Citation: 2011 TCC 92
Date: 20110216
Docket: 2009-1785(IT)G
BETWEEN:
RNC MÉDIA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Bédard J.
[1]
This is an appeal by
the appellant, RNC Média Inc., formerly Radio Nord Communications Inc., from an
assessment made on April 18, 2007, by the Minister of National Revenue (the
Minister), pursuant to the Income Tax Act (the Act) for its taxation
year ending August 31, 2003. A notice of objection was duly produced on July
12, 2007. The assessment was amended on February 26, 2009. The total amount in
question is less than $50,000 (Category A).
[2]
On February 15, 2001,
the appellant dismissed its President and Chief Operating Officer, Gilles
Poulin. The appellant paid Mr. Poulin $135,843 in the context of his dismissal.
The appellant deducted $135,843 from its income calculation for the 2003
taxation year. The appellant claims it was entitled to deduct the amount of
$135,843 in the calculation of its income because it paid Mr. Poulin
compensation for the services he had rendered. Moreover, in the assessment made
on April 18, 2007, and amended on February 26, 2009, the Minister disallowed
the expense the appellant deducted as a benefit for services rendered. The
Minister considered that this amount had been used to purchase the 75 shares
Mr. Poulin held in the capital stock of the appellant and which resulted in
a deemed dividend pursuant to subsection 84(3) of the Act. In this case, only
one issue is raised: did the appellant pay Mr. Poulin $135,843 to
purchase its own shares that he held, or as a benefit for services rendered?
[3]
Martin Leblanc, tax
specialist with the firm Samson, Bélair (the appellant's external auditor) and
Pierre Brosseau, Chair of the appellant's board of directors, testified in
support of the appellant's position. Only Mr. Poulin testified in support of
the respondent's position.
Background
[4]
The appellant has been
operating in the telecommunications sector for more than 50 years. It began its
activities by operating radio stations in northwest Quebec.
It has since acquired many radio stations and some regional television
stations.
[5]
Until February 15,
2001, Mr. Poulin worked as the appellant's President and Chief Operating
Officer. He was responsible for the activities of all its radio and television
units. During his 24 years of service, Mr. Poulin held the positions of
Director General, Vice-President of Development, Executive Vice-President,
President and Director General, and President and Chief Operating Officer (as
of 1998) for the appellant. Starting in 1982, he took on the role of director
and officer as president. In 1987, he became a shareholder of the appellant. He
held 2,575 ordinary shares, for 5% of the appellant's capital stock.
[6]
On March 19, 1998, the
appellant entered into a contract of employment with Mr. Poulin (Exhibit A‑1,
Tab 10) to retain his services as president and Chief Operating Officer.
The contract came into force on September 1, 1997. When the contract was
signed, and when Mr. Poulin was dismissed, the appellant was represented by
Pierre Brosseau, a lawyer by training who was a consultant for Groupe Radio‑Nord
Inc. and Radio‑Nord Communications Inc. in 1996 and President and Chief
Executive Officer of Groupe Radio‑Nord Inc. in 1997, in which he held 50%
of shares as of the fall of 2000.
[7]
A specific agreement on
Mr. Poulin's profit sharing in the appellant's capital stock (the Agreement)
was entered into on March 19, 1998 (Exhibit I‑1, Tab 1). The
effective date of the Agreement is September 1, 1997. Article 1 of the
Agreement stipulates:
[translation]
ARTICLE 1 – CAPITAL PROFIT SHARING
1.1.
Considering that the Intervenor shall proceed
with a corporate reorganization as a "freeze", the President and COO
shall subscribe to 75 of the 1,000 voting and participating shares to be issued
by the Company after the "freeze", representing the only participating
shares that will be in circulation, for consideration of $1.00 per share
payable in cash, or for a similar fraction of a different number of equally
voting and participating shares.
1.2.
In the case where the President and COO does not
remain employed by Radio Nord Inc. for a period of 3 years as of the Effective
Date, he shall return to the Company or to persons determined by the Company's
board of directors 25 of the voting and participating shares he holds for
consideration of $1.00 each payable upon request. The balance of 50 shares
shall be treated in the same manner as the case where the President and COO
remains employed by the Company for a minimum period of 3 years.
1.3.
In the case where the President and COO remains
employed by the Company for 3 years as of the Effective Date, the Company or
persons designated by its board of directors, shall proceed with the purchase
or redemption of the shares in circulation for their book value during the
Company's last fiscal year settled by the Company's auditors and payable in the
30 days following the board of directors meeting approving the financial
statements of the preceding fiscal year.
1.4.
For the purposes of ensuring the execution of
each party's obligations under this paragraph, the share certificates for the
Company subscribed by the President and COO shall be remitted to a
depositary-agent that will be the law firm Lapointe, Rosenstein and whose
mandate shall be as follows:
1.
hold the above-noted share certificates duly
endorsed by the Company (or eventually the Intervenor);
2.
remit the above-noted share certificates or any
portion thereof to their owner according to the provisions set out in these
presents;
3.
in case of dispute between the parties, hold the
shares until final judgment, provided always that:
a.
the depositary-agent shall only be responsible
for its acts done or made in bad faith,
b.
shall be released from any obligation if it acts
in accordance with an opinion from a Quebec law firm of at least 20 lawyers in a partnership,
c.
may resign from its duties simply with a 15-day
notice or be replaced upon consent by the parties,
d.
shall not be responsible for ensuring the
execution of the respective obligations of the parties and may require any
indemnity guarantee it deems sufficient.
All of the depositary-agent's fees shall be assumed in equal parts
by the Company and/or Intervenor on one hand, and by the President and COO on
the other.
[8]
Mr. Poulin submits that
he subscribed to 75 ordinary Class "C" shares in the appellant for
consideration of $0.10 per share and he paid the amount of the subscription by
cheque payable to the appellant for $7.50 on August 15, 2000. I immediately
note that the appellant's financial statements (see Exhibit A-1, Tab 2, Page
99, note 10) for its fiscal year ending August 25, 2002, indicate that the appellant's
shares subscribed to by Mr. Poulin were not issued. One could also deduce from
these financial statements that the appellant cashed the $7.50 cheque at some
point because there is an entry for $8 ($7.50 rounded to $8) under the heading
[translation] "other
subscribed shares" dated August 25, 2002. On this, I immediately note that
the appellant submits that while the 75 ordinary Class C shares of its capital
stock had been subscribed by Mr. Poulin, they were never issued. The respondent
submits that these shares were issued, hence the present litigation.
[9]
On February 15, 2001,
Pierre Brosseau sent a letter to Mr. Poulin (Exhibit I‑1, Tab 3) in which
the appellant advised him that he was dismissed following the company's
reorganization. This letter was accompanied by the text of a transaction and
discharge that stated the various benefits granted by the appellant to
terminate its relationship with Mr. Poulin. The appellant had granted Mr.
Poulin 6 days to communicate his consent to such an agreement. The second
"whereas" of this agreement stipulates:
[translation]
Whereas Mr. Poulin subscribed to seventy-five (75) voting and
participating shares of RNCI pursuant to a capital profit-sharing agreement
entered into on March 19, 1998;
(emphasis added)
In regard to the 75 shares with voting and
participation rights to which Mr. Poulin subscribed, the appellant offered,
under paragraph 2.4 of this agreement that: [translation]
"RNCI buy back the 75 voting and participating shares of capital stock in
RNCI acquired by Mr. Poulin pursuant to the capital profit-sharing agreement
entered into by the parties on March 19, 1998, and pay Mr. Poulin, in
consideration of the said redemption, the amount of $59,193." Mr. Poulin
rejected the appellant's transaction proposal.
[10]
On June 21, 2001, Mr.
Poulin brought legal action against the appellant to have his rights recognized
under the terms of the Agreement (Exhibit I‑1, Tab 1). The
initial case included a declaratory component and for passation of title
regarding the 75 ordinary Class "C" shares to which he subscribed. On
this, paragraphs 45 and 46 of the Re-Amended Statement and Retraxit are worth
citing (see Exhibit I‑1, Tab 4). They state:
[translation]
45 Also, the applicant is asking this court to declare
whether, in fact, he or the defendant company, could, after his contract for
employment was extended for two years on February 15, 2001, require the sale,
purchase or redemption of his shares;
46 In the affirmative, the applicant asks for the transfer
of titles, for the price to be determined by this honourable Court, submitting
that the fair market value of his shares is $3,000,000 and their book
value is not $59,193 as proposed by the defendant company, but rather
$279,127.00… In support of these claims, the applicant submitted an expert
accounting report (Exhibit P-36)…
[11]
Further to this initial
litigation, as a settlement offer on August 22, 2002, the appellant paid Mr.
Poulin compensation of $468,986. On reading the letter by counsel Alain Gascon
(Exhibit I‑1, Tab 7), who represented the appellant during this
case, to which cheques totalling $468,986 were enclosed, it can be seen that a
cheque for $67,880.37 was drawn on the appellant's bank account payable to
Mr. Poulin in regard to the 75 ordinary Class "C" shares. The text of
this letter can be usefully reproduced. It states:
[translation]
|
SHARE REDEMPTION:
|
$59,193.00
|
|
DIVIDENDS:
|
$69,559.00
|
|
Cheque no. 003987
|
Payable to Gilles Poulin
|
$67,880.37
|
|
|
|
|
|
|
|
Share redemption:
|
$59,193.00
|
|
|
|
(Value of the 75 non-issued ordinary
shares)
|
|
|
|
|
|
|
|
|
Dividends:
|
$69,559.00
|
|
|
|
|
|
|
|
|
Gross total:
|
$128,752.00
|
|
|
|
Less tax deductions
|
- 60 871.63
|
|
[Emphasis added]
[12]
As to the initial litigation,
an amendment took place so that the August 22, 2002, payment of
$468,986 (see Exhibit I‑1, Tab 4) could be taken into
consideration. Considering the $59,193 received by Mr. Poulin for the 75
subscribed ordinary Class "C" shares after his initial legal case was
brought, Mr. Poulin asked, in the amended case, for a judgment on the balance, submitting
that the value of his shares was $279,127 and not $59,193.
[13]
On August 28, 2003,
Justice Nicole Morneau of the Superior Court of Québec rendered the following
decision regarding the 75 ordinary Class "C" shares in the appellant
to which Mr. Poulin subscribed (see Exhibit A‑1, Tab 6,
page 14):
[translation]
…
DETERMINES the value of the applicant's
75 ordinary shares in Radio Nord Communications Inc. to be $195,036.00, as of August 31, 2000;
ORDERS the defendant to pay the
applicant $135,843.00 for the balance of its shares with interest at the legal
rate and additional indemnity as provided under article 1619 Cr.C.Q. on the
amount of $195,036.00 from February 2001 to August 22, 2002, and on the balance
of $135,843.00 as of August 23, 2002;
DECLARES good and valid the tender and
payment of the applicant's shares to the defendant and orders their transfer to
the defendant for payment of the price established above;
…
[14]
Moreover, the evidence
showed that:
a.
The regulation (Special
Regulation No. 29) modifying the appellant's status and in particular
giving effect to the freeze proposed by the appellant in the Agreement and to
create a Class "C" ordinary shares class was adopted on August 9,
2000 (see Exhibit A-1), Tab 14, pages 159-160). The statute modification
certificate was submitted to the Inspecteur général des institutions
financières the same day Special Regulation No. 29 was adopted (see Exhibit A‑1,
Tab 14, pages 161-175);
b.
The appellant submitted
a T-4 information slip (Exhibit A‑1, Tab 8) regarding the
$135,843 paid to Mr. Poulin. This information slip indicates that this
$135,843 was paid to Mr. Poulin as employment income and that the appellant
made the appropriate source deductions. Immediately, I note that Mr. Poulin had
testified that in his income tax return for the 2003 taxation year, he had
treated that amount received by the appellant as employment income (see page
64 of the transcript);
c.
The appellant's
financial records for its fiscal year ending August 31, 2003, indicate that the
subscription for the 75 ordinary Class "C" shares had been cancelled
(see Exhibit A-1, Tab 2, page 99);
d.
The appellant treated
the $135,843 paid to Mr. Poulin in 2003 as an expense for the purpose of
earning income from his business for both accounting and tax reasons;
e.
The appellant's
Regulation No. 21 (Exhibit A‑1, Tab 15, pages 194‑195)
indicates that:
[translation]
(1)
the company's capital
stock may be distributed at the times, in the manner, and to the persons or
categories of persons the directors may occasionally determine by resolution;
(2)
the company was to keep
records at its head office that included the names of all persons who were or
had been shareholders in the company in alphabetical order, the number of
securities held by each shareholder, and the details of the issuance and
transfer of each share in the company's capital;
(3)
each share certificate
in the company must be issued under the seal of the company and signed by the
President or Vice‑President and countersigned by the secretary or
assistant secretary.
It must immediately be noted that Jacques
Lavallée (the Canada Revenue Agency auditor who conducted the audit of the
appellant's books that led to the April 18, 2007, assessment made by the
Minister) stated during his direct examination (see Exhibit A-2) that during
his audit of the appellant's books, he did not see any resolution by the
directors authorizing Mr. Poulin to be issued 75 ordinary Class "C"
shares, any share certificate indicating these shares had been issued or any
entry in the appellant's shareholder record indicating these shares had been
issued to Mr. Poulin. Mr. Lavallée added that after the April 18, 2007,
assessment was made and its amendment he became aware of the photocopy of a
cheque (Exhibit A‑1, Tab 11) indicating that, on August 5,
2000, Mr. Poulin had drawn a cheque on his bank account for $7.50 payable to
the appellant. Mr. Lavallée explained during this direct examination that his
decision that the 75 ordinary Class "C" shares had been issued by the
appellant to Mr. Poulin was solely based on his interpretation of the Agreement
and on the provisions of the judgment cited at paragraph 13, below. It is also
of note that Mr. Poulin, as Mr. Brosseau, testified that he had not
attended nor was he summoned to a meeting of the board of directors during
which it was resolved to issue Mr. Poulin 75 ordinary Class "C"
shares, and he was not aware that such a resolution had been adopted;
f.
The appellant's
securities register (Exhibit A‑1, Tab 12) indicates that 5% of the
ordinary shares held by Mr. Poulin had been redeemed on June 15, 1998, for
$375,000 in accordance with paragraph 10.1.4 of his employment contract
(Exhibit A‑1, Tab 9) and that he no longer held any shares in
the appellant's capital;
g.
The corporation
information report (Exhibit I‑1, Tab 5) obtained from the
Inspecteur général des institutions financières, dated February 22, 2001,
indicates that as of December 19, 2000 (the date the appellant's last annual
return was filed) Mr. Poulin was the appellant's director and second
shareholder. It must be noted that the evidence submitted by the parties does
not provide the name of the person who filed the annual return of December 19,
2000, or the name of the person who audited it or the name of the person who
sent it to the Inspecteur général des institutions financières.
Martin Leblanc's testimony
[15]
Mr. Leblanc's testimony
can be summarized as follows:
i.
During his review of
the appellant's minute books and share register, he could not find any minutes
by the board of directors (or a resolution by its directors) or any entry in
the share register indicating that 75 ordinary Class "C" shares in
the appellant had been issued;
ii.
During the review of
the appellant's records, he did not find the original share certificate
attesting to the alleged issuance of these 75 ordinary Class "C"
shares; this certificate should have been in the appellant's books, duly signed
by Mr. Poulin following the appellant's alleged purchase or redemption of the
shares in question;
iii.
He reviewed the employment
contract and the Agreement between the appellant and Mr. Poulin, the legal action
brought by Mr. Poulin against his client and the judgment rendered by the
Superior Court of Québec in that case;
iv.
He knew that Mr. Poulin
had drawn a cheque for $7.50 payable to the appellant;
v.
He reviewed the
appellant's regulations;
vi.
Mr. Brosseau pointed
out to him that the appellant and Mr. Poulin had entered into the following
verbal agreement: the 75 ordinary Class "C" shares would not be
issued; however, the appellant would pay Mr. Poulin, in consideration for the
services he had rendered, an amount equal to that which he would have been
entitled to receive under the Agreement regarding the 75 ordinary Class
"C" shares to which he had subscribed;
vii.
After his review of all
the documents, he found that:
1.
Mr. Poulin had
subscribed to 75 ordinary Class "C" shares in the appellant, but the
shares were not actually issued because the appellant's directors had not
adopted a resolution to this effect;
2.
In her judgment, Justice
Nicole Morneau did not order that these 75 ordinary Class "C" shares
be issued;
3.
The appellant had not
paid Mr. Poulin $135,843 in consideration for the purchase of the shares
he held because they had never been issued;
4.
The $135,843 paid
to Mr. Poulin should instead have been treated from tax and accounting
perspectives as an expense incurred by the appellant for the purpose of earning
income from his business as it was paid to Mr. Poulin as compensation for
services he rendered to the appellant.
Mr. Brosseau's testimony
[16]
Mr. Brosseau's
testimony can be summarized as follows:
a.
The board of directors
of the appellant (for which he was the director for all the relevant periods)
never adopted the resolution to issue the 75 ordinary Class "C"
shares subscribed by Mr. Poulin;
b.
After signing the
employment contracts (Exhibit A‑1, Tabs 9 and 10), he came to an
oral agreement with Mr. Poulin that the appellant would not issue him the 75
ordinary Class "C" shares in the appellant to which he had
subscribed, notwithstanding its commitment to issue them in accordance with
these contracts. Mr. Brosseau explained that he had come to an oral agreement
with Mr. Poulin that the appellant would pay him, in consideration for the
services he had rendered to the appellant, an amount equal to that which he
would been entitled to receive under the terms of the contracts of employment
regarding the shares. Mr. Brosseau added that a ghost stock purchase plan had
in a sense been set up for Mr. Poulin under the terms of which 75 ordinary
Class "C" shares were used as a reference to calculate the amount of
the compensation (for services rendered) to be paid by the appellant to
Mr. Poulin. It must be noted that Mr. Brosseau admitted that the use of
the term "redemption" regarding the 75 ordinary Class "C"
shares in the transaction offer (Exhibit I-1, Tab 3) and in Mr. Gascon's
letter (Exhibit I‑1, Tab 7) was inappropriate considering the
subscribed shares had not been issued under the terms of the verbal agreement
between him and Mr. Poulin. Mr. Brosseau explained that he did not pay
particular attention to the language used in the two settlement offers
considering that under the verbal agreement he had come to with Mr. Poulin the
compensation would be calculated based on the shares in question that were
subscribed but not issued.
Mr. Poulin's testimony
[17]
Mr. Poulin's testimony
can be summarized as follows:
a.
On June 22, 2000, he
attended a meeting of the appellant's board of directors at which it was
resolved to give effect to the appellant's commitment (under the Agreement) to
reorganize its capital (freeze) such that he could subscribe to 75 of the 1,000
voting and participating shares to be issued after the reorganization. I note
that the respondent, in support of Mr. Poulin's testimony on this, wished to
submit to evidence a copy of the minutes from the meeting of the appellant's
board of directors held June 22, 2000 (Exhibit I-2). I note that the appellant
objected to the submission of this document in evidence considering it was not on
the respondent's list of documents and it had been brought to his attention a
short time before the beginning of the hearing. In my opinion, the respondent
should be allowed to produce that document because it is not unknown to the
appellant and because its production is not likely to cause prejudice. Indeed,
the appellant knew that such a resolution existed. Moreover, I do not see how
the submission to evidence of this resolution could cause the appellant
prejudice considering that at most it triggered the freeze, without
particularly or automatically authorizing the issuance of the 75 ordinary Class
"C" shares to Mr. Poulin once the freeze came into effect (namely,
once the statute modification certificate was filed with the Inspecteur général
des institutions financières).
b.
On August 15, 2000, Mr.
Hertel, the appellant's secretary, gave him a copy of the front of the original
share certificate (Exhibit I‑1, Tab 2) noting that since August 15,
2000, he held 75 ordinary Class "C" shares in the appellant after
having signed the original certificate as the appellant's president, as
required by the appellant's Regulation No. 21;
c.
he does not recall
either having attended a meeting of the appellant's board of directors at which
it was allegedly resolved to issue him 75 ordinary Class "C" shares
in the appellant, or having been called to such a meeting, or even having
signed a resolution by all the directors to this effect. I must note that in
April 2000 (the month in which the appellant had reorganized its capital and 75
ordinary Class "C" shares were allegedly issued according to Mr.
Poulin) Mr. Poulin was the appellant's director and president and he was
dismissed in 2001;
d.
he does not recall
whether his $7.50 cheque payable to the appellant for the 75 subscribed
ordinary Class "C" shares had been cashed;
e.
he did not know who had
prepared and sent the appellant's annual return for 2000 to the Inspecteur
général des institutions financières;
f.
he never orally agreed
with Mr. Brosseau to the non-issuance of the 75 ordinary Class "C"
shares in the appellant, to which he had subscribed for consideration of an
amount equal to that which he would have received under the terms of the
Agreement if the shares in question had been issued;
g.
he recalls (see page 64
of the transcript) having indicated, in his income tax report for the 2003
taxation year, that the $135,843 was employment income, in accordance with he
T-4 information slip he had received from the appellant (Exhibit A‑1,
Tab 8).
Analysis and conclusion
[18]
The respondent
essentially submits that the sum of $135,843 the appellant paid to Mr. Poulin
in 2003 was used to purchase the 75 ordinary Class "C" shares that
Mr. Poulin held in the appellant's capital stock, resulting in a deemed
dividend pursuant to subsection 84(3) of the Act. On the other hand, the
appellant submits that the amount paid to Mr. Poulin should be treated as
compensation for services rendered, which is fully deductible pursuant to
paragraph 18(1)(a) of the Act, and not a dividend since Mr. Poulin
never held the 75 ordinary Class "C" shares in the appellant to which
he had subscribed and therefore, never received a dividend. It seems to me
then, that the only question to answer is the following: were the 75 ordinary
Class "C" shares of the appellant's capital stock to which Mr. Poulin
had subscribed issued?
[19]
Under the Agreement
(Exhibit I-1, Tab 1), the appellant granted Mr. Poulin an option to
subscribe to 75 of the 1,000 voting and participating shares to be created
following the freeze for consideration of $1 per share. Under the Agreement,
the appellant made a prior and irrevocable commitment to issue these shares to
Mr. Poulin once the latter had exercised the option. The agreement
corresponds somewhat to an order of intent and the appellant is required to
follow through. Once the option was exercised, the appellant and Mr. Poulin
were required to respect the contract, namely on one hand to issue the 75
voting and participating shares and on the other, take and pay for them. The
evidence showed beyond a doubt that Mr. Poulin exercised the option.
However, the following question remains: were these subscribed shares actually
issued?
[20]
The issuance and
distribution of shares generally involves three stages: a resolution by the
board of directors to order the issuance, entries to the share register
ordering them, and lastly the delivery of the share certificates, which, to a
certain extent, provide prima facie evidence that they were issued and
makes the share transfer easier. In this case, the appellant's Regulation No.
21 (Exhibit A‑1, Tab 15) clearly stipulates that: (i) the
appellant's capital stock shares may be distributed at the times, in the manner
and to the persons or categories of persons that the directors may occasionally
determine by resolution; (ii) the appellant was to keep records at its
head office that included the names of all persons who were or had been
shareholders in the company in alphabetical order, the number of securities
held by each shareholder, and the details of the issuance and transfer of each
share in the company's capital; and (iii) each share certificate in the
company must be issued under the seal of the company and signed by the
President or Vice-President and countersigned by the secretary or assistant
secretary.
[21]
At the end of the day,
the following question must be answered: did the appellant's board of directors
validly adopt a resolution ordering the issuance of the 75 ordinary Class
"C" shares to which Mr. Poulin subscribed?
[22]
The appellant's
evidence that the shares in question were not issued is based solely on Mr.
Brosseau's testimony that he came to an oral agreement with Mr. Poulin
that the appellant would not issue the shares in question to which he had
subscribed and it would instead pay him compensation (in regard to the services
he had rendered) calculated based on these non-issued shares. The question, for
me, is the following: was Mr. Brosseau's testimony credible and likely? To
answer this question, the following evidence that was offered to me that seems
to contradict his testimony must be considered::
i.
first, Mr. Poulin
testified that he never agreed with Mr. Brosseau that the appellant would not
issue the shares to which he had subscribed;
ii.
on February 15, 2001,
the appellant made Mr. Poulin an offer (Exhibit I‑1, Tab 3) [translation] "to redeem the 75
voting and participating shares in RNCI acquired…pursuant to the Capital Profit
Sharing Agreement entered into by the parties on March 19, 1998." The use
of the word "redeem" could lead us to conclude that the shares in
question had been issued;
iii.
the use of the word
"redeem" in the settlement offer dated August 22, 2002
(Exhibit I‑1, Tab 6) could also lead us to conclude that the
shares in question had been issued;
iv.
the appellant's
information report obtained from the Inspecteur général des institutions
financières (Exhibit I‑1, Tab 5) indicates that as of December
19, 2000 (date the appellant's last annual return was filed) Mr. Poulin was the
director and the appellant's second shareholder.
[23]
Considering the
following, what is the probative value of Mr. Poulin's testimony?
i.
He did not agree with
Mr. Brosseau that the appellant not issue the shares to which he had
subscribed; in his opinion, the evidence of this fact was that on August 15,
2000, Mr. Hertel, the appellant's secretary, had him sign (as the appellant's
president as required under its Regulation No. 21) the original share
certificate attesting that the shares in question were issued and also gave him
a copy of the front of the original certificate. Mr. Poulin explained that he
did not verify whether the formalities for issuing the shares had been
followed, considering he was given the original share certificate to sigh,
attesting to the issuance of the shares in question. Mr. Poulin's testimony on
this should be cited:
[translation]
I did not conduct any verification, the
certificate confirmed that I had 75 shares. I was comfortable with that, I was
sure of that acquisition.
ii.
He did not participate
nor was he summoned to a meeting of the appellant's board of directors at which
the issuance of the shares in question was allegedly ordered.
According to Mr. Poulin's testimony, the meeting of
the appellant's board of directors, at which the issuance of the shares in
question was allegedly ordered, was held without his knowledge. It is very
difficult for me to believe that such a meeting could have been held without
Mr. Poulin's knowledge because of his duties within the appellant's business
and their harmonious relations until he was dismissed. Moreover, it is just as
difficult to believe that Mr. Poulin (who was the appellant's director and
chief officer at the time such a meeting of the board of directors would have
been held) assumed that all the formalities for the shares in question to be
issued had been respected simply because he had been given the original share
certificate to sign. At any rate, a director who is also the chief officer of a
company incorporated under the Companies Act cannot in such
circumstances rely on the rule of the internal governance provided under
section 123.32 of that act. Lastly, Mr. Poulin's irrational behaviour
only confirms my doubts regarding his credibility. Why did Mr. Poulin not
object when the appellant made source deductions in the settlement offer of
August 22, 2002, and then issued a T-4 information slip indicating that the
$135,543 was employment income unless he had agreed with Mr. Brosseau that the
appellant would not issue the shares to which he had subscribed and that it
would pay him compensation instead for the services rendered, calculated based
on the shares that should have been issued? Why did Mr. Poulin declare income
of $135,843 in 2003 in accordance with the T-4 information slip if not for that
same reason? Why did Mr. Poulin not ask Justice Morneau (in his civil case) to
order the issuance of the shares in question when Mr. Brosseau told him on
November 1, 2001, that the shares in question had not been issued (see Exhibit
A‑1, Tab 6, paragraph 6)? In my opinion, the fact Mr. Poulin
had agreed with Mr. Brosseau that the appellant would not issue the shares
in question could explain such behaviour. The unlikelihood of Mr. Poulin's
testimony and his irrational behaviour on these aspects only strengthened my
belief that Mr. Brosseau's testimony (regarding the agreement he had with
Mr. Poulin) is credible and likely despite some documentation brought to
my knowledge that seems to support the theory that the shares in question were
issued.
[24]
At the end of the day,
the version of the facts provided by Mr. Brosseau seems more credible to me
than that provided by Mr. Poulin. Mr. Brosseau's explanations regarding the
inappropriate choice of the words "share redemption" (when they had
not been issued) in the settlement offers of February 15, 2001, and August 22,
2002, also seemed credible to me. I must note that Mr. Brosseau explained that
he had not paid much attention to the language used in these two settlement
offers considering the verbal agreement he and Mr. Poulin had come to, under
which the compensation agreed to would be calculated based on the non-issued
shares. In this regard, the settlement offer of August 22, 2002, very clearly
shows the confusion that results from the language used: the words "share
redemption" are used while the same document indicates that the shares
were not issued.
[25]
The information report
on the appellant obtained from the Inspecteur général des institutions
financières (Exhibit I‑1, Tab 5) also seems to indicate that
the shares in question were issued. Considering it was impossible to obtain the
name of the person that had prepared and submitted this document to the
Inspecteur général des institutions financières from Mr. Brosseau or Mr.
Poulin, I feel it must not be granted too much probative value in the
circumstances.
[26]
The Minister's theory
that the shares had been issued is not based on the appellant's corporate books
and records. On this, I note Mr. Lavallée's statements. He stated that during
the review of the appellant's books and records, he could not find the
directors' written resolution ordering the issuance of these shares (or the
minutes of any meeting of the board of directors that reported a decision by
its members to issue them and the consideration required from Mr. Poulin),
entries in the appellant's share register indicating that the shares had been
issued to Mr. Poulin, nor the original share certificate that was allegedly
issued to Mr. Poulin and that would necessarily have been cancelled following
the alleged redemption of the shares. In fact, the Minister's position was that
the issuance of these shares resulted from the Superior Court judgment. On
this, the Minister's submissions at paragraphs 7 and 25.1 of the Response to
the Notice of Appeal should be cited. Paragraph 7 states:
[translation]
He denies paragraph 11 of the Notice of Appeal, as written. He
states that the appellant neglected to issue the shares to Mr. Poulin following
the conclusion of the share acquisition contract. According to the Superior
Court judgment, following the action brought by Mr. Poulin against the
appellant, the shares were issued because the appellant was ordered to redeem
them and pay the amount of $135,843 to Mr. Poulin.
And paragraph 25 states:
[translation]
It is true the appellant neglected to issue the 75 ordinary Class
"C" shares to Mr. Poulin after accepting the subscription on
August 15, 2000. However, by ordering the appellant to redeem the 75 shares for
the amount of $135,843, the Superior Court required it to correct this error.
The appellant cannot claim today that the 75 shares were not issued.
[27]
In my opinion, Justice
Morneau's judgment does not in any way order the appellant to correct its error
(as claimed by the Minister) by issuing the 75 Class "C" shares. The
judgment essentially orders the appellant to redeem the 75 Class "C"
shares for $135,843. I am of the view that Justice Morneau presumed that the
shares to which Mr. Poulin had subscribed had been issued by the appellant, since:
1.
on February 15, 2001,
the appellant had proposed (Exhibit I-1, Tab 3) to Mr. Poulin that it
redeem [translation] "the 75
voting and participating capital stock shares in RNCI acquired…pursuant to the
capital profit-sharing agreement entered into by the parties on March 19, 1998,
and [denies] pay[ment] to Mr. Poulin, in consideration of the said redemption,
the amount of $59,193;"
2.
in the context of a
settlement offer dated August 22, 2002, the appellant had paid Mr. Poulin
compensation of $468,986 (Exhibit I‑1, Tab 6).
[28]
As a result, the
appellant has persuaded me that it had paid Mr. Poulin the amount of $135,843
in 2003 as compensation for the serviced he had rendered. Therefore, the
appellant was entitled to deduct the amount of $135,843 in the calculation of
its income for the year in question.
[29]
For these reasons, the
appeal is allowed, with costs.
Signed at Ottawa, Canada, this 16th day of February 2011.
"Paul Bédard"
Translation
certified true
on this 15th day
of April 2011.
François Brunet,
Revisor
Email this Content