Marcel, Rene and Yvonne Giguere v. Minister of National Revenue, [1972] CTC 2466, 72 DTC 1392

Maurice Boisvert:—in this matter, three appeals were instituted by Marcel Giguére, René Giguere and Yvonne Giguere, all three being shareholders in a corporation known under the name of Giguère Automobile Ltée, which dates back to 1933 and which, since then, has developed into a very lucrative automobile dealership. The taxation years in question are 1965 and 1968 and the assessments are dated August 11, 1970.

The appeals were heard partly at Quebec City and partly at Montreal, Province of Quebec, by the Tax Appeal Board as it was then constituted and by the undersigned who was at that time Assistant Chairman of the said Board.

During the hearing it was agreed among the parties that only the appeal of Yvonne Giguere would be heard but that the evidence, argument and judgment would apply in the appeals of Rene and Marcel.

The three appellants had signed a waiver of the time limits provided under section 46 of the Income Tax Act, then in force (RSC 1952, c 148).

In order to grasp the issue, reference should be made to the following table showing the declared income and the income added by the respondent for the years in question:

the income added by the respondent is derived from amounts received and taxable under section 138A and is deemed to have been received as dividends as described in paragraph 38(1 )(a) of the said Act. The sections on which the assessments are based read as follows:

138A. (1) Where a taxpayer has received an amount in a taxation year,

(a) as consideration for the sale or other disposition of any shares of a corporation or of any interest in such shares,

which amount was received by the taxpayer as part of a transaction effected or to be effected after June 13, 1963 or as part of a series of transactions each of which was or is to be effected after that day, one of the purposes of which, in the opinion of the Minister, was or is to effect a substantial reduction of, or disappearance of, the assets of a corporation in such a manner that the whole or any part of any tax that might otherwise have been or become payable under this Act in consequence of any distribution of income of a corporation has been or will be avoided, the amount so received by the taxpayer or such part thereof as may be specified by the Minister shall, if the Minister so directs,

(d) be included in computing the income of the taxpayer for that taxation year, and

(e) in the case of a taxpayer who is an individual, be deemed to have been received by him as a dividend described in paragraph (a) of subsection (1) of section 38.

(2) Where, in the case of two or more corporations, the Minister is satisfied

(a) that the separate existence of those corporations in a taxation year is not solely for the purpose of carrying out the business of those corporations in the most effective manner, and

(b) that one of the main reasons for such separate existence in the year is to reduce the amount of taxes that would otherwise be payable under this Act

the two or more corporations shall, if the Minister so directs, be deemed to be associated with each other in the year.

(3) On an appeal from an assessment made pursuant to a direction under this section, the Tax Appeal Board or the Exchequer Court may

(a) confirm the direction;

(b) vacate the direction if

(i) in the case of a direction under subsection (1), it determines that none of the purposes of the transaction or series of transactions referred to in subsection (1) was or is to effect a substantial reduction of, or disappearance of, the assets of a corporation in such a manner that the whole or any part of any tax that might otherwise have been or become payable under this Act in consequence of any distribution of income of a corporation has been or will be avoided; or

(ii) in the case of a direction under subsection (2), it determines that none of the main reasons for the separate existence of the two or more corporations is to reduce the amount of tax that would otherwise be payable under this Act; or

(c) vary the direction and refer the matter back to the Minister for reassessment.

38. (1) An individual who was resident in Canada at any time in a taxation year may deduct from the tax otherwise payable under this Part for a taxation year 20% of the amount by which

(a) the aggregate of all dividends received by him in the year from taxable corporations in respect of shares of the capital stock of the corporations from which they were received and of all dividends that he is, by subsection (3) of section 8 and section 81, deemed to have received from such corporation in the year, to the extent that the dividends so received or so deemed to have been received, as the case may be, were included in computing his income for the year,

Before analysing the above sections, we have to collate them with the facts proved in these appeals. From 1933 to 1964, 200 shares of the capital stock of Giguére Automobile Ltée (hereinafter called “Giguere No 1”) had been issued in favour of the following persons: Yvonne Giguére—33 shares; Marcel Giguere—33 shares; René Giguere

—33 shares; Henri Giguere—101 shares. As can be seen, Henri Giguére was the majority shareholder. The company was very prosperous and the shareholders were all employees of the business and kept their jobs after the series of transactions which gave rise to the assessments now being appealed.

On July 20, 1964 Henri Giguère, father of the three appellants, who was very ill, sold to his son Robert 50 common shares of Giguere No 1 for the price of $200,000, payable as follows: $10,000 upon the signing of the contract and the balance of the capital ($190,000) payable in annual instalments of $10,000 the balance bearing interest at 6% per annum. The written agreement contains the following paragraph:

(TRANSLATION)

The balance may also be converted into preferred shares or debentures of any company that my son Robert may wish to form to purchase my common shares. This sale is therefore made to my son Robert or to any other company formed by him.

From the above-mentioned date, Robert, who had also been an employee of the company since 1957, became the holder of 50 shares. Henri therefore no longer held majority control. On that same day, Henri Giguère informed General Motors Products of Canada Limited (hereinafter called “General Motors”) of his intention to retire from business. By so doing, Henri’s intention was to set his son Robert up in business. This is revealed in a letter produced by Miss Yvonne Giguere, addressed to Henri Giguère by General Motors and reproduced hereunder:

(TRANSLATION)

Dear Henri:

It was certainly with a great deal of regret that we read your letter ot July 20 informing us of your intention to retire from business.

Our company’s association with you personally and with your organization has always been most pleasant and productive from all points of view, and such family ties cannot be easily broken.

Would you kindly submit, for our files, your termination on your company’s official paper, using the sample letter attached hereto. Your resignation will take effect when we have officially acknowledged receipt of your official termination.

You are no doubt aware that the resignation of any individual named in paragraph 3 automatically terminates the present sale agreement. We shall have to receive an official application for a franchise from Robert who, we are sure, is personally qualified to have a General Motors franchise in his own name exclusively.

We are counting on receiving your revised termination. We hope to have the pleasure of visiting you in the near future.

The evidence shows that the dealership agreements had been signed not by Henri Giguère but by Giguére No 1 and we shall hereinafter see that they passed to Giguère Automobile (1964) Inc (hereinafter called “Giguère No 2”). When Yvonne and the other appellants say in their testimony that Robert had the dealership outright, they are mistaken. That is apparent from the documents produced as Exhibits A-7, A-10 and A-11. In all those agreements, the designated and signatory dealer was Giguére No 1 up until October 31, 1964, and even before Giguére No 2 was incorporated the agreement of October 31 was signed by Giguére No 2. From the business standpoint, nothing changed except the name. On October 31, 1964 it was no longer Henri Giguére who signed for Giguere No 2 but Robert, who called himself president of a company which was not yet in existence. The witnesses stated that Giguere No 1 never held directors’ or shareholders’ meetings. Giguere No 2 was incorporated by letters patent issued under the Quebec Companies Act on December 29, 1964. There is evidence (Exhibit A-13) that on December 30, 1964 and January 8, 1965 meetings of the directors and shareholders of Giguére No 2 were held, and the minutes read as follows:

(TRANSLATION)

MINUTES of the adjourned meeting of the directors of GIGUERE AUTOMOBILE (1964) INC., held at Quebec City on December 30, 1964, at 4:00 p.m.

PRESENT: ROBERT GIGUERE

JANET MONROE GIGUERE

YVONNE GIGUERE

JEAN GIGUERE

all being directors of the company.

The company’s president, Mr. Robert Giguere, chaired the meeting and Miss Yvonne Giguère acted as secretary.

The minutes of the last director’s meeting were read and on a motion duly moved and seconded were unanimously approved and adopted.

On a motion duly moved and seconded, it was unanimously resolved, Miss Yvonne Giguére having stated her interest and abstained from voting, that the company purchase ninety-six (96) common shares with a par value of one hundred dollars ($100) each of the capital stock of Giguere Automobile Ltée held by Miss Yvonne Giguère, thirty-two (32) common shares, Mr. René Giguére, thirty-two (32) common shares, and Mr. Marcel Giguère, thirty-two

(32) common shares, and pay the price of such purchase by handing over to each of the vendors one thousand (1,000) preferred shares of its capital stock, with a par value of one hundred dollars ($100).

In addition, the purchase shall include three (3) common shares belonging to each of the vendors which shall be transferred when all the preferred shares handed over to each of the vendors have been fully purchased by the company.

The company shall purchase from each of the vendors two hundred (200) preferred shares per annum each year starting on January 1, 1965, until all the said preferred shares have been so purchased.

That, as a guarantee of the purchase of the preferred shares handed over to the vendors, the company not authorize the transfer or sale of its common shares; that it not merge with Giguère Automobile Ltée or any other company; that it not authorize the issuance of common shares not outstanding at the present time or of preferred shares other than those required for paying the vendors and an additional two thousand eight hundred and fifty (2,850) without obtaining the prior written consent of the majority of the vendors; that it not authorize, without obtaining the prior written consent of the majority of the vendors, the sale of the lands and buildings which the company currently owns and which are situated at 1700 Dorchester Street North, Quebec City, nor the establishment of a real guarantee on such lands and buildings.

MINUTES of a special general meeting of the shareholders of GIGUERE AUTOMOBILE (1964) INC. held at Quebec City on December 30, 1964, at 5:00 p.m.

PRESENT: ROBERT GIGUERE

JANET MONROE GIGUERE

YVONNE GIGUERE

JEAN GIGUERE

all being shareholders of the company.

Mr. Robert Giguére acted as chairman of the meeting and Miss Yvonne Giguère as secretary.

The minutes of the last meeting of the board of directors were read and on a motion duly moved and seconded were unanimously approved and adopted.

The chairman of the meeting then drew the shareholders’ attention to by-laws No. 3 and No. 4 which had been passed by the directors of the company at a meeting held earlier that day.

The said by-laws were discussed clause by clause and on a motion duly moved and seconded it was unanimously resolved that the said by-laws No. 3 and No. 4 of the company be and are hereby duly approved, ratified and confirmed.

BY-LAW NO. 3

THAT it be and is hereby established as by-law No. 3 of the by-laws of GIGUERE AUTOMOBILE (1964) INC. (hereinafter called the “company”) as follows, to wit:

THAT the company purchase from Robert Giguére fifty-one (51) common shares, with a par value of one hundred dollars ($100) each, of the capital stock of Giguère Automobile Ltée and pay the price of such purchase by handing over to the vendor two thousand one hundred and fifty (2,150) preferred shares duly paid up, with a par value of one hundred dollars ($100) each, of its capital stock.

THAT the vice-president of the company be and is hereby authorized to sign and execute for and on behalf of the company any contract or document necessary or useful for giving full effect to the foregoing.

BY-LAW NO. 4

THAT it be and is hereby established as by-law No. 4 of the by-laws of GIGUERE AUTOMOBILE (1964) INC. (hereinafter called the “company”) as follows, to wit:

THAT the company purchase ninety-six (96) common shares, with a par value of one hundred dollars ($100) each, of the capital stock of Giguére Automobile Limitée and pay the price of such purchase by handing over to each of the vendors one thousand (1,000) preferred shares, with a par value of one hundred dollars ($100) each, of its capital stock. Such purchase shall include, furthermore, three (3) additional shares to be transferred, the whole in accordance with the draft contract submitted to this meeting and approved.

THAT the president of the company, Mr. Robert Giguère, be, and is, hereby authorized to sign for and on behalf of the company the contract as drafted, with any change he may deem appropriate to make thereto in the interests of the company, and to execute for and on behalf of the company any document necessary for giving full effect to the foregoing.

MINUTES of the meeting of the directors of GIGUERE AUTOMOBILE (1964) INC., held at Quebec City on January 8, 1965, at 9:00 p.m.

PRESENT: ROBERT GIGUERE

JANET MONROE GIGUERE

YVONNE GIGUERE

JEAN GIGUERE

all being directors of the company.

The president of the company, Mr. Robert Giguére, chaired the meeting and Miss Yvonne Giguére acted as secretary.

The minutes of the last meeting of the directors were read, and on a motion duly moved and seconded were approved and adopted.

All the directors being present and having waived the convening notice prescribed in such case, the meeting was declared duly convened and constituted.

The secretary informed the meeting that Mr. Robert Giguére had offered to sell to the company nine (9) common shares he held in the capital stock of LOCATION LAURENTIENNE INC. — LAURENTIAN LEASING INC. for the price of four thousand dollars ($4,000) per common share.

The secretary further informed the meeting that Mrs. Janet Monroe Giguére had offered to sell to the company the common share she held in the capital stock of LOCATION LAURENTIENNE INC. — LAURENTIAN LEASING INC. for the price of four thousand dollars ($4,000).

The secretary informed the meeting that it would be to the company’s advantage to acquire such shares because LOCATION LAURENTIENNE INC.

—LAURENTIAN LEASING INC. operated a car rental business (all makes of cars) and that the ten (10) shares being offered for sale represented all the shares outstanding of that company.

On a motion duly moved and seconded, it was unanimously resolved, Mr. Robert Giguére and Mrs. Janet Monroe Giguére having stated their interest and abstained from voting, that the company purchase from Mr. Robert Giguére for the price of thirty-six thousand dollars ($36,000) the nine (9) common shares he held in the capital stock of LOCATION LAURENTIENNE INC. — LAURENTIAN LEASING INC. and pay the price of such purchase by handing over to him three hundred and sixty (360) preferred shares duly paid up, with a par value of one hundred dollars ($100), of its capital stock; it was unanimously resolved that the company purchase from Mrs. Janet Monroe Giguére for the price of four thousand dollars ($4,000) the common share she held in the capital stock of LOCATION LAURENTIENNE INC. — LAURENTIAN LEASING INC. and pay the purchase price of that share by handing over to her forty (40) preferred shares duly paid up, with a par value of one hundred dollars ($100), of its capital stock.

The secretary was instructed to issue in the names of Mr. Robert Giguere and Mrs. Janet Monroe Giguére one or more share certificates representing the said preferred shares issued to them.

The secretary of the company is, and was hereby authorized to sign and execute for and on behalf of the company any contract or document necessary or useful for giving full effect to this resolution.

As a reading of the minutes shows, the parties concerned were not overly particular as to the legality of the prospective transactions.

When Robert purchased $200,000 worth of shares from his father, he did not have the money to pay that amount; similarly, when Giguere No 2, which did not exist, purchased shares from Yvonne, René and Marcel (32 each), there was also no money with which to pay. With a bit of imagination it was found in the treasury of Giguere No 1 which, at the time of Henri Giguére’s death in November 1964, had an undistributed income of $544,000 which represented profits. Therefore a means had to be found to appropriate that surplus through a manipulation of shares so as to avoid payment of possible and probable taxes. If a dividend were declared the shareholders would have to pay the tax (section 6 of the afore-mentioned Act).

On the advice of lawyers and chartered accountants highly qualified in income tax matters, Robert and the appellants decided that the best way to make that accumulated surplus vanish into thin air, under the tax department’s nose, was to incorporate another company (Giguere No 2), which was done, as mentioned above, on December 29, 1964 and to form its capital stock of preferred and common shares. The letters patent of Giguére No 1 show that the capital stock was divided into 200 shares of $100 each representing the sum of $20,000 which was subscribed and paid.

The letters patent of Giguére No 2 show that the amount of the company’s capital stock was $1,000,000 divided into 15,000 common shares with a value of $1 each and into 9,850 preferred shares with a nominal value of $100 each. The clauses of the letters patent read as follows with respect to the preferred shares:

(TRANSLATION)

The preferred shares have the following rights and privileges and are subject to the following restrictions, limitations and conditions, to wit: (inter alia

(a) In preference to holders of common shares or shares ranking after the preferred shares, the holders of the preferred shares shall be entitled, out of the profits or surpluses available for that purpose, to a fixed, preferred, non-cumulative dividend when and as declared by the board of directors, at the rate of seven per cent (7%) per annum on the amount paid on such shares;

(b) No dividend may be declared or paid on the common shares or on any shares ranking after the preferred shares in any fiscal year, unless and until the said fixed, preferred, non-cumulative dividend of seven per cent

(7%) has been declared and paid on all the said preferred shares then issued and outstanding.

(e) Unless expressly or otherwise herein provided, the holders of the preferred shares shall not have, as such, the right to vote at shareholders’ meetings nor to attend them; the holders of preferred shares shall not be, as such, eligible to hold the office of director of the company;

(f) The company may at any time, on notice given as prescribed, redeem without the consent of their holders, all or part of the preferred shares issued and outstanding on payment, for each share to be redeemed, of the amount paid thereon, with, in addition, the amount of any dividend declared thereon and not yet paid. If the company wishes to redeem only part of the preferred shares then issued and outstanding, the redemption shall be prorated to the number of preferred shares held by each holder of such preferred shares, without fractions of shares being taken into account, unless the shares to be redeemed have been chosen or determined by unanimous consent of all the holders of preferred shares.

The company shall give to each registered holder of preferred shares at least fifteen (15) days’ notice of the company’s intention to proceed with the redemption of the preferred shares. Such notice shall be sent by mail to the last known address of the holder of preferred shares. Such notice shall indicate to the person to whom it is sent: the number of preferred shares held by him that will be redeemed, the redemption price, the date on which the redemption will take place, and the location where the shareholders can go and submit the certificates for the preferred shares called for redemption in order to receive the redemption payment;

On the day fixed in such notice, the company shall pay the redemption price to the registered holder of such shares on presentation and handing over of the certificates for such redeemed shares, at the company’s head office in Quebec City or at any other location fixed in the notice, and such share certificates shall then be cancelled and the redemption of such shares shall be completed; from the redemption date mentioned in the said notice, the preferred shares called for redemption shall cease to be entitled to any dividend and their holders may no longer exercise any right arising therefrom, except in the case where the company fails to pay the redemption price, in which case the holders of preferred shares shall retain all their rights. On or before the redemption date, the company may deposit the price of the preferred shares called for redemption, with the Minister of Finance of the Province of Quebec in trust, to be paid to each holder of the said shares on handing over of the certificates representing such shares; from the date of such deposit the shares whose redemption price has been so deposited shall be deemed to have been redeemed and the sole right of the respective holders of such shares shall be that of receiving, out of the amount of such deposit, without interest, the redemption price of the said shares on presentation and handing over of the certificates representing such shares;

(g) The company may at any time and at its discretion redeem all or part of the preferred shares outstanding by purchasing on the market or by mutual agreement at the lowest price at which, in the opinion of the directors of the company, such shares can be obtained, but such purchase price may at no time exceed the above redemption price fixed in paragraph

(g) with, in addition, the brokerage commission if any; the shares so purchased shall be deemed to have been redeemed and the certificates representing them shall be cancelled. The purchase, if partial, shall be made proportionally or otherwise, by unanimous consent of the holders of the preferred shares.

What happened was that the appellants converted their common shares of Giguére No 1 into preferred shares of Giguére No 2 which subsequently redeemed them all at the price agreed upon by the said appellants and Robert. It was understood that the appellants’ common shares would be deposited in trust until Robert paid for them in one way or another.

On December 18, 1966 Giguére No 2 concluded the following agreement with the Estate of Henri Giguere:

(TRANSLATION)

WHEREAS the VENDOR (the Estate of Henri Giguère) holds fifty (50) common shares of Giguére Automobile Ltée;

WHEREAS the VENDOR wishes to sell the said shares for a total price of $237,000;

WHEREAS the PURCHASER (Giguére No. 2) wishes to purchase the said shares from the VENDOR on the terms and conditions hereinafter established;

IT IS HEREBY AGREED THAT:

1.—The VENDOR sells, conveys and transfers to the PURCHASER, here present and accepting, fifty (50) common shares of the capital stock of Giguère Automobile Ltée for the price of $237,000 payable as follows:

(a) $37,000 cash payable to the DEPOSITARY (The Royal Trust Company) upon the signing of this agreement, and

(b) the balance of $200,000 with interest at 7 per cent which . . . due at any time, payable to the DEPOSITARY in eight (8) annual and consecutive instalments of $25,000 each, commencing December 1, 1967. The interest shall be payable semi-annually commencing June 1, 1967. The first interest payment shall include the interest on the balance from October 1, 1966. In the event of late payment of the capital and interest, interest at 7 per cent shall be calculated on the balance owing and on the interest then payable and in arrears.

Notwithstanding this article, the PURCHASER shall be entitled at any time to pay in advance, in whole or in part, with thirty (30) days’ notice, but without compensation, any balance owing on the capital and the interest accrued to the date of such payment.

2— The said shares accompanied by a power of attorney for transfer in the name of the DEPOSITARY shall be deposited by the VENDOR, upon the signing of this agreement, in the hands of the DEPOSITARY to be held by it in trust in its name until the full amount of capital and interest has been paid, and to be subsequently returned in negotiable form to the PURCHASER.

3— until the said shares have been finally handed over to the PURCHASER as stated above and provided that the PURCHASER has not failed to meet any obligation or condition of this agreement, the DEPOSITARY shall give to it personally or to its dummies a power or powers of attorney permitting it or its dummies to exercise the right of vote of the said shares at any meeting of the shareholders of Giguere Automobile Ltée and to take any other action pertaining to usual administration, with as much latitude as if the said shares were registered in their name.

4.—Notwithstanding the rights given to the PURCHASER under the foregoing paragraph, the PURCHASER hereby undertakes until the said sale price has been paid in full, unless it has obtained prior written consent from the VENDOR, not to make any change in the authorized capital or in the issued and paid capital of Giguère Automobile Ltée, or in the nature of its business, and not to declare or pay any dividend whatever either in money or in the form of shares or otherwise, or to distribute any assets or capital to the holders of common shares.

5. —As long as the said shares remain in the name of the DEPOSITARY, provided the PURCHASER does not fail to make its payments, the DEPOSITARY shall instruct the company to pay to the PURCHASER all the dividends declared by it. If the PURCHASER fails to make its payments to the VENDOR, any dividend declared during that time by Giguere Automobile Ltée shall be collected by the DEPOSITARY and deducted from the balance still owing by the PURCHASER.

6. —The PURCHASER undertakes to send to the VENDOR, on request, within ninety (90) days following the end of its fiscal year, copies of its certified balance sheets.

7. —If the PURCHASER refuses or neglects to meet any of its obligations under this contract within the time limits, or if the PURCHASER fails to meet the conditions stipulated in paragraph 4 of this contract, or if the PURCHASER makes a proposal to its creditors, or if a receiving order is issued against it by judgment having acquired the force of res adjudicate, if it makes an authorized assignment or becomes otherwise insolvent, the VENDOR may inform the DEPOSITARY thereof in writing. Upon receipt of such written notice, the DEPOSITARY may, without delay, send a formal notice in writing to the PURCHASER indicating to it the obligation or condition regarding which it is in default; if the PURCHASER does not rectify the default mentioned in the formal notice received from the DEPOSITARY within thirty (30) days of receipt of such notice, any balance still owing by it to the VENDOR shall immediately become payable and the VENDOR may immediately institute proceedings to collect it.

8. —The DEPOSITARY shall not have any other obligation or responsibility hereunder than to hold the shares in question and to hand them over to the PURCHASER in accordance with the terms of the agreement and to hand over to the VENDOR the moneys collected in satisfaction of the sale price of the said shares.

INTERVENTION

Robert Giguére, the INTERVENOR, intervened in these presents and after reading the foregoing he declared that he was satisfied therewith and agreed to personally guarantee the execution of the obligations and commitments of the PURCHASER hereunder. The INTERVENOR confirms that Jean Giguère is one of the PURCHASER’S directors and that he shall remain in that capacity until the balance owing has been fully paid. The INTERVENOR waives benefit of discussion, benefit of division and privilege of subrogation.

The above agreement was ratified on December 27, 1966, as evidenced by the following minutes:

(TRANSLATION)

Extract from the minutes of a meeting of the board of directors of GIGUERE AUTOMOBILE (1964) INC. held at the company’s office in Quebec City, on December 27, 1966.

The chairman informed the meeting that the Estate of Henri Giguère held fifty (50) common shares of Giguére Automobile Ltée and that it wanted to sell the said shares for the total price of $237,000.

The chairman informed the meeting that it was to the company’s advantage to purchase the said shares before December 31, 1966.

After discussion, on duly seconded motion it was unanimously resolved:

1. That the company purchase, for the total price of $237,000, the fifty (50) common shares of Giguère Automobile Ltée held by the Estate of Henri Giguere.

2. That the said shares be transferred to the Royal Trust Company until the purchase price of the said shares has been fully paid.

3. That the president of the company be authorized to sign, for and on behalf of the company, all the documents required for that purpose.

lt should be noted that Miss Yvonne Giguére, secretary of Giguere No 1 and who lived in fear of Robert — continued to act as secretary of Giguère No 2.

As a result of the above transactions, the preferred shares of Giguere No 2 were used to enable Robert to pay for the shares purchased from his father and, secondly, to have Giguére No 2 pay for the common shares of Giguére No 1 which were held by the appellants and purchased by Giguère No 2.

Giguére No 1 disposed of its thriving business in favour of Giguere No 2, while keeping the land as an asset which it leased to Giguere No 2. The opening balance sheet as at January 1, 1965 gives a good indication of the situation of Giguere No 2:

ASSETS

Investment:

Shares of a subsidiary — at cost		$525,000
LIABILITIES
Shareholders’ assets:
Capital stock —
Authorized:
9,850 preferred shares,
7% non-cumulative, redeemable,
face value of $100 each	$985,000
15,000 common shares, face value of $1 each	15,000
	$1,000,000
Issued and paid:
5,150 preferred shares	515,000
10,000 common shares	10,000	$525,000

By having Giguére No 2 purchase the common shares of Giguere No 1 and having it pay for them in the form of preferred shares, the surplus was distributed without any provision for tax purposes — so much so that, after having the value of the shares evaluated by two chartered accounting firms, that value, in terms of undistributed surplus, gave $300,000 to the appellants and $200,000 to Henri Giguere, which means, if there had been a legal and uncamouflaged liquidation, that Giguére No 1 shareholders would have had profits equivalent to dividends, to be taken out of the surplus.

In view of these facts, the respondent ordered an inquiry which ended in the following direction:

(TRANSLATION)

ORDER

With regard to the facts and recommendations set forth in the attached memorandum dated March 12, 1970, I hereby order, pursuant to the provisions of subsection (1) of section 138A of the Income Tax Act, that the sum of $20,000 be included in computing the income of Yvonne Giguére for the 1965 taxation year and that the sum of $80,000 be included in computing her income for the 1968 taxation year and that these sums be deemed to have been received by her as dividends referred to in paragraph

(a) of subsection (1) of section 38 of the Income Tax Act. The said sums represent the compensation received by Miss Giguère for the sale of Giguére Automobile Limitée shares to Giguere Automobile (1964) Inc.

This direction proceeds from a laborious inquiry and this is what prompted the departmental direction:

It is recommended that directions under Section 138A(1) be made against the above-noted persons (Estate of Henri Giguere, Yvonne Giguére, Marcel Giguère, René Giguere and Robert Giguere) in connection with the sale to Giguére Automobile (1964) Inc. of their common shares of Giguére Automobile Limitée and Location Laurentienne Inc. The circumstances are as follows:

The Estate of Henri Giguère held 50 shares of Giguère Automobile and Yvonne, Marcel and René each held 33. Robert held the remaining 51 shares of Giguére Automobile as well as all 40 of the outstanding shares of Location Laurentienne. In December of 1964 Yvonne, Marcel and René sold their shares to Giguére Automobile (1964) Inc. and received preferred shares of that company in payment. Also in December of 1964, Robert sold his shares of Giguére Automobile and in payment received common and preference shares of Giguére Automobile (1964) valued at $10,000 and $215,000, respectively. In January of 1966 Robert sold his Location Laurentienne shares and received preference shares of Giguere Automobile (1964). Finally, in December of 1966 the estate sold its shares to Giguere Automobile (1964) for a promissory note which was paid in full in 1967. As indicated in the attached schedule the total purchase consideration given for the Giguére Automobile shares was not allocated to the vendors in the same proportions as their respective shareholdings, Robert and the estate receiving more than their pro-rata share and the others less.

For many years Giguère Automobile Limitée had operated a General Motors dealership in Quebec City under the direction of Henri Giguére and his son Robert. When the older Giguére died in November of 1964, the franchise was transferred to Giguere Automobile (1964) Inc., a new company incorporated by Robert who is the beneficial owner of the whole of its $10,000 common stock. The new company acquired substantially all of the assets of the old company at book value, the main exceptions being the land and buildings which are, however, being used by the new company on a rental basis. It is understood that General Motors requested the reorganization as it preferred to have Robert in full charge of the operation. Location Laurentienne continues to operate its car rental business as a wholly-owned subsidiary of Giguére Automobile (1964).

Both Location Laurentienne and the old Giguére Automobile Limitée had substantial amounts of undistributed income on hand when their shares were sold to the new company. It is clear to see, therefore, that these sales (for a consideration which can be easily converted into cash and thereby lead to a disappearance of assets) have placed the former shareholders in the position where they can withdraw from the companies amounts in excess of these undistributed incomes without incurring the tax thereon for which they would otherwise have become liable if these amounts had been paid to them by way of ordinary distributions of income. In these circumstances Section 138A(1) clearly seems applicable.

We propose that the former shareholders of Location Laurentienne and Giguére Automobile be treated as though the shares which they sold had been redeemed, acquired or converted within the meaning of Section 81(2) when the sales took place in each case and that they be required to include in their income the amount that would have been their deemed dividend under Section 81(2). This, of course, would only determine the amount to be included in income and not the year in which this is to be done. Under Section 138A(1) a direction can only be made in respect of an “amount received’’. On this basis the estate or its beneficiaries would be taxed in 1967. (We are not, however, asking for a direction against the estate or its beneficiaries at this time but will do so at a later date when the affairs of the estate have been wound up and it is known definitely which of the beneficiaries should be taxed).

In the case of the other vendors, it can be argued that because they received payment in the form of shares of Giguere Automobile (1964), they can be regarded as having received “an amount” for purposes of Section 138A(1). We are prepared, however, not to assess on that basis but to seek directions only as and when the shares received are redeemed or otherwise disposed of.

In 1965 Robert, Yvonne, Marcel and René sold some of their preference shares in Giguère Automobile (1964) to the company’s pension plan. It is our view that these sales to the pension plan are part of a series of transactions that began with the sale of Location Laurentienne and Giguére Automobile shares and will end with the consideration received therefor being turned into cash. We are, therefore, of the opinion that the amounts received from the pension plan must be regarded as having been received by Robert, Yvonne, Marcel and René on the sale of their Giguère Automobile shares. Directions are, therefore, being sought in respect of these amounts for 1965.

The remaining preference shares held by Yvonne, Marcel and René were redeemed in 1968 and directions are being sought accordingly. The remaining shares issued to Robert for his Giguere Automobile and Location Laurentienne shares are still outstanding. Further directions will be sought later when these shares are ultimately redeemed or otherwise disposed of. We realize, of course, that if the vendors of the shares are taxed in the manner proposed above, they will only be taxed on deemed distributions. The actual undistributed income of Giguère Automobile and Location Laurentienne will remain in these companies and may subsequently be passed up to Giguere Automobile (1964) and become part of its undistributed income. It is unlikely, however, that it will ever find its way into the hands of the shareholders of Giguère Automobile as a taxable distribution. This is because Giguere Automobile (1964) will be in a position to write off the cost of its investment in Location Laurentienne and Giguère Automobile as a charge against undistributed income under Section 82(1)(a)(iv). As the undistributed incomes of Location Laurentienne and Giguére Automobile at the time of the acquisition of their shares by Giguére Automobile (1964) were less than the cost of the investment, they are thus for all practical purposes effectively wiped out. It is true that under Section 82(1 )(a)(iv) the charge against undistributed income for the write-off of the investment account would have to be reduced by any capital gains Giguère Automobile (1964) might have realized but it seems pure speculation at this time to assume that there would be such capital gains. It is noted in this connection that General Motors does not normally permit the sale of goodwill on the transfer of its franchise and this eliminates the most likely source of a capital gain. It will also be remembered that the company operates in rented premises and this reduces the possibility of a capital gain on real estate. We are informed that to date Giguére Automobile (1964) has not realized any capital gains and that it still holds the full investment in the other two companies.

We recognize that Giguére Automobile and Location Laurentienne both have designated surplus which, if passed up intact, would attract tax in the hands of Giguère Automobile (1964). It is common knowledge, however, that it is a very easy matter to undesignate such surplus and allow it to pass up tax-free. This is so easy in fact that we feel that the existence of designated surplus in the two companies should be disregarded. If it should happen that surplus is passed up as designated surplus and attracts tax in the hands of Giguére Automobile (1964), we could undertake to consider alleviating the effects of double taxation by means of a remission either to the company or to the vendors of the shares.

The amounts we propose to add to the vendors’ income are shown below along with an estimate of the additional federal tax this will produce. Directions are attached for your signature for the years 1965 and 1968. As indicated above, separate directions will be sought later for the amounts marked “later” in the schedule below. The additional tax these amounts will produce cannot be estimated at this time. Please note that the amounts of tax shown are net after deducting the 20% dividend tax credit and the 44% or 58% provincial tax abatement.

		Additional	Additional
	Year	Income	Tax Tax
Estate of Henri Giguère	(later	$ 91,580	—
Yvonne Giguère	(1965	20,000	$ 2,848
	(1968	80,000	13,821
Marcel Giguere	(1965	20,000	2,783
	(1968	80,000	13,602
René Giguere	(1965	20,000	2,710
	(1968	80,000	13,611
Robert Giguère	(1965	40,000	8,419
	(later	154,193	—
		$585,773	$57,694

The taxpayers were advised four months ago of our intention to seek these directions but as yet they have made no representations. It is understood that they are now considering making representations but as the 1965 taxation year is about to become statute-barred we feel that we cannot wait any longer and that we should proceed without them. While it was undoubtedly necessary to reorganize the business on the death of Henri Giguère, we feel that this could have been achieved without the share transfers which resulted in the avoidance of tax.

The direction, as we can see from its wording, is based on the application of sections 138A and 38 of the said Act. I am of the opinion that these sections must be examined in conjunction with paragraph 137(2)(a) and subsection 8(1) of the Act, which read as follows:

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,

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

(a) a payment has been made by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction,

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

(c) a benefit or advantage has been conferred on a shareholder by a corporation,

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

I am of the opinion that the amounts received by the appellants were received after and during a series of factitious transactions and that one purpose, if not the main one, was to effect a substantial reduction of the assets of Giguére No 1, without there being any need for it. Such transactions affected the undistributed surplus which constituted the most obvious equity for the shareholders in question. Through preferred shares they took their share of those assets to which they were entitled but they did not take into account the fact that what they took might be or might have been taxable. The wording of section 138A is not ambiguous. It says . to effect a substantial reduction of, or disappearance of, the assets of a corporation in such a manner that the whole or any part of any tax that might otherwise have been or become payable under this Act in consequence of any distribution of income of a corporation has been or will be avoided”. (The italics are mine.)

The appellants attempted to show that no assets disappeared from Giguére No 1 and Giguére No 2. They have not convinced me that they were right in acting as they did. First of all, the forming of Giguére No 2 was pointless and no evidence was brought forward to establish that the sole purpose of the separate existence of Giguere No 2 was to conduct the affairs of Giguère No 1 and Giguère No 2 in the most effective manner.

Robert had been manager of Giguère No 1 since 1957. He had begun to take an interest in the company’s capital stock during his father’s illness. From that moment on, through careful manoeuvres, he wanted to become the absolute master of the thriving business. At this point we have a background report prepared for the Royal Trust Company by Clarkson, Gordon & Co, Chartered Accountants. The document is dated March 29, 1966 and reads as follows:

(TRANSLATION)

EVALUATION OF THE COMMON SHARES OF GIGUERE AUTOMOBILE LIMITEE

Dear Sirs:

You sent us, for examination, a letter from the Department of National Revenue, dated February 10, 1966, indicating a basis for evaluating Giguère Automobile Limitée shares. We have examined that plan and our comments on this matter are as follows:

Background

On the death of Mr. Henri Giguère in November 1964, the common shares of the company were held by the following persons:

Mr. Henri Giguére	50 shares
Mr. Robert Giguère	51 shares
Miss Yvonne Giguère	33 shares
Mr. René Giguére	33 shares
Mr. Marcel Giguere	33 shares
	200 shares

Mr. Henri Giguere was the company’s president, Mr. Robert Giguére was general manager and the other shareholders held various responsible positions within the car dealer business.

It should be noted that Mr. Henri Giguére was personally holding a General Motors franchise for the Quebec region and that before his death General Motors had agreed to grant that franchise to Mr. Robert Giguére. Such franchise is given to an individual whose job it must be to manage the business and usually to hold control of the company if the business is run in that form.

After Mr. Robert Giguère’s appointment as the company’s general manager, it was obvious that he would replace his father and succeed him as dealer of General Motors products. The year before the death, when the question of succession was discussed more seriously between Henri and Robert Giguere, it became clear that the latter could not be interested in operating that business in which he would hold only about 25 per cent of the shares and in which, because of the incidence of the income taxes, it would be impracticable for him to personally redeem the other outstanding shares. It was then decided that as soon as the franchise was granted, a new company would be incorporated to operate the business in which Mr. Robert Giguere would hold the majority of the common shares. It is also clear that measures would be taken not to oust or harm the other Giguére Automobile Limitée shareholders, especially where the surplus accumulated up to 1964 was concerned.

Book value

The book value of the shares on the last official balance sheet before the death, i.e. December 31, 1963, was $565,000. Taking into account the estimated appreciation of the property, the corrected value of the shares would be $645,000, i.e. $3,225 per share. We do not believe that the financial statements drawn up after the death should be taken into account in this calculation since they include income earned subsequently.

Yield value

We do not think that this factor should be considered because, after Mr. Robert Giguere obtained the franchise, a new company was incorporated to run the automobile dealership. The company’s operations have changed radically and it is unlikely that profits will be made in future. Positive goodwill cannot be considered in evaluating the shares.

Sales of shares

On December 30, 1964, two separate sales of company shares were transacted. The first involved the sale of 99 shares by the three share- holders who each held 33 shares, for a total price of $300,000, or $3,030 per share and close to the book value of the shares when negotiations were opened. The second transaction involved the sale of 51 shares at the price of $225,000 or $4,400 per share. It should be noted that the price of those shares was based on the corrected book value as at December 31, 1964 because this transaction could not be carried out until the first sale had been agreed to. The main condition for these transactions was that the total amount was reinvested in Giguére Automobile (1964) Inc. preferred shares with a non-cumulative dividend. The total cost of these shares was $525,000 or $3,500 per share, and these four shareholders hold 5,250 preferred shares with a nominal value of $100 each in the new company. No dividend was declared or paid in 1965 on these shares, and it is unlikely that dividends will be paid in the near future. On the other hand, these shares are redeemable and the directors have expressed their intention to redeem the shares of the three shareholders, parties to the first transaction, when funds are available. The fact nonetheless remains that the present value of these shares is much less than the amounts shown at the time of the transactions and that no bona fide purchaser would consider buying such shares, unless at a substantial discount. For these reasons we do not think that these transactions permit us to establish the value of the shares of the estate. The only likely purchaser of these shares is still the new company which already has control of the company.

Conclusion

For these reasons we think that the value of the shares, for estate tax purposes, should be calculated solely on the book value. We can allow a certain appreciation of the property of the order mentioned ($80,000) and even a portion of the 1964 profits, which would bring the shareholders’ assets up to about $700,000, or a maximum of $3,500 per share.

An error in this document must be pointed out. The General Motors franchise or dealership was actually in the name of Giguere No 1. The following sentence should also be pointed out: “The year before the death, when the question of succession was discussed more seriously between Henri and Robert Giguère, it became clear that the latter could not be interested in operating that business in which he would hold only about 25 per cent of the shares and in which, because of the incidence of the income taxes, it would be impracticable for him to personally redeem the other outstanding shares” (The italics are mine.) The only positive result of the incorporation of Giguere No 2 was to have the assets of Giguére No 1 pass over to Giguere No 2 in order to eventually appropriate the surplus which was used for redeeming the appellants’ shares.

lt may be that everything was legal from the business standpoint, but that is not the problem since this must be viewed in terms of the Income Tax Act. What is legal elsewhere does not prevent the application of the Act if, from related, successive transactions, the taxation department lost or was in danger of losing in the game played by the parties however well-informed they might be.

Giguère No 1 could have availed itself of sections 81, 82 and 105 of the Act which deal with undistributed income, defined in subsection 82(1) and paragraphs 139(1)(au) and (ay).

By availing itself of the above-mentioned provisions, Giguere No 1 could have freed its undistributed income by paying the tax department the required tax, and by so doing the appellants would not have vio- lated the law and would have found themselves in a situation where what they would have received could not have been deemed a dividend appropriated out of the undistributed income that Giguere No 1 had in reserve at the end of the year 1964. By being party to Robert’s designs, they had the respondent lose the benefit of the tax encumbering the said undistributed income because that benefit represented taxable profits.

For the above reasons I am of the opinion to confirm the direction.

Appeals dismissed.