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Lethbridge Herald Newspaper Archives

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Lethbridge Herald, The (Newspaper) - March 31, 1973, Lethbridge, Alberta Tax column I. H. ASPER One of the cloudiest areas of tax law is the question of how far taxpayers can go in agree- ing amongst themselves on the relative tax consequences ol business arrangements made between them. The situation arises frequently, because once two people reach an agreement in principle on a business deal, they will then try to implement the transaclion in a manner which will cost eacli ol the par- ties to the deal the least tax, or, at least in arriving at the busi- ness arrangement, they will certainly take into account the intended tax consequences and costs of the arrangement. Tiiis is perfectly legitimate. However, it is equally lawful for the court to upset what it considers to be a tax avoidance or artificial transaction and ig- nore the form in which the deal is made and look to the sub- Solurdoy, Morth 31, 197S THE LETHBRIDGE HBWLO 25 stance of what was actually done. That will often produce tax consequences considerably different from what the parties really intended or expected. One of the dangers of this power being given under the In- come Tax Act, that is, the right of the courts in effect, to re- write the deal between two businessmen who are dealing at arm's length, is that they often make.the deal in tha first place based on their expectation of what the tax costs will be, and can find themselves stuck with a deal that they wouldn't have made had the tax consequences been different than what they had expected. An example of this kind of case came before the federal court a few weeks ago. The facts were typical of hundreds of similar business transactions, v.'hich occur every year and should he of interest to people who are shareholders in part- MRS. EDITH tEPPARD MOVED to Centre Village Mali To larger, brighter pre- mises for the convert ience and enjoyment of our many customers. We will be open Mon., April 2nd. CAROUSEL KNITTING SHOP Phone 328-4143 nerships or small business ven- lures, where the situation most frequently arises. In the case before the court, the taxpayer was a shareholder, along with three others, in an Ontario company. There had been a very serious falling out amongst the shareholders, and the three remaining share- holders resolved to separate themselves from the taxpayer, their co-shareholder. They made him an offer to buy his shares for approxi- mately The taxpayer made several counter offers, and, after negotiations an agreement was reached. The remaining shareholders agreed to pay him for his shares in the company, plus certain cash bonuses, and the company gave him a contract for consulting services for a fee of per year for five years. Although It didn't come out in Ihe evidence, one can assume that the change in the deal was based on tax considerations. For example, if the sharehold- ers simply paid him it would be a non-deductible ex- pense for them because it is ir.oney laid out to buy a capital asset, the shares. On the other hand, the would likely have been a capital gain for the taxpayer, and since the transac- tion arose before the imposition of tlie capital gains tax, he would wind up with net. The arrangement actually en- tered into would see him re- ceived as a capital gain, and would come to him is taxable income, ostensibly for the consulting services. Be- cause it was spread out over five years, his effective tax rate on the per year con- sulting fee might be about 25 per cent, thus making a total income tax on the of consulting fees in the amount of roughly In this way, the taxpayer ALBERTA TEACHERS ASSOCIATION Professional Development Activities For Teachers Sponsored by Rural Teachers of Southern Alberta! MON., APRIL 2 a.m. FOREMOST PROFESSIONALISM Hrynyk MON., APRIL 2 a.m. TABER TEACHER WELFARE, PENSIONS, and UNEMPLOYMENT INSURANCE Leskiw MON., APRIL p.m. BOW ISLAND PROFESSIONALISM Hrynyk MON., APRIL 2 p.m. BROOKS (Masonic Hall) USE OF TEACHERS' AIDES Sillito TUES., APRIL 3 a.m. FOREMOST INTERPERSONAL COMMUNICATIONS-Williams TUES., APRIL 3 a.m. BLAIRMORE INTERPERSONAL COMMUNICATIONS Bianchini TUES., APRIL p.m. BOW ISLAND EDUCATIONAL FINANCE and UNEMPLOYMENT INSURANCE Hyman WED., APRIL p.m. P1NCHER CREEK COMMISSION ON EDUCATIONAL PLANNING Keeler WED., APRIL 4- p.m. -VULCAN PROFESSIONALISM Hrynyk THURS., APRJL 5 a.m. LETHBRIDGE (Holiday Inn) MEETING OF P.D. CHAIRMEN FRI., APRIL 6 a.m. BLAIRMORE GOALS OF TEACHER EDUCATION Rieger would receive tax-free for the shares, and about 000 after taxes on the consulting contract. The total, after taxes, would be as opposed to .he he had been offered as a capital gain on the sale of us shares. Obviously, he would x much better off in both com- mercial and tax terms. From the point of .view of the Buying shareholdeis and the company, the final iorm of ar- rangement would not have seen iiem in a rnruch different posi- ;ion than had they carried out he original offer to buy the shares for Assuming the company was in the 50 per cent tax bracket, the cost of paying the per year con- sulting contract would be a de- ductible expense, and would come to Add this to the that they had to lay out for the shares, and the cost was only more than the 000 originally offered. Assuming that was their rea- soning, coupled with their de- sire to get rid of the taxpayer as a shareholder, that was the way in which the transaction was written for the shares, plus a five year con- sulting contract at per year. However, the taxpayer broke the faith. He no sooner got his and started receiving his consulting contract payment than he filed his rax return, and claimed that the per year consulting fees weren't consulting fees at all, hut were really a payment for the shares, and were thus capital, rather than income. This has been done before, but usually it is the tax depart- ment which looks to the form in which a transaction is done and taxes it on the basis of what Ihe real intent. It might well be ar- gued, in the present case, that the real intent was to buy his shares and therefore any money paid, whetheK for the shares or under the alleged consulting contract, was really a non-de- ductible expense for the com- pany, and a non-taxable receipts for the taxpayer. Indeed, that's what the tax appeal board said when the matter first went to court. The tax consequence to be settled was Oils: were the consulting fees genuinely paid for services to be rendered, in which cast they were to be taxes in the hands of the and de- ductible by the paying corpo- ration, or were they really a charade and another method payment for the shares the tax- payer had sold. If the latter were held to be tho case, then the payments would be tax-free in the hands of the taxpayer, and lion-deductible expenses by the corporation. That would cer- tainly have a dramatic effect on the deal. If a court ruled on the latlei principle, the taxpayer would in effect get for Ms shares, and not as proj- ected, and the cost of the shares to the buying parties will be 25% cash day of the tali before Aug. 15. Settlement in tut" TRUCKS- 1-1949 Chev. 3 ton truck axle; Reo 2 ton repair; Mercury __ ____. fag axle, side tip hoist, 5 speed (ran TRACTORS- 1-5010 JD traclor with i hours, (good cTrouifcs. MACHINERY- ft. Massey Harris d ft. model HC 17 standards; 1 14 ft. Inu John Deere folding harro1 ers, centre drive; I.H.C. hoe drill, 10 fn. spacing, torn John Deere plow; ft. 300 gal. lank. HARVESTING EQU1PMENT- 1-Mottel C2 Allis Chalmers con and rattle bars (Al polled swatncr; 1-28 ft. Moyro ft. 8" Speed King auger, p.t.o belt type pick-up; 1-10 ft. Me1 reel. TANKS- 1 135 gal. slip in truck 1atik; 500 gal. fuel tanks; sfrmd for a ouu n waler tank; 2-MacoNaught fuel pumps. MISCEIUNEOUS- 4-hydroulic cylinders; 1- ougersi 1-12 ft. truck b telephone guide wire; 31 25 telephone poles; Waukashaw molor, need 2-Sels of steel wheel Number of wheels and ti 30 fracfor iire 1 pump; Old wagon and HOUSEHOLD- table and ch propane cook stove. Lie. No. 010457 pheld in would be and not as expected. The tax appeal board ruled in favor of the taxpayer, saying that notwithstanding the form !n which the agreement were entered into, dividing the money between the purchase price ot the shares and the consulting contract, the real intention was to pay all of the moneys to the taxpayer In order to buy his shares, and since that was a capital purchase of an asset, the consulting contract payments weren't deductible by the company nor were they taxable in the hands ol the shareholder. For some reason, the roiiuster of national revenue appealed to the federal court. The judgment was recently handed down, and should be welcome in both business and professional circles. The court ruled that the parties had committed themselves to a certain course of action and had agreed to accept the tax consequences thereof. The court said there was no sufficient reason to disturb that arrangement, and ruled that the transaction as the parties had agreed upon should be carried forward for tax purposes. One of the interesting observations in the judgment indicates that the moving factor in deciding the case was the fact that all of the parties to the transaction knew they were signing binding agreements, and what tlie consequences of those agreements were, both civil law terms as well as tax law terras, and everyone having changed their position and relied upon those agreements being upheld for all purposes, it was not a proper case in which tho court should look behind the agreements and, in effect, rewrite the commercial transaction arrived at between, paople who were obviously dealing at arm's length'. There is little doubt that the court reached the right 'conclusion. It would be unlortunate If businessmen could not rely upon the advice they get as to the tax consequences of the way in which they do their business. The uncertainty would make it somewhat difficult and add another note of complexity to the cost ot doing business. It is conceded that where a flagrant abuse of the tax laws occurs in a business transaction, the court should have the right to set it aside, but in this case as in most others of its kind, the court should not interfere. In effect, the court has wisely said to these taxpayers: You are grown men, you agreec upon the tax consequences of what you were doing, everyone understood it, and someone apparently has tried to break the deal, but we will not allow the tax courts to be used as an agency for one who is so inclined. (Mr. Asper is a Winnipeg potential OTTAWA (CP) _ A New York petroleum economist told 'he Commons resources committee yesterday there is a vast potential for new oil finds in Canada. Compared with oil-producing states like Oklahoma, Milton Lipton said, even Alberta, the source of almost all Canadian oil, "is hardly explored." Called as a witness hy Conservative MPs on the committee, he rejected assertions made Wednesday by Ottawa petroleum geologist F. K. North that there Is no evidence any more large oil fields will be found in Canada and that Alberta has been thoroughly explored, llr. North was a New Democrat witness. Thursday's hearing was the last of 10 in which the com. mittce discussed whether Canada should impose long-term restrictions on oil exports or use revenue from increased exports to finance increased exploration and development. The NDP favor the first alternative, the Conservatives the second. Mr. Upton said he would not presume "to discuss what would be an appropriate policy for Canada." Later, however, he said the alternatives of all-out exports or no development, except for Canadian needs, are extreme and oil vast He favored strenuous exploration and development efforts, saying that it would be logical to finance such exploration and development with U.S. money. "Within reasonable the availability of U.S. capital was not dependent upon giving U.S. investors part ownership in Canadian development. Mr. Upton said if North American energy resources are not developed, the continent will be at the mercy of Middle East suppliers. If resources like dlHicult-to-develop oil sands or hard-to-reach frontier reserves were developed, the Middle East would be restricted in the prices it demands, the .U.S. would take all available 'Canadian oil if Canada decided to go all out on exports, he replied "we've always loved Canadian oil." LIABILITY BONDS AUTO FIRE ROSSHER AGENCIES LTD. ESTABLISHED 1911 Lower Floor 517 4fh Ave. f. Phone 3270541 Juke box of tariff By JAMES NELSON OTTAWA (CP) The taritt board has ruled that juke boxes are, in fact, a kind cf amusement device, but say? they are not subject to 10-per-cent excise taxes. In arriving at ics decision, the board philosophized on the role of the juke box in society, and the personal musical preferences of many which, apparently, don't always agree with these of the board members. The judgment was issued over the signature of board secretary J. R. Mitchell, hut he said it was the combined work of the three hoard members who heard an appeal from La-niel AutamKic Machines Inc. against imposition of the tax. The board upheld the apr-oal, W. S. Landretc presided at the hearing with board members T. Dauphinee and Rene Lahelle. Mr. Landretli wrote the judgment, with which tht other members agreed. Laniel Automatic Machines appealed against the revenue department's imposition of a 10-per-cent tax on coin-operated automatic or juke imported from the freed taxes At one time, the tax law specifically mentioned phonographs as being taxable, but in June, 1971, Parliament re-wrote the law, making reference only to "coin, disc or token-operated games or amusement devices of all kinds." The question before the board was whether juke boxes are covered by the definition ol games or amusement devices. "It would only be a mild exaggeration to suggest that 'juke boxes' are almost as familiar a feature of leisure time living in the 20th century as is the television the Ward said. Considering whether a juke box is an amusement device, ihe board added: 'Amusement' Is a word of such sweeping generality as to encompass within its meaning virtually all the pleasurable preoccupations of mankind, including that of listening to music or hearing music played on a juke box, or of simply inserting coins in it to watch it work. "For some people, the music issuing forth from such devices falls short of being pleasurable. Nevertheless, a person who inserts coins in a juke box does so not with the object of torturing his sensibilities but in pursuit of 'amusement' At this point, it seemed clear that juke boxes would fall within the scope of the tax law. But the tariff board looked deeper into the subject. It said that when Parliament re-wrote the tax law in June, 1971, it "conjoined" the term amusement devices with games. "It can hardly be said that a phonograph is a dev'te or equipment of the sama type or class as a device or equipment to play the board said. "No doubt a phonograph provides entertainment, amusc-jnent or diversion, but certainly not of the type or class as would be provided by a game." The board referred to a judgment by the late chief justice of the Supreme Court of Canada, Robert Taschereau, concerning coin operated bowling machines. The question then was whether bowling machines offered a service to the public. He ruled (hat juke boxes, bowling machines, and similar coin-operated devices did not sell essential services like coin-operaled door locks on public toilets, but merely "innocent recreation for the benefit and advantage of the 01 OTTOMAR LANGE AUCTION SALE 7 miles east of Claresholm on the Starline Road, then 4 miles north and 'A mile cost or 3 miles south end 13 miles west of Carmangay or 9 miles east of Pulteney. MONDAY, APRIL 2nd 10 a.m. TERMS CASH lunch will served by the Slarline ladiet' Club NO RESERVE HAYING John Deere No. 5 mower, ttiree-point Holland sido delivery rake; Big Six push off bole fork; Six baia automatic slacker; Ten bale slacker; Malco 24-fr. bale elevator on rubber; 28-ff. hay trailer, landem axle. MACHINERY Mossey Ferguson 410 combine, complete wilh cab, Mel-roe pickup and straw cutter; Massey Ferguson No, 36 18-Jj SF> swolher; IHC No. SO 17-ft. deep Ullage cultivator; Victory Triplex blade wilh collers; CCIL 15-0. discer, complete wilh seed box, .fertilizer attachment and packers; New Holland No. 205 manure spreader, used one season; CCIL 1 4-ft. wigwag harrows; John Deere 15-fl. double disc; Massey Ferguson M-ff. high wheel drill; Ki'rshmen fertilizer box, <5-inch spacings; Noble 1 4-ft. packers, 6-inch IHC 14-ft. rod weeder; Diamond chaff wagon and blower; Allied 8-0. bulldozer blade; Na ional field iprayer; duplex 14-fl. cultivator; 8-ft. scraper, 3-poinr hitch; Ford two bottom plow, 3-point hitch; IHC 5 bottom plow, John Deere 6-fl. pony drill; 6-ft. packers. AIRSTREAM 1 8-FT. TRAILER Complete with electric fridge, ioiler, propane heating, electric hot waler tank, hydraulic brakes, wired for 12 volt cmd volt lighting and gas lamp. TRUCKS AND TRACTORS Cockshult .1 800 B series w th cab, block heater, live PTO, duol hydraulics, only 2700 hours; Massey Ferguson 165 gas tractor, block healer, three-point hitch, only 400 hours, 1 year old, multi-power, largo tires; Ford 8N wilh three-point hitch; IHC 1600 toadslar, 304 V8 engine, block healers, 15 grain box with Renn hoist, road tank, 1arp, 925x20 tires S500 actual mites; Ford 1949 2-ton, 12-fl. box and stock' racks, Brantford hoist, low mi cage, good rubber, just overhauled; Davis front end loader wilh bt'ls nickup and bucket. TANKS 1000 gallon propone tank with regulators; 250 gallon propane lank with regulators; 20 gallon propone bailie, propane torch and branding box, and stock tank heateri Two single compartment fuel tanks on steel stands, complete; 250 gal, single comp. fuel tank on steel stand, complete. HOUSEHOLD Moffatt propane 4-burner s ove, 30-in. with rolisterie; RCA Whirlpool dishwasher; Moffal propane clajhes tcLACHAN N SALE 17th at 11 a.m. miles North of COUT7S on jns will be posted. 5ERVED f swathftr and combine. Terms balance payable on or ull before truck, 20 fr. box, stock racks, ed 2 speed axle. block. 24.5x32 tires, cab, 1800 rmall M gas traclor, dual hy--r6 ft. Cockshult surflex TOOLS AND MISCELLANEOUS ITEMS Lincoln ISO amp, arc welder, whh helmeisj Acelyleno welder wilh carl; Wheelbarrow; Comet high volume air compressor; Black and Decker por able grinder; BTU circulating healer, natural gas; Anvil and stand; Post nuts and bolts; Electr c scale; Grease gunS; Gas pum clocks; Suzuki 80 model K11 mounted post driver; Maclec hopper and running gear; 8 Two pump jackt, 1wo well purr wrenches; complete set taps Cement mixer; Beam oble blade, 2 wing winch, Q anal cultivator; Sections of -14 it. Trash Waster rod weed-.C. press drills; 1-T4 ft. 150 g, [good bot-. Golden Arrow weed sprayer, 16 ft. cur, new rub bars 1-model 163 I.H.C. self pro-Hh ouger wilh B3 molor; 1-41 3. dfive; 10 ft. John Deere Iroe ft. pick-up gal. water tank; 3 sr a 500 fuel tank; gal. jel pumps. Tiller; field worker; Drag -hydraulic drill filler; TOO ft. carrier outside elcclrlcal wirej telephone wire; cylinder r repair; h.p. B S moto-j i; ft. windmill combine tire; rafec; 1 station ail bike; Horndraulic rear d 1 1-in, grain grinder whh aus, reg. No, 2 barley; ps, complete set socket d dies; Endless belt; Two Shell Case hydraulic rams; IHC 5 h.p. sioiionary engine; Fanning mill; 10-ff, drag out auger; Scythe and sickle sharpener; Assarted lengths in. and M-in. plaslic hose; Assorted fence posts; Barbed Wire) Used plywood; Gas and oil drums; Rolls of neoprene; Assorted blocks and lumber; 5 and 6-m. pressure treaied posls; Garden rolor (jlle-r; Power lawn mower; Steel wriee ed wagon with grain lank, wooden running gear; 29 16-ft. feed bunkt; Large quantity of scrap iron and some old machinery; 250 gal. steel water trough; Quantity used red brickj Sunbeam electric animal Bolt rack; One Border Collie, good collie dog; Elec. bench grinder. SPECIAL Good stock saddle, saddle blanket, bridles, hollers, haeka-more, saddle bags., 4 pack Loxes, Many other items too numerous to mention rJ L f-- buried in vault KINGSTON, Jamaica (AP) -Entertainer and playwright Sir Noel Coward was buried yesterday at his mountaintop Jamaican estate. Coward, 73, died of a heart attack Monday. Flowers were sent from members of the Royal Family Chesterfield and chair; 1 world. Rev. Theo Worrell, an DUCTID BY N AUCTION MN AUCTIONEER Phong 647-2141 nt McLACHAN i Cole Lesley, Coward's secretary for 37 years, read from the Bible at the request of actor Sir Laurence Olivier. Coward was buried in a vault near the main house on his Firefly Visit Wilh Your M.P. Bob Dyck- 062045 Ken Hurlburl 004041 ROSJ Annert Brant Hurlburt- 062044 OL ;