Federal Court of Appeal Decisions

Date: 20020114

Docket: A-421-00

Neutral citation: 2002 FCA 3

CORAM:        ROTHSTEIN J.A.

NOËL J.A.

MALONE J.A.

BETWEEN:

                                                        HER MAJESTY THE QUEEN

                                                                                                                                                       Appellant

(Respondent by

Cross-appeal)

                                                                                 and

                                                          ERLING MARVIN OLSEN

                                                                                                                                                   Respondent

(Appellant by

Cross-appeal)

                                Heard at Vancouver, British Columbia, on December 11, 2001.

                                  Judgment delivered at Ottawa, Ontario, on January 14, 2002.

REASONS FOR JUDGMENT BY:                                                                                          NOËL J.A.

CONCURRED IN BY:                                                                                                  ROTHSTEIN J.A.

                                                                                                                                              MALONE J.A.

Date: 20020114

Docket: A-421-00

Neutral citation: 2002 FCA 3

CORAM:        ROTHSTEIN J.A.

NOËL J.A.

MALONE J.A.

BETWEEN:

                                                        HER MAJESTY THE QUEEN

                                                                                                                                                       Appellant

(Respondent by

Cross-appeal)

                                                                                 and

                                                          ERLING MARVIN OLSEN

                                                                                                                                                   Respondent

                                                                                                                                               (Appellant by

Cross-appeal)

                                                        REASONS FOR JUDGMENT

NOËL J.A.

[1]                 This is an appeal from a decision of Judge O'Connor of the Tax Court of Canada (now reported at [2000] T.C.J. No. 297 (Q.L.)) vacating the reassessments issued with respect to the Taxpayer's 1993 and 1994 taxation years on the basis that he was not in receipt of a deemed dividend pursuant to section 84.1 of the Income Tax Act (the Act).

[2]                 The narrow issue raised by the appeal is whether the reference in section 84.1 of the Act to subsection 186(4) incorporates the definition of the word "control" as found in subsection 182(2). If so, a deemed dividend does arise. In that event, the Taxpayer raises by way of a cross-appeal the further question as to how this deemed dividend should be computed.

[3]                 The matter was heard and decided by the Tax Court Judge on the basis of Statement of Agreed Facts which reads as follows:

1.1      The Respondent is an individual resident in Canada who resides at 10663 River Road, Delta, British Columbia, V4C 2R1, and at the relevant time was the President, a Director and controlling shareholder of Leader Fishing Ltd. ("Leader"), a corporation resident in Canada incorporated under the Company Act (B.C.) which carries on the business of fishing.

1.2      Leader had issued 120 Class "A" Voting ("Class "A" shares") and 120 Class "B" Non-voting Common ("Class "B" shares") shares.

1.3      The Respondent's children or children and spouses all resident in Canada owned all the issued shares of the following companies (the "Children's Companies") all of which are resident in Canada.

NAME		SHAREHOLDERS
(a)	Pacific Fraser Fishing ("Pacific")	Launa Groulx (the Respondent's daughter)
(b)	Cornerstone Fishing Ltd. ("Cornerstone")	Corrine Bjork (the Respondent's daughter)
(c)	Viking Fishing Ltd. ("Viking")	Trevor Olsen (the Respondent's son)
(d)	Viking West Industries Ltd. ("Viking West")	Jason Olsen (the Respondent's son and his wife)

1.4.     The Respondent sold shares of Leader all of which were capital property and qualified small business corporation shares to the Children's Companies for consideration which was entirely non-share consideration as follows:

DATE OF AGREEMENT	PURCHASER	NUMBER AND CLASS OF SHARES	STATED PURCHASE PRICE
14 Jan 93	Cornerstone	5B	$ 95,580
16 Feb 93	Cornerstone	6A	154,420
31 Jan 94	Cornerstone	1A	28,885
14 Jan 93	Pacific	5B	95,580
16 Feb 93	Pacific	6A	154,420
31 Jan 94	Pacific	1A	28,885
31 Jan 94	Viking	2A	57,770
31 Jan 94	Viking West	2A	57,770
			$673,310

1.5      Each purchaser agreed to pay the purchase price in ten equal annual payments commencing on the date of the agreement together with interest at six percent (6%) in respect of the 1993 agreements and at five percent (5%) in respect of the 1994 agreements, on the balance remaining from time to time, provided that the purchaser could repay the balance owing without penalty and the Agreements were subject to escrow arrangements all as more particular set out in the Agreements found at Tabs 5, 6, 7, 8, 10, 11, 12 and 13 of the Combined Book of Documents.

1.6      The shares referred to in paragraph [1.4] hereof were transferred into the names of the purchasers in accordance with the Agreements at the time of the agreement.

1.7      The non-share consideration received by the Respondent for the sale of the shares pursuant to the Agreements with the Children's Companies was in excess of the adjusted cost base of the shares calculated according to the provisions of section 84.1 of the Income Tax Act.

1.8      The Respondent was related to each of the Children's Companies and to each of the Shareholders listed at paragraph [1.3] hereof.

1.9      The fair market value of the Leader shares sold to the Children's Companies was the Stated Purchase Price listed in paragraph [1.4].

1.10    The fair market value of the notes payable to the Respondent by each of Pacific, Cornerstone, Viking and Viking West at the respective dates of issue if sold to an independent arms-length purchaser aggregated $423,226.00 being $250,084.00 less than the face amount of the notes and the fair market value of the shares sold as follows:

	FMV Shares	FMV Notes
1993
Cornerstone	$28,885	$60,840
Cornerstone	28,885	98,294
Pacific	57,770	60,840
Pacific	57,770	98,294	$318,268

1994
Cornerstone	$28,885	$17,500
Pacific	28,885	17,500
Viking	57,770	34,999
Viking West	57,770	34,999	104,998
TOTAL			$423,266

1.11    Neither the Respondent nor Leader owned any of the issued shares of any class of any of Pacific, Cornerstone, Viking and Viking West.

1.12    At no time did any one of Pacific, Cornerstone, Viking or Viking West own more than ten percent (10%) of the issued shares of Leader having full voting rights under all circumstances and at no time did any one of Pacific, Cornerstone, Viking or Viking West own shares of Leader having a fair market value of more than ten percent (10%) of the fair market value of all of the issued shares of Leader.

1.13    By assessment dated May 30, 1997, the Minister included in computing the income of the Respondent for 1993 $524,863.00 as the grossed-up amount dividends deemed received by the Respondent upon the sale of the Class "A" and Class "B" Common shares to Cornerstone and Pacific in 1993 which amount was calculated as follows:

Proceeds of disposition	$500,000
Cost for s.84.1	80,110
Actual amount of deemed dividend	419,890
125% thereof	$524,863

1.14     By assessment dated May 30, 1997, the Minister included in computing the income of the Appellant for 1994 $216,630.00 as dividends received by the Appellant upon the sale of the 6 Class "A" Common shares in 1994 which amount was calculated as follows:

Proceeds of disposition	$173,310
Cost for s.84.1	6
Actual amount of deemed dividend	$173,304
125% thereof	$216,630

1.15    The Respondent filed Notices of Objection to the 1993 and 1994 reassessments.

1.16    By notice dated June 19, 1998, the Minister confirmed the 1993 and 1994 assessments on the grounds that:

"in 1993, you disposed of shares of Leader Fishing Ltd. to each of Pacific Fraser Fishing Ltd. and Cornerstone Fishing Ltd., corporations with which you did not deal at arms length, and, immediately after the disposition, you and Pacific Fraser Fishing Ltd. and you and Cornerstone Fishing Ltd. were connected within the meaning of subsection 186(4). Therefore, paragraph 84.1(1)(b) deems each of Pacific Fraser Fishing Ltd. and Cornerstone Fishing Ltd. to have paid you a dividend. Based on the formula in paragraph 84.1(1)(b), you collectively received dividends amounting to $419,890.00. They are "taxable dividends" as defined in subsection 89(1). Therefore, an amount of $524,863.00, determined under subsection 82(1) is income from property under paragraph 12(1)(j). It has been included in your income according to section 3 in paragraph 82(1).

in 1994, you disposed of shares of Leader Fishing Ltd. to each of Pacific Fraser Fishing Ltd., Cornerstone Fishing Ltd., Viking Fishing Ltd. and Viking West Industries Ltd., corporations with which you did not deal at arms length, and immediately after the disposition, you and each of Pacific Fraser Fishing Ltd., Cornerstone Fishing Ltd., Viking Fishing Ltd. and Viking West Industries Ltd. were connected within the meaning of subsection 186(4). Therefore, paragraph 84.1(1)(b) deems each of Pacific Fraser Fishing Ltd., Cornerstone Fishing Ltd., Viking Fishing Ltd. and Viking West Industries Ltd. to have paid you a dividend. Based on the formula in paragraph 84.1(1)(b), you collectively received dividends amounting to $173,304.00. They are "taxable dividends" as defined in subsection 89(1). Therefore, an amount of $216,630.00, determined under subsection 82(1) in income from property under paragraph 12(1)(j). It has been included in your income according to section 3 and paragraph 82(1)."

[4]                 Upon an appeal being brought before the Tax Court of Canada, Judge O'Connor held that no deemed dividend arose from the transaction as the Taxpayer was not connected to the purchasers of the shares within the meaning of subsection 186(4). He did so on the basis that the notion of "control" as defined by subsection 186(2) had no application. He went on to express the view in obiter that if a deemed dividend did arise, it ought to be computed by reference to the fair market value of the notes rather than the fair market value of the shares.

[5]                 The precise findings of the Tax Court Judge are as follows:

The meaning of control does not require a reference to subsection 186(2). The courts have defined control. The question is what control does subsection 186(4) refer to and, in my opinion, the ordinary meaning of control applies, not the expanded subsection 186(2) meaning. (Reasons for Judgment, p. 19, para. 7)

There is at least a reasonable doubt not totally resolved by the ordinary rules of interpretation. Therefore the Respondent is entitled to the residual presumption in favour of the taxpayer. (Reasons for Judgment, p. 19, para 8)

It is not necessary to decide this issue but if I had to I would have found for the Respondent that the consideration the Respondent received should be based on the value of the notes and not on the stipulated price of the shares. (Reasons for Judgment, p. 20, para. 11)

[6]                 The Crown brought the present appeal alleging that the Tax Court Judge erred in holding that subsection 186(2) had no application. The Taxpayer asks by way of cross-appeal that should the appeal be allowed, judgment be given ordering that the deemed dividend be computed by reference to the value of the notes rather than the value of the shares, as found by the Tax Court Judge.

Analysis and Decision

[7]                 Section 84.1 is found in Part I of the Act and subsections 186(2) and (4) are found in Part IV. These provisions insofar as they are relevant provide:

(b) for the purposes of this Act, a dividend shall be deemed to be paid to the taxpayer by the purchaser corporation and received by the taxpayer from the purchaser corporation at the time of the disposition in an amount determined by the formula (A + D) - (E + F) where

b) pour l'application de la présente loi, un dividende, calculé selon la formule suivante, est réputé avoir été versé par l'acheteur au contribuable et reçu par celui-ci au moment de la disposition: (A + D) - (E + F) où

(ii) subject to paragraphs (2)(a) and (a.1), the adjusted cost base to the taxpayer, immediately before the disposition, of the subject shares, and F          is the total of all amounts each of which is an amount required to be deducted by the purchaser corporation under paragraph (a) in computing the paid-up capital in respect of any class of shares of its capital stock by virtue of the acquisition of the subject shares.

(ii) le prix de base rajusté des actions concernées pour le contribuable immédiatement avant la disposition, sous réserve des alinéas (2) a) et a.1), F le total des montants dont chacun représente un montant que l'acheteur doit déduire selon l'alinéa a) dans le calcul du capital versé au titre d'une catégorie d'actions de son capital-actions à cause de l'acquisition des actions concernées.

186 (2) For the purposes of this Part, other than for the purpose of determining whether a corporation is a subject corporation, one corporation is controlled by another corporation if more than 50% of its issued share capital (having full voting rights under all circumstances) belongs to the other corporation, to persons with whom the other corporation does not deal at arm's length, or to the other corporation and persons with whom the other corporation does not deal at arm's length.

186(2) Pour l'application de la présente partie, sauf pour ce qui est de déterminer si une société est une société assujettie, une société est contrôlée par une autre société si plus de 50_% des actions émises de son capital-actions (comportant plein droit de vote en toutes circonstances) appartiennent à l'autre société, à des personnes avec lesquelles cette autre société a un lien de dépendance ou à la fois à l'autre société et à des personnes avec lesquelles l'autre société a un lien de dépendance.

[8]                 The Crown contends that the reference in subsection 84.1(1) to subsection 186(4) includes a reference to the notion of control as defined in subsection 186(2). On the other hand, the Taxpayer argues that there is a well established jurisprudential meaning ascribed to the notion of control for income tax purposes (i.e. de jure control or the right of control that rests in ownership of such a number of shares as carries with it the right to a majority of votes in the election of the board of directors, Duha Printers (Western) Ltd. v. The Queen 98 D.T.C. 6334 at 6341). According to the Taxpayer, this narrower notion of control is the one which ought to be read into subsection 186(4).

[9]                 Subsection 84.1(1) incorporates the notion of "connected" within the meaning assigned by 186(4) subject to only two modifications i.e. that the references therein to "payer corporation" and to "particular corporation" be read as "subject corporation" and "purchaser corporation" respectively. Otherwise subsection 186(4) must be taken as it reads.

[10]            Subsection 186(4) provides that a payer corporation is "connected" with a particular corporation "For purpose of this Part" (i.e. Part IV), when the former is "controlled" by the latter. Under Part IV, the term "control" can only have the meaning assigned to it by subsection 186(2). It follows therefore that this is the meaning which must be given to the word "controlled" in subsection 186(4).

[11]            Subsection 84.1(1) incorporates the word connected "within the meaning assigned by subsection 186(4)" subject only to the above noted modification in the designation of the corporate parties. As the meaning of the word "controlled" under subsection 186(4) is unaffected by this modification and as thereunder it is only capable of being given the meaning attributed to it under part IV, this must be the meaning which subsection 84.1(1) incorporates.

[12]            This reading, if it needs to be reinforced, is confirmed by another provision of the Act. Paragraph 110.6(15)(a), like subsection 84.1(1), refers to corporations "connected" with one another "within the meaning of subsection 186(4)" whereas subparagraph 110.6(15)(b)(ii) uses the words "within the meaning of subsection 186(4) as determined without reference to subsection 186(2)" (my emphasis). Quite obviously, Parliament in drawing this distinction must be taken as having recognized that an unqualified reference to corporations "connected" with one another "within the meaning of subsection 186(4)" requires that this provision be read with subsection 186(2).

[13]            I can see no merit to the argument that the phrases "within the meaning of subsection 186(4)" and "within the meaning assigned by subsection 186(4)" should somehow be read as conveying a different intent. Although these phrases are not identical, they convey exactly the same meaning. Indeed, the French text in each instance uses the singular phrase "au sens du paragraph 186(4)". This meaning which is common to both the English and the French text must be taken as the intended meaning.

[14]            This result flows from the ordinary use of the words and is consistent with the scheme of the Act. Section 84.1 was initially designed to forestall the stripping of valuation day values. It was and is still an anti-surplus stripping provision. In 1984, section 84.1 was expanded to take into account the fact that tax-free capital gains could be realized by individuals in respect of qualified small business corporation shares.

[15]            The incorporation of the word "connected" under subsection 186(4) was obviously intended to give section 84.1 a wide scope, and a reading of subsection 186(4) which, in effect, limits the benefits of the capital gains exemption in the case at hand on the basis that the purchaser corporations were controlled by the Taxpayer's children is consistent with the scheme of the Act.

[16]            Therefore, I can see no basis for the conclusion of the Tax Court Judge that the word "controlled" in subsection 186(4), as incorporated by subsection 84.1(1), can refer to something other than "control" as defined under Part IV. As the respondent has conceded that if this definition applies, a deemed dividend does arise under subsection 84.1(1), the decision of the Tax Court must be set aside to the extent that it held otherwise.

[17]            I now turn to the cross-appeal. As noted in paragraphs 1.13 and 1.14 of the Statement of Agreed Facts, the Minister in issuing the reassessments considered that the actual amount of the deemed dividend was $419,890 and $173,304 for the 1993 and 1994 taxation years respectively which amounts were grossed up by 25% pursuant to paragraph 82(1)(b).

[18]            In order to arrive at these amounts, the Minister computed the deemed dividend by reference to the fair market value of the Leader shares (the "subject shares") which has been agreed to be $673,310. The Crown recognizes that "ordinarily" it is the fair market value of the notes (i.e. the non-share consideration) which is to be reflected in D of the formula set out in paragraph 84.1(1)(b). However, as in this case the parties do not deal at arm's length, the Crown argues that paragraph 69(1)(b) deems the consideration received by the appellant to be the fair market value of the subject shares rather than the fair market value of the notes received as payment (Memorandum of Fact and Law of the Respondent on cross-appeal, paragraphs 2 and 3).

[19]            I must confess my difficulty in understanding the Crown's argument. The statutory basis for the reassessments is paragraph 84.1(1)(b) and not paragraph 69(1)(b) (Reply to the Notice of Appeal, paragraph 11). Paragraph 84.1(1)(b) (like paragraph 69(1)(b)), only applies where parties do not deal at arm's length and provides for its own fair market value computation. However, what is to be reflected in D of the formula set out thereunder is not the fair market value of the subject shares but the fair market value of the non-share consideration received by the Taxpayer for the subject shares.

[20]            The non-share consideration received in this instance are the notes, the fair market value of which has been agreed to be $318,268 and $104,998 for the 1993 and 1994 taxation years respectively (paragraph 1.10 of the Statement of Agreed Facts). It follows that the deemed dividend must be computed by reference to these amounts.

[21]            The cross-appeal should therefore also be allowed and the reassessments referred back to the Minister for reconsideration and reassessment on the basis that the fair market value to be set out in D of the formula in paragraph 84.1(1)(b) is the fair market value of the notes rather than the fair market value of the subject shares. Having regard to the result I would make no award as to costs.

                    "Marc Noël"                 

J.A.

"I agree

Marshall Rothstein J.A."

"I agree

B. Malone J.A."