Subsections 15(1) and 56(2) of the Income Tax Act —The Risks of Double Taxation
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SUBSECTIONS 15(1) AND 56(2) OF THE INCOME TAX ACT—
THE RISKS OF DOUBLE TAXATION
Paul Grower
Subsection 15(1) 1
Introduction
If one were to summarize the underlying principle of subsection
2
Act, it might be as follows:
15(1)
of the Income Tax
Don't remove wealth from a corporation, without paying tax on it - the Government hates
that.
Subsection 15(1) specifically states:
15. (1) Where at any time in a taxation year a benefit is conferred on a shareholder, or on
a person in contemplation of the person becoming a shareholder, by a corporation
otherwise than by
(a) the reduction of the paid-up capital, the redemption, cancellation or acquisition by the
corporation of shares of its capital stock or on the winding-up, discontinuance or
reorganization of its business, or otherwise by way of a transaction to which section
88 applies, 3
4
(b) the payment of a dividend or a stock dividend,
(c) conferring, on all owners of common shares of the capital stock of the corporation at
that time, a right in respect of each common share, that is identical to every other
right conferred at that time in respect of each other such share, to acquire additional
shares of the capital stock of the corporation... 5
(d) an action described in paragraph
84(1)(c.1)
, paragraph
84(1)(c.2)
or
6
84(1)(c.3) ,
the amount or value thereof shall, except to the extent that it is deemed by section
84
to be a dividend, be included in computing the income of the shareholder for the year.
In plain language, subsection
where:
15(1)
states, that subject to certain exceptions, at any time
1. a benefit is conferred,
2. on a shareholder (or on a person in contemplation of them becoming a shareholder),
3. by a corporation,
the value of the benefit is included in the income of the shareholder. 7
Purpose
Subsection
15(1)
is broadly defined in an effort to prevent taxpayers from accessing
corporate wealth, or property, in a manner that is not "sanctioned" by the Act. Common
examples of "sanctioned" transfers of wealth or property include:
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• remuneration, such as salary, wages and bonuses;
• investment income, such as dividends or interest; and,
• other processes such as private pension plans and private health service plans.
These methods are representative of processes where Canada Revenue Agency ("CRA") would
be expected to be made aware of the transfer of wealth or property.
As noted by Justice Cattanach of the Exchequer Court in Pillsbury Canada Ltd. v. Minister of
8
National Revenue:
[The subsection] is aimed at payments, distributions, benefits and advantages flowing
from a corporation to a shareholder... while the subsection does not say so explicitly, it is
fair to infer that Parliament intended... to sweep in payments, distributions, benefits and
advantages that flow from a corporation to a shareholder by some route other than the
dividend route and that might be expected to reach the shareholder by the more orthodox
dividend route if the corporation and the shareholder were dealing at arm's length. 9
And more recently noted by the Federal Court of Appeal, in Servais v. R.:
10
14 Put simply, any use by a shareholder of corporate property is potentially sub ect to tax
11
under subsection
15(1) ....
Recent Case-Law
There have been a number of cases of note over the last several years which have shed further
light on the application of subsection
15(1) .
THE ISSUE OF ONUS AND PROOF
One of the most difficult situations facing taxpayers, and their professionals, in any audit with
CRA, and in particular those involving subsection
15(1) , is a lack of documentation on the
part of the taxpayer. Unfortunately, this can often lead to a conclusion on the part of many CRA
auditors that can be succinctly summarized as: no paper = no case.
Thankfully, the Federal Court of Appeal, in its recent decision in House v. R.,
hope does exist even if the documents do not.
12
reminds us that
Mr. and Mrs. House were the sole shareholders of a corporation that ceased operations in the late
1990s.
At the request of CRA, the 2001, 2002, and (subsequently) the 2003 tax returns of the
corporation were prepared and filed by the accountant for the corporation. The 2003 return
indicated that the corporation had cashed in a $305,000 investment (which appeared as an asset
on the 2001 and 2002 financials of the corporation). This disclosure triggered an audit by CRA
of the 2003 year for both the corporation and Mr. House — specifically focused on the $305,000
asset.
The accountant was unable to provide any records to the CRA auditor as the corporation had
ceased operations in 1999. The explanation for the 2003 disposition was that the accountant
determined that the asset, along with a corresponding balance owing to the shareholder, which
were recorded in the 2001 and 2002 financials, did not, in fact, exist and the 2003 entries were
made to correct that error.
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Mr. House was assessed a subsection
15(1) benefit, in his 2003 year, on the assumption that
the $305,000 investment had been transferred to him, from the company, in 2003.
Mr. and Mrs. House's testimony was that the $305,000 asset was transferred from the company,
to Mrs. House, in approximately the year 2000. The accountant had also provided statements of
bank accounts in the name of Mrs. House showing a balance in her name of $652,000 since
2000.
At trial, Associate Chief Justice Rossiter dismissed Mr. House's appeal, finding that Mr. House
had failed to meet his burden to demonstrate, on a balance of probabilities, that the Minister's
assumptions were in error. The Associate Chief Justice found that the quality of the above noted
evidence was insufficient to discharge the burden on Mr. House.
In its decision, the Court of Appeal made particular note of several comments of the Associate
Chief Justice, including:
• the income tax system in Canada is a voluntary, self-reporting and self- monitoring
system premised on the fact that taxpayers have in their possession the information
required to make a proper report;
• the self-monitoring system is a privilege not to be abused by taxpayers;
• the obligation of record-keeping and production is on all taxpayers, regardless of their
station in life, rich, poor, educated, uneducated, sophisticated, unsophisticated; and,
• the accountant should have been aware of the type of documentation required.
To begin its analysis, the Court of Appeal turned to the decision of the Supreme Court of Canada
in Hickman Motors Ltd. v. R., 13 where Madam Justice L'Heureux-Dub‚ enunciated, at
paragraphs 92 to 95 of her reasons, the principles which govern the "burden of proof" in taxation
cases:
1. The burden of proof in taxation cases is that of the balance of probabilities.
2. With regard to the assumptions on which the Minister relies for his assessment, the
taxpayer has the initial onus to "demolish" the assumptions.
3. The taxpayer will have met his initial onus when he or she makes a prima facie case.
4. Once the taxpayer has established a prima faciecase, the burden then shifts to the
Minister, who must rebut the taxpayer's prima faciecase by proving, on a balance of
probabilities, his assumptions.
5. If the Minister fails to adduce satisfactory evidence, the taxpayer will succeed.
The Court of Appeal found that:
The Associate Chief Justice confused the appellant's initial onus to "demolish" the
Minister's assumptions by adducing evidence that, prima facie, supported his position
with the overall burden resting on the parties to prove that the investment had or had not
been paid to the appellant in 2003.
Further, the Court of Appeal took issue with the Associate Chief Justice finding that Mr. House
had failed to meet his onus by providing sufficient source documentation.
Firstly, it was noted that no credibility issues were raised by the Associate Chief Justice in
respect of the evidence of Mr. House, Mrs. House or the accountant. Further, the oral evidence
was sufficient for Mr. House to establish a prima faciecase.
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Secondly, the appellant court noted the comments of Madam Justice L'Heureux-Dub‚ in
Hickman, at paragraph 87 and 88:
[f]urthermore, where the ITA [The Income Tax Act] does not require supporting
documentation, credible oral evidence from a taxpayer is sufficient notwithstanding the
absence of records... the ITAdoes not require that the revenue be shown in the financial
statements and, accordingly, since no issue of credibility was raised, the evidence
adduced by the appellant is clearly sufficient. [Emphasis Added]
The Court of Appeal concluded:
68 Although [the accountant's] evidence, coupled with that of the appellant and his wife,
is far from perfect, it is, in my view, sufficient to demonstrate, on a prima facie basis, that
there was no long-term investment held by Hunt River at the end of 2002 and that,
consequently, no transfer of that investment to the appellant had taken place in 2003. As I
have already indicated, the Associate Chief Justice made no findings of credibility
against [the accountant] and his evidence was neither challenged nor impeached by the
respondent. Absent evidence challenging [the accountant's] explanation for the erroneous
entries in the 2001, 2002 and 2003 tax returns and his explanation that no funds were left
at the end of 2002, there was no basis upon which the Associate Chief Justice could
refuse to accept [the accountant's ]evidence.
69 Confronted with [the accountant's] evidence, the respondent was bound, in my view,
to adduce evidence rebutting the appellant's prima facie case by proving, on a balance of
probabilities, that his assumptions were correct, i.e. by demonstrating that $305,000 had
been transferred to the appellant's account in 2003. As the Minister failed to adduce any
evidence challenging [the accountant's] testimony, the appellant's prima facie case was
not rebutted. Consequently, in these circumstances, the Associate Chief Justice ought to
have concluded in favour of the appellant.
And in respect of the failure of Mr. House, or the accountant, to provide source documents, the
Court noted:
72 The Associate Chief Justice appears to have elevated the judicial requirement that
supporting documents may be required for a taxpayer to establish his or her claims and
deductions to an authoritative principle that documents will always be required for a
taxpayer to establish his or her case. There is, in my respectful view, no principle to the
effect that oral evidence must necessarily be supported by source documents. Whether
documents are required to establish a point will depend on the particular circumstances of
the case. However, whether documents are required or not, a judge must nonetheless
assess the oral evidence and determine whether it is credible. The requirement for
documents, or not, will often turn on such an assessment. [Emphasis Added]
House, therefore, clarifies that a taxpayer's credible and un-contradicted evidence can be
sufficient to meet their prima faciecase. Furthermore, a credible taxpayer can be successful at
appeal without documentation. These are two principles that are sometimes lost when one deals
with CRA.
Is There a Benefit?—Accounting Errors
Many readers will be familiar with the decisions generally known as the "accounting error"
cases, such as:
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14
• Chopp v. R. and Long v. R. 1 5 where the Court found that a payment on behalf of a
shareholder, which was inadvertently recorded to general expenses, and not against the
shareholder loan account (which had a positive balance to the benefit of the shareholder),
did not result in a shareholder benefit as:
• the benefit was not conferred with the knowledge or consent of the shareholder (in
both cases, they arose due to bookkeeper errors); and, in the alternative,
• there were no circumstances (e.g. the amount involved) where it was reasonable to
conclude that the shareholder ought to have known that the benefit had been
conferred.
17
• Cook v. R. 1 6and Robinson v. Minister of National Revenue, where funds that should
have been recorded to the corporation's income account, but were posted to the
shareholder loan account, did not result in a shareholder benefit for the same reasons as
articulated in Chopp and Long, above.
Justice Bowman (as he then was), in Long specifically makes note of the main principle flowing
from the decision in Pillsbury Holdings Ltd., noting that Justice Cattanach in dealing with the
predecessor to subsection
15(1) , said:
In applying paragraph c full weight must be given to all the words of the paragraph.
There must be a benefit or advantage and that benefit or advantage must be conferred by
a corporation on a shareholder. The word confer means grant or bestow. 18 Even where a
corporation has resolved formally to give a special privilege or status to shareholders, it is
a question of fact whether the corporation's purpose was to confer a benefit or advantage
on the shareholders or some purpose having to do with the corporation's business such as
inducing the shareholders to patroni e the corporation. If this be so, it must equally be a
question of fact in each case where the Minister contends that what appears to be an
ordinary business transaction between a corporation and a shareholder is not what it
appears to be but is in reality a method, arrangement or device for conferring a benefit or
advantage on the shareholder qua shareholder.
Justice Bowman concluded that:
11 I do not see how it can be said that a bookkeeping error of which the sole shareholder
was not aware and which he did not sanction and that was not in accordance with the
company's established practices constitutes in reality a method, arrangement or device for
conferring a benefit or advantage on the shareholder qua shareholder.
The devil, of course, in any case of this nature, is in the details. For example, the above
exceptions to a shareholder benefit were found not to exist when:
• the shareholder should have noted, when he signed the financial statements, that the debt he
owed to the corporation had been extinguished; 19
• the shareholder must have known what he was doing when he deposited two $13,000 cheques
for payment for services performed by the corporation — with one deposited to his personal
account and one to the corporation's account; 20 and,
• the shareholder had no intention of classifying corporate payments, made for his personal
expenses, as a draw-down of the shareholder loan owed by the corporation to him, until CRA
Audit raised the issue with him. 21
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However, when considering cases such as these, note must be made of the Franklin v. R. 2
2decision, which involved a Mr. Franklin and his wife's company purchasing a condominium
with funds advanced by Mr. Franklin (which were recorded as a shareholder loan owing to Mr.
Franklin). The expenses for the condominium, and the asset itself, were recorded in the
company's financials.
A 50% interest in the condominium was purchased by a third party from the company. The sale
was not recorded by the company. However, as the sale price was 50% of the original purchase
price and the condominium asset was never depreciated by the company, no tax effects arose
from the sale.
The main issue of the appeal arose from the fact that most of the sale proceeds were directed to
Mr. Franklin, with no corresponding reduction of the shareholder loan owed by the company to
Mr. Franklin (this was due, in large part, to the fact that Mr. Franklin did not advise the
accountant about the sale). Of further note was the fact that Mr. Franklin did use those funds to
purchase further assets for the company (which were recorded as assets of the company and, it
appears, resulted in a further increase in the shareholder loan owed by the company to Mr.
Franklin).
Justice Beaubier found that Mr. Franklin was negligent, particularly given his education and
business experience, noting:
8 because there was no error by the accountant the Court is of the view that the line of
cases respecting subsection 15 1 of the Actarising from accountants' errors does not
apply. 23 The Court finds that Mr. Franklin deliberately failed to report the sale and the
payments in dispute respecting the sale to [the third party] and in turn, to the Respondent.
The amounts were large, they constituted a number of payments and at times unreported
sums were paid periodically. espite Mr. ranklin's protests of innocence or ignorance, he
knew of these payments and what they constituted. He is also an experienced and, in
some fields, expert businessman, who advises other businesses.
While one could reasonably presume that Mr. Franklin was "sunk", Justice Beaubier found that:
13 However, had the sale to [the third party] been properly recorded by [the corporation],
its assets would have fallen by one-half the value of the condominium as would the
shareholder's loan to Mr. ranklin. Therefore, Mr. ranklin's total equity in his shares and
his loan in [the corporation] would not have changed. Moreover, Mr. ranklin's correct net
loan position in [the corporation] never fell into a deficit position during the years under
appeal [regardless if the reduction had been recorded].
Ultimately concluding, in allowing the appeal:
... what has occurred is a series of bookkeeping errors in [the corporation's] statements
which were caused by Mr. ranklin either on purpose or inadvertently. But none of them
gave him any benefit that is in evidence. He did not withdraw any money from [the
corporation] in excess of his correct loan balance during the years in question. or is there
any evidence that he used the incorrect financial statements to obtain a benefit elsewhere
for himself. There was no receipt of a benefit byMr. Franklin. [Emphasis Added]
At the Federal Court of Appeal, Justices Rothstein and Sexton, in their majority decision, found
no palpable or overriding errors in the findings of Justice Beaubier, concluding:
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7 The problem here is that the books of the company do not reflect the facts. The facts are
that the respondent received the proceeds of the sale of the one half interest in the
condominium unit which was owned and sold by [the company]. The asset and
shareholder's loan accounts of [the company] did not accurately reflect these transactions.
However, that does not justify ignoring the fact that no benefit was conferred on [Mr.
Franklin] and assessing tax on the basis of financial statements which have been found to
be in error. [Emphasis Added]
8 The appeal should be dismissed with costs. However, obviously, this judgment is not to
be interpreted as condoning taxpayers negligently keeping inaccurate records or
deliberately not disclosing transactions. The Income Tax Act provides remedies to the
Minister when taxpayers engage in such activity.
Justice Strayer, in his dissent, focused on the fact that Mr. Franklin could have used the sales
proceeds for his own benefit (i.e. he could have accessed the excessively high shareholder loan
balance). He further noted the finding of the trial judge that Mr. Franklin knew, or ought to have
known, that the shareholder loan account was higher than it should have been. Therefore, based
on these facts and findings, he did not see how the situation could be seen as a "bookkeeping
error" and would have reversed the ultimate finding of Justice Beaubier.
One would have thought that this very helpful decision — particularly where the shareholder
24
loan owing to the taxpayer always remained in the "good" balance — would have significantly
influenced later case-law. However, the effect of the Franklin decision has been of limited
benefit as subsequent cases have either distinguished it or even ignored it.
25
For example, in Coutre v. R.,
Justice McArthur, in a decision involving a company
transferring land to the sole-shareholder's wife for a price significantly less than fair market
value, found a shareholder benefit and distinguished Franklin on the basis that in Franklin: (1)
there were "bookkeeping" errors and not valuation errors and, (2) no benefit was found to occur
to Franklin, where the Court in Coutre did find that one existed.
Interestingly, Justice McArthur appears to have focused on the fact that in Coutre the taxpayer
intended for a benefit to occur - yet, with respect, is that really no different than what occurred in
Franklin?
26
Further, in Dumais v. R.,
Justice Lamarre distinguished Franklinon the facts by noting, in
particular, that Mr. Franklin reinvested the received funds in the business and received no
personal benefit from them. In Dumais, a debt owing by the corporation to the appellant was
never reduced even though an asset was transferred to the appellant shareholder. The Court
noted:
On the contrary, it increased. The appellant undoubtedly received a bene it because the
debt, which remains on the books, can still be repaid to her, without any tax conse
uences, as advances owed to her.
Once again, with respect, these facts do not appear to be distinguishable to the facts in
Franklin— Mr. Franklin's debt owing to him by the corporation was increased when he
reinvested the funds and, in any event, until the audit, the debt remained on the books!
In Dumais, Justice Lamarre relied on Chopp in finding that the appellant was aware, or should
have been aware that a benefit was conferred on the appellant without a corresponding reduction
in the shareholder loan owed to the appellant. In the author's opinion, it is hard to see how this
can be distinguished from Franklin.
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Interestingly, the Federal Court of Appeal (though a different panel than those that decided
Franklin), in affirming Dumais, 27 did not even cite Franklin.
28
More recently, in Dyck v. R., Justice Bowie considered the situation where a taxpayer, on the
advice of his accountant, consolidated his personal investment account with the investment
account of the corporation owned by the taxpayer and his wife, in the hopes of generating better
returns.
The investment advisor actually cautioned against such a move, due to tax concerns, but the
accountant's advice prevailed.
The accountant, approximately three years later, realized that there could be a problem and the
accounts were separated once again in an effort to return things where they were before the
consolidation. The funds had never been accessed by the taxpayer orhis wife during this three
year period.
Justice Bowie considered the Chopp case at paragraph 8 of his reasons:
Choppe xemplifies a class of case that may be described as bookkeeping error cases. In
those cases, generally a bookkeeping entry is made by someone who does not properly
understand the transaction being recorded, with the result that the books of account do
not properly reflect the transaction. Typically, the error results in an increase in the
balance of a shareholder loan account, because the bookkeeper wrongly assumes that that
is what was intended. t is clear that in such cases the shareholder is entitled to have a
correcting journal entry made, restoring the balance of the shareholder loan account to
what it would have been had the erroneous entry never been made.
What is of particular note is Justice Bowie's consideration of Franklin:
10... in Franklin, this ourt held that no shareholder bene it arose where the taxpayer,
again the person that controlled the corporation s a airs, sold an asset owned by the
company and took the proceeds or his own use. Because he did not tell the bookkeeper
about the transaction at all, the decrease in the company s assets was not recorded, nor
was any reduction in the company s debt to the shareholder recorded. The decision of this
Court, affirmed by a majority in the Court of Appeal, seems to proceed on the basis that it
is no benefit to a shareholder to overstate the company's debt to him, so long as the loan
account remains in credit balance. ...[Emphasis Added]
It was an agreed act before the trial judge in that case that the proper entries had been
made to correct the company s books o account, but not until the acts had been brought to
light during the Minister s audit o the company.
Justice Bowie ultimately concluded that:
The Chopp principle, there ore, seems to have been extended to permit the erroneous
overstatements o shareholders credit loan balances to be reversed without adverse tax
29
conse uence at any time, so long as the account has remained in credit balance, even
though the shareholder was responsible or the ailure to record the transaction correctly.
These cases were distinguished by Margeson. in Poushinsky,30 apparently on the basis
that the taxpayer in that case actually made personal use o the unds that had been diverted
to him.
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Interestingly, in the facts of Dyck, it could be argued that the appellant had made no personal use
of the funds in the combined investment account.
However, Justice Bowie distinguished the facts in Dyck from Chopp and Franklin, by noting:
11... This is not a case in which events were either incorrectly recorded, as in Chopp, or
not recorded at all, as in Franklin, until some time later when the books were adjusted to
reflect the real transactions. In this case the Dycks, acting on extraordinarily bad advice,
entered into a transfer to themselves of the assets of the corporation. That was a real
transaction that took place. The [reversal of the] transaction in March was another real
transaction. The taxpayers did not do what they did in in order to properly reflect an
earlier transaction that had been wrongly recorded. Unfortunately taxpayers cannot undo
history, or create it ex post facto, when it turns out that they have made a mistake, except
in a very limited class o cases where the applicable legislation speci ically sanctions it.
When the balance in the corporate account was transferred to the appellants' joint account
the funds became the property of the appellants. That act is not changed by the act that
they did not make any withdrawals from the investment account. They owned it; it was
being put to use or their benefit by Nesbitt Burns; any accretions to the account were or
their benefit had they chosen to do so, they could have withdrawn any or all of the funds
in the account and put them to any purpose they wished.
Once again, and with respect, Mr. Franklin also had use of the funds in the shareholder loan
account and could have used them for any purpose that he wished. Further, is there really any
difference between Mr. Franklin's shareholder loan account and the shared investment account of
the Dyck's and their corporation? In both cases it appears that the taxpayers did not obtain any
actual economic benefit.
In conclusion, while Franklin appears to support a position that a shareholder benefit cannot
arise if the shareholder loan balance remains in a "good" balance, or if the taxpayer receives no
benefit from the funds (e.g. they are reinvested into the company) — other than an increased
shareholder loan balance, it appears clear that the Tax Court is reluctant to even extend the
decision that far as shown in Dyck.
Thankfully, the recent decisions of Justice Tardiff in 9100-2402 Québec Inc. v. The Queen. 3
1and Poulin v. The Queen, 3 2leave us with some hope.
In 9100-2402, an "Opco" paid the professionals fees of its "Holdco" without an inter- company
liability being created. A subsection
15(1) benefit was assessed against Holdco.
Holdco's 100% shareholder, Ms. Cyr, did not have extensive accounting experience. Further, she
was not aware of any issue arising as Opco had a bank account to pay the professional fees —
Holdco did not.
In allowing the appeal, Justice Tardiff noted:
[11] As soon as she noticed the mistake that led to the reassessment, Ms. Cyr did what
was necessary to rectify the situation so that everything would reflect reality, which was
that the amount was not a benefit, but rather, a loan from [Opco] to [Holdco]. The
corrections were made so that the financial statements would reflect exactly what they
should have reflected from the start.
And citing the principles articulated in both Longand Chopp, noted:
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[20] In the case at bar, Ms. Cyr's act had the effect of creating a benefit in the Appellant's
books. Not only was this not her intent, but she was also unaware of the matter, and did
not know enough to understand the import of her decision to impute the expense to the
wrong corporation.
[21] Should she have known? The evidence showed that she clearly did not have the
expertise required to understand the consequences. In fact, the quick acknowledgment
and admission by the accountant tend to confirm that this was a mistake, not an
intentional, self-interested initiative that was subsequently explained away as a banal
error.
[22] While the amount in issue was relatively large, it was not an exceptional amount that
could have or should have compelled Ms. Cyr to question herself and consult the
accountant.
The Justice's final comments are of note:
[26] In my opinion, in order for an assessment under subsection 15(1) of the Act to be
warranted, certain factors must be found to be present, such as wilful blindness, a subtle,
intentional tactic, a skilful attempt, or a self-interested and advantageous initiative that
could ultimately be explained as an error if it were ever discovered. [Emphasis Added]
In Poulin, the taxpayer was the majority shareholder of a company ("9098"). The taxpayer had
transferred assets to another company he owned ("B2C"), resulting in a proper increase in the
shareholder loan owed to him by B2C.
However, due to a bookkeeping error (committed by a third party bookkeeper), the loan owing
by 9098 to the taxpayer was also increased by the same amount (as 9098 also recorded receiving
the asset from the taxpayer).
Justice Tardiff noted that the error was likely due to the negligent record-keeping of the taxpayer
— but further noted that the taxpayer "spontaneously admitted to the mistake and hastened to
correct it".
33
Justice Tardiff further commented, in allowing the appeal:
34
25 In support of their respective positions, the parties re erred to a number of decisions.
Not that these decisions are irrelevant, but I think it is important to note that mere
evidence of a mistake does not automatically result in tax consequences. The mistake
may be intentional or unintentional. It may be a clerical error. Each case must be the
subject of a specific analysis, and so the case law must be considered with some
reservation. [Emphasis Added]
...
35 Contrary to the auditor s interpretation, I am of the view that the explanations given
spontaneously are credible. If the appellant had wanted to disguise the acts or deliberately
hide some of them, obviously he would have behaved differently. [Emphasis Added]
...
37 In a balance of probabilities, the appellant was negligent to some extent with respect
to his responsibility to keep clear accounting records supported by appropriate
documentary evidence.
38 However, he demonstrated his good faith, borne out by irreproachable cooperation.
The burden of proof was on the appellant, and while the evidence was far from perfect, it
supports the conclusion that the explanations given are credible, so much so that it
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appears reasonable to me to find them probable. [Emphasis Added]
Is There a Benefit? — Income Production Purpose
The Tax Court has confirmed that subsection
15(1) will not apply in respect of an expense
incurred by the corporation IF the expense was incurred for the purpose of gaining or producing
income pursuant to paragraph
18(1)(a) .
35
the taxpayer had its lawyers update its Unanimous
For example, in Truckbase Corp. v. R.,
Shareholder Agreements (which had been poorly drafted and had deficiencies and defects).
While CRA assessed a subsection
15(1) benefit, Justice McArthur found that the
Shareholder Agreements were in need of repair and further stated:
[19] I believe the costs incurred for the Shareholder Agreements were for the purpose of
a bona fide business reorganization which facilitated effective management, good
governance and protection for the [corporate group] against any disruption due to the
disability of key employee shareholders. The fees were not personal or living expenses of
[the shareholder] pursuant to paragraph 8(1)(h) of the Act. Since there was no shareholder
benefit conferred on [the shareholder], there is no need to consider whether Truckbase is
automatically disentitled to a corresponding deduction.
More recently, in Bilous v. The Queen, 36 the classic conundrum of subsection
15(1) arose
— the denial of the deduction at the corporate level and the inclusion of the alleged benefit at the
shareholder level.
Mr. Bilous was the principal shareholder of Yorkton Distributors (1976) Ltd. ("Yorkton"), which
was in the business of selling canola seed and farm chemicals.
Yorkton deducted expenses and capital cost allowance for a building and snowmobiles (the
"Snowmobile Museum") which it claimed were used to promote its business.
CRA took the position that the expenses did not meet the test laid out by paragraph
of the Act, and further, assessed Mr. Bilous with a subsection
15(1) benefit.
18(1)(a)
There was no question that Mr. Bilous had a personal interest in, and a long history of,
snowmobiling.
Yorkton had, over the years, purchased a number of historical snowmobiles and had built the
museum to store and showcase them. In addition to being available for viewing at the museum,
the snowmobiles were often displayed at agricultural events where Yorkton was marketing its
products.
As Justice Sheridan commented:
32 In the Yorkton area, winters are long, cold and snowy. Such conditions make for good
snowmobiling and provide farmers with the time to turn their minds to planning next
year's crop. Hoping to capitalize on this happy coincidence, in the winter of 2003,
Yorkton Distributors collaborated with its Bayer products distributor, Mr. Reeves, to use
the Snowmobile Museum as a featured stop on the Big Dog Run trail ride. ...
Justice Sheridan also noted that the snowmobiles and museum were used for marketing events
subsequent to the years under appeal. Further, while it appears that the Justice recognized that
the expenditures did result it additional revenues for the business, she found that there was no
need for there to be a causative relationship between the expense and the receipt of income. 37
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Simply put, as she comments, at paragraph 54, "business decisions are the province of the
business person, not the Canada Revenue Agency".
The Justice ultimately found that the snowmobiles and museum were used as part of Yorkton's
38
promotional strategy,
and therefore, the expenses met the test of paragraph
18(1)(a) of
the Act — i.e. they were incurred to earn income from the business. As such, no subsection
15(1) benefit arose.
What About Double Taxation?
The initial assessment resulting in the Bilous appeal represents what many taxpayers, and
practitioners, view as the application of subsection
15(1) in imposing "double taxation".
The "classic" situation arises when an expense is denied to the corporation (often through the
application of paragraphs 18(1)(a) or (h)) and, at the same time, the value of the expenses is
15(1) .
brought into the income of the taxpayer via subsection
Now, one can argue that the Act is simply placing the taxpayer and the corporation into the
situation that would have arisen if the "benefit" (e.g. the cash for the expense) had been properly
allocated to the shareholder through such "proper" processes as the payment of a salary.
However, while subsection
15(1) brings the "value" into the income of the taxpayer, in the
same fashion as declared salary, a salary expense would normally be deductible to the
corporation.
This distinction was recognized by Justice Rowe in J. Galon v. Minister of National Revenue, 39
who considered whether a forgiveness of a loan should be treated as an employee benefit (which
was deductible to the corporation) or shareholder benefit (which does not allow a deduction),
ultimately finding, at paragraph 7:
Having regard to the evidence, in my view there is nothing which would preclude me
from applying as the appropriate subsection to these matters subsection
6(15) which
deals with forgiveness of a loan to an employee. The one difference is that by so
categorizing this transaction it does not lead to double taxation, which unless there is a
valid reason therefor, should, wherever possible, be avoided.I don't particularly see any
moral turpitude attaching here to the appellants in their attempt to categorize the
transaction, any more than it should be attached to the Minister who from time to time
undertakes a series of reassessments on exactly the same set of acts. That is the very
nature of tax litigation and it is fundamentally one of the reasons for our existence for
those of us who occupy ourselves in this field of endeavour. [Emphasis Added]
Justice Mogan in Chopp, 40 also noted the same issue of double taxation, but found that, in
appropriate circumstances, the result was harsh, but necessary:
12 The relationship between a corporation and those individuals who work in the operation of
the corporation's business is one of employer employee. That employment relationship is, of
course, incidental to and connected with the corporation's business. If a shareholder is also an
employee of the corporation and receives a benefit in his capacity as employee, the value of that
benefit would be taxed under paragraph
6(1)(a) of the Act. 41 A corporation is ordinarily
permitted to deduct as a business expense the cost of a benefit received or enjoyed by an
employee qua employee. A corporation, however, is not permitted to deduct any amount with
respect to a benefit conferred on a shareholder qua shareholder because the corporate shareholder
relationship is not incidental to the corporation's business. A shareholder benefit is more like a
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dividend and less like a business expense. Therefore, a benefit taxed under subsection 15(1) will
usually result in some form of double taxation because the shareholder will be taxed on an
amount which has not been deducted in computing the income of the corporation. In appropriate
circumstances, this will be a harsh but necessary result. [Emphasis Added]
However, as the reader may recall, Justice Mogan noted, at least in respect of bookkeeping
errors, that there had to be some form of responsibility on the part of the shareholder:
17 I cannot accept the Respondent's argument so broadly stated that a bookkeeping error
which benefits a shareholder to the disadvantage of his corporation is a benefit within
subsection 15(1) even if the error was not intended and was not known to the
shareholder. In my opinion, if the value of a benefit is to be included in computing a
shareholder's income under subsection
15(1) , the benefit must be conferred with
the knowledge or consent of the shareholder or alternatively, in circumstances where it is
reasonable to conclude that the shareholder ought to have known that the benefit was
conferred
....
15
22 I would not go as far as Judge Rowe in stating that the words used in subsection
(1) refer to some form of action with a strong component of intent. I think a benefit
may be conferred within the meaning of subsection 15(1) without any intent or actual
knowledge on the part of the shareholder or the corporation if the circumstances are such
that the shareholder or corporation ought to have known that a benefit was conferred and
did nothing to reverse the benefit if it was not intended. I am thinking of relative
amounts. If there is a genuine bookkeeping error with respect to a particular amount, and
that amount is truly significant relative to a corporation's revenue or its expenses or a
balance in the shareholder loan account, a court may conclude that the error should have
been caught by some person among the corporate employees or shareholders or outside
auditors. Shareholders should not be encouraged to see how close they can sail to the
wind under subsection 15(1) and then plead relief on the basis of no proven intent or
knowledge. [Emphasis Added]
As was outlined, above, the subsequent case-law has very much limited the application of
Chopp, and other similar cases, to true bookkeeping errors that fit within the circumstances of
either the taxpayer having no knowledge or no reason for the taxpayer to have any knowledge.
Looking at this from another angle — one of undeclared revenue — Chapter 13 of CRA's Audit
42
Manual states that if a net worth discrepancy is established to be unreported income of the
corporation, the shareholder will be assessed the unreported amount as an appropriation under
subsection
15(1) . The corporation will also be assessed the unreported revenues under
subsection
9(1) .
Further, CRA has stated, in Interpretation 2010-0354691I7 — Shareholders' liability
forcorporate tax, that a shareholder who has been assessed under subsection
15(1) , can
also be assessed under section
160 . CRA relies on the decision in Bleau v. The Queen, 43
where the taxpayer was assessed with subsection
15(1) benefits, but also subsection
15
(2) benefits, as a loan to the shareholder remained unpaid.
In Bleau, Justice Archambault found that at the time of the appropriation and the advance
(transfer) of the loan proceeds, the corporation's corporate tax was unpaid, thereby concluding
that subsection
160(1) was applicable to the amount appropriated and the loan proceeds,
notwithstanding that the same amounts were caught under the provisions of subsections 15(1)
and (2).
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CRA takes the position that double taxation does not arise in such a situation as:
[t]he assessments under subsections 15(1) and (2) involve income inclusion or taxation
purposes, whereas the assessment under subsection is a collection remedy to aid in the
collection o the unpaid corporate tax,
But the effect is still the same.
44
45
The two recent cases of Potvin v. The Queen and JDI 2000 Transport Ltd. v. The Queen,
indicate that the Tax Court is aware of the double taxation issue arising from subsection
15(1)
and, unfortunately, appears to accept it.
In Potvin, the taxpayer was the sole shareholder of the corporation. The corporation made a
vehicle available to the taxpayer's spouse. The main issue in the appeal was whether subsection
15(1) should have been used to assess a benefit against the shareholder — or whether a
paragraph
6(1)(a) benefit should have been assessed against the spouse.
While the case, itself, is not very exciting (the taxpayer lost), the comments of Justice Tardiff
recognizing the risk of double and triple taxation are of note:
22 In theory, there can actually be triple taxation. An assessment under subsection
15
(1)
normally triggers double taxation, in that it imposes an amount that ordinarily
cannot be deducted by the corporation because it was not an expense incurred by the
corporation or the purpose of gaining or producing income, as required by paragraph
18(1)(a)
. Moreover, the Minister could simultaneously assess a taxable benefit
under section
6 , thereby giving rise to triple taxation
....
38 In my opinion, the mere potential or double taxation that is posed by a situation like
this does not constitute a reason or vacating the assessment.
39 It is true that the Minister has a certain discretion, which he must use parsimoniously
and judiciously. In the event of abusive or unreasonable enforcement, a vacation of the
assessment might be the appropriate remedy.
40 In the case at bar, the Appellant was the cause of the assessment that she is contesting.
Indeed, every taxpayer is entitled to organize his or her afairs in such a manner as to
reduce his or her tax burden as much as possible. This is a legitimate, recognized and
accepted practice.
41 According to her own arguments, the Appellant could have and should have made a
choice with respect to the tax treatment of the automobile benefit. he did not make that
choice, and the use of the automobile was not taxed at all, which resulted in the Minister
making the choice in the Appellant's place.
In JDI 2000 Transport, the corporation had deducted personal expenses for its sole shareholder,
and the shareholder's family. These expenses were disallowed to the corporation, and created a
subsection
15(1) benefit to the shareholder.
The corporation did not dispute that the amounts should have been included in the shareholder's
income, but sought a deduction from its own income as to same.
Justice Woods gave the argument short shrift:
13 The avoidance of harsh tax consequences is not a sufficient justification for a
deduction. If the expenditures are appropriations by [the shareholder] in his capacity as a
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shareholder, the legislation does not permit their deduction as they are not laid out or the
purpose of earning income
....
15 A payment made, not in the course of the business, but as an appropriation by a
shareholder is subject to the prohibition [contained in paragraph
18(1)(a)
]. The
fact that the result is harsh is something that is clearly contemplated by the legislation,
presumably to discourage abuse.
16 If the personal expenses had been paid, not as shareholder appropriations, but as
compensation for services rendered, the expenditures could be deducted as business
expenses subject to considerations of reasonableness
....
21 The reasonable inference that should be drawn from the evidence is that [the
shareholder] had no intention of treating these amounts as compensation on which he
would have to pay tax. His intention was to extract these funds for the benefit of himself
and his family without having to pay tax on them. quite simply, he got caught.
Given the above, one is taken to wishing that the comments of Justice Bowman (as he then was)
46
in 378733 Ontario Ltd. v. R., would carry more weight today:
24 There is a departmental mindset, enshrouded in the euphemistic rubric of fiscal
symmetry, that says that if you disallow an expense to a corporation you must
simultaneously find a shareholder on whom to visit a parallel and matching tax
consequence under section
15 of the Income Tax Act. The premise on which this
practice of double taxation is based is evidently some misplaced sense of moral rectitude
that, so the argument goes, justifies the imposition of an additional punishment on the
shareholders or allowing their company to incur disallowable expenses
....
And his further comments:
25 I have some sympathy for the departmental officials trying to make some sense out of
the appellants' fiscal affairs. Their enquiries met with obfuscation, stonewalling,
prevarication, gamesmanship and unresponsiveness. I found parts of Mr. Robson's
evidence unbelievable as I suspect the departmental auditors did as well, and, in
frustration, they threw the book at him. This may explain some of the extreme assessing
actions outlined above. In throwing the book at someone you have to gauge with some
nicety the size and weight of the book to throw. Here the CCRA got a little carried away.
No one, regardless of how exasperating his or her behaviour may appear to the Agency,
should have to pay a penny more tax than the law requires.
Some General Points of Note in Respect of Subsection 15(1)
In addition to the above, the following points should be considered when dealing with
subsection
15(1) .
47
• As a result of comments of Justice Hogan in the Informal Procedure decision in Ustel v. R.,
David Sherman has mused that CRA could possibly deny the dividend tax credit on
dividends that are void (due to the corporation not meeting the solvency test outlined in its
governing legislation), thereby resulting in a higher-tax subsection
15(1) benefit to the
shareholder.
• One should always be mindful of not only the risks of "double taxation", but also the risk of
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tax evasion charges being pursued in matters involving subsection
that the standard of section
239 has been met. 48
15(1)
Page 16 of 26
, if CRA believes
• Subsection
15(7) confirms that subsection
15(1) applies to a resident shareholder
of a non-resident corporation - whether or not the corporation carried on business in Canada.
• Subsection
15(5)
directs that the provisions of subsections
6(1)
,
6(1.1)
,
6(2)
, and (7) apply when calculating the shareholder benefit when an automobile is
made available to a shareholder.
49
• Pursuant to subsection
15(1.3)
and section 173 of the Excise Tax Act,
and if the
corporation is a registrant, the value of the benefit will include the value of any GST that
would have been payable and further, the corporation may be required to include tax deemed
collectible and collected on the total value of the taxable benefit.
Subsection 56(2)
Introduction
56(2)
50
To carry on the theme of "plain language", if one were to summarize the underlying principle of
subsection
56(2) of the Act, it might be as follows:
Don't transfer wealth from a corporation to a third party, without paying tax on it the government
hates that.
Subsection
56(2)
specifically states:
56(2) Indirect payments -- A payment or transfer of property made pursuant to the
direction of, or with the concurrence of, a taxpayer to another person or the benefit of the
taxpayer or as a benefit that the taxpayer desired to have conferred on the other person
other than by an assignment of any portion of a retirement pension under section 65.1 of
the Canada Pension Planor a comparable provision of a provincial pension plan as
defined in section
3 of that Act shall be included in computing the taxpayer's
income to the extent that it would be if the payment or transfer had been made to the
taxpayer.
Simply put, subsection
56(2) imputes to a taxpayer the value of wealth removed from a
corporation at the direction, or concurrence, of the taxpayer to another party. It attempts to
prevent tax avoidance through income splitting. 51
As the Federal Court of Appeal noted in Winter v. Canada(otherwise known as Outerbridge
Estate v. Canada): 52
14 It is generally accepted that the provision of subsection
56(2) is rooted in the
doctrine of "constructive receipt" and was meant to cover principally cases where a
taxpayer seeks to avoid receipt of what in his hands would be income by arranging to
have the amount paid to some other person
The Preconditions Before 56(2) Can Be Applied
The Supreme Court, in Neuman v. Minister of National Revenue,
subsection
56(2) to apply, four preconditions must be met:
53
stated that in order for
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(1) the payment (or transfer of property)
55
taxpayer;
54
Page 17 of 26
must be to a person other than the reassessed
56
(2) the allocation must be at the direction or with the concurrence
of the reassessed
taxpayer;
(3) the payment must be for the benefit of the reassessed taxpayer or for the benefit of
another person whom the reassessed taxpayer wished to benefit; 57 and
(4) the payment would have been included in the reassessed taxpayer's income if it had
been received by him or her. 58
It has been suggested, based on the comments of the Federal Court of Appeal in Winter/
Outerbridge Estate and in Neuman, that there is a "fifth condition". This condition arises if the
reassessed taxpayer had no entitlement to the payment or transferred property (i.e. the doctrine of
constructive receipt is inapplicable). If that is the case, subsection
56(2) will only apply if
the benefit is not taxable in the hands of the recipient (such as in the case of a gift).
Justice Jorr‚, in the decision Delso Restoration Ltd. v. R.,
Outerbridge Estate facts as follows:
59
summarized the Winter /
35 In Outerbridge, Sir Leonard Outerbridge caused a company he controlled to sell
shares to his son-in-law for less than their air market value. The appellant had argued that
the son in law was taxable on the benefit under subsection
15(1) and that the law
was not intended to tax the benefit twice.
36 While the Court of Appeal found the son-in-law was not taxable under subsection
15(1) because the benefit was conferred on the son-in-law in his capacity as a sonin-law, it accepted the principle that if the son-in-law had received this in his capacity as
shareholder then subsection 15(1) would have applied to him and subsection
56(2)
would not have applied to Sir Leonard. The Court of Appeal was satisfied that what had
been conferred was a benefit.
In the Delso decision, the individual taxpayer's had been reassessed on the basis that they had
arranged for a corporation (Delso) to pay for personal expenses, specifically payments to
contractors for work on their home. As they were not direct shareholders of Delso, CRA relied
on subsection
56(2) .
The individual taxpayer's argued, in a preliminary motion, 60 that subsection
56(2) did not
apply as the recipients (i.e. the contractors) were taxable on the payments received. Justice Jorr‚
did not agree with this reasoning noting that in Winter / Outerbridge Estate the recipient and the
beneficiary were the same person.
Justice Jorr‚ summarized the "fifth condition" as follows:
(1)
(2)
(3)
(4)
If the first four conditions are met. AND
The taxpayer has no pre-existing entitlement to the property AND
A benefit is conferred on a person other than the taxpayer AND
The benefit is taxable as a benefit in the hands of the other person then subsection
56
(2) will not apply.Based on this analysis, the individual taxpayers in Delso could not
avoid the application of subsection 56(2), as the contractors while receiving a benefit
(payments from the corporation), were not taxed on those payments as if they were a
benefit — they were taxed as business income.
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As Justice Jorr‚ stated:
[47] ... If a taxpayer buys a gift for his child and pays for the gift with money he
appropriated from a corporation he owns, the taxpayer will be taxable on the appropriated
funds notwithstanding the fact that the supplier of the gift will be taxable on the sale of
the gift to the taxpayer as part of his normal business income.
[48] ... Similarly, under subsection
56(2) the taxpayer who directs a corporation to
buy a gift for his child and send the gift to his child is taxable on the amount spent by the
corporation this liability of the taxpayer is not affected by the act that the supplier of the
gift is taxable on the sale of the gift.
Double Taxation
In Delso, CRA, in addition to adding the benefit to the individual taxpayers, also denied the
15(1)
deduction for the expenses to the corporation (Delso), in the same manner as subsection
61
, discussed above.
This issue of double taxation, in another form, was explored in another decision of Justice Jorr‚ 62
Sochatsky v. R..
Mr. Sochatsky was a shareholder and director of the family company. In 2001, he reported
$3,000,000 of employment income from the company.
In addition to the $3,000,000 paid to Mr. Sochatsky by the family company, a further $700,000
was paid to two companies ("772" and "779") that had been set up by Mr. Sochatsky and which
had invoiced the family company for "management services".
772 and 779 were controlled by Mr. Sochatsky and his wife.
Justice Jorr‚ found that there was no evidence of an agreement between the family company, 772
and 779, nor was there any evidence of services being performed by 772 and 779.
Further, the evidence at trial showed that an original T4 had been issued to Mr. Sochatsky in the
amount of $3,700,000, which was a few months later amended (on the instructions of Mr.
Sochatsky) to $3,000,000, with the further $700,000 being paid to 772 and 779 and recorded as
consulting fees.
Both 772 and 779 declared the combined income of $700,000.
CRA took the position that the $700,000 was taxable to Mr. Sochatsky pursuant to subsection
56(2) . CRA did not reduce the reported income of 772 and 779.
Counsel for the appellant summarized the issue before the Court by focusing on the problem of
double taxation:
... at the end of the day the issue before this Court is simple and straight forward. Was the
Minister correct to have added to the Appellant's income on reassessment an amount that
had been paid to another person, and that person reported the amount as income and paid
tax on that income. Put another way, do all of the circumstances of this appeal warrant
the Minister receiving tax twice on the same income.
Justice Jorr‚ dealt with the issue of double taxation succinctly:
43 With respect to double taxation, there is no general rule against the taxation of the
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same amount in the hands of two different taxpayers. Perhaps the most common example
of this is when profits of a corporation which are taxed in the hands of the corporation are
taxed again in the hands of the shareholder when they are paid out as dividends (subject
of course to the dividend tax credit).
44 In addition, in this case one wonders why 772 and 779 each included $350,000, in
their income. While the assessments of 772 and 779 are not before me, it may well be
that those two companies should not each have included $350,000, in their income.
45 Individuals are ree to plan their affairs. However, the so called "tax planning"... could
not change the character of what already happened ...
Mr. Sochatsky had conceded that the four conditions of subsection
argued that a fifth condition existed.
56(2)
had been met, but
Justice Jorr‚ dismissed that argument, noting:
52 While there has been some debate regarding the fifth element, it is not necessary for
me to review that debate.
53 This requirement was set out by Marceau J.A. in Outerbridge Estate v. Canada:
... It seems to me, however, that when the doctrine of "constructive receipt" is not
clearly involved, because the taxpayer had no entitlement to the payment being made
or the property being transferred, it is fair to infer that subsection
56(2)
may
receive application only if the benefit conferred is not directly taxable in the hands of
the transferee....
54 In this case the appellant did have a pre existing entitlement to the $700,000 and chose
to have half that amount paid to 772 and half that amount paid to 779. Accordingly, to the
extent such a requirement exists, the fifth requirement could not have any application
here.
Unlike the situation in Delso(where a deduction was denied to the corporation in the same
fashion as the interaction between subsection
15(1) and paragraphs
18(1)(a)
and
18(1)(h) ), Sochatsky raises a different "twist" on double taxation.
In Sochatsky, 772 and 779 declared the income and, yet, there is no automatic mechanism to
"reverse" that declaration.
In the case of corporations, presuming that the taxation year has not remained "open" pursuant to
the objection or appeal process, CRA does not even have the jurisdiction to adjust a corporation's
63
64
year that has become statute barred, even if the taxpayer consents.
In the case of individuals, subsection
152(4.2) does grant to the Minister (i.e. CRA) the
discretion to reduce an amount payable under the Act, if an application for same is made within
ten years of the end of the applicable taxation year.
Unfortunately, this is a discretion, and as shown in the Taylor v. Canada, 65 decision, the
Minister is not obligated to exercise that discretion to grant the relief requested.
Ms. Taylor's husband had been found guilty of embezzling $4,000,000 from his employer over a
period of 20 years. The funds were funneled to a corporation wholly owned by Ms. Taylor.
CRA assessed Mr. Taylor, pursuant to subsection
56(2) , for a period of three years.
Interestingly, Ms. Taylor had received all of the pertinent income from her company during that
time in the form of dividends or salary, and had reported same.
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As her husband had been assessed with the income, Ms. Taylor requested, pursuant to
152(4.2)
that the tax she had paid be refunded, as the income that she had
subsection
reported had been "re-assigned" to Mr. Taylor.
CRA refused.
Ms. Taylor sought a judicial review of CRA's decision.
At the judicial review hearing, Ms. Taylor argued that double taxation had arisen.
CRA responded that subsection
56(2)
does not result in double taxation, as double taxation
only occurs if a single payment is taxed twice in the hands of the same taxpayer.
66
The Federal Court found that CRA's decision was reasonable, and dismissed Ms. Taylor's
application for judicial review.
So, where does this leave us? Regrettably, it appears that CRA may be following the process of
"Assess Them All and Let the Court Sort it Out".
This appears to have occurred in the appeals of Singleton v. R. 6 7 and Aniger ConsultingInc. v.
R. 68
Mr. Barry Singleton incorporated a company ("SAEL") which, in turn, retained a corporation
("Aniger") which was wholly owned by Mr. Singleton's wife.
CRA reassessed Mr. Singleton to include in his income the amount of $246,386.00 in respect of
a payment made by SAEL, to Aniger, on the basis that the payment was pursuant to the direction
of, or with the concurrence of, Mr. Singleton.
What is interesting is that the same income was reported by Aniger, which had a current appeal
(which was heard at the same time as Mr. Singleton's appeal) relating to whether Aniger was a
Personal Services Business.
The appeals were heard at the same time and a few days before the actual hearing, counsel for
CRA indicated that it was prepared to remove the subsection
56(2) income from Mr.
Singleton and the appeals proceeded on that basis.
Therefore, until shortly before the hearing dates, both Mr. Singleton and Aniger had been
assessed with the same income.
The reason for CRA's position of assessing multiple parties appears to flow from a concern that
if they only assess one party, and that party successfully disputes the assessment on the basis, for
example, that the income belongs to another party, CRA may be statute barred from assessing
the "other party".
What is not clear is whether CRA is, in fact, prohibited from assessing two different taxpayers
for the same income as a result of subsection
56(2) .
In Winter / Outerbridge Estate, the following comments were made, at paragraph 14, in respect
of subsection
56(2) :
... It seems to me, however, that when the doctrine of "constructive receipt" is not clearly
involved, because the taxpayer had no entitlement to the payment being made or the
property being transferred, it is fair to infer that subsection 56(2) may receive application
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only if the benefit conferred is not directly taxable in the hands of the transferee. Indeed,
as I see it, a tax-avoidance provision is subsidiary in nature; it exists to prevent the
avoidance of a tax payable on a particular transaction, not simply to double the tax
normally due nor to give the taxing authorities an administrative discretion to choose
between two possible taxpayers. [Emphasis Added]
Subsequently, in Ascot Enterprises v. R.,
69
the Court made the following comment:
70
15 In the case at bar, assuming at this stage that the applicant had the required "desire", there
would have been a transfer of property made by Ascot pursuant to the direction of the
applicant—the "taxpayer" to the applicant's father as a benefit that the applicant desired to have
conferred on his father. Had the transfer been made to the applicant himself rather than to his
father, it would have been included in computing the applicant's income by reason of the
15(1) . It is precisely because subsection 15(1) does not
deeming provision of subsection
apply that subsection 56(2) would come into play. This, it seems to me, would be a classic
application of subsection
56(2) .
16 I do not agree with counsel that to apply subsection 56(2) would lead to double
taxation. Double taxation exists where a single payment is taxed twice in the hands of the
same taxpayer. ... Here, the benefit would be taxed once in the hands of Ascot pursuant to
69(1)(b)(i) and once in the hands of the applicant pursuant to
subparagraph
subsection
56(2)
. It could also lead further down the line to another form of
taxation, this time in the hands of the father: when disposing of the property the father,
not having been taxed, would not be entitled to rely on subsection
52(1) of the Act
for a consequential increase of his cost base for purposes of computing his future capital
gain. But the fact that a single transaction generates income tax under different provisions
in the hands of more than one taxpayer does not constitute double taxation. ... [Emphasis
Added]
17 The fact that the application of subsection
56(2) may lead to harsh consequences
is an additional reason for the Court, when it assesses the evidence in a case where the
motive is not obvious, not to infer too hastily that a taxpayer had evinced a desire such as
71
to attract the application of the provision.
Given the above comments, and the recent decisions in Delso and Sochatsky, it appears that the
courts are willing to accept situations of "double taxation".
1
The author owes much thanks to other excellent papers on the topic, including: Brian Mitchell, "The "Dark Path":
Subsection
15(1)
of the Income Tax Act" (2012) 5 Tax Times; Elizabeth Junkin, "Section 15 Shareholder Benefits Update," 2009 British Columbia Tax Conference, (Vancouver: Canadian Tax Foundation,
2009), 12:1-18; Lisa Heddema, "Section 15 Shareholder Benefits: A Review and Update," 2004 British
Columbia Tax Conference, (Vancouver: Canadian Tax Foundation, 2004), 12:1-32; Lisa Heddema and Joyce
Lee, "Shareholder and Employee Benefit and Deductions: Selected Issues," 2006 British Columbia Tax
Conference, (Vancouver: Canadian Tax Foundation, 2006), 15:1-48; and, as well as the excellent commentary
of David Sherman and McCarthy Tetreault in the Canada Tax Service (Toronto, Ont: Taxnet Pro, 2012).
2
RSC 1985, c. 1 (5th Supp.), as amended (herein referred to as "the Act"). Unless otherwise stated, statutory
references in this paper are to the Act.
3
Section 88 relates to the winding-up of a Canadian corporation or dissolution of a controlled foreign affiliate.
4
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Please note that subsection
15(1.1)
will apply if one of the purposes of the stock dividend payment is to
significantly alter the value of the interest in the corporation of any specified shareholder of the corporation,
unless the amount of the dividend has been included under paragraph
82(1)(a)
in computing the income
of the person who received the stock dividend.
5
The rest of the paragraph clarifies identical property and identical rights.
6
Which relates to an insurance corporation, bank or other corporation converting contributed surplus into paid-up
capital.
7
CRA normally includes it in the applicable "taxation year" of the shareholder.
8
64 D.T.C. 5184.
9
It is interesting to note that the main purpose of subsection
15(1)
has not changed since the Pillsbury
decision, where the subsection [then subsection
8(1)
] stated: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 business
transaction,(b) funds or property of a corporation have been appropriated in any manner whatsoever to, or for
the benefit of, a shareholder, or(c) a benefit or advantage has been conferred on a shareholder 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.
10
2003 FCA 329.
11
CRA states, in Interpretation 2001-0101867 -- Shareholder—loans and 15(1) that, "A benefit under subsection
15(1) , while not specifically defined in the Act, would include just about any payment, appropriation of
property or advantage conferred on the shareholder by the corporation."
12
2011 FCA 234.
13
[1997] 2 S.C.R. 336.
14
95 D.T.C. 527 (T.C.C.); aff'd 98 D.T.C. 6014 (F.C.A.).
15
98 D.T.C. 1420 (T.C.C.- Informal Procedure).
16
2006 TCC 344.
17
2000 D.T.C. 6176 (F.C.T.D.).
18
The paragraph of the subsection, at that time stated, "a benefit or advantage has been conferred on a shareholder
by a corporation". The present subsection
15(1)
still uses the term "conferred".
19
Cano v. R., [1998] 2 C.T.C. 2344 (T.C.C.).
20
Poushinsky v. R., 2005 TCC 463 — Informal Procedure.
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Subsections 15(1) and 56(2) of the Income Tax Act —The Risks of Double Taxation
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21
Tymchuk v. R., 2003 TCC 699 — Informal Procedure.
22
2000 D.T.C. 2455 (T.C.C.); aff'd 2002 FCA 38.
23
Justice Beaubier did not specify which cases he was referring to, but they likely included Chopp and Long.
24
As a lawyer, the author appears to suffer from a genetic inability to understand when one should use the term
"credit" or "debit". As such, he normally uses the term "good" balance for the situation whether the corporation
is indebted to the shareholder and "bad" balance when the shareholder is indebted to the corporation.
25
2009 TCC 456.
26
2007 TCC 297; aff'd 2008 FCA 174.
27
2008 FCA 174.
28
2007 TCC 458.
29
i.e. a "good" balance
30
See above
31
2006 TCC 302 — Informal Procedure.
32
2010 TCC 313.
33 9100-2402and Poulinraise the possibility that it may be prudent for a taxpayer to correct "errors" during the
audit in an effort to avoid subsection
15(1) . See, as well, the comments of Justice Little in Burrows v. R.,
2006 TCC 463 (Informal Procedure), at paragraph 19.
34
These decisions are not cited by the Court.
35
2006 TCC 215 — Informal Procedure
36
2011 TCC 154
37
Citing paragraph 57 of the Supreme Court decision in Symes, [1993] 4 S.C.R. 695
38
Relying on the decisions in Matt Harris & Son Ltd. v. The Queen, 2000 CanLII 475 (TCC) and Ross v. The Queen,
2005 TCC 286, where in both cases the Tax Court allowed promotion expenses even though the owner had a
personal interest in the promotional activity.
39
[1995] 2 C.T.C. 2521 — Informal Procedure
40
95 D.T.C. 527 (T.C.C.); aff'd 98 D.T.C. 6014 (F.C.A.).
41
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Subsections 15(1) and 56(2) of the Income Tax Act —The Risks of Double Taxation
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See paragraph 1 of
IT-432R2
. See, as well, the recent decision of McIntosh v. R., 2011 TCC 579 (IP),
where Justice Woods found that after-business-hours meals consumed by the shareholders (who were also the
only employees), and paid for by the corporation, were not payments to benefit the shareholders qua
shareholders. Rather, the Court found that the expenditures were incurred in order to benefit the business in the
same manner that any corporation agrees to reimburse arm's length employees for meals consumed while
working overtime. The case supports smaller-sized businesses that may not fit within CRA Interpretation 20050115691E5 -- Shareholder vs. employee benefits, which states "that when an equivalent benefit is extended to
all employees, including employees who are shareholders, the benefit provided to the employee/shareholder is
normally considered an employment benefit rather than a shareholder benefit."
42
13.4.44 -- Reason for Discrepancy in Net Worth
43
2006 TCC 36; aff'd 2007 FCA 61.
44
2008 TCC 319 — Informal Procedure.
45
2010 TCC 310
46
[2002] 1 C.T.C. 2275
47
2010 TCC 444 — Informal Procedure.
48
See, for example, R. v. Goett, 2010 ABQB 100 and R. v. Alberta Hot Oil Services Ltd., 2006 ABPC 45; aff'd 2007
ABQB 155.
49
RSC 1985, c. E-15, as amended.
50
The author owes much thanks to other excellent papers on the topic, including: Colin Smith and Brent
Pidborochynski, "Indirect Shareholder Benefits: Subsections 56(2) and 246(1)," 2009 Ontario Tax Conference,
(Toronto: Canadian Tax Foundation, 2009), 10:1-21; and, as well as the excellent commentary of David
Sherman and McCarthy Tetreault in the Canada Tax Service (Toronto, Ont: Taxnet Pro, 2012).
51
See Neuman v. Minister of National Revenue,[1998] 1 S.C.R. 770, at paragraph 35.
52
[1991] 1 F.C. 585.
53
[1998] 1 S.C.R. 770.
54
The recent decisions in Guilbault v. R., 2011 TCC 394 and 507582 B.C. Ltd. v. R., 2008 TCC 220, confirm that
there must be a full and complete transfer of the property for subsection
56(2) to apply.
55
CRA acknowledges, in
IT-335R2
, at paragraph 2, that subsection
56(2)
would not apply to a bona
fide loan as such a loan does not constitute a payment of transfer of property. If the loan is forgiven, the
subsection may apply. Further, CRA acknowledges, at Chapter 24 of its Audit Manual, that in order for
subsection
56(2) to apply, there must be a payment or transfer. The simple use of corporate property
(unlike in the case of subsection
15(1) ) does not result in the application of subsection
56(2)
.
56
In the case of Hasiuk v. R., 2007 TCC 724; aff'd 2008 FCA 294, the Tax Court found that a sole shareholder and
director of a corporation could not "escape the contention that he directed or concurred in the transfer" when his
corporation transferred funds to a corporation owned by his son.
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57
The Federal Court of Appeal, in Ascot Enterprises v. R., [1996] 1 C.T.C. 384 found that the use of the term
"desire" meant that subsection
56(2) , "will not be applicable where there exists no intention by the
taxpayer to avoid receipt of funds in his hands by arranging payments to be made without adequate
consideration to third persons."
58
In Neuman, the Supreme Court found that dividend income cannot meet this fourth test on the basis of entitlement.
If the dividend is not paid to the "other" party (being a shareholder of one class of shares), it remains with the
corporation — no other shareholder (i.e. the reassessed taxpayer) has a right to it or would receive it. Arguably,
outside the area of dividends, all that is required is that the amount would have been included in the taxpayer's
income if he had received it directly — see Lambert v. R., 2004 FCA 389, at paragraph 18.
59
2011 TCC 435.
60
Pursuant to Rule 58 of the Tax Court of Canada Rules (General Procedure), the individual taxpayers sought a
56(2) would apply even if the factual basis for CRA's assessment position
ruling as to whether subsection
was ultimately found to be correct.
61
The assessment against Delso never proceeded to trial.
62
2011 TCC 41
63 Canadian Marconi Co. v. Canada, [1991] 2 C.T.C. 352 (F.C.A).
64
As such, if a corporate taxpayer becomes aware that income reported by it may be "doubled" to another taxpayer,
152(4)
. While the
it may be prudent for the corporate taxpayer to file a waiver pursuant to subsection
taxpayer will not have the right to dispute the income reported, it does provide CRA with the ability (but not the
obligation) to reduce the reported income of the corporation.
65
2008 FC 1317.
66
Paragraph
248(28)(a)
attempts to prohibit this from occurring, but is limited to a specific taxpayer being
taxed twice on the same income, unless otherwise provided for by the Act. It states:(28) Limitation respecting
inclusions, deductions and tax credits -- Unless a contrary intention is evident, no provision of this Act shall
be read or construed(a) to require the inclusion or permit the deduction, either directly or indirectly, in
computing a taxpayer's income, taxable income or taxable income earned in Canada, for a taxation year or in
computing a taxpayer's income or loss for a taxation year from a particular source or from sources in a
particular place, of any amount to the extent that the amount has already been directly or indirectly included or
deducted, as the case may be, in computing such income, taxable income, taxable income earned in Canada or
loss, for the year or any preceding taxation year;
67
2010 TCC 638.
68
2010 TCC 637.
69
[1996] 1 C.T.C. 384
70
Which involved the transfer of property from the taxpayer's corporation (Ascot), to his father, at an amount less
than fair market value. The taxpayer was assessed the difference between the sale proceeds and the fair market
value, pursuant to subsection
56(2)
.
71
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As the evidence was that the taxpayer genuinely believed that he had sold the property at fair market value, there
56(2)
to apply as the requisite "desire" did not exist.
was no basis for subsection
Author Information:
Paul Grower, Fillmore Riley LLP, Winnipeg
Bibliography Information:
Paul Grower, "Subsections 15(1) and 56(2) of the
Income Tax Act—The Risks of Double Taxation,"
2012 Prairie Provinces Tax Conference, (Toronto:
Canadian Tax Foundation, 2012), 10: 1-34.
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