Tax Court of Canada


Income tax

Administration and enforcement

Companies not related for purpose of s. 251(2) of Act because it did not have de jure control

Holding company H Ltd. and Sc trust each held 50 per cent of shares of operating company P Ltd.. H Ltd. was held by S trust, whose beneficiaries were WS and BB. P Ltd. paid dividends to H Ltd. for no consideration at time when P Ltd. owed corporate income tax debt. H Ltd. then paid dividends in S trust for no consideration, which distributed funds to WS and BB as beneficiaries of trust, for no consideration. Minister of National Revenue assessed H Ltd., S trust, WS and BB (appellants) under s. 160 of Income Tax Act. Appellants appealed. Appeals dismissed. H Ltd. was not related to P Ltd. for purpose of s. 251(2) of Act because it did not have de jure control of P Ltd.. WS, through S trust and H Ltd., controlled 50 per cent of shares of P Ltd., and MS, through Sc trust, controlled other 50 per cent of shares. Tax plan was put in place to allow for income splitting between WS and his family members, which included payment of dividends by P Ltd. to H Ltd., and then by H Ltd. to S trust. MS and WS, as P Ltd.’s only directors and officers acted in concert and with common economic interest to decide how they would withdraw profits made by P Ltd. for their personal use. There was no evidence that P Ltd. paid dividends at discretion of MS. H Ltd. and P Ltd. did not deal at arm’s length with respect to payment of dividends by P Ltd., and since this was only issue regarding application of s. 160 of Act, appeals were dismissed. 

HLB Smith Holdings Limited v. The Queen (2018), 2018 CarswellNat 2072, 2018 TCC 83, Steven K. D’Arcy J. (T.C.C. [General Procedure]).

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