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Citation: 2005TCC66
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Date: 20050119
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Docket: 2001-1236(IT)G
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BETWEEN:
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MAYA FORESTALES S.A.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Dussault J.
[1] These are appeals from assessments
made on May 5, 2000, under the Income Tax
Act (the Act), in respect of the appellant's 1994 to 1998
taxation years.
[2] The appellant is a corporation
incorporated in Costa Rica.
[3] The assessments are based on the
assumption that the appellant was a non-resident person,
that it carried on a business in Canada during the years in issue
and that it was therefore liable to pay tax on its taxable income
earned in Canada by virtue of subsection 2(3),
subparagraph 115(1)(a)(ii) and
paragraph 253(b) of the Act. The assessments
were made under subsection 152(7) of the Act and include a
late-filing penalty because the appellant never filed an
income tax return in Canada.
[4] During the years in issue, the
appellant offered some Canadians the opportunity to invest in a
teak-tree plantation of which it was the registered owner in
Costa Rica (Exhibits A-6, I-5, I-6, I-9 and I-10). As a
result, more than 80 Canadian investors purchased a lot of
land, or part thereof, on the teak-tree plantation that the
appellant owned in Costa Rica. They signed a contract with the
appellant to develop the lot, or part thereof, by planting and
growing trees with a view to cutting them and marketing the
timber.
[5] As an example, in consideration of
the sum of $10,000, the appellant offered an investor a lot or
part thereof, along with the right to plant 100 teak trees on the
lot, for $100, which is 1% of the amount of the investment. In a
separate contract, the appellant obtained a mandate to develop
the lot and plant trees on it in consideration of $9,900, which
is 99% of the amount of the investment. Each purchaser or
investor's right was simply registered with the appellant's
notary in Costa Rica, a certain Rodolfo Loria.
[6] In the contracts signed until
early 1997 at least, the appellant offered the investor the
opportunity to redeem his or her lot at a guaranteed redemption
price. At the end of an eight-year period, the investor
could exercise an option to transfer his or her lot to the
appellant within 180 days. The appellant guaranteed the
redemption for an amount equal to 70% of the total purchase price
and development fees; in the example chosen, the amount would be
$7,000. In order to do this, the appellant placed a part of
the amount received from the investor in escrow with
Lévesque Beaubien Geoffrion, a securities broker in
Montréal, so that it could produce the amount required to
redeem the lot at the end of the eight-year period.
[7] If, upon the expiry of the
eight-year period, the investor wanted the appellant to cut
and sell the timber, the appellant would retain an amount equal
to 40% of the net selling price of the timber as a cutting and
marketing fee.
[8] The contracts signed from 1997
onward stated that the appellant was asking the investor for
additional forest maintenance and engineering fees of 2% per
year, payable in U.S. currency, which were included in the 40%
cutting and marketing fee retained by the appellant. The
contracts did not indicate the amount used as the basis for
computing these additional fees of 2% per year payable in
U.S. currency, but it seems likely that the fees were a
percentage of the initial investment.
[9] The development fee of 99% payable
on signing the contracts and the additional fees of 2% per year
were both held out to be completely deductible in computing the
investor's income for income tax purposes.
[10] All the contracts tendered in evidence
were signed by Michel Maheux, who is designated as a
mandatary of the appellant. The evidence also shows that two
corporations incorporated in Canada, that is, Hexalog Ltd.
and Maya Inc., promoted investment in the appellant's
teak-tree plantation in Costa Rica.
[11] To obtain information about the product
sold to investors and determine the appellant's tax status,
Madeleine Lapointe, a tax avoidance officer with the
Department of National Revenue,
and Jean-Michel Richard, a technical auditor for
non-residents with the same department, began by meeting
Pierre Roberge, president of Maya Inc. and
representative of the appellant,
Maya Forestales S.A.
[12] The first meeting took place on
October 6, 1997, at the head office of
Maya Inc., located at 71 St-Alphonse Street
West in Thetford Mines, Quebec. At the meeting,
Mr. Roberge provided some explanations about his interests
in the appellant, its activities in Costa Rica and the role
of Maya Inc. in promoting and selling the proposed
investment in the appellant's teak-tree plantation in
Costa Rica, since Maya Inc. had a written mandate to
represent the appellant in Canada (Exhibit A-1,
Part 1). At Mr. Roberge's request, Michel Maheux
joined the others in the afternoon. He introduced himself as the
appellant's signing authority (Exhibit A-1, Part 2). He
provided additional explanations regarding the appellant's
incorporation, its activities in Costa Rica, the contracts
proposed to Canadian investors and the roles of various
individuals, including himself and Mr. Roberge, with regard
to the appellant's activities.
[13] The minutes of the meeting, signed by
Ms. Lapointe and Mr. Richard, state in particular that
all contracts with Canadian investors were signed in Canada and
then forwarded to Costa Rica. In his testimony, Mr. Maheux
said he actually brought the contracts to Costa Rica to sign
them there, a statement that squarely contradicts what is written
in the contracts themselves. Mr. Maheux also testified that
he completely divested himself of his financial interests in the
appellant in or about 1994 and 1995, and this was never mentioned
in the meeting of October 6, 1997―on the
contrary. In any event, Mr. Maheux introduced himself as the
appellant's signing authority. In fact, on November 13, 1995,
he personally signed a resolution, as the appellant's
[TRANSLATION] "delegated authority", to deposit
securities with the broker Lévesque Beaubien Geoffrion in
order to guarantee the appellant's redemption of the lots
acquired by the investors (Exhibits I-7 and
I-8). In addition, the "amended" notice of appeal
states that Mr. Maheux is the appellant's
representative. Moreover, as mentioned earlier, he signed all the
contracts tendered in evidence as the appellant's
mandatary.
[14] At the end of this first meeting,
Ms. Lapointe drew up a list of accounting records and
supporting documents that she felt she would need in order to
pursue her audit.
[15] On December 10, 1997,
Ms. Lapointe, along with another tax avoidance officer named
Jean-Guy Dupont, met with Pierre Roberge again. On this
occasion, Mr. Roberge provided additional information about
certain characteristics of the contracts signed between the
appellant and the investors and agreed to remit the accounting
records of Maya Inc. along with supporting documents.
However, it appears that he was not in possession of some of the
documents requested at the meeting of October 6, 1997.
In addition, Mr. Roberge informed Ms. Lapointe and
Mr. Dupont that he could not give them the appellant's
accounting records because Rodolfo Loria objected to that.
At the meeting, Mr. Roberge also made certain arguments
seeking to establish that the proposed investment in the
appellant's teak-tree plantation was not a tax shelter
because, as early as the meeting on October 6, 1997,
the representatives of the Department of National Revenue had
expressed the opinion that it was indeed a tax shelter.
[16] On December 17, 1997,
Maya Inc. filed a motion in the Court of Québec
(Civil Division) for a declaratory judgment stating that the
lots in Costa Rica, purchased by Quebec businesspeople, did
not constitute a tax shelter within the meaning of
section 1079.1 of Quebec's Taxation Act
(Exhibit A-4, Part 1).
[17] Maya Inc. also filed a motion in
the Federal Court of Canada (Trial Division) for a
declaration that the lots in Costa Rica, which it promoted and
which were purchased by Quebec businesspeople, did not constitute
a tax shelter within the meaning of section 237.1 of the
Act. On July 29, 1998, Rouleau J. issued an
order declining jurisdiction because, in his opinion, the matter
was one for the Tax Court of Canada to decide
(Exhibit A-3).
[18] On March 24, 1998,
Ms. Lapointe, still not having received the requested
documents concerning the appellant, sent a notice to the
appellant in Costa Rica and to Michel Maheux, in his
capacity as the appellant's signing authority, requiring that
they provide the appellant's accounting records and
supporting documents pursuant to section 231.6 of the Act
(Exhibit I-1). Mr. Maheux filed a motion
contesting this requirement in the Quebec Superior Court (Civil
Division) on June 19, 1998 (Exhibit A-4,
Part 2).
[19] On March 8, 1999, Allard
J. of the Quebec Superior Court rendered judgment on the
motion contesting the requirement under section 231.6 of the
Act and limited the scope of the requirement to such documents as
were necessary to audit the deductions claimed by the Canadian
investors, including the contracts and proofs of payment and a
document establishing the cost of the services and property sold
to Canadian taxpayers (Exhibit A-5).
[20] On July 7, 1999,
Jean-Michel Richard sent to the appellant in Costa Rica, to
the appellant, care of Maya Inc., to the attention of
Pierre Roberge, and to Michel Maheux a requirement to
file an income tax return for the 1994 to 1998 taxation years.
This was done after a fact check resulted in a finding that
the appellant was a non-resident person that carried on a
business in Canada during the years in issue and was therefore
subject to tax on the taxable income that it earned in Canada
under subsections 2(3) and 115(1) of the Act
(Exhibit A-8).
[21] On
August 30, 1999, Mr. Maheux apparently
sent a fax to Mr. Richard in response to this requirement.
The fax was not tendered in evidence.
However, Mr. Richard replied to it in a letter dated
September 30, 1999, setting out the facts on which he
based his conclusion that the appellant had carried on a business
in Canada. In the letter, Mr. Richard referred expressly to
the statutory presumption in paragraph 253(b) of the
Act.
[22] During his testimony, Jean-Michel
Richard spoke of an additional audit in August 1999 conducted at
Lévesque Beaubien Geoffrion. The audit made it possible to
obtain certain documents signed by Michel Maheux on behalf
of the appellant, including the aforementioned resolution that he
signed on November 13, 1995, as a [TRANSLATION]
"delegated authority." (Exhibits I-6, I-7 and
I-8).
[23] Ms. Lapointe referred to other
elements, which were discovered during her audit and which
indicated that the appellant carried on economic activity in
Canada, in particular, the fact that the appellant was listed in
the telephone directory and had an address and telephone number
in Canada matching those of Maya Inc.
(Exhibits I-2 and I-3).
[24] Ms. Lapointe and
Mr. Richard's testimony clearly show that the
authorities managed to obtain some of the information and
documents requested. However, it is just as clear that, following
the various challenges, judgments, meetings and discussions,
several documents that were considered essential, including the
appellant's tax returns, were never produced.
[25] Jean-Michel Richard authorized
the assessments in respect of the appellant for the years in
issue (Exhibit I-4) on the basis of the calculations
of Ms. Lapointe of the appellant's sales in Canada.
Those calculations were based on the information obtained
regarding Maya Inc.'s bank deposits, the information obtained
from the investors themselves, and the information supplied by
the ministère du Revenu du Québec.
[26] In late December 1999, the
appellant's income tax returns still not received,
Jean-Michel Richard recommended that the assessments be
made.
[27] The appellant still not having produced
the returns required, the assessments were finally made on
May 5, 2000 (Exhibits I-11 to I-16).
The assessments were based on the appellant's gross
sales because the appellant, having never filed a return, had
obviously never claimed any deductions.
[28] However, at the hearing, the respondent
acknowledged that the appellant had paid commissions equal to
12.5% of the total sales figure to various companies and
individuals and was therefore entitled to deduct an amount equal
to those commissions in computing its income for the years in
issue.
[29] Counsel for the appellant submitted
that the assessments must be vacated. The first ground for
this submission was that the appellant's activities are
devoid of Canadian character because the contracts between the
appellant and each investor pertain, first, to the sale of
property located in Costa Rica, and, second, to a mandate for
services performed entirely in Costa Rica. This would mean that
the appellant had no taxable income earned in Canada. Should the
Court determine that the appellant is subject to income tax in
Canada, counsel for the appellant submitted that its gross income
earned in Canada should equal the commissions paid. Therefore,
its income earned in Canada would equal zero.
[30] Counsel for the appellant also
submitted that the assessments of the appellant constitute double
taxation because the persons who received the commissions were
already taxed on those amounts.
[31] Lastly, in the "amended"
notice of appeal, counsel for the appellant also argued that the
limitation period had elapsed for the 1994, 1995 and 1996
taxation years, that the assessments were not made within a
reasonable time and that it was therefore for the respondent to
show that the assessments for the 1994 and 1995 taxation years
were correct since the appellant [TRANSLATION] "had not been
careless." I must admit that I have some trouble
understanding these submissions regarding the limitation period
and the reversal of the burden of proof. In any event, I will
deal with these submissions after addressing the fundamental
question, that is, whether the appellant was subject to income
tax in Canada, and, if so, with respect to what amount.
Analysis
[32] Paragraph 2(3)(b) of the Act
states that if a non-resident person carried on a business
in Canada at any time during a taxation year, it is subject, for
that year, to Canadian income tax. The tax is payable on its
taxable income earned in Canada, determined in accordance with
Division D of Part I of the Act.
Subparagraph 115(1)(a)(ii) of Division D establishes
that the taxable income earned in Canada is the amount that would
be determined under section 3 if the non-resident
person had no income other than incomes from a business carried
on by the non-resident person in Canada. In addition,
where a business is carried on partly in Canada and partly
outside Canada, paragraph 4(1)(b) requires a
reasonable allocation of the income, since only the taxable
income earned in Canada must be determined under
subparagraph 115(1)(a)(ii) of the Act.
[33] It should also be noted that
paragraph 253(b) of the Act establishes the following
irrebuttable presumption:
SECTION
253:
Extended meaning of "carrying on business".
For the purposes of this Act, where in a taxation year a person
who is a non-resident person or a trust to which Part XII.2
applies
(a)
. . .
(b) solicits
orders or offers anything for sale in Canada through an agent or
servant, whether the contract or transaction is to be completed
inside or outside Canada or partly in and partly outside Canada,
or
(c)
. . .
the person shall be deemed, in respect of the activity or
disposition, to have been carrying on business in Canadain the
year.
[34] A few general comments should be made
about this provision. First of all, it is quite clear that
Parliament's intent in creating the presumption was to
subject non-resident persons to Canadian tax provided they
carry out a minimum amount of commercial activity within
Canada's borders. It is equally clear that there can be
international elements or aspects to these transactions. It
should also be noted that it is not important that a commercial
transaction be legally completed on Canadian soil. Moroever, the
object of the solicitation, order or offer for sale need not have
any connection with Canadian territory. Indeed, the words
"in Canada" apply to the activity of soliciting,
ordering or offering anything for sale, not the object of that
activity, since the presumption establishes that the activities
themselves are what constitute carrying on a business. As for the
word "orders", or "commandes" in the
French version, standard dictionaries define the word, in its
commercial sense, as requests for goods or services.
It should also be recognized that the word
"anything", and its French equivalent "quoi que
ce soit", contain no restriction on the object of an
offer for sale; it can be tangible or intangible, moveable or
immoveable.[1]
[35] The phrase "quoi que ce
soit" is defined in Le Grand Robert de
la langue française, 2d ed., 1985, vol. VII, at
p. 974, as a "locution exprimant
l'indétermination au plus haut degré"
(a phrase denoting the greatest degree of indeterminacy.)
Moreover, the Oxford English Dictionary, 2d ed.,
1989, vol. 1, defines "anything" at
pp. 539-40 as "1. ... A combination of ANY
and THING, in the widest sense of the latter, with all the
varieties of sense belonging to ANY. ... 2. ... Thing
of any kind."
[36] Clearly, the purpose of
section 253 is to extend Canada's tax jurisdiction to
non-resident persons based on certain activities that they
carry out within Canada's borders. In this context, the
choice in paragraph 253(b) of terms as broad and
vague as "anything" in English, and "quoi que
ce soit" in French, certainly does not indicate that
Parliament intended to limit the object of the activities in
question-quite the contrary. In light of this, I do not see what
principle would enable me to limit the scope of the
provision.
[37] In the case at bar, there is no doubt
that the appellant, through a mandatary, offered for sale, in
Canada, lots or parts thereof on its plantation in Costa Rica;
that it solicited orders for services in connection therewith;
and that all of this was reflected in a sale, and then in a
contract of mandate to develop the lot sold and in another
contract of mandate under which the trees would be cut and the
timber would be marketed at a later time. While each of these
aspects was the subject of a separate contract, it is
clear―and this is consistent with the advertising brochure
(Exhibit I-5)―that the purpose of this
indivisible whole―this
"package deal"―was to sell a timber harvesting
business to investors; the appellant was given a mandate to carry
out all the requisite tasks for the investors, while promising
them generous tax deductions, not to mention the guaranteed lot
redemption available to them, at least until early 1997. That was
the specific type of investment―an investment that included
property and services―that the appellant was actually
offering investors in Canada, and it was that type of investment
for which each investor paid an overall amount upon signing the
contract (see Exhbit I-4, details of sales). It is also
important to note that the payment of the commissions was based
on the investor's acceptance of this package proposal or
offer, which included the sale of land (1%) and the advance
payment of the development costs (99%); these commissions,
totalling 12.5%, were paid to various individuals or corporations
acting as mandataries of the appellant.
[38] In my opinion,
paragraph 253(b) of the Act applies to these package
offers that the appellant made to Canadian investors―offers
that, once accepted, resulted in the aforementioned contracts,
which were moreover signed in Canada (though this fact is not
really important) by each investor and by Michel Maheux in his
capacity as the appellant's mandatary.
[39] It is known that the assessments were
based on the appellant's gross sales in Canada, and the
respondent acknowledged at the hearing that the commissions paid,
equal to 12.5% of those sales, must be allowed as a deduction in
computing the appellant's taxable income earned in Canada
within the meaning of subparagraph 115(1)(a)(ii) of
the Act.
[40] In his arguments against the
assessments, counsel for the appellant referred to Interpretation
Bulletin IT-420R3 - Non-Residents -
Income Earned in Canada, dated March 30, 1992. At
paragraph 10, the bulletin addresses in particular the reasonable
allocation of income and expenses that must be made when a
non-resident carries on a business both inside and outside
Canada, so that its taxable income earned in Canada can be
determined for the purposes of
subparagraph 115(1)(a)(ii) of the Act.
[41] Counsel for the appellant also referred
to Interpretation Bulletin IT-270R2 - Foreign Tax
Credit, dated February 11, 1991. More specifically,
paragraph 26 of the bulletin deals with the determination of
the territorial source of income. It states that the
determination of the place where a business or part thereof is
carried on necessarily requires a consideration of all relevant
facts but has been stated in general terms to be the place where
the operations in substance take place. The bulletin then sets
out the guidelines that the Department usually relies on in
determining where a particular type of business is carried on. If
the business involves the development and sale of real property,
what is considered is the place where the property is situated
and, if the business is a service business, the place where the
services are performed.
[42] My first comment is that these
statements, which are based on generally accepted common law
rules, must be understood in light of the context in which they
were made and cannot under any circumstances take precedence over
a statutory provision that contains an irrebuttable presumption
where the conditions necessary for the provision to apply have
been noted.
[43] In fact, paragraph 253(b) also
sets aside another common law rule, which places importance on
the place where contracts are formed (see Grainger and
Son v. Gough (Surveyor of Taxes) (1896), 3
T.C. 462 (H.L.)). Indeed, it specifies that the presumption
applies to the activities in question "whether the
contract or transaction is to be completed inside or outside
Canada or partly in and partly outside
Canada...".
[44] As stated earlier, it seems to me that
paragraph 253(b) clearly applies to the
appellant's activities in Canada. This is not however a
negation of its commercial activities abroad, particularly in
Costa Rica, where it likely draws another portion of its income.
This raises the issue of the reasonable allocation of revenue and
possible deductions for the purpose of determining its taxable
income earned in Canada under
subparagraph 115(1)(a)(ii) of the Act. The
appellant has consistently refused to file income tax returns in
Canada for the years in issue, and the assessments were made
merely on the basis of its gross sales, moreover using
information obtained from third parties. Subject to the
respondent's admission that 12.5 % of the total sales
was paid out as commissions and that the appellant can use this
as a deduction, the appellant provided no evidence of any kind
whatsoever to establish in a different way the taxable income
earned in Canada through activities included in the presumption
in paragraph 253(b) of the Act. There is no way for the
tax authorities to reasonably allocate the income when the
taxpayer itself refuses to provide the necessary information, and
there is no way for those authorities to grant deductions that
the taxpayer never claimed because it refused to file the tax
returns required.
[45] While counsel for the appellant
criticized the authorities for providing no breakdown of the
appellant's revenues and expenses, there is no escaping the
fact that the appellant did not propose any and did not provide
any evidence whatsoever on that point. It is perhaps helpful to
simply reiterate the principle that the taxpayer has the initial
onus of demolishing the assumptions on which the Minister relies
to make his assessment; see, inter alia, Johnston v.
M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195,
3 DTC 1182 and Hickman
Motors Ltd. v. Canada,
[1997] 2 S.C.R. 336, at paras. 91-98.
The assertion by counsel for the appellant that its income earned
in Canada is simply equal to the commissions paid (assuming it is
subject to tax in Canada) and is therefore equal to zero remains
a mere assertion and proves nothing at all.
[46] This brings me to issues raised by
counsel for the appellant and briefly referred to earlier: the
limitation periods in respect of the years 1994, 1995 and 1996,
and the reversal of the burden of proof regarding the years 1994
and 1995.
[47] First of all, the assessments for all
the years in issue are original assessments made under
subsection 152(7) of the Act, the appellant having filed no
returns for those years. The Act establishes no limitation period
for making an original assessment. It can therefore be made at
any time, unlike a reassessment or an additional reassessment,
which generally cannot be made after the normal reassessment
period defined in subsection 152(3.1) of the Act has
elapsed, except under the circumstances set out in
subsection 152(4) of the Act. Moreover, it is only in
respect of a reassessment made after the normal reassessment
period that the Minister has the initial burden of establishing
the facts that enable him to make an assessment after that
period.
[48] The remaining issue regards the making
of the assessments with dispatch. The facts referred to above
show that, from the very first meeting of
October 6, 1997, with Pierre Roberge and subsequently
with Michel Maheux, the tax authorities had problems obtaining
the documents they requested in order to be able to check the
appellant's and investors' situation. I went over the
various requests made by the authorities and the challenges by
Maya Inc. and Michel Maheux before the Court of Québec,
the Quebec Superior Court and the Federal Court (Trial Division).
Moreover, as I have stated several times, the appellant did not
file any income tax return for the years in issue, even after
formally being required to do so. All the challenges gave rise to
delays for which the tax authorities cannot be held responsible.
They were trying to obtain all the documents needed to do a
complete audit of the appellant's activities in connection
with soliciting Canadians to invest in its teak-tree
plantation in Costa Rica. It was only in late December 1999,
when all the recourses were exhausted and the last deadline given
to the appellant to file its tax returns was approaching, that
Jean-Michel Richard finally recommended that the assessments be
made. Since the appellant itself had, until then, still failed to
file any of its returns, it is wholly inappropriate for it to
invoke the authorities' lack of dispatch. It is true
that the assessments were made only on
May 5, 2000, and that the time that elapsed
between Jean-Michel Richard's recommendation and the
date of the assessments has not been explained. Even if one
assumes that this delay can be blamed on the authorities, it is
clearly established that failure to act with dispatch is not a
basis for vacating an assessment (see, inter alia, The
Queen v. Ginsberg, [1996] 3 C.T.C. 63,
96 DTC 6372 (F.C.A.),
[1996] F.C.J. No. 777 (QL);
Carter v. The Queen, [2001]
4 C.T.C. 79, 2001 DTC 5560 (F.C.A.),
[2001] F.C.J. No. 1435 (QL); and Lassonde
v. The Queen, 2003 DTC 1289 (T.C.C.), [2003]
T.C.J. No. 560 (QL). This is especially true where, the
assessments were made not under subsection 152(1) after
examining filed returns, but rather under subsection 152(7)
of the Act in the absence of a tax return for each of the years
in issue.
[49] In light of the foregoing, the appeals
from the assessments made in respect of the appellant's 1994,
1995, 1996, 1997 and 1998 taxation years are allowed, and the
assessments are referred back to the Minister for reconsideration
and reassessment on the basis that the appellant is entitled to
deduct the commissions, equal to 12.5% of the sales in Canada,
for the purposes of computing its taxable income earned in Canada
for each of the years in issue.
[50] With costs to the respondent.
Signed at Ottawa, Canada, this 19th day of January 2005.
Dussault J.
Translation certified true
on this 22nd day of March 2005
Sophie Debbané, Revisor
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