Citation: 2011 TCC 318
Date: 20110623
Docket: 2009-2331(IT)G
BETWEEN:
Fiducie Famille Gauthier,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Archambault J.
[1]
The Minister of
National Revenue (the Minister) made an assessment whereby he increased the
amount of the dividend deemed to have been received by Fiducie Famille
Gauthier (Fiducie) in respect of the 2002 taxation year, under section 84.1 of
the Income Tax Act (the Act). Fiducie is contesting this increase.
The statement of facts in Fiducie's Notice of Appeal reads:
[TRANSLATION]
C. FACTS
3.
During its 2002 taxation year, the appellant
was the owner of 1,250 Class B shares of the capital stock of Groupe
Orléans Express Inc. ("Groupe").
4.
On or about April 15, 2002, the appellant
disposed of 817 Class B shares of Groupe in favour of Jacques Gauthier
(164 shares) and 4041763 Canada Inc. ("4041763") (653 shares).
5.
At all relevant times, a non-arm's length
relationship within the meaning of the federal Income Tax Act ("the
Act") existed between the parties.
6.
The unit price on which the parties agreed
was $6,550.63 per share.
7.
On or about April 15, 2002, the appellant
disposed of the remaining 433 Class B shares in favour of 4041763 at a
unit price of $6,010.71 per share. In consideration for this disposition,
4041763 issued a promissory note in the amount of $2,602,637 to the appellant
(that is, 433 shares x $6,010.71).
8.
It was understood that the 433 shares were
going to be sold to Keolis Canada Inc. ("Keolis"), a party
at arm's length from the appellant.
9.
The selling price of the 433 shares to Keolis
was $2,836,423, which is $6,550.63 per share. The difference
between the selling price to Keolis and the selling price to the appellant ($2,836,423
– $2,602,637 = $233,786) consists of professional fees, which
were paid by 4041763 upon the disposition, and which would have had to be paid
by the appellant if the appellant had sold the shares directly to Keolis.
10.
In making its assessment, the CRA made the
following assumptions:
a.
It assumed that the fair market value of the
shares transferred by the appellant to 4041763 was $2,836,423, not $2,602,637.
b.
For the purposes of paragraph 69(1)(b) of
the Act, it adjusted the fair market value of the consideration (i.e. the
promissory note) received by the appellant on the disposition of the 433 shares
in favour of 4041763 to $2,836,423.
c.
Then, for the purposes of subsection 84.1(1) of
the Act, it determined that an additional taxable dividend of $291,099 was to be
taxed in the appellant's hands, based on the assumption that variable D in the
formula in paragraph 84.1(1)(b) of the Act – that is to say, the fair
market value of the consideration (i.e. the note) received by the purchaser – could,
and should, be increased.
11.
The assessment issued by the CRA on March 7,
2007, was beyond the normal reassessment period for the appellant's 2002
taxation year.
12.
Prior to the expiry of the normal reassessment
period, the appellant had filed a specific waiver of
the normal reassessment period. The specific subjects covered by the waiver
were:
a.
Qualified small business shares.
b.
Capital gains deduction.
c.
Sections 84.1,
85, and 83(2) of the ITA.
d.
Professional fee expenses.
13.
The appellant duly objected to the CRA's
assessment in a timely manner and, by notice of confirmation dated April 30,
2009, the Minister confirmed the assessment.
[Emphasis
added.]
[2]
The respondent admitted
all these facts, except the ones set out in paragraph 10 and in the last statement
made in paragraph 9, which reads: [translation]
"which would have had to be paid by the appellant if the appellant had
sold the shares directly to Keolis." Moreover, the Minister relied on the
following facts in his Reply to the Notice of Appeal (the Reply):
[translation]
10. In making the assessment in issue, the Minister
of National Revenue relied on the following assumptions of fact:
. . .
(i) The appellant neither incurred nor paid
professional fees in relation to the transactions between the appellant and 4041763.
(j) 4041763 paid the $233,550 in professional fees for
the appellant.
[3]
At the beginning of the
hearing, I asked counsel for the respondent to clarify the meaning of
subparagraph 10(j) of the Reply. He said that the Minister’s position was not that
4041763 Canada Inc. (404) was acting as an agent of Fiducie when it paid
the "professional fees" of $233,550. In addition, the respondent's evidence
reveals that, at the objection stage, the appeals officer adopted a position
different from that of the auditor: the officer did not apply paragraph 69(1)(b)
of the Act; rather, it was his position that the consideration paid by 404
included not only the $2,602,637 promissory note, but the $233,786 in fees as
well.
Position of the parties
[4]
Contrary to what the
Minister's auditor may have done, neither the appeals officer handling the
objection, nor counsel for the respondent before this Court, cited paragraph
69(1)(b) of the Act in applying section 84.1, nor did they try to
increase, by operation of paragraph 69(1)(b), the capital gain amount
realized by Fiducie, on the basis that the deemed proceeds of disposition of
the 433 shares are greater than the proceeds stated in the contract. Indeed,
the Minister acknowledges that he could not do this, because the assessment was
made beyond the normal assessment period, and the notice waiving the limitation
period did not contain a waiver with respect to the computation of the capital
gain, or a waiver in relation to the application of paragraph 69(1)(b)
of the Act. However, the Minister does argue that he is justified in taking
into account not only the promissory note referred to in the contract, that is
to say, the note for $2,602,637
described in paragraph 7 of Fiducie's Notice of Appeal, but also the fees that
404 paid in relation to the sale of the 433 shares.
[5]
In support of his
position, counsel for the respondent points to the analysis of Judge Lamarre in
Republic National Bank of New York v. Canada, [1999] T.C.J. No. 183
(QL) (Eng.), [1999] A.C.I. No 183 (QL) (Fr.), [1999] G.S.T.C. 32, 7 G.T.C. 3107, where, at paragraphs 91
and 93, she wrote:
91 A common definition used for consideration is that given by
Lush J. in Currie v. Misa (1875) L.R. 10 Exch. 153 at p. 162 (affd.
1 App. Cas. 554 H.L.):
A valuable consideration, in the sense of the law, may consist
either in some right, interest, profit, or benefit accruing to the one party,
or some forbearance, detriment, loss, or responsibility, given, suffered, or
undertaken by the other.
This definition was essentially adopted by Black's Law Dictionary,
sixth edition:
Consideration. The inducement to a contract. The cause,
motive, price, or impelling influence which induces a contracting party to
enter into a contract. . . . Some right, interest, profit or benefit
accruing to one party, or some forbearance, detriment, loss, or responsibility,
given, suffered, or undertaken by the other.
. . .
93 Consideration is therefore quite a broad term. As it
includes any responsibility undertaken, it most definitely includes debts
and charges assumed by the purchaser, such as those claimed by the
appellant.
[Emphasis
added.]
[6]
Counsel for Fiducie
submits that the description of the consideration contained in the contract for
the sale of the 433 shares (Exhibit A‑1, tab 9) is the one that
should be relied on. When cross-examining the appeals officer, counsel was
careful to ask him to acknowledge that nothing in the drafting of the contract
constituted a sham, and that the contract had not been varied by any subsequent
agreements. Counsel also noted that fees totalling $233,786 were billed to 404
and that the Minister, in making his assessment, assumed that Fiducie neither
incurred nor paid fees in relation to the transactions between itself and 404. Naturally,
counsel noted that the question at issue raised by the operation of
section 84.1 is not the question of the fair market value of the 433 Class
B shares that Fiducie sold to 404, but rather the fair market value of the
consideration that Fiducie received from 404 following the disposition of its
433 shares.
Analysis
[7]
In order to ascertain
whether the Minister, in determining the fair market value of the consideration
received in exchange for the shares, was entitled to take the professional fees
paid by 404 into account, it is important to consider all the circumstances of
the transactions of April 15, 2002. It must be noted that Fiducie was set up as
a trust for the Gauthier family, which held 1,250 Class B shares of Groupe
Orléans Express Inc. (Groupe Orléans), a corporation that operated a passenger
bus and courier business through subsidiaries (Exhibit A-1, tab 10, page 3). The
Gauthier family had apparently decided to dispose of its interest in Groupe
Orléans, and had instructed KPMG to find someone to purchase that interest. It
appears that KPMG found Keolis, a subsidiary of a French corporation, which
purchased the Gauthier family's interest in Groupe Orléans.
[8]
It appears that KPMG was
also instructed to advise the Gauthier family on the best way to carry out the
sale from a taxation standpoint, and that a tax consultant from that major
accounting firm proposed a series of transactions to carry out the sale as
efficiently as possible from that standpoint.
[9]
One of the purposes of Fiducie's
sale of 164 shares to Jacques Gauthier was to enable each of his two
children, who are beneficiaries of Fiducie, to take advantage of the $500,000
capital gains exemption. The sale of the 653 shares to 404 was designed to crystallize
the "safe income" and make it possible to defer the capital gain
using the election in subsection 85(1) of the Act (see Exhibit A-1, tab 11).
These 653 actions Class B shares were converted into 653 Class K shares
that were then sold in two stages to Keolis: first, 567 shares, and second, the
remaining 86 shares.
Mr. Gauthier also transferred his 164 Class B shares to Keolis. All these
transactions took place on April 15, 2002.
[10]
The agreed unit price
for the 164 and 653 Class B shares sold to 404 and the agreed unit price of the
653 Class K shares and the 164 Class B shares sold to Keolis are the same: $6,550.63.
However, when Fiducie sold the 433 Class B shares to 404, the amount indicated as
the fair market unit value of the shares decreased to $6,010.71. But all these
shares were sold on the same day. To justify this reduction of the price in
relation to the other shares of the same class, the tax consultant informed the
auditor that the selling price had been "voluntary [sic] reduced to
take the fees into account. If not, GESTION would realize a capital loss" (see
Exhibit A-1, tab 12, page 2). In an appendix to the letter, the
KPMG tax consultant stated that the $233,550 in fees represents approximately
8% of the proceeds of the sale of the shares sold to Keolis by 404. The breakdown
that the tax consultant provided to the auditor is as follows:
GESTION FAMILIALE GAUTHIER MACKINNON INC.
Allocation
method used
|
Number
|
Share class
|
Proceeds
|
Expenses
|
Proportion
|
|
567
|
K
|
$3,714,098
|
$309,879
|
|
|
86
|
K
|
$563,491
|
$46,527
|
|
|
653
|
K
|
$4,277,589
|
$356,406
|
8.33%
|
|
433
|
B
|
$2,836,186
|
$233,550
|
8.23%
|
|
|
|
$7,113,775
|
$589,956
|
|
[11]
$560,000 of the $589,956
in fees was paid to KPMG. This is the description contained in the statement of
account of June 10, 2002, addressed to 404, attention Jacques Gauthier: [translation] "Professional services
rendered up to April 15, 2002, under the contract of service concerning
the disposition of the shares of Groupe Orléans Express Inc." The other fees
include professional fees billed to 404 by the law firm of Joli-Cœur, Lacasse,
Geoffrion, Jetté, St-Pierre. They are described as follows: [translation] "For professional
services rendered up to April 15, 2002, including advice, corporate
documentation and assistance upon the closing of the sale of the shares of
Groupe Orléans Express Inc."
As for the professional fees of Desjardins Lapointe Mousseau Bélanger, legal
advisors and notaries, the statement of account dated June 12, 2002, provides
further details, including:
[translation]
. . . [F]amiliarization with draft trust deposit agreement; . . .
various discussions and negotiations between each party's representatives;
attendance . . . at closings of April 15, 2002; . . . preparation,
execution and publication of a discharge by RoyNat Inc. . . . in relation
to a hypothec on the immovable located at . . . chemin des Quatre-Bourgeois,
Sainte-Foy; and five voluntary cancellation registration applications, signed
by RoyNat, in relation to the movable hypothecs previously granted in its
favour by Autocars Orléans Express Inc., . . . Gare d'autobus
de la Vieille Capitale Inc., . . . Groupe Orléans Express Inc. . . .
(Exhibit A-1, tab 12, page 8 and page 7)
[12]
Furthermore, one of the
important reasons for billing the fees to 404, not Fiducie, was to recover the
GST and QST on those fees by claiming input tax credits and input tax refunds.
[13]
This quick description
of the transactions carried out on April 15, 2002, and shortly before shows that
404 was interposed between Fiducie and Keolis for the purpose of minimizing the
tax consequences of the sale of the Gauthier family's interests to Keolis, a
subsidiary of a French corporation. Plainly, 404 was a corporation under the
Gauthier family's control in this tax plan. It is true that KPMG and the two law
firms billed their fees to 404, not Fiducie. However, as Fiducie states in its
Notice of Appeal, these were fees [translation]
"that would have had to be paid by the appellant if the appellant had sold
the shares directly to Keolis."
[14]
Moreover, it seems
strange that Fiducie sold 164 Class B shares to Jacques Gauthier and 653Class
B shares to 404 at a price of $6,550 per share when the 433 shares of the same
class that it sold the same day to 404 were merely worth $6,010 per share. And
these same shares were all resold to Keolis at a unit price of $6,550. It
seems obvious that the true fair market value of the 433 shares that Fiducie
sold to Keolis was $6,550 per share, but that the price was reduced to take
account of the fact that 404 would have to pay approximately $233,786 in fees.
[15]
I can understand that,
in his testimony, the tax consultant whose services the Gauthier family
retained contended that the market value had to be $6,010 in order to take
account of the fact that 404 was to pay the $233,786 in fees. However, in
my opinion, it more accurately reflects reality to say that Fiducie transferred
433 shares whose unit market value was $6,550, that the actual selling price of
those shares was $2,836,423 (433 X $6,550), an amount which, in fact,
404 obtained when it resold the shares to Keolis, and that the consideration
given for this market value of $2,836,423 included two elements: a $2,602,637
promissory note, and 404's agreement to pay the fees that Fiducie would have
had to pay if 404 had not been interposed in the series of transactions
carried out to sell the shares in question to Keolis.
[16]
I accept the definition
of consideration laid down in Currie and referred to by Judge Lamarre in
Republic National Bank, above, and the definition in Black's Law
Dictionary, according to which "consideration" can encompass "[t]he inducement
to a contract. . . . [s]ome right, interest, profit or benefit accruing to one
party, or some forbearance, detriment, loss, or responsibility, given,
suffered, or undertaken by the other." By agreeing to be billed for the
fees related to the sale of the shares in the place of Fiducie, 404 was, in a
sense, undertaking Fiducie's responsibility. A benefit therefore accrued to Fiducie.
I find that such a description of the situation is more consistent with
reality, and the true fair market value of the shares was $6,550 per unit. In
order to acquire the 433 Class B shares at their fair value, 404 had to provide
the note stipulated in the contract, and undertake responsibility for the fees.
[17]
In my opinion, the
above description of the transactions is more consistent with reality than the
description given in the sale contract, which would hold that the unit value of
the 433 Class B shares was $6,010. The fact that the amount of fees incurred by
404 is not referred to in the contract as part of the consideration given to
acquire the shares does not, in my view, prevent this Court from finding that,
in reality, the parties took 404's acceptance of the liability for the fees
into account. This fact is clear from the explanation given by the tax
consultant, who told the Minister that the price was reduced to take account of
the fees that 404 would have to pay. The fact that this consideration is
not expressly referred to in the contract does not mean that the Minister must be
limited to the parties' contractual stipulations in determining the amount of
the deemed dividend.
In this instance, the parties preferred to reduce the selling price to reflect
the fact that 404 was assuming responsibility for the $233,786 in fees, instead
of stating the true unit selling price of the shares, that is to say, $6,550
per share. In my opinion, that does not square with reality.
[18]
Courts that are
required to distinguish between an employment contract and a service contract
are entitled to find, under the reality principle, that a contract described as
a service contract is in fact an employment contract, or that the reverse is
true, despite the descriptions contained in the contract. For the same reasons,
this Court certainly has the authority to conclude that the true consideration
given by 404 to Fiducie Gauthier includes 404's agreement to pay the fees that Fiducie
would have paid if 404 had not been interposed in the series of transactions
leading to the disposition of the shares. The application of this reality
principle does not necessarily entail a finding that a sham is involved. A waiter who
receives a tip can certainly come before a court and designate the tip as a
gift as opposed to remuneration for the quality of service, but if the evidence
discloses that the customer paid the tip in consideration for the service
rendered, the Court is not bound by the waiter's designation.
[19]
For all these reasons, Fiducie
has not satisfied the Court that the assessment made by the Minister was in
error and, consequently, Fiducie's appeal is dismissed, with costs to the respondent.
Signed at Ottawa, Canada, this 23rd day of June 2011.
"Pierre Archambault"
Translation
certified true
on this 30th day
of September 2011
François Brunet,
Reviser
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