Lloyd Nichols and Marvin Shore, Trustee of the Estate of J Alvin Keillor in Bankruptcy v. Minister of National Revenue, [1972] CTC 2424, 72 DTC 1330

The Chairman (orally):—The appeal heard was that of the taxpayer Lloyd Nichols against notices of reassessment for the taxation years 1964 and 1965. The facts of this appeal are complicated to some extent, and are fully set out in the Notice of Appeal and the Minister’s Reply to the Notice of Appeal, and I adopt those facts as being the detailed facts in this case, and shall make only summary reference to them in this formal judgment.

Apparently in or about the month of April 1964 the appellant and one Alvin Keillor agreed to buy a company known as London Forwarders Limited. The transaction was to be a purchase of the shares of that company from the beneficial owner thereof, a Mr Cathcart, I believe. The purchase price was $200,000 payable on terms, and the shares were pledged with the vendor until payment was made in full, with the usual right of the purchasers to operate the company.

Apparently neither Mr Keillor nor Mr Nichols had sufficient funds in his personal capacity to complete this transaction, but there was some $40,000 in the bank account of London Forwarders Limited, and it was decided that that company would arrange a loan with Canadian Acceptance Corporation for the sum of $125,000. The application for this loan was supported by an appraisal of the company’s fleet of trucks at a valuation of somewhere in the range of $130,000 to $140,000, which, together with the guarantees of the individuals, resulted in the receipt of the $125,000 as a loan by Canadian Acceptance Corporation to London Forwarders Limited. Keillor and Nichols then borrowed this sum from the company for the purpose of making their respective payments to the vendor of the shares. I would point out — although perhaps it is not necessary for me to do so — that there was nothing unusual or improper in the manner in which this was done. These two gentlemen continued to operate the business of London Forwarders Limited for some months and, in March of 1965, set in motion a series of transactions which culminated, in August 1965, in a final transaction which really gave rise to the appeals in question.

Two other companies were involved in this series of transactions, one being Keillor Construction Company Limited, a company which, although dormant as of March 1, 1965, had a large loss available for tax purposes, and the other being a company called Dixie Downs Limited which London Forwarders Limited was using as a payroll company to cover all union employees and thus avoid certain difficulties that had existed in the past between London Forwarders Limited and union executives.

Under the series of transactions which, as I have said, commenced in 1965, Nichols received a 49% interest in Keillor Construction Company Limited for $1,500, which was paid by way of a promissory note as shown on page 47 of appellant’s Exhibit A-1. On March 25, London Forwarders Limited sold to Keillor Construction Company Limited certain equipment as shown on page 52 of the said Exhibit A-1, which equipment, during the course of the appeal, was referred to for convenience as Fleet A. The purchase price was stated to be $36,577.60, with the acknowledgement that the vendor was to be responsible for any liens thereon. (It should be pointed out that all the transactions that took place in March involved companies with common directors.)

On the next day, March 26, Dixie Downs Limited purchased from Keillor Construction Company Limited this same Fleet A for $117,500, as shown in appellant’s Exhibit A-1 at page 56. A bill of sale was entered into and duly executed. This again was said to be subject to liens, although in this case they might not technically be liens. However, the equipment was certainly that for which Keillor Construction Co Ltd had promised to pay $36,577.60. In all these transactions, it is admitted that the directors declared their interests and that the transactions were subsequently ratified by the company shareholders in each case.

On March 26, 1965 Keillor Construction Company also sold Dixie Downs Limited another fleet of trucks, Fleet B, for $148,179.13. Again payment was made by promissory note, as shown at page 61 of appellant’s Exhibit A-1. Dixie Downs Limited then leased both fleets to London Forwarders Limited for one year at a price of $140,625 payable in monthly instalments of $12,105. Thus, at this stage, not only were the employees of London Forwarders Limited being paid by Dixie Downs Limited but the company’s operations were carried on by means of the trucks of Fleets A and B which were now owned by Dixie Downs Limited and were merely leased by it to London Forwarders Limited.

On that same March 26, 1965 the shares of Messrs Keillor and Nichols in Dixie Downs Limited were transferred to Keillor Construction Company Limited and, as of that date, constituted Dixie Downs Limited a wholly-owned subsidiary of Keillor Construction Company Limited and of course, as already mentioned, Dixie Downs Limited was now leasing two fleets of trucks to London Forwarders Limited.

On August 24, 1965 London Forwarders Limited purchased from Messrs Keillor and Nichols all their common shares in Keillor Construction Company Limited for a price of $117,000 and paid for these shares by way of promissory notes made out to those two individuals while, at the same time, the loan to these shareholders as shown on the books of London Forwarders Limited was reduced by the same amount, thus, in effect, cancelling this note.

Briefly, the result of all this was that Fleet A had been transferred to Keillor Construction Company Limited for approximately $36,500, which Caused a recapture of capital cost allowance in the amount of some $35,000, I believe. Then there was a transfer from Keillor Construction Company Limited to Dixie Downs Limited of the same equipment for $117,500, which resulted again in a recapture of some $80,000. Also, at the end of its 1965 fiscal year, rental income of $55,475 was shown in the books of Keillor Construction Company Limited. It is admitted that no cash changed hands in any of these transactions, which were effected by promissory notes and journal entries only. It is also admitted that everything was put through Keillor Construction Company Limited because of the loss it had available for taxation purposes.

It is not really relevant, but London Forwarders Limited subsequently went out of business for financial reasons, and disposed of its assets under The Bulk Sales Act, which apparently resulted in a personal loss to the individual shareholders concerned.

As I say, those, briefly, are the facts. Therefore the question, as I see it, is whether or not the shares purchased by London Forwarders Limited from Nichols and Keillor in August of 1965 had any value, because what was done, or was attempted to be done, was for Nichols and Keillor to set off on the books of London Forwarders Limited the debts owed by them in their personal capacities for the original purchase of their shares in that company against the notes received by them from London Forwarders Limited for their shares in Keillor Construction Company Limited. If there was any value in those shares in the amounts of the notes, then I am satisfied that, in law, it was a proper matter for set-off.

it is clear that in March of 1965, just prior to all these transactions, Keillor Construction Company Limited was not only dormant but had a large loss available for tax purposes. London Forwarders Limited wanted to take advantage of this loss, and ail these transactions, as I have said, were devised to achieve that end. In each of the purported sales, the same individuals were involved and no money changed hands: promissory notes and journal entries were all that entered into it. With regard to the rental income of $55,000 odd shown on the books of Keillor Construction Company Limited, it is admitted that no actual cash was ever paid in respect of that item. In my view, the result was a fictitious “earned surplus” figure in the books of Keillor Construction Company Limited at the end of its 1965 fiscal year. It is alleged that this is the value that London Forwarders Limited was to get when it purchased control of Keillor Construction Company Limited by purchasing its shares from Keillor and Nichols for $117,000, which amount, as I have pointed oui, was also paid by way of promissory notes and not in cash.

Without being at all facetious, it would seem to me that what Keillor Construction Company Limited did was to literally pull itself up by its own bootstraps and suspend itself in mid-air long enough for Keillor and Nichols to slide out from under their obligations to London Forwarders Limited. In my view, the mere execution of the documents and their presentation as a neat and tidy legal bundle to circumvent the Income Tax Act cannot create value where no value previously existed. The whole series of transactions that were documented were not in my mind true legal transactions; they were never intended to be acted upon in the words of the documents that were executed. In my view, it was a completely artificial series of transactions that did not, and could not, achieve what the appellant taxpayers had hoped for.

I find as a fact that the shares of Keillor Construction Company Limited had no value in August of 1965 or, if they had, that it was merely a nominal value, and that therefore the loan obligations of Messrs Keillor and Nichols to London Forwarders Limited could not be set off against the sale of their shares in Keillor Construction and therefore the loan made by London Forwarders to these shareholders was not repaid within the time prescribed in the Income Tax Act for the repayment of such *oans to shareholders.

Further, it is my view that, pursuant to section 8 of the Income Tax Act, the correct year for assessing these loans as benefits is 1964. Therefore, the end result is that the appeal of Lloyd Nichols for that taxation year must be dismissed.

It was stated at the outset that the appeal of the bankrupt Keillor would follow the event because the same facts were involved. Therefore, for the reasons enunciated above, I find that the Keillor appeal in respect of the taxation year 1964 must also be dismissed.

lt follows that, because I find that the Dixie Downs shares were also of no value at the time of their sale to Keillor Construction Company Limited, the appeals against the re-assessments for the 1965 taxation years must also be dismissed.

Accordingly, for the reasons above stated, the appeals of both appellants for both taxation years will be dismissed.

Appeals dismissed.