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Citation: 2004TCC773
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Date: 20041124
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Docket: 2002-2256(IT)G
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BETWEEN:
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DIANE DU-PERRÉ,
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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
Lamarre J.
[1] The Appellant is appealing from an
assessment established by the Minister of National Revenue (the
"Minister") under section 160 of the Income Tax
Act (the "Act") claiming $32,866. Section 160
states:
SECTION 160: Tax liability re property
transferred not at arm's length.
(1) Where a person has, on or after May 1, 1951,
transferred property, either directly or indirectly, by means of
a trust or by any other means whatever, to
(a) the person's spouse or common-law partner or a person
who has since become the person's spouse or common- law
partner,
(b) a person who was under 18 years of age, or
(c) a person with whom the person was not dealing at arm's
length,
the following rules apply:
(d) the transferee and transferor are jointly and severally
liable to pay a part of the transferor's tax under this Part
for each taxation year equal to the amount by which the tax for
the year is greater than it would have been if it were not for
the operation of sections 74.1 to 75.1 of this Act and section 74
of the Income Tax Act, chapter 148 of the Revised Statutes of
Canada, 1952, in respect of any income from, or gain from the
disposition of, the property so transferred or property
substituted therefore, and
(e) the transferee and transferor are jointly and severally
liable to pay under this Act an amount equal to the lesser of
(i) the amount, if any, by which the fair market value of the
property at the time it was transferred exceeds the fair market
value at that time of the consideration given for the property,
and
(ii) the total of all amounts each of which is an amount that
the transferor is liable to pay under this Act in or in respect
of the taxation year in which the property was transferred or any
preceding taxation year,
but nothing in this subsection shall be deemed to limit the
liability of the transferor under any other provision of this
Act.
[2] In this August 16, 2001,
assessment, the Minister holds the appellant and her spouse Louis
Leclair jointly and severally liable for the taxes (including
penalties and interest) owed by Mr. Leclair during a transfer of
the shares of the corporation 173832 Canada Inc.
(the "company") and an "amount owing to the
shareholder" on December 28, 1996, in favour of the
Appellant (see assessment of April 16, 2001, Exhibit I-1,
tab 24).
[3] In addition, in the Reply to the
Notice of Appeal (the "Reply"), the Respondent reported
assumptions of fact relied upon to assess the Appellant and
refers not only to the December 28, 1996, transfer, but to a
number of transfers, between December 28, 1996, and June 6, 1997.
These assumptions are found in paragraph 3 of the Reply:
[translation]
(a) Louis Leclair (the "Spouse") has been
married to the Appellant since September 1993; (admitted)
(b) between December 28, 1996, and June 6, 1997,
the Spouse transferred his stock in the company 173832 Canada
Inc. to the Appellant; (admitted)
(c) between December 28, 1996, and June 6, 1997, the
Spouse transferred his account receivable for the company 173832
Canada Inc. to the Appellant;
(d) the transferred goods listed in paragraphs 3(b) and
3(c) above (the "goods") had a fair market value of
$65,000.00;
(e) the Spouse received $100.00 from the Appellant as
consideration for the Goods; (admitted)
(f) on August 16, 2001, the Spouse's debt to
the Minister for the taxation years 1995 and 1996 was $32,866.72;
and
(g) the Appellant and the Spouse are jointly and
severally responsible for the Spouse's tax payments for the
taxation years 1995 and 1996.
[4] The parties admit that the
Appellant and her Spouse had each had 100 shares in the Company
(for a total of 200 shares) since December 1, 1994. On December
28, 1996, Louis Leclair transferred 80 shares of the company
to the Appellant for an $80 consideration. On June 6, 1997, he
transferred his remaining 20 shares to her for a consideration of
$20.
[5] The parties also do not contest
that the 80 shares transferred on December 28, 1996, had a value
of $8,044 and the 20 shares transferred on June 6,
1997, had a value of $3,190.
[6] The parties did not make any
representations on the amount Louis Leclair owed in taxes at the
time of the transfer, $32,866, and I take this silence to mean
that this amount is not being challenged.
[7] The Appellant's challenge involves
two issues. First, she feels that since the assessment
established in her name only makes reference to the December 28,
1996, transfer, the benefit received in the June 6, 1997,
transfer of shares cannot be used after the assessment date. I
will address this argument immediately.
[8] On one hand, even if the Minister
had only considered the December 28, 1996, transfer at
the time of the assessment, the benefit received by the Appellant
at the time was, according to the report of the expert produced
by the Respondent, $51,145 [($8,044 + $43,181) - $80],
and therefore far greater than the $32,866 Louis Leclair owed at
that time, which allowed for the Appellant to be assessed under
section 160 of the Act.
[9] On the other hand, the Minister is
free to raise any argument in support of his assessment as long
as there is no prejudice to the Appellant by the surprise effect
of the Minister's new allegations (see Loewen v. R.,
2004 CarswellNat 960, 2004 F.C.A. 146, 2004 DTC 6321).
[10] Here, the evidence shows that the
evaluation preceding the assessment focused on two transfers of
shares. The auditor from the Canada Customs and Revenue Agency
("CCRA") even helped the Appellant and Louis Leclair
update the documentation required during these two transfers of
shares. In the Reply, the Respondent relied on the transfer of
shares and the "amount owing to the shareholder" to the
Appellant's benefit, on the two dates mentioned above. The
expert retained by the Appellant evaluated the shares on those
two dates. There is therefore no surprise effect related to the
Minister's new allegations.
[11] I am therefore dismissing the
Appellant's first argument that the Respondent cannot rely on
the benefit the Appellant received during the
June 6, 1997, transfer to justify establishing the
assessment.
[12] The Appellant's key argument is
based on the fact that although her spouse transferred all his
shares to her, he did not transfer the "amount owing to the
shareholder" account that appears on the company's
balance sheet, worth $47,979 on December 28, 1996, and June
7, 1997. She said that on one hand, this account should really
not even exist. She explained that the account had been created
by the accountant to account for the contribution of the
couple's personal goods (office supplies, equipment). She
claimed that since the Minister added a taxable benefit for the
personal use of these goods, then the Minister does not consider
these as the company's belongings. As a result, she feels
that there is no "amount owing to the shareholder" at
the time the shares were transferred, and that no such entry
should appear on the balance sheet.
[13] Her accountant, Raymond Robillard, said
he wrote the value of the personal goods the couple transferred
to the company in the "amount owing to the shareholder"
account and that he assumed that this account was owing to the
Appellant and her spouse, for one half each.
[14] Louis Leclair confirmed that an
"amount owing to the shareholder" account existed, and
added that the amount owed by the company was payable solely to
him and he never transferred this account to the Appellant.
[15] Robert Prévost, one of
CCRA's auditors who worked on this case, said he asked for
justifications on this position. The Appellant and her spouse
asked Mr. Robillard to meet with him. Mr. Robillard
apparently justified the "amount owing to the
shareholder" account with the document submitted as Exhibit
I-4, called, "Analysis of the source of advances."
[16] This document show that a $50,000 loan
and a $20,000 line of credit existed. According to a bank
statement from the National Bank of Canada("NBC"), for
Les constructions Leclair, a company belonging solely
to Louis Leclair, the $50,000 loan was allegedly credited to
its account on May 2, 1995 (Exhibit I-5). In
another NBC bank statement for the same company,
Les constructions Leclair, a line of credit of $18,000
had been used as of February 29, 1996 (Exhibit I-6).
[17] In the "Analysis of the source of
advances" (Exhibit I-4), there is also an indication of a
transfer of fixed assets (furniture and equipment). In light of
this document, Mr. Prévost accepted that an "amount
owing to the shareholder" account existed, in the amount of
$70,148 in 1995 and $57,997 in 1996 (see balance sheet attached
to the declaration of income for 1996, Exhibit I-1, tab 15). It
must be pointed out that following the adjustments made by Mr.
Prévost (Exhibit A-1), the "amount owing to the
shareholder" account was reduced to $47,979 as of December
31, 1996. This figure was used by the Appellant's expert in
the evaluation of the shares on December 31, 1996.
[18] After verification, the Minister found
that the advances to the company came mainly from
Louis Leclair since he personally borrowed the amounts
invested. Moreover, following the sale of the shares to the
Appellant, the "amount owing to the shareholder"
account remained on the company's balance sheet even if Louis
Leclair was no longer a shareholder of the company as of June 6,
1997. This account fluctuated until 2003, when the account was
reduced to zero. The Minister then considered that by
transferring his shares, Louis Leclair also transferred the
"amount owing to the shareholder" account to the
Appellant.
[19] This was confirmed by documents
prepared by a CCRA auditor, on the faith of information provided
by Mr. Leclair and signed by the Appellant and Mr. Leclair. In
these documents, Exhibit I-1, tabs 13 and 18, Louis Leclair
acknowledges that he transferred his shares to the Appellant and
that the transfer included the transfer of the "amount owing
to the shareholder" account, pro rata to the shares sold.
Mr. Prévost said that the documents (Exhibit I-1, tabs 13
and 18) were prepared as a follow up to a document Mr. Leclair
sent to the CCRA auditor to establish the conformity of the
"amount owing to the shareholder" account with the
distribution of shares (Exhibit I-1, tab 23). Mr. Leclair and the
Appellant acknowledge that the amounts in this document were
taken from the company's financial statements. Moreover, attached
to the document is an acknowledgement by Louis Leclair that he
was donating all his shares in the company to the Appellant in
exchange for his nearly unilateral participation in the
development of the business. He said this included all the
company's cash value (Exhibit I-1, tab 23,
page 2).
[20] The Appellant and Mr. Leclair now say
they did not understand the signification of these documents,
which they signed at the request of the CCRA auditor. They say
she told them to sign them so that the file could be closed, and
that there would be no tax consequences.
[21] It is true that the auditor was not at
the hearing to help the court understand the role she played in
the conclusion of this case.
[22] I must note, however, that Louis
Leclair has a master's degree in project management and a
university degree in economics. The company was in the business
of offering accounting, finance, tax, and business management
services, and had been doing so since around 1992. I must also
point out that Louis Leclair went bankrupt in April 1999 and that
he took care not to state that he held a financial claim to the
company on his statement of bankruptcy. Today, he claims that he
never transferred this claim to his spouse. He states that this
omission on his statement of bankruptcy occurred because in his
mind, this claim and even the company's shares were worth
nothing. Ironically, this contradicts the expert report that he
himself ordered and that gives the 100 shares of the company,
transferred to the Appellant, a value of $11,234 ($8,044 +
$3,190). He acknowledges that the inherent value of the
"amount owing to the shareholder" account was $47,979
on the date the shares were transferred.
[23] Moreover, the evidence shows that the
bookkeeping was insufficient. Mr. Prévost said the
audit was particularly long because of confusion through all
Mr. Leclair's personal accounts, his personal company, Les
constructions Leclair, and the business run by the company, Les
consultants Leclair. Mr. Leclair himself stated that he did
not have a personal bank account and that he used his company's
accounts.
[24] In my opinion, Mr. Leclair knew
perfectly well what he was doing when he signed the document
stating he was transferring not only his shares, but also the
"amount owing to the shareholder" to the Appellant. I
was not convinced that Mr. Leclair thought the "amount owing
to the shareholder" account had no value when he signed his
statement of bankruptcy. The best evidence of this is that the
account was not eliminated from the company's balance sheets, but
rather it was liquidated over the years. This could not have been
done if he had not transferred it to the Appellant, since it
would have been an asset in the statement of bankruptcy. All this
also contradicts the Appellant's version that the account did not
exist and should not have appeared in the balance sheets when the
shares were transferred.
[25] I therefore find that the evidence is
clearly sufficient to conclude that Louis Leclair deliberately
transferred his shares and the "amount owing to the
shareholder" account to the Appellant, his spouse.
[26] As for whether this account was owing
equally to the Appellant and Mr. Leclair before the shares
were transferred, contradictions between the testimony given by
Mr. Robillard, the Appellant and Mr. Leclair, along with the
documentary evidence submitted by the Respondent, cannot allow me
to conclude that the Appellant was partial creditor of this
account before the shares were transferred.
[27] In fact, the documentary evidence tends
to show that Mr. Leclair took out a personal loan and then
invested the product of the loan into the company. I agree with
counsel for the Respondent that without documentation showing the
precise quantum that might have been invested personally by the
Appellant, and considering the contradictions raised earlier in
the testimony, it is difficult to find that the Appellant
contributed anything to the company, considering the facts.
[28] I therefore find that
Louis Leclair transferred the entire "amount owing to
the shareholder" account to the Appellant between December
28, 1996, and June 6, 1997. Since the portion of the fair
market value of the transferred goods exceeds the value of the
consideration given by the Appellant at the time of the transfer
and the "amount owing to the shareholder" account
exceeds the amount Mr. Leclair owed in taxes at the time,
the Appellant and Mr. Leclair are jointly and severally
liable for the tax debt owed by Mr. Leclair at the time of the
transfer, in accordance with section 160 of the Act.
[29] The assessment established for the
Appellant is therefore confirmed.
[30] The appeal is denied with costs.
Signed at Ottawa, Canada, this 24th day of November 2004.
Lamarre J.
Translation certified true
on this 8th day of February 2005.
Elizabeth Tan, Translator
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