Two brothers (the "Mazzoccas"), who constituted two of the three equal shareholders of a corporation ("Tri-M"), transferred their shares of Tri-M on a partial rollover basis to two holding companies and caused the two holding companies to purchase the shareholding of the third shareholder ("Manley"). Immediately thereafter, an arm's length purchaser ("461") lent money to Tri-M sufficient for it to pay a dividend to the two holding companies equal to the estimated accounting retained earnings of Tri-M, following which 461 purchased the shares of Tri-M held by the two holding companies for a reduced purchase price.
In confirming reassessments by the Minister which included the amount of the dividends in the proceeds of disposition realized by the holding companies, Sarchuk J. rejected submissions inter alia:
- that the transactions were grandfathered on the basis that they occurred as part of a series of transactions or events which commenced prior to April 22, 1980 the evidence disclosed that "there was no serious intention on the part of the Mazzoccas to dispose of their interest in Tri-M prior to late summer and fall of 1980" (p. 431);
- that the reference to "income earned or realized" was ambiguous and therefore should be interpreted in the taxpayers' favour to refer to accounting retained earnings (it was clear in light of the wording of ss.55(5)(c) and in light of the decision in Mattabi Mines Ltd. v. MNR, [1988] 2 CTC 294, [1988] 2 SCR 175 that "income" referred to income determined in accordance with the Part I of the Act); and
- that s. 55(2) was void for uncertainty (the problems in application of s. 55(2) were "not surprising given the complexity of the subject matter" and it could not be concluded that it was "couched in such vague or general language that it does not contain an intelligible standard" (p. 437)).