Citation: 2008 TCC 506
Date: 20081007
Docket: 2006-1070(IT)G
BETWEEN:
GUY PICARD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Bédard J.
[1]
The Appellant is
appealing from reassessments made by the Minister of National Revenue ("the Minister")
under the Income Tax Act ("the ITA"), on September 14, 2004,
in respect of the Appellant's 1999, 2000 and 2001 taxation years.
[2]
By these reassessments,
the Minister made the following changes to the Appellant's income tax returns:
|
|
1999
|
2000
|
2001
|
|
Previous total income
|
$13,365
|
$16,000
|
$43,800
|
|
Additions
|
|
|
|
|
1. Fees received from
Les produits Déli‑Bon Inc.
|
$47,000
|
$62,000
|
|
|
2. Advances from Les produits
Déli‑Bon Inc. , not
repaid
|
|
$75,000
|
|
|
3. Advances made and then
written off by Les produits Déli‑Bon Inc.
|
|
$88,570
|
|
|
4. Benefit received from
Les produits Déli‑Bon Inc. in connection with the acquisition of
its shares
|
|
$213,162
|
|
|
5. Benefit received from
Les produits Déli‑Bon Inc.
|
|
$110,918
|
|
|
Total additions
|
$47,000
|
$549,650
|
Ø
|
|
Deductions
|
|
|
|
|
6. 2001 business investment
loss
|
$5,365
|
$254,736
|
|
|
7. Business investment
loss
|
|
|
$303,900
|
|
Revised taxable income
|
$55,000
|
$310,914
|
Ø
|
[3]
I should immediately
note that the Appellant cannot appeal from the reassessment stating that he
does not owe any tax that was issued against him for the 2001 taxation year,
because, as a result of that reassessment, his tax liability was nil.
Background
[4]
The Appellant is an
Aboriginal who lived with his family in Village-des-Hurons, which is located on
an Indian reserve. The Appellant is a credit consultant. His business
office is located on the Indian reserve. His business has a telephone line that
is separate from the Appellant's. The business is registered with the Inspecteur général des
institutions financières.
[5]
In January 1996,
François Gravil, who had been a nutrition consultant for roughly ten years, was
hired by Les produits Déli‑Bon Inc. ("Déli-Bon"), a company which
produced and distributed fruit salads and whose sole shareholder was the Unimark Group
Inc. ("Unimark"), a Texas company. In the summer of 1999, Mr. Gravil,
Déli-Bon's principal, learned that Unimark was experiencing major financial problems
and was considering divesting itself of Déli-Bon, among other things. This
is when the idea of acquiring Déli-Bon's shares took root in
Mr. Gravil's mind. Mr. Gravil was very familiar with Déli-Bon's
operations, but his knowledge with respect to the financing of such an
acquisition was limited. Thus, before embarking upon the acquisition of
Déli-Bon's shares, Mr. Gravil thought it would be useful to find a partner
who was knowledgeable about financing. He therefore contacted the Appellant,
a credit consultant whom he had known for about a year, in 1999. The
discussions between the two men led to the partnership that Mr. Gravil sought,
and on October 11, 1999, the two of them, as equal partners, bought
all of Déli-Bon's shares for US$1,423,932. The purchase contract
(Exhibit I‑4) specifies that François Gravil and Guy Picard were
acting "in trust for the company to be owned and operated by François
Gravil and Guy Picard." It is worth noting here that the shares were
never registered under the name of this future company. Section 1 of the
purchase agreement sets out the terms and conditions of the sale:
Sale and Purchase of Stock. Seller hereby agrees to sell, and Purchaser hereby agrees to
purchase, the Deli‑Bon Shares for $1,423,932 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.
[6]
The two men divided the
responsibilities within Déli-Bon as follows:
(1)
As president, François
Gravil was to be responsible for the operation of Déli-Bon, including sales and
supplier relations.
(2)
As CEO, the Appellant
was to be responsible for the financing of the business, and for accounts
payable.
The Minister's assumptions of fact
[7]
In making and
confirming the reassessments dated September 14, 2004, the Minister
relied on the same facts, namely:
(a)
On October 11, 1999,
the Appellant and François Gravil each purchased 50% of the shares of Les
produits Déli‑Bon Inc. ("Déli‑Bon") for US$1,423,932 (admitted).
It should immediately be noted that the Appellant acknowledged that the
purchased shares were always held by him, and were never registered under the
name of any company that was to be incorporated in the future. Indeed, the
Appellant acknowledged that the purchase transaction was never ratified by any
company whatsoever.
(b)
On June 14, 2000, Mr.
Gravil sold his shares in Déli-Bon to the Appellant for $75,000, and the
Appellant also assumed liability for the amounts still owed upon the
acquisition of the said shares. (admitted)
(c)
On October 12, 2001, Déli-Bon
went bankrupt. (admitted)
Fees received from Déli-Bon
(d)
Déli-Bon's fiscal year began
on October 3 and ended on October 2. (admitted)
(e)
Déli-Bon operated a
business specializing in food. (admitted)
(f)
The Appellant was Déli-Bon's
secretary and as such was responsible for the general management of the
business. (admitted)
(g)
At all relevant times, Déli-Bon's
place of business was 132 Giroux Street, Loretteville, Quebec.
(admitted)
(h)
Déli-Bon was located
outside an Indian reserve and its activities were carried on outside the
reserve. (admitted)
(i)
In the course of the
1999 and 2000 taxation years, the Appellant received from Déli-Bon the amounts
of $47,000 and $62,000. Those amounts were called fees. (admitted)
(j)
The Appellant did not earn
those amounts through work on the Village-des-Hurons Indian Reserve. (denied)
(k)
If the Appellant earned
these amounts through work, that work was done at Déli-Bon's place of business,
which was located outside the reserve. (denied)
(l)
The Appellant did not
report these amounts in his income tax returns for the 1999 and 2000 taxation
years. (admitted)
Benefit from Déli-Bon in
relation to the acquisition of the shares
(m)
On October 13 and
October 21, 1999, payments of US$320,000 and US$380,000 for the
acquisition of Déli-Bon's shares were made from Déli-Bon's funds and entered in
its books as advances to shareholders. (admitted)
(n)
Of the amounts lent to
the Appellant and Mr. Gravil, Déli-Bon, by means of accounting
entries in its general ledger during its fiscal year ended
October 2, 2000, transferred $426,324 to "fee expenses accrued"
and $221,836 to "consulting fees", and reduced the "owed by
shareholders" account by the same amounts, even though the shareholders
had rendered no services. I would immediately emphasize that the Appellant admitted
this allegation from the outset, with the exception of the underlined
part. Indeed, the Appellant initially claimed that he had rendered services
worth $213,162. In support of his assertion that services were rendered, the
Appellant tendered Exhibit A‑3, a $213,162 invoice for fees that he
had sent to Déli-Bon. I would immediately note that, in his testimony, the Appellant
ultimately admitted that he had rendered no services to Déli-Bon. I also note from
the invoice that the $213,162 in fees was related to services supposedly
rendered in connection with the purchase of Déli‑Bon's shares by the
Appellant and Mr. Gravil. I note as well that the invoice is dated
September 27, 1999, which is before the Déli‑Bon shares were
acquired.
(o)
The portions of these
amounts transferred by Déli-Bon that the Appellant owed Déli-Bon were $213,162 and
$110,918, that is to say, half the amount loaned. (admitted)
(p)
Thus, during the 2000
taxation year, Déli-Bon paid personal expenses of the Appellant's, specifically
$213,162 and $110,918 for the purchase of Déli-Bon shares by the Appellant. (denied)
Advances not repaid
(q)
According to Déli-Bon's
financial statements, as at October 2, 2000, Déli-Bon had advanced a
net total of $75,000 to the Appellant. (denied)
(r)
There were no repayment
terms for the loans made by Déli-Bon to the Appellant. (denied)
(s)
As at
October 2, 2001, the Appellant had not repaid Déli-Bon the $75,000 loan.
(denied)
I stress that while the Appellant initially
denied these three allegations concerning the $75,000 in advances that were not
repaid, he adduced no evidence to rebut them. I note that Déli-Bon's financial
statements as at October 2, 2000 (Exhibit I‑8) refer to a
$75,000 shareholder advance receivable. I would also point out that the
Appellant was the sole shareholder of Déli-Bon as at October 2, 2000.
Advances made and then written
off
(t)
According to Déli-Bon's
financial statements as at October 2, 2000, Déli‑Bon claimed a $225,000
loss on a bad debt. (denied)
(u)
This loss was on
advances that had been made to the Appellant and Mr. Gravil during the
1999 and 2000 taxation years. (denied)
(v)
$136,430 of the
$225,000 loss consisted of advances made by Déli-Bon to Mr. Gravil in the
course of the 1999 and 2000 taxation years. (denied)
(w)
In the course of the
2000 taxation year, Déli-Bon paid $88,570 worth of the Appellant's
personal expenses. This amount consists of the $225,000 written off by Déli-Bon,
less the $136,430 in advances made by Déli-Bon to Mr. Gravil. (denied).
Although the Appellant initially denied
these four allegations in relation to advances made and then written off, I
emphasize that he adduced no evidence to show that the allegations were false,
in whole or in part.
[8]
The first issue for
determination is whether the Minister was justified in adding $47,000 to the
Appellant's reported income for the 1999 taxation year, and $62,000 to his
reported income for the 2000 taxation year, as unreported income. I would
immediately note that the Appellant argued that the $47,000 and $62,000 in fees
that he received from Déli-Bon were personal property situated on a reserve
within the meaning of paragraph 87(1)(b) of the Indian Act, and
that the income in question was therefore exempt under paragraph 81(1)(a)
of the ITA.
[9]
The second issue for
determination is whether the Minister was justified in adding to the income
reported by the Appellant for his 2000 taxation year $213,162, $110,918 and
$88,570 as shareholder benefits, in accordance with subsection 15(1) of
the ITA. The Appellant's position in this regard is also that this income was
personal property situated on a reserve within the meaning of paragraph 87(1)(b)
of the Indian Act, and was therefore exempt under paragraph 81(1)(a)
of the ITA.
[10]
The third issue for determination
is whether the Minister was justified in adding $75,000 to the Appellant's income
for his 2000 taxation year as advances to a shareholder that were not repaid, in
accordance with subsection 15(2) of the ITA. Once again, the Appellant
submits that this income of $75,000 was personal property situated on a reserve
within the meaning of paragraph 87(1)(b) of the Indian Act,
and was therefore exempt under paragraph 81(1)(a) of the ITA.
Analysis and determination
The tax exemption under
section 87 of the Indian Act
[11]
In order to decide
whether the Appellant's consulting income and the amounts that the Minister
seeks to add to the Appellant's reported income under section 15 of the
ITA are exempt, the relevant provision is paragraph 81(1)(a) of the
ITA, which states:
81. (1) Amounts not included in income -- There shall not be
included in computing the income of a taxpayer for a taxation year,
(a) Statutory exemptions -- an amount that is declared
to be exempt from income tax by any other enactment of Parliament,
other than an amount received or receivable by an individual that is exempt by
virtue of a provision contained in a tax convention or agreement with another
country that has the force of law in Canada;
[Emphasis added.]
[12]
In this instance, the
relevant provision of another enactment is section 87 of the Indian Act,
which states:
87. (1) Notwithstanding any other Act of Parliament or any Act
of the legislature of a province, but subject to section 83, the following property
is exempt from taxation, namely,
(a) the interest of an Indian or a band in
reserve lands or surrendered lands; and
(b) the personal property of an Indian
or a band situated on a reserve.
(2) No Indian or band is subject to taxation in respect
of the ownership, occupation, possession or use of any property
mentioned in paragraph (1)(a) or (b) or is otherwise subject to
taxation in respect of any such property.
(3) No succession duty, inheritance tax or estate duty is payable on
the death of any Indian in respect of any property mentioned in paragraphs (1)(a)
or (b) or the succession thereto if the property passes to an Indian,
nor shall any such property be taken into account in determining the duty
payable under the Dominion Succession Duty Act, chapter 89 of the
Revised Statutes of Canada, 1952, or the tax payable under the Estate Tax
Act, chapter E-9 of the Revised Statutes of Canada, 1970, on or in respect
of other property passing to an Indian.
[Emphasis added.]
[13]
Since the decision of
the Supreme Court of Canada in Nowegijick v. The Queen,
[1983] 1 S.C.R. 29, income earned by an Aboriginal can be considered personal
property of an Indian for the purposes of section 87 of the Indian Act.
It remains to be determined whether the income in issue here was "situated
on a reserve" within the meaning of the Indian Act. The key
decision with respect to that question is another decision of the Supreme Court
of Canada: Williams v. Canada, [1992] 1 S.C.R. 877. There, the
Supreme Court explained the approach that the courts must take in determining
the situs of an Indian's property. In particular, Gonthier J. relied
on the detailed analysis done by La Forest J. in Mitchell v. Peguis Indian
Band, [1990] 2 S.C.R. 85, where, as Gonthier J. remarked in Williams,
at page 885, La Forest J. defined the purpose of sections 87 and
89 of the Indian Act:
. . . the purpose of these sections was to preserve the
entitlements of Indians to their reserve lands and to ensure that the use of
their property on their reserve lands was not eroded by the ability of
governments to tax, or creditors to seize. The corollary of this
conclusion was that the purpose of the sections was not to confer a
general economic benefit upon the Indians (at pp. 130‑31) . . .
[Emphasis added.]
[14]
Gonthier J. added in Williams,
at page 887:
Therefore, under the Indian Act, an Indian has a
choice with regard to his personal property. The Indian may situate this
property on the reserve, in which case it is within the protected area and free
from seizure and taxation, or the Indian may situate this property off the
reserve, in which case it is outside the protected area, and more fully
available for ordinary commercial purposes in society. Whether the Indian
wishes to remain within the protected reserve system or integrate more fully
into the larger commercial world is a choice left to the Indian.
The purpose of the situs test in s. 87 is to determine whether the Indian holds the
property in question as part of the entitlement of an Indian qua
Indian on the reserve. Where it is necessary to decide amongst
various methods of fixing the location of the relevant property, such a method
must be selected having regard to this purpose.
[Emphasis added.]
[15]
At pages 890-91, Gonthier
J. came to the following conclusion with respect to the method that must be
applied in determining the situs of unemployment insurance benefits:
In resolving this question, it is readily apparent that to simply
adopt general conflicts principles in the present context would be
entirely out of keeping with the scheme and purposes of the Indian Act
and Income Tax Act. The purposes of the conflict of laws have
little or nothing in common with the purposes underlying the Indian Act.
It is simply not apparent how the place where a debt may normally be enforced
has any relevance to the question whether to tax the receipt of the payment of
that debt would amount to the erosion of the entitlements of an Indian qua
Indian on a reserve. The test for situs under the Indian
Act must be constructed according to its purposes, not the purposes of
the conflict of laws. Therefore, the position that the residence
of the debtor exclusively determines the situs of benefits such as those
paid in this case must be closely reexamined in light of the purposes of the Indian Act.
It may be that the residence of the debtor remains an important factor, or
even the exclusive one. However, this conclusion cannot be directly
drawn from an analysis of how the conflict of laws deals with such an issue.
[Emphasis added.]
[16]
Lastly, at pages
892-93, Gonthier J. set out the following approach:
. . . The first step is to identify the various
connecting factors which are potentially relevant. These factors should
then be analyzed to determine what weight they should be given in
identifying the location of the property, in light of three considerations:
(1) the purpose of the exemption under the Indian Act; (2) the
type of property in question; and (3) the nature of the taxation of that
property. The question with regard to each connecting factor is
therefore what weight should be given that factor in answering the question
whether to tax that form of property in that manner would amount to the erosion
of the entitlement of the Indian qua Indian on a reserve.
[Emphasis added.]
[17]
It should also be noted
that the Federal Court of Appeal has had several occasions to analyze the situs
of income from a business, notably in Southwind v. Canada, A-760-95,
January 14, 1998, [1998] F.C.J. No. 15 (QL), 98 DTC 6084, and Bell
v. Canada, A-527-98, May 18, 2000, [2000] F.C.J. No. 680
(QL). In Southwind, counsel for the Crown suggested the following
factors to consider in deciding whether a business’s income is situated on a
reserve: (l) the location of the
business activities, (2) the location of the customers (debtors) of the
business, (3) where decisions affecting the business are made, (4) the
type of business and the nature of the work, (5) the place where the payment is
made, (6) the degree to which the business is in the commercial mainstream, (7)
the location of a fixed place of business and the location of the books and
records, and (8) the residence of the owner of the business.
[18]
At paragraph 14 of that
decision, Linden J.A. expressed the following opinion:
14 According to the Supreme Court in Mitchell,
where an Indian enters into the "commercial mainstream", he must
do so on the same terms as other Canadians with whom he competes. Although
the precise meaning of this phrase is far from clear, it is clear that it
seeks to differentiate those Native business activities that deal with people
mainly off the Reserve, not on it. It seeks to isolate those business
activities that benefit the individual Native rather than his community as a
whole, recognizing, of course, as Mr. Nadjiwan says, that a person benefits
his or her community by earning a living for his family.
[Emphasis added.]
[19]
In my opinion, the
factors in Southwind are very relevant in determining whether the
Appellant's consulting income of $47,000 for the 1999 taxation year and $62,000
for the 2000 taxation year was exempt under paragraph 81(1)(a) of the ITA.
However, I will individually analyze only the following factors because there
is no evidence with respect to the other factors:
(i)
the location of the
business activities; and
(ii)
the location of the
customers of the business.
The location of the business activities
[20]
The Appellant had an
office on the reserve and a telephone line that he used solely for his
consulting business.
[21]
There is no doubt that
the Appellant had to do some of his consulting on the Indian reserve. Indeed,
he had an office on the reserve, and a separate telephone line. I would
note, however, that there was nothing at all in the Appellant's testimony about
any activities other than activities related to services rendered to Déli-Bon that
were carried on by his business during the relevant period. If the "location
of business activities" factor were to be strictly applied, the business
income could, quite clearly, have been situated on the reserve. However, two
remarks must be made here. First of all, this factor is not determinative,
because its importance must be weighed having regard to the purpose of the Indian
Act, that is, that we must determine whether the Aboriginal holds the
property in question by virtue of his entitlements qua Indian on a
reserve. Secondly, there is little evidence showing that the office in
question was either permanent or of any importance during the relevant period.
The location of the customers
[22]
The evidence in the
case at bar shows that Déli-Bon, the only customer served by the Appellant
during the relevant period, was located outside the reserve.
Type of business and nature of the work
[23]
The evidence discloses that
the Appellant had an office at Déli-Bon's headquarters and that he worked there
every business day for at least eight hours. The evidence also discloses
that he held the position of CEO and that, by virtue of that position, he was specifically
responsible for the financing of the company, for its accounts payable and for
supplier relations. Lastly, the evidence discloses that the amounts of $47,000
and $62,000 were paid by Déli-Bon to the Appellant for services that he
rendered to Déli-Bon.
[24]
The fact that Déli-Bon was
located outside the reserve is important in the case at bar because Déli-Bon was
the Appellant's only customer and debtor during the relevant period. Moreover,
all the services provided by the Appellant were provided outside the reserve,
and that, too, is an important element in the instant case. It seems to me
that, in the case at bar, these two elements are more important than the
fact that the Appellant had a place of business on the reserve during the
relevant period. For these reasons, I find that the Appellant held no property qua
Indian on the reserve, and that his consulting income was subject to the ITA.
[25]
With respect to the
amounts that the Minister seeks to add, under section 15 of the ITA, to
the income reported by the Appellant, the first step is to determine the nature
of that income. It should be noted at the outset that section 15 is in
Subdivision b of Division B of Part I of the ITA, which deals with income from
property or a business of a taxpayer. In addition, the purpose of
section 15 of the ITA is to ensure that a shareholder pays tax on any
disguised distribution of the wealth accumulated by a corporation of which he
or she is a shareholder. In a sense, the income on which a shareholder
must pay tax under section 15 of the ITA could be characterized as income
from property, or passive income from a corporation. Being passive, the
income is not earned through work done by the taxpayer as an individual. Thus,
a great deal of importance must be attached to the manner in which this passive
income (distributed to the Appellant as a loan) was produced. In the case
at bar, the passive income that was distributed indirectly to the Appellant was
generated by a corporation whose plant and head office were situated outside
the reserve, and whose customers were exclusively outside the reserve. The
corporation had no other tie to the reserve than the fact that its shareholders
and directors lived on an Indian reserve, a fact that is not, in my opinion,
sufficient to allow one to conclude that the income is like personal property
situated on a reserve and therefore tax-exempt.
[26]
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 26th day
of February 2010.
Erich Klein,
Revisor
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