Lambert v. Canada, 2005 DTC 5499, 2004 FCA 389

Date: 20041126

Docket: A-533-03

Citation: 2004 FCA 389

CORAM:        LÉTOURNEAU J.A.

NOËL J.A.

NADON J.A.

BETWEEN:

                                                              DENIS LAMBERT

                                                                                                                                            Appellant

                                                                           and

                                                    HER MAJESTY THE QUEEN

                                                                                                                                        Respondent

Hearing held at Québec, Quebec, on November 18, 2004.

Judgment delivered at Ottawa, Ontario, on November 26, 2004.

REASONS FOR JUDGMENT:                                                                                          NOËL J.A.

CONCURRED IN BY:                                                                                        LÉTOURNEAU J.A.

                                                                                                                                      NADON J.A.

Date: 20041126

Docket: A-533-03

Citation: 2004 FCA 389

CORAM:        LÉTOURNEAU J.A.

NOËL J.A.

NADON J.A.

BETWEEN:

                                                              DENIS LAMBERT

                                                                                                                                            Appellant

                                                                           and

                                                    HER MAJESTY THE QUEEN

                                                                                                                                        Respondent

                                                    REASONS FOR JUDGMENT

NOËL J.A.

[1]        This is an appeal from a decision by the Tax Court of Canada in which Judge

François Angers confirmed that the appellant was subject to tax in an additional amount of $42,095 for the 1994 taxation year pursuant to subsection 56(2) of the Income Tax Act (the ITA).

[2]        The appellant is a pilot and the sole shareholder in Aviation Denis Lambert Inc. (Aviation). In 1994, the appellant was also one of the shareholders in the Domaine

La Sorbière (1991) Inc. (La Sorbière). One of La Sorbière's assets was an abandoned outfitter which the shareholders wanted to put into operation again.

[3]        Since 1992, Aviation had been responsible for the air transportation of clients and goods for La Sorbière, as the territory was quite large and there was no road to the outfitter.

[4]        In 1994, the appellant and one James Boudreault controlled the operations of La Sorbière. The company's capital stock was divided as follows:

-           The class B shares were voting and participating shares.

-           The class A shares were voting, but non-participating shares.

[5]        After the fire at the main cottage on July 14, 1994, La Sorbière received insurance compensation of some $375,000. Part of this amount ($94,582.65) was transferred to Aviation on October 18, 1994. The appellant and James Boudreault used it to purchase two aircraft engines. One of these engines was installed in James Boudreault's aircraft and the other in the Aviation aircraft. Additionally, the appellant had the wings of the Aviation aircraft modified using this money.

[6]        The engine installed in the Aviation aircraft cost $31,500 and the bill for the repairs done to the wings of the same aircraft was $6,200, making a total of $42,095 (including taxes), which is the amount assessed by the Minister.

[7]        On the pretext that he wished to avoid problems with class A shareholders, the appellant had Aviation issue false invoices certifying the sale to La Sorbière of a series of items, including generators, sloops and engines, as well as shaped metal, the value of which corresponded to the purchase price of the two aircraft engines and the repairs done.

[8]        In a tax audit in March 1998, the appellant admitted that the description of the property shown in the invoices in question was false. Five criminal charges were laid against the appellant in March 1999. On January 11, 2000 he admitted his guilt on one of these charges and was fined $5,000.

[9]        In January 1999, Revenue Canada sent out a notice of reassessment to add the sum of $42,095 to the appellant's income for 1994, relying on subsection 15(1) of the ITA. When the appellant objected, the appellant ratified the notice of reassessment, relying this time on subsection 56(2):

[10]      The appellant appealed the assessment to the Tax Court of Canada. He argued before the trial judge that the amount paid by La Sorbière to Aviation was intended to compensate the latter for flights relating to the outfitter's operations prior to October 18, 1994. He further maintained that he was not entitled to the payment of the sum of $42,095, thereby eliminating one of the essential conditions for application of subsection 56(2).

[11]      Judge Angers concluded, first, that contrary to what the appellant maintained, no money was owed by La Sorbière to Aviation in 1994 for services allegedly rendered by the latter. He further concluded that even if the appellant was not entitled to payment of the sum of $42,095, the conditions for the application of subsection 56(2) had still been met.

[12]      That is the judgment under appeal.

Analysis and decision

[13]      There are four requirements for subsection 56(2) to apply:

            i.          the payment must be made to some person other than the taxpayer against whom a reassessment is made;

            ii.          the distribution must be made pursuant to the direction of, or with the concurrence of, the taxpayer against whom a reassessment is made;

            iii.         the payment must be made for the benefit of the taxpayer against whom a reassessment is made or to some other person as a benefit that the taxpayer desired to have conferred on that other person;

            iv.         the payment would have been included in the income of the taxpayer against whom a reassessment is made if the latter had received it himself (see Neuman v. M.N.R., [1998] 1 S.C.R. 770).

[14]      The appellant conceded that the first two conditions had been met. However, he submitted that Judge Angers erred in determining that the latter two had also been met.

[15]      In the case at bar, the appellant argued that the payment of $42,095 in favour of Aviation was not a benefit conferred on the latter, since it was compensation for services rendered.

[16]      Further, as a shareholder of La Sorbière, the appellant had no entitlement to the sum of $42,095 except as a dividend. Based on the evidence, no dividends were declared. In the appellant's submission, subsection 56(2) only applies where the taxpayer in question was entitled to the payment or property transferred, as the case may be.

[17]      The trial judge properly dismissed each of these arguments. As for the first argument, the judge noted (paragraph 14) the fact that in 1994 outstanding bills were settled between Aviation and La Sorbière for the transport provided to the latter by the payment of the sum of $8,351.42 on October 17, 1994. These amounts were itemized in Aviation's books and supported by cheques. The trial judge preferred to rely on the documents, thus passing over the appellant's testimony. I find no error in this regard.

[18]      As for the second argument, the fact that the appellant was not entitled to the sum of $42,095 does not bar to the application of subsection 56(2). A finding that this amount would have been included in the appellant's income if he had received it himself will suffice, since in the circumstances at issue in this case there would have been an appropriation within the meaning of subsection 15(1) of the I.TA. As Marceau J.A. explained in Winter v. Canada, [1991] 1 F.C. 585 (FCA), at 593, subsection 56(2):

. . . does not require, for its application, that the taxpayer be initially entitled to the payment or transfer of property made to the third party, only that he would have been subject to tax had the payment or transfer been made to him. [See also Neuman v. M.N.R., supra.]

[19]      Finally, the appellant argued that the amount in question was taxable and in fact was taxed in the hands of Aviation, thereby resulting in double taxation contrary to the rule stated by Marceau J.A. in Winter at 593 (which was referred to and applied in David Smith v. The Queen, 93 D.T.C. 5351):

. . . it is fair to infer that subsection 56(2) may receive application only if the benefit conferred is not directly taxable in the hands of the transferee. Indeed, as I see it, a tax-avoidance provision is subsidiary in nature; it exists to prevent the avoidance of a tax payable on a particular transaction, not simply to double the tax normally due nor to give the taxing authorities an administrative discretion to choose between two possible taxpayers. [Footnotes omitted.]

[20]      The record as it stands does not indicate double taxation. First, I would note that the amount in question was not taxable and was not taxed in the year it was received by Aviation, since it did not correspond to any service rendered by Aviation. The appellant was unable to identify any provision that would have allowed the Minister to assess the amount in question as income in the hands of Aviation in the year it was received.

[21]      It is true that two years later, following the sale by Aviation of the aircraft to which the improvements were made, the Minister treated the resulting profit as income and did not allow the cost of the engine and wing improvements in calculating this profit. However, that does not mean that Aviation was taxed or taxable on the amount directed to it by the appellant.

[22]      First, the improved wings and the engine installed in the Aviation aircraft were in the latter's hands a contribution to assets without consideration, since no consideration of any kind could be associated therewith. There was thus no basis for allowing the cost of the engine and wings in the hands of Aviation.

[23]      Second, the treatment of the profit from the sale as income depended on a consideration of a completely different nature, namely whether Aviation bought its aircraft in order to resell them at a profit. The fact is that this was the third sale of an aircraft by Aviation within a short period of time. Contrary to what the appellant maintained, this treatment had nothing to do with whether Aviation was subject to any tax on the amounts directed to it by the appellant.

[24]      I would dismiss the appeal with costs.

I concur.

     Gilles Létourneau J.A.

I concur.

     M. Nadon J.A.

Certified true translation

Kelley Harvey, BCL, LLB

                                                  FEDERAL COURT OF APPEAL

                                                      SOLICITORS OF RECORD

DOCKET:                                                                   A-533-03

STYLE OF CAUSE:                                                   DENIS LAMBERT v. HER MAJESTY THE QUEEN

PLACE OF HEARING:                                             QUÉBEC, QUEBEC

DATE OF HEARING:                                               NOVEMBER 18, 2004

REASONS FOR JUDGMENT BY:                          NOËL J.A.

CONCURRED IN BY:                                              LÉTOURNEAU J.A.

NADON J.A.

DATE OF REASONS:                                               NOVEMBER 26, 2004

APPEARANCES:

Pierre Hémond                                                              FOR THE APPELLANT

Martin Gentile                                                                FOR THE RESPONDENT

SOLICITORS OF RECORD:

Brochet, Dussault, Lemieux, Larochelle                          FOR THE APPELLANT

Sainte-Foy, Quebec

Department of Justice Canada                                        FOR THE RESPONDENT

Montréal, Quebec