Date: 20010118
Docket: 98-2034-IT-G,
98-2035-IT-G
BETWEEN:
FORESBEC INC.,
SOCIÉTÉ DE GESTION J.N.G.
INC.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Lamarre Proulx, J.T.C.C.
[1]
These appeals were heard on common evidence. In both cases, the
appeals are for the appellants' 1990 to 1992 taxation
years.
[2]
The issues as regards the appellant Foresbec Inc. are as
follows:
(1)
Was the $150,000 paid to Multi-Ind. from 1990 to 1992 so
paid under a contract for services? Can the appellant claim the
following amounts as expenses incurred to earn income within the
meaning of subsection 9(1) and paragraph 18(1)(a) of
the Income Tax Act ("the Act"): $12,500
for 1990, $75,000 for 1991 and $62,500 for 1992, for a total of
$150,000?
(2)
If the answer is no, was the Minister of National Revenue
("the Minister") justified in assessing the
appellant for the 1990 taxation year outside the reassessment
period in accordance with subsection 152(4) of the
Act?
(3)
Did the appellant knowingly, or under circumstances amounting to
gross negligence, include an ineligible expense in computing its
income for the taxation years at issue?
[3]
As regards the appellant Société de Gestion J.N.G.
Inc., the issues are as follows:
(1)
Did the appellant, as a shareholder in Foresbec Inc., receive a
taxable benefit within the meaning of subsection 15(1) of the
Act through the payment of the above-mentioned $150,000 in
the years at issue?
(2)
If the answer is yes, was the Minister justified in assessing the
appellant for the 1990 and 1991 taxation years outside the
reassessment period in accordance with subsection 152(4) of the
Act?
(3)
Did the Minister properly assess a penalty under subsection
163(2) of the Act?
[4]
When the hearing began, counsel for the appellant
Société de Gestion J.N.G. Inc. told the Court that
that appellant was withdrawing its appeal against the notice of
determination of non-capital loss issued by the Minister in
relation to the loss at the end of the 1992 taxation year. That
notice is dated December 20, 1996.
[5]
Counsel for the appellant Foresbec Inc. asked to amend that
appellant's Notice of Appeal to remove any reference to 1993
and 1994. Counsel for the respondent told the Court that she had
no objection to that request. The Notice of Appeal was therefore
amended as requested by counsel for the appellant.
[6]
The following witnesses testified at the request of counsel for
the appellants: Guy Boissé, Louis Lagassé, Yvan
Bouvet, Gérald Gagnon and Jacques Maltais. André
L'Espérance testified at the request of counsel for
the respondent.
[7]
Guy Boissé explained that the appellant
Société de Gestion J.N.G. Inc. (hereinafter J.N.G.)
is a management company controlled by him. Prior to
March 1989, J.N.G. controlled the appellant Foresbec Inc.
(hereinafter Foresbec). Mr. Boissé was the president
of both companies. Foresbec is a public company whose common
shares are listed on the Montréal Exchange. It carries on
its activities in two areas, namely the timber business and the
sale of construction materials. Its activities in the timber
business involve seasoning wood, grading it and marketing it,
especially for the export market.
[8]
Mr. Boissé explained that, as a public company, Foresbec
was of interest to André L'Espérance, a
substantial shareholder in Multi-Ind. Inc. (hereinafter
Multi-Ind.), who wanted his group to gain access to the
Montréal Exchange.
[9]
On March 8, 1989, J.N.G. sold 3,600,000 shares it held in
Foresbec to Multi-Ind. for $3,960,000. Part of that
amount—$2,010,000—was paid in cash, while the balance
of $1,950,000 was payable in three equal instalments on
April 1, 1992, 1993 and 1994 (Exhibit I-1).
[10] After
that sale, Mr. Boissé remained in charge of running the
company and Mr. L'Espérance became the chairman of its
board of directors. He reorganized Foresbec's corporate
structure and made changes to its contractual agreements with
certain foreign customers, particularly a German company named
Offerman, with which he signed an exclusivity agreement. That
agreement provided that Foresbec would not sell to any German
purchaser other than Offerman. Moreover, sales to Offerman went
through another Canadian company, Prime Wood Lumber. Offerman
owned 50 percent of the shares of Prime Wood Lumber. Mr.
Boissé totally disagreed with the aforementioned changes.
According to him, the decisions were clearly not in
Foresbec's interest.
[11] According
to the agreement (Exhibit I-1), if the total value of the
purchaser's claims was greater than an amount referred to in
the agreement, the purchaser had 10 days to inform the vendor.
That notification was given by the purchaser before the end of
the year. The notification and the operational changes made by
Mr. L'Espérance caused intense conflict within
Foresbec that threatened its very existence. As a result, the
banks wrote to each of the parties on January 22 and
February 23, 1990. Those letters were filed as Exhibit A-4.
The letter of February 23, 1990, to Guy Boissé and another
similar letter to André L'Espérance were a
kind of demand by the bank that the conflict between the two men
be resolved by March 12.
[12] Mr.
Boissé explained that the bank exerted a great deal of
pressure to get Mr. L'Espérance and him to come to an
agreement. Mr. Boissé decided to buy back the shares. To
that end, J.N.G. was able to ally itself with nine other
shareholders.
[13] On March
10, 1990, J.N.G. bought back the Foresbec shares.
Mr. Boissé said that the negotiations were very
difficult. It took 12 hours to reach an agreement. Proposal after
proposal was made. The buyback agreement (Exhibit I-2)
between J.N.G. and Multi-Ind. provided, inter alia,
that $1,750,000 would be paid and that the $1,950,000 balance of
the sale price from the 1989 agreement would be waived. Above
all, the agreement contained a clause by which J.N.G. gave an
undertaking that Foresbec would award a $150,000 contract to
Multi-Ind. for André L'Espérance's
services. The consulting contract (Exhibit A-1) was
dated April 9, 1990, and signed by J.N.G. and Foresbec.
Mr. Boissé signed for both companies.
[14] The
ratification of the consulting contract (Exhibit A-1) took
place at a meeting of Foresbec's directors on April 12, 1990.
The minutes of that meeting were filed as Exhibit A-3.
[15] Mr.
Boissé argued that, by signing the buyback agreement
(Exhibit I-2), Mr. L'Espérance agreed to
provide services. Mr. Boissé said that, where a company is
taken over by another group, it is normal and desirable that the
outgoing executive officer be offered a consulting contract. It
is natural to think that that person has committed the company or
taken actions in relation to third parties that require
explanations or will require explanations in the future. Two
types of co-operation were wanted from
Mr. L'Espérance: active co-operation, that
is, providing information on the contracts already negotiated,
and passive co-operation, which involved preventing him
from competing.
[16] Mr.
Boissé admitted that he and Mr. L'Espérance did
not get along but said that he expected Mr.
L'Espérance to co-operate once the shares were
bought back. According to Mr. Boissé, while Mr.
L'Espérance did nothing wrong in terms of his passive
co-operation, he did not give active co-operation. He
did not want to return calls or sign the minute books covering
the period when he had been in charge.
[17] In June
1997, the Foresbec shares were sold to an American company.
Mr. Boissé told the Court that he had been authorized
by Foresbec's officers to pursue this appeal.
[18] Oddly, it
was the respondent who filed the 1989 share sale agreement (as
Exhibit I-1) and the buyback agreement of March 10, 1990
(as Exhibit I-2).
[19] The
clause from which this case arises, which can be found in the
buyback agreement (Exhibit I-2), reads as follows:
[TRANSLATION]
4.
J.N.G. promises that the Company will award MULTI-IND. a
contract for André L'Espérance's services
as a consultant for a period of two (2) years, starting on the
closing date, for total fees of one hundred and fifty thousand
dollars ($150,000) payable monthly in instalments of six thousand
two hundred and fifty dollars ($6,250) to be paid on the last day
of each month starting on the thirtieth of April nineteen ninety
(April 30, 1990) and from month to month thereafter up
to and including the month of March nineteen ninety-two
(1992); should the Company have not made any of the said payments
more than fifteen (15) days after being given written notice of
default by MULTI-IND., the balance outstanding at that time
shall become payable immediately with loss of the benefit of the
term.
[20] It is
also helpful to look at some of the agreement's other
clauses. Clauses 5, 6(vi) and 8 read as follows:
[TRANSLATION]
5.
André L'Espérance shall file a solemn
declaration stating that there are no other agreements by which
the Company may be bound that were entered into outside the
Company's ordinary course of business and not disclosed in
writing to the Company prior to the date hereof.
6.
On closing:
. . .
(vi)
André L'Espérance, Claude Grondin and Arnold
Kostiner shall sign a trade restriction agreement in the usual
form in favour of the Company for all of Canada and Western
Europe for three (3) years; and
. . .
8.
On closing, André L'Espérance shall represent
that a verbal agreement, made subject to certain conditions, has
been entered into by Primewood Lumber Inc./Guy Genest whereby
they have undertaken not to compete directly or indirectly with
the Company until the thirty-first of December nineteen
ninety (December 31, 1990).
[21] The
consulting contract awarded to Multi-Ind. (Exhibit
A-1) is dated April 9, 1990, and signed by J.N.G. and
Foresbec but not by Multi-Ind. It is worded as follows:
[TRANSLATION]
SOCIÉTÉ DE GESTION J.N.G. INC.—a
federally incorporated company, here acting through and
represented by its president, Guy Boissé, and stipulating
on behalf of Foresbec Inc., in whose name it gives an undertaking
herein—hereby awards Multi-Ind. Inc. a consulting
contract for a period of two (2) years under which
André L'Espérance, as Multi-Ind.'s
president, shall act as a consultant to Foresbec Inc. starting on
the date hereof.
CONTRACT TERM
The contract term shall be two (2) years starting today. The
contract shall therefore end on the ninth of April nineteen
ninety-two (April 9, 1992), and it shall not be extended in
any way, whether tacitly or explicitly, without an agreement in
writing duly approved by both parties.
TOTAL FEES
The said consulting contract is thus awarded for a total of
ONE HUNDRED AND FIFTY THOUSAND DOLLARS ($150,000.00) payable
monthly in instalments of SIX THOUSAND TWO HUNDRED AND FIFTY
DOLLARS ($6,250.00) to be paid on the last day of each month from
the thirtieth of April nineteen ninety (April 30, 1990)
up to and including the thirtieth of March nineteen
ninety-two (March 30, 1992). Should Foresbec have not made
such consulting fee payments more than 15 days after being given
written notice of default by Multi-Ind., the balance of the
said $150,000.00 outstanding at that time shall become payable
immediately with loss of the benefit of the term.
[22] Exhibit
A-2 is made up of the amounts paid to Multi-Ind. and
the invoices prepared by Multi-Ind. for its administrative
services.
[23] Louis
Lagassé is a businessman who also has legal training. In
1989, he was on Foresbec's board of directors. He was
involved in the negotiations for the share buyback. He stated
that the purpose of the consulting contract awarded to
Mr. L'Espérance was to make sure that he would be
loyal to Foresbec. It was essential that he make himself
available. Mr. Lagassé also indicated that it was normal
to provide an outgoing manager with severance pay.
[24]
Yvan Bouvet is a chartered accountant who has known Mr.
Boissé since 1986. He was the tax advisor and auditor for
Mr. Boissé's businesses. He said that, since
Foresbec was a public company, purchase and buyback transactions
had to be at close to the stock market value pursuant to
Quebec's Securities Act, unless the specific procedure
required by that statute was followed. The difference could not
be more than 10 percent of the stock market value. He said that
the purchase and buyback prices were therefore tied to the value
of the shares on the stock market. The shares, he said, were
listed at $1.10 on the stock market at the time of the purchase.
One year later, when they were bought back, they were worth half
that amount. His conclusion is that the share buyback price could
only have been $1,750,000. According to Mr. Bouvet, the other
amounts paid were not of the same nature as the buyback price. He
is aware that there was a contract for services, but he was not
involved in the negotiations to establish the quantum or anything
else. The legal advisors had suggested to him that such a
contract could be useful in dealing with Foresbec's sensitive
issues. He admitted that, when J.N.G. disposed of its shares in
Foresbec in June 1997, the $150,000 was included in the adjusted
cost base of the shares. He had not included it initially, but
after a conversation with the appellants' lawyers, the amount
was included as a defensive measure.
[25]
Gérald Gagnon testified at the request of counsel for the
appellants. He was a basic file auditor at Revenue Canada for the
Sherbrooke area. Counsel for the appellants asked him how he
interpreted clause 4 (quoted in paragraph 19 of these Reasons) of
the agreement between J.N.G. and Multi-Ind. dated
March 10, 1990 (Exhibit I-2). His audit showed
that the $150,000 had been paid but not for fees. He learned this
from Mr. Boissé during his audit. His interview with Mr.
Boissé took place at the end of November 1994 and was
recorded in his T2020 report, which was filed as Exhibit
I-7. He asked Mr. Boissé what services
Mr. L'Espérance had provided and, after some
hesitation, Mr. Boissé told him that no services had ever
been provided but that that was the last point to be negotiated
in order for the agreement to be concluded. He did not ask
whether Mr. Boissé knew when he signed the agreement
that services would not be provided.
[26] As
regards the benefit to J.N.G. as a shareholder, Mr. Gagnon's
view was that J.N.G. had used an asset owned by Foresbec, a
corporation in which it was a shareholder, and that that was a
taxable benefit. Mr. Boissé is a knowledgeable businessman
who was well aware of the consequences of the transaction.
[27]
André L'Espérance became a director on
Foresbec's board of directors before the share purchase, but
he does not remember attending meetings of the board. The
Multi-Ind. group immediately began talks to acquire
Foresbec.
[28] Mr.
L'Espérance explained that, before the shares were
purchased by Multi-Ind., he went over the company's
financial statements and inventories with accountants and met the
company's senior managers. After all that, he thought that
the shares were not worth the price being asked. The main issues
were the accounts receivable and the quality of the inventories.
He was nonetheless interested in buying, and he asked his lawyers
to draft a failsafe clause concerning the vendor's
representations and warranties. That clause is article 8 of
Exhibit I-1.
[29] When the
shares were purchased, it was agreed that Mr.
L'Espérance would become the chairman of the board of
directors and that Mr. Boissé would remain the
corporation's executive president. Mr. Boissé
continued to be a director of Foresbec and worked there every
day.
[30] Offerman
wanted to be Foresbec's only customer in Germany. Offerman
would resell to Foresbec's other customers in Germany through
Primewood Lumber. Primewood had been incorporated at
Offerman's request and was owned in part by Offerman and in
part by Guy Genest, a former important employee of Foresbec.
Mr. L'Espérance saw that way of doing business
as appropriate and advantageous.
[31] The facts
that led to the dispute between Mr. Boissé and Mr.
L'Espérance have already been set out.
[32] As for
the contract for services, Mr. L'Espérance said that
it was nothing of the kind but was rather a share payment method
proposed by Mr. Boissé. Mr. Boissé's
concern was that he not see Mr. L'Espérance any
more. Mr. L'Espérance
said: [TRANSLATION] I did not want to work and he did not want
me to work. They never asked me to co-operate. Mr.
Boissé did not want him to be entitled to do anything in
the company. Mr. L'Espérance pointed out that, under
the so-called consulting contract, he had no obligation to
provide services. A dispute was being ended, and that was all.
The non-competition clause (quoted in paragraph 20 of these
Reasons) was not negotiated. It is a normal clause, and he had no
intention of getting involved in that type of business
anyway.
[33] Jacques
Maltais is a businessman who was on Foresbec's board of
directors. He said that, as a director, he considered it
essential to bind Mr. L'Espérance to ensure that
he co-operated to some extent.
The appellants' arguments
[34] Counsel
for the appellants argued that, in the circumstances, with the
Foresbec shares being bought back by a group of shareholders, it
was reasonable for Foresbec to want to ensure that it had the
co-operation of the outgoing owner, who was also its senior
director. The expense is eligible even though, in the end, it did
not have the expected effect.
[35] What
counts, counsel said, is the purpose for which the expense was
incurred. Even if the ultimate goal of an expense is to bind
someone, the expense is not capital in nature if the method
chosen in order to incur it is a contract for services. The
purpose of the contract for services was to ensure the loyalty of
the former owner and to obtain from him a minimum level of
co-operation, whether passive or active.
[36] Counsel
for the appellants referred to the Tax Appeal Board's
decision in Brock et al. v. M.N.R., 67 DTC 52,
especially at page 54. That case involved the purchase of an
accounting practice. Along with the purchase price, there was a
contract for the employment of the former owner. The cited
passage is as follows:
There is, it appears to me, no vagueness, no ambiguity in the
indenture. There was a set price on the one hand, and, on the
other hand, a contract of employment for a definite period and
for a definite amount of money to be determined under the
agreement. The parties to the agreement dealt in good faith and
with no intention to deceive the fisc. It was a perfectly legal
document called for by the circumstances of the business. True
that Armfield was asking more and Muirhead could not raise more
than $15,000. So they arrived at the compromise that the price
would be $15,000 and Armfield would become an employee whose
remuneration would be a commission of 3% of the gross revenue of
the business. It is also true that Armfield did not do much to
develop the business. Meanwhile, he visited the business on a few
occasions, saw some of his former clients and did nothing to hurt
the trade one way or the other. It cannot be said that the
transaction was artificial and that by such agreement the income
of the appellant was "unduly or artificially reduced" .
. . .
[37] Counsel
also referred to Kerim Brothers Ltd. v. M.N.R.,
67 DTC 326, especially at page 336. That case involved
the sale of a rental business. The breakdown of the sale price
showed that the price paid was for the undepreciated capital cost
of the building and equipment and for the land and goodwill. The
cited passage is as follows:
A consideration of all the facts and circumstances as
disclosed in the evidence has led to a conclusion that the
agreement of sale of November 9, 1961, was, without doubt, an
arm's length agreement in which each party had bargained for
the best possible terms and every possible advantage to be had.
There is nothing in the evidence which would support a finding
that the agreement was in any sense or to any degree a sham or
subterfuge or a mere device in the sense referred to by Thurlow,
J., in the Klondike decision.
Counsel argued that the contract for services in the instant
case was also an arm's length agreement and that it reflected
what the parties intended.
[38] He
referred as well to this Court's decision in Farm Business
Consultants Inc. v. The Queen, 95 DTC 200, [1994] T.C.J.
No. 760, to show that the facts of that case differed from
the facts here. The cited passage is at page 203:
Before the closing Mr. Whalls became concerned that he and
his wife might have somewhat onerous obligations under the
consulting agreement and at closing an amendment of the
consulting agreement was made and signed by all parties. It read
as follows:
1. The parties hereto agree to amend their consulting agreement
dated May 17, 1982, as follows:
The Company agrees that Agricultural and Whalls will only be
required to devote a maximum of five days service per year to the
Company.
The Minister disallowed the deduction of the so-called consulting
fees, allowed a deduction of a portion as an eligible capital
expenditure and a further portion as an interest component. He
took this reassessing action with respect to all years under
appeal, including those that were statute-barred, and imposed
penalties under subsection 163(2) for all years which he
reassessed.
I have set out the agreements to show what the parties purported
to agree to. The agreements do not reflect the legal reality.
Apart from the obligation to make the weekly payments of $1,665
the consulting agreement was never intended to be acted upon. The
Whalls were not expected or intended by the appellant to render
any consulting services and in fact they did not do so. . . .
There is no need to repeat the jurisprudence on substance over
form. That has been done in other cases. The essential nature of
a transaction cannot be altered for income tax purposes by
calling it by a different name. It is the true legal
relationship, not its nomenclature, that governs. The idea of
dressing up the payments for the customer list in the garb of
consulting fees was the idea of Mr. Ibbotson, the president
of the appellant, because he wanted to turn the payments for
goodwill into currently deductible expenses. Evidently the Whalls
were prepared to go along with this suggestion but their
acquiescence, and the fact that they were prepared to include the
payments in income, does not assist the appellant, nor indeed
does the fact that the Minister did not question the Whalls'
inclusion of the payments in income. After all, why would he?
[39] Counsel
for the appellants argued that, in Farm Business
Consultants, supra, the number of days in the contract
for services had been determined—namely five days a year,
which was ridiculously low—and that the judge could see
from the evidence before him that neither of the parties intended
to comply with the agreement. Counsel argued that the primary
purpose of the agreement in the case at bar, unlike that in
Farm Business Consultants, was not to make the expenses
deductible but to secure the former owner's loyalty and
services.
[40] He
referred to this Court's decision in Molinaro v.
The Queen, 98 DTC 1636, [1998] T.C.J. No. 197,
particularly at page 1642:
The witnesses called by the respondent testified that they
regarded the salary arrangement with Mr. Molinaro reasonable
and essential and I can see why. He struck me as a dynamic and
forceful person essential to the success of the enterprise.
Quite apart from the fact it strikes me as most anomalous that
where a person enters into a binding agreement with an arm's
length party who relies upon the maintenance of a legal
relationship as set out in the formal documentation and that
person is advised of the legal and fiscal consequences of what he
or she is signing that person should be entitled to repudiate the
agreement not only as against the Minister of National Revenue
but as against the other party. I suppose that in theory one
might be able to make a case that a party to an agreement can
invoke the substance over form doctrine but it seems to run
counter to all principles of commercial morality and indeed of
commonsense that one can, after solemnly and formally entering
into carefully drafted legal documents upon which the other party
relies, simply snap his fingers and say "That legal
relationship isn't to my liking. It doesn't suit my
fiscal objectives. Therefore I shall clothe it in a different
nomenclature that I like better." I cannot believe that
Mr. Molinaro's advisors would have told him to go ahead
and sign the agreements because it was necessary to get the deal
through, but it was not the real deal and he could ignore it and
conjure up another deal that was more attractive to him and,
perhaps more importantly, to Bluevest.
I do not need to resurrect the ancient doctrine of estoppel by
deed, although it might apply (the employment contract was in
fact under seal, an essential prerequisite to invoking this
venerable rule). Rather I prefer to place my reasoning upon an
even more ancient principle that if one makes one's bed in a
particular way one should — particularly if one has had
help from professional accountants and lawyers in making the bed
— be prepared to lie in it. In Collins v. The Queen,
96 DTC
1034 at page 1039 this court quoted from Savoie v. The
Queen, 93 DTC
552 as follows:
The situation here differs from that of spouses who, with a
full appreciation of the legal consequences of what they are
doing, choose that property be held jointly, or solely by one
spouse or in any other of the variety of ways in which property
can be owned. Such deliberate choices must be respected because
the legal form is consistent with the economic reality and the
informed intentions of the parties.
Counsel for the appellants argued that deliberate choices must
be respected.
[41] He
referred to R.P. Bell v. M.N.R., [1962] C.T.C. 253 (Ex.
Ct), particularly at pages 268-69:
In my opinion, the contract of employment of June 4, 1953,
between the Company and the appellant is exactly what it purports
to be. There is no doubt that the appellant could have
successfully sued the Company on it if it had refused to carry
out its terms and it could not have defended the action on the
ground that the contract was not what it purported to be.
Moreover, the contract contains the very terms that the appellant
had insisted upon as a condition of his offer to sell the pooled
shares to Messrs. Morrow, Lee and Smith. There is no doubt
that he desired the contract of employment that they had arranged
for him. . . .
Moreover, the terms of the agreement are clear and free from
ambiguity and neither the appellant nor the Company could be
heard to deny them. The Company has not sought to do so and the
appellant's attempt to do so should not be allowed to
succeed.
. . .
The fact that the appellant was never asked by Mr. Morrow,
Mr. Lee or Mr. Smith to render any service to the
Company under his contract of employment and that he never
rendered any service is immaterial. If he had sued on the
contract for failure on the part of the Company to comply with
its terms it would not have been a valid defence on its part that
it had never asked him for advice or consulted him. . . .
[42] With
regard to the application of subsection 152(4) of the Act,
counsel referred to M.D. Glazier Ltd. v. M.N.R.,
83 DTC 48, particularly the following passage at page
50:
Ultimately, therefore, there remains the view in my mind that
what happened in this instance should not be characterized as
misrepresentation. A mistake it may have been, but I am prepared
at this stage of the development of the law on section 152(4) to
believe that a mistake is different from misrepresentation, as it
is applied to the facts in this case. I cannot see from the
evidence presented that there was neglect or carelessness to the
degree that one might not expect to find in the work of a
normally cautious and wise taxpayer.
The appellant corporation, I believe, did everything within
its grasp to put forward for the Minister the circumstances as it
interpreted and saw them. I see nothing of either
misrepresentation, neglect or carelessness in its conduct.
[43] Counsel
for the appellants referred to the decision of the Federal
Court-Trial Division in M.N.R. v. Bisson, [1972]
F.C. 719, especially the following passage at page 730:
. . . I therefore conclude that a taxpayer who, without any
negligence on his part, commits an error in declaring his income,
does not make a misrepresentation within the meaning of
s. 46(4)(a)(i). When the Minister seeks to rely on
this provision to proceed with a re-assessment after four years,
he must therefore not only show that the taxpayer committed an
error in declaring his income but also that that error is
attributable to negligence on his part.
[44] He
referred again to Farm Business Consultants, supra,
at pages 205-06:
A court must be extremely cautious in sanctioning the imposition
of penalties under subsection 163(2). Conduct that warrants
reopening a statue-barred year does not automatically justify a
penalty and the routine imposition of penalties by the Minister
is to be discouraged. Conduct of the type contemplated in
paragraph 152(4)(a)(i) may in some circumstances also be
used as the basis of a penalty under subsection 163(2), which
involves the penalizing of conduct that requires a higher degree
of reprehensibility. In such a case a court must, even in
applying a civil standard of proof, scrutinize the evidence with
great care and look for a higher degree of probability than would
be expected where allegations of a less serious nature are sought
to be established. Moreover, where a penalty is imposed under
subsection 163(2) although a civil standard of proof is required,
if a taxpayer's conduct is consistent with two viable and
reasonable hypotheses, one justifying the penalty and one not,
the benefit of the doubt must be given to the taxpayer and the
penalty must be deleted. I think that in this case the required
degree of probability has been established by the respondent, and
that no hypothesis that is inconsistent with that advanced by the
respondent is sustainable on the basis of the evidence
adduced.
[45] Counsel
argued that, if the Court concludes that Foresbec cannot deduct
the payments in question, their inclusion in computing that
company's income must be considered merely an honest mistake
by the appellants.
The respondent's arguments
[46] Counsel
for the respondent pointed out that the respondent was the one
who filed the agreement dated March 8, 1989, through which
Multi-Ind. purchased the Foresbec shares, and the agreement
dated March 10, 1990, through which the same shares were bought
back by J.N.G. Those documents were filed as Exhibits I-1
and I-2. Counsel expressed surprise that documents so
important to the evidence were not filed during Mr.
Boissé's direct examination. She argued that the
reason those important documents were not introduced in evidence
by the appellants is that they did not want to adduce clear
evidence.
[47] Counsel
for the respondent referred to Exhibit I-1, which is the
agreement entered into by J.N.G. and Multi-Ind. on March 8,
1989. In agreeing to purchase the Foresbec shares for $3,960,000,
Multi-Ind. required from J.N.G. warranties as to the value
of the assets. The request that those warranties be honoured and
the refusal to pay the balance of the sale price were what gave
rise to the dispute between Multi-Ind. and J.N.G.
[48] Counsel
noted that J.N.G. had a liquidity problem at the time of the
buyback transaction in March 1990. J.N.G. managed to bring
together other investors, but it would seem that there was a lack
of money. It was at that time that the decision was made to
involve Foresbec. The Notice of Appeal seems to suggest that it
was Mr. L'Espérance who insisted on having a
consulting contract, whereas in their testimony all of the
appellants' witnesses said that it was essential to secure
Mr. L'Espérance's services. Mr.
L'Espérance testified that he was not the one who
requested such a contract for services and that he considered it
a method of paying for the shares owned by Multi-Ind.
[49] Counsel
also noted that Mr. Bouvet was unable to explain in his testimony
how the $150,000 had been calculated. Was it based on the salary
or fees that Mr. L'Espérance was to receive? The
buyback agreement of March 1990 (Exhibit I-2) was between
J.N.G. and Multi-Ind., with J.N.G. giving an undertaking
that Foresbec would award a contract to Multi-Ind.
Foresbec, however, did not participate in the agreement. That is
why, on April 12, 1990, it was very important to have the
consulting contract ratified by Foresbec's board of
directors.
[50] Counsel
argued that the parties to the agreement did not intend to enter
into a contract for services. She noted that Mr. Boissé
gave lengthy testimony to show that
Mr. L'Espérance had made bad business decisions.
With regard to the non-competition clause, counsel for the
respondent referred to the agreement (Exhibit I-2). Mr.
L'Espérance undertook to sign a trade restriction
agreement in favour of the company, which agreement was to cover
all of Canada and Western Europe for a period of three years.
Counsel argued that the last part of the clause giving the
undertaking regarding Foresbec clearly shows that there was no
contract for services. That part reads as follows:
[S]hould the Company fail to make any of the said payments
more than fifteen (15) days after being given written notice of
default by MULTI-IND., the balance outstanding at that time
shall become payable immediately with loss of the benefit of the
term.
[51] The
consulting contract (Exhibit A-1) repeated this last clause
in its entirety. That contract, which was not signed by
Multi-Ind., did not provide for the performance of services
but rather provided a guarantee of payment in connection with the
buyback of the shares. There was no clause stating that no
payment would be made if no services were provided. Mr.
Boissé had remained a shareholder and director of Foresbec
even while Mr. L'Espérance was its principal
shareholder. Mr. Boissé had been aware of everything that
happened at Foresbec even though he had disagreed with a number
of decisions. Counsel for the respondent argued that, according
to Mr. Boissé, Mr. L'Espérance had made
decisions that made no sense or that were not in Foresbec's
interest, that were even detrimental to Foresbec, in fact.
Mr. L'Espérance never considered himself to be
working for Foresbec, and the very wording of the alleged
contract for services contradicted the existence of such a
contract.
[52] Counsel
for the respondent, like counsel for the appellants, referred to
Farm Business Consultants, supra, arguing that that
decision must be followed, especially since it has been affirmed
by the Federal Court of Appeal, 96 DTC 6085.
[53] She also
referred to my decision in Thibault v. The Queen,
99 DTC 489, and in particular paragraph 31
thereof:
Counsel for the respondent argued that the important point to
be determined is whether the contract for services between
Vermonbec and Navimex that was part of the agreement dated
January 29, 1987 (see paragraph 12 of these reasons) reflected
the economic reality of the transaction. Counsel for the
respondent argued that the contract was a sham transaction, as
that term is used in tax law, because it did not create between
the parties the legal relationship that they intended to create.
He referred to Stubart, supra, at page 572:
The element of sham was long ago defined by the courts and was
restated in Snook v. London & West Riding Investments,
Ltd., [1967] 1 All E.R. 518. Lord Diplock, at p. 528, found
that no sham was there present because no acts had been
taken:
. . . which are intended by them to give to third parties or
to the court the appearance of creating between the parties legal
rights and obligations different from the actual legal rights and
obligations (if any) which the parties intend to create.
This definition was adopted by this Court in Minister of
National Revenue v. Cameron, [1974]
S.C.R. 1062, at p. 1068 per Martland J.
[54] Finally,
counsel for the respondent argued that Foresbec knew the payments
made to Multi-Ind. from 1990 to 1992 were not for Mr.
L'Espérance's services but were made to enable
J.N.G. to buy the Foresbec shares. The Minister was therefore
entitled to assess the appellant Foresbec for 1990, which was
outside the normal assessment period, and for 1991 and 1992, and
in so assessing, to disallow the deductions claimed under section
9 and paragraph 18(1)(a) of the Act. The Minister
was also entitled to assess J.N.G. for 1990 and 1991, which were
outside the normal assessment period, and for 1992, on the basis
that it received a benefit under subsection 15(1) of the
Act. He was also entitled to assess penalties against the
two appellants under subsection 163(2) of the Act because
they knowingly made a misrepresentation in computing their
income.
Conclusion
[55] The
relevant parts of subsections 152(4), 15(1) and 163(2) of the
Act read as follows:
152(4) The Minister may at any time
make an assessment, reassessment or additional assessment of tax
for a taxation year, interest or penalties, if any, payable under
this Part by a taxpayer or notify in writing any person by whom a
return of income for a taxation year has been filed that no tax
is payable for the year, except that an assessment, reassessment
or additional assessment may be made after the taxpayer's
normal reassessment period in respect of the year only if
(a)
the taxpayer or person filing the return
(i)
has made any misrepresentation that is attributable to neglect,
carelessness or wilful default or has committed any fraud in
filing the return or in supplying any information under this Act,
or
. . .
(Prior to December 20, 1991)
15(1) Where, in a taxation
year, a benefit has been conferred on a shareholder, or on a
person in contemplation of the person's becoming a
shareholder, by a corporation otherwise than by . . .
the amount or value thereof shall, except to the extent that it
is deemed by section 84 to be a dividend, be included in
computing the income of the shareholder for the year.
(As of December 20, 1991)
15(1) Where at any time in
a taxation year a benefit is conferred on a shareholder, or on a
person in contemplation of the person becoming a shareholder, by
a corporation otherwise than by . . .
the amount or value thereof shall, except to the extent that it
is deemed by section 84 to be a dividend, be included in
computing the income of the shareholder for the year.
163(2) Every person who, knowingly, or
under circumstances amounting to gross negligence in the carrying
out of any duty or obligation imposed by or under this Act, has
made or has participated in, assented to or acquiesced in the
making of, a false statement or omission in a return, form,
certificate, statement or answer (in this section referred to as
a "return") filed or made in respect of a taxation year
as required by or under this Act or a regulation, is liable to a
penalty of the greater of $100 and 50% of the total of
. . .
[56] In his
argument, counsel for the appellants focused on the fact that the
contract for services was a genuine contract and that the
appellant Foresbec was entitled to deduct the costs associated
therewith in computing its income under section 9 and paragraph
18(1)(a) of the Act. As a result, in computing the
income of the appellant J.N.G., no benefit could be included
under subsection 15(1) of the Act. With regard to the
application of subsections 152(4) and 163(2) of the Act,
he argued that, if the Court is of the view that there was no
genuine contract for services, it should take into consideration
the fact that everything was done in good faith and not for the
purpose of tax evasion.
[57] In each
of the decisions cited above in support of counsel for the
appellants' argument, the reality of the contract for
services was accepted on the ground that certain services had
been rendered or that it was plausible to think that certain
services would be requested and rendered. In Bell, for
example, the employee had kept his office and was available to
provide services. Moreover, in each case, the terms and
conditions of the contracts were those of a contract for services
and the contracts were signed by both parties.
[58] In the
instant case, the evidence could not be any clearer that the two
main players do not want to see each other again. Mr.
Boissé in particular cannot stand
Mr. L'Espérance. It is therefore not plausible to
say that certain services were requested and rendered. As for
terms and conditions in the alleged contract for services quoted
in paragraph 21 of these Reasons, all things considered, there
were none. No description was given of the services to be
provided or of the terms respecting the consultant's
availability. The contract even provided that, if Foresbec had
not made a payment more than 15 days after being given a written
notice of default, the balance of the $150,000 would become
payable immediately. No provision was included to cover the
failure to provide services.
[59] Counsel
for the appellants submitted that the contract was useful to
ensure that Mr. L'Espérance did not act against
Foresbec's interests. In this regard, it should be noted that
clauses to that effect had been included in the buyback agreement
itself. Those clauses had been obtained without any problems,
since Mr. L'Espérance no longer wanted to work in
the timber industry. The clauses in question are reproduced in
paragraph 20 of these Reasons.
[60] I must
conclude that the terms of the alleged contract for services were
not in fact those of a contract for services. As in Farm
Business Consultants, supra, and Thibault,
supra, the contract for services did not reflect the legal
reality of the parties' rights and obligations. It was never
contemplated that the consulting contract would be implemented.
All that was provided for was the obligation to make the payments
for the share buyback. The contract was a sham for the purposes
of the Act, being intended to lead the Minister to believe
that rights and obligations were created that were different from
the actual rights and obligations that the parties intended to
create.
[61] Since
what was involved was not a contract for services but payment for
J.N.G.'s buyback of the Foresbec shares, Foresbec cannot
deduct the payments. Foresbec, by making the payments to
Multi-Ind. for that buyback by its shareholder, J.N.G.,
conferred a benefit on that shareholder.
[62] Both of
the appellants knew that the contract for service was a sham.
There was thus an intentional misrepresentation and so
subsection 152(4) of the Act is applicable. That same
element of intent allows the application of subsection 163(2) of
the Act. This was not simple negligence in relation to the
duty to comply with the Act; it was a deliberate act,
namely claiming as operating expenses what was actually a payment
for shares.
[63] The
appeals are dismissed with costs being awarded on the basis of a
single hearing.
Signed at Ottawa, Canada, this 18th day of January 2001.
"Louise Lamarre Proulx"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
[OFFICIAL ENGLISH TRANSLATION]
98-2034(IT)G
BETWEEN:
FORESBEC INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal
of Société de Gestion
J.N.G. INC. (98-2035(IT)G), on June 1
and 2 and July 25, 2000, at Montréal, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
Counsel for the
Appellant:
Christopher R. Mostovac
Counsel for the
Respondent:
Sophie-Lyne Lefebvre
JUDGMENT
The
appeals from the assessments made under the Income Tax Act
for the 1990, 1991 and 1992 taxation years are dismissed in
accordance with the attached Reasons for Judgment.
Costs
are awarded to the respondent on the basis of a single
hearing.
Signed at Ottawa, Canada, this 18th day of January 2001.
J.T.C.C.
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