Denault,
J::—This
is
an
appeal
by
the
Minister
of
National
Revenue
from
a
decision
of
the
Tax
Court
of
Canada,
as
well
as
a
cross
appeal
by
the
taxpayer.
It
involves
two
transactions,
the
first
resulted
in
the
defendant's
wife
acquiring
shares
of
the
Company
controlled
by
the
defendant,
the
second
resulted
in
his
children
acquiring
shares.
At
issue
are
the
1981
and
1982
income
tax
years.
Facts
The
material
facts
were
agreed
to
by
the
parties
in
an
agreed
statement
of
facts.
The
defendant
Albert
Kieboom
is
an
individual
resident
in
Canada
for
the
purposes
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
'Act")
who
owned
nine
common
shares
in
the
capital
of
"Carpet
Colour
Centre
(Red
Deer)
Ltd.”
(the
"Company").
The
Company
was
incorporated
May
3,
1976
and
carried
on
the
business
of
selling
carpets
in
Red
Deer
and
the
surrounding
area.
It
was
a
"Canadian
controlled
private
corporation”
within
the
meaning
of
the
Act
which
means
that
all
or
most
of
the
fair
market
value
of
the
assets
were
used
in
active
business
carried
on
primarily
in
Canada.
At
the
time
of
incorporation,
Adriana
Kieboom
("Adriana"),
Albert's
wife,
acquired
one
common
share
of
the
capital
in
the
Company.
At
all
material
times,
the
defendant
was
the
controlling
mind
and
will
of
the
Company.
The
Kiebooms
have
three
children,
Sheila
Ibbotson
("Sheila"),
Yost
Kieboom
("Yost")
and
Alma
Kieboom
("Alma"),
all
of
whom
were
over
the
age
of
18
and
were
Canadian
residents
at
all
material
times,
for
the
purposes
of
the
Act.
By
a
special
resolution
passed
October
31,
1979
and
registered
with
the
Alberta
Corporate
Registry,
the
share
capital
of
the
Company
was
increased
by
the
creation
of
10,000
class
"A"
non-voting
common
shares
in
the
capital
of
the
Company.
At
a
February
12,
1980
meeting
to
determine
the
rights
attaching
to
the
newly
created
shares,
the
defendant
declined
to
subscribe
to
any
of
the
shares.
However,
Adriana
subscribed
to
eight
of
the
said
shares
for
consideration
of
$1
per
share.
After
the
meeting
Adriana
held
one
common
share
plus
eight
class
"A"
common
shares,
giving
her
50
per
cent
equity
while
the
defendant
retained
his
nine
common
shares
with
50
per
cent
equity.
Prior
to
the
meeting,
the
defendant
held
nine
common
shares
with
90
per
cent
equity
while
Adriana
held
one
common
share
with
10
per
cent
equity.
On
March
1,
1981,
the
defendant
and
Adriana,
who
were
at
that
time
the
directors
and
only
shareholders
of
the
company,
held
a
meeting.
They
determined
that
eight
class
"A"
common
shares
of
the
Company
would
be
issued
to
each
of
the
three
children
for
a
consideration
of
$1
per
share.
No
shares
were
issued
to
either
Adriana
or
the
defendant.
After
the
issuance
of
shares
to
the
children,
the
defendant
and
Adriana
owned
21.4
per
cent
of
the
equity,
while
each
of
the
children
Yost,
Alma
and
Sheila
owned
19
per
cent
of
the
equity
respectively.
The
effect
of
the
issuance
of
shares
to
Adriana
and
later
to
the
children
was
to
decrease
the
defendant's
proportionate
shareholdings
in
the
Company
and
to
increase
the
shareholdings
of
his
wife
and
children.
The
transactions
were
planned
and
executed
by
the
defendant
who
desired
to
have
the
company
issue
shares
first
to
his
wife
and
later
to
his
children,
thereby
decreasing
his
(and
then
his
wife's)
percentage
of
issued
shares
in
the
Company.
During
the
1982
taxation
year,
the
Company
issued
dividends
in
the
amount
of
$4,000
per
common
share
and
$3,750
per
class
"A"
share.
During
the
1982
taxation
year,
the
taxable
amount
of
dividends
received
by
Adriana
(after
subsection
82(1)
"gross-up")
in
respect
of
7.2
of
her
class
"A"
shares
was
$40,500
($3,750
x
7.2
x
1.5
=
$40,500).
By
notice
of
reassessment
dated
August
10,
1987,
the
Minister
of
National
Revenue
reassessed
the
defendant
for
the
1981
taxation
year.
The
issue
of
shares
to
Sheila,
Yost
and
Alma
constituted
a
disposition
of
an
economic
interest
by
way
of
gift
from
the
defendant
and
Adriana
pursuant
to
paragraph
245(2)(c)
of
the
Act.
Therefore,
the
defendant
and
Adriana
were
deemed
to
have
received
proceeds
of
disposition
of
$113,450
each,
which
is
equal
to
the
fair
market
value
economic
interest
of
the
shares.
Eighty
per
cent
of
the
taxable
capital
gain
received
by
Adriana
was
attributed
to
the
defendant
and
included
in
his
income
pursuant
to
subsection
74(2)
of
the
Act,
which
are
the
spousal
attribution
rules.
By
notice
of
reassessment,
dated
May
25,
1989,
the
Minister
reassessed
the
defendant
for
his
1982
taxation
year,
on
the
basis
that
the
dividends
received
by
Adriana
($40,500)
were
includable
in
his
income
pursuant
to
subsection
74(1)
of
the
Act.
In
the
respective
reassessments,
the
Minister
assumed
the
above
facts,
except
that
he
had
originally
placed
the
fair
market
value
of
the
shares
issued
by
the
Company
to
the
children
at
$9,450
on
March
1,
1981
and
he
is
now
Willing
to
concede
that
the
fair
market
value
of
the
shares
at
that
date
was
$6,800.
Plaintiff's
Argument
The
defendant
decreased
his
proportionate
economic
interest
in
the
Company
by
issuing
eight
treasury
shares
to
Adriana,
thereby
conferring
a
benefit
on
Adriana.
The
benefit
is
deemed
to
be
a
payment
to
her
under
subsection
245(2),
and
the
payment
is
deemed
by
paragraph
245(2)(c)
to
be
a
disposition
by
way
of
a
ift.
This
gift
is
deemed
to
be
a
transfer
of
capital
property,
under
the
provisions
of
subsection
74(1)
and
the
provisions
of
this
section
require
the
attribution
to
the
defendant
of
the
income
arising
from
that
property.
Therefore,
the
Minister
was
correct
in
including
$40,500
as
taxable
dividends
in
the
defendant's
income
in
1982.
The
defendant
and
Adriana
decreased
their
proportionate
economic
interest
in
the
Company
by
issuing
eight
treasury
shares
to
their
children.
This
transaction
conferred
a
benefit
upon
the
children.
Under
the
provision
of
subsection
245(2),
the
benefit
is
deemed
to
be
a
payment,
and
the
payment
is
deemed
by
paragraph
245(2)(c)
to
be
a
disposition
by
way
of
gift.
The
defendant
is
deemed
to
have
received
proceeds
of
disposition
in
the
amount
of
$204,120
in
respect
of
this
gift
to
his
children
in
the
following
manner:
his
own
interest
in
the
company
under
subsection
69(1)(b)(ii)
and
by
virtue
of
Adriana's
economic
interest,
the
provisions
of
74(2)
require
her
proportion
to
be
included
in
the
defendant's
taxable
income.
Defendant's
Argument
The
defendant's
submission
relies
on
the
assumption
that
there
is
no
separate
property
interest
referable
to
a
corporation
which
can
be
described
as
an
economic
interest.
The
proportionate
interest
of
persons
having
an
interest
in
a
corporation
are
reflected
solely
in
the
shareholdings.
Therefore,
the
defendant
denies
the
plaintiff's
assumption
that
any
of
the
shareholders
owned
property
that
constitutes
an
economic
interest
separate
and
apart
from
the
shares
of
the
company.
The
Minister
seeks
to
tax
the
defendant
by
a
decrease
in
the
value
of
his
shareholdings
in
the
Company,
as
a
result
of
the
increase
of
the
shareholdings
of
his
wife
and
children.
This
is
not
sustainable
under
the
provisions
of
the
Act.
The
issuance
of
shares
by
the
company
to
his
wife
and
children
was
a
benefit
conferred
on
them
by
the
Company
and
not
by
him.
Alternatively,
if
the
Court
finds
that
the
issuance
of
shares
by
the
Company
to
Adriana
and
the
children
was
a
benefit
conferred
on
them
by
the
defendant
under
the
provisions
of
paragraph
245(2)(c)
by
way
of
a
gift,
this
has
no
tax
consequences
for
the
defendant.
There
is
no
provision
in
the
Act
which
imposes
a
tax
on
a
payment
of
a
gift.
If
the
deemed
payment
of
a
gift
is
subject
to
tax
under
the
provisions
of
the
Act,
it
does
not
result
in
or
give
rise
to
a
disposition
of
property
by
the
defendant
to
Adriana.
Therefore,
the
provisions
of
subsection
74(1)
and
74(2)
have
no
application
to
amounts
received
by
Adriana
in
respect
of
her
shares.
The
defendant
appeals
the
Tax
Court
finding
that
the
issuance
of
shares
by
the
Company
to
the
defendant's
children
resulted
in
a
disposition
of
the
property
of
the
defendant
which
is
subject
to
tax
under
the
provisions
of
the
Act.
Analysis
The
first
question
to
be
addressed
is
the
nature
of
the
transaction
through
which
Adriana
acquired
shares
in
the
company
and
later
through
which
the
children
acquired
shares.
The
defendant's
counsel
argues
that
this
is
the
case
of
a
corporate
treasury
issuing
shares
to
Mrs.
Kieboom
and
later
to
the
children.
The
defendant
did
not
receive
income
directly.
He
received
nothing,
nor
did
he
dispose
of
anything.
Any
tax
liability
must
arise
by
virtue
of
some
deemed
or
imputed
income.
It
is
not
in
dispute
that
Adriana
and
then
the
children
received
a
benefit
which
falls
under
the
provisions
of
section
245(2)(c).
(2)
Where
the
result
of
one
or
more
sales,
exchanges,
declarations
of
trust
or
other
transactions
of
any
kind
whatever
is
that
a
person
confers
a
benefit
on
a
taxpayer,
that
person
shall
be
deemed
to
have
made
a
payment
to
the
taxpayer
equal
to
the
amount
of
the
benefit
conferred
notwithstanding
the
form
or
legal
effect
of
the
transactions
or
that
one
or
more
other
persons
were
also
parties
thereto;
and
whether
or
not
there
was
an
intention
to
avoid
or
evade
taxes
under
this
Act,
the
payment
shall,
depending
on
the
circumstances,
be
(c)
deemed
to
be
a
disposition
by
way
of
a
gift.
The
ability
of
Adriana
and
of
the
children
to
acquire
shares
at
less
than
fair
market
value
is
a
benefit.
The
dispute
is
whether
or
not
Mr.
Kieboom
conferred
a
benefit
on
Mrs.
Kieboom.
The
defendant
alleges
that
the
Minister
failed
to
allege
that
Mr.
Kieboom
conferred
the
benefit
in
their
pleadings
and
the
appeal
should
be
dismissed
on
this
basis
alone.
In
support
of
this,
counsel
for
the
defendant
refers
to
a
decision
of
Cattanach,
J.
(as
he
then
was)
which
said
that
where
the
Minister
has
failed
to
allege
as
a
fact
an
essential
ingredient
to
the
validity
of
the
assessment
under
the
applicable
statutory
provision,
there
is
no
onus
on
the
taxpayer
to
disprove
that
fact
or
the
assumptions
which
were
made
did
not
of
themselves
support
the
assessment.
(Kit-Win
Holdings
(1973)
Ltd.
v.
The
Queen,
[1981]
C.T.C.
43;
81
D.T.C.
5030
at
56
(D.T.C.
5039).)
I
am
unconvinced
by
this
submission.
I
find
no
flaw
in
the
plaintiff's
pleadings
in
this
regard.
The
Minister
has
pleaded
that
the
defendant
was
the
controlling
mind
and
will
of
the
corporation
in
its
statement
of
facts.
In
paragraphs
19
and
20
of
its
statement
or
claim,
it
is
pleaded
that
the
defendant
planned
and
executed
the
transactions
and
that
the
economic
interest
received
by
Adriana
was
a
gift
subject
to
the
provisions
of
paragraph
245(2)(c)
and
subsection
74(1).
In
paragraph
28
of
the
statement
of
claim,
the
Minister
specifically
pleads
that
the
defendant
decreased
his
economic
interest
which
conferred
a
benefit
on
his
wife.
This
is
pleaded
in
paragraph
30
with
respect
to
the
transaction
conferring
a
benefit
on
the
children.
The
facts
are
different
in
Kit-Win
Holdings,
supra.
There,
it
was
necessary
for
the
Minister
to
allege
that
one
of
the
motivating
factors
at
the
time
of
acquisition
of
the
land
was
the
possibility
of
resale.
The
Minister
was
seeking
to
include
it
in
his
income
as
an
adventure
in
the
nature
of
trade.
In
this
case,
it
was
necessary
to
allege
that
a
transaction
occurred
through
which
a
person
conferred
a
benefit
which
falls
within
the
provisions
of
paragraph
245(2)(c).
Since
this
was
pleaded,
I
find
no
flaw
in
the
plaintiff's
pleadings.
Counsel
for
the
defendant
has
submitted
that
there
was
no
property
that
was
transferred
by
Mr.
Kieboom
to
his
wife
Adriana
or
to
the
children.
Before
and
after
the
meeting,
which
resulted
in
Mrs.
Kieboom
acquiring
shares,
the
defendant
retained
the
same
number
of
shares.
What
occurred,
in
his
submission,
is
that
the
corporate
treasury
issued
shares
to
Mrs.
Kieboom.
This
position
assumes
that
the
only
link
between
a
corporation
and
a
shareholder
is
the
share.
Effectively,
the
defendant
is
relying
on
the
long
established
principle
in
company
law
that
a
corporation
is
a
legal
entity
separate
and
distinct
from
its
shareholders.
Accordingly,
unissued
shares
are
owned
exclusively
by
the
corporation.
In
this
respect,
counsel
has
cited
section
16
of
the
Alberta
Companies
Act,
R.S.A.
1970,
c.
60,
section
16,
which
describes
the
formal
obligations
of
a
company
limited
by
shares.
He
has
also
directed
my
attention
to
various
articles
which
describe
the
nature
and
definition
of
shares
in
relation
to
the
corporation.
A
share
is
defined
to
be
“simply
a
proportionate
interest
in
the
net
worth
of
a
business”
("Proposals
fora
New
Alberta
Business
Corporation
Act").
Another
definition
of
share
that
was
cited
is:"A
share
is
the
interest
of
a
shareholder
in
the
company
.
.
.
A
share
is
not
a
sum
of
money
settled
in
any
way
suggested,
but
an
interest
measured
by
a
sum
of
money.
.
.”.
Another
interesting
point
which
was
addressed
by
the
material
submitted
by
the
defendant
is
the
purpose
behind
the
concept
of
shares.
As
Professor
Welling
notes
in
Corporate
Law
in
Canada:
The
Governing
Principles,
"The
Corporate
Capital
Structure"
(Toronto:
Butterworths)
at
page
569:
"[cjorporate
design
evolved
as
the
legal
vehicle
for
economic
combinations
of
entrepreneurs,
who
participated
personally,
and
capitalists,
who
participated
financially".
In
other
words,
the
share
permits
a
corporation
to
raise
capital
and
investors
to
invest
money
in
a
corporation.
Because
the
shareholder's
only
link
to
the
corporation
is
through
a
share,
the
Minister's
position
that
the
taxpayer
had
an
economic
interest
in
the
corporation
is
not
sustainable
under
corporate
law
nor
under
the
provisions
of
the
Income
Tax
Act.
However,
the
principle
of
a
corporation
as
a
legal
entity
separate
and
apart
from
its
shareholders
is
no
longer
absolute.
The
general
legal
principle
is
that
a
shareholder
does
not
have
any
proprietary
interest
in
the
corporation
which
as
a
legal
person
cannot
be
owned.
The
shareholder's
property
is
in
the
shares
which
confer
only
the
rights
that
are
specified
in
the
corporate
constitution.
However,
this
principle
has
been
eroded
to
reflect
the
realities
of
business
law.
I
will
review
briefly
the
development
of
corporate
law
in
respect
of
the
corporation
as
a
separate
legal
entity.
Salomon
v.
Salomon
&
Co.,
[1897]
A.C.
22;
[1895-9]
All
E.R.
33
established
the
principle
of
the
corporation's
separate
legal
personality.
There,
Mr.
Salomon
set
up
a
company
and
sold
his
shoe
business
to
it.
He
took
shares
and
a
debenture
from
the
company
as
a
payment,
thereby
making
himself
a
secured
creditor
of
the
company.
The
company
wound
up
a
year
later
and
the
creditors
attempted
to
recover
from
Mr.
Salomon,
arguing
that
the
corporation
was
an
alter
ego
of
Mr.
Salomon.
The
House
of
Lords
held
that
as
long
as
the
statutory
requirements
of
incorporation
are
met,
a
corporation
becomes
a
legal
entity
separate
and
apart
from
the
person
who
set
it
up.
It
does
not
matter
whether
it
is
a
sole
shareholder
or
what
the
purposes
of
incorporation
were.
The
corporation
is
a
separate
legal
entity
apart
from
its
shareholders.
This
principle
is
reflected
in
company
law
legislation
where
the
certificate
of
incorporation
is
conclusive
evidence
of
incorporation
under
the
Companies
Act,
R.S.A.
1980,
c.
C-20,
section
27.
The
policy
reason
behind
the
rule
is
to
encourage
business
activity
without
holding
the
entrepreneur
personally
liable
for
the
corporation's
debts.
It
also
encourages
investment
in
companies
by
allowing
investors
to
invest
at
a
predetermined
loss.
As
time
went
on,
the
difficulties
of
the
corporation's
separate
legal
personality
became
apparent.
In
the
law
of
insurance
a
main
shareholder
could
not
recover
from
loss
to
the
company
because
his
insurable
interest
was
in
the
shares
and
not
in
the
corporation.
The
business
insurance
policy
had
to
be
in
the
corporation's
name
(Macaura
v.
Northern
Assurance
Co.,
[1925]
A.C.
619).
However,
a
1981
Ontario
case
(Kosmopoulous
v.
Constitution
Insurance
(1981),
42
O.R.
(2d)
428
(C.A.);
affd
(1987),
34
D.L.R.
(4th)
208
(S.C.C.))
allowed
a
sole
shareholder
to
recover
from
an
insurance
policy
which
was
registered
in
his
name
and
not
in
the
name
of
the
company
which
he
had
incorporated.
The
reasoning
was
that
a
sole
shareholder
does
not
have
a
proprietary
interest
in
the
company
assets,
but
is
the
only
one
who
can
lose
if
the
assets
are
destroyed.
Therefore,
if
the
assets
are
insured
by
the
shareholder
personally,
he
can
recover
because
there
will
be
a
certainty
of
loss.
Other
circumstances
in
which
the
corporate
veil
has
been
lifted
are
where
a
director
was
held
to
be
personally
liable
where
he
refrained
from
action
and
could
see
that
the
corporation
was
not
carrying
out
its
duties
(Berger
v.
Willowdale
(1983),
145
D.L.R.
(3d)
247;
41
O.R.
(2d)
89
(Ont.
C.A.));
and
where
a
corporation
was
created
to
circumvent
legal
obligations
and
obtain
debt
prior-
ity
(Saskatchewan
Economic
Development
Corporation
v.
Patterson-Boyd
Manufacturing
Corp.,
P.-B.
Fabricators
Ltd.
&
Western
Metal
&
Supply
Ltd.
(1981),
6
Sask.
R.
325
(C.A.)).
In
summary,
the
concept
of
the
corporation
as
a
separate
legal
entity
with
shareholders
having
no
proprietary
interest
apart
from
the
shares
is
no
longer
absolute.
The
principle
has
been
eroded
to
reflect
the
realities
of
business
law.
This
is
a
development
which
is
especially
applicable
to
small
corporations
where
there
is
a
main
shareholder
as
is
found
in
the
present
case.
In
larger
corporations,
directors
have
been
increasingly
held
liable
for
the
acts
of
the
corporation.
In
income
tax
law,
the
corporate
veil
has
been
lifted
to
ascertain
the
motive
behind
incorporation.
If
the
sole
motive
was
tax
avoidance,
the
Courts
have
lifted
the
corporate
veil.
In
Glacier
Realties
Ltd.
v.
The
Queen,
[1980]
C.T.C.
308;
80
D.T.C.
6243
at
310
(D.T.C.
6245)
Addy,
J.
(as
he
then
was)
looked
behind
the
corporate
veil
to
determine
the
main
purpose
of
a
land
purchase:
The
fact
that
a
company
was
incorporated
for
the
sole
purpose
of
holding
a
single
parcel
of
land
and
did
not
engage
in
any
other
type
of
business,
is
a
factor
to
be
considered
but
is
by
no
means
conclusive
as
to
what
the
object
of
the
taxpayer
was
in
purchasing
the
land.
[.
.
.]
The
objects
clauses
of
a
corporation
are
also
relatively
unimportant
in
determining
its
intentions
as
compared
with
what
it
actually
did.
[.
.
.]
It
is
important
where
[a]
private
company
such
as
the
present
one
is
concerned
to
go
behind
the
corporate
veil
and
examine
the
background
of
the
shareholders
in
order
to
determine
more
precisely
if
possible
the
purpose
or
purposes
of
the
purchase.
Another
example
in
the
Act
where
the
veil
is
lifted
is
subsection
227.1(1)
which
holds
directors
of
a
corporation
personally
liable
for
unpaid
taxes.
In
the
present
case,
the
issue
is
the
substance
of
a
transaction.
The
relevant
section
or
the
Act
is
paragraph
245(2)(c).
The
question
is
whether
the
defendant
had
an
interest
in
the
corporation
which
allowed
him
to
confer
the
right
to
subscribe
to
shares
on
his
wife
and
later
his
children.
This
section
reads
as
follows:
(2)
Where
the
result
of
one
or
more
sales,
exchanges,
declarations
of
trust
or
other
transactions
of
any
kind
whatever
is
that
a
person
confers
a
benefit
on
a
taxpayer,
that
person
shall
be
deemed
to
have
made
a
payment
to
the
taxpayer
equal
to
the
amount
of
the
benefit
conferred
notwithstanding
the
form
or
legal
effect
of
the
transactions
or
that
one
or
more
other
persons
were
also
parties
thereto;
and
whether
or
not
there
was
an
intention
to
avoid
or
evade
taxes
under
this
Act,
the
payment
shall,
depending
on
the
circumstances,
be
(c)
deemed
to
be
a
disposition
by
way
of
a
gift.
The
wording
of
the
section
states
"notwithstanding
the
form
or
legal
effect
of
the
transactions”.
This
would
suggest
that
irrespective
of
the
form
of
the
transaction,
the
Minister
will
examine
the
substance
of
the
transaction.
Counsel
for
the
plaintiff
referred
me
to
M.N.R.
v.
Dufresne,
[1967]
C.T.C.
153;
67
D.T.C.
5105
(Ex.
Ct.)
a
case
which
interpreted
the
predecessor
section
to
paragraph
245(2)(c).
In
Dufresne,
the
taxpayer
was
the
controlling
shareholder
and
the
owner
of
practically
all
of
the
shares.
Mr.
Dufresne
owned
164
shares,
his
wife
owned
one
share,
while
each
of
his
five
children
owned
15
shares
each.
He
was
the
head
of
the
family
and
had
the
controlling
influence
in
the
determination
of
events
which
led
to
the
reassessment
and
appeal.
The
impugned
transactions
in
Dufresne
were
ones
in
which
the
company
offered
to
each
of
the
shareholders
the
right
to
purchase
three
new
shares
for
each
share
held
at
a
purchase
price
of
$100
a
share.
Prior
to
the
stock
option,
the
original
shares
had
a
value
of
$1,421.47.
The
children
exercised
the
options
and
neither
the
taxpayer
nor
his
wife
exercised
their
options.
The
result
was
that
the
taxpayer
retained
the
same
number
of
shares,
164,
but
the
value
of
the
shares
had
dropped
to
$78,560
from
$243,044.
The
children's
shareholdings
had
risen
from
15
to
360
common
shares
from
a
value
of
$21,315
to
$199,400.
The
Exchequer
Court
held
that
a
benefit
was
conferred
on
the
children
by
the
taxpayer,
Mr.
Dufresne.
The
basis
of
this
decision
was
that
the
taxpayer,
Mr.
Dufresne,
had
an
interest
separate
and
apart
from
his
shareholdings.
President
Jackett
(as
he
then
was)
gave
the
underlying
reasons
behind
the
transaction
at
page
162
(D.T.C.
5110):
"[t]he
sequence
of
events
bears
all
the
earmarks
of
a
series
of
company
transactions
that
had
been
arranged
in
advance
by
the
major
shareholder
and
father,
after
taking
appropriate
professional
advice,
with
a
view
to
achieving
the
result
of
increasing
the
children's
proportions
in
the
ownership
of
the
stock
of
the
company".
Paragraph
137(2)(c),
the
predecessor
to
paragraph
245(2)(c),
has
been
interpreted
to
look
behind
the
corporate
veil
to
look
at
the
substance
of
the
transaction.
Where
a
controlling
shareholder
designs
a
transaction
to
increase
the
family
members'
proportion
in
the
ownership
of
the
company
while
decreasing
the
value
of
his
own
shareholdings,
that
transaction
will
be
reviewed
to
assess
income
tax.
While
Dufresne,
supra,
was
decided
under
the
provisions
of
paragraph
137(2)(c),
which
is
the
predecessor
to
paragraph
245(2)(c),
the
wording
is
identical
to
the
present
paragraph
except
that
the
words
"to
which
part
IV
applies"
were
dropped.
The
gift
tax
was
abolished
in
1971,
an
issue
which
I
will
address
later.
President
Jackett
(as
he
then
was)
held
that
if
there
was
a
benefit
conferred
upon
the
children
by
Mr.
Dufresne,
then
he
is
deemed
to
have
made
a
payment
to
each
of
the
children
equal
to
the
amount
of
the
benefit.
That
payment
is
"deemed
to
have
been
a
disposition
by
way
of
a
gift",
which
attracts
taxation
under
Part
IV
as
it
then
was.
Dufresne
has
also
been
followed
in
Applebaum
v.
M.N.R.,
[1971]
Tax
A.B.C.
550;
71
D.T.C.
371
(T.A.B.)
where
the
children
of
the
taxpayer
acquired
the
right
to
subscribe
to
shares
through
a
behind-the-scenes
transfer
of
the
taxpayer's
interest
in
the
company.
The
learned
member
of
the
Tax
Appeal
Board
makes
the
following
comments
at
page
562
(D.T.C.
378):
This
relinquishing
of
control
to
the
other
shareholders
by
the
appellant
was
the
direct
result
of
his
decision
not
to
exercise
his
“right”
to
the
full
and
the
subsequent
exercise
of
their
“rights”
by
the
other
shareholders.
[.
.
.]
There
was
no
question
that
the
appellant
was
the
head
of
his
family
and
had
their
future
interests
at
heart
as
well
as
being
controlling
shareholder
of
the
family
company
and
that
he
designed
the
course
that
was
to
be
followed
in
full
expectation
that
his
wishes
would
be
respected
and
the
plan
accepted
as,
in
fact,
it
was.
Dufresne,
supra,
was
also
followed
in
Levine
Estate
v.
M.N.R.,
[1973]
C.T.C.
219;
73
D.T.C.
5182
(F.C.T.D.)
wherein
the
deceased's
son
acquired
5,000
shares
in
his
father's
company
at
a
reduced
price.
It
was
found
that
the
transactions
which
implemented
the
conferral
of
the
right
to
subscribe
to
shares
were
executed
at
the
direction
of
the
controlling
mind
and
will
of
the
corporation,
the
late
Mr.
Abe
Levine.
Therefore,
the
benefit
was
a
gift
taxable
in
the
hands
of
Mr.
Levine.
The
purpose
behind
paragraph
245(2)(c)
is
consistent
with
ascertaining
the
reason
for
issuing
the
shares.
As
I
noted
above,
the
main
reason
for
the
creation
of
the
concept
of
shares
was
a
vehicle
through
which
a
corporation
could
raise
capital.
In
the
present
case,
the
corporation
raised
absolutely
no
capital
through
the
impugned
transactions.
On
the
contrary,
it
issued
shares
for
nominal
consideration
to
members
of
the
controlling
shareholder's
family.
The
defendant
cannot
cling
steadfastly
to
the
concept
of
the
corporation
as
a
separate
legal
entity
from
the
shareholders
whose
only
proprietary
interest
is
in
the
shares
when
the
real
purpose
behind
the
transaction
was
not
to
raise
capital,
but
to
increase
the
shareholdings
of
his
family.
This
reasoning
is
applicable
to
the
present
case.
Here
the
defendant
was
the
controlling
mind
and
will
of
the
Company.
It
is
agreed
that
the
defendant
desired
to
have
the
company
issue
shares
first
to
his
wife
and
later
to
his
children,
thereby
decreasing
his,
and
then
both
his
and
later
his
wife's
proportionate
interest
in
the
Company.
Therefore,
the
fact
that
Mr.
Kieboom
retained
the
same
number
of
shares
is
not
the
determining
factor.
He
divested
himself
of
his
economic
interest
to
the
benefit
of
his
wife
and
later
his
children.
He
did
this
by
diluting
his
own
shareholdings
and
increasing
his
wife's
and
later
his
children's.
This
finding
is
consistent
with
the
reasoning
in
Dufresne,
as
well
as
the
development
of
the
corporate
law
in
respect
to
shares.
Counsel
for
the
defendant
submits
that
the
present
case
is
distinguished
from
the
Dufresne,
supra,
case
because
it
was
decided
at
a
time
when
there
was
a
gift
tax.
Since
there
is
no
longer
a
gift
tax,
there
are
no
taxation
consequences
in
such
a
situation.
The
defendant
takes
the
position
that
section
245
is
a
charging
provision
which
means
that
it
must
bring
something
into
the
taxpayer's
income.
A
charging
section
operates
in
two
stages,
there
must
be
a
benefit
and
the
benefit
is
deemed
to
be
a
payment.
Because
the
Minister
took
the
position
that
it
was
a
gift
under
paragraph
(c),
there
are
no
taxation
consequences
since
the
gift
tax
was
abolished.
While
the
Act
taxes
dispositions
of
property
elsewhere,
the
section
does
not
deal
with
that,
it
simply
says
"deemed
disposition
by
way
of
a
gift".
The
Minister's
method
of
assessing
tax
on
the
transaction,
it
is
argued,
is
a
tortuous
route
through
the
Act
which
is
not
sustainable.
I
am
unconvinced
by
this
argument.
In
my
opinion,
section
245
is
a
characterizing
provision.
It
is
designed
to
identify
transactions
as
indirect
payments
or
transfers.
The
section
is
under
Part
XVI
which
is
entitled
"Tax
Evasion".
Even
if
the
gift
tax
had
not
been
abolished,
it
would
be
necessary
to
go
to
another
part
of
the
Act
in
order
to
find
the
charging
provisions.
Therefore,
it
is
not
necessary
for
this
section
to
bring
something
into
the
taxpayer's
income.
The
section
characterizes
a
benefit
as
a
deemed
disposition.
Other
provisions
of
the
Act
operate
to
tax
gifts.
The
technical
notes
from
the
Finance
Department,
referred
to
by
both
counsel,
indicate
that
the
Department
did
not
consider
that
repealing
the
gift
tax
created
a
taxation
vacuum.
The
capital
gains
provisions
operate
to
tax
gifts.
The
applicable
section
here
is
subparagraph
69(1)(b)(ii),
which
provides
that
the
taxpayer
is
deemed
to
have
received
of
the
proceeds
of
disposition
if
he
disposes
of
anything
at
less
than
the
fair
market
value.
The
underlying
reason
for
the
deemed
disposition
provisions
at
fair
market
value
is
to
prevent
taxpayers
from
transferring
an
interest
in
property
for
the
purposes
of
avoiding
taxation
consequences.
Paragraph
245(2)(c)
specifies
that
it
is
not
necessary
to
have
an
intention
to
avoid
taxes
for
a
deemed
disposition
in
the
transfer
of
property.
In
this
case,
I
have
found
that
the
taxpayer
reduced
his
economic
interest
in
the
company
at
less
than
the
fair
market
value,
and
he
is
deemed
to
have
received
proceeds
of
disposition.
Therefore,
the
transferred
property
is
subject
to
the
capital
gains
provisions
in
the
Act.
While
the
route
may
be
tortuous,
the
principle
is
a
simple
one.
A
taxpayer
cannot
give
away
an
interest
in
property
at
less
than
fair
market
value
without
attracting
taxation.
The
rationale
behind
this
principle
is
to
capture
transactions
which
are
designed
to
transfer
ownership
without
attracting
tax
consequences.
Alternatively,
the
defendant
argues
that
if
section
69
applies
in
the
circumstances,
then
subsection
73(5)
must
apply
giving
the
children
the
benefit
of
a
rollover
of
the
disposition
of
shares.
Subsection
73(5)
allows
the
taxpayer
to
reduce
the
capital
gain
of
a
share
transfer.
The
qualifying
factors
of
subsection
73(5)
are
outlined
as
follows:
Inter
Vivos
Transfer
of
Share
of
The
Capital
Stock
of
Small
Business
Corporation
(5)
For
the
purposes
of
this
part,
where
at
any
particular
time
a
taxpayer
has
transferred
property
to
his
child
who
was
resident
in
Canada
immediately
before
the
transfer
and
the
property
was,
immediately
before
the
transfer,
a
share
of
the
capital
stock
of
a
small
business
corporation,
except
where
the
rules
in
subsection
74(2)
require
any
taxable
gain
from
the
disposition
by
the
taxpayer
of
property
to
be
included
in
the
income
of
a
person
other
than
the
taxpayer
of
that
property
to
be
included
in
the
income
of
a
person
other
than
the
taxpayer,
the
following
rules
apply
.
.
.
The
same
reasoning
as
the
above
analysis
of
paragraph
245(2)(c)
would
apply.
The
taxpayer
transferred
property
to
his
children
who
were
residents
in
Canada.
However,
the
requirement
for
subsection
73(5)
to
apply,
is
that
immediately
before
the
transfer,
the
property
must
have
been
a
share.
In
this
case,
what
was
transferred
was
a
right
to
subscribe
to
shares
and
not
shares
themselves.
The
transferred
property
did
not
become
a
share
until
the
children
took
the
option
and
subscribed
to
shares.
Accordingly,
the
rules
with
respect
to
inter
vivos
transfers
of
capital
stock
of
a
small
business
corporation
cannot
apply
in
the
circumstances.
In
summary,
the
two
transactions
which
resulted
in
Mrs.
Kieboom
acquiring
shares
in
consideration
of
$1
and
later
the
children
is
a
benefit
conferred
upon
by
the
defendant
which
is
"deemed
to
be
a
disposition
by
way
of
a
gift".
This
finding
is
based
on
paragraph
245(2)(c)
and
case
law
which
has
interpreted
that
section
to
look
at
the
substance
of
a
transaction.
The
argument
that
what
occurred
was
a
corporate
treasury
issued
shares
does
not
allow
the
defendant
to
escape
income
tax
consequences.
As
I
have
outlined,
the
corporation
as
a
separate
legal
entity
apart
from
its
shareholders
is
no
longer
absolute,
particularly
in
respect
of
small
corporations.
The
remaining
question
is
the
operation
of
the
spousal
attribution
rules.
If
the
spousal
attribution
rules
apply,
the
income
derived
from
the
property
transferred
from
Mr.
Kieboom
to
his
wife
is
attributed
back
to
him.
In
the
resent
case,
the
income
earned
from
Adriana's
shares
would
be
attributed
oack
to
the
defendant
which
includes
the
income
received
from
the
deemed
disposition
from
the
transaction
conferring
a
benefit
on
the
children.
Subsection
74(1)
reads
as
follows:
74.(1)
Where
a
person
has
on
or
after
August
1,
1917,
transferred
property
either
directly
or
indirectly
by
means
of
a
trust
or
by
any
other
means
whatever
to
his
spouse,
or
to
a
person
who
has
since
become
his
spouse,
any
income
or
loss,
as
the
case
may
be,
for
a
taxation
year
from
the
property
or
from
property
substituted
therefor
shall,
during
the
lifetime
of
the
transferor
while
he
is
resident
in
Canada
and
the
transferee
is
his
spouse,
be
deemed
to
be
income
or
a
loss,
as
the
case
may
be,
of
the
transferor
and
not
of
the
transferee.
The
defendant
maintains
the
position
that
there
was
no
transfer
of
anything
from
the
defendant
to
Adriana
or
to
the
children.
The
corporate
treasury
issued
shares
to
the
respective
parties.
Therefore,
the
spousal
attribution
rules
cannot
apply.
Furthermore,
income
flows
from
the
shares
and
shares
were
not
transferred
to
the
children.
Since
the
Minister's
position
is
that
an
economic
interest
in
the
corporation
was
transferred
from
the
defendant
to
his
wife
and
later
to
his
children,
there
is
no
income
earning
property
that
was
transferred.
While
there
may
have
been
a
decrease
in
the
value
of
his
shares
this
does
not
amount
to
a
transfer
of
property
by
the
taxpayer
which
would
attract
taxation
under
the
attribution
rules.
The
Minister's
position
is
that
transfer
of
property
in
subsection
74(1)
is
broad
enough
to
encompass
the
economic
interest
which
was
transferred
in
the
case
at
bar.
In
support
of
this
conclusion,
counsel
for
the
Minister
refers
to
Fasken
Estate
v.
M.N.R.,
[1948]
C.T.C.
265;
49
D.T.C.
491
(Ex.
Ct.)
wherein
the
taxpayer
incorporated
a
company
in
order
to
purchase
property
in
Texas.
He
owned
all
of
the
shares,
but
later
transferred
all
of
his
shares.
However,
at
the
time
of
transfer,
the
taxpayer
maintained
his
right
against
the
company
in
respect
of
the
purchase
price
of
the
farm
and
other
advances.
In
1924,
the
Company
executed
an
acknowledgement
of
indebtedness
plus
interest
in
favour
of
three
trustees
and
on
the
same
date
the
trustees
declared
the
trusts
under
which
they
held
the
indebtedness
which
included
payments
of
interest
to
the
taxpayer's
wife.
President
Thorson
analyzed
the
meaning
of
transfer
of
property
within
the
meaning
of
the
Act.
At
page
279
(D.T.C.
497),
he
interpreted
transfer
under
the
Act
to
be
very
broad,
all
that
is
required
is
that
the
taxpayer
divest
himself
of
property
and
vest
it
in
his
wife;
it
need
not
be
made
in
any
particular
form
or
oe
made
directly.
In
that
case,
Thorson,
P.
held
that
there
was
a
transfer
of
property
from
the
taxpayer
to
his
wife.
Counsel
for
the
plaintiff
submits
that
the
Fasken
scenario
parallels
the
present
case.
The
taxpayer's
wife
in
the
former
did
not
receive
a
right
to
the
indebtedness
of
the
corporation
to
the
taxpayer,
but
she
received
a
right
to
interest
payments.
Here,
Mrs.
Kieboom
did
not
receive
shares,
but
received
a
right
to
subscribe
to
shares.
Therefore,
the
logical
conclusion
is
that
there
was
a
transfer
of
property
within
the
meaning
of
subsection
74(1).
In
the
present
case,
the
broad
meaning
which
is
ascribed
to
the
word
"transfer"
could
encompass
the
transaction
through
which
Adriana
acquired
shares.
I
have
found
that
the
defendant
divested
himself
of
an
economic
interest
in
the
company
and
which
was
vested
in
his
wife.
Effectively
there
was
an
indirect
transfer
of
Mr.
Kieboom's
economic
interest
in
the
company
to
his
wife.
The
more
difficult
issue
is
whether
it
encompasses
property
through
which
Adriana
earned
income.
In
Fasken,
supra,
the
property
transferred
was
a
right
to
receive
interest,
and
this
was
described
as
the
fruits
of
the
property
to
which
the
attribution
rules
must
apply.
This,
the
plaintiff
submits,
is
analogous
to
the
present
case
through
which
Adriana
acquired
a
right
to
subscribe
to
shares.
Therefore,
the
income
earned
from
those
shares
must
be
attributed
back.
However,
the
analogy
is
not
as
compelling
as
Counsel
for
the
Minister
would
argue.
In
Fasken,
the
recipient
acquired
a
direct
right
to
receive
income,
that
is
a
right
to
receive
interest
from
her
husband's
company.
In
the
present
case,
Mrs.
Kieboom
did
not
receive
a
direct
right
to
receive
dividends.
She
received
a
right
to
acquire
shares
which
she
exercised.
The
right
in
itself
did
not
create
income.
It
was
the
exercising
of
the
right
through
which
Mrs.
Kieboom
acquired
income
earning
property.
Therefore,
the
logic
of
the
present
case
requires
a
step
beyond
the
definition
of
property
as
was
transferred
in
Fasken.
I
am
not
prepared
to
extend
the
effect
of
the
impugned
transaction
to
include
the
creation
of
income
earning
property.
In
the
present
case,
I
have
found
that
Mr.
Kieboom
transferred
his
economic
interest
in
the
corporation
to
his
wife
and
later
to
his
children.
The
recipients
received
a
right
to
subscribe
to
shares
at
a
nominal
value,
which
they
exercised,
thereby
resulting
in
taxation
consequences
for
the
defendant.
It
was
not
the
right
to
subscribe
to
shares
that
created
income,
but
the
actual
shares
that
created
the
income.
Therefore,
the
spousal
attribution
rules
do
not
apply
to
this
case.
I
have
found
that
the
taxpayer
cannot
take
advantage
of
the
provisions
of
subsection
73(5)
because
the
property
transferred
was
not
a
share.
Similarly,
the
Minister
cannot
attribute
income
back
to
the
defendant
and
maximize
the
taxation
consequences
because
the
defendant
gave
a
right
to
subscribe
shares
and
not
the
actual
shares.
There
is
another
reason
why
the
Minister's
position
is
untenable.
The
Minister
takes
the
position
that
both
transactions,
the
one
in
1980
whereby
Mrs.
Kieboom
acquired
shares
and
secondly
in
1981,
whereby
the
children
acquired
shares,
are
deemed
dispositions
by
way
of
a
gift
pursuant
to
paragraph
245(2)(c).
Therefore
section
69
applies
absent
some
other
provision
in
the
Act.
With
respect
to
the
first
transaction,
the
Minister's
position
is
that
subsection
74(1)
overrides
the
effect
of
section
69
resulting
in
attribution
of
income
through
a
spousal
transfer.
I
disagree
with
this
submission.
I
have
already
concluded
that
these
identical
transactions
are
"deemed
dispositions
by
way
of
a
gift"
which
fall
under
paragraph
245(2)(c).
The
1980
transaction
is
not
in
issue,
the
Minister
having
decided
that
no
taxable
event
occurred
in
that
year.
The
1980
transaction
which
created
a
right
for
Adriana
to
subscribe
to
shares
cannot
be
both
a
"deemed
disposition
by
way
of
a
gift"
under
paragraph
245(2)(c)
and
a
spousal
transfer
under
subsection
73(1).
Paragraph
245(2)(c)
creates
a
deemed
disposition
to
capture
transactions.
It
does
not
go
on
to
deem
there
to
have
been
a
transfer
of
property.
If
it
is
not
a
spousal
transfer
then
the
attribution
rules
do
not
apply.
Conclusion
The
defendant's
cross
appeal
with
respect
to
his
1981
taxation
year
is
dismissed,
in
respect
of
the
capital
gain
of
$81,600.
His
cross
appeal
is
allowed
with
respect
to
the
capital
gain
attributed
to
him
from
his
spouse.
The
plaintiff's
appeal
with
respect
to
the
defendant's
1982
taxation
year
regarding
the
dividend
income
attributed
back
to
the
defendant
is
dismissed.
The
Minister
is
ordered
to
vary
the
reassessment
in
accordance
with
the
terms
of
the
reasons
for
judgment.
No
costs
are
awarded.
Minister's
appeal
dismissed.
Taxpayer's
appeal
dismissed.
Taxpayer's
cross
appeal
allowed
in
part.
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