Effective Date

Vendors agreed to sell shares for a sale price of $16 million, of which $2 million was payable in subsequent years only if an EBITDA condition respecting the sold companies was satisfied.  The sales agreements contained a simple price adjustment clause based on the final audited shareholders’ equity of the sold companies.  When a substantial deficiency in shareholders’ equity subsequently emerged, a negotiated Settlement Agreement concluded more than a year after the  sale reduced the sale price by $0.5 million (to $15.5 million), increased the portion of the sale price payable under the reverse earn-out to $3 million – and provided that the vendors would reimburse a further portion of the sale price out of amounts received by them under the earn-out.

Favreau J respected the retroactive downward adjustment, pursuant to the Settlement Agreement, of the proceeds of disposition by $0.5 million but, by the same token, considered that the reverse earnout amounts of $3 million could not be excluded from the proceeds of disposition notwithstanding their contingent nature.  However, he did not permit a downward adjustment to the proceeds of disposition for the contingent obligation to refund the sale price to the purchasers.

See summary under s. 54 – proceeds of disposition – para. (a).

An individual shareholder of a corporation ("B&N") thought that he was the beneficial owner of his home, but everyone else, including his accountants (and ultimately the Tax Court) considered that it was beneficially owned by B&N. Immediately before his sale of the home at a gain, it was transferred to him by B&N, with the excess of its book value over the outstanding mortgage amount being treated as a shareholder advance to him.

In reversing a shareholder benefit assessment of the taxpayer equal to the excess of the property's fair market value over its book value (and stating an "understanding" that the shareholder loan amount would be increased by this difference), VA Miller J stated (at paras. 40-41):

The Appellant was not aware of the error in this case nor did he sanction the error. He believed that the Declaration of Trust was followed and that he already owned the Property.

It is clear that B&N did not intend to confer a benefit on the Appellant. It transferred the Property to him and included an amount with respect to the Property as a loan receivable from him. The problem was that the amount included was incorrect. This problem arose as a result of an error made by [the accountants] not from any intent of B&N or the Appellant to commit a fraud.

An estate unsuccessfully argued that the effect of the settlement of some estate litigation pursuant to a consent order, which provided for the transfer of the interest in the deceased's RRSPs, by the children who otherwise would have received the RRSP assets, to the deceased's surviving spouse, was to retroactively access the rollover for RRSP transfers to a surviving spouse. In connection with noting that the children had not disclaimed their interests in the RRSPs, V. Miller J stated (at para. 33) that the effect of a disclaimer (being "a refusal to accept an interest which has been bequeathed to a disclaiming party") is "to void the gift as if the disclaiming party never received it."

See detailed summary under s. 146(8.8).

To secure mortgage financing for his home purchase, the appellant's friend ("Khandaker") agreed to co-sign the mortgage documents and to be placed on title as a co-owner. Less than three weeks after closing, they signed a statutory declaration stating that the appellant was the 100% beneficial owner and that Khandaker held a 0.01% interest in trust for the appellant. In rejecting a submission that the appellant was the sole beneficial owner (so that the new housing HST rebate was available to him), Lyons J stated (at para. 27):

The creation of a trust must be properly documented containing the requisite elements of a trust, dated, signed and in existence prior to or contemporaneous with the matter that is the subject of the trust arrangement.

See summary under ETA s. 254(2).

The British Columbia Court of Appeal ordered a retroactive increase in the monthly amount of the support payments the taxpayer paid to his spouse, and was thus made to pay a lump sum equal to the monthly increases. Pursuant to the finding in Dale that retroactive court orders are binding on the Minister for tax purposes, C Miller J found that the lump sum represented payments "on a periodic basis," and were therefore support payments.

The present case was distinguishable from Peterson, in which there was insufficient proof that the lump sum in question represented periodic payments.

In 2005, the taxpayer sold 78 of his 100 common shares of an Ontario corporation ("115") to the other shareholder ("D.K."), and claimed the capital gains exemption. Both shareholders had believed from the time of the organization of 115 in 1995 that they each held 100 common shares of 115, and this belief was reflected in 115's financial statements and accounting ledgers. However, in connection with the sale in 2005, they discovered that (due to some communication difficulties relating to a change in the taxpayer's counsel) the corporate minute books recorded only one share as having been issued to each of them. A shareholders' resolution was passed "acknowledging the initial intent of the parties and issuing share certificates totaling 99 common shares of 115 to each of the Appellant and D.K. to correct the error without further consideration to be paid for them" (para. 9). CRA denied substantially all of the taxpayer's capital gains exemption claim on the basis that 77 of the 78 shares sold by him had been issued within 24 months of the time of their disposition, contrary to the requirement of para. (b) of the qualified small business corporation share definition.

Pizzitelli J. found that in fact all 200 common shares (including those sold by the taxpayer) had been issued in 1995. He stated (at paras. 19, 24):

We frankly have inconsistent corporate records at best, but the reality is that the correcting resolution quite clearly speaks to the other documents, clearly superseding them for the simple reason of correcting an error. ...

...The correcting resolution resulted in the records being amended to give effect to the true facts.

Accordingly, the taxpayer satisfied the 24-month requirement and was eligible for the capital gains exemption.

In 1996, the taxpayer (a Canadian-resident individual) purported to sell shares of a Canadian company ("Vienna"), while retaining the rights to dividends and the voting rights, to an Austrian private foundation (privatstiftung) which had been contemporaneously formed and funded in Austria by his father, and with family members including the taxpayer named as beneficiaries. The selling price was equal to 1/2 the fair market value of the shares (i.e., 1/2 of $1.33 per share, or $0.665 per share). When the parties subsequently were advised that it was not legally possible to transfer shares excluding certain of the rights attaching to those shares, they amended the agreement (perhaps in 1998, but purportedly on a retroactive basis) so as to provide that the Vienna shares (including all of the rights attached to the shares) had been sold in 1996 at a price of $1.33 per share, and with the voting rights and the dividend rights on the shares then immediately being assigned by the foundation to the taxpayer for $0.665 per share.

C. Miller J found that these amendments were legally effective on a retroactive basis in light inter alia of a clause in the original sale agreement which provided that any parts of the agreement that were found to be unenforceable would be replaced so as to give effect to the business intent. Respecting a submission that the sale agreement instead was void for mistake, he stated (at para. 54);

With respect to the Vienna shares, there was no mistake that Mr. Sommerer owned the Vienna shares, and that he could transfer them; he simply could not carve out certain rights. But the parties could easily rectify the situation, which they did.

After the accountants, over a year later, realized that a reorganization plan resulted in Part IV tax because two corporations were not connected at the time of the redemption of shares giving rise to a deemed dividend, they had resolutions prepared by a notary dated as of the date of the previous reorganization effective date purporting to issue special voting shares to the corporation receiving the deemed dividend, followed immediately thereafter by the shares' redemption. Favreau, J. interpreted these measures as retroactive tax planning, not the correction of a mistake in the implementation of the plan, and noted, in any event, that under the articles of the corporation issuing the voting shares, such shares were not redeemable, nor did it appear that such shares were validly issued as it appeared that the corporation did not receive the subscription price therefor.

The taxpayer originally signed an agreement for the sale of his half interest in a business (which was found to be held in a corporation) to his brother. Upon receiving the fifth and final cash instalment payment of the purchase price from the corporation, his brother purported to have the corporation retroactively issue two shares to the taxpayer and got the taxpayer to sign a second agreement providing for the purchase of those two shares by the corporation from the taxpayer in consideration for the four payments that the corporation had in fact made to him. In finding that the taxpayer had received deemed dividends, Lamarre J. stated (at para. 22) that "a person can be declared a shareholder retroactively" and found that the second agreement was the one that prevailed as it reflected the contractual reality negotiated by the two brothers.

Although the taxpayer signed an agreement with a holding company for the sale of shares in a company ("READ") to the holding company, Bowman T.C.J. found that the transaction was not completed, so that there was no disposition for purposes of s. 84.1. Among other things, none of the stipulated consideration was ever paid by the holding company and the directors of READ did not approve the transfer as required by the articles.

Bowman A.C.J. stated (at p. 1496):

"If the Minister can attack a transaction in this court or the Federal Court of Appeal on the basis it is legally ineffective or incomplete, so too can the taxpayer. There is no need to wait for a provincial court to set an incomplete or legally invalid transaction aside."

Following an assessment of the taxpayer under s. 160 she alleged that there had been a transfer of a one-half interest in a property to her from her husband in the summer of 1991 when there was a discussion between them that she should receive the equity in the property rather than, as alleged by the Crown, three years later when, on a sale of the property, the husband signed a direction authorizing the purchaser to pay the closing proceeds to her. McArthur T.C.J. stated (at p. 1244):

"It takes more than an intention or uncertain conversation to transfer an interest in real estate. The law of contract requires a clear statement of transfer, acceptance and delivery."

The time at which the taxpayer's employer agreed to issue shares to her was the time at which the president called her to his desk and told her that he was going to issue to her 45,000 stock options at a $1.50, rather than at the later date when a written stock option agreement was signed by the president and a related directors' resolution was passed. The president had ostensible authority to commit the company to issue shares to her (notwithstanding that the Board of Directors in fact had not delegated this authority to him as required by the stock option plan), and failure to comply, on the earlier date, with a stipulation in the stock option plan that the options be granted to her pursuant to a written and approved stock option agreement related to failure to comply with administrative rules rather than invalidating the grant.

O'Connor T.C.J. applied s. 8(3) of the Land Act (BC), which provided that "a disposition of Crown land is not binding on the government until the certificate of purchase ... is executed by the government under this Act" to find that the period of ownership of land by the taxpayer did not satisfy the 24-month holding period requirement in the definition of qualified farm property.

Dividends that were purportedly paid to the taxpayers "as of" December 30, 1990 were dividend income to the taxpayers in their 1991 taxation years given that the dividends were not declared until February 13, 1991, the amount of the dividends was not known until that date, and the dividends would not have been declared or paid if a sale of shares of the corporation had not closed on that date.

In rejecting a submission of the Crown that the taxpayers were not assisted by a price adjustment clause, Kempo J. noted that they had addressed the fair market value of the shares in question, had noted the historical sales and earnings of the corporation, had considered the effect of a recent material event and had felt at the time that the value fixed by them (which later was established to be excessive) was reasonable.

Following the exercise by the taxpayer of a "shot-gun" clause in the shareholders' agreement, it was understood by him and the other shareholder that the corporation would redeem the other shareholder's shares. However, the documents which were drawn up and signed called for the purchase of the other shareholder's shares by the taxpayer. When this was discovered by the taxpayer two years later, an amended agreement effective as of the earlier date was executed by all three parties providing for the transfer of the other shareholder's shares to the corporation for the same price.

Rip J. rejected an argument by the agent for the taxpayer that the defence of non est factum applied given that there was negligence on the part of the taxpayer in not reading the original agreement. The agent apparently did not argue that the subsequent amending agreement was a rectification of the first written agreement.

The Court refused to give retroactive effect to the replacement, as of a previous date, of a demand promissory note by a series of promissory notes payable at specified dates.

A court order became effective from the date it was pronounced rather than not taking effect until the date of issuance.

After finding that the taxpayer's employer had conferred a benefit on her in 1979 and 1980, Couture C.J. found that at the time of the decision (1986) it was not legally feasible to allow a retroactive deduction of those fees against loans that were outstanding in the books of the corporation. He stated (at. p. 59) "its fiscal years have been closed, and they reflected at the time its financial position as it legally existed then".

Before going on to find that the taxpayer had disposed of property on the effective date for a lease-purchase agreement in which land and building was leased by the taxpayer to the lessee for five years with an obligation to purchase within that period of time for a specified price, Tremblay T.C.J. found that the date of sale of the land and building was the subsequent date when the lease was terminated by purchase and stated (at p. 648):

"Consequently, where the parties have agreed for a future time, it cannot be decided under civil law that the transaction took place at a time other than the one determined and executed by them. A bi-lateral promise does not have the effect of making the promisor-purchaser an owner; it merely allows him to become one when the contract of sale is executed or when the judgment in lieu of contract is rendered."

The taxpayer sold shares to a third party in 1933 under a contract which he subsequently alleged to have been induced by fraud. In 1939 he obtained a judgment reducing (i.e., setting aside)the contract with effect from the date that it was made, together with orders that the shares be retransferred to him and the dividends which the purchaser had received be paid to him. After the judgment, the Revenue repaid the surtax assessed on the dividends in the hands of the fraudulent purchaser and assessed the taxpayer instead. In finding that the taxpayer was taxable on the dividends when they had been paid by the company, Lord President Normand stated (at p. 317):

In this case the party sued for rescission and in the end of the day he obtained a decree of reduction. The effect of that reduction was to restore things to their position at the date of the transaction reduced, with the result that as at that date and afterwards the successful pursuer in the action fell to be treated as having been the person in titulo of the shares which he had sold to the defender and therefore to have been in right of the dividends. No doubt it is true that in the interval the dividends had to be paid and were paid to the defender because his name stood in the register as the proprietor of the shares and no doubt also they were for the time being treated by the Inland Revenue as his income and while matters stood entire no other person had any right to the shares or to the dividends except the defender, Mr Crawford. But from the moment the reduction took place Mr Spence fell to be treated as having been throughout the proprietor of the shares and equally the person properly entitled to receive the dividends.

A father instructed his solicitors that it was his intention to take in his son as a partner effective on the date of the instruction and requested them to prepare a deed of partnership. In finding that no partnership was intended to arise before the deed had been executed, Rowlatt J. stated (p. 197):

"When people enter into a deed of partnership and say that they are to be partners as from some date which is prior to the date of the deed, that does not have the effect that they were partners from the beginning of the deed [sic]. It cannot alter the past in that way. What it means is that they begin to be partners at the date of the deed, but then they are to take the accounts back to the date that they mentioned as from which the deed provides that they shall be partners."