Citation: 2013 TCC 127
Date: 20130426
Docket: 2012-1687(IT)I
BETWEEN:
JUSTIN AHMAD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rip C.J.
[1]
The issue in this
appeal (Informal Procedure), the sixth appeal arising from the same
transaction,
is whether as a result of a reorganization of Tyco International Ltd.
("Tyco"), a corporation resident in Bermuda, Justin Ahmad, the
appellant, received a dividend in 2007. Mr. Ahmad claims he did not, the
Minister of National Revenue ("Minister") assessed his 2007 tax
return pursuant to subsection 52(2) of the Income Tax Act ("Act")
on the basis he received a dividend in kind, namely shares of two other Bermuda
resident corporations that immediately prior to the reorganization were wholly
owned by Tyco.
[2]
In 2006, Tyco, a
publicly traded company, had announced its intent to separate its businesses
into three independent public corporations. The businesses that Tyco carried on
included:
(a) providing electronic security, fire
and safety services and products, valves and controls and other industrial
products under the name Tyco International ("International");
(b) providing engineered electronic
components, network solutions and wireless systems under the name Tyco
Electronics ("Electronics"); and
(c) developing, manufacturing and
distributing of medical devices and supplies, diagnostic imaging agents and pharmaceuticals,
under the name Tyco Healthcare ("Healthcare").
[3]
According to the U.S.
Securities and Exchange Commission forms 10‑K, filed by Covidien
Ltd. ("Covidien") on December 13, 2007 and by Tyco Electronics
Ltd. ("Tycoelect") on December 18, 2007, Tyco transferred its
Healthcare business on June 29, 2007 to Covidien and its Electronics
business to Tycoelect, both corporations resident in Bermuda. Both Covidien and
Tycolect had been wholly‑owned subsidiaries of Tyco since Tyco's 2000
fiscal year and until June 29, 2007. During that time neither Covidien nor
Tycoelect had engaged in any significant business activity and had held minimal
assets.
[4]
Tyco transferred its
healthcare and electronic businesses to Covidien and Tycoelect, respectively, on
June 29, 2007 through a distribution of shares of these companies to its
shareholders. Shareholders of Tyco received one common share of Covidien and
one common share of Tycoelect for every four common shares of Tyco held at the
close of business on June 18, 2007. Immediately after the distribution of
the "spin‑off" shares every four shares of Tyco were converted
into one common share by way of a "reverse" stock split. This was, in
fact, a consolidation of shares; Tyco retained the international business. The
shares of all three corporations were publicly traded as of June 29, 2007.
[5]
The reorganization
affected the appellant in that before June 29, 2007 he owned 1,000 shares
of Tyco. As a result of the distribution of shares, he received 250 shares
of Covidien and 250 shares of Tycoelect; his 1,000 shares of Tyco were
consolidated into 250 shares of Tyco.
[6]
Mr. Ahmad was
assessed on the basis the shares of Covidien and Tycoelect that he received on
the reorganization had a value of CDN$22,058 and that these shares were
dividends in kind.
[7]
The appellant submits
that he received no economic gain by way of dividend or otherwise as a result
of the Tyco reorganization and the receipt of shares of Covidien and Tycoelect.
Further, TD Waterhouse, his stockbroker, was wrong in sending him a T5
slip (Statement of Investment Income) for 2007 reporting a dividend resulting
from the Tyco reorganization. Mr. Ahmad claims that he is being taxed on
an amount that is not income to him "but simply what I already owned but
in a different form". The shares he owned in each of the three
corporations on June 29 "represented the same ownership interest in
exactly the same businesses as did my original 1,000 Tyco shares on
June 28, 2007". He insisted he incurred no economic gain and ought
not be taxed. In fact, the closing price of Tyco shares on June 29, 2007
was US $33.79 or US $33,790 for 1,000 shares and the closing
prices on the first day of trading for Covidien, Tycoelect and Tyco, on
July 2, 2007, aggregated US $34,185 for Mr. Ahmad's shares.
[8]
In short,
Mr. Ahmad argues that prior to the Tyco reorganization "my healthcare
and electronics assets of US$20,538 (Tyco old shares) came under the name
'Tyco', and after the reorganization the same assets were transferred to Covidien
and Tycoelect. It is basically taking my asset, changing its name and giving it
back to me as a dividend."
[9]
The appellant argues
that what he received was not a dividend. He cites dictionary definitions of
the word "dividend"
as well as CRA Interpretation Bulletin IT‑67R3 to the effect that a
dividend is payable to shareholders from carryings of profits available for
distribution. In his view the Covidien and Tycoelect shares were not from
earnings or profits or from capital gains.
[10]
In Special Risk
Holdings Inc. v. R.,
the Federal Court Trial Division agreed that a "dividend" is
"any distribution by a corporation of its income or capital gains made pro rata
among shareholders" and that dividends in kind are specifically
contemplated by subsection 52(2) of the Act. I agree with Hershfield J.
that "Where the source of the receipt, of anything of value, is from a
corporation, and it is paid in respect of a participation right of shares held
in that corporation by the recipient, it is, by its nature, a dividend" .
[11]
The appellant also referred
to Tyco's application to the Ontario Securities Commission ("OSC")
for exemptive relief in accordance with the Mutual Reliance Review System
("MRRS"). The MRRS decision was that Tyco's Canadian shareholders who
receive Covidien and Tycolect shares as a dividend would have the same rights
as U.S. resident shareholders of Tyco receiving these shares which, according
to Mr. Ahmad, meant that the dividend would not be taxable.
[12]
The exemption granted
by the OSC was not that the distribution of the "spin‑off"
shares would be exempt from tax. As my colleague V. Miller J. stated
in Marshall, the OSC does not have the
jurisdiction to make this type of decision. Rather, according to the MRRS decision,
the OSC and the other provincial securities regulators agreed that Tyco was
exempted from the prospectus and registration requirements of their legislation
in respect of the proposed distribution of the spin-off shares. Also, I note as
did V. Miller J., that in its application to the provincial securities
regulators Tyco stated that its distribution of the spin-off shares "to
holders of common shares of Tyco resident in Canada" would be "by way
of a pro rata dividend in kind".
[13]
I agree with
Mr. Ahmad and his representative that Mr. Ahmad incurred no economic
benefit as a result of the Tyco reorganization. However, according to the Act,
he did receive dividends in kind from Tyco and the dividends had a value. As
Hershfield J. explained in Hamley at paragraphs 8 and 16:
8. The appellant argued that she did not receive an
amount of money, per se, and accordingly she had not
received an income amount or dividend, at least as she would understand the
idea of what income or a dividend was. While not unsophisticated, she laboured
under a misconception of how the Income Tax Act
defines income. Income does not have to be money; it is the receipt of anything
that derives from certain sources, that has value, and the amount of the
receipt is the value of the thing received.
…
16. … The Act does not as
a starting point work on the theory that a simple change in form of a holding
is not a taxable event. Indeed, it works on the theory that every change in
holdings that gives you something different than you had before is a taxable
event, even if your net economic position has not changed and you have not
received actual dollars to suggest that you really received something of value.
[14]
Mr. Ahmad's
representative relied on the reasons for judgment in Capancini v. The Queen
where, on similar facts, the judge allowed the appeal. The judge in Capancini
relied on the reasons for judgment in Morasse v. The Queen.
[15]
In Morasse the
Minister assessed to include investment income based on the value of a stock
distribution. Morasse owned Telmex shares, which traded on the New York Stock
Exchange, the underlying shares of which traded on the Mexican stock exchange.
The "spin‑off" transaction resulted in each holder of Telmex
shares becoming owner of an equal number of Movil shares of the corresponding
class. Morasse's T5 Form for income tax indicated the receipt of foreign
investment income in the amount of the value of the Movil shares. The taxpayer
argued, among other things, that the receipt of the Movil shares was not a
stock dividend on income accrued but a non taxable capital receipt.
[16]
The judge agreed,
recognizing that the Movil shares would not have been issued but for Telmex's
decision to spin‑off its shares. The Movil shares, he concluded, were not
received as dividends nor were they received in lieu of payment of dividends on
the Telmex shares. The equity among the two companies remained the same; there
was no distribution of profit. There was a recognition of a shift of capital
from Telmex to Movil. There was a stock distribution but it was as a result of an
overall restructuring of Telmex, a restructuring in which Movil shares were
never owned by Telmex. There was a shift of value from the Telmex shares to the
Movil shares; there was no disposition to constitute a capital gain.
[17]
The reasons for
judgment in Morasse, at paragraph 3, include a description of the "spin‑off"of
Telmex, pursuant to a procedure particular to Mexico called a
"escisión":
...
an existing company is divided, creating a new company to which specified
assets and liabilities are allocated. This procedure differs from the procedure
by which a spin‑off is typically conducted in the United States, where a parent company distributes to its shareholders shares of a
subsidiary. …
The "spin‑off" of Tyco shares is a traditional
"spin‑off" conducted in the United States.
[18]
In the appeal at bar
Tyco distributed to its shareholders shares of its two subsidiaries. The Judge
in Capancini unfortunately may not have been presented with any evidence
that Covidien and Tycoelect had been subsidiaries of Tyco. The SEC Forms 10‑K
of Covidien and Tycoelect probably were not before him. As previously stated, Tyco
had owned the shares of Covidien and Tycoelect since its 2000 fiscal year. That
Covidien and Tycoelect became public companies on June 29, 2007 does not
mean they did not exist as non public companies before that time, as
Mr. Ahmad's representative appeared to insist. These corporations did
exist before 2007.
[19]
Tyco owned property,
shares in Covidien and Tycoelect, and it distributed these properties to its
shareholders pro rata to their interest as a dividend, the same as
if Tyco had distributed widgets to its shareholders. In both cases, Tyco,
rather than distributing a dividend in money, distributed a dividend in kind,
property it had acquired with profits it had earned and the distributions of
the shares were distributions from profits.
[20]
I have found no
evidence that TD Waterhouse incorrectly calculated the amount of the dividends
in kind received by Mr. Ahmad as he alleges.
[21]
Unfortunately, Tyco did
not avail itself of section 86.1 of the Act to categorize the
distribution of the Covidien and Tycoelect shares as an "eligible
distribution" that would have had the effect of not including the amounts
of the dividends in the appellant's income.
[22]
The appeal is
dismissed.
Signed at Ottawa, Canada, this 26th day of April 2013.
"Gerald J. Rip"
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