Audrey Guthrie v. Minister of National Revenue, [1972] CTC 2057, 72 DTC 1070

Roland St-Onge:—This appeal was heard in Toronto on May 26, 1971 by the Tax Appeal Board as it was then constituted, and is from an assessment dated May 7, 1969 wherein a tax in the sum of $87,658.80 was levied in respect of income for the taxation year 1966.

The appellant was a shareholder of Lawr Holdings Limited, an Ontario corporation, hereinafter referred to as “Lawr”. During its 1966 taxation year Lawr invested the sum of $185,000 in preferred shares of Shamrock Holdings Limited, a Bahamian corporation hereinafter referred to as “Shamrock”. Its common shares were held by trusts for the benefit of the appellant’s five daughters. By the above- mentioned assessment the Minister of National Revenue added to the appellant’s declared income the said sum of $185,000, and in his reply to the notice of appeal alleged as follows the facts on which he based his decision:

(a) At all times relevant to this appeal, the appellant was the controlling shareholder of Lawr Holdings Limited, the shares of which in the year 1966, up to and including November 23, 1966, were held as follows:

Audrey A Guthrie	2,101 common shares
	10,000 preferred shares
Maxwell M Guthrie	126 common shares
Hazel Turnbull	1 common share

(b) During the years 1965 and 1966, Lawr Holdings Limited was engaged in the business of stock promotion and was an underwriter of Equity Explorations Limited. On March 19th, 1965 the Ontario Securities Commission halted trading in Equity Explorations Limited and froze any funds due to Lawr Holdings Limited and Maxwell M Guthrie, husband of the Appellant. On or about May 9th, 1966, the Ontario Securities Commission released $270,000.00 due from J P Cannon and Company, a broker, to Lawr Holdings Limited. J P Cannon and Company paid $45,000.00 directly to Lawr Holdings Limited and the remaining $225,000.00 was paid to McLaughlin, May, Soward, and Bales, Solicitors of Lawr Holdings Limited. The solicitors retained $25,000.00 as legal fees and remitted $200,000.00 by a bank draft to Barclays Bank in Nassau, Bahamas, to the account of Shamrock Investments Limited;

(c) $15,000.00 of the aforesaid $200,000.00 was alleged to be a loan to Shamrock Investments Limited and the remainder, that is, $185,000.00 was alleged to be invested in the preferred shares of Shamrock Investments Limited. The certificates for the alleged preferred shares were issued on May 19th, 1966;

(d) The Minute Book of Lawr Holdings Limited does not contain any minutes of the Directors or shareholders of that company with respect to the alleged investment of $185,000.00;

(e) During 1965, Lawr Holdings Limited had loaned $71,000.00 to said Shamrock Investments Limited, which loan, however, was re-paid before December 31, 1966;

(f) Shamrock Investments Limited is a non-resident, Bahamian corporation, owned beneficially by five trusts for the five children of Mrs Audrey A Guthrie and Mr Maxwell M Guthrie;

(g) Under the terms of the aforesaid trusts, the “Trustee” is given uncontrolled discretion with respect to the application of the income or the corpus of the “trust fund” for the benefit of the beneficiary. The “Trustee” is empowered to make any changes in the terms of the trusts except those relating to the discretionary objects or beneficiaries. The “Trustee” is also given absolute discretion in exercising the voting and other rights attaching to any securities of the “trust fund.” Mr Maxwell M Guthrie, or in the event of his death, Mrs Audrey A Guthrie shall have the power to remove the “Trustee” for the time being and thereupon to appoint as a new “Trustee” any other person;

(h) The alleged preferred shares of Shamrock Investments Limited were not a bona fide investment of Lawr Holdings Limited, but merely a means of making a payment or transfer of property to or conferring a benefit upon Shamrock Investments Limited or upon the said trusts, or the trustees or beneficiaries thereof. The conditions attaching to the alleged preferred shares made them worthless and no bona fide attempt was ever made by Lawr Holdings Limited to deal with, have redeemed, or otherwise treat such shares as property of value;

(i) The circumstances surrounding the Appellant’s dealings with Lawr Holdings Limited and Shamrock Investments Limited were such that the Appellant was not dealing with them at arms length within the meaning of Section 139(5) of the Income Tax Act;

(j) Up to and including its taxation year 1965, Lawr Holdings Limited owed $61,346.48 on account of taxes under the Income Tax Act, which taxes have not been paid to date;

Lawr Holdings Limited ceased its business at the end of 1967 and allowed its letters patent to be cancelled on December 10th, 1969 without any attempt being made to realize anything on the alleged preferred shares which es-cheated to the Crown under Section 330 of The Corporations Act of Ontario.

The respondent contended that the transfer of $185,000 from Lawr to Shamrock was not for the purpose of investment but was merely a benefit or advantage that Lawr conferred on the appellant, or a loan that Lawr made to the appellant and, therefore, the said $185,000 was properly included in computing the income of the taxpayer for the 1966 taxation year under paragraph 8(1 )(b) and subsections 16(1) and 137(2) of the Income Tax Act.

At the hearing Mrs Guthrie testified that although she was the president of Lawr she knew nothing about the company, and that it had been managed by her husband. The latter, a prospector since 1953, corroborated substantially the allegations of fact (Supra) in the Minister’s reply to the notice of appeal. He narrated that initially his wife used her money to purchase 2,101 common shares and 10,000 preferred shares of Lawr. A Mrs Hazel Turnbull, who with her husband had been assisting the witness in his mining business, owned one common share which qualified her to be a director of the company. Mrs Turnbull acted as bookkeeper for Lawr and from time to time she lent money to Mr Guthrie. In 1965 the latter was paid $75,000 in salary by Lawr but in 1966 the company did not earn sufficient income to pay him that sum. Mr John Frame, a member of the Toronto Stock Exchange, had intended to underwrite Equity Explorations Limited (a company for whom Mr Guthrie had been working and which ran out of money) but his licence was cancelled. Consequently, Mr Guthrie, who was on the point of discovering a major ore body, decided to incorporate his own underwriting company. He and Mrs Turnbull made the decisions with respect to the buying and selling of shares of other companies and were assisted by a broker by the name of Anderson of J P Cannon & Company, who was also given a kind of carte blanche to make decisions on his own.

In 1965 Mr and Mrs Guthrie and Mrs Turnbull paid an amount of $60,000 in income tax on a gain of $220,000 which apparently resulted from previous trading done by Mrs Guthrie and Mrs Turnbull. In 1965 and 1966 the drawing account of Equity Explorations Limited was frozen by the Ontario Securities Commission because of some misunderstanding concerning rock samples. After investigation, the restriction was lifted and the money became available. On the advice of his lawyer, Mr Guthrie took this money out of Canada and invested it in the preferred shares of Shamrock Investments Limited. In 1965 he lent $70,000 to Shamrock and this amount was repaid the next year. Then when the Equity Explorations Limited money was freed, he lent $15,000 to Shamrock and, as already mentioned, used the balance of $185,000 to buy redeemable preferred shares in Shamrock.

Upon cross-examination he stated: that he alone made the decisions in both companies (Lawr and Shamrock); that he told Mr Maillis (the “trustee” in Shamrock) how to invest Shamrock’s money; that Mr Maillis was a practising lawyer in the Bahamas, in whose office Shamrock had its headquarters; that Shamrock had no employees other than the lawyer’s secretary; that Shamrock and Lawr were investing in the same mining business; that he alone, upon the advice of his accountant and lawyer, decided to buy the preferred shares of Shamrock; that he chose to invest in Shamrock because its trustee, Mr Maillis, was well qualified as an investor and he felt that Shamrock would be making successful investments and would be able to redeem its preferred shares; that he thought it was a sound investment because meanwhile Lawr was getting 7% interest and the shares were redeemable at $185,000. He also admitted: that he knew his company (Lawr) owed $61,346.48 in taxes to the government when it received the $270,000 from J P Cannon & Company Limited, but because of his unfortunate experience in having had money frozen, he hastily transferred it out of the country; that Lawr ceased to do business some time in the late fall of 1967 because of financial difficulties; and that its charter was cancelled on December 10, 1969.

Counsel for the appellant argued that according to the evidence adduced no one in the Guthrie family — neither Mr Guthrie, Mrs Guthrie nor any of their five daughters — received the $185,000. He also pointed out that Mr Guthrie who with his wife, Mrs Turnbull and Lawr, had been successful in his previous investments and had paid substantial sums in income tax to the Department of National Revenue, would normally think that the investments in Lawr and Shamrock (with which he had a close relationship) would bring substantial gains but, unfortunately, an investment with Conigo Mines went sour and as a result the money invested by both companies was lost. He referred to paragraph 8(1 )(b) which reads as follows:

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

(b) funds or property of a corporation have been appropriated in any manner whatsoever to, or for the benefit of, a shareholder,

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

in this respect he submitted that the funds of Lawr had not been appropriated for the benefit of Mrs Audrey Guthrie since, had Shamrock been successful, the money paid for the preferred shares would have come back to Lawr before anything went to the common shareholders of Shamrock because Mrs Guthrie and her daughters were only the “cestui que trust” of Shamrock. He suggested that section 16 falls with paragraph 8(1 )(b) because Mr Guthrie was making all the decisions, bad or good; and that Mrs Guthrie and her five daughters were the “cestui que trust” of Shamrock, but that company did not make any money and, consequently, Mrs Guthrie and her daughters did not receive any benefit.

Counsel for the respondent submitted that “if there is an imbalance in consideration given and the property received and returned, then there is an inference of benefit”; that Lawr did not make an investment since Mr Guthrie, while he knew that their shares were 7% non- cumulative preferred shares, did not know whether they were participating or voting shares or whether they were redeemable at the option of Lawr alone; that the advice received from the professionals was merely to the effect that the best course for Lawr to follow was to get the money out of Canada, and it did not deal with the question of whether or not it was a good investment. He suggested that, pursuant to subsections 137(2) and 8(1), this alleged investment was not a genuine bona fide transaction for the following reasons:

(1) The chief motive was to get the money out of Canada.

(2) Nothing was adduced to show that the shares of Shamrock had a value at the time they were purchased and that the conditions attaching to these shares were such that they would not affect their marketability.

(3) That, of all the investments available in Canada, the appellant

chose to invest in a company in the Bahamas which was controlled by the trusts of her children.

It is clear from the evidence that the appellant was the controlling shareholder and president of Lawr and it would be too easy for her to avoid paying income tax if she were allowed to say that she knew nothing about the managing of this company. Furthermore, she had an army of advisers to tell her how to proceed, and the fact remains that when a person becomes the majority shareholder of a company and accepts the position of president, that person should be responsible for the course of conduct of the company. It must be noted that when this company received the $200,000, it did not wait very long to get the money out of the country (on the advice of its lawyer) at a time when the company owed $61,346.48 in income tax. Moreover, this transfer of money was effectuated by buying preferred shares in a non-resident Bahamian corporation and no evidence was adduced to show that these purchased shares had any value. The onus was on the appellant to show that this purchase was a genuine bona fide transaction and this she failed to do. Consequently, the Board cannot consider this transfer of money as a serious investment. On the other hand, this money was transferred to a non-resident Bahamian corporation, owned beneficially by five trusts for the appellant’s five children. The fact that a mother transferred the funds of a corporation to the trusts of her five children in the circumstances mentioned above constitutes, in my view, the transfer of funds for the advantage of a shareholder. Consequently, the appellant falls under the said subsection 8(1) for the reasons stated hereunder:

(a) A payment was made by a corporation to a shareholder other than pursuant to a bona fide business transaction.

(b) Funds of a corporation were appropriated in a manner which constitutes a benefit to the appellant shareholder.

(c) An advantage was conferred on the shareholder by a corporation.

Consequently, the value of the benefit for advantage should be included in computing the income of the appellant and, for the above reasons, the appeal is dismissed.

Appeal dismissed.