Francois Fournier v. Minister of National Revenue, 91 DTC 746, [1991] 1 CTC 2699 (TCC)

Dussault, T.C.J.:—This is an appeal from a reassessment No. 22208, made by the respondent pursuant to subsection 160(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). By that assessment the respondent claimed from the appellant the sum of $6,885.86, namely a tax of $6,364.01 and interest of $521.85. The tax is claimed from the appellant as being owed by the company Les Évaluateurs Fra-Mic Inc. for its taxation year ending August, 31, 1983. The respondent assumed that the company made a transfer of property to the appellant in the amount of $45,000 in dividends, and that, as a person with whom the company was not dealing at arm's length, the appellant was jointly and severally liable for the tax owed by the company under subsection 160(1) of the Act.

Summary of Facts

In 1982, the appellant, Mr. François Fournier, and Messrs. Michel and Pierre Juneau founded the company Les Évaluateurs Fra-Mic Inc., in which they were the sole shareholders, directors and officers. This company provided real estate valuation services. The evidence disclosed that only Messrs. François Fournier and Michel Juneau were really concerned with and involved in the company: Mr. François Fournier as a certified appraiser and Mr. Michel Juneau as an appraiser. It appeared that the participation of Mr. Pierre Juneau was intended only to provide a third shareholder and director and that the ten per cent held by him was held for the benefit of his brother Mr. Michel Juneau. Mr. Pierre Juneau did not attend shareholders’ or directors' meetings and, according to the company accountant, Mr. Christian Hénaire, who was called as a witness, the company profits were divided 55 per cent to Mr. Michel Juneau and 45 per cent to Mr. François Fournier. Due to the fact that the company made profits, Messrs. Michel Juneau and François Fournier decided in the winter of 1983, on Mr. Hénaire’s advice, that the benefits they would receive from the company would be in the form of year-end dividends, which would be declared to cover the amount of the regular advances which the two principal parties concerned were paid by the company. Mr. François Fournier did not in any way deny that, during the company's taxation year ending August 31, 1983, he received a total of $45,000, namely his share of $100,000 of dividends allegedly declared by the directors at the end of the year. The tax return for 1983 filed by the appellant on May 26, 1987 indicated that his only income for 1983 was a dividend of $45,000.

As to the amounts which the company owed under the Act for its 1983 taxation year, as tax payable or interest, it appeared that several changes were made to reflect partial payments, interest rebates and a reduction of tax payable as the consequence of a retrospective deferral of the losses suffered in subsequent years. Several assessments were therefore made, the latest No. 22208, dated December 16, 1987, finally indicating a tax payable of $6,885.86 and interest accumulated at that time in the amount of $521.85.

Analysis

The relevant parts of the legislation on which the respondent based its assessment are as follows:

160.(1) Tax liability re property transferred not at arm's length.—Where a person has, on or after the 1st day of May, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to

(c) a person with whom he was not dealing at arm's length,

the following rules apply:

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 aggregate of all amounts each of which is an amount that the transferor is liable to pay under this Act in respect of the taxation year in which the property was transferred or of any preceding taxation year. . .*

(2) Minister may assess transferee.—The Minister may at any time assess a transferee in respect of any amount payable by virtue of this section and the provisions of this Division are applicable mutatis mutandis in respect of an assessment made under this section as though it had been made under section 152.

As there is no doubt that an amount of $45,000 was transferred to the appellant by Les Évaluateurs Fra-Mic Inc. during its taxation year ending August 31, 1983, the only question that remains to be decided is whether the company and the appellant were dealing at arm's length. In this regard, subsection 251(1) of the Act provides:

♦Subparagraph 160(1)(e)(ii) has subsequently been amended effective December 17, 1987. The amendment is not relevant here.

251.(1) Arm's length.—For the purposes of this Act,

(a) related persons shall be deemed not to deal with each other at arm's length;

and

(b) it is a question of fact whether persons not related to each other were at a particular time dealing with each other at arm's length.

Though certain company documents entered in evidence may appear to contradict this, it seems clear that Mr. François Fournier's participation in the company actually was 45 per cent. In any case, he did not control the company and also was not related to Messrs. Michel and Pierre Juneau, so that subparagraphs 251(2)(b)(i) and (ii) do not appear to apply here. As these persons were dealing at arm's length, paragraph 251(1)(a) cannot be relied on.

It is therefore paragraph 251(1)(b) of the Act that may be applied, provided the evidence establishes that the parties were in fact not dealing at arm's length.

The concept of an arm's length transaction has been the subject of many decisions of our courts. (See, inter alia: M.N.R. v. Sheldons Engineering Ltd., [1955] C.T.C. 174; 55 D.T.C. 1110 (C.S.C.); Gatineau Westgate Inc. v. M.N.R. (1966), 41 Tax A.B.C. 440; 66 D.T.C. 560; M.N.R. v. Estate of Thomas Rodman Merritt, [1969] C.T.C. 207; 69 D.T.C. 5159; Swiss Bank Corporation and Swiss Credit Bank v. M.N.R., [1972] C.T.C. 614; 72 D.T.C. 6470 (C.S.C.); G. Sayers v. M.N.R., [1981] C.T.C. 2871; 81 D.T.C. 790; Special Risks Holdings Inc. v. The Queen, [1986] 1 C.T.C. 201; 86 D.T.C. 6035; Noranda Mines Ltd. v. M.N.R., [1987] 2 C.T.C. 2089; 87 D.T.C. 379.) When the parties to a transaction act in concert, when they have similar economic interests or they act with a common intent, it is generally admitted that they are not dealing at arm's length.

I will take the liberty of citing in this regard Cattanach, J. of the Exchequer Court (as he then was), who said in M.N.R. v. Estate of Thomas Rodman Merritt, supra, at 217 (D.T.C. 5165):

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.

For his part, Thurlow, J. of the Exchequer Court (as he then was) said in Swiss Bank Corporation v. M.N.R., supra, at 437-48(D.T.C. 5241):

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.

We have here two principal shareholders in a company who are for all practical purposes the only real shareholders and directors and who decide together, on the advice of the company accountant, to withdraw profits made by the company in the form of dividends declared at year-end. It is agreed between them that in the meantime they will receive advances from the corporation and that the dividends to be declared subsequently will be for an amount equivalent to the advances received. A dividend of $100,000 was in fact declared at year-end and the appellant admitted receiving his share in the form of advances throughout the year.

I cannot find a situation more suited to application of the concept of a nonarm's length transaction between unrelated persons, in that the company's two principal directors and shareholders apparently acted in concert and with a common economic interest to decide how they would withdraw the profits made by the company for their personal use. Acting both as directors of the company and its shareholders, they were in a position where the concept of not being at arm's length in fact as established by our courts could hardly be better applied. In this sense, therefore, I consider that Les Évaluateurs Fra-Mic Inc. was not at arm's length with the appellant at the time of the property transfer made during its 1983 taxation year, and that accordingly the respondent was right to apply subsection 160(1) of the Act to this transaction.

The assessment under subsection 160(2) of the Act is accordingly correct and the appeal is dismissed.

Appeal dismissed.