T-2604-90
Her Majesty the Queen (Plaintiff) (Defendant by
cross appeal)
v.
Albert Kieboom (Defendant) (Plaintiff by cross
appeal)
INDEXED AS. CANADA V. KIEBo0M (TR)
Trial Division, Denault J.—Calgary, May l; Ottawa,
July 30, 1991.
Income tax — Corporations — Taxpayer (directing mind of
corporation) reducing economic interest in company by
increasing equity of other family members — Maintaining
same number of shares, but wife and children subscribing to
newly created shares at nominal value — Concept of corpora
tion as separate legal entity with shareholders having no pro
prietary interest apart from shares no longer absolute — Cases
eroding concept to reflect realities of business law, particularly
where small corporation with main shareholder— Courts lift
ing corporate veil where sole motive tax avoidance — "Not-
withstanding the form or legal effect of the transactions" in s.
245(2)(c) suggesting Minister to look at substance — As cor
poration not raising capital through impugned transactions
(purpose behind concept of shares), purpose of transactions to
increase shareholdings of family — Transactions whereby tax
payer's family acquiring shares at less than fair market value
benefit conferred by taxpayer — Deemed disposition by way of
gift under s. 245(2)(c).
Income tax — Gifts — Taxpayer reducing economic interest
in company by creating shares to which wife and later children
subscribed for nominal consideration — Deemed disposition
by way of gift under s. 245(2)(c) — As s. 245(2)(c) characteriz
ing provision, necessary to go to another Part of Act to find
charging provision — Rules re: inter vivos transfers of capital
stock of corporation not applicable as right to subscribe to
shares transferred, not shares — Spousal attribution rules not
applicable as shares, not right to subscribe thereto, generating
income — Transaction cannot be both deemed disposition by
way of gift under S. 245(2)(c) and spousal transfer under s.
74(l).
Income tax — Income calculation — Capital gains — Tax
payer reducing economic interest in company by creating
shares to which wife, and later children, subscribed for nomi
nal consideration — Deemed disposition by way of gift under
s. 245(2)(c) — Transferred property subject to capital gains
provisions — Taxpayer deemed to have received proceeds of
disposition if disposes of anything at less than fair market
value under s. 69(I)(b)(ii).
This was an appeal and cross-appeal from a decision of the
Tax Court of Canada. The taxpayer had owned nine common
shares in a carpet company and his wife owned one. The tax
payer was the controlling mind and will of the company. In
1979, 10,000 class "A" non-voting shares were created. In
1980, taxpayer's wife subscribed to eight of the new shares for
nominal consideration, giving her 50% equity while taxpayer
retained his nine shares, but reduced his equity from 90% to
50%. In 1981, eight class "A" common shares were issued to
each of taxpayer's three children, again for nominal considera
tion, thereby reducing the equity of taxpayer and his wife to
21.4% each and giving each of the children 19% of the equity.
In 1982, the Company issued dividends. The Minister reas
sessed the taxpayer for 1981 on the basis that the issue of
shares to the children was a disposition of an economic interest
by way of gift from taxpayer and his wife pursuant to Income
Tax Act, paragraph 245(2)(c). Paragraph 245(2)(c) provides
that where a transaction results in a person conferring a benefit
on a taxpayer, that person shall be deemed to have made a pay
ment to the taxpayer equal to the amount of the benefit con
ferred notwithstanding the form or legal effect of the transac
tions; and depending upon the circumstances, the payment
shall be deemed to be a disposition by way of gift. The tax
payer and his wife were deemed to have received proceeds of
disposition equal to the fair market value of the shares. Eighty
percent of the taxable capital gain received by taxpayer's wife
was attributed to taxpayer and included in his income pursuant
to subsection 74(2) of the Act (which deems the gain from
property transferred to a spouse to be the capital gain of the
transferor). The Minister also reassessed taxpayer for 1982 on
the basis that the dividends received by his wife should have
been included in his income pursuant to subsection 74(I),
which provides that any income from the property transferred
to a spouse shall be deemed to be income of the transferor.
The issues were (I) the nature of the transaction; (2) whether
paragraph 245(2)(c) imposed a tax; and (3) whether the spousal
attribution rules applied.
Taxpayer argued (I) that he did not confer a benefit on the
members of his family because he neither received anything
directly, nor disposed of anything. The company issued the
shares. He relied on the principle that a corporation is a legal
entity separate and distinct from its shareholders. Accordingly,
unissued shares are owned exclusively by the corporation. No
property was transferred because taxpayer retained the same
number of shares before and after the transactions. Alterna
tively, it was argued that the Act does not impose tax on a pay
ment of a gift. If the capital gains provision (section 69)
applied, then subsection 73(5), which allows the taxpayer to
reduce the capital gain of a share transfer, must apply, giving
the children the benefit of a rollover of the disposition of
shares. (2) It was further argued that the spousal attribution
rules should not apply because there was no disposition of
property from the taxpayer to his wife or children. Further
more, income flows from shares and it was an economic inter
est, not shares, that was transferred to the children.
Held, the taxpayer's cross-appeal with respect to the capital
gain should be dismissed; the cross-appeal with respect to the
capital gain attributed to the taxpayer from his spouse should
be allowed. The Crown's appeal regarding the dividend
income attributed back to the taxpayer should be dismissed.
(I) The transactions which resulted in the taxpayer's wife
and children acquiring shares at less than fair market value was
a benefit conferred by the taxpayer which was "deemed to be a
disposition by way of a gift" under paragraph 245(2)(c). The
concept of a corporation as a separate legal entity with share
holders having no proprietary interest apart from the shares is
no longer absolute. That principle has been eroded by case law
to reflect the realities of business law, particularly in relation to
small corporations where there is a main shareholder. In larger
corporations, directors have been increasingly held liable for
the acts of the corporation. In income tax cases, courts have
lifted the corporate veil where the sole motive for incorpora
tion was tax avoidance. The phrase "notwithstanding the form
or legal effect of the transactions" in paragraph 245(2)(c) also
suggests that the Minister will examine the substance of the
transaction, regardless of form. Where a controlling share
holder designs a transaction to increase the family members'
proportion in the ownership of the company while decreasing
the value of his own shareholdings, that transaction will be
reviewed to assess income tax. The purpose behind paragraph
245(2)(c) is consistent with ascertaining the reason for issuing
the shares. The concept of shares was created to provide a
vehicle through which a corporation could raise capital. The
corporation herein did not raise any capital through the
impugned transactions. The taxpayer cannot cling to the con
cept of the corporation as a legal entity separate from the
shareholders whose only proprietary interest is in the shares,
when the real purpose behind the transaction was not to raise
capital, but to increase the shareholdings of his family. That
the taxpayer retained the same number of shares was not the
determining factor.
Section 245 is a characterizing provision. It characterizes a
benefit as a deemed disposition. It was designed to identify
transactions as indirect payments or transfers. It is under Part
XVI, which is entitled "Tax Evasion". It is necessary to go to
another Part of the Act to find the charging provisions. Under
subparagraph 69(l)(b)(ii), the taxpayer is deemed to have
received the proceeds of disposition if he disposes of anything
at less than fair market value. The reason for the deemed dis
position provisions was to prevent taxpayers from transferring
an interest in property solely to avoid taxation consequences.
Paragraph 245(2)(c) specifies that it is not necessary to have an
intention to avoid taxes for a deemed disposition in the transfer
of property. The taxpayer reduced his economic interest in the
company at less than fair market value, and he is deemed to
have received proceeds of disposition. Therefore, the trans
ferred property is subject to the capital gains provisions in the
Act. The rules with respect to inter vivos transfers of capital
stock of a small business corporation (subsection 73(5)) did
not apply. Subsection 73(5) requires that the property have
been a share immediately before the transfer. What was trans
ferred was a right to subscribe to shares and not shares them
selves. The transferred property did not become a share until
the children took the option and subscribed to shares.
(2) The spousal attribution rules did not apply. Although
"transfer" in subsection 74(I) could include an indirect transfer
of an economic interest, the more difficult issue was whether it
included property through which taxpayer's wife earned
income. It was the actual shares that created the income, not
the right to subscribe to shares. Taxpayer's wife did not receive
a direct right to receive dividends, but a right to acquire shares
which she exercised. That right in itself did not create income.
It was the exercising of the right through which taxpayer's
wife acquired income earning property. Secondly, both trans
actions divesting taxpayer of shares were found to be "deemed
dispositions by way of gift" pursuant to subsection 245(2)(c).
Therefore section 69 applied. The transaction which created a
right for the taxpayer's wife to subscribe to shares cannot be
both a "deemed disposition by way of gift" under paragraph
245(2)(c) and a spousal transfer under subsection 74(I). If it is
not a spousal transfer then the attribution rules do not apply.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Companies Act, R.S.A. 1980, e. C-20, s. 27.
Income Tax Act, S.C. 1970-71-72, e. 63, ss. 69(I)(b)(ii),
73(5) (as am. by S.C. 1979, e. 5, s. 24), 74 (as am. by
S.C. 1974-75-76, e. 26, s. 39, 82(1)), 227.1(1) (as
enacted by S.C. 1980-81-82-83, e. 140, s. 124),
245(2)(c).
The Companies Act, R.S.A. 1970, c. 60, s. 16 (as am. by
S.A. 1975, c. 44, s. 2; 1976, c. 61, s. 2).
CASES JUDICIALLY CONSIDERED
APPLIED
Minister of National Revenue v. Dufresne, Didace, [ 1967]
Ex.C.R. 128; [1967] C.T.C. 153; (1967), 67 DTC 5105;
Levine Estate v. Minister of National Revenue, [1973]
F.C. 285; [1973] CTC 219; (1973), 73 DTC 5182 (T.D.);
Applebaum v. Minister of National Revenue (1971), 71
DTC 371 (T.A.B.).
DISTINGUISHED:
Kit-Win Holdings (1973) Ltd v The Queen, [1981] CTC
43; 81 DTC 5030 (F.C.T.D.); Fasken, David v. Minister
of National Revenue, [1948] Ex.C.R. 580; [1948] CTC
265; (1948), 49 DTC 491.
CONSIDERED
Salomon v. Salomon & Co., [ 1897] A.C. 22 (H.L.);
Macaura v. Northern Assurance Co., [1925] A.C. 619
(H.L.); Kosmopoulos et al. v. Constitution insurance Co.
of Canada et al. (1983), 42 O.R. (2d) 428; 149 D.L.R.
(3d) 77; 22 B.L.R. 11I; 1 C.C.L.I. 83; [1983] I.L.R. I-660
(C.A.); affd [1987] I S.C.R. 2; (1987), 34 D.L.R. (4th)
208; 36 B.L.R. 233; 22 C.C.L.I. 297; [1987] I.L.R. 1-
2147; 74 N.R. 360; 21 O.A.C. 4; Berger v. Willowdale
A.M.C. et al. (1983), 41 O.R. (2d) 89; 145 D.L.R. (3d)
247; 23 B.L.R. 19 (C.A.); Sask. Econ. Dev. Corpn. v. Pat-
terson-Boyd Mfg. Corpn., [1981] 2 W.W.R. 40; (1981), 6
Sask. R. 325 (C.A.); Glacier Realties Ltd v The Queen,
[1980] CTC 308; (1980), 80 DTC 6243 (F.C.T.D.).
AUTHORS CITED
University of Alberta. Institute of Law Research and
Reform. Proposals for a New Alberta Business Corpo
rations Act, Volume 1, Report No. 36, Edmonton,
Alberta, August 1980.
Welling, Bruce Corporate Law in Canada: The Gov
erning Principles, Toronto: Butterworths, 1984.
COUNSEL:
Helen C. Turner for plaintiff (defendant by cross
appeal).
H. George McKenzie for defendant (plaintiff by
cross appeal).
SOLICITORS:
Deputy Attorney General of Canada for plaintiff
(defendant by cross appeal).
Bell, Felesky, Flynn, Calgary for defendant
(plaintiff by cross appeal).
The following are the reasons for judgment ren
dered in English by
RENAULT J.: This is an appeal by the Minister of
National Revenue from a decision of the Tax Court of
Canada, as well as a cross-appeal by the taxpayer. It
involves two transactions, the first resulted in the
defendant's wife acquiring shares of the Company
controlled by the defendant, the second resulted in his
children acquiring shares. At issue are the 1981 and
1982 income tax years.
FACTS
The material facts were agreed to by the parties in
an agreed statement of facts.
The defendant Albert Kieboom is an individual
resident in Canada for the purposes of the Income Tax
Act [S.C. 1970-71-72, c. 63] (the "Act") who owned
nine common shares in the capital of "Carpet Colour
Centre (Red Deer) Limited" (the "Company"). The
Company was incorporated May 3, 1976 and carried
on the business of selling carpets in Red Deer and the
surrounding area. It was a "Canadian-controlled pri
vate corporation" within the meaning of the Act
which means that all or most of the fair market value
of the assets were used in active business carried on
primarily in Canada. At the time of incorporation,
Adriana Kieboom ("Adriana"), Albert's wife,
acquired one common share of the capital in the
Company. At all material times, the defendant was
the controlling mind and will of the Company. The
Kiebooms have three children, Sheila Ibbotson
("Sheila"), Yost Kieboom ("Yost") and Alma
Kieboom ("Alma"), all of whom were over the age of
18 and were Canadian residents at all material times,
for the purposes of the Act.
By a special resolution passed October 31, 1979
and registered with the Alberta Corporate Registry,
the share capital of the Company was increased by
the creation of 10,000 class "A" non-voting common
shares in the capital of the Company. At a February
12, 1980 meeting to determine the rights attaching to
the newly created shares, the defendant declined to
subscribe to any of the shares. However, Adriana
subscribed to eight of the said shares for considera
tion of $1 per share. After the meeting Adriana held
one common share plus eight class "A" common
shares, giving her 50% equity while the defendant
retained his nine common shares with 50% equity.
Prior to the meeting, the defendant held nine com
mon shares with 90% equity while Adriana held one
common share with 10% equity.
On March I, 1981, the defendant and Adriana,
who were at that time the directors and only share
holders of the Company, held a meeting. They deter
mined that eight class "A" common shares of the
Company would be issued to each of the three chil
dren for a consideration of $1 per share. No shares
were issued to either Adriana or the defendant.
After the issuance of shares to the children, the
defendant and Adriana owned 21.4% of the equity,
while each of the children Yost, Alma and Sheila
owned 19% of the equity respectively. The effect of
the issuance of shares to Adriana and later to the chil
dren was to decrease the defendant's proportionate
shareholdings in the Company and to increase the
shareholdings of his wife and children. The transac
tions were planned and executed by the defendant
who desired to have the company issue shares first to
his wife and later to his children, thereby decreasing
his (and then his wife's) percentage of issued shares
in the Company.
During the 1982 taxation year, the Company
issued dividends in the amount of $4,000 per com
mon share and $3,750 per class "A" share. During the
1982 taxation year, the taxable amount of dividends
received by Adriana (after subsection 82(1) "gross-
up") in respect of 7.2 of her class "A" shares was
$40,500 ($3,750 x 7.2 x 1.5 = $40,500).
By notice of reassessment dated August 10, 1987,
the Minister of National Revenue reassessed the
defendant for the 1981 taxation year. The issue of
shares to Sheila, Yost and Alma constituted a disposi
tion of an economic interest by way of gift from the
defendant and Adriana pursuant to paragraph
245(2)(c) of the Act. Therefore, the defendant and
Adriana were deemed to have received proceeds of
disposition of $1 13,450 each, which is equal to the
fair market value economic interest of the shares.
Eighty percent of the taxable capital gain received by
Adriana was attributed to the defendant and included
in his income pursuant to subsection 74(2) [as am. by
S.C. 1974-75-76, c. 26, s. 39] of the Act, which are
the spousal attribution rules.
By notice of reassessment, dated May 25, 1989,
the Minister reassessed the defendant for his 1982
taxation year, on the basis that the dividends received
by Adriana ($40,500) were includable in his income
pursuant to subsection 74(1) [as am. idem] of the Act.
In the respective reassessments, the Minister
assumed the above facts, except that he had origi
nally placed the fair market value of the shares issued
by the Company to the children at $9,450 on March
1, 1981 'and he is now willing to concede that the fair
market value of the shares at that date was $6,800.
PLAINTIFF'S ARGUMENT
The defendant decreased his proportionate eco
nomic interest in the Company by issuing eight trea
sury shares to Adriana, thereby conferring a benefit
on Adriana. The benefit is deemed to be a payment to
her under subsection 245(2), and the payment is
deemed by paragraph 245(2)(c) to be a disposition by
way of a gift. This gift is deemed to be a transfer of
capital property, under the provisions of subsection
74(1) and the provisions of this section require the
attribution to the defendant of the income arising
from that property. Therefore, the Minister was cor
rect in including $40,500 as taxable dividends in the
defendant's income in 1982.
The defendant and Adriana decreased their propor
tionate economic interest in the Company by issuing
eight treasury shares to their children. This transac
tion conferred a benefit upon the children. Under the
provision of subsection 245(2), the benefit is deemed
to be a payment, and the payment is deemed by para
graph 245(2)(c) to be a disposition by way of gift.
The defendant is deemed to have received proceeds
of disposition in the amount of $204,120 in respect of
this gift to his children in the following manner: his
own interest in the Company under subparagraph
69(1)(b)(ii) and by virtue of Adriana's economic
interest, the provisions of subsection 74(2) require
her proportion to be included in the defendant's taxa
ble income.
DEFENDANT'S ARGUMENT
The defendant's submission relies on the assump
tion that there is no separate property interest refera-
ble to a corporation which can be described as an
economic interest. The proportionate interest of per
sons having an interest in a corporation are reflected
solely in the shareholdings. Therefore, the defendant
denies the plaintiff's assumption that any of the
shareholders owned property that constitutes an eco
nomic interest separate and apart from the shares of
the Company.
The Minister seeks to tax the defendant by a
decrease in the value of his shareholdings in the
Company, as a result of the increase of the sharehold-
ings of his wife and children. This is not sustainable
under the provisions of the Act. The issuance of
shares by the Company to his wife and children was a
benefit conferred on them by the Company and not
by him.
Alternatively, if the Court finds that the issuance
of shares by the Company to Adriana and the chil
dren was a benefit conferred on them by the defen
dant under the provisions of paragraph 245(2)(c) by
way of a gift, this has no tax consequences for the
defendant. There is no provision in the Act which
imposes a tax on a payment of a gift.
If the deemed payment of a gift is subject to tax
under the provisions of the Act, it does not result in
or give rise to a disposition of property by the defen
dant to Adriana. Therefore, the provisions of subsec-
tions 74(1) and 74(2) have no application to amounts
received by Adriana in respect of her shares.
The defendant appeals the Tax Court finding that
the issuance of shares by the Company to the defend
ant's children resulted in a disposition of the property
of the defendant which is subject to tax under the
provisions of the Act.
ANALYSIS
The first question to be addressed is the nature of
the transaction through which Adriana acquired
shares in the company and later through which the
children acquired shares. The defendant's counsel
argues that this is the case of a corporate treasury
issuing shares to Mrs. Kieboom and later to the chil
dren. The defendant did not receive income directly.
He received nothing, nor did he dispose of anything.
Any tax liability must arise by virtue of some deemed
or imputed income.
It is not in dispute that Adriana and then the chil
dren received a benefit which falls under the provi
sions of paragraph 245(2)(c).
245. ...
(2) Where the result of one or more sales, exchanges, decla
rations of trust, or other transactions of any kind whatever is
that a person confers a benefit on a taxpayer, that person shall
be deemed to have made a payment to the taxpayer equal to the
amount of the benefit conferred notwithstanding the form or
legal effect of the transactions or that one or more other per
sons were also parties thereto; and, whether or not there was an
intention to avoid or evade taxes under this Act, the payment
shall, depending upon the circumstances, be
(c) deemed to be a disposition by way of a gift.
The ability of Adriana and of the children to acquire
shares at less than fair market value is a benefit.
The dispute is whether or not Mr. Kieboom con
ferred a benefit on Mrs. Kieboom. The defendant
alleges that the Minister failed to allege that Mr.
Kieboom conferred the benefit in their pleadings and
the appeal should be dismissed on this basis alone. In
support of this, counsel for the defendant refers to a
decision of Cattanach J. which said that where "the
Minister has failed to allege as a fact an essential
ingredient to the validity of the assessment under the
applicable statutory provision, there is no onus on the
taxpayer to disprove that fact for the assumptions
which were made did not of themselves support the
assessment."
I am unconvinced by this submission. I find no
flaw in the plaintiff's pleadings in this regard. The
Minister has pleaded that the defendant was the con
trolling mind and will of the corporation in its state
ment of facts. In paragraphs 19 and 20 of its state
ment of claim, it is pleaded that the defendant
planned and executed the transactions and that the
economic interest received by Adriana was a gift sub
ject to the provisions of paragraph 245(2)(c) and sub
section 74(1). In paragraph 28 of the statement of
claim, the Minister specifically pleads that the defen
dant decreased his economic interest which conferred
a benefit on his wife. This is pleaded in paragraph 30
with respect to the transaction conferring a benefit on
the children. The facts are different in Kit-Win Hold
ings. There, it was necessary for the Minister to
allege that one of the motivating factors at the time of
acquisition of the land was the possibility of resale.
The Minister was seeking to include it in his income
as adventure in the nature of trade. In this case, it was
necessary to allege that a transaction occurred
through which a person conferred a benefit which
falls within the provisions of paragraph 245(2)(c).
Since this was pleaded, I find no flaw in the plain
tiff's pleadings.
Counsel for the defendant has submitted that there
was no property that was transferred by Mr. Kieboom
to his wife Adriana or to the children. Before and
after the meeting, which resulted in Mrs. Kieboom
acquiring shares, the defendant retained the same
number of shares. What occurred, in his submission,
is that the corporate treasury issued shares to Mrs.
Kieboom. This position assumes that the only link
between a corporation and a shareholder is the share.
Effectively, the defendant is relying on the long
established principle in company law that a corpora
tion is a legal entity separate and distinct from its
shareholders. Accordingly, unissued shares are
I Kit-Win Holdings (/973) Ltd v The Queen, [ 1981] CTC 43
(F.C.T.D.), at pp. 55-56.
owned exclusively by the corporation. In this respect,
counsel has cited section 16 of The Companies
Act 2 which describes the formal obligations of a com
pany limited by shares. He has also directed my
attention to various articles which describe the nature
and definition of shares in relation to the corporation.
A share is defined to be "simply a proportionate
interest in the net worth of a business". 3 Another def
inition of share that was cited is: "A share is the
interest of a shareholder in the company .... A share
is not a sum of money settled in any way suggested,
but an interest measured by a sum of money ...."
Another interesting point which was addressed by the
material submitted by the defendant is the purpose
behind the concept of shares. As Professor Welling
notes: "[c]orporate design evolved as the legal vehi
cle for economic combinations of entrepreneurs, who
participated personally, and capitalists, who partici
pated financially". 4 In other words, the share permits
a corporation to raise capital and investors to invest
money in a corporation.
Because the shareholder's only link to the corpora
tion is through a share, the Minister's position that
the taxpayer had an economic interest in the corpora
tion is not sustainable under corporate law nor under
the provisions of the Income Tax Act. However, the
principle of a corporation as a legal entity separate
and apart from its shareholders is no longer absolute.
The general legal principle is that a shareholder does
not have any proprietary interest in the corporation
which as a legal person cannot be owned. The share
holder's property is in the shares which confer only
the rights that are specified in the corporate constitu
tion. However, this principle has been eroded to
reflect the realities of business law. I will review
2 The Companies Act, R.S.A. 1970, c. 60, s. 16 (as am. by
S.A. 1975, c. 44, s. 2; 1976, e. 61, s. 2).
3 Proposals for a New Alberta Business Corporations Act.
4 Welling, Bruce Corporate Law in Canada: The Governing
Principles, "The Corporate Capital Structure" (Toronto: But-
terworths), at p. 569.
briefly the development of corporate law in respect
of the corporation as a separate legal entity.
Salomon v. Salomon & Co. 5 established the princi
ple of the corporation's separate legal personality.
There, Mr. Salomon set up a company and sold his
shoe business to it. He took shares and a debenture
from the company as a payment, thereby making
himself a secured creditor of the company. The com
pany wound up a year later and the creditors
attempted to recover from Mr. Salomon, arguing that
the corporation was an alter ego of Mr. Salomon.
The House of Lords held that as long as the statutory
requirements of incorporation are met, a corporation
becomes a legal entity separate and apart from the
person who set it up. It does not matter whether it is a
sole shareholder or what the purposes of incorpora
tion were. The corporation is a separate legal entity
apart from its shareholders.
This principle is reflected in company law legisla
tion where the certificate of incorporation is conclu
sive evidence of incorporation under the Companies
Act. 6 The policy reason behind the rule is to
encourage business activity without holding the
entrepreneur personally liable for the corporation's
debts. It also encourages investment in companies by
allowing investors to invest at a predetermined loss.
As time went on, the difficulties of the corpora
tion's separate legal personality became apparent. In
the law of insurance a main shareholder could not
recover from loss to the company because his insura-
ble interest was in the shares and not in the corpora
tion. The business insurance policy had to be in the
corporation's name.? However, a 1981 Ontario case 8
allowed a sole shareholder to recover from an insur
ance policy which was registered in his name and not
s Salomon v. Salomon & Co., [1897] A.C. 22 (H.L.).
6 Cennpanies Act, R.S.A. 1980, c. C-20, s. 27.
7 Macaura v. Northern Assurance Co., [1925] A.C. 619
(H.L.).
s Kosmopoulos et al. v. Constitution Insurance Co. of
Canada et al. (1983), 42 O.R. (2d) 428 (C.A.); affd [1987] I
S.C.R. 2.
in the name of the company which he had incorpo
rated. The reasoning was that a sole shareholder does
not have a proprietary interest in the company assets,
but is the only one who can lose if the assets are
destroyed. Therefore, if the assets are insured by the
shareholder personally, he can recover because there
will be a certainty of loss.
Other circumstances in which the corporate veil
has been lifted are where a director was held to be
personally liable where he refrained from action and
could see that the corporation was not carrying out its
duties; 9 and where a corporation was created to cir
cumvent legal obligations and obtain debt priority. 10
In summary, the concept of the corporation as a
separate legal entity with shareholders having no pro
prietary interest apart from the shares is no longer
absolute. The principle has been eroded to reflect the
realities of business law. This is a development which
is especially applicable to small corporations where
there is a main shareholder as is found in the present
case. In larger corporations, directors have been
increasingly held liable for the acts of the corpora
tion.
In income tax law, the corporate veil has been
lifted to ascertain the motive behind incorporation. If
the sole motive was tax avoidance, the courts have
lifted the corporate veil. In Glacier Realties Ltd v The
Queen, Addy J. (as he then was) looked behind the
corporate veil to determine the main purpose of a
land purchase:
The fact that a company was incorporated for the sole pur
pose of holding a single parcel of land and did not engage in
any other type of business, is a factor to be considered but is
by no means conclusive as to what the object of the taxpayer
was in purchasing the land .... The objects clauses of a cor-
9 Berger v. Willowdale A.M.C. et al. (1983), 41 O.R. (2d)
89 (C.A.).
10 Sask. Econ. Dev. Corp. v. Patterson-Boyd Mfg. Corpn.,
[1981] 2 W.W.R. 40 (C.A.).
poration are also relatively unimportant in determining its
intentions as compared with what it actually did .... It is
important where [a] private company such as the present one is
concerned to go behind the corporate veil and examine the
background of the shareholders in order to determine more
precisely if possible the purpose or purposes of the purchase."
Another example in the Act where the veil is lifted
is subsection 227.1(1) [as enacted by S.C. 1980-81-
82-83, c. 140, s. 124] which holds directors of a cor
poration personally liable for unpaid taxes.
In the present case, the issue is the substance of a
transaction. The relevant section of the Act is para
graph 245(2)(c). The question is whether the defen
dant had an interest in the corporation which allowed
him to confer the right to subscribe to shares on his
wife and later his children. This section reads as fol
lows:
245....
(2) Where the result of one or more sales, exchanges, decla
rations of trust, or other transactions of any kind whatever is
that a person confers a benefit on a taxpayer, that person shall
be deemed to have made a payment to the taxpayer equal to the
amount of the benefit conferred notwithstanding the form or
legal effect of the transactions or that one or more other per
sons were also parties thereto; and, whether or not there was an
intention to avoid or evade taxes under this Act, the payment
shall, depending upon the circumstances, be
(c) deemed to be a disposition by way of a gift.
The wording of the section states "notwithstanding
the form or legal effect of the transactions". This
would suggest that irrespective of the form of the
transaction, the Minister will examine the substance
of the transaction.
Counsel for the plaintiff referred me to Minister of
National Revenue v. Dufresne, Didace, 12 a case
which interpreted the predecessor section to para
graph 245(2)(c). In Dufresne, the taxpayer was the
controlling shareholder and the owner of practically
all of the shares. Mr. Dufresne owned 164 shares, his
wife owned 1 share, while each of his five children
I Glacier Realties Ltd v The Queen, [ 1980] CTC 308
(F.C.T.D.), at p. 310.
12 Minister of National Revenue v. Dufresne, Didace, [1967]
Ex.C.R. 128.
owned 15 shares each. He was the head of the family
and had the controlling influence in the determina
tion of events which led to the reassessment and
appeal. The impugned transactions in Dufresne were
ones in which the company offered to each of the
shareholders the right to purchase three new shares
for each share held at a purchase price of $100 a
share. Prior to the stock option, the original shares
had a value of $1,421.47. The children exercised the
options and neither the taxpayer nor his wife exer
cised their options. The result was that the taxpayer
retained the same number of shares, 164, but the
value of the shares had dropped to $78,560 from
$243,044. The children's shareholdings had risen
from 15 to 360 common shares from a value of
$21,315 to $199,400.
The Exchequer Court held that a benefit was con
ferred on the children by the taxpayer, Mr. Dufresne.
The basis of this decision was that the taxpayer, Mr.
Dufresne had an interest separate and apart from his
shareholdings. President Jackett (as he then was)
gave the underlying reasons behind the transaction:
"[t]he sequence of events bears all the earmarks of a
series of company transactions that had been
arranged in advance by the major shareholder and
father, after taking appropriate professional advice,
with a view to achieving the result of increasing the
children's proportions in the ownership of the stock
of the company".) 3
Paragraph 137(2)(c) [R.S.C. 1952, c. 1481, the
predecessor to paragraph 245(2)(c), has been inter
preted to look behind the corporate veil to look at the
substance of the transaction. Where a controlling
shareholder designs a transaction to increase the fam
ily members' proportion in the ownership of the com
pany while decreasing the value of his own share-
holdings, that transaction will be reviewed to assess
income tax.
While Dufresne was decided under the provisions
of paragraph 137(2)(c), which is the predecessor to
paragraph 245(2)(c), the wording is identical to the
present paragraph except that the words "to which
13 Ibid., at p. 138.
part IV applies" were dropped. The gift tax was abol
ished in 1971, an issue which I will address later.
President Jackett held that if there was a benefit
conferred upon the children by Mr. Dufresne, then he
is deemed to have made a payment to each of the
children equal to the amount of the benefit. That pay
ment is "deemed to have been a disposition by way
of a gift", which attracts taxation under Part IV as it
then was.
Dufresne has also been followed in Applebaum v.
Minister of National Revenue 14 where the children of
the taxpayer acquired the right to subscribe to shares
through a behind-the-scenes transfer of the taxpayer's
interest in the company. The learned member of the
Tax Appeal Board makes the following comments, at
page 378:
This relinquishing of control to the other shareholders by the
appellant was the direct result of his decision not to exercise
his "right" to the full and the subsequent exercise of their
"rights" by the other shareholders .... There was no question
that the appellant was the head of his family and had their
future interests at heart as well as being controlling share
holder of the family company, and that he designed the course
that was to be followed in full expectation that his wishes
would be respected and the plan accepted, as in fact it was.
Dufresne was also followed in Levine Estate v.
Minister of National Revenue 15 wherein the
deceased's son acquired 5,000 shares in his father's
company at a reduced price. It was found that the
transactions which implemented the conferral of the
right to subscribe to shares were executed at the
direction of the controlling mind and will of the cor
poration, the late Mr. Abe Levine. Therefore, the
benefit was a gift taxable in the hands of Mr. Levine.
The purpose behind paragraph 245(2)(c) is consis
tent with ascertaining the reason for issuing the
shares. As I noted above, the main reason for the cre
ation of the concept of shares was a vehicle through
which a corporation could raise capital. In the present
case, the corporation raised absolutely no capital
through the impugned transactions. On the contrary,
14 Applebaum V. Minister of National Revenue (1971), 71
DTC 371 (T.A.B.).
15 Levine Estate v. Minister of National Revenue, [1973]
F.C. 285 (T.D.).
it issued shares for nominal consideration to mem
bers of the controlling shareholder's family. The
defendant cannot cling steadfastly to the concept of
the corporation as a separate legal entity from the
shareholders whose only proprietary interest is in the
shares when the real purpose behind the transaction
was not to raise capital, but to increase the sharehold-
ings of his family.
This reasoning is applicable to the present case.
Here the defendant was the controlling mind and will
of the Company. It is agreed that the defendant
desired to have the company issue shares first to his
wife and later to his children, thereby decreasing his,
and then both his and later his wife's proportionate
interest in the Company. Therefore, the fact that Mr.
Kieboom retained the same number of shares is not
the determining factor. He divested himself of his
economic interest to the benefit of his wife and later
his children's. He did this by diluting his own share-
holdings and increasing his wife's and later his chil
dren. This finding is consistent with the reasoning in
Dufresne, as well as the development of the corporate
law in respect to shares.
Counsel for the defendant submits that the present
case is distinguished from the Dufresne case because
it was decided at a time when there was a gift tax.
Since there is no longer a gift tax, there are no taxa
tion consequences in such a situation. The defendant
takes the position that section 245 is a charging pro
vision which means that it must bring something into
the taxpayer's income. A charging section operates in
two stages, there must be a benefit and the benefit is
deemed to be a payment. Because the Minister took
the position that it was a gift under paragraph (c),
there are no taxation consequences since the gift tax
was abolished. While the Act taxes dispositions of
property elsewhere, the section does not deal with
that, it simply says "deemed to be a disposition by
way of a gift." The Minister's method of assessing
tax on the transaction, it is argued, is a tortuous route
through the Act which is not sustainable.
I am unconvinced by this argument. In my opin
ion, section 245 is a characterizing provision. It is
designed to identify transactions as indirect payments
or transfers. The section is under Part XVI which is
entitled "Tax Evasion". Even if the gift tax had not
been abolished, it would be necessary to go to
another Part of the Act in order to find the charging
provisions. Therefore, it is not necessary for this sec
tion to bring something into the taxpayer's income.
The section characterizes a benefit as a deemed dis
position.
Other provisions of the Act operate to tax gifts.
The technical notes from the Finance Department,
referred to by both counsel, indicate that the Depart
ment did not consider that repealing the gift tax cre
ated a taxation vacuum. The capital gains provisions
operate to tax gifts. The applicable section here is
subparagraph 69(1)(b)(ii), which provides that the
taxpayer is deemed to have received the proceeds of
disposition if he disposes of anything at less than the
fair market value. The underlying reason for the
deemed disposition provisions at fair market value is
to prevent taxpayers from transferring an interest in
property for the purposes of avoiding taxation conse
quences. Paragraph 245(2)(c) specifies that it is not
necessary to have an intention to avoid taxes for a
deemed disposition in the transfer of property. In this
case, I have found that the taxpayer reduced his eco
nomic interest in the company at less than the fair
market value, and he is deemed to have received pro
ceeds of disposition. Therefore, the transferred prop
erty is subject to the capital gains provisions in the
Act. While the route may be tortuous, the principle is
a simple one. A taxpayer cannot give away an inter
est in property at less than fair market value without
attracting taxation. The rationale behind this principle
is to capture transactions which are designed to trans
fer ownership without attracting tax consequences.
Alternatively, the defendant argues that if section
69 applies in the circumstances, then subsection
73(5) [as am. by S.C. 1979, c. 5, s. 24] must apply
giving the children the benefit of a rollover of the dis
position of shares. Subsection 73(5) allows the tax
payer to reduce the capital gain of a share transfer.
The qualifying factors of subsection 73(5) are out
lined as follows:
73. ...
(5) For the purposes of this Part, where at any particular
time a taxpayer has transferred property to his child who was
resident in Canada immediately before the transfer and the
property was, immediately before the transfer, a share of the
capital stock of a small business corporation, except where the
rules in subsection 74(2) require any taxable capital gain from
the disposition by the taxpayer of that property to be included
in the income of a person other than the taxpayer, the follow
ing rules apply ....
The same reasoning as the above analysis of para
graph 245(2)(c) would apply. The taxpayer trans
ferred property to his children who were residents in
Canada. However, the requirement for subsection
73(5) to apply, is that immediately before the trans
fer, the property must have been a share. In this case,
what was transferred was a right to subscribe to
shares and not shares itself. The transferred property
did not become a share until the children took the
option and subscribed to shares. Accordingly, the
rules with respect to inter vivos transfers of capital
stock of a small business corporation cannot apply in
the circumstances.
In summary, the two transactions which resulted in
Mrs. Kieboom acquiring shares in consideration of
$1 and later the children is a benefit conferred upon
them by the defendant which is "deemed to be a dis
position by way of a gift". This finding is based on
paragraph 245(2)(c) and case law which has inter
preted that section to look at the substance of a trans
action. The argument that what occurred was a corpo
rate treasury issued shares does not allow the
defendant to escape income tax consequences. As I
have outlined, the corporation as a separate legal
entity apart from its shareholders is no longer abso
lute, particularly in respect of small corporations.
The remaining question is the operation of the
spousal attribution rules. If the spousal attribution
rules apply, the income derived from the property
transferred from Mr. Kieboom to his wife is attrib
uted back to him. In the present case, the income
earned from Adriana's shares would be attributed
back to the defendant which includes the income
received from the deemed disposition from the trans
action conferring a benefit on the children. Subsec
tion 74(1) reads as follows:
74. (1) Where a person has, on or after August 1, 1917,
transferred property either directly or indirectly by means of a
trust or by any other means whatever to his spouse, or to a
person who has since become his spouse, any income or loss,
as the case may be, for a taxation year from the property or
from property substituted therefor shall, during the lifetime of
the transferor while he is resident in Canada and the transferee
is his spouse, be deemed to be income or a loss, as the case
may be, of the transferor and not of the transferee.
The defendant maintains the position that there
was no transfer of anything from the defendant to
Adriana or to the children. The corporate treasury
issued shares to the respective parties. Therefore, the
spousal attribution rules cannot apply. Furthermore,
income flows from the shares and shares were not
transferred to the children. Since the Minister's posi
tion is that an economic interest in the corporation
was transferred from the defendant to his wife and
later to his children, there is no income earning prop
erty that was transferred. While there may have been
a decrease in the value of his shares this does not
amount to a transfer of property by the taxpayer
which would attract taxation under the attribution
rules.
The Minister's position is that transfer of property
in subsection 74(1) is broad enough to encompass the
economic interest which was transferred in the case
at bar. In support of this conclusion, counsel for the
Minister refers to Fasken, David v. Minister of
National Revenue 16 wherein the taxpayer incorpo
rated a company in order to purchase property in
Texas. He owned all of the shares, but later trans
ferred all of his shares. However, at the time of trans
fer, the taxpayer maintained his right against the
company in respect of the purchase price of the farm
16 Fasken, David v. Minister of National Revenue, [1948]
Ex.C.R. 580.
and other advances. In 1924, the company executed
an acknowledgement of indebtedness plus interest in
favour of three trustees and on the same date the
trustees declared the trusts under which they held the
indebtedness which included payments of interest to
the taxpayer's wife. President Thorson analyzed the
meaning of transfer of property within the meaning
of the Act. At page 592, he interpreted transfer under
the Act to be very broad, all that is required is that the
taxpayer divest himself of property and vest it in his
wife; it need not be made in any particular form or be
made directly. In that case, Thorson P. held that there
was a transfer of property from the taxpayer to his
wife.
Counsel for the plaintiff submits that the Fasken
scenario parallels the present case. The taxpayer's
wife in the former did not receive a right to the
indebtedness of the corporation to the taxpayer, but
she received a right to interest payments. Here, Mrs.
Kieboom did not receive shares, but received a right
to subscribe to shares. Therefore, the logical conclu
sion is that there was a transfer of property within the
meaning of subsection 74(1).
In the present case, the broad meaning which is
ascribed to the word "transfer" could encompass the
transaction through which Adriana acquired shares. I
have found that the defendant divested himself of an
economic interest in the company which was vested
in his wife. Effectively there was an indirect transfer
of Mr. Kieboom's economic interest in the company
to his wife. The more difficult issue is whether it
encompasses property through which Adriana earned
income.
In Fasken, the property transferred was a right to
receive interest, and this was described as the fruits
of the property to which the attribution rules must
apply. This, the plaintiff submits, is analogous to the
present case through which Adriana acquired a right
to subscribe to shares. Therefore, the income earned
from those shares must be attributed back. However,
the analogy is not as compelling as counsel for the
Minister would argue. In Fasken, the recipient
acquired a direct right to receive income, that is a
right to receive interest from her husband's company.
In the present case, Mrs. Kieboom did not receive a
direct right to receive dividends. She received a right
to acquire shares which she exercised. The right in
itself did not create income. It was the exercising of
the right through which Mrs. Kieboom acquired
income earning property. Therefore, the logic of the
present case requires a step beyond the definition of
property as was transferred in Fasken.
In am not prepared to extend the effect of the
impugned transaction to include the creation of
income earning property. In the present case, I have
found that Mr. Kieboom transferred his economic
interest in the corporation to his wife and later to his
children. The recipients received a right to subscribe
to shares at a nominal value, which they exercised,
thereby resulting in taxation consequences for the
defendant. It was not the right to subscribe to shares
that created income, but the actual shares that created
the income. Therefore, the spousal attribution rules
do not apply to this case. I have found that the tax
payer cannot take advantage of the provisions of sub
section 73(5) because the property transferred was
not a share. Similarly, the Minister cannot attribute
income back to the defendant and maximize the taxa
tion consequences because the defendant gave a right
to subscribe shares and not the actual shares.
There is another reason why the Minister's posi
tion is untenable. The Minister takes the position that
both transactions, the one in 1980 whereby Mrs.
Kieboom acquired shares and secondly in 1981,
whereby the children acquired shares, are deemed
dispositions by way of a gift pursuant to paragraph
245(2)(c). Therefore section 69 applies absent some
other provision in the Act. With respect to the first
transaction, the Minister's position is that subsection
74(1) overrides the effect of section 69 resulting in
attribution of income through a spousal transfer. I
disagree with this submission. I have already con
cluded that these identical transactions are "deemed
dispositions by way of a gift" which fall under para-
graph 245(2)(c). The 1980 transaction is not in issue,
the Minister having decided that no taxable event
occurred in that year. The 1980 transaction which
created a right for Adriana to subscribe to shares can
not be both a "deemed disposition by way of a gift"
under paragraph 245(2)(c) and a spousal transfer
under subsection 74(1). Paragraph 245(2)(c) creates a
deemed disposition to capture transactions. It does
not go on to deem there to have been a transfer of
property. If it is not a spousal transfer then the attri
bution rules do not apply.
CONCLUSION
The defendant's cross-appeal with respect to his
1981 taxation year is dismissed, in respect of the cap
ital gain of $81,600. His cross-appeal is allowed with
respect to the capital gain attributed to him from his
spouse. The plaintiff's appeal with respect to the
defendant's 1982 taxation year regarding the divi
dend income attributed back to the defendant is dis
missed.
The Minister is ordered to vary the reassessment in
accordance with the terms of the reasons for judg
ment.
No costs are awarded.
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