Jan 26th, 2023
Sep 9th, 2020
By Philippe Brunelle
In a recent decision of the Tax Court of Canada, the Honourable Don. R. Summerfeldt comments on the principles applicable to section 160 of the Income Tax Act (I.T.A.) in a very interesting manner, concluding nevertheless, as the Federal Court of Appeal did in Gilbert v. the Queen (Gilbert), that the full amount of a pre-tax dividend may be claimed from the shareholder in the event of the application of section 160 I.T.A.
The purpose of section 160 I.T.A. is to regulate transfers from a tax debtor to related persons without fair consideration. Notably, in the case at hand, it allows the tax authorities to claim from the recipient of a dividend an amount equal to the tax liability of the corporation paying the dividend, up to the fair market value of the dividend.
In the Mamdani Family Trust (Mamdani) case, the shareholder trust of a corporation that had become insolvent received dividends totalling more than $3,500,000 in the years 2000, 2001 and 2002. Following the receipt of these dividends, the trust and the beneficiaries paid almost $1 million in taxes, leaving an after-tax asset of less than three million dollars.
The Canada Revenue Agency's position in the Tax Court of Canada was to recover from the trust and its beneficiaries the total gross value of the dividends, which was more than $3,500,000.
To counter this position, the appellant presented an extensive valuation of the fair market value of the dividends to be considered for the purposes of section 160 I.T.A., arguing that the fair market value should be the after-tax dividend, worth less than three million dollars. In fact, the expert considers that the fair market value of the dividend will vary according to the tax rate paid by the recipient.
For Justice Summerfeldt, the first step is to determine the time at which the value of the dividend must be determined under section 160 I.T.A., i.e. the "time of transfer". In doing so, the Court concludes that at the time the dividend is issued by the corporation, i.e. the "transfer time", it is worth more than $3,500,000, which coincides with the time it is received by the trust. The value of the dividend for the purposes of section 160 I.T.A. is therefore the gross value of the dividend, and not its value less taxes that will be paid later.
The relevant amount for the purposes of section 160 I.T.A. is therefore the full amount of the dividend. The appellant also argued that this interpretation would mean a double taxation, since she was taxed at the time she received the dividend in addition to having a potential tax liability for the full amount because of section 160 I.T.A. The Court concluded that section 160 I.T.A. is a tax collection provision, and not a tax burden creation provision. This section simply allows the debt of a tax debtor to be transferred to a related party without creating an additional tax. There is therefore no double taxation.
Thus, like the Federal Court of Appeal in Gilbert, the Court concluded that the trust and the beneficiaries are respectively liable up to the full amount of the dividend received before taxes, despite the fact that they have collectively already paid close to $1 million in taxes following the receipt of the dividend.
The Court notes that in the United States, a payment following an assessment based on the equivalent section of section 160 I.T.A. gives rise to a claim for loss, thereby countering the effect of previously paid taxes. Unfortunately, no similar principle has been introduced in the Income Tax Act.
 Mamdani Family Trust v. The Queen, 2020 TCC 93
 R.S.C., 1985, c. 1 (5th suppl.)
 2007 FCA 136