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.