Estate of the Late Aileen Chadwick v. Her Majesty the Queen (Informal Procedure), [1994] 1 CTC 2628

Bowman, J.T.C.C.:—This appeal is from a reassessment for the 1991 taxation year under which the late Mrs. Chadwick was treated on having received a dividend on the redemption of her shares rather than a capital gain on the sale thereof.

At the conclusion of argument on Friday, March 4, 1994 ! informed Mr. Chadwick, executor of the estate of the late Aileen Chadwick, that I did not believe that I could grant him any relief and that I had no alternative but to dismiss the appeal.

On reflection I have concluded that in so doing I was wrong. Until a formal judgment is actually signed and issued I am entitled to dispose of the matter differently from that in which I indicated I was prepared to do at the conclusion of the hearing. See: Shairp v. The Queen, [1988] 2 C.T.C. 344, 88 D.T.C. 6484 (F.C.A.); Fernandez v. M.N.R., [1991] 1 C.T.C. 2211, 91 D.T.C. 182 (T.C.C.).

The facts are relatively simple. The late Mrs. Chadwick owned redeemable preferred shares in a public company, Kelsey-Hayes Canada Ltd. In connection with a proposed corporate amalgamation she received an offer to purchase her shares by a subsidiary of the Canadian company's parent. The offer, dated December 7, 1990 stated:

Shareholders who elect to sell their redeemable preferred shares pursuant to the offer will receive capital gains treatment for Canadian income tax purposes on the disposition of their shares.

If you intend to accept the offer to purchase, you must complete and return to National Trust Co. the letter of transmittal accompanying this circular together with certificates for your common shares by 5:00 p.m. on January 23, 1990; you will still be entitled to vote on the proposed amalgamation and to receive the 15¢ per share dividend payable on January 7,1991 notwithstanding your acceptance of the offer. If you do not validly accept the offer your redeemable preferred shares will be redeemed. In order to receive a cheque for the redemption price of you shares you must complete and return to National Trust Co. the redemption letter accompanying this circular together with certificates for your common shares.

A summary of the transaction in a circular accompanying the offer contained the following additional statement:

The sole purpose of the offer by K-H Acquisitions to purchase the redeemable preferred shares is to permit public shareholders to obtain capital gains treatment instead of the deemed dividend tax treatment which would result on the redemption of the redeemable preferred shares. Shareholders who accept the offer should receive capital gains treatment on the sale of their redeemable preferred shares and may be entitled to use the $100,000 cumulative lifetime capital gains exemption. On the redemption of redeemable preferred shares, shareholders will generally be deemed to have received a taxable dividend of $19.83 per share. In the case of an individual shareholder, such taxable dividend must be included in his income subject to the usual gross-up and dividend tax credit rules applicable to dividends from taxable Canadian corporations. In addition to a deemed dividend, individual holders of KHC common shares will recognize a capital loss to the extent that the adjusted cost base of their KHC common shares exceeds the paid up capital of the redeemable preferred shares. However, capital losses are only deductible against capital gains.

Mrs. Chadwick accepted the offer to sell her shares and sent her shares to National Trust Co. by registered mail on January 9, 1991. She was paid $1,200 for the shares.

It is clear that her acceptance of the offer to purchase her shares was complete when she sent her shares to National Trust Co. on January 9,1991 and at that point all of the elements necessary to create a valid and binding contract of purchase and sale were present: Carlill v. Carbolic Smoke Ball Co., [1893] 1 Q.B. 256. For some reason National Trust sent a T5 slip to her and to the Department of National Revenue and no one was prepared to acknowledge that a mistake had been made. Once Mrs. Chadwick accepted the offer nothing that either Kelsey-Hayes Canada Ltd. or National Trust Co. could do could alter the legal relationship that her acceptance created.

It is clear that in treating her sale of the shares as a redemption giving rise to a deemed dividend rather than as a sale giving rise to proceeds of disposition and therefore a capital gain either National Trust Co. or Kelsey-Hayes Canada Ltd. made a mistake and treated the transaction in a manner that did not reflect its true nature. Her actions in accepting the offer to sell the shares and in sending in the shares are consistent only with a sale and not a redemption. Having made the mistake of treating the sale of the shares as a redemption and of erroneously issuing a T5 slip National Trust Co. refused to acknowledge the mistake.

The amount involved is not large but it would be patently unfair to tax this small shareholder because an error was made by either Kelsey-Hayes Canada Ltd. or National Trust Co.

The appeal is allowed and the assessment for 1991 referred back to the Minister of National Revenue for reassessment on the basis that the $1,200 received by Mrs. Chadwick on the sale of her shares represented proceeds from the sale of her shares giving rise to a capital gain and did not represent the proceeds from the redemption of shares giving rise to a deemed dividend.

Appeal allowed.