A-323-89
Herbert H. Winter and David Herbert Outer-
bridge Winter (Appellants)
v.
Her Majesty the Queen (Respondent)
INDEXED AS: WINTER V. CANADA (CA.)
Court of Appeal, Marceau, MacGuigan and
Décary JJ.A.—Montréal, October 2; Ottawa,
November 2, 1990.
Income tax — Income calculation — Tax-avoidance —
Indirect benefits principle — Minister including in director's
income value of shares sold to son-in-law pursuant to s. 56(2)
— No piercing of corporate veil — Director as majority
shareholder able to cause corporation to sell shares at less
than market value to confer benefit on buyer — S. 56(2) rooted
in doctrine of 'constructive receipt" — Only requiring taxpay
er be subject to tax had transfer been made to him — S. 56(2)
applies only if benefit not directly taxable in hands of payee or
transferee — As shares purchased qua son-in-law, not qua
shareholder, not subject to tax under s. 15(1).
This was an appeal from the trial judgment dismissing an
action attacking an income tax assessment. In 1979 the Board
of Directors of an investment holding company resolved to sell
its shares in an operating company to the son-in-law of the
majority shareholder, Sir Leonard Outerbridge, for $100 per
share. The Minister included the value of those shares, cal
culated at $1,089 per share, in Sir Leonard's income as a
benefit conferred on him pursuant to Income Tax Act, subsec
tion 56(2). Subsection 56(2) provides that a transfer of prop
erty made with the concurrence of a taxpayer to another as a
benefit that the taxpayer desired to have conferred on the other
person shall be included in the taxpayer's income to the extent
that it would be if the payment or transfer had been made to
him. The plaintiffs, Sir Leonard's executors, argued that the
shares belonged to the holding company, not to Sir Leonard. To
say that Sir Leonard conferred a benefit on his son-in-law
would involve piercing the corporate veil, for which there was
no justification. Alternatively, they argued that Sir Leonard
should not be taxed under subsection 56(2) because the son-in-
law as a shareholder was already subject to tax for the benefit
pursuant to subsection 15(1).
Held, the appeal should be dismissed.
There was no piercing of the corporate veil. Of importance
was the fact that Sir Leonard could cause the corporation to
sell its shares at less than market value, with a view to
conferring a benefit on the buyer. That he had no direct right
to the shares would be relevant only if subsection 56(2) was
restricted in its application to cases of diversion of income
receivable by the taxpayer.
Subsection 56(2) was a tax-avoidance provision dating back
to 1948. While it has been the subject of a number of reported
decisions, the vagueness of its wording has not been overcome
and its purpose remains controversial. Some qualification sug
gested by the aim and purpose for which the rule was adopted
must be read into subsection 56(2) so as to avoid unreasonable
results. Subsection 56(2) is rooted in the doctrine of "construc-
tive receipt" and, although meant to cover principally cases
where a taxpayer seeks to avoid receipt of income by having the
amount paid to some other person, it is not confined to such
clear cases of tax avoidance. For its application, the taxpayer
need not be initially entitled to payment or transfer of property
made to the third party. The only requirement is that he would
have been subject to tax had the payment or transfer been
made to him. When the taxpayer has no entitlement to the
payment made or the property transferred, subsection 56(2)
applies only if the benefit conferred is not directly taxable in
the hands of the transferee. A tax-avoidance provision exists to
prevent the avoidance of a tax payable on a particular transac
tion, not to double the tax normally due, nor to give the taxing
authorities administrative discretion to choose between two
possible taxpayers. The implied condition that the transferee
not be subject to tax on the benefit received did not apply here,
as the shares were purchased qua son-in-law, not qua share
holder, and subsection 15(1) did not apply.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Income Tax Act, R.S.C. 1970, c. I-5, s. 56(2).
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 15(1), 56(2),
69 (as am. by S.C. 1974-75-76, c. 26, s. 37; 1977-78, c.
32, s. 13; 1979, c. 5, s. 22).
The Income Tax Act, S.C. 1948, c. 52, s. 16(1) (as am.
by S.C. 1960-61, c. 49, s. 5).
CASES JUDICIALLY CONSIDERED
DISTINGUISHED:
Canada v. McClurg, [1988] 2 F.C. 356; [1988] 1 C.T.C.
75; (1987), 18 F.T.R. 80; 84 N.R. 214 (C.A.) affg
McClurg (J.A.) v. The Queen, [1986] 1 C.T.C. 355;
(1986), 86 DTC 6128; 2 F.T.R. 1 (F.C.T.D.).
CONSIDERED:
Minister of National Revenue v. Bronfman, Allan,
[1966] Ex.C.R. 172; [1965] C.T.C. 378; (1965), 65 DTC
• 5235.
REFERRED TO:
Miller, Alex v. Minister of National Revenue, [1962] Ex.
C.R. 400; [1962] C.T.C. 378; (1962), 62 DTC 1139;
Murphy (G A) v. The Queen, [1980] CTC 386;
(1980), 80 DTC 6314 (F.C.T.D.); Minister of National
Revenue v. Pillsbury Holdings Ltd., [1965] 1 Ex.C.R.
676; [1964] C.T.C. 294; (1964), 64 DTC 5184; Herbert
v. Inland Revenue Comrs., [1943] 1 All E.R. 336
(K.B.D.); Vestey v Inland Comrs. (Nos I and 2), [1979]
3 All ER 976 (H.L.).
COUNSEL:
A. Peter F. Cumyn and Gary Nachshen for
appellants.
P. E. Plourde and Michael Murphy for
respondent.
SOLICITORS:
Stikeman, Elliott, Montréal, for appellants.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment
rendered in English by
MARCEAU J.A.: This appeal from a judgment of
the Trial Division [Outerbridge (Sir L.C.) Estate
v. Canada, [1989] 2 C.T.C. 55; (1989), 89 DTC
5304 (F.C.T.D.) (sub nom Winter v. Canada)] is
concerned with the interpretation and conditions
of application of subsection 56(2) of the Income
Tax Act [S.C. 1970-71-72, c. 63], which states 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.
This well-known tax-avoidance provision, which
gives effect to the indirect benefits principle, has a
long legislative history dating back to 1948.' It
gave rise to important decisions, among which:
Miller, Alex v. Minister of National Revenue,
[1962] Ex.C.R. 400; and Minister of National
1 The provision was originally enacted as subsection 16(1) of
The Income Tax Act, [S.C. 1948, c. 52]; it was amended in
1961 (S.C. 1960-61, c. 49, s. 5), and, as amended, became
subsection 56(2) in the 1970 revision.
Revenue v. Bronfman, Allan, [1966] Ex.C.R. 172,
in the Exchequer Court; Murphy (G A) v. The
Queen, [1980] CTC 386, in the Trial Division of
the Federal Court; and, more recently, in this
Court, of Canada v. McClurg, [1988] 2 F.C. 356,
affirming [1986] 1 C.T.C. 355 (F.C.T.D.), a deci
sion now under appeal before the Supreme Court.
And yet the vagueness of its wording has never
been totally surmounted and its aim and purpose
are still subject of controversy. The case at bar is
yet another example of the difficulty one has to
fully understand how Parliament meant it to be
applied in practice.
In 1979, Sir Leonard C. Outerbridge, a resident
of St. John's, Newfoundland, then 91 years of age,
was the controlling shareholder of Littlefield
Investments Limited ("Littlefield"), a company
incorporated under the laws of Canada, on
December 8, 1961, as an investment holding com
pany. He held 99.16% of the issued shares of the
company (9,916 shares) while his daughter, Nancy
D. Winter, held .83% (83 shares) and his son-in-
law, Herbert H. Winter (Dick) held .01% (1
share). Both Sir Leonard personally and his invest
ment company were beneficial owners of shares of
A. Harvey & Company Limited ("Harvey"), an
operating company engaged in various distribu
tion, transportation and warehousing activities: Sir
Leonard owned 254 Harvey shares and Littlefield,
661.
On September 19, 1979, the Board of. Directors
of Littlefield (then consisting of the three share
holders), in a regularly held meeting, resolved that
the 661 Harvey shares owned by the company be
sold to Dick Winter for a price of $100 per share.
The resolution was acted upon shortly thereafter
and the sale price was fully paid. Approximately
one month later, Sir Leonard gifted to his daugh
ter, Mrs. Winter, the 254 Harvey shares that he
owned personally, a gift that he reported, in his
1979 tax return, as .a disposition for deemed pro
ceeds of $100 per share.
On October 21, 1985, by notice of reassessment,
Sir Leonard was advised that the Minister of
National Revenue had added to his income for his
1979 taxation year: a) an amount of $648,368,
pursuant to subsection 56(2) of the Act, as a
benefit conferred on him by virtue of the sale by
Littlefield to Dick Winter of the 661 Harvey
shares; and b) an amount of $54,673, pursuant to
section 69 [as am. by S.C. 1974-75-76, c. 26, s. 37;
1977-78, c. 32, s. 13; 1979, c. 5, s. 22j of the Act,
as a taxable capital gain realized by him on the
gift of the 254 Harvey shares to his daughter. To
calculate the benefit and the capital gain, the
Minister had ascribed a value of $1,089 to each of
the Harvey shares at the time of their disposition
in 1979, a figure arrived at following a valuation
survey conducted the year before, 1984. Sir Leon-
ard duly objected. On July 3, 1986, the Minister
issued a second notice of reassessment which
reduced the amount which had been added pursu
ant to subsection 56(2) by some $150, on the basis
that Sir Leonard, in 1979, held only 99.16% of the
shares of Littlefield, not 99.18% as previously
calculated, but otherwise confirmed the first one.
Sir Leonard, of course, reiterated his objection.
On September 7, 1986, Sir Leonard passed
away. Nancy Winter and Dick Winter were
appointed as the sole executors under the last will
and testament of the deceased, but Nancy Winter
died on December 25, 1986 and was replaced by
David Herbert Outerbridge Winter. On June 16,
1987, after rejection by the Minister of the objec
tion filed by Sir Leonard before his death, the
executors, in the exercise of the rights and reme
dies of the deceased, took action, in the Trial
Division, claiming that the reassessment of July 3,
1986 was unfounded in fact and in law. The attack
in the action was directed against both branches of
the assessment but before trial the plaintiffs with
drew their opposition to the second one dealing
with the capital gain deemed to have been realized
by the taxpayer on his gift to his daughter of the
personally owned shares. On May 29, 1989, judg
ment was rendered dismissing the action. This is
the judgment here under appeal.
The position taken by counsel for the plaintiffs
before the Trial Judge, as I understand it, was
essentially the following. The value of $1,089 per
share attributed to the Harvey shares by the Min
ister was one that was arrived at after a complex
valuation conducted "with ex post facto wisdom",
to use the expression of the Trial Judge. It was not
one respectful of the parties' perception at the time
of the transaction. Considering the price that had
been attributed to the shares in some contempo
rary transactions, the restrictions to which the
transfer of the shares was subjected by the articles
of the corporation, the opinion of the accountant
present at the directors' meeting when the sale was
authorized, it was reasonable for Sir Leonard,
argued counsel, to believe that $100 was the fair
market value of a Harvey share on September 19,
1979. There was no indication that Sir Leonard
had a wish or a desire to confer a benefit on Dick
Winter. Besides, Sir Leonard had himself no right
to those shares, he was certainly not attempting to
divert part of his income into the hands of a third
party to avoid tax. The conditions of application of
subsection 56(2), which is a tax-avoidance provi
sion, therefore do not exist.
The learned Trial Judge disagreed. Being satis
fied on the evidence that the Minister was right in
his valuation of the shares, he said [at page 62] he
had to find, "on the basis of the relationship
between the taxpayer and his son-in-law, as well as
on the more objective circumstances surrounding
the specific transaction as well as those transac
tions ancillary to it, that in causing the Littlefield
shares to be transferred, the taxpayer desired to
confer a benefit to his son-in-law." Then, rejecting
the interpretation of subsection 56(2) suggested by
the plaintiffs as one which would put "the kind of
strain on the language of the section that it cannot
reasonably bear", he concluded that the conditions
of application of the provision were met.
In this Court, counsel had to narrow further his
position after acknowledging, at the opening of the
hearing, that the findings of fact of the Trial
Judge were difficult to assail. His claim was now
simply that, even if the parties to the transaction in
1979 were aware that the fair market value of the
Harvey shares was $1,089 per share, the condi
tions of application of subsection 56(2) properly
construed according to its aim and purpose were
not present. In support thereof, he submitted a
two-fold argument.
1. It must not be forgotten, said counsel, that
the shares belonged to Littlefield, not to Sir Leon-
ard who was acting only as director of the com
pany. To say that Sir Leonard conferred a benefit
on Dick Winter would be to ignore the distinction
between Sir Leonard and the company, which
would amount to piercing the corporate veil for
which there was no justification. On the other
hand, argued counsel, the language of the provi
sion did not justify the notion that a director
acting as such could be seen as causing a corpora
tion to divert a transfer or payment for his own
benefit or the benefit of another person, absent
bad faith or breach of fiduciary duty, which was
not the case, and was not even alleged to be the
case here. And counsel referred to the case of
McClurg, supra, which indeed decided that the
language of subsection 56(2) does not encompass
acts of a director when he participates in the
declaration of a dividend.
I do not agree with this first part of the argu
ment. There is no question of piercing the corpo
rate veil here. The distinction between Littlefield
and Sir Leonard is fully respected. The question is
whether Sir Leonard could cause the corporation
to sell shares that belonged to it for a price below
the market value, with a view to conferring a
benefit on the buyer; and the answer is certainly
yes. The fact that Sir Leonard had no direct right
to the shares would have a bearing if the provision
was to be construed as covering only cases of
diversion of income receivable by the taxpayer and
there is no indication whatever that the provision
was meant to be so confined. Finally, the McClurg
decision was concerned with a declaration of divi
dend in accordance (in the views of the majority)
with the powers conferred by the share structure of
the corporation, and I do not see it as having
authority beyond the particular type of situation
with which it was dealing.
2. Besides, counsel continued, Dick Winter, as a
shareholder, was already subject to tax for the
benefit conferred on him by the transaction pursu
ant to subsection 15(1). Even if it could be said
that, broadly interpreted, the conditions of
application of the provision as it reads were
present, an assessment pursuant to it could not, in
those conditions, be valid. Here is how he put the
submission in his factum:
8. In the alternative, it is submitted that under the scheme of
the Income Tax Act shareholder A should not be taxed pursu
ant to subsection 56(2) in respect of a benefit conferred on
shareholder B when shareholder B can be taxed pursuant to
subsection 15(1) in respect of that same benefit. There is a
natural order to the provisions of the Income Tax Act, with
technical rules such as subsection 15(1) at the base, specific
anti-avoidance rules like subsection 56(2) one level higher, and
the general anti-avoidance rule in section 245 at the apex. As a
matter of assessment practice, a specific anti-avoidance rule
should be resorted to only when a particular transaction is not
caught by any technical rule, just as the general anti-avoidance
rule should not be invoked except in the absence of a specific
anti-avoidance rule.
9. In the specific context of shareholder benefits, the scheme of
the Income Tax Act is made even clearer by the presence of
subsection 52(1). This provision provides that a taxpayer who
has had an amount in respect of the value of property he
acquires added to his income shall add this same amount to his
cost base for the property. Where a taxpayer is taxed under
subsection 15(1) on property acquired from a corporation in
which he is a shareholder, subsection 52(1) thus operates
automatically so as to make the consequential modification to
adjusted cost base for purposes of computing the future capital
gain or capital loss. Where subsection 56(2) is invoked, by
contrast, subsection 52(1) cannot operate since the taxpayer
suffering taxation has not himself acquired any property. If any
party to the subject transaction was to attract taxation, it
should have been Mr. Winter pursuant to subsection 15(1) and
not the Deceased pursuant to subsection 56(2).
I would be prepared to go along with that line of
thinking. As was so often pointed out, again by
both the Trial Judge and the Court of Appeal in
the McClurg decision, the language of
subsection 56(2) cannot be taken in its broadest
possible meaning without leading to results obvi
ously untenable, particularly in the context of
corporate management. Some qualification sug
gested by the aim and purpose for which the rule
was adopted must be read into it so as to avoid
those unreasonable results.
It is generally accepted that the provision of
subsection 56(2) is rooted in the doctrine of "con-
structive receipt" and was meant to cover princi
pally 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
either for his own benefit (for example the extinc
tion of a liability) or for the benefit of that other
person (see the reasons of Thurlow J. in Miller,
supra, and of Cattanach J. in Murphy, supra).
There is no doubt, however, that the wording of
the provision does not allow to its being confined
to such clear cases of tax-avoidance. The Bronf-
man judgment, which upheld the assessment,
under the predecessor of subsection 56(2), of a
shareholder of a closely held private company, for
corporate gifts made over a number of years to
family members, is usually cited as authority for
the proposition that it is not a pre-condition to the
application of the rule that the individual being
taxed have some right or interest in the payment
made or the property transferred. The precedent
does not appear to me quite compelling, since gifts
by a corporation come out of profits to which the
shareholders have a prospective right. But the fact
is that the language of the provision does not
require, for its application, that the taxpayer be
initially entitled to the payment or transfer of
property made to the third party, only that he
would have been subject to tax had the payment or
transfer been made to him. It seems to me, how
ever, that when the doctrine of "constructive
receipt" is not clearly involved, because the tax
payer 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. 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 2 nor to give the taxing authori
ties an administrative discretion to choose between
two possible taxpayers.'
So, I agree that the validity of an assessment
under subsection 56(2) of the Act when the tax
payer had himself no entitlement to the payment
made or the property transferred is subject to an
implied condition, namely that the payee or trans-
feree not be subject to tax on the benefit he
received. The problem for the appellants, however,
is that, in my judgment, this qualification does not
come into play in this case. It seems clear to me
that, although holder of one share in Littlefield, it
is not qua shareholder but qua son-in-law of the
controller of the company that Dick Winter
entered into the transaction with the corporation
and acquired the benefit; he could not, therefore,
be assessed with respect to it under subsection
15(1) of the Act (see Minister of National Reve
nue v. Pillsbury Holdings Ltd., [1965] 1 Ex.C.R.
676). It follows that, in my view, the appellants'
alternative argument also fails.
The appeal should, I think, be dismissed.
MACGUIGAN J.A.: I agree.
DÉCARY J.A.: I agree.
2 Which would be in addition to the capital gain tax already
imposed on the payor or transferor for deemed proceeds of
disposition pursuant to s. 69 of the Act.
3 Not only would such administrative discretion violate prin
ciples of taxation (see Herbert v. Inland Revenue Comrs.,
[1943] 1 All E.R. 336 (K.B.D.), at p. 388; Vestey v Inland
Revenue Comrs. (Nos 1 and 2), [1979] 3 All ER 976 (H.L.), at
pp. 984-985); in the case of a transfer of property, it would
again amount to a sort of gratuitous doubling of the tax, since
the transferee, not being 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.
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.