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Citation: 2003TCC589
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Date: 20030910
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Docket: 2002-834(IT)G
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BETWEEN:
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LOUIS SHEFF (1984) INC.,
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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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2002-836(IT)G
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AND BETWEEN:
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LOUIS SHEFF,
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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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REASONS FOR JUDGMENT
Lamarre, J.
[1] These are appeals from assessments
made by the Minister of National Revenue ("Minister")
that included in both appellants' income an amount of $22,500
for the 1995 taxation year and $90,000 for each of the 1996, 1997
and 1998 taxation years. The Minister is of the opinion that the
amounts in question were paid to Louis Sheff (1984) Inc.
("LS 1984") pursuant to a contract for services entered
into on September 13, 1985 between Sheff, Weiser, Perelman &
Associates Inc. ("SW") and the appellants and that
those amounts are taxable in LS 1984's hands as income
pursuant to section 9 of the Income Tax Act
("Act"). The monies having been deposited in the
joint personal account of LS 1984's principal shareholder,
Louis Sheff, and his wife Sally, the Minister is also of the view
that the same amounts are taxable in the hands of Louis Sheff
personally, pursuant to subsection 15(1) of the Act,
as a benefit conferred upon him by LS 1984.
Facts
[2] The parties filed a Joint
Statement of Facts (Exhibit A-1), which reads as follows:
1. According to the September
13th, 1985 agreement (hereinafter "the
Agreement"), Mr. Louis Sheff and his spouse, Mrs[.] Sally
Sheff, sold their 300 preferred shares and 98 common share[s],
being all the shares owned by them in Sheff, Weiser, Perelman
& Associates Inc. (hereinafter "the Shares") to
their son, Mr. Allan Sheff, and nephew Mr. Joseph Weiser.
∙ Table 7, page 2, September 13th,
Agreement
2. The sale of the Shares in Sheff,
Weiser, Perelman & Associates Inc. (hereinafter
"SW") was the result of disputes and clashes between
himself and Mr. Allan Sheff and Mr. Joseph Weiser, each owner of
one-third of SW at the time.
∙ Table 17, p. 6, of the French version of the Judgment
of the Superior Court of Quebec
3. Among other things, the Agreement
stipulates that:
a. Allan Sheff and Joseph Weiser will pay
the sum of $120,000 payable to Mr. Louis Sheff at closing by
certified cheque, less any sums withdrawn from SW by Mr. Louis
Sheff or Sally Sheff over and above their regular payroll
salaries during 1985;
b. the sum of $325,000 will be payable to
the Estate or as may be directed in the relevant last will and
testament of the last surviving of Mr. Louis Sheff and his
spouse, but in no event before October 1st, 1995;
and
c. SW will pay to Louis Sheff (1984) Inc.
(hereinafter "LS1984") the sum of $90,000 per year
($7,500 per month starting on October 1st 1985)
payable during the lives of Mr. Louis Sheff and his spouse, for a
minimum of 10 years.
∙ Table 7, page
2, September 13th, 1985 Agreement
4. At the time of the sale of the
shares, Mr. Louis Sheff was 74 years old and Mrs. Sally Sheff was
70 years old.
5. Shortly following the signature of
the Agreement, other disputes arose between Mr. Louis Sheff, Mr.
Allan Sheff and Mr. Joseph Weiser.
6. Neither LS1984 nor Mr. Louis Sheff
reported any amount paid or payable under the Agreement for the
1985 and 1986 taxation years.
7. On May 21st, 1986
Counsel Gary H. Waxman, Mr. Louis Sheff's representative,
obtained from Marcel Chapados, f.s.a., f.i.c.a. from Blondeau
& Company, actuaries, an evaluation of the actual value (on
September 13th, 1985) of the amounts payable to Mr.
Louis Sheff and Mrs. Sally Sheff according to the Agreement. The
September 13th, 1985 value of the payments was
established at $1,058,619.
∙ Tab 9, Letter from Marcel Chapados, f.s.a.,
f.i.c.a.
8. On or around September
16th, 1987 the Minister transmitted to Mr. Louis Sheff
the result of an evaluation of the fair market value of the
shares of SW. On September 13th, 1985 the evaluation
of the common shares by the Minister was of the amount of $4,071
each (98 shares x $4,071 = $398,598).
∙ Tab 11, Letter from M. Richard and F. Flibotte in
regards of the valuation of the shares, dated September
16th, 1985.
∙ Tab 12, Valuation (with attachments) of the
disposition of the Shares in SW
9. On or around November 18th,
1987, Mr. Louis Sheff transmitted a letter to the Minister
indicating that he was in disagreement with the September
16th, 1987 valuation. Mr[.] Louis Sheff indicated in
his letter that the cash value purchase price was calculated by a
licensed actuary to be more than $1,000,000.
∙ Tab 13, Letter of Mr. Louis Sheff in regards of the
valuation of the shares of SW.
10. Mr. Sheff personally reported all sums that he
considered received or receivable from SW under the terms of the
Agreement as being the proceeds of disposition of the Shares in
his 1987 taxation year, on a similar basis as the valuation by
Blondeau & Company, actuaries, thus reporting a capital gain
of $869,416 in regards of such.
∙ Tab 1, Louis Sheff's income tax return for the
1987 taxation year.
11. Due to the circumstances (dispute) surrounding the
transaction, the Minister accepted, 1987 to be the effective year
of transaction.
12. On July 4th, 1991, the Minister
reassessed Mr. Louis Sheff's 1987 taxation year to adjust the
proceeds of disposition of the Shares to $1,345,000 (and
consequently his capital gain and reserve). The $1,345,000 is the
aggregate of $120,000, plus $325,000, plus $900,000 (i.e. $90,000
X 10 years).
13. On or around July 1990, following the refusal of Mr.
Louis Sheff to sign a letter to the Minister to the effect that
he was rendering services to SW, the tax treatment of the monthly
payments of $7,500 resulted in another legal dispute between SW
and LS1984. SW stopped making the monthly payments of $
7,500.
∙ Table 14, Project of letter in regards of the
September 13th, 1985 agreement
14. On July 15th, 1992 by way of judgment of
the Superior Court of Quebec, the Honourable Justice Victor
Melançon ordered SW to continue paying LS1984 the monthly
payments of $7,500 contracted by way of the Agreement.
∙ Table 17, Judgment of the Superior Court of
Quebec.
15. On November 15th, 1993 the Quebec Court
of Appeal rejected the appeal of SW.
∙ Table 18, Judgment of the Court of Appeal of
Quebec.
16. On or around January 8th, 1996 (during
the course of an audit of Mr. Louis Sheff's 1993 and 1994
taxation years) LS1984 and Mr. Louis Sheff were informed in
writing by CCRA to include the monthly payments of $7,500
($90,000 per year), in LS1984's income, beginning October
1st, 1995.
∙ Tab 21, Letter by Serge Desjardins
17. The cheques in regards of the monthly payments of
$7,500 were made in the name of "Louis Sheff (1984) & /or
Louis Sheff & /or Sally Sheff". They were signed by
LS1984, by Mr. Louis Sheff and by Sally Sheff and were deposited
in the joint bank account of Mr. Louis Sheff and Sally Sheff
(hereinafter "the bank account").
∙ Tab 8, Example of cheque payable
18. As of October 1st, 1985, Mr. Louis Sheff
was the majority shareholder, the president and director of
LS1984. Sally Sheff was a director of LS1984.
19. The initial Notice of Assessment of LS1984 for [the]
taxation year ended December 31, 1995 was issued September 3,
1996.
20. The initial Notice of Assessment for taxation year
1995 of Mr. Louis Sheff was issued May 30, 1996.
21. By notice of reassessment, the Minister included in
LS1984 & Mr. Louis Sheff's income the monthly payments
received as of October 1st, 1995 and deposited in the
joint bank account of Mr. Louis Sheff and his spouse,
accordingly.
22. On February 24, 2000, the CCRA issued a first notice
of reassessment to LS1984 for taxation years 1995 to 1998.
23. On February 24, 2000, the CCRA issued a first notice
of reassessment to Mr. Louis Sheff for taxation years 1995 to
1998.
24. On January 24, 2001, the CCRA issued notices of
reassessment whereby it cancelled the penalties levied under
subsection 163(2) of [the] Income Tax Act, but maintained
the monthly instalments of $7,500 to be to be [sic]
included in the income of LS1984.
[3] It is worthwhile reproducing here
the September 13, 1985 agreement ("1985 agreement")
signed by Allan Sheff and Joseph A. Weiser on the one hand, and
agreed to and accepted by Louis Sheff, Sally Sheff, SW and
LS 1984 on the other hand. A copy of it is to be found at
Tab 7 of the joint book of documents (Exhibit I-1) and it reads
as follows:
ALLAN SHEFF
. . .
-and-
JOSEPH A. WEISER
. . .
September 13, 1985
Mr. Louis Sheff and
Mrs. Sally Kapustin Sheff
. . .
Re: Sheff, Weiser, Perelman
&
Associates Inc. (the "Company") and
Louis Sheff (1984) Inc. ("Company B")
Dear Mr. and Mrs. Sheff:
This will confirm our discussions with respect to the captioned
matters only as herein set forth, all previous offers and counter
offers being hereby expressly revoked:
A.
Company
1.
Allan Sheff ("A.S.") and Joseph Weiser
("J.W.") hereby purchase all three hundred (300)
preferred shares and ninety-eight (98) common shares presently
owned by Louis Sheff ("L.S.") and Sally Sheff
("S.S.") being all the shares owned by them in the
Company, in consideration of the payment to L.S. at closing by
certified cheque of the sum of One Hundred and Twenty Thousand
Dollars ($120,000 Cdn) less, if any, sums withdrawn by L.S.
and/or S.S. from the Company over and above their regular payroll
salaries during 1985.
2.
The Company shall pay a consulting fee to Louis Sheff (1984) Inc.
("Company 'B'") the sum of Ninety Thousand
Dollars ($90,000 Cdn) per year for and during the lives of L.S.
and S.S., but in any event for a minimum of ten (10) years from
the date of closing. Such sum shall be payable in equal monthly
amounts of Seven Thousand Five Hundred Dollars ($7,500 Cdn) on
the first day of each month, the first payment to be made on
October 1st, 1985. The responsibility as consultant to the
Company shall be limited to the promotion of its image.
3.
The sum of Three Hundred and Twenty-Five Thousand Dollars
($325,000 Cdn) shall be paid to the Estate (or as may be directed
in the relevant last will and testament of the last surviving of
L.S. and S.S.) upon the decease of the last surviving of L.S. and
S.S.. Such $325,000 Cdn shall in no event be paid prior to
October 1st, 1995, even if both L.S. and S.S. are deceased prior
to such date.
B. Company B
1.
A.S. and J.W. hereby sell all shares presently held by them in
Company B to L.S. and S.S. for the price of One Hundred Dollar[s]
($100 Cdn).
2.
L.S. shall have access to all general files which are now part of
the portfolio of the Company. This is for the purpose of enabling
L.S. to solicit his clients for the sale and service of new and
old business in the field of Life Insurance Pension Plans,
Registered Retirement Savings Plans, Annuities and other kindred
Plans. To facilitate the foregoing, L.S. shall be provided, upon
request, with a computer print-out of the Company's
clients' names, addresses and telephone numbers.
3.
A.S. and J.W. represent and warrant that they will not,
themselves or through others, knowingly directly compete with
L.S. or this class of business mentioned in the immediately
preceding paragraph.
C. General
1.
Company shall transfer to L.S. for no consideration at closing
the 1983 Oldsmobile 98 Regency vehicle he presently drives, the
balance of payment therefor to GMAC to be assumed by L.S. to the
exoneration of the Company.
2.
Closing shall be held on Thursday, September 19, 1985, at 11:00
a.m., at the offices of Gascon, Gibson, Larose, 1210 Sherbrooke
Street, West, 5th Floor, Montreal, Quebec:
i) At closing, all
shares being sold hereby shall be endorsed over to the relevant
party and they shall sign and execute such other documentation as
may be reasonably required by their attornies [sic] in
order to effect the transfer of all said shares;
ii) At closing:
a) L.S. shall be elected as a
member of the Board of Directors and Chairman of the Company,
which positions he may hold for as long as he so desires;
b) S.S. shall resign as a
Director and Officer of the Company; and
c) A.S. and J.W. will
resign as Directors and Officers of Company B.
iii) L.S. shall be entitled to
use and occupy the office at the Company which he presently uses
and occupies and shall be entitled to an allowance of Seven
Thousand Five Hundred Dollars ($7,500) to refurbish his office
and
iv) L.S. shall be entitled to
the requisite secretarial services for purposes of his personal
affairs.
3.
Sheff, Weiser, Perelman & Associates Inc. shall pay all legal
fees and expenses relating to this Agreement.
4.
The parties shall execute such other documents and do such other
acts as may be necessary to give effect to the foregoing.
If the foregoing is acceptable, please indicate by your signature
below.
Yours very truly,
________________________
____________________________
Witness
Allan Sheff
________________________
____________________________
Witness
Joseph A. Weiser
Agreed and Accepted this
13th day of September, 1985.
________________________
____________________________
Witness
Louis Sheff
________________________
____________________________
Witness
Sally Sheff
SHEFF, WEISER, PERELMAN &
ASSOCIATES INC.
________________________
Per:_________________________
Witness
LOUIS SHEFF (1984) INC.
________________________
Per:_________________________
Witness
[4] The evidence disclosed that Louis
Sheff founded in 1939 a Montreal-based insurance brokerage
company that eventually became SW. It was a family business.
Louis Sheff's nephew Joseph Weiser joined it at the end of
the 1960s, and his son Allan Sheff did so in the mid-70s.
The business expanded over the years and, in 1981, Joseph Weiser
and Allan Sheff acquired two-thirds of the SW shares for the
shares' nominal value. In 1985, Louis Sheff, then almost 75
years old, was convinced by the other two shareholders to sell
them the remaining third of the SW shares. According to
Louis Sheff, they threatened to bankrupt the business unless
he sold his interest. Louis Eidelman, the appellants'
accountant, stated that Allan Sheff and Joseph Weiser had
threatened the appellant that they would break up the business to
start another business on their own if Louis Sheff did not sell
his shares. Louis Sheff ultimately agreed to sell and
negotiations ensued over the price. Louis Sheff wanted enough
money to support his wife, Sally Sheff, and to ensure a
comfortable retirement. Allan Sheff testified that he and Joseph
Weiser wanted to buy out Louis Sheff and also provide him with
the security he needed through either a pension or a retirement
allowance for the number of years he had given to the business.
After most difficult negotiations, they eventually all agreed on
the 1985 agreement.
[5] Allan Sheff had established an
approximate value for the whole business of $646,000, one-third
of this amount being $215,000 (Exhibit I-1, Tab 12). It was
finally agreed that he and Joseph Weiser would pay forthwith
$120,000 to buy Louis Sheff's shares and that an amount of
$325,000 would be paid to the estate of either Louis Sheff
or Sally Sheff upon the decease of the last surviving of the two,
but not prior to October 1, 1995. Allan Sheff testified that
the purpose of the $325,000 was to leave an estate for his two
sisters. It was also agreed, as stated in the 1985 agreement,
that a consulting fee of $90,000 per year (payable in equal
monthly amounts of $7,500) would be paid to LS 1984 for and
during the lives of Louis and Sally Sheff but in any event
for a minimum of ten years. That amount was to be paid by SW.
[6] Allan Sheff testified that shortly
after the agreement was signed his father wanted to rescind it,
saying that it was signed under extreme duress. Nonetheless, he
said, Louis Sheff, who had access to an office on the
business's premises, went to that office on a regular basis,
spoke to clients and gave instructions to the staff. According to
Allan Sheff, his father was supposed to provide the benefit of
his 50 years of experience in the insurance business to whatever
extent he could.
[7] However, the situation became
bitter as time passed. This led SW, Allan Sheff and Joseph
Weiser in December 1985 to file for an injunction against
Louis Sheff to, as I understand it, restrain him from
attending at the office. By a judgment dated June 26, 1986,
Reeves J. of the Superior Court of Quebec ordered Louis Sheff to
[TRANSLATION] "refrain from acting in such a manner as to
obstruct or hinder the work of [SW] employees". The judge
also stated that it would be up to the officers of SW to assess
the situation and determine whether it was in their interests to
remain present on the premises if Louis Sheff decided to stay at
the office outside reasonable hours. It is worth mentioning here
the following comments by Reeves J. preceding the order:
In this context, the Court . . . will first observe that R-1
[1985 agreement] remains a contract that binds the parties. It is
the law which the parties have agreed to and they have to abide
by it. There are reciprocal obligations in this contract. The
Court has no comments to make on whether the contract is executed
or not. Each party has its rights and if this give rise to
further proceedings, it will be for the tribunal to adjudicate on
them as questions are put, submitted to the Court. Some question
naturally has arisen to find out whether there have been any
steps taken to execute the contract. The evidence reveals that
attempts have been made and it is hoped that these will prove
fruitful in shortest possible delay. What is the concern of the
Court in regarding the injunction, is the interest, the further
and continuing interest of the business. This is paramount to the
interest of all parties involved in this particular question and
should be their guide.
(Exhibit I-1, Tab 9, page 2.)
[8] Despite the bitterness of the
situation, between October 1985 and June 1990 SW made the monthly
payments of $7,500 to LS 1984 as provided for in the 1985
agreement.
[9] This stream of payments (the
$7,500 monthly payments) was the subject of an audit by Revenue
Canada (as it was then called) in 1990. Louis Sheff considered
those payments as being part of the proceeds of disposition of
his shares, and thus declared a capital gain in his 1987 taxation
year, based in part, presumably, on an estimate of the value at
that time of all the amounts to be received in the future
pursuant to the 1985 agreement. In that connection,
Louis Sheff obtained a valuation from Blondeau &
compagnie, actuaires et conseillers, of the amounts payable to
him as per the 1985 agreement and [TRANSLATION] "the present
value" of all the amounts thus payable was estimated at
$1,058,619 (Exhibit I-1, Tab 10). Based on that value, Louis
Sheff declared a capital gain of $869,416 in his 1987 tax return
(Exhibit I-1, Tab 1).
[10] SW, now controlled by the younger
generation, wanted to expense the $7,500 monthly payments as
salary. On January 16, 1990, Revenue Canada asked
Louis Sheff to sign a declaration stating that the monthly
payments of $7,500 were paid as consulting fees and should not be
part of the proceeds of disposition of the shares (Exhibit 1,
Tab14). He refused to do so as he did not agree with that
statement.
[11] Mr. Serge Clairoux, the auditor for
Revenue Canada, finally agreed to consider the sum of all the
amounts to be paid to Louis Sheff over a ten-year period pursuant
to clause A of the 1985 agreement to be the proceeds of
disposition of the shares. He arrived at a figure of $1,145,000,
being the aggregate of $120,000, $325,000 and $900,000 ($90,000 x
10 years), less a deduction of $200,000 pursuant to subsection
73(5) of the Act (see notice of reassessment and
auditor's report, Exhibit I-1, Tabs 2 and 15).
[12] In Mr. Clairoux's view, the
$1,345,000 figure (before the deduction of $200,000) was very
close to the 1,2 million dollar value arrived at by Revenue
Canada for SW's shares (see business equity valuation made in
1987 by Revenue Canada, Exhibit I-1, Tabs 11 and 12). Louis
Sheff finally agreed to settle and to be taxed on a capital gain
calculated on the basis of a higher valuation of the sale price
of the shares than he had previously claimed ($1,345,000 instead
of $1,058,619). Louis Sheff was therefore reassessed accordingly
for his 1987 taxation year.
[13] But this settlement (the "1990
settlement") put SW in a bind. If the $90,000 yearly
payments were capital, the company could not expense them as
salary. Revenue Canada thus denied the salary expense and added a
corresponding amount to the adjusted cost base of the shares that
Allan Sheff and Joseph Weiser had purchased from Louis Sheff
(Exhibit I-1, Tab 23).
[14] The Revenue Canada audit poisoned
relations between Louis Sheff and SW. Each accused the other of
trying to unfairly shift the tax burden. On July 1, 1990, SW
ceased paying the $7,500 per month. Relying on Louis Sheff's
denial, in his dealings with Revenue Canada, that he rendered any
services to the company, SW claimed that he had repudiated their
contract. LS 1984 sued SW to force it to make the $7,500 monthly
payments. SW contested that action and, by means of a
counterclaim, asked for a declaratory judgment establishing
whether the 1985 agreement contained two contracts, one relating
to the sale of shares and the other to LS 1984's commitment
as a consultant.
[15] In July 1992, Melançon J. of the
Superior Court of Quebec upheld the obligation to make the
monthly payments and ordered SW to pay LS 1984 back pay. In so
doing, he declared that the 1985 agreement constituted a whole of
which a part comprised SW's obligation to pay LS 1984 $7,500
per month for and during the lives of Mr. Louis Sheff and Mrs.
Sally Sheff, or until October 1, 1995, should they die before
that date.
[16] Melançon J. mentioned the
following in the course of his judgment, at page 3 of the English
version (Exhibit I-1, Tab 17).
Does the document P-1 [1985 agreement] consist of one or two
contracts : that is to say, a sale of shares and a
committment [sic] as a consultant ?
In the case of Bock & Tétreault Inc. vs Corporation
Eagle Lumber (J.E. 88-243, reported in extenso in
"Jurisprudence en matière d'obligations,"
published by Soquij, page 355 and following), jurisprudence has
acknowleged [sic] that a contract of sale of shares can
also entail a consultant's contract. The defendant, via its
shareholders, undertook to pay, from October 1, 1985 on, and this
for at least ten years, the sum of $7,500 per month to the
plaintiff. As already stated, these payments were interrupted as
of July 1, 1990.
The defendant claims to have this right because the
plaintiff's principal and sole shareholder claimed not to be
providing any services. In actual fact, it appears to the
undersigned that the providing of services is not very important
in the context. These services are both of a positive nature (to
promote the company's image) and of a negative one, as
understood by Mr. Louis Sheff, the father and the plaintiff's
principal and sole shareholder, that is to say, not to speak
against the defendant company, which he did do. It shoul[d] also
be noted that nothing in evidence indicates, on the part of the
defendant, regarding the plaintiff or its sole shareholder, any
request for services whatsoever.
[17] In November 1993, the Quebec Court of
Appeal confirmed Melançon J.'s decision. In his
1994 personal tax return, Louis Sheff claimed as a capital loss
the legal fees incurred before the Quebec courts in the action
launched against SW to recover the $7,500 monthly payments.
However, in the course of a second audit, conducted by Revenue
Canada in 1995 and 1996 with respect to the appellants' 1993
and 1994 taxation years, Mr. Joseph Waxman, one of the
accountants who was acting on behalf of Louis Sheff at the time,
argued that the $7,500 monthly payments constituted consulting
fees and that the legal fees incurred with respect thereto should
be deductible as a business expense (Exhibit I-1, Tab 31).
Because Revenue Canada had considered those payments as being
part of the proceeds of disposition of the shares payable over a
ten-year period ending on October 1, 1995, it first
considered the legal fees to be a non-deductible capital
expenditure (Exhibit I-1, Tab 20). Finally, in order to settle,
Revenue Canada agreed to allow half of the legal fees as a
deduction against Louis Sheff's personal income for the 1994
taxation year (Exhibit I-1, Tab 31). In his report, the auditor
at the time indicated that Mr. Eidelman acknowledged that the
$7,500 monthly payments should be taxed as consulting fees as of
October 1, 1995, but was of the view that they should be taxed in
Louis Sheff's personal tax return because those amounts were
received by LS 1984 [TRANSLATION] "on behalf of"
Louis Sheff (see T-2020 report, from Revenue Canada,
Exhibit I-1, Tab 19). As a matter of fact, at his
discovery and at trial, Louis Sheff was very vague as to why
the 1985 agreement stipulated that the $7,500 monthly payments
were to be made to LS 1984. At discovery, he mentioned that LS
1984 was never involved in SW's business. He said, however,
that LS 1984 was used in order to protect his wife in the event
of his death. In Exhibit I-1, Tab 35, pages 12-15, there is
the following:
Q. Mr. Sheff, there was an
agreement at the effect that $90,000.00 was paid by... to Louis
Sheff (1984) Inc.?
A. That's in there.
Q. You recall that?
A. Yes, it's in there.
Q. Why was it paid to Louis
Sheff (1984) Inc.? Why it had to be paid to Louis Sheff (1984)
Inc.?
A. In the event of my death, I
wanted the money to go to her, to protect her.
Me
VIGEANT :
Q. I'm sorry, when you say
her, can you be more precise?
A. My wife.
Me
ARCELIN :
Q. Why was it made through Louis
Sheff (1984) Inc.?
A. I couldn't answer that.
I've been up nights trying to figure out how that name of
Louis Sheff (1984) ever came into the picture. It never had any
interest near the business, none whatsoever. I'm still trying
to figure that one out.
Q. So, did you participate in
any mean... in any way in the negotiation of the September 13th
1985 agreement?
A. I was there.
Q. You were there. Did you
participate in the negotiation that led to that agreement that
you signed?
A. I must have.
Q. You must have.
A. I must have.
Q. So, you must have but you
don't recall the rational?
A. I know I was under extreme
pressure.
Q. That we understand, Mr.
Sheff. We understand that. You were... there was an assessment
that was made... what... Ok, no, sorry, I will rephrase that.
When was the first time that you declared revenues, not the
revenues, I mean the product of disposition, the gain that you
realized on the sell [sic] of those actions? The
shares?
A. Louis Adelman (ph) would be
in a better position to explain than I could.
Q. Can you repeat that,
please?
A. Louis Adelman, the
accountant, would be in a better position to explain it that
[sic] I could.
. . .
Q. After September... after
October 1st... no, on and after October 1st 1995, why neither you
or Louis Sheff (1984) Inc. declared any amount received by Sheff,
Weiser, Perelman and Associate?
A. I don't see, I cannot
understand how Louis Sheff Inc. became involved in this in the
first place. I just can't see it. I can't recall any
reason for it. Louis Sheff is not... Inc. was never in it, never
had any shares, never had any income. They are not in it.
[18] At trial, the question was put to
Louis Sheff as follows (transcript, November 7, 2002, page
63):
[36] Q. They were. So,
Louis Sheff (1984) was an active business and was an active
business that was actually, you're carrying some insurance
business through Louis Sheff (1984) company?
A. That is right.
[19] On the expiration of the ten-year
period, that is, as of October 1, 1995, Mr. Louis Sheff and his
wife, being still alive, continued to receive and are still
receiving the $7,500 monthly payments. A monthly cheque drawn on
SW's account continued to be made out to the order of LS 1984
and/or Louis Sheff and/or Sally Sheff. All cheques received were
endorsed by Louis Sheff for LS 1984, and by Louis Sheff
and Sally Sheff personally, and deposited in Louis and Sally
Sheff's joint personal account. Neither LS 1984 nor Louis
Sheff declared those monthly payments in their income for tax
purposes after October 1, 1995. The appellants obtained
legal advice in June 1994 stating that:
. . . Since, however, Revenue Canada has accepted in respect
of the 1987 taxation year (and subsequent years) to include in
the calculation of the capital gain the $90,000 annual payments
and the lump sum payment, an argument can be made that subsection
4(4) of the Income Tax Act will preclude Revenue Canada
from including such amounts in income in the future since they
have already been included in calculating the amount of the
taxable capital gain included in your income in 1987 and
subsequent taxation years by use of the reserve. We are of the
view, therefore, based on this analysis that no amount already
included by you in proceeds of sale of the SCo shares should be
included in your income in the future.
[Exhibit I-1, Tab 22, page 3.]
[20] Revenue Canada disagreed. By letter
dated January 8, 1996, it asked that LS 1984 include the
payments in its income starting October 1, 1995. LS 1984
ignored this request and Revenue Canada, that became the Canada
Customs and Revenue Agency ("CCRA") on November
1st, 1999,[1] reassessed both LS 1984 and Louis Sheff personally to
include in their income the sum of $22,500 for 1995 ($7,500 x
3 months) and $90,000 for each of the 1996, 1997 and 1998
taxation years. LS 1984 was reassessed on the basis that in
those years it received consulting fees that had to be included
in income pursuant to section 9 of the Act. The same
amounts were included in Louis Sheff's income pursuant to
subsection 15(1) of the Act, on the basis that a
benefit was conferred on him by LS 1984 in those years. The
parties admit that Louis Sheff is the majority shareholder of
LS 1984. Although it is stated in paragraph 4 of the Notice
of Appeal that Louis Sheff owns 75 per cent of LS 1984's
common shares, the balance being owned by
Mrs. Sally Sheff, this has not been admitted by the
respondent and there is no evidence on that point. The appellants
appealed the aforementioned reassessments before this Court.
Issue
[21] The main issue is the tax treatment, as
of October 1995, of the monthly payments of $7,500 received by
the appellants. For 1995, it must also be determined whether
Revenue Canada was allowed to reassess the appellants beyond the
normal reassessment period.
Appellants' arguments
[22] The appellants have not included the
$7,500 monthly payments in their tax returns filed since the 10th
anniversary of the 1985 agreement because they firmly believe
that they are part of the proceeds of disposition of the shares
sold in 1985, which sale was declared in 1987 for income tax
purposes. According to the appellants, the cash value of the
purchase price of the SW shares had been calculated by a licensed
actuary to be over one million dollars (Exhibit I-1,
Tab 13). In the appellants' view, the proceeds of
disposition were calculated taking into account the $90,000 per
year (the $7,500 monthly payments) component at its value at that
time and that amount should not be added to their income after
the expiration of the ten-year period. Their counsel argued that,
when first reassessing the appellants in 1991, pursuant to the
1990 settlement, Revenue Canada accepted for the 1987 taxation
year the inclusion of the $90,000 per year component in the
proceeds of disposition from the sale of Louis Sheff's
SW shares. In counsel's view, the 1990 settlement was
comprehensive, that is to say, Louis Sheff has already paid tax
on the capital gain based on the proceeds of disposition which
included the value at that time of an indefinite stream of
$90,000 payments. Since Mr. Sheff has already paid tax, Revenue
Canada's efforts amount to double taxation, which is not
acceptable pursuant to subsection 248(28) (former subsection
4(4)) of the Act. Under the 1990 settlement, Mr. Sheff
paid more tax than was due because Revenue Canada did not
discount for inflation the ten guaranteed payments of $90,000 or
the payment due at death.
[23] According to the appellants'
counsel, Revenue Canada is therefore now estopped from changing
its mind and recharacterizing the $90,000 per year payment as
consulting fees as it did with respect to the payments made since
October 1995. In counsel's view, the $90,000 cannot be
treated as both income and a capital gain at the same time. For
1995 particularly, Revenue Canada's reassessment is
unreasonable as it taxed the $7,500 monthly payments as a capital
gain for the first nine months of the year but, for the last
three months of the same year, it taxed monies from the same
source as income.
[24] In counsel's view, estoppel bars
Revenue Canada from reassessing the same transaction on a basis
different from that of its 1990 settlement with Mr. Sheff.
To conclude otherwise would be to enable Revenue Canada to
disavow the settlement, which confirmed that all proceeds arising
from the sale, including the $90,000 per year, gave rise to a
capital gain that was declared by Mr. Sheff in his 1987 tax
return. Mr. Sheff relied on that settlement as accurately stating
all amounts received from SW. This also is a bar to Revenue
Canada's reassessing beyond the limitation period for the
1995 taxation year. Furthermore, counsel stated that, according
to the evidence, neither Mr. Sheff nor LS 1984 ever rendered any
consulting services after 1985 and he argued that the appellants
cannot be taxed as though they did.
[25] Counsel also argued that the $90,000
per year should not be reported as a capital gain for each year
it was received after 1995 because there was no disposition
giving rise to a capital gain in those years. Finally, counsel
argued in the alternative that the $90,000 per year received
after 1995 could be characterized as a payment made to prevent
Mr. Louis Sheff from competing with SW and argued that such a
payment is not taxable, as per the decision in Fortino et al.
v. The Queen, [1996] T.C.J. No. 1457 (Q.L.), affirmed [1999]
F.C.J. No. 1964 (Q.L.).[2]
Respondent's arguments
[26] The respondent, on the other hand, is
of the view that the $90,000 per year has been taxable in LS
1984's hands as consulting fees since October 1995, even
though it could be argued by the appellants that no services were
rendered (which, in counsel's view, is not the case on the
evidence). Counsel for the respondent relied on the 1985
agreement and on the judgment of the Superior Court of Quebec
forcing SW to pay the $90,000 per year to LS 1984. Counsel put
forward his argument notwithstanding the fact that Revenue Canada
has in the past considered the $7,500 monthly payments to be part
of the proceeds of disposition of Louis Sheff's shares in SW.
In counsel's view, Revenue Canada is not bound by previous
assessments. The respondent is of the opinion that the appellants
freely structured their affairs to produce a certain outcome and,
therefore, should be bound by the resulting tax consequences.
[27] The respondent is also of the view that
subsection 15(1) of the Act applies and, accordingly, the
$90,000 per year should be included in Louis Sheff's income
because the cheques made out to the order of LS 1984 and/or Louis
Sheff and/or Sally Sheff, and endorsed by the three of them,
were deposited in the joint personal account of Louis and Sally
Sheff. The money not having been distributed by way of a
dividend, the respondent considered that a benefit was conferred
by LS 1984 on Louis Sheff personally and the total amount thereof
should consequently be included in Louis Sheff's income
pursuant to subsection 15(1) of the Act.
[28] The respondent argues in the
alternative that if the $7,500 monthly payments are not business
income for LS 1984, they are business income for Louis Sheff
personally as they were paid in consideration of some kind of
services to be rendered by him personally.
[29] The respondent also argues in the
further alternative that the $90,000 per year should be included
in Louis Sheff's income as an annuity pursuant to
paragraph 56(1)(d) of the Act. If the amount
in question is not an annuity, counsel argues, it should be
taxable as a capital gain pursuant to section 40 of the
Act even though no disposition has taken place after 1995.
In his view, the share sale agreement was based on the occurrence
of future, uncertain events and, accordingly, a capital gain can
be included in Louis Sheff's income for each year that he
received the $90,000 after October 1995.
[30] Finally, counsel submits that, in
filing their income tax returns for the 1995 taxation year, the
appellants made with respect to the undeclared consulting fees
received from SW a misrepresentation that is attributable to
neglect, carelessness or wilful default under paragraph
152(4)(a) of the Act. It was therefore open to
Revenue Canada to reassess the appellants for that year.
Analysis
[31] My first comment is that the
circumstances of this case as they have unfolded from the
beginning resulted in an imbroglio in which each of the parties
concerned has tried to interpret in that party's own way the
tax consequences of a desperate settlement agreement reached by
people having intertwined interests.
[32] It is also my perception that neither
Mr. Louis Sheff nor Mr. Allan Sheff wanted to bring back at the
hearing memories of the acrimonious relationship that had existed
years ago when they were negotiating the departure of Louis Sheff
as a shareholder of SW, the company he had founded. Thus, both
were vague in describing how the 1985 agreement was finally
reached, and what the real intention of each party in drafting
that agreement had been. Furthermore, it is my perception as well
that although Joseph Weiser and Allan Sheff had a common
interest in pushing Louis Sheff out of his position in the
business, they were concerned at the same time with their family
relationship with Louis and Sally Sheff, for whom they wanted to
ensure a lifetime income. Allan Sheff also testified that the
1985 agreement was drafted in part to benefit his two
sisters.
[33] The reason for the involvement of LS
1984 is also mysterious. It is not clear why it was decided that
the $7,500 monthly payments would be made to LS 1984 under
the 1985 agreement. Allan Sheff testified that it was at the
request of his father. On the other hand, Louis Sheff said many
times at his discovery that LS 1984 never rendered any services
to SW either before or after the 1985 agreement. He said,
however, that LS 1984 got involved in the agreement to protect
his wife in case he predeceased her. At the hearing, Louis Sheff
acknowledged that LS 1984 was an active business and that he was
carrying on the insurance business through LS 1984.
[34] Furthermore, the facts as they have
been presented show that neither Louis Sheff nor Revenue
Canada differentiated between the company and the individual in
the tax treatment of the monies received or expensed in relation
to the 1985 agreement. Thus, although it was stated in that
agreement that the $7,500 monthly payments were to be made to
LS 1984, both Revenue Canada and Louis Sheff treated
those amounts as proceeds of disposition of Louis Sheff's
shares in SW. The capital gain was declared in
Louis Sheff's personal income in 1987. Subsequently,
although it was LS 1984 who sued SW for the payment of the $7,500
monthly amount in the Superior Court of Quebec, the legal fees
relating to that action were claimed as a deductible expense for
Louis Sheff personally and half of them were accepted as such by
Revenue Canada. These are examples of how this case has been
misunderstood from the beginning by everyone having to deal with
the tax consequences of the transaction in question.
[35] Finally, I want to say that Louis
Sheff, who was 91 years old at the time of the trial, struck me
as still being very lucid and alert. Without showing any sign of
fatigue, he attended with his wife Sally at a hearing that lasted
for a whole day.
[36] Having said this, I will now try my
best to reconcile it all and to reach a decision that I hope will
define in accordance with the law the real nature of the payments
at issue and the tax treatment to be given them.
[37] First of all, it seems quite clear to
me that the $90,000 annual payments did not form part of the
proceeds of disposition of the SW shares sold by
Louis Sheff. On the one hand, the 1985 agreement clearly
stipulates in paragraph A (1) that the consideration for the
purchase of the shares is the amount of $120,000 less any amounts
owed by Louis or Sally Sheff to SW and that the purchase price is
to be paid by the purchasers of the shares, Allan Sheff and
Joseph Weiser.
[38] In a separate paragraph, paragraph A
(2), the agreement provides that SW (not the purchasers of the
shares) is to pay to LS 1984 (not the vendor of the shares) a
consulting fee of $90,000 per year during the lives of Louis and
Sally Sheff, but in any event for a minimum of 10 years from
the date of closing. The wording of this paragraph alone is
explicit enough to demonstrate that the $90,000 yearly payment
was not in consideration of the sale of the shares.
[39] Secondly, Allan Sheff had determined an
approximate value of $646,000 for the entire business. Revenue
Canada arrived at a value of $1,200,000 for all the shares in SW
(including $3,000 for the preferred shares owned by
Louis Sheff as per Exhibit A-1, Tab 12). Louis Sheff was
selling one-third of his common shares and all his preferred
shares. So, even taking the higher figure of $1,200,000, one ends
up with a value of $402,000 (1/3 x $1,197,000 = $399,000 plus
$3,000 for a total of $402,000) for the shares Louis Sheff was
selling. It is therefore difficult to argue that an amount of
$900,000 ($90,000 per year for ten years) was paid for the shares
on top of the $120,000 paid on closing and the $325,000 payable
in the future. The valuation obtained from Blondeau &
compagnie by Louis Sheff estimated the value at that time of all
amounts payable to him under the 1985 agreement at $1,058,619. It
did not provide an estimation of the value of the shares as such.
The amounts payable under the 1985 agreement represented payment
for the sale of the shares and the payment of something else that
was referred to as being consulting fees.
[40] In my view, Revenue Canada was misled
when it agreed to include in the proceeds of disposition of Louis
Sheff's shares an amount of $900,000 representing the $90,000
yearly payment over a period of ten years. This should never have
been done in the first place and, consequently, the amount of
$900,000 should not have been included in the capital gain
resulting from the sale of Louis Sheff's shares in 1987.
Revenue Canada abided by the 1990 settlement for ten years. But
at the expiration of the ten-year period, it reassessed the
appellants on the basis that the $90,000 yearly payment was
income for LS 1984.
[41] The appellants argued that Revenue
Canada is now estopped from reassessing them in subsequent
taxation years on a different basis.
[42] In Nova Scotia Power Inc. v. The
Queen, 2002 DTC 1432 (T.C.C.), a case referred to by the
appellants, the estoppel issue was raised by the Minister. The
Minister had argued that, owing to a representation said to have
been made to him by the taxpayer's counsel that the taxpayer
was an agent of Her Majesty the Queen, the taxpayer was now
estopped from contesting that position. However, the
representation relied on was essentially a conclusion of law
based on a solicitor's opinion. Bowman A.C.J. of this Court
held that such a representation could not give rise to an
estoppel and bind the Court.
[43] Bowman A.C.J. addressed the estoppel
issue as follows, at pages 1440-41, paragraphs 28 and 29:
[28] I do not think that these representations give rise to an
estoppel. In S. Goldstein v. Canada, [1995] 2 C.T.C. 2036,
the question of estoppel was discussed at some length at pages
2045-6:
. . .
. . . In Canadian Superior Oil Ltd. v. Paddon-Hughes
Development Co., [1970] S.C.R. 932 at pages 939-40 Martland,
J. set out the factors giving rise to an estoppel as follows:
The essential
factors giving rise to an estoppel are I think:
(1) A
representation or conduct amounting to a representation intended
to induce a course of conduct on the part of the person to whom
the representation is made.
(2) An act or
omission resulting from the representation, whether actual or by
conduct, by the person to whom the representation is made.
(3) Detriment
to such person as a consequence of the act or omission.
Estoppel is
no longer merely a rule of evidence. It is a rule of substantive
law. Lord Denning calls it "a principle of justice and of
equity". (See Moorgate Mercantile Co. v. Twitchings,
[1976] 1 Q.B. 225, at page 241.)
It is
sometimes said that estoppel does not lie against the Crown. The
statement is not accurate and seems to stem from a misapplication
of the term estoppel. The principle of estoppel binds the Crown,
as do other principles of law. Estoppel in pais, as it
applies to the Crown, involves representations of fact made by
officials of the Crown and relied and acted on by the subject to
his or her detriment. The doctrine has no application where a
particular interpretation of a statute has been communicated to a
subject by an official of the government, relied upon by that
subject to his or her detriment and then withdrawn or changed by
the government. In such a case a taxpayer sometimes seeks to
invoke the doctrine of estoppel. It is inappropriate to do so not
because such representations give rise to an estoppel that does
not bind the Crown, but rather, because no estoppel can arise
where such representations are not in accordance with the law.
Although estoppel is now a principle of substantive law it had
its origins in the law of evidence and as such relates to
representations of fact. It has no role to play where questions
of interpretation of the law are involved, because estoppels
cannot override the law.
The question
of the interpretation of paragraph 146(1)(c) is a matter
of law and I must decide it in accordance with the law as I
understand it. I cannot avoid that obligation because the
Department of National Revenue may previously have adopted an
interpretation different from that which it now propounds. The
question is not whether the Crown is bound by an earlier
interpretation upon which a taxpayer has relied. It is more to
the point to say that the courts, who have an obligation to
decide cases in accordance with the law, are not bound by
representations, opinions or admissions on the law expressed or
made by the parties.
The result of
the application of the rule in Maritime Electric and the
many other cases to the same effect can have, in particular
cases, unfortunate consequences for a taxpayer who, in good
faith, relies upon a departmental interpretation that is
subsequently changed. Nonetheless it is not in the interests of
justice that the courts should be fettered by erroneous
interpretations of the law by departmental officials.
[29]
The representation relied upon is essentially a conclusion of
law, based upon an opinion from a firm of solicitors. Such an
opinion or conclusion of law is entitled of course to respect but
it cannot bind the court. Lawyers routinely make representations
to the taxing authorities and in the course of doing so may
express conclusions of law. The fact that the taxing authorities
may accede to the tax result sought by the lawyers, whether or
not they concur in the legal reasoning upon which the
lawyers' arguments are premised, cannot give rise to an
estoppel.
[Footnotes omitted.]
[44] In Cohen v. Canada, [1980]
F.C.J. No. 501 (Q.L.), the reverse situation occurred. Pratte J.
of the Federal Court of Appeal summarized the case and decided as
follows:
¶
4
The appellant's second argument was that the Minister could
not legally reassess the appellant on the basis that the profit
in question was income because he had previously agreed to treat
that profit as a capital gain. Counsel submitted that this
agreement had been made during the course of negotiations between
representatives of the appellant and officers of the Department
of National Revenue concerning the appellant's assessments
for the years 1961 to 1964. The appellant had agreed, said
counsel, not to appeal his assessments for the 1961 to 1964
taxation years on the understanding that his income tax for 1965
would be computed on the basis that the profit here in question
was a capital gain. Counsel argued that the Minister could not
repudiate that understanding, particularly after the expiry of
the time within which the appellant might have appealed the 1961
to 1964 assessments.
¶
5
In my view, the Trial judge correctly dismissed that argument.
"... the Minister has a statutory duty to assess the amount
of tax payable on the facts as he finds them in accordance with
the law as he understands it. It follows that he cannot assess
for some amount designed to implement a compromise settlement
..." [See Note 1 below]. The agreement whereby the Minister
would agree to assess income tax otherwise than in accordance
with the law would, in my view, be an illegal agreement.
Therefore, even if the record supported the appellant's
contention that the Minister agreed to treat the profit here in
question as a capital gain, that agreement would not bind the
Minister and would not prevent him from assessing the tax payable
by the appellant in accordance with the requirements of the
statute.
_________________________________________________________________
Note 1: Galway v. M.N.R. [1974] 1 F.C.
600 at page 602.
_________________________________________________________________
[45] Here there was no representation
or conduct by Revenue Canada amounting to a representation
intended to induce a course of conduct on the part of the
appellants. Indeed, the appellants accepted the 1985 agreement
(with which Revenue Canada had had nothing to do) and only
reported the transaction in their 1987 tax returns. In the course
of the 1990-1991 audit, Revenue Canada agreed to treat the
$90,000 annual payment for a ten-year period as being part of the
proceeds of disposition of the shares. I do not see that as a
representation intended to induce a course of action on the part
of the appellants. When Revenue Canada became involved in the
matter, the appellants had already decided on their course of
action. The question raised by Revenue Canada was simply how the
payments should be treated from a tax point of view. The issue of
whether payments received by the appellants are taxable as
income, capital gain or simply constitute a windfall is a
question of law. The 1990 settlement cannot have the effect of
narrowing the Court's jurisdiction or displacing the
Act. Numerous other authorities state that an estoppel
cannot override the law of the land and that the Crown is not
bound by the errors or omissions of its servants (see also, for
example, M.N.R. v. Inland Industries, 72 DTC 6013 (S.C.C.)
at 6017; Gibbon v. The Queen, 77 DTC 5193 (F.C.T.D.)).
[46] In light of the case law cited
above, the doctrine of estoppel has no application here. In the
present case, Revenue Canada erred in its belief that the stream
of $90,000 yearly payments was part of the proceeds of
disposition of the shares and it is open to this Court to revisit
the case and determine the true nature of those payments for
taxation years that were not even comprised within the
ten-year period covered by the 1990 settlement.
[47] In order to determine the true nature
of the $7,500 monthly payments, I will rely on all the factors
that have been presented before me. First, the 1985 agreement
stipulates that SW is to pay a consulting fee to LS 1984. The
agreement also stipulates that the responsibility as a consultant
to SW is to be limited to the promotion of its image. Louis
Sheff, the controlling shareholder of LS 1984, is entitled to use
and occupy an office on the premises of SW. He has also been
elected as a member of the board of directors and as chairman of
SW, which positions he may hold for as long as he so desires.
[48] Second, Allan Sheff testified that the
1985 agreement had a twofold purpose. He and Joseph Weiser wanted
to buy out Louis Sheff and they wanted to provide him with the
security he needed through either a pension or a retirement
allowance for the number of years that he had given to SW (see
transcript, November 7, 2002, at page 92). He also testified that
Louis Sheff went to the office on a regular basis after 1985,
spoke to clients and gave instructions to the staff, when he was
in town. Mr. Sheff would go to Florida for several months in
the wintertime. Allan Sheff said that Louis Sheff had an
office at SW's premises up until two or three years ago.
[49] Third, Mr. Louis Sheff was vague and
not very cooperative in his testimony at trial. At discovery he
had seemed to say that the $90,000 yearly payments were to be
made to LS 1984 in order to protect his wife in case he
predeceased her (Exhibit I-1, Tab 35, page 12). He also said that
neither he nor LS 1984 ever rendered any services to SW after the
1985 agreement. As to the situation prior to 1985, there are
contradictions in the evidence, so it is not clear whether
services were rendered by Louis Sheff personally or through LS
1984.
[50] Fourth, the testimony of Louis Eidelman
was in direct contradiction with what the appellant's other
accountant, Joseph Waxman, had said to the auditor during the
second audit, done in 1995-1996. At that time, Mr. Waxman was of
the view that the professional fees incurred for the action
brought before the Superior Court of Quebec were related to
collecting the consulting fees for Louis Sheff (Exhibit I-1,
Tab 31). At the hearing, however, Mr. Eidelman said that the same
professional fees were "not to collect consulting fees [but]
to collect the continuing payments of his capital gain, his
disposition of property" (see transcript, November 7, 2002,
at page 77). Mr. Eidelman also testified that he was present as a
professional advisor to Louis Sheff during the negotiations that
culminated in the 1985 agreement. It is worth noting that he
agreed during the 1995-1996 audit to the $7,500 monthly payments
being included in LS 1984's income as of October 1995
(Exhibit I-1, Tab 19).
[51] Fifth, application for an injunction
was filed by Joseph Weiser and Allan Sheff against Louis Sheff
to, as I understand it, restrain him from attending at the
office. The Superior Court of Quebec ordered the parties to abide
by the 1985 agreement.
[52] Sixth, when SW stopped making the
payments in 1990, it was LS 1984 (not Louis Sheff personally)
that sued SW in order to get paid. Melançon J., after
hearing the evidence, was of the opinion that providing services
was not very important in the context of the signature of the
1985 agreement and he ordered that the monthly payment amounts
owing be paid to LS 1984 in accordance with that agreement.
[53] Seventh, the cheques were made out by
SW to the order of LS 1984 and/or Louis Sheff and/or Sally Sheff
and endorsed by the three of them and deposited in the joint
personal account of Louis and Sally Sheff.
[54] In my view, analysing the whole, the
$90,000 yearly payment could perhaps be an annuity payment to Mr.
Louis Sheff payable through LS 1984, within the meaning of
paragraph 56(1)(d) of the Act. The term
"annuity" is defined as follows in subsection
248(1):
SECTION 248: [Interpretation].
4248(1)3
(1) Definitions. In this Act,
"annuity" - "annuity" includes an
amount payable on a periodic basis whether payable at intervals
longer or shorter than a year and whether payable under a
contract, will or trust or otherwise.
[55] Indeed it would be plausible that SW
had agreed to pay a retiring allowance in the form of an annuity
to Louis Sheff for the services he had rendered in the past.
[56] However, in view of the various
contradictions referred to above, the ambiguity surrounding the
drafting and signing of the 1985 agreement, and the attitude
thereafter of the parties concerned, I find it more prudent to go
along with the decisions already rendered by two judges of the
Superior Court of Quebec and rely on the only document that was
signed by all, that is, the 1985 agreement. I agree with
Reeves J. that this agreement contains reciprocal
obligations and that it is the law which the parties have agreed
to and they must abide by it in all respects.
[57] The 1985 agreement states that the
$90,000 yearly payment is a consulting fee payable to LS 1984 and
that LS 1984's responsibility as a consultant shall be
limited to the promotion of SW's image. It is therefore
plausible, in the context of the particular facts of this case,
that it was in consideration of services rendered in the past
that SW undertook the obligation to pay LS 1984 for the minor
services requested in the 1985 agreement.
[58] In my view, the evidence is
insufficient to support the appellants' alternative argument
that the $90,000 annual payment should be characterized as a
payment made to prevent Louis Sheff from competing with SW. The
respondent's alternative argument that it should be
characterized as a capital gain after 1995 does not stand up
either, as it was not a payment for the disposition of
property.
[59] In those circumstances, I am of the
view that, with the exception of the 1995 taxation year, which I
will address below, the assessments are well-founded with respect
to LS 1984 and that the $90,000 yearly payment had to be included
in its income pursuant to section 9 of the Act. The 1985
agreement indicated that the payments were to be made to LS 1984
as consulting fees; it was LS 1984 that sued SW for payment of
those fees; and Louis Sheff finally acknowledged at trial that
the insurance business was carried on through LS 1984 in the
past. Furthermore, there is no clear indication that LS 1984 was
acting only as a conduit for Louis Sheff.
[60] With respect to Louis Sheff's
assessments, the cheques having been endorsed by LS 1984 and
deposited in the joint personal bank account of Louis and Sally
Sheff, there was a benefit conferred on him as a shareholder of
LS 1984 within the meaning of subsection 15(1) of the Act.
In Chopp v. Canada, [1997] F.C.J. No. 1551 (Q.L.),
the Federal Court of Appeal approved the interpretation of
subsection 15(1) given by Mogan J. of this Court, which
interpretation is reproduced in paragraph 4 of the Court of
Appeal's decision as follows:
¶
4
In allowing the taxpayer's appeal, Mogan J.T.C.C. interpreted
subsection 15(1) as follows:
"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."
[61] It is clear here that a benefit was
conferred on Louis Sheff as the money went directly into his bank
account. The situation is somewhat akin to that in Smith v.
Canada, [1999] F.C.J. No. 1605 (Q.L.), a case in which the
individual taxpayer was credited with amounts that were paid to
the company he controlled. Those amounts were taxed both in the
company's and in the individual's hands.
[62] This seems at first sight to be unfair
as the same amount is taxed in LS 1984's hands and in
Louis Sheff's hands. However, it is the result of what the
parties decided in the 1985 agreement. After all, Louis Sheff
negotiated through his professional advisors, and the decision to
make the payments to LS 1984 must have been a deliberate one at
the time, especially when we consider, again, that it was LS 1984
that sued SW five years later for payment of the amounts unpaid.
Furthermore, there is no evidence that LS 1984 expensed the
payments as salary paid to Louis Sheff or that it declared a
dividend in favour of Louis Sheff. Louis Sheff cannot now
repudiate an agreement that he agreed to sign on the advice of
professionals. I adopt the words of Bowman A.C.J. in Molinaro
v. The Queen, 98 DTC 1636 (T.C.C.) (conf. by 2000 DTC 6114
(F.C.A.)) at paragraphs 26 and 27, which read as follows:
[26] Quite apart from that fact it strikes me as most
anomalous that where a person enters into a binding agreement
with an arm's length party who relies upon the maintenance of
a legal relationship as set out in the formal documentation and
that person is advised of the legal and fiscal consequences of
what he or she is signing that person should be entitled to
repudiate the agreement not only as against the Minister of
National Revenue but as against the other party. I suppose that
in theory one might be able to make a case that a party to an
agreement can invoke the substance over form doctrine but it
seems to run counter to all principles of commercial morality and
indeed of commonsense that one can, after solemnly and formally
entering into carefully drafted legal documents upon which the
other party relies, simply snap his fingers and say "That
legal relationship isn't to my liking. It doesn't suit my
fiscal objectives. Therefore I shall clothe it in a different
nomenclature that I like better." I cannot believe that Mr.
Molinaro's advisors would have told him to go ahead and sign
the agreements because it was necessary to get the deal through,
but it was not the real deal and he could ignore it and conjure
up another deal that was more attractive to him and, perhaps more
importantly, to Bluevest.
[27] I do not need to resurrect the ancient doctrine
of estoppel by deed, although it might apply (the employment
contract was in fact under seal, an essential prerequisite to
invoking this venerable rule). Rather I prefer to place my
reasoning upon an even more ancient principle that if one makes
one's bed in a particular way one should - particularly if
one has had help from professional accountants and lawyers in
making the bed - be prepared to lie in it.
[63] In view of the foregoing, and as
counsel for the appellants has not really argued on the
application of subsection 15(1), I have no choice but to maintain
the assessments issued against Louis Sheff for the 1996, 1997 and
1998 taxation years. I must add here that no evidence was given
as to whether Sally Sheff was also a shareholder of LS 1984.
Consequently, the entire benefit is Louis Sheff's.
[64] With respect to the
appellants' argument that subsection 248(28) (former
subsection 4(4)) of the Act precludes a reassessment where
the taxpayer has already been taxed on the same income from a
particular source, that argument does not hold water. The $90,000
yearly payments are recurrent year after year and I have decided
that the source of the payments is the 1985 agreement, which
specifies that they are annual consulting fees. The fact that
Louis Sheff was able to include the amount of those payments
corresponding to a ten-year period in his income as a capital
gain in 1987 and that, as luck would have it, LS 1984 was able to
avoid including any of those same payments in its income, does
not mean that the appellants have already paid tax on the annual
payments made after 1995. In fact, those payments should indeed
have been taxed on a yearly basis, and in my view the appellants
took advantage of the 1990 settlement.
[65] As regards the appellants'
1995 taxation year, Revenue Canada has reassessed beyond the
normal reassessment period. It accordingly had to show that the
appellants had made misrepresentations that were attributable to
neglect, carelessness or wilful default in filing their returns,
as required by subparagraph 152(4)(a)(i) of the
Act. I am of the view that the respondent has not
discharged that burden. The appellants were under the impression
in 1995 that the $90,000 yearly payment was included in the
proceeds of disposition even after the expiration of the ten-year
period. Mr. Clairoux from Revenue Canada testified that in
reaching the 1990 settlement, he did not consider what would
happen if the Sheffs survived beyond the ten-year period.
Furthermore, the appellants obtained legal advice in 1994 that no
amount already included by Louis Sheff in the proceeds of
disposition of the SW shares should be included in his income in
the future. Louis Sheff, who is also the controlling mind of LS
1984, was therefore under the impression that LS 1984 did not
have to include the yearly payment amounts in its income. He did
not agree with the position taken by Revenue Canada in January
1996 that these amounts were to be included in LS 1984's
income (Exhibit I-1, Tab 21).
[66] I do not think that in the
circumstances it can be said that the appellants made
misrepresentations that were attributable to neglect,
carelessness or wilful default and that would justify Revenue
Canada in reassessing with respect to the statute-barred
1995 taxation year. After all, Revenue Canada could have
reassessed earlier, being aware in 1996 of the misleading
approach adopted by one of its auditors in reaching the 1990
settlement.
[67] For these reasons, the appeals
are allowed for the 1995 taxation year and the reassessments
issued against the appellants for that year are quashed on the
basis that they are statute-barred. The appeals for the 1996,
1997 and 1998 taxation years are dismissed with costs.
Signed at Ottawa, Canada, this 10th day of September 2003.
J.T.C.C.
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