Wong v. R., 99 DTC 458, [1999] 2 CTC 2173 (TCC)

Rowe D.J.T.C.:

Counsel agreed these four appeals would be heard on common evidence. The facts are applicable to all the appeals. The issue - common to all appeals - is whether subsection 15(1.1) of the Income Tax Act (the “Act”) applies to stock dividends received by the appellants in their 1989 and 1991 taxation years. A Book of Documents was filed as Exhibit A-1, Tabs 1-12 inclusive and any reference to a Tab number will be in relation to a document found in Exhibit A-l.

The Minister of National Revenue (the “Minister”)issued assessments of income tax against all appellants in February, 1994 and added the sum of $24,975 to each appellant’s income in each of the 1989 and 1991 taxation years. The Minister’s position was that each appellant in 1989 and in 199] had received stock dividends that should have been included in computing income in accordance with subsection 15(1.1) of the Act.

The corporation redeemed certain Class “C” preferred shares held by Lauren Lee, Andrew Lee and Jordan Lee and by virtue of subsection 84(3) of the Act the appellants reported income on the basis they were deemed to have received dividends of $14,985 in the 1989 taxation year, $9,990 in the 1990 taxation year and $9,900 in the 1991 taxation year. As a result, Lauren Lee, Andrew Lee and Jordan Lee take the position that the amounts were duly included in their income under subsection 82(1) of the Act as a taxable dividend for the respective taxation years and no reassessment is required. There was never any redemption of any Class “C” shares held by Judy Wong.

Hilary Pui Kay Lee testified he is a resident of Vancouver, British Columbia and is a physician. He is the husband of the appellant, Judy Wong, and the father of the appellants, Lauren - 12 - Jordan - 13 - and Andrew -

15. At Tab 1, he referred to a copy of the Certificate of Incorporation, dated November 14, 1985, pertaining to Dr. H. Pui Kay Lee Inc. and, at Tab 2, to the Memorandum and Articles. The corporation provided medical services, serving as a vehicle for his personal medical practice which was transferred to the corporation. Dr. Lee referred to a letter - dated March 21, 1986 - Tab 4 - sent to his solicitor (with a copy directed to him) by his accountant, Vanesse Ling. The letter also attached an Appendix setting forth the assets transferred by him to the corporation at fair market value. The corporation, in consideration for the transfer of assets, issued him a promissory note in the sum of $89,226 and 156 Class “C” preferred shares with a par value of $1 per share and redeemable and retractable at $1,000 per share. Later, he received 25 Class “B” shares along with all of the appellants. As required by the British Columbia College of Physicians and Surgeons, he held all of the Class “A” voting shares. The corporation also issued Class “C” shares to the appellants. Dr. Lee explained that, by 1989, he had acquired 45 Class “C” shares in addition to 156 of those shares he had been issued in 1985. Dr. Lee stated the value of his medical practice had not increased between 1985 and 1989. He was the sole Director of the corporation and referred to a resolution - Tab 5 - of the Directors of the corporation, dated December 5, 1989, wherein the corporation declared a dividend of one Class “C” preferred share for each Class “B” non-voting common share held. As a result, Dr. Lee, his wife, Judy Wong and their children, Andrew, Jordan and Lauren each received 25 Class “C” preferred shares. On October 14, 1991 a resolution - Tab 7 - was consented to in writing by the Directors of the corporation by which the corporation issued 25 Class “C” preferred shares - as a dividend - to Dr. Lee and to each of the appellants by virtue of each holding 25 Class “B” non-voting common shares. At this point, Dr. Lee stated he now held 251 Class “C” shares and his wife, Judy Wong, held 95 Class “C” shares. As the sole Director, he made all decisions whether or not dividends would be paid. He stated that, in the fall of 1985, he had discovered physicians in British Columbia were permitted to incorporate and to carry on a practice through the vehicle of a corporation. He understood there were some tax advantages to this mechanism and he went to the accounting firm of Price Waterhouse for some advice. Dr. Lee stated he spoke to John Robinson, Chartered Accountant, and to others, including Vanesse Ling, working in the firm under his supervision. A letter - Tab 3 - dated October 30, 1985 was sent to him by the accounting firm setting out details of incorporating a professional corporation and referring to potential advantages from the standpoint of reducing income tax by being able to defer tax on earnings retained in the corporation for investment or other purposes and to split income with family members. He decided to accept the advice and a solicitor was retained, on his behalf, by Price Waterhouse to proceed with the incorporation and related matters. In accordance with the mechanism established by the method of incorporation, he relied on accounting advice when the resolutions of December 5, 1989 - Tab 5 - and October 14, 1991 - Tab 7 - were passed in order to issue the dividend of one Class “C” preferred share for each Class “B” share held. He stated it was clear to him that the purpose of declaring the dividends in this manner was to “share income of the corporation with the shareholders”. He had received advice from Price Waterhouse that the stock dividend method allowed greater flexibility for redemption by shareholders in return for cash. As to whether he ever considered the effect these dividends would have on his interest in the corporation or on his capital gain position, Dr. Lee stated: “the thought never crossed my mind”. He explained the corporation would be of value only to another physician who was licensed to practise in British Columbia and the possibility of any sale would be “very, very remote”. The matter of the effect, if any, on the value of his own shares, as a result of issuing dividends in the particular manner after having received advice from his accountants, was never raised by him or with him at any time. On December 30, 1990, as a result of a resolution - Tab 6 - the company was authorized to redeem 25 of the issued and outstanding Class “C” preferred shares for the sum of $1,000 per share from each of Andrew Lee, Jordan Lee and Lauren Lee. On December 30, 1993, as a result of a resolution - Tab 8 - the company was authorized to redeem 25 of the issued and outstanding Class “C” preferred shares from each of Andrew Lee, Jordan Lee and Lauren Lee. Upon each redemption the relevant share certificates were cancelled. On behalf of the corporation, he issued a cheque dated December 15, 1989 - Exhibit A-2 - in the sum of $45,000 to Judy Wong in trust for Andrew, Jordan and Lauren representing payment for redemption of 15 Class “C” shares held by each child. Dr. Lee stated he prepared income tax returns for each of the children. The return of Andrew Lee - Tab 9 - indicates the sum of $18,790.67 was reported as the taxable amount of dividend received from a taxable Canadian corporation. The income tax returns for Jordan and Lauren were completed in the same manner to record the redemption. The resolution - Tab 8 - dated December 30, 1993 reflected that all Class “C” shares previously owned by the children had been redeemed by the corporation. The amount of $24,975 which was included in the income, by the Minister, of each appellant in respect of each of the 1989 and 1991 taxation years represented the total redemption amount of the Class “C” preferred shares issued to each child appellant (Judy Wong’s shares were never redeemed) in each of the taxation years under appeal less the amount of $25 which had been included in each appellant’s return of income for those years in respect of such stock dividends. Of the stock dividends received by the appellants in their 1989 and 1991 taxation years the following stock was redeemed on the following dates for the amounts specified:

15 Class “C” preferred shares were redeemed for $15,000 from each of Andrew Lee, Jordan Lee and Lauren Lee in 1989;

10 Class “C” preferred shares were redeemed for $10,000 from each of Andrew Lee, Jordan Lee and Lauren Lee in 1990;

10 Class “C” preferred shares were redeemed for $10,000 from each of Andrew Lee, Jordan Lee and Lauren Lee in 1991;

15 Class “C” shares were redeemed for $15,000 from each of Andrew Lee, Jordan Lee and Lauren Lee in 1993,

Dr. Lee stated he would discuss his year-end financial position with his accountants and then receive advice from them on the appropriate dividend to be issued by the corporation.

In cross-examination, Dr. Lee stated he relied on the advice contained in the letter dated October 30, 1985 - Tab 3 - received from Vanesse Ling of Price Waterhouse with a view to splitting income with family members and - to a lesser degree - deferring some tax and taking advantage of the lower tax rate for small business corporations. In 1985, his income from his medical practice was approximately $175,000 and it remained at about the same level thereafter. He drew out $60,000 a year in salary and left the remainder in the corporation since that was the only way to benefit from the lower tax rate applying to corporations as opposed to individuals. Subsequent to incorporation, he intended to use the corporation to pay dividends to holders of Class “B” shares and then to redeem them on behalf of his children based on advice from his accountants. Relying on advice from that source, his wife, Judy Wong, who earned a salary from the corporation, chose not to redeem her Class “C” shares. He understood that, as a physician, he had to hold all the voting shares in the professional corporation but he was not as clear on the matter of Class “B” and Class “C” shares except he knew these share classes could be used to facilitate splitting of income. He understood that the corporation would pay dividends only on Class “B” shares. He was unable to explain the reason for having been issued the specific amount of 1,000 Class “A” shares but he knew he had to own all of the voting shares. He stated he was not aware he held over 90% of the issued shares in the corporation and the extent of his ownership was never discussed with any of the accountants at Price Waterhouse. The income of the corporation was earned as a result of him carrying on a medical practice. His aim was to split income with family members and to take advantage of the fact they were in a lower tax bracket. He never considered any effect on his own shareholding position as a result of issuing dividends to his wife and children. At the end of each fiscal year, tax advice became more relevant and he understood the advice he had received from Price Waterhouse and used the vehicle of issuing Class “C” shares as a means by which to pay dividends on Class “B” common shares.

John Robinson testified he is a Chartered Accountant practising at Price Waterhouse Coopers, successor to the firm of Price Waterhouse. In 1985, he was working as a supervisor of tax in the Burnaby office and met Dr. Lee. Medical doctors had recently been granted permission to carry on practice through a professional corporation and Dr. Lee was seeking advice about various aspects of incorporation. At Tab 3, Robinson identified the letter dated October 30, 1985 sent to Dr. Lee as a letter generated by the Price Waterhouse office as a generic letter offering advice to doctors and dentists. Robinson stated he handled tax matters arising from any incorporation by their clients. The letter dated March 21, 1986 - Tab 4 - signed by Vanesse Ling and directed to Frank Baily, Barrister and Solicitor contained advice which was commonly offered to physicians and dentists. The assets of Dr. Lee were transferred to the corporation at fair market value and in a manner which would avoid incurring any additional tax. Dr. Lee received a promissory note and 156 Class “C” preferred shares at $1.00 per share redeemable at $1,000 per share which then accounted for the total value of his medical practice. The amount of $12,000 for goodwill was based on certain factors but was, basically, an estimate of value. The Class “B” shares were worth $1.00 each. Robinson stated that in 1985, the Tax Court of Canada had issued a decision in the McClurg case (McClurg v. Minister of National Revenue (1984), 84 D.T.C. 1379 (T.C.C.)) in which it had been held the taxpayer had conferred a benefit on his wife by issuing a cash dividend on non-voting shares. The decision was appealed and, while waiting for it to be heard, the firm of Price Waterhouse considered the most conservative method by which the result in McClurg could be avoided was to use a “two- step” process. This method was premised on not paying cash dividends but, instead, to issue stock as a dividend which would be redeemed later. One of the advantages of incorporating the professional practice was that the physician could draw out sufficient funds to support a lifestyle and retain surplus funds in the corporation. The precise number of shares to be declared to Dr. Lee’s family members by way of dividend - to be redeemed later - was probably not the subject of specific advice from Price Waterhouse but Dr. Lee was provided with a general overview of the procedure. Robinson stated the only purpose of setting up the payment of dividends in this fashion was to avoid the effect of the Tax Court of Canada decision in McClurg . He stated there was never any discussion with Dr. Lee on the subject of capital gains on shares and no conversations about the shares of the corporation ever being sold to anyone. Robinson estimated he had acted for 20 or 30 physicians and none had ever sold shares in a professional corporation that was used to carry on a medical practice. There was never any consideration of the matter whether issuance of dividends would alter Dr. Lee’s interest in the corporation. The issue as to whether or not subsection 15(1.1) of the Act might apply was raised by an auditor from Revenue Canada. As a result, Robinson stated he spoke to other accountants in his firm who conceded the auditor may have a point. However, it had never been considered at any time in the course of offering tax advice to Dr. Lee which had included offering up a suggested effective range of dividend to any shareholder without any additional income, with the maximum at $20,000. After the reassessments, the appellants whose shares had been redeemed and the dividends declared on income tax returns would be worse off than before because the Minister’s position was that the operation of subsection 15(1.1) of the Act did not permit recognition of the income which had been reported earlier by way of taxable dividend.

In cross-examination, John Robinson repeated the primary objective of incorporation by Dr. Lee was to reduce the amount of tax payable. The letter - Tab 3 - referred only to income tax advantages - by deferral and/or income splitting - by means of issuing dividends to minor children who would be taxed at a lower rate. Dr. Lee received a salary of $60,000 per year from the corporation. Any payment of dividends had to come from retained earnings of the corporation after paying salary to Dr. Lee and the amount of corporation tax owing for that fiscal year. The corporation owned a medical practice - carried on by Dr. Lee - and had other assets which could enure to the benefit of the shareholders. Since 1,025 out of a total of 1,125 shares issued by the corporation were owned by Dr. Lee, counsel for the respondent suggested Dr. Lee would be entitled to 91.11% of the retained earnings of the corporation but had actually received only 20% of that amount by way of dividends issued on his Class “B” shares in the form of Class “C” shares and then redeeming the latter shares. Robinson did not quarrel with the calculations offered by counsel and agreed that payment of dividends on any class of share reduces the value available to par- ticipating shareholders. Similarly, if a corporation is wound up, then the Articles of Association dictate the manner in which that will be undertaken and, on winding up, Dr. Lee would be entitled to 91.11% of the net assets. Robinson agreed that the payment of dividends on the Class “B” shares would affect the amount of money in the corporation which would otherwise be available to Dr. Lee as the sole shareholder of Class “A” voting shares. Robinson acknowledged that only the Lee children received cash from the corporation upon redeeming their Class “C” shares because they did not have any other significant amounts of income, if any, and would be taxed at a lesser rate. Pursuant to the Articles of Association - Tab 2 - by virtue of subparagraph 27.1(c) - the declaration of dividend was at the sole discretion of Dr. Lee.

Counsel for the appellants submitted the legislative purpose of subsection 15(1.1) of the Act - found in the Technical Notes of the Department of Finance published when this section was introduced - indicates that it was an anti-avoidance provision directed against the use of stock dividends to effect a change in the interests of significant shareholders in a corporation and thereby shift the capital gain on a subsequent sale of shares from one person to another. This amendment was consequential on the introduction of the new lifetime capital gains exemption. Counsel submitted the evidence clearly established that none of the purposes of payment of stock dividends in the within appeals was to significantly alter the value of the interest of any specified shareholder in the corporation and that the purpose of the transactions was adequately explained by the evidence adduced on behalf of the appellants.

Counsel for the respondent submitted there was no need to look beyond the actual wording of subsection 15( 1.1 ) of the Act as there was no ambiguity requiring referral to external sources. Counsel pointed out Dr. Lee was a specified shareholder for purposes of the subsection and, while income splitting with members of the Lee family may have been a motivating factor in setting up the method of payment of stock dividends, the mechanism chosen inherently shifted the value in the corporation from Dr. Lee to his wife and children. In counsel’s submission, it was an inescapable result that the income-splitting mechanism would significantly alter the value of Dr. Lee’s interest in the corporation and, therefore, the procedure to accomplish the income-splitting may reasonably be considered as one of the purposes of paying the dividends.

The relevant provision of the Act is subsection 15(1.1) as follows:

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.

The Federal Court of Appeal dealt with this subsection in the case of Wu v. R. (1997), 98 D.T.C. 6004 (Fed. C.A.). The decision of Strayer J.A. (orally for the Court) is brief and I quote the entire judgment as follows:

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 consid- ered” 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 H.M. v. Placer Dome Inc.}, [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 veiw, 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.

The appeal was from the decision of The Honourable Judge Sobier, Tax Court of Canada, unreported, (Wu v. R. 96-7(IT)I ), [reported, [1996] 3 C.T.C. 2879 (T.C.C.)]. In the course of his analysis, at p. 4 of his judgment Judge Sobier stated:

Subsection 15(1.1) of the Act states:

(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.

It is the redemption price which has been added to Mr. Wu’s income.

An examination of subsection 15(1.1) shows that the appropriate language used in determining whether the subsection applies reads as follows:

...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 ...

This language differs somewhat from what is contained in subsection 55(2) of the Act which subsection was dealt with by Judge Bell of this Court in the unreported case of Placer Dome Inc. v. The Queen. The relevant portion of subsection 55(2) (edited by me) reads as follows:

Where a corporation resident in Canada has 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 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 ...

In Placer Dome, the question was whether one of the purposes of the transaction was to effect a significant reduction in the capital gain but for the dividend. At page 12 of his reasons, Judge Bell said:

The next question is whether one of the purposes of the transactions (assuming a transaction can have a purpose) was to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized by the Appellant on the sale at fair market value of the shares of Falconbridge and McIntyre. It is my conclusion that neither the Appellant nor Falconbridge had such purpose.

Respondent’s counsel submitted that under subsection 55(2) the Appellant need only have a purpose, not a main purpose, of effecting a significant capital gain reduction. He referred to definitions of “purpose” such as

from Black’s Law Dictionary

That which one sets before him to accomplish or attain; an end, intention, or aim, object, plan, project. Term is synonymous with ends sought, an object to be attained, an intention etc.

and

from Shorter Oxford English Dictionary

I. The object which one has in view 2. The action or fact of intending or meaning to do something: mention, resolution, determination.

He then submitted that a person is presumed to intend the natural consequences of his actions and that in the Appellant’s case one of the consequences was the significant reduction of capital gain. This approach seems to employ hindsight. The receipt of a dividend which may be free of tax does not mean that one of the purposes of the transactions was the payment or receipt of a tax free dividend. That approach looks at the transactions completed rather than examining all evidence in order to determine whether that particular result was an objective of any party to the transactions.

In my view the addition of the words “it may reasonably be considered” in subsection 15(1.1) does not detract from the validity of examining the definition of “purpose” as it pertains to the intention, end, aim, object, plan, project or goal to be accomplished or achieved. The additional words make it clear that an objective standard is to be applied to the evidence offered up by a taxpayer and fanciful, outrageous or otherwise unreliable testimony on the issue of purpose does not have to be accepted at face value any more than any other portion of testimony or piece of evidence even though it is forcefully expressed in a manner consistent with a deeply-held belief. It is apparent the standard to be applied against the taxpayer is much more stringent than where the language of the legislation used the word, “desired” as in subsection 56(2) of the Act as considered by the Federal Court of Appeal in Ascot Enterprises Ltd. v. R. (1995), [1996] 1 C.T.C. 384 (Fed. C.A.). Using the latter report, I quote from the judgment of Décary, J.A. - writing for the Court - at p. 388 as follows:

Once it is recognized that the purpose of subsection 56(2), as summed up by Dickson C.J. in McClurg v. Canada, [1990] 3 S.C.R. 1020, [1991] 1 C.T.C. 169, 91 D.T.C. 5001, at pages 1052-53 (C.T.C. 184, D.T.C. 5012), is to:

...ensure that payments which otherwise would have been received by the taxpayer are not diverted to a third party as an anti-avoidance technique...

and that one should be careful when interpreting that provision not to

...violate fundamental principles of corporate law and the realities of commercial practice and... “overshoot" the legislative purpose of the section.

It becomes evident that the “desire" to confer a benefit is a key element of the provision. On a plain reading, the section will not be applicable where there exists no intention by the taxpayer to avoid receipt of funds in his hands by arranging payments to be made without adequate consideration to third persons.

The use of the word “desire" in the Income Tax Act is exceptional. Its use in subsection 56(2) introduces a requirement of purpose. It carries a step further the requirement that the taxpayer participate in a leading way (“pursuant to the direction of") or in a more passive way (“with the concurrence of”) in the decision to make the payment or transfer of property. This Court, in Smith v. Minister of National Revenue, [1993] 2 C.T.C. 257, 93 D.T.C. 5351 at page 261, (D.T.C. 5355) (F.C.A.) referred to “the taxpayer’s motive...". It is indeed remarkable that in the other provisions where the phrase “as a benefit that the taxpayer desired to have conferred" is found, i.e. in paragraphs 51(2)(c), 85( 1 )(e.2) and 86(2)(b), it is preceded by the words “it is reasonable to regard any part [or portion] of such excess as ...”, which indicates, in my view, that the test to be applied under these paragraphs is different from, and less subjective than, that applicable under subsection 56(2).

The Court has, therefore, to direct its attention to what it is that the taxpayer wanted to achieve. The test is subjective, but as always when assessing a subjective state of mind after the fact one may resort to inferences. It is not what the taxpayer says now but what he did then that counts. As noted in Smith, at page 262 (D.T.C. 5356), a judge most certainly can conclude that, on a balance of probabilities, a taxpayer has not disproved the assumptions upon which the Minister assessed him when the taxpayer relied solely on his ignorance. It is up to the taxpayer to explain why the transactions were made and why they have been handled as they were. There will be cases — some were enumerated in Smith, at page 261 (D.T.C. 5355) — where the nature of the benefit conferred or the circumstances of a transaction will speak for themselves and be such as to render obvious the purpose of the taxpayer.

Turning to the evidence before me, it is clear, Dr. Lee was extremely interested in obtaining advice about using a professional corporation to carry on the practice of medicine. The permission to use the vehicle of the professional corporation was newly granted in 1985 and he sought advice from the accounting firm of Price Waterhouse. The advice he received was consistent with what he wanted to achieve, namely, the ability to defer income under certain circumstances and, most important, to be in a position whereby he could split his income with his wife and children to reduce the overall amount of tax paid on the earnings derived from his efforts as a medical practitioner. By using the professional corporation, he could draw out a salary of approximately $60,000 per year and retain earnings in the corporation after paying the appropriate amount of corporate income tax at the lower rate applying to corporations. The particular method chosen to issue dividends was in response to the judgment of the Tax Court of Canada in McClurg , (supra). While the case was under appeal by the taxpayer (allowed by the Federal Court - Trial Division — McClurg v. Minister of National Revenue (1986), 86 D.T.C. 6128 (Fed. T.D.) - and upheld by the Federal Court of Appeal — (1988), 88 D.T.C. 6047 (Fed. C.A.)), the advice given to Dr. Lee and acted on by him was to utilize the method of paying dividends on Class “B” shares by issuing Class “C” shares redeemable for the sum of $1,000 per share. When the Class “C” shares issued - as dividends - to the children were redeemed by the corporation, the amounts received by the children were reported on each of their income tax returns pursuant to the provisions of subsection 82(1) of the Act. Dr. Lee testified he never considered any effect these dividends paid to the children would have on his interest in the corporation or on his capital gain position. He stated “the thought never crossed my mind”. It is obvious it never was considered by John Robinson, C.A. who was the person offering income tax advice to Dr. Lee. In fact, it was not until the auditor from Revenue Canada raised the matter of potential applicability of subsection 15(1.1) of the Act to the particular facts of the Wong and Lee income tax returns that Robinson consulted with colleagues in his firm to examine the matter further. Un- til that time, I accept that this effect - even as a downstream or potential consequence - was never contemplated by either Dr. Lee or any of his professional advisors. From the standpoint of Dr. Lee, his corporation was a professional corporation specially permitted by law in British Columbia and, more important, finally approved by the British Columbia College of Physicians and Surgeons as a business vehicle suitable for carrying on a medical practice under certain conditions. One of the conditions was that Dr. Lee, in his capacity as a licensed medical practitioner, had to hold all of the voting shares in the corporation. Pursuant to subparagraph 27.1(b) of the Articles of Association of the corporation, the Class “B” non-voting common shares and the Class “C” preferred shares “may only be held by a Member of the College of Physicians and Surgeons holding the Class “A” common shares or the Member’s spouse or child”. Dr. Lee considered any possibility of selling the corporation to any other practising physician as being extremely remote. Prior to being permitted to practise medicine by means of the professional corporation, Dr. Lee’s annual income was about $175,000 and, for the most part, would be taxable. Following incorporation, the revenue from the medical practice remained consistent but he was able to draw only $60,000 per year from the corporation and then take advantages accruing from retained earnings in the corporation - which paid tax at a lower rate than an individual - and then to split income with his wife and children to lower the overall tax extracted on the earned income of the corporation. His wife, Judy Wong, worked for the corporation in the medical practice and earned about $24,000 per year.

It is obvious that the effect of the manner of issuing the stock dividends in the form of Class “C” preferred shares redeemable at $1,000 per share was to significantly alter the interest of Dr. Lee in the corporation. Whether or not he or his advisors ever turned their minds to that aspect of their taxplanning procedures, that was the result.

The Minister wishes that subsection 15(1.1) read this way:

...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 effects of that payment, notwithstanding the purpose for which it was made, was to significantly alter the value of the interest of any specified shareholder of the corporation ... shall be included in computing the income of that person for the year.

Although the language of the desired provision - set forth in italics - has not been approved by Parliament, Counsel for the Respondent submitted I could interpret it as though it had been drafted in that manner on the basis that purpose can be divined by examining the inevitable result. On the evi- dence before me, there is no reason to reject the testimony of Dr. Lee explaining the reasons for setting up the corporation and - later - for using the particular method of paying stock dividends to his wife and children. The testimony of John Robinson, Dr. Lee’s accountant, supports the proposition that the sole purpose of the incorporation and the payment of stock dividends in the manner chosen was to split income with the family members so as to reduce the amount of income tax otherwise payable and to take advantage of a lower corporate tax rate on retained earnings. Because the ability to use a professional corporation to carry on a medical practice in British Columbia was granted in 1985, after Dr. Lee had been in practice for some years, it is reasonable to accept that the narrow structure of the professional corporation would not lead anyone to consider it as having any marketable value to any outsider.

I do not find that one of the purposes of the payment of stock dividends was to significantly alter the value of the interest of Dr. Lee in the company. To hold otherwise on the evidence would be to embrace the procedures of certain tribunals in medieval times which were prone to convict persons of the specific crime of “having unlawfully imagined the death of Our Sovereign” despite vociferous denials - under oath - by those unfortunate accused coupled with heartfelt affirmations of constant, undying fealty. Unmoved, and despite any other evidence, the verdicts were based on the supposition that those various and sundry felons must have - at some point in their miserable lives - contemplated, however fleeting, the possibility, however remote, of the Sovereign’s demise. The Minister continues to see tax avoidance nearly everywhere in various shapes and forms - all deliberate and crafty disguises - and wishes the Courts would be more open to embracing non-statutory anti-avoidance doctrines even in the face of clear language in the particular legislation under consideration. That crusade is based, apparently, on the vague concept that, sometimes, a particular result “just isn’t fair” or that there could never have been any real intent by Parliament to allow any “wiggle room” when enacting a particular provision.

Counsel for the appellant and counsel for the respondent made helpful submissions to me on what their positions would be in the event I found subsection 15(1.1) of the Act applied and it would have required further analysis as to whether recognition could be extended to the income already reported by the Lee children who had received payment for redemption of the Class “C” preferred shares. The corporation did not redeem any of the Class “C” preferred shares issued to Judy Wong. I do not see any reason to consider any alternative result in light of the clear finding I have made and the facts upon which the alternative submissions are based are evident and need no specific fact-finding by me to assist any appellate court should it be determined that I am incorrect in holding subsection 15(1.1) of the Act is not applicable to the within appeals.

The appeal of each appellant is hereby allowed with one set of costs on a party-party basis. I find the Minister should not have included any amounts into the income of any appellant for either the 1989 or 1991 taxation year because subsection 15(1.1) of the Act does not apply and the assessments against each appellant are hereby vacated.

Appeals allowed.