Date: 199912224
CORAM: STONE J.A.
ISAAC J.A.
SEXTON J.A.
In re the Income Tax Act
Docket: A-405-97
BETWEEN:
BARRIE ROMKEY
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
Docket: A-406-97
BETWEEN:
BRIAN ROMKEY
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
STONE J.A.
[1] These appeals from judgments of the Tax Court of Canada of April 29, 1997,1 were heard together.
[2] The issue before the Tax Court of Canada was whether amounts of dividends declared and paid in 1988, 1989 and 1990 by Brimar Developments Ltd. (the "Company") were to be included in the respective income of the appellants for the taxation years 1988, 1989 and 1990 pursuant to subsections 74.1(2), 56(2) or 75(2) of the Income Tax Act (the "Act"). The respondent"s position that subsections 56(2) and 75(2) applied was not pursued in argument on this appeal. The only issue, therefore, is whether the provisions of subsection 74.1(2) of the Act apply in the circumstances of this case so as to render the respective appellants liable to include the dividends in income.
[3] The Company was incorporated in 1982 under the Nova Scotia Companies Act (the "Nova Scotia statute"),2 with an authorized capital of 5,000 shares without nominal or par value. Shortly afterward, the appellant Brian Romkey became the owner of two shares and his wife the owner of one share.
[4] On April 3, 1987, the Company adopted a special resolution by which the capital was altered so as to consist of 10,000 Class "A" voting preferred shares with a par value of $1.00 each carrying no set dividend rate and 10,000 Class "B" non-voting common shares of no par value. The evidence at trial indicated, and the Tax Court Judge so found, that on the same day the Company issued certain shares "resulting in the following purported share ownership:"3
| Common shares - Class "B" Non-voting |
Number of shares |
| Brian H. Romkey |
167 |
| Margaret Romkey |
167 |
| Brian H. Romkey Child"s Trust |
166 |
| Barrie W. Romkey |
125 |
| Lynn Romkey |
125 |
| Barrie W. Romkey Child"s Trust |
250 |
| Preferred shares - Class "A" Voting Brian H. Romkey |
100 |
| Barrie W. Romkey |
100 |
[5] In the meantime, the Company had been inactive and remained so for a period of time after April 3, 1987. It is not in dispute that no part of the subscription price of the Class "B" shares held in the names of the trusts was paid for on that date. The Tax Court Judge found, however, that these shares were "ascribed a nominal price of $1.00" at the time of issue and that such value had not been questioned by the respondent.4
[6] Concurrently with the issuance of Class "B" shares to the trusts on April 3, 1987, each of the appellants signed a declaration of trust to the effect that the shares held by them in their respective "Child"s Trust" were held "only in trust for the owner and his heirs, executors, administrators and assigns" (Marc, the child of Brian Romkey and Michael and Jeffery, the children of Barrie Romkey) and that the shares had been "purchased with money of the owner." At the time these shares were issued and throughout the taxation years in question, each of these children were under 18 years of age.
[7] On October 21, 1988, each of the appellants entered into a formal trust agreement as "settlor" and as "trustee" for the beneficiaries " their respective children. By Clause 3.02 each of the appellants acknowledged that he held the Class "B" shares of the Company for the use and benefit of the beneficiaries and that the trust of April 3, 1987 would continue and be subject to the terms of the formal trust agreement. The declaration of April 3, 1987 was revoked. Clause 6.01 conferred a discretionary power on each trustee to "allocate or pay any part of the income from the Trust Property to or for the benefit of the Beneficiaries in such proportions as the Trustee in his uncontrolled discretion may decide."5 The same clause authorized the trustee:6
"...to make any payments to or for any person under the age of eighteen (18) years to such person or to a parent or guardian of such person and where such money is paid to such parent or guardian of such person the receipt of such parent or guardian shall be a sufficient discharge to the Trustee..."
[8] During the taxation years in question, the Company declared and paid dividends on the Class "B" shares, including the following amounts in favour of the two trusts:
| Date |
Brian Romkey"s Child"s Trust |
Barrie Romkey"s Child"s Trust |
| November 21, 1988 |
$ 22,000.00 |
$ 33,000.00 |
| October 30, 1989 |
9,000.00 |
13,500.00 |
| November 10, 1989 |
3,000.00 |
4,500.00 |
| November 27, 1989 |
4,000.00 |
6,000.00 |
| December 8, 1989 |
4,000.00 |
6,000.00 |
| December 15, 1989 |
2,000.00 |
3,000.00 |
| March 2, 1990 |
4,000.00 |
6,000.00 |
| March 16, 1990 |
4,000.00 |
6,000.00 |
| March 28, 1990 |
2,000.00 |
3,000.00 |
| April 10, 1990 |
4,000.00 |
6,000.00 |
| April 19, 1990 |
4,000.00 |
6,000.00 |
| May 2, 1990 |
4,000.00 |
6,000.00 |
The Tax Court Judge found that these moneys were deposited in joint bank accounts of the respective parents.
[9] Evidence was led at trial that the subscription price of the Class "B" shares that were held by the trusts was paid for between May 27 and October 31, 1989 out of family allowance funds received by the mothers of the children pursuant to the Family Allowances Act .7 The Tax Court Judge found, however, that evidence on the point was not "satisfactory" and, accordingly, that "the Appellants failed to demonstrate that the family allowance payments had been used to pay for the Brimar shares which the trusts held."8
[10] The Tax Court Judge was of the view that at the time the initial dividends of November 21, 1988 were paid the Class "B" shares of the trusts were "unpaid" and, accordingly, that the dividends represented "an indirect payment to the children for no consideration."9 He was of the further view "that fair market value" of the shares was not paid. He also noted that the trust documents "were not entirely accurate or complete," that the trust accounting was "in disarray" and that a tax advantage that might be otherwise available could be lost for failure to strictly comply with legal formalities. He here relied on Stubart Investments Ltd. v. The Queen10 and the decisions of this Court in Atinco Paper Products Ltd. v. The Queen11 and Friedberg v. The Queen12 to emphasize the importance in tax planning of carefully documenting any particular arrangement.
[11] The Tax Court Judge then considered whether the appellants had "transferred...property" within the meaning of subsection 74.1(2), such that the income from the property must be attributable to each of the appellants. Guided by the reasoning of this Court in The Queen v. Kieboom,13 he determined that "property" had been "transferred" by each of the appellants to each of the trusts. He stated:14
| We must look to the true nature of the transactions. In reality, each of the Appellants" beneficial interests in Brimar were reduced by one-third. The fact that the transfer of the property was accomplished by directing Brimar to issue the shares does not alter the situation. Although done indirectly, the Appellants in fact transferred property to their children. The Appellants divested themselves of the right to receive dividends. I find that the Appellants transferred property, namely shares, indirectly by means of a trust for the benefit of their infant children and the dividend income from those shares is deemed to be income of the Appellants. Having regard to the jurisprudence and the facts of this case, I find that the tax planning strategy fails. |
ANALYSIS
[12] Subsection 74.1(2) of the Act reads:15
| 74.1 (2) Where an individual has transferred or loaned property, either directly or indirectly, by means of a trust or by any other means whatever, to or for the benefit of a person who was under 18 years of age and who
any income or loss, as the case may be, of that person for a taxation year from the property or from property substituted therefor, that relates to the period in the year throughout which the individual is resident in Canada, shall be deemed to be income or a loss, as the case may be, of the individual and not of that person unless that person has, before the end of the year, attained the age of 18 years. |
74.1 (2) Lorsqu"un particulier transfère ou prête un bien " directement ou indirectement, par le biais d"une fiducie ou par tout autre moyen " à une personne de moins de 18 ans qui a un lien de dépendance avec le particulier ou qui est le neveu ou la nièce du particulier ou au profit de cette personne, le revenu ou la perte, selon le cas, de cette personne pour une année d"imposition provenant du bien ou d"un bien y substitué, qui se rapporte à la période de l"année tout au long de laquelle le particulier réside au Canada, est considéré comme un revenu ou une perte, selon le cas, du particulier et non de cette personne, sauf si celle-ci atteint l"âge de 18 ans avant la fin de l"année. |
Thus income from property transferred to a person who was under the age of 18 years "by means of a trust" is prima facie covered by the subsection.
[13] As noted above, the Tax Court Judge was not satisfied with the accuracy and completeness of the documentation purporting to support the steps claimed to have been taken, particularly the trust documents. However, at the hearing of these appeals counsel for the respondent indicated that he did not intend to question either the validity or existence of the trusts. In view of that it is neither necessary nor desirable to deal with this aspect of the judgments below. The point was not argued.
[14] The appellants contend that the Tax Court Judge erred in failing to find that the shares that were issued to the trusts were paid for out of family allowance payments received by the mothers of the children. The respondent concedes that if the shares had been fully paid for in that way subsection 74.1(2) would not apply because no "property" would have been "transferred" to the children. As was noted by the Tax Court Judge, the record contains evidence of the receipt by the mothers of family allowance payments during the material period and other evidence including entries in the Company"s 1989 general ledger with respect to payments made on account of the subscription price. However, he did not regard this evidence, and presumably the oral testimony of the appellants on the point, as satisfactory. In order to justify this Court in interfering with that finding it would have to be demonstrated that the Tax Court Judge committed a palpable and overriding error which affected his assessment of the facts.16 In my view, no such error has been established.
[15] Two issues remain. The first is whether the reasoning of this Court in Kieboom, supra, is dispositive of the issue of whether the dividends received by the trusts are taxable in the hands of the appellants pursuant to subsection 74.1(2). Alternatively, the appellants contend that their liability should be limited to the inclusion of only the dividends paid and received in 1989 and 1990.
[16] I turn to the first of these issues. The facts in Kieboom, supra, may be briefly summarized. At the time the company there in issue was incorporated the taxpayer acquired 9 common shares and caused 1 common share to be issued to his wife. Later, 8 new shares were issued to the taxpayer"s wife, below their market value. Later still, 8 more new shares were issued to each of the taxpayer"s three children, again well below their market value. The company declared and paid a dividend to each of the shareholders in 1982. By reassessments, the Minister first added to the taxpayer"s 1981 income his wife"s one-half share of the deemed proceeds of disposition of her economic interest in the company to the children, and then added to his 1982 income by way of attribution under subsection 74(2) of the Act, as it stood at the relevant time,17 the dividends received by his wife in that year.
[17] In upholding these assessments, Linden J.A. stated for the Court:18
| In my view, the phrase "transfer of property" is used in this provision in a rather broad sense. Both of the nouns in the phrase are general and non-technical. As for the word transfer, Lord Justice James in Gathercole v. Smith (1980-1981), 17 Ch. D. 1 stated at p. 7 that the noun transfer was "one of the widest terms which can be used." Lord Justice Lush stated that the word "transferable" includes "every means by which the property may be passed from one person to another". |
| President Thorson, relying on the above definitions in Estate of David Fasken v. M.N.R., 49 DTC 491, at p. 497 stated: |
| The word "transfer" is not a term of art and has not a technical meaning. It is not necessary to a transfer of property from a husband to his wife that it should be made in any particular form or that it should be made directly. All that is required is that the husband should so deal with the property as to divest himself of it and vest it in his wife, that is to say, pass the property from himself to her. The means by which he accomplishes this result, whether direct or circuitous, may properly be called a transfer. |
| A gift is a transfer, therefore, as was made clear by Mr. Justice Heald (as he then was) in The Queen v. Zandstra 74 DTC 6416, at p. 6419. (See also The Queen v. McBurney 85 DTC 5433, at p. 5435 and Commissioner of Taxation of the Commonwealth v. McPhail (1967-8), 41 A.L.J.R. 346.) |
As for the word property, it too has been widely interpreted. The Income Tax Act, subsection 248(1) defines property as "...property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing includes (a) a right of any kind whatever, a share or a chose in action, ..." Lord Langdale once stated that the word property is the "most comprehensive of all the terms which can be used inasmuch as it is indicative and descriptive of every possible interest which the party can have." (See Jones v. Skinner (1836), 5 L.J. (N.S.) ch. 87, at p. 90; see also Re Liness (1919), 46 O.L.R. 320, at p. 322; Estate of Fasken, supra, at p. 496; and Vaillancourt v. M.N.R. [91 DTC 5352], [1991] 3 F.C. 663.)
In this case, therefore, the taxpayer transferred property to his wife, that is, he gave a portion of his ownership of the equity in his company to his wife. The 40% capital interest in his company which he gave to his wife was clearly property. His beneficial interest in his company was reduced by 40% and hers was increased by 40%. The fact that this transfer of property was accomplished through causing his company to issue shares makes no difference. Subsection 74(1) covers transfers that are made "directly or indirectly" and "by any other means whatever." The transfer, which in this case was indirect, in that the taxpayer arranged for his company to issue shares to his wife, is nevertheless a transfer from the husband to the wife. There is no need for shares to be transferred in order to trigger this provision of the Act, as was erroneously concluded by the Tax Court judge. By this transfer of property to his wife, he divested himself of certain rights to receive dividends should they be declared. Hence, when the dividends were paid to the wife in 1982, that was income from the transferred property and was rightly attributable to the taxpayer.
In addition, the property transferred to Mrs. Kieboom in 1980 was a portion of his ownership equity. As a result of the transfer, the taxpayer"s entitlement of 40% was transferred to Mrs. Kieboom. Moreover, the shares which Mrs. Kieboom acquired are also taxable as "substituted property" pursuant to subsection 248(5), as it may be said that she substituted the shares she purchased for the property she received from her husband. (See also the Interpretation Bulletins I.T. 258, I.T. 209.) Mrs. Kieboom disposed of part of that interest when she transferred a part of that equity to the children. On the same reasoning as above, the section 69 deemed capital gain on that disposition must also be attributed to the taxpayer under subsection 74(2).
[18] It thus appears that a transfer of property had been accomplished by the taxpayer in two different ways: in the form of "a portion of the [taxpayer"s] ownership of equity in his company" and by divestiture "of certain rights to receive dividends should they be declared."
[19] It is to be noted that three requirements must be met in order for subsection 74.1(2) to apply: a transfer (either directly or indirectly) to a child under the age of 18 years; of property; and the generation of income or loss from the property transferred or from property substituted therefor.
[20] The appellants seek to distinguish Kieboom, supra, on the basis that, there, at the time of the initial and subsequent share issuances to the taxpayer"s wife the company was a going concern and considerable "equity" had been built up by the taxpayer in his ownership of the common shares. By contrast, in the present matters, at the time the Class "B" shares were issued to the trusts the Company had yet to commence business and had neither assets nor liabilities. The appellants also argued that although the subscription price was "unpaid" as of April 3, 1987, the trusts were bound to pay it eventually.19 It was submitted that the appellants had no "equity" and, therefore, no "property" to transfer20 to the trusts for the benefit of the children. In view of what follows it is not necessary to decide whether the issuance of the shares to the trusts at the time that the Company may have been without any assets constituted, by itself, a transfer of property to the children.
[21] Subsection 74.1(2) is broadly worded. Moreover, some of the terms employed therein are defined by the Act in a similarly broad fashion. For example, as was pointed out in Kieboom, supra, the definition of "property" in subsection 248(1) of the Act is itself very broad. It then read, and still reads:
| 248. (1) In this Act, |
| "property" means property of any kind whatever whether real or corporeal or incorporeal and, without restricting the generality of the foregoing, includes |
| (a) a right of any kind whatever, a share or a chose in action, and |
| (b) unless as contrary intention is evident, money; |
| 248. (1) Dans la présente loi, |
| "biens" signifie les biens de toute nature, meubles ou immeubles, corporel ou incorporels et comprend, sans restreindre la portée générale de ce qui précède, |
| a) un droit de quelque nature qu"il soit, une action ou part, et |
| b) à moins d"une intention contraire évidente, de l"argent; |
It seems to me that by causing the Class "B" shares to be issued to the trusts the appellants effectively forewent the right to receive an increased measure of any future dividends declared and paid by the Company. As Linden J.A. put it in the passage quoted above:21
By this transfer of property to his wife, he [the taxpayer] divested himself of certain rights to receive dividends should they be declared. Hence, when the dividends were paid to the wife in 1982, that was income from the transferred property and was rightly attributable to the taxpayer.
[22] The appellants" alternative argument is that only the dividends that were paid on the trusts" Class "B" shares in 1989 and 1990 should be attributable to the appellants and not the 1988 dividends, because it was only at the time the subscription price was paid in 1989 that a "transfer" of property occurred.
[23] I am unable to see how this enables the appellants to escape from the broad provisions of subsection 74.1(2) with respect to the 1988 dividends. By causing the Class "B" shares to be issued to the trusts in 1987, the appellants had already effected a transfer of property to their respective children, i.e. divesting themselves of the right to receive a measure of future dividends. If that be correct, then it would appear to make no difference in the application of the subsection that the appellants may have paid no part of the subscription price of the trusts" Class "B" shares prior to the date of the 1988 dividends.
[24] I would dismiss the appeals with one set of costs.
"A.J. Stone"
J.A.
"I agree.
Julius A. Isaac, J.A."
"I agree.
J.E. Sexton, J.A."
Date: 19991224
CORAM: STONE J.A.
ISAAC J.A.
SEXTON J.A.
In re the Income Tax Act
Docket: A-405-97
BETWEEN:
BARRIE ROMKEY
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
Docket: A-406-97
BETWEEN:
BRIAN ROMKEY
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
Heard at Halifax, Nova Scotia, on Thursday, December 2, 1999.
Judgment rendered at Ottawa, Ontario, on Friday, December 24, 1999.
REASONS FOR JUDGMENT BY: STONE J.A.
CONCURRED IN BY: ISAAC J.A.
SEXTON J.A.
Date: 19991224
Docket: A-405-97
OTTAWA, Ontario, Friday, December 24, 1999.
CORAM: STONE J.A.
ISAAC J.A.
SEXTON J.A.
In re the Income Tax Act
BETWEEN:
BARRIE ROMKEY
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
JUDGMENT
The appeal is dismissed with one set of costs in this appeal and the appeal in Court file no. A-406-97.
"A.J. Stone"
J.A.
Date: 19991224
Docket: A-406-97
OTTAWA, Ontario, Friday, December 24, 1999.
CORAM: STONE J.A.
ISAAC J.A.
SEXTON J.A.
In re the Income Tax Act
BETWEEN:
BRIAN ROMKEY
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
JUDGMENT
The appeal is dismissed with one set of costs in this appeal and the appeal in Court file no. A-405-97.
"A.J. Stone"
J.A.
__________________1 The judgments of the Tax Court of Canada is reported as Romkey v. R., [1997] 3 C.T.C. 2405, 97 DTC 719.
2 R.S.N.S. 1967, c. 42.
3 Reasons for Judgment, Appeal Books, at p. 20.
4 Ibid., at p. 21.
5 Appeal Book, Common Appendix I, at p. 17.
6 Ibid.
7 R.S.C. 1985, c. F-1, as amended (2nd Supp.), c. 9.
8 Supra, note 3, at p. 29.
9 Ibid., at p. 28.
10 [1984] 1 S.C.R. 536.
11 78 DTC 6387 (FCA), per Urie J.A., at p. 6395, leave to appeal to S.C.C. dismissed (1979), 25 N.R. 603n.
12 92 DTC 6031 (FCA), per Linden J.A., at p. 6032, aff"d, [1993] 4 S.C.R. 285.
13 [1992] 3 F.C. 488 (C.A.), 92 DTC 6382.
14 Supra, note 3, at p. 31.
15 An Act to amend the Income Tax Act and a related Act, S.C. 1986, c. 55, ss. 17(1). A slightly modified version of the subsection is found in the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1.
16 Stein v. The Ship "Kathy K", [1976] 2 S.C.R. 802, at p. 808.
17 S.C. 1970-71-72, c. 63.
18 Supra, note 13, at pp. 499-501. The years mentioned in the citation of Gathercole v. Smith should read "1880-1881."
19 Subsection 95(2) of the Nova Scotia statute, relied on by the appellants, provides that a share without nominal or par value is deemed to be issued and held "subject to the payment in cash of the whole amount" therefor.
20 A share of a corporation has been described as a "bundle of rights" that amounts to "property, no more, no less": B. Welling, Corporate Law in Canada (Toronto: Butterworths, 1984), at p. 570. In Zwicker v. Stanbury, [1953] 2 S.C.R. 438, at p. 439, Rand J. described corporate shares as "simply fractions of potential interest in the assets and active life of the company" that "gives rise to a title to property which is of the nature of a chose in action ."
21 Supra, note 13, at p. 500.