GALE, J.:—After reading, and in most instances rereading, all the cases cited, and many others, I have come to the conclusion that the questions presented to the Court in this matter ought to be answered in such a way as to indicate that the sums.-received by the trustees upon the redemption of the preference shares of Mills Bros. Ltd., to which detailed reference will be made later, represent income in the hands of the trustee for the purpose of administering the trusts involved. My decision flows from a conviction that this case is governed by the effect of the judgment in Ke Fleck, [1952] 2 D.L.R. at page 658; [1952] C.T.C. 196 affirmed [1952], 2 D.L.R. at page 664; [1952] C.T.C. 205, which to-day express the law of this Province upon the subject-matter of this motion.
The late Stanley Mills died on January 20, 1938, and shortly thereafter letters probate of his last will and testament and codicil were granted to the above-mentioned trust company, the executor and trustee therein named.
At the date of his death the late Mr. Mills was the owner of 3,331 shares of the capital stock of Mills Bros. Ltd., a private company incorporated under the Dominion Companies Act. Those shares had a par value of $100 each and formed part of the total issued and fully-paid share capital of the company consisting of 10,000 shares. Under the provisions of the will the trust company was directed to hold those shares in trust to pay out of the income arising therefrom an annuity in favour of the widow of the testator and to pay the remainder of such income in designated proportions to several branches of the Victorian Order of Nurses. The will also directed that in certain events which have not yet come to pass, and may never occur, the Victorian Order of Nurses would cease to be entitled to receive the income, which would thereafter be payable to other charitable institutions.
The trustee was empowered to hold the shares of Mills Bros. Ltd. so long as it deemed advisable and in the exercise of such discretion those shares have been. retained.
By the end of 1949 the company had on hand accumulated surplus profits in an amount in excess of $500,000. On December 20, 1950, a special meeting of the shareholders of Mills Bros. Ltd. was held, at which the shareholders approved of a resolution of the directors that the company elect to pay a tax of 15% on its undistributed income as at the end of its 1949 taxation year under the provisions of Section 95A (1), of the Income Tax Act, 1948 c. 52. Accompanying the notice calling such meeting was the following letter signed by the president of the company, and dated December 1, 1950:
11 To the Shareholders of Mills Bros. Limited :
“I enclose this letter with a Notice of a Special General Meeting of the Shareholders of the Company so that you may be apprised of the actions taken by your Board requesting the approval of the Resolution which was passed by the Directors of this Company on the Twenty-Third day of November, 1950.
“In March, 1950, an amendment to the Income Tax Act was passed (See. 95A) which provides that Companies such as ours may pay a Special Tax of 15% on undistributed income on hand at December 3lst, 1949.
“In the intervening months there has been a war in Korea and an accelerated rearmament program in Canada and the U.S.A. with the result that the general feeling is that taxes are going to be heavier to support these expenditures.
‘‘Specifically the present privileges extended to Private Companies within the past year to get out their undistributed surpluses, may become more expensive or withdrawn entirely at the next budget. The terms of such relief at present are not as generous as those that were formerly available and the pres- ent relief may well be supplanted by more stringent terms in the near future. Any such change in that direction could be very expensive to the shareholders of this Company.
‘‘The plan you are asked to approve will be for the Company to pay the 15% of tax by December 31st, 1950, and thus qualify the Company for future tax free distributions.
‘“We feel sure you will be gratified to know that the physical well-being of your Company is such that we can afford to take advantage of such a tax privilege as this without detriment to current operations. We consider it as good news to our shareholders and which will be favourably received.
“Will you kindly return your proxy form in case you are unable to attend.”
That letter is of prime importance in a consideration of this matter.
Pursuant to the resolution of December 20, 1950, the company did pay the said tax of 15% amounting to $126,300.59, on its undistributed income of $842,003.94, calculated in accordance with the provisions of Section 73A(1) of the Income Tax Act, and the company was then left with tax-paid accumulated income as of the end of its 1949 fiscal year of $715,703.35.
Subsequently that accumulated income was dealt with by the company. A notice in this form was sent out to the shareholders of the company on May 15, 1951 :
“NOTICE
“Special GENERAL MEETING OF SHAREHOLDERS
“Please take notice that a Special General Meeting of the shareholders of Mills Bros. Limited will be held on the 5th day of June, 1951, at 10 a.m., E.D.S.T., at the head office of the Company, Imperial Building, 25 Hughson Street South, Hamilton, Ontario.
“The business before the meeting will be:
(a) To consider and if deemed advisable sanction and confirm By-Law No. 23 of the Company passed by the Directors on the 8th day of May, 1951, authorizing an application for Supplementary Letters Patent subdividing the authorized and issued ten thousand (10,000) shares of the capital stock of the Company having a par value of One Hundred Dollars $(100.00) each into one hundred thousand (100,000) shares having a par value of Ten Dollars ($10.00) each and increasing the capital of the Company by the creation of one hundred thousand (100,000) four per centum (4%) non-cumulative redeemable preference shares having a par value of Ten Dollars ($10.00) each,
“(b) To consider and if deemed advisable sanction and confirm By-Law No. 24 of the Company passed by the Directors on the 8th day of May, 1951, being a by-law empowering the Directors of the Company to declare stock dividends and to issue therefor shares of the Company fully paid and nonassessable, and
“ (c) To transact such other business as may properly come before the meeting.”
At the special general meeting of June 5, 1951, the company did two things. In the first place the shareholders sanctioned By-law 23 of the company passed by its directors authorizing an application for supplementary letters patent subdividing the authorized and issued 10,000 shares of the capital stock of the company of a par value of $100 each and increasing the capital of the company by the creation of 100,000 4% non-cumulative redeemable preference shares having a par value of $10 each, and, secondly, the shareholders confirmed By-law 24 of the company passed by the directors which was in this form:
“By-Law No. 24
Being a by-law empowering the Directors to declare stock dividends.
“Now THEREFORE BE IT ENACTED AND IT IS HEREBY ENACTED as by-law No. 24 of Mills Bros. Limited (hereinafter called the ‘Company’) that:
fully declare payable in money the Directors may declare a stock dividend and issue therefor shares of the Company fully paid and non-assessable.
For the amount of any dividend which the Directors may law-
Enacted this 8th day of May, A.D. 1951.”
On July 30, 1951, supplementary letters patent were issued to the company pursuant to the application made under the first of the two last-mentioned resolutions.
Then on October 23, 1951, the Board of Directors of the company passed the following resolution :
‘ ‘ RESOLUTION RE Stock DIVIDEND
‘“ WHEREAS By-law No. 24 which was passed by the directors on the 8th day of May, 1951, and was confirmed by the share- holders in meeting duly convened, authorizes the directors to issue fully paid shares for the amount of any dividend that the directors may lawfully declare payable in money ;
“ And WHEREAS by supplementary letters patent bearing date the 30th day of July, 1951, the authorized capital of the Company was subdivided and increased as follows :—
4 'The capital stock of the Company shall be two million dollars divided into one hundred thousand four per cent non- cumulative redeemable preference shares and one hundred thousand common shares, all of the par value of ten dollars each ;
"And WHEREAS pursuant to the authority of said by-law the directors have decided to issue 71,564 of the preference shares authorized by the supplementary letters patent as fully paid and non-assessable shares as a dividend ;
"Now BE it RESOLVED that a dividend be and the same is hereby declared on the isued shares of the common stock of the Company in the form of an issue of preference shares of the Company of an aggregate par value of $715,640.00 ;
"Be IT FURTHER RESOLVED that in appropriating said shares to said dividend, $715,640.00 of the tax paid undistributed income on hand of the Company standing on the books of the Company be capitalized and appropriated to payment in full of said 71,564 preference shares appropriated for said stock dividend ;
' Be it FURTHER RESOLVED that contemporaneously with said appropriation and capitalization of said $715,640.00 of said undistributed income, there be issued and allotted the said 71,564 preference shares of the Company of the par value of ten dollars ($10) each as fully paid and non-assessable shares to the holders of record of the outstanding common shares of the Company in proportion to the shares held by them respectively at the close of business on the 31st day of October, 1951, said preference shares to rank for dividends from and after the 1st day of November, 1951;
"Be it FURTHER RESOLVED that the Company take cognizance of any waivers filed by shareholders with respect to receipt of said stock dividend and appropriate and distribute any shares affected by such waivers among or to shareholders who have not filed any such waiver, so that persons holding qualification shares need not be obliged to receive and account for any shares to be issued as a stock dividend.”
Following enactment of this resolution, there was subsequently issued by the company to the trustee of this estate a certificate (or certificates) for 23,840 4% non-cumulative redeemable preference shares of the company.
On the same day, namely, October 23, 1951, the Board passed this resolution :
“Resolution RESPECTING REDEMPTION OF PREFERENCE SHARES
“Whereas there are now issued and outstanding as fully paid and non-assessable 71,564 4% non-cumulative redeemable preference shares of the par value of ten dollars ($10) each;
and
“Whereas the Directors have declared a dividend on such 4% non-cumulative redeemable preference shares at the rate of 4% per annum from November 1st, 1951, for the period of one month, such dividend to be payable on December 1st, 1951, to the Shareholders of record as of the close of business October 31st, 1951 ; and
‘“ WHEREAS it is expedient that 50,000 if such issued and outstanding 4% non-cumulative redeemable preference shares should be redeemed as hereinafter mentioned ;
“Now THEREFORE be it RESOLVED THAT THE Company do redeem, on the 1st day of December, 1951, 50,000 of its 4% non- cumulative redeemable preference shares of the par value of ten dollars ($10) each by payment for each of such shares of ten dollars ($10) together with the sum of .314 cents per share, being a dividend at the rate of 4% per annum for the period from November 1st, 1951 to the date fixed for redemption of the said shares; and that a least thirty (80) days’ notice in writing be given to each of the persons who at the date of the giving of such notice are the registered holders of such shares, of the intention of the Company to redeem the same, such notice to be given by the Secretary of the Company, in the manner, and containing the information, required by the provisions of the supplementary letters patent of the Company, and further that the redemption moneys be paid in accordance with such provisions ;
‘ 4 And BE it FURTHER RESOLVED that the officers of the Company be and they are hereby authorized to take all such steps and execute all documents which may be necessary or desirable for the purpose of effecting such redemption.”’
Later, on January 15, 1952, the directors of the Company, by similar resolution, made provision for redemption of the out- standing redeemable preference shares on April 1, 1952, and at the same time stipulated that the shareholders were also to be paid the sum of 30c per share by way of a dividend. Under the authority of the last two resolutions 16,655 of the preference shares issued to the trustee were called for redemption on December 1, 1951, and the trustee, in exchange therefor, received $167,105.16, and on April 1, 1952, the balance of those shares were redeemed, at which time the trustee received the further sum of $93,405.
The Court is asked for its advice upon these two questions :
“1. Whether upon the true construction of the said Will and in the events which have happened the sum of $166,550.00, being the sum (exclusive of the amount representing accrued dividends) received by the Trustee upon the redemption of 16,655 4% Non-Cumulative Redeemable Preference Shares of Mills Bros. Limited which were issued and received as a stock dividend by the said Company to the Trustee, is income or corpus in the hands of the Trustee for the purpose of administering the said Trust.
“2. Whether upon the true construction of the said Will and in the events which have happened the remaining 7,185 4% Non-Cumulative Redeemable Preference Shares of Mills Bros. Limited, which were issued and received as a stock dividend to the Trustee, and not yet redeemed by the Company, are income or corpus in the hands of the Trustee for the purpose of administering the said Trust.’’
The second question was, of course, phrased before the shares with which it is concerned were redeemed and, therefore, is not now entirely appropriate.
The authorities on matters of this kind are numerous and, if I may say so, frequently discordant. Reconciliation of what is contained in many of them is not easily attained but this much can be said: whether shares which come into the hands of trustees in circumstances such as I have outlined above are received as capital or income depends upon the intention of the company effecting delivery of those shares. What that intention was is a question of fact in each instance and when it has been ascertained it is binding upon all persons interested in the trusts.
If I correctly apprehend what was decided in Bouch v. Sproule (1887), 12 App. Cas. 385, and in the cases which follow it, including Re Fleck, [1952] 2 D.L.R. 657 ; [1952] C.T.C. 196, it is that whatever may be the means used by a company to transmit accumulated profits to its shareholders, the answer to the question whether those profits reach the shareholders as income or capital is to be found not only in the form of the transaction, but by determining its substance. That principle has been described in many ways, but I believe that it is essentially a question of fact in each case as to what has been the company’s decision with respect to the ultimate disposition of the surplus. If a company decides to devote the accrued income to capital purposes, any shares issued by reason of that decision, or the proceeds thereof, will be regarded as a capital accretion to the shareholders no matter what process is employed by the company to achieve its objective. If, on the contrary, the company resolves to pass the surplus income over to its shareholders rather than to blend it into its capital fabric, the shareholders will be deemed to receive income and not capital.
As in the Fleck case, the sole and fundamental intention of this company was to distribute the tax-paid accumulated income among its shareholders in such a way as to relieve them from the burden of personal income tax. No other logical or reasonable construction can be placed upon the letter of December 1, 1950, or upon the steps taken thereafter by the company. The rather intricate procedure invoked by it furnishes further incontrovertible proof of that intention because it was the only way by which the undistributed income could reach the shareholders as income without rendering them liable for tax. One must also bear in mind that the auditors’ statements of the company for 1949 and for 1950 make it abundantly clear that at the end of 1949 the company’s financial position was relatively liquid and that there was no possible reason for it to convert the accumulated income into capital. I repeat, therefore, that all that was done was part of a plan—a perfectly proper and legal one—to benefit the shareholders by paying over the accumulated surpluses really as dividends but involving a form of capitalization so as to free them from the obligation of paying personal income tax; what was done does not in any sense suggest an intention on the part of the company to add the value of the new redeemable preference shares to its capital structure. Accordingly, the essential nature of the transaction was to transfer income resting in the coffers of the company to its shareholders and the situation is, therefore, the converse of that which was presented to the Courts in the Bouch case, supra.
It was argued on behalf of the remaindermen that the process of capitalization had the result of irrevocably transforming the surplus from income to capital which could not thereafter be regarded as income for any purpose. This argument seems to be supported by the judgments in Re Piercy, [1907] 1 Ch. 289 at p. 294; Inland Revenue Commissioners v. Fisher’s Executors, [1926] A.C. 395 at p. 403; Commissioners of Income-Tax, Bengal v. Mercantile Bank of India Ltd., [1936] A.C. 478; Whitmore v. Commissioners of Inland Revenue (1925), 10 T.C. 645; Re Duff’s Settlements, [1951] 1 Ch. 923, and by portions of the judgments in Inland Revenue Commissioners v. Blott, [1921] 2 A.C. 171, and Hill v. Permanent Trustee Co. of N.S.W., [1930] A.C. 720, but a perusal of the appeal book and memoranda of argument filed with the Court of Appeal in the Fleck case indicates that the proposition was raised and apparently rejected in that Court. While the resolutions and proceedings were silent as to any such incident, the Booth Lumber Co. surplus must have been capitalized momentarily, and, if that is so, the Fleck judgments repudiate the contention that once the accumulated income has been changed to capital even to effect a distribution of income, that conversion arbitrarily settles the quality of the interest passing to the shareholders.
Counsel then invited me to distinguish this case from the Fleck case because of the diversity of procedure and language used when the respective plans were in the course of being executed. It cannot be denied that the technique of getting the moneys into the hands of the shareholders was not by any means the same in each instance, but in view of my conclusion that the essential purpose of both companies was to allow the shareholders to enjoy the undivided surplus income as such, it matters not that procedural differences can be found. Moreover, I believe that it would be undesirable and perhaps dangerous to search for and attempt to establish variations of method in other cases where it is obvious that the paramount concern of the company involved is to pass accumulated income on to its shareholders by issuing redeemable preferene shares for the single purpose of freeing those shareholders from a personal tax liability. If relatively unimportant differences were given recognition, uncertainty would result and in almost every similar situation the question whether moneys received by trustees were income or capital would have to be determined by the Court after an extensive investigation. What is conclusive is that both companies decided to transfer the tax-paid accumulated income as such to their respective shareholders and they adopted a similar, though not entirely identical, method of ensuring that the shareholders would not be required to pay tax on receipt of that income.
The fact that redemption was effected in the Fleck case im- mediately after the issue of the preference shares, and here some months later, does not alter the character of the two transactions. On this point reference should be made to Aykroyd v. Inland Revenue Commissioners, [1942] 2 All E.R. 665. The Court is obliged to ascertain the decision of the company when it embarked upon the plan which ultimately causes the moneys to be paid to its shareholders in exchange for the shares, and if at that time it was the company’s intention to release those moneys to its shareholders at once or soon thereafter, then I am of the opinion that what the shareholders got was income.
No purpose whatever would be served by examining and discussing the other decided cases on this subject. If I am right in interpreting Re Fleck as I have, it must be followed.
Both questions will therefore be answered by a declaration that the sums received by the trustee upon the redemption of the company’s preference shares represent income and not capital.
Costs of all parties are to be taxed on a solicitor-and-client basis and are to be paid out of the moneys in question forthwith after taxation.
Declaration accordingly.