The Chairman (orally: October 23, 1973):—This case involves an appeal by Gilles Thibault against reassessments of the Minister of National Revenue for the taxation years 1968 and 1969, and also involves the appeals of three of his nine brothers, his mother, and one of his sisters, and all these appeals abide the outcome in this matter. The other appellants are Pierrette Thibault Dufault, Julia Thibault, Guy Thibault, Réjean Thibault, and Pierre-Paul Thibault.
The facts are not really in dispute. The evidence of Gilles Thibault and his witness Fernand Sirouard indicates that the Thibaults were the owners of the family company in which each of the brothers apparently held equal shares—at least those brothers who have appealed and are affected by this decision.
The four brothers entered into an agreement (Exhibit A-1) dated March 11, 1968, whereby they sold to Guy Charron Ltée and Finco Limitée, a Company owned or controlled by Guy Charron Ltée, the shares held by these four appellants in Pierre Thibault (Canada) Limitée, the family company. The purchase price of each brother’s shares was to be $140,000, making a total of $560,000 for the shares of the four brothers.
The evidence of Mr Sirouard is that, prior to his becoming associated with Finco Limitée, he had been carrying on negotiations for the purchase of the Thibault company, and after he joined Finco in 1968 and became general manager he reopened negotiations with the Thibaults on behalf of Finco. (I refer to Finco throughout synonymously as Finco and/or Guy Charron Ltée.)
The situation was that the four brothers, who were prepared to sell at the price stipulated by themselves, controlled only 48% of the shares and at that time their other five brothers were apparently not interested in the transaction. In order to control 52% of the company, Guy Char- ron Ltée and Finco entered into an agreement, which is respondent’s Exhibit 1, I believe, with the mother and the sister, whereby those ladies agreed to sell their shares on the terms set out in that agreement which was also dated in March 1968. Presumably all agreements, including an agreement on the part of Finco to reimburse the four brothers for any tax that might be assessed against them by virtue of funds received through this transaction, were executed simultaneously, or within such close proximity of time as to be considered as having been executed simultaneously. The last of the three agreements I have just referred to is appellants’ Exhibit 2.
The evidence indicates that the four brothers affected by this appeal agreed to take, in payment for their shares, a monthly sum to be paid over a guaranteed period of 15 years, a payment that the Department of National Revenue has alleged was an annuity payment. The appellants submit that this was simply the payment on an instalment basis of the capital purchase price for the shares.
It is interesting to note in the agreement (A-1) that the instalment payments to the brothers, who allegedly controlled equal numbers of shares, were not equal in amount, the oldest brother receiving the greatest amount and the youngest the least. I have said many times in my short term on this Board that the ingenuity of the taxpayer and his advisers in their attempts to legally avoid the payment of tax—which a taxpayer is allowed to do if he is able—never ceases to amaze me. To me, the purpose of this transaction is, so far as I am concerned, and to put it rather bluntly, just another form of dividend stripping. It is just too good to be true. I think that it is trite law to say that the only proper way that a limited company can dispose of its earnings is through declaring and paying dividends which would be taxable in the hands of the shareholders.
If I understand the appellants’ proposition, the shareholders were to transfer all their shares to Finco in consideration of a so-called “rente capitale”. As the name would indicate, these are purported to be capital payments and to constitute capital receipts in replacement of another capital asset, in this case the shares of the company held by each of the appellants. However, as far as I know, there is no such thing, in law or in practice, as “rente capitale”. To me, the terms are contradictory.
What the shareholders in this case did, in my view, was transfer their shares for what is commonly referred to as “an annuity”, a term which for obvious reasons, or obvious to me, in any event, was not used in the contract. I do not subscribe to the assertion that this term “was picked out of the air” without any knowledge or consideration of its legal ramifications. I think it was a term that was used to try and circumvent the use of the term “rente viagère” that appears in the Quebec Civil Code and which would more properly fit the situation here, as was pointed out by counsel for the respondent.
The payee in an annuity contract usually receives from, say an insurance company, in exchange for a lump sum, payments spread over a period of time: in most instances, a guaranteed minimum period of time, as was the case here. Fifteen years was the guaranteed period. It seems to me that, if it were possible for one to circumvent the law by turning capital assets into long-paying annuities in order to avoid the payment of tax, the sale of annuities would greatly increase. Each annuity is, by its nature and definition under the Income Tax Act, a combination of capital and interest. Whether the appellants in this case were parties to an annuity contract as such, or not, is of no consequence, in my view, because, in looking at the agreement (Exhibit A-1), one must look at the substance of it as well as at the substance of the contract (Exhibit R-1) involving the two female members of the family, which clearly indicates to me that what each appellant was receiving in return for his shares was a guaranteed payment of money which, if he had been fortunate enough to have picked a company that was going to survive, would have produced a substantial sum in excess of the alleged selling price of the shares. Unfortunately for these appellants, the purchaser, Finco (or Guy Charron Ltée) went bankrupt after only some 52 payments had been made.
It is interesting to note from the evidence of Mr Sirouard that early in 1969 the shares of the other five brothers had been purchased outright for a lump sum, and yet the appellant brothers continued to abide by what is alleged to have been only a temporary arrangement between themselves and Finco.
Counsel for the appellants says that the respondent’s solicitor has not made reference in his argument to Exhibit A-2, which was the agreement to reimburse the appellants for any tax they were required to pay by virtue of sums received under the agreement produced as Exhibit A-1. One must not forget that, in deciding cases under the Income Tax Act, one is not dealing with matters that affect only the parties directly concerned. it is not the type of litigation that one finds in the usual court of law, where the adversary system of jurisprudence and procedure prevails. What we deal with in tax cases are questions of whether or not an individual owes a sum of money to the State. The result of that determination affects, not only the appellant before the Board or the court at the material time, but also all citizens who are taxpayers.
Therefore it is clear on the evidence and it is clear on the law that the sums received pursuant to the appellants’ Exhibit A-2 were properly added back as income to the appellants. Only one year was calculated, and I presume this to be because of the small amounts involved, but in other cases many years or many calculations have been pursued and carried to completion.
If one were to assume, for the moment, that each appellant was correct in his contention that he received a capital payment and nothing else, one would surely wonder how Finco would treat these disbursements. The least one can expect is that they would treat them as capital payments and not as dividends. Whatever the accounting treatment might be, the shares in Pierre Thibault (Canada) Ltée would produce tax-free dividends in the hands of Finco and the moneys would certainly be used for the payment of the annuities, thus depleting the undistributed earnings of this company.
The appellants’ counsel has cited to me the case of Wilder v MNR, [1951] CTC 304; 52 DTC 1014, a decision of the Supreme Court of Canada, and I refer to the words of Mr Justice Rand (as he then was) which appear at page 311 [1017], and I quote:
Perhaps the most familiar use of the word “annuity” envisages the payment of one or more sums of money in return for which an obligation is undertaken to pay an annual or other periodic sum during the lifetime of the purchaser. In that case, the purchase money is properly looked upon as having disappeared, and the annual payments, notwithstanding that they are actually or theoretically built up of the capital and accumulated interest, as neither a return nor a conversion of the money advanced but as income.
I think that what has happened here, as I have said, is that the capital interest, that is, the shares in the Thibault company, was turned over by these appellants in exchange for the annuity provisions contained in the various documents that I have cited.
For these reasons, I am satisfied that the appeals must be dismissed and, the parties having agreed that the arithmetic is correct, the assessments of the Minister will be affirmed in each case.
Appeals dismissed.