155579 Canada Inc. v. R., [1997] 1 CTC 2011, 97 DTC 691

Bell J.T.C.C.: —

ISSUE

The issue is whether each of the Appellants, 155578 CANADA INC. (“78 Canada”) and 155579 CANADA INC. (“79 Canada”) is liable, under section 160 of the Income Tax Act (“Act” to pay an amount (“Amount”) in respect of the dividends paid to it by 99728 Canada Limited (“Amalgamated 99).

In 1964 Brian Daly (“Daly”) and Edward McDorman (“McDorman”) and others founded a computer hardware and software services firm called I.P. Sharp Associates Ltd. (“Sharp”). In 1980 McDorman transferred 66,000 common shares of Sharp to a holding company, 99728 Canada Limited (“99 Canada”) and in 1982 Daly transferred 44,000 common shares of Sharp to a holding company, 117222 Canada Limited (“11 Canada”).

In 1987, by exchange of shares, 78 Canada, then a McDorman family held company, acquired the shares of 99 Canada. Similarly, in 1987, 79 Canada, then a Daly family held company, acquired the shares of 11 Canada.

Then, in 1987, 99 Canada and 11 Canada amalgamated to form Amalgamated 99.

The result of the foregoing transactions, without share details, is displayed by the following chart:

MCDORMAN FAMILYDALY FAMILY

78 CANADA 79 CANADA APPELLANT APPELLANT

AMALGAMATED 99

SHARP

It is agreed that Amalgamated 99, 78 Canada and 79 Canada did not deal with each other at arm’s length during all material times. In June, 1987 Amalgamated 99 received $11,130,000 on the sale of its common shares of Sharp. Amalgamated 99 then paid substantial sums as dividends to 78 Canada and 79 Canada. Amalgamated 99, having the advice of its chartered accountants, retained assets of approximately $2,000,000 to pay taxes calculated at approximately $1,455,000. It then, however, invested in a real estate venture which proved unsuccessful and left it without sufficient funds to pay its tax obligations. After unsuccessful actions by the Department of National Revenue to collect tax, it issued notices of assessment, in August, 1993 to each of the Appellants in the sum of $425,598.46 pursuant to section 160 of the Act in respect of the payment in March, 1988 of dividends to 78 Canada in the sum of $2,277,148 and to 79 Canada in the sum of $1,380,089.

McDorman and Daly each gave evidence, mainly with respect to the amounts they had been paid as salary by and dividends from Sharp from 1965 to 1988. In McDorman’s case, the salaries ranged from $10,298 in 1965 to $29,911 in 1977 and from that figure to $61,014 in 1986 and $59,514 in 1987. In addition, dividends, in modest amounts, were received in the years 1978 to 1982 inclusive. Daly testified that although accurate figures were not available in his case, they were roughly comparable to those of McDorman.

Appellants’ counsel submitted that the assessment of each Appellant is statute-barred pursuant to the provisions of section 152 of the Act because the assessment was issued after the expiry of the three year limitation period provided in that section. Alternatively he submitted that the Minister of National Revenue (“Minister”) did not, in accordance with the provisions of subsection 152(1) assess “with all due dispatch”. Subsection 160(2) provides that the Minister “may at any time” assess a transferee in respect of any amount payable by virtue of section 160. An assessment under that section, therefore, is made separate from the assessment provisions of section 152 [1] and the limitation period imposed by subsection 152(4) does not apply.* [2] Accordingly, the Appellants’ submissions in this regard fail.

Counsel then submitted that neither Appellant had “transferred property” within the meaning of subsection 160(1). The relevant portions of that section read as follows:

Where a person has ... transferred property ... to a person with whom the person was not dealing at arm’s length ... the transferee and the transferor are jointly and severally liable to pay ... an amount equal to the lesser of the amount ... by which the fair market value of the property ... exceeds the fair market value ... of the consideration given for the property and the total ... that the transferor is liable to pay ... in respect of the taxation year in which the property was transferred ...

There is ample authority to support a conclusion that the payment of a dividend is a transfer of property. [3]

Appellants’ counsel submitted that if there had been a transfer of property there was consideration for the dividend in that the services provided by both McDorman and Daly to Sharp were worth substantially more than the amounts paid to them by Sharp. He relied on the decisions in Davis v. R., (sub nom. Davis v. Canada) [1994] 2 C.T.C. 2033, 94 D.T.C. 1934 and McClurg v. Minister of National Revenue, (sub nom. McClurg v. Canada) [1990] 3 S.C.R. 1020, [1991] 1 C.T.C. 169, (sub nom. R. v. McClurg), (sub nom. McClurg v. The Queen) 91 D.T.C. 5001. In Davis, T Inc. paid cash dividends to the taxpayers who were its only two shareholders, such dividends being paid in lieu of salaries for their full time services to the company. This Court, in considering the application of section 160 of the Act, found that consideration can be given in exchange for dividends. Specifically, at pages 2039-40 (D.T.C. 1938) the Court said,

It is within the discretion of the directors to declare dividends in exchange for consideration. I find that at the time of the declaration of the dividends, the Appellants had committed their future services to the benefit of the business and in fact the dividends were not paid until the services were rendered.

In McClurg, Wilma McClurg, the wife of one of the two shareholder directors, had, in the words of the Federal Court judge, at page 176,

Made a real contribution to the establishment of the company and business through the personal guarantee she gave and the share of the mortgage she assumed on their jointly-owned home. The evidence presented...also satisfied me that she had taken an active part in the operation of the business to the extent of her abilities and the requirements of the situation.

In this case, Chief Justice Dickson said, at page 185

Although I agree with Desjardins J. that, with respect to a shareholder, “dividends come as a return on his or her investment” ..., 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. ... Furthermore, the efforts expended by Wilma McClurg in the operation of Northland Trucks, while not dispositive of the issue raised in this appeal, do provide further evidence that the dividend payment was the product of a bona fide business relationship.

I do not interpret the words of Dickson, C.J. as meaning that consideration can be given in exchange for dividends. The McClurg case was not concerned with section 160 but rather with subsection 56(2) dealing with the payment or transfer of property pursuant to the direction of or with the concurrence of a person for the benefit of the recipient. That subsection does not use the word “consideration” as does subsection 160(1). Indeed, subsection 160(1) speaks of the fair market value ... of the consideration given for the property”. That seems clearly to refer to a contractual arrangement where something is given in exchange for something else. Dickson, C.J. referred to the dividend payment as “the product of’ a bona fide business relationship. In the same paragraph he said he agreed with Desjardins J. that, with respect to a shareholder, “dividends come as a return on his or her investment”.

I do not interpret the words “the product of’ as meaning “consideration given for’. Rather I consider “product” as referring to the result of that case. It appears that the learned Chief Justice looked to the motivation for paying the dividend, namely recognition of contribution, rather than having sought to characterize Wilma McClurg’s efforts as consideration for that dividend. Had that been his objective, he could have achieved it easily in precise and unequivocal terms. He seems to have seen her efforts as the reason for, not as the consideration for, payment of the dividend. A dividend is a payment related, by way of entitlement, simply to the interest of the payee as a shareholder. [4] Accordingly, with respect, I do not concur with the finding in the Davis case and I do not accept the submission of Appellants’ counsel that consideration was given for the dividends received by them. [5] It is noted that the dividends were paid, not to McDorman and Daly, who had provided services to Sharp, a subsidiary of the dividend paying corporation, but rather to the Appellants, the shares of which were owned by those two gentlemen and members of their families.

Appellants’ counsel said that section 160 was intended to refer to family situations and was not intended to apply to the payment of dividends. He argued that if no consideration can be given for a dividend the section operates unfairly in situations where a dividend is paid because, unlike family situations, there is no opportunity to reduce the amount required to be paid by proving the value of consideration given. However, the law must be interpreted and applied as it exists. Any repair to this legislation is not the duty or province of the courts but is a matter for the legislature.

For the above reasons, the appeals are dismissed.

Costs are awarded to the Respondent.

Appeal dismissed.