[OFFICIAL ENGLISH TRANSLATION]
Date: 20020607
Docket: 1999-4063(IT)G
BETWEEN:
CLAUDE MARTEL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Tardif, J.T.C.C.
[1] This is an appeal concerning the
1995 and 1996 taxation years. At the outset of the hearing, the
respondent admitted that the rental losses were correct and,
accordingly, the 1995 taxation year is no longer in issue. The
respondent also made a number of admissions with the result that
the sole remaining issue is whether the appellant could claim an
allowable business investment loss as a bad debt for the 1996
taxation year in the amount of $56,643 ($75,524 gross).
[2] At the beginning of the hearing,
the parties indicated that they had reached an agreement with
regard to the following facts (Exhibit A-1):
[translation]
1. Gestion
Conseil PME inc. (hereinafter "Gestion") was incorporated in
1978;
2. The
appellant and his brother Germain Martel are the shareholders of
Gestion, in equal proportions;
3. In the
years prior to 1996, the appellant advanced the amount of
$75,524 to Gestion;
4. Until March
1996, the assets held by Gestion were the shares of two
companies: 2321-4711 Québec inc. (hereinafter
"2321") and 3104-9919 Québec Inc. (hereinafter
"3104");
5. Gestion
held 50% of the shares of those two companies;
6. Until
February 29, 1994, "2321" operated a restaurant (hereinafter
"Fritz") in a building that it owned and whose address is 745
Dupon Street, Alma;
7. From March
1994 to March 1996, "2321" leased the commercial building to
"3104" so that "3104" could operate another restaurant called
"Jukebox";
8. During
their respective final year of operation, "2321" had two
employees whereas "3104" had slightly more than twelve
employees;
9. Also in
their final year of operation, the income of "2321" came from the
rental of the building housing the Jukebox restaurant operated by
"3104", while the income of "3104" came from the operation
of that restaurant;
10. The "3104" company
declared bankruptcy on March 6, 1996;
...
12. After ceasing
operations in the summer of 1996, "2321" was dissolved shortly
thereafter;
13. As for the building,
the following transactions were made prior to Gestion's
repossessing the property in May 1996:
(a) the Caisse
populaire Desjardins in Alma was a creditor of "2321" in the
amount of $350,000 under the terms of a loan agreement dated
April 27, 1993, which debt was secured by a hypothec on the
building;
(b) the appellant,
his brother Germain Martel and Gestion paid an amount of
$28,111.05 to the Caisse populaire Desjardins in Alma in
order to be subrogated to all its rights, remedies, actions and
hypothecs, but only to the extent of the amounts paid under the
terms of a subrogation release dated January 30, 1996;
(c) On January 30,
1996, the balance of the hypothecary loan owed by "2321" to the
Caisse populaire in Alma was $314,899.20; that balance was not
covered by the subrogation release of January 30, 1996;
(d) Les Immeubles
Desjardins was also a creditor of "2321" for an amount of
$125,000 under the terms of a deed of sale dated April 30, 1993,
which debt was secured by a second hypothec on the building;
(e) On February 1,
1996, the appellant, his brother Germain Martel and Gestion
served a prior notice of exercising a hypothecary right on
"2321", that is, a taking in payment, relying on the rights
provided for under the subrogation release of January
30, 1996;
(f) On March
15, 1996, Les Immeubles Desjardins, as second ranking
creditor on the building that was the subject of the hypothec
granted to the Caisse populaire Desjardins, paid the amount of
$28,111.05 to the appellant, his brother Germain Martel, and
Gestion in order to be subrogated to the rights set out in the
subrogation release of January 30, 1996;
(g) The company, Les
Immeubles Desjardins, was therefore subrogated to the rights of
the appellant, Germain Martel and Gestion resulting from the
payment remedy that they had exercised on February
1, 1996;
(h) On April 3,
1996, Les Immeubles Desjardins demanded that the building be
taken in payment following the failure of "2321" to meet its
obligations under the hypothec deed between it and the Caisse
populaire Desjardins in Alma;
(i) By the
subrogation release act of May 1996, the appellant, his brother
Germain Martel and Gestion were subrogated to the rights,
remedies and hypothecs of Immeubles Desjardins with respect to
its claims towards "2321";
(j) In
consideration of the subrogation to the rights of the company,
Les Immeubles Desjardins, the appellant, Germain Martel and
Gestion paid an amount of $118,111.05;
(k) In consideration
of the above-mentioned subrogation, the appellant, his brother
Germain Martel and Gestion repossessed the building, in
accordance with the terms of a corrected judgment dated May
20, 1996;
(l) On July
10, 1996, before the notary Michel Parizeau, the appellant and
his brother Germain Martel transferred the undivided portion of
the building purchased in accordance with the terms of the
corrected judgment of May 20,1996, to Gestion;
14. Following the
repossession, Gestion leased the commercial building to another
restauranteur, an A & W franchisee.
[3] The appellant's
brother, Germain Martel, testified at length. His
testimony was generally confirmed by the appellant during his
very brief testimony. The testimonial evidence essentially
repeated the facts that had been admitted, putting them in
context with qualifications and some additions.
[4] This testimony shows that the
Martel brothers invested in the restaurant business and had to
cope with a number of constraints while suffering various
unexpected events that had the effect of transforming a seemingly
very viable project into a real financial nightmare.
[5] A lack of expertise and the poor
economic situation forced the appellant to abandon the project as
originally planned and redirect the intended use of the premises
to rental operations.
[6] As indicated above, there is only
one outstanding issue. Could the appellant claim a business
investment loss for the 1996 taxation year in the amount of
$56,643 ($75,524 gross)?
[7] In substance, the appellant argued
that he was entitled to claim a business investment loss of
$56,643 for the advances and loans made to Gestion.
[8] The respondent replied that the
appellant was not entitled to deduct that loss because Gestion
was not a "small business corporation" within the meaning of the
Act.
[9] The relevant provisions of the
Act are as follows:
38. Taxable capital gain and allowable capital loss - For the
purposes of this Act, ...
(c) a taxpayer's allowable business investment loss
for a taxation year from the disposition of any property is 3/4
of the taxpayer's business investment loss for the year from
the disposition of that property.
39. Meaning of capital gain and capital loss - (1) For the
purposes of this Act, ...
(b) a taxpayer's capital loss for a taxation year
from the disposition of any property is the taxpayer's loss
for the year determined under this subdivision (to the extent of
the amount thereof that would not, if section 3 were read in the
manner described in paragraph (a) of this subsection and without
reference to the expression "or the taxpayer's allowable
business investment loss for the year" in paragraph
3(d), be deductible in computing the taxpayer's income
for the year or any other taxation year) from the disposition of
any property of the taxpayer other than
(i)
depreciable property, or
(ii)
property described in any of subparagraphs (a)(i), (ii) to
(iii) and (v); and
(c) a taxpayer's business investment loss for a
taxation year from the disposition of any property is the amount,
if any, by which the taxpayer's capital loss for the year
from a disposition after 1977
(i) to which
subsection 50(1) applies, or
(ii) to a person
with whom the taxpayer was dealing at arm's length
of any property that is
(iii) a share of the
capital stock of a small business corporation, or
(iv) a debt owing to the
taxpayer by a Canadian-controlled private corporation (other
than, where the taxpayer is a corporation, a debt owing to it by
a corporation with which it does not deal at arm's length)
that is
(A) a small business
corporation,
(B) a bankrupt (within the
meaning assigned by subsection 128(3)) that was a small business
corporation at the time it last became a bankrupt, or
(C) a corporation referred to
in section 6 of the Winding-up Act that was insolvent
(within the meaning of that Act) and was a small business
corporation at the time a winding-up order under that Act was
made in respect of the corporation, ...
125.(7) Definitions - In this section,
"specified investment business" ... a business ...
the principal purpose of which is to derive income (including
interest, dividends, rents and royalties) from property but, ...
where
(a) the
corporation employs in the business throughout the year more than
5 full-time employees, or
(b) any other
corporation associated with the corporation provides, in the
course of carrying on an active business, managerial,
administrative, financial, maintenance or other similar services
to the corporation in the year and the corporation could
reasonably be expected to require more than 5 full-time employees
if those services had not been provided;
248. (1) Definitions - In this Act, ...
"specified investment business" has the meaning
assigned by subsection 125(7).
"active business" in relation to any business
carried on by a taxpayer resident in Canada, means any business
carried on by the taxpayer other than a specified investment
business or a personal services business;
"small business corporation", at any particular
time, means, subject to subsection 110.6(15), a particular
corporation that is a Canadian-controlled private corporation all
or substantially all of the fair market value of the assets of
which at that time is attributable to assets that are
(a) used
principally in an active business carried on primarily in Canada
by the particular corporation or by a corporation related to
it,
(b) shares of
the capital stock or indebtedness of one or more small business
corporations that are at that time connected with the particular
corporation (within the meaning of subsection 186(4) on the
assumption that the small business corporation is at that time a
"payer corporation" within the meaning of that
subsection), or
(c) assets
described in paragraphs (a) and (b), including, for
the purpose of paragraph 39(1)(c), a corporation that was
at any time in the 12 months preceding that time a small business
corporation, and, for the purpose of this definition, the fair
market value of a net income stabilization account shall be
deemed to be nil;
[10] It was admitted that during the last
year of operation the income of "2321" came from the rental of
the building housing the Jukebox Restaurant operated by "3104".
During that period, "2321" had two employees whereas "3104" had
slightly more than twelve employees.
[11] The respondent admitted that "3104" was
an "active business"; however, the respondent argued that "2321"
was a "specified investment business". When analyzed separately,
"2321" is not an "active business" and does not employ more than
five full-time employees. To bypass this hurdle, the appellant
contended that the operations of "2321" and "3104" should be
considered jointly.
[12] The respondent replied that this
argument had no merit since it was contrary to the imperative
principle that legal persons are completely separate and
independent entities, a principle to which I fully subscribe.
[13] This important issue of separate
capital and the independence of legal entities was dealt with by
the Honourable Judge Margeson in Casey Realty Ltd. v. Canada
(Minister of National Revenue - M.N.R.), [1991] T.C.J. No.
963 (Q.L.).
[14] In the case at bar, there is no reason
to accept the appellant's claims that the operations of "2321"
and "3104" ought to be considered jointly; this argument has no
basis in law and is completely contrary to the very essence of a
corporation, which is an independent legal entity.
[15] Each of the companies "2321" and "3104"
must be considered as having its own legal personality. The
purpose of "2321" was to derive income from property; therefore,
it was a specified investment business, from which it follows
that it was not an active business within the meaning of the
Act.
[16] It is important to remember that it is
wholly inappropriate to ignore the existence of a corporation for
a taxpayer's benefit especially where he himself has decided to
choose and create this vehicle because he found it to his
advantage.
[17] It is acknowledged and admitted that
taxpayers are entitled to organize their affairs so as to reduce
their tax burden to a minimum to the extent that the planning
decided on complies with the provisions of the Act.
[18] It is equally true that a person or
group of persons may decide to create a legal entity with a
distinct legal personality for many reasons, both fiscal and
civil, including, inter alia, to limit their
liability.
[19] In either case, this decision implies
that many factors are taken into consideration that generally
create advantages and occasionally create some disadvantages.
Once the decision has been made, the parties in question must
deal with the consequences, both positive and negative.
[20] Often, in order to enjoy only the
advantages, the parties in question are inconsistent and lack
transparency, wanting to keep all options open; some even
interpret their actions so as to forego an earlier choice or to
totally disregard the reality of that choice. Such an attitude is
unacceptable and wholly contrary to the basic principles that
must govern what was established by Parliament in order that
balance and transparency be protected in all transactions. Every
corporation has and must have its own legal personality with all
of the consequences that this entails.
[21] A definition of the expression "small
business corporation" is found in subsection 248(1) of the
Act. To meet the definition, the corporation need only to
have been a "small business corporation" at any time in the 12
months preceding December 31, 1996.
[22] The respondent argued that Gestion was
not itself an "active business". Until March 1996, the only
assets held by Gestion were the shares of the two companies
"2321" and "3104". During the period from March 1994 to
March 1996, "2321" leased its commercial building to "3104"
in order for "3104" to operate the restaurant named
"Jukebox".
[23] The companies "2321" and "3104" would
be "small business corporations" if, in 1996, each of them
was
... a particular corporation that is a
Canadian-controlled private corporation all or substantially all
of the fair market value of the assets of which at that time is
attributable to assets that are
(a) ... used principally in an active business carried
on primarily in Canada by the particular corporation or by a
corporation related to it,
[24] Subsection 248(1) of the Act
defines the expression "active business" as
... any business carried on by the taxpayer other than a
specified investment business or a personal services
business;
[25] As defined in subsection 125(7) of the
Act, the term "specified investment business" means a
business ... the principal purpose of which is to derive
income (including interest, dividends, rents and royalties) from
property ...
[26] However, a business carried on by a
corporation in a taxation year is not a "specified investment
business" where
(a) the corporation employs in the business
throughout the year more than 5 full-time employees; or
(b) any other corporation associated with the
corporation provides, in the course of carrying on an active
business, managerial, administrative, financial, maintenance or
other similar services to the corporation in the year and the
corporation could reasonably be expected to require more than 5
full-time employees if those services had not been provided;
[27] Having regard to the foregoing, I must
determine whether "2321" could qualify as a "small business
corporation" on the basis that it was a corporation related to a
"small business corporation" in light of the facts disclosed by
the evidence. The corporation "2321" could qualify as a "small
business corporation" if it were related to a "small business
corporation". Since "3104" is an "active business", it must be
determined whether "2321" is related to it. Paragraph
251(2)(c) stipulates that for the purposes of the
Act two corporations are related
(i)
if they are controlled by the same person or group of
persons,
(ii)
if each of the corporations is controlled by one person and the
person who controls one of the corporations is related to the
person who controls the other corporation,
(iii)
if one of the corporations is controlled by one person and that
person is related to any member of a related group that controls
the other corporation,
(iv)
if one of the corporations is controlled by one person and that
person is related to each member of an unrelated group that
controls the other corporation,
(v)
if any member of a related group that controls one of the
corporations is related to each member of an unrelated group that
controls the other corporation, or
(vi)
if each member of an unrelated group that controls one of the
corporations is related to at least one member of an unrelated
group that controls the other corporation.
[28] On reading those provisions from the
Act, control appears to be of decisive importance.
Separately, the appellant did not have control. However, he was a
member of a group of persons that controlled "2321" and
"3104".
[29] The expression "group of persons" is
not explicitly defined for the purposes of the definition of
"related persons". The only definition for this expression is
found in subsection 256(1.2) concerning associated corporations.
The provision provides that a group of persons means any two or
more persons each of whom owns shares of the capital stock of
that corporation.
[30] That definition in fact codifies the
rule in the well-known case of Buckerfield's. In that
case, 50% of Buckerfield's shares were owned by the Pioneer Grain
company and the other 50% were held by the Federal Grain Company.
Those two corporations owned the shares of the Green Valley
company in equal proportions.
[31] Judge Jackett was of the view that
neither Pioneer Grain nor Federal Grain by itself controlled the
appellant companies. However, the honourable judge found that
Buckerfield's and Green Valley were controlled by the same group
of persons, that is, the group consisting of Pioneer Grain and
Federal Grain. The definition of "group" accepted by Judge
Jackett was the following: "The word
"group" in its ordinary meaning, as I
understand it, can refer to any number of persons from two to
infinity."[1]
[32] Applying the principles in
Buckerfield's, Mr. Justice Abbott affirmed in the Supreme
Court decision in Vina-Rug that, once it is established
that a group of shareholders owns a majority of the voting shares
of a company, and the same group owns a majority of the voting
shares of a second company, that fact suffices to make the two
companies associated and thus related.
[33] That principle is relevant to the case
at bar. During the period at issue, the ownership of all of the
issued and outstanding shares of the capital stock of "2321" and
"3104" was held equally by Gestion and Ruth Parent.
[34] The two companies were therefore
controlled by the same group of persons by virtue of subparagraph
251(2)(c)(i) of the Act.
[35] It must also be concluded that "2321"
and "3104" were related for the purposes of paragraph (a)
of the definition of a "small business corporation".
[36] Consequently, Gestion was a corporation
all or substantially all of the fair market value of the assets
of which was attributable, at a time in 1996, to assets that
consisted of shares of the capital stock of two small business
corporations that were connected with Gestion at the relevant
time.
[37] I find, therefore, that for the 1996
taxation year Gestion was a "small business corporation" within
the meaning of the Act.
[38] Consequently, the appellant could claim
an allowable business investment loss in the amount of $56,643
($75,524 gross).
[39] For these reasons, the appeal is
allowed with costs, and the matter shall be referred back to the
Canada Customs and Revenue Agency for reconsideration on the
basis that the appellant sustained a business investment loss in
the amount of $56,643 ($75,524 gross) for the 1996 taxation
year.
Signed at Ottawa, Canada, this 7th day of June 2002.
J.T.C.C.
1 Buckerfield's Ltd. v. Canada (Minister of National Revenue -
M.N.R.),[1965] 1 Ex. C.R. 299.
2 Vina-Rug (Canada) Limited v. Canada (Minister of
National Revenue - M.N.R.),
[1968] S.C.R. 193.
Translation certified true
on this 26th day of August 2003.
Sophie Debbané, Revisor
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