Date:
20070404
Dockets: A-547-05
A-548-05
Citation: 2007 FCA 136
CORAM: DESJARDINS
J.A.
DÉCARY
J.A.
NADON
J.A.
A-547-05
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
ADELA GILBERT
Respondent
A-548-05
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
PIERRE GILBERT
Respondent
REASONS FOR JUDGMENT
NADON J.A.
[1]
This is an
appeal of a decision by Madam Justice Lamarre Proulx of the Tax Court of Canada
dated October 17, 2005, in dockets 2002-3402(IT)G and 2002-3401(IT)G, allowing
the appeal of Adela and Pierre Gilbert (the respondents) against an assessment
made in their regard by the Minister of National Revenue (the Minister or the
appellant) pursuant to section 160 of the Income Tax Act, R.S.C.
1985, c.1 (5th
Supp.) (the Act).
[2]
The
appellant asked the Court to vary the Tax Court of Canada’s decision by
ordering that the fair market value of the dividends correspond to the actual
amount of the dividend received by each of the respondents. The appellant also
asked that the respondents’ cross-appeal be dismissed with costs.
[3]
For their
part, the respondents asked the Court to vary the Tax Court of Canada’s
decision and to decide that the payment of dividends does not amount to a
transfer without consideration within the meaning of paragraph 160(1)(a)
of the Act.
Statement of facts
[4]
The respondents
were the sole shareholders of the corporation Sécovac Inc. (the corporation)
and responsible for the administration and control of the corporation.
Incorporated in 1996, the corporation was in the field of design and sales
of lumber drying kilns.
[5]
For tax
years 1999 and 2000, the corporation paid dividends to each of the respondents
totalling $55,000. At the time the dividends were paid, the corporation had a
tax debt of $36,338.04 owing to the Minister of National Revenue.
[6]
On June 6,
2002, the Minister assessed each of the respondents under section 160 of the
Act, in the amount of $55,000.
[7]
The
respondents appealed the Minister’s decision to the Tax Court of Canada and on
October 17, 2005, Lamarre Proulx J. allowed the appeal in part (Gilbert
v. Canada [2005] T.C.J. No. 570). First, she determined that paying a
divided to a shareholder was a transfer without consideration within the
meaning of subsection 160(1) of the Act. Second, she determined that the fair
market value of the dividends paid to the respondents was the amount
transferred less the tax payable by the transferee for the dividend received.
[8]
On
November 15, 2007, the appellant filed a notice of appeal before this Court
challenging the second finding by the Tax Court of Canada. The respondents
challenged the judge’s first finding by way of a notice of cross-appeal.
Issues
[9]
Two issues
are therefore raised by the appeal and by the cross-appeal. The first is
whether the payment of dividends to the respondents was a transfer of property
without consideration within the meaning of paragraph 160(1)(a) of
the Act. If we answer the first question in the affirmative, the second
question arises regarding the fair market value of the dividends paid to the
respondents.
Analysis
[10]
Prior to
reviewing the judge’s decision, I immediately refer to subsection 160(1)
of the Act:
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160. (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
other provision of this Act.
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160. (1) Lorsqu’une
personne a, depuis le 1er mai 1951, transféré des biens, directement ou
indirectement, au moyen d’une fiducie ou de toute autre façon à l’une des
personnes suivantes :
a) son époux
ou conjoint de fait ou une personne devenue depuis son époux ou conjoint de
fait;
b) une
personne qui était âgée de moins de 18 ans;
c) une
personne avec laquelle elle avait un lien de dépendance,
les règles suivantes
s’appliquent :
d) le
bénéficiaire et l’auteur du transfert sont solidairement responsables du
paiement d’une partie de l’impôt de l’auteur du transfert en vertu de la
présente partie pour chaque année d’imposition égale à l’excédent de l’impôt
pour l’année sur ce que cet impôt aurait été sans l’application des articles
74.1 à 75.1 de la présente loi et de l’article 74 de la Loi de l’impôt sur le
revenu, chapitre 148 des Statuts révisés du Canada de 1952, à l’égard de tout
revenu tiré des biens ainsi transférés ou des biens y substitués ou à l’égard
de tout gain tiré de la disposition de tels biens;
e) le
bénéficiaire et l’auteur du transfert sont solidairement responsables du
paiement en vertu de la présente loi d’un montant égal au moins élevé des
montants suivants :
i) l’excédent éventuel
de la juste valeur marchande des biens au moment du transfert sur la juste
valeur marchande à ce moment de la contrepartie donnée pour le bien,
ii) le total des
montants dont chacun représente un montant que l’auteur du transfert doit
payer en vertu de la présente loi au cours de l’année d’imposition dans
laquelle les biens ont été transférés ou d’une année d’imposition antérieure
ou pour une de ces années;
aucune disposition du
présent paragraphe n’est toutefois réputée limiter la responsabilité de
l’auteur du transfert en vertu de quelque autre disposition de la présente
loi.
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[11]
With
regard to the first issue, Lamarre Proulx J. determined that the
dividends paid to the respondents amounted to a transfer without consideration
within the meaning of paragraph 160(1)(a) of the Act. At paragraphs
30 to 32 of her reasons, she stated the following:
[30] From my
understanding of corporate law, it is when a corporation is wound up that the
shareholders share the remaining property of the corporation. The issuing of a
dividend is different in nature. I cannot accept the argument that receipt of a
dividend causes the correlative impoverishment of the shareholder transferee. I
do not believe that is the case in corporate law and it is decidedly not the
case in tax law. In tax law, a person who receives a dividend must include it
in computing his income because it is an increase in his income. For the
corporation that issues it, it constitutes a reduction of its retained earnings
and a reduction of its assets.
[31] There is
therefore impoverishment of the issuing corporation and enrichment of the
transferee, as is the case in any transfer of property subject to section 160
of the Act.
[32] As to
the possibility of consideration to be given for the issuing of a dividend, I
believe that the Supreme Court of Canada clearly stated in Neuman (supra)
there was no such possibility. The right to a dividend stems from ownership of
the shares. The consideration given to acquire the shares must not be confused
with the consideration for dividends. The consideration given to acquire shares
is considered for the acquisition and disposition of shares. It is not a
consideration given for a dividend.
[12]
In my
opinion, Lamarre-Proulx J. did not err in dismissing the respondents’
argument to the effect that a dividend was paid to them as shareholders of the
corporation for consideration, since she was simply following the precedents of
our Court and the Supreme Court.
[13]
Specifically,
Lamarre Proulx J. referred to Newman v. M.N.R., [1998] 1
S.C.R. 770, at page 791, where the Supreme Court of Canada, referring
with approval to the dissenting reasons of LaForest J. in McClurg v.
Canada, (1990) 3 S.C.R. 1020), clearly confirmed that no
consideration can be given for the payment of a dividend:
. . . 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.
[14]
This
finding ratified the determination of Rip J. of the Tax Court of Canada in Algoa
Trust v. Canada, [1993] 1 C.T.C. 2294, page 2303, a decision which our
Court dismissed on appeal, on February 4, 1998 (Court docket A-201-93):
When a person
subscribes for shares of a corporation he or she is paying theoretically for
the acquisition of a share of the ownership of the corporation and receives
shares of a class in the capital stock of the corporation. The shareholder
gives consideration for the shares and not for what the shares may bring.
Ownership of shares gives the shareholder certain rights: right to vote as a
shareholder, right to a distribution of capital on the winding-up of the
corporation, right to receive dividends. (This list is not meant to be
exhaustive.) When the shareholder receives a dividend it is not as a
result of any consideration he or she gave the corporation and which the
corporation is obliged to pay for investing. When a shareholder purchases
shares he is not purchasing an income right. A shareholder receives a
dividend solely because the right to a dividend is an attribute of owning
shares.
[Emphasis added.]
[15]
With
regard to the issue of whether the payment of a dividend is a transfer of
property within the meaning of section 160 of the Act, Sharlow J.A. in Addison
& Leyen Ltd. v. Canada [2006] F.C.J. No. 489, at
paragraphs 57 to 60, stated that dividends could be subject to
section 160:
[57] . . . One of
the questions raised but not answered by the 1981 amendment to section 160 was
whether the payment of a dividend could be a "transfer of property"
within the meaning of section 160. It is possible to imagine a corporation,
especially a closely held one, using the payment of a dividend to divest itself
of assets in order to avoid paying a tax liability, but in most cases the
payment of a dividend is an ordinary commercial transaction. A dividend is also
taxable income to the recipient (except for certain corporate
recipients) . . .
[60] . . . Thus,
the 1993 decision of the Tax Court in Algoa Trust is the leading
authority for the proposition that section 160 may apply to a dividend.
[Emphasis added.]
[16]
Despite
his very clever arguments, Mr. Ryan, the respondents’ counsel, did not persuade
me that the respondents had given consideration for the dividend they were paid
by the corporation. Moreover, he did not persuade me that there was a basis
for reconsidering Rip J.’s determination that a shareholder receiving a
dividend does not give any consideration.
[17]
I now turn
to the second issue. According to subparagraph 160(1)(e)(i) of the
Act, the transferee and the transferor are jointly and severally liable to pay
a tax debt in an amount equal to “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”.
[18]
In Nash
v. Canada, 2005 FCA 386, our Court agreed with the definition of “fair
market value” set out by Cattanach J. of the Federal Court in Henderson
Estate and Bank of New York v. M.R.N (1973), 73 D.T.C. 5471, at page
5476 (affirmed by this Court in [1975] F.C.J. No. 613), namely:
. . . the
highest price an asset might reasonably be expected to bring if sold by the
owner in the normal method applicable to the asset in question in the ordinary
course of business in a market not exposed to any undue stresses and composed
of willing buyers and sellers dealing at arm's length and under no compulsion
to buy or sell. I would add that the foregoing understanding as I have
expressed it in a general way includes what I conceive to be the essential
element which is an open and unrestricted market in which the price is hammered
out between willing and informed buyers and sellers on the anvil of supply and
demand.
[19]
Moreover,
in Hewett v. Canada, [1997] F.C.J. No. 1541 (QL), our Court
determined that the fair market value of property had to be assessed in the
hands of the transferor and that the value of transferred property had to be
the same in the patrimony of the transferor as it was in that of the
transferee.
[20]
In this
case, the transferred property is a dividend in the amount of $55,000 received
by each of the respondents. Applying the definition of fair market value
accepted by our Court in Nash, supra, I find that the fair market
value paid to the transferor for the purposes of section 160 is $55,000
for each of the respondents.
[21]
It is
therefore this amount which must be assessed, i.e. the amount that the Minister
could have seized in the hands of the corporation had the transfer not been
effected. It appears to me that this determination is the only one possible
considering the fact that the fair market value must be assessed by considering
that the property is still in the hands of the transferor, namely the
respondents. This finding is consistent with section 160 of the Act, the
purpose of which is to prevent taxpayers from transferring their property in
order to circumvent the Minister’s assessment for unpaid taxes.
[22]
Moreover,
I am satisfied that the fiscal consequences for the respondents resulting from
the transfer are not at all relevant in regard to determining fair market
value.
[23]
Accordingly,
in my opinion, Lamarre Proulx J. erred in deciding that the fair market
value of a dividend is the amount of the dividend less the income tax payable
on that dividend.
Conclusion
[24]
I would
allow the appeal with costs, I would dismiss the cross-appeal and I would set
aside the decision of the Tax Court of Canada. Deciding as the Tax Court of
Canada should have decided, I would dismiss the appeal filed by the respondent
against the Minister’s assessment with costs.
“M.
Nadon”
“I
concur with these reasons.
Alice
Desjardins J.A.”
“ I
concur with these reasons.
Robert
Décary J.A.”
Certified
true translation
Kelley
A. Harvey, BCL, LLB
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