Date: 20000927
Docket: 98-2465-IT-G
BETWEEN:
MARGARET HICKMAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Counsel for the Appellant: Barrie Heywood
Counsel for the Respondent: John P. Bodurtha and Marcel
Prevost
___________________________________________________________________
Reasons for Judgment
(Delivered orally from the Bench at St. John's,
Newfoundland, on June 9, 2000)
Bowie J.T.C.C.
[1] The Appellant has been reassessed under the Income Tax
Act (the Act) for the 1993 taxation year. By that
reassessment the Minister of National Revenue (the Minister)
added to her income for the year $425,365 as a dividend which, he
says, is deemed to have been paid to her under the provisions of
section 84.1 of the Act. She appeals from that assessment.
The facts are not in dispute.
[2] On December 1, 1993 the Appellant owned 42 of the 100
issued shares of Marco Management Limited (Marco). CSC Holdings
Limited (CSC) owned 48 shares, and the other 10 were owned
by David Martin. All the issued shares of CSC were owned by the
Hickman Family Trust (the Trust); the trustees were Margaret
Hickman, her husband, Thomas Hickman and Randell Earle, who is
not related to either of them. The beneficiaries of the trust
were the three children of Margaret and Thomas Hickman, all of
whom were over the age of majority.
[3] Evidence was led by the Appellant that the trust deed
provides that decisions of the trust may be taken by a majority
of the trustees. The Appellant and her husband and their three
children were, at the material time, directors of CSC: see
Exhibit A-1, Document No. 7.
[4] On December 1, 1993 the Appellant sold her 42 shares of
Marco to CSC for $425,407, plus one preference share of CSC. It
is this amount, less the $42 paid up value of the shares, which
the Minister has assessed as a deemed dividend.
[5] Section 84.1 of the Act, so far as it is relevant
to the issues in this appeal, reads:
(1) Where ... a taxpayer resident in Canada (other than a
corporation) disposes of shares that are capital property of the
taxpayer (in this section referred to as the "subject
shares") of any class of the capital stock of a corporation
resident in Canada (in this section referred to as the
"subject corporation") to another corporation (in this
section referred to as the "purchaser corporation")
with which the taxpayer does not deal at arm's length and,
immediately after the disposition, the subject corporation would
be connected (within the meaning assigned by subsection 186(4) if
the references therein to "payer corporation" and to
"particular corporation" were read as "subject
corporation" and "purchaser corporation"
respectively) with the purchaser corporation,
...
If that preamble to the rest of the section is satisfied, then
a dividend is deemed to have been paid.
[6] In broad terms then, three things must be shown for a
deemed dividend to be triggered under this section. First, there
must be a disposition by the taxpayer of shares of a corporation
to another corporation; second, the taxpayer and the purchasing
corporation must not be dealing at arm's length; and third,
after the transaction, the two corporations must be
"connected". The Appellant does not dispute that the
first and the third requirements are met here, nor does she
dispute the computation of the amount of deemed dividend, if as a
matter of law, there is one. The point she takes is that the
second requirement has not been met. She says that there is no
evidence to establish that in fact she and CSC were not dealing
at arm's length, and that she and CSC are not related, or
deemed to be related, and so they deal at arm's length. In
this, she relies on subsection 251(1) of the Act which
provides:
For the purposes of this Act,
(a) related persons shall be deemed not to deal with
each other at arm's length; and
(b) it is a question of fact whether persons not
related to each other were at a particular time dealing with each
other at arm's length.
[7] The arguments on both sides seemed to revolve around
paragraph 84.1(2)(d) of the Act, which, so far as
it is relevant, provides that:
For the purposes of the section,
...
(d) a trust and a beneficiary of the trust or a person
related to a beneficiary of the trust shall be deemed not to deal
with each other at arm's length;
[8] The Minister's position, as I understood it, was that
this paragraph together with subparagraphs 251(2)(b)(i)
and (iii) somehow combine to deem the Appellant and CSC to have
been related at the time of the transaction. The position taken
by the Appellant was that paragraph 84.1(2)(d) should be
read in such a way as to restrict its operation to only those
trusts of the kind described in
subparagraph 84.1(2)(c)(ii), notwithstanding that its
words seem plain, because to give it broader effect would somehow
render subparagraph 84.1(2)(c)(ii) redundant.
[9] Both of these arguments miss the point. The operation of
paragraph 84.1(2)(d), even assuming that it is not
limited in the way that Mr. Heywood suggests that it should
be, is only to deem the trust and the Appellant to be not dealing
with each other at arm's length. It does not deem them to be
related and so, it cannot supply the requirement of
"relatedness" which subparagraph 251(2)(b)(iii)
requires. That subparagraph provides that for the purposes of the
Act related persons include "a corporation and
... any person related to a person described in subparagraph
(i) or (ii); ...". Subparagraph (i) provides that a
corporation is related to "a person who controls the
corporation, if it is controlled by one person". It can be
seen, therefore, that simply being not at arm's length will
not trigger subparagraph 251(2)(b)(iii). For that to
happen, the Appellant and the trust must be related to each
other.
[10] Mr. Heywood's vigorous argument that the scope of
paragraph 84.1(2)(d) should be limited to trusts described
in 84.1(2)(c)(ii) is therefore redundant. It is also
contrary to recent authority which is binding on me: see
Canada v. Antosko [1994] 2 S.C.R. 312 per Iacobucci J. at
327 and LGL Limited v. The Queen 99 DTC 675, affirmed
2000 DTC 6108. The provisions which do operate in relation to the
issue of arm's length, in this case are paragraphs
251(1)(a), 251(2)(a), subparagraph
251(2)(b)(ii), subsection 251(4) and paragraph
251(5)(a).
[11] Margaret Hickman and Thomas Hickman are related by
marriage. They are two of the three trustees of the trust. On the
evidence of Mr. Harris, they can, by a majority vote, control
decisions of the trust. They are, therefore, a related group
which is in a position to control CSC by reason of paragraph
251(5)(a) which reads
... where a related group is in a position to control a
corporation, it shall be deemed to be a related group that
controls the corporation whether or not it is part of a larger
group by which the corporation is in fact controlled;
Therefore, by the operation of subparagraph
251(2)(b)(ii), the Appellant and CSC are related;
therefore, they do not deal at arm's length; that is provided
by paragraph 251(1)(a) which says:
For the purposes of this Act,
(a) related persons shall be deemed not to deal with
each other at arm's length; ...
[12] The requirements of section 84.1 are therefore all
satisfied, and the disposition resulted in a deemed dividend.
[13] The appeal is dismissed, with costs.
Signed at Ottawa, Canada, this 28th day of September,
2000.
"E.A. Bowie"
J.T.C.C.
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