Trower v. R. – TCC: Amounts of dividends paid without proper corporate authority not taxable in the hands of former director/shareholder

Trower v. R. – TCC:  Amounts of dividends paid without proper corporate authority not taxable in the hands of former director/shareholder

https://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/367571/index.do

Trower v. The Queen (April 8, 2019 – 2019 TCC 77, Monaghan J.).

Précis:   The taxpayer and her estranged spouse were shareholders and directors of Cove BD Inc. (Cove).  They separated in the Fall of 2015.  The taxpayer ceased to be a director and shareholder of Cove on October 2, 2016 (or, possibly, September 30, 2016).  In February of 2017 her husband caused Cove to declare retroactive dividends of $50, 342 payable to the taxpayer in 2016 (representing a taxable amount of $58,900).  CRA assessed her in respect of the alleged dividends and she appealed to the Tax Court.

The Tax Court Judge found that Cove could not legally pay dividends to the taxpayer in respect of the period of 2016 in which she was a director and shareholder without her concurrence, which she had not given.  Accordingly the appeal was allowed.  The parties were to bear their own costs.

Decision:   Essentially this was a case of the taxpayer’s estranged spouse taking matters into his own hands over the clear objections of the taxpayer:

[15]  As indicated, Cove also made some direct transfers to Ms. Trower’s personal account and to Mr. Trower’s personal account. Although bank statements for the personal accounts were not made available to the Court, email correspondence between Tyler Dougan and Mr. Trower was submitted as evidence. In one email, Mr. Dougan summarizes a number of transfers from Cove’s bank account for the period August 31, 2016 to December 3, 2016. That summary shows direct transfers during that period totalling $7,550.91 to Mr. Trower’s personal account and totalling $2,976.77 to Ms. Trower’s personal account.

[16]  However, the character of any of these payments cannot be determined simply from the fact that there were transfers. For example, those payments could have been advances, loans, consulting fees, employment income earned by Mr. Trower, returns of capital on shares, dividends, reimbursement of expenses, repayment of advances from shareholders, etc. Accordingly, to determine whether any or all of these payments were dividends requires an examination of other evidence.

[17]  Ms. Trower testified that she had consistently advised Mr. Trower in 2016 that she did not want anything to do with Cove and that she was not interested in income splitting in 2016. She explained that the prior year she had agreed to income splitting, effected through a dividend payment to her by Cove but, at the time, had not understood the tax she would have to pay as a result. Once she understood that, she had no further interest in receiving dividends and told Mr. Trower that. A draft separation agreement, email exchanges between Ms. Trower and Mr. Trower, and between Ms. Trower and Mr. Dougan, are consistent with her testimony. In emails to Mr. Trower and Mr. Dougan, Ms. Trower repeatedly reasserts her position that she does not want to income split, that she does not want dividends, and that she believes she and Mr. Trower have agreed that she would not receive dividends.

[18]  She explained her motivation was twofold. Primarily, she was concerned because any additional income she had could put at risk benefits for their child with special needs. She expressed that concern in emails to Mr. Trower in 2016. However, as their marriage was ending, she also wanted nothing to do with Cove which she claims she knew very little about, notwithstanding her status as shareholder and director.

[19]  Mr. Trower did not dispute that Ms. Trower had told him a number of times that she did not want any dividends. However, his position is that Ms. Trower should have understood that, as they had split income in the prior years through dividend payments, income splitting would occur in 2016 as well. He stated that, as they were both shareholders, they both should receive dividends and that, because Ms. Trower had full access to the funds in the joint bank account, funds deposited by Cove to the joint bank account shouldbe treated as dividends paid to her (and presumably to him as well).

[39]  If Ms. Trower were a Cove shareholder, but not a director, at the time the payments were made, presumably the directors at that time could have declared and paid a dividend to her without her agreement. However, she was a director from January 1, 2016 until October 2, 2016, a period during which she consistently was objecting to dividend payments. Payments made when she was one of two directors would have required her acquiescence to be authorized and declared as dividends. So no amount paid by Cove in 2016 before October 2, 2016 could be a dividend. It is true that Mr. Trower, as sole director and shareholder after that date, would have had the power to approve transfers occurring on or after that date as dividends without having followed the best practice described above. However, Ms. Trower ceased to be a shareholder on September 30, 2016 and thus could not have received any dividends Mr. Trower himself might have approved after that date.

[40]  For the same reason, in my view, this is not a circumstance where the February 2017 resolution can be viewed as remedying a minor deficiency in the corporate record, sometimes referred to as “coopering up”, through preparation of documents to evidence events that are assumed to have occurred based on subsequent events.  Based on the evidence, it would be incorrect to assume that dividends had occurred in 2016, or at least prior to October 2, 2016. Rather, the overwhelming evidence is that no dividends had been approved by the directors or shareholders before that date in 2016.

[Footnotes omitted]

Since there were no effective dividends paid to the taxpayer in 2016 while she was a shareholder of Cove the appeal was allowed.  Both sides were to bear their own costs.