Rip
T.C.J.:
The
issue
in
this
appeal
by
943963
Ontario
Inc.
(“Ontario”)
from
an
assessment
for
1992
taxation
year
is
whether
the
appellant
or
the
Minister
of
National
Revenue
(“Minister”)
was
correct
in
calculating
the
appellant’s
deemed
proceeds
of
disposition
of
shares
pursuant
to
subsection
55(2)
of
the
Income
Tax
Act
(“Act”).
The
appellant
states
that
in
calculating
proceeds
of
disposition
of
shares
pursuant
to
subsection
55(2)
the
portion
of
the
dividend
subject
to
tax
under
Part
IV
of
the
Act
is
added
to
what
is
referred
to
as
safe
income
of
the
appellant.
Safe
income,
described
“broadly”
by
Robertson,
J.A.
in
Nassau
Walnut
Investments
Inc.
v.
R.
:
IS
equivalent
to
the
tax
retained
earnings
of
the
dividend
paying
corporation
realized
after
1971
and
prior
to
the
receipt
of
the
dividend.
The
respondent
argues
that
the
dividends
subject
to
Part
IV
tax
must
be
reduced
by
any
safe
income.
The
parties
agree
that
the
transaction
is
subject,
inter
alia,
to
subsection
55(2)
and
paragraph
55(5)(f)
of
the
Act.
They
disagree
on
how
subsection
55(2)
provides
for
the
calculation
of
proceeds
of
disposition
or
a
capital
gain.
For
the
1992
taxation
year
subsection
55(2)
provided
that:
Where
a
corporation
resident
in
Canada
has
after
April
21,
1980
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
event
or
a
series
of
transactions
or
events
(other
than
as
part
of
a
series
of
transactions
or
events
that
commenced
before
April
22,
1980),
one
of
the
purposes
of
which
(or,
in
the
case
of
a
dividend
under
subsection
84(3),
one
of
the
results
of
which)
was
to
effect
a
significant
reduction
in
the
portion
of
the
capital
gain
that,
but
for
the
dividend,
would
have
been
realized
on
a
disposition
at
fair
market
value
of
any
share
of
capital
stock
immediately
before
the
dividend
and
that
could
reasonably
be
considered
to
be
attributable
to
anything
other
than
income
earned
or
realized
by
any
corporation
after
1971
and
before
the
transaction
or
event
or
the
commencement
of
the
series
of
transactions
or
events
referred
to
in
paragraph
(3)(a),
notwithstanding
any
other
section
of
this
Act,
the
amount
of
the
dividend
(other
than
the
portion
thereof,
if
any,
subject
to
tax
under
Part
IV
that
is
not
refunded
as
a
consequence
of
the
payment
of
a
dividend
to
a
corporation
where
the
payment
is
part
of
the
series
of
transactions
or
events)
(a)
shall
be
deemed
not
to
be
a
dividend
received
by
the
corporation;
(b)
where
a
corporation
has
disposed
of
the
share,
shall
be
deemed
to
be
proceeds
of
disposition
of
the
share
except
to
the
extent
that
it
is
otherwise
included
in
computing
such
proceeds;
and
(c)
where
a
corporation
has
not
disposed
of
the
share,
shall
be
deemed
to
be
a
gain
of
the
corporation
for
the
year
in
which
the
dividend
was
received
from
the
disposition
of
a
capital
property.
There
is
no
doubt
that
the
safe
income
calculation
is
complex
and
controversial.
A.
Facts
The
facts
in
this
appeal
are
not
in
dispute.
The
parties
filed
the
following
Agreed
Statement
of
Facts:
1.
The
appellant
is
a
corporation
incorporated
under
the
laws
of
the
Province
of
Ontario.
The
appellant
carried
on
business
in
the
Province
of
Ontario
having
its
registered
office
at
118
Northshore
Blvd.
West,
Burlington,
Ontario
(formerly
1240
Advance
Road
in
the
City
of
Burlington).
2.
At
all
material
times
relating
to
this
appeal
the
shareholders
of
the
appellant
were
as
follows:
William
Ascenuik
George
Barbu,
Jr.
3.
The
appellant’s
taxation
and
fiscal
year
end
is
July
31st
of
each
year.
4.
At
all
material
times
the
appellant
constituted
a
“Canadian
controlled
private
corporation”
as
that
term
is
defined
in
subsection
125(7)
of
the
Income
Tax
Act
of
Canada
(“Act”).
5.
As
at
August
13th,
1991
the
appellant
was
the
legal
and
beneficial
owner
of
732
common
shares
in
the
capital
of
HSP
Graphics
Ltd.
(hereinafter
referred
to
as
“HSP”).
6.
The
appellant’s
“adjusted
cost
base”
(as
determined
pursuant
to
subsection
53(1)
of
the
Act)
for
the
732
HSP
shares
as
at
August
14,
1991
was
$329,702.
7.
On
the
14th
day
of
August,
1991
HSP
purchased
for
cancellation
the
732
common
shares
held
by
the
appellant
for
proceeds
aggregating
$1,200,000.
The
fair
market
value
of
the
732
common
shares
of
HSP
as
at
August
14th,
1991
was
equal
to
$1,200,000.
8.
The
purchase
for
cancellation
of
the
HSP
shares
held
by
the
appellant
pursuant
to
the
operation
of
subsection
84(3)
of
the
Act
resulted
in
the
appellant
being
deemed
to
have
received
a
taxable
dividend
equal
to
the
difference
between
the
purchase
proceeds
received
by
the
appellant
($1,200,000)
and
the
“paid-up
capital”
of
the
purchased
for
cancellation
common
shares
($732)
being
$1,199,268.
9.
The
appellant
and
HSP
at
all
material
times
constituted
“connected
corporations”
as
that
term
is
defined
in
subsection
186(4)
of
the
Act.
10.
The
appellant’s
pro
rata
share
of
the
income
earned
or
realized
after
1971
and
immediately
before
the
purchase
for
cancellation
of
the
HSP
shares
attributable
to
the
732
HSP
common
shares
totaled
$252,265
(“Safe
Income”)
as
determined
in
accordance
with
subsection
55(5)
to
the
Act.
1
1.
On
payment
of
the
$1,199,268
dividend
to
the
appellant
(as
a
result
of
the
operation
of
subsection
84(3)
of
the
Act
on
the
purchase
for
cancellation
of
the
732
HSP
common
shares),
HSP
became
entitled
to
a
dividend
refund
pursuant
to
subsection
129(1)
of
the
Act
in
the
amount
of
$141,730
(“RDTOH
Refund”).
12.
The
RDTOH
refund
to
HSP,
in
the
amount
of
$141,730,
consisted
of
the
whole
of
HSP’s
refundable
dividend
tax
on
hand
(“RDTOH”)
account
at
the
time
HSP
became
entitled
to
the
RDTOH
refund.
The
amount
of
$141,730
was
comprised
of
$63,342
which
was
carried
forward
from
a
predecessor
corporation
(also
known
as
HSP
Graphics
Ltd.)
and
$78,388
which
was
the
refundable
portion
of
Part
IV
tax
paid
by
HSP
with
respect
to
the
taxable
capital
gain
resulting
from
the
disposition
by
HSP
in
1991
of
the
property
with
the
municipal
address
of
1240
Advance
Road,
Burlington,
Ontario.
13.
As
a
consequence
of
HSP’s
entitlement
to
the
RDTOH
refund
on
the
payment
of
the
dividend
to
the
appellant,
the
appellant
became
liable
for
Part
IV
tax
(subsection
186(1)
of
the
Act)
on
a
portion
of
the
dividend
received
from
HSP.
The
amount
of
dividend
received
upon
which
the
appellant
became
liable
to
Part
IV
tax
was
$566,920.
14.
The
appellant
did
not
as
part
of
a
series
of
transactions
or
events
within
the
meaning
of
subsection
55(2)
of
the
Act,
declare
and
pay
a
subsequent
dividend
to
a
corporation
upon
which
it
could
have
been
entitled
to
a
refund
of
Part
IV
tax.
15.
The
appellant
in
its
1992
taxation
year
Federal
corporate
tax
return
designated
under
paragraph
55(5)(/)
of
the
Act
to
treat
the
$1,199,268
dividend
that
it
received
as
a
series
of
separate
taxable
dividends
as
follows:
$130,000
20,000
10,000
10,000
20,000
20,000
20,000
22,265
566,920
80.083
$1,199,268
16.
Subsection
55(2)
of
the
Act
applies
to
a
portion
of
the
$1,199,268
dividend
received
by
the
appellant.
17.
The
appellant
in
its
1992
taxation
year
Federal
corporate
tax
return
determined
the
amount
of
$1,199,268
taxable
dividend
to
be
treated
as
“proceeds
of
disposition”
pursuant
to
the
operation
of
subsection
55(2)
of
the
Act
as
follows:
Purchase
for
Cancellation
Proceeds
|
$
1,200,000
|
Less:
Paid
up
capital
|
$732
|
Taxable
Dividend
|
$1,199,268
|
[The
taxable
dividend
is
equal
to
the
difference
between
the
appellant's
proceeds
of
disposition
of
the
732
shares
purchased
for
cancellation
and
its
paid
up
capital
of
the
shares:
subsection
84(3).]
Less
the
sum
of:
(i)
income
earned
or
realiszed
by
HSP
after
|
|
1971
and
before
purchase
for
cancellation
|
|
(“Safe
Income”)
|
$252,265
|
[The
appellant
deducted
from
the
$1,199,268
is
the
portion
of
the
dividend
amount
of
the
deemed
dividend
$1,199,268
the
aggregate
of
two
amounts.
The
first
amount
deducted
ts
safe
income
of
$252,265.]
|
|
and
|
|
(ii)
amount
of
$1,199,268
dividend
to
appellant
|
|
subject
to
Part
VI
tax
($141,730
x
4)
|
$566,920
|
[The
second
amount
deducted
from
the
$1,199,268
is
the
portion
of
the
dividend
received
by
the
appellant
that
was
subject
to
Part
IV
tax;
i.e.
$566,920.
This
is
the
source
of
the
dispute
between
the
parties.]
Subsection
55(2)
—
“Proceeds
of
Disposi-
$380,083
tion”
[The
difference
between
the
taxable
dividend
($1,199,268)
and
the
aggregate
of
the
safe
income
($252,265)
and
the
amount
of
the
dividend
subject
to
Part
IV
tax
($566,920)
is
$380,083,
according
to
the
appellant,
is
its
proceeds
of
disposition
for
purposes
of
paragraph
55(2)(b)
of
the
Act.
18.
The
appellant
in
its
1992
taxation
year
Federal
corporate
tax
return
determined
the
capital
gain
to
the
appellant
resulting
from
the
application
of
subsection
55(2)
of
the
Act
to
the
$1,199,268
dividend
received
as
follows:
Deemed
Proceeds
of
Disposition
(s.55(2))
|
$380,083
|
Less:
Adjusted
Cost
Base
of
732
HSP
Common
|
$329,702
|
shares
|
|
Capital
Gain
|
$
50,381
|
The
taxable
portion
(75%)
of
the
said
capital
gain
as
determined
by
the
appellant
was
$37,786.
19.
The
respondent
by
Notice
of
Reassessment
dated
July
5th,
1996
reassessed
the
appellant’s
1992
taxation
year
by
increasing
the
taxable
capital
gain
from
$37,786
(as
reported
by
the
appellant)
by
$189,748
to
a
taxable
capital
gain
of
$227,534.
20.
The
respondent
determined
that
the
amount
of
the
$1,199,268
taxable
dividend
to
be
treated
as
“proceeds
of
disposition’’
pursuant
to
the
oper-
ation
of
subsection
55(2)
of
the
Act
was
as
follows:
(a)
Dividend
in
excess
of
“safe
income”
Proceeds
Received
by
the
appellant:
|
|
$1,200,000
|
Less:
Paid-up
Capital
|
$
|
732
|
|
“safe
income”
|
$252,265
|
$
252,997
|
Dividend
in
excess
of
“safe
income”
|
|
$
947,003
|
[The
Minister
first
calculated
the
amount
of
the
dividend
that
is
in
excess
of
safe
income,
$947,003.
The
amount
of
$947,003
is
that
portion
of
the
dividend
“that
could
be
considered
to
be
attributable
to
anything
other
than”
the
amount
of
safe
income.
I
(b)
Portion
of
dividend
in
excess
of
“safe
income”
subject
to
Part
IV
tax.
Portion
of
entire
deemed
dividend
subject
to
[The
respondent's
position
is
that
the
safe
income
portion
of
the
dividend
is
not
exempt
from
Part
IV
tax.
All
taxable
dividends
subject
to
Part
IV
tax
are
from
income
earned
after
1971.
A
taxable
dividend
includes
both
safe
income
[“Proceeds
of
disposition”,
according
to
the
respondent,
is
the
difference
between
the
dividend
in
excess
of
safe
income
and
the
portion
of
the
dividend
that
is
subject
to
Part
IV
tax.
The
amount
of
Part
IV
tax
will
be
refunded
to
the
appellant
when
it
pays
out
taxable
dividends
to
the
extent
that
there
is
any
amount
left
in
its
refundable
dividend
tax
on
hand
account;
in
the
meantime
the
Part
IV
tax
is
added
to
the
appellant's
refundable
tax
on
hand
account.
The
amount
in
a
private
corporation's
refundable
tax
on
hand
account
is
income
realized
after
1971.
Income
earned
or
realized
after
1971
also
increases
safe
income.
To
deduct
that
portion
of
the
dividend
subject
to
Part
IV
tax
as
well
as
the
amount
of
safe
income
from
the
deemed
dividend
would
grant
the
appellant
a
double
deduction,
according
to
the
respondent.]
|
$566,920
|
Par
IV
tax
|
|
Less:
Paid-up
capital
|
$
|
732
|
|
Safe-income
|
$252,265
|
$252,997
|
Portion
of
dividend
in
excess
of
“safe
in-
|
|
come”
|
|
subject
to
Part
IV
tax.
|
|
$313,923
|
|
and
income
in
excess
of
safe
income.
One
cannot
separate
|
|
a
dividend
into
portions
that
are
from
safe
income
and
|
|
other
income.
The
Minister
therefore
deducted
the
safe
in
|
|
come
amount
(and
the
amount
of
paid-up
capital
of
the
|
|
shares)
from
that
portion
of
the
dividend
subject
to
Part
IV
|
|
tax
to
find
the
amount
of
dividend
in
excess
of
safe
income
|
|
subject
to
Part
IV
tax.]
|
|
(c)
|
Portion
of
dividend
deemed
to
be
proceeds
of
disposition.
|
|
Dividend
in
excess
of
“safe
income”
|
$947,003
|
|
Less:
portion
thereof
subject
to
|
$313,923
|
|
Part
IV
tax
|
|
|
Subject
to
55(2)
-
Proceeds
of
disposition
|
$633,080
|
21.
The
respondent,
by
the
Notice
of
Reassessment
referred
to
above,
determined
the
capital
gain
to
the
appellant
resulting
from
the
application
of
subsection
55(2)
of
the
Act
to
the
$1,199,268
dividend
received
as
follows:
Deemed
Proceeds
of
Disposition
(s.
55(2))
|
$633,080
|
Less:
Adjusted
Cost
Base
of
732
HSP
Common
|
$329,702
|
Shares
|
|
Capital
Gain
|
$303,378
|
The
taxable
portion
(75%)
of
the
said
capital
gain
as
determined
by
the
respondent
was
$227,534.
B.
Background
Section
55
was
designed
to
prevent
a
taxable
capital
gain
from
becoming
a
tax-free
intercorporate
dividend
by
recharacterizing
the
dividend
into
a
gain
or
proceeds
of
disposition.
Subsection
55(5)
establishes
the
rules
for
calculating
a
taxpayer’s
safe
income.
Paragraph
55(5)(f)
allows
a
taxpayer
to
designate
a
portion
of
taxable
dividend
as
one
or
more
separate
taxable
dividends.
With
55(5)(f),
Parliament
has
expressed
its
intent
that
section
55
should
operate
without
effecting
double
taxation.
The
portion
of
the
taxable
dividend
that
is
safe
income
is
not
taxed
as
a
capital
gain.
In
Nassau
Walnut,
supra,
Robertson,
J.A.
stated,
at
page
5052,
that
subsection
55(2):
...is
an
anti-avoidance
provision
which
has
the
effect
of
converting
certain
tax-
free
dividends
into
(taxable)
capital
gains.
The
object
is
to
prevent
“capital
gains
stripping”.
However,
to
the
extent
that
a
dividend,
including
a
deemed
dividend
arising
under
subsection
84(3),
is
attributable
to
what
is
colloquially
referred
to
as
safe
income
of
the
dividend
paying
corporation,
then
that
portion
of
the
dividend
remains
tax-free.
On
the
facts
of
the
appeal
at
bar,
the
market
value
of
the
shares
purchased
by
HSP
Graphics
Ltd.
(“HSP”)
from
the
appellant
was
$1,200,000
and
the
appellant’s
adjusted
cost
base
of
the
shares
was
$329,702.
On
a
sale
of
the
shares
to
a
person
other
than
HSP,
the
appellant
would
have
a
profit,
a
capital
gain,
of
$870,298.
Were
it
not
for
subsection
55(2),
on
the
sale
to
HSP,
the
appellant
would
be
deemed
by
subsection
84(3)
to
have
been
paid
and
to
have
received
a
taxable
dividend
of
$1,199,268
($1,200,000
less
the
paid-up
capital
of
the
share
of
$732).
By
virtue
of
subsection
112(1)
of
the
Act,
an
amount
equal
to
the
dividend
would
be
deducted
from
the
appellant’s
income
and
the
appellant
would
pay
no
tax
on
the
sale
of
the
shares.
Subsection
55(2)
attempts
to
prevent
the
tax-free
disposition
of
shares.
However,
by
itself,
subsection
55(2)
may
yield
a
harsh
result.
The
amount
of
the
dividend
“other
than
the
portion
thereof
if
any”
subject
to
Part
IV
tax
is
deemed
not
be
a
dividend
but
proceeds
of
disposition
or
a
capital
gain.
Respondent’s
counsel
compared
the
calculation
of
the
proceeds
of
disposition
where
a
portion
of
the
deemed
dividend
is
subject
to
Part
IV
tax
to
proceeds
of
disposition
where
no
portion
is
subject
to
Part
IV
tax:
a
single
dividend
in
the
amount
of
$1,199,268,
where
a
portion
of
the
dividend
is
subject
to
Part
IV
tax,
would
result
in
deemed
proceeds
of
disposition
or
a
gain
equal
to
the
amount
by
which
the
dividend
exceeds
the
portion
thereof
subject
to
Part
IV
tax,
i.e.
$1,199,268
less
$566,920
or
$632,348.
When
no
portion
of
the
dividend
is
subject
to
Part
IV
tax,
the
entire
taxable
dividend
of
$1,199,268
would
be
proceeds
of
disposition
or
a
gain
notwithstanding
the
existence
of
$252,265
of
safe
income.
Paragraph
55(5)(/)
is
designed
to
prevent
a
result
that
ignores
the
taxpayer’s
safe
income.
Robertson,
J.A.
explained
in
Nassau
Walnut,
supra,
at
page
5053
that
paragraph
55(5)(/):
[which
is
by
no
stretch
of
the
imagination
a
model
of
legislative
clarity],
allows
a
corporation
to
avoid
the
“all
or
nothing’’
result
by
designating
a
dividend
to
be
a
number
of
separate
dividends.
By
means
of
designation,
the
portion
of
the
dividend
attributable
to
safe
income
is
severed
and
remains
tax-free.
That
part
of
the
dividend
which
is
not
attributable
to
“safe
income”
is
to
be
treated
as
though
a
capital
gain
has
been
realized.
As
previously
stated,
a
taxable
dividend
may
then
be
divided
into
two
or
more
taxable
dividends
so
that
one
of
the
designated
dividends
could
be
attributable
to
safe
income
and
avoid
the
application
of
subsection
55(2).
C.
Appellant’s
Submissions
The
appellant’s
view
is
that
the
aggregate
of
safe
income
and
the
portion
of
the
taxable
dividend
subject
to
Part
IV
tax
must
be
deducted
from
the
full
amount
of
the
taxable
dividend.
Appellant’s
counsel
relied
on
the
following
excerpt
of
subsection
55(2)
to
support
this
submission:
...was
to
effect
a
significant
reduction
in
the
portion
of
the
capital
gain
that,
but
for
the
dividend,
would
have
been
realized
on
a
disposition
at
fair
market
value
of
any
share
of
capital
stock
immediately
before
the
dividend
and
that
could
reasonably
be
considered
to
be
attributable
to
anything
other
than
income
earned
or
realized
by
any
corporation
after
1971
and
before
the
transaction
or
event
or
the
commencement
of
the
series
of
transactions
or
events...
Mr.
Monaco,
appellant’s
counsel,
explained
that
the
amount
of
safe
income
is
to
be
deducted
from
the
total
dividend
since
it
is
the
amount
in
excess
of
safe
income
that
is
treated
as
a
capital
gain.
The
Minister
deducted
the
paid
up
capital
and
safe
income
from
the
amount
of
$1,200,000
received
by
the
appellant
and
determined
the
dividend
in
excess
of
safe
income
to
be
$947,003.
Only
the
amount
of
the
dividend
in
excess
of
safe
income,
once
it
is
determined,
can
be
subject
to
paragraphs
55(2)(a),
(b)
and
(c)
counsel
insisted.
Mr.
Monaco
referred
to
the
closing
words
in
the
opening
paragraph
of
subsection
55(2):
..
notwithstanding
any
other
section
of
this
Act,
the
amount
of
the
dividend
(other
than
the
portion
thereof,
if
any,
subject
to
tax
under
Part
IV
that
is
not
refunded
as
a
consequence
of
the
payment
of
a
dividend
to
a
corporation
where
the
payment
is
part
of
the
series
of
transactions
or
events)
Mr.
Monaco
stated
that
reference
in
subsection
55(2)
to
the
“amount
of
the
dividend
(...subject
to
tax
under
Part
IV...)”
is
the
amount
of
the
dividend
in
excess
of
safe
income.
Consequently,
he
argued,
in
determining
the
amount
of
the
dividend
that
is
subject
to
paragraphs
55(2)(a),
(b)
and
(c)
one
must
subtract
both
safe
income
and
the
dividend
subject
to
Part
IV
tax.
The
appellant
followed
this
methodology
in
determining
its
liability
under
subsection
55(2)
of
the
Act.
This,
counsel
insisted,
is
a
reasonable
and
logical
interpretation
of
the
language
contained
in
subsection
55(2).
In
addition,
appellant’s
counsel
submitted
that
the
language
in
subsection
55(2)
provides
for
a
determination
of
the
amount
of
the
dividend
that
is
equal
to
safe
income
and
the
amount
of
the
dividend
that
is
in
excess
of
safe
income.
Subsection
55(5)(f)
permits
a
taxpayer
to
elect
to
sever
a
dividend
between
its
various
components,
that
is,
amongst
the
safe
income
portion
of
the
dividend,
the
portion
of
the
dividend
that
is
in
excess
of
the
safe
income
and
other
portions.
The
appellant
availed
itself
of
the
provisions
of
paragraph
55(5)(/)
and
in
its
return
of
income
designated
portions
of
the
taxable
dividend
as
separate
taxable
dividends.
(See
paragraph
15
of
the
Agreed
Statement
of
Facts).
Since
paragraph
55(5)(f)
permits
a
corporation
to
designate
any
portion
of
a
taxable
dividend
received
to
be
a
“separate
taxable
dividend”,
counsel
argued
that
the
appellant
may
treat
the
dividend
subject
to
Part
IV
tax
separate
and
distinct
from
the
portion
of
the
taxable
dividend
it
received
that
is
safe
income
attributable
to
the
HSP
shares.
The
appellant
made
eight
designations
pursuant
to
paragraph
55(5)(/)
totalling
$252,265,
the
exact
amount
of
the
safe
income
attributable
to
HSP’s
common
shares.
A
ninth
designation
representing
the
portion
of
the
dividend
subject
to
Part
IV
tax
was
also
made.
And
subsequently
the
appellant
designated
a
dividend
in
the
amount
that
the
appellant
believes
was
its
proceeds
of
disposition
of
the
shares,
that
is,
$380,083.
Thus,
the
appellant
“consciously”
attempted
to
first
capture
safe
income,
then
capture
the
portion
of
the
dividend
that
was
subject
to
Part
IV
tax,
and
lastly,
capture
the
dividend
that
is
deemed
to
be
proceeds
of
disposition.
Appellant’s
counsel
insisted
that
a
taxpayer
has
the
right
to
designate
which
portion
of
a
dividend
that
will
or
will
not
be
subject
to
Part
IV
tax.
Subsection
55(2)
is
paramount
to
subsection
186(1)
of
the
Act.
The
words
“notwithstanding
any
other
section
of
the
Act’
in
subsection
55(2)
provide
the
legislative
authority
to
permit
the
appellant
to
treat
as
separate
dividends
the
amount
of
the
dividend
that
is
subject
to
Part
IV
tax
and
another
portion
which
is
safe
income
and
not
subject
to
Part
IV
tax.
Paragraph
55(5)(/)
applies
to
subsection
55(2).
The
safe
income
dividend
is
added
to
the
Part
IV
dividend
as
a
consequence
of
the
appellant’s
designations
under
paragraph
55(5)(f)
and
do
not
constitute
one
and
the
same
dividend
as
assumed
by
the
respondent.
The
Minister
erred,
appellant’s
counsel
argued,
in
applying
a
“greater
of”
formula
in
applying
subsection
55(2)
and
determined
that
the
amount
of
the
dividend,
subject
to
subsection
55(2),
was
the
amount
of
the
taxable
dividend
less
the
greater
of
the
amount
of
safe
income
and
the
portion
of
the
dividend
subject
to
Part
IV
tax.
The
language
of
subsection
55(2)
does
not
provide
for
a
“greater
of”
test
in
determining
the
amount
of
the
dividend.
The
Minister
has
added
extra
wording
to
the
provision
and,
based
on
Friesen
v.
/?.,
a
court
should
not
accept
an
interpretation
that
requires
the
insertion
of
extra
wording
where
there
is
another
acceptable
interpretation
that
does
not
require
any
additional
wording.
The
Minister’s
interpretation
of
subsection
55(2)
is
contrary
to
its
legislative
intent.
The
safe
income
component
of
the
dividend
should
pass
tax-free
as
an
intercorporate
dividend
to
the
appellant.
Counsel
argued
that
the
Minister’s
use
of
a
“greater
of’
test
as
a
deduction
from
a
taxable
dividend
results
in
safe
income
not
passing
tax-free
to
the
appellant.
It
becomes
subject
to
Part
IV
tax
which
is
contrary
to
the
intention
of
subsection
55(2).
Finally,
appellant’s
counsel
referred
to
a
paper
presented
to
the
Canadian
Tax
Foundation
in
1981
by
Mr.
John
R.
Robertson,
Director
General
of
the
Corporate
Rulings
Directorate,
Legislation
Branch
of
Revenue
Canada.
Mr.
Robertson
suggested
that
one
may
designate
separate
dividends
which
are
subject
to
Part
IV
tax
and
dividends
that
constitute
safe
income.
In
short,
the
appellant’s
position
is
that
on
the
facts
at
bar,
in
calculating
proceeds
of
disposition
pursuant
to
subsection
55(2),
no
portion
of
the
dividend
paid
from
safe
income
is
subject
to
Part
IV
tax.
The
appellant’s
calculation
(in
paragraph
17
in
the
Agreed
Statement
of
Facts)
therefore
appears
to
protect
or
insulate
the
safe
income
amount
of
$252,265
from
that
portion
of
the
taxable
dividend
of
$1,199,268
that
is
subject
to
Part
IV
tax.
D.
Analysis
The
words
“the
amount
of
the
dividend”
in
subsection
55(2)
that
appear
immediately
before
the
last
set
of
parenthesis
preceding
paragraph
(a)
refer
to
the
phrase
“where
a
corporation
resident
in
Canada
has
received
a
taxable
dividend...”,
that
is,
the
opening
words
of
subsection
55(2).
The
words
“the
amount
of
the
dividend”
also
applies
to
amounts
of
all
dividends
designated
by
a
corporation
pursuant
to
paragraph
55(5)(f).
Thus,
“the
amount
of
the
dividend”
is
the
full
amount
of
the
dividend
the
appellant
received
from
HSP
and
the
portion
of
the
dividend
subject
to
Part
IV
tax
is
the
portion
of
the
taxable
dividend
of
$1,199,268
that
is
subject
to
Part
IV
tax.
There
is
nothing
in
the
Act
liberating
the
portion
of
the
taxable
dividend
equal
to
safe
income
from
Part
IV
tax.
The
whole
of
the
taxable
dividend
of
$1,199,268
that
is
deemed
by
subsection
84(3)
of
the
Act
to
be
paid
by
HSP
to
the
appellant
and
received
by
the
appellant
as
a
private
corporation
is
subject
to
Part
IV
tax
by
virtue
of
section
186.
The
phrase
“notwithstanding
any
other
section
of
the
Act”
preceding
the
words
“the
amount
of
the
dividend”
in
subsection
55(2)
do
not
affect
the
character
of
the
receipt
as
a
taxable
dividend,
whether
or
not
subject
to
Part
IV
tax.
All
amounts
in
the
introductory
paragraph
of
subsection
55(2)
(and
the
dividends
referred
to
in
paragraph
55(5)(/))
are
amounts
of
taxable
dividends;
it
is
only
in
paragraphs
(a),
(b)
and
(c)
that
the
deeming
provisions
arise
and
that
the
“notwithstanding”
phrase
applies
to
these
deeming
provisions
only.
The
“notwithstanding”
provision
does
affect
the
operation
of
section
186.
The
whole
of
the
dividend
of
$1,199,268
is
an
amount
determined
under
paragraph
186(1)(b).
I
cannot
find
any
provision
in
section
55
that
even
implies,
let
alone
declares,
that
the
portion
of
the
dividend
of
$1,199,268
which
is
subject
to
Part
IV
tax
(i.e.
$566,920)
and
the
amount
of
the
dividend
of
$566,920
designated
by
the
appellant
under
paragraph
55(5)(/)
may
necessarily
become
one
and
the
same.
The
Act
does
not
grant
taxpayers
the
right
to
arbitrarily
allocate,
identify
and
designate
the
origin
of
the
amounts
included
in
a
taxable
dividend;
only
the
amounts
themselves
are
designated.
I
agree
with
respondent’s
counsel
that
there
is
an
implied
ordering
of
the
several
dividends
designated
pursuant
to
paragraph
55(5)(f).
Otherwise
the
exercise
would
be
fruitless.
This
approach
is
reasonable
in
particular
when
one
considers
the
“object
and
spirit”
of
section
55
and
its
role
in
the
scheme
of
the
statute.
The
taxpayer
wishes
to
protect
its
safe
income
from
inclusion
in
proceeds
of
disposition
or
as
a
capital
gain.
It
is
only
by
first
considering
a
dividend
that
is
equal
to
or
less
than
the
amount
of
safe
income
that
the
test
in
subsection
55(2)
is
passed.
If
there
is
still
safe
income
remaining
after
the
dividend
in
question,
then
it
is
reasonable
to
conclude
that
the
dividend
did
not
reduce
that
portion
of
the
capital
gain
inherent
in
the
related
dividend
that
is
attributable
to
anything
other
than
safe
income.
Only
when
the
amounts
of
dividends
exceed
the
amount
of
safe
income
does
the
test
in
subsection
55(2)
come
into
play.
The
order
implicit
in
applying
subsection
55(2)
to
several
designated
dividends
is
that
the
dividend
or
dividends
that
aggregate
an
amount
equal
to
or
less
than
the
amount
of
safe
income
must
be
considered
before
any
remaining
designated
dividends.
In
the
case
at
bar,
the
appellant
designated
several
dividends
pursuant
to
paragraph
55(5)(/)
.
The
designated
first
dividend
of
$130,000
and
the
next
seven
designated
dividends
used
did
not
reduce
the
portion
of
the
gain
inherent
in
the
shares
that
are
attributable
to
anything
other
than
safe
income
since
the
amount
of
safe
income
is
$252,265
and
the
total
of
the
first
eight
designated
dividends
is
$252,265.
It
is
only
when
one
considers
the
ninth
designated
dividend
of
$566,920,
the
amount
equal
to
the
dividend
subject
to
Part
IV
tax,
and
the
tenth
designated
dividend
of
$380,083
that
it
is
no
longer
reasonable
to
conclude
that
the
reduction
in
the
gain
inherent
in
the
shares
is
attributable
to
safe
income.
After
the
eighth
designated
dividend
the
safe
income
has
been
exhausted
and
subsection
55(2)
applies.
At
this
point
the
issue
between
the
parties
is
joined.
Subsection
55(2)
provides
that
in
calculating
the
capital
gain
or
proceeds
of
disposition
the
amount
of
safe
income
and
the
amount
of
the
dividend
subject
to
Part
IV
tax
will
not
be
included
in
the
calculation.
No
capital
gain
should
apply
to
after
tax
income
that
is
safe
income
or
to
the
amount
of
the
taxable
dividend
which
is
subject
to
Part
IV
tax.
The
appellant
says
no
part
of
the
amount
of
the
safe
income
dividend
is
subject
to
Part
IV
tax.
To
subject
safe
income
to
Part
IV
tax,
appellant’s
counsel
argued,
would
result
in
double
taxation
to
the
taxpayer.
Respondent’s
counsel
does
not
agree.
Paragraph
55(5)(/)
is
silent
with
respect
to
any
allocation
of
the
Part
IV
tax
among
the
designated
dividends.
This
is
not
surprising
since
the
designations
of
dividends
made
under
the
authority
of
paragraph
55(5)(/)
are
for
purposes
of
section
55
only
and
do
not
affect
the
application
of
the
Part
IV
tax.
The
Act
does
not
expressly
determine
what
“proportion”
if
any,
of
each
of
the
several
dividends
designated
by
paragraph
55(5)(f)
is
subject
to
Part
IV
tax.
Messrs.
Kellough
and
McQuillan
suggest
three
possible
applications
of
Part
IV
tax
to
designated
dividends,
that
is,
a)
the
dividends
paid
from
safe
income
are
subject
first
to
Part
IV
tax,
with
the
balance
of
the
amount
subject
to
Part
IV
tax
allocated
to
the
dividends
paid
from
“other
than
safe
income”,
b)
each
of
the
several
dividends
established
by
the
designation
under
paragraph
55(5)(/)
is
subject
to
Part
IV
tax
in
the
same
proportion,
and
c)
the
dividends
paid
from
“other
than
safe
income”
are
subject
first
to
Part
IV
tax.
That
Part
IV
tax
is
payable
on
the
first
dollar
of
a
taxable
dividend
received
by
a
private
corporation
is
supported
by
the
mechanics
of
a
private
corporation’s
entitlement
to
a
dividend
refund
on
payment
of
a
taxable
dividend.
A
private
corporation
is
liable
for
Part
IV
tax
on
receipt
of
a
dividend.
The
amount
of
the
Part
IV
tax
is
added
to
the
refundable
dividend
tax
on
hand
account.
Subsection
129(1)
provides
that
the
dividend
refund
is
the
lesser
of
twenty-five
percent
of
the
taxable
dividends
paid
and
the
balance
of
the
corporation’s
“refundable
dividend
tax
on
hand”
account,
as
defined
by
subsection
129(3).
In
the
case
at
bar,
HSP’s
dividend
refund
was
limited
to
the
amount
of
its
refundable
dividend
tax
on
hand
account,
that
is,
$141,730.
Whether
HSP
paid
a
dividend
of
$566,920
(four
times
$141,730)
or
$1,000,000,
the
refund
payable
to
HSP
would
be
the
same,
$141,730.
And
a
dividend
received
by
the
appellant
in
excess
of
$566,920
would
not
result
in
a
Part
IV
tax
greater
than
$141,730;
a
dividend
less
than
$566,920
would
result
in
Part
IV
tax
equal
to
twenty-five
percent
of
the
dividend
since
that
amount
would
be
less
than
HSP’s
refundable
dividend
tax
on
hand
at
the
time.
It
is
readily
apparent
that
Part
IV
tax
is
exigible
on
receipt
of
the
first
dollar
of
dividend,
on
the
facts
at
bar,
on
amounts
first
totalling
$566,920.
Safe
income
is
not
safe
from
Part
IV
tax.
The
same
dollars
may
be
included
to
increase
the
amount
of
both
safe
income
and
“income
subject
to
Part
IV
tax”.
Respondent’s
counsel
proposed
a
test
to
confirm
that
the
$566,920
is
subject
to
Part
IV
tax.
The
facts
in
the
agreed
statement
are
assumed,
but
also
assumed
is
that
the
amounts
of
the
total
dividends
were
$566,920
and
not
$1,199,268.
In
such
a
case,
it
would
still
be
true
that
$252,265
of
the
reduction
in
the
capital
gain
that
would
have
otherwise
been
realized
on
a
disposition
at
fair
market
value
could
reasonably
be
considered
to
be
attributable
to
safe
income,
and
the
remainder
of
the
reduction,
i.e.
the
difference
between
$252,265
and
$566,920,
could
reasonably
be
considered
to
be
attributable
to
something
“other
than
safe
income”.
The
portion
of
the
dividend
subject
to
Part
IV
tax
would
remain
at
$566,920.
Increasing
the
amount
of
the
dividend
from
$566,920
to
$1,199,268
does
not
result
in
any
additional
portion
of
the
dividend
being
attributable
to
safe
income,
nor
does
it
result
in
any
additional
portion
of
the
dividend
being
subject
to
Part
IV
tax.
It
is
also
apparent
that
the
same
income
dollars
make
up
HSP’s
safe
income
and
the
amounts
in
its
refundable
dividend
tax
on
hand
account.
Safe
income
is
a
corporation’s
“income
for
the
year”
(after
1971)
determined
by
the
rules
in
section
3
of
the
Act
and,
in
accordance
with
paragraph
3(b),
includes
taxable
capital
gains.
Amounts
in
a
corporation’s
refundable
dividend
tax
on
hand
account
are
from
income
earned
or
realized
after
1971.
As
a
corporation’s
refundable
dividend
tax
on
hand
increases,
so
normally
does
its
safe
income.
There
is
no
“double
taxation”
in
the
Minis-
ter’s
calculation
of
proceeds
of
disposition.
Indeed,
to
accept
the
appellant’s
formula
in
calculating
proceeds
of
disposition
the
appellant
may
gain
the
advantage
of
two
deductions,
one
arising
from
safe
income
and
another
from
the
amount
of
the
dividend
subject
to
Part
IV
tax.
It
is
only
if
safe
income
is
not
increased
in
accordance
with
an
increase
in
the
corporation’s
refundable
dividend
tax
on
hand
account
that
there
would
be
double
taxation
in
the
Minister’s
calculation.
Specifically,
in
the
case
of
HSP,
the
taxable
capital
gain
realized
by
HSP
would
be
included
in
its
safe
income.
By
virtue
of
subparagraph
129(3)(«)(i)
the
amount
of
$78,388
was
included
in
HSP’s
refundable
dividend
tax
on
hand
account
on
the
disposition
of
its
capital
property.
A
taxable
capital
gain
is
Canadian
investment
income.
The
transaction
resulting
in
the
capital
gain
increased
both
HSP’s
safe
income
and
its
refundable
dividend
tax
on
hand
account,
thereby
increasing
the
“portion
of
the
dividend
subject
to
Part
IV
tax”.
Indeed,
if
I
am
wrong
in
this
analysis,
it
may
be
more
prudent
to
find
that
all
of
the
dividends
designated
by
paragraph
55(5)(f)
include
a
pro
rata
portion
of
the
dividend
subject
to
Part
IV
tax.
However,
I
do
not
believe
this
is
a
reasonable
option.
The
appeal
is
therefore
dismissed
with
costs.
Appeal
dismissed.
Ontario
Ltd.
v.
Minister
of
National
Revenue,
93
D.T.C.
423
(T.C.C.)
at
435,
per
Sarchuck,
J.T.C.C.