Ruffolo v. R., [1998] 4 CTC 2114, 99 DTC 184

Bonner T . C.J.:

The Appellants appeal from assessments under section 160 of the Income Tax Act in respect of transfers of property in the form of dividends paid to them by Felm Investments Limited (“Felm”) as follows:

Generally speaking section 160 is a provision intended to combat the avoidance of the payment of tax by means of non arm’s length transfers of the taxpayer’s property for no consideration or for inadequate consideration.

At the relevant time it read in part:

160 (1) Where a person has, on or after the 1st day of May, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to

(a)

(b)

(c) a person with whom he was not dealing at arm’s length,

the following rules apply:

(d)

(e) the transferee and transferor are jointly and severally liable to pay under this Act an amount equal to the lesser of

(i) the amount, if any, by which the fair market value of the property at the time it was transferred exceeds the fair market value at that time of the consideration given for the property, and

(ii) the aggregate of all amounts each of which is an amount that the transferor is liable to pay under this Act in or in respect of the taxation year in which the property was transferred or any preceding taxation year,

but nothing in this subsection shall be deemed to limit the liability of the transferor under any other provision of this Act.

(2) The Minister may at any time assess a transferee in respect of any amount payable by virtue of this section and the provisions of this Division are applicable mutatis mutandis in respect of an assessment made under this section as though it had been made under section 152.1[1]

The Appellants attack the assessments on two grounds. Firstly, they assert that consideration was given for the dividends. This argument starts with the well known principle that when a corporation declares a dividend to be payable on a certain date to its shareholders, a debt becomes payable on that date to each shareholder in the amount of the dividend.[2] The Appellants’ theory is that the shareholder pays consideration for the dividend equal in value to that dividend by giving up the right to receive which was vested in him as a consequence of the declaration. Thus, so the Appellants assert, the subparagraph 160(1)(e)(i) amount is nil.

Secondly, the Appellants assert that notices of the final assessments of Felm for its taxation years 1987 and 1988 indicate that Felm was not liable to pay anything in respect of those taxation years. In this regard the Appellants point to “Nil” entries in the “balance unpaid” boxes found in the notices of assessment. They assert further that Felm’s liability as established by assessment for its 1989 taxation year consists to a great extent of arrears interest and that none can be exigible in light of the assessments for 1987 and 1988.

The parties filed a Statement of Agreed Facts which sets out the background to the appeals. It reads in part:

The parties hereto, by their solicitors, hereby agree to the following facts, without limiting the rights of either party to introduce evidence with a view to proving additional facts:

1. The Appellants are Canadian residents, who throughout the material time resided in Ontario.

2. At all material times, the Appellants owned all of the authorized and outstanding shares of Felm Investments Limited (“Felm”). At all material times, each of the Appellants owned a one-third of the issued and outstanding shares of Felm.

3. At all material times Felm was a Canadian Controlled Private Corporation as defined in Subsections 248(1) and 125(7) of the Income Tax Act.

4. At all material times Felm’s fiscal and taxation year end was August 31.

5. In the 1987 taxation year Felm sold a capital property comprised of land and a building (the “Property”) for total proceeds of $4,500,000 (transaction referred to as the “Sale”). Under the Sale terms, Felm took back a mortgage in the amount of $3,500,000.

6. Felm reported in its 1987 T2 income tax return (the “Original 1987 T2”) a gross capital gain in the amount of $3,769,749.00 with respect to the Sale, claimed a current year reserve in the amount of $2,932,000.00, resulting in a net capital gain in the amount of $837,749.00, and a taxable capital gain in the amount of $418,875.00 for the 1987 taxation year. ...

7. The Minister of National Revenue (the “Minister”) issued a Notice of Assessment dated June 23, 1988 in respect to Felm’s 1987 taxation year, wherein the Minister assessed federal tax in the amount of $221,933.62 and allowed a dividend refund of $150,000.00. ...

8. Bill C-139, dated June 30, 1988, implemented the June 1987 Tax Reform White Paper as amended by December 1987 Tax Reform detailed proposals, the February 1988 Budget, the December 3, 1987 child care proposals, and various press release announcements, Bill C-139 was enacted as S.C. 1988, c.55, and received Royal Assent on September 13, 1988.

9, Bill C-139 included amendments to the way in which refundable dividend

tax on hand (“RDTOH) is calculated. Subsection 129(3) of the Income Tax Act (the “Act”) provides for the necessary adjustment to a corporation’s RDTOH by reducing the corporation’s RDTOH at December 31, 1987 by its “reduction at December 31, 1987 of refundable dividend tax on hand” as determined under new subsection 129(3.5) of the Act. Subsection 129(3.5) is intended to operate in conjunction with subsection 129(3) to ascertain, and reduce by one-quarter, a corporation’s RDTOH as at December 31, 1987 and to provide that RDTOH in respect of investment income earned after 1987 will be accumulated at a rate of 20% of such income.

10. In October, 1988, Felm filed an amended 1987 T2 return. The amended 1987 T2 reduced the amount of reserve that was previously claimed with respect to the Sale from $2,937,000.00 to Nil. This amendment increased the amount of Felm’s taxable income for the 1987 taxation year from $602,731 to $2,068,731 and increased the RDTOH that was available at the end of the 1987 taxation year from $151,588.50 to $518,088.49. ...

11. The Minister issued a Notice of Reassessment dated December 18, 1989 in respect to Felm’s 1987 taxation year, wherein the Minister assessed federal tax in the amount of $762,328.75 and allowed a dividend refund of $150,000.00. ...

12. The Minister issued a Notice of Reassessment dated April 2, 1990 in respect of Felm’s 1987 taxation year, wherein the Minister assessed federal tax in the amount of $762,328.76, revised the dividend refund for the year to the amount of $150,000, and calculated Felm’s closing RDTOH balance as being $518,088.49. ...

13. In October, 1988, Felm filed its 1988 T2 return, wherein it claimed a dividend refund in the amount of $373,000.00 ($1,119,000 x 1/3). The RDTOH schedule filed with Felm’s return for the 1988 taxation year (Form T763) contained an error in calculating the 1988 dividend refund.

14. The Minister issued and mailed a Notice of Assessment dated March 31, 1989 in respect to Felm’s 1988 taxation year. This assessment, among other minor adjustments, reduced the dividend refund allowed to $5,082.38. ...

15. The Minister issued a Notice of Reassessment dated April 2, 1990 in respect of Felm’s 1988 taxation year, wherein the Minister assessed federal tax in the amount of $6,146.80 and revised the amount of dividend refund to $279,750.00. ...

16. The Minister issued a Notice of Reassessment dated February 28, 1991 in respect of Felm’s 1988 taxation year, correcting an error in the calculation of refundable dividend tax balance. ...

17. In December, 1989, Felm filed its 1989 T2 return, declaring tax payable of $13,627.00, a taxable dividend of $325,938.00 and requesting a 1989 dividend refund of $9,616.00....

18. The Minister issued a Notice of Assessment dated April 2, 1990 in respect of Felm’s 1989 taxation year, wherein the Minister assessed federal tax in the amount of $13,577.00 and allowed a 1989 dividend refund of $81,484.50. ...

19. The Minister issued a Notice of Reassessment dated May 6, 1991 in respect of Felm’s 1989 taxation year, wherein the Minister assessed fed- eral tax in the amount of $13,626.22 and reduced the 1989 dividend refund to $9,822.98....

20. In the 1987 taxation year Felm declared and paid dividends in the amount of $450,000. Each of the Appellants received $150,000 of such dividends, reported the receipt of the dividend on his 1987 T1 return, and paid income tax in respect thereto.

21. In the 1988 taxation year Felm declared and paid dividends in the amount of $1,119,000. Each of the Appellants received $373,000 of such dividends, reported the receipt of the dividend on his 1988 T1 return, and paid income tax in respect thereto.

22. In the 1989 taxation year Felm declared and paid dividends in the amount of $325,938. Each of the Appellants received $108,646 of such dividends, reported the receipt of the dividend on his 1989 T1 return, and paid income tax in respect thereto.

23.

24.

25.

26. By three concurrent Notice of Assessment dated January 27, 1992, the Minister assessed each of the Appellants pursuant to subsection 160(2) of the Act for payment of corporate income taxes owing by Felm in the amount of $267,379.72....

27. The Appellants objected to the said assessments dated January 27, 1992 by Notice of Objection dated March 31, 1992....

28. The Minister confirmed the assessments dated January 27, 1992 by three concurrent Notices of Confirmation dated August 18, 1995....

In respect of what is said in paragraph 12 of the Statement of Agreed Facts the notice of assessment of April 2, 1990 does indeed show a balance unpaid of “Nil”. The notice, however, also bears the following:

The result of this reassessment will be associated with previously assessed amounts, or other credits, if any, and a consolidated statement of account issued by the Taxation Centre, at: Sudbury, Ont. P3A 5C3.

It is clear that the first of the Appellants’ arguments cannot succeed. The word “consideration” in subparagraph 160(1)(e)(i) is to be given its ordinary meaning, namely, something given in payment. Nothing in the statutory context or in the purpose which underlies section 160 suggests otherwise. The right to payment of a debt which is satisfied and therefore disappears when the debt is paid cannot be said to have been given up by the creditor in payment for the payment. When a dividend is paid by a corporation to a shareholder property flows in one direction only. The right of a shareholder to receive payment of a dividend which has been declared flows from his status as shareholder and not from any consideration given by him.[3] Nothing in the decision of the Supreme Court of Canada in Neuman v. Minister of National Revenue^[4] supports the Appellants’ position.

The second of the Appellants’ arguments stems from the reassessment of April 2nd, 1990 for Felm’s 1987 taxation year, the reassessment of February 28, 1991 for Felm’s 1988 taxation year and the reassessment of May 6, 1991 for Felm’s 1989 taxation year. Counsel for the Appellants asserts that those are the last assessments made before the expiry of subsection 152(4) limitation period applicable to those years. Counsel then points to the fact that the “balance unpaid” and “arrears interest” boxes on the Notices of those reassessments show “nil”. The reassessment notice for the 1989 taxation year shows a previous balance of $161,138 which, counsel says, cannot have been properly assessed given the 1987 and 1988 nil balances. Counsel asserts that the Minister of National Revenue must, when assessing the transferee’s liability under section 160, proceed on the basis that “ ... the amount which the transferor is liable to pay under [the Income Tax Act] in or in respect of the taxation year ...” is fixed by the final assessment of the transferor made within the subsection 152(4) limitation period. In this regard he relies on the decision of the Federal Court of Appeal in Wesbrook Management Ltd. v. R.[5] Counsel asserts that every box in a notice of assessment has legal significance. The taxpayer, he says, has a right to rely on a notice of reassessment and, in particular, on what is said about the balance owing for that is what is important to the taxpayer. He pointed to the testimony of Ben Gotlib, the accountant who acted for Felm and the Appellants. Mr. Gotlib said that he thought that there were sufficient credits to cover the Felm’s liabilities.

I observe in passing that the Appellants cannot have been misled into causing Felm to pay dividends to them by erroneous nil balances shown in notices of assessment issued to Felm long after the dividends were declared and paid.

It is essential to keep in mind that the question here is whether the Appellants are liable under section 160 of the Act to the extent of $267,379.72 being what Felm owed in respect of the 1987 taxation year for that is the basis on which the assessments were made. The notices of reassessment dated December 18, 1989 and April 2, 1990 for Felm’s 1987 taxation year show federal tax to be $762,328.76 and a dividend refund of $150,000. According to Christopher Tillcock, a Revenue official who testified at the hearing of the appeals, yet another reassessment for Felm’s 1987 taxation year was made on May 27, 1991. No copy of a notice of this assessment could be found. A computer printout furnished by Mr. Tillcock indicates that this assessment did not effect any material change in the amount of tax assessed.

I am not aware of any authority for the proposition that an erroneous nil “balance owing” entry in a notice of assessment has the effect of eradicating the taxpayer’s liability under the statute. Wesbrook does not establish any principle which has application here. It is a case in which it was held that the Minister could not proceed on the basis that derivative liability under section 159 of the Act exceeded the liability of the taxpayer who was primarily liable when that primary liability was fixed by an assessment which the Minister could no longer change by reason of expiry of the subsection 152(4) limitation period. In the present case none of the assessments of Felm is late. The Minister is not attempting to reassess Felm’s liability. He is simply seeking to enforce the Appellants’ derivative section 160 liability on the basis of the proper amount of Felm’s primary liability as opposed to an erroneous statement of the balance owing by it. The Income Tax Act does not impose on the Minister any statutory requirement to advise the taxpayer of the balance unpaid. Absent estoppel, the Minister is free to treat as erroneous any inaccurate statements which he may have made regarding balances owing such as those which appear on the notices of assessment of April 2, 1990 for Felm’s 1987 taxation year and February 28, 1991 for Felm’s 1988 taxation year.

For the foregoing reasons, the appeals will be dismissed. The Respondent shall have one set of costs plus $400.00 in accordance with the agreement between the parties.

Appeals dismissed.