Docket: 2001-2959(IT)G

BETWEEN:

VIH LOGGING LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on September 25, 2003 at Vancouver, British Columbia

By: The Honourable Justice J.M. Woods
Appearances:
Counsel for the Appellant:	E. Michael McMahon
Counsel for the Respondent:	Ernest Wheeler and Rosemary Fincham

____________________________________________________________________

JUDGMENT

The appeal in respect of the assessment made under the Income Tax Act for the 1994 taxation year is allowed, with costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment consistent with the reasons for judgment.

Signed at Ottawa, Canada this 19th day of December, 2003.

"J.M. Woods"

J.M. Woods J.

Citation: 2003TCC732

Date: 20031219

Docket: 2001-2959(IT)G

BETWEEN:

VIH LOGGING LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Woods J.

[1]      VIH Logging Ltd. appeals an income tax assessment that applied subsection 55(2) of the Income Tax Act to intercorporate dividends received as part of a tax shelter arrangement. The central issue concerns the calculation of so-called "safe income," and in particular whether the computation period includes periods that are part taxation years.

[2]      VIH Logging also appeals the assessment on the ground that it is statute barred. The central question on the statute bar issue is whether an assessment sent by private courier is made in time if it is picked up by the courier in time but not delivered until after the expiry of the statute bar period.

STATUTE BAR ISSUE

[3]      A notice of assessment was sent to VIH Logging's authorized representative by private courier perilously close to the end of the statute bar period in subsection 152(4) of the Income Tax Act. The Crown submits:

·         the assessment was made on time because the notice was picked up by the courier prior to the expiry of the time period; and

·         alternatively, the assessment is deemed to be made on the date stated on the notice of assessment.

[4]      On the first issue, VIH Logging submits that it is not sufficient for statute bar purposes that the notice of assessment be picked up by the courier. It submits that the notice needs to be delivered in time. Alternatively, VIH Logging submits that the evidence does not establish that the notice of assessment was picked up before the expiry of the statute bar period. The parties agree that the Crown has the onus to establish that the notice of assessment was picked up in time: Aztec Industries Ltd. v. The Queen.[1] I will consider this factual issue first.

When was notice picked up?

[5]      The last day for making an assessment of VIH Logging's 1994 taxation year was November 14, 1997. The Crown submits that the notice of assessment was picked up by the courier on November 13, 1997.

[6]      Not surprisingly, none of the Crown's witnesses recalled the circumstances of sending this particular notice of assessment. The Crown attempts to establish the November 13, 1997 pick up date by:

·         testimony regarding the general mailing and courier procedures at the Canada Customs and Revenue Agency[2];

·         testimony regarding the general pick up and delivery procedures at the courier company that delivered the notice; and

·         documents in connection with the delivery of this particular notice of assessment.

Testimony as to the CCRA's general practices and procedures was presented by the audit team supervisor who instructed the mailroom to deliver the notice by courier and by the mailroom supervisor who received this instruction. Testimony was also provided by someone familiar with the general CCRA procedures for courier deliveries.

[7]      In accordance with the CCRA's normal procedures at the time, when an assessment was close to becoming statute barred, a notice of assessment would be placed in an envelope with a memorandum of instructions to the mailroom, called a Round Trip Memorandum, attached to it. The envelope would be taken immediately to the mailroom. If the Round Trip Memorandum requested courier delivery, someone in the mailroom would immediately contact a courier for pick up that day. The courier clerk at the CCRA would fill out a waybill and indicate the date that the envelope was picked up. If the envelope was not picked up on the date specified, the waybill would be changed to reflect the actual date of pick up.

[8]      As for the VIH Logging assessment, a notice of reassessment dated November 13, 1997, along with a Round Trip Memorandum with the same date, was delivered to the mailroom at the Surrey Tax Office. The Round Trip Memorandum instructed the mailroom to have the notice of assessment picked up by private courier that same day and delivered to VIH Logging's authorized representative, Beaton Sherwood, in Victoria, British Columbia.

[9]      According to a handwritten notation on the Round Trip Memorandum, a mailroom clerk telephoned a private courier, Dan Foss Couriers, at 1:03 p.m. on November 13. The waybill indicates that the notice of assessment was picked up the same day. The pickup date is also supported by an internal memorandum sent by the acting supervisor of the mailroom to someone at the Vancouver Island Tax Services Office (VITSO).

[10]     According to the waybill, the notice of assessment was to be sent by overnight courier. In accordance with Dan Foss' normal procedures, delivery of an overnight courier would have been attempted the next day, November 14. According to the internal memorandum to the VITSO, there was no one at Beaton Sherwood to receive the envelope on November 14 and it could not be delivered that day. It appears that there was a second attempt at delivery which also failed. In any event the envelope went back to Dan Foss' office without having been delivered. The envelope was finally delivered to Beaton Sherwood on the afternoon of November 18 which was several days after the statute bar period had expired.

[11]     A driver with Dan Foss Couriers at the relevant time testified that the CCRA could have stopped the delivery of the envelope at any time. However, there is no evidence that the CCRA attempted to do this.

[12]     In considering whether this evidence establishes that the notice was picked up on November 13, it is clear that the date can be established without someone recalling the details of this courier delivery. Bowman J. (as he then was) discussed proof of mailing for purposes of a GST notification in Schafer v. The Queen:[3]

In a large organization, such as a government department, a law or accounting firm or a corporation, where many pieces of mail are sent out every day it is virtually impossible to find a witness who can swear that he or she put an envelope addressed to a particular person in the post office. The best that can be done is to set out in detail the procedures followed, such as addressing the envelopes, putting mail in them, taking them to the mail room and delivering the mail to the post office.

[13]     A similar view was recently expressed by Rothstein J.A. in Kovacevic v. The Queen:[4]

I accept that when legislation requires that documents be sent by a large organization such as a government department by ordinary mail, but does not require registered or certified mail or evidence of a more formal means of sending, the observation of Bowman J. in Schafer is reasonable. Generally, it would be sufficient to set out in an affidavit, from the last individual in authority who dealt with the documents before it entered the normal mailing procedures of the office, what those procedures were.

[14]     In my analysis the evidence clearly establishes that the notice of assessment was picked up by the courier on November 13, 1997. The witnesses were knowledgeable about general mailing and courier procedures and were the people in authority who handled the courier delivery of this notice of assessment. They testified that the notice of assessment would, in the normal course, have been picked up by the courier on November 13, 1997. In addition, there were several documents that show that the notice of assessment was in fact picked up on that date. Although VIH Logging disputed that the notice was picked up on November 13, counsel did not press the point too vigorously. Accordingly, I find that the notice of assessment was picked up by Dan Foss Couriers on November 13, 1997.

Is assessment made when notice picked up?

[15]     Subsections 152(2) and (4) of the Act provide:

(2) Notice of assessment. After examination of a return, the Minister shall send a notice of assessment to the person by whom the return was filed.

(emphasis added)

(4) Assessment and reassessment. The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, ... except that an assessment, reassessment or additional assessment may be made after the taxpayer's normal reassessment period in respect of the year only if ...

(emphasis added)

[16]     The statute bar test is set out in subsection 152(4) and in this case the assessment had to be made by November 14, 1997. The Act does not specify when an assessment is made unless the notice of assessment is mailed. If it is mailed, the assessment is deemed to be made on the date stated on the notice.[5]

[17]     The Crown takes the view that that the assessment is made when it is picked up by the courier. Alternatively, the Crown suggests that delivery by courier constitutes mailing and accordingly, the assessment is deemed to be made on November 13. I will first consider whether an assessment is made when it is picked up by the courier.

[18]     There have been several cases that consider when an assessment is made. The appropriate test is that an assessment is made when the notice has been sent by the Minister of National Revenue: Aztec Industries, and Flanagan v. The Queen.[6] While the parties agree that this is the appropriate test, they differ as to whether the notice is sent when it is picked up by the courier.

[19]     In Flanagan, the Federal Court of Appeal determined that "send" means dispatch. This meaning is also consistent with the following definition of "send" from The Oxford English Dictionary:[7]

To dispatch (a message, letter, telegram, etc.) by messenger, post, or other means of communication, So to send cards (of invitation).

In my view the notice of assessment was dispatched when it was picked up by the courier. It was at that point that it left the Minister's possession for transmission to VIH Logging's authorized representative.

[20]     VIH Logging submits that the notice was not dispatched when the courier picked it up because the envelope could have been recalled by the CCRA at any time. It suggests that it remained in the Minister's control until delivery. Counsel cited Flanagan in support. With respect, Flanagan does not support this proposition. In Flanagan, an employee of the CCRA attempted personal delivery of a notice of assessment because of a postal strike. The Court concluded that the notice of assessment never left the Minister's possession and, accordingly, it could not be said that the notice had been "dispatched." In an oral judgment, Hugessen J.A. observed:

            In law the Notice never left the Minister's possession. The Minister cannot at one and the same time both send and retain a Notice of Reassessment.

[21]     In the case at bar, I find that the Minister sent the notice when it was picked up by the courier even though the Minister had the power to recall it.[8] The ordinary meaning of "send" does not support the restrictive meaning that VIH Logging suggests. It is also not supported by Flanagan which refers to the notice leaving the Minister's possession, not control.

[22]     VIH Logging also submits that a more restrictive meaning of the word "send" is implied by the evidentiary rule in subsection 244(10). This provision permits the Minister to introduce evidence by affidavit of "mailing or other communication." VIH Logging argues that the phrase "or other communication" suggests that Parliament either intended that the assessment be mailed or, if not mailed, that it be communicated such that the taxpayer becomes aware of it. I disagree that subsection 244(10) restricts the ordinary meaning of the word "send" in subsection 152(2). If Parliament intended a more restrictive test than can be supported by the ordinary meaning of "send," different language would have been used in subsection 152(2). The plain interpretation of subsection 152(2) should not be affected by an evidentiary rule such as subsection 244(10).

[23]     VIH Logging also submits that there are good policy reasons to interpret "send" narrowly. It argues that a broad interpretation could have draconian consequences because a taxpayer could lose the right to appeal if the notice of assessment was not received. This problem has been alluded to in other cases: See Sharlow J.A.'s comments in Schafer. I have concluded that the word "send" must be given its ordinary meaning even if there is a possibility of an unfair result. As Sharlow J.A. noted in Schafer, Parliament has provided for a rule that could possibly have draconian results and that is Parliament's prerogative.

[24]     Accordingly, I would conclude that the assessment was made when the notice of assessment was picked up by the courier. In light of my conclusion that the notice of assessment was picked up on November 13, 1997, it follows that the assessment is not statute barred.

Deeming Rule

[25]     It is not necessary for me to consider the Crown's alternative argument that the assessment is deemed, by virtue of subsections 244(14) and (15), to be made on November 13, 1997. However, I will comment briefly with respect to this issue.

[26]     This is a difficult issue. The deeming rule will apply if "mail" includes courier delivery. Dictionary definitions of "mail" typically do not include courier delivery but it is included in the seventh edition of Black's Law Dictionary. The Black's definition appears to be supported by decisions in the United States, including some involving statute bar provisions. However, the United States decisions go both ways.[9] In light of the importance of this issue, I am reluctant to make a finding on it.

SECTION 55 ISSUE

[27]     In its 1994 taxation year, VIH Logging participated in a tax shelter known as a "Profitco Transaction." In generic terms, a Profitco Transaction is designed to reduce the taxable income of a profitable corporation by having the profitable corporation purchase tax deductions from an unrelated corporation. The Minister reassessed VIH Logging in respect of dividends received as part of this arrangement.

Facts

[28]     VIH Logging is wholly-owned by Kenneth Norie. Prior to the transactions at issue, another corporation wholly-owned by Mr. Norie, 401277 B.C. Ltd., operated a helicopter logging business on Vancouver Island.

[29]     The helicopter logging business carried on by 401277 did not earn profit of any significance until the taxation year that ended March 1, 1993. Mr. Norie sought tax advice regarding the projected profit for the 1993 taxation year and, as a result, 401277 and VIH Logging implemented a Profitco Transaction that, if effective, would eliminate 401277's taxable income for the year. The transaction was implemented over a nine-day period that straddled the end of the 1993 taxation year.

[30]     The essential elements of a Profitco Transaction are:

·         Profitco transfers its profitable business to a related corporation on a tax-effective basis;

·         an unrelated corporation sells fast write-off property to Profitco that enables Profitco to eliminate its tax liability for the year; and

·         the shares of Profitco are sold to the former owner of the fast write off property.

[31]     A moredetailed description was presented by the parties as follows. I have added after each step a description of the corresponding transaction undertaken by 401277 and VIH Logging. None of these facts are in dispute.

[32]     STEP 1 -    Target amends authorized capital to accommodate transaction.

On February 23, 1993, 401277 filed with the Registrar of Companies a special resolution that amended its authorized capital to create two classes of preferred shares that were needed to accommodate the transactions.

[33]     STEP 2 -     A new company is incorporated (Holdco) to acquire the shares of Target.

On February 23, 1993, VIH Logging was incorporated under the B.C. Company Act. Its first taxation year ended on January 31, 1994. At all relevant times, Mr. Norie owned all the shares of this company. Also on February 23, Mr. Norie exchanged the shares of 401277 for shares of VIH Logging and 401277 became a wholly-owned subsidiary of VIH Logging.

[34]     STEP 3 -     Target transfers to Holdco its assets (less cash equal to income taxes payable by Target on its income for the year) and its liabilities (except its income tax liability).

On February 24, 401277 sold the helicopter logging business to VIH Logging for consideration consisting of the assumption of liabilities and the issuance of a promissory note. The stated purchase price for the assets was $1,850,403, which was their estimated fair market value. No value was attributed to the goodwill of the business and accordingly the business was transferred with little taxable gain to 401277.

[35]     STEP 4 -    Target pays a series of dividends to Holdco amounting to safe income (cash dividends) plus a stock dividend for any excess.

On February 24 and 25, 401277 paid cash dividends[10] to VIH Logging in the amounts of $980,629 and $416,800 respectively. The aggregate amount, $1,397,429, was equal to the estimated safe income of 401277. Because 401277 did not earn significant profit prior to its 1993 taxation year, almost all the estimated safe income was attributable to the period March 1, 1992 to February 23, 1993, February 23 being the date that the Profitco Transaction commenced.

After the payment of the cash dividends, the only remaining assets and liabilities of 401277 consisted of a potential income tax liability of $938,080 and cash sufficient to pay that liability.

After the payment of the cash dividends, but also on February 25, 401277 paid a stock dividend to VIH Logging consisting of 366,079 Class F Preferred shares with a paid-up capital of $1.00 each. This dividend increased the aggregate adjusted cost base of the shares of 401277 by $366,079.

The aggregate amount of the cash and stock dividends was $1,763,508. This amount was included in VIH Logging's income for its taxation year ended January 31, 1994 and was deducted in computing its taxable income pursuant to subsection 112(1).

[36]     STEP 5 -    New directors of Target appointed.

On February 25, two persons unknown to Mr. Norie became officers and majority directors of 401277. This was at the request of Senergy Inc., which was the company that acquired the shares of 401277 a few days later.

[37]     STEP 6 -    Target acquires deductions (in this case seismic data) sufficient to offset current year income.

On February 27, 401277 purchased seismic data from an unrelated corporation, 548231 Alberta Ltd. The purchase price was $2,200,000, its fair market value. In computing income for the taxation year ended March 1, 1993, 401277 claimed a deduction equal to the purchase price as a Canadian exploration expense. The effect of this deduction was to reduce 401277's income for the year to nil.[11]

[38]     STEP 7 -    Holdco sells the Target shares to the purchaser.

On March 2, VIH Logging sold all the shares of 401277 to Senergy Inc., an unrelated corporation. It appears that Senergy Inc. was related to 548231 Alberta Ltd., the corporation that sold the seismic data to 401277, but nothing turns on this.[12] The purchase price for the shares was equal to their adjusted cost base, $366,080.

[39]     The Minister assessed VIH Logging on the basis that intercorporate dividends aggregating $1,624,959 were deemed to be proceeds of disposition pursuant to subsection 55(2) of the Act. This was $138,549 less than the aggregate dividends received. The result was a substantial taxable capital gain in VIH Logging's 1994 taxation year.

Statutory Provisions

[40]     Subsection 55(2) of the Act as it read at the relevant time provides:

(2)         Where a corporation ... received a taxable dividend ... as part of a transaction or event or a series of transactions or events ... one of the purposes 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 ...

[41]     Paragraph 55(5)(c) of the Act as it read at the relevant time provides:

(5)         For the purposes of this section, ...

(c) the income earned or realized by a corporation for a period throughout which it was a private corporation shall be deemed to be its income for the period otherwise determined ...

Analysis

[42]     Although the Profitco Transaction was designed to reduce 401277's taxable income, that corporation was not a party to the appeal. Moreover, the Crown limited its argument to subsection 55(2) and, accordingly, I have not considered any other arguments with respect to the Profitco Transaction, including the possible application of the general anti-avoidance rule.

[43]     Subsection 55(2) is an anti-avoidance provision aimed at "capital gains strips." A capital gains strip converts what would be a taxable capital gain from the disposition of shares into a tax-free intercorporate dividend.[13] However, not all such transactions are offensive in policy terms and subsection 55(2) attempts to exclude from its ambit the inoffensive ones. One example is the permitted extraction of what is commonly known as "safe income." In the relevant taxation year safe income was described in subsection 55(2) as "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."

[44]     The policy underlying the permitted extraction of safe income was described by the CCRA in 1978 as follows:

... the capital gain on an arm's length economic disposition of shares ... 'should not be less than the increase in the value of the shares reasonably attributable to unrealized or untaxed appreciation in goodwill and other assets after 1971'.[14]

[45]     The tax shelter scheme in the case at bar is not a typical capital gains strip. In a typical transaction, the aim is to minimize tax on an impending sale of shares. In this case, Mr. Norie had no desire to sell the helicopter logging business that 401277 operated. Instead, the capital gains strip in this case was an incidental part of a larger series of transactions that was designed to eliminate the tax that would be paid on 401277's earnings for the 1993 taxation year.

[46]     VIH Logging presented the following arguments on subsection 55(2):

·         401277's safe income includes the profits of the helicopter logging business up to February 23, 1993 and accordingly the safe income was sufficient to cover the cash dividends;

·         none of the purposes of the cash dividends was to reduce the capital gain that would be payable on a disposition of the shares of 401277;

·         none of the purposes of the cash dividends was to extract funds in excess of safe income; and

·         the purpose of the stock dividend was not to reduce the capital gain that would be payable if the shares of 401277 were disposed of immediately prior to the stock dividend.

Safe Income

[47]     VIH Logging's computation of safe income included the helicopter logging profits for most of 1993 even though 401277 had no taxable income for the year because of the seismic deduction.

[48]     The Crown did not take issue with the seismic deduction not reducing safe income because the seismic data was acquired after the safe income calculation period in subsection 55(2). At first blush, this appears to be inconsistent with the CCRA administrative position that losses incurred after the commencement of the series of transactions should reduce safe income on hand if the losses were anticipated. The seismic deduction was certainly anticipated when the series of transactions commenced. However, the "loss" that arose from the seismic deduction was not a loss that resulted in a reduction in the value of the company and accordingly the Crown agrees that the seismic deduction did not reduce safe income on hand.

[49]     Instead, the Crown's argument is based on the deeming rule in paragraph 55(5)(c). It submits that this rule modifies the safe income calculation period set out in subsection 55(2) by excluding periods that are less than complete taxation years. In this case, safe income would exclude profits earned during the stub period March 1, 1992 to February 23, 1993.[15]

[50]     The Crown's argument focuses on the phrase "income for the period otherwise determined" in paragraph 55(5)(c). There is no question that paragraph 55(5)(c) is a deeming rule that overrides in subsection 55(2). The Crown suggests that, under section 3 of the Act, income is only determined for completed taxation years and accordingly income otherwise determined cannot include part taxation years. Counsel for the Crown admits that this interpretation is contrary to the CCRA's administrative policy but states that the interpretation is not novel. He notes that the argument that safe income includes only income for completed taxation years was referred to in a paper presented at a conference of the Canadian Tax Foundation in 1992 by Jake E. Harms.[16]

[51]     The Crown suggests that this interpretation is required by the words of the legislation and is supportable on policy grounds because it better reflects taxed retained earnings.

[52]     As for the policy argument, it is clear that Parliament's general intent was to permit the extraction of "taxed retained earnings" by tax-free intercorporate dividends. However, I do not agree that this intent is better reflected by the Crown's interpretation. In my analysis, taxed retained earnings are better captured by including income earned during part taxation years because, in most instances, tax will be paid on this income. Certainly this would be the case in a typical capital gains strip where intercorporate dividends are paid immediately prior to a sale of shares. In applying a purposive interpretation to legislation it is important to strive for an interpretation that best achieves Parliament's intent in as many circumstances as possible and not just the narrow fact situation that is being decided in a particular case. In my view, the Crown's policy argument has this flaw.

[53]     As for the Crown's argument that its interpretation is required by the words of paragraph 55(5)(c), I do not think that the Crown's interpretation is the more reasonable one if paragraph 55(5)(c) is read in context.

[54]     When both paragraph 55(5)(c) and subsection 55(2) are read together, I think it is quite apparent that Parliament intended for paragraph 55(5)(c) to set out the method of calculation of safe income and for subsection 55(2) to set out the safe income calculation period. The safe income calculation period in subsection 55(2) is

from 1971 until the commencement of the series of transactions. Paragraph 55(5)(c), on the other hand, does not set out a computation period, at least explicitly. If paragraph 55(5)(c) were intended to supplant the calculation period clearly set out in subsection 55(2), much clearer language would have been required.

Although I have concluded that a contextual interpretation favours VIH Logging, it remains to be considered whether paragraph 55(5)(c) can be interpreted in this manner. The question is whether "income for the period otherwise determined" can possibly be interpreted to include part taxation years.

Paragraph 55(5)(c) requires safe income to be determined in accordance with section 3 for the period set out in subsection 55(2). If income is to be computed under section 3 for a period that is not a complete taxation year, there are two possible approaches. The first approach would be to compute income as if the period were a complete taxation year. The second approach would be to conclude that there is no income for that period. In my view, the first approach is the more reasonable. I recognize that this interpretation could be viewed as interpreting the words "otherwise determined" in an unusual way, but in my view this is the only reasonable interpretation in the circumstances.

[55]     Another difficulty that I have with the Crown's submission is that it would result in a different safe income computation period for different types of corporations. Paragraph 55(5)(c) only applies for periods throughout which a corporation is a private corporation. The calculation of safe income for public corporations and foreign affiliates are subject to the deeming rules in paragraph 55(5)(b) and (d) respectively. In some situations, there are no applicable deeming rules. It is unlikely that Parliament would have intended that the safe income computation period be different depending on the status of the corporation involved.

[56]     Lastly, I note that the Crown's position is contrary to the CCRA's administrative position that has been applied countless times over 20 years. If the Crown's highly technical interpretation of paragraph 55(5)(c) were to be accepted, the legislation should clearly require this result.

[57]     Accordingly, I find that safe income includes 401277's income for the part year ended February 23, 1993.

Was purpose to reduce gain

[58]     In an alternative argument, VIH Logging suggests that, in participating in the Profitco Transaction, it did not have the purpose that is a necessary element for the application of subsection 55(2). The cash dividends received by VIH Logging totalled $1,397,429 which is approximately equal to the safe income attributable to the shares of 401277.

[59]     It is not disputed that the cash dividends had the result of reducing the capital gain that would be realized if the shares of 401277 were sold for their fair market value immediately before the particular dividend. Before the payment of the cash dividends, the shares of 401277 were worth at least $1,443,000 and the adjusted cost base of the shares was nominal. The question, however, is the purpose, not the result.

[60]     VIH Logging submits that its purpose in paying the cash dividends was to remove assets from 401277 and not to reduce a capital gain. This submission was based on Mr. Norie's testimony. I do not agree. One of Mr. Norie's purposes was to enable the shares of 401277 to be sold on a tax-free basis and the payment of the cash dividends was a necessary step in achieving this end. Mr. Norie may not have been aware of the details of the Profit Transaction but he certainly was aware of the intended overall tax effect. Moreover, Mr. Norie's tax advisors certainly were aware of the tax consequences of the cash dividends. These circumstances are sufficient for the purpose test in subsection 55(2).

Was purpose to extract safe income

[61]     VIH Logging's alternative argument is that it thought it had sufficient safe income and accordingly, its purpose was not to extract funds in excess of safe income. This interpretation raises the question of whether the purpose test is a two part test, that is, to reduce gain and to extract funds in excess of safe income. From a grammatical point of view, the purpose test could be interpreted as a two-part test but does not need to be. Either interpretation is possible. In my view, the better interpretation is that the purpose test is only a one-part test. It is most unlikely that Parliament intended that a taxpayer could avoid the application of subsection 55(2) by incorrectly computing safe income.

[62]     For these reasons, I have not been persuaded by VIH Logging's alternative arguments regarding the purpose test.

Was purpose of stock dividend to reduce gain

[63]     After VIH Logging received cash dividends in an amount equal to 401277's safe income, it received a stock dividend in the amount of $366,079. The purpose of the stock dividend was to increase the adjusted cost base of the aggregate shares of 401277 to $366,080 in anticipation of a possible sale of those shares for that amount. There is no dispute that the purpose of the stock dividend was to reduce gain. The question is, what gain was being reduced.

[64]     VIH Logging submits that the purpose of the stock dividend was not to reduce a capital gain that would be realized immediately before the dividend. It suggests that the fair market value of the shares immediately before the dividend was nominal and therefore no gain would have been realized on their sale at that time.

[65]     VIH Logging's submission depends on their being no value in the shares of 401277 on February 25.[17] At this point, 401277's only liability was a contingent liability for income tax and its only asset was cash equivalent to the tax liability. 401277 became more valuable two days later because on February 27 the contingent liability was eliminated by the purchase of the seismic data. VIH Logging introduced expert valuation evidence on the valuation[18] and although the Crown did not explicitly agree with the valuation, it did not vigorously dispute it. In the circumstances, I would accept the valuation evidence presented by VIH Logging.

[66]     Accordingly, I would conclude that the stock dividend is not subject to subsection 55(2) because none of the purposes of the dividend was to reduce a capital gain that would be realized if the shares were sold immediately before the dividend.

CONCLUSION

[67]     The appeal is allowed, with costs, and the reassessment for the 1994 taxation year is referred back to the Minister of National Revenue for reconsideration and reassessment on a basis consistent with these reasons.

Signed at Ottawa, Canada this 19th day of December, 2003.

"J.M. Woods"

J.M. Woods J.

CITATION:

2003TCC732

COURT FILE NO.:

2001-2959(IT)G

STYLE OF CAUSE:

VIH Logging Ltd. v. The Queen

PLACE OF HEARING:

Vancouver, British Columbia

DATE OF HEARING:

September 25, 2003

REASONS FOR JUDGMENT BY:

The Honourable Justice J.M. Woods

DATE OF JUDGMENT:

December 19, 2003

APPEARANCES:

Counsel for the Appellant:

E. Michael McMahon

Counsel for the Respondent:

Ernest Wheeler and Rosemary Fincham

COUNSEL OF RECORD:

For the Appellant:

Name:

E. Michael McMahon

Firm:

Michael McMahon Law Corporation Vancouver, British Columbia

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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