Gibson, J:—These two appeals. were: heard together on common evidence.
The appellant Huron Steel Fabricators (London) Limited appeals from a judgment of the Tax Appeal Board dated July 2, 1971 in respect of reassessments for income tax for the taxation years 1965, 1966, 1967 and 1968.
The appellant Herman Fratschko appeals from a judgment of the Tax Appeal Board dated June 28, 1971 in respect of reassessments for income tax for the taxation years 1965, 1966 and 1967.
In essence, these reassessments are premised on the allegations that, by reason of the execution and completion of (1) a loan contract (Exhibit 17) between Herman Fratschko and Leslie E Peckham, (2) a service contract (Exhibit 16) between Huron Steel Fabricators (London) Limited and Pelon Holdings Limited, and (3) the transfer of 1,000 common shares of Huron Steel Fabricators (London) Limited from one Leslie E Peckham to Herman Fratschko, (a) a “benefit” within the meaning of subsection 8(1)* [1] of the Income Tax Act was conferred on Herman Fratschko, (b) the moneys paid out by Huron Steel Fabricators (London) Limited to Pelon Holdings Limited pursuant to the service contract (Exhibit 16) were not outlays or expenditures made or incurred by Huron Steel Fabricators (London) Limited for the purpose of gaining or producing income within the meaning of paragraph 12(1)(a)+ [2] of the Income Tax Act, and (c) such moneys so paid out were disbursements or expenses made or incurred in respect of a transaction or operation that, if allowed, would artificially reduce the income of the appellant within the meaning of subsection 137(1)$ [3] of the Income Tax Act.
The respondent in the defences in each of these actions pleaded certain assumptions.
The evidence did not support the following assumptions made in the defence in the Herman Fratschko action namely, those stated in paragraphs of the defence numbered 2(e)(iii), (iv) and the concluding words of paragraph 2(e) commencing with the words “with the result that it would appear that a loan of $5,000 had been made . . .”, paragraph 3(a), (b) and paragraph 5.
The evidence also did not support the following assumptions in the defence in the Huron Steel Fabricators (London) Limited action, namely, paragraphs 2(d) and (e), 3(a) and (b), 5 and paragraph 8.
In particular, the evidence did not support the allegations in paragraph 3(a) where reference was made to another taxpayer, Pelon Holdings Limited. . .
The evidence from the income tax returns of Pelon Holdings Limited which the respondent purported to use in making this said assumption was not supported by the facts contained in such income tax ‘returns. (Counsel for the appellants, by order in the Trial Division of this Court which was appealed by the respondent, unsuccessfully, to the Court of Appeal of this. Court, obtained production of these income tax returns and they were filed on these subject appeals.)
It was this evidence together with the evidence brought out on the cross-examination of the assessor of the respondent which established that the above assumptions were not supportable. The findings made in favour of the appellants in respect to these assumptions are predicated in a substantial measure on the cross-examination of the official for the respondent who gave evidence on these appeals. This evidence was less than frank.
On April 6, 1965 the appellant Fratschko owned all the shares except 1,000 shares of Huron Steel Fabricators (London) Limited. One Peckham owned these 1,000 shares.
Huron Steel Fabricators (London) Limited is a private company incorporated under The Corporations Act of Ontario and the following restriction on the transferability of its shares is contained in its charter:
. . . (1) the right to transfer shares of the company shall be restricted in that no share or shares shall be transferred without either (a) the sanction of the directors of the Company expressed by a resolution passed at a meeting of the board of directors or by an instrument or instruments in writing signed by a majority of the directors, or (b) the sanction of the holders of at least fifty-one per cent (51%) of the shares of the Company for the time being outstanding expressed by a resolution passed at a meeting of the holders of such shares or by an instrument or instruments in writing signed by the holders of at least fifty-one per cent (51%) of such shares; provided, however, that without such resolution (i) any share may be transferred by a shareholder to any other shareholder of the Company, and (ii) any share may be transferred by a shareholder during his lifetime or by his executor or administrator after the death of such shareholder according to the terms of his Will or by intestate succession to the issue of such shareholder or other shareholder or brother, sister, husband or wife of such shareholder or other shareholder; (2) The number of shareholders of the Company, exclusive of persons who are in the employment of, the Company, is hereby limited to fifty (50), two (2) or more persons holding one (1) or more shares jointly being counted as a single shareholder; and
(3) Any invitation to the public to subscribe for any shares or securities of the Company is hereby prohibited; 'j :
The market therefore for these 1,000 shares of Peckham on April 6, 1965 was the appellant Fratschko and there was no other market. As a consequence, they had little if any value. In any event, their value was not the market value ascribed to them by the witness at trial who gave evidence for the respondent, and not the value pleaded in the defence.
In April 1965 Peckham and Pelon Holdings Limited were in financial trouble, but notwithstanding this, the appellant Fratschko and the corporate appellant wished to have the services of Pelon Holdings Limited and, through it, the services of Peckham. In consequence, the loan contract (Exhibit 17) and the service contract (Exhibit 16) were entered into and subsequently completely executed by all parties. The evidence established that Pelon Holdings Limited provided substantial services to Huron Steel Fabricators (London) Limited for the purpose of the latter gaining or producing income.
As a consequence, the evidence proved that no “benefit” within the meaning of subsection 8(1) of the Income Tax Act was conferred on Herman Fratschko, that the moneys paid out to Pelon Holdings Limited were outlays or expenditures for gaining or producing income within the meaning of paragraph 12(1)(a) of the Act, and the manner and method by which moneys were paid out in this case did not cause subsection 137(1) of the Act to be breached.
The appeals, therefore, are allowed, and the reassessments are set aside and referred back for further reassessments not inconsistent with these reasons.
*8. (1) Where, in a taxation year,
(a) a payment has been made by a corporation to a shareholder otherwise than pursuant to a bona fide. business transaction,
(b) funds. or property of a corporation have been appropriated in any manner whatsoever to, or for the benefit of, a shareholder, or
(c) a benefit or advantage has been conferred on a shareholder by a corporation,
(i) on the reduction of capital, the redemption of shares or the winding- ‘Up, discontinuance or reorganization of its business,
ii) by payment of a stock dividend, or
(iii) by conferring on all holders of common shares in the capital of the corporation a right to buy additional common shares therein,
the amount or value thereof: shall ‘be included in computing the income of the shareholder for the year. '-
+12. (1) In computing income, no deduction shall be made in respect of
(a) an -outlay or expense except to: the extent that it was made or in curred by the taxpayer for the purpose of gaining or Producing Income from property or a business of the taxpayer,
+137. (1) In computing income for the purposes of this Act no deduction may be made in respect of a disbursement or expense made dr incurred in respect of a transaction or operation that, if allowed, would unduly or artificially reduce the income.