Jean-Guy Jubinville, André Globensky and Donald a McLeod v. Minister of National Revenue, [1977] CTC 2020, 77 DTC 20

Roland St-Onge:—These appeals were heard on March 24, 1976 in Montreal, Quebec and deal with the assessment of tax on gifts allegedly made by the appellants to their wives and children for the taxation year 1970.

At the hearing, it was agreed that the evidence in the record of Jean-Guy Jubinville be entered in the records of Messrs André Globensky and Donald A McLeod.

In his notification of March 20, 1975 the Minister confirmed an assessment which taxed the appellant Jubinville on gifts in the amount of $45,268.60, including a $500 penalty for late filing and $5,931.83 in interest, for a grand total of $51,200.43.

Pursuant to the provisions of subsection 137(2) of the Income Tax Act, the Minister applied Part IV of the Act after concluding that benefits were conferred by the appellant Jubinville on his children with respect to the sale of the shares of Faymor Chemical (1968) Ltd to H B Fuller Canada Ltd, and that these benefits were gifts.

In his Reply to the Notice of Appeal, the respondent relied on the following facts:

10. The appellant, together with Donald A McLeod and André Globensky, each owned one-third of the shares of Faymor Chemical Ltd;

11. During November 1968 the following companies were incorporated:

(a) Sylipa Corporation Ltd—shareholders:

—Jean-Guy Jubinville

19 voting preferred shares

—children of Jean-Guy Jubinville

3 common shares

—wife of Jean-Guy Jubinville

16 voting preferred shares

(b) Sapar Corporation Ltd—shareholders:

—André Globensky

22 voting preferred shares

—children of André Globensky

4 common shares

—wife of André Globensky

18 voting preferred shares

(c) Madi Corporation Ltd—shareholders:

—Donald A McLeod

22 voting preferred shares

—children of Donald A McLeod

5 common shares

—wife of Donald A McLeod

18 voting preferred shares

(d) Trichem Corporation Ltd—shareholders:

—Jean-Guy Jubinville

100 voting preferred shares

—Sylipa Corporation Ltd

10,000 common shares

—André Globensky

100 voting preferred shares

—Sapar Corporation Ltd

10,000 common shares

—Donald A McLeod

100 voting preferred shares

—Madi Corporation Ltd

10,000 common shares

(e) Faymor Chemical (1968) Ltd—shareholders:

—Trichem Corporation Ltd

300 common shares

12. As may be seen in paragraph eleven, the appellant, along with André Globensky and Donald A McLeod, participated in the profits of Faymor Chemical Ltd, while their children participated in the profits of Faymor Chemical (1968) Ltd through the corporations in which they held common shares;

13. On December 1, 1968, Faymor Chemicals Ltd sold its net assets to Faymor Chemicals (1968) Ltd for the sum of $186,947.09, and its goodwill for the sum of $713,052.91, a total consideration of $900,000.00;

14. Under the agreement of December 1, 1968, Faymor Chemicals Ltd was paid in the following manner: 70,000 preferred shares of Faymor Chemical (1968) Ltd with a value of $10.00 each, and a $200,000.00 interest-free note, repayable in annual installments of $20,000.00;

15. At the beginning of 1970, H B Fuller Canada Ltd showed interest in acquiring Faymor Chemicals (1968) Ltd, for the sum of $905,000.00;

16. On March 31, 1970 H B Fuller Canada Ltd purchased the 300 common shares of Faymor Chemicals (1968) Ltd held by Trichem Corporation Ltd, for the sum of $485,000.00:

17. On the same day, March 31, 1970, H B Fuller Canada Ltd purchased the 70,000 preferred shares and the $200,000.00 note from Faymor Chemicals (1968) Ltd held by Faymor Chemical Ltd, for the sum of $420,000.00;

18. On March 31, 1970, the 300 common shares of Faymor Chemicals (1968) Ltd had a fair market value of $5,000.00.

19. By this scheme the appellant, along with André Globensky and Donald A McLeod, caused Trichem Corporation [to] realize a profit of $480,000.00 as a result of the sale of the common shares of Faymor Chemicals (1968) Ltd, and Faymor Chemical Ltd to sustain a loss of $480,000.00 as a result of the sale of the 70,000 preferred shares and the $200,000.00 note from Faymor Chemicals (1968) Ltd;

(B) Statutory provisions and supporting reasons

20. The respondent relies, inter alia, on ss 111, 112, 113, 114, 115 and 137(2) of the Income Tax Act, RSC 1952, c 148;

21. Through the corporations mentioned in paragraph eleven, and under the agreement of March 21, 1970 with H B Fuller Canada Ltd, the appellant conferred a benefit in the amount of $161,447.67 on his children, and he is deemed, under s 137(2) of the Act, to have made a payment to them equal to the amount of the benefit conferred;

22. The payment of $161,447.67 made by the appellant to his children must be deemed to be a disposition by way of gift to which Part IV of the Act applies, by virtue of s 137(2)(c) of the Act.

Mr Martel, counsel for the vendors, related what follows. He was consulted on two occasions. On December 14, 1967 the appellants, who had gone to see him for the purpose of selling their shares in Faymor Chemical Ltd to a company called Ferro Products Canada, personally held the said shares and, by selling them, realized sic] a non-taxable capital gain. There was some discussion regarding whether it was in their interests to sell the shares or to undertake estate planning.

seven months later, on August 2, 1968, the appellants returned to consult Mr Martel, but this time for the purpose of expanding their business. On August 12, 1968 Mr Martel prepared a report called “Transmission of the increase in property to the heirs of the surviving parent’’, which was accepted by the appellants and submitted to the Minister of National Revenue.

Under this program, the property of the company was sold to a second company in such a manner that the latter paid the purchase price, thereby freezing the estate. The second company became the property of the family companies and its profits remained in it. Since the appellants wanted to build up a considerable business, Mr Martel suggested that they incorporate a parent holding company and an operating company among the family companies. The holding company would do the promoting, and the five subsidiaries the operating.

Accordingly, on March 11, 1968 Faymor Chemical Ltd sold all its assets to Faymor Chemical (1968) Ltd and ceased operations. The sale price of $900,000, which belonged to the fathers, included a $200,000 interest-free note, payable at the rate of $20,000 per year, and preferred shares in the amount of $700,000, with voting rights suspended and 6% dividends deferred for 10 years. The share capital of the second company was $1,000,000, divided into 300 common shares with a par value of $1, and 99,970 preferred shares with a par value of $10. The common shares participated in the administration of the profits and the capital, while the preferred shares reported no dividends for 10 years. According to paragraph 1 of the letters patent:

The dividends however shall be deferred until the 31st day of December 1978 so that no dividend shall be declared or paid during the period ending December 31, 1978. . . .

Mr Martel also testified that at the time of the sale to H B Fuller Canada Ltd the value of the shares based on the known yield could have been $425,000, while based on negotiations for sale which had taken place the previous year with Ferro Enamels Canada Limited and Union Carbide it could have been $1,200,000 and $1,000,000, respectively. After discussion, $900,000 was chosen as the sale price.

During all the discussions of December 14, 1967 and August 2, 1968 there was no question of H B Fuller Canada Ltd buying Faymor Chemical Ltd, and it was not until February 1970 that Mr Martel was asked to represent his clients in drafting the contract.

Two accountants represented the purchaser and the initial offer to purchase designated the vendors as being three individuals. Since the shares belonged to two companies, that is, Trichem Corporation Ltd and the former company Faymor Chemical Ltd, Mr Martel corrected the error. The property sold was divided in three:

(1) $200,000 note;

(2) 700 preferred shares held by Faymor Chemical Ltd:

(3) 300 common shares held by Trichem Corporation Ltd.

On March 25, 1970 the sale contract was signed, Mr Martel representing the vendors and signing for Mr McLeod.

Thus, after 12 months, Trichem Corporation Ltd sold its 300 common shares, for which it had paid $300, for $420,000, and Faymor Chemical Ltd sold property worth $900,000 for $480,000.

Mr Martel swore that he had never discussed tax matters with his clients before the sale.

Mr Jubinville, president and general manager of H B Fuller Canada Ltd, formed Faymor Chemical Ltd with Messrs McLeod and Globensky in 1960. He testified that before March 1970 he did not know the owners of H B Fuller Canada Ltd, a public company, and that they had communicated with him only on August 27, 1969 to inquire whether Faymor Chemical was interested in merging or selling.

Pierre Lesage, a chartered accountant, valued the property sold in a brief entered as A-12.

In cross-examination, Mr Lesage admitted that 12 months after the offers Faymor Chemical Ltd was still worth $900,000, but because of the sale to a third party, the company became no longer worth $900,000, but only $480,000.

Maurice Duval, chartered accountant and expert in securities, testified that the $200,000 interest-free note, payable at $20,000 per year, was worth only $80,000, and the preferred shares only $133,000.

Counsel for the appellant contended that the appellants were in a non-taxable capital gain position, and consequently there could be no question of tax evasion. Usually, taxpayers are in a taxable position and wish to get out of it by methods which have not been accepted by the courts.

He also contended that the Minister was trying to link independent planning to the Fuller transaction, whereas the plan prepared by the taxpayers had never foreseen the appearance of a possible buyer for the business.

According to him, the undisputed testimony of Mr Jubinville, of his counsel Mr Martel and the latter’s brief clearly showed that there had never been any question of a possible purchaser, that it was the decision not to sell the business that had motivated them to plan their long-term portfolio, and that if the Minister had wanted to definitively link these plans to the transaction in question he ought to have proven the existence of such a purchaser at the time the plan Originated.

With respect to subsection 137(3) of the Act, he stated that this subsection could not be applied to the appellants, since the Minister did not dispute the sale price and could show no dependent link between the vendors and the purchaser; that two parties were involved in the series of transactions, namely, the purchaser and the vendor; and that it is important to know, not whether the appellants controlled the vendor, but rather whether the vendor was in a position of influence and control with respect to the purchaser.

He referred the Board to the following three cases: MNR v Cameron, [1972] CTC 380; 72 DTC 6325; Nathaniel C Brewster v The Queen, [1976] CTC 107; 76 DTC 6046; The Queen v Esskay Farms Limited, [1976] CTC 24; 76 DTC 6010, to support his submission that it was never the appellants’ intent to fabricate a false or sham transaction, since the evidence showed that the property was sold for its true value, that the parties to the transaction were dealing at arm’s length, and that the appellants were acting for themselves and not in concert with the purchaser.

He also referred the Board to the case of The Queen v Esskay Farms Limited (supra) as authority for saying that a taxpayer has the right to arrange his own affairs so as to pay the least possible tax, as well as to the definition of market value, well established in the courts, which reads as follows:

It is, generally speaking, the highest price available in an open and unrestricted market between a willing buyer and a willing seller dealing at arm’s length, both of whom are fully informed as to the qualities of the property concerned, and neither of whom is under any compulsion or haste to transact.

For his part, counsel for the respondent contended that the shareholders of Faymor Chemical Ltd were in a position to impose their wishes and ensure that Faymor Chemical Ltd sold and suffered a loss of $480,000, in order that Faymor Chemical (1968) Ltd could sell and realize a profit of $420,000, and that the three appellants participated in the profits of Faymor Chemical Ltd while only their children participated in the profits of Trichem Ltd. It follows that any loss taken by Faymor Chemical Ltd would decrease the appellants’ estates and any profit realized by Trichem would increase the children’s estates; that between the date of the sale by Faymor Chemical Ltd to Faymor Chemical (1968) Ltd and the date of the sale of these two companies to H B Fuller Canada Ltd, nothing occurred to justify an increase in value of the common shares of Faymor Chemical (1968) Ltd by $484,700, the profit realized by that company; and that, on the contrary, Faymor Chemical (1968) Ltd had realized a net profit of $24,900 on December 31, 1969 which was immediately distributed to its shareholders in dividends, leaving no accumulated surplus.

The respondent also maintained that, on March 25, 1970, the amount of $905,000 was available, that the financial means to buy back the preferred shares and pay the promissory note were offered to Faymor Chemical (1968) Ltd and that, since the three appellants controlled Faymor Chemical (1968) Ltd, they could buy back the preferred shares and pay off the note and also preserve their stated sale value of $900,000.

The respondent also drew the Board’s attention to the fact that the appellants did not call the purchaser’s accountants to explain how the division of the sale price was made, and suggested that the appellants themselves provided the accountants with the figures.

Finally, counsel for the respondent stated that, contrary to the contention of counsel for the appellants, he did not allege that the transaction of March 25, 1970 was a sham or trick. On the contrary, he accepted the contract as written, but concluded that the purpose of this contract was to make a gift of $480,000 to the children, and referred the Board to paragraph 115E(d) of the Income Tax Act, which provides as follows:

115E. In this Part,

(d) “gift” includes a transfer, assignment or other disposition of property (whether situate inside or outside Canada) by way of gift and, without limiting the generality of the foregoing, includes

(i) the creation of a trust of, or an interest in, property by way of gift,

and

(ii) a transaction or transactions whereby a person disposes of property directly or indirectly by way of gift.

In reply to the respondent’s written pleadings, the appellant stated:

(1) that the purpose of the estate planning was to transfer not the equity but rather the future increase after the transfer to the family companies, and that the estate planning was independent of the Fuller transactions;

(2) that the estate planning had not foreseen the effects of the transaction with H B Fuller Canada Ltd;

(3) that immediately before the transaction the vendor company did not have the financial means to buy back the preferred shares or pay the note;

(4) that the appellants were not in a position to order the repurchase of the shares, since according to the testimony of Mr Martel and the evidence given, ownership of the shares was organized in such a way that no one had absolute control of the family company;

(5) that the shareholders would not necessarily vote as a group, because of the danger of thereby defeating the rights of their children and wives, and that the jurisprudence indicates that the rights of parties should now be strictly regarded and it should not be assumed that parties will act as a group or otherwise;

(6) that Messrs Duval and Lesage clearly indicated that, after 10 or 12 years, according to the program, there would be sufficient funds to buy back the preferred shares; that the whole program was based on this long period and that the company did not have the financial means in the short term for repurchase;

(7) that he found that ‘the value to the owner” was not applicable in a case where it is clearly necessary to fall back on the idea of “fair market value,” as the writers and the parties intended;

(8) that between the dates of the two transactions, something important occurred, since, first, $900,000 in assets, and secondly, negotiable instruments which were subject to restrictions, were sold;

(9) that the vendor did not control the purchaser (and that no agreement was made to raise or lower the sale price) to the detriment of one of the contracting parties;

(10) that there is a document which divides the shares sold, and that unproved theories may not be brought against a valid written document in an attempt to say, on the one hand, that there was arm’s length negotiation of the total price and, on the other hand, that there was no arm’s length negotiation to divide the price;

(11) that Mr Martel had explained that the planning was for the purpose of freezing the parents’ estates for the future and increasing the children’s estates in the future without impoverishing the parents’ estates.

In this case, the Board must decide whether there was a gift. In the written pleadings, counsel for the respondent mentions that the transaction on March 25, 1970 was not a sham, but that its effect was to create a gift to the children and wives of the appellants.

Is the evidence of such a nature as to convince the Board that the appellants, in planning their estates, had effectively intended to make the alleged gift in the specific circumstances of the numerous transactions mentioned above?

It is almost impossible to believe that these three individuals would have been able to accomplish this feat since, at the time of the estate planning, neither the appellants nor Mr Martel had any inkling that H B Fuller Canada Ltd wanted to purchase Faymor Chemical Ltd. As a result, it is to be expected that the principal intent of the appellants in planning their estates was to follow the advice of their counsel Mr Martel, who in his testimony has described the purpose of the estate planning.

If the purpose was to freeze the parents’ estates for the future and increase the children’s estates in the future, without impoverishing the parents’ estates, it is clear that the intent of the appellants was not to make a gift of property in the short term since, at the precise time of the planning, the appellants transferred no property to the children.

The appearance of a purchaser 12 months later was merely an accident that allowed the shares sold for $900,000 in 1969 to be resold for almost the same price in 1970, but because of already existing transactions and the incorporation of several companies the sale to Fuller Canada Ltd took place through the transfer of 70,000 preferred shares in Faymor Chemical Ltd at a face value of $10 each, and an interest-free note for $200,000 owed by Faymor Chemical (1968) Ltd to Faymor Chemical Ltd, to Fuller Canada Ltd for $480,000, while Trichem Corporation Ltd transferred 300 common shares in Faymor Chemical Ltd to Fuller Canada Ltd for $420,000.

The evidence, which the respondent has not contradicted, shows that the division of the values of the various assets was made by the two accountants of H B Fuller Canada Ltd, and two experts in valuation testified that the preferred shares and the promissory note had a value of only $470,000 because of the restrictions attached to these negotiable instruments for a period of 10 years.

It is certain that, because of the restrictions attached to the preferred shares and the promissory note for a period of 10 years at the time of the sale by Faymor Chemical Ltd to Faymor Chemical (1968) Ltd, these negotiable instruments had a true market value much lower than their face value, and that Faymor Chemical Ltd was justified in accepting the sum of $420,000 for their transfer. Also, since the total value of the assets transferred was $900,000, Trichem Corporation Ltd was justified in accepting the difference as the value of its 300 common shares.

Since the transaction with H B Fuller Canada Ltd was done at arm’s length and the respondent did not succeed in proving bad faith on the part of the parties, it is clear that section 137 of the Income Tax Act does not apply.

The Board believes that paragraph 115E(d) does not apply either since at the time of the estate planning the appellants never had any intention of making, and in fact did not make, a transfer, assignment or other disposition of property.

In fact at the time of the planning, nothing was transferred to the children, since it was Faymor Chemical Ltd which made the sale to Faymor Chemical (1968) Ltd for valuable consideration, and the children were never mentioned in the contract of sale. It was the same when H B Fuller Canada Ltd bought Faymor Chemical Ltd and Trichem Corporation Ltd, since it was these two companies which transferred the shares and the note to Fuller Canada Ltd, and the children were never mentioned in the contract.

Paragraph 115E(d) also mentions, in subparagraph (ii), that a gift includes a transaction or transactions by which a person disposes of property directly or indirectly by gift.

In the appeal at bar, an individual is assumed to have made gifts to his children through the incorporation of companies, which companies have carried out the transactions which have benefited the appellants’ children.

So, to make a gift, a person must have the intent to give property. The appellants never wished to make a gift, and it is only by accident that the children’s estates were enriched through no voluntary action of the appellants who wanted to plan their estates, an accident which cannot constitute a gift.

Accordingly, having taken all the evidence into account, I must allow the appeal.

Appeals allowed.