Citation: 2010 TCC 634
Date: 20110111
Docket: 2008-3443(IT)G
BETWEEN:
RÉAL MARTEL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Boyle J.
[1]
The sole question to be
decided in this appeal is whether the Canada Revenue Agency (“CRA”) can use the
collection provisions in section 160 of the Income Tax Act (the “Tax
Act”) to collect taxes owed by a corporate taxpayer from an owner‑manager
shareholder who has received dividends from the corporation after the
time that a properly disclosed creditor proposal under the Bankruptcy and
Insolvency Act (the “BIA”) is made, accepted by the creditors and
ratified by the court.
I. Facts
[2]
Mr. Martel is an
owner‑manager and significant shareholder of Martel Management Inc.
(“Martel Management”). Martel Management operates a consulting business that
counts several persons.
[3]
Martel Management made
a proposal to its creditors including the CRA under the proposal provisions of
the BIA in December 2003. The BIA proposal was amended at
the request of creditors and was accepted by the creditors of Martel Management
in January 2004. Neither the CRA nor any other creditor asked for any
participation in the future profits of the company during the course of the
proposal process. The proposal, as accepted, provided that unsecured creditors
would be paid 30% of their claims (aggregating approximately $180,000) at the
rate of $2,000 per month. The CRA was an unsecured creditor for an amount of
$15,000 and thus was to receive approximately $4,500 under the proposal
accepted by it. (To the extent the CRA was also a preferred creditor, the
proposal also provided that any amount described in subsection 224(1.2) of
the Tax Act would be fully paid within six months.)
[4]
After the BIA
proposal was accepted by the creditors, it was approved by the Quebec Superior Court
in March 2004.
[5]
In February 2005,
Martel Management declared a $30,000 dividend payable on the class of shares
owned by Mr. Martel. According to Mr. Martel’s testimony, that
dividend was declared and paid to reflect the absence of payment of any salary
to him for services rendered to Martel Management in 2003 and 2004. The
detailed work records of himself and Martel Management’s other consultants were
offered in evidence.
[6]
Martel Management had
posted financial losses in 2003 and 2004. By 2005 Martel Management was
returning to profitability and positive cash flows. Its 2005 revenues had
increased by approximately $300,000 and it realised profits of $67,000. In 2005
Mr. Martel was paid approximately $40,000 in salary in addition to the
$30,000 in dividends. This, according to his testimony, was a fraction of the salary
he had received in the years before Martel Management experienced financial
difficulties. Mr. Martel acknowledged that the salary/dividend mix was
chosen for tax purposes.
[7]
The dividend was paid in
2005. This was before the final $2,000 payment under the proposal was made on
January 2, 2006. The terms of the proposal were fully complied with
by Martel Management in timely fashion and the CRA received the amounts it had agreed
to under the proposal. The payments called for by the proposal continued to be
made in timely fashion after the dividend was declared and paid to
Mr. Martel.
[8]
The testimony was clear
and uncontradicted as to the funds from which the dividend was declared and
paid: those were the revenues and profits realised by Martel Management after
the proposal had been accepted by the creditors and ratified by the court.
There is no question in this case of assets having been concealed within or
outside of the company’s estate to the detriment of any creditors, including
the CRA.
[9]
In accordance with the
provisions of the BIA, the trustee filed an application for discharge before
the Quebec Superior Court, which allowed it in September 2006. The CRA did
not exercise its rights under the BIA to object to the discharge of the
trustee for not having pursued the rights of the creditors or otherwise.
II. Issues
[10]
There are two issues
raised in this case:
1)
At the time of the payment
of the dividend in 2005, the transfer for purposes of section 160 of the Tax
Act, was the tax debt the initial amount of approximately $15,000 or the
reduced 30% amount payable under the terms of the creditor-accepted and court-ratified
BIA proposal? Specifically, under the terms of subparagraph 160(1)(e)(ii)
of the Tax Act, what was the company’s unpaid tax liability for 2005 and
prior years?
2)
Was there consideration
in the form of services rendered in exchange for the receipt by Mr. Martel
in 2005 of the mix of salary and dividends?
III. Law
Tax Act
|
160(1)
Transfert de biens entre personnes ayant un lien de dépendance — Lorsqu’une personne a […] transféré des biens, directement ou
indirectement, au moyen d’une fiducie ou de toute autre façon à l’une des
personnes suivantes :
[…]
c) une personne avec laquelle elle
avait un lien de dépendance,
les règles
suivantes s’appliquent :
[…]
e) le bénéficiaire et l’auteur du
transfert sont solidairement responsables du paiement en vertu de la présente
loi d’un montant égal au moins élevé des montants suivants :
(i) l’excédent éventuel de la juste valeur marchande des biens au
moment du transfert sur la juste valeur marchande à ce moment de la
contrepartie donnée pour le bien,
(ii) le total des montants dont chacun représente un montant que
l’auteur du transfert doit payer en vertu de la présente loi au cours de
l’année d’imposition dans laquelle les biens ont été transférés ou d’une
année d’imposition antérieure ou pour une de ces années;
aucune
disposition du présent paragraphe n’est toutefois réputée limiter la
responsabilité de l’auteur du transfert en vertu de quelque autre disposition
de la présente loi.
[…]
(3) Extinction
de l’obligation — Dans le cas où un contribuable
donné devient, en vertu du présent article, solidairement responsable, avec
un autre contribuable, de tout ou partie d’une obligation de ce dernier en
vertu de la présente loi, les règles suivantes s’appliquent :
a) tout paiement fait par le
contribuable donné au titre de son obligation éteint d’autant l’obligation
solidaire;
b) tout paiement fait par l’autre
contribuable au titre de son obligation n’éteint l’obligation du contribuable
donné que dans la mesure où le paiement sert à réduire l’obligation de
l’autre contribuable à une somme inférieure à celle dont le contribuable
donné est solidairement responsable en vertu du présent article.
|
160(1) Tax liability re property transferred not at arm’s length — Where
a person has. . . transferred property, either directly or indirectly, by means of a
trust or by any other means whatever, to
. . .
(c) a person with whom the person was not dealing at arm’s
length,
the following
rules apply:
. . .
(e) the transferee and transferor are jointly and severally
liable to pay under this Act an amount equal to the lesser of
(i) the amount, if any, by which the fair market value of the
property at the time it was transferred exceeds the fair market value at that
time of the consideration given for the property, and
(ii) the total of all amounts each of which is an amount that the
transferor is liable to pay under this Act in or in respect of the
taxation year in which the property was transferred or any preceding taxation
year,
but nothing in
this subsection shall be deemed
to limit the liability of the transferor under any other
provision of this Act.
. . .
(3) Discharge
of liability — Where a particular taxpayer has
become jointly and severally liable with another taxpayer under this section
in respect of part or all of a liability under this Act of the other
taxpayer,
(a) a payment by the particular taxpayer on account of that
taxpayer’s liability shall to the extent of the payment discharge the joint
liability; but
(b) a payment by the other taxpayer on account of that
taxpayer’s liability discharges the particular taxpayer’s liability only to
the extent that the payment operates to reduce that other taxpayer’s
liability to an amount less than the amount in respect of which the
particular taxpayer is, by this section, made jointly and severally liable.
|
IV. Positions of the Parties
[11]
The transferee in a
section 160 dispute is entitled to challenge the tax debt of the
transferor in the same manner as the tax debtor itself: See, for example, Thorsteinson
v. M.N.R., 80 DTC 1369 (TRB). That is not in dispute. In this
case, Mr. Martel submits that, by the time of the transfer, that is the
time when the dividend was paid to him, the tax debt had been reduced in part
as a result of the acceptance and court approval of the proposal. He also notes
that thereafter the company fully satisfied the remaining tax debt and the
remaining debt was fully discharged.
[12]
The parties agree that,
as held by the Federal Court of Appeal in The Queen v. Heavyside, 97 DTC 5026,
a section 160 transferee’s debt under the Tax Act arises at the
time of the transfer and is unaffected by a discharge from bankruptcy of the
tax debtor occurring after that time.
[13]
The parties further
agree that 2753-1359 Québec Inc. and Larouche v. The Queen,
2010 CAF 32, 2010 DTC 5031 applies; in that case, the
Federal Court of Appeal rejected the technical argument in a section 160
claim emanating from the province of Quebec that the payment of a dividend is
consideration for the settlement of the debt created under corporate law when
the dividend was declared.
[14]
The Appellant’s counsel
cites Visionic Inc. c. Michaud, [1982] J.Q. no 174, for the
proposition that, in Quebec at least, a dividend can be paid in consideration
of foregone salary or in consideration of services rendered. In that case the
owner‑managers of the corporation had changed their remuneration from
salary to dividends. They did this for tax planning purposes. The Quebec
Superior Court concluded that a dividend is nonetheless salary, at least for the
purposes of the provincial Loi sur les normes du travail. The change in form
of the remuneration did not remove its character as salary. It is not entirely
clear to me whether that holding applied only with respect to the Loi sur
les normes d’emploi or for all purposes under the laws of Quebec. Since I
am allowing this appeal on other grounds, I do not have to decide this issue;
it will be for another court to do so eventually at another time.
[15]
The issue that needs to
be decided in this case is: when is the tax debtor partly released and the tax
debt partly discharged by virtue of a successful proposal under the BIA?
[16]
The BIA is
silent as to when a debtor is released from its liabilities in the case of a
proposal. It is the Respondent’s position that, under subsection 66(1) of
the BIA, the bankruptcy provisions of the BIA are to supplement,
by analogy, the provisions of the BIA relating to proposals. It is clear,
under the bankruptcy provisions of that statute, that the debtor is released at
the time of an order of discharge of the bankrupt: see subsection 178(2).
It is the Respondent’s position that, by analogy, the time of the partial
discharge of a debt and partial release of the debtor under a BIA
proposal is the time of the order of discharge of the trustee or the time the
trustee issues a certificate under section 65.3 that the proposal has been
fully performed. If the Respondent is correct in this regard, Mr. Martel
is in the unfortunate position of having had Martel Management pay him his
dividend too early, that is, at a time when the CRA had, technically, the right
to collect the entire uncompromised tax debt of Martel Management from
Mr. Martel, even though under the BIA it clearly could not collect
it from Martel Management itself and even though the CRA did not have any
rights in the additional amount under the terms of the accepted and approved
proposal. The Respondent also points to section 69.1 of the BIA
which restrains creditors from taking action between the filing of a proposal
and the discharge of a trustee or the occurrence of a bankruptcy if the
proposal is not accepted or approved. The Respondent submits that this also
supports its position that it is the time of the order of discharge of the
trustee which governs in the case of a proposal. The Respondent submits that, at
the time the dividend was declared and paid, the tax debt therefore remained
the full amount of the debt even though the creditors could not collect that
amount from the debtor if the terms of the proposal were complied with by the
debtor.
[17]
Further, the Respondent
submits that paragraph 160(1)(e) of the Tax Act addresses the
transferee’s joint liability for the transferor’s tax liability under that Act,
that is, the Respondent submits, without regard to any compromise under the BIA.
[18]
It is the taxpayer’s
position that, if the BIA is properly read analogically, the time of the
partial release of the debtor and partial discharge of the original debt under
a BIA proposal is the time at which the proposal has been ratified by the
court following the acceptance thereof by the creditors. If the Appellant’s
position is correct, the CRA is not permitted to use section 160 of the Tax
Act against persons to whom property of the original tax debtor has been
transferred after the creditor’s acceptance and court ratification.
[19]
The Appellant cites Deslauriers
on “La faillite et l'insolvabilité au Québec”
in support of his position that it is not the date of the discharge of the
trustee by the court that is the effective date of the settlement of the debt
under the proposal:
ii) Libération des dettes du débiteur
La proposition peut avoir pour effet de libérer le
débiteur d’une partie de ses dettes. En effet, une proposition prévoyant le
versement d’un certain pourcentage des créances (par exemple 30 %) aura pour
effet de libérer le débiteur pour le solde si ce concordat est accepté (art.
62(2) L.f.i.). Le débiteur ne sera toutefois pas libéré des dettes visées
par l’article 178(1) L.f.i. à moins que les créanciers concernés n’y
consentent. De plus, les personnes tenues au paiement de la dette, à titre
d’associé, de cocontractant ou de caution, ne seront pas libérées par
l’acceptation de la proposition (art. 62(3) et 179 L.f.i.).
Certaines cautions ont déjà prétendu que la remise
consentie par les créanciers lors d’un concordat devait profiter aux cautions
et les libérer en conséquence. En effet, la remise d’une dette éteint
normalement le cautionnement, car ce dernier est un accessoire d’une obligation
principale, qui une fois éteinte, met fin au cautionnement. Cependant, la
remise de dette résultant d’un concordat n’est pas une remise volontairement
consentie par le créancier. Cette remise résulte plutôt de circonstances
imposées par la loi et d’une décision du tribunal. De plus, l’article 179
L.f.i. prévoit que la libération obtenue par un débiteur ne profite pas aux
cautions et l’article 62(3) L.f.i. édicte que l’acceptation d’une proposition
par un créancier ne libère aucune personne qui ne le serait pas aux termes de
la Loi sur la faillite par la libération du débiteur.
[Emphasis added.]
[20]
In addition, the
Appellant cites Houlden and Morawetz on “Bankruptcy and Insolvency Law of
Canada”
where it is stated:
When a proposal is accepted by creditors and
approved by the court, the debtor receives the same relief as he or she would
receive from a discharge from bankruptcy, i.e., a release of all debts
and liabilities to unsecured creditors, except
those listed in s. 178: Flint v. Barnard (1888), 22 Q.B.D. 90, 58
L.J.Q.B. 53, 37 W.R. 185, 5 T.L.R. 79 (C.A.); Anderson v. Canadian
Imperial Bank of Commerce (1999), 11 C.B.R. (4th) 157, 1999 CarswellOnt
1896 (Ont. Gen. Div.).
[Emphasis added.]
[21]
In particular, Houlden
and Morawetz cite Anderson v. Canadian Imperial Bank of Commerce (1999),
11 C.B.R. (4th) 157, [2000] C.C.S. No. 7021, where the Ontario Court of Justice,
which has jurisdiction over the application of the BIA in that province,
wrote at paragraphs 40 and 41:
I have no doubt that Mr. Wallace is meticulously
correct in his submission that a court‑approved proposal grants the
debtor the same relief as the debtor would get from a discharge in bankruptcy.
In Houlden & Morawetz, The 1999 Annotated Bankruptcy and Insolvency Act,
(Toronto: Carswell, 1998) one finds the following supporting comment for that
view at p. 199:
A proposal which has been accepted by creditors and
approved by the court is binding on:
(a)
all unsecured creditors, and
(b)
all secured creditors with claims in a class of
secured creditors that voted for the acceptance of the proposal by a majority
in number and two‑thirds in value of the secured creditors in that class.
When a proposal is accepted by creditors and approved
by the court, the debtor receives the same relief as he or she would receive
from a discharge from bankruptcy, i.e., a release of all debts and liabilities
to unsecured creditors, except those listed in s. 178: Flint v. Barnard
(1888), 22 Q.B.D. 90, 58 L.J.Q.B. 53, 37 W.R. 185, 5 T.L.R. 79 (C.A.).
If one moves to s. 178(2) of BIA one finds, in
somewhat cryptic language, that “an order of discharge releases the bankrupt
from all claims provable in bankruptcy.” I take it, then, that, by
analogy, the approved Proposal has a similar releasing effect on otherwise
valid unsecured claims.
[Emphasis added.]
[22]
The Respondent points
out that Houlden and Morawetz add:
E§85 Proposal Performed in Full
If a proposal is fully performed, the trustee gives a certificate to
the debtor and to the official receiver: s. 65.3. The form of the
certificate is Form 46. Presumably the certificate has the same effect
as a discharge from bankruptcy.
[Emphasis added.]
[23]
The taxpayer also
refers to subsection 62(2) of the BIA which provides that “a
proposal accepted by the creditors and approved by the court is binding on
creditors in respect of. . . all unsecured claims”. Further,
subsection 62(2.1) provides that “a proposal accepted by the creditors and
approved by the court does not release the insolvent person from any particular
debt or liability referred to in subsection 178(1) [being specific types
of debts not generally subject to compromise under the BIA such as
fines, alimony, fraud, etc.] unless the proposal explicitly
provides. . . ”
V. Analysis and Conclusion
[24]
In Wannan v. The
Queen, 2003 FCA 423, 2003 DTC 5715, the Federal Court of Appeal
acknowledges that the effects of the application of section 160 of the Tax
Act can be unjust, unfair and unwarranted but that Parliament nonetheless
has the power to, and did, give such a broad collection power to the CRA.
[25]
In Clause v. HMQ,
2010 TCC 410, I applied the provisions in section 160 in a
manner which arguably led to an unfair result. That being said, in that case, I
had to decide whether the transfer to Mrs. Clause occurred prior to a
second BIA proposal or prior to the original BIA proposal being
reinstated subsequent to default and the language of the BIA and the
proposals were clear.
[26]
As in Clause, the
Respondent in this case is unable to answer my question as to how, if I dismiss
the appeal, I could explain to Mr. Martel that the result will be fair or
that, in view of the language of the BIA, I am clearly bound to dismiss
the appeal. Indeed, the Respondent’s counsel concedes that such a result may
appear unjust.
[27]
While the Respondent’s
arguments are not without merit, at the end of the day, I am persuaded by Houlden
and Morawetz and Deslauriers.
I am not bound by the interpretation of the BIA on this very issue
propounded by the Ontario Court of Justice in Anderson v. CIBC, however,
I am prepared to follow that decision. That Court's interpretation is sensible since
that legislation does not specifically address proposals; in addition, in this
case, it will lead to a fair result. Finally, in the interest of judicial
comity, the Tax Court should follow the interpretation of courts having
jurisdiction over proposals under the BIA.
[28]
The Respondent submits,
in the alternative, that the language of section 160 applies strictly; the
amount of the liability under the Tax Act must be determined according
to that legislation and no regard must be had to any proposal under the BIA.
I cannot accept that argument. If it were taken literally, the CRA could pursue
transferees in respect of transfers made years after a bankruptcy discharge or
a successful proposal for the amount foregone voluntarily by the CRA as
creditor under a BIA proposal or involuntarily under a bankruptcy.
Section 160 may lead, in some cases, to unfair, unjust and harsh results, but
common sense surely imposes some limits.
[29]
The appeal is allowed
with costs.
Signed at Ottawa, Canada, this 11th day of January 2011.
"Patrick Boyle"
Translation certified true
On this 11th day of January 2011
François Brunet, Revisor
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