MacDonald v. The Queen

MacDonald v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2012-04-17
Neutral citation
2012 TCC 123
File numbers
2009-1(IT)G
Judges and Taxing Officers
Joe E. Hershfield
Subjects
Income Tax Act
Decision Content
Docket: 2009-1(IT)G
BETWEEN:
DR. ROBERT G. MACDONALD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on September 21 and 22, 2011 at Fredericton, New Brunswick
Before: The Honourable Justice J.E. Hershfield
Appearances:
Counsel for the Appellant:
J. Paul M. Harquail
Counsel for the Respondent:
David I. Besler
____________________________________________________________________
JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 2002 taxation year is allowed, with costs, and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with and for the reasons set out in the attached Reasons for Judgment.
Signed at Ottawa, Canada this 17th day of April 2012.
“J.E. Hershfield”
Hershfield J.
Citation: 2012 TCC 123
Date: 20120417
Docket: 2009-1(IT)G
BETWEEN:
DR. ROBERT G. MACDONALD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hershfield J.
Issues
[1] The Appellant was assessed to include a taxable dividend in the amount of $524,967 in his income for the 2002 taxation year pursuant to subsection 84(2) of the Income Tax Act (the “Act”). That subsection deems a dividend to have been received when a company distributes funds to a shareholder on a winding up, discontinuance, or reorganization of a business.
[2] The transactions assessed as invoking this provision of the Act included a non-arm’s length sale of the Appellant’s shares in Robert G. MacDonald Professional Corporation Ltd. (“PC”) in 2002 (the “share sale”).
[3] The assessment also relied on section 245 of the Act, the provision commonly referred to as the General Anti-Avoidance Rule (“GAAR”).
[4] A further basis for the assessment was that the share sale, funded by way of a series of related transactions with funds provided by PC, was a sham. The sham basis for the assessment was abandoned at trial.
[5] The Appellant had reported the amount at issue as a capital gain arising from the share sale on the basis of receiving proceeds of disposition of $525,068 and as having an adjusted cost base of $101. The Appellant had capital losses and capital loss carry forwards (net capital losses) available to shelter part of the capital gain triggered on the share sale. The assessment, applying subsection 84(2), deemed the amount received by the Appellant on the disposition, less $101 being the paid-up capital of the shares sold, to have been received as a dividend.[1]
[6] The issue raised by the appeal is whether subsection 84(2) applies on the facts of this case or whether, in any event, GAAR applies to give the same result. Further, in the event the subject amount is to be treated as a dividend, another question was raised by the Appellant: namely, whether filing his tax return for the subject year on the basis that he was a resident of Canada at the time of the share sale was, in fact, correct. Detailed evidence was given at the hearing relating to his taking up residency in the United States so as to afford the Court the opportunity to answer that question.
[7] If the Appellant was not a resident of Canada at the time of the share sale, the deemed disposition rules in paragraph 128.1(4)(b) of the Act would apply and the tax payable on the deemed divided would be governed by section 212 of the Act and by the Canada–United States Income Tax Convention.[2]
How Evidence was Presented
[8] There was a partial Agreed Statement of Facts filed at the hearing. It is appended to these Reasons as Schedule 1. It describes the transactions surrounding the share sale. In effect, it concedes that the manner by which the share sale was carried out was by way of a non-arm’s length series of transactions designed to give the Appellant access to essentially all of the assets of PC.
[9] However, the Appellant also testified at the hearing. His testimony, the credibility and reliability of which Respondent’s counsel openly acknowledged, provided the background leading up to the share sale, the related transactions, and the reasons for the manner chosen to implement those transactions. His elaboration of the transactions afforded counsel the opportunity to clarify some uncertainties contained in the partial Agreed Statement of Facts.
[10] As well, his testimony detailed with some exactitude the events relating to his departure from Canada and his taking up residence in the United States. This evidence is relevant to the alternative argument raised by the Appellant in the event that I found that subsection 84(2) applied, namely whether he was already a resident of the United States at the time of payment of the deemed dividend arising out of the application of that provision. On filing his return for the year, the Appellant took the position that the share sale and the capital gain took place on June 25, 2002 while he was still a resident of Canada. The Respondent has never taken issue with this filing position and rejects the Appellant’s alternative position that his residence changed before the share sale or before any distribution or appropriation of PC’s assets occurred.
[11] It might be easiest and fairest to deal with the Appellant’s testimony before looking at, and elaborating on, the series of transactions implementing the share sale.
Background Facts
[12] As noted, the testimony of the Appellant was not challenged. Accordingly, his evidence was accepted as factual, except where it was admitted to be uncertain in terms of his recollection of certain events going as far back as 2000 when events leading to his departure from Canada first began.
[13] The Appellant’s testimony includes the following background:
· After completing medical studies in Canada, the Appellant did post-graduate work in the United States where he met his wife Dale Paley, a US citizen who was then completing her studies in veterinary medicine. The Appellant was in the United States on a visa that required his return to Canada on completion of his studies. His studies resulted in his obtaining a cardiologist’s specialty designation known as an interventionist heart surgeon. He returned to Canada in 1986 by taking a position in Halifax. Ms. Paley came with him and they were soon married, a step that facilitated her Canadian studies in veterinary medicine. Later, in 1991, the Appellant and his wife moved to New Brunswick where the Appellant took a position with the New Brunswick Heart Centre at the Saint John Regional Hospital. His association there lasted until his departure from Canada in 2002.
· The Appellant performed his services for the New Brunswick Heart Centre as an employee of his professional corporation, namely PC, which was incorporated under the laws of New Brunswick on September 4, 1991. From the incorporation of PC until well after his departure from Canada in 2002, the Appellant was its sole director and officer. He was the sole shareholder until the share sale. PC changed its name to 050509 N.B. Ltd. on June 26, 2002 as part of the series of transactions required as a consequence of his moving to the United States and of his ending his medical practice in New Brunswick.[3]
· The New Brunswick Heart Centre housed many independent practitioners, including the Appellant’s practice. The hospital leased space to these practitioners, and provided secretarial help. There was a common billing system among the practitioners, but each cared for their own patients. Over the decade that the Appellant spent in Saint John, he had convinced many practitioners to join him at the hospital, but he remained the sole employee of PC.
· PC received income only from Medicare. PC held a billing number which was a requirement to practise medicine in New Brunswick.[4] PC billed Medicare for services. Medicare then sent a cheque in PC’s name to the Appellant. The Appellant would deposit the cheque into an office bank account. A new cheque would be made out to PC based on its proportionate entitlement.
· After practising medicine for over a decade in Canada, it became apparent to the Appellant that his wife wanted them to move back to the United States to live. Her veterinarian’s practice was difficult to maintain and the weather was problematic for her.
· The Appellant started working toward emigrating to the United States in the year 2000. The process required many steps to be taken and satisfactorily completed in order for the Appellant to obtain the necessary status to reside and work in the United States with his wife. These steps include the following:
° Being sponsored by his wife, a United States citizen, as an immigrant;
° Showing an intention to become a United States resident, including buying a house in the United States and listing his Canadian house for sale;
° Signing a letter of agreement to join a practice in Greenville, North Carolina.[5] The Appellant was paid recruiting expenses and a signing bonus by that practice, which he was obligated to refund if he did not join the practice;
° Certifying two automobiles he bought in Canada for export to the United States, including ensuring that the vehicles met US Environmental Protection Agency regulations and US federal safety requirements.[6]
· On June 5, 2002, the United States Consulate in Montreal issued an “Immigrant Visa and Alien Registration” document. The visa expired at midnight, December 4, 2002, meaning the Appellant needed to leave Canada and take up residency in the United States by December 4 of that year.
· As required by the visa, the Appellant left Canada prior to its expiry date by crossing the border with his wife. They crossed at 5:30 p.m., Eastern Standard Time, on June 25, 2002 taking with them all their personal property.
· Further actions taken relating to this departure from Canada included:
° Meeting with the moving company at the border on June 25, 2002 to ensure records reflected a permanent exporting of their personal property to the United States;
° Setting up his practice in the United States by joining many medical societies and associations. He obtained his license from the North Carolina licensing body which was required for him to practise medicine there. Shortly after, he was licensed by the South Carolina Medical Association which enabled him to practise medicine at the medical facility where he still works today;
° Surrendering his New Brunswick driver’s license and obtaining a North Carolina license;
° Opening a bank account in North Carolina.
[14] While the forgoing describes steps taken to affect his immigration to the United States, it is necessary to set out the evidence relating more specifically to his severance of ties from Canada. I will divide that evidence into two parts: the Appellant’s additional testimony dealing with the wind-up of his professional and personal ties and affairs in Canada; and, his evidence dealing with his investment in PC and the share sale. I will deal firstly with his evidence dealing with areas of his severance other than those dealing with his holdings in PC.
[15] In severing his ties to Canada other than his investment in PC, his evidence was as follows:
· Prior to June 25, 2002 he sold his house in New Brunswick and disposed of many chattels he no longer needed.[7]
· Prior to June 25, 2002, he allowed his New Brunswick medical license to expire, as well as resigning from his practice and numerous medical associations and societies. However, he is still a member of Royal College of Physicians.
· Prior to June 25, 2002, he gave notice to the Saint John Regional Hospital that he was ceasing to practise medicine in New Brunswick.
· He caused his accountants, Teed Saunders Doyle & Co., to prepare the necessary T4 form for remuneration from his listed employer, 050509 N.B. Ltd. (formerly PC). The T4, filed after the Appellant’s departure, was required because Medicare paid, as it did in the normal course, between six to eight weeks after a professional invoiced the province for services provided. That is, 050509 N.B. Ltd. was receiving funds after June 25, 2002 for entitlements PC earned prior to June 25, 2002. Such receipts were accounted for as remuneration paid to the Appellant as an employee of 050509 N.B. Ltd..
[16] This takes me to the Appellant’s dealings with PC.
[17] As a preliminary matter, I reiterate what I noted earlier: the Appellant had, unrelated to the transactions under review in this appeal, suffered personal capital losses and personal capital loss carry forwards or net capital losses. These are the losses that sheltered the capital gain triggered by the share sale. I will frequently refer to these personal capital losses and personal capital loss carry forwards as such, as did the parties although more technically it appears that we are talking about the Appellant’s net capital losses.
[18] In any event, the decision to leave Canada caused the Appellant, as one might expect, to seek tax advice from his accountant.
[19] His accountant advised that the departure could cause significant income tax problems given the deemed disposition rules under the Act. The problem described to him was that a deemed disposition of his PC shares would trigger capital gains tax in Canada on his capital gain but that the United States would not recognize an increase in the cost base of those shares. Accordingly, on the actual disposition of the PC shares after his departure, the entire capital gain would be taxable in the United States, based on his residency there.[8]
[20] That is, while the Appellant could use his personal capital losses and carry forwards to off-set the capital gain in Canada arising from the deemed disposition under the Act of his PC shares, that would provide no protection against recognition of a potential future capital gain in the United States measured from his original cost of $101. In effect, the Appellant would lose the economic benefit of applying his personal capital losses against his gain in respect of his shares in PC.[9]
[21] Based on this concern, the Appellant was referred by his accountant to tax professionals in both the legal and accounting fields. As a result, a plan was devised to utilize the capital losses and loss carryovers available in Canada and while preventing a second taxable realization of his shares in PC in the United States.
[22] Initially, the advice was to sell his shares in PC in what I might refer to as an arm’s length transaction, but that proved impractical, indeed impossible. As a going concern, providing the services of a medical doctor, there was no market for PC shares: there was no medical doctor who would want to inherit another doctor’s corporate issues. Hence, the corporation had to be converted from a professional corporation to a holding company but again there was no market for its shares.
[23] A plan was devised whereby the assets of PC would be liquidated and its shares would be sold to the Appellant’s brother-in–law J.S., a resident of Canada married to the Appellant’s sister.[10] J.S. was a willing purchaser on being given a $10,000 spread between what he could extract from the company and what he would have to pay the Appellant for the shares; and, on being given a complete indemnity for any third party liability that he might incur as a result of his purchase of the PC shares. While it is acknowledged that, pursuant to the provisions of the Act, the Appellant and J.S. were not dealing at arm’s length,[11] it was not asserted that the terms of the transactions involving J.S. would have been different, or required to have been different or substantially different, if J.S. had been dealing at arm’s length with the Appellant.
[24] The plan, as described in the Agreed Statement of Facts and elaborated on at the hearing, was carried out as follows:
· 601798 NB Ltd. (“601 Ltd.”) was incorporated by J.S. under the laws of New Brunswick on June 20, 2002. It acquired the shares in PC on June 25, 2002 from J.S. after J.S. had acquired them personally on that same day.[12] The transactions are well documented and each transaction that occurred on June 25, 2002 identifies the time of execution. The transactions are thereby readily identifiable as being in a particular sequence.
· The purchase by J.S. of the PC shares was paid by delivery of a promissory note by J.S. to the Appellant (the “J.S. note”). The purchase price was set out as a formula that gave rise to a total consideration of $525,068.[13]
· J.S. transferred the PC shares to 601 Ltd. in consideration of receiving shares in 601 Ltd. and a note payable by 601 Ltd. to J.S. in the amount of $525,068 (the “601 Ltd. note”).
· PC declared two dividends on June 25, 2002, one in the amount of $500,000 and the other in the amount of $10,000. On the same day, PC issued two cheques to 601 Ltd., as the PC shareholder at the time the dividend was declared, in partial payment of the $500,000 dividend. One was for $320,000 and the other was for $159,842. 601 Ltd. in turn endorsed the cheques to J.S. as partial payment of the 601 Ltd. note and J.S. in turn endorsed the cheques to the Appellant as partial payment of the J.S. note. The Appellant wrote a cheque to PC in the amount of an unrelated indebtedness to it, namely, $159,842. The cheques for $159,842 were off-setting and booked as such although never cashed. The cheque for $320,000 now held by the Appellant was never cashed or presented for payment at a bank but was booked as a payable to the Appellant. All such events occurred on June 25, 2002.
· As noted, PC changed its name to 050509 N.B. Ltd. on June 26, 2002. This was consistent with PC ceasing to be a professional corporation due to the Appellant no longer being a shareholder of the company and his ceasing to practise medicine in New Brunswick. For the most part, I will continue to refer to this company as “PC”.
· PC declared a final dividend on September 1, 2002 to 601 Ltd. equal to the amount still owing on the 601 Ltd. note, namely $25,068. This amount plus the unpaid portion of the dividend declared on June 25, 2002 was, as an acknowledged indebtedness to J.S., booked by PC, on the direction of J.S., as an indebtedness to the Appellant.[14] Such direction was in satisfaction of J.S.’s remaining obligation under the J.S. note.
· On July 15, 2002, PC by cheque paid 601 Ltd. the amount of $10,000. The cheque was deposited on August 27, 2002.
· PC prepared Articles of Dissolution on July 31, 2002 and it was officially dissolved on February 4, 2005.
[25] It is important to note that the parties were in agreement as to the timing of the distribution and appropriation of PC’s assets. That is, while they are not in agreement as to the effect of such appropriations or distributions, they are in agreement as to the time that they occurred.
[26] That is, the issuance of cheques and promissory notes, despite not being paid or presented for payment in the usual way, were acknowledged as delivered in the sequences advanced at the hearing and such deliveries were accepted by the Respondent as the distributions or appropriations that were the subject of the hearing.[15] The net effect was that it was acknowledged that the book or journal entries, notional or actual, created genuine liabilities or book debts that constituted fully distributed and appropriated amounts. Therefore, it is of no relevance as to when money changed hands in a more literal sense. That is, it is of no relevance at all when and how funds were actually, eventually, distributed to the book creditor, namely the Appellant. The dates of the subject distributions then are as follows:
· June 25, 2002 prior to the 5:30 PM border crossing:
$479,842
· September 1, 2002:
$45,226
[27] While the time of the distributions and appropriations is not in dispute, the Respondent set out a number of assumptions in its Reply to the Notice of Appeal (the “Reply”) dealing with the question of the bona fide purposes of the transactions. Most of those relate to the assessing position that the subject transactions were a sham. Since that position was abandoned at trial I will not dwell on those assumptions save two that the Appellant disputed:
There was no bona fide purpose for the sale of shares to James Stewart other than to obtain the tax benefit to the Appellant; and
The Appellant entered into the series of transactions with the primary intention of accessing the accumulated surplus of the P.C. in a manner that provided him with a tax benefit;
[28] As well, in describing the transactions entered into by the Appellant, the following admitted assumption was set out in the Reply:
…
gg) The gain, as claimed, was partly sheltered by capital losses that the Appellant incurred during the year as well as loss carry forwards from prior years;
…
[29] Under the heading “Grounds Relied on and Relief Sought”, the Reply goes on as follows:
…
18. Furthermore, the transactions entered into by the Appellant resulted in an abuse of the Act since they were part of an arrangement to circumvent the application of subsection 84(2) of the Act. There was no purpose for the transactions other than to provide the Appellant with the means for capital gains treatment and to avoid the ordinary consequences of distributions of corporate assets on the wind-up and discontinuance of business, as deemed dividends. Accordingly, the $525,068 is properly included in the Appellant’s income as dividends, pursuant to section 245 of the Act.
...
[30] Nowhere in the Reply does the Respondent expressly identify the “tax benefit” that needs to be identified for the purposes of section 245. Implicitly however, given the assumption in paragraph (gg) of the Reply referred to above, the benefit must be taken to be the use of capital losses and loss carry forwards that could not have been used had subsection 84(2) applied. That was certainly the position taken at trial although the general avoidance of dividend treatment sought to be imposed under subsection 84(2), regardless of the particular tax benefit achieved by avoiding it, seems to be an underlying and relevant concern to the Respondent in this case.
[31] As such, I do not think my analysis can ignore that concern even though it appears to me nothing more than a confusing if not troubling distraction from the “tax benefit” analysis required by section 245.
Statutory Provisions
[32] The relevant statutory provisions of the Act will be reproduced as necessary throughout these Reasons. A brief comment, however, is warranted. Although not expressly relied upon by the parties, I note here that the Respondent seeks to give effect to the assessment in a manner that invokes paragraph (c) of subsection 245(5):
245(5) Determination of tax consequences -- Without restricting the generality of subsection (2), …
…
(c) the nature of any payment or other amount may be recharacterized, and
…
[33] On the other hand, I note section 246 was not expressly relied upon by the Respondent.
Respondent’s Submissions
[34] The Respondent’s submissions can be broken down as follows:
a. Subsection 84(2) applies. The words “in any manner whatever” are broad. The sale complements the winding-up of PC’s business.
b. Section 245 applies.
i. There is a tax benefit. It allowed a receipt to be categorized as a capital gain as opposed to a dividend, avoiding tax on the receipt by shielding the gain with off-setting net capital losses.
ii. There was no bona fide purpose for the share sale.
iii. There was a misuse or abuse of subsection 84(2) and the Act as a whole. The Act addresses surplus stripping with many provisions, including section 245.
c. Dr. MacDonald was a Canadian resident at the time the deemed dividends were received.
[35] Except subparagraph b(i) above, which needs no elaboration, I will elaborate, albeit somewhat summarily, on Respondent’s arguments supporting these submissions.
The requirements of subsection 84(2) are met:
· The appropriation was made on winding-up or discontinuance of PC’s business. That is, Dr. MacDonald was winding-up his Canadian medical practice, which was run through PC. The Respondent also submits that the appropriation was made on a reorganization of PC’s business: that is, PC was reorganized from being a professional corporation to being a holding company.
· RMM Canadian Enterprises Inc. v. R.[16] is relied on. In particular reliance is placed on Justice Bowman’s, as he then was, broad interpretation of the phrase “in any manner whatever” as used in that subsection. Addressing Dr. MacDonald’s submission that the funds were received as a creditor, the Respondent emphasizes a passage in RMM where Justice Bowman said the share sale and winding-up of Equilease’s business complement each other. “The sale was merely an aspect of the transaction described in subsection 84(2) that gives rise to the deemed dividend.”[17] This is to say that the status of creditor is inextricably bound to the distribution qua shareholder.
· Having abandoned the sham argument as the basis for the assessment, it might have been difficult for the Respondent to argue that the transactions undertaken and effected did not give rise to J.S. having legal and beneficial ownership in the shares of PC at the time he transferred them to 601 Ltd.. Nonetheless, Respondent’s counsel has, in effect, made that argument. Further, with respect to subsection 84(2), the Respondent’s counsel argued that PC had effectively wound-up or discontinued its business prior to the time of the appropriation of its assets to the benefit of the Appellant so that the other requirements of subsection 84(2) were met.
Section 245 – no bona fide purpose for the share sale:
· The Respondent relies on there being no business purpose to the transactions.
· The avoidance of double taxation is said not to be of relevance to the GAAR analysis. Reliance is placed on RMM. In RMM, Justice Bowman said the primary purpose of a transaction must be determined in the context of Canadian tax law, and international implications were not to be considered.
Section 245 - there was a misuse or abuse of subsection 84(2) and the Act as a whole:
· The Respondent submits that the rationale of section 84 is to prevent a corporation from converting a taxable dividend into a capital gain. The Respondent sets out a history of “surplus stripping”, including its origin in the pre-1972 Act. There is a significant discussion on former subsection 247(1). Citing a Department of Finance technical note, the Respondent submits tax applies when extracting the funds from an entity in excess of the amount invested. When GAAR was introduced and subsection 247(1) repealed, transactions covered by subsection 247(1) were intended to be covered by GAAR.
· The Respondent submits the courts have agreed avoidance is inappropriate in the case of non-arm’s length transactions resulting in “extraction of corporate funds by ‘manufacturing’ a capital gain eligible for the deduction provided by section 110.6 of the Act”.[18] Four cases are cited in support.[19] In particular, Justice Bowman’s comments in RMM regarding surplus stripping as an abuse of the Act as a whole are cited.
· The Respondent submits the relevant time to tax deemed dividends is when they are earned, not withdrawn from a bank account. Citing Interpretation Bulletin IT-221R3,[20] the Respondent submits Dr. MacDonald was a Canadian resident until some time after Dr. MacDonald entered the United States. The reasons for this are:
° Dr. MacDonald signed the agreements before he left Canada;
° The agreements acknowledge Dr. MacDonald’s Canadian residency;
° Dr. MacDonald signed the US Customs declarations as a US non-resident;
° Dr. MacDonald maintained Canadian bank accounts, his New Brunswick driver’s license, and his vehicles’ New Brunswick registration after June 25, 2002.
· In the alternative, the Respondent submits the earliest Dr. MacDonald’s residency could terminate was when he crossed the border. The dividends would still be earned before he crossed the border. This was the Appellant’s filing position. He intended that his residence be fixed in Canada at least until he crossed the border. It can be said that his attention to the details of his move support and ensure that result. In effect, the argument is that the evidence is not clear enough to rebut the Respondent’s presumption of the Appellant’s residence in Canada at the relevant times.
· No cases on the residency issues were submitted. Regarding a Canada Revenue Agency (“CRA”) letter saying Dr. MacDonald was a non-resident as of June 25, 2002, the Respondent submits that the CRA has since done a more detailed review and as a result changed its opinion. Citing Ludco v. R.,[21] the Respondent submits the letter is not binding on the CRA.
[36] More generally, the Respondent’s argument inherently suggests that subsection 84(2) should be applied whenever a shareholder accesses retained earnings, directly or indirectly, to ensure the receipt is characterized as a dividend. That is asserted to be its intended purpose. That is, the Respondent wants subsection 84(2) to be applied to ensure dividend treatment as it was intended to apply and thereby frustrate the asserted abusive purpose of the taxpayer in this case. That will focus my analysis of subsection 84(2) in terms of its intended scope and purpose as an avoidance provision. Failing my finding that subsection 84(2) applies here, the Respondent turns to section 245. Applying GAAR, the Respondent would ensure the amount the Appellant received from PC is found to be a dividend received by him as a shareholder while resident in Canada.
Appellant’s Submissions
[37] The Appellant’s submissions can be dealt with under the section headings of the two provisions that are at issue, namely subsection 84(2) and section 245. The alternative argument respecting the residence of the Appellant will be addressed under the residence heading.
Subsection 84(2):
· The Appellant’s argument is that at the time of the distribution or appropriation of PC assets he was not a shareholder. Citing Maccala v. The Queen[22] as authority, he asserts that subsection 84(2) cannot apply in his case because at the time of the appropriation or distribution he was a creditor of the corporation, not a shareholder. The distribution here was to the shareholder of record – namely, 601 Ltd. not the Appellant.
· As well, if there was a benefit conferred on him qua shareholder it was not a benefit conferred on the winding-up or discontinuance of PC’s business since its activities in respect of that business, such as dealing with receivables continued after the appropriation that benefited him.
· The Appellant also relies on the fact the transactions were carried out at fair market values. The provisions of section 69 of the Act have no relevance; and there were no benefits that accrued to him in the course of carrying out the subject transactions by virtue of his non-arm’s length relationship with J.S.
Section 245:
· The Appellant asserts that there was no tax benefit in this case as the transactions were motivated to avoid a US tax by creating a capital gain in Canada prior to his departure to the US.
· Citing Evans v. R.,[23] he submits that there is no avoidance transaction. It is submitted that the Minister of National Revenue (the “Minister”) ought not to be able to re-characterize transactions that are permitted by the Act as a means identifying tax avoidance.
· The Appellant further asserts that the transactions were not abusive. They did not frustrate a specific provision that the Act sought to prevent the outcome achieved; nor did they misuse any provision of the Act, defeat the object, spirit or purpose of any of the Act’s provisions or abuse any provision having regard to the Act read as a whole.
· A Senate debate and a House of Commons debate were cited to reflect the parliamentary intention to relieve double taxation. As well, the use of accrued capital losses to shelter capital gains was clearly relief contemplated by the Act.
· More broadly put, the Appellant argues that it is not a misuse or abuse of the provisions of the Act to engage in a transaction that allows for the utilization of genuine historical losses. Further, it is asserted that if it is found on the facts of this case that the purpose of the transactions was to re-characterize income, the bona fide primary purpose of same was not to enjoy the tax benefit of utilizing available capital losses and loss carry forwards but was to avoid double tax that would arise given the deemed disposition rules in Canada and the failure of the US taxing provisions at the time to recognize the stepped-up cost base in the shares of PC.
The Appellant’s Residence:
· As an alternative argument the Appellant asks me to consider that he was not a resident of Canada, at the relevant time, should I find that the alleged distribution or appropriation must be treated as a dividend.
· It is asserted that this alternative would result in the Act imposing only a withholding tax on the dividend at a rate of 15% or even 5% depending on the application of the provisions of the Canada – United States Treaty.[24]
Analysis
Subsection 84(2)
[38] Subsection 84(2) reads:
84(2) Distribution on winding-up, etc. -- Where funds or property of a corporation resident in Canada have at any time after March 31, 1977 been distributed or otherwise appropriated in any manner whatever to or for the benefit of the shareholders of any class of shares in its capital stock, on the winding-up, discontinuance or reorganization of its business, the corporation shall be deemed to have paid at that time a dividend on the shares of that class equal to the amount, if any, by which,
(a) the amount or value of the funds or property distributed or appropriated, as the case may be,
exceeds
(b) the amount, if any, by which the paid-up capital in respect of the shares of that class is reduced on the distribution or appropriation, as the case may be,
and a dividend shall be deemed to have been received at that time by each person who held any of the issued shares at that time equal to that proportion of the amount of the excess that the number of the shares of that class held by the person immediately before that time is of the number of the issued shares of that class outstanding immediately before that time.
[39] The property that the Appellant received, at least at the beginning of the chain of events, is a promissory note – the J.S. note. That is not PC property.
[40] Following the series of events, the Appellant received payment of the J.S. note as a creditor of PC and he was paid as such with funds from PC.
[41] The Respondent wants me to find then that the Appellant has received those funds from PC in the capacity of a shareholder.
[42] On the other hand, the Respondent has conceded that each transaction in the series leading to the Appellant receiving PC funds was a legally effective transaction creating genuine liabilities among all the parties involved in the series.
[43] The distribution of PC funds as a dividend paid to 601 Ltd. as its sole shareholder was then a legally effective dividend.[25] The transactions that followed that resulted in the Appellant being a creditor of PC were also legally effective transactions. Therefore, at law, there really should be no dispute that the Appellant received the PC funds qua creditor.
[44] My reference to the series of “legally effective transactions” derives from the abandonment of the assessing position that the subject transactions were a sham. That being the case, I have concluded, on the facts of this case, that the subject transactions were legally effective, giving rise to the rights and liabilities created by the terms of those transactions.
[45] Put another way, it is my view that any entitlement that the Appellant arises as consideration from the share sale. That is not an entitlement vis-à-vis the Appellant and PC. That is, the right to receive $525,068 is not an entitlement vis-à-vis the Appellant and the company.
[46] That being the case, subsection 84(2), on its express terms, cannot apply to deem a dividend to the Appellant in this case.
[47] Still, the Respondent essentially makes three arguments. First, reliance is placed on the phrase “in any manner whatever”. Second, reliance is placed on RMM. Third, reliance is placed on a purposive rather than literal construction of the subject provision. This third argument led to the argument that subsection 84(2) was an anti-avoidance provision that, more specifically, dealt with what has been commonly referred to as surplus stripping. In answer to this aspect of the Respondent’s argument, the Appellant referred the Court to a related CRA advance income tax rulings dealing with surplus strip transactions in a post-mortem context. I will deal with that as an adjunct to the Respondent’s third argument.
[48] As to the Respondent’s reliance on the phrase “in any manner whatever”, such reliance is, in my view, ill-fated. The manner of distribution of PC property in this case was a dividend. The party benefiting from that distribution was the shareholder, 601 Ltd.. The express language of “in any manner whatever” does not redirect to whom the dividend was paid. It is the manner of effecting the distribution to the shareholder at the time of that distribution that the subject provision is aimed. Any manner of distribution to 601 Ltd. other than as a dividend would, pursuant to subsection 84(2), result in 601 Ltd. being deemed to have received a dividend (whether or not that invokes a tax consequence to that shareholder at that time).
[49] The entitlement of the Appellant derives from his being a creditor of the third party purchaser. Compare the language in subsection 84(2) with that in subsection 84(3). The latter provision addresses an acquisition of shares and deems a dividend to the extent the amount paid for the shares acquired exceeds the paid-up capital of those shares. While that provision deals only with the acquisition by a company of its own capital stock, it confirms that a provision dealing more broadly with amounts paid for shares acquired could have expressly been subject to a similar formulation of the deemed dividend component where the company directly or indirectly financed the payment of the purchase price. That subsection 84(2) has no such express language, demonstrates to me that its scope was not intended to cover payments arising as consideration on a share sale.
[50] Indeed, as I have already said, the express language of subsection 84(2) ensures that it is only a shareholder at the time of the distribution or appropriation who can be deemed to be the recipient of a dividend. That language, set out again with emphasis, is:
Where funds or property of a corporation … have … been distributed or otherwise appropriated in any manner whatever to or for the benefit of the shareholders … on the winding-up, discontinuance or reorganization of its business, the corporation shall be deemed to have paid at that time a dividend on the shares of that class equal to … and a dividend shall be deemed to have been received at that time by each person who held any of the issued shares at that time equal to … [Emphasis added].
[51] Such language does not permit a finding in this case that it can apply to deem the share sale price paid to the Appellant to be a dividend.
[52] Further, the Appellant’s ongoing management of PC’s affairs does not speak at all to the capacity in which he received his entitlement to PC’s assets. It does not establish a beneficial ownership in PC shares that differed from the legal ownership. 601 Ltd. held both legal and beneficial ownership in the PC sha