Dickson,
C.J.
[Per
Coram]:—This
is
an
income
tax
case.
The
question
in
the
appeal
is
whether
certain
dividends
received
by
the
wife
of
the
respondent,
Jim
A.
McClurg,
in
the
years
1978,1979,
and
1980
in
respect
of
Class
B
common
shares
of
Northland
Trucks
(1978)
Ltd.
(hereafter
Northland
Trucks)
should
be
attributed
in
part
to
the
respondent,
an
officer
and
director
of
Northland
Trucks
and
the
holder
of
the
controlling
Class
A
common
shares
in
the
capital
stock
of
that
company.
I
Background
1.
Relevant
Legislation
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
“Act”):
56.
(2)
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.
Saskatchewan
Business
Corporations
Act,
R.S.S.
1978,
c.
B-10:
24.
(4)
The
articles
may
provide
for
more
than
one
class
of
shares
and,
if
they
so
provide:
(a)
the
rights,
privileges,
restrictions
and
conditions
attaching
to
the
shares
of
each
class
shall
be
set
out
therein;
and
(b)
the
rights
set
out
in
subsection
(3)
shall
be
attached
to
at
least
one
class
of
shares
but
all
such
rights
are
not
required
to
be
attached
to
one
class.
40.
A
corporation
shall
not
declare
or
pay
a
dividend
if
there
are
reasonable
grounds
for
believing
that:
(a)
the
corporation
is,
or
would
after
the
payment
be,
unable
to
pay
its
liabilities
as
they
become
due;
or
(b)
the
realizable
value
of
the
corporation's
assets
would
thereby
be
less
than
the
aggregate
of
its
liabilities
and
stated
capital
of
all
classes.
97.
(1)
Subject
to
an
unanimous
shareholder
agreement,
the
directors
of
a
corporation
shall:
(a)
exercise
the
powers
of
the
corporation
directly
or
indirectly
through
the
employees
and
agents
of
the
corporation;
and
(b)
direct
the
management
of
the
business
and
affairs
of
the
corporation.
234.
(1)
A
complainant
may
apply
to
a
court
for
an
order
under
this
section.
(2)
If,
upon
an
application
under
subsection
(1),
the
court
is
satisfied
that
in
respect
of
a
corporation
or
any
of
its
affiliates:
(a)
any
act
or
omission
of
the
corporation
or
any
of
its
affiliates
effects
a
result;
(b)
the
business
or
affairs
of
the
corporation
or
any
of
its
affiliates
are
or
have
been
carried
on
or
conducted
in
a
manner;
or
(c)
the
powers
of
the
directors
of
the
corporation
or
any
of
its
affiliates
are
or
have
been
exercised
in
a
manner;
that
is
oppressive
or
unfairly
prejudicial
to
or
that
unfairly
disregards
the
interests
of
any
security
holder,
creditor,
director
or
officer,
the
court
may
make
an
order
to
rectify
the
matters
complained
of.
2.
The
Facts
The
respondent
is
president
of
Northland
Trucks,
a
company
incorporated
under
the
Saskatchewan
Business
Corporations
Act.
The
company
was
established
in
1978
upon
purchase
of
an
ongoing
business,
a
dealership
in
International
Harvester
trucks.
The
respondent
and
his
partner,
Veryle
Ellis,
are
the
only
directors
of
the
company.
The
Articles
of
Incorporation
provide
for
three
categories
of
shares:
Class
A
which
are
common,
voting
and
participating
shares;
Class
B
which
are
common,
non-voting
and
participating
where
authorized
by
the
directors;
and
Class
C
which
are
preferred,
non-voting
shares.
The
Articles
deal
with
the
entitlement
to
dividends
as
follows:
Class
A
Common:
Common,
voting
and
shall
be
participating
shares
carrying
the
distinction
and
right
to
receive
dividends
exclusive
of
the
other
classes
of
shares
in
the
said
corporation.
Class
B
Common:
Common,
non-voting
and
shall
be
participating
shares
where
authorized
to
be
participating
shares
by
unanimous
consent
of
the
Directors
and
the
said
shares
shall
carry
the
distinction
and
right
to
receive
dividends
exclusive
of
other
classes
of
shares
in
the
said
corporation.
Class
C
Preferred:
Preferred,
non-voting
shares
which
carry
the
distinction
and
right
to
receive
dividends
exclusive
of
other
classes
of
shares
in
the
said
corporation,
if
the
said
dividends
are
authorized
by
unanimous
resolution
of
the
directors.
Each
class
of
shares
has
the
right
to
receive
dividends
exclusive
of
other
classes
of
shares
in
the
company
and
the
company
is
authorized
to
issue
an
unlimited
number
of
shares
in
each
class.
The
clause
”
the
distinction
and
right
to
receive
dividends
exclusive
of
other
classes
of
shares
in
the
said
corporation"
in
the
definition
of
the
share
classes
is
crucial
to
the
analysis
in
this
case;
a
primary
question
is
whether
the
clause,
which
gives
to
the
directors
unfettered
discretion
as
to
the
allocation
of
dividends
among
classes
of
shares,
constitutes
a
valid
derogation
to
the
common
law
rule
of
equality
of
distribution
of
dividends.
For
the
sake
of
simplicity,
I
will
refer
to
it
as
the
“discretionary
dividend
clause”
throughout
these
reasons.
Shares
in
the
company
were
issued
at
a
price
of
$1
each,
and
the
distribution
of
shares
demonstrates
the
closely-held
nature
of
the
company:
|
Class
A
|
Class
B
|
Class
C
|
|
Name
|
Common
|
Common
|
Preferred
|
|
Jim
McClurg
|
400
|
—
|
37,500
|
|
Veryle
Ellis
|
400
|
—
|
37,500
|
|
Wilma
McClurg
|
—
|
100
|
—
|
|
(wife
of
Jim
McClurg)
|
|
|
Suzanne
Ellis
|
—
|
100
|
—
|
|
(wife
of
Veryle
Ellis)
|
|
In
the
years
1978,
1979,
and
1980,
the
directors,
McClurg
and
Ellis,
voted
a
declaration
and
distribution
of
dividends
as
follows:
|
Name
|
1978
|
1979
|
1980
|
|
Jim
McClurg
|
—
|
—
|
—
|
|
Veryle
Ellis
|
—
|
—
|
—
|
|
Wilma
McClurg
|
$10,000
|
$10,000
|
$10,000
|
|
Suzanne
Ellis
|
$10,000
|
$10,000
|
$10,000
|
The
form
of
resolution
declaring
the
dividends
was
as
follows:
It
was
noted
and
unanimously
agreed
by
all
the
Directors
that
Class
"8"
Shareholders
receive
dividends
in
the
amount
of
$100
per
share
for
each
issued
share
they
hold.
Be
It
Resolved
that
payment
of
dividends
to
Class
“B”
Shareholders
are
made
as
follows:
|
Class
“B”
|
Number
of
|
Dividend
|
Total
|
|
Shareholder
|
Issued
Shares
|
per
Share
|
Paid
|
|
Wilma
McClurg
|
100
|
$100
|
$10,000
|
|
Suzanne
Ellis
|
100
|
$100
|
$10,000
|
Although
the
two
directors
received
no
dividends
on
either
their
class
A
or
class
C
shares
during
this
three-year
period,
they
did
not
go
unrewarded.
They
received
salaries,
were
paid
bonuses,
and
bonus
entitlements
totalling,
according
to
the
trial
judge,
in
the
case
of
the
respondent,
$33,968
in
1978,
$65,292
in
1979,
and
$57,900
in
1980.
As
well,
the
company's
retained
earnings
as
of
October
31,
1980,
were
$312,611
and
as
of
October
31,
1981,
were
$421,481.
The
directors
of
the
company,
as
owners
of
the
Class
A
shares
(the
only
shares
participating
as
of
right),
alone
were
entitled
as
of
right
to
share
in
the
accumulated
profits
of
the
company.
An
analysis
of
the
equity
of
the
two
classes
of
shares
is
shown
below:
Submissions
attached
with
the
notice
of
objection
of
Mr.
McClurg
for
the
1978,1979
and
1980
taxation
years
show
that
at
the
end
of
the
1981
taxation
year,
the
equity
(growth)
per
share
stood
at
$527
per
share
for
Class
A
common
shareholders
(an
amount
of
1.75
times
that
of
Class
B
shares)
whereas
the
total
growth
(equity)
accruing
to
Class
B
common
shares
still
remained
at
$300
per
share.
|
Class
A
|
Class
B
|
|
Shares
|
Shares
|
|
Shares
Issued
|
800
|
200
|
|
Amount
Paid
|
800
|
200
|
|
Dividends
Received
|
Nil
|
60,000
|
|
Growth
Accruing
to
shares
to
Oct.
31,
1980
|
312,611
|
Nil
|
|
Total
|
Equity
Growth
|
|
Total
$
|
|
|
Reimbursement
|
Retained
to
|
|
Per
Share
|
|
|
to
Oct.
31/81
|
Oct.
31/81
|
Total
|
Owned
|
%
|
|
Jim
McClurg
|
224,700
|
210,741
|
435,441
|
1,088.62
|
45
|
|
Veryle
Ellis
|
224,700
|
210,741
|
435,441
|
1,088.62
|
45
|
|
Wilma
McClurg
|
48,125
|
Nil
|
48,125
|
481.25
|
5
|
|
Suzanne
Ellis
|
48,125
|
Nil
|
48,125
|
481.25
|
5
|
|
100
|
|
545,650
|
421,482
|
967,132
|
|
The
financing
of
the
formation
of
the
company
must
also
be
reviewed.
For
the
respondent's
investment
of
37,500
preferred
shares,
he
borrowed
$37,500
from
the
Toronto
Dominion
Bank
on
a
note
co-signed
by
his
wife
and
his
father-in-law.
The
latter
provided
further
security
in
the
form
of
a
term
deposit
certificate
totalling
$40,000.
The
purchase
of
the
business
was
partly
financed
by
a
loan
from
the
vendor,
security
for
which
was
provided,
in
part,
by
the
respondent
and
his
wife
through
the
placing
of
a
second
mortgage
on
their
jointly-owned
home
in
the
amount
of
$25,000.
Furthermore,
Wilma
McClurg
co-signed
with
the
respondent
a
personal
guarantee
to
the
International
Harvester
Company,
the
supplier
of
the
company,
with
respect
to
a
$500,000
debenture
in
connection
with
the
business
affairs
of
Northland
Trucks.
Finally,
the
company
opened
a
line
of
credit
with
the
Toronto
Dominion
Bank,
initially
for
$50,000,
and
later
increased
to
$200,000,
which
was
guaranteed
by
all
of
the
shareholders.
It
is
worth
noting
that
the
trial
judge
found
that
Wilma
McClurg
had
personal
assets
of
between
$15,000
and
$20,000
during
this
time,
which
indicates
that
her
personal
guarantee
was
not
without
significance.
The
role
of
Wilma
McClurg
in
the
business
during
the
period
in
question
also
warrants
examination.
The
evidence
indicates
that
she
carried
the
title
of
Administrative
Assistant.
As
such,
she
assisted
in
the
operation
of
the
business,
performing
a
variety
of
tasks
as
the
need
arose—including
stenography,
bookkeeping,
stock
taking,
and
driving
a
truck.
For
her
efforts
she
received
a
salary
of
$625
in
1978,
$5,000
in
1979,
and
$5,000
in
1980.
Of
the
$30,000
received
by
Wilma
McClurg
in
dividends
during
this
period,
$20,000
was
reinvested
by
her
in
M.E.
Investments
Corporation,
a
company
with
a
similar
structure
to
that
of
Northland
Trucks
and
which
involved
the
same
shareholders
and
directors.
The
purpose
of
M.E.
Investments
Corporation
was
the
acquisition
of
land
upon
which
the
operations
of
Northland
Trucks
were
located.
In
acquiring
the
land,
a
first
mortgage
was
given.
Wilma
McClurg
was
a
personal
guarantor
of
the
mortgage.
On
January
14,
1982,
by
notices
of
reassessment,
the
Minister
of
National
Revenue
reassessed
the
respondent's
income
for
1978,
1979,
and
1980.
The
basis
for
the
reassessment
was
that
in
each
of
those
years
$8,000
of
the
$10,000
in
dividends
attributed
to
Wilma
McClurg
on
her
Class
B
shares
was
properly
attributable
instead
to
the
respondent
pursuant
to
subsection
56(2)
of
the
Income
Tax
Act.
The
Minister
made
this
reallocation
on
the
basis
of
the
number
of
Class
A
shares
owned
by
the
respondent
in
relation
to
the
number
of
Class
B
shares
owned
by
Wilma
McClurg.
The
position
of
the
Minister
is
that
the
dividends
declared
in
each
of
the
years
in
question
should
be
attributed
equally
to
all
of
the
common
shares,
no
matter
of
what
class
and
notwithstanding
the
express
condition
attaching
to
the
Class
B
shares
that
they
shall
carry
the
right
to
receive
dividends
exclusive
of
other
classes
of
shares
in
the
company.
The
respondent's
appeal
to
the
Tax
Court
of
Canada
was
dismissed.
The
respondent
further
appealed
from
the
decision
of
the
Tax
Court
judge
by
way
of
an
action
commenced
in
the
Federal
Court
of
Canada,
Trial
Division.
The
appeal
was
allowed.
The
Minister's
appeal
to
the
Federal
Court
of
Appeal
was
dismissed.
Finally,
leave
to
appeal
was
granted
by
this
Court.
3.
Judgments
Below
Tax
Court
of
Canada,
[1984]
C.T.C.
2469;
84
D.T.C.
1379
Goetz,
T.C
J.
found
no
evidence
suggesting
that
the
investment
of
Wilma
McClurg
in
the
company
was
of
any
importance.
He
reasoned
that
the
respondent
and
his
partner
had
full
control
of
the
company
and
he
concluded
that
the
share
structure
was
solely
an
income
splitting
device
(at
page
2471
(D.T.C.
1381)
):
To
my
way
of
thinking
the
share
set
up
and
the
establishment
of
the
Class
"B"
shares
was
a
channel
of
Northland
to
funnel
payments
of
profits
to
the
appellant's
wife
and
this
was
to
the
appellant's
tax
benefit
and
is
prohibited
by
subsection
56(2).
Goetz,
T.C.J.
concluded
that
the
dividends
were
a“
"
blatant
effort"
(at
page
2471
(D.T.C.
1381))
at
conferring
a
benefit
on
the
wives
of
the
directors
and
he
further
remarked
that
"the
wives
were
the
puppets
of
the
appellant
and
Ellis
and
did
as
they
were
told”
(at
page
2472
(D.T.C.
1382)).
Finally,
he
determined
that
the
efforts
expended
by
Wilma
McClurg
and
her
exposure
under
the
guarantees
had
no
relevance
to
the
payment
of
dividends.
He
dismissed
the
appeal
from
the
reassessment.
Federal
Court-Trial
Division,
[1986]
2
F.T.R.
1;
[1986]
1
C.T.C.
355;
86
D.T.C.
6128
Strayer,
J.
began
by
considering
the
interpretation
of
subsection
56(2),
and
he
found
that
its
literal
meaning
could
require
that
every
"dividend
paid
to
any
shareholder
of
a
company
could
be
attributed
to
the
income
of
directors
participating
in
a
decision
to
pay
the
dividend"
(at
page
358
(D.T.C.
6130;
F.T.R.
4)).
He
continued:
Such
a
dividend
would
be
a
"payment
to
some
other
person"
with
the
"concurrence"
of
the
director.
It
could
so
be
described
as
a
"benefit"
that
the
director
"desired
to
have
conferred"
on
the
shareholder,
it
surely
being
desirable
from
the
viewpoint
of
directors
that,
where
ever
possible,
dividends
be
paid
to
the
shareholders
of
the
company
in
order
to
enhance
their
satisfaction
with
the
company.
Strayer,
J.
reasoned,
however,
that
the
intention
of
the
legislature
could
not
have
been
such
a
broad
reading
and
found
the
subsection
qualified
in
that,
to
fall
foul
of
subsection
56(2),
the
taxpayer
must
seek
to
avoid
receipt
of
funds
that
would
otherwise
be
payable
to
him
and
that
the
concept
of
payment
of
a
"benefit"
is
to
be
contrasted
with
payments
for
consideration.
In
the
opinion
of
Strayer,
J.,
it
could
not
be
said
that
money
payable
to
the
respondent
was
diverted
to
his
wife
so
as
to
bring
the
situation
within
subsection
56(2).
He
was
not
persuaded
that
the
Articles
of
Incorporation
must
be
regarded
as
void
insofar
as
they
permit
differential
payment
of
dividends
to
various
classes
of
shareholders.
Nor
did
he
see
any
legal
impediment
to
a
contract
between
the
shareholder
and
the
company
which
allows
the
directors
of
the
company
to
fix
the
amount
of
dividends
payable
in
a
given
year
to
a
given
class
of
shareholders.
Since
no
dividends
were
payable
as
a
matter
of
right
to
holders
of
Class
A
shares,
such
as
the
respondent,
without
a
resolution
to
that
effect
being
adopted
by
the
directors,
it
could
not
be
said
that
money
payable
to
him
was
diverted
to
his
wife
so
as
to
bring
the
situation
within
subsection
56(2).
Strayer,
J.
also
was
satisfied
that
the
dividends
paid
to
Wilma
McClurg
were
not
a
"benefit"
within
the
contemplation
of
subsection
56(2).
The
dividends
were
paid
within
the
context
of
a
legal
relationship
between
the
shareholder
and
the
company
pursuant
to
which
she
was
entitled
to
receive
dividends
as
declared
from
time
to
time
by
the
directors.
The
surrounding
circumstances
suggested
to
him
that"this
was
a
legitimate
business
relationship
created
by
all
the
necessary
legal
instruments
and
should
not
be
treated
as
a
sham"
(at
page
360
(D.T.C.
6131;
ET.R.
5)).
Wilma
McClurg
had
made
a
real
contribution
to
the
establishment
of
the
business
through
her
personal
guarantee
and
the
share
of
the
mortgage
she
assumed
on
the
house
she
owned
jointly
with
the
respondent.
Furthermore,
she
had
taken
an
active
part
in
the
operation
of
the
business
for
which
she
was
paid
only
a
small
salary.
The
appeal
was
allowed.
Federal
Court
of
Appeal,
[1988]
2
F.C.
356;
[1988]
1
C.T.C.
75;
88
D.T.C.
6047
The
majority
judgment
at
the
Federal
Court
of
Appeal
was
delivered
by
Urie,
J.
and
was
concurred
in
by
Heald,
J.
Urie,
J.
began
by
expressing
a
difficulty
in
appreciating
how
subsection
56(2)
could
apply
in
a
corporate
context.
A
corporation
provides
to
its
shareholders,
by
way
of
dividends,
such
portion
of
its
earnings
as
its
directors
deem
advisable.
Those
directors
do
so
in
their
capacities
as
directors
and
not
in
their
personal
capacities,
no
matter
how
closely
held
the
corporation's
shares.
Urie,
J.
had
further
difficulty
understanding
how
"a
taxpayer,"
when
acting
as
a
director,
satisfies
any
of
the
conditions
precedent
for
the
application
of
subsection
56(2).
He
reasoned
that
(at
page
79
(D.T.C.
6050;
F.C.
363)):
Only
the
most
explicit
language,
which
is
not
present
in
subsection
56(2),
would
justify
the
notion
that
a
director
acting
as
such
could
be
seen
as
directing
a
corporation
to
divert
a
transfer
or
payment
for
his
own
benefit
or
the
benefit
of
another
person,
absent
bad
faith,
breach
of
fiduciary
duty
or
acting
beyond
the
powers
conferred
by
the
share
structure
of
the
corporation,
none
of
which
bases
have
been
alleged
here.
Furthermore,
Urie,
J.
felt
that
applying
subsection
56(2)
in
a
corporate
context
would
make
no
distinction
between
arms
length
and
non-arms
length
transactions,
leaving
all
directors
at
risk
of
having
dividends
declared
by
them,
and
paid
to
shareholders
who
may
be
relatives,
attributed
to
them
for
tax
purposes.
He
concluded
that
the
subsection
was
not
intended
to
apply
to
the
directors
of
corporations
participating
in
the
declaration
of
corporate
dividends.
He
dismissed
the
appeal.
Desjardins,
J.
dissented
at
the
Court
of
Appeal.
She
began
by
observing
that,
unless
otherwise
provided
in
the
articles
of
incorporation
or
by
statute,
the
rights
of
the
classes
of
shareholders
to
receive
dividends
are
to
be
assessed
on
a
basis
of
equality.
She
disagreed
with
Strayer,
J.'s
conclusion
that
the
description
of
the
dividends
found
in
the
Articles
of
Incorporation
constituted
a
"derogation
from
the
principle
of
equality
amongst
shareholders
recognized
in
the
common
law”,
stating
(at
page
83
(D.T.C.
6052;
F.C.
368-69)):
What
happens
in
the
case
at
bar
is
that
shareholders
in
each
class
are
given
"the
distinction
and
right
to
receive
dividends
to
the
exclusion
of
other
classes".
From
that
perspective,
they
are
all
equal.
Moreover,
no
mathematical
formula
is
given
if
a
distribution
were
to
occur.
.
.
.
The
directors
obtain
full
control
over
the
allocation
if
they
declare
dividends.
.
.
.
I
doubt
that
such
a
discretion
to
be
exercised
by
way
of
a
resolution
of
the
directors,
can
be
equated
with
a
derogation
specific
and
substantive
enough
to
discard
the
common
law
rule
of
equality
of
distribution
since
there
is
no
rule
by
which
the
directors
are
to
carry
out
their
discretion.
The
moneys
paid,
in
her
opinion,
ought
to
have
been
distributed
equally
amongst
the
shareholders
and
there
should
have
been
included
in
the
respondent's
income
part
of
the
dividends
paid
to
his
wife.
In
rejecting
the
trial
judge's
conclusion
that
there
was
a
legitimate
business
relationship
between
the
respondent's
wife
and
the
company,
Desjardins,
J.
remarked
that
there
is
no
relationship
between
the
services
that
a
shareholder
brings
to
a
company
and
his
or
her
entitlement
to
a
dividend.
The
dividends
come
as
a
return
on
investment
and
attach
to
the
share,
rather
than
to
the
shareholder.
Desjardins,
J.
was
not
persuaded
that
subsection
56(2),
if
interpreted
widely,
would
cover
every
declaration
of
dividends.Once
declared,
the
amount
of
the
dividend
received
on
each
share
is
governed
by
a
mathematical
formula
which
the
director
must
apply
in
accordance
with
the
contract
between
the
shareholders
and
the
company.
I
I
Analysis
This
appeal
raises
issues
relating
both
to
corporate
law
and
the
law
of
income
taxation.
In
my
view,
it
is
useful
to
deal
with
the
former
first
as
the
analysis
is
beneficial
in
the
determination
of
the
application
of
subsection
56(2)
of
the
Income
Tax
Act.
1.
Corporate
Law
Issues
I
begin
the
analysis
with
a
statement
of
the
obvious.
The
decision
to
declare
a
dividend
lies
within
the
discretion
of
the
directors
of
a
company,
subject
to
any
restrictions
which
have
been
included
in
the
articles
of
incorporation.
This
principle
has
long
been
accepted
at
common
law
and
was
explicitly
recognized
by
Lord
Davey,
speaking
for
the
Judicial
Committee
of
the
Privy
Council,
in
Burland
v.
Earle,
[1902]
A.C.
83,
wherein
the
principle
was
described
in
terms
of
the
“internal
management"
of
the
company
(at
page
95):
Their
Lordships
are
not
aware
of
any
principle
which
compels
a
joint
stock
company
while
a
going
concern
to
divide
the
whole
of
its
profits
amongst
its
shareholders.
Whether
the
whole
or
any
part
should
be
divided,
or
what
portion
should
be
divided
and
what
portion
retained,
are
entirely
questions
of
internal
management
which
the
shareholders
must
decide
for
themselves,
and
the
Court
has
no
jurisdiction
to
control
or
review
their
decision,
or
to
say
what
is
a
"fair"
or
“reasonable”
sum
to
retain
undivided,
or
what
reserve
fund
may
be
"properly"
required.
With
the
advent
of
statutory
regulation
of
corporations,
the
authority
to
pay
dividends,
recognized
at
common
law
as
part
of
the
internal
management
of
the
company,
has
been
given
statutory
recognition.
In
the
case
at
bar,
the
governing
legislation
is
the
Saskatchewan
Business
Corporations
Act,
(hereafter
SBCA).
In
my
view,
it
cannot
be
disputed
that
the
power
to
pay
dividends
is
an
integral
component
of
the
broad
grant
of
managerial
power
for
directors
found
in
subsection
97(1)
of
the
Act,
cited
earlier.
I
take
it,
both
from
an
observation
of
the
workings
of
corporations,
and
from
other
provisions
in
the
statute,
that
the
subsection
embraces
the
common
law
power
of
directors.
The
power
to
declare
dividends
is
expressly
limited
in
the
Act,
in
much
the
same
way
as
it
was
at
common
law.
For
example,
section
40
of
the
SBCA,
also
cited
earlier,
prohibits
the
declaration
of
a
dividend
if
there
exists
reasonable
grounds
to
believe
that
to
do
so
would
leave
the
corporation
unable
to
pay
its
debts
(subsection
40(1));
or,
if
the
payment
of
a
dividend
would
render
the
realizable
value
of
the
assets
of
the
corporation
less
than
the
aggregate
of
its
liabilities
and
stated
capital
of
all
classes
of
shares
(subsection
40(2)).
Although
these
restrictions
are
not
brought
into
play
by
the
declarations
of
dividends
in
issue
in
this
appeal,
the
presence
of
those
limitations
in
the
Act
suggests
that
the
power
to
declare
dividends
is
statutorily
limited
only
by
restrictions
expressly
stated.
Of
course,
the
power
to
declare
dividends
is
further
qualified
by
the
fact
that
the
law
has
for
many
years
recognized
that
the
general
managerial
power
which
rests
in
the
directors
of
a
company
is
fiduciary
in
nature.
The
declaration
of
dividends,
which
is
subsumed
within
that
power,
therefore
is
limited
legally
in
that
it
must
be
exercised
in
good
faith
and
in
the
best
interests
of
the
company.
As
Professor
Bruce
Welling
recognized
in
his
treatise
Corporate
Law
in
Canada—The
Governing
Principles
(Toronto:
Butterworths,
1984),
this
limitation
exists
when
any
disbursement
is
made
by
the
directors
of
a
company
(at
page
614):
The
directors'
general
managerial
power
is
a
fiduciary
one,
owed
to
the
corporation.
It
must
always
be
exercised
in
what
the
directors'
from
time
to
time
think
is
likely
to
serve
the
best
interests
of
the
corporation.
It
has
been
consistently
urged
throughout
this
book
that
"the
corporation",
as
referred
to
in
that
context,
means
the
legal
and
economic
entity,
not
some
vague
aggregation
of
the
shareholders'
wants.
This
means
that
dividends
should
be
seen
as
basically
what
they
seem
to
be
on
a
narrow,
legalistic
view:
corporate
gifts..
.
.
giving
it
is
permissible
only
to
the
extent
that
the
directors
think
that
it
will
serve
the
corporate
entity's
best
interest,
as
they
then
perceive
those
interests;
beyond
this,
the
declaration
of
any
dividend,
like
any
other
unauthorized
gift
of
corporate
property,
is
a
breach
of
directors'
duty.
In
my
opinion,
this
is
an
accurate
statement
of
the
legal
basis
of
the
declaration
of
a
dividend
in
the
context
of
the
modern
corporation.
Having
reviewed
the
legal
basis
for
the
payment
of
a
dividend
by
a
company,
another
fundamental
principle
of
corporate
law
can
be
restated.
The
appellant
argues,
and
it
is
conceded
by
the
respondent,
that
the
rights
carried
by
all
shares
to
receive
a
dividend
declared
by
a
company
are
equal
unless
otherwise
provided
in
the
articles
of
incorporation.
This
principle,
like
the
managerial
power
to
declare
dividends,
has
been
well
accepted
at
common
law.
The
principle,
or
more
accurately,
the
presumption
of
equality
amongst
shares
and
the
prerequisites
required
to
rebut
that
presumption,
are
described
in
Palmer's
Company
Law,
Vol.
1,
23rd
ed.,
C.M.
Schmitthoff,
ed.
(at
page
387,
paragraph
33-06):
Prima
facie
the
rights
carried
by
the
shares
rank
pari
passu,
i.e.
the
shareholders
participate
in
the
benefits
of
membership
equally.
It
is
only
when
a
company
divides
its
share
capital
into
different
classes
with
different
rights
attached
to
them
that
the
prima
facie
presumption
of
equality
of
shares
may
be
displaced.
In
my
view,
a
precondition
to
the
derogation
from
the
presumption
of
equality,
both
with
respect
to
entitlement
to
dividends
and
other
shareholder
entitlements,
is
the
division
of
shares
into
different
"
classes”.
The
rationale
for
this
rule
can
be
traced
to
the
principle
that
shareholder
rights
attach
to
the
shares
themselves
and
not
to
shareholders.
The
division
of
shares
into
separate
classes,
then,
is
the
means
by
which
shares
(as
opposed
to
shareholders)
are
distinguished,
and
in
turn
allows
for
the
derogation
from
the
presumption
of
equality:
Bowater
Canadian
Ltd.
v.
R.L.
Crain
Inc.
(1987),
62
O.R.
(2d)
752;
46
D.L.R.
(4th)
161
(C.A.),
at
754
(D.L.R.
165)
(per
Houlden,
J.A.).
The
concept
of
share
"classes"
is
not
technical
in
nature,
but
rather
is
simply
the
accepted
means
by
which
differential
treatment
of
shares
is
recognized
in
the
articles
of
incorporation
of
a
company.
As
Professor
Welling,
supra,
succinctly
explains,
"a
class
is
simply
a
sub-group
of
shares
with
rights
and
conditions
in
common
which
distinguish
them
from
other
shares"
(at
page
583).
Indeed,
the
use
of
the
share
class
is
recognized
in
the
SBCA
as
the
means
by
which
derogation
from
the
principle
of
equality
is
to
be
achieved.
The
statute
thus
explicitly
requires
that
"the
rights,
privileges,
restrictions
and
conditions
attaching
to
the
shares
of
each
class"
must
be
expressly
stated
in
the
articles
of
incorporation:
paragraph
24(4)(a).
Having
outlined
the
underlying
principles
of
corporate
law
relevant
to
the
issues
raised
on
this
appeal,
the
application
of
those
principles
to
the
facts
can
be
attempted.
The
appellant,
the
Minister
of
National
Revenue,
argues
that
the
discretionary
dividend
clause
in
the
Articles
of
Incorporation
of
Northland
Trucks
does
not
create
discrete
classes
of
shares
with
different
rights
to
dividends.
Furthermore,
the
Minister
contends
that
the
clause
creates
no
right
to
dividends
at
all
and,
therefore,
does
not
comply
with
the
statutory
requirement
in
paragraph
24(4)(a).
Consequently,
the
allocation
of
a
dividend
made
pursuant
to
the
discretionary
dividend
clause
must
be
disregarded
because
of
its
failure
to
comply
with
the
SBCA
and
with
the
principles
of
corporate
and
common
law.
As
a
result,
the
presumption
of
equality
has
not
been
rebutted
and
equality
of
distribution
amongst
the
share
classes
prevails.
As
I
have
earlier
noted,
Desjardins,
J.
in
her
dissenting
reasons
at
the
Court
of
Appeal
accepted
this
argument,
and
held
that
the
clause
permits
the
directors
to
create
differences
in
dividend
allocation
"at
whim".
She
thus
expressed
doubts
as
to
whether
(at
page
83
(D.T.C.
6052;
F.C.
369)):
.
.
.
such
a
discretion
to
be
exercised
by
way
of
a
resolution
of
the
directors,
can
be
equated
with
a
derogation
specific
and
substantive
enough
to
discard
the
common
law
rule
of
equality
of
distribution
since
there
is
no
rule
by
which
the
directors
are
to
carry
out
their
discretion.
The
respondent
argues,
on
the
other
hand,
that
the
discretionary
dividend
clause
is
a
valid
exercise
of
contractual
rights
between
the
company
and
its
shareholders
in
accordance
with
the
common
law
and
statute.
Moreover,
the
right
to
receive
dividends
in
potentially
unique
amounts
gives
each
share
class
different
rights.
It
is
argued
that
this
is
a
material
distinction
sufficient
to
create
separate
share
classes
with
differentiated
dividend
entitlements
which,
in
turn,
validly
derogates
from
the
principle
of
equality.
I
agree
with
the
arguments
which
the
respondent
has
raised
in
this
regard.
In
my
opinion,
the
discretionary
dividend
clause
is
both
a
valid
means
of
allocating
declared
dividends
and
is
sufficient
to
rebut
the
presumption
of
equality
amongst
shares.
I
find
this
determination,
with
respect
to
the
presumption
of
equality,
to
be
a
simple
factual
inquiry.
In
my
view,
the
presence
of
a
discretionary
dividend
clause
can
only
be
interpreted
as
creating
differences
between
share
classes,
since
that
is
the
rationale
for
the
clause.
As
far
as
the
statutory
requirements
are
concerned,
the
purpose
of
paragraph
24(4)(a)
is
to
ensure
that
shareholders
are
fully
aware
of
their
entitlements
and
privileges
to
the
extent
that
the
presumption
of
equality
is
rendered
inapplicable.
To
my
mind,
that
purpose
has
been
met
since
the
dividend
entitlements
are
clearly
set
out
in
the
description
of
the
share
classes.
In
this
regard,
I
find
the
argument
of
Pierre
Quessy
in
his
article
"Les
aspects
corporatifs
et
fiscaux
des
actions
à
dividende
discrétionnaire",
Revue
de
Planification
Fiscale
et
Successorale,
(1985)
Vol.
7
No.
1,
31
at
45
to
be
persuasive:
[Translation]
.
.
.
the
inclusion
in
the
articles
of
a
discretionary
dividend
clause
expressly
establishes
that
the
corporation
intends
to
derogate
from
the
principle
of
equality
among
shareholders.
The
provision
included
in
the
articles
alters
the
division
of
profits
which
in
the
absence
of
such
a
provision
would
have
to
be
made
in
accordance
with
the
principle
of
equality
among
shareholders.
I
am
in
full
agreement
with
Strayer,
J.
that,
with
respect
to
the
presumption
of
equality,
"the
Articles
of
Incorporation
specifically
provide
to
the
contrary"
(at
page
359;
D.T.C.
6131;
F.T.R.
5).
In
my
view,
then,
the
presumption
of
equality
manifestly
has
been
rebutted.
I
find
the
appellant's
arguments
as
they
relate
to
the
validity
of
a
discretionary
dividend
clause
in
terms
of
general
corporate
law
and
the
requirements
of
the
SBCA
to
be
equally
unpersuasive.
Counsel
for
the
appellant
placed
considerable
emphasis
in
his
arguments
upon
the
nature
of
a
shareholder
“right”,
arguing
that
for
the
purposes
of
the
statute
and
common
law,
a
right
to
a
dividend
comprises
a
right
to
a
portion
of
the
total
dividend
declared,
calculated
according
to
the
terms
set
out
in
the
share
description
if
and
when
the
directors
decide
to
make
a
distribution
of
the
profits
of
the
company.
The
appellant
argues
that
the
insertion
of
a
discretionary
dividend
clause
in
the
Articles
of
Incorporation
is
insufficient
to
confer
a"
right"
since
no
corresponding
"duty"
is
imposed
on
the
company
to
pay
dividends
on
that
class
once
a
dividend
has
been
declared.
Implicitly,
Desjardins,
J.
accepted
this
argument
when
she
referred
to
the
ability
of
the
directors
to
allocate
dividends
"at
whim”.
The
appellant
argues
that
this
unconstrained
discretion
cannot
be
considered
a
"right"
which
is
conferred
by
the
shares.
I
disagree
with
this
analysis.
In
my
opinion,
the
fact
that
dividend
rights
are
contingent
upon
the
exercise
of
the
discretion
of
the
directors
to
allocate
the
declared
dividend
between
classes
of
shares
does
not
render
entitlement
to
a
dividend
any
less
a“
"right".
Rather,
it
is
the
entitlement
to
be
considered
for
a
dividend
which
is
more
properly
characterized
in
those
terms.
I
agree
with
the
respondent
that
the
Class
B
common
shareholders
of
the
company
have
an
entitlement
comparable
to
that
of
a
fixed
dividend
holder
to
receive
a
dividend
if
the
company's
directors
declare
one.
As
well,
the
appellant's
argument
that
there
is
no
corresponding
"duty"
on
directors
as
regards
the
"rient"
of
shareholders
is,
in
my
view,
specious.
The
directors
are
bound
by
their
fiduciary
duty
to
act
in
good
faith
for
the
best
interests
of
the
company
in
the
declaration
and
allocation
of
any
dividend.
That
duty
is
in
no
way
circumvented
by
the
presence
of
a
discretionary
dividend
clause.
Finally,
I
think
that
it
should
be
borne
in
mind
that
many
shareholder
rights
may
be
qualified
and
contingent
(voting
rights,
the
right
to
transfer
shares,
preferential
rights
to
dividends,
participation
rights);
yet
the
mere
fact
that
these
rights
are
fettered
does
not
render
them
anything
less
than
shareholder
rights.
In
a
similar
vein,
I
do
not
agree
that
the
absence
of
a
mathematical
formula
for
the
allocation
of
declared
dividends
in
the
Articles
of
Incorporation
of
the
company
is
dispositive
of
the
issue
of
the
validity
of
the
discretionary
dividend
clause.
As
the
decision
to
declare
a
dividend
and
the
determination
of
the
funds
available
for
a
dividend
are
already
within
the
discretion
of
the
directors,
it
seems
to
me
that
a
discretionary
dividend
clause
is
not
a
significant
departure
or
extension
of
that
discretion:
De
Vail
v.
Wainwright
Gas
Co.,
[1932]
2
D.L.R.
145;
[1932]
1
W.W.R.
281
(Alta.
C.A.).
If
shares
are
divided
into
separate
classes,
one
of
which
contains
a
preferred
entitlement
to
dividends
declared
by
the
company,
the
directors
effectively
have
the
discretion
to
allocate
dividends
only
to
that
preferred
class.
Thus,
the
respondent
could
have
achieved
precisely
the
same
allocation
of
dividends
by
structuring
the
company
so
that
Wilma
McClurg
and
Suzanne
Ellis
constituted
a
preferred
class
of
shareholders
with
first
entitlement
to
dividends.
Such
a
structure
would
be
unimpeachable
in
terms
of
the
principles
of
corporate
law.
Furthermore,
it
cannot
reasonably
be
maintained
that
the
presence
of
a
discretionary
dividend
clause
inherently
leads
to
a
conflict
of
the
duty
of
directors
and
their
self-interest
any
more
than
does
the
discretion
to
declare
a
dividend
in
any
company.
Consequently,
I
cannot
agree
with
those
authors
who
take
the
position
that
the
allocation
of
dividends
by
directors,
pursuant
to
a
discretionary
dividend
clause,
inherently
cannot
be
exercised
in
the
best
interests
of
the
company:
see
M.
Martel
and
P.
Martel,
La
compagnie
au
Québec,
Les
aspects
juridiques,
Vol.
I,
at
18-10-14C;
M.
Boivin,
“Le
droit
aux
dividendes
et
le
dividende'discrétionnaire'"
(1987),
47
R.
du
B.
73.
I
agree
with
the
argument
of
the
respondent
that
it
is
unrealistic
to
think
that
directors
will
not
pay
heed
to
the
identity
of
shareholders
and
the
contribution
to
the
company
of
those
shareholders
any
time
a
decision
is
made
as
to
whether
dividends
of
any
sort
should
be
declared.
The
fact
that
directors
may
consider
the
identity
of
shareholders
does
not
necessarily
render
the
declaration
invalid
on
the
basis
of
a
conflict
of
duty
and
self-interest.
For
example,
the
discretion
could
be
exercised
for
the
purpose
of
rewarding
a
group
of
employees
who
comprise
a
preferred
class
of
shareholders
and
who
have
been
encouraged
to
invest
in
a
company.
Surely
the
fact
that
the
identity
of
the
holders
of
that
class
of
shares
was
considered
in
the
decision
to
declare
a
dividend
and
in
the
determination
of
the
quantum
of
the
dividend
would
not
render
the
decision
invalid.
To
reiterate,
the
limitation
on
the
decision
is
purely
a
fiduciary
one
and
the
entitlement
of
a
shareholder
is
"to
share
in
the
profits
of
the
company
when
these
are
declared
as
dividends
in
respect
of
the
shares
of
the
class
of
which
his
share
forms
a
part":
Bryden,
“The
Law
of
Dividends",
Studies
in
Canadian
Company
Law,
Jacob
S.
Ziegel,
ed.,
at
270.
That
right
is
in
no
way
undermined
by
the
presence
of
a
discretionary
dividend
clause.
In
other
words,
the
clause
simply
divides
conceptually
into
two
components—declaration
and
allocation—what
has
been,
traditionally,
one
decision.
In
substance,
though,
the
discretion
which
lies
in
the
hands
of
the
directors
has
always
included
both,
subject
to
the
provisions
of
the
articles
of
incorporation.
In
this
regard,
the
only
other
limitation
upon
the
directors
of
which
I
am
aware
is
that
"if
a
dividend
is
declared
by
[a]
corporation
.
.
.
there
must
be
some
shares
entitled
to
receive
the
dividend":
Welling,
supra,
at
pages
588-89.
The
principle
has
been
given
statutory
recognition
in
paragraph
24(4)(b)
of
the
SBCA.
In
my
view,
this
rule
is
not
defeated
by
the
presence
of
the
discretionary
dividend
clause
because
the
identity
of
the
class
eligible
for
a
dividend
simply
remains
unknown
until
the
allocation
takes
place.
This
conceptual
division
into
declaration
and
allocation
is
not
substantively
different
from
any
derogation
from
the
presumption
of
equality
in
the
payment
of
dividends.
Consequently,
for
this
Court
to
find
that
the
use
of
a
discretionary
dividend
clause
on
these
facts
was
an
invalid
exercise
of
the
discretion
of
the
directors,
would
be
to
defeat
the
substance
of
what
was
achieved
solely
on
the
basis
of
its
form.
Finally,
I
question
whether
it
would
be
appropriate
for
this
Court
to
determine
that
the
use
of
a
discretionary
dividend
clause
is
invalid
in
the
context
of
an
income
tax
appeal.
The
purpose
of
the
governing
statute,
the
SBCA,
is
facilitative—that
is,
it
allows
parties,
with
certain
explicit
restrictions,
to
structure
bodies
corporate
as
they
wish.
As
well,
the
Act
provides
the
means
for
an
aggrieved
party—security
holder,
creditor,
director
or
officer—whose
interests
have
not
been
regarded
fairly
by
the
corporation,
to
seek
redress
through
the
oppression
remedy
in
section
234
of
the
Act.
No
such
complaint
has
been
lodged
by
any
interested
party
in
this
case,
presumably
because
all
those
involved
in
this
company
are
satisfied
with
the
way
in
which
the
directors
are
conducting
its
affairs.
Furthermore,
at
common
law
it
is
a
well
established
principle
that
where
shareholders
are
unanimously
agreed
to
a
transaction,
inequality
of
treatment
does
not
render
it
ultra
vires
the
company:
Wegenast,
The
Law
of
Canadian
Companies,
at
pages
321-22.
As
I
have
found
that
the
use
of
a
discretionary
dividend
clause
is
not
prohibited
expressly
by
the
Act,
nor
contrary
to
common
law
or
corporate
law
principles
I
think
the
permissive
spirit
of
the
Act
demands
that
a
conclusion
be
reached
that
the
use
of
the
clause
is
valid.
As
Pierre
Quessy,
supra,
explained,
the
use
of
the
clause
represents
a
legitimate
exercise
of
the
contractual
rights
between
shareholders
and
a
company
(at
page
48):
[Translation]
'.
.
.
the
declaration
and
payment
of
a
dividend
by
the
directors
on
discretionary
dividend
shares
is
a
legal
act
under
the
Corporations
Acts
when
the
articles
contain
a
provision
conferring
greater
discretion
on
them.
We
then
have
shares
of
the
capital
stock
carrying
the
right
to
receive
any
dividend
declared.
Moreover,
the
articles
contain
an
express
provision
indicating
that
the
parties
intend
to
derogate
from
the
principle
of
equality
among
shareholders.
Accordingly,
as
the
parties
to
the
contract
are
not
acting
contrary
to
public
order
and
not
infringing
the
law,
we
are
of
the
view
that
the
terms
of
the
agreement
concluded
by
them
should
be
observed.
I
agree
with
this
conclusion.
Professor
Melvin
Eisenberg,
more
than
two
decades
ago,
in
his
work
on
modern
corporate
law,
“The
Legal
Roles
of
Shareholders
and
Management
in
Modern
Corporate
Decisionmaking"
(1969),
57
Cal.
L.
Rev.
1,
reasoned
that"
[i]n
the
case
of
the
privately
held
corporation,
legal
rules
governing
internal
decisionmaking
should
be
suppletory
in
nature
and
based
on
the
shareholders’
probable
expectations"
(at
page
180).
Given
that
the
legislature
has
not
chosen
to
disallow
the
discretionary
dividend
clause,
and
no
shareholder
has
taken
remedial
action
against
its
use
(presumably
because
shareholder
expectations
have
been
realized
by
its
exercise),
it
would
be
paternalistic
in
the
extreme
for
this
Court
to
invalidate
the
clause
at
the
behest
of
the
appellant
Minister
of
National
Revenue.
If
the
legislature
determines
that
the
use
of
the
discretionary
dividend
clause
undermines
the
reasonable
expectations
of
shareholders
or
is
in
some
way
unfair
to
an
interested
party,
then
it
is
up
to
the
legislature
to
limit
the
use
of
this
means
of
structuring
corporate
affairs.
In
conclusion,
then,
I
find
nothing
untoward
in
the
use
of
the
discretionary
dividend
clause
in
the
allocation
of
corporate
dividends.
There
is
nothing
in
the
SBCA
or
at
common
law
that
prohibits
this
dividend
allocation
technique.
2.
Income
Tax
Implications
Having
dealt
with
the
corporate
law
issues
raised
by
the
use
of
a
discretionary
dividend
clause,
I
now
turn
to
the
primary
issue
raised
in
this
appeal,
namely,
the
tax
consequences
of
the
allocation
of
dividends
made
pursuant
to
the
clause.
This
analysis
entails
an
examination
of
subsection
56(2)
of
the
Income
Tax
Act
and
its
application
to
the
facts
at
bar.
Before
proceeding
with
that
analysis,
though,
I
would
like
to
review
briefly
the
method
of
interpretation
to
be
followed
in
applying
the
subsection.
Interpretation
of
Taxing
Statutes
In
recent
years
this
Court,
in
an
income
tax
appeal,
has
found
it
beneficial
to
engage
explicitly
in
the
development
of
an
interpretive
approach
to
the
Income
Tax
Act;
an
approach
which
is
wedded
neither
to
a
rule
of
"strict
construction”
nor
to
an
all-encompassing
test
of
independent
business
purpose".
This
trend
began
with
the
judgment
of
Estey,
J.
in
his
majority
reasons
in
Stubart
Investments
Ltd.
v.
The
Queen,
[1984]
1
S.C.R.
536;
[1984]
C.T.C.
294;
84
D.T.C.
6305.
In
that
case,
Estey,
J.
undertook
an
extensive
discussion
of
interpretive
techniques,
and
he
drew
a
conclusion
as
to
the
preferred
approach
to
be
taken
by
the
courts
(at
315
(D.T.C.
6322;
S.C.R.
576)):
It
seems
more
appropriate
to
turn
to
an
interpretation
test
which
would
provide
a
means
of
applying
the
Act
so
as
to
affect
only
the
conduct
of
a
taxpayer
which
has
the
designed
effect
of
defeating
the
expressed
intention
of
Parliament.
In
short,
the
tax
statute,
by
this
interpretative
technique,
is
extended
to
reach
conduct
of
the
taxpayer
which
clearly
falls
within
"the
object
and
spirit”
of
the
taxing
provisions.
Estey,
J.
expanded
upon
this
test
of
“object
and
spirit"
in
his
majority
judgment
in
The
Queen
v.
Golden,
[1986]
1
S.C.R.
209;
[1986]
1
C.T.C.
274;
86
D.T.C.
6138
(at
277
(D.T.C.
6140;
S.C.R.
214-15)):
.
.
.
the
law
is
not
confined
to
a
literal
and
virtually
meaningless
interpretation
of
the
Act
where
the
words
will
support
on
a
broader
construction
a
conclusion
which
is
workable
and
in
harmony
with
the
evident
purposes
of
the
Act
in
question.
Strict
construction
in
the
historic
sense
no
longer
finds
a
place
in
the
canons
of
interpretation
applicable
to
taxation
statutes
in
an
era
such
as
the
present.
More
recently,
in
Bronfman
Trust
v.
The
Queen,
[1987]
1
S.C.R.
32;
[1987]
1
C.T.C.
117;
87
D.T.C.
5059,
I
described
the
approach
in
terms
of
the
need
to
discern
the
commercial
reality
of
a
taxpayer's
transaction
(at
128
(D.T.C.
5066-67;
S.C.R.
52-53)):
I
acknowledge,
however,
that
just
as
there
has
been
a
recent
trend
away
from
strict
construction
of
taxation
statutes
.
.
.
so
too
has
the
recent
trend
in
tax
cases
been
towards
attempting
to
ascertain
the
true
commercial
and
practical
nature
of
the
taxpayer's
transactions.
There
has
been,
in
this
country
and
elsewhere,
a
movement
away
from
tests
based
on
the
form
of
transactions
and
towards
tests
based
on
.
.
.
"a
common
sense
appreciation
of
all
the
guiding
features”
of
the
events
in
question.
.
.
This
is,
I
believe,
a
laudable
trend
provided
it
is
consistent
with
the
text
and
purposes
of
the
taxation
statute.
Assessment
of
taxpayers'
transactions
with
an
eye
to
commercial
and
economic
realities,
rather
than
juristic
classification
of
form,
may
help
to
avoid
the
inequity
of
tax
liability
being
dependent
upon
the
taxpayer's
sophistication
at
manipulating
a
sequence
of
events
to
achieve
a
patina
of
compliance
with
the
apparent
prerequisites
for
a
tax
deduction.
Thus,
in
proceeding
to
analyze
the
tax
consequences
of
the
application
of
the
discretionary
dividend
clause,
it
is
necessary
to
determine
both
the
purpose
of
the
legislative
provision
and
the
economic
and
commercial
reality
of
the
taxpayer's
actions.
To
a
certain
extent,
the
latter
inquiry
in
the
case
at
bar
already
has
been
answered
by
my
determination
that
the
use
of
the
discretionary
dividend
clause
is
a
valid
means
whereby
directors
of
a
company
can
distribute
dividends.
The
question
also
is
answered,
in
part,
by
the
fact
that
it
was
not
argued
by
the
appellant
that
the
payment
of
dividends
to
Wilma
McClurg
was
a
"sham".
Therefore,
to
use
the
words
of
Estey,
J.
in
Stubart
Investments
Ltd.,
supra,
it
cannot
be
said
that
the
transaction
was
"constructed
as
to
create
a
false
impression
in
the
eyes
of
a
third
party,
specifically
the
taxing
authority”
(at
page
313
(D.T.C.
6321;
S.C.R.
572)).
Having
determined
these
preliminary
issues,
the
purpose
of
subsection
56(2)
can
be
examined.
Subsection
56(2)
of
the
Income
Tax
Act
In
attempting
to
discern
the
purpose
of
subsection
56(2),
it
is
helpful
to
refer
to
the
body
of
jurisprudence
dealing
with
the
subsection.
A
useful
starting
point
is
an
early
case
dealing
with
the
predecessor
subsection
to
subsection
56(2):
Miller
v.
M.N.R.,
[1962]
C.T.C.
199;
62
D.T.C.
1139
(Ex.
Ct.).
In
that
case,
Thurlow,
J.,
as
he
then
was,
in
examining
subsection
16(1)
of
the
Act,
made
some
general
comments
as
to
the
anti-avoidance
purpose
of
the
provision
which
remain
relevant
today
(at
page
212
(D.T.C.
1147)):
In
my
opinion,
subsection
16(1)
is
intended
to
cover
cases
where
a
taxpayer
seeks
to
avoid
receipt
of
what
in
his
hands
would
be
income
by
arranging
to
have
the
amount
received
by
some
other
person
whom
he
wishes
to
benefit
or
by
some
other
person
for
his
own
benefit.
The
scope.
of
the
subsection
is
not
obscure
for
one
does
not
speak
of
benefitting
a
person
in
the
sense
of
the
subsection
by
making
a
business
contract
with
him
for
adequate
consideration.
Strayer,
J.
noted
in
respect
of
the
Miller
case,
supra,
at
page
358
(D.T.C.
6130-31;
ET.R.
4):
Two
important
qualifications
are
noted
here:
the
first
is
that
the
taxpayer
seek
"to
avoid
receipt"
of
funds,
presumably
funds
that
would
otherwise
be
payable
to
him;
and
the
second
is
that
the
concept
of
payment
of
a“
benefit”
is
contrasted
to
payments
for
adequate
consideration.
In
my
opinion,
the
views
of
Thurlow,
J.
and
Strayer,
J.
provide
a
sound
foundation
for
the
interpretation
of
subsection
56(2).
The
subsection
obviously
is
designed
to
prevent
avoidance
by
the
taxpayer,
through
the
direction
to
a
third
party,
of
receipts
which
he
or
she
otherwise
would
have
obtained.
I
agree
with
both
Thurlow,
J.
and
Strayer,
J.
in
their
characterization
of
the
purpose
of
the
subsection
and,
specifically,
I
concur
with
their
view
that
the
subsection
reasonably
cannot
have
been
intended
to
cover
benefits
conferred
for
adequate
consideration
in
the
context
of
a
legitimate
business
relationship.
Application
to
the
Facts
Having
discerned
the
purpose
of
the
section
and
the
proper
approach
in
interpretation,
the
next
step
in
the
analysis
is
apparent:
a
determination
of
the
commercial
reality
and
practical
nature
of
the
respondent's
transactions
which
were
the
subject
of
reassessment
by
the
Department
of
National
Revenue.
Urie,
J.
in
the
Court
of
Appeal
found
the
determination
that
the
transaction
occurred
in
the
context
of
a
director-shareholder
relationship
to
be
dispositive.
I
agree
with
that
conclusion,
and
with
the
skepticism
expressed
by
Le
Dain,
J.
in
Perrault
v.
The
Queen,
[1979]
1
F.C.
155;
[1978]
C.T.C.
395;
78
D.T.C.
6272
(EC.A.),
where
he
questioned
whether
the
words
of
subsection
56(2)
"were
intended
to
apply
to
the
payment
of
a
dividend"
(at
403
(D.T.C.
6278;
FC.
165-66)).
While
it
is
always
open
to
the
courts
to
"pierce
the
corporate
veil”
in
order
to
prevent
parties
from
benefitting
from
increasingly
complex
and
intricate
tax
avoidance
techniques,
in
my
view
a
dividend
payment
does
not
fall
within
the
scope
of
subsection
56(2).
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).
The
appellant
argues,
and
Desjardins,
J.
accepted
in
dissent
in
the
Court
of
Appeal,
that
subsection
56(2)
may
be
invoked
at
the
point
when
the
allocation
is
made
of
a
dividend
declared
by
the
directors
pursuant
to
the
discretionary
dividend
clause.
It
is
submitted
that
because,
once
declared,
a
dividend
must
be
receivable
by
one
class
of
shares
pursuant
to
paragraph
24(4)(b)
of
the
SBCA,
a
portion
of
the
dividend
would
have
been
received
by
the
respondent
in
his
capacity
as
shareholder
had
the
payments
not
been
directed
to
Wilma
McClurg
by
him
in
his
capacity
as
director.
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.
Although
I
have
concluded
that
subsection
56(2)
does
not
apply
to
the
declaration
of
dividends
generally,
its
application
also
would
be
contrary
to
the
commercial
reality
of
this
particular
transaction.
Strayer,
J.
reviewed
the
evidence
and
reached
the
conclusion
that
the
background
and
context
of
the
transaction
could
be
described
as
a
"legitimate
business
relationship”
(at
page
360
(D.T.C.
6132;
F.T.R.
5)),
and
he
found
that:
.
.
.
the
plaintiff's
wife
had
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
before
me
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.
I
find
this
conclusion
to
be
completely
supported
by
the
evidence.
Wilma
McClurg
played
a
vital
role
in
the
financing
of
the
formation
of
the
company.
Although
I
agree
with
Desjardins,
J.
that,
with
respect
to
a
shareholder,
"divi-
dends
come
as
a
return
on
his
or
her
investment"
(at
page
83
(D.T.C.
6053;
F.C.
370)),
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.
In
my
opinion,
Goetz,
T.C.J.
erred
when
he
found
that
the
dividends
were
a
blatant
attempt
at
tax
avoidance.
Indeed,
his
dismissal
of
the
relevance
of
Wilma
McClurg's
contribution
to
the
company
and
his
description
of
her
and
Suzanne
Ellis
as
"
puppets"
pay
no
regard
to
the
very
real
contributions,
financial
and
operational,
made
by
Wilma
McClurg.
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.
In
my
opinion,
if
a
distinction
is
to
be
drawn
in
the
application
of
subsection
56(2)
between
arms
length
and
non
arms
length
transactions,
it
should
be
made
between
the
exercise
of
a
discretionary
power
to
distribute
dividends
when
the
non
arms
length
shareholder
has
made
no
contribution
to
the
company
(in
which
case
subsection
56(1)
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.
III
Disposition
In
conclusion,
I
have
found
that:
(i)
the
discretionary
dividend
clause
is
valid
in
terms
of
the
principles
of
corporate
law
and
the
provisions
of
the
Saskatchewan
Business
Corporations
Act;
(ii)
the
declaration
of
a
dividend
is
normally
beyond
the
scope
of
subsection
56(2)
of
the
Income
Tax
Act;
and,
(iii)
the
facts
at
bar
provide
no
evidence
that
the
business
arrangement
was
an
attempt
at
tax
avoidance,
but
rather
that
it
was
the
product
of
a
business
contract
made
for
adequate
consideration.
As
a
result,
I
would
dismiss
the
appeal.
Pursuant
to
the
order
of
this
Court
granting
leave
to
appeal
in
this
case,
costs
of
the
appeal
will
be
payable
by
the
appellant
on
a
solicitor-client
basis.
La
Forest,
J.:—This
appeal
is
concerned
with
whether
money
received
by
Wilma
McClurg,
wife
of
the
respondent
Jim
A.
McClurg,
by
virtue
of
a
"discretionary
dividend"
clause,
may
properly
be
attributed
to
the
respondent
pursuant
to
subsection
56(2)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act").
The
facts
and
the
judgments
of
the
courts
below
have
been
set
out
at
length
in
Chief
Justice
Dickson's
reasons,
and
I
do
not
propose
to
repeat
them.
Rather,
I
will
proceed
directly
to
the
legal
analysis.
Following
the
basic
framework
of
the
opinion
of
the
Chief
Justice,
the
discussion
is
divided
into
issues
of
corporate
and
tax
law.
Corporate
Law
Issues
Simply
put,
the
corporate
law
question
raised
by
this
appeal
is
whether
the
clause
in
Northland
Trucks
(1978)
Ltd.'s
Articles
of
Incorporation
purporting
to
give
each
class
of
shares
the
“right
to
receive
dividends
exclusive
of
other
classes
of
shares
in
the
said
corporation”
is
a
valid
allocation
of
power
to
the
directors
of
the
corporation
under
the
Saskatchewan
Business
Corporations
Act,
R.S.S.
1978,
c.
B-10.
The
clause
is
referred
to
as
a
"discretionary
dividend"
clause
because
the
mode
of
distribution
of
dividends
is
not
determined
by
the
articles
of
incorporation
themselves,
but
is
left
to
the
"discretion"
of
the
directors
of
the
company.
In
a
certain
sense,
the
term
"discretionary
dividend"
is
a
misnomer,
since
it
is
a
well-accepted
principle
of
common
law
that
the
directors
of
a
corporation
have
the
discretion
to
determine
if
and
when
a
dividend
should
be
declared,
and
in
what
amount.
This
discretion
is,
of
course,
subject
to
certain
reasonable
limitations.
For
example,
paragraph
40(a)
of
the
Saskatchewan
Business
Corporations
Act
provides
that
a
dividend
may
not
be
declared
if
there
are
reasonable
grounds
to
believe
such
declaration
would
render
the
corporation
unable
to
pay
its
debts.
As
well,
there
is
the
overriding
principle
that
the
discretion
must
always
be
exercised
in
a
manner
which
is
in
the
best
interests
of
the
corporation;
see
Welling,
Corporate
Law
in
Canada:
The
Governing
Principles
(1984),
at
614.
Although
the
term
"discretionary
dividend"
may
be
somewhat
misleading,
it
is
nonetheless
not
difficult
to
understand
how
the
label
itself
was
first
chosen.
Clauses
such
as
the
one
contained
in
the
articles
of
incorporation
of
Northland
Trucks
give
directors
a
power
of
discretion
that
they
never
previously
had:
the
power
to
discriminate
between
different
classes
of
shares
when
determining
how
a
dividend
should
be
distributed.
Is
this
allocation
of
power
to
the
directors
valid
under
the
Saskatchewan
Business
Corporations
Act
.
To
answer
this
question,
it
is
necessary
to
examine
both
the
principles
at
common
law
and
the
statute
itself.
The
Common
Law
Since
the
famous
decision
of
the
House
of
Lords
in
Salomon
v.
Salomon
&
Co.,
[1897]
A.C.
22,
it
has
been
a
settled
proposition
of
law
that
a
corporation
has
a
separate
legal
existence,
independent
from
that
of
its
shareholders.
Even
before
Salomon,
it
had
been
said
that
it
was
this
proposition
that
lay
at
the
"root"
of
corporate
law;
Farrar
v.
Farrars,
Ltd.
(1888),
40
Ch.
D.
395,
at
409-10.
The
independent
legal
existence
of
the
corporation
means
that,
while
the
shareholder
remains
a
proportionate
owner
of
the
corporation,
he
does
not
actually
own
its
assets.
These
assets
belong
to
the
corporation
itself,
as
a
separate
legal
entity;
Schmitthoff,
Palmer's
Company
Law,
Vol.
1,
23rd
ed.
(1982),
at
384,
paragraph
33-01.
Management
of
the
corporation
is
entrusted
to
its
officers
and
directors
with
the
shareholder's
interest
protected
through
the
distribution
of
shareholder
votes.
Thus,
the
corporate
entity
is
unique
in
that
it
allows
the
shareholder
to
alienate
ownership
of
property
by
placing
it
in
a
structure
where
the
ownership
of
the
property
is
separated
from
the
effective
control
over
that
property;
see
Welling,
supra,
at
page
81.
The
sole
link
between
the
shareholder
and
the
company
is
the
share,
which
provides
both
a
measure
of
the
shareholder's
interest
in
the
company,
as
well
as
of
the
extent
of
the
shareholder's
liability
for
the
actions
of
that
company;
see
Borland's
Trustee
v.
Steel
Brothers
&
Co.,
[1901]
1
Ch.
279,
at
288.
This
separation
of
ownership
and
control
provides
the
basis
for
many
of
the
fundamental
principles
of
corporate
law.
One
example
is
the
principle
that
the
directors
and
officers
of
a
corporation
owe
a
fiduciary
duty
to
the
corporation;
see
Canadian
Aero
Service
Ltd.
v.
O'Malley,
[1974]
S.C.R.
592;
40
D.L.R.
(3d)
371.
In
recognizing
for
the
first
time
that
the
fiduciary
duty
owed
by
directors
to
the
corporation
should
be
extended
to
senior
officers
of
the
corporation
as
well,
this
Court
focused
upon
the
degree
of
control
that
the
officers
were
in
a
position
to
exercise
in
that
case.
Laskin,
J.,
speaking
for
the
Court,
there
stated,
at
610
(D.L.R.
384):
Strict
application
against
directors
and
senior
management
officials
is
simply
recognition
of
the
degree
of
control
which
their
positions
give
them
in
corporate
operations,
a
control
which
rises
above
day-to-day
accountability
to
owning
shareholders
and
which
comes
under
some
scrutiny
only
at
annual
general
or
at
special
meetings.
It
is
a
necessary
supplement,
in
the
public
interest,
of
statutory
regulation
and
accountability
which
themselves
are,
at
one
and
the
same
time,
an
acknowledgment
of
the
importance
of
the
corporation
in
the
life
of
the
community
and
of
the
need
to
compel
obedience
by
it
and
by
its
promoters,
directors
and
managers
to
norms
of
exemplary
behaviour.
Another
principle
that
I
believe
also
stems
logically
from
the
separation
of
ownership
and
control
inherent
in
the
corporation
is
the
principle
of
equality
of
shares.
Since
the
shareholders
are
only
proportionate
owners
of
the
company,
if
their
interest
is
to
be
adequately
and
fairly
protected,
those
in
the
position
of
control
must
treat
all
the
shareholders,
or
more
accurately,
all
the
shares,
equally.
Thus
see
C.M.
Schmitthoff,
supra,
at
page
387,
paragraph
33-06:
Prima
facie
the
rights
carried
by
the
shares
rank
pari
passu,
i.e.
the
shareholders
participate
in
the
benefits
of
membership
equally.
It
is
only
when
a
company
divides
its
share
capital
into
different
classes
with
different
rights
attached
to
them
that
the
prima
facie
presumption
of
equality
of
shares
may
be
displaced.
In
my
opinion,
the
principle
of
equality
of
shares,
like
the
principle
of
fiduciary
duty,
developed
as
more
than
just
a
mere
contractual
right—it
was
a
measure
of
protection
for
the
shareholder
that
arose
as
a
practical
consequence
of
the
unique
nature
of
the
corporate
structure
itself.
This
is
so
even
though
the
parties
could
contract
out
of
it
to
the
extent
that
shares
could
be
created
that
did
not
themselves
have
equal
rights.
In
such
a
situation,
the
shareholder
was
still
protected
by
virtue
of
the
common
law
rule
that
shareholder
rights
had
to
be
attached
to
the
share
itself,
and
not
to
the
individual
shareholder.
Thus,
while
the
shares
had
differentiated
rights
depending
upon
the
particular
class
to
which
they
belonged,
the
shareholder
himself
could
not
be
discriminated
against.
For
example,
even
when
different
classes
of
shares
were
created,
the
shares
within
the
various
classes
themselves
still
had
to
be
treated
on
an
equal
basis.
It
is
thus
put
by
Wegenast,
The
Law
of
Canadian
Companies
(1979),
at
320-21:
Apart
from
provisions,
duly
adopted,
for
preferences
as
between
different
classes
of
shares,
and,
where
there
are
such
preferences,
then
as
amongst
the
members
in
each
respective
class,
shareholders
are
entitled
to
be
treated
on
a
basis
of
equality.
Shareholders
may
differ
as
to
the
wisdom
of
a
particular
course
of
action,
but
once
adopted
it
must
be
carried
out
without
discrimination
amongst
the
shareholders
or,
as
it
is
said
in
some
of
the
cases,
"for
the
benefit
of
the
company
as
a
whole.”
[Emphasis
added.]
More
significantly,
even
when
more
than
one
class
of
shares
was
created,
the
directors
were
not
free
to
discriminate
arbitrarily
between
the
classes
when
awarding
a
dividend.
As
Fraser
and
Stewart
state
in
Company
Law
of
Canada,
5th
ed.
(1962),
at
532,
quoting
Lord
Cranworth,
L.C.
in
Henry
v.
Great
Northern
Ry.
Co.
(1857),
1
De
G.
&
J.
606,
at
638;
44
E.R.
858
at
871:
Where
there
is
more
than
one
class
of
shareholders"
it
will
be
[always]
the
duty
of
the
directors
to
fix
the
amount
of
the
fund
retained
with
reference
to
the
general
interest
of
all
classes
of
shareholders,
and
not
to
favour
any
one
class
at
the
expense
of
the
others".
The
few
Canadian
cases
that
appear
to
have
considered
the
issue
have
all
held
that,
even
when
the
shareholders
agree
to
do
so,
a
company
may
not
validly
be
structured
so
as
to
derogate
from
the
common
law
principle
that
shareholder
rights
must
attach
to
the
shares
themselves.
When
I
speak
of
shareholder
rights,
I
include
at
least
those
three
categories
of
rights
that
are
considered
to
be
fundamental:
the
right
to
a
dividend,
the
right
to
vote,
and
the
right
to
participate
in
the
distribution
of
assets
upon
dissolution
of
the
corporation.
In
Jacobsen
v.
United
Canso
Oil
&
Gas
Ltd.
(1980),
113
D.L.R.
(3d)
427;
[1980]
6
W.W.R.
38
(Alta.
Q.B.),
the
defendant
company
passed
a
by-law
to
the
effect
that
no
one
person
was
entitled
to
vote
more
than
1000
shares,
notwithstanding
the
number
of
shares
actually
held
by
that
person.
The
company
had
originally
been
incorporated
under
the
Companies
Act,
R.S.C.
1952,
c.
53.
The
Court
found
the
by-law
invalid
since
the
Companies
Act
recognized
the
common
law
presumption
of
equality
"that
all
shares
confer
equal
rights
and
impose
equal
liabilities
and
that
if
voting
rights
are
to
vary
separate
classes
of
shares
must
be
created
so
that
the
different
numbers
of
votes
can
be
attached
to
the
shares
themselves
and
not
to
the
holder’
(at
page
433).
[Emphasis
added.]
The
court
also
held
that
the
by-law
was
invalid
under
the
Canada
Business
Corporations
Act
(R.S.C.
1974-75,
c.
33,
which
superseded
the
Companies
Act),
the
Act
upon
which
the
Saskatchewan
Business
Corporations
Act
is
based.
In
Bowater
Canadian
Ltd.
v.
R.L.
Crain
Inc.,
supra,
the
Ontario
Court
of
Appeal
held
invalid
a
"step-down"
provision
contained
in
the
respondent
Crain
Inc.'s
articles
of
incorporation.
The
provision
provided
for
a
special
class
of
common
shares
that
carried
ten
votes
per
share
while
in
the
possession
of
the
original
shareholder,
but
that
would
carry
only
one
vote
per
share
if
transferred
to
another.
The
Court
of
Appeal
followed
the
reasoning
of
McRae,
J.
in
the
Court
below,
who,
at
page
754
(D.L.R.
165),
held
that:
.
.
.
although
there
was
no
express
prohibition
in
the
CBCA
against
a
step-down
provision,
5.
24(4)
of
the
Act
should
be
interpreted
in
accordance
with
the
general
principles
of
corporation
law
with
the
result
that
the
rights
which
are
attached
to
a
class
of
shares
must
be
provided
equally
to
all
shares
of
that
class,
this
interpretation
being
founded
on
the
principle
that
rights,
including
votes,
attach
to
the
share
and
not
to
the
shareholder.
[Emphasis
added.]
Both
Jacobsen
and
Bowater
recognize
that
the
principle
that
shareholder
rights
must
attach
to
the
corporation's
shares
is
more
than
a
mere
contractual
right:
even
the
shareholders
themselves
may
not
agree
to
circumvent
this
principle.
Another
case
holding
that
rights
attach
to
the
share
rather
than
the
shareholder,
albeit
in
a
different
context,
is
Rondeau
v.
Poirier,
[1980]
C.A.
35
(Que.).
In
that
case,
the
respondent
claimed
he
was
entitled
to
receive
a
portion
of
the
cumulative
dividends
paid
on
shares
that
were
given
by
him
to
his
former
wife
as
part
of
their
divorce
settlement.
The
respondent
argued
that
he
should
receive
the
dividends
that
were
paid
retroactively
for
the
years
during
which
he
possessed
the
shares.
This
argument
was
rejected
by
the
Court
of
Appeal,
which
held
that
the
right
to
receive
dividends
is
a
contingent
right
that
does
not
actually
arise
until
the
dividends
have
been
declared
by
the
corporation.
Although
the
respondent
had
been
the
shareholder
during
the
years
when
most
of
these
dividends
were
accumulated,
any
right
to
these
dividends
passed
with
the
shares
when
they
were
transferred
(at
page
39).
Writing
for
the
majority
of
the
Court
of
Appeal
in
Rondeau,
Lamer,
J.,
as
he
then
was,
noted
(at
page
37)
that
the
shareholder's
right
to
a
dividend
encompasses
the
right
to
a
particular
mode
of
distribution
once
a
dividend
has
been
declared:
[L'actionnaire]
a
Ie
droit
non
pas
aux
profits,
puisque
les
administrateurs
ne
sont
pas
obligés
de
les
distribuer,
mais
à
une
quotité
et
à
certaines
modalités
de
distribution
des
profits
si
et
lorsque
les
administrateurs
décident
d
une
distribution,
c'est-à-dire
déclarent
un
dividende.
[Emphasis
added.]
In
my
view,
a
discretionary
dividend
clause
such
as
the
one
in
this
case,
that
permits
the
directors
of
a
corporation
to
choose
which
class
is
entitled
to
receive
dividends
to
the
exclusion
of
the
other
classes,
would
be
invalid
at
common
law.
It
contravenes
the
principle
that
the
directors
are
not
permitted
to
favour
one
class
at
the
expense
of
the
others;
see
Fraser
and
Stewart,
supra,
at
page
532.
Further,
and
the
respondent
does
not
dispute
this
point,
if
dividends
are
allocated
to
the
different
classes
on
a
discretionary
basis,
then
the
directors
will
be
making
this
allocation
primarily
on
the
basis
of
the
identity
of
the
shareholders
in
the
various
classes.
While
the
respondent
contends
that
this
does
not
represent
a
significant
departure
from
the
existing
state
of
the
law,
I
disagree,
for
it
means,
in
effect,
that
the
right
to
the
dividend
attaches
not
to
the
shares,
but
to
the
shareholder;
see
M.
Boivin,
"Le
droit
aux
dividendes
et
le
dividende'discrétionnaire'"
(1987),
47
R.
du
B.
73
at
92.
Again,
in
my
view,
the
rule
that
shareholder
rights
must
attach
to
the
shares
themselves
is
a
principle
which
has
its
roots
in
the
very
nature
of
the
corporate
structure.
When
the
articles
of
incorporation
create
classes
of
shares
that
have
different
rights,
this
normally
does
not
require
the
directors
to
discriminate
between
the
shareholders—the
mode
of
distribution
is
set
out
in
the
shares
themselves.
To
allow
discrimination
on
the
basis
of
the
identity
of
those
possessing
the
shares
ignores
the
separation
that
is
supposed
to
exist
between
the
corporation
and
its
shareholders;
see
M.
Martel
and
P.
Martel,
La
compagnie
au
Québec:
Les
aspects
juridiques
(1987),
Vol.
I
at
18-14B.
The
respondent,
however,
contends
that,
even
in
a
situation
where
no
discretionary
dividend
clause
exists,
in
a
corporation
with
at
least
one
class
of
preferred
share,
the
directors
of
a
corporation
effectively
have
the
power
to
choose
which
classes
will
receive
dividends.
They
can
do
so
by
declaring
dividends
in
an
amount
small
enough
that
only
the
preferred
shares
will
partake.
This,
however,
is
a
discretion
that
is
expressly
limited
by
the
terms
of
the
articles
of
incorporation.
The
need
for
protection
is
not
as
great,
for
the
common
shareholder
is
not
placed
in
a
position
where
the
director
can
award
dividends
of
any
amount
to
a
class
other
than
his
or
her
own.
That
shareholder
knows
that
if
dividends
are
declared
in
excess
of
a
specified
amount,
then
his
or
her
class
of
shares
will
participate.
If
dividends
are
never
declared
in
excess
of
that
amount,
then
at
least
the
money
is
retained
by
the
corporation.
Where
there
is
a
discretionary
dividend
clause,
however,
the
shareholder
is
completely
dependent
on
the
good-will
of
the
directors.
The
minority
shareholder
is
placed
in
a
near
impossible
position
if
this
good-will
turns
against
her;
see
Martel
and
Martel,
supra,
at
page
18-14A.
It
is
interesting
to
note
that
at
least
one
commentator
who
writes
in
favour
of
the
discretionary
dividend
clause
suggests
that
each
shareholder's
"informed"
consent
to
this
sort
of
arrangement
be
obtained
in
advance
in
writing,
presumably
to
guard
against
just
such
an
eventuality;
see
Pierre
Quessy,
"Les
aspects
corporatifs
et
fiscaux
des
actions
à
dividende
discrétionnaire",
Revue
de
Planification
Fiscale
et
Successorale
(1985),
Vol.
7,
no.
1,
31
at
42-43.
In
my
opinion,
a
second
reason
why
the
discretionary
dividend
clause
is
invalid
at
common
law
is
because
it
places
the
director
in
a
position
where
he
cannot
fulfill
his
fiduciary
obligations
to
the
corporation
as
a
whole.
The
interests
of
different
classes
of
shareholders,
where
a
discretionary
declaration
of
dividends
is
concerned,
are
necessarily
divergent,
since
a
dividend
will
be
declared
for
the
benefit
of
one
class
of
shareholders
at
the
expense
of
the
others.
As
put
by
Martel
and
Martel,
supra,
at
pages
18-14
and
18-14A:
Il
lui
serait
impossible
de
justifier
cette
préférence,
car
elle
n'est
sûrement
pas
faite
de
bonne
foi
dans
l'intérêt
de
la
compagnie.
En
utilisant
la
discrétion
qui
leur
est
conférée
pour
avantager
certains
actionnaires,
les
administrateurs
sont
en
conflit
d'intérêt
manifeste,
particulièrement
s'ils
sont
eux-mêmes
ces
actionnaires
ou
liés
à
eux.
.
.
.
La
situation
créée
par
les
clauses
de
dividende
discrétionnaire
est
sans
précédent,
et
place
les
administrateurs
dans
une
position
impossible:
s'ils
avantagent
certains
actionnaires
en
dérogeant
à
la
règle
de
l'égalité,
ils
contreviennent
à
leurs
obligations
de
mandataires
ou
quasi-fiduciaires
de
la
compagnie,
et
agissent
en
réalité
comme
mandataires
des
actionnaires
qu'ils
favorisent,
ou
du
moins
de
ceux
qui
contrôlent
la
compagnie.
The
conflict
of
interest
is
heightened
when
the
director
happens
to
be
a
shareholder
himself.
When
the
discretionary
dividend
clause
is
utilized
to
award
dividends
to
a
class
in
which
the
director
holds
shares,
or
from
which
he
derives
some
personal
benefit,
the
situation
can
be
compared
to
the
usurpation
of
a
corporate
opportunity
properly
belonging
to
the
company.
As
Laskin,
J.
observed
in
the
Canadian
Aero
Service
Ltd.
v.
O'Malley,
supra,
at
page
382
(S.C.R.
606-607),
the
fiduciary
duty,
at
the
very
least,
precludes
the
director
.
.
.
from
obtaining
for
himself,
either
secretly
or
without
the
approval
of
the
company
(which
would
have
to
be
properly
manifested
upon
full
disclosure
of
the
facts),
any
property
or
business
advantage
either
belonging
to
the
company
or
for
which
it
has
been
negotiating;
and
especially
is
this
so
where
the
director
or
officer
is
a
participant
in
the
negotiations
on
behalf
of
the
company.
A
discretionary
dividend
clause
gives
the
director
a
licence
to
secure,
by
virtue
of
his
position,
a
personal
benefit
at
the
expense
of
the
corporation
and
its
shareholders
without
having
to
seek
shareholder
approval.
By
contrast,
requiring
the
mode
of
distribution
to
be
expressly
set
out
in
the
articles
of
incorporation,
which
can
only
be
amended
by
approval
of
the
shareholders,
is
consistent
with
the
fiduciary
obligation
as
described
in
the
Canadian
Aero
case.
I
note
that,
in
the
usual
case,
if
the
directors
themselves
hold
preferred
shares,
this
does
not
present
a
problem,
for
the
common
shareholders
will
have
agreed
to
subordinate
their
dividend
interest
to
the
preferred
class
of
shares
based
upon
“
full
disclosure”
of
the
maximum
amount
to
which
these
preferred
shares
will
enjoy
priority.
With
a
discretionary
dividend
clause,
there
is
no
such
disclosure,
since
the
amount
and
priority
is
left
to
be
determined
in
the
future,
wholly
at
the
directors'
discretion.
The
Chief
Justice
states
that
the
fact
that
the
directors
take
into
account
the
identity
of
shareholders
when
declaring
a
dividend
does
not
necessarily
create
a
conflict
of
duty.
As
an
example,
he
suggests
that
the
directors
could
validly
exercise
their
discretion
to
allocate
dividends
so
as
to
reward
a
group
of
employees
who
comprise
a
class
of
preferred
shareholders.
With
respect,
it
seems
to
me
that
even
this
would
constitute
an
improper
exercise
of
the
discretionary
dividend
power.
If
the
employees
truly
merit
some
additional
reward,
the
proper
course
would
be
to
achieve
this
through
some
other
form
of
compensation,
for
example
a
bonus.
A
dividend
is
supposed
to
be
a
return
on
an
investment.
On
this
point,
I
adopt
the
words
of
Desjardins,
J.
of
the
Federal
Court
of
Appeal
at
page
83
(D.T.C.
6053;
F.C.
370):
But
surely,
there
is
no
relationship,
in
company
law,
between
the
work
and
services
a
shareholder
brings
to
a
company
and
his
or
her
entitlement
to
a
dividend
if
declared.
The
dividends
come
as
a
return
on
his
or
her
investment
and
not
on
account
of
work
and
services
he
or
she
may
render
to
the
company.
The
dividend
attaches
to
the
share
and
not
to
the
shareholder.
In
any
event,
even
if
I
did
not
find
that
the
discretionary
dividend
clause
was
itself
invalid
under
the
common
law,
I
would
find
that
the
clause,
at
least
as
designed
in
the
present
case,
is
insufficient
to
rebut
the
common
law
presumption
of
equality.
As
earlier
noted,
it
is
well
accepted
that
in
the
absence
of
some
differentiation
between
the
shares,
all
shares
must
be
treated
equally;
see
Birch
v.
Cropper;
In
re
Bridgewater
Navigation
Co.
(1889),
14
A.C.
525
(H.L.).
The
respondent
contends
that
the
fact
that
the
classes
of
shares
have
the
potential
to
receive
dividends
in
potentially
different
amounts
is
sufficient
to
differentiate
them.
The
fact
remains,
however,
that
all
three
classes
of
Northland
Trucks’
shares
are
defined
in
substantially
the
same
manner
with
respect
to
their
entitlement
to
dividends.
Each
class
carries"
the
distinction
and
right
to
receive
dividends
exclusive
of
other
classes
of
shares
in
the
said
corporation”.
As
Professor
Boivin,
supra,
notes,
at
page
94:
.
.
.si
toutes
les
actions
sont
assorties
d'une
clause
de
dividende
discrétionnaire,
elles
sont
toutes
sur
un
pied
d’égalité
en
matière
de
dividendes,
même
si
certaines
particularités
existentquant
à
d'autres
droits
ou
privilèges.
Loin
de
rompre
le
principe
d'égalité,
la
clause
ainsi
employée
le
confirme.
Any
difference
between
the
shares
concerning
their
right
to
receive
dividends
that
does
exist
clearly
does
not
derive
from
any
differentiation
between
the
shares,
but
would
have
to
stem
from
the
actions
of
the
directors
of
the
corporation.
This
would,
however,
be
a
right
that
does
not
derive
from
the
share
itself,
and
as
such
would
be
invalid
at
common
law.
Having
found
that
the
discretionary
dividend
clause
contained
in
the
articles
of
incorporation
of
Northland
Trucks
was
an
invalid
allocation
of
power
at
common
law,
it
remains
to
examine
the
Saskatchewan
Business
Corporations
Act
to
see
if
the
statute
changes
this
result.
The
Saskatchewan
Business
Corporations
Act
Paragraph
24(4)(a)
of
the
Saskatchewan
Business
Corporations
Act
provides
that
the
corporation
may
derogate
from
the
common
law
rule
of
equality,
by
creating
more
than
one
class
of
shares:
24.
(4)
The
articles
may
provide
for
more
than
one
class
of
shares
and,
if
they
so
provide:
(a)
the
rights,
privileges,
restrictions
and
conditions
attaching
to
the
shares
of
each
class
shall
be
set
out
therein;
See
also
subparagraph
6(1)(c)(i).
The
question
becomes
whether
the
allocation
of
power
to
the
directors
of
a
corporation
to
determine
each
class
of
shares'
right
to
a
dividend,
once
one
has
been
declared,
is
consistent
with
paragraph
24(4)(a),
which
provides
that
such
rights
must
be
"set
out”
in
the
articles
of
incorporation.
There
are
two
possible
interpretations.
The
first
is
that
it
is
sufficient
if
the
articles
"set
out”
that
the
different
classes
of
shares
have
the
right"
to
receive
a
dividend
that
has
been
declared,
wholly
at
the
discretion
of
the
directors.
The
second
is
that
the
requirement
that
the
rights
be
"set
out”
requires
that
the
mode
of
distribution
of
the
dividends
be
expressly
provided
for
in
the
articles
themselves.
I
start
from
the
premise
that
paragraph
24(4)(a)
must,
of
course,
be
interpreted
in
accordance
with
the
principles
of
the
common
law;
see
Bowater,
supra,
at
page
754.
It
should
be
apparent
from
the
preceding
analysis
that,
in
my
opinion,
this
would
inevitably
lead
one
towards
the
second
interpretation,
since,
at
common
law,
shareholder
rights
had
to
be
expressly
provided
for
in
the
shares
themselves.
If
the
Saskatchewan
legislature
intended
to
depart
from
this
principle,
it
could
have
stated
so
explicitly.
In
my
view,
paragraph
24(4)(a)
falls
far
short
of
providing
the
clear
expression
necessary
to
indicate
an
intent
to
provide
the
directors
of
a
corporation
with
a
power
which
they
did
not
otherwise
have
at
common
law.
I
note
that
this
interpretation
of
paragraph
24(4)(a)
appears
to
be
the
most
consistent
with
other
provisions
of
the
Act
as
well.
For
example,
section
27
provides
for
the
possibility
of
creating
different”
series"
within
a
class
of
shares,
which
may
themselves
be
structured
so
as
to
possess
different
rights.
In
contrast
to
its
treatment
of
classes
of
shares,
the
Act
expressly
provides
that
the
directors
of
a
corporation
may
be
given
the
discretion
to
determine
the
rights
attaching
to
these
series.
Subsection
27(1)
reads:
27.
(1)
The
articles
may
authorize
the
issue
of
any
class
of
shares
in
one
or
more
series
and
may
authorize
the
directors
to
fix
the
number
of
shares
in
and
to
determine
the
designation,
rights,
privileges,
restrictions
and
conditions
attaching
to
the
shares
of
each
series,
subject
to
the
limitations
set
out
in
the
articles.
It
is
significant
that,
even
when
the
Act
specifically
provides
that
the
directors
may
be
given
the
discretion
to
determine
the
rights
to
be
assigned
to
a
series,
this
discretion
is
not
unlimited;
see
subsections
27(2)-(4).
In
particular,
the
directors
may
not
assign
to
a
series
a
higher
priority
in
respect
of
dividends
or
return
of
capital
over
any
other
series
of
the
class
that
are
still
outstanding
(subsection
27(3)).
Thus,
even
though
under
the
Act
the
shareholders
can
give
the
directors
the
power
to
issue
series
within
a
class
and
assign
rights
to
those
series,
the
shareholders
may
not
agree
to
give
the
directors
the
discretion
to
interfere
with
their
right
to
dividends
or
a
return
of
capital
by
choosing
to
give
another
series
priority.
Why
would
the
legislature
find
it
necessary
to
protect
the
shareholders
by
restricting
the
directors'
discretion
in
this
manner?
In
my
view,
the
answer
lies
in
the
fact
that
the
rights
assigned
to
series,
unlike
classes
of
shares,
may
be
altered
without
amending
the
corporate
constitution.
As
Professor
Welling,
supra,
notes,
at
page
584,
this
distinction
leads
to
a
potential
for
abuse
of
power
by
the
directors:
The
result
is
clear
although,
from
the
point
of
view
of
shareholder
protection,
it
is
initially
astounding.
The
statute
requires
that
discrimination
between
different
classes
be
strictly
regulated
by
the
corporate
constitution,
subject
to
the
remedies
protecting
adherence
to
the
corporate
constitution
and
changeable
only
by
the
usual
shareholder
approvals.
Strangely,
discrimination
within
a
particular
class
need
only
be
premeditated
in
the
articles:
the
details
can
be
supplied
from
time
to:
time
by
ordinary
directors’
resolutions,
without
any
shareholder
participation
at
all.
Because
section
27
allows
the
shareholders
to
give
directors
the
power
to
discriminate
between
series
of
shares,
while
leaving
the
directors
with
the
ability
to
"supply
the
details”
of
this
discrimination
themselves
at
a
later
date,
the
legislature
apparently
found
it
necessary
to
limit
this
power,
by
preventing
the
directors
from
discriminating
in
certain
areas,
specifically
with
respect
to
priority
over
dividends.
This
attempt
at
protection
would
be
rendered
futile
if
it
were
permissible
for
shareholders
to
give
to
directors
the
same
power
to
discriminate
with
respect
to
priority
over
dividends
where
shareholder
classes
are
concerned,
through
the
use
of
a
discretionary
dividend
clause.
A
more
reasonable
interpretation
of
the
statute
is
that
it
contemplates
that
shareholders
will
be
protected
from
changes
being
made
to
the
rights
attached
to
different
classes
of
shares
by
virtue
of
the
fact
that
such
rights
may
only
be
amended
by
altering
the
corporate
constitution.
Paragraph
170(1)(c)
of
the
Saskatchewan
Business
Corporations
Act
provides
that:
170.
(1)
.
.
.
the
holders
of
shares
of
a
class
or
.
.
.
of
a
series
are
entitled
to
vote
separately
as
a
class
or
series
upon
a
proposal
to
amend
the
articles
to:
(c)
add,
change
or
remove
the
rights,
privileges,
restrictions
or
conditions
attached
to
the
shares
of
such
class
.
.
.
The
protection
afforded
by
section
170
for
dividend
rights
can
only
be
meaningful
if
the
mode
of
distribution
must
itself
be
set
out
in
the
articles
of
incorporation.
Otherwise,
the
section
can
effectively
be
circumvented
because
the
directors
will
have
the
power
to
change
each
class’
allocation
of
dividends
at
will,
without
the
need
for
a
shareholder
vote.
The
importance
of
subsection
170(1)
as
a
mechanism
for
protecting
shareholder
interests
is
evi-
denced
by
the
fact
that
each
class
of
shares
is
entitled
to
vote,
regardless
of
whether
the
shares
normally
carry
this
right
or
not
(subsection
170(3)).
I
also
find
the
use
of
the
discretionary
dividend
clause
in
the
present
case
to
be
inconsistent
with
the
requirement
of
the
Act
that
at
least
one
class
of
shares
must
be
entitled
"to
receive
any
dividend
declared
by
the
corporation"
(paragraph
24(3)(b)).
On
this
point,
I
agree
with
the
following
remarks
of
Professor
Boivin,
supra,
at
page
93:
Dans
l'hypothèse
où
Ie
capital
comporte
une
seule
catégorie
d'actions
et
que
ces
actions
sont
assorties
d’un
dividende
discrétionnaire,
elles
ne
confèrent,
à
notre
avis,
aucun
droit
à
un
dividende
quelconque,
ce
qui
n'a
rien
d'étonnant
puisque
c'est
précisément
à
l'objectif
visé.
Même
en
supposant
que
l'action
confère
un
droit
à
un
dividende,
ce
droit
ne
peut
s'interpréter
comme
celui
de
recevoir
"tout
dividende
déclaré".
In
essence,
the
argument
of
the
respondent
distills
down
to
a
single
point:
the
Saskatchewan
Business
Corporations
Act
does
not
appear
to
specifically
prohibit
the
use
of
a
discretionary
dividend
clause,
and
in
the
absence
of
such
explicit
prohibition,
the
parties
must
be
left
free
to
contract
at
will.
If
one
were
to
carry
this
argument
to
its
logical
conclusion,
there
would
be
nothing
to
prevent
shareholders
from
passing
a
"discretionary
voting”
clause,
giving
the
directors
the
power
to
exercise
all
of
their
votes
as
they
see
fit.
Indeed,
during
the
oral
argument,
counsel
for
the
respondent
appeared
to
suggest
that
this,
too,
would
be
a
permissible
allocation
of
power.
I
find
that
such
an
arrangement,
which
would
leave
the
directors
in
complete
control
of
the
corporation,
with
the
power
to
prolong
their
tenure
indefinitely,
to
be
completely
unacceptable
in
that
it
would
undermine
virtually
all
of
the
protection
afforded
to
shareholders
by
the
Act.
It
is
true,
of
course,
that
the
actions
of
the
directors
will
always
be
subject
to
the
qualification
that
they
are
acting
as
fiduciaries
for
the
corporation.
Thus,
in
theory,
it
is
always
open
for
a
shareholder
to
bring
a
suit
if
he
feels
the
directors
are
exercising
their
discretion
improperly.
In
reality,
however,
one
cannot
overlook
the
significant
burden
and
expense
that
this
remedy
entails.
In
my
view,
placing
the
onus
on
shareholders
to
bring
a
suit
to
vindicate
their
rights
is
an
inadequate
means
of
protecting
them
from
the
potential
for
abuse
created
by
the
presence
of
a
discretionary
dividend
clause.
If
this
protectionist
view
seems
somewhat
patronizing,
I
would
point
out
that
other
provisions
of
the
Saskatchewan
Business
Corporations
Act
provide,
in
a
similar
manner,
for
the
protection
of
shareholders
from
arrangements
to
which
they
might
otherwise
agree.
One
example
already
referred
to
is
section
27,
which
restricts
the
power
that
can
validly
be
allocated
to
directors
to
determine
the
rights
and
privileges
of
future
series
of
shares.
I
also
note
that
the
protection
of
the
individual
shareholder
was
one
of
the
major
driving
forces
behind
the
extensive
statutory
reform
that
took
place
in
Canadian
corporate
law
in
the
1970s;
see
Welling,
supra,
at
page
502.
The
Saskatchewan
Business
Corporations
Act
is
a
product
of
that
reform,
as
is
the
Canada
Business
Corporations
Act
upon
which
the
Saskatchewan
Business
Corporations
Act
is
modeled.
Corporate
law
has
not
yet
evolved
to
the
point
where
the
freedom
to
contract
at
any
cost
has
become
paramount
to
all
other
concerns.
The
need
for
shareholder
protection
from
abuse
of
the
discretionary
dividend
clause
becomes
all
the
more
apparent
when
one
considers
the
possibility
that
such
a
clause
could
be
inserted
in
the
articles
of
incorporation
of
a
large,
publicly-held
corporation.
I
recognize
that
in
this
case
we
are
dealing
with
a
closely-held
corporation,
where
there
has
been
no
allegation
of
a
breach
of
fiduciary
duty
by
the
directors,
but
the
Saskatchewan
Business
Corporations
Act
applies
to
large
and
small
corporations
equally.
One
rule
of
law
must
stand
for
both.
I
hasten
to
add
that,
in
my
view,
the
primary
reason
that
the
discretionary
dividend
clause
is
invalid
is
that
it
offends
the
principle
that
the
corporation
has
a
separate
legal
existence
from
the
shareholder.
Since
the
shareholders
of
closely-held
corporations
are
given
preferential
treatment,
such
as
limited
liability,
based
upon
the
notion
of
this
separation
between
corporation
and
shareholder,
it
is
not
unreasonable
for
the
state
to
require
them
to
respect
this
separation
by
structuring
their
corporation
accordingly.
Against
the
weight
of
these
arguments,
I
can
think
of
no
socially
useful
purpose,
and
counsel
for
the
respondent
could
point
to
none,
behind
the
employment
of
a
discretionary
dividend
clause.
The
only
apparent
purpose
of
such
a
clause
is
to
facilitate
tax-avoidance
through
"income-splitting",
which
does
little
to
persuade
me
of
the
need
to
allow
corporations
to
be
structured
in
this
manner;
see
Boivin,
supra,
at
page
106;
see
also
comment,
"
McClurg
v.
The
Queen:
The
Last
Bastion
for
Income-Splitting?”
(1986),
34
Canadian
Tax
Journal
404.
Having
found
that
the
discretionary
dividend
clause
used
in
the
articles
of
incorporation
of
Northland
Trucks
was
invalid,
it
remains
to
determine
how
the
money
distributed
pursuant
to
that
clause
should
be
allocated.
Since
the
directors
of
Northland
Trucks
must
be
taken
to
have
made
the
decision
that
the
declaration
of
the
amount
of
dividends
that
were
distributed
was
in
the
best
interests
of
the
corporation,
it
would
be
inappropriate
to
now
return
this
money
to
the
corporation.
The
proper
solution,
in
my
view,
is
to
redistribute
the
dividends
amongst
the
various
classes
of
shares.
As
previously
discussed,
in
the
absence
of
a
valid
differentiation
between
the
shares
to
the
contrary,
all
of
the
classes
will
share
in
the
dividend
equally.
In
the
present
case,
that
means
that
the
money
will
be
allocated
equally
to
the
shares
in
classes
A
and
B.
I
turn
then
to
a
consideration
of
the
income
tax
consequences
of
the
dividend
payments.
Income
Tax
Consequences
General
I
am
in
agreement
with
the
Chief
Justice
as
to
the
proper
approach
to
the
interpretation
of
the
Income
Tax
Act
generally,
and
subsection
56(2)
specifically,
as
well
as
the
necessity
of
ascertaining
the
true
nature
of
the
transaction
in
question.
With
deference,
however,
I
am
unable
to
agree
with
him
as
to
the
application
of
subsection
56(2)
in
the
present
case.
Our
differences
arise
as
a
result
of
the
interdependence
of
the
corporate
law
and
income
taxation
issues
in
this
case,
and
my
finding
that
the
discretionary
dividend
clause
is
invalid.
Any
tax
planning
technique
is
open
to
challenge
on
the
basis
that
the
underlying
legal
construct
is
invalid.
This
follows
from
the
fundamental
principle
of
taxation
law
that
the
actual
legal
result
of
a
transaction,
rather
than
its
form,
is
relevant
to
tax
liability.
In
Champ
v.
The
Queen,
[1983]
C.T.C.
1;
83
D.T.C.
5029
(F.C.T.D.),
for
example,
a
dividend
payment
was
found
to
be
invalid
in
law,
and
the
form
of
the
payment
was
disregarded
for
tax
purposes.
In
that
case,
the
taxpayer
and
his
wife
held
two-thirds
and
one-third
of
the
shares
of
the
corporation
respectively.
While
the
Articles
of
Association
of
the
company
specifically
stated
that
"dividends
may
be
declared
and
paid
according
to
.
.
.
the
number
of
shares
held”,
dividends
were
paid
to
only
one
class
of
shares,
which
were
held
exclusively
by
the
wife.
The
Court
found
that
the
taxpayer
diverted
his
pro
rata
share
of
the
dividends,
and
included
this
indirect
payment
in
his
income
by
way
of
subsection
56(2).
The
approach
adopted
by
the
Federal
Court
in
Champ
is
in
keeping
with
the
“ineffective
transaction"
test
for
denying
a
taxpayer
the
benefit
of
a
particular
transaction,
which
was
articulated
by
this
Court
in
Stubart
Investments
Ltd.
v.
The
Queen,
[1984]
1
S.C.R.
536;
[1984]
C.T.C.
294;
84
D.T.C.
6305.
In
the
present
case,
Mrs.
McClurg
received
a
dividend
payment
of
$10,000
on
the
basis
of
the
discretionary
dividend
clause
that
has
been
found
to
be
invalid.
Therefore,
the
taxpayer's
characterization
of
the
true
nature
of
the
payment
cannot
stand.
Instead,
the
analysis
must
proceed
on
the
basis
that
the
dividend
declared
in
each
of
the
three
years
in
question
should
have
been
allocated
equally
to
the
shares
in
classes
A
and
B.
Of
the
$10,000
dividend
declared,
then,
$8,000
was
payable
to
Mr.
McClurg,
and
only
$2,000
was
payable
to
Mrs.
McClurg.
Before
turning
to
the
specifics
of
the
application
of
subsection
56(2)
to
the
facts
at
hand,
it
is
necessary
to
comment
on
two
points
raised
by
the
Chief
Justice.
First,
he
states
that
a
dividend
payment
does
not
fall
within
the
scope
of
subsection
56(2).
I
agree
with
this
view
so
far
as
it
refers
to
the
typical
situation
where
the
dividend
payment
is
within
the
powers
of
the
corporation
and
the
shareholder
is
bona
fide
entitled
to
the
dividends.
It
must
be
emphasized,
however,
that
$8,000
of
the
dividend
payment
to
Mrs.
McClurg
was
not
a
bona
fide
dividend
payment,
but
a
receipt
of
dividend
income
otherwise
payable
to
her
husband.
As
was
the
case
in
Champ
v.
The
Queen,
supra,
a
payment
which
is
not
in
law
a
dividend
payment
cannot
serve
as
a
bar
to
the
application
of
subsection
56(2).
Secondly,
I
must
comment
on
the
relevance
of
Mrs.
McClurg's
contribution
to
the
business.
At
trial,
it
was
found
as
a
fact
that
Wilma
McClurg
contributed
to
the
establishment
and
operation
of
the
business.
The
Chief
Justice
considers
this
fact
to
be
of
relevance
to
the
resolution
of
the
matter
before
this
Court,
because
it
indicates
that
the
dividend
payment
was
not
the
product
of
a
blatant
tax-avoidance
scheme,
but
rather
a
benefit
conferred
for
adequate
consideration
in
the
context
of
a
legitimate
business
relationship.
In
other
words,
the
dividend
payment
can
be
justified
because
of
the
efforts
made
by
Mrs.
McClurg
on
behalf
of
the
company.
With
respect,
this
fact
is
irrelevant
to
the
issue
before
us.
To
relate
dividend
receipts
to
the
amount
of
effort
expended
by
the
recipient
on
behalf
of
the
payor
corporation
is
to
misconstrue
the
nature
of
a
dividend.
As
discussed
earlier,
a
dividend
is
received
by
virtue
of
ownership
of
the
capital
stock
of
a
corporation.
It
is
a
fundamental
principle
of
corporate
law
that
a
dividend
is
a
return
on
capital
which
attaches
to
a
share,
and
is
in
no
way
dependent
on
the
conduct
of
a
particular
shareholder.
In
the
present
case,
a
$10,000
dividend
was
declared
by
the
directors
of
Northland
Trucks
and
was
allocated
in
its
entirety
to
Mrs.
McClurg,
ostensibly
in
return
for
work
and
services
rendered
to
the
company.
Regardless
of
what
motivated
the
directors
to
allocate
the
dividends
to
Mrs.
McClurg,
if
she
were
somehow
bona
fide
entitled
to
the
dividends,
it
would
be
an
entitlement
based
solely
on
her
ownership
of
shares
of
the
corporation,
and
subsection
56(2)
would
not
apply.
In
other
words,
subsection
56(2)
clearly
is
inapplicable
to
a
transaction
wherein
a
shareholder
is
in
receipt
of
a
dividend
properly
allocated
to
his
or
her
shares.
Application
of
Subsection
56(2)
Turning
to
the
application
of
subsection
56(2)
to
the
instant
case,
I
find
it
useful
as
a
starting
point
to
break
the
provision
down
into
its
constituent
parts.
Such
an
analytical
framework
was
adopted
by
Cattanach,
J.
in
Murphy
v.
The
Queen,
[1980]
C.T.C.
386;
80
D.T.C.
6314
(F.C.T.D.),
where
he
stated,
at
389-90
(D.T.C.
6317-18):
To
fall
within
subsection
56(2)
each
essential
ingredient
to
taxability
in
the
hands
of
the
taxpayer
therein
specified
must
be
present.
Those
four
ingredients
are:
(1)
that
there
must
be
a
payment
or
transfer
of
property
to
a
person
other
than
the
taxpayer;
(2)
that
the
payment
or
transfer
is
pursuant
to
the
direction
of
or
with
the
concurrence
of
the
taxpayer;
(3)
that
the
payment
or
transfer
be
for
the
taxpayer's
own
benefit
or
for
the
benefit
of
some
other
person
on
whom
the
taxpayer
wished
to
have
the
benefit
conferred,
and
(4)
that
the
payment,
or
transfer
would
have
been
included
in
computing
the
taxpayers
income
if
it
had
been
received
by
him
instead
of
the
other
person.
It
must
be
determined,
then,
whether
these
four
elements
or
prerequisites
to
the
application
of
subsection
56(2)
are
present
in
the
transaction
at
hand.
With
regard
to
the
first
element,
the
term
“payment”
has
acquired
no
technical
meaning
in
the
Income
Tax
Act
and
is
to
be
interpreted
in
its
popular
sense;
see
Murphy,
supra,
at
page
392
(D.T.C.
6320).
Furthermore,"property"
is
defined
in
very
broad
terms
in
subsection
248(1)
of
the
Income
Tax
Act,
and
specifically
includes
money.
It
is
also
noteworthy
that
subsection
16(1),
the
predecessor
to
subsection
56(2),
originally
referred
to
a
transfer
of
"money,
rights
or
things”.
Therefore,
it
appears
that
the
payment
in
question
satisfies
the
first
prerequisite
to
the
operation
of
subsection
56(2).
This
is
confirmed
by
Champ
v.
The
Queen,
supra,
where
it
was
held
that
the
taxpayer
effected
a
"transfer
of
property”
by
directing
the
payment
of
dividends.
The
second
element
provides
that
the
payment
or
transfer
be
pursuant
to
the
direction
of
the
taxpayer
or
with
the
concurrence
of
the
taxpayer.
The
respondent
argued
that
the
payment
was
made
by
the
company,
a
legal
entity
separate
from
the
taxpayer,
and
to
the
extent
that
the
taxpayer
directed
or
concurred
in
the
payment
of
the
dividend,
this
was
done
in
his
capacity
as
a
director
of
the
corporation,
and
not
in
any
personal
capacity.
Under
subsection
56(2),
however,
it
is
sufficient
that
such
a
payment
be
made
with
the
concurrence
of
the
taxpayer.
The
facts
indicate
that
the
respondent,
in
his
capacity
as
a
shareholder,
did
not
object
to
the
distribution
of
dividends.
The
appellant
argued
that
Mr.
McClurg's
failure
to
object
to
the
payment
to
Mrs.
McClurg
constituted
implied
concurrence.
In
other
words,
since
Mr.
McClurg
did
not
demand
his
share
of
the
dividends,
he
implicitly
accepted
that
the
company
make
an
$8,000
payment
to
his
wife.
To
this
end,
the
appellant
relied
on
Bronfman,
A.
v.
M.N.R.,
[1965]
C.T.C.
378;
65
D.T.C.
5235
(Ex.
Ct.),
at
385
(D.T.C.
5239),
in
which
Dumoulin,
J.
held
that
the
"abstention
or
indifference”
of
shareholders
who
had
the
power
to
object
to
the
actions
of
directors
was
"tantamount
to
an
approval”
and
sufficient
to
invoke
subsection
16(1),
the
predecessor
to
subsection
56(2).
In
my
view,
an
individual
in
control
of
a
corporation
can
be
said
to
have
directed
a
payment
or
transfer
of
property
within
the
meaning
of
subsection
56(2)
by
exercising
that
control.
Furthermore,
even
if
one
accepts
the
contrary
view
that
the
taxpayer
did
not
direct
the
payment,
the
payment
nevertheless
was
made
with
the
concurrence
of
Mr.
McClurg
in
his
personal
capacity
as
a
shareholder
of
the
company.
Thus,
the
second
precondition
to
the
operation
of
subsection
56(2)
is
met.
The
third
precondition
requires
that
the
payment
be
for
the
benefit
of
the
taxpayer
or
recipient.
Since
Mrs.
McClurg
was
entitled
to
only
$2,000
in
dividends,
the
$8,000
portion
of
the
payment
representing
Mr.
McClurg's
dividend
entitlement
amounts
to
a
benefit
to
her
under
subsection
56(2).
In
addition,
Mr.
McClurg
himself
obtained
a
benefit
from
the
transaction
by
way
of
a
reduction
in
income
tax.
As
explained
by
Cattanach,
J.
in
Murphy
v.
The
Queen,
supra,
at
page
390
(D.T.C.
6318),
this
type
of
benefit
goes
to
the
very
purpose
of
subsection
56(2):
Subsection
56(2)
is
to
impute
receipt
of
income
to
the
taxpayer
that
was
diverted
at
his
instance
to
someone
else.
It
is
to
cover
cases
where
the
taxpayer
seeks
to
avoid
the
receipt
of
what
in
his
hands
would
be
income
by
arranging
to
transfer
that
amount
to
some
other
person
he
wishes
to
benefit
or
for
his
own
benefit
in
doing
so.
Apart
from
any
moral
satisfaction
the
practical
benefit
to
the
taxpayer
is
the
reduction
in
his
income
tax.
Finally,
it
is
obvious
that
the
$8,000
dividend
would
have
been
included
in
Mr.
McClurg’s
income
had
the
allocation
been
properly
made.
Therefore,
the
four
prerequisites
to
the
application
of
subsection
56(2)
have
been
met.
Since
$8,000
of
the
$10,000
in
dividends
attributed
to
Wilma
McClurg
on
her
class
B
shares
was
properly
attributable
to
Mr.
McClurg,
this
amount
should
be
included
in
the
computation
of
his
income.
Disposition
In
the
result,
I
would
allow
the
appeal
and
uphold
the
Minister's
reassessment.
Appeal
dismissed.
Email this Content