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Citation: 2003TCC732
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Date: 20031219
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Docket: 2001-2959(IT)G
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BETWEEN:
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VIH LOGGING LTD.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Woods J.
[1] VIH Logging Ltd. appeals an income
tax assessment that applied subsection 55(2) of the Income Tax
Act to intercorporate dividends received as part of a tax
shelter arrangement. The central issue concerns the calculation
of so-called "safe income," and in particular whether
the computation period includes periods that are part taxation
years.
[2] VIH Logging also appeals the
assessment on the ground that it is statute barred. The central
question on the statute bar issue is whether an assessment sent
by private courier is made in time if it is picked up by the
courier in time but not delivered until after the expiry of the
statute bar period.
STATUTE BAR ISSUE
[3] A notice of assessment was sent to
VIH Logging's authorized representative by private courier
perilously close to the end of the statute bar period in
subsection 152(4) of the Income Tax Act. The Crown
submits:
· the
assessment was made on time because the notice was picked up by
the courier prior to the expiry of the time period; and
·
alternatively, the assessment is deemed to be made on the date
stated on the notice of assessment.
[4] On the first issue, VIH Logging
submits that it is not sufficient for statute bar purposes that
the notice of assessment be picked up by the courier. It submits
that the notice needs to be delivered in time. Alternatively, VIH
Logging submits that the evidence does not establish that
the notice of assessment was picked up before the expiry of the
statute bar period. The parties agree that the Crown has the onus
to establish that the notice of assessment was picked up in time:
Aztec Industries Ltd. v. The Queen.[1] I will consider this
factual issue first.
When was notice picked up?
[5] The last day for making an
assessment of VIH Logging's 1994 taxation year was November
14, 1997. The Crown submits that the notice of assessment was
picked up by the courier on November 13, 1997.
[6] Not surprisingly, none of the
Crown's witnesses recalled the circumstances of sending this
particular notice of assessment. The Crown attempts to establish
the November 13, 1997 pick up date by:
· testimony
regarding the general mailing and courier procedures at the
Canada Customs and Revenue Agency[2];
· testimony
regarding the general pick up and delivery procedures at the
courier company that delivered the notice; and
· documents
in connection with the delivery of this particular notice of
assessment.
Testimony as to the CCRA's general practices and
procedures was presented by the audit team supervisor who
instructed the mailroom to deliver the notice by courier and by
the mailroom supervisor who received this instruction. Testimony
was also provided by someone familiar with the general CCRA
procedures for courier deliveries.
[7] In accordance with the CCRA's
normal procedures at the time, when an assessment was close to
becoming statute barred, a notice of assessment would be placed
in an envelope with a memorandum of instructions to the mailroom,
called a Round Trip Memorandum, attached to it. The envelope
would be taken immediately to the mailroom. If the Round Trip
Memorandum requested courier delivery, someone in the mailroom
would immediately contact a courier for pick up that day. The
courier clerk at the CCRA would fill out a waybill and indicate
the date that the envelope was picked up. If the envelope was not
picked up on the date specified, the waybill would be changed to
reflect the actual date of pick up.
[8] As for the VIH Logging assessment,
a notice of reassessment dated November 13, 1997, along with a
Round Trip Memorandum with the same date, was delivered to the
mailroom at the Surrey Tax Office. The Round Trip Memorandum
instructed the mailroom to have the notice of assessment picked
up by private courier that same day and delivered to VIH
Logging's authorized representative, Beaton Sherwood, in
Victoria, British Columbia.
[9] According to a handwritten
notation on the Round Trip Memorandum, a mailroom clerk
telephoned a private courier, Dan Foss Couriers, at
1:03 p.m. on November 13. The waybill indicates that the
notice of assessment was picked up the same day. The pickup date
is also supported by an internal memorandum sent by the acting
supervisor of the mailroom to someone at the Vancouver Island Tax
Services Office (VITSO).
[10] According to the waybill, the notice of
assessment was to be sent by overnight courier. In accordance
with Dan Foss' normal procedures, delivery of an overnight
courier would have been attempted the next day, November 14.
According to the internal memorandum to the VITSO, there was no
one at Beaton Sherwood to receive the envelope on November 14 and
it could not be delivered that day. It appears that there was a
second attempt at delivery which also failed. In any event the
envelope went back to Dan Foss' office without having been
delivered. The envelope was finally delivered to Beaton Sherwood
on the afternoon of November 18 which was several days after
the statute bar period had expired.
[11] A driver with Dan Foss Couriers at the
relevant time testified that the CCRA could have stopped the
delivery of the envelope at any time. However, there is no
evidence that the CCRA attempted to do this.
[12] In considering whether this evidence
establishes that the notice was picked up on November 13, it is
clear that the date can be established without someone recalling
the details of this courier delivery. Bowman J. (as he then was)
discussed proof of mailing for purposes of a GST notification in
Schafer v. The Queen:[3]
In a large organization, such as a government department, a
law or accounting firm or a corporation, where many pieces of
mail are sent out every day it is virtually impossible to find a
witness who can swear that he or she put an envelope addressed to
a particular person in the post office. The best that can be done
is to set out in detail the procedures followed, such as
addressing the envelopes, putting mail in them, taking them to
the mail room and delivering the mail to the post office.
[13] A similar view was recently expressed
by Rothstein J.A. in Kovacevic v. The Queen:[4]
I accept that when legislation requires that documents be sent
by a large organization such as a government department by
ordinary mail, but does not require registered or certified mail
or evidence of a more formal means of sending, the observation of
Bowman J. in Schafer is reasonable. Generally, it would be
sufficient to set out in an affidavit, from the last individual
in authority who dealt with the documents before it entered the
normal mailing procedures of the office, what those procedures
were.
[14] In my analysis the evidence clearly
establishes that the notice of assessment was picked up by the
courier on November 13, 1997. The witnesses were knowledgeable
about general mailing and courier procedures and were the people
in authority who handled the courier delivery of this notice of
assessment. They testified that the notice of assessment would,
in the normal course, have been picked up by the courier on
November 13, 1997. In addition, there were several documents that
show that the notice of assessment was in fact picked up on that
date. Although VIH Logging disputed that the notice was picked up
on November 13, counsel did not press the point too vigorously.
Accordingly, I find that the notice of assessment was picked up
by Dan Foss Couriers on November 13, 1997.
Is assessment made when notice picked up?
[15] Subsections 152(2) and (4) of the
Act provide:
(2) Notice of assessment. After examination of a
return, the Minister shall send a notice of assessment to
the person by whom the return was filed.
(emphasis added)
(4) Assessment and reassessment. The Minister may at
any time make an assessment, reassessment or additional
assessment of tax for a taxation year, ... except that an
assessment, reassessment or additional assessment may be
made after the taxpayer's normal reassessment period in
respect of the year only if ...
(emphasis added)
[16] The statute bar test is set out in
subsection 152(4) and in this case the assessment had to be
made by November 14, 1997. The Act does not specify
when an assessment is made unless the notice of assessment is
mailed. If it is mailed, the assessment is deemed to be made on
the date stated on the notice.[5]
[17] The Crown takes the view that that the
assessment is made when it is picked up by the courier.
Alternatively, the Crown suggests that delivery by courier
constitutes mailing and accordingly, the assessment is deemed to
be made on November 13. I will first consider whether an
assessment is made when it is picked up by the courier.
[18] There have been several cases that
consider when an assessment is made. The appropriate test is that
an assessment is made when the notice has been sent by the
Minister of National Revenue: Aztec Industries, and
Flanagan v. The Queen.[6] While the parties agree that this is the
appropriate test, they differ as to whether the notice is sent
when it is picked up by the courier.
[19] In Flanagan, the Federal Court
of Appeal determined that "send" means dispatch. This
meaning is also consistent with the following definition of
"send" from The Oxford English Dictionary:[7]
To dispatch (a message, letter, telegram, etc.) by messenger,
post, or other means of communication, So to send cards (of
invitation).
In my view the notice of assessment was dispatched when it was
picked up by the courier. It was at that point that it left the
Minister's possession for transmission to VIH Logging's
authorized representative.
[20] VIH Logging submits that the notice was
not dispatched when the courier picked it up because the envelope
could have been recalled by the CCRA at any time. It suggests
that it remained in the Minister's control until delivery.
Counsel cited Flanagan in support. With respect,
Flanagan does not support this proposition. In
Flanagan, an employee of the CCRA attempted personal
delivery of a notice of assessment because of a postal strike.
The Court concluded that the notice of assessment never left the
Minister's possession and, accordingly, it could not be said that
the notice had been "dispatched." In an oral judgment,
Hugessen J.A. observed:
In law the Notice never left the Minister's possession. The
Minister cannot at one and the same time both send and retain a
Notice of Reassessment.
[21] In the case at bar, I find that the
Minister sent the notice when it was picked up by the courier
even though the Minister had the power to recall it.[8] The ordinary meaning of
"send" does not support the restrictive meaning that
VIH Logging suggests. It is also not supported by Flanagan
which refers to the notice leaving the Minister's possession,
not control.
[22] VIH Logging also submits that a more
restrictive meaning of the word "send" is implied by
the evidentiary rule in subsection 244(10). This provision
permits the Minister to introduce evidence by affidavit of
"mailing or other communication." VIH Logging argues
that the phrase "or other communication" suggests that
Parliament either intended that the assessment be mailed or, if
not mailed, that it be communicated such that the taxpayer
becomes aware of it. I disagree that subsection 244(10) restricts
the ordinary meaning of the word "send" in subsection
152(2). If Parliament intended a more restrictive test than can
be supported by the ordinary meaning of "send,"
different language would have been used in subsection 152(2). The
plain interpretation of subsection 152(2) should not be affected
by an evidentiary rule such as subsection 244(10).
[23] VIH Logging also submits that there are
good policy reasons to interpret "send" narrowly. It
argues that a broad interpretation could have draconian
consequences because a taxpayer could lose the right to appeal if
the notice of assessment was not received. This problem has been
alluded to in other cases: See Sharlow J.A.'s comments in
Schafer. I have concluded that the word "send"
must be given its ordinary meaning even if there is a possibility
of an unfair result. As Sharlow J.A. noted in Schafer,
Parliament has provided for a rule that could possibly have
draconian results and that is Parliament's prerogative.
[24] Accordingly, I would conclude that the
assessment was made when the notice of assessment was picked up
by the courier. In light of my conclusion that the notice of
assessment was picked up on November 13, 1997, it follows that
the assessment is not statute barred.
Deeming Rule
[25] It is not necessary for me to consider
the Crown's alternative argument that the assessment is
deemed, by virtue of subsections 244(14) and (15), to be made on
November 13, 1997. However, I will comment briefly with respect
to this issue.
[26] This is a difficult issue. The deeming
rule will apply if "mail" includes courier delivery.
Dictionary definitions of "mail" typically do not
include courier delivery but it is included in the seventh
edition of Black's Law Dictionary. The Black's definition
appears to be supported by decisions in the United States,
including some involving statute bar provisions. However, the
United States decisions go both ways.[9] In light of the
importance of this issue, I am reluctant to make a finding on
it.
SECTION 55 ISSUE
[27] In its 1994 taxation year, VIH Logging
participated in a tax shelter known as a "Profitco
Transaction." In generic terms, a Profitco Transaction is
designed to reduce the taxable income of a profitable corporation
by having the profitable corporation purchase tax deductions from
an unrelated corporation. The Minister reassessed VIH Logging in
respect of dividends received as part of this arrangement.
Facts
[28] VIH Logging is wholly-owned by Kenneth
Norie. Prior to the transactions at issue, another corporation
wholly-owned by Mr. Norie, 401277 B.C. Ltd., operated a
helicopter logging business on Vancouver Island.
[29] The helicopter logging business carried
on by 401277 did not earn profit of any significance until the
taxation year that ended March 1, 1993. Mr. Norie sought tax
advice regarding the projected profit for the 1993 taxation year
and, as a result, 401277 and VIH Logging implemented a Profitco
Transaction that, if effective, would eliminate 401277's
taxable income for the year. The transaction was implemented over
a nine-day period that straddled the end of the 1993 taxation
year.
[30] The essential elements of a Profitco
Transaction are:
· Profitco
transfers its profitable business to a related corporation on a
tax-effective basis;
· an
unrelated corporation sells fast write-off property to Profitco
that enables Profitco to eliminate its tax liability for the
year; and
· the shares
of Profitco are sold to the former owner of the fast write off
property.
[31] A moredetailed description was
presented by the parties as follows. I have added after each step
a description of the corresponding transaction undertaken by
401277 and VIH Logging. None of these facts are in dispute.
[32] STEP 1 - Target amends
authorized capital to accommodate transaction.
On February 23, 1993, 401277 filed with the Registrar of
Companies a special resolution that amended its authorized
capital to create two classes of preferred shares that were
needed to accommodate the transactions.
[33] STEP 2 - A new
company is incorporated (Holdco) to acquire the shares of
Target.
On February 23, 1993, VIH Logging was incorporated under the
B.C. Company Act. Its first taxation year ended on January 31,
1994. At all relevant times, Mr. Norie owned all the shares of
this company. Also on February 23, Mr. Norie exchanged the shares
of 401277 for shares of VIH Logging and 401277 became a
wholly-owned subsidiary of VIH Logging.
[34] STEP 3 - Target
transfers to Holdco its assets (less cash equal to income taxes
payable by Target on its income for the year) and its liabilities
(except its income tax liability).
On February 24, 401277 sold the helicopter logging business to
VIH Logging for consideration consisting of the assumption of
liabilities and the issuance of a promissory note. The stated
purchase price for the assets was $1,850,403, which was their
estimated fair market value. No value was attributed to the
goodwill of the business and accordingly the business was
transferred with little taxable gain to 401277.
[35] STEP 4 - Target pays a
series of dividends to Holdco amounting to safe income (cash
dividends) plus a stock dividend for any excess.
On February 24 and 25, 401277 paid cash dividends[10] to VIH Logging in
the amounts of $980,629 and $416,800 respectively. The aggregate
amount, $1,397,429, was equal to the estimated safe income of
401277. Because 401277 did not earn significant profit prior to
its 1993 taxation year, almost all the estimated safe income was
attributable to the period March 1, 1992 to February 23, 1993,
February 23 being the date that the Profitco Transaction
commenced.
After the payment of the cash dividends, the only remaining
assets and liabilities of 401277 consisted of a potential income
tax liability of $938,080 and cash sufficient to pay that
liability.
After the payment of the cash dividends, but also on February
25, 401277 paid a stock dividend to VIH Logging consisting of
366,079 Class F Preferred shares with a paid-up capital of $1.00
each. This dividend increased the aggregate adjusted cost base of
the shares of 401277 by $366,079.
The aggregate amount of the cash and stock dividends was
$1,763,508. This amount was included in VIH Logging's income for
its taxation year ended January 31, 1994 and was deducted in
computing its taxable income pursuant to subsection 112(1).
[36] STEP 5 - New directors
of Target appointed.
On February 25, two persons unknown to Mr. Norie became
officers and majority directors of 401277. This was at the
request of Senergy Inc., which was the company that acquired the
shares of 401277 a few days later.
[37] STEP 6 - Target
acquires deductions (in this case seismic data) sufficient to
offset current year income.
On February 27, 401277 purchased seismic data from an
unrelated corporation, 548231 Alberta Ltd. The purchase price was
$2,200,000, its fair market value. In computing income for the
taxation year ended March 1, 1993, 401277 claimed a
deduction equal to the purchase price as a Canadian exploration
expense. The effect of this deduction was to reduce 401277's
income for the year to nil.[11]
[38] STEP 7 - Holdco sells
the Target shares to the purchaser.
On March 2, VIH Logging sold all the shares of 401277 to
Senergy Inc., an unrelated corporation. It appears that Senergy
Inc. was related to 548231 Alberta Ltd., the corporation that
sold the seismic data to 401277, but nothing turns on this.[12] The purchase
price for the shares was equal to their adjusted cost base,
$366,080.
[39] The Minister assessed VIH Logging on
the basis that intercorporate dividends aggregating $1,624,959
were deemed to be proceeds of disposition pursuant to subsection
55(2) of the Act. This was $138,549 less than the
aggregate dividends received. The result was a substantial
taxable capital gain in VIH Logging's 1994 taxation year.
Statutory Provisions
[40] Subsection 55(2) of the Act as
it read at the relevant time provides:
(2) Where a
corporation ... received a taxable dividend ... as part
of a transaction or event or a series of transactions or events
... one of the purposes of which ... was to effect a
significant reduction in the portion of the capital gain that,
but for the dividend, would have been realized on a disposition
at fair market value of any share of capital stock immediately
before the dividend and that could reasonably be considered to be
attributable to anything other than income earned or realized by
any corporation after 1971 and before the transaction or event or
the commencement of the series of transactions or events
...
[41] Paragraph 55(5)(c) of the
Act as it read at the relevant time provides:
(5) For the purposes
of this section, ...
(c) the income earned or realized by a corporation for
a period throughout which it was a private corporation shall be
deemed to be its income for the period otherwise determined
...
Analysis
[42] Although the Profitco Transaction was
designed to reduce 401277's taxable income, that corporation
was not a party to the appeal. Moreover, the Crown limited its
argument to subsection 55(2) and, accordingly, I have not
considered any other arguments with respect to the Profitco
Transaction, including the possible application of the general
anti-avoidance rule.
[43] Subsection 55(2) is an anti-avoidance
provision aimed at "capital gains strips." A capital
gains strip converts what would be a taxable capital gain from
the disposition of shares into a tax-free intercorporate
dividend.[13]
However, not all such transactions are offensive in policy terms
and subsection 55(2) attempts to exclude from its ambit the
inoffensive ones. One example is the permitted extraction of what
is commonly known as "safe income." In the relevant
taxation year safe income was described in subsection 55(2) as
"income earned or realized by any corporation after 1971 and
before the transaction or event or the commencement of the series
of transactions or events."
[44] The policy underlying the permitted
extraction of safe income was described by the CCRA in 1978 as
follows:
... the capital gain on an arm's length economic
disposition of shares ... 'should not be less than the
increase in the value of the shares reasonably attributable to
unrealized or untaxed appreciation in goodwill and other assets
after 1971'.[14]
[45] The tax shelter scheme in the case at
bar is not a typical capital gains strip. In a typical
transaction, the aim is to minimize tax on an impending sale of
shares. In this case, Mr. Norie had no desire to sell the
helicopter logging business that 401277 operated. Instead, the
capital gains strip in this case was an incidental part of a
larger series of transactions that was designed to eliminate the
tax that would be paid on 401277's earnings for the 1993
taxation year.
[46] VIH Logging presented the following
arguments on subsection 55(2):
·
401277's safe income includes the profits of the helicopter
logging business up to February 23, 1993 and accordingly the safe
income was sufficient to cover the cash dividends;
· none of the
purposes of the cash dividends was to reduce the capital gain
that would be payable on a disposition of the shares of
401277;
· none of the
purposes of the cash dividends was to extract funds in excess of
safe income; and
· the purpose
of the stock dividend was not to reduce the capital gain that
would be payable if the shares of 401277 were disposed of
immediately prior to the stock dividend.
Safe Income
[47] VIH Logging's computation of safe
income included the helicopter logging profits for most of 1993
even though 401277 had no taxable income for the year because of
the seismic deduction.
[48] The Crown did not take issue with the
seismic deduction not reducing safe income because the seismic
data was acquired after the safe income calculation period in
subsection 55(2). At first blush, this appears to be inconsistent
with the CCRA administrative position that losses incurred after
the commencement of the series of transactions should reduce safe
income on hand if the losses were anticipated. The seismic
deduction was certainly anticipated when the series of
transactions commenced. However, the "loss" that arose
from the seismic deduction was not a loss that resulted in a
reduction in the value of the company and accordingly the Crown
agrees that the seismic deduction did not reduce safe income on
hand.
[49] Instead, the Crown's argument is
based on the deeming rule in paragraph 55(5)(c). It
submits that this rule modifies the safe income calculation
period set out in subsection 55(2) by excluding periods that are
less than complete taxation years. In this case, safe income
would exclude profits earned during the stub period March 1, 1992
to February 23, 1993.[15]
[50] The Crown's argument focuses on the
phrase "income for the period otherwise determined" in
paragraph 55(5)(c). There is no question that paragraph
55(5)(c) is a deeming rule that overrides in subsection
55(2). The Crown suggests that, under section 3 of the
Act, income is only determined for completed
taxation years and accordingly income otherwise determined cannot
include part taxation years. Counsel for the Crown admits that
this interpretation is contrary to the CCRA's administrative
policy but states that the interpretation is not novel. He notes
that the argument that safe income includes only income for
completed taxation years was referred to in a paper presented at
a conference of the Canadian Tax Foundation in 1992 by Jake E.
Harms.[16]
[51] The Crown suggests that this
interpretation is required by the words of the legislation and is
supportable on policy grounds because it better reflects taxed
retained earnings.
[52] As for the policy argument, it is clear
that Parliament's general intent was to permit the extraction
of "taxed retained earnings" by tax-free intercorporate
dividends. However, I do not agree that this intent is better
reflected by the Crown's interpretation. In my analysis,
taxed retained earnings are better captured by including income
earned during part taxation years because, in most instances, tax
will be paid on this income. Certainly this would be the case in
a typical capital gains strip where intercorporate dividends are
paid immediately prior to a sale of shares. In applying a
purposive interpretation to legislation it is important to strive
for an interpretation that best achieves Parliament's intent
in as many circumstances as possible and not just the narrow fact
situation that is being decided in a particular case. In my view,
the Crown's policy argument has this flaw.
[53] As for the Crown's argument that
its interpretation is required by the words of paragraph
55(5)(c), I do not think that the Crown's
interpretation is the more reasonable one if paragraph
55(5)(c) is read in context.
[54] When both paragraph 55(5)(c) and
subsection 55(2) are read together, I think it is quite apparent
that Parliament intended for paragraph 55(5)(c) to set out
the method of calculation of safe income and for subsection 55(2)
to set out the safe income calculation period. The safe income
calculation period in subsection 55(2) is
from 1971 until the commencement of the series of
transactions. Paragraph 55(5)(c), on the other hand, does
not set out a computation period, at least explicitly. If
paragraph 55(5)(c) were intended to supplant the
calculation period clearly set out in subsection 55(2), much
clearer language would have been required.
Although I have concluded that a contextual interpretation
favours VIH Logging, it remains to be considered whether
paragraph 55(5)(c) can be interpreted in this manner. The
question is whether "income for the period otherwise
determined" can possibly be interpreted to include part
taxation years.
Paragraph 55(5)(c) requires safe income to be
determined in accordance with section 3 for the period set out in
subsection 55(2). If income is to be computed under section 3 for
a period that is not a complete taxation year, there are two
possible approaches. The first approach would be to compute
income as if the period were a complete taxation year. The second
approach would be to conclude that there is no income for that
period. In my view, the first approach is the more reasonable. I
recognize that this interpretation could be viewed as
interpreting the words "otherwise determined" in an
unusual way, but in my view this is the only reasonable
interpretation in the circumstances.
[55] Another difficulty that I have with the
Crown's submission is that it would result in a different
safe income computation period for different types of
corporations. Paragraph 55(5)(c) only applies for periods
throughout which a corporation is a private corporation. The
calculation of safe income for public corporations and foreign
affiliates are subject to the deeming rules in paragraph
55(5)(b) and (d) respectively. In some situations,
there are no applicable deeming rules. It is unlikely that
Parliament would have intended that the safe income computation
period be different depending on the status of the corporation
involved.
[56] Lastly, I note that the Crown's
position is contrary to the CCRA's administrative position
that has been applied countless times over 20 years. If the
Crown's highly technical interpretation of paragraph
55(5)(c) were to be accepted, the legislation should
clearly require this result.
[57] Accordingly, I find that safe income
includes 401277's income for the part year ended February 23,
1993.
Was purpose to reduce gain
[58] In an alternative argument, VIH Logging
suggests that, in participating in the Profitco Transaction, it
did not have the purpose that is a necessary element for the
application of subsection 55(2). The cash dividends received by
VIH Logging totalled $1,397,429 which is approximately equal to
the safe income attributable to the shares of 401277.
[59] It is not disputed that the cash
dividends had the result of reducing the capital gain that would
be realized if the shares of 401277 were sold for their fair
market value immediately before the particular dividend. Before
the payment of the cash dividends, the shares of 401277 were
worth at least $1,443,000 and the adjusted cost base of the
shares was nominal. The question, however, is the purpose,
not the result.
[60] VIH Logging submits that its purpose in
paying the cash dividends was to remove assets from 401277 and
not to reduce a capital gain. This submission was based on Mr.
Norie's testimony. I do not agree. One of Mr. Norie's
purposes was to enable the shares of 401277 to be sold on a
tax-free basis and the payment of the cash dividends was a
necessary step in achieving this end. Mr. Norie may not have been
aware of the details of the Profit Transaction but he certainly
was aware of the intended overall tax effect. Moreover, Mr.
Norie's tax advisors certainly were aware of the tax
consequences of the cash dividends. These circumstances are
sufficient for the purpose test in subsection 55(2).
Was purpose to extract safe income
[61] VIH Logging's alternative argument
is that it thought it had sufficient safe income and accordingly,
its purpose was not to extract funds in excess of safe income.
This interpretation raises the question of whether the purpose
test is a two part test, that is, to reduce gain and to extract
funds in excess of safe income. From a grammatical point of view,
the purpose test could be interpreted as a two-part test but does
not need to be. Either interpretation is possible. In my view,
the better interpretation is that the purpose test is only a
one-part test. It is most unlikely that Parliament intended that
a taxpayer could avoid the application of subsection 55(2) by
incorrectly computing safe income.
[62] For these reasons, I have not been
persuaded by VIH Logging's alternative arguments regarding
the purpose test.
Was purpose of stock dividend to reduce gain
[63] After VIH Logging received cash
dividends in an amount equal to 401277's safe income, it
received a stock dividend in the amount of $366,079. The purpose
of the stock dividend was to increase the adjusted cost base of
the aggregate shares of 401277 to $366,080 in anticipation of a
possible sale of those shares for that amount. There is no
dispute that the purpose of the stock dividend was to reduce
gain. The question is, what gain was being reduced.
[64] VIH Logging submits that the purpose of
the stock dividend was not to reduce a capital gain that would be
realized immediately before the dividend. It suggests that
the fair market value of the shares immediately before the
dividend was nominal and therefore no gain would have been
realized on their sale at that time.
[65] VIH Logging's submission depends on
their being no value in the shares of 401277 on February 25.[17] At this point,
401277's only liability was a contingent liability for income
tax and its only asset was cash equivalent to the tax liability.
401277 became more valuable two days later because on February 27
the contingent liability was eliminated by the purchase of the
seismic data. VIH Logging introduced expert valuation evidence on
the valuation[18]
and although the Crown did not explicitly agree with the
valuation, it did not vigorously dispute it. In the
circumstances, I would accept the valuation evidence presented by
VIH Logging.
[66] Accordingly, I would conclude that the
stock dividend is not subject to subsection 55(2) because none of
the purposes of the dividend was to reduce a capital gain that
would be realized if the shares were sold immediately before the
dividend.
CONCLUSION
[67] The appeal is allowed, with costs, and
the reassessment for the 1994 taxation year is referred back to
the Minister of National Revenue for reconsideration and
reassessment on a basis consistent with these reasons.
Signed at Ottawa, Canada this 19th day of December, 2003.
J.M. Woods J.
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