Date: 19991004
Docket: 97-1569-IT-G; 98-1054-IT-G
BETWEEN:
ARNOLD MURRAY NUSSEY and GEORGE ALFRED NUSSEY, EXECUTORS OF THE ESTATE OF THE LATE ARNOLD WILLIAM NUSSEY,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
O'Connor, J.T.C.C.
[1] These appeals were heard on common evidence at Windsor, Ontario on April 12, 1999 pursuant to the General Procedure of this Court. Counsel for the parties submitted an Agreed Partial Statement of Facts which, as corrected and subject to notations in brackets, reads as follows:
Nature of Proceedings
1. The Appellants appeal the Notices of Assessment, dated March 2, 1995 and March 23, 1995, for the taxation year 1991, being a Notice without any serial number.
Statement of Facts
2. Arnold William Nussey died on the 1st day of April, 1991. Letters Probate were granted to his personal representatives on the 11th day of September, 1991 and Arnold Murray Nussey and George Alfred Nussey were appointed executors of the estate.
3. The Minister of National Revenue assessed the estate of the late Arnold William Nussey on the basis that the estate received a taxable benefit in the amount of $900,000.00 pursuant to subsection 15(1) of the Income Tax Act.
4. Prior to his death, Arnold William Nussey owned 100,000 Class 1 shares of Nussey Transport Limited which had been purchased on March 1, 1991 from his sons, Arnold Murray Nussey and George Alfred Nussey at their fair market value of $900,000.00.
5. A promissory note for the fair market value of the shares was given by Arnold William Nussey to Arnold Murray Nussey and George Alfred Nussey ($450,000.00 to each).
6. The purchased shares were subject to the provisions of a unanimous shareholders agreement which fact was noted on the share certificates in the following terms:
The shares represented by this certificate are subject to all the terms of the certain Shareholders Agreement dated the 1st day of October, 1998(sic) and are not transferable except on compliance with the terms of the said Agreement. (Note that although the certificates refer to the date of 1998, it is obvious that this was an error and that the actual date was 1988. This change has no bearing on the outcome of these appeals)
7. The terms of the Shareholders Agreement which had been executed by the shareholders of Nussey Transport Limited, stipulated that the company was deemed to have redeemed the Class 1 shares of the company held by the holder of same "the day immediately before" his or her death. The provision is as follows:
(c)Notwithstanding anything to the contrary herein contained, the Company shall be deemed to have redeemed all the Class 1 shares held by any Shareholder as of the day immediately preceding the Shareholder's death or incapacity, as the case may be. For this purpose such redemption shall take effect without any further action of the company or the Shareholder as of the day immediately preceding the Shareholder's death or incapacity, as the case may be. The Company shall, upon the demand of any former holders of the Class 1 shares or the holder's legal representative, deliver the Company's non-interest bearing demand promissory note in the full amount of the redemption price, as evidence of the Company's obligation pursuant to any redemption made pursuant to this Agreement, if the same has not yet been satisfied.
8. As of the time of his death, Arnold William Nussey had not paid out the funds due pursuant to the above mentioned promissory notes.
9. Consequently, in order to reflect the redemption of the shares, a journal entry was made in the financial records of the company to show a credit to the account of Arnold William Nussey (to purchase the shares from him in the amount of $900,000) and a second journal entry was made on the same date and time to debit the account of Arnold William Nussey (with the amount of $900,000) and (to show a credit in) the loan accounts of Arnold Murray Nussey and George Alfred Nussey to reflect payment of the two promissory notes of $450,000 each. (The date when the journal entries were made was August 15, 1991.)
10. The Appellants filed their Notice of Objection on May 29, 1995. On February 27, 1997, the Minister delivered his Notice of Confirmation by the Minister.
[2] At the hearing counsel for the Appellant also submitted Exhibit A-1 entitled Appellant's Document Brief which contains the principal documents in these appeals which are summarized in the index to Exhibit A-1 as follows:
INDEX
Tab
Notarial copy of Letters Probate of the Estate of Arnold
William Nussey, dated September 18, 1991; 1
Shareholders Agreement dated October 1, 1988; 2
Copy of the Articles of Amalgamation of Nussey Transport
Limited dated September 30, 1988; 3
Resolution of the Board of Directors of Nussey Transport
Limited dated April 1, 1991; 4
Share Purchase Agreement between Arnold William Nussey
and Arnold Murray Nussey dated March 1, 1991; 5
Promissory Note signed by Arnold William Nussey to
Arnold Murray Nussey dated March 1, 1991; 6
Share Purchase Agreement dated March 1, 1991 between
Arnold William Nussey and George Alfred Nussey 7
Promissory Note signed by Arnold William Nussey dated
March 1, 1991 to George Alfred Nussey; 8
Copy of the journal entries of Nussey Transport Limited 9
Class 1 Share Certificates 10
[3] After the hearing of these appeals it was agreed that the parties would make written submissions and this was done. The last submission being entitled Appellant's Reply was filed with this Court on May 17, 1999.
[4] The most important testimony given at trial was that of Edward Herbert. His testimony is well summed up in paragraphs 12 through 15 of the Appellant's original written submission as follows:
12. Edward Herbert testified that he has been an accountant for 32 years and has acted as the Nussey family accountant since 1978. Mr. Herbert indicated that A.W. was a sophisticated businessman who was certainly aware of and interested in tax planning.
13. Mr. Herbert testified that he was involved in the transaction which took place in the fall of 1988 which transaction gave rise to the creation of the Shareholders Agreement dated October 1, 1988 and to his knowledge A.W. was aware of the transaction. Herbert stated that the purpose of the transaction at that time was essentially two-fold:
(i) it was in part an estate freeze whereby new shares were issued to the 3rd generation of the Nussey family (the "cousins"); and
(ii) it was the intention of A.W. and his sons that a buyout would occur on death in order to keep the business in one branch of the family so the brothers or their successors would not have to deal with spouses or in-laws.
14. Mr. Herbert further testified that he was involved in the transaction which took place in 1991 whereby Arnold and George Nussey crystallized their capital gains by entering into a share purchase agreement with their father, A.W. Nussey for the purchase of their class 1 shares. Herbert testified that a sale of the shares to a third party was merely one of the ways in which George and Arnold Nussey could crystallize their capital gain but there were at least two other ways in which the crystallization could be achieved.
15. Herbert indicated that following the death of A.W. Nussey on April 1, 1991, he subsequently made journal entries in the company's books to reflect his interpretation of events regarding the deemed redemption of A.W. Nussey's class 1 shares on the day before his death. Herbert testified that the only reason for the entries was to reflect the transaction and that they would not exist but for the redemption.
Issues
[5] The issues to be decided are:
(a) Whether there was a redemption of shares by Nussey Transport Limited from the late A.W. Nussey at any time in 1991.
(b) If the answer to issue (a) is no, whether a benefit was conferred on the estate of the late A.W. Nussey.
(c) If the answer to issue (a) is yes, whether the disposition of shares pursuant to the redemption took place on the day prior to the death of the late A.W. Nussey or later.
Analysis and Decision
[6] In my opinion, after considering the evidence and the written submissions, I conclude that there was a redemption of shares in 1991 but that it, at least as regards the Minister of National Revenue, did not occur on the day immediately prior to the death of the late A.W. Nussey. To hold the shareholder agreement to be binding in this regard on the Minister would in effect permit the shareholders to negate the effect of subsection 70(5) of the Income Tax Act that states that a deceased taxpayer is deemed to have disposed of all of his property (including shares) at fair market value and to have received proceeds of disposition equal to that value thus triggering the realization of capital gains and losses in the hands of the deceased taxpayer. The shareholders cannot by agreement amend the provisions of the Act as applicable to them. It is true that subsection 70(5) refers to the disposition being deemed to occur "immediately before death" but the subsection only applies if and when the taxpayer dies. Further, it does not deem the disposition to take place "the day" immediately preceding the death.
[7] In Wood v. M.N.R., 88 DTC 1180, the articles of incorporation of a corporation provided that "A resolution signed by all the members of the Board ... shall be held to relate back to any date therein stated to be the date thereof." In 1983, a resolution was passed declaring a dividend to have been paid as of January 1, 1982. By a journal entry dated December 31, 1982, but in fact posted sometime between January 1, 1983 and March 14, 1983, the dividend was set off against amounts owing by a shareholder to the corporation in 1982. Revenue Canada refused to accept the dividend as having been paid in 1982, and the shareholder appealed. In dismissing the appeal, Bonner, T.C.C.J. said (at 1182):
Nothing in the wording of the statute [Corporations Act of Alberta] makes the Articles binding on persons other than the company and its members. They do not bind the Respondent who is a stranger to them. I find unacceptable the notion that a company and its shareholder are entitled, for purposes affecting the rights of third parties, to rewrite history, that is to say to treat imaginary events as having happened. A legislature has the power to enact deeming provisions. Others do not.(emphasis added)
I find this decision very close to the facts in these appeals.
[8] Further in my opinion, the proper disposition of these appeals is contained in paragraph 47) of the Respondent's Written Submissions, which paragraph reads as follows:
47) It is respectfully submitted that, if the Court finds that there was a redemption of the shares in 1991 pursuant to the Shareholder's Agreement, then for income tax purposes the disposition of the shares can only have occurred after the death of the late A.W. Nussey. In which case, it is submitted that Appeal number 98-1054(IT)G (being the appeal of the reassessment of the terminal return of A.W. Nussey) should be dismissed, and that Appeal number 97-1569(IT)G (being the appeal of the reassessment of the 1991 return for the Estate of A.W. Nussey) should be allowed and referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the shares were redeemed from the Estate of the late A.W. Nussey in 1991 and consequently Nussey Transport Ltd. did not confer a benefit on the Estate within the meaning of subsection 15(1) of the Income Tax Act with respect to the payment made by journal entry ...
[9] Consequently appeal number 98-1054(IT)G is dismissed and appeal number 97-1569(IT)G is allowed and that matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the shares were redeemed from the estate of the late A.W. Nussey in 1991 and consequently Nussey Transport Limited did not confer a benefit on the estate within the meaning of subsection 15(1) of the Income Tax Act with respect to the payment made by journal entry.
[10] On the issue of costs I had a telephone conference call with counsel for both parties. I have decided that the results of the two appeals, considered together, are mixed, one favouring the Minister and one favouring the estate, and further that the issue in these appeals was novel. Consequently, notwithstanding that there had been an offer of settlement by counsel for the Respondent essentially based upon the submission set forth in paragraph 47) above quoted, I order that each party shall bear its own costs.
Signed at Ottawa, Canada this 4th day of October 1999.
"T.P. O'Connor"
J.T.C.C.