Citation:
2015 TCC 297
Date: 20151209
Docket: 2011-1393(IT)G
BETWEEN:
LINE
DUROCHER,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent,
Docket:
2011-1274(IT)G
AND BETWEEN:
XAVIER
VALLERAND,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent,
Docket:
2011-1284(IT)G
AND BETWEEN:
G.
MARIUS BÉRUBÉ,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent,
Docket:
2011-1305(IT)G
AND BETWEEN:
AПSHA
BLONDEAU,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent,
Docket: 2011-1314(IT)G
AND BETWEEN:
CATHERINE
SANSOUCY,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent,
Docket:
2011-1349(IT)G
AND BETWEEN:
CLAUDINE
LAGARDE,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent,
Docket:
2011-1350(IT)G
AND BETWEEN:
ÉLISE
LAGARDE,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent,
Docket:
2011-1351(IT)G
AND BETWEEN:
FRANCIS
S. LABONTÉ,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent,
Docket: 2011-1352(IT)G
AND BETWEEN:
GENEVIÈVE
LAGARDE,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent
Docket:
2011-1356(IT)G
AND BETWEEN:
NATHALIE
MONETTE,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent,
Docket:
2011-1357(IT)G
AND BETWEEN:
MARISOL
RINGUET,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent,
Docket:
2011-1358(IT)G
AND BETWEEN:
MARIE‑PIER
BLONDEAU,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent,
Docket:
2011-1360(IT)G
AND BETWEEN:
FRANCINE
BUSSIÈRES,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent,
Docket:
2011-1363(IT)G
AND BETWEEN:
VINCENT
LAGARDE,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent,
Docket:
2011-1365(IT)G
AND BETWEEN:
OLIVIER
RINGUET,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent,
Docket:
2011-1272(IT)G
AND BETWEEN:
LOIK
VALLERAND,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rip J.
[1]
The principal issue in all appeals is whether
the appellants may claim a capital gains deduction in 2006 in accordance with
subsection 110.6(2) of the Income Tax Act ("Act"). To
decide the issue I must determine whether at all relevant times the shares of
Gestion RJCG Inc. ("RJCG") were "qualified small business
corporation shares" as defined by subsection 110.6(1).
[2]
A question to be answered is whether throughout
the 24 months immediately preceding the disposition of the shares of RJCG
by its shareholders, another person had a right under a contract, either
immediately or in the future, absolutely or contingently, to acquire the shares
of RJCG and therefore "be deemed to have the same position in relation to
control of the corporation as if the person owned the shares at that
time": subsection 125(7) and paragraph 251(5)(b) of the Act.
[3]
In assessing the appellants, the Minister of
National Revenue ("Minister") assumed, among other things, that Aviva
Canada Inc. ("Aviva") held an option to acquire the shares of RJCG
notwithstanding a unanimous shareholders agreement (“Shareholders Agreement”), signed
in 2002, provides for an option to Aviva to acquire shares of Gestion Lagarde Massicotte Inc. (“Gestion Lagarde”). The Crown argued that as of
December 20, 2005, Aviva had the right to acquire the shares of RJCG and
at that date, RJCG ceased to be a Canadian controlled private corporation:
subsection 125(7).
[4]
The appellants are Claudine Lagarde,
Vincent Lagarde, Geneviève Lagarde, Élise Lagarde,
Line Durocher, Francis S. Labonté, Nathalie Monette,
Marisol Ringuet, Olivier Ringuet, Catherine Sansoucy,
Xavier Vallerand, Loik Vallerand, Aïsha Blondeau, Marie‑Pier Blondeau,
G. Marius Bérubé and Francine Bussières (“nine individuals”).
[5]
All the appellants realized a taxable capital
gain following the 2006 disposition. They then claimed a capital gain
deduction.
[6]
The appellants Nathalie Monette,
Francine Bussières, Élise Lagarde, Claudine Lagarde,
G. Marius Bérubé, Marie‑Pier Blondeau,
Vincent Lagarde and Aïsha Blondeau also claimed minimum tax
carry-over deductions for the 2007 and 2008 taxation years. As for the
appellants Line Durocher, Genviève Lagarde and Francis Labonté,
they also claimed this deduction for the 2008 taxation year.
[7]
Three corporations, other than RJCG, have been
identified in the pleadings and are relevant to the disposition of the appeals.
They are:
(a) Dale Parizeau L.M. Inc. (“Dale
Parizeau” or “DPLM”), an insurance brokerage company in Quebec;
(b) Gestion Lagarde, a company that
holds all the common and preferred shares in Dale Parizeau; and
(c) Aviva Canada Inc. (“Aviva”),
formerly CGU Group Canada Ltd. ("CGU"), incorporated under the laws
of Ontario, was a wholly owned subsidiary of Aviva International Holdings
Limited ("Aviva International"), a non‑resident corporation. Aviva
carried on a general insurance business.
[8]
RJCG held all the common shares in Gestion
Lagarde, while Aviva held all the preferred shares in Gestion Lagarde.
[9]
Until April 2002, a group of nine persons living
in Canada, namely Carmen Bérubé, Maurice Bussières,
Sonia Blondeau, Christian Dumais, Robert Lagarde,
Luc Labonté, Jean‑Pierre Ringuet, François Vallerand and Jean‑Charles Massicotte
( the “nine shareholders”), held the capital stock shares in RJCG. Each
individual held 6,400 common shares in RJCG, except for Robert Lagarde and
Jean‑Charles Massicotte who each held 47,603. They were also all
managers at Dale Parizeau.
[10]
On April 1, 2002, each of the nine individuals
sold their shares in RJCG for fair market value to a family trust residing in Canada.
The appellants are the beneficiaries of these family trusts.
[11]
On April 12, 2002, Gestion Lagarde, the
shareholders in Gestion Lagarde, namely RJCG and CGU (Aviva) and Gestion
Lagarde as sole shareholder of Dale Parizeau and Dale Parizeau entered
into a unanimous shareholders agreement ("Shareholders Agreement").
Gestion Lagarde identified itself as a "Corporation" in the
agreement. The "Shares" are identified as those of Gestion Lagarde. The
Shareholders Agreement defined and regulated the respective rights and
obligations of the parties as shareholders of Gestion Lagarde. Gestion Lagarde,
as sole shareholder of Dale Parizeau, acknowledged that the Shareholders
Agreement also constituted a unanimous shareholders agreement of
Dale Parizeau. The Shareholders Agreement was subject to the laws of
Québec.
[12]
The parties to the Shareholders Agreement
recognized that Aviva had been granted an option, with various rights ("put/call")
("option"), to subscribe to and purchase a number of Class "A"
shares in the capital stock of Gestion Lagarde, which, when issued and added to
the number of Class "A" shares already issued would result in
the shares subject to the option representing 66.305 per cent of all
issued Class "A" shares. (The Class "A" shares
and Class "F" shares of the capital stock of Gestion Lagarde are
referred to as "Shares".) The appellants state that this is not a
matter affecting the appeals.
[13]
The April 12, 2002 Shareholders Agreement
set out the following provisions:
6. CGU
OPTION
The parties
recognize that CGU has been granted the option to subscribe to and purchase
that number of Class "A" Shares (the "Optioned Shares")
which, when issued and added to the issued and outstanding
Class "A" Shares, would result in the Optioned Shares
representing 66.305% of the resulting issued and outstanding
Class "A" Shares (which include the Optioned Shares), for a
price of one dollar ($1.00) per Share, pursuant to a restated and amended
option agreement entered into between CGU and the Corporation as of
April 12, 2002 (the "CGU Option"). The Shareholders
shall, and shall cause their respective nominees to the board of directors of
the Corporation to, give effect to the CGU Option and cause the Corporation to
issue the appropriate number of Shares to CGU upon the exercise of the CGU
Option.
7. DISPOSITION
OF SHARES
7.1 Put
by RJCG
At any time after May 1, 2005, RJCG will be entitled to put all
but not less than all its Shares to CGU (which notice may be given six months
prior to May 1, 2005), and CGU will, in such event, purchase such Shares at
Fair Value or cause such Shares along with all Shares held by CGU together with
the CGU Option to be purchased by a third party at fair market value.
7.3 Call
on RJCG Shares by CGU
CGU will be entitled to require RJCG to sell on
May 1, 2005, and any May 1 thereafter, all but not less than all of
its Shares to CGU upon giving six (6) months’ prior notice to RJCG, (which
notice may be given six months prior to May 1, 2005), and CGU will, in
such event, purchase such Shares at their Fair Value increased by an amount
equal to the following:
…
and RJCG shall be obliged to sell such Shares at such purchase
price.
7.4 Closing of Call on RJCG
Shares by CGU
The sale of Shares pursuant to the call in
Section 7.3 will take place at the principal office of the Corporation on
the date indicated in CGU's notice, which date shall be within thirty (30) days
following expiry of the six (6) months' notice period set forth in
Section 7.3.
[14]
Article 18.1 of the Shareholders Agreement permitted
a modification of the Agreement with the consent of all the parties but any
change would not take effect until a document setting out such change or
modifications is signed by all the parties. Article 18.6 provided that:
The Agreement shall be governed and construed in accordance with the
laws of the Province of Quebec and the federal laws of Canada applicable therein.
[15]
In 2005 and 2006, the Shareholders Agreement was
subject to several amendments and attempts to amend.
[16]
By letter dated September 16, 2005, from
Aviva to RJCG, Gestion Lagarde and Dale Parizeau, the parties agreed to
free Aviva of its obligation in the Shareholders Agreement to give six months'
notice to exercise the option on May 1, 2006 (Article 7.3) and agreed
that from thereon Aviva could give notice until February 1, 2006. In
consideration of the change, Aviva agreed to pay Gestion Lagarde $400,000.
[17]
Soon after the corporations agreed to the terms
of the letter of September 16, 2005, the nine individual shareholders of
RJCG added their signatures to the letter agreeing to its terms. I note that
earlier in the year by agreement dated April 1, 2005, the nine shareholders
had transferred their shares in RJCG to family trusts. A directors' resolution
of RJCG approving the transfers and the actual share transfer is dated
April 1. Aviva executed its acceptance of the terms of the letter on
October 13, 2005.
[18]
Both the Shareholders Agreement and letter of
September 16, 2005, were signed on behalf of Aviva by Ross Betteridge
who, at the time, was Chief Financial Officer of Aviva, and another officer of
Aviva. At trial, Mr. Betteridge stated that Aviva wanted to purchase the
shares of Gestion Lagarde so as to prevent any competitor acquiring
Dale Parizeau. In his letter of September 16, Mr. Betteridge
advised that Aviva would be in a position to give formal notice whether it
would acquire RJCG no later than February 1, 2006.
[19]
Another letter, dated October ‑,
2005 (sic) was addressed to Aviva but apparently drafted by Aviva and sent
by email to Ms. Sonia Blondeau, Vice President – Finance and
Chief Information Officer of Dale Parizeau. This letter clarified that Aviva
would pay RJCG $400,000 in consideration for amending the Shareholders
Agreement on September 16. The nine individuals and the corporations all
signed the letter agreeing to its contents. Aviva accepted the terms of the
letter on October 27, 2005.
[20]
The next amendments are in a letter dated
December 20, 2005, again originating with Aviva; one in the form of a
letter, the other in the form of amendments to the Shareholders Agreement and
attached as a Schedule to the letter entitled "Amendments to the Unanimous
Shareholders Agreement made on September 20th, 2005".
Section 7.3 of the Shareholders Agreement was further amended, among other
things, so that Aviva was not required to give six months prior notice to
purchase the Shares of Gestion Lagarde but instead may give prior notice to
RJCG at any time from the date of the letter until and including March 3,
2006.
[21]
In the letter of December 20, Aviva also
agreed, at page 2:
…
a) that
in the event it provides notice to RJCG requiring it to sell to Aviva its shares,
as outlined above, Aviva agrees to purchase the shares held directly by the
individual shareholders of RJCG;
…
[22]
A recital to the Schedule to the letter of
December 20 stated that "for fiscal purposes the individual
shareholders of RJCG wish to transfer their shares of the capital stock of RJCG
to family trusts" and the parties have agreed to such transfers. I note
that the RJCG shares had already been transferred to the trusts. The Schedule
also provided that all provisions of the Shareholders Agreement that apply to
individual shareholders of RJCG also apply to the family trusts of each
individual.
[23]
The letter of December 20 was signed by
each of the corporations, RJCG, Gestion Lagarde and Dale Parizeau and the
nine individuals. Whether the individuals signed as shareholders, trustees or
otherwise is not apparent from the letter. The Schedule itself was signed only
by the four corporations.
[24]
It is this letter of December 20, 2005, and
the Schedule that the respondent argues granted Aviva the option to acquire the
shares of RJCG.
[25]
By letter dated March 29, 2006, the parties
agreed to again amend the notice provision in Section 7.3 of the Shareholders
Agreement, among other provisions. The contents of the letter were agreed to by
three corporations and nine individuals. Again, from the face of their
signatures, the capacity of the nine individuals was not identified. Ms. Blondeau
stated the nine shareholders signed as officers and executives of the
corporations.
[26]
Aviva prepared a letter, dated April 17,
2006, addressed to itself for signature by RJCG, Gestion Lagarde,
Dale Parizeau and the nine individuals.
[27]
The letter referred to the December 20,
2005, letter purporting to amend section 7.3 of the Shareholders Agreement
"such that the exercise by Aviva of its call right thereunder would result
in the acquisition of the shares held by each of the individual shareholders of
RJCG in RJCG instead of the acquisition of the [shares] of Gestion
Lagarde". Ms. Blondeau did not agree that the Shareholders Agreement was
so amended. She was also unaware at the time that Aviva planned to assign its
option to 1695711 Ontario Inc. ("Newco"). She did say three
corporations and nine individuals refused to agree to the execution and
delivery of any share purchase agreement by Aviva or Newco and each of the
shareholders of RJCG. The letter was not signed by any of the corporations or
individuals.
[28]
In any event on the next day, April 18,
2006, Aviva gave written notice to RJCG that it was exercising its call right
under Section 7.3 of the Shareholders Agreement, as amended, to acquire
the shares of RJCG. It also agreed to subscribe to 572,449
Class "A" shares of Gestion Lagarde. RJCG owned 550,000
Class "A" shares. Aviva would therefore own 51 per cent of
the Class "A" of Gestion Lagarde shares and all of the shares of
RJCG. Aviva would not be acquiring all of the shares of Gestion Lagarde from
RJCG as originally contemplated in the Shareholders Agreement.
[29]
By agreement dated as of April 28, 2006 ("Rollover
Agreement") Aviva transferred its rights under the Shareholders Agreement,
as amended, to Newco in consideration of 1,000 Class "F" shares
in the capital of Newco.
[30]
In another agreement, the "Holdback
Agreement", also dated as of April 28, 2006, the sale of the shares
of RJCG to Newco was acknowledged and agreed. According to one of the recitals
to the Holdback Agreement:
WHEREAS a call notice was delivered on
April 18, 2006 whereby Aviva exercised its call right under
Section 7.3 of the Unanimous Shareholders Agreement (the "Call
Notice") and in accordance therewith required the sale to Aviva of the
shares held by each of the individual shareholders of RJCG in RJCG (the "RJCG
Shares"), such sale to occur on April 28, 2006 (the "Acquisition
Date"):
[31]
Each of the Vendors of the shares of RJCG consented
in the Holdback Agreement to the assignment by Aviva to its "right to
acquire the RJCG shares pursuant to the call notice."
[32]
Article 3.1 of the Shareholders Agreement
states that:
DPLM shall be
managed by a board of directors of four (4) directors, of whom two shall be
nominated by CGU (the "CGU Directors of DPLM") and two shall
be nominated by RJCG (the "RJCG Directors of DPLM").
…
Resolutions,
decisions or approvals of the board of directors of DPLM shall not be effective
unless consented to in writing by all of the directors of DPLM or, if
considered at a meeting, where a quorum of the directors is present at the time
such resolution, decision or approval is considered and such resolution,
decision or approval is passed by a majority of the directors present, provided
that such majority shall include the affirmative vote of the CGU Directors of
DPLM and that the chairman of the board of directors of DPLM shall not have a
second or casting vote.
…
[33]
The trustees of each family trust as well as
Newco, RJCG and Dale Parizeau executed the Holdback Agreement. The
obligations of each trust were guaranteed by one of the nine erstwhile
shareholders who transferred his or her shares in RJCG to their respective
trusts.
[34]
The appellants' argument, as I understand it, is
two‑fold:
(a) the Shareholders Agreement is absolutely null; and
(b) the right of Aviva, described in
the Shareholders Agreement, was the right to acquire shares of Gestion Lagarde
and not those of RJCG and thus the bases of the assessments are wrong; what was
eventually acquired were shares of RJCG and at no time within the
24 months of the disposition of the RJCG's shares did Aviva have an option
or right to acquire the shares.
[35]
The question whether the Shareholders Agreement
is absolutely null is of great importance and if the Shareholders Agreement is
absolutely null, then I need not consider the issue relating to the Income
Tax Act. I shall consider first the appellants' submission that the Shareholders
Agreement is absolutely null.
[36]
The appellants state the Shareholders Agreement
is absolutely null by virtue of article 1417 of the Civil Code of
Quebec ("C.C.Q.") and section 148 of the Act respecting
the distribution of financial products and services ("Act
respecting financial services"), in force in Quebec at all relevant
times. Article 1417 declares that:
|
A contract is absolutely null where the
condition of formation sanctioned by its nullity is necessary for the
protection of the general interest.
|
La nullité d'un contrat est absolue
lorsque la condition de formation qu'elle sanctionne s'impose pour la
protection de l'intérêt général.
|
[37]
Section 148 of the Act respecting
financial services restricted the ability of certain financial institutions
to own more than 20 per cent of the voting shares of corporations
such as Dale Parizeau:
|
Not more than 20% of the shares of a firm
or voting rights attached to its shares may be held directly or indirectly by
financial institutions, financial groups or legal persons related thereto.
|
Les actions d'un cabinet ou les droits de
vote qui y sont afférents ne peuvent être détenus, directement ou
indirectement, à plus de 20%, par des institutions financières, des groupes
financiers ou des personnes morales qui leur sont liés.
|
|
. . .
|
[…]
|
[38]
As for section 147 of the Act respecting
financial services, Aviva is a "financial institution", namely a
"financial institution other than an insurer engaging exclusively in the
business of reinsurance". Also, for the purposes of section 147,
Dale Parizeau meets the definition of "firm", namely "a
firm registered for the damage insurance sector that acts through a damage
insurance broker and does not engage exclusively in the business of
reinsurance".
[39]
The Autorité des marchés financiers ("AMF")
is responsible for administering the Act respecting financial services. Its
mission in administering this act is to ensure the protection of the public
regarding the exercise of the activities governed by the Act.
[40]
Also under section 184, the AMF shall ensure
compliance with the provisions of the Act respecting financial services
and its regulations that govern certificate holders and firms, among others.
[41]
The appellants argued that the Court must find
that Article 7.3 of the Shareholders Agreement is contrary to public order
and is therefore null by virtue of the effect of section 148 of the Act
respecting financial services prohibiting the transaction described in the Shareholders
Agreement, that is, the sale of 100% of the shares of Gestion Lagarde to Aviva,
coupled with the AMF's mandate to protect the public.
[42]
Article 1413 of the C.C.Q. states
that:
|
A contract whose object is prohibited by
law or contrary to public order is null.
|
Est nul le contrat dont l'objet est
prohibé par la loi ou contraire à l'ordre public.
|
[43]
Article 1418
of the C.C.Q. provides that:
|
The absolute nullity of a contract may be
invoked by any person having a present and actual interest in doing so; it is
invoked by the court of its own motion.
|
La nullité absolue d'un contrat peut être
invoquée par toute personne qui y a un intérêt né et actuel; le tribunal la
soulève d'office.
|
|
A contract that is absolutely null may
not be confirmed.
|
Le contrat frappé de nullité absolue
n'est pas susceptible de confirmation.
|
[44]
A contract that
is null absolutely is deemed never to have existed and, in such case, each
party is bound to restore to the other what each received under the contract.
[45]
First of all,
before entering the discussion of absolute nullity of the Shareholders
Agreement, I must concede that it is the Quebec Superior Court, not the Tax
Court of Canada, that has jurisdiction to declare a contract absolutely null.
The appellants may have proceeded to the Quebec Superior Court for such a
declaration before appearing in this Court, but they did not.
[46]
Nevertheless,
notwithstanding that the court of competent jurisdiction has not made any
declaration of nullity of the Shareholders Agreement, as amended, this Court
has jurisdiction to dispose of an appeal by dismissing or allowing the appeal:
subsection 171(1) of the Act. In considering whether to dismiss or
allow an appeal the trial judge must consider the bona fides of
contracts, including the validity of a contract and any of its provisions.
[47]
Under section 148 of the Act respecting
financial services, no more than 20% of the shares in a firm or voting
rights attached to the shares may be held directly or indirectly by financial
institutions, financial groups or legal persons related thereto. In the
appellants' view, Articles 6 and 7.3 of the Shareholders Agreement violate
section 148 of the Act respecting financial services.
[48]
The respondent alleged that Aviva never held
shares in Dale Parizeau in any manner. She claimed instead that Aviva held a right
to acquire said shares, but never actually held the shares related to the
acquisition right. Therefore, Aviva did not violate section 148 of the Act
respecting financial services.
[49]
The appellants challenge the respondent's
position on this, indicating that the effect of influence is the same whether there
is a right to acquire or ownership of more than 20% of the capital-stock shares
of a firm.
[50]
Whether, on the
facts of the appeal, the right of Aviva to acquire more than
20 per cent of the shares of Gestion Lagarde violated the spirit and
object of section 148 of the Act respecting financial services may be rather moot. Until such time as the
contemplated transaction closed, it is arguable that Aviva could have
carved up its rights to acquire the shares among other persons so that, at
closing, it would acquire not more than 20 per cent of the target
company. And, in fact, Aviva did so.
[51]
The interpretation
of the words "shares [that] may be held directly or indirectly …" in section 148
of the Act respecting financial services cannot be said to be influenced
by the deeming provision of subparagraph 251(5)(b)(i) of the Act.
The words of section 148 speak of actual ownership, "shares …
held", not influence of control of the corporation due to a right to
acquire shares.
[52]
As far as section 148
of the Act respecting
financial services
is concerned, neither Aviva nor an assignee "held" or owned shares of
Gestion Lagarde or RJCG before April 28, 2006. However, prior to
April 28, 2006, Aviva, on the particular facts before me, may have been
deemed by a different statute of a different jurisdiction, the Act, to be in the same position in relation to the control of Gestion
Lagarde or RJCG as the shareholders of those corporations. One ought not
confuse a provision in one statute with a provision in another statute of a
different authority.
[53]
Nevertheless, if I am
wrong that Aviva's right to acquire shares did not violate section 148 of
the Act respecting
financial services,
then, I must consider whether or not the Shareholders Agreement is null
absolutely. Article 18.6 of the Shareholders Agreement provided for the severability
of illegal portions of the Agreement. Thus, Article 7.3 of the Shareholders
Agreement may be null absolutely but the rest of the Agreement would continue
in existence.
[54]
Absolute nullity is a general law sanction, and
its application is based on article 1413 C.C.Q.
[55]
The principle of the invalidity of a contract
that leads, in one way or another, to a prohibited legal operation is also
affirmed at section 41.3 of the Interpretation Act: "[p]rohibitive
laws entail nullity, even if nullity is not pronounced therein."
[56]
Thus, when a law of public order prohibits
something, [translation] "the
contract that violates it is null, although this sanction might not even be
mentioned."
[57]
This rule of interpretation is not absolute,
however, and may very well be overturned when justified under the
circumstances. Moreover, a peremptory norm may be sanctioned other than by
invalidating the contract in question.
[58]
To determine whether the violation of a right
outside civil law leads to the nullity of the contract, the position Professor
Jobin defended in 1985 must be considered, namely that a textual analysis of the legislation is required.
[59]
In her article on sanctions associated with laws
of public order, Michelle Cumyn summarizes Professor Jobin's position
well as follows:
[translation]
When the
prohibition specifically targets a particular contract, the trade of a
particular non-conforming good or the provision of a particular service without
the required authorization, the contract must be considered null. On the other
hand, when the legislator has merely imposed certain duties on a person subject
to a sanction, it is not relevant to apply nullity. In the first case, the
contract would directly violate the law, and in the second, there would be an
indirect violation.
[60]
Professor Jobin also gives the example that [translation] "it is one thing to
prescribe, subject to a fine, that all dwellings must have at least two exits,
and completely another to defend renting an apartment that does not have two
exits.
[61]
Jean Pineau, Danielle Burman and Serge Gaudet also
defend Professor Jobin's opinion that [translation]
"if the legislator does not provide specific directions on the fate of the
contract, should there be a violation of the law, one must question whether the
objectives of the standard require the contract to be nullified. The
presumption of nullity under section 41.3 of the Interpretation Act is
merely a guide."
[62]
For example, a law may very well dictate that
all cars must have a legible serial number, without necessarily leading to the
conclusion that the sale of a vehicle is null if there is no serial number or
if the number is not legible.
[63]
Moreover, Michelle Cumyn writes that in
analyzing whether to apply absolute nullity, one should ask if, on the one
hand, this sanction is necessary to ensure compliance with the law, while
considering, on the other hand, the disadvantages likely to result from the
sanction of nullity for the parties and certain third parties. She adds that
when a monitoring authority is responsible for enforcing the law, and the
authority has a variety of preventive sanctions at its disposal, absolute
nullity should be disregarded.
[64]
This is the situation in the present case. Under
section 184 of the Act respecting financial services, the AMF is the
body responsible for the compliance with this act; it ensures the protection of
the public with regard to the activities governed by the Act respecting
financial services.
[65]
Additionally, I have trouble applying the
sanction of absolute nullity of the contract when the legislator provided the
appropriate sanction at section 485 of the Act respecting financial services:
485. Unless
otherwise specifically provided, every person that contravenes a provision
of this Act or the regulations is guilty of an offence and is liable to a
minimum fine of $2,000 in the case of a natural person and $3,000 in other
cases, double the profit realized or one fifth of the sums entrusted to or
collected by the person, whichever is the greatest amount. The maximum fine is
$150,000 in the case of a natural person and $200,000 in other cases, four
times the profit realized or half the sums entrusted to or collected by the
person, whichever is the greatest amount.
…
[66]
The Quebec Court of Appeal, in Elge
financialease Inc. v. Dépanneur Kildare Enr. noted the importance of applying the absolute nullity sanction with
restraint and diligence.
[67]
In that case, Dépanneur Kildare had signed a
leasing contract with Elge for financing to use a rotisserie provided by N.A. Credit Services Inc. A few months later, Dépanneur
Kildare realized that the rotisserie did not conform to the standards required
under the Electrical Installations Act. It complained to the supplier, but
to no avail. It therefore decided to stop making rental payments to Elge, and
offered to return the rotisserie. Elge refused this offer and took action for
the amount of rent owing. The Court of Quebec maintained Elge's action and ordered
Dépanneur Kildare to pay the rent in arrears. On appeal from this decision, Dépanneur
Kildare alleged that the lease was an absolute nullity, considering the
rotisserie was non-compliant.
[68]
The Quebec Court of Appeal dismissed the appeal.
Per Justice Rothman, the Court noted that the object of the contract was merely
to obtain financing, which was received. Justice Rothman stated the following
about the concept of absolute nullity:
In principle, of
course, the object of an obligation or contract must not be something forbidden
by law…and prohibitive laws import nullity…. But application of these principles
has evolved over the years to meet changing needs and realities…
Not all contracts
which violate a law or regulation, however indirectly or theoretically, must be
considered absolutely null. The theory of public order and nullity must be
applied with due regard to the nature of the law and the violation as well as
the nature of the contract.
[69]
It is on this
basis that I find that the Shareholders Agreement, and in particular
Section 7.3 of the Agreement, is not absolutely null and is a "bona
fide" agreement.
[70]
I now turn to
consider whether the shares of RJCG were "qualified small business
corporation shares" of the appellants immediately before they were
disposed of in 2006.
[71]
During the course
of reviewing the evidence I had the Registrar of the Court write to counsel
with the following question:
[translation]
Supposing the
Unanimous Shareholders Agreement dated April 12, 2002, is not absolutely null,
does the fact that Aviva Canada Inc. ("Aviva"), a corporation
controlled by a non-resident, acquired—in the Agreement—an option to purchase
the majority participation in Gestion Lagarde Massicotte Inc.
("Lagarde") have repercussions on the status of Lagarde and Dale
Parizeau C.M. Inc. ("D.P.") as Canadian-controlled private
corporation [subsection 125(7) and paragraph 251(5)(b)] in 2002 and as a result, the shares in Gestion RJCG Inc.
("RJCG") ceased to be qualified small business corporation shares [paragraph
110.6(1)(c)]? (No
evidence was submitted regarding the fair market value of the RJCG or Lagarde’s
assets [paragraph 110.6(1)(c.1)]).
[72]
In their reply to the letter of the Registrar
counsel for the appellants reviewed the facts pointing out that Aviva never
exercised the option to become owner of the shares of Gestion Lagarde. Further,
they argued that the shareholders of RJCG were not bound by the Shareholders
Agreement and the Shareholders Agreement did not apply to the shareholders of
RJCG. Their analysis of my request was as follows:
[translation]
It is the
appellants’ opinion that the respondent abandoned in fact and in law this new
argument raised by your question, namely that it is possible that the shares of
RJCG are not qualified small business shares, even though RJCG is a CCPC. This would
be found in the composition of its assets.
Therefore, although
under 251(5(b)(i), GLM might
be disqualified as a CCPC, and you would have to rule that the option is not
absolute nullity, the shares in RJCG could still be eligible small corporation
shares on the basis that RJCG is a CCPC and that the composition of its assets
respects the standards set out in the definition of "qualified small
business corporation share" at subparagraph 110.6(c)(i) and
(ii) ITA, in that more than 50% of the fair market value of RJCG's assets can
be attributed to elements other than shares of GLM.
Since the
transaction took place in April 2006, more than nine years ago, any evidence to
prove or contradict the value of the elements in RJCG's assets is no longer possible.
The appellants respectfully submit that, in accordance with subsection 152(9)
ITA, the Court should not allow a new argument to be introduced based on the
question you asked.
There is
certainly confusion about which company is covered by the option, but we must
remember that it is the CRA that made the assessments and determined their
basis, namely that the option was for shares in RJCG whereas the option is for
shares in GML.
[73]
Obviously, the Crown does not agree with the
appellants. With respect to the assets of RJCG, respondent's counsel referred
to the testimony of Sonia Blondeau that both RJCG and Gestion Lagarde were
only management companies ("sociétés de gestion").
[74]
Gestion Lagarde held 100 percent of the
shares of Dale Parizeau, the operating company. And all of the common shares of
Gestion Lagarde were owned by RJCG. Neither Gestion Lagarde nor RJCG carried on
any business activity, according to Ms. Blondeau.
[75]
An immediate result of the parties to the
Shareholders Agreement on April 12, 2002, granting the right to acquire
the common shares of Gestion Lagarde, was that RJCG, Gestion Lagarde and Dale‑Parizeau
all lost certain benefits as to status under the Income Tax Act.
[76]
Aviva, a non‑resident controlled
corporation, was deemed by paragraph 251(5)(b) to have the same
position in relation to the control of Gestion Lagarde as if Aviva owned the
shares. Paragraph 110.6(14)(b) refers to rights cited in
paragraph 251(5)(b). Rights in paragraph 251(5)(b) are
to be taken into account to determine “Canadian-controlled private corporation”
status as defined in paragraph 125(7). However, paragraph 251(5)(b) carves out specific exceptions when determining control by the
existence of an option. These exceptions where the right to acquire shares is
contingent on the death, bankruptcy or permanent disability of an individual are
of a relieving nature and are intended to accommodate provisions frequently
found in shareholders’ agreements which govern the purchase and sale of shares. If paragraph 110.6(14)(b) shelters shareholders’
agreements in purchase and sale agreements, it would be wholly unnecessary for
the Parliament to carve out specific exceptions due to involuntary and
uncertain events that are commonly found in shareholders’ agreements. Paragraph 110.6(14)(b) has no application to the facts
at bar.
[77]
The decision of this court in Chartier c. R.,
2007 TCC 37, was brought to my attention. In that case an “Option
Agreement,” signed the same day as a purchase and sale agreement, was envisaged
in the original share purchase agreement, thereby making the right to acquire
additional shares a “right under a purchase and sale agreement.” The “Option
Agreement” was referred to in the purchase and sale agreement but was not
expressly provided for by reason of drafting error. The trial judge was careful
to call attention to the clear intention of the parties at the time of drafting:
the taxpayer wanted to sell all of their shares of a corporation at the time of
signing. The finding in Chartier is confined to its particular set of
facts.
[78]
Hence, as of April 12, 2002, Dale‑Parizeau,
controlled by Gestion Lagarde, was controlled "directly or indirectly in
any manner whatever" by Aviva. Dale‑Parizeau was no longer a
Canadian controlled private corporation: paragraph 125(7)(a).
[79]
Also, each of Dale‑Parizeau and Gestion
Lagarde ceased to be a "small business corporation" within the
meaning of the Act: subsection 248(1).
[80]
A capital gain deduction claimed by each
individual appellant is available on the disposition of the individual's shares
of RJCG if the RJCG shares were qualified small business corporation shares of
the individual at time of disposition. A "qualified small business
corporation share" of an individual is defined in
subsection 110.6(1).
|
"qualified small business corporation share" of an
individual (other than a trust that is not a personal trust) at any time (in
this definition referred to as the “determination time”) means a share of the
capital stock of a corporation that,
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« action admissible de petite entreprise » S’agissant d’une
action admissible de petite entreprise d’un particulier (à l’exception d’une
fiducie qui n’est pas une fiducie personnelle) à un moment donné, action du
capital-actions d’une société qui, à la fois :
|
|
(a) at the determination time, is a share of the capital stock
of a small business corporation owned by the individual, the individual’s
spouse or common-law partner or a partnership related to the individual,
|
a) au
moment donné, est une action du capital-actions d’une société exploitant une
petite entreprise, action dont le particulier, son époux ou conjoint de fait
ou une société de personnes liée au particulier est propriétaire;
|
|
(b) throughout the 24 months immediately preceding the
determination time, was not owned by anyone other than the individual or a
person or partnership related to the individual, and
|
b) tout
au long de la période de 24 mois qui précède le moment donné, n’est la
propriété de nul autre que le particulier ou une personne ou société de
personnes qui lui est liée;
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|
(c) throughout that part of the 24 months immediately
preceding the determination time while it was owned by the individual or a
person or partnership related to the individual, was a share of the capital
stock of a Canadian-controlled private corporation more than 50% of the fair
market value of the assets of which was attributable to
|
c) tout
au long de la partie de la période de 24 mois qui précède le moment donné, où
l’action est la propriété du particulier ou d’une personne ou société de
personnes qui lui est liée, est une action du capital-actions d’une société
privée sous contrôle canadien et dont plus de 50 % de la juste valeur
marchande de l’actif est attribuable à des éléments visés aux sous-alinéas
(i) ou (ii):
|
|
(i) assets used principally in an active business
carried on primarily in Canada by the corporation or by a corporation related
to it,
|
(i) des éléments utilisés principalement dans
une entreprise que la société ou une société qui lui est liée exploite
activement, principalement au Canada,
|
|
(ii) shares of the capital stock or indebtedness of
one or more other corporations that were connected (within the meaning of
subsection 186(4) on the assumption that each of the other corporations was a
“payer corporation” within the meaning of that subsection) with the
corporation where
|
(ii) des actions du capital-actions ou des dettes
d’une ou plusieurs autres sociétés rattachées à la société — au sens du
paragraphe 186(4), selon l’hypothèse que chacune de ces autres sociétés est
une société payante au sens du même paragraphe — dans le cas où, à la fois :
|
|
…
|
…
|
|
(B) throughout that part of the 24 months
immediately preceding the determination time while such a share or
indebtedness was owned by the corporation, a person or partnership related to
the corporation or a person or partnership related to such a person or
partnership, it was a share or indebtedness of a Canadian-controlled private
corporation more than 50% of the fair market value of the assets of which was
attributable to assets described in subparagraph (iii), or
|
(B) tout au long de la partie de la
période de 24 mois qui précède le moment donné, où ces actions ou ces dettes
sont la propriété de la société, d’une personne ou société de personnes qui
lui est liée ou d’une personne ou société de personnes liée à une telle
personne ou société de personnes, il s’agit d’actions ou de dettes de
sociétés privées sous contrôle canadien et dont plus de 50 % de la juste
valeur marchande de l’actif est attribuable à des éléments visés au
sous-alinéa (i) ou au présent sous-alinéa.
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[81]
The definition of "qualified small business
corporation share", therefore, appears to disqualify the shares of RJCG as
qualified small business corporation shares. At least throughout the 24 months
immediately preceding the disposition of the shares on April 28, 2006 not
more than 50 percent of the fair market value of RJCG's assets were
attributable to assets used principally in an active business carried on
primarily in Canada by RJCG or a corporation related to it.
[82]
Also, throughout the same 24 months period the
shares of Gestion Lagarde owned by RJCG were not shares of a
Canadian-controlled private corporation more than 50 percent of the fair
market value of the assets of which was attributable to assets used principally
in an active business carried out primarily in Canada by Gestion Lagarde or a
corporation related or connected to it. In my view it does not matter whether
or not Aviva obtained an option to purchase the shares of RJCG in
December 2005, as alleged by the respondent. During the period of
24 months preceding April 28, 2006, RJCG's shares were not qualified
small business corporation shares.
[83]
The appellants complain that the sales of the
RJCG shares took place in April 2006, nine years ago, and it is therefore
impossible to prove or contradict the value of RJCG's assets at the time. Not
so. Surely financial statements are available. But nevertheless Ms. Blondeau
has testified that the sole assets of RJCG were shares of Gestion Lagarde; RJCG
was a holding company not carrying on a business. There was no evidence that
any corporation that owned RJCG or any holding company met the threshold
requirements in paragraphs 110.6(1)(c) and 110.6(1)(d). Paragraph 110.6(14)(e)
does not affect the “interposition of a holding company between themselves and
the small business corporation.”
There are no financial statements in evidence to verify whether the threshold
requirements were met at each subsidiary level. However, the threshold
requirement is a moot point since the option on Gestion Lagarde’s shares, even
if never exercised, tainted the definition of “qualifying small business
corporation” in section 110.6(1) since the operating company was no longer
under Canadian control as required by paragraph 251(5)(b).
[84]
Therefore, the appeals will be dismissed. The
appellants did not dispose of any qualified small business corporation shares
in 2006 and are not eligible to claim a capital gain deduction. It would also
follow that appellants Nathalie Monette, Francine Bussières,
Élise Lagarde, Claudine Lagarde, G. Marius Bérubé, Marie‑Pier Blondeau,
Vincent Lagarde and Aïsha Blondeau are not eligible to claim a
minimum tax carry-over for the 2007 and 2008 taxation years, and for Line Durocher,
Geneviève Lagarde and Francis Labonté, for the 2008 taxation year
also.
Signed at Ottawa, Canada, this 9th day of December 2015.
"Gerald J. Rip"
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