Dockets: A-416-14
A-429-14
Citation: 2016 FCA 1
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CORAM:
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NADON J.A.
BOIVIN J.A.
DE MONTIGNY J.A.
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Docket: A-416-14
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BETWEEN:
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GUY GERVAIS
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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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Docket: A-429-14
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AND BETWEEN:
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HER MAJESTY THE
QUEEN
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Appellant
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and
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LYSANNE GENDRON
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Respondent
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REASONS FOR JUDGMENT
BOIVIN J.A.
[1]
These are two appeals from a decision of a judge
of the Tax Court of Canada (the judge) rendered on September 2, 2014 (2014
TCC 119), whereby the judge first dismissed the appeal from the reassessments of
Guy Gervais for taxation years 2002 and 2003 and, second, allowed the appeal of
Lysanne Gendron regarding the reassessments for taxation years 2002, 2003 and
2004.
[2]
Before this Court, Mr. Gervais is the appellant in
docket A-416-14 and the Minister of National Revenue (the Minister) is the
respondent. In docket A-429-14, the Minister is appealing from the judge’s decision
and Ms. Gendron, Mr. Gervais’s wife, is the respondent.
[3]
The two cases were heard consecutively by order
of a judge of this Court dated December 4, 2014.
[4]
For the reasons that follow, I would allow Mr. Gervais’s
appeal in docket A-416-14 and dismiss the Minister’s appeal in docket A-429-14.
I.
The facts
[5]
The relevant facts in these two cases are not disputed.
Here is a brief overview to help understand the issues in this case.
[6]
Vulcain Alarme Inc. (Vulcain) is a family business,
incorporated in 1968 under Part 1A of the Quebec Companies Act (CQLR
chapter C-38). Based in Delson, Quebec, it manufactures in particular toxic gas
monitors. During 2002, a company from Calgary, BW Technologies Ltd. (BW
Technologies), presented a purchase offer for the purpose of acquiring Vulcain.
At that time, Mr. Gervais and his brother were the only two shareholders of
Vulcain. Ms. Gendron, Mr. Gervais’s wife, had worked for Vulcain since
1992, but was not a shareholder when BW Technologies made its purchase
offer.
[7]
On June 12, 2002, BW Technologies and Vulcain
entered into a confidentiality agreement. Approximately three months later, the
purchase offer for the entirety of the capital stock was accepted by the shareholders,
which had to be finalized on October 7, 2002. In the weeks preceding this date,
Mr. Gervais and Ms. Gendron made the decision to obtain tax advice
from a law firm in the light of the purchase offer in question.
[8]
A series of transactions relating to the capital
stock of Vulcain followed, all before the date planned for finalizing the sale
to BW Technologies. For the purpose of the cases at issue, the following two
transactions are relevant.
[9]
The first transaction is that of September 26,
2002, whereby Mr. Gervais sold to his wife, Ms. Gendron, 1,043,889
shares for $1,043,889. With respect to this transaction, Mr. Gervais opted,
in his return of income for the taxation year 2002, not to avail himself of the
provisions in subsection 73(1) of the Income Tax Act, R.S.C.
(1985), c. 1 (5th Suppl.) (the Act). In other words, there was no rollover of
the tax consequences resulting from the transaction between Mr. Gervais and his
wife, Ms. Gendron. Therefore, as the adjusted cost base of the shares was $43,889,
Mr. Gervais reported a gain of $1,000,000. As for the adjusted cost base of
the shares purchased by Ms. Gendron, it was set at $1,043,889.
[10]
The second relevant transaction occurred four
days later on September 30, 2002. At the relevant time of this
transaction, Mr. Gervais gave 1,043,889 of his shares gratuitously to Ms. Gendron.
This time, Mr. Gervais did not choose to exempt this transaction from subsection 73(1)
of the Act. Therefore, there is a rollover, such that Mr. Gervais is deemed
to have disposed of the shares at the adjusted cost base, i.e. $43,889, and Ms. Gendron
is deemed to have acquired them at the same price.
[11]
Ms. Gendron’s shares, those purchased on September 26,
2002, and those given to her on September 30, 2002, were then sold to BW
Technologies on October 7, 2002.
[12]
At the end of the day, in her return of income for
taxation year 2002, Ms. Gendron, under the mechanism provided for in
section 47 of the Act, reported a capital gain of $1,000,000 and invoked
the exemption provided for at subsection 110.6(2.1) of the Act in the amount
of $250,000. Mr. Gervais also claimed an exemption of $158,720 in capital
gains corresponding to the maximum available amount that he could claim when he
sold his shares to Ms. Gendron. As a result of the transactions of
September 26 and 30, 2002, Ms. Gendron pays no tax on her disposition
of the shares and half of the gain is attributed to Mr. Gervais.
[13]
The Minister considered that this result it not
consonant with the Act. He rejected the tax benefits resulting from the sale of
the shares from Ms. Gendron to BW Technologies and reassessments were
issued to that effect. Therefore, the Minister reassessed Ms. Gendron on
the ground that the gain derived from the sale of her shares is an income. Simultaneously,
the Minister reassessed Mr. Gervais by applying the general anti-avoidance
rule (GAAR) and attributed the capital gain realized by Ms. Gendron, for
which she had claimed the capital gain exemption, back to Mr. Gervais’ income
as capital gain.
[14]
Mr. Gervais and Ms. Gendron appealed from the Minister’s
reassessments to the Tax Court of Canada.
II.
The decision of the Tax Court of Canada
[15]
First, the judge made a thorough statement of
the facts and background that led to the sale and gift of shares prior to the
sale of these shares to BW Technologies by Ms. Gendron.
[16]
The judge then began his analysis by choosing to
review Ms. Gendron’s file. According to the judge, if the entire gain made
by Ms. Gendron should have been attributed to Mr. Gervais, it follows
logically that Mr. Gervais could not have received a tax benefit within
the meaning of section 245 of the Act and, consequently, the GAAR cannot be
applied.
[17]
The judge continued his analysis by discussing the
case law relating to the sale of shares from Mr. Gervais to Ms. Gendron
and their subsequent resale to BW Technologies. The judge considered whether shares
(or bonds) held on a long term basis could result in the acquisition of a
capital asset that generates a capital gain when it is sold, but he was of the
view that, in the circumstances, the shares acquired and then sold by Ms. Gendron
to BW Technologies were inconsistent with an investment (judge’s reasons at paragraphs 91
and 92).
[18]
In coming to this conclusion, the judge made a distinction
between Irrigation Industries Ltd. v. Canada (The Minister of National
Revenue – M.N.R.), [1962] S.C.R. 346 [Irrigation Industries] and
this case. Specifically, he explained that: (i) the shares purchased by Ms. Gendron
had been issued, which was not the case in Irrigation Industries; and
(ii) there were “clea[r]” indicia that the resale of shares had been “planned” before
the purchase (judge’s reasons at paragraph 121). Consequently, the judge found
that he had before him an adventure in the nature of trade and the gain on the
sale of the shares purchased by Ms. Gendron therefore had to be qualified
as a business income and not a capital gain.
[19]
Second, the judge discussed the question of the
shares that Ms. Gendron received gratuitously. At the outset, he made a distinction
between receiving a gift or an inheritance and purchasing a property for resale.
On that basis, the judge qualified the gain derived from the sale to BW
Technologies of the shares acquired gratuitously by Ms. Gendron as a capital
gain and not as a business income.
[20]
Given his finding that the disposition of the
shares purchased resulted in income and that the disposition of the shares received
as gifts resulted in a capital gain, the judge excluded the application of
section 47 of the Act relating to identical property and, in accordance with
section 74.2 of the Act, he attributed to Mr. Gervais the gain subsequently
achieved when the shares received as gifts by Ms. Gendron were sold to BW Technologies.
By thus attributing Ms. Gendron’s entire gain to Mr. Gervais, the judge concluded
that it was not necessary to decide on the application on the GAAR since Mr.
Gervais had not profited from a tax benefit within the meaning of the GAAR.
III.
The issue
[21]
At issue in this appeal is whether the judge erred
by qualifying as income the gain derived from the sale of the shares purchased by
Ms. Gendron and by qualifying as capital gain the gain derived from the sale
of the shares received by Ms. Gendron as gifts.
[22]
The standard applicable is that developed in Housen
v. Nikolaisen, 2002 SCC 33, [2002] 2 S.R.C. 235. The findings of
fact must be reviewed on the standard of palpable and overriding error. The
judge’s conclusions on questions of law are reviewable on the correctness
standard. Questions of fact and law are also subject to the standard of palpable
and overriding error, unless an error of law is extricable, in which case the
correctness standard applies.
IV.
The parties’ submissions
[23]
In the A-416-14 case, Mr. Gervais alleged that the
judge erred in deciding that the sale of the shares purchased by Ms. Gendron
resulted in business income. Rather, he argued that all the shares held by Ms. Gendron
were capital property. Specifically, the disposition of the shares purchased by
Ms. Gendron was part of a broader context of property that also resulted
in capital gain in the same way as the shares received as gifts by Ms. Gendron.
According to Mr. Gervais, section 47 of the Act applies and the reassessments
issued in his case, which essentially rely on the GAAR, are without basis.
[24]
Opposite to Mr. Gervais, the Minister argued in the
A-429-14 case that the sale of all the shares held by Ms. Gendron was
instead an adventure in the nature of trade. The Minister asked thus this Court
to find that the shares acquired gratuitously as gifts were aimed at making a
profit and were in the nature of trade, in the same way as the shares purchased
by Ms. Gendron. In addition, the Minister argued that if this Court were
to find that the entire gain resulting from the sale of Ms. Gendron’s
shares to BW Technologies constitutes a capital gain, the GAAR applies and the
gain is that of Mr. Gervais.
V.
Analysis
A.
The shares purchased by Ms. Gendron and resold to
BW Technologies
[25]
In his analysis relating to the shares purchased
by Ms. Gendron and resold to BW Technologies, the judge considered Ms.
Gendron’s intention and eventually concluded that the transaction was an adventure
in the nature of trade and, thus, resulted in income.
[26]
From his perspective, the judge accepted several
facts: (i) prior to September 26, 2002, Ms. Gendron was not a shareholder,
but she knew of the existence of the purchase offer that had been submitted by BW
Technologies and its subsequent acceptance by Vulcain shareholders; (ii) Ms. Gendron
also knew the negotiated sale price and the time limit set for the sale of Vulcain’s
shares to BW Technologies; (iii) she knew that a significant profit would be made
from the sale of Vulcain’s shares to BW Technologies; and (iv) Ms. Gendron
participated with Mr. Gervais in tax planning meetings that took place at
a law firm.
[27]
Although the judge noted in passing that “[t]raditionally, the nature of the property in question,
namely, the shares, is considered to be an indicia of an investment”—which
results in a capital gain—in contrast, he noted three indicia that are, in his
view, inconsistent with this presumption (judge’s reasons at paragraph 94):
(a) Even
before Ms. Gendron had acquired her shares, she intended to resell them quickly.
(b) The shares had not produced any
income while she had them.
(c) The
shares had been resold less than two weeks after their acquisition.
[28]
Despite these three indicia, the judge was of
the view that an aspect “seems to be missing” to qualify the gain derived from the
sale of the shares as income: Ms. Gendron had not made any profit by selling
the purchased shares.
[29]
At the end of his analysis and after weighing
the indicia surrounding the transaction, the judge decided that the sale of the
shares purchased by Ms. Gendron is tantamount to an adventure in the nature of
trade resulting in income: “[a]lthough there was no
gain or loss on the disposition of the shares purchased, the indicia point very
strongly in favour of characterizing the sale as income” (judge’s
reasons at paragraph 101).
[30]
In justifying this conclusion, the judge pointed
out that although the sale of the shares purchased by Ms. Gendron did not result
in any profit, this transaction has nevertheless resulted in a tax benefit over
a few years as Ms. Gendron reimbursed Mr. Gervais over a period of 5 years.
Thus, Ms. Gendron obtained the benefit of very advantageous net cash flow (judge’s
reasons at paragraphs 95-98). The judge considered that financial benefit sufficient
to conclude that the transaction resulted in income, despite the absence of profit.
With respect, I cannot agree with the judge’s analysis on this point.
[31]
First, judge’s introduction of the concept of financial
benefit as opposed to the well-established concept of profit is not supported
by any case law to this effect. Second, the case law accepts the test of the
reasonable expectation of profit to apply to a finding of adventure in the
nature of trade. For example, in Friesen v. Canada, [1995] 3 S.C.R. 103,
[1995] S.C.J. No 71 (QL) [Friesen], the Supreme Court of Canada, referring
to an adventure in the nature of trade, noted at paragraph 16 that “[t]he taxpayer must have a legitimate intention of gaining a
profit from the transaction” (see
also Canada v. Loewen, [1994] 3 FC 83 (C.A.) (QL) at paragraphs 22-24).
[32]
Moreover, in this case, not only has the sale of
the shares by Ms. Gendron not resulted in any profit, she had no reasonable
expectation of profit. Since she purchased Mr. Gervais’s shares, the share
purchase agreement provided that she could not sell her shares without Mr. Gervais’s
authorization. Ms. Gendron’s sale of the shares she purchased was predetermined
and she sold them at the same price that she had acquired them from Mr. Gervais,
thereby not making any profit from the transaction. In these circumstances, although
the sale of the shares was “planned before the purchase” as the judge stated, it
appears at the least incongruous to attribute to Ms. Gendron a reasonable
expectation of profit and to qualify this transaction as an adventure in the
nature of trade.
[33]
Absent a reasonable expectation of profit and in
the light of Friesen, I conclude that the judge erred in ruling that
this transaction resulted in income. With respect, the distinction that he made
between Irrigation Industries and this case, which resulted in displacing
the strong presumption that a company’s sale of shares results in the acquisition
of a capital asset that generates a capital gain when the shares are sold, is
not apposite in this case.
[34]
In my view, had it not been for the errors he
made, the judge could not but rule that the shares purchased and sold by Ms. Gendron
resulted in a capital gain and not income.
[35]
Now I will address the second transaction that
occurred on September 30, 2002, relating to Ms. Gendron’s sale of the
shares received as gifts.
B.
The shares received by Ms. Gendron as gifts
and sold to BW Technologies
[36]
On September 30, 2002, 4 days after purchasing
the shares, Ms. Gendron received gratuitously from Mr. Gervais a gift of
shares within the meaning of article 1806 of the Civil Code of Quebec.
For the purposes of this transaction, Mr. Gervais then invoked the rollover provided
for at section 73 of the Act with the result that he would not make any
gain contrary to the transaction of September 26, 2002. Therefore, Ms.
Gendron is deemed to have acquired the shares at their adjusted cost base from
Mr. Gervais. As the judge stated, this cost was small so to speak.
[37]
In his reasons, the judge made a distinction
between the transaction to purchase shares of September 26, 2002, and the
transaction to give shares of September 30, 2002, and found that the sale
of the shares received as gifts, contrary to the sale of the shares purchased, resulted
in a capital gain (judge’s reasons at paragraphs 125 and 126). It is not
disputed by the parties that Mr. Gervais gave part of his shares to Ms. Gendron
and that was not called into question before this Court. Although I do not
endorse the judge’s entire reasoning in this matter, I agree with his
conclusion that the gain derived from the sale of the shares received by Ms. Gendron
and sold to BW Technologies must be qualified as a capital gain.
[38]
Since both transactions result in a capital gain,
the question that remains at this point is whether the rules for computing the
cost of identical property provided for at section 47 of the Act, which,
combined with the effect of the attribution rules provided at sections 73,
74.2 and 74.5 and the exemption for capital gain under subsection 110.6(2.1) result
in a possible violation of the purpose and spirit of the Act.
[39]
The GAAR was adopted by Parliament for the
purpose of regulating the type of questions raised by the parties when no other
anti-avoidance provisions apply (Vern Krishna, The Fundamentals of Canadian
Income Tax, Toronto, Carswell, 2009 at page 806; Canada Trustco Mortgage
Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601 at page 614 [Trustco]).
The three steps involved in the application of the GAAR noted at section 245
of the Act, in my view, help resolve the problem in the context of the facts in
this case and the scheme of the Act (Trustco at paragraphs 16 and
17). In the context of this case, the discussion of the questions raised by the
parties is appropriate for review under this authority: the GAAR is an integral
part of this issue and the Minister’s position relies on its application. Indeed,
the Minister invoked the GAAR in assessing Mr. Gervais.
[40]
Specifically, the application of the GAAR will
help review the transactions independently so as to consider the true legal
effect resulting from each one and give effect to them (Singleton v. Canada,
2001 SCC 61, [2001] 2 S.C.R. 1046).
VI.
Conclusion
[41]
Since I hold that the gain realized as a result
of the sale of the shares purchased and received as gifts by Ms. Gendron constitutes
a capital gain, it follows that the judge should have reviewed the question of
the application of the GAAR provided for at section 245 of the Act. I
considered the possibility of conducting the analysis myself, but in the circumstances,
I conclude that it is preferable to refer the matter back to the Tax Court of
Canada, giving it the directive to carefully review the application of the GAAR
to the facts of this case.
[42]
Therefore, I propose that Mr. Gervais’s
appeal in the A-416-14 case be allowed with costs and that the Minister’s appeal
in the A-429-14 case be dismissed with costs. I would refer the two cases back
to the judge or to another judge to be designated by the chief justice of the
Tax Court of Canada so that the application of the GAAR can be reviewed and determined.
[43]
These reasons will be filed in docket A-416-14 and
a copy thereof will be filed in docket A-429-14 as reasons for judgment.
“Richard Boivin”
“I agree
Marc Nadon J.A.”
“I agree
Yves de Montigny J.A.”
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