Citation: 2009 TCC 81
Date: 20090211
Dockets: 2006-439(IT)G
2006-441(IT)G
BETWEEN:
JOHN NEUMANN,
MONICA NEUMANN,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Paris, J.
[1]
The Appellants are challenging
assessments made under subsection 160(1) of the Income Tax Act (the
“Act”). The Minister of National Revenue (the “Minister”) assessed
the Appellants on the basis that they had each received a dividend of $173,500 from
782047 Alberta Ltd. (“782”), a corporation with which they were not
dealing at arm's-length, at a time when 782 had a debt of $39,152.51 under the Act.
[2]
The Appellants are contesting the
assessments on two grounds. Firstly, they say that subsection 160(1) does not
apply to the dividends paid by 782 because the dividends were capital dividends
as described in subsection 83(2) of the Act. Secondly, they say that if
section 160 does apply to a capital dividend, they provided consideration for
the dividends that exceeded the amount of the dividends.
Facts
[3]
The following summary of facts is
taken from the statement of agreed facts filed by the parties at the hearing.
[4]
The Appellants are married. They
incorporated 782 in 1998 and each held 50% of the shares. They were the only directors
and officers of 782.
[5]
The principal asset of the
corporation was an industrial building which it rented to another corporation,
Apex Group Inc., which was also owned by the Appellants.
[6]
The Appellants worked approximately
10 hours per week for 782 managing its affairs but did not receive any payment
for this work.
[7]
On December 28, 2002, 782 sold the
building to an unrelated purchaser. This gave rise to a large capital gain to
782, and an increase of $347,337 in its capital dividend account for tax
purposes.
[8]
On July 1, 2003, 782 filed an
election under subsection 83(2) of the Act to pay its shareholders a
capital dividend of $347,000. On August 20, 2003, 782 declared and paid a
dividend of $347,000 to the Appellants. The directors’ resolution of the same
date read, in part, as follows:
1. A
dividend in the amount of $3,470 per Class A share (for a total dividend of
$347,000) is hereby declared to be payable on the 20th day of August
2003 to all Class A common shareholders of record of the Corporation as of the
20th day of August 2003.
2. The
Corporation shall make an election under subsection 83(2) of the Income Tax Act
(Canada) in respect of the full amount of the dividend.
3. The
said dividend shall not become payable unless and until the Corporation has
duly filed an election, in prescribed manner and in prescribed form, under
subsection 83(2) of the Income Tax Act (Canada) in respect of the full amount
of the said dividend.
…
[9]
The dividend was paid to the
Appellants by way of a credit of $173,500 to each of their shareholder loan
accounts with 782 on August 20, 2003. The amount owing by 782 to the Appellants
as a result of the credit to their shareholder loan accounts was secured by a
general security agreement registered in their favour in the Alberta Personal
Property Registry.
[10]
On December 2, 2004, 782 made a
voluntary assignment in bankruptcy. The bankruptcy filing showed that 782 had
assets of $319,729 against liabilities of $498,489. The Appellants, the only
secured creditors and 782, filed proofs of claim in the amount of $160,000
each. The Minister was an unsecured creditor in the bankruptcy and did not
receive any funds from the distribution of the assets of 782.
[11]
On January 25, 2005 the Minister
assessed each of the Appellants pursuant to subsection 160(1) for the
outstanding liability of 782 under the Act for its taxation years ending
January 31, 2003 and January 31, 2004 in the amount of $39,152.51.
Arguments
[12]
The Appellants first argument is
that section 160 does not apply to the dividend paid to the Appellants’ by 782
because the dividend was a capital dividend.
[13]
Counsel for the Appellants
acknowledged that the payment of an ordinary dividend by corporation to its
shareholder is a transfer of property within the meaning of section 160 of the Act
but submitted that the capital dividend paid to the Appellants in this case
was not an ordinary dividend and did not constitute a transfer property under
section 160.
[14]
According to counsel, a capital
dividend is “a notional creature under the Income Tax Act and is not a
corporate law concept.” He said that a capital dividend is created by the Act,
and is triggered by the filing of an election under subsection 83(2) of the Act,
and that the filing of the election could not be equated to a transfer property
by the Corporation.
[15]
He also likened a capital dividend
to a stock dividend, saying that a capital dividend was not the property of the
corporation prior to the capital dividend being declared.
[16]
If the payment of the dividend in
this case is found to be a transfer of property by the corporation to the
Appellants, counsel argued that the assessments should still be vacated because
the Appellants provided consideration for the payment of the dividend. That
consideration consisted of the Appellants filing the election, the unpaid work
they had done for 782 over the years, and their loan of the dividend back to
782.
[17]
Finally counsel stated that the
Appellants were not attempting to obtain the benefit of the dividend to the
detriment of the other creditors of 782.
[18]
Respondent’s counsel submitted
that the payment of the dividend to the Appellants was a transfer property
within the meaning of subsection 160(1) and that the fact that the dividend was
a capital dividend did not matter. The dividend was paid from the proceeds of the
sale of the building owned by 782, and was therefore paid out of property of
the Corporation. The Corporation was impoverished by the payment of the
dividends and the Appellants were correspondingly enriched by the receipt of
them. The transfer of the property out of the Corporation led ultimately to its
inability to pay its taxes owing under the Act.
[19]
Counsel for the Respondent referred
to the case of Neuman v. The Queen, 1 S.C.R. 770, in which the Supreme
Court held that the payment of a dividend relates to the entitlement of the
shareholder to a capital or share interest in the corporation and not to any
other consideration received from the shareholder. This decision was followed
in Ruffolo v. The Queen, [1998] 4 C.T.C. 2114, [1998] T.C.J. No.
714, and Cote v. The Queen, [2002] T.C.J. No. 76, [2003].4 C.T.C. 2064,
2002 D.T.C. 1348.
[20]
Lastly, counsel for the Respondent
submitted that an intention to avoid payment of taxes by the transferor of the
property is not required in order to apply section 160 of the Act.
Legislation
[21]
Subsection 83(2) of the Act
reads as follows:
(2) Capital dividend. Where at any particular time after 1971
a dividend becomes payable by a private corporation to shareholders of any
class of shares of its capital stock and the corporation so elects in respect
of the full amount of the dividend, in prescribed manner and prescribed form
and at or before the particular time or the first day on which any part of the
dividend was paid if that day is earlier than the particular time, the
following rules apply:
(a) the dividend shall be deemed to be a capital dividend to
the extent of the corporation’s capital dividend account immediately before the
particular time; and
(b) no part of the dividend shall be included in computing
the income of any shareholder of the corporation.
[22]
Subsection 160(1) of the Act
reads as follows:
(1) Where a
person has, on or after May 1, 1951, transferred property, either directly or
indirectly, by means of a trust or by any other means whatever, to
(a) the
person’s spouse or common-law partner or a person who has since become the
person’s spouse or common-law partner,
(b) a
person who was under 18 years of age, or
(c) a
person with whom the person 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 74.1 to 75.1 of this Act and section 74 of the Income
Tax Act, chapter 148 of the Revised Statutes of Canada, 1952, 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
total 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 provision of this Act.
Analysis
[23]
The Appellants’ first argument,
that a capital dividend is not a transfer of property under subsection 160(1)
of the Act, cannot succeed. While I am not aware of any jurisprudence on
point, and no cases were referred to me by counsel, it appears self-evident
that a capital dividend is no less a transfer of property by a corporation to
its shareholder than an ordinary dividend.
[24]
In Algoa Trust v. The Queen,
[1993] 1 C.T.C. 2294, 93 D.T.C. 405, Rip, J., as he then was, found that
a dividend was a transfer of property within the meaning of subsection 160(1). In
doing so, he said:
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.
This
description is equally applicable to the payment of the dividends in this case.
Property of 782 was taken from the patrimony of the corporation and placed in
the patrimony of the Appellants; there was an impoverishment of the corporation
and an enrichment of the Appellants.
[25]
The fact that 782 elected under
subsection 83(2) to pay the dividend out of its capital dividend account did
not affect the legal nature of the dividend or the means by which the dividend
was paid. A capital dividend allows a private corporation to make a tax-free
distribution of certain non-taxable gains it earns, such as the untaxed portion
of capital gains. The election only affects the tax attributes of the dividend
payment once it had been made. Subsection 83(2) is applicable only “where at
any particular time after 1971 a dividend becomes payable by a private
corporation to shareholders of any class of shares” and an election under that
section has been made.
[26]
Contrary to the submission of the
Appellants’ counsel, the capital dividend election did not create the dividend;
it simply made the dividend tax-free to the recipient shareholders. Subsection
83(2) does not purport to authorize the payment of the dividend by a corporation
or to create a fund out of which to pay it. The authority to declare a dividend
lies with the directors subject to any restrictions that have been included in
the articles of incorporation. The dividend here was created by the directors’
resolution and paid pursuant to that resolution out of the property of the
corporation.
[27]
Since the dividend was paid out of
the property of the corporation it is distinguishable from a stock dividend. As
noted by Rip, J. at paragraph 51 of the Algoa case, supra, the shares
authorized in a corporation’s articles of incorporation are not assets of the
corporation, and the issuance of shares pursuant to the declaration of a stock
dividend is not a transfer of property by the corporation because the
corporation has not divested itself of any of its property.
[28]
The Appellants’ argument that they
provided consideration for the dividend cannot succeed either. It has now been
clearly established that the right of a shareholder to receive the payment of a
dividend that has been declared flows from his or her status as a shareholder
and not from any consideration given by him or her. In other words, dividends
attach to the shares and not to the shareholder. In Neuman v. The Queen,
supra, Iacobucci J., writing for the Court said at paragraph 57 that:
…a dividend is
a payment which is related by way of entitlement to one’s capital or share
interest in the corporation and not to any other consideration. Thus, the
quantum of one’s contribution to a company, and any dividends received from
that corporation, are mutually independent of one another. La Forest J made the
same observation in his dissenting reasons in McClurg (at p. 1073):
With respect, this fact is irrelevant to the issue before us. To
relate dividend receipts to the amount of effort expended by the recipient on
behalf of the payor corporation is to misconstrue the nature of a
dividend. As discussed earlier, a dividend is received by virtue of
ownership of the capital stock of a corporation. It is a fundamental principle
of corporate law that a dividend is a return on capital which attaches to a
share, and is in no way dependent on the conduct of a particular shareholder.
[29]
Thus, neither work done for a
corporation nor a promise by a shareholder to lend money to the corporation can
be a consideration for the payment of a dividend to the shareholder. As well,
the Appellants’ position that they gave consideration for the dividends by
making the capital dividend election is ill-founded also because the election
was made by 782 rather than by them.
[30]
In summary, therefore, I find that
the payment of the dividend by 782 to each of the Appellants was a transfer of
property within the meaning of subsection 160(1) that was made for no
consideration. As a result, the appeals shall be dismissed, with one set of
costs to the Respondent.
Signed at Ottawa, Canada, this 11th day of February 2009.
“B.Paris”
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