Calgary QC loses bid to unwind dividends that prompted unexpected tax bill and litigation
CRA wants 60 per cent of $550,000 dividends that Roderick J. McLeod, Q.C. thought would be tax free
An Alberta judge has refused a retired Calgary lawyer’s request to unwind a series of dividend payments from his investment company that landed him with a huge tax bill and spawned litigation against both the Canada Revenue Agency and his accounting advisors.
According to Alberta Court of Queen’s Bench Justice Johanna Price’s recent ruling, real property law expert Roderick McLeod, Q.C., paid himself a total of $550,000 between September 2013 and September 2014, believing the entire amount would be considered tax-free capital dividends.
The money came from his investment company R.J. McLeod Investments Inc. – an owner of shares and securities – of which the lawyer is the sole director and shareholder.
However, McLeod soon discovered that RJM’s capital dividend account (CDA) was in fact empty at the time of the transactions – when the CRA delivered the company a notice explaining that it intended to tax the payments at a rate of 60-per cent, amounting to $330,000.
The lawyer sought to reverse the payments, claiming he had no pressing need for the cash would not have authorized the transaction if he had known the CDA’s balance was actually nil. However, Justice Price sided with the Attorney General of Canada and denied the request:
“Based on the facts before me and the law in Canada on equitable relief, neither rescission nor rectification is available to RJM and Mr. McLeod in this case. The Application for an order rescinding or rectifying the director’s resolutions and the subsidiary orders applied for is dismissed,” she wrote in the June 3 decision.
The ruling says McLeod and RJM have sued two of their former tax advisors for damages over an alleged mix-up surrounding the company’s CDA, which tracks various tax-free amounts accumulated by corporations, as well as outgoing capital dividends, which can be paid tax-free by private corporations to Canadian-resident shareholders as long as they are properly logged with the CRA.
According to Justice Price’s decision, the tax advisors deny any breach of duty or negligence, blaming each other for the failure to record or consider an earlier 2007 capital dividend of $640,000 paid by RJM to McLeod, shortly before the lawyer switched between the service providers.
McLeod’s newer accountants also say the lawyer was at fault for the alleged CDA miscalculation, claiming he never told them about the 2007 transaction. However, McLeod denies any responsibility, and the entire action has been placed on hold since the pleadings were filed, so none of the allegations have been tested in court.
In the meantime, RJM and McLeod launched their application to undo the 2013 and 2014 dividends, claiming they were only intended on the basis that they would be tax-free.
But Justice Price found that the remedy of rescission was not available in this case, characterizing the request as “a form of retroactive tax planning.”
“While they do not like the tax effect of their transaction, it has been complete for several years and Mr. McLeod has had the benefit of the funds in his personal investment account. I agree that the Court should not help taxpayers circumvent measures enacted by Parliament by reversing transactions only to avoid tax liability,” she wrote.
In addition, the judge found that it was not “unconscionable, unfair or inequitable that the Dividends willingly declared and paid by RJM to Mr. McLeod should result in a tax liability,” noting they had other remedies available, including an election to treat the payments as ordinary dividends that would reduce the levy from 60 per cent to McLeod’s marginal tax rate of up to 19.29 per cent.
On the alternative remedy of rectification, which is intended to correct written instruments that inaccurately express the intent of parties, Justice Price concluded that it was also not applicable to the case before her.
“On the record before me, it is clear that RJM and Mr. McLeod intended to declare and pay the Dividends. The mistake was not in recording or drafting the director’s resolutions or promissory note, but rather a misapprehension as to the tax effect,” she wrote. “Whether or not Mr. McLeod needed the funds is not relevant. To ‘rectify’ the Dividends to nil would not bring them in line with RJM’s and Mr. McLeod’s intention, but rather would cancel the transaction altogether. RJM and Mr. McLeod are asking this Court to ‘rectify’ a mistake in the transaction itself, not the recording of it.”
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