O’Connor
T
.
C.J.:
These
appeals
were
heard
at
Saskatoon,
Saskatchewan
on
January
21,
1999.
Issue
The
issue
which
is
common
to
these
appeals
and
to
the
appeals
of
Sykes
v.
Minister
of
National
Revenue
(February
12,
1999),
Doc.
90-340(IT)0
(T.C.C.)),
Rao
v.
Minister
of
National
Revenue
(February
12,
1999),
Doc.
90-842(IT)O
(T.C.C.)
and
Ator
v.
Minister
of
National
Revenue
(February
12,
1999),
Doc.
90-2810(IT)O
(T.C.C.)
is
whether
the
Minister
was
correct
in
reallocating
certain
dividend
income
to
the
Appellant
pursuant
to
subsection
56(2)
of
the
Income
Tax
Act
(“Act”)
in
the
1984,
1985
and
1986
years.
On
this
issue,
the
parties
proceeded
principally
on
the
basis
of
an
Agreed
Statement
as
to
Facts
which
statement
reads
as
follows:
Agreed
Statement
as
to
Facts
The
Appellant
and
the
Respondent
do
hereby
agree
with
each
other
in
connection
with
the
truth
and
accuracy
of
the
following
facts
and
statements:
1.
The
Appellant,
Dr.
Paul
Korol,
(having
social
insurance
no.
[
...
])
is
an
individual
resident
in
the
City
of
Saskatoon,
in
the
Province
of
Saskatchewan.
2.
The
Appellant
is
a
shareholder
in
Korol
Investments
Ltd.
(the
“Company”),
a
body
corporate
incorporated
under
The
Business
Corporations
Act
(Saskatchewan).
3.
The
Articles
of
Incorporation
authorized
the
Company
to
issue
the
following
shares
in
1984,
1985
and
1986
(the
“relevant
taxation
years”):
unlimited
number
of
Class
“A”
Common
Voting
Shares
unlimited
number
of
Class
“B”
Common
Voting
Shares
unlimited
number
of
Class
“C”
Common
Nonvoting
Shares
unlimited
number
of
Class
“A”
Preferred
Voting
Shares
unlimited
number
of
Class
“B”
Preferred
Shares
Schedule
“1”
annexed
hereto
is
a
true
copy
of
the
Certificate
and
Articles
of
Incorporation
of
the
Company,
and
the
Certificate
and
Articles
of
Amendment
thereto
applicable
to
the
relevant
taxation
years
4.
The
Company’s
Articles
of
Incorporation
(as
amended)
provided
the
following
with
respect
to
the
rights
to
dividends
in
1984,
1985
and
1986:
3.
The
Directors
may
from
time
to
time
declare
and
pay
dividends
to
the
holders
of
one
class
of
Common
Voting
Shares
to
the
exclusion
of
the
other
classes
of
Common
Voting
Shares.
5.
The
holders
of
Class
“A”
Preferred
Voting
Shares
and
Class
“B”
Preferred
Shares
shall
be
entitled
to
receive
dividends
out
of
the
surplus
or
net
profits
of
the
Company
when
and
as
declared
by
the
Directors.
The
Directors
may
declare
and
pay
dividends
to
the
holders
of
one
class
of
Preferred
Shares
to
the
exclusion
of
the
holders
of
the
other
class
of
Preferred
Shares.
6.
No
dividends
shall
be
paid
in
any
fiscal
year
of
the
Company
on
the
Class
“A”
Common
Voting
Shares,
Class
“B”
Common
Voting
Shares,
and
Class
“C”
Common
Non
voting
Shares
until
dividends
for
the
year
or
period
shall
have
been
declared
and
paid
on
the
Class
“A”
Preferred
Voting
Shares
and
Class
“B”
Preferred
Shares.
5.
The
following
shares
of
the
Company
were
issued
and
outstanding
during
the
relevant
taxation
years.
|
Name
|
Class
of
Shares
|
1984
|
1985
|
1986
|
|
Paul
Korol
|
Class
“A”
Common
|
72,994
|
72,994
|
72,994
|
|
Voting
|
|
|
Paul
Korol
|
Class
“A”
Preferred
|
314,248
|
314,248
|
314,248
|
|
Voting
|
|
|
Stella
Korol
|
Class
“C”
Common
|
1,000
|
1,000
|
1,000
|
|
Nonvoting
|
|
|
Stephen
|
Class
“B”
Common
|
500
|
500
|
500
|
|
Korol
|
Voting
|
|
|
Stephen
|
Class
“B”
Preferred
|
500
|
500
|
500
|
|
Korol
|
|
|
Anthony
|
Class
“B”
Common
|
500
|
500
|
500
|
|
Korol
|
Voting
|
|
|
Anthony
|
Class
“B”
Preferred
|
500
|
500
|
500
|
|
Korol
|
|
6.
The
following
dividends
were
declared
and
paid
during
the
relevant
taxation
years:
|
Name
|
Class
of
Shares
|
1984
|
1985
|
1986
|
|
Anthony
|
Class
“B”
Preferred
|
{*}$
13,500
|
$7,100}
|
$5,470
|
|
Korol
|
|
|
Stephen
|
Class
“B”
Preferred
|
{*}$13,500!
|
$7,100
|
$5,470
|
|
Korol
|
|
|
Stella
Korol
|
Class
“C”
Common
|
$35,800
$18,800
$14,500
|
|
Voting
|
|
|
Notes:
|
|
(*These
reflect
the
1987
correction
to
the
1984
Directors’
Resolutions
regarding
the
payment
of
dividends
on
the
Class
“B”
Preferred
Shares,
see
below.)
Schedule
“2”
annexed
hereto
is
a
true
copy
of
the
Directors’
Resolutions
in
the
minute
book
of
the
Company
indicating
that
dividends
were
declared
and
paid
as
stated
above,
the
same
being
dated
August
22,
1984,
August
20,
1985
and
September
22,
1986.
Also
attached
is
a
copy
of
Directors’
Resolutions
dated
September
28,
1987,
wherein
the
Minutes
of
the
Directors
of
August
22,
1984
were
corrected
to
show
that
the
dividend
of
$27.00
per
share
was
paid
to
the
holders
of
Class
“B”
Preferred
Shares
rather
than
the
Class
“B”
Common
Voting
Shares.
7.
On
or
about
July
11,
1988,
the
Respondent
reassessed
the
Appellant
(the
“Reassessments”)
with
respect
to
each
of
the
relevant
taxation
years
and
included
in
his
income,
pursuant
to
Subsection
56(2)
of
the
Income
Tax
Act
(Canada),
the
following
dividend
income
which
had
been
paid
by
the
Company
pursuant
to
paragraph
6
above:
|
Taxation
Year
|
Amount
of
Dividend
Income
Reallocated
|
|
to
the
Appellant
(before
gross
up)
|
|
1984
|
$62,310
|
|
1985
|
$32,743
|
|
1986
|
$25,242
|
8.
Notices
of
Objection
to
the
Reassessments
were
prepared
and
filed
with
the
Respondent
in
prescribed
form
and
in
a
timely
manner.
The
Respondent
confirmed
the
Reassessments,
and
the
Appellant
appealed
the
decision
of
the
Respondent
to
this
Honourable
Court.
At
the
hearing,
counsel
for
the
Minister
acknowledged
that
the
dividends
on
the
Class
B
Preferred
Shares
for
all
years
was
no
longer
in
issue.
In
addition
to
the
Agreed
Statement
as
to
Facts
the
Appellant
testified
as
follows:
he
was
a
diagnostic
radiologist
carrying
on
practice
in
partnership
in
Saskatoon,
Saskatchewan;
he
had
the
vast
majority
of
the
shares
of
Korol
Investments
Ltd.
(the
“Company”),
a
holding
company
incorporated
in
1979;
he
had
a
solicitor
named
Muzyka
and
an
accountant
named
Birney
and
he
relied
on
the
advice
of
Birney
as
to
the
payment
of
dividends
by
the
Company;
the
setting
up
of
the
Company
and
the
payment
of
dividends
were
part
of
a
tax
plan
to
allocate
as
much
dividend
income
as
possible
to
his
wife
and
sons.
In
this
regard
he
followed
the
advice
of
his
accountant.
He
stated
further
that,
had
the
accountant
so
advised,
the
Company
would
have
declared
dividends
in
minimal
amounts,
say
$1.00
on
the
shares
having
dividend
priority
in
accordance
with
the
Articles
of
Incorporation
(“Articles”),
so
that
there
would
have
been
conformity
with
the
Articles.
Appellant’s
Submissions
Counsel
for
the
Appellant
submits
that,
as
was
determined
by
the
Supreme
Court
of
Canada
in
Neuman
v.
Minister
of
National
Revenue,
[1998]
1
S.C.R.
770
(S.C.C.)
and
McClurg
v.
Minister
of
National
Revenue,
[1990]
3
S.C.R.
1020
(S.C.C.),
dividend
income
generally
cannot
be
the
subject
of
a
reallocation
pursuant
to
subsection
56(2)
of
the
Act.
In
Neuman
the
Supreme
Court
of
Canada
stated
as
follows
at
page
782:
In
order
for
s.
56(2)
to
apply,
four
preconditions,
each
of
which
is
detailed
in
the
language
of
the
s.
56(2)
itself,
must
be
present:
(1)
the
payment
must
be
to
a
person
other
than
the
reassessed
taxpayer;
(2)
the
allocation
must
be
at
the
direction
or
with
the
concurrence
of
the
reassessed
taxpayer;
(3)
the
payment
must
be
for
the
benefit
of
the
reassessed
taxpayer
or
for
the
benefit
of
another
person
whom
the
reassessed
taxpayer
wished
to
benefit;
and
(4)
the
payment
would
have
been
included
in
the
reassessed
taxpayer’s
income
if
it
had
been
received
by
him
or
her.
Because
I
conclude
that
s.
56(2)
does
not
apply
to
dividend
income
since
dividend
income,
by
its
very
nature,
cannot
satisfy
the
fourth
precondition
absent
a
sham
or
other
subterfuge,
it
is
not
necessary
to
discuss
the
other
three
prerequisites
to
the
application
of
s.
56(2).
...First,
s.
56(2)
strives
to
prevent
tax
avoidance
through
income
splitting;
however,
it
is
a
specific
tax
avoidance
provision
and
not
a
general
provision
against
income
splitting.
In
fact,
“there
is
no
general
scheme
to
prevent
income
splitting”
in
the
ITA.
...Section
56(2)
can
only
operate
to
prevent
income
splitting
where
the
four
preconditions
to
its
application
are
specifically
met.
...it
is
important
to
remember
that
this
Court
held
unanimously
in
Stubart,
...
that
a
transaction
should
not
be
disregarded
for
tax
purposes
because
it
has
no
independent
or
bona
fide
business
purpose...
Thus,
taxpayers
can
arrange
their
affairs
in
a
particular
way
for
the
sole
purpose
of
deliberately
availing
themselves
of
tax
reduction
devices
in
the
/7A.
Further,
counsel
argues
that
since
there
is
no
amount
fixed
for
the
amount
of
dividends
that
had
to
be
declared
on
the
priority
shares,
any
amount
such
as
$1.00,
or
other
nominal
amount,
could
have
been
paid
thereon
and
the
Articles
would
then
have
been
complied
with.
This
was
the
uncontradicted
testimony
of
the
Appellant
and
consequently
if
subsection
56(2)
were
applicable
the
quantum
of
any
reallocation
should
only
be
$1.00
or
other
nominal
amount.
He
submits
further
that
in
any
event
the
failure
to
follow
the
priority
of
dividends
stipulated
in
the
Articles
does
not
result
in
the
amount
of
the
dividend
(or
as
was
done
in
the
present
appeals,
99.22%
thereof)
being
allocated
to
the
Appellant.
He
states
there
is
no
authority
for
the
quantum
allo-
cation
used
by
the
Minister
which
is
based
on
the
percentage
of
all
the
shares
in
the
Company
owned
by
the
Appellant.
He
points
further
to
The
Business
Corporations
Act
of
Saskatchewan
(“B.C.A.S.”)
which
states
as
follows:
15(1)
A
corporation
has
the
capacity
and,
subject
to
this
Act,
the
rights,
powers
and
privileges
of
an
individual.
16(3)
No
act
of
a
corporation,
including
any
transfer
of
property
to
or
by
a
corporation,
is
invalid
by
reason
only
that
the
act
or
transfer
is
contrary
to
its
articles
or
this
Act.
He
refers
further
to
what
are
known
as
the
oppression
provisions
in
the
said
B.C.A.S.,
namely:
234(1)
A
complainant
may
apply
to
a
court
for
an
order
under
this
section.
(2)
If,
upon
an
application
under
subsection
(1),
the
court
is
satisfied
that
in
respect
of
a
corporation
or
any
of
its
affiliates:
(a)
any
act
or
omission
of
the
corporation
or
any
of
its
affiliates
affects
a
result:
(b)
the
business
or
affairs
of
the
corporation
or
any
of
its
affiliates
are
or
have
been
carried
on
or
conducted
in
a
manner:
or
(c)
the
powers
of
the
directors
of
the
corporation
or
any
of
its
affiliates
are
or
have
been
exercised
in
a
manner:
that
is
oppressive
or
unfairly
prejudicial
to
or
that
unfairly
disregards
the
interests
of
any
security
holder,
creditor,
director
or
officer,
the
court
may
make
an
order
to
rectify
the
matters
complained
of.
(3)
In
connection
with
an
application
under
this
section,
the
court
may
make
any
interim
or
final
order
it
thinks
fit
including,
without
limiting
the
generality
of
the
foregoing:
(a)
an
order
restraining
the
conduct
complained
of;
(b)
an
order
appointing
a
receiver
or
receiver-manager;
(c)
an
order
to
regulate
a
corporation’s
affairs
by
amending
the
articles
or
bylaws
or
creating
or
amending
a
unanimous
shareholder
agreement;
(d)
an
order
directing
an
issue
or
exchange
of
securities;
(e)
an
order
appointing
directors
in
place
of
or
in
addition
to
all
or
any
of
the
directors
in
office;
(f)
an
order
directing
a
corporation,
subject
to
subsection
(6),
or
any
other
person,
to
purchase
securities
of
a
security
holder;
(g)
an
order
directing
a
corporation,
subject
to
subsection
(6),
or
any
other
person,
to
pay
to
a
security
holder
any
part
of
the
moneys
paid
by
him
for
securities;
(h)
an
order
varying
or
setting
aside
a
transaction
or
contract
to
which
a
corporation
is
a
party
and
compensating
the
corporation
or
any
other
party
to
the
transaction
or
contract;
(i)
an
order
requiring
a
corporation,
within
a
time
specified
by
the
court,
to
produce
to
the
court
or
an
interested
person
financial
statements
in
the
form
required
by
section
149
or
an
accounting
in
such
other
form
as
the
court
may
determine;
(j)
an
order
compensating
an
aggrieved
person;
(k)
an
order
directing
rectification
of
the
registers
or
other
records
of
a
corporation
under
section
236;
(l)
an
order
liquidating
and
dissolving
the
corporation;
(m)
an
order
directing
an
investigation
under
Division
XVII
to
be
made;
(n)
an
order
requiring
the
trial
of
any
issue.
(4)
If
an
order
made
under
this
section
directs
amendment
of
the
articles
or
bylaws
of
a
corporation:
(a)
the
directors
shall
forthwith
comply
with
subsection
(4)
of
section
185;
and
(b)
no
other
amendment
to
the
articles
or
bylaws
shall
be
made
without
the
consent
of
the
court,
until
a
court
otherwise
orders.
(5)
A
shareholder
is
not
entitled
to
dissent
under
section
184
if
an
amendment
to
the
articles
is
effected
under
this
section.
(6)
A
corporation
shall
not
make
a
payment
to
a
shareholder
under
clause
(f)
or
(g)
of
subsection
(3)
of
there
are
reasonable
grounds
for
believing
that:
(a)
the
corporation
is
or
would
after
that
payment
be
unable
to
pay
its
liabilities
as
they
become
due;
or
(b)
the
realizable
value
of
the
corporation’s
assets
would
thereby
be
less
than
the
aggregate
of
its
liabilities.
(7)
An
applicant
under
this
section
may
apply
in
the
alternative
for
an
order
under
section
207.
Counsel
concluded
that
these
oppression
provisions
provide
the
remedy
of
an
aggrieved
shareholder
—
for
example,
a
shareholder
who
did
not
receive
dividends
in
the
priority
established
by
the
Articles.
If
the
aggrieved
shareholder
foregoes
this
remedy
the
dividends
declared
should
stand
and
remain
valid.
Counsel
refers
also
to
the
decision
of
the
Supreme
Court
of
Canada
in
Continental
Bank
of
Canada
v.
R.,
[1998]
2
S.C.R.
298
(S.C.C.)
where
a
bank
contravened
section
174
of
the
Bank
Act
which
prohibited
the
bank
from
holding
an
interest
in
a
partnership.
The
bank
held
shares
in
a
subsidiary
which
was
a
partner
in
a
partnership.
It
was
therefore
argued
that
the
partnership
was
void
with
the
result
that
the
rollover
of
asserts
into
the
partnership
under
subsection
97(2)
of
the
Act
was
also
void.
The
majority
of
the
Court
held
otherwise.
Thus
the
desired
tax
treatment
was
allowed,
notwithstanding
the
bank
had
contravened
an
element
in
its
charter.
Respondent’s
Submissions
Counsel
for
the
Respondent
declined
to
offer
any
comments
on
what
should
be
the
quantum
of
the
dividends
the
Minister
could
allocate
to
the
Appellant.
He
submitted
that
form
counts
in
income
tax
matters
(Friedberg
v.
R.
(1991),
92
D.T.C.
6031
(Fed.
C.A.))
and
since
the
Company
did
not
follow
the
priorities
set
forth
in
the
Articles
when
declaring
dividends
there
must
be
a
reallocation
of
dividends
to
the
Appellant
under
subsection
56(2)
of
the
Act.
He
referred
also
to
Champ
v.
R.
(1982),
[1983]
C.T.C.
1
(Fed.
T.D.)
where
the
Federal
Court
held
that
where
under
its
Articles
dividends
could
not
be
paid
selectively
the
plaintiff
with
full
control
of
a
corporation
was
subject
to
subsection
56(2)
with
respect
to
dividends
paid
to
his
wife.
He
also
referred
to
the
dissenting
opinion
of
La
Forest,
J.
in
the
McClurg
case.
Counsel
also
alluded
to
the
doctrine
of
“ultra
vires”
with
the
apparent
conclusion
that
sections
15(1)
and
16(3)
of
the
B.C.A.S.
could
not
be
relied
upon
by
the
Appellant.
Analysis
and
Decision
In
my
opinion
the
decision
of
the
Supreme
Court
in
Neuman
is
the
last
word
on
the
issue
in
these
appeals
and
the
only
distinction
between
these
appeals
and
that
decision
is
that
the
Articles
with
respect
to
priority
of
dividends
were
not
followed.
I
do
not
believe
that
this
alters
the
situation.
The
failure
to
follow
the
priority
for
dividends
in
the
Articles
in
my
opinion
is
not
sufficient
to
cause
subsection
56(2)
to
be
applicable.
Subsections
15(1)
and
16(3)
of
the
B.C.A.S.
make
it
clear
that
the
Company
could
validly
declare
dividends
without
complying
with
its
Articles
and
even
if
these
sections
were
only
there
to
protect
third
parties,
shareholders
are
third
parties.
In
any
event,
the
following
statements
of
Bastarache,
J.
(dissenting)
in
Continental
Bank
are
helpful
in
considering
the
theory
of
“ultra
vires
':
(a)
Ultra
Vires
175
The
ultra
vires
doctrine
was
developed
by
the
courts
in
the
mid-19th
century
to
restrict
the
legal
capacity
of
corporations
created
under
the
Companies
Act
and
its
successor
statutes.
The
doctrine
provided
that
a
corporation
had
the
legal
capacity
to
perform
only
those
acts
authorized
by
its
articles.
Any
acts
not
authorized
by
the
articles
were
void
for
want
of
legal
capacity...
176
The
doctrine
was
meant
to
limit
the
scope
of
activities
of
a
corporation
in
order
to
protect
the
interests
of
its
creditors
and
shareholders.
It
came
to
be
recognized
that
the
doctrine
produced
inconvenience
and
occasional
hardship
for
the
public
who
were
expected
to
take
notice
of
all
limitations
on
the
corporation’s
capacity
as
revealed
through
public
documents....
177
In
1974,
the
Canada
Business
Corporations
Act,
S.C.
1974-75-76,
c.
33
(“CBCA”),
abolished
the
ultra
vires
doctrine
in
the
context
of
Canadian
corporations
by
attributing
to
corporations
the
capacity
of
a
natural
person.
Section
15(1)
of
the
CBCA
provided
that
“a
corporation
has
the
capacity
and,
subject
to
this
Act,
the
rights,
powers
and
privileges
of
a
natural
person”.
The
CBCA
also
provides
at
s.
16(3)
that
“[n]0
act
of
a
corporation,
including
any
transfer
of
property
to
or
by
a
corporation,
is
invalid
by
reason
only
that
the
act
or
transfer
is
contrary
to
its
articles
or
this
Act”.
...Legal
rights
and
duties
created
in
transactions
prohibited
to
banks
by
the
Act
and
conferred
on
third
parties
are
valid
and
no
longer
subject
to
disturbance
by
judicial
avoidance
of
the
original
prohibited
transaction.
Rather,
the
bank
is
subject
to
the
penalties
set
out
in
the
Bank
Act,
and
probably
also
those
existing
in
the
general
law,
for
engaging
in
prohibited
actions.
181
In
Canadian
Pickles,
supra,
this
Court
held
that
the
doctrine
of
ultra
vires
has
been
abolished
for
corporations
incorporated
under
most
business
corporations
legislation.
Further,
I
accept
the
submission
of
Appellant’s
counsel
with
respect
to
the
effects
of
the
sections
quoted
from
the
B.C.A.S
and
the
principles
established
in
Continental
Bank.
Moreover,
it
is
clear
that
since
no
amount
of
dividends
on
the
priority
shares
was
fixed
in
the
Articles,
the
allocation
under
subsection
56(2),
if
it
were
applicable,
could
have
been
simply
$1.00
or
some
other
nominal
amount.
For
all
of
these
reasons
the
appeals
are
allowed,
with
costs,
and
the
matter
is
referred
back
to
the
Minister
of
National
Revenue
for
reconsideration
and
reassessment
on
this
basis.
Appeal
allowed.
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