Leo Cliche v. Minister of National Revenue, [1986] 2 CTC 2114, 86 DTC 1571

Bonner, T.C.J.:—This is an appeal from an income tax assessment for the appellant's 1980 taxation year. On assessment the respondent added to declared income the sum of $9,900 as the appellant’s share of a dividend paid by Peeltown Welding Limited (hereinafter "Peeltown").

In the reply to notice of appeal the respondent pleaded that the assessment was based on the following findings or assumptions of fact:

(a) Peeltown Welding Limited (hereinafter ‘‘Peeltown’’) is a closely held private corporation in which the Appellant and his spouse are the only shareholders;

(b) the Appellant owns 99 shares and the Appellant’s spouse owns 1 share of Peeltown;

(c) the Appellant is also an employee of Peeltown and the company’s income is derived from the sale of the Appellant’s services;

(d) in the 1980 taxation year Peeltown declared a dividend of $10,000.00 for the benefit of the Appellant’s spouse;

(e) at the time this $10,000.00 dividend was declared, the company’s retained earnings totalled $20,000.00;

(f) the rights carried by the shares ranked pari passu and thus shareholders participated in the benefits of membership equally;

(g) on this basis, the Appellant would have been entitled to a dividend of $990,000.00 in the 1980 taxation year which the company was clearly unable to declare;

(h) the Appellant purported to waive the Peeltown dividend to which he was entitled;

(i) the dividend of $9,900.00 constituted a payment or transfer of property made pursuant to the direction of, or with the concurrence of the Appellant to his spouse for the benefit of the Appellant or as a benefit the Appellant desired to have conferred on his spouse.

The respondent, as suggested by the last of the assumptions, relied on subsection 56(2) of the Income Tax Act as the basis for including in the computation of the appellant’s income 99/100ths of the dividend payment to the appellant’s wife.

The appellant advanced two arguments. The first was that the $10,000 payment was in substance salary or a bonus which Mrs. Cliche had earned by virtue of services which she had rendered to the company. This argument rested on evidence given by the appellant in which he described his wife as an "active shareholder" of Peeltown and stated that she does now and has in the past looked after all bookkeeping and banking chores in connection with the company's business. He asserted that without the teamwork of his wife and himself the company could not have gotten by. It was plain that Mr. Cliche felt that Mrs. Cliche was entitled to compensation in addition to the salary which had been paid to her. He stated that it was decided that such compensation should take the form of dividends and not a bonus.

As is evident, it was common ground that the payment to Mrs. Cliche was not in fact additional salary or bonus. Tax liability rests on events which have occurred and not events which might have occurred. Thus, I need not consider the tax consequences which might have ensued had the payment in fact been salary.

The appellant’s second argument was that the respondent had "accepted" the waiving of dividends and that by waiving his right to the dividend he did not receive any money or confer any benefit on his spouse. This argument rested on Interpretation Bulletin No. IT-208 dated April 28, 1975. The first two paragraphs thereof read as follows:

1. Where a shareholder does not receive a taxable dividend because he unconditionally waived (before or after its declaration) his present or future right to it, it is not included in computing his income and section 80, dealing with the forgiveness of debts, does not apply to the payer corporation which declared but did not pay the taxable dividend to the shareholder. However, a taxable dividend actually received by a shareholder in spite of his prior waiver is included in his income pursuant to subsection 82(1) or 90(1).

2. Where a taxpayer only waived direct receipt of a taxable dividend and directs or concurs with its payment to some other person to benefit himself or the other person, the dividend when paid is included in his income pursuant to subsection 56(2). A dividend included in computing a taxpayer’s income pursuant to subsection 56(2) is considered to be received by him for purposes of sections 82, 112, and 121 and subsection 212(2).

This Bulletin was “‘cancelled” by a second bulletin dated May 18, 1981, but, as the appellant pointed out, the dividend now in question was declared and paid during 1980 before the cancellation.

The evidence of the circumstances surrounding the waiver was incomplete. No detail was given as to how and when the waiver was effected. The only evidence produced with regard to corporate proceedings consisted of minutes of a meeting of the directors of Peeltown held on June 29, 1981. It is evident that that meeting could not have been the one at which the dividend now in question was declared not only because of the date, but also because the minutes do not set forth any resolution declaring a dividend. The directors named in the minutes were the appellant and his spouse. There was no evidence indicating whether they were the directors at the time the 1980 dividend was declared. The corporate articles were not produced. No suggestion was made that the shares held by the appellant and the share held by his spouse fell into different classes.

As a result of the gaps in the evidence I am not in a position to reach any conclusion as to whether the circumstances justified the respondent's reliance on subsection 56(2). Dealing more directly with the appellant’s argument, I cannot find whether the appellant waived a present or future right to dividends as contemplated by paragraph 1 of the Bulletin on which he relied or whether he simply “.. . waived direct receipt .. .” of the dividend and directed payment to his spouse as contemplated by paragraph 2. A bulletin may properly be used as an aid to the interpretation of an unclear statutory provision*. [1] However, the Bulletin is of little use in this case because there appears to be no doubt about the meaning of subsection 56(2). In Alex Miller v. M.N.R., [1962] C.T.C. 199 at 212; 62 D.T.C. 1139 at 1147, Thurlow, J. (as he then was) considered subsection 16(1) of the former Income Tax Act, the predecessor of the present subsection 56(2). His Lordship said:

In my opinion, section 16(1) is intended to cover cases where a taxpayer seeks to avoid receipt of what in his hands would be income by arranging to have the amount received by some other person whom he wishes to benefit or by some other person for his own benefit. The scope of the subsection is not obscure for one does not speak of benefitting a person in the sense of the subsection by making a business contract with him for adequate consideration.

Here, the appellant has failed to make any attempt to show that in waiving the right which he as holder of 99 per cent of the issued shares had to 99 per cent of the dividend, he was not seeking to avoid receipt of dividend income and arranging for receipt of that amount by his spouse as the respondent assumed had been done. The decision of the Federal Court — Trial Division in Warren Champ v. The Queen, [1983] C.T.C. 1; 83 D.T.C. 5029, is indistinguishable in principle. The appeal will therefore be dismissed.

Appeal dismissed.