Sobier
J.T.C.C.:
—
This
appeal
was
heard
under
the
Informal
Procedure
of
this
Court.
The
Appellant
appeals
from
the
assessments
by
the
Minister
of
National
Revenue
(the
“Minister”)
for
his
1990,
1991
and
1992
taxation
years
whereby
the
Minister
included
in
his
income
in
each
year
the
amount
of
$24,997.50
pursuant
to
the
provisions
of
subsection
15(1.1)
of
the
Income
Tax
Act
(the
“Act”)
with
respect
to
the
250
class
D
preference
shares
of
Dr.
Susanna
Ng,
Inc.
(the
“Company”)
received
by
the
Appellant
as
stock
dividends
in
each
of
those
years.
The
Appellant
is
a
Certified
General
Accountant
carrying
on
a
public
accountancy
practice
in
Vancouver,
British
Columbia.
The
majority
of
his
practice
involves
preparation
of
financial
statements,
preparation
of
tax
returns
and
tax
planning,
dealing
mostly
with
individuals
and
small
businesses.
The
Appellant’s
spouse,
Dr.
Susanna
Ng,
is
a
medical
practitioner
practising
in
Surrey,
British
Columbia.
As
a
result
of
discussions
with
medical
colleagues,
Dr.
Ng
became
interested
in
incorporating
her
medical
practice
and
in
1986,
she
instructed
her
husband
to
incorporate
a
corporation
and
the
Company
was
incorporated.
The
purpose
of
the
Company
was
to
carry
on
that
portion
of
the
medical
practice
which
is
permitted
by
the
College
of
Physicians
and
Surgeons
of
British
Columbia.
To
be
able
to
incorporate,
however,
she
was
required
to
comply
with
conditions
set
down
by
the
College
of
Physicians
and
Surgeons
and
she
was
required
to
give
certain
undertakings
to
the
College.
One
of
the
conditions
was
that
Dr.
Ng
must
be
the
holder
of
all
the
voting
shares
of
the
Company.
After
being
instructed
to
carry
out
the
incorporation,
the
Appellant
states
that
on
June
17,
1986
he
instructed
a
solicitor,
Mr.
McCue,
by
telephone
to
incorporate
a
“normal
medical
company”.
Mr.
Wu
states
that
he
gave
the
solicitor
no
instructions
on
the
share
structure
of
the
Company
and
that
he
had
no
discussions
with
him
concerning
capital
gains
exemptions,
stock
dividends
or
any
sale
or
winding-up
of
the
Company.
There
was
to
be
one
share
held
by
Dr.
Ng,
one
by
himself
and
one
on
behalf
of
each
of
the
two
children
through
a
family
trust.
What
arrived
from
Mr.
McCue
were
incorporation
documents
which
were
signed
by
Dr.
Ng
and
returned.
The
share
structure
as
set
forth
in
the
articles
called
for
class
A
common
shares
with
the
par
value
of
$1
each;
class
B
common
shares
of
par
value
of
$1
each;
class
C
preference
shares
with
a
par
value
of
$1
each
and
class
D
preference
shares
with
a
par
value
of
$0.01
each
and
a
redemption
price
of
$100
each.
The
class
A
common
shares
were
voting
shares,
were
not
entitled
to
have
dividends
paid
thereon
and
were
fully
participating
on
the
liquidation,
dissolution
or
winding-up
of
the
Company
after
all
other
classes
of
shares
had
been
redeemed
or
the
paid-up
capital
returned.
The
class
B
common
shares
were
non-voting,
non-participating
on
winding-up
except
for
repayment
of
paid-up
capital.
They
were,
however,
entitled
to
receive
dividends.
The
class
C
preference
shares
were
only
to
be
used
in
connection
of
what
is
known
as
a
“section
85
roll-over”.
They
were
non-voting,
nonparticipating
as
to
dividends
but
on
liquidation,
dissolution
or
winding-
up,
the
holders
thereof
would
be
entitled
to
receive
the
redemption
price
of
such
shares
prior
to
the
claims
of
the
holders
of
all
other
classes
of
shares.
The
class
D
preference
shares
were
non-voting,
non-participating
as
to
dividends
but
on
dissolution
liquidation
or
winding-up,
the
holders
thereof
would
be
entitled
to
the
redemption
price
and
no
more
after
the
claims
of
the
holders
of
class
C
preference
shares
but
with
priority
over
the
claims
of
the
holders
of
other
classes
of
shares.
At
all
material
times,
Dr.
Ng
held
the
only
class
A
common
share
issued.
Four
class
B
common
shares
were
issued,
one
was
held
by
each
of
Dr.
Ng
and
Mr.
Wu
and
two
were
held
by
the
Wu
Family
Trust
(the
“Trust”)
of
which
their
two
children
were
the
beneficiaries.
Dr.
Ng
held
all
of
the
20,001
issued
and
outstanding
class
C
preference
shares.
I
assume
that
these
shares
were
issued
to
Dr.
Ng
in
connection
with
the
purchase
by
the
Company
of
certain
of
the
assets
of
her
medical
practice.
During
the
time
the
incorporation
was
being
undertaken,
Mr.
Wu
claims
never
to
have
received
any
advice
from
Mr.
McCue.
Mr.
McCue
sent
incorporation
documents
to
Mr.
Wu
for
him
to
pass
on
to
Dr.
Ng
for
signature.
Similarly,
resolutions
which
I
assume
were
for
the
purpose
of
organizing
the
Company
were
sent
along
for
execution
by
Dr.
Ng.
In
any
event,
the
Company
was
incorporated
and
organized
by
October
3,
1986.
Again,
Mr.
Wu
says
that
prior
to
and
after
the
Company
was
incorporated
and
organized,
no
discussions
were
held
with
Mr.
McCue
including
discussions
concerning
the
subject
of
capital
gains,
stock
dividends,
etc.
It
was
Mr.
Wu’s
evidence
that
at
the
time
of
incorporation,
he
was
unaware
of
the
rights
and
conditions
attaching
to
the
various
classes
of
shares
and
that
he
did
not
review
the
share
structure
at
the
time
of
incorporation.
However,
he
states
that
he
is
now
aware
of
these
rights
as
a
result
of
these
proceedings
and
the
discussions
with
representatives
of
Revenue
Canada
after
the
assessments
in
question.
Mr.
Wu
was
led
through
a
series
of
questions
tending
to
elicit
the
fact
that
there
were
no
discussions
regarding
the
sale
of
either
the
shares
or
assets
of
the
Company
or
its
liquidation
or
winding-up
and
that
no
offer
had
been
received
to
purchase
Dr.
Ng’s
practice
or
the
shares
of
the
Company.
On
cross-examination,
Mr.
Wu
admitted
that
he
was
generally
familiar
with
the
Act
and
engaged
in
tax
planning
for
small
businesses.
He
also
stated
that
he
was
the
accountant
for
at
least
one
other
doctor
who
incorporated
his
practice.
He
decided
the
type
of
dividends
to
be
declared.
It
was
never
his
stated
intention
to
reduce
the
value
of
Dr.
Ng’s
shares.
According
to
Mr.
Wu,
the
stated
intentions
of
incorporation
were
(1)
tax
saving,
since
the
Company
paid
tax
at
a
lower
rate
than
an
individual
because
of
the
small
business
deductions,
(2)
income
splitting
among
the
family
members
and
(3)
tax
deferral.
These
last
two
goals
were
achieved
by
declaring
stock
dividends
of
class
D
preference
shares,
on
the
class
B
common
shares
and
not
redeeming
those
held
by
Dr.
Ng
and
Mr.
Wu
but
redeeming
the
shares
held
by
the
Trust.
In
such
a
fashion,
it
was
possible
to
defer
the
payment
of
tax
on
the
class
D
preference
shares
held
by
Dr.
Ng
and
Mr.
Wu
(except
for
the
$0.01
per
share
par
value)
until
they
were
redeemed
and
also
put
income
in
the
hands
of
the
Trust
by
redeeming
the
class
D
preference
shares
held
by
the
Trust
at
a
price
of
$100
per
share.
In
each
of
the
years
under
appeal
as
well
as
in
1988,
1989
and
1993,
250
class
D
preference
shares
were
so
issued
to
Dr.
Ng
and
Mr.
Wu
and
500
class
D
preference
shares
were
issued
to
the
Trust.
In
each
year,
the
Company
redeemed
the
class
D
common
shares
owned
by
the
Trust
for
a
total
redemption
price
of
$50,000.
In
issuing
stock
dividends,
the
value
of
the
class
A
share
owned
by
Dr.
Ng
was
reduced
by
an
amount
equal
to
the
redemption
price.
Of
course,
the
value
of
the
class
A
common
share
is
reduced
when
the
Trust’s
shares
are
redeemed
but
the
recipients
of
the
redemption
price
pay
the
tax
immediately.
The
Trust
also
would
have
to
include
as
income
the
$0.01
per
share
in
the
year
of
receipt
of
the
stock
dividend
as
would
Dr.
Ng
and
Mr.
Wu.
This
being
the
price
at
which
the
shareholder
is
deemed
to
have
acquired
the
shares.
However,
this
course
of
action
would
defer
the
tax
on
$99.99
per
share
until
Dr.
Ng
or
Mr.
Wu’s
shares
were
also
redeemed.
Subsection
15(1.1)
of
the
Act
states:
15(1.1)
Notwithstanding
subsection
(1),
where
in
a
taxation
year
a
corporation
has
paid
a
stock
dividend
to
a
person
and
it
may
reasonably
be
considered
that
one
of
the
purposes
of
that
payment
was
to
significantly
alter
the
value
of
the
interest
of
any
specified
shareholder
of
the
corporation,
the
fair
market
value
of
the
stock
dividend
shall,
except
to
the
extent
that
it
is
otherwise
included
in
computing
that
person’s
income
under
paragraph
82(1
)(a),
be
included
in
computing
the
income
of
that
person
for
the
year.
It
is
the
redemption
price
which
has
been
added
to
Mr.
Wu’s
income.
An
examination
of
subsection
15(1.1)
shows
that
the
appropriate
language
used
in
determining
whether
the
subsection
applies
reads
as
follows:
...
Where
in
a
taxation
year
a
corporation
has
paid
a
stock
dividend
to
a
person
and
it
may
reasonably
be
considered
that
one
of
the
purposes
of
that
payment
was
to
significantly
alter
the
value
of
the
interest
of
any
specified
shareholder
of
the
corporation...
[Emphasis
added.]
This
language
differs
somewhat
from
what
is
contained
in
subsection
55(2)
of
the
Act
which
subsection
was
dealt
with
by
Judge
Bell
of
this
Court
in
the
unreported
case
of
Placer
Dome
Inc
v.
The
Queen.
The
relevant
portion
of
subsection
55(2)
(edited
by
me)
reads
as
follows:
Where
a
corporation
resident
in
Canada
has
received...a
taxable
dividend
in
respect
of
which
it
is
entitled
to
a
deduction
under
subsection
112(1)
or
138(6)
as
part
of
a
transaction
or
events...one
of
the
purposes
of
which...
was
to
effect
a
significant
reduction
in
the
portion
of
the
capital
gain
that,
but
for
the
dividend,
would
have
been
realized....
[Emphasis
added.]
In
Placer
Dome,
the
question
was
whether
one
of
the
purposes
of
the
transaction
was
to
effect
a
significant
reduction
in
the
capital
gain
but
for
the
dividend.
At
page
12
of
his
reasons,
Judge
Bell
said:
The
next
question
is
whether
one
of
the
purposes
of
the
transactions
(assuming
a
transaction
can
have
a
purpose)
was
to
effect
a
significant
reduction
in
the
portion
of
the
capital
gain
that,
but
for
the
dividend,
would
have
been
realized
by
the
Appellant
on
the
sale
at
fair
market
value
of
the
shares
of
Falconbridge
and
McIntyre.
It
is
my
conclusion
that
neither
the
Appellant
nor
Falconbridge
had
such
purpose.
Respondent’s
counsel
submitted
that
under
subsection
55(2)
the
Appellant
need
only
have
a
purpose,
not
a
main
purpose,
of
effecting
a
significant
capital
gain
reduction.
He
referred
to
definitions
of
“purpose”
such
as
from
Black’s
Law
Dictionary
That
which
one
sets
before
him
to
accomplish
or
attain;
an
end,
intention,
or
aim,
object,
plan,
project.
Term
is
synonymous
with
ends
sought,
an
object
to
be
attained,
an
intention
etc.
and
from
Shorter
Oxford
English
Dictionary
1.
The
object
which
one
has
in
view
2.
The
action
or
fact
of
intending
or
meaning
to
do
something:
mention,
resolution,
determination.
He
then
submitted
that
a
person
is
presumed
to
intend
the
natural
consequences
of
his
actions
and
that
in
the
Appellant’s
case
one
of
the
consequences
was
the
significant
reduction
of
capital
gain.
This
approach
seems
to
employ
hindsight.
The
receipt
of
a
dividend
which
may
be
free
of
tax
does
not
mean
that
one
of
the
purposes
of
the
transactions
was
the
payment
or
receipt
of
a
tax
free
dividend.
That
approach
looks
at
the
transactions
completed
rather
than
examining
all
evidence
in
order
to
determine
whether
that
particular
result
was
an
objective
of
any
party
to
the
transactions.
Counsel
for
the
Appellant
here
urges
the
Court
to
look
at
the
purpose
or
purposes
for
which
the
incorporation
and
the
various
shareholdings
were
established.
Counsel
states
that
the
three
purposes
set
forth
above
did
not,
according
to
Mr.
Wu’s
evidence,
include
the
purpose
of
significantly
altering
the
value
Dr.
Ng’s
class
A
common
shares.
That
this
in
fact
happened,
there
is
no
doubt.
Dr.
Ng
alone
would
be
the
person
who
would
receive
residue
of
the
value
of
the
Company
on
winding-up
and
this
value
would
be
reduced
by
the
amount
of
the
stock
dividends.
However,
in
Placer
Dome
since
the
Appellant
did
not
participate
in
the
creation
and
structure
of
the
scheme,
Judge
Bell
stated
“that
finding
alone
renders
it
impossible
to
conclude
that
one
of
the
purposes
of
the
Appellant
was
to
effect
a
significant
reduction
in
the
capital
gain
to
be
realized
...”
However,
in
the
present
situation,
Mr.
Wu
did
participate
in
the
creation
and
structure
of
the
scheme
and
therefore
it
would
be
possible,
if
the
evidence
so
indicated,
to
consider
that
one
of
the
purposes
of
the
payment
was
to
significantly
alter
the
value
of
Dr.
Ng’s
class
A
common
shares.
The
most
obvious
difference
between
subsections
15(1.1)
and
55(2)
is
the
inclusion
in
subsection
15(1.1)
of
the
words
“and
it
may
reasonably
be
considered
that
one
of
the
purposes
...”.
In
dealing
with
the
interpretation
and
significance
of
the
word
“purpose”
as
it
dealt
with
a
roll-over
and
the
application
of
subsection
55(2)
in
C.P.L.
Holdings
Ltd.
v.
R.
(sub
nom.
C.P.L.
Holdings
Ltd.
v.
Canada),
[1995]
1
C.T.C.
447,
95
D.T.C.
5253
(F.C.T.D.)
the
Court
concluded
that
there
was
evidence
that
the
purpose
was
not
to
significantly
reduce
the
capital
gain
but
to
make
one
of
the
parties
a
secured
creditor
of
the
other.
It
was
admitted
that
the
effect
of
the
roll-over
was
to
reduce
the
capital
gain
but
the
Court
determined
that
that
was
not
the
purpose.
The
purposes
behind
the
scheme
in
Placer
Dome
and
C.P.L.
Holdings
Ltd.
were
found
not
to
be
tax
related
but
were
found
to
be
for
the
purpose
of
effecting
a
takeover
bid
on
the
one
hand
and
to
make
a
party
a
secured
creditor
on
the
other.
However,
all
of
the
stated
purposes
for
the
incorporation
of
Dr.
Ng’s
practice
were
tax
driven
-
income
splitting,
tax
deferral
and
tax
reduction.
To
this,
the
Respondent
seeks
to
add
a
reduction
of
the
value
of
Dr.
Ng’s
class
A
common
shares
and
its
concomitant
reduction
of
potential
capital
gains.
The
inclusion
of
the
words
in
subsection
15(1.1)
no
doubt
make
the
subsection
capable
of
a
more
objective
interpretation.
If
Parliament
had
not
included
those
words,
then
the
reasoning
in
C.P.L.
Holdings
Ltd.
and
Placer
Dome
would
tend
to
support
the
Respondent’s
argument.
But
because
they
were
included,
one
cannot
ignore
them.
The
Appellant
argues
that
the
purpose
of
using
the
vehicle
of
stock
dividend
must
have
been
to
significantly
alter
Dr.
Ng’s
interest
in
the
Company
in
order
to
be
able
to
take
advantage
of
the
capital
gains
deduction.
Of
course,
nowhere
in
the
subsection
is
reference
to
capital
gains
to
be
found.
It
was
within
Parliament’s
ability
to
include
words
which
would
preclude
the
Appellant
from
taking
advantage
of
the
capital
gains
deduction
as
it
did
in
subsection
55(2)
of
the
Act,
by
mentioning
the
capital
gains
but
in
subsection
15(
1.1
)
it
did
not.
Although
subsection
15(1.1)
is
capable
of
a
broader
interpretation,
I
do
not
believe
that
it
goes
so
far
to
allow
one
to
equate
words
there
set
forth
with
words
such
as
“he
knew
or
ought
to
have
known”
that
it
would
significantly
alter
the
value
of
the
shares.
There
must
be
some
evidence
which
would
permit
one
to
place
the
purpose
in
the
mind
of
the
Appellant
other
than
conjecture
or
speculation.
The
only
evidence
before
the
Court
was
that
of
Mr.
Wu.
At
best,
with
respect
to
the
fourth
purpose
Mr.
Wu
states
that
he
cannot
recall
any
discussions
with
anyone
concerning
the
effect
of
declaring
and
paying
stock
dividends.
I
was
not
impressed
with
Mr.
Wu’s
evidence.
At
times,
he
was
evasive
and
at
other
times
he
was
forgetful.
But
the
fact
remains
that
unimpressive
as
it
was,
his
testimony
was
the
only
evidence
before
the
Court
on
this
subject.
The
share
structure,
according
to
Mr.
Wu
came
forth
full
blown
in
the
manner
it
did
because
that
was
what
the
solicitor
drafted.
This
drafting
came
about
on
the
instructions
of
Mr.
Wu
to
incorporate
the
“usual”
company
to
carry
on
a
portion
of
a
medical
practice
and
nothing
more.
However,
I
am
not
on
the
whole
satisfied
that
one
of
the
purposes
of
paying
the
stock
dividends
was
to
significantly
alter
the
value
of
Dr.
Ng’s
class
A
common
shares.
Therefore,
the
appeal
is
allowed
with
costs.
Appeal
allowed.
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