Estate of John Primeau v. Minister of National Revenue, [1973] CTC 2170, 73 DTC 142

The Chairman (orally):—This is an appeal by the Estate of John Primeau against the reassessment of the Minister of National Revenue for the taxation year 1966. It is agreed also that the result of the appeal will be the result in the appeals of Dominic Cobetto, Raymond Eudes and Aurélien Poirier.

The reassessment is based by the Minister on the fact that he alleges that the appellant in this case received a benefit under subsection 8(1) of the Income Tax Act as it was applicable to the year 1966. The appellant argues, and I stress the word argues, that there was a capital benefit to the appellant in the transaction that I am about to describe, and also that, under section 81 of the said Act, it was, at the very least, a dividend which would be subject to the 20% dividend tax credit as it existed in 1966.

The facts are quite simple. Six parties got together in 1955, the appellants that I have mentioned and also a Mr Denis and Larry Smith Inc, to take over a group of some three hundred taxicabs and operate them under the name of Veteran Taxi Owners Association of Montreal Inc. (I will throughout this judgment refer to them as “Veterans”.) They obviously were not primarily in the business of operating this taxi company, but it was an investment for at least five of them—if not all of them—because they had other occupations. Mr Larry Smith, who was called as the witness for the appellant today, is a chartered accountant and had personal knowledge of the facts pertaining to the lifetime of “Veterans”. They operated until 1965, when the premises out of which they operated were expropriated—I believe it was on August 3, 1965—but they were permitted to occupy the premises until January of 1966.

It was a fortuitous expropriation, I think, because, in May of 1966, the renewal of their liability insurance policy with Wawanesa Mutual Insurance Company was due, and an indication had been received that, if it was renewed at all, the premium would be increased by some $18 a car, and I believe the premium at that time was some $25,000 a month. One could almost take judicial notice of the fact that insurance companies, so far as taxi companies are concerned, have to be almost “flushed at the point of a gun” to take such coverage, and the evidence of Mr Smith is that there was no other company that would grant the coverage. He says that at one time the taxi operators considered forming their own insurance company, but this was an unsuccessful venture, and I don’t think that there is a taxi operation in the country with a large number of vehicles that has not, annually, at least considered the prospect of becoming a self-insurer rather than pay the premium demanded by the insurance company.

In any event, in early 1966 a rival taxi operator, of whose full corporate name I am not certain but which I will refer to as “Diamond”, indicated a willingness to purchase the shares of “Veterans” for $100,000. It turned out that the $100,000 was to be made up of $10,000 for the shares and an employment contract over three years for $90,000. “Diamond” was not interested in the premises owned by “Veterans” that had been expropriated, and insisted, as part of the contract, that the said property be excluded from the transaction. The answer given by Mr Smith, and I think a very logical answer, was that if the property had been included in the assets sold to “Diamond”, or if it had been included on the balance sheet upon which the shares were to be valued, the sale price would have been extremely high and “Diamond” would not have been interested.

I think I should point out at this time that “Veterans” really consisted of a switchboard, an inspector’s car, a telephone transmitter and some thirty-five to forty employees. As is so frequently the case, the motor vehicles themselves were owned by the operators, as were the permits, and this allowed “Veterans” to avoid the responsibility of making the usual business deductions such as income tax, unemployment insurance, workmen’s compensation, etc. In other words, the cab drivers were not actually employees, in the true sense of the word, of “Veterans”.

The transaction was completed on June 1, 1966, but on May 31, 1966, in order to meet the requirements of “Diamond”, the building, which housed a tavern and some other commercial enterprises as well as the offices of “Veterans”, was conveyed, through the intermediary of a notary, to Primeau and Smith in trust. The transaction was then completed, and Smith said that he was disappointed in the breakdown of the $100,000, because the $90,000 became income in the hands of the former shareholders of “Veterans” but was a deductible expense to “Diamond”, which made it a much more attractive transaction for the purchaser than for the vendor.

The whole question revolves around the property that was conveyed pursuant to the trust agreement, which is Exhibit A-3. The action of conveying it to these two men as trustees was subsequently confirmed by a resolution of the board of directors, and ratified, I assume, by the shareholders, who were the same persons. The formalities are not looked at too closely because, in these small, closely-held corporations, there is great flexibility in the manner in which the Corporation Acts of the various provinces are treated by the shareholders; but there is no doubt whatsoever, and I find it to be a fact, that the whole six shareholders of “Veterans” concurred in that trust agreement.

The Minister of National Revenue takes the position that at that time a benefit was conferred on the shareholders to the extent of the value of the building. I have referred to “the building” for simplicity’s sake, because in fact the company did not own the building at the time it transferred it in trust, but merely had what has been called, and what is perhaps known in the law of Quebec as, “an indemnity” coming to it to the value of the building. This value was subsequently settled by negotiation at $175,000, to be paid by the expropriating party.

The witness called on behalf of the respondent, who was a chartered accountant for some 23 years, I think, and had been an employee of the Department of National Revenue for 19 years, gave his evidence in a straightforward manner, and unquestionably, in my mind, was satisfied that the conveyance in trust to Primeau and Smith constituted a taxable benefit under subsection 8(1) of the Income Tax Act.

The appellant argues today that, after the amount of the recapture and the payment of the balance outstanding on the mortgage had been deducted or paid out of the indemnity, the balance was paid pro rata to the shareholders as a capital gain. As I have said, in the alternative, it was a dividend under section 81 in respect of which they were entitled to the dividend tax credit. The former argument was not in the pleadings, but it is obvious from the by-play between counsel that its introduction did not come as a surprise to the respondent; and because, under the Tax Review Board Act, the Board is not bound by the technical rules of evidence, I am prepared to consider both arguments in arriving at my decision.

There was a third point that was raised, and that was that the expropriation could not have occurred in 1966 because the figure of $175,000 as indemnity was not arrived at until 1968. In answer to that, counsel for the Minister refers to the “deemed” aspect of it, and says that it is deemed to have been conveyed at the time of the transaction notwithstanding the date on which the compensation is finally established or received.

In my view, section 8 was never meant to cover a transaction such as this. It was meant to prevent the siphoning-off from a continuing operation of a benefit to individual shareholders at the expense of the company generally. As I see this transaction, and perhaps I oversimplify, these people had a business which they sold. As the sale price of their business they received $10,000 in cash plus an employment contract, which was taxable, plus whatever they could get from the Province of Quebec on the expropriation. I cannot accept the proposition that they circumvented the Act and paid the money directly out, without going through the usual dividend payment receipts. In fact Exhibit R-4 filed by the respondent, the letter from the Samson Belair firm of accountants, indicates the various ways that the transaction could have been carried out other than the way it was actually done.

“Veterans” could have left the receivable in the company and had a capital gain, but that was not possible because “Diamond” was only interested in buying the shares without the building—again I am using “building” in the sense that it was an asset with a value to them as yet unascertained.

Secondly, they could have taken cash declared a stock dividend and—I am paraphrasing—paid out on the undistributed income on hand and taken an ordinary dividend plus the 20% dividend tax credit.

Or they could have liquidated the company after expropriation and transferred all the assets, without being taxed on more than they were in fact in this instance taxed; and I think that that is exactly what they did do. They ceased to operate as Veterans Taxi, they became, not shareholder-employees or officers but, in the case of some of them, employees under the employment contract, and what they received was not paid by them individually to the Minister of National Revenue for recapture and was not allocated by them individually to pay off the mortgage, but was paid by the trustees under the terms of the trust; and the balance was paid, and properly paid, to the participants on a pro rata share basis as a non-taxable capital gain.

I think that, throughout, the substance of this has been to dispose of a saleable asset, a capital asset, which could have been accomplished in other ways but was done in a way that, to me, is just as effective, and just as permissible under the provisions of the Income Tax Act, as other alternatives. It is true that they could have limited themselves to the actual pleadings, but they have argued, as I have said, that they are appealing the whole assessment of the profit from the expropriation, and I give effect to that assertion. I think that they are entitled to receive the net proceeds of the sale, after the payment of appropriate recapture and other liabilities on a pro rata basis, without being subjected to tax thereon.

The appeal will, therefore, be allowed and referred back to the Minister for reassessment accordingly.

Appeal allowed.