Allan J Wing v. Minister of National Revenue, [1976] CTC 2228, 76 DTC 1175

A W Prociuk:—The appellant, Alan J Wing, appeals from the respondent’s reassessment of his income for the taxation year 1971, wherein the sum of $5,200 was added as a benefit he received from his company, A J Wing Construction Limited, pursuant to the provisions of subsection 8(1) of the Income Tax Act, as it was then in force, as consideration for the sale of shares owned by him in Superior Brick and Tile (1969) Limited to it, in December of 1971, on the assumption that the said shares were of no value.

For the purposes of convenience, subsection 8(1) of the old Income Tax Act reads as follows:

8. (1) Where, in a taxation year,

(a) a payment has been made by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction,

(b) funds or property of a corporation have been appropriated in any

manner whatsoever to, or for the benefit of, a shareholder, or

(c) a benefit or advantage has been conferred on a shareholder by a corporation,

otherwise than

(i) on the reduction of capital, the redemption of shares or the winding- up, discontinuance or reorganization of its business.

(ii) by payment of a stock dividend, or

(iii) by conferring on all holders of common shares in the Capital of

the corporation a right to buy additional common shares therein,

the amount or value thereof shall be included in computing the income of the shareholder for the year.

In his Notice of Appeal the appellant states as follows in paragraphs 2, 3 and 7 which read:

2. The appellant is the president and principal shareholder of A J Wing Construction Limited, (hereinafter referred to as “the Company”), a corporation duly incorporated in the Province of Ontario Carrying on business at the City of Thunder Bay, in the District of Thunder Bay as a general contractor.

3. In or about the year 1969, the Appellant purchased certain shares in the capital of Superior Brick and Tile (1969) Limited, (hereinafter referred to as “Superior”), for the sum of FIVE THOUSAND, TWO HUNDRED ($5,200.00) DOLLARS. At the same time, the Company purchased the same number of Shares in Superior for the sum of FIVE THOUSAND, TWO HUNDRED ($5,200.00) DOLLARS.

7. The shares registered in the name of the Appellant were purchased for the benefit of the Company and not for the benefit of the Appellant for the reasons aforesaid.

In his Reply to the Notice of Appeal the respondent states that he reassessed the appellant on the assumptions of the following facts:

4. He does not admit any allegations of fact in paragraphs 7, 8 and 9 of the Notice of Appeal and he says that in assessing the Appellant for income tax for the 1971 taxation year, the Minister of National Revenue, assumed, inter alia, that

(a) on or about 15 December 1971, the Appellant sold shares owned by him in Superior Brick and Tile (1969) Limited to A J Wing Construction Limited, a company of which the Appellant was the President and chief shareholder;

(b) the consideration received by the Appellant from A J Wing Construction Limited on the sale of the said shares in Superior Brick and Tile Limited (1969) to A J Wing Construction Limited was $5,200.00:

(c) at the time the said shares in Superior Brick and Tile (1969) were sold by the Appellant to A J Wing Construction Limited their value was nil:

(d) during the 1971 taxation year, a benefit or advantage in the amount of $5,200.00 was conferred on the Appellant by A J Wing Construction Limited.

The appellant testified on his own behalf. The following is a brief résumé of the evidence adduced at the hearing. The appellant is a contractor by occupation and operates as a corporate entity. His company is A J Wing Construction Limited of Thunder Bay, Ontario. of which he is the principal shareholder. He is also an agent for a steel Company and his interest in construction involving steel brings in extra income. He was familiar with the former Superior Brick and Tile Co Ltd of Thunder Bay which was principally involved in the manufacturing of bricks, a construction commodity which was desir- able and financially advantageous in this part of the Province of Ontario, as ordering bricks from elsewhere was a costly matter by reason of transportation.

in 1968 the president of Superior Brick and Tile Co Ltd was J V Bailey, who was interested in rebuilding the plant and modernizing and updating the manufacturing process of bricks. Apparently, Bailey applied to the Ontario Development Corporation for a sizeable loan to be secured by debentures of the company. Ontario Development Corporation agreed to this proposal but required the company to increase its capital by acquiring more shareholders.

The appellant was approached by Bailey and, after some discussion, agreed to participate in this new venture principally because there was a promise of a building contract in respect of the proposed new structure, the total contract price being in the neighbourhood of $70,000 more or less.

Superior Brick and Tile Co Ltd was incorporated as a new company under the name of “Superior Brick and Tile (1969) Limited”, hereinafter referred to as “Superior”.

The appellant’s problem was the working capital of his own company as this had a direct bearing on the maximum amount of construction performance bond his insurers would issue to cover his contracts. Accordingly, the amount that his company could safely invest in Superior without impairing its working capital was approximately $5,000. The appellant had decided to participate to the extent of $10,000, which meant ten units in Superior, each five-unit package being comprised of 75 common shares, 45 Class A preference shares and 625 Class B preference shares. He stated that Superior indicated every promise of success in its reorganized structure but the strongest factor influencing his decision to participate therein was the fact that as a shareholder he was assured of a building contract for his company. He decided to subscribe to five units personally and his company, over which he had complete control, subscribed for the other five units, each paying $5,200.

The appellant’s company obtained the promised contract (see Exhibit A-1). The appellant was elected to the board of directors of Superior. Subsequently, he held the position of vice-president of this enterprise. Manufacturing problems beset Superior from the outset resulting in at least a a 30% loss on each batch of bricks cooked in the kilns, by reason of the technical difficulties in heating and/or qualitative composition of the bricks. This problem continued, resulting in Superior experiencing severe losses. It was unable to meet its obligations to the Ontario Development Corporation with regard to the debentures and new capital was urgently needed to save the operation. Some additional capital was injected by one of the shareholders by the name of Stan Mach, who was a highly successful entrepreneur in his other companies and commanded a lot of respect within the Superior group of shareholders. Mach contributed an additional $25,000 of capital in return for treasury stock at a reduced price.

in 1971 the financial picture of Superior was dismal, to say the least (see Exhibit A-8). On October 1, 1971 Mach made an offer (see Exhibit A-9) to buy out existing shareholders at a rate of 10¢ per share for common shares; $10 for each of the Class A preference shares and 10¢ per share for each of the Class B preference shares. The appellant states that he rejected this offer principally on the ground that he considered that Mach must be on the road to brighter horizons if he were interested in buying the stock from the other shareholders, even at this minimal price. Two shareholders who held only one unit each accepted the offer but all the others decided to stay. As it turned out Superior went into receivership in April of 1972 at the instance of the Ontario Development Corporation when Superior (Mach now being the controlling shareholder) decided not to honour its obligations under the debenture agreement. The plant was closed and later sold to Mach and his associates who by then had incorporated another entity in which neither the appellant, nor the appellant’s company, nor any one of the other shareholders who rejected the offer of October 1, 1971, made by Mach, were included.

Mach passed away shortly thereafter and this new company went down financially as well.

The appellant states that in December of 1971, after discussing the matter with his accountant, he transferred the shares he held in his personal capacity in Superior to his company, A J Wing Construction Limited, for $5,200. Two factors that he considered then were the fact that Valuation Day was that month and that the said shares should be registered in the name of his company for future use; and, also, that the financial picture of his company had improved to the extent that it was now possible to proceed in this direction.

it was agreed by the parties at the commencement of the hearing that the issue in this appeal was really in two phases. The first phase is: Did the appellant purchase, in 1969, the shares and have them registered in his name on behalf of his company? If so, then he was merely an agent or trustee for his company and when he transferred them back to the company in December of 1971 he did not receive the benefit to the extent of $5,200 but merely a reimbursement for his initial outlay on behalf of his company. The second phase is: If he did not purchase the said shares on behalf of his company, what was the quantum of benefit, if any, received by him in return for the transfer of the said shares in December of 1971 to his company? In other words, what was the fair market value of the said shares in December of 1971?

I must state that I was impressed by the utterly and absolutely candid manner in which the appellant testified. He was perhaps not the most articulate protagonist of his position and the suggestion was also advanced by learned counsel for the appellant that he doubted whether the appellant fully appreciated the significance of certain legal and corporate terminology used at the hearing, such as, for instance, beneficial owner, declaration of trust, agency, trustee and other terms relative to the transaction. While I observed that the appellant hesitated at times in replying to a question, or asked that the question be reworded, he did reply to the questions put to him in the examination-in-chief, as well as in the course of his cross- examination, in a manner that compels me to believe that he knew what he was saying. In his evidence-in-chief, he was asked the following question:

Q. At the time when you acquired some of the shares in your own name and some of the shares in the company name, did you intend to retain the shares in your own name indefinitely, or did you have any other plans for what you were going to do with these shares? A. At that time I did not think very far ahead really. We wanted the work at the brickyard, but subsequently our position did improve, our financial position. At the time that we transferred the shares to the company our financial position—which was a couple of years later—our financial position had improved and our bonding had improved and almost tripled from the time that I made the transaction in buying the shares.

In answer to questions put to him in the course of cross-examination by Mr O A Pyrez, the appellant stated that at all times he was the legal and beneficial owner of the shares registered in his name; that he was under no compulsion to sell or transfer the shares to his company; that he did not act as an agent or trustee for his company nor did he execute any declaration of trust in favour of his company and that there were no documents in the records of his company with regard to the acquisition and subsequent disposal of the said shares registered in his name; that he was at liberty to sell the said shares held by him personally to anyone else if he chose to do so. I asked him if he would have held on to the shares if Superior had not been in such dire financial straits in 1971, and he replied in the affirmative.

While sympathizing with the appellant, the Board cannot disregard the overall picture as presented by him and particularly how he viewed his position vis-a-vis the shares in question.

Taking the evidence in its totality, I am driven to the conclusion that the appellant purchased the said shares for $5,200 for himself and not on behalf of his company. It is true that the motive for so doing was to assist his company, of which he was, to all intents and purposes, the sole owner, to obtain a building contract with Superior, but there it ends.

As to the second phase of the issue, it is clear from the evidence, and particularly from Exhibit A-8, the last financial statement of Superior which shows a loss position of some $153,000 in addition to its obligations to the Ontario Development Corporation and other creditors, that the value of issued and outstanding shares was in fact nil in December of 1971. I believe that the proper inference to be drawn from the facts as they presented themselves is that the appellant attempted to transfer to his company the loss he foresaw would be his. His receipt of $5,200 from A J Wing Construction Limited was therefore a benefit within the meaning of the said subsection 8(1) of the Act.

Accordingly, the appeal is dismissed.

Appeal dismissed.