Lamarre
Proulx
J.T.C.C.:—This
is
an
appeal
for
the
taxation
year
ending
on
January
31,
1989.
The
issue
is
whether
there
was
a
disposition
of
shares
within
the
mean-
ing
of
subsection
54(c)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act")
when
the
appellant
transferred
the
ownership
of
its
shares
to
a
lender
on
August
18,
1988,
with
an
option
to
repurchase
at
a
price
different
from
the
transfer
price,
at
the
time
of
a
loan
made
to
a
subsidiary,
or
whether
this
transfer
of
property
is
included
in
the
exception
described
in
subparagraph
54(c)(iv)
of
the
Act
because
the
shares
were
transferred
solely
for
the
purpose
of
securing
a
loan,
in
which
case
the
transfer
of
property
is
not
a
disposition
of
property.
The
appellant
became
owner
of
all
the
common
shares
of
Les
Entreprises
Jean
Mercier
Ltée
("Les
Entreprises")
in
two
stages,
in
1981
and
1987,
for
a
total
amount
of
$150,000.
In
1988
Les
Entreprises,
which
needed
a
contribution
of
capital,
obtained
a
loan
of
$300,000
from
2622-6233
Québec
Inc.
("2622").
This
loan
was
made
directly
to
the
appellant’s
subsidiary
but
the
appellant
had
to
agree
to
transfer
50
per
cent
of
the
common
shares
held
by
it
in
Les
Entreprises.
It
is
this
transfer
which
is
at
issue
here.
The
transfer
was
made
pursuant
to
an
agreement
concluded
on
August
18,
1988.
The
agreement
is
short
and
as
it
is
central
to
solution
of
the
dispute
I
reproduce
it
in
full.
AGREEMENT
CONCLUDED
AUGUST
18,
1988
BETWEEN:
106443
CANADA
LTEE,
having
its
head
office
at
12272,
rue
April,
Pointe-aux-Trembles,
province
of
Quebec,
hereinafter
106
AND:
2622-6233
QUÉBEC
INC.,
a
corporation
legally
incorporated,
with
its
head
office
at
625,
ouest,
boul.
René
Lévesque,
suite
800,
Montréal,
Quebec,
represented
herein
by
Mr.
George
Weber;
hereinafter
2622
WHEREAS
2622
has
made
a
loan
of
$300,000
to
Les
Entreprises
Jean
Mercier
Ltée
(hereinafter
the
company).
WHEREAS
in
consideration
of
this
loan
to
the
company
106
agrees,
on
the
conditions
hereinafter
stated,
to
transfer
50
per
cent
of
the
Class
A
shares
held
by
it
in
the
capital
stock
of
Les
Entreprises
Jean
Mercier
Ltée.
THE
PARTIES
HAVE
AGREED
AS
FOLLOWS:
1.
The
preamble
shall
be
part
of
this
agreement.
2.
106
hereby
assigns
and
transfers
to
2622,
for
$1,
50
per
cent
of
the
Class
A
shares
held
by
it
in
the
capital
stock
of
the
company.
3.
The
said
shares
are
deposited
in
trust
with
the
trustee
Daniel
Kochenburger,
attorney,
625
ouest,
boul.
René
Lévesque,
suite
800,
Montréal,
Quebec.
4.
These
shares
may
be
repurchased
at
the
book
value
once
the
following
conditions
are
met:
(a)
the
capital
and
interest
of
the
loan
made
to
the
company
by
106
are
repaid
or
a
release
obtained
therefor;
(b)
the
capital
and
interest
of
the
loan
made
to
the
company
by
2622
are
repaid
or
a
release
obtained
therefor.
5.
The
parties
agree
that
authorizations
for
the
transfers
will
be
obtained
and
the
secretary
instructed
to
issue
the
certificates
accordingly
and
to
make
entries
in
the
register.
6.
The
trustee
shall
not
transfer
the
shares
or
endorse
one
or
more
of
the
certificates
representing
the
shares
held
by
him
in
trust
without
the
consent
of
2622
and
106.
7.
As
long
as
2622
is
owner
of
the
shares
so
transferred
it
shall
receive
the
dividends
declared,
if
any.
SIGNED
BY
THE
PARTIES
AT
MONTREAL
ON
AUGUST
18,
1988.
By:
2622-6233
QUÉBEC
INC.
By:
106443
CANADA
LTÉE
[Translation.]
Mr.
Jean-Pierre
Mercier
and
Mr.
George
Weber
testified
for
the
appellant.
They
had
never
met
before
1988.
They
were
introduced
by
their
mutual
accountant.
Mr.
Weber
stated
that
the
loan
looked
to
him
like
a
good
investment.
He
and
two
other
partners
each
loaned
$100,000
to
2622,
making
a
total
of
$300,000,
and
this
amount
was
loaned
to
Les
Entreprises
by
2622.
There
was
no
explanation
by
the
witnesses
as
to
why
the
agreement
provided
for
a
transfer
at
$1
and
repurchase
at
the
book
value.
From
certain
comments
made
at
the
hearing
it
would
appear
that
this
was
a
last-minute
inducement.
2622
did
not
intervene
in
the
management
of
Les
Entreprises
but
its
shareholders
took
part
in
a
few
meetings
with
the
Les
Entreprises
bankers.
The
latter
company
went
into
bankruptcy
in
1992.
In
view
of
this
bankruptcy
the
Minister
of
National
Revenue
(the
"Minister")
is
not
disputing
that
the
appellant
is
entitled
to
a
business
investment
loss
in
accordance
with
paragraph
39(1
)(c)
of
the
Act
in
1992.
The
appellant
is
asking
that
this
loss
be
included
in
calculating
its
income
for
the
year
at
issue,
if
it
is
entitled
to
it.
Counsel
for
the
appellant
maintained
that
the
transfer
of
the
shares
was
genuine:
they
were
not
transferred
solely
as
security
for
the
loan.
He
argued
that
in
a
transfer
of
property
as
security
for
a
loan
the
transferor
recovers
the
thing
transferred
when
the
loan
is
repaid,
without
having
to
repurchase
it.
He
further
pointed
out
that
in
the
instant
agreement
the
repurchase
price
is
different
from
the
price
at
which
the
lender
acquired
the
thing,
which
makes
it
even
more
different
from
the
usual
legal
form
of
a
transfer
as
security.
The
agreement
provided
that
the
shares
would
be
transferred
to
the
lender
(the
transferee)
for
$1
and
could
be
repurchased
by
the
appellant
at
the
book
value
when
two
loans
had
been
repaid,
that
of
2622
and
an
earlier
loan
obtained
by
the
appellant
in
1987.
Counsel
for
the
appellant
maintained
that
the
effect
of
this
requirement
that
the
two
loans
be
repaid
was
to
increase
the
book
value
and
that
repurchase
at
a
price
greater
than
the
disposition
price
could
not
be
regarded
as
the
return
of
property
used
as
security.
Counsel
for
the
respondent
argued,
in
reliance
on
the
wording
of
the
second
whereas
clause
in
the
agreement
and
on
the
purpose
of
the
agreement,
that
the
transfer
of
shares
was
made
only
as
security
for
the
loan,
that
the
situation
is
one
to
which
paragraph
54(c)(iv)
of
the
Act
applies
and
that
accordingly
there
was
no
disposition
of
the
shares.
Analysis
Paragraph
54(c)(iv)
of
the
Act
provides
that
a
disposition
of
property
does
not
include:
(iv)
any
transfer
of
property
for
the
purpose
only
of
securing
a
debt
or
a
loan,
or
any
transfer
by
a
creditor
for
the
purpose
only
of
returning
property
that
had
been
used
as
security
for
a
debt
or
a
loan....
For
the
purposes
of
this
case
and
in
order
to
determine
the
correct
application
of
paragraph
54(c)(iv),
the
Court
must
consider
the
legal
position
of
the
transferor,
that
of
the
transferee
and
the
nature
of
the
legal
act
which
transferred
the
ownership.
The
transferor
must
not
have
the
intention
of
absolutely
giving
up
ownership
to
the
property
transferred.
He
must
retain
the
power
of
recovery.
It
must
be
possible
to
infer
from
the
circumstances
of
the
transfer
of
ownership
that
the
transferor’s
intention
was
not
to
give
up
the
ownership
of
property
and
that
he
only
gave
it
up
temporarily
and
in
order
to
provide
security
for
a
loan.
In
the
instant
case
it
should
be
noted
regarding
the
transferor
that
the
shares
were
given
to
a
trustee
who
could
not
sell
them
without
the
consent
of
2622
and
the
transferor.
However,
it
was
2622
which
was
entitled
to
the
dividends
declared.
However,
the
appellant
retained
the
right
to
repurchase
the
shares.
The
provisions
of
the
share
transfer
agreement
thus
do
not
indicate
an
intention
to
make
an
absolute
disposition
of
them.
They
indicate
an
intention
to
retain
some
measure
of
ownership
and
be
able
to
recover
ownership
completely
once
certain
conditions
have
been
met.
The
intention
of
the
transferee
also
must
not
be
to
absolutely
acquire
the
property,
and
in
my
opinion
the
provisions
of
the
agreement
do
not
indicate
such
an
intent
either.
However,
the
paragraph
speaks
of
the
return
("restitution")
by
the
creditor
of
the
property
transferred
as
security.
It
should
be
noted
that
the
word
used
in
the
English
version
is
"return".
Can
such
a
return
encompass
a
sale
at
a
price
different
from
that
of
the
acquisition
price?
It
may
seem
surprising
at
first
glance
that
the
resale
by
the
lender
at
their
book
value
of
shares
purchased
for
$1
could
be
regarded
as
a
return.
However,
if
we
analyse
the
legal
nature
of
this
transfer
with
an
option
to
repurchase
at
a
price
different
from
the
disposition
price,
it
would
seem
clear
that
this
is
a
sale
with
a
right
of
redemption
as
described
in
arts.
1546
et
seq.
of
the
Civil
Code
of
Lower
Canada.
In
his
Traité
de
droit
civil
du
Québec,
vol.
II,
L.
Faribault
says
the
following
at
heading
395,
page
366:
It
frequently
happens
that
the
parties
will
make
use
of
a
sale
with
a
right
of
redemption
to
secure
the
repayment
of
a
loan.
[Translation.]
In
heading
401,
page
369
of
the
same
Traité
it
is
indicated
that
the
redemption
price
is
often
the
same
as
the
selling
price,
but
there
is
nothing
to
prevent
its
being
different.
A
sale
with
a
right
of
redemption
is
a
sale
on
a
resolutory
condition
in
which
the
seller
retains
a
real
right
in
the
thing.
We
feel
that
the
seller
with
a
right
of
redemption
remains
owner
of
the
thing
sold
on
a
suspensive
condition
and
that
the
buyer
with
a
right
of
redemption
becomes
owner
subject
to
a
resolutory
condition.
Contrary
to
the
opinion
stated
by
Pothier,
the
seller
with
a
right
of
redemption
thus
retains
a
real
right
in
the
thing,
a
jus
in
re
[Traité
de
droit
civil
du
Québec,
vol.
II,
L.Faribault,
page
365]
[Translation.]
In
his
article
entitled
"Précis
sur
la
vente"
contained
in
the
digest
entitled
La
réforme
du
Code
civil,
Obligations,
Contrats
nommés,
Les
Presses
de
F
Université
Laval,
page
365,
Pierre
Gabriel
Jobin
says
the
following
at
513:
A
sale
with
a
right
of
redemption,
now
known
as
a
sale
with
an
option
to
repurchase,
is
less
used
now
than
it
was
formerly,
especially
at
times
when
the
lending
of
money
at
interest
was
prohibited
or
severely
restricted:
at
those
times
the
sale
with
a
right
of
redemption
was
used
to
disguise
a
loan
of
money....
The
Office
de
révision
recommended
that
no
provision
be
adopted
on
sales
with
a
right
of
redemption,
as
it
had
recommended
the
establishment
of
a
general
presumption
of
a
hypothec
which
would
have
met
the
objectives
of
protection
generally
sought
through
a
sale
with
a
right
of
redemption
used
as
security
for
a
loan....
[Translation.]
In
the
same
series
on
La
réforme
du
Code
civil
du
Québec,
dealing
in
particular
with
priorities
and
hypothecs,
volume
3,
page
9,
Louis
Payette
in
his
article
entitled
Des
Priorités
et
des
Hypothèques
at
page
58
also
notes
that
sales
with
an
option
to
repurchase
may
be
used
to
provide
security
for
a
loan.
As
we
have
just
seen
a
sale
with
a
right
of
redemption
is
a
legal
act
occurring
frequently
in
connection
with
the
security
for
a
loan.
The
fact
that
the
repurchase
price
is
different
from
the
transfer
price
does
not
alter
the
purpose
for
which
this
transfer
or
sale
with
a
right
of
redemption
was
made.
The
transferor
retains
over
the
thing
transferred
rights
which
are
consistent
with
the
legal
nature
of
a
security
for
a
loan.
When
the
borrower
returns
the
property
at
a
price
higher
than
the
acquisition
price,
there
will
also
be
no
disposition
and
the
difference
between
the
amounts
in
my
opinion
will
constitute
additional
income
from
the
money
loaned.
The
purpose
of
paragraph
54(c)(iv)
is
to
state
that
what
would
otherwise
be
a
disposition
or
transfer
is
not
one
when
the
transfer
is
made
solely
for
the
purpose
of
securing
the
repayment
of
a
debt
and
not
so
as
to
absolutely
give
up
the
ownership
of
property.
In
the
circumstances
of
the
instant
case
it
seems
quite
clear
to
me
that
the
appellant’s
shares
were
transferred
as
security
for
a
loan
and
not
to
make
a
final
transfer,
and
the
legal
method
used,
namely
a
sale
with
an
option
to
repurchase,
is
one
that
can
be
used
for
this
purpose.
The
appeal
is
accordingly
dismissed
with
costs.
Appeal
dismissed.
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