Atlantic Wholesalers Limited v. Minister of National Revenue, [1972] CTC 2611, 72 DTC 1512

Roland St-Onge:—This appeal was heard at Saint John, New Brunswick on July 12, 1971 by the Tax Appeal Board as it was then constituted, and is from a reassessment dated April 29, 1970 wherein tax in the amount of $600,823.28 was levied in respect of income for the taxation year 1968.

The facts in this appeal are fully disclosed in the Notice of Appeal and are reproduced hereunder almost in their entirety:

1. The appellant is a company duly incorporated under the laws of the Province of New Brunswick and is and at all relevant times has been primarily engaged in the business of the wholesale distribution of groceries, produce and allied lines of merchandise, in furtherance of which business it regularly extends financial assistance to independent retail grocery operators.

2. Prior to November 9th, 1964, L T Cairns Co, Ltd (hereinafter called “Cairns”) was an independent company carrying on the business of a retail grocer in the Town (now City) of Campbellton in the Province of New Brunswick and was controlled by the late Lawrence T Cairns and later by the administrators of his estate. Cairns was a customer of the Appellant.

3. On November 9th, 1964, the Appellant, pursuant to a tender submitted in response to a public call for tenders, purchased for cash all of the outstanding shares of the capital stock of Cairns for a price of $96,600, subject to certain adjustments which brought the total price to $96,607.89.

4. Cairns, since November 9th, 1964, has been and is now a wholly-owned subsidiary of the Appellant.

9. On June 30th, 1964 (Cairns’ fiscal year-end) Cairns had undistributed income on hand of $54,418.00. After June 30th, 1964, and prior to November 9th, 1964, a dividend of $4,700.00 was paid. Designated surplus within the meaning of Section 28(2) of The Income Tax Act (hereinafter called ‘‘the Act’’) was therefore $49,718.00.

6. On the said 9th day of November, 1964, the assets of Cairns comprised a lot of land on Roseberry Street in the Town of Campbellton on which was erected a multi-storey building (of which the ground floor and basement were used for retail sale of groceries and the upper storeys were let out as apartments); store and office furniture, fixtures and equipment, etc, and a certain vehicle; stock-in-trade of merchandise and certain accounts receivable, together with its goodwill as a grocery business and certain prepaid expenses.

7. The purpose of the Appellant in acquiring the shares of Cairns was to ensure the retention of the business volume of Cairns for the Appellant’s wholesale grocery operations. Though the Appellant does operate some retail grocery outlets these are ordinarily units of much larger size. The store operated by Cairns was not of such character as could be effectively operated by the Appellant as a retail outlet with salaried personnel. The Appellant was therefore anxious to establish an independent retailer in the store theretofore operated by Cairns under terms which would ensure to the Appellant that the store would purchase the bulk of its stock from the Appellant.

8. On the said 9th day of November, 1964, immediately after acquisition of its shares by the Appellant, Cairns sold to William L P Caldwell who had, since the death of Lawrence T Cairns, been the manager of Cairns, certain assets of Cairns as follows, for the consideration stated:

	Furniture, fixtures, equipment
	and vehicle	$16,700
	Stock-in-trade	Cost as to be
		determined by
		joint inventory
	Accounts receivable	Face amount with
		no reserves
	Goodwill	$12,000
	Prepaid expenses	Pro-rated value.
9.	After such joint inventory and after joint accounting as to value of receiv

ables and prepaid items, and as to liabilities, the net price, after deducting liabilities as assumed by said William L P Caldwell, was established at $59,116.76, no part of which was paid in cash.

10. The said William L P Caldwell thereafter and prior to December 22nd, 1964, transferred the assets so acquired by him from Cairns to a new company formed by him named Cairns Foodmarket Ltd.

11. On the said 9th day of November, 1964, Cairns also demised to the Appellant the ground floor and basement of its said building in Campbellton for a term of ten years with an option for renewal. The Appellant thereupon sublet the said premises to the said William L P Caldwell or to his company, Cairns Foodmarket Ltd.

12. As security for payment of the purchase price of the said assets, Cairns Foodmarket Ltd, on December 22nd, 1964, executed a demand promissory note for $59,116.76, the payee of which was the Appellant, with interest at 7% per annum, which was below the normal interest for such a security at the date of execution.

13. As security for the payment of such promissory note Cairns Foodmarket Lid also executed a chattel mortgage in favour of Chignecto Holdings Limited (hereinafter called “Chignecto”) expressed to be as agent for the Appellant, in the said amount of $59,116.76, payable by instalments of $550.00 per month.

14. In explanation of paragraphs numbered 12 and 13 above, the Appellant says that:

(a) the Appellant acts as the banker for all of its subsidiaries. All cash received by its subsidiaries, as well as its own cash received at head office or at branches, is normally deposited or transferred immediately into the consolidated bank account of the Appellant;

(b) the Appellant is the only company of the group comprised of itself and its subsidiaries that has arranged banking facilities continuously available for discounting notes. All such notes are therefore taken in the name of the Appellant to facilitate such discounting, even though beneficially owned by a subsidiary;

(c) Chignecto is a wholly-owned subsidiary of the Appellant and often acts as agent and trustee of the Appellant or of another subsidiary for the purpose of taking, holding and enforcing the security given by a third party to cover a discounted promissory note such as, as has frequently been the case, a chattel mortgage.

15. The obligation owing by the said William L P Caldwell or Cairns Foodmarket Ltd to Cairns was transferred by book entry from Cairns to Chignecto by entry made effective the 3rd day of April, 1965 at its face amount. Chignecto was shown on the books of both Cairns and Chignecto as owing Cairns the appropriate amount.

16. The obligation owing by Williams L P Caldwell or Cairns Foodmarket Ltd to Chignecto and the Appellant as Chignecto’s agent was paid promptly by regular instalments and was discharged on March 12th, 1968.

17. From November 9th, 1964, until January 1st, 1968, Cairns conducted no trading business but continued to hold the said lands and building in Campbellton and collected the rents thereof from the Appellant and from the other tenants.

18. By agreement dated as of January 1st, 1968, Cairns agreed to sell to Atlantic Properties Ltd (hereinafter called “Properties”) the said lands and building for a price made up as follows:

Lands	$17,700.00
Building	$24,880.00
	$42,580.00

The said value placed on the building was the book value thereof and the value placed on the lands was the fair value thereof as estimated by the management of Cairns and agreed to by the management of Properties. The said purchase price was by said agreement stated to be, and still remains as, a debt owing on open account by Properties to Cairns.

19. The said sale was implemented by deed dated as of January ist, 1968, and actually executed on January 16th, 1968.

20. Properties is a real property holding and leasing company, no shares of which are held by or for the Appellant and which is at arm’s length from the Appellant, though Properties and the Appellant have close business relations.

21. Properties held title on January 1st, 1968, to some forty foodmarket sites (on most of which were operating foodmarkets) located throughout the Provinces of New Brunswick, Nova Scotia and Prince Edward Island, all of which were demised to the Appellant by lease dated as of November 1st, 1962, and expiring on October 31st, 2061, and by instruments supplemental thereto. The said lands, building and store premises acquired from Cairns were added to this lease by lease amendment dated as of January 1st, 1968, and actually executed on January 18th, 1968.

22. Most of the retail foodmarket sites controlled by or for the Appellant are held in the name of Properties and so leased to the Appellant. This is the Appellant's ordinary manner of holding real property used or to be used for retail foodmarkets.

23. By a Deed of Trust and Mortgage dated as of November 1st, 1962, made by Properties in favour of The Royal Trust Company and drawn to secure First Mortgage Bonds of Properties, all of the present and future lands and buildings of Properties were mortgaged and subjected to various covenants in the said Deed of Trust and Mortgage contained.

24. As a result of the transactions described in paragraphs numbered 18 and 19 hereof Cairns became an inactive company holding nothing but book debts owing to it by Chignecto and Properties. Its business activities were suspended. The debts owing to it were, however, owed by subsisting companies with ample assets and Cairns was and ever since has been in a position to resume trading activities as soon as an appropriate role could be found for Cairns. Cairns was actively considered by the Appellant in 1969 for employment upon the acquisition by the Appellant of a large wholesale grocery business. the negotiations for the acquisition of which proved abortive at that time.

25. By Supplementary Letters Patent dated June 24th, 1970, Cairns changed its name to Valu-Mart (1970) Ltd. Such Supplementary Letters Patent were obtained at the instigation of the Appellant for the purpose of protecting the trade name “Valu-Mart” and with a view to having Cairns enter into the business of a franchising company with respect to the name “Valu-Mart” which is, and is to be, employed by discount warehouse retail food stores controlled directly or indirectly by the Appellant.

26. The Minister has, by letter dated June 3rd, 1969, stated, as regards the portion of the said assessment appealed against:

“A dividend of $54,418.03 was deemed to have been received by (Appellant) in 1968 from (Cairns) under the provisions of sections 28, 81 and 82 of The Income Tax Act.”

In his 20 pages of Reply to the Notice of Appeal the respondent alleged, among other things, the following:

(h) William L P Caldwell or Cairns Foodmarket Ltd paid the following amounts to the Appellant in full discharge of the said promissory note:

	Interest	Principal
Nov. 10, 1964— Mar. 30, 1965	$1,367.55	$ 8,457.16
Mar. 31, 1965 —Mar. 30, 1966	2,972.61	11,077.39
Mar. 31, 1966 — Mar. 30, 1967	2,024.81	14,075.19
Mar. 31, 1967 — Jan. 7, 1968	997.73	10,252.27
Jan. 8, 1968 — Mar. 12, 1968	323.52	14,670.25
	$8,186.22	$58,532.26

(i) the Appellant deposited the said funds in its own bank account as they were received and appropriated them to its own use, and on its books entered them as accounts payable to Cairns, while Cairns entered such amounts as accounts receivable from the Appellant;

(j) by book entry recorded May 30, 1965, the Appellant caused Chignecto Holdings Ltd to assume the Appellant’s debt expressed to be owing by the Appellant to Cairns in the amount of $60,120.21 and at the same time reduced by that amount a debt expressed to be owing to the Appellant by Chignecto Holdings Ltd;

(k) after May 30, 1965, the Appellant continued to receive all amounts paid by William L P Caldwell or Cairns Foodmarket Ltd on the said promissory note and to appropriate such funds to its own use, and required Chignecto Holdings Ltd to express such amounts as owing to Cairns;

(l) on or about January 1, 1968, Cairns transferred the said real property to Atlantic Properties Ltd for $42,580.00 at book value, no part of which amount was paid to Cairns or secured in any way;

(m) the business of Cairns was wound up or discontinued between the time of the said transfer of its real property to Atlantic Properties Ltd and March 12, 1968, and Cairns has since that time carried on no business whatsoever, but has remained an inactive company;

(n) Atlantic Properties Ltd was at all material times a corporation which was not dealing with Cairns or the Appellant at arm’s length because

(i) all of these companies and Loblaw Companies Limited were related persons, within the meaning of subsections (5), (5a), (5b) and

(5d) of section 139 of the Income Tax Act,

and

(ii) they were not dealing with each other at arm’s length in fact, within the meaning of paragraph (b) of subsection (5) of section 139 of the Income Tax Act;

(o) the Appellant at all material times had control of Cairns and had its nominees on the board of directors of Cairns;

(p) the transfer of the said real property by Cairns to Atlantic Properties Ltd was made pursuant to the direction of, or with the concurrence of, the Appellant for the benefit of the Appellant or as a benefit that the Appellant desired to have conferred on Atlantic Properties Ltd;

(q) no payment has ever been made to Cairns on account of the promissory note or chattel mortgage or on account of the transfer of the real property to Atlantic Properties Ltd, and at no time has Cairns made any demand for payment;

(r) the Appellant and Atlantic Properties Ltd did not, as consideration for the said assets incur any real or bona fide obligation to pay Cairns a sum of money, or make such promise that the Appellant, Atlantic Properties Ltd or Cairns intended would be fulfilled or enforced;

(s) the said transactions whereby Cairns appropriated all payments made on the promissory note to the Appellant and transferred its real property to Atlantic Properties Ltd were part of an overall plan or scheme whereby Cairns would transfer all or substantially all of its assets either to the Appellant or to Atlantic Properties Ltd at the direction of or with the concurrence of the Appellant without the Appellant or Atlantic Properties Ltd being called upon to pay Cairns therefor, and to leave Cairns as an empty and inactive shell:

(t) as a result of the appropriations of the payments on the promissory note between January 8, 1968 and March 12, 1968, amounting to $14,- 993.77, as hereinbefore more particularly set forth in paragraph (h), funds or property of Cairns in the amount of $14,993.77 were distributed or otherwise appropriated to or for the benefit of the Appellant, within the meaning of section 81(1) of the Income Tax Act;

(u) had the transfer of the said real property been made to the Appellant rather than to Atlantic Properties Ltd, the result would have been that funds or property of Cairns in the amount of $42,580.00 would have been distributed or otherwise appropriated to or for the benefit of the Appellant upon the winding-up, discontinuance or reorganization of the business of Cairns, within the meaning of section 81(1) of the Income Tax Act, and the lesser of the amounts mentioned in section 81(1) would have been deemed to have been received by the Appellant as a dividend and all or a portion thereof would have been required to be included in the Appellant’s income in accordance with the provisions of sections 6(1) (a)(i) and 28 of the Act; therefore, since the said transfer was made to Atlantic Properties Ltd pursuant to the direction of, or with the concurrence of, the Appellant for the benefit of the Appellant or as a benefit that the Appellant desired to have conferred on Atlantic Properties Ltd, such aforementioned amount is to be included in the Appellant’s income under section 16(1) of the Act;

(v) at all material times and at the end of its 1964, 1965, 1966, 1967 and 1968 taxation years Cairns had the following amounts of undistributed income on hand, within the meaning of sections 81 and 82 of the Income Tax Act:

June 30, 1964	$54,418.03
March 30, 1965	$61,028.03
March 30, 1966	$63,055.03
March 30, 1967	$64,728.03
March 30, 1968	$65,579.03

of which amounts the sum of $49,718.03 was at all such times designated surplus, within the meaning of section 28 of the Act;

(w) since the amount or value of the funds or property distributed or appropriated, as aforesaid, between January 1, 1968 and March 12, 1968, ie $57,573.71, was less than the amount of Cairns’ undistributed income then on hand, ie $65,579.03, the amount of the dividend deemed to have been received by the Appellant under section 81(1) of the Income Tax Act was that lesser amount, and only that amount is to be included in computing the Appellant’s income for the 1968 taxation year;

(x) since Cairns’ designated surplus amounted to $49,718.03 at the time when the Appellant was deemed to have received the said dividend of $57,573.77, only such amount of the dividend as was not paid out of designated surplus is deductible under section 28(2) of the Income Tax Act when computing the Appellant’s taxable income for the 1968 taxation year.

16. Alternatively, as a result of the said transactions whereby Cairns appropriated all payments on the promissory note to the Appellant and transferred its real property to Atlantic Properties Ltd, Cairns conferred in the 1968 taxation year on the Appellant, or on Atlantic Properties Ltd at the direction of or with the concurrence of the Appellant, a benefit of $68,823.77, being the total of $1,321.25 on account of interest and $24,922.52 on account of principal paid to the Appellant in the year on the promissory note and $42,580.00 with respect to the real property transferred to Atlantic Properties Ltd in January, 1968, within the meaning of sections 16(1) and 137(2) of the Income Tax Act, and Cairns is therefore deemed by section 137(2) of the Act to have made a payment to the Appellant in the amount of $68,823.77, which amount is to be included in computing the Appellant’s income by virtue of section 137(2) of the Act.

17. In the further alternative, the Respondent says that if the said property and assets of Cairns were not distributed or otherwise appropriated to or for the benefit of the Appellant or as a benefit which the Appellant desired to have conferred on Atlantic Properties Ltd on the winding-up, discontinuance or reorganization of Cairns’ business, the payments made to the Appellant on the promissory note in the 1968 taxation year and the said transfer of the real property to Atlantic Properties Ltd at the direction of or with the concurrence of the Appellant, the total in the years amounting to $68,823.77, were:

(a) payments made by Cairns to the Appellant qua shareholder otherwise than pursuant to bona fide business transactions, or

(b) funds or property of Cairns which Cairns appropriated to or for the benefit of the Appellant qua shareholder, or

(c) benefits or advantages which were conferred by Cairns upon the Appellant qua shareholder otherwise than by way of the methods specified in section 8(1 )(c)(i), (ii) or (iii) of the Income Tax Act,

so that the amount of $68,823.77 is to be properly included in computing the Appellant’s income for the 1968 taxation year pursuant to sections 8(1) and 16(1) of the Act.

17A. In the further alternative, the Respondent says that:

(a) If the said amounts which were paid by William L P Caldwell or Cairns Foodmarket Ltd to the Appellant totalling $26,243.77 in the 1968 taxation year, were in fact intended to be repaid by the Appellant to Cairns, they were intended to have been received and retained by the Appellant as loans from Cairns and are thus to be properly included in computing the Appellant’s income for the 1968 taxation year pursuant to section 8(2) of the Income Tax Act,

and

(b) if the amount representing the value of the said real property, ie $42,580.00 was in fact intended to be paid to Cairns, it was intended to have been retained by Atlantic Properties Ltd at the direction of or with the concurrence of, the Appellant as a loan and was therefore a payment or transfer of property which, had it been made to the Appellant, would have to be properly included in computing the Appellant’s income for the 1968 taxation year pursuant to section 8(2) of the Income Tax Act; the said amount of $42,580.00 is therefore to be properly included in computing the Appellant’s income for the 1968 taxation year pursuant to section 16(1) of the Income Tax Act.

Mr Douglas J T Hamm, who has been with the company for 25 years and who is its president as well as president of its subsidiaries, testified concerning the nature of the operations of the appellant and its subsidiaries, and also with respect to the transaction dated November 9, 1964 between L T Cairns Company Limited and the appellant company. He stated that the appellant is a company which operates a wholesale grocery business, having 18 branch outlets. It has 24 retail stores and its consolidated sales volume is approximately $82 million. In addition to operating its 24 stores, the appellant services about 3,500 independent accounts of varying sizes. In 1959 the appellant, for the purpose of becoming more familiar with the supermarket business, purchased one major supermarket outlet, namely St George Fruits Limited in Moncton. Previously the appellant had been involved in the franchise business with Red & White and Lucky Dollar groups. In 1959 it went with a major group called Save Easy which was Carrying on the same type of business with independent operators.

The witness explained that the appellant will purchase land, build a store thereon and lease it to an independent, but a customer owning his own store may also become a member of the organization. In the latter circumstance, if a customer wishes to renovate his store, purchase equipment or establish his business in a new outlet, the appellant will grant him financial assistance in return for a demand note or chattel mortgage on the stock and equipment.

According to the appellant’s 1965 income tax return the sum of $775,772 was advanced on such mortgages. The witness explained that demand notes are made payable to the appellant company whereas chattel mortgages are taken in the name of Chignecto Holdings Ltd, a wholly-owned subsidiary of the appellant company and primarily an insurance agent. According to this financial system, the appellant at the material time was able to obtain a line of credit up to an amount of $500,000 by discounting customers’ notes at the Royal Bank of Canada which would credit the appellant with the face value of the notes. He stated that the appellant company also operates its wholesale grocery business through two other wholly-owned subsidiaries, namely, R McGregor and Sons Ltd in New Glasgow and Kitchen Bros Ltd in Fredericton — each company having a warehouse in its respective city. The appellant company has a centralized accounting system in its head office in Sackville to which all accounts from the different branches are transferred on a daily basis.

As already stated, the appellant deals with its 24 customers in two different ways — it either owns and leases the store to the customer or the customer owns his own store but is bound to buy his stock from the appellant. In the case at bar, the appellant purchased all the shares of L T Cairns Company Limited, sold the food business to its customer and the land and building to its wholly-owned subsidiary by the name of Atlantic Properties Limited. The stock-in-trade of the grocery outlet was sold to one Mr William Caldwell for a price of $59,116.76, and the ground floor of the building was leased to Atlantic Wholesalers Limited by L T Cairns Company Limited for a term of 10 years at a rental of $350 per month. Atlantic Wholesalers Limited leased back the ground floor to Cairns Food Market Limited for $400 per month, under which lease the tenant was bound to purchase all its merchandise from Atlantic Wholesalers Limited. The rent is collected by the appellant manager of the Campbellton branch.

Cairns Food Market Limited agreed to assign the book debts (December 21, 1964) and a chattel mortgage (January 4, 1965) to Chig- necto Holdings Ltd, and to purchase the stock-in-trade and fixtures from Atlantic Wholesalers Limited for $59,116.76, which amount corresponds to the amount of the promissory note payable to the appellant. (The said promissory note could not be located and consequently was not filed at the hearing.) Apparently, this was not an isolated transaction but a standard procedure used by the appellant to facilitate the discounting of notes, and Chignecto Holdings Ltd was used to keep the name of the appellant company out of Dunn and Bradstreet reports so that no information would be available to competitors and also to avoid any proceedings against the appellant.

The witness also stated that the purchase price has been completely paid, the promissory note returned, and the chattel mortgage released; that L T Cairns Company Limited has been inactive since November 9, 1964, has had no employees, and consequently the appellant company collects the rent. The financial statements of L T Cairns Company Limited dated June 30, 1964 and November 7, 1964 show a net profit of $19,040.25 from the store operation and an amount of $804.84 as the net rental income. Thereafter the rent was arrived at by charging 60% of the store expenditures in lieu of a fixed rent and L T Cairns Company Limited, as landlord, was reporting and paying income tax on an annual total rental income of $6,700. The promissory note mentioned above was held for about three months — that is to say, until there was sufficient room between the amount of credit authorized and the balance of notes currently discounted. According to a bank ledger sheet, the appellant company received full credit for the face value of the promissory note on August 12, 1965. It then credited L T Cairns Company Limited through a company account wherein this amount was set up as an amount owing to Cairns and receivable by Cairns.

In 1970 L T Cairns Company Limited changed its name to Valu-Mart (1970) Limited, and according to the financial statements filed the former was credited with an amount of $60,120 which was the sale price by Cairns Food Market Ltd.

in 1968 the property was sold to Atlantic Properties Limited for the sum of $42,580 — $17,700 for the land and $24,880 for the building.

Mr Hamm also stated that the fact that L T Cairns Company Limited had a non-distributed income on hand in the amount of $54,418.03 never entered his mind as being an incentive for the appellant to buy the shares, and the examination of Cairns’ financial statements was made solely to appraise the value of the shares for the purpose of buying the company in order to retain it as an outlet volume for their branch operation in Campbellton. He admitted that the $54,418.03 was income earned prior to the sale of the shares and that it was undistributed; that the appellant company never took over Cairns’ assets and, therefore, the undistributed income, because the receivables were always shown to be owing to the company. However, he also admitted that the people who would have to make the decision that Cairns de- mand payment would be the same people who would make the decision that the appellant company pay the debts; that from 1964 nothing has in fact ever been paid by the appellant or demanded by Cairns; and that nothing was planned for Cairns, to which company the debts could be owed by the appellant forever.

According to financial statements, when the appellant discounted the promissory note at face value of $59,116.76, it was credited the same day with $12,076.32, which amount represented the payments made by Mr Caldwell up to that date. The appellant company billed Cairns Food Market every month for the amount it had to pay to the Royal Bank, plus a charge of 1% interest to cover the expense of the clerical work involved. L T Cairns Company Limited never reported this interest as income. From November 9, 1964 to January, 1968 its only source of income was rental income and all activities ceased in 1968 when the property was transferred to Atlantic Properties Limited. On May 30, 1965 Chignecto Holdings Limited was substituted for the appellant as debtor for the amount expressed to be owing to L T Cairns Company Limited. There is nothing in evidence to show that the Cairns Company consented to this substitution of debtors. According to the witness, the building was transferred at $24,880 which was the undepreciated capital cost — possibly to avoid recapture but also because it was considered to be part and parcel of a reasonable price for the overall deal. The sum of $17,700 for the land had been discussed by the management of all the companies when they decided that the building should be transferred to Atlantic Properties Limited because it was the only one housing a retail outlet that was not in their possession. Consequently, the property was transferred for $42,580 to Atlantic Properties Limited but the latter never paid anything to L T Cairns Company Limited except an account which was not secured by a mortgage, and which was to be owing to it by Atlantic Properties Limited.

Mr J R Pichette, who was in the real estate and general insurance business in Campbellton and who was also the official Royal Trust real estate representative and appraiser in the area, was accepted as a qualified appraiser. He stated that he had never succeeded in selling a commercial building at the municipal assessment, and he put the following valuations on the property at issue as at the beginning of 1968:

(a) cost of replacement less depreciation — $47,500

(b) with respect to the income approach — $46,786

(c) according to comparable properties sold in the neighbourhood — $46,000 to $47,000.

He also stated that, under the conditions that Mr Caldwell bought the property, he could have found a half-dozen buyers and that, as a salesman, he could not have sold that building for more than $40,000 unless the buyer intended to go into the retail grocery business and wished to capitalize on the Cairns goodwill.

After this testimony the parties admitted that Atlantic Properties Limited and Atlantic Wholesalers Limited are non-arm’s length companies.

Mr A M McNicol, treasurer of the appellant company, testified that no inter-company interest was charged or inter-company security documents prepared in any way whatsoever. Referring to financial statements prepared and filed with income tax returns, he quoted the following figures:

Upon cross-examination he admitted that in the case of loans made to outsiders the appellant would charge interest and take securities. He corroborated the testimonies of the other witnesses to the effect that the appellant, when advancing money to a customer, would take a promissory note or a chattel mortgage. With respect to the transaction under discussion, he said that he was not aware of any resolution made by the Cairns Company authorizing the transfer of the assets. According to him, the appellant company operates on a centralized banking system whereby it deals with the funds of all the other companies as if they were its own. Consequently, from 1964 onward the Cairns Company did not make any use of the money as it was always shown as an account receivable and had been transferred to the appellant. Mr McNicol agreed that Atlantic Wholesalers Limited simply removed the assets of L T Cairns Company Limited and used them for its own purposes and gave only a receivable in return. Apparently, this was done to split the winding up of a business from the winding up of a company because subsection 81(1) of the Income Tax Act does not apply to the winding up of a company but only to the winding up of its business. He also stated that the appellant company purchased the shares of another company by the name of Kitchen Bros Limited which is still operating, and that it had at that time an undistributed income on hand, designated surplus in excess of $400,000, and that the appellant was awaiting the outcome of the present appeal before dealing with that company.

Mr J P Palmer, senior partner in the firm of Palmer, O’Connell, Leger and Turnbull, and president of Atlantic Properties Limited, corroborated the previous testimonies and testified that the sum of $42,581 was not a loan but an obligation arising out of transactions between the aforementioned companies; that these debts are recoverable any time on demand; and that this amount was for the value of the property transferred by L T Cairns Company Limited to Atlantic Properties Limited. He stated that this amount has never been paid by Atlantic Properties and no demand for payment has ever been made by the Cairns Company. He went on to say that in unusual transactions he usually reports to a law firm in Toronto to get direction, but that this was not done with respect to the transaction under discussion. He agreed that there was a great degree of cooperation and mutual trust between the different companies, but he did not admit that these com- panies were entirely one. He stressd the fact that the debt was a demand debt, payment for which could be requested at any time. It was not guaranteed by a mortgage but was very valuable because of the solvability of the debtor.

Counsel for the appellant argued that the appellant carried out the transactions under review in its normal course of business. When the stock-in-trade of the Cairns Company was sold, the appellant received a promissory note and one of its subsidiaries, Chignecto Holdings Limited, received a chattel mortgage from Mr Caldwell. He also contended that when L T Cairns Company Limited sold its stock-in-trade on November 9, 1964 its business as a retail grocery was discontinued and from then on the appellant company looked after the maintenance of and repairs to the building, collected the rents and kept the books, Cairns Company having no employees of its own. He stated that if there was any distribution or appropriation of property it happened back on November 9, 1964, but he submitted that there was no appropriation by the shareholders of Atlantic Wholesalers Limited. He stressed the fact that Cairns got rid of some assets and received another one in return — an account receivable which was very valuable because of the substantial assets of the appellant company.

With respect to the sale of the real property by the Cairns Company to Atlantic Properties Limited for $42,580, counsel for the appellant submitted that the evidence of Mr Pichette to the effect that on the open market he could not get more than $40,000 for it was very convincing, and that it does not make any difference whether this amount was paid by Atlantic Properties Limited to the Cairns Company or whether it was secured by a mortgage or other security because there was no need to proceed in that manner. He stated that the debt was created and could be paid at any time, and that he would be very happy to own personally the shares of the Cairns Company. He pointed out that at the present time Cairns is doing everything possible to stay alive. It files annual income tax returns and undergoes an annual audit. Since 1968 it has changed its charter and its name, and has filed documents in other jurisdictions to protect the name of Valu-Mart. it was actively considered by management for the acquisition of the assets of another company.

He further contended that these amounts of $59,116.76 and $42,580 were not loans to shareholders but a balance owing from the sale of properties. He referred the Board to two cases, namely, Commissioners of Inland Revenue v George Burrell, [1924] 2 KB 52, and Commissioners of Inland Revenue v Blott, [1920] 2 KB 657, to say that appropriation of property in section 81 of the Income Tax Act means complete and utter distribution or complete appropriation or benefit from property. He contended that Atlantic Wholesalers Limited and Atlantic Properties Limited owed L T Cairns Company Limited the fair market value for what they received and that there was no appropriation or, alternatively, if there was appropriation by Atlantic Wholesalers Limited, it happened in 1965 when the benefits were received.

Counsel for respondent referred the Board to subsection 8(1) of the Act to say that if a shareholder gets property without giving value for it, then this is to be included in computing the shareholder’s income. On the other hand, if a company makes a loan to a shareholder, then under certain circumstances which are spelled out in subsection 8(2) of the Act, such loan also shall be included in computing the income of the shareholder. In a case where property comes into the hands of a shareholder without the shareholder giving adequate value in return — and this may happen in the course of the winding up or discontinuance of a business — subsection 81(1) would come into operation. If the shareholder that gets the appropriation is a corporation, then further rules come into play under the various subsections of section 28 of the Income Tax Act. The present assessment was made on the assumption that there was an appropriation of funds from a company by the name of L T Cairns Company Limited, either to Atlantic Wholesalers Limited or to another company, Atlantic Properties Limited, with the concurrence or at the direction of Atlantic Wholesalers Limited, and therefore subsection 16(1) of the Act comes into play. According to him, when you look at the substance of the various transactions, it appears that at one point in time in 1964 there was a company which owned valuable assets, but at the next point in time the said assets disappeared and in their place was an account receivable. He contended that the substitution of an account receivable for a valuable property was simply a device that was used to detract from the fact that Atlantic Wholesalers Limited or a company at its direction had acquired the use and benefit of the property. According to him, what really happened was that, instead of valuable property coming into the hands of the Cairns Company, an account receivable, totally unsecured, was received. Neither the principal nor any interest thereon has been paid up to the present time, and the appellant has had the full use and benefit of the property. Cairns was just left sitting there with the account receivable. According to counsel for respondent, the Cairns Company continued to carry on the business of leasing the real property, but in so far as the grocery property was concerned, that property or its value was appropriated and came into the hands of the appellant company. Similarly, when the Cairns Company transferred its real estate to Atlantic Properties Limited, this again was done with the complete concurrence or at the direction of the appellant because everything was done by the same group of people which directed all the companies. He contended that when Cairns transferred the building to Atlantic Properties for an account receivable, not even a promissory note was given to secure this amount; no interest was paid and no mortgage given. In substance, what happened was that the parent company simply appropriated the assets remaining, shifted them around in such a way as to have their value come into the hands of its nominee, Atlantic Properties Limited. Consequently, it is simply a substitution of an account receivable for real property.

After contending that in substance there was appropriation in both transactions, counsel for the respondent saw fit to determine the nature of those appropriations through point of time. With respect to the real property transferred to Atlantic Properties Limited on January 1, 1968 he stated that there was no difficulty in determining when the appropriation took place because it happened in the taxation year under appeal. With respect to the payment of the promissory note, his colleague had argued that if there was an appropriation, it took place in 1964 or 1965 — in 1964 when the appellant received Caldwell’s promissory note, or in 1965 when it discounted the note with the bank. Counsel for the respondent argued that what happened in 1964 was only the receiving of a promise to pay, and that no payments were received until the payments on the note were received. Consequently, if there were appropriations, they consisted of funds received from Mr Caldwell and the latter did not pay anything in 1964.

As for 1965 he submitted that the appellant took the promissory note to the bank, and the bank credited the appellant with the full amount of the promissory note, ie $59,000. Counsel for the respondent admitted that at this point the appellant had full use of the money but because the appellant received the money on the condition that the promissory note would be fully paid, he contended that the appellant did not have full beneficial ownership of the said money until it was actually received from Mr Caldwell. He stated that no evidence was adduced to contradict the figures mentioned in his reply to the notice of appeal and, consequently, the Board should rely on those amounts. According to him, the problem would have been different if the promissory note had been sold to the bank without any recourse because the bank then would have had to collect the money. However, that was not the case in the present appeal. The discounting amounted, in substance, to nothing more than the lending of money by the bank to Atlantic Wholesalers Limited on the security of a promissory note. Consequently, he suggested that since the Board is dealing with the 1968 taxation year, the payments that were made on the promissory note are those referred to on page 6 of his Reply to the Notice of Appeal, namely, those made from March 31, 1967 to January 7, 1968 and from January 8, 1968 to March 12, 1968. These amounts make a total of $24,922.52 (paragraph 16 on page 11 of the Reply). Consequently, he contended that in 1968 the total appropriation was this amount of $24,922.52, plus interest of $1,321.25, and the amount of $42,580 on the transfer of the real property, making a total of $68,823.77.

Counsel for the respondent also argued that if the appropriation on the Caldwell note took place in 1964 or 1965, then the assessment should be referred back to the Minister on the basis that the only amount that should be taxed as an appropriation is the $42,580 with respect to the real property. On the other hand, he argued that the business was not wound up in 1964 or 1965 as contended by counsel for the appellant because the last amount on Mr Caldwell’s note was collected on March 30, 1968 and no business is discontinued when accounts continue to be collected and assets serviced. He referred the Board to Household Products Company Limited v MNR, 34 Tax ABC 441; 64 DTC 164, in which it was held that as long as a company oper- ated after a point in time one of its normal aspects such as the collection of accounts receivable, the company will be in business until such accounts are collected.

He also submitted that, in dealing with the case at issue, the Board should look at the substance of the matter, and he referred the Board to the following cases: Smythe et al v MNR, [1967] CTC 498; 67 DTC 5334 (Exch), affirmed by Can SC [1969] CTC 558; 69 DTC 5361; Craddock and Atkinson v MNR, [1968] CTC 379; 68 DTC 5254 (Exch), affirmed by Can SC [1969] CTC 566; 69 DTC 5369; No 507 v MNR, 19 Tax ABC 193; 58 DTC 279; St-Germain v MNR, [1969] CTC 194; 69 DTC 5086 (Can SC); Sokyo v MNR, [1971] Tax ABC 140; 71 DTC 129; Farris v MNR, [1963] CTC 345; 63 DTC 1221 (Exch); British Columbia Power Corporation, Ltd v MNR, [1966] CTC 451; 66 DTC 5310 (Exch).

According to the evidence adduced, it is clearly apparent that the appellant, being a corporation, appropriated not only the funds of L T Cairns Company Limited but also the buildings which were transferred to Atlantic Properties Limited, a subsidiary of the appellant, and in both cases in exchange for an account receivable, unsecured, bearing no interest and lacking the usual elements of a bona fide business transaction.

These appropriations were effectuated, to use the wording of subsection 16(1) “pursuant to the direction of, or with the concurrence of” Atlantic Wholesalers Limited. In such a case, the Board should look at the substance of the various transactions which shows that at one point in time in 1964 the Cairns Company owned valuable assets which, at another point in time, disappeared only to be replaced with an account receivable. This course of conduct may be customary in the appellant company and may be acceptable as good business policy, but a great many sections in the Income Tax Act prevent such behaviour, and, by the same token, prevent tax evasion. The appellant submitted that the account receivable was a valuable asset because of the importance and solvency of the appellant company. This argument has some merit but in the present context one should not forget that the account receivable was completely unsecured, and that the appellant did not even issue or sign a promissory note in favour of Cairns in order to crystallize such an account receivable. Furthermore, there is absolutely nothing in the Cairns Company records either authorizing or allowing such a transfer of money or property. The whole course of conduct of L T Cairns Company Ltd and the appellant company in those transactions does not brand them as being non-arm’s length companies. If such had been the case, they would have taken more serious means to protect their own interests. It also appears very clear that the appellant company did empty the treasury of the Cairns Company to its own advantage or profit. The appellant did not sign any promissory note but was happy to use the promissory note signed by Mr Caldwell as collateral with which to borrow money from the bank. It did not sell the Caldwell promissory note to the bank and, consequently, it cannot be said that in 1964 the appellant appropriated the full amount of the said note. The funds were therefore appropriated by the appellant when the latter received the last payment from Mr Caldwell. The appellant was fortunate enough to be able to get two separate negotiables for the same transaction, namely, the promissory note signed by Mr Caldwell and a chattel mortgage granted by Cairns Food Market. It is self-evident that all the parties involved in those transactions were not dealing at arm’s length, the appellant being careful to take all necessary business precautions to secure the sale of assets to people with whom he was dealing at arm’s length while taking none whatsoever when dealing among themselves.

Although the companies under review may have mutual trust, apparently the Minister cannot entertain the same degree of optimism and goes so far as to construe the so-called account receivable as one that will never be collected, especially when the vested interests of the creditor and the debtor appear to be the same. After the sale of the property to Atlantic Properties Limited, L T Cairns Company Limited seemed to have no useful purpose even though its name was changed to Valu-Mart to protect a trade name. Valu-Mart Limited had no course of conduct and the Board cannot rely upon future events that might never take place to make a decision in the present case.

Therefore, the payments made on the principal of the promissory note in 1968 and the interest paid thereon in the same year, in the amounts of $24,922.52 and $1,321.25 respectively, are deemed to be appropriation of funds by the appellant, and these amounts, together with the amount of $42,580 on the transfer of the real property to Atlantic Properties Limited, make a total of $68,823.77 which should be included in the appellant’s income for the year 1968 under the provisions of the Income Tax Act.

Consequently, the appeal is dismissed.

Appeal dismissed.