Algoa Trust v. The Queen, 93 DTC 405, [1993] 1 CTC 2294 (TCC)

Rip, T.C.C.J.:—Jaans Leasing Ltd. ("Jaans") paid both cash and stock dividends to its shareholders in 1982. At the time the dividends were paid Jaans had satisfied all past assessments for its 1975 to 1981 taxation years. After 1982 reassessments of tax were made increasing Jaans' liability under the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") for amongst other years, its 1979, 1980 and 1981 taxation years. The Minister of National Revenue ("Minister") assessed each of Algoa Trust and 116488 Canada Inc. (” Canada") pursuant to section 160 of the Act making them jointly and severally liable with Jaans for the latter's liability under the Act to the extent of the value of the dividends each received in 1982.

The appellants have appealed the assessments on the basis that the payments of dividends did not constitute a transfer of property within the meaning of section 160 of the Act and, in the alternative, the appellants gave consideration to Jaans for the dividends received. The appellants also questioned the applicability of paragraph 160(1)(e) with respect to liabilities incurred prior to November 13, 1981, when that provision took effect.

The appeals were heard on common evidence.

Mr. Joseph Schlesinger, C.A. ("Schlesinger") testified for both appellants. Schlesinger is a partner in the auditing firm that audited Jaans’ accounts and at all relevant times worked closely with the directors of Jaans.

Jaans was incorporated under the laws of Canada. Its fiscal periods ended on December 31. At all relevant times Jaans was a corporation carrying on an active business and during the years 1975 to 1982 inclusive paid dividends to its shareholders. Algoa Trust was the sole shareholder of Jaans, owning 103 common shares, from July 13, 1977 to December 17, 1982. In 1981 the annual dividend was slightly above annual earnings and in 1982 dividends were substantially above annual earnings. In 1981 the amount of dividends, was $78,000. In 1982 the dividends declared and paid aggregated $228,000, of which $78,000 was declared and paid in May ($40,000) and September ($38,000).

In his budget speech of November 12, 1981, the Minister of Finance amended Part II of the Act that is, sections 181 and 182, to impose a tax on a corporation paying a dividend out of its small business income. Schlesinger testified Jaans' professional advisers recommended Jaans pay dividends on active business income earned prior to 1982 to a corporate shareholder so as to avoid the Part II tax in future years on dividends paid out of such income. Thus, on December 17, 1982, Canada was incorporated and effective the same day Algoa Trust transferred its 103 common shares in Jaans to Canada in exchange for 103 common shares of Canada. By certificate of amendment, issued on December 20, 1982, Jaans' authorized capital was increased by the addition of an “unlimited number of nine per cent non-cumulative redeemed [sic] preferred shares". On December 21, 1982, the directors of Jaans declared a stock dividend of $150,000 and caused to be issued to Canada 15,000 fully paid preferred shares in the capital stock, having a stated capital of ten dollars per share, that is, a stated capital of $150,000 for the 15,000 shares.

As early as August, 1982 the Minister had informed the directors of Jaans that its tax returns for 1975 to 1978 inclusive were being audited and on or about September 9, 1982 an agreement between Jaans and the corporation associated with it was filed with the Minister allocating no part of the "business limit" and “total business limit" for those years to Jaans. By notices dated January 17, 1983 Jaans was reassessed pursuant to sections 125 and 127 of the Act for 1975 to 1978 in accordance with the agreement. For similar reasons Jaans was also reassessed tax on August 30, 1984 for its 1979, 1980 and 1981 taxation years. Jaans had paid all taxes assessed for taxation years 1975 to 1979 inclusive; Jaans' liability to the fisc for which the appellants are jointly and severally liable is for taxes for 1980 and 1981 aggregating $21,952.37 and interest of $66,292.45 with respect to taxation years 1978 to 1982 inclusive. The total liability of Jaans is $88,244.82. [1]

Both parties called expert witnesses to testify as to the fair market value of the issued shares of Jaans before and after the declaration and payment of the stock dividend on December 21, 1982. The conclusion of both experts, Richard Wise, C.A., ("Wise") for the appellants and Jacques Pelletier ("Pelletier") for the Minister, was that a potential buyer of all the capital stock of Jaans on December 21, 1982 would have paid the same amount for the issued shares of Jaans both before and after the payment of the stock dividend. The experts also agreed that as a result of the payment of the stock dividend the value of the common share was reduced by $150,000. Wise opined that the 15,000 preferred shares had a value of $150,000; Pelletier agreed the preferred shares had a value of $150,000 to a person not dealing with the common shareholders at arm's length but less than $150,000 to a person dealing at arm's length with the common shareholders.

A collection officer with Revenue Canada, Normand Gélinas, ("Gélinas") testified for the Minister with respect to payments of tax made by or on behalf of Jaans. Gélinas agreed that on December 21, 1982, the records of Revenue Canada indicated Jaans owed no money. The appellants' counsel produced through Gélinas as Exhibit A-3 a bundle of photostatic copies of Revenue Canada remittance forms sent by Jaans to Revenue Canada, photostatic copies of cheques drawn on Jaans’ bank account payable to the Receiver General of Canada in the amounts indicated on the remittance form, as well as a copy of a Revenue Canada computer print-out indicating payments by Jaans for taxation years 1979 to 1984 inclusive. On six remittance forms there are handwritten changes to the fiscal period for which the particular payment is indicated. For example, the year in the remittance form for a payment for the fiscal period ending “31 Dec. 81” was changed by hand to “83” and the payment of $11,200 appears to have been allocated to the 1983 fiscal period. Gélinas was unable to indicate on whose instructions the alterations were made. Counsel for the appellants advised that while his clients were prepared to accept the unaltered remittance forms directing payment for the relevant fiscal period as valid they were not prepared to acknowledge that Jaans had made, or instructed Revenue Canada, to alter the fiscal periods on the six forms. Obviously the interest assessed Jaans would be less if credit were given to earlier payments. Counsel queried if, in the circumstances, such handwritten alterations to the remittance forms could be held against the appellants who are third parties. I agree that when the Minister is unable to reply to a question with respect to facts that ought to be within his knowledge, the appellants ought to get the benefit of doubt. Payments should be applied to the earlier fiscal periods indicated on the remittance forms for the purpose of calculating interest.

The Minister, by notices dated November 20, 1989, assessed Algoa Trust for $78,000 and Canada for $89,424.17 pursuant to subsection 160(1) of the Act. On November 19, 1992, 12 days before trial, the Minister mailed notices to the appellants reassessing Algoa Trust the same amount he did on November 20, 1989 and reducing the amount assessed Canada to $88,244.82. Both notices of assessment sent to Canada stated the liability under subsection 160(1) of the Act was in respect of a transfer "on or about December 21, 1992” from Jaans to Canada of 15,000 preferred shares. The Minister reassessed in view of the Court's decision in Leung v. M.N.R., [1991] 2 C.T.C. 2268, 91 D.T.C. 1020 and attached particulars to Jaans' liability to each assessment. [2] The appellants’ counsel agreed the appeals proceed as scheduled.

The relevant portions of section 160 read as follows:

(1) Where a person has, on or after the 1st day of May, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to

(c) a person with whom he was not dealing at arm's length, the following rules apply:

(e) the transferee and transferor are jointly and severally liable to pay under this Act an amount equal to the lesser of

(i) the amount, if any, by which the fair market value of the property at the time it was transferred exceeds the fair market value at that time of the consideration given for the property, and

(ii) the aggregate of all amounts each of which is an amount that the transferor is liable to pay under this Act in or in respect of the taxation year in which the property was transferred or any preceding taxation year,

but nothing in this subsection shall be deemed to limit the liability of the transferor under any other provision of this Act.

(2) The Minister may at any time assess a transferee in respect of any amount payable by virtue of this section and the provisions of this Division are applicable mutatis mutandis in respect of an assessment made under this section as though it had been made under section 152.

Subsection 160(1) was amended by 1980-81-82-83, c. 140, s. 107(1) and paragraph (c) is applicable with respect to transfers of property occurring after November 12, 1981.

Submissions of appellants

Counsel for the appellants made three submissions:

(a) The declaration and payment of a dividend by its nature cannot in normal circumstances as in the appeals at bar constitute a transfer of property within the meaning of that term in subsection 160(1);

(b) Even if the Court concludes a dividend constitutes a transfer of property for the purposes of subsection 160(1), such a transfer of property is done for consideration and in the absence of evidence to the contrary, the consideration is equal to the dividend paid; and

(c) Jaans was not liable to pay any amount under the Act in or in respect of 1982 or any preceding year at the time dividends were paid to Algoa Trust and Canada.

(a) Dividend not a transfer of property

After reviewing briefly the legislative history of section 160, in particular the enactment of paragraph 160(1)(e), counsel stated that the fisc did not require any provision in the Act to attach improper transfers of property by its debtors since it had available in Quebec, for example, the right to an action Paulienne under the provisions of articles 1032 to 1040 of the Civil Code of Quebec [3] as well as oppression remedies such as section 241 of the Canada Business Corporations Act with respect to federally incorporated companies.

Counsel declared that Dussault, T.C.C.J., in Fournier v. M.N.R., [1991] 1 C.T.C. 2699, 91 D.T.C. 743, assumed the payment of a dividend was a transfer of property since that was not an issue before him. Dividends had been paid to a shareholder who owned 45 per cent of the issued shares of a private corporation and who was not related to, nor otherwise could have been said to be dealing at arm's length with, the majority shareholder who held 55 per cent of the shares. The question before Dussault, T.C.C.J. was whether, as a matter of fact, the corporation was dealing with the minority shareholder at arm's length when it paid him the dividend. The Court held that on the facts they were not dealing at arm's length at the time and confirmed the assessment against the minority shareholder under section 160.

Counsel also referred me to the Supreme Court of Canada decision of McClurg v. M.N.R., [1990] 3 S.C.R. 1020, [1991] 1 C.T.C. 169, 91 D.T.C. 5001 for the authority that the payment of a dividend in certain circumstances is not a transfer of property. The McClurg appeal arose out of an assessment against the taxpayer that a portion of dividends declared under a discretionary dividend clause to one class of shareholders to the exclusion of other classes and received by his wife should be included in the taxpayer's income pursuant to subsection 56(2) [4] of the Act.

Mr. McClurg and his partner, who were the only directors of their company, each held 400 Class A common shares and 37,000 Class C preferred shares. Their respective wives each held 100 Class B shares. During the taxation years involved, the corporation paid dividends of $100 per share on the Class B shares so that the taxpayer's wife received $10,000. The corporation did not declare any other dividends during the taxation years. The Minister reassessed the taxpayer's income for the taxation years on the basis that 80 per cent of the amount paid to his wife was attributable to the taxpayer pursuant to subsection 56(2) of the Act. In the Minister’s view the dividends declared should have been paid proportionately on all common shares and no distinction should have been made between the Class A common and Class B common shares. The Minister based its assessment on the basis that the dividends paid to the minority shareholders were in substance an indirect payment to the majority shareholders, and should be attributed to the principal shareholders and taxed in their hands.

The Supreme Court dismissed the Minister's appeal and concluded that subsection 56(2) does not generally apply to corporate dividends. A dividend payment cannot reasonably be considered to be a benefit diverted from a taxpayer to a third party within the contemplation of subsection 56(2). Dickson, C.J., as he then was, wrote at page 184 (D.T.C. 5011-12):

I agree with that conclusion, and with the skepticism expressed by Le Dain, J. in Perrault v. The Queen, [1979] 1 F.C. 155, [1978] C.T.C. 395, 78 D.T.C. 6272 (F.C.A.), where he questioned whether the words of subsection 56(2) "were intended to apply to the payment of a dividend" (at 403 (D.T.C. 6278; F.C. 165-66)). While it is always open to the courts to "pierce the corporate veil” in order to prevent parties from benefitting from increasingly complex and intricate tax avoidance techniques, in my view a dividend payment does not fall within the scope of subsection 56(2).

The indirect payments rule in subsection 56(2) of the Act was designed to prevent tax avoidance by means of a payment to a third party and the section cannot reasonably have been intended to cover benefits conferred for adequate consideration in the context of a legitimate business relationship, the Court stated. Had the dividend not been declared and paid to the third party, it would not otherwise have been received by the taxpayer because the funds would have been retained by the corporation.

The majority of the Supreme Court took the view that although subsection 56(2) does not generally apply to the declaration of corporate dividends, its application on the particular facts would also have been contrary to the commercial reality of the particular transaction. On the facts of McClurg the arrangement constituted a legitimate business relationship. The taxpayer's wife played an important role in financing of the corporation by providing her personal guarantees on the corporate loans. She also worked as an administrative assistant in her husband's company and was paid a small annual salary. The Court was of the view that the dividend payments to her represented a legitimate quid quo pro for her efforts and risk.

The majority of the Court was of the view that subsection 56(2) draws a distinction between arm's length and non-arm's length transactions. As Dickson, C.J., as he then was, stated at page 184 (D.T.C. 5012-13):

In my opinion, if a distinction is to be drawn in the application of subsection 56(2) between arms length and non arms length transactions, it should be made between the exercise of a discretionary power to distribute dividends when the non- arms length shareholder has made no contribution to the company (in which case subsection 56(1) may be applicable), and those cases in which a legitimate contribution has been made.

A minority of the Court held that the discretionary dividend provision was invalid and that a portion of the dividends received by the taxpayer's wife should be attributed for tax purposes to her husband. La Forest, J., in his minority opinion, noted the majority's view that the taxpayer's wife’s contribution to the business was somehow relevant in an assessment of the tax consequences of the dividend. In his view, her contribution had nothing to do with the determination of the tax issue. A dividend is received by virtue of the ownership of shares in the corporation. It is a return on capital that attaches to the share and is no way dependent on the conduct of the particular shareholder. He turned to a specific analysis of the constituent elements of subsection 56(2) and adopted the reasoning of Cattanach, J., of the Federal Court in the case Murphy v. The Queen, [1980] C.T.C. 386, 80 D.T.C. 6314 (F.C.T.D.). La Forest, J., was of the view a dividend payment is a transfer of property.

Subsection 56(2), appellants’ counsel argued, is virtually identical to section 160. Both provisions refer to the phrase "transfer of property". In subsection 56(2) that phrase triggers a benefit on a transferee which in turn adds the amount of the benefit to the transferor's income. While the word "benefit" is not present in subsection 160(1), a benefit in fact is received by a transferee when he or she is transferred property, he said.

Counsel added section 160 is even more restrictive than subsection 56(2). There is no” built in test" in section 160 as there is in subsection 56(2): there is no requirement in the former provision that the transfer of property be for anyone's benefit. One must look at the purpose and object of subsection 160(1) and not simply read literally its words, he declared. Hence if subsection 56(2) does not generally apply to dividends, neither does section 160.

In support of his position counsel stated that if subsection 160(1) applied to dividends innocent shareholders may be affected. He offered the example of a corporation managed by Canadian resident directors which pays a dividend to a non-resident shareholder who owns 75 per cent of the shares of the company. Unknown to the non-resident shareholder is that the corporation has recently been assessed tax under the Act. If the corporation is liable for tax under the Act, the unsuspecting shareholder would be liable under section 160 if the section is strictly interpreted, he declared. For this reason Parliament could not have intended section 160 to apply to dividends.

(b) Consideration for dividend

A dividend is paid to shareholders for consideration, counsel submitted. When a person subscribes for shares in a corporation a bargain is struck between that person and the corporation that in return for the investment the corporation will pay dividends to the shareholder. The payment of a dividend, if a transfer of property, is made by a corporation to its shareholder for consideration equal to the amount of the dividend paid.

Also, counsel submitted, on declaration of a dividend by directors of a corporation, the shareholder obtains an "action en droit” (right of action) against the corporation to sue for an amount equal to the dividend amount if not paid the dividend when it is payable. A shareholder surrenders this right when he or she receives the dividend. This, too, is consideration given to the corporation in return for the dividend.

With respect to the stock dividend, counsel argued that as a result of the stock dividend of 15,000 preferred shares, the value of the common shares owned by Canada was reduced; the reduction in value of its common stock was consideration given by the owner of the common stock for the receipt of the preferred stock. Also, to any extent Canada was impoverished as a result of the stock dividend, the shareholder was not enriched. In D'Aoust v. M.N.R.,

[1990] 1 C.T.C. 2360, 90 D.T.C. 1253, at page 2363 (D.T.C. 1256), Garon, T.C.C.J. stated :

. . if paragraph 160(1)(e) is to apply, the transferor must have been impoverished by the transfer, and the transferee correspondingly enriched.

(c) Existence of liability

Counsel also submitted that timing is vital in the application of subsection 160(1). On December 21, 1982, Jaans had paid all amounts assessed against it up to that day. Neither in its accounts or in the accounts of Revenue Canada was there any indication that Jaans was liable under the Act.

Appellants’ counsel, argued that third parties such as the appellants should not be jointly and severally liable for liabilities under the Act pursuant to subsection 160(1) when, at the time property is transferred to them, the transferor had satisfied all assessments issued to time of transfer. He referred to the following comments of Noel, J. in The Queen v. Simard-Beaudry Inc., [1971] F.C. 396, 71 D.T.C. 5511 (F.C.T.D. ) at D.T.C. page 5515:

. . . the general scheme of the Income Tax Act indicates that the taxpayer's debt is created by his taxable income, not by an assessment or reassessment. In fact, the taxpayer's liability results from the Act and not from the assessment. In principle, the debt comes into existence the moment the income is earned, and even if the assessment is made one or more years after the taxable income is earned, the debt is supposed to originate at that point.

[He] contended that these comments must be limited to the taxpayer whose own liability is in question. Subsection 160(1) does not contemplate a third party being affected by assessments issued subsequent to the transfer of property he insisted. Where a court is concerned with a collections procedure in a statute, an assessment must be issued and when there is no assessment subsection 160(1) does not apply. Counsel referred to The Queen v. Cyrus J. Moulton Ltd., [1976] C.T.C. 416, 76 D.T.C. 6239.

In support of his position counsel also cited the reasons for judgment of the Exchequer Court in Subsidiaries Holding Co. v. The Queen, [1956] C.T.C. 240, 56 D.T.C. 1141 where a taxpayer proceeded by way of petition of right to obtain a refund on alleged overpayment of tax under the 1948 Act. In that case, Cameron, J. found that “the amounts of tax payable under this Act” meant "amounts of tax payable as fixed by assessment". However, Cameron, J. applied the definition of "tax payable” found in paragraph 127(1)(y) of the 1948 Act in concluding in the manner he did. Paragraph 127(1)(y) stated that "the tax payable by a taxpayer. . . means the tax payable by him as fixed by assessment Or reassessment There is no such definition in the current Act.

Counsel also referred the Court to Flemming, H.J., Sr. Estate v. M.N.R., [1983] C.T.C. 321, 83 D.T.C. 5329 where Cattanach, J. stated, on page 329 (D.T.C. 5336), that". . . taxes do not become payable before assessment". In Flemming, however, the Court was considering subsections 159(2) and (3) of the Act. Subsection 159(2) provided for certain persons, before distributing property under their control, “to obtain a certificate from the Minister certifying that taxes, interest or penalties that have been assessed . . . have been paid . . ." and subsection 159(3) imposed a personal liability on those persons who distributed property without the certificate "for the unpaid taxes, interest and penalties”. Reading subsections 159(2) and (3) together it is clear that "the taxes, interest and penalties" referred to subsection (3) refer to those taxes, interest and penalties "that have been assessed" referred to in subsection (2) and not taxes, interest and penalties that have not been assessed. The reasons in Flemming do not assist him.

Counsel also raised the argument that since paragraph 160(1)(c) was not a provision of the Act for at least two of the taxation years, 1980 and 1981, for which Jaans was liable for tax, and earlier years when Jaans was liable for interest under the Act, the appellants as third parties cannot be jointly and severally liable with Jaans for such debts, that is, debts created prior to the creation of the relevant statutory provision.

Crown's submissions

In his lengthy argument touching on numerous aspects of corporate law, counsel for the Minister submitted that a transfer of property by a corporation to its shareholder takes place on the declaration of the dividend by the directors of the corporation since on declaration of the dividend the corporation becomes indebted to its shareholders. The payment of the dividend simply satisfies the corporation's debts to its shareholder. He referred to the reasons for judgment of Jackett, C.J., as he then was, in Kennedy v. M.N.R., [1973] C.T.C. 437, 73 D.T.C. 5359, cited in The Queen v. Phillips, [1975] C.T.C. 250, 75 D.T.C. 5188, at page 254 (D.T.C. 5192) for the proposition that a benefit is conferred for purposes of subsection 8(1) (now subsection 15(1)) at the time the debt is created and not when the debt is paid. Thus once the cash and stock dividends were declared a transfer of property took place.

He also argued the purpose of subsection 56(2) is to ensure that payments which otherwise would have been received by the taxpayer are not diverted to a third party as an anti-avoidance technique. Subsection 160(1) has no such purpose and one cannot make any analogy of that provision to subsection 56(2). Thus the reasoning in McClurg, supra, is not relevant.

Counsel submitted directors have no obligation to declare a dividend. The investment by a shareholder in a corporation is not consideration given to the corporation in return for dividends: In re Ganong Estate v. Belyea et al., [1941] S.C.R. 125 at page 135 per Crocket, J. Hence the appellants did not give consideration to Jaans for any dividend.

With respect to appellants’ counsel's submission that paragraph 160(1)(e) was not in force in years prior to 1982, Minister's counsel stated that paragraph 160(1)(e) was effective with respect to transfers of property which take place after November 12, 1981 and the dividends in issue were declared after that ate.

Analysis

(a) Consideration

When a person subscribes for shares of a corporation he or she is paying theoretically for the acquisition of a share of the ownership of the corporation and receives shares of a class in the capital stock of the corporation. The shareholder gives consideration for the shares and not for what the shares may bring. Ownership of shares gives the shareholder certain rights: right to vote as a shareholder, right to a distribution of capital on the winding-up of the corporation, right to receive dividends. (This list is not meant to be exhaustive.) When the shareholder receives a dividend it is not as a result of any consideration he or she gave the corporation and which the corporation is obliged to pay for investing. When a shareholder purchases shares he is not purchasing an income right. A shareholder receives a dividend solely because the right to a dividend is an attribute of owning shares. Directors of a corporation are normally under no obligation to declare dividends and a corporation is under no obligation to pay dividends on its shares (except for certain preferred and special shares) notwithstanding that generally an investor expects, or hopes, to receive dividends on the shares he purchases. Neither appellant gave any consideration to Jaans for the dividends each received.

b) Transfer of Property

(i) Algoa Trust

The purpose of section 160 is to foil an attempt by a taxpayer who is liable to pay any amount under the Act to avoid the fisc by transferring property otherwise available to satisfy the liability to one of three groups of persons, including a person with whom he or she was not dealing at arm's length.

In the case at bar Jaans had certain assets in 1982. In that year it paid dividends to Algoa Trust in the amount of $78,000, thus reducing its assets.

The Shorter Oxford English Dictionary On Historical Principles defines the word "transfer" as follows:

1. To convey or take from one place, person, to another; to transmit, transport; to give or hand over from one to another. 2. To convey or make over (title, right or property) by deed or legal process.

The transfer of any property is the physical handing-over of it from one person to another whether or not it is accompanied by consideration, as in the case of a sale or by way of gift. In St. Aubyn v. A.-G., [1952] A.C. 15 (H.L.) at page 53, Lord Radcliffe interpreted “ transfer” as follows:

If the word “transfer” is taken in its primary sense, a person makes a transfer of property to another person if he does the act or executes the instrument which divests him of the property and at the same time vests it in that other person.

In Fasken Estate v. M.N.R., [1948] C.T.C. 265, 49 D.T.C. 491 (Exch.), Thorson, P. expressed the matter thusly at page 279 (D.T.C. 497):

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.

When a corporation pays a dividend to its shareholders the corporation gives or hands over property to its shareholders. Property is taken from the patrimony of a corporation and placed in the patrimony of a shareholder. When the dividend is declared, the corporation becomes indebted to the shareholder. When the dividend is paid, the corporation divests itself of ownership of the money (or other property) used to pay the dividend.

In McClurg, supra, the Supreme Court concluded that subsection 56(2) does not generally apply to corporate dividends. A payment of a dividend, on the facts of McClurg, cannot reasonably be considered to be a benefit diverted from one person to another as contemplated by that provision. The Supreme Court stated the indirect payment rule in subsection 56(2) was designed to prevent tax avoidance by means of a payment to a third party and the provision cannot reasonably have been intended to cover benefits for adequate consideration in the context of a legitimate business relationship. In the view of the Supreme Court if a dividend had not been paid to Mr. McClurg it would not necessarily have been paid to her husband. No benefit due to Mr. McClurg was diverted to Mrs. McClurg. The corporation was not required to make the payment it made his wife to Mr. McClurg.

However the purposes of subsections 56(2) and 160(1) are different. Subsection 56(2) is found in subdivision d of Division B of Part I of the Act. Subsection 56(2) describes a source of income not otherwise included in computing a taxpayer's income to be included in that taxpayer's income if a payment or transfer of property is made to a person at the taxpayer's direction or concurrence because the taxpayer desired that person to enjoy as a benefit to the extent the payment or transfer had been made to the taxpayer.

Subsection 160(1) is not an income inclusion provision. It is found in Division I of Part I of the Act which, amongst other things, sets out procedures and requirements for returns, assessments, payment and appeals. Subsection 160(1) is included with several provisions, starting at section 153 and terminating at section 163.1, concerning payment of tax. The ability of the Minister to collect amounts owed under the Act may be seriously prejudiced when a debtor conveys property to another for no or little consideration. In McClurg, supra, Dickson, C.]., as he then was, stated that had the dividend not been declared and paid to the third party, it would have been retained by the corporation; the taxpayer would not have received the funds. It is precisely because the dividend was paid to Algoa Trust that Jaans did not retain funds to satisfy its liabilities under the Act. The payment of a dividend in money or other property is a transfer of property within the meaning of subsection 160(1) of the Act. The corporation is impoverished and its shareholders are enriched. I fail to see the reason why a dividend is not a transfer of property. [5] I do realize an unknowing shareholder not dealing at arm's length with the corporation may become jointly and severally liable under the Act for the liability of the corporation as a result of my interpretation of subsection 160(1). If this is an unintended effect of that provision — and I am not sure it is — Parliament surely will consider remedying the problem.

Jaans transferred property to Algoa Trust in 1982.

(ii) 116488 Canada Inc.

The payment of a stock dividend is not a transfer of property. The shares authorized in a corporation's articles of incorporation are not assets of the corporation. When a person subscribes for the shares and pays the corporation for the shares, the shares are issued to that person and recorded in the share registry of the corporation. The payment is consideration for the shares. The issue of shares is not a transfer since the corporation has not divested itself of its property: the shares were never owned by the corporation. Assets are transferred for purposes of section 160 only at the time one person is divested of ownership of property and another person is vested in that property. Prior to issue and during issue the shares of a corporation are not property of that corporation.

When a corporation pays a stock dividend to its shareholders it issues shares to those shareholders. A corporation's paid-up capital is increased when it issues shares. The corporation is usually enriched, not impoverished, when shares are issued for consideration; when a corporation issues a stock dividend it is neither enriched nor impoverished. The value of the assets of the corporation are not reduced on the payment of a stock dividend. As a result of the stock dividend there are changes in the corporation's balance sheet; for example, accounts comprising shareholders equity are adjusted to reflect the increase in paid-up capital. These accounts, however, are not assets of the corporation.

In the reply to the notice of appeal the Deputy Attorney General of Canada stated that on February 5, 1983 Jaans redeemed from Canada 7,800 of the 15,000 preferred shares issued in December 21, 1982 for $78,000 and argued that the payment of the stock dividend and the subsequent redemption of the preferred shares were part of a series of transactions whereby property was transferred by Jaans to Canada for no consideration. This may be so. [6] However both the notice of assessment dated November 19, 1992, with respect to the assessment under appeal, and the notice dated November 20, 1989 state Canada's liability is in respect of a transfer to it, on or about December 21, 1982 of 15,000 preferred shares from Jaans. There is no indication in any document which is part of the assessment that, in assessing, the Minister considered the redemption of the preferred shares to be part of the transaction transferring property to Canada. The notices of assessment refer only to the payment of the stock dividend and Canada appealed relying on facts contained in the relevant notice of assessment. In fact the amount assessed Canada, $88,244.82, assumes the payment of the stock dividend was the transfer of property. If the Minister considered the redemption of the preferred shares as the final transaction in the transfer of property he did not assess on that basis; had the Minister so assessed he would have assessed Canada $78,000, the amount it received from Jaans on the redemption of the 7,800 preferred shares.

In a reply to notice of appeal, facts not considered by the Minister in assessing may be alleged and the onus is on the Minister to prove those facts. However, the Minister cannot allege new facts in his pleadings which change the very foundation of the assessment which, in the appeal at bar, is the time and nature of a purported transfer of property. For this reason, when Canada's counsel objected, I did not permit Minister's counsel to adduce evidence and argue the redemption was part of a series of transactions transferring property from Jaans to Canada.

I am also of the view that for purposes of subsection 160(1), property is not transferred when a dividend is declared by the directors. The funds (or property) represented by the dividend are under the control of a corporation until the corporation pays the dividend to the shareholder; only when the funds or property leave the control of the corporation is there a transfer of property.

Jaans cannot be said to have transferred property to Canada of subsection 160(1) when it paid a stock dividend in 1982.

(c) Existence of liability under the Act

Subsection 152(3) of the Act provides that:

Liability for tax under this Part is not affected by an incorrect or incomplete assessment or by the fact that no assessment has been made.

The Act is clear: it is not the assessment itself that creates the liability for tax; it is the operation of the Act itself that creates the liability. Notwithstanding the Minister issued reassessments to Jaans after 1982 with respect to 1981 and prior years, Jaans was liable to pay amounts under the Act at the time it paid dividends to Algoa Trust in 1982. I cannot agree with appellants’ counsel that the reasons of Noel, J., in Simard-Beaudry, supra, apply only to principal debtors. If a principal debtor is indebted under the Act and he or she makes a transfer of property, section 160 may apply.

Paragraph 160(1)(e) applies to transfers of property made after November 12, 1981. A transferee is made jointly and severally liable with the transferor for the latter's liability under the Act as a result of a transaction he or she was party to after November 12, 1981, notwithstanding the transferor's liability was incurred prior to that date, if the transferee and the transferor were not dealing at arm's length.

Accordingly, the appeal by Algoa Trust is allowed and referred back to the Minister only to recalculate interest on the basis payments of tax and interest made by Jaans shall be allocated to those fiscal periods originally indicated in the six remittance forms and not on the dates, as altered, and to make the appropriate reassessment; Algoa Trust shall be entitled to no further relief. The appeal by Canada is allowed and the assessment is vacated. Canada shall be entitled to costs in its appeal and the respondent shall be entitled to her costs in the appeal by Algoa Trust.

Appeal of Algoa Trust dismissed; appeal of 116488 Canada Inc. allowed.