McArthur T.C.J.:
1 These appeals were heard in Halifax on common evidence for the years 1988, 1989 and 1990. The Minister of National Revenue (the “Minister”) included in the Appellants' respective incomes, for each year, amounts paid to two trusts funds. The Appellants' sons were the sole beneficiaries of these trust funds. The money was advanced by way of dividends paid to the trusts by Brimar Developments Ltd. (Brimar) which was a corporation controlled by the Appellants.
2 This judgment applies to both Appellants. The issue is whether the sums of $22,000 in the appeal of Brian Romkey and $33,000 in the appeal of Barry Romkey are to be included in their respective incomes for each of the years 1988, 1989 and 1990 pursuant to subsections 74.1(2) or 56(2) or 75(2) of the Income Tax Act (the “Act”).
Facts
Brimar shares issued
3 The Appellants are brothers who have been business associates for some time primarily and successfully involved in the general field of real estate development and investment. Brimar was incorporated under the Nova Scotia Companies Act in 1982. It did not commence significant business operations until 1987, when the Appellants decided to use the company as “a vehicle by which their respective families would participate equally in corporate profits and equity growth.” On April 3, 1987, upon the direction of the Appellants the sole directors of the company, Brimar issued certain shares resulting in the following purported share ownership:
| Common shares — Class "B" Non-voting | Number of shares |
|---|
| Brian H. Romkey | 167 |
| Margaret Romkey | 167 |
| Brian H. Romkey Child's Trust | 166 |
| Barrie W. Romkey | 125 |
| Lynn Romkey | 125 |
| Barrie W. Romkey Child's Trust | 250 |
| Preferred shares — Class "A" Voting | Number of shares |
|---|
| Brian H. Romkey | 100 |
| Barrie W. Romkey | 100 |
Shares held in trust
4 By Declarations of Trust, Brian Romkey declared that he held 166 of the common shares issued to him in trust for his son, Marc, and Barrie Romkey declared that he held 250 of the common shares issued to him in trust for his sons, Michael and Jeffrey. The Appellants executed identical simple Declarations on April 3, 1988. Finally, the Appellants executed detailed Trust Agreements dated October 21, 1988 which reaffirmed that the shares had been issued to them in trust for their children.
5 Brian and Barrie Romkey were the only signatories to each of their respective Declarations of Trust. In the final Declarations they were given absolute power and control to deal with trust holdings in any manner he wished. Prior to the share transfer, the trusts had a capital value of $10.00 each.
Payment for shares
6 The Appellants submitted that the Brimar common shares issued to the children's trusts had been paid with family allowance payments received by the children's mothers and that the amounts paid represented the fair market value of the shares at the time. At the time of issue, the common shares were ascribed a nominal price of $1.00. The Respondent did not question the $1.00 value attributed to each common share. When the shares were issued on April 3, 1987, Brimar had no assets and no liabilities. It was only after the share issue that Brimar aggressively acquired income-producing storage rental buildings. As of December 31, 1990, Brimar's Financial Statement reflected rental income and interest of $744,695 and a year end accumulated deficit of $624,392. The 167 Brimar shares issued to Brian H. Romkey Child's Trust were paid for in instalments of $65.48, $32.74 and $65.48 on May 27, September 30, and October 31, 1989 for a total payment of $163.70. The Appellant submitted that Margaret Romkey endorsed family allowance cheques in these amounts which were then deposited in Brimar's bank account. The 250 Brimar shares issued to Barrie W. Romkey Child's Trust were paid for by instalments in the amounts of $130.96, $65.18 and $65.48 made on May 27, September 30, and October 30, 1989 for a total payment of $261.62. The Appellants submitted that these payments also represented family allowance cheques used to pay for the shares. The Respondent submitted that family allowance payments had not been used to pay for the Brimar shares and denied that Margaret and Lynn Romkey had in fact transferred the family allowance funds to the children's trusts in order that the trusts could purchase the shares in Brimar for the benefit of the children.
Dividends paid on the Brimar shares
7 Beginning in 1988, Brimar paid dividends on the shares held by the children's trusts. On November 21, 1988, the sum of $22,000 in dividends was paid into Brian H. Romkey Child's trust, withdrawn the same day, and deposited into the joint bank account of Brian and Margaret Romkey. The money was then loaned back to Brimar, for use in its operations, and later repaid to the joint bank account. In 1989, the sum of $22,000 in dividends from Brimar was paid directly into the joint bank account. In 1990, the sum of $22,000 in dividends paid by Brimar was deposited into the trust, withdrawn the same day, and deposited into the joint bank account. In each year, dividends of $22,000 were paid to both Brian and Margaret Romkey. The parents blended the trust funds with their personal funds using the money for general family expenditures.
8 On November 21, 1988, Brimar paid a dividend of $16,500 to each of Barrie Romkey and Lynn Romkey and dividends totalling $33,000 to Barrie W. Romkey's Child's trust. The total amount of $66,000 was deposited into the joint bank account of Barrie and Lynn Romkey. On the same day, it was loaned back to Brimar. Through the remainder of 1988 and in 1989, Brimar repaid the loan by depositing money into the joint bank account. Between October 30 and December 15, 1989, Brimar paid dividends totalling $16,500 to each of Barrie and Lynn Romkey, and $33,000 to Barrie W. Romkey in trust. Between March 2 and May 2, 1990, Brimar paid dividends totalling $16,500 to each of the Barrie and Lynn Romkey, $27,000 to Barrie W. Romkey in trust, and $12,000 to Michael and Jeffrey Romkey in trust. Each of the dividends paid was deposited directly or indirectly into the joint bank accounts of Barrie and Lynn Romkey
9 The dividends paid to the children's trusts, in most instances, ended up in the Appellants' personal bank accounts the same day they were declared.
10 Both Appellants testified that the shares, trusts, and dividends were structured pursuant to their accountant's advice and direction. When dividends were paid by Brimar in 1988 it was in a deficit position. The dividend paid was immediately paid back to it.
Legislation
11 Subsection 74.1(2) reads as follows:
74.1(2) Transfers and loans to minors. Where an individual has transferred or loaned property, either directly or indirectly, by means of a trust or by any other means whatever, to or for the benefit of a person who was under 18 years of age and who(a) does not deal with the individual at arm's length, or
(b) is the niece or nephew of the individual,
12 The Appellant submitted the following:Brimar was incorporated under the Companies Act of Nova Scotia, which permits a company to issue shares which are not fully paid. Each family's 50% equity in Brimar was to be distributed equally among its members. Since Brian's child and Barrie's two children were under the age of majority, their interests were held in trust. The Appellants' wives used family allowance payments they received to pay for the shares of Brimar which were held by the children trusts. The Appellants' interests in Brimar were not reduced upon issuance of shares to the trusts.
The trust agreements gave the Appellants complete discretionary use of the funds. The Appellants had fiduciary duties and it should not matter for the purpose of determining who is taxable on the dividends received by the trusts, where the dividend money was deposited, or how it was spent. No money from a source other than the family allowances was used to purchase the trusts' shares of Brimar.
The Appellants added that for subsection 74.1(2) to apply to the Appellants, they must have “transferred or lent property” to or for the benefit of their children. Since the income sought to be taxed to the Appellants takes the form of dividends paid on the shares of Brimar held by the trusts, those shares must be the transferred property. The shares were paid for with family allowance funds. The Appellants cannot be regarded as having transferred the funds in question to the trusts. The Appellants, as the fathers, did not have any beneficial interest in the family allowance payments. The mothers received the funds beneficially and any transfer to a trust for the child is a transfer of property by her and not by her husband. The funds used to pay Brimar never vested in the Appellants and cannot be said to have been transferred by them and therefore subsection 74.1(2) of the Act cannot apply to attribute the dividends in question to the Appellants. The Appellants rely on Dunkelman v. Minister of National Revenue (1959), 59 D.T.C. 1242 (Can. Ex. Ct.), for the principle that section 74.1 should be strictly construed and that the subject matter of a transfer must be the property of the transferor, and not that of some other person, and such property must have been vested by him in a person under the age of majority, if the subsection is to apply.
The Appellant cited Thalheimer v. Minister of National Revenue (1983), 83 D.T.C. 498 (T.R.B.), in which the issue was not attribution rules, but the application of section 160 of the Act, which also requires a transfer of property. The Appellant submits that this case indicates that a transfer of beneficial ownership is what is contemplated by a “transfer of property” in the legislation. The present Appellants were not beneficial owners of the family allowance payments. It follows that no amount of participation by them in the transactions in question can be characterized as a transfer of property by them.
With respect to the applicability of subsection 56(2), Counsel referred the Court to Fraser Cos. v. R. (1981), 81 D.T.C. 5051 (Fed. T.D.), wherein Cattanach J. considered the application of subsection 56(2) and set out each of the essential ingredients which must be met in order for the subsection to apply. The four “ingredients” are listed at 5058. Both counsel acknowledged that the first three requirements were not in issue. The fourth ingredient to be met is that “the payment or transfer would have been included in computing the taxpayer's income if it had been received by him instead of the other person”. The Appellants submit that this fourth element was not present in the circumstances at bar because the Appellants had no personal right to receive the dividends in question.
With respect to subsections 75(1) and (2), the Appellants argued that it cannot be said that the trusts “directly or indirectly received” property from the Appellants. Consequently, the Appellants were not “the person from whom the property or property for which it was substituted was directly or indirectly received” referred to in subparagraph 75(2)(a)(i). Subsection 75(2) does not apply to attribute the income from the trust property to the Appellants.
13 The Respondent submitted the following:As of April 3, 1987 the Appellants were the sole directors and officers of Brimar and the sole holders of its voting preferred shares. At their direction new common non-voting shares were issued to themselves, allegedly “in trust” for their children. The shares had no par value and were sold for $1.00 per share. Although the shares were issued, none were paid for. As a result of these transactions, the Appellants' interests in the corporation were substantially reduced. On October 21, 1988 the Appellants created trusts for the benefit of their children, wherein each Appellant became both the settlor and trustee of each respective trust. The trust property of each trust consisted of $10.00 and of the shares which had been previously issued to the Appellants “in trust” for their children. At that time the shares were still unpaid. The Appellants, as directors of Brimar, caused the company to declare and pay dividends on all non-voting shares. The children's dividends were deposited in the Appellants' bank account and were used by the Appellants in their uncontrolled discretion.
These transactions constituted a “transfer of property” so as to engage the attribution rules found at subsection 74.1(2). In Kieboom v. Minister of National Revenue (1992), 92 D.T.C. 6382 (Fed. C.A.), the Court stated the giving of a portion of one's ownership of the equity in a corporation by the issuance of shares constitutes a transfer of property within the meaning of subsection 74.1 of the Act. Herein, the Appellants' beneficial interest in their corporation was reduced by one-third and the children's interests were increased by same. The fact that the transfer of property was accomplished through causing the corporation to issue shares makes no difference. The transfer, although indirect, is nevertheless a transfer from the fathers to the children. By the transfer of property to the children, the fathers divested themselves of rights to receive dividends. Therefore the dividends that were effectively paid, but used by the Appellants in their uncontrolled discretion, was income from the transferred property and rightly attributable to the Appellants pursuant to subsection 74.1(2) of the Act.
Dealing with subsection 56(2) Counsel quoted the four tests that must be satisfied and agreed that the fourth test is the only one which required attention. The commercial reality was that the Appellants not only controlled the corporation, but completely controlled both the trusts, and its property, and used the trusts' income at their total discretion, therefore, the dividend payments would have been included in the Appellants' income, had they been received by the Appellants.
The Respondent submitted that the Court should follow the reasoning in Neuman v. Minister of National Revenue (1996), 96 D.T.C. 6464 (Fed. C.A.)(application for leave to appeal to Supreme Court of Canada granted March 13, 1997), to dismiss the appeal since, in the appeal at bar, the creation of the trusts and the transfer of shares to the trusts, were done for tax planning and income splitting purposes and had no independent purpose but the reduction of the tax payable by the taxpayers who enjoyed all the rights of ownership of the income flowing from the shares. The amount of dividends declared was arbitrary and the children made no contribution to Brimar and did not assume any risks of the corporation.
Analysis
14 The first question I will consider is whether there was a transfer of property within the meaning of subsection 74.1 so as to engage the attribution provisions of the Act.
15 The Appellants referred to the Exchequer Court decision in Dunkelman (supra) for their position that for subsection 74.1 to apply, the property transferred must first belong to the transferor which, they argued, is not the situation here. The Appellants submitted that Brimar issued shares directly to the children's trusts, not to the Appellants, and that the family allowance money, used to pay for the shares, was never the property of the Appellants. The family allowance money was always the property of the Appellants' wives or that of the children. Furthermore, the attribution rules in 74.1 do not apply to transfers of property for fair market value. Since it was not contested that the fair market value April 3, 1987 was $1.00 per share and that funds equal to the fair market value were paid to Brimar from May through October 1988, the attribution rules have no application to the shares held by the trusts.
16 The Appellants' submission must fail for the following reasons. Firstly, the initial dividends paid to the trusts were distributed while the Brimar shares held by the trusts were unpaid. Even though the Nova Scotia Companies Act may permit a company to issue shares without receiving consideration for those shares, the dividends paid to the trusts on those unpaid shares represent an indirect payment made to the children for no consideration. Therefore, regardless of which funds, if any, were used to pay for the shares, the initial dividends of November, 1988 are attributable to the Appellants income under subsection 74.1(2) of the Act.
17 Secondly, although certain amounts were shown to have been paid to Brimar prior to the payment of further dividends to the trusts, the Appellants failed to provide satisfactory evidence that these funds represented family allowance payments. The Appellant referred to paragraph 16 of Information Circular 79-9R — Family Allowances (July 7, 1986) and submitted that it was the Department of National Revenue's own policy at the relevant times to treat income arising out of the investment of family allowance payments as taxable in the hands of the child. The Department requires that the taxpayer be able to establish that the family allowance payments were the sole source of the investment income and that the funds were to be used for the benefit of the child in the future. I agree with this reasoning. In the present instance, the Appellants failed to demonstrate that the family allowance payments had been used to pay for the Brimar shares which the trusts held. When money was finally paid in instalments from May to October, 1989, the amounts paid did not match the nominal value of the shares. In the case of Brian H. Romkey Child's Trust, only $163.70 was paid for shares with a nominal price of $167.00 and in the case of Barrie W. Romkey Child's Trust $261.62 was paid for shares with a nominal price of $250.00.
18 Furthermore, the trust documents were not entirely accurate or complete. The Declaration of Trust dated April 3, 1987 and a similar one dated April 3, 1988 stated “the shares having been purchased with money of the owner”. This was not accurate; no money was paid to Brimar on or before April 3, 1987 or April 3, 1988. There are three sets of trust documents and the trust accounting, as presented, was in disarray. Brian Romkey admitted that the trust arrangements were structured at least in part for the purpose of income splitting. While agreeing that the Appellants' paper work and accounting was sloppy, Counsel for the Appellants submitted that this should be overlooked and that by piecing together loose ends, eventually everything fell into proper order. Counsel for the Appellant suggested that all necessary procedures were eventually taken. I cannot accept that position. The Supreme Court of Canada in Stubart Investments Ltd. v. R. (1984), 84 D.T.C. 6305 (S.C.C.), affirmed the principle that no tax planning transaction will be recognized unless validly established. A tax advantage can be lost should legal formalities not be strictly complied with.
19 In Atinco Paper Products Ltd. v. R. (1978), 78 D.T.C. 6387 (Fed. C.A.), Urie J.A. cautioned that tax driven transactions are to be fully implemented and carefully documented and stated at 6395:
Nonetheless, it is the duty of the Court to carefully scrutinize everything that a taxpayer has done to ensure that everything which appears to have been done, in fact, has been done in accordance with applicable law. It is not sufficient to employ devices to achieve a desired result without ensuring that those devices are not simply cosmetically correct, that is, correct in form, but, in fact, are in all respects legally correct, real transactions. If this Court, or any other Court, were to fail to carry out its elementary duty to examine with care all aspects of the transactions in issue, it would not only be derelict in carrying out its judicial duties, but in its duty to the public at large. It is for this reason that I cannot accede to the suggestion, sometimes expressed, that there can be a strict or liberal view taken of a transaction, or series of transactions which it is hoped by the taxpayer will result in a minimization of tax. The only course for the Court to take is to apply the law as the Court sees it to the facts as found in the particular transaction. If the transaction can withstand that scrutiny, then it will, of course, be supported. If it cannot, it will fall. That is what happened here.
20 These remarks were echoed in Friedberg v. R. (1991), 92 D.T.C. 6031 (Fed. C.A.), where Linden J.A. stated at 6032:
In tax law, form matters. A mere subjective intention, here as elsewhere in the tax field, is not by itself sufficient to alter the characterization of a transaction for tax purposes. If a taxpayer arranges his affairs in certain formal ways, enormous tax advantages can be obtained, even though the main reason for these arrangements may be to save tax (see The Queen v. Irving Oil, 91 D.T.C. 5106, per Mahoney, J.A.). If a taxpayer fails to take the correct formal steps, however, tax may have to be paid. If this were not so, Revenue Canada and the courts would be engaged in endless exercises to determine the true intentions behind certain transactions. Taxpayers and the Crown would seek to restructure dealings after the fact so as to take advantage of the tax law or to make taxpayers pay tax that they might otherwise not have to pay. While evidence of intention may be used by the Courts on occasion to clarify dealings, it is rarely determinative. In sum, evidence of subjective intention cannot be used to “correct” documents which clearly point in a particular direction.
21 I am not satisfied that fair market value was paid for the shares and, therefore, the Federal Court of Appeal's decision in Kieboom (supra) applies to these appeals. At pages 6386-87, Linden J.A. stated the following:
In this case, therefore, the taxpayer transferred property to his wife, that is, he gave a portion of his ownership of the equity in his company to his wife. The 40% capital interest in his company which he gave to his wife was clearly property. His beneficial interest in his company was reduced by 40% and hers was increased by 40%. The fact that this transfer of property was accomplished through causing his company to issue shares makes no difference. Subsection 74(1) covers transfers that are made “directly or indirectly” and “by any other means whatever”. The transfer, which in this case was indirect, in that the taxpayer arranged for his company to issue shares to his wife, is nevertheless a transfer from the husband to the wife. There is no need for shares to be transferred in order to trigger this provision of the Act, as was erroneously concluded by the Tax Court judge. By this transfer of property to his wife, he divested himself of certain rights to receive dividends should they be declared. Hence, when the dividends were paid to the wife in 1982, that was income from the transferred property and was rightly attributable to the taxpayer.
22 I apply this reasoning to the facts before me. We must look to the true nature of the transactions. In reality, each of the Appellants' beneficial interests in Brimar were reduced by one-third. The fact that the transfer of property was accomplished by directing Brimar to issue the shares does not alter the situation. Although done indirectly, the Appellants in fact transferred property to their children. The Appellants divested themselves of the right to receive dividends. I find that the Appellants transferred property, namely shares, indirectly by means of a trust for the benefit of their infant children and the dividend income from those shares is deemed to be income of the Appellants. Having regard to the jurisprudence and the facts of this case, I find that the tax planning strategy fails. It is not necessary to deal with the alternate arguments.
23 The appeals are dismissed with costs.
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