Rip, T.C.C.J.:—The executors of the Estate of the late George A. Richardson ("Estate") disagree with the respondent, the Minister of National Revenue ("Minister"), as to the value of 75,000 Cheyenne Petroleum Corporation ("Cheyenne") shares issued to George A. Richardson ("Richardson") in 1979 for his past services to Cheyenne. The Minister, in reassessing for 1979, determined the value of the shares to be $297,000, or $3.96 per share. Cheyenne's shares traded on the Vancouver Stock Exchange.
The estate is of the view that prior to the shares being delivered to Richardson they were subject to deposit in escrow as required by the Vancouver Stock Exchange. Thus their value should be discounted from their trading price. In the alternative, the shares had been allotted to Richardson in 1978, or at the latest at the beginning of 1979. If they were allotted and not issued then the value of the right Richardson had in the shares, which would be much less than the price they were being traded at the date they were allotted, is to be included in income. The Minister is of the view that the shares were never deposited in escrow and they were allotted to Richardson about the time they were issued to him. The Minister allowed no discount in valuing the shares.
The parties agreed on the following facts set forth in the appellant's notice of appeal:
(a) The deceased died December 19, 1979, aged 83. In his lifetime he had been engaged in endeavoured discovery promotion and development of natural gas resources in what became known as the Grizzly Valley Gas field.
(b) The date of incorporation or amalgamation of Cheyenne was September 24, 1973. At material times its shares were listed for trading on the Vancouver Stock Exchange.
(c) March 3, 1978, the directors of Cheyenne adopted a resolution for allotment of 75,000 shares of that company to the deceased and 10,000 shares of that company to one, J.L. Wilson (now deceased) at a price or consideration of 60¢ per share determined by the Directors pursuant to the Company Act, R.S.B.C. 1979, c. 59, and subject to deposit in escrow as required by securities regulatory bodies and to approval by resolution of shareholders of the company.
(d) As presented by the directors of Cheyenne to a meeting of its shareholders for approval, allotment of such shares was described to be:
(e) Respecting J.L. Wilson, for payment for services provided by Mr. Wilson to the Company, its predecessors and the Grizzly Monkman project over the past number of years in addition to the duties he has performed as a director of the company".
(f) Respecting Mr. Richardson:
In connection with the significant and substantial services provided by him to the company, its predecessors and the Grizzly Monkman project during the past 30 years in addition to the duties he has performed as a director of the company.
(g) Approval of allotment of such shares was adopted by resolution of members of the company May 12, 1978 subject to deposit of such shares in escrow upon terms and subject to periodic release of the discretion of securities regulation bodies.
(h) The deceased Mr. Richardson subscribed to a regular form of escrow agreement of the Vancouver Stock Exchange and of the British Columbia Superintendent of Brokers August 8, 1978.
A book consisting of 22 documents was filed by counsel of the parties as Exhibit A-1. The valuation report of Cheyenne shares as at May 20, 1979 prepared by Dennis Turnbull (“Turnbull”), C.G.A., referred to in tab 20 of the Exhibit A-1, was not included in the book of documents but was provided separately. The Minister produced two statements of Cheyenne filed with the Vancouver Stock Exchange, one dated June 8, 1978, and the second, May 31, 1979.
The appellant does not dispute the market value of the shares at $3.96 each, determined by Turnbull. The appellant states that since the shares were subject to deposit to escrow they were worth about 10 per cent to 20 per cent of the value of freely traded shares, as stated by Turnbull in his report. However, Turnbull was of the view that the shares were never deposited in escrow and valued the shares at then average trading price on May 30, 1979 ($33,850 -:- 8558 shares).
The exhibits reflect the following:
(a) A notice dated April 12, 1978, advised members that the annual general meeting of members for 1977 of Cheyenne would be held on May 12,1978 to consider, amongst other things, approving the issuance of 75,000 common shares in the capital stock of Cheyenne to Richardson.
The Information Circular accompanying the notice of meeting stated that two directors, Wilson and Richardson, would be allotted shares in the corporation. The Information Circular states:
By resolution of the board of directors of the company made at a meeting held on March 3, 1978, it was resolved that the company should allot, issue and deliver to the following present directors shares in its capital stock subject to the approvals of the regulatory securities authorities and of the members of the company:
1. John L. Wilson: Mr. Wilson is to be allotted 10,000 Company shares in payment for services which he has provided to the company, its predecessors and the Grizzly-Monkman project, over the past numbers of years in addition to the duties he has performed as a director of the company.
2. George A. Richardson: Mr. Richardson is to be allotted 75,000 company shares in connection with the significant and substantial services provided by him to the company, its predecessors and the Grizzly-Monkman project during the past thirty years in addition to the duties he has performed as a director of the company,
which shares are to be issued to them as fully paid and non-assessable shares subject to the requirements of the regulatory securities authorities.
In the past, the company has been unable to properly remunerate Messrs. Richardson and Wilson for their services due to financial circumstances.
The company shares to be issued to Messrs. Wilson and Richardson are to be deposited with the company's registrar and transfer agent in escrow under escrow agreements on terms as may be required by the regulatory securities authorities subject to periodic releases in the discretion of the regulatory securities authorities. Under the circumstances that these shares are to be deposited in escrow and thereby no subject to immediate release except in the discretion of the regulatory securities authorities . . .
Apparently Wilson was dissatisfied with the number of shares to be issued to him and had advised Cheyenne he would take legal action without further notice if Cheyenne persisted in attempting to pursue the directors' [1] resolution to allot Richardson shares in excess of those to be allotted to Wilson. Obviously no shares had been allotted or issued to Richardson by April 12, 1978.
Note 9 to Cheyenne's financial statements for the year ended June 30, 1978 stated that the shares were issued in escrow.
(b) Richardson ceased to be a director of Cheyenne on May 12, 1978.
(c) Richardson executed a document entitled "Escrow Agreement", dated August 8, 1978 (Exhibit A-1, Tab 8). Richardson, the first party to the Agreement, is referred to as a shareholder, but the name of the corporation of which he is a shareholder is omitted. An“ escrow agent" is the second party to the escrow agreement but no person is so identified. Finally Cheyenne is referred to as the third party. The president and secretary of Yorkshire Trust Company ("Yorkshire") appear to have executed the agreement. However there is no description of Yorkshire's interest in the escrow agreement. The escrow agreement also appears to have been executed on behalf of the escrow agent, but the name of the agent is absent; indeed, the same persons who executed the escrow agreement on behalf of the escrow agent also appear to have signed on behalf of Cheyenne. It would appear however Yorkshire executed this escrow agreement sometime in May, 1979 (See Appendix VIII of Turnbull Valuation Report).
(d) By letter dated August 8,1978 Richardson wrote to the Superintendent of Brokers of British Columbia undertaking to lodge in escrow with Cheyenne's registrar and transfer agent the 75,000 shares pursuant to an escrow agreement with the Vancouver Stock Exchange. The recital to the latter escrow agreement states the shares of Cheyenne registered in Richardson's name "are at present deposited in escrow with the Vancouver office of the Yorkshire Trust Company. . . ." Counsel for the appellant acknowledged this was not so. Richardson agreed he would not, without the written consent of the Vancouver Stock Exchange, sell, deal in, assign or transfer in any manner whatsoever any of the said shares and that the certificates representing the shares deposited in escrow would not be released from escrow without the prior written consent of the Vancouver Stock Exchange.
(e) By letter dated January 16, 1979, Mr. F. Michael P. Warren, solicitor for Cheyenne and President and Director of Cheyenne in 1979, wrote to the Vancouver Stock Exchange that his firm has been instructed by Cheyenne "to request that you approve the issuance by the company of the escrow shares to Messrs. Richardson and Wilson”. He referred to the situation with Wilson "in the proposed allocations of company shares", advising the "company wishes to proceed with the allotment of the escrow shares regardless of what action, if any Mr. Wilson may take
(f) On February 1, 1979 Mr. Desmond H. Harrison, Vice President, listings of the Vancouver Stock Exchange advised Warren the Exchange “now consents to the issuance" of the shares to Richardson and Wilson in escrow.
(g) On May 11,1979 Cheyenne issued a Treasury order to Yorkshire authorizing and directing it to issue a certificate representing 75,000 shares to Richardson. The order states the shares have been allotted as fully paid and non-assessable.
(h) On May 30, 1979 the Vancouver Stock Exchange consented to the release of the 75,000 shares of Cheyenne "held in escrow" pursuant to the escrow agreement signed by Richardson in 1978.
(i) Yorkshire, on May 30, 1979, advised the Vancouver Stock Exchange on that day it issued from Treasury 75,000 shares of Cheyenne to Richardson.
It is quite clear that no shares were issued from Cheyenne's treasury before May 30,1979 and accordingly none of the 75,000 shares issued to Richardson were ever deposited in escrow, notwithstanding the documents stating they were or the purported intentions of Richardson, Cheyenne and Yorkshire.
Appellant's counsel then argued, if I understand him correctly, that notwithstanding no shares were issued to Richardson before May 30, the value of the shares should be discounted on the basis firstly, the directors of Cheyenne allotted the shares to Richardson before that time and secondly, all the parties, that is, Richardson, Cheyenne and Yorkshire, had intended that the 75,000 shares be held in escrow.
The British Columbia Company Act, R.S.B.C. 1979, c. 59 authorizes a company to allot shares: section 41. Section 42 refers to the price of shares to be “allotted or issued". The words "allot", “allotment” and “allotted” are peculiar to the Company Act, in particular Part 3 concerning corporate finance. None of the Alberta Business Corporations Act, S.A. 1981, c. B-15, the Canada Business Corporations Act, R.S.C. 1985, c. C-44, and the Ontario Business Corporations Act, R.S.O. 1990, c. B.16, for example, use these words in provisions analogous to Part 3 of the Company Act.
Bouck, J. examined the meaning of the words "allotted" and “issued” in Milburn v. Copperbank Resources Ltd. (1975), 58 D.L.R. (3d) 138 (B.C.S.C.) at page 152:
The words “allot” and "issue" and their derivatives are used in the Companies Act [2] in various ways. It is not clear what the Legislature actually intended the words to mean because they are undefined in the statute. The word “allot” has been defined by other authorities but I must first look to the statute to see how the two words interrelate. Section 63 refers to entering the name of an “allottee” on the register of members and when a person's name is on the register of members, he is for all intents and purposes a member. Section 42 states that no shares may be issued until fully paid. Section 47 says that within one month after allotment and payment for shares the company shall have ready a share certificate for delivery. Other sections taken together with the above seem to mean that the company may not allot shares from its treasury in the sense that these shares are reserved for the allottee and issue certificates following the allotment.
On the other hand it would seem that only those shares that have been paid for should be shown as being allotted to the member on the register of members. The reason for this, is that the register of members is used to calculate who is entitled to vote at meetings, to dividends, to participate in the distribution of the proceeds on a winding-up etc.
Chitty, J. discussed the word“ "allotment" in Nicol's Case (1885), 29 Ch. D. [3] at pages 426-27:
There is no difference, as has often been pointed out, between a contract to take shares and any other contract. What is termed "allotment" is generally neither more nor less than the acceptance by the company of the offer to take shares. To take the common case, the offer is to take a certain number of shares, or such a less number of shares as may be allotted. That offer is accepted by the allotment either of a total number mentioned in the offer or a less number, to be taken by the person who made the offer. This constitutes a binding contract to take that number according to the offer and acceptance. To my mind there is no magic whatever in the term allotment” as used in these circumstances. It is said that the allotment is an appropriation of a specific number of shares. It is an appropriation, not of specific shares, but of a certain number of shares. It does not, however, make the person who has thus agreed to take the shares a member from that moment; all that it does is simply this: it constitutes a binding contract under which the company is bound to make a complete allotment of the specified number of shares, and under which the person who has made the offer and is now bound by the acceptance is bound to take that particular number of shares. In most cases the act of placing the person who has agreed to become a member on the register is a mere matter of form, and may be described as a mere ministerial act; but it appears to me that in point of law all that is done by the process I have just indicated, and all that was done in this case, was to make a complete and binding contract.
In Nelson Coke & Gas Co. v. Pellatt (1902), 4 O.L.R. 481 (C.A.), Maclennan, J.S., said at page 489:
As applied to a fixed quantity of anything, or a fixed number of shares, the word "allotment" can mean nothing more than to give, to assign, to set apart, to appropriate. The word has all these meanings. Nor does the word "issue" in the present case mean the doing of any particular act, and I think "issue", and "allotment" taken together mean no more than some signification by the company of its assent that the defendant now was or had become the owner of the number of shares which he agreed to take.
On the facts before me there is no acceptance by Cheyenne of any offer by anyone to take the shares simply because there was no such offer. Neither the formality described by Chitty, J. nor the register of allotment required by section 65 of the Company Act, for example, is present in the appeal at bar. The term “allotted” in the resolution of directors of Cheyenne at the meeting of March 3, 1978 has no special legal or technical meaning different from its normal meaning. Fraser and Stewart, at page 213, wrote:
In its proper sense, the term” "allotment" signifies a positive act by which shares authorized but unissued are allocated to an applicant by the duly authorized executive authority of the company.
The Shorter Oxford English Dictionary on Historical Principles defines the word "allot" as follows:
1. To distribute by lot, or in such way that the recipients have no choice; to assign shares authoritatively; to apportion. 2. To assign as a lot or portion to; to appoint (without distribution); hence, to appropriate to a special person or purpose. . . .
The word "allot" and its derivatives add nothing to the word “issue” in either sections 41 and 42 of the Company Act or the director's resolution of March 3, 1978. The word “allot” on the facts before me, means that prior to unissued, but authorized, shares being issued, the company sets aside from its authorized capital the number of shares to be issued to specific persons. In the appeal at bar — and in most other cases as far as I can see — the allotment and issuance of shares are contemporaneous. I have not been given any example where the procedure to issue shares in a company under the Company Act is any different from the issuance of shares in a company under a similar statute of another province or Canada. I understand that even in these jurisdictions it is the practice of many solicitors when drafting directors' resolution authorizing the company to issue shares to employ the phrase “allot” and "issue". Hence I cannot agree that Richardson had received some right to the shares, which had a value, in 1978 or early 1979 as a result of any allotment.
As far as the relevance of the intentions of Richardson, Cheyenne and Yorkshire is concerned I need only refer to Friedberg v. Canada, [1992] 1 C.T.C. 1, 92 D.T.C. 6031, a judgment of the Federal Court of Appeal, where Linden, J. stated, at pages 2-3 (D.T.C. 6032):
In tax law, form matters. A mere subjective intention, here as elsewhere in the tax field, is not by itself sufficient to alter the characterization of a transaction for tax purposes. If a taxpayer arranges his affairs in certain formal ways, enormous tax advantages can be obtained, even though the main reason for these arrangements may be to save tax (see The Queen v. Irving Oil, [1991] 1 C.T.C. 350, (F.C.A.), 91 D.T.C. 5106, per Mahoney, J.A.). If a taxpayer fails to take the correct formal steps, however, tax may have to be paid. If this were not so, Revenue Canada and the courts would be engaged in endless exercises to determine the true intentions behind certain transactions. Taxpayers and the Crown would seek to restructure dealings after the fact so as to take advantage of the tax law or to make taxpayers pay tax that they might otherwise not have to pay. While evidence of intention may be used by the Courts on occasion to clarify dealings, it is rarely determinative. In sum, evidence of subjective intention cannot be used to "correct" documents which clearly point in a particular direction.
See also Rose v. M.N.R., [1973] C.T.C. 74, 73 D.T.C. 5083 (F.C.A.) at page 80 (D.T.C. 5087) per Jackett, C.J.
The facts are clear: Cheyenne allotted and issued the 75,000 shares to Richardson on May 30, 1979. Before that time none of the 75,000 shares had been allotted or issued to him. The value of the shares at that date was $287,000. I find no error in the assessment and dismiss the appeal.
Appeal dismissed.
The resolution of the directors read as follows:
Subject to the approval of the regulatory securities’ authorities and to the approval of the shareholders of the company at the company's forthcoming annual general meeting to be held May 12, 1978:
(i) the company allot, issue and deliver as fully paid and non-assessable 75,000 shares in trie capital stock of the company to George A. Richardson to be lodged in escrow by Mr. Richardson with the company's registrar and transfer agent;
(ii) pursuant to section 41, subsection (3) of the Companies Act of British Columbia, R.S.B.C. 1960, c. 67 [repealed and substituted S.B.C. 1973, c. 18], the price or consideration at and for which the 75,000 shares are to be allotted, issued and delivered to him shall be deemed to be $0.60 per share;
(iii) any officer or director of the company be and he is hereby authorized to affix the seal of the company to and sign and deliver a treasury order pertaining to these 75,000 shares to the company’s registrar and transfer agent should the shareholders of the company and the regulatory securities' authorities give their required approvals to this share transaction.
The Companies Act, R.S.B.C. 1960, c. 67; rep. and sub. S.B.C. 1973, c. 18 was the predecessor to the Company Act.
As cited in Fraser and Stewart, Company Law of Canada, 5th ed., Toronto: Carswell, 1962, page 199.