Melville Neuman v. Minister of National Revenue, [1992] 2 CTC 2074, 92 DTC 1652

Sarchuk, T.C.C.J.:—The appeal of Melville Neuman with respect to his 1982 taxation year raises one issue, that being whether the dividend received by the appellants spouse paid on her Class" F” shares in Melru Ventures Inc. (Melru), was properly included in the appellants income on the basis that the amount was a payment or transfer of property made pursuant to the direction of, or with the concurrence of the appellant, to her, for the benefit of the appellant or as a benefit the appellant desired to confer upon her within the meaning of subsection 56(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

c. 63) (the "Act").

The appellant is a barrister and solicitor. He carries on his profession as a partner in the law firm Newman, MacLean at Winnipeg, Manitoba. Newmac Services (1973) Ltd. (Newmac) is a corporation incorporated on May 2, 1973 by letters patent issued pursuant to the Manitoba Corporation Act. Newmac owned property at 212 McDermott Street in Winnipeg, and owned all the shares in 436 Main Street Limited, which in turn owned property at 436 Main Street in Winnipeg. Newmac also had a management contract with Newman, MacLean. Prior to April 29, 1981 the appellant and his partners owned all the common shares in the capital stock of Newmac, and the appellant in particular was the owner of 1285.714 common shares. His wife Ruby Neuman had never been involved in Newmac.

Melru is a corporation duly incorporated on April 29, 1981 by articles of incorporation filed pursuant to the provisions of the Manitoba Corporation Act. On May 1, 1981, the appellant sold to Melru his 1285.714 common shares in Newmac, receiving in full payment therefore 1285.714 Class “G” shares in Melru with a fair market value of $120,000. The appellant and Melru made an election pursuant to the provisions of subsection 85(1) of the Act and filed all necessary elections required by the provisions of the Act.

The appellant described the rationale for this transaction as follows:

Doing several roll-overs and freezes at that time, it struck me that perhaps I should look after my own affairs, and I considered an estate freeze, and I will be quite candid to say I also thought of the possibility of splitting income.

He said the plan was discussed with his wife, and then added:

. . . She was no different than most of my clients. She probably didn't understand it too well, and relied on me. I explained what was going to happen. I explained that she would have to pay for her own shares.

In addition to the Class "G" shares the appellant was issued the only common voting share of Melru. Ruby Neuman subscribed for 99 Class "F" shares, and paid for them with $99 of her own money.

The rights attached to all the shares in Melru are set out in its articles (Exhibit R-1, Tab 1) and provide, inter alia, as follows:

8. The rights, privileges, restrictions and conditions attaching to the shares are:

(a) the holders of Class "G" shares shall in each year, in the discretion of the directors, be entitled out of any or all profits or surplus available for dividends to non-cumulative dividends at such rate as may from time to time be declared on any such shares but not exceeding the equivalent of 1% per annum on "redemption price” above the maximum prime bank rates, charged by the bankers for the time being of the Corporation for the year in question;

(b) the holders of Class “A”, Class "B", Class "C", Class "D" and Class "E" shares (herein collectively called” preference shares") shall in each year, in the discretion of the directors, be entitled out of any or all profits or surplus available for dividends to non-cumulative dividends at such rate as may from time to time be declared on any such class or classes of shares but not exceeding the equivalent of 1% per annum on stated capital above the maximum prime bank rates charged by the bankers for the time being of the Corporation for the year in question; provided however that no dividends shall be paid on preference shares so as to reduce the value of the Class "G" shares below their redemption price;

(e) all dividends paid or declared and set aside for payment in any fiscal year, after making payments on Class "G" shares and preference shares of dividends declared shall be paid firstly on Class "F" shares until dividends aggregating 1 cent per share on the Class “F” shares then outstanding have been paid and then any additional dividends shall be set aside for payment on common shares until the common shares then outstanding shall have received 1 cent per share and any additional dividends shall be paid on Class "F" shares until they receive that fraction of profits properly available for payment of dividends as the number of Class "F" shares then outstanding bear to the total number of Class" F" shares and common shares then outstanding and the balance shall in the discretion of the directors be paid on common shares or set aside for future payment on common shares at the discretion of the board of directors. Any monies set aside for future payment on common shares as provided in this clause (e) shall no longer be considered in computing future profits properly available for payment of dividends insofar as Class "F" shares are concerned; provided however that no dividends shall be paid on Class "F" shares or common shares so as to reduce the value of the Class "G" shares below their redemption price; . . .

[Emphasis added.]

The articles of incorporation of Melru show the appellant as the incorporator and the first director. At a meeting of shareholders held on May 1, 1981, he resigned as the first director. At the same meeting the shareholders resolved that the number of directors shall be one and the appellant was elected sole director. At a meeting of directors held the same day the appellant was elected president and his wife secretary. On June 30, 1981, at a meeting of the Board of Directors, Melru’s financial period was established as being June 30, commencing June 30, 1981.

A statement of income and retained earnings filed with Melru's income tax return for year ending June 30, 1982, disclosed the receipt of dividends paid by Newmac in the sum of $10,000. The return is signed by the appellant. A statement of income and retained earnings filed with Melru's income tax return for the year ending June 30, 1983, disclosed a further receipt of dividends in the sum of $10,000. It is admitted that this dividend was paid by Newmac to Melru at some point in time following June 30, 1982, and prior to September 8, 1982.

On August 12, 1982, at the annual meeting of the shareholders of Melru the appellant elected his wife the sole director. On September 8, 1982 Ruby Neuman declared dividends in the amounts of $5,000 on the outstanding Class"G" shares and $14,800 on the outstanding Class “F” shares. At a shareholders meeting held on October 12, 1983, the appellant as the sole voting shareholder confirmed all actions taken by the director since the meeting of August 12, 1982.

The only income of Ruby Neuman in the 1982 taxation year was the income from the dividends declared on her Class" F" shares in Melru. It is not disputed that Ruby Neuman played no active role in the business of Meltru. It is also not disputed that a tax planning purpose, including income splitting, was contemplated when Melru entered into the agreement with the appellant to purchase his shares of Newmac. No business was contemplated for Melru and at the time of the hearing of this appeal, no other business had been carried on by it.

The appellant explained the election of Ruby Neuman as sole director. He said that although in that capacity she alone was entitled to exercise all statutory powers and could make all of the decisions on behalf of Meltru, he was certain that she would follow his recommendations. He conceded that by giving her the power to decide when to declare dividends he would be one step removed from that decision. This was a major element in electing her as director and was motivated by the possibility of reassessment based on the provisions of subsection 56(2) of the Act.

When Neuman was examined as to the specific considerations which went into the declaration of dividends by Melru on December 8, 1982, the following exchange took place:

Mr. McMechan:

Q. How, by reference to document 1, the Articles of Incorporation and the rights, privileges, restrictions, and conditions attached to the shares are those amounts computed?

A. There was no—it seemed at that time $5,000 for this, when it came in, was not unreasonable. That is equivalent to $7,500 by way of interest. We weren't sure. At that time, we thought the shares were worth probably about $100,000. We originally elected at 120.

Q. Well, my question is: Can the $5,000 and the $14,800 be tied in any way back to the articles to show how they were computed?

A. No, it was a decision of the director.

Q. Right. Just to understand correctly, what specific considerations went into the formulation of those amounts, $5,000 and $14,800?

A. I would almost say that was a nice figure to use that day. No real thought.

Q. All right. And these were amounts that you recommended to your wife?

A. That is correct.

Q. And you are sure that she acted on your recommendation?

A. On my recommendation, but I didn't tell her what to do. I thought $5,000 was a nice round figure to try out.

Q. I take it was probably influenced by the fact that by this time Melru had received from Newmac $20,000 in dividends?

A. That is correct.

Q. So you declared out of that $19,800?

A. That is right. We kept $200 back for miscellaneous expenses.

While it is of marginal significance, the dividend of $14,800 paid by Melru to Ruby Neuman was immediately borrowed from her by the appellant. The loan was secured by way of a demand note. The interest stipulated, to the best of the appellant's recollection, was the prime bank rate and both the principal and interest were payable on demand. As at the time of the trial, more than three years later, Ruby Neuman had not made demand on the note.

The appeal was heard on December 17, 1985 and judgment was reserved.

The appellant's position:

The appellant's position at the time of the trial was that a taxpayer, acting in accordance with the general principles set out in Stubart Investments Ltd. v. The Queen, [1984] 1S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305 (S.C.C.), can, with the avowed intention of reducing his taxes, make arrangements whereby future profits or earnings are routed in the best possible manner so as to reduce his tax liability. In this case the arrangement was what is commonly referred to as a section 85 rollover. He argued that a taxpayer is perfectly entitled to follow normal corporate procedure and take advantage of the law as it stands.

In the case at bar the appellant argued that at the time of the declaration of the dividends the sole director of Melru was Ruby Neuman. The by-laws of Melru provided that subject to the Corporation Act of Manitoba and the Articles of Incorporation the Board of Directors may, from time to time by ordinary resolution, declare and pay dividends. Dividends were declared by the duly elected director, a decision which was the director's and hers alone. The result flowed from proper corporate procedure which was correct in law, and which did not offend any provisions of the Corporation Act of Manitoba or of the Income Tax Act. In support he cited The Queen v. Parsons, [1984] C.T.C. 354, 84 D.T.C. 6447 (F.C.A.).

Mr. Neuman also contended that subsection 56(2) of the Act did not apply, relying on the decision of the Federal Court of Appeal in Charles Perrault v. M.N.R., [1978] C.T.C. 395, 78 D.T.C. 6272 (F.C.A.), and in particular on the comments of Le Dain, J., as to subsection 16(1) of the Act (which section is identical to the present subsection 56(2)) said at page 403 (D.T.C. 6278):

I doubt whether these words were intended to apply to a payment of a dividend.

The respondent's position at trial:

Counsel submitted that the articles of incorporation failed to clearly define the rights, privileges, restrictions and conditions attaching to each class of shares and as a result failed to comply with the provisions of subparagraph 6(1)(c)(i) of the Corporations Act, S.M. 1976, c. 40, section 225. Since the dividend rights and in particular the rights of the Class" F" shareholders are not clearly defined in the Articles the provisions of paragraph 24(4)(b) of the Corporations Act and the common law presumption of equality of shares as to dividends applies and the Class "F" shares were not entitled to the dividend paid in the case at bar.

The second proposition advanced was that leaving the declaration of dividends as between different classes of shares to the absolute discretion of the directors of the corporation offends the principle that the articles of incorporation constitute a contract between the company and the shareholders since, in order for a contract to be valid, its terms must be certain.

Subsequent submissions:

Prior to judgment counsel for both parties advised me that a similar issue had been raised in J.A. McClurg v. M.N.R., which was soon to be heard by the Federal Court-Trial Division. They were of the view that a judgment in McClurg would likely resolve the issue and asked that my decision be further reserved. In due course McClurg made its way to the Supreme Court of Canada where judgment was ultimately given on December 20, 1990 (now reported as J.A. McClurg v. M.N.R., [1991] 1 C.T.C. 169, 91 D.T.C. 5001 (S.C.C.)). Upon receipt of the decision of the Supreme Court both counsel filed supplemental submissions which I have now had the opportunity of considering.

It is common ground between the parties that the majority of the Supreme Court upheld the validity of discretionary dividend clauses. That being the case, the respondent states that he is no longer relying in this appeal upon the common law presumption of equality of shares as to dividends.

Counsel for the respondent, however, contends that an analysis of the reasons found in the majority judgment supports the proposition that the declaration of the dividend to the appellant's wife is still subject to the application of subsection 56(2) of the Act. He submits that although Dickson C., J.C. said "As a general rule, a dividend payment cannot reasonably be considered a benefit diverted from a taxpayer to a third party within the contemplation of subsection 56(2).” he also laid considerable emphasis in his reasons upon the fact that Mrs. McClurg made very real financial and operational contributions to Northland Trucks. Since the majority held only that the declaration of a dividend is normally beyond the scope of subsection 56(2), by implication it permits the application of subsection 56(2) to the distribution of dividends to a non-arm's length shareholder who has made no contribution to the company in a case such as McClurg“ in which a legitimate contribution has been made". Furthermore, while the facts in McClurg provided no evidence that the arrangement was an attempt at tax avoidance, no such argument could be made by the appellant in this case. The logical inference therefore, is that where there is a tax scheme and a non-arm's length relationship the rule expressed by Dickson, C.J.C. may not apply.

These conclusions, counsel argued, are logical when read in the context of the purpose of subsection 56(2) about which Dickson, C.J.C. said "The subsection obviously is designed to prevent avoidance by the taxpayer, through the direction of a third party, of receipts which he or she otherwise have obtained." Counsel contends that on the facts of this case the respondent was correct in assessing as he did.

The appellant's response is that all of the judges of the Supreme Court who heard the McClurg appeal held that subsection 56(2) does not apply to dividends. The minority dissented solely on the basis that the discretionary dividend provision was invalid. According to the appellant the question of whether a blatant tax avoidance scheme can be challenged under subsection 56(2) rests solely on certain comments made by Chief Justice Dickson which were obiter dicta and not ratio decidendi. He argues that while the Chief Justice may have left it open for future consideration to pierce the corporate veil in order to prevent parties from benefiting from increasingly complex and intricate tax avoidance techniques, the case at bar does not present such a tax avoidance scheme but is merely a simple rollover of shares of an operating company to a holding corporation for, among other things, an estate freeze. As to the contribution argument, the appellant submits that La Forest, J. dealt with the relevance of Nelly McClurg's contribution to the business quite appropriately, stating at page 195 (D.T.C. 5020):

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 payer corporation is to misconstrue the nature of a dividend.

Accordingly the appellant submits the principles enunciated in McClurg must be applied with respect to the Minister's use of subsection 56(2) and the assessment referred back to the Minister for reconsideration and reassessment on that basis.

Conclusions:

In McClurg Chief Justice Dickson said at page 184 (D.T.C. 5011-12):

Urie, J. in the Court of Appeal found the determination that the transaction occurred in the context of a director-shareholder relationship to be dispositive. I agree with that conclusion, and with the scepticism expressed by Le Dain , J. in Perrault v. The Queen, [1979] 1 F.C. 155, [1978] C.T.C. 395, 78 D.T.C. 6272 (F.C.A.), where he questioned whether the words of subsection 56(2) "were intended to apply to the payment of a dividend” (at 403 (D.T.C. 6278, F.C. 165-66)). While it is always open to the Courts to" pierce the corporate veil” in order to prevent parties from benefiting from increasingly complex and intricate tax avoidance techniques, in my view a dividend payment does not fall within the scope of subsection 56(2). The purpose of subsection 56(2) is to ensure that payments which otherwise would have been received by the taxpayer are not diverted to a third party as an antiavoidance technique. This purpose is not frustrated because, in the corporate law context, until a dividend is declared, the profits belong to a corporation as a juridical person: Welling, supra, at pp. 609-10. Had a dividend not been declared and paid to a third party, it would not otherwise have been received by the taxpayer. Rather, the amount simply would have been retained as earnings by the

company. Consequently, as a general rule, a dividend payment cannot reasonably be considered a benefit diverted from a taxpayer to a third party within the contemplation of subsection 56(2).

[Emphasis added.]

In the absence of any further comment it would have been reasonable to conclude not only that subsection 56(2) did not apply in factual situations such as those in McClurg, it also did not apply in any circumstances to the payment of corporate dividends. However, Dickson, C.J.C. went on to say at page 185 (D.T.C. 5012):

Although I have concluded that subsection 56(2) does not apply to the declaration of dividends generally, its application also would be contrary to the commercial reality of this particular transaction.

and:

Although I agree with Desjardins, J. that, with respect to a shareholder,"dividends come as a return on his or her investment” (at page 83 (D.T.C. 6053, F.C. 370)), in my view there is no question that the payments to Wilma McClurg represented a legitimate quid pro quo and were not simply an attempt to avoid the payment of taxes.

and finally at page 185 (D.T.C. 5012-13):

In my opinion, if a distinction is to be drawn in the application of subsection 56(2) between arm's length and non-arm's length transactions, it should be made between the exercise of a discretionary power to distribute dividends when the nonarm's length shareholder has made no contribution to the company (in which case subsection 56(1) may be applicable), and those cases in which a legitimate contribution has been made.

The respondent's position as I see it appears to be premised on the conclusion that these comments are a part of the ratio decidendi and constitute a legal precedent. The appellant, as noted, says they are obiter dicta. These submissions require me to revisit the somewhat arcane law regarding the meaning and judicial interpretation of the expressions obiter dictum and ratio decidendi. I turn first to:

Black's Law Dictionary, (6th ed., 1991):

obiter dictum—words of an opinion entirely unnecessary for the decision of the case.

dicta—expressions in court's opinion which go beyond the facts before court and therefore are individual views of author of opinion and not binding in subsequent cases as legal precedent.

dictum—the word is generally used as an abbreviated form of obiter dictum, "a remark by the way;” that is, an observation or remark made by a judge in pronouncing an opinion upon a cause, concerning some rule, principle or application of law, or the solution of a question suggested by the case at bar, but not necessarily involved in the case or essential to its determination; any statement of the law enunciated by the court merely by way of illustration, argument, analogy or suggestion.

ratio decidendi—the ground or reason of decision. The point in a case which determines the judgment.

The jurisprudence on this subject is voluminous, but even a quick perusal of the leading cases makes it apparent that the distinction between ratio and dicta is blurred. Not the least of the reasons for such blurring, as several learned authors have noted, [1] is the tendency by judges to embrace whatever definition best suits their immediate purposes, be it to follow or avoid a previous decision. It is also apparent that there is no generally accepted meaning or definition for these terms. This is particularly so when the remarks in issue while not ratio decidendi, are to be accepted as something more than a casual observation made by a judge in pronouncing an opinion upon some matter.

Several cases, both English and Canadian, point out this difficulty. In Slack v. Leeds Industrial Co-operative Society Ltd., [1923] 1 Ch. 431, Lord Sterndale, M.R. said at page 451:

Dicta are of different kinds and of varying degrees of weight. Sometimes they may be called almost casual expressions of opinion upon a point which has not been raised in the case, and is not really present to the judge's mind. Such dicta, though entitled to the respect due to the speaker, may fairly be disregarded by judges before whom the point has been raised and argued in a way to bring it under much fuller consideration. Some dicta however are of a different kind; they are, although not necessary for the decision of the case, deliberate expressions of opinion even after consideration upon a point clearly brought and armed before the Court. It is open no doubt to other Judges to give decisions contrary to such dicta, but much greater weight attaches to them than to the former class.”

[Emphasis added.]

Conceptually the same approach is taken in Canada. For example in David- ner v. Schuster, [1936] 1 D.L.R. 560 (C.A.) at page 569 Turgeon, J. stated:

. . . all that is needed to render its decision authoritative is that there was an application of the judicial mind to the precise question adjudged; and that the point was investigated with care and considered in its fullest extent; 5 Md. 488; and that when a question of general interest is involved, and is fully discussed and submitted by counsel, and the court decides the question with a view to settle the law, the decision cannot be considered a dictum.

[Emphasis added.]

In his text Drafting and Interpreting Legislation (Toronto: Carswell, 1988) Louis-Philippe Pigeon discussed the doctrine of stare decisis with particular reference to the Supreme Court of Canada. He said at pp. 57-58:

It is thus extremely important to know the precise scope of the doctrine of stare decisis. To what does this doctrine apply? It applies solely to what is called the ratio decidendi: the grounds of decision. And remember this: the doctrine of stare decisis does not apply to everything said in a judgment or in the notes of the judges who make up the majority. It applies solely to what is involved in the decision; in other words, to the reason behind the decision. If a case can be decided without any pronouncement on the point, and some of the judges let it be understood that they were inclined to think thus, the matter is not settled. But if the court comes to a decision. even when not required to, the question is thereby settled: see Sellars v. The Queen, [1980] 1S.C.R. 527 (S.C.C.).

[Emphasis added.]

In the text The Canadian Legal System (3rd ed.) (Toronto Carswell, 1990), page 292 Gerald L. Gall wrote:

. . . The ratio decidendi is the "part of the case that is said to possess authority” containing “the rule of law upon which the decision is founded”. On the other hand, an obiter dictum is any statement of law made by a judge that is part of a case but which does not contain the particular rule of law upon which that case is decided. A future judge, of course, is not bound by an obiter dictum, as the doctrine of stare decisis is not applicable to it and it merely has persuasive force at best. Very significantly, a recent ruling from the Supreme Court of Canada, however, indicates that this is not true of obiter statements from the Supreme Court of Canada. In Sellars v. The Queen, [1980] 1 S.C.R. 527, 20 C.R. (3d) 381, 52 C.C.C. (2d) 345, 110 D.L.R. (3d) 629, 32 N.R. 70, the court stated that even obiter dicta emanating from that court are binding on lower courts. See, e.g., The Queen v. Pollock, [1981] C.T.C. 389, 81 D.T.C. 5293, (F.C.T.D.) affirmed [1984] C.T.C. 353, 84

D. T.C. 6370 (F.C.A); see also The Queen v. Miller, 39 O.R. (2d) 41,29 C.P.C. 159, 29 C.R. (3d) 153, 70 C.C.C. (2d) 129, 141 D.L.R. (3d) 330, affirmed [1985] 2 S.C.R. 613, 52 O.R. (2d) 585, 49 C.R. (3d) 1, 16 Admin. L.R. 184, 23 C.C.C. (3d) 97,24 D.L.R. (4th) 9, 14 O.A.C. 33, 63 N.R. 321.

[Emphasis added.]

All of which leads to the decision of the Supreme Court of Canada in James Edward Sellars v. The Queen, [1980] 1 S.C.R. 527, 110 D.L.R. (3d) 629. Sellars was found guilty of murder after being tried by a court consisting of a judge and jury. The prosecution called as a witness an accessory after the fact. The trial judge did not instruct the jury regarding the weight to be given to the uncorroborated testimony of an accessory. The Court of Appeal of Quebec upheld the guilty verdict. In the Supreme Court the appellant raised but one question, arguing that the rule requiring a judge to warn the jury of the risk of basing a guilty verdict on the uncorroborated testimony of an accomplice extends to an accessory after the fact. The respondent contended that even if the appellant was correct on this point the appeal should be dismissed in accordance with subparagraph 613(1)(b)(iii) of the Criminal Code.

Chouinard, J., speaking for the Court, concluded that the appellants argument with respect to the testimony of an accessory after the fact was correct, stating:

. . . in Paradis v. The Queen, [1978] 1 S.C.R. 264, a majority of this Court expressed the opinion that the same rule of caution must be applied to the testimony of an accessory after the fact as to that of an accomplice, and in my opinion, therefore, this is the interpretation that must prevail.

As it does from time to time, the Court has thus ruled on the point, although it was not absolutely necessary to do so in order to dispose of the appeal.

Chouinard, J. then proceeded to consider the authority of an opinion previously expressed by the Supreme Court, stating:

“In Provincial Secretary of Prince Edward Island v. Egan, [1941] S.C.R. 396, which has since been followed on the constitutional question decided in that case, Rinfret, J., as he then was, wrote at pp. 411 and 412:

The Supreme Court en banc, however, thought it advisable to deal with the question of the constitutionality of section 84(1) of the Highway Traffic Act, 1936, since the Criminal Code has enacted sec. 285, subs. 7, amended by sec. 6 of ch. 30 of the Statutes of Canada, 3 Ceo. VI (1939). And that Court declared ultra vires the provision of the Highway Traffic Act as to cancellation of a licence on a conviction for driving a motor car whilst intoxicated”.

It is because of the declaration on that point that the Attorney-General of Prince Edward Island has carried his appeal to this Court and that the Attorney- General of Canada and the Attorney-General for Ontario have been allowed to intervene. It was represented to us that this declaration has an important and wide consequence and that, while only an obiter dictum, it might affect the jurisprudence not only in Prince Edward Island but also in other provinces. It appears desirable, therefore, that this Court should express its opinion upon the matter.

[Emphasis added.]

Similarly, in Schwartz v. The Queen, [1977] 1 S.C.R. 673, the Court, although this was not necessary to its decision, expressed a majority opinion on the meaning of the word "wrong" in subsection 16(2) of the Criminal Code. Martland, J. wrote at pp. 694 and 695:

In my opinion the judge’s charge upon the meaning of the word “wrong” in subsection 16(2) was not erroneous. I propose to deal with this issue only because the matter was fully argued before us, and it would be desirable that an expression of opinion on this point by this Court should be made.

[Emphasis added.]

See also Switzman v. Elbling, [1957] S.C.R. 285 and The Queen v. Zelensky, [1978] 2 S.C.R. 940.

In Attorney General for the Province of Quebec v. Cohen, [1979] 2 S.C.R. 305, the Court affirmed the authority of a statement of principle contained in one of its decisions. Pigeon , J., speaking for the Court, wrote at page 308:

I cannot accept that what was said in Patterson by the two judges who disagreed with Judson , J. on what he said in the last quoted paragraph, although one of them agreed on the conclusion, in any way detracts from the authority of this statement of principle approved by a majority of this Court.

[Emphasis added.]

The Patterson decision was also followed by the Court of Appeal of Alberta in Re Depagie and the Queen (1976), 32 C.C.C. (2d) 89, in which McDermid, J., citing the same passage as Pigeon, J. in Cohen, wrote on behalf of the majority, at page 92:

. . . However, even if the last paragraph of the judgment I have quoted is obiter, as stated by Bouck, J., in The Queen v. Hubbard, [1976] 3 W.W.R. 152, I would not feel justified in not following it even if I thought it was not in accord with the previous authorities.

[Emphasis added.]

In Ottawa v. Nepean Township et al., Robertson, C.J. wrote for the Court of Appeal of Ontario, at page 804:

. . . What was there said may be obiter, but it was the considered opinion of the Supreme Court of Canada and we should respect it and follow it even if we are not strictly bound by it.”

Following this review Chouinard, J. said at page 531:

In view of the foregoing conclusion that, as determined by this Court in Paradis, the same rule must be applied to the testimony of an accessory after the fact, appellant's argument on this point must be upheld.

Notwithstanding the favourable ruling on the appellants main point the Supreme Court dismissed the appeal on the basis that no substantial wrong or miscarriage of justice had occurred.

The issue in Sellars was whether the rule of caution applied to the evidence of an accessory. The Supreme Court held that it did. In its finding the Court relied on its earlier opinion in Paradis v. The Queen, [1978] 1 S.C.R. 264, 73 D.L.R. (3d) 745, an opinion not part of the ratio decidendi in that case. It appears from the language used by Chouinard, J. that depending on its context an opinion so given by the Supreme Court is to be considered as more than a dictum, as more than a "remark by the way” not necessarily essential to the determination of an issue.

It might be appropriate at this stage to consider the distinction drawn between judicial dicta and obiter dicta by Megarry, J. in Brunner v. Greenslade, [1971] 1 Ch. 993 at pages 1002 and 1003:

In the Lawrence case [1939] Ch. 656, Simonds, J. held, in a reserved judgment, that on the facts before him no general scheme of development existed. It was accordingly not necessary to determine what rights as between the subpurchasers there might have been if the main scheme had been held to exist. However, as the point had been fully argued, he expressed his views on it. I do not think that such views can simply be stigmatised as being obiter and so of little

weight. A mere passing remark, or a statement or assumption on some matter that has not been armed, is one thing; a considered judgment on a point fully armed is another, especially where, had the facts been otherwise; it would have formed part of the ratio. Such judicial dicta, standing in authority somewhere between a ratio decidendi and an obiter dictum, seem to me to have a weight nearer to the former than the latter; and perhaps I may add, anything uttered by Simonds, J. carries its own intrinsic authority.

[Emphasis added.]

This approach commends itself to me. I am not able to accept the proposition advanced by some authors that even obiter dicta emanating from the Supreme Court are binding on lower courts. What I perceive to have been intended by Chouinard, J. in Sellars v. The Queen is akin to the concept of judicial dicta expressed by Megarry, J.

Returning to the matter at hand. Are the comments relied upon by the respondent judicial dicta? Dickson, C.J.C., speaking for the majority, disposed of the appeal in McClurg in the following words:

In conclusion, I have found that: (i) the discretionary dividend clause is valid in terms of the principles of corporate law and the provisions of the Saskatchewan Business Corporations Act; (ii) the declaration of a dividend is normally beyond the scope of subsection 56(2) of the Income Tax Act; and, (iii) the facts at bar provide no evidence that the business arrangement was an attempt at tax avoidance, but rather that it was the product of a business contract made for adequate consideration. As a result, I would dismiss the appeal.

It is apparent that the issue of the application of subsection 56(2) of the Act to a non-arm's length transaction was before the Supreme Court and was argued. However l find it difficult if not impossible to read into the judgment of the majority an intention to express an opinion amounting to a judicial dictum upon the application of subsection 56(2) of the Act to transactions which are not at arm's length and which form part of a tax avoidance scheme. Had the Court intended to do so it should have expressed its views regarding the importance of the added comments in the same clear language that was utilized by Rinfret, J. in Prince Edward Island v. Egan, [1941] S.C.R. 396, [1941] 3 D.L.R. 305 and by Martland, J. in Schwartz v. The Queen, [1977] 1 S.C.R. 673, 67 D.L.R. (3d) 716. In order for the Supreme Court's comments to be taken as judicial dicta the intention to give guidance of a binding nature to the lower courts should be unambiguously expressed.

Nonetheless the opinions expressed, while not judicial dicta, are those of the Supreme Court and cannot be simply ignored. Without deciding whether the operation of subsection 56(2) was perceived or intended by the legislators to be applicable to non-arm's length transactions and assuming for the moment, as the appellant noted, that the majority judgment may have left it open for future consideration to pierce the corporate veil to prevent complex tax avoidance schemes, I have concluded that the facts in this case would not support such an approach nor the conclusion sought by the respondent.

Counsel for the respondent contended that the application of subsection 56(2) of the Act is supported by the following facts:

(a) the dividend payment was not the product of a bona fide business relationship” (judgment of Dickson, C.J.C. at page 35), but was conceived as part of a tax avoidance plan;

(b) the dividend payment was, in effect, a rerouting of monies from New- mac, in which the appellant's wife had no claim or entitlement, that would otherwise have been payable to the appellant;

(c) the declaration of a dividend, although normally the function of a director, in this case was the fruit of the appellant's recommendations to his wife;

(d) the declaration of the dividend to the appellant's wife from Melru was merely a temporary device for the redirection of the dividend, as the money was immediately lent back to the appellant by his wife on non-commercial terms; and

(e) ” . . . there was no legitimate purpose to the dividend distribution” (judgment of Dickson, C.J. at page 35), within the meaning of the majority judgment in McClurg.

These propositions do not of themselves support so much the application of subsection 56(2) as they do the possible application of the doctrine of sham. That, however, was neither pleaded nor argued and since on the facts there was no dissimulation or attempt at deception by the appellant, that position may not have been open to the respondent in any event. Furthermore it would be, in my view, inappropriate to describe the plan developed by the appellant as a blatant tax avoidance scheme. Although clearly done for tax purposes the absence of a business reason is not fatal: Stubart Investments Ltd. v. The Queen, supra, and there is no legal impediment to what the appellant did nor any flaw in the steps taken by him. Income splitting per se is not covered by any form of blanket prohibition in the Income Tax Act and indeed is permitted in certain contexts, for example with regard to spousal RRSPs, transfers of rights to pension, annuities, etc. Excesses, in cases involving spouses and minors are now strictly governed by the attribution rules found in section 74.1 of the Act.

The appeal is allowed.

Appeal allowed.