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Citation: 2003TCC6
Date: 20030221
Docket: 2000-2398(IT)G
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BETWEEN:
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SYLVIO THIBEAULT,
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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.T.C.C.
[1] This is an appeal involving the 1995 taxation year.
[2] At issue is whether the appellant incurred a business investment loss during the taxation year at issue. Alternatively, the appellant has argued that, if there is no business investment loss, there is a capital loss.
[3] In making the assessment appealed from, the respondent relied on the following assumptions of fact:
[TRANSLATION]
(a) the appellant held shares in Investissements Navimex Inc. (hereinafter "Navimex");
(b) in August 1995, the appellant sold the shares in Navimex;
(c) in an August 9, 1999, Notice of Assessment, the following adjustments were made to the capital gain that resulted from the disposition of the shares in Navimex:
1995
Invoices from Joli-Coeur, Lacasse provided: $29,200.05
Portion absorbed by Guy Gagnon: 8,600.00
Portion absorbed by the appellant: $20,600.05
Amount claimed: 24,852.31
Amount disallowed: $4,252
Taxable capital gains (75%): $3,189
(d) in 1992, a total of $126,185 in legal fees ($39,756 plus $86,429) was paid to the legal firm of Joli-Coeur, Lacasse, Simard, Normand et Associés;
(e) in 1990 and 1991, $39,956 of the legal fees invoiced involved proceedings before the Quebec Superior Court to terminate a contract for services included in a contract for the sale of shares;
(f) on January 29, 1987, the appellant and Guy Gagnon sold their shares in Relais Nordik Inc. (hereinafter "Nordik") to Vermonbec Inc.;
(g) the contract of sale stipulated that Navimex agreed to provide marine consulting services to Nordik for $150,000, payable in 60 instalments of $2,500, starting on April 30, 1987;
(h) in 1988, Vermonbec Inc. sold its shares in Nordik to Groupe Desgagnés (1981) Inc. (hereinafter "Groupe Desgagnés");
(i) Groupe Desgagnés terminated the contract for services and stopped making the payments to Navimex;
(j) Nordik initiated proceedings against Navimex and the appellant in order to terminate the contract for services (Court docket No. 200-05-001257-885);
(k) on September 30, 1991, a decision in those proceedings was rendered ordering Nordik to pay Navimex $150,000 plus interest;
(l) an amount of $168,215.24 was received by the legal firm of Joli-Coeur, Lacasse, Simard, Normand et Associés. Of this amount, $25,000 was remitted to Guy Gagnon;
(m) the legal fees in the amounts of $39,756 and $86,429 were paid out of the $168,215.24 received by the legal firm of Joli-Coeur, Lacasse, Simard, Normand et Associés;
(n) on February 13, 1996, the Minister of National Revenue made an assessment concerning the appellant, increasing the proceeds of disposition of the shares in Nordik by $56,250 for the 1987 taxation year:
Proceeds of disposition of shares (see September 30, 1991
Quebec Superior Court decision,
docket No. 200-05-001257-885): $250,000
Portion of shares held by Sylvio Thibault: 75%
Portion of proceeds owed to Sylvio Thibault: $187,500
CALCULATION OF CAPITAL GAIN:
Revised amount of proceeds: $187,500
Less adjusted cost base: 0
Capital gain: $187,500
Taxable capital gain (50%): $ 93,750
Less:
Taxable capital gain declared: $ 37,500
Additional taxable capital gain: $56,250
(o) that assessment was upheld in the August 7, 1998, Tax Court of Canada decision in Sylvio Thibeault v. Her Majesty the Queen, 96-1726(IT)G, in which Lamarre Proulx J.T.C.C. found that the contract for services belonged to the appellant and that the amount of $150,000 formed part of the proceeds of disposition of the shares in Nordik;
(p) in 1990 and 1991, $86,429 of the legal fees invoiced involved proceedings against the appellant regarding maintenance of a parking lot in Baie Sainte-Catherine belonging to him;
(q) the appellant leased a lot to Navimex for $25,000 per year;
(r) in 1990, the appellant had legal problems regarding this lot involving environmental issues and an application to demolish the parking lot.
[4] The appellant admitted the truth of nearly all the assumptions of fact relied on by the respondent. However, he expressed reservations about the content of subparagraphs 10(p) and 10(r) and suggested certain clarifications, in exchange for which he offered to admit the truth of all the assumptions of fact without exception. The respondent refused to amend subparagraphs 10(p) and 10(r) of her Reply to the Notice of Appeal to meet the appellant's expectations.
[5] The evidence was composed of testimony by the appellant and the Appeals Officer, Lise Boutin.
[6] The chronology of the relevant facts can be summarized as follows:
® 1987 The appellant transferred to Vermonbec Inc. (hereinafter "Vermonbec") his shares in Relais Nordik Inc. (hereinafter "Nordik"), that is, 75 per cent of the shares sold in the transaction, the total consideration of which was $100,000; the appellant thus received $75,000. The transaction also provided for a consulting contract that was to generate fees of $150,000 payable to Navimex Inc. (hereinafter "Navimex"), a company entirely controlled by the appellant.
® 1988 Vermonbec in turn sold the shares to Groupe Desgagnés (1981) Inc. (hereinafter "Groupe Desgagnés"), which contested the $150,000 consulting contract. Legal proceedings regarding the validity of the contract were then initiated.
® 1991 On September 30, the Superior Court of Quebec upheld the validity of the consulting contract as well as Navimex's right to be paid $150,000 plus interest, for a total of $168,215.24.
® 1992 Navimex considered that the fees resulting from the consulting contract, the validity of which was upheld by the Superior Court of Quebec, were business income.
® 1995 The appellant sold the parking lot that he owns personally and that is leased to Navimex for its operations; at the same time, he sold his shares in Navimex.
® 1998 Lamarre Proulx J.T.C.C., writing for the Tax Court of Canada, found that the consulting contract that was to generate fees of $150,000 was a sham intended to decrease the proceeds of disposition of the shares to $100,000; following this Tax Court of Canada decision, the proceeds of disposition of the shares became $250,000 and a reassessment concerning the appellant was made.
® Neither the 1991 Quebec Superior Court decision nor the Tax Court of Canada decision was appealed from; the findings of these decisions have therefore become permanent and cannot be ignored.
[7] The appellant claimed that the $150,000 originally determined and described as consulting fees was taxed twice, a first time as business income and a second time as a capital gain. He also stated that he never received the consulting fees, which were received by Navimex.
[8] The appellant argued that he was entitled to claim a loss; alternatively, if he was not so entitled, he wanted to obtain an equivalent reduction in the amount attributed to him as a capital gain following the 1998 Tax Court of Canada decision.
[9] The respondent, on the other hand, denied the appellant's claims; she argued that Navimex paid, on the appellant's behalf, the legal fees for the legal proceedings in a case involving the appellant personally and concluded that there was no loss.
[10] The appellant argued in rebuttal that these fees were not owed to him at all but were, rightly, the exclusive responsibility of Navimex; his claims were based on a lease the subject of which was the parking lot.
[11] The lot was required for the company's business activities; the lease provided for payments that were "net, net, net". In other words, the appellant argued, he leased the parking lot personally owned by him for an annual consideration of $25,000 "net, net, net", which in his view meant that all expenses, fees and other disbursements were to be the responsibility, not of himself, but of the lessee company. The lease was not adduced.
[12] The existence of the lease is not problematic; whether it was oral or written is of no importance except as evidence of its content; if it was put in writing, it was not adduced.
[13] In fact, what is problematic is the content of that agreement including its purpose. The appellant argued that this agreement was "net, net, net" and that responsibility for fees and disbursements lay indisputably, not with the lessor, but with the company leasing the lot, in this case Navimex.
[14] The respondent, on the other hand, contested the appellant's arguments concerning the responsibility for fees. According to the respondent, the issue was basically whether the lot could legally be used as a parking lot, a responsibility that fell to the lessor, who was obliged to warrant and ensure the full enjoyment of the lot that was the subject of the lease.
[15] Counsel for the appellant gave as an example a department store, which at one point, having decided to change the use of property that is the subject of the lease, should be responsible for fees for proceedings resulting from that decision, a reasoning with which I fully agree.
[16] In this case, matters are different since the lease was fundamentally different from the lease in the hypothetical example given by counsel for the appellant. At issue, in fact, was the actual purpose of the agreement.
[17] In his capacity as the owner of the lot, the appellant was certainly obliged to oppose any initiative that would hinder the enjoyment of the lot leased for parking purposes; he had to object to any initiative likely to jeopardize the full enjoyment of the lot leased by Navimex, the lessee company.
[18] In this regard, I consider it helpful to reproduce article 1854 of the Civil code of Québec ("the Code"):
RIGHTS AND OBLIGATIONS RESULTING FROM LEASE
1. General Provisions
1854. The lessor is bound to deliver the leased property to the lessee in a good state of repair in all respects and to provide him with peaceable enjoyment of the property throughout the term of the lease.
He is also bound to warrant the lessee that the property may be used for the purpose for which it was leased and to maintain the property for that purpose throughout the term of the lease.
[19] Is it possible to derogate from the obligations set out in the Code by means of an express agreement? In other words, could Navimex and the appellant have reached an agreement under which Navimex agreed to assume responsibility for the appellant's defence in any proceedings without exception, even a dispute having nothing to do with Navimex but having to do with the nature and use of the premises under the applicable legislation and municipal by-laws? Since the appellant was the sole shareholder of Navimex and personally owned the leased lot, more decisive and particularly more persuasive evidence would have been required since this point was exceptional and highly specific. There is no provision that a lease must be in writing but, when the sole parties to a contract are closely related, it is dangerous to rely on an oral lease that, in case of dispute, would make it possible to adjust the content to fit the circumstances, depending on the interests at stake.
[20] At issue are fees and disbursements made in the following circumstances:
· The town of Baie Sainte-Catherine, which had jurisdiction over the lot on which the parking lot was located, had initiated legal proceedings ultimately to prevent that the lot be used for parking purposes.
· The proceedings were vigorously contested since the parking lot concerned was vital to Navimex's operations; costs and fees of over $86,000 for the proceedings were invoiced by the legal firm.
· Navimex paid the costs and fees invoiced.
[21] I consider it appropriate to summarize the facts. When the shares were transferred resulting in a capital gain, the parties to the transaction had agreed to a contract for services that was to generate fees of $150,000. The contract generating those fees was characterized in a decision by this Court as a disguised payment for the purchase of the shares, thereby increasing the capital gain by the same amount.
[22] At the time of the transaction, from the parties' points of view, the amount of $150,000 was an expense for the company purchasing the shares and business income for the company that was to perform the contract, that is, Navimex. What was involved was a contract that was freely entered into by the parties concerned and that was later upheld by the Superior Court of Quebec.
[23] The appellant received the proceeds of disposition of the shares in Nordik. The fees that were to be paid under the contract for services were payable to Navimex, not to the appellant personally.
[24] The fact that the appellant controlled Navimex did not entitle him to the fees owed to the company. Two separate legal entities, and thus two separate taxpayers, were involved.
[25] The bases for the assessments were completely different. The assessments were made at two different levels, on two different sources of income, involving two different taxpayers.
[26] The appellant's claims that he was taxed twice are therefore unfounded; in fact, he has forgotten to differentiate between his personal affairs and those of the company he controlled. The capital gain was attributable to him, whereas the fees were payable to Navimex. As well, under the contract, it was the appellant in his capacity as director and principal shareholder who chose this arrangement. In a way, the appellant would like to rework the facts following the decisions from which he did not appeal.
[27] Concerning the argument that he never received the fees, here again the appellant has only himself to blame. Firstly, the amounts involved were not owed to him at all because, under the contract, he chose and decided that the fees would be payable not to him personally but to Navimex, the company he controlled. At the time of the agreement, he could have required that the fees would be payable to him personally; he chose otherwise. Under the terms of the contracts, Navimex was the only entity to which the said fees were owed.
[28] The appellant chose not to appeal from the Tax Court of Canada decision concerning the amount of the taxable capital gain, and he must bear the consequences of his choice.
[29] On this point, it is interesting to note the comments by McIntyre J., recalling a basic principle, that an order by a court having jurisdiction stands and is binding and conclusive unless it is set aside on appeal or lawfully quashed. Thus, the Tax Court of Canada decision cannot be impugned indirectly.
[30] To be entitled to claim a business investment loss, a taxpayer must meet the conditions set out in paragraph 39(1)(c) of the Income Tax Act, which reads in part as follows:
(c) a taxpayer's business investment loss for a taxation year from the disposition of any property is the amount, if any, by which the taxpayer's capital loss for the year from a disposition after 1977
...
(iii) a share of the capital stock of a small business corporation, or
(iv) a debt owing to the taxpayer by a Canadian-controlled private corporation ...
...
[31] Do the facts make it possible to conclude that the appellant was entitled to claim a business investment loss? The answer is no because Navimex owed him nothing. The absence of any such debt is also clear from the decision of the Superior Court of Quebec ordering Nordik to pay the amount provided for in the contract, not to the appellant, but to Navimex.
[32] Secondly, the appellant realized a capital gain when he disposed of his shares in Navimex. His arguments that the amounts received by Navimex were advances made to the company have no legal basis in light of the evidence adduced.
[33] The appellant has argued that he incurred a loss as the result of a debt, or as a result of the failure to recover an advance made to Navimex. The evidence does not support such conclusions, which would imply a total disregard of the decisions that have not been appealed from and of the choices and actions by the appellant himself, both personally and in his capacity as director of the companies concerned.
[34] The evidence has two elements. The first element results from facts over which the appellant had full control. I refer in particular to the companies, the transactions, and all the decisions and operations with which the appellant was closely associated.
[35] The second element results from two court decisions: a first by the Tax Court of Canada rendered by Lamarre Proulx J.T.C.C.; and a second by the Superior Court of Quebec rendered by McIntyre J.
[36] The respondent argued that the appellant was not entitled to claim any loss since, if there was a loss, it was offset by the fact that Navimex had paid $86,429 in legal fees for which the appellant was personally responsible.
[37] In order to establish the validity of her arguments, the respondent adduced in evidence a stack of invoices issued by the legal firm that acted in the proceedings dealing with the parking lot; these invoices were issued to the appellant personally.
[38] The appellant contested this argument, stating that Navimex was to assume responsibility for all fees; he relied on a lease between himself and the company under which all expenses were the exclusive responsibility of the lessee Navimex, on the basis that the agreed consideration of $25,000 was "net, net, net".
[39] In this case, the appellant made choices that had effects and consequences. Some choices were the subject of court decisions from which no appeals were made.
[40] Following a number of transactions, some of which were the subject of court decisions, the appellant took stock of the situation and concluded that his tax burden may have been reduced.
[41] In order to do so, the appellant would like this Court to substitute for the facts an interpretation not consistent with reality, and this basically results from unwanted consequences. I cannot accept this line of argument, which has no basis in the facts or in the law at the time the facts occurred.
[42] Mere oral statements unsupported by any documents are certainly not sufficient to find that Navimex was fully and solely responsible for paying costs and fees of $86,429.
[43] As well, the respondent has established that the invoices were issued to the appellant, not to the company, thus creating a very strong presumption that the appellant was responsible for paying them.
[44] The appellant tried to minimize the impact of this element of the respondent's evidence by simply contradicting it.
[45] The burden of proof was on the appellant. The appellant's dual status as shareholder in Navimex, the lessee of the lot, and as the owner of the lot that was the subject of the lease put him in a situation that was quite delicate and certainly not ideal for determining the rights and obligations of the two legal entities that his status gave him.
[46] In these circumstances, he should have made a special effort to find and adduce the lease or, failing that, to have the legal firm to which the costs and fees were owed intervene in the case. The appellant chose to do neither of these things and to rely on his testimony alone.
[47] Unfortunately, that testimony was simply not enough to discharge the burden of proof that was on the appellant, particularly since his interpretation of the facts suggested a very singular view of the law that applied. Furthermore, the respondent adduced evidence that was logical and completely in line with the state of that law.
[48] In the circumstances, I find that the balance of evidence does not support the appellant's arguments; on the contrary, that same balance confirms the soundness of the respondent's arguments.
[49] The appeal is therefore dismissed, with costs.
Signed at Ottawa, Canada, this 21st day of February 2003.
J.T.C.C.
Translation certified true
on this 26th day of March 2004.
Sophie Debbané, Revisor
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