October 07, 2011

Granite Bay Charters Ltd. (Appellant) v. Her Majesty the Queen (Respondent)

2001 DTC 615
Tax Court of Canada
June 12, 2001

(Court File No. 98-2524(IT)G.)

Avoidance — Deemed dividends — Corporate taxpayer deemed by subsection 84(3) to have received a dividend upon the redemption in its hands of certain shares of a corporation known as Greenstone — Mr. and Mrs. C owning all of the shares of both the taxpayer and Greenstone, and selling their shares of Greenstone at arm’s length — Minister purporting to assess taxpayer under the avoidance provisions of subsection 55(2) of the Act, alleging that the proceeds of redemption received by it not a dividend, but a capital gain — Whether taxpayer able to show that subsection 55(2) inapplicable under paragraph 55(3)(a) of the Act, on the ground that the Coxes’ sale of their shares of Greenstone not part of a series of transactions involving both the redemption by Greenstone of its shares, and the sale by the Coxes of their shares of Greenstone — Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended, ss. 55(2)(a), 55(2)(b), 55(2)(c), 55(3)(a), 82(1), 84(3), 112(1) and 248(10).

The corporate taxpayer was deemed by subsection 84(3) of the Act to have received a dividend upon the redemption in its hands of certain shares of a corporation known as Greenstone. (Such redemption had been effected pursuant to a reorganization of Greenstone.) Mr. and Mrs. C, who owned all of the shares of both the taxpayer and Greenstone, sold their shares of Greenstone at arm’s length. The Minister purported to assess the taxpayer for 1994 under the avoidance provisions of subsection 55(2) of the Act, alleging that the proceeds of redemption received by it in respect of its shares of Greenstone was not a dividend, but a capital gain. The taxpayer appealed to the Tax Court of Canada, alleging that subsection 55(2) did not apply, inasmuch as the redemption by Greenstone of its shares pursuant to the said reorganization was not part of a series of transactions or events resulting in the sale by Mr. and Mrs. Cox of their shares of Greenstone.

Held: The taxpayer’s appeal was dismissed. On the evidence, Mr. and Mrs. Cox had decided to sell their shares of Greenstone in the summer of 1993, if not earlier. Hence, the actual transactions which gave rise to the subsection 84(3) deemed dividend in the taxpayer’s hands were the sale by Mr. and Mrs. Cox of their shares in Greenstone to Granite Bay, and the redemption of those shares by Greenstone for a conveyance to Granite Bay of its non-logging assets. Indeed, the agreements to sell the shares and the corporate resolutions were all dated December 31, 1993. The dividend, therefore, had prepared Greenstone for the said sale by removing from it its non-logging assets. In other words, the Greenstone share redemption could not be divorced from the subsequent sale by the Coxes of their shares of Greenstone (even though the ultimate purchaser was different from the one with whom the Coxes had originally been negotiating). In light of all of the foregoing, the Minister’s subsection 55(2) avoidance assessment was affirmed.