Citation: 2006TCC209
Date: 20060529
Docket: 2003-3703(IT)I
BETWEEN:
MICHEL DAGENAIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1] This is an appeal by way of informal procedure from an assessment dated May 28, 1996. By this assessment, the Minister of National Revenue (the "Minister") imposed upon the Appellant a penalty pursuant to subsection 162(9) of the Income Tax Act (the "Act") according to the version applicable in 1992. The Appellant was assessed this penalty for having breached subsection 162(9) of the Act according to the version applicable to the case, that is for having sold an interest or interests in one or more tax shelters, whether as principal or agent or for having accepted a contribution for the acquisition of one or more such interests before the Minister had issued an identification number to these tax shelters.
[2] In establishing the disputed assessment, the Minister assumed the facts set out in subparagraphs (a) to (i) of paragraph 7 of the Reply to the Notice of Appeal:
[TRANSLATION]
(a) During the 1992 taxation year, the Appellant, whether as principal or agent, directly or indirectly, issued or sold interests or accepted a contribution for the acquisition of such interests in, among others, the following partnerships (the "partnerships"):[admitted]
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1.
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CHLOROMELLA ENRG.
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2.
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CROISSABONE ENRG.
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3.
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MICROPS ENRG.
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4.
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TMBPHOR ENRG.
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(b) In relation to acquiring interests in these partnerships, a loss was announced as being tax deductible in the calculation of income from the interest in the proportion that could be incurred or suffered by the person or assigned to the person for the year or a previous taxation year; [admitted]
(c) the person acquiring a interest of these partnerships or a person at arm's length with them, considering the statements or announcements made with regard to these partnerships, could reasonably expect to receive, directly or indirectly, or dispose of an amount for the interest; [admitted]
(d) considering the statements or announcements made pertaining to these partnerships, it was reasonable to consider that if a person acquired a interest of one of them, the amount representing the loss that was announced as being deductible would be, at the end of a taxation year ending within four years of the first day the interest was acquired, equal to or greater than the potential surplus of the cost of the interest for the person on the total of the amounts that that person could reasonably expect to receive, directly or indirectly, or have at there disposition, for the interest; [denied]
(e) these partnerships constituted tax shelters under the Income Tax Act; [denied]
(f) the Appellant, as principal or agent, issued or sold interests in tax shelters or accepted a contribution for the acquisition of such interests before the Minister of National Revenue issued an identification number to these tax shelters; [denied]
(g) the total cost of the interests in these tax shelters, for those who acquired them before the registration number was assigned as follows:
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TAX SHELTERS
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COST OF INTERESTS
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CHLOROMELLA ENRG.
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$39,000 [admitted]
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CROISSANBONE ENRG.
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$41,000 [admitted]
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MICROPS ENRG.
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$75,000 [admitted]
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TMBPHOR ENRG.
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$220,000 [denied]
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(h) the Appellant was assessed a penalty in the amount of $11,250 for having, as principal or agent, issued or sold interests or accepted a contribution for the acquisition of such interests in tax shelters before the Minister of National Revenue issued an identification number to those tax shelters;
(i) the penalty imposed on the Appellant is equal to 3% of the cost of the interests in the tax shelters mentioned in subparagraph (g) above.
[3] The Appellant has admitted the statements of fact, except for those in subparagraphs (d), (e), (f) and part of subparagraph (g). In subparagraph g), only the amount of the cost of TMBPHOR ENRG. is denied. The Appellant claims that the cost of the interests attributable to him is $60,000.
[4] The issue in dispute therefore is whether what the Appellant sold in the 1992 taxation year and what is described in subparagraph (a) above constitutes a tax shelter. If the answer is affirmative, is the Appellant liable to a penalty as provided in subsection 162(9) of the Act? This subsection reads as follows:
Tax shelter identification number - Every person who
(a) files false or misleading information with the Minister in an application under subsection 237.1(2) for an identification number for a tax shelter, or
(b) whether as a principal or as an agent, sells, issues or accepts a contribution for the acquisition of an interest in a tax shelter before the Minister has issued an identification number therefor,
is liable to a penalty equal to the greater of
(c) $500, and
(d) 3% of the total of all amounts each of which is the cost to each person who acquired an interest in the tax shelter before the correct information is filed with the Minister or the identification number is issued, as the case may be.
[5] The legislative provision that makes it compulsory to obtain a registration number for a tax shelter is found in subsection 237.1(4) and in the definition of "tax shelter" in subsection 237.1(1) of the Act applicable to the period at issue. They read as follows:
237.1(4) No person shall, whether as principal or agent, sell, issue or accept a contribution towards the acquisition of an interest in a tax shelter before the Minister has issued an identification number for the tax shelter.
Article 237.1 - Definitions - In this section:
"tax shelter" means any property in respect of which it may reasonably be considered having regard to statements or representations made or proposed to be made in connection with the property that, if a person were to acquire an interest in the property, at the end of any particular taxation year ending within 4 years after the day on which the interest is acquired,
(a) the aggregate of all amounts each of which is:
(i) a loss represented to be deductible in computing income in respect of the interest in the property and expected to be incurred by or allocated to the person for the particular year or any preceding taxation year, or
(ii) any other amount represented to be deductible in computing income or taxable income in respect of the interest in the property and expected to be incurred by or allocated to the person for the particular year, other than any amount included in computing a loss described in subparagraph (i),
would exceed
(b) the amount, if any, by which
(i) the cost to the person of the interest in the property at the end of the particular year,
(ii) would exceed the aggregate of all amounts each of which is the amount of any prescribed benefit that is expected to be received or enjoyed directly or indirectly in respect of the interest in the property, by the person or a person with whom the person does not deal at arm's length
but does not include property that is a flow-through share or a prescribed property.
[6] A second issue was raised at the hearing, i.e. whether the assessment was issued within the time prescribed by the Act. In respect to this, the parties sent additional observations to the courtfor consideration.
[7] The Appellant admitted having sold, as principal or agent, interests in the partnerships identified in subparagraph (a) above. The evidence has established that the Appellant was registered with various companies and with the Securities Commission as a securities and mutual fund broker representative during the period from August 14, 1986, to September 13, 1994.
[8] A table of sales made by the Appellant has been filed as evidence (Exhibit A-12). This table identifies the names of the investors to whom the Appellant sold interests in each of the four partnerships at issue, the amount invested by each of them, the date and the percentage and the amount of the commission collected by the Appellant.
[9] The Appellant testified to being an intermediary in the sale of interests in the partnerships in question. He drew his information from documents prepared by chartered accountants who expressed the opinion that these were not tax shelters. Two of these documents were filed (Exhibits I-3 et A-1), one of them dated March 2, 1992, and the other March 12, 1992. These two opinions summarize the proposed approach for a project identified in the documents as Projet Colimax, which is similar in principle to the structures put in place to solicit investors in the case before us. The opinion expressed in Exhibit I-3 warns the reader that it is possible that the tax authorities consider that the purchase of interests constitutes a conferred benefit that reduces the cost of investing and, that being the case, the proportion of the research and development expense in the partnership for the partner is higher than the cost of investing reduced by the proceeds from the disposition of the shares and that the project would be considered a tax shelter and that a number would have to be obtained. According to the Appellant, he mainly relied on the opinion contained in Exhibit A-1, which does not mention this fact. A careful reading of the exhibit however demonstrates the contrary to his claim. One need only read paragraph B on pages 5 and 6.
[10] The Respondent had Ms. Hélène Couture, head of investigations and special projects at Revenue Québec, testify. Ms. Couture got involved in the Appellant's file when she was leading an investigation into tax shelters in 1993. Following a document search of the promoters of all of these projects and a directive from the courts on the legality of searches, she continued her investigation, which she has described as vast, in 1997.
[11] Her investigation enabled her to explain that a group of people had put together a financial setup making it possible for taxpayers to claim unfounded tax losses pertaining to research projects. The Respondent has filed as Exhibit I-4 a table demonstrating the general operation of this financial setup, described as the "groupe Roy", and a second table including the sellers. One thousand two hundred and fourteen taxpayers invested in groupe Roy's projects. They were distributed by groups of five in 265 different partnerships. There were seven management partnerships, five laboratory partnerships and five partnerships whose function was share buybacks. Also appearing in this table are those who set up or sold the plan, i.e. Placements Etteloc and 2952-2166 Québec inc., and the sellers, including the name of the Appellant, who falls under 2848-9988 Québec inc., which in turn falls under Consultation Investpro C.D. inc.
[12] In her testimony, Ms. Couture presented a table (Exhibit I-9) entitled [TRANSLATION] "Contribution of those involved by investment plan". This plan shows the distribution of the funds obtained by the investors. The investors only paid for 32% of their equity position. Of this amount, 0.5% went to the research management partnership, 7% to the laboratories, 0.5% to the buyback partnerships, 15% to sales commissions and 9% to the document and business management partnership Etteloc and to the partnership.
[13] Ms. Couture then filed, as illustration, the signed documentation involving the investors and explained the operation of this solicitation by the Appellant concerning the four partnerships identified in subparagraph (a) of paragraph 7 of the Reply to the Notice of Appeal. These are exhibits I-5 to I-8 inclusive. These documents identify the different plans that existed in relation to the investment, but regardless of the plan, the result remained the same, that is that the actual contribution of the investor only corresponded to 32% of amount invested, and the investor deducted as a business loss the full amount allegedly invested (100%). The documentary evidence filed as illustration for each of the four partnerships clearly demonstrates this state of things. In my opinion, such a scenario allows me to conclude that, in this case, we are dealing with tax shelters according to the definition. Moreover, Ms. Couture filed a table (exhibit I-10) showing that each of the investors claimed, in their income tax return, a business loss equal to the amount of the investment and not to the amount actually paid.
[14] The Appellant needed to convince me on a balance of probabilities that these partnerships did not constitute tax shelters within the meaning of the Act. However, his approach was unsuccessful. The Appellant focussed his position on a decision of the Court of Quebec in Fortin v. Quebec, [1999] R.D.F.Q. 175 (C. of Quebec). In this case, there was a motion for class action by investors against businesses that had set up investment plans similar to the ones in this case. In my opinion, and it is also that of Mr. Justice Noël of the Federal Court of Appeal in Bernier v. Canada, 2004, DTC 6497, the Fortin decision in no way establishes that the investment sold was not a tax shelter within the meaning of subsection 237.1(1) of the Act. This decision established that the investor in question was manipulated and that his investment did not even carry a reasonable expectation of profit.
[15] The Appellant maintains that the cost of the interests attributable to him for TMBPHOR ENRG. is only $60,000 since the difference between the total cost of the interests, i.e. $220,000, and the cost of the interests he sold is attributable to another seller. According to subsection 162(9) of the Act, every person who sells an interest in a tax shelter before the Minister has issued an identification number therefor, is liable to a penalty equal to the greater of $500 and 3% of the interests in that tax shelter for each person who acquired them before the identification number was issued. In this case, the total cost of the interests sold in TMBPHOR ENRG. is $220,000, interests that that were purchased before a registration number was assigned. The subsection only requires the sale of a single interest for the penalty to be applicable. The penalty, with regard to TMBPHOR ENRG., must be calculated on the total cost of interests sold, i.e. $220,000.
[16] Did the Appellant exercise a due diligence that could exonerate him from application of the penalty? Exhibits A-1 and I-3 make reference to the information circular IC 89-4 dated August 14, 1989, and particularly to the définition of a tax shelter or to the fact that its existence entirely depends on conclusions that can be reasonably drawn from the announcements made about the property. These two exhibits also refer to the information circular 89-5R dated June 21, 1991. The Appellant has testified that he relied on the opinion expressed in exhibit A-1. He was therefore capable of appreciating the risk that this plan could constitute a tax shelter. The evidence presented by the Respondent clearly demonstrates that advertising to investors focussed on tax savings. The Appellant was a qualified securities brokerage representative and as such had to act with caution in terms of the investments that he offered his clients. As Justice Lamarre Proulx put it in Blier v. Canada, 2003 DTC 970, [2003] T.C.J. No. 416 (QL), in paragraph 73:
[73] Financial planners have an important role in economic life. They cannot hide behind the authorization given by the director of the firm. They must personally ensure that the investments they propose are legal and must exercise the required diligence with respect to the substantial investments that they propose to their clients.
[17] The Appellant has stated that he relied on opinions from an external expert. In my opinion, that is not sufficient to avoid application of the penalty provided in subsection 162(9) of the Act.
[18] The last question raised in submissions concerns the legislative and factual grounds that allowed the Respondent to issue the assessment notice of May 28, 1996. It seems appropriate to refer to a passage written by Justice Dussault in Hexalog Ltée v. The Queen, [2005] DTC 184:
5 On these additional issues relating to the limitation period and burden of proof for penalties, counsel for the Appellant relied particularly on Bigayan v. Canada, [1999] T.C.J. No. 778 (Q.L.), [2000] 1 C.T.C. 2229, 2000 DTC 1619, and Hans v. Canada, [2003] T.C.J. No. 464 (Q.L.), [2004] 1 C.T.C. 2078, 2003 DTC 1065. However, these decisions deal mainly with income tax assessments established after the end of the usual reassessment period under subparagraph 152(4)(a)(i) of the Act; it is known that in such cases, the Minister is responsible for establishing the facts that led him to perform an assessment after the end of this period, meaning he must show that the taxpayer made an erroneous claim through negligence, inattention or voluntary omission, or committed some sort of fraud when making a claim or providing information under the Act. These decisions also deal with the penalty that, in cases of omissions or false statements made knowingly or in circumstances that equal gross negligence, is imposed in accordance with subsection 163(2) of the Act; a penalty for which subsection 163(3) specifically states that the Minister is responsible for establishing the facts that justify the assessment.
6 However, the assessments in this appeal are not ordinary tax assessments that can include the penalty set out in subsection 163(2) of the Act; they are a different type. First, these assessments were established under subsection 227(10) of the Act, not under subparagraph 152(4)(a)(i). Paragraph 227(10)(b) specifically authorizes establishing an assessment for the amount of the penalty set out in subsection 237.1(7.4) of the Act, regarding a "tax shelter," and such an assessment may be established at any time. Paragraph 227(10)(b) states:
227(10) Assessment. The Minister may at any time assess any amount payable under:
(a) . . .
(b) subsection 237.1(7.4) by a person or partnership;
(c) . . .
(d) . . .
7 Moreover, this penalty set out in subsection 237.1(7.4) is very different than the one set out in subsection 163(2) of the Act. Although it can be imposed when a person provides false or misleading information to the Minister in an application for an identification number for a "tax shelter," it can also be imposed, as in this case, when a person violates subsection 237.1(4) of the Act. Under this provision, no person shall sell or issue a "tax shelter" or accept consideration in respect of a "tax shelter" before the Minister has issued an identification number for the "tax shelter." In short, the assessments regarding the penalty set out in subsection 237.1(7.4) are not related to an income tax assessment established after the usual period for a reassessment under subparagraph 152(4)(a)(i) or with the penalty set out in subsection 163(2) of the Act. There is therefore no issue of limitation period or reversing the initial burden of proof that lies with the Appellant.
[19] This is therefore an unusual assessment that is made possible under the provisions of the Act of 1992, in particular subsection 152(4) of the Act, which reads as follows:
152(4) Assessment - Subject to subsection (5), the Minister may at any time assess tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer . . .
[20] In my opinion, the coming into force of paragraph 227(10)(b) of the Act on December 2, 1994 also enables the Respondent to issue the current assessment of May 28, 1996. Subsection 227(10) reads as follows:
227(10) Assessment - The Minister may at any time assess any amount payable under
(a) subsection (8), (8.1), (8.2), (8.3) or (8.4) or 224(4) or (4.1) or sections 227.1 or 235 by a person,
(b) subsection 237.1(7.4) by a person or partnership,
(c) subsection 227(10.2) by a person as a consequence of a failure of a non-resident person to deduct or withhold any amount, and
(d) Part XIII by a person resident in Canada.
Divisions I and J of Part I apply, with necessary modifications, to any notice of assessment that the Minister sends to the person or the partnership.
[21] For these reasons, the appeal is dismissed.
Signed at Ottawa, Canada, this 29th day of May 2006.
"François Angers"
Translation certified true
on this 29th day of November 2006.
Gibson Boyd, Translator
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