Strachan v. R. – TCC: Issuance of Treasury Shares Below FMV a Benefit Conferred on Wife by Husband

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Strachan v. The Queen[1] (December 4, 2013) involved three significant issues[2] arising out of the issuance of treasury shares of Northside Development Corporation (“Northside) at less than fair market value to Mrs. Strachan at dates when Northside was controlled by her husband and he had an outstanding tax liability.  Particulars of the share issuance are as follows:

a)       Transfers of shares

[16]        On December 19, 1990, the appellant and Mr. Strachan entered into a Mariage Contract in which, among other things, Mr. Strachan agreed to transfer all of his shares in the capital stock of Northside for the consideration of $1.00 payable upon execution of the contract. According to Northside’s corporate records, Mr. Strachan continued to be the sole shareholder of Northside until January 2001. Mr. Strachan owned or acquired the two shares of Northside as follows:

i.        he owned one of the shares prior to the execution of the Marriage Contract, and

ii.       the second share was acquired on March 30, 1993 in consideration of Mr. Strachan transferring to Northside a leasehold interest in the building in which Northside carried on its business, Mr. Strachan and Northside jointly making an election pursuant to section 85 of the Act.

He claims he transferred beneficial ownership of these two shares to the appellant by the Marriage Contract executed in December 1990.

[17]        On January 29, 2001, the appellant suscribed for 38 common shares of Northside for a consideration of $38,000. The Minister’s expert witness estimated that on March 31, 2001 the fair market value of the 40 issued shares was $263,000. Northside’s year end was March 31.

[18]        Then, on February 22, 2002, the appellant subscribed for an additional 75 common shares of Northside for a consideration of $75,000. The Minister’s expert witness estimated that on March 31, 2002 the fair market value of all the 115 issued shares was $334,000; 75 shares was thus valued at $217,800.

[19]        It was only on December 9, 2004 that a resolution of the director of Northside was signed transferring two common shares to the appellant for no consideration (purportedly in accordance with the marriage contract) and cancelling the share certificates registered in the name of Mr. Strachan in whose name they were registered until December 9. Mr. Strachan was sole director of Northside at all relevant times.

[Footnote omitted]

The first issue was Mr. Strachan’s contention that he had held the shares in trust for his wife since the date of their marriage.  The court did not accept this argument:

[23]        Mr. Strachan was the beneficial owner of the dividends paid to shareholders and received by him as owner of the two shares. He received the dividend for his own use and enjoyment. He enjoyed all the attributes of ownership of the shares and of the dividend received. In Covert Estate v. Nova Scotia (Minister of Finance) the Supreme Court stated that a “beneficial owner” is one who can “ultimately” exercise the right of ownership in the property. On the evidence before me it was Mr. Strachan who “ultimately” exercised the right of ownership of the two shares at all times prior to December 9, 2004. One of the shares registered in Mr. Strachan’s name was issued in consideration for his sale to the corporation of a leasehold interest in 1993, several years after the execution of the marriage contract. I fail to understand how this particular share could have been contemplated in the marriage contract. Mr. Strachan said that the reasons he, and not a corporation, owned the leasehold interest originally was because the Federal Business Development Bank, who loaned $225,000 to the venture, insisted it be owned by him personally. He stated that the “rollover” of the leasehold to Northside took two years while the CRA reviewed the documents.

[24]        Mrs. Strachan’s husband was the beneficial owner of the two common shares until they were actually transferred to her on December 9, 2004. It was Mr. Strachan to whom Northside paid dividends before December 9, 2004 and it was Mr. Strachan who received the dividends payable on these two shares. It was Mr. Strachan, not Mrs. Strachan, who included the amount of dividends in his income for tax purposes for the year of receipt. In a previous appeal to this Court Mr. Strachan agreed that in 1992, the taxation year then under appeal, he was the sole shareholder and employee of Northside.

[Footnotes omitted]

The second was the argument that the issuance of treasury shares was not a “transfer” of property to Mrs. Strachan by her husband.  The court also rejected this reasoning:

[37]        Subsection 160(1) of the Act includes the same words found in subsection 74(1) considered in Kieboom:

… a person has … transferred property, either directly or indirectly … by any other means whatever …

… une personne a … transféré des biens, directement ou indirectement … de toute autre façon …

[38]        At hand, Mr. Strachan similarly transferred property to the appellant in that he gave her first 95 percent then 98 percent of his capital interest in Northside by allowing her to subscribe to 38 shares for a value of $38,000 and 75 shares for a value of $75,000 in 2001 and 2002 respectively. I have found that Mr. Strachan was the sole shareholder of Northside before December 9, 2004. He thereby divested himself of the rights attached to his shares in the same proportion (i.e. his right to vote as sole shareholder, to receive 100 percent of the dividends should they be declared and to receive all the remaining property of the corporation on dissolution). The fact that Mr. Strachan accomplished the transfer of the shares to the appellant by causing Northside to issue them should make no difference.

Finally there was the question of the value to be attributed to the shares.  There the court made some adjustments to CRA’s valuation:

[60]        While it is by no means a fail proof method of fixing professional fees and travel expenses in making adjustments, I make the following adjustments having regard to Northside’s business activity over the years. The expenses for travel and professional fees should be adjusted as follows:

1999 2000 2001 2002 2003 2004
Travel $22,000 $30,000 $25,177 $22,000 $15,093 $33,000
Professional Fees $30,000 $13,004 $33,000 $15,000 $15,000 $10,048

[61]        With respect to the adjusted book value by Mr. Hawkins of the one‑ton plant I make the following adjustments: I would retain the one‑ton plant’s adjusted book value as of March 31, 2001 at $500,000; the book value for each subsequent year, however, should be reduced by 20 per cent on declining balance.

[62]        I would make no other changes to Mr. Hawkins’ valuations except for adjustments to other items that may be required as a result of the proposed adjustments.

[Footnote omitted]

Accordingly the court allowed the appeal but awarded the Crown two thirds of its costs.

[1] 2013 TCC 362.

[2] There was also a minor benefit ($6,543.95) to Mrs. Strachan relating to the transfer of some real property from her husband.  That benefit was upheld by the court.