A-123-86
The Queen (Appellant)
v.
Jim A. McClurg (Respondent)
INDEXED AS: CANADA V. MCCLURG
Court of Appeal, Heald, Urie and Desjardins
JJ.—Regina, October 26; Ottawa, December 22,
1987.
Income tax — Corporations — Appeal from trial judgment
holding dividends received by respondent's wife not attribut
able to respondent pursuant to Income Tax Act, s. 56(2) —
Respondent, as director of corporation, declaring dividends
payable on class of shares held by wife — No dividends paid
on two other classes of shares held by directors — S. 56(2) not
applicable to corporate situation.
Corporations — Dividends paid on class of shares held by
director's wife — Whether attribution of dividends to director
pursuant to Income Tax Act, s. 56(2) — S. 56(2) not appli
cable to corporate situations.
This is an appeal from the trial judgment holding that
dividends received by the respondent's wife were not attribut
able to the respondent pursuant to subsection 56(2) of the
Income Tax Act. Subsection 56(2) provides that a payment
made pursuant to the direction of a taxpayer to some other
person for the benefit of the taxpayer shall be included in
computing the taxpayer's income to the extent that it would be
if the payment had been made to him.
The respondent, as one of two directors of a company, voted
a distribution of dividends to the class of shares held by his
wife. No dividends were declared on the other two classes of
shares (held by the two directors). The issue was whether the
Trial Judge erred in concluding that the dividends declared
should not have been attributed equally to all of the common
shares of the company.
Held (Desjardins J. dissenting), the appeal should be
dismissed.
Per Urie J. (Heald J. concurring): Subsection 56(2) does not
apply to the acts of a director when he participates in the
declaration of a corporate dividend. It would require much
more explicit language than that found in subsection 56(2) to
justify the notion that a director, acting as such, could be seen
as directing a corporation to divert a payment for his own
benefit, or the benefit of another, absent bad faith, breach of
fiduciary duty or acting beyond the powers conferred by the
share structure of the corporation. Furthermore, the subsection,
if it were to apply to corporate situations, does not distinguish
between arm's length and non-arm's length transfers. Literally
construed, all directors of corporations, among whose share
holders may be relatives, would risk having dividends declared
by them and paid to such shareholders, attributed to them for
tax purposes. Acceptance of such an absurd construction would
surely inhibit directors from the declaration of dividends at all.
Per Desjardins J. (dissenting): At common law, there is a
presumption of equality of distribution of dividends amongst all
classes of shareholders. This presumption may be rebutted
where a contrary intention appears, i.e., when a company
divides its share capital into different classes with different
rights. The share structure in this case does not reverse the
common law presumption. The shareholders in each class were
equal in that they had the right to receive dividends to the
exclusion of other classes. No mathematical formula was pro
vided in the event of a distribution. Instead, the directors had
full discretion over the allocation if they declared dividends.
Such a discretion was insufficient to rebut the common law rule
of equality of distribution. The monies paid should have been
distributed equally between all the shareholders. Part of the
dividends paid to the repsondent's wife should have been
included in his income. He avoided receipt of funds that would
otherwise have come to him as a Class A shareholder. The
payment was not compensation for work done by the
respondent's wife. There is no relationship in company law
between the work and services a shareholder brings to a
company and the entitlement to a dividend. Dividends are a
return on investment and not on account of work done.
There was no basis for the concern that subsection 56(2), if
interpreted too widely, would apply to every declaration of
dividends. Generally, the amount of the dividend is governed by
a mathematical formula, specific enough to derogate from the
common law rule of equality of distribution.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Income Tax Act, S.C. 1970-71-72, c. 63, s. 56(2).
CASES JUDICIALLY CONSIDERED
DISTINGUISHED:
G. A. Murphy v. M.N.R. (1980), 80 DTC 6314; [1980]
CTC 386 (F.C.T.D.).
REFERRED TO:
W. Champ v. The Queen (1983), 83 DTC 5029
(F.C.T.D.); Stubart Investments Ltd. v. The Queen,
[1984] 1 S.C.R. 536; R. v. Parsons, [1984] 2 F.C. 909
(C.A.); Miller, Alex v. Minister of National Revenue,
[1962] Ex.C.R. 400; 62 DTC 1139; International Power
Co. v. McMaster University, [1946] S.C.R. 179; Ron-
deau c. Poirier, [1980] C.A. 35 (Que.).
AUTHORS CITED
Gower, L. C. B. Gower's Principles of Modern Company
Law, 4th ed. London: Stevens & Sons Ltd., 1979.
Mitchell, Victor E. A Treatise on the Law Relating to
Canadian Commercial Corporations (1916), Montréal:
Southern Press Limited.
Schmitthoff, Clive M. Palmer's Company Law, vol. 1,
23rd ed. London: Stevens & Sons Ltd., 1982.
Wegenast, F. W. The Law of Canadian Companies,
Toronto: The Carswell Company Limited, 1979.
COUNSEL:
Johannes A. Van Iperen, Q. C. and O. Brent
Paris for appellant.
Gordon Balon for respondent.
SOLICITORS:
Deputy Attorney General of Canada for
appellant.
Gordon Balon Law Office, Prince Albert, Sas-
katchewan, for respondent.
The following are the reasons for judgment
rendered in English by
URIE J.: In this appeal from a judgment of the
Trial Division [(1986), 86 DTC 6128; (1986), 2
F.T.R. 1] rendered by Strayer J. in which he
allowed the appeal of the respondent from reas
sessments for income tax made by the appellant
for the respondent's 1978, 1979 and 1980 taxation
years. I have had the advantage of reading a draft
copy of the reasons for judgment of Desjardins J.
with which I respectfully disagree.
The facts as found by the learned Trial Judge
are not in dispute but due to their importance for a
proper appreciation of the case, it would be con
venient to set forth hereunder the complete text
thereof:'
The plaintiff is president and general manager, as well as
being a director, of Northland Trucks (1978) Ltd. which
carries on business in Prince Albert, Saskatchewan as a dealer
in IHC trucks. The company was established in 1978 and the
business purchased at that time. The Articles of Incorporation
provide for three categories of shares: Class A which are
common, voting, and participating shares; Class B which are
common, non-voting, and participating where so authorized by
' at pp. 6129-6130 DTC; 2-4 F.T.R.
unanimous consent of the directors; and Class C which are
preferred, non-voting shares. According to the Articles, each of
these categories of shares carries "the distinction and right to
receive dividends exclusive of the other classes of shares".
The following shares were issued in the company at a paid
price of $1 per share
Class A Class B Class C
NAME Common Common Preferred
Jim McClurg 400 — 37,500
Veryle Ellis 400 — 37,500
Wilma McClurg
(wife of Jim
McClurg) — 100
Suzanne Ellis
(wife of Veryle
Ellis) — 100 —
(Veryle Ellis was the other principal owner of the company and
major participant in the business as sales manager and service
manager.)
Messrs. McClurg and Ellis as holders of the only voting
shares were at all material times the only directors of the
company. In 1978, 1979, and 1980 they voted a distribution of
dividend as follows:
1978 1979 1980
Jim McClurg — —
Veryle Ellis — —
Wilma McClurg $10,000 $10,000 $10,000
Suzanne Ellis $10,000 $10,000 $10,000
While it will be noted that no dividends were paid on either the
Class A or Class C shares—the only ones owned by the two
directors—they earned substantial amounts in salaries, paid
bonuses, and bonus entitlements, totalling in the case of the
taxpayer $33,968 in 1978, $65,292 in 1979, and $57,900 in
1980. As the owners of the Class A shares, the only participat
ing shares as of right, the two directors would also be entitled to
share in the accumulated profits of the company. According to
the financial statements of the company, its retained earnings
as of October 31, 1980 were $312,611, and as of October 31,
1981 were $421,481.
In the formation and financing of this company and business,
the plaintiffs wife took an active part. For the plaintiffs initial
investment of $37,500 preferred shares, the plaintiff borrowed
this amount from the Toronto-Dominion Bank by a note
co-signed by his wife and his father-in-law. His father-in-law
provided further security in the form of a term deposit certifi
cate in the amount of $40,000. The purchase of the business
was partly financed by a loan from the vendor in the amount of
$50,000, security for which was provided by the two directors.
For his part, the taxpayer and his wife provided security in the
amount of $25,000 by putting a second mortgage on their
jointly-owned home. The plaintiff's wife also co-signed with
him a personal guarantee to the International Harvester Com
pany, the supplier of Northland Trucks (1978) Ltd., with
respect to a debenture given by Northland Trucks (1978) Ltd.
to IHC covering future indebtedness to IHC of up to $500,000.
Further, the plaintiff's wife co-signed another personal guaran
tee to the Toronto-Dominion Bank with respect to the line of
credit to be made available by the bank to Northland Trucks
(1978) Ltd. The evidence advanced before me indicated that at
that time the plaintiff's wife had personal assets of from
$15,000 to $20,000, so that these guarantees were not empty
gestures.
Of the $30,000 dividends paid to the plaintiff's wife during
the three years in question, $20,000 was reinvested by her in
M.E. Investments Corporation, a company with a structure and
control similar to that of Northland Trucks (1978) Ltd. involv
ing the same shareholders and directors. M.E. Investments
Corporation acquired land to which the business of Northland
Trucks (1978) Ltd. was moved. For acquiring this land a first
mortgage was assumed of which the plaintiff's wife was also a
guarantor personally.
According to the plaintiff's wife, she used the remainder of
her dividends from Northland Trucks (1978) Ltd. for personal
purposes.
The plaintiff's wife worked in the business from time to time
during the three years in question. The nature and extent of
this work varied. Although her participation was only part-time
and somewhat sporadic depending on need, the evidence satis
fied me that it was significant notwithstanding that she had
young children to care for during this period.
By notices of reassessment dated January 14, 1982 the
Minister of National Revenue reassessed the plaintiff's income
for 1978, 1979, and 1980, on the basis that in each year $8,000
of the $10,000 in dividends attributed to the plaintiff's wife as
dividends on her Class B shares should be attributed to the
plaintiff instead. This allocation of the $10,000 was made on
the basis of the number of Class A shares (400) owned by the
plaintiff in relation to the number of Class B shares (100)
owned by his wife. That is, the Minister takes the position that
the dividends declared in each of these years should be attribut
ed equally to all of the common shares, no matter of what class.
At the hearing, he relied principally on subsection 56(2) of the
Income Tax Act which provides as follows:
56 (2) A payment or transfer of property made pursuant to
the direction of, or with the concurrence of, a taxpayer to
some other person for the benefit of the taxpayer or as a
benefit that the taxpayer desired to have conferred on the
other person 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 him.
The learned Trial Judge reached the conclusion
that in the circumstances of this case the dividends
received by the respondent's wife were not proper
ly attributable to the respondent pursuant to sub
section 56(2) of the Income Tax Act [S.C. 1970-
71-72, c. 63] and allowed the respondent's appeal
from the reassessments for the taxation years in
issue.
The sole issue in the appeal is whether or not the
Trial Judge erred in concluding that the dividends
declared in each of the 1978, 1979 and 1980
taxation years should not have been attributed
equally to all of the common shares of the com
pany, no matter what class, pursuant to subsection
56(2).
The basis upon which counsel for the appellant
argued the appeal was two-fold. First, he said,
subsection 56(2) operates to tax the income
received by Mrs. McClurg by way of dividends
declared on the Class B shares of the company, in
the hands of her husband, the respondent, because
of the share structure of the company and because
of his powers as a director. To support this submis
sion he relied upon G. A. Murphy v. M.N.R. 2 and
W. Champ v. The Queen.' The latter case, in his
view, was indistinguishable from this case on the
facts.
Secondly, in the alternative, it was counsel's
submission that discretionary dividends (which
dividends on Class B shares were, he said) are
illegal because, in law, all shareholders are entitled
to dividends equally, pro rata, once they have been
declared.
Subsection 56(2) reads as follows:
56....
(2) A payment or transfer of property made pursuant to the
direction of, or with the concurrence of, a taxpayer to some
other person for the benefit of the taxpayer or as a benefit that
the taxpayer desired to have conferred on the other person 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
him.
2 (1980), 80 DTC 6314; [1980] CTC 386 (F.C.T.D.).
3 (1983), 83 DTC 5029 (F.C.T.D.).
Before dealing with the principal and alternative
submissions of appellant's counsel, I perceive a
preliminary problem which arises from my basic
difficulty in appreciating how subsection 56(2) can
apply in the context of a corporate situation. While
the applicability of the subsection was not raised
by counsel for the respondent, the Court alluded to
it during the presentations of each counsel, ques
tioned them and received responses from each.
I start from the premise that it would indeed be
unusual for an individual to declare a dividend
payable to others, in the sense that a corporation
can on the proportion of ownership of the company
to which each share entitles a holder. A corpora
tion provides to its shareholders by way of divi
dends, such portion of its earnings as its directors
deem advisable. This is one of the benefits accru
ing from ownership of shares of a corporation.
That is accomplished by the directors, as the
directing minds of the corporation, passing resolu
tions from time to time, declaring dividends within
the restrictions imposed by law and its articles of
incorporation. Those directors do so in their capac
ities as directors not in their personal capacities no
matter how closely held or widely held the corpo
ration's shares may be. That being so, I have
difficulty in understanding how it can be said that
"a taxpayer", when acting as a director of a
company satisfies any of the conditions precedent
for the application of subsection 56(2). In G. A.
Murphy v. M.N.R., 4 Cattanach J. identified the
elements required to be present for the subsection
to apply, in the following way:
To fall within subsection 56(2) each essential ingredient to
taxability in the hands of the taxpayer therein specified must be
present.
Those four ingredients are:
(1) that there must be a payment or transfer of property to a
person other than the taxpayer;
(2) that the payment or transfer is pursuant to the direction
of or with the concurrence of the taxpayer;
(3) that the payment or transfer be for the taxpayer's own
benefit or for the benefit of some other person on whom the
taxpayer wished to have the benefit conferred, and
(4) that the payment or transfer would have been included in
computing the taxpayer's income if it had been received by him
instead of the other person.
4 (1980), 80 DTC 6314 (F.C.T.D.), at pp. 6317-6318.
At page 6318 of the report, Justice Cattanach
set forth what was, in his view, the purpose for
which the subsection was enacted:
As I appreciate this difference in language between the two
subsections it follows from the purpose to be accomplished by
each. Subsection 56(2) is to impute receipt of income to the
taxpayer that was diverted at his instance to someone else. It is
to cover cases where the taxpayer seeks to avoid the receipt of
what in his hands would be income by arranging to transfer
that amount to some other person he wishes to benefit or for his
own benefit in doing so. Apart from any moral satisfaction the
practical benefit to the taxpayer is the reduction in his income
tax.
The language of the subsection creating the
essential ingredients required in its application,
viewed in light of its purpose, is simply not apt, in
my opinion, to encompass the acts of a director
when he participates in the declaration of a corpo
rate dividend unless it is read in its most literal
sense. To do so ignores the existence of the corpo
rate entity. Only the most explicit language, which
is not present in subsection 56(2), would justify the
notion that a director acting as such could be seen
as directing a corporation to divert a transfer or
payment for his own benefit or the benefit of
another person, absent bad faith, breach of fiduci
ary duty or acting beyond the powers conferred by
the share structure of the corporation, none of
which bases have been alleged here.
It is noteworthy, furthermore, that the subsec
tion, if it is to apply to corporate situations, makes
no distinction between arms length and non-arms
length transfers. Literally construed, then, all
directors, whether of large or small public or pri
vate corporations among whose shareholders may
be relatives, would risk having dividends declared
by them and paid to such shareholders, attributed
to them for tax purposes.
In fact, as observed by Strayer J., a strict, literal
construction of the subsection would inhibit direc
tors from declaring dividends at all, no matter the
relationship of any of the shareholders to them,
because of the possibility of the attribution thereof
to them.
Such a construction is, of course, absurd but if
the appellant's application of the subsection in
cases such as the one at bar is to be accepted
where is the line to be drawn? To find where it is
to be drawn is it either proper or practical in each
factual situation to examine all extraneous circum
stances? For example, would it be necessary to
ascertain the individual relationship of the direc
tors to any of the shareholders for the closeness of
that relationship? Is the wideness of the distribu
tion of shares an element? Is the fact that a
company is a public one and not a private one a
relevant fact?
Posing the questions appears to demonstrate
cogently, it seems to me, that the subsection was
never intended to permit the attribution of corpo
rate dividends to the directors participating in the
declaration thereof. Consistency and uniformity in
applying it would lead to absurd results. If it had
been intended by the legislators that it might apply
to directors of small, closely held family corpora
tions only, apt language could have been employed
to achieve the desired result. But to utilize the
general language of subsection 56(2) to achieve
the result desired by the taxing authorities, as
exemplified in this case, is not, in my view, justifi
able. Undoubtedly, other provisions in the Income
Tax Act may be employed to prevent improper
income splitting without recourse to this subsec
tion which patently does not apply.
I would, accordingly, dismiss the appeal for
those reasons.
It is unnecessary for me, then, to discuss in any
detail the attacks of the appellant on the impugned
judgment. Suffice it to say that I agree substan
tially with the reasons and conclusions of the
learned Trial Judge and, in particular, in his dis
tinguishing previous cases in the manner in which
he did.
In leaving the matter, I should observe I find it
incongruous or ironic that in both of his attacks on
the judgment, counsel for the appellant relied
heavily on corporate law principles for support
while, at the same time ignored the existence of
the corporation in the application of subsection
56(2) as the basis for the reassessments at issue. In
doing so he obviously overlooked the statements of
principle in Stubart Investments Ltd. v. The
Queen, 5 as applied in this Court in such cases as
R. v. Parsons, 6 to which Strayer J. referred in his
reasons.
I would dismiss the appeal with costs.
HEALD J.: I agree.
* * *
The following are the reasons for judgment
rendered in English by
DESJARDINS J. (dissenting): This is an appeal
by Her Majesty the Queen from a judgment of the
Honourable Mr. Justice Barry L. Strayer rendered
on February 20, 1986, allowing the appeal of the
respondent from reassessments raised by the Min
ister of National Revenue with respect to the
respondent's 1978, 1979 and 1980 taxation years.
The findings of fact made by the Trial Judge are
not in dispute. They are set forth in the reasons for
judgment by Urie J. They can also be found in the
Trial Judge's decision reported at (1986), 86 DTC
6128; (1986), 2 F.T.R. 1.
The sole issue for determination, both before the
Trial Division, and before this Court, is whether
the respondent was, pursuant to the provisions of
subsection 56(2) of the Income Tax Act, R.S.C.
1952, c. 148 as amended by section 1 of S.C.
1970-71-72, c. 63, under an obligation to include
in the computation of his income the amount of
eight thousand dollars ($8,000) of the total
amount of ten thousand dollars ($10,000) paid by
Northland Trucks (1978) Ltd. to his spouse in
each of the taxation years 1978, 1979 and 1980.
The Articles of Incorporation give the respon
dent, as director, complete discretion to decide
whether a dividend should be declared and if so,
which of the holders of Class A, B or C shares
would receive the dividend. In fact, the classes of
5 [1984] 1 S.C.R. 536, in particular, at pp. 570 and 571.
6 [1984] 2 F.C. 909 (C.A.).
shares contained the following description with
respect to dividends:
CLASS A
(i) Common, voting and shall be participat
ing shares carrying the distinction and right to
receive dividends exclusive of the other classes
of shares in the said corporation.
CLASS B
(i) Common, non-voting and shall be par
ticipating shares where authorized to be par
ticipating shares by unanimous consent of the
Directors and the said shares shall carry the
distinction and right to receive dividends exclu
sive of other classes of shares in the said
corporation.
CLASS C
(i) Preferred, non-voting shares which carry
the distinction and right to receive dividends
exclusive of other classes of shares in the said
corporation, if the said dividends are authorized
by unanimous resolution of the directors ... .
As will be noted, there are some slight variations
in the drafting with regard to dividends. Class A
makes no reference to the unanimous consent of
the directors with regard to the distinction and
right to receive dividends. Class B refers to the
unanimous consent of the directors but only with
regard to the participating shares and not with
regard to dividends. Class C makes reference to
the unanimous resolution of the directors with
regard to the distinction and right to receive divi
dends. These variations are however not pertinent
to the issue since, at all relevant times, two direc
tors were in office.
What is contended by the appellant is that by
exercising a discretion in the attribution of the
dividends to either of the classes of shares, the
respondent met the four essential criteria that have
to be satisfied before subsection 56(2) establishes
tax liability in the hands of the taxpayer. In G. A.
Murphy v. M.N.R. (supra), Mr. Justice Cattanach
listed these criteria in the following manner [at
pages 389-390]:
(1) that there must be a payment or transfer of property to a
person other than the taxpayer;
(2) that the payment or transfer is pursuant to the direction of
or with the concurrence of the taxpayer;
(3) that the payment or transfer be for the taxpayer's own
benefit or for the benefit of some other person on whom the
taxpayer wished to have the benefit conferred, and
(4) that the payment or transfer would have been included in
computing the taxpayer's income if it had been received by him
instead of the other person.
The forerunner of subsection 56(2) (i.e. subsec
tion 16(1)) was commented on by Thurlow J., as
he then was, in Miller, Alex v. Minister of Na
tional Revenue, [1962] Ex.C.R. 400, at page 415;
62 DTC 1139, at page 1147, when he said:
In my opinion, s. 16(1) is intended to cover cases where a
taxpayer seeks to avoid receipt of what in his hands would be
income by arranging to have the amount received by some
other person whom he wishes to benefit or by some other person
for his own benefit. The scope of the subsection is not obscure
for one does not speak of benefitting a person in the sense of the
subsection by making a business contract with him for ade
quate consideration.
These comments were adopted by the Trial
Judge who referred to them [at pages 6130-6131
DTC; 4 F.T.R.] as two important qualifications,
namely:
1) ... that the taxpayer seek "to avoid
receipt" of funds, presumably funds that would
otherwise be payable to him;
2) ... that the concept of payment of a
"benefit" is contrasted to payments for adequate
consideration.
It is trite law that the directors have full discre
tion to declare dividends and that if they do, the
dividends so declared must not represent a part of
the capital. It is also trite law that unless otherwise
provided in the Articles of Incorporation or in the
statute, the rights of all classes of shareholders to
dividends are to be assessed on a basis of equality:
L. C. B. Gower, Gower's Principles of Modern
Company Law, 4th ed. (London: Stevens & Sons
Ltd., 1979), at page 403; International Power Co.
v. McMaster University, [1946] S.C.R. 179, at
page 203; Rondeau c. Poirier, [ 1980] C.A. 35
(Que.), at page 38. This prima facie equality
arises "by implication which the law raises as
between partners, unless their contract has pro
vided to the contrary" (Victor E. Mitchell, A
Treatise on the Law Relating to Canadian Com
mercial Corporations (1916), Montréal: Southern
Press Limited, at pages 429-430).
When does such an intention to the contrary
appear?
F. W. Wegenast, The Law of Canadian Compa
nies, (Toronto: The Carswell Company Limited,
1979), at page 320 notes:
Apart from provisions, duly adopted, for preferences as
between different classes of shares, and, where there are such
preferences, then as amongst the members in each respective
class, shareholders are entitled to be treated on a basis of
equality. [Emphasis added.]
Clive M. Schmitthoff, Palmer's Company Law,
vol. 1, 23rd ed. (London: Stevens & Sons Ltd.,
1982), c. 33, no. 33-06, at page 387 states in brief:
It is only when a company divides its share capital into
different classes with different rights attached to them that the
prima facie presumption of equality of shares may be displaced.
Speaking generally, a separate class of shares is constituted
when the principal rights carried by the shares differ from
those carried by other shares; e.g. some shares carry preferen
tial or deferred rights as to dividend or capital, or more votes
than other shares. But differentiation between other rights may
suffice to create a different class of shares, e.g. differences as to
freedom of transferability, or redeemability under the 1981
Act. [Emphasis added.]
In view of the conclusion the Trial Judge has
arrived at, he had to be convinced that the descrip
tion with respect to dividends found in the Articles
of Incorporation constituted a derogation from the
principle of equality amongst shareholders recog
nized in the common law. The Trial Judge states,
at page 357 of the Appeal Book, pages 6131
DTC; 5 F.T.R. that "the Articles of Incorporation
specifically provide to the contrary." Further down
he says "they permit differential payment of divi
dends to various classes of shareholders".
With respect, I do not share his conviction on
this matter. Nowhere do I find a reference specific
enough to overturn the common law rule of equal
ity of dividends.
What happens in the case at bar is that share
holders in each class are given "the distinction and
right to receive dividends to the exclusion of other
classes". From that perspective, they are all equal.
Moreover, no mathematical formula is given if a
distribution were to occur. (See Gower, supra,
pages 412-425 for a description of the classes of
shares generally encountered.) The directors
obtain full control over the allocation if they
declare dividends. On what basis do they then
allot? What criteria do they follow? If they create
differences at whim, are they not necessarily bene
fitting some classes and not others? If they are
also shareholders, as in the case at bar, why should
they not seek also a return on their money? Is not
their decision not to receive a return on their
money for their class of shares the equivalent, for
the other classes of shares, of a "receipt of funds,
presumably funds that would otherwise be payable
to" them (the directors) as shareholders? If, conse
quently, they give more to other classes because
they take nothing for themselves, is there not a
benefit for the others?
I doubt that such a discretion to be exercised by
way of a resolution of the directors, can be equated
with a derogation specific and substantive enough
to discard the common law rule of equality of
distribution since there is no rule by which the
directors are to carry out their discretion.
Having come to the conclusion that the dividend
clause does not constitute a valid derogation from
the common law rule of equality amongst share
holders, I am of the opinion that the monies paid
in the case at bar should have been distributed
equally between all the shareholders of Northland
Trucks (1978) Ltd. Thus, it is manifest that part
of the dividends paid to Mrs. McClurg should have
been included in the respondent's income. What
Mr. McClurg has done was "to avoid receipt" of
funds that would otherwise have come to him as a
Class A shareholder.
Does such a payment represent a "benefit" by
contrast to payments for adequate consideration?
The Trial Judge was satisfied that the dividends
paid to the plaintiffs wife were not a "benefit"
within the contemplation of subsection 56(2). He
clearly discarded the possibility of a sham. The
surrounding circumstances, as shown in the evi
dence, suggested to him that there had been, be
tween the plaintiff and his wife, a legitimate busi
ness relationship created by all the necessary legal
instruments.
But surely, there is no relationship, in company
law, between the work and services a shareholder
brings to a company and his or her entitlement to
a dividend if declared. The dividends come as a
return on his or her investment and not on account
of work and services he or she may render to the
company. The dividend attaches to the share and
not to the shareholder. The return on the capital is
proportionate to the capital invested by the share
holder as represented by the number of shares. It
has nothing to do with the individual who owns the
shares.
The Trial Judge's concern that subsection 56(2),
if it were to be interpreted too widely, would cover
every declaration of dividends, does not arise since,
generally, once declared, the amount of dividend
received on each share is governed by a math
ematical formula which the director is called upon
to apply in virtue of the contract between the
shareholders and the company. There is no direc
tion by him at whim.
In reaching the conclusion I have arrived at, I
am mindful and respectful of the corporate veil.
What I am saying, essentially, is that because the
share structure of Northland Trucks (1978) Ltd.
does not, in my view, reverse the common law
presumption of equality of dividends, Mr.
McClurg, as a shareholder, is deemed to have
received money equally to the other shareholders
and that money is taxable in his hands, as a
shareholder.
I would therefore set aside the decision of the
Trial Judge.
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.