Hall v. The Queen, 86 DTC 6208, [1986] 1 CTC 399 (FCTD)

Collier, J.:—This action was heard at the same time as another, T-1375-80. There was common evidence and common issues. The reasons in this action will apply in the other.

In the other action, the plaintiffs are the executors of the estate of Haydon Hall. Haydon Hall, who died in 1978, was the father of Wayne Hall, the plaintiff in this action.

The actions are appeals against reassessments, for income tax, by the Minister of National Revenue for the Halls’ 1975, 1976, and 1977 taxation years.

The Minister, for 1975, included in income an amount of $3,750, allotting $3,000 to Wayne Hall and $750 to Haydon Hall. The Minister asserted the $3,750 was a benefit or advantage conferred on the Halls, as shareholders in a company (subsection 15(1) of the Income Tax Act, as amended by S.C. 1970-71-72, c. 63, and further amended).

For the 1976 and 1977 years, the Minister included in income amounts of $8,749 and $87,500 respectively. These were allocated as follows:

The Minister's position was these sums were profits from an adventure in the nature of trade.

I shall frequently refer to the father and son as "the plaintiffs".

The facts are complicated. Most of the facts flow from various transactions set out in equally complicated agreements and other documents.

Prior to March of 1970, Tapatco Limited, a Delaware company, had been carrying on business, first at Chatham, Ontario, then, from 1955, at Ayer's Cliff, Quebec. In the evidence and documents, that company was, and is, referred to as “Delaware”. Delaware manufactured gloves and marine lifesaving equipment. Its operations were managed by the plaintiffs. Wayne Hall ran the plant. His father looked after financial matters.

Delaware was a wholly owned subsidiary of another United States company, Jersey City Investment Company (“Jersey”). There was no direct evidence of that fact. There appeared to be no dispute about it. Jersey was owned or controlled, perhaps through another corporation, by one Fernal Marlier. Marlier was a US. citizen.

The legal adviser to Marlier and his companies was a Pittsburg attorney, David B. Buerger. Buerger was, as well, a director of Delaware. Buerger devised and authored most of the transactions relevant to this litigation. He testified at trial.

In 1970, Marlier was over 70 years old and in failing health. He wanted to dispose of Delaware. Delaware was a profitable operation. He consulted Buerger. There were negotiations with the plaintiffs, for the acquisition of the business of Delaware. An agreement in principle was reached in February 1970 in New York.

A Quebec company, Tapatco Industries Ltd., was incorporated on March 17, 1970. Its authorized capital was 40,000 shares of $1 par value. One hundred and twenty-five shares were issued to the plaintiffs. Wayne Hall was the president. In the evidence, and documents, this company was, and is, referred to as “Quebec”.

On March 31, 1970, a number of agreements were entered into. Delaware sold all its assets to Quebec for $453,332.47. That was said by Buerger to be the book value of Delaware’s assets. He said the real value was approximately $250,000. It was his idea to put the higher value in the agreement, in case Quebec fell on “hard times”. He expressed the view that all that was ever expected was $250,000. I am not satisfied with that explanation. In any event, this was the price agreed on by the two companies.

Quebec gave a promissory note to Delaware for $453,332.47. It provided for interest payments of $3,333.33 per month, for ten years, with the principal sum due on March 31, 1980. The interest over ten years would amount to $400,000. There was a default clause, in which case the full amount of principal and interest, after 15 days’ notice, became payable. The note had, therefore, a total value of approximately $853,000.

On the same day, Delaware agreed to sell the note to the plaintiffs for $250,000. The plaintiffs agreed to pay $3,750 semi-annually in March and September for ten years. The balance of $175,000 became due on March 31, 1980.

There were two provisos. First, the $175,000 payable at the end of the ten-year period was to be reduced by any payments of principal by Quebec on its note, and to be increased by any amounts of interest unpaid on its note. Second, on April 1, 1980, Delaware would pay to the plaintiffs any amounts then received from Quebec by Delaware in excess of $650,000.

The Quebec note was to be delivered to the Halls on March 31, 1980. Delaware, as security for the performance of its obligations, pledged the note to Buerger as escrow agent. The plaintiffs, in turn, pledged their shares in Quebec.

Delaware then assigned the Quebec note, and the Delaware-Hall note purchase agreement, to Jersey.

On March 10, 1975, the note purchase agreement was varied somewhat, in respect of a possible earlier reduction in the $175,000 amount due by the plaintiffs on March 31, 1980.

The effect of all this, as I see it, was the plaintiffs were buying, over a period of ten years, their company's note of $453,332.47 for $250,000. This company was, over the same period, going to pay substantial interest on its note to Jersey.

In the early 1970s, Haydon Hall began to take a less active part in Quebec's affairs. Wayne Hall began a more active overall role.

From March of 1970, to and including September 1974, the plaintiffs paid the semi-annual payment of $3,750 on the note purchase agreement. The payment due on March 31, 1975 was not paid by them, but by Quebec. This was conceded in argument. Jersey apparently applied the amount as a payment on the Quebec note. Exhibit 36 shows a reduction, by that amount, from the $453,332.47 still owing. It is this $3,750 payment on behalf of the plaintiffs that the Minister contends is caught by subsection 15(1).

I shall deal with that issue now.

For the plaintiffs, it was contended that, while at first blush, this payment is obviously a conferred benefit, and taxable, one must look at the true economic impact of the payment: because Jersey credited it against the Quebec note, this reduced the amount the plaintiffs could ultimately collect on that note. Therefore, it was said, the plaintiffs did not really receive any economic benefit. All that may be mathematically correct. But it only results from the fact a third party, through which the plaintiffs had a contractual interest, chose to treat the payment in a certain manner in its accounts. What Jersey did, in its books, with the payment, cannot, to my mind, change the character of the transaction as between Quebec and its shareholders. As between those parties, this was a benefit deemed income by subsection 15(1). If Jersey had merely shown it as a payment only on the Delaware-Hall agreement, the submission made could not have been advanced.

The appeal in respect of the 1975 year is dismissed.

I return to the facts.

By September 30, 1975, the financial position of the company had improved considerably. Its volume of sales had increased yearly, as had its gross profits. Net income had, generally speaking, increased. Retained earnings rose from approximately $17,000 in 1971 to a figure of approximately $226,000 in 1975.

In September of that year, a number of transactions were entered into. It was said by Buerger they were done basically to "gussy" up Quebec's balance sheet. This dressing-up was allegedly done for the benefit of suppliers, and others, dealing with the company.

The authorized capital of Quebec was increased to 265,000 common shares. The plaintiffs subscribed for 212,500 shares: 170,000 by Wayne Hall, and 42,500 by Haydon Hall. The plaintiffs paid for the shares with $212,500 borrowed from the Royal Bank. The bank’s cheque was endorsed by the plaintiffs to Quebec.

Quebec, in turn, endorsed the cheque to Jersey as prepayment, without penalty, on its note. This reduced the amount owing on that note, according to the Jersey books, to $237,082.47.

Jersey then transferred, or "sold”, the Quebec note to the plaintiffs, 80 per cent to Wayne Hall and 20 per cent to Haydon Hall. The plaintiffs borrowed the $212,500 from Jersey. They each gave, in return, promissory notes to Jersey. Wayne Hall’s note was for $170,000. Haydon Hall’s note was for $42,000. The combination of the notes called for a total payment of $3,750 on September 30, 1975, and semi-annual payments of that amount, in March and September, for the next four years (1976-1979 inclusive). The balance of the principal, $175,000, became due on March 31, 1980. Interest, in the aggregate of $3,333.33 per month was payable from September 30, 1975 to March 31, 1980.

The $212,500 loan by Jersey to the plaintiffs was paid back to the Royal Bank.

This circular transaction was, in fact, carried out by the Royal Bank's cheque to Quebec (for the shares), being endorsed by Quebec to Jersey, endorsed over to the plaintiffs by Jersey, and by the plaintiffs back to the bank.

The Quebec note, still in the face amount of $453,332.47 was pledged, for performance of their obligation under these notes, by the plaintiffs to Jersey.

As of September 1975, the balances owing on these various matters were as follows:

(I have excluded the March 1975 payment of $3,750.00 by Quebec)

I now set out the payments of principal made by Quebec on its note (Exhibit 36):

SCHEDULE OF PAYMENTS BY QUEBEC ON THE QUEBEC NOTE

	To	To	To	To	To
Date	Jersey	Wayne Hall		Haydon Hall		Balance
						$453,332.47
March 27, 1975	$ 3,750					449,582.47
Sept., 1975	212,500					237,082.47
Sept., 1975			$ 11,000		$ 2,750	223,332.47
March, 1976			3,000		750	219,582.47
June, 1976			20,000		5,000	194,582.47
Sept., 1976			3,000		750	190,832.47
March, 1977			20,000		4,000	166,832.47
June, 1977			20,000		6,000	140,832.47
Sept., 1977			27 ,000		6,750	107 ,082.47
			3,000		750	103,332.47
March, 1978			12,000		3,000	88,332.47
			3,000		750	84,582.47
			$122,000		$30,500

In respect of the plaintiffs’ notes to Jersey, the aggregate balance owing by them, on principal, as of March 1978, was $56,250. As of March 1980, the balance was $3,750.

A schedule, entered as Exhibit 41, shows what occurred from September 1975 to March 1978. The loan payments on the Quebec note were paid to the plaintiffs, who, in turn, paid them to Jersey.

The Minister's assessor, as I understood him, assessed in this manner:

In 1976, payments totalling $32,500 were made to the plaintiffs by Quebec. Of that amount, $23,750 reduced the Quebec liability to the plaintiffs to $199,582.47.

The remaining amount of $8,750, and the full amount of $87,500 paid, in 1977, to the plaintiffs by Quebec, were then characterized as profits from an adventure in the nature of trade.

The plaintiffs contend the transactions entered into by them, and any resulting gains, are on account of capital.

Counsel for the plaintiffs submitted the intention of the plaintiffs was to acquire, through Quebec, the business carried on by Delaware; the acquisition was to be held as a capital asset; the right to acquire the Quebec note was part of the whole transaction.

It was further said the plaintiffs did not put their minds to any gain which might be realized from the Quebec note; there was never any intention to realize anything on the note; everyone considered the true value of the Delaware company to be $250,000; it was the ‘‘true negotiated price”; the inflated face amount of $453,332.47 was never intended, or expected, to be paid. The evidence of Buerger and Wayne Hall, asserted to be to that effect, was relied on.

Mr. Buerger was an experienced attorney. I have already commented that I found unsatisfactory his explanation for the use of the larger figure: the book value amount would mean a larger realization, over other creditors, if Quebec got into financial difficulties. I suspect there were other reasons, not expressed in evidence, such as U.S. tax reasons. The attorney indicated it was not just Marlier’s health, but for tax reasons, Delaware sold its assets "to the Halls”.

Wayne Hall testified he understood they were buying the Delaware company for $250,000; that price was fair value. But he conceded he knew of the Quebec note, and its actual amount. He signed the Quebec note on behalf of that company. Both he, and his father, knew they were buying the note from Delaware for $250,000, and that on March 31, 1980, the note would be theirs.

Haydon Hall, as earlier recounted, was familiar with financial matters. The Halls were, as well, advised by a Montreal solicitor throughout.

The Halls were not to get the $40,000 annual interest on the note. That went to Delaware (Jersey). No interest was payable after March 31, 1980. If there were no prepayments before March 31, 1980, the Halls had, subject to some provisos, a note with an enforceable face value of $453,332.47.

All the people involved, Buerger, the Halls and their solicitor, knew the sale of the Delaware assets to Quebec was for the larger sum. They knew it was a binding, enforceable agreement. To my mind, it had to be obvious to them all, including the plaintiff, that the Halls, if all the terms of the transactions were met, and no defaults, stood to make a gain.

I do not accept Mr. Buerger's statement that that prospect, or possibility, never crossed his, or anyone else's mind.

The legal situation, as I see it, was the Halls, through Quebec, were purchasing the assets of Delaware. That was a transaction on account of capital by Quebec. The Halls were merely shareholders. In their personal capacity, they agreed to purchase the Quebec note, in effect, at a discount. I do not accept the submission on their behalf this was, somehow, an investment on account of capital; that any future gain was on the capital side.

The plaintiffs successfully operated the business of Quebec. The 1975 reorganization provided the means by which ultimate gains, over the cost or discounted value, could be realized.

It is well known tax law that even a single transaction can be an adventure in the nature of trade: M.N.R. v. Freud, [1969] S.C.R. 75 at 83; [1968] C.T.C. 438 at 444.

Counsel for the plaintiff cited M.N.R. v. Sissons, [1969] C.T.C. 184; 69 D.T.C. 5152, and cases which followed that authority. Counsel distinguished the transactions in that line of cases; that their facts are considerably different to the facts here.

I agree one can distinguish the facts. But all these cases involving capital gain versus income, or adventure in the nature of trade, must depend on their own particular facts. This was pointed out by Judson, J. in Regal Heights Limited v. M.N.R., [1960] S.C.R. 902 at 907; [1960] C.T.C. 384 at 390. I refer also to the comment of Kerwin, C.J. in McIntosh v. M.N.R., [1958] S.C.R. 119 at 121; [1958] C.T.C. 18 at 20.

It is impossible to lay down a test that will meet the multifarious circumstances that may arise in all fields of human endeavour. . . . it is a question of fact in each case. .. .

Looking at all the circumstances of this case, I conclude the purchase of the Quebec note for $250,000 was not an investment, or on account of capital. It was obvious, as I have said, from the outset, a gain could be made. In 1976 and in 1977, the plaintiffs began realizing on it.

Mr. Bowman, for the plaintiffs, referred to the 1975 transactions. He said the plaintiffs used $212,500 of the debt owing to them by Quebec to purchase shares; this was a retrograde step; they placed themselves in a subordinate position to other creditors of Quebec to the extent of the $212,500.

I do not think that adds anything to the contention the ultimate gain was on account of capital. The plaintiffs deliberately chose to exchange a portion of the debt for more shares. At the same time, under the new arrangement with Jersey, they became the holder of the note as of September 1975.

The plaintiffs have not persuaded me the Minister’s assessment was wrong.

The appeal is dismissed. There will be only one set of costs recoverable by the defendant. I direct the taxation to be in this action.

Appeal dismissed.