Alexander Dewar v. Minister of National Revenue, [1972] CTC 2499

The Chairman (orally):—This is an appeal by Alexander Dewar against a reassessment by the Minister for the taxation years 1968 and 1969 involving a sum of money in the neighbourhood of $3,400. Two taxation years are involved because the corporation which was paying the money to the appellant had a fiscal year that ended in January whereas the individual’s fiscal year was the calendar year. There is also an appeal by Myrle Dewar, the wife of the appellant Alexander Dewar, which is based on the same facts. Only the figures are different, the source being the same in each case.

For the assistance of the Board counsel submitted a partial statement of facts which had been agreed upon by both parties. I adopt as part of this judgment those agreed facts and will refer to them only briefly in summary.

What happened in this instance apparently was that for some years there was a company known as the Raphael-Mack Company Limited which was engaged in the ladies’ apparel business. The principal and perhaps the sole beneficial shareholder of that company in 1961 was Mrs Francis Hollinrake who had loaned or advanced to the company the sum of $81,000 and I am using round figures.

There is not any dispute that the moneys were advanced to the company and were a legitimate debt of the limited company to Mrs Hollinrake. Of course there would be no doubt it would be a capital indebtedness of the company to Mrs Hollinrake. In 1961 the limited company apparently ran into difficulties. The evidence is not clear whether it was in bankruptcy but I think a reasonable inference is that it was at least insolvent. It had to make a proposal to its creditors which apparently was eventually accepted. it is not clear whether this was in conformity with the terms of the Bankruptcy Act or was an arrangement with the solicitors for the creditors, but I do not think that that makes any substantial difference in the result. The Dewars were not involved in any way in this deal with the creditors. They did enter into the picture though in 1961 by buying for the sum of about $22,000 the right to use the name “Raphael-Mack” along with certain fixtures. Apparently they were also in the ladies’ apparel business.

The only viva voce evidence called was that of Anthony Luciani, a chartered accountant with the Department of National Revenue. In his view the limited company was inactive from 1961 on. From 1961 until 1965 the Dewars operated, apparently successfully, a ladies’ wear store under the name of Raphael-Mack.

The situation in 1965 was that the limited company had some 5,000 common shares outstanding, all owned or beneficially owned at least by Mrs Hollinrake, and a deficit of some $86,000, being in effect the loan or indebtedness to Mrs Hollinrake by Raphael-Mack Company Limited. In 1965 the Dewars purchased the common shares and the loan owed to Mrs Hollinrake for the sum of $1,500. There was some suggestion that there was some earned surplus in the company, but I think it is safe to assume or infer from the evidence that to all intents and purposes the company at that time was insolvent, having only the issued shares and the debt to Mrs Hollinrake.

lt was urged by counsel on behalf of the appellant that when they purchased the shares of the limited company they took an assignment of the note under seal indicating the debts to Mrs Hollinrake. Of course it would have been folly to do otherwise because what they intended to do and did do was to bring into Raphael-Mack Company Limited two businesses, the Raphael-Mack Ladies Wear in downtown Hamilton and the Merle store in a local shopping centre, and to reactivate the company with those assets being operated as divisions of the company. I think it would have been folly not to take an assignment of the note because otherwise Mrs Hollinrake could then have turned around and demanded payment of the note when the company had acquired the assets of the Dewars. In one case, I believe it was in the Merle case, a specific figure was allowed for goodwill, but in the other case, apparently by agreement with the Department, no goodwill was included in the transfer of the assets.

Matters went along then until 1968-69 when the limited company was in a position to make payments to each of the Dewars of the sums specified in the reassessments on account of the loan, which apparently had been acquired equally by Mr and Mrs Dewar from Mrs Hollinrake, or so close to being equal as to be immaterial.

At this stage the Minister attacked the payments as being income in the hands of the recipients rather than a return of capital. Counsel for the appellant pointed out that, had it not been for the emergence into tax law of the case of MNR v Sissons in 1968-69 ([1969] SCR 507; [1969] CTC 184; 69 DTC 5152), the problem before me today might not have arisen. I think it is fair to say that up until that time such a repayment or such an assignment or the acquiring of such a loan would have been treated as capital.

Both parties really rest their cases on the Sissons case (supra). The Minister has said in effect that this case falls on all fours with that decision of the Supreme Court of Canada, whereas counsel for the appellant acknowledges that in order to succeed he must distinguish the facts of this case from the facts in the Sissons case.

The argument on behalf of the appellant is that the company was acquired in 1965 as an investment; that the situation existed whereby, although they had the right to use the name Raphael-Mack, it was still possible for Mrs Hollinrake to sell the shares of the company to a third party who might then open a business of the same type in this area and take action to prevent the appellant from continuing to use the name He also argued that the acquiring of the note was collateral or inci dental to the purchase of the company.

Counsel on behalf of the Minister alleges that by no stretch of the imagination can a purchase for $1,500 of the shares of this company along with a “worthless” note for $80,000 odd be considered an investment. The respondent’s argument is that, relying on the judgment of Mr Justice Pigeon in the Sissons case in the Supreme Court of Canada, it only became possible for the Dewars to realize on this note by virtue of their own efforts in building up the business to a position where funds were available for distribution.

The question of subsections 8(1) and 137(2) was raised, but I do not think I need deal with that in respect of the decision in this case.

Mr Robinson argued that in effect the investment was the buying of the company’s shares to protect the already existing business of the taxpayers, and that the Minister has misconstrued what the real investment was by dwelling entirely on the note or the loan that was assigned to the appellants.

Were it not for the words of Mr Justice Pigeon in the Sissons case I would have no hesitation whatsoever in following completely the Exchequer Court decision in that matter ([1968] CTC 363; 68 DTC 5236). However, I do feel and I so find that the only advantage that the appellant’s gained from the $80,000 odd loan was as a result of their efforts in building up this business to the state it was in 1968-69 when the payment was made. I feel therefore bound by the Supreme Court of Canada decision in the Sissons case and find that this was clearly an adventure in the nature of trade and that the payments to the appellants in the respective amounts were correctly assessed by the Minister. The appeal must therefore be dismissed.

Appeal dismissed.