Deltona Corp. v. MNR, 71 DTC 5186, [1971] CTC 297, 71 DTC 5186 (Ex Ct), briefly aff'd 73 DTC 5180, [1973] CTC 215 (SCC)

CATTANACH, J.:—This is an appeal by the appellant, The Deltona Corporation, a corporation incorporated pursuant to the laws of the State of Delaware, one of the United States of America, and resident in the City of Miami, Florida also one of the United States of America, from its assessment to income tax by the Minister for its 1966 taxation year.

The basic assumption of fact upon which the assessment of the appellant rests is that on March 29, 1966 its wholly owned subsidiary company, Deltona of Canada Limited with head office in Brantford, Ontario, paid to its parent, the appellant, as its sole shareholder, in the course of its winding-up a dividend in the amount of $2,509,158, in cash to the extent then on hand, and the balance in specie.

On November 15, 1967 the Minister assessed the appellant, as a non-resident, income tax of 15% or $376,373.70 on the “dividend” of $2,509,158 so paid to it by Deltona of Canada Limited.

The corporate history of the appellant and its subsidiary, Deltona of Canada Limited, extends back into the years and passes through a complexity of sales, changes of corporate names and similar transactions.

I shall summarize that history.

At the beginning of the present century there was a company known as Cockshutt Farm Equipment Limited, at Brantford, Ontario, which, as the name indicates, was engaged in the manufacture of farm implements for the local market but more particularly for the market in Western Canada then in the process of settlement and development. It is obvious that at that time its products were in great demand.

In 1924, Cockshutt Farm Equipment Limited caused to be incorporated a wholly owned subsidiary under the original name of Canada Carriage and Truck Company, Limited which changed its name to Brantford Coach and Body Limited and on July 2, 1965 the name was changed to Deltona of Canada Limited.

In 1955 Cockshutt Farm Equipment Limited incorporated another wholly owned subsidiary under the name of Brantford Halan Limited which name was subsequently changed to that of FRP Products Limited. This company engaged in the manufacture of fibre-glass products but did not enjoy success. Its active manufacturing business was ended about 1960.

Before the corporate name of Brantford Coach and Body Limited was changed to Deltona of Canada Limited, it owned all the shares of Brantford Coach Realty Limited which company as its name indicates held real property on behalf of its parent.

In 1962 Cockshutt Farm Equipment Limited sold its business, excepting FRP Products Limited and Brantford Coach and Body Limited and the wholly owned subsidiary of that company, Brantford Coach Realty Limited, to White Motor Truck. Cockshutt Farm Equipment Limited then changed its name to CKP Developments Limited.

At the same time, in 1962 a corporation was formed pursuant to the laws of the State of Delaware under the name of CKP Inc. The assets remaining to CKP Developments Limited, including the shares in Brantford Coach and Body Limited, were transferred to CKP Ine. CKP Developments Limited was then wound up.

In 1963 CKP Inc. changed its corporate name to Deltona Corporation, the appellant herein.

It is evident from the foregoing that Brantford Coach and Body Limited and FRP Products Limited were wholly owned subsidiaries of Deltona Corporation (the appellant) from 1963 forward.

It was agreed by counsel for the parties that the appellant was resident in Florida and it was also agreed by them that Brantford Coach and Body Limited (which subsequently in 1965 changed its name to Deltona of Canada Limited) and FRP Products Limited were resident in Canada immediately prior to March 25, 1966.

Brantford Coach and Body Limited prior to June 15, 1965 when its corporate name was changed to Deltona of Canada, Limited was engaged in the business of manufacturing truck bodies and trailers with its principal plant in Brantford, Ontario.

The business of its parent company, the appellant, was that of real estate development and construction in Florida, a business entirely unrelated to that of its susbidiary. The personnel of the appellant were not particularly well versed or expert in the business of the subsidiary, although that business was carried on at a profit. It was felt that the extent of the investment and the effort required by its officers dictated that the investment and management effort could be more advantageously utilized in the Florida enterprise. All assets of Brantford Coach and Body Limited and the negligible assets owned by FRP Products Limited were situate in Canada. Accordingly in 1965 the decision was made by the directors of the appellant that the assets of Brantford Coach and Body Limited should be sold.

After negotiation a sale of those assets to Novo Industrial Corporation was arranged in an arm’s length transaction.

Brantford Coach and Body Limited sold all the assets of which it was possessed that were not readily liquidable to its subsidiary, Brantford Coach Realty Limited, such as its fixed assets and goodwill, work in progress, inventory, and all raw material necessary to complete the work in progress and consigned to Brantford Coach Realty Limited the balance of its inventory for sale.

The shares of Brantford Coach Realty were sold to Novo Industrial Corporation.

The assets and liabilities of Brantford Coach and Body Limited were disclosed in its financial statement for December 31, 1963 and 1964 and can be summarized as follows:

The sale price to Novo Industrial Corporation was allocated in the books of Brantford Coach and Body Limited as follows:

The consideration received by Brantford Coach and Body Limited from Novo Industrial Corporation was,

The agreement of sale between Brantford Coach and Body Limited and FRP Products Limited, which latter company was dormant and possessed of negligible assets, as vendors and Novo Industrial Corporation as purchaser was executed on May 21, 1965.

One of the terms of the agreement was that Brantford Coach and Body Limited would change its corporate name. This it did by supplementary letters patent dated July 2, 1965 to Deltona of Canada Limited.

In the fall of 1965 Deltona of Canada Limited sold lands it owned in the Province of Quebec and in the city of Ottawa for the respective considerations of $277,500 and $160,000.

On December 23, 1965 the appellant caused a company under the name of T.D.C. Holdings Limited to be incorporated. All of the issued shares were held beneficially by the appellant.

On December 31, 1965 FRP Products sold whatever assets remained to it after the sale to Novo Industrial Corporation, to Deltona of Canada Limited so that FRP Products Limited had neither assets nor liabilities.

On December 31, 1965 Deltona Corporation of Canada Limited had an accumulated surplus of $2,509,158.

Deltona Corporation of Canada Limited transferred all of its assets, other than cash and certificates of deposit, to T.D.C. Holdings Limited in exchange for a demand promissory note for $1,823,933 payable without interest.

The assets sold by Deltona Corporation of Canada Limited to T.D.C. Holdings Limited and the book value thereof taken from the balance sheet as at December 31, 1965 (Exhibit 82) were as follows:

Debt from Brantford Coach and Body re

current inventory		$114,205
Accounts receivable		337,662
Farm Implement accounts and notes
receivable		85,910
Inventory on consignment and used trailers
and repossessed farm implements		725,906
Mortgages receivable		175,000
Manufacturing and distribution facilities
held for sale		490,517
Prepaid Expenses		37,440
	Total	$1,966,640
Less:
Accounts payable and accrued liabilities
assumed	-	$ 67,707
Provision for losses on termination of coach
and body operations		75,000
		$ 142,707
		$1,823,933

This value coincides with the value of the promissory note received by Deltona of Canada Limited from T.D.C. Holdings Limited.

The assets so transferred were of the nature that they must be held for some time to be realized upon and it was admitted in evidence that T.D.C. Holdings Limited was incorporated for the purpose of receiving the unliquid assets of Deltona of Canada Limited so that there would be no implication that Deltona of Canada Limited was carrying on business as resident in Canada by holding such assets for realization.

After the sale of the unliquid assets of Deltona of Canada Limited to T.D.C. Holdings the assets and liabilities of Deltona of Canada Limited as shown in its balance sheet as at December 31, 1965 (Exhibit 82) were as follows:

The foregoing assets of Deltona of Canada Limited are then in liquid form.

On March 2, 1966 Deltona of Canada Limited, among other deposits that had matured and were then re-invested, deposited money in the Franklin National Bank and received therefor a certificate of deposit No. 1.3037 dated March 2, 1966 (Exhibit 18) issued by the bank wherein it certi :

That there has been deposited in this bank the sum of $853,000.00 payable to Deltona of Canada Limited or order on April 4, 1966 with interest at 1% per annum upon presentment and surrender of this certificate properly endorsed. No withdrawals may be made before maturity nor will interest be paid after maturity. Interest computed for actual days on 360 day basis.

By an agreement dated March 15, 1966, (Exhibit 14) Deltona of Canada Limited and FRP Products Limited agreed to amalgamate under the provisions of Section 128A of the Canada Corporations Act.

Just prior to the execution of the agreement discussions were held between the solicitors of the companies and officials of the Companies Division of the Department of the Secretary of State to ascertain if an agreement in the form to be executed would be acceptable as the basis of an application for letters patent of amalgamation and if the name Deltona of Canada Limited would be available as the name of the amalgamated company.

On March 15, 1966 the Department replied that the agreement appeared acceptable in form and that Deltona of Canada Limited could continue to be the name of the amalgamated company.

I might add at this point that there was considerable difficulty during the course of the hearing in identifying which company was being referred to, the pre-amalgamated Deltona of Canada Limited or the amalgamated Deltona of Canada Limited, and in deciding which Company’s board of directors purported to pass various resolutions. This difficulty would have been avoided if the name of the amalgamated company, while retaining the predominate feature of the name of the pre-amalgamated company had incorporated therein some distinguishing device.

At meetings of the directors and shareholders of Deltona of Canada Limited and FRP Products Limited held on March 23, 1966 the amalgamation agreement between those companies was approved and the officers of the respective companies were authorized to execute the agreement and petition the Secretary of State for letters patent of amalgamation. The meetings of the directors of both companies were held in Miami, Florida and the meetings of the shareholders were held in the offices of the companies’ solicitors in Toronto, Ontario.

The petition for letters patent of amalgamation was executed on March 23, 1966 and delivered to the Secretary of State on March 25, 1966.

As of March 25, 1966 Deltona of Canada Limited (the preamalgamated company) had on hand the following assets:

These I total in the amount of $3,209,138.67 but I do not include the interest on the certificate of deposit nor any adjustment for exchange on U.S. funds.

After receipt of the application for letters patent of amalgamation on March 25, 1966 the Department of the Secretary of State advised the solicitors for the applicants by letter dated April 1, 1966 (Exhibit 9) in part as follows:

This is to acknowledge the manual receipt on March 25, 1966 of the application for letters patent confirming an amalgamation of DELTONA OF CANADA LIMITED AND FRP PRODUCTS LIMITED to continue under the name DELTONA OF CANADA LIMITED.

As discussed with you, the agreement of amalgamation will be reproduced in the same form as received. However, it is noted that in paragraph 4 on page 3 the following words should be deleted and will be expunged: “or such greater amount as the Board of Directors of the Company may deem expedient on payment to the Secretary of State of Canada of the fees payable on such greater amount and on the issuance by the Secretary of State of Canada of a certificate of such payment.” As these shares have already been issued, such a statement would be redundant.

The foregoing language was included in the amalgamation agreement but was not included in the letters patent of amalgamation when issued.

The solicitors apparently agreed verbally or by implication in their acknowledging letter dated April 4, 1966 (Exhibit 10) to the deletion of the language mentioned in the third paragraph of the letter of April 1, 1965 (Exhibit 9). In any event neither the board of directors of Deltona of Canada Limited nor FRP Products Limited, when in existence as separate corporations, passed a resolution consenting to the alteration under paragraph 18 of the amalgamation agreement (Exhibit 14).

By letter dated April 5, 1966 (Exhibit 11) the Department advised the solicitors as follows :

The application for letters patent to confirm the amalgamation agreement between DELTONA OF CANADA LIMITED and FRP PRODUCTS LIMITED to continue as one company under the name DELTONA OF CANADA LIMITED has been approved and letters patent are being prepared upon the basis of their bearing date of March 25, 1966.

The letters patent confirming the amalgamation agreement between Deltona of Canada Limited and F RP Products Limited bearing date of March 25, 1966 were forwarded to the solicitors for the applicants under cover of a letter from the Department dated April 15, 1966 (Exhibit 18) which was received by the solicitors on April 18, 1966.

At a meeting of the first directors of Deltona of Canada Limited held in Miami, Florida on March 28, 1966 at 11 o’clock in the forenoon (Exhibit 58) it was resolved unanimously that

... the Company elect to be taxed under Section 70 of the Income Tax Act and that the Secretary of the Company be and he is hereby authorized to do, sign, execute and deliver all acts, things, deeds and instruments necessary or desirable to ensure that the Company elects in the prescribed manner to be taxed under said Section 70 of the said Income Tax Act.

Counsel for the Minister has raised the issue whether this meeting and subsequent meetings were meetings of the directors of the pre-amalgamated Deltona of Canada Limited or the amalgamated Deltona of Canada Limited and similarly with respect to the meeting of shareholders.

The meeting was then adjourned until 3 :45 in the afternoon.

At a meeting of the shareholders of Deltona of Canada Limited held in Toronto, Ontario at 3 :30 in the afternoon of March 28, 1966 (Exhibit 59) a resolution adopting a plan of liquidation was approved, reading as follows :

. . . the Company be and it is hereby authorized to dispose of its property and to divide and distribute its assets rateably among its Shareholders, in such manner as the Directors may determine, effective as of 9:15 a.m. on March 29, 1966, and to proceed to dissolution by way of surrender of charter proceedings under Section 29 of the Canada Corporations Act and to make application to the Secretary of State of Canada for acceptance of the surrender of its charter.

The meeting of the directors resumed at 3 :45 in the afternoon of March 28, 1966 in Miami, Florida (Exhibit 60) at which resolutions were passed,

(a) electing a secretary treasurer;

(b) declaring,

1. A dividend of $2,509,158 in the aggregate in lawful funds of Canada on the outstanding shares of the capital of the Company be and the same is hereby declared payable as of 9:15 a.m. on March 29, 1966, to Shareholders of record as of the close of business on March 28, 1966;

2. The said dividend shall be satisfied to the extent of cash on hand and as to the balance, in specie by a note or part of a note of TDC Holdings Limited; . . .

(c) approving a general deed of conveyance...

. . . of all of the assets of the Company to be made by the Company as of 9:15 a.m., on March 29, 1966, in favour of The Deltona Corporation, . . . in favour of the appellant.

Counsel for the Minister admitted the foregoing documents (Exhibits 58, 59 and 60) as minutes of meetings held by persons assembled together as directors and shareholders subject to the distinct reservation that he did not admit in what capacity those persons were assembled, that is, whether they met as shareholders and directors of the pre-amalgamated Deltona of Canada Limited or as shareholders and directors of the amalgamated Deltona of Canada Limited.

At a meeting of the directors of T.D.C. Holdings Limited held on March 28, 1966, the directors adopted a plan of liquidation whereby it was authorized that the assets be distributed to its shareholders (the appellant being the sole shareholder) and that application be made to the Lieutenant Governor of the Province of Ontario for an order accepting the surrender of its charter and declaring the company to be dissolved as from a date fixed in the order.

On March 29, 1966 :

(1) the account of Deltona of Canada Limited with the First National Bank of Miami was closed out and the sum of $51,089.34 on deposit was transferred to the appellant;

(2) the account of Deltona of Canada Limited with the Franklin National Bank was closed out and the sum of $636,445.36 on deposit was transferred to the appellant;

(3) the certificate of deposit of the Franklin National Bank in the face amount of $853,000 in U.S. funds with interest at 1% per annum from March 2, 1966 to April 4, 1966 was transferred from Deltona of Canada Limited to the appellant ; and

(4) the demand promissory note of T.D.C. Holdings Limited for $1,823,933 was assigned by Deltona of Canada Limited to the appellant.

Thus on the one day, March 29, 1966 Deltona of Canada Limited effectively divested itself of all assets to the appellant in satisfaction of the declared dividends with the possible exception of an apportionment of the interest on the certificate of deposit at 1% per annum for the period from March 2, 1966 to March 29, 1966, w hich is in dispute between the parties hereto.

It was established in evidence that no amounts were recorded in respect of interest received or interest receivable pursuant to the certificate of deposit on the books of account of the preamalgamated Deltona of Canada Limited or the amalgamated Deltona of Canada Limited.

In its original tax returns for the period ending June 16, 1966 Deltona of Canada Limited (the amalgamated company) disclosed no income.

After the notice of re-assessment dated November 15, 1967 it was apparent that the residence of Deltona of Canada Limited would be in dispute.

On February 16, 1968 an amended income tax return was filed on behalf of Deltona of Canada Limited which disclosed income in the amount of $687.16 being interest accrued on the certificate of deposit to Deltona of Canada Limited for 29 days and the balance of $94.76 for four days is shown as accrued to Deltona Corporation.

On June 16, 1966 Deltona of Canada Limited applied to the Secretary of State for leave to surrender its charter pursuant to Section 29 of the Canada Corporations Act. The application has not been consummated because the necessary returns have not been forthcoming from the Department of National Revenue.

The appellant had decided to sell its investments in Canada and repatriate its investment to Florida for use in its business there. Accordingly it is a fair inference that following the sale of the business of Brantford Coach and Body Limited to Novo Industrial Corporation on May 21, 1965 that the directors of the appellant began serious consideration of ways by which the investment could be paid to the appellant without attracting tax or so as to attract the minimum tax both in Canada and the United States.

Many proposals were advanced by the appellant’s legal advisers.

Discussions were being held with the officials of the Treasury Department of the United States to obtain a ruling that a “liquidating dividend” paid by Deltona of Canada Limited would be free of tax in that jurisdiction.

It was part of the plan that T.D.C. Holdings Limited should be created on December 23, 1965 to hold all assets of Deltona of Canada Limited, other than cash, so that the assets held by Deltona of Canada Limited were liquid, that Deltona of Canada Limited would not be holding unliquid assets and so be considered as carrying on business in Canada and so that the vesting of non-liquid assets in T.D.C. Holdings Limited would enable a decision to liquidate Deltona of Canada Limited to be postponed and other means considered in the event of an unfavourable ruling from the United States taxing authorities.

On March 24, 1966 the appellant was advised by the United States taxing authorities that a liquidating dividend paid by Deltona of Canada Limited to the appellant would be free of tax in the United States. Indication that such ruling would be forthcoming had been given prior to the actual ruling on March 24 1966.

That advice triggered the rapid sequence of events outlined above, that is

(1) March 23, 1966 the directors and shareholders of Deltona of Canada Limited and FRP Products Limited approved the amalgamation agreement.

(2) March 23, 1966 the application for letters patent of amalgamation was executed.

(3) March 25, 1966, the day after advice of the United States ruling was received the petition for amalgamation was lodged with the Secretary of State. No doubt verbal advice was received on that date that the letters patent of amalgamation would bear date of March 25, 1966.

(4) March 28, 1966 at 11:00 a.m. first directors of Deltona of Canada Limited elect to be taxed under section 70 as a non-resident-owned investment company. V. M. Seabrook in an undated letter (Exhibit 84) advised Department of this election.

(5) March 28, 1966 at 3:30 p.m. the shareholders of Deltona of Canada Limited passed a resolution to dispose of its property, distribute assets to its shareholders and surrender its charter.

(6) March 28, 1966 at 3:45 p.m. the directors of Deltona of Canada Limited (a) declared a dividend of $2,509,158,

(b) executed a general deed of conveyance of all its assets in favour of the appellant and (c) elected a secretarytreasurer.

(7) March 28, 1966 the directors of T.D.C. Holdings Limited authorized the surrender of its charter.

(8) March 29, 1966, all liquid assets of Deltona of Canada Limited transferred to the appellant.

This undue haste, without waiting for the physical delivery of the letters patent of amalgamation was because of the explanation of the solicitor for the appellant that the imminent introduction of a budget was expected and that it was anticipated that there might be a change in the provisions of the Income Tax Act which would detrimentally affect the tax position of the appellant if the foregoing arrangements were carried out. No change in the applicable provisions of the /ncome Tax Act resulted.

The argument by counsel for the appellant was that no tax is exigible under Section 106(la) of the Income Tax Act on the dividend paid by Deltona of Canada Limited to the appellant because Deltona of Canada (amalgamated) Limited was a nonresident of Canada.

Section 106(la) reads as follows:

(la) Every non-resident person

(a) shall pay an income tax of 15% on every amount that a person resident in Canada, other than a person described in paragraph (b), pays or credits, or is deemed by Part I to pay or credit, to him as, on account or in lieu of payment of, or in satisfaction of a dividend other than

(1) a dividend from a non-resident-owned investment corporation if the corporation has, previous to the payment of the dividend and at a time when it was taxable under section 70, paid dividends (other than dividends on which no tax was payable under this Part) the aggregate amount of which is not less than the corporation’s surplus determined in prescribed manner for taxation years for which it was not taxable under section 70,...

He based that argument upon the submission that as from December 31, 1965 neither Deltona of Canada Limited (preamalgamated) nor FRP Products Limited was a resident of Canada at common law because the central management and control of both companies abided out of Canada. All directors’ meetings were held outside of Canada, all directors were nonresidents of Canada and the sole beneficial shareholder was not resident in Canada.

During the course of his argument, counsel for the appellant conceded that both Deltona of Canada Limited and FRP Products Limited were resident in Canada.

However he made no such concession with respect to Deltona of Canada Limited (the amalgamated company). He reiterated his submission that at common law amalgamated Deltona of Canada Limited was not resident in Canada because its management and control abided elsewhere and that the common law position is not altered by Section 139 (4a).

The letters patent of amalgamation bore date of March 25, 1966, a date well after April 26, 1965. However his submission was that under Section 128A of the Canada Corporations Act the letters patent continue the pre-existing companies as one and do not result in the “incorporation” of a corporation as contemplated by Section 139 (4a) (a) which reads,

139 (4a) For the purposes of this Act, a corporation shall be deemed to have been resident in Canada throughout a taxation year if

(a) in the case of a corporation incorporated after April 26, 1965, it was incorporated in Canada;...

He further buttressed this submission by a reference to Section 851(2) (a) of the Income Tax Act which reads as follows:

(2) Where there has been an amalgamation of two or more corporations the following rules apply :

(a) TAXATION YEAR OF CORPORATION.—for the purposes of this Act, the corporate entity formed as a result of the amalgamation shall be deemed to be a new corporation the first taxation year of which shall be deemed to have commenced at the time of the amalgamation, and a taxation year of a predecessor corporation that would otherwise have ended after the amalgamation shall be deemed to have ended immediately before the amalgamation ;

Under this section the amalgamated companies amalgamation is deemed to be ‘‘a new corporation” with its taxation year beginning at the time of amalgamation. This, he submitted, does not have the effect of providing that there is a new incorporation upon the issue of the letters patent of amalgamation.

Similarly he submitted that Section 139 (4a) (b) is also inapplicable. The letters patent of amalgamation bore date of March 25, 1966 a date after April 27, 1965. Under Section 851(2) (a) the amalgamated corporation had no taxation year prior to March 25, 1966, the date of the letters patent, and at no time subsequent to that date was it resident or carried on business in Canada.

Secondly, he submitted that no tax is exigible on the dividend paid by Deltona of Canada Limited by virtue of Section 106 (la) (1) and under Section 851(2) (a) it had no taxation year prior to the date of amalgamation*[1] since it was a non-resident- owned investment corporation by virtue of the election to be so taxed under Section 70(4)(d) which was not revoked under Section 70(4) (e) and fell within the precise definition of a nonresident-owned investment corporation.

Section 70(4) reads as follows:

70. (4) In this Act, a “non-resident-owned investment corporation” means a corporation incorporated in Canada that during the whole of the taxation year in respect of which the expression is being applied complied with the following conditions

(a) at least 95% of the aggregate value of its issued shares and all of its bonds, debentures and other funded indebtedness were

(1) beneficially owned by non-resident persons,

(ii) owned by trustees for the benefit of non-resident persons or their unborn issue, or

(iii) owned by a corporation, whether incorporated in Canada or elsewhere, at least 95% of the aggregate value of the issued shares of which and all of the bonds, debentures and other funded indebtedness of which were beneficially owned by non-resident persons or owned by trustees for the benefit of nonresident persons or their unborn issue or by several such corporations;

(b) its income was derived from

(i) ownership of or trading or dealing in bonds, shares, debentures, mortgages, hypothecs, bills, notes or other similar property or any interest therein, (ii) lending money with or without security,

(iii) rents, hire of chattels, charterparty fees or remunerations, annuities, royalties, interest or dividends, or (iv) estates or trusts;

(ba) not more than 10% of its gross revenue was derived from rents, hire of chattels or charterparty fees or charterparty remunerations;

(c) its principal business was not

(i) the making of loans, or

(ii) trading or dealing in bonds, shares, debentures, mortgages, hypothecs, bills, notes or other similar property or any interest therein;

(d) it has, not later than 90 days after the commencement of the taxation year, elected in prescribed manner to be taxed under this section; and

(e) it has not, before the taxation year, revoked in a prescribed manner the elections so made by it.

Counsel for the Minister conceded that the amalgamated Deltona of Canada Limited met the requirements of Section 70(4) (a), (ba) and (c). The position taken by counsel for the Minister was that Deltona of Canada Limited had no income at all and so did not meet the requirement of Section 70(4) (b) and if it did have income then that income did not fall within paragraph (b) (iii) and that no valid election was made under paragraph (d) and any election so made had been revoked.

Counsel for the appellant submitted in answer to the position taken by counsel for the Minister that Deltona of Canada derived no income under Section 70(4) (b) : (1) that there was no requirement that a non-resident-owned investment corporation must have income but only that its income (if any) must be derived from the sources outlined in paragraph (b) and (2) that in any event it had income between March 25, 1966 (the date of the letters patent) and March 29, 1966 (the date in which all assets were transferred to the appellant) that is the apportionment of interest on the certificate of deposit with the Franklin National Bank for 33 days which was $781.92 the apportionment to Deltona of Canada Limited being $687.16 for 29 days and $94.76 to the appellant for four days as reported in the amended income tax return for the period ending June 16, 1966.

In further support of his contention that Deltona of Canada Limited had income, counsel for the appellant also relied on Sections 17(6) and 19A which read as follows:

17. (6) Where property of a corporation has been incorporated in any manner whatsoever to, or for the benefit of, a shareholder, on the winding up of the corporation, if the sale thereof at the fair market value immediately prior to the winding up would have increased the corporation’s income for a taxation year, for the purpose of determining the corporation’s income for the year, it shall be deemed to have sold the property during the year and to have received therefor the fair market value thereof.

19A. Where, by virtue of an assignment or other transfer of a bond, debenture or similar security (other than an income bond for an income debenture), the transferee has become entitled to interest in respect of a period commencing before the time of transfer and ending after that time that is not payable until after the time of transfer, an amount equal to that proportion of the interest that the number of days in the portion of the period that preceded the day of transfer is of the number of days in the whole period

(a) shall be included in computing the transferor’s income for the taxation year in which the transfer was made, and

(b) may be deducted in computing the transferee’s income for a taxation year in the computation of which there has been included

(i) the full amount of the interest under section 6, or (ii) a portion of the interest under paragraph (a) of this section.

In paragraph 3 of the Minister’s reply to the notice of appeal, the Minister alleged that the letters patent of amalgamation, although dated March 25, 1966, did not issue until about April 15, 1966 from which it would follow that all acts prior to April 15, 1966 purporting to be done by the directors of the amalgamated Deltona of Canada Limited were abortive or were the acts of the directors of the pre-amalgamated Deltona of Canada Limited.

In reply to that allegation counsel for the appellant submitted that Section 133 of the Canada Corporations Act is conclusive of the date of the letters patent.

Section 133 reads as follows:

133. Except in any proceeding by scire fac-z'as or otherwise for the purpose of rescinding or annulling letters patent or supplementary letters patent issued under this Part, such letters patent or supplementary letters patent, or any exemplification or copy thereof certified by the Registrar General of Canada, shall be conclusive proof of every matter and thing therein set forth.

The concluding contention of counsel for the appellant was that Section 187(2) of the Income Tax Act does not render the otherwise tax free dividend taxable.

Section 137 (2) reads as follows:

(2) Where the result of one or more sales, exchanges, declarations of trust, or other transactions of any kind whatsoever is that a person confers a benefit on a taxpayer, that person shall be deemed to have made a payment to the taxpayer equal to the amount of the benefit conferred notwithstanding the form or legal effect of the transactions or that one or more other persons were also parties thereto; and, whether or not there was an intention to avoid or evade taxes under this Act, the payment shall, depending upon the circumstances, be

(a) included in computing the taxpayer’s income for the purpose of Part I,

(b) deemed to be a payment to a non-resident person to which Part III applies, or

(c) deemed to be a disposition by way of gift to which Part IV applies.

In essence the argument on behalf of the appellant in this respect, as I understood it, was that the effect of Section 137(2) is to transmute transactions which do not constitute a payment into a. deemed payment. The appellant conceded it received a payment by way of a liquidating dividend from Deltona of Canada Limited. However counsel for the appellant contended that this was an actual payment which, on the grounds he argued above, was a tax free payment and Section 137(2) does not warrant the conversion of a tax free payment into a taxable payment. He further argued that Section 137(2) is not an independent charging section.

In contradiction of the submissions on behalf of the appellant, counsel for the Minister contended that the assessment was proper.

I shall summarize his argument as I understood it.

There is no question that as of March 24, 1966 the liquid assets that were transferred to the appellant by virtue of the transactions between those dates as I have outlined them, were the absolute property of Deltona of Canada Limited the preamalgamated company.

The first contention for the Minister was that on March 29, 1966 (the date of the transfer of those assets to the appellant) the assets were still vested absolutely in the pre-amalgamated company because the amalgamated company was not then in existence with the result that no dividend could be paid by it.

As the basis of the contention that the amalgamated company was not in existence, counsel for the Minister relies on the fact that, while the letters patent bore date of March 25, 1966 they had not been issued on that date, but on a date approximate to April 15, 1966. He contended that since the status of the amalgamated company was not in issue in this appeal, the Minister is not precluded by Section 133 of the Canada Corporations Act from establishing the date upon which the letters patent were issued in fact.

Assuming that the amalgamated company did not come into existence on March 25, 1966, counsel for the Minister contended that the meeting of the directors held in Miami, Florida, at 3 :45 p.m. on March 28, 1966 at which the dividend was declared, was a meeting of the directors of the pre-amalgamated Deltona of Canada Limited.

In that event the appellant is clearly liable to the payment of the 15% withholding provided in Section 106(la) because the amount received by the appellant was in satisfaction of a dividend of the pre-amalgamated Deltona of Canada Limited which was a person resident in Canada by virtue of Section 139 (4a) (b) and was not within the exemption of Section 106(la) (a) (1).

However, if the meeting of directors held on March 28, 1966 was not a meeting of the directors of the pre-amalgamated Deltona of Canada Limited, then counsel for the Minister contended that the meeting was abortive because there was no amalgamated Deltona of Canada Limited in existence and no directors thereof, so that no dividend had been legally declared. Therefore, the property transferred to the appellant on March 29, 1966 was so transferred by the pre-amalgamated company because no other company existed to do so, the property was vested in the old company because it could not vest in the amalgamated company which did not exist at that date and accordingly the transfer to the appellant was by way of a gift from the old company. By so doing a benefit was conferred upon the appellant within the meaning of Section 137(2) and the appellant is taxable thereunder.

He also submitted that in any event the distribution of the surplus by the pre-amalgamated company to its shareholders, at a time when it had no creditors was in law a dividend even in the absence of a formal declaration of dividend. For authority for this proposition he relied on /n re Dorenwends Limited, 55 O.L.R. 418.

In the event that the letters patent of amalgamation were effective as of their date of March 25, 1966, that the assets of the pre-amalgamated company vested in the amalgamated company on that date and that the dividend was paid to the appellant by the amalgamated company, then counsel for the Minister submitted that the payment falls within Section 106(la) (a) because the amalgamated company was resident in Canada since (1) it was incorporated in Canada after April 26, 1965 (Section 139

(4a) (a)); (2) it was a continuing company formed by the amalgamation of two pre-existing companies both of which were resident in Canada prior to amalgamation and the act of holding a single director’s meeting in Florida was not sufficient to divest the amalgamated company of that residence and (3) the acts done in Canada by the amalgamated company in Canada were more important in the management and control thereof than the single director’s meeting in Florida so that the company would have a dual residence.

Still further counsel for the Minister submitted (1) that if the payment was made by the pre-amalgamated Deltona of Canada Limited it was not a non-resident-owned investment corporation and again the exemption in Section 106(la) (a) (i) would not apply.

In support of his second contention that the amalgamated company was not a non-resident-owned investment corporation he relied upon the following factors :

(1) There was never any intention that the amalgamated company would carry on any investment activity or business and in fact it did not do so.

(2) That the decision at the meeting of the shareholders immediately subsequent to the meeting of the directors electing to be taxed as a non-resident-owned investment corporation, to adopt a plan of liquidation prior to the execution of the election, was tantamount to a revocation of the director’s decision to carry on an investment business and be taxed as a non-resident-owned investment corporation.

Of course he also submitted that if the effective date of the letters patent was not March 25, 1966 then there was no election on March 28, 1966.

He concluded his argument with the submissions that the cumulative effect of the election was that it was a sham, there was never any intention to derive income from investments, the avowed purpose was that the amalgamated company was to be a conduit for the distribution of the assets of the pre-amalgamated company to the appellant, and that the amalgamated company never had any income.

I therefore turn to an analysis of the situation as revealed by the evidence that I have reviewed in so far as the question involved in this appeal is concerned.

The appellant is, and was at all relevant times, a United States corporation resident in the United States. On March 29, 1966, the original Deltona of Canada Limited was a company resident in Canada all of whose shares belonged to the appellant. On March 29, 1966 and presumably on March 29, 1966, the original Deltona of Canada Limited had an earned surplus of $2,509,158.67 (and probably, therefore, at least the same amount of unearned income on hand for the purposes of the Income Tax Act (Section 82). While the original Deltona of Canada Limited had been a manufacturing company all its assets had, by March 29, 1966, been converted into a liquid form. On that date, the appellant took, or received, from the original Deltona of Canada Limited all its assets amounting in value to $2,509,158.

The question is whether the assessment of the appellant for non-resident income tax on the aforesaid amount of $2,509,158 under Part III of the Income Tax Act is valid.

Assuming that the above facts are all the relevant facts, there would appear to be a clear case for applying Section 106(la) (a), which I repeat here for convenience.

106. (la) Every non-resident person

(a) shall pay an income tax of 15% on every amount that a person resident in Canada, other than a person described in paragraph (b), pays or credits, or is deemed by Part I to pay or credit, to him as, on account or in lieu of payment of, or in satisfaction of a dividend other than

(i) a dividend from a non-resident-owned investment corporation if the corporation has, previous to the payment of the dividend and at a time when it was taxable under section 70, paid dividends (other than dividends on which no tax was payable under this Part) the aggregate amount of which is not less than the corporation’s surplus determined in prescribed manner for taxation years for which it was not taxable under section 70, or

(ii) a dividend that would not be included in computing income under Part I by virtue of section 67;

Either there was a dividend payment from the resident company to the non-resident shareholder such as is covered expressly by Section 106(la) (a), or there was an appropriation or distribution to the non-resident shareholder on winding up, or there was an appropriation by the non-resident shareholder of the resident company’s property. If there was an appropriation or distribution on winding up, the matter is covered by Section 81(1) (a) (b), which reads:

81. (1) Where funds or property of a corporation have, at a time when the corporation had undistributed income on hand, been distribution or otherwise appropriated in any manner whatsoever to or for the bentfit of one or more of its shareholders on the winding-up, discontinuance or reorganization of its business, a dividend shall be deemed to have been received at that time by each shareholder equal to the lesser of

(a) the amount or value of the funds or property so distributed or appropriated to him, or

(b) his portion of the undistributed income on hand.

and Section 108(6) which reads:

108. (6) Where section 81 would, if Part I were applicable, require an amount to be included in computing a shareholder’s income, for the purpose of this Part, that amount shall be deemed to have been paid to the shareholder as a dividend.

If there was an appropriation of the subsidiary’s property to the parent, it is covered by Section 8(1) which reads:

8. (1) Where, in a taxation year,

(a) a payment has been made by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction,

(b) funds or property of a corporation have been appropriated in any manner whatsoever to, or for the benefit of, a shareholder, or

(c) a benefit or advantage has been conferred on a shareholder by a corporation,

otherwise than

(i) on the reduction of capital, the redemption of shares or the winding-up, discontinuance or reorganization of its business,

(11) by payment of a stock dividend, or

(iii) by conferring on all holders of common shares in the capital of the corporation a right to buy additional common shares therein,

the amount or value thereof shall be included in computing the income of the shareholder for the year.

and Section 108(5) which reads:

108. (5) Where section 8 or section 16 would, if Part I were applicable, require an amount to be included in computing a shareholder’s income or deem a dividend to have been received by a shareholder, for the purpose of this Part, that amount or the amount of that dividend shall be deemed to have been paid to the shareholder as a dividend.

In my view, therefore, if the original Deltona of Canada Limited was still in existence and still owned the assets taken over by the appellant right up to the time when the appellant took the $2,509,158 worth of assets acquired by it on the liquidation of its property, there is no doubt that the non-resident income tax was legally payable by the appellant as assessed.

There can be no doubt, as I see it, that if this case had been heard and the appeal had been decided prior to April 15, 1966, the situation would have been as I have already analyzed it.

The difficulties in this appeal arise because, prior to the appropriation by the appellant of the assets of the original Deltona of Canada Limited, preliminary steps had been taken with a view to effecting an amalgamation of the original Deltona of Canada Limited with another wholly-owned Canadian subsidiary of the appellant (FRP Products Limited, which had no appreciable assets) and the individuals concerned had gone through the motions of having a dividend declared by the then, as yet, nonexistent amalgamated Deltona of Canada Limited and of having the, as yet, non-existent amalgamated Deltona of Canada Limited elect” to be taxed as a non-resident-owned investment corporation. The appellant’s claim for exemption from the tax in dispute is based on the view that, when this amalgamation was subsequently completed, the Court must take it to be related back to a date prior to the appropriation of the property of the original Deltona of Canada Limited so that, not only must the amalgamated Deltona of Canada Limited be regarded as a company that came into existence, for the purposes of the Canada Corporations Act, at an earlier date, but

(a) the original Deltona of Canada Limited must be regarded, for the purposes of the Income Tax Act, as not having been in existence when its property was taken by the appellant, and

(b) the property taken from the original Deltona of Canada Limited by the appellant must be regarded, for the purposes of the Income Tax Act, as having been the property of the amalgamated Deltona of Canada Limited.

These results may be the necessary consequence of the decisions of the Supreme Court of Canada in Letain v. Conwest Exploration Co. Lid., [1961] S.C.R. 98 and Conwest Exploration Co. Lid. v. Letain, [1964] S.C.R. 20, although it is not apparent to me that what was actually decided in those cases requires any such conclusions on the facts of this case. I do not find it necessary, however, to reach any decision on that question.

The reason that it is not necessary to reach a decision as to the effect of the Letain decisions in this case is that, even if they have the effect contended for them, in my view, the appellant was, nevertheless, liable to pay the non-resident income tax in question.

Assuming, without deciding it, that the amalgamated Deltona of Canada Limited was in existence on March 25, 1966 and paid the sum of $2,509,158 to the appellant by way of a dividend, the appellant was liable, on the undisputed facts to which I have referred, to pay the tax in question unless the amalgamated Deltona of Canada Limited was not, at the time of payment, resident in Canada or the amalgamated Deltona of Canada Limited was, at that time, a ‘‘non-resident-owned investment corporation’’ that meets the requirements set out in Section 106(la) (a) (i).

First, I will consider the question whether the amalgamated Deltona of Canada Limited was resident in Canada.

Amalgamated Deltona of Canada Limited came into existence as a corporation by virtue of an amalgamation under Section 128A of the Canada Corporations Act (as enacted by Section 41 of chapter 52 of the Statutes of Canada of 1954-65), which reads in part as follows:

128A. (1) Any two or more companies incorporated under this Act, including holding and subsidiary companies, may amalgamate and continue as one company.

(2) Companies proposing to amalgamate may enter into an agreement for the amalgamation prescribing its terms and conditions and the mode of carrying the amalgamation into effect.

(10) The amalgamating companies shall, within six months of the date of the final vote on the amalgamation agreement, jointly file with the Secretary of State the amalgamation agreement together with a certificate from the secretary of each of the amalgamating companies establishing the percentage of those who voted in favour of the agreement and the percentage of dissentient shareholders, in respect of each class of shares.

(11) Not less than eight days following the final vote on the amalgamation agreement and upon receipt of evidence that no application was made under this section for the annulment of the amalgamation agreement or that, if such an application was made, it was dismissed, the Secretary of State may issue letters patent confirming the agreement ; but the requirement of eight days’ delay may be dispensed with if the amalgamation agreement has received the approval of more than ninety per cent of the votes of each class of shares cast at each meeting of the amalgamating companies.

(13) Upon the issue of letters patent pursuant to subsection

(11), the amalgamation agreement has full force and effect and

(a) the amalgamating companies are amalgamated and are continued as one company (in this section called the “amalgamated company”) under the name and having the authorized capital and objects specified in the amalgamation agreement; and

(b) the amalgamated company possesses all the property, rights, assets, privileges and franchises, and is subject to all the contracts, liabilities, debts and obligations of each of the amalgamating companies.

Note that, upon the ‘‘issue’’ of the confirming letters patent (subsection (13)), the two ‘‘amalgamating companies’’ are continued as ‘‘one company’’ called the “amalgamated company”. As previously there were two companies and after the issue of the letters patent there is only ‘ ‘ one company ’ ’, it seems to follow that that ‘‘one company” is a company that did not previously exist and that came into existence at that time.

Section 139 (4a) contains a special provision concerning residence, for purposes of the Income Tax Act, of corporations “incorporated” in Canada. That provision, which I reproduce here again for convenience, reads as follows:

139. (4a) For the purposes of this Act, a corporation shall be deemed to have been resident in Canada throughout a taxation year if

(a) in the case of a corporation incorporated after April 26, 1965, it was incorporated in Canada; and

(b) in the case of a corporation incorporated before April 27, 1965, it was incorporated in Canada and, at any time in the taxation year or at any time in any preceding taxation year of the corporation ending after April 26, 1965, it was resident in Canada or carried on business in Canada.

In my view, Section 139 (4a) (a) applies to deem the amalgamated Deltona of Canada Limited to be resident in Canada because it was a corporation ‘‘incorporated in Canada’’ after April 26, 1965. As already indicated, the amalgamated Deltona of Canada Limited came into existence as a corporation by virtue of the confirming letters patent issued in 1966 under Section 128A of the Canada Corporations Act. In my view when a corporation, such as a company under that Act, is brought into existence, it is ‘‘incorporated’’ within the meaning of that word when used in a provision such as Section 139 (4a). There is no statutory definition of the word ‘‘incorporated’’ in the Income Tax Act. In my view, it has its obvious meaning of the act of creation of a corporation or, as it is expressed in the appropriate sense of the word ‘‘incorporation’’ in the Shorter Oxford English Dictionary, ‘‘The action of forming into a . . . corporation’’. In my view, once it is accepted that amalgamation results in a corporation that did not exist before, it follows that it 1s, among other things, the “incorporation” of that new corporation.*[2]

It follows that, assuming the $2,509,158 was paid to the appellant as a dividend by the amalgamated Deltona of Canada Limited, it was a dividend to which Section 106 (la) applies (as being a dividend payment made by ‘‘a person resident in Canada’’ to a ‘‘non-resident person’’) unless the amalgamated Deltona of Canada Limited was ‘‘a non-resident-owned invest- ment corporation’’ of the class described in Section 106(la)

(a) (1).

I turn, therefore, to the question whether the amalgamated corporation was, at the relevant time, a non-resident-owned investment corporation within the meaning of the expression in Section 106 (la) (a) (i).

Where the expression ‘‘non-resident-owned investment corporation” is found in the Income Tax Act, it means a corporation defined by Section 70 to be a non-resident-owned investment corporation (Section 139(1) (aa)). Section 70 provides for payment of a 15% tax in lieu of the tax otherwise payable under Part I by a resident corporation and it provides for that tax being paid on a base (taxable income) computed in a special way. The corporations to which it applies are defined by Section 70(4), which I repeat here: :

70. (4) In this Act, a “non-resident-owned investment corporation” means a corporation incorporated in Canada that during the whole of the taxation year in respect of which the expression is being applied complied with the following conditions:

(a) at least 95% of the aggregate value of its issued shares and all of its bonds, debentures and other funded indebtedness were

(i) beneficially owned by non-resident persons,

(ii) owned by trustees for the benefit of non-resident persons or their unborn issue, or

(iii) owned by a corporation, whether incorporated in Canada or elsewhere, at least 95% of the aggregate value of the issued shares of which and all of the bonds, debentures and other funded indebtedness of which were beneficially owned by non-resident persons or owned by trustees for the benefit of nonresident persons or their unborn issue or by several such corporations;

(b) its income was derived from

(i) ownership of or trading or dealing in bonds, shares, debentures, mortgages, hypothecs, bills, notes or other similar property or any interest therein, (ii) lending money with or without security,

(iii) rents, hire of chattels, charterparty fees or remunerations, annuities, royalties, interest or dividends, or

(iv) estates or trusts;

(ba) not more than 10% of its gross revenue was derived from rents, hire of chattels or charterparty fees or charterparty remunerations ;

(c) its principal business was not

(i) the making of loans, or

(ii) trading or dealing in bonds, shares, debentures, mortgages, hypothecs, bills, notes or other similar property or any interest therein;

(d) it has, not later than 90 days after the commencement of the taxation year, elected in prescribed manner to be taxed under this section ; and

(e) it has not, before the taxation year, revoked in a prescribed manner the elections so made by it.

My conclusion that the amalgamated corporation was not, at the time of the payment of the dividend in question, a nonresident-owned investment corporation is based on my finding that it had never ‘‘elected’’ to be ‘‘taxed’’ under Section 70 as required by Section 70(4) (d).

In the first place, I say it had never ‘‘elected . . . to be taxed’’ under Section 70 because such an election would be a decision to pay income tax under Part I of the Income Tax Act on its taxable income computed in the Section 70 manner at the rate fixed thereby for the year in which it made that decision and for each subsequent year until it revoked that decision (Section 70(4)(e)). In this case, in my view, there was no actual decision to pay tax under Part I of the Income Tax Act at all. While it is true that there was a resolution of the Board of Directors at 11:00 a.m. on March 28, 1966, which purported to be an election under Section 70, as part of what was obviously a pre-arranged program of corporate acts, there was a shareholders’ resolution at 3:30 p.m. on the same day to distribute the amalgamated corporation’s assets to its shareholders and to surrender its charter, and, at 3:45 p.m., the directors executed a general deed of conveyance whereby all the assets of the amalgamated corporation were conveyed to the appellant, its sole shareholder. When these three acts, viz,

(a) the purported election to be taxed under section 70,

(b) the decision to distribute its assets to its shareholders and surrender its charter, and

(c) the actual conveyance of all its assets to its shareholder,

are looked at as acts that were practically speaking simultaneous, it is apparent that there was never a decision by the amalgamated corporation to pay tax under Part I of the Income Tax Act. Any apparent decision to pay tax was nullified by the simultaneous decision to wind up and the immediate implementation of that decision by distributing all the corporation’s assets to its shareholders.

I am not overlooking the fact that Section 70(4) (d) provides for an election ‘‘in prescribed manner’’ and that Regulation 500 provides that such an election shall be made by forwarding to the Deputy Minister certain documents which were in fact sent. In my view, however, this is the prescribed manner for electing to be taxed under Part I in the manner set out in Section 70 when there is actually a decision to be so taxed. Where the several corporate acts at the time of the purported election, taken as a whole, make it clear that the corporation intends to rid itself of its property and surrender its charter so that it cannot be taxed, in my view it has, in fact, decided not to exist and not to be taxed at all. A purported election ‘‘in prescribed manner’’ based on a decision not to be taxed is not, in my view, an election ‘‘to be taxed” such as is required by Section 70(4) (a).

I have been discussing Section 70(4) (a) on the assumption that the amalgamated corporation did in fact forward to the Deputy Minister the documents contemplated by Regulation 500. However, in my view, this is not so and cannot be taken to be so. The only evidence of any such documents being so forwarded concerns documents that were received by the Deputy Minister on March 29, 1966, some two weeks before the ‘‘issue’’ of the letters patent confirming the amalgamation. On that date, in fact, the amalgamated corporation was not in existence. No matter how the Letain (supra) cases and the statutory provisions on which they are based are read, I can find no suggestion of any principle that would justify the Court in concluding that an “election” that was filed under the Income Tax Act when the amalgamated corporation did not exist and which was not, therefore, filed by it, must nevertheless be found as a fact to have been filed by it.

I find it impossible to conclude that a non-existent corporation that decided to wind up and surrender its charter before, in fact, it had a charter, ever became a non-resident-owned investment corporation for the purposes of Part I of the Income Tax Act.

The appeal is, therefore, dismissed with costs.