Mar-Tech Pipe Services Ltd. v. R., [1996] 2 CTC 2501, 97 DTC 515

Beaubier J.T.C.C.: — This matter was heard at Vancouver, British Columbia on March 13, 1996 pursuant to the General Procedure of this Court. The only evidence was portions of an examination for discovery of the Appellant’s representative which were read into the record by the Respondent’s counsel. Paragraphs 1 to 11 inclusive of the Notice of Appeal and the Reply, to and including paragraph 9, read as follows:

NOTICE OF OF APPEAL

1. The Appellant is a British Columbia company with an address at 8363 128th Street, Surrey, British Columbia and appeals from Assessment number 12582, notice of which was dated March 19, 1993, in respect of liability for tax under section 160(1) of the Income Tax Act (Canada) (the “Act”) and section 19 of the Income Tax Act (British Columbia) (the “BC Act”).

2. The Appellant was the sole shareholder of Mar-Tech Municipal Pipe Services Ltd. (“MMPS”), a company continued under the Canada Business Corporations Act and registered as an extra- provincial company under the British Columbia Company Act.

3. On or about January 31, 1989, MMPS was wound up into the Appellant. Specific liabilities of MMPS were assumed by the Appellant in consideration for the transfer of MMPS assets with a fair market value equal to those liabilities. With respect to the balance of MMPS’s assets, the Appellant received a dividend in kind paid as of January 31, 1989.

4. By Notices of Reassessment dated March 22, 1990, MMPS was reassessed in respect of its 1987 and 1988 taxation years.

5. MMPS filed a Notice of Objection to the reassessments, but did not file a Notice of Appeal as the company had already been wound up.

6. By Notice of Assessment number 12582 dated March 19, 1993, the Appellant was assessed pursuant to subsection 160(1) of the Act and section 19 of the BC Act as being jointly and severally liable for taxes and interest owing by MMPS. The basis of the assessment was that MMPS on or about January 19, 1989 transferred a dividend to the Appellant.

7. By Notice of Objection dated May 20, 1993, the Appellant objected to the Assessment.

8. By Notice of Confirmation dated January 28, 1994, the Assessment was confirmed.

9. The Appellant says that neither the declaration nor the payment of a dividend constitutes a transfer of property, with the result that subsection 160(1) of the Act has no application in the circumstances.

10. The Appellant says in the alternative that if either the declaration or the payment of a dividend does constitute a transfer of property, the Appellant provided MMPS with fair market value consideration for both the declaration and payment of the dividend.

11. The Appellant says that its appeal should be allowed with costs and the Assessment should be vacated.

REPLY TO NOTICE OF APPEAL

The Deputy Attorney General of Canada on behalf of Her Majesty the Queen, in answer to the Appellant’s Notice of Appeal received by the Tax Court of Canada on March 24, 1994 and by the Deputy Attorney General of Canada on April 5, 1994, with respect to Notice of Assessment number 12582 dated March 19, 1993, says as follows:

A. Statement of Facts

1. Except as expressly admitted hereinafter, he denies the allegations of fact and law contained in the Notice of Appeal.

2. He admits the allegations of fact contained in paragraphs 1, 2, 7 and 8 of the Notice of Appeal.

3. He denies the allegations of fact and law contained in paragraphs 9, 10 and 11 of the Notice of Appeal.

4. With respect to paragraph 3 of the Notice of Appeal, he admits only that, on or about January 31, 1989, Mar-Tech Municipal Pipe Services Ltd. (“MMPS”) was effectively, but not formally wound up into the Appellant; he admits that certain liabilities of MMPS were assumed by the Appellant in consideration for the transfer of assets of MMPS and that, with respect to the balance of MMPS’s assets, the Appellant received a dividend paid as of January 31, 1989.

5. He admits the allegations of fact in paragraph 4 of the Notice of Appeal except that he says that Notices of Reassessment of both the 1987 and 1988 taxation years of MMPS were issued on March 22, 1990 and again on April 22, 1991.

6. He admits the allegations of fact contained in paragraph 5 of the Notice

of Appeal except that he says that MMPS was never formally found up.

7. He admits the allegations of fact contained in paragraph 6 of the Notice of Appeal except that he says that the assessment states that it was in respect of a transfer of a dividend on or about January 31, not January 19, 1989.

8. He says that, in assessing the Appellant for $39,899.44 pursuant to subsection 160(1) of the Income Tax Act in respect of the payment of a dividend from MMPS, the Minister of National Revenue relied, inter alia, upon the following assumptions:

(a) The facts as stated and admitted hereinbefore;

(b) The Appellant was incorporated on October 5, 1971;

(c) MMPS was incorporated on January 19, 1979;

(d) The Appellant was the sole shareholder of MMPS:

(e) The Appellant controlled MMPS and was related to MMPS within

the meaning of subpara. 251 (2)(b)(i) of the Income Tax Act;

(f) The Appellant changed its name to Mar-Tech Enterprises Ltd., Mar-Tech Municipal Pipe Services Ltd., Mar- Tech Holdings Ltd., and then back to Mar-Tech Pipe Services Ltd.;

(g) In about July, 1988, MMPS went out of business and, on or about

January 31, 1989, was effectively wound up into the Appellant:

(i) MMPS’s final tax return was filed for its taxation year ending January 31, 1989;

(ii) The Appellant assumed certain liabilities of MMPS in consideration for assets of MMPS with a fair market value equal to those liabilities;

(iii) The balance of MMPS’s assets were transferred to the Appellant by way of a dividend in the amount of $87,340 paid as of January 31,1989;

(iv) MMPS had no assets with which to satisfy its tax liability after the payment of the dividend;

(v) MMPS was struck from the Register of Companies on October 19, 1990 for failure to file annual reports;

(h) The Appellant gave no consideration to MMPS for the payment of the dividend;

(i) The fair market value of the Appellant’s capital investment in MMPS was reduced by the outstanding tax liability of MMPS for its 1987 and 1988 taxation years;

(j) On April 22, 1991, MMPS was reassessed for the amounts of $31,523.64 and $1,181.38 for its 1987 and 1988 taxation years respectively;

(k) From April 22, 1991 to March 19, 1993, the date of the assessment of the Appellant, interest in the amount of $7,194.42 had accrued on the above 2 amounts.

B. Issues to be Decided

9. The issues in this appeal are:

(a) Whether the payment of a dividend constitutes a transfer of property within the meaning of subsection 160(1) of the Income Tax Act; and

(b) If the payment of a dividend does so constitute a transfer of property, whether the Appellant gave MMPS consideration equal to the value of the dividend.

The argument put forward for the Appellant was that legally, upon declaration of a dividend, a shareholder has a right to sue for the dividend. Upon payment of the dividend that right is cancelled and satisfied. The right to sue is consideration for payment of the dividend. Therefore consideration passes between the payee and the payor at the time of payment. The Appellant’s counsel did not refer to assumption 8(h) in his argument. However that assumption constitutes fact in evidence before the Court when the Appellant has elected not to call any evidence to refute it.

In these circumstances, based upon the decision of Rip J.T.C.C. in Algoa Trust v. R. (sub nom. Algoa Trust v. Canada), [1993] 1 C.T.C. 2294, 93 D.T.C. 405 (T.C.C.), the appeal is dismissed.

The Respondent is awarded party and party costs.

Appeal dismissed.