A S Walker Holdings LTD v. Minister of National Revenue, [1979] CTC 2112, 79 DTC 132

The Assistant Chairman:—A S Walker Holdings Ltd (sometimes hereinafter called the “appellant”, “the parent” or “parent”), under another name, carried on its business of bottling soft drinks in the Town of Orangeville in the province of Ontario in 1973 as it had for many years prior thereto. The parent in 1973 had a wholly-owned subsidiary, Orangeville Bottling Company Limited (sometimes hereinafter called “the subsidiary” or “subsidiary”—in 1973 and earlier it had a different name) which also carried on the business of bottling soft drinks. Both had a fiscal year ending February 28. Apparently both companies operated out of the same premises and they had many inter-corporate transactions. In the opinion of the officers of both companies, this situation caused many needless problems in addition to increasing costs and making the overall operations less efficient. Late in the 1973 calendar year, officers of the parent discussed the corporate setup with their auditors, a prominent firm of chartered accountants, and sought their advice. Early in January 1974 the appellant was advised by them (Exhibit A-1) as to several possible solutions, one of which was to transfer all its business and assets to the subsidiary, which would increase efficiency and there would be no capital gains tax involved on the sale of the land. By document (Exhibit A-2) dated February 28, 1974, the parent and subsidiary signed a memorandum of agreement reflecting the transfer between both corporations as recommended by the auditors. This memorandum followed one of the plans set forth in the advice received in Exhibit A-1. The solicitors for the appellant, a prominent Toronto firm, wrote to the appellant’s auditors by letter dated May 8, 1974, (Exhibit A-4) with respect to the sale and enclosed with that letter a draft copy of a proposed formal agreement between the parent and the subsidiary. On June 20,1974, the formal agreement (Exhibit A-3) between the parent and the subsidiary was executed and it was, in that agreement, stated to be made as of February 28, 1974. The parent and the subsidiary filed with the Minister of National Revenue an “Election on Disposition of Property to a Canadian Corporation” dated August 23, 1974 (Exhibit A-5). The election clearly reflects a capital gain on the sale of land of $74,000 which of course means that $37,000 was subject to tax. The Election was consistent with the formal agreement (Exhibit A-3). However, it was inconsistent with the advice received (Exhibit A-1), the memorandum of agreement (Exhibit A-2) and the draft agreement (Exhibit A-4).

The respondent added to the income of the appellant the $37,000 and asessed tax accordingly. The appellant appealed that assessment contending that the respondent should assess based on the real intent of the parties; namely, the transfer would take place without any capital gain.

Counsel for the Minister objected to any document being introduced or any evidence being given relating to any matter or event prior to the execution of Exhibit A-3 on June 20, 1974, on the basis of the contents of that Exhibit A-3. Clause 2(H) of Exhibit A-3 (formal agreement) reads as follows:

2 . . . (subsidiary) will pay to .. . (parent) for the assets an amount (“th^purchase price”) which is the aggregate of the following amounts:

(ii) an amount equal to the fair market value of all land (exclusive of depreciable property thereon) included in the said sale and purchase which was owned by . . . (parent) on the effective date.

(The words in italics are mine.)

(The “effective date” in the agreement is, by the parties, stated to be “as of the date hereof . . which is February 28, 1974.)

Clause 9 of Exhibit A-3 (formal agreement) reads as follows:

9. This agreement is executed on June 20, 1974, with effect from the effective date, and is intended to replace and supersede that certain memorandum of agreement dealing with the same subject matter which was dated February 28, 1974 and signed on that date by the directors of. . . (subsidiary) and by certain of the directors and shareholders of . . . (parent).

(The words in italics are mine.)

Counsel for the respondent contends that the parties themselves, by clause 9, have stated that this formal agreement (Exhibit A-3) is the agreement of sale—it is the one which should be looked at since it states that it “is intended to replace and supersede that certain memorandum of agreement dealing with the same subject matter which was dated February 28, 1974 ... . It should be treated as such. There is no confusion, ambiguity or uncertainty in the agreement (Exhibit A-3). It is clear and unequivocal and for that reason, the correctness of the assessment should be determined in the light of that document (Exhibit A-3). The figures used on the election form (Exhibit A-5) are consistent with clause 2(ii) of Exhibit A-3.

Counsel for the appellant contends the case should be determined on the real intent of the parties. This is not a hind-sight intent just because an assessment has been made, but an intent clearly determined by advice and documents received at the time of the transaction. In addition, why would parties enter into a transaction in such a fashion so as to attract tax when a route was pointed out which was legal and which would not attract tax? Exhibit A-1 stated, if the transaction were done in the stated fashion, one advantage was “no capital gains tax because land can be transferred at cost or valuation day value.’’ The draft agreement (Exhibit A-4) at clause 2 reads as follows:

. . . (subsidiary) Will pay to .. . (parent) for the assets an amount (“the purchase price”) which is the aggregate of the following amounts:

(ii) an amount equal to the fair market value on December 31, 1971 of all land (exclusive of depreciable property thereon) included in the said sale and purchase which was owned by . . . (parent) on that day, such value to be determined by a qualified real estate broker acceptable to the parties hereto;

(iii) an amount equal to the cost to . . . (parent) of all land (exclusive of depreciable property thereon) included in the said sale and purchase which was acquired by it since the last-mentioned date, according to the books of . . . (parent) and as determined by the auditors; and . . . .

(The words in italics are mine.)

If the transaction were completed and the election filed pursuant to a formal agreement in the terms of the draft agreement (Exhibit A-4), there would have been no capital gain to the parent and consequently no assessment in this respect.

Submissions were made as to whether or not parol evidence could be introduced to show the true intent of the parties. The respondent submitted such evidence could not be given as the formal agreement was clear and unambiguous. The appellant said the document (Exhibit A-3) was ambiguous as the effect of clause 2(H) is that there would be a capital gain, yet clause 8 indicates the use of section 85 of the Income Tax Act, SC 1970-71-72, c 63 as amended, which would produce no capital gain. Clause 8 of the formal agreement (Exhibit A-3) reads as follows:

8. . . . (parent) and . . . (subsidiary) agree to execute jointly any forms of election pursuant to sections 22 and 85 of the Income Tax Act of Canada respecting the computation of their income as may be advised by the Auditors.

(The words in italics are mine.)

Counsel for the respondent also made reference to paragraph 85(1 )(a) of the Income Tax Act after tax reform and specifically pointed out the use of the word “deemed” in that paragraph, which paragraph reads as follows:

85.(1) Where a taxpayer has, after May 6,1974, disposed of any property that was a capital property . . . to a Canadian corporation for consideration . . .'if the taxpayer and the corporation have jointly so elected in prescribed form and within the time referred to in subsection (6), the following rules apply:

(a) the amount that the taxpayer and the corporation have agreed upon in their election in respect of the property shall be deemed to be the taxpayer’s proceeds of disposition of the property and the corporation’s cost of the property.

It should be noted that both parties agreed that the use of section 85 was proper in the circumstances of this appeal. Other facts were pointed out as indicating why sometimes one should “correct” the formal agreement and on other occasions “accept” it.

The solicitor for the appellant wrote to the appellant by letter of September 12, 1974, with respect to the transaction and the conveyance of land from the parent to the subsidiary. One paragraph of that letter reads as follows:

As I understand the position, the value of consideration for land transfer tax purposes is the fair market value of the lands plus the undepreciated capital cost of the buildings and other fixed depreciable property, although you will be using different values for the purposes of electing under section 85 of the Income Tax Act.

The last sentence of that letter states:

The aggregate of land and buildings is now $358,268 because we are selling at current fair market value instead of V-Day value, and the land transfer tax attracted is $1,969.61 in total.

It was also pointed out that all income tax returns of both the appellant and the subsidiary were filed from 1974 to the date of the assessment (January 1977) using the same figures as those used on the election, and their books and records for the same period were on the same basis. On or about April 21, 1977, the parent sent to the subsidiary a cheque for $74,000 which cheque was accompanied by the following memorandum (Exhibit A-6):

Enclosed is our cheque for $74,000. This relates to our transaction with you as of February 28,1974 wherein it was our intention that the properties be transferred at either their cost to us or their value at valuation day.

It was not our intention that the transaction be executed at the fair market value of the properties concerned. We are therefore returning $74,000 to you representing the excess liabilities which you assumed from us on the date of the transaction.

As I view the matter, the appellant had competent advisors and it sold, inter alia, land to its subsidiary pursuant to an agreement (Exhibit A-3), which agreement stipulated what the consideration was to be for that sale. It and its subsidiary filed an election within the meaning of subsection 85(1), which Election clearly indicated a capital gain of $74,000. From the date of the sale/purchase until about the date of the assessment in question, both companies’ books reflected the sale on a basis which showed, in effect, that the parent (vendor) had a capital gain. As to what in fact was paid by the subsidiary (purchaser) to the parent (vendor), it was the amount computed in accordance with the formal agreement (Exhibit A-3), not the documents prior to the date of the formal agreement, as in April 1977 the parent (vendor) sent a cheque to the subsidiary (purchaser) for the $74,000. There was no suggestion that the meaning of subsection 85(1) was confusing or unclear, nor really was any explanation given as to why the change was made between the draft agreement (Exhibit A-4) and the formal agreement (Exhibit A-3) paragraph 2. The change is startling. One can only conclude it was done deliberately, even if one cannot see why it was done. The appellant chose to do what it did and, having done so, it must accept the consequences of that act. It did act in accordance with the formal agree- ment (Exhibit A-3) and I am of the view it should be assessed on the same premise.

The result is that judgment will go dismissing the appeal.

Appeal dismissed.