Champ v. The Queen, 83 DTC 5029, [1983] CTC 1 (FCTD)

Rouleau, J:—The plaintiff, a resident of Saskatoon, Saskatchewan, incorporated Warren Champ Limited, a holding company not actively engaged in any endeavour. Both the memorandum of association and articles of association, are dated April 10, 1953. The memorandum of association affirms that the authorizated capital of the company was $20,000 divided into 200 shares, having a par value of $100 each. The articles of association, issued in conjunction with the memorandum of association, state inter alia:

(1) that no share can be transferred in the company without the consent of the Board of directors;

(2) conditions attached to the shares are the following:

(a) they are referred to as 6% non cumulative preference shares;

(b) preference dividends, if declared, are to be 6% on those issued; only after payment to preference shares can the holders of common shares be entitled to dividends; (no other reference to common shares)

(c) the voting rights are reserved to the holders of common shares;

(d) only the directors can authorize the declaration of dividend;

(e) subject to the rights of persons (if any) entitled to shares with special rights as to dividends, all dividends shall be declared and paid according to the amounts paid on the shares; but, if and so long as nothing is paid up on any of the shares in the Company, dividends may be declared and paid according to the amounts of the shares, or, in the case of shares without nominal or par value, the number of shares held.

By a Special Resolution of the company, dated November 14, 1969, Warren Champ Limited reorganized the capital structure of the company. At the time of the reorganization, two shares had been issued and registered in the name of the plaintiff and one share in the name of Kathleen Champ, his wife. The following is a recital of the entire resolution:

That the memorandum of association of the company be amended by deleting paragraph 5 thereof, and inserting the following:

“5. The authorized capital of the company is $20,000 divided into 5,000 Class “A” voting common shares having a nominal or par value of $1 each. 5,000 Class “A” non-voting common shares having a nominal or par value of $1 each. 5,000 Class “B” voting shares having a nominal or par value of $1 each, and 5,000 Class “B” non-voting shares having a nominal or par value of $1 each. The said shares shall confer upon the holders thereof the following rights, and shall subject the holders thereof to the following limitations:

(a) The holders of Class “A” and Class “B” voting common shares shall be entitled to receive notice of, and to attend and vote at all meetings of the shareholders of the company and shall have 1 vote for each such share held.

(b) The holders of Class “A” and Class “B” non-voting common shares shall not, with respect to such shares, be entitled to receive notice of or attend or vote at any meetings of the shareholders of the company.

(c) Except with respect to the rights hereinbefore set forth, all classes of shares and the holders thereof shall rank equally as to participation in the capital of the company and may receive such dividends as are declared in respect of their shares, in accordance with the provisions of the articles of association of the company.”

Upon motion duly made and seconded it was unanimously resolved as a special resolution of the company that the outstanding shares of the company be, and the same are hereby converted to Class “A” voting and non-voting, and Class “B” voting and non-voting shares in the manner following, that is to say:

	No of shares
Name of	presently	Class “A”		Class “B”
holder	held	voting non-voting voting non-voting
Warren Champ	200	150	50
Kathleen Champ	100			75	25

Upon motion duly made and seconded it was unanimously resolved that applications for allotment as follows:

Warren Champ	450 Class “A” voting and
	150 Class “A” non-voting
and
Kathleen Champ	225 Class “B” voting and
	75 Class “B” non-voting

be accepted and the secretary was directed to issue share certificates reflecting all of the above changes of ownership at her earliest convenience. It was noted that the sum of $900 had been paid in respect of the above application for allotment.

It should be noted that in both classes of shares, some were voting and others non-voting; no other conditions, which attach to the shares were amended or changed; I therefore conclude that all other conditions previously recited in the articles of association, attach to the new issue.

During the years 1974 to 1978, Mr Champ was successfully engaged in another business and the shares from this third party corporation were held by Warren Champ Limited. Dividends from this third party corporation were declared and paid to Warren Champ Limited as follows:

During the years in question, duly authorized dividends were declared on the Class “B” voting shares only, and the wife of the plaintiff received the following amounts:

As a result, the Minister of Revenue, by notice of reassessment for the years in question relying on subsection 56(2) of the Act*, reassessed the plaintiff's income by inclusion of part of the dividends declared to Kathleen Champ as follows:

It was suggested by Counsel for the plaintiff that the section of the Act, relied upon by the Minister, did not contemplate a payment of dividends to a shareholder. It was his submission that a shareholder has a proprietary right in the dividend, and since the corporation would be obligated to pay it, no tax could be attributed to anyone else.

He has also referred me to an article on income splitting through share capital which appears in the report of the Thirty-Third Tax Conference, 1981, commencing at page 66. While its persuasive value is, to say the least doubtful, I feel that this article is more in support of the defendant’s position than his own.

A director of a company, in his discretion, may declare dividends, but cannot do so selectively when the articles of association specfically state:

dividends may be declared and paid according to the amounts of the shares, or, in the case of shares without nominal or par value, to the number of shares held.

The real issue appears to be:

(a) was there a payment or a transfer of property to a person other than the taxpayer?;

(b) was the payment made pursuant to the direction of the taxpayer?;

(c) could there have been a benefit to the taxpayer that he wished to confer to another person?;

(d) would he be taxable on the amount if it has been paid to him?;

A Mr Justice Thorson in The Estate of D Fasken v MNR, [1948] CTC 265; 4 DTC 491, discussed transfer:

The word “transfer” is not a term of art and has not a technical meaning. It is not necessary to a transfer of property from a husband to his wife that it should be made in any particular form or that it should be made directly. All that is required is that the husband should so deal with the property as to divest himself of it and vest it in his wife, that is to say, pass the property from himself to her. The means by which he accomplishes this result, whether direct or circuitous, may properly be called a transfer.

Income Tax Act 1974-75, section 56(2)

(2) A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer’s income to the extent that it would be if the payment or transfer had been made to him.

The plaintiff’s position is indefensible. He was in control of Warren Champ Limited. He did effect a transfer of property by directing the payment of dividends on Class “B” shares only, without declaring any dividends on the shares he held, which shares carried exactly the same rights and benefits as the Class “B”. He totally diverted any pro rata payment to himself, to his wife. This situation appears to be analogous to the case of G A Murphy v The Queen, [1980] CTC 386; 80 DTC 6314:

Subsection 56(2) is to impute receipt of income to the taxpayer that was diverted at his instance to someone else. It is to cover cases where the taxpayer seeks to avoid the receipt of what in his hands would be income by arranging to transfer that amount to some other person he wishes to benefit or for his own benefit in doing so. Apart from any moral satisfaction, the practical benefit to the taxpayer is the reduction in his income tax.

and further commented on by Mr Justice Thurlow, as he then was, in A Miller v MNR, [1962] CTC 199; 62 DTC 1139:

In my opinion, s 16(1) (now 56(2)* [1] is intended to cover cases where a taxpayer seeks to avoid receipt of what in his hands would be income by arranging to have the amount received by some other person whom he wishes to benefit or by some other person for his own benefit. The scope of the subsection is not obscure for one does not speak of benefitting a person in the sense of the subsection by making a business contract with him for adequate consideration.

Is calling of shares Class “A” and Class “B” sufficient to create a distinction: Palmer’s Company Lawt [2] at 281, suggests the following:

The holding of a share in a company limited by shares carries the right to receive a proportion of the profits of the company and of its assets in the winding up, and all other benefits of membership, combined with an obligation to contribute to its liabilities, all measured by a certain sum of money which is the nominal value of the share, and all subject to the memorandum and articles of the company.

It further goes on to state at 282

Prima facie the rights carried by the shares rank pari passu, ie, the shareholders participate in the benefits of membership equally. It is only when a company divides its share capital into different classes with different rights^ [3] attached to them that the prima facie presumption of equality of shares may be displaced.

The Law of Canadian Companies** [4] states at 320:

Apart from provisions, duly adopted, for preferences as between different classes of shares, and, where there are such preferences, then as amongst the members in each respective class, shareholders are entitled to be treated on a basis of equality. Shareholders may differ as to the wisdom of a particular course of action, but once adopted it must be carried out without discrimination amongst the shareholders or, as it is said in some of the cases, “for the benefit of the company as a whole”.

It further goes on to state at 325:

It has been held that the property right of a shareholder is not an interest in the property of the company but merely a right to a proportionate share of the profits made by the company. But this right is subject, according to the generally accepted view, to the important qualification that a shareholder has, generally speaking, and subject to certain considerations which are discussed in the chapter on Dividends, no right to say when those profits shall be distributed, or, in other words, he has no right to demand the declaration of a dividend, that being a matter for the discretion of the directors, with which the Courts will not interfere unless in case of fraud or bad faith. The right of the shareholder may therefore be said to be a right to a proportionate share of profits if and when the majority chooses to distribute them: so that the right of a shareholder in respect of profits would be little, if anything more than the right to equality of treatment, which has been discussed above.

I therefore conclude that the plaintiff, in full control of Warren Champ Limited, transferred property to his wife, two thirds of which was rightfully his.

The appeal is therefore dismissed with costs.

Appeal dismissed.