Nelson v. The Queen, 74 DTC 6266, [1974] CTC 360 (FCA)

Thurlow, J (per curiam—judgment delivered from the Bench):— This is an appeal from a judgment of the Trial Division which confirmed a reassessment of income tax for the year 1969. The issue in the appeal is whether the appellant is liable for tax in respect of a sum of $2,880 representing parts of dividends paid by Atle Lumber Limited to three of the appellant’s sons, the basis of the assessment being that this amount was part of a dividend which was payable to the appellant, but which he had directed to be paid to them. At the material time the appellant was the registered owner of 97 shares of the company and each of the three sons was the registered owner of one share. Nevertheless, the company had paid dividends of $1,000 to each of the four shareholders.

There was evidence to show, and the learned trial judge found, that an equal partnership had existed between the appellant and his three sons prior to the incorporation of the company, that the company was formed to carry on the partnership business and that the four were to have equal interests therein save that the appellant was to have the power to vote so as to override the others. How this was to be accomplished was left to a solicitor and there seems to have been some confusion as to what was to be done or needed to be done. Some years later the solicitor was instructed to arrange for the issue to the sons of additional shares, but this was not done. The documentation shows that one share was allotted to each of the four for cash at the time of incorporation in 1963 and that either immediately or within a year afterwards the appellant, in whose name the partnership business had been carried on, sold and transferred to the company the partnership assets for $11,289.88 of which $96 was to be satisfied by the issue to him of 96 shares of the capital stock of the company and the balance of $11,193.80 by a promissory note payable to him with interest at 6%. When asked at the trial about the ownership of the note, the appellant’s evidence was as follows:

Q. Now the promissory notes that have been referred to, which are in as '- Exhibit 1, those notes you have told my friend were in your name, they have never been repaid? A. No.

Q. Who actually owns those notes, do you personally own the whole of the beneficial interest, if you got the money today would that money belong to you personally? A. No.

Q. Who would it belong to? A. Well it belongs to all of us, that was part of the—

It appears to us that, if indeed there was a partnership, as the learned trial judge found, it follows that the beneficial ownership of the 96 shares was the same as that of the note and must have remained the same at least pending the completion of any other arrangements that may have been contemplated with respect to the shareholding. I should add that the learned trial judge found that there was complete honesty in all the shareholders.

Mr Jackson in his argument sought to challenge the findings that a partnership had in fact existed, but we think that the conclusion of the learned trial judge on this issue is well supported by the evidence and that it must stand. He also sought to uphold the assessment on the basis that the 96 shares belonged to the appellant but ultimately conceded that, if the finding that there was a partnership was upheld, in the circumstances the appellant was not beneficially entitled to 97% of the dividend.

In our view, on the facts, each of the four shareholders was entitled to the $1,000 actually paid to him by the company either because the 96 shares issued to the appellant as part of the consideration for the partnership property were held by the appellant on a resulting trust for the members of the partnership in equal shares, or because the agreement between them called for them to have equal equity shareholdings in the company and to share equally in any divisions of the profits of the company. In these circumstances the appellant was not entitled as against them to 97% of the total dividend paid by the company and there is no basis for holding that section 16 of the Income Tax Act applied to render him ‘liable for tax in respect of any part of the dividends paid to his three sons.

The appeal will therefore be allowed. The appellant is entitled to his costs of the appeal and in the Trial Division.