Harold J C Terry v. Minister of National Revenue, [1973] CTC 349, 73 DTC 5291

Collier, J:—This is an appeal against a reassessment by the respondent for the year 1965. The Minister added to the appellant’s income for that year the sum of $60,851.06, “a deemed dividend from a personal corporation under subsection 67(1) of the Income Tax Act.* [1] This had the effect of increasing the appellant’s tax from $2,384.58 to $21,596.89. The personal corporation, Northland Holdings Ltd (hereafter “Northland”), was at certain material times a shareholder of two other companies, Skeena Navigation Ltd (hereafter “Skeena”) and Sannie Transportation Company Ltd (hereafter “Sannie”). On December 23, 1964 Skeena and Sannie amalgamated under the name Skeena Navigation Ltd (hereafter “Skeena Amalgamated”). Northland held 60% of the share capital. On December 29, 1964 Skeena Amalgamated declared a stock dividend of preference shares to its shareholders. The Minister, under section 82 of the Income Tax Act, calculated the combined undistributed income of the two companies at $102,331.56 and deemed Northland to be the recipient of the sum earlier mentioned of $60,851.06, which was then deemed to have been received by the appellant.

The appellant disputes the respondent’s calculation of the undistributed income, and says there was, in fact, no undistributed income on the material date. There are two distinct issues:

1. Whether certain alleged expenses ought to have been deducted by the Minister, pursuant to subparagraph 82(1 )(a)(ii), which reads:

82. (1) In this Act,

(a) “undistributed income on hand” of a corporation at the end of, or at any time in, a specified taxation year means the aggregate of the incomes of the corporation for the taxation years beginning with the taxation year that ended in 1917 and ending with the specified taxation year minus the aggregate of the following amounts. for each of those years:

(i) each loss sustained by the corporation for a taxation year,

(ii) each expense incurred or disbursement made by the corporation during one of those years that was not allowed as a deduction in computing income for one of those years under this Part except

(A) an expense incurred or disbursement made in respect of the acquisition of property (including goodwill) or the repayment of loans or capital,

(B) an outlay or expense the deduction of which was not allowed by reason of subsection (3) of section 12, or

(C) unless the undistributed income on hand is being determined for the purpose of subsection (1) of section 81, any part of the payment referred to in section 76 that has not been allowed as a deduction in computing income for one of those years,

2. Whether the sum of $27,847.63,* [2] the accumulated taxable operating losses of Sannie from 1921 to 1957, ought to have been deducted in the calculation of Sannie’s undistributed income. On this issue subsections 82(13) and (14) are relevant:

82. (13) Where more than 50% of the issued share capital of a corporation has, between a time when the corporation ceased to carry on active business and a time when it commenced to carry on active business again, been acquired by a person or persons who did not own any of the shares of the corporation at the time when it so ceased to carry on active business, i the corporation had no undistributed income on hand at the latter time, the reference in subsection (1) to “the taxation year that ended in 1917” shall be deemed to be a reference to the taxation year in which the corporation so commenced to carry on active business again.

(14) A person who has a right under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently, to, or to acquire, shares in a corporation shall be deemed, for the purpose of subsection (13), to have acquired the shares at the time he acquired the right.

I turn to the first issue. Skeena and Sannie had each owned fleets of vessels which serviced the coastal waters of British Columbia. Each company had, pursuant to the provisions of the Canadian Vessel Construction Assistance Act} [3] (hereafter the “CVCA Act”) deducted from income substantial ‘capital cost allowances for these vessels. In 1962 the fleets were sold. The amounts realized were:

These dispositions brought into play section 4 of the CVCA Act. The relevant portions of that section are:

4. (1) Where a vessel is disposed of by a taxpayer

(a) subsection (1) of section 20 of the Income Tax Act does not apply to the proceeds of disposition

(i) to the extent that they are used by any person for replacement under conditions satisfactory to the Canadian Maritime Commission, or

(ii) if the Canadian Maritime Commission certifies. that the taxpayer has, on satisfactory terms, deposited an amount at least equal to the tax that would but for this Act be payable by the taxpayer under the Income Tax Act in respect of the proceeds of disposition, or satisfactory security therefor, as a guarantee that the proceeds of disposition will be used for replacement; . . .

Paragraph 4(1 )(c) in effect provides that if a new vessel does not replace the vessel disposed of within seven years, the deposit, or what remains of it, referred to in subparagraph 4(1)(a)(ii) becomes part of the Consolidated Revenue Fund. As I interpret the statute, the taxpayer has three choices on the disposition of a vessel. (1) pay tax pursuant to the recapture provisions of section 20 of the Income Tax Act; (2) build a replacement vessel using the proceeds or some part of the proceeds of the disposition; (3) have someone else build a replacement vessel using the proceeds or some part of the proceeds of the disposition.

Sannie and Skeena did not wish to pay tax on the recapture of depreciation and with the approval of the Canadian Maritime Commission the following took place, and I refer to the pleadings.

Paragraph 10 of the notice of appeal is as follows:

10. Both Sannie and Skeena were successful in arranging for the use of the entire proceeds of disposition of each of the vessels as provided under the terms of the CVCA Act but in so doing necessarily incurred the following costs:

Sannie	$108,318.30
Skeena	$ 63,033.56

In its reply (paragraph 5) the respondent alleges:

5. The Respondent denies paragraph 10 of the Notice of Appeal, and says:

(i) Sannie Transportation Company Ltd deposited the proceeds of disposition of $900,000 arising from the sale of M V Taksis Prince (sic) M V Haida Prince, M V Skeena Prince, with its banker, and subsequently sold and assigned $575,500 of the monies on deposit for the sum of $499,631.70 and thereby sustained a loss of $75,868.30;

(ii) Sannie Transportation Company Ltd deposited with the Canadian Maritime Commission, securities which had a fair market value of $46,600 and subsequently sold and assigned all of its rights, title and interest in the securities for $14,150.00 and thereby sustained a loss of $32,450.00;

(iii) Skeena deposited the proceeds of disposition of $306,000 arising from the sale of M V Northern Prince with its banker and subsequently sold and assigned the monies on deposit for the sum of $264,568.30 and thereby sustained a loss of $41,431.70;

(iv) Skeena deposited certain bonds with the Canadian Maritime Commission and subsequently sold and assigned all of its right, title and interest therein and thereby sustained a loss of $18,234.36;

(v) Skeena throughout its 1962, 1963 and 1964 taxation years sold other bonds and thereby sustained losses of $3,367.50, $1,090.95 and $576.00 respectively.

The facts alleged by the respondent were not challenged in the evidence adduced by the appellant. As was said by Rand, J in R W S Johnston v MNR, [1948] SCR 486 at 489; [1948] CTC 195 at 202; 3 DTC 1182:

Every such fact found or assumed by the assessor or the Minister must then be accepted as it was dealt with by these persons unless questioned by the appellant.

The total amounts involved, as calculated by the respondent, are $108,318.30 in respect to Sannie and $64,700.51 in respect to Skeena.

The sale of the proceeds of the dispositions were to Steel Company of Canada who constructed replacement vessels, as that term is used in the CVCA Act.

The securities referred to in the paragraph of the reply quoted above were deposited with the Canadian Maritime Commission pursuant to subparagraph 4(1 )(a)(ii) of the CVCA Act.

The appellant contends that these amounts were an expense incurred by it that had not already been allowed as a deduction under the Income Tax Act (see subparagraph 82(1 )(a)(ii)).

I cannot accept the appellant’s argument that these sums were expenses in the sense that word is used in the Income Tax Act and particularly in the subparagraph in question. The companies had disposed of certain capital assets and had obtained a certain price for them. To avoid the recapture provisions of section 20 they sold the proceeds of the sale of the vessels for less than what they had received because the monies were encumbered by the provisions of the CVCA Act. I do not think that the fact these transactions were approved by the Canadian Maritime Commission makes any difference. It seems to me the companies were by analogy selling a capital asset when they sold the proceeds of the dispositions.

For the reasons I have given I decide against the appellant on the first issue.

I deal now with the second issue. The point here is that if Sannie was not carrying on an active business in 1958 and the first few days of 1959 when more than 50% of its share capital was acquired by what I shall call the Terry group, then its accumulated losses of previous years could not be deducted in determining its undistributed income under subsection 82(1). It is necessary to review the facts.

The Terry group was a group of companies (including Northland) controlled by the appellant and his associates. Union Steamships Limited was a British Columbia company which had real estate assets as well as a steamship division. In 1958 the Terry group became interested in acquiring Union Steamships Limited. Union did not wish to sell its real estate assets. Finally, an agreement was reached whereby its steamship division would end up in the control of the Terry group.

Sannie was a wholly owned subsidiary of Union Steamships Limited. It is conceded that Sannie was not carrying on an active business in 1957. To effect the transfer of the steamship division to the Terry group Union Steamships Limited were to sell the vessels and ancillary equipment to Sannie and the Terry group were to purchase all the shares and debentures of Sannie.

An agreement dated January 10, 1959 was entered into between Union Steamships Limited, the Terry group and Sannie. Union agreed to sell to Sannie all the assets of its steamship division. Sannie agreed to pay for the assets by a debenture and Union then agreed to assign and sell the debenture to the Terry group. Union also agreed to sell the outstanding shares of Sannie to the appellant. The closing date for all these arrangements was January 15, 1959. The vessels were not, in fact, transferred to Sannie until January 14, 1959.

Counsel for the appellant concedes that from a technical point of view the Terry group had acquired the shares of Sannie before it was reactivated but argues that from a practical point of view this really was not the case. It is said that the earlier correspondence and records in December of 1958 leading to the agreement of January 10, 1959 are the key matters to consider and that for practical purposes Sannie had been reactivated in December of 1958 and not on January 14 or 15, 1959, four or five days after the Terry group had acquired the right to shares in Sannie (see subsection 82(14)).

To me the documentation is quite clear. At the time the Terry group acquired the right to the shares, Union Steamships Limited and not Sannie were operating the vessels which were ultimately transferred. In my opinion, from a legal and practical point of view, Sannie was not reactivated until after the Terry group had acquired its shares.

The appeal on the second issue is therefore dismissed.