De Groote v. The Queen, 85 DTC 5008, [1984] CTC 687 (FCTD)

Walsh, J:—This is a tax appeal against a notice of reassessment dated July 7, 1977 reassessing plaintiffs income tax for his 1974 taxation year. An appeal was brought to the Tax Review Board which by judgment dated November 16, 1982 dismissed the appeal. There is very little dispute as to the facts. On March 20, 1973 plaintiff purchased 10,000 common shares of the stock of the Hamilton Tiger Cat Football Club from persons with whom he was dealing at arm’s length and on the same date sold 1,500 common shares to various purchasers with whom he was also dealing at arm’s length. On January 10, 1974 he sold his remaining 8,500 common shares to Pine Hollow Holdings Limited which is a company wholly-owned by him incorporated in 1972 as a holding company for his investments. The sale from him to the company was made in accordance with the terms and conditions of an agreement dated January 10, 1974 which provided inter alia that the shares would continue to remain registered in the name of the plaintiff but for the beneficial owner thereof Pine Hollow. Plaintiff executed a declaration of trust declaring that he was holding the shares in trust for Pine Hollow and that Pine Hollow was the beneficial holder thereof and all moneys or payments received by him by virtue of the shares being registered in his name would be for the account of Pine Hollow.

The shares remained registered in plaintiffs name until October 3, 1974 while awaiting the necessary approval of the Canadian Football League regarding his sale of the said shares to Pine Hollow. On February 18, 1974 the Football Club declared a dividend of $21 per common share to shareholders of record on the 29th day of December, 1973, the dividend being payable on March 4, 1974. As a result of this plaintiff received the sum of $178,500 of dividends in trust for Pine Hollow. He immediately transferred these dividends to Pine Hollow which reported the receipt of them as income for its fiscal year ending on August 31, 1974. The notice of reassessment of plaintiffs income tax dated July 7, 1977 assesses this dividend of $178,500 as income received by and taxable to the plaintiff.

It is plaintiffs contention that the record date for payment of the dividend has no relevance to determining the legal entitlement to the dividend for tax purposes when prior to the declaration of the dividend ownership of the shares on which the dividend is paid has been transferred, even though this transfer has not been recorded in the books of the paying company. Plaintiff contends that as of January 10, 1974 Pine Hollow became the beneficial owner of the shares and therefore of the dividends declared after that date. Plaintiff could only deal with the dividend when received as trustee for Pine Hollow and could not claim it for his own use.

Defendant for its part in its pleadings calls attention to a memorandum of agreement dated October 23, 1973 whereby plaintiff undertook to sell to George Trottier 3,000 shares of his 8,500 common shares of the Hamilton Tiger Cat Football Club Limited. In this agreement it was specified that any dividends declared by the club on or before March 31, 1974 relating to the fiscal year ending December 29, 1973, would be distributed between the vendor and other directors of the club in accordance with their shareholdings, the purchaser waiving any right to such dividends.

Plaintiffs agreement with Pine Hollow when he sold 8,500 shares to it on January 10, 1974, contained a clause reading as follows:

DeGroote and Pine Hollow agree that the shares shall remain registered in the name of DeGroote for the beneficial owner thereof, Pine Hollow; that DeGroote will execute a declaration of trust declaring that he is holding the said shares in trust for Pine Hollow; further that Pine Hollow is the beneficial holder thereof and that all monies or payments received by DeGroote by virtue of the said shares being registered in his name shall be for the account of Pine Hollow to the exclusion of DeGroote. DeGroote further covenants and agrees that he will deal with the shares only upon the instructions of Pine Hollow and that insofar as he is legally entitled so to do he will carry out and fulfill any and all instructions given to him by Pine Hollow pertaining to any or all matters relating to the said shares and without restricting the generality of the foregoing, the sale, pledge, hypothecation of such shares, and DeGroote further covenants and agrees that he will vote such shares in accordance with any instructions which might be given to him by Pine Hollow.

The trust agreement signed by him on the same day carried forth this undertaking, reading as follows:

I, Michael George DeGroote hereby declare that I have this day sold 8,500 common shares without par value of the capital stock of Hamilton Tiger-Cat Football Club Limited to Pine Hollow Holdings Limited and further that by agreement between me and Pine Hollow Holdings Limited said shares shall remain registered in my name. I further declare that as of this day I have no beneficial interest therein and that I am holding said shares in trust for the beneficial owner thereof, Pine Hollow Holdings Limited. I undertake to deal with such shares only upon instructions received by me from Pine Hollow Holdings Limited; I further acknowledge and agree, direct and declare that all dividends or any other payments of any nature or kind received by me by virtue of the fact that said shares are registered in my name shall be for the account of Pine Hollow Holdings Limited to the absolute exclusion of myself. I further agreed that I will follow and carry out all legal instructions given to me by the owner of such shares, Pine Hollow Holdings Limited as same may pertain to any and/or all dealings with such shares.

The Directors’ resolution at a meeting held on February 28, 1974, declaring the dividend read as follows:

It is resolved that the Company elects to pay a dividend of $21.00 per common share to the shareholders of record on December 29, 1973, and payable March 4, 1974.

Defendant contends that as of March 4, 1974, plaintiff was legally and beneficially entitled to the dividend in the amount of $178,500 because he was entitled to it as of December 29, 1973. It was submitted that the agreement and declaration of trust with Pine Hollow entitles the latter to dividends only relating to a period of time during which Pine Hollow was the beneficial owner of the shares and as of December 29, 1973, Pine Hollow was not entitled beneficially or otherwise to any such dividends.

It is common ground between the parties that a dividend becomes taxable only in the year in which payment of it is received so that the fact that when it was declared it was to be payable to shareholders of record as of December 29, 1973 would not make it taxable in that year. The Hamilton Tiger Cat Football Club Limited was not of course privy to the agreement between Mr DeGroote and his holding company Pine Hollow and very properly paid the dividend to Mr DeGroote. Although defendant in the pleadings relies on subsections 56(2) and 82(1) of the Income Tax Act as well as on section 3, subsection 56(2) has no application in the present circumstances. It reads as follows:

56. (2) Indirect payments.—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.

Here the Football Club did not make any payment to Pine Hollow pursuant to directions from DeGroote. It was DeGroote himself who made the payment to Pine Hollow pursuant to his agreement with it, as soon as he received payment of the dividend from the Football Club.

On January 15, 1974, Pine Hollow Holdings Limited sold to George Trottier 3,000 shares of the Football Club Mr DeGroote intervening as guarantor. Said agreement contained a clause stating: “Any and all dividends declared by the Board of Directors of the Club on or before March 31st, 1974 relating to the period up to the fiscal year ending December 29th, 1973, shall be distributed amongst the vendor and the present directors of the Club in accordance with their present shareholdings and the purchaser hereby waives any right to such dividends”.* [1] A similar agreement was signed the same day for 400 common shares between Pine Hollow Holdings Limited and Harry Walters, with the same clause relating the dividends incorporated therein.

The plaintiff Mr DeGroote was present at the meeting of the Football Club of February 28, 1974, at which the dividend was declared. Although final figures were not available as to the profits of the Football Club for its year ending December 29, 1973 until the time of the meeting at which the dividend was declared, as it would be necessary to await information as to the club’s shares in the proceeds of the Grey Cup game in late November there can be little doubt that Mr DeGroote would at the time of the sale of his shares to Pine Hollow have had a very good idea as to the financial position of the Football Club of which he was the controlling shareholder and whether it would or would not be in a position to declare a dividend on the basis of its operations during the 1973 fiscal year, so that the declaration of a dividend at the meeting of February 28, 1974, would be anticipated if not controlled by him. In fact the minutes of the meeting indicate that he stated that he would make arrangements with the Toronto-Dominion Bank if a situation arose that the declaration of the dividend and the undertaking to repay $24,000 being the balance of a debenture owed by the club caused a short cash position at times throughout the year. It was not feasible to transfer his shares in the books of the company however to Pine Hollow prior to the declaration of the dividend because the approval of the league had to first be obtained. If this had not been the case the transfer would no doubt have been made and there would have been no problem with respect to the declaration of the dividend by Pine Hollow. In fact Pine Hollow prior to the declaration of the dividend resold some of the shares although not yet registered in its name to Trottier and Walters on the understanding however that Pine Hollow would receive its share of the dividends declared for the Football Club’s December 29, 1973 fiscal year rather than the purchaser’s. As late as May 13, 1974 a letter from the commissioner, J JG Gaudaur to Mr R J Sazio, president of the Football Club points out that these transfers as well as what he refers to as the proposed transfer of 5,100 shares from Mr DeGroote to Pine Hollow Holdings Limited must be approved by the commissioner or executive committee before the transfer can be considered effective. Approval was finally given by letter dated October 3, 1974.

In the evidence before the Tax Review Board which was by consent made part of the record it was pointed out that at the meeting on February 28, 1974 at which the dividend resulting from the Football Club’s operations in 1973 was declared no particular significance was attached by anyone to the fact that it was declared to be payable to shareholders of record as of December 29, 1973. It was the normal practice for the company not to declare any dividend until about February when the final financial statements of the company arising out of its operations in its preceding fiscal year could be finally determined and as a matter of routine practice it was always declared payable to shareholders of record as of the last day of the said fiscal year. The minutes of the preceding meeting held on January 25, 1974, by which time Mr DeGroote’s transfer of his shares to Pine Hollow on January 10 was known were approved and Mr DeGroote testified that there was some discussion to the effect that he had sold his shares to Pine Hollow and also that Messrs Trottier and Walters had purchased some shares subject to approval by the CFL but that neither Mr Walters nor Mr Trottier would be the beneficiary of any dividends relating to the previous year. He also recalls some discussion that the record date would be between the 10th and 15th of January. When he subsequently found out that the record date was set at December 29, 1973 this caused him no concern until the issue was raised with the Tax Department.

I do not attach any significance to this however as in any event he remained the shareholder of record long after the dividend was actually paid, while the company awaited formal approval of the CFL to record the transfer in its books.

The Football Club acted properly in paying the dividend to him as it was obliged to do, not being privy to the agreement between him and Pine Hollow. On the other hand there is no doubt that when Pine Hollow purchased the shares from him on January 10 and he executed the trust agreement it was clearly understood by both parties that any dividends received from the shares would be turned over to Pine Hollow which was in fact done and declared by it in its 1974 income tax return.

Defendant argues that plaintiff was not and could not be trustee of the shares for Pine Hollow nor could Pine Hollow be the equitable holders of same until the agreements of January 10, 1974 were signed. The declaration of trust read in part:

kind received by me by virtue of the fact that the said shares are registered in my name shall be for the account of Pine Hollow to the absolute exclusion of myself.

The agreement of sale read in part:

All monies or payments received by DeGroote by virtue of the said shares being registered in his name shall be for the account of Pine Hollow to the exclusion of DeGroote.

I believe that proper emphasis must be given to the word “received”. When the dividends were in due course in February received by Mr DeGroote as a result of the shares being registered in his name, and immediately turned over by him to Pine Hollow they were certainly “received” after the date of the sale agreement.

Most of the jurisprudence relates to disputes between the vendor and purchaser of shares as to the right of dividends on same or disputes between the company and the shareholder as to dividend rights. Neither situation exists in the present case. Some analogies may be found in the jurisprudence. The British case of Richards v Wimbush et al, [1941] Ch 92 expresses the situation in picturesque language.At page 99, Morton, J states:

The purchaser has bought the tree and with it the fruits that are ripening on the tree.

This case referred with approval to the case of Black v Homersham, 4 Exch 24. In that case Cleasby, B stated at page 209:

. . . Here the claimants bought these shares at the value put upon them before the dividend had been declared. They bought a property which had an accruing interest, and were they not to be held entitled to receive it, the result would be that they would have to pay more for the shares than they, in fact, bargained for, or intended or supposed they would have to pay.

In the same case Kelly, C B stated:

. . . from the moment that that contract was effected at the sale, the right to the shares, with all accruing benefits and liabilities, became vested in the several purchasers.

In the present case there was no evidence of the price paid for the shares and the sale was of course not an arm’s length transaction. Nevertheless it does not appear to have been made with the view of plaintiff evading taxation in his hands of the dividend which he had good reason to believe was likely to be declared on the shares.The evidence disclosed that Pine Hollow was a holding company for a number of his assets. Pine Hollow had assumed payment of his indebtedness of a large sum to the Toronto-Dominion Bank. It is unnecessary in the present proceedings to go further into what is referred to in the evidence before the Tax Review Board as a section 85 rollover of Mr DeGroote’s assets to Pine Hollow. Plaintiff submits that in order to be taxable in his hands the dividend would have had to be income which he could have used absolutely for his own benefit which is not the case.

Reference was made in this connection to Canadian Fruit Distributors Limited v MNR, [1954] CTC 284; 54 DTC 1145, in which President Thorson as he then was stated at 292 [1149]:

The receipts, therefore, did not have the essential quality of income, namely that the appellant’s right to them was absolute and under no restriction, contractual or otherwise, as to their disposition, use or enjoyment. I had occasion in Robertson Limited v Minister of National Revenue (1944), Ex CR 170 [2 DTC 655], to consider the test to be applied in determining whether a sum of money received by a person has the quality of income in his hands . . . I adopted the test of income thus laid down by Mr Justice Brandeis. At page 182 I said:

In my judgment the language used by him to which I have already referred, lays down an important test as to whether an amount received by a taxpayer has the quality of income. Is his right to it absolute and under no restriction, contractual or otherwise, as to its disposition, use or enjoyment? To put it in another way, can an amount in a taxpayer’s hands be regarded as an item of profit or gain from his business, as long as he holds it subject to specific and unfulfilled conditions and his right to retain it and apply it to his own use has not yet accrued, and may never accrue?

I do not find that the jurisprudence cited by defendant changes this conclusion. In the case of Kidner v Kidner, [1929] All ER 551 a manager was to receive as part of his remuneration all dividends declared in respect of his shares as long as he remained the manager but his rights were to cease as soon as he ceased to serve in this capacity. The judgment merely found that he was entitled to all dividends once they had been declared, the agreement not requiring them to be declared and paid and that the declaration of the dividend created a debt owing by the company to him as the registered shareholder even though he could not have enforced payment until the due date for payment was reached. In short it was the declaration of the dividend that governed and the mere fact that payment was postponed did not operate to deprive him as holder of the shares at the date of the declaration.

In the present case there was of course no contract between Mr DeGroote and the company and by the time the dividend was declared he was the legal but not equitable owner of the shares, so although the company had to pay the dividend to him he had no right to retain same.

The other case relied on by defendant is the Tax Review board case of Pylyp- chuk v MNR, [1957] 17 Tax ABC 337; 57 DTC 375, an unusual case where the directors declared a dividend in 1950 to shareholders of the company of record as of 1943, since it was only in 1950 that the company received a refund of excess profits tax in respect of the period ending in 1943, enabling the dividend to be declared in 1950. The judgment merely held that this was quite proper. At 345 [380] it is stated:

It is well known that directors of companies declaring a dividend declare it in favour of shareholders of record as of a certain date, although the dividend itself may not be payable until a date considerably later than the date specified in the resolution for determining the shareholders of record. Therefore by the time the dividend is actually payable, many of the shareholders of record on the date specified may have sold or transferred their shares in the meantime and may no longer be shareholders of the company, with the result that they are still entitled to payment of the amount of the dividend only by way of an accounting between the vendors or transferors of the shares and the purchasers or transferees, since the new shareholders were not shareholders of record at the specified date.

While this is an accurate statement of law it does not settle the present issue.

Paragraph 82(1 )(a) of the Income Tax Act reads as follows:

82. (1) In computing the income of a taxpayer for a taxation year, there shall be included

(a) all amounts received by him in the year from corporations resident in Canada

as, on account or in lieu of payment of, or in satisfaction of, taxable dividends.

At first sight this might appear to make the dividends received in February 1984 taxable in plaintiffs hands. This must be looked at in the light of subsection 56(4) however which reads as follows:

56. (4) Where a taxpayer has, at any time before the end of a taxation year (whether before or after the end of 1971), transferred or assigned to a person with whom he was not dealing at arm’s length the right to an amount that would, if the right thereto had not been so transferred or assigned, be included in computing his income for the taxation year because the amount would have been received or receivable by him in or in respect of the year, the amount shall be included in computing the taxpayer’s income for the taxation year unless the income is from property and the taxpayer has also transferred or assigned the property. [Emphasis added]

The word “property” is defined in subsection 248(1) as follows:

“property” means 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, and

(b) unless a contrary intention is evident, money.

The dividends are income from property namely shares in the Football Club and the taxpayer, Mr DeGroote, in addition to assigning the dividends or income from the shares to Pine Hollow had also assigned the shares to that corporation. All this was done before the dividend was declared. The situation is entirely different from that in which a dividend has been declared and will in due course be received by the shareholder of record as of the record date. He cannot then by assigning his right to it evade payment of the tax on the dividend when received. In the present case the sale of shares and rights to any dividends declared on them was clearly made prior to any declaration of dividends. The realities are that plaintiff by his contract for the sale of the shares and execution of the trust agreement could only dispose of the dividend in accordance with their terms. He could not appropriate it for his own use even though the Hamilton Tiger Cat Football Club had to make the payment to him.

Plaintiff’s appeal is therefore maintained with costs and the reassessment of his 1974 return is referred back to the Minister on the basis that the amount of $178,500 received by him as a dividend was not properly included in his income for tax purposes and that any amounts held by the Minister in respect of such reassessment will be paid forthwith to the plaintiff with interest.