John Page and Genevieve McLvers, Co-Executors of the Estate of Abe Levine (Deceased) v. Minister of National Revenue, [1973] CTC 219

Sweet, DJ:—This is an appeal against a reassessment in respect of the late Mr Abe Levine for the taxation year 1965.

Particulars in connection with the reassessment were:

Respondent’s counsel consented to the appeal being allowed in respect of the item “Gift element in sale of shares to daughters-in- law $30,000.00”.

Counsel for the parties agreed (Exhibit 4):

(a) should it be this Court’s decision that there was a gift by Abe Levine to Weldon Levine in respect to 5000 shares of the capital stock of Abe Levine & Sons Ltd, the amount of the gift is $121,250

(b) should it be this Court’s decision that there was a gift by Abe Levine to Weldon Levine in respect to 3500 shares of the capital stock of Abe Levine & Sons Ltd the amount of the gift is $70,000.

To understand what is really involved requires recital of some history.

The late Mr Abe Levine had become a man of quite substantial affairs. The one of his enterprises which is particularly germane to this case was a business of buying and selling scrap metal. In respect of that operation a company was incorporated by letters patent dated December 23, 1955 with the name “Abe Levine & Sons Ltd”.

In the latter part of 1964 or the early part of 1965 Mr E J Mockler, a barrister, was retained to do, in connection with Mr Levine’s affairs, what Mr Mockler called ‘overall planning”.

Mr Mockler worked out a rather far-reaching plan which included provisions for wives of Mr Levine’s then married sons, his grandchildren and his son, Weldon Levine. On Mr Levine’s instructions he drafted documents to implement the plan.

Included in the planning was machinery for the son Weldon increasing, and very substantially, his interest in Abe Levine & Sons Ltd.

As originally incorporated the authorized capital stock of that company was 2,500 shares without par value. Of these Mr Abe Levine held, at the time Mr Mockler was called in, 1,999 shares; his wife held one share, which it is conceded she held as the nominee of Abe Levine, and the son, Weldon, held 500 shares.

The plan to increase Weldon Levine’s holdings in the company required a number of steps. They start with supplementary letters patent dated October 12, 1965, increasing the authorized capital stock of Abe Levine & Sons Ltd by an additional 25,000 shares without par value.

Exhibit 1, which contains what it has been agreed are copies of a considerable amount of documentation, includes a copy of what purport to be minutes of a meeting of the board of directors of Abe Levine & Sons Ltd held on October 22, 1965. They indicate that present were Abe Levine, Bessie Levine, Weldon Levine and Harry Levine, said therein to be all the directors of the company. Those minutes indicate that a resolution was unanimously passed which inter alia included:

Twenty-five thousand (25,000) common shares in the capital stock of the Company (hereinafter called “the common shares”) be offered for subscription to the holders of record of common shares of the Company at the close of business on the 22nd day of October 1965 on the basis that such holders of record of common shares shall be given the right to subscribe for ten common shares of the Company at the price (hereinafter sometimes called “the subscription price”) of One Dollar ($1.00) per share (Canadian funds) for each common share of the Company held at such time, ten rights to subscribe to attach to each common share of the Company and each such right and One Dollar ($1.00) be required to subscribe for each common share of the Company;

It might be noted that although in those minutes Harry Levine is referred to as a director this matter proceeded on the basis that at all relevant times the only shareholders, until there were subsequent assignments by Abe and Weldon Levine, were they and Bessie Levine. It is on that basis that this matter is being disposed of.

By subscriptions dated November 3, 1965 Weldon Levine exercised his rights to subscribe for 5,000 shares and Abe Levine subscribed for 500 shares. The result was that, instead of shares being owned as previously, shares of Abe Levine & Sons Ltd came to be owned as follows:

Weldon Levine—5,500 shares

Abe Levine (assuming Bessie Levine was holding one share for him)—2500 shares

In connection with the acquiring of the additional 5,000 shares Weldon Levine was to pay into the company the $1 for each of them and, Abe Levine, the $1 for each of his.

By agreement dated November 30, 1965 Abe Levine agreed to sell to each of Sarah Levine, Edith Levine and Betty Levine, daughters-in- law of his, and they agreed to purchase 800 common shares in the capital stock of Abe Levine & Sons Ltd at a price of $30,000 each being $37.50 per share. That agreement also contained:

It is hereby agreed that the fair market value of the shares as of the date of this agreement is $90,000.00; provided, however, that if at any time in the future the Department of National Revenue shall assign a different value to any of the aforesaid shares as of the date of this agreement it is mutually covenanted and agreed that the terms of this agreement shall be adjusted accordingly, and that the Party or Parties in whose favour such adjustment accrues shall be entitled to recover as a debt due from the other Party or Parties any excess in the value of the shares plus additional consideration transferred or paid by him under this agreement over the value of the shares and other consideration received by him.

By agreement dated November 30, 1965 between Weldon Levine, therein called the vendor, and John Page and Genevieve Mclver, trustees of the “Levine Family Trust” therein called the purchasers the vendor agreed to sell and transfer to the purchasers and the purchasers thereby purchased 1,500 common shares of no par value in the capital stock of Abe Levine & Sons Ltd for a total price of $56,250, being $37.50 per share. It also contained a provision regarding adjustment of terms if at any time in the future the Department of National Revenue assigned a different value to any of the shares similar to the one in the previously mentioned agreement between Abe Levine and Sarah, Edith and Ethel Levine.

Accordingly at that stage the situation, so far as Weldon Levine was concerned, was: he had paid or agreed to pay to the company $1 for each of 5,000 shares; had agreed to sell 1,500 shares at $37.50 each and after transfer of the 1,500 shares would have remaining 4,000 shares including the 500 which he originally owned. Those were one- half of the total issued shares of the capital stock of Abe Levine & Sons Ltd.

Mr Mockler was a witness. It was he who advised on the planning previously referred to and, as I gather from his evidence, actually developed the plan. With leave he also acted as one of the appellants’ counsel.

Mr Mockler argued from a number of aspects stressing, however, three main positions: (1) that the assessment could not stand because it had been proven that it had been made on an assumption of circumstances which did not exist; (2) that the acquisition of the shares by Weldon Levine through the issuing of rights had a commercial purpose; (3) that if the acquisition of shares by Weldon Levine did contain a gift element, it applied only to 3,500 shares and not to 5,000 shares.

In connection with the first of these points Mr Mockler submitted that the respondent assumed that there had been a transfer from Abe Levine to Weldon Levine and, in his submission, there was no such transfer.

He referred to the following in the judgment of Jackett, P, as he then was, in MNR v Dufresne, [1967] 2 Ex CR 128 at 140; [1967] CTC 153 at 163; 67 DTC 5105 at 5111:

In my view, the onus was on the respondent to plead and prove either

(a) that the assessment was not based on an assumption that the result of the transactions set out in paragraph 4 of the Notice of Appeal was that the respondent conferred a benefit of $66,596.73 on the children; or

(b) that it was not, in fact, a result of such transaction that the respondent conferred a benefit in that amount on the children.

Mr Mockler submitted that what he claimed was the Minister’s incorrect assumption is made manifest by the following wording in the notice of reassessment: “Value of gift element in transfer of shares of Abe Levine & Sons to Weldon” and in wording of the notification by the Minister under section 58 of the Act namely, “in respect of the gift element of $220,000.00 in the transfer of shares of Abe Levine & Sons Limited to the taxpayer’s son and daughters-in-law”.

Reference was also made to the following questions and answers in the examination for discovery of Joseph Blanchard, an officer of the Department of National Revenue.

Q. In this letter of July 17, 1969, on page 2, you state “It is our opinion that the change in Weldon Levine’s ownership from 20% of the issued common shares on November 1, 1965 to 68.75% on November 4, 1965 constitutes a transfer from Abe Levine to Weldon—which is subject to tax under Section 111 of the Income Tax Act.” A. Yes.

Q. Now when you wrote that letter, I take it that the basis upon which you were making the assessment was that a gift had been made by Abe Levine to Weldon Levine, is that correct? A. Yes.

and

Q. Let’s get this clear. At the time you would have got Estate and Gift Tax involved in this, the decision to assess would have been made—in other words, November 1969, the decision to assess would have been made at that point, is that correct? A. Yes.

Q. And now were you the person who would have made that decision? A. Yes, that the amount was taxable, that the gift was taxable. Yes, I would say.

Q. And you did it on the assumptions we talked about earlier? A, Yes.

and also

Q. And this T-7-W8 also explains how the minister or the assessor has arrived at his conclusion to tax, it is an explanation of the assumption he has made for the tax or for the assessment, is that correct? A. Yes.

Abe Levine did not assign to Weldon Levine any shares of the capital stock of Abe Levine & Sons Ltd issued by that company to Abe Levine. It was the company, and not he, who received payment for the shares issued to Weldon Levine pursuant to the rights.

As I understand the Dufresne case it is there made quite clear that when a shareholder, who has effective control of a company, causes, by a “rights issue”, whereby shares can be acquired by shareholders. at a price less than their actual value, equity in that company to flow from him to another shareholder, there can be a gift element or “benefit” involved in the acquisition, by that other, of shares issued pursuant to the rights. This is so though the controlling shareholder did not assign any shares issued to him and the company, and not he, received payment for the shares issued by the company pursuant to the rights.

In the Dufresne case (p 129 [154, 5105-6]) there is:

The question raised by the appeal relates to the acquisition, on two separate occasions, by each of the respondent’s five children of shares in a company in which the respondent was the controlling shareholder in circumstances which resulted in the children having an interest in the capital stock of the company, relative to that of the respondent, that was greater than the interest they had, relative to his, prior to such acquisition.

Commencing at page 138 [162, 5110] of that authority there is:

The second question is whether, if that result—acquisition at a cost of $7,500 of a holding of 6/17 of the stock of the company in place of the 1/12 previously held was a “benefit” to the children, was that benefit conferred on them by the respondent?

That question cannot, in my view, be realistically answered by an analysis of each of the respective steps taken without taking account of the ordinary well known facts of life in the world of affairs. The resolution granting the “rights” was, it is true, passed by the Board of Directors; and the respondent was only one director and had in the proceedings of the Board only one vote. There is nothing, moreover, to show that the wife and children did not each act independently in deciding their respective courses of action in the whole series of events. Nevertheless, in the absence of any evidence by the respondent or on his behalf to show what in fact happened, I am of the view that the balance of probability is that he, as the owner of practically all the shares in the company and the head of the family, had the controlling influence in the determination of the course of events with which we are concerned. The sequence of events bears all the earmarks of a series of company transactions that had been arranged in advance by the major shareholder and father, after taking appropriate professional advice, with a view to achieving the result of increasing the children’s proportions in the ownership of the stock of the company. That that is what in fact happened is corroborated by the evidence given before the Tax Appeal Board. There was very little, if any, consultation in advance between the children and the respondent, who, in effect, presented them with what he had arranged for their benefit and assumed that they would accept it, which they did. Moreover, the benefit, if it was one, was an increase in the proportions of the children almost entirely at the expense of the decrease in the respondents.

There is no doubt in my mind that, if the result of the transaction was a benefit to the children, it was conferred on them by the respondent.

In this connection counsel for the appellants attempted to distinguish the Dufresne case on the ground, among others, that the Dufresne case was decided on an interpretation of subsection 137(2) of the Income Tax Act and that under the circumstances of this case that provision is not available to the respondent. He submitted, indeed, that the Dufresne case itself made that reasoning inapplicable to section 111 of the Income Tax Act. For this he relied on the following in Dufresne (p 129 [154, 5105]):

By virtue of subsection (1) of section 111 of the Income Tax Act, a tax is payable upon the gifts made in a taxation year by an individual resident in Canada. (An extended meaning is given, for this purpose, to the word "‘gift” by subsection (2) of section 111, but it has not been suggested that that subsection has any application to the determination of the question raised by this appeal.) The tax on gifts imposed by section 111 is, by virtue of section 114, payable by the donor.

It seems to me that all that passage does is to indicate that the learned and distinguished President of the Exchequer Court was simply not dealing with section 111.

Subsection (2) of section 137 is:

137. (2) Where the result of one or more sales, exchanges, declarations of trust, or other transactions of any kind whatsoever is that a person confers a benefit on a taxpayer, that person shall be deemed to have made a payment to the taxpayer equal to the amount of the benefit conferred notwithstanding the form or legal effect of the transactions or that one or more other persons were also parties thereto; and, whether or not there was an intention to avoid or evade taxes under this Act, the payment shall, depending upon the circumstances, be

(a) included in computing the taxpayer’s income for the purpose of Part I,

(b) deemed to be a payment to a non-resident person to which Part III applies, or

(c) deemed to be a disposition by way of gift to which Part IV applies.

Section 111 of the Income Tax Act is:

111. (1) A tax shall be paid as hereinafter required upon the gifts made in a taxation year by an individual resident in Canada or a personal corporation.

(2) For the purpose of this section, “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

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

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

I think that the Dufresne case makes it clear that if the evidence were to disclose that in making the assessment the Minister did in fact rely on an assumption which the evidence discloses was incorrect the assessment cannot stand. However, in my view the evidence here does not disclose that the Minister assumed a situation which did not exist.

The letter dated July 17, 1969 from Mr Blanchard to which reference is made in his examination for discovery (and one of the items on which the appellants appear to rely) shows that Mr Blanchard was not under any misconception as to how the substantial change in the shareholding of Abe Levine & Sons Ltd came about and that there was no assumption that Abe Levine had assigned to his son, Weldon, any shares issued by the company to Abe Levine. The letter itself shows that the Minister’s officer was fully aware that the purpose sought to be accomplished was effected by means of the issuing of rights to subscribe for shares.

A photocopy of that letter is part of Exhibit 2. It contains inter alia:

The events or transactions leading to the change in ownership were as follows:

October 12, 1965. Supplementary Letters Patent were obtained increasing the capital stock from 2500 to 27,500 common shares.

October 22, 1965. Rights were issued to purchase at $1.00 per share for each old common share held, 10 shares of the new common shares authorized.

November 3, 1965. Abe Levine subscribed for 500 shares and Weldon Levine subscribed for 5,000 shares, all at $1.00 per share.

November 5, 1965. The remaining 19,500 rights issued to Abe Levine expired.

In that letter Mr Blanchard said: “It is our opinion that the change in Weldon Levine’s ownership from 20% of the issued common shares on November 1, 1965 to 68.75% on November 4, 1965 constitutes a transfer from Abe Levine to Weldon Levine by gift which is subject to tax under section 111 of the Income Tax Act.” The wording “constitutes a transfer from Abe Levine to Weldon Levine” is not synonymous with a wording such as “resulted from a transfer from Abe Levine to Weldon Levine of his shares of capital stock”.

A change in the percentages of ownership of shares of the capital stock of the company by the method employed so that Weldon Levine’s holdings relative to the total issued shares would be increased was part of the “overall” plan devised by Mr Mockler.

I find, on the evidence, that as part of the “overall” plan Abe Levine, using the control which he then had in Abe Levine & Sons Ltd, caused rights to be made available to the shareholders with the intention that Weldon Levine would subscribe for the rights which he did and that Abe Levine would refrain from subscribing for all of the rights for which he might have subscribed so that in the result Weldon Levine would have 5,500 shares instead of the 500 he previously held and that Abe Levine, including the share held by his wife, would have 2,500 shares instead of the 2,000 shares he previously had. The increase to Weldon Levine was, to use the words of my Lord Jackett in. the Dufresne case, ‘‘at the expense of a decrease” in Abe Levine’s percentage of ownership of the equity in the company.

There is no essential difference in what was done in this case than if Abe Levine had actually transferred shares of the capital stock held by him to Weldon Levine so that after such transfer Weldon Levine would have owned 68.75% of the issued shares of the capital stock of the company.

The reference by Mr Blanchard in his letter of July 17, 1969 to section 111 of the Income Tax Act did not and could not make subsection 137(2) unavailable to the Minister.

Furthermore it is my opinion that the wording in the notification by the Minister under section 58 of the Act: “confirms the said assessment as having been made in accordance with the provisions of the Act and in particular on the ground that gift tax has been properly levied in accordance with the provisions of Part IV of the Act” does not make section 137 inapplicable even though that section is in Part VI and not Part IV. I do not consider that the particularizing regarding Part IV limits the immediately prior general, all-inclusive wording “in accordance with the provisions of the Act’’. Moreover, in my opinion, para-

graph (c) of subsection 137(2): “deemed to be a disposition by way of gift to which Part IV applies’, makes Part IV relevant to the situation disclosed by the evidence here.

There is no reference to either section 111 or section 137 in the notice of reassessment.

I am of the opinion that section 137 is available to the respondent. I am also of the opinion that the evidence discloses -a transaction the result of which was that Abe Levine conferred a benefit on Weldon Levine under circumstances contemplated by that paragraph 137(2)(c).

In any event, it is my opinion that even if subsection 137(2) were not available to the respondent, the reasoning in Dufresne relating to subsection 137(2) is also applicable to paragraph 111(2)(b). I find that there was a transaction within the meaning of paragraph 111(2)(b) whereby Abe Levine, through the planned rights issue, disposed of property, if not directly, at least indirectly, by way of gift.

When Abe Levine put into operation, as I find he did, the prearranged plan over which, and in the implementation of which, he had control, by which the percentage of the holding by Weldon Levine of the issued shares was increased at the expense of his own holding Abe Levine disposed of property by way of gift within the meaning of paragraph 111(2)(b). Abe Levine was, in effect, the donor and Weldon Levine the donee. What was given was the increase in the ownership of the equity in the company.

I find the circumstances, as disclosed by the evidence, fit both paragraph 137(2)(c) and paragraph 111(2)(b) and, in my view, both or either were available to the respondent and that Abe Levine was properly assessable under either of them.

I was referred to Craddock v MNR, [1969] 1 Ex CR 23; [1969] CTC 566; 69 DTC 5369, in which Gibson J said:

Finally, in cases such as this (and generally in all income tax cases), the Minister in his pleadings and evidence at trial, is not bound by the assumptions made by the assessor in making the assessment or re-assessment and the Minister is also not restricted to relying on the reasons stated in the Notices of Assessment or Reassessment or the section or sections of the Income Tax Act therein relied upon but, instead, is entitled to allege in his pleadings other facts and to plead any other alternative or additional section or sections of the Income Tax Act, and to adduce evidence in support thereof, provided however, if the latter situation obtains the onus of proof is on the Minister.

Even if the Minister had made an incorrect assumption he has in his reply to the notice of appeal adequately pleaded to come within the requirements enunciated by Gibson, J and the evidence adduced is sufficient, in my opinion, to discharge the onus which Gibson, J said would be on the Minister.

I find the permitted acquisition of shares did not have a commercial purpose so far as Abe Levine was concerned.

At one point Mr Mockler’s evidence was to the effect that the factors motivating Abe Levine in doing what he did to change the shareholding of Weldon Levine were:

1. What Mr Mockler referred to as Abe Levine’s general philosophy which envisaged equality among his children or their families.

2. The contributions those children had made to the businesses.

3. The importance of maintaining the benefits for the company which would flow from Weldon Levine remaining with it.

Previously Mr Mockler said in effect that when discussing the situation with Mr Levine he indicated concern about there being relative equality among his four sons and he acknowledged that each had worked with him and each had contributed to the growth of the enterprises and he indicated he considered it an obligation to see that they were equally treated. I am satisfied that at the time of the interviews which Mr Mockler had with Abe Levine both Abe Levine and Weldon Levine felt that that equality had then not yet been achieved and that Weldon Levine had then not yet been the object of Abe Levine’s bounty to the extent that his other three sons had been. I am satisfied, too, that the real purpose behind the issue of rights to the holders of shares of Abe Levine & Sons Ltd to subscribe for additional shares was to achieve that equality.

No doubt Weldon Levine’s services were of value. He had become general manager. However valuable service is what a company is entitled to expect from its general manager. There is no suggestion that his salary was inadequate. Neither is there any suggestion that there was any binding, enforceable agreement that he would receive the shares which he did.

No doubt he was disgruntled. He did give evidence to the effect that if he had not received the 5,000 shares he would not have stayed on. He may even have made such a threat to his father. Nevertheless I do not think that he would have left the company if he had not received the 5,000 shares. His association with the company was close and of long standing. It was not likely easily to be severed. He had a not insignificant interest in it, being the owner of one-fifth of its issued shares—a valuable property. I do not think the evidence as a whole points to Abe Levine being motivated by any threat by Weldon Levine to leave. Certainly it was not to Abe Levine’s financial interest to become a minority shareholder as he did. Furthermore as part of the overall plan Abe Levine’s interests in the company would still further be reduced. By an agreement dated November 30, 1965 he agreed to sell 800 of his shares to each of Sarah Levine, Edith Levine and Betty Levine at $37.50 per share. This left him with only 100 shares out of a total of 8,000 issued shares.

It is not the nature of business to make a general manager, however valuable, the majority shareholder, with 68.75% of the issued shares of a prosperous company either as a reward for past services or because he threatens to leave, or both.

I find that the whole plan was conceived and implemented on the basis of gratuity.

I pass now to the third main point submitted on behalf of the appellant, namely that if the acquisition of shares by Weldon Levine did contain a gift element it applied only to 3,500 shares.

Presumably this submission was made because of the transfer of 1,500 shares by Weldon Levine to the trustees of the Levine Family Trust pursuant to the agreement dated November 30, 1965.

According to the documentation:

1. On November 3, 1965 Weldon Levine, exercising his rights, subscribed for 5,000 shares at $1 per share, not 3,500 shares.

2. On November 30, 1965 Weldon Levine agreed to sell 1,500 shares at $37.50 per share subject to the provision for adjustment if the Department of National Revenue assigned a different value to any of the said shares.

3. Weldon Levine previously had held 500 shares. Accordingly, following the completion of the sale pursuant to the agreement of November 30, 1965, he would hold 4,000 shares and also be entitled to $56,250 from the purchasers subject to any adjustment to be made as above stated.

I do not see any merit in the submission that if the acquisition of shares by Weldon Levine contained a gift element it applied only to 3,500 shares.

In the result:

1. On agreement through counsel the appeal is allowed in respect of the item “Gift element in sale of shares to daughters-in-law 30,000.00”.

2. It being found that there was a gift by Abe Levine to Weldon Levine in respect of 5,000 shares of the capital stock of Abe Levine & Sons Ltd the amount of the gift, on the agreement of counsel (Exhibit 4), is to be taken as $121,250.

3. The appeal, accordingly, is allowed in part namely to the extent sufficient to provide for the foregoing set out in paragraphs numbered 1 and 2 immediately above and in all other respects the appeal is dismissed.

The matter is referred back for reassessment on the bases set out above.

On agreement through counsel the respondent shall pay to the appellants by way of costs the fixed sum of $1,500 and there is no further order as to costs.