The appellant, her cousin (“McAllister”) and her father held 40%, 40% and 20% of the common shares of Brown’s Paving Ltd. (“BPL”), respectively, and her father also had voting control through special voting shares (representing over 90% of the voting rights). Both she and McAllister worked in the business. After McAllister had approached the appellant about purchasing her shares, the following occurred:
- BPL took out a $600,000 bank loan, secured by a charge on its assets and a secured guarantee of McAllister and his personal holding company (Corco).
- Corco purchased all of the appellant’s shares in consideration for issuing a $600,000 demand promissory note.
- BPL redeemed the shares held by Corco for $600,000 in cash, which was used by Corco to pay off the demand promissory note. Corco claimed the s. 112(1) deduction.
In finding that the sale in 2 above was a transaction between persons dealing with each other at arm’s length, so that s. 84.1 did not deem the appellant to receive a dividend, Graham J indicated that:
- “The Appellant and Corco engaged in hard bargaining regarding the terms of the sale.” (para. 48)
- “[T]he transactions were structured in the way they were to benefit Corco … [which] needed a way to finance the purchase.” (para. 49)
- “The parties only ended up in the position that they did because the Appellant, when asked, was willing to sell her shares to Corco” (para. 53), and a transaction in which her shares instead were redeemed by BPL was not a realistic alternative.
Graham J stated (at para. 56):
Ultimately, for the Appellant and Corco to have been acting in concert without separate interests, there must be something more than sharing the same tax advisors and having a common interest in getting the deal done.