Richard W Jarvis v. Minister of National Revenue, [1981] CTC 2153, 81 DTC 89

The Chairman:—The appeal of Richard W Jarvis for an income tax assessment by which the Minister of National Revenue computed the appellant’s taxable capital gain resulting from the sale of 500 shares of Central Farm Supply (Brantford) Limited as being $2,257.83 and $2,297.38 for the 1975 and 1976 taxation years respectively.

There are two issues in this appeal; the first is relative to the adjusted cost base used by the appellant in computing the amount of taxable capital gains reported in his 1975 and 1976 tax returns, which resulted from the sale of shares in 1974; the second issue is whether or not the appellant’s spouse owned half of the shares sold by the appellant and should, as claimed by the appellant, have been assessed for half of the taxable capital gain resulting from the sale.

Summary of Facts:

The evidence is that the appellant for over 30 years operated a farm implement business, later, in 1961 he commenced a wholesale small parts business operating under the name of Central Farm and Garden Supply. In January 1972, both enterprises were merged into and incorporated under the name of Central Farm (Brantford) Supply Limited.During all these years the appellant’s spouse worked full time for her husband’s businesses as secretary without remuneration and made a significant contribution to the success of the business. She also acted as a director of the company.

Prior to the incorporation of Central Farm Supply (Brantford) Limited, the closing balance sheet of Central Farm and Garden Supply shows that the only partners in the enterprise were the appellant and Mr Don Cowherd, each holding a /2 interest, (Exhibit R-1). This relationship existed in the newly incorporated Central Farm Supply (Brantford) Limited in which 1,000 common shares were issued for $1,000, (Exhibit R-2).

Mr Cowherd owned 500 shares, the appellant owned 499 shares and the appellant’s spouse owned 1 share, qualifying her to act as director of the company. No further shares were issued or allotted.

In July of 1974, the appellant and his spouse agreed to sell their 500 shares in Central Farm Supply (Brantford) Limited to Mr Cowherd for $75,087.58 and according to the terms of the sale contract the appellant received $5,000 in 1975 and $5,087.58 in 1976.

In computing his income for 1974, the appellant used an adjusted cost base of $56,708.00 and declared a taxable capital gain of $9,435.35. On that basis the appellant declared a taxable capital gain of $611.71 in 1975 and $622.42 in 1976. (There is no dispute as to the reserves taken by the appellant).

In assessing the proceeds of disposition of the shares, the Minister of National Revenue computed the capital gain, using an adjusted cost base of $500, the alleged cost to the taxpayer of his 500 shares of Central Farm Supply (Brantford) Limited. With appropriate reserves the Minister of National Revenue arrived at a taxable capital gain of $2,257.83 for 1975 and $2,297.38 for 1976.

Conclusion:

The appellant was concerned as to why the Minister used an adjusted cost base of $500 rather than the $56,708.08 used by the appellant in the computation of his capital gain. The answer, as suggested by counsel for the respondent, is that what was disposed of in 1974 were the appellant’s shares in Central Farm Supply (Brantford) Limited. The only additional cost to the appellant in January of 1972 was $500 which was deducted from the proceeds of disposition of the shares. The capital gains were therefore properly computed by the Minister.

The second issue about which the appellant felt very strongly was that his spouse had contributed so much to the success of his business that she deserved to be considered as half-owner of his shares. The Board has no reasons to doubt this allegation and indeed accepts the evidence that the appellant’s spouse contributed substantially to the appellant’s business. However, there is no evidence that the appellant’s spouse had legal title to any shares other than the one qualifying share in Central Farm Supply (Brantford) Limited. Neither the closing balance sheet of Central Farm Supply (Brantford) Limited and Central Farm and Garden Supply nor opening balance sheet of Central Farm Supply (Brantford) Limited, attributes any other shares to the appellant’s spouse. It is rather surprising that the professional advice allegedly received by the appellant at the time of incorporating Central Farm Supply (Brantford) Limited did not take the spouse’s contribution to the company into account.

However unfair it may appear to be to the appellant’s spouse, there is no legal basis on which this Board would be justified in concluding that the appellant held anymore than a qualifying share in Central Farm Supply (Brantford) Limited.

For these reasons and regretfully so, I have no alternative but to dismiss the appeal.

Appeal dismissed.