Special Risks Holdings Inc. v. The Queen, 82 DTC 6229, [1982] CTC 224 (FCTD)

Walsh, J:—Two motions were brought on in this matter, one being plaintiff’s motion to delete paragraph 8 of its statement of claim, to amend paragraph 12 by substituting for “Hogg Robinson” the words “Hogg Robinson Group Ltd (herein “Hogg Robinson”) and to strike the portion of paragraph 3 of the defence alleging that plaintiff entered into a scheme with the hope and expectation of avoiding tax on the distribution of dividends, and the other being defendant’s motion calling upon plaintiff to furnish a list of documents and affidavit verifying the list pursuant to Rule 448. They were argued simultaneously as the same facts apply.

The proceedings are an appeal against assessments dated March 19, 1981, resulting from elections made by defendant in March 1978 and December 1978 pursuant to subsection 83(1) of the Income Tax Act to pay dividends out of its tax paid undistributed surplus on hand account (TPUS) and its 1971 capital surplus on hand account (CSOH). A number of intercorporate transactions and share subscriptions and changes were involved between plaintiff, Hogg Robinson Group Ltd, Richards, Melling & Co Ltd, and Melling Hogg Robinson Ltd, which need not be gone into here. As a result plaintiff paid a dividend of $185,000 on March 31, 1978, calculating that $181,604 of this was paid out of its TPUS account and $3,396 out of its CSOH account, and another dividend on December 29, 1978 of $1,346,231 out of its 1971 CSOH account. The Minister in the reassessment calculated that with respect to the March 13, 1978 election an amount of $129,334.35 was deemed to be paid from the TPUS account and $51,171.65 from the CSOH account, and assessed additional tax accordingly.

Plaintiff relies on sections 3, 83, 86, 89, 184 and 248 of the Act as applicable to the 1978 taxation year and on section 26 of the Income Tax Application Rules. Defendant relies on the same sections.

Defendant admits a number of paragraphs of plaintiff’s statement of claim including an admission in paragraph 3 of paragraphs 10, 11, 12, 14, 16 and 18 of it, but in the said paragraphs then goes on to say “the plaintiff entered into a scheme described in said paragraphs with the hope and expectation of avoiding tax on the distribution of dividends”.

In paragraph 4 defendant denies paragraphs 13, 15 and 17 adding that in assessing plaintiff the Minister assumed that plaintiff, in effect, controlled at all relevant times, Richards, Melling & Co Ltd. Paragraphs 5 and 8 supplement this contention that plaintiff was not dealing at arm’s length with the said company after it disposed of its shares, paragraph 8 concluding that the amount referred to in subparagraph 89(1 )(l)(ii) of the Act is deemed to be nil in accordance with the provisions of subparagraph 89(5)(a)(ii) of the Act. The parties agree that this is the issue between them.

Dealing first with plaintiff's motion to amend its statement of claim by deleting paragraph 8 thereof, said paragraph reads as follows:

8. In 1976, negotiations for the acquisition of RMC were instituted by Hogg Robinson Group Ltd (herein “Hogg Robinson”) a United Kingdom company which owned shares in the three (3) following subsidiaries: Hogg Robinson Gardner Mountain International Ltd, Growth Enterprises Ltd and Hogg Robinson Cappel (Canada) Ltd, a company incorporated under the laws of Canada.

Defendant states plaintiff wishes to delete it in order to avoid questioning in connection therewith. Defendant has already pleaded, ignoring and denying the said paragraph. Consent of the Court is therefore required for the amendment and will be given as the paragraph is merely narrative in nature and adds nothing to the issue. Consent is also given to the amendment sought to paragraph 12, which does not affect the issue.

Plaintiff objects strongly to the allegation in paragraph 3 of the defence that it entered into a scheme with the hope and expectation of avoiding tax on the distribution of dividends, pointing out that it is well established that a taxpayer may arrange his affairs in such a manner as to minimize or avoid taxation, and in the absence of sham is entitled to do so. There is no allegation of sham in this case and defendant admits that the various manoeuvres with the shares were carried out. Plaintiff does not deny that the objective was to avoid taxation on the dividend distributions but contends that it had a legal right to take the steps it did, and that defendant has no right to go into its motives for doing so. Defendant contends that it is the substance, not the form of the transactions that must be looked into, and that for a brief period of 11 days control passed out of the hands of plaintiff, before returning to it. Defendant has not pleades section 245 of the Act dealing with artificial transactions, section 246 respecting tax avoidance, or section 247 dealing with dividend stripping. I therefore find that the allegation in the latter part of paragraph 3 of the defence relating to plaintiff’s motives should be struck.

Turning now to defendant’s motion under Rule 448, a letter annexed to the accompanying affidavit indicates the documents sought.

Paragraph (a) seeks documents relating to negotiations between Hogg Robinson and plaintiff as to acquisition of Richards, Melling & Co Ltd, and paragraph (b) seeks documents as to the capital reorganization of that company. Details of the reorganization have already been produced, and any writings or memoranda of any discussions go to motive and are irrelevant. With respect to paragraphs (c) and (d) concerning the incorporation of Melling Hogg Robinson Ltd and the distribution of its shares between the Hogg Robinson Group and plaintiff, and the purchase of shares of Richards, Melling & Co by Melling Hogg Robinson, here again it appears that these documents have already been produced by plaintiff in its list filed pursuant to Rule 447, or have been admitted by defendants in the paragraphs of plaintiff’s statement of claim admitted by it. If the documentation is incomplete additional company records (as distinct from correspondence) can no doubt be obtained on discovery. Paragraph (e) asks for documents and agreements betweeh the Hogg Robinson Group and plaintiff respecting control of Melling Hogg Robinson Ltd. Here again this appears to go to motive, and in the absence of allegations of sham this information need not be provided. For these reasons defendant’s motion fails.

ORDER

Plaintiff’s motion to delete paragraph 8 of its statement of claim is granted and to amend paragraph 12 by substituting for “Hogg Robinson” the words “Hogg Robinson Group Ltd (herein “Hogg Robinson”). The words “but adds that plaintiff entered into a scheme described in said paragraphs with the hope and expectation of avoiding tax on the distribution of dividends” are struck from paragraph 3 of the defence. Plaintiff’s motion is therefore maintained with costs.

Defendant’s motion that plaintiff be ordered to produce documents pursuant to Rule 448 is dismissed with costs, said documents being irrelevant at this stage of proceedings.