Smith (H.M.) v. Minister of National Revenue, (1987) 12 F.T.R. 305 (TD)

• Judge: McNair, J.
• Court: Federal Court (Canada)
• Case Date: July 24, 1987
• Jurisdiction: Canada (Federal)
• Citations: (1987), 12 F.T.R. 305 (TD)

Smith v. MNR (1987), 12 F.T.R. 305 (TD)

MLB headnote and full text

H. Murray Smith (plaintiff) v. Her Majesty The Queen (defendant)

T-2778-84

Indexed As: Smith (H.M.) v. Minister of National Revenue

Federal Court of Canada

Trial Division

McNair, J.

July 24, 1987.

Summary:

The plaintiff and his sons were the sole shareholders of a company. The parties executed a buy-sell agreement respecting their shares. Subsequently, pursuant to the agreement, the plaintiff sold his shares to his sons. The plaintiff did not declare a capital gain as a result of the demand disposition of his shares on his income tax return. The Minister of National Revenue assessed capital gains tax on the deemed disposition. The plaintiff appealed.

The Federal Court of Canada, Trial Division, dismissed the appeal.

Company Law - Topic 7161

Fundamental changes and shareholders' rights - Buy-sell agreements - General - The plaintiff and his sons were the sole shareholders of a company - They executed a buy-sell agreement wherein they agreed not to sell or transfer their shares to a person not a party to the buy-sell agreement except under certain conditions, and that the plaintiffs shares would pass to the sons on his death - Subsequently the plaintiff sold his shares to the sons - The M.N.R. assessed capital gains tax on the deemed proceeds from the disposition of the shares - The plaintiff argued that there was no income tax liability, because the buy-sell agreement created a trust of the plaintiff's shares in favour of his sons - The Federal Court of Canada, Trial Division, held that the buy-sell agreement would not create a trust and there was capital gains tax on the deemed disposition of the shares - See paragraphs 21 to 35.

Company Law - Topic 7162

Fundamental changes and shareholders' rights - Buy-sell agreements - Interpretation - The plaintiff and his sons were the sole shareholders of a company - They executed a buy-sell agreement wherein they agreed not to sell or transfer any of their shares in the company to a person not a party to the buy-sell agreement except under certain conditions, and that the plaintiff's shares would pass to the sons upon the plaintiff's death - The sale price of the shares under the buy-sell agreement was to be $3.00 - The Federal Court of Canada, Trial Division, held that the agreement did not bind the plaintiff to transfer his shares to his sons at his death for the stipulated price of $3.00 - See paragraphs 41, 42.

Company Law - Topic 7164

Fundamental changes and shareholders' rights - Buy-sell agreements - Whether agreement prohibits transfer to outsider - The plaintiff and his sons were the sole shareholders of a company - They executed a buy-sell agreement wherein they agreed not to sell or transfer any of their shares in the company to a person not a party to the agreement, unless the seller offered the shares to the other shareholders first and the outside purchaser agreed to execute a new similar buy-sell agreement - The Federal Court of Canada, Trial Division, held that the agreement would at most hinder, but not effectively prohibit or prevent the plaintiff from selling his shares to a stranger - See paragraph 43.

Income Tax - Topic 1763

Capital gains and losses - Capital gains - Securities - Deemed disposition of shares under buy-sell agreement - [See Company Law - Topic 7161 above].

Trusts - Topic 308

Creation of - Words which create a trust - The Federal Court of Canada, Trial Division, stated that "equity looks to intent rather than form and no special form of words is necessary for the creation of a valid trust. Nevertheless, the language employed must clearly and imperatively manifest the intent to create a trust. The settlor must also take the constitutive step of transferring or vesting the subject matter of the trust in the trustee" - See paragraph 30.

Trusts - Topic 341

Creation of - Requirements of - General - The Federal Court of Canada, Trial Division, referred to definitions of a "trust" - See paragraphs 25 to 27 - The court stated that there are three essential characteristics of a valid trust: (1) the language of the settlor must be imperative (certainty of intention); (2) the subject matter of the trust must be certain; and (3) the objects of the trust must be certain - See paragraph 28.

Trusts - Topic 664

Creation of - Transactions not creating trusts - Shareholders' buy-sell agreements - [See Company Law - Topic 7161 above].

Cases Noticed:

Re Marshall's Will Trusts, [1945] Ch. 217; [1945] 1 All E.R. 550, refd to. [para. 27].

Green v. Russell, [1959] 2 All E.R. 525 (C.A.), refd to. [para. 27].

Tobin Tractor (1957) Ltd. v. Western Surety Co. (1963), 40 D.L.R.(2d) 231, refd to. [para. 27].

Garden, Re, [1931] 4 D.L.R. 791 (Alta. C.A.), refd to. [para. 31].

Heartley v. Nicholson (1875), L.R. 19 Eq. 233, refd to. [para. 31].

Atinco Paper Products Ltd. v. M.N.R., 78 D.T.C. 6387 (F.C.A.), refd to. [para. 32].

Case v. Edmonton Country Club Ltd., [1975] 1 S.C.R. 534; 1 N.R. 563, refd to. [para. 37].

Ontario Jockey Club v. McBride, [1927] A.C. 916 (P.C.), refd to. [para. 38].

Emerson v. Provincial Secretary-Treasurer, [1941] 2 D.L.R. 232 (N.B.C.A.), refd to. [para. 39].

Statutes Noticed:

Income Tax Act, S.C. 1970-71-72, c. 63, sect. 173(1) [paras. 15, 16].

Federal Court Act, R.S.C. 1970 (2nd Supp.), c. 10, sect. 17(3) [paras. 15, 17].

Authors and Works Noticed:

Gower, Modern Company Law (4th Ed.), p. 445 [para. 37].

Halsbury's Laws of England (4th Ed.), vol. 48, para. 501 [para. 27].

Keeton, The Law of Trusts (9th Ed.), p. 5 [para. 27].

Maitland, Equity and Forms of Action, p. 44 [para. 25].

Underhill, Law of Trusts and Trustees, p. 3 [para. 26].

Waters, Law of Trusts in Canada (2nd Ed.), pp. 4, 5, 6 [para. 27]; 99 [para. 28].

Counsel:

B. McGarva, for the plaintiff;

M. Templeton and L. Teichman, for the defendant.

Solicitors of Record:

Shibley, Righton & McCutcheon, Toronto, Ontario, for the plaintiff;

Frank Iacobucci, Q.C., Deputy Attorney General of Canada, Ottawa, Ontario, for the defendant.

This appeal was heard in Toronto, Ontario, on May 26 and 27, 1987, before McNair, J., of the Federal Court of Canada, Trial Division, who delivered the following decision on July 24, 1987: