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Citation: 2005TCC203
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Date: 20050323
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Docket: 2002-1228(IT)G
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BETWEEN:
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ALAIN BROUILLETTE,
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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
[OFFICIAL ENGLISH
TRANSLATION]
Lamarre
Proulx J.
[1] This
appeal involves the 1995 taxation year.
[2] The
issue is whether the appellant and the corporation that acquired the appellant's
shares in another corporation were dealing with each other at arm's length. If
they were not dealing with each other at arm's length, section 84.1 of the
Income Tax Act ("the Act") would apply, and the disposition
price of the shares would be a deemed dividend received by the appellant rather
than a capital payment.
[3] If
I find that the dealings were at arm's length and that consequently
section 84.1 of the Act does not apply, the Minister of National Revenue
("the Minister") makes the alternative submission that the General anti‑avoidance
rule (GAAR) set out in section 245 of the Act applies.
[4] The
appellant, Mr. Brouillette, testified that he and Rolland Ferland
each held 50% of the shares of Brouillette Automobiles Inc. In late 1994, Mr. Ferland wanted to get out of the business and sell his shares for $500,000. Mr. Brouillette tried to
get financing to purchase these shares. The bank apparently refused to grant a
loan to Brouillette Automobiles Inc. Following this refusal, the appellant's
accountant suggested that he team up with a partner. The accountant introduced
him to Richard Chagnon, another of the accountant's clients.
[5] Richard
Chagnon and Pierre Brunet operated a Mazda dealership in Drummondville as
partners. They used the same accounting firm as the appellant's business:
Samson Bélair.
[6] In
his testimony, Mr. Chagnon clearly stated that he and his partner wanted to buy
Brouillette Automobiles Inc. They knew that Rolland Ferland wanted to leave
immediately and were aware that Mr. Brouillette might want to stay on a
bit longer. However, when the shares were purchased, provisions were made for
Mr. Brouillette's ultimate departure in five years and for the possibility
of ending the relationship earlier.
[7] Mr.
Chagnon explained that it did not bother him that Mr. Brouillette might
want to stay on a bit longer: since the dealership in question was a Chrysler
dealership and theirs was a Mazda dealership, Mr. Brouillette's services
would be useful in keeping the Chrysler dealership. Mr. Chagnon also stated
that the business relationship subsequently fluctuated. Mr. Chagnon and Mr. Brunet
did not have the same work culture as Mr. Brouillette. Consequently, Mr. Chagnon
and Mr. Brunet used the clause entitling them to terminate their business
relationship with Mr. Brouillette at an earlier date.
[8] The
appellant testified that none of his children were interested in continuing the
family business. Consequently, he wanted to get as much as possible for his
shares while continuing to work for the business for a while.
[9] Jean Martineau,
a tax specialist with Samson Bélair, prepared the various phases of the sale in
issue.
[10] On February 21, 1995, 9016‑4476 Québec Inc.
("9016") was incorporated. At April 21, 1995,
Mr. Brouillette held 500 Class "A" shares and 20 Class
"C" shares in that company. The company 9017‑4481 Québec Inc.
("9017"), of which Mr. Chagnon and Mr. Brunet were the two
equal shareholders, held 500 Class "A" shares and, for $100,000,
subscribed for the 100,000 Class "G" shares. Alain Brouillette
was the president of 9016 and Richard Chagnon was its secretary.
[11] The parties admit that the appellant controlled 51% of the voting
shares of 9016.
[12] On April 24, 1995, the National Bank of Canada made $490,000 in term financing available to Brouillette Automobiles Inc. The full
amount was to be disbursed by June 30, 1995. The offer was addressed
to the appellant and to Richard Gagnon. The collateral clause reads as follows:
[TRANSLATION]
Collateral
• The surety of Alain Brouillette, Richard Chagnon and
Pierre Brunet, solidarily, for the sum of $300,000.
• A first
security for the sum of $490,000 on the Borrower's immovables, located at 2750 Lafontaine Street in Saint-Hyacinthe, based on the standard forms in use at the Bank
and including the standard clauses to protect the Lender.
[13] The offer was accepted. The borrowed amount was used to lend $400,000
to 9016 and to pay Rolland Ferland a $75,000 retirement allowance. Company 9016
signed a note in favour of Brouillette Automobiles Inc.
[14] On June 13, 1995, 9016 purchased the shares held by
Rolland Ferland. The price was $500,000 (Exhibit I‑1,
tab 20).
[15] On the same date, by means of a rollover, the appellant converted his
Brouillette Automobiles Inc. shares into 500,000 non-participating,
non-voting Class "E" shares in 9016 with a paid-up capital of
$7,500. As a result, 9016 became the sole shareholder of Brouillette
Automobiles Inc.
[16] On September 30, 1995, Brouillette Automobiles Inc. declared
a $400,000 dividend payable to 9016.
[17] On October 6, 1995, the parties entered into a new agreement.
A two‑page document at tab 18 of Exhibit I‑1 succinctly
explains the agreements that followed. I will quote from the paragraph entitled
[TRANSLATION] "Sale of Preferred Shares" and the first part of the
agreement entitled [TRANSLATION] "Shareholders' Agreement".
[TRANSLATION]
Sale of Preferred Shares
In October 1995, Alain
Brouillette sells his 500,000 Class E preferred shares in 9016‑4476
Québec Inc. to 9017‑4481 Québec Inc. The selling price is $500,000,
payable by the issuance of a non-interest-bearing demand note. 9017‑4481
Québec Inc. agrees to pay the note as follows: a minimum of $50,000 per
year provided Brouillette Automobile Inc. has the necessary cash flow. Balance
to be paid in full on October 1, 2000.
. . .
Shareholders' Agreement
➢ The parties shall sign a Shareholders' Agreement. In
addition to the standard clauses, the Shareholders' Agreement shall include the
following clauses:
➢ A restriction on the powers of the shareholder having
51% of the votes.
➢ . . .
[18] On November 17, 1995, the appellant sold 500,000 preferred
shares in 9016 to 9017 for $500,000, payable by a non-interest-bearing demand
note (tab 24).
[19] An agreement between the appellant and 9017 dated
November 17, 1995, states that the debtor acknowledges owing the
creditor $500,000, payable in annual instalments of not less than $50,000. The
balance of the note is payable in full on October 1, 2000
(tab 27).
[20] On November 17, 1995, the shareholders of 9016, that is, the appellant
and 9017, signed a unanimous shareholders' agreement (tab 25, pages 22‑23).
Among other things, the agreement stipulates that 9017 shall not receive any
amount as dividends from 9016 until the $500,000 note has been paid in full and
that any amount 9017 receives from 9016 must serve to pay down the note.
[21] This clause was read at the request of counsel for the respondent. In
other respects, the real purpose of the agreement of the shareholders of 9016,
the corporation that holds the shares in Brouillette Automobiles Inc., is to
restrict the decision‑making powers of the shareholder who had 51% of the
votes, that is, Mr. Brouillette.
[22] On June 30, 1997, 9017 used its power to terminate its
relationship with shareholders at an earlier date and paid the appellant
$300,000 in final settlement of the $500,000 demand note (tab 31).
[23] Jacques Jubainville,
CA, a partner with the accounting firm of Samson Bélair in Ste‑Hyacinthe, testified at
the hearing. He explained that his firm was the auditor of Brouillette
Automobiles Inc. His dealings with the appellant began when one of his partners
left the firm. At the time, Mr. Ferland had commenced negotiations
regarding the sale of his shares. The $500,000 amount was determined on the
basis of book value.
[24] Mr. Jubainville testified that Mr. Brouillette initially
tried to purchase the shares himself from Mr. Ferland. The book value of the
business was about $900,000 - $1,000,000 at the time, but the
business was turning a meagre profit of roughly $40,000 per year. The bank was
hesitant. It apparently suggested finding a partner who would invest money in
the business. Since Mr. Brouillette did not quite know what to do,
Mr. Jubainville suggested the name of Richard Chagnon, one of
his clients. He told him that Messrs. Chagnon and Brunet had taken over a
car dealership that was on the verge of bankruptcy and had turned it around in
two years, making a great deal of profit.
[25] Mr. Jubainville testified that as of 1995, Mr. Chagnon made
Brouillette Automobiles Inc. into another success after he got involved in the
business. In two years, he doubled its sales from $11 million to $24 million.
[26] Jean Martineau, a tax specialist with the same accounting firm,
testified that he suggested Mr. Brouillette buy out Mr. Ferland using
a company as an intermediary and using a technique called a “leveraged buyout”.
Mr. Martineau testified that this technique is not disadvantageous to the
seller and is less costly for the buyer. To pay the seller, the operating
company can declare intercorporate dividends because that company often
finances a part of the purchase. The dividends can be used to pay the seller.
If Mr. Brouillette had purchased the shares personally, he would have needed a
$700,000 dividend from his company after it had obtained its $500,000 loan. However,
by using a company and by paying intercorporate dividends, which are not
subject to tax, he need only give the buying company a $500,000 dividend.
[27] Mr. Martineau explained that his plan took into account the separate
interests of the parties he needed to protect. This explains why Mr.
Brouillette initially had 51% of the shares in 9016. It also explains why, upon
the sale of his shares, the shareholders' agreement restricted his
decision-making powers (in that all decisions required unanimity) but it also
provided that priority would be given to paying Mr. Brouillette's shares.
Arguments
[28] Counsel for the appellant referred to paragraph 251(1)(c) of the
Act, which reads as follows:
251(1) Arm's length
— For the purposes of this Act,
. . .
(c) where
paragraph (b) does not apply, it is a question of fact whether persons
not related to each other are at a particular time dealing with each other at
arm's length.
[29] He submitted that, based on the evidence as a whole, the appellant and
Messrs. Chagnon and Brunet had separate economic interests and that they
entered into the agreement in issue based on those separate economic interests.
[30] In his opinion, this was essentially a purchase and sale of shares
between parties with separate economic interests. There is no doubt that the
parties negotiated because they managed to find common ground. None of the
parties had a detailed understanding of the way in which the transaction was
structured; nonetheless they all had a very good understanding of the desired
purpose or outcome: the sale of shares by one party and the purchase of those
shares by another. The parties relied on professionals to ensure that the
transactions would be lawful and that they would pay as little tax as
possible.
[31] Counsel for the appellant submitted that Mr. Brouillette was not the
shareholder of the corporation that acquired its shares, and he had neither de
jure nor de facto control of that corporation. The shareholders'
agreement concerned 9016, which held 100% of the shares of Brouillette Automobiles Inc.
In order to establish non‑arm's length dealings, one would have to claim
that Mr. Brouillette controlled 9017. In fact, the contrary is true: 9017
actually controlled 9016 because it could exercise the option.
[32] In counsel's submission, the fact that the transaction was negotiated
to minimize the tax consequences between the parties does not amount to acting
in concert.
[33] As for the potential application of section 245, counsel for the
appellant referred to subsection 245(3) of the Act:
245(3) Avoidance
transaction — An avoidance transaction means any transaction
(a) that,
but for this section, would result, directly or indirectly, in a tax benefit,
unless the transaction may reasonably be considered to have been undertaken or
arranged primarily for bona fide purposes other than to obtain the tax
benefit; or
(b) that
is part of a series of transactions, which series, but for this section, would
result, directly or indirectly, in a tax benefit, unless the transaction may
reasonably be considered to have been undertaken or arranged primarily for bona
fide purposes other than to obtain the tax benefit.
[34] Counsel submitted that the business transaction in issue was undertaken
primarily for bona fide purposes, specifically the purchase and sale of
a business, and that the tax aspect was an ancillary albeit integral part of
the transaction.
[35] The Minister submitted that the appellant and 9017 acted in concert in
their transaction for the reasons set out in the Reply to the Notice of Appeal:
[TRANSLATION]
aa. in 1995 and
during the period referred to in the preceding paragraph, the appellant and
9017 acted in concert in their transactions for the following reasons, inter
alia:
▪ a single entity was responsible for negotiating the
transactions involving the appellant, Brouillette Automobile, 9016,
9017, Richard Chagnon and/or Pierre Brunet;
▪ the parties were economically dependent on each other
and acted without separate interests;
▪ following the transaction of
November 17, 1995, the appellant had full control over the income 9017
received from 9016, and indirectly over the use of the operating surpluses
generated by Brouillette Automobile;
▪ the transaction of November 17, 1995, that
is, the sale and purchase of 500,000 non‑voting shares, had no commercial
legitimacy other than a transfer of $500,000 in surpluses of Brouillette
Automobile to the appellant without tax consequences;
▪ a non-interest-bearing note was presented to create an
artificial situation;
▪ the appellant had de facto control of all the
transactions.
[36] Counsel for the respondent explained that the important point in the
instant case is whether the appellant and 9017 were dealing at arm's length.
[37] Counsel for the respondent referred to the decision of the Exchequer
Court in M.N.R. v. Estate of Thomas Rodman Merritt, 69 DTC 5159,
and, in particular, to an excerpt from pp. 5165-66:
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.
[38] Counsel also referred to the decision of the Supreme Court of Canada
in Swiss Bank Corp. v. Canada (Minister of National Revenue – M.N.R.),
[1974] S.C.R. 1144, and, in particular, to the comments of Laskin J. at
page 1152:
. . . A sound reason for this that the
enactment itself suggests is the assurance that the interest rate will reflect
ordinary commercial dealing between parties acting in their separate interests.
A lender-borrower relationship which does not offer this assurance because
there are, in effect, no separate interests must be held to be outside of the
exception that exempts a non-resident from taxation on Canadian interest
payments. . . .
[39] According to counsel, the appellant dictated the terms of the agreement
to the other party, or both parties acted in concert when they accepted the
terms proposed by accounting consultants who acted for both parties, or the
appellant had de facto control over 9017.
[40] Counsel also referred to the decision of the Federal Court of Appeal in
Petro-Canada v. Canada, [2004] F.C.J. No. 734 (QL), at
paragraphs 54, 55 and 56:
54 There is a large body of jurisprudence
dealing with the determination of whether a transaction is between two parties
dealing at arm's length. Broadly speaking, the courts have identified three
questions that may be used as a framework for analysis; see, for example, Peter
Cundill & Associates Ltd v. Minister of National Revenue, [1991] 2 C.T.C.
221, 91 D.T.C. 5543 (F.C.A.). First, is there a common mind directing the
bargaining for both parties to the transaction? Second, did the parties to the
transaction act in concert without separate interests? Third, did one party to
the transaction exercise de facto control over the other?
55 The Judge addressed these questions
implicitly rather than expressly, and concluded that the joint exploration
corporations did not deal with each other at arm's length when entering into
the agreement for the purchase and sale of the seismic data. In my view, the
evidence justifies that conclusion. The terms of the transactions did not
reflect ordinary commercial dealings between vendors and purchasers acting in
their own interests. The joint exploration corporations, for example, did not
attempt to negotiate a volume discount, as the evidence indicated would be
normal for such large acquisitions of seismic data. Neither joint exploration
corporation acted independently and in its own interest in entering into the
transactions. The terms of the transaction were in fact dictated jointly by
Petro-Canada and Phillips (in the case of the Phillips JEC) and jointly by
Petro-Canada and CanEagle (in the case of the CanEagle JEC). The joint exploration
corporations, for all practical purposes, were indifferent as to the purchase
price of the seismic data because, whatever it turned out to be, the
shareholders would ensure that the purchase price was funded. Any tax relief
relating to the cost of the seismic data would be transferred to Petro-Canada
by means of a renunciation.
56 In my view, this case cannot be
distinguished from Swiss Bank Corporation v. Minister of National Revenue,
[1974] S.C.R. 1144, [1972] C.T.C. 614, 72 D.T.C. 6470. The question
in Swiss Bank was whether interest payments made by a Canadian
corporation on loans made by investors in Switzerland were paid at arm's
length. The investors were not related to each other. They became involved in
the transaction as the result of the promotional activities of Swiss Bank
Corporation and Swiss Credit Bank. The two Swiss banks each owned 40% of the
shares of another Swiss corporation, referred to as S.I.P., which acted as a
trustee or agent for the investors. S.I.P. was the sole shareholder of the
Canadian corporation to which the investors' funds were lent. Thus, the
Canadian borrower was completely captive to the common interests of the
lenders, who effectively acted in concert (through S.I.P) in dictating the
terms of the loans. Similarly, in this case, the joint exploration corporations
were captive to the common interests of their respective shareholders, who
acted jointly in dictating the terms upon which the seismic data would be
purchased. In my view, the Judge was correct to conclude that the joint
exploration corporations did not deal at arm's length with the vendors of the
seismic data.
[41] Counsel for the respondent submitted that section 245 applies
because there were avoidance transactions that had no bona fide business
purpose.
Analysis and Conclusion
[42] Section 84.1 of the Act applies to dispositions of the shares of one
corporation to another corporation with which the seller is not dealing at
arm's length within the meaning of section 251 of the Act. That meaning is broadened
by paragraphs 84.1(2)(b) and (c), although that broadened meaning
was not referred to by the respondent.
[43] It is interesting to read the papers about section 84.1 of the Act
by the various authors who attended the 2000 and 2002 conferences of the
Association de planification fiscale et financière (APFF). One excerpt that I
find interesting, because I believe it explains the purpose of section 84.1, is
from page 38:36 of an article by Louis Tassé entitled
"L'article 84.1 et le lien de dépendance de fait"
(2000 APFF conference):
[TRANSLATION]
Historically, it was the CCRA's
position that section 84.1 of the ITA did not apply when the taxpayer parted
with all of his shares in the corporation in issue. This position dates
back to the 1970s, when a Revenue Canada official stated as follows at a
conference:
It was our view that the
shareholder was entitled to realise his equity in the form of a tax-free gain
if he parted with ownership, but that rearranging his affairs so that he did
not really part with ownership but merely held indirectly what he formerly held
directly resulted in an improper avoidance of tax on the distribution of
retained earnings.
[44] In my view, the following excerpt from pp. 31:15-16 of a paper by
notary Denis Lacroix entitled "Mise à jour sur
l'article 84.1" (2002 APFF conference) where he comments on this
Court's decision in Nadeau v. The Queen,
[1999] 3 C.T.C. 2235, is also of interest:
[TRANSLATION]
. . . According to the
main argument made by the son, who was representing his mother in court, the
series of transactions could not be considered an abuse of the provisions of
the Income Tax Act because a sale of the shares to a corporation
controlled by a third party would have been acceptable. This argument did not
succeed before the judge. As pathetic as the argument may appear to some, it
brings out the completely perverse nature of section 84.1. It has been
demonstrated beyond a doubt that we live in a climate where intergenerational
transfers of small businesses are fraught with great peril. It is therefore
unfortunate that, under our tax system, transfers of businesses to family
members are subject to conditions far more onerous than transfers of businesses
to strangers.
[45] H. Heward Stikeman and Robert Couzin write as follows in
"Surplus Stripping" (1995) 43 Can. Tax J., No. 5, at page 1853:
. . . By 1975, a
continuum had been established. At one end was the "classic" strip, a
sale of shares of an operating company to a new company controlled by the
seller. At the other was the innocent arm's‑length disposition. In
between, the department turned thumbs down on cases where the economic interest
in the purchasing corporation was held for the benefit of the seller or his or
her family, but might accept situations where the purchasing company was owned
by adult relatives who participated in the business. . . .
[46] Parliament has decided that there will be a deemed dividend in this
type of transaction only when the buying corporation is not dealing with the
seller at arm's length. Parliament could have provided that any disposition of
shares to a corporation would result in a deemed dividend equal to the amount
by which the paid‑up capital was exceeded. However, Parliament did not do
so. It must therefore be assumed that Parliament intended to sanction
transactions made with one's self, that is to say, complex transactions in
which the shareholder ultimately retains substantially the same property. When
the buyer corporation and the seller have separate economic interests, and they
carry out the transaction in accordance with those separate interests,
section 84.1 of the Act does not apply.
[47] In McNichol v. Canada, [1997] T.C.J. No. 5 (QL), Bonner J.
of this Court made an exhaustive analysis of a de facto non-arm's length
relationship in a situation where subsection 84(2) and section 84.1
of the Act applied:
16 Three criteria or tests are commonly used to
determine whether the parties to a transaction are dealing at arm's length.
They are:
(a) the existence of a common mind
which directs the bargaining for both parties to the transaction,
(b) parties to a
transaction acting in concert without separate interests, and
(c) "de
facto" control.
The common mind test emerges from two
cases. The Supreme Court of Canada dealt first with the matter in M.N.R. v.
Sheldon's Engineering Ltd. ([1955] C.T.C. 174, 55 DTC 1110). At pages
1113-14 Locke J., speaking for the Court, said the following:
Where corporations are controlled directly
or indirectly by the same person, whether that person be an individual or a
corporation, they are not by virtue of that section deemed to be dealing with
each other at arm's length. Apart altogether from the provisions of that
section, it could not, in my opinion, be fairly contended that, where
depreciable assets were sold by a taxpayer to an entity wholly controlled by
him or by a corporation controlled by the taxpayer to another corporation
controlled by him, the taxpayer as the controlling shareholder dictating the
terms of the bargain, the parties were dealing with each other at arm's length
and that s. 20(2) was inapplicable.
The decision of Cattanach, J. in M.N.R. v.
T R Merritt Estate ([1969] C.T.C. 207, 69 DTC 5159) is also helpful. At
pages 5165-66 he said:
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 were 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.
The acting in concert test illustrates the
importance of bargaining between separate parties, each seeking to protect his
own independent interest. It is described in the decision of the Exchequer Court in Swiss Bank Corporation v. M.N.R. ([1971] C.T.C. 427, 71 DTC 5236;
aff'd [1972] C.T.C. 614, 72 DTC 6470). At page 5241 Thurlow J.
(as he then was) said:
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 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 [supra], as I see it, is an instance of this.
Finally, it may be noted that the existence
of an arm's length relationship is excluded when one of the parties to the
transaction under review has de facto control of the other. In this regard
reference may be made to the decision of the Federal Court of Appeal in Robson
Leather Company Ltd. v. M.N.R., 77 DTC 5106.
[48] In analysing the separate interests of the
sellers and buyers, he concluded that a buyer and a seller are not acting in
concert simply because they are seeking to enter into an agreement that is
beneficial to both parties:
17 The evidence in the present case
shows that arm's length bargaining was present in the sale of the Bec shares.
The interests of vendors and purchaser were divergent with regard to the
purchase price. The appellants were clearly price sensitive for they terminated
discussions with regard to the sale of the shares to a prospective purchaser,
Malcolm Dunfield, upon learning that Forestell would pay a higher price.
Conduct of overriding importance in establishing that the purchaser dealt with
the appellants at arm's length, is Mr. Forestell's action in consulting Mr.
Haylock, his own accounting and tax adviser, before committing Beformac to the
transaction. At Mr. Forestell's request Mr. Haylock reviewed the situation and
gave his opinion on the transaction from the point of view of Mr. Forestell.
The actions of the appellants and Mr. Forestell in negotiating the share sale
transaction were clearly governed by their respective perceptions of their own
self-interest and nothing else. The fact that the tax savings potentially
accruing to the appellants as a consequence of sale formed not only the reason
for the sale but also the boundaries within which sale price might be
negotiated does not suggest that the appellants and Forestell acted in concert.
Buyer and seller do not act in concert simply because the agreement which they
seek to achieve can be expected to benefit both. Section 84.1 is therefore not
applicable.
[49] In the case at bar, there was no evidence that there were retained
earnings or that the corporation had significant liquidity. There is reason to
doubt that the corporation had liquidity because when Brouillette Automobiles
Inc. wanted to borrow money, the bank suggested finding a strong financial
partner. In addition, unlike Petro‑Canada, supra,
there was no evidence of ordinary or normal commercial relations between
sellers and buyers, different from those that took place.
[50] In my opinion, the evidence established without a doubt that the
interests of Messrs. Chagnon and Brunet were totally separate from those of
Mr. Brouillette. Mr. Brouillette tried to sell at the best price he
could get. Mr. Chagnon and Mr. Brunet tried to get the lowest price
for the shares of a business that they were seeking to purchase and operate.
[51] Financial advisors are not the directing minds of the corporations that
they advise. They advise. They do not make the decisions. It cannot be determined
that parties have acted in concert simply because they have used the same
financial advisors. The interests of each party to an agreement must be
analysed to determine whether they have acted in concert.
[52] From Mr. Chagnon
and Mr. Brunet's point of view, what was involved was the purchase of a
new business without the old shareholders. This was understood from the outset
of the negotiations. Mr. Ferland was leaving immediately and the appellant
would be leaving in five years. Ultimately, he left in two years.
[53] The appellant had no
control over 9017 when the agreement was entered into or at any other time.
First, 9017 had to pay the disposition price of the shares before benefiting,
by way of dividends, from the profits of Brouillette Automobiles Inc. This was
a disposition intended to protect the seller. It was not a disposition aimed at
controlling 9017. Company 9017 was entitled to exercise a total purchase option
at any time. In fact, it exercised this option early in 1997. In addition, based
on the shareholders' agreement between the shareholders of 9016, he did not
control that corporation either.
[54] Since section 84.1
of the Act applies only to non-arm's length dealings, it does not apply here.
[55] Can section 245 of
the Act apply to the case at bar? The respondent did not refer to any basis of
taxation other than to section 84.1 of the Act. In my view, when the
evidence shows that the parties were dealing at arm's length, the legal debate
is closed. To hold that section 245 of the Act applies would be to
legislate. The respondent stated that the purpose of the Act was to avoid
corporate surplus stripping. If so, the respondent would have needed to point
to an applicable section of the Act other than section 84.1.
[56] In McNichol, supra, it was possible to apply subsection 84(2)
of the Act. Bonner J. applied section 245 based on the application of
subsection 84(2), not of section 84.1, which had also been invoked as a
basis for the assessment.
[57] Ultimately, even if section 245 could be applied to the case at
bar, it is my opinion that the transactions were entered into fundamentally for
a business or commercial purpose. That was the only true purpose of the
transaction. The financial advisors helped the parties carry out these
transactions for the least amount of tax. However, the purpose of one of the
two parties was to purchase the business and the purpose of the other was to
sell his shares for the best possible price. As a result of this finding regarding the purpose,
the General anti‑avoidance rule is not applicable under
subsection 245(3) of the Act.
[58] The appeal is accordingly allowed, with costs.
Signed at Ottawa, Canada, this 23rd day of
March 2005.
Lamarre
Proulx J.
Translation
certified true
on
this 30th day of June 2005.
Sophie
Debbané, revisor
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