Citation: 2008TCC15
Date: 20080110
Docket: 2006-1176(IT)G
BETWEEN:
L'INDUSTRIELLE ALLIANCE,
ASSURANCES ET SERVICES FINANCIERS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Lamarre Proulx J.
[1] The issue in the
instant case is whether the Minister of National Revenue
("the Minister") may declare that a share subscription agreement
in which shares were purchased at market value, and a brokerage agreement in
which the new owner of the shares was registered and a broker was chosen, are without
legal effect since the ownership of the shares, or at least the right to the
dividends, was not transferred. The Minister is not contesting the
validity or veracity of these agreements, which were entered into as part of a large
bonded debt incurred by the
Appellant in order to increase its capital.
[2] The taxation years
in issue are 1997 and 1998. The statutory provision which the Appellant invokes
is subsection 138(6) of the Income Tax Act ("the Act") under
which a life insurer may deduct dividends received from a taxable Canadian
corporation if it included those dividends in computing its income. The
Minister submits that the Appellant is not entitled to this deduction because
the dividend income does not belong to the Appellant and was not included in
its income.
[3] Yvon Côté, the
Appellant's Vice President and Executive Director, Finance and Investment,
testified for the Appellant. He explained that the Appellant was in a difficult
and even precarious financial situation in 1992 as a result of the acquisition
of Trustco Général. The
Appellant had to let go of that company, and sustained losses in excess of $100
million. The Appellant's liabilities ballooned, and the ratio of capital available
to capital required became dangerously low.
[4] According to the
witness, the Appellant needed to find a way to increase its available capital. It turned to the Caisse de dépôt et placement du Québec ("CDPQ").
In view of its low capital
available and the regulatory environment for mutual life insurance companies,
it would have been too onerous to turn to the private sector. After 18 months
of arduous discussions, the Appellant and the CDPQ agreed on a financial plan
that the insurance directorate of Quebec's Inspecteur
général des institutions financières ("IGIF"), which was overseeing
the situation, considered satisfactory.
[5] In accordance with
this plan, the Appellant issued a subordinated debenture in the amount of $60
million to the CDPQ on January 24, 1994. On the same day, the Appellant purchased Domtar
bonds and Power Financial Corporation shares from the CDPQ at market value for $60 million. Closing
documents described at tab 27 of Exhibit I‑1 were signed that
day. The main documents in the instant dispute are the debenture, Schedule A,
the Share Subscription Agreement, and the Brokerage Agreement.
[6] In an initial
letter dated October 26, 1993 (Exhibit A-1, tab 54), the IGIF accepted the CDPQ's proposal to
invest $60 million in the Appellant's capital. On January 14, 1994, the final version of
the investment proposal was accepted in the following terms (Exhibit I-1, tab
35):
[TRANSLATION]
. . .
I have reviewed the documents that you
sent me on December 23, 1993 with respect to the above-referenced subject, and
I understand that they constitute the final version of your proposed agreement
with the CDPQ.
Over the last few months, my
staff has analysed different versions of your proposal, and various discussions
took place with your representatives and the CDPQ's. These meetings made it
possible to clarify and rework certain sections of the documents submitted.
In this regard, I would like to inform
you that I am satisfied with the results of the discussions concerning events
of default, the impact of such events on the repayment of the debentures, and
referrals to regulators. In addition, as I have already told you, the
debentures will not be redeemable prior to maturity without my prior consent.
Consequently, I confirm that the value of
the debenture will be considered in the capital base, and that the
straight-line depreciation to which the debenture will be subject for the
purposes of the statutory surplus tests shall commence five (5) years prior to
maturity.
This acceptance supersedes the one
contained in my letter of October 26, 1993, which was based on
earlier documents that were subsequently amended.
. . .
[7] This letter
confirms that, from the IGIF's perspective, the value of the debenture will be
factored into the Appellant's capital base.
[8] Clauses 2 and
3 of the Subscription Agreement (Exhibit I-1, tab 36) describe the purchase of
the debenture by the CDPQ and the Appellant's use of the amount invested by the
CDPQ.
[9] I quote clauses 2
and 3:
[TRANSLATION]
2. PURCHASE OF DEBENTURE
Subject to the terms and conditions hereof,
and based on the representations and warranties made by the Company herein, the Company
agrees to issue and sell the Debenture to the CDPQ this day, and the CDPQ
agrees to subscribe for it and purchase it from the Company for the
subscription price of $60,000,000.
3. USE OF
INVESTMENT PROCEEDS
The Company shall use the entire
proceeds of the Debenture investment for the initial establishment of the
Portfolio. In this regard, the Company agrees to purchase this day the
following Initial Securities from the CDPQ, and the CDPQ agrees to sell same to
the Company, for the prices set out below, which represent the market value of
the Initial Securities as at January 21, 1994:
|
Description
of securities
|
|
Total
selling price
|
|
• Domtar
Inc. 8% convertible debentures with an aggregate par value of $20,000,000
|
|
$29,650,000
|
|
• 895,941 common
shares of Power Financial Corporation
|
|
$30,350,000
|
|
|
|
$60,000,000
|
[10] Since the Respondent
focuses on certain sections of this agreement in her attempt to show that the
Appellant did not own the shares, or that, if it did, it did not own the income
therefrom, I quote clauses 6.2 and 6.3, part of clause 6.4, and clauses 6.5,
6.12, 6.14 to 6.16, and 7.2:
[TRANSLATION]
6.2 The Portfolio shall initially consist of
the Initial Securities. The Company grants the CDPQ the exclusive right to
choose possible changes to the Portfolio mix and agrees not to change it on its
own except (i) in accordance with a Request (within the meaning of clause 6.4
below) or (ii) with the prior written agreement of the CDPQ. However, the
Company may modify the Portfolio mix to the extent necessary if the CDPQ fails
to make a Request under clause 6.11 below.
6.3 The Company is the owner of the Portfolio
Securities and Portfolio Cash and shall not hypothecate, charge or subject them
to any other security.
6.4 Further to the right granted by the Company
to the CDPQ under clause 6.2, the CDPQ may occasionally ask that the Portfolio
mix be changed or that the rights set out in clauses 6.12 and 6.13 be exercised
in a certain manner. In order to do so, it shall issue a written request
("a Request") setting out the contemplated transaction or the manner
in which the rights are to be exercised, specifying, at its election,
. . .
6.5 Unless the CDPQ decides to be responsible
for them, the purchase price of Securities to be included in the Portfolio
shall be borne by and taken from the Portfolio Cash, or, in the case of an
exchange, shall be effected by the delivery of Portfolio Securities. Unless the
CDPQ decides to assume them, all the Broker's fees, all safekeeping expenses
for the Portfolio Securities and all transaction charges payable to market intermediaries
in respect of Portfolio transactions further to Requests shall also be borne by
and taken from the Portfolio Cash (if necessary, by selling certain Portfolio
Securities chosen by the CDPQ); in the event of insufficiency the CDPQ shall
provide the funds required to pay for the Securities acquired or pay the
brokerage or safekeeping expenses and all transaction charges payable to market
intermediaries.
. . .
6.11 If the Company is
required, by reason of any legislation or rules applicable to the Company, to
reduce its holdings of an issuer's Securities, it shall first divest itself of
the Securities that it holds but that are not part of the Portfolio, and if such
divestiture is insufficient, the CDPQ shall, within two (2) business days
after the Company notifies it in writing of such insufficiency, make a Request
for Portfolio Securities to be sold in such a manner as to ensure the Company complies
with the new holding rules.
6.12 All rights attached to the Portfolio
Securities (including voting rights and the right to accept a takeover or
exchange offer) shall be exercised by the Company (directly or through the
Broker) in accordance with the Requests. If no Requests in this regard are
made, the Company and the Broker shall refrain from exercising such rights. The
Company (or the broker, on the Company's instructions) may refrain from
exercising the voting rights associated with a Portfolio Security (but not
exercise the voting right in a manner contrary to the Requests) if the subject
on which the Company is called upon to vote as a shareholder is known to be the
subject of serious opposition by shareholders or certain directors of the
issuer concerned.
. . .
6.14 The Company shall not be entitled to any
management, transaction or other fee in relation to the Portfolio.
6.15 Under no
circumstances shall the CDPQ be liable to anyone whatsoever for the manner in
which it exercises its rights under section 6 hereof, and, for greater clarity,
it shall not be liable to anyone whatsoever for any decrease in the value of
the Portfolio for any reason whatsoever. The provisions of this clause 6.15
shall have no effect on the Bearer's obligations under the Debenture.
. . .
[11] What these clauses
expressly state is that the CDPQ has the exclusive right to manage the
portfolio. The Appellant, as the portfolio's owner, retains the power to modify
the portfolio mix, but this power is tied to the CDPQ's management power. The
only way that the Appellant can modify the mix on its own initiative is in cases
contemplated by clause 6.11 of the Agreement, if the CDPQ fails to issue a
Request concerning a certain transaction required by any legislation or rule
applicable to the Appellant.
[12] Clause 7.2 of
the Agreement was the clause that had the greatest influence on the Minister's
officer. It is part of section 7 of the Agreement, entitled [TRANSLATION]
"Income and Portfolio Appreciation", and it provides:
[TRANSLATION]
7.2 Subject to subparagraph 8.5.1 of the Debenture,
as long as the Debenture is outstanding, the Company shall, immediately upon
receiving Income, pay the CDPQ an amount equal to the Income received. Such
payment shall be made by the Company (or the Broker acting on its behalf) no
later than the business day after the day in which the Company receives
(through the Broker) the Income in question. Except where the CDPQ
directs otherwise, the payment to the CDPQ shall be made in cash, and, where
applicable, by the delivery of the assets or securities received as Income.
[13] The clause provides
that the Appellant must pay the CDPQ an amount equal to the income received.
[14] However, it should
be noted that section 8 of the Subscription Agreement states that as long as
the debenture is outstanding, the CDPQ is entitled to appoint a director to the
Appellant's board at any time. The director may also sit on the Appellant's
management and audit committees.
[15] Section 5 of the
Brokerage Agreement (Exhibit I‑1, tab 42), provides that all the
portfolio securities shall be registered under the broker's name for the
company (i.e. the Appellant) or, in certain cases, under the company's name.
[16] Section 6 of
that agreement provides once again that the company owns the securities. The
same stipulation is already made in section 6.3 of the Subscription Agreement.
[17] Section 6 of the
Brokerage Agreement reads:
6. Portfolio Ownership
The Company is the owner of the Portfolio
Securities and Portfolio Cash, and consequently, the Broker shall not use them
in any manner, hypothecate, charge or subject them to any security whatsoever,
or effect compensation in any manner without the prior agreement of the Company
and the CDPQ. Further, the Broker shall not transfer or deliver the Portfolio
Securities or Portfolio Cash to the Company or any other person without the
prior consent of the CDPQ, except (i) to the CDPQ in accordance with this
Agreement or (ii) where the Broker is required to do so under a provision of an
applicable statute or regulation or under a judgment of a competent court from
which no appeal is available.
In addition, the Company shall not
hypothecate, charge or subject the Portfolio Securities or Portfolio Cash to
any security whatsoever. Immediately upon becoming aware of the creation or
attempted creation of a hypothec, charge or security by the Company or a third
party, the Broker shall notify the CDPQ, and, if applicable, the Company.
[18] Appendix A is a
document that forms an integral part of any certificate containing the
subordinated debenture. It is entitled [TRANSLATION] "Appendix A to
the Industrial Alliance Life Insurance Company Subordinated Debenture".
Its definitions in section 1, [TRANSLATION] "Interpretation", refer
to the Subscription and Brokerage Agreements. Appendix A is significant in its
own right. It is appended to the Subscription Agreement (tab 36) and the
Brokerage Agreement (tab 42). As an appendix to the debenture, it can be
found at tab 40 of Exhibit I-1.
[19] Section 3 of
Appendix A sets out the [TRANSLATION] "Interest Terms and
Conditions". There is basic interest, profit-sharing interest, and
additional interest. Section 4 provides for the [TRANSLATION]
"Repayment Method upon Maturity". The method provided for is that the
CDPQ guarantees the $60-million value of the portfolio.
[20] Section 6 of
Appendix A is about the [TRANSLATION] "Subordinate Nature of the
Debentures". Payment of the principal and any interest on the debenture is
subject to the prior settlement of higher ranking debts. Section 6.2 sets
out the order of payment upon dissolution, winding-up, reorganization or
measures involving the Company by reason of its bankruptcy or insolvency, or by
reason of reorganization brought about by insolvency.
[21] I must immediately
state that, on reading this clause, I do not see anything that would enable me,
or a court sitting in bankruptcy, to assert that the Appellant's assets do not
include full ownership of the portfolio securities in issue, and that the
securities cannot be applied in their entirety to the payment of the
Appellant's higher-ranking debts.
[22] It should also be
noted that the CDPQ and the Appellant presented their respective assets in
accordance with the agreements made under the investment and recovery plan. One
can see that the debenture is listed in the CDPQ's assets, whereas the shares
transferred to the Appellant are no longer included as assets. The shares
acquired from the CDPQ are listed under the Appellant's assets.
[23] On April 27, 2001
(Exhibit I-1, tab 17), the auditor referred the Appellant's file to the tax
avoidance manager. I quote the main paragraphs of the referral letter:
[TRANSLATION]
. . .
In summary, the corporation is claiming a
deduction for dividends received from taxable corporations under subsection
138(6) of the ITA ($1,538,417 in 1997 and $985,805 in 1998). In our opinion,
this series of transactions is abusive within the meaning of the Income Tax
Act.
We question the accounting entries in its
books, whether a true loan existed, and whether a part of the interest is
deductible. We believe that tax avoidance concepts (agency and/or
"substance over form") may be applicable.
We refer you to the statement of facts
and the analysis of the transaction contained in the attached letter from
Michel Lévesque. We can confirm that, in the past, the Canada Customs and
Revenue Agency did not contest the deductibility of these dividends from the Caisse
de Dépôt du Québec.
[24] On January 9, 2002 (Exhibit
I‑1, tab 19), the Tax Avoidance Section responded that the use of the Act's
anti-avoidance provisions [TRANSLATION] "could not be contemplated"
because it would be difficult to [TRANSLATION] "reasonably
argue that the transaction was not undertaken or arranged primarily for bona
fide purposes." (Emphasis added.)
[25] On January 25, 2002,
the auditor issued a draft assessment for the 1997 and 1998 taxation years (Exhibit
A‑1, tab 60). The opening paragraph reads:
[TRANSLATION]
. . .
1. The referral of the dividend
deduction issue to the Tax Avoidance Section ended on January 9, 2002, and you
were notified of this situation by Jacques Renaud. It remains our view
that Industrial Alliance did not have the right to the income, and therefore
could not claim the dividend deduction under section 138(6) of the ITA.
. . .
[26] Based on the Report
on Objection dated January 27, 2006, at tab 10 of Exhibit I-1, the amount disallowed
in 1997 was $1,538,417, and the amount disallowed in 1998 was $985,505.
[27] The appeals
officers' perspective on the right to the income, set out at page 152 of
the same report, is interesting to read:
[TRANSLATION]
(5) The right to
income: The Minet case
Based on the finding of
Stone J.A. in Minet (98 DTC 6364), in determining whether an
amount constitutes income under section 9(1) of the ITA, it is important
that the amount be completely earned by the owner, in that the owner is
entitled to dispose of it as he sees fit or has an "absolute right"
to it. Based on the documents before us in this matter, IA must, on the
following day, remit an amount equal to the income earned/received in respect
of the investments acquired with the proceeds of the debenture issue. In our
opinion, IA is so limited that it cannot be considered to have an absolute
right over the investment income, and thus, is not the recipient thereof.
The taxpayer in Minet
had some freedom with respect to the management of the premiums and commissions
before the premiums were remitted to the American insurers and the commissions were
remitted to the American brokers. Nonetheless, the ultimate or absolute right to
the income was the important factor; under the law, Minet was required to remit
the commission income amounts to American brokers, and thus, in the final
analysisend result, did not have the absolute right to the income. Hence, at
the end of the day, it was ruled that the commission income did not belong to
Minet.
IA did not even briefly have enjoyment of
the income from the securities, since an "amount equal" to the income
was payable on the next business day. Thus, in our opinion, it stands even more
to reason that IA has no right to the income derived from the securities
"acquired" following the issuance of the debenture.
[28] The Notice of
Confirmation dated February 2, 2006, can be found at tab 9 of Exhibit I‑1. It
reads:
[TRANSLATION]
NOTICE OF
CONFIRMATION BY THE MINISTER
…
Industrial Alliance Life
Insurance Company does not have the right to the income, including dividend
income, from the securities related to the $60M debenture issued to the Caisse
de Dépôt et Placement du Québec in 1994. Consequently, you cannot deduct the
taxable dividend amounts under subsection 138(6) of the Income Tax Act.
[29] On the same day, the
appeals officer sent the Appellant an explanatory letter (Exhibit I‑1,
tab 11). I quote from the paragraphs entitled "The Minet case"
and "An equal amount":
[TRANSLATION]
. . .
The Minet case
Our position that the
revenue does not belong to the corporation is based on the Minet case (98 DTC
6364). There, the taxation of the broker Minet's commissions was set aside by
the Federal Court of Appeal because, by law, the commissions had to be paid to
an American broker; the risk insurers were American. Between the time that
the premiums were collected, and the time that the brokers and insurers had to
be paid, Minet was free to make the funds grow, manage them, and keep the
revenues thereby derived. Despite this fact, the Court held that the commission
income did not belong to Minet because he did not have an absolute right over the
commissions. With Industrial Alliance, there is no opportunity to manage or use
the income from the securities in any way, and an immediate and equal liability
to the CDPQ is created and payable on the next business day.
An equal amount
You stated that the actual
income was not paid to the CDPQ, but that an equal amount was payable under clause 7.2
of the Subscription Agreement so that the income remained in the corporation.
Since an immediate and equal liability is created at the moment that the income
is received, it would be difficult for us not to consider that the income is
ultimately being returned to the CDPQ. In addition, we note that section 12
of the Brokerage Agreement addresses the broker's handling of the revenues and
the registration of these revenues and transfers to the CDPQ; there is no
reference to an equal amount.
[30] André Gauthier,
the lead auditor in the instant matter, explained the Minister's position. In
the Subscription Agreement, the Appellant agreed to remit to the CDPQ an amount
equal to the dividends received. Thus, the economic effect in relation to the
acquired shares is zero. This is why the Minister was of the view that the
share purchase contract was not a share purchase contract and that there was no
transfer of ownership. It is true that the Appellant was the registered owner,
but, in the Minister's determination, it was not the true owner. Perhaps it had
the bare ownership, but, in his opinion, it was certainly not entitled to the
income. It received dividends so that it could remit them to the CDPQ,
which continued to own the shares, or at least the right to the dividends. Nevertheless,
the auditor did not believe
that there was any deception or sham involved.
[31] Before closing the
discussion of the evidence, I would like to refer to the press releases issued
by the Caisse and the Appellant on February 22, 1994 (Exhibit I‑1,
tab 50). They succinctly set out the different legal characteristics of the CDPQ's
$60-million investment and the correlative increase in the Appellant's capital.
[32] Here are a few paragraphs
from the press release:
The issue of capital comes from a
participating subordinated debenture at variable interest. The debenture will mature
in 2004 and is redeemable after 5 years at the option of the issuer.
The expected return by the holder is
composed of three items: a basic annual return, a variable return which depends
on the portfolio's performance and a participation in the Company's profits,
subject to a maximum limit.
"The negotiations
between the two institutions have allowed the Caisse to develop an innovative
financial tool which financial institutions can use to their advantage, whether
they be stock corporations, mutual companies or cooperatives," Mr. Savard
explained. He went on to say that "this innovative financial tool lies in
the creation of a type of debenture indexed to the value of a portfolio in the stock,
bond or money markets. The return on the debenture doesn't only depend on the
financial tool, but also on the behaviour of the underlying securities. This innovative
tool should provide added value to the Caisse."
Mr. Garneau indicated that "this
additional capital, combined with Industrial‑Alliance's $27.2 million
profit for 1993, will provide the company with more room to manoeuvre in order
to continue our growth at a more vigorous rate. This capital will also allow
the company to meet the capital requirements set out by the Canadian Life and
Health Insurance Compensation Corporation (CompCorp) with an even more
considerable margin than before, as well as those that have just been announced
by the Inspector General of Financial Institutions of Quebec, which will
officially come into effect in 1995 and will take full effect after a
transition period."
Analysis and conclusion
[33] Subsection 138(6)
of the Act reads:
138(6) Deduction for dividends from taxable
corporations – In computing
the taxable income of a life insurer for a taxation year, no deduction from the
income of the insurer for the year may be made under section 112 but, except as
otherwise provided by that section, there may be deducted from that income the
total of taxable dividends (other than dividends on term preferred shares that
are acquired in the ordinary course of the business carried on by the life
insurer) included in computing the insurer's income for the year and received
by the insurer in the year from taxable Canadian corporations.
[34] From the outset of his
oral submissions, counsel for the Respondent stated that the Respondent was not
arguing that the agreements were deceptions or shams. Rather, the Respondent submitted,
the ownership of the Portfolio Securities was not transferred by the
agreements, and if a transfer of some kind took place, it was merely a transfer
of the bare ownership, not a transfer of the right to the income.
[35] Counsel for the
Appellant referred to the decision of the Supreme Court of Canada in Continental
Bank of Canada v. The Queen (sub
nom. Continental Bank Leasing
Corp. v. Canada), [1998] 2 S.C.R. 298, [1998] S.C.J. No. 63
(QL), a
decision written by Bastarache J., arguing that if the sham doctrine does not
apply, the agreements must be given the legal effects sought by the parties.
[36] I quote from
paragraph 21 of that decision:
21 After it has been found that the sham
doctrine does not apply, it is necessary to examine the documents outlining the
transaction to determine whether the parties have satisfied the requirements of
creating the legal entity that it sought to create. The proper
approach is that outlined in Orion Finance Ltd. v. Crown Financial
Management Ltd., [1996] 2 B.C.L.C. 78
(C.A.), at p. 84:
The first task is to determine
whether the documents are a sham intended to mask the true agreement between
the parties. If so, the court must disregard the deceptive language by which
the parties have attempted to conceal the true nature of the transaction into
which they have entered and must attempt by extrinsic evidence to discover what
the real transaction was. There is no suggestion in the present case that any
of the documents was a sham. Nor is it suggested that the parties departed
from what they had agreed in the documents, so that they should be treated as
having by their conduct replaced it by some other agreement.
Once the documents are accepted as genuinely
representing the transaction into which the parties have entered, its proper
legal categorisation is a matter of construction of the documents. This does
not mean that the terms which the parties have adopted are necessarily
determinative. The substance of the parties' agreement must be found in the
language they have used; but the categorisation of a document is determined by
the legal effect which it is intended to have, and if when properly construed
the effect of the document as a whole is inconsistent with the terminology
which the parties have used, then their ill-chosen language must yield to the
substance.
[37] What legal effects
did the CDPQ and the Appellant intend? The CDPQ invested $60 million in a
debenture issued by the Appellant. The Appellant was required, on the same
day, to use the entire amount to purchase shares and bonds held by the CDPQ for
their market value.
[38] In my opinion, to claim
that the agreement for the purchase and sale of shares was not a true purchase
and sale agreement amounts to saying that the entire financial plan was a scam:
$60 million was not lent to the Appellant, and the Appellant did not use these
funds to purchase shares. Indeed,
market value for the full ownership of shares will not be paid if full
ownership is not acquired. If the only thing that is acquired is bare
ownership, what is its market value? Why did the parties enter into a brokerage
agreement if the CDPQ remained the usufructuary?
[39] It is true that the
Appellant conceded an almost exclusive right to manage the Portfolio
Securities. It is also true that an amount equal to the income generated by the
shares was paid to the CDPQ. These were terms negotiated as part of a
substantial loan. Based on these terms, can one conclude that the full
ownership of the shares was not transferred, when the entire plan was an
injection of capital?
[40] The authenticity of
the investment and recovery plan was not questioned. Thus, it must be taken as
a given that the Appellant received $60 million from the CDPQ and that this money
was used under the plan to purchase the full ownership of the shares and bonds
in issue for the market value of such ownership. These were shares and
bonds that it fully owned and could lawfully include in its assets. That was
the purpose of the 18 months of negotiation: an increase in the capital base.
[41] It must also be
borne in mind that the CDPQ and the Appellant presented their respective assets
in accordance with the agreements signed. Moreover, in order to protect its
investment, the CDPQ demanded the right to have a director on the Appellant's
board.
[42] Since the decision
of the Federal Court of Appeal in Minet v. Canada, [1998] F.C.J.
No. 697 (QL) played a determinative role in the auditors' decision,
I will address it briefly. The decision essentially turned on the fact
that the Appellant had no legal right to the commissions. I refer to
paragraph 36 of the judgment:
36 If I am correct in the foregoing analysis, I do not see how
as the Tax Court Judge stated the appellant "received" the
commissions or acquiesced in their payment to MIPI and Bowes so as to keep them
"in the family", or that the appellant exercised a "degree of
control and dominion" over them. The three companies were entirely
distinct legal entities. The U.S. state laws simply prohibited U.S. insurers from
paying commissions to an unlicensed broker like the appellant. In my view,
therefore, the appellant could not and never did become the owner of or have
any absolute right to the commissions. Accordingly, the commissions did not
constitute income from its business. The relevant foreign laws prevented that
from occurring. As we have seen, the case law both in Canada and the United States
strongly suggests that an amount is not to be regarded as the income of a
taxpayer where he or she has no absolute ownership or dominion over it. This,
it seems to me, is the situation in the case at bar.
[43] American laws
forbade American insurers from paying commissions to unlicensed brokers like
the appellant in Minet. The Federal Court of Appeal was therefore of the
opinion that he could not be in possession of the commissions or have any right
over them, and thus, that the commissions were not income from his business.
[44] The situation in the
case at bar is that the Appellant is entitled to the dividends if we respect
the parties' intentions with respect to the agreements between them. As the Supreme Court has held in Continental
Bank, supra, the legal effects intended by the parties in their
agreements must be respected unless those agreements are a deception or sham vis-à-vis
the Minister. Here, however, the Respondent admits that there is no sham.
Thus, the agreements must be respected. The receipt of the dividend and the
payment of an equal amount are two separate transactions having distinct legal
sources, and each transaction must be subject to its own tax treatment.
[45] In conclusion, the
Appellant owned the Portfolio Securities, and, as the owner of the shares, it received
the dividends declared on those shares and included them in its income. It is
entitled to the deduction provided in subsection 138(6) of the Act in
respect of those dividends.
[46] The appeals are accordingly allowed, with
costs.
Signed at Ottawa, Canada, this
10th day of January 2008.
"Louise Lamarre Proulx"
Translation certified true
on this 22nd day of February 2008.
François Brunet, Revisor
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