Michael G Degroote v. Minister of National Revenue, [1982] CTC 2806, 82 DTC 1807

The Assistant Chairman:—To the reported income of the appellant for the 1974 taxation year, was added a dividend in the amount of $237,405 paid to him by The Hamilton Tiger-Cat Football Club Limited (hereinafter referred to as the “Football Club”). The appellant being of the view that that dividend was the income and property of his holding company, Pine Hollow Holdings Limited (hereinafter referred to as “Pine Hollow”), objected to the assessment and, following confirmation thereof by the respondent, appealed to this Board. While evidence was given by Mr DeGroote and Mr Ralph Sazio, then the president of the Football Club, there really was no dispute as to the facts of the case.

The appellant had shareholdings in many companies. To act as a holding company for some of his interests, on the advice of his lawyers and accountants, he caused to be incorporated Pine Hollow, of which he was the sole shareholder and director. By agreement dated March 20, 1973, Mr DeGroote purchased all of the shares of the Football Club from the then shareholders. There were terms and conditions attached to that agreement, none of which is relevant to this issue. Shortly thereafter, the appellant sold 15% of the said shares to the parties from whom he had acquired shares. In addition, a little later, a small percentage was sold to other people. Mr DeGroote became the registered owner in the books of the Football Club to the extent of his share ownership.

Later (in 1973) the appellant personally entered into a formal agreement with a Mr Trottier to sell him 3,000 shares of the Football Club and orally agreed in the same year with another gentleman to sell him a few shares. No shares were transferred pursuant to either of these agreements. Following the incorporation of Pine Hollow, the appellant, on January 10, 1974, entered into an agreement with it to sell to it all the shares of the Football Club which he owned. The shares were not transferred on that day and, in fact, they were not registered in the name of Pine Hollow until October or November, 1974. The reason for this was, first of all, that since the Football Club was in the Eastern Conference of the Canadian Football League, that transfer had to be approved by that organization. Following that approval, the transfer still had to be further approved by the Canadian Football League. As Mr Sazio explained, this took time and it wasn't until late 1974 that full approval was given.

Mr Sazio further explained that the Football Club usually had a meeting at the end of each month. The financial position of the Football Club for a particular year (calendar year) could not be ascertained until after the Grey Cup game when the Football Club would be advised of its share of the proceeds of that contest. It then took the Football Club accountants some time to prepare the books and records for presentation to the directors. There was a Football Club Director’s Meeting on February 28, 1974. At that meeting a motion was approved. It read as follows:

It was revolved that the company elects to pay a dividend of $21 per common share to the shareholders of record on December 29, 1973 and payable March 4, 1974.

Immediately following that motion, the Minute contained the following:

Cash Position — Mr Gibson advised the meeting that the above actions may cause a short cash position at times throughout the year. Mr DeGroote said that he would make arrangements with the Toronto-Dominion Bank to meet this situation should it arise.

It is noted that Mr DeGroote was in attendance at that meeting as was Mr Sazio, who was the Chairman. As to the date for the “shareholders of record”, Mr Sazio could offer no explanation except that basically, since he had been with the Football Club (about 30 years), virtually always the last working day of the year for which the dividend was being declared (if a profit in that year) was used as the date of “record”.

As mentioned, by agreement of January 10, 1974, the appellant sold all the shares he then had in the Football Club to Pine Hollow. It was stated in evidence that there was good and valuable consideration for the sale and that statement was in no way disputed. The document says “on this date sell”. It also contained clause 3, which reads as follows:

3. DeGroote and Pine Hollow agree that the shares shall remain registered in the name of DeGroote for the beneficial owner thereof, Pine Hollow; that DeGroote will execute a declaration of trust declaring that he is holding the said shares in trust for Pine Hollow; further that Pine Hollow is the beneficial holder thereof and that all monies or payments received by DeGroote by virtue of the said shares being registered in his name shall be for the account of Pine Hollow to the exclusion of DeGroote. DeGroote further covenants and agrees that he will deal with the shares only upon the instructions of Pine Hollow and that in so far as he is legally entitled so to do he will carry out and fulfil any and all instructions given to him by Pine Hollow pertaining to any or all matters relating to the said shares and without restricting the generality of the foregoing, the sale, pledge, hypothecation of such shares, and DeGroote further covenants and agrees that he will vote such shares in accordance with any instructions which might be given to him by Pine Hollow.

Concurrently the appellant signed a declaration of trust, which reads as follows:

I, MICHAEL GEORGE DEGROOTE hereby declare that I have this day sold 8,500 common shares without par value of the capital stock of Hamilton Tiger-Cats Football Club Limited to Pine Hollow Holdings Limited and further that by agreement between me and Pine Hollow Holdings Limited said shares shall remain registered in my name. I further declare that as of this day I have no beneficial interest therein and that I am holding said shares in trust for the beneficial owner thereof, Pine Hollow Holdings Limited. I undertake to deal with such shares only upon instructions received by me from Pine Hollow Holdings Limited. I further acknowledge and agree, direct and declare that all dividends or any other payments of any nature or kind received by me by virtue of the fact that said shares are registered in my name shall be for the account of Pine Hollow Holdings Limited to the absolute exclusion of myself. I further agree that I will follow and carry out all legal instructions given to me by the owner of such shares, Pine Hollow Holdings Limited as same may pertain to any and/or all dealings with said shares.

The appellant’s position, shortly stated, is:

(a) The date of record is for company purposes only. (To whom does it write and send the cheque?)

(b) On the signing of the agreement on January 10, 1974, anything that the appellant would receive from those Football Club shares from that date forward was not only the property of but also the income of Pine Hollow, and the trust agreement of the same date supports that position. (When he received the dividend cheque, he could only deal with it as trustee.)

It should be mentioned that the cheque paying the dividend was made payable to Mr DeGroote and he turned it over to Pine Hollow.

The Crown’s submission was that the date of “shareholder of record” was determinative of the issue and, since the appellant was the shareholder of record on December 29, 1973, then the dividend cheque was his and no other person’s and so it was his income.

Counsel for the appellant relied first of all on the Business Corporations Act of Ontario, RSO 1970, c 53, section 75(1), which reads as follows:

Subject to sections 106 and 112, the issuer or the indenture trustee may treat the registered holder as the person entitled to receive notice of and to vote at meetings of the security holders and to receive any payment in respect of the security and otherwise to exercise all the rights and powers of an owner.

His submission continues that the sole purpose of that subsection is for the protection of the payor — if it has paid that person the dividend then, in so far as it is concerned, the dividend has been paid properly. Reliance was also placed on the cases of Black et al v Homersham, [1874-80] All ER 207; and In re Wimbush, Richards v Wimbush et al, [1940] 1 Ch 92. Counsel submitted that, once the shares have been purchased, all things flowing from the company following the purchase go to the now shareholder.

Counsel for the Crown referred to a number of cases, but the most relevant one is the case of Victor A Pylypchuk v MNR, 17 Tax ABC 337; 57 DTC 375, a decision of Mr Fisher of the Tax Appeal Board. In 1943, the appellant and others purchased shares of a limited company from certain people. The agreement reflecting the purchase stated in part:

The Vendors shall be entitled as their own property to ... all accounts or bills received by the Company or owing to the Company, as at August 31, 1943.

In 1950 the company received a sum from the Department of National Revenue with respect to excess profit tax, a portion of which the parties (the vendor and purchaser of the shares) agreed was due with respect to a period prior to August 31, 1943. The directors of the company, on December 31, 1951, declared a dividend payable to the shareholders of record on August 30, 1943, (they were the vendors of the shares to the now shareholders) which dividend related in part to the payment in 1950 from the Department of National Revenue. By this dividend declaration, no dividend was payable to the current shareholders. The Minister assessed the appellant on the basis that he received a benefit by the company paying the dividend to an old shareholder and so relieving the appellant of an obligation. Mr Fisher allowed the appeal saying there was no benefit as the amount of the dividend was “a bill or account receivable” on or before August 31, 1943, and so, was the property of the vendor of the shares. In the instant appeal, there was no suggestion that the dividend was the property of the appellant because, at the time of declaration and payment of the dividend, the appellant not only owned but was also the registered owner of the same shares.

I am of the view that the date of the “shareholder of record” is more important than giving the name and address of the person to whom the dividend cheque should be sent. I believe it does that, but it also indicates who is the owner of that dividend, subject to any pre-existing terms. As pointed out previously, it must be remembered that the appellant was at the meeting when the dividend was declared and the date for “shareholder of record” was set. There was no notation on the minute of any dissent from the resolution. The appellant could easily have requested the day of say, January 20, 1974, to be the date of the “shareholder of record”. Had this happened, it could be that the sales agreement and trust declaration would have made him a bare trustee and so the dividend would not have the character of income to him.

Judgment will go dismissing the appeal.

Appeal dismissed.