St-Pierre – Tax Court of Canada finds that the judicial nullification rather than rectification of a premature capital dividend declaration gave rise to a s. 15(2) income inclusion

A private corporation that sold eligible capital property in 2008 declared a capital dividend in the year in an amount which included the untaxed portion of this sale receipt. This was a mistake, as the addition to the capital dividend account for this amount does not occur until the beginning of the following year. When CRA discovered this mistake a number of years later, it indicated that it would not assess the corporation for Part III tax provided that the mistake was rectified through an order of the Quebec Superior Court.

What CRA likely had in mind was that the court order would simply change the effective dates of the dividend payable dates. As it happened, only a small portion of the dividend made payable in 2008 was actually paid in 2008, so that the CDA addition from the sale was not needed to cover that dividend payment. Accordingly, all that was necessary to fix the problem was to get the court order to declare the payable date for most of the dividend to be on or after January 1, 2009.

What the corporation instead sought and obtained was a court order dated January 6, 2014 that retroactively annulled the dividend and ordered the individual shareholder to repay the dividend, which he then did, and with a fresh capital dividend then being declared and paid. The corporation’s counsel sought this nullification order notwithstanding that CRA, on being apprised of this nullification plan, had a number of months previously assessed the individual under s. 15(2).

Favreau J upheld the s. 15(2) assessment. Although he did not consider that the court-declared obligation of the individual to effect restitution to the corporation of the dividend amounts had retroactive effect so as to give rise to indebtedness at the time of the s. 15(2) assessment, he considered that the dividend payments gave rise to indebtedness of the individual to the corporation under the unjust enrichment principle.

Neal Armstrong Summaries of St-Pierre v. The Queen, 2017 CCI 69 under s. 15(2) and General Concepts - Estoppel.