McLellan, J:—This is an application for an order pursuant to subsection 234(1) of The Business Corporations Act setting aside payment of $966,000 on October 27, 1981, and $322,251.97 on October 30, 1981, by the Sands Motor Hotel Limited to Kristian Developments Ltd and Green Spot Implements Ltd, respectively, and prohibiting this money from being paid until the moneys owing by the Sands Motor Hotel Limited pursuant to the provisions of the Income Tax Act have been paid or secured.
The shares of the respondent Sands Motor Hotel Limited (hereinafter referred to as “the taxpayer”) were owned by the other two respondents.
In 1979 the taxpayer sold its sole property the Sands Motor Hotel. In anticipation of receipt of income from the sale of the property the taxpayer declared dividends in August, 1981, of $56,000, $84,500 and $560,000. On October 21, 1981, the corporation received $1,452,146 from the sale of the property. The taxpayer on that date distributed $966,000 to the respondent Kristian Developments Ltd. On October 30, 1981, the taxpayer distributed $322,251.97 to the other respondent. There were no resolutions passed by the taxpayer in October, 1981, with respect to these payments.
Prior to the taxpayer making the payments the Department of National Revenue had mailed a letter dated September 12, 1981, wherein it advised the taxpayer that it proposed to tax the gain on the sale of the hotel property, “as an adventure in the nature of trade, ie income and not a capital gain”. The letter to the taxpayer concluded as follows:
Based on our telephone conversation of September 10, 1981, we will be making the above adjustment with the understanding that there is no basis for settlement at this time.
The Department, on February 26, 1982, mailed to the taxpayer a notice of reassessment imposing additional taxes in the amount of $541,064.13. The taxpayer filed a notice of objection on March 18, 1982.
There was a further reassessment by the Department in April 1983, resulting in additional taxes of $419,903.63 which reassessment was again appealed by the taxpayer.
The end result is that as of October 6, 1983, the Department claims taxes owing by the taxpayer in the sum of $1,270,984.25 plus interest.
In response to letters of Requirement of Information the taxpayer advised the Department of its financial affairs and in particular advised that having distributed the proceeds received from the sale of the hotel it had no other assets.
Section 234 of The Business Corporations Act (hereinafter referred to as the “BCA”) provides in part as follows:
234.—(1) A complainant may apply to a court for an order under this section.
(2) If, upon an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates:
(a) any act or omission of the corporation or any of its affiliates effects as a result;
(b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner; or
(c) the powers of the directors of the corporation or any of its affiliates are or have been exercised in a manner;
that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer, the court may make an order to rectify the matters complained of.
(3) In connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing:
(a) an order restraining the conduct complained of;
(b) an order appointing a receiver or receiver-manager;
(c) an order to regulate a corporation’s affairs by amending the articles or bylaws or creating or amending a unanimous shareholder agreement;
(d) an order directing an issue or exchange of securities;
(e) an order appointing directors in place of or in addition to all or any of the directors in office;
(f) an order directing a corporation, subject to subsection (6), or any other person, to purchase securities of a security holder;
(g) an order directing a corporation, subject to subsection (6), or any other person, to pay to a security holder any part of the moneys paid by him for securities;
(h) an order varying or setting aside a transaction or contract to which a corporation is a party and compensating the corporation or any other party to the transaction or contract;
(i) an order requiring a corporation, within a time specified by the court, to produce to the court or an interested person financial statements in the form required by section 149 or an accounting in such other form as the court may determine;
(j) an order compensating an aggrieved person;
(k) an order directing rectification of the registers or other records of a corporation under section 236;
(1) an order liquidating and dissolving the corporation;
(m) an order directing an investigation under Division XVII to be made; (n) an order requiring the trial of any issue.
A complainant is defined under paragraph 231(b) of the BCA as:
(i) a registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates;
(ii) a director or an officer or a former director or officer of a corporation or of any of its affiliates;
(iii) the Director; or
(iv) any other person who, in the discretion of a court, is a proper person to make an application under this Division. [Emphasis added]
I must first of all decide whether the applicant, as a creditor of the corporation has the status of a complainant under the BCA. However, prior to making that decision it must be determined whether the applicant was a creditor of the taxpayer at the time the payments were made in October 1981, as the respondents take the position that the applicant was not a creditor at that time.
Income taxes are a debt. Section 222 of the Income Tax Act (the “Act”) provides as follows:
222. All taxes, interest, penalties, costs and other amounts payable under this Act are debts due to Her Majesty and recoverable as such in the Federal Court of Canada or any other court of competent jurisdiction or in any other manner provided by this Act.
The respondents argue that the debt with respect to payment of income taxes does not arise until the assessment or reassessment has been issued pursuant to subsection 158(1) of the Act.
Subsection 158(1) states that:
The taxpayer shall, within 30 days from the day of mailing of the notice of assessment, pay to the Receiver General any part of the assessed tax, interest and penalties then remaining unpaid, whether or not an objection to or appeal from the assessment is outstanding.
The applicant argues that the tax liability exists as soon as the income is earned and cite in support of that proposition the case of The Queen v Simard- Beaudry Inc, 71 DTC 5511 where Noel, AJ states at 5515:
As to his second argument, namely that the debt arising from re-assessment of the taxpayer dates only from the time that the taxpayer is assessed, and that it did not, accordingly, exist at the time the agreement was made, it seems to me that the answer to this is that the general scheme of the Income Tax Act indicates that the taxpayer’s debt is created by his taxable income, not by an assessment or re-assessment. In fact, the taxpayer’s liability results from the Act and not from the assessment. In principle, the debt comes into existence the moment the income is earned, and even if the assessment is made one or more years after the taxable income is earned, the debt is supposed to originate at that point. Here the re-assessments issued on August 14, 1969, for income earned in previous years seem to me to be at most a confirmation or acknowledgement of the amounts owing for these earlier years. Indeed, in my opinion, the assessment does not create the debt, but is at most a confirmation of its existence.
I agree with the reasoning of Noël, ACJ. In my opinion there was a debt owing at the time that the letter was written to the taxpayer on September 12, 1981, although the exact amount of that debt had not yet been ascertained.
The provisions of section 234 of the BCA expressly provide that it is to protect, among others, creditors, from acts or conduct that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any creditor.
If the applicant cannot be a complainant then I fail to see who is to complain on her behalf. If a creditor does not come within the definition of complainant one wonders how a creditor can obtain remedies for breaches of those provisions of the BCA which are obviously inserted for the protection of creditors such as the solvency tests contained in sections 34 and 40.
It would seem to me that in the circumstances the applicant is a proper person to make an application. I therefore exercise the discretion granted to me by paragraph 231(b) and hold that the applicant in this case is a complainant within the provisions of section 234.
The payment by the taxpayer of the dividends in the amount of $1,228,251.97 was in violation of the provisions of section 40 of the BCA which provide:
40. A corporation shall not declare or pay a dividend if there are reasonable grounds for believing that:
(a) the corporation is, or would after the payment be, unable to pay its liabilities as they become due; or
(b) the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities and stated capital of all classes.
There were certainly reasonable grounds for believing that after those payments the taxpayer would be unable to pay its liabilities as they became due and in particular that it would be unable to pay the additional income taxes that it had been advised were in the process of being assessed.
In my opinion the payment by the taxpayer of dividends when it could not meet the solvency test set forth in section 40 of the BCA was an act that effected a result that was unfairly prejudicial to and unfairly disregarded the interests of Her Majesty the Queen as a creditor of the taxpayer and the applicant is entitled to an order under section 234.
The applicant also seeks an order setting aside the redemption of certain shares by the taxpayer. On October 12, 1982, the taxpayer redeemed preferred shares of the taxpayer held by one of its directors, Jerry Kristian and by one of its corporate shareholders Scott One Investments Ltd in the amounts of $187,500 and $80,358, respectively, by offsetting the value of the shares against advances made by the taxpayer to the said director and shareholder in anticipation of redemption of those shares.
The redemption of those shares by the taxpayer was contrary to the provisions of section 34 of the BCA which provides as follows:
34. (1) Notwithstanding subsection 32(2) or subsection 33(3), but subject to subsection (2) of this section and to its articles, a corporation may purchase or redeem any redeemable shares issued by it at prices not exceeding the redemption price thereof stated in the articles or calculated according to a formula stated in the articles
(2) A corporation shall not make any payment to purchase or redeem any redeemable shares issued by it if there are reasonable grounds for believing that:
(a) the corporation is, or would after the payment be, unable to pay its liabilities as they become due; or
(b) the realizable value of the corporation’s assets would after the payment be less than the aggregate of:
(i) its liabilities; and
(ii) the amount that would be required to pay the holders of shares that have a right to be paid, on a redemption or in a liquidation, rateably with or prior to the holders of the shares to be purchased or redeemed.
Again the redemption of the shares was an act that effected a result that was unfairly prejudicial to and unfairly disregarded the interests of the applicant as a creditor of the taxpayer and it is therefore entitled to a further order under section 234.
There will be an order directing that:
(1) The payments by the taxpayer of $966,000 on October 27, 1981 to the respondent Kristian Developments Ltd and of $322,251.97 on October 30 to the respondent Scott One Investments Ltd be set aside and that the taxpayer do forthwith recover the payments from the said respondents;
(2) The corporate shareholders of the said taxpayer Kristian Developments Ltd and Scott One Investments Ltd repay forthwith to the taxpayer the sums of 966,000 and $322,251.97, respectively;
(3) The redemption of the preferred shares by the taxpayer in the amounts of $187,500 and $80,358 held by Jerry Kristian and Scott One Investments Ltd respectively be set aside;
(4) The taxpayer collect forthwith the advances in the amount of $187,500 and $80,358 made respectively to Jerry Kristian and Scott One Investments Ltd;
(5) The taxpayer be prohibited from distributing or otherwise disposing of the assets it will recover under the provisions of the preceding paragraphs 1, 2, 3 and 4, until the payment in full of the moneys owing by the taxpayer to Her Majesty pursuant to the provisions of the Income Tax Act and the assessments issued thereunder.
The applicant will have its costs of the application.
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