Date:
20020516
Docket:
1999-5017-IT-G
BETWEEN:
ROSARIO POIRIER
INC.,
Appellant,
and
HER MAJESTY THE
QUEEN,
Respondent.
ReasonsFOR
Judgment
Archambault,
J.T.C.C.
[1]
Rosario Poirier Inc. (RPI) has instituted an
appeal from income tax assessments made by the Minister of
National Revenue (Minister) for the 1994, 1995, 1996 and
1997 taxation years (relevant period). In computing the
income tax owed by RPI, the Minister disallowed a portion of the
small business deduction (SBD). The respondent contends
that RPI is not entitled to the disallowed portion of the SBD
because it was a corporation associated, within the meaning of
the Income Tax Act (Act), with another
corporation, Trab Inc. (Trab), during the relevant period.
According to the respondent, RPI controlled Trab directly or
indirectly in any manner whatever. Except for 1995, that is the
sole ground advanced by the respondent in support of the
Minister's assessments. With regard to 1995, the respondent
argues in addition that RPI could not appeal from the
Minister's assessment since no tax was payable. RPI admitted
through its counsel that it could not appeal from a
"nil" assessment.
The
facts
[2]
Rosario Poirier, who is a farmer's son and has very
little education, lives in St-Alphonse, a village located
on the Gaspé Peninsula, in Bonaventure County. It was
there that he founded a sawmill. RPI was incorporated as a
business corporation under letters patent issued on
March 19, 1973, and, on December 23, 1993, its
existence was continued under Part IA of the Quebec
Companies Act. As from February 18, 1994,
Mr. Poirier held 80 percent of RPI's common shares,
while his son, Luc Poirier, held the rest. Luc Poirier
has also been a member of RPI's board of directors since that
time. It would appear that Rosario Poirier had previously
held all the shares of RPI. In February 1994, he converted all
the common shares he then held into preferred shares valued at
$888,300. This reorganization of RPI's capital has all the
hallmarks of a partial estate freezing. Considering its modest
beginnings, RPI appears to have been very successful, and
Rosario Poirier is justifiably proud of it.
[3]
At first, RPI itself cut and transported the timber. It owned a
truck for hauling the logs from the forest to the sawmill. The
finished products were transported by a public carrier.
Luc Poirier apparently began to drive the truck as soon as
he was 18 years old. He left school after Secondary II,
at the age of 16. In the summer, he worked at the sawmill as a
pallet truck operator and, in the winter, he drove the truck or
worked as a skidder operator in the woods, according to what was
required at the time.
[4]
When Luc Poirier reached his twenties, his father wanted
him, so he said, to acquire experience in running a corporation
and to have greater financial security in the event RPI could no
longer provide him with work. His father therefore encouraged him
to buy, on August 10, 1988, all the shares of Trab from a
certain Boudreault for $6,000. Trab owned only two assets at the time, an old
timber transport truck worth approximately $200 and a timber
transportation permit worth approximately $5,500. Neither
Rosario Poirier nor
Luc Poirier remembered how the Trab share purchase had been
financed.
[5]
Shortly after Luc Poirier purchased Trab, that corporation
acquired RPI's truck for the sum of $1. Luc Poirier
admitted that this was a gift in disguise. He said that the truck
had little economic value. Even though RPI had transferred
ownership of its truck to Trab, RPI's employees continued to
drive it.
[6]
It was moreover Rosario Poirier who selected the first
driver for Trab's truck. Luc Poirier said he had handled
maintenance of the truck on Saturdays with the help of another
RPI employee, but he received no salary from Trab for that
service. In general, the truck was mainly used during the logging
period. At first, it was used chiefly for daytime transportation,
but later on it was used 24 hours a day, five days a
week.
[7]
During the relevant period, RPI was virtually Trab's only
customer. In Trab's financial statements for the fiscal years
ended on May 31, 1994 and 1995 it is noted that:
[TRANSLATION] "The corporation earns all its timber
transportation income from an affiliated corporation."
Starting in 1996, the statement read as follows: [TRANSLATION]
"The corporation earns all its timber transportation and
equipment rental income from an affiliated corporation."
According to a statement of fact, which was admitted, in the
Reply to the Notice of Appeal, 92 percent, 88 percent
and 100 percent of Trab's income for the 1995, 1996 and
1997 fiscal years respectively came directly from RPI, whereas
other income came from transportation provided for persons who
had contacted Rosario Poirier.
[8]
In particular, in the fall of 1995, Trab transported timber for
9011-6989 Québec Inc. (JGT) for $12,075. The
shareholder of JGT, one Jean-Guy Thériault, had
communicated with Rosario Poirier concerning the
transportation of logs to be loaded onto a ship. The following
year, Trab also provided transportation for Entreprises
Bernard Lepage (EBL), a business belonging to a
personal friend of Rosario Poirier's. In his testimony,
Luc Poirier said he did not remember this last
transportation contract.
[9]
Luc Poirier admitted that he had not bid on other
transportation contracts. When asked why Trab had not expanded by
acquiring other trucks and serving other customers, he answered
that he did not like getting up at night to repair a broken down
truck—nor, presumably, did he like getting up to replace
truck drivers either.
[10]
In addition to being Trab's sole shareholder, Luc Poirier has also
been its only director from 1988 to the present, except during a
brief one-year period starting in June 1994 when his father
was also on the board of directors. When questioned on the
management of Trab, Luc Poirier had
difficulty providing precise answers. He said that RPI's
secretary and the accountant for both RPI and Trab had handled
all matters pertaining to management.
[11]
One of the facts on which the Minister relied in making his
assessment was that Luc Poirier had confirmed in a telephone
conversation with the Minister's auditor that [TRANSLATION]
"it's more Rosario Poirier who looks after
Trab." In his testimony, Luc Poirier did not deny
that conversation with the auditor. Furthermore, resolutions by
Trab's board of directors dated May 6 and June 23,
1992, gave Rosario Poirier and his wife, Sergine Dugas,
authority to sign all documents considered necessary and also to
make any decisions relating to Trab.
[12]
The two main, if not the only, administrative duties performed by
Luc Poirier were signing Trab's cheques for the few
expenses it occasionally paid and choosing a replacement truck
every three years. When purchasing one of those trucks,
Luc Poirier said, he selected one with a bigger engine than
the one his father had suggested to him. To explain his lack of
involvement in managing Trab, Luc Poirierdescribed himself as being more
a man for working in the field. Since 1991,
Luc Poirier has worked for RPI on a full-time, year-round
basis. Although he has the title of production manager at RPI,
his duties consist mainly in doing equipment, maintenance,
driving a pallet truck, replacing, as necessary, employees who
operate the sawmill equipment, or planning the logging. He is
remunerated by the week, as is his father. His only employment
income comes from RPI. The other employees of that corporation
are paid by the hour.
[13]
According to Rosario Poirier, he does not get involved in
running Trab. He merely advises his son, whom he considers his
right-hand man, confidant and hunting and fishing partner. He
added that he knew nothing about trucks and, as evidence of that,
stated that he had consulted more knowledgeable members of his
family when he had had to purchase trucks in the past. However,
the evidence shows that Rosario Poirier was present when
Trab obtained the loan to finance the purchase of the first new
truck to replace the truck acquired from RPI. Rosario and
Luc Poirier stated that neither Rosario Poirier nor RPI
had provided a guarantee for the loan.
[14]
Other facts reveal that Rosario Poirier was more involved in
running Trab than he was prepared to acknowledge. In addition to
being the person who appears to have negotiated the two timber
transportation contracts with JGT and EBL, it was he who handled
the collection of the transportation charges. Fearing that Trab
would not be paid for the services it had provided to JGT,
Rosario Poirier obtained a personal letter of guarantee from
Mr. Thériault. When JGT did not pay the $12,075 it
owed Trab, it was RPI, not Trab, that sent JGT a formal demand
for payment. Thanks to Rosario Poirier's business sense
and experience, Trab was JGT's only supplier to be
paid.
[15]
The ordinary administrative duties at Trab are generally the
responsibility of Rosario Poirier's secretary, who is an
employee of RPI. In particular, it was she who, with the help of
Trab's outside accountant (the same as RPI's), prepared
Trab's invoices for the transportation provided to RPI.
Trab's operating expenses, that is, salaries,
fuel, oil and grease, were paid by RPI. Those expenses were then
billed to Trab at irregular intervals: often every month, but
sometimes the invoices were for periods of two or
five months. In addition, the T4 slips for the truck drivers
were prepared by RPI. In addition to using RPI's
administrative services and its staff, Trab also used the same
premises and telephone. Trab was not listed in the telephone
directory.
[16]
For Luc Poirier, the acquisition of Trab provided a source
of supplementary income. According to its financial statements,
Trab made net profits of approximately $32,000 in 1994 and 1995,
$135,549 in 1996 and $146,774 in 1997. Shareholders' equity
increased from $157,718 in 1994 to $190,095 in 1995, $304,253 in
1996, $441,427 in 1997 and $527,628 in 1998. Those profits from
the transportation done for RPI enabled Trab to pay
Luc Poirier dividends of $9,000 on June 1, 1995, and
January 4, 1996, and $28,000 on January 4, 1998. With
those dividends, Luc Poirier was able to acquire a trailer
and a rental property.
[17]
In addition, it was admitted that RPI and Trab lent each other
money when there was a cash shortage and that no interest was
charged on such loans. Luc Poirier stated that Trab was paid
on the basis of the quantity of timber hauled for RPI and that
the price was fixed in accordance with the market rate. From May
to December 1994, Trab's transportation charges to RPI were
below the market rate, and an adjustment of $2/m3 had
to be made in December 1995. In the St-Alphonse region,
there are at least two other sawmills and at least two log
haulage businesses.
Positions of
the Parties
[18]
Counsel for the respondent contends that RPI controlled Trab
directly or indirectly in any manner whatever during the relevant
period since Trab was economically very dependent on RPI at that
time. Furthermore, Trab's operations were closely integrated
into those of RPI.
[19]
Counsel for RPI recognizes that his client exercised influence
over Trab's activities. However, that influence was not
sufficient for RPI to have control in fact of Trab. It was,
argues counsel, Luc Poirier who made the important decisions
for Trab and exercised predominant influence in the conduct of
the affairs of that business. According to counsel, if
subsection 256(5.1) of the Act were to be construed
liberally, it could apply to cases not contemplated by the
legislator. As a particular example, he cited the case of the
American government which, through the adoption of tax measures,
could even bring about the sawmill's closure.
[20]
In the alternative, counsel for RPI contends that, even if it
could be concluded that there was control in fact by virtue of
the application of subsection 256(5.1) of the Act,
such a conclusion is not possible where control in law exists, as
is the case here. As Luc Poirier controls 100 percent
of Trab's shares, no one else can exercise control in fact
over that corporation. In other words, it cannot be found that
there is control in fact unless one person has control in law of
a corporation. Counsel bases this interpretation on the wording
of subsection 256(1.2) of the Act, the effects of
which are limited to subsections 256(1) to (5).
Subsection 256(5.1) thus escapes the application of
subsection 256(1.2). Counsel for RPI points out that the
rule stated in this last subsection was adopted as a result of
the decision in Southside Car Market Ltd. v. The
Queen, [1982] 2 F.C. 755, 82 DTC 6179, in
which it was held that there could not be two parallel controls
held by two separate persons or groups of persons. In this
instance, there could not exist at the same time control in law
exercised by Luc Poirier and control in fact exercised by
RPI.
Analysis
[21]
The only issue is whether Trab was controlled directly or
indirectly in any manner whatever by RPI during the relevant
period. If it was, the Minister's assessment must be
confirmed. If not, RPI would be entitled to the full amount of
the SBD which it claimed. If such control was exercised, Trab and
RPI would have been associated corporations during the relevant
period.
[22]
The relevant provisions in the instant case are the following,
found in section 256:
256. (1) Associated
corporations — For the purposes
of this Act, one corporation is associated with another in a
taxation year if, at any time in the year,
(a) one of the
corporations controlled, directly or indirectly in any manner
whatever, the other;
(b) both of the
corporations were controlled, directly or indirectly in any
manner whatever, by the same person or group of
persons;
(c) each of the
corporations was controlled, directly or indirectly in any manner
whatever, by a person and the person who so controlled one of the
corporations was related to the person who so controlled the
other, and either of those persons owned, in respect of each
corporation, not less than 25% of the issued shares of any class,
other than a specified class, of the capital stock
thereof;
(d) one of the
corporations was controlled, directly or indirectly in any manner
whatever, by a person and that person was related to each member
of a group of persons that so controlled the other corporation,
and that person owned, in respect of the other corporation, not
less than 25% of the issued shares of any class, other than a
specified class, of the capital stock thereof; or
(e) each of the
corporations was controlled, directly or indirectly in any manner
whatever, by a related group and each of the members of one of
the related groups was related to all of the members of the other
related group, and one or more persons who were members of both
related groups, either alone or together, owned, in respect of
each corporation, not less than 25% of the issued shares of any
class, other than a specified class, of the capital stock
thereof.
(1.2) Control,
etc. — For the purposes of
this subsection and subsections (1), (1.1) and
(1.3) to (5),
(a)
a group of persons in respect of a corporation
means any two or more persons each of whom owns shares of the
capital stock of the corporation;
(b)
for greater certainty,
(i)
a corporation that is controlled by one or more members of
a particular group of persons in respect of that
corporation shall be considered to be controlled by that group of
persons, and
(ii)
a corporation may be controlled by a person or a particular
group of persons notwithstanding that the corporation is also
controlled or deemed to be controlledby another
person or group of persons;
(c) a
corporation shall be deemed to be controlled by another
corporation, a person or a group of persons at any time
where
(i)
shares
of
the capital stock of the corporation having a fair market
value of more than 50% of the fair market value of all
the issued and outstanding shares of the capital stock of the
corporation, or
(ii)
common
shares of the capital stock of the
corporation having a fair market value of more than
50% of the fair market value of all the issued and
outstanding common shares of the capital stock of the
corporation
are owned
at
that time by the other corporation, the person or the group of
persons, as the case may be;
(d)
where shares of the capital stock of a corporation
are owned, or deemed by this subsection to be
owned, at any time by another corporation (in this
paragraph referred to as the "holding corporation"),
those shares shall be deemed to be owned at that time by
any shareholder of the holding corporation in a
proportion equal . . .
(e)
where, at any time, shares of the capital
stock of a corporation are property of a partnership, or
are deemed by this subsection to be owned by the partnership,
those shares shall be deemed to be owned at that time by each
member of the partnership in a proportion equal
. . .
(f)
where shares of the capital stock of a corporation are
owned, or deemed by this subsection to be owned, at any
time by a trust,
(i) . . .
(A) . . . shall be deemed . . .
(g) in
determining the fair market value of a share of the capital stock
of a corporation, all issued and outstanding shares of the
capital stock of the corporation shall be deemed to be
non-voting.
(5.1) Control in
fact — For the purposes of
this Act, where the expression "controlled, directly
or indirectly in any manner whatever," is used,
a corporation shall be considered to be so controlled by
another corporation, person or group of persons (in this
subsection referred to as the "controller") at any time
where, at that time, the controller has any
direct or indirect influence that, if exercised, would result in
control in fact of the corporation, except that, where
the corporation and the controller are dealing with each other at
arm's length and the influence is derived from a franchise,
licence, lease, distribution, supply or management agreement or
other similar agreement or arrangement, the main purpose of which
is to govern the relationship between the corporation and the
controller regarding the manner in which a business carried on by
the corporation is to be conducted, the corporation shall not be
considered to be controlled, directly or indirectly in any manner
whatever, by the controller by reason only of that agreement or
arrangement.
[23]
The respondent relies here on paragraph 256(1)(a) of
the Act in concluding that RPI and Trab were associated.
Subsection 256(5.1) states the meaning and scope of the
notion of control exercised directly or indirectly in any manner
whatever. The purpose of that provision is to expand the concept
of control defined in the case law (in particular in
Buckerfield's Ltd. v. M.N.R., 64 DTC 5301,
5303, and M.N.R. v. Dworkin Furs (Pembroke) Ltd.,
67 DTC 5035)¾which
had limited it to control in law¾by
adding the notion of control in fact which had been excluded by
the courts. A corporation will be "controlled, directly
or indirectly in any manner whatever" where a controller
(RPI) has any direct or indirect influence that, if exercised,
would result in control in fact of that corporation (Trab in the
instant case). This is a question of fact.
[24]
In my view, such a situation in fact exists here. The indicators
of such influence over Trab are as follows. First of all,
pursuant to a resolution by Trab's board of directors,
Rosario Poirier has been authorized since May 6, 1992,
to sign all documents considered necessary and to make any
decisions pertaining to Trab. Rosario Poirier has control in
law of RPI and, by virtue of that resolution, RPI may, through
Rosario Poirier, exercise managerial rights with respect to
Trab.
[25]
Furthermore—and this is the key factor—Trab is to a
large degree economically dependent on RPI. That dependence stems
from the fact that RPI is Trab's only customer. The financial
statements moreover confirm this: "The corporation earns
all its timber transportation income from an affiliated
corporation." This dependence exists even where the
transportation service is not being provided to RPI, as in the
case of the haulage done for EBL and JGT. If RPI decided to
terminate the transportation contract, Trab would find it hard to
continue operating its business, for lack of customers. It would
then quickly have to find others, which is not necessarily easy
in the St-Alphonse region. As a result, RPI is in a
position to exercise influence such as to be able to control Trab
in fact.
[26]
Another indicator of this control is the integration of
Trab's activities with those of RPI. All the personnel
required for the operation of Trab's business are RPI
employees. The cost of the services provided by those employees
was subsequently reimbursed by Trab. Trab has no place of
business separate from RPI's. Another indicator is the extent
of Rosario Poirier's involvement in running Trab. In
particular, it was he who negotiated the transportation contracts
with JGT and EBL and who took the steps to obtain payment of the
amounts to which Trab was entitled. It must be added that
Luc Poirier, Trab's sole shareholder, is an employee of
RPI and earns all his employment income from RPI. Trab paid him
no employment income. Not only was Luc Poirier a full-time
employee of RPI, but his activities had very little connection
with those of Trab. Other RPI employees had more to do with
operating Trab. Lastly, Luc Poirier is the son of
Rosario Poirier, who has control in law of RPI. These are
all facts which afford a better understanding of Trab's
economic dependence on RPI.
[27]
In the circumstances, I think it clear that RPI is a controller
having an influence that, if exercised, not only would result in
control in fact, but here actually did enable RPI to have control
in fact of Trab.
[28]
Invoking in particular Southside Car Market Ltd.,
supra, counsel for RPI contends in the alternative that
there could not be simultaneous control of Trab by RPI and
Luc Poirier in view of the fact that Luc Poirier had
control in law of 100 percent of Trab's voting shares.
In my view, that decision by the Federal Court-Trial Division is
irrelevant to the interpretation of
paragraph 256(1)(a) of the Act. In
Southside Car Market Ltd., two corporations, A and B, were
controlled by Mr. W. Another corporation, D, was held
equally by Mr. W and another taxpayer. The Minister relied
on paragraph 256(1)(b), as it was drafted at the
time,
in concluding that A, B and D were associated with each other.
Cattanach J. concluded that the first two corporations were
controlled by one person, while corporation D was controlled
by a group of persons. In Cattanach J.'s view, the
three corporations would have had to be controlled by the
same person or group of persons. He writes as follows at
pages 769 and 770 F.C. (page 6186 DTC):
In my view it is implicit from the language quoted that if a
single person owns a sufficient number of shares in a company,
there is no necessity to consider the question of fact as to what
group of persons owns such a number of shares. Thus, if a single
person owns sufficient shares to exercise control, resort to
whether a group of persons holds control is precluded. The
condition precedent to the consideration of control in a group is
that no single person has control.
That, in my view, is the precise meaning of
paragraph 256(1)(b).
The interpretation
problem in Southside Car Market Ltd. does not arise in the
instant case. Moreover, the same paragraph of
subsection 256(1) of the Act is not involved
here.
[29]
In my view, paragraph 256(1)(a) is clear and precise
and leaves no doubt as to its meaning. Once one corporation
controls another directly or indirectly in any manner whatever,
those two corporations are associated with one another. The fact
that another taxpayer had control in law of Trab is irrelevant
here since RPI had control in fact under
paragraph 256(1)(a) of the Act.
[30]
Furthermore, under subparagraph 256(1.2)(b)(ii) of
the Act, there is nothing to prevent one from concluding
that a corporation (RPI) has control in fact of another (Trab)
within the meaning of paragraph 256(1)(a) of the
Act, even if another person (Luc Poirier) exercises
control in law over the latter corporation.
Subparagraph 256(1.2)(b)(ii) of the Act
clearly applies to paragraph 256(1)(a). In other
words, it is not necessary for subsection 256(1.2) of the
Act to refer to subsection 256(5.1). Reference to
subsection 256(1) is sufficient.
[31]
Consequently, RPI's appeals shall be dismissed, with costs to
the respondent.
Signed at Ottawa, Canada, this
16th day of May 2002.
"Pierre
Archambault"
J.T.C.C.
Translation certified
true on this 11th day of June 2002.
[OFFICIAL ENGLISH
TRANSLATION]
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
1999-5017(IT)G
BETWEEN:
ROSARIO POIRIER INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard at Québec, Quebec, on
November 19, 2001, by
the Honourable Judge Pierre
Archambault
Appearances
Counsel for the
Appellant:
Robert
Marcotte
Counsel for the
Respondent:
Daniel Marecki
JUDGMENT
The appeals from the assessments made under the Income Tax
Act for the 1994, 1995, 1996 and
1997 taxation years are dismissed with costs to the
Respondent.
Signed at Ottawa, Canada, this 16th day of May
2002.
J.T.C.C.
Translation certified
true
on this 11th day of June
2002.
Erich Klein, Revisor
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