Lammare
Proulx
J.:
The
appellant
instituted
an
appeal
from
the
reassessment
made
by
the
Minister
of
National
Revenue
(the
“Minister”)
on
March
30,
1987,
for
the
appellant’s
1983
taxation
year.
The
reassessment
involves
the
application
of
subsection
55(2)
of
the
Income
Tax
Act
(the
“Act”).
That
subsection
reads
as
follows:
55(2)
Where
a
corporation
resident
in
Canada
has
after
April
21,
1980
received
a
taxable
dividend
in
respect
of
which
it
is
entitled
to
a
deduction
under
subsection
112(1)
or
138(6)
as
part
of
a
transaction
or
event
or
a
series
of
transactions
or
events
(other
than
as
part
of
a
series
of
transactions
or
events
that
commenced
before
April
22,
1980),
one
of
the
purposes
of
which
(or,
in
the
case
of
a
dividend
under
subsection
84(3),
one
of
the
results
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
referred
to
in
paragraph
(3)(a),
notwithstanding
any
other
section
of
this
Act,
the
amount
of
the
dividend
(other
than
the
portion
thereof,
if
any,
subject
to
tax
under
Part
IV
that
is
not
refunded
as
a
consequence
of
the
payment
of
a
dividend
to
a
corporation
where
the
payment
is
part
of
the
series
of
transactions
or
events)
(a)
shall
be
deemed
not
to
be
a
dividend
received
by
the
corporation;
(b)
where
a
corporation
has
disposed
of
the
share,
shall
be
deemed
to
be
proceeds
of
disposition
of
the
share
except
to
the
extent
that
it
is
otherwise
included
in
computing
such
proceeds;
and
(c)
where
a
corporation
has
not
disposed
of
the
share,
shall
be
deemed
to
be
a
gain
of
the
corporation
for
the
year
in
which
the
dividend
was
received
from
the
disposition
of
a
capital
property.
The
appellant
received
in
1983
a
taxable
dividend
under
subsection
84(3)
of
the
Act
in
respect
of
the
redemption
of
common
shares
that
it
had
held
in
a
corporation,
with
regard
to
which
dividend
it
was
entitled
to
a
deduction
under
subsection
112(1)
of
the
Act.
One
of
the
results
of
this
dividend
was
to
effect
a
significant
reduction
in
the
capital
gain
that,
but
for
the
dividend,
would
have
been
realized
on
the
disposition
at
fair
market
value
of
those
shares
immediately
before
the
dividend;
this
gave
rise
to
the
application
of
subsection
55(2)
of
the
Act.
The
appellant
made
no
mention
of
the
transaction
in
question
in
its
return
of
income.
It
did
not
report
the
disposition
of
the
shares
or
include
the
deemed
dividend
in
computing
its
income.
However,
there
was
no
allegation
of
negligence
or
bad
faith
in
the
Amended
Reply
to
the
Notice
of
Appeal.
The
Minister
assessed
the
total
amount
of
the
deemed
dividend
under
subsection
84(3)
of
the
Act
as
proceeds
of
the
disposition
of
the
shares
in
accordance
with
subsection
55(2)
of
the
Act.
The
Minister
did
not
allow
the
designation
of
a
separate
dividend
under
paragraph
55(5)(f)
of
the
Act.
There
was
no
dispute
as
to
whether
the
deemed
dividend
reduced
the
capital
gain
that
would
have
resulted.
For
his
first
argument,
counsel
for
the
appellant
relied
on
the
French
version
of
paragraph
55(5)(e)
of
the
Act
which
was
in
effect
at
the
time
of
the
events
in
question
and
which
provided
as
follows:
afin
de
déterminer
si
deux
ou
plusieurs
personnes
ont
un
lien
de
dépendance,
un
frère
qui
traite
avec
une
soeur
est
réputé
ne
pas
avoir
de
lien
de
dépendance
avec
elle
et
ne
pas
être
lié
à
celle-ci,
et
réciproquement;
et
Counsel
for
the
appellant
claimed
that
since
it
was
two
brothers
we
were
concerned
with,
the
fiction
created
by
that
paragraph
of
the
Act
did
not
apply
to
them
and
thus
they
were
not
dealing
with
each
other
at
arm’s
length.
Consequently,
they
were
not
subject
to
subsection
55(2)
of
the
Act.
For
its
second
argument,
the
appellant
contended
that
the
total
capital
gain
could
reasonably
be
considered
to
be
attributable
to
income
earned
or
realized
after
1971
by
the
corporation
that
had
paid
the
deemed
dividend
(by
proceeding
to
redeem
its
shares).
In
arriving
at
this
result,
counsel
for
the
appellant
contended
that,
for
the
purposes
of
computing
the
income
earned
or
realized
after
1971,
only
the
accumulated
income
reported
each
year
since
1971,
without
making
deductions
for
tax
paid,
dividends
paid
and
certain
expenses
not
included
in
computing
the
income,
was
to
be
taken
into
account.
He
further
claimed
that
the
income
earned
or
realized
after
1971
that
could
be
attributed
to
the
dividend
received
should
not
take
into
account
the
proportion
represented
by
the
shares
in
issue.
The
appellant
argued
in
the
alternative
that
if
the
total
capital
gain
was
not
attributable
to
income
earned
or
realized
after
1971,
it
was
entitled
to
designate
the
portion
attributable
to
such
income
as
a
separate
taxable
dividend
under
paragraph
55(5)(f)
of
the
Act.
Counsel
for
the
respondent
contended
that
the
income
earned
or
realized
after
1971
that
could
be
distributed
could
only
be
income
on
hand,
that
is,
income
that
had
not
already
been
distributed,
and
that
this
income
must
be
allocated
according
to
the
shares
held.
He
further
contended
that
subsection
55(2)
and
paragraph
55(5)(f)
of
the
Act
are
provisions
that
may
be
penal
in
nature.
He
submitted
that
it
was
important
in
a
system
of
selfassessment
that
the
taxpayer
include
a
capital
gain
in
his
return
of
income
and
make
the
election
provided
for
in
paragraph
55(5)(f)
of
the
Act
in
that
return
for
the
year
in
issue.
In
counsel’s
view,
there
was
no
possibility
of
designation
if
such
designation
was
not
made
in
the
return
for
the
year
in
which
the
dividend
was
received.
Having
set
out
the
parameters
of
the
dispute,
let
us
now
turn
to
the
facts
of
the
case.
The
parties
filed
the
following
agreement
on
facts:
1.
A.
Champagne
Inc.
was
formed
on
December
22,
1966,
for
the
purpose
of
acquiring
and
operating
the
general
store
and
flour-mill
formerly
known
under
the
style
A.
Champagne
Enr.,
owned
by
two
brothers,
Jean-Paul
Champagne
and
Guy
Champagne.
2.
Prior
to
August
26,
1982,
the
common
shares
of
A.
Champagne
Inc.
were
held
as
follows:
Jean-Paul
Champagne
299
Fernande
Jacques
(his
spouse)
1
Guy
Champagne
299
Anne-Marie
Lacombe
(his
spouse)
1
3.
On
August
27,
1982,
Guy
Champagne
and
his
spouse
Anne-Marie
Lacombe
disposed
of
all
their
common
shares
in
A.
Champagne
Inc.
to
Gestion
Guy
Champagne
Inc.,
making
an
election
under
section
85
of
the
Income
Tax
Act
(hereinafter
the
“Act”).
4.
On
that
same
day,
A.
Champagne
Inc.
disposed
of
a
pig
farm
located
in
St-Honor
to
Gestion
Guy
Champagne
Inc.
for
consideration
of
$100,000,
$50,000
of
which
was
payable
in
cash
and
$50,000
on
demand.
5.
On
December
1,
1982,
Gestion
Guy
Champagne
made
an
offer
to
Jean-Paul
Champagne
to
purchase
his
common
shares
of
A.
Champagne
Inc.
as
well
as
the
one
held
by
his
spouse
Fernande
Jacques.
6.
On
December
28,
1982,
the
parties
signed
an
agreement
under
which
the
common
shares
of
A.
Champagne
Inc.
would
be
redeemed
at
a
premium
by
that
company
immediately
after
Jean-
Paul
Champagne
and
Fernande
Jacques
had
disposed
of
their
shares
of
A.
Champagne
Inc.
to
the
appellant
(at
that
time
unincorporated).
7.
On
December
30,
1982,
Gestion
Jean-Paul
Champagne
Inc.
(hereinafter
“the
appellant”)
was
incorporated
under
Part
1A
of
the
Quebec
Companies
Act.
Jean-Paul
Champagne
and
his
spouse
Fernande
Jacques
each
subscribed
for
50
class
A
common
shares
at
a
price
of
$50.
Jean-Paul
Champagne
also
subscribed
for
five
class
G
shares
at
a
price
of
$5.
7.1
The
appellant
is
a
corporation
resident
in
Canada.
8.
The
appellant’s
first
fiscal
year
and
first
taxation
year
ended
on
December
31,
1983.
9.
On
December
30,
1982,
Jean-Paul
Champagne
disposed
of
300
common
shares
of
the
capital
stock
of
A.
Champagne
Inc.
(including
his
spouse’s
share)
to
the
appellant.
An
election
was
made
under
section
85
of
the
Act,
thus
attributing
to
the
300
shares
a
fair
market
value
of
$396,000
and
an
amount
agreed
upon
of
$40,000.
In
consideration
of
the
disposition,
300
class
D
shares
and
a
demand
note
for
$29,700
were
issued
by
the
appellant.
10.
Also
on
December
30,
1982,
at
10:15
a.m.,
A.
Champagne
Inc.
declared
a
$100,000
dividend,
that
is,
$166.67
per
share,
in
favour
of
the
holders
of
common
shares
registered
in
the
company’s
books
at
that
time.
11.
The
appellant
thus
received
a
dividend
of
$50,000
in
respect
of
which
it
was
entitled
to
a
deduction
under
subsection
112(1)
of
the
Act
as
part
of
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
the
capital
stock
of
A.
Champagne
Inc.
immediately
before
the
dividend.
12.
The
appellant
moreover
included
the
said
$50,000
dividend
in
computing
its
income
for
the
1983
taxation
year
and
deducted
that
dividend
in
accordance
with
subsection
112(1)
of
the
Act.
13.
On
December
30,
1982,
at
around
10:25
a.m.,
A.
Champagne
Inc.
passed
new
by-laws
providing
for
the
company’s
continuation
under
Part
1A
of
the
Companies
Act,
and
new
class
A
common
share
certificates
were
issued
to:
Gestion
Jean-Paul
Champagne
Inc.
(the
appellant)
300
Gestion
Guy
Champagne
Inc.
299
Anne-Marie
Lacombe
1
14.
On
that
same
day
at
11:00
a.m.,
A.
Champagne
Inc.
redeemed
its
300
class
A
common
shares
held
by
the
appellant
for
a
price
of
$346,000,
whereas
the
adjusted
cost
base
of
those
shares
was
$40,000.
The
paid-up
capital
in
respect
of
those
shares
was
$30,000.
Thus,
A.
Champagne
Inc.
is
deemed
to
have
paid
to
the
appellant
a
dividend
of
$316,000
within
the
meaning
of
subsection
84(3)
of
the
Act.
15.
The
appellant
did
not
report
this
disposition
of
the
shares
of
A.
Champagne
Inc.
in
its
income
tax
return
for
the
1983
taxation
year.
16.
Furthermore,
the
appellant
did
not
include
the
deemed
dividend
of
$316,000
in
computing
its
income
for
the
1983
taxation
year.
17.
The
appellant
thus
received
a
$316,000
dividend
in
respect
of
which
it
was
entitled
to
a
deduction
under
subsection
112(1)
of
the
Act
as
part
of
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
the
capital
stock
of
A.
Champagne
Inc.
immediately
before
the
dividend.
18.
The
appellant
contends
that
the
reduction
of
the
capital
gain
mentioned
in
paragraph
17
is
attributable
to
the
“income
earned
or
realized”
by
A.
Champagne
Inc.
after
1971
within
the
meaning
of
section
55
of
the
Act.
19.
The
respondent
contends
that
the
reduction
of
the
capital
gain
mentioned
in
paragraph
17
is
attributable
“to
anything
other
than
income
earned
or
realized”
by
A.
Champagne
Inc.
after
1971
within
the
meaning
of
section
55
of
the
Act.
20.
The
series
of
transactions
and
events
commenced
on
December
1,
1982,
with
Gestion
Guy
Champagne’s
offer
to
Jean-Paul
Champagne
to
purchase
the
common
shares
of
A.
Champagne
Inc.
held
by
Jean-Paul
Champagne
as
well
as
the
one
held
by
his
spouse
Fernande
Jacques.
21.
No
portion
of
the
dividends
of
$50,000
and
$316,000
received
by
the
appellant
was
subject
to
Part
IV
tax.
22.
In
its
return
of
income
for
the
1983
taxation
year,
the
appellant
did
not
designate
as
a
separate
taxable
dividend
any
portion
of
the
taxable
dividend
of
$316,000
received
by
it
during
that
same
year.
23.
The
respondent
claims
that
the
“income
earned
or
realized”
by
A.
Champagne
Inc.
“after
1971”
and
before
“the
commencement
of
the
series
of
transactions
or
events”
and
included
in
the
capital
gain
that
was
realized
on
the
disposition
at
fair
market
value
of
the
shares
of
A.
Champagne
Inc.
immediately
before
the
$100,000
dividend
is
equal
to
$507,265.88
(or
$845.44
per
share).
24.
The
appellant
claims
that
the
“income
earned
or
realized”
by
A.
Champagne
Inc.
“after
1971”
and
before
“the
commencement
of
the
series
of
transactions
or
events”
and
included
in
the
capital
gain
that
was
realized
on
the
disposition
at
fair
market
value
of
the
shares
of
A.
Champagne
Inc.
immediately
before
the
$100,000
dividend
is
equal
to
$677,640.73.
25.
The
appellant
was
not
involved
in
a
butterfly
reorganization
under
paragraph
55(3)(b)
of
the
Act.
26.
Lastly,
the
appellant
admits
the
truth
and
authenticity
of
the
amounts
that
appear
in
Schedule
I
to
this
agreement.
[Translation]
Jean-Paul
Champagne
and
Guy
Champagne
were
two
brothers
holding
shares
in
A.
Champagne
Inc.
After
a
number
of
years
of
joint
operation,
a
dispute
arose
between
the
two
brothers
and
they
agreed
on
a
separation.
One
brother
purchased
the
other’s
shares.
Each
of
the
two
brothers
effected
a
“rollover”
of
his
shares
of
A.
Champagne
Inc.
to
a
management
corporation
under
section
85
of
the
Act.
The
appellant
is
one
of
those
corporations.
It
holds
Jean-Paul
Champagne’s
shares
in
A.
Champagne
Inc.,
which
paid
a
$50,000
dividend
to
each
of
the
management
corporations.
There
is
no
dispute
with
respect
to
this
dividend.
A.
Champagne
Inc.
subsequently
redeemed
the
shares
held
by
the
appellant
Gestion
Jean-Paul
Champagne
for
the
sum
of
$346,000.
It
is
with
respect
to
the
redemption
that
the
dispute
arose.
The
facts
described
in
paragraphs
4
and
13
of
the
agreement
were
set
out
by
way
of
establishing
the
accuracy
of
what
was
alleged
to
have
taken
place
and,
according
to
the
parties,
have
no
legal
significance.
The
dispute
concerns
the
application
of
section
55
of
the
Act.
Under
subsection
84(3)
of
the
Act,
where
the
shares
of
a
corporation
are
redeemed,
the
redemption
price
less
the
capital
paid
to
purchase
the
shares
is
deemed
to
be
a
dividend.
However,
intercorporate
dividends
are
exempt
under
subsection
112(1)
of
the
Act.
Section
55
of
the
Act
provides
that
if
such
dividend
can
be
attributed
to
anything
other
than
income
earned
or
realized
after
1971,
it
is
taxed
as
a
capital
gain.
The
two
parties
agreed
on
the
amount
of
the
capital
gain:
$316,000.
In
fact,
there
is
no
dispute
as
to
the
figures.
The
dispute
is
over
the
application
and
meaning
of
subsection
55(2)
of
the
Act.
As
stated
at
the
outset,
counsel
for
the
appellant
relied
on
three
points.
The
first
point
concerns
the
determination
as
to
the
existence
of
a
lien
de
dépendance
(non-arm’s-length
dealing)
under
the
French
version
of
paragraph
55(5)(e)
of
the
Act
as
it
existed
in
1983.
I
have
already
cited
it
above,
but
cite
it
again
here:
...afin
de
déterminer
si
deux
ou
plusieurs
personnes
ont
un
lien
de
dépendance,
un
frère
qui
traite
avec
une
soeur
est
réputé
ne
pas
avoir
de
lien
de
dépendance
avec
elle
et
ne
pas
être
lié
à
celle-ci,
et
réciproquement;
et
If
the
two
brothers
were
not
dealing
with
each
other
at
arm’s
length,
subsection
55(2)
of
the
Act
would
not
apply
to
them
since
that
disposition
applies
only
where
the
parties
are
dealing
with
each
other
at
arm’s
length.
The
introductory
words
of
subsection
55(3)
of
the
Act
read
as
follows:
Subsection
(2)
does
not
apply
to
any
dividend
received
by
a
corporation,
(a)
unless
such
dividend
was
received
as
part
of
a
transaction
or
event
or
a
series
of
transactions
or
events
that
resulted
in
(i)
a
disposition
of
any
property
to
a
person
with
whom
that
corporation
was
dealing
at
arm’s
length,
or
The
meaning
of
this
disposition
is
that
subsection
55(2)
of
the
Act
applies
in
cases
where
corporations
are
dealing
with
each
other
at
arm’s
length.
The
French
version
of
paragraph
55(5)(e)
of
the
Act
was
amended
on
October
29,
1985,
to
read
as
follows:
pour
déterminer
si
deux
ou
plusieurs
personnes
ont
un
lien
de
dépendance,
deux
personnes
sont
réputées
n’avoir
aucun
lien
de
dépendance
et
ne
pas
être
liées
entre
elles
si
l’une
est
le
frère
ou
la
soeur
de
l’autre.
The
provision
had
always
read
as
follows
in
English:
in
determining
whether
two
or
more
persons
are
dealing
with
each
other
at
arm’s
length,
persons
shall
be
deemed
to
be
dealing
with
each
other
at
arm’s
length
and
not
to
be
related
to
each
other
if
one
is
the
brother
or
sister
of
the
other;
and
Counsel
for
the
appellant
contended
that,
in
1982,
since
the
French
text
of
the
disposition
contemplated
a
brother
dealing
with
his
sister
at
arm’s
length,
but
made
no
provision
for
the
case
of
two
brothers
dealing
together,
under
the
Official
Languages
Act
and
under
section
18
of
the
Canadian
Charter
of
Rights
and
Freedoms
that
text
had
as
much
force
as
the
English
version
and
must
be
considered
as
authoritative.
It
is
in
that
text
that
Parliament’s
intention
is
expressed.
Counsel
for
the
appellant
referred
to
Pierre-André
Côté’s
Interpretation
of
Legislation,
Les
Editions
Yvon
Blais,
1984,
pages
251
ff.,
on
the
interpretation
of
bilingual
statutes.
I
believe
that
this
issue
is
resolved
by
the
following
passage
appearing
at
pages
257
and
258:
In
several
cases,
the
courts
have
preferred
the
wider
meaning,
or
even
one
of
the
possibilities
of
an
ambiguous
version
that
was
not
confirmed
by
the
unambiguous
one.
The
shared
meaning
is
only
one
guide
among
many
in
the
search
for
Parliament’s
real
intent.
This
was
confirmed
unequivocally
by
the
Supreme
Court
of
Canada
in
R.
v.
Compagnie
Immobilire
BCN
Ltée,
[1979]
1
S.C.R.
865,11979]
C.T.C.
71,
79
D.T.C.
5068.
The
Supreme
Court
faced
a
highly
technical
problem
posed
by
section
1100(2)
of
the
Income
Tax
Regulations.
Much
simplified,
it
dealt
with
property
which,
in
French,
is
“aliénés”
and
which,
in
English,
is
“disposed
of”.
Some
assets
had
been
“destroyed”:
a
right
to
lease
was
rendered
meaningless
because
the
lessee
became
the
owner
of
the
building.
Goods
“destroyed”
are
not
“aliénés”
in
the
true
sense
of
the
word,
but
they
are
certainly
“disposed
of”.
The
Federal
Court
of
Appeal
adopted
the
shared
meaning
of
the
two
versions,
in
this
case
the
narrower
French
version.
Its
conclusion
was
supported
by
section
8(2)b)
of
the
Official
Languages
Act.
The
Supreme
Court
of
Canada
preferred
the
broader
English
version.
Mr.
Justice
Pratte
[at
pages
871-72
(C.T.C.
75,
D.T.C.
5071)]
explained
why
the
shared
meaning
was
not
adopted:
I
do
not
believe
that
s.
8(2)b)
of
the
Official
Languages
Act
is
of
much
assistance
to
respondent.
The
rule
therein
expressed
is
a
guide;
it
is
one
of
several
aids
to
be
used
in
the
construction
of
a
statute
so
as
to
arrive
at
the
meaning
which,
“according
to
the
true
spirit,
intent
and
meaning
of
an
enactment,
best
ensures
the
attainment
of
its
objects”
(s.
8(2)d)).
The
rule
of
s.
8(2)b)
should
not
be
given
such
an
absolute
effect
that
it
would
necessarily
override
all
other
canons
of
construction.
In
my
view
therefore
the
narrower
meaning
of
one
of
the
two
versions
should
not
be
preferred
where
such
meaning
.would
clearly
run
contrary
to
the
intent
of
the
legislation
and
would
consequently
tend
to
defeat
rather
than
assist
the
attainment
of
its
objects.
[Emphasis
added]
This
decision
cited
in
the
above
text
was
also
cited
by
counsel
for
the
respondent.
It
is
my
opinion
that
this
decision
by
the
Supreme
Court
of
Canada
settles
this
discussion.
The
statutory
provision
in
question
clearly
contemplates
the
relationship
between
siblings
—
be
it
between
brothers,
between
sisters
or
between
brothers
and
sisters
—
and
not
merely
the
relationship
between
brother
and
sister,
which
would
be
contrary
to
common
sense
and
certainly
to
the
object
of
paragraph
55(5)(e)
of
the
Act.
Let
us
turn
now
to
the
second
point
at
issue.
It
has
to
do
with
the
meaning
to
be
given
to
and
the
computation
of
income
earned
or
realized
after
1971
under
paragraph
55(5)(c)
and
subsection
55(2)
of
the
Act
and
raises
the
question
of
whether
such
income
is
wholly
attributable
regardless
of
income
already
distributed
and
regardless
of
the
shares
that
have
been
disposed
of,
or
whether
one
must
take
into
account
income
that
remains
to
be
distributed
and
the
rights
attaching
to
the
shares
disposed
of.
Paragraph
55(5)(c)
of
the
Act,
which
describes
income
earned
or
realized,
reads
as
follows:
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
on
the
assumption
that
no
amounts
were
deductible
by
the
corporation
by
virtue
of
paragraph
20(1
)(gg)
or
section
37.1
;
To
understand
the
appellant’s
position
and
that
of
the
respondent,
it
is
necessary
to
refer
to
the
schedule
to
the
agreement
on
facts,
which
is
appended
to
these
reasons.
The
appellant
claims
that
the
income
earned
or
realized
after
1971
is
the
sum
of
the
total
net
income
for
tax
purposes
($627,821.73)
and
the
total
deductions
claimed
by
virtue
of
paragraph
20(1
)(gg)
of
the
Act
($49,819),
i.e.
$677,640.23,
and
that
this
is
the
only
amount
having
to
be
considered
for
the
purposes
of
subsection
55(2)
of
the
Act.
As
far
as
the
respondent
is
concerned,
for
the
purposes
of
subsection
55(2)
of
the
Act,
there
must
be
subtracted
from
the
aforementioned
sum,
which
is
that
determined
under
paragraph
55(5)(c)
of
the
Act,
the
following
amounts:
the
dividends
paid
(including
the
$100,000
dividend
that
does
not
appear
in
the
schedule,
but
was
paid
at
the
time
of
the
events
in
question),
the
interest
on
taxes,
federal
and
provincial
taxes
and
the
non-
deductible
debt.
In
computing
the
income
earned
or
realized
after
1971
that
was
available
for
dividend
distribution,
the
Minister
deducted
from
the
amount
of
$677,640.23
the
$3,000
dividend
paid
in
1979
and
the
$100,000
dividend
paid
in
1982
for
a
total
of
$103,000,
interest
of
$15,740
on
taxes,
federal
tax
of
$85,434.68,
provincial
tax
of
$65,492
and
the
non-deductible
debt
of
$707.72.
In
the
respondent’s
view,
the
income
earned
or
realized
after
1971
that
was
available
for
distribution
was
$407,265.88,
$203,632.94
of
which
was
available
for
the
shares
redeemed
from
the
appellant,
that
is,
50
percent
of
the
common
shares.
Counsel
for
the
appellant
referred
to
the
decision
by
this
Court
in
454538
Ontario
Ltd.
v.
Minister
of
National
Revenue,
[1993]
1
C.T.C.
2746,
93
D.T.C.
427,
at
page
2758
(D.T.C.
435),
where
Judge
Sarchuk
wrote:
I
am
satisfied
that
subsection
55(2)
of
the
Act
is
to
be
read
in
conjunction
With
paragraph
55(5)(c)
and
section
3
of
the
Act.
It
is
therefore
appropriate
for
the
Minister
to
consider
the
application
of
subsection
55(2)
on
the
basis
that
“income
earned
or
realized”
is
income
determined
pursuant
to
the
provisions
found
in
Division
B
of
Part
I
of
the
Act.
I
concur
in
these
remarks
by
Judge
Sarchuk
and
I
agree
also
with
those
of
John
R.
Robertson
reported
at
page
83
of
the
1981
Conference
Report
(CTF)(ACEF)
to
which
counsel
for
the
respondent
referred:
The
term
“income
earned
or
realized”
as
used
in
subsections
55(2)
and
(5)
is
income
as
otherwise
determined
pursuant
to
the
Act.
However,
it
is
logical
that
only
that
portion
of
the
income
earned
or
realized
that
remains
on
hand
immediately
before
the
dividend
can
attribute
to
the
gain.
In
addition,
we
have
taken
the
position
that
such
undistributed
retained
taxed
earnings
only
attribute
to
the
value
of
the
share
of
a
corporation
on
a
dollar
for
dollar
basis
and
any
balance
of
the
gain,
including
any
balance
that
may
reasonably
be
attributable
to
earnings
(if,
for
example,
the
company
was
valued
using
the
earnings
method)
is
attributable
to
something
other
than
income
earned
or
realized
(that
is,
future
earnings
have
not
yet
been
earned
or
realized).
This
position
is
supported
by
paragraph
55(5)(a)
and
the
intent
of
the
law,
which
was
(where
capital
gains
strips
are
involved)
to
allow
income
to
pass
tax
free
subject
to
Part
IV
within
the
corporate
sector
only
to
the
extent
that
it
had
been
taxed
at
the
corporate
level.
[French
version]
L’expression
“revenu
gagné
ou
réalisé”
utilisée
aux
paragraphes
55(2)
et
(5)
désigne
du
revenu
tel
que
déterminé
ailleurs
dans
la
Loi.
Toutefois,
il
semble
logique
que
seule
la
partie
du
revenu
gagné
ou
réalisé
qui
demeure
en
main
immédiatement
avant
le
dividende
peut
être
attribuée
au
gain.
De
plus,
nous
avons
pris
la
position
que
de
tels
bénéfices
non
distribués
frappés
d’impôt
ne
sont
qu’attribués
à
la
valeur
de
l’action
d’une
corporation
que
sur
la
base
d’un
dollar
pour
un
dollar
et
que
tout
solde
du
gain,
incluant
tout
solde
qui
peut
être
raisonnablement
attribué
aux
bénéfices
(si,
par
exemple,
la
compagnie
était
évaluée
en
utilisant
la
méthode
des
bénéfices),
est
attribuable
à
autre
chose
que
le
revenu
gagné
ou
réalisé
(c’est-à-dire,
les
bénéfices
futurs
n’ont
pas
encore
été
gagnés
ou
réalisés).
Cette
position
s’appuie
sur
l’alinéa
55(5)a)
et
l’intention
du
législateur,
qui
est
de
permettre
(lorsqu’il
y
a
eu
dépouillement
de
gains
en
capital)
que
le
revenu
soit
libre
d’impôt,
sous
réserve
de
la
partie
IV
dans
le
cas
des
corporations,
pourvu
qu’il
ait
été
imposé
au
niveau
de
la
corporation.
Returning
to
the
amounts
in
the
instant
case,
the
income
earned
or
realized
after
1971
under
paragraph
55(5)(c)
of
the
Act
amounted
to
$677,640.23.
Can
this
entire
sum
reasonably
yield
dividends
when
part
of
it
has
already
been
distributed?
What
subsection
55(2)
of
the
Act
states
is
that
if
a
portion
of
the
capital
gain
cannot
reasonably
be
attributed
to
income
earned
or
realized
after
1971,
the
dividend
becomes
the
proceeds
of
disposition.
The
word
“reasonably”
is
important.
It
seems
quite
clear
to
me
that
it
would
not
be
reasonable
to
claim
to
distribute
a
dividend
out
of
profits
already
distributed.
Moreover,
would
it
be
reasonable
to
allow
the
attribution
of
income
earned
or
realized
after
1971
without
considering
the
equality
of
rights
attaching
to
the
shares?
On
the
principle
of
the
equality
of
rights
attaching
to
shares,
I
refer
to
the
remarks
made
by
Dickson
J.
in
McClurg
v.
Minister
of
National
Revenue
(sub
nom.
McClurg
v.
The
Queen),
[1990]
3
S.C.R.
1020,
[1991]
1
C.T.C.
169,
(sub
nom.
R.
v.
McClurg)
91
D.T.C.
5001
at
pages
1041-42
(C.T.C.
178,
D.T.C.
5007):
Having
reviewed
the
legal
basis
for
the
payment
of
a
dividend
by
a
company,
another
fundamental
principle
of
corporate
law
can
be
restated.
The
appellant,
the
Minister
of
National
Revenue,
argues,
and
it
is
conceded
by
the
respondent,
that
the
rights
carried
by
all
shares
to
receive
a
dividend
declared
by
a
company
are
equal
unless
otherwise
provided
in
the
Articles
of
Incorporation.
This
principle,
like
the
managerial
power
to
declare
dividends,
has
been
well
accepted
at
common
law.
The
principle,
or
more
accurately,
the
presumption
of
equality
amongst
shares
and
the
prerequisites
required
to
rebut
that
presumption,
are
described
in
Schmitthoff,
Palmer's
Company
Law,
23rd
ed.,
vol.
I,
at
p.
387,
para.
33-06:
Prima
facie
the
rights
carried
by
the
shares
rank
pari
passu,
i.e.
the
shareholders
participate
in
the
benefits
of
membership
equally.
It
is
only
when
a
company
divides
its
share
capital
into
different
classes
with
different
rights
attached
to
them
that
the
prima
facie
presumption
of
equality
of
shares
may
be
displaced.
In
my
view,
a
precondition
to
the
derogation
from
the
presumption
of
equality,
both
with
respect
to
entitlement
to
dividends
and
other
shareholder
entitlements,
is
the
division
of
shares
into
different
“classes”.
The
rationale
for
this
rule
can
be
traced
to
the
principle
that
shareholder
rights
attach
to
the
shares
themselves
and
not
to
shareholders.
The
division
of
shares
into
separate
classes,
then,
is
the
means
by
which
shares
(as
opposed
to
shareholders)
are
distinguished,
and
in
turn
allows
for
the
derogation
from
the
presumption
of
equality:
Bowater
Canadian
Ltd.
v.
R.L.
Crain
Inc.
(1987),
62
O.R.
(2d)
752
(C.A.),
at
p.
754
(per
Houlden
J.A.).
Counsel
for
the
appellant
did
not
claim
that
shares
of
the
same
class
carried
unequal
rights;
his
argument
was
that
the
equal
rights
of
the
shares
did
not
apply
to
the
retained
earnings
account
(RE).
He
referred
to
the
recent
judgment
by
our
Court
in
Nassau
Walnut
Investments
Inc.
v.
R.
(sub
nom.
Nassau
Walnut
Investments
Inc.
v.
Canada)
[1995]
2
C.T.C.
2057,
95
D.T.C.
367,
in
which
it
was
held
that
the
Act
did
not
require
such
distribution
on
a
pro
rata
basis
according
to
the
number
of
shares
and
that
other
forms
of
distribution,
e.g.
according
to
the
number
of
shareholders,
could
be
accepted.
On
the
basis
of
this
decision,
counsel
for
the
appellant
asserted
that
nothing
in
the
Act
prevented
the
total
undistributed
income
earned
and
realized
after
1971
from
being
distributed
to
one
of
the
two
shareholders.
It
does
not
appear
to
me
that
this
extreme
inference
may
be
drawn
from
the
logic
of
the
judgment
cited
above.
It
is
my
opinion
that
this
approach
runs
counter
both
to
the
aforementioned
corporate
law
principles
relating
to
the
presumption
of
equality
of
shares
and
to
the
purpose
of
subsection
55(2)
of
the
Act.
On
the
one
hand,
that
presumption
has
not
been
rebutted
and,
on
the
other
hand,
it
seems
obvious
to
me
that
it
is
with
respect
to
the
shares
in
issue
that
the
capital
gain
and
the
dividend
must
be
computed
for
the
purposes
of
subsection
55(2)
of
the
Act.
For
the
principle
of
equality
of
rights
attaching
to
shares
and
for
the
object
of
subsection
55(2)
of
the
Act
to
be
taken
into
account,
the
income
earned
and
realized
after
1971
must
be
reasonably
attributed
according
to
the
ratio
of
the
common
shares
redeemed
to
the
total
common
shares
issued
and
still
held.
The
third
point
at
issue
concerns
the
possibility
of
making
a
designation
under
paragraph
55(5)(f)
of
the
Act
at
the
time
of
reassessment.
Paragraph
55(5)(f)
of
the
Act
reads
as
follows:
For
the
purposes
of
this
section,
(f)
where
a
corporation
has
received
a
dividend
any
portion
of
which
is
a
taxable
dividend,
(i)
the
corporation
may
designate
in
its
return
of
income
under
this
Part
for
the
taxation
year
during
which
the
dividend
was
received
any
portion
of
the
taxable
dividend
to
be
a
separate
taxable
dividend,
and
(ii)
the
amount,
if
any,
by
which
the
portion
of
the
dividend
that
is
a
taxable
dividend
exceeds
the
portion
designated
under
subparagraph
(i)
shall
be
deemed
to
be
a
separate
taxable
dividend.
May
this
designation
be
made
only
in
the
return
for
the
year
in
which
the
dividend
was
received,
as
the
respondent
claimed,
or
can
it
be
made
at
the
time
of
a
reassessment
under
subsection
55(2)
of
the
Act?
The
taxpayer
did
not
indicate
in
its
return
of
income
that
it
had
received
the
$316,000
dividend,
pursuant
to
subsection
84(3)
of
the
Act.
This
omission
is
hard
to
understand.
This
legislative
provision
had
been
in
existence
for
a
long
time
and
the
return
was
prepared
by
accountants.
No
explanation
was
provided
as
to
the
omission
except
to
say
that
there
had
been
an
error
in
the
return
of
income.
The
appellant
included
the
$50,000
dividend
(mentioned
in
paragraphs
10,
11
and
12
of
the
agreement
on
facts)
in
computing
its
income
for
the
taxation
year,
but
made
no
mention
of
the
amount
of
$316,000.
It
is
true
that
this
payment
was
different
in
nature.
With
respect
to
the
$50,000
amount,
it
was
by
its
very
nature
a
dividend.
In
the
case
of
the
redemption
of
the
appellant’s
shares,
there
was
a
dividend
resulting
from
a
fiction
created
by
subsection
84(3)
of
the
Act.
Although,
if
taken
literally,
the
French
text
of
paragraph
55(5)(e)
of
the
Act
could
render
subsection
55(2)
inapplicable
(the
meaning
of
the
French
version
of
this
provision
is
discussed
at
the
beginning
of
these
reasons),
subsection
84(3)
of
the
Act
still
applied
and
there
was
still
the
request
for
exemption
under
subsection
112(1)
of
the
Act.
It
is
important
to
note,
however,
that
no
wrongdoing
was
alleged
by
the
respondent.
Both
parties
admitted
that
subsection
55(2)
of
the
Act
is
essentially
an
anti-avoidance
provision.
Counsel
for
the
respondent
viewed
subsection
55(2)
and
paragraph
55(5)(f)
of
the
Act
as
“penalizing”
provisions.
It
is
hard
for
me
to
agree
that
such
is
the
primary
nature
of
these
provisions
of
the
Act
for
they
are
not
worded
as
penal
provisions.
Could
they,
on
the
principle
that
a
person
may
not
invoke
his
own
turpitude
and
is
in
that
circumstance
subject
to
estoppel,
have
taken
on
such
a
nature
if
there
had
been
an
allegation
of
intentional
conduct?
Possibly,
but
that
is
not
the
legal
situation
with
which
the
present
analysis
is
concerned
and
I
therefore
do
not
have
to
rule
on
the
point.
We
are
surely
dealing
here
with
a
provision
whose
purpose
is
to
regulate
tax
avoidance
and,
more
particularly,
a
provision
that
supplements
the
effect
of
subsection
84(3)
of
the
Act.
In
a
situation
in
which
a
corporation
redeems
its
own
shares
where
those
shares
are
held
by
another
corporation,
Parliament’s
intent
is
to
prevent
everything
from
becoming
a
non-taxable
intercorporate
dividend.
Even
if
it
were
a
penal
provision,
the
law
would
require
the
Minister
to
give
reasons
why
the
conduct
was
improper
in
order
to
assess
accordingly
and
the
taxpayer
would
thus
know
what
he
had
to
prove.
As
no
mention
of
bad
faith
or
negligence
on
the
part
of
the
taxpayer
is
made
either
in
the
reply
to
the
notice
of
appeal
or
in
the
amended
reply
to
the
notice
of
appeal,
there
is
in
such
a
circumstance,
as
counsel
for
the
appellant
stated,
a
presumption
of
good
faith.
Counsel
for
the
appellant
gave
me
the
following
reason
for
the
taxpayers’
conduct
at
page
279
of
the
transcript:
Because
it
was
certainly
not
the
taxpayers’
intention
to
avoid
tax;
that
was
not
the
taxpayers’
intention;
you
have
no
evidence
on
that
point.
They
carried
out
a
transaction
convinced
that
it
was
proper
based
on
their
knowledge
of
the
interpretation
of
the
—
pardon
the
expression
—
monstrous
section
—
because
it
still
is
so
today.
So
I
believe
it
is
possible
to
do
that.
[Translation]
As
stated
above,
there
was
no
allegation
of
improper
conduct;
thus,
no
evidence
was
adduced
on
this
point.
In
these
circumstances,
I
prefer
to
adhere
to
the
presumption
of
law
that
a
party
is
presumed
to
be
in
good
faith.
While
the
Minister
can
and
must
use
subsection
55(2)
of
the
Act
to
reassess
the
appellant,
I
fail
to
see
what
principle
of
law
would
prevent
the
appellant
from
availing
itself
of
paragraph
55(5)(f)
of
the
Act,
unless
such
be
expressly
prohibited
by
its
terms,
which
is
not
the
case.
I
do
not
understand
why
the
Minister
wishes
to
make
this
paragraph
out
to
be
so
complicated.
The
election
must
be
made
simultaneously
with
the
application
of
subsection
55(2)
of
the
Act,
but
if
an
error
is
made
at
the
time
of
the
first
application
and
if
the
Minister
reassesses
on
the
basis
of
a
new
amount,
there
is
no
reason
for
the
same
correction
not
to
be
made
for
the
purposes
of
paragraph
55(5)(f)
of
the
Act.
Looking
at
the
wording
of
subsection
112(1)
of
the
Act,
which
the
Minister
readily
applied
in
making
the
reassessment,
I
note
that
as
regards
the
time
when
the
deduction
is
claimed,
it
is
appreciably
the
same
as
in
the
case
of
paragraph
55(5)(f)
of
the
Act,
and
I
cite
the
relevant
part:
Where
a
corporation
in
a
taxation
year
has
received
a
taxable
dividend
from
(a)
a
taxable
Canadian
corporation,
or
an
amount
equal
to
the
dividend
may
be
deducted
from
the
income
of
the
receiving
corporation
for
the
year
for
the
purpose
of
computing
its
taxable
income.
Counsel
for
the
respondent
referred
to
the
decision
of
the
Federal
Court
of
Appeal
in
Miller
v.
Minister
of
National
Revenue,
(1992),
[1993]
1
C.T.C.
269,
(sub
nom.
Miller
v.
R.)
93
D.T.C.
5035,
in
which
Mahoney
J.A.
wrote
as
follows
with
respect
to
the
election
provided
for
in
subsection
110.4(1)
(forward
averaging)
of
the
Act,
which
came
into
effect
in
1982,
the
year
in
issue
in
this
case
(at
page
271
(D.T.C.
5036)):
The
reasoning
that
amendment
of
the
election
was
part
and
parcel
of
the
assessment
might
well
be
unexceptionable
if
a
taxpayer
electing
to
forward
average
had
been
obliged
to
make
that
election
in
respect
of
a
prescribed
amount
or
portion
of
his
taxable
income
for
the
year
but
that
was
not
the
case.
Subject
to
a
minimum
of
$1,000,
the
taxpayer
had
the
option
to
forward
average
all,
some
or
none
of
the
eligible
amount.
It
was
the
taxpayer’s
election
and
there
was
no
basis
upon
which
the
Minister,
absent
legislative
authority,
could
be
allowed
to
impose
the
choice
on
him
even
if
the
taxpayer
considered
it
beneficial.
I
am
of
the
opinion
that
the
Minister
had
no
power
to
amend
a
forward
averaging
election
for
much
the
same
reason
that
this
Court
held
that
absent
fraud,
misrepresentation
or
a
timely
waiver,
the
Minister
is
powerless
to
reassess
after
expiration
of
the
limitation
period
provided
by
subsection
152(4)
of
the
Act
even
if
the
taxpayer
wanted
the
reassessment.
A
finding
that
the
Minister
had
that
power
would
not
be
limited
to
the
particular
taxpayer
and
could
oblige
other
taxpayers
to
object
to
amendment
of
their
elections
and
perhaps
to
litigate.
In
attempting
to
apply
the
reasoning
set
forth
in
the
first
paragraph
cited
above
to
the
situation
in
the
instant
case,
I
am
of
the
opinion
that
this
is
more
a
case
in
which
the
taxpayer
was
forced
to
make
an
election
on
the
basis
of
an
amount
determined
by
a
provision
of
the
Act,
in
this
case
subsection
55(2),
than
a
case
of
an
election
which
is
made
by
the
taxpayer
of
his
own
volition
and
which
is
dictated
rather
by
his
own
expectations
than
by
the
provisions
of
the
Act.
It
also
seems
clear
to
me
from
the
Federal
Court
of
Appeal’s
reasons
that
the
considerable
increase
in
the
Minister’s
administrative
workload
was
taken
into
account.
This
was
obviously
a
factor
to
be
considered
in
interpreting
Parliament’s
intention.
This
factor
was
not
raised
in
the
instant
case
and
I
do
not
see
how
an
amendment
of
the
amount
designated
under
paragraph
55(5)(f)
of
the
Act,
correlative
with
that
of
the
amount
determined
under
subsection
55(2)
of
the
Act
for
the
purpose
of
reassessment,
would
cause
an
administrative
overload.
There
are
also
other
factors
that
may
be
considered
with
regard
to
making
an
election
or
a
designation
at
the
time
of
a
reassessment,
including
the
prejudice
caused
to
the
rights
of
the
Minister
or
other
taxpayers.
I
do
not
see
that
any
prejudice
was
caused
to
anyone
in
the
instant
case.
Furthermore,
it
seems
to
me
that
not
to
allow
the
taxpayer
to
exercise
the
right
provided
for
in
paragraph
55(5)(f)
of
the
Act
in
the
case
of
a
reassessment
would
run
counter
to
the
object
of
subsection
55(2)
of
the
Act.
The
intent
of
this
provision
is,
on
the
one
hand,
that
the
portion
of
the
capital
gain
that
is
not
attributable
to
the
payment
of
a
dividend
(according
to
the
amount
of
income
earned
and
realized
after
1971
as
regards
those
shares)
be
considered
as
proceeds
of
disposition
and
subject
to
capital
gains
tax
and,
on
the
other
hand,
that
the
portion
of
the
capital
gain
that
is
attributable
to
the
income
earned
and
realized
after
1971
may
be
designated
as
a
dividend.
The
appeal
is
allowed,
with
costs,
and
the
Minister
shall
assess
the
appellant
on
the
following
basis:
the
taxpayer
may
designate
the
sum
of
$203,632.94
as
a
separate
taxable
dividend
for
the
1982
taxation
year,
that
amount
being
the
income
earned
or
realized
after
1971
attributable
to
the
redeemed
shares.
The
difference
between
the
amount
of
$316,000
and
$203,632.94
constitutes
the
proceeds
of
disposition
of
the
shares.
Appeal
allowed
in
part.
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