Date: 20080214
Dockets: A-571-06
A-572-06
Citation: 2008 FCA 60
CORAM: DESJARDINS
J.A.
NOËL
J.A.
PELLETIER
J.A.
A-571-06
BETWEEN:
LES CONSULTANTS PUB CRÉATION INC.
Appellant
and
HER MAJESTY THE QUEEN
Respondent
A-572-06
BETWEEN:
LOUIS MASSICOTTE
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
NOËL J.A.
[1]
These are
two appeals filed by Consultants Pub Création Inc. (Pub Création) and Louis
Massicotte (Mr. Massicotte) from judgments by Judge Archambault of the Tax
Court of Canada (the TCC judge), dismissing Mr. Massicotte’s appeal in part and
that by Pub Création in its entirety. Mr. Massicotte is objecting to the
part of the decision which confirmed the taxable benefit in the order of $239,000
derived from his employment pursuant to paragraph 6(1)(a) of the Income
Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the Act), during his 1995 taxation
year. Pub Création, for its part, argued that if it conferred such a benefit on
Mr. Massicotte it was entitled to deduct this amount in computing its income
for 1995, and the TCC judge should have warned it
not to withdraw its appeal for the year in question in order to preserve this
right.
[2]
The two appeals
were joined by order of this Court on April 17, 2007, case A-571-06 being
designated the lead case. Pursuant to that order, these reasons will be filed
in the principal case, and a copy hereof entered in case A-572-06 to be the
reasons thereof.
FACTS
[3]
I would
first note the problems which the TCC
judge had unravelling the facts surrounding the transactions which gave rise to
the assessments at issue. The TCC judge discussed antedated contracts and
provisions not consistent with the facts, adding that the appeals by
Mr. Massicotte and Pub Création raised serious problems of credibility
(Reasons, at paras. 57, 64 and 65). It was not until he had heard the witnesses
and carefully sifted through the evidence that the TCC judge was able to draw his conclusions.
The relevant facts were related with monastic care throughout his reasons. For our
purposes we need only mention the following few facts.
[4]
In 1990
Mr. Massicotte was president and director of Pub Création. He also held all the shares in
Gestion Amadéus-Amadéus Ltée (Amadéus), which in turn held all the shares in
Pub Création. In 1990 Mr. Massicotte was approached by Michel Audy (Mr. Audy)
suggesting they do business together. An agreement recording their business
plan was made in December 1990.
[5]
Under that
agreement Amadéus sold part of the Pub Création shares to Gestion Cyrano Inc.
(Cyrano), a company 100% owned by Mr. Audy, for $350,000. At the same time,
Amadéus acquired part of the shares of Im-Média Inc. (Im-Média), a company held
100% by Cyrano.
[6]
In June
1994 Mr. Massicotte and Mr. Audy agreed to make a division of their direct or
indirect holdings in Pub Création and Im-Média (the separation agreement). For our
purposes it is important to note paragraph 3, which reads as follows:
[TRANSLATION]
3. SALES OF IM-MÉDIA
SHARES AND RELEASE OF DEBT
CYRANO, AUDY undertake
to purchase all shares held in Im-Média by Massicotte since October ’93 for the
sum of $70,000, thus eliminating any agreement prior hereto between the
parties, and in particular the non-competition clause between CYRANO and AUDY and
Massicotte in the shareholder
agreement of CONSULTANTS PUB CREATION INC. AUDY and CYRANO acknowledge
owing the capital sum of $240,000, in the form of a note payable, to Massicotte
and/or AMADÉUS.
[Emphasis
added.]
[7]
After the
division of June 10, 1994, the situation appears to have returned to what it
was originally, in that Mr. Massicotte held 100% of the Amadéus shares, and the
latter held 100% of the Pub Création shares.
[8]
In late
1994 and early 1995 Mr. Massicotte assigned to Pub Création the debt of
$240,000 mentioned in paragraph 3 of the separation agreement. An adjusting
entry in the books of Pub Création indicates that the sum of $240,000 was
credited to an account designated [TRANSLATION] “employee advance” in Mr.
Massicotte’s name to offset the transfer of the debt dated December 31, 1995.
The amount so credited was allegedly used to wipe out certain loans made to Mr.
Massicotte by Pub Création in 1994, 1995 and 1996 (Reasons, at para. 17).
[9]
Following
an audit, the Minister of National Revenue (the Minister) concluded that the
debt assigned by Mr. Massicotte to Pub Création in 1995 had no value. The
reassessment issued following this audit taxed Mr. Massicotte for some $240,000
as [TRANSLATION] “allocation of funds from Consultants Pub Création” (appeal
record, vol. II, at p. 105). The notice of confirmation issued by the Appeal
Division following Mr. Massicotte’s objection spoke of a [TRANSLATION] “benefit
relating to the transfer of a debt” conferred by Pub Création under subsection
15(1) of the Act (appeal record, vol. II, at p. 109).
[10]
Mr.
Massicotte appealed the matter and in an initial reply to the notice of appeal
filed by Mr. Massicotte, Her Majesty the Queen, acting on behalf of the
Minister (hereinafter the respondent or the Crown), took the position that the
$240,000 benefit was taxable under subsection 246(1) of the Act. Alternatively,
the respondent maintained that this was a benefit conferred by Pub Création as
employer of Mr. Massicotte under paragraph 6(1)(a) of the Act.
[11]
The
respondent subsequently obtained leave to amend its reply to the notice of
appeal by deleting the allegation that the benefit was taxable under paragraph
6(1)(a) of the Act. The respondent then argued solely that the benefit
in question was conferred by Amadéus pursuant to subsection 246(1) of the Act.
Counsel for the respondent explained that this decision was made to accurately
reflect the position taken by the auditor when issuing the assessment. The
latter explained in her testimony that it was uncertainty about Mr.
Massicotte’s status with Pub Création, the fact that he was not a direct
shareholder of Pub Création and the method used to obtain the benefit which led
her to use subsection 246(1) rather than subsection 15(1) or paragraph 6(1)(a)
as a basis for the assessment (examination-in-chief of auditor, transcript,
vol. III, at pp. 9 to 18).
[12]
Accordingly,
the only position maintained by the Crown to defend the assessment in the Tax
Court of Canada was that, under subsection 246(1), Amadéus had conferred a
benefit on Mr. Massicotte by arranging for Pub Création to assign to the
debt transferred to it a value of $240,000, when it had no value, and enter a
credit equal to that amount in his name (written submissions of respondent, appeal
record, vol. I, at p. 4, para. 13).
TAX COURT OF CANADA DECISION
[13]
The TCC
judge concluded that the origin of the $240,000 debt was the sale of Pub
Création shares in December 1990. In the opinion of the TCC judge, this sale was made for an
“inflated” amount, which explains why Mr. Audy and Cyrano always believed that
the amount of the note would never be paid (Reasons, at para. 78). No credible
expert witness could confirm the value assigned to this debt (Reasons, at para.
77). Relying on the expert report filed by the respondent, the TCC judge
concluded that the debt had practically no value when assigned to Pub Création.
It was thus a benefit which was conferred on Mr. Massicotte.
[14]
In the
opinion of the TCC judge, the evidence allowed
him to conclude that the benefit was conferred by Pub Création pursuant to
paragraph 6(1)(a) (Reasons, at para. 82). The evidence also supported
the conclusion that it was this benefit which was conferred by Amadéus under
subsection 246(1), as maintained by the Crown in its pleadings (Reasons,
at para. 101). However, the TCC judge said that in his opinion subsection
246(1) could not be used as a basis for assessment if the benefit could be
taxed under paragraph 6(1)(a) (Reasons, at para. 27).
[15]
The TCC judge said he was concerned that Mr.
Massicotte could appropriate the sum of $240,000 without paying any tax because
of a mistake by the Minister (Reasons, at paras. 43 and 44), and of his own
motion undertook to rely on paragraph 6(1)(a) (Reasons, at paras. 45 to 48). Based on that provision, the
TCC judge concluded that Mr. Massicotte had received a taxable benefit in the
order of $239,000.
APPELLANTS’ POSITION
[16]
Counsel
for the appellants questioned only that aspect of the judgment based on
paragraph 6(1)(a). He acknowledged that a benefit of some $239,000 was
conferred on his client, but maintained that the TCC judge could not apply this provision on
his own motion in order to tax the benefit.
[17]
In the
submission of counsel for the appellants, the TCC judge, by relying on paragraph
6(1)(a) when the respondent had formally withdrawn it from his
pleadings, took upon himself the function of Deputy Attorney General as
representative of the Minister. What is more, the Minister himself could not
have relied on paragraph 6(1)(a), since the normal assessment period had
elapsed and paragraph 6(1)(a) applies on its face to a particular
factual situation which the Crown had expressly withdrawn from its pleadings.
[18]
In his
submission, the TCC judge committed a breach of the
rule of natural justice by allowing Pub Création to discontinue its appeal
without regard for the fact that, if applicable, paragraph 6(1)(a)
would have allowed it to deduct the amount of the benefit in computing its
income. As to the latter argument, the respondent conceded that if paragraph
6(1)(a) was the applicable provision, Pub Création’s appeal should be
allowed.
ANALYSIS AND DECISION
[19]
I do not
have to deal with any of the points raised by the appellants in support of their
appeals to dispose of the matter. I need only conclude, as the TCC judge did at paragraph 101 of his
reasons, that on the facts in evidence Mr. Massicotte received a taxable
benefit in the order of $239,000 under subsection 246(1). I would note that
this conclusion was not questioned in the appeals.
[20]
The debate
before the Tax Court of Canada was conducted on the wrong footing. Counsel for
the appellants maintained that the Minister lost his right to rely on
subsection 246(1) once it was established that the value of the benefit
[TRANSLATION] “could be included” in his client’s income under paragraph 6(1)(a)
(counsel presented the matter the same way on appeal – appellants’ memorandum,
para. 36). The
TCC judge rendered his decision on that basis. That is not the issue.
[21]
Subsection
246(1), to be found in Part XVI of the Act (“Tax Avoidance”) reads as follows:
|
Benefit conferred on a person
246. (1) Where at any time a person confers a benefit,
either directly or indirectly, by any means whatever, on a taxpayer, the
amount of the benefit shall, to the extent that it is not otherwise
included in the taxpayer’s income or taxable income earned in Canada under
Part I and would be included in the taxpayer’s income if the amount of
the benefit were a payment made directly by the person to the taxpayer and if
the taxpayer were resident in Canada, be
(a) included in computing the taxpayer’s income or
taxable income earned in Canada under Part I for the taxation year that
includes that time; or
(b) where the taxpayer is a non-resident person, deemed
for the purposes of Part XIII to be a payment made at that time to the
taxpayer in respect of property, services or otherwise, depending on the
nature of the benefit.
|
Avantage conféré à un
contribuable
246. (1) La valeur de l’avantage qu’une
personne confère à un moment donné, directement ou indirectement, de quelque
manière que ce soit à un contribuable doit, dans la mesure où elle n’est
pas par ailleurs incluse dans le calcul du revenu ou du revenu imposable
gagné au Canada du contribuable en vertu de la partie I et dans la mesure
où elle y serait incluse s’il s’agissait d’un paiement que cette personne
avait fait directement au contribuable et si le contribuable résidait au
Canada, être :
a) soit
incluse dans le calcul du revenu ou du revenu imposable gagné au Canada,
selon le cas, du contribuable en vertu de la partie I pour l’année
d’imposition qui comprend ce moment;
b) soit, si
le contribuable ne réside pas au Canada, considérée, pour l’application de la
partie XIII, comme un paiement fait à celui-ci à ce moment au titre de bien
ou de services ou à un autre titre, selon la nature de l’avantage.
|
[Emphasis added.]
[22]
In my
humble opinion, the only purpose of the underlined portion is to prevent double
taxation. By its broad wording, subsection 246(1) covers practically all
situations where a benefit may result in an inclusion under Part I of the Act.
Parliament has thus expressly limited the application of this anti-avoidance
measure to situations where the value of the benefit is not otherwise “included”
in computing the taxpayer’s income under Part I.
[23]
This is
what Judge Tardif of the Tax Court of Canada explained in the decision he
rendered in the case at bar, authorizing the respondent to enter subsection
246(1) as the sole basis of its assessment in its amended reply to the notice
of appeal (2004TCC558):
[34]
Subsection
246(1) of the ITA is a provision of alternative application since it must be
shown that the amount is not otherwise included (for example, under subsection
15(1) of the ITA) and that it would be included if the payment made to the
taxpayer was made to him directly.
.
. . . .
[36] Consequently, subsection 246(1) of the ITA will
be applied “alternatively”. That does not mean that the Respondent may not
assess solely on the basis of subsection 246(1) of the ITA, since that
provision is sufficient basis for an assessment.
[37] It is enough simply to establish that the amount
is not otherwise included, whereas it would be included were it not for the
fact that the payment was made indirectly. The way to prove this is to
enumerate the facts constituting the basis of the assessment in the Reply to
the Notice of Appeal. This proof should normally show that the amount is not
included in computing the taxpayer's income, but would have been if the payment
had been made directly.
[24]
The
question the TCC judge should have asked was not whether the benefit “could be
included” under paragraph 6(1)(a), but rather whether the value of the
benefit was “included” in computing Mr. Massicotte’s income under paragraph
6(1)(a) or any other provision in Part I. While subsection 246(1) is
generally used as an alternative basis, nothing prevents the Minister from
relying on this provision as the sole basis of assessment when the
circumstances require.
[25]
As the TCC judge concluded there had been a benefit
under subsection 246(1) on the facts in evidence, and the value of that benefit
had not been included in Mr. Massicotte’s income under Part I, he should have confirmed
the assessment. He did not have to go any further.
[26]
I
therefore come to the conclusion that Mr. Massicotte’s appeal cannot succeed.
Since the appeal by Pub Création and the concession made by the Crown are based
on paragraph 6(1)(a) being applicable, they should suffer the same fate.
[27]
For these
reasons, I would dismiss the appeals with costs in the principal case only.
“Marc
Noël”
I concur.
Alice Desjardins J.A.
I
concur.
J.D. Denis Pelletier J.A.
Certified
true translation
Brian
McCordick, Translator
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