Delmer
E
Taylor:—This
is
an
appeal
from
an
income
tax
assessment
for
the
year
1973
in
which
the
Minister
of
National
Revenue
increased
the
taxable
income
of
the
appellant
corporation
by
an
amount
of
$33,640.
The
respondent
relied,
inter
alia,
upon
sections
3,
38,
39,
40
and
54
of
the
Income
Tax
Act,
SC
1970-71-72,
c
63
and
amendments
thereto.
Facts
The
appellant
(hereinafter
referred
to
as
the
“corporation”
or
“Stamay”)
was
incorporated
under
the
laws
of
the
Province
of
Ontario
with
its
head
office
in
Burlington,
Ontario.
On
January
10,
1972
the
corporation
purchased
from
one
Thomas
R
Wilson
(hereinafter
referred
to
as
“Wilson”)
for
the
sum
of
$104,900
his
40%
interest
in
another
company,
Diplomat
Coffee
Services
Limited
(hereinafter
re-
ferred
to
as
“Diplomat”).
The
40%
interest
consisted
of
1,440
common
shares
of
no
par
value
and
49
preference
shares
with
a
par
value
of
$100
each.
The
balance
of
the
capital
stock
in
Diplomat,
consisting
of
2,160
common
and
59
preferred
shares
was,
at
the
time
of
purchase,
directly
or
beneficially
owned
by
one
May
A
Fitchett
who
held
the
title
of
president
of
Diplomat.
The
secretary
of
Diplomat
was
one
Norman
Fitchett,
husband
of
May
A
Fitchett.
In
the
month
of
January
1973
all
the
common
shares
of
Diplomat
were
sold
to
VS
Services
Ltd
(hereinafter
referred
to
as
“VS”)
for
a
sum
of
$422,200,
and
the
preference
shares
were
sold
at
par
value.
The
purchase
price
therefore
attributed
to
the
40%
interest
of
Stamay
was
$168,880
and
the
Minister
of
National
Revenue
taxed
the
corporation
on
the
basis
that
it
had
made
a
capital
gain
of
$68,880
during
the
period
it
held
the
stock
and
after
allowance
for
certain
expenses
the
resulting
$33,640,
representing
50%
of
such
capital
gain,
was
added
to
income
for
the
year
in
question.
There
was
no
issue
brought
before
this
Board
respecting
the
preference
shares.
Contentions
The
appellant
asserted
that
the
transaction
between
Stamay
and
Wilson,
and
that
between
Stamay
and
VS
were
both
conducted
at
arm’s
length
and
that
there
had
been
no
capital
gain
realized,
the
share
value
not
having
increased
during
the
period
the
stock
was
owned
by
Stamay.
The
position
in
support
of
this
was
that
due
to
the
minority
shareholding
position
of
Wilson
before
the
sale
of
Stamay,
the
price
of
$100,000
received
by
him
for
the
shares
was
not
a
true
indication
of
the
real
value
of
the
shares.
Stamay,
it
appeared,
was
a
corporation
totally
controlled
by
Norman
Fitchett
and
therefore,
after
purchase,
all
the
capital
stock
of
Diplomat
was
owned
by
Mr
and
Mrs
Fitchett—Norman
and
May.
The
respondent
contended
that
the
adjusted
cost
base
of
the
shares
sold
to
VS
was
$100,000,
and
that
the
gain
was
taxable
accordingly.
Evidence
At
the
commencement
of
this
hearing
counsel
for
the
respondent
advised
the
Board
that
a
separate
and
related
appeal
from
one
May
A
Fitchett,
which
had
been
scheduled
to
be
heard
on
common
evidence
with
the
appeal
of
Stamay,
was
being
allowed
by
the
Minister
of
National
Revenue
and
added
that
the
appeal
would
not
be
contested
as
a
consent
to
judgment
would
be
filed
with
the
Board.
In
that
appeal
the
issue
had
been
that
an
amount
of
$8,305.62
had
been
added
to
the
taxable
income
of
May
A
Fitchett
represented
by
the
Minister
to
be
the
taxable
portion
of
a
capital
gain
received
by
her
on
the
sale
of
her
60%
interest
in
Diplomat
to
VS,
the
details
of
which
have
been
related
earlier
in
this
matter.
The
$8,305,62
was
50%
of
$16,611.24,
calculated
to
be
the
gain
of
May
A
Fitchett
on
that
sale,
since
the
selling
price
had
been
$253,320
($422,200
less
$168,880
for
the
Stamay
40%
interest)
minus
the
amount
calculated
to
be
the
adjusted
cost
base
($235,620)
of
the
same
shares.
Appropriate
allowance
had
been
made
for
her
share
of
expenses
incurred
in
the
sale
of
$1,088.76.
Through
Wilson,
counsel
for
the
appellant
introduced
the
following
documents:
Exhibit
A-1—option
to
purchase
dated
December
1,
1971
from
Sta-
may
to
Wilson;
A-2—correspondence
from
Fitchett
to
Wilson
regarding
his
portion
of
Diplomat’s
profit
sharing
plan,
and
continuing
employment
by
Wilson
in
Diplomat,
also
dated
December
1,
1971
;
A-3—acceptance
by
Stamay
dated
January
10,
1972
of
the
option
to
purchase
dated
December
1,
1971.
Wilson
himself
gave
evidence
that
he
had
received
his
shares
in
Diplomat
in
about
1961,
had
paid
only
a
nominal
sum
for
them,
considered
himself
an
equal
“partner”
with
Norman
Fitchett
in
the
operation
of
Diplomat,
had
been
receiving
a
salary
of
about
$10,000
in
1971
and
was
aware
that
the
balance
of
the
shares
in
Diplomat
belonged
to
the
Fitchetts
(although
he
was
uncertain
if
this
meant
Norman,
May,
or
Stamay).
Through
some
rather
ill-defined
criteria,
he
had
established
that
he
wanted
$100,000
for
his
common
shares
and
Stated
that
he
was
unaware
of
any
outside
offer
to
purchase
all
of
the
Diplomat
capital
stock.
He
had
never
urged
Fitchett
to
accept
such
an
offer,
he
was
not
an
officer
or
director
of
Diplomat,
considered
that
the
profit-sharing
arrangement
referred
to
in
Exhibit
A-2
dealt
with
that
already
earned
by
him
during
1971,
and
stated
that
he
had
made
his
arrangements
for
sale
of
his
stock
before
agreeing
with
Fitchett
to
remain
on
as
an
employee
after
such
sale.
Finally,
the
purpose
of
the
sale
by
him
had
been
simply
to
provide
funds
for
his
retirement—he
was
53
years
of
age
at
the
time.
Mr
Stuart
Daw,
of
Toronto,
president
of
Stuart’s
Branded
Foods
Ltd,
gave
evidence
that
in
1971
Fitchett
had
discussed
with
him
the
possibility
of
Stamay
obtaining
Wilson’s
shares
for
$100,000
and
that
he
had
indicated
to
Fitchett
the
price
was
very
attractive.
The
coffee
service
business
in
the
1960’s
and
1970’s
had
been
volatile,
smaller
operators
starting
up
and
closing
down
all
the
time,
and
he
stated
that
except
for
the
national
firms,
his
own
firm
at
the
time,
Stuart
Coffee
Services,
and
Diplomat
were
the
largest
independents
in
the
country.
He
regarded
Fitchett
as
the
individual
responsible
for
Diplomat,
and
felt
he
was
a
good
operator
and
competitor.
Discussions
had
gone
on
for
some
time
between
them,
on
a
generally
continuing
basis,
regarding
expansion,
acquisition,
buying
or
selling
of
the
businesses,
but
he
added
that
this
was
just
symptomatic
of
the
state
of
affairs
in
the
industry
at
the
time.
He
was
of
the
opinion
that
in
1971
Diplomat
had
approximately
1,300
service
locations
and
that
the
“going
price”
was
about
$350
to
$400
for
each
location
in
a
business
sale.
Serious
discussions
had
not
taken
place
regarding
any
sale
until
after
the
heart
attack
suffered
by
Fitchett
in
the
summer
of
1972,
and
the
arrangements
finally
concluded
were
those
by
which
VS
purchased
Diplomat.
Mrs
Fitchett
stated
that
she
had
left
the
business
arrangements
largely
up
to
her
husband.
Two
other
witnesses
gave
corroborating
information
regarding
the
appeal,
but
their
evidence
was
of
little
direct
import
in
the
view
of
the
Board.
Argument
Counsel
for
the
appellant
argued
that
the
price
paid
by
Stamay
for
Wilson’s
shares
at
that
time
could
not
be
regarded
as
an
indication
of
their
real
value,
Wilson
having
been
a
minority
shareholder
wishing
to
retire
and
having
been
on
a
personal
relationship
basis
with
Fitchett.
The
position
of
counsel
for
the
respondent
in
argument
was
not
at
all
clear
to
the
Board.
Neither
counsel
cited
cases
which
might
bear
on
the
matter.
Findings
The
Board
has
considerable
difficulty
in
not
only
identifying
the
precise
point
or
points
at
issue,
but
what
evidence
has
been
brought
forward
either
in
support
of
or
against
those
points.
The
Minister
has
withdrawn
his
contention
to
the
appeal
of
May
A
Fitchett
and,
since
there
is
nothing
in
the
evidence
to
suggest
that
when
the
Wilson
holdings
were
sold
to
Stamay,
Diplomat
was
not
completely
owned
by
the
two
Fitchetts,
it
would
appear
to
the
Board
that
the
value
agreed
to
by
the
Minister
for
the
May
A
Fitchett
shares
would
apply
equally
to
those
held
by
Stamay—apparently
a
corporation
owned
and
controlled
by
Norman
Fitchett.
It
would
appear
to
the
Board
that
the
onus
to
show
that
such
should
not
be
the
case
would
rest
entirely
with
the
respondent.
The
fact
that
Wilson
sold
to
Stamay
on
January
10,
1972
for
$100,000
does
not
establish
that
under
the
changed
circumstances
(the
Fitchetts
or
their
corporation
Stamay
then
owning
100%
of
the
shares
of
Diplomat),
that
on
January
11,
1972
the
former
Wilson
shares
would
still
be
available
for
sale
at
$100,000—at
a
unit
value
of
slightly
less
than
$7
per
share—while
those
of
May
A
Fitchett
should
be
valued
at
$253,320,
slightly
more
than
$11.50
per
share.
It
would
seem
that
if
the
sale
from
Wilson
to
Stamay
for
some
reason
was
alleged
to
be
at
non-arm’s
length,
this
fact
would
tend
to
conflict
with
the
position
of
the
Minister
since
the
conclusion
would
probably
be
that
Stamay
had
paid
less,
not
more
than
market
value
for
the
shares.
Further,
if
the
Board
is
to
heed
the
evidence
of
Mr
Daw
who
appeared
eminently
Knowledgeable
and
credible,
one
must
take
into
account
that
the
sale
from
Diplomat
to
VS
in
1973
took
place
after
the
serious
heart
attack
of
Mr
Norman
Fitchett
at
a
time
when
Fitchett
was
finding
it
nearly
impossible
to
continue
to
manage
the
affairs
of
Diplomat.
In
my
opinion,
this
fact
would
tend
to
depress,
not
increase
the
value
of
the
shares
to
VS—it
would
be
approaching
a
distress
sale.
This
is
hardly
a
situation
under
which
VS
would
pay
an
inflated
price
for
the
shares
of
Diplomat.
The
option
to
purchase
(Exhibit
A-1)
being
dated
December
1,
1971
and
the
sale
from
Wilson
to
the
appellant
being
consummated
on
or
about
January
10,
1972,
with
the
full
knowledge
of
all
parties
that
Valuation
Day
for
purposes
of
calculation
of
capital
gains
under
the
Income
Tax
Act
was
December
22,
1971,
I
can
reach
no
conclusion
other
than
that
Wilson
received
all
he
felt
he
could
obtain
for
his
shares
under
the
circumstances,
and
that
the
appellant
in
turn,
under
changed
circumstances
both
as
to
ownership
of
all
the
outstanding
shares
in
the
company
and
the
health
of
a
major
officer,
also
obtained
all
it
could
for
the
resale
of
the
same
shares.
It
is
probably
also
worth
noting
that
Stamay
did
not
control
Diplomat
(at
least
as
a
majority
shareholder)—it
was
controlled
by
May
A
Fitchett.
Mrs
Fitchett
testified
that
she
did
not
participate
in
the
business
decisions
at
any
time
and
that
her
husband
ran
the
business
of
Diplomat.
It
was
undoubtedly
Fitchett’s
ability
to
commit
for
sale
the
shares
of
Mrs
Fitchett
in
the
arrangements
with
VS,
a
factor
unavailable
to
Wilson,
which
would
have
made
a
great
difference
in
any
discussions
regarding
the
sale
of
Diplomat
shares
conducted
by
a
minority
shareholder
in
1972
as
opposed
to
any
such
possible
discussions
in
1971.
Any
enhancement
in
the
value
of
the
shares
as
a
result
of
this
set
of
circumstances
should
not,
of
itself,
place
the
appellant
in
jeopardy
with
respect
to
the
impact
of
income
tax
liability,
when
as
indicated
above
the
same
or
other
factors
might
have
adversely
affected
the
value
of
the
shares.
There
was
no
evidence
that
the
appellant
had
made
any
arrangements
to
resell
the
acquired
Wilson
shares
prior
to
that
transaction
between
Wilson
and
Fitchett,
and
the
evidence
of
Mr
Daw
was
that
there
was
no
such
arrangement.
Decision
The
appeal
is
allowed—the
gain
realized
is
all
on
capital
account.
The
matter
is
referred
back
to
the
respondent
for
reconsideration
and
reassessment
accordingly.
Appeal
allowed.
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