Macdonell v. R., [1997] 2 CTC 2450

Dubienski J. orally):

This is an appeal of an assessment as to capital loss claimed by the Appellant. The loss is based on the forgiveness of an indebtedness by the Corporation, Dairy, to the Appellant, a major and controlling shareholder. The company had been incorporated and very shortly ran into difficulties and the Appellant deemed it prudent to try and find a purchaser before bankruptcy became necessary to save the business. To avoid too much of the history, at this time, which I don’t think is relevant, is subsequent to certain proceedings the Appellant found willing purchasers who entered into an agreement to take over the business. The agreement is between the three purchasers, as purchasers and the Dairy and the Appellant, as vendor. The agreement, in this particular case, has to speak for itself. Because the evidence that has been given to the court has been not as helpful as one would hope because of the lack of certainty with regard to it. The court has not been assisted with any documentation or any matters that would give more certainty to the dealings of the company, the company affairs, and more specific, evidence with regard to what actually took place in terms of time, dates, etc. So, we have to go to the document, itself. The main relevant parts of the document, to the court, deal with those references under Article 4 of the document, headed, “Conditions Precedent to Closing.” In that document, paragraph E states:

The company shall, if required by the purchaser, convene meetings of its shareholders and directors on the closing date or at such earlier time and transact there at such business as a person may reasonably require, including, without limiting the generality of the foregoing, resignations of the present officers and directors of the company in favour of the nominees of the purchaser and to issue one further common share to MacDonell for $1, such that after, the closing of the shareholdings of the company shall be as follows: MacPhee - 570 shares, 75%, Muize Lear - 76 shares, 10%, Pineo, 38 Shares - 5%, MacDonell - 76 shares, 10% or a total of 760 shares or 100%.

The net result of that would indicate to the court that MacDonell retained his shares, conveyed no shares and, in fact, acquired one further share in the company. Further condition precedent, paragraph J.

That the company will have received from MacDonell a release of any and all loans, owing by the company to MacDonell, and for this purpose MacDonell agrees to further provide such other documentation that the solicitor for the purchaser may require to evidence the same.

Obviously this has reference to the shareholder’s loan that MacDonell had with the company. Apparently the debt referred to was forgiven by Mac- Donell on the 28th of August 1989, as evidenced by a document which contains the following:

Paragraph 1: MacDonell hereby forgives the repayment of any and all existing shareholders’ or directors’ loans, owing to him by the company, up to the time of the commencement of the closing date on August 28th as provided for in the aforesaid agreement.

There was some question as to whether or not it could be stated as to what the dates were that these events actually took place. But I have nothing to give me any guidance in that, except the dates that are on the documents would be considered to be the date at which time it took place. We, therefore, have the agreement for the transaction, as a whole, August 24th and the forgiveness, August 28th. It must be reiterated and clear that the documents do not disclose any action on behalf of the Appellant that he, in any way remain anything other than a shareholder in the company. The question then is, how does that reflect in the interpretation of the law. Counsel for the Minister has indicated that this becomes a technical matter. And I must say that, in my opinion, that is a fact. In equity one might be aware of the fact of the — and be able to draw inference of contention from evidence or further evidence as there was available. But this being a statutory court and having no access to the theory of equity must proceed in a strictly legalistic manner, as interpreted by the law. It is quite clear, as I have stated from the evidence, that the Appellant remained a shareholder at all times. He had a shareholder’s loan with the company, and it was a condition precedent for it to be released and that he had to do under the terms of the contract. But the question is, how does that affect the matter of such a disposition of capital property, when one looks at the terms of the act. The section that would have the main control and influence for such an interpretation would be Sub paragraph 40(2)(g)(ii) of the act, wherein it is necessary for anybody dealing in such a situation must be dealing at arm’s length. And, obviously, with a shareholder dealing with a corporation, which he is a shareholder, he is not dealing at arm’s length. The Minister has suggested that maybe this could have been disposed of, if it had been dealt with as a bad debt. But that has not been done and that is irrelevant as far as this decision is concerned. I, therefore, have come to the conclusion that, looking at all of the evidence, that for two reasons I must disallow the appeal. First of all, that this was a forgiveness of a debt, but it was not a consideration for the disposition of capital property to a person with whom the taxpayer was dealing at arm’s length, within the meaning of Section (40)(2)(g)(ii), and therefore was not a capital loss. Secondly, however, I find in relation to the Tignish case, which states that the court, in appraising evidence that comes before it, can only interfere with the discretionary decision of the Minister if there is some evidence that would show to this court some evidence different and that would — was not known to the Minister — that would bring it within his jurisdiction to maybe have come to a different conclusion. That has not been the case here. I don’t find any evidence, before the court now, that was not before the Minister at the time he made his decision. So for that reason, also, I would disallow the appeal.

Appeal dismissed.