A J Frost:
1 I shall now give my decision in the matter of an application by the Minister of National Revenue pursuant to subsection 174(1) of the Income Tax Act, SC 1970–71–72, c 63, as amended, with respect to the assessments of tax for the 1969, 1970 and 1971 taxation years of the above-named taxpayers. The hearing was held in camera at Toronto, Ontario on February 25, 1975 pursuant to an order of this Board dated October 24, 1974 that the matter be dealt with at the next available sittings in the appropriate district.
2 The question in respect of which the Minister requests a determination by this Board is whether the whole or any part, and, if any, then what part, of the amounts of $75 per week paid by Ferro Structural Steel (Toronto) Limited to William Spira were paid (a) as a consideration for the sale of shares by Spira to Randell and Salamon, or (b) were paid for services rendered by Spira to Ferro.
3 The three individual taxpayers in this matter held various holdings in the following companies:Ferro Structural Steel (Toronto) Limited
Ferro Erectors (Toronto) Limited
Halton Steel Joist Limited, and in a partnership known as Ferro Holdings.
4 By March 1969 a tight money situation had developed because of Ferro's declining sales and, as a result, policy differences arose among the three shareholders who are the subject of this application.
5 Spira was blocking the expansion plans of Randell and Salamon, and it is apparent to the Board that his services were no longer really wanted by his associates. On the other hand Spira was not too pleased with developments and, in any event, he had other things he wanted to do. Consequently, it was decided that Spira should sell to Randell and Salamon his holdings in the three companies and his 45% interest in the partnership.
6 Sections 2 and 6 of the agreement dated March 28, 1969 between these three taxpayers, read in part as follows:
(2) The purchase price for the said shares and interest shall be TWO DOLLARS ($2.00) in cash, ... and being employed as hereinafter set out.[FN1: <p>Italics mine.</p>]
(6) Spira agrees to be employed and Randell and Salamon agree to cause Ferro Structural Steel (Toronto) Limited to employ Spira as a consultant at a salary of $3,900 per annum, payable $75.00 per week commencing April 1st, 1969, and running until the 1st day of November, 1974 ...
7 Under an agreement dated March 31, 1969 between Ferro Structural Steel (Toronto) Limited and William Spira, Ferro purportedly engaged Spira from April 1, 1969 at the rate of $75 per week, the agreement to come to an end when the final instalment was paid up to and including November 1, 1974.
8 The language of section 2 of the agreement of March 28, 1969 is precise and says, in effect, that the consideration for the sale of Spira's shares and partnership interest shall be a contract of employment for Spira plus $2 in cash, which makes the contract of employment part of the agreement for the sale of Spira's holdings.
9 It was adduced in evidence that Spira was never asked to render any service, and Spira testified that it was never intended that he should perform any services as a consultant. Accordingly, the Board has no alternative but to conclude that the employment agreement was not what it purported to be and that the method adopted to pay Spira was a scheme or device to confer a benefit on the shareholders Randell and Salamon.
10 The non-competition restrictive covenants contained in the consulting agreement indicate, in my view, that the holdings of Spira were far from worthless, and that Randell and Salamon placed some value on the shares they were acquiring and wanted to protect themselves as fully as possible.
11 My conclusion is further strengthened by the fact that the balance sheets of Ferro Structural Steel (Toronto) Limited as at October 31, 1968 and October 31, 1969, together with the company's sales and profits record from 1962 forward, show positive results, and indicate that Randell and Salamon were buying into a situation which had value as a going concern and some future potential. The sum of $20,000 to be paid Spira during the alleged contract of employment was approximately the book value of the three companies plus the value of the partnership interest, and may well have reflected the intrinsic value of the shares sold by Spira to Randell and Salamon at the time of sale. Although the Board makes no specific finding as to value, nevertheless it considers the $2 value assigned in the agreement for sale of the shares to be completely unrealistic.
12 Having regard to the surrounding circumstances, I have concluded that the point at issue is one of form and substance wherein the Board is obliged to have regard for the real intent of the parties. Accordingly, I find that what Spira agreed to sell and what Randell and Salamon agreed to purchase were Spira's holdings and not his services, and that the consideration for the shares was $20,000 plus $2.
13 The Board therefore determines as a fact(a) that the amounts of $75 per week paid by Ferro to Spira were paid as consideration for the sale of shares by Spira to Randell and Salamon;
(b) that the payments were of a capital nature; and
(c) that Randell and Salamon, in respect of their 1969, 1970 and 1971 taxation years, each received a benefit pursuant to subsection 8(1) of the Income Tax Act.
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