An agreement of a corporation ("Château Dollard") owned equally by the three individual taxpayers to sell its assets for $13,750,000 was replaced by an agreement of the taxpayers to sell their shares to the same purchaser for a selling price that was reduced by the sum of $4,678,000. This sum instead was stated to be paid to them in consideration for their entering into a non-competition agreement with the purchaser. $1,050,000 paid by the taxpayers to the purchaser was stipulated as consideration for the purchaser converting the purchase arrangement to a share purchase. The taxpayers treated their proceeds from the disposition of their shares as $7,144,584 (i.e., the proceeds were reduced both by their $1,050,000 payment and also by the amounts allocated to their non-competition agreements, which they treated as non-taxable receipts.)
In finding that no weight should be given to the parties' agreed allocation, Favreau J indicated that they were not dealing at at arm's length in agreeing to this allocation as the purchaser was sharing through the $1,050,000 payment in the anticipated tax benefit to the taxpayers of the restructured transaction. He stated (at para. 43):
[T]he parties were working together and had a common interest, that is, that of minimizing as much as possible the tax consequences of the transaction and to divide among them the tax saving on the projected income.
There was no evidence that the $1,050,000 payment was a disposition expense, and the amounts allocated to the non-competition agreement were patently unreasonable. In finding that the the full $13,750,000 received was proceeds of disposition of the taxpayers' shares , Favreau J referred (at para. 49) to the Glegg principle that:
there is no need to turn to paragraph 68(a)...where the entire amount of consideration received or receivable by a taxpayer from a person can reasonably be regarded as consideration for the disposition of a particular property, namely the shares sold... .