Maurice Boisvert:—This appeal is from an assessment involving the taxation year 1965.
Appellant was the principal shareholder in a company known as Montreal Terra Cotta Limited (hereinafter referred to as “Terra Cotta”), which came into being on June 26, 1936. He held 273 shares of the authorized capital, which gave him control of the company, since there were only 490 issued and paid up shares. Among the shareholders was Central Motor Sales Ltd (hereinafter referred to as “Central Motor”), which held 193 shares. In 1965 Central Motor’s shares were held by the Estate of A H Rocheleau.
On July 28, 1965 appellant offered to buy the Estate’s 193 shares for the amount of $350,000. On August 12, 1965 the Estate accepted the offer.
At the time the offer was made to the Estate, Terra Cotta was about to sell land in one case, and to be expropriated in another. The sum of $350,000 was a huge amount to pay; the situation called for imagination and reflection. On November 15, 1965, on an accountant’s advice, Terra Cotta held a meeting at which all the company’s directors were present, the minutes of which read as follows:.
(TRANSLATION)
WAIVER OF NOTICE
We the undersigned, being all the directors of Montreal Terra Cotta Limited, by these presents do waive notice of time, place and object of the meeting of directors of the company, to be held in the sales office of the same, Suite 936, Dominion Square Building, Montreal, Que, on the fifteenth day of November, one thousand nine hundred sixty-five, at eleven A.M.
Montreal, November 15, 1965.
(signed) Chas Perrault, Pres. (signed) T Bénard, Secretary.
The Secreary read the minutes of the last meeting, which were unanimously adopted.
The President informed the meeting that a dividend of $1813.50 per share could be declared, but he waived this dividend of $1813.50 per share which could be declared.
The Vice-President informed the meeting that he shared the President’s opinion that a dividend of $1813.50 per share could be declared, but he waived this dividend of $1813.50 per share which could be declared.
By motion duly proposed and seconded, it was unanimously resolved to declare a dividend of $1813.50 per share, payable the day of 19 to holders of shares registered in the books of the company before the day of 19
The President informed the meeting that he waived this dividend of $1813.50 per share.
The meeting took notice of a letter in the following terms, dated November 15, 1965, and written to the company by the President.
Montreal, November 15, 1965.
Montreal Terra Cotta Limited
Dominion Square Building
Suite 936
Montreal, Que.
Dear Sirs:
I the undersigned, CHAS PERRAULT, by these presents do waive the dividend of $1813.50 declared on this day.
(signed) CHAS PERRAULT.
By motion duly proposed and seconded, the Secretary was ordered to include this letter of waiver in the minutes of the meeting.
The Vice-President informed the meeting that he waived this dividend of $1813.50 per share.
The meeting took notice of a letter in the following terms, dated November 15, 1965, and written to the company by the Vice-President.
Montreal, November 15, 1965.
Montreal Terra Cotta Limited
Dominion Square Building
Suite 936
Montreal, Que.
Dear Sirs:
I the undersigned, OSKAR NOMM, by these presents do waive the dividend of $1813.50 declared on this day.
(signed) OSKAR NOMM.
By motion duly proposed and seconded, the Secretary was ordered to include this letter of waiver in the minutes of the meeting.
The meeting was closed.
As can be seen from the minutes, by taking an amount of $1813.50 for each share as a basis, appellant arranged payment of the sum of $350,000 by the company which he controlled, and of which he was President. The amount of the pseudo-dividend was paid to the Estate, and full ownership of the shares passed from the Rocheleau Estate to the appellant. At the time in question Terra Cotta had been paid the sum of $465,000 by the city of Pointe-Claire, and in addition had signed a promise to sell land for the amount of $800,000.
In this way, without spending a cent, appellant became owner of the shares of Central Motor. Naturally respondent taxed appellant on the sum of $350,000, relying on the provisions of subsection 8(1) of the Income Tax Act then in effect (RSC 1952, c 148). The subsection relied on by respondent reads as follows:
8. (1) Where, in a taxation year,
(a) a payment has been made by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction.
(b) funds or property of a corporation have been appropriated in any manner whatsoever 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 be included in computing the income of the shareholder for the year.
The proven facts establish beyond any doubt that the voting of a dividend to a third party was not a bona fide business transaction: it was a subterfuge to have the Terra Cotta company pay what was appellant’s personal obligation. It is clear that funds belonging to the company were appropriated for the appellant’s benefit, as he did not have to pay out the sum of $350,000 which he personally. owed to the Rocheleau Estate. If this was not a benefit or advantage for appellant, what does a benefit or advantage consist of? The person of appellant is a different entity in law from that of a corporation. The Exchequer Court of Canada has ruled on the meaning to be given to the words “benefit” and “advantage”. In MNR v D Dufresne, [1967] 2 Ex CR 128 [1967] CTC 153; 67 DTC 5105, Jackett, P, said, at page 138 [162, 5110]:
That question cannot, in my view, be realistically answered by an analysis of each of the respective steps taken without taking account of the ordinary well known facts of life in the world of affairs. The resolution granting the “rights” was, it is true, passed by the board of directors; and the respondent was only one director and had in the proceedings of the board only one vote. There is nothing, moreover, to show that the wife and children did not each act independently in deciding their respective courses of action in the whole series of events. Nevertheless, in the absence of any evidence by the respondent or on his behalf to show what in fact happened, I am of the view that the balance of probability is that he, as the owner of practically all the shares in the company and the head of the family, had the controlling influence in the determination of the course of events with which we are concerned. The sequence of events bears all the earmarks of a series of company transactions that had been arranged in advance by the major shareholder and father, after taking appropriate professional advice, with a view to achieving the result of increasing the children’s proportions in the ownership of the stock of the company. That that is what in fact happened is corroborated by the evidence given before the Tax Appeal Board. There was very little, if any, consultation in advance between the children and the respondent, who, in effect, presented them with what he had arranged for their benefit and assumed that they would accept it, which they did. Moreover, the benefit, if it was one, was an increase in the proportions of the children almost entirely at the expense of a decrease in the respondent’s.
There is no doubt in my mind that, if the result of the transaction was a benefit to the children, it was conferred on them by the respondent.
Humanity and feeling do not enter into tax computations. Much was made of the Rocheleau Estate’s financial situation, and the fact that the dividend transaction was the Estate’s only hope. True though that may be, the law has no heart, and it must be strictly applied regardless of whatever inconveniences and consequences flow from its application.
For the foregoing reasons, I feel the appeal should be dismissed.
The above appeal was heard at Montreal, Province of Quebec, on October 21, 1971 by the undersigned, then Assistant Chairman of the Tax Appeal Board, as then constituted.
Appeal dismissed.