[OFFICIAL ENGLISH TRANSLATION]
1999-4627(IT)G
BETWEEN:
BENOÎT CÔTE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on July 10, 2001, at Québec, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
Counsel for the Appellant: Patrick Poulin
Counsel for the Respondent: Yanick Houle
JUDGMENT
The appeal from the assessments made on January 7, 1999, under section 160 of the Income Tax Act for the taxation years is dismissed, with costs, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 7th day of February 2002.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Date: 20020207
Docket: 1999-4627(IT)G
BETWEEN:
BENOÎT CÔTE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre Proulx, J.T.C.C.
[1] This is an appeal from an assessment by the Minister of National Revenue (the "Minister") made under section 160 of the Income Tax Act, (the "Act") in respect of a dividend paid to the appellant by a corporation of which he was the sole shareholder.
[2] The parties agreed on a common statement of facts, as follows:
[TRANSLATION]
1. Desco Stratégies Marketing Inc. (hereinafter called "the corporation") was incorporated in November 1991.
2. At all relevant times, the appellant was the sole shareholder and director of the corporation.
3. The only tax return filed by the corporation pertains to the fiscal year from December 1, 1991, to November 30, 1992.
4. The corporation paid advances of $57,300 in 1992 by means of cheques made out periodically to the appellant, as appears from the copies of the cheques filed as tab 5 of the Joint Book of Documents.
5. The appellant used those amounts paid periodically to support himself.
6. The corporation declared a dividend of $58,350 to the appellant, its sole shareholder, before the end of the fiscal year ended on November 30, 1992, as appears from the financial statements appended to its tax return for the 1992 taxation year filed as tab 6 of the Joint Book of Documents.
7. The balance of advances made to the appellant during the fiscal year ended on November 30, 1992, was reduced to zero by way of set-off.
8. In his tax return for the 1992 taxation year, the appellant reported a taxable dividend in the amount of $71,632.
9. This was, for all purposes relevant to the instant case, the only income reported by the appellant for the year in issue, as appears from the tax return for 1992 filed as tab 7 of the Joint Book of Documents.
10. That dividend is equal to the amount of advances paid during 1992, grossed up in accordance with the provisions of the Act.
11. At all relevant times, the corporation owed the Minister the sum of $15,871.76 for the 1992 taxation year. That amount represents unpaid income tax of $14,871 and a penalty of $1,000.26, as appears from notices of assessment of January 7, 1999, and December 7, 2000, filed as tabs 1 and 4 of the Joint Book of Documents.
12. On January 7, 1999, the interest on the tax debt amounted to $10,851.49, as appears from the notice of assessment of January 7, 1999, filed as tab 1 of the Joint Book of Documents.
13. On December 7, 2000, the interest on the tax debt amounted to $16,096.34, as appears from the notice of assessment of December 7, 2000, filed as tab 4 of the Joint Book of Documents.
[3] The facts on which the Minister relied are described in paragraph 11 of the Reply to the Notice of Appeal (the "Reply") as follows:
[TRANSLATION]
(a) Desco Stratégies Marketing Inc. (hereinafter called "the corporation") was incorporated in November 1991.
(b) At all relevant times, the appellant was the sole shareholder of the corporation.
(c) The only tax return filed by the corporation pertains to the fiscal year from December 1, 1991, to November 30, 1992.
(d) The corporation paid the appellant a cash dividend of $71,632 in 1992.
(e) In his tax return for the 1992 taxation year, the appellant reported a dividend in the amount of $71,632.
(f) At the time the corporation paid that dividend, it owed the Minister the sum of $15,871.76 for the 1992 taxation year. That amount represents unpaid income taxes of $14,871 and a penalty of $1,000.26.
(g) On January 7, 1999, the interest on the corporation's tax debt amounted to $10,851.49.
(h) No consideration may be paid in exchange for a dividend.
[4] The Notice of Appeal is based in particular on the following:
[TRANSLATION]
. . .
5. More particularly, the assessment is based on the apparent joint and several liability that the appellant has with Desco Stratège Marketing inc. (hereinafter "Stratège"), having regard to that corporation's tax for 1992, in respect of a dividend of $57,300, which the appellant purportedly received.
6. In fact, that dividend does not constitute a transfer within the meaning of section 160 and therefore may not give rise to any joint and several liability of the appellant under that section, for the reasons given below.
7. In 1991, the appellant was employed by a third party, the Marketel corporation, from which he received a salary.
8. In 1992, the appellant left that employment and devoted himself to the activities of Stratège on a full-time basis but never drew a salary.
9. Rather, the appellant took cash advances from Stratège to support himself.
10. Those advances were subsequently taxed in the appellant's hands in the form of dividends.
11. Thus, no payment of dividends was ever made to the appellant.
12. Thus, since the advances represented the appellant's sole remuneration for full-time work done for the corporation, it was not a transfer within the meaning of section 160 of the ITA, as was recognized in case law.
13. Stratège had moreover made an agreement with the Department of Revenue for the payment of its taxes and had issued a series of postdated cheques for that purpose.
14. However, Stratège held 50 percent of the shares of a corporation called "Desco Stratège Conseil Inc.", which declared bankruptcy in May 1994.
15. It was because of that corporation's financial difficulties and of the payment by Stratège of the debts of Conseil that it had guaranteed that it was unable to honour the cheques issued to pay its taxes.
16. This clearly shows that there was no intention to deprive the government of the amounts owed to it.
17. The amounts paid to the appellant were paid as remuneration for his services to the corporation.
[5] It should be noted that the Notice of Appeal and the Reply do not refer to the second assessment, which is mentioned in the common statement of facts. When questioned on this point in a teleconference held on December 11, 2001, the two counsel informed me that it was not a point at issue in the instant case and that the fate of the second assessment will follow the fate of the first. I pointed out to them at that time that, according to the decision by Judge Dussault of this Court in Algoa Trust v. Canada, [1998] T.C.J. No. 292 (Q.L.), interest ceases to accrue against the transferee from the moment he is assessed.
[6] A joint book of documents was filed as Exhibit A-1.
[7] The appellant testified briefly. He explained that he is a management and organization consultant. The corporation rendered the same type of services. The corporation is not dissolved, but it has been inactive since 1992. This was the first time that he had been an owner-shareholder of a business corporation. During the year, he rendered services to the corporation and drew periodic advances totalling $57,300 to support himself. The cheques were filed as tab 5 of Exhibit A-1. The word "salary" is indicated at the beginning of a number of cheques. On two cheques, it is written that they constitute reimbursement for kilometrage. Further on, the word "advances" is written and, further yet, the word "dividend".
[8] The corporation's tax return was filed as tab 6 of Exhibit A-1. It states that gross income amounted to $290,965 and expenses to $161,131. Those expenses did not include the appellant's salary. The figure $76,879 appears under the heading "fees" but, according to the appellant, those were fees to subcontractors. No fees or salaries were included for the appellant. Before-tax profit was $129,834. Tax was $22,625. Net profit was $107,209. A $58,350 dividend on Class A shares was deducted from that net profit. The final balance was $48,859.
[9] The appellant explained that the corporation held 50 percent of the shares of Desco Stratège Conseil Inc., which declared bankruptcy in May 1994. It was purportedly as a result of the financial difficulties of Desco Stratège Conseil Inc., whose debts the corporation had guaranteed, that the corporation was unable to pay the taxes owed for 1992. Apart from that statement, there was no further evidence on this matter.
[10] Counsel for the appellant referred to the decision by the Federal Court of Appeal in Heavyside v. Canada, [1996] F.C.J. No. 1608 (Q.L.), specifically to paragraph 8 of that decision:
8 The object of section 160 is to prevent a taxpayer from avoiding his tax liability by simply transferring his assets to his or her spouse or to any other person described in this section. Section 160, in making the transferee personally liable for the tax due by the transferor, allows the Minister to seek payment from a taxpayer who is not the original taxpayer.
[11] He argued that this sentence means that one must have the intention of avoiding one's tax obligations at the time of the transfer and that the corporation did not have that intention.
[12] He referred to the decision by this Court in Davis v. Canada, [1994] T.C.J. No. 242 (Q.L.), specifically to the following paragraphs:
24 The Appellants submitted that their labour was consideration and employees of a Company who have received dividends instead of wages and who declared and paid tax on such dividends should not be cast into some deemed relationship of paying another person's tax because of subsequent unfortunate circumstances where neither the Company nor its employees were at fault. (The Swedish Company went bankrupt which precipitated the downfall of the Company). The Company declared and paid the dividends at a time when it was quite solvent and thriving.
. . .
26 The purpose of subsection 160(1) is to ensure that taxpayers do not avoid the payment of taxes by means of a transfer of property to a third party without consideration.
. . .
28 The Appellant submitted that a payment of a cash dividend by the corporation cannot constitute a transfer of property. In the Algoa supra case, J. Rip stated at page 412:
"The payment of a dividend in money or other property is a transfer of property within the meaning of subsection 160(1) of the Act. The corporation is impoverished and its shareholders are enriched. I fail to see the reason why a dividend is not a transfer of property."
29 I find in the case at bar that the payment of the cash dividends is a transfer of property.
(b) Can a corporate dividend be paid in exchange for consideration?
. . .
38 While Dickson's, C.J. statement may not be the ratio of his decision, he emphasized the fact that Mrs. McClurg made a very real contribution in consideration for the dividends paid her, it clearly supported his primary reasoning. I accept it for the position that consideration can be given for dividends.
. . .
41 I find that consideration can be given in exchange for dividends.
(c) Was there consideration given in exchange for the dividends in fact in the case at bar?
. . .
46 I conclude from the facts, that good and sufficient consideration was by the Appellants to the Company to justify the payment of $67,500 to them in 1985 and $64,500 in 1986. Had it been paid by way of salary, it is very doubtful that the Respondent would have applied subsection 160(1) of the Act.
47 The purpose of subsection 160(1) is to prevent a person (Company) with income tax liability, from avoiding the Minister's claim by transferring property, including cash dividends, to a non-arm's length person for no consideration. This is not the situation at bar. The Appellants devoted their full-time services to the Company and paid themselves by way of dividends rather than salary. At the time the dividends were declared the Company was solvent and there is no question that the declaration and subsequent payment of dividend was not made to circumvent taxes. The taxes had not been assessed at the time the dividend was declared as paid.
[13] Counsel for the appellant stated that, in 1992, the appellant had devoted himself full time to the proper operation of the corporation and that the dividend received was in compensation for services rendered. No other compensation was granted to the appellant for his services.
[14] He referred to the decision by the Supreme Court of Canada in Neuman v. M.N.R., [1998] 1 S.C.R. 770, more particularly to the following passage at page 792:
60 In my view, it is wrong to suggest that there may be an exception to the rule that s. 56(2) does not apply to dividend income where the recipient of the dividend income in a non-arm's length transaction has not made a "legitimate contribution" to the corporation. In so stating, I assume, of course, that proper consideration was given for the shares when issued. I am not aware of any principle of corporate law that requires in addition that a so-called "legitimate contribution" be made by a shareholder to entitle him or her to dividend income and it is well accepted that tax law embraces corporate law principles unless such principles are specifically set aside by the taxing statute.
[15] He emphasized the last sentence. If I understand his argument clearly, he contends that section 15 of the Act states that a benefit to a shareholder must be included in computing the shareholder's income and that this explains why a dividend was paid. In his view, the taxing statute has thus specifically set aside the corporate law notion of dividend.
[16] Counsel for the respondent referred in particular to the decisions of this Court in Algoa Trust v. Canada, [1993] T.C.J. No. 15 (Q.L.); 155579 Canada Inc. v. Canada, [1996] T.C.J. No. 1188 (Q.L.); Gosselin v. Canada, [1996] T.C.J. No. 206 (Q.L.); Pauzé v. Canada, [1998] T.C.J. No. 560 (Q.L.); Gazaille v. Canada, [2001] T.C.J. No. 240 (Q.L.); and to the decision by the Supreme Court of Canada in Neuman, supra, in arguing that the payment of a dividend constitutes a transfer of property within the meaning of subsection 160(1) of the Act and that no consideration is given by a shareholder in exchange for payment of a dividend.
[17] Counsel also referred to the following cases: Bronfman Trust v. Canada, [1987] S.C.J. No. 1 (Q.L.); Friedberg v. Canada (F.C.A.), [1991] F.C.J. No. 1255 (Q.L.); and Friedberg v. Canada, [1993] S.C.J. No. 123 (Q.L.) in contending that the courts must consider what the taxpayer has actually done, not what he might have done. In particular, he quoted a passage written by Dickson C.J. in Bronfman Trust, supra, at page 13:
. . . It would be a sufficient answer to this submission to point to the principle that the courts must deal with what the taxpayer actually did, and not what he might have done: Matheson v. The Queen, 74 DTC 6176 (F.C.T.D.), per Mahoney J. at p. 6179.
Conclusion
[18] With respect to this Court's decision in Davis, supra, I do not believe it has been followed by the other judges of this Court. It can surely no longer be followed since the decision by the Supreme Court of Canada in Neuman, supra, which determined that a dividend is the return on capital relating to a share and in no way depends on the conduct of a given shareholder.
[19] As Judge Dussault wrote in Gosselin, supra, in paragraph 15 of his reasons: The declaration of a dividend is essentially the allocation of a company's undistributed profits to its shareholders in proportion to the shares held by them and in accordance with the rights attached to those shares. Payment of the dividend is the act by which the dividends so allocated by the directors in their discretion, and in compliance with the principles of company law and the specific rules laid down in this regard, distribute to the shareholders the dividend allocated to each class of shares. In addition to the rules regarding solvency of the company there is the rule of equality of shares in the same class in terms of the privileges and limitations attached to shares in that class.
[20] The decision in Davis, supra, also stated that it had not been the transferor's intention to avoid paying his taxes at the time of the transfer. This intention to avoid paying one's taxes or not has never been the decisive element of a decision by this Court. In fact, that intention is not material for the purposes of the application of section 160 of the Act. It is enough that the transferor had a tax debt in the year in which the transfer took place or in previous years and that the transfer was made at a value below its market value.
[21] Counsel for the appellant suggested that section 15 of the Act set aside the corporate law meaning of a dividend. It was to compensate for section 15 of the Act that a dividend was paid. It would follow that only payment of the advances and not payment of the dividend should be taken into account.
[22] It is true that, under subsection 15(1) of the Act, the value of the benefits that a corporation confers on a shareholder must be included in computing the shareholder's income. This applies unless that benefit has been, inter alia, conferred by the payment of a dividend, which is the case in this instance. Subsection 15(2) of the Act is to the same effect concerning loans made by a corporation to a shareholder.
[23] In my view, section 15 of the Act in no way sets aside the corporate meaning of dividend. It includes it in its full sense. Section 15 of the Act states that a dividend is not to be included in computing income under section 15 of the Act. Other provisions of the Act provide for the tax treatment of dividends.
[24] There are different paths a taxpayer may take in organizing his affairs, and each of those paths entails a specific tax treatment. It is well-settled in tax matters that the Court must consider what the taxpayer has done. Here the taxpayer chose not to pay himself a salary but to take advances and to repay those advances by means of a dividend. The tax treatment of a dividend is different from the treatment of salaries or other payments for services rendered. Unfortunately, I can only conclude as follows: the corporation's payment of a dividend to the appellant in 1992 was a transfer of property within the meaning of section 160 of the Act, and no consideration was given in respect of that property because, according to corporate law and the provisions of the Act applicable in the instant case, the dividend in question is a share of the corporation's profits allocated to the appellant as a shareholder. It is not a salary or other payment for services rendered.
[25] The appeal must be dismissed.
Signed at Ottawa, Canada, this 7th day of February 2002.
|
"Louise Lamarre Proulx" |
J.T.C.C.