Citation: 2010 TCC 581
Date: 20101110
Docket: 2010-86(IT)I
BETWEEN:
WAYNE CAPANCINI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bowie J.
[1] Mr. Capancini
appeals from a reassessment for income tax for the taxation year 2007. By that
reassessment the Minister of National Revenue added $5,101 to his income for
the year. There is no disagreement between the parties as to the facts that
gave rise to this inclusion. However, they do disagree as to the application of
the Income Tax Act
to those facts.
[2] Prior to June
29, 2007 Mr. Capancini owned 225 shares of Tyco International Ltd (Tyco I), a
large and diversified corporation with its head office in Bermuda and operating
in the United States and elsewhere. On that date, Tyco I underwent a
reorganization that involved spinning off two segments of its business to new
corporations, Tyco Electronics Ltd. (Tyco E) and Covidien Ltd., together with a
reverse stock split. Tyco E and Covidien were also incorporated under the laws
of Bermuda. Under this reorganization Tyco I shareholders each received one
Tyco E share, one Covidien share, and one new Tyco I share for each four old
Tyco I shares that they held. For fractions over a multiple of four they
received a cash payment. The appellant, therefore, received 56 Tyco E shares,
56 Covidien shares, 56 new Tyco I shares and a small cash payment in place of
his 225 old Tyco I shares.
[3] Mr.
Capancini’s broker, Northern Securities, issued a T5 slip to him which indicated
that he had received foreign dividend income of $4,647.44US ($5,001CAD)
consisting of his 56 Tyco E and 56 Covidien shares, that being their market
value on the date of issue. On the basis of that T5 slip the Minister
reassessed the appellant, adding the value of the Tyco E and Covidien shares to
his income for the year.
[4] Understandably,
Mr. Capancini asserts that he is being taxed on an amount that is not income to
him but simply what he already owned, but in a different form. His 168 shares in
three corporations on June 29 2007 represented exactly the same ownership
interest in exactly the same businesses as did his 225 old Tyco I shares on
June 28. In filing his income tax return for the 2007 taxation year he included
a letter explaining that he did not consider that his receipt of the shares of
Tyco E and Covidien was a taxable event, and after he was reassessed he filed a
notice of objection with the Minister, and he also asked his broker, Northern
Securities, to amend the T5 slip to delete the value of these shares from the
statement of his foreign income received.
[5] The Minister
responded to his notice of objection by confirming the reassessment with this
explanation:
$4,740.00 US $
is foreign income and is income from a property under paragraph 12(1)(c).
It has been included in your income according to section 3.
[6] For its part,
Northern Securities declined to amend the T5 slip that it had issued. It relied
upon a press release issued by Tyco I on June 7, 2007, which referred to the spin-offs
to Tyco E and Covidien as being effected through a tax‑free dividend
distribution to Tyco International shareholders, and a statement from Tyco I to
the effect that each of Tyco I, Tyco E and Covidien are resident in Bermuda,
and that there is no tax treaty between Canada and Bermuda, and therefore
section 86.1 of the Act does not apply.
[7] The Minister’s position as pleaded in the Reply to the
Notice of Appeal is that as a result of the restructuring of Tyco I the
appellant received the Tyco E and Covidien shares as dividends in kind. If
those shares were a dividend in kind then their fair market value at the date
of the distribution would be taxable in Mr. Capancini’s hands by reason of
section 90, paragraph 12(1)(k) and subsection 52(2) of the Act,
unless it could be shown that section 86.1 applied to make it an eligible
distribution. Section 90, paragraph 12(1)(k) and subsection 52(2) read
as follows:
90 In computing the income for a taxation year of a taxpayer resident in Canada,
there shall be included any amounts received by the taxpayer in the year
as, on account or in lieu of payment of, or in satisfaction of, dividends on a share owned by the taxpayer of the capital
stock of a corporation not resident in Canada.
12(1) There
shall be included in computing the income of a taxpayer for a taxation year as
income from a business or property such of the
following amounts as are applicable:
(a) …
(k) dividends
from other corporations -- any amount required by
subdivision i to be included in computing the taxpayer's income for
the year in respect of a dividend paid by a corporation not resident in Canada on
a share of its capital
stock or in respect of a share owned by the taxpayer of the
capital stock of a foreign affiliate of
the taxpayer; …
52(2) Where any property has, after
1971, been received by a shareholder of a corporation at any
time as, on account or in lieu of payment of, or in satisfaction of, a dividend payable in
kind (other than a stock dividend) in respect of a share owned by the shareholder of the
capital stock of the corporation, the shareholder shall be
deemed to have acquired the property at a cost to
the shareholder equal to
its fair market value at that time, and the corporation shall be
deemed to have disposed of the property at that time
for proceeds equal to that fair market value.
[8] I shall not
reproduce section 86.1 as Mr. Capancini does not rely on it. His position is
simply that there is no dividend, in kind or otherwise. His 225 shares of Tyco
I were a capital asset; his 56 shares of each of Tyco I, Tyco E and Covidien
which have replaced them are a capital asset.
[9] Counsel for
the respondent referred me to five decisions.
[10] In 463 v.
M.N.R.
the taxpayer received, through a personal corporation, a cash dividend from one
U.S.
corporation, and from another U.S. corporation shares of a subsidiary of that
corporation. The appellant contended that these were not taxable events as the
payor corporations described them as payments in the nature of return of
capital and not taxable under the laws of the United States. The presiding
member of the Tax Appeal Board, W.S. Fisher, held that they were dividends and
taxable in the appellant’s hands because the companies that made the payments
“were not in the process of winding-up, being discontinued, or reducing their
capital structure”.
[11] Cangro
Resources Ltd. (In Liquidation) v. M.N.R. concerned
the exigibility of tax on a cash dividend that was paid to shareholders of a
U.S. corporation to enable them to subscribe for shares of a new corporation
being organized by the existing corporation. The existing corporation described
the process as a “partial reorganization”, but W.O. Davis, the presiding member
of the Tax Appeal Board, found that the new corporation was created to carry on
a business that was distinct from that of the old corporation, and that the
transactions were not part of a reorganization of the first corporation. On
that basis he found the payment to be a taxable dividend.
[12] In Brulotte
v. The Queen
Lamarre Proulx J. found that the dividend in question was a stock dividend,
as defined in the Act, and therefore was a dividend by reason of the
definition of that word, which specifically includes a stock dividend. These
definitions, found in subsection 248(1) of the Act, read then, as they
do now, as follows:
“dividend”
includes a stock dividend (other than a stock dividend that is paid to a
corporation or to a mutual fund trust by a non-resident corporation);
and
“stock
dividend” includes any dividend (determined without reference to the definition
“dividend” in this subsection) paid by a corporation to the extent that it is
paid by the issuance of shares of any class of the capital stock of the
corporation;
[13] Morasse v.
The Queen is a case in which the facts were indistinguishable
from the case before me. The taxpayer was the owner of 400 shares of a Mexican
corporation which underwent a reorganization whereby a distinct part of the
business of the corporation was spun off to a new corporation. The assets and
the liabilities relating to that part of the business of the original company
became the assets and liabilities of the new company. Each shareholder received
one share of the new company for each share held in the original company. As in
this case, the appellant’s broker described the shares of the new company as a
stock dividend and issued a T5 form for the market value of the shares on the
date of issue. Miller J. held that that was not determinative of the issue. I
agree with that, and I agree with his conclusion that in these circumstances
the new shares are not a stock dividend, because they are not shares of the
original company. Nor are they a dividend in kind, as is the case when a wholly
owned subsidiary is spun off by a distribution of its shares to shareholders of
the parent company. In this case the shares of Tyco E and Covidien were never
owned by Tyco I. They were created in the course of a reorganization, and
together with the new Tyco I shares they simply comprise the original capital
of Tyco I in a different form.
[14] The word
“dividend” is not a word of art. Subject only to the inclusion of a stock
dividend by reason of the definition in section 248, it is a word to be given
its ordinary meaning: see Re Carson. Black’s Law Dictionary, while acknowledging some 30 different types of
dividends, defines the word “dividend” as
A portion of a
company’s earnings or profits distributed pro rata to its shareholders,
usually in the form of cash or additional shares.
The
Oxford Dictionary of Law defines “dividend” as “a payment declared … as
being payable to shareholders from profits available for distribution.” It is
clear that the shares of Tyco E and Covidien that were distributed to the
shareholders of Tyco I do not come within the ordinary meaning of the word
“dividend”. Consequently, they are not subject to tax in the hands of the
appellant.
[15] Allen
v. The Queen
is a case in which the facts were not dissimilar to those in Morasse.
However in Allen, Miller J. found that the only evidence as to the
nature of the transaction was the description by the appellant’s broker of the
shares as being a dividend, and that the appeal must fail because there had not
been compliance with the requirements of section 86.1. In this case there is no
disagreement as to the basic facts of the reorganization, as appears from
paragraphs 9 and 10 of the respondent’s Reply to the Notice of Appeal. The only
matter of dispute is the Minister’s characterization in subparagraph 9(b) of
the Tyco E and Covidien shares as a dividend in kind. This is an incorrect
conclusion on his part, for the reasons that I have given. It is also a
statement of mixed fact and law, the pleading of which offends the rule laid
down by the Federal Court of Appeal in The Queen v. Anchor Pointe Energy Ltd.
[16] The appeal is
allowed and the reassessment is referred back to the Minister of National
Revenue for reconsideration and reassessment in accordance with these Reasons
for Judgment.
Signed at Ottawa, Canada, this
10th day of November, 2010.
“E.A. Bowie”
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