The Queen v. Kieboom, 92 DTC 6382, [1992] 2 CTC 59 (FCA)

Linden, J.A.:—This is an appeal by the Minister and a cross-appeal by the taxpayer from a decision of the Trial Division of this court concerning certain transactions in the taxation years 1981 and 1982 for which reassessments were issued. The main legal issues are whether there has been a conferral of a benefit by the taxpayer under paragraph 245(2)(c) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") and whether there should be a spousal attribution of certain dividend and other income under subsection 74(1). A subsidiary issue involves a consideration of subsection 73(5).

There is no dispute as to the facts. Albert Kieboom (the taxpayer) carried on a business of selling carpets in Red Deer, Alberta, through his company, Carpet Colour Centre (Red Deer) Ltd., which was incorporated on May 3, 1976. Mr. Kieboom acquired nine common shares at incorporation and his wife, Adriana Kieboom, acquired one common share. Mr. Kieboom thus owned 90 per cent of the equity of the company, while his wife owned 10 per cent. Mr. and Mrs. Kieboom were the sole directors and shareholders.

In late 1979, additional class "A" non voting shares were created and on February 12, 1980, Adriana, Mr. Kieboom's wife, purchased eight of these shares. The class “A” common shares were equal in equity to the original common shares. Mrs. Kieboom purchased her eight shares for $1 each, a sum which was well below market value. This divided the equity of the company equally between the taxpayer, who still held his original nine shares, and his wife, who held nine shares (one common and eight class "A" common).

At a further meeting on March 1, 1981, the company, pursuant to the decision of its directors, the taxpayer and his wife, issued eight further class "A" shares to each of their three children for $1 each, which was again below market value. The fair market value of the shares at the time was $6,800 each.

As a result of these two transactions, the taxpayer's interest in his company fell first from 90 per cent to 50 per cent, and then from 50 per cent to 21.4 per cent. The second transaction reduced his wife's interest from 50 per cent to 21.4 per cent. This transaction also gave the three children 19 per cent of the equity of the company each. The transactions are illustrated by the charts below:

1. At Incorporation

2. After the Meeting of February 12, 1980

Alternately, the transactions can be considered in terms of the effect which they had on the equity of the company:

1. At Incorporation

2. After the Meeting of February 12, 1980

In 1982, the company declared and paid a dividend of $4,000 per common share and $3,750 per Class "A" common share.

The Minister reassessed the taxpayer for both the 1981 and the 1982 taxation years. The taxpayer was reassessed for 1981 in two respects. Firstly, the Minister stated that the issuance of common shares to the children by the company constituted a disposition pursuant to paragraph 245(2)(c) and subsection 69(1) of the Income Tax Act. The taxpayer and his wife were both deemed to have received the proceeds of disposition at fair market value.

Secondly, the Minister also reassessed the taxpayer in 1981 on the grounds that the subsection 74(1) attribution rules applied to the issuance of snares to Mrs. Kieboom. Under section 74, income on property transferred between spouses is attributed to the transferor spouse. The definition of income for the purposes of this section includes capital gain. Thus, 80 per cent of the capital gain deemed to have been received by Mrs. Kieboom by virtue of her deemed disposition to the children as described in the paragraph above was attributed to the taxpayer, according to section 74.

The Minister's view that there had been a section 74 spousal transfer led to a reassessment of the taxpayer in 1982 stating that Mr. Kieboom was required to include in his income any income which his wife received from the Class "A" shares. As was recounted in the facts above, dividends on the Class "A" shares were issued in 1982. Thus, the reassessment included the sum of $40,500 in the income of the taxpayer, as this was the amount of money received in dividends by Mrs. Kieboom in respect of her class "A" common shares in 1982.

The issue before us is whether these reassessments are correct. The Tax Court decided that paragraph 245(2)(c) applied to the conferral of the benefit, but that there should not be attribution under subsection 74(1). On appeal to the Trial Division of this Court, the Court essentially agreed. The Minister appealed the decision of the Trial Division as to the attribution under subsection 74(1) and there is a cross-appeal by the taxpayer as to whether there was any conferral of a benefit under paragraph 245(2)(c). I shall deal with the main issues, Starting with the question of the conferral of a benefit under paragraph 245(2)(c), then with the matter of attribution under subsection 74(1) and finally under subsection 73(5).

1. Was there a benefit conferred by the taxpayer?

The first issue is whether the shares acquired by the children were a benefit conferred by the taxpayer so as to fall within paragraph 245(2)(c), which reads:

(2)Where the result of one or more sales, exchanges, declarations of trust or other transactions of any kind whatever is that a person confers a benefit on a taxpayer, that person shall be deemed to have made a payment to the taxpayer equal to the amount of the benefit conferred notwithstanding the form or legal effect of the transactions or that one or more other persons were also parties thereto; and whether or not there was an intention to avoid or evade taxes under this Act, the payment shall, depending on the circumstances, be

(c) deemed to be a disposition by way of gift.

It is not disputed that the acquisition of the shares at less than the market value was a benefit to the children, but it is contended that it was the corporation, not the taxpayer, which did the conferring. This is inaccurate. Although it is true that it was the corporation which actually issued the shares, it cannot be said that the benefit was conferred by the corporation. By the issuance of these additional shares, the value of the shares held by the taxpayer was diminished. The amount of this decrease in value was, in effect, given to the new shareholders at the nominal purchase price of the shares. The fact that this was done by the taxpayer directing the company he controlled to issue new shares to the recipients, rather than issuing new shares to himself and then giving them to his family, made no difference at all. The result was the same. A benefit was conferred on the children by the taxpayer. While this court respects fully the corporate forms used in various transactions, Parliament directs on occasion that these forms be ignored. In this case, the express wording of the Act requires that the forms used be disregarded for purposes of the section. The section stipulates that” notwithstanding the form or legal effect of the transactions or that one or more other persons were also parties thereto”, if the result is a benefit conferred by one person to another, the amount is deemed to be a payment which is a“ disposition by way of gift”.

Here, the taxpayer has arranged for his company to issue shares to his children in such a way that the value of his own and his wife's shares was reduced and an interest of corresponding value was created in his children. It was undoubtedly hoped that this indirect conferral, using the corporate form, would reduce Mr. Kieboom's tax burden. However, the clear words of the statute require that the Court ignore the "form and legal effect" of the conferral. There is no need to invoke the common law principles of lifting the corporate veil. The statute clearly directs that the veil must be lifted in this instance. The trial judge recognized this when he stated:

The wording of the section states notwithstanding the form or legal effect of the transaction.” This would suggest that irrespective of the form of the transaction, the Minister will examine the substance of the transaction.

This view is consistent with that of the Exchequer Court in M.N.R. v. Dufresne, [1967] C.T.C. 153, 67 D.T.C. 5105. Although the Exchequer Court case dealt with an issue of gift tax under the old subsection 137(2), the wording in this section is almost identical to that in paragraph 245(2)(c). President Jackett, addressing a similar fact situation, expressed the law as follows:

The sequence of events bears all the earmarks of a series of company transactions that had been arranged in advance by the major shareholder and father, after taking appropriate professional advice, with a view to achieving the results of increasing the children's proportions in the ownership of the stock of the company. Moreover, the benefit, if it was one, was an increase in the proportions of the children almost entirely at the expense of a decrease in the respondent's.

There is no doubt in my mind that, if the result of the transaction was a benefit to the children, it was conferred on them by the respondent.

With respect, I agree with this statement of the law and, in my view, the fact of the repeal of the gift tax should make no difference to the reasoning of the Court on this issue. See also Applebaum v. M.N.R. (1971), Tax A.B.C. 49, 71 D.T.C. 371; Levine v. M.N.R., [1973] C.T.C. 219, 73 D.T.C. 5182.

The trial judge correctly found that paragraph 245(2)(c) is a characterizing provision, not a charging provision. It is not persuasive to argue that it is a charging provision which does not end up charging. The Courts are obligated to give some meaning to the words of parliament, where it can be fairly done, and to avoid rendering parliamentary language meaningless. The effect of paragraph 245(2)(c) is to characterize the benefit as a deemed disposition, which is deemed to occur at fair market value under subparagraph 69(1)(b)(ii). This subparagraph provides that if a taxpayer disposes of anything by way of a gift inter vivos at less than fair market value, the taxpayer is "deemed to have received the proceeds of disposition therefore equal to that fair market value”.

This interpretation of paragraph 245(2)(c) reflects the aim of the Minister of Finance, as expressed in the White Paper which preceded the enactment of these tax reforms which was tabled in the House of Commons on November 7, 1969. In that document it was made clear that gifts, which used to be taxed as such, would henceforth be taxed as if the donor had sold the asset for its fair market value and then made a gift of the proceeds. In addition, this interpretation is in harmony with Interpretation Bulletin 453 which, although not binding on this Court, is, according to the decision of Mr. Justice Dickson,"entitled to weight and can be an important factor in the case of a doubt about the meaning of the legislation." (Nowegijick v. The Queen, [1983] 1 S.C.R. 29, [1983] C.T.C. 20, 83 D.T.C. 5041; The Queen v. Fries, [1989] 1 C.T.C. 471, 89 D.T.C. 5240, at page 474 (D.T.C. 5242) per Urie J.A.; and Vaillancourt v. M.N.R., [1991] 2 C.T.C. 42, 91 D.T.C. 5352.

As the trial judge explained:

A taxpayer cannot give away an interest in property at less than fair market value Without attracting taxation. The rationale behind this principle is to capture transactions which are designed to transfer ownership without attracting tax consequences.

I agree with that conclusion. Unlike McClurg v. M.N.R., [1990] 3 S.C.R. 1020, [1991] 1 C.T.C. 169, 91 D.T.C. 5001, here there was no statutory language using corporate vocabulary, only general language. Here there was clearly in the issuance of shares to the children a benefit conferred such as meets the description in susbsection 245(2) of "transactions . . .which confer a benefit.” These transfers to the children are thus subject to the application of subsection 69(1).

2. Was there a transfer of property so as to engage the attribution provisions?

The second issue is whether the spousal attribution rules apply to income derived from the property given to the wife, including income from the deemed disposition from the transaction which conferred the benefit of a portion of Mr. and Mrs. Kieboom's interest in the company to the children. Subsection 74(1) is the governing provision and it states:

74. (1) Where a person has on or after August 1, 1917, transferred property either directly or indirectly by means of a trust or by any other means whatever to his spouse, or to a person who has since become his spouse, any income or loss, as the case may be, for a taxation year from the property or from property substituted therefore shall, during the lifetime of the transferor while he is resident in Canada and the transferee is his spouse, be deemed to be income or a loss, as the case may be, of the transferor and not of the transferee.

In my view, the phrase "transfer of property" is used in this provision in a rather broad sense. Both of the nouns in the phrase are general and nontechnical. As for the word transfer, Lord Justice James in Gathercole v. Smith (1880-81), 17 Ch. D. 1 stated at page 7 that the noun transfer was "one of the widest terms which can be used.” Lord Justice Lush stated that the word

President Thorson, relying on the above definitions in Estate of David Fasken v. M.N.R., [1948] C.T.C. 265, 49 D.T.C. 491, at page 279 (D.T.C. 497) stated:

The word "transfer" is not a term of art and has not a technical meaning. It is not necessary to a transfer of property from a husband to his wife that it should be made in any particular form or that it should be made directly. All that is required is that the husband should so deal with the property as to divest himself of it and vest it in his wife, that is to say, pass the property from himself to her. The means by which he accomplishes this result, whether direct or circuitous, may properly be called a transfer.

A gift is a transfer, therefore, as was made clear by Mr. Justice Heald (as he then was) in The Queen v. Zandstra, [1974] C.T.C. 503, 74 D.T.C. 6416, at page 508 (D.T.C. 6419). (See also The Queen v. McBurney, [1985] 2 C.T.C. 214, 85 D.T.C. 5433, at page 218 (D.T.C. 5435) and Commissioner of Taxation of the Commonwealth v. McPhail (1967-8), 41 A.L.J.R. 346.

As for the word " property", it too has been widely interpreted. The Income Tax Act, subsection 248(1) defines property as". . .property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing includes (a) a right of any kind whatever, a share or a chose in action. . . .”. Lord Langdale once stated that the word property is the “most comprehensive of all the terms which can be used inasmuch as it is indicative and descriptive of every possible interest which the party can have." (See Jones v. Skinner (1836), 5 L.J. (N.S.) ch. 87, at page 90; see also Re Liness (1919), 46 O.L.R. 320, at page 322; Estate of Fasken, supra, at page 277 (D.T.C. 496); and Vaillancourt v. M.N.R., supra.

In this case, therefore, the taxpayer transferred property to his wife, that is, he gave a portion of his ownership of the equity in his company to his wife. The 40 per cent capital interest in his company which he gave to his wife was clearly property. His beneficial interest in his company was reduced by 40 per cent and hers was increased by 40 per cent. The fact that this transfer of property was accomplished through causing his company to issue shares makes no difference. Subsection 74(1) covers transfers that are made "directly or indirectly” and "by any other means whatever." The transfer, which in this case was indirect, in that the taxpayer arranged for his company to issue shares to his wife, is nevertheless a transfer from the husband to the wife. There is no need for shares to be transferred in order to trigger this provision of the Act, as was erroneously concluded by the Tax Court judge. By this transfer of property to his wife, he divested himself of certain rights to receive dividends should they be declared. Hence, when the dividends were paid to the wife in 1982, that was income from the transferred property and was rightly attributable to the taxpayer.

In addition, the property transferred to Mrs. Kieboom in 1980 was a portion of his ownership equity. As a result of the transfer, the taxpayer's entitlement of 40 per cent was transferred to Mrs. Kieboom. Moreover, the shares which Mrs. Kieboom acquired are also taxable as “substituted property” pursuant to subsection 248(5), as it may be said that she substituted the shares she purchased for the property she received from her husband. (See also the Interpretation Bulletins IT-258, IT-209.) Mrs. Kieboom disposed of part of that interest when she transferred a part of that equity to the children. On the same reasoning as above, the section 69 deemed capital gain on that disposition must also be attributed to the taxpayer under subsection 74(2).

3. Does subsection 73(5) apply to the transfer to the children?

It has been argued that if there had been a transfer of property to the wife for attribution purposes, there has also been a transfer to the children so as to trigger the rollover provisions of subsection 73(5) which reads:

73. (5) For the purposes of this Part, where at any particular time a taxpayer has transferred property to his child who was resident in Canada immediately before the transfer and the property was, immediately before the transfer, a share of the capital stock of a small business corporation, except where the rules in subsection 74(2) require any taxable gain from the disposition by the taxpayer of that property to be included in the income of a person other than the taxpayer, the following rules apply. ....

The express language in the section does not permit this conclusion. In order to receive the benefit of subsection 73(5) the property being transferred should be“ immediately before the transfer, a share of capital stock of a small business corporation." The fact that there is here a transfer of property which was later turned into shares is not enough in the face of the express language of the provision. This may appear to some to be inconsistent, but that was clearly the intention of Parliament. The taxpayer could easily have chosen to transfer shares to his children and to obtain the tax benefit in subsection 73(5), but instead he chose to attempt to secure other tax benefits for himself by using different methods of transferring his property. The Court must deal with what the taxpayer did, not what he could have done. (See Mahoney, J.A. in Matheson v. The Queen, [1974] C.T.C. 186, 74 D.T.C. 6176, at page 189 (D.T.C. 6179); approved The Queen v. Bronfman (P.B.) Trust, [1987] 1 C.T.C. 117, 87 D.T.C. 5059 (S.C.C.), at page 129 (D.T.C. 5067), per Dickson, C.J.). For an even more restrictive example of a rollover provision as to farmers, see subsection 73(3) requiring the children to have used the farm in the business of farming.)

In conclusion, the aim of the taxpayer in this case was to split his income with his wife and children in order to reduce his tax burden. The Income Tax Act is now designed to prevent practices which were often allowed in earlier times. The Interpretation Bulletins explained the policy of the department in accordance with its interpretation of the provisions. The taxpayer, on the advice of his advisers, sought to circumvent the operation of the sections in question with an ingenious set of transactions. He is entitled to attempt to do that. He did not succeed, because the language used in the Act does not allow him to.

Subsections 74(2) and 73(1) apply to the transfer of property from Mr. Kieboom to Mrs. Kieboom. Thus, her income on the shares, including the dividends which she received in 1982, are attributed back to Mr. Kieboom. Subsection 69(1) and paragraph 245(2)(c) together deem that the transfers of equity which both Mr. and Mrs. Kieboom made to their children are gifts, whose transfer is deemed to have occurred at fair market value. Mr. Kieboom thus is deemed to have received proceeds of disposition equal to the fair market value of the shares. Due to the operation of subsection 74(2), Mrs. Kieboom's deemed fair market value disposition to her children must also be attributed back to Mr. Kieboom.

The appeal will be allowed, and the cross-appeal dismissed. The reassessments will be restored for the years 1981 and 1982 on the basis of the revised agreed value of the shares. [1] Pursuant to Rule 337(2)(b), counsel for the appellant may prepare a draft of an appropriate judgment to implement the Court's conclusions and move for judgment pursuant to Rule 324. The parties may also, at the same time, address the issue of costs by way of a motion in writing pursuant to Rule 324.

Appeal allowed; cross-appeal dismissed.