Rouleau J.:
1 This is an appeal from a Tax Court of Canada decision dismissing the plaintiff's appeal concerning a notice of reassessment issued by the Minister of National Revenue (“the MNR”) for the 1980 location year in relation to the appropriation of funds of a corporation controlled by the plaintiff.
The Facts
2 During the year in question, a corporation controlled by the plaintiff, Formules d'affaires Richelieu Ltée (“Richelieu”), disposed of its investment in shares and promissory notes receivable from a corporation, Savoy Business Form Ltd. (“Savoy”) which it had itself acquired and controlled. The proceeds of disposition of the notes were paid directly to the individual shareholders of Felray and Richelieu. The plaintiff did not include any amount in relation to this transaction in the computation of its income.
3 At all relevant times the plaintiff was a corporation whose shares were owned by Messrs. Vachon and Messier, each of whom owned more than 49%. The plaintiff was also the sole owner of Les Éditions Richelieu Ltée (“Éditions”), a printing company that published periodicals. The plaintiff held 52% of the shares of Formules d'affaires Richelieu Ltée (“Richelieu”), a corporation established in 1979 that was engaged in photocomposition; the balance of the shares, 48%, were held in four equal parts by the following shareholders: Ms. Guillet and Messrs. Fontaine, Laroche and Audet. For tax purposes, these corporations were Canadian-controlled private corporations.
4 Some officers of Éditions, while selling advertising, obtained orders for the printing of business forms. Éditions subcontracted the photocomposition to Richelieu and the printing of the business forms to third parties. In the fall of 1979, Richelieu purchased a press for the purpose of printing business forms and did several projects of this type for Éditions.
5 In December 1979, discussions began with a view to the acquisition of Savoy, a business in financial difficulty that was engaged in printing business forms. On January 25, 1980, Richelieu acquired all of Savoy's shares for $50,000. On the same day, Richelieu purchased, in consideration of $1, the $340,746 in notes receivable issued by Savoy in favour of the late Preston Savoy, the owner of that company. From that time on. Savoy became the business forms subcontractor of Éditions. It was refinanced for about $700,000 and the six shareholders guaranteed this financing in the total amount of about $130,000.
6 Despite some substantial efforts, Savoy was not profitable and, from the summer of 1980 on, consideration was already being given to reselling the firm or simply shutting it down.
7 On November 3, 1980, Richelieu sold all of Savoy's shares to Data Business Forms Ltd. (“Data”) in consideration of $185,000. Schedule 12 of the sales contract stipulated that Savoy would reimburse Richelieu for the notes through a payment of $340,746 by a cheque issued directly in the names of the individual shareholders of Richelieu, in the amount of $41,179 each and to the two Felray shareholders in the amount of $88,015 each. The cheques were issued by Savoy on November 3, 1980 and signed by Messrs. Vachon and Messier in their capacity as officers of Savoy. The contract of sale contained a clause prohibiting competition within the province of Quebec for a three-year period. However, Richelieu kept back a list of 52 preferred customers of Éditions for whom Savoy was to continue to print business forms on a subcontract.
8 The individual shareholders included in the computation of their income for the 1980 taxation year the taxable capital gain they claimed to have realized when taking receipt of the promissory notes.
9 In 1983, Richelieu sold its equipment and became completely inoperative. Following the disposition of the Savoy shares and until 1983, Richelieu was engaged solely in photocomposition.
10 On November 12, 1984, the MNR issued a reassessment to Richelieu through which it taxed the profit made on the sale of Savoy's shares to Data as a capital gain and the proceeds of disposition of the notes as business income on the ground that Richelieu had engaged in a business venture in acquiring the notes for $1 and obtaining repayment therefor 10 months later for $164,716.
11 On November 6, 1984, the MNR issued a notice of reassessment to Felray, through which it added $176,030 to its income for the 1980 taxation year as an appropriation of property.
12 The Tax Court of Canada judgment upheld the reassessment issued to Felray on November 6, 1984.
Issue
13 The issue is whether the amounts in relation to the notes paid to the shareholders of Richelieu and Felray should be taxed under subsection 15(1) or subsection 84(2) of the Income Tax Act (the “Act”). In the case at bar, only this aspect of the 1980 assessment is at issue.
Statutory Provisions
14 The relevant statutory provisions are subsections 15(1), 56(2) and 84(2) of the Act. They read as follows:
15(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 whatever to, or for the benefit of, a shareholder, or
(c) a benefit or advantage has been conferred on a shareholder by a corporation,
(d) on the reduction of capital, the redemption, cancellation or acquisition by the corporation of shares of its capital stock or the winding-up, discontinuance or reorganization of its business, or otherwise by way of a transaction to which section 88 applies,
(e) by the payment of a dividend or a stock dividend,
(f) by conferring on all holders of common shares of the capital stock of the corporation a right to buy additional common shares thereof, or
(g) by an action described in paragraph 84(1)(c.1) or (c.2),
56(2) Indirect payments. A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer's income to the extent that it would be if the payment or transfer had been made to him.
84(2) Distribution on winding-up, ... Where funds or property of a corporation resident in Canada have at any time after March 31, 1977 been distributed or otherwise appropriated in any manner whatever to or for the benefit of the shareholders of any class of shares in its capital stock, on the winding-up, discontinuance or reorganization of its business, the corporation shall be deemed to have paid at that time a dividend on the shares of that class....
Analysis
15 St-Onge T.C.J. of the Tax Court of Canada, in his decision of October 7, 1986, dismissed the plaintiff's appeal on the following grounds: he found that Richelieu had continued its operations by reserving for itself a list of 52 preferred customers to whom it sold business forms. He also found that Richelieu continued to operate its firm for three years exclusively in the field of photocomposition. The Court cited, respectively, the following extracts from Kennedy v. Minister of National Revenue, [1972] C.T.C. 429 (Fed. C.A.)and from Canadian Tax Reports:
In subsection 81(1) (now section 84 (2)), the word “reorganisation” is used in association with the words “winding-up” and “discontinuance”. Both of those words contain an element of finality. The company is ended. [Emphasis by TCC.]
What is contemplated by discontinuance of a business is presumably a complete cessation of business activity and not simply the discontinuance of one or more of several lines of activity. Discontinuance of a business may in practice occur without any coincident termination of a company's existence.
16 Thus the Tax Court judge thought there was sufficient evidence to determine that the plaintiff did not fall within the provisions of subsection 84(2) of the Act, since it had not terminated the main operation of its business, the photocomposition.
17 The plaintiff is now appealing this decision primarily on the ground that the notes receivable had been conveyed to individuals when securing Richelieu's debts, notwithstanding the admission that there is no documentation in support of such a conveyance of the notes. It relies on the oral evidence, on Schedule 5 of the contract for the sale of Savoy's shares, which lists the individual shareholders in the list of creditors, on Savoy's financial statements as of September 30, 1980, which indicate the amount of the notes as “Notes payable to directors” and on Richelieu's financial statements as of June 30, 1980, which include a note concerning investments without referring to the notes receivable. These miscellaneous items were said to be evidence of the direct payment to the individuals and the tax treatment as a capital gain declared by them.
18 The plaintiff alleges in the alternative that the MNR applied subsection 15(1) of the Act to the plaintiff, notwithstanding the representations to the effect that subsection 84(2) applies because of the discontinuance of the Richelieu firm or, at least, its reorganization or de facto winding-up. The plaintiff submits that subsection 84(2) applies for the following reasons: subsection 15(1) does not apply to a deemed dividend contemplated by section 84; Richelieu was carrying on two distinct businesses; its main business consisted of the production of business forms, which ended in November 1980 with the sale of the Savoy shares; and the photocomposition activity had nothing to do with the business forms activity and was not addressed to the same clientele. In 1980, Richelieu sold its investment in Savoy and its equipment, an action that demonstrates the discontinuance of the business form printing business; Richelieu continued the photocomposition in a very marginal way, it was operating at a loss with only one captive customer, and the activity had been isolated for trade-union reasons.
19 The plaintiff argues that subsection 84(2) of the Act does not require the discontinuance of all business activity and submits that such an interpretation would deprive subsection 88(1) of the Act of force and effect. It cites the following comment on subsection 84(2) in Wards Tax Law& Planning by Davies, Ward & Beck, Arnold, Vol. 4 (Carswell, 1983), at pages 12-72: “ For instance, the sale of substantial part of the assets of a corporation may constitute a discontinuance of its business...,” and submits that this theory applies even where there is no winding-up. According to the plaintiff, Richelieu sold more than 90% of its assets when it disposed of the Savoy shares; Savoy had sales in the millions of dollars and about one hundred employees.
20 The defendant, relying on subsection 15(1) of the Act, argues that the assessment was correctly established in regard to Felray. In reply to plaintiffs first submission, it argues that in Schedule 12 to the contract of sale to Data there is the directive by the transferor Richelieu that the amounts “presently owing to the undersigned” be paid to the individuals. Consequently, there was no assignment of claims by Richelieu to the latter, and this is confirmed by the legal documents and the parties to the transaction. The defendant notes that Richelieu was assessed in the past concerning the tax treatment of the notes, that this assessment was not contested at the time and that this issue is not involved in this dispute. The present issue affects the transfer of money with Richelieu's agreement and its tax treatment in the hands of the shareholder Felray as an appropriation of property under subsection 15(1) or a dividend under subsection 84(2) of the Act.
21 The defendant argues that Richelieu operated a photocomposition business from the beginning to the end of its operations and that it registered substantially the same sales from that business throughout the years it operated. She concedes that toward the end of 1979 Richelieu purchased a press. However, the evidence to this effect shows that it printed very few business forms. Savoy had all the necessary equipment and Richelieu's business form printing activities were quickly transferred to it following its acquisition. The defendant submits that Richelieu never really operated a business form printing business and that it entirely abandoned this activity at the time of the purchase of the Savoy shares. Instead, Richelieu held an investment in shares, the disposition of which gave rise to a capital gain.
22 The defendant argues that the rationale behind subsection 84(2) of the Act is to anticipate the distribution of a corporation's property upon its winding-up, the discontinuance of the business or the reorganization of the firm. Parliament sought to enable the shareholder to take out the funds in the form of dividends and to recover the invested capital. However, subsection 15(1) applies when the funds of a corporation that continues to exist and to operate are appropriated. In this case, the defendant argues, when the notes were paid there was no discontinuance of the business by Richelieu or de facto winding-up.
23 The defendant further submits that subsection 84(2) is an exception to subsection 15(1), and in order to benefit from this exception, the exact words of the section must apply. Where there is not actually a de facto winding-up and the business carries on, subsection 84(2) cannot apply. In support of this argument, she relies on the wording of the Act, which stipulates that there must be a winding-up, discontinuance or reorganization of the business. The defendant further cites the following Editorial Comment from the Canadian Tax Report (CCH), at page 6246:
What is contemplated by discontinuance of a business is presumably a complete cessation of business activity and not simply the discontinuance of one or more of several lines of activity.
24 The dispute raises a number of questions. First, who was the owner of the notes receivable when they were receipted? Second, did Richelieu operate a business form printing business? If so, at what time did it cease operation? Finally, does Richelieu's disposition of its investment in Savoy shares constitute the winding-up, discontinuance or reorganization of its business?
25 In regard to the ownership of the notes payable, the documentary evidence of their acquisition by Richelieu in January 1980 and Richelieu's directive in the schedule to the contract for the sale of Savoy's shares, specifying that the amounts “presently owing to the undersigned” be paid to the individuals, satisfies me that there was no debt transfer in favour of these shareholders.
26 I accept that when Richelieu was incorporated, one of the plaintiff's objectives was to have it produce business forms on a subcontract for Éditions. However, the record showed that Richelieu commenced its operations in 1979 through photocomposition activities for Éditions, and that it carried on with these activities until it ceased to operate in 1983. According to the plaintiff's chief witness, it was only toward the end of 1979 that Richelieu purchased a press, and it did only “three or four jobs” printing business forms for its sole customer, Éditions. In January 1980, Richelieu purchased Savoy, which was engaged in printing business forms, and immediately transferred to Savoy this part of its operations. After the sale of Savoy, the latter continued to produce business forms for Éditions.
27 The defendant rightly argued that it was never Richelieu's major goal to operate a business form printing business, and that while it did become somewhat involved in this occupation, it immediately transferred the activity when it purchased Savoy. There is no evidence to support the plaintiff's contention that Richelieu “discontinued, reorganized or wound up its business” printing business forms at the time of disposition of the Savoy shares, such as to warrant the application of subsection 84(2) of the Act.
28 In this case, Richelieu disposed of an investment in shares in a corporation that was engaged in the business of printing business forms. The disposition of this investment is not a sale of the substantial part of its business.
29 The plaintiff referred to Smythe v. Minister of National Revenue, [1970] S.C.R. 64 (S.C.C.), in which the Supreme Court of Canada held that there was a winding-up and discontinuance of the business and applied subsection 84(2) to the proceeds of disposition of the shares. Counsel's argument is based on a very broad reading of subsection 84(2) that does not require any winding-up of the corporation itself. But the latter point is not challenged. This judgment cites Minister of National Revenue v. Merritt, [1942] S.C.R. 269 (S.C.C.), and confirms that a winding-up in law is not required for the purposes of subsection 84(2) and that a de facto winding-up is sufficient. In that case the MNR had assessed the taxpayer under the equivalent provision to the present subsection 84(2), given the “end” of its activities, while the taxpayer claimed that there had been no discontinuance of activities. Similarly, at page 71, it is noted that in Merritt there was a discontinuance of the business of the Security Company. In the case at bar the situation is completely different: there is neither a discontinuance of the business nor a de facto winding-up.
30 The plaintiff cited David v. R. (1975), 75 D.T.C. 5136 (Fed. T.D.), which involved an appropriation of surplus. The Court referred to Merritt, supra, and applied subsection 84(2) in a situation where the most substantial part of the business was sold, while what remained was continued in an investment corporation. In the present case, the situation is reversed. Richelieu sold its investment and continued its photocomposition business.
31 In Perrault v. R. (1978), [1979] 1 F.C. 155 (Fed. C.A.), the MNR assessed the taxpayer under subsection 8(1) (15(1) in 1980) and the Court found in its favour. A declared dividend had the effect of extinguishing the shareholder's debt to a third party. The appellant argued that this was a step toward winding-up and cited Smythe, supra, since in both cases the corporations no longer had any assets. The Court found that the company still had assets to continue its operations, albeit at a reduced scale. The application of subsection 8(1) [15(1)] was warranted.
32 In this case, the application of subsection 15(1) of the Act is warranted. The plaintiff cannot avail itself of the exception under subsection 84(2) of the Act. Accordingly, I dismiss the appeal with costs.
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