Citation: 2008 TCC 505
Date: 20081007
Docket: 2006-1130(IT)G
BETWEEN:
FRANÇOIS GRAVIL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Bédard J.
[1]
The Appellant is
appealing from the reassessments made on September 14, 2004, by the
Minister of National Revenue ("the Minister") under the Income Tax
Act ("the Act") for the 1999 and 2000 taxation years.
[2]
Through the
reassessments, the Minister made the following changes to the Appellant's tax
returns:
|
|
1999
$
|
2000
$
|
|
Former total income
|
62,505
|
14,525
|
|
Add
|
|
|
|
1. Fees received from Les produits
Déli‑Bon Inc.
|
47,000
|
60,000
|
|
2. Amounts advanced and written off by Les produits
Déli‑Bon Inc.
|
|
136,430
|
|
3. Benefit received from Les produits Déli‑Bon
Inc. for the purchase of its shares
|
|
213,162
|
|
4. Benefit received from Les produits Déli‑Bon
Inc.
|
|
110,918
|
|
Total additions
|
47,000
|
520,510
|
|
A penalty was assessed under subsection 163(2)
of the Income Tax Act for all added income
|
|
Deduct
|
|
|
|
Deductions claimed by the Appellant
|
4,578
|
37,653
|
|
5. Business investment loss
|
|
271,867
|
|
Revised taxable income
|
104,927
|
225,515
|
Background
[3]
The Appellant is an
Aboriginal person living on an Indian reserve. In January 1996, the
Appellant, who had worked as a food consultant for about 10 years, was
hired by Les produits Déli‑Bon Inc. ("the company"), a business
that produced and distributed fruit salad and was owned at the time by
The Unimark Group Inc. ("Unimark"), a Texas corporation that was
the company's sole shareholder. In the summer of 1999, the Appellant, who was
then the company's principal officer, learned that Unimark was having serious
financial problems and was thinking of divesting itself of the company, among
other things. The idea of purchasing the company's shares began to form in the
Appellant's mind. He was very familiar with the company's activities but knew
little about how to finance such a purchase. He therefore thought it would be
helpful to find a partner who knew about financing before proceeding with his
purchase of the company's shares. This idea led him to contact Guy Picard,
a credit consultant he had known for about a year, in 1999. Their discussions
resulted in the partnership the Appellant was seeking. On October 11,
1999, the two partners purchased all the company's shares for US$1,423,932
as equal shareholders. The purchase agreement (Exhibit A‑8) stated
that François Gravil and Guy Picard were acting "in trust for
the company to be owned and operated by François Gravil and
Guy Picard". Section 1 of the purchase agreement therefore set
out the terms of the sale:
Sale and Purchase of Stock. Seller
hereby agrees to sell, and Purchaser hereby agrees to purchase, the Deli‑Bon
Shares for $1,432,932 payable as follows:
(a) by delivering $320,000 (U.S.) in immediately available
funds on the closing date (as set forth in Section 4 of this Agreement);
(b) by executing and delivering a 30 day non‑interest
bearing promissory note in the original principal amount of $400,000 (U.S.), in
substantially the same form as Exhibit B hereto (the “30 Day Note”).
The note shall be secured by all the Deli‑Bon Shares in accordance with
the terms of two pledge agreements in substantially the same form as
Exhibit C hereto (the “Short‑term Pledge Agreement”) and
Exhibit F hereto (the “Long‑term Pledge Agreement”);
(c) by executing and delivering a 60 day non‑interest
bearing promissory note in the original principal amount of $400,000 (U.S.), in
substantially the same form as Exhibit D hereto (the “60 Day Note”).
The note shall be secured by all the Deli‑Bon Shares in accordance with
the terms of two pledge agreements in substantially the same form as the Short‑term
Pledge Agreement and the Long‑term Pledge Agreement;
(d) by executing and delivering a five year promissory
note in the original principal amount of $303,932 (U.S.). The note shall bear
interest at 8.75% per annum, with interest and principal payable in
monthly installments of $6,272 and shall be in substantially the same form as
Exhibit E hereto (the “5 Year Note”). The note shall be secured by
the Deli‑Bon Shares. The note shall be secured by 51% of the outstanding
Deli‑Bon Shares in accordance with the terms of the Long‑term Pledge
Agreement.
Finally, it is worth noting that section 15 of
the purchase agreement was worded as follows:
15 Neither this Agreement nor any
interest of any party herein may be assigned, pledged or transferred without
the prior written consent of the parties hereto.
[4]
The two men
divided up roles in the company as follows:
(1)
as president, the
Appellant was in charge of the company's operation, including sales and
supplier relations;
(2)
as chief executive
officer, Mr. Picard was responsible for financing and accounts payable.
[5]
The first
two payments provided for in the agreement for the purchase of the
company's shares were made using the company's own funds and were entered in
its books as shareholder advances.
[6]
In May 2000, the
Appellant concluded that his partnership with Mr. Picard could not
continue any longer because of their differences of opinion over how to run the
company. They talked about ending their partnership and finally agreed that the
Appellant would leave the company. On June 15, 2000, the two men
therefore signed a [translation]
"Contract for Sale of Shares" (Exhibit A‑13) under which
the Appellant sold Mr. Picard his shares in the company. The content of
that document was as follows:
[TRANSLATION]
Contract for Sale of Shares
I, the undersigned, François Gravil, businessman, acting
personally and/or in trust, residing at 10 Gaspard Picard, Wendake, Quebec
G0A 4V0, and
Guy Picard, businessman, acting personally and/or in trust, residing
at 80 des écureuils, Wendake G0A 4V0
Do declare and agree as follows:
That on October 11, 1999, through a stock purchase agreement,
they purchased all shares owned by The UniMark Group Inc., being
certificates C‑3 and C4, totalling 1,450,000 common shares.
That they gave the said 1,450,000 common shares to
The UniMark Group Inc. as collateral security under a stock power through
two notes, a "60 days secured note" and a "5 years
secured note" dated October 11, 1999.
That they entered into a shareholder agreement and a consulting
contract pursuant to a resolution passed by Les Produits Déli‑Bon Inc.
on October 12, 1999.
That Les Produits Déli‑Bon Inc. agreed to provide a
vehicle pursuant to resolutions passed on December 20, 1999.
That Guy Picard is purchasing from François Gravil,
personally and/or in trust, all the common shares owned by
François Gravil, that is, certificates C3 and C‑4, and given as
security to The UniMark Group Inc., namely a total of
1,450,000 common shares.
That François Gravil, personally and in trust, acknowledges
receiving good and valuable consideration, full and final receipt whereof is
hereby acknowledged.
That François Gravil irrevocably transfers and renounces any
right, title and interest in all the shares owned by him in Les Produits
Déli‑Bon Inc. and/or Les Produits Déli‑Bon 2000 Inc., the
whole in favour of Guy Picard.
That François Gravil renounces outright any benefit granted by
Les Produits Déli‑Bon Inc. and/or in Les Produits Déli‑Bon
2000 Inc. with respect to any financial consulting contract and/or any other
benefit previously granted by resolution.
That François Gravil renounces any right, title and interest
and any personal or other remedy and grants and undertakes to sign before
Danielle Grenon a release of any security created under any movable or
immovable hypothec and/or collateral security within five days of being
given notice to do so.
That François Gravil undertakes not to directly or indirectly
operate, within a 50‑kilometre radius of Québec, a business that produces
and sells fruit salad and/or salsa products for a period of five years.
That the parties declare themselves satisfied with the
said agreement.
. . .
[7]
The Appellant also
signed the following document on June 15, 2000:
[TRANSLATION]
I, the undersigned, François Gravil, acknowledge
receiving $75,000.00 from Guy Picard for good and valuable consideration.
François Gravil
[8]
The same day, the
Appellant signed the following notice of resignation:
[TRANSLATION]
I, the undersigned, François Gravil, businessman, residing at
10 Gaspard Picard, Wendake, province of Quebec G0A 4V0, give notice that I
am resigning as company president, operations manager, financial consultant
and/or employee of Les Produits Déli‑Bon Inc. and/or
Les Produits Déli‑Bon 2000 Inc.
In witness whereof, I have signed on this day at
Loretteville, province of Quebec.
François Gravil
[9]
On October 3,
2000, Unimark and UniMark Goods Inc. brought an action against the company,
Les Produits Déli‑Bon 2000 Inc., François Gravil and
Guy Picard to recover the unpaid balance of the sale price for the shares.
On October 12, 2001, the company declared bankruptcy.
[10]
The evidence also
showed the following:
(i)
on June 5, 2000,
the company's board of directors passed the following resolution
(Exhibit A‑18):
[TRANSLATION]
That the company to be formed as specified at the time the company
was purchased (Guy Picard in trust and François Gravil in trust)
shall be the new corporation Les Produits Déli‑Bon 2000 Inc.,
designating no. 1149110141.
(ii)
on June 3, 2000,
the company's board of directors passed the following resolution
(Exhibit A‑21):
[TRANSLATION]
That the company shall give a good, sufficient and final acquittance
to François Gravil and Guy Picard, personally and/or in trust, for
the total of US$725,000 owed pursuant to the following resolutions:
A
October 6, 1999
B October 21, 1999
C December 10, 1999
That the said
loans shall be the full responsibility of Les Produits Déli‑Bon 2000
Inc., designating no. 1149110141, in consideration of the shares issued,
namely 1,450,000 common shares (certificates C‑3, C‑4).
Minister's assumptions of fact
[11]
The same facts were
assumed by the Minister in making and confirming the reassessments dated
September 14, 2004, namely:
(a)
on October 11,
1999, the Appellant and Guy Picard purchased 50% each of the shares of
Les produits Déli‑Bon Inc. ("the company") for
US$1,423,932; (denied)
(b)
on June 14, 2000,
the Appellant sold his shares in the company for $75,000 to Mr. Picard,
who also assumed the amounts still owing at the time the said shares were purchased;
(denied)
(c)
on October 12,
2001, the company declared bankruptcy; (admitted)
Fees received from the
company
(d)
the company's fiscal
year started on October 3 and ended on October 2; (admitted)
(e)
the company operated a
food business; (admitted)
(f)
the Appellant was the
company's president, operations manager and sales manager; (admitted)
(g)
at all relevant times,
the company had its place of business at 132 Giroux Street in
Loretteville, Quebec; (admitted)
(h)
the company was located
and carried on its activities off an Indian reserve; (admitted)
(i)
during the 1999 and
2000 taxation years, the Appellant received $47,000 and $60,000,
respectively, from the company, which described those amounts as fees; (admitted)
(j)
at all relevant times,
the Appellant did not work on the Indian reserve in the Huron village to earn
those amounts; (admitted)
(k)
if the Appellant worked
to earn those amounts, he worked at the company's place of business, which was
off the reserve; (admitted)
(l)
the Appellant did not
report those amounts in his tax returns for the 1999 and 2000 taxation
years; (admitted)
Benefit received from the
company for the purchase of shares
(m)
on October 13 and
21, 1999, payments of US$320,000 and US$380,000 for the purchase of
the company's shares were made using the company's own funds and recorded in
its books as shareholder advances; (admitted)
(n)
out of the amounts
loaned to the Appellant and Mr. Picard, the company, during its fiscal
year ending on October 2, 2000, transferred $426,324 to the item for
accrued expenses as fees and $221,836 to the item for consulting fees
through accounting entries in its ledger, reducing the balance of receivables
from the shareholders by the same amount, even though no service had been
rendered by the shareholders; (admitted)
(o)
of the amounts
transferred by the company, the portion the Appellant owed the company was
$213,162 and $110,918, that is, half of the amount loaned; (denied as
written)
(p)
the company thus paid
personal expenses on the Appellant's behalf during the 2000 taxation year,
namely $213,162 and $110,918 for the Appellant's purchase of the company's
shares; (denied as written)
Amounts advanced and
written off
(q)
according to the
company's financial statements, on October 2, 2000, it claimed a bad debt
of $225,000; (admitted)
(r)
that bad debt was from
advances made to the Appellant and Mr. Picard during the 1999 and
2000 taxation years; (denied as written)
(s)
$88,570 of the bad debt
of $225,000 represented advances made by the company to Mr. Picard during
the 1999 and 2000 taxation years; (not known)
(t)
the company paid
$136,430 in personal expenses on the Appellant's behalf during the
2000 taxation year, namely the $225,000 written off by the company minus
the $88,750 in advances made by the company to Mr. Picard; (denied as
written)
Issues
[12]
The first issue, namely
whether the Minister was justified in adding unreported income of $47,000 for
the 1999 taxation year and $60,000 for the 2000 taxation year to the
income reported by the Appellant, will not be analysed because counsel for the
Appellant admitted at the outset that the Minister was justified in doing so.
However, the Appellant argued that the Minister was not justified in imposing a
penalty on him under subsection 163(2) of the Act for that unreported
income.
[13]
The second issue,
namely whether the Minister was justified in adding $213,162, $110,918 and
$136,430 to the Appellant's income for the 2000 taxation year as
benefits conferred on a shareholder in accordance with subsection 15(1) of
the Act, will be analysed only with regard to the $213,162 and $110,918,
since counsel for the Appellant admitted at the outset that the Minister was
justified in adding $136,430 to his income for the 2000 taxation year. It
should be noted that, although the Appellant made an admission concerning the
$136,430, he argued that the Minister was not justified in imposing a penalty
on him under subsection 163(2) of the Act for that unreported income.
[14]
The third issue is
whether, in computing the Appellant's business investment loss for the
2000 taxation year, the Minister was justified in taking account of the
$75,000 the Appellant received when he sold his shares in the company.
[15]
The fourth issue is
whether, for the Appellant's 1999 and 2000 taxation years, the Minister
was justified in imposing a penalty under subsection 163(2) of the Act for
all the income added by the Minister.
Appellant's position and analysis
[16]
The Appellant argued
that, in computing his business investment loss for the 2000 taxation
year, the Minister was not justified in taking account of the $75,000 he had
received from Mr. Picard on June 15, 2000. The Appellant submitted
that he had transferred his shares to Mr. Picard for free. He claimed that
the receipt for $75,000 (Exhibit A‑15) was for the cash repayment of
an amount he had entrusted to Mr. Picard in cash in August 1999 when
they were planning to purchase equal shares of a vacant lot located near the
Indian reserve where they lived, a plan that they never carried out. This
version of the facts is difficult to believe. Is it conceivable that the
receipt for $75,000 (Exhibit A‑15) has nothing to do with the
contract of sale (Exhibit A‑13) and the Appellant's resignation
(Exhibit A‑14), documents that were all signed at the same time and
in the same place? My answer to this question is no, especially since the
Appellant's version strikes me as totally implausible. Why would the Appellant
have entrusted $75,000 in cash to Mr. Picard, a future partner whom he
barely knew at that point, when they were not contractually required to pay the
vendor any amount whatsoever at that time? I note that the Appellant did not
explain what had motivated him to entrust such an amount to Mr. Picard so
early. For these reasons, I am of the opinion that, in computing the
Appellant's business investment loss for the 2000 taxation year, the
Minister was justified in taking account of the $75,000 he had received from
Mr. Picard.
Amounts of $213,162 and $110,918 added to
the Appellant's income for the 2000 taxation year in accordance with
subsection 15(1) of the Act
[17]
It will be recalled
that, on October 13 and 21, 1999, payments of US$320,000 and US$380,000
for the purchase of the company's shares were made out of the company's own
funds and entered in its books as shareholder advances. I also note that, out
of the amounts so loaned to the Appellant and Mr. Picard, the company,
during its fiscal year ending on October 2, 2000, transferred
$426,324 to the item for accrued expenses as fees and $221,836 to the
item for consulting fees through accounting entries in its ledger, reducing the
balance of receivables from the shareholders (which was only $75,000 on
October 2, 2000) by the same amount, even though no service had been
rendered by the shareholders. Finally, I note that, out of the amounts transferred
by the company, the portion the Appellant owed the company was
$213,162 and $110,918, that is, half of the amount loaned. The Appellant
argued that the Minister was not justified in adding those two amounts to his
income for the 2000 taxation year as benefits conferred on a shareholder
under subsection 15(1) of the Act for the following reasons:
(i)
Les Produits Déli‑Bon
2000 Inc. was the purchaser of the company's shares. The Appellant argued that
he and Mr. Picard had purchased the company's shares for a company to be
constituted, namely Les Produits Déli‑Bon 2000 Inc., which was
constituted a few months after the agreement to purchase the company's shares
was signed on October 11, 1999. Let me say at once that the Appellant was
unable to file in evidence the minutes of Les Produits Déli‑Bon 2000
Inc. showing that it ratified the transaction of October 11, 1999, since
its minute book could not be found. The Appellant alleged that Mr. Picard
had simply forgotten to note down the effects of the ratification in the
company's books of account as they had agreed. Finally, the Appellant argued
that, although the documents in this regard were not all properly prepared,
there are several documents (Exhibits A‑13, A‑18 and A‑19)
showing that Les Produits Déli‑Bon 2000 Inc. ratified the
transaction of October 11, 2000.
(ii)
Since Les Produits
Déli‑Bon 2000 Inc. was the purchaser of the company's shares, the
Appellant argued that the payments of US$320,000 and US$380,000 made out of the
company's own funds for the purchase of the shares must be considered advances
made by the company to Les Produits Déli‑Bon 2000 Inc. rather than
to him and Mr. Picard and that he therefore does not have to pay tax on
those amounts because the benefit was received by Les Produits Déli‑Bon
2000 Inc.
[18]
In theory, the
Appellant's position with regard to the payments of US$320,000 and US$380,000
for the purchase of the company's shares is well‑founded. What emerges
from section 123.7 of the Companies Act, articles 319 and 320
of the Civil Code of Québec and the interpretation thereof by the Quebec
Court of Appeal in Société sylvicole de l'Outaouais v. Rasmussen et al.,
2005 QCCA 729, J.E. 2005‑1551, is that the initial signatories
of a pre‑incorporation contract, the promoters (here the Appellant and
Mr. Picard), cease to be contracting parties and become mandataries of the
recently constituted legal person following ratification (which may be tacit
and which does not necessarily have to occur within the 90‑day time limit
set out in section 123.7 of the Companies Act). That being said,
the Appellant had to at least prove that Les Produits Déli‑Bon 2000 Inc.
had ratified the transaction of October 11, 1999 at least tacitly,
since there are apparently no documents from Les Produits Déli‑Bon
2000 Inc. stating that it ratified that transaction. The Appellant has not
satisfied me that Les Produits Déli‑Bon 2000 Inc. ratified the
transaction. First of all, neither the Appellant nor Mr. Picard clearly
stated that the transaction had been ratified or said when it had been ratified
by Les Produits Déli‑Bon 2000 Inc. In fact, the Appellant's evidence
in this regard rested essentially on two documents filed in evidence as
Exhibits A‑13 and A‑18. I note that the document filed as
Exhibit A‑18 was prepared by Mr. Picard, who was unable to
explain its content during his testimony. That document prepared by
Mr. Picard may indeed indicate that Les Produits Déli‑Bon 2000
Inc. ratified the transaction of October 11, 1999. If that is the case,
how can it be explained that the payments of US$320,000 and US$380,000 for the
purchase of the company's shares were entered in the company's books of account
(for its fiscal year ending on October 2, 2000) as advances to the
Appellant and Mr. Picard (and not as advances to Les Produits Déli‑Bon
2000 Inc.) and that, during the same fiscal year, the company transferred
$426,324 to the item for accrued expenses as consulting fees and
$221,836 to the item for consulting fees through accounting entries in its
ledger, reducing the balance of receivables from Mr. Picard and the
Appellant by the same amount? If the transaction of October 11, 1999, had
been ratified as argued by the Appellant, Mr. Picard, who handled the
company's accounting, would never have agreed to make such entries in the
company's books of account. Mr. Picard, who is facing the same tax
problems as the Appellant, had no interest in not having the company's books
reflect the effects of a ratification of the transaction of October 11,
2000, by Les Produits Déli‑Bon 2000 Inc. if such ratification had
occurred. As for the document filed in evidence as Exhibit A‑13, it
may also indicate that Les Produits Déli‑Bon 2000 Inc. ratified the
transaction of October 11, 1999. Counsel for the Appellant argued that
Unimark would not have taken the trouble to sue Les Produits Déli‑Bon
2000 Inc. if the latter company had not ratified the transaction of
October 11, 1999. In my opinion, this fact does not necessarily show that
that transaction was ratified. It might also be thought that Unimark decided to
sue Les Produits Déli‑Bon 2000 Inc. in case it had ratified the
transaction of October 11, 1999. It would have been very interesting to
hear an officer of Unimark explain why Unimark had decided to sue
Les Produits Déli‑Bon 2000 Inc. In any event, this evidence is not
sufficient to satisfy me that the transaction was ratified, since most of the
documentary evidence indicates the contrary.
Penalties
[19]
The Appellant argued
that the Minister was not justified in imposing a penalty on him under subsection 163(2)
of the Act for his unreported fees of $47,000 and $60,000 during the 1999 and
2000 taxation years, respectively, because his accountant,
Mr. Leblanc, had told him that the fees he had received from the company
were not taxable because part of his services to the company had been provided
on the Indian reserve where he resided. In other words, his accountant told him
that his consulting fee income was exempt under paragraph 81(i)(a)
of the Act and section 87 of the Indian Act. The Appellant's
testimony that he provided part of his services on the Indian reserve and that
his accountant told him this meant his fees were not taxable does not seem
credible to me, since the evidence showed, inter alia, that the
Appellant worked at the company's head office at least from 9:00 a.m. to
5:00 p.m. on at least every business day during the relevant period. It
would have been very interesting to hear Mr. Leblanc's testimony
concerning what he allegedly told the Appellant in this regard. The Appellant
could have called Mr. Leblanc as a witness to back up his testimony. He
did not do so, which leads me to infer that Mr. Leblanc's testimony would
have been unfavourable to him. I conclude from this that Mr. Leblanc never
made such statements to him and that the Appellant knowingly failed to report
consulting fees of $47,000 and $60,000 during the 1999 and
2000 taxation years, respectively.
[20]
The Appellant also
argued that the Minister was not justified in imposing a penalty on him under
subsection 163(2) of the Act for the $136,432 (which he admitted must be
included in computing his income for the 2000 taxation year under
subsection 15(1) of the Act) because his accountant, Mr. Leblanc, had
told him that that amount was an interest‑free loan with no repayment terms
and that such a loan did not have to be included in computing his income for
the 2000 taxation year. The Appellant's allegations about what his
accountant said are simply not credible. It seems totally implausible that an
accountant who was in any way competent would have made such an assertion. Once
again, it would have been very interesting to hear Mr. Leblanc's testimony
on this point. The Appellant did not call him as a witness even though he could
have done so, which leads me to infer that this evidence would have been
unfavourable to him. I conclude from this that Mr. Leblanc never made such
a statement to the Appellant and that the Appellant knowingly failed to report
that $163,432 amount in his tax return for the 2000 taxation year.
[21]
I also conclude that
the Minister was justified in imposing a penalty on the Appellant under
subsection 163(2) of the Act for the $213,162 and $110,918 not
reported by the Appellant for the 2000 taxation year under
subsection 15(1) of the Act. The Minister has satisfied me that the
Appellant knowingly failed to report those amounts in his tax return for the
2000 taxation year.
[22]
For these reasons, the
appeal is dismissed with costs.
Signed at Ottawa, Canada, this 7th day of
October 2008.
"Paul Bédard"
Translation
certified true
on this 25th day
of November 2008.
Brian McCordick,
Translator
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