Les Placements Bourg-Royal Inc v. Her Majesty the Queen, [1974] CTC 362, 74 DTC 6269

Walsh, J:—This is an appeal from a decision of the Tax Review Board made November 7, 1972, rejecting plaintiff’s appeal for its 1968 tax year and maintaining a reassessment dated September 14, 1971, amending reassessment date January 26, 1970, adding to taxpayer’s taxable income the sum of $86,317 resulting from the sale of shares of Fibracan Incorporée (hereinafter referred to as “Fibracan”) and also a deemed advantage or benefit received by the plaintiff in the amount of $16,600.

The plaintiff company (hereinafter referred to as “Bourg-Royal”) was incorporated on December 3, 1964 by six industrialists and two engineers as an investment company with an authorized capital of $150,000 divided into 20,000 common shares with a par value of $1 each, and 13,000 non-cumulative 6% preferred shares with a par value of $10 each. Subsequently by supplementary letters patent dated October 18, 1967, 80,000 additional common shares with a par value of $1 each were authorized. Mr Fernand Lucchési was president of it and also of Fibracan at all relevant times. On December 7, 1964 the eight shareholders subscribed and paid for 16,000 common shares and 6,400 preferred shares, making a total of $80,000. Subsequently additional shares were issued resulting from monthly payments by the various incorporators so that by December 10, 1968, 33,433 common shares had been issued and fully paid, 600 were under option and 8,800 preferred shares had been issued as fully paid, the total capital subscribed now amounting to $122,033.

With respect to Fibracan, it had been incorporated on November 30; 1961 with an authorized capital of $10,000 consisting of 10,000 common shares of $1 par value each, but by supplementary letters patent dated March 11, 1964 and March 17, 1966 its capital had been increased to $575,000 consisting of 27,500 redeemable 6% preferred shares participating with the common shares after payment of a 200 dividend per share on them, said preferred shares having a par value of $10 each, and 300,000 common shares of a par value of $1 each. In the years 1965 and 1966 plaintiff Bourg-Royal subscribed and paid for 57,425 common shares and 4,250 preferred shares of Fibracan, for a total of $99,925. Plaintiff contends that this was done as an investment in accordance with the purposes for which Bourg-Royal was incorporated.

The minutes of a directors’ meeting. of Fibracan dated July 4, 1964 authorized the issue of preferred and common shares to a list of subscribers which includes the name Société d’Administration Com- mercial Inc for 32,500 common shares and 4,250 preferred shares. It was explained by Mr. Lucchési in his testimony that this was the name which he and his group had proposed to adopt for their company but that when they found that it was not available they then used the name Les Placements Bourg-Royal Inc. It is of some significance, however, that this meeting of Fibracan authorizing the subscription was five months before the issue of the letters patent to Bourg-Royal and the authorization for the issue of the shares apparently resulted from offers made some time previously but which could not be acted upon until Fibracan had been registered as a security issuer by the Quebec Securities Commission which the minutes record had now taken place. At a subsequent meeting on October 29, 1966 the issue of a further 24,925 common shares to Les Placements Bourg-Royal was authorized.

At a meeting of Fibracan on September 22, 1967 options were given valid for five years covering 9,000 common shares to all directors, past and present, and members of the management committee who had attended regular meetings since January 29, 1964 at a price of $1.50 per share, the right to purchase being based on 60 common shares for each attendance at regular meetings. There had been 22 meetings in all and a list was included in the resolution indicating the names of those entitled to these options. This list included Mr Lucchési for 1,320 common shares, Mr L Barnabé for 780, Mr J Royer for 300 and Mr G Paré for 240, making a total of 2,640. Messrs Barnabé, Royer and Paré had all at one time or another represented Bourg-Royal on the board of directors of Fibracan along with Mr Lucchési, as Bourg- Royal always had two directors out of the seven on the board. Another member of the group, a Mr Robichaud, had also been a director but possibly this was after the September 22, 1967 meeting as he was not given any share option. At the same meeting options were given to the five members of the management committee, one of whom was Mr Lucchési, for the purchase of 4,000 common shares each at the same price of $1.50 per share. As of July 25, 1968 total subscribed capital to Fibracan stood at 174,109 common shares and 10,255 preferred shares.

Early in 1968 negotiations commenced between Messrs D’Souza and Lucchési on behalf of Fibracan and Charterhouse Canada Limited (hereinafter referred to as “Charterhouse”) in order to raise additional capital which Fibracan required. Charterhouse offered to buy common shares at 850 per share. After further negotiations in May 1968 Charterhouse agreed to buy 65,000 common shares at $1.75 per share. Plaintiff alleges that during a social meeting between Mr D’Souza and Mr Lucchési on May 17, 1968 Mr D’Souza expressed his optimism as to the future of Fibracan, which had been going through a difficult period and had needed substantial additional funds, as a result of the arrangements made with Charterhouse. He pointed out that the volume of sales had gone from $156,000 for the first operating year of the company to $669,000 by the third year and he foresaw a volume of $1,500,000 for the fourth year which might double in the fifth and sixth years. He felt that the common shares would be worth about $10. In view of the fact that because of the expansion of Fibracan all profits would be reinvested for some years to come without any dividends being paid, that there were restrictions on transfer of common shares requiring that any shareholder wishing to sell them must first offer them to his co-shareholders at a price equal to one and one-quarter times the book value as established by the financial statements for the financial year terminating June 30 preceding, and that this book value was only 32.4c as of June 30, 1966 and 74.8c on June 30, 1967, and further, in view of the fact that as a result of the financing with Charterhouse Fibracan could not pay a dividend even on its preferred shares without having first fulfilled certain conditions, and that there was substantial competition with large and well-established companies in the manufacture of cups and similar products, and that for all these reasons it appeared likely that plaintiff would have to wait some time before receiving any income from its investment, Mr Lucchési then suggested to Mr D’Souza that he would sell plaintiff’s common shares to him at the said price of $10 per share. After further discussion plaintiff gave Mr D’Souza an option on its 57,425 common shares at a price of $4 per share and all its 4,250 preferred shares at par, this option to remain valid for a period of 90 days from May 17 1968. On June 4, 1968 Charterhouse subscribed for 60,000 common shares of Fibracan at $2 a share subject to registration with the Quebec Securities Commission and these shares were issued on July 26, 1968. As of September 5, 1968 Mr D’Souza, through Charterhouse, purchased from plaintiff 30,000 of its common shares at $4 a share and 2,250 of its preferred shares at par, making a total price of $142,500 of which $71,250 was paid in cash, $35,625 was payable on September 5, 1969 and $35,625 on September 5, 1970, without interest, with the provision that a commission of $3,562 payable to Mr D’Souza would be deducted from the sale price. It is the profit on this sale which defendant is taxing as income of plaintiff.

Plaintiff alleges that the proceeds of the sale of these shares were reinvested in other investments through the stock exchange such as Industrial Acceptance Corporation, Dupont of Canada, Great Lakes Paper Ltd, Price Company, Abitibi, Alcan, Chemcell, Traders, Westcoast, Bell Canada, American Growth Special, Acklands Ltd, among others, and that plaintiff also looked into other investment proposals for shares of companies such as Nilus Leclerc Inc, La Buanderie de Lévis Ltée and Victoriaville Caskets. Plaintiff further alleges that it had no office, employees, nor telephone and made no public solicitation for funds or investments, it did no advertising, it was not registered as a broker with the Quebec Securities Commission, and that at all times it conducted itself merely as a private investment company. The sale of the shares in question resulted from an unsolicited offer and was accepted after no income had been received on this investment from the time it was made and when it became apparent that it might be some time before any income would be received.

Subsidiarily, plaintiff pleads that even if the profit was taxable, which it denies, subparagraph 85B(1)(d)(i) of the Income Tax Act, RSC 1952, c 148, as amended* [1] would apply, profit having been received over a period of more than two years.

With respect to the second part of the assessment in the amount of $16,600, the deemed benefit or advantage concerned arose from the share option. Plaintiff contends that these options were not conferred on it but on Fernand Lucchési, Lionel Barnabé, Jean Royer and Gilles Paré as individuals, resulting from their attendance at meetings. Moreover, the book value of the shares at the time of exercising the option on August 1, 1968 was about 850 per share and the market value would vary between $1.50, the price paid by the shareholders, and $2, the price paid by Charterhouse, a third party, and was not $4, the price paid plaintiff for the common shares bought from it.

Defendant, for its part, contends that since its incorporation in 1964 until September 1968 plaintiff exercised only one activity, namely, the promotion of Fibracan, and that all the share capital subscribed by its shareholders was used by plaintiff to buy shares in Fibracan, that Mr Lucchési was always at the same time president of both companies, and at the time that plaintiff commenced buying shares in Fibracan this latter company was a new company with slim chances of success because of the existence of multi-national well-established companies in the manufacture of polystyrene cups and that it was evident at the time that the shareholders of Fibracan could not hope to receive dividends for some years as a result of the need for reinvesting in the enterprise any profits which they might hope to make. Defendant contends therefore that plaintiff only bought the shares in Fibracan with a view to obtaining an increase in their value and reselling them at an opportune moment. Since its incorporation in 1964 up to September 30, 1968 plaintiff received only the following income:

but on September 5, 1968 as a result of the sale of part of its Fibracan shares to Charterhouse Canada Limited it realized a net profit of $86,317.

With respect to the claim on the deemed benefit as a result of the option given for the purchase of 6,640 common shares at $1.50 a share which was exercised in. August 1968, defendant contends that this was an acquisition by plaintiff and that at the time the true value was $4 per share as appears from the transaction whereby other common shares of the company were bought from plaintiff at this price on September 5, 1968.

Evidence was given by Mr Jean Royer and Mr Fernand Lucchési, members of the group which formed plaintiff company, and by Mr Edgar D’Souza who promoted and formed Fibracan. Messrs Royer and Lucchési had been members of a group composed mainly of the same people who later incorporated Bourg-Royal and who had a few years previously formed a company for the manufacture of steel for reinforced concrete known as Compagnie d’Usinage d’Acier de Québec in which they had lost money which they had treated as a capital loss. They and their associates alleged that they wanted to build up funds for themselves for their eventual retirement and this was their purpose in forming an investment group. In view of their unfortunate experience with the Usinage d’Acier de Québec they decided to incorporate rather than to form a syndicate or partnership. The company they would form would be in the nature of a holding company and could benefit from their varied business experience. They felt, as Mr Lucchési testified, that one of the problems in the Province of Quebec was a lack of sufficient people with administrative experience and considered that they could advise and help others realize on their investments. They wanted to acquire substantial but not necessarily controlling interests in various business enterprises, place one or more of their members on the board of directors and derive income from their investment in these businesses. As a secondary advantage they hoped as individuals to get some business contracts for their own personal business from these companies in which they invested.

They were approached by Mr D’Souza who was forming Fibracan and required $100,000 in capital. He had had a study made by La Société Canadienne d’Etudes Techniques d’investissements Inc as to the possible profitability of a factory for manufacturing paper cups, which detailed report was produced as an exhibit, and projected that $400,000 in capital would be required of which $200,000 could be borrowed and $200,000 raised by sale of shares, with a forecast of net profit after taxes of $43,900 the first year, $98,610 for the second year and $135,250 the third year. The study indicated a market for Sales totalling $20,000,000 in 1964 in Canada but did point out that there were three subsidiaries of large American companies namely Lily Cups, Dixie Cups and Continental Can in the business, all of whose plants were located in Ontario. As a result of this and of contacts which they believed Mr D’Souza had with hospitals, having worked for the Quebec Ministry of Health as a consultant in its hospital programmes, they decided to invest the entire $80,000 which they had available in shares of this business.

Subsequently as a result of further monthly contributions which they made to Bourg-Royal and following the sale of the shares of Fibracan owned by Bourg-Royal they did acquire other investments. Bourg- Royal bought some land in Orsainville in Quebec being vacant land and eventually built on it, using borrowed money. It still owns this development and, although it is still operated at a loss, Mr Lucchési estimates that it may commence to yield profits in 1975. They: also investigated the possibility of investing in a family company, Nilus Leclerc Inc, in the textile business in L’lslet, with the intention of expanding it. They investigated the possibility of buying into La Buanderie de Lévis and also Victoriaville Caskets, and in fact had accepted an offer to buy into that company when it backed out of the offer, which led to a lawsuit. As already stated, in the interval between the sale of the shares in Bourg-Royal and finding a suitable reinvestment they invested the funds on hand in a stock of companies quoted on the stock exchange. The objects clauses of Bourg-Royal set out that it is an investment company and gives it the right to acquire and hold shares, bonds, or other securities of companies with similar objects whose acquisition can be useful to the company and to sell or otherwise dispose of them. As has frequently been said, however, in previous cases, it is not so much the objects clauses of the company which must be looked at but the nature of the business which is actually carried on within the scope of these objects which must be examined to determine the real nature of its operations. See, for example, R K Farris v MNR, [1970] CTC 224 at 240; 70 DTC 6179 at 6189, and Regal Heights Limited v MNR, [1960] SCR 902 at 907; [1960] CTC 384 at 390; 60 DTC 1270, in which Judson, J, in referring to the significance of objects clauses in a company’s charter, stated:

Nothing turns upon such a statement in such a document. The question to be determined is not what business or trade the company might have carried on but rather what business, if any, it did in fact engage in.

See also Sutton Lumber & Trading Company Limited v MNR, [1953] 2 SCR 77; [1953] CTC 237; 53 DTC 1158, in which Locke, J stated at page 83 [244, 1161]:

The question to be decided is not as to what business or trade the company might have carried on under its memorandum, but rather what was in truth the business it did engage in. To determine this, it is necessary to examine the facts with care.

Plaintiff relies among others on the case of Paul Racine, Amédée Demers and François Nolin v MNR, [1965] CTC 150; 65 DTC 5098. That case turned however on the finding that when the appellants invested in the shares of a business which they sold soon after at a profit they had no secondary intention of. so doing at the time they made the investment but had intended to operate the business themselves as an investment as they had with other businesses and properties they had acquired. Noël, J, as he then was, stated at page 5103:

Thus, it appears that the fact alone that a person buying a property with the aim. of using it as capital could be induced to resell it if a sufficiently high price were offered to him, is not sufficient to change an acquisition of capital into an adventure in the nature of trade. In fact, this ‘Is not what must be understood by a “secondary intention” if one wants to. utilize this term. -,

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.

In the present case Messrs Royer and Lucchési testified that they and their associates were only interested in income which might be derived through Bourg-Royal from their investment, but I do not find that the facts bear this out. An examination of the study of possible profitability of Fibracan on which they allegedly based their investment shows very clearly that any profits which the company might make in its initial years would probably have to be ploughed back in for future capital needs as it expanded, and that while the shares of the company might well increase in value it would be highly unlikely that any dividends could be paid in the initial years. Moreover, the entire available capital of Bourg-Royal was committed to this investment at the time. When, after three years, they found that they were receiving no income, and that as a matter of fact substantial further capital commitments would be necessary if Fibracan was to continue to operate (which requirements Fibracan obtained from Charterhouse, but only on the basis of a commitment which would restrict payment of dividends even on the preferred shares for some time), it was then decided to sell the shares of Bourg-Royal and an unsolicited but profitable offer for them was received from Mr D’Souza. It is true that initially Bourg- Royal only sold one-half of its shares, the profit from which is the subject of the present litigation, and retained the other half which were subsequently sold for about the same price, but it is difficult to conclude that the profit on the sale of the investment was not at least a secondary intention at the time the investment was made, unlike the Racine, Demers and Nolin case (supra). The requirement that two representatives of the plaintiff be on the board of directors of Fibracan at all times and the fact that this was to be the professed policy of the group in connection with any investments which Bourg- Royal would make, and that they considered that their engineering and business experience and financial and other contacts would be of substantial benefit to the small companies in which it was intended to invest, indicate that the policy was, if not to actually control the operation, to nevertheless be in a position to observe and influence the operation of the businesses in which investments were to be made, and thus to assist in turning these investments to a profit. This type of operation is in itself a business, and I conclude that plaintiff was quite properly and legitimately seeking not merely income from its investments but was also hopeful of increasing the value of them by promoting the expansion: and development of the companies in which it had so invested so that the value of the assets so invested would continue to increase and expand. This is distinguishable from the situation in the Supreme Court case of Irrigation Industries Limited v MNR, [1962] CTC 215; 62 DTC 1131, where the appellant, which had merely invested in treasury shares of a company in which it had no inside interest or over which it had no control whatsoever, by way of a single isolated transaction outside the course of its ordinary business was found to have made a capital gain. This case referred to the Leeming v Jones case in which the House of Lords’ decision is reported in [1930] AC 415. In rendering judgment Lord Buckmaster stated at page 420:

. an accretion to capital does not become income merely because the original capital was invested in the hope and expectation that it would rise in value; if it does so rise, its realization does not make it income.

The situation is quite different when, as here, there is participation in the development of an investment through representation on the board of directors.

As the Lord Justice Clerk said in Californian Copper Syndicate v Harris (1903-11), 5 TC 159 at 165-6:

It is quite a well settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit . . . assessable to Income Tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment but an act done in what is truly the carrying on, or carrying out, of a business; .. .

What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the

question to be determined being—Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made In an operation of business in carrying out a scheme for profit-making?*

In Canada Permanent Mortgage Corporation v MNR, [1971] CT C 694; 71 DTC 5409, Heald, J stated at page 709 [5418]:

. . . the course of conduct should be given precedence over the oral testimony of company officers as to the intent of the company where there Is a conflict between the two.

In the case of Wellington Hotel Holdings Limited v MNR, [1973] CTC 473; 73 DTC 5391, the converse of the present situation was in issue with the Minister contending that the loss realized by the taxpayer on buying and selling securities was a capital and not an income loss. In rendering judgment finding that the loss from these investments (which did not constitute appellant’s principal business) was an income loss, Urie, J, after referring to the above jurisprudence, stated at page 481 [5397]:

I found Mr Escaf’s testimony to be credible and I think that when it Is viewed with the conduct of the appellant in the purchase and sale of securities which were obviously not of “investment grade” but of “speculative grade” it can be accepted, as I do accept it, as corroborative of such course of conduct.

Mr Escaf was not looking for safe investments, he was looking for a greater return through appreciation in the value of his securities.

and again at page 482 [5398]:

•Italics mine.

The additional facts in evidence upon which I rely to support my view are that the securities bought and sold were speculative in nature, were non-income producing, were held for relatively short periods of time and formed a substantial portion of the total business of the appellant.

He accordingly found the loss to be an income loss and deductible. With the sole exception that the securities in Fibracan were held by plaintiff for a longer time in this case, all the other criteria are similar.

In the Supreme Court case of Norman R Whittail v MNR, [1967] CTC 377; 67 DTC 5264, Martland, J, in rendering judgment of the Court, stated at page 393 [5273]:

The sole issue here is whether he, personally, was engaged in the business of trading in oil and gas rights and in corporate shares. The information which was available to him, qua director, and the actions which he took in the light of that information are relevant to that issue to the extent that they are of assistance in determining the intentions of the appellant in relation to the various rights and shares which he acquired and sold.

The plaintiff in the present case had the same sort of inside information available through Mr Lucchési’s presence on the board of direct- tors of Fibracan.

In the case of William C Mainwaring v MNR, [1964] CTC 341; 64 DTC 5214, profits on the sale of shares of a company formed by five associates, of whom appellant was one, for developing an oil and gas company were taxed as income despite appellant’s contention that he had acquired the shares for investment purposes only. In rendering judgment, Dumoulin, J distinguished the Irrigation Industries case (supra) stating, with reference to it at page 348 [5217]:

Manifestly, the aforementioned deal consisted in an isolated transaction and the Directors of Irrigation Industries took no participation whatsoever in the organization of the mining company and had nothing to do with {ts financing, promotion or management.

I do not believe that it could be said in the present case that the directors of Bourg-Royal had nothing to do with the financing, promotion or management of Fibracan. It may well be that when Mr Lucchési and his associates incorporated Bourg-Royal they were thinking in terms of investment and of the revenue to be derived from their shareholdings in it. The profits of Bourg-Royal which they, as its shareholders, would eventually share were not, however, necessarily to be derived from income-producing investments but Bourg-Royal's policy was primarily to invest in small businesses with a considerable growth potential either just starting up, as in the case of Fibracan, or which, although in existence for some time, had the potential for expansion and growth when provided with the necessary management skills and capital. While Bourg-Royal may not have wanted to actually operate these businesses, it wished to acquire a substantial interest in them and to assist in their promotion and development by representation on their board of directors. This manner of operating, while it did not necessarily make Bourg-Royal a holding company or a conglomerate, nevertheless went beyond what would be expected of a company which was operating purely as an investment company. In fact, it embarked on a business enterprise consisting of assisting the development of other companies by its participation in their businesses, the first example being its substantial participation in Fibracan. The profits from such a participation resulting when its shares of Fibracan were sold are business profits properly taxable as income and not capital gains resulting from an incidental investment; accordingly this portion of plaintiff’s claim must fail.

Plaintiff raises a subsidiary argument, however, based on subparagraph 85B(1)(d)(i) of the Income Tax Act (supra). The documentation respecting the dates and terms of sale by Bourg-Royal of the portion of its shares in Fibracan resulting in the profits with which we are here concerned is somewhat confused. On May 21, 1968 Mr D’Souza wrote Mr Lucchési referring to the option given by the latter to him on May 17 for the purchase of all shares of Fibracan registered in the name of Placements Bourg-Royal Inc, stating that the duration of the option was to be for 90 days effective May 17, 1968 and terminating August 17, 1968, that the sale was to be a bulk sale, all the preferred and common shares to be sold at the same time, and that payment of the total price of $272,200 was to be made to the extent of $102,200 “on transfer of shares” (italics mine), $85,000 12 months from date of transfer and $85,000 24 months thereafter. It was not until September 16, 1968 however, after the accepted option had expired, that Charterhouse Canada Limited wrote Bourg-Royal confirming their purchase as agents of 30,000 common shares and 2,200 preferred shares for $142,500 which was paid as follows: $71,250 cash on closing (which was apparently September 5, 1968), a promissory note for $35,625 due September 5, 1969, and another $35,625 due September 5, 1970. These payments do not seem to be dependent on the date of transfer of the shares but on the date of the purchase on September 5, 1968 and it only covers part of the shares and not all of them so it really constitutes a new transaction quite separate from that on which the option effective May 17, 1968 was based, although along the same general lines. Actually, it appears that the shares were not transferred at the time of the sale as the list of shareholders of Fibracan as of October 1, 1968 was sent to the Minister of National Revenue with a covering letter dated October 2, 1969 and Bourg-Royal Inc was still listed as shareholder for 4,250 preferred shares and 57,425 common shares. The same document lists Placements Bourg-Royal Inc as holding outstanding options for 6,640 common shares as of June 30, 1968. Certainly, there is nothing in this documentation to indicate that payment was td be made more than two years after the day on which the property was sold so as to bring subparagraph 85B(1)(d)(i) into effect and to permit plaintiff to deduct a reserve. This, argument must therefore also fail.

Turning now to the second portion of plaintiff’s appeal, against the assessment of deemed profit on the 6,640 common shares for which options to purchase at $1.50 per share were given to directors and members of the management committee of the company on the basis of their attendance at meetings, we find a series of somewhat confusing and contradictory resolutions in the minutes of the meetings of Fibracan. The options were originally given at a meeting held on September 22, 1967 and after reference was made to the extraordinary services which had been rendered by the directors and members of the management committee to get the enterprise under way, including personal loans, and the endorsement of substantial loans, all of which had been done without remuneration or reimbursement of expenses, provision was made for the issue of the options, details of which have been given herein above. At a meeting on July 26, 1968, however, Fibracan accepted subscriptions from various persons for common shares including Les Placements Bourg-Royal Inc for 6,640 shares at a total price of $9,960. The copy of the minutes filed as an exhibit has a marginal note signed by G M Alarie, the secretary, stating:

[Translation]

In the present minutes the name of Fernand Lucchési should be substituted for the name of Les Placements Bourg-Royal Inc.

but there is nothing to indicate when this marginal note was made, or whether in fact it appears in the original minute book.

At a later meeting on April 11, 1972 (after the assessment of the deemed profit resulting from the issue of these shares had been made on September 14, 1971) it was stated that there had been an error made in a previous directors’ meeting concerning the issue of a share certificate for 6,640 common shares in the name of Les Placements Bourg-Royal Inc and a resolution was passed reading as follows:

THAT the minutes of the Directors’ meeting held on July 26th, 1968 be, and they are hereby amended to read, in respect of the above mentioned issue,: “Issued to the name of Fernand Lucchési” instead of “Les Placements Bourg Royal Incorporée”.

lt was presumably after this meeting that the marginal note was made correcting the minutes of the July 26, 1968 meeting.

To confuse the situation further, at a directors’ meeting of Placements Bourg-Royal on August 1, 1968 a resolution was passed providing for the purchase by the company of 6,640 common shares of Fibracan at $1.50 a share, reference being made to “its right to purchase”. Immediately following is a resolution, partially illegible, in the copy of the minutes filed as an exhibit but which appears to provide for the sale of the 6,640 shares to Mr Lucchési at the same price. At a further meeting of the directors of Bourg-Royal on November 25, 1971 (after the reassessment of September 14, 1971) under the heading “Amendment” is found a lengthy explanation by Mr Lucchési in which he states that since, at the September 22, 1967 meeting of Fibracan, the options were given to its directors and members of its management committee, said options being given to them personally, his intention was to simply mention them at the meeting of August 1, 1968 in order that none of the other shareholders of Bourg-Royal could reproach him for having taken advantage of his situation as a director and officer of Fibracan, with the view of obtaining from the company a declaration that it had no interest in the said purchase options, and that, therefore, in view of this the resolutions adopted at the meeting of August 1, 1968 were incorrect. The resolutions adopted at the meeting on August 1, 1968 providing for the purchase by the company of the 6,640 shares, and the second resolution providing for the sale of these shares to Mr Lucchési were therefore annulled and replaced by a resolution to the effect that the company declared that it had no interest whatsoever in the said options and that as a result it could not sell, cede or otherwise dispose of any right whatsoever in them to Fernand Lucchési since it had never been the owner or beneficiary of them.

While all this is very confusing, and certainly one mus ’ook with some suspicion on resolutions passed following an assessment which have the effect of making alterations in previous minutes which, had they been properly drawn in the first place, would probably have resulted in the assessment never having been made, I believe that in justice we must look at the real picture. The options were clearly given to directors and members of the management committee of Fibracan as compensation for their services and in this capacity Mr Lucchési and certain of his associates in Bourg-Royal who had from time to time been on the board of directors of Fibracan with him were given these options personally. Mr Lucchési testified that in fact all the options were taken up by him, including those given to Messrs Barnabé, Royer and Paré, because the latter had been willing that he should do so. We are not here concerned with the taxation as income in the hands of Mr Lucchési and his said associates of the value of these share options, nor with the effect on this of the assignment by the other three of their option rights to Mr Lucchési, but merely with the taxability of Bourg-Royal on same. It appears evident that, despite the errors made in the minutes of both companies, Bourg-Royal did not in fact take up the options or benefit by them. Mr Lucchési testified that he paid for them himself. Bourg-Royal should therefore not have been taxed on the deemed benefit arising out of the granting of these options and therefore succeeds in this portion of its appeal. In view of this conclusion it is not necessary to go into the question of the value of the deemed benefit.

Plaintiff’s action is therefore maintained in part only, the profit of $86,317 for which it was assessed on the sale of some of its shares in Fibracan being properly treated as income, and taxable as such, and its appeal against this part of the assessment is therefore dismissed, but the amount of $16,600 deemed benefit resulting from the issue of 6,640 common shares of Fibracan should not have been assessed as income of plaintiff and its appeal against this part of the assessment is therefore maintained. Since this part of the assessment would most probably never have been made had the minutes been properly drawn in the first place, plaintiff is not entitled to any costs on its appeal, although partially. successful.

Since defendant has been successful on the principal issue in the appeal, costs are awarded in favour of defendant in the amount of two-thirds of Its taxable costs.