Wu v. R., 98 DTC 6004, [1998] 1 CTC 99 (FCA)

Strayer J.A.:

This is an application for judicial review of a decision of the Tax Court of Canada dated September 3, 1996, in which the Court allowed an appeal by Mr. Wu with respect to his 1990, 1991 and 1992 taxation years.

The provision of the Income Tax Act at issue is subsection 15(1.1) which provides as follows:

(1.1) Notwithstanding subsection (1), where in a taxation year a corporation has paid a stock dividend to a person and it may reasonably be considered that one of the purposes of that payment was to significantly alter the value of the interest of any specified shareholder of the corporation, the fair market value of the stock dividend shall, except to the extent that it is otherwise included in computing that person’s income under paragraph 82(1 )(a), be included in computing the income of that person for the year.

We should first note that we are satisfied that the Trial Judge correctly found that the stock dividends paid to Mr. Wu in the years in question had the effect of significantly altering the value of the class A common share of his wife, Dr. Ng. The remaining issue is whether the Trial Judge made a reviewable error in concluding that it was not established that this was one of the purposes of that payment.

In addressing the proper interpretation of subsection 15(1.1) and in reaching his conclusions on the facts the learned Trial Judge stated:

Although subsection 15(1.1) is capable of a broader interpretation, I do not believe that it goes so far to allow one to equate words there set forth with words such as “he knew or ought to have known” that it would significantly alter the value of the shares. There must be some evidence which would permit one to place the purpose in the mind of the Appellant other than conjecture or speculation.

We understand this passage to mean that to establish the relevant purpose of a payment under subsection 15(1.1) that purpose must be demonstrated to have been in the conscious intent of the taxpayer: that is, a subjective test must be applied to “place the purpose in the mind” of the taxpayer. We do not believe that this is correct as a matter of law. The words “it may reasonably be considered” in subsection 15(1.1) clearly indicate that the evidence of necessary intent can be established if in the circumstances it is reasonable to consider that this was one of the purposes of the payment.

In this connection we refer to the decision of this Court in Placer Dome Inc. v. R. [1] ’, decided after the trial judgment in the present case. The provision in question in that case, subsection 55(2) of the Income Tax Act, required for its application that “one of the purposes” be to support a significant reduction in capital gain realized. It did not contain the words “may reasonably be considered that...”. This Court, for purposes of decision, assumed, without finding, that the test was subjective. But it was held that in the face of the Minister’s presumption that this was one of the purposes:

the taxpayer must offer an explanation which reveals the purposes underlying the transaction. That explanation must be neither improbable nor unreasonable.... the taxpayer must offer a persuasive explanation that establishes that none of the purposes was to effect a significant reduction in capital gain.^ [2]

In our view, with the additional words in subsection 15(1.1) allowing for its application where “it may reasonably be considered” that one of the purposes of payment is alteration of the value of the interest of a shareholder, the onus is even greater on a taxpayer to produce some explanation which is objectively reasonable that none of the purposes was to alter the value of a shareholder’s interest.

The learned Trial Judge appears not to have applied this legal standard to the facts before him. He concluded his decision with the following statements:

The only evidence before the Court was that of Mr. Wu. At best, with respect to the fourth purpose Mr. Wu states that he cannot recall any discussions with anyone concerning the effect of declaring and paying stock dividends. I was not impressed with Mr. Wu’s evidence. At times, he was evasive and at other times he was forgetful. But the fact remains that unimpressive as it was, his testimony was the only evidence before the Court on this subject.

The share structure, according to Mr. Wu came forth full blown in the manner it did because that was what the solicitor drafted. This drafting came about on the instructions of Mr. Wu to incorporate the “usual” company to carry on a portion of a medical practice and nothing more.

However, I am not on the whole satisfied that one of the purposes of paying the stock dividends was to significantly alter the value of Dr. Ng’s class A common shares. Therefore, the appeal is allowed with costs.

The learned judge appears not to have taken into account the onus placed on the taxpayer by the Minister’s assumption that this was one of the purposes of the payment of the stock dividends to the taxpayer. In other words, the onus here was on the taxpayer to prove that this was not one of the purposes of the payment. Yet, after treating the taxpayer’s evidence as unsatisfactory, in the passage quoted above, he held that as this was the only evidence he had to accept it. He should instead have considered whether the evidence met the standard of objective reasonability which was required to overcome the onus on the taxpayer of proving that none of the purposes of the payment was a significant alteration of Dr. Ng’s interest within the meaning of subsection 15(1.1).

In the circumstances we have concluded that the decision of the Tax Court should be set aside and the matter remitted for a new trial and disposition in accordance with these reasons. At that time, the Trial Judge should also adopt in his or her judgment the terms consented to by the parties at trial and not dealt with by the Tax Court in the decision under appeal.

Reasonable and proper costs are awarded to the respondent.

Appeal allowed.