William Milne, Max Knab, Thomas Streifel and Richmond Plywood Corporation Limited v. Her Majesty the Queen, [1994] 2 CTC 2190

Mogan J.T.C.C.:—The income tax appeals of William Milne v. The Queen (No. 91-635), Max Knab v. The Queen (No. 91-668), Thomas Streifel v. The Queen (No. 91-1344) and Richmond Plywood Corp. v. The Queen (No. 91-2308) were called for hearing at the same time. Each individual appellant was an employee and shareholder of the corporate appellant. The issues in the appeals of Milne, Knab and Streifel are identical because in 1985 they entered into similar transactions with Richmond Plywood Corp, (herein referred to as "RPC"). The issue in the appeal of RPC would be influenced by the decision in the other three appeals but the respondent made a preliminary motion to quash the appeal of RPC on the basis that it was from a nil assessment. The parties are in agreement that the appeals of Milne, Knab and Streifel are from valid assessments of tax. Because I was required to hear the appeals of the three individuals in any event, I reserved on the respondent's motion to quash until all of the evidence had been presented. Without prejudice to her preliminary motion, counsel for the respondent agreed with counsel for the appellants that all four appeals would be heard together on common evidence.

At the beginning of 1985, Milne, Knab and Streifel each owned one share in the capital stock of RPC. During 1985, Milne, Knab and Streifel each sold his respective share to RPC upon his respective retirement from employment. The main issue is whether a certain amount paid by RPC upon the retirement of each individual appellant was in part a “retiring allowance” (within the meaning of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act")) and in part consideration for the surrendered share or whether the entire amount paid by RPC was consideration for the surrendered share.

RPC was formed in 1957 under the Company Act of British Columbia, R.S.B.C. 1979, c. 59, for the purpose of operating a plant to make plywood. RPC was an unusual corporation because it was intended from the beginning that the employees of the plant would be the shareholders. In order to finance the start-up of the business, 300 common shares were sold for $5,000 each to raise aggregate capital of $1,500,000. No individual could own more than one share and, in 1957, $5,000 was relatively a more significant amount than today because it represented about one-third the cost of an average house. The articles of RPC were entered in evidence as Exhibit A-1 and they state in part:

2.5 No person except any trustee appointed by the company pursuant to a registered pension plan established under the provisions of the Income Tax Act of Canada shall be entitled to hold more than one common share of the company either by allotment or transfer.

2.6 Ownership of a share shall confer on the holder a right to employment by the company subject to all rules and regulations of the company in force at the time of acquiring the share, all future amendments thereto and all rules and regulations issued thereafter.

2.7 The sale of a share by any member who is or has been employed by the company in any capacity whatsoever shall terminate his employment as well as any right, legal or equitable, to future employment which, but for this Article, such employee might otherwise have enjoyed or to which he might have been entitled.

When RPC first started, most shareholders were not employees but, as time passed, most individuals who purchased a share used the right to employment either to become an employee of RPC or to entrench their existing employment with RPC. A person would purchase a share in order to be assured of having a job. By the 1980s, 90 per cent of the shareholders were employees. A retired employee could keep his share as could the estate of a deceased employee but, because RPC never paid any dividends, a retired employee would ordinarily sell his share at the first opportunity. Although ownership of a share conferred on the holder a right to employment, there were many persons (up to 125 in busy periods) employed by RPC who were not shareholders. These non-shareholder employees provided a type of market in which a vending shareholder could offer his share for sale.

Along with a right to employment, ownership of a share conferred certain other benefits. Shareholder employees had first preference over other employees for any overtime that was available. All shareholder employees were treated equally in terms of hourly wages and benefits whether doing a menial task or operating a complicated machine. Non-shareholder employees were paid the going rate for comparable jobs in the plywood industry in British Columbia but the package of wages and benefits for shareholder employees was almost $10 per hour higher than the wages and benefits of most non-shareholder employees. Shareholder employees participated in a bonus program which was based on the number of hours worked. RPC paid no dividends and so the bonus program was the only way to distribute profits which were not needed for working capital. This could result in a very significant bonus. And lastly, the sons of shareholders were given preference for casual employment in the summer or on weekends.

If business was slow, all shareholder employees would have their hours reduced in the same ratio. During a recession in 1982 when RPC had to reduce production, most non-shareholder employees were laid off but the shareholder employees were cut back to working alternate 40 hour weeks for a 20 week period. This was a dramatic reduction from the prior year when most shareholder employees had worked regular 48 hour weeks but it demonstrated the equal treatment given to all shareholder employees who wanted to work.

The payroll cost to RPC of a shareholder employee was about $20,000 per year higher than the payroll cost of a non-shareholder employee. After the 1982 recession when production and working hours had to be reduced, the directors of RPC began to consider ways of reducing the number of shareholder employees as a method of reducing the number of employees and production costs. If RPC offered to purchase snares from certain employees, the Company Act of British Columbia required RPC to make the same offer to all shareholders. The corporation could not afford to make a general offer to all shareholders. RPC could, however, receive an offer from a particular individual who wanted to sell his share and accept such offer without any obligation to the other shareholders.

At a shareholders’ meeting in January, 1983, the directors of RPC were authorized to purchase up to 20 shares from shareholder employees during 1983. As a result of this decision, RPC purchased nine shares during 1983 and two shares during 1984 at the following times and prices:

For 1985, RPC consulted with its professional advisors and decided to make available a different package for the shareholder employee who wanted to sell his share at the time of his retirement. For that kind of employee, RPC decided to purchase the share at a price in the range of $15,000 to $20,000 and to pay a retiring allowance in the range of $30,000 to $40,000. There were six shareholder employees who retired in 1985 and sold their six respective shares to RPC at the following times and upon the following terms (Exhibit A-3):

In the above table, the amounts in the column “retiring allowance” were not paid to the vending and retiring employee shareholder but were paid directly into a registered retirement savings plan (RRSP) designated by such employee. It is these amounts which are the subject of the principal issue in these appeals. The shareholder employees identified as T. Streifel, M. Knab and W. Milne in the above table are the three individual appellants herein. Streifel, Knab and Milne each reported the full amount of the retiring allowance as part of his income for 1985 and then deducted such amount because it had been paid directly into an RRSP. On the other side of the transaction, RPC deducted in computing income each amount paid as a retiring allowance but did not deduct the balance paid to each person because the balance was regarded as consideration for the share purchased.

Upon assessment, the Minister of National Revenue disallowed the deduction of the retiring allowance amounts to RPC on the basis that the total amount paid to each retiring shareholder was consideration for his share. If the Minister is correct, then Streifel, Knab and Milne would each have received $5,000 as a return of paid-up capital and the remaining balance ($50,000 to each) would be a deemed dividend under subsection 84(3) of the Income Tax Act. If that remaining balance is a deemed dividend, then it is not deductible in computing the income of RPC and no part of that remaining balance could be a retiring allowance, able to be transferred into an RRSP. The principal issue in these appeals is to determine the character of the amounts paid by RPC to Streifel, Knab and Milne in the above circumstances.

The tables set out above show the names of 17 shareholder employees each of whom sold his share to RPC in the period 1983 to 1985. Cheryl Hildebrand, a Revenue Canada auditor who had examined the books and records of RPC, appeared as a witness and stated that she found evidence of 59 other shares which had been sold in the period 1983 to 1985 in single share transactions between individuals. According to her testimony, in 1983 there were 24 single share transactions between individuals at prices in the range of $30,000 to $46,000 per share and nine shares sold to RPC. In 1984 there were 20 single share transactions between individuals at prices in the range of $42,000 to $55,000 per share and two shares sold to RPC. And in 1985, there were 15 single share transactions between individuals at prices in the range of $55,000 to $64,000 per share and six shares sold to RPC.

The principal issue was argued on the basis of valuation, and each party called an expert witness to express opinion evidence on the value of shares in RPC during 1985. Evidence on valuation was given to determine whether part of the amount ($55,000) paid by RPC to or at the direction of each individual appellant could reasonably be regarded as a retiring allowance or whether all of that amount should be regarded as proceeds of disposition for a share of RPC. The appellants put forward an alternative argument which proceeded as follows: if all of the amount ($55,000) received by each individual appellant was technically proceeds of disposition for his share, could part (approximately $38,000) of that amount be a retiring allowance because it was paid in respect of the retirement of his (i.e., the recipient's) job with RPC?

Mr. Michael D. Bowie, a well qualified business valuator, was an expert witness for the appellants. His valuation report was entered as Exhibit A-51. He compared the value ($55,000) which Revenue Canada attributed to each RPC share in 1985 with the value ($15,000-$17,000) which the appellants attributed to each share, and he stated at page 3 of his report:

There were 289 shares issued and outstanding at December 31, 1984. Ascribing values of $15,000 to $17,000 to the shares sold in 1985 implies values of $4,335,000 to $4,913,000 respectively for all of the shares of Richply (the “en bloc” value). A share price of $55,000, as proposed by Revenue Canada, would imply an en bloc value of $15,895,000. For purposes of our comments herein, we have rounded the indicated en bloc values to $4.3 million, $4.9 million and $15.9 million, respectively.

Mr. Bowie made certain adjustments to the reported earnings of RPC in 1984 and 1985 to determine what he regarded as maintainable earnings of $650,000 to $700,000 per annum. He then used his maintainable earnings to determine the following price earnings multiples:

According to the above table, price earnings multiples in the range of 23 x to 24 x would be needed to support the Revenue Canada implied value of $15.9 million, suggesting that investors would be satisfied with a return of four per cent to 4.5 per cent on invested capital. The RPC implied value of $4.3 million to $4.9 million could be supported by price earnings multiples of 6.1 x to 7.5 x which are equivalent to a return of 13.3 per cent to 16.4 per cent on invested capital. Mr. Bowie concluded his report with the following observations:

1. The implied earnings multiples that support the Richply share values are not inconsistent with the multiples one would expect for a private company such as Richply.

2. Revenue Canada’s value of $55,000 per share is significantly higher than the pro rata fair market value of a Richply share in January, July or August 1985; and

3. The company's values of $15,000 to $17,000 per share appear to be reasonably reflective of the pro rata fair market value of Richply shares in early or mid 1985.

An important aspect of Mr. Bowie's valuation is that he determined the en bloc value of all the issued shares of RPC. He was aware of the transactions between individuals involving only one share but he stated under cross-examination (Transcript page 214):

. . . I wasn't asked to look at what the value of a share was. I was asked to look at what the investment value—what the fair market value would be of all of the shares of Richmond Plywood . . . .

Mr. Dennis N. Turnbull, an experienced valuator of shares in private companies, was an expert witness for the respondent. His valuation was based on his opinion of the fair market value of a single share of RPC on the three dates in 1985 when Streifel, Knab and Milne sold their respective shares. He explained his approach to valuation as follows (transcript pages 286-87):

. . . when I reviewed the company and the valuation of shares, I reviewed the actual investment value of the company itself, what I suppose you would call the intrinsic notional value, which is a value of an entire company as a package to an outside investor wishing to acquire the company.

Now, this is determined without reference to the actual market itself or to special interest purchasers. I felt that this approach did not fully reflect the fair market value of the subject shares under consideration, because the rights inherent in the shares, being the job right, didn't necessarily have any interest to an outside investor wishing to acquire the entire company. The investment rights being the dividend rights and the rights to liquidation assets were inherent in the shares, so all shareholders had that, but there were additional rights that an outside investor wouldn't have, being security of employment while a shareholder and guarantee of employment upon attaining [sic] the shares.

So based on that it was my opinion that you had to consider that there were two classes of special interest purchasers willing to pay an amount in excess on [sic] an investment criteria for the shares.

Mr. Turnbull's first class of special interest purchaser included prospective employees of RPC who wanted only the assurance of a full-time job, and current non-shareholder employees of RPC who wanted continuous employment, a preference for overtime, a higher hourly wage, participation in the bonus program and a preference for casual employment (summer and weekends) for their sons. He referred to 62 shares which were sold in single share transactions to persons within this class of special interest purchaser in the period 1983 to 1985 (transcript page 289) but the evidence of Ms. Hildebrand indicated that only 59 shares were sold in such transactions during that period. The difference between 62 and 59 is not significant and was partly explained by Mr. Turnbull. He therefore knew that this class of special interest purchaser created an active market for buying a single share of RPC in order to entrench prospective or current employment.

Mr. Turnbull’s second class of special interest purchaser was RPC, the corporation itself. RPC started a share buy-back plan in 1983 because it wanted to reduce the work force by eliminating some of the 300 shares (issued and outstanding at January 1, 1983) each of which carried a right to employment; and it wanted to reduce production costs because the cost of wages and benefits to a shareholder employee was about $20,000 per annum higher than the wages and benefits to a non-shareholder employee. From 1983 to 1985, RPC purchased 17 shares including the three acquired from Streifel, Knab and Milne. In Mr. Turnbull’s view, these two classes of special interest purchaser "had to vie against each other to acquire shares" and that created a real market for single share transactions. Under cross- examination, he stated (transcript page 301):

I would agree that on a pure intrinsic basis, an investment basis, based on the normal rates of returns expected on shares, dividends and such, that Mr. Bowie's valuation is reasonable.

It was easy for Mr. Turnbull to make that statement because his approach to valuation was so different from that of Mr. Bowie.

I do not doubt the reasonableness of Mr. Bowie’s opinion that in 1985 an investor would pay only $15,000 to $17,000 per share for all the issued shares of RPC to earn a return on capital of 13 per cent to 16 per cent. That opinion, however, is in sharp contrast with the actual price which many individuals paid in 1983, 1984 and 1985 to acquire a single share of RPC. To repeat a portion of Ms. Hildebrand’s evidence, in 1983 there were 24 single share transactions at prices from $30,000 to $46,000 per share; in 1984 there were 20 single share transactions at prices from $42,000 to $55,000; and in 1985 there were 15 single share transactions at prices from $55,000 to $64,000. Accepting Mr. Bowie's opinion, I have no hesitation in concluding that the 59 individual purchasers of single shares in 1983, 1984 and 1985 were not purchasing those shares for investment purposes.

The issued common shares of a corporation are ordinarily regarded as identical properties. See section 47 of the Income Tax Act. And so they are, but when the articles of a corporation permit an individual to hold only one share, and when ownership of a share confers on the holder a right to employment, there would be certain elements of value in the mind of an individual purchasing one share with a view to employment which would not be present in the mind of an investor purchasing all of the issued shares en bloc.

The right to employment had a significant influence on those persons who actually purchased shares of RPC in single share transactions during 1983, 1984 and 1985. The individual purchasers were either seeking assured employment or wanting to enhance the benefits they already had as non-shareholder employees. The corporate purchaser (RPC itself) wanted to reduce the work force by eliminating some of the “rights to employment" and also wanted to reduce the cost of production by the lower wages and benefits paid to non-shareholder employees. The right to employment would not have influenced and would not have been relevant to the investor who in the hypothetical open market may have purchased all the shares of RPC to obtain a reasonable return on invested capital.

The individual buyer of a single share acquired a right to employment which could be exercised and enjoyed immediately and the buyer was prepared to pay for that right. A person buying all of the issued shares of RPC for investment purposes would not need the right to employment conferred by ownership of a share and would not pay for that right. If the property in a single share of RPC with its attached right to employment is the same as the property represented by all of the issued shares of RPC, then Mr. Bowie was looking at the wrong market when he expressed his opinion because the hypothetical investment market for all of the shares en bloc had expectations which were significantly different from the expectations in the employee market in which many shares were actually purchased and sold in single share transactions. And if the property in a single share of RPC with its attached right to employment is different from the property represented by all of the issued shares of RPC, then Mr. Bowie was looking at the wrong property.

I favour Mr. Turnbull’s method of valuation over Mr. Bowie’s method because Mr. Turnbull concentrated on the property (a single share of RPC) which was actually sold by the three individual appellants whereas Mr. Bowie concentrated on a hypothetical sale of all the issued shares of RPC en bloc. Mr. Turnbull had the advantage of examining a real market in which there were at least 76 separate transactions from 1983 to 1985 each involving the purchase and sale of a single share of RPC (59 sales to individuals plus 17 sales to RPC). Mr. Bowie examined a hypothetical market in which the purchaser was an investor and not a person seeking to entrench or eliminate employment.

In his evidence, Mr. Turnbull described what he regarded as two classes of special interest purchasers (first, prospective employees of RPC and current nonsnareholder employees; and second, RPC itself). It would appear from recent cases that a special interest purchaser is to be included in the “open market" which is required to determine fair market value. In Henderson Estate v. M.N.R., [1973] C.T.C. 636, 73 D.T.C. 5471 (F.C.T.D.), Cattanach J. described the concept of fair market value at page 644 (D.T.C. 5476):

. . . the highest price an asset might reasonably be expected to bring if sold . . . in the normal method applicable to the asset. . . in a market not exposed to any undue stresses and composed of willing buyers and sellers dealing at arm's length and under no compulsion to buy or sell.

In Lakehouse Enterprises Ltd. v. M.N.R., [1983] C.T.C. 2431, 83 D.T.C. 388 (T.R.B.), the Tax Review Board at page 2435 (D.T.C. 392) accepted the following definition of “special purchaser" from an article by lan R. Campbell in the Canadian Tax Journal:

Special purchasers may be defined as those who, for one or more reasons, are willing to pay a higher price for a given asset than are other purchasers.

In Dominion Metal & Refining Works Ltd. v. The Queen, [1986] 2 C.T.C. 47, 86 D.T.C. 6311 (F.C.T.D.), Joyal J. assumed that a “special purchaser" would be one of the potential buyers in the hypothetical open market needed to determine fair market value. He stated at page 52 (D.T.C. 6314):

It may be stated at the outset that the “special purchase” approach to value adds a new element to the more orthodox “fair market value" approach. The concept is based on experience. It is a premium which a special purchaser is willing to pay over and above fair market value. If the law in expropriation cases is willing to look at special value to an owner over and above fair market value, so is the law in income tax matters willing to look at special value to a purchaser over and above fair market value.

In Dominion Metal & Refining, supra, Joyal J. proceeded to find that there was no evidence of a special purchaser at the relevant time.

I have some doubt as to whether in 1985 the prospective and current (nonshareholder) employees of RPC were special interest purchasers. All shares of RPC were identical and the right to employment attached to each share. There was no right attached to a particular share which satisfied a need which was unique or special to the prospective or current employee. Normally a special interest purchaser has a “special interest" in a particular property because it has some characteristic which is of almost unique value to the purchaser as, for example, a land owner needing to expand and looking at adjoining land. In my view, the prospective and current (non-shareholder) employees of RPC were part of the class of potential buyers in an open market for single shares who saw value in the right to employment. In 1983, 1984 and 1985, RPC was also part of that class of potential buyers. In any event, it makes no difference whether the prospective and current (non-shareholder) employees of RPC were special interest purchasers or ordinary purchasers because they were both within the class of potential buyers in the open market according to the recent decision in Dominion Metal & Refining Works Ltd,

Counsel for the appellant argued strongly that the "right to employment" referred to in Article 2.6 of RPC (quoted above) was not in law a right incidental to share ownership; it was not part of the bundle of rights (i.e., participating in dividends, electing directors, etc.) which one ordinarily associates with share ownership. In support of that argument, he referred to the decision in Hickman v. Kent & Romney Marsh Sheepbreeders' Assn., [1915] 1 Ch. 881 (U.K.), and to section 13 of the Company Act of British Columbia. Article 2.6 states that the right to employment is “subject to all rules and regulations of the company in force at the time". Also, there was evidence given by Charlie Spriggs, a long time director of RPC, that each prospective employee/shareholder had a 20-day probation period of working in the plant to determine if he was a reasonable and compatible worker before the directors would approve a share transfer to him.

Even if I accept the argument of appellants’ counsel, I do not see how it advances the appellants’ case. There was an assumption or an understanding on the part of the employees (both prospective and current) and the directors that ownership of a share would bring permanent employment by RPC. This assumption or understanding was in fact supported by the policy of RPC. Mr. Spriggs stated that 90 per cent of the shareholders were employees. If the right to employment was not a shareholder’s right in a legal sense, everyone in the open market thought that it was. And in the notional open market which determines value, it is the assumption or understanding of prospective buyers which makes the market and drives prices up or down. For example, land in a particular municipality may be zoned for single family dwellings but, if there is a real need for multiple dwellings to provide affordable housing, developers and house builders may drive up the price of that land on the assumption or understanding that the land will be rezoned. The evidence of Charlie Spriggs makes it clear that both the employees and the director looked upon a share as having a job attached [transcript pages 128-9].

I find that the fair market value of a single share of RPC during the first eight months of 1985 was $55,000. I rely on the following evidence to support this finding. Firstly, the prices paid in single share transactions between individuals during 1983, 1984 and 1985 show that the value of an RPC share was rising during that period. Those transactions are summarized in the following table:

In the same three year period, the amounts paid by RPC to retiring employees in connection with the acquisition of their respective shares were as follows:

The information in the above two tables supports the statement by Mr. Turnbull that these two potential purchases (employees and RPC) "had to vie against each other to acquire shares".

And secondly, it was clear to me from the evidence of Messrs. Milne, Knab and Streifel that they all knew of the $55,000 value in 1985. When RPC decided to make available the “retiring allowance” package for shares purchased in 1985, the directors had consulted with Ron Larter, a tax partner in the firm of chartered accountants who were outside auditors of RPC. The directors decided that if any employee about to retire was interested in the “retiring allowance” package and needed advice, that employee could consult with Mr. Larter on the basis that RPC would pay any professional fees resulting from such consultation. Mr. Milne took advantage of the opportunity to consult with Mr. Larter and he gave the following answers in cross-examination (transcript pages 171-75):

. . . how did you arrive at the figure of $55,000?

A. 55,000 was pretty well the going rate at that time which sounded very acceptable to me.

Q. And you wanted to get the going rate for your share.

A. That's correct.

Q. And when you said you talked with Larter and Larter said it should be done this way, what way is “this way"?

A. The way it was recommended, that we take this portion into RRSP and the balance in cash.

Q. So that was Mr. barter's suggestion to you.

A. Yes.

Q. And did you get any independent accounting advice about this?

A. No.

Q. So you relied on Mr. Larter?

A. Absolutely. I talked to Mr. Jones, the CEO at the time. He made arrangements with me to have a meeting with Mr. Larter. He sent me downtown for a discussion on this, came back —

Q. And did you tell Mr. Larter that the shares were selling at $55,000 at that time?

A. No, I didn't discuss the price of the shares with Mr. Larter. He was well aware of what the price of shares were at that time.

Q. So Mr. Larter knew the shares were worth $55,000.

A. He knew the shares were worth $55,000.

Q. So basically for you the sale price of your share was $55,000?

A. Correct. As long I got $55,000 I didn't care how it was. It could have been pennies.

Q. And you didn't care how it was designated on the books, you wanted your $55,000?

A. Yes.

Q. And were you told that it would give you a tax advantage if it was designated this way?

A. Absolutely.

Q. And that was —

A. But putting the $38,000 into RRSP.

Q. So it would be a benefit to you in your taxes.

A. Yes.

Q. And was that one of the incentive for doing—for selling it to the company?

A. Absolutely.

Mr. Larter was also a witness and his evidence about value was as follows (transcript pages 96-97):

Q. Who did decide where the $55,000 came from?

A. Well, the $55,000 my recollection would be is if these individuals were retiring that they could sell their shares in the plant for $55,000. And I think that would be undisputed and Charlie would say look at you know these individuals can sell their shares in the plant for $55,000 but on the other hand we don't want to pay $55,000 for the shares, so you know, can we pay a retiring allowance, you know can we go to the employees and come together with some package of retiring allowance and payment for their shares you know would that be something that we could do? And my answer to Charlie would have been and likely would still be yeah I think you can.

Mr. Knab did not consult with Mr. Larter but explained that he heard about the breakdown of $17,000 and $38,000 in the employee lunch room (transcript page 179). Mr. Streifel consulted with one of Mr. barter's partners and stated that he had paid $15,000 for his share in 1976 and, upon retirement, he wanted to get back the $15,000 plus a year's salary ($40,000) (transcript page 153). Mr. Streifel also stated that he made no secret of his retirement package and most employees in the plant would have known about it. When asked if he would have sold his share for $20,000, he answered: "I wouldn't have sold it for less than what I got” (transcript page 166). I conclude that it was common knowledge in the employee lunch room and out in the plant that a single share was selling for $55,000 in the early months of 1985.

Having found that the fair market value of a single share of RPC was $55,000 during the first eight months of 1985, I also find that the whole amount of $55,000 paid by RPC upon the retirement of William Milne was consideration for his share in RPC and no part of that amount was a “retiring allowance” within the meaning of the Income Tax Act. The same finding applies to Max Knab and Thomas Streifel. It must be remembered that RPC purchased 11 shares from 11 retiring employees in 1983 and 1984 for prices in the range of $33,000 to $39,000. There is no evidence that RPC designated any portion of those amounts as a retiring allowance. Indeed, those amounts were consistent with the purchase prices paid by the 44 individuals who each purchased a share of RPC in 1983 and 1984. That being the case, how can the individual appellants and RPC argue that the value of a single share had dropped in 1985 to $15,000 to $17,000 from $33,000 to $39,000 in the two prior years? All of the evidence is consistent with the fact that the value of a share in RPC was rising during the period 1983 to 1985.

“Retiring allowance" is defined in subsection 248(1) of the Income Tax Act as follows (omitting irrelevant words):

248(1) “retiring allowance” means an amount (other than. . . .) received

(a) upon or after retirement of a taxpayer from an office or employment in recognition of his long service, or.. .

by the taxpayer . . . .

There is no evidence that RPC had a corporate policy at any relevant time of paying a retiring allowance in the range of $38,000 to $40,000 upon the retirement of any employee in recognition of long service. Quite the contrary; there was a long established policy of giving an employee a watch after 20 years of continuous employment and paying a retirement amount equal to $50 for each year of service upon the retirement of an employee. Each of the individual appellants received this retirement amount based on his years of service. It is a fact that Milne, Knab and Streifel were all long term employees of RPC at the time of their retirement (26 years, 24 years and 27 years respectively) but that fact in itself cannot change a portion of what was received as consideration for the transfer of a share into a retiring allowance.

It is appropriate to recite the well established principle that the name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction. See I.R.C. v. Wesleyan and General Assurance Society, 30 T.C. 11 at page 24. Although RPC and each individual appellant identified a portion of the $55,000 as a “retirin allowance”, the main issue in these appeals is to determine the real character of the $55,000 amount. In my opinion, the $55,000 amount was the fair market value of and the total consideration paid for the surrender of the employee's share upon his retirement.

For the above reasons, the appeals of William Milne, Max Knab and Thomas Streifel are dismissed. I would also dismiss the appeal of RPC but for the motion by counsel for the respondent to quash the appeal on the basis that RPC is attempting to appeal from a nil assessment.

When RPC computed its income for the 1985 taxation year, it deducted the amount of $226,000 as the aggregate of six retiring allowances which it claimed to have paid to six persons (including Messrs. Milne, Knab and Streifel). In a notice of reassessment dated September 25, 1989, the Minister of National Revenue disallowed the deduction of that amount. In a subsequent Notice of Assessment dated July 25,1991, the disallowance of the deduction was confirmed. This most recent reassessment of July 25,1991 is the assessment under appeal. In the notice of appeal filed by RPC, the only issue raised is whether the amount of $226,000 is deductible in computing income. Under the heading of “Relief Sought", paragraph 16 of the RPC notice of appeal states:

The appellant asks that the appeal be allowed and that the respondent be directed to reassess the appellant’s taxation year ending in 1985 on the basis that the $226,000 paid to various employees was a retiring allowance and a deductible expense to the appellant.

The notice of reassessment dated July 25, 1991, clearly discloses nil federal tax, nil provincial tax, nil penalties, arrears interest of $16,150.85, refund interest of $28,599.40 and a total refund of $111,906.29. The form T7W-C attached to the notice of reassessment contains certain adjustments to active business income and then proceeds as follows:

There are some explanatory notes at the bottom of the form T7W-C including the following:

Your 1985 qualified expenditures for 1.T.C. purposes shown on draft T2038 submitted on May 13, 1991 have been adjusted to $2,412,991 as previously reassessed. All items currently reclassified were already considered as I.T.C. eligible on previous reassessment. Hence no changes to total qualifying expenditures are required.

On these facts, the respondent moved to quash the appeal of RPC citing the following authorities: Okalta Oils Ltd. v. M.N.R., [1955] S.C.R. 824, [1955] C.T.C. 271, 55 D.T.C. 1176; The Queen v. Bowater Mersey Paper Co., [1987] 2 C.T.C. 159, 87 D.T.C. 5382 (F.C.A.); Lornex Mining Corp. v. The Queen, [1988] 2 C.T.C. 195, 88 D.T.C. 6399 (F.C.T.D.); and Consoltex Inc. v. Canada, [1992] 2 C.T.C. 2040, 92 D.T.C. 1567 (T.C.C.).

The appellant relies on the decision of this Court in Martens v. M.N.R., [1988] 2 C.T.C. 2018, 88 D.T.C. 1382 (T.C.C.), and on subsection 152(1.2) of the Income Tax Act to argue that a taxpayer has the right to appeal from the Minister's determination of the amount of tax deemed to be paid under subsection 127.1(1) with respect to a refundable investment tax credit. In the Martens case, the taxpayer actually disputed the Minister's determination of refundable investment tax credit. In this appeal, RPC does not dispute any determination by the Minister of National Revenue with respect to refundable investment tax credit. As stated above, RPC claims only the right to deduct the $226,000. In the course of argument, I asked appellants’ counsel how RPC would be financially better off if its appeal were allowed. He answered that it would not have needed to carry back the 1988 loss if the amount of $226,000 were to be deductible.

In my opinion, the Martens case is distinguishable because RPC is not contesting any determination by the Minister with respect to refundable investment tax credits. RPC is attempting to appeal from a nil assessment of federal tax. In Bowater Mersey Paper referred to above, the Minister appealed to the Federal Court of Appeal from a decision of the Federal Court-Trial Division. Upon delivering the judgment of the Court, Pratte J. stated at page 161 (D.T.C. 5383):

This appeal, in my view, must succeed. The reassessments of March 6, 1984, were reassessments of the totality of the tax payable by the respondent for 1981 and 1982. They, therefore, replaced prior assessments that had been made for those years. Those prior assessments were no longer in existence and could not, for that reason, be the subject of an appeal.

. . .it is simply untrue that the rule in Abrahams does not apply in cases where, in spite of the reassessment, the taxpayer retains an interest in the solution of an issue relating to a prior assessment. This presupposes that a taxpayer may appeal from alleged errors made by the Minister in calculating the tax owed by him. There is no such right of appeal. The right of appeal that exists is from the result of the calculation made by the Minister, not from those calculations.

[Emphasis added.]

For RPC, the result of the calculations made by the Minister is that no federal tax is payable. If RPC had a valid appeal, I would dismiss it consistent with my decision in the appeals of Messrs. Milne, Knab and Streifel. But even if I were to allow the RPC appeal, the corporation could not achieve any financial relief in 1985 because its federal tax cannot be reduced below nil. As the appellants’ counsel conceded in argument, a successful appeal by RPC would only defer until after 1985 the application of its 1988 loss in the computation of taxable income. The right of RPC to deduct the amount of $226,000 in 1985 may be argued as a collateral issue when its 1988 loss would otherwise be applied in the computation of taxable income for some taxation year after 1985. The purported appeal of RPC is quashed.

Because these appeals were heard together on common evidence, and because there was only one issue affecting all four appeals, the respondent is entitled to costs as if there were only one appellant except that, if more than one person was examined for discovery, costs related to examinations for discovery are awarded in accordance with the number of persons examined.

Appeals dismissed.