Citation: 2011TCC497
Date: 20111021
Docket: 2009-1446(IT)G
BETWEEN:
GORDON E.
MARSHALL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller J.
[1]
The issue in this
appeal is whether shares distributed to the Appellant by a Bermudan company in
2007 were dividends that had to be included in his income.
[2]
In June 2007, Tyco
International Ltd. (“Tyco”), a Bermuda company, reorganized so that two of its
wholly-owned subsidiaries, Tyco Electronics Ltd. (“Electronics”) and Covidien
Ltd. (“Covidien”), were spun-off to be separate, publicly-traded companies.
[3]
The spin-off was
conducted in two steps.
[4]
First, shareholders of
Tyco were issued one common share of Electronics and one common share of
Covidien for every four common shares of Tyco which they held at close of
business on June 18, 2007.
[5]
Second, following the
distribution of the spin-off shares, through a reverse stock split,
shareholders received one common share of Tyco (“New”) for every four common
shares of Tyco (“Old”) which they had held.
[6]
Prior to the
reorganization, the Appellant owned 2,679 shares in Tyco (“Old”). As a result
of the reorganization, the Appellant received 669 shares of Covidien and 669
shares of Electronics (the spin-off shares). It is these shares that are the
subject of this appeal.
[7]
The Appellant also
received 669 shares of Tyco (“New”) as a result of the reverse stock split.
[8]
TD Waterhouse issued a
T5 slip to the Appellant which indicated that he had received foreign income in
the amount of $57,170 for the 2007 taxation year. This amount represented the
value of the Covidien and Electronics shares. The Appellant failed to include
this amount in his income.
[9]
The question to be
decided is the nature of the spin-off shares received by the Appellant. For the
reasons that follow, I have concluded that the distribution of the spin-off
shares was a dividend in kind and the amount of $57,170 is to be included in
the Appellant’s income in 2007.
[10]
This is the fifth
appeal before this court which has dealt with the nature of the spin-off shares
from the Tyco reorganization; but, it is the first such appeal under the
General Procedure. Hershfield J. in Hamley v R.[1],
Sheridan J. in Yang v R.[2],
and McArthur J. in Rezayat v R[3],
each found that the spin-off shares were dividends in kind and the appeals were
dismissed. Whereas Bowie J. in Capancini v R.[4]
found that the spin-off shares were never owned by Tyco but were created in the
course of the reorganization and together with the shares in Tyco (“New”) they
make up the original capital of Tyco (“Old”)[5].
Bowie J. found that the spin-off shares were not dividends
and he allowed the appeal.
[11]
It was the Appellant’s
position that I should follow the decision in Capancini and find that
Tyco did not own the spin-off shares prior to the reorganization. However, the
Respondent has presented evidence which clearly showed that Electronics[6] and Covidien[7] were
incorporated in Bermuda in 2000 as wholly-owned subsidiaries of
Tyco (“Old”).
[12]
The Appellant also
submitted that Tyco applied for exemptive relief from the various provincial
securities regulators, including the Ontario Securities Commission (“OSC”). He
referred to the Mutual Reliance Review System (“MRRS”) Decision Document[8] as support for
his position that the spin-off shares from the Tyco reorganization were to be
distributed tax free and not as a dividend. He stated that OSC had granted the
exemption and the provincial portion of his income taxes should be refunded to
him.
[13]
The exemption granted
by the OSC was not that the distribution of the spin-off shares would be exempt
from tax. The OSC did not have the jurisdiction to make this type of decision.
Rather, according to the MRRS dated June 29, 2007, the OSC and the other
provincial securities regulators agreed that Tyco was exempted from the
prospectus and registration requirements of their legislation in respect of the
proposed distribution of the spin-off shares. I note as well that in its
application to the provincial securities regulators Tyco stated that its
distribution of the spin-off shares “to holders of common shares of Tyco
resident in Canada” would be “by way of a pro rata dividend in kind”. See
paragraphs 1.1 and 1.2 of the MRRS.
[14]
It is the Respondent’s
position that the Appellant received foreign dividends as a result of the Tyco
reorganization and section 86.1 of the Income Tax Act (the “Act”)
does not apply to exempt those dividends from taxation.
[15]
Counsel for the
Respondent submitted that the word “dividends” is not defined in the Income
Tax Act (“Act”) and it should have its ordinary meaning as found in
the dictionary. I agree. Section 248 of the Act reads that “dividends”
includes stock dividends but it does not define the word “dividends”.
[16]
In Special Risks
Holdings Inc. v. The Queen[9],
Muldoon J. accepted that a “dividend” was “any distribution by a corporation of
its income or capital gains made pro rata among shareholders”. The
Dictionary of Canadian Law defines “dividend as a “payment from profits,
whether in cash, specie or the shares of another company”. Black's Law Dictionary defines the word "dividend" as
A portion of a
company's earnings or profits distributed pro rata to its shareholders,
usually in the form of cash or additional shares.
[17]
A distribution of the
shares of a wholly owned subsidiary by a parent corporation to its shareholders
is a dividend in kind[10].
The spin-off shares at issue in this appeal were a pro rata distribution
of property and this distribution was a dividend in kind.
[18]
Dividends in kind are
specifically contemplated by subsection 52(2) of the Act.
[19]
In this appeal, the
dividends are from a non-resident corporation and they are taxable pursuant to
paragraph 12(1)(k) and section 90 of the Act.
[20]
Although the Appellant
has not relied on section 86.1, I feel that I should speak to it as it is the
only section of the Act that could allow the Appellant to exclude the
value of the spin-off shares from income. Section 86.1 was included in the Act
to address the fact that many Canadian shareholders of foreign corporations
were being taxed on the distributions from spin-off transactions while
shareholders resident in the foreign country where the transaction occurred
were not taxed on the same distributions[11].
Section 86.1 contains a number of conditions. It reads:
86.1 Foreign spin-offs -- (1) Eligible distribution not included in income -- Notwithstanding any other provision of this
Part,
(a) the amount
of an eligible distribution received by a taxpayer shall not be included in
computing the income of the taxpayer; and
(b) subsection
52(2) does not apply to the eligible distribution received by the taxpayer.
(2) Eligible distribution -- For the purpose of this section, a
distribution by a particular corporation that is received by a taxpayer is an
eligible distribution if
(a) the
distribution is with respect to all of the taxpayer's common shares of the
capital stock of the particular corporation (in this section referred to as the
"original shares");
(b) the
distribution consists solely of common shares of the capital stock of another
corporation that were owned by the particular corporation immediately before
their distribution to the taxpayer (in this section referred to as the
"spin-off shares");
(c)
in the case of a distribution that is not prescribed,
(i) at the time
of the distribution, both corporations are resident in the United States and
were never resident in Canada,
(ii) at the
time of the distribution, the shares of the class that includes the original
shares are widely held and actively traded on a designated stock exchange in
the United States, and
(iii) under the
United States Internal Revenue Code applicable to the distribution, the
shareholders of the particular corporation who are resident in the United States are not taxable in respect of the distribution;
(d) in the case of a distribution that is prescribed,
(i) at the time
of the distribution, both corporations are resident in the same country, other
than the United States, with which Canada has a tax treaty (in this
section referred to as the "foreign country") and were never resident
in Canada,
(ii) at the
time of the distribution, the shares of the class that includes the original
shares are widely held and actively traded on a designated stock exchange,
(iii) under the
law of the foreign country, those shareholders of the particular corporation
who are resident in that country are not taxable in respect of the
distribution, and
(iv) the
distribution is prescribed subject to such terms and conditions as are
considered appropriate in the circumstances;
[21]
Unfortunately for the Appellant,
the spin-off shares were not an eligible distribution because the conditions in
subsection 86.1(2) were not met. The corporations involved were not resident in
the United States (subparagraph 86.1(2)(c)(i)); and, they were
not resident in a country with which Canada has a tax treaty (subparagraph 86.1(2)(d)(i)).
As well, the distribution was not prescribed within the meaning of subparagraph
86.1(2)(d)(iv); and, Tyco did not provide information to the Minister as
required by paragraph 86.1(e).
[22]
The appeal is dismissed with
costs.
Signed at Ottawa, Canada, this 21st day of October 2011.
“V.A. Miller”
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