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Citation: 2004TCC688
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Date: 20041123
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Docket: 2000-5020(IT)G
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BETWEEN:
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JEAN-GUY ST-GEORGES,
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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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[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
ParisJ.
[1] The Appellant is a chartered
accountant and trustee in bankruptcy. In 1988, he agreed to act
as director of a company belonging to a client of his firm.
Because of some of his actions as director, he was sued and
ordered to pay damages. In his computation of income for 1994,
the Appellant claimed a loss of $187,467, the amount he paid as a
result of the order plus legal costs, less certain amounts
received for services rendered during the course of the
litigation. The Minister of National Revenue (the "Minister")
disallowed the loss and the Appellant appealed that decision.
[2] The amount of the loss suffered by
the Appellant was not contested by the parties. The sole issue
was whether or not the net amounts he was ordered to pay in costs
and damages can be deducted as business expenses.
[3] The Appellant claimed that the
disputed amounts were paid as part of his accounting business
because he agreed to act as director at the request of one of his
corporate clients.
[4] As for the Respondent, Her Majesty
the Queen submitted that the damages awarded by the Court and the
legal costs were not expenses incurred by the Appellant to earn
business income, but were rather incurred by him as a director,
and that those amounts could not therefore be deducted in
computing his business income.
Evidence
[5] At the hearing, the parties filed
an agreed statement of facts in which the following facts were
admitted:
[Translation]
1. The
Appellant is a chartered accountant and a trustee in
bankruptcy.
2. During
1994, the Appellant worked as an accountant at an accounting firm
he owns.
3. The
Appellant is also the sole shareholder of the company
St-Georges Hébert Inc. which was used by the
Appellant as a vehicle to account for and report all income
generated by his accounting firm and trustee activities.
4. In his
income tax return for the 1994 taxation year, the Appellant
reported at line 130 (other income) the amount of $94,579.00,
representing the amounts he withdrew from St-Georges
Hébert Inc., which, according to him, represented his net
income from accounting and trustee activities.
5. The
Appellant reported at line 232 of his income tax return for the
1994 taxation year the amount of $187,467.00, as "other
deductions."
6. The amount
of $187,467.00 mentioned in the foregoing paragraph represents
the net loss reported by the Appellant for an amount he was
ordered to pay following a decision by the Quebec Superior Court
on December 23 [sic], 1993, in Standal's
Patents Ltd. (hereinafter "Standal").
7. By its
decision, the Quebec Superior Court ordered the Appellant in his
capacity as a director, jointly and severally with the other
directors of 160088 Canada Inc. (formerly Sweecan), to reimburse
to Standal the amount of $1.9 million corresponding to illegally
declared dividends.
8. Although
the Appellant appealed the decision mentioned above to the Quebec
Court of Appeal, the appeal was abandoned/dismissed, and for the
purposes of this case before the Tax Court of Canada, the
Appellant accepted the Court's findings and did not plan to
contradict the information contained therein.
. . . .[1]
10. For the services
rendered for the preparation, involvement and assistance related
to the trial of Standal, the Appellant allegedly received
remuneration/compensation of US$100,000.00
from Mr. Pinat.
11. As for the transaction
for which the Appellant and other directors were held liable, the
Appellant was appointed director to facilitate the transaction
and had it not been for his professional accounting relationship
in the circumstances, he would have never agreed to act as
director.
12. Following his
conviction in December 1993 by the Superior Court, the Appellant
negotiated a settlement with Standal's lawyers, a settlement
which resulted in the issuance of a release in consideration of a
payment of $250,000.00 by the Appellant.
[6] The Appellant was the only witness
at the hearing. He told the Court that Gaston Pinat, the sole
shareholder in 160088 Canada Inc. ("160088") through a holding
company (151095 Canada Inc.) had been a client of his accounting
firm since 1960 and that in about 1986 or 1987, Mr. Pinat advised
him that he intended to sell his businesses. Therefore,
Mr. Pinat asked the Appellant to provide accounting services
for the sale.
[7] After meeting with several
prospective purchasers, Mr. Pinat accepted an offer to purchase
the assets of 160088. When the sale was being finalized, the
lawyers acting for the purchasers noticed that 160088 had only
one director while it was required by its articles of
incorporation to have three directors. At their request, and in
order to facilitate the sale, the Appellant agreed to act as one
of the three directors of 160088. He said that he was asked,
along with the company lawyer, Moe Ackman, to act as
director exclusively for the purpose of completing the
transaction. He reiterated that he would not have agreed to act
as director had it not been for his accounting relationship with
Mr. Pinat.
[8] The Appellant's firm received
$75,000 in fees for work relating to the sale of the assets, that
is to say, for about 500 hours of work over the course of a year.
No remuneration was paid to the Appellant for his role as
director of 160088.
[9] The evidence also revealed that
after the sale of 160088's assets, the Appellant participated as
director in the declaration of a dividend of $1,900,000 by 160088
in favour of its shareholder 151095 Canada Inc., of which Mr.
Pinat owned all the shares.
[10] Subsequently, Mr. Pinat had the money
transferred to other companies under his control and finally to a
bank account in Cayman Islands.
[11] At the time of the declaration of the
dividend, Standal Patents Ltd. was suing 160088 in Federal Court
for patent infringement. The case, which dated back to 1980, was
decided in favour of Standal on July 20, 1989, and the Federal
Court ordered 160088 to pay to Standal the amount of $760,000
with interest. The decision was upheld by the Federal Court of
Appeal on April 12, 1992.
[12] However, Standal could not proceed to
execute his judgment because 160088 did not have any assets.
Therefore, Standal sued 160088, its shareholder and directors in
the Quebec Superior Court and requested from the Court an order
voiding the dividend declared by 160088 and ordering the
directors and shareholder to reimburse to 160088 the amount of
$1,900,000.
[13] The Quebec Superior Court rendered a
judgment on December 22, 1993, ordering the Appellant in his
capacity as a director, jointly and severally with the other
directors, to reimburse to Standal the amount of $1,900,000 as
requested.
[14] The decision of the Quebec Superior
Court was appealed but the Court of Appeal required the
Appellants to deposit $2,000,000 with the Court before the appeal
could proceed. The Appellants were unable to provide a deposit
satisfactory to the Court and their appeal was dismissed.
[15] Following the dismissal of the appeal,
the Appellant concluded an agreement with Standal under which he
paid to it $250,000, in settlement of the amount he was ordered
to pay by the Quebec Superior Court.
Argument
[16] Counsel for the Appellant stated that
the Appellant's relationship with 160088 was that of accountant
for the company acting in the sale of its assets, and that it was
in this context that he was asked to act as director to sign a
document to complete the sale. He said that the evidence showed
that the Appellant would not have agreed to act as director of
160088 had it not been for the fact that he was providing
accounting services to the company and its shareholder. For that
reason, it is not possible to dissociate his role as director of
160088 from his role as accountant for that company and for Mr.
Pinat.
[17] According to counsel for the Appellant,
the latter had an overall commercial purpose in acting for
160088. His agreeing to act as director and signing the sale
document as director was an integral part of, and within the
scope of, his role as an accountant. Therefore any liability that
accrued to him as a result of what he did as director was
necessarily the result of the commercial activities by which he
earned business income.
[18] The Appellant's counsel also said that
the only income that the Appellant earned from 160088 was by way
of accounting fees, and that he was not paid to act as director.
Therefore, the only source of income to which the expenses could
relate was the Appellant's accounting business. Although the
Income Tax Act (the "Act") provides that an office is a
separate source of income from business, counsel argues that the
Appellant's position as director of 160088 was not an
"office" within the meaning of that term because the appellant
was not paid to act in that capacity. The definition of "office"
in subsection 248(1) of the Act reads as follows:
"office"- means the position of an individual entitling
the individual to a fixed or ascertainable stipend or
remuneration . . . and also includes the position of a
corporation director; . . .
[19] Counsel also argued that acts carried
out by the Appellant as director for 160088 must be viewed in the
context of the accounting services he was hired to perform which
was to effect the sale of the company's assets. In his view,
those acts were out of the ordinary for an accountant but done
nonetheless to complete the transaction he was working on and to
assist his client.
Analysis
[20] To succeed in this appeal, the
Appellant is required to establish that the amounts in issue were
not expenses related to an office held by him, but rather
expenses incurred by him in the course of carrying on a business.
Generally, damages are deductible as a business expense when the
conduct for which the Court allowed them is part of the
taxpayer's business operations.[2]
[21] If the appellant's directorship with
160088 was an office within the definition of that term in
section 248(1) of the Act, it follows that his activities as a
director would constitute a distinct source of income to him
under the Act. Sections 5 to 8 of the Act govern the computation
of income from an office and permit only limited deductions.
Losses in relation to liability incurred while holding an office
are not one of the permitted deductions.
[22] However, I agree with the
Appellant's counsel that a director of a corporation who is
not entitled to any remuneration for acting in that capacity does
not hold an office as defined in the Act. The definition of
"office" in the Act includes the condition that the position
sought to be so qualified must entitle the holder to a "fixed or
ascertainable stipend or remuneration." This condition is
mandatory.[3] It
was not disputed that the Appellant was not entitled to receive
any pay for acting as a director, and therefore it follows that
his directorship with 160088 was not an office within the meaning
of the Act.
[23] The next issue that must be determined
is whether the action taken by the appellant as director of
160088 that gave rise to the award of damages was within the
scope of a business carried on by him. This is a two-fold issue:
was the appellant carrying on a business, and if so, was the
expense that he deducted incurred for the purpose of producing
income from that business?
[24] Unfortunately, I am of the view that
the Appellant has failed to show a nexus between the declaration
of the dividend by him and the other directors of 160088 and any
business carried on by the appellant personally. It appears that
the accounting services related to the sale of the assets were
provided to Mr. Pinat and 160088 through a company belonging
to the Appellant, St-Georges Hébert Inc., and not by the
Appellant himself.
[25] The Appellant testified that Mr. Pinat
had been a client of his accounting firm since approximately 1960
and that his firm received $75,000 for the work related to the
sale of assets. According to the Minister's assumption in
subparagraph 20(c) of the reply to the amended notice of
appeal, the income of the firm was reported as the income of
St-Georges Hébert Inc. This would mean that the fees that
were paid by Mr. Pinat to the Appellant's accounting firm for
services relating to the sale of the assets of 160088 were
reported as income of St-Georges Hébert Inc., as part of
its business rather than as part of a business carried on by the
Appellant.
[26] The evidence supports the view that the
Appellant became a director of 160088 in the context of providing
accounting services to Mr. Pinat through his accounting firm and
therefore through St-Georges Hébert Inc.: the Appellant
said that his appointment as director of 160088 was solely for
the purpose of enabling the asset sale to take place without
delay. There was nothing to show that the Appellant was operating
an accounting business personally in parallel to the one he ran
through his firm and St-Georges Hébert Inc. or that he was
earning business income personally from Mr. Pinat or 160088 at
that time.
[27] I am aware that the Appellant received
US$100,000 from Mr. Pinat for services he rendered during the
lawsuit that was brought by Standal, and that he reported this
income personally in his 1994 tax return by deducting it from the
damages that he paid to Standal, but this alone is not sufficient
to prove that he was operating a business personally at the time
that he participated in the declaration of the dividend in 1988.
There is nothing to show that this payment was received in the
course of an ongoing activity that included the declaration of
the dividend.
[28] Moreover, although it is not
determinative, the Appellant reported the net loss from the
damages awarded by the Court, after taking into account the
receipt of the payment from Mr. Pinat, under the category of
"other deductions" on his return, rather than as a loss from a
business or from a profession.
[29] Since it has not been shown that at the
time the dividend was declared the Appellant was carrying on a
business personally, the damage award and related fees cannot be
said to have been incurred by him for the purpose of earning
business income and are not deductible in the computation of his
income.
[30] Even if I had arrived at the conclusion
that the accounting work done by the Appellant for Mr. Pinat and
160088 was done on his own behalf rather than on behalf of his
firm, it would not follow that the amounts at issue were
deductible by him. The onus is on the Appellant to show that the
declaration of the dividend for which he was later found liable
was an act done in the course of carrying on a business on his
own behalf. I am not satisfied that he has met that onus.
[31] It is clear that the sale of 160088's
assets and the declaration of the dividend were separate
transactions that occurred several months apart. Although the
dividend was said to have been declared on February 1, 1988,
according to
the
Quebec Superior Court:
At best, the declaration of dividend for $1,900,000.00 was
made in September 1988, and all of the documents of 160088 which
are dated February 1, 1988 were drafted after this date . . . .[4]
[32] No evidence was filed concerning the
Appellant's motivation in continuing to act as a director of
160088 after the asset sale was completed and participating in
declaring the dividend. All that I have before me is the
Appellant's statement that he became a director to complete the
sale of the assets. This purpose cannot be attributed to the
declaration of the dividend, and in the absence of any evidence
of how it related to the business purportedly carried on by the
Appellant, there is no basis for allowing him to deduct the
amounts in issue.
[33] It is hard to imagine circumstances in
which a director's purpose in declaring a dividend would be to
earn income from a separate unrelated business operated by the
director. In this case, no such circumstances have been
shown.
[34] For all of these reasons, the appeal
is dismissed with costs.
Signed at Ottawa, Canada, this 23rd day of November 2004.
Paris J.
Translation certified true
on this 28th day of February 2005.
Daniela Possamai, Translator
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