Cases
Envision Credit Union v. The Queen, 2013 DTC 5144 [at 6275], 2013 SCC 48
The taxpayer ("Envision") was formed on the amalgamation under the Credit Union Incorporation Act (B.C.) (the "CUIA") of two credit unions. S. 23(b) thereof provided that "the amalgamated credit union is seized of and holds and possesses all the property ... and is subject to all the debts ... of each amalgamating credit union."
The taxpayer sought to avoid having this qualify as an amalgamation described in s. 87(1) of the Act (which required that all property of the predecessors, other than intercompany shares or debts, become property of the amalgamated corporation). To this end, a beneficial interest in some "surplus" real estate was conveyed to a numbered corporation subsidiary at the exact stipulated time for the amalgamation in the amalgamation agreement.
In finding that the taxpayers had failed to avoid the application of s. 87(1), Rothstein J stated (at para. 56):
Although there is extrinsic evidence that the predecessors intended to prevent Envision from being seized of the surplus properties, such an arrangement would be in violation of s. 23(b) of the CUIA. When a contract may be construed in two ways, a lawful interpretation ought to be preferred over an unlawful one: G. McMeel, The Construction of Contracts: Interpretation, Implication, and Rectification (2nd ed. 2011), at para. 7.31. Accordingly, the words of the contract (as opposed to the intention of the parties with respect to tax consequences) are best interpreted as merely ensuring that the surplus properties were sold at the time of the amalgamation. This interpretation is consistent with s. 23(b) of the CUIA. As a result, the amalgamation agreement is not invalid.
Richstone v. MNR, 72 DTC 6232, [1972] CTC 265 (FCTD), briefly aff'd 74 DTC 6129 (FCA)
In rejecting an argument that a payment for a non-compete covenant was not taxable under what now is s. 6(3)(d) because the covenant was unforceable, Collier J. stated (at p. 6238):
"That, however, does not solve the problem for the purposes of the section of the Income Tax Act in question. The covenant is a subsisting one: no one has yet challenged it and until that is done it is binding on the parties."
Continental Bank Leasing Corp. v. The Queen, 98 DTC 6505, [1998] 2 S.C.R. 298
There was no dispute that the participation by the taxpayer, as a partner, in a partnership for a four-day period resulted in a breach by its parent (a bank) of s. 174(2)(i) of the Bank Act, which prohibited the direct or indirect investment or participation in a partnership by a bank. The majority found that the unlawfulness of the investment by the bank and the taxpayer did not affect the legality of the partnership's business or of the taxpayer's participation in the partnership. Furthermore, considerations of public policy required that breaches of the Bank Act not lead to the invalidation of contracts and other transactions because "to unravel commercial transactions on the basis that a corporate actor breached a statute is to introduce uncertainty into the affairs of individuals and businesses" (p. 6509) and, furthermore, s. 20(1) of the Bank Act (which stated that no act of a bank was invalid by reason only that the act was contrary to the Act) supported the view that Parliament never intended breaches of the Bank Act to render bank transactions null and void.
Bow River Pipe Lines Ltd. v. The Queen, 97 DTC 5385, Docket: A-472-96 (FCA)
A wholly-owned subsidiary ("Lone Rock") of the taxpayer held a 99.9% limited partnership interest in a partnership between Lone Rock and a subsidiary of Lone Rock ("Newco"). Lone Rock assigned its limited partnership interest in the partnership to the taxpayer, the taxpayer on the same day caused Lone Rock to be wound up, and the following day Newco and the taxpayer signed a distribution agreement whereby the partnership assigned all its assets to the taxpayer.
The taxpayer was found not to have become a member of the partnership because the assignment of Lone Rock's limited partnership interest had not complied with provisions of the partnership agreement that required: the assignee of the interest to agree in writing to be bound by the terms of the agreement; the execution by the assignor to be guaranteed by a Canadian chartered bank; and all requisite filings as required by the Partnership Act (Alberta) to be made. There could be no finding of an implicit consent of the parties to these breaches because the partnership agreement also provided that no amendment thereto would be effective unless it had been approved by an extraordinary resolution.
Cooper v. The Queen, 88 DTC 6525, [1989] 1 CTC 66 (FCTD)
In finding that the making of an interest-free loan by executors in breach of their duties under provincial law did not give rise to a benefit to the recipient, Rouleau, J. stated: "A well established principle of income tax law states that the illegality (if any) of actions of the taxpayer, in this case the payment to the Plaintiff in relation to the terms of the trust, is irrelevant in the assessment of tax liability."
Curlett v. MNR, 61 DTC 1210 (Ex Ct), briefly aff'd 62 DTC 1320, [1967] CTC 62, [1967] S.C.R. 280
The taxpayer regularly made mortgage loans at a discount and then sold them for their face amount to his company. In dealing with a submission that the mortgage discounts were not income to the taxpayer because he had an obligation, as a director of his company, to account to that company for the profits, Dumoulin J. noted that the taxpayer "had not evinced discernible signs of being prompted by any lurking urge to discharge such a belatedly invoked obligation to refund the" company. His profits were taxable.
See Also
McLarty v. The Queen, 2014 DTC 1162 [at 3556], 2014 TCC 30
On December 31, 1993, the taxpayer and 21 other signatories to a joint venture acquired rights to exploit seismic data. Under the terms of the joint venture agreement, no nominees were permitted, but in fact various of the purchasers were acquiring their rights on behalf of others (totaling 30) who also claimed Canadian exploration expense deductions for "their" share of the seismic expenditures. Favreau J stated (at para. 80) that this:
is not an indication of a sham. It is rather an indication that some persons were not legally members of the Joint Venture and were not entitled to the deductions. The Minister should have simply denied those person the tax deductions... .
Richter & Associates Inc. as trustee of Castor Holdings Ltd. v. The Queen, 2005 TCC 92,
In rejecting a submission that the trustee for a bankrupt company was not authorized by the Bankruptcy and Insolvency Act to engage in a "litigation support business" of providing assistance to most of the creditors in connection with their action sounding in negligence against company's former auditors, C&L for $800 million in damages, Archambault J stated (at paras. 33-4):
[T]he Trustee, acting as agent for the Estate, was legally entitled to carry on the undertaking in question. … In any event, I would add that the Act is not to be applied to transactions that ought to have taken place, nor is it to be applied only to transactions that could be legally carried out. In my view, the Act ought to be applied to what has actually taken place.
See summary under s. 141.01(2).
Wallsten v. The Queen, 2001 DTC 215, Docket: 1999-5116-IT-I (TCC)
The taxpayer entered into a contract with Sun Life to provide sales services as an independent contractor. The taxpayer then agreed with a company owned by him and his family ("Lakeside") that Lakeside would receive all proceeds under the contract with Sun Life. Lakeside provided all equipment and supplies for the conduct of the sales business and paid salary to the taxpayer.
Before finding that none of the income earned under the contract with Sun Life was income of the taxpayer notwithstanding a clause in the contract with Sun Life indicating that no assignment of the benefits of the contract would be made by the taxpayer, and after noting judicial authorities that "'an attempted assignment of contractual rights in breach of a contractual prohibition is ineffective to transfer such contractual rights'", Bell TCJ indicated (at p. 217) that "the issue in this appeal has nothing to do with a contractual dispute with a third party".
Bernier v. The Queen, 97 DTC 317 (TCC)
The taxpayer's employer issued employee stock options to the taxpayer and others. Later in the same year, the Quebec Securities Commission notified the employer that the options did not comply with the Quebec Securities Act, and the employer responded by notifying the Commission that it would treat the options that had been awarded as null and void.
In finding that the taxpayer was not entitled to any deduction under s. 110(1)(d) in respect of a lump sum she received in the following year in consideration for the waiver of her rights under the stock option, Lamarre Proulx TCJ. found that the shares subject to the option could not be prescribed shares when they could never be issued or purchased.
Cox v. The Queen, 96 DTC 1690 (TCC)
The fact that a transfer of property from the taxpayer's spouse to the taxpayer was void against the trustee in bankruptcy of the spouse did not prevent the application of s. 160(1) to the taxpayer given that the proper interpretation of the Bankruptcy Act was that the trustee had to do something to render the transaction void, which did not occur.
Lemoine v. The Queen, 96 DTC 1655 (TCC)
A loan made by a corporation to its individual shareholder was subject to s. 15(2) notwithstanding that the Companies Act (Quebec) prohibited a loan by a company to a shareholder.
Wuslich v. MNR, 91 DTC 704 (TCC)
Because the Province of Saskatchewan did not permit the taxpayer to carry on the practice of orthodontics through a corporation, income which his corporation purportedly derived from that practice was his income instead.
Administrative Policy
2001 Canadian Tax Foundation Roundtable Q. , 2001-0092495
Notwithstanding the Wallsten decision, the CCRA will not accept that insurance agents or realtors can transfer their commission income to a corporation if they are legally prohibited from doing so by third parties.
3 April 1996 Memorandum 952293
Respecting a spousal trust that was not formally varied before assets were distributed to non-spousal beneficiaries, the Directorate indicated that the distribution could not be ignored for income tax purposes, whether or not it was made legally, i.e., a disposition should not be ignored even if the trustee had no authority to distribute.
21 March 1991 Memorandum (Tax Window, No. 1, p. 14, ¶1162)
Fishing income was earned by corporations to which fishermen had leased their fishing licences, rather than by the fishermen personally, notwithstanding that corporations are expressly prohibited by law from holding such licences. The profits from a business are the income of the person carrying on the business even if the business is being carried on illegally.
31 May 1990 T.I. (October 1990 Access Letter, ¶1489)
RC generally would be reluctant to give its assent to a transaction prohibited by the Quebec Companies Act.
Articles
Marshall Haughey, "Issuing Shares for a Promissory Note", 24 Can. Current Tax, May 2014, p. 85.
Prohibition by jurisdiction (pp. 85-6)
[I]n Saskatchewan, Manitoba, New Brunswick, and Newfoundland…a promissory note cannot be given as consideration for the issuance of shares under any circumstances.…
In Alberta, Ontario, and under the CBCA, the restriction only applies to promissory notes issued by the subscriber or a person who does not deal at arm's length with the subscriber… [A] subscriber could pay for shares with a promissory note issued by an arm's length party. …
[I]n British Columbia, the restriction only applies to "a record evidencing indebtedness of the person to whom shares are to be issued" (i.e., a promissory note issued by the subscriber)….
[N]ova Scotia and Prince Edward Island's corporate legislation contains no restriction… .
Consequences of breach: invalid share issuance (pp. 86-7)
The case law is divided on what results when shares are issued for less than adequate or no consideration. The two streams of cases can be described as the "Nullification Stream" and the "Contextual Stream" .[fn 13: For a more comprehensive discussion of the cases see Greg Johnson, "Recent Developments of Interest to Tax Practitioners", 2005 Prairie Provinces Tax Conference (Toronto: Canadian Tax Foundation, 2005), 18:1-27 at 18:4-8.] The genesis of the "Nullification Stream" can be traced to Professor Bruce Welling's commentary from his textbook Corporate Law in Canada, which was adopted by the Québec Superior Court in Javelin International Ltd. v. Hillier. [fn 15: [1988] Q.J. No. 928 (Qc. Sup. Ct.),,,] In Welling's view, the use of the phrase "shall not be issued" in s. 25(3) of the CBCA (and its provincial equivalents) means that inadequate consideration results in a nullity as between the issuer corporation and the registered holder. This was also the view of the Tax Court in Ball v. MNR [fn 16: …92 D.T.C. 2123…] …. . Nullification was used in the recent Federal Court of Appeal case St Arnaud v. The Queen [St Arnaud]. [fn 18: [2013] F.C.J. No. 338, 2013 FCA 88.]. …[T]he court found that the money paid for shares was either not received by the corporation or received simply as a conduit for the fraudster. The result was that the shares were not validly issued.
Consequences of breach: consequences in court's discretion (p. 87)
The Contextual Stream of cases posits that corporate legislation does not explicitly state what remedy is available when shares are issued without being fully paid for; thus, it is up to the courts to decide on the appropriate remedy. The result can then be nullification, director liability, or permitting the purported shareholder to pay the subscription price to validate the share issue. There are lines of cases out of British Columbia [fn 19: Davidson v. Davidson Manufacturing Co. (1977), [1978] B.C.J. No. 60 (B.C.S.C.); Oakley v. McDougall, [1987] B.C.J. No. 272, 17 B.C.L.R. (2d) 134 (B.C.C.A.); Re Lajoie Lake Holdings Ltd, [1991] B.C.J. No. 137 (B.C.S.C.).] and Ontario, [fn 20: See Dunham and Pollo Tours Ltd. (No. 1), [1978] O.J. No. 3380, 20 O.R. (2d) 3, (Ont. H.C.J.); Gillespie v. Retail Merchants' Assn. of Canada (Ontario) Inc., [1997] O.J. No. 956 (Ont. C.J.).] supporting this view. A more recent Alberta Court of Appeal case also adopts the contextual approach… [fn 21: Pearson Finance Group Ltd. v. Takla Star Resources Ltd., [2002] A.J. No. 422, 2002 ABCA 84, aff'g [2001] A.J. No. 917, 2001 ABQB 588 [Takla].]… .
Validation by curative provision (p. 88)
Interestingly, neither the Nullification Stream nor the Contextual Stream referred to subs. 16(3) of the CBCA or its provincial equivalents. [fn 24: ABCA, s. 17(3); SBCA, s. 16(3); MCA, s. 16(3); OBCA, s. 17(3); NBBCA, s. 14(3); NLCA, s. 29. Subsection 33(2) of the BCBCA is slightly narrower in that it only validates acts that are done contrary to the company's constating documents.] That provision states that "[n]o act of a corporation, including any transfer of property to or by a corporation, is invalid by reason only that the act or transfer is contrary to its articles or this Act". This wording is seemingly dispositive of the issue; yet, this is not entirely clear as ambiguity exists in the wording "by reason only"….