Roland St-Onge:—The appeals of Dr Arthur W Nauss and Mrs Doris B Nauss came before me on July 13, 1978 at the City of Calgary, Alberta, and the issue is to know when an exchange of shares took place in order to find out the amount of capital gain.
Dr Nauss was the holder of 380,000 common shares and his wife, 20,000 in a private company known as Polaris Oil Ltd (hereinafter referred to as “Polaris”).
There was a takeover by a public company known as Peyto Oil Ltd (hereinafter referred to as ‘‘Peyto’’) of all the shares of Polaris by trading six shares for one Peyto share, which means that Dr Nauss received some 63,333 shares of Peyto and his wife, 3,333. These Peyto shares were being traded on the Toronto Stock Exchange.
Naturally there was a taxable capital gain involved and the question is to determine when the disposition of the shares took place in order to fix the fair market value of the Peyto shares. In his Notice of Appeal, Dr Nauss contended the following:
2. On or about October 19, 1972 discussions between Peyto Oils Ltd (“Peyto”) and the principal shareholders of Polaris (including the Appellant) were held as a result of which the principal shareholders indicated the committment of their shares in the event of a formal take over bid by Peyto.
3. On or about November 20, 1972 Peyto made a formal take-over bid in writing to all of “the holders of common. shares without nominal or par value of Polaris Oil Limited . . . to acquire all of the shares of Polaris by exchanging such shares for shares without nominal or par value in the capital of Peyto on the basis of 1 Peyto share for 6 Polaris shares” (the “said offer”).
4. The said offer was made subject to certain terms and/or conditions including, inter alia, that:
(a) the offer could be accepted at any time between November 20, 1972 and December 15, 1972 (or at such later time as Peyto might in wrtiing designate) (referred to in the said offer as the “Offer Period”).
(b) acceptance of the offer by the Polaris shareholders was to be by completion of a letter of transmittal included with the offer which was to be forwarded together with the shareholder’s Polaris share certificates to Peyto’s transfer agent, Montreal Trust Company, on or before the expiry of the Offer Period.
(c) receipt by the Montreal Trust Company as aforesaid was to constitute an irrevocable acceptance of the offer by the depositing Polaris shareholder, except that those shareholders depositing within seven days of the date of the offer on November 20, 1972 could withdraw those same shares up to and including November 27, 1972 but not after.
(d) the obligation of Peyto to take up any of the shares deposited was subject to the satisfaction of conditions set out in paragraph 6 of the said offer, including inter alia, the deposit by the expiry of the offer of 100% of the issued and outstanding no par value common shares of Polaris; no material change in the business or affairs of Polaris or any of its subsidiaries between October 1, 1972 and the expiry of the Offer Period; no funded indebtedness was to be created in the same period; no changes in the capitalization of Polaris or any of its subsidiaries; no dividends were to be paid or material contracts entered into out of the ordinary course of business providing for the disposition of Pclaris assets or otherwise; no unusual executive compensation packages were to be contracted for or entered into; no material actions or proceedings were to be pending at the expiry of the offer period; and contemporaneously with Peyto taking up the Polaris shares tendered, meetings of the Directors of Polaris and its subsidiaries were to be held at which they were to resign to be replaced by Peyto nominees, provided, however, that these conditions were acknowledged to be for the benefit of Peyto only and could be waived in whole or in part at any time and further provided, however, that notwithstanding the provisions of the said paragraph 6 “Peyto would be entitled to at any time and from time to time, after the expiration of seven days from the date of the offer, to take up all the Polaris shares then tendered . . . by giving notice thereof to the trust company at its office in Calgary . . . and Peyto shall be deemed to have waived all of the conditions contained in this paragraph 6”.
(e) If Peyto’s obligation to take up shares did not become binding by the expiry of the Offer Period pursuant to the provisions of paragraph 6, then the offer would terminate automatically and Polaris shareholders would be entitled to the return of their shares:
(f) If, as and when the offer became binding on Peyto in accordance with the provisions of paragraph 6, each offeree was to be entitled to receive in exchange for his tendered Polaris shares, and within fourteen days following the expiry of the offer period, share certificates of Peyto and, if appropriate, cash (based upon a Peyto share value of $2,75 per share) in lieu of an fractional Peyto shares.
5. At no time following the making of the offer on November 20, 1972 did Peyto give notice of its intention to extend the Offer Period beyond the date of December 15, 1972 set out in the offer.
6. On or about November 20, 1972 it was resolved by all of the Directors of Peyto that Peyto should take up those shares of Polaris Oil Limited deposited in accordance with the provisions of the offer dated November 20, 1972 and that there should be issued and alloted to each shareholder of Polaris depositing his shares in accordance with the: offer 1 share of the capital stock of Peyto for each 6 shares of Polaris tendered which shares would be issued for a deemed consideration of $2,75 per share.
7. On or about November 28, 1972 the appellant irrevocably accepted Peyto’s .offer of November 20, 1972 by tendering his 380,000 no par value common shares of Polaris together with the required letter of transmittal to the Montreal Trust Company.
8. On or about December 14, 1972, the appellant filed with the Minister, pursuant to the provisions of section 116 of the Income Tax Act, Canada (the “Act”), Form T2062 disclosing the disposition by the appellant, a non-resident, of taxable Canadian property and including payment in the amount of $14,249.50, representing tax at the prescribed rate of 25% on the appellant’s net capital gain based upon the value at which Peyto shares traded on the Toronto Stock Exchange on November 28, 1972, namely $3.90 per share.
9. On or about April 3, 1973 the Minister issued to the appellant his Certificate, No 819452, on Form 172068 certifying that the provisions of subsection 116(4) had been complied with as regards the subject transaction and that there would be no liability on the purchaser of the property described (ie Peyto) to pay tax under the provisions of subsection 116(5).
10. By Notice of Assessment No 4413376 dated March 21, 1975, the Minister arbitrarily assessed the proceeds of disposition received by the appellant arising on the exchange of the Polaris shares for Peyto shares at the value of Peyto shares on January 11, 1973, namely $5.35 per share, for total proceeds of disposition of $338,832.46 and included in the taxpayer’s 1973 income a taxable capital gain in the amount of $74,416.23 in respect of which the Minister claimed tax to be payable in the amount of $37,128.82 including a late filing penalty pursuant to paragraph 162(1)(b) of the Act in the amount of $500, the unpaid balance of which at the date of assessment, including interest thereon from the. due date of the balance to the date of assessment in the amount of $1,174.91, was in the amount of $24,054.23.
These paragraphs are the same in substance as those mentioned in his wife’s notice of appeal.
At the hearing, three witnesses were heard:
1. Mr Vanderham, President of Peyto Oil Ltd.
2. Mr Roger Ball, Chief Accountant of Peyto Oil Ltd and former Vice-President of Polaris;
3. Dr Arthur W Nauss, geologist, one of the appellants.
Mr Vanderham explained the following. In the Fall of 1972, he negotiated the takeover of Polaris by Peyto with Messrs John Downing and Roger Ball, two officers of Polaris. Peyto was interested in acquiring certain assets of Polaris. Mr Downing, as Presiednt of Polaris, was authorized to speak for all the shareholders. On November 16, 1972 he received a letter of confirmation from Mr Downing (Exhibit A-1). From then on, in his estimation,
. . we had made a deal with all the shareholders of Polaris Oil Ltd and that the deal was made and it was only waiting for more paper and regulatory approval to conclude it.
On the same day, a press release was sent out so that the oil industry in England would know that Peyto had acquired an interest in Polaris which held an interest in the UK. Polaris had North Sea acreage.
On November 20, 1972, a document was signed which stipulated, among other things, that:
1. acceptance of the offer was to be made by Polaris shareholders by depositing the share certificates with a letter of transmittal to Montreal Trust Company on or before November 27, 1972 and this was subject to the right to withdraw up to November 27, 1972;
2. Peyto was not to make any material changes in its business and was not to pay any dividends to its shareholders;
3. fourteen days later (December 11, 1972) Polaris shareholders. were to receive share certificates of Peyto based upon Peyto share value of $2.75 per share.
On the same day, a resolution of the Directors of Peyto (Exhibit A-4) was passed which reads in part as follows:
That there be issued and allotted to the shareholders of POLARIS OIL LIMITED who have deposited their shares in accordance with the pro- visions of the offer dated November 20, 1972, one share in the. capital stock of the Company for each six shares of Polaris Oil Limited deposited in accordance with the terms of the said offer, which shares of the Company shall be issued and allotted at a deemed consideration of $3. per share.
That the Company’s Registrar and Transfer Agent, Montreal Trust Company, be instructed to issue share certificates to the shareholders of POLARIS OIL LIMITED who are depositing their stock in accordance with the said offer and that the deposit of a certified copy of this Resolution with the Montreal Trust Company be sufficient authority for that company to issue the share certificates as required by this Resolution.
On December 22, 1972 a statement on Peyto’s stationery (Exhibit A-5) was issued which said:
Further to our share exchange offer of November 20, 1972, we wish to advise that the Montreal Trust Company has received the Polaris shares from all but one shareholder.
We have not as yet received the Toronto Stock Exchange or the Ontario Securities Commission’s approval of the transaction. The Toronto Stock Exchange did advise us that the Peyto shares to be issued to the Polaris shareholders would be free shares, tradeable without restrictions.
We did receive the consent from the Alberta Securities Commission.
We regret the delay which is partly caused by the holiday season and the slowness of the mail.
Please rest assured that the transaction will be concluded at the earliest possible date.
On being asked when the deal took place, Mr Vanderham said:
A Well sir, my memory is a little bit weak in this respect, I’m afraid it is eight years ago, six years ago but there is no doubt in my mind that when we sent out the press release, we advised the Toronto Stock Exchange, the Ontario Securities Commission and the Alberta Securities Commission that we had made a deal, that we had made a deal [sic].
Q The press release was November —
A November 20.
Q November 20, 1972?
A That’s right. There is a letter to the Toronto Stock Exchange I believe, the same date.
Q Excuse me, ! think it was November 16.
A November 16, excuse me.
Q So on that date, you thought you had an agreement?
A That is correct.
Q I have no further questions.
Upon cross-examination, the witness admitted:
1. that when he negotiated the agreement with Polaris, he made sure that there were no skeletons in the closet;
2. that they would receive 100% of the shares but also that there would be a more formal offer to purchase;
3. that when the press release was sent out Peyto would issue a total of 383,333 of its Treasury shares for this acquisition subject to approval of regulatory bodies.
Mr Vanderham went on to say, and I quote from the transcript, pages 17, 18 and 23:
Q This offer seems to be quite an elaborate document, is that correct?
A Yes sir.
Q Would it be your testimony today that this document really, as far as you were concerned, has no weight and should be ignored?
A I could hardly say that sir, it is a four page document, no, we would not ignore it.
Q I would like to refer you to paragraph six of that agreement. Could you read paragraph 6(a).
A On the expiry of the offer period, certificates which represent in the
aggregate, one hundred per cent of the total then issued outstanding Polaris shares shall have been deposited in the manner herein provided . . . pursuant to paragraph nine herewith.
Q Am I correct in assuming that this was one of the conditions you originally discused with Mr Downing, the fact that you were originally interested in at least getting one hundred per cent of the shares?
A That’s right.
Q Did you indicate to Mr Downing either verbally or in writing that that condition was to be waived and was not of importance to you?
A I don’t think it was ever discussed. Right from the beginning, Mr Downing spoke for all his shareholders and his assurance was that all the shareholders had approved the exchange and his word was good enough for us.
Q One last question, Mr Vanderham. Would you agree with me that it would have been open for Peyto to not proceed with this deal because of certain clauses put in here for the benefit of Peyto? I refer you specifically to paragraph 6 after sub-paragraph (n) if you wish to refer to that.
A Well sir, you know, the main assets of Polaris Oil were, I believe, about $400,000 in cash, an interest in Block 37 in England and an interest in about two hundred thousand acres of North Atlantic lease.
I presume you want to go on this hypothetical thing, if the $400,000 was missing, yes, we would have had an opportunity to not proceed with the deal. That would have been fraudulent and that is the reason for the agreement. .
Mr Roger Ball testified that in the latter part of October 1972 Mr Downing was agent for all the shareholders of Polaris and received confirmation from them to the effect that they agreed to the takeover of their company by Peyto.
Upon cross-examination, he admitted that the 11th of January 1973 was the closing date, that only on that date were the shares of Peyto received and that all the directors of Polaris resigned.
Dr Nauss testified that Messrs John Downing and Roger Ball were the two officers who were actually running Polaris; that he gave Mr Downing complete authority to act on his behalf with regard to the disposition of his shares; that on November 28, 1972 he took his shares out of the safety deposit box, delivered them to the Montreal Trust Company and, once in their office, endorsed them. Then, within ten days, he signed and forwarded a form pursuant to the provisions of section 116 of the Income Tax Act.
Counsel for appellant contended that in common law there was a binding agreement in existence prior to the written offer of November 20, 1972 to know by November 16 because, on that date, all the shareholders of Polaris had already accepted verbally to tender their shares on a six to one basis and Peyto, on that date, had accepted this agreement in writing.
He mentioned that Dr Nauss delivered his shares on November 28, 1972 and within ten days thereafter, he filed a form to declare that he had disposed of his shares. According to counsel for appellant, what happened thereafter is immaterial, the appellant disposed of all rights which he had in the Polaris shares and, for that reason, he submitted that the effective date of disposition under paragraph 54(c) is the date that the appellant disposed of his shares.
He referred the Board to the following cases:
1. Ridge Nominees, Ltd v Inland Revenue Commissioners, [1961] 2 All ER 354;
2. Wood Preservation, Ltd v Prior, [1969] 1 All ER 364.
Counsel for respondent referred the Board to paragraph 54(c) which reads as follows:
(c) “Disposition” of property.—“disposition” of any property, except as expressly otherwise provided includes
(i) any transaction or event entitling a taxpayer to proceeds of disposition of property,
(ii) any transaction or event by which
(A) any property of a taxpayer that is a share, bond, debenture, note, certificate, mortgage, hypothec, agreement of sale or similar property, or an interest therein, is redeemed in whole or in part or is cancelled,
(B) any debt owing to a taxpayer or any other right of a taxpayer to receive an amount is settled or cancelled,
(C) any share owned by a taxpayer is converted by virtue of an amalgamation, or
(D) any option held by a taxpayer to acquire or dispose of property expires, and
(iii) any transfer of property to a trust, or any transfer of property of a trust to any beneficiary under the trust, except as provided in subparagraph (v),
but, for greater certainty, does not include
(iv) any transfer of property for the purpose only of securing a debt or a loan, or any transfer by a creditor for the purpose only of returning property that had been used as security for a debt or a loan,
(v) any transfer of property by virtue of which there is a change in the legal ownership of the property without any change in the beneficial ownership thereof,
(vi) any issue by a corporation of a bond, debenture, note, certificate, mortgage or hypothec of the corporation, or
(vii) any issue by a corporation of a share of its capital stock, or any other transaction that, but for this subparagraph, would be a disposition by a corporation of a share of its capital stock.
He submitted that, according to this definition, disposition of property does not mean when the property has been disposed of as in the examples given by the appellant but when the latter becomes entitled “to proceeds of disposition of property’’ and that is when he received the Peyto shares. He agreed that there might have been a meeting Of the mind prior to November 20, 1972 but submitted that the document which sets down the terms and conditions of the sale was prepared for some purpose and must be given some weight.
According to counsel for respondent, the verbal agreement was subject to a more formal offer, and the written offer of November 20, 1972 stipulated that 100% of the shares had to be received by Montreal Trust and approved by the Stock Exchange.
He referred the Board to the decision of Mr Justice Noel in Victory Hotels Ltd v MNR, [1962] CTC 614; 62 DTC 1378 in which the Judge had to deal with the definition of disposition of property in section 20 of the former Act. It reads in part as follows:
20(5)(b)
(b) “disposition of property” includes any transaction or event entitling a taxpayer to proceeds of disposition of property.
In that case, the appellant was not entitled to the proceeds of disposition until January 3., 1955 or such time after that date that all the conditions of the contract had been fulfilled.
According to the evidence adduced, it is obvious that the agreement was subject to many conditions, one of the main being the transfer of 100% of the shares by the shareholders of Polaris to Peyto. Apparently, this was not done until January 11, 1973. Furthermore, Mr Roger Ball testified that the closing date of the transaction was on January 11, 1973, when all the shares were delivered and the Polaris directors had resigned.
In the case of a takeover, the disposition of property occurs only when the shareholders who trade their shares for others are entitled to receive the shares of the other company. In the case at bar, it is obvious that the appellants were entitled to receive the Peyto shares only when the transaction was finalized on January 11, 1973.
The Board does not feel that a distinction should be made between disposition of property in section 20 of the former Act as interpreted by Mr Justice Noël and that under paragraph 54(c) of the new Act.
This decision of Mr Justice Noël confirms my thinking with respect to the case at bar.
Consequently, the appeals are dismissed.
Appeals dismissed.