T-1903-87
Walter Gordon Sweeney (Plaintiff)
v.
Her Majesty the Queen (Defendant)
INDEXED AS: SWEENEY V. CANADA (T.D.)
Trial Division, Denault J.—Halifax, February 7;
Ottawa, September 6, 1990.
Income tax — Income calculation — Capital gains
Agreement between father and son for purchase of shares in
family business, at stipulated price, upon father's death
Termination clause requiring 60 days' notice — Father giving
away shares and making will contrary to agreement — After
father's death, plaintiff's share purchase tender rejected
Plaintiff's specific performance action settled out of court for
$625,000 — Calculation of adjusted cost base of right to
purchase shares — Dispute as to fair market value of right on
valuation day — Plaintiff arguing no capital gain — Termi
nation clause integral to agreement — Fair market value to be
determined from perspective of third party in bona fide offer
— Right without value — Interpretation of "other transac
tions of any kind whatever" in Income Tax Act, a. 245(2)
Failure to revoke agreement not "benefit" essential to applica
tion of s. 245(2) — Right to purchase shares acquired by
contract, not gift.
This was an appeal from a reassessment of the plaintiff's
1983 tax return. In 1950 the plaintiff agreed to purchase, for a
stipulated sum, his father's shares in the family business upon
his death. The agreement provided that the price per share
would be reviewable, that the father would not dispose of the
shares other than pursuant to the agreement and that if a bona
fide offer by a third party was considered that the son would
have a right of first refusal. It was revocable by either party
upon 60 days' notice. On valuation day (December 31, 1971)
the father owned 79 of the 100 issued shares, valued at
$1,200,000. The plaintiff was unaware that, contrary to the
agreement, his father had given 20 shares to his other children.
The father's 1965 will provided that the company should be
wound up. The plaintiff argued that such conduct demonstrated
that on valuation day, his father considered the agreement void,
but that he confirmed the agreement shortly before his death
by giving the original to his son for safekeeping. After his
father's death in 1983, the plaintiff's tenders to purchase the
shares were returned and he commenced an action for specific
performance. The litigation was settled out of court and
$625,000 paid in "lieu of damages". The plaintiff did not
include this amount in his 1983 tax return. Subsection 26(3) of
the Income Tax Application Rules, 1971 provides that the
adjusted cost base is the middle figure of actual cost, fair
market value on December 31, 1971, and proceeds of disposi
tion. The issue was the fair market value of the plaintiff's right
to purchase his father's shares on valuation day in order to
determine the adjusted cost base and capital gain. The plaintiff
argued that the fair market value on valuation day was more
than the proceeds of disposition, resulting in no capital gain.
The Crown argued that the fair market value on valuation day
was nil, and that half of the proceeds of disposition was capital
gain.
Held, the appeal should be dismissed.
Plaintiff's submission, that the agreement should be
appraised as if it did not contain a termination clause, could not
be accepted. The clause was part and parcel of the agreement.
Even if the father erroneously believed that the agreement was
void on December 31, 1971, and there was therefore no likeli
hood that he would invoke the termination clause, it merely
remained there unused, if only because he may have preferred
to construe the agreement to be valid at a later date. In view of
the numerous limitations in the agreement, the fair market
value of the plaintiff's right had to be determined from the
perspective of a third party in a bona fide offer and these
limitations rendered the right without value.
As to the argument that the father's forbearance from
terminating the agreement constituted a "transaction" within
Income Tax Act, subsection 245(2) so that the fair market
value of the right according to paragraph 69(1)(c) is to be
determined when the transaction was completed (59 days
before his death when the termination clause ceased to have
effect), subsection 245(2) requires that there in fact be a
benefit to the taxpayer. The failure to revoke the agreement did
not confer a benefit on the plaintiff. There was no "transac-
tion", in the sense of any act having operative effect in relation
to a business or property, 59 days prior to the father's death.
Nor was there merit in the argument that the plaintiff had
received a gift of the increased value of the right when his
father told him to put the agreement in a safe place shortly
before he died. From the father's previous actions in regard to
the agreement, it could not be implied that the father was
indicating that he would not amend or terminate the agree
ment. He did not transfer anything to his son. At most he
confirmed the agreement.
There was no "gift" or "inheritance" within Income Tax
Act, paragraph 69(1)(c) at the time of the father's death, due
to the certainty that the agreement could no longer be revoked
or changed. A right to purchase shares, acquired by contract
under seal and for mutual consideration cannot be interpreted
as a gift. The essence of a gift is the intentional, voluntary and
gratuitous transfer of property. There was no element of gratui-
tousness in the agreement or will.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 69(1)(c),
245(2).
Income Tax Application Rules, 1971, S.C. 1970-71-72,
c. 63, Part III, s. 26(3) (as am. by S.C. 1973-74, c. 14,
s. 75).
CASES JUDICIALLY CONSIDERED
APPLIED:
Minister of National Revenue v. Dufresne, Didace,
[1967] 2 Ex.C.R. 128; [1967] C.T.C. 153; (1967), 67
DTC 5105; Boardman (B.M.) et al. v. The Queen, [1986]
1 C.T.C. 103; (1985), 85 DTC 5628 (F.C.T.D.).
DISTINGUISHED:
Goodwin Johnson (1960) Ltd v The Queen, [1983] CTC
389; (1983), 83 DTC 5417 (F.C.T.D.).
CONSIDERED:
Armstrong's Estate v. C. I. R., 146 F. 2d 457 (7th Cir.
1944).
REFERRED TO:
Minister of National Revenue v. Granite Bay Timber Co.
Ltd., [1958] Ex.C.R. 179; [1958] C.T.C. 117; (1958), 58
DTC 1066.
COUNSEL:
M. Jill Hamilton for plaintiff.
Bonnie F. Moon for defendant.
SOLICITORS:
Daley, Black & Moreira, Halifax, for
plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
DENAULT J.: This is an appeal by the plaintiff,
Walter G. Sweeney, from a reassessment by the
Minister of National Revenue with respect to the
plaintiff's 1983 tax return by which a taxable
capital gain of $312,500 was added to the plain
tiff's income. The sole issue for determination in
this dispute is the proper calculation of the adjust
ed cost base of the plaintiff's right to purchase his
father's shares in Lawrence Sweeney Fisheries
Ltd., pursuant to an agreement of December 18,
1950.
Pursuant to subsection 26(3) of the Income Tax
Application Rules, 1971 [S.C. 1970-71-72, c. 63,
Part III, as am. by S.C. 1973-74, c. 14, s. 75], the
adjusted cost base would be the middle figure of
cost, fair market value as at December 31, 1971,
and proceeds of disposition. If two of these figures
are the same, the adjusted cost base will be that
figure. Both parties are in substantial agreement
as to the cost and the proceeds of disposition, they
disagree however as to the fair market value of the
plaintiff's right as of December 31, 1971 (valua-
tion day). The plaintiff submits that the fair
market value at valuation day is in excess of the
amount obtained from the proceeds of disposition,
and that as a result no capital gain resulted and no
tax is owing. The Minister submits that the fair
market value of the plaintiff's right at valuation
day was nil, and that consequently half of the
entire proceeds of disposition is a taxable capital
gain.
THE FACTS
The plaintiff returned from his studies in 1948
to enter his father's business. On December 18,
1950 Walter Lawrence Sweeney submitted to his
son Gordon an agreement whereby the son could
purchase the father's shares in his company, for a
stipulated sum upon the father's death. The price
agreed upon was $1,327.13 per share. The agree
ment provided that the son would contribute
towards a life insurance policy for the father, the
proceeds of which would be used to purchase the
shares; it also provided that the price per share
would be reviewable, that the father would not
dispose of the shares other than pursuant to the
agreement and that if a bona fide offer by a third
party was considered that the son would have a
right of first refusal. The agreement provided fur
thermore that it could be revoked by either party
upon 60 days' notice.
On December 31, 1971, the father was 67 years
old, in good health and active in the business. At
that time he owned 79 of the 100 shares issued by
the company. 20 shares had been given over the
past eight years to his three other children without
the plaintiff's knowledge, and contrary to the
agreement. Moreover the father's will, which was
drawn up in 1965, provided that his trustees
should continue his interests in Lawrence Sweeney
Fisheries Ltd., and then wind up the company. The
plaintiff had no knowledge of the existence of this
will. The fair market value of the father's remain
ing shares on valuation day was $1,200,000.
When the father died on January 20, 1983, he
had been ill for merely a week prior to his death.
Shortly before his death he had assured his son of
the continued validity of their agreement. After his
father's death the son obtained the proceeds of the
life insurance policy, and tendered to purchase the
father's 79 shares in the company for $104,843
($1,327.13 x 79). The tenders were returned by his
brother and sisters, and he launched an action
before the Supreme Court of Nova Scotia for
specific performance of his right of purchase.
After three days of hearing the case was settled
out of court and the plaintiff was paid $625,000 in
"lieu of damages". It is agreed by the parties that
this amount represents the proceeds of disposition
of the plaintiff's right. No portion of that capital
receipt was included in the plaintiff's 1983 tax
return.
PLAINTIFF'S ARGUMENT
The plaintiff has put forward four distinct argu
ments in support of his position. The principal
argument advanced by the plaintiff is that in
determining the fair market value of the plaintiff's
right at valuation day the agreement setting forth
his rights should be evaluated as though it con
tained no revocation clause. It is on this basis that
the plaintiff's expert estimated the valuation day
fair market value of the plaintiff's right to be
between $821,000 to $876,000.
The plaintiff sought to establish that from the
mid-1960s up until and including valuation day,
the father no longer considered the 1950 agree
ment to be valid. In support of this contention it
was pointed out that from 1957 until 1978, the
plaintiff was not involved in the functioning of the
company and that when he left in 1957 he stopped
paying the yearly premiums on the life insurance
policy as stipulated in the contract. Except for a
few occasions his father took over that responsibili
ty. Moreover in making gifts of his shares to his
other son and to his daughters in the mid-1960s
the father breached clause 5 of the agreement, and
his will of 1965 also seems to indicate his belief
that the agreement was no longer of value. Finally
two memos written by the father, one in April
1967, and one in January 1970, indicate that he
was then of the opinion that the agreement was no
longer valid.
The Crown objected to the filing of both these
memos and of two other letters, as they were
unsigned. However the plaintiff established that
the memos had been drafted in reply to letters
from Walter P. Wakefield, the father's solicitor. It
appears from handwritten comments on the
memos, from the father's peculiar drafting style,
and from the uncontradicted evidence that he con
stantly wrote memos to himself, that Walter Law-
rence Sweeney was the author of these documents
and that they should be accepted and filed in
Court as such. They therefore also contribute to
the submission that the father considered the
agreement to be void at the time of valuation day.
However in spite of his belief that the agreement
was null and void, it was never revoked or even
altered in any way by the parties. In fact the
father never even indicated to his son that he
privately believed the agreement to be invalid. The
father and son worked very closely and enjoyed
good relations, even during the time the son moved
away to Yarmouth to look after another family
business. In 1978 the son returned to help his
father in the running of Lawrence Sweeney Fisher
ies Ltd. In late 1982 the plaintiff was told by an
intimate friend of his brother's that he was in for a
big surprise when his father died. This prompted
the plaintiff to ask his father whether the 1950
agreement was still valid and his father replied:
"Certainly!" A few days before Christmas, and
just four weeks before his death the father handed
the original agreement over to his son and told
him: "Keep this in a safe place."
In essence the plaintiff is submitting that, while
the father may have later confirmed the validity of
the 1950 agreement, at the material time, Decem-
ber 31, 1971, it is submitted that the father con
sidered the agreement to be void. As the father
thought the agreement was void, there was virtual
ly no likelihood that the revocation clause would
have been invoked at that time. The plaintiff sub
mits that given that fact, it is appropriate to read
the agreement as if the revocation clause did not
exist. The plaintiff relied on the case of Goodwin
Johnson (1960) Ltd v The Queen, [1983] CTC 389
(F.C.T.D.) for the proposition that the Court
should look beyond the specific words of a contract
to its surrounding circumstances, to determine the
contract's effect, and that it was indeed permissi
ble to find that no termination clause did exist
even in a case where it was expressly stipulated in
the contract.
Three alternative arguments were also presented
by the plaintiff. The first alternative argument
starts from the assumption that the termination
clause ceased to have effect at least 59 days prior
to the father's death, since by its own terms it
required a 60-day notice period. Thus from 59
days before his death onward any revocation by
the father would have been invalid. On that basis
it is submitted that from the beginning of that
59-day period the value of the plaintiff's rights
increased considerably by virtue of the fact that
the agreement could no longer be revoked. The
plaintiff's expert presented uncontested evidence
that the value of the 1950 agreement, 59 days
prior to the father's death, was close to the value
of the shares themselves, that is it was worth
between $8,200,000 and $8,700,000.
The plaintiff submitted that the agreement
allowed the father to pass on one of the family
businesses to his eldest son. It remained in effect,
unaltered, for 33 years. The plaintiff had suggest
ed to his father over the years that the agreement
be reviewed but the father declined. The father
confirmed the validity of the agreement just
months prior to his death. The plaintiff submits
that all these events, perfected by the father's
forbearance from terminating the agreement when
he was legally able to do so, constitute a "transac-
tion" within the meaning of subsection 245(2)
[Income Tax Act, S.C. 1970-71-72, c. 63], in
which case the fair market value of the right,
according to paragraph 69(1)(c) of the Act, is to
be determined not at valuation day but at the time
the transaction was completed, namely 59 days
prior to death.
Counsel for the plaintiff stressed that the words
"other transactions of any kind whatever" have
been given a very broad interpretation by the
Court, and one that should include the circum
stances of this case (Minister of National Revenue
v. Granite Bay Timber Co. Ltd., [1958] Ex.C.R.
179; Minister of National Revenue v. Dufresne,
Didace, [1967] 2 Ex.C.R. 128; and Boardman (B.
M.) et al. v. The Queen, [1986] 1 C.T.C. 103
(F.C.T.D.)). If the offer of the right to buy the
shares can be viewed as a transaction perfected at
the time the agreement became irrevocable, then
the fair market value, assessed as of that time
would be over $8,000,000, a figure well in excess
of the proceeds of disposition and the plaintiff
would have no capital gain to declare.
The second alternative argument is that at the
time the plaintiff's father delivered to him the
agreement with instructions to keep it in a safe
place, he was in effect making a gift to the plain
tiff of the sizeable increase in value of the agree
ment due to the fact that the agreement had been
handed over to the son for his safe-keeping with
the intimation that no changes or revocation would
follow. It was submitted that this benefit constitut
ed either a "transaction" within the meaning of
subsection 245(2) or a "gift" which again, accord
ing to paragraph 69(1)(c) of the Act, would cause
the fair market value to be calculated at the time
of death when the right to purchase was at its most
valuable which would again result in no capital
gain for the plaintiff.
The final alternative argument is that a "gift"
or "inheritance" occurred within the meaning of
paragraph 69(1)(c), at the time of the father's
death due to the certainty that no revocation or
changes would be made, and that the agreement
remained in force. The plaintiff cited the Ameri-
can case Armstrong's Estate v. C. I. R. (146 F. 2d
457 (7th Cir. 1944)), for the proposition that such
words ought to be interpreted in a broad manner,
so that substance may rule over form. In that case
it was held that benefits which were derived from a
contract entered into during the taxpayer's life
time, were in substance benefits in the nature of
legacies, and should be recognized as such.
DEFENDANT'S ARGUMENT
The defence consisted entirely of a rebuttal of
the plaintiff's arguments. As for the first argument
the defendant's expert maintained that a math
ematical approach, estimating the impact of each
individual limitation on the plaintiff's right at
valuation day, was inappropriate. He claimed that
the fair market value of the plaintiff's right to
purchase the shares upon his father's death had to
be determined, as any other property, from the
perspective of a third party in a bona fide offer. In
light of the numerous limitations on the plaintiff's
right of purchase the Crown's expert claimed that
the fair market value of the right was nil. Among
the limits mentioned by the expert in his opinion
were: (1) the fact that the father could raise the
purchase price at any time and if it were not
accepted by the plaintiff or a third party purchas
er, the father could terminate the agreement; (2)
the fact that should a bona fide offer from a third
party be made the plaintiff, or any other notional
purchaser, would only have 30 days under the
agreement to exercise his right of first refusal
not by paying the stated price in the agreement,
but by matching the bona fide offer; (3) the father
could revoke the agreement for any reason with 60
days' notice; and (4) there was nothing to prevent
the father from decreasing the value of the com
pany, either through mismanagement or otherwise.
The expert insisted first on the termination clause
on a 60-day notice being the most negative one,
and second on the possibility by the father to
change the purchase price.
The Crown also submitted that the fact that the
father thought the agreement to be invalid actually
strengthened its submission that the right to pur
chase had no value at valuation day since the
informed, prudent party making a bona fide offer
would have sought to have the father confirm the
agreement's continued existence. All these factors,
along with the likelihood of litigation concerning
the legal validity of the right, would have, in the
Crown expert's opinion, rendered the right without
value.
As for the plaintiff's alternative arguments the
Crown responded that no "transaction" within the
meaning of subsection 245(2) can be deemed to
occur if no benefit accrues to the taxpayer. In this
case the Crown submitted that no benefit
occurred; the plaintiff merely offered to purchase
shares for less than their market value, but his
offer was refused. The Crown submitted that the
plaintiff's father had not directly or indirectly
disposed of any shares or even of a right to pur
chase shares, and that as no property was trans
ferred there can be no deemed disposition, by way
of gift or otherwise.
Finally the Crown submitted that the father's
will belies any intention to impart any benefit on
the plaintiff by way of gift or inheritance, and that
the agreement itself demonstrates that there was a
contract, based on mutual consideration, which
also belies the suggestion of a gift having been
made.
For these reasons the Crown concluded that the
cost of the agreement was nil, that the fair market
value at valuation day was nil, and that the adjust
ed cost base pursuant to subsection 26(3) of the
Income Tax Application Rules, 1971 was there
fore also nil.
DECISION
I cannot accept the plaintiff's main submission
that the 1950 agreement should be appraised at
valuation day, as though it did not contain a
termination clause. In Goodwin Johnson (1960)
Ltd, supra, the case relied on by the plaintiff for
this submission, the defendant therein had submit
ted that the timber sales contract between the
parties could not be transferred or assigned from
the plaintiff to anyone else. Those submissions
however were not based on the terms of the con
tract itself, but merely on statements in corre
spondence from the provincial Forestry Service.
However, the Court found, as a matter of fact,
that the contract could have been assigned by way
of a power of attorney, to any other reputable
operator. There is also some indication in the
decision that this matter was not strenuously con
tested. I see therefore little relevance between that
case and the present one. Here the termination
clause is part and parcel of the agreement itself.
Even if the Court were to accept the plaintiff's
allegation of an erroneous belief by the father that
the agreement was invalid, that is certainly no
ground for reading the agreement as if it contained
no termination clause. The clause merely remains
there unused, if only for the very good reason that
the father may have preferred to construe the
agreement to be valid at a later date, as the mood
suited him, and as he later asserted.
I rather agree with the Crown's expert that in
view of the numerous limitations in the agreement,
the fair market value of the plaintiff's right had to
be determined from the perspective of a third
party in a bona fide offer and that these limita
tions rendered the right without value.
I now turn to the plaintiff's first alternative
argument that since the termination clause had
ceased to have effect at least 59 days prior to the
father's death, at that point in time the father,
even though he was not aware of his upcoming
death, conferred a benefit on the plaintiff. It was
further argued that numerous events including the
father's confirmation of the validity of the agree
ment a few months prior to his death, perfected by
his forbearance from terminating it when he was
legally able to do so, constitute a transaction
within the meaning of subsection 245(2) of the
Act.
I do not share that view. First it is a requisite for
the application of subsection 245(2) that there be
in fact a benefit to the taxpayer (Boardman (B.
M.) et al. v. The Queen, [1986] 1 C.T.C. 103
(F.C.T.D.)). In this case, the Court cannot accept
that on November 23, 1982, 59 days prior to the
father's death and without the benefit of hindsight,
the failure by the father to revoke the 1950 agree
ment had the effect of conferring a benefit to the
plaintiff. On that date, there was no "transaction",
the word being used in the widest possible sense,
"as meaning any act having operative effect in
relation to a business or property" (Minister of
National Revenue v. Dufresne Didace, [1967] 2
Ex.C.R. 128).
As to the second alternative argument by the
plaintiff that he received a gift from his father
when he was told to keep the agreement in a safe
place, I see no merit in that argument. From the
father's previous actions in regard to the 1950
agreement, it cannot be reasonably implied, as
counsel suggested, that by delivering to his son his
copy of the agreement the father was indicating
that he would not amend or terminate it. The
father did not transfer anything to his son, and at
the very most, he was then confirming the 1950
agreement, thereby indicating that his son could
eventually acquire his remaining shares in the
company, under the same terms and conditions.
The final alternative argument is that a "gift"
or "inheritance" occurred within the meaning of
paragraph 69(1)(c) at the time of the father's
death since no revocation or changes could then be
made.
Paragraph 69(1)(c) states that:
69. (1) . . .
(c) where a taxpayer has acquired property by way of gift,
bequest or inheritance, he shall be deemed to have acquired
the property at its fair market value at the time he so
acquired it.
Unfortunately for the plaintiff, I fail to see how
a right to purchase shares, acquired by contract
under seal and for mutual consideration can be
interpreted as a gift. The essence of a gift is the
intentional, voluntary and gratuitous transfer of
property. In the instance, there was no element of
gratuitousness in the 1950 agreement and the will
of the plaintiff's father stipulating and authorizing
treatment of the shares inconsistent with the
agreement belies any intention on his part to
confer a gift on the plaintiff upon death.
For these reasons, the appeal is dismissed with
costs.
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