Trustee of 684417 B.C. Ltd v. Johnson
This is a very interesting case which may have tax consequences, as well as insolvency and others.
J was working at a company collecting wages. In 2005, M the controlling party, offered to make J a partner in the company. J incorporated 417 which became a partner, with M’s company B, and took on all the liabilities and profits from the company. 417 didn’t have the resources to purchase equity in the partnership, so J and M agreed that 417 would receive partnership money that J would have received in the first 6 years, but no profits from the partnership. The partnership operated, paying both 417 and B as if they were salaried employees. They were paid more than the company was profiting They requested to off-set the money taken out as tax-deductible expenses, but the accountant wouldn’t do it, because they were partners, and since it was in excess of the profits it must be a loan.
J was unhappy, he wanted to be paid at his old salary, but he didn’t want to take the risk that the partnership would not make enough money to pay it. Therefore, 417 and its principal J, and B and its principal M, entered into an amended partnership agreement which upon one of three events occurring, if 417 was found to owe money to partnership, then B would indemnify 417.
However, bankruptcy was not one of the events. In 2008, the partnership and 417 made an assignment in bankruptcy.
At various times, 417 in 2007 and 2008 had made payments to J and his wife. At the end of the fiscal year, 417 passed a resolution to make these declared as dividends.
The trustee claimed that in 2007, 417 assets were not sufficient to pay its liabilities, and J knew this. This was also the case in 2008. J caused 417 to declare dividends of 60 k to J, and 100 k to his wife and in 2008, 253 k to J.
The court found that the relevant point was when they were declared to be dividends. It also found that J knew 417 was insolvent, and it rejected J’s claim that they were wages. Since his controlling stake and actions made it clear he was much more than that.
The judge found that these were dividends contrary to the BC Corporations Act. Further, these were all made within 1 year and under the BIA judgment would be granted against them.
So… think twice before using companies for taxes, income splitting, or moving away from employee to owner/partner!