David Prussick v. Minister of National Revenue, [1979] CTC 2455, 79 DTC 386

Delmer E Taylor:—This is an appeal heard in the City of Montreal, Quebec, on October 12, 1978, against an income tax assessment in which the Minister of National Revenue assessed tax on the basis of a “deemed” dividend allegedly received by the appellant during the year 1973. In the reply to notice of appeal, the respondent relied, inter alia, upon subsections 15(1), 82(1), 83(1), 84(2), 152(7) and section 196 of the Income Tax Act, SC 1970-71-72, c 63.

Facts

The appellant was a shareholder of Preston Physical Culture Inc (hereinafter referred to as the “corporation” or the “Company”) in the 1973 taxation year. In that year the Company made application to surrender its charter. Prior to the distribution of assets to the appellant, the Company elected within the prescribed time and manner to pay a 15% tax on its 1971 undistributed income on hand pursuant to subsection 196(1) of the Income Tax Act. Forms T2053 and T2056 were filed with Revenue Canada and the calcualtions used by the Company in arriving at its “undistributed income” including reducing the surplus by an amount of $15,000 carried in the records as “goodwill”.

Contentions

The appellant submitted that the $15,000 (noted above) formed part of the tax-paid undistributed income of the Company on hand at December 31, 1971, and was properly deducted. The balance was paid to him all in accordance with the provisions of subsection 83(1) of the Income Tax Act.

The position of the respondent was that:

—On July 19, 1973, Preston’s Physical Culture Inc filed a T-2053 form, electing an amount of $31,858 as the undistributed income on hand in 1971;

—On July 23,1973, the Company filed a T-2056 form and paid the 15% tax in order to declare a tax-free dividend of $1,000;

—On December 21,1973, the Company filed a second election in respect of the full amount of the dividend to the paid, that is to say $30,858, the amount equal to the difference between the amount of the first election $31,858 and the dividend free of tax already declared, $1,000; consequently, the Company declared an undistributed income on hand in 1971 of $31,858 and the 15% thereupon was paid.

—The Minister of National Revenue re-computed the amount of 1971 undistributed income on hand and increased the said amount by $15,000; this sum represents the value of the goodwill, which is not deductible in computing the undistributed income on hand in 1971.

—Consequently, he sent a registered letter dated March 5, 1974, to the Company.

—The sum amounting to $15,000 represents the goodwill, and formed a balance (after the election of 1973) not included in the distributed income on hand in 1971.

— Mr Prussick, the appellant, received on the winding-up of the Company, a sum of $15,000 and is taxable on a deemed dividend of $20.000.

—The undistributed income on hand in 1971 has been properly computed according to the provisions of the Income Tax Act.

— It is too late for the Company to make another election with regard to the $15,000 added; the charter of the Company was officially surrendered on November 9, 1974.

—On the winding-up of the Company, funds or property have been distributed to the taxpayer in accordance with the provisions of subsection 84(2) of the Act. Consequently, dividends amounting to $20,000 are deemed to have been received by the taxpayer and have been properly included in computing the tax-payer’s income in accordance with the provisions of paragraph 82(1)(b) of the Act.

Evidence

The general history of the Company was explained to the Board and the reasons given for the decision to wind-up the Company.

Argument

The propriety of deducting the $15,000 in question was reviewed at length by both parties, and considerable attention paid to the complex process of calculation of undistributed income for purposes of winding-up a company. Written submissions were received on some of the specific points raised at the hearing.

Findings

In reviewing the arguments and submissions of the parties, I find the facts to be as follows:

—The appellant was during the relevant years the sole shareholder of the Company.

—On incorporation in 1959, an amount of $15,000 was set up representing “Goodwill” from the predecessor unincorporated business.

—The appellant took in payment for the above goodwill, common and preference shares to the full amount of $15,000.

— No objection was raised by Revenue Canada in 1959 either to the purchase or valuation of goodwill by the corporation.

— In 1973 the appellant decided to wind up the Company and distributed the net assets remaining.

— In so doing, he concluded that the most advantageous approach would be to pay the reduced rate of 15% tax on undistributed income.

— He did so effective December 31,1973, with what he regarded to be the agreement of Revenue Canada.

— In making the necessary calculation, and ultimate distribution of the Company assets, he reduced the book amount of undistributed income by $15,000 representing the above-noted goodwill.

—There is some minimal evidence that the appellant was notified at a date earlier than March 1974 that the deduction of the $15,000 was not permitted, but in March 1974, according to Revenue Canada, the appellant was notified by mail.

—The appellant denies any knowledge of the receipt of the above letter.

—On June 21, 1974, a notice of assessment was issued against the Company, accepting the 15% tax paid on the Company’s calculation of undistributed

income—which had been reduced by the $15,000 now in issue.

—There is no evidence that the Minister proceeded to issue any revised assessment against the Company, to collect the additional tax on the $15,000, or indeed that any further assessment was issued against the corporation.

—On November 9, 1974, the charter of the Company was surrendered.

—On March 19, 1976, an assessment was issued directly against the appellant (not against the corporation), the basis of which was the tax paid at the rate of 15% on the $15,000 at issue—but now treated as a benefit received by the appellant.

—The appellant filed a notice of objection pointing out:

Did not receive letter dated March 4, 1974, indicating revision of figures submitted, otherwise 15% would have been paid on $15,000 additional UIOH to avoid present assessment.

Request interest be waived on amount due, and that PRESTON’S PHYSICAL CULTURE INC be allowed to file an additional T2056 to pay 15% on the final $15,000 and this assessment be cancelled.

—On January 7, 1977, the Minister notified the appellant that the assessment of tax against him personally had been sustained and the objection rejected.

—The appeal at issue resulted.

— Reference is made to one of the contentions of the respondent, noted earlier:

It is too late for the Company to make another election as regard to the $15,000 added; the charter of the Company was officially surrendered on November 9, 1974.

While a considerable part of the argument brought forward related to the subject of goodwill, its original calculation and validity, its continued existence in 1973, its deduction from undistributed income, etc, in my view the Board is not required to make any determination on that point. Nor do I see that paragraph 82(1 )(b) of the Act, quoted as support by the Minister, has any application. The only point at issue is whether or not, on winding up the corporation, the appellant as the sole shareholder received a benefit under paragraph 15(1)(a), (b) or (c) of the Act. The basic transaction involved

—winding up the Company and distributing the net assets—certainly was bona fide—th ere fore paragraph 15(1 )(a) does not apply. Similarly, there was no appropriation by the shareholder, as it should be understood under paragraph 15(1 )(b). And finally, the net assets of the corporation, after winding up, were clearly the property of the taxpayer, and distributed to him—there was no benefit under paragraph 15(1)(c). It would appear to me that the fundamental position of the Minister is that the appellant received an amount greater than that which he would have received, based upon the current calculations by the Minister of the undistributed income. Just as easily, it might be contended that instead of a benefit or advantage, the corporation had conferred upon him a possible liability—a part of the corpora tion tax payable. I fail to see the position that because Revenue Canada apparently did not issue an assessment against the Company in support of the contention that insufficient tax had been paid, the Minister should now be permitted to issue an assessment directly against the appellant for some alleged benefit received.

Conclusion

The Board is not called upon to determine whether or not the position of the Minister is indeed valid with respect to the calculation of the undistributed income as filed. The only determination is that the appellant did not receive a benefit from the Company under paragraph 15(1)(c) of the Act. Reference might be made to an earlier decision of the Board (C R Stewart Equipment Ltd v MNR, [1977] CTC 2232; 77 DTC 176), in which the subject matter touches upon the same general area of corporate or personal tax responsibility.

Decision

The appeal is allowed, and the assessment vacated.

Appeal allowed.