Canada v. Paxton
A-513-94
Strayer, Robertson JJ.A.; McDonald J.A. dissenting
12/12/96
25 pp.
Appeal from Tax Court of Canada decision involving application of Income Tax Act, s. 73(5)-Provision seeking to facilitate intergenerational roll-over of small business corporations by permitting deferral of capital gains upon transfer from parent to child-In 1986, taxpayer decided to retire and sell 50 percent interest in small business corporation, Ronlar Investments Ltd.-Taxpayer's children not interested in carrying on business-Taxpayer agreed to sell, children agreed to purchase Ronlar shares-Prior to documenting agreements taxpayer agreed to sell shares to Tandet Management Inc. pursuant to agreement executed on November 6, 1986-Under art. 3.3 of Tandet Agreement, taxpayer had right to elect to make "interim transfer" of Ronlar shares to members of family-Right to elect subject to restriction transfer to family members valid only if latter completed sale, transferred shares to Tandet in accordance with Tandet Agreement-On November 24, 1986, taxpayer notified Tandet he wished to exercise right to transfer family's shares-On November 27, 1986, taxpayer, children entered agreements of purchase and sale for Ronlar shares-On same date, shares duly transferred to children for less money than Tandet had agreed to pay-Children transferring shares to Tandet-Each child receiving $10,000 as result of transaction-Balance of sale proceeds flowing to taxpayer-Appeal allowed, McDonald J.A. dissenting-Per Robertson J.A.: purpose of sale of Ronlar shares to taxpayer's children to enable him to defer payment of capital gains arising on sale to Tandet-Whether transfer of Ronlar shares to taxpayer's children transfer within meaning of s. 73(5)-Tandet Agreement of November 7, 1986 effecting transfer of Ronlar shares-Binding, enforceable contract-Word "transferred" in s. 73(5) could not be interpreted narrowly as meaning "actual transfer" such as when shares registered in name of new owner-Executory contract subject to third party approval nonetheless binding-Purchaser under executory contract for sale of shares has right to specific performance of contract-Argument purchaser such as Tandet had no proprietary interest in shares pending actual closing of transaction and transfer of shares contrary to accepted principles of law-By excluding executory contracts from ambit of word "transferred", interpretation by Tax Court Judge too narrow, not in harmony with jurisprudence-Court not preoccupied with form of transfers in context of roll-over provisions of Act-Ronlar shares effectively transferred by taxpayer to Tandet-Type of transfer embraced by s. 73(5) must enable purchaser to exercise degree of control necessary to determine ultimate fate of family business-Criterion not satisfied herein-Tandet Agreement depriving children of right to decide whether business would be sold or held-Children had no right to use or enjoyment of shares other than to transfer them within one day to Tandet and to retain small portion of sale proceeds-Limited right, legal inability to decide whether family business should be continued sufficient grounds to hold transfer within meaning of s. 73(5) did not occur on November 27, 1986-Agency argument unacceptable-Evidence not supporting existence of oral contract for sale of Ronlar shares to children-Not establishing enforceable contract between taxpayer, children prior to execution of Tandet Agreement-At best supporting finding taxpayer had entered into informal, non-binding agreement to permit children to share in proceeds received from Tandet-Agency argument giving rise to allegation of sham-Definition of sham implies parties to transaction have deliberately set out to misrepresent actual state of affairs-Deceit cornerstone of sham doctrine-Parties to transaction did not have common intention to deceive Minister-Facts giving rise to "inverse sham" which falls outside ambit of conventional sham doctrine-Difference between sham doctrine, theory of incomplete transactions-In present case, taxpayer arguing things not what they appear to be-In Tandet Agreement taxpayer warrants he is owner of shares, but maintains this not true state of affairs as he was in fact acting as agent for children who must, in turn, be deemed to be undisclosed principals-Tandet, not Minister, has been misled-Taxpayer's agency argument which stands in contradiction of documentary evidence, rather than documentary evidence itself, giving rise to allegation of sham-Tax professionals must be cautious when raising legal arguments which represent threat to veracity of documentary evidence drafted-Allegation of inverse sham placing onus on taxpayer to explain why things not as represented on face of such evidence-No tax planning transaction recognized for tax purposes unless transaction validly established under rules of general law-Tax planners must ensure tax driven transactions fully implemented, carefully documented-Present case ineffective, incomplete transaction due to failure to properly document sale of Ronlar shares to children prior to execution of Tandet Agreement-Per McDonald J.A. (dissenting): to determine whether fully effective, complete transfer to children, helpful to establish who had beneficial ownership of shares at time of transfer to Tandet-Children beneficial owners of shares when sale to Tandet completed-Whether children nominal owners of shares at time of transfer to Tandet-After sale agreement with Tandet negotiated taxpayer transferred nominal ownership to children-Nominal ownership transfer fully effective, complete when children fulfilled agreement, transferred shares to Tandet-Transfer from taxpayer to children fully effective, legal-No foundation for allegation of sham-No evidence of deceit-Whether transaction violates object, spirit of Act, s. 73(5)-Taxpayers free to arrange affairs so as to minimize tax liability-Parliament's intention not violated by taxpayer's use of s. 73(5)-Parliament not requiring transferred shares be retained by children for any specific length of time-Even where sole purpose of transaction to minimize tax, where result not inconsistent or repugnant with Act as a whole nor with Parliament's intent, transaction valid-Transaction herein legally effective, complete, not violating provisions of Act-Income Tax Act, S.C. 1970-71-72, c. 63, s. 73(5) (as repealed by S.C. 1986, c. 6, s. 36(1)).