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Reference: 2003TCC619
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Date: 20031015
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Docket: 2000-4123(IT)G
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BETWEEN:
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DENIS LAMBERT,
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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
Angers, J.
[1] The Appellant appeals before this Court the assessment made by the Minister of National Revenue (the "Minister") of the 1994 taxation year. The Appellant objects to the sum of $42,095, which the Minister added to the Appellant's income for the year at issue, and to the penalty the Minister imposed under subsection 163(2) of the Income Tax Act (the "Act"). Initially, the Appellant raised the issue of the constitutional validity of subsection 163(2) of the Act, however, he did not argue this point at the start of the trial.
[2] The Minister assessed the Appellant pursuant to subsection 56(2) of the Act as a result of a business transaction, which is at the heart of this case.
[3] The Appellant is the sole shareholder of the company Aviation Denis Lambert Inc. ("Aviation"), which has transported clients and merchandise by aircraft since 1992 for the benefit of another company, Domaine La Sorbière (1991) Inc. ("La Sorbière"). The Appellant was one of four shareholders of the latter company, which was incorporated at the end of 1990 or at the beginning of 1991. La Sorbière was an abandoned outfitter and the Appellant, along with the other shareholders, intended to reopen it for business. It was a large area and there was no road leading to the outfitter.
[4] According to the Appellant, two of the shareholders went bankrupt and one, James Boudreau, became a shareholder in 1993. The capital stock was reorganized at that time to create Class A and Class B shares. According to the Appellant, holders of Class A shares could occupy a cottage, but their shares did not entitle them to share in the profits. However, they had the right to access the books of account. The Appellant and James Boudreau each held 1,000 Class B voting shares. However, no company documents were filed to confirm the nature of the capital stock.
[5] According to the Appellant, operating La Sorbière proved to be a disaster during all of these years. The outfitter was not able to receive its first clients until 1992. Aviation transported clients, materials, equipment, merchandise and fuel except during the winter months when snowmobiles were used. From 1991 to 1995, Aviation used its aircraft solely to provide services to La Sorbière. The Appellant claims to have flown an average of 200 flying hours per year during this period. Each flying hour was worth approximately $300, not counting damage caused to the aircraft. He produced the aircraft journey log for 1995, in which 66 flying hours were recorded. The Appellant maintains that Aviation did not require reimbursement for its expenses because La Sorbière did not have the means to pay. However, in cross-examination, he had to acknowledge that on October 17, 1994, La Sorbière paid in cash a series of invoices prepared by Aviation, for the period from May to October 1994, totalling $8,351.42, and that Aviation deposited this money into its account. All of the invoices make reference to air transport at a rate of $150 per hour.
[6] The Appellant described the misfortunes that befell the outfitter, including the loss of the fuel depot in the winter of 1993 due to fire, a number of forest fires that raged in the area of La Sorbière and a flood. The most significant event was the loss of the cottage in the fire of July 14, 1994. It was completely destroyed.
[7] La Sorbière received approximately $375,000 from its insurance company. A portion of this amount, that is $45,000, was paid to a collections officer. To ensure that the outfitter would be operational the following season, reconstruction of the cottage was planned early and was completed at a lower cost than the balance of the insurance payment received, leaving a large sum of money in the coffers of La Sorbière. Thus, the Appellant and his associate, James Boudreau, used this money to purchase two aircraft engines and to make some repairs to Aviation's aircraft. Both engines were purchased from Société Aviation B.L. Inc. ("B.L.") at a cost of $83,000 plus tax. The engine installed in Aviation's aircraft cost $31,500 and the one installed in James Boudreau's aircraft cost $51,500. With regard to the repairs, modifications were made to the wings of Aviation's aircraft at a cost of $6,200. These two invoices total $42,095, that is, the amount that was added to the Appellant's income and the subject-matter at issue in this case.
[8] Wanting to avoid problems with La Sorbière's Class A shareholders, the Appellant had B.L. and André Guérin prepare false invoices. Thus, rather than listing the sale of an aircraft engine, B.L.'s invoices listed a series of items including generators, boats and engines, the value of which corresponded to the purchase of the two aircraft engines, that is, $83,000 plus taxes in the amount of $11,582, for a total of $94,582. André Guérin's invoice described the sale of formed metal rather than the repairs that he made to the wings of Aviation's aircraft in the amount of $6,200. In a letter addressed to Maurice Hammond, dated July 15, 1998, the Appellant acknowledged that the invoice description was false and he explained that he did not do this to avoid paying taxes, but to avoid a legal saga with the "inactive" shareholders who were jealous because they would like to have received a portion of the insurance proceeds, which the Appellant claims belonged exclusively to him and to James Boudreau.
[9] The false invoices were discovered during an audit conducted by Investigator Maurice Hammond from Revenue Canada (former name of the Canada Customs and Revenue Agency), in March 1998. Five criminal charges were laid against the Appellant in March 1999, and on January 11, 2000, he acknowledged his guilt of one of the charges. He was fined $5,000.
[10] In addition, the Appellant testified that Aviation sold some property to La Sorbière in December 1994, for a total of $26,209.65, which was paid by cheque on January 19, 1995. This included the sale of tools, generators, outboard motors, etc. The Appellant acknowledged that some items were his own personal belongings. The Appellant signed all of the cheques relating to the purchase of aircraft engines, payment for air transport, repairs to the wings and the sale of tools.
[11] The Appellant testified that paying Aviation for its services was always an issue. His associate, James Boudreau, agreed with this principle. The transaction involving the purchase of the engine was recorded in Aviation's accounts.
[12] Mr. Jacques Amyot, Aviation's accountant, was not informed of the purchase of the engine prior to the audit conducted by Revenue Canada in 1998. According to the financial statements, the aircraft was sold in 1996 and a capital gain was declared. Once informed of the transaction involving the purchase of the engine and the repairs, he corrected the financial statements for tax purposes. The 1994, 1995 and 1996 financial statements filed in evidence did not reflect reality. Mr. Amyot received the information used in the preparation of the financial statements from the Appellant's spouse.
[13] Mr. Maurice Hammond described his audit work to the Court and explained how he discovered the false invoices. He suspected that B.L. did not sell boats and, from there, his investigation led to the laying of charges against the Appellant and subsequently to the new assessment that added $42,095.82 to the Appellant's income.
[14] In cross-examination he was asked whether, during his audit, he discovered that Aviation rendered some services to La Sorbière. The witness then referred to the invoices thatAviation prepared in 1994 for air transport to the outfitter of La Sorbière and stated that on October 17, 1994, this company paid $8,351.42. He acknowledged that Aviation rendered services to La Sorbière, but he did not see any documentation during his audit confirming this fact or revealing debts that La Sorbière owed to Aviation. The documents he saw were those relating to the purchase of the engine and to the repairs completed in 1994, and the 1995 aircraft journey log.
[15] The Minister relies on subsection 56(2) of the Act. This provision reads as follows:
56(2) Indirect payments. A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person (other than by an assignment of any portion of a retirement pension pursuant to section 65.1 of the Canada Pension Plan or a comparable provision of a provincial pension plan as defined in section 3 of that Act or of a prescribed provincial pension plan) shall be included in computing the taxpayer's income to the extent that it would be if the payment or transfer had been made to the taxpayer.
[16] Thus, this subsection sets out four pre-conditions to its application:
(1) the payment must be to a person other than the reassessed taxpayer;
(2) the allocation must be at the direction or with the concurrence of the reassessed taxpayer;
(3) the payment must be for the benefit of the reassessed taxpayer or for the benefit of another person whom the reassessed taxpayer wished to benefit, and;
(4) the payment would have been included in the reassessed taxpayer's income if it had been received by him or her.
[17] Counsel for the Respondent invokes the application of subsection 56(2) on the grounds that the Appellant paid a sum of money (the sum at issue) obtained from La Sorbière for the benefit of another company (Aviation), even though the Appellant is not necessarily entitled to payment or to the amount of money that was transferred. Counsel for the Respondent maintains that subsection 56(2) applies if the benefit conferred is not directly taxable in the hands of Aviation.
[18] Counsel for the Appellant submits that conditions 3 and 4 have not been met. Condition 3 requires that there is a benefit that the Appellant wishes to confer on Aviation. And yet, in this case, Counsel submits that the services that Aviation rendered to La Sorbière during the taxation year at issue are far greater than the value of the engine it received and the repair work that was done on the wings of its aircraft and that it is simply a matter of reimbursement for numerous services rendered. Condition 4 requires the payment in question to have been included in the Appellant's income, that it was his due. In this case, Counsel for the Appellant maintains that the Appellant was not owed this money, which precludes the application of subsection 56(2). In addition, Aviation was taxed on the amount received in such a way that if subsection 56(2) were to be applied, there would be double taxation, which is not the purpose of subsection 56(2). Finally, Counsel for the Appellant maintains that the money came from the insurance proceeds, and as such, it constitutes a capital gain, half of which is not taxable. This half could be distributed to shareholders tax-free. With regard to this last point, the evidence presented at the trial is clearly insufficient to permit me to determine the possible treatment of this money, especially since it is known that it was used to purchase, based on false invoices, equipment for La Sorbière. I shall not rule on this issue.
[19] Subsection 56(2) has been discussed and analyzed in several decisions including McClurg v. Canada [1990] 3 S.C.R. 1020, Winter v. Canada, 1990 CarswellNat 722 and Neuman v. M.N.R. [1998] 1 S.C.R. 770. The provision relates to tax-avoidance. In Winter (supra), Marceau J., summarized its scope as follows:
It is generally accepted that the provision of subsection 56(2) is rooted in the doctrine of "constructive receipt" and was meant to cover principally cases where a taxpayer seeks to avoid receipt of what in his hands would be income by arranging to have the amount paid to some other person either for his own benefit (for example the extinction of a liability) or for the benefit of that other person (see the reasons of Thurlow J. in Miller, supra, and of Cattanach J. in Murphy, supra). There is no doubt, however, that the wording of the provision does not allow to its being confined to such clear cases of tax-avoidance. The Bronfman judgment, which upheld the assessment, under the predecessor of subsection 56(2), of a shareholder of a closely held private company, for corporate gifts made over a number of years to family members, is usually cited as authority for the proposition that it is not a pre-condition to the application of the rule that the individual being taxed have some right or interest in the payment made or the property transferred. The precedent does not appear to me quite compelling, since gifts by a corporation come out of profits to which the shareholders have a prospective right. But the fact is that the language of the provision does not require, for its application, that the taxpayer be initially entitled to the payment or transfer of property made to the third party, only that he would have been subject to tax had the payment or transfer been made to him. It seems to me, however, that when the doctrine of "constructive receipt" is not clearly involved, because the taxpayer had no entitlement to the payment being made or the property being transferred, it is fair to infer that subsection 56(2) may receive application only if the benefit conferred is not directly taxable in the hands of the transferee. Indeed, as I see it, a tax-avoidance provision is subsidiary in nature; it exists to prevent the avoidance of a tax payable on a particular transaction, not simply to double the [page 594] tax normally due nor to give the taxing authorities an administrative discretion to choose between two possible taxpayers.
[20] Not only is it admitted that the first two conditions for the application of subsection 56(2) have been met, but the facts also support this conclusion. As for the third condition, Counsel for the Appellant maintained that no benefit was conferred on Aviation through the transfer of an aircraft engine and through the modification of the wings of the aircraft for a total value of $42,095, on the grounds that, prior to and during the year at issue, Aviation rendered essential services to La Sorbière, namely transport by aircraft of clients and equipment. Furthermore, without such support, La Sorbière could not have carried on its business. According to Counsel for the Appellant, the services rendered greatly exceed the value of the engine and the modifications, in such a way that Aviation did not receive actual benefits, but rather reimbursement for the services it rendered to La Sorbière.
[21] The aircraft journey log filed in evidence indicates that a number of flying hours were accrued in 1995 to provide service to La Sorbière. On this evidence, it is submitted that as many flying hours were conducted. The Appellant testified that he flew an average of 200 flying hours per year at a rate of $300 per hour. He added that Aviation did not submit invoices because La Sorbière had no income. However, the evidence also revealed that a series of invoices from May to October 1994 were issued by Aviation to La Sorbière, that the hourly rate was $150, that the total of the invoices was $8,351.42 and that they were paid on October 17, 1994. Considering that La Sorbière's main cottage was completely destroyed by fire on July 14, 1994, that leaves very few months to carry on business to justify the number of flying hours and the hourly rate that the Appellant seems to have suggested. I find that, for 1994, Aviation was paid for its services and that the transaction was carried out to confer a benefit on Aviation, while enabling the Appellant to avoid trouble with the Class A shareholders.
[22] At first glance, it seems as though the last condition described in subsection 56(2) has not been met. Indeed, the evidence presented at trial does not prove that the Appellant was entitled to payment of this money or that he was entitled to retained earnings by La Sorbière. However, Winter, supra, tells us that in such a case, it would be fair to infer that subsection 56(2) only applies if the benefit conferred is not directly taxable in the hands of the transferee, in this case, Aviation.
[23] However, before addressing the issue of whether the benefit conferred on La Sorbière was taxed, I cannot disregard a passage containing some of the comments the Appellant made in a letter that he wrote to Mr. Maurice Hammond, dated July 15, 1998 (Exhibit I-8), in which he states in the final paragraph on page two:
[translation]
... I understand that the invoice description is false, but the reason has already been explained. It was not to avoid taxes, but to avoid a "legal saga" with the "inactive shareholders" who were "jealous" of the insurance proceeds and who would have liked to receive a share of that which belonged to us exclusively. Furthermore, the one who "accommodated" us is a "passive shareholder" himself and he agreed to say that he was owed nothing.
[24] In my opinion, this passage from the letter written by the Appellant, who together with the other shareholder held Class B voting shares, confirms the fact that they had the power to confer entitlement on retained earnings by La Sorbière, thereby making subsection 56(2) applicable.
[25] As for knowing whether this money was taxed in the hands of Aviation, the corrections Mr. Jacques Amyot made to the accounts do not seem to show that Aviation actually declared the value of the engine and the modifications as income. Rather, the items were capitalized to correct the capital gain realized by Aviation when the aircraft was sold in 1996. For these reasons, I find that the fourth condition has been met, that subsection 56(2) applies and that the Minister was justified in adding the sum of $42,095 to the Appellant's income for the 1994 taxation year.
[26] In addition, the Minister imposed a penalty on the Appellant for the taxation year at issue, under subsection 163(2) of the Act:
163(2) False statements or omissions. Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a "return") filed or made in respect of a taxation year as required by or under this Act or a regulation, is liable to a penalty of the greater of $100 and 50% of the total of
...
[27] The onus is thus on the Respondent to show on a balance of probabilities that the Appellant made a false statement in his income tax returns for the year in question and that the statement was made knowingly or under circumstances amounting to gross negligence.
[28] Strayer J., in Venne v. Canada, 84 DTC 6247, maintained that gross negligence must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not.
[29] In this case, it is obvious that the Appellant, within the context of fraudulent transactions, showed total indifference as to whether the law was complied with or not. His actions led to the laying of criminal charges and he acknowledged his guilt. Obviously, his ultimate goal was to appropriate funds by falsifying documents to avoid problems with the other shareholders. In so doing, however, he did not realize that there were tax consequences for La Sorbière, for Aviation and for himself. Thus, the Minister was justified in imposing a penalty under subsection 163(2) of the Act.
[30] Therefore, the appeal is dismissed with costs.
Signed at Ottawa, Canada, this 15th day of October 2003.
Angers, J.
Translation certified true
on this 24th day of March 2004.
Sharlene Cooper, Translator
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