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Citation: 2004TCC360
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Date: 20040514
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Docket: 2002-232(IT)G
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BETWEEN:
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ANDRÉE LAROCHELLE,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1] This is an appeal from an
assessment made under section 160 of the
Income Tax Act ("Act").
The Notice of Assessment in the amount of $116,940.04,
bearing the number 19704, was made after a transfer of the
single share in the corporation "Les Assurances
Gérard Pelchat Inc." held by
Gérard Pelchat, spouse of the Appellant, the
transferee. The transfer was made in exchange for payment of a
consideration of $10, the face value of the share when it
was issued, at the time the business was incorporated.
[2] The issue here is to determine
whether the Appellant is jointly and severally liable with
Gérard Pelchat, under section 160 of
the Act, for payment of Mr. Pelchat's tax
debt of $116,940.04 under the Act with respect
to the 1994, 1995 and 1996 taxation years.
[3] The appeal was initiated by
submission of the Appellant's claims, expressed
as follows:
[translation]
(2) The APPELLANT was, in 1996, the spouse of
Gérard Pelchat
(hereinafter the "spouse");
(3) The APPELLANT's spouse holds an insurance
broker's licence;
(4) Prior to November 13, 1984, the
APPELLANT's spouse had been personally operating an insurance
brokerage since 1979;
(5) The corporation
Les Assurances Gérard Pelchat Inc.
(hereinafter the "Corporation") was incorporated
on November 13, 1984;
(6) The Corporation sells insurance and investment
funds;
(7) When the Corporation was incorporated, its
sole shareholder and director was the APPELLANT's spouse, who
held one common share in the Corporation, which had been
issued for a consideration of ten dollars ($10.00);
(8) The APPELLANT's spouse never sold or
otherwise transferred his interests in his insurance brokerage
business to the Corporation, including specifically the client
list and any goodwill;
(9) From March 1 to July 23, 1985,
the interests of the APPELLANT's spouse in the Corporation
were exercised via nominees. For this purpose, the following
transactions were entered in the Corporation books:
(a) On March 1, 1985,
the APPELLANT's spouse transferred the common share he held
in the Corporation to Claude Feuiltaut for a consideration
of ten dollars ($10.00) and resigned as president and
secretary of the Corporation.
(b) On March 1, 1985, the
Corporation issued a common share at the price of
ten dollars ($10.00) to
Johanne Laberge Feuiltaut and the Corporation's
head office was transferred to 9450 Henri-Bourassa,
in Charlesbourg.
(c) From
March 1, 1985, to July 23, 1985, the
APPELLANT's spouse acted as vice-president of the
Corporation but did not hold any shares in the Corporation.
Claude Feuiltaut was the president and
Johanne Laberge Feuiltaut was the secretary.
(d) On July 23, 1985,
Claude Feuiltaut and Johanne Laberge Feuiltaut
transferred their common shares to the APPELLANT's spouse for
a total consideration of twenty dollars ($20.00) and
resigned as directors of the Corporation. The Corporation's
head office was then transferred to the APPELLANT's
spouse's address, and he became the Corporation's
president and sole shareholder;
(10) The Corporation's balance sheet, as
at October 31, 1996, prepared by Jacques Amyot,
CGA, indicated the following values (in dollars):
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ASSETS
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Short-term
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Cash
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2,919
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Accounts receivable
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5,600
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8,519
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Long-term (amortized cost)
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Equipment
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838
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Computer
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935
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1,773
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10,292
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LIABILITIES
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Short-term
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Accounts payable and
accrued liabilities
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0
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Tax payable
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0
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0
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Shareholders' Equity
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Issued and paid-up
share capital
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20
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Retained Earnings
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Starting balance
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10,265
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Plus: net profit
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7
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10,272
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10,292
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10,292
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(11) On November 28, 1996, the APPELLANT's
spouse resigned as director of the Corporation;
(12) On November 28, 1996, the APPELLANT's
spouse transferred the common share he held in the Corporation to
the APPELLANT for the price of ten dollars ($10.00) by
a resolution entered in the Corporation minutes book (hereinafter
the "transfer to the APPELLANT");
(13) At the time the Corporation's common share was
transferred to the APPELLANT, the APPELLANT's spouse did
not enter into any non-competition or
non-solicitation agreement, nor did he enter into any
employment contract with the APPELLANT or the Corporation;
(14) The Corporation has not held an insurance broker's
licence either before or after the date of the transfer to the
APPELLANT;
(15) The APPELLANT has not held an insurance broker's
licence either before or after the transfer to the APPELLANT;
(16) The Corporation has always operated its business using
the licence belonging to the APPELLANT's spouse;
(17) In January 1999, the APPELLANT's spouse declared
bankruptcy;
(18) On February 23, 2000, Revenue Canada
(hereinafter the "Agency") issued the Corporation
a Notice of Reassessment increasing the
Corporation's taxes payable by $2,846.51 for the fiscal year
ending October 31, 1996;
(19) On February 23, 2000, Revenue Canada
(hereinafter the "Agency") issued the Corporation a
Notice of Reassessment increasing the Corporation's
taxes payable by $6,699.20 for the fiscal year ending
October 31, 1997;
(20) After a Notice of Objection, on
December 14, 2000, the Agency issued the Corporation a
Notice of Reassessment adjusting the Corporation's
taxes payable to $2,390 for the fiscal year ending
October 31, 1996;
(21) After a Notice of Objection, on
December 14, 2000, the Agency issued the Corporation a
Notice of Reassessment adjusting the Corporation's
taxes payable to $6,322 for the fiscal year ending
October 31, 1997;
(22) On April 30, 2001, the Ministère du
revenu du Québec issued the Corporation a
Notice of Reassessment increasing the Corporation's
taxes payable by $1,070 for the fiscal year ending
October 31, 1996;
(23) On April 30, 2001, the Ministère du
revenu du Québec issued the Corporation a
Notice of Reassessment increasing the Corporation's
taxes payable by $2,683 for the fiscal year ending
October 31, 1997;
(24) On June 20, 2001, the Minister issued the
APPELLANT Notice of Assessment No. 19704 in
the amount of $116,940.04 with respect to the "obligation
under subsection 160(1) of the
Income Tax Act in the amount of $116,940.04 with
respect to the sale of a common share in
"Les Assurances
Gérard Pelchat Inc." on
November 28, 1996, between Gérard Pelchat
and Andrée Larochelle";
(25) On July 9, 2001, the APPELLANT duly submitted a
Notice of Objection to Notice of Assessment
number 19704 issued on June 20, 2001;
[4] In response to the
Notice of Appeal, the Respondent listed the following
assumptions of fact, which were relied upon to make and uphold
the assessment. These facts are listed in paragraph 25 of
the Reply to the Notice of Appeal.
[translation]
(a) "Les Assurances
Gérard Pelchat Inc." (hereinafter
"Assurances G.P.") was incorporated on
November 13, 1984, under Part 1A of the
Companies Act;
(b) When it was incorporated, Assurances G.P.
issued one common share in the name of
Gérard Pelchat at the cost of $10;
(c) Assurances G.P. did not issue any
other shares between November 13, 1984, and
November 28, 1996;
(d) On November 28, 1996,
Gérard Pelchat sold his common share in
Assurances G.P. to the Appellant (hereinafter
the "transfer") for a consideration of $10 paid by
her;
(e) At the time of the transfer,
Gérard Pelchat was the Appellant's spouse;
(f) The fair market value of the only share
of the capital stock of Assurances G.P., as at
November 28, 1996, was $190,000;
(g) Gérard Pelchat had a tax
debt to the Minister for the 1994, 1995 and 1996 taxation
years;
(h) This tax debt owed by
Gérard Pelchat totalled $116,940.04 as at
June 20, 2001, distributed as follows:
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Taxation Year
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1994
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1995
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1996
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Taxes
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$17,509.26
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$23,641.54
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$24,708.68
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Employment Insurance
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Penalties
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$10,298.16
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$14,271.47
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$615.12
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Interest
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$11,413.70
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$10,239.98
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$4,142.13
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Total
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$39,321.12
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$48,152.99
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$29,465.93
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(i) Gérard Pelchat
declared bankruptcy on January 26, 1999, and his tax
debt remained unpaid;
(j) Before and after the transfer,
Assurances G.P. had clients, the source of its commission
and fees income;
(k) In its tax returns, Assurances G.P.
indicated income from commissions and fees (before operating
costs) for each taxation year ending on the
following dates:
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Taxation year
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Income from commissions and fees
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October 31, 1994
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$83,608
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October 31, 1995
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$131,953
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October 31, 1996
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$82,726
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October 31, 1997
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$139,500
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(l) On October 8, 1996,
Assurances G.P. and
Assurances Bertrand Carrier Inc. (hereinafter
"Assurances B.C.") signed an agreement by which
they agreed, specifically, to refer certain clients to each other
and to share, in equal proportions, the commissions and bonuses
received with respect to the client files referred in this
manner;
(m) Furthermore, the agreement provided for the
buyback of clients, for $400,000, by Assurances G.P. or
Assurances B.C. in the event of the death of
Bertrand Carrier in the former case, or the death of
Gérard Pelchat in the latter case. This agreement was
supported by 10-year life insurance contracts on the
lives of Bertrand Carrier and Gérard Pelchat,
the beneficiaries of these policies being Assurances G.P.
and Assurances B.C. respectively;
(n) In the liabilities section of his
balance sheet for the fiscal year ending
October 31, 1996, Assurances G.P. indicated a nil
balance under tax payable.
[5] With respect to her work
experience, the Appellant testified that she had participated in
some of the office work for insurance proposals; she ensured that
all the relevant information required by the corporation to which
the proposal was being submitted was on the insurance proposal.
She described her work as follows:
[translation]
Years 1996-1997
For Assurances Gérard Pelchat Inc. and
Assurances Bertrand Carrier Inc. (to a
lesser degree)
My duties involved meeting clients to finalize documents and
forms, and sending them to the companies involved.
Conducting follow-up on files, and delivering contracts
to clients.
Printing the clients' investment statements, sending them
by mail or delivering them in person (for the most important
clients).
Client reception at the office.
Training another employee for the office work so that in the
future I could fully concentrate on working on the road.
[6] In fact, the Appellant had very
little knowledge in the field of administration. She did not
differentiate between her spouse as a person and in his capacity
as director of the corporation "Les Assurances
Gérard Pelchat Inc." For her, they were
one and the same.
[7] She did not really understand why
she became the owner of the only share in the
corporation "Les Assurances
Gérard Pelchat Inc." She did not know where
the consideration came from and she knew even less about the
implications of the transfer.
[8] She relied totally and completely
on her spouse, obeyed his instructions and blindly gave him
everything that had to do with accounting, administration, the
corporation's business and especially the various
assessment notices. Moreover, she stated that she was not in
any way concerned by the Notices of Assessment that
gave rise to this appeal.
[9] The evidence showed that the
Appellant gave her spouse access to her entire financial wealth,
and she did not oversee him in any way.
[10] The Appellant's spouse, who has a
university diploma in administration, also testified. As
part of his professional activities, the Appellant described
himself as someone who was only comfortable with simple things.
He stated that he never wanted to become involved in complicated
files, and that he preferred to leave such files to his
colleagues.
[11] He stated that he introduced himself to
his clients as a simple advisor, and offered products that were
equally simple and unsophisticated. He also mentioned that he was
unaware of the requirements related to keeping and recording the
minutes of a corporation. According to him, both his personal
affairs and those of the corporation, of which he was the sole
shareholder prior to the transfer, were administered
informally.
[12] He presented a whole series of
explanations to justify the low value of the only share in
circulation, which he had sold to the Appellant, his spouse, for
its face value of $10. Specifically, he stated that he could
have walked away from the corporation and created a new
one for a minimal cost. He then set aside this assumption
and instead said that his spouse was becoming a bit more
involved, in the hopes that the corporation could eventually
build itself a reserve or an undistributed fund. He also stated
that as the result of poor investments, he wanted to protect the
corporation's reputation.
[13] Broadly speaking,
Gérard Pelchat indicated that the share transferred
to his spouse had no value because, he was of the opinion that
the corporation he controlled did not have any clients, and if it
did, that had no effect on the corporation's value. In other
words, Mr. Pelchat asserted that, without his personal
participation and involvement, the corporation he controlled
would have no market value. He maintained that he managed all his
clients so well that he could have taken them all from the
corporation if it were ever abandoned or given to a
third party, or if his share was attached; it would then
become a corporation without clients or income, and consequently,
without any value.
[14] At the time of the transfer, he did not
consult anyone to determine the fair market value (FMV) of
the transferred share, which conferred control of
the corporation.
[15] Describing himself as an investment
resource person, the Appellant's spouse believed he was,
above all, competent to provide investment ideas. He avoided
complexity and the suggestions he made to his clients were
generally very simple.
[16] His clients were mainly seniors, some
quite elderly. They gave him their savings, which he invested in
various ways, concentrating mainly on investments such as term
deposits, and including pooled investment funds and mutual funds.
Although he was required to keep a registry of clients, the
corporation had none, for the simple reason that he was unaware
that he was required to keep a registry/registries.
[17] The income generated by his work was
shared between the corporation and him. There were no rules
or agreement between the corporation and him with respect to
splitting the fees and the manner in which that should be done.
The only item that was explained clearly was the fact that
commissions from the sales of mutual funds could not be allocated
to a corporation; for this reason, he personally cashed the
commissions from such sales. With respect to the remainder, the
Appellant himself stated that the corporation operated
informally.
[18] After an audit, he was subject to an
assessment that revealed unreported income; he then became liable
for a significant tax debt exceeding $100,000 with interest
and penalties. After the assessment, he assigned his
property.
[19] The evidence also revealed that,
several years earlier, in 1986, fearing he would be prosecuted,
he assigned his share to third parties in order to protect
the corporation's wealth from any potential suit
resulting from his insolvency.
[20] Gérard Pelchat testified in
a very peculiar manner for someone who has a university education
in administration and several years of investment experience.
[21] He stated that he did not know the
difference between credits and debits, that he did not know that
the corporation had to have a list of clients and a series of
very precise records, and that he was not aware of and did not
understand the importance of recording the minutes of a
corporation.
[22] He had no record or agreement with
respect to sharing the fees between himself and the corporation
he controlled. It was carried out without any specific criteria,
as the mood took him.
[23] Although, according to
Gérard Pelchat, the corporation he controlled had no
value, on October 8, 1996, he signed an agreement with
a colleague, a certain Bertrand Carrier. The agreement
provided as follows:
[translation]
PARTNERSHIP AGREEMENT
BETWEEN
ASS. GÉRARD PELCHAT INC.
AND ASS. BERTRAND CARRIER INC.
Whereas Assurances Gérard Pelchat Inc.
and Assurances Bertrand Carrier Inc. refer certain
investment, life insurance and wage loss insurance clients to
one another. It is agreed that:
Remuneration:
Ass. Gérard Pelchat Inc. and
Ass. Bertrand Carrier Inc. shall pay each other,
as consideration for referrals, an amount equal to
50% of the commissions and bonuses collected on each of the
files referred unless a prior agreement has been made.
Renewals shall be made under the same conditions, with the
exception of investment renewals. These shall remain the property
of Gérard Pelchat or Bertrand Carrier.
Refund:
Should any commissions or bonuses (laps) be refunded, the
partners agree to reimburse one another the prorated amount
of the sums received.
Transfer of a living partner's
files:
If, for one reason or another, this agreement should be
terminated, the files referred by
Ass. Gérard Pelchat Inc. shall be returned
to it without any conditions. In the case of the total
disability of either partner, (as stipulated in their wage
loss insurance contract), the able partner shall continue
operations; therefore, all files shall become referrals. The
disabled partner may nevertheless sell its client list to
whomever it wishes, under whatever conditions it desires, after
having offered its partner the right of first refusal at the same
price and conditions.
Transfer of files in case of death:
Upon the death of either partner, with the agreement of the
estate of the deceased, a client buyback for the price of
four hundred thousand dollars ($400,000) shall take
place. This agreement is supported by life insurance contracts
with TransAmerica, with a death benefit of $500,000.
The remainder ($100,000) shall be retained by the survivor
as coverage of the key person.
The identifiers on the TransAmerica policies:
Gérard Pelchat # 080000649 and
Bertrand Carrier # 080000659.
[24] According to
Gérard Pelchat, the content of the agreement is not
relevant or useful in determining the FMV of the share that
he transferred to his spouse. The content of the agreement
had been prepared by the co-signer, Bertrand Carrier,
allegedly a very competent individual. It might have been
interesting to hear Mr. Carrier's version. The Appellant
chose not to have him testify.
[25] What was the FMV of the share that was
transferred, the share that resulted in the assessment being
challenged by the Appellant in this appeal?
[26] It is much easier to define FMV than to
determine it.
[27] A definition from the
Federal Court is likely to have unanimous support. It
was given by the Honourable Justice Cattanach, in
Henderson Estate and Bank of New York v.
M.N.R., 73 DTC 5471, at page 5,476:
The statute does not define the expression 'fair market
value' I do not think it necessary to attempt an exact
definition of the expression as used in the
statute . . . That common understanding I
take to mean the highest price an asset might reasonably be
expected to bring if sold by the owner in the normal method
applicable to the asset in question in the ordinary course of
business in a market not exposed to any undue stresses and
composed of willing buyers and sellers dealing at
arm's length and under no compulsion to buy or sell.
I would add that the foregoing understanding as I have expressed
it in a general way includes what I conceive to be the essential
element which is an open and unrestricted market in which the
price is hammered out between willing and informed buyers and
sellers on the anvil of supply and demand.
[Emphasis added.]
[28] Here, the FMV of the sole share must be
determined; it granted total control over the business of the
corporation involved, and thus it is important to analyze the
assets, liabilities and future outlook of the corporation.
[29] Assigning a value to a single share
that grants control of a corporation is very difficult for many
reasons. First, there are no really trustworthy reference
criteria because the potential data is infinite.
[30] In real estate, there is the advantage
of some objectivity to the approaches used; I am referring in
particular to the building site, the materials used, the year of
construction, the quality of the maintenance, the general
condition of the premises, the size, the income, and, finally,
comparable buildings.
[31] There is nothing equally reliable with
which to value the corporation shares, especially when dealing
with small private corporations. The Court must analyze the work
of experts as a function of their experience, considering all the
relevant factors and the significance given to the various
aspects of the expertise presented to the Court.
[32] Before analyzing the process that
established the FMV of the transferred share, it seems
appropriate to recall that this determination implies an
assumption that the seller must have done, and been ready to do,
everything possible in order to obtain the highest attainable
consideration for the asset the seller has decided to convey and
transfer.
[33] Conversely, it must be assumed that the
buyer will take all possible precautions to ensure that the
minimum price is paid and that no events or surprises will be
encountered in the future that might result in unanticipated
expenses or adverse consequences.
[34] Section 160 of the Act
reads as follows:
Tax
liability re property transferred not at arm's length
160.(1) Where a person has, on or after May 1, 1951,
transferred property, either directly or indirectly, by means of
a trust or by any other means whatever, to
(a) the person's spouse or common-law partner
or a person who has since become the person's spouse or
common-law partner,
(b) a person who was under 18 years of age, or
(c) a person with whom the person was not dealing at
arm's length,
the following rules apply:
(d) the transferee and transferor are jointly and
severally liable to pay a part of the transferor's tax under
this Part for each taxation year equal to the amount by
which the tax for the year is greater than it would have been if
it were not for the operation of sections 74.1 to 75.1
of this Act and section 74 of the
Income Tax Act, chapter 148 of the
Revised Statutes of Canada, 1952, in respect of
any income from, or gain from the disposition of, the property so
transferred or property substituted therefor, and
(e) the transferee and transferor are jointly and
severally liable to pay under this Act an amount equal to the
lesser of
(i) the amount, if any, by which the fair market value of
the property at the time it was transferred exceeds the fair
market value at that time of the consideration given for the
property, and
(ii) the total of all amounts each of which is an amount that
the transferor is liable to pay under this Act in or in respect
of the taxation year in which the property was transferred or any
preceding taxation year,
but nothing in this subsection shall be deemed to limit the
liability of the transferor under any other provision of this
Act.
[Emphasis added.]
[35] Although section 160 of the
Act does not give rise to many issues of interpretation,
it is appropriate to recall that Parliament's ultimate goal
was to ensure that debtors of a tax debt do not deplete their
wealth by transferring it, in whole or in part, without
equivalent consideration to a spouse or anyone else with whom
they do not have an arm's length relationship.
[36] To this effect, it is relevant to refer
to extracts from certain decisions. First, in
Algoa Trust v. Canada,
[1993] T.C.J. No. 15 (Q.L.),
the Honourable Justice Rip said the following at
page 10:
The purpose of section 160 is to foil an attempt by a
taxpayer who is liable to pay any amount under the Act to
avoid the fisc by transferring property otherwise available to
satisfy the liability to one of three groups of persons,
including a person with whom he or she was not dealing at
arm's length.
[37] In Biderman v. Canada,
[2000] F.C.J. No. 194 (Q.L.),
the Honourable Justice Létourneau of the
Federal Court of Appeal said the following at
paragraph 37:
. . . Section 160 of the Act is an
anti-avoidance provision with respect to transfers. Its
purpose "is to prevent a taxpayer from defeating the claim
of the Minister to unpaid taxes by transferring his assets to a
spouse, or certain other persons, for little or no
consideration" [See Note 28 below].
[38] In Hewett v. Canada,
[1997] F.C.J. No. 1541 (Q.L.),
the Honourable Justice Strayer said the following at
paragraphs 1 and 2:
We are
all of the view that this appeal should be dismissed.
We
agree with the learned Tax Court judge that the purpose
of section 160 of the Income Tax Act is to
prevent a taxpayer from defeating the claim of the Minister to
unpaid taxes by transfering [sic] his assets to a
spouse, or certain other persons, for little or no consideration.
In our view, this means that the "property" referred to
in the section must be that property interest of the taxpayer
that would have been available to the Minister for attachment had
the transfer not taken place.
[39] There is another concern with respect
to the transfer of property described in section 160 of the
Act: when should the FMV of property
be determined?
[40] In this respect, the Courts clearly
recognized, as I said in Bergeron v. Canada,
[2003] T.C.J. No. 535, that the time of transfer
is similar to the specific moment at which a camera shutter
clicks and the valuation must be made with respect to the
situation in the seconds preceding this click.
[41] This nuance is important in that it
permits an understanding that the value of the transferred
property must have the same value in the wealth of the transferor
as it does in that of the transferee. In other words, the FMV of
the property being transferred, and subject to section 160
of the Act, must be the same and cannot be
changed.
[42] This is a fundamental requirement,
since a seller could very well stipulate a series of clauses
providing all kinds of assumptions, rights, obligations,
servitudes, etc., all making the transferred property completely
valueless, or considerably decreasing its value, thereby
modifying the FMV of the property at the time of transfer. The
transferred property could therefore have all or a portion of its
value cut, which is in complete contradiction to the purpose of
section 160 of the Act.
[43] In this case, we are dealing with a
very specific operation, in that this is one share, which
confers control of the activities of the
"Les Assurances Gérard Pelchat Inc."
corporation. Equally specific is the fact that the transfer was
not subject to any agreement including the usual clauses for an
operation of this nature.
[44] In fact, despite the rights and
obligations arising from the transfer, the parties did not think
it appropriate to formalize the content of the agreement in
writing, even if only to record the transfer in the minutes of
the corporation.
[45] Although the operation was not
conducted in a simplistic and unusual manner, it should be
analyzed and assessed as if it were a normal, typical, everyday
legal act between two parties at arm's length from
one another.
[46] The Appellant maintains that the verbal
agreement contained nothing specific or particular, except for
the fact that the transfer was made in exchange for
a $10 consideration. In her opinion, the verbal
contract did not have any provisions either with respect to
income, debts or obligations, or with respect to restricting
competition. In other words, this was a verbal contract that
could have been recorded in writing as follows:
"Gérard Pelchat sells to
Andrée Lachapelle his share, the only share of
the corporation in circulation, in exchange for a consideration
of $10, and hereby gives release."
[47] The Appellant strongly asserted that
these are the only factors of the operation that should be taken
into consideration in establishing the FMV. With respect to
assets that are of no great importance, worth about $10,000,
the Appellant asserted that they should not be included in the
components for establishing the FMV since these were assets that
could and must compensate for potential tax debts or other
eventualities.
[48] Accepting the Appellant's claims
would be tantamount to accepting the principle that the parties
to an operation subject to the provisions of section 160 of
the Act may agree upon a whole series of assumptions
that would have the effect of considerably reducing the FMV of
the transferred property, or even totally eliminating it, which
is contrary to the letter as well as the spirit of
section 160.
[49] For the Appellant, the FMV of the
transferred share was essentially symbolic. In support of
her claims, she advanced two main arguments.
[50] The first, and clearly most important,
is that any consideration would have been inappropriate since it
would have been sufficient for the transferor to contact all the
corporation's clients and ask them to continue to do business
with him in his capacity as an individual, rather than as a
representative of the corporation affected by the transferred
share, thereby ruining any hopes of deriving a profit as a result
of the share transfer.
[51] I do not accept this argument. The sale
of the controlling share has no meaning or
raison d'être unless the transferor
expressly renounces direct or indirect solicitation of the
corporation's clients for a specific period of time and
within a specific area.
[52] The second argument is that the client
base had no value, given that the main business of the transferor
was the sale of term deposits. According to the Appellant's
expert, this was a specific financial product that had no
attraction or interest for a potential buyer.
[53] This is also a totally ludicrous
argument. It is public knowledge that people buy simple lists of
names. In this case, Mr. Pelchat stated that his clients
were mainly seniors. It is not unreasonable to assume that
seniors are generally very discrete with respect to their assets
and therefore do not shop around a great deal when their term
deposits mature. Therefore, it is not irrational to think that
loyalty upon renewal would be the rule, rather than the
exception.
[54] I agree that such a product may be
different. I agree that it may be of less value than a car
insurance contract. However, I simply do not believe that such a
product has no value. Furthermore, it strikes me as completely
ridiculous to make such a bizarre assertion.
[55] The Appellant held that the FMV should
be established as a function of the verbal contract with
two elements, the object, which is the share, and the
consideration, which is $10.
[56] Since the contract was a verbal one, it
is therefore necessary to analyze the facts and circumstances in
such a way as to identify the intention of the parties. In this
respect, the evidence essentially constitutes the
self-serving testimony of Gérard Pelchat.
[57] The transfer was not something
spontaneous and ill-considered, carried out without
reflection. On the contrary, the transfer was the result of a
considered and self-serving decision. Fully aware of the
consequences of his actions, and in particular, well aware of his
possible tax debt, Mr. Pelchat's desire was essentially
to protect the wealth of the corporation he controlled from his
possible financial difficulties caused by a significant tax debt.
As an informed businessman, he anticipated and prepared
everything in such a way as to prevent the corporation he
controlled from being affected by his insolvency.
[58] Under such circumstances, it is obvious
that the totality must be presented so that the FMV of the share
be null. To avoid any ambiguity or issues of interpretation that
would arise from a document, it became advantageous to do
everything verbally, in which case any interpretation would
become speculation.
[59] However, given the situation,
Mr. Pelchat's skill and his experience a few years
earlier, the purpose and goal of the transfer of the share was
indubitably to avoid payment of the tax debt. In order to make
the project attractive, it was essential to provide a scenario in
which the share was transferred for a minimal, or essentially
symbolic, consideration.
[60] In this case, under subsection 160
of the Act, I have to establish the FMV based on the
assumption that this must be an operation conducted in a normal,
everyday business context.
[61] The Appellant retained the services of
Pierre-André Rodrigue as an expert with
Services Multi-Alliance Inc. to establish the FMV
of the share that was the subject of the transfer.
[62] The Court very quickly noted that
Mr. Rodrigue had very little experience with which to
perform his mandate. The process he used was simplistic
and undocumented.
[63] Furthermore, the proportion used to
establish the value, not of the share but of the business
operated by the corporation issuing the share, was essentially
arbitrary and in no way supported by appropriate
documentation.
[64] He tried as best as he could to justify
his approach and the process he used. The explanations he
submitted were confusing, arbitrary, and for the most part,
absolutely unjustified.
[65] Despite all his efforts,
Mr. Rodrigue had neither the experience nor the expertise to
perform the work entrusted to him. He essentially reached his
conclusion as a function of the Appellant's expectations,
which required him to support simply unsustainable, if not
ridiculous, conclusions.
[66] Mr. Rodrigue did not have the
expertise to submit the work that he presented. In order to
compensate for this inadequacy, his work could have been
meticulous, but no, it was very perfunctory and quite shallow
with respect to unverified data, which the evidence in fact
demonstrated to be neither exact nor reliable. I therefore
do not accord any value or probative force to the conclusions,
which are utterly incredible.
[67] The Appellant's expert made the
following errors:
· He took at
face value the data provided to him by the Appellant's
spouse, an individual with a clear self-interest in the
matter.
· He did not
validate the data, although it formed the basis for his
opinion.
· The
evidence established that the data in question had come from
Mr. Pelchat's flawed memory. He used incomplete deposit
slips to help him remember, which is totally unacceptable.
· The
evidence also demonstrated that the notorious document he used
was full of errors and contained incorrect information, yet that
information was quite significant since it constituted the very
foundation upon which the FMV was based.
· He had no
valid experience to enable him to submit work of
acceptable quality.
· Having an
interest in a particular area does not mean that one is an
expert.
· He did not
understand the nature of the mandate, which involved establishing
the FMV of the share that was transferred.
· A lawyer by
profession, he was unfamiliar with the provisions of the law
relating to the obligation to keep a list of clients and various
records with strict requirements.
· According
to him, the fact that the corporation had clients had no effect
on the FMV. Such a conclusion is all the more surprising since it
is public knowledge that some corporations buy what are
essentially lists of names.
[68] These are some of the weaknesses I
noted, which are largely sufficient for me to set aside from the
evidence anything arising from
Mr. Rodrigue's testimony. Consequently, I see no
interest in continuing or completing my assessment of this
testimony.
[69] Lucie Demers, an expert witness
recognized by the Court, described her professional experience,
which has spanned several years.
[70] During her training, Ms. Demers
had, and continues to have, access to a great deal of data and
information that would complete and improve her knowledge in the
field of securities valuation.
[71] Clearly enthusiastic and passionate
about the field, Ms. Demers' work
was extensive.
[72] From the start, Ms. Demers'
task was a difficult one. In fact, during the process
leading to the assessment, she made a decision that established
the FMV based on an approach that was probably very cursory and,
clearly, not very well documented.
[73] Therefore, the work she presented to
the Court had to confirm the accuracy of her first valuation at
the time of the assessment. In addition to this difficulty, I
cannot ignore the fact that Ms. Demers has always worked for
the Respondent, thereby acting indirectly as judge and party.
[74] I have already addressed this issue
previously and I do not think that it prevents an employee of
Canada Customs and Revenue Agency (CCRA) from
acting as an expert, but I do believe that this is an obstacle
that must be overcome by very high quality work, in order to
avoid any conclusion that the work was adulterated by an
assessment that had been determined prior to the start of the
work required to prepare the expert report.
[75] Certainly, any expert whose services
are retained becomes bound in a business relationship with the
person who is responsible for paying the fees needed to prepare
the expert opinion. On the other hand, this is a one-time
relationship with no past or future, whereas an expert working
for CCRA is constantly learning with the mandate conferred by the
valuation work.
[76] My comments also take into account the
fact that any individual recognized as an expert should normally
have the mental quality and capacity for objectivity, to ensure
that the findings are essentially the result of facts assumed as
part of the challenge faced when preparing the expert report.
[77] Things become somewhat more complicated
when the expert producing the expertise is the same person who
intervened at the time of the assessment.
[78] I understand that when the assessment
was made, it was not realistic to request such a highly
documented and exhaustive valuation as that presented during a
court hearing, for the practical reason that the vast majority of
files do not require a hearing before this Court.
[79] Some issues may be raised by the fact
that an expert, who provided a first valuation on the basis of
experience and a consideration of the facts that were readily
available, is then asked to do much more extensive work for the
Court, with an obligation to prepare for a very close, if not
tough cross-examination.
[80] In this case, Ms. Demers submitted
reliable work with real concern for objectivity. She wanted to
ground her conclusions or validate her claims based on facts
external to her own analysis. However, in this respect, the
cross-examination drew out some clear weaknesses and
deficiencies. I am referring in particular to several
documents and some information taken out of context and that
lacked the relevance they were given.
[81] That being said, Ms. Demers'
work was of better quality than that of Mr. Rodrigue.
First, she understood the nature of the mandate, which involved
determining the FMV of the share that was transferred. She also
obtained genuine data. The Appellant's expert did not do
so, but he could and should have.
[82] From Ms. Demers' work, I
retain the formula of the income available over four years.
For these four years, the income of the
"Les Assurances
Gérard Pelchat Inc." corporation was as
follows:
|
Year
|
Income
$
|
|
1993
|
68,296
|
|
1994
|
83,608
|
|
1995
|
131,953
|
|
1996
|
82,726
|
|
Total
|
366,583
|
[83] Thus, the average income was
$91,645.75, or the total of the four years ($366,583),
divided by four, which equals $91,645.75. The average is
therefore $91,645.75.
[84] It is reasonable to use double the
income to set the FMV of such a business, which is $183,291.50.
With respect to weighting, I retain and deduct 30% to
account for random items which may affect such an operation,
thereby reducing the value to $128,304.05, to which must be
added the amount of the corporation's assets, $10,292, for a
total of $138,596.05. I therefore set the FMV of the
transferred share at $138,596.05; the whole with costs.
Signed at Ottawa, Canada, this 14th day
of May 2004.
Tardif J.
Translation certified true
on this 15th day
of November 2004.
Shulamit Day, Translator
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