Date: 20010612
Docket: 98-2524-IT-G
BETWEEN:
GRANITE BAY CHARTERS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowie J.
[1] This appeal is from an assessment under the Income Tax Act (the Act) for the taxation year 1994. The issue it raises is a narrow one. The Appellant is deemed by section 84 of the Act to have received a dividend upon the redemption of certain shares of Greenstone Creek Logging Ltd. (Greenstone) which it owned. Subsequently, Mr. and Mrs. Cox, who owned all the shares of both the Appellant and Greenstone, sold their Greenstone shares at arms length. The Minister of National Revenue has assessed the Appellant on the basis that subsection 55(2) of the Act applies to deem the proceeds of the redemption to be proceeds of disposition giving rise to a taxable capital gain, rather than a tax-free intercorporate dividend. The Appellant contends that subsection 55(2) does not apply, because the transaction is saved by paragraph 55(3)(a) of the Act, as the redemption by Greenstone of its shares was not part of a series of transactions or events that resulted in the sale by Mr. and Mrs. Cox of their Greenstone shares.
[2] The parties have agreed to the following facts for the purposes of this appeal:
1. The Appellant is a corporation resident in Canada and has a mailing address at 1855 Perkins Road, Campbell River, British Columbia, V9W 4S2.
2. At all material times, all of the issued and outstanding shares of the Appellant were owned by Donald Cox and Anna Cox.
3. Greenstone Creek Logging Ltd. ("Greenstone") is a taxable Canadian corporation which at all material times carried on a contract logging business.
4. Prior to April 8, 1994, all of the issued and outstanding shares of Greenstone were owned by Donald Cox and Anna Cox. [sic]
5. At all material times, Mr. and Mrs. Cox were the sole directors of both Greenstone and the Appellant.
6. At all material times, the accountant to Mr. and Mrs. Cox, Greenstone and the Appellant was Mr. William Huxham, Chartered Accountant.
The Hayes Group Inquiry
7. In late 1993, Mr. Donald Hayes, on behalf of a group of companies referred to as the Hayes Group, became interested in purchasing Greenstone. Information was gathered by agents for the Hayes Group in this regard.
8. On November 10, 1993, one of the companies in the Hayes Group, Pat Carson Bulldozing Limited, issued a letter of intent to Mr. and Mrs. Cox in connection with a proposed purchase of the shares of Greenstone .
9. The purchase price proposed by Pat Carson Bulldozing Limited was considered grossly inadequate by Mr. and Mrs. Cox and they rejected the letter of intent and the proposal terminated.
The Dougan Offer
10. In or about November, 1993, Mr. Cox received an unsolicited expression of interest regarding the purchase of the shares of Greenstone from Mr. Greg Dougan, the owner of Dougan Logging Ltd.
11. In late November and the first part of December 1993, financial information regarding Greenstone was provided to Dougan Logging Ltd. By a letter dated December 10, 1993 agents for Dougan Logging Ltd. wrote to Mr. Huxham informing him that Dougan Logging Ltd. wished to purchase the shares of Greenstone.
12. On December 14, 1993, Dougan Logging Ltd. made an offer to purchase the shares of Greenstone, which offer was accepted by the Coxes hereto. A $50,000 deposit was made to secure the offer.
13. Subsequent discussions with Dougan Logging Ltd. revealed that it did not have the financial wherewithal to complete the purchase and discussions were terminated. The initial deposit was returned on January 28, 1994.
The Reorganization
14. By a letter dated December 10, 1993, Mr. Huxham, on behalf of Mr. Cox, informed Greenstone's solicitor, Mr. Brian Stamp, that a reorganization of Greenstone was to proceed.
15. One of the steps in the reorganization outlined in Mr. Huxham's letter (Tab E) was the redemption of certain shares in Greenstone held by the Appellant. The Appellant received certain assets of Greenstone as in specie proceeds of redemption on these shares. As a result of this redemption of the Greenstone shares, the intended result was that the Appellant would be deemed by section 84(3) of the Income Tax Act (the "Act") to have received a dividend in the amount of $756,525 (the "Dividend"), being the difference between the amount of the in specie proceeds of redemption and the paid-up capital of the shares redeemed.
16. Further, it was intended that the Dividend would be received by the Appellant free of tax as an intercorporate dividend deductible under subsection 112(1) of the Act.
17. Mr. Huxham was aware of the possible implications of subsection 55(2) of the Act, which, in certain circumstances, will recharacterize an intercorporate dividend as proceeds of disposition of a share giving rise to a capital gain.
18. Mr. Huxham concluded that subsection 55(2) of the Act would not apply to that portion of the Dividend paid to the Appellant which was paid out of "income earned or realized by [Greenstone] after 1971" (the so called, "safe income" of Greestone). Mr. Huxham concluded that because the total safe income of Greenstone was greater than the Dividend, subsection 55(2) would not apply to recharacterize any portion of the Dividend as proceeds of disposition of the Greenstone shares.
19. Mr. Cox was sufficiently concerned about the magnitude of the dollars involved in the reorganization that he asked Mr. Huxham to obtain a second opinion on the tax efficacy of the transaction.
20. Mr. Huxham consulted a tax lawyer, Mr. William Ruskin of Clark, Wilson Barristers & Solicitors to seek confirmation of his advice. In a letter dated December 21, 1993, Mr. Ruskin confirmed Mr. Huxham's advice that because the amount of the Dividend was less than the total amount of Greenstone's safe income, subsection 55(2) of the Act would not apply to recharacterize the Dividend as proceeds of disposition of the Greenstone shares.
21. Mr. Huxham revised his instructions to Mr. Stamp in a letter dated December 23, 1993. The revision related solely to the fair market value of the Greenstone shares. Mr. Huxham concluded that the fair market value determined by the arm's length offer from Dougan Loggins Ltd. was a better gauge of fair market value than his previous estimate.
22. Based on the instruction letter of December 10, 1993 (Tab E), as modified by the letter of December 23, 1993 (Tab G), Mr. Stamp prepared the necessary corporate documents to complete the reorganization.
23. All documents were drafted by Mr. Stamp prior to December 31, 1993 in accordance with the instructions provided by Mr. Huxham with effect from December 30 and 31, 1993.
24. Certain documents, including special resolutions of the Appellant and Greenstone filed with the British Columbia Registrar of Companies on December 15, 1993 and December 17, 1993 respectively were signed in December, 1993. Other documents were not actually signed until January 11, 1994 when Mr. and Mrs. Cox returned from vacation.
The Olsen Sale
25. A letter of intent from the Olsen Group proposing to purchase the shares of Greenstone was issued to the shareholders of Greenstone on February 10, 1994.
26. After a period of due diligence, a Memorandum of Understanding dated February 21, 1994 was executed among T. Olsen, K. Olsen, D. Cox and A. Cox.
27. Under a share purchase agreement made the 8th day of April, 1994, all of the issued and outstanding shares of Greenstone were sold by Mr. and Mrs. Cox to 392896 B.C. Ltd. The shareholders of 392896 B.C. Ltd. were, directly or indirectly, Thomas G. Olsen and I. Keith Olsen, all of whom dealt at arm's length with Mr. and Mrs. Cox, Greenstone and the Appellant.
The Reassessments
28. Based on the advice provided by Mr. Huxham and Mr. Ruskin, the Appellant filed its 1994 T2 corporate income tax return indicating that the Dividend was an intercorporate dividend includable in income under subsections 82(1) and 84(3) of the Act but deductible under subsection 112(1) of the Act.
29. By a Notice of Reassessment dated July 27, 1998, the Minister of National Revenue reassessed the Appellant to tax by adding $323,245 to the income of the Appellant. This amount was calculated as:
Deemed Dividend $756,525
Less: pro rata safe income attributable to
the Greenstone shares transferred to the Appellant $325,532
Deemed proceeds of disposition per s. 55(2) $430,993
Taxable capital gain (75%) $323,245
30. The Appellant accepts for purposes of this litigation that the safe income of Greenstone is attributable pro rata to each Greenstone share. Hence, only $325,532 of the Dividend is attributable to safe income in respect of the Greenstone shares acquired by the Appellant and redeemed by Greenstone.
In addition, Mr. Cox and Mr. Donald Hayes gave evidence for the Appellant, and both counsel read in parts of the examinations for discovery.
[3] The following provisions of the Act are relevant:
55(2) Where a corporation resident in Canada has after April 21, 1980 received a taxable dividend in respect of which it is entitled to a deduction under subsection 112(1) or 138(6) as part of a transaction or event or a series of transactions or events (other than as part of a series of transactions or events that commenced before April 22, 1980), one of the purposes of which (or, in the case of a dividend under subsection 84(3), one of the results of which) was to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a disposition at fair market value of any share of capital stock immediately before the dividend and that could reasonably be considered to be attributable to anything other than income earned or realized by any corporation after 1971 and before the transaction or event or the commencement of the series of transactions or events referred to in paragraph (3)(a), notwithstanding any other section of this Act, the amount of the dividend (other than the portion thereof, if any, subject to tax under Part IV that is not refunded as a consequence of the payment of a dividend to a corporation where the payment is part of the series of transactions or events)
(a) shall be deemed not to be a dividend received by the corporation;
(b) where a corporation has disposed of the share, shall be deemed to be proceeds of disposition of the share except to the extent that it is otherwise included in computing such proceeds; and
(c) where a corporation has not disposed of the share, shall be deemed to be a gain of the corporation for the year in which the dividend was received from the disposition of a capital property.
55(3) Subsection (2) does not apply to any dividend received by a corporation,
(a) unless such dividend was received as part of a transaction or event or a series of transactions or events that resulted in
(i) a disposition of any property to a person with whom that corporation was dealing at arm's length, or
(ii) a significant increase in the interest in any corporation of any person with whom the corporation that received the dividend was dealing at arm's length; or
...
248(10) For the purposes of this Act, where there is a reference to a series of transactions or events, the series shall be deemed to include hany related transactions or events completed in contemplation of the series.
[4] In written argument filed at the hearing, counsel for the Appellant framed the issue this way:
The Appellant agrees that if the dividend it was deemed by subsection 84(3) of the Act to have received on the redemption of the Greenstone shares is "part of a transaction or event or series of transactions or events" that includes the disposition of the Greenstone shares by Mr. and Mrs. Cox to 392896 B.C. Ltd., then subsection 55(2) of the Act applies and this appeal fails.
Counsel for the Appellant has stated his position succinctly in paragraph 12 of his written argument:
The Appellant's argument is simple. The December 31, 1993 reorganization giving rise to the deemed dividend cannot be part of a series of transactions or events resulting in the sale of the shares of Greenstone to 392896 B.C. Ltd. because the Coxes could not possibly have contemplated that particular sale of shares. They were not actively selling the company, they did not know with any degree of certainty there would be a sale, they did not know of the purchaser's existence, the purchase price or anything concrete to do with a potential sale. All the Coxes knew is that if a potential purchaser did appear, they would be willing to discuss a sale with that party. The transaction lacked the degree of interconnection and interdependence required by the relevant jurisprudence to be considered a series of transactions.
[5] In 454538 Ontario Limited and 454539 Ontario Limited v. M.N.R.,[1] Sarchuk J. had to consider the meaning of the expression "series of transactions or events" as it appears in subsection 55(2) of the Act. The Appellant, attempting to bring itself within the grandfather provision in the subsection, took the position that disagreements and hostility among three shareholders occurring in the period between 1975 and 1979 formed part of a series of events which culminated in a reorganization and sale of the business in 1980. Sarchuk J. noted the lack of a nexus between the events of the 1970s and the later reorganization and sale of shares, and held that they were not a series of transactions or events beginning prior to April 1980. In reaching this conclusion, he said:[2]
The evidence adduced on behalf of the appellant fails to establish a reasonable nexus between the impugned transaction and any event or transaction which took place prior to April 22, 1980. There was no serious intention on the part of the Mazzoccas to dispose of their interests in Tri-M prior to late summer and fall of 1980. Romantino's testimony made it clear that he and his brother were bent on retaining their interest and this is confirmed by D'Angela's understanding of what Romantino and Mauro were endeavouring to obtain from Brunner. He described his instructions in September 1980 as:
I think the first was to see whether - the Mazzoccas did not really want to sell their interest. They would have preferred to find someone that would have just taken over Manley's interest and eliminate the problem, the animosity and the mistrust that had existed. They just wanted to change partners.
Counsel for the appellant contended that Robertson's comments, and thus the Department's position, were premised on the assumption that, where the transactions giving rise to the reduction in capital gains were contemplated then the transactions or events occurring at that preliminary stage would form part of the series of transactions or events. He argued that the appellant met this test. I do not agree. The transaction contemplated by subsection 55(2) is the disposition at fair market value of a share of capital stock as a result of which the corporation received a taxable dividend in respect of which it was entitled to a deduction under subsection 112(1) or subsection 138(6) of the Act. It is difficult if not impossible to point to one single item of evidence which supports the existence in the minds of the Mazzoccas or their corporations of such "contemplation" prior to April 22, 1980. A generalized desire to rid oneself of a problem is an insufficient base upon which one can make the quantum leap to the conclusion sought.
The phrase "series of transactions or events" must be read in its grammatical and ordinary sense reflecting the context in which it is found, the scheme and object of the Act and the intention of Parliament. Bearing this stricture in mind it seems reasonable to conclude that in order for the events to form part of a series they must follow each other in time and must somehow be logically or reasonably connected to one another. Furthermore the appellant and 539 themselves must intend that the series of transactions be linked together to achieve the specific result in this case being the disposition of the shares of Tri-M to 461 in the circumstances and in the manner previously described. This approach is consistent with the dictionary definitions of the words, "series", "transaction" and "event".
This passage has since been quoted with approval by Cullen J. in C.P.L. Holdings Ltd. v. Canada,[3] and by Archambault J. in Industries S.L.M. Inc. v. M.N.R.[4]
[6] In Industries S.L.M., Archambault J. examined dictionary definitions in both French and English, as well as the academic literature, in his consideration of the meaning of the expression "series of transactions or events". He also considered the purpose of the legislation, and said:[5]
... This subsection is an anti-avoidance provision designed to prevent an artificial or undue reduction of the capital gain that a taxpayer would have realized if he had simply sold his shares at their fair market value. ...
Having regard to these objectives of subsection 55(2), what scope can be given to the expression "series of transactions" and when did this series of transactions commence? In my view, the expression series of transactions must have a meaning that is sufficiently broad to enable tax authorities to prevent an artificial or undue reduction, but that, at the same time, is as narrow as possible so as not to penalize a taxpayer needlessly. ...
[7] Counsel for the Appellant placed great reliance on the judgment of this Court in Meager Creek Holdings Limited v. The Queen.[6] In that case the Crown argued that a dividend declared in February 1990 and a sale of shares which took place the following December were a series of transactions or events for the purposes of subsection 55(2) of the Act. In rejecting this contention O'Connor J. said:[7]
[29] I accept the credibility of the witnesses for the Appellant. All but Proctor were subjected to rigorous cross-examinations and although certain inconsistencies were shown, these were not in my opinion crucial. Witnesses Burridge, Pickering and Harris were consistent in their position that it was the budget which provoked the declaration of the dividends and not any possibility of a sale with the resultant reduction in the capital gain. The fact that 26 other companies in similar situations as Meager, Tyee Pemberton and CRB, were advised by Burridge immediately before the budget to declare dividends is a strong indication that the purpose behind the declaration of dividends was to avoid any distribution tax that the budget might have contained rather than a desire to effect a reduction in a capital gain on a disposition of shares.
[30] Moreover, I do not agree that a series of transactions or events occurred. The dividends were declared in February, 1990 but the sale discussions only began in August, 1990 with the sale of one-third of the shares of Tyee and Pemberton occurring December 31, 1990. Admittedly Pickering in October, 1989 offered to sell his shares to Turner. However, this was related to Pickering's health problems and was not indicative of a contemplated sale of the business in whole or in part to any prospective purchaser. Further, in my view, the French versions of the subsections in question do not alter these conclusions.
[31] Also, I cannot accept Respondent's argument that any possible future sale can suffice to bring subsection 55(2) into play. There must be a series of transactions or events contemplated. To accept Respondent's argument could open the door to the subsection being applied to almost any declaration of inter-corporate dividends.
Meager Creekwas not a case in which the dividend arose under subsection 84(3), and so the purpose of the series of transactions or events, if there was a series, was crucial to the result. O'Connor J.'s conclusion, in the passage that I have quoted above, was that the evidence before him established that the purpose behind the declaration of the dividend was to pre-empt a possible taxing provision that might have been included in a forthcoming budget, and not to reduce a possible capital gain on a future disposition of shares. Having reached that conclusion, it followed that there was no nexus to be found between the dividend and the disposition some 10 months later. In fact, there was no sale in contemplation until August, about six months after the dividend was declared.
[8] These authorities establish that for transactions or events to comprise a series require that there be some nexus between them. The determination must be driven largely by the facts of each case, but it is relevant to consider proximity in time, as well as purpose and result. However, as the present case deals with a subsection 84(3) deemed dividend, it is not necessary that the purpose include minimization of a capital gain, if that is the result of the dividend. I agree with Archambault J. that while care must be taken not to cast too wide a net, it is also important to give the legislation a construction that will permit it to achieve its anti-avoidance purpose.
[9] Mr. Cox said in his evidence that by the summer of 1993 Greenstone, after some 20 years in the logging business, was having a difficult time. Payments for equipment were causing cash flow problems. The company's business was cutting timber for MacMillan Bloedel on limits owned by MacMillan Bloedel, and that company was becoming increasingly difficult to deal with. That summer he was looking to refinance the Greenstone operation. Mr. William Huxham updated the financial reports of the company and in connection with that the company's equipment was appraised by Mr. John Lloyd, a local logging equipment dealer.
[10] As well as selling logging equipment, Mr. Lloyd also was involved in brokering logging companies. Mr. Cox testified that he did not make Mr. Lloyd his agent for the purpose of selling Greenstone. However, they did discuss a sale of the company in the summer of 1993, and Mr. Lloyd introduced the Hayes Group to Mr. Cox at that time. The negotiation with the Hayes Group broke down in November 1993, and in the same month Greg Dougan began negotiating with Mr. Cox, and a deal was struck on December 14, or within a day or two thereafter. There was a binding agreement for sale from mid-December 1993 until late January 1994. On January 28, Mr. and Mrs. Cox exercised their right to return the deposit and terminate the contract, as Dougan Logging had been unable to finance the purchase.
[11] Mr. Cox testified that Mr. Huxham had advised him in either 1992 or early 1993, that the non-logging assets should be removed from Greenstone, and that he had procrastinated in giving instructions to do so. That procrastination ended in either late November or early December, while the negotiations with Mr. Dougan were taking place, and only a few days before a contract was signed. Mr. Cox knew that there were tax-related reasons behind Mr. Huxham's advice. In mid-December they sought advice from a tax lawyer. The preparation and execution of the documents giving effect to the reorganization took place between December 10, 1993 and January 11, 1994. There is no question that a sale of the shares of Greenstone was in contemplation by Mr. and Mrs. Cox at that time. Indeed, it must have been in the forefront of their minds.
[12] When the Dougan deal fell through in January, it was not long before Mr. Lloyd contacted Mr. Cox to tell him of the interest of Thomas and Keith Olsen, who in fact, through a corporation, became the purchasers. The Olsens visited Mr. Cox within three or four days of the return of the Dougan deposit, and they delivered a letter of intent by February 10, less than a month after the execution of the last of the reorganization documents.
[13] Although Mr. Cox denied having contracted with Mr. Lloyd to find a buyer for Greenstone, he admitted that Greenstone paid Mr. Lloyd a fee of about $35,000, the amount of which he and Lloyd negotiated. It is significant that Mr. Lloyd did not testify. I draw the inference that Mr. and Mrs. Cox had decided to sell Greenstone in the summer of 1993, if not earlier, that Mr. Lloyd knew that, and that he was at least informally acting on their behalf to find a buyer. A sale of Greenstone was undoubtedly within the contemplation of Mr. and Mrs. Cox from July 1993 until the actual sale took place in April 1994.
[14] The actual transactions which gave rise to the subsection 84(3) deemed dividend were a sale by Mr. and Mrs. Cox of shares in Greenstone to Granite Bay, and the redemption of those shares by Greenstone for a conveyance to Granite Bay of its non-logging assets. The agreements to sell the shares and the corporate resolutions are all dated December 31, 1993; they may have been executed as late as January 11, 1994. In either event, there was an agreement in place at the time between Mr. and Mrs. Cox and Dougan Logging for the sale of all the outstanding shares of Greenstone. The dividend had prepared Greenstone for sale by removing from it the non-logging assets. There can be no doubt that if the Dougan sale had been completed, it would have been the culmination of a series of events within subsection 55(2). If Dougan Logging had assigned its rights under the December 1993 agreement to another purchaser and it had completed the sale, it would have come within subsection 55(2). In my view, a change in the identity of the purchaser, where the intention to sell remained intact throughout and the hiatus is as short as this one, cannot divorce the share redemption from the subsequent sale of the Cox shares.
[15] Counsel for the Appellant placed great emphasis on the passage which I have quoted from the judgment of O'Connor J. in the Meager Creek case, and, in particular, his rejection of the proposition that " ... any possible future sale can suffice to bring subsection 55(2) into play."[8] However, it is clear from the latter part of that pararaph that O'Connor J. was only concerned not to give subsection 55(2) an interpretation so expansive that it would embrace future sales not yet in contemplation. In this he echoed the concern expressed earlier by Sarchuk J. in 454538 Ontario Ltd., and by Archambault J. in Industries S.L.M. Inc. However, the facts of this case are at the other end of the spectrum; to conclude that no nexus existed between the corporate reorganization and the redemption of the Greenstone shares in December or January and the sale of the Cox shares in February would be to ignore the obvious tax-avoidance purpose of subsection 55(2), as well as the words of subsection 248(10).
[16] Counsel also argued that the decisions of the House of Lords[9] in the step transaction cases support the notion that the transactions should not be considered to be a series unless the identity of the final purchaser was known throughout. The step transaction doctrine was developed in England as a common law remedy to counter tax avoidance schemes which were developed in a legislative vacuum. It is not surprising that the House of Lords limited the doctrine to those situations where the transactions were pre-ordained. I do not think that their reasoning in doing so should be applied to limit unduly the efficacy of specific anti-avoidance legislation.
[17] The appeal is dismissed. The Respondent is entitled to costs.
Signed at Ottawa, Canada, this 12th day of June, 2001.
"E.A. Bowie"
J.T.C.C.
COURT FILE NO.: 98-2524(IT)G
STYLE OF CAUSE: Granite Bay Charters Ltd. and
Her Majesty the Queen
PLACE OF HEARING: Vancouver, British Columbia
DATE OF HEARING: July 4 and 5, 2000
REASONS FOR JUDGMENT BY: The Honourable Judge E.A Bowie
DATE OF JUDGMENT: June 12, 2001
APPEARANCES:
Counsel for the Appellant: Douglas H. Mathew
Counsel for the Respondent: Robert Carvalho
COUNSEL OF RECORD:
For the Appellant:
Name: Douglas H. Mathew
Firm: Thorsteinssons
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
98-2524(IT)G
BETWEEN:
GRANITE BAY CHARTERS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on July 4 and 5, 2000, at Vancouver, British Columbia, by
the Honourable Judge E.A. Bowie
Appearances
Counsel for the Appellant: Douglas H. Mathew
Counsel for the Respondent: Robert Carvalho
JUDGMENT
The appeal from the assessment of tax made under the Income Tax Act for the 1994 taxation year is dismissed, with costs.
Signed at Ottawa, Canada, this 12th day of June, 2001.
|
"E.A. Bowie" |
J.T.C.C.
[1] 93 DTC 427 (T.C.C.).
[2] Ibid., paras. 24 to 26.
[3] 95 DTC 5253 (F.C.T.D.).
[4] [1996] 2 C.T.C. 2572 (T.C.C.).
[5] Ibid. at paras 48 and 50.
[6] 98 DTC 2073.
[7] paras. 29 to 31.
[8] Meager Creek Holdings Ltd. v. the Queen, supra, at para.31.
[9] Craven v. White, Commissioners of Inland Revenue v. Bowater Property Developments Ltd. Baylis v. Gregory [988] 62 T.C. 151 (H.L.); W.T. Ramsay v. Inland Revenue Commissioners, [1982] A.c. 300; Inland Revenue Commissioners v. Burmah Oil Co. Ltd., 54 T.C. 200; Furniss v. Dawson, [1984] A.C. 274.