MACLEAN,
P.:—This
is
an
appeal
from
a
decision
of
the
Minister
of
National
Revenue,
affirming
an
assessment
made
for
the
years
1927
and
1928,
against
the
appellant,
a
shareholder
of
a
personal
corporation,
under
the
Income
War
Tax
Act,
R.S.C.,
1927,
c.
97.
The
appeal
was
heard
upon
the
pleadings
and
upon
an
agreed
statement
of
facts.
It
may
be
convenient
first,
to
refer
to
the
provisions
of
the
Act
pertinent
to
the
issue
involved
in
this
appeal.
The
statute
defines
a
personal
corporation
as
follows
:—
"S.
2
(i)
Personal
corporation
means
a
corporation
or
joint
stock
company
(no
matter
when
or
where
created)
controlled
directly
or
indirectly
by
one
person,
who
resides
in
Canada,
or
by
one
such
person
and
his
wife
or
any
member
of
his
family,
or
by
any
combination
of
them,
or
by
any
other
person
or
corporation
on
his
or
their
behalf,
whether
through
holding
a
majority
of
the
stock
of
such
corporation,
or
in
any
other
manner
whatsoever,
the
gross
revenue
of
which
is
to
the
extent
of
one
quarter
or
more
derived
from
one
or
more
of
the
following
sources
namely:—
"‘(i)
From
the
ownership
of
or
the
trading
or
dealing
in
bonds,
stocks
or
share,
debentures,
mortgages,
hypothees,
bills,
notes
or
other
similar
property
;
"
(ii)
From
the
lending
of
money
with
or
without
security,
or
by
way
of
rent,
annuity,
royalty,
interest
or
dividend,
or
(iii)
From
or
by
virtue
of
any
right,
title
or
interest
in
or
to
any
estate
of
trust;’’
The
manner
of
assessing
the
income
of
a
personal
corporation
is
defined
by
s.
21
of
the
Act,
which
in
part
is
as
follows
:—
"21.
The
income
of
a
personal
corporation,
in
lieu
of
being
assessed
the
tax
prescribed
by
section
nine
of
this
Act,
shall
on
the
last
day
of
each
year
be
deemed
to
be
distributed
as
a
dividend
to
the
shareholders
thereof
and
shall
in
their
hands
constitute
taxable
income
for
each
year
in
the
proportion
hereinafter
mentioned,
whether
actually
distributed.
by
way
of
dividend
or
not.
(2)
Each
shareholder’s
taxable
portion
of
the
income
of
the
corporation
deemed
to
be
distributed
to
him
as
above
provided
for,
shall
be
such
percentage
of
the
income
of
the
corporation,
as
the
value
of
all
property
transferred
or
loaned
by
such
shareholder
or
his
predecessor
in
title
to
the
corporation
is
of
the
total
value
of
all
property
of
the
corporation
acquired
from
the
shareholders.
"
(3)
The
value
of
the
property
transferred
by
each
shareholder
or
his
predecessor
in
title
shall
be
the
fair
value
as
at
the
date
of
the
transfer
of
such
property
to
the
corporation,
and
the
total
value
of
the
property
of
the
corporation
acquired
from
its
shareholders
shall,
for
the
purpose
of
determining
the
percentage
referred
to
in
the
last
preceding
subsection,
be
taken
as
at
the
date
of
acquisition
thereof
by
the
corporation;
and
in
ascertaining
values
under
this
subsection,
regard.
shall
be
had
to
all
the
facts
and
circumstances,
and
the
decision
of
the
Minister
in
that
regard
shall
be
final
and
conclusive.
‘
’
Mr.
Elliott,
for
the
respondent:
suggested
that
s.
21
of
the
Act
was
enacted
for
the
express
purpose
of
circumventing
those
who
might
be
inclined
to
escape
income
tax,
by
the
transfer
or
loan
of
securities
of
one
kind
or
another,
to
a
private
investment
corporation,
in
exchange
for
shares
in
the
corporation,
and,
who,
controlling
such
a
corporation
might
be
willing
to
accept
as
annual
income,
interest
or
dividend
therefrom,
a
return
below
what
was
normal
in
the
ordinary
practise
of
investors,
assigning
undistributed
profits
or
income
to
some
reserve
account,
in
order
to
minimise
their
income
which
ordinarily
would
be
taxable.
With
this
the
appellant’s
counsel,
Mr.
Montgomery,
agreed.
I
am
not
of
course
accepting
this
statement
of
counsel
as
inter-
pretative
of
this
provision
of
the
Act,
though
I
must
say
that
the
suggested
explanation
of
the
origin
of
this
statutory
provision
respecting
personal
corporations,
seems
quite
probable
if
not
obvious.
A
personal
corporation
is
distinguishable
from
the
ordinary
corporation
or
joint
stock
company
assessable
under
s.
9,
ss.
2
of
the
Act;
in
respect
of
the
former
corporation
special
statutory
provisions
are
enacted;
its
control
must
be
in
the
hands
of
a
specified
class,
and
its
business
activities
are
limited;
and
special
provisions
are
enacted
prescribing
how
the
income
of
such
a
corporation
is
to
be
assessed,
and
against
whom.
By
s.
9
of
this
Act,
ordinary
corporations
or
joint
stock
companies
shall
pay
income
tax
at
the
rate
and
subject
to
the
exemptions
set
forth
in
the
First
Schedule
of
this
Act.
The
Dunkeld
Securities
Company
is
a
company
incorporated
in
the
province
of
Quebec
and
carrying
on
business
in
Canada,
and
it
is
agreed
between
the
parties
that
this
company
is
a
personal
corporation
within
the
meaning
of
s.
21
of
the
Income
War
Tax
Act.
The
appellant
is
the
holder
of
7,850
shares
out
of
an
authorized
issue
of
10,000
shares,
the
balance,
with
the
exception
of
250
shares,
being
held
by
members
of
his
family.
The
income
of
Dunkeld
Securities
Company,
for
1927,
was
$93,154.09
of
which
$53,250
was
interest
derived
from
tax
free
bonds
of
the
Dominion
of
Canada.
In
1928,
the
income
of
the
company
was
$107,783.85,
of.
which
$54,901.52
was
interest
derived
from
tax
free
bonds
of
the
Dominion
of
Canada.
The
appellant’s
proportion
of
interest
in
the
income
of
the
company
derived
from
the
Dominion
of
Canada
tax
free
bonds,
under
s.
21
of
the
Act,
would
be
that
fraction
of
the
said
income
that
7,850
shares
is
of
10,000
shares;
it
is
not
necessary
to
state
the
result
of
a
calculation
upon
that
basis.
The
appellant
was
assessed
upon
that
portion
of
the
income
of
the
company
which
was
deemed
to
have
been
distributed
to
him
in
the
years
mentioned,
and
no
deduction
was
allowed
in
réspect
of
that
portion
of
such
income
received
by
the
company
from
the
Dominion
of
Canada
tax
free
bonds.
The
respondent
claims
that
the
full
amount
deemed
to
have
been
distributed
to
the
appellant,
was
received
by
his
1
"as
dividend’’,
and
as
such
was
liable
to
income
tax.
The
appellant
claims
he
is
not
liable
to
assessment
upon
that
portion
of
the
income
of
the
company,
deemed
to
be
distributed
to
him,
which
was
derived
from
Dominion
of
Canada
tax
free
bonds.
The
question
for
decision
therefore
is
whether
income
of
a
personal
corporation
derived
from
Dominion
of
Canada
tax
free
bonds
and
deemed
to
be
distributed
to
a
shareholder,
is
subject
to
income
tax.
As
I
have
already
stated,
for
the
purposes
of
assessment
under
the
Income
War
Tax
Act,
there
is
a
distinction
between
corporations
and
joint
stock
companies,
and
a
personal
corporation.
The
former
is
assessable
and
taxable
in
the
manner
prescribed
by
section
nine
of
the
Act.
See.
21
enacts
that
the
income
of
a
personal
corporation
"‘in
lieu
of
being
assessed
the
tax
prescribed
by
section
nine
of
this
Act’’,
shall
be
deemed
to
be
distributed
as
a
dividend
to
the
shareholders
thereof,
and
shall
in
their
hands
constitute
taxable
income,
whether
actually
distributed
by
way
of
dividend
or
not.
The
evident
purpose
of
this
section
of
the
Act
was
to
ignore
the
personal
corporation
altogether
and
to
assess
the
company’s
income
as
if
in
the
hands
of
the
shareholders,
according
to
their
several
interests.
In
so
far
as
assessable
income
.was
concerned,
the
Dunkeld
Securities
Company
at
the
end
of
the
calendar
year
possessed
no
income;
it
was
deemed
to
have
been
distributed
among
its
shareholders,
whether
in
fact
it
was
actually
distributed
by
way
of
dividend
or
not;
the
liability
to
assessment
was
legislatively'
transferred
from
the
company
to
its
shareholders.
The
assessment
was
then
to
be
made
upon
that
constructive
distribution,
designated
as
a
dividend.
I
do
not
think
any
special
significance
is,
or
was
intended,
to
be
attached
to
the
word
^dividend”,
it
might
as
well
have
been
"‘income’’.
It
is
merely
descriptive
of
the
company’s
income
deemed
to
be
distributed
to
shareholders,
and
was
not
intended
to
mean
that
the
amounts
distributed,
however
denominated,
were
necessarily
taxable
dividends
or
income.
The
total
income
of
the
company
was
deemed
to
be
distributed
to
shareholders
there
to
be
assessed
and
taxed
as
income
according
to
the
provisions
of
the
Act;
that
I
think
is
what
the
language
of
sec.
21
means
and
what
it
was
intended
to
mean.
The
word
dividend
here
appears
to
be
surplusage
as
the
section
would
seem
to
be
as
complete
and
effective
without
the
word
as
with
it.
Interest
derived
from
a
Dominion
of
Canada
tax
free
bond
is
I
apprehend
a
dividend,
but
is
not
a
taxable
dividend,
in
the
hands
of
the
recipient.
Income,
under
the
Act
does
not
necessarily
mean
‘‘taxable
income”.
Sec.
3
defines
what
is
‘‘income’’,
and
that
includes
interest
received
from
Dominion
of
Canada
tax
free
bonds,
but
such
income
is
exempted
from
taxation
by
sec.
4
of
the
Act,
and
is
not
therefore
taxable
income.
Such
income
would
not
be
taxable
in
the
hands
of
a
personal
corporation,
even
if
by
it
received
and
retained;
there
is
nothing
in
the
statute
to
indicate
that
this
portion
of
the
company’s
income
was
intended
to
be
taxable
in
the
hands
of
the
shareholder
to
whom
it
is
deemed
to
have
been
transferred.
That
view
would
accomplish
the
purpose
of
the
Act
as
suggested
by
counsel,
which
was
not,
so
far
as
I
can
see,
designed
to
make
taxable,
income
derived
from
tax
free
bonds.
The
purpose
of
the
legislation
was,
for
income
tax
purposes,
to
transfer
to
shareholders
all
the
income
of
the
personal
corporation,
so
that
for
such
purposes,
the
situation
would
be
the
same
as
if
there
never
had
been
any
transfer
of
securities
to
the
corporation
by
the
shareholders,
and
as
if
the
personal
corporation
had
never
existed,
and
in
which
circumstances
the
amounts
received
as
interest
from
the
Dominion
of
Canada
bonds
in
question
would
not
be
taxable,
because
by
statute
they
were
exempt
from
the
income
tax.
Further,
subsec.
2
of
sec.
21
seems,
by
implication
at
least,
to
contemplate
that
not
all
the
income
received
by
the
company
and
deemed
to
be
distributed
to
the
shareholder
was
to
be
taxable,
because
it
expressly
declares
that
‘‘each
shareholder’s
taxable
portion
of
the
income
of
the
corporation
deemed
to
be
distributed
to
him’’,
shall
be
ascertained
in
the
manner
prescribed
by
this
subsection.
This,
I
think,
implies
that
it
was
only
the
taxable
portion
of
the
corporation’s
income
deemed
to
be
distributed
to
the
shareholder
that
was
to
be
ascertained
in
the
manner
prescribed,
and
for
the
portion
that
was
non-taxable
no
method
of
ascertainment
is
prescribed,
as
none
was
necessary.
I
think
the
proper
view
of
sec.
21
of
the
Act
is,
that
it
was
the
purpose
and
intention
of
the
legislature
to
ignore
the
corporation
altogether,
so
far
as
income
taxation
was
concerned,
and
to
assess
the
shareholder
upon
the
company’s
income
according
to
their
several
interests,
and
to
grant
to
the
shareholders
of
personal
corporations
any
statutory
exemptions
or
deductions
which
ordinarily
the
corporation,
or
the
shareholder
itself,
would
be
entitled
to.
This
interpretation
of
sec.
21,
would,
I
think,
secure
the
attainment
of
the
purpose
and
intention
of
the
statute.
I*am
therefore
of
the
opinion
that
the
appeal
must
be
allowed
and
costs
will
follow
the
event.
Judgment
accordingly.
Email this Content