Citation: 2006TCC247
Date: 20060421
Docket: 2005-4225(IT)I
BETWEEN:
SYLVAIN LEFEBVRE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
and
2005-4227(IT)I
JEANNETTE TARDIF,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Lamarre J.
[1] The Minister of National Revenue (the "Minister") disallowed the Appellants' rental losses for 1997 and 1998. The Appellants entrusted their income tax returns for these two years to Christian Avard, a childhood friend of Mr. Lefebvre. Mr. Avard had them buy an income property in LaSalle, Quebec. The Appellants never considered themselves owners of this income property. They never concerned themselves with it, never visited it, never received any rental income and never made a payment in relation to this building. Several times they said on paper that they were acting as nominee for Mr. Avard (see solemn declaration of Sylvain Lefebvre, Exhibit I-1, pages 5 and 6 of 7, questions 2 (c), (d), (h), (i), and (l); letter written by the Appellants to the Montréal Tax Services Office, Exhibit I-3, page 2, paragraph 9; solemn declaration of Jeannette Tardif, Exhibit I-4, pages 5 and 6 of 7, questions 2 (c), (d), (h) and (l)).
[2] Effectively, in 1995, they sold their residence to Mr. Avard's brother for a sum apparently greater than the asking price. Mr. Avard then asked them to go to the notary in order to acquire the rental building in LaSalle. It seems that the balance of the hypothec on the personal residence was transferred to the rental property to avoid paying a penalty to the bank.
[3] The Appellants stayed in their residence, continuing to make the same payments that they had been making on their hypothec, but in the form of rent paid to Mr. Avard. The payments had nothing to do with expenses related to the income property.
[4] Mr. Avard collected the rental income directly and assumed the costs associated with the building, including the hypothec payments. The Appellants had no involvement with the building: they received no income from it and paid none of the expenses. Nonetheless, Mr. Avard calculated rental losses and deducted them from the Appellants' income. Although each Appellant, on paper, was 50% owner of the rental building, the full rental loss was claimed by each of the Appellants. The tax refund received by each of the Appellants as a result of these rental losses was then handed over to Mr. Avard.
[5] Although the Appellants have little education and appear to have been set up by Mr. Avard, it is evidenced from the letter written to the Canada Customs and Revenue Agency that they had a doubt right from the start as to the legality of Mr. Avard's actions (see Exhibit I-3, paragraph 5).
[6] Later on, in February 1996, Sylvain Lefebvre received a letter from the Laurentian Bank informing him that the payments on the hypothec now on the rental building in LaSalle were in default. At that time, Mr. Lefebvre stated that he had started having doubts about the legal manoeuvrings of Mr. Avard. Nonetheless, he and his spouse, Ms. Tardif, accepted his approach by each of them claiming the full amount of the rental losses in their income statements for 1997 and 1998, for expenses that neither one of them had ever incurred. In 1998, they asked Mr. Avard to sell the rental building.
[7] I am of the opinion that the assessments disallowing the rental losses are well founded. For one, the Appellants cannot deduct from their income expenses that they never incurred. Moreover, even if the Appellants' claim to have not understood the expression "act as nominee," the evidence shows that they did in fact act as nominees for Mr. Avard. Indeed, they went to the notary at the time of the sale of the income property with the sole intention of lending their names to a transaction made for and in the name of Mr. Avard. This is who was entitled to the rental income and who assumed the expenses associated with renting out the building. The evidence does not at all show that he was acting as a simple agent for the Appellants, but rather that it was the Appellants who, by lending their names to a transaction acted as mandataries for Mr. Avard. The Appellants have clearly stated that they assumed no responsibility for this income property, and that they were not the owners.
[8] In Victuni A.G. v. Quebec [1980] 1 S.C.R. 580, 1980 CarswellQue 108F, the Supreme Court of Canada recognized the agreement to act as nominee as a lawful form of the contract of mandate in Quebec law. The Court says the following at paragraph 7 of the CarswellQue version:
7 In Quebec law, as in French law, an agreement to act as nominee is a lawful form of the contract of mandate. In the Civil Code of Quebec, this appears from art. 1716, which provides:
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Art. 1716. A mandatary who acts in his own name is liable to the third party with whom he contracts without prejudice to the rights of the latter against the mandator also.[1]
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With reference to this article, it is stated in the Traité de droit civil du Québec, Vol. 13, at p. 70:
[TRANSLATION]
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As to nominees, a contract to act as such is a well-recognized form of mandate in our law (Canuel v. Belzile (1922), 33 Que. K.B. 355). In effect, a nominee is just a kind of mandatary ...
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In this decision, it was put into evidence that Victuni had bought the property in its name, as mandatary for two other companies who were the true owners on whose behalf Victuni held the property. The Court said this at paragraphs 9 and 10:
9 Under the general principles of the law of mandate, it is clear that the obligation of a mandatary towards the mandator is not a debt. The person who has bought property on behalf of a third party who wishes to remain unknown is no more indebted for the price paid than he is the owner of the property. The true owner is the mandator, and the obligation of the mandatary nominee is to render an account to the mandator and deliver over what he has received on his behalf (C.C., art. 1713).
10 With regard to the nature of the tax in question, another decision of the Privy Council respecting the first Quebec statute in this matter clearly stated that the tax in question is a personal tax not property tax: Bank of Toronto v. Lambe [(1987), 12 A.C. 575]. This is therefore not a kind of tax of the same nature as the real property taxes levied by municipalities, which of course are payable by the apparent owner, since they are charge on the realty. The tax on the paid-up capital of companies, like the tax on their income, is on the contrary a levy imposed on the person exactly like the income tax on individuals. Any mandatary, apparent or covert, who holds property on another's behalf is required to report to the tax authorities what he receives on his mandator's behalf, but he is not liable for the tax.
It is therefore evidenced from this decision that the mandatary acting as nominee is not the debtor of the tax on the income property, nor is he or she entitled to the rental losses from this income property.
[9] Moreover, the tax refund turned over to Mr. Avard cannot be a deductible expense for the Appellants, as their agent is claiming. The sum handed over by the Appellants to Mr. Avard was not used to earn income from a property; it was used to finance the tax scheme organized by Mr. Avard. Such an expense cannot be deductible, even if the Appellants were victims of tax fraud (see Vankerk v. The Queen, 2006 FCA 96, [2006] F.C.J. No. 371 (QL)).
[10] Also, the Minister was justified in assessing outside of the normal assessment period. Indeed, there was misrepresentation attributable to neglect, carelessness or wilful default under subsection 152(4) of the Income Tax Act. From the beginning, the Appellants had doubts about Mr. Avard's schemes but they allowed him to act, knowing that they were each deducting the total of the rental losses that they had never assumed. This is not demonstrating due diligence (see Venne v. Canada, (F.C.T.D.) [1984] F.C.J. No. 314 (QL)).
[11] The appeals are dismissed.
Signed at Ottawa, Canada, this 21st day of April 2006.
"Lucie Lamarre"
Translation certified true
on this 10th day of November 2006.
Gibson Boyd, Translator
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