Citation: 2007TCC389
Date: 20070821
Docket: 2005-4492(IT)G
BETWEEN:
DOMENIC ARMENTI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bédard J.
[1] This is an appeal under
the general procedure from an assessment for $53,011 against the Appellant made
by the Minister of National Revenue (the "Minister") under
section 160 of the Income Tax Act (the "Act") for the 1999 and
2000 taxation years.
The facts
[2] The Appellant is
the son of Enzo Armenti, the president, director and sole shareholder of
Le Groupe Armenti Inc. (the "Corporation"). The Corporation
operated an excavation business. It did not file income tax returns for the 1999
and 2000 taxation years. During those years, Les Excavations Super Inc.
("Excavation") granted the Corporation excavation contracts worth
approximately $200,000 in total. The income from these contracts was never reported
by the Corporation.
[3] The Corporation's
banking transactions in 1999 and 2000 were done through an account it had with
the Caisse populaire de Notre‑Dame‑de‑Grâce (the "Caisse").
In those same years, Enzo Armenti was the only person authorized by the
Corporation to use this account. It should be pointed out that, during those
years, the account was subjected to a number of seizures due to the serious
financial difficulties with which the Corporation was faced.
[4] During 1999 and 2000,
Excavation issued in particular three cheques in consideration of services rendered
by the Corporation.
[5] Thus, in September
1999, Excavation issued a cheque for
$46,010 drawn on its bank account and payable to the Corporation. This cheque
was endorsed first by Enzo Armenti, as authorized by the Corporation, and
then by the Appellant, who cashed it at the Caisse, where he himself had a bank
account. The Appellant's bank account number also appeared on the back of the
cheque.
[6] In November 1999,
Excavation issued a second cheque
for $2,000 drawn on its bank account and payable to the Corporation. This cheque
was likewise endorsed first by Enzo Armenti, as authorized by the
Corporation, and then by the Appellant, who cashed it at the Caisse, where he
himself had a bank account. The Appellant's and his father's bank account numbers
also appeared on the back of the cheque.
[7] The Appellant,
whose credibility is not to be doubted, testified that he handed over the
entire amount of the cheques thus cashed in to his father. His testimony concerning
the circumstances of the cashing of the two cheques is worth quoting:
Q. Can you tell us the circumstances which led to the cashing in of
this cheque?
A. Well, I happened to be going to the bank that day and my father,
Enzo Armenti, asked me a favour.
Q. Could you…
A. Oh! I’m sorry, I apologize.
Q. … speak to the Judge.
A. I apologize, sorry. My father, Enzo Armenti, asked me to do
him a favour and exchange a cheque for him, being that I was going to the bank
and he was busy that day working.
[8] In August 2000,
pursuant to a direction to pay given by the Corporation to Excavation, Excavation issued a cheque
for $29,011 drawn on its bank account and payable to Enzo Armenti
personally in payment for services rendered by the Corporation. Only Enzo
Armenti's signature and the number of his personal account at the Caisse
appeared on the back of the cheque. In this regard, Enzo Armenti, whose
credibility was not questioned, testified that he had personally cashed this
third cheque at the Caisse and had asked the Caisse to deposit part of the
amount of the cheque, namely $5,000, in the Appellant's bank account. He
explained that this amount of $5,000 was deposited in his son's bank account in
partial payment of back rent he owed his son. It should be noted that at the
time Enzo Armenti lived in a residence that was owned by the Appellant and
that they had entered into a lease that was filed in evidence as Exhibit A-4.
The issue
[9] The only issue is
the following: were the three aforementioned cheques transferred within the
meaning of section 160 of the Act from the Corporation to the Appellant,
with or without adequate consideration?
Respondent's position
[10] The Respondent submits
firstly that the answer to the question of whether there was a transfer in this
case from the Corporation to the Appellant is to be found in the relevant
provisions of the Bills of Exchange Act, R.S.C., 1985, c. B‑4
(the "BEA"):
INTERPRETATION
2. [Definitions] In
this Act,
[“delivery” « livraison »] “delivery” means transfer of possession, actual or
constructive, from one person to another;
. . .
Form and Interpretation of Bill
16. (1) [Bill of exchange]
A bill of exchange is an unconditional order in writing, addressed by
one person to another, signed by the person giving it, requiring the person
whom it is addressed to pay, on demand or at a fixed or determinable future
time, a sum certain in money to or to the order of a specified person or
to bearer.
. . .
20. (1) [Transfer words] When a bill contains words prohibiting transfer, or indicating an
intention that it should not be transferable, it is valid as between the
parties thereto, but it is not negotiable.
(2) [Negotiable bill] A negotiable bill may be payable either to order or to bearer.
(3) [When payable to bearer] A bill is
payable to bearer that is expressed to be so payable, or on which the only or
last endorsement is an endorsement in blank.
. . .
39. (1)
[Requisites] As between immediate parties and as
regards a remote party, other than a holder in due course, the delivery of a
bill
(a)
in order to be effectual must be made either by or under the authority of the
party drawing, accepting or endorsing, as the case may be; or
(b) may be shown to have
been conditional or for a special purpose only, and not for the purpose of
transferring the property in the bill.
(2) [Presumption] Where
the bill is in the hands of a holder in due course, a valid delivery of the
bill by all parties prior to him, so as to make them liable to him, is
conclusively presumed
40. [Parting with possession] Where a bill
is no longer in the possession of a party who has signed it as drawer, acceptor
or endorser, a valid and unconditional delivery by him is presumed until the
contrary is proved.
. . .
Negotiation
59. (1) [By transfer]
A bill is negotiated when it is transferred from one
person to another in such a manner as to constitute the transferee the holder
of the bill.
(2) [By delivery] A bill payable to bearer is negotiated by
delivery.
(3) [By endorsement] A bill payable to order is negotiated by the endorsement of the
holder.
. . .
62. (1) [Signature sufficient] The simple signature of the endorser on
a bill, without additional words, is a sufficient endorsement.
. . .
66. (1) [Endorsement] An
endorsement may be made in blank or special.
(2) [In blank] An endorsement
in blank specifies no endorsee, and a bill so endorsed becomes payable
to bearer.
(3) [Special] A special endorsement specifies the person to whom, or to whose
order, the bill is to be payable.
(4) [Application of Act] The provisions of
this Act relating to a payee apply, with such modifications as the
circumstances require, to an endorsee under a special endorsement.
(5) [Conversion of blank endorsement] Where
a bill has been endorsed in blank, any holder may convert the blank endorsement
into a special endorsement by writing above the endorser’s signature a
direction to pay the bill to or to the order of himself or some other person.
. . .
[Emphasis added.]
[11] With regard to the first two cheques, relying on the
relevant provisions of the BEA, which state that a cheque endorsed in blank is
payable to the bearer, that is, to the person having possession thereof, the Respondent
submits that when Enzo Armenti, as the authorized agent of the Corporation's
signing officer, gave possession of the two cheques endorsed in blank to his
son, the Corporation, through its agent, automatically transferred ownership of
the two cheques or the right to receive the proceeds thereof to the Appellant. Moreover,
the Respondent claims that these transfers occurred for no consideration since
the Appellant handed the entire amount of the cashed cheques over to his father
personally, who, according to the Respondent, was not the transferor.
[12] Alternatively, the
Respondent submits that the consideration paid by the Appellant was not a
consideration within the meaning of section 160 of the Act because it was
the result of a moral obligation the Appellant was under to hand the amounts of
the cashed cheques over to his father. The Respondent bases this argument on
the decision by the Federal Court of Appeal in Raphael v. Canada,
2002 FCA 23.
[13] The Respondent also
submits that the Corporation, through its agent, Enzo Armenti, did not
give the Appellant a mandate to cash the two cheques in question for it, since,
under the relevant provisions of the BEA, a transfer of property occurred when
the Corporation gave the two cheques endorsed in blank to the Appellant,
whereas, in the case of a mandate, there can be no transfer of property.
[14] Finally, the
Respondent submits that if I were to find that the transfers took place first between
the Corporation and the father and then between the father and his son, there
would still be a cascading application of section 160 of the Act. In
support of this position, the Respondent relies on the Federal Court of Appeal
decision in Jurak v. Canada, 2003 FCA 58.
Analysis and conclusion
The law
[15] Subsection 160(1) of the Act states:
SECTION
160: Tax liability re property transferred not at arm’s length.
(1) Where a person has, on
or after May 1, 1951, transferred property, either directly or
indirectly, by means of a trust or by any other means whatever, to
(a) the person's spouse or
common-law partner or a person who has since become the person's spouse or
common- law partner,
(b) a person who
was under 18 years of age, or
(c) a person with whom the
person was not dealing at arm's length,
the following rules
apply:
(d) the transferee and
transferor are jointly and severally liable to pay a part of the transferor's
tax under this Part for each taxation year equal to the amount by which the tax
for the year is greater than it would have been if it were not for the
operation of sections 74.1 to 75.1 of this Act and section 74 of the Income
Tax Act, chapter 148 of the Revised Statutes of Canada, 1952, in
respect of any income from, or gain from the disposition of, the property so
transferred or property substituted therefor, and
(e) the transferee and
transferor are jointly and severally liable to pay under this Act an amount
equal to the lesser of
(i) the amount, if any, by which the
fair market value of the property at the time it was transferred exceeds
the fair market value at that time of the consideration given for the
property, and
(ii) the total of all
amounts each of which is an amount that the transferor is liable to pay under
this Act in or in respect of the taxation year in which the property was
transferred or any preceding taxation year,
but nothing in this subsection shall be deemed to limit
the liability of the transferor under any other provision of this Act.
[Emphasis added.]
[16] The Federal Court of
Appeal, in Raphael, supra, reiterated the conditions to
be met for subsection 160 (1) of the Act to apply:
4 The Tax Court
Judge set out four conditions to be met in order for subsection 160(1)
to apply and in so doing he was following a decision of the Tax Court, Doreen
Williams v. The Queen, [2000] T.C.J. No. 459,
File No. 98 1604, July 4, 2000. Those conditions were:
1) There must be a transfer of property;
2) The transferor and transferee are not dealing at
arm's length
3) There must be no consideration or inadequate consideration
flowing from the transferee to the transferor; and
4) The transferor must be liable to pay an amount under the Act in
or in respect of the year when the property was transferred or any preceding
year.
[Emphasis added.]
From Raphael, supra,
I conclude that each and every condition listed must be met for the Appellant
to be held jointly and severally liable with the Corporation for the latter's tax
debt.
The first and second cheques
[17] We will begin by considering the issue of
whether there was a transfer of the first two cheques from the Corporation to
the Appellant, that being the first condition for the application of
subsection 160(1) of the Act stated in Raphael, supra. The
Respondent submits that it was the Corporation, through its authorized agent,
Enzo Armenti, who gave the first two cheques, endorsed in blank, to the
Appellant, and not the father in his personal capacity who did so. In other
words, the Respondent argues that there was no transfer between the Corporation
and the father. The issue of whether it was the Corporation or the father who
gave the two cheques to the Appellant would require a determination if giving
these two cheques endorsed in blank constituted a transfer within the meaning
of subsection 160(1) of the Act. However, in my opinion, giving a
cheque endorsed in blank does not automatically constitute a transfer for the
purposes of subsection 160(1) of the Act. The Respondent, invoking
relevant provisions of the BEA, contends that giving over a cheque endorsed in
blank does constitute a transfer because the person thus acquiring possession
of the cheque automatically becomes the owner of the cheque or the holder of
the right to cash it. In my opinion, the relevant provisions of the BEA merely allow
third parties to assume that the person who has possession of a cheque endorsed
in blank is the owner thereof and is also entitled to cash it. The BEA does not
enable one to characterize the nature of the transaction that occurred in this
case between the person who gave the cheque endorsed in blank and the person
who received it. In this case, the evidence showed that the father, regardless
of whether he was acting in his personal capacity or as the Corporation's
authorized agent, never wanted to transfer ownership of the two cheques to the
Appellant, nor did he want ownership of these cheques to pass to the Appellant.
At no time did the Appellant have the right to use, enjoy or dispose of these
two cheques as he saw fit. Thus, contrary to the Respondent’s
position that there could not be a mandate here, I am of the opinion that the
transaction that occurred between the father ─ whether acting in his personal capacity or
as the Corporation’s authorized agent ─ and the son was in the nature of a mandate
within the meaning of the Civil Code of Québec. Indeed, the evidence
very clearly showed that in this case, the father, whether personally or as the
Corporation’s authorized agent, at most gave the Appellant the mandate
to cash the two cheques and to hand over to him the amounts thereof, which
mandate the Appellant carried out gratuitously. Since in this case there was
never a transfer of ownership of these two cheques to the Appellant, I am of
the opinion that with regard to these cheques, the Appellant cannot be held
jointly and severally liable with the Corporation for its tax debt.
The third cheque
[18] As for the third cheque,
for $29,011, the situation is quite different from that existing in the case of
the first two cheques. In accordance with a direction to pay given by the
Corporation to Excavation, Excavation issued a cheque for $29,011 drawn on its
bank account and payable to Enzo Armenti personally in payment for
services rendered by the Corporation. In my opinion, this resulted in a
transfer from the Corporation to the father of $29,011. The father,
subsequently received the proceeds of this cheque at the Caisse, except for an
amount of $5,000 that he required that the Caisse deposit directly in the Appellant’s
bank account at that same institution. In my opinion, this resulted in a second
transfer, namely, a transfer by the father to his son of $5,000. I reiterate
that the evidence also showed that the father transferred this amount to his
son in payment of rent arrears.
[19] Therefore, in the
present case, there was a transfer of $5,000 from the father to the son, two
people not dealing at arm's length. Still, in order for the Appellant to be
held liable under section 160 of the Act for his father’s the tax debt, which
was not proven, this second transfer would have to have been made for no
consideration or for an inadequate consideration. However, in this case, the
consideration was adequate because the father, by having the $5,000 deposited in
his son's bank account, paid part of the rent arrears he owed his son.
[20] Relying on the pronouncements
of the Federal Court of Appeal in Jurak, supra, confirming in a
way the principle of the cascading application of section 160 of the Act, the
Respondent argues that the second transfer of $5,000 led to the joint and
several liability of the Appellant for an equivalent amount. In my opinion, the
principle of the cascading application of section 160 as confirmed in that
decision cannot apply in the present case because when the second transfer took
place, there was adequate consideration.
[21] For these reasons,
the appeal is allowed, with costs.
Signed at Ottawa, Canada, this 21st day of August 2007.
"Paul Bédard"
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