[OFFICIAL ENGLISH TRANSLATION]
Date: 20021129
Docket: 2000-2217(IT)G
2000-2218(IT)G
BETWEEN:
ÉRIC PIUZE,
MARIE-JOSÉE BONNEVILLE,
Appellants,
and
Her Majesty The
Queen,
Respondent.
Reasons
For Judgment
P. R. Dussault, J.T.C.C.
[1] These appeals from assessments
made under section 160 of the Income Tax Act (the "Act")
were heard on common evidence.
[2] In assessing Éric Piuze, the
Minister of National Revenue (the "Minister") assumed that Société
Gestion Éric Piuze Inc. ("Gestion") owed the Minister an amount
of $27,965.91 for its 1994 and 1995 taxation years and that it had declared and
paid the appellant dividends of $45,500 and of $13,812 during its 1996 and 1997
taxation years respectively. The assessment in the amount of $20,971.65 is
therefore only for a portion of Gestion's liability.
[3] In assessing Marie‑Josée Bonneville,
the Minister assumed that Gestion had the same tax liability and that it had declared
and paid the appellant dividends of $6,560 during its 1997 taxation year. In
that case, the assessment in the amount of $6,560 is therefore for the full
amount of the dividends received by the appellant.
[4] The total of the amounts assessed
in respect of the two appellants is thus $27,531.65, an amount slightly less
than Gestion's tax liability.
[5] In addition, counsel for the
respondent informed the Court at the hearing that the amount of Gestion's tax
liability was not $27,965.91 but rather $18,749.70. In any case, an adjustment
should be made accordingly.
[6] Marie‑Josée Bonneville
is the spouse of Éric Piuze.
[7] Gestion was incorporated under
Part 1A of the Quebec Companies Act ("Q.C.A.") on
April 1, 1993. Éric Piuze was its sole shareholder, director and
officer until May 1, 1997, on which date Marie‑Josée Bonneville
also became a shareholder and director of Gestion.
[8] From 1993 to July 8, 1997,
through Société 2952‑3065 Québec Inc., a corporation offering
payroll services, Gestion paid Éric Piuze a generally fixed amount every
two weeks by cheque drawn on its "payroll account" without
source deductions. In 1996, the total amount paid by Gestion was $45,500. From
January to July 8, 1997, it was $13,812. As to Marie‑Josée Bonneville,
the total amount paid for the months of May and June 1997 was $6,560. In the
report filed in evidence on amounts paid (Exhibit A‑1), payments are
simply identified under the heading "OTHER EARNINGS".
[9] Starting on July 8, 1997,
the variable amounts paid to both Éric Piuze and Marie‑Josée Bonneville
were identified as regular remuneration with source deductions (see
Exhibit A‑1).
[10] The Minister considers the
amounts of $45,500 paid to Éric Piuze in 1996 and $13,812 and $6,560 paid
respectively to Éric Piuze and Marie‑Josée Bonneville before
July 8, 1997, to be dividends and thus as the fair market value of
property transferred without consideration for the purposes of section 160
of the Act.
[11] Éric Piuze testified that
the amounts the Minister considered as dividends were in fact a salary that was
paid to him regularly every two weeks. He stated that it was Gestion's
accountant who had considered those amounts as dividends, whereas he himself
viewed them as regular salary and that this was ultimately a simple matter of
terms. He asserted that there had never been any resolution by Gestion's board
of directors attesting to any declaration of dividends.
[12] In cross-examination,
Éric Piuze admitted that he had characterized the amounts received from
Gestion from 1993 to July 1997 as dividends in his income tax returns for each
year.
[13] It
is important at this stage to quote the questions and answers from a written
examination for discovery of the appellant Éric Piuze who very clearly
describes the modus operandi of Gestion, its directors and shareholders.
Each answer, which may be found in tab 8 of Exhibit I‑1, is
reproduced immediately after the corresponding question, which appears in
tab 7 of the same exhibit:
[TRANSLATION]
Q 1. Did
the amounts that were paid to you by Gestion Éric Piuze Inc. reflect
source deductions for the 1997 taxation year?
A. The amounts
that were paid to me by Gestion Éric Piuze Inc. in 1997 reflected source
deductions starting in July 1997. I began receiving a salary from the
corporation of which I am a shareholder in July 1997, after it appeared that
Revenue Canada had disallowed Gestion Éric Piuze Inc. the small business
deduction. I had previously received my regular remuneration in the form of
dividends. Gestion Éric Piuze Inc. was an active business with more than
five employees, but Revenue Canada nevertheless considered it to be inactive.
That created a tax liability that Gestion Éric Piuze Inc. was unable to
pay, resulting in the bankruptcy of the corporation at the end of 1998.
I did not
dispute that decision by Revenue Canada since it was part of a comprehensive
settlement together with other management businesses providing sales and
promotion services to Industries Bonneville Ltée. I therefore accepted the
decision in order to close the file, and, at the same time, I amended the
remuneration policy for shareholders of Gestion Éric Piuze Inc. so that
they would be paid in the form of salary starting in July 1997.
Remuneration by dividend had resulted in a combined (corporation-shareholder)
tax rate of nearly 60%. A salary remuneration policy therefore had to be
established.
(My
emphasis.)
Q 2. Did
Gestion Éric Piuze Inc. issue you a T4 slip for the amounts that were paid
to you for the 1997 taxation year?
A. Gestion
Éric Piuze Inc. gave me a T4 slip for the amounts that were paid to me in
salary starting in July 1997. That T4 slip was given to me in February 1998,
and I have provided a copy of that T4 slip with this statement.
Q 3. Why
did Gestion Éric Piuze Inc. characterize those amounts that were paid to
you in 1997 as dividends?
A. Since
it was founded, Gestion Éric Piuze Inc. had paid me my regular
remuneration every two weeks in the form of dividends in accordance with
my accountants' recommendations. The policy of paying remuneration in the form
of dividends was more advantageous for me because Gestion Éric Piuze Inc.
enjoyed the small business deduction. Staring in July 1997, I decided to
receive my remuneration in the form of salary because Revenue Canada disallowed
the corporation the deduction. Personally, I have always considered the
dividend I received since 1993 as my salary since I received my pay regularly
every two weeks. Instead of paying income tax at source, I paid it every
three months by instalments. That dividend was my regular pay, like a
salary, not an occasional, special payment. Starting in July 1997, the amounts
that had previously been paid to me as dividends were paid in the form of
salary and at the same frequency—every two weeks.
(My emphasis.)
Q 4. Why
did you characterize the amounts Gestion Éric Piuze Inc. paid you in 1997
as dividends received?
A. Part
of my income was paid in the form of dividends until June 1997. So I reported a
dividend in my taxes for that part of my income.
Q 5. Did
you receive amounts from Gestion Éric Piuze Inc. as dividends for the 1993
to 1997 taxation years? If so, why?
A. Gestion
Éric Piuze Inc. has always paid me my remuneration in the form of
dividends from the time it was founded in 1993 until 1997. The amounts received
were $33,800 in 1993, $45,500 in 1996 and $15,760 in 1997. I don't have the
breakdown for the years preceding 1995.
Q 6. Did
you declare employment income from Gestion Éric Piuze Inc. for the years
from 1993 to 1997?
A. I didn't declare
employment income from Gestion Éric Piuze Inc. for the years from 1993 to
1997, except for the last month of 1997, when I declared the amount of $37,506.
Q 7. Did
the cheques for the amounts received from Gestion Éric Piuze Inc. in 1997
bear the notation "salary"? If so, give us copies of those cheques.
A. The cheques I
received from Gestion Éric Piuze Inc. through a pay processing firm bore
the notation "salary". Copies of those cheques are appended to this
statement.
[14] Marie‑Josée Bonneville
did not testify at the hearing, counsel for the parties having agreed that her
testimony would be similar to that of Éric Piuze. However, as was done for
Éric Piuze, I will reproduce the questions and answers from a written
examination for discovery. The questions appear in tab 5 of Exhibit I‑1
and the answers in tab 6. They read as follows:
Q 1. Did
the amounts that Gestion Éric Piuze Inc. pay you reflect source deductions
for the 1997 taxation year?
A. The amounts
that Gestion Éric Piuze Inc. paid me in 1997 reflected source deductions
starting in July 1997. I became a shareholder of the company in May 1997 and,
from May to June 1997, my remuneration was paid to me in the form of dividends.
Q 2. Did
Gestion Éric Piuze Inc. issue you a T4 slip for the amounts that were paid
to you for the 1997 taxation year?
A. Gestion
Éric Piuze Inc. gave me a T4 slip in February 1998 for amounts that were
paid to me in the form of salary starting in July 1997. A copy of that T4 slip
is appended to this declaration.
Q 3. Why
did Gestion Éric Piuze Inc. characterize those amounts that were paid to
you in 1997 as dividends?
A. Gestion
Éric Piuze Inc. paid me my regular remuneration every two weeks from
the moment I became a shareholder in May 1997, in the form of dividends for
two months, in accordance with the shareholder remuneration policy in
effect to that date. The policy of paying remuneration in the form of
dividends was more advantageous for me when Gestion Éric Piuze Inc.
enjoyed the small business deduction. Starting in July 1997, I decided to
receive my remuneration in the form of salary because Revenue Canada disallowed
the corporation that deduction. Personally, I considered the dividend as salary
since I received my pay regularly every two weeks. Instead of paying
income tax at source, I paid it every three months by instalment. The
dividend was my regular remuneration, like a salary, not an occasional, special
payment. Starting in July 1997, my remuneration was paid to me in the form of
salary with source deductions.
(My emphasis.)
Q 4. Why
did you characterize the amounts Gestion Éric Piuze Inc. paid you in 1997
as dividends received?
A. I declared
the part that was paid to me in the form of dividends between May and June
1997, that is $6,560, as a dividend. I declared the part I received as salary
starting in July 1997, as employment income.
Q 5. Did
you receive amounts from Gestion Éric Piuze Inc. as dividends for the 1993
to 1997 taxation years? If so, why?
A. Since I was
not a shareholder of Gestion Éric Piuze Inc. until May 1997, I therefore
did not receive dividends from the company during the years from 1993 to 1996.
In 1997, I received dividends of $6,560 for May and June 1997.
Q 6. Did
you declare employment income from Gestion Éric Piuze Inc. for the years
from 1993 to 1997?
A. I did not
declare employment income from Gestion Éric Piuze Inc. for the years from
1993 to 1997, except for the last month of 1997, when I declared employment
income of $37,506.
Q 7. Did
the cheques for the amounts received from Gestion Éric Piuze Inc. in 1997
bear the notation "salary"? If so, give us copies of those cheques.
A. The cheques I
received from Gestion Éric Piuze Inc. through a pay processing firm bore
the notation "salary". Copies of those cheques are appended to this
declaration.
[15] I recall that from April 1,
1993, to May 1, 1997, Éric Piuze was the sole shareholder, sole
director and sole officer, as president and secretary, of Gestion. Starting on
May 1, 1997, Marie‑Josée Bonneville became both a shareholder
and director of Gestion.
[16] Exhibit I‑1,
tab 4, contains a certain number of written resolutions of
Éric Piuze, sole shareholder and director until May 1997, and also
resolutions of the two directors and shareholders, Éric Piuze and Marie‑Josée Bonneville,
starting on that date.
[17] The purpose of one written
resolution by the sole director dated March 15, 1995, was to approve the
financial statements for the fiscal year ended on December 31, 1994, and
to authorize the sole director to sign them. That same day, a written
resolution by the sole shareholder was intended to approve, ratify and confirm
those financial statements.
[18] Two similar written resolutions
dated March 15, 1996, one by the sole director and the other by the sole
shareholder are to the same effect with respect to the financial statements for
the fiscal year ended on March 31, 1995.
[19] Two resolutions dated
March 14, 1997, are also to the same effect for the financial statements
for the year ended December 31, 1996.
[20] In addition, it is clearly stated
in Gestion's income tax return for its 1996 taxation year, signed by
Éric Piuze himself, that Gestion had paid taxable dividends of $45,500
during the year. Gestion's financial statements, which were signed by Éric Piuze
and included with that return, state just as clearly that dividends of $45,500
were paid (Exhibit I‑1, tab 2).
[21] It is equally clear in Gestion's
income tax return for its 1997 taxation year, which was signed by
Éric Piuze, that Gestion had paid dividends of $23,320 during the year.
Gestion's financial statements, again signed by Éric Piuze and
accompanying the income tax return, state the same thing.
[22] Counsel for the appellants
submits that the dividend amounts paid to the appellants in 1996 and 1997
should be considered as salary since there had never been a meeting of
directors or any resolution declaring dividends. In his view, the shareholders'
approval of the financial statements cannot constitute a valid declaration of
dividends. He thus contends that the amounts paid may not be considered as
dividends if the formalities required by the Q.C.A. are not carried out.
He further asserts that declaring such high dividends is in a way nonsensical
from a financial standpoint since the dividends paid would represent a
disproportionate return on the initial investment of only a few dollars.
Lastly, he argues that the payment of dividends cannot be considered as a
transfer without consideration for the purposes of section 160 of the Act
since the work performed by each of the appellants for Gestion, which
constitutes valuable consideration for the transfer, must be taken into
account.
[23] In the opinion of counsel for the
respondent, the evidence shows that the appellants did in fact receive
dividends from Gestion and that, faced with an assessment under
section 160 of the Act, they are now trying to alter their nature
and transform them into salary.
Analysis
[24] It is clearly established that
the decision to declare and pay dividends is the responsibility of a company’s
board of directors (see Q.C.A., sections 81 and 123.6). However,
where there is only one director, that person exercises the rights and assumes
the obligations of the board (see Q.C.A., section 123.82). The
board of directors normally expresses its decisions in the form of resolutions
passed at its meetings, and those resolutions are normally recorded in the
minutes of those meetings. Certified minutes must be recorded in the books that
are to be kept by the company (see Q.C.A., paragraph 107(d)). Those
books are prima facie evidence of the facts stated therein (see Q.C.A.,
section 109). Moreover, resolutions in writing, signed by all the
directors entitled to vote on those resolutions at a meeting of the board of
directors, are as valid as if they had been passed at a meeting (see Q.C.A.,
sections 89.3 and 123.6). Minutes and resolutions are thus prima facie
evidence of the decisions made by the board of directors or by the sole
director, as the case may be. However, the absence of those minutes or
resolutions does not mean that a decision has not been made provided that it
can be proven that one has been made by other means. In my view, the problem
thus boils down to what is essentially a matter of evidence. We may refer on
this point to the decision in Mullin v. Canada, [1992] T.C.J.
No. 104, and to the authorities cited on this point at pages 8 and
following. I have only reproduced the comments by Bayda J. of the
Saskatchewan Court of Appeal in Roman Hotels Ltd. v. Desrochers Hotels
Ltd., 69 D.L.R. (3d) 126 (Sask.C.A.), concerning the evidence of a
decision of a corporation in the absence of a formal meeting or resolution
certifying the decision made. Bayda J. wrote as follows at pages 133
and 134 of the decision:
. . . Apart
from any express provision in the company's articles or other rules of
administration and procedure is it possible for a binding corporate decision on
a matter which requires the decision of the directors, to come into existence
without the holding of a formal meeting and the passing of a resolution? In
considering the answer to this question, it is important to keep in mind that the
existence of a corporate decision is a question of fact, and, further, that
there is a distinction to be drawn between the actual existence of a corporate
decision and evidence of its existence. A formal resolution, considered,
passed and duly recorded at a formal meeting, properly constituted, is,
generally speaking, the best evidence of the existence of the fact of a
corporation decision. Although it may be the best evidence of that fact, it
is not necessarily the only evidence. Where during the course of an
informal consideration of the company's affairs there comes a point at which
occurs a meeting of the minds of all those entitled to participate in a
decision to do, on behalf of the company, a certain act which is intra vires
followed by the actual doing of that act, then generally speaking and apart
from a specific company rule or statutory provision to the contrary, it may
be said that corporate decision came into existence when that meeting of the
minds occurred, despite the lack of observance of formalities pertaining to
meetings and passing of resolutions. . . .
(My emphasis.)
[25] In Mulligan v. Canada,
[1999] T.C.J. No. 271 (Q.L.), Judge Rip adopted that same principle
in paragraph 41, as follows:
Thus it would appear
that the state of corporate law today is that the formalities required by
statute or the articles of the corporation may be bypassed if the shareholders
or directors who have the power to authorize the action unanimously approve of
the action. . . .
[26] A decision of a board of
directors or a sole director is thus a fact that can be proven otherwise than
by minutes or a resolution in writing. It is not difficult to establish a
"meeting of the minds" when only one person was authorized to act as
a director and when it may be seen that a measure was in fact taken. In the
instant case, the only person who could decide, as a director, that Gestion
would pay dividends to its shareholder from April 1, 1993, to May 1,
1997, was Éric Piuze himself as sole director.
[27] Gestion's financial statements
and income tax returns signed by Mr. Piuze as director amply attest to the
decision to declare and pay dividends, without having to rely on the admission
on this point contained in the answers given to the written examination for
discovery quoted above. Moreover, with respect to Gestion's documents that the
appellant signed, it is worth recalling the rule stated in paragraph 123.31(4)
of the Q.C.A., that "Third persons may presume that . . .
the documents of the company issued by one of its directors, officers or other
mandataries are valid."
[28] According to the answers Marie‑Josée Bonneville
herself gave at her written examination for discovery, when she became a
shareholder and director of Gestion on May 1, 1997, the policy of
declaring and paying dividends to shareholders was still in effect. It was not
until later, on July 8, 1997, that she and Éric Piuze apparently decided
to receive their remuneration in the form of a salary.
[29] My conclusion is therefore that
Gestion in fact declared and paid the appellants the dividends referred to
above in 1996 and 1997 by a decision of the sole shareholder, Éric Piuze.
[30] The argument of counsel for the
appellants concerning the disproportionate return that the dividends would have
given the appellants relative to their initial investment is immaterial and not
worth considering.
[31] As to the argument that the
payment of dividends does not constitute a transfer of property without
consideration for the purposes of section 160 of the Act on the
ground that the appellant's work constituted valuable consideration, we need
only refer on that point to the decision of the Supreme Court of Canada in Newman v.
M.N.R., [1998] 1 S.C.R. 770. In that judgment,
Iacobucci J. discusses and analyzes certain comments made by
Dickson C.J. in McClurg v. Canada, [1990] 3 S.C.R. 1020,
on the relationship between dividends paid by a corporation and the
contribution that the shareholder receiving dividends might have made to the
corporation, comments that may have caused some confusion at the time.
Iacobucci J. thus made the following point in paragraph 57 of Neuman,
supra:
. . .
Dickson C.J.
seemed to be of the view that the character of a shareholder's dividend income
is to be determined by that shareholder's level of contribution to the
corporation. This approach ignores the fundamental nature of dividends; a
dividend is a payment which is related by way of entitlement to one's capital
or share interest in the corporation and not to any other consideration. Thus,
the quantum of one's contribution to a company, and any dividends received from
that corporation, are mutually independent of one another.
La Forest J. made the same observation in his dissenting reasons in McClurg
(at p. 1073):
With
respect, this fact is irrelevant to the issue before us. To relate dividend
receipts to the amount of effort expended by the recipient on behalf of the
payor corporation is to misconstrue the nature of a dividend. As discussed
earlier, a dividend is received by virtue of ownership of the capital stock of
a corporation. It is a fundamental principle of corporate law that a dividend
is a return on capital which attaches to a share, and is in no way dependent on
the conduct of a particular shareholder. [Emphasis added.]
[32] In law, the allocation of a
corporation's profits to shareholders by dividends does not constitute
remuneration for their work, any more than that work constitutes consideration
for dividends received. On this point, we may also refer to the decisions in Gosselin v.
R., [1997] 2 C.T.C. 2830, paragraphs 15 and 16 and to 155579
Canada Inc. v. R., [1997] 1 C.T.C. 2011, page 2016.
[33] The appellant Marie‑Josée Bonneville
was assessed for an amount of $6,560, the lesser of the fair market value of
the dividends received from Gestion and Gestion's tax liability of $18,749.70,
not $27,965.91, as initially computed. The assessment is consistent with paragraph 160(1)(e)
of the Act and is thus confirmed. The appeal is accordingly dismissed.
[34] Despite the fact that he received
a total of $59,312 in dividends from Gestion, the appellant Éric Piuze was
assessed (subject to an error of $433.96) only for an amount representing
Gestion's tax liability less the $6,560 for which the appellant Marie‑Josée Bonneville
was assessed, that is, for an amount of $20,971.65. In my view, given that the
transferee and transferor are jointly and severally liable for the transferor's
tax liability, as provided in paragraph 160(1)(e) of the Act,
that is to say, for an amount not exceeding the amount by which the fair market
value of the property transferred exceeds the fair market value of the
consideration, if any, Éric Piuze could have been assessed for the full
amount of Gestion's tax liability, regardless of the assessment of Marie‑Josée Bonneville.
It appears that liability is now $18,749.70, not $27,965.91, as was initially
calculated. Under paragraph 160(1)(e), the Minister could reassess
Éric Piuze for the total amount of Gestion's tax liability, that is,
$18,749.98. However, since counsel for the parties made no comments that might
justify the lesser amount used in the initial assessment, I find it reasonable
to allow the appeal and to refer the assessment back to the Minister for
reconsideration and reassessment, simply stating that the amount assessed shall
not exceed Gestion's tax liability of $18,749.70.
[35] The respondent is entitled to her
costs. However, since the appeals were heard on common evidence, the costs
relating to the services of a lawyer for the preparation and conduct of the
hearing are limited to those that would be applicable in the case of a single
appeal.
Signed at
Ottawa, Canada, this 29th day of November 2002.
J.T.C.C.
Translation certified true
on this 13th day of January
2004.
Sophie Debbané, Revisor
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