[OFFICIAL ENGLISH TRANSLATION]
Date: 20020207
Docket: 1999-4627(IT)G
BETWEEN:
BENOÎT CÔTE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre Proulx, J.T.C.C.
[1] This is an appeal from an
assessment by the Minister of National Revenue (the
"Minister") made under section 160 of the
Income Tax Act, (the "Act") in respect of
a dividend paid to the appellant by a corporation of which he was
the sole shareholder.
[2] The parties agreed on a common
statement of facts, as follows:
[TRANSLATION]
1. Desco
Stratégies Marketing Inc. (hereinafter called "the
corporation") was incorporated in November 1991.
2. At all
relevant times, the appellant was the sole shareholder and
director of the corporation.
3. The only
tax return filed by the corporation pertains to the fiscal year
from December 1, 1991, to November 30, 1992.
4. The
corporation paid advances of $57,300 in 1992 by means of cheques
made out periodically to the appellant, as appears from the
copies of the cheques filed as tab 5 of the Joint Book of
Documents.
5. The
appellant used those amounts paid periodically to support
himself.
6. The
corporation declared a dividend of $58,350 to the appellant, its
sole shareholder, before the end of the fiscal year ended on
November 30, 1992, as appears from the financial statements
appended to its tax return for the 1992 taxation year filed as
tab 6 of the Joint Book of Documents.
7. The balance
of advances made to the appellant during the fiscal year ended on
November 30, 1992, was reduced to zero by way of
set-off.
8. In his tax
return for the 1992 taxation year, the appellant reported a
taxable dividend in the amount of $71,632.
9. This was,
for all purposes relevant to the instant case, the only income
reported by the appellant for the year in issue, as appears from
the tax return for 1992 filed as tab 7 of the Joint Book of
Documents.
10. That dividend is equal
to the amount of advances paid during 1992, grossed up in
accordance with the provisions of the Act.
11. At all relevant times,
the corporation owed the Minister the sum of $15,871.76 for the
1992 taxation year. That amount represents unpaid income tax of
$14,871 and a penalty of $1,000.26, as appears from notices of
assessment of January 7, 1999, and December 7, 2000,
filed as tabs 1 and 4 of the Joint Book of Documents.
12. On January 7,
1999, the interest on the tax debt amounted to $10,851.49, as
appears from the notice of assessment of January 7, 1999,
filed as tab 1 of the Joint Book of Documents.
13. On December 7,
2000, the interest on the tax debt amounted to $16,096.34, as
appears from the notice of assessment of December 7, 2000,
filed as tab 4 of the Joint Book of Documents.
[3] The facts on which the Minister
relied are described in paragraph 11 of the Reply to the
Notice of Appeal (the "Reply") as follows:
[TRANSLATION]
(a) Desco
Stratégies Marketing Inc. (hereinafter called "the
corporation") was incorporated in November 1991.
(b) At all relevant
times, the appellant was the sole shareholder of the
corporation.
(c) The only tax
return filed by the corporation pertains to the fiscal year from
December 1, 1991, to November 30, 1992.
(d) The corporation
paid the appellant a cash dividend of $71,632 in 1992.
(e) In his tax
return for the 1992 taxation year, the appellant reported a
dividend in the amount of $71,632.
(f) At the
time the corporation paid that dividend, it owed the Minister the
sum of $15,871.76 for the 1992 taxation year. That amount
represents unpaid income taxes of $14,871 and a penalty of
$1,000.26.
(g) On
January 7, 1999, the interest on the corporation's tax
debt amounted to $10,851.49.
(h) No consideration
may be paid in exchange for a dividend.
[4] The Notice of Appeal is based in
particular on the following:
[TRANSLATION]
. . .
5. More
particularly, the assessment is based on the apparent joint and
several liability that the appellant has with Desco
Stratège Marketing inc. (hereinafter
"Stratège"), having regard to that
corporation's tax for 1992, in respect of a dividend of
$57,300, which the appellant purportedly received.
6. In fact,
that dividend does not constitute a transfer within the meaning
of section 160 and therefore may not give rise to any joint
and several liability of the appellant under that section, for
the reasons given below.
7. In 1991,
the appellant was employed by a third party, the Marketel
corporation, from which he received a salary.
8. In 1992,
the appellant left that employment and devoted himself to the
activities of Stratège on a full-time basis but never drew
a salary.
9. Rather, the
appellant took cash advances from Stratège to support
himself.
10. Those advances were
subsequently taxed in the appellant's hands in the form of
dividends.
11. Thus, no payment of
dividends was ever made to the appellant.
12. Thus, since the
advances represented the appellant's sole remuneration for
full-time work done for the corporation, it was not a transfer
within the meaning of section 160 of the ITA, as was
recognized in case law.
13. Stratège had
moreover made an agreement with the Department of Revenue for the
payment of its taxes and had issued a series of postdated cheques
for that purpose.
14. However,
Stratège held 50 percent of the shares of a
corporation called "Desco Stratège Conseil
Inc.", which declared bankruptcy in May 1994.
15. It was because of that
corporation's financial difficulties and of the payment by
Stratège of the debts of Conseil that it had guaranteed
that it was unable to honour the cheques issued to pay its
taxes.
16. This clearly shows
that there was no intention to deprive the government of the
amounts owed to it.
17. The amounts paid to
the appellant were paid as remuneration for his services to the
corporation.
[5] It should be noted that the Notice
of Appeal and the Reply do not refer to the second assessment,
which is mentioned in the common statement of facts. When
questioned on this point in a teleconference held on
December 11, 2001, the two counsel informed me that it was
not a point at issue in the instant case and that the fate of the
second assessment will follow the fate of the first. I pointed
out to them at that time that, according to the decision by
Judge Dussault of this Court in Algoa Trust v.
Canada, [1998] T.C.J. No. 292 (Q.L.), interest ceases to
accrue against the transferee from the moment he is assessed.
[6] A joint book of documents was
filed as Exhibit A-1.
[7] The appellant testified briefly.
He explained that he is a management and organization consultant.
The corporation rendered the same type of services. The
corporation is not dissolved, but it has been inactive since
1992. This was the first time that he had been an
owner-shareholder of a business corporation. During the year, he
rendered services to the corporation and drew periodic advances
totalling $57,300 to support himself. The cheques were filed as
tab 5 of Exhibit A-1. The word "salary"
is indicated at the beginning of a number of cheques. On two
cheques, it is written that they constitute reimbursement for
kilometrage. Further on, the word "advances" is written
and, further yet, the word "dividend".
[8] The corporation's tax return
was filed as tab 6 of Exhibit A-1. It states that
gross income amounted to $290,965 and expenses to $161,131. Those
expenses did not include the appellant's salary. The figure
$76,879 appears under the heading "fees" but, according
to the appellant, those were fees to subcontractors. No fees or
salaries were included for the appellant. Before-tax profit was
$129,834. Tax was $22,625. Net profit was $107,209. A $58,350
dividend on Class A shares was deducted from that net
profit. The final balance was $48,859.
[9] The appellant explained that the
corporation held 50 percent of the shares of Desco
Stratège Conseil Inc., which declared bankruptcy in May
1994. It was purportedly as a result of the financial
difficulties of Desco Stratège Conseil Inc., whose debts
the corporation had guaranteed, that the corporation was unable
to pay the taxes owed for 1992. Apart from that statement, there
was no further evidence on this matter.
[10] Counsel for the appellant referred to
the decision by the Federal Court of Appeal in
Heavyside v. Canada, [1996] F.C.J. No. 1608
(Q.L.), specifically to paragraph 8 of that decision:
8 The
object of section 160 is to prevent a taxpayer from avoiding
his tax liability by simply transferring his assets to his or her
spouse or to any other person described in this section.
Section 160, in making the transferee personally liable for
the tax due by the transferor, allows the Minister to seek
payment from a taxpayer who is not the original taxpayer.
[11] He argued that this sentence means that
one must have the intention of avoiding one's tax obligations
at the time of the transfer and that the corporation did not have
that intention.
[12] He referred to the decision by this
Court in Davis v. Canada, [1994] T.C.J. No. 242
(Q.L.), specifically to the following paragraphs:
24 The Appellants
submitted that their labour was consideration and employees of a
Company who have received dividends instead of wages and who
declared and paid tax on such dividends should not be cast into
some deemed relationship of paying another person's tax
because of subsequent unfortunate circumstances where neither the
Company nor its employees were at fault. (The Swedish Company
went bankrupt which precipitated the downfall of the Company).
The Company declared and paid the dividends at a time when it was
quite solvent and thriving.
. . .
26 The purpose of
subsection 160(1) is to ensure that taxpayers do not avoid
the payment of taxes by means of a transfer of property to a
third party without consideration.
. . .
28 The Appellant
submitted that a payment of a cash dividend by the corporation
cannot constitute a transfer of property. In the Algoa supra
case, J. Rip stated at page 412:
"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."
29 I find in the
case at bar that the payment of the cash dividends is a transfer
of property.
(b) Can a corporate
dividend be paid in exchange for consideration?
. . .
38 While
Dickson's, C.J. statement may not be the ratio of his
decision, he emphasized the fact that Mrs. McClurg made a
very real contribution in consideration for the dividends paid
her, it clearly supported his primary reasoning. I accept it for
the position that consideration can be given for dividends.
. . .
41 I find that
consideration can be given in exchange for dividends.
(c) Was there
consideration given in exchange for the dividends in fact in the
case at bar?
. . .
46 I conclude from
the facts, that good and sufficient consideration was by the
Appellants to the Company to justify the payment of $67,500 to
them in 1985 and $64,500 in 1986. Had it been paid by way of
salary, it is very doubtful that the Respondent would have
applied subsection 160(1) of the Act.
47 The purpose of
subsection 160(1) is to prevent a person (Company) with
income tax liability, from avoiding the Minister's claim by
transferring property, including cash dividends, to a
non-arm's length person for no consideration. This is not the
situation at bar. The Appellants devoted their full-time services
to the Company and paid themselves by way of dividends rather
than salary. At the time the dividends were declared the Company
was solvent and there is no question that the declaration and
subsequent payment of dividend was not made to circumvent taxes.
The taxes had not been assessed at the time the dividend was
declared as paid.
[13] Counsel for the appellant stated that,
in 1992, the appellant had devoted himself full time to the
proper operation of the corporation and that the dividend
received was in compensation for services rendered. No other
compensation was granted to the appellant for his services.
[14] He referred to the decision by the
Supreme Court of Canada in Neuman v. M.N.R.,
[1998] 1 S.C.R. 770, more particularly to the following
passage at page 792:
60 In my view, it is
wrong to suggest that there may be an exception to the rule that
s. 56(2) does not apply to dividend income where the
recipient of the dividend income in a non-arm's length
transaction has not made a "legitimate contribution" to
the corporation. In so stating, I assume, of course, that proper
consideration was given for the shares when issued. I am not
aware of any principle of corporate law that requires in addition
that a so-called "legitimate contribution" be
made by a shareholder to entitle him or her to dividend income
and it is well accepted that tax law embraces corporate law
principles unless such principles are specifically set aside by
the taxing statute.
[15] He emphasized the last sentence. If I
understand his argument clearly, he contends that section 15
of the Act states that a benefit to a shareholder must be
included in computing the shareholder's income and that this
explains why a dividend was paid. In his view, the taxing statute
has thus specifically set aside the corporate law notion of
dividend.
[16] Counsel for the respondent referred in
particular to the decisions of this Court in Algoa
Trust v. Canada, [1993] T.C.J. No. 15 (Q.L.);
155579 Canada Inc. v. Canada, [1996] T.C.J.
No. 1188 (Q.L.); Gosselin v. Canada, [1996]
T.C.J. No. 206 (Q.L.); Pauzé v. Canada,
[1998] T.C.J. No. 560 (Q.L.); Gazaille v.
Canada, [2001] T.C.J. No. 240 (Q.L.); and to the
decision by the Supreme Court of Canada in Neuman,
supra, in arguing that the payment of a dividend
constitutes a transfer of property within the meaning of
subsection 160(1) of the Act and that no
consideration is given by a shareholder in exchange for payment
of a dividend.
[17] Counsel also referred to the following
cases: Bronfman Trust v. Canada, [1987] S.C.J.
No. 1 (Q.L.); Friedberg v. Canada (F.C.A.),
[1991] F.C.J. No. 1255 (Q.L.); and Friedberg v.
Canada, [1993] S.C.J. No. 123 (Q.L.) in contending that
the courts must consider what the taxpayer has actually done, not
what he might have done. In particular, he quoted a passage
written by Dickson C.J. in Bronfman Trust,
supra, at page 13:
. . . It would be a sufficient answer to this
submission to point to the principle that the courts must deal
with what the taxpayer actually did, and not what he might have
done: Matheson v. The Queen, 74 DTC 6176 (F.C.T.D.),
per Mahoney J. at p. 6179.
Conclusion
[18] With respect to this Court's
decision in Davis, supra, I do not believe it has
been followed by the other judges of this Court. It can surely no
longer be followed since the decision by the Supreme Court of
Canada in Neuman, supra, which determined that a
dividend is the return on capital relating to a share and in no
way depends on the conduct of a given shareholder.
[19] As Judge Dussault wrote in
Gosselin, supra, in paragraph 15 of his
reasons: The declaration of a dividend is essentially the
allocation of a company's undistributed profits to its
shareholders in proportion to the shares held by them and in
accordance with the rights attached to those shares. Payment of
the dividend is the act by which the dividends so allocated by
the directors in their discretion, and in compliance with the
principles of company law and the specific rules laid down in
this regard, distribute to the shareholders the dividend
allocated to each class of shares. In addition to the rules
regarding solvency of the company there is the rule of equality
of shares in the same class in terms of the privileges and
limitations attached to shares in that class.
[20] The decision in Davis,
supra, also stated that it had not been the
transferor's intention to avoid paying his taxes at the time
of the transfer. This intention to avoid paying one's taxes
or not has never been the decisive element of a decision by this
Court. In fact, that intention is not material for the purposes
of the application of section 160 of the Act. It is
enough that the transferor had a tax debt in the year in which
the transfer took place or in previous years and that the
transfer was made at a value below its market value.
[21] Counsel for the appellant suggested
that section 15 of the Act set aside the corporate
law meaning of a dividend. It was to compensate for
section 15 of the Act that a dividend was paid. It
would follow that only payment of the advances and not payment of
the dividend should be taken into account.
[22] It is true that, under
subsection 15(1) of the Act, the value of the
benefits that a corporation confers on a shareholder must be
included in computing the shareholder's income. This applies
unless that benefit has been, inter alia, conferred by the
payment of a dividend, which is the case in this instance.
Subsection 15(2) of the Act is to the same effect
concerning loans made by a corporation to a shareholder.
[23] In my view, section 15 of the
Act in no way sets aside the corporate meaning of
dividend. It includes it in its full sense. Section 15 of
the Act states that a dividend is not to be included in
computing income under section 15 of the Act. Other
provisions of the Act provide for the tax treatment of
dividends.
[24] There are different paths a taxpayer
may take in organizing his affairs, and each of those paths
entails a specific tax treatment. It is well-settled in tax
matters that the Court must consider what the taxpayer has done.
Here the taxpayer chose not to pay himself a salary but to take
advances and to repay those advances by means of a dividend. The
tax treatment of a dividend is different from the treatment of
salaries or other payments for services rendered. Unfortunately,
I can only conclude as follows: the corporation's payment of
a dividend to the appellant in 1992 was a transfer of property
within the meaning of section 160 of the Act, and no
consideration was given in respect of that property because,
according to corporate law and the provisions of the Act
applicable in the instant case, the dividend in question is a
share of the corporation's profits allocated to the appellant
as a shareholder. It is not a salary or other payment for
services rendered.
[25] The appeal must be dismissed.
Signed at Ottawa, Canada, this 7th day of February 2002.
J.T.C.C.
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