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Citation: 2003TCC941
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Date: 20031222
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Docket: 2002-1850(IT)G
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BETWEEN:
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PIERA J. SIRACUSA,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Rip J.
[1] The issue in this appeal by Piera
J. Siracusa is whether or not she was dealing at arm's length
with 470555 Ontario Limited ("Ontario") for purposes of
subsection 160(1) of the Income Tax Act
("Act") when Ontario paid her a dividend in 1996
at the time the corporation was liable to pay tax.
[2] Subsection 160(1) provides, among
other things, that where a person who is liable for payment of
tax transfers property to a person with whom it does not deal at
arm's length, the transferee and the transferor are jointly
and severally liable to pay the transferor's tax; the
transferee's liability is limited to the value of the
property he or she received less any consideration paid.
[3] Mrs. Siracusa is of the view that
she did deal at arm's length with Ontario when the dividend
was declared on January 16, 1996 and paid on
January 17, 1996 notwithstanding that she was a
shareholder and director of Ontario at the time.
[4] Ontario was incorporated in 1991
by Mr. Siracusa, the deceased husband of Mrs. Siracusa, and two
other gentlemen, each having a one-third interest. Ontario
owned a building in which it operated what Mrs. Siracusa
described as a bar or "beer hall". Ontario also rented
rooms on the second floor of the building. Mr. Siracusa
managed and administered the business; the other two shareholders
operated the bar. Mrs. Siracusa maintained the books of account
of Ontario.
[5] In early 1983 Mr. Siracusa became
ill with lung cancer. Mrs. Siracusa testified that he knew he was
dying. He wanted to keep the family in the business but "he
knew I could not handle" running the business. One of the
original shareholders had previously died. Mr. Siracusa
eventually brought in a third shareholder. At the time of Mr.
Siracusa's death in June, 1985, the shareholders and
directors of Ontario were Mr. Siracusa, Anastase (Tom)
Konstandinu and Frank Catalano. Mr. Catalano held his shares
through a holding company. The shareholders and directors were
not related.
[6] After her husband's death, the
appellant inherited his shares and became a director of Ontario.
Mrs. Siracusa described the other two directors as a
Greek immigrant and a Sicilian immigrant who did not want a
woman interfering in how they ran the business of the
corporation. Their attitude, said Mrs. Siracusa, was that
women had no place in running a business but it was "O.K.
for them to do the books of the business".
[7] The male directors took over total
management of Ontario after Mr. Siracusa's death. Mrs.
Siracusa continued as a bookkeeper but she said the other two
directors made all decisions without consulting her. It is clear
that Mrs. Siracusa was not in a position of control of
Ontario.
[8] Mrs. Siracusa worked about one day
per week from home where she kept the financial records. One day
she was asked to bring the books to the business. She said she
was reluctant to do so because she would have to go to the
business and have contact with the other two shareholders, which
she dreaded. Nevertheless she did take the books to Ontario's
place of business and commenced working at the business
premises.
[9] Mrs. Siracusa said there was
"lots of friction between us", meaning the directors,
which, she insisted, was caused by how decisions were being made.
She reiterated that she found things "very rough". She
stated she was not comfortable working with the other two
shareholders. Presumably because she was the bookkeeper, Mrs.
Siracusa signed the 1996 income tax return for the
corporation in her capacity as director. The return was prepared
by Ontario's accountant. Ontario's 1996 fiscal year
terminated on January 31.
[10] Mrs. Siracusa testified that, at one
point, she felt lost and obtained legal advice. The lawyer
attended with her at a shareholders' meeting. Mrs. Siracusa
said that she wanted a lawyer attending with her because she
thought the other two shareholders would be more attentive to her
wishes if she showed up "with a man".
[11] In December, 1995, Ontario sold the
building and the bar business. The bar had not been doing as well
as it had done in earlier years and debt had been piling up. One
of the reasons Mrs. Siracusa agreed to the sale was that she
wanted to get away from the other shareholders. In any event, all
three shareholders decided to sell and the property was sold in
December, 1995.
[12] After the sale, Mrs. Siracusa brought
all bills and any other financial material in her possession to
the lawyer who acted for Ontario on the sale. The net proceeds
from the sale were being held by the lawyer in trust. On or about
January 16, 1996, Mrs. Siracusa, and Messrs.
Konstandinu and Catalano, together with the lawyer, met at the
lawyer's boardroom. Apparently all trade bills had been
satisfied by Ontario. Mrs. Siracusa testified that at the meeting
she said that notwithstanding that all the bills were paid, she
thought that there may still be some outstanding bills and was
leary of distributing the proceeds of sale immediately. The other
two directors and the lawyer said that they should divide the net
proceeds immediately. The net proceeds amounted to $45,000.
Mrs. Siracusa insisted she continued to object; she said
that she wanted to wait. She wanted to leave the money in trust.
She and the other directors, she recalled, got into a yelling
match. The doors of the boardroom had to be closed because the
office staff were being disturbed. She was upset that the lawyer
who, she thought, should have been neutral, sided with the other
two directors. A directors' resolution declaring and
authorizing payment of a capital dividend was prepared by the
lawyer. Mrs. Siracusa felt pressured by the others to sign the
resolution and eventually did so. She said that she had been
taking tranquilizers and other medication as a result of the
stress caused by her having to deal with the other two
directors.
[13] The resolution declaring the capital
dividend contained the recital that:
In the opinion of the directors of the Corporation, there are
reasonable grounds for believing that the Corporation is now and
would after the payment of the dividend be able to pay its
liabilities as they become due and the realizable value of the
Corporation's assets after payment of such dividend would be
greater than the aggregate of the liabilities and stated capital
of all classes.
Subsequent events indicate that this recital was simply
"boiler plate" and that in fact Ontario did not have
sufficient assets after payment of the dividend to satisfy its
debts, in particular, its debt to the Receiver General for Canada
on account of income tax.
[14] Mrs. Siracusa testified that during the
meeting of January 16, the matter of tax owing by Ontario was not
mentioned. "It was not in our mind."
[15] The position of the respondent in
assessing Mrs. Siracusa is that since she signed the
Directors' Resolution she was not dealing at arm's length
with Ontario. The Crown referred to two reported cases of this
Court, Fournier v. M.N.R.,[1] and Gosselin v. Canada,[2] both decisions of
my colleague Dussault, J. In Fournier the corporation paid
the taxpayer a dividend of $45,000 at a time when it owed tax.
The Minister of National Revenue assessed the corporation and the
taxpayers personally under the provisions of
subsections 160(1) and (2). Dussault, J. held that since the
taxpayer held only 45% of the shares of the corporation and was
not related to either of the other two shareholders, he could not
be deemed to be in a non-arm's length relationship with the
corporation through the combined operation of paragraph
251(1)(a) and subparagraphs 251(2)(b)(i) and (ii)
of the Act. Whether he was in such a relationship became a
question of fact. On the facts, Dussault, J. held that the
taxpayer and the corporation were not dealing at arm's
length. It was all the directors who decided, on advice of the
corporation's accountants, the form in which profits would be
withdrawn from the company. They therefore acted in concert with
a common economic interest, so that the taxpayer in fact could
not be considered to have been dealing at arm's length with
the corporation.
[16] Similarly, in Gosselin,
supra, two equal shareholders, although not related to
each other, had, together with the corporation, common interests
and were acting in concert. Dussault, J. addressed his mind to
the specific transaction which involved the declaration of
payment of a cash dividend, which resulted in the transfer of
property from the company to the shareholders. He said:
If we consider a company's ultimate interests to be
actually the interests of its shareholders or, if you like, of
its owners, through the shares in its capital stock that they
hold, it is hard to see any separate interests where there are
only two shareholders who hold shares of the same class with the
same rights and in equal proportions.
[17] I agree with Dussault, J. that to
determine whether or not unrelated persons deal at arm's
length, one must consider the specific circumstances. On the
facts before me, none of the shareholders, directly or
indirectly, is related to the other. It is also clear from the
evidence that there were serious disagreements between Mrs.
Siracusa and the other two directors, that their relationship was
severely strained and she felt she could no longer deal with
them.
[18] In Gestion Yvan Drouin Inc. v. The
Queen,[3]
Archambault, J., distinguishing the Fournier and
Gosselin appeals, questioned the influence of a
shareholder holding only one-third of a corporation's
shares:
... The third shareholder-director, the one who holds,
for himself, only a third of the voting shares is not in a
position to exercise such influence. Whether or not he votes to
declare and pay the dividend, his vote is not essential if the
shareholder-director exercising control has decided that a
dividend will be paid. I find it completely inappropriate in such
circumstances to apply subsection 160(1) to the truly minority
shareholder-director when he has merely performed his
duties as a director.
[19] Mrs. Siracusa's testimony was not
challenged in cross-examination. The Crown offered no
evidence to contradict Mrs. Siracusa's version of events and
her relationship with the other two directors. I found her to be
a credible witness and I accept her evidence without
exception.
[20] There is no question that Mrs. Siracusa
and the other two directors, Messrs. Konstandinu and
Catalano were in conflict. Mrs. Siracusa testified that
notwithstanding her signature to the Directors' Resolution
declaring the dividend, she questioned the propriety of paying
the dividend at the time. She described the rancour and tension
present at the meeting, she felt the pressure not only from
Messrs. Konstandinu and Catalano but also from the lawyer acting
for Ontario who supported the two other directors. I think I may
fairly infer that the resolution was prepared by this lawyer and
the fact that the resolution is preceded by a recital that
Ontario has sufficient assets to pay any debts after payment of
the dividend corroborates Mrs. Siracusa's testimony with
respect to the pressure on her by the two other directors and a
lawyer to agree to the dividend. She was not in any position to
influence Ontario and was not part of any group that was in a
position to influence Ontario.
[21] This is not a situation analogous to
the facts in Fournier, supra, where the directors were
found to be acting in concert and with a common economic
interest. There was no common mind amongst the three directors of
Ontario. The comments of Cattanach, J., who considered the
question of a directing mind in M.N.R. v. Estate of T. R.
Merritt,[4] are
instructive:
In my view, the basic premise on which this analysis is based
is that, where the "mind" by which the bargaining is
directed on behalf of one party to a contract is the same
"mind" that directs the bargaining on behalf of the
other party, it cannot be said that the parties are dealing at
arm's length. In other words where the evidence reveals that
the same person was "dictating" the "terms
of the bargain" on behalf of both parties, it cannot
be said that the parties were dealing at arm's length.
[22] Archambault, J. found in Gestion
Yvan Drouin Inc. supra that the acting in concert test
illustrates the importance of bargaining between separate
parties, each seeking to protect his own independent interest.
Thurlow, J. (as he then was) described this test in Swiss Bank
Corporation v. M.N.R.[5]:
To this I would add that where several parties-whether
natural persons or corporations or a combination of the
two-act in concert, and in the same interest, to direct or
dictate the conduct of another, in my opinion the
"mind" that directs may be that of the combination as a
whole acting in concert or that of any one of them in carrying
out particular parts or functions of what the common object
involves. Moreover as I see it no distinction is to be made for
this purpose between persons who act for themselves in exercising
control over another and those who, however numerous, act through
a representative. On the other hand if one of several parties
involved in a transaction acts in or represents a different
interest from the others the fact that the common purpose may be
to so direct the acts of another as to achieve a particular
result will not by itself serve to disqualify the transaction as
one between parties dealing at arm's length. The
Sheldon's Engineering case, 1955 S.C.R. 637 [55 DTC
1110], as I see it, is an instance of this.
[23] Here, control of Ontario was held by
Messrs. Konstandinu and Catalano; the interest of these two
shareholders was the interest of Ontario. Mrs. Siracusa was a
nuisance, insofar as they were concerned.
[24] The appeal is allowed, with costs, and
the assessment is vacated.
Signed
at Ottawa, Canada, this 22nd day of December,
2003.
Rip. J.
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