Active Asset Management – Tax Court of Canada finds that issuing promissory notes in satisfaction of dividends in kind does not entail a transfer of property

AAM, which wholly-owned a private corporation (Bakorp), resolved to increase the stated capital of one of the two classes of shares held by it by $35 million (resulting in a deemed dividend in that amount) and, on the same day, received two promissory notes aggregating $77.6 million in satisfaction of dividends declared on that date on both classes of shares.

In finding that none of these dividends constituted a transfer of property by Bakorp to AAM, so that s. 160(1) did not apply regarding an unpaid tax debt of Bakorp, Bocock J first stated, regarding the stated capital increase:

AAM can now say its shares reflect a different stated value, but not a penny has been received by it as a consequence of the deemed dividend. …

[T]he mischief targeted by s.160, avoidance of payment of a tax debt to the Crown, has also not occurred. The “funds” available to Bakorp have not changed in the slightest. … .

Regarding the dividends-in-kind, he stated:

Where and how has Bakorp transferred, dissipated or surrendered control of its assets, funds or property to circumvent the payment of its tax liability.[citing Algoa] It has not in any way done so. No assets or funds of Bakorp, consequentially arising from the declaration of the declared dividends or making of the promissory notes, reside with AAM.

He did not refer to the statement in Banner Pharmacaps that:

[I]n some circumstances a promissory note may be evidence of a debt to be paid at some future time. In other circumstances, delivery of a promissory note may itself be payment of a particular obligation.

It is not apparent from the above-quoted passages from his judgment that Bocock J would have considered this distinction to be relevant.

Neal Armstrong. Summary of Active Asset Management Inc. v. The King, 2024 TCC 87 under s. 160(1).