Maxwell Janes v. Minister of National Revenue, [1981] CTC 2622, 81 DTC 577

The Assistant Chairman:—By reassessments, one for each of the 1974 to 1977 taxation years inclusive, the respondent added to the income of the appellant (hereinafter called “Janes” or the “appellant”) the sums of $6,959, $7,505, $9,591 and $10,312 respectively, all of which reassessments were made on the 14th day of November, 1979. Having followed the objection procedure as set forth in the Income Tax Act, and following confirmation of the said reassessments, the appellant appealed to this Board.

The issue in the appeal is whether the appellant received a benefit or advantage within the meaning of paragraph 15(1 )(c) of the said Income Tax Act after tax reform from a corporation of which he was a shareholder. The relevant portion of that section reads as follows:

Where in a taxation year

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

the amount or value thereof shall be included in computing the income of the shareholder for the year.

For some time prior to 1973 the appellant had been employed by a corporation named London, New York and Paris Association of Fashion Limited (hereinafter referred to as “London”). Prior to 1974 all the shares in London had been beneficially owned by two Goldstone brothers. The appellant, for at least some few years prior to 1974, was a registered shareholder of London so that it would have, pursuant to the Newfoundland Companies Act, RSN 1970, c 55, the requisite number of directors and shareholders. In the late 60s the appellant was either a manager of a branch store of London or a manager of a section within a store, the overall manager at that time was a Mr Price, a son-in-law of one of the Goldstone brothers. Around 1969, Mr Price tried to bring together a group of people, including himself and the appellant and other managers like the appellant, to buy out the Goldstone brothers. At that time the appellant stated he owned a term life insurance policy having a face value of $100,000 on which he paid the premium. When there was a possiblity that Mr Price’s efforts would be successful, the appellant took out a further term life policy for $200,000. He also paid the premium on this policy.The Price proposition was not successful and it was abandoned. Mr Price then (about 1972) left London, and one of the Goldstone brothers assumed control. The appellant at this time became the manager of London. After the Price proposal collapsed, the appellant himself began to consider acquiring all the shares of London from the Goldstone brothers and commenced to work towards this goal.

To acquire the shares of the Goldstone brothers, the appellant had to pay $1,400,000 and at that time, in the appellant’s words, he had no cash and his total assets may have been worth $200,000. The appellant approached London’s banker, the main branch of the Canadian Imperial Bank of Commerce in St John’s (hereinafter referred to as the “Bank”), to ascertain whether or not he could obtain a loan for the requisite amount and, if so, on what terms. In summary fashion he was told that the bank would loan $1,200,000 only and also what the conditions of such a loan were. The appellant then approached a supplier of London and some of his friends, and those two groups loaned him $200,000 on the same terms and conditions as the bank required. This sum in fact was put in a term deposit in the bank and the bank then loaned the sum required when the conditions were satisfied. From the appellant’s point of view, he caused to be incorporated a corporation called Marc Holdings Ltd (hereinafter referred to as “Marc”). This company was to acquire (and did acquire) all the shares of London. The appellant apparently was the only beneficial shareholder of Marc although, once again to comply with the Newfoundland Companies Act, two members of his family were shareholders and directors.

The bank made the loan on certain conditions, the main conditions being:

(a) a debenture issued by London for $1,800,000;

(b) the loan be guaranteed by London;

(c) all of London’s shares be assigned to the bank; and

(d) there be insurance on the life of the appellant for $1,000,000, all of which was to be assigned to the bank.

The appellant took out a further policy of $700,000 and it and the other two policies were assigned by him to the bank. All these policies were term policies. All the conditions were met and the loan was made and the shares acquired by Marc. For the years in question the premiums on all policies were paid by London. Since the policies were term policies, the premiums increased each year. A witness of the bank made it clear that, had insurance in the sum of $1,000,000 not been assigned to the bank, there would not have been a loan. The appellant was the key man to London and if he died there was no one to run it. The accountant for London stated that the premium London paid on the policies was not charged as an expense in arriving at London’s net profit for any of the four years under appeal. While Marc actually was the registered shareholder of London, it was admitted that really Marc was the appellant. There is no dispute then that section 15 might operate against the appellant if the other requirements of the section are satisfied.

The main submission of the appellant was that if, by the whole transaction, any benefit was conferred on anyone, the one on whom the benefit was conferred was the bank. The bank held the polcies. By the assignment it would be the person to whom the insurance company (or companies) would pay the contract price if they were required to pay. If anyone was to gain by the insurance polcies, it was the bank and the policies were for the bank’s benefit and not the appellant’s benefit.

Counsel for the appellant submitted alternatively that if there was a benefit to the appellant, which he does not admit, then to get the benefit there was an equal expense which was deductible pursuant to paragraph 18(1 )(a) of the Act in that there was an expense to earn income from property.

In support of his submission, counsel for the appellant referred to three decisions, namely, Equitable Acceptance Corporation Limited v MNR, [1964] CTC 74; 64 DTC 5045, a decision of Mr Justice Cattanach; Rousseau Metal Inc v MNR, [1979] CTC 2681; 79 DTC 467; and Côté-Reco Inc v MNR, [1980] CTC 2019; 80 DTC 1012, both decisions of Mr Tremblay of this Board. In the former case the disallowance of insurance premiums paid on the life of the president of a company was confirmed while in the latter two cases, in similar circumstances, the appeals were allowed. Counsel submitted that since London did not endeavour to deduct the premiums as an expense in determining its net profit there would be no benefit to the appellant.

As to the latter point, counsel for the respondent submitted that whether or not the premiums were deducted by the company is irrelevant in determining whether or not there has been a benefit conferred by London on the appellant. With this I agree.

In so far as the benefit, if one, being set off against the expense of the premium, counsel for the respondent took the position that money was not laid out by the appellant and even if it were it would not be deductible as it was not laid out to gain or produce income from a business or property. With this submission I agree.

Counsel for the respondent’s submission was that, by London paying the premiums, there clearly was a benefit conferred on the appellant as he was a shareholder of London. He continued and stated what that benefit was — with the policy of insurance and the payment of the premium by London (together with other collateral to the Bank), the appellant gained the ability to acquire and did acquire all the shares of London, with which he could do as he willed (and he did by having them registered in the name of Marc), subject of course to the terms imposed by the bank. After the transaction was completed the appellant owned the shares of London but they were assigned to the bank as security while the loan was outstanding. The whole arrangement was that once the bank loan was discharged the appellant would own the shares of London free and clear (of course subject to what transpired after the transaction). While the appellant did not die nor was the face value of the insurance paid, had he died the effect would have been that the bank loan would be virtually retired by the payment of the insurance policies and so his estate would own the shares enencumbered.

The position taken by the respondent is strengthened by the decision of the Federal Court of Appeal in the case of Guilder News Company (1963) Limited et al v MNR, [1973] CTC 1; 73 DTC 5048, which also was an appeal concerning a benefit. As to the facts in that case, the Chief Justice stated:

.. . For the purpose of stating my views with reference to the merits of the appeals, I can summarize the facts that are directly in point, very briefly, in a way that is applicable to each of the appeals, as follows:

1. In 1962 an indivdual sold to a company, whose stock all belonged to him,

shares in other companies for a price substantially below actual value.

2. In 1964, the company resold the shares, whose value had not changed since 1962, to the individual at the same price under an agreement containing the following clause:

4. It being the intention of the Vendor and the Purchaser that the prices herein stipulated should represent the fair market value of the shares being purchased and sold herein, the parties hereto agree that in the event that the Minister of National Revenue should at any time hereafter make a final determination that the fair market value of the said shares as of the date of the Agreement is less than or greater than the prices herein stipulated, the prices herein stipulated shall be automatically adjusted nunc pro tunc to conform with such fair market value as finally determined and all necessary adjustments shall be made, including adjustment of the above mentioned promissory note.

And at [5053] the Chief Justice continued:

That sale is at a substantial undervaluation and, except in a certain event, it will continue indefinitely to be so. Even if that event should arise at some subsequent time, the individual will have had the benefit of not having had to pay the amount in excess of the “price” until that subsequent time and this, in days of high interest, can be substantial benefit.

It is important to have in mind that the question of “benefit” or no “benefit”, in a case such as this, must be determined as of the time immediately after the sale. Immediately after the 1964 sale, in these cases, the individual had the shares for which he had paid an amount obviously less than their value and he had assumed an obligation that, in a certain event, he would, at some time in the future pay an amount equal to the difference between price and that value. Clearly, his position just after the 1964 sale was an improvement over his position just before that sale. He had something worth substantially more than he had paid for it and there was only a possibility that he might have to pay the difference and, if that eventuality should arise, the difference would not have to be paid until some time in the future.

In the words of the Chief Justice, the appellant’s position after the transaction had clearly improved from what it was before. Before he owned no shares, now he owns all, subject of course to a pledge to the bank. That change in position is a benefit.

The result is judgment will go dismissing the appeal.

Appeal dismissed.