JUDSON, J. (all concur) :—The problem in these two appeals is essentially the same as that in the Smythe appeals [[1969] C.T.C. 558]. Wilbour Lee Craddock and Stanley Curtis Atkinson were the principal shareholders in a private Saskatchewan corporation named Allied Heating and Supply Limited. There were 200 issued common shares, of which Craddock held 138, Atkinson 60, and the remaining 2 belonged to Craddock’s son,
W. J. Craddock, and his son-in-law, Norman Abraham. This company had $101,000 of undistributed income on hand. At the conclusion of the series of transactions, which I will summarize later, this undistributed income was in the hands of the appellants. The transactions took place in April and May of 1968, just before the enactment of Section 138A of the Income Tax Act relating to dividend-stripping. This new legislation came into force after June 13, 1963.
The amounts received by the appellants as a result of these transactions were not reported in their 1963 returns. The Minister re-assessed in 1967. The appeals from these re-assess- ments were decided in the Exchequer Court solely under Section 137(2) of the Income Tax Act. Gibson, J. held that this section stood by itself independently of other sections of the Act, that it was a charging section and that a benefit under Section 137(2) was one of the sources of income under Section 3 so that it was not necessary to assess the benefit under any specific provisions of the Act. He further held that no dividend tax credit could be claimed in respect of these benefits. He dismissed the appeals but referred back the re-assessments for reconsideration and re-assessment in accordance with his reasons.
I adhere to my reasons in the Smythe appeals. In my opinion, these receipts by the appellants were deemed to be dividends under Section 81(1) of the Income Tax Act and the appellants are entitled to the dividend tax credit. On the hearing of the appeals a letter was filed from the Minister undertaking that the dividend tax credits would be allowed as they had been in the original assessments.
I now turn to a brief summary of the facts. The scheme is, in substance, the same as that in the Smythe appeals. I have mentioned the shareholders in the old company. On April 19, 1963, a new company—Allied Heating Supply (1963) Ltd.— was incorporated as a private Saskatchewan corporation. The ownership of the common shares of the new company was substantially the same as that of the old company. The new company agreed to buy the assets of the old company for $101,000. The common shares of the old company were divided into two classes, with the proportionate ownership of the subdivided shares remaining unchanged. The new company gave a cheque for $101,000 in exchange for the assets of the old company. This cheque was covered by what is called a ‘‘daylight loan’’ from a bank.
The next transaction was a sale by the appellants of their shares in the old company, as subdivided, to certain individuals who were engaged in the business of dividend-stripping. These individuals and companies were to perform their services for a fee of $3,000. The old company distributed its assets by way of a liquidating dividend. The appellants received $96,000 of this amount, which they then lent to the new company to cover that company’s cheque for the purchase of the assets.
The precise figures are as follows:
(a) A cheque for $101,448.61 was passed from the new company. At this point $2,000 disappears in expenses. (b) A cheque for $99,442.61 was passed from the old company to the dividend-strippers. At this point a fee of $3,000 was extracted.
(c) A cheque for $96,447.99 was passed from the dividendstrippers to Craddock and Atkinson.
(d) Craddock and Atkinson lent $96,447.99.
For the reasons delivered in the Smythe appeals, I would hold that these receipts were taxable to the appellants in their proportionate shares as deemed to be dividends under Section 81(1), and that they are entitled to the dividend tax credits which they have already been allowed.
I would dismiss the appeals with costs.