T-1614-71
Simard-Beaudry Inc. (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Addy J.—Montreal, March 15;
Ottawa, July 16, 1974.
Income tax—Dividend stripping—Transactions in acquisi
tion of corporate assets—Claim for depreciation—Whether
unduly or artificially reducing income—Income Tax Act, s.
137(1)—Income Tax Act, S.C. 1970-71-72, c. 63, s.
245(1)—Quebec Civil Code Art. 1569a et seq. (Bulk sales).
The appellant S.B. was incorporated to acquire the assets
of companies S and B. The business, goodwill and current
assets of the two companies were acquired on December 15,
1964. On the same day, M, purchaser of the shares in S and
B, transferred them to Bermuda company G. Companies S
and B, having elected domicile in Bermuda, gave an option,
on January 8, 1965, to company G, for the sum of $1, on the
purchase of their fixed assets. On January 13, 1965, appel
lant acquired this option from company G for the sum of
$5,406,000, representing mainly the accumulated deprecia
tion on the fixed assets, companies S and B not having paid
any income tax on the depreciation as it was accumulating.
On the same day, appellant exercised the option to purchase
the fixed assets of S and B, upon payment to them of
$1,950,000, representing the depreciated value of the assets
as shown on the books. The actual value of the fixed assets
at the moment of purchase was about $10,600,000. The case
turned on the question on whether the appellant had the
right to claim, for the years following the purchase, a
depreciation calculated on the additional amount of the
$5,406,000 paid to company G for the option, plus the
amount of $1,950,000 paid on the purchase, or whether, as
the Minister asserted, the deduction of the former sum
would unduly or artificially reduce the income, contrary to
section 137(1) of the Income Tax Act, and depreciation
could be allowed only on the Iatter sum.
Held, allowing the appeal, the total amount of $7,356,000
was paid for the fixed assets. No part of this, as far as the
appellant was concerned, could be considered as an artificial
payment, in the sense that it represented anything but a
payment for the fixed assets of the two vendor companies.
The reason why the appellant could acquire the fixed assets
at a price lower than their value was by the contrivance of
the option. The purchase by means of the option did not
constitute a sham in the legal sense. In the absence of sham,
section 137(1) could not be invoked to deny depreciation
where the revenue of the taxpayer claiming depreciation
would not be unduly or artificially reduced.
Cattermole-Trethewey Contractors Ltd. v. M.N.R. 71
DTC 5010; Snook v. London & West Riding Invest-
ments Ltd. [1967] 1 All E.R. 518; Susan Hosiery Lim
ited v. M.N.R. [1969] 2 Ex.C.R. 27; Commissioners of
Inland Revenue v. Wesleyan and General Assurance
Society (1948) 30 T.C. (H.L.) 11; M.N.R. v. Cameron
[1972] C.T.C. 380; Concorde Automobile Ltd. v.
M.N.R. 71 DTC 5161; West Hill Redevelopment Com
pany Limited v. M.N.R. [1969] 2 Ex.C.R. 441; Shulman
v. M.N.R. [1961] Ex.C.R. 410; and Harris v. M.N.R.
[1966] C.T.C. 226, applied.
INCOME tax appeal.
COUNSEL:
Claude P. Desaulniers and Maurice A. Reg -
nier for appellant.
Alban Garon, Q.C., and Mme Louise
Lamarre-Proulx for respondent.
SOLICITORS:
Stikeman, Elliott, Tamaki & Co., Montreal,
for appellant.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment
delivered in English by
ADDY J.: The facts as established at trial were
numerous as well as complicated. The case con
cerned the alleged responsibility of the appellant
toward respondent for its participation in the
operations of two other companies which, by
various offshore trading operations, that is to
say, various loans, sales and transfers of
options, shares and assets to individuals and
companies in Canada, as well as companies and
agencies in Bermuda, converted or attempted to
convert into dividends payable to their share
holders the major portion of their assets.
If these transactions had taken place in
Canada, and directly between the appellant and
the two vendor companies, the latter undoubt
edly would be obliged to pay a large amount of
income tax, on the recuperation of accumulated
depreciation on their fixed assets.
However, to determine the question in issue,
it is not necessary nor even helpful, in my view,
to describe in detail all the various manoeuvres
or to identify the role of each actor in the
complicated drama which unfolded between the
months of May 1964 and March 1965, as the
issue depends mainly on the role which the
appellant might have played either directly or by
means of agents, and either as one of the main
instigators of the plan or as a participant in
certain of the financial operations and transfers
of assets.
The two companies, which engaged in divi
dend stripping, were Simard & Frères, Cie Ltée,
owned by the two Simard brothers and Beaudry
Ltée, owned by the two Beaudry brothers.
Simard & Frères, Cie Ltée was engaged mainly
in heavy construction while Beaudry Ltée oper
ated, above all, as a production company
engaged in the manufacture of concrete and
cement blocks and also in the exploitation of
quarries, etc.
Aubert Brillant, who had more than sixteen
years experience in general construction and
who was at that time the owner of various
construction companies, became interested in
the purchase of the two companies: Simard &
Frères, Cie Ltée and Beaudry Ltée. To accom
plish this, on the 31st of August, 1964, he
incorporated the appellant, Simard-Beaudry Inc.
On the 15th of December, 1964, the appellant
acquired the business, goodwill and current
assets of Beaudry Ltée for the sum of $518,-
162.00 and those of Simard & Frères, Cie Ltée
for the sum of $851,941.00. On the 13th of
January, 1965, the appellant also acquired from
a Bermuda company, Group Investments Lim
ited (hereinafter called "Group"), an option to
purchase the fixed assets of these two compa
nies and paid for this option a sum of approxi
mately $5,406,000.00. Five days previously,
Group had acquired this option from Beaudry
Ltée and from Simard & Frères, Cie Ltée for
the sum of $1.00. On the same day that it
acquired the option, that is the 13th of January,
1965, the appellant acquired directly from these
two companies the fixed assets for an additional
sum of $1,950,000.00, in exercising the option
which it had acquired from Group. This sum of
$1,950,000.00 represented the depreciated
value of the assets as shown on the books, while
the sum of $5,406,000.00 represented mainly
the accumulated depreciation on these fixed
assets, the two vendor companies not having
paid any income tax on this depreciation as it
was accumulating. The actual value of these
fixed assets at the moment of the purchase was
approximately $10,600,000.00.
The case turns on the question whether the
appellant would have the right to claim for the
years following the purchase, a depreciation cal
culated on the additional amount of some
$5,406,000.00 paid to Group for the option plus
the amount of $1,950,000.00 or whether, as
alleged by the respondent, the depreciation can
be allowed only on the amount of $1,950,-
000.00, that is, the depreciated value as shown
in the books of the two vendor companies.
The ultimate decision depends on the inter
pretation of and on the effect of subsection (1)
of section 137 of the Income Tax Act' . The
subsection reads as follows:
137. (1) In computing income for the purposes of this Act,
no deduction may be made in respect of a disbursement or
expense made or incurred in respect of a transaction or
operation that, if allowed, would unduly or artificially
reduce the income.
It is interesting to note that, when the Income
Tax Act was revised in 1971, although the Eng-
lish text of this subsection, now section 245(1),
was not touched, the French text was amended
slightly: for the word déboursé there was sub
stituted the word débours (which is perhaps
better French) and the words dépense faite ou
engagée were replaced by the words dépense
contractée 2 .
To understand the sequence of events, it is
useful to note that the matter first arose in the
Spring of 1964, during a discussion between
Aubert Brillant and one of the Simard brothers,
when Brillant let it be known that he would
possibly be interested in the acquisition of the
company Simard & Frères, Cie Ltée. Soon after
that, Mr. Brillant consulted Mr. Jacques Melan-
çon of Jacques Melançon et Associés, Inc.,
financial counsellors. The latter advised Mr.
Brillant that he should give some thought at the
same time to the possibility of buying Beaudry
R.S.C. 1952, chapter 148.
2 See S.C. 1970-71-72, chapter 63, section 245(1).
Ltée and prepared for the latter's use a plan, for
the acquisition of these two companies, dated
the 1st of June, 1964. Briefly, this plan provided
for the purchase of the shares of these
companies.
Mr. Brillant testified at the trial, and I accept
his evidence on this point, that, after having
considered the report of Mr. Melançon, it
seemed evident to him that it would not be
profitable for him to acquire these two compa
nies in the manner recommended by Mr. Melan-
çon, that is, by purchasing the issued shares. In
spite of certain testimony to the contrary, the
evidence, in my view, establishes clearly that
Mr. Brillant, after analyzing Mr. Melançon's
report, decided that it would not be profitable
for a buyer to purchase the shares of these two
companies due to the fact that the future
depreciation, such a purchaser could claim on
these fixed assets worth $10,600,000.00, would
be limited to $1,900,000.00. In addition thereto,
it was evident to him that any future sale of
these assets would attract a very large amount
of tax on the accumulated depreciation of
$5,406,000.00.
Mr. Brillant, however, remained interested in
the purchase of the assets of these two compa
nies and, between the end of July and the end of
August of the same year, he caused three
reports to be prepared on the assets and liabili
ties and on the amount of business of these two
companies in order to study the possibility of
acquiring same. These reports were prepared by
Unica Research Company Limited, by Canadian
Appraisal Company Limited and by McDonald,
Currie & Co., Accountants.
It is evident according to these reports, the
testimony given at trial and the events which
took place subsequently that, in the opinion of
McDonald, Currie & Co. and of Mr. Brillant's
legal counsel, the only method by which Mr.
Brillant could purchase these companies at the
price he wished to pay and at the same time
benefit of the full depreciation for the amount
paid for the fixed assets, would be to acquire
the assets themselves and not the shares. It was
equally evident to the sellers, that is, the Beau-
dry brothers and the Simard brothers, that in
order to avoid income tax on the recuperation
of the accumulated depreciation in their compa
nies and also in order to be able to withdraw the
assets by means of dividend stripping, it would
be necessary to engage in the financial manoeu
vre of offshore trading. In other words, in order
that the final deal lead to the desired results, it
would be necessary to engage in operations
involving offshore trading, the details of which
were conceived to a large extent by one D. J.
MacGregor of McDonald, Currie & Co.
The evidence at trial establishes clearly that
Mr. Brillant was perfectly aware at all times of
the exact effect of the financial manoeuvring
proposed by the Beaudry brothers and by the
Simard brothers. He contributed also to the
ultimate success of the plan by actively par
ticipating in various meetings in Canada and in
Bermuda and by being instrumental in obtaining
financial aid from at least one finance company,
that is, Traders Finance Corporation Limited.
Mr. Melançon, having become the owner of
the shares of these two companies by various
interim financial operations including back-to-
back bank loans, transferred the shares of the
vendor companies to Group on the same day
that the appellant purchased the current assets,
goodwill and business of the companies, that is,
the 15th of December, 1964.
Despite certain statements to the contrary by
certain witnesses of the appellant, the evidence,
in my view, establishes clearly the following
facts:
1. That Jacques Melançon et Associés, Inc.
and Group were acting as figureheads for the
vendor companies and their shareholders;
2. That Jacques Melançon et Associés, Inc.
was acting as agent not only of Simard &
Frères, Cie Ltée and of Beaudry Ltée but also
of Aubert Brillant as well as of the appellant
in order to bring to fruition the planned finan
cial operations;
3. These financial manoeuvres resulting in the
stripping of the surplus and the avoidance of
income tax on the recuperation of accumulat
ed depreciation did not directly benefit
Simard-Beaudry Inc., but this company bene-
fited indirectly from these operations since
the purchase of the assets could not have
taken place at the agreed price without the
operations having succeeded;
4. Aubert Brillant and, by the same token, his
company, the appellant, were perfectly aware
of this financial manoeuvring and of its ulti
mate aim;
5. The option granted Group for one dollar
and re-sold to Simard-Beaudry Inc. for the
amount of $5,406,000.00 was but an indirect
method of effectuating the purchase of the
fixed assets at a global price of $7,356,000.00
and at the same time allowing dividend strip
ping and ensuring the avoidance of payment
of tax by the vendors on the recuperation of
the $5,406,000.00 paid on the option.
Simard-Beaudry Inc. cannot be considered, in
any way, as an alter ego either of Simard &
Frères, Cie Ltée, or of Beaudry Construction,
or of the Beaudry brothers or of the Simard
brothers who benefited from the dividend strip
ping. Mr. Melançon was, without a doubt, the
agent and the alter ego of the Simard brothers
and of the Beaudry brothers in the transaction
relating to dividend stripping and in the sale of
the shares in their companies. He was also the
agent of Brillant and of the appellant in so far as
the first negotiations for the purchase of the
business and of the fixed assets are concerned,
but he was not the agent of Brillant or of the
appellant in the deal concerning dividend strip
ping or the sale of the shares.
The law is too clear for any useful purpose to
be served by citing jurisprudence to that effect,
that a person may act as an agent of two people
without thereby creating joint responsibility
between them for all their actions or for those
of the agent. The fact that Melançon was acting
as agent, but for different objects, for the
Simard brothers and their company on the one
part and for Brillant and the appellant on the
other part, could and should in the present cir
cumstances impute a mutual knowledge of their
respective actions but not necessarily a mutual
responsibility as to those actions. The evidence
establishes clearly that Melançon, in acquiring
the shares of the two vendor companies, did so
as agent and alter ego of the Simard brothers,
the Beaudry brothers and the two vendor com
panies and not as agent of Brillant or of the
appellant company; the latter had never
acquired these shares and never had any inter
est in them. Notwithstanding the argument of
counsel for the respondent, there is no evi
dence, either direct or circumstantial, that
would indicate that they would have ever
acquired these shares. The evidence establishes
clearly that Melançon acquired the shares, but
he did so in the name of the shareholders of the
two vendor companies. The fact that he had
acted as agent for Brillant at the outset of the
negotiations is certainly not sufficient to impute
to Brillant or to the appellant a real interest in
these shares at the time of the subsequent
acquisition by Melançon, since it was clearly
established that Brillant had already decided for
a considerable time previously that he was not
interested in the least in the purchase of the
shares for himself or his company.
One must first determine whether the
$7,356,000.00 that the appellant alleges having
disbursed for the fixed assets of the two compa
nies were really disbursed for this purpose. If
not, it would follow that a depreciation on these
fixed assets could not be claimed to the extent
that monies were not actually disbursed in
attaining this end. When a transaction consti
tutes a trick or hoax in the sense that the word
"sham" is employed when describing certain
financial transactions, one must pierce the veil
and decide what the real substance or the intrin
sic nature of the transaction is.
A transaction or a financial operation consti
tutes a sham when it is not truly what it appears
to be or when it is but a veil to dissimulate an
entirely different state of affairs. For example,
when one uses the pretext of establishing a
pension plan for employees of a firm for the
purpose of furnishing a means of removing
profit from that firm free from tax, without
having the true intention of furnishing protec
tion to employees or to continue to make dis
bursements to the pension plan. See Cattermole-
Trethewey Contractors Ltd. v. M.N.R. 3 . An
excellent definition of a financial sham was
71 DTC 5010.
given by Lord Diplock in the case of Snook v.
London & West Riding Investments, Ltd. 4 at
pages 528 and 529:
As regards the contention of the plaintiff that the transac
tions between himself, Auto-Finance, Ltd. and the defend
ants were a "sham", it is, I think, necessary to consider
what, if any, legal concept is involved in the use of this
popular and pejorative word. I apprehend that, if it has any
meaning in law, it means acts done or documents executed
by the parties to the "sham" which are intended by them to
give to third parties or to the court the appearance of
creating between the parties legal rights and obligations
different from the actual legal rights and obligations (if any)
which the parties intend to create. One thing I think, how
ever, is clear in legal principle, morality and the authorities
(see Yorkshire Railway Wagon Co. v. Maclure (1882), 21
Ch. D. 309; Stoneleigh Finance, Ltd. v. Phillips [1965] 1 All
E.R. 513;11965] 2 Q.B. 537) that for acts or documents to
be a "sham", with whatever legal consequences follow from
this, all the parties thereto must have a common intention
that the acts or documents are not to create the legal rights
and obligations which they give the appearance of creating.
No unexpressed intention of a "shammer" affect the rights
of a party whom he deceived. There is an express finding in
this case that the defendants were not parties to the alleged
"sham". So this contention fails.
This definition was approved by our Courts.
See Susan Hosiery Limited v. M.N.R. 5 .
On the other hand, in order to determine if a
document constitutes or not a sham and for this
reason must necessarily attract financial conse
quences, one must not take an exaggerated view
of the motives of the parties for the sole pur
pose of arriving at an interpretation favourable
to the taxing authority. The rule which lays
down that the substance and the nature of the
transaction must be considered, must not serve
as a pretext for a detailed search into motives in
order to attain a farfetched or exaggerated inter
pretation of its exact nature. Lord Greene in the
case of Commissioners of Inland Revenue v.
Wesleyan and General Assurance Society 6
described the restrictions which must be applied
to such a search in the following terms at page
16 of the report:
4 [1967] 1 All E.R. 518.
s [1969] 2 Ex.C.R. 27.
6 (1948) 30 T.C. (H.L.) 11; 176 L.T. 84 (K.B. & C.A.); 64
T.L.R. 173.
It is perhaps convenient to call to mind some of the
elementary principles which govern cases of this kind. The
function of the Court in dealing with contractual documents
is to construe those documents according to the ordinary
principles of construction, giving to the language used its
normal ordinary meaning save in so far as the context
requires some different meaning to be attributed to it. Effect
must be given to every word in the contract save in so far as
the context otherwise requires.
Another principle which must be remembered is this. In
considering tax matters a document is not to have placed
upon it a strained or forced construction in order to attract
tax, nor is a strained or forced construction to be placed
upon it in order to avoid tax. The document must be
construed in the ordinary way and the tax legislation then
applied to it. If on its true construction it falls within a
certain taxing category, then it is taxed. If on its true
construction it falls outside the taxing category, then it
escapes tax.
There have been cases in the past where what has been
called the substance of the transaction has been thought to
enable the Court to construe a document in such a way as to
attract tax. That particular doctrine of substance as distinct
from form was, I hope, finally exploded by the decision of
the House of Lords in the case of Duke of Westminster v.
Commissioners of Inland Revenue, 19 T.C. 490. The argu
ment of the Crown in the present case, when really under
stood, appears to me to be an attempt to resurrect it. The
doctrine means no more than that the language that the
parties use is not necessarily to be adopted as conclusive
proof of what the legal relationship is. That is indeed a
common principle of construction.
These remarks were approved by the House
of Lords when the case was brought before
them on appeal. They describe the precise
manner in which the question should be
considered.
Since the true value of the fixed assets pur
chased was $10,600,000.00 and the payment of
$5,406,000.00 for the option cannot be attribut
ed to anything except the assets, which were
purchased by means of this option, it seems
clear that Simard-Beaudry Inc. paid the total
amount of approximately $7,356,000.00 for the
fixed assets. It seems clear also that no part of
this money, in so far as Simard-Beaudry Inc. is
concerned, could be considered as an artificial
payment in the sense that it represents anything
but a payment for the fixed assets of the two
vendor companies.
The sole reason why Simard. Beaudry Inc.
could acquire these fixed assets at a price lower
than their true value was the method of pur
chase by the ingenious contrivance of an option.
This option covered solely the right to purchase
the fixed assets. There is no question here of
any artificial increase of the purchase price. On
the contrary, the purchase price could only be
fixed at this reduced amount because of the
financial manoeuvres, of which the option
formed an essential part. This reduction in the
purchase price was effected of course to the
detriment of the taxing authority and to the
benefit of Simard-Beaudry Inc., which acquired
these fixed assets at a reduced price, as well as
to the benefit of the two companies Beaudry
Ltée and Simard & Frères, Cie Ltée who profit
ed directly from the- avoidance of tax on the
recuperated depreciation which had been
claimed previously on their assets and also to
the benefit of the Simard brothers and of the
Beaudry brothers who, by stripping dividends
from their respective companies, managed to
extract large sums without paying tax.
When one considers the transaction from the
standpoint of the appellant, one is driven to the
realization that the latter spent monies for the
sole purpose of acquiring the assets purchased
and for the right to purchase those fixed assets
and that the total value of the monies spent by
this company is in fact represented by these
assets. One must also realize in addition that
this company never purchased at any time the
shares of other companies. Therefore, I can
come to no other conclusion but that the pay
ment of $7,356,000.00 was truly made and that
the payment can be attributed to nothing else
but the purchase of the fixed assets and not to
the purchase of shares or other assets.
Having regard to the manner in which the
Supreme Court of Canada, in its unanimous
judgment in the recent case of M.N.R. v.
Carneron 7 , applied the definition contained in
the case of Snook v. London & West Riding
Investments, Ltd. (supra) to the circumstances
of the Cameron case, it is clear, in my view, that
the purchase by the appellant by means of an
7 [1972] C.T.C. 380.
option does not constitute a sham in the legal
sense. In addition, contrary to the motives of
the taxpayer in the case of Concorde Automo
bile Ltd. v. M.N.R. 8 who, in order to deduct as
expenses revenue otherwise taxable for income
tax purposes established a pension plan, in the
present case the main object and even the sole
object of the appellant was not to avoid the
payment of tax, for no tax was payable by it in
any event, but in order to purchase the assets of
the two vendor companies, as described in the
option.
But the question is not finally settled in
favour of the appellant by the simple fact that
the transaction does not constitute a sham as
defined in tax law; one must also determine
whether, notwithstanding this, it would not con
stitute in whole or in part a disbursement which
would reduce unduly or artificially the income
of the appellant or whether a depreciation taken
on the assets involved in the transaction would
not constitute one. See Concorde Automobile
Ltd. v. M.N.R. (supra); also West Hill Redevel
opment Company Limited v. M.N.R. 9 ; and Shul-
man v. M.N.R. 1 ° which deal clearly and precise
ly with the definition and the effect of section
137(1). The case Harris v. M.NR." establishes
that a disbursement or expense, as mentioned in
section 137(1), includes a claim for deprecia-
tion—see pages 241 and 242 of the report.
Putting aside any sympathy that one might
naturally feel for the respondent, who finds
himself deprived of an enormous sum by these
financial manoeuvres, and also for the numer
ous citizens of modest means whose contribu
tions to public coffers only too frequently
involve considerable sacrifice, in order to exam
ine from a strict legal standpoint section 137(1)
in the light of the above-mentioned conclusions
of fact it is, in my view, impossible to imagine
how, under this section, the appellant can be
deprived of the right to claim a depreciation on
8 71 DTC 5161 at page 5174.
9 ' [1969] 2 Ex.C.R. 441.
' 0 [1961] Ex.C.R. 410 at page 424.
" [1966] C.T.C. 226.
the full amount of $7,356,000.00 paid for the
purchase of these fixed assets. If these fixed
assets had been acquired directly from the two
selling companies at their true value, that is for
the sum of $10,600,000.00 without any finan
cial manoeuvring, nobody could logically deny
that the appellant would have the right to claim
an annual depreciation based on this purchase
price. The depreciation, in such a case, would
be calculated on a total capitalization of fixed
assets of approximately $3,244,000.00 more
than the amount on which the appellant is claim
ing depreciation in the present appeal. As they
are the same assets, how can one then conclude
that this would be a deduction or an expense
which would "unduly or artificially reduce the
income" of the appellant?
Furthermore, it seems evident that if the
appellant had acquired these assets from the
two companies who sold them at the same price
and under the same conditions, but only after
these two companies had paid to the taxing
authority, from the purchase price, income tax
calculated on the recaptured depreciation, there
would not be the slightest question but that the
appellant would be fully entitled to claim the
depreciation on the total amount paid, including
the cost of the option.
Unless there is a sham, section 137(1), in my
view, cannot be invoked to deny an expense or
a deduction where the revenue of the taxpayer
who is claiming the depreciation, would not be
reduced unduly or artificially. The original
expense was made for the purchase at the
reduced price of fixed assets which, according
to the evidence submitted, will undoubtedly be
used to produce revenue. There is no evidence
that these fixed assets will not be entirely
required for this object. The original expense
therefore cannot be an undue or an artificial one
and the depreciation itself cannot constitute that
type of reduction in revenue. It is interesting
also to note that the respondent has already in
the past allowed a depreciation on this entire
amount involving the same fixed assets in the
same type of business, at a time when they were
actually worth less than at the time the appellant
purchased them.
Even when interpreting the section in the
most favourable way possible to the respondent,
it is impossible for me to attribute to it any
other meaning but that advanced by the
appellant.
It has been stated too often, to justify citing
jurisprudence to establish the validity of the
principle, that in interpreting a section of a
taxing statute one must not consider moral prin
ciples nor even equitable principles. It would
undoubtedly seem more equitable to tax the
appellant since, by its creator and guiding light,
Aubert Brillant, it participated very actively in a
manoeuvre which permitted the selling compa
nies to deny to the taxing authorities income tax
on an accumulated depreciation of $5,406,-
000.00 and also permitted the shareholders of
these companies to extract this as a capital gain.
In the event of the operation involving divi
dend stripping by means of the option being
illegal when it occurred, it is possible that the
respondent might recuperate from the appellant,
from these assets, the income tax of which the
former was deprived by the vendors since the
appellant is still in possession of the assets
which one might possibly consider as being sub
ject to a claim of the respondent. Furthermore
the appellant could certainly not be considered
as a purchaser in good faith of these assets
since it knew in detail of the claims for income
tax. At the time of the hearing of the appeal I
also brought up the question of the Bulk Sales
Act of the Province of Quebec. Counsel for
both parties admitted that they had not con
sidered this question on the appeal but that, on
thinking it over, they were satisfied that the sale
was in accordance with this Act. However, it
would seem to me that there never at any time
was a single contract covering the purchase of
both the current assets and the fixed assets and
that furthermore the two transactions took place
at different moments in time. The evidence ten
dered establishes that, after the purchase of the
current assets including goodwill, from the two
companies on the 15th of December, 1964,
there was no contractual obligation on the part
of the appellant to purchase the fixed assets nor
was there \ any obligation on the part of the
Beaudry brothers or the Simard brothers or
their companies to sell these fixed assets. In
addition, the purchase of the option and the
purchase of the fixed assets took place in Ber-
muda and all the vendors were, apparently, at
that moment situated in and domiciled in Ber-
muda, the two vendor companies having appar
ently elected domicile in that country before the
sale; one might therefore question whether the
sale would not fall under the provisions of the
Bulk Sales Act of Bermuda since the option was
given in Bermuda and that the purchase of the
fixed assets took place in accordance with the
rights acquired by the option.
In any event, the question before me is not to
determine whether the taxing authorities could,
by some other means, recover the income taxes
which might be otherwise payable, but to decide
as to the application of section 137(1) to the
circumstances of the present case.
The appeal is therefore allowed with costs.
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