Citation: 2010 TCC 284
Date: 20100615
Docket: 2008-515(IT)G
BETWEEN:
Komutel Inc.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1]
This is an appeal of an
assessment that was confirmed on November 15, 2007. The issues are as
follows:
For the 2005 taxation year, did the Minister correctly add $100,937
to the appellant’s income as settlement of a commercial obligation, in
accordance with subsection 80(13) of the Act?
For the 2006 taxation year, did the Minister correctly change the
refundable investment tax credit to $39,417 in accordance with subsection 127.1(1)
of the Act?
[2]
In making the assessment
under appeal, the respondent relied on the following facts:
[TRANSLATION]
a)
The company Groupe Capital Vision Inc. (“Capital
Vision”) was incorporated on July 7, 2000, under Part IA of the Quebec Companies Act.
b)
Benoît Beaudin was the president, director and
shareholder of Capital Vision.
c)
Capital Vision has never filed an income tax
return.
d)
Richard Poulin was a shareholder of the company
9098‑5854 Québec Inc. (“9098‑5854”), incorporated
on December 4, 2000, under Part IA of the Quebec Companies Act.
e)
According to the Enterprise Register, 9098‑5854
specializes in software development.
f)
Richard Poulin had an
assistive technology product for Web/Internet customer service and was looking
for financial partners.
g)
Capital Vision was
willing and had the capital to invest in technology.
h)
On April 4, 2001, Capital Vision,
represented by its president, Benoît Beaudin, and Richard
Poulin, an independent contractor, signed an agreement
that included the following provisions:
i) a contract of employment for Richard Poulin under the terms of the
agreement;
ii) an undertaking from Capital Vision to create a business (and
incorporate it under federal law for this purpose) with 51 per cent of the
common voting shares to be held by Capital Vision and 49 per cent by
Richard Poulin, and 49 per cent of non‑voting preferred shares to be
held by Capital Vision and 51 per cent by Richard Poulin;
iii) an investment of $350,000 by Capital Vision, namely,
·
A $200,000 initial investment in the
business according to a timetable extending from April to September 2001;
·
$100,000 paid to the company to be
incorporated, in the form of advances reimbursable from profits; and
·
$50,000 paid in cash to Richard Poulin, on
terms to be established.
i)
On April 23, 2001, the company B2C Web
Support Inc. (“B2C”) was incorporated federally under the Canada Business Corporations Act.
j)
B2C’s articles of incorporation provide for
various classes of shares:
|
CLASS
|
|
|
“A”
|
Voting and
participating (subject to, among other things, pre-emptive rights attaching
to the other classes of shares) and exchangeable for Class C shares
under certain conditions.
|
|
“B”
|
Non‑voting
and non‑participating.
|
|
“C”
|
Non‑voting,
entitling the holder to a preferred dividend on classes A, D and E, redeemable
by the company at the holder’s option under certain conditions, with the
possibility of being bought over the counter by the company.
|
|
“D”
|
Voting and entitling
the holder to a preferred dividend on classes A and E.
|
|
“E”
|
Non‑voting
and entitling the holder to a preferred dividend on Class A, but after
classes C and D.
|
k)
B2C’s articles of incorporation state that no
shares of the capital stock may be transferred without the consent of the
majority of the directors or the majority of the shareholders.
l)
The company’s minutes book, the declaration of
registration dated July 16, 2001, and the annual returns filed for 2002,
2003, 2004 and 2005 with the Enterprise Registrar show that Richard Poulin
is the sole director and shareholder of B2C.
m)
According to Corporations Canada’s information,
Richard Poulin was also the sole director and shareholder of B2C.
n)
According to the computerized reports of the
Canada Revenue Agency (CORTAX) for the taxation years ending March 31,
2002, 2003, 2004 and 2005, B2C’s income tax returns indicated that Richard
Poulin held 100 per cent of the common shares and, as of the year 2004,
100 per cent of the preferred shares.
o)
B2C’s share register does not mention the
issuance of any non‑voting Class C shares, or of any other shares of
Class A or any other class.
p)
B2C’s minutes book does not contain any
resolutions of the director regarding the issuance of Class C shares or
any other class of shares.
q)
B2C has not issued any share certificates.
r)
The notes to B2C’s financial statements for the
years ending March 31, 2002, and March 31, 2003, show that there were
100 Class A shares issued and paid for, and 350,000 Class C shares were
apparently issued.
s)
Of these 350,000 Class C shares, 193,532 were
purchased for $1 each on March 31, 2002, and 233,532 were purchased for $1
each on March 31, 2003.
t)
The FF‑1 sheet comparing the capital stock
on March 31, 2004, with the capital stock on March 31, 2003, indicates
that Richard Poulin held 350,000 Class C (ordinary) shares on March 31,
2003.
u)
The chartered accountants’ office that had
prepared the financial statements for the years ending March 31, 2002 and 2003,
stated in the notice to reader that no audit or review of the balance sheet and
the statement of income and expenses had been carried out, and that no other
measures had been taken to ensure the accuracy and completeness of the
information provided by B2C’s management.
v)
No external audit was carried out of B2C’s
financial statements for the fiscal years ending March 31, 2004, and March 31, 2005.
w)
On May 15, 2004, Benoît Beaudin, Capital
Vision and Fiducie MGT gave Richard Poulin, B2C and 9098‑5854 Québec Inc.
a full and final acquittance in consideration of $5,000 payable to Benoît
Beaudin in five instalments between April 15 and August 15, 2005.
x)
This acquittance covered the extinction or performance
of recipients’ obligations under the terms of any investment project agreed to
orally or in writing between the parties.
y)
On October 17, 2005, the company B2C changed
its name to Komutel Inc., the appellant.
z)
In an initial meeting with the Agency’s auditor
on May 3, 2005, Richard Poulin stated the following:
·
Capital Vision had invested $250,000 over the
first three years in exchange for B2C shares.
·
Benoît Beaudin had been paid $5,000 for the
redemption of the shares held by Capital Vision.
aa)
In a second meeting with the Agency’s auditor on
May 6, 2005, Richard Poulin stated the following:
·
He had redeemed the 350,000 Class C shares
that Capital Vision held in B2C for $5,000.
·
Payment had been made to Benoît Beaudin by a cheque
for$5,000 issued by B2C.
bb)
In a third meeting with the Agency’s auditor on
June 16, 2005, Richard Poulin stated the following:
·
Capital Vision had actually loaned $350,000 to B2C.
cc)
In a fourth meeting with the Agency’s auditor on
October 4, 2005, Richard Poulin stated the following:
·
No document regarding Capital Vision’s $350,000 investment
was signed following the initial agreement of April 4, 2001, and he was
unable to confirm whether it was a loan or capital stock.
·
B2C had not issued any share certificates to Capital
Vision.
·
He was unable to confirm how and by whom the
$5,000 for acquittance was paid to Benoît Beaudin in order to terminate the
partnership.
dd)
On January 11, 2006, Benoît Beaudin signed
a letter stating that all of the money invested in B2C had been so invested in
exchange for 51 per cent of the common shares and that he authorized Capital
Vision’s management to transfer the share certificates to Richard Poulin’s
account as consideration for the redemption of May 15, 2004.
ee)
No share certificates of any class whatsoever
were transferred between Capital Vision and Richard Poulin.
ff)
Capital Vision was struck off the enterprise register
on June 16, 2006, by the Quebec Enterprise Registrar.
gg)
B2C never repaid to Capital Vision the $350,000 loan.
hh)
The money paid to B2C by Capital Vision totalled
$363,932, representing the $350,000 loan, plus a $130,500 advance
minus a $116,568 subscription receivable.
[3]
The facts set out in
the reply to the notice of appeal are substantially the same as those revealed
by the evidence. In short, the evidence showed that Mr. Poulin and
Mr. Beaudin had met in the course of an attempt to obtain financing.
[4]
Mr. Poulin said
that after the presentation of his project, he was surprised by the interest
and, above all, eagerness of the group led by Mr. Beaudin to invest over $300,000.
[5]
Mr. Poulin was aware
that his financial limitations prevented him from successfully carrying out his
project alone; he explained that he could not be too demanding regarding the
control of the company and had therefore agreed to hand control over to Mr. Beaudin’s
group.
[6]
The parties then agreed
in writing to the approach that would be taken and the form that the financial contributions
were to take. It was a bare‑bones agreement with some potentially confusing
points, given the lack of detail and clarification on several aspects.
[7]
Early on, Mr. Poulin
became disabused of his regarding cooperation with Mr. Beaudin and his
group. He became more worried still on receiving calls from putative
shareholders with unrealistic expectations.
[8]
Mr. Poulin became
increasingly worried, to the point of becoming suspicious and mistrustful of
Mr. Beaudin and his group. He feared losing control of the business. Thus,
Mr. Poulin hesitated and repeatedly postponed signing the draft share‑transfer
agreement that Mr. Beaudin had prepared and submitted.
[9]
In the context of a now
rather strained relationship between the investing group’s leader and the project’s
initiator, the documentary and regulatory aspects were so badly neglected as to
give rise to confusion and ambiguity, so much so that the interested parties,
Mr. Poulin and Mr. Beaudin, had substantially different
interpretations of the situation, according to their testimony.
[10]
This was the context or
background at the time of the audit and the drafting of the reply to the notice
of appeal.
[11]
In his testimony, Mr. Poulin
stated that he had lacked discipline when it came to management, that he had
lacked knowledge, and that he had also had problems communicating with
Mr. Beaudin. He stated as well that there had been several changes because
the development of the project did not correspond to his initial vision or to
his expectations. He repeated that adjustments had had to be made a number of
times.
[12]
In May 2004, when the
business was still at the developmental stage, the two men decided to terminate
their business relationship. Mr. Poulin was as mistrustful and worried as
ever, especially since he was still receiving calls from people who had been
misinformed about the file.
[13]
It is important to note
at the outset that the terms of the agreement on the management of the initial
investments are not all clear and precise, particularly those relating to the
consideration for the funds invested. The contents of the agreement were
reproduced in paragraphs h i) to iii) of the reply to the notice of
appeal, at page 2 of these reasons.
[14]
Even though the project’s
progress had failed to meet expectations, the parties made no changes to the
agreement prior to breaking off their relationship.
[15]
This breaking off was
sealed by a document that reads as follows:
[translation]
FULL AND FINAL
ACQUITTANCE
BY: Benoît
Beaudin, domiciled and residing at 1558 Antoine‑Daniel Street, Boisbriand, Quebec, J7G 3B5;
Groupe Capital Vision Inc., a duly incorporated
company having its head office at 1200 Chomedy Boulevard, Laval, Quebec, H7V
3Z3, and represented herein by its mandatary, Benoît Beaudin, duly authorized
for the purposes of this acquittance;
Fiducie MGT, 1558
Antoine‑Daniel Street, Boisbriand, Quebec, J7G 3B5, and represented herein by
the trustee Benoît Beaudin, acting as its duly authorized mandatary for the
purposes of this acquittance; (hereafter collectively referred to as the “Creditor”)
FOR THE BENEFIT OF:
Richard Poulin, domiciled and
residing at 747 161st Street,
St‑Georges de Beauce, Quebec, G5Y 7V9
B 2 C WEB SUPPORT Inc. (Innocom), a duly
incorporated company having its head office at 11505 1st Avenue, Suite 470,
St‑Georges de Beauce, Quebec, G5Y 7X3, and represented herein by its
mandatary, Richard Poulin, duly authorized for the purposes of this acquittance;
90985854 CANADA INC. (Innocom) a duly incorporated company having
its head office at 11505 1st Avenue, Suite 470, St‑Georges de
Beauce, Quebec, G5Y 7X3, and represented herein by its mandatary Richard
Poulin, duly authorized for the purposes of this acquittance; (hereafter
collectively referred to as the “Recipient”)
FOR GOOD AND VALUABLE CONSIDERATION,
which each of the undersigned acknowledges having duly
received, we, the undersigned, agree as follows:
The Creditor, Benoît Beaudin, Groupe Capital Vision Inc. and Fiducie
MGT, and all other entities related to or affiliated with Benoît Beaudin,
Groupe Capital Vision Inc. and Fiducie MGT, hereby acknowledge and confirm the extinction
and/or performance of each and every one of the Recipient’s obligations to them
under any investment project or verbal or written agreement between the parties,
and hereby release by the Recipient from all obligations under any investment
project or verbal or written agreement between the parties.
PAYMENT OF THE CONSIDERATION
The acquittance is granted in consideration of the following:
FIVE THOUSAND DOLLARS ($5,000.00), to be by means of five bank
cheques made out to Benoît Beaudin, commencing April 15, 2005, and continuing
to August 15, 2005.
Accordingly, for good and valuable consideration, the Creditor,
Benoît Beaudin, Groupe Capital Vision Inc. and Fiducie MGT, and all other
entities related to or affiliated with Benoît Beaudin, Groupe Capital Vision
Inc. and Fiducie MGT, hereby grant full, final and definitive acquittance to
the Recipient or the Recipient’s directors, officers, shareholders or employees,
in their capacity as directors, officers, shareholders or employees or
otherwise, with respect to all rights, claims, actions, demands, rights of
action, damages, and claims of any nature whatsoever, past, present or future,
that the Creditor, Benoît Beaudin, Groupe Capital Vision Inc. and Fiducie MGT,
and all other entities related to or affiliated with Benoît Beaudin, Groupe
Capital Vision Inc. and Fiducie MGT, have or could claim to have against the
Recipient in relation to any investment project, investment, or verbal or
written agreement.
This acquittance constitutes a transaction within the meaning of
article 2631 of the Civil Code of Québec.
IN WITNESS WHEREOF, the parties have signed this acquittance on
the 15th day of May 2004.
[16]
During the audit, the auditor
noticed several discrepancies and ambiguities. He concluded that the documentary evidence was either
incomplete or deficient.
[17]
The minutes book and
financial statements, far from clarifying the situation, confirm instead that there
was so much confusion regarding the file that neither the appellant nor the
respondent could rely on these documents to support their respective positions,
which were based mainly on interpretations and extrapolations.
[18]
Given the poor quality
of the documentary evidence available, the Canada Revenue Agency characterized the
capital contributions of Mr. Beaudin’s group as loans rather than shareholders’
participation in a new company run by Richard Poulin.
[19]
Consequently, an
assessment was made in which the loss at issue was characterized as a loss
resulting from the partial forgiveness of a loan rather than a loss resulting
from a sale of shares, since the investor had accepted a consideration that was
less than the amount invested.
[20]
Thus, the respondent
relied on the assumption that it was not a capital loss but, rather, a forgiveness
of debt, which therefore generated income for the recipient taxpayer under
section 80 of the Income Tax Act (ITA), all of which had, in
addition, direct consequences on the computation of the research and
development tax credits claimed.
[21]
It is important to note
at the outset that an assessment must be made on the basis of actual and
verifiable facts, not possible and probable scenarios desired by the taxpayer
or taxpayers concerned.
[22]
This is an important
principle that must be upheld, otherwise, a person could, in order to make a
more advantageous choice from a tax standpoint, rely on a confused and
ambiguous situation that was unsupported by written evidence and that could lead
to various interpretations when facts unknown at the closing of the transaction
are revealed. In other words, retroactive tax planning is obviously unacceptable.
[23]
Maintaining and/or fostering
ambiguity in order to be able to obtain a tax benefit later is therefore very
risky, if not dangerous. Indeed, such recklessness may often lead to outcomes
that are more penalizing than beneficial.
[24]
In this case, the
evidence is very clear on one point. A number of the usual documents are
missing, while other relevant documents are incomplete or so confusing that all
of the hypotheses put forward by the parties are plausible.
[25]
The appellant first
called Mr. Beaudin, who described himself as a financial broker. He stated
that he was convinced that his agreement with Mr. Poulin provided for,
among other things, an investment in the form of common shares in the capital
stock of the company to be created by Mr. Poulin. This interpretation is
supported, moreover by some of Mr. Poulin’s statements, in particular his
explanation that his personal financial situation prevented him from being too independent
and demanding.
[26]
Mr. Beaudin claimed
that he had recently learned that his group had actually invested in preferred
shares. His testimony revealed that he was a slightly mysterious individual
whose behaviour had caused Mr. Poulin to be worried and even somewhat
mistrustful.
[27]
As for Mr. Poulin,
he stated that the company run by Mr. Beaudin had indeed invested a little
over the $350,000 provided for by the agreement.
[28]
A sum of $200,000 was
allegedly invested in preferred stock through a series of payments that in fact
did not follow the established timetable. This was allegedly a temporary, not
to say transitory, situation.
[29]
The shares were
eventually to be converted into common shares, following the conclusion of a
shareholders’ agreement allowing Mr. Poulin to keep control of the
company. The agreement was never signed for various reasons, including certain
concerns Mr. Poulin had.
[30]
The $100,000 loan amount
provided for by the agreement was not paid, given the company’s difficulties.
According to Mr. Poulin, that amount, like the $50,000 provided for by the
agreement that was to be used to pay his salary, had been invested in the
company, also in the form of preferred stock.
[31]
Mr. Poulin stated
that he had run the business as best he could given the knowledge he had, which
he himself considered inadequate. He explained that he had always been aware of
the importance of Mr. Beaudin’s contributed and that he had felt indebted
to him. Nevertheless, Mr. Beaudin’s behaviour and the calls from people
from his investment group had worried Mr. Poulin.
[32]
Moreover, the breaking
off of his relationship with Mr. Beaudin took place after Mr. Poulin began
receiving telephone calls from people claiming to have made investments in a
manner that was not totally in line with reality. In fact, this was part of the
reason, he said, for the company’s subsequent name change.
[33]
Mr. Poulin also
explained that he himself had drafted the document attesting the definitive
breakup with Mr. Beaudin, using a loan acquittance template, the object of
it all being pay off Mr. Beaudin by means of five payments of $1,000.
[34]
Only the auditor, Éric
Laplante, testified in support of the respondent’s evidence. His testimony, as
well as his observations, appear to me to summarize very aptly the assumptions
of fact in paragraphs a) to hh) inclusive of the reply to the notice of appeal,
which are reproduced at pages 1, 2, 3, 4 and 5 of these Reasons for Judgment.
[35]
Mr. Laplante stated
that he had also relied on the document entitled [translation] “Full and Final Acquittance”, attesting
the breakup of Mr. Poulin’s and Mr. Beaudin’s relationship. He stressed
the fact that it made no mention of shares, but contained rather the terms [translation] “creditor” and [translation] “investment project”. He
also noted that the financial statements dated March 31, 2003, are based
on data that were not audited by the accounting firm that had prepared those
statements.
[36]
Called on by the
respondent to explain the discrepancy between the financial statements, which
indicate that $156,468 in preferred shares had been issued and paid for, and
the income tax returns, which show that Mr. Poulin was the taxpayer’s sole
shareholder, Mr. Laplante conceded that [translation]
“this is the only point that mentioned a second shareholder”.
[37]
In cross‑examination,
Mr. Laplante stated that, in the financial statements from the years 2002
to 2004, he had found no trace of the $100,000 loan provided for in the
agreement, or of any documents attesting the existence of such a loan, or of
any agreements providing for the payment of interest, or of amounts due as
interest, and this despite his acknowledgment that Mr. Poulin, who at the
time had referred him to his accountant, had been cooperative.
[38]
I think it would be
useful to reproduce an excerpt of one of the important documents at the core of
this dispute. The agreement entered into following the one relating to the initial
investment reads as follows:
[translation]
A total investment of $350,000.00 will be made under
the following terms:
-
A $200,000.00 initial investment in the business
according the following timetable . . .
-
$100,000.00 paid to the company in the form of
advances reimbursable from profits
-
$50,000.00 in cash paid to Richard Poulin, on
terms to be established.
[39]
The first and third undertakings
are rather poorly defined, since the form that the $200,000 investment is to
take is not indicated; as for the terms regarding the $50,000 payment, it was
agreed that the money was to go to Mr. Poulin personally, not the company
to be created. That it was the appellant that received that amount supports
Mr. Poulin’s testimony that changes were made to the agreement along the way.
[40]
The respondent invoked
the absence of any resolutions on the issuance of shares, but her position contains
an implicit admission, as the necessity of a resolution is not specific or exclusive
to the issuance of shares. A resolution would have also been appropriate in the
case of a loan. Indeed, the company would have had to accept the loan, for
loans are also contracts arising from the exchange of consents.
[41]
The financial statements
for March 31, 2002, 2003 and 2004, recorded sums of $193,532, $233,532
and $350,000 respectively, in association with the words [translation] “issued and paid – Class C
shares”. It is true that this is not the best evidence of shares having been issued.
However, it is fair to consider such information to be at least a commencement
of proof.
[42]
On the one hand, it is
clear that things did not proceed as had been expected; on the other hand, it
was expressly provided for in the financial undertakings that clarification or
modification might be necessary with regard to the treatment of the initial
investments, given the uncertainties that existed even at the time that the
first agreement was concluded.
[43]
One thing is sure:
neither the agreement creating the partnership between Mr. Beaudin and the
company to be established for the purpose of developing Mr. Poulin’s
project nor the document attesting his good faith is a model of clarity.
[44]
Between the beginning
and end of the business relationship between Mr. Poulin and the group led
by Mr. Beaudin, the company produced financial statements. While these
financial statements do not satisfactorily support either the appellant’s position
or the respondent’s, it is possible to find therein at least one indicator
supporting the appellant’s position.
[45]
I refer in particular
to the fact that there is no indication of a loan. Had the financial statements
mentioned such a loan, there would obviously have been a paper trail,
especially since the period during which these statements were prepared corresponds
to the period during which the initial investments were made.
[46]
However, there is
absolutely no evidence on this point, which thus creates a kind of presumption,
albeit not a formally stated one, that the contribution agreed to by Mr. Beaudin’s
group was not disputed.
[47]
The respondent
concluded that this was a partial forgiveness of a commercial liability, in
particular because shares could not have been involved, as the formalities
required for issuing shares were either non-existent or insufficient.
[48]
In other words, the
respondent seems to be alleging that the contribution is simply a loan, since
the formalities for issuing shares were not observed or respected.
[49]
If it is a loan, although
fewer, less strict formalities are required in order to attest its validity, there
should have been a certain minimum of formalities, including those relating to
the term and the interest rate applicable. There were no such formalities here.
[50]
In this regard, I note
that the respondent made certain allusions to the fact that the parties were
run by businessmen. Is it plausible that businessmen would forget to specify
the term or interest rate of a loan? The answer is obvious.
[51]
The argument that this
was a $350,000 commercial liability because there was an agreement between two
companies represented by experienced businessmen who were not related is not
serious and can be explained as essentially the result of a desperate search to
find a basis for a hypothesis that is somewhat odd on its face.
[52]
As for the acquittance
document, the respondent refers to it merely to show that Mr. Beaudin is a
seasoned businessman.
[53]
The respondent
submitted that an acquittance document that mentions a [translation] “creditor” and [translation]
“investment project” and makes no reference to shares would support the theory that
a loan had been made to the appellant. This argument is preposterous and,
moreover, was not pursued at the oral argument stage.
[54]
This is also the case
with the various undertakings regarding dates that were not fulfilled. Any type
of undertaking can be modified with the consent of all the parties.
[55]
A change agreed to by
the parties is perfectly legitimate as long as it does not involve retroactive
tax planning.
[56]
Lastly, Mr. Poulin’s
fear of losing control of the company is completely irrelevant, as there are an
infinite number of ways to attach conditions, benefits or privileges to shares
and create several classes of shares.
[57]
The financial
statements for March 31, 2002, 2003 and 2004, are dated August 12, 2002, September 9, 2003, and
July 9, 2004,
respectively. Neither the date
on which they were prepared nor their contents were called into question. The
financial statements for 2004, indicating an amount of $350,000 accompanied by
the note [translation] “Issued and
paid – Class ‘C’ shares”, were prepared by a third party. Again, this is not
the best evidence, but it is at least a commencement of proof, an indicator of
a scenario more consistent with the argument of the appellant than that of the
respondent. In any event, this one point alone has greater validity than those put
forward by the respondent, which are essentially based on the auditor’s fertile
imagination.
[58]
The financial
statements were disregarded, given that they were unaudited. However, there is
no evidence that they were not reliable or credible.
[59]
These financial
statements contain nothing to support the respondent’s argument, but they do
reveal some indicators supporting the appellant’s position.
[60]
The auditor attached great
importance to the contents of the agreement, so much so, in fact, that he said
he had been given what he judged to be four different versions, and he implied
that he consequently no longer believed Mr. Poulin. However, an analysis
of what he considered to be different, if not contradictory, versions, does not
support such a conclusion. What is certain is that the agreement cannot be
excluded from the evidence on the basis of that analysis.
[61]
The auditor’s testimony
confirms the impression of confusion left by the file. However, if the
appellant’s intention had been to foster confusion for its own benefit, the
appellant would have at least tried to give explanations pointing in the direction
it desired, but this was not the case.
[62]
The auditor gave such great
weight to the fact that Mr. Poulin had given different versions of the
evidence that he concluded that Mr. Poulin was not particularly credible
and that a large part of his testimony had to be disregarded.
[63]
What the auditor
considered to be contradictory versions is rather a demonstration of the
ambiguity of the situation and the obvious candour of Mr. Poulin, who himself
did not know how the file would evolve, his sole concern having been to pursue and
maintain control of the project that he had created.
[64]
The auditor, asserting
that the existence of preferred shares suggested the presence of another
shareholder, stated that these documents were the only ones supporting such a conclusion.
All the same, he had noted that Schedule 50 to the 2004 tax return also showed
the existence of these shares, although they were in Mr. Poulin’s name. Having
recognized that the $350,000 had not come from Mr. Poulin, the respondent
could have seen therein an indicator corroborating the 2004 financial
statements.
[65]
It is true that all
assessments must be made on the basis of facts that existed during the period
covered by the assessment, not on the basis of hypotheses or wishes that do not
correspond to reality. It is true that any retroactive planning must be rejected.
Everyone must assume the consequences of his or her actions in tax matters, and
this frequently gives rise to results which are neither desired nor hoped for by
those involved. Moreover, anyone who is assessed bears the burden of proof. Nevertheless,
such statements must not be used as the only foundation for an assessment. The
respondent cannot make an assessment on the basis of questionable, uncertain or
incomplete facts, on the pretext that the appellant bears the burden of proof. The
respondent must provide a certain minimum of reasonable justification.
[66]
Here, Mr. Poulin set
up a project related to information technology. He could not afford to develop
his project himself. Information technology is a very popular field that
attracts investors. There is a host of “get rich quick” stories in that field,
and new ideas rapidly fuel investors’ speculative hopes.
[67]
Mr. Poulin met
Mr. Beaudin, who headed a group of investors. Mr. Poulin gave a
presentation concerning his project and its possibilities. Very quickly, within
hours, he received a positive response beyond all his expectations: a formal undertaking
to invest $350,000.
[68]
Extremely happy and very
surprised, he was nevertheless aware that he would now have to form a
partnership with others. He wanted to lead the project, but the funds required for
its development were supplied by third parties. He assessed the situation, in
particular with respect to control of the project. The parties entered into a
written agreement whose contents were vague but reflective of a certain degree
of mutual trust.
[69]
Things subsequently
advanced somewhat chaotically, and Mr. Poulin became disillusioned to the
point that the parties had to agree to break off their relationship upon five
payments of $1,000, that is, $5,000 in total, although the amounts laid
out had been in the order of $350,000.
[70]
What was to have been the
consideration for the $350,000 investment? There are two possibilities: a
loan or a certain number of shares to which various rights could be attached.
[71]
We must place ourselves
in the context of the birth of the project. At that point, the idea was at the
embryonic stage, potentially very promising, but hypothetical and speculative.
[72]
The investors knew
neither the promoter nor the company, but they obviously wanted to participate
in this promising project and reap the profits it would yield.
[73]
This scenario clearly presupposes
the issuance of some number of shares to which various rights may be attached,
but it excludes all scenarios of initial investments in the form of loans, since
the evidence shows that, in the present case, it was in essence a speculative
project.
[74]
This is not public
money for the creation of jobs, where a return on the investment is not the
priority, nor is it a philanthropic venture or short‑term support. This
is essentially a commercial project in which, on the one hand, there are
businessmen willing to take great risks in exchange for an exceptional return,
which is obviously not a characteristic of a loan under circumstances considered
to be very risky.
[75]
These are the inescapable
facts revealed by the evidence. At this point, is it possible that one or more
intelligent people would have committed to such a venture by making an
interest-free loan? It is all the same doubtful given that there is no note or
document supporting such an interpretation. To pose the question is sufficient
to conclude without hesitation that the answer is no.
[76]
Months passed, the
project progressed very slowly, and the financial situation was disappointing. It
is possible that the investors, with the promoter’s consent, agreed to have
part of the money invested presently retroactively as a loan? Again, the
question answers itself: relatively reasonable people would not have
contemplated such a scenario unless their goal had been completely unrelated to
any return.
[77]
Except in the case of
governments and certain paragovernmental entities, I have trouble imagining
that an investor looking for exceptional returns would agree to loan money to a
prospective debtor who was not financially sound, without attaching a very high
interest rate to the loan.
[78]
Here, while the project
might have been promising despite its speculative nature, it was plainly not likely
to interest a lender.
[79]
On the contrary, the
project was still in its early stages. True, it perhaps showed promise, but
offered no prospect of short‑term or even medium‑term, profitability.
The group led by Mr. Beaudin was in no way charitable or philanthropic. It
was looking to obtain the greatest return possible as quickly as possible.
[80]
If this were a loan,
the lenders would certainly have set an interest rate, but there is no evidence
in this regard.
[81]
The appellant submitted
evidence of which only the verbal aspect is coherent. Generally, in matters of evidence,
it is in the nature of things to validate and corroborate verbal explanations
using documentary evidence. However, the documentary evidence here is
deficient, incomplete and confused.
[82]
It fails to meet basic
requirements and simply does not respect certain formalities for the
incorporation of a company, in particular as regards the issuance of shares,
the declaration and the financial statements.
[83]
Nonetheless, this
evidence has the virtue of being reasonable and probable. A conclusion does not
depend solely on the number of flaws or shortcomings found; it must have at
least some degree of reasonableness.
[84]
Faced with such chaos
in the documents, the auditor became decidedly suspicious and sought to
document certain points in order to make an assessment.
[85]
On the grounds that the
documentary evidence was of very poor quality and that the explanations
obtained regarding the company’s organizational development (the initial
agreement and the change of heart regarding the nature of the shares, different
versions, etc.) were often incoherent, the auditor concluded that the amount at
issue was a loan and that there was enough evidence in support of his finding
to justify the assessment under appeal.
[86]
The auditor focussed
mainly on the words used, which, however, in no way validated the conclusion drawn.
He noted that there was insufficient written evidence and that the written
evidence available was confusing, and he concluded, quite rightly, that this
file was plagued by rather generalized confusion. He also raised some irregularities
regarding compliance with formalities. However, there was insufficient evidence
to establish the existence of a commercial liability that could trigger the application
of section 80 of the ITA.
[87]
The word liability was
indeed used, but I do not think that this is enough to support the Agency’s
conclusion, especially since that would contradict everything revealed by the context
and the evidence, which is rather circumstantial here.
[88]
I do not think that incoherence,
deficiency and insufficiency should be rewarded; generally, one does the
opposite in such cases.
[89]
I am of the opinion
that the evidence here is clear on some points. I note in particular the
following facts: a potentially promising project; investors showing interest
very quickly; project advancing chaotically and contrary to expectations; generalized
confusion; and lacunae, deficiencies and irregularities in the issuance of
shares. Underlying all of this is the fact that the principal party concerned was
acting in good faith. He believed in his project and wanted to succeed. These
facts are demonstrated by Mr. Poulin’s cooperation with the auditor.
[90]
In conclusion, I am of
the view that, through the oral evidence and a commencement of proof or bits of
information revealed by the documentary evidence, the appellant has established
on a balance of probabilities that the capital at issue was invested in the
form of shares, and not as loans as the Agency contends.
[91]
The respondent’s
argument is based on evidence that is insufficient and on hypotheses that do
not pass the test of reasonableness. Consequently, these are excluded.
[92]
The appeal is therefore
allowed, and the file will be referred back to the Agency for reassessment on
the basis that the amounts received by the appellant were contributions by its
shareholders, not loans. Costs are awarded to the appellant.
Signed at Ottawa, Canada, this 15th day of June 2010.
“Alain Tardif”
on this 10th day
of November 2010.
Erich Klein,
Revisor
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