KEARNEY,
J.:—This
is
an
appeal
from
a
notice
of
re-assessment
whereby
the
Minister
added
to
the
appellant’s
taxable
income
otherwise
payable
for
its
taxation
year
ended
June
30,
1956
an
amount
of
$26,000,
which
the
Minister
declared
was
a
disbursement
or
expense
made
or
incurred
by
the
taxpayer
which
was
designed
to
artificially
reduce
its
taxable
income
for
the
said
year,
as
contemplated
in
Section
137(1)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(as
amended),
and
which
reads
as
follows:
“In
computing
income
for
the
purposes
of
this
Act,
no
deduction
may
be
made
in
respect
of
a
disbursement
or
expense
made
or
incurred
in
respect
of
a
transaction
or
operation
that,
if
allowed,
would
unduly
or
artificially
reduce
the
income.’’
The
evidence
in
the
case
consisted
of
the
testimony
of
four
witnesses,
Messrs.
Leslie
Farkas
and
Andrew
Gaty,
who
were
called
at
the
instance
of
the
appellant,
and
Mr.
Leslie
Benko
and
Mr.
P.
Gould,
C.A.,
who
were
heard
on
behalf
of
the
respondent,
together
with
various
exhibits
filed
by
them,
as
well
as
the
documents
transmitted
by
the
Minister
pursuant
to
Section
100(2)
of
the
Act.
Apart
from
Mr.
Gould,
who
gave
expert
evidence
as
to
the
value
of
certain
shares
of
stock—later
described—the
other
three
witnesses
were
personally
interested
in
the
transactions
in
issue.
It
is
common
ground
that
the
aforesaid
re-assessment
arises
out
of
certain
transactions
nearly
all
of
which
are
in
documentary
form
and
which
were
all
concerned
with
the
same
piece
of
real
estate,
composed
of
about
twenty
arpents,
situated
in
the
County
of
Laprairie,
in
the
Province
of
Quebec
(hereinafter
sometimes
referred
to
as
‘‘the
property’’).
I
propose
to
summarize
the
documentary
evidence
supplemented
by
reference
to
some
verbal
evidence
which
has
not
been
disputed
and
which
may
serve
to
make
the
documents
more
readily
understandable.
Messrs.
Farkas
and
Gaty
were
engaged
in
the
real
estate
business
in
Montreal
and
operated
through
three
media,
namely,
by
acting
in
their
personal
capacity,
through
the
appellant
company,
of
which
they
were
secretary
and
president
respectively
and
owned
between
them
two-thirds
of
its
capital
stock,
and
the
third
medium
was
Crosstown
Realties
(Mtl)
Ine.
which
was
engaged
in
a
real
estate
agency
business
and
its
entire
issued
stock
was
owned
by
Messrs.
Farkas
and
Gaty
(or
members
of
their
families)
;
they
were
its
president
and
secretary
respectively.
Mr.
Benko
was
in
no
way
related
to
them
nor
did
he
hold
any
stock
in
either
of
the
above
companies
prior
to
October
1,
1955.
‘The
following
is
a
brief
summary
of
the
documentary
evidence
of
the
foregoing
transactions,
some
of
which
I
will
comment
upon
more
fully
later.
='
In
April
1955
Messers.
Farkas
and
Gaty
made
an
offer
to
purchase
the
property
from
its
then
owner
J.
P.
Martin
for
the
sum
of
$32,500
and
the
deed
of
sale
completing
the
transactions
was
to
be
finalized
by
June
30,
1955.
Messrs.
Farkas
and
Gaty
hoped
to
sell
the
property
prior
to
the
aforesaid
date
but
no
buyer
could
be
found.
See
notice
of
objection
dated
October
3,
1958,
signed
by
Andrew
Gaty,
contained
in
the
documents
transmitted
by
the
Minister.
On
June
30,
as
alleged
in
the
statement
of
facts
and
admitted
in
the
respondent’s
reply,
Farkas
and
Gaty
caused
the
appellant
company
to
acquire
the
property
in
their
stead
by
a
notarial
deed
dated
June
30,
1955
(Ex.
P-1),
as
alleged
in
paragraph
1
of
the
statement
of
facts,
which
is
admitted.
As
appears
by
Exhibit
P-2,
on
July
6,
1955
Leslie
Benko
made
an
offer
through
Crosstown
Realties
(Mtl)
Inc.
to
purchase
the
property
for
a
price
of
$35,000.
The
main
provisions
of
the
offer
are
as
follows:
“To
CROSSTOWN
REALTIES
(MTL)
Inc.
6th
July,
1955
630
Dorchester
West
Montreal,
P.Q.
Dear
Sirs
:—
I
the
undersigned
hereby
offer
to
Purchase
through
your
agency
for
myself
or
for
my
nominee(s)
a
piece
of
land
known
as
P
1-4
of
the
Parish
of
Laprairie,
having
a
total
surface
area
of
20.57
arpents
english
measure
and
more
or
less,
all
as
shown
on
the
surveyor’s
plan
prepared
by
Mr.
Lapointe,
surveyor,
dated
24th
May,
1955;
The
total
purchase
price
to
be
$35,000.00
(THIRTY-FIVE
THOUSAND
Dollars)
payable
as
follows
and
under
the
following
terms
and
conditions
:
(1)
$18,750.00
in
cash
upon
signing
of
the
deed
of
sale.
(2)
$16,250.00
by
assuming
the
existing
first
mortgage,
bearing
interest
at
the
rate
of
5%
per
annum,
repayable
within
five
years,
all
in
accordance
with
the
terms
and
conditions
stipulated
in
the
deed
creating
said
mortgage.
(5)
This
offer
is
open
for
acceptance
until
the
10th
day
of
July
1955
6
P.M.
after
which
date
it
becomes
nil
and
void.
Herewith
my
cheque
of
$2,000
as
a
deposit
on
account
of
the
purchase
price.
This
offer
can
be
accepted
directly
to
your
company
as
agents.
L.
BENKO’’
On
September
14,
1955,
prior
to
obtaining
title
to
it,
Mr.
Benko
offered
to
sell
the
property
through
Crosstown
Realties
to
its
nominee
for
$61,000
(Exhibit
P-3);
the
main
provisions
of
the
offer
are
as
follows
:
“To
Crosstown
Realties
(Mtl)
Inc.
14th
Sept.
1955
630
Dorchester
West
Montreal,
P.Q.
Dear
Sirs
:—
I
the
undersigned
hereby
offer
to
sell
through
your
agency
to
your
nominee(s)
a
piece
of
land
known
as
P
1-4
in
the
Parish
of
Laprairie,
measuring
20.57
arpents
english
measure
and
more
or
less,
all
as
shown
on
the
surveyor’s
plan
prepared
by
Mr.
Pierre
Lapointe
surveyor,
dated
24th
May,
1955.
The
total
sales
price
to
be
$61,000
payable
as
follows
and
under
the
following
terms
and
conditions
:—
(1)
$44,750.00
in
cash
upon
signing
of
the
deed
of
sale.
(2)
$16,250.00
by
assuming
the
existing
first
mortgage
bearing
interest
at
the
rate
of
5%
per
annum,
becoming
due
within
5
years
(1960),
all
in
accordance
with
the
terms
and
conditions
stipulated
in
the
deed
of
sale
creating
said
mortgage.
(5)
This
Offer
to
Sell
is
open
for
acceptance
until
the
18th
day
of
(month
missing,
should
be
September)
1955
12
P.M.
after
which
date
it
becomes
nil
and
void.
If
accepted
it
must
be
accompanied
by
a
cheque
of
$2,000.00
made
to
my
order
as
a
deposit
on
account
of
the
purchase
price.
L.
BENKO’
’
On
September
30,
1955
Mr.
Benko
secured
title
to
the
property
from
the
appellant
for
$35,000
(Ex.
P-4)
and
on
the
same
date
he
sold
it
back
to
the
appellant
for
$61,000
(Ex.
P-5),
whereupon
the
appellant
acquired
immediate
title
and
possession.
On
the
day
following
the
sale,
namely,
October
1,
1955,
the
appellant
issued
a
cheque
amounting
to
$26,000,
signed
by
Andrew
Gaty
as
president
of
the
appellant
and
payable
to
the
order
of
Leslie
Benko.
As
appears
by
the
said
cheque,
it
was
endorsed
by
L.
Benko
and
L.
Farkas
and
was
cleared
for
payment
on
November
3,
1955.
The
significance
of
the
said
cheque
endorsement
is
not
explained
by
any
documentary
evidence
but
will
be
presently
disclosed
in
a
review
of
the
testimony
of
the
main
witnesses.
As
appears
by
paragraph
4
of
the
appellant’s
statement
of
facts,
on
October
31
the
appellant
sold
the
property
to
River
Construction
Limited
for
$65,000.
The
deed
was
not
produced,
as
the
said
paragraph
4
was
admitted
in
the
respondent’s
reply.
The
dispute
concerns
the
artificiality
or
otherwise
of
all
or
any
of
the
transactions
described
in
Exhibits
P-3
to
P-6
inclusive.
Now,
with
respect
to
the
testimony
of
witnesses,
apart
from
his
evidence
previously
referred
to
and
which
is
non-controversial,
Mr.
Farkas
testified
that
some
time
prior
to
the
Benko
offer
of
September
14
(Ex.
P-3)
he
and
the
latter
after
discussion
agreed
that
the
resale
price
would
be
$61,000.
In
describing
what
took
place
when
Exhibits
P-4
and
P-5
were
executed
Mr.
Farkas
said
that
the
$61,000
mentioned
in
the
deed
was
paid
to
Mr.
Benko,
and
when
asked
how
it
was
paid
he
said,
4
It
was
an
accounting,
because,
on
the
same
day,
Mr.
Benko
had
purchased
from
the
same
Corporation
the
same
piece
of
property
for
$35,000
and
for
the
difference
of
$26,000
the
appellant
company
issued
a
cheque
to
Mr.
Benko’’,
who
used
it
to
purchase
$26,000
worth
of
shares
from
Mr.
Gaty
and
himself.
In
cross-examination
the
witness
testified
that
some
time
prior
to
the
signing
of
the
Benko
offer
of
September
14
(Ex.
P-3)
the
latter
had
agreed
to
accept
2,600
preferred
shares
of
Crosstown
Realties
stock
in
full
settlement
of
the
balance
owing
him
of
$26,000.
Mr.
Farkas
also
testified
that
the
endorsement
of
the
cheque
and
the
delivery
of
the
shares
took
place
the
day
after
Exhibits
P-4
and
P-5
had
been
executed.
The
witness
stated
that
he
actually
cashed
the
cheque.
Mr.
Farkas
could
not
remember
when
the
possibility
of
Mr.
Benko
acquiring
Crosstown
Realties’
shares
arose
or
whether
the
latter
inquired
into
the
financial
status
of
the
said
company.
The
witness
stated
that
Mr.
Benko,
some
time
before
he
gave
the
nominee
of
Crosstown
Realties,
which
was
the
appellant,
the
option
to
repurchase
the
property,
reminded
him
and
Mr.
Gaty
that
the
property
was
worth
much
more
than
the
$35,000
which
he
was
paying
for
it,
that
he
wanted
a
good
price
for
it
and
that
if
Mr.
Benko
had
asked
him
to
release
him
from
his
offer
he
would
have
been
glad
to
do
so.
It
was
Mr.
Benko,
he
said
also,
who
suggested
the
figure
of
26,000
(should
read
44
2,600”)
Crosstown
Realties
shares
and
informed
the
witness
that
he
wished
later
on
to
buy
some
more
shares
of
the
said
stock.
Mr.
Gaty,
apart
from
giving
testimony
on
facts
which
are
not
disputed
or
which
were
already
referred
to
in
Mr.
Farkas’
testimony,
made
some
further
statements
which
I
think
are
noteworthy.
Crosstown
Realties,
he
thought,
drew
up
the
Benko
offer
to
buy
the
property
for
$35,000
(Ex.
P-2),
and,
in
respect
thereof,
Crosstown
Realties
was
acting
as
agent
for
the
appellant.
The
above-mentioned
company
also
drew
up
the
offer
by
Mr.
Benko
to
sell
the
property
to
the
nominee
of
Crosstown
Realties
for
$61,000
(Ex.
P-8)
and,
in
the
latter
instance,
it
was
acting
both
for
the
appellant
and
Mr.
Benko.
Asked
if
Crosstown
Realties
received
any
commission
in
respect
of
the
$61,000
transaction,
the
witness
stated
:
“Because
River
Investment
was
a
company
which
was
two-
thirds
(2/3)
controlled
by
us,
we
did
not
deem
it
necessary
to
charge
commission
to
ourselves
when
it
came
to
resale
for
Mr.
Benko
.
.
.
the
price
agreed
was
fixed.
We
probably
could
have
charged—we
could
have
quoted
a
few
thousand
dollars
more
and
charged
commsision
but
we
did
not
deem
it
necessary.’’
Later,
in
his
evidence,
when
reminded
that
Crosstown
Realties
and
the
appellant
were
separate
companies,
and
on
again
being
asked
if
a
commission
had
been
paid,
the
witness
said,
“I
mean
I
don’t
know,
I
don’t
remember
that.
I
don’t
remember
that
it
was
not.”
The
witness,
when
questioned
about
one
of
the
by-laws
of
Crosstown
Realties
called
‘‘
By-law
No.
12’’,
which,
inter
ala,
stipulated
that
no
transfer
of
shares
could
be
made
without
the
consent
of
its
directors,
agreed
that
it
had
not,
to
his
knowledge,
ever
been
repealed.
Mr.
Gaty
also
confirmed
that
the
minutes
of
a
meeting
of
the
directors
of
Crosstown
Realties,
dated
October
1,
record
that
he
and
Mr.
Farkas
sold
and
transferred
to
Leslie
Benko
the
2,600
shares
previously
referred
to.
The
witness
stated
that
the
reason
“we”—meaning,
I
presume,
the
appellant—“repurchased
the
property
was
because
we
had
a
chance
to
resell
it
later’’.
He
later
stated:
“When
we
made
the
sale
to
Benko,
which
was
effected
on
June
30,
there
were
only
hopes
that
houses
would
be
built
in
the
area,
but
by
the
end
of
the
summer
they
had
become
facts
due
to
the
construction
which
had
been
carried
out
in
the
immediate
neighbourhood
during
the
later
summer
months
.
.
.”,
which
accounted
for
the
sudden
increase
in
value
of
the
instant
property.
Mr.
Benko,
during
his
testimony,
filed
a
letter,
signed
by
himself,
addressed
to
the
Inspector
of
Income
Tax
in
Montreal
(Ex.
R-1)
dated
June
12,
1958,
which
together
with
his
testimony
set
out
his
version
of
his
dealings
with
Messrs.
Farkas
and
Gaty.
As
appears
from
the
letter,
he
control
Benmar
Realty
Investment
Corporation
which
had
acquired
two
income-bearing
prop-
erties
from
which
he
derives
his
living.
He
had,
in
two
separate
years,
by
influencing
others
to
follow
his
example,
received
what
amounted
to
commissions,
which
he
reported
as
taxable
income,
but
stated
he
did
not
deal
on
a
business
level
with
immovable
property,
either
as
a
buyer
or
seller
or
brokerage
agent.
Mr.
Benko,
in
the
aforesaid
letter,
gave
the
following
account
of
what
prompted
him
to
make
the
offer
of
July
6
(Ex.
P-2).
His
family,
he
stated,
consists
of
an
only
daughter
whose
husband
was
working
in
Montreal
for
Dominion
Engineering
Company
Limited.
Harbouring
some
doubts
early
in
1955
about
the
permanency
of
his
son-in-law’s
employment
and
fearing
that
he
might
move
to
California,
in
order
to
prevent
this
occurrence,
after
much
thought
and
visiting
many
sites,
he
decided
to
acquire
the
instant
property
for
his
son-in-law
who
was
fond
of
sports,
with
the
intention
of
developing
it
into
a
sports
centre,
including
golf
driving
range,
a
miniature
golf
course,
tennis
and
archery
courts
and
such
additional
like
features.
He
instructed
an
architect
to
prepare
drawings
of
the
proposed
sports
centre
who
made
a
sketch
dated
July
15,
1955.
He
had
rented
for
part
of
the
summer
season
a
cottage
at
Donnelly
Lake.
During
the
latter
part
of
July,
the
manager
(since
deceased)
of
Dominion
Engineering
Co.
Ltd.
and
his
wife
visited
him
and
assured
him
that
he
need
have
no
concern
about
the
permanency
of
his
son-in-
law’s
employment
and
that
he
should
give
up
all
thought
of
establishing
an
alternative
business
for
him.
The
witness
abandoned
his
plans
for
the
centre.
The
letter
goes
on
to
say
(p.
2,
last
paragraph)
:
“Upon
my
return
from
the
summer
home
to
Montreal
I
notified
Messrs.
Gaty
and
Farkas
that
due
to
altered
circumstances
I
would
not
be
requiring
the
property
and
asked
if
they
could
locate
a
buyer
to
take
it
off
my
hands.
I
myself
tried
to
find
a
buyer,
but
without
experience
in
the
handling
of
land,
and
with
no
connections
in
that
business,
I
was
unsuccessful.
Subsequently
Messrs.
Gaty
and
Farkas
indicated
to
me
that
they
were
interested
to
buy
the
property,
and
I
agreed
that
for
the
difference
between
my
buying
and
selling
price
I
would
obtain
and
accept
2600
Preferred
Shares
of
Crosstown
Realties
Limited,
having
a
par
value
of
$10.00
each.”’
The
witness
testified
that
he
first
spoke
to
Messrs.
Farkas
and
Gaty
about
selling
the
property
for
him
when
he
returned
from
the
country,
which,
he
thought,
was
at
the
end
of
July
or
some
time
in
August.
Asked
if
at
the
above
time
he
also
discussed
the
question
of
acquiring
preferred
shares
in
Crosstown
Realties,
he
answered
:
“We
spoke
for
this
question
when
I
sell
this
piece
of
land
and
we
have
plus—I
buy
for
this
plus,
the
shares,
I
take
the
shares.
Q.
When
did
you
discuss
this
question
of
taking
the
shares?
A.
I
tell
you,
I
want
to
sell
this
piece.
First
alone,
I
don’t
find
a
buyer
for
this.
I
don’t
find
a
buyer
alone
and
so,
I
go
back
to
Mr.
Farkas
and
Gaty
and
tell
them:
‘Look,
I
am
squeezed,
now
my
house
is
not
sold
and
I
have
to
pay
maybe
in
a
short
time
and
I
don’t
have
this
money
free.
Sell
me
this
property
for
me’.’’
At
pages
80
and
81
of
the
transcript,
on
being
cross-examined
by
counsel
for
the
appellant,
Mr.
Benko
replied
:
“Me
R.
E.
PARsons:
Q.
You
accepted
an
offer
to
purchase
this
property
on
July
6th
or
7th,
1955?
A.
Yes.
Q.
And
then,
you
went
away
for
the
summer?
A.
Yes.
Q.
When
you
came
back,
you
said
that
you
no
longer
had
use
for
this
property
?
A.
No.
Q.
Why
was
that?
A.
Because
the
Manager
for
Dominion
Engineering
working
with
my
son-in-law
and
he
invited
us
and
we
spoke
about
it
and
I
told
him
I
had
trouble
with
my
son-in-law,
two
or
three
friends
of
his
want
to
go
to
the
States
and
I
have
only
one
son
and
daughter
and
I
don’t
want
him
to
go,
what
kind
of
a
future
he
has.
So,
he
told
me
:
‘There
is
a
very
nice
future,
he
has
a
very
good
future
in
engineering.
Why
don’t
you
want
him
to
go?’
I
stopped
him,
he
has
a
future
in
the
factory,
he
has
today,
he
has
a
very
nice
position.
I
told
him:
‘‘Look,
you
cannot
go
from
here,
I
will
sell
the
property,
I
am
not
interested
for
that.
’
.
.
.
Q.
Then,
if
I
understood
correctly,
you
went
to
see
Mr.
Farkas
and
Mr.
Gaty?
A.
Yes.
Q.
And
then
you
also
agreed
with
Mr.
Farkas
and
Mr.
Gaty,
if
I
understood
you
correctly,
that
with
the
plus
or
profit,
the
difference
between
your
purchase
price
and
what
they
would
get
for
it,
you
would
buy
shares
of
Crosstown
Realties
from
Mr.
Farkas
and
Mr.
Gaty,
is
that
correct?
A.
Yes.
Me
S.
PHILLIPS:
The
testimony
is
that
he
would
accept
shares,
not
buy
shares.
That
is
the
testimony
by
the
letter
in
evidence.
Me
R.
E.
Parsons:
Q.
At
the
time
the
deeds
were
signed,
did
you
receive
payment
by
River
Shore
Investments?
Did
you
receive
a
cheque
or
cash.
for
the
difference
?
A.
I
had
a
cheque,
but
I
endorsed
it
and
1
gave
it
to
Mr.
Farkas
and
Mr.
Gaty.’’
There
remains
the
evidence
of
Pierce
Gould,
a
chartered
accountant
and
partner
in
a
well-known
firm
of
chartered
accountants,
who
testified
that
in
his
opinion
the
fair
market
value
in
1955
of
the
2,600
preferred
shares
in
issue
in
the
hands
of
anybody
who,
like
Leslie
Benko,
was
not
a
common-shareholder,
was
not
in
excess
of
$1
per
share.
The
witness
arrived
at
this
valuation
for
the
following
reasons.
The
shares
in
question
were
non-cumulative
4%
non-participating
non-voting
shares
and
formed
part
of
a
block
of
4,500
shares
which
had
been
issued
in
1955
to
Messrs.
Farkas
and
Gaty
in
consideration
of
the
transfer
from
a
company
called
Crosstown
Realties
of
its
goodwill
to
Crosstown
Realties
(Mtl)
Inc.
The
significant
part
of
the
above-mentioned
goodwill
was
made
up
of
a
contract
which
existed
between
the
Town
of
Préville
and
Crosstown
Realties.
The
balance
sheets
of
Crosstown
Realties
Inc.
for
1955
to
1961,
inclusive,
showed
that
the
4,500
preferred
shares
originally
issued
to
Messrs.
Parkas
and
Gaty
were
still
outstanding,
that
they
were
redeemable
at
par
at
the
option
of
the
directors
and
on
voluntary
winding
up
the
holder
would
be
entitled
to
nothing
more
than
$1
per
share;
that
no
dividend
had
ever
been
paid
on
them
and
that
Leslie
Benko
had
never
received
from
the
said
company
any
payment
of
any
kind
and
that,
at
the
date
of
trial,
he
still
retained
possession
of
them.
Mr.
Gould
also
stated
that
since
no
evidence
to
the
contrary
was
presented
to
him,
he
assumed
that
the
commission
earnings
of
the
company
between
1955
and
1959
were
such
that
in
the
hands
of
common-shareholders
could
be
worth
par.
The
profit
and
loss
account
for
1961
indicated
that
the
company
had
current
assets
of
$231,000,
almost
all
of
which
represented
loans
receivable
the
character
of
which
the
witness
had
not
examined
and
it
had
current
liabilities
of
$227,000.
After
comparing
the
quoted
market
value
of
preferred
shares
which
were
in
a
comparable
status
to
the
instant
shares,
the
witness
was
of
the
opinion
that,
marketwise,
they
had
only
a
nuisance
value,
which
he
placed
at
$1
per
share.
Counsel
for
the
appellant
submitted
that
the
respondent
had
failed
to
produce
any
evidence
that
the
original
offer
to
purchase
the
property
signed
by
Leslie
Benko
on
July
6,
1955
(Ex.
P-2),
which
contained
a
requirement
that
a
deed
of
sale
be
executed
on
or
before
October
1
of
the
current
year,
was
in
any
way
artificial
or
a
transaction
not
at
arm’s
length
or
in
the
ordinary
course
of
business;
that
the
same
was
true
with
respect
to
the
subsequent
transactions
in
issue
and,
consequently,
that
the
appeal
should
not
be
maintained.
Moreover,
insofar
as
the
2,600
shares
which
Mr.
Benko
received
are
concerned,
since
they
were
not
shares
of
the
appellant
company
this
Court
was
not
entitled
to
inquire
into
their
value.
Similarly,
that
while
it
may
well
be
said
in
another
court
on
another
appeal
that
Messrs.
Farkas
and
Gaty
enjoyed
a
profit
on
which
they
may
well
have
to
pay
tax,
this
is
not
pertinent
to
the
instant
case,
since
we
are
here
dealing
with
an
appeal
from
a
re-assessment
against
the
appellant
company
and
there
is
no
evidence
that
the
foregoing
transactions
were
not
made
at
arm’s
length
and
in
good
faith.
In
further
support
of
the
non-artificiality
of
the
two
transactions
described
in
Exhibits
P-4
and
P-5,
counsel
for
the
appellant
submitted
that
as
a
result
of
them
the
appellant
realized
a
profit
of
$2,500
when
it
sold
the
property
to
Mr.
Benko
on
September
30
and
a
further
sum
of
$4,000
when
it
sold
it
to
River
Construction
Ltd.;
that
the
above-mentioned
profits
amounting
to
$6,250
were
reported
as
taxable
income
and
were
the
only
profits
made
by
the
appellant
on
his
real
estate
transactions
;
that
the
payment
of
$26,000
made
by
the
appellant
constitutes
an
amount
which
it
was
required
to
disburse
in
order
to
repurchase
the
property
and
that
its
taxable
income
for
the
year
amounted
to
$250,
as
stated
in
its
income
tax
report,
and
not
$26,250,
as
claimed
in
the
Minister’s
re-assessment.
It
is
submitted
on
behalf
of
the
respondent
that
Messrs.
Farkas
and
Gaty,
with
or
without
the
knowledge
of
Mr.
Benko,
used
him
as
a
vehicle
to
cause
the
appellant
to
pay
an
unnecessary
and
artificial
price
of
$26,000
in
repurchasing
the
property,
and
but
for
which
the
said
sum
would
have
been
added
to
the
appellant’s
otherwise
taxable
income
for
the
year;
that
since
there
is
abundant
proof
that
Mr.
Benko
was
in
financial
difficulties
and
unable
to
make
good
his
offer
to
purchase
it
for
$35,000
and
anxious
to
have
it
‘‘taken
off
his
hands’’
it
is
unrealistic
to
regard
his
offer
to
sell
the
property
to
the
appellant
at
nearly
double
such
amount,
the
said
offer
being
an
apparent
artificial
transaction.
Moreover,
it
should
be
disregarded
for
taxation
purposes,
as
it
was
used
to
conceal
the
fact
that
the
cheque
for
$26,000
and
the
proceeds
therefrom,
signed
on
behalf
of
the
appellant
by
Mr.
L.
Gaty,
payable
to
Leslie
Benko,
was
to
be
received
on
the
following
day
by
Messrs.
Farkas
and
Gaty
and
that
what
Mr.
Benko
was
to
receive
was
2,600
worthless
shares
which
belonged
to
the
said
Farkas
and
Gaty.
Furthermore,
that
the
appellant
had
acquired
the
property
for
$32,500
and
ulti-
mately
sold
it
for
$65,000
and
that
its
taxable
income
derived
therefrom
was
$32,500,
not
$6,250
as
reported
by
the
appellant,
and
that
the
difference
of
$26,000
was
taxable
income
instead
of
a
disbursement
or
expense
which
if
allowed
would
artificially
reduce
its
income.
I
cannot
accept
without
reservation
the
submission
of
counsel
for
the
appellant
that
the
evidence
clearly
shows
that
Mr.
Benko’s
original
offer
to
purchase
the
property
dated
July
6,
1955
(Ex.
P-2)
was
made
in
the
ordinary
course
of
business—and
this
is
doubly
true
of
a
like
submission
in
respect
of
the
subsequent
transactions
in
issue.
Neither
can
I
agree
with
his
submission
that
this
Court
is
not
entitled
to
inquire
into
the
value
of
the
$26,000
shares
of
Crosstown
Realties
stock
which
Mr.
Benko
received,
because
they
were
not
owned
by
the
appellant
company.
In
my
opinion,
the
value
of
the
shares
is
very
relevant
to
determine
the
nature
of
the
transactions
with
which
we
are
concerned,
although
I
agree
with
counsel
for
the
appellant
that
the
taxability
of
non-taxability
of
the
profit
which
Messrs.
Farkas
and
Gaty
enjoyed
on
the
sale
of
the
shares
is
not
before
this
Court.
Nevertheless,
I
consider
that
the
relationship
which
had
been
proven
to
exist
between
Messrs.
Farkas
and
Gaty
and
the
company
indicates
that
in
making
a
personal
profit
they
were
not
dealing
with
the
company
at
arm’s
length.
Now,
with
respect
to
the
submission
of
counsel
for
the
respondent,
I
am
in
agreement
that,
if
it
is
established
that
Messrs.
Farkas
and
Gaty
made
use
of
Mr.
Benko
as
a
vehicle
to
cause
the
appellant
to
pay
an
unnecessary
artificial
price
of
$26,000
in
repurchasing
the
property,
it
is
immaterial
whether
Mr.
Benko
was
aware
or
unaware
of
their
interest
and
purpose
in
doing
so.
I
will
first
comment
on
Mr.
Gould’s
evidence,
as
it
can
be
dealt
with
in
a
few
words.
lL
am
satisfied
that
while
the
nominal
value
of
the
instant
2,600
preferred
shares
was
$26,000
they
had,
marketwise,
only
a
nuisance
value.
Mr.
Gould,
in
coming
to
this
conelusion,
did
not
even
take
into
account
the
restriction
on
the
transferability
of
the
said
shares,
which,
in
my
opinion,
is
the
most
detrimental
element
affecting
their
value.
Now,
in
respect
of
the
three
interested
witnesses,
I
find
that
I.
can
give
little
credence
to
some
of
the
testimony
given
by
Messrs.
Farkas
and
Gaty
and
certain
statements
made
by
Mr.
Benko
leave
the
latter’s
evidence
open
to
suspicion
and
it
is
difficult
to
determine
the
extent
to
which
it
can
be
relied
upon.
I
cannot
credit
Mr.
Farkas’
testimony
wherein
he
stated
that
Mr.
Benko
declared
that
he
wanted
later
on
to
buy
more
than
the
2.600
Crosstown
Realties
shares
which
he
received.
Mr.
Benko,
in
his
testimony,
made
no
reference
to
such
a
statement
and
since
he
knew
or
could
easily
have
ascertained
that
the
said
shares
had
little
value,
it
is
unlikely
that
he
would
be
disposed
to
place
his
own
money
in
such
a
bad
investment.
It
seems
apparent
from
Mr.
Gaty’s
evidence,
wherein
he
was
dealing
with
commissions,
that
he
would
have
no
compunction
about
adding
a
few
thousand
dollars
to
the
repurchase
price
of
the
property,
without
regard
for
the
consequences
insofar
as
income
tax
was
concerned.
The
above-mentioned
three
witnesses
were
unable
or
failed
to
produce
any
written
evidence
of
the
acceptance
of
the
Benko
offer
(Ex.
P-2)
to
purchase
the
property
for
$35,000
or
of
the
$2,000
which
he
allegedly
paid
on
account
of
the
purchase
price
thereof.
The
same
is
true
with
respect
to
his
offer
to
sell
the
property
for
$61,000
and
the
$2,000
which
he
supposedly
received
on
account
thereof
and
I
consider
that
such
a
situation
would
not
have
occurred
in
transactions
which
are
carried
out
at
arm’s
length.
Counsel
for
the
appellant
appeared
to
base
his
whole
case
on
the
reliability
of
the
testimony
of
Mr.
Benko
and
I
will
deal
with
it
in
some
detail.
I
think
that
Mr.
Benko’s
recital
of
events
which
occurred
even
before
July
1955,
when
he
first
came
in
contact
with
Messrs.
Farkas
and
Gaty,
which
are
uncorroborated,
is,
to
say
the
least,
rather
strange.
As
we
have
seen
by
his
long
explanatory
letter
Exhibit
R-1,
he
began
to
have
fears,
early
in
1955,
about
the
permanency
of
his
son-in-law’s
position
with
Dominion
Engineering
Co.
Ltd.
and
because
he
was
contemplating,
on
that
account,
going
to
California.
One
would
expect
that
his
first
thought
would
be
to
ascertain
from
the
boy’s
manager
how
he
was
faring—I
might
here
remark
that,
according
to
Mr.
Benko’s
letter
(Ex.
R-1),
it
appears
that
the
manager
of
Dominion
Engineering
Co.
and
his
wife
came
during
the
latter
part
of
July
to
visit
him
at
his
country
cottage,
while
in
his
testimony
he
stated
that
he
and
his
son-in-law
had
been
invited
to
visit
the
manager
;
in
any
event,
the
manager
was
accessible.
Instead,
he
began
searching
for
a
sports
centre
site
which,
if
and
when
developed,
would
only
provide
his
son-in-law
with
employment
for
less
than
six
months
per
annum.
Having
found
the
present
property,
for
which
Messrs.
Farkas
and
Gaty
as
late
as
June
30
were
unable
to
find
a
purchaser,
on
July
6
he
signed
an
offer
(Ex.
P-2)
to
buy
it,
and,
towards
the
end
of
the
same
month,
in
order
to
allay
his
fears,
contacted
the
latter’s
manager
and
learned—apparently
for
the
first
time—that
he
was
doing
exceedingly
well
and
had
a
bright
future
with
the
company,
whereupon
Mr.
Benko
promptly
decided
to
get
rid
of
his
commitment
to
purchase
the
property.
It
has
been
said
that
sometimes
‘‘truth
is
stranger
than
fiction
’
’
and
perhaps
it
may
be
applicable
to
his
aforesaid
early
evidence.
Some
aspects
of
his
later
actions,
I
think,
are
more
open
to
suspicion.
By
putting
a
most
favourable
construction
on
such
subsequent
actions,
however,
I
think,
it
could
be
argued
that
Mr.
Benko
found
himself
in
the
position
of
being
unable
to
raise
the
necessary
money
to
make
good
his
offer
to
purchase
the
property
and
I
believe
it
is
obvious
that
his
first
concern
was
to
obtain
a
release
from
his
obligation
to
pay
$35,000
for
the
property.
This
is
borne
out
by
Exhibit
P-4
in
which
there
is
an
acknowledgment
that
he
had
discharged
his
obligation,
as
appears
by
Exhibit
P-4,
which,
in
part,
states
:
“THE
PRESENT
SALE
is
thus
made
for
and
in
consideration
of
the
price
and
sum
of
THIRTY-FIVE
THOUSAND
DOLLARS
($35,000),
on
account
and
in
deduction
whereof
the
Vendor
acknowledges
to
have
well
and
truly
received
of
and
from
the
Purchaser
herein,
the
sum
of
eighteen
thousand
seven
hundred
and
fifty
dollars
($18,750),
and
whereof
quit
for
so
much.’’
The
balance
was
taken
care
of
by
his
assumption
of
the
existing
mortgage
amounting
to
$16,250.
Secondarily,
if
he
were
able,
without
risk,
to
obtain
anything
in
addition,
so
much
the
better.
This,
in
my
opinion,
explains
why,
without
any
writing
to
evidence
it,
he
agreed
to
accept,
by
prearrangement,
the
aforementioned
2,600
shares
without
taking
the
ordinary
precautions
of
inquiring
or
having
someone
inquire
on
his
behalf
into
the
financial
status
and
corporate
setup
and
by-laws
of
Crosstown
Realties.
If
he
had
done
so,
he
would
have
perceived
how
valueless
they
were,
particularly
since,
due
to
their
non-transferability
without
the
consent
of
Messrs.
Farkas
and
Gaty,
they
would
be
the
only
prospective
buyers
of
the
shares.
In
order
to
attribute
the
above-mentioned
motive
to
Mr.
Benko,
I
think
one
must
assume
that,
unlike
Messrs.
Farkas
and
Gaty,
he
was
not
aware
of
the
construction
development
which
by
the
end
of
the
summer
had
tremendously
increased
the
value
of
the
property.
If
he
were
aware
of
it,
then
I
cannot
believe
he
would
have
parted
with
the
$26,000
cheque
which
he
received
the
next
day
in
exchange
for
the
relatively
worthless
shares
of
Crosstown
Realties,
unless
he
were
serving
as
an
accommodation
party
under
Messrs.
Farkas
and
Gaty.
A
further
indication
of
the
artificiality
of
the
cheque,
insofar
as
Mr.
Benko
was
concerned,
is
the
fact
that,
in
his
long
explanatory
letter,
Exhibit
R-1,
he
made
no
reference
to
it
nor
what
he
did
with
it
and
it
was
only
long
afterwards,
in
the
concluding
lines
of
his
testimony,
that
he
stated
that
he
received
a
cheque,
endorsed
it
and
gave
it
to
Messrs.
Farkas
and
Gaty.
In
any
event,
as
earlier
mentioned,
insofar
as
Mr.
Benko’s
evidence
is
concerned,
I
agree
with
the
submission
of
counsel
for
the
respondent
that,
if
it
can
be
established
that
Messrs.
Farkas
and
Gaty
caused
the
appellant
to
pay
an
artificial
price
amounting
to
$26,000
in
repurchasing
the
property,
it
is
immaterial
whether
this
was
done
with
or
without
the
knowledge
or
connivance
of
Mr.
Benko,
since
it
was
not
he
but
themselves
who
obtained
the
$26,000
paid
by
the
company.
In
my
opinion
an
analysis
of
the
evidence
of
this
case
clearly
discloses
that,
in
respect
of
the
transactions
of
September
14
(Ex.
P-3)
and
the
two
transactions
which
occurred
on
September
30
(Exhibits
P-4
and
P-5)
and
the
verbal
transaction
which
took
place
the
day
following,
the
appellant
company
was
not
a
free
agent
because
its
president
and
secretary,
acting
in
their
own
personal
interests,
required
the
latter
company
to
expend
$26,000
more
than
was
necessary
to
repurchase
the
property
from
Mr.
Leslie
Benko;
that
the
money
used
to
effect
the
said
repurchase
constituted
a
clever
but
artificial
scheme
whereby
Messrs.
Farkas
and
Gaty
succeeded
in
realizing
a
handsome
profit
personally
on
the
sale
of
the
previously
mentioned
2,600
preferred
shares,
and
this,
with
money
provided
by
the
appellant
and
but
for
which
the
said
$26,000
would
have
been
included
in
the
appellant’s
taxable
income
when
it
sold
the
property
for
$65,000
on
October
1,
1955.
Dealing
with
Exhibit
P-3,
it
is
clear
that
quite
some
time
before
September
14
Messrs.
F'arkas
and
Gaty
had
procured
the
consent
of
Mr.
Benko
that,
for
the
difference
between
the
purchase
price
to
be
fixed
for
the
property
and
the
$35,000
which
Mr.
Benko
was
required
to
pay
for
it,
the
latter
would
accept
2,600
shares
of
preferred
stock
which
he
knew
(or
should
have
known)
had
but
a
nuisance
value.
I
am
convinced,
notwithstanding
any
evidence
to
the
contrary,
that
the
so-called
discussion
between
Messrs.
Farkas
and
Gaty
and
Mr.
Benko,
as
to
the
fixing
of
the
amount
of
the
repurchase
price,
was
a
one-sided
affair,
that
it
was
determined
by
Messrs.
Farkas
and
Gaty
and
agreed
to
by
Mr.
Benko,
and
but
for
the
aforesaid
verbal
understanding
the
repurchase
price
mentioned
in
Exhibit
P-5
would
never
have
been
fixed
at
$61,000.
As
we
have
seen,
the
evidence
establishes
that
Messrs.
Farkas
and
Gaty
desired
to
repurchase
the
property
because
they
knew
that
they
had
a
good
chance
of
disposing
of
it.
As
a
matter
of
fact,
they
did
dispose
of
it
within
thirty
days
of
repurchase
for
$65,000.
I
think
it
may
be
reasonably
inferred
from
the
evidence
that
Messrs.
Farkas
and
Gaty,
if
they
were
not
fully
aware
that
they
would
be
able
to
shortly
realize
$65,000
for
the
property,
they
were
confident
that
it
would
bring
at
least
$61,000,
and
this
explains
why
they
inserted
the
last-mentioned
figure
in
Exhibit
P-o.
The
advantage
to
Messrs.
Farkas
and
Gaty
personally
of
having
the
purchase
price
in
Exhibit
P-5
fixed
at
$61,000
is
obvious,
because
when
the
property
was
later
sold
for
$65,000
the
company
could
deduct
$61,000
and
report
a
taxable
gain
of
$4,000.
In
absence
of
any
proof
that
they
made
a
business
of
buying
or
selling
shares,
to
all
appearances
they
would
make
a
non-taxable
capital
gain
of
about
$26,000.
Per
contra,
the
appellant
company
—which
they
controlled—would
be
required
to
pay
practically
no
income
tax
at
all,
since
after
reporting
the
$2,500
difference
between
the
$32,500
they
originally
paid
for
the
property
and
the
$35,000
Mr.
Benko
allegedly
paid
for
it
and
the
$4,000
of
taxable
gain
realized
on
the
ultimate
sale
of
the
property
for
$65,000
the
only
taxable
income
which
remained,
according
to
the
appellant’s
income
tax
return,
amounted
to
$250,
whereon
the
tax
payable
amounted
to
$32.50,
instead
of
$26,250
and
$5,100
respectively
as
assessed
by
the
Minister.
A,
further
indication
of
the
artificiality
of
Exhibit
P-5
is,
I
consider,
the
fact
that
it
was
the
day
after
the
said
exhibit
had
been
signed
that
Mr.
Gaty
caused
the
appellant
to
issue
the
cheque
for
$26,000
payable
to
Mr.
L.
Benko,
dated
October
1,
1955
(Ex.
P-6),
although
Mr.
Benko
had
agreed
to
wipe
out
$26,000,
the
difference
between
$35,000
and
$61,000,
as
set
forth
in
Exhibit
P-5:
.
POSSESSION
By
virtue
of
these
presents,
the
Purchaser
shall
become
the
absolute
owner
of
the
immoveable
hereby
sold,
with
immediate
possession
thereof.
PRICE
THE
PRESENT
SALE
is
thus
made
for
and
in
consideration
of
the
price
and
sum
of
SIXTY-THOUSAND
DOLLARS
($61,000.00),
on
account
and
in
deduction
whereof
the
Vendor
acknowledges
to
have
well
and
truly
received,
of
and
from
the
Purchaser
herein,
the
sum
of
forty-four
thousand
seven
hundred
and
fifty
dollars
($44,750.00),
and
whereof
quit
for
so
much.
AND
as
to
the
balance
remaining,
namely,
the
sum
of
sixteen
thousand
two
hundred
and
fifty
dollars
($16,250.00),
the
Purchaser
hereby
binds
and
obliges
itself
to
pay
the
same,
to
the
entire
exoneration
and
acquittal
of
the
Vendor,
.
.
.’’
I
do
not
think
that
it
can
be
said
that
the
appellant
freely
consented
to
pay
$26,000
to
repurchase
a
property
which
Leslie
Benko,
the
vendor,
was
willing
to
part
with
for
shares
that
had
little
or
no
market
value,
particularly
when
the
recipients
of
the
cheque
for
the
said
amount
were
two
of
its
own
directors.
I
consider,
however,
that
the
intentions
of
the
appellant
are
deemed
to
be
those
of
its
directors
and
it
is
bound
by
the
artificiality
of
the
transactions
carried
out
by
the
said
directors.
Vide:
Kerwin,
J.,
as
he
then
was,
in
Atlantic
Sugar
Refineries
Limited
v.
M.N.R.,
[1949]
S.C.R.
706
at
707;
[1949]
C.T.C.
196
at
198,
and
Judson,
J.,
in
Regal
Heights
v.
M.N.R,,
[1960]
S.C.R.
902
at
905;
[1960]
C.T.C.
384
at
387.
For
the
foregoing
reasons
I
would
dismiss
the
present
appeal
with
costs.
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