Strager Securities Limited v. Minister of National Revenue, [1986] 2 CTC 2050, 86 DTC 1507

Bonner, T.C.J.:—Prior to its 1979 taxation year the appellant owned a 438- acre part of a farm. In that year it and the owners of the remainder sold the farm to a corporation. The appellant realized a capital gain on the sale. Its share of the consideration included approximately 8,000 cumulative, redeemable, non-transferable, preferred shares issued by the purchaser. Those shares were to be redeemed over a ten-year period at a redemption price of $100 each.

In its income tax return for the 1979 taxation year the appellant, in computing the gain from the disposition of the land, claimed a reserve under subparagraph 40(1)(a)(iii) of the Income Tax Act in respect of an amount arrived at by multiplying the redemption price by the number of preferred shares which it had received. The respondent disallowed the reserve on the basis that the shares were not “. . . the proceeds of disposition of the property that are not due to him until after the end of the year . . .” within the meaning of subparagraph 40(1 )(a)(iii). The sole issue is whether the respondent was correct in doing so.

Paragraph 40(1)(a), in the form applicable to dispositions made before November 12, 1981, reads:

40(1) Except as otherwise expressly provided in this Part

(a) a taxpayer’s gain for a taxation year from the disposition of any property is the amount, if any, by which

(i) if the property was disposed of in the year, the amount, if any, by which his proceeds of disposition exceeds the aggregate of the adjusted cost base to him of the property immediately before the disposition and any outlays and expenses to the extent that they were made or incurred by him for the purpose of making the disposition, or

(ii) if the property was disposed of before the year, the amount, if any, claimed by him under subparagraph (iii) in computing his gain for the immediately preceding year from the disposition of the property,

exceeds

(iii) such amount as he may claim, not exceeding a reasonable amount as a reserve in respect of such of the proceeds of disposition of the property that are not due to him until after the end of the year as may reasonably be regarded as a portion of the amount determined under subparagraph (i) in respect of the property; . . .

The agreement of purchase and sale, after setting forth the purchase price of the land and making reference to a deposit to be credited towards the purchase price on completion, provides in part as follows:

2. Purchaser agrees to pay the balance of the purchase price as follows:

(a) As to $1,400,000.00, by the Purchaser allotting and issuing to the Vendor 14,000 $6.25 cumulative redeemable Series C Second Preferred Shares of the Purchaser having substantially the attributes set out in Schedule A attached hereto; . . .

The Articles of the purchaser set forth the attributes of the preferred shares as follows:

9.4 Redemption rights — Subject to the provisions of subsection 34(2) of the Act and to the provisions of sections 4.10, 6.7, 7.9 and 9.8, upon giving notice as hereinafter provided the Corporation, pursuant to resolution of the directors, may at its option at any time redeem by call the whole or from time to time any part of the then outstanding series C Second Preferred Shares at a price for each such share to be redeemed of an amount equal to $100 plus all unpaid accrued preferential dividends thereon, which for such purpose shall be treated as accruing from day to day to the date of such redemption. . . .

9.7 Compulsory redemptions — Except as hereinafter provided and subject to the provisions of section 34(2) of the Act and to the provisions of sections 4,10, 6.7, 7.9 and 9.8, the Corporation shall redeem in accordance with the provisions of sections 9.4 and 9.5:

(a) on or before the last day of December in each of the years 1980 to 1988 both inclusive (‘partial redemption dates’) 980 Series C Second Preferred Shares or such lesser number thereof as are then outstanding; and

(b) on or before the last day of December, 1989 (the ‘final redemption date’) all Series C Second Preferred Shares then outstanding.

If the number of Series C Second Preferred Shares required to be redeemed on any partial redemption date exceeds the number of such shares which the directors determine the Corporation is then permitted to redeem pursuant to these provisions and applicable law, the number of such shares which the Corporation is not then permitted to redeem shall be added to the number of Series C Second Preferred Shares which the Corporation is required to redeem on the next partial redemption date. . . .

The argument advanced on behalf of the appellant rests on the premise that it is the money which becomes payable when the shares are redeemed which constitutes the proceeds of disposition of the land. The argument proceeds from that point to emphasize the similarities between the result achieved by the preferred shares and the result which might have been achieved had the purchase price been payable by instalments over the same period as called for in the schedule for redemption of the shares. In this regard emphasis was placed on the fixed value, non-participating nature of the shares and on the fixed rate of return. Counsel pointed out that the appellant was incapable of enforcing payment of the proceeds of redemption of the shares in advance of the scheduled redemption times. Accordingly, it was said that the shares created a form of proceeds of disposition not due until the scheduled time for redemption and that they were therefore properly the subject of a paragraph 40(1 )(a) reserve.

This argument, in my view, rests on a faulty premise. The moneys which the appellant is entitled to receive when the shares are redeemed are the proceeds of redemption of the shares. Such moneys are not the ". . . proceeds of disposition of the property .. .”, namely the land which has been sold at a gain. The agreement of purchase and sale makes it quite clear that the preferred shares were to be allotted and issued upon completion of the sale of the land as a part of the consideration for the sale of the land. Furthermore, it must be noted that after all that had been done no part of the proceeds of disposition of the land remained “due”. There is, in my view, a substantial distinction between an arrangement of the sort under consideration in this case and its supposed equivalent, one in which the sale price of the land is payable in instalments over a period of time. The appellant, as a result of the sale, became a shareholder of the purchaser. As vendor of the land it did not become a creditor of the purchaser in relation to the purchase price. Indeed, even as shareholder it did not become a creditor of the purchaser. Nothing was "due" to the appellant following completion of the sale.

For the foregoing reasons the appeal will be dismissed.

Appeal dismissed.