Mérette v. R., [1998] 1 CTC 3321

Bowman T.C.J.:

These are appeals from assessments for the 1991 and 1992 taxation years. The issues are as follows:

(1) the Minister of National Revenue’s refusal to authorize the deduction of automobile expenses of $10,103.00 for 1991 and $6,575.23 for 1992 in calculating the appellant’s income;

(2) the Minister’s refusal to recognize as a capital gain an amount which the appellant received in 1992 from the redemption of his shares by a corporation known as Transtronic Inc.; the Minister treated the greater part of this amount as a deemed dividend.

It should be noted in connection with Mr. Mérette’s automobile expenses that in 1991 and 1992 most of his income came from his employment with Transtronic Inc. He was also the owner of the business known as “Micronomic”. In each of the two years in question this business suffered a loss. Nonetheless, he deducted automobile expenses in calculating his income from this business.

A taxpayer may claim a deduction for automobile expenses either in calculating income from a business or in calculating income from employment. In calculating his automobile expenses Mr. Mérette calculated the number of kilometers he did. In 1991 he covered 36,000 km. and allocated 27,389 to his employment (Transtronic), 4,075 to his business (Micronomic) and the remainder (4,536) to his use of the vehicle for personal reasons. In 1992 he allocated nothing to his business but allocated 25,920 out of a total of 32,400 km. covered in the year to his employment with Transtronic Inc.

Mr. Mérette called several auditors from the Department of National Revenue, but was not able to persuade them to alter their position. I am not satisfied that the appellant has established that the amounts indicated by him as automobile expenses are reasonably attributable to his employment or his business. It would appear that a substantial part of the distance covered for which he sought a deduction corresponded to the distance he travelled between his house and office.

One of the auditors whom he called to testify was Y von Derome of the Appeals Division. Mr. Derome made a calculation in which he proposed allowing further automobile expenses.

The calculations are as follows:

900.00

5,100.00

Business expenses 50% 2,550.00

2,550.00

Automobile expenses

Adjustment proposed by Appeals Division in full settlement of case.

199]	— $2,550.00 — $2,550.00
1992	— $2,550.00 - $1,087 (already
	allowed) = $1,463

It must be acknowledged that the calculations made by Mr. Derome are estimates, but they are not unreasonable. Mr. Mérette should have accepted them. I see no reason not to allow him the amounts suggested by Mr. Derome.

As to the deemed dividend in 1992, Mr. Mérette was a shareholder of Transtronic Inc., in which he held 25 per cent of the shares. The corporation redeemed part of the four shareholders’ shares, and at this time Mr. Mérette received $15,000 for his shares. In his 1992 tax return he reported a capital gain of $10,312 calculated as follows:

Additionally, he claimed a capital gains deduction of $10,312.

The Minister made an estimate in respect of the appellant for 1992 three times, and each time he made corrections in terms of the fiscal effect of redeeming the shares. The Court is only concerned here with his final assessment. In that reassessment, made after the appellant served a notice of objection, the Minister dealt with the share redemption as follows:

[TRANSLATION]

a. increase of taxable deemed dividend on share redemption by corporation in amount of $6,000 calculated as follows:

Price paid by corporation on redemption	$15,000
Less: paid-up capital	3,000
Deemed dividend	$12,000
Revised taxable dividend $12,000 x 1.25	$15,000
Prior taxable dividend	9,000
Increase in taxable dividend	$ 6,000

b. Capital gain on disposition of corporation shares for $2,250, $1,687 of which is taxable, calculated as follows:

Proceeds of disposition	$15,000
Less: Deemed dividend	12,000
Net proceeds of disposition	3,000
Less: Adjusted cost base	750
Capital gain	$ 2,250
Taxable at 75%	$ 1,687

d. considered tax credit for dividend of $ 1,999.99

Mr. Mérette argued that the redemption of Transtronic Inc. shares resulted in a capital gain, not a deemed dividend. He also argued that the redemption price of $15,000 was the fair market value of the shares and that there were sound commercial reasons for the redemption. I have no reason to doubt the correctness of this argument.

However, it does not solve the problem. Subsection 84(3) of the Income Tax Act reads as follows:

Where at any time after December 31, 1977 a corporation resident in Canada has redeemed, acquired or cancelled in any manner whatever (otherwise than by way of a transaction described in subsection (2)) any of the shares of any class of its capital stock,

(a) the corporation shall be deemed to have paid at that time a dividend on a separate class of shares comprising the shares so redeemed, acquired or cancelled equal to the amount, if any, by which the amount paid by the corporation on the redemption, acquisition or cancellation, as the case may be, of those shares exceeds the paid-up capital in respect of those shares immediately before that time; and

(b) a dividend shall be deemed to have been received at that time by each person who held any of the shares of that separate class at that time equal to that portion of the amount of the excess determined under paragraph (a) that the number of those shares held by him immediately before that time is of the total number of shares of that separate class that the corporation has redeemed, acquired or cancelled, at that time.

Without that provision I would agree with Mr. Mérette’s argument that the redemption must have the effect of producing a capital gain for him. However, subsection 84(3) has the result of transforming what would otherwise be a capital gain into a deemed dividend, in order to prevent the distribution of a corporation’s accumulated profits to shareholders under cover of a redemption of its own shares by the corporation.

An exception to this rule is set out in subsection 84(6), which reads as follows:

Subsection (2) or (3), as the case may be, is not applicable

(a) in respect of any transaction or event, to the extent that subsection (1) is applicable in respect of that transaction or event; and

(b) in respect of any purchase by a corporation of any of its shares in the open market, if the corporation acquired those shares in the manner in which shares would normally be purchased by any member of the public in the open market.

It should be noted that in order to benefit from the exemption conferred by this paragraph (i) the purchase by the corporation must be made on the open market and (ii) the corporation must have acquired its shares in the manner in which shares would normally be purchased by any member of the public in the open market.

The expression “marché libre” [open market] is defined in the Dictionnaire de la comptabilité et de la gestion financière as follows:

[TRANSLATION]

Market in which there is free competition and in which buyers and sellers may participate to buy or sell goods, services or factors of production at prices determined without coercion.

The expression “open market” is defined in The Random House Dictionary of the English Language (2nd ed.) as follows:

An unrestricted competitive market in which any buyer and seller is free to participate.

The concept and theory of the market has occupied generations of economists. I do not have to go into this subject at any length in order to decide this case. It will suffice to note that the ordinary usage of the phrase “open market” covers at least three ideas:

(a) free participation by the public;

(b) the absence of any restrictions on prices;

(c) the effect of supply and demand on prices.

These characteristics are present in the case of a public corporation whose shares are quoted on the exchange. There can be no open market when the sale of shares to a corporation is governed by a private agreement between shareholders and the corporation. This is not how the public would ordinarily purchase shares on the open market.

For these reasons, I cannot agree that the redemption of the appellant’s shares falls outside the scope of the provisions of s. 84(3) of the Act.

The appeals from the assessments for the 1991 and 1992 taxation years are allowed without costs and these assessments are referred back to the Minister of National Revenue for re-examination and reassessment so as to allow the appellant to deduct automobile expenses of $2,550 for 1991 and $2,550 for 1992 in calculating his income:

Appeal allowed in part.