Citation: 2010 TCC 20
Date: 20100112
Docket: 2006-3725(IT)G
BETWEEN:
FERME KOIRIS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Hogan J.
Introduction
[1]
This is an appeal from
a reassessment made on February 7, 2006, under section 160 of the Income
Tax Act (ITA). The two questions in issue are as follows:
1.
Can the doctrine of res
judicata be set up against the reassessment, as the Appellant asserts?
2.
Are the conditions for
the application of section 160 met?
Summary of the facts
[2]
In making and
confirming the reassessment in issue, the Minister of National Revenue ("the Minister")
made the following assumptions of fact:
[TRANSLATION]
(a)
The Appellant is a corporation that operates a
cattle farm.
(b)
Ferme Normand et Frères Inc., the tax debtor,
was a corporation that operated a dairy farm in St-André, Quebec.
(c)
By contract of sale under private writing dated
June 7, 1993, Ferme Normand et Frères sold the Appellant the following property:
-
ninety-eight (98) dairy cows;
-
twenty-seven (27) pregnant heifers;
-
twenty-five (25) heifers;
-
six (6) calves;
-
three (3) bulls;
-
the farm's entire equipment and rolling stock;
and
-
the proceeds of the sale of 3,000 kg of
processing milk fat
(d)
In consideration of the property listed in the
previous subparagraph, the Appellant paid Ferme Normand et Frères Inc. the sum
of $175,000.
(e)
Eleven days later, on June 18, 1993, the Appellant
sold part of the property listed in subparagraph (c) above at auction for a
total of $319,415.98.
(f)
As at June 7, 1993, the fair market value of the
property listed in subparagraph (c) above was at least $353,818.
(g)
On June 7, 1993, when the property listed in subparagraph
(c) was transferred, the sole shareholder of Ferme Normand et Frères Inc. was 2971-3690
Québec Inc. and the sole shareholder of that numbered company was Roger Ouellet.
(h)
On June 7, 1993, when the property listed in subparagraph
(c) was transferred, the sole shareholder of the Appellant was Immeuble Isjapa
Inc., whose sole shareholder was Raynald Ouellet.
(i)
Raynald Ouellet is Roger Ouellet's brother.
(j)
At the time of the transfer referred to in subparagraph
(c), Ferme Normand et Frères Inc. and the Appellant were related persons.
(k)
On May 26, 1995, Ferme Normand et Frères Inc.
made an assignment of its property.
(l)
During its taxation year beginning June 1, 1993,
and ending May 31, 1994, or in the course of a prior taxation year,
Ferme Normand et Frères Inc. had a tax debt of $93,509.74.
[3]
Raynald Ouellet, the
sole shareholder of the Appellant, testified concerning the facts surrounding
the acquisition of the assets of Ferme Normand et Frères Inc. ("the Normand
Farm") by the Appellant, which he represented for the purposes of the
transaction.
[4]
In the summer of 1993, Roger
Ouellet, Raynald Ouellet’s brother, told him that the Normand Farm was in the
process of being liquidated or sold. According to the witness, the owners of
the farm, the Normand brothers, were no longer in agreement about how to run the
farm.
[5]
The Appellant's farming
operation is located in the regional county municipality of Rouyn‑Noranda, and the Normand Farm is in the Rivière-du-Loup
area, 1,200 km away.
[6]
Raynald Ouellet testified
that he had told his brother at the outset that he was only interested in
purchasing the farm's livestock, part of its milk quota, and its equipment. He
was not interested, he stated, in purchasing the remainder of the farm's assets
(consisting of immovable property) because he felt that he lived too far away
from the location to be able to look after the sale of those assets. However,
he believed that the equipment and livestock could be sold quickly at an auction
held within two weeks of the purchase of those farm assets.
[7]
Raynald Ouellet
testified that he visited the farm for the first time on his own, in order to
meet the Normand brothers. From their body language, he saw that the Normand brothers
no longer got along and were highly motivated to sell the assets. While there,
he quickly noticed that the farm was generally being allowed to deteriorate:
the stables were very poorly maintained and a number of cows were sick. A few
were lying down and unable to get up. Raynald Ouellet testified that he thought
he could purchase the assets and resell them at a profit if he took the time to
properly care for the animals, slaughter the ones that were sick, and make
minor repairs to the farm's equipment.
[8]
Raynald Ouellet returned
to the farm for a second visit, accompanied this time by his brother Roger, who
was interested in acquiring the remainder of the farm's assets by purchasing
the shares of the company that owned the Normand Farm. Raynald Ouellet made
an offer to purchase the assets for $175,000. He negotiated the price with the Normand
Brothers, and they ultimately accepted the offer. Unbeknownst to his brother Raynald,
Roger Ouellet negotiated the purchase of the farm's shares. Raynald Ouellet
does not know the purchase price of the shares. The two brothers are no
longer speaking to each other following that transaction, and all the banking
documents concerning the transaction have been destroyed. A letter from the
National Bank confirms, however, that the transaction took place and that the
documents were destroyed.
[9]
There are, however, two
items of evidence in the record that indicate that Roger Ouellet borrowed $500,000
from the National Bank in order to purchase the shares in the Normand Farm. The
bank required each of the two brothers to provide a $250,000 guarantee. Raynald
Ouellet says that he had to guarantee his brother's loan until the sale of the
assets at the auction and the payment of the $175,000 owed to the Normand Farm.
The bank was concerned that even though it had a security in the form of all the
farm's movable and immovable assets, that security would cease to be effective as
soon as the movable assets were sold and removed from the farm. Since buyers at
auction pay with non-certified cheques, the National Bank wanted Raynald Ouellet
to bear, until it cashed the cheques, the credit risk that the eventual
purchasers posed. The witness confirmed that he was released from his
suretyship when the National Bank confirmed that the purchase price was received.
[10]
On June 18, 1993, the
Appellant held an auction at which it sold the property that it had acquired on
June 7, 1993. The proceeds of the auction, not including taxes, totalled
$231,004.27. It should be noted that these proceeds were not for all of the
equipment and inventory, and did not include the proceeds of the sale of 2,400
kg of processing milk fat (the milk quota) that had been sold for the sum of
$76,824. The gross proceeds from both transactions, before expenses and
not including sales taxes, totalled $307,828. Raynald Ouellet testified
that he incurred expenses of approximately $10,000 for labour, $8,000 for
advertising and $3,000 for farm equipment repairs. In addition, there were bank
charges of roughly $4,000, for a total cost of about $26,000. In my opinion,
the Appellant's net profit from the sale of the assets was approximately
$108,000. The Appellant paid tax on that profit.
[11]
Raynald Ouellette says
that he is surprised, for several reasons, that the Canada Revenue Agency (CRA)
is hounding the Appellant. First of all, the transaction in issue dates back to
1993, and it is now 2010. The CRA sent the Appellant a first notice of
assessment on December 20, 1993. The Appellant appealed that first
assessment on August 4, 2000. Following various discussions between
the parties' counsel, the Appellant filed a Consent to Judgment that put an end
to the dispute. This consent, produced as Exhibit A‑6 in the case at bar,
was sanctioned by my colleague Justice McArthur on January 15, 2004. According
to the Appellant, the reassessment under appeal pertains to exactly the same
facts as those that were the subject of the first assessment. Both assessments
were made under section 160 of the ITA. Raynald Ouellet is of the
opinion that the Consent to Judgment put an end to this matter.
[12]
Moreover, Raynald Ouellet
believes that the Appellant paid a price corresponding to the fair market value
of the property. That price was negotiated with the Normand brothers, who had
an independent economic interest which motivated them to seek the highest
possible price for the assets. According to the witness, if it was so clear
that the property could have been sold for a better price at auction, the Normand
brothers would have done it. It was only after the fact, when the property was
resold, that it became clearer that the transaction was a good one for the
Appellant. At the time of the purchase, however, it was not clear. Furthermore, the
witness maintained that the certified appraiser employed by the CRA, who also
testified (concerning her valuation, which was done at the request of CRA
staff) at the hearing, was not qualified to value the Appellant's assets.
He testified that the appraiser's expertise is in real estate. He stated
that he himself is knowledgeable about agricultural property valuation because
he was once employed by Quebec's ministry of agriculture, fisheries and food (ministère
de l’Agriculture, des Pêcheries et de l’Alimentation, hereinafter referred to
as MAPAQ), where his duties involved approving farm loans, and because the
Appellant's activities frequently involve the purchase and sale of livestock
and farm equipment.
The testimony of Nathalie Locas
[13]
The Respondent's main
witness was Ms. Locas, a certified appraiser with the CRA. Further to a
request made by CRA auditor Éric Vaillancourt, Ms. Locas valued the assets
purchased by the Appellant. Her findings are set out in a memorandum dated
November 29, 2004, produced as Exhibit A‑9. She assigned the
following fair market values to the assets:
|
Livestock:
|
$134,288
|
|
Proceeds from milk sales:
|
$96,030
|
|
Farm equipment and rolling stock:
|
$123,500
|
|
Total:
|
$353,818
|
[14]
Ms. Locas's expert
report states that she used two methods to value the cattle, namely: an
analysis of the actual livestock sale transactions at the June 18, 1993 auction,
and a reference to the list prepared by the Comité de références économiques en
agriculture du Québec. Using those two methods, Ms. Locas found that the
selling price for each animal at the auction was representative of the market
value at that time. She arrived at a total value of $134,288, despite the fact
that the selling price of the animals was $107,280, because only 123 animals
were sold at the auction, while the herd comprised 159 head of cattle — hence the difference of $27,008.
[15]
Ms. Locas admitted that
she made a mistake in calculating the fair market value of the 3,000-litre milk
quota. Specifically, she forgot to take into account a 20% reserve applied by
the Fédération des producteurs de lait du Québec. When that reserve was
applied, the fair market value of the quota was determined to be $76,824.
[16]
Ms. Locas determined
that the fair market value of the Appellant's equipment and rolling stock was
$123,500 on the basis of the proceeds of the sale of the farm equipment at the auction.
Since not all the farm equipment was sold at the auction, Ms. Locas characterized
as conservative her estimation of the value of the equipment and rolling stock.
Appellant's position
[17]
The Appellant objects
to the reassessment under appeal on the grounds of res judicata, in
light of Justice McArthur's decision.
[18]
Further, the Appellant
submitted that Ms. Locas should not be recognized as an expert in farm
equipment valuation. In its submission, Ms. Locas is experienced in real
estate appraisal and has no relevant experience in the agricultural field.
[19]
Lastly, for the reasons
mentioned in Raynald Ouellet's testimony, the Appellant believes that the
price of $175,000 represents the fair market value of the assets purchased on
June 7, 1993.
Respondent's position
[20]
The Respondent's
position is contrary to the Appellant's on each of the above points. As a
result of the correction that Ms. Locas accepted in relation to the sale
of the milk quota, the fair market value of the assets as determined by the
Respondent is $333,612.
Analysis
[21]
Under the civil law,
article 2848 of the Civil Code of Québec (C.C.Q.) provides as follows
with respect to the issue of res judicata:
2848. The authority of a final judgment (res judicata) is an
absolute presumption; it applies only to the object of the judgment when the
demand is based on the same cause and is between the same parties acting in the
same qualities and the thing applied for is the same.
However, a judgment deciding a class action has the authority of a
final judgment in respect of the parties and the members of the group who have
not excluded themselves therefrom.
[22]
Jean-Claude Royer, in La
preuve civile,states
the following regarding res judicata:
[TRANSLATION]
The authority of a final judgment preserves public order while protecting
private interests. It is a legal presumption that avoids repeated or perpetual
litigation, ensures the stability of social relations, and prevents conflicting
judgments from being issued.
[23]
Further on, he adds:
[TRANSLATION]
The authority of a final judgment extends only to the reasons that
are closely connected to the judgment.
[24]
Article 2848 C.C.Q.
provides that three conditions must be met in order for the authority of a
final judgment to be relied upon in a case in which there has already been a
judgment. Briefly stated, there must be identity of cause, identity of object
and identity of parties. Royer discusses these three identities in his
book. With regard to identity of parties, he states:
[TRANSLATION]
Legal identity - Article 2848 C.C.Q. requires
that the parties be the same and that they be acting in the same capacity.
[25]
With respect to
identity of cause, the author writes:
[TRANSLATION]
. . . there is no identity of cause where the physical facts or
juridical acts alleged in the trials are different, or where the legal
characterization of those facts is different. Thus, there is no identity of
cause between two claims that are based on different contracts or instruments.
. . .
. . . As a general rule, identity of the legal characterization of the
facts requires not only that the facts be the same, but also that the legal
rule applicable to those facts be the same. . . .
. . . The true criterion for determining whether there
is identity of cause is the legal characterization of the facts. As a general
rule, where the legal characterization is the same, the legal rule is the same
as well. If there are two different legal rules applicable to identical facts,
there are two different causes, for distinct rules generally call for different
legal characterizations.
On the other hand, in certain exceptional cases, there can be
identity of cause even if the legal rules relied upon are different. In order for
this to happen, there must, however, be identity of facts and identity of their
legal characterization. The latter identity supposes identity as to the basis
of the two legal rules and also as to the potential outcome of the application
of each.
[26]
With regard to the
third element, the identity of object, the author concludes as follows:
[TRANSLATION]
. . . The object of a legal action is the benefit that the litigant
seeks, or the right that he seeks to have enforced, reduced or set aside. The
presumption in article 2848 C.C.Q. does not require material identity
of the thing applied for. It is sufficient that there be abstract or formal
identity of the right asserted.
[27]
The juridical facts
referred to in Justice McArthur's decision are not the same as those
established for the purposes of the reassessment herein. The relevant part of
the Consent to Judgment is worded as follows:
[TRANSLATION]
[N]o transfer took place on June 29 and August 26, 1993, between Ferme
Koiris Inc. and Ferme Normand et Frères Inc.
[28]
The reassessment in
issue pertains to a transfer that occurred on June 7, 1993, not the
transfers that occurred on June 29 and August 26, 1993. In the earlier
case that was decided, the transfers were of money. Counsel for the Respondent
pointed out that the pleading referred to those two transactions, whereas the
transfer in issue here involves the sale of assets, to which section 160
of the ITA applies. The purpose of the Consent to Judgment is specified in a
letter dated November 25, 2003, to Bernard Barrette, the Appellant's
lawyer at the time. In the letter, counsel for the Respondent clearly indicated
that she was recommending that her client consider the possibility of assessing
the Appellant pursuant to subsection 160(1) of the ITA with respect to the
transfer of property that took place on June 7, 1993.
[29]
Consequently, it is my
opinion that res judicata cannot be asserted against the reassessment at
issue in this case.
Fair market value
[30]
The only issue with
regard to the application of section 160 of the ITA is the fair market
value of the assets purchased by the Appellant. There is no dispute between the
parties with respect to the legal aspect of the definition of the term "fair
market value." Consequently, the question that I must address is strictly
a question of fact.
[31]
Mr. Barrette, the
Appellant's counsel, objected to Ms. Locas being recognized as an expert.
In view of her education and professional experience, I am able to recognize
Ms. Locas as a valuation expert. However, I share Mr. Barrette's view
as to the weight to be given to her opinion. First of all, I note that she has a
great deal of experience in real estate appraisal. Indeed, her appraisal report
attests to this fact. At page 4 of the report, Ms. Locas states:
[TRANSLATION]
1. INTRODUCTION
1.1 PURPOSE AND DATE OF APPRAISAL
The purpose of this report is to estimate the fair
market value of the property of Ferme Normand et Frères Inc. sold to Ferme
Koiris Inc. on June 7, 1993.
Our mandate was to determine whether the price, namely
$175,000, of the transaction between the two aforementioned entities was
representative of the fair market value of the property as at
June 7, 1993.
This real estate appraisal is solely for our agent, for
taxation purposes only.
It should be noted that the property was not seen by the
author of this report because it had all been sold at the time of the initial
valuation in November 2004.
1.2 DEFINITION OF MARKET VALUE
Market value is defined as the likeliest price at which
a property would be sold on the real estate market, having regard to the
following conditions:
- The market for the real estate is competitive, i.e.
the interaction between supply and demand is normal.
- All normal and reasonable information regarding
market conditions and opportunities circulates freely and the buyer and the
seller have knowledge thereof.
- There is no undue pressure on either party.
- "Rational" or prudent economic behaviour is
observed in both the buyer and the seller.
- A reasonable time frame is specified when the
property is put up for sale.
- The payment methods are in keeping with market
standards.
. . .
[32]
It is clear that Ms.
Locas made a mistake. However, I believe that the mistake is revelatory of the
fact that Ms. Locas mainly does real estate appraisal. Indeed, she is with
the CRA's real estate appraisal section in Quebec City. Moreover, during her cross-examination, I asked Ms. Locas
whether the buyer should have benefited from a substantial discount because he
was buying all the movable assets of the farm, whereas, at the auction, each
subsequent buyer purchased specific items. I noticed that Ms. Locas had a
great deal of trouble answering this question, and it is clear that she failed
to address it in her report. Later during the hearing, she answered that, according
to her calculations, some purchasers of cattle paid the same average price when
they bought more than one animal. However, I would point out that these buyers
were not purchasing 100% of the assets. Furthermore, I believe Raynald
Ouellet's testimony that certain animals were in a poor state at the time of
the Appellant’s purchase. Thanks to the work that he and his team did over a
seven-day period, the condition of the animals improved appreciably. Since Ms. Locas
did her appraisal on August 4, 2008, she was unable to make any
findings regarding their condition. Lastly, if the Appellant's expenses are
added to Ms. Locas's valuation, the Appellant, according to the CRA's
position, should have incurred a loss. I find such a conclusion unlikely. Raynald
Ouellet, who acted on the Appellant's behalf, took a calculated risk in making
the purchase. He made a personal commitment in providing a $250,000 surety for
the Appellant in order to facilitate its purchase of the assets. The auction
sale could have been less successful. The CRA is attempting to use the results of
the auction after its success has been confirmed. A lot of people would get
rich if they could set their purchase price after the results of the purchased
assets' resale become known.
[33]
Ms. Locas made other
mistakes in her report. With respect to the sale of the milk quota, she failed
to deduct the 20% reserve prescribed by regulation. In her initial report, she concluded
that the reserve had been established through the Fédération des producteurs de
lait du Québec and its centralized quota sales system. However, at the hearing,
she admitted that she should have taken into account a 20% reserve, which was
the percentage in effect at the time of the transaction. This shows in Ms.
Locas a lack of knowledge in the agricultural field.
[34]
Ms. Locas's conclusion
is also contradicted by the facts of the transaction, as presented by Raynald Ouellet
in his testimony. Raynald Ouellet testified that he negotiated the
purchase price of the assets with the Normand brothers on his second visit to
the Normand Farm. At the time of the negotiations, the Normand brothers owned
the shares of the company that held the assets, and it was very much in their
interest to get the best possible price for the assets. If they succeeded in
selling the assets purchased by the Appellant at the best possible price, they
would be able to command a higher price for the shares of the company that
owned the Normand Farm, or pay themselves a dividend before selling the shares.
They negotiated the price with their interests alone in mind, as unrelated parties
do. My conclusion remains unchanged notwithstanding the fact that, at the
time of the sale, the Normand Farm shares belonged to Roger Ouellet, Raynald Ouellet's
brother. In my view, the essential point is how the purchase price was arrived
at, and in that regard the evidence is uncontradicted. The Normand brothers,
who were acting entirely and exclusively in their own interests, accepted the
Appellant's $175,000 offer. This is consistent with the conduct of people doing
business with each other at arm's length.
[35]
Moreover, if, as
counsel for the Respondent argues, it was so clear that the assets could be
resold at a profit at the auction, why did the Normand brothers not sell the
assets by auction themselves? It was in their economic interest to conduct
their business as they did. In my opinion, I must take into account the fact
that, at the time of the sale to the Appellant, it was less clear that they
would be able to obtain the same result as was achieved at the auction; it only
became obvious once the Appellant had resold the assets at the auction. It is a
well-accepted principle of valuation that one must not consider subsequent
events in determining the price of an earlier transaction.
[36]
In Nash v. Canada, the Federal
Court of Appeal preferred to use the purchase price of the property, rather
than its selling price.
29 Where there is a gap between the time an asset is acquired
and disposed of, the cost of the asset will normally be an unreliable basis for
estimating fair market value. But where the dates of acquisition and
disposition are very close in time, barring evidence to the contrary, the cost
of acquiring the asset will likely be a good indicator of its fair market value.
. . .
[37]
In Gilvesy
Enterprises Inc. v. Canada,
this Court stated:
22 Finally, Ms. Senyk was, I think, somewhat influenced,
whether consciously or not, by hindsight. . . .
23 . . . Faced with a choice
between the highly theoretical opinion of Ms. Senyk, and the real
transaction between these two very experienced business men, knowledgeable
about the company and the industry, dealing in the real world with their own
money, I have a strong preference for the latter as evidence of value. . . .
[38]
The Appellant's
position in this matter is supported by additional and independent facts. The
National Bank lent $500,000 to Raynald Ouellet's brother to help him purchase
the Normand Farm shares. The bank required each of the Ouellet brothers to provide
a $250,000 guarantee. It was not at all in the National Bank’s interest to
allow the assets to be sold to the Appellant for less than their fair market
value. If the Normand brothers accepted too low a price, the bank's credit
risk exposure would be greater. It is true that the bank had a personal
guarantee from Raynald Ouellet, but this guarantee ended when the assets
were sold at auction and Ferme Normand received the $175,000 selling price.
Under the circumstances, I believe that the bank had sufficient assurance
that the other assets of the company could cover the outstanding balance of the
debt. Lastly, I would point out that it is clear that, under the circumstances,
Roger Ouellet had an economic interest distinct from Raynald Ouellet's when
the transaction of June 7, 1993 took place. If the assets could have been sold
at a higher price, he might have made a better deal. I would note that things
can often seem clearer after the fact. However, when we look at things as they
were before the fact, they are not often quite so clear. Accordingly, I find,
on a balance of probabilities, that the price of $175,000 paid for the assets
represented their fair market value. I would also point out that the Appellant
provided further consideration for the assets. Specifically, Raynald
Ouellet undertook to guarantee the loan from the National Bank, which was used
to purchase the assets of the company that owned the Normand Farm, and he did
so in order to facilitate the Appellant’s purchase of the assets that were
subsequently resold at auction.
Conclusion
[39]
For all these reasons,
I allow the appeal, with costs, and I order that the reassessment be vacated.
Signed at Ottawa, Canada, this 12th day of January 2010.
"Robert J. Hogan"
Translation
certified true
on this 29h day of
April 2010.
Erich Klein,
Revisor
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