A family holding company ("MPSI") paid a stock dividend of preferred shares, having nominal paid-up capital and a redemption amount of $48,000, on the Class B non-voting shares of MPSI, which were held by a family trust ("MFT") whose sole trustee ("McClarty") was the father. MFT then sold these preferred shares to McClarty in consideration for a demand promissory note of $48,000. McClarty then sold these preferred shares to a corporation ("101 SK") of which he was the sole shareholder and director in consideration for a $48,000 demand promissory note, which 101 SK then repaid out of cash proceeds received by it on the redemption of the preferred shares.
The Minister contended that, because of the breadth of the words "in any manner whatever" in s. 84(3), the redemption resulted in a deemed dividend for MFT in the amount of $48,000. This contention was supported by the Tax Court's decision in RMM, which held that the breadth of the words "in any manner whatever" meant that "each person" in s. 84(3)(b) could include people who no longer held the shares.
Angers J. rejected the Minister's argument. RMM concerned a situation where the economic substance of the transactions was that the redeemed shares were still the property of the taxpayer. In the present case, none of the transactions were fictitious or lacking in economic substance. Angers J. stated (at para. 65):
Even if I were to look into the method by which the shares were redeemed, I would need to view the transactions as many steps in the process of redemption, acquisition or cancellation, which I do not believe to be the case here. The steps in this case were undertaken for a bona fide reason [namely, to protect assets from an anticipated civil suit] and I do not believe that, in these circumstances, subsection 84(3) can be applied so as to have MFT declared the recipient of a deemed dividend on the redemption of the 2003 and 2004 stock dividend shares.