McClurg v. Minister of National Revenue, (1990) 119 N.R. 101 (SCC)

• Judge: Dickson, C.J.C., Wilson, La Forest, L'Heureux-Dubé, Sopinka, Gonthier and Cory, JJ.
• Court: Supreme Court (Canada)
• Case Date: December 20, 1990
• Jurisdiction: Canada (Federal)
• Citations: (1990), 119 N.R. 101 (SCC)

McClurg v. MNR (1990), 119 N.R. 101 (SCC)

MLB headnote and full text

[French language version follows English language version]

[La version française vient à la suite de la version anglaise]

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Her Majesty the Queen (appellant) v. Jim A. McClurg (respondent)

(No. 20751)

Indexed As: McClurg v. Minister of National Revenue

Supreme Court of Canada

Dickson, C.J.C., Wilson, La Forest, L'Heureux-Dubé, Sopinka, Gonthier and Cory, JJ.

December 20, 1990.

Summary:

A taxpayer and his partner were the sole officers and directors of a company. Each held 400 Class A common shares. Their wives each held 100 Class B common shares. In 1978, 1979 and 1980, the taxpayer and his partner, pursuant to a discretionary dividend clause, paid each wife dividends of $10,000.00 per year. No other dividends were paid by the company. The Minister of National Revenue reassessed the taxpayer's income and, pursuant to s. 56(2) of the Income Tax Act, determined that 80% of the dividends (i.e. $8,000.00 per year) were to be included in the taxpayer's income. The taxpayer appealed.

The Tax Court of Canada in a decision reported, [1984] C.T.C. 2469; 84 A.T.C. 1379, dismissed the appeal and affirmed the assessment. The taxpayer appealed.

The Federal Court of Canada, Trial Division, in a decision reported (1986), 2 F.T.R. 1, allowed the appeal. The court held that s. 56(2) did not apply, therefore none of the dividends could be included in the taxpayer's income. The Minister appealed.

The Federal Court of Appeal, Desjardins, J.A., dissenting, in a decision reported 84 N.R. 214, dismissed the appeal. The Minister appealed again.

The Supreme Court of Canada, per Dickson, C.J.C. (Sopinka, Gonthier and Cory, JJ., concurring), dismissed the appeal. La Forest, J., dissenting (Wilson and L'Heureux-Dubé, JJ., concurring), opined that the appeal should be allowed.

*Editor's note: Dickson, C.J.C., was Chief Justice at the time of hearing, and Lamer, C.J.C., was Chief Justice at the time of judgment.

Company Law - Topic 2485

Shareholders - Shares - Classes of shares - Rights respecting - Presumption of equality - [See first Company Law - Topic 3862].

Company Law - Topic 3801

Dividends - General - The Supreme Court of Canada discussed the power of corporate directors to declare dividends - See paragraph 21.

Company Law - Topic 3862

Dividends - Entitlement - Presumption of equality - The Supreme Court of Canada stated that the rights carried by all shares to receive a dividend declared by a company are equal unless otherwise provided in the articles of incorporation (the presumption of equality) - However when a company divides its shares into classes there is a derogation from the presumption of equality - See paragraph 24.

Company Law - Topic 3862

Dividends - Entitlement - Presumption of equality - The articles of incorporation of a Saskatchewan company provided, inter alia, that its shares "carry the distinction and right to receive dividends exclusive of other classes of shares in the said corporation" (i.e. a discretionary dividend clause) - The Supreme Court of Canada held that the discretionary dividend clause was a valid means of allocating declared dividends and was sufficient to rebut the presumption of equality amongst shares - See paragraphs 26 to 28.

Company Law - Topic 3873

Dividends - Allocation - Discretionary dividend clause - The articles of incorporation of a company, incorporated under the Saskatchewan Business Corporations Act, provided, inter alia, that each class of shares had "the distinction and right to receive dividends exclusive of other classes of shares in a said corporation" (i.e. a discretionary dividend clause) - The Supreme Court of Canada held that the discretionary dividend clause was valid where there was nothing in the Saskatchewan Business Corporations Act or at common law that prohibited this dividend allocation technique - See paragraphs 21 to 36.

Company Law - Topic 3873

Dividends - Allocation - Discretionary dividend clause - [See second and third Income Tax - Topic 2103].

Income Tax - Topic 2103

Other sources of income - Indirect payments - To other persons for taxpayer's benefit - The Income Tax Act, s. 56(2), imputed income to the taxpayer that was diverted at his instance to someone else - The Supreme Court of Canada discussed when s. 56(2) was applicable and stated that the section did not apply to benefits conferred for adequate consideration in the context of a legitimate business relationship - See paragraphs 40, 41.

Income Tax - Topic 2103

Other sources of income - Indirect payments - To other persons for taxpayer's benefit - The Income Tax Act, s. 56(2) imputed income to the taxpayer that was diverted at his instance to someone else - The Supreme Court of Canada stated that as a general rule, a dividend payment cannot reasonably be considered a benefit diverted from a taxpayer to a third party within the contemplation of s. 56(2) - See paragraph 42 - Similarly s. 56(2) was not applicable to dividends allocated by corporate directors under a discretionary dividend clause - See paragraph 43.

Income Tax - Topic 2103

Other sources of income - Indirect payments - To other persons for taxpayer's benefit - A taxpayer and his partner (the sole directors of a company) each held 400 Class A common shares - Their wives each held 100 Class B common shares - The company's articles of incorporation contained a discretionary dividend clause - Pursuant to the clause, the taxpayer and his partner paid $10,000 dividends to their wives and none to themselves - The Minister of National Revenue applied s. 56(2) of the Income Tax Act to include 80% of the dividends in the taxpayer's income (i.e. $8,000) - The Supreme Court of Canada held that s. 56(2) was inapplicable because generally a declaration of a dividend was beyond the scope of s. 56(2) and there was no evidence of tax avoidance - See paragraphs 37 to 46.

Income Tax - Topic 3901

Interpretation - General - The Supreme Court of Canada discussed generally the interpretation of taxing statutes - See paragraphs 38 to 39.

Cases Noticed:

Burland v. Earle, [1902] A.C. 83, refd to. [para. 21].

Bowater Canadian Ltd. v. Crain (R.L.) Inc. and Craisec Ltd. (1987), 26 O.A.C. 348; 62 O.R.(2d) 752 (C.A.), refd to. [paras. 24, 59, 60, 75].

De Vall v. Wainwright Gas Co., [1932] 2 D.L.R. 145 (Alta. C.A.), refd to. [para. 31].

Stubart Investments Ltd. v. Minister of National Revenue, [1984] 1 S.C.R. 536; 63 N.R. 241, refd to. [para. 38, 39, 93].

Golden et al. v. Minister of National Revenue, [1986] 1 S.C.R. 209; 65 N.R. 135, refd to. [para. 38].

Bronfman Trust - see Phyllis Barbara Bronfman Trust.

Phyllis Barbara Bronfman Trust v. Minister of National Revenue, [1987] 1 S.C.R. 32; 71 N.R. 134, refd to. [para. 38].

Miller v. M.N.R., 62 D.T.C. 1139 (Ex. Ct.), refd to. [para. 40].

Perrault v. Minister of National Revenue, [1979] 1 F.C. 155; 21 N.R. 530 (Fed. C.A.), refd to. [para. 42].

Salomon v. Salomon & Co., [1897] A.C. 22 (H.L.), refd to. [para. 51].

Farrar v. Farrars Limited (1888), 40 Ch. D. 395, refd to. [para. 51].

Borland's Trustee v. Steel Brothers & Co., [1901] 1 Ch. D. 279, refd to. [para. 52].

Canadian Aero Service Ltd. v. O'Malley, [1974] S.C.R. 592, refd to. [paras. 53, 67, 68].

Henry v. Great Northern Ry. Co. (1857), 1 De G. & J. 606, refd to. [para. 56].

Jacobsen v. United Canso Oil & Gas Ltd. (1980), 23 A.R. 512; 113 D.L.R.(3d) 427 (Q.B.), refd to. [paras. 58, 60].

Rondeau v. Poirier, [1980] C.A. 35 (Qué.), refd to. [paras. 61, 62].

Birch v. Cropper; In re Bridgewater Navigation Co. (1889), 14 App. Cas. 525 (H.L.), refd to. [para. 70].

Champ v. The Queen, 83 D.T.C. 5029 (F.C.T.D.), refd to. [paras. 90, 92, 97].

Murphy v. The Queen (1980), 80 D.T.C. 6314 (F.C.T.D.), refd to. [paras. 96, 97, 101].

Bronfman v. M.N.R., [1965] C.T.C. 378 (Exch. Ct.), refd to. [para. 99].

Statutes Noticed:

Business Corporations Act, R.S.S. 1978, c. B-10, generally [para. 34]; sect. 6(1)(c)(i) [para. 73]; sect. 24(4) [para. 2]; sect. 24(4)(a) [paras. 25, 26, 28, 73]; sect. 24(4)(b) [paras. 33, 43]; sect. 27 [paras. 76, 77, 78, 84]; sect. 27(1) [para. 76]; sect. 40 [paras. 2, 22]; sect. 40(a) [para. 49]; sect. 97(1) [paras. 2, 22]; sect. 170(1)(c) [para. 79]; sect. 170(3) [para. 80]; sect. 234(1) [paras. 2, 34].

Income Tax Act, S.C. 1970-71-72, c. 63, sect. 56(1) [para. 45]; sect. 56(2) [paras. 2, 10-20, 37 et seq.].

Saskatchewan Business Corporations Act - see Business Corporations Act.

Authors and Works Noticed:

Boivin, Michelle, Le droit aux dividendes et le dividende "discrétionnaire" (1987), 47 R. du B. 73, generally [para. 32]; pp. 92 [para. 63]; 93 [para. 81]; 94 [para. 70]; 106 [para. 86].

Bryden, R.M., The Law of Dividends, in Jacob S. Ziegel, ed., Studies in Canadian Company Law (1967), p. 270 [para. 32].

Comment, McClurg v. The Queen: The Last Bastion for Income-Splitting? (1986), 34 Canadian Tax Journal 404, generally [para. 86].

Eisenberg, Melvin, The Legal Roles of Shareholders and Management in Modern Corporate Decision Making (1969), 57 Cal. L. Rev. 1, p. 180 [para. 35].

Fraser and Stewart, Company Law of Canada (5th Ed. 1962), p. 532 [paras. 56, 63].

Martel, Maurice and Paul Martel, La compagnie au Québec, Les aspects juridiques, vol. I, 1987, generally [para. 32]; pp. 18-14 [para. 66]; 18-14A [paras. 65, 66]; 18-14B [para. 64].

Quessy, Pierre, Les aspects corporatifs et fiscaux des actions à dividende discrétionnaire, Revue de Planification fiscale et successorale, 1985, vol. 7, no. 1, pp. 42, 43 [para. 65]; 45 [para. 28]; 48 [para. 34].

Schmitthoff, Clive M., Palmer's Company Law (23rd Ed. 1982), vol. 1, pp. 384 [para. 52]; 387 [paras. 24, 54].

Wegenast, F.W., The Law of Canadian Companies (1979), pp. 320 [para. 55]; 321 [paras. 34, 55]; 322 [para. 34].

Welling, Bruce, Corporate Law in Canada (1984), pp. 81 [para. 52]; 502 [para. 84]; 583 [para. 25]; 584 [para. 77]; 588, 589 [para. 33]; 609, 610 [para. 42]; 614 [paras. 23, 49].

Counsel:

Ian S. MacGregor and Brent Paris, for the appellant;

Robert W. Thompson and Gordon Balon, for the respondent.

Solicitors of Record:

John C. Tait, Q.C., Ottawa, Ontario, for the appellant;

Bennett Jones, Calgary, Alberta, for the respondent.

This appeal was heard on November 29, 1989, before Dickson, C.J.C., Wilson, La Forest, L'Heureux-Dubé, Sopinka, Gonthier and Cory, JJ., of the Supreme Court of Canada.

The judgment of the court was delivered in both official languages on December 20, 1990, including the following opinions:

Dickson, C.J.C. (Sopinka, Gonthier and Cory, JJ., concurring) - see paragraphs 1 to 46;

La Forest, J., dissenting (Wilson and L'Heureux-Dubé, JJ., concurring) - see paragraphs 47 to 103.