Docket: 2005-2543(IT)I
BETWEEN:
9100-2402 QUÉBEC INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL
ENGLISH TRANSLATION]
__________________________________________________________________
Appeal heard on May
10, 2006, at Matane, Quebec.
Before: The
Honourable Justice Alain Tardif
Appearances:
|
Counsel
for the Appellant:
|
Denis
Tremblay
|
|
Counsel
for the Respondent:
|
Christina
Ham
|
__________________________________________________________________
JUDGMENT
The appeal from the
assessment made under the Income Tax Act for the 2001 taxation year is
allowed, without costs, and, in accordance with the attached Reasons for
Judgment, the assessment is referred back to the Minister of National Revenue
for reconsideration and reassessment in order to eliminate the sum of $16,000
from the Appellant's income and make the appropriate corrections as a
consequence of this judgment.
Signed
at Ottawa, Canada, this 4th
day of July 2006.
"Alain Tardif"
Translation
certified true
on this 4th
day of July 2007.
Brian
McCordick, Translator
Citation: 2006TCC302
Date: 20060704
Docket: 2005-2543(IT)I
BETWEEN:
9100-2402 QUÉBEC INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL
ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1] This appeal
pertains to the 2001 taxation year.
[2] The issue is
whether the Minister properly added the amount of $16,000 to the Appellant's
income for the 2001 taxation year as a taxable benefit.
[3] In making the
assessment under appeal, the Respondent relied on the following assumptions of
fact:
[TRANSLATION]
(a) During
the period in issue, the Appellant's sole shareholder was Martine Cyr. (admitted)
(b) The
Appellant's fiscal year ended on December 31, 2001. (admitted)
(c) During
the period in issue, the Appellant held 100% of 2550‑9605 Québec Inc.
(hereinafter the "operating company"). (admitted)
(d) The
operating company's fiscal years ended on March 23, 2001, and
December 31, 2001, respectively. (admitted)
(e) During
her audit, the Minister's auditor made the following findings:
(i) The
operating company paid a total of $16,000 in professional fees ($10,000 +
$6,000). (admitted in part)
(ii) These
professional fees were paid for transactions in which the Appellant purchased
385 Class B shares and 341 Class D shares of the operating company. (admitted
in part)
(iii) No
intercompany liability was entered in the accounting books in respect of these
payments, which totalled $16,000. (admitted in part)
(f) Consequently,
the Minister's auditor made the following determinations:
(i) The
total amount of $16,000 was a benefit conferred on the Appellant. (admitted in
part)
(ii) The
adjusted cost base of the stock investment was increased by $10,000 in fees. (admitted
in part)
(iii) $6,000
in fees were incorporation expenses and were considered eligible capital
property. (admitted in part)
(iv) The
total of $16,000 was not allowable as an expense of the operating company. (admitted
in part)
(g) At
the objections stage, the Appellant's representative told the objections
officer that the Appellant was not contesting the Minister's disallowance of
the $16,000 as an expense of the operating company. (admitted)
(h) The
facts set out in subparagraph 6(g) above were first assumed when the
reassessment of August 19, 2004, in respect of the 2001 taxation
year, was confirmed. (admitted)
[4] The vast
majority of the facts were admitted. This includes, inter alia,
subparagraphs (a), (b), (c), (d) and (g). Sub-subparagraphs (e)(i), (ii) and (iii),
and (f)(i), (ii), (iii) and (iv) were admitted in part.
[5] The facts are
not truly being contested. The Appellant essentially claims that the
assumptions of fact stemmed from a simple error caused by the ignorance and
lack of experience of Martine Cyr, the sole shareholder of the corporation.
[6] Counsel for the
Appellant placed considerable emphasis on the speed with which the Appellant
corrected the mistake following the auditor's finding.
[7] In support of
its case, the Appellant adduced the testimony of France Guérette, the corporation's
accountant, and Martine Cyr, its sole shareholder, who was responsible for the
day‑to-day bookkeeping in that she made the entries in the various
accounting books. Ms. Guérette's mandate was essentially to produce the
financial statements at the end of the corporations' fiscal year.
[8] As for the
Respondent, she called Gaétane Gauthier, the auditor, as a witness. Essentially,
Ms. Gauthier explained the nature of the various findings that led her to
conclude that a reassessment based on subsection 15(1) of the Income Tax Act
("the Act") was necessary.
[9] Ms. Guérette
explained that she acknowledged, at the time of the objection, that the
auditor's findings of fact which form the basis of the assessment under appeal
were correct.
[10] Counsel for the
Appellant argued that this was essentially a mistake that can be explained and
justified by Ms. Cyr's ignorance, and lack of experience, at the time that
it was made.
[11] As soon as she
noticed the mistake that led to the reassessment, Ms. Cyr did what was
necessary to rectify the situation so that everything would reflect reality, which
was that the amount was not a benefit, but rather, a loan from 2550‑9605
Québec Inc. to the Appellant corporation. The corrections were made so that the
financial statements would reflect exactly what they should have reflected from
the start.
[12] Ms. Cyr, a
nurse by training, explained that she had very little accounting knowledge. In
fact, she said that she has taken courses in order learn more about it.
[13] The explanation
that she offered in order to convince the Court that this was a mistake was
that, to her mind, there was no real difference between the two corporations; the
newly incorporated 9100‑2402 Québec Inc. had no bank account and
therefore had no money in the bank, whereas 2550‑9605 Québec Inc. had
a bank account with cash in it. Thus, she spontaneously, naturally and
automatically had the expenses covered by the corporation which, in strictly
reasonable terms for someone who was not trained in accounting, seemed able to
do so. Based on this reasoning, she wrote a cheque drawn on the account in
question.
[14] It is a settled
principle of tax law that all taxpayers may organize and plan their affairs in
order to minimize their tax liability, provided their planning is in keeping
with the provisions of the Act. All planning requires a voluntary act that is
clearly expressed and is not ambiguous.
[15] It is also
settled that an assessment must be based on the facts as they were observed and
gathered. In other words, while it may occasionally be necessary to question
the facts in order to uncover the intent of certain transactions that have
arisen in the course of certain business, it is generally accepted that an
assessment must reflect the facts and transactions that are actually entered in
the various relevant books, not hypothetical facts or facts that the assessed person
wishes that he had brought about after he discovers certain advantages, or,
conversely, certain drawbacks.
[16] However, this
reality does not prevent a genuine mistake from being corrected. Several types
of mistakes can be made. In some cases, the mistake is not a genuine one, but rather,
a intentional mistake aimed at deriving a benefit while being able to plead
good faith in order to avoid penalties in the event that these mistakes are
discovered or followed up in an audit.
[17] All the facts in
the case at bar point to a genuine mistake, committed in good faith, without an
ulterior motive, and in an unusual context. In this regard, I have in mind the
following facts, among others:
·
Ms.
Cyr acted on a reflex that was normal for a layperson to act upon when she
caused an expense to be incurred by the corporation that was able to incur it
rather than the corporation that had no cash and no bank account at the time of
the payment.
·
Ms.
Cyr was clearly acting in good faith when she had the amounts in issue paid by
the legal entity that had the necessary funds; this reflex was not without
logic even though it was repugnant to the rigour and strict requirements that
must apply where there are two distinct legal entities. In the case at bar, the
Appellant corporation had just recently been incorporated, and had no assets
and no bank account; consequently, the payment was made by the other
corporation.
·
As
soon as the finding was made in the assessment, the accountant immediately
corrected the financial statements of both corporations involved.
[18] In Long v.
Canada, [1997] T.C.J. No. 722, docket 96‑4714(IT)I, the
Honourable Chief Judge Bowman, of this Court, cited a passage from the decision
in Pillsbury Holdings Ltd., 64 D.T.C. 5184, at page 5187, where
the Honourable Judge Cattanach wrote as follows:
In applying
paragraph (c) full weight must be given to all the words of the
paragraph. There must be a "benefit or advantage" and that benefit
or advantage must be "conferred" by a corporation on a
"shareholder". The word "confer" means "grant"
or "bestow". Even where a corporation has resolved formally to give
a special privilege or status to shareholders, it is a question of fact whether
the corporation's purpose was to confer a benefit or advantage on the
shareholders or some purpose having to do with the corporation's business such
as inducing the shareholders to patronize the corporation. If this be so, it
must equally be a question of fact in each case where the Minister contends
that what appears to be an ordinary business transaction between a corporation
and a shareholder is not what it appears to be but is in reality a method,
arrangement or device for conferring a benefit or advantage on the shareholder qua
shareholder.
[19] Judge Morgan, in
Chopp v. Canada, [1995] T.C.J. No. 12, docket 93‑547(IT)G,
affirmed by the Federal Court of Appeal, [1997] F.C.J. No. 1551,
A-87-95, wrote as follows:
19 I would not go as far as Judge Rowe in
stating that the words used in subsection 15(1) refer to some form of action
with a strong component of intent. I think a benefit may be conferred within
the meaning of subsection 15(1) without any intent or actual knowledge on the
part of the shareholder or the corporation if the circumstances are such that
the shareholder or corporation ought to have known that a benefit was conferred
and did nothing to reverse the benefit if it was not intended. I am thinking
of relative amounts. If there is a genuine bookkeeping error with respect to a
particular amount, and that amount is truly significant relative to a
corporation's revenue or its expenses or a balance in the shareholder loan
account, a court may conclude that the error should have been caught by some
person among the corporate employees or shareholders or outside auditors.
Shareholders should not be encouraged to see how close they can sail to the
wind under subsection 15(1) and then plead relief on the basis of no proven
intent or knowledge.
[20] In the case at
bar, Ms. Cyr's act had the effect of creating a benefit in the Appellant's
books. Not only was this not her intent, but she was also unaware of the matter,
and did not know enough to understand the import of her decision to impute the
expense to the wrong corporation.
[21] Should she have
known? The evidence showed that she clearly did not have the expertise required
to understand the consequences. In fact, the quick acknowledgment and admission
by the accountant tend to confirm that this was a mistake, not an intentional,
self-interested initiative that was subsequently explained away as a banal
error.
[22] While the amount
in issue was relatively large, it was not an exceptional amount that could have
or should have compelled Ms. Cyr to question herself and consult the
accountant.
[23] Ms. Cyr simply
made the entry without questioning herself or conducting any sort of analysis; essentially,
she drew a cheque on the account that contained the money so that it would be
honoured, and the fact that the two legal entities were, to her mind, closely
related (in the sense that a layperson would ascribe to that concept) lends
further support to this understanding of her actions.
[24] In reality, the
payment was made without an element of intent, other than the intent to pay the
professional services invoice out of an account that would permit such a
payment to be made.
[25] In order to
avoid this mistake, Ms. Cyr would have had to possess knowledge that she
clearly did not have, or she would have had to do absolutely nothing without
consulting the accountant first. And what she did, which was to pay an invoice
by cheque, was completely commonplace.
[26] In my opinion,
in order for an assessment under subsection 15(1) of the Act to be warranted, certain
factors must be found to be present, such as wilful blindness, a subtle,
intentional tactic, a skilful attempt, or a self-interested and advantageous
initiative that could ultimately be explained as an error if it were ever
discovered.
[27] For all these
reasons, the appeal is allowed on the basis that the Respondent improperly
added $16,000 to the Appellant's income as a taxable benefit. The assessment
is referred back to the Minister of National Revenue for reconsideration and
reassessment in order to eliminate the amount of $16,000 from the Appellant's
income. Naturally, my decision means that the appropriate corrections must be
made as a consequence of this judgment. There shall be no costs.
Signed at Ottawa, Canada, this 4th
day of July 2006.
"Alain Tardif"
Translation
certified true
on this 4th
day of July 2007.
Brian
McCordick, Translator
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