Date: 19980623
Docket: 97-1403-IT-I
BETWEEN:
MICHEL PAUZÉ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
PIerre Archambault, J.T.C.C.
[1] Mr. Pauzé is contesting the notice of
assessment made by the Minister of National Revenue ("the
Minister") on August 23, 1996 for the 1991 taxation
year. The Minister claimed the sum of $11,130.75 from
Mr. Pauzé pursuant to s. 160 of the Income
Tax Act ("the Act") as tax owed by the company
Référium Inc. ("Référium")
in 1991. The Minister applied s. 160 of the Act because
Référium had paid a dividend of $70,000 to
Mr. Pauzé in that year. Mr. Pauzé submits
that the dividend was paid to him in return for services he
rendered to the company and that s. 160 of the Act does not
apply.
Facts
[2] Référium operates a communications and
marketing executive search business. Its fiscal year ends on
February 28. Mr. Pauzé purchased all the shares
in Référium in 1979, paying $42,000 for them. From
1976 onward, Mr. Pauzé was the sole shareholder and
sole director of this company.
[3] Mr. Pauzé reported earnings from
three sources — a base salary, reimbursement of
expenses and advances — totalling about $150,000 to
$170,000 a year. It was his accountant who determined at the end
of Référium's fiscal year whether the advances
would be treated as a dividend or as salary. A dividend was
generally declared in January or February. Mr. Pauzé
did not know whether by-laws had been drafted. He answered
that he relied on his accountant for such matters. The income tax
returns filed at the hearing gave the following information on
taxable salary and dividends reported as income for
Mr. Pauzé for the 1989 to 1992 taxation years:
|
Year
|
Salary
|
Taxable dividend
|
Actual dividend
|
|
1989
1990
1991
1992
|
$26,924
$25,327
$ 3,600
$73,176
|
$177,500
$ 35,000
$ 87,500
$ 0
|
$142,000
$ 28,000
$ 70,000
$ 0
|
[4] In the fiscal year ending February 28, 1991
Référium paid Mr. Pauzé a dividend of
$70,000. For that fiscal year Référium was required
under the Act to pay $11,130.75. Mr. Pauzé admitted
that Référium had closed down its operations around
December 1992. From that time on, he continued operating his
executive search business through a new company.
[5] Référium's accountant, Mr. Morin,
also testified at the hearing. As a partner in the chartered
accountants' firm of Morin, D'Août, he prepared the
1992 financial statements. In 1991 he was an employee of Coopers
& Lybrand, Laliberté, Lanctôt, which had
prepared Référium's financial statements for
1991. However, he did not personally participate in preparing
those financial statements. Mr. Morin admitted that it was
common practice in some independent businesses to advance money
to their sole shareholders, and before the end of the financial
year, to treat these advances as a dividend. He stated that there
was no particular advantage to declaring dividends rather than
paying a salary during those years. However, he admitted that the
payment of a dividend conferred a benefit on
Mr. Pauzé in terms of liquidity since there were no
source deductions in the case of a dividend. He further admitted
that when a company pays a dividend it does not have to
contribute to Quebec's health insurance plan or to the Quebec
Pension Plan.
Analysis
[6] The assessment was made pursuant to s. 160(1) of the
Act, which reads as follows:
160. (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
(a) his spouse or a person who has since become his
spouse,
(b) a person who was under 18 years of age, or
(c) a person with whom he was not dealing at arm's
length,
the following rules apply:
(d) the transferee and transferor are jointly and
severally liable to pay a part of the transferor's tax under
this Part for each taxation year equal to the amount by which the
tax for the year is greater than it would have been if it were
not for the operation of sections 74 to 75.1, in respect of
any income from, or gain from the disposition of, the property so
transferred or property substituted therefor, and
(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.
[Emphasis added.]
[7] The only condition for applying s. 160(1) of the Act
which is disputed by Mr. Pauzé in this appeal is the
one in s. 160(1)(e)(i) of the Act. In other words,
the question to be answered is the following: was the amount of
the dividend paid in consideration of the services rendered by
Mr. Pauzé to Référium? According to
Mr. Pauzé, he received earnings of about $150,000 to
$170,000 and, as his salary was only $3,600 in 1991 and $25,327
in 1990, he considers it clear that the $70,000 dividend was paid
to him in consideration of his services and that the value of
those services was at least $70,000. In support of his arguments
Mr. Pauzé cited the decision in Davis et al. v.
The Queen, 94 DTC 1934, in which a judge of this Court
relied on the following obiter dictum of Dickson C.J.
in The Queen v. McClurg, 91 DTC 5001, at
p. 5012:
I find this conclusion to be completely supported by the
evidence. Wilma McClurg played a vital role in the financing
of the formation of the company. Although I agree with
Desjardins J. that, with respect to a shareholder,
"dividends come as a return on his or her investment"
(at p. 370), in my view there is no question that the
payments to Wilma McClurg represented a legitimate quid
pro quo and were not simply an attempt to avoid the payment
of taxes.
[8] Contrary to the argument of counsel for
Mr. Pauzé, I am not bound by
Mr. Pauzé's testimony that he received employment
income from three separate sources, namely in the form of a base
salary, the reimbursement of expenses and advances treated as
dividends. The question this Court has to resolve is one of mixed
law and fact. As Mr. Pauzé was both an employee and
the sole shareholder in Référium, he could be paid
both as an employee and as a shareholder. As an employee he could
receive a salary for the services he rendered to
Référium, and as a shareholder he could receive a
dividend representing that company's accumulated profits. The
fact that Mr. Pauzé considered the reimbursement of
his expenses to be a form of pay is a very revealing indication
that he may have been mistaken as to the tax treatment of the
money paid to him by Référium.
[9] Furthermore, I have no doubt that Référium
really intended to pay its sole shareholder a dividend. The
company was advised by a chartered accountant who was fully aware
of the difference between a salary and a dividend. It was
precisely because he was well aware of the rules regarding the
payment of dividends that he paid only a salary of $73,176 in
1992, unlike previous years. As it had an accumulated deficit of
$74,346 at the close of its fiscal year ending February 29,
1992, Référium could not pay a dividend. The
accountant also knew that when a company pays a dividend it does
not have to make source deductions and may avoid paying certain
payroll taxes. In paying the $70,000 dividend
Référium did in fact wish to pay a dividend, not to
pay money in consideration of services rendered.
[10] As my colleague Judge Dussault said in Gosselin
v. R., 1996 CanRepNat 2472 (TaxPartner, Carswell
CD-ROM), at paragraph 16, a company which pays
dividends does not receive any consideration from its
shareholders:[1]
The right to a dividend is a right to share in a
company’s profits. With respect for those who hold the
contrary view, that right arises from only one source: the
ownership of shares that carry the right, and nothing else. The
dividend is income from "property" and is not pay or
compensation for services rendered. The fact that dividends
are given favourable tax treatment when they are received by
individuals, under the gross-up and tax credit provisions,
is because they represent the result of this very division of a
company’s profits, profits which have already, in theory at
least, been taxed at this initial stage, and on which the purpose
is to limit or reduce the impact of double taxation when they are
received by individuals. This scheme clearly does not apply to
payment for services rendered . . . .
[Emphasis added.]
[11] My colleague Judge Bell also adopted the same
approach in 155579 Canada Inc. et al. v. The Queen,
97 DTC 691, in which he stated the following at
pp. 693-94: "A dividend is a payment related, by
way of entitlement, simply to the interest of the payee as a
shareholder". He also set out the reasons why he did not
follow the decision in Davis, supra. I concur with
him in this respect.
[12] I would also add that when an employer pays money in
consideration of services rendered by an employee it is salary.
If Référium had really paid Mr. Pauzé a
salary, it should have made source deductions and could have been
required to pay certain payroll taxes. If the amount of $70,000
actually represented consideration for services rendered, that
is, a salary, it would have been subject to a higher tax than if
it were a dividend. Mr. Pauzé would not have been
entitled to the dividend tax credit provided for in s. 121
of the Act. Well aware of this, the accountant decided to pay a
dividend rather than a salary.
[13] As I conclude that the sum of $70,000 was paid as a
dividend and was not paid for consideration, I have no choice but
to uphold the assessment.
[14] Before concluding, I would add that
Mr. Pauzé's counsel initially argued that a
dividend was not a transfer of property within the meaning of
s. 160 of the Act. Apparently, a recent and
as-yet-unreported Federal Court of Appeal judgment
affirmed Judge Rip's decision in Algoa Trust et al.
v. The Queen, 93 DTC 405, and counsel accordingly
withdrew this argument.
[15] For these reasons, Mr. Pauzé's appeal is
dismissed without costs.
Signed at Ottawa, Canada, June 23, 1998.
"Pierre Archambault"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 30th day of November
1998.
Stephen Balogh, Revisor
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