T-301-74
Maurice J. Arpin (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Smith D.J.—Winnipeg, March 25
and June 12, 1975.
Plaintiff sole owner of shares in personal corporation
engaged only in rental of real property—Company having one
rental asset—Suffering net loss—Whether deductible from
plaintiffs income—Income Tax Act, R.S.C. 1952, ss. 4, 67, 68.
Plaintiff was the sole beneficial owner of all the issued shares
of A Ltd., a private company, and a personal corporation. In
1970, the company lost $22,789.15 net, which plaintiff deduct
ed from his income. The Minister disallowed the deduction and
the Tax Review Board disallowed the appéal.
Held, dismissing the appeal, while plaintiff argued that had
he acted personally, and not through a corporation, the deduc
tion would have been permissible, it has been established that a
corporation is a legal person, separate and distinct from its
creators. It is not true that where a corporation has only one
shareholder who conducts all its business it is his alter ego. Nor
is a corporation an agent for its shareholders, although a sole
shareholder may be the only one entitled to act as agent for his
company. Plaintiff has submitted that "income" includes
"negative income", or loss. Profits and losses of a corporation
are its own, not its shareholders. When income is distributed
through dividends, profits are transferred to shareholders pro
portionately, thereby reducing the company's assets. If losses
were so distributed, such a transfer would involve a decrease in
the company's liabilities and an increase in assets, and would
require shareholders to pay to the company proportionately the
amount of losses so transferred. However, a basic feature of a
limited company is the liability of a shareholder only for the
amount of his subscription for shares. In the case of a personal
corporation, to impose a liability on shareholders to make up
company losses would require clear expression in the Act.
While sections 67 and 68 may support the alter ego argument,
nowhere is there reference to distribution of losses among
shareholders. The sections, especially 67(1), are of little effect,
and do not destroy the corporation's separate legal personality.
As to plaintiff's argument that the words "as a dividend" in
section 67(1) do not refer to a true dividend, the words must be
given their ordinary meaning in the absence of any indication
of intention to the contrary. Neither subsection (10) nor (11)
contains any indication that the words "a dividend deemed to
have been received" mean anything other than a distribution to
shareholders out of profits.
Salomon v. Salomon [1897] 2 A.C. 22, applied.
INCOME tax appeal.
COUNSEL:
M. J. Arpin, Q.C., for plaintiff.
L. P. Chambers and J. Weinstein for
defendant.
SOLICITORS:
Arpin & Company, Winnipeg, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
SMITH D.J.: This is an appeal by way of trial de
novo by the plaintiff from a decision of the Tax
Review Board dismissing an appeal from a deci
sion of the Minister disallowing a deduction of
$22,789.15 claimed by the plaintiff from his
income for the 1970 taxation year.
The facts are not in dispute. At the opening of
the trial the parties filed an agreed statement of
facts, reading as follows:
The parties hereto by their respective solicitors admit the
following facts, provided that the admission is made for the
purpose of this action only and may not be used against either
party on any other occasion, and provided further that the
parties may adduce further and other evidence relevant to the
issues and not inconsistent with this agreement.
1. At all material times the Plaintiff was a partner in a law
firm, practising in Winnipeg, Manitoba.
2. During the 1970 taxation year the net income of the Plain
tiff from his practice of law was $26,832.24.
3. At all material times the Plaintiff was the sole beneficial
owner of all the issued shares of Acadian Investments Ltd., a
private company.
4. During its 1970 taxation year, Acadian Investments Ltd.
was a personal corporation within the meaning of section 68 of
the Income Tax Act.
5. During its 1970 taxation year, Acadian Investments Ltd.
engaged in no activities other than the rental of real property.
6. At all material times Acadian Investments Limited had only
one rental asset, a leasehold interest in one parcel of real
property consisting of land and the building erected thereon.
7. In its 1970 taxation year, Acadian Investments Ltd.
incurred a net loss of $22,789.15.
8. In filing his 1970 return of income, the Plaintiff claimed as a
deduction from his income the said net loss of Acadian Invest
ment Ltd. in the amount of $22,789.15.
9. In assessing the Plaintiff for his 1970 taxation year, the
Minister of National Revenue disallowed the deduction by the
Plaintiff, of the net loss of Acadian Investments Ltd.
DATED at Winnipeg, this 25th day of March, 1975.
"D. S. Thorson"
P. P. J. A. Weinstein
D. S. Thorson
Deputy Attorney General of Canada
Ottawa, Ontario.
No other documents were filed and no witnesses
were called to give viva voce evidence.
The plaintiff is a highly competent barrister and
Queen's Counsel of long experience. He argued his
own case with all his usual skill, force and logic,
resulting in considerable persuasive effect. He did
not cite any judicial decisions in support of his
argument, but relied on his interpretation of cer
tain sections of the Income Tax Act and on an
attractive argument for fairness and justice in the
application of the law.
The plaintiff pointed out that Acadian Invest
ments Ltd. was a private company, a personal
corporation, of which he held all the capital shares
except directors' qualifying shares, and that he
alone planned and carried out everything that was
done in the corporation's business, viz: the rental
of real estate. He contended that if, instead of
setting up the company, Acadian Investments
Ltd., he had carried on the real estate rental
business personally, on his own account, he would
unquestionably have been entitled to set off the
losses incurred in that business against the profits
earned by him in the practice of law in the same
taxation year, and that as he, being the only
shareholder, was the only person who could gain or
lose from the company's operations, there was no
good reason why the interposition of the company
should have an adverse effect upon his taxation
rights. Further, to hold that it did entail such an
adverse effect would be most unfair and unjust to
him.
This argument has a good deal of appeal, but
certain facts must be looked at. As the plaintiff
himself stated, Acadian Investments Ltd. was
formed for the very common purpose, inter alia, of
protecting the plaintiff against liability for debts
that might be incurred by the rental business,
beyond the amount of his investment in shares of
the company. But as has been stated by judges in a
number of cases, a step of this kind, designed to
afford protection against excessive loss, may pro
duce other results that are not beneficial to the
incorporator.
The plaintiff's argument suggests some reliance
on what has sometimes been called the alter ego
theory, viz: that a corporation which has in reality
only one shareholder who conducts all the corpora
tion's business, is simply the alter ego of that
shareholder. With that theory I do not agree. At
least since the leading case of Salomon v. Salomon
[1897] 2 A.C. 22, it has been clearly established
that a corporation once formed is a legal person
separate and distinct from the person or persons
who had it brought into existence. This is true
whether the corporation has one shareholder or a
thousand. The company's assets are owned by
itself, not by the shareholders. Nor do the share
holders own the company, they merely own shares
of stock that have been issued by the company.
Further, a corporation is not an agent for its
shareholders, even if there is only one shareholder.
However, the converse may be true. It must be
remembered that a corporation being a notional
thing, recognized by the law as a legal person, but
without any human or physical existence, can act
only through agents. Thus where one man holds all
the shares of a company (except a couple of direc
tors' qualifying shares) he may, as director, presi
dent, manager or by virtue of the company's
by-laws, be the only person entitled to act as an
agent for the company. But the company is not his
agent.
Next, it must be remembered that there is no
legal obligation upon a sovereign legislature to act
fairly in enacting laws. Whatever intention such a
legislature has expressed in a statute is the law,
though legislatures generally act in a manner
intended to be fair to people in respect of their
persons and property. Similarly courts, in applying
a statutory provision, seek to find such an intention
to be fair, if the rules of interpretation properly so
admit, but always bearing in mind that plain clear
words must be given their ordinary meaning,
unless the statute contains a clear indication that
something else is intended.
The question for determination is thus: what did
the Parliament of Canada intend in the Income
Tax Act, as it stood in the 1970 taxation year,
concerning the income and taxation of personal
corporations, with particular reference to the
meaning of "income", "profits" and "dividend".
The intention of Parliament is of course to be
found in the words of the Act.
The word "income" appears many times in the
Act, and apparently not always with precisely the
same meaning. The plaintiff submits that the word
means not only gain or profit but also includes
what he calls "negative income" or loss. This is not
an impossible conception of "income" but we have
in section 4 of the Act the following definition:
4. Subject to the other provisions of this Part, income for a
taxation year from a business or property is the profit there
from for the year.
This definition clearly identifies income with
profit, except where some other provision in Part I
of the Act indicates that a different meaning is
intended. The plaintiff did not argue that "profit"
includes "loss", with which it is normally contrast
ed, and in my view it would require very clear
wording in a statute to indicate that in a particular
expression "profit" was intended to include "loss".
The Tax Review Board attached decisive weight
to section 67(1) of the Income Tax Act, which at
the relevant date read as follows:
67. (1) The income of a personal corporation whether actu
ally distributed or not shall be deemed to have been distributed
to, and received by the shareholders as a dividend on the last
day of each taxation year of the corporation.
The terms of this subsection point up important
differences between a personal corporation and its
shareholders on the one hand and an ordinary
(public or private) corporation and its shareholders
on the other. All of the income of a personal
corporation is deemed to have been distributed to
its shareholders, and the amounts so deemed to
have been received form part of the incomes of
those shareholders who are accordingly assessed
for income tax thereon. By section 67(2) a person
al corporation is not itself liable to pay income tax,
and by subsection (3) the distribution of the corpo
ration's income is not proportional simply to the
proportion of the shares held by each shareholder,
but is proportional to the portion of the total
investment made by each shareholder, including,
e.g.: the amount of any loans made by a sharehold
er to the corporation.
In an ordinary public or private corporation
dividends are declared by the directors and only
then are they paid. Only then are the shareholders
entitled to receive them. For common shares there
is normally no requirement that dividends shall be
paid, even though the company has earned sub
stantial profits. The directors may decide that no
dividend shall be paid in a particular year, or that
a dividend equal to part or all of the profits shall
be paid. The corporation is liable to pay income
tax on its income and the shareholders are only
taxable on the amount of the dividend received by
each of them, as part of their income for the year.
Dividends, when declared, are for an equal amount
on each share of the same class.
Dividends can only be paid out of profits. If a
company has not earned any profits in a particular
year no dividends can be paid for that year unless
the company has on hand profits from a previous
period which have not been distributed to the
shareholders. Where a company sustains a loss in a
particular year and has no reserve of profits from
previous years, there is no distribution of the loss
among the shareholders. The situation is simply
that the company has suffered a loss of capital.
It must be remembered that the profits earned
by a company are its profits, not profits of the
shareholders, and similarly the losses sustained by
a company are its losses, not losses of the share
holders. What happens when income of a corpora
tion is distributed to its shareholders by way of
dividend is that part or all of the company's profits
are transferred to the shareholders, proportionate
ly to their respective shareholdings. This involves a
reduction in the company's assets. Logically, if
company losses were distributed to the sharehold
ers there would be a transfer of these losses from
the company to the shareholders, which in turn
would involve a decrease in the company's liabili
ties or an increase in its assets. Logically again,
such a decrease in the company's liabilities or
increase in its assets, arising from the transfer of
losses to the shareholders, would require that the
shareholders become liable to pay to the company,
proportionately to their respective shareholdings,
the amount of the losses so transferred. Otherwise
there would not be a transfer of the losses and the
company would still be saddled with them.
A result of this kind would run completely con
trary to a fundamental feature of a limited com
pany, i.e.: that shareholders are liable only for the
amount of their subscription for shares and that
once his shares have been paid for in full a share
holder has no further liability either to the com
pany or its creditors. Any such radical change in
fundamental company law and the rights of share
holders, if it were ever intended by Parliament,
would, in my view, require very clear language
expressing that intent.
Is the situation just described different when the
company is a personal corporation? In my opinion
it is not. In the case of a personal corporation also,
such a radical departure from the rules of com
pany law, imposing a liability on shareholders to
make up company losses, would require a very
clear expression of an intention to that effect in the
statute.
The fact that if, contrary to my view, section
67(1) were intended to direct the distribution and
receipt, or transfer, of company losses to the share
holders, the transfer would not be actual but only
deemed to have occurred; the situation would not
be altered. The concept of transferring company
losses to the shareholders would still be involved,
with its radical change in fundamental company
law.
This brings me to a brief examination of the
effect of section 67 (1) of the Income Tax Act.
Even assuming for this purpose that the term
"income", in some sections of the Act, includes or
may include negative as well as positive income,
can it properly be interpreted in this double sense
in section 67(1)? The critical words are:
The income ... shall be deemed to have been distributed to,
and received by, the shareholders as a dividend ....
The plaintiff submits that the Income Tax Act
ignores the existence of the personal corporation
and treats it as if it was simply the alter ego of the
shareholders, in this case himself as the sole share
holder. In so far as distribution of the company's
income is concerned, there is some support for this
submission in section 67(1), also in subsections (2)
and (3) of that section and in section 68. But
nowhere do I find any reference to a distribution
of losses among the shareholders. Again, how is
part of a personal corporation's "loss" received by
a shareholder? When he receives part of a compa-
ny's profits as a dividend he receives money or
money's worth. Conversely, in my view, as indicat
ed above, if he can be said to receive a part of the
company's losses the effect would be that he would
become liable to pay to the company the amount
of the loss received by him. Nothing in the Act
indicates that anything of this sort happens.
In my view the submission that Acadian Invest
ments Ltd. was only another name for the plain
tiff, his alter ego, is not correct. The sections of the
Act which suggest the possibility that it may be
correct, particularly section 67(1), are limited in
their effect. The separate legal personality of the
corporation is not destroyed, though some of the
rules affecting corporate income tax are altered.
The plaintiff submits that the words "as a divi
dend" in the phrase "distributed to, and received
by, the shareholders as a dividend" do not refer to
a true dividend, but mean only "in the same
manner as a dividend", or alternatively "as if it
were a dividend". In my opinion this interpretation
involves a straining of language that in this
instance is not permissible. In the first place the
words "as a dividend" have a clear, simple gram
matical meaning, which by the first rule of inter
pretation should be given their ordinary meaning,
unless it is clear from the context or some other
provision in the statute that something else is
intended. I can find no . indication of such an
intention.
Secondly, the wording of several of the subsec
tions of section 67 clearly indicate that an actual
or true dividend is meant. For example,
(1) Subsection 10 begins:
Where a dividend is deemed by this section to have been
received from a personal corporation ... , the person by whom
the dividend is so deemed to have been received ... that portion
of the dividend that he is so deemed to have received ....
and paragraph (a) of said subsection (10) begins:
the income of the personal corporation (from which the divi
dend is so deemed to have been received) ....
(2) Similarly, subsection (11) speaks in several
places of a "dividend deemed to have been
received."
In neither of subsections (10) and (11) is there
any suggestion that the words "a dividend deemed
to have been received" intend, by the word "divi-
dend" anything other than the ordinary meaning
of that word, viz: a distribution to shareholders or
to a shareholder out of the profits.
Another subsection, subsection (12) should be
referred to. It reads:
67. (12) The shareholder by whom a personal corporation is
controlled shall file with the return of his income for each
taxation year a statement of the assets, liabilities and income of
the personal corporation for the year and if he fails to file such
a statement for a year there may be included in his income for
that year double the amount of the part of the income of the
corporation for the year that under this section is deemed to
have been received by him.
The latter part of this subsection is obviously a
penalty provision. It is clear that in it the word
"income" means "positive" not "negative income".
If it included "negative income", it would mean
that a controlling shareholder of a personal corpo
ration who failed in any taxation year to file with
his income return, a statement showing the nega
tive income or loss for that year of the personal
corporation might receive a deduction in his
income for that year of double the amount of the
part of the negative income or loss of the corpora
tion for the year that he "was deemed to have
received". I cannot imagine a penalty section being
designed to confer a taxation benefit of this sort.
In the result, after giving this matter the fullest
and most careful consideration, the only conclu
sion I can come to is that the appeal must be
dismissed. This 'result may seem unfair to the
plaintiff, but in my view the relevant provisions of
the Income Tax Act leave me no reasonable
ground on which to base a contrary conclusion.
The remedy, if one is desired, lies in the hands of
Parliament, not of the courts.
No costs are allowed to either party.
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.