Law Times

Law Times • January 8, 2018 Page 15 www.lawtimesnews.com CASELAW RPD's findings, as it was appar- ent it still exercised independent judgment and conducted own assessment. RAD extensively re- viewed RPD's findings based on applicants' submissions and re- cord, and reasonably recognized RPD had meaningful advantage in assessing credibility. Both RPD and RAD found sterilization no- tices were fraudulent, so RAD's findings about future risks of ster- ilization were inconsequential to decision. Guo v. Canada (Minister of Citizenship and Immigration) (2017), 2017 CarswellNat 875, 2017 FC 317, Keith M. Boswell J. (F.C.). Tax Court of Canada Tax INCOME TAX Business and property income Taxpayer assessed gross negligence penalties for false statement relating to management fee After business operated by tax- payer's almost-wholly owned company ceased operations, he formed new corporation with friend. Friend purchased as- sets of that new corporation for $450,000, with such proceeds dis- tributed by taxpayer's company issuing invoice to new corpora- tion for management services of $223,250 and authorizing pay- ment directly to taxpayer. Tax- payer's income tax return initially did not include management service fee into income and then, on adjusting entry, it was applied against larger shareholder loan ac- count. Company filed corporate tax return, claiming management services amount into income and applying loss carryovers from pre- vious years to wipe out almost all of its business income. Minister assessed taxpayer for unreported management service fees and im- posed gross negligence penalties and reassessed company without deleting such amount from its income. Taxpayer and company appealed. Taxpayer's appeal dis- missed; company's appeal al- lowed. Parties agreed that com- pany's reassessment, which led to double taxation of same income, was protective assessment and that one of parties' appeals should be allowed. There was no written agreement between companies for provision of management ser- vices nor between taxpayer and company for provision of his ser- vices to new corporation on com- pany's behalf. There was no legal relationship that existed requiring new corporation to pay company management fee for services ren- dered by taxpayer. Invoice did not provide any details about services rendered or how "fees" equating to 50 per cent of proceeds of sale were calculated. Taxpayer's cred- ibility was severely lacking, given inconsistency with his position in prior tax appeal trial that amount he received was his share of profits due as shareholder of new corpo- ration. Alleged agreement to pay company management fees was fabricated just before completion of asset purchase transaction in order to use losses already ex- isting in company and remove funds tax free from company by drawing down from shareholders account. Taxpayer was properly assessed gross negligence penal- ties as his false statement of not including management fee in his income was made knowingly with awareness that there was no agreement to pay company such fee. McLeod v. The Queen (2017), 2017 CarswellNat 5225, 2017 TCC 192, F.J. Pizzitelli J. (T.C.C. [General Procedure]). INCOME TAX Special rules Wife could not receive dividend income from shares in professional corporation Shares in taxpayer dentist's pro- fessional corporation were held by family trust until new profes- sional rule required him to own such shares. Taxpayer distrib- uted shares to wife who gifted them back to him. Corporation declared dividends to taxpayer that were reported in wife's in- come through operation of at- tribution 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 outstand- ing shares of corporation. Tax- payer 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 taxpay- er, 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 is- suance of new shares, and im- posing gross negligence penal- ties. Taxpayer appealed. Appeal allowed in part. Wife could not own shares of professional cor- poration, 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 distrib- uted directly by trust to taxpayer and only possible conclusion was that tax plan was specifi- cally designed to take advantage of income attribution rule. Min- ister 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]). Ontario Civil Cases Bankruptcy and Insolvency AVOIDANCE OF TRANSACTIONS PRIOR TO BANKRUPTCY Fraudulent and illegal transactions Debtor incorporated for purpose of carrying out "inappropriate conduct" D and C ran various compa- nies (D/C companies), includ- ing debtor company which was incorporated on May 28, 2013. Respondent R had loaned money to various D/C companies. On June 6, 2013, debtor entered into agreement that factoring com- pany L Co. would purchase cer- tain receivables owing to debtor on account of work done and services supplied by debtor. L Co. advanced $1,107,017.87 to debtor's account between June 10 and 28, 2013. Between June 3 and July 12, 2013, debtor made five payments totalling $411,000 into joint ac- count held by R and his wife, re- spondent A, as partial re-payment of loans R had made to other D/C companies. Debtor was placed in bankruptcy in December 2013. Trustee brought application for order under s. 96 of Bankruptcy and Insolvency Act to have R and A pay $411,000 to estate on basis monies were received pursuant to transfer at undervalue trans- actions. Application granted in part. Requirements in s. 96(1)(a) were met in respect of R. Receipt by R of payments from debtor was sufficient to constitute "deal- ing" within s. 96. R was dealing at arm's length. Payments occurred in year before debtor's bankrupt- cy, while debtor was insolvent. Given timing of events, debtor was incorporated for purpose of defrauding L Co., which it sub- sequently did. Debtor never had any employees, conducted any business, or had any real assets. Debtor's activities after incorpo- ration confirmed evidence debtor was incorporated for purpose of carrying out "inappropriate conduct". There was no evidence D/C companies were operating as single enterprise or joint venture. As L Co. did not become creditor until it advanced monies to debt- or on June 10th, transfers after that date, totalling $389,000, were transfers at undervalue and were to be repaid by R to debtor's estate. A was not party or privy to trans- fers and was not liable under s. 96. WF Canada, Re (2017), 2017 CarswellOnt 8208, 2017 ONSC 3074, L.A. Pattillo J. (Ont. S.C.J.). Business Associations SPECIFIC MATTERS OF CORPORATE ORGANIZATION Shareholders Shareholder not having reasonable expectation she would become manager or receive dividends Applicant was minority share- holder of LL Inc. which was fam- ily business. Applicant and his brother each received 24 per cent of shares in context of father's es- tate planning and gift of shares had never been accompanied by promises or insinuations re- garding involvement in manage- ment. Applicant asked brother to buy back all of his remaining shares but since these shares were ordinary shares, not accompa- nied by redemption option, LL Inc. refused to redeem remain- ing shares and brought motion in attempt to force redemption. Applicant alleged that she ex- pected dividends when family business was profitable and that brother chose not to distribute profits and made questionable business decisions. Applicants unsuccessfully brought motion for oppression under s. 248 of Business Corporations Act. Mo- tion dismissed. Applicant ap- pealed. Appeal dismissed. Judge did not err in law or in fact when he concluded that conduct of respondent was not abusive or unfair or that it would harm in- terests of applicant as sharehold- ers. Judge clearly explained why applicant did not have reason- able expectation as shareholder, that she would become manager or employee or that she would receive dividends, given chal- lenges facing lumber industry. Judge correctly concluded that only applicants' claim that was not time-barred was remedy for non-payment of dividends. Lemoine c. Lecours (2017), 2017 CarswellOnt 18606, 2017 ONCS 7011, Swinton J., Lin- hares de Sousa J., and Favreau J. (Ont. Div. Ct.); affirmed (2017), 2017 CarswellOnt 10842, 2017 ONCS 3230, Robert N. Beau- doin J. (Ont. S.C.J.). Civil Practice and Procedure COSTS Security for costs Litigant need not establish that third party litigation funding unavailable Ecuadorian plaintiffs, on behalf of 30,000 Ecuadorian residents, obtained judgment of US$9.5 billion from Ecuadorian court against defendant C Corp. for environmental damage. Plain- tiffs sought to enforce judgment in Ontario against C Corp. and its seventh level, indirect sub- sidiary, CC. Plaintiffs appealed judgment granting defendants' motion for summary judgment dismissing claims against CC on basis of its separate corpo- rate personality. Motion judge granted defendants' motion for security for costs against plain- tiffs. Fact that plaintiffs were nor- mally resident outside of Ontario triggered inquiry into security for costs. Judge held that plain- tiffs had not established that they were impecunious or that third party litigation funding was unavailable, and they did not demonstrate that their claim had good chance of success. Plaintiffs brought motion to vary security for costs order. Motion granted and order vacated. Judge's failure to conduct holistic analysis of justness of order constituted er- ror in principle. Unique circum- stances led to conclusion that interests of justice required that no order for security for costs be made. This was public interest litigation. It would be impracti- cal to obtain direct evidence of impecuniosity from representa- tive plaintiffs. Defendants had annual gross revenues in billions of dollars. There should be no bright line rule that litigant must establish that third party litiga- tion funding was unavailable to successfully resist motion for security for costs. It could not be said that this was case wholly de- void of merit, even though plain- tiffs' arguments were innovative and untested. Yaiguaje v. Chevron Cor- poration (2017), 2017 Carswel- lOnt 16763, 2017 ONCA 827, Alexandra Hoy A.C.J.O., E.A. Cronk J.A., and C.W. Hourigan J.A. (Ont. C.A.); reversed (2017), 2017 CarswellOnt 14592, 2017 ONCA 741, Gloria Epstein J.A., In Chambers (Ont. C.A.). Family Law COSTS Custody and access As long as there were unresolved issues, there was still "cause" not determined At hearing regarding final deter- mination of child's school and interim arrangements that were in child's best interests, order was made to effect that child should attend at school put forward by mother and that preservation of status quo parenting schedule was in child's best interests. In recognition of increased travel time by father because of child's school, father was permitted ad- ditional access. On issue of costs, father was ordered to pay costs to mother in total amount of $34,968.42 consisting of partial indemnity costs to date of moth- er's first offer to settle, substantial indemnity costs following moth- er's first offer to settle, HST and disbursements and HST. Mother was successful on two issues put before court. Issues were impor- tant to parties and involvement of Office of Children's Lawyer added somewhat to complexity of evidence. Father acted inap- propriately in communications with child. Costs incurred by mother were within amount rea- sonably contemplated by father to have been expended to cur- rent stage of litigation. Although issue of what school child would attend had now been finally de- termined, there were other issues which remained to be deter- mined. As long as there were un- resolved issues between parties there was still "cause" that had not been determined by court and it was up to trial judge to de- termine which party was entitled to $3,000 in costs fixed in earlier proceedings regarding child's school. To some extent parties agreed that it would be in child's best interests to attend school that court determined he should attend. It was open to father to accept that part of mother's offer and had he done so, costs to pre- pare for and attend focused hear- ing would have been reduced. Clark v. Moxley (2017), 2017 CarswellOnt 15569, 2017 ONSC 5892, L. Sheard J. (Ont. S.C.J.); additional reasons (2017), 2017 CarswellOnt 13011, 2017 ONSC 4971, L. Sheard J. (Ont. S.C.J.).

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