Special Risk Holdings Inc. v. Canada
T-416-88
Muldoon J.
1/12/93
30 pp.
Action for declarations Income Tax Act, s. 184(3.1) elections operative only when court finally determining plaintiff made excessive elections; plaintiff made reasonable attempt to determine tax-paid undistributed surplus (TPUS), capital surplus on hand (CSOH); upon repayment of dividends, s. 184(3.1) operating to deem dividends not to be dividends so that Part III tax paid deemed not to have been payable; judgment requiring that in view of retroactive change in law applicable to plaintiff's Part III tax, Minister exercise s. 152(4) power to "at any time assess tax, interest or penalties" with such modifications as circumstances require by virtue of s. 185(3), declaration plaintiff entitled to repayment of Part III taxes paid -- Corporate income subject to tax on two planes: corporation paying tax on income; shareholders paying tax on dividends (distribution of corporation's after-tax income) -- S. 89(5)(a)(ii) deeming 1971 CSOH nil if surplus arising when taxpayer disposing of shares of corporation controlled by taxpayer to person with whom taxpayer dealing at arm's length -- S. 186(2) meaning of "controlled": if more than 50% of issues share capital belonging to other corporation, to persons with whom taxpayer not dealing at arm's length, or to other corporation and persons with whom other corporation not dealing at arm's length -- Finding of "control" fatal to crystallization of 1971 CSOH account because amount of account deemed nil -- Election to distribute funds from this account would be excessive -- 1977 amendments terminated, at end of 1978, corporation's right to make distributions of non-taxable dividends out of TPUS and CSOH accounts -- Payout of excessive nontaxable dividends attracting penalty of 100% of excess (later reduced to 50%) under s. 184 -- S. 184(3.1) providing where corporation electing in accordance with s. 83(1) in respect of full amount of any dividend becoming payable after March 31, 1977 and before 1979 and corporation making "reasonable attempt to correctly determine" TPUS on hand and 1971 CSOH and portion of dividend giving rise to gain from disposition of shares and if corporation so elects and penalty paid, dividend deemed not to be dividend, but loan by corporation to person receiving dividend if full amount of loan repaid before date stipulated by Minister -- Throughout negotiations with foreign firm interested in purchasing minority interest in corporation owned and controlled by plaintiff, principals ad idem plaintiff would control new corporation, but parties agreeing to temporary 50/50 split of shares with subsequent reversion to 51/49 split -- Action dismissed -- In Special Risks Holdings Inc. v. The Queen, [1984] CTC 553 (F.C.T.D.), Reed J. holding transaction designed solely to avoid taxes -- As same issue litigated by same parties findings of Reed J. constituting res judicata, or issue estoppel -- Parties intending from outset to have 51/49 share deal -- 50/50 share deal contrivance or deliberate sham -- Although parties purporting to agree to be equal partners for few days, never agreement to remain as such -- "Reasonable attempt to correctly determine" pre-1972 surpluses meaning attempt to determine those sums in accord with truth, as taxpayer knows it to be, not merely as taxpayer would like it to appear to gain tax advantage not otherwise available -- Under statutory standard taxpayer not required to be "right", but required not to be duplicitous or deceitful, or knowingly to evade duty to make reasonable attempt to meet standard of correctly determining tax paid 1971 CSOH -- Plaintiff's 1971 CSOH deemed nil pursuant to s. 89(5)(a)(ii) -- Plaintiff not making reasonable attempt to correctly determine surpluses upon which paid up as required by judgment -- Alternatively plaintiff contending s. 184(3.1) conferring right to have Part III tax imposed remitted because retroactively changing basis upon which tax imposed -- Canadian Marconi Co. v. Canada, [1992] 1 F.C. 655 (C.A.) applied -- MNR cannot be compelled to reassess -- MNR functus -- Not able to open up matter by means of another assessment -- Income Tax Act, S.C. 1970-71-72, c. 63, ss. 83(1) (as am. by S.C. 1977-78, c. 1, s. 37), (2) (as am. idem), 89(5)(a)(ii) (as enacted by S.C. 1974-75-76, c. 26, s. 53; rep. by S.C. 1977-78, c. 1, s. 44), 152(1) (as am. by S.C. 1978-79, c. 5, s. 5; 1985, c. 45, s. 86), (2), (3), (3.1) (as enacted by S.C. 1990, c. 39, s. 38), (4) (as am. by S.C. 1984, c. 45, s. 59; 1988, c. 55, s. 136), (8), 184(2) (as am. by S.C. 1973-74, c. 49, s. 18; 1977-78, c. 1, s. 83), (3) (as enacted by S.C. 1977-78, c. 1, s. 83; 1980-81-82-83, c. 48, s. 91; c. 140, s. 110; 1986, c. 86, s. 95), (3.1) (as enacted by S.C. 1980-81-82-83, c. 48, s. 91), (4) (as enacted by S.C. 1977-78, c. 1, s. 83; 1980-81-82-83, c. 48, s. 91), (5) (as am. idem), 185(1) (as am. by S.C. 1977-78, c. 1, s. 84; (2) (as am. idem; 1980-81-82-83, c. 48, s. 115), (3), 186(2) (as am. by S.C. 1980-81-82-83, c. 140, s. 111).