Her Majesty the Queen v. Louis Bisson, [1978] CTC 332, 78 DTC 6224

Walsh, J:—This is a petition seeking an order by virtue of subsection 174(3) of the Income Tax Act joining Jacques Gaston Bisson and Georges Bisson to the proceedings in order to determine the following question:

what was the distribution of common shares of the share capital of Western Quebec Investments Ltd between the shareholders Louis Bisson, Jacques Gaston Bisson and Georges Bisson immediately before the agreement between them dated January 8th, 1972.

(b) the determination of the said question.

(c) an order to the effect that Louis Bisson, Jacques Gaston Bisson and Georges Bisson will be bound by this determination.

(d) such other order as this Honourable Court will make concerning the determination of the question and the necessary proof for this purpose.

Section 174 of the Income Tax Act reads in part as follows:

174. (1) Where the Minister is of the opinion that a question of law, fact or mixed law and fact arising out of one and the same transaction or occurrence or series of transactions or occurrences is common to assessments in respect of two or more taxpayers, he may apply to the Tax Review Board or the Federal Court—Trial Division for a determination of the question.

(2) An application under subsection (1) shall set forth

(a) the question in respect of which the Minister requests a determination,

(b) the names of the taxpayers that the Minister seeks to have bound by the determination of the question, and

(c) the facts and reasons on which the Minister relies and on which he based or intends to base assessments of tax payable by each of the taxpayers named in the application,

and a copy of the application shall be served by the Minister on each of the taxpayers named in the application and on any other persons who, in the opinion of the Tax Review Board or the Federal Court—Trial Division, as the case may be, are likely to be affected by the determination of the question.

(3) Where the Tax Review Board or the Federal Court—Trial Division is Satisfied that a determination of the question set forth in. an application under this section will affect assessments in respect of two or more taxpayers who have been served with a copy of the application and who are named in an order of the Board or the Court, as the case may be, pursuant to this subsection, it may

(a) if none of the taxpayers so named has appealed from such an assessment, proceed to determine the question in such manner as it considers appropriate, or

(b) if one or more of the taxpayers so named has or have appealed, make such order joining a party or parties to that or those appeals as it considers appropriate.

(4) Where a question set forth in an application under this section is determined by the Tax Review Board or the Federal Court—Trial Division, the determination thereof is, subject to any appeal therefrom in accordance with the Federal Court Act, final and conclusive for the purposes of any assessments of tax payable by the taxpayers named by it pursuant to subsection (3).

The facts set out in the application indicate that Western Quebec Investments Ltd was incorporated on October 28, 1959 by virtue of Part I of the Quebec Companies Act and that according to the shareholders’ register of the company the 2,000 common shares which had been subscribed for were immediately prior to January 8, 1972 distributed as follows:

(f) The remaining 572 shares were held by the sisters of the above- named shareholders

Western Quebec Investments Ltd at the beginning of 1972 owned 50% of the ordinary shares issued by J G Bisson Construction and Engineering Limited, the other half of the common shares being owned by Georges and Jacques Gaston Bisson. At the same time Western Quebec Investments Ltd owned all the shares of three other companies, Transport de Hull Limitée, Transport Hull Métropolitain Limitée, and Transport d’écoliers de I’Outaouais Inc. During 1970 and 1971 Western Quebec Investments Ltd acting through Louis Bisson negotiated with the Transport Commission of the Outaouais Regional Community for the sale of the shares of these three companies, but since a dispute and various legal proceedings had arisen between Louis Bisson and Georges and Jacques Gaston Bisson which endangered the completion of the negotiations for this sale the three brothers in order to put an end to it signed an agreement on January 8, 1972. This agreement provided that Georges and Jacques Gaston Bisson would transfer to Louis Bisson all their common shares in Western Quebec Investments Ltd and would receive in return the shares held by Western Quebec Investments Ltd in J G Bisson Construction and Engineering Limited. On January 10, 1972, following this agreement, Jacques Gaston Bisson signed a document in which he recognized having transferred to Louis Bisson one common share of Western Quebec Investments Ltd and Georges Bisson signed a similar document.

Following this agreement Louis Bisson was assessed for his taxation year 1972 for an amount of $789,000 representing the fair market value of the 50% of ordinary shares of J G Bisson Construction and Engineering Limited in exchange for which he had received the two common shares of Western Quebec Investments Ltd held by Georges and Jacques Gaston Bisson. For their taxation years 1972 Georges and Jacques Gaston Bisson claimed as a result of the agreement a capital loss resulting from the disposal of 666 common shares each of Western Quebec Investments Ltd in exchange for 50% of the common shares of J G Bisson Construction and Engineering Limited. This claim was rejected by the Minister and they were assessed on the basis that they each only held one common share of Western Quebec Investments Ltd and that as a result they had each made a capital gain in the amount of $393,652 as a result of the exchange. Subsequent to this Jacques Gaston and Georges Bisson produced share certificates of common shares of Western Quebec Investments Ltd indicating that they each held 665 common shares issued on January 6, 1961. The financial statements of Western Quebec Investments Ltd of December 31, 1972 show a capital loss based on the exchange of 50% of the shares of J G Bisson Construction and Engineering Limited for two ordinary shares of its capital stock.

In support of his assessment of the three taxpayers the Minister contends that since the shareholders’ ledger of Western Quebec Investments Ltd indicated that Georges and Jacques Bisson only possessed one common share each of Western Quebec Investments Ltd they realized a capital gain of. $393,652 each when they transferred these shares for 50% of the shares of J G Bisson Construction and Engineering Limited, that each should therefore have included in his income tax return for the year 1972 an amount of $196,826 as taxable capital gain. The Minister also contends that the transaction by which two common shares of Western Quebec Investments Ltd were transferred for 50% of the shares of J G Bisson Construction and Engineering Limited constituted for Louis Bisson an advantage to a shareholder by a company in accordance with subsection 15(1) of the Income Tax Act and that as a result the sum of $789,000 representing the true market value of the 50% of the common shares of J G Bisson Construction and Engineering Limited should be included in calculating Louis Bisson’s income for his taxation year 1972. Alternatively the Minister submits that this transaction constituted in accordance with subsection 56(2) of the Income Tax Act a transfer of property made on the instructions of and with the agreement of Louis Bisson to his two brothers for his profit or by the way of an advantage which he wished to accord to his two brothers and accordingly the sum of $789,000 should have been included in his income tax for the 1972 taxation year. Subsection 15(1) of the Act reads in part as follows:

15. (1) Where in a taxation year

(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.

Subsection 56(2) reads:

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.

All parties were represented at the hearing of the petition. At the outset it can be said that it is clear that it is proper and desirable that section 174 of the Act should be used so as to join Jacques Gaston Bisson and Georges Bisson in the present petition brought against Louis Bisson as the question arises out of a transaction which is common to the assessment of all three taxpayers and all three should be bound by the determination of the question.

Neither the respondent nor Jacques Gaston Bisson or Georges Bisson seriously disputed this. It must be emphasized that the determination of the shareholding of the three brothers in the company is the sole issue to be decided in the present petition and not the consequences thereof with respect to their respective tax, liability. On this basis counsel for Louis Bisson agreed with counsel for petitioner that the result of the determination should be a finding that Jacques Gaston Bisson and Georges Bisson each only owned one common share of the common stock of Western Quebec Investments Ltd as of January 8, 1972, but he did not agree that Louis Bisson should be assessed for taxation in the manner in which he was and he has appealed this assessment. While the Court was given to understand that the other two brothers have not yet formally appealed their assessments to the Court it is their intention to do so depending on the outcome of the determination of this issue.

The petition was accompanied by an affidavit of Lorainne Tremblay an employee of the Minister of National Revenue to which was annexed a substantial number of documents including photostats of the letters patent of Western Quebec Investments Ltd, of the sheets from its shareholders’ ledger, of the share certificates of J G Bisson Construction and Engineering Limited issued to Western Quebec Investments Ltd on March 30; 1965 and December 31, 1970, of the handwritten agreement between the three brothers of January 8, 1972, of transfers dated January 10, 1972, signed by Georges Bisson and Jacques Gaston Bisson each transferring to Louis Bisson one common share of Western Quebec, stating that the certificate was lost and renouncing to any rights which arise from same, of the reassessment of Louis Bisson for 1972 and the tax returns and reassessments of Jacques Gaston and Georges Bisson for 1972, of two certificates for 665 common shares each in Western Quebec Investments Ltd issued to J G Bisson and Georges Bisson dated January 6, 1961, bearing the apparent signature of Georges Bisson as president of the company and endorsed on the back on January 10, 1972, for transfer to Louis Bisson by Georges Bisson and Jacques Bisson respectively, of the balance sheet of Western Quebec Investments Ltd as of December 31, 1972, of Louis Bisson’s opposition to the reassessment of his taxes for 1972 and of the notices of Georges Bisson and Jacques Gaston Bisson objecting to their reassessments.

As the stock transfer register had not been filed as an exhibit I directed that it be produced as an exhibit at the hearing and this was done, and at the same time by consent of the parties photocopies of minutes of various meetings of Western Quebec Investments Ltd were also produced. Counsel for Georges Bisson and Jacques Gaston Bisson wanted some sort of examiner to be appointed to examine the books of the company and other documents and report thereon to the Court. This was refused as it is the responsibility of the Court to determine the issue on the basis of the documents produced in evidence and no expert evidence is required nor should be permitted in this connection. Counsel was invited to produce copies of any additional meetings of Western Quebec Investments Ltd or other documents which might be pertinent, and he exhibited a folder of documents which on examination proved to be additional copies of documents already in the record, and none of which made any reference to 665 shares allegedly owned by each of Georges Bisson and Jacques Gaston Bisson, with the exception of the two share certificates endorsed by them for transfer to Louis Bisson copies of which had already been produced with the affidavit of Miss Tremblay. This file was not produced as an exhibit therefore. Counsel also wished to produce a further memorandum of agreement between the three brothers dated some time in 1973 and permission to produce this was refused as any agreement subsequent to the 1972 taxation year for which the reassessments have been made would have no effect to alter or vary the share distribution as is existed on January 8, 1972, which is the issue before the Court.

An examination of the extracts from the minute book of Western Quebec Investments Ltd indicates that at the first meeting of directors on October 28, 1959 the three incorporaters transferred one common share each to Jeannette Bisson, J G Bisson and Georges Bisson. These transfers were duly entered in the register of transfers, and in the shareholders’ ledger sheets for Georges Bisson and J G Bisson they are each shown as having acquired one common share as of that date. The only other entry in the shareholders’ ledger sheets for J G Bisson and Georges Bisson indicates on January 10, 1972 transfer of one share each to Louis Bisson in trust as per contract of January 8, 1972. These two transfers of one share each are also duly recorded in the stock transfer register.

At a directors’ meeting on November 1, 1959, 295 common shares were allotted to Louis Bisson, the entry being duly recorded on his ledger sheet. At a meeting on February 23, 1960, Louis Bisson subscribed for preferred shares of two categories and these were duly allotted. This does not concern us here. At a directors’ meeting on January 5, 1971, a subscription of Louis Bisson for 1,700 additional common shares was received as well as for additional preferred shares. The acquisition of these additional common shares was recorded in his ledger sheet bringing the total held by him to 1,995 such shares. On January 6, 1961 he transferred a number of these shares to various persons leaving him with a balance of 1,330 common shares. Neither J G Bisson nor Georges Bisson were among the transferees. These transfers were duly recorded in the stock transfer register. At a subsequent meeting of directors on January 5, 1961 Louis Bisson sold to Western Quebec Investments Ltd shares of Hull City Transport Limited, Wrightville Building Supplies Company Limited and 1,000 common shares of J G Bisson Construction and Engineering Limited. The company accepted these in full payment for 1,700 common shares and 1,815 Class A preferred shares which had been allotted to him.

There are no further entries of any significance in the extracts from the company’s minute book nor in the register of transfers or shareholders’ ledger until the recording of the transaction of January 10, 1972 above referred to by virtue of which Jacques Bisson and Georges Bisson each transferred one share to Louis Bisson in trust for Western Quebec Investments Ltd. Presumably the reason why they are indicated as being held by him in trust was because in payment for them he caused Western Quebec Investments Ltd to transfer to Jacques and Georges Bisson all of its shares in J G Bisson Construction and Engineering Limited,* [1] but this can have no bearing on the number of shares of Western Quebec Investments Ltd owned by Jacques or Georges Bisson.

I now turn to the agreement between the brothers of January 8, 1972, in which it is stated that it is to settle all conflicts present and future between them. Georges and Jacques Bisson agreed to withdraw any present or future proceedings before the courts and give a final discharge to Louis Bisson, and to transfer to him (translated) “all the shares which they possess and all the rights which they may have in Western Quebec Investments Ltd’’. Louis Bisson transfers in return to them the 50% of the common shares of stock and the preferred stock of J G Bisson Construction and Engineering Limited held by him or by the company. It is stated that the purpose is that Louis Bisson shall in the future hold all the shares and rights which Georges or Jacques might have in Western Quebec Investments Ltd and in turn Georges and Jacques will in future have all the common and preferred shares of J G Bisson Construction and Engineering Limited.

Various additional clauses of the agreement dealing with the guarantees, pension funds and so forth do not concern us here. The significant thing is that there is no mention whatsoever of Jacques or Georges Bisson owning 665 shares each of Western Quebec Investments Ltd although it may be significant that they refer to “all their shares” in the plural.

It is significant that neither in the stock transfer register, nor in the shareholders’ ledger of Louis Bisson is there any indication of any transfer to him from either of his brothers of any shares other than the one share each referred to, transferred to him in trust for Western Quebec Investments Ltd. In fact there could not be any entry respecting such transfer since the ledger sheets of Jacques Gaston and Georges Bisson never showed either of them as owning more than one common share. In fact the letters patent of the company only authorized the issue of 2,000 common shares and all of these were allotted by the subscriptions recorded in the ledger sheets of the various shareholders. If in addition to this Georges Bisson and Jacques Gaston Bisson had each had an additional 665 common shares this would have made a total allotment in excess of the authorized capital of the company and would of course have been illegal. It is of some interest to note that on January 5, 1961, before Louis Bisson transferred a total of 665 of his common shares to various female shareholders, which transfers do not concern us here, he had a balance of 1,995 common shares. If there had been any intention of transferring one-third of this holding to each of his brothers, certainly there is nothing in the minute books of the company, in the register of transfers, or in the shareholders’ ledger to indicate that it was ever done,* [2] and in fact had he done so and still made the transfer of 665 common shares to the various other shareholders referred to, he would have been left with no such shares following the transfers of January 6, 1961.

One further matter may be of some significance. At the initial meeting of directors of the company on October 28, 1959 the form of share certificates was approved, and annexed to the minutes are samples of these forms, indicating that the company had printed share certificates. The two share certificates produced by Georges Bisson however and Jacques Gaston Bisson dated January 6, 1961, although apparently bearing the signature of Georges Bisson as president? [3] are on ordinary stationery forms with the name of the company and its authorized capital typed in. It would seem odd that this should have been done when the company had printed certificates for this purpose. I do not wish to make any implications, however, nor do I draw any conclusions from this, but merely record the fact.

The relationships and quarrels between the brothers are not the issue before the Court nor is it of any concern to the Court what they may have intended to do in 1961 with respect to the shares of the company or what in fact was done in 1972. The decision must be based on the factual information produced as to what is recorded in the company’s books and records.

Section 49$ [4] of the Quebec Companies Act under the heading “Share Certificates” reads as follows:

49. (1) Every shareholder shall, without payment, be entitled to a certificate under the common seal of the company, stating the number of shares held by him and the amount paid up thereon; but, in respect of a share or shares held jointly by several persons, the company shall not be bound to issue more than one certificate.

(2) The certificate shall be prima facie evidence of title of the shareholder to the shares mentioned in it.

The reference to “prima facie evidence” in subsection (2) however must be read in the light of subsection (1) indicating that the certificate shall represent “the number of shares held by him”. If he does not hold the shares represented by the certificate then the certificate is illegally issued and of no value. It is a fundamental of company law that shares can be issued by initial allotment of treasury stock or by transfer. Section 44 of the Quebec Companies Act provides that unless the letters patent make other provision the stock shall be allotted as the directors by by-law may order. Subsection 68(1) of the Act headed “Transfer of Shares” reads as follows:

68. (1) No transfer of shares, unless made by sale under execution or under the decree, order or judgment of a court of competent jurisdiction, shall be valid for any purpose until entry thereof is duly made in the register of transfers, except for the purpose of exhibiting the rights of the parties thereto towards each other and of rendering the transferee liable in the meantime, jointly and severally with the transferor, to the company and its creditors.

There is nothing to indicate that Georges Bisson or Jacques Gaston Bisson ever were entitled to the 665 shares for which they each had a certificate either by initial allotment or transfer. Section 106 of the Act states:

106. Such books shall be prima facie evidence of all facts purporting to be thereby stated, in any action, suit or proceeding against the company or against any shareholder.

It is abundantly clear that they must each be considered as only having owned one share of the capital stock of the company and that the Minister was correct in reaching this conclusion on an examination of the company’s books.

I therefore make the following order on this motion:

ORDER

1. Jacques Gaston Bisson and Georges Bisson are joined to Louis Bisson as respondents in the present proceedings.

2. Jacques Gaston Bisson and Georges Bisson each owned only one common share of the capital stock of Western Quebec Investments Ltd as of January 8, 1972.

3. Louis Bisson, Jacques Gaston Bisson and Georges Bisson are bound by this determination made pursuant to section 174 of the Income Tax Act, without costs.