Date: 19990805
Docket: 97-3715-IT-G
BETWEEN:
IAN KATZ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1] The Appellant appeals his assessment for the 1995 taxation
year. The Appellant, a Canadian resident, was an employee and
shareholder of Standard Securities Capital Corporation
("SSCC"), a corporation resident in Canada. In 1995,
the Appellant owned 16,557 common shares (the "shares")
in SSCC. The aggregate adjusted cost base to the Appellant of
those shares was $75,978. In addition to those shares, the
Appellant owned $250,920 of subordinated debt in SSCC.
[2] On or about July 1995, the Appellant agreed to resign as
an employee. At that time he sold the shares for consideration of
$91,641 and assigned $142,561 of the subordinated debt to
Winthrope Investments Ltd. for no consideration and retired
$108,359 of the subordinated debt for consideration of $108,359.
SSCC issued to the Appellant a T5 showing a taxable dividend for
the sale of the shares.
[3] The Appellant submits that it was his understanding that
he was selling the shares directly to other shareholders and that
the sale would result in a capital gain of $15,641 (in other
words not a taxable dividend). The Appellant states that because
SSCC issued the T5 he was forced to file his 1995 tax return on
the basis that the shares were acquired for cancellation and that
he had realized a deemed dividend and incurred an allowable
business investment loss ("ABIL") on the disposition of
the shares. The Appellant was able to demonstrate to the Minister
of National Revenue (the "Minister") that the T5 was
incorrect as it did not take into account the full paid-up
capital of the shares. The Minister reduced the deemed dividend
to reflect the full paid-up capital of the shares, however, he
disallowed the Appellant’s claim for an ABIL.
[4] The Minister submits that the Appellant incurred a deemed
dividend upon the acquisition by SSCC of all the Appellant's
shares. Pursuant to paragraph 84(3)(b), a deemed
dividend of $84,815 was said to have been received by the
Appellant with proceeds of disposition being $6,826. The Minister
found that since the adjusted cost base of the redeemed shares
was $75,978, the Appellant incurred a capital loss of $69,152 as
a result of the disposition. The Respondent submits that the
Appellant claimed capital gains deductions in 1986, 1987, 1988
and 1990 and therefore pursuant to subsection 39(9) any
business investment loss otherwise calculated pursuant to
paragraph 39(1)(c) would be nil.
ISSUES
[5] Is the sale of the Appellant's shares in SSCC a
dividend or a capital gain?
[6] Is the Appellant entitled to a business investment loss
("BIL")?
THE EVIDENCE AT TRIAL
[7] The Appellant has been in business for a number of years
and was an experienced employee and director of SSCC for a period
of time.
[8] After some difficult discussions and as a result of
negotiations with SSCC, the Appellant agreed to sell all of his
interest in SSCC and SSCC agreed to purchase all of his interest.
The Appellant stated that in the original draft of the agreement
he was to transfer his shares to specified shareholders, however
he asked that the clause be changed as he felt not all of the
shareholders under this transaction were dealt with fairly. As a
result, the appellant signed an agreement that included the
following clauses:
Katz wishes to sell all of his interest in SSCC and SSCC is
desirous of purchasing his said interest upon the terms and
conditions herein contained.
...
2. Katz agrees to transfer his common shares as SSCC will in
writing direct.
...
5. Katz agrees to execute all corporate minutes to date as
requested by SSCC's solicitor and any and all documents
necessary to give effect to the terms and conditions of this
Agreement.
6. The parties agree to execute and exchange mutual Releases
in favour of each other with respect to all claims of every
nature and kind which each may have against the other, save and
except for any matters provided for in this Agreement.[1]
[9] The agreement was complied with and the funds were paid.
The shares were acquired by SSCC and apparently thereafter were
re-issued to others.
[10] The Appellant stated the decision of SSCC to issue a T5
showing a taxable dividend because of the operation of subsection
84(3) was contrary to his understanding that the whole
transaction was a sale of shares solely on capital account.
[11] He alleges incompetence on the part of the SSCC
professional advisors and questions the actions of certain SSCC
officials. He also submitted that SSCC never recorded the
transaction of redemption or re-issuance of shares.
LEGISLATION
CHARACTERIZATION OF THE PROCEEDS
OF DISPOSITION TO A CORPORATION OF SHARES
[12] The applicable subsection is 84(3) of the Income Tax
Act (the "Act") which reads:
Where at any time after December 31, 1977 a corporation
resident in Canada has redeemed, acquired or cancelled in any
manner whatever (otherwise than by way of a transaction described
in subsection (2)) any of the shares of any class of its capital
stock,
(a) the corporation shall be deemed to have paid at
that time a dividend on a separate class of shares comprising the
shares so redeemed, acquired or cancelled equal to the amount, if
any, by which the amount paid by the corporation on the
redemption, acquisition or cancellation, as the case may be, of
those shares exceeds the paid-up capital in respect of those
shares immediately before that time; and
(b) a dividend shall be deemed to have been received at
that time by each person who held any of the shares of that
separate class at that time equal to that portion of the amount
of the excess determined under paragraph (a) that the
number of those shares held by the person immediately before that
time is of the total number of shares of that separate class that
the corporation has redeemed, acquired or cancelled, at that
time.
[13] In summary, a resident corporation is deemed to have paid
a dividend if it redeems, acquires or cancels any of the shares
of any class of its capital stock and pays an amount in excess of
the paid-up capital of its shares.
CAPITAL LOSS AS A 'BIL'
[14] An ABIL is defined in paragraph 38(c) of the
Act as ¾ of a BIL as defined in
paragraph 39(1)(c). The relevant parts of
paragraph 39(1)(c) of the Act reads as
follows:
For the purposes of this Act,
...
(c) a taxpayer’s business investment loss for a
taxation year from the disposition of any property is the amount,
if any, by which the taxpayer’s capital loss for the year
from a disposition after 1977
(i) to which subsection 50(1) applies, or
(ii) to a person with whom the taxpayer was dealing at
arm’s length
of any property that is
(iii) a share of the capital stock of a small business
corporation, or
...
exceeds the total of
...
(viii) the amount determined in respect of the taxpayer under
subsection (9) or (10), as the case may be.
[15] Under paragraph 39(1)(c) a BIL is defined to
be a capital loss realized on a disposition after 1977 of shares
of a small business corporation. The purpose of the BIL and the
ABIL is to provide the taxpayer with preferential treatment for
certain types of capital losses. Unlike other capital losses
which can only be used to offset capital gains (pursuant to
paragraph 3(b)), capital losses which fall within the
definition of a BIL can be used to offset income from any source
income (pursuant to paragraph 3(d) of the
Act).
[16] Subsection 39(9) of the Act provides for the
reduction in a taxpayer's BIL until the taxpayer has realized
business investment losses equal to previous years' capital
gains which are eligible for the capital gains exemption under
section 110.6.
ANALYSIS
[17] After discussion, consultation and amendments, the
Appellant signed the agreement. This created a contractual
relationship. The text of the agreement is clear. SSCC purchased
the shares of the Appellant.
[18] The Appellant's submission that his understanding of
the intention of the agreement as to who bought the shares is not
supported by the written text of the agreement and the actions of
SSCC and the Appellant.
[19] Because SSCC acquired the shares of the appellant, the
appellant is deemed to have received a dividend of $84,815
pursuant to subsection 84(3).
[20] The acquisition of shares by SSCC results in proceeds of
disposition to the Appellant. However, pursuant to section 54
deemed dividends are not included in the proceeds of disposition.
The proceeds of disposition were $6,826, that is, the difference
between the amount received ($91,641) and the amount deemed to be
a dividend ($84,815). The Appellant therefore incurred a capital
loss of $69,152[2]
and an allowable capital loss of $51,864[3].
[21] A capital loss under certain circumstances is also a
BIL[4]. As to the
Appellant's alternative plea that he should be entitled to
claim an ABIL[5] it
appears to be of little practical use to the Appellant. The
Appellant was allowed capital gains exemptions in the amounts of
$22,180, $25,820, $2,667 and $5,575 for the taxation years 1986,
1987, 1988 and 1990. Pursuant to subsection 39(9) as a
result of the capital gains exemptions previously claimed, the
Appellant's BIL is reduced to nil.
CONCLUSION
[22] I conclude the Appellant sold his shares of SSCC to SSCC.
As a result of subsection 84(3), SSCC is deemed to have paid
a dividend when it purchased and acquired all of the
Appellant's shares in SSCC. The Minister's assessment was
correct.
DECISION
[23] The appeal is dismissed.
[24] The Respondent is entitled to costs.
Signed at Ottawa, Canada, this 5th day of August 1999.
"D. Hamlyn"
J.T.C.C.
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