Isaac
C.J.
(Stone
and
McDonald,
J
J.
A.,
concurring:
—
This
is
an
appeal
from
a
decision
of
the
Trial
Division,
[1994]
2
F.C.
154,
affirming
a
decision
of
the
Tax
Court
[reported
92
D.T.C.
1652]
which
had
allowed
the
respondent’s
appeal
from
the
reassessment
of
his
income
for
the
taxation
year
1982
in
the
circumstances
mentioned
below.
The
appeal
raises
the
issue
whether
a
dividend
in
the
amount
of
$14,800,
received
by
the
respondent’s
spouse
on
non-voting
Class
“F”
shares
in
a
corporation,
was
properly
attributed
to
the
respondent
as
income,
on
the
basis
that
the
amount
of
the
dividend
was
a
payment
or
transfer
of
property
made
pursuant
to
the
direction
of,
or
with
the
concurrence
of
the
respondent
within
the
contemplation
of
subsection
56(2)
of
the
Income
Tax
Act
(the
“Act”).
The
appeal
also
requires
us
to
consider
the
following
statement
by
the
Chief
Justice
of
Canada
in
his
majority
reasons
in
McClurg
v.
Minister
of
National
Revenue
(sub
nom.
McClurg
v.
The
Queen),
[1990]
3
S.C.R.
1020
[1991]
1
C.T.C.
169
(sub
nom.
R.
v.
McClurg),
91
D.T.C.
5001,
at
page
1054
(C.T.C.
185):
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
non-arm’s
length
shareholder
has
made
no
contribution
to
the
company
(in
which
case
subsection
56(2)
may
be
applicable),
and
those
cases
in
which
a
legitimate
contribution
has
been
made.
[Emphasis
added.]
The
Facts
The
respondent
was
at
all
relevant
times
a
lawyer
practicing
with
the
firm
of
Newman,
MacLean
in
Winnipeg,
Manitoba.
He
and
some
other
members
of
the
firm
each
owned
1,285.714
common
shares
in
Newmac
Services
(1973)
Ltd.
(“Newmac”).
Newmac
owned
some
commercial
property
in
downtown
Winnipeg,
including
the
property
occupied
by
Newman,
MacLean.
Newmac
also
managed
that
property
under
contract
with
Newman,
MacLean.
On
29
April
1981,
the
respondent
incorporated
Melru
Ventures
Inc.
(“Melru”)
and
was
its
sole
shareholder
and
director.
Melru
was
established
as
a
tax
planning
vehicle
with
specific
purposes
to
split
any
income
received
from
Newmac
with
his
wife
Ruby
Neuman
and
to
freeze
the
respondent’s
equity
in
Newmac
in
order
that
any
increase
in
that
equity
would
accrue
to
his
wife.
The
authorized
capital
of
Melru
was
divided
as
follows
:
5,000
common
voting
shares,
5,000
common
non-voting
shares,
10,000
Class
“A”
shares,
30,000
Class
“B”
shares,
25,000
Class
“C”
shares,
25,000
Class
“D”
shares,
300,000
Class
“E”
shares,
5,000
Class
“F’
shares,
and
1,286
Class
“G”
shares,
all
without
par
value,
provided
that
the
shares
shall
not
be
issued
for
a
consideration
exceeding
in
amount
or
value
in
the
aggregate
the
sum
of
$40,000.
The
Articles
of
Incorporation
of
Melru
contain
the
following
rights,
privileges,
restrictions
and
conditions
attaching
to
Class
“F”
and
Class
“G”
shares:
(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)
...
(c)
in
the
event
of
the
liquidation,
dissolution
or
winding
up
of
the
Corporation,
whether
voluntary
or
involuntary,
the
holders
of
Class
“G”
shares
shall
be
entitled
to
receive
before
any
distribution
on
any
part
of
the
assets
of
the
Corporation
among
the
holders
of
any
other
class
of
shares
an
amount
equal
to
the
redemption
price
for
each
Class
“G”
share
and
any
dividends
declared
thereon
and
unpaid
and
no
more;
(d)
in
the
event
of
the
liquidation,
dissolution
or
winding
up
of
the
Corporation,
whether
voluntary
or
involuntary,
the
holders
of
the
preference
shares
shall
be
entitled
to
receive,
before
any
distribution
on
any
part
of
the
assets
of
the
Corporation
among
the
holders
of
Class
“F”
shares
and
common
shares
an
amount
equal
to
the
sum
of
$1
per
share
and
any
dividends
declared
thereon
and
unpaid
and
no
more;
(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.]
(f)
subject
to
the
prior
rights
of
Class
“G”
shares
and
preference
shares,
on
the
dissolution
of
the
Corporation,
the
Class
“F’
shares
shall
be
entitled
to
receive
an
amount
equal
to
the
sum
of
$1
per
share
and
all
declared
dividends
which
have
not
been
paid
thereon
in
priority
to
any
payment
on
the
common
shares
and
after
the
holders
of
common
shares
shall
have
received
a
similar
amount
per
share
and
all
dividends
declared
thereon
and
unpaid
and
all
monies
set
aside
for
payment
of
dividends
on
common
shares,
the
holders
of
Class
“F’
shares
and
the
holders
of
common
shares
shall
participate
in
equal
amount
per
share
without
preference
or
priority;
(g)
the
Corporation
may
redeem
the
whole
or
any
part
of
the
Class
“F”
shares
on
payment
for
each
share
to
be
redeemed
of
what
would
have
been
available
for
that
class
if
the
Corporation
were
then
dissolved
divided
by
the
number
of
Class
“F”
shares
then
outstanding;
provided
however
that
no
dividends
shall
be
paid
on
Class
“F”
shares
so
as
to
reduce
the
value
of
the
Class
“G”
shares
below
their
redemption
price.
(h)
the
Corporation
shall
have
the
right
at
its
option
at
any
time
and
from
time
to
time
to
purchase
the
Class
“G”
shares
pursuant
to
tenders
received
for
a
sum
not
exceeding
the
redemption
price
and
dividends
declared
thereon
and
unpaid;
(i)
...
(j)
subject
to
the
provisions
of
The
Corporations
Act,
any
holder
of
Class
“G”
shares
may
require
that
the
Corporation
redeem
all
or
any
part
of
his
shares
upon
payment
for
each
share
to
be
redeemed
of
the
redemption
price
together
with
dividends
declared
thereon
and
unpaid;
(k)
...
(l)
except
as
set
out
in
paragraph
(v)
and
subject
to
The
Corporations
Act,
the
holders
of
common
non-voting
shares,
Class
“D”
shares,
Class
“E”
shares
and
Class
“F”
shares
shall
not,
as
such,
have
any
voting
rights
for
the
election
of
directors
or
for
any
other
purpose
nor
shall
they
be
entitled
to
notice
of
or
to
attend
shareholders’
meetings.
Common
voting
shares,
Class
“A”
shares,
Class
“B”
shares
and
Class
“G”
shares
shall,
subject
to
paragraphs
(m)
and
(n),
entitle
their
holders
to
one
vote
for
each
of
such
shares
so
held.
Class
“C”
shares
shall,
subject
to
paragraph
(o),
entitle
their
holders
to
four
votes
for
each
share
so
held.
(m)
except
as
set
out
in
paragraph
(m)
[sic]
and
subject
to
The
Corporations
Act
immediately
on
the
happening
of
any
one
or
more
of
the
following
namely:
(i)
on
the
death
of
any
holder
of
Class
“G”
shares;
(ii)
on
the
transfer
of
any
Class
“G”
shares
(whether
legally
or
equitably);
then
the
entire
class
of
Class
“G”
shares
shall
forthwith
lose
all
voting
rights
and
thereafter
no
shares
of
such
class
shall
entitle
the
holder
thereof
to
vote
at
the
election
of
directors
or
for
any
other
purposes
nor
shall
they
entitle
the
holders
to
notice
of
or
to
attend
shareholders’
meetings;
On
29
April
1981,
the
respondent
agreed
with
Melru
to
sell
his
common
shares
in
Newmac
in
exchange
for
1,285.714
Class
“G”
shares
of
Melru.
Subsequent
to
this
acquisition,
Melru
carried
those
shares
on
its
balance
sheet
as
an
asset,
having
a
value
of
$120,000.
On
1
May
1981,
at
10:00
a.m.
a
meeting
of
the
first
director
was
held
at
which
the
respondent
was
appointed
President,
his
wife,
Ruby
was
appointed
Secretary
and
1
common
voting
share
of
Melru
was
issued
to
the
respondent
for
$1
.
At
a
special
general
meeting
of
shareholders
held
on
the
same
day
at
10:15
a.m.
the
respondent
resigned
as
first
director
of
Melru
and
was
elected
a
director
of
that
corporation
until
the
first
annual
meeting
of
the
corporation
or
until
his
successor
was
elected.
Ruby
Neuman,
his
wife,
acted
as
secretary
of
the
meeting.
On
the
same
day
at
a
meeting
of
the
board
of
directors
held
at
10:30
a.m.,
the
respondent,
as
chairman
of
the
meeting
reported
that
his
wife,
had
subscribed
for
99
Class
“F”
shares
in
Melru
and
a
resolution
was
passed
authorizing
the
issue
of
such
shares
to
Ruby
Neuman
at
a
price
of
$1
per
share
.
The
minutes
of
the
annual
meeting
of
shareholders
of
Melru
held
on
12
August
1982
at
10:15
a.m.
read
in
part
as
follows
:
PRESENT:
Melville
Neuman
Ruby
Neuman
being
all
the
shareholders
of
the
Corporation...
The
Chairman
then
stated
that
it
was
in
order
to
proceed
with
the
election
of
the
directors
and
asked
for
nominations.
The
following
was
nominated:
Ruby
Neuman
[Emphasis
added.
]
Ruby
Neuman
was
duly
elected
a
director
of
Melru
to
hold
office
until
her
successor
was
elected
or
appointed.
Curiously,
the
minutes
of
the
meeting
of
the
board
of
directors
held
on
the
same
day
at
10:30
a.m.,
contains
the
following
resolution
:
On
motion
duly
made,
seconded
and
unanimously
carried,
the
following
persons
were
elected
or
appointed
as
officers
of
the
Corporation
to
hold
the
office
referred
to
opposite
their
respective
names
for
the
ensuing
year
or
until
their
successors
are
elected
or
appointed:
President:
Melville
Neuman
Secretary:
Ruby
Neuman
[Emphasis
added.]
As
the
minutes
of
the
meeting
of
the
board
of
directors
held
on
8
September
1982
are
critical
to
the
issues
in
this
appeal,
we
reproduce
them
in
full
:
MINUTES
of
a
meeting
of
the
Board
of
Directors
of
MELRU
VENTURES
INC.
held
at
the
offices
of
the
Corporation
on
the
8th
day
of
September,
1982,
at
the
hour
of
10:00
o’clock
in
the
forenoon.
PRESENT:
Ruby
Neuman
being
the
sole
director
of
the
Corporation.
ALSO
PRESENT:
Melville
Neuman
The
President
took
the
Chair
and
the
Secretary
acted
as
Secretary
of
the
meeting.
The
sold
[sic]
director
being
present
and
having
waived
notice
of
the
calling
of
the
meeting,
the
meeting
was
declared
to
be
regularly
constituted.
On
motion
duly
made,
seconded
and
unanimously
carried,
it
was:
RESOLVED
that
a
taxable
dividend
of
$5,000
on
the
outstanding
Class
“G”
shares
in
the
capital
stock
of
the
Corporation
be
and
the
same
is
hereby
declared
payable
forthwith
and
the
President
be
and
he
is
hereby
authorized
to
do
all
things
necessary
for
such
payment.
RESOLVED
that
the
said
dividends
on
Class
“G”
shares
be
applied
against
any
shareholders’
advances.
The
meeting
discussed
the
payment
of
dividend
of
$14,800
on
common
shares
and
Class
“F”
shares.
The
meeting
was
further
advised
that
the
holder
of
common
shares
was
prepared
to
have
money
set
aside
for
future
payment
on
his
common
shares.
On
motion
duly
made,
seconded
and
unanimously
carried,
it
was:
RESOLVED
that
a
taxable
dividend
of
$14,800
on
the
outstanding
Class
“F’
shares
of
the
Corporation
be
and
the
same
is
hereby
declared
payable
forthwith
to
shareholders
of
record
and
any
officer
of
the
Corporation
be
and
he
or
she
is
hereby
authorized
to
do
all
things
necessary
for
the
payment
of
such
dividends.
The
next
annual
meeting
of
the
shareholders
of
Melru
was
held
on
12
October
1983
at
8:15
p.m.
According
to
the
minutes
of
that
meeting
,
Melville
Neuman
acted
as
Chairman
and
Ruby
Neuman
as
Secretary.
Ruby
Neuman
was
elected
as
a
director.
Those
minutes
also
contain
the
following
resolution:
On
motion
duly
made,
seconded
and
unanimously
carried,
the
following
resolution
was
passed:
RESOLVED
that
all
acts,
contracts,
by-laws,
proceedings,
appointments
and
payments
passed,
made,
done,
or
taken
by
the
directors
and
officers
of
the
Corporation
since
the
last
annual
meeting
of
the
shareholders
(or
resolution
signed
in
lieu
thereof)
as
the
same
are
set
out
or
referred
to
in
the
minutes
of
the
meeting
of
the
Board
of
Directors
or
resolutions
signed
by
the
Board
of
Directors
and
the
Financial
Statements
submitted
to
the
shareholders
for
approval
be
and
the
same
are
hereby
confirmed.
The
respondent
gave
the
following
evidence
concerning
the
reasons
for
electing
his
wife
as
the
sole
director
of
Melru
:
Q.
All
right.
Now,
what
was
the
purpose
of
your
wife
being
elected
sole
director?
A.
I
thought
it
would
be
a
good
idea
to
have
my
wife
as
sole
director
so
she
can
make
all
the
decisions.
Q.
You
indicated
that
you
were
sure,
as
I
understood
your
words,
that
she
would
follow
your
recommendations?
A.
If
I
told
her
what
to
do,
she
would
not.
If
I
recommended,
she
might.
Q.
I
take
it
that
it
was
an
element
of
your
decision
making
process
that
if
you
had
your
wife
in
place
as
director,
you
would
have
a
superior
argument
should
you
ever
be
reassessed?
A.
I
am
electing
my
—
the
argument
will
come
shortly.
It’s
a
rule
of
thumb.
It
was
my
decision
to
elect
my
wife
director,
and
I
may
have
thought
about
it.
I
will
be
quite
candid
about
it.
Q.
Well,
did
you
think
about
it?
A.
Probably,
probably.
I
probably
recommended
to
other
—
not
necessarily
in
this
case.
I
may
have
recommended
it
to
other
clients.
Q.
But
the
concept
was
that
you
would
be
one
step
removed
from
the
declaration
of
the
dividend
if
it
were
put
in
the
hands
of
your
wife?
A.
I
decided
to
make
her
the
sole
director
so
she
could
exercise
all
statutory
powers.
I
have
recommended
to
other
clients
previously
that
in
the
similar
situations
that
they
elect
their
wife
director.
Is
that
candid
enough?
He
also
testified
that
he
explained
to
his
wife
the
duties
of
a
director,
that
they
manage
the
corporation,
that
they
have
a
duty
to
the
corporation
and
that
they
make
the
decisions,
including
decisions
respecting
the
dividends
that
could
be
paid
by
Melru,
if
dividends
were
to
be
declared
.
Respecting
the
declaration
of
dividends,
the
respondent
testified
at
trial
as
follows
:
Q.
All
right.
Fine.
Now,
under
tab
19,
we
come
to
minutes
of
the
meeting
of
the
board
of
directors
on
the
8th
of
September,
1982,
at
10:00
a.m.,
which
deal
with
the
declaration
of
dividends;
is
that
correct?
A.
That
is
correct.
Q.
And
it’s
declared
that
there
be
a
taxable
dividend
of
$5,000
on
class
G
shares
which
you
held?
A.
That
is
correct.
Q.
And
a
dividend
of
$14,800
on
class
F
shares
which
your
wife
held?
A.
That
is
correct.
Q.
Now,
my
question
is:
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
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.
Q.
Was
the
amount
of
dividend
declared
on
class
F
shares
calculated
all
by
reference
to
what
the
taxation
impact
would
be
taking
into
account
the
dividend
tax
credit?
A.
You
want
to
know
—
my
own
thought,
my
own
recommendation
was
that
something
should
be
paid
on
that.
From
my
knowledge
of
what
had
taken
place
in
all
roll-overs
and
rulings
of
the
Department,
they
were
not
concerned
about
what
dividends
paid
as
long
as
they
were
fully
retractable,
but
my
own
opinion
was
something
should
be
paid
which
was
more
than
a
nominal
amount,
and
so
I
thought
$5,000
would
be
a
reasonable
amount.
On
8
September
1982,
the
same
day
on
which
she
declared
the
dividend,
Ruby
Neuman
lent
to
her
husband
the
sum
of
$14,800,
the
same
amount
she
had
received
as
dividend,
on
the
security
of
a
promissory
note
in
the
following
terms
:
September
8th,
1982.
FOR
VALUE
RECEIVED,
I
promise
to
pay,
on
demand,
to
RUBY
NEUMAN,
the
sum
of
FOURTEEN
THOUSAND,
EIGHT
HUNDRED
DOLLARS
($14,800).
Such
demand
may
be
made
in
whole
or
in
part
as
the
payee
shall
deem
advisable.
No
interest
shall
be
payable
prior
to
demand
and
thereafter
at
prime
bank
rate
on
the
amount
on
which
interest
is
so
demanded.
Ruby
Neuman
died
on
2
October
1988.
It
is
common
ground
that
no
demand
was
ever
made
and
no
interest
was
ever
paid
on
the
loan.
The
learned
Trial
Judge
made
the
following
findings
of
fact
:
(1)
Melru
was
incorporated
for
tax
planning
and
income
splitting
purposes.
It
had
no
other
independent
business
purpose.
(2)
The
dividends
declared
by
Ruby
Neuman
on
her
own
Class
“F’
shares
and
the
defendant’s
Class
“G”
shares
were
declared
pursuant
to
discretionary
dividend
provisions
in
the
Articles
of
Incorporation
of
Melru
.
The
dividends
of
$14,800
on
her
Class
“F”
shares
and
$5,000
on
the
defendant’s
Class
“G”
shares
were
arbitrary
numbers
having
regard
only
to
the
fact
that
Melru
had
earnings
by
way
of
dividends
from
Newmac
of
$20,000
available
for
distribution.
But
the
allocation
of
$14,800
to
the
Class
“F”
shares
and
$5,000
to
the
Class
“G”
shares
was
arbitrary.
(3)
Ruby
Neuman
made
no
contribution
to
Melru,
nor
did
she
assume
any
risks
for
the
company.
The
Decisions
Below
(a)
The
Tax
Court
On
19
May
1992,
the
learned
Tax
Court
Judge
allowed
the
respondent’s
appeal
with
costs
and
referred
the
assessment
back
to
the
appellant
for
reconsideration
and
reassessment
on
the
basis
that
the
dividend
received
by
the
respondent’s
spouse
on
her
Class
“F”
shares
of
Melru
was
not
to
be
included
in
the
respondent’s
income
for
the
taxation
year
1982.
In
reaching
that
conclusion
the
Tax
Court
Judge
noted
that
in
McClurg,
the
Supreme
Court
of
Canada
established
that,
as
a
general
rule,
subsection
56(2)
of
the
Act
does
not
apply
to
the
declaration
of
dividends.
However,
he
was
required,
as
we
are
in
this
appeal,
to
deal
with
the
appellant’s
contention
that
the
dictum
of
Dickson
C.J.,
which
we
have
earlier
quoted,
was
binding
upon
him
and
mandated
the
dismissal
of
the
respondent’s
appeal.
He
concluded
that
the
dictum
was
neither
the
ratio
decidendi
nor
judicial
dicta
by
a
majority
of
the
Supreme
Court
of
Canada
and,
consequently,
that
it
was
not
binding
upon
him.
He
then
continued:
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.
(b)
The
Trial
Division
The
Trial
Judge
dismissed
the
appeal
from
the
decision
of
the
Tax
Court
on
the
ground
that
subsection
56(2)
of
the
Act
was
not
designed
to
prevent
the
type
of
income
splitting
engaged
in
by
the
respondent
and
his
wife.
He
concluded
his
reasons
with
the
following
statement
:
...
subsection
56(2)
is
not,
in
my
opinion,
the
appropriate
provision
for
the
Minister
to
invoke
to
challenge
income
splitting
in
the
context
of
the
directorshareholder
relationship
and
the
declaration
of
dividends.
Earlier
in
his
reasons,
the
Trial
Judge
commented
upon
the
submission
of
counsel
for
the
appellant
that
Ruby
Neuman,
in
declaring
the
dividends
in
issue
in
this
appeal,
was
acting
“pursuant
to
the
direction
of,
or
with
the
concurrence
of’,
the
respondent
as
those
terms
are
used
in
subsection
56(2)
of
the
Act.
After
reviewing
some
of
the
evidence
and
the
relevant
principles
of
corporation
law,
the
Trial
Judge
stated
:
For
these
reasons,
I
would
be
reluctant
to
presume
that
Ruby
Neuman
was
acting
pursuant
to
the
direction
of,
or
with
the
concurrence
of,
the
defendant
[respondent]
when
she,
as
director,
declared
dividends
on
behalf
of
Melru.
A
finding
that
Ruby
Neuman
was
not
acting
pursuant
to
the
direction
of,
or
with
the
concurrence
of,
the
defendant
would
be
determinative
in
this
case.
However,
because
this
issue
was
not
addressed
in
depth
by
counsel,
I
do
not
propose
to
decide
the
case
on
this
issue
and
my
comments
should
be
considered
as
obiter
only.
Without
deciding
this
issue
therefore,
I
proceed
with
an
analysis
of
McClurg,
supra,
and
its
application
to
the
case
at
bar.
After
engaging
in
an
extensive
examination
of
McClurg,
the
Trial
Judge
reached
the
conclusion
quoted
at
the
commencement
of
this
segment
of
these
reasons
and
dismissed
the
appeal.
The
Legislation
12(1)
Amounts
to
be
included
as
income
from
business
or
property
.-There
shall
be
included
in
computing
the
income
of
a
taxpayer
for
a
taxation
year
as
income
from
a
business
or
property
such
of
the
following
amounts
as
are
applicable:
(j)
dividends
from
corporations
resident
in
Canada.—any
amount
required
by
subdivision
h
to
be
included
in
computing
the
taxpayer’s
income
for
the
year
in
respect
of
a
dividend
paid
by
a
corporation
resident
in
Canada
on
a
share
of
its
capital
stock;
56(2)
Indirect
payments.
-
A
payment
or
transfer
of
property
made
pursuant
to
the
direction
of,
or
with
the
concurrence
of,
a
taxpayer
to
some
other
person
for
the
benefit
of
the
taxpayer
or
as
a
benefit
that
the
taxpayer
desired
to
have
conferred
on
the
other
person
shall
be
included
in
computing
the
taxpayer’s
income
to
the
extent
that
it
would
be
if
the
payment
or
transfer
had
been
made
to
him.
56(3)
Undistributed
payments
or
profits.
-
For
the
purposes
of
this
Part,
a
payment
or
transfer
in
a
taxation
year
of
property
made
to
the
taxpayer
or
some
other
person
for
the
benefit
of
the
taxpayer
and
other
persons
jointly
or
a
profit
made
by
the
taxpayer
and
other
persons
jointly
in
a
taxation
year
shall
be
deemed
to
have
been
received
by
the
taxpayer
in
the
year
to
the
extent
of
his
interest
therein
notwithstanding
that
there
was
no
distribution
or
division
thereof
in
that
year.
56(4)
Transfer
of
rights
to
income.
-
Where
a
taxpayer
has,
at
any
time
before
the
end
of
a
taxation
year
(whether
before
or
after
the
end
of
1971),
transferred
or
assigned
to
a
person
with
whom
he
was
not
dealing
at
arm’s
length
the
right
to
an
amount
that
would,
if
the
right
thereto
had
not
been
so
transferred
or
assigned,
be
included
in
computing
his
income
for
the
taxation
year
because
the
amount
would
have
been
received
or
receivable
by
him
in
or
in
respect
of
the
year,
the
amount
shall
be
included
in
computing
the
taxpayer’s
income
for
the
taxation
year
unless
the
income
is
from
property
and
the
taxpayer
has
also
transferred
or
assigned
the
property.
82(1)
Taxable
dividends
received.-
In
computing
the
income
of
a
taxpayer
for
a
taxation
year,
there
shall
be
included
(a)
all
amounts
received
by
him
in
the
year
from
corporations
resident
in
Canada
as,
on
account
or
in
lieu
of
payment
of,
or
in
satisfaction
of,
taxable
dividends,
plus
(b)
where
the
taxpayer
is
an
individual,
other
than
a
trust
that
is
a
registered
charity,
1/2
of
the
aggregate
of
all
amounts
described
in
paragraph
(a)
received
by
him
in
the
year
from
taxable
Canadian
corporations.
Issues
In
Part
II
of
his
memorandum
of
fact
and
law,
the
appellant
alleges
that
the
decision
of
the
Trial
Division
poses
the
following
issues
for
resolution:
(a)
whether
Ruby
Neuman
was
acting
pursuant
to
the
direction
of,
or
with
the
concurrence
of,
the
respondent,
when
she
declared
the
dividend
of
$14,800
from
Melru
to
herself;
(b)
whether
the
dictum
of
Dickson
C.J.C.
in
McClurg
was
binding
upon
the
courts
below;
and
(c)
whether
subsection
56(2)
of
the
Act
permitted
the
Minister
to
include
in
the
income
of
the
respondent
for
the
taxation
year
1982,
the
dividend
of
$14,800
which
Ruby
Neuman
received
from
Melru.
We
deal
with
each
issue
in
turn.
(a)
whether
Ruby
Neuman
was
acting
pursuant
to
the
direction
of,
or
with
the
concurrence
of,
the
respondent,
when
she
declared
the
dividend
of
$14,800
from
Melru
to
herself
On
this
issue,
counsel
for
the
appellant
made
several
submissions.
First,
he
said
that,
on
the
evidence,
Ruby
Neuman
acted
at
the
direction
of
the
respondent
in
declaring
the
dividend
from
Melru
to
herself.
In
this
respect
he
urged
the
findings
of
the
Trial
Judge
that
the
respondent
had
incorporated
Melru
as
a
tax
planning
vehicle
to
split
income
from
Newmac
with
his
wife,
Ruby
Neuman;
that
one
of
the
reasons
motivating
the
respondent’s
resignation
as
a
director
of
Melru
and
his
electing
Ruby
Neuman
in
his
place
was
to
distance
himself
from
the
decision
making
in
Melru,
in
order
to
provide
the
respondent
with
a
superior
argument,
if
the
Minister
had
challenged
the
income
splitting
arrangement;
and,
that
the
respondent
gave
his
wife
expert
advice
and
made
recommendations
to
her
concerning
the
declaration
of
dividends
which
he
was
sure
she
would
take.
Secondly,
counsel
submitted
that
the
respondent’s
recommendation
to
Ruby
Neuman
that
she
declare
the
dividend
to
herself
amounted,
in
the
circumstances
of
this
case,
to
concurrence
within
subsection
56(2)
of
the
Act.
For
his
part,
counsel
for
the
respondent,
started
from
the
premise
that
a
director
of
a
corporation
has
the
responsibility
to
manage
the
business
and
affairs
of
the
corporation,
including
the
responsibility
to
declare
dividends.
He
characterized
a
dividend
as
being
a
distribution
of
corporate
property
which
does
not
require
the
direction
or
concurrence
of
a
shareholder
of,
or
advisor
to,
a
corporation
in
order
to
be
declared
or
paid.
For
that
reason,
so
he
contended,
the
respondent’s
direction,
or
concurrence
was
not
relevant
since
neither
could
create
a
tax
obligation
under
subsection
56(2)
of
the
Act.
We
are
unable
to
accept
the
respondent’s
contention,
having
regard
to
the
uncontradicted
evidence
in
this
appeal.
The
minutes
of
the
meeting
of
the
board
of
directors
dated
12
August
1982
show
unequivocally
that
the
respondent
had
been
elected
President
of
Melru
and
his
wife
Ruby
as
Secretary.
They
thereby
became
officers
of
Melru.
The
next
meeting
of
the
board
was
held
on
8
September
1992.
The
minutes
disclosed
the
following:
first,
that
the
respondent
acted
as
Chairman
and
his
wife
as
Secretary
of
the
meeting;
secondly,
that
as
President,
the
respondent
chaired
the
meeting;
thirdly,
that
the
resolution
to
pay
the
dividend
of
$5,000
on
his
Class
“G”
shares
was
passed
unanimously;
and,
fourthly,
that
the
meeting
discussed
payment
of
a
dividend
of
$14,800
on
common
and
Class
“F”
shares.
It
should
be
recalled
that
the
respondent
was
the
only
holder
of
a
common
voting
share
in
Melru;
the
respondent
advised
that
he
was
prepared
to
have
money
set
aside
for
the
future
payment
of
his
common
shares;
and,
that
the
resolution
to
pay
a
taxable
dividend
of
$14,800
on
the
Class
“F”
shares
held
by
Ruby
Neuman
was
passed
unanimously.
Furthermore,
there
was
evidence
before
the
Trial
Judge
that
at
the
meeting
of
shareholders
held
on
12
October
1983,
the
respondent,
as
an
officer
of
Melru,
ratified
the
declaration
of
dividends
that
had
been
made
at
the
meeting
of
the
board
of
directors
on
8
September
1982.
For
convenience,
we
reproduce
that
resolution
here:
On
motion
duly
made,
seconded
and
unanimously
carried,
the
following
resolution
was
passed:
RESOLVED
that
all
acts,
contracts,
by-laws,
proceedings,
appointments
and
payments
passed,
made,
done,
or
taken
by
the
directors
and
officers
of
the
Corporation
since
the
last
annual
meeting
of
the
shareholders
(or
resolution
signed
in
lieu
thereof)
as
the
same
are
set
out
or
referred
to
in
the
minutes
of
the
meeting
of
the
Board
of
Directors
or
resolutions
signed
by
the
Board
of
Directors
and
the
Financial
Statements
submitted
to
the
shareholders
for
approval
be
and
the
same
are
hereby
confirmed.
It
is
clear
to
us
that
the
Trial
Judge
failed
to
consider
all
of
this
evidence
in
reaching
his
conclusion
and,
as
a
result,
he
erred
in
law.
From
this
examination
of
the
evidence,
we
conclude
that
there
was
sufficient
evidence
of
the
respondent’s
concurrence
with
Ruby
Neuman’s
declaration
of
the
dividend
of
$14,800
from
Melru
to
herself
and
that
Ruby
Neuman
acted
with
that
concurrence
when
she
declared
that
dividend.
However,
is
the
respondent’s
concurrence
to
the
declaration
of
the
dividend
to
Ruby
Neuman
sufficient
to
attract
the
application
of
subsection
56(2)
of
the
Income
Tax
Act?
The
answer
to
this
question
requires
an
examination
of
the
subsection
itself
and
of
the
decision
in
McClurg.
For
convenience,
we
repeat
the
text
of
subsection
56(2).
It
reads:
56(2)Indirect
payments
-
A
payment
or
transfer
of
property
made
pursuant
to
the
direction
of,
or
with
the
concurrence
of,
a
taxpayer
to
some
other
person
for
the
benefit
of
the
taxpayer
or
as
a
benefit
that
the
taxpayer
desired
to
have
conferred
on
the
other
person
shall
be
included
in
computing
the
taxpayer’s
income
to
the
extent
that
it
would
be
if
the
payment
or
transfer
had
been
made
to
the
taxpayer.
In
Outerbridge
Estate
v.
Canada,
[1991]
1
C.T.C.
113
(sub
nom.
Winter
v.
R.)
90
D.T.C.
6681
(F.C.A.),
Marceau
J.A.
writing
for
a
unanimous
Court
referred
to
the
subsection
as
“This
well
known
tax
avoidance
provision,
which
gives
effect
to
the
indirect
benefit
principle,
has
a
long
legislative
history
dating
back
to
1948”.
He
continued
at
page
117:
It
is
generally
accepted
that
the
provision
of
subsection
56(2)
is
rooted
in
the
doctrine
of
“constructive
receipt”
and
was
meant
to
cover
principally
cases
where
a
taxpayer
seeks
to
avoid
receipt
of
what
in
his
hands
would
be
income
by
arranging
to
have
the
amount
paid
to
some
other
person
either
for
his
own
benefit
...
or
for
the
benefit
of
that
other
person
...
There
is
no
doubt,
however,
that
the
wording
of
the
provision
does
not
allow
to
[sic]
its
being
confined
to
such
clear
cases
of
tax-avoidance.
As
will
be
discussed
more
fully
below,
the
majority
of
the
Supreme
Court
in
McClurg
held
as
a
general
principle
that
subsection
56(2)
does
not
apply
to
the
declaration
of
dividends
including
those
declared
pursuant
to
discretionary
power.
Of
particular
significance
for
the
case
at
bar,
however,
is
that
the
majority
did
not
foreclose
the
possible
application
of
this
subsection
to
instances
where
a
discretionary
power
exists
to
distribute
dividends
to
the
non-arm’s
length
shareholder
who
“has
made
no
contribution
to
the
company”
.
It
has
been
well
accepted
since
Fraser
Companies
Ltd.
v.
R.
(sub
nom.
Fraser
Companies
Ltd.
v.
The
Queen)
(F.C.T.D.),
[1981]
C.T.C.
61,
81
D.T.C.
5051,
at
page
71
(D.T.C.
5058)
that
in
order
to
invoke
subsection
56(2)
successfully,
the
appellant
must
demonstrate
that
the
payment
or
transfer
of
property:
1.
must
have
been
made
to
a
person
other
than
the
taxpayer
2.
must
have
been
at
the
direction
or
with
the
concurrence
of
the
taxpayer
3.
must
be
for
the
taxpayer’s
own
benefit
or
for
the
benefit
of
some
other
person
on
whom
the
taxpayer
desired
to
have
the
benefit
conferred
4.
would
have
been
included
in
computing
the
taxpayer’s
income
if
it
had
been
received
by
the
taxpayer
instead
of
the
other
person.
See
Smith
v.
Minister
of
National
Revenue
(sub
nom.
Smith
v.
The
Queen),
[1993]
2
C.T.C.
257
(sub
nom.
Smith
v.
R.),
93
D.T.C.
5351
(F.C.A.),
at
pages
361-62
(D.T.C.
5355)
and
McClurg,
supra,
at
pages
1074-75
(C.T.C.
195-96),
per
LaForest
J.
dissenting.
We
need
hardly
add
that
in
applying
subsection
56(2)
to
the
facts
of
a
particular
case,
the
concurrence
or
participation
of
the
taxpayer
in
the
conferring
of
the
benefit
need
not
be
active.
It
may
well
be
passive
or
implicit
and
can
be
inferred
from
all
the
circumstances,
not
the
least
of
which
is
the
degree
of
control
which
the
taxpayer
is
entitled
to
exercise
over
the
corporation
conferring
the
benefit.
See,
Smith
v.
The
Queen,
supra,
at
pages
261-62
(D.T.C.
5355).
As
they
apply
to
the
circumstances
of
this
case,
we
are
all
of
the
view
that
the
appellant
has
satisfied
the
four
elements
laid
down
in
Fraser,
supra,
for
the
successful
invocation
of
subsection
56(2).
First,
it
has
been
held
that
the
payment
of
a
dividend
is
a
transfer
of
property.
See,
Champ
v.
R.
(sub
nom.
Champ
v.
The
Queen),
[1983]
C.T.C.
1,
83
D.T.C.
5029
(F.C.T.D.)
where
it
was
held
that
the
declaration
of
dividends
to
a
wife
by
a
corporation
in
which
she
and
her
husband
were
the
only
shareholders,
contrary
to
the
provisions
of
the
Articles
of
Association,
was
a
transfer
of
property
within
the
meaning
of
subsection
56(2)
of
the
Act.
In
our
respectful
view,
the
reasoning
in
Champ
applies
with
equal
force
to
the
dividend
of
$14,800
that
was
declared
to
Ruby
Neuman
in
this
case.
Secondly,
as
we
have
already
noted,
the
learned
Trial
Judge
found
that
Melru
was
incorporated
for
one
purpose
only,
namely,
income
splitting
of
dividends
received
from
Newmac.
Furthermore,
the
minutes
of
the
meeting
of
the
Board
of
Directors
of
Melru,
held
on
8
September
1982,
show
clearly,
in
our
view,
that
the
respondent
had
concurred
in
the
declaration
of
the
dividend
to
his
wife,
Ruby
Neuman,
for
the
following
reasons.
As
an
officer
of
Melru,
the
respondent
chaired
the
meeting
at
which
his
wife,
also
an
officer,
was
present.
These
two
officers
discussed
payment
of
a
dividend
on
common
shares,
of
which
the
respondent
was
the
sole
holder,
and
on
Class
“F”
shares
of
which
the
respondent’s
spouse
was
the
holder
of
99.
The
minutes
indicate
that
the
respondent,
as
holder
of
one
common
voting
share
in
Melru,
advised
the
meeting
that
he
“was
prepared
to
have
money
set
aside
for
future
payment
of
dividends
on
his
common
share”.
In
other
words,
the
respondent
advised
his
wife
that
he
was
prepared
to
forego
his
entitlement
as
the
holder
of
the
only
issued
common
share
in
Melru
in
order
that
the
corporation
might
declare
a
dividend
to
her
in
an
amount
that
was
out
of
all
proportions
with
her
entitlement
pursuant
to
Article
8(e)
of
the
Articles
of
Incorporation
.
It
would
seem
that,
in
doing
so,
the
respondent
was
in
breach
of
his
fiduciary
duty
to
Melru
.
The
resolution
respecting
the
payment
of
the
dividend
of
$14,800
to
the
respondent’s
wife
was
passed
unanimously
and
the
minutes
were
signed
both
by
the
respondent
and
his
wife,
as
Chairman
and
Secretary,
respectively
of
the
Board
of
Directors
of
Melru.
We
note,
from
the
minutes
of
the
annual
meeting
of
shareholders
of
Melru
held
on
12
October
1983,
that
the
respondent
and
his
wife,
as
the
only
shareholders
of
that
corporation
ratified
the
resolution
of
8
September
1982
at
which
the
dividend
was
declared
on
the
Class
“F”
shares
held
by
the
respondent’s
spouse.
This
evidence,
arguably
of
marginal
relevance
on
the
issue
of
concurrence
standing
alone,
does,
when
taken
together
with
that
which
is
contained
in
the
minutes
of
the
meeting
of
the
Board
of
Directors
held
on
8
September
1982,
negate
the
respondent’s
testimony
that
his
role
was
that
of
adviser
only.
In
our
view,
the
evidence,
taken
as
a
whole,
was
sufficient
to
prove
on
a
balance
of
probabilities
that
the
dividend
of
$14,800
was
declared
to
Ruby
Neuman
with
the
concurrence
of
the
respondent.
It
should
be
noticed
here
that
subsection
56(2)
does
not
require
proof
that
the
transfer
of
property
be
both
at
the
direction
of
and
with
the
concurrence
of
the
taxpayer.
The
phrase
is
expressed
disjunctively.
It
follows
that
proof
of
either
is
sufficient.
Here,
as
we
have
said,
there
was
sufficient
proof
that
the
dividend
was
declared
with
the
concurrence
of
the
respondent.
Thirdly,
the
benefit
that
the
respondent
derived
from
splitting
the
income
with
his
wife
is
obvious.
It
enabled
him
to
reduce
the
incidence
of
income
taxation
by
the
amount
of
the
dividend
she
received.
But
the
respondent
received
an
additional
benefit.
On
the
same
day
on
which
his
wife
received
the
dividend
of
$14,800,
the
respondent
borrowed
from
her
the
entire
amount
and
gave
as
security
a
promissory
note
at
interest
which
was
never
paid.
The
respondent
therefore
benefitted
in
two
ways:
by
splitting
the
dividend
from
Newmac
in
the
way
he
did,
he
reduced
the
amount
of
income
tax
he
would
otherwise
have
paid
and,
furthermore,
he
enjoyed
the
use
of
the
full
amount
of
the
dividend
which
his
wife
had
received.
The
final
element
that
the
appellant
must
satisfy
is
that
the
property
transferred
would
have
been
included
in
computing
the
taxpayer’s
income
if
it
had
been
received
by
the
taxpayer
instead
of
the
other
person.
In
our
view,
the
appellant
has
also
satisfied
this
element,
since,
by
the
conjoint
operation
of
sections
12(l)(j)
and
82(1)
of
the
Act,
the
dividend
which
Ruby
Neuman
received
would
have
been
included
in
the
respondent’s
income
for
the
1982
taxation,
if
it
had
not
been
paid
to
her.
In
reaching
this
conclusion,
we
are
not
unmindful
of
the
following
passages
taken
from
the
reasons
of
Dickson
C.J.C.
in
McClurg,
supra,
at
pages
1052-53
(C.T.C.
184):
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
anti-avoidance
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
pages
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)....
However,
in
discussing
the
use
of
the
discretionary
dividend
clause,
I
have
already
concluded
that
its
validity
rests,
in
part,
on
the
fact
that
allocations
made
pursuant
to
the
clause
are
substantively
no
different
from
allocations
made
pursuant
to
a
mathematical
formula
in
the
articles
of
incorporation
of
a
company.
Given
that
determination,
it
would
be
formalistic
in
the
extreme
to
reach
the
conclusion
that
but
for
the
payment
to
a
third
party
shareholder,
a
director-shareholder
would
be
the
recipient
of
a
portion
of
the
payment.
Instead,
my
view
is
that
an
allocation
pursuant
to
a
discretionary
dividend
clause
is
no
different
from
the
payment
of
a
dividend
generally.
In
both
cases,
but
for
the
declaration
(and
allocation),
the
dividend
would
remain
part
of
the
retained
earnings
of
the
company.
That
cannot
legitimately
be
considered
as
within
the
parameters
of
the
legislative
intent
of
subsection
56(2).
If
this
Court
were
to
find
otherwise,
corporate
directors
potentially
could
be
found
liable
for
the
tax
consequences
of
any
declaration
of
dividends
made
to
a
third
party.
I
agree
with
both
Urie
J.
and
Strayer
J.
in
the
courts
below
that
this
would
be
an
unrealistic
interpretation
of
the
subsection
consistent
with
neither
its
object
nor
its
spirit.
It
would
violate
fundamental
principles
of
corporate
law
and
the
realities
of
commercial
practice
and
would
“overshoot”
the
legislative
purpose
of
the
section.
However,
unlike
McClurg,
the
application
of
subsection
56(2)
in
the
circumstances
of
this
case
would
not
be
contrary
to
the
commercial
reality
of
the
declaration
of
the
dividend
to
Ruby
Neuman,
since
there
was
none.
In
McClurg,
the
Trial
Judge
found
that
Wilma
McClurg
had
made
a
real
contribution
to
the
establishment
of
the
company
and
the
business;
and,
in
his
majority
reasons,
the
Chief
Justice
said
that
she
played
a
vital
role
in
the
formation
of
the
company
and
made
a
very
real
contribution
to
the
company
both
financially
and
operationally.
As
we
read
his
reasons,
it
was
this
contribution
by
Wilma
McClurg
which
led
the
Chief
Justice
to
say
at
page
1054
(C.T.C.
185):
In
my
view
there
is
no
question
that
the
[dividend]
payments
to
Wilma
McClurg
represented
a
legitimate
quid
pro
quo
and
were
not
simply
an
attempt
to
avoid
the
payment
of
taxes.
And
later:
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.
By
contrast,
in
this
case,
the
learned
Trial
Judge
found
that
Melru
was
incorporated
for
tax
planning
and
income
splitting
purposes
and
had
no
other
independent
business
purpose
,
that
the
amount
of
dividends
declared
were
arbitrary
and
that
Ruby
Neuman
had
made
no
contribution
to
Melru
and
did
not
assume
any
risks
for
the
company.
In
light
of
these
facts
and
of
the
other
evidence
to
which
we
have
referred
earlier,
we
are
of
the
view
that
the
payment
of
the
dividend
of
$14,800
to
Ruby
Neuman
cannot
be
said
to
be
the
product
of
a
bona
fide
business
relationship.
Counsel
for
the
respondent,
relying
on
the
obiter
dictum
of
Marceau
J.,
in
Outerbridge,
also
contended,
that
the
successful
invocation
of
subsection
56(2)
required
the
appellant
to
satisfy
a
fifth
element,
namely,
proof
that
the
respondent’s
spouse
was
not
subject
to
tax
on
the
dividend
she
received.
Since
that
obiter
dictum
received
subsequent
approval
in
Smith,
we
consider
it
desirable
to
deal
with
it.
In
Outerbridge,
the
majority
shareholder
in
an
investment
company
caused
the
company
to
sell
some
of
its
shares
to
his
son-in-law,
himself
a
shareholder
in
the
company.
The
Minister
of
National
Revenue
reassessed
the
majority
shareholder,
pursuant
to
subsection
56(2),
by
adding
to
his
income
an
amount
equal
to
the
différence
between
what
the
son-in-law
had
paid
for
the
shares
and
the
amount
by
which
the
Minister
had
valued
them,
some
$648,368.
This
amount,
the
Minister
contended,
was
a
benefit
which
the
majority
shareholder
had
conferred
upon
his
son-in-law.
At
pages
116-17,
Marceau
J.A.,
writing
for
a
unanimous
Court,
addressed
the
arguments
advanced
by
Counsel
for
the
taxpayer
(majority
shareholder)
as
follows:
2.
Besides,
counsel
continued,
Dick
Winter,
as
a
shareholder,
was
already
subject
to
tax
for
the
benefit
conferred
on
him
by
the
transaction
pursuant
to
subsection
15(1).
Even
if
it
could
be
said
that,
broadly
interpreted,
the
conditions
of
application
of
the
provision
as
it
reads
were
present,
an
assessment
pursuant
to
it
could
not,
in
those
conditions,
be
valid.
Here
is
how
he
put
the
submission
in
his
factum:
8.
In
the
alternative,
it
is
submitted
that
under
the
scheme
of
the
Income
Tax
Act
shareholder
A
should
not
be
taxed
pursuant
to
subsection
56(2)
in
respect
of
a
benefit
conferred
on
shareholder
B
when
shareholder
B
can
be
taxed
pursuant
to
subsection
15(1)
in
respect
of
that
same
benefit.
There
is
a
natural
order
to
the
provisions
of
the
Income
Tax
Act,
with
technical
rules
such
as
subsection
15(1)
at
the
base,
specific
anti-avoidance
rules
like
subsection
56(2)
one
level
higher,
and
the
general
anti-avoidance
rule
in
section
245
at
the
apex.
As
a
matter
of
assessment
practice,
a
specific
anti-avoidance
rule
should
be
resorted
to
only
when
a
particular
transaction
is
not
caught
by
any
technical
rule,
just
as
the
general
anti-avoidance
rule
should
not
be
invoked
except
in
the
absence
of
a
specific
anti-avoidance
rule.
9.
In
the
specific
context
of
shareholder
benefits,
the
scheme
of
the
Income
Tax
Act
is
made
even
clearer
by
the
presence
of
subsection
52(1).
This
provision
provides
that
a
taxpayer
who
has
had
an
amount
in
respect
of
the
value
of
property
he
acquires
added
to
his
income
shall
add
this
same
amount
to
his
cost
base
for
the
property.
Where
a
taxpayer
is
taxed
under
subsection
15(1)
on
property
acquired
from
a
corporation
in
which
he
is
a
shareholder,
subsection
52(1)
thus
operates
automatically
so
as
to
make
the
consequential
modification
to
adjusted
cost
base
for
purposes
of
computing
the
future
capital
gain
or
capital
loss.
Where
subsection
56(2)
is
invoked,
by
contrast,
subsection
52(1)
cannot
operate
since
the
taxpayer
suffering
taxation
has
not
himself
acquired
any
property.
If
any
party
to
the
subject
transaction
was
to
attract
taxation,
it
should
have
been
Mr.
Winter
pursuant
to
subsection
15(1)
and
not
the
Deceased
pursuant
to
subsection
56(2).
I
would
be
prepared
to
go
along
with
that
line
of
thinking.
As
was
so
often
pointed
out,
again
by
both
the
Trial
Judge
and
the
Court
of
Appeal
in
the
McClurg
decision,
the
language
of
subsection
56(2)
cannot
be
taken
in
its
broadest
possible
meaning
without
leading
to
results
obviously
untenable,
particularly
in
the
context
of
corporate
management.
Some
qualification
suggested
by
the
aim
and
purpose
for
which
the
rule
was
adopted
must
be
read
into
it
so
as
to
avoid
those
unreasonable
results.
He
then
continued
at
page
117:
It
is
generally
accepted
that
the
provision
of
subsection
56(2)
is
rooted
in
the
doctrine
of
“constructive
receipt”
and
was
meant
to
cover
principally
cases
where
a
taxpayer
seeks
to
avoid
receipt
of
what
in
his
hands
would
be
income
by.
arranging
to
have
the
amount
paid
to
some
other
person
either
for
his
own
benefit
(for
example
the
extinction
of
a
liability)
or
for
the
benefit
of
that
other
person
(see
the
reasons
of
Thurlow
J.
in
Miller,
supra,
and
of
Cattanach
J.
in
Murphy,
supra).
There
is
no
doubt
however,
that
the
wording
of
the
provision
does
not
allow
to
its
being
confined
to
such
clear
cases
of
tax-avoidance.
The
Bronfman
judgment,
which
upheld
the
assessment,
under
the
predecessor
of
subsection
56(2),
of
a
shareholder
of
a
closely
held
private
company,
for
corporate
gifts
made
over
a
number
of
years
to
family
members,
is
usually
cited
as
authority
for
the
proposition
that
it
is
not
a
pre-condition
to
the
application
of
the
rule
that
the
individual
being
taxed
have
some
right
or
interest
in
the
payment
made
or
the
property
transferred.
The
precedent
does
not
appear
to
me
quite
compelling,
since
gifts
by
a
corporation
come
out
of
profits
to
which
the
shareholders
have
a
prospective
right.
But
the
fact
is
that
the
language
of
the
provision
does
not
require,
for
its
application,
that
the
taxpayer
be
initially
entitled
to
the
payment
or
transfer
of
property
made
to
the
third
party,
only
that
he
would
have
been
subject
to
tax
had
the
payment
or
transfer
been
made
to
him.
It
seems
to
me,
however,
that
when
the
doctrine
of
“constructive
receipt”
is
not
clearly
involved,
because
the
taxpayer
had
no
entitlement
to
the
payment
being
made
or
the
property
being
transferred,
it
is
fair
to
infer
that
subsection
56(2)
may
receive
application
only
if
the
benefit
conferred
is
not
directly
taxable
in
the
hands
of
the
transferee.
Indeed,
as
I
see
it,
a
tax-avoidance
provision
is
subsidiary
in
nature;
it
exists
to
prevent
the
avoidance
of
a
tax
payable
on
a
particular
transaction,
not
simply
to
double
the
tax
normally
due
nor
to
give
the
taxing
authorities
an
administrative
discretion
to
choose
between
two
possible
taxpayers.
[Footnotes
omitted.]
In
the
end,
he
rejected
the
appellant’s
alternative
argument
on
the
basis
that
the
son-in-law
was
not
liable
to
tax
and
dismissed
the
appeal.
The
appeal
in
Smith
was
from
a
judgment
of
the
Trial
Division
and
was
concerned
with
funds
or
property
assumed
by
the
Minister
to
have
been
diverted
from
one
company
to
another
for
the
benefit
of
the
appellant
or
the
second
company.
The
trial
judgment,
decided
before
Outerbridge,
dealt
with
the
issue
as
if
the
Minister
was
required
to
satisfy
only
the
four
elements
laid
down
in
Fraser.
The
Court
concluded
that
the
Minister
had
satisfied
each
of
them.
On
appeal,
Mahoney
J.A.,
speaking
for
a
unanimous
Court,
differently
constituted,
concluded
that
Outerbridge
had
“added
another
precondition
to
the
application
of
subsection
56(2)”,
which
seemed
to
him
to
be
relevant
in
the
circumstances
of
the
appeal
before
him.
He
allowed
the
appeal
on
the
basis
that
the
appellant
taxpayer
in
that
case
had
no
entitlement
to
any
of
the
payments
made
to
or
for
the
benefit
of
a
company
in
which
the
appellant
had
an
interest
and
which
were
clearly
taxable
in
the
hands
of
the
second
company.
We
do
not
read
either
Outerbridge
or
Smith
as
laying
down
a
fifth
element
or
pre-condition
applicable
in
every
case
in
which
subsection
56(2)
is
invoked.
Indeed,
Marceau
J.A.
in
his
obiter
dictum,
acknowledged
an
exception
when
the
doctrine
of
constructive
receipt
is
clearly
involved.
Moreover,
in
that
case,
the
Court
had
before
it
for
consideration,
its
recent
judgment
in
McClurg
in
which
Urie
J.A.
for
the
majority
acknowledged
at
page
79,
the
four
ingredients
laid
down
in
Fraser
and
first
developed
by
Cattanach
J.
in
Murphy
v.
R.
(sub
nom.
Murphy
v.
The
Queen),
[1980]
C.T.C.
386,
80
D.T.C.
6314.
Marceau
J.A.
did
not
consider
the
decision
of
this
Court
in
McClurg
to
be
binding
on
him,
saying
at
page
116
that
he
did
“not
see
[McClurg]
as
having
authority
beyond
the
particular
type
of
situation
with
which
it
was
dealing”.
Furthermore,
even
though
McClurg
was
decided
in
the
Supreme
Court
subsequent
to
the
decision
of
this
Court
in
Outerbridge,
the
reasons
in
McClurg
contain
no
reference
to
a
fifth
element
or
pre-condition.
Indeed,
LaForest
J.
in
his
dissenting
reasons
referred
expressly
to
the
four
elements
or
pre-conditions
laid
down
in
Fraser.
Finally,
we
see
nothing
in
subsection
56(2),
read
in
the
context
of
the
Act
as
a
whole,
which
mandates
the
imposition
of
a
fifth
element
or
pre-condition
in
a
case
such
as
this
which
is
concerned
with
the
declaration
of
dividends
designed
solely
to
reduce
the
tax
payable
by
the
respondent.
(b)
whether
the
dictum
of
Dickson,
C.J.C.
in
McClurg
was
binding
upon
the
courts
below
In
this
case,
there
can
be
no
dispute
that
the
respondent
and
Ruby
Neuman
were
not
dealing
with
each
other
at
arms
length.
They
were
related
persons
(husband
and
wife)
and
by
section
251
of
the
Act
are
presumed
not
to
be
dealing
with
each
other
at
arms
length.
Furthermore,
since
they
were
the
only
shareholders
of
Melru,
neither
was
dealing
with
that
corporation
at
arms
length.
Confronted
by
these
undisputed
facts,
the
Courts
below
were
bound
to
consider
the
final
paragraph
of
the
reasons
of
the
Chief
Justice
of
Canada
in
McClurg,
at
page
1054
(C.T.C.
185):
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
non-arm’s
—.
length
shareholder
has
made
no
contribution
to
the
company
(in
which
case
subsection
56(2)
may
be
applicable),
and
those
cases
in
which
a
legitimate
contribution
has
been
made.
In
the
case
of
the
latter,
of
which
this
appeal
is
an
example,
I
do
not
think
it
can
be
said
that
there
was
no
legitimate
purpose
to
the
dividend
distribution.
As
we
have
already
said,
the
learned
Tax
Court
Judge
considered
this
paragraph
to
be
less
than
judicial
dicta
.
As
he
put
it,
it
was
an
opinion
expressed
by
the
Supreme
Court
of
Canada
which
“cannot
simply
be
ignored”.
He,
nonetheless,
refused
to
decide
whether
section
56(2)
was
intended
to
apply
to
non-arm’s
length
transaction.
Furthermore,
on
assumption
that
it
was,
he
concluded
that
the
facts
of
this
case
did
not
fall
squarely.
within
that
subsection.
For
his
part,
the
learned
Trial
Judge
faced
with
the
difficulty
of
reconciling
the
opinion
expressed
in
that
passage
with
opinions
expressed
by
the
Chief
Justice
of
Canada
earlier
in
his
reasons
in
McClurg,
relied
dicta
of
Urie
J.A.
in
McClurg
v.
Minister
of
National
Revenue
(sub
nom.
R.
v.
McClurg),
[1988]
1
C.T.C.
75,
88
D.T.C/
6047
(F.C.A.)
and
of
Estey
J.
in
Stubart
Investments
vi:
R.
(sub
nom.
Stubart
Investments
Ltd.
v.
The
■Queen),
[1984]
1
S.C.R.
536
[1984]
C.T.C.
294,
84
D.T.C.
6305,
at
page
172
(C.T.C.
)
to
reach
the
following
conclusion
:
Based
on
the
decisions
of
the
Federal
Court
of
Appeal
in
McClurg
and
the
Supreme
Court
in
Stubart,
I
must
conclude
that
the
threshold
question,
whether
a
distinction
is
to
be
drawn
between
an
arm’s
length
and
a
non-arm’s
length
transaction
in
the
application
of
subsection
56(2),
must
be
answered
in
the
negative.
In
our
respectful
view,
the
issue
of
the
applicability
of
section
56(2)
to
non-arm’s
length
transactions
was
a
live
one
in
McClurg,
both
before
this
Court
and
in
the
Supreme
Court
of
Canada.
That
is
why
Urie
J.A.
dealt
with
the
issue
when
McClurg
was
before
this
Court
and
the
Chief
Justice
dealt
with
it
in
the
final
paragraph
of
his
reasons.
It
is
true
that
in
McClurg
the
Supreme
Court
found
that
Wilma
McClurg
had
made
a
contribution
to
Northland
Trucks.
For
that
reason,
the
dictum
of
the
Chief
Justice
could
not
be
considered
part
of
the
ratio
decidendi
of
that
case.
Although
not
necessary
for
the
disposition
of
that
appeal,
the
opinion
expressed
by
the
Chief
Justice
represented
the
considered
opinion
of
a
majority
of
the
Court
and
was
therefore
binding
on
the
Courts
below
and
on
this
Court.
See,
R.
v.
Sellars
(sub
nom.
Sellars
v.
The
Queen),
[1980]
1
S.C.R.
527,
20
C.R.
(3d)
381.
In
this
case,
the
declaration
of
the
dividend
to
Ruby
Neuman
was
made
in
the
exercise
of
a
discretionary
power
to
distribute
dividends
to
a
nonarm’s
length
shareholder
who,
as
the
learned
Trial
Judge
found,
made
no
contribution
to
the
company
and
assumed
none
of
the
risks
for
it.
In
these
circumstances,
and
paying
heed
to
the
majority
opinion
in
McClurg,
it
is
our
opinion
that
subsection
56(2)
of
the
Act
is
applicable
to
the
transaction.
(c)
whether
subsection
56(2)
of
the
Act
permitted
the
Minister
to
include
in
the
income
of
the
respondent
for
the
taxation
year
1982,
the
dividend
of
$14,800
which
Ruby
Neuman
received
from
Melru
It
follows
from
what
we
have
already
said
that
section
56(2)
has
application
to
the
facts
of
this
case
and
that
the
Minister
was
right
in
including
the
dividend
which
Ruby
Neuman
received
from
Melru
in
the
income
of
the
respondent
for
the
1982
taxation
year.
Conclusion
For
all
the
foregoing
reasons,
we
would
allow
the
appeal,
set
aside
the
decisions
of
the
Trial
Division
and
of
the
Tax
Court
and
affirm
the
Minister’s
assessment.
Costs
osts
Paragraph
65
of
the
memorandum
of
fact
and
law
filed
on
behalf
of
the
respondent
reads:
65.
The
Respondent
submits,
regardless
of
the
determination
of
this
Honorable
Court
on
this
appeal,
costs
are
to
be
awarded
to
the
Respondent
under
former
subsection
178(2)
as
the
amount
of
tax
in
controversy
does
not
exceed
$10,000.
Subsection
178(2)
reads
178(2)
Costs
payable
by
Minister
in
certain
cases
-
Where,
on
an
appeal
by
the
Minister,
other
than
by
way
of
cross-appeal,
from
a
decision
of
the
Tax
Court
of
Canada,
the
amount
of
(a)
tax,
refund
or
amount
payable
under
subsection
196(2)
(in
the
case
of
an
assessment
of
the
tax
or
determination
of
the
refund
or
the
amount
payable,
as
the
case
may
be)
that
is
in
controversy
does
not
exceed
$10,000,
or
(b)
loss
(in
the
case
of
a
determination
of
the
loss)
that
is
in
controversy
does
not
exceed
$20,000,
the
Federal
Court,
in
delivering
judgment
disposing
of
the
appeal,
shall
order
the
Minister
to
pay
all
reasonable
and
proper
costs
of
the
taxpayer
in
connection
therewith.
As
no
oral
submissions
were
addressed
to
us
on
this
issue,
it
is
our
opinion
that
the
award
of
costs
in
this
appeal
should
not
be
made
until
the
appellant
files
and
serves
a
motion
respecting
the
award
of
costs
of
the
appeal
pursuant
to
Rule
324
of
the
Federal
Court
Rules.
Counsel
for
the
respondent
shall
file
and
serve
his
submissions
within
20
days
from
the
date
of
service
of
the
appellant’s
submissions
and
Counsel
for
the
appellant
shall
file
and
serve
his
submissions
in
reply,
if
any,
within
10
days
of
the
receipt
of
the
submissions
filed
on
behalf
of
the
respondent.
Appeal
allowed.
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