If dividend was repayment of loan there would be no debt remaining afterward

Tax – Income tax – Administration and enforcement

Corporate taxpayer was sole shareholder of numbered company, and they had same sole director. In June 2006, company declared dividend of $600,000 in favour of taxpayer and taxpayer agreed to loan $600,000 to company. Minister assessed company under Income Tax Act for $116,754.22 in respect of 2006 taxation year. Minister assessed taxpayer under s. 160(1) of Act for this amount. Taxpayer appealed. Appeal dismissed. It was undisputed that there was transfer of property from company to taxpayer while company had tax liability. Director, sole decision maker for both companies, was dictating terms of bargain for both sides of this transaction. Facts did not reflect ordinary commercial dealings between two parties acting in their separate interests as it was apparent no reasonably prudent arm’s length person would pay $600,000 for opportunity to obtain loan for same amount. Due to director’s control, taxpayer and company were deemed by s. 251(1) of Act not to be dealing with each other at arm’s length . Transactions apparently involved company declaring dividend in favour of taxpayer, who then agreed to loan in same amount so that company could pay this dividend to it, but evidence did not suggest that there was actual transfer of funds on date of transactions. Later repayments of loan suggested that it was entirely separate transaction with its own consideration since, if dividend was repayment of loan, there would be no debt remaining afterward and documentary evidence showed no connection between dividend and loan. Dividend payment had to be considered as separate transaction without consideration in return. Even if loan was consideration, fair market value of that consideration was not $600,000. Taxpayer and company were jointly and severally liable to pay amount as assessed by Minister in respect of 2006 taxation year.

Gentile Holdings Ltd. v. The Queen (2020), 2020 CarswellNat 369, 2020 TCC 29, Diane Campbell J. (T.C.C. [General Procedure]).

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