Guilder News Co. (1963) Limited, Florin News
Company (1963) Limited, Joel Rottman, and
Pruta News Company (1963) Limited (Appel-
lants)
v.
Minister of National Revenue (Respondent)
Court of Appeal, Jackett C.J., Sheppard and
Bastin D.JJ.—Toronto, December 8; Vancou-
ver, December 20, 1972.
Income tax—Benefit or advantage conferred by company
on shareholders—Whether a dividend—Property sold by
company to shareholders below value subject to revalua-
tion—Income Tax Act, secs. 8(1)(c), 38.
In 1962 four shareholders of two investment dealer com
panies sold their shares therein below their actual value to
four companies, each of which was controlled by one of the
four vendors. In 1964, pursuant to an agreement, the four
companies resold the shares (whose value had not
increased) at the same price to the original vendors subject
to the condition that the resale price should be adjusted in
accordance with any subsequent determination of the
shares' fair market value by the Minister of National Reve
nue. The Minister of National Revenue subsequently deter
mined the fair market value of the shares to be much higher
than the resale price.
Held, affirming Gibson J.:
(1) The resale of the shares by the companies at less than
their value conferred a benefit or advantage on the purchas
ers as shareholders within the meaning of section 8(1)(c) of
the Income Tax Act (the amount of that benefit or advan
tage was, however, not in issue).
(2) The benefit or advantage so conferred on the share
holders was not a dividend within the meaning of section 38
so as to entitle the recipient (if otherwise entitled) to a tax
credit thereon. Smythe v. M.N.R. [1970] S.C.R. 64,
followed.
APPEAL from Gibson J.
W. D. Goodman, Q.C. and Franklyn E. Cap-
pell for appellants.
G. W. Ainslie, Q.C. and M. J. Bonner for
respondent.
JACKETT C.J.—These four appeals were
argued together. Each appeal is from a judg
ment of the Trial Division dismissing an appeal
from an assessment under the Income Tax Act.
The facts are stated in the Reasons for Judg
ment of the learned Trial Judge' and I need not
repeat them. For the purpose of stating my
views with reference to the merits of the
appeals, I can summarize the facts that are
directly in point, very briefly, in a way that is
applicable to each of the appeals, as follows:
1. In 1962 an individual sold to a company,
whose stock all belonged to him, shares in other
companies for a price substantially below actual
value.
2. In 1964, the company resold the shares,
whose value had not changed since 1962, to the
individual at the same price under an agreement
containing the following clause:
4. It being the intention of the Vendor and the Purchaser
that the prices herein stipulated should represent the fair
market value of the shares being purchased and sold herein,
the parties hereto agree that in the event that the Minister of
National Revenue should at any time hereafter make a final
determination that the fair market value of the said shares
as of the date of this Agreement is less than or greater than
the prices herein stipulated, the prices herein stipulated
shall be automatically adjusted nunc pro tunc to conform
with such fair market value as finally determined and all
necessary adjustments shall be made, including adjustment
of the above mentioned promissory note.
The assessments attacked by the appeals
were each based on an assumption
(a) that the 1964 sale by the company to the
individual at a price less than value was a
device adopted for the purpose of conferring
a benefit or advantage on the individual as a
shareholder in the company within the sense
of such provisions as section 8 of the Income
Tax Act, 2 and
(b) that, as a result of the 1964 sale a benefit
or advantage was conferred upon the
individual by the appellant in a specified
amount.
Two questions were raised by the appellant in
the Trial Division and in this Court, namely,
1. the appellant contended that no benefit
was conferred on the individual by the compa
ny, and
2. in the Joel Rottman case, it was contended
that, if any benefit was conferred on him, he
was entitled to a dividend credit.
The learned Trial Judge expressed the view,
with reference to the first of such contentions,
after considering all the evidence, that the
assumption pleaded of benefit or advantage had
not been rebutted. With reference to the second
contention, the learned Trial Judge concluded
that the amount or value of the benefit received
by Joel Rottman is not subject to section 38 of
the Act . 3
The position taken in this Court by the appel
lants with reference to the first contention is set
out in their Memorandum of Fact and Law as
follows:
1. It is respectively submitted that the learned Trial Judge
erred in holding that a benefit was conferred on each of the
four individuals because:
(a) the agreements of June 10, 1964 merely effected a
cancellation of the earlier agreements of August 1, 1962
and put the parties back in the same position as they had
been before the agreements of August 1, 1962;
(b) the whole group of transactions must be looked at in
its entirety in order to determine whether or not there was
any benefit to the four individuals;
(c) there could be no benefit in light of the readjustment
clause;
(d) the alleged benefit was not conferred on these four
individuals in their capacities as shareholders, but in their
capacities as purchasers, and Sections 8 and 108(5) do
not apply to such transactions.
The first two of these submissions may be
considered together. They come to this, that,
when the 1962 and 1964 transactions are con
sidered together, there is no benefit, because
one sale cancels out the other. Leaving aside, as
I think we are required by the jurisprudence to
do in a case such as this, the fact that, when an
individual benefits a company whose stock is all
owned by him or when such a company benefits
the individual, the individual's overall net assets
may well have neither increased nor diminished
because the amount transferred out of his per
sonal assets to the company may have effected
an equivalent and offsetting increase in the
value of his shares in the company, or vice
versa, in my view, the two transactions, that of
1962 and that of 1964, must be regarded sepa
rately in the absence of any evidence that they
were part of a single scheme, and there is no
such evidence here. It is quite clear that,
immediately after the 1962 transaction, the
company was the wealthier and the individual
was the poorer, to the extent of the difference
between the 1962 price and the value of the
shares sold and that that condition persisted
until the 1964 transaction, after which the com
pany was the poorer and the individual was the
wealthier by the same amount.
If it had not been for the 1964 resale, the
individual would have continued in the relative
ly impoverished state that resulted from the
1962 sale. As a result of the 1964 resale he was
restored to his relatively affluent state at the
expense of the company and the effect of the
1964 sale was, therefore, that the company
thereby conferred a benefit on him.
With reference to the fourth submission on
the first branch of the case, that is that the
alleged benefit was not conferred on the
individual in his capacity as shareholder but in
his capacity as purchaser, I am of opinion that
there was no evidence to rebut the assumption,
set out above, on which the assessment was
made that the 1964 sale was a "device" adopted
by the company and the individual for the pur
pose of conferring a benefit or advantage upon
the individual "as a shareholder" of the compa
ny. Clearly, the onus was on the appellant to
rebut this assumption and no explanation was
given of a sale by the company to the individual
at such a substantial undervaluation that would
have warranted such a sale as between persons
dealing at arm's length. We are left with the
only possible explanation, which is that the
substantial undervaluation was acceptable as
price only because the purchaser was the 100
per cent shareholder in the vendor company.
I turn now to the remaining submission on
this branch of the case, which is that there
could be no benefit conferred by the company
on the individual "in light of the readjustment
clause". The reference is to clause 4 of the
1964 agreement which is repeated here for
convenience:
4. It being the intention of the Vendor and the Purchaser
that the prices herein stipulated should represent the fair
market value of the shares being purchased and sold herein,
the parties hereto agree that in the event that the Minister of
National Revenue should at any time hereafter make a final
determination that the fair market value of the said shares
as of the date of this Agreement is less than or greater than
the prices herein stipulated, the prices herein stipulated
shall be automatically adjusted nunc pro tunc to conform
with such fair market value as finally determined and all
necessary adjustments shall be made, including adjustment
of the above mentioned promissory note.
The respondent submits that the evidence
shows that clause 4 was a sham, in the sense
that the parties never intended it to affect their
rights or obligations inter se and that, in any
event, it never had any effect on their rights or
obligations in the circumstances of these par
ticular transactions. I do not find it necessary to
deal directly with these submissions.
The appellants' submissions, while variously
put, as I appreciate them, all come to this, that
the clause in question has the same legal effect
as if the 1964 sale were expressed to be a sale
at fair market value to be determined by a third
person.
If, in fact, a company simply sold property to
its sole shareholder on express terms that the
price payable was an amount equal to fair
market value and provided a fair manner to
determine such value, I would agree with the
contention on behalf of the appellants that there
could not, as a matter of law, be a benefit
arising out of the sale.
In my view, however, the 1964 sale was not
such a sale.
In the first place, it is common ground that
"The purchase price in each transaction was
obviously less than the fair market value of the
shares being sold ..." 4 as appears from the
Memorandum of Fact and Law filed in this
Court on behalf of the appellants at paragraph
7. It follows that, at least with regard to the sale
price set out in the contract, the statement in
the opening words of clause 4 that it was "the
intention of the Vendor and the Purchaser that
the prices herein stipulated should represent the
fair market value ..." is a departure from the
truth and can have no effect (unless it be as
evidence that the clause was in fact a "sham").
Leaving aside the untruthful introductory
portion of clause 4, an examination of clause 4
shows that it does not have the effect of making
the sale a sale at a price equal to actual value to
be determined. When clause 4 is considered in
the context of the whole of the 1964 sale agree-
ment, what one finds is that, by an agreement
executed on June 10, 1964, the company agreed
to sell specified shares to the individual for a
specified amount, which was obviously below
their value, which sale was to be completed on
the same day but subject to an agreement
between the parties (clause 4) that "in the
event" that the Minister of National Revenue
should "at any time hereafter" make a final
determination that the value of the shares as of
the date of the agreement is less than or greater
than the price stipulated in the agreement, such
prices are to be adjusted retroactively to con
form to the value as so determined.
This agreement is radically different from a
sale that is expressly made for a consideration
equal to value. This is an agreement for a sale at
a price obviously less than value, which price is
to be the only amount payable until such time,
if any, as the Minister of National Revenue
determines the value of the shares that happen
to be the subject matter of this sale. While it
can be said, as a matter of law, that a simple
sale for value, with no other provisions, cannot
result in a benefit, it cannot be said, as a matter
of law that the 1964 sale is such a sale merely
because it is an agreement containing clause 4.
That sale is at a substantial undervaluation- and,
except in a certain event, it will continue indefi
nitely to be so. Even if that event should arise
at some subsequent time, the individual will
have had the benefit of not having had to pay
the amount in excess of the "price" until that
subsequent time and this, in days of high inter
est, can be substantial benefit.
It is important to have in mind that the ques
tion of "benefit" or no "benefit", in a case such
as this, must be determined as of the time
immediately after the sale. Immediately after
the 1964 sale, in these cases, the individual had
the shares for which he had paid an amount
obviously less than their value and he had
assumed an obligation that, in a certain event,
he would, at some time in the future, pay an
amount equal to the difference between price
and that value. Clearly, his position just after
the 1964 sale was an improvement over his
position just before that sale. He had something
worth substantially more than he had paid for it
and there was only a possibility that he might
have to pay the difference and, if that eventual
ity should arise, the difference would not have
to be paid until some time in the future.
The appellant's contention that, having regard
to the readjustment clause, there was no benefit
must, therefore, be rejected.
I do not overlook the fact that, in this case,
the assessments were apparently made on the
basis that the benefit was equal to the differ
ence between value and price paid whereas, on
my view of the effect of clause 4, the benefit
may have been something less than that
amount. 5 However, as I understand the pro
ceedings, not only did the parties proceed to the
hearing of evidence on the appeal on the under
standing that there was no issue as to quantum,
but the appellants had, at no time, put forward
any contention or evidence based on the view
that, if there were benefits, the amounts of the
assessments were too high. The appellants' con
tention on this branch of the case was that there
were, having regard to clause 4, no benefits.
That contention, on my view of the matter,
fails.
Having regard to that conclusion, as already
indicated I do not find it necessary to deal with
certain of the arguments put forward on behalf
of the respondent. If the question of the quan
tum of the benefit had been raised, such argu
ments would have had to be considered.
With regard to the second branch of the
appeal, which is the question whether the appel
lant Joel Rottman is entitled to a dividend tax
credit on the benefit conferred on him, I am
unable to accept the submission that a benefit
or advantage the amount of which must be
brought into a shareholder's income by virtue of
section 8(1) of the Income Tax Act is a "divi-
dend" within the meaning of that word in sec
tion 38 of the Act. Where Parliament intended
such a result in that Act, it seems to have said
so. Compare section 8(2) and (3). It is also to be
noted that many of the amounts that would fall
under section 8(1) would not fall within the
concept of "dividend" in its ordinary sense in
this context, which, as I conceive it, is "sum
payable ... as profit of joint-stock company"
even though it were accepted that the term
applies to a division of profits otherwise than in
the manner required by the governing company
law. In any event, it seems clear that the
Supreme Court of Canada, in Smythe v. M.N.R.
[1970] S.C.R. 64, has dealt with the matter
expressly. See per Judson J., giving the judg
ment of that court, at pages 70-1:
The Exchequer Court leaves the result untouched but
bases its judgment on the application of s. 137(2) and s.
8(1). If these were applied, there would be no dividend tax
credit.
I am of opinion that this point also fails.
In the result, I am of the opinion that each of
the appeals must be dismissed with costs.
* * *
BASTIN D.J.—I concur.
* * *
SHEPPARD D.J.—In these four appeals heard
together, the issue is whether a benefit or
advantage within the meaning of section 8(1)(c)
of the Income Tax Act was conferred in the
taxation year 1964 by the three appellant com
panies and by Lira News Company (1963) Ltd.,
on each of the four members of the Rottman
family.
The four members, Milton Rottman, Charles
Rottman, Joel Rottman, the sons, and Muriel
Ettlinger, the mother, are all citizens of the
United States of America, and there reside,
except Joel Rottman, who was resident in
Canada.
By agreement of the 1st of August, 1962 each
of the sons sold 151 shares in City News Com
pany Limited and 193 shares in Montreal
Newsdealing Supply Co. Ltd. for $34,400 to a
company "wholly owned and controlled" by
him (para. 3 of the Notice of Appeal) by sales
by Milton Rottman to Florin News Co. Ltd., by
Charles Rottman to Pruta News Co. Ltd., and
by Joel Rottman to Lira News Co. Ltd. The
mother, Muriel Ettlinger, sold 150 shares in
City News Co. Ltd., and 24 shares in Montreal
Newsdealing Supply Co. Ltd. to Guilder News
Co. Ltd., a company which she "wholly owned
and controlled". All sold at par at $100 per
share with the purchase price secured by the
purchaser's promissory note payable on
demand without interest.
Each purchasing company amalgamated with
Eleventh Calder News Limited on the 27th day
of December, 1963, and after amalgamation
was known by the addition of (1963) to the
former name as appears in the appellant
companies.
By agreement of the 10th day of June, 1964,
each purchasing company resold to its original
vendor (a son or the mother, as the case may
be) the said shares purchased by the Company
at the same price to be paid by surrendering the
promissory note which agreements contain
clause 4 as follows:
4. It being the intention of the Vendor and the Purchaser
that the prices herein stipulated should represent the fair
market value of the shares being purchased and sold herein,
the parties hereto agree that in the event that the Minister of
National Revenue should at any time hereafter make a final
determination that the fair market value of the said shares
as of the date of this Agreement is less thn or greater than
the prices herein stipulated, the prices herein stipulated
shall be automatically adjusted nunc pro tunc to conform
with such fair market value as finally determined and all
necessary adjustments shall be made, including adjustment
of the above mentioned promissory note.
The reason for the resale is that each of the
four members was indebted to City News Co.
Ltd. (and to a lesser amount to Montreal News-
dealing Supply Co. Ltd.), and by restoring the
individual to the register of shareholders it was
possible for the creditor company to declare a
dividend in an amount sufficient to repay the
indebtedness. (Goodman p. 25, 1.10 to p. 26, 1.
35) That method was adopted.
The Minister of National Revenue subse
quently determined that the fair market value of
the shares of each son was $98,375 greater than
the stipulated price of $34,400, and the market
value of the shares of the mother was $51,600
greater than the stipulated price of $17,400. By
assessment, the respondent assessed each
appellant Company for having sold to those
resident in the U.S.A., namely to Milton Rott-
man, Charles Rottman, and the mother Muriel
Ettlinger, and having failed to deduct and remit
the withholding tax at a rate of 15% of the
amount of the benefit alleged conferred; by
further assessment Joel Rottman was re
assessed in respect of his income for the 1964
taxation year by adding to his declared income,
the said amount of $98,375.
By a further agreement each of the three
Rottman sons and their mother acknowledged
to the vendors a further indebtedness of
$98,375 for each son and $51,600 for the
mother.
In the interval between 1962 and 1964 the
value of the shares did not materially increase,
although there was that change by the amalga
mation by the purchasing companies and by a
dividend in issue; the issue is whether any
assessment could be made.
The learned Trial Judge has found "that the
assumption pleaded of benefit or advantage
within the meaning of section 8(1)(c) of the
Income Tax Act has not been rebutted", and
accordingly, he dismissed the appeal with costs.
From that judgment the four appellants have
appealed. Each appellant submits:
That the agreement of the 10th of June 1964
was a cancellation of the previous transaction
of the 1st of August, 1962. That contention has
not been made good. The purchase of the
shares was not a mere cancellation of the previ
ous transaction of the 1st of August, 1964, as
the shares were then registered in the names of
the purchasing companies and each purchasing
company thereupon was vested with the rights
of an owner with respect to the shares. Pursu
ant to the agreement of the 10th of June 1964,
the share certificates endorsed by the vendor
company were delivered to the re-purchasing
son or mother, and an application for registra
tion of the transfers of the shares from the
Company was approved by the City News Co.
Ltd. (AB p. 160) and by the Montreal News-
dealers Supply Co. Ltd. (AB p. 162).... Upon
registration of the transfers of shares there was
revested in each member the rights of the
owner of the shares.
A dividend was thereupon declared in an
amount sufficient to pay the indebtedness of
that member as registered shareholder. Hence,
there were two executed sales of shares and not
a mere cancellation of the original sale of the
10th of June, 1962. The declaration of dividend
vested the right to that dividend in the individu
al member registered as shareholder and result
ed in being discharged from the debt to the
Company by offset of that dividend against the
debt.
Each appellant further contended that the
purchasing son or mother has acknowledged the
liability to pay the further sum and therefore
there can be no benefit or advantage in the
resale under such circumstances.
Clause 4 was a mere sham, and in any event
has no application on the facts of the case, for
the following reasons:
1. Fair value was not considered at the time
the agreement was negotiated by the parties.
Hence, there was never any intention to sell at
the market value but only at par.
2. There was no finding by the Minister of
the fair market value within the meaning of
clause 4. There was at the most an assessment
by the Minister under the power of the Income
Tax Act, and not a valuation pursuant to clause
3. Further, the agreement acknowledging the
further indebtedness was a mere sham as it
acknowledges that the balance of indebtedness
is payable on demand of the selling company
but without interest (AB p. 183) and as the
company is wholly owned and controlled by the
member acknowledging as a party there is no
possibility that the company could collect.
Each appellant further contends that to come
within section 8(1)(c) the benefit or advantage
must be conferred on the shareholder qua
shareholder and in the appeals in question the
benefit or advantage was conferred upon the
shareholder "qua" purchaser, and not qua
shareholder.
The appellant has cited M.N.R. v. Pillsbury
Holdings Ltd. [1965] 1 Ex.C.R. 676. That judg
ment does not support the appellant's conten
tion. In Robson v. M.N.R. [1951] Ex.C.R. 201
Sidney Smith D.J.A., at p. 202 stated:
I think it will be convenient to consider the relative law
before I analyze the admitted facts and the evidence. On the
facts as claimed by the respondent, there can be no doubt
that the new Income Tax Act sec. 8(1)(c) would catch the
appellant, but he says that there is nothing similar in the
Income War Tax Act which governed in 1944. The respond
ent in answer invokes sec. 18 of the latter Act and also the
more general provisions of section 3.
and at p. 203:
... The same considerations must apply to any variation of
the same kind of transaction. If the company cannot give
shares away tax free, then what is substantially a gift, such
as a pretended sale for a nominal consideration, must be in
the same position; and I cannot distinguish between a
nominal consideration and an inadequate consideration.
The above conclusion does no violence even to the lan
guage of sec. 3 of the Income War Tax Act which includes
as income: "profits directly or indirectly received ... from
stocks or from any other investment".
In appeal [1952] 2 S.C.R. 223 Kerwin J.
stated for the majority at p. 226:
This appeal is concerned with the assessment to income
tax of the appellant under the Income War Tax Act in the
year 1944. I agree with the reasons for judgment of the trial
judge except that I find no occasion to consider any of the
decisions in the Courts of the United States referred to by
him.
Rand J. stated at p. 229:
But such a distribution can be made under the guise of a
sale, and here Smith J. has found that to have taken place.
Shares purchased originally by Timberland for $100 each
were, seven years later, made the subject of an agreement
purporting to sell them to the shareholders of Timberland
for the same price. One year still later, they were disposed
of by the shareholders for $750 each. Those striking facts
were buttressed by the frank disclosure of the desire to
make a distribution of the shares, as to the mode of which
the advice of the Income Department was sought; and I
agree with Smith J. that the form adopted was simply what
was thought to be a means of avoiding the taxation conse
quences of declaring a dividend.
The remaining question is of the value of the shares
found, namely $600 when they were received. In this, Smith
J. has, I think, dealt carefully and thoroughly with all
relevant factors, and I am quite unable to say that his
conclusion was unwarranted or indeed that it was not dictat
ed by what was before him.
The Pillsbury case supra follows the Robson
case supra as Cattanach J. stated at p. 684:
On the other hand, there are transactions between closely
held corporations and their shareholders that are devices or
arrangements for conferring benefits or advantages on
shareholders qua shareholders and paragraph (c) clearly
applies to such transactions. (Compare Robson v. M.N.R.
[1952] 2 S.C.R. 223.) It is a question of fact whether a
transaction that purports, on its face, to be an ordinary
business transaction is such a device or arrangement.
The Pillsbury case is distinguishable on the
facts as the issue here arising did not arise in
the Pillsbury case as Cattanach J. stated at p.
668:
However; there was no allegation that the waiver was
anything other than what it purported to be, that is, a lender
granting relief to a borrower in difficulties. Had the transac
tions been attacked in the Notice of Appeal and at the trial
as being a device or arrangement for conferring a benefit on
the respondent qua shareholder, it might well have been
difficult for the respondent to have resisted the attack.
However no such attack was made and the assessments
cannot therefore stand.
The assumption of benefit or advantage
within the meaning of section 8(1)(c) of the
Income Tax Act has not been rebutted and the
appeals are therefore dismissed with costs.
On the question whether Joel Rottman is enti
tled to a dividend credit, I adopt the reasons of
the Chief Justice.
The judgment of Gibson J. was as follows:
These appeals were heard together on common
evidence.
Four individuals, namely, Milton Rottman, Charles
Rottman, Joel Rottman and Muriel Ettlinger, all United
States citizens and residents except Joel Rottman who
was at all material times a Canadian resident, and six
companies, namely, the three appellant companies, Lira
News Company (1963) Limited, City News Company
Limited and Montreal Newsdealers Supply Company
Limited completed a transaction involving sales of shares
on June 10, 1964. The three appellant companies (one of
each of which was owned by the said Milton Rottman,
Charles Rottman and Muriel Ettlinger) and Lira News
Company (1963) Limited (owned by the said Joel Rott-
man), by agreements all dated June 10, 1964, each
respectively sold its shares of City News Company Limit
ed and Montreal Newsdealers Supply Limited to Charles,
Milton and Joel Rottman for $34,400 each and to Muriel
Ettlinger for $17,400. The assumption pleaded by the
respondent is that $34,400 was not fair market value but
instead such was not less than $98,375 and that $17,400
also was not fair market value but such was instead not
less than $69,000.
The said individuals had previously on August 1, 1962
respectively sold the same shares to the said appellant
companies and Lira News Company (1963) Limited for
the same sums, but had received no option to re-purchase
the said shares or other understanding that they could
re-purchase them at the same price.
In the interval between 1962 and 1964, the value of the
shares did not increase.
The said agreements dated June 10, 1964 at paragraph
four of each contained a provision for adjusting the said
prices paid for the shares nunc pro tunc to conform with
any final determination by the Minister of National Reve
nue that the fair market value of the shares as of the
dates of the agreements was less or greater than the said
sums paid.
The main issue on this appeal is whether or not a
benefit or advantage within the meaning of section 8(1)(c)
of the Income Tax Act was respectively conferred by the
appellant companies and Lira News Company (1963)
Limited on the said four individuals; and the only other
issue is whether or not, if a benefit was so conferred on
Joel Rottman was it a dividend.
The whole of the transaction must be looked at, includ
ing both the 1962 and 1964 parts of the transaction and
all their relevant documents; and especially paragraph
four of the said agreements dated June 10, 1964.
After doing so, and considering all of the evidence of
the whole of the transaction, I am of the view that the
assumption pleaded of benefit or advantage within the
meaning of section 8(1)(c) of the Income Tax Act has not
been rebutted.
In the case of the appellant Joel Rottman I am also of
the view that the amount or value of the benefit received
by him is not subject to the provisions of section 38 of
the Act.
The appeals are therefore dismissed with costs.
2 8. (1) Where, in a taxation year,
(a) a payment has been made by a corporation to a
shareholder otherwise than pursuant to a bona fide busi
ness transaction,
(b) funds or property of a Corporation have been appro
priated in any manner whatsoever to, or for the benefit
of, a shareholder, or
(c) a benefit or advantage has been conferred on a share
holder by a corporation,
otherwise than
(i) on the reduction of capital, the redemption of shares
or the winding-up, discontinuance or reorganization of
its business,
(ii) by payment of a stock dividend, or
(iii) by conferring on all holders of common shares in
the capital of the corporation a right to buy additional
common shares therein,
the amount or value thereof shall be included in computing
the income of the shareholder for the year.
(2) Where a corporation has, in a taxation year, made a
loan to a shareholder, the amount thereof shall be deemed
to have been received by the shareholder as a dividend in
the year unless
(a) the loan was made
(i) in the ordinary course of its business and the lending
of money was part of its ordinary business,
(ii) to an officer or servant of the corporation to enable
or assist him to purchase or erect a dwelling house for
his own occupation,
(iii) to an officer or servant of the corporation to enable
or assist him to purchase from the corporation fully
paid shares of the corporation to be held by him for his
own benefit, or
(iv) to an officer or servant of the corporation to enable
or assist him to purchase an automobile to be used by
him in the performance of the duties of his office or
employment,
and bona fide arrangements were made at the time the
loan was made for repayment thereof within a reasonable
time, or
(b) the loan was repaid within one year from the end of
the taxation year of the corporation in which it was made
and it is established, by subsequent events or otherwise,
that the repayment was not made as a part of a series of
loans and repayments.
(3) An annual or other periodic amount paid by a corpo
ration to a taxpayer in respect of an income bond or income
debenture shall be deemed to have been received by the
taxpayer as a dividend unless the corporation is entitled to
deduct the amount so paid in computing its income.
(4) This section is applicable in computing the income of
a shareholder for the purposes of this Part whether or not
the corporation was resident or carried on business in
Canada.
3 38. (1) An individual who was resident in Canada at any
time in a taxation year may deduct from the tax otherwise
payable under this Part for a taxation year 20% of the
amount by which
(a) the aggregate of all dividends received by him in the
year from taxable corporations in respect of shares of the
capital stock of the corporations from which they were
received and of all dividends that he is, by subsection (3)
of section 8 and section 81, deemed to have received
from such corporation in the year, to the extent that the
dividends so received or so deemed to have been
received, as the case may be, were included in computing
his income for the year,
exceeds the aggregate of
(b) the amount, if any, deductible from income in respect
of those dividends by virtue of a regulation made under
subsection (2) of section 11, and
(e) all outlays and expenses deductible in computing the
taxpayer's income for the year to the extent that they
may reasonably be regarded as having been made or
incurred for the purpose of earning the dividend income.
(2) In this section, "taxable corporation" means
(a) a corporation
(i) that was resident in Canada when the dividend was
received or deemed to have been received, and
(ii) that was not, by virtue of a statutory provision
exempt from tax under this Part for the taxation year of
the corporation during which the dividend was received
or deemed to have been received; or
(b) a corporation
(i) any of the shares of which were listed on a pre
scribed stock exchange in Canada throughout the taxa
tion year of the corporation during which the dividend
was received or deemed to have been received,
(ii) not less than 85% of the income of which, for the
taxation year of the corporation during which the divi
dend was received or deemed to have been received,
was from a business carried on in Canada by the
corporation, and
(iii) that was not, by virtue of a statutory provision,
exempt from tax under this Part for the taxation year of
the corporation during which the dividend was received
or deemed to have been received.
(2a) For the purposes of this Act, a dividend from a
corporation described in paragraph (b) of subsection (2)
shall be deemed to be a dividend from a source in Canada.
(3) Where, by virtue of section 21, 22 or 23, there is
included in computing a taxpayer's income for a taxation
year a dividend received or deemed to have been received
by some other person, for the purpose of this section the
dividend shall be deemed to have been received by the
taxpayer.
(4) Notwithstanding subsection (4) of section 10 of the
Old Age Security Act, the amount deductible under this
section shall be computed as though that subsection had not
been enacted.
4 The italics are mine.
5 This would depend on the facts of the particular appel
lant's position immediately after the 1964 sale. Having
regard to the reporting practices of the appellant and the
efficiency and perspicacity of the respondent's assessing
and investigative officers, the possibility of clause 4 coming
into operation might have been de minimus or it might have
been so real that it was a mere matter of time.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.