Citation: 2008TCC223
Date: 20080609
Docket: 2004-1311(IT)G
BETWEEN:
PAN-O-LAC LTÉE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1]
In its income tax
return for the taxation year ended December 31, 1999, the Appellant
carried forward $567,856 ($757,142 x ¾) with respect to a deductible
capital loss that it purportedly incurred in 1992 in respect of its holding of debentures
in Normick Chambord Inc. (hereinafter "Normick"). The debentures
in question were purchased from the Syndicat des producteurs de bois de
Saguenay–Lac St‑Jean ("the Syndicate")
for $757,142 on December 11, 1992.
[2]
By notice of
reassessment dated July 22, 2003, the Minister of National Revenue
("the Minister") disallowed the loss carry-forward on the ground
that the capital loss incurred by the Appellant in this regard was nil. The
Minister determined that when the Appellant purchased the debentures, it was de
facto, by virtue of paragraph 251(1)(b) of the Income Tax Act
("the Act"), not dealing with the Syndicate at arm's length. Since
the debentures had a fair market value of zero on the date of the transaction,
the Appellant is deemed to have acquired them at no cost, by operation of
paragraph 69(1)(a) of the Act. Consequently, upon Normick's bankruptcy
on December 16, 1992, the Appellant incurred no tax loss in relation
to the Normick debentures, and is therefore not entitled to carry forward any
loss whatsoever from the taxation year in question.
[3]
At the beginning of the
hearing, the Appellant acknowledged that the issue of non-arm's length dealing
is not in dispute. Both entities had the same directors, and the Appellant
acknowledges that the Normick debentures had a fair market value of zero on
December 11, 1992. However, the Appellant argues that the Syndicate acquired and
held the Normick debentures on the Appellant's behalf in accordance with a
contract of mandate, and that, in reality, the agreement of purchase and sale concerning
the debentures entered into between the Appellant and the Syndicate and dated
December 11, 1992, was signed in order to regularize the
situation, because the Appellant was the true owner of the debentures at all
times.
[4]
What is at issue, then,
is the Appellant's and Syndicate's true intention with respect to the
acquisition of the Normick debentures. Did the Syndicate purchase the debentures
for itself, outside the mandate that the Appellant had entrusted to it, or were
the debentures acquired within that mandate?
[5]
The Syndicate in
question was formed under the Professional Syndicates Act, R.S.Q.,
c. S‑40, and the Act respecting the marketing of agricultural,
food and fish products, R.S.Q. c. M-35.1. It is composed of owners of
private woodlots whose object is to create a joint plan to sell and market
timber. It has roughly 5 000 members.
[6]
This whole matter began
in the early 1980s. Roughly half the trees in private forests are deciduous (aspen
and birch) and have very little market value. Therefore, the Syndicate
decided to fund a feasibility study on a possible use for deciduous trees. The
outcome of the study was the creation of a waferboard plant. In order
to ensure the availability of raw material for such a plant, the Syndicate
asked the Quebec government to get involved, because the private woodlots were
not sufficient to meet demand. It also asked that the Quebec government have a
financial stake in the venture.
[7]
In addition, the Syndicate
asked other associations, such as the Fédération des coopératives forestières
du Saguenay Lac St-Jean ("the Federation") and the Coopérative des
travailleurs du Royaume ("the Cooperative") to get involved in its
plant project. In fact, those two entities and the Syndicate are identified as
the "regional group" in the various agreements concerning the plant's
creation.
[8]
Although the Syndicate
was the promoter and was actively involved, it wanted to keep some
distance from the project in order to avoid any potential conflict of interest and
keep the marketing of the timber separate from its processing. It therefore
had the Appellant created in 1985, with a view to entrusting it with the role
of investing the necessary funds in the plant project.
[9]
The Syndicate carried
out financing drives by turning to its members and the community in 1984 and in
early 1987 when the project was truly gaining momentum. The goal of raising $3
million was surpassed. More than 2,000 of the Syndicate's members invested, and
thereby became shareholders in the Appellant.
[10]
This made it necessary
to team up with a company that was familiar with the manufacturing of
waferboard. The Appellant turned to Normick Perron Inc., and, following
negotiations, Société Normick Chambord Inc. ("Normick") was
incorporated on March 31, 1987, for the purpose of undertaking the construction
and start-up of a waferboard plant in the municipality of Chambord, located in
the Lac St‑Jean area.
[11]
On the same date, March 31, 1987, nine agreements were signed by Normick Perron Inc.,
the Syndicate, the Federation and the Cooperative (the last three entities are
collectively referred to as the "regional group") and Normick. According
to the testimony of Jean Louis Vigneault, CEO of the Syndicate, Normick Perron
Inc. insisted that the regional group be a party to the agreements.
It insisted that the Syndicate and the Federation, which represents
several cooperatives, be their partners in the project in order to ensure their
financial participation, and, above all, a supply of timber. Indeed, according
to Mr. Vigneault, Normick Perron Inc. did not want to have anything to do
with other entities, including the Appellant, whose existence was unknown to Normick Perron
Inc., and which had not participated in the negotiations.
[12]
The initial investments
were therefore made by the parties in accordance with the agreement signed in
this regard. In exchange, the parties, including the Syndicate, received common
and preferred share certificates on the basis of their respective investments. Normick
Perron Inc. held 51% of the voting shares, and the balance were held by
the three members of the regional group.
[13]
The second agreement
signed by the parties on March 31, 1987, pertains to an additional injection of
funds, in the event that it would be needed. This investment was to be
made through the purchase of debentures and common shares in accordance with
the formula contained in the agreement. The other agreements include an
agreement on design and layout, a unanimous shareholders' agreement and
undertaking, an agreement on the management of the plant and on marketing
and supply, a counterletter regarding the interpretation of various
clauses of certain agreements, and so forth.
[14]
Since the Syndicate was
a party to the various agreements with Normick Perron Inc. and the other
entities, and held shares in Normick even though this ran counter to its
initial idea, a mandate agreement between the Appellant and the Syndicate was signed
on March 2, 1988, in order to regularize their relationship, under which agreement
the Syndicate agreed to act on the Appellant's behalf with respect to the
transactions with Normick Perron Inc. and to hold the Normick shares. The
mandate agreement provided, inter alia, as follows:
(a) The Appellant
confirmed that it gave the Syndicate a mandate in connection with the Chambord
waferboard plant project and that, in its capacity as mandatary, the Syndicate
signed various agreements with the partners, including, among others, an
agreement on the initial investment, an agreement concerning an additional
investment, and a shareholders' agreement.
(b) The Appellant
acknowledged that it was bound by the agreements as though it had signed them
itself.
(c) The Appellant agreed
to save the Syndicate harmless from and against any action arising out of the
agreements signed by the Syndicate as a mandatary, and to reimburse it for any
amount that it might disburse in the performance of the agreements and its mandate.
[15]
The agreement
acknowledges that the Syndicate did indeed invest in Normick as a mandatary,
and that the funds come from the Appellant's shareholders. As mandatary of
the Appellant, the Syndicate held common shares with a value of $1,810,000 and
preferred shares with a value of $2,631,600. For the purposes of this decision,
it is important to reproduce the entire text of paragraphs 4.1, 4.2 and 4.3 of
the agreement:
[TRANSLATION]
4.1 Management of funds and investments
The Corporation confirms and continues the Syndicate's
mandate to manage the funds obtained, with a view to making the planned
investments in the project to build a waferboard plant in Chambord.
In addition, the Corporation gives the Syndicate a
mandate and power of attorney to exercise all rights associated with the common
shares that it has acquired, and, in particular, the voting rights and the rights
under the unanimous shareholders' agreement among all the shareholders of Normick
Chambord Inc.
However, upon receiving any amount on account of the redemption of
preferred shares or the payment of dividends on such shares, the Syndicate
shall pay that entire amount to the Corporation.
The Corporation acknowledges, however, that the Syndicate may
deduct, from the amounts received from Normick Chambord Inc. on account of the redemption
of common shares or dividends thereon, the amount of its remuneration, fees,
and expenses, as stated in the terms and conditions set out below.
4.2 Administration of the Corporation's affairs
In order to reduce its administrative costs, the Corporation hereby
entrusts the entire management of its operations and, generally, the entire
administration of its affairs, to the Syndicate, which shall have all accessory
or ancillary powers in the execution of this mandate, including, without restricting
the foregoing, powers similar to those of a general partner in a limited
partnership within the meaning of articles 1871 et seq. of the Civil
Code of the province of Quebec.
4.3 Administration of the agreements
The Corporation acknowledges that the Syndicate shall
be responsible for ensuring that all the agreements made with the Regional
Group's members, Normick Perron Inc. and Normick Chambord Inc. are
complied with, and, as part of this mandate, shall be responsible for
administering the various agreements, and, in particular, the supply agreement
under which the Syndicate's members are to supply part of the wood material
necessary for the operations of Normick Chambord Inc. To ensure that the
Syndicate's members that supply the said wood material to Normick Chambord Inc.
receive a fair price at all times, the Corporation hereby authorizes the
Syndicate to make any adjustments that it deems appropriate in order to secure
a reasonable price for the said producers, and the allocation of these
adjustments made by the Syndicate shall be final and without appeal. The amount
of the adjustments resulting from this allocation shall be added to the general
fees that the Syndicate charges the Corporation hereunder, in accordance with
the provisions of paragraph V below.
[16]
It should be noted
that, in its income tax return for the taxation year ended
December 31, 1999, the Appellant also deducted a capital loss equal
to the amount of money that the Syndicate used to purchase the common and
preferred shares of Normick on the Appellant's behalf. The Respondent accepted
the capital loss carry‑over in respect of the shares.
[17]
In late 1989, Normick was
facing serious financial difficulties which made it necessary to apply the undertaking
by the various stakeholders in relation to additional financing. In a letter dated December 20, 1989, Normick notified
the stakeholders that it expected to run out of funds on or about March 31,
1990. It specified the amounts required and requested that they act
accordingly.
[18]
The Appellant did not
have the wherewithal to invest the additional amounts requested, and did not
have any new subscribers. According to Mr. Vigneault, this is when the
Syndicate decided to make a temporary investment until such time as the
Appellant would be able to make an investment itself.
[19]
On February 14, 1990, a
cheque for $162,488.80 from the Syndicate was given to Normick in response to
the request for funds. In return, debentures for the same amount were issued to
the Syndicate along with certain shares, as contemplated by paragraph 4.8
of the agreement on additional financing.
[20]
However, the financial
difficulties persisted, and on June 7, 1990, a second request for additional
funds was made to the Syndicate and the other stakeholders. The amount required
from the Syndicate was $594,652. According to Mr. Vigneault, in view of
the urgency of the situation and the Appellant's inability to come up with the
money, the Syndicate took out from the Caisse populaire St‑François-Xavier
on July 6, 1990, a $594,000 loan repayable over ten years. The Syndicate
put up the shares that it held with the Appellant and with Normick, as well as its
savings, its accounts receivable, and the principal and interest on the
debentures issued by Normick, as collateral. In a resolution of its board of
directors dated August 30, 1990, the Appellant agreed to the shares
held by the Syndicate being surrendered to the Caisse populaire St-François-Xavier
as security. On July 4, 1990, the Syndicate sent Normick a
cheque dated July 21, 1990, in the amount of $594,652, which was
equal to the additional investment required on June 7, 1990. Normick
issued debentures to the Syndicate in the same amount.
[21]
But the situation did
not improve, and none of the majority or minority shareholders wished to inject
additional funds. Normick had to cease operations in October 1990. The Syndicate
subsequently made several attempts to find the support needed to start up the
plant again. The Syndicate's efforts were not successful in 1991 because the
economic climate was unfavourable. In 1992, the Syndicate gave a business
project mandate. The markets were recovering. An agreement to restart the
plant was entered into by various stakeholders. The Appellant was to
contribute $1 million to this project.
[22]
The Appellant's
accounting firm, which happens to be the same as the Syndicate's, was mandated
to propose a plan to financially restructure the Appellant as part of the new
investment aimed at starting up a new plant. The Syndicate's objectives were to
protect the investments already made by the Appellant's shareholders by giving
them some kind of value in the restructuring, and to ensure sufficient
profitability to entice new investors to invest. On October 12, 1992,
the Appellant's restructuring proposals were submitted to the Syndicate. Under
the proposal that was accepted, the Appellant's existing share capital would be
restructured by converting the previous investments, in the form of common and
preferred shares, into new subordinated shares. The new investments were to be accounted
for as voting, participating common shares. One of the steps in this process was
to transfer the amounts that the Syndicate had invested in Normick to the
Appellant in consideration of the issuing of preferred shares of the Appellant
to the Syndicate. In this context, "amounts invested" means the
debentures. According to the accountant Albert Lemieux, who developed
the selected proposal, the Appellant asked for this transfer.
[23]
At that time, the National
Bank had repossessed Normick's assets. An agreement was made to buy back
the assets, and a new company was incorporated to launch the new waferboard
plant. Normick went bankrupt on December 16, 1992.
[24]
In order to implement
the accounting firm's proposal, the Appellant and the Syndicate entered into an
agreement of purchase and sale of the debentures on December 11, 1992.
According to Mr. Vigneault, the matter of the debentures had to be regularized
so that the Syndicate would be reimbursed given the launch of a new plant. The
preamble of the agreement states that the Syndicate had subscribed for the
debentures at the Appellant's request. It also states that the Syndicate held
the debentures and intended to transfer them to the Appellant in consideration
of shares of the Appellant's share capital. In the agreement, the terms
[TRANSLATION] "sells" and [TRANSLATION] "purchases" are
used in relation to the nature of the transaction, which is referred to as a
[TRANSLATION] "sale".
[25]
The minutes of several
of the Appellant's and the Syndicate's board meetings from 1987 to 1993 were
tendered in evidence. At its meeting of October 16, 1992, the Appellant's
board of directors welcomed Albert Lemieux, the person who had developed the
proposal. He explained how the Appellant's restructuring would proceed.
This part of the meeting was a joint meeting of the Appellant's and the
Syndicate's boards. It should be understood that the participants were the
same. In the summary of Albert Lemieux's presentation concerning the
Appellant's investment in Normick, it is stated that the Syndicate itself invested
an additional $757,142. In addition, during another meeting of the Appellant's
board on December 11, 1992, it was resolved that the Appellant would
purchase the debentures from the Syndicate in consideration of shares. The
preamble of the resolution states that the Syndicate owns the debentures, that
it subscribed for them at the Appellant's request, that the Syndicate intends
to transfer them to the Appellant, and that the Appellant intends to purchase them.
[26]
As for the Syndicate's
minutes, they refer to a resolution of the board dated
December 11, 1992, authorizing the sale of all the debentures to the
Appellant in consideration of shares in the Appellant. The preamble of the resolution
of the Syndicate's board resembles that of the resolution of the Appellant's
board. However, it is stated at point E, under [TRANSLATION] "Debentures",
that the Normick debentures which the Syndicate acquired were to be
acquired by the Appellant in order to be part of the restructuring proposed by
the Appellant. This comment precedes the preamble and the resolution in
question.
[27]
The Appellant's and the
Syndicate's financial statements for the years relevant to the appeal were also
tendered in evidence. The Appellant's financial statements as at
December 31, 1991, contain no reference to debentures under the heading
[TRANSLATION] "Investments". However, in the statements as at
December 31, 1992, there is a note which explains that, in accordance
with the management agreement dated March 2, 1988 between the Appellant and the
Syndicate, and the agreement concerning additional financing for Normick, the Appellant's
financial statements as at December 31, 1991, were adjusted to show the
Normick debenture investment as well as the liability associated with the
investment in Normick. The debentures are found under the heading
[TRANSLATION] "Investments". The evidence discloses that the Appellant's
management provided the accountant with the information necessary to prepare
the financial statements, and that all the financial statements were duly
accepted by resolution of the Appellant's board of directors.
[28]
The Appellant's
financial statements as at December 31, 1992, were prepared on
February 16, 1993. The adjustment note is dated May 25, 1993. In a
letter dated May 13, 1993, from the accounting firm Mallette Maheu to the Syndicate,
accountant Albert Gagnon raises the problem of the value of the debentures held
by the Syndicate as at December 10, 1992 in the context of the
purchase and sale transaction of December 11, 1992 and the bankruptcy
of Normick on December 16, 1992, and suggests that the value of the
debentures was nil. He also refers, in his letter, to certain legal and tax
problems and raises a question that he characterizes as major, namely:
[TRANSLATION]
Is it possible that this debenture purchase transaction was
incorrectly entered, and that the Syndicate should have purchased shares in the
Appellant, and that the Appellant should have purchased Normick debentures? In
light of the Syndicate's management mandate, it appears to us that such a
mistake may have been made.
[29]
Mr. Gagnon accordingly suggested
the adjustment contained in the Appellant's financial statements as at December
31, 1992.
[30]
However, in the
Syndicate's financial statements as at December 31, 1990, the debentures
are entered under the heading [TRANSLATION] "Investments." There is
no information showing that the Syndicate made an advance to the Appellant for
the value of the debentures, and there is an entry for the loan from the Caisse populaire
in relation to the second debenture under the heading [TRANSLATION] "Contractual Obligations
and Contingent Liabilities". The shares are only discussed in reference
to the mandate from the Appellant. The accountant Mr. Gagnon testified
that during the preparation of the financial statements there was no discussion
of the debentures in relation to the Appellant.
[31]
In the Syndicate's
financial statements as at December 31, 1992, it can be seen, under the heading
[TRANSLATION] "Investments", that the value of the debentures in
question is nil, whereas, at fiscal year-end on December 31, 1991,
their value was $757,142. The notes to the financial statements explain that
the Syndicate agreed to sell all the debentures to the Appellant in
consideration of a total of $757,142, payable in the form of shares. The
accountant relied on the documents in preparing the financial statements.
[32]
In the context of the
May 25, 1993 adjustment to the Appellant's financial statements as at December
31, 1992, there is a reference, under the heading [TRANSLATION] "Advances
to the Syndicate", to a $757,142 liability of the Appellant to the
Syndicate. In the accountant Albert Gagnon's notes dated May 23, 1993
(Exhibit I‑1, Tab 9), which refer to the Appellant's
indebtedness to the Syndicate, mention is made of the debentures and the terms
of payment, which, the accountant acknowledges, are not evidenced by any
document. Apparently, the accountant relied on the instructions of lawyers, who
said that the debentures should have been entered as though they belonged to
the Appellant. According to the accountant, instead of executing an agreement
of purchase and sale, it would have been necessary to have the debentures transferred
to the Appellant. The accountant cannot explain why his notes (Tab 9 of
Exhibit I-1) refer to a debt to the Appellant, when the Syndicate's financial
statements as at December 31, 1993 refer to a sale, except that he was
following the instructions of the Appellant's lawyers. The accountant acknowledges
that this is a strange situation, but he was only informed of the situation
between the Syndicate and the Appellant in May 1993 by means of a
letter from their lawyers.
[33]
Thus, in 1999, the
Appellant, having realized a large capital gain, claimed a deduction for its
$4.9-million capital loss, which included its investments in Normick shares as
well as the debentures in question. The Respondent allowed the loss with
respect to the shares, but disallowed the loss associated with the debentures
on the ground that the Syndicate acquired them for itself, and not for the
Appellant and in the Appellant's name under the mandate of
March 2, 1988. In fact, the Respondent argues that the mandate is not
sufficiently broad to authorize the Syndicate to act as it did in relation to
the Normick debentures.
[34]
The Appellant made
three main arguments in support of its entitlement to deduct a capital loss in
respect of the Normick debentures. Firstly, the Appellant submitted
that, according to the decisions in Shell Canada Ltd. v. Canada,
[1999] 3 S.C.R. 622 and Continental Bank Leasing Corp. v. Canada,
[1998] 2 S.C.R. 298, this Court must take the taxpayer's legal situation into
account. In particular, it must take into consideration the legal relationships
created by the taxpayer in tax matters.
[35]
Secondly, the Appellant
submitted as follows. The Syndicate had always been involved in the project to
start up the plant. However, the Syndicate itself never intended to invest in
this project. The mandate dictated the Appellant's relationship with the
Syndicate, in accordance with the provisions of the Civil Code of Lower
Canada (C.C.L.C.). The Appellant explained the wording and the scope of the
mandate, and the obligations of the mandatary (the Syndicate) and the
mandator (the Appellant), and, lastly, it described the conditions under
which the mandate would be extinguished. The Appellant submitted that it was
bound when the Syndicate, as mandatary, paid $757,142 for the purchase of
Normick debentures as investments, and, consequently, that the Appellant is
entitled to deduct a capital loss from its capital gains. The Appellant draws
a connection between the transaction involving the debentures and the
investments made by its shareholders, including the Syndicate, in the form
of Normick shares. The Appellant submitted that it was for economic reasons
that the shareholders of Normick Perron had demanded that the Syndicate be the
only stakeholder in Normick.
[36]
Thirdly, the Appellant
listed the elements that might not support the mandate theory, and explained
how the agreement concerning the additional investment included not only the
shares recognized by the Respondent, but also the Normick debentures which the
Syndicate held for the Appellant. The Appellant explained the composition of
its board of directors and of the Syndicate's; it explained the loan taken out
by the Syndicate to purchase the Normick debentures; it explained as well the
purchase and sale agreement, and tried to clarify some the unclear language in
the minutes and financial statements.
[37]
As for the Respondent, she
said that she agreed with the Appellant on the manner in which the Court should
legally interpret the legal relationships entered into by the taxpayer. She also
admitted the existence of the Appellant's mandate to the Syndicate during the
years in question. However, the Respondent disputes the suggestion that the
Appellant empowered the Syndicate to proceed, in the future, to acquire
debentures from Normick on behalf of the Appellant, and, above all, the
suggestion that the Syndicate was given a mandate to purchase these debentures
with its own funds. The Respondent asserted that the mandate did not
provide that the Syndicate had the power to borrow money to acquire the debentures.
[38]
Further, the Respondent
argued that the Syndicate was the true owner of the Normick debentures. She
submitted that the Syndicate acted as the debenture owner at all times, and she
made eight arguments in support of this position:
1.
The Syndicate advanced the
$757,142 necessary to purchase the debentures.
2.
No acknowledgment by
the Appellant of a $754,142 debt to the Syndicate was adduced in evidence.
3.
The Syndicate borrowed
$594,000 under its own name and gave the Normick debentures as a security
without the Appellant's authorization.
4.
The Syndicate assumed
all the expenses in relation to the debentures.
5.
The agreement of
purchase and sale of December 11, 1992.
6.
The Syndicate invested,
in its own name, more than $400,000 in the plant relaunch.
7.
The minutes of the
Appellant's and Syndicate's meetings.
8.
The information contained
in the Syndicate's and the Appellant's financial statements.
[39]
The Respondent
submitted that the Syndicate and the Appellant had a de facto non-arm's
length relationship and that the fair market value of the debentures was
therefore zero, not $757,142, because the true value of the considerations
given under the agreement of purchase and sale was nil by virtue of subsection 69(1)
of the Act. When Normick went bankrupt, the Appellant incurred no capital
loss.
[40]
So was there a mandate
between the Syndicate and the Appellant? If so, what was the scope of the
powers conferred by the mandate from 1988 to 1992, and did the Syndicate act in
accordance with the mandate?
[41]
It appears to me that
the parties agree that there was a mandate between the Syndicate and the
Appellant. Was this mandate broad enough to permit the Syndicate to acquire the
Normick debentures?
[42]
The mandate that the
Appellant gave to the Syndicate is subject to the C.C.L.C., which applied
during the period in question, and to the definition of mandate contained therein.
Article 1701 C.C.L.C. defines a mandate as follows:
Mandate is a contract by which a person, called the mandator,
commits a lawful business to the management of another, called the mandatary,
who by his acceptance obliges himself to perform it.
The acceptance may be implied from the acts of the mandatary and in
some cases his silence.
[43]
Article 1703 is also
rather important in the instant case.
The mandate may be either special, for a particular business,
or general, for all the affairs of the mandator.
When general it includes only acts of administration.
For the purpose of alienation and hypothecation, and for all acts of
ownership other than acts of administration, the mandate must be express.
[Emphasis added.]
[44]
Authors Henri Roch and
Rodolphe Paré, in their treatise Droit civil du Québec, volume 13,
explain the above provisions as follows, at page 28:
[TRANSLATION]
If the mandate is worded in general terms, the
mandatary's power is limited to acts of administration, according
to the second paragraph of the provision; and these acts of administration
consist of all acts necessary for proper administration. However, the
third rule set forth in the provision is that alienation or hypothecation, and any
act of ownership other than acts of administration, must be
the subject of an express mandate.
The principle, in all cases, is that a mandate must
be interpreted restrictively. If the mandator wishes to empower the
mandatary to carry out acts other than acts of administration, he must state
this formally, and, in such event, the mandatary is not permitted to carry
out any acts other than those referred to in the mandate.
[Emphasis added.]
[45]
That said, in order to put
everything in context in relation to the mandate's raison d'être, I feel it is
important to consider the preamble of the mandate that was signed before the
debentures were issued. The preamble's three paragraphs read as follows:
[TRANSLATION]
WHEREAS, in relation to the construction and launch of a waferboard
plant in Chambord, the Syndicate acted as the Corporation's mandatary in
making the various investments and signing various agreements with, among
others, Normick Perron Ltée, Normick Chambord Inc., the Fédération des
coopératives forestières du Saguenay-Lac St-Jean and its member cooperatives,
and the Coopérative des Travailleurs du Royaume;
WHEREAS, in the performance of that mandate, the Corporation
advanced large sums of money to the Syndicate in order to enable it to
make, on the Corporation's behalf, the investments contemplated by the
agreements in this regard;
AND WHEREAS it is appropriate that the
parties enter into written agreements in order to ratify the acts done by
the Syndicate for and on behalf of the Corporation, in view of the short
time frame within which this matter was definitively finalized,
[46]
The ensuing clauses
contain no reference to a future purchase of debentures. Under the heading [TRANSLATION]
"Mandate", the Appellant confirms that it gave a mandate
[TRANSLATION] "for the purpose of signing certain agreements with the
partners involved in the project to build and start up the waferboard plant in
Chambord." The terms used are broad and general and do not contemplate any
specific situations, other than entering into agreements, including the
agreement on additional financing. The C.C.L.C., which governs the mandate,
states that a mandate may be special for a particular business, or general.
A mandate worded in general terms covers acts of administration only. For
anything else, the mandate must be express (article 1703 C.C.L.C.).
1703. The mandate may be
either special, for a particular business, or general, for all the affairs of
the mandator.
When general it includes only acts of administration.
For the purpose of alienation and hypothecation, and
for all acts of ownership other than acts of administration, the mandate must
be express.
[47]
Under the heading [TRANSLATION]
"Investment" is a list of investments authorized by the Appellant.
There is no reference to requests for additional funds. While there is a
reference to the share certificates issued by Normick to the Syndicate, no
reference is made to debentures and the shares that were to accompany them.
[48]
Under the heading
"Management of funds and investments", to which I have already
referred, paragraph 4.1 of the mandate agreement provides as follows:
"The Corporation confirms and continues the Syndicate's mandate to manage
the funds obtained, with a view to making the planned investments in the
project to build a waferboard plant in Chambord." There is no reference to
the debentures, or to the possibility of borrowing and putting up property as security.
In my opinion, the Syndicate's mandate in this regard is limited to managing
the funds obtained from the Appellant's shareholders, and the mandate does not
provide that the Syndicate can commit its own funds on the Appellant's behalf
with a view to making additional investments in order to purchase debentures.
[49]
Under the heading
"Administration of the Corporation's affairs", paragraph 4.2,
quoted above, states that the Syndicate's powers are similar to those of a
general partner in a limited partnership within the meaning of articles 1871 et
seq. C.C.L.C. Those articles, and in particular, article 1876, provide that
only the general partners are authorized to administer the business of and to
bind the partnership. Although these powers may appear rather broad, the mandate
agreement stipulates that the Appellant, in order to reduce its administrative
costs, entrusts the entire administration of its activities, and generally the
entire administration of its affairs, to the Syndicate, but makes no specific
reference to the possibility of acquiring debentures, let alone to borrowing a
significant sum of money, like the amount in the case at bar, on its behalf.
Even if the agreement on additional financing refers to the acquisition of
debentures, it certainly does not authorize the Syndicate to acquire them with
its own money. The mandate grants no express authorization to do so, nor does
any other document.
[50]
Consequently, I am of
the opinion that the mandate conferred on the Syndicate did not permit the
Syndicate to do what it did with respect to the debentures, much less to borrow
funds to purchase them. Moreover, in light of the evidence as a whole, I am
satisfied, on a balance of probabilities, that the Syndicate acted as an owner
in the instant case.
[51]
It must be remembered
that, according to Mr. Vigneault, the Syndicate had an interest in the
construction and start-up of the Normick plant, mainly because it supplied the
plant. The Syndicate was, in a sense, the promoter, and it was very much in its
interest that the project be viable, even though it wanted to keep its distance
from the project in order to avoid any potential conflict of interest. Indeed,
it was only after the fact—almost a year later—that the mandate agreement was
signed in order to ratify what the Syndicate had done.
[52]
In my opinion, it was as
a promoter, not as a mandatary of the Appellant, that the Syndicate decided, in
1990, to use its own funds and to borrow money to acquire debentures in the
amount of $757,142. In my opinion, there was nothing temporary about the Syndicate's
decision to make this investment, and the decision was not due to the fact
that the Appellant lacked the wherewithal to invest additional amounts. Quite
simply, the Syndicate was the entity that ran the project, and it was very much
in its interest that the project be and remain viable. The project's
survival was so crucial that when the second request for funds was made, the
Syndicate, of its own initiative, borrowed $594,000 from the Caisse populaire
St-François-Xavier. Nowhere is it stated that the loan request was made by the
Syndicate in its capacity as mandatary of the Appellant. The Syndicate even put
up as collateral the shares that it held with the Appellant and with Normick,
as well as its own savings and accounts receivable. Thus, it was the Syndicate
that advanced the funds necessary to acquire the debentures.
[53]
In my opinion, if the
Syndicate had been acting for and on behalf of the Appellant, using its own
funds for and on behalf of the Appellant, it would surely have required an
acknowledgment of debt from the Appellant or some form of proof that the funds
invested by the Syndicate to acquire the debentures were a loan to the
Appellant. The Appellant could also have issued shares or debentures to the
Syndicate as it had done for its investments during the financing drive. I
cannot disregard the fact that the Appellant's financial statements never
reported a debt of $757,142 owed by the Appellant to the Syndicate. It was only
in March 1993, when the financial statements were adjusted, that this debt was
referred to. In my opinion, these are all indications that the Syndicate was
acting on its own behalf with respect to the purchase of the Normick debentures.
[54]
As far as the interest
expenses associated with the Caisse populaire's loan to the Syndicate are
concerned, it was the Syndicate that paid these expenses, at least during the
two years following the loan, and these expenses were not billed to the
Appellant, as they would have been in a mandator-mandatary relationship (see article 1724 C.C.L.C.).
[55]
Another factor that
tends to show that the Syndicate acted on its own behalf with respect to the
debenture acquisition is that the Syndicate and the Appellant signed a purchase
and sale agreement in which the Syndicate sold, assigned and transferred the
Normick debentures at a price of $757,142 in consideration of 142 common shares
and 7,570 preferred shares of the Appellant's share capital. This is not a
reimbursement of amounts advanced in respect of the debentures, as
Mr. Vigneault would have it. In my opinion, the Appellant did not incur
any liability to the Syndicate arising within the framework of a mandator-mandatary
relationship; rather, what took place was the implementation of the
accountants' proposal for relaunching the plant. It seems to me that the
agreement accurately reflects what it does, namely, to effect a purchase and a
sale. As a reading of its preamble discloses, the agreement makes no reference
to any reassignment or reimbursement, or anything else.
[56]
As I have already stated,
all the facts support the theory that the Syndicate acted on its own behalf,
and on its own initiative, as the true owner of the Normick debentures.
Thus, the true legal situation between the parties is the situation reflected
in the instruments herein referred to, in the documentation adduced,
consisting of contracts, financial statements and minutes. In other words, although
the Syndicate may have been the Appellant's mandatary in relation to the
shares, it was the true owner of the Normick debentures, which it subsequently sold
to the Appellant on December 11, 1992.
[57]
It would be difficult to
find, as the Appellant would like, that the purpose of the adjustment of the
1991 financial statements, dated May 25, 1993, was to correct a
mistake in the financial statements. It took them a long time to find the
mistake when one considers that the accountants were only advised of it in
May 1993; furthermore, there is no documentation to support the position
that such a mistake was made. The fact that the Appellant did not acknowledge
the existence of a liability (debt) to the Syndicate in 1990, 1991 and 1992,
the Syndicate's taking out a loan in response to the second additional
financing request, the assignment of the debentures by the Syndicate as
security, the minutes referring to the Syndicate as the owner, the agreement of
purchase and sale, and the financial statements, all reflect the
Syndicate's intention to invest in Normick on its own behalf, and thus, the
true legal reality in which the Syndicate and the Appellant were operating was that
the Syndicate was the true owner of these debentures.
[58]
Given this finding and
the fact that the Appellant acknowledges its non-arm's length relationship with
the Syndicate, I find that the sale of the debentures to the Appellant in 1992
was a transaction between parties who were not dealing with each other at arm's
length, and, since the Appellant acquired them for $757,142 when their fair
market value was nil, it is deemed to have acquired them for an amount equal to
their fair market value, namely zero, in accordance with paragraph 69(1)(a)
of the Act. Consequently, the appeal is dismissed, with costs.
Signed at Fredericton, New Brunswick, this 9th day of June 2008.
"François Angers"
Translation certified
true
on this 28th day
of November 2008.
Erich Klein, Revisor
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