Tax Court of Canada


Income tax

Special rules

Wife could not receive dividend income from shares in professional corporation

Shares in taxpayer dentist’s professional corporation were held by family trust until new professional rule required him to own such shares. Taxpayer distributed shares to wife who gifted them back to him. Corporation declared dividends to taxpayer that were reported in wife’s income through operation of attribution rules. Taxpayer, after agreeing to sell practice to arm’s length purchaser, carried out corporate reorganization before selling certain shares to wife and two children. Purchaser paid $4.5 million for outstanding shares of corporation. Taxpayer reported capital gains of $760,537 before deduction, while family members’ capital gains deductions essentially reduced their reported taxable capital gains of $367,443 each to nil. Minister reassessed taxpayer, applying s. 74.5(11) of Act to prevent attribution of dividend income to wife, applying s. 86(2) of Act to bar tax-free basis of issuance of new shares, and imposing gross negligence penalties. Taxpayer appealed. Appeal allowed in part. Wife could not own shares of professional corporation, as that was prohibited by rules of professional body, and so she could not receive dividend income on such shares. It was only through application of s. 74.1 of Act that dividends could be taxed in wife’s hands. Shares could have been distributed directly by trust to taxpayer and only possible conclusion was that tax plan was specifically designed to take advantage of income attribution rule. Minister properly assessed dividends to taxpayer.

Mady v. The Queen (2017), 2017 CarswellNat 2718, 2017 TCC 112, Robert J. Hogan J. (T.C.C. [General Procedure]).

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