Citation: 2013 FCA 110
MAJESTY THE QUEEN
ROBERT G. MACDONALD
Crown appeals the April 17, 2012 judgment of the Tax Court of Canada (2012 TCC
123) in which the judge allowed the appeal of Dr. Robert G. MacDonald from a
reassessment made pursuant to the Income Tax Act, R.S.C. 1985, c. 1 (5th
Supp) for the 2002 tax year. The principal issue in this case is whether
subsection 84(2) of the Income Tax Act applies to deem Dr. MacDonald to
have received a dividend of approximately $500,000 as a result of transactions
relating to the winding up of his corporation.
the reasons that follow, I would allow the Crown’s appeal.
MacDonald is a medical doctor who practised in New Brunswick until 2002, when
he moved to the United States with the intention of establishing his residence
there. He conducted his practise in New Brunswick under the auspices of Robert
G. MacDonald Professional Corporation Ltd. (“PC”), of which he was the sole
shareholder, director, and officer.
contemplation of his move, and on the advice of his accountant and counsel, Dr.
MacDonald initiated a series of transactions to dismantle PC. As the judge
states at paragraph 23 of his reasons, “a plan was devised whereby assets of PC
would be liquidated and its shares would be sold to [Dr. MacDonald’s]
brother-in-law, J.S.”. The plan was set out in a partial Agreed Statement of
Facts filed in the Tax Court, and reproduced at paragraph 24 of the judge’s
reasons (footnotes omitted):
a. 601798 NB Ltd. (“601
Ltd.”) was incorporated by J.S. under the laws of New Brunswick on June 20,
2002. It acquired the shares in PC on June 25, 2002 from J.S. after J.S. had
acquired them personally on that same day. The transactions are well documented
and each transaction that occurred on June 25, 2002 identifies the time of
execution. The transactions are thereby readily identifiable as being in a
b. The purchase by J.S.
of the PC shares was paid by delivery of a promissory note by J.S. to [Dr.
MacDonald] (the “J.S. note”). The purchase price was set out as a formula that
gave rise to a total consideration of $525,068.
c. J.S. transferred the
PC shares to 601 Ltd. in consideration of receiving shares in 601 Ltd. and a
note payable by 601 Ltd. to J.S. in the amount of $525,068 (the “601 Ltd.
d. PC declared two
dividends on June 25, 2002, one in the amount of $500,000 and the other in the
amount of $10,000. On the same day, PC issued two cheques to 601 Ltd., as the
PC shareholder at the time the dividend was declared, in partial payment of the
$500,000 dividend. One was for $320,000 and the other was for $159,842. 601
Ltd. in turn endorsed the cheques to J.S. as partial payment of the 601 Ltd.
note and J.S. in turn endorsed the cheques to [Dr. MacDonald] as partial
payment of the J.S. note. [Dr. MacDonald] wrote a cheque to PC in the amount of
an unrelated indebtedness to it, namely, $159,842. The cheques for $159,842
were off-setting and booked as such although never cashed. The cheque for
$320,000 now held by [Dr. MacDonald] was never cashed or presented for payment
at a bank but was booked as a payable to [Dr. MacDonald]. All such events
occurred on June 25, 2002.
e. As noted, PC changed
its name to 050509 N.B. Ltd. on June 26, 2002. This was consistent with PC
ceasing to be a professional corporation due to [Dr. MacDonald] no longer being
a shareholder of the company and his ceasing to practise medicine in New
Brunswick. For the most part, I will continue to refer to this company as “PC”.
f. PC declared a final
dividend on September 1, 2002 to 601 Ltd. equal to the amount still owing on
the 601 Ltd. note, namely $25,068. This amount plus the unpaid portion of the
dividend declared on June 25, 2002 was, as an acknowledged indebtedness to
J.S., booked by PC, on the direction of J.S., as an indebtedness to [Dr.
MacDonald]. Such direction was in satisfaction of J.S.’s remaining obligation
under the J.S. note.
g. On July 15, 2002, PC
by cheque paid 601 Ltd. the amount of $10,000. The cheque was deposited on
August 27, 2002.
h. PC prepared Articles
of Dissolution on July 31, 2002 and it was officially dissolved on February 4,
judge held that the share sale was carried out “by way of a non-arm’s length
series of transactions designed to give [Dr. MacDonald] access to essentially
all of the assets of PC” (reasons, at paragraph 8), and that this series of
transactions was effected during the course of the winding up of PC’s business
(reasons, at paragraphs 84-85). In the months leading up to June 25, 2002, Dr.
MacDonald “caused PC to liquidate its investments” (reasons, at paragraph 24, note
10), and, at all times, 601 Ltd. was an inactive holding company (reasons, at paragraph
24, note 12).
filing his income tax return for 2002, Dr. MacDonald treated the amount of
$525,068 as proceeds of disposition of his PC shares, resulting in a capital
gain. That capital gain was offset with capital losses realized in 2002 and
prior years. The Minister reassessed on the basis that subsection 84(2) of the Income
Tax Act applied. The result was that the $525,068, less the $101 paid-up
capital of the shares sold, was taxed as a dividend. Dr. MacDonald successfully
appealed the reassessment to the Tax Court.
II. THE TAX COURT’S
Tax Court considered two primary issues: (i) whether subsection 84(2) applied
to the transactions; and (ii) whether, in the alternative, the general
anti-avoidance rule (GAAR) in section 245 of the Income Tax Act applied
to achieve the same result.
84(2) reads as follows:
84. (2) Where funds
or property of a corporation resident in Canada have at any time after March
31, 1977 been distributed or otherwise appropriated in any manner whatever to
or for the benefit of the shareholders of any class of shares in its capital
stock, on the winding-up, discontinuance or reorganization of its business,
the corporation shall be deemed to have paid at that time a dividend on the
shares of that class equal to the amount, if any, by which
amount or value of the funds or property distributed or appropriated, as the
case may be,
amount, if any, by which the paid-up capital in respect of the shares of that
class is reduced on the distribution or appropriation, as the case may be,
and a dividend shall be deemed
to have been received at that time by each person who held any of the issued
shares at that time equal to that proportion of the amount of the excess that
the number of the shares of that class held by the person immediately before
that time is of the number of the issued shares of that class outstanding
immediately before that time.
84. (2) Lorsque des
fonds ou des biens d’une société résidant au Canada ont, à un moment donné
après le 31 mars 1977, été distribués ou autrement attribués, de quelque
façon que ce soit, aux actionnaires ou au profit des actionnaires de tout
catégorie d’actions de son capital-actions, lors de la liquidation, de la
cessation de l’exploitation ou de la réorganisation de son entreprise, la
société est réputée avoir versé au moment donné un dividende sur les actions
de cette catégorie, égal à l’excédent éventuel du montant ou de la valeur
visés à l’alinéa a) sur le montant visé à l’alinéa b):
a) le montant ou la
valeur des fonds ou des biens distribués ou attribués, selon le cas;
b) le montant éventuel
de la réduction, lors de la distribution ou de l’attribution, selon le cas,
du capital versé relatif aux actions de cette catégorie;
chacune des personnes qui détenaient au moment
donné une ou plusieurs des actions émises est réputée avoir reçu à ce moment
un dividende égal à la fraction de l’excédent représentée par le rapport
existant entre le nombre d’actions de cette catégorie qu’elle détenait
immédiatement avant ce moment et le nombre d’actions émises de cette
catégorie qui étaient en circulation immédiatement avant ce moment.
judge held that subsection 84(2) of the Income Tax Act did not apply to
Dr. MacDonald’s transactions because he received the funds in question in his
capacity as creditor, rather than as shareholder. He narrowly construed the
provision, concluding that its scope “was not intended to cover payments
arising as consideration on a share sale” (at paragraph 49). He reasoned that
the provision “ensures that it is only a shareholder at the time of the
distribution or appropriation who can be deemed to be the recipient of a
dividend” (at paragraph 50) and that “[t]he express language of ‘in any manner
whatever’ does not redirect to whom the dividend was paid” (at paragraph 48).
judge considered McNichol v. Canada,  T.C.J. No. 5 and RMM
Canadian Enterprises Inc. and Equilease Corporation v. Her Majesty the Queen,
97 D.T.C. 302, and adopted what he termed the “McNichol approach,” which
looks to section 245 when subsection 84(2) does not apply on a strict
construction of its language (reasons, at paragraph 59).
judge held that, while there was an avoidance transaction that gave rise to a
tax benefit, this avoidance did not constitute an abuse of the Income Tax
issues are raised in this appeal:
the judge erred in law in finding that subsection 84(2) of the Income Tax
Act does not apply on the facts of this case; and
whether the judge erred in law in finding that the GAAR does not apply on the
facts of this case.
the reasons that follow, I have concluded that the judge erred in finding that
subsection 84(2) does not apply. Having reached that conclusion, it is not
necessary to comment on the other issue, and I decline to do so.
IV. STANDARD OF
stated at paragraph 44 of Canada Trustco Mortgage
Co. v. Canada, 2005 SCC 54, “[t]he textual, contextual and
purposive interpretation of specific provisions of the Income Tax Act is
essentially a question of law but the application of these provisions to the
facts of a case is necessarily fact-intensive.” Whether the judge properly
interpreted subsection 84(2) of the Income Tax Act is thus a question of
law, to be reviewed for correctness (Housen v. Nikolaisen, 2002 SCC 33
at paragraph 8). If properly interpreted, the judge’s application of the
provision to the facts ought to be shown deference; if improperly interpreted,
the judge’s application to the facts may amount to an error of law, in which
case it should be shown no deference (Housen at paras. 26-37).
84(2) of the Income Tax Act
is “no doubt today that all statutes, including the Income Tax Act must
be interpreted in a textual, contextual and purposive way. However, the
particularity and detail of many tax provisions have often led to an emphasis
on textual interpretation” (Canada Trustco at
paragraph 11). This case turns on the interpretation of the opening words of
subsection 84(2). The entire section is quoted above, but for ease of
reference, the opening words are reproduced here (my underlining):
84. (2) Where funds or property
of a corporation resident in Canada have … been distributed or otherwise
appropriated in any manner whatever to or for the benefit of the
shareholders of any class of shares in its capital stock, on the winding-up,
discontinuance or reorganization of its business, the corporation shall be
deemed to have paid at that time a dividend on the shares of that class equal
84. (2) Lorsque des fonds ou des biens d’une
société résidant au Canada ont … été distribués ou autrement attribués, de
quelque façon que ce soit, aux actionnaires ou au profit des actionnaires
de tout catégorie d’actions de son capital-actions, lors de la liquidation,
de la cessation de l’exploitation ou de la réorganisation de son entreprise,
la société est réputée avoir versé au moment donné un dividende sur les
actions de cette catégorie, égal à […].
Crown contends that the judge erred in holding that subsection 84(2) does not
apply, arguing at paragraph 30 of its memorandum that his conclusion “defies
the wording of s. 84(2) which looks to the how and why and in ‘whatever manner’
the corporate funds find their way into the respondent’s hands on the
dissolution or wind-up of his corporation and is inconsistent with the
jurisprudence dealing with the provision.”
plain reading of the text reveals several elements that are necessary for its
application: (1) a Canadian resident corporation that is (2) winding-up,
discontinuing or reorganizing; (3) a distribution or appropriation of the
corporation’s funds or property in any manner whatever; (4) to or for the
benefit of its shareholders.
facts that are potentially relevant to the application of subsection 84(2) are
undisputed. First, PC was a Canadian resident corporation. Second, the series
of transactions described above was intended to achieve the termination of PC,
and did so. Third, at the commencement of the series of transactions, Dr.
MacDonald was the sole shareholder of PC, which had cash or near cash of
approximately $500,000. Fourth, by the end of the series of transactions, the
money had become the property of Dr. MacDonald, except for the $10,000 retained
by J.S. The question is whether, because of the manner in which the money moved
from PC to Dr. MacDonald, his receipt of that money falls within the scope of
judge focused his analysis on the legal character of what Dr. MacDonald
received in the course of the series of transactions described above. I
paraphrase as follows his summary of the legal nature and consequences of the
transactions: When J.S. purchased the PC shares from Dr. MacDonald, J.S. became
the only shareholder of PC but he owed Dr. MacDonald $525,068 for the purchase
price. When 601 Ltd. later purchased the PC shares from J.S., 601 Ltd. became
the only shareholder of PC, but it owed J.S. $525,068 for the purchase price.
When PC made a distribution of its corporate assets by way of dividend, only
601 Ltd. was entitled to receive the distribution. Looking through the various
exchanges of cheques, what Dr. MacDonald finally received, as a matter of law,
was not a corporate distribution at all (much less a corporate distribution
from PC), but an amount paid to discharge a debt that was owed to him. The
judge reasoned that because Dr. MacDonald did not receive a corporate
distribution or appropriation from PC, subsection 84(2) had no application.
Crown argues that, in determining whether subsection 84(2) applies, the focus
should be on the words “in any manner whatever”. The money that was originally
the property of PC, in fact, ended up in the hands of Dr. MacDonald by means of
the series of transactions described above, which were designed to achieve that
my view, a textual, contextual and purposive analysis of subsection 84(2) leads
the Court to look to: (i) who initiated the winding-up, discontinuance or
reorganization of the business; (ii) who received the funds or property of the
corporation at the end of that winding-up, discontinuance or reorganization;
and (iii) the circumstances in which the purported distributions took place.
This approach is consistent with the jurisprudence interpreting this provision
and provides the consistency of approach with respect to subsection 84(2)
spoken to by both parties to this appeal.
cases interpreting subsection 84(2) are instructive. In Merritt v. Canada (Minister of National Revenue),  Ex. C.R. 175, rev’d on other
grounds  2 D.L.R. 465, for example, the appellant was a shareholder of
Securities Loan & Savings Company (“the Security Company”). As part of its
winding up, the Security Company sold its assets and business as a going
concern to Premier Trust Company, in exchange for which the shareholders of the
Security Company were to receive either shares in Premier Trust Company or
cash. The appellant opted to receive a combination of cash and shares in the
Trust Company, and the Exchequer Court upheld the Minister’s assessment that
her portion of the undistributed surplus of the Security Company fell within
the scope of the predecessor to subsection 84(2), which was similarly worded
(subsection 19(1) of the War Income Tax Act, R.S.C., 1927, c. 97, as
amended by 1 Edw. VIII, c. 38, s. 11), and was thus taxable as a dividend. It
is noteworthy that in so holding, the Exchequer Court looked at the
circumstances of the transactions on the winding-up of the Security Company and
held that “[i]t is immaterial … that the consideration received by the
appellant for her shares happened to reach her directly from the Premier
Company [the third party facilitator] and not through the medium of the
Security Company” (at paragraph 7).
facts in Smythe v. Canada (Minister of National Revenue), 
S.C.R. 64 were similar to those in Merritt in that the “old company”
sold its assets to a new company, in consideration of which the shareholders of
the old company received shares in the new company and debentures. The complex
series of transactions in that case also involved two intermediary
“dividend-stripping” companies that bought the shares of the old company for
cash and otherwise facilitated the transactions for a fee. The issue was the
application of another similarly worded predecessor to subsection 84(2) of the Income
Tax Act (subsection 81(1) of the Income Tax Act, R.S.C. 1952, c.
Supreme Court of Canada’s main concern with the
transactions in that case was that, “when the old company transferred its
assets to the new company, the total consideration should have been received by
the old company” rather than by the shareholders of the old company (at page 72).
In holding that the predecessor to subsection 84(2) “clearly applied”, the
Court again looked at the circumstances of the transactions at the end of the
winding-up to conclude that the transactions were artificial and that their
sole purpose was “to distribute or appropriate to the shareholders the
‘undistributed income on hand’ of the old company” (at page 69).
to the judge’s assertions, McNichol is readily distinguishable from the
case at hand. In McNichol, the shareholders of Bec sold their
shares to Beformac, a holding company, for less than their book value. To fund
the purchase, Beformac obtained a loan from a bank, secured against the amount
of money Bec held in its account (which was, incidentally, its only asset). Bec
and Beformac amalgamated five days after the share sale, and the loan from the
bank was repaid two weeks later. The Tax Court held that subsection 84(2) of
the Income Tax Act did not apply because it could not be said that any
of Bec’s funds found their way into the shareholder’s hands. Specifically, the
financing of the share purchase came from the bank, and Bec’s assets remained
deposited in its bank account for some time after the amalgamation. It is clear that
the same cannot be said of Dr. MacDonald’s case. Indeed, PC’s property ended up
in his hands and the entire series of events was designed and executed to
achieve this result.
84(2) was held to apply in RMM. The namesake of
that case was a holding company created for the express purpose of buying the
shares of Equilease Limited and its wholly owned subsidiary (together, “EL”), a
company that was winding up into its American parent, Equilease Corporation
(“EC”). RMM obtained a loan from a bank, secured on the assets of EL, to fund
the purchase of the shares, the price of which was equal to the total assets
held by EL (primarily cash and an income tax refund). Three days after the
share sale closed, RMM repaid the loan from the funds of EL. RMM later endorsed
the tax refunds and interest thereon to EC. RMM was paid $10,000 to cover its
Bowman, as he then was, determined that RMM was an
“instrumentality” used to effect the distribution of property to the
shareholder, EC, and stated his conclusion with respect to subsection 84(2) in
very clear terms at page 308 (my underlining):
The words “distributed or
otherwise appropriated in any manner whatever on the winding-up,
discontinuance or reorganization of its business” are words of the widest
import, and cover a large variety of ways in which corporate funds can end up
in a shareholder’s hands. See Merritt (supra); Smythe et
al. v. M.N.R., 69 DTC 5361 (S.C.C.). They were unquestionably received on
the winding-up or discontinuance of EL’s business and it is impossible to
say that the funds that found their way into EC’s hands were not on any
realistic view of the matter EL’s funds, notwithstanding the brief intervention
of the bank and RMM.
winding-up of the business of a corporation is a process. The judge here
recognized in his decision that “‘on the winding up’ as used in subsection
84(2) refers to a course of events that are part of the winding-up process”
(reasons, at paragraph 84). He further specifically determined that “the sale
of the shares here does not exist in a vacuum: each transaction, from beginning
to end, was entered into and completed in contemplation of each other”
(reasons, at paragraph 109). And yet, he concluded that subsection 84(2) did
not apply. In my respectful view, the judge erred in focusing exclusively on
the legal character of the various transactions in the series, which led him to
fail to give effect to the statutory phrase “in any manner whatever”. His
interpretation is not consistent with Merritt, Smythe, or RMM.
this case, at the end of the winding up, all of PC’s money (net of the $10,000
compensation to the accommodating brother-in-law) ended up through circuitous
means in the hands of Dr. MacDonald, the original and sole shareholder of PC
who was both the driving force behind, and the beneficiary of, the
transactions. In my view, the only reasonable conclusion is that subsection
84(2) applies, as the Crown contends.
I would allow the appeal, set aside the judgment of the Tax Court and,
rendering the judgment that should have been rendered, dismiss Dr. MacDonald’s
appeal from the 2002 reassessment. The Crown is entitled to its costs in this
Court and in the Tax Court.
K. Sharlow J.A.”
Johanne Trudel J.A.”