Minister of National Revenue v. Paxton, (1996) 206 N.R. 241 (FCA)

• Judge: Strayer, Robertson and McDonald, JJ.A.
• Court: Federal Court of Appeal (Canada)
• Case Date: December 12, 1996
• Jurisdiction: Canada (Federal)
• Citations: (1996), 206 N.R. 241 (FCA)

MNR v. Paxton (1996), 206 N.R. 241 (FCA)

MLB headnote and full text

In Re: The Income Tax Act

Her Majesty The Queen (appellant) v. Jerrold D. Paxton (respondent)

(A-513-94)

Indexed As: Minister of National Revenue v. Paxton

Federal Court of Appeal

Strayer, Robertson and McDonald, JJ.A.

December 12, 1996.

Summary:

A parent transferred shares in a small business corporation to his children provided the children transferred the shares to a third party. The parent invoked s. 73(5)(now repealed) of the Income Tax Act and attempted to defer capital gains arising upon the transfer of the shares to his children. The Minister issued a Notice of Confirmation disallowing the parent's attempt. The parent appealed.

The Tax Court of Canada, in a decision reported [1995] 1 C.T.C. 2229, allowed the appeal. The Minister appealed.

The Federal Court of Appeal, McDonald, J.A., dissenting, allowed the appeal.

Income Tax - Topic 1752

Capital gains and losses - Capital gains - Sale of shares - A purchase and sale agreement dated November 6, 1986 re­specting shares in a small business corpo­ration allowed the seller Paxton to sell his shares to his children provided the children resell them to the buyer Tandet by closing - Paxton and his children availed them­selves of this provision - After closing, Paxton invoked s. 73(5) of the Income Tax Act and attempted to defer capital gains arising upon the transfer to his children - The Federal Court of Appeal denied the attempt because: (1) the shares had been effectively transferred to Tandet on Nov­ember 6, 1986, and (2) there was no trans­fer to the children since Paxton's agree­ment with Tandet denied the children the right to decide whether the business would be sold or held - See paragraphs 1 to 29.

Income Tax - Topic 9545

Tax evasion and tax avoidance - Artificial transactions - Sham - Defined - [See Income Tax - Topic 9549 ].

Income Tax - Topic 9549

Tax evasion and tax avoidance - Artificial transactions - Ineffective or incomplete transaction - A purchase and sale agree­ment dated November 6, 1986 respecting shares in a small business corporation allowed the seller Paxton to sell his shares to his children provided the children resell them to the buyer Tandet by closing - Paxton and his children availed themselves of this provision - After closing, Paxton invoked s. 73(5) of the Income Tax Act and attempted to defer capital gains arising upon the transfer to his children - He argued that he acted as his children's agent even though he had warranted in the agreement that he owned the shares - The Federal Court of Appeal denied Paxton's attempt and described the situation as an "inverse sham" and "an incomplete or ineffective tax planning scheme" - See paragraphs 22 to 29.

Cases Noticed:

Antosko v. Minister of National Revenue, [1994] 2 S.C.R. 312; 168 N.R. 16, refd to. [para. 2].

Orr v. Minister of National Revenue, [1989] 2 C.T.C. 2348; 89 D.T.C. 557 (Tax C.C.), refd to. [para. 7].

Barnett v. Harrison et al., [1976] 2 S.C.R. 531; 5 N.R. 131, refd to. [para. 10].

Fasken Estate v. Minister of National Revenue, [1948] Ex. C.R. 580, refd to. [para. 13].

Dunkelman v. Minister of National Rev­enue, [1959] 59 D.T.C. 1242 (Ex. Ct.), refd to. [para. 13].

German v. Minister of National Revenue, [1957] 57 D.T.C. 1216 (Ex. Ct.), refd to. [para. 13].

Boger Estate v. Minister of National Rev­enue (1993), 155 N.R. 303 (F.C.A.), refd to. [para. 14].

Snook v. London & West Riding Invest­ments Ltd., [1967] 1 All E.R. 518; 2 Q.B. 786 (C.A.), consd. [para. 23].

Cameron v. Minister of National Revenue, [1974] S.C.R. 1062, refd to. [para. 23].

Stubart Investments Ltd. v. Minister of National Revenue, [1984] 1 S.C.R. 536; 53 N.R. 241, refd to. [para. 23].

Atinco Paper Products Ltd. v. Minister of National Revenue, [1978] C.T.C. 566; 22 N.R. 485 (F.C.A.), leave to appeal re­fused (1979), 25 N.R. 603 (S.C.C.), consd. [para. 27].

Friesen v. Minister of National Revenue, [1995] 3 S.C.R. 103; 186 N.R. 243, consd. [para. 36].

Canada (Attorney General) v. LeBlanc (1991), 124 N.R. 321 (F.C.A.), refd to. [para. 38].

Mount Royal/Walsh Inc. v. Ship Jensen Star et al. (1989), 99 N.R. 42 (F.C.A.), refd to. [para. 39].

Continental Bank Leasing Corp. v. Minis­ter of National Revenue (1996), 199 N.R. 9 (F.C.A.), refd to. [para. 47].

Inland Revenue Commissioners v. West­minster (Duke), [1936] A.C. 1, refd to. [para. 48].

Minister of National Revenue v. Mara Properties Ltd., [1996] 2 S.C.R. 161; 197 N.R. 308, reving. [1995] 2 F.C. 433; 179 N.R. 363 (F.C.A.), refd to. [para. 52].

Statutes Noticed:

Income Tax Act, S.C. 1970-71-72, c. 63, sect. 73(5) [para. 2].

Authors and Works Noticed:

Hogg, Peter W., Notes on Income Tax (3rd Ed. 1994), p. 22:12 [para. 36].

Krishna, Vern, Fundamentals of Canadian Income Tax (5th Ed. 1995), pp. 1371 to 1372 [para. 23].

Nitikman, Joel A., Current Cases of Inter­est in Report of the Forty-Sixth Tax Conference (1995), p. 12:1 at 12:12 [para. 26].

Sharpe, Robert J., Injunctions and Specific Performance (2nd Ed. 1995), p. 8-26 [para. 10].

Counsel:

Harry Erlichman and Elizabeth Chasson, for the appellant;

Maralynne Monteith, for the respondent.

Solicitors of Record:

George Thomson, Deputy Attorney Gen­eral of Canada, Ottawa, Ontario, for the appellant;

Morris, Rose, Ledgett, Toronto, Ontario, for the respondent.

This appeal was heard at Toronto, Ontario, on October 8, 1996, by Strayer, Robertson and McDonald, JJ.A, of the Federal Court of Appeal.

The decision of the Court of Appeal was delivered at Ottawa, Ontario, on December 12, 1996, and the following opinions were filed:

Robertson, J.A. (Strayer, J.A., concurring) - see paragraphs 1 to 29;

McDonald, J.A., dissenting - see para­graphs 30 to 54.