This content was first published by the Canadian Tax Foundation in (2025) 15:3 Canadian Tax Focus / Focus sur la fiscalité canadienne. Republished with permission.
In McCague v. The King (2025 TCC 59), the Tax Court of Canada (TCC) held that two equal shareholders who jointly paid themselves dividends from a tax-indebted corporation were not dealing at arm’s length with the corporation.
The key factor in triggering section 160 liability was that the dividends were paid not for a business purpose, but to meet the personal financial needs of the shareholders.
The decision, alongside Veilleux v. The Queen (2022 TCC 69), signals a shift in how courts assess non-arm’s-length relationships in the context of 50-50 shareholder arrangements. McCague and Veilleux establish that joint action driven by personal financial interests can be sufficient to create a non-arm’s-length relationship, even in the absence of de jure or de facto control.
The appellant, Mr. McCague, was a director and 50 per cent shareholder of 2189632 Ontario Inc. (“218”). The corporation paid a dividend to Mr. McCague while it owed corporate income tax. As a result, the CRA applied section 160 to hold Mr. McCague liable for 218’s outstanding tax debt.
The court was asked to determine whether a non-arm’s-length relationship existed between 218 and Mr. McCague, which is a prerequisite for the application of section 160.
Canada v. McLarty (2008 SCC 26) sets out three criteria for the determination of whether there is a non-arm’s-length relationship:
- Was there a common mind that directed the bargaining for both parties to a transaction?
- Were the parties to a transaction acting in concert without separate interests?
- Was there de facto control?
It is the second of these criteria—acting in concert—that was at issue.
The court found that although there were diverging interests and personal motivations for receiving the dividend— such as a breakdown in the shareholders’ relationship—this was insufficient to avoid being found to have acted in concert. Finding that Veilleux had similar facts, the court quoted from that decision:
There were no such divergent or opposing interests. The two directors and shareholders . . . both wanted to withdraw profits from [the corporation] (at paragraph 66).
The court continued:
I agree. It follows that I take issue with the way that the appellant framed his “common interest” argument. Counsel for Mr. McCague suggested that the reasons why [the other shareholder] may have wanted a dividend were not necessarily the same as or aligned with those of Mr. McCague. . . . [T]his argument takes the inquiry too far into the nature of the personal reasons of each shareholder rather than the common nature of the reasons i.e. that their reasons were personal and not related to the business (at paragraph 67).
The court distinguished between dividend payments made for genuine business purposes, such as facilitating a buyout or restructuring, and those made primarily to serve the personal financial interests of the shareholders.
The latter applied in this case. This collective and co-ordinated action without a business rationale led the court to conclude that the shareholders were not dealing at arm’s length with each other or the corporation and therefore section 160 applied.
Although the original case law emphasized commonalities such as factual control and formal roles, McCague and Veilleux highlight a meaningful difference: the courts now give greater weight to whether shareholders acted jointly to serve personal financial ends.
The court in McCague built on its reasoning in Veilleux, and these two decisions together represent a shift from earlier case law, which was more reluctant to find non-arm’s-length relationships among equal shareholders.
The court acknowledged this evolving jurisprudence by referencing Dean Blachford’s article discussing the pre-Veilleux framework. It agreed with “the proposition that the ‘acting in concert’ test looks at whether a person acting in concert with another is exercising control over the corporation on his or her own” (at paragraph 57). See Dean Blachford’s article in the August 2022 issue of Focus regarding the case law prior to the Veilleux and McCague decisions.
