Citation: 2005TCC748
Date: 20051209
Docket: 2004-3997(IT)I
BETWEEN:
LISETTE LALANCETTE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Archambault J.
[1] Ms. Lalancette's
story is similar to that of Thérèse St-Hilaire whose appeal I heard immediately
after this one. In
fact, Ms. Lalancette also embarked on a scheme devised to transfer to RRSP
holders part of their money tax free. I agree with the Respondent's counsel who
set out the following facts at paragraphs 48 and 50 of her written submissions:
[translation]
. . . we are dealing with an RRSP
strip scheme that benefits the promoters as well as the annuitants like the
Appellant because they succeeded in obtaining money from their RRSPs without
any tax consequences, had it not been for this assessment in dispute.
. . .
It is general knowledge that the RRSP
vehicle allows for the accumulation of tax-sheltered funds. The funds are
only taxed when they are taken out of the RRSP (unless they are put into
another type of plan permitted by the Act). That is logical since, originally,
the amount qualified for a deduction. In this case, the scheme was
established for the sole purpose of getting around those rules. Investors
like the Appellant were able to withdraw funds from their RRSPs without any
tax consequences.
. . .
[Emphasis added.]
[2] As he did in the
case of the taxpayer in St-Hilaire, the Minister of National Revenue (Minister)
added, under subsection 146(10) of
the Income Tax Act (Act), a sum of $45,000 to
Ms. Lalancette's income for the 1999 taxation year, representing the
market value of an alleged non-qualified investment for RRSP purposes.
[3] In his Notice of
Appeal, Ms. Lalancette's counsel stated: [translation] ". . . in addition to
having lost the capital, [she] was taxed on the withdrawal from the RRSP whose
purpose was to provide security for a loan to be obtained for the financing of
a business;" Furthermore, as a ground of attack, he added that: [translation] "The taxation was
not done in the proper year and is statute barred." At the hearing of
the appeal, the Appellant's counsel did not repeat that allegation. In fact,
the evidence showed that the acquisition of 45,000 shares of Les Immeubles R.V.
(1986) Inc. (Immeubles R.V.) for $45,000, namely the alleged
non-qualified investment, was not made by Compagnie de Fiducie M.R.S. (MRS),
Ms. Lalancette's RRSP trustee, until January 1999. However, her counsel
argued that his client should have been entitled to a deduction for the loss of
funds that she never received from the promoter of the scheme.
[4] At the hearing,
that position seemed invalid because it is the trust governed by the RRSP that
had lost the funds and not Ms. Lalancette. I did not see how
Ms. Lalancette could deduct that loss from her income. Furthermore, as the
45,000 class B shares of Immeubles R.V. acquired by the RRSP at the time
appeared to be a non-qualified investment, since the evidence had shown that
the partnership was not carrying on any business and it did not hold any
interest in a partnership carrying on an active business nor any debt
instrument issued by such a partnership, I rendered a decision from the bench dismissing
Ms. Lalancette's appeal.
[5] After having heard
Ms. St-Hilaire's appeal, I concluded that subsection 146(10) of the
Act used by the Minister to justify his assessment was not the appropriate
legislative provision to apply. It was not truly a case of non‑qualified
investment; it was rather an RRSP strip. In fact, the scheme devised in both St-Hilaire
and this appeal used a series of simulated transactions to strip the RRSPs. To
carry out the scheme, the RRSP trustees were made to believe that they were
investing in shares in companies. In St-Hilaire, I concluded that the
shares acquired were not a genuine investment because the intention of the
promoters of the scheme was not to invest money in order to make a profit,
obtain added value or maintain the value. The shares of the company 3563545
Canada Inc. – like the 45,000 shares of Immeubles R.V. in this case – were
merely a sham allowing the promoters of the scheme to distribute, on a tax-free
basis, the money held in the RRSPs. The following is what I stated in St-Hilaire:
[translation]
[20] Based on the evidence before
me, I find that, on a balance of probabilities, Telco never intended to make a
loan since it never intended to ask for the reimbursement of the capital or to
collect interest. Telco's true intention was to return part of
Ms. St-Hilaire's RRSP to her. Telco was able to obtain possession of the
money held in this RRSP by devising another sham, namely the subscription of
1,928 Class B shares of 3563. Furthermore, Ms. St-Hilaire states that she
never authorized the subscription of such shares. It is true that subsection
146(1) defines a "non-qualified investment" in relation to a trust
governed by an RRSP as "property
acquired by the trust after 1971 that is not a qualified investment for the
trust. "It is clear that this definition and the definition of
"qualified investment" contemplate
property acquired as an investment. Investment is defined as "the act or process of investing
money" and the word "investing" is defined as "applying or
using money especially for making a profit, obtaining added value or
maintaining the value." In this case, when the representative of 3563
informed the Laurentian Bank that Ms. St‑Hilaire had purchased
shares of 3563, he had no intention, as one of the authors of the scheme, to
use the capital to make a profit, obtain added value or maintain the value. It
was instead a pretext, a cover-up the purpose of which was to justify to the
Laurentian Bank the withdrawal of the money from the RRSP in such a way that
the money passed from Ms. St‑Hilaire's RRSP to her through 3563 and
Telco, after the deduction of a "commission" of 36%. . . .
[6] Since a judgment
has not been rendered as long as the Court has not signed it, I am free to change the
"opinion" I expressed from the bench and to instead conclude that
Ms. Lalancette's appeal must be allowed on the ground that subsection
146(10) of the Act does not apply and it is instead subsection 146(8) that must
be applied. That subsection sets out the following:
146(8) Benefits
taxable. There shall be included in
computing a taxpayer's income for a taxation year the total of all amounts
received by the taxpayer in the year as benefits out of or under
registered retirement savings plans, other than excluded withdrawals (as
defined in subsection 146.01(1) or 146.02(1)) of the taxpayer and amounts that
are included under paragraph (12)(b) in computing the taxpayer's income.
[7] To better
understand the justification for that conclusion, it would be helpful to
provide a brief summary of the relevant facts as revealed by the evidence.
The facts
[8] Ms. Lalancette
lived for about twenty years with Philippe Routhier who was, before his
death on April 13, 2003, her common law spouse. It also seems that
Mr. Routhier participated in a scheme devised by Jacques Gagné and
the company 9063‑3223 Québec Inc., also performing its activities under
the name of "Services Financier [sic] MacKenzie" (SFM)
(see Exhibit I‑8, Tab 4, page 2). In fact, in the
documentation produced, Mr. Routhier is described as a representative. According to the enterprise register
(Cidreq system), the primary shareholder of SFM was General Venture Capital
Management Ltd. whose address is in the Bahamas. SFM had its establishment in the
town of St‑Hubert.
[9] Immeubles R.V. is a
company that was incorporated on August 28, 1986, by two shareholders that have
nothing to do with the scheme. According to Mr. Routhier's statutory
declaration, signed on June 20, 2002 (Exhibit I‑5): [translation] "We purchased the
charter of Immeubles R.V. at the beginning of those transactions. The company
existed, but was closed. . . ." According to Ms. Lalancette, she
only acted as a nominee for Mr. Routhier for the purchase of that company.
Due to his precarious financial situation, Mr. Routhier could not acquire
it in his own name. He declared bankruptcy in 2002, seemingly due to tax debts.
It was also Ms. Lalancette who signed the cheques drawn on the account of
Immeubles R.V., including the cheques payable to herself and to SFM.
[10] The authorization
given by Ms. Lalancette to MRS to acquire the 45,000 shares of Immeubles
R.V. was given on January 20, 1999 (Exhibit I-11, Tab 12), even though that
document is dated December 1, 1998.
Furthermore, according to an MRS internal memorandum, the request for the
issuance of the cheque for $45,000 was made on January 22, 1999, and the cheque
was issued on January 25, 1999. According to a document signed by
Mr. Routhier, the cheque for $45,000, representing the funds from
Ms. Lalancette's RRSP, was deposited on January 27, 1999, in the bank
account of Immeubles R.V., and Mr. Routhier advised Mr. Gagné of
this.
[11] According to the
audits conducted by the Minister, SFM allowed an amount of $681,300 to be
illegally withdrawn from RRSPs. In fact, the Minister's auditor was able to
find, in the bank accounts of Immeubles R.V., deposits from RRSP annuitants of
$681,300. That amount was paid for the alleged subscriptions of shares of
Immeubles R.V. Most of that information came from documents seized by the
Minister from Mr. Gagné. Immeubles R.V. gave $659,998 to SFM, namely
around 97% of the amounts collected by Immeubles R.V. from RRSP annuitants, and
a very large part of the balance, namely $21,163.75 was paid to
Ms. Lalancette by Immeubles R.V., as $9,260.40 was given directly to her
and $11,903.35 used to pay the Visa credit card accounts, to repay a line of
credit or to make a cash payment to her (or to her spouse). In his statutory
declaration made before his death, Mr. Routhier told the Minister's
auditor that Ms. Lalancette had recovered $21,000 or $22,000 directly from
Immeubles R.V. and that she had lost $24,000 (in fact $23,836.25
($45,000 — $21,163.75 = $23,836.25)).
[12] Although
Mr. Routhier indicated in his statutory declaration that
Ms. Lalancette had since sold Immeubles R.V. and that he had no documents
concerning that company, Ms. Lalancette produced, at the hearing, the
company's minutes book, which she stated that she found in the belongings of
her deceased spouse. Review of that book showed that there was no transfer made
by the former shareholders in favour of Ms. Lalancette. There was no
shareholder resolution electing Ms. Lalancette as director. The only
relevant document that I was able to find in the section "minutes/resolutions"
was a resolution of the board of directors in which it was written that
Ms. Lalancette was to become the company's sole director and that she was
to open a bank account at the Royal Bank in Saint‑Félicien. Furthermore, there was no trace of the issuance of
Class B shares in favour of any RRSP, whether that of Ms. Lalancette or
the RRSPs of other annuitants, who would have also subscribed, together with
Ms. Lalancette's RRSP, for the total of $681,300. Nor was there any
resolution authorizing the issuance of such shares by the board of directors of
Immeubles R.V. Furthermore, that company did not file income tax returns for
the taxation years following its 1996 taxation year (Exhibit I-4). There were
no financial statements from Immeubles R.V. for its 1998 and later
taxation years. Moreover, Immeubles R.V. was stricken off on May 8, 1999, as
shown in the enterprise register (Cidreq system) dated February 5, 2004
(Exhibit I-8, Tab 2). The last annual return is dated September 23, 1997. The
notice of default was given on May 22, 1998.
[13] According to the
Minister's auditor, Ms. Lalancette was not among the persons who would
have received a loan from SFM. Therefore, in all likelihood, the other
annuitants would have received the alleged loans from SFM. However, SFM's
income statement at May 31, 1999,
did not show any income, but rather only indicated expenses totalling $48,073,
for a net loss of $48,073. As to the balance sheet at the same date, the total
of its assets indicated on the balance sheet was $116,269 and the total of its
liabilities was $164,242.
The only capital stock appearing on the balance sheet was $100. Thus, there is
no trace of the $659,998 paid by Immeubles R.V. to SFM that would reflect an
investment by Immeubles R.V. in SFM.
[14] When the auditor
asked to meet with Ms. Lalancette during the audit, it was
Mr. Routhier who went to meet with the auditor and who provided the
relevant information. In her testimony, Ms. Lalancette stated that she was
not aware of the scheme and that her goal was to make an investment.
[15] According to
Mr. Routhier's statutory declaration, after the transfer of the $45,000
from Ms. Lalancette's RRSP to Immeubles R.V., [translation] "Ms. Lalancette could obtain the
money through Jacques Gagné. That money was to be used to redeem the mortgage
on the buildings." Mr. Routhier added: [translation] "The money was then transferred to
Services Financiers MacKenzie. Jacques Gagné was to have kept the money to
invest it and was to lend it to us when we needed it. Mr. Gagné did not
give anything. Ms. Lalancette did not receive money." A little
further on, he added: [translation]
"Ms. Lalancette sent $45,000 to Services Financiers MacKenzie and
she recovered part of the money in Immeubles R.V." According to
Ms. Lalancette, Mr. Gagné did not respond to her multiple calls. She
allegedly then panicked and that would explain the withdrawals totalling
$21,163 from the bank account of Immeubles R.V., made between February 15,
1999, and March 31, 1999. The bank statements of Immeubles R.V. show that the
balance of its account at March 31, 1999, was $157.85 (Exhibit I-2, Tab 2,
page 3). There is nothing to indicate that Ms. Lalancette withdrew that
amount for her benefit.
Analysis
[16] The facts set out
above reveal that two reasons justify the conclusion that Ms. Lalancette's
RRSP did not acquire the 45,000 Class B shares of Immeubles R.V. as a
non-qualified investment. First, as in St-Hilaire, there was no
intention of making a genuine investment because, clearly, the promoters of the
scheme did not want Ms. Lalancette's RRSP to make from the alleged
investment a profit, obtain added value or maintain the value. Their intention
was strictly to transfer part of the money from Ms. Lalancette's RRSP to
her and from the RRSPs of other annuitants to them. The shares of Immeubles
R.V. were merely a sham, a pretext to allow the transfer of money from
Ms. Lalancette's RRSP to her through Immebules R.V. and SFM. SFM was to
give part of the money back to Ms. Lalancette through an alleged loan. It
seems, however, that the only person who did not receive the alleged loan from
SFM was Ms. Lalancette. According to Mr. Routhier's statutory
declaration, Mr. Gagné never gave money to Ms. Lalancette and no
explanation was provided in this regard at the hearing. It seems plausible that
it was due to the special relationship that may have existed between
Mr. Routhier as a "representative" and Mr. Gagné that the
amount was not paid. The amounts held by Immeubles R.V. could represent a
commission of 3% for the benefit of Mr. Routhier (since
Ms. Lalancette was only acting as a nominee). Mr. Routhier relied on
SFM to later remit part of the $45,000, but that did not happen. It looks like
the tables were turned. By participating in a scheme to defraud the tax
authorities, Mr. Routhier jeopardized the money of his spouse,
Ms. Lalancette. In a state of panic, Ms. Lalancette, who had signed
the cheques for Immeubles R.V., only succeeded in recovering a fraction
(47 %) of the $45,000, namely $21,163.75.
[17] The conclusion as to
the existence of a sham is all the more easy to draw in this case since
Immeubles R.V. was not operating a company, since it was inactive since 1996,
since it no longer filed annual returns with the financial institutions
inspector, since the transfer of that company's shares to Ms. Lalancette
(as nominee of Mr. Routhier) was not made in its records, since there was
no evidence that the Class B shares were legally issued in favour of the
trustee of Ms. Lalancette's RRSP and the RRSPs of other annuitants. On the
contrary, the minutes book of Immeubles R.V. showed that nothing was done to
issue them.
[18] In my opinion, it is
not appropriate in this case to apply subsection 146(10) of the Act, which aims
to penalize the annuitant of an RRSP who makes "genuine," although
non-qualified, investments.
Instead, subsection 146(8) of the Act should be applied, which aims to tax an
annuitant on all amounts "received" from an RRSP. However,
Ms. Lalancette only received, directly or indirectly, $21,163.75. Since
Ms. Lalancette will only be taxed on the amounts that she received, it is
not necessary to deduct a loss of $23,836.25. That amount should instead be
taxable in the hands of the person who received it.
[19] For all of those
reasons, Ms. Lalancette's appeal is allowed, without costs, and the
assessment is referred back to the Minister for reconsideration and
reassessment on the basis that the amount to be included in
Ms. Lalancette's income under section 146 of the Act must be reduced to $21,163.75.
Signed at Ottawa, Canada, this 9th day of December
2005.
"Pierre Archambault"
Aveta Graham,
Translator
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