Charles Acton-Bond v. Her Majesty the Queen, [1994] 1 CTC 2640

Sarchuk, J.T.C.C. (orally):—These appeals concern assessments of tax with respect to the appellant’s 1986 and 1987 taxation years. In assessing the appellant for the 1986 taxation year, the Minister of National Revenue included in income an amount of $36,240.05 as determined by the net worth method, plus $2,004.89 in penalties.

In addition, the 1986 assessment added to income the amount of $50,000, representing an indirect payment or transfer within the meaning of subsection 56(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), or as a benefit conferred on the appellant qua shareholder of Rideau Manor Marina Ltd. pursuant to subsection 15(1) of the Act.

In assessing the appellant for the 1987 taxation year, the Minister included in the appellant’s income the amount of $15,948.01 determined by the net worth method plus $1,259.98 in penalties.

At the commencement of the trial, counsel filed a consent to judgment dated June 7, 1993, dismissing the appeal with respect to the 1987 taxation year. With respect to the 1986 taxation year, the appellant consents to judgment against him insofar as it relates to the income included by way of the net worth assessment and the penalties imposed in respect thereto. Thus the sole remaining issue reflects the Minister's inclusion in the appellant’s income of the amount of $50,000 as an indirect payment or benefit conferred by Rideau Manor.

Put simply, the appellant’s position is that the $50,000 was neither a benefit conferred on him by Rideau Manor nor an amount received by him qua shareholder pursuant to subsection 15(1) of the Act. Similarly, it was not an indirect benefit within the meaning of subsection 56(2) of the Act.

Counsel for both parties also advised that the following facts were not in issue:

(a) the appellant, in reporting his income for the 1986 and 1987 taxation years, did not include all of tne income received by him in those years;

(b) the appellant was, at all material times, an officer and director of, and owned 50 per cent of the shares of the company;

(c) the appellant’s brother, Michael Acton-Bond, owned the remaining shares of the company;

(d) the appellant and his brother were members of a related group that controlled the company within the meaning of subparagraph 251 (2)(b)(ii) of the Income Tax Act;

(e) Minnie Acton-Bond, the mother of both the appellant and Michael Acton- Bond, was, to the date of transfer hereinafter referred to in subparagraph (f), the owner of approximately 1.72 acres of land located at Manotick, Ontario;

(f) on or about September 2, 1986, the company and Minnie Acton-Bond sold certain lands and personal property, including the lands referred to in subparagraph (e) above, to one Peter Hurst, in trust, for total consideration of $1,050,000 ("the transaction");

(g) Minnie Acton-Bond's sole contribution to the transaction was the lands referred to in (e) above;

(h) the fair market value of the lands contributed by Minnie Acton-Bond as at September 2, 1986 was $125,000;

(i) Minnie Acton-Bond received, on the closing of the transaction on or about September 2, 1986, proceeds of $175,000 for the lands referred to in (e) above;

(j) on or about September 3, 1986, Minnie Acton-Bond transferred $50,000 to each of the appellant and Michael Acton-Bond;

(k) Minnie Acton-Bond, in filing her return of income for the 1986 taxation year, reported proceeds from the sale of the lands referred to in (e) above of $75,000.

The issues to be decided were set out by counsel as follows:

(a) whether as a consequence of the transaction, there was a payment or transfer of property made pursuant to the direction of or with the concurrence of the appellant to Minnie Acton-Bond for the benefit of the appellant, or as a benefit the appellant desired to have conferred on Minnie Acton-Bond which payment or transfer would have been included in the appellant’s income for the 1986 taxation year had it been made to him; or

(b) whether the appellant received in his 1986 taxation year qua shareholder a benefit of $50,000 within the meaning of subsection 15(1).

The evidence

Only one witness was heard, that is the appellant Charles Acton-Bond. He testified that Rideau Manor and Minnie Acton-Bond each owned a parcel of land upon which Rideau Manor operated a marina. This marina included a restaurant, building and fixtures as well as the normal accoutrements of a marina, such as dock slips, a marina railway, gas pumps and so forth.

In 1986 Peter Hurst tendered a joint offer to purchase the business and both parcels of land for a total price of $1,050,000. Mrs. Acton-Bond insisted that she receive $175,000 for her parcel. The appellant testified that for several years prior to the Hurst offer, efforts had been made to sell the marina, and that all through this period his mother made it quite clear that as far as she was concerned this was the value of her property.

It was equally clear to the appellant, and by extension to Rideau Manor, that she could have refused to sell if her price was not met and the transaction could have fallen through. Rideau Manor was intent on selling, thus notwithstanding that the appellant and his brother believed the amount demanded by her was in excess of the actual value of her interest, they decided to—and caused Rideau Manor to agree to this allocation.

Mrs. Acton-Bond, upon completion of the transaction on September 2, 1986, received her share of the proceeds of sale in the amount of $175,000. On or about September 3, 1986, she transferred $50,000 to each of the appellant and his brother Michael. The appellant deposited this amount into an account held in the name of Bond Marine Contracting Ltd., a company of which he was the principal shareholder. With respect to the amount received from his mother, he said this was an unexpected gift, but asserted that this was something his mother had wanted to do all her life.

In her return of income for the taxation year, Mrs. Acton-Bond included, as proceeds of disposition, the amount of $75,000. The appellant testified he was not aware of his mother's intentions, nor was he aware of the manner in which she reported her income.

Analysis

First as to the respondent's position that the amount was a benefit to the appellant pursuant to subsection 15(1) of the Act. This subsection provides:

15 (1) Where in a taxation year

(a) a payment has been made by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction;

(b) funds or property of a corporation have been appropriated in any manner whatever to, or for the benefit of, a shareholder, or

(c) a benefit or advantage has been conferred on a shareholder by a corporation,

the amount or value thereof shall, except to the extent that it is deemed to be a dividend by section 84, be included in computing the income of the shareholder for the year.

The evidence does not support a conclusion that Rideau Manor made a payment to the appellant or that a benefit had been conferred on him qua shareholder. Subsection 15(1) of the Act was not vigorously asserted by the respondent and indeed was for all practical purposes, abandoned at trial. In my view this was the correct choice to make.

I turn next to subsection 56(2) of the Act. This subsection provides:

56 (2) A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer’s income to the extent that it would be if the payment or transfer had been made to him.

Appellant's submissions

Counsel for the appellant argued that the purpose of subsection 56(2) was described by Mr Justice Dickson of the Supreme Court of Canada in McClurg v. The Queen, [1990] 3 S.C.R. 1020, [1991] 1 C.T.C. 169, 91 D.T.C. 5001. At page 1051 (C.T.C. 183, D.T.C. 5011), Dickson, C.J., referred to the following comment of Strayer, J., and I quote:

Two important qualifications are noted here: the first is that the taxpayer seek "to avoid receipt” of funds, presumably funds that would otherwise be payable to him; and the second is that the concept of payment of a "benefit" is contrasted to payments for adequate consideration.

Dickson, C.J., then commented at page 1051 (C.T.C. 183-84, D.T.C. 5011):

In my opinion, the views of Thurlow, J. and Strayer, J. provide a sound foundation for the interpretation of subsection 56(2). The subsection obviously is designed to prevent avoidance by the taxpayer, through the direction to a third party, of receipts which he or she otherwise would have obtained. I agree with both Thurlow, J. and Strayer, J. in their characterization of the purpose of the section and, specifically, I concur with their view that the section reasonably cannot have been intended to cover benefits conferred for adequate consideration in the context of a legitimate business relationship.

Counsel for the appellant submitted that to infringe subsection 56(2), "the benefit conferred must be one that would otherwise be income in a taxpayer's hands”. In this case the allocation to Mrs. Acton-Bond, had it not been made, would only result in greater income to Rideau Manor and not the appellant.

Counsel also contended that the purpose of subsection 56(2) was to ensure that payments, otherwise receivable by a taxpayer, are not diverted to third parties as avoidance measures. He argued that this had not occurred as the amounts in question were not otherwise receivable by the appellant.

Respondent's submissions

It was argued that the benefit derived by the appellant was similar to that received by the taxpayer in Kieboom v. M.N.R., [1992] 2 C.T.C. 59, 92 D.T.C. 6382, a decision of the Federal Court of Appeal. Paraphrasing a passage at pages 71 and 72 of the report of the Kieboom proceedings and modifying it to describe the facts in the present appeal, counsel for the respondent said, and I quote:

Here Mr. Acton-Bond has arranged for his company to allocate to his mother in such a way that the value of his own and his brother’s shares was reduced and that interest of corresponding value was created in his mother. It was undoubtedly hoped that this indirect conferral using the corporate forum would reduce Mr. Acton-Bond's tax burden.

Counsel conceded that Kieboom, supra, dealt with section 245 of the Act, however he reconciled this by stating that subsection 56(2) of the Act is a more particularized anti-avoidance provision than subsection 245(2) of the Act.

In support of his proposition, counsel also relied on Outerbridge Estate v. Canada, [1991] 1 C.T.C. 113, 90 D.T.C. 6681 (F.C.A.) (sub. nom Winter et al. v. M.N.R.) (a decision which incidentally predates McClurg), wherein Marceau, J. speaking for the Court said at page 117 (D.T.C. 6684):

it is generally accepted that the provision of subsection 56(2) is rooted in the doctrine of “constructive receipt" and was meant to cover principally cases where a taxpayer seeks to avoid receipt of what in his hands would be income by arranging to have the amount paid to some other person either for his own benefit (for example the extinction of a liability) or for the benefit of that other person (see the reasons of Thurlow, J. in Miller v. M.N.R., [1962] C.T.C. 199, 62 D.T.C. 1139 (Ex. Ct.), and of Cattanach, J. in Murphy v. The Queen, [1980] C.T.C. 386, 80 D.T.C. 6314 (F.C.T.D.).

Counsel contends that it is not a requirement of subsection 56(2) that the person sought to be taxed is necessarily entitled to the funds upon which tax is imposed.

In his review of the facts, counsel for the respondent also questioned the accuracy of the assertions made by the appellant and whether the appellant had prior knowledge of Mrs. Acton-Bond's intention to transfer the sum of $50,000 to nim. He argued that on the evidence, the issue of credibility ought to be determined against the appellant.

Conclusion

I am satisfied that the appellant’s position must prevail. Counsel for the respondent conceded that had this been an arm's length transaction, Mrs. Acton- Bond's approach would have amounted to nothing more than hard-nosed bargaining. But, as I understood him, in this case the relationship itself negated the possibility of real bargaining and that was sufficient to have the Minister invoke an anti-avoidance provision. On the facts the respondent's position cannot be sustained.

This was an unusual transaction and it must be assessed on its own peculiar facts and on the specific events which took place. Rideau Manor and Mrs. Acton- Bond each owned a piece of property upon which Rideau Manor carried on a business, rather unsuccessfully I might add. Mrs. Acton-Bond had her price for the property, a price which on the evidence she had apparently determined before the sale. Rideau Manor was insistent on selling the operation as a going concern; but without her involvement, her approval, its objective might have been frustrated.

On the evidence it was obvious that she was unwilling to move from her price. As the appellant noted:

While she is not an ignorant person, she was a school teacher all her life, she was retired at the time, she’d invested a lot of money in the property and she felt that that was what the property was worth.

Thus it would appear that to achieve its desired end, Rideau Manor paid what may best be described as a premium in order to obtain her approval.

I appreciate that much rests on the appellant’s assertion that the decision to allocate the amount of $175,000 to Mrs. Acton-Bond was a reasonable business decision by Rideau Manor in the circumstances. In this context I have reviewed Mr. Acton-Bond's testimony, several times as a matter of fact. It was not of itself improbable, nor was there any substantial contradiction of his primary assertions. Although his responses were occasionally facile and raised some doubt, his credibility on the whole was not weakened demonstrably by cross-examination.

On balance, I concluded that it would be improper to reject his testimony on a basis that would be tantamount to rejecting it out of hand. I have therefore concluded that the allocation of the proceeds of disposition between Rideau Manor and Mrs. Acton-Bond did not come about because of the non-arm’s length relationship. Rather, it resulted from the separate economic interests of Rideau Manor and Mrs. Acton-Bond which reflected ordinary commercial dealing between parties acting in their separate interests.

As counsel for the appellant put it, “Mrs. Acton-Bond drove a hard bargain”, as she was entitled to, I might add. That being the case, it cannot be said that the payment, or part of it, constituted a benefit to the appellant or that he desired to nave conferred on his mother.

While that effectively disposes of the issue before me, I feel obliged to note that there is some substantial merit to the comments of Marceau, J., that subsection 56(2) should only or might only apply if the amount of the benefit is not taxable in the hands of the transferee. As he noted at page 117 (D.T.C. 6684) of the Outerbridge decision, supra, and I quote:

It seems to me, however, that when the doctrine of “constructive receipt” is not clearly involved, because the taxpayer had no entitlement to the payment being made or the property being transferred, it is fair to infer that subsection 56(2) may receive application only if the benefit conferred is not directly taxable in the hands of the transferee.

And then he added at pages 117-18 (D.T.C. 6684):

So, I agree that the validity of an assessment under subsection 56(2) of the Act when the taxpayer had himself no entitlement to the payment made or the property transferred is subject to an implied condition, namely that the payee or transferee not be subject to tax on the benefit he received.

It seems to me that tax avoidance provisions are aimed at preventing the avoidance of tax payable on a particular transaction.

In these circumstances, the money was taxable in the hands of Mrs. Acton- Bond as proceeds of disposition of her property. The fact that she did not declare this amount as income and include it in her return, does not in the present circumstances make it taxable in the appellant's hands.

I add only that her understatement of income is for the Minister to deal with under other provisions of the Income Tax Act as perhaps he should have.

The appeal is therefore allowed, with costs to the appellant. These costs will be taxed and they will obviously apply only to the issue that was heard by the Court.

Appeal allowed.