Citation: 2007TCC603
Date: 20080121
Docket: 2005-96(IT)I
BETWEEN:
MARIO BOILY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
AMENDED REASONS FOR JUDGMENT
Bédard J.
[1] This appeal, heard
under the informal procedure, is from a reassessment established for the
Appellant, in which the Minister of National Revenue (the "Minister")
added $35,000 in income from a registered retirement savings plan ("RRSP")
to the Appellant's income for the 1999 taxation year, in accordance with
subsection 146(10) of the Income Tax Act (the "Act"). With
this reassessment, the Minister also established the goods and services tax
credit and the heating allowance at nil.
Preliminary observations
[2] The Appellant was
represented by his accountant, Yvan Tremblay. I note that only
Michel Leduc, an investigator for the Canada Customs and Revenue Agency,
testified in this case. I also note that the agent for the Appellant admitted
that the company 9063‑3223 Québec Inc., for which the legal
name was Services financiers Mackenzie ("SFM") in 1998 and 1999,
never granted a loan to his client, and that the company Fiducie MRS, a trust
governed by an RRSP, never used any property from the Appellant's RRSP as
security for a loan or allowed such a use. Once these admissions were made,
counsel for the Respondent amended, with my approval, the Reply to the Amended
Notice of Appeal to withdraw all charges by the Respondent regarding a loan
that was allegedly granted by SFM to the Appellant and the Appellant's RRSP
property allegedly used as security for a loan. As a result, counsel for the
Respondent amended the Reply to the Amended Notice of Appeal so that it no
longer relied on the provisions set out at paragraphs 146(10)(b) and (d)
of the Act.
The facts
[3] In 1998, the
Appellant held a locked-in RRSP with the Royal Bank of Canada. On October 25,
1998, the Appellant transferred his RRSP to Fiducie MRS.
[4] On December 1,
1998, the Appellant signed a letter (Exhibit I-1, Tab 1) addressed to
Fiducie MRS, pursuant to which he asked them to immediately acquire 34,500
class "B" shares of
Les Immeubles R.V. (1986) Inc. ("RV") for $1.00
each, to issue a $34,500 cheque to RV and send it to him. On December 1, 1998,
the Appellant signed an offer to purchase shares (Exhibit I-1, Tab 4)
addressed to RV, pursuant to which he offered to purchase 34,500 class
"B" shares for $1.00 a share. He points out that RV's signature does
not appear on this offer. Again on December 1, 1998, the Appellant signed a
sale contract (Exhibit I-1, Tab 5), pursuant to which he acquired 34,500 class
"B" shares of RV for $1.00 a share. I note that the contract was not
signed by RV, the other party to this sale contract. On December 1, 1998,
Lucie Lauzon signed a letter (Exhibit I‑1, Tab 7)
addressed to Fiducie MRS, in which she stated that the shares of RV were a
"qualified investment" within the meaning of the Act. On
December 1, 1998, the Appellant signed a bond of indemnity (Exhibit I-1,
Tab 8) drafted by Fiducie MRS, the relevant part of which states:
[translation]
In accordance with the terms of the
self-directed retirement savings plan number 6043947 and the definition in
the trust declaration of the 417-013 type plan, the annuitant hereby claims
that the investment of 34,500 shares in Immeubles RV is in accordance with
the regulations of the Income Tax Act (Canada) and its
amendments. The annuitant acknowledges that he ordered MRS to make the payment
for the property of the small business before receiving a certificate, and he
is the sole person in charge of delivery of the certificate to MRS at the
desired time. The annuitant disengages the trustee from all responsibility
in case of loss, fees, commissions and expenses of any kind that the annuitant
or his successors, executors, administrators and dependents may bear or have to
pay because of this investment in Immeubles RV, and of all taxes or additional
penalties required under the Income Tax Act (Canada) or any other
applicable tax legislation.
On December 1, 1998, RV
issued a share certificate (Exhibit A‑3) certifying that Fiducie
MRS, trustee for Mario Boily's RRSP #6043947, held 34,500 class
"B" shares of RV. I must note that the certificate states the shares
are subject to a unanimous shareholder agreement. Moreover, the stub of the
share certificate (Exhibit I‑1, Tab 6) indicates that the
certificate was issued to the Appellant and to Fiducie MRS. This stub shows
that the share certificate was delivered to the Appellant on December 1, 1998.
Lastly, on December 1, 1998, the Appellant signed RV's unanimous shareholder
agreement (Exhibit I‑2, Tab 3), which was not signed by
Lisette Lalancette, the other party to theagreement.
[5] On January 19,
1999, the Appellant signed a letter addressed to MRS Trust (Exhibit I‑1,
Tab 9) which stated:
[translation]
I ask that upon receiving this letter,
you send a cheque to Les Immeubles R.V. (1986 inc.) for $34,500.00 to the
following address: 1174 Boul. Sacré-Cœur, St-Félicien G8B 2R2. This will
be in exchange for share certificates in the company for $34,500.00 of class B
shares.
For more information, please contact my
agent.
Thank you for your attention to this
matter.
Mario Boily
915 Robert Jean
Alma
G8B 7J6
On January 25, 1999, Fiducie MRS
drew a $34,500 cheque payable to RV (Exhibit I-1, Tab 10). On
February 3, 1999, the Appellant received an $18,360 cheque (Exhibit I-3,
Tab 2) issued by SFM. On or around September 9, 2007, Fiducie MRS sent the
Appellant the share certificate representing the 34,500 class "B"
shares of RV issued to Fiducie MRS. Lastly, it must be noted that RV was struck
off ex officio on August 5, 1999 (Exhibit I-2, Tab 2).
Testimony of Mr. Leduc
[6] Mr. Leduc's
testimony and Exhibits I‑2, Tab 3; I‑2, Tab 4; I-4; I‑5;
I‑6; I-7; I-8 and I-9, submitted to evidence in support of his testimony,
shows:
(i)
Jacques Gagné
and SFM, whose main shareholder was General Ventures Capital Management and
whose address at the time was in the Bahamas, and that also had an institution
in St. Hubert, were the main artisans and promoters of an RRSP strip scheme
that benefited this group and many annuitants including the Appellant. The
purpose of this RRSP strip scheme was to allow RRSP annuitants to receive money
from their RRSP without any tax consequences;
(ii)
SFM
allowed $681,400 to be removed from these RRSPs in this way. Mr. Leduc
explained that he found deposits in RV bank accounts that came from annuitants'
RRSPs totalling $681,400. This amount was paid for alleged subscriptions in RV
shares. Mr. Leduc added
that for the most part, information came from documents the Minister seized at
Mr. Gagné's residence;
(iii)
RV issued $659,998 to
SFM, close to 97% of the amount RV collected from RRSP annuitants;
(iv)
RV did not produce
income tax returns for the years following its 1996 taxation year;
(v)
RV did not produce
financial statements in 1998 and on. I restate that RV was struck off ex
officio on May 8, 1999;
(vi)
Cheques totalling
$355,399 payable to the RRSP annuitants (including a $18,630 cheque
payable to the Appellant) were drawn on SFM bank accounts. Mr. Leduc explained
that the RRSP annuitants thus received around 54% of the amounts invested in
their RRSP tax free (if not for the assessments the Minister subsequently
established). Moreover, Mr. Leduc added he did not find any documents showing
that $355,399 was paid by SFM to the annuitants of these RRSPs under loans
allegedly granted by SFM;
(vii)
SFM's income statement
to May 31, 1999, does not show any income, only expenses for $48,073, for a loss
of $48,073. As for the balance sheet to that date, its total assets indicated
amount to $116,269 and its liabilities, $162,242. The only capital stock
indicated is $100. Therefore, there is no trace of the $659,998 RV paid to SFM
that would reflect an investment by RV in SFM.
[7] In June 2007, the
Court received an Amended Notice of Appeal, which states:
[translation]
INFORMAL PROCEDURE
AMENDED NOTICE OF APPEAL-CDN COURT
Upon reading the judgments rendered in
Lisette Lalancette and Her Majesty the Queen, and Don Nunn and Her Majesty the
Queen, and upon examining the documents requested in our September 26, 2002
letter, we understand it would be difficult to continue supporting the
eligibility of the investment in shares of the company Les Immeubles R.V.
(1986) Inc (RV) by the Compagnie de Fiducie MRS in 1999.
However, one question has yet to be
answered, and that is the way Mr. Boily is to deal with his loss fiscally,
which we shall call "commission paid to the facilitator," following a
transfer by the annuitant of funds held in a locked-in retirement savings plan
to use as security for a benefit/loan from Service financiers Mackenzie (SFM).
The documents regarding the
"strategy" clearly show that the $34,500 transferred from MRS to
RV was deposited to RV's bank account and then transferred entirely to SFM. A
cheque for $18,630 was then given to Mr. Boily by SFM.
The share certificate representing
$34,500 given as compensation to MRS thus had a zero value as soon as it was
received by MRS because RV was an inactive business, RV had no assets that
would justify a $1/share worth, the $34,500 was not retained by RV but was
returned in its entirety to SFM for which there was no account receivable, RV’s
minutes do not make any mention of issuing these shares, etc… Paragraphs 12 and
13 of Mr. Archambault's judgment are ample evidence of the preceding and the
intent was never to make the funds grow by purchasing a viable investment; this
was not the purpose.
In our opinion, the disbursement of the
$34,500 was indirectly carried out to get $18,630 for a "commission"
of $15,670 and not for the purchase of an investment, whether admissible or
not. Because the $34,500 was used as security, it is automatically
deregistered, the trust ceases to exist and Mr. Boily must include the
$34,500 in his income for 1999.
Since the funds were not used to purchase
a non-allowable investment, subsection 146(10) does not apply. It would be
subsection 146(7) that should apply, and Mr. Boily, according to this
provision, must be allowed to reduce the additional income of $34,500 by
$15,670 as a loss regarding the security provided to SFM or as "commission
paid to the facilitator."
We therefore ask the Tax Court of Canada
to rule on the eligibility of the reduction of $15,670 from the income of
$34,500 in 1999.
At the end of April 1997, the Court
received another Amended Notice of Appeal, which states:
[translation]
INFORMAL PROCEDURE
AMENDED NOTICE OF APPEAL-AMENDED-TAX COURT CDA
NOTE TO READER: Read this notice as if
the entire text was underlined to indicate the changes in relation to the
Amended Notice of Appeal dated April 17, 2007.
The purchase of 34,500 B shares in Les
immeubles R.V. (1986) Inc (RV) by the Compagnie de fiducie MRS (MRS), trustee
of the annuitant Mario Boily's locked-in/self-directed RRSP and the $18,630
loan granted to Mario Boily by Services financiers Mackenzie (SFM) are two
transactions that must be analyzed separately.
First, at Mario Boily's
request, MRS acquired 34,500 B shares of RV at $1 each. The share certificate
is numbered B017 and was issued by RV on December 1, 1998. The annuitant
acknowledged receipt and sent the certificate to MRS through his investment
advisor. On January 25, 1999, MRS addressed a $34,500 cheque to RV for full
payment of the certificates. The share certificate is still being held by MRS
according to the December 2006 statement of account, but has not been subject
to any annual trust fees since 2002.
Following receipt of the
cheque from MRS, RV invested the entire amount of its sale of B shares,
$34,500, in some investment fund with SFM. The accounting records in the RV
books might state:
|
Cash
Investment with SFM
Cash
|
Capital- B stock
|
$
34,500
34,500
|
$
34,500
34,500
|
and the accounting records
in the SFM books might be:
|
Cash
Funds
held in trust for RV
|
34,500
|
34,500
|
Aside from the fact that the investment
was disallowed for the purposes of a locked-in/self-directed RRSP, the
accounting entries above, which should normally have appeared in RV and SFM's
books, show a normal situation and no income results from these transactions.
Therefore, the annuitant did not have a loss, as we claimed earlier.
Second, SFM granted an $18,630 loan to
Mario Boily on February 3, 1999, in the course of regular activities as the
financial intermediary for RV. The loan appears to have been granted
interest-free and with no repayment schedule or security; we have nothing in
our possession to state the contrary.
The letter addressed to Mario Boily by
the Canada Customs and Revenue Agency (CCRA) on August 2, 2002, includes the
following reason for including the $34,500 in the 1999 income: [translation] "…to the extent that
this loan exists, that the property of your RRSP was security on a loan."
As previously stated, RV could invest the
proceeds of the sale of B shares as it saw fit, even if the CRA considered the
funds held in a locked-in/self-directed RRSP used to acquire an investment in
RV were security for the loan granted to Mario Boily.
We also know that the certificate for the
B017 shares is still being held by MRS to this date, and as a result, Mario
Boily did not transfer this certificate to SFM; the space provided for this
purpose was not filled in and MRS did not send Mario Boily a T4RSP in 1999.
Therefore, the B shares certificate held in Mario Boily's
locked-in/self-directed RRSP was not used as security for the loan granted by
SFM since it was attributed during SFM's regular activities. The only reason
Mario Boily must include $34,500 in additional income in his 1999 income is
because the funds from the locked-in/self-directed RRSP were used to acquire an
investment found to be inadmissible, and not because the B shares certificate
was used to guarantee a loan.
Originally, the locked-in/self-directed
RRSP was for $34,986.35 according to MRS's December 1999 statement of accounts.
The account was composed of an investment in RV ($34,500) and cash ($486.35).
Over the years, the annuitant withdrew annual trust fees of $187.25 from this
account, meaning that as early as 2002, the cash was completely depleted,
leaving only the investment in RV. In January 2004, the MRS's statement of
accounts showed only a devaluation of the investment in RV at zero.
It is reasonable to believe that the
trust governing the account in question ceased to exist in 2002 when the cash
was completely used up to pay for the annual trustee fees. In our opinion, this
is not the case for the trust governing the investment in RV. We claim that the
trust governing the investment in RV ceased to exist as soon as the investment
became inadmissible in 1999, leading to its deregistration and the annuitant's
being taxed.
From the time the investment became
inadmissible, the annuitant was to pay tax on the $34,500 according to
subsection 146(10) ITA and remove his locked‑in/self-directed RRSP
from his inadmissible investment himself. According to subsection 146(7) ITA,
Mario Boily could have returned the proceeds of disposition of his investment
in RV and gotten a tax credit for the same amount. However, since these were
shares in a small business, there was no market available for transactions, and
RV was insolvent, Mario Boily was not able to sell these B shares.
We therefore consider the
investment deregistered in 1999 as income to that date, a business investment
eligible for the deduction of a loss in that respect under the election set out
at subsection 50(1) ITA. Under thiselection, the 34,5000 [sic] B shares
of RV are deemed to have been sold for nil proceeds of disposition, that the small
business was insolvent at the end of the taxation year, and that neither the
company nor a company it controlled was operating a business. A letter signed
by Mario Boily, attached to this Amended Amended Notice of Appeal,
confirms the election set out in subsection 50(1) ITA.
In conclusion, we ask the Tax Court of
Canada to make a ruling on the admissibility of the part of the $34,500 that,
under subsection 50(1), is recognized as a deductible loss as an allowable
business investment loss (ABIL) in 1999. Should this be recognized by the
Court, we ask that this ABIL be applied in its entirety against the additional
income for 1999.
[8] During his
submissions, the Agent for the Appellant restated part of the arguments raised
in the two Amended Notices of Appeal and also relied on the application of
subsection 146(12) of the Act. As we can see, the Appellant's position
may have changed over time. Without knowing what side the Agent was on at the
time of his submissions, I will address the arguments presented by the
Appellant in his two Amended Notices of Appeal and the additional arguments
raised by the Agent for the Appellant during his submissions. Lastly, I will
address paragraphs 146(10)(b) and (d) and subsection 146(7) of
the Act even if the Agent for the Appellant admitted that SFM did not loan his
client $18,630.
Analysis and conclusion
[9] The relevant
provisions of section 146 of the Act state:
146(1) "qualified
investment" for a
trust governed by a registered retirement savings plan means
(a) an investment that would be described
in any of paragraphs (a), (b), (d) and (f) to (h) of the definition
"qualified investment" in section 204 if the references in that
definition to a trust were read as references to the trust governed by the
registered retirement savings plan,
(b) a bond, debenture, note or similar
obligation
(i) issued by a corporation the shares of
which are listed on a prescribed stock exchange in Canada, or
(ii) issued by an authorized foreign bank
and payable at a branch in Canada of the bank,
(c) an annuity described in the
definition "retirement income" in respect of the annuitant under the
plan, if purchased from a licensed annuities provider,
(c.1) a contract for an annuity issued by
a licensed annuities provider where
(i) the trust is the only person who,
disregarding any subsequent transfer of the contract by the trust, is or may
become entitled to any annuity payments under the contract, and
(ii) the holder of the contract has a
right to surrender the contract at any time for an amount that would, if
reasonable sales and administration charges were ignored, approximate the value
of funds that could otherwise be applied to fund future periodic payments under
the contract,
(c.2) a contract for an annuity issued by
a licensed annuities provider where
(i) annual or more frequent periodic
payments are or may be made under the contract to the holder of the contract,
(ii) the trust is the only person who,
disregarding any subsequent transfer of the contract by the trust, is or may
become entitled to any annuity payments under the contract,
(iii) neither the time nor the amount of
any payment under the contract may vary because of the length of any life,
other than the life of the annuitant under the plan (in this definition referred
to as the "RRSP annuitant"),
(iv) the day on which the periodic
payments began or are to begin (in this paragraph referred to as the
"start date") is not later than the end of the year in which the RRSP
annuitant attains 70 years of age,
(v) either
(A) the periodic payments are payable for
the life of the RRSP annuitant and either there is no guaranteed period under
the contract or there is a guaranteed period that begins at the start date and
does not exceed a term equal to 90 years minus the lesser of
(I) the age in whole years at the start
date of the RRSP annuitant (determined on the assumption that the RRSP
annuitant is alive at the start date), and
(II) the age in whole years at the start
date of a spouse or common-law partner of the RRSP annuitant (determined on the
assumption that a spouse or common-law partner of the RRSP annuitant at the
time the contract was acquired is a spouse or common-law partner of the RRSP
annuitant at the start date), or
(B) the periodic payments are payable for
a term equal to
(I) 90 years minus the age described in
subclause 146(1) "qualified investment" (c.2)(v)(A)(I), or
(II) 90 years minus the age described in
subclause 146(1) "qualified investment" (c.2)(v)(A)(II), and
(vi) the periodic payments
(A) are equal, or
(B) are not equal solely because of one
or more adjustments that would, if the contract were an annuity under a
retirement savings plan, be in accordance with subparagraphs 146(3)(b)(iii) to
146(3)(b)(v) or that arise because of a uniform reduction in the entitlement to
the periodic payments as a consequence of a partial surrender of rights to the
periodic payments, and
(d) such other investments as may be
prescribed by regulations of the Governor in Council made on the recommendation
of the Minister of Finance;
146(1) "non-qualified investment", in relation to a trust governed by a
registered retirement savings plan, means property acquired by the trust after
1971 that is not a qualified investment for the trust.
Regulation 4900(6) [Small business
investment] -- Subject to subsections (8) and (9), for the purposes of
paragraph (d) of the definition "qualified investment" in subsection
146(1) of the Act, paragraph (e) of the definition "qualified
investment" in subsection 146.1(1) of the Act and paragraph (c) of the
definition "qualified investment" in subsection 146.3(1) of the Act,
a property is prescribed as a qualified investment for a trust governed by a
registered retirement savings plan, a registered education savings plan and a
registered retirement income fund at any time if at that time the property is
(a) a share of the capital stock of an
eligible corporation (within the meaning assigned by subsection 5100(1)),
unless a person who is an annuitant, a beneficiary or a subscriber under the
plan or fund is a designated shareholder of the corporation;
…
4900(12) [Small business corporation] -- For the purposes of paragraph (d) of
the definition "qualified investment" in subsection 146(1) of the
Act, paragraph (e) of the definition "qualified investment" in
subsection 146.1(1) of the Act and paragraph (c) of the definition
"qualified investment" in subsection 146.3(1) of the Act, a property
is prescribed as a qualified investment for a trust governed by a registered
retirement savings plan, a registered education savings plan or a registered
retirement income fund at any time if, at the time the property was acquired by
the trust,
(a) the
property was a share of the capital stock of a corporation (other than a
cooperative corporation) that would, at that time or at the end of the last
taxation year of the corporation ending before that time, be a small business
corporation if the expression "Canadian-controlled private
corporation" in the definition "small business corporation" in
subsection 248(1) of the Act were read as "Canadian corporation (other
than a corporation controlled at that time, directly or indirectly in any
manner whatever, by one or more non-resident persons)",
...
and,
immediately after the time the property was acquired by the trust, each person
who is an annuitant, a beneficiary or a subscriber under the plan or fund at
that time was not a connected shareholder of the corporation.
5100(1) "qualifying
active business", at any time, means any business carried on primarily
in Canada by a corporation, but does not include
(a) a
business (other than a business of leasing property other than real property)
the principal purpose of which is to derive income from property (including
interest, dividends, rent and royalties),
...
5100(1) "eligible
corporation", at
any time, means
(a) a particular
corporation that is a taxable Canadian corporation all or substantially all of
the property of which is at that time
(i) used in a qualifying
active business carried on by the particular corporation or by a corporation
controlled by it,
(ii) shares of the capital
stock of one or more eligible corporations that are related to the particular
corporation, or debt obligations issued by those eligible corporations, or
(iii) any combination of
the properties described in subparagraphs (i) and (ii),
…
146(6) Disposition of non-qualified investment -- Where in a taxation year a trust
governed by a registered retirement savings plan disposes of a property that,
when acquired, was a non-qualified investment, there may be deducted, in
computing the income for the taxation year of the taxpayer who is the annuitant
under the plan, an amount equal to the lesser of
(a) the amount that, by virtue of
subsection 146(10), was included in computing the income of that taxpayer in
respect of the acquisition of that property, and
(b) the proceeds of disposition of the
property.
146(7) Recovery of property used as security – Where in a taxation year a loan, for
which a trust governed by a registered retirement savings plan has used or
permitted to be used trust property as security, ceases to be extant, and the
fair market value of the property so used was included by virtue of subsection
146(10) in computing the income of the taxpayer who is the annuitant under the
plan, there may be deducted, in computing the income of the taxpayer for the
taxation year, an amount equal to the amount, if any, remaining when
(a) the net loss
(exclusive of payments by the trust as or on account of interest) sustained by
the trust in consequence of its using the property, or permitting it to be
used, as security for the loan and not as a result of a change in the fair
market value of the property
is deducted from
(b) the amount so
included in computing the income of the taxpayer in consequence of the trust's
using the property, or permitting it to be used, as security for the loan.
146(9)
Where disposition of
property by trust –
Where in a taxation year a trust governed by a registered retirement savings plan
(a)
disposes of property for a consideration less than the fair market value of the
property at the time of the disposition, or for no consideration, or
(b)
acquires property for a consideration greater than the fair market value of the
property at the time of the acquisition,
the
difference between the fair market value and the consideration, if any, shall
be included in computing the income for the taxation year of the annuitant
under the plan.
146(10) Where acquisition of non-qualified investment by
trust – Where at any
time in a taxation year a trust governed by a registered retirement savings
plan
(a) acquires a non-qualified investment,
or
(b) uses or permits to be used any
property of the trust as security for a loan,
the fair market value of
(c) the non-qualified investment at the
time it was acquired by the trust, or
(d) the property used as security at the
time it commenced to be so used,
as the case may be, shall be included in
computing the income for the year of the taxpayer who is the annuitant under
the plan at that time.
146(12) Change in plan
after registration –
Where, on any day after a retirement savings plan has been accepted by the
Minister for registration for the purposes of this Act, the plan is revised or
amended or a new plan is substituted for it, and the plan as revised or amended
or the new plan, as the case may be (in this subsection referred to as the
"amended plan"), does not comply with the requirements of this
section for its acceptance by the Minister for registration for the purposes of
this Act, subject to subsection 146(13.1), the following rules apply:
(a) the amended
plan shall be deemed, for the purposes of this Act, not to be a registered
retirement savings plan; and
(b) the taxpayer
who was the annuitant under the plan before it became an amended plan shall, in
computing the taxpayer's income for the taxation year that includes that day,
include as income received at that time an amount equal to the fair market
value of all the property of the plan immediately before that time.
[10] First, in light of
the evidence, I find that by subscribing to 34,500 class "B" shares
of RV, Fiducie MRS (a trust governed by an RRSP) acquired a non-qualified
investment as defined under subsection 146(1) of the Act. In fact, the evidence
showed beyond any doubt that RV did not operate a business and that it did
not hold any interest in a company operating a business or any debt instrument
issued by such a company.
[11] Paragraphs 146(10)(a)
and (c) of the Act set out that if, in a given taxation year, a trust
governed by an RRSP acquires a non-qualified investment, the annuitant of that
RRSP must include the fair market value (FMV) at the time of acquisition of the
non-qualified investment in his or her income for that year. Therefore, the
Appellant was to include the FMV of the 34,500 class "B" shares at
the time of their acquisition in the calculation of his income. We will return
to the issue of whether these shares were acquired in 1998 or 1990 later.
[12] What was the FMV of
the 34,500 class "B" shares of RV at the time they were acquired
by Fiducie MRS? In its Response to the Amended Notice of Appeal, the Respondent
claims that the shares were acquired in 1999 and their FMV was $34,500 at the
time they were acquired. I note that the Appellant's evidence regarding the FMV
of these shares was non-existent. As a result, I find that the FMV of these
shares at the time they were acquired was $34,500. At any rate, I must state
that the provisions set out at subsection 146(9) of the Act make any discussion
about the FMV of the shares at the time they were acquired theoretical, for all
intents and purposes. Subsection 146(9) of the Act
states that if a trust governed by an RRSP disposes of property in a given year
in exchange for a consideration with a value inferior to the FMV of this
property at the time of the disposition or for no consideration, any difference
between this FMV and the consideration must be included in the calculation of
that year's income for the annuitant beneficiary of the RRSP. If the FMV of the
34,500 class "B" shares was nil at the time of their acquisition, the
$34,500 should still be included in the Appellant's income calculation for the
taxation year in which they were acquired, not in accordance with paragraphs
146(10)(a) and (c) of the Act, but rather in accordance with
subsection 146(9) of the Act.
[13] However, when, in a
given taxation year, a trust governed by an RRSP disposes of property that was
a non-qualified investment at the time it was acquired, subsection 146(6)
of the Act sets out that in calculating the income for that taxation year, the
annuitant can deduct the lower of the proceeds of disposition of property or
the amount that, under subsection 146(10), was included in the calculation of the
annuitant's income regarding the acquisition of this non-qualified investment.
Did Fiducie MRS dispose of the 34,500 class "B" shares of RV? In this
case, the evidence shows that, in 2007, Fiducie MRS gave the Appellant the
share certificate issued by RV on December 1, 1998, stating that Fiducie MRS
held 34,500 class "B" shares of RV. The evidence also showed that RV
was struck off ex officio on May 8, 1999. The questions to ask now are: did
issuing the share certificate in 2007 constitute a disposition in 2007, and if
we allow that a person can dispose of and acquire shares in a company that does
not have a legal existence, what were the proceeds of disposition for Fiducie
MRS and the acquisition price for the Appellant? In my opinion, issuing a share
certificate in 2007 does not constitute a disposition in this case. Moreover,
if I erroneously found that issuing a certificate in 2007 did not constitute a
disposition, it would still hold true that the proceeds of disposition and the
acquisition price for the Appellant were nil in this case and the Appellant
could therefore not deduct any amount as a loss in the calculation of his
income under subsection 146(6) of the Act.
[14] The agent for the
Appellant also claimed that subsection 146(7) of the Act applied in this
case. I feel that subsection 146(7) of the Act does not apply in this case
because the Appellant did not show that a loan existed, that Fiducie MRS used
or allow to be used the 34,500 class "B" shares of RV as security for
a loan and that the loan ceased to exist. I will restate that, at the hearing,
the Agent for the Appellant admitted that SFM did not grant a loan to the
Appellant and that Fiducie MRS did not give the 34,500 class "B"
shares to RV as security for the repayment of a loan.
[15] Lastly, the Agent
for the Appellant claimed that, because of the acquisition of a non-qualified
investment by Fiducie MRS, the RRSP no longer met the registration conditions
set out at section 146 of the Act. He claimed that in such a case, under
subsection 146(12) of the Act:
(i) the
plan is no longer considered an RRSP. The Agent for the Appellant explained
that, from that time on, all the property of the RRSP is considered to have
been subject to a disposition in exchange for consideration equal to its FMV
and the annuitant is therefore deemed to have acquired it at a cost equal to
its FMV at the time. As a result, the Agent for the Appellant claimed that his
client was deemed to have acquired the 34,500 class "B" shares
of RV at a cost of $34,500, the FMV of the shares at the time the plan ceased
to be an RRSP;
(ii) the
annuitant must add an amount equal to the FMV of all the property in the plan
immediately before the plan is no longer considered to be an RRSP to his income
for the year the plan is no longer considered to be an RRSP.
[16] The Agent for the
Appellant claimed that his client could deduct a business investment loss
because RV is insolvent, no longer operates a company and was struck off ex
officio.
[17] In my opinion, the
reasoning by the Agent for the Appellant in terms of applying subsection
146(12) of the Act to this case is not valid. Paragraphs 146(10)(a) and
(c) of the Act apply when a trust governed by an RRSP acquires a
non-qualified investment and subsection 146(6) of the Act applies when that
trust disposes of that non-qualified investment.
[18] Lastly, in light of Nunn, I do not see how I could find that a
mock document existed and, therefore, it is not appropriate in this case to
apply subsection 146(10) of the Act; rather, subsection 146(8) of the Act
should apply and the actual amount received from the Appellant's RRSP, $18,630,
should be added to his income.
[19] To summarize, I feel
that by subscribing to 34,500 class "B" shares of RV, Fiducie MRS
acquired a non-qualified investment with an FMV of $34,500 at the time of
subscription, and that the Appellant should have added $34,500 to his income
for the taxation year the shares were so acquired, in accordance with
paragraphs 146(10)(a) and (c) of the Act. I also feel that, in this
case, the Appellant could not and will not be able to deduct any loss
whatsoever from his income with regard to these shares.
[20] However, one
question remains: did Fiducie MRS acquire the 34,500 class "B" shares
of RV in 1998 or in 1999? This question seems important to me because, if I
find that they were acquired in 1998, I will have no other choice but to allow
the appeal.
[21] In my opinion, the
date the shares in RV were acquired by Fiducie MRS must be re-examined in
light of the corporate law that applies in this case. Martel defines the
contract to purchase shares as:
[TRANSLATION]
A contract consisting of a commitment by
a person to acquire shares in a company (called subscription) and the
acceptance of this commitment by the company (called issuance and distribution)
delivered to this person.
[22] Therefore, for
shares to have been acquired, three elements must be present. The first element
of an acquisition contract is the offer by a person to acquire shares in the
company. The offer may be made orally or in writing. The second element is the
issuance of the shares subject to the subscription. This second element is
generally simultaneous to the conclusion of the first, with directors
proceeding with the issuance and distribution of the shares at the same time
they decide to accept a subscription. Issuance means that the shares are taken
from the capital stock to be given to someone. Distribution means the shares
issued are assigned and granted to persons. It must be noted that the subscriber
can ask that those shares be distributed to another person. Moreover, there is
a distinction between the issuance of shares and the issuance of share
certificates. Also, the company's board of directors usually carries out the
issuance and distribution of shares, whether the certificates are issued or
not. However, a subscriber or the person to whom the shares are distributed,
accordingly, does not become the owner of the shares unless that person is
advised of the issuance. I would add that once the shares are issued and the
subscriber or the person to whom the shares are distributed is advised of the
issuance, they become the property of the subscriber or the person, regardless
of whether the subscriber or person has paid for them.
[23] The first question
to ask in this case is: who was the subscriber, or in other words, who made the
offer to purchase the shares in RV? The December 1, 1998, letter
(Exhibit I-1, Tab 1) and the issuance of the share certificate (Exhibit A-3)
attesting that on December 1, 1998, Fiducie MRS held 34,500 class "B"
shares, without more compelling evidence, lead me to believe that the
subscriber was Fiducie MRS. The issuance of the share certificate also leads me
to believe, without more compelling evidence, that the offer by Fiducie MRS to
purchase shares was accepted by RV on December 1, 1998. However, counsel for
the Respondent claimed that Fiducie MRS did not become the owner of the shares
in 1998 because there is nothing in the evidence submitted indicating that
Fiducie MRS was advised of such an issuance in 1998. Counsel for the Respondent
claimed that a subscriber does not become the owner of the shares even if the
offer was accepted by the company unless and until the subscriber is advised
that there was issuance, meaning the purchase offer was accepted. Counsel for
the Respondent claimed that the only evidence submitted showing that Fiducie
MRS was advised there had been issuance of the 34,500 class "B"
shares of RV and that RV had accepted its offer to purchase shares was when RV
collected the price of the subscribed shares by Fiducie MRS in 1999. As a
result, I find that Fiducie MRS acquired a non-qualified investment in 1999, in
this case, 34,500 class "B" shares in RV, for which the FMV at the
time of acquisition was $34,500 and, therefore, the Appellant must add $34,500
to his income for the 1999 taxation year in accordance with paragraphs 146(10)(a)
and (c) of the Act.
[24] For all these
reasons, the appeal is dismissed.
Signed at Ottawa,
Canada, this 21st day of January 2008.
"Paul Bédard"
on this 17th day
of June 2008.
Elizabeth Tan,
Translator
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