A-990-91
Her Majesty the Queen (Appellant) (Respondent by
cross-appeal)
v .
Albert Kieboom (Respondent) (Appellant by cross-
appeal)
INDEXED AS: CANADA V. K/EBOOM (CA.)
Court of Appeal, Heald, Décary and Linden JJ.A.—
Calgary, June 15; Ottawa, July 3, 1992.
Income tax — Gifts — Taxpayer (directing mind and will of
corporation) reducing economic interest in company by creat
ing shares to which wife and children subscribed for nominal
consideration — Shares acquired by children benefit conferred
by taxpayer within Act, s. 245(2)(c) (disposition by way of gift)
— Act, s. 245(2) requiring Court to ignore form and legal
effect of transactions and examine substance of transactions
resulting in benefit being conferred by one person upon
another — Fact company issued shares to children irrelevant
— Transfers to children subject to application of Act, s. 69(1)
— Spousal application rules applicable to income derived from
property given to wife, including' income from deemed disposi
tion of portion of wife's interest in company to children — Rol-
lover provision of Act, s. 73(5) not applicable to transfer to
children as shares not transferred directly to children.
Income tax — Income calculation — Capital gains — Tax
payer reducing economic interest in company by creating
shares to which wife and children subscribed for nominal con
sideration — Deemed disposition by way of gift under Act, s.
245(2)(c) — Transferred property subject to capital gains pro
visions — Taxpayer deemed to have received proceeds of dis
position if disposes of anything at less than fair market valued
under Act, s. 69(1)(b)(ii) — Spousal application rules applica
ble to income derived from property given to wife, including
income from deemed disposition of portion of wife's interest in
company to children.
Income tax — Corporations — Taxpayer (directing mind
and will of corporation) reducing economic interest in com
pany by creating shares to which wife and children subscribed
for nominal consideration — Act, s. 245(2) requiring Court to
ignore form and legal effect of transactions and examine sub
stance of transactions resulting in benefit being conferred by
one person upon another — Fact shares issued by company
irrelevant.
The taxpayer carried on a business of selling carpets by
means of a company of which he was the directing mind and
will. The taxpayer gradually reduced his economic interest in
the company by creating shares to which his wife, and later his
children, subscribed for nominal consideration. In 1980, by
means of share creation, the taxpayer reduced his equity from
90% to 50% in favour of his wife whose equity rose from 10%
to 50%, for nominal consideration. In 1981, by a second simi
lar transaction, the taxpayer and his wife both reduced their
equity from 50% to 21.4% in favour of their three children
who each received 19% of the equity, again for nominal con
sideration. In 1982, the company declared and paid a dividend
of about $4,000 per share.
The Minister reassessed the taxpayer for the 1981 taxation
year, stating that, pursuant to paragraph 245(2)(c) and subsec
tion 69(1) of the Income Tax Act, the issuance of shares to the
children by the company constituted a disposition of an eco
nomic interest by way of gift from the taxpayer and his wife.
The taxpayer and his wife were therefore both deemed to have
received the proceeds of disposition at fair market value. The
Minister also applied the spousal attribution rule of subsection
74(1) (which deems the gain from property transferred to a
spouse to be the capital gain of the transferor), to the issuance
of shares to the taxpayer's wife. Thus, 80% of the capital gain
deemed to have been received by his wife by virtue of her
deemed disposition to the children was attributed to the tax
payer. The Minister also applied the spousal attribution rule to
the dividend income received by the taxpayer's wife in 1982.
The Tax Court decided that paragraph 245(2)(c) applied to
the conferral of the benefit, but that there should not be attribu
tion under subsection 74(1). On appeal, the Trial Division of
this Court essentially agreed. The Minister appealed the deci
sion ôf the Trial Division as to the attribution under subsection
74(1) and there was a cross-appeal by the taxpayer as to
whether there was any conferral of a benefit under paragraph
245(2)(c).
Held, the appeal should be allowed and the cross-appeal dis
missed.
The shares acquired by the children were a benefit conferred
by the taxpayer within the meaning of paragraph 245(2)(c).
Although it is true that it was the company which actually
issued the shares, it cannot be said that the benefit was con
ferred by the company. Section 245, which deems a payment
to be a disposition by way of gift, requires that the substance of
the transaction be examined regardless of form if the result is a
benefit conferred by one person upon another. Here, the tax-
payer arranged for his company to issue shares to his children
so that the value of his own and his wife's shares was reduced
and an interest of corresponding value was created in his chil
dren. Thus, subsection 69(1) and paragraph 245(2)(c) together
deem that the transfers of equity were gifts and the transfers
were deemed to have occurred at fair market value.
Subsection 74(1) (the spousal attribution rules) applied to
income derived from the property given to the wife, including
income from the deemed disposition from the transaction
which conferred the benefit of a portion of their interest in the
company upon the children. The phrase "transfer of property"
in that provision is used in a rather broad sense. The word
"transferable" has been defined by case law as including
"every means by which property may be passed from one per
son to another" and "property" as the "most comprehensive of
all the terms which can be used, inasmuch as it is indicative
and descriptive of every possible interest which the party can
have". The 40% capital interest in the company which the tax
payer gave to his wife was clearly property. The fact that this
transfer was accomplished through causing the company to
issue shares makes no difference. Subsection 74(1) covers
transfers that are made "directly or indirectly" and "by any
other means whatever". Moreover, the shares which the tax
payer's wife acquired are also taxable as "substituted property"
pursuant to subsection 248(5), as it may be said that she substi
tuted the shares she purchased for the property she received
from her husband. And the section 69 deemed capital gain on
her transfer of a part of her equity to the children must also be
attributed to the taxpayer under subsection 74(2).
The rollover provisions of subsection 73(5) do not apply to
the transfer to the children because the fact that there was here
a transfer of property which was later turned into shares was
not enough in the face of the express language of the provi
sion: "share of the capital stock of a small business corpora
tion".
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Federal Court Rules, C.R.C., c. 663, RR. 324, 337(2)(b).
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 69(1)(b)(ii),
73(5) (as am. by S.C. 1979, c. 5, s. 24), 74 (as am. by
S.C. 1974-75-76, c. 26, s. 39), 245(2)(c), 248(1),(5) (as
enacted by S.C. 1980-81-82-83, c. 48, s. 108(12)).
CASES JUDICIALLY CONSIDERED
APPLIED:
Minister of National Revenue v. Dufresne, Didace, [1967]
2 Ex.C.R. 128; [1967] C.T.C. 153; (1967), 67 DTC 5105;
Applebaum v. Minister of National Revenue (1971), 71
DTC 371 (T.A.B.); Levine Estate v. Minister of National
Revenue, [1973] F.C. 285; [1973] CTC 219; (1973), 73
DTC 5182 (T.D.); Nowegijick v. The Queen, [1983] 1
S.C.R. 29; (1983), 144 D.L.R. (3d) 193; [1983] 2
C.N.L.R. 89; [1983] CTC 20; 83 DTC 5041; 46 N.R. 41;
R. v. Fries (1989), 89 CLLC 14,029; [1989] 1 C.T.C. 471;
(1989), 89 DTC 5240; 99 N.R. 208 (F.C.A.); Vaillancourt
v. Deputy M.N.R., [1991] 3 F.C. 663; [1991] 2 C.T.C. 42;
(1991), 91 DTC 5408 (Eng.); 5352 (Fr.) (C.A.);
Gathercole v. Smith (1880-81), 17 Ch. D. 1 (C.A.); Fas-
ken, David v. Minister of National Revenue, [1948]
Ex.C.R. 580; [1948] C.T.C. 265; The Queen v. Zandstra,
[1974] 2 F.C. 254; [1974] CTC 503; (1974), 74 DTC
6416 (T.D.); The Queen v. McBurney (L), [1985] 2 CTC
214; (1985), 85 DTC 5433; 20 E.T.R. 283; 62 N.R. 104
(F.C.A.); Commr of Taxation (Cth) v. McPhail (1968), 41
A.L.J.R. 346 (H.C.); Jones v. Skinner (1836), 5 L.J. (N.S.)
Ch. 87 (Rolls Ct.); Re Lunness (1919), 46 O.L.R. 320; 51
D.L.R. 114 (App. Div.); Matheson, JA v The Queen,
[1974] CTC 186; (1974), 74 DTC 6176 (F.C.T.D.);
Bronfman Trust v. The Queen, [ 1987] 1 S.C.R. 32; (1987),
36 D.L.R. (4th) 197; [1987] 1 C.T.C. 117; 87 DTC 5059;
25 E.T.R. 13; 71 N.R. 134.
DISTINGUISHED:
McClurg v. Canada, [1990] 3 S.C.R. 1020; (1990), 76
D.L.R. (4th) 217; [1991] 2 W.W.R. 244; [1991] 1 C.T.C.
169; 91 DTC 5001; 119 N.R. 101.
AUTHORS CITED
Revenue Canada Taxation. Interpretation Bulletin Nos.
IT-209; IT-258; IT-453.
APPEAL from the Trial Division decision ([1992]
1 F.C. 276; [1991] 2 C.T.C. 106; (1991), 91 DTC
5478) on an appeal from the Tax Court of Canada as
to whether the conferral of benefit dispositions of
Income Tax Act paragraph 245(2)(c) and subsection
69(1), and the spousal attribution rules of subsection
74(1) apply to transactions whereby a taxpayer
reduced his interest in his company in favour of his
wife, and later his children, by having his company
create shares which they acquired for nominal con
sideration. Appeal allowed and cross-appeal dis
missed.
COUNSEL:
Helen C. Turner and Douglas B. Titosky for
appellant and respondent by cross-appeal.
H. George McKenzie for respondent and appel
lant by cross-appeal.
SOLICITORS:
Deputy Attorney General of Canada for appel
lant and respondent by cross-appeal.
Felesky, Flynn, Calgary, for respondent and
appellant by cross-appeal.
The following are the reasons for judgment ren
dered in English by
LINDEN J.A.: This is an appeal by the Minister and
a cross-appeal by the taxpayer from a decision of the
Trial Division of this Court [[1992] 1 F.C. 276] con
cerning certain transactions in the taxation years
1981 and 1982 for which reassessments were issued.
The main legal issues are whether there has been a
conferral of a benefit by the taxpayer under para
graph 245(2)(c) of the Income Tax Act [S.C. 1970-71-
72, c. 63] and whether there should be a spousal attri
bution of certain dividend and other income under
subsection 74(1) [as am. by S.C. 1974-75-76, c. 26, s.
39]. A subsidiary issue involves a consideration of
subsection 73(5) [as am. by S.C. 1979, c. 5, s. 24].
There is no dispute as to the facts. Albert Kieboom
(the taxpayer) carried on a business of selling carpets
in Red Deer, Alberta, through his company, Carpet
Colour Centre (Red Deer) Ltd., which was incorpo
rated on May 3, 1976. Mr. Kieboom acquired 9 com
mon shares at incorporation and his wife, Adriana
Kieboom, acquired 1 common share. Mr. Kieboom
thus owned 90% of the equity of the company, while
his wife owned 10%. Mr. and Mrs. Kieboom were
the sole directors and shareholders.
In late 1979, additional class "A" non voting
shares were created and on February 12, 1980, Adri-
ana, Mr. Kieboom's wife, purchased 8 of these
shares. The class "A" common shares were equal in
equity to the original common shares. Mrs. Kieboom
purchased her 8 shares for $1 each, a sum which was
well below market value. This divided the equity of
the Company equally between the taxpayer, who still
held his original 9 shares, and his wife, who held 9
shares (1 common and 8 class "A" common).
At a further meeting on March 1, 1981, the Com
pany, pursuant to the decision of its directors, the tax
payer and his wife, issued 8 further class "A" shares
to each of their three children for $1 each, which was
again below market value. The fair market value of
the shares at the time was $6,800 each.
As a result of these two transactions, the taxpayer's
interest in his company fell first from 90% to 50%,
and then from 50% to 21.4%. The second transaction
reduced his wife's interest from 50% to 21.4%. This
transaction also gave the three children 19% of the
equity of the Company each. The transactions are
illustrated by the charts below:
1. At Incorporation
Albert Kieboom 9 common shares
Adriana Kieboom 1 common share
2. After the Meeting of February 12, 1980
Albert Kieboom 9 common shares
Adriana Kieboom 1 common share
8 Class "A" common
shares
3. After the Meeting of March 12, 1981
Albert Kieboom 9 common shares
Adriana Kieboom 1 common share
8 Class "A" common
shares
Yost Kieboom 8 Class "A" common
shares
Alma Kieboom 8 Class "A" common
shares
Sheila Kieboom 8 Class "A" common
shares
Alternately, the transactions can be considered in
terms of the effect which they had on the equity of
the Company:
1. At Incorporation
Albert Kieboom 90% of the equity
Adriana Kieboom 10% of the equity
2. After the Meeting of February 12, 1980
Albert Kieboom 50% of the equity
Adriana Kieboom 50% of the equity
3. After the Meeting of March 12, 1981
Albert Kieboom 21.4% of the equity
Adriana Kieboom 21.4% of the equity
Yost Kieboom 19% of the equity
Alma Kieboom 19% of the equity
Sheila Kieboom 19% of the equity
In 1982, the Company declared and paid a divi
dend of $4,000 per common share and $3,750 per
class "A" common share.
The Minister reassessed the taxpayer for both the
1981 and the 1982 taxation years. The taxpayer was
reassessed for 1981 in two respects. Firstly, the Min
ister stated that the issuance of common shares to the
children by the Company constituted a disposition
pursuant to paragraph 245(2)(c) and subsection 69(1)
of the Income Tax Act. The taxpayer and his wife
were both deemed to have received the proceeds of
disposition at fair market value.
Secondly, the Minister also reassessed the taxpayer
in 1981 on the grounds that the subsection 74(1) attri
bution rules applied to the issuance of shares to Mrs.
Kieboom. Under section 74 [as am. by S.C. 1974-75-
76, c. 26, s. 39], income on property transferred
between spouses is attributed to the transferor spouse.
The definition of income for the purposes of this sec
tion includes capital gain. Thus, 80% of the capital
gain deemed to have been received by Mrs. Kieboom
by virtue of her deemed disposition to the children as
described in the paragraph above was attributed to
the taxpayer, according to section 74.
The Minister's view that there had been a section
74 spousal transfer lead to a reassessment of the tax
payer in 1982 stating that Mr. Kieboom was required
to include in his income any income which his wife
received from the class "A" shares. As was recounted
in the facts above, dividends on the class "A" shares
were issued in 1982. Thus, the reassessment included
the sum of $40,500 in the income of the taxpayer, as
this was the amount of money received in dividends
by Mrs. Kieboom in respect of her class "A" com
mon shares in 1982.
The issue before us is whether these reassessments
are correct. The Tax Court decided that paragraph
245(2)(c) applied to the conferral of the benefit, but
that there should not be attribution under subsection
74(1). On appeal to the Trial Division of this Court,
the Court essentially agreed. The Minister appealed
the decision of the Trial Division as to the attribution
under subsection 74(1) and there is a cross-appeal by
the taxpayer as to whether there was any conferral of
a benefit under paragraph 245(2)(c). I shall deal with
the main issues, starting with the question of the con-
ferral of a benefit under paragraph 245(2)(c), then
with the matter of attribution under subsection 74(1)
and finally under subsection 73(5).
L Was there a Benefit Conferred by the Taxpayer?
The first issue is whether the shares acquired by
the children were a benefit conferred by the taxpayer
so as to fall within paragraph 245(2)(c), which reads:
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 gift.
It is not disputed that the acquisition of the shares
at less than the market value was a benefit to the chil
dren, but it is contended that it was the corporation,
not the taxpayer, which did the conferring. This is
inaccurate. Although it is true that it was the corpora
tion which actually issued the shares, it cannot be
said that the benefit was conferred by the corpora
tion. By the issuance of these additional shares, the
value of the shares held by the taxpayer was dimin
ished. The amount of this decrease in value was, in
effect, given to the new shareholders at the nominal
purchase price of the shares. The fact that this was
done by the taxpayer directing the company he con
trolled to issue new shares to the recipients, rather
than issuing new shares to himself and then giving
them to his family, made no difference at all. The
result was the same. A benefit was conferred on the
children by the taxpayer. While this Court respects
fully the corporate forms used in various transac
tions, Parliament directs on occasion that these forms
be ignored. In this case, the express wording of the
Act requires that the forms used be disregarded for
purposes of the section. The section stipulates that
"notwithstanding the form or legal effect of the trans
actions or that one or more other persons were also
parties thereto", if the result is a benefit conferred by
one person to another, the amount is deemed to be a
payment which is a "disposition by way of gift".
Here, the taxpayer has arranged for his company to
issue shares to his children in such a way that the
value of his own and his wife's shares was reduced
and an interest of corresponding value was created in
his children. It was undoubtedly hoped that this indi
rect conferral, using the corporate form, would
reduce Mr. Kieboom's tax burden. However, the
clear words of the statute require that the Court
ignore the "form and legal effect" of the conferral.
There is no need to invoke the common law princi
ples of lifting the corporate veil. The statute clearly
directs that the veil must be lifted in this instance.
The Trial Judge recognized this when he stated [at
page 290]:
The wording of the section states "notwithstanding the form or
legal effect of the transactions". This would suggest that irre
spective of the form of the transaction, the Minister will
examine the substance of the transaction.
This view is consistent with that of the Exchequer
Court in Minister of National Revenue v. Dufresne,
Didace, [1967] 2 Ex.C.R. 128. Although the Excheq
uer Court case dealt with an issue of gift tax under
the old subsection 137(2) [R.S.C. 1952, c. 148], the
wording in this section is almost identical to that in
paragraph 245(2)(c). President Jackett, addressing a
similar fact situation, expressed the law as follows [at
pages 138-139]:
The 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 profes
sional advice, with a view to achieving the result of increasing
the children's proportions in the ownership of the stock of the
company.... Moreover, the benefit, if it was one, was an
increase in the proportions of the children almost entirely at
the expense of a decrease in the respondent's.
There is no doubt in my mind that, if the result of the trans
action was a benefit to the children, it was conferred on them
by the respondent.
With respect, I agree with this statement of the law
and, in my view, the fact of the repeal of the gift tax
should make no difference to the reasoning of the
Court on this issue. See also Applebaum v. Minister
of National Revenue (1971), 71 DTC 371 (T.A.B.);
Levine Estate v. Minister of National Revenue, [ 1973]
F.C. 285 (T.D.).
The Trial Judge correctly found that paragraph
245(2)(c) is a characterizing provision, not a charging
provision. It is not persuasive to argue that it is a
charging provision which does not end up charging.
The courts are obligated to give some meaning to the
words of Parliament, where it can be fairly done, and
to avoid rendering Parliamentary language meaning
less. The effect of paragraph 245(2)(c) is to charac
terize the benefit as a deemed disposition, which is
deemed to occur at fair market value under subpara-
graph 69(1)(b)(ii). This subparagraph provides that if
a taxpayer disposes of anything by way of a gift inter
vivos at less than fair market value, the taxpayer is
"deemed to have received proceeds of disposition
therefor equal to that fair market value".
This interpretation of paragraph 245(2)(c) reflects
the aim of the Minister of Finance, as expressed in
the White Paper which preceded the enactment of
these tax reforms which was tabled in the House of
Commons on November 7, 1969 [House of Commons
Debates, 2nd Sess., 28th Parl., vol. I, at page 659]. In
that document it was made clear that gifts, which
used to be taxed as such, would henceforth be taxed
as if the donor had sold the asset for its fair market
value and then made a gift of the proceeds. In addi
tion, this interpretation is in harmony with Interpreta
tion Bulletin No. IT-453 which, although not binding
on this Court, is, according to the decision of Mr.
Justice Dickson [as he then was], "entitled to weight
and can be an `important factor' in case of doubt
about the meaning of legislation." (Nowegijick v. The
Queen, [1983] 1 S.C.R. 29, at page 37; R. v. Fries
(1989), 89 CLLC 14,029 (F.C.A.), at page 12,237 per
Urie J.A.; and Vaillancourt v. Deputy M.N.R., [1991]
3 F.C. 663 (C.A.).
As the Trial Judge explained [at page 294]:
A taxpayer cannot give away an interest in property at less
than fair market value without attracting taxation. The ratio
nale behind this principle is to capture transactions which are
designed to transfer ownership without attracting tax conse
quences.
I agree with that conclusion. Unlike McClurg v.
Canada, [ 1990] 3 S.C.R. 1020, here there was no
statutory language using corporate vocabulary, only
general language. Here there was clearly in the issu
ance of shares to the children a benefit conferred such
as meets the description in susbsection 245(2) of
"transactions ... [which] confer a benefit". These
transfers to the children are thus subject to the appli
cation of subsection 69(1).
2. Was there a Transfer of Property so as to Engage
the Attribution Provisions?
The second issue is whether the spousal attribution
rules apply to income derived from the property
given to the wife, including income from the deemed
disposition from the transaction which conferred the
benefit of a portion of Mr. and Mrs. Kieboom's inter-
est in the Company to the children. Subsection 74(1)
is the governing provision and it states:
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.
In my view, the phrase "transfer of property" is used
in this provision in a rather broad sense. Both of the
nouns in the phrase are general and non-technical. As
for the word transfer, Lord Justice James in
Gathercole v. Smith (1880-81), 17 Ch. D. 1 (C.A.),
stated at page 7 that the noun transfer was "one of the
widest terms that can be used." Lord Justice Lush [at
page 9] stated that the word "transferable" includes
"every means by which the property may be passed
from one person to another."
President Thorson, relying on the above defini
tions in Fasken, David v. Minister of National Reve
nue, [1948] Ex.C.R. 580, at page 592, stated:
The word "transfer" is not a term of art and has not a techni
cal meaning. It is not necessary to a transfer of property from a
husband to his wife that it should be made in any particular
form or that it should be made directly. All that is required is
that the husband should so deal with the property as to divest
himself of it and vest it in his wife, that is to say, pass the
property from himself to her. The means by which he accom
plishes this result, whether direct or circuitous, may properly
be called a transfer.
A gift is a transfer, therefore, as was made clear by
Mr. Justice Heald (as he then was) in The Queen v.
Zandstra, [1974] 2 F.C. 254 (T.D.), at page 261. (See
also The Queen v. McBurney (L), [1985] 2 CTC 214
(F.C.A.), at page 218 and Commr of Taxation (Cth) v.
McPhail (1968), 41 A.L.J.R. 346 (H.C.).)
As for the word property, it too has been widely
interpreted. The Income Tax Act, subsection 248(1)
defines property as "property of any kind whatever
whether real or personal or corporeal or incorporeal
and, without restricting the generality of the foreging
includes (a) a right of any kind whatever, a share or a
chose in action,". Lord Langdale once stated that the
word property is the "most comprehensive of all the
terms which can be used, inasmuch as it is indicative
and descriptive of every possible interest which the
party can have." (See Jones v. Skinner (1836), 5 L.J.
(N.S.) Ch. 87 (Rolls Ct.), at page 90; see also Re Lun-
ness (1919), 46 O.L.R. 320 (App. Div.), at page 322;
Fasken, supra, at page 591; and Vaillancourt v. Dep
uty M.N.R., [1991] 3 F.C. 663 (C.A.).)
In this case, therefore, the taxpayer transferred
property to his wife, that is, he gave a portion of his
ownership of the equity in his company to his wife.
The 40% capital interest in his company which he
gave to his wife was clearly property. His beneficial
interest in his company was reduced by 40% and hers
was increased by 40%. The fact that this transfer of
property was accomplished through causing his com
pany to issue shares makes no difference. Subsection
74(1) covers transfers that are made "directly or indi
rectly" and "by any other means whatever". The
transfer, which in this case was indirect, in that the
taxpayer arranged for his company to issue shares to
his wife, is nevertheless a transfer from the husband
to the wife. There is no need for shares to be trans
ferred in order to trigger this provision of the Act, as
was erroneously concluded by the Tax Court Judge.
By this transfer of property to his wife, he divested
himself of certain rights to receive dividends should
they be declared. Hence, when the dividends were
paid to the wife in 1982, that was income from the
transferred property and was rightly attributable to
the taxpayer.
In addition, the property transferred to Mrs.
Kieboom in 1980 was a portion of his ownership
equity. As a result of the transfer, the taxpayer's enti
tlement of 40% was transferred to Mrs. Kieboom.
Moreover, the shares which Mrs. Kieboom acquired
are also taxable as "substituted property" pursuant to
subsection 248(5) [as enacted by S.C. 1980-81-82-83,
c. 48, s. 108(12)], as it may be said that she substi
tuted the shares she purchased for the property she
received from her husband. (See also the Interpreta
tion Bulletins Nos. IT-258, IT-209.) Mrs. Kieboom
disposed of part of that interest when she transferred
a part of that equity to the children. On the same rea
soning as above, the section 69 deemed capital gain
on that disposition must also be attributed to the tax
payer under subsection 74(2).
3. Does Subsection 73(5) Apply to the Transfer to
the Children?
It has been argued that if there had been a transfer
of property to the wife for attribution purposes, there
has also been a transfer to the children so as to trigger
the rollover provisions of subsection 73(5) which
reads:
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 express language in the section does not permit
this conclusion. In order to receive the benefit of sub
section 73(5) the property being transferred should be
"immediately before the transfer, a share of the capi
tal stock of a small business corporation". The fact
that there is here a transfer of property which was
later turned into shares is not enough in the face of
the express language of the provision. This may
appear to some to be inconsistent, but that was
clearly the intention of Parliament. The taxpayer
could easily have chosen to transfer shares to his chil
dren and to obtain the tax benefit in subsection 73(5),
but instead he chose to attempt to secure other tax
benefits for himself by using different methods of
transferring his property. The Court must deal with
what the taxpayer did, not what he could have done.
(See Mahoney J. in Matheson, JA y The Queen,
[1974] CTC 186 (F.C.T.D.), at page 189; approved
Bronfnian Trust v. The Queen, [1987] 1 S.C.R. 32, at
page 55 per Dickson C.J.). For an even more restric-
tive example of a rollover provision as to farmers, see
subsection 73(3) requiring the children to have used
the farm in the business of farming.
In conclusion, the aim of the taxpayer in this case
was to split his income with his wife and children in
order to reduce his tax burden. The Income Tax Act is
now designed to prevent practices which were often
allowed in earlier times. The Interpretation Bulletins
explained the policy of the department in accordance
with its interpretation of the provisions. The taxpayer,
on the advice of his advisers, sought to circumvent
the operation of the sections in question with an inge
nious set of transactions. He is entitled to attempt to
do that. He did not succeed, because the language
used in the Act does not allow him to.
Subsections 74(1) and 73(1) apply to the transfer
of property from Mr. Kieboom to Mrs. Kieboom.
Thus, her income on the shares, including the divi
dends which she received in 1982, are attributed back
to Mr. Kieboom. Subsection 69(1) and paragraph
245(2)(c) together deem that the transfers of equity
which both Mr. and Mrs. Kieboom made to their chil
dren are gifts, whose transfer is deemed to have
occurred at fair market value. Mr. Kieboom thus is
deemed to have received proceeds of disposition
equal to the fair market value of the shares. Due to
the operation of subsection 74(1), Mrs. Kieboom's
deemed fair market value disposition to her children
must also be attributed back to Mr. Kieboom.
The appeal will be allowed, and the cross-appeal
dismissed. The reassessments will be restored for the
years 1981 and 1982 on the basis of the revised
agreed value of the shares.' Pursuant to Rule
1 At the hearing of the appeal, the Court drew the attention
of counsel to the second sentence of the Trial Division's con
clusion (A.B., at p.146). Counsel agreed that the second sen
tence was in error since it did not accord with the reasons for
judgment of the learned Trial Judge. It was further agreed that
the second sentence should have read substantively somewhat
(Continued on next page)
337(2)(b) [Federal Court Rules, C.R.C., c. 663],
counsel for the appellant may prepare a draft of an
appropriate judgment to implement the Court's con
clusions and move for judgment pursuant to Rule
324. The parties may also, at the same time, address
the issue of costs by way of a motion in writing pur
suant to Rule 324.
HEALD J.A.: I agree.
DEcARY IA.: I agree.
(Continued from previous page)
as follows: "The plaintiff's appeal, with respect to the capital
gain attributed to the defendant from his wife is dismissed."
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.