https://decisia.lexum.com/tcc-cci/decisions/en/item/309700/index.do
HLB Smith Holdings Limited v. The Queen (April 30, 2018 – 2018 TCC 83, D’Arcy J.).
Précis: The subsection 160(1) reassessments under appeal all resulted from dividends paid by an operating company in which the Smith Family had a 50% interest:
[1] Each of the four appellants has appealed an assessment under section 160 of the Income Tax Act. The assessments of HLB Smith Holdings Limited (the “Holding Company”) and the Smith Family Trust (2001) relate to the payment of dividends in 2007 and 2008 by Power Electric Systems Limited (the “Operating Company”) to the Holding Company and, in the case of the Smith Family Trust (2001), the subsequent payment of dividends by the Holding Company to that trust. The assessments of Wayne Smith and Brenda Lee Brunelle relate to subsequent distributions by the Smith Family Trust (2001) to each of Mr. Smith and Ms. Brunelle.
The other 50% was owned by the Scott Family. The taxpayer argued that they were not dealing at less than arm’s length with the Operating Company since Mr. Smith was a passive director who accepted the decisions of Mr. Scott in terms of dividends and other corporate matters. The Tax Court rejected this argument holding that Mr. Smith and Mr. Scott acted in concert to control the Operating Company and therefore each of the appellants dealt at less than arm’s length with the Operating Company for the purposes of subsection 160(1). As a result all of the appeals were dismissed with costs.
Decision: The Tax Court based its decision on an earlier decision of Justice Dussault in in Fournier (F.) v. M.N.R., [1991] 1 C.T.C. 2699, 91 DTC 746 dealing with directors acting in concert to control a corporation:
[25] I have reached a similar conclusion in these appeals. In my view, Mr. Smith and Mr. Scott acted in concert with respect to the payment of dividends by the Operating Company to the Holding Company and the Scott Family Trust.
[26] Mr. Smith, through the Smith Family Trust (2001) and the Holding Company, controlled 50% of the shares of the Operating Company, and Mr. Scott, through the Scott Family Trust, controlled the other 50% of the shares. More importantly, they were the only two directors and officers of the Operating Company.
[27] The Operating Company’s chartered accountant, Mr. Howatt, put forward a tax plan to allow for income splitting between the Appellant and his family members. The plan included the payment of dividends by the Operating Company to the Holding Company and then by the Holding Company to the Smith Family Trust (2001).
[28] Mr. Smith testified that he and Mr. Scott accepted the plan and at that point in time they began to split income with family members. In other words, Mr. Smith and Mr. Scott, acting in concert as the only directors of the Operating Company, authorized the payment of dividends to the Holding Company for the benefit of Mr. Smith and to the Scott Family Trust for the benefit of Mr. Scott. In the words of Judge Dussault, Mr. Smith and Mr. Scott as the Operating Company’s only directors and officers acted in concert and with a common economic interest to decide how they would withdraw the profits made by the Operating Company for their personal use.
[29] I do not accept the Appellant’s argument that Mr. Scott was the decision maker with respect to the payment of dividends. This is not consistent with the evidence before me. Mr. Smith testified that both he and Mr. Scott accepted the plan to pay the dividends. The Operating Company then, except with regard to one week, paid the $1,000 weekly amounts to the Holding Company pursuant to the agreement and direction of the two directors. There is no evidence before me that the Operating Company paid the dividends at the discretion of Mr. Scott.
As a result the appeals were dismissed with costs.