Date:
20010412
Docket:
2000-1255-IT-I
BETWEEN:
ROGER
GAZAILLE,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
Alain
Tardif, J.T.C.C.
[1]
This is an appeal concerning the 1996 and 1997 taxation years.
The disputed assessment was made pursuant to section 160 of
the Income Tax Act (the "Act").
[2]
The assessment was increased substantially through the addition
of interest. Accordingly, this Court will also have to decide
whether the interest was correctly computed.
[3]
The appellant testified himself and called Michel Lafrance to
testify in his capacity as an accountant. Mr. Lafrance, who was
very familiar with the appellant's case, admitted from the
outset that the interest had been correctly computed even though
the amount thereof is very substantial in comparison with the
principal amount of the assessment.
[4]
Mr. Lafrance laid great stress on the matter of the dividends
paid to the appellant. According to Mr. Lafrance, this was
basically the process or method used to pay the appellant's
salary for the work he did for Gazaille, Belleau et
associés Inc.
[5]
The witness said that the company was fully capable of paying
such a dividend at the time dividends were normally paid; he also
said that, when the dividends for the years at issue were paid,
it was accepted as a fact that the company would be able to pay
all the taxes it owed. He was very insistent in arguing that
there was no bad faith whatsoever and in showing that there was
an unequivocal intent to repay all the company's debts
eventually.
[6]
However, he admitted that the company's financial situation
was very precarious at the time, so much so that the
directors-namely the appellant and his financial advisors-were in
liquidation mode. He repeated that their reviews, analyses and
assessments gave them hope that all creditors, including
Revenue Canada, would be repaid in full with respect to
their various claims.
[7]
The appellant, for his part, testified that he has always
fulfilled his responsibilities toward the Canadian tax
authorities. He even estimated the taxes he has paid during his
working life at close to $1.5 million.
[8]
He also repeated that he has always been in good faith and honest
and that he really did everything he could to prevent the
company's collapse. Moreover, the evidence shows that the
appellant was the victim of a defrauder (who was given a severe
sentence for fraud), and that this hurt the company the appellant
controlled.
[9]
The appellant also explained that he did not make an assignment
of his property and that he repaid all the victims of the fraud.
Finally, he took issue with the astronomical amount of interest
being claimed, which is greater than the principal, adding that
he found it unfair, unreasonable and somewhat excessive to have
to pay taxes even though he self-assessed when and after
the dividends were paid.
Analysis
[10] The
evidence focused mainly on fairness and sympathy factors. The
appellant has certainly achieved his goal in this regard, since I
have no doubt that he was always in good faith and did not want
to evade taxes. He did not deliberately try to evade his tax
liabilities. Nevertheless, I must point out that this Court is
obliged to render judgment on the basis of the only real facts
available to it and the applicable law.
[11] In the
instant case, the arguments based solely on good faith,
reasonableness, fairness, the total absence of bad faith, and
excessiveness are not admissible, since the Act's
provisions are clear and very specific.
[12]
Moreover, the appellant and his witness, Mr. Lafrance, never
disputed the basis for the assessment; it was even admitted that
the interest had been correctly computed. It was also admitted
that the company had paid the dividends that gave rise to the
application of section 160.
[13] Given
the admission concerning the interest, the Court must confirm the
validity of that significant component of the assessment,
especially since the Court has no jurisdiction to vary or cancel
the interest added to an assessment. That is a discretion that
Parliament has conferred on the Department.
[14] Only
the Federal Court has jurisdiction to judicially review the
exercise of that discretion. The Tax Court of Canada has no
jurisdiction if the interest has been correctly
computed.
[15] As
regards the basis for the assessment, Mr. Lafrance was very
insistent that too much importance should not be attached to the
characterization of the chosen means as a "dividend",
since what was actually involved was basically a salary paid by
that means.
[16]
However, he did admit that dividends were indeed paid. A dividend
is not a salary but is truly a benefit related to one's
capital or share interest in a company. This fact was very
clearly stated by Iacobucci J. in Neuman v. M.N.R., [1998]
1 S.C.R. 770:
57
Dickson C.J. seemed to be of the view that the character of a
shareholder's dividend income is to be determined by that
shareholder's level of contribution to the corporation. This
approach ignores the fundamental nature of dividends; a dividend
is a payment which is related by way of entitlement to one's
capital or share interest in the corporation and not to any other
consideration. Thus, the quantum of one's contribution to a
company, and any dividends received from that corporation, are
mutually independent of one another. La Forest J. made the same
observation in his dissenting reasons in McClurg [v.
Canada, [1990] 3 S.C.R. 1020] (at p. 1073):
With respect, this
fact is irrelevant to the issue before us. To relate dividend
receipts to the amount of effort expended by the recipient on
behalf of the payor corporation is to misconstrue the nature of a
dividend. As discussed earlier, a dividend is received by virtue
of ownership of the capital stock of a corporation. It is a
fundamental principle of corporate law that a dividend is a
return on capital which attaches to a share, and is in no way
dependent on the conduct of a particular shareholder.
. .
.
64
To summarize, it is inappropriate to consider the contributions
of a shareholder to a corporation when determining whether s.
56(2) applies. Dividends are paid to shareholders as a return on
their investment in the corporation. . . .
[18] A
dividend is not a salary; this question was dealt with very
explicitly in Pauzé v. Canada, [1998] T.C.J.
No. 560 (Q.L.), a case in which Judge Archambault of this
Court stated the following:
3
. . . It was his accountant who
determined at the end of Référium's fiscal year
whether the advances would be treated as a dividend or as salary.
. . .
4
In the fiscal year ending February 28, 1991
Référium paid Mr. Pauzé a dividend of
$70,000. . . . Mr. Pauzé admitted that
Référium had closed down its operations around
December 1992. From that time on, he continued operating his
executive search business through a new company.
5
Référium's accountant, Mr. Morin, also
testified at the hearing. . . . Mr. Morin admitted that it was
common practice in some independent businesses to advance money
to their sole shareholders, and before the end of the financial
year, to treat these advances as a dividend. He stated that there
was no particular advantage to declaring dividends rather than
paying a salary during those years. However, he admitted that the
payment of a dividend conferred a benefit on Mr. Pauzé in
terms of liquidity since there were no source deductions in the
case of a dividend. He further admitted that when a company pays
a dividend it does not have to contribute to Quebec's health
insurance plan or to the Quebec Pension Plan.
. .
.
8
Contrary to the argument of counsel for Mr. Pauzé, I am
not bound by Mr. Pauzé's testimony that he received
employment income from three separate sources, namely in the form
of a base salary, the reimbursement of expenses and advances
treated as dividends. The question this Court has to resolve is
one of mixed law and fact. As Mr. Pauzé was both an
employee and the sole shareholder in Référium, he
could be paid both as an employee and as a shareholder. . .
.
9
Furthermore, I have no doubt that Référium really
intended to pay its sole shareholder a dividend. The company was
advised by a chartered accountant who was fully aware of the
difference between a salary and a dividend. . . . The accountant
also knew that when a company pays a dividend it does not have to
make source deductions and may avoid paying certain payroll
taxes. In paying the $70,000 dividend Référium did
in fact wish to pay a dividend, not to pay money in consideration
of services rendered.
10
As
my colleague Judge Dussault said in Gosselin v. R., 1996
CanRepNat 2472 (TaxPartner, Carswell CD-ROM), at paragraph 16, a
company which pays dividends does not receive any consideration
from its shareholders. . . .
11
My
colleague Judge Bell also adopted the same approach in 155579
Canada Inc. et al. v. The Queen, 97 D.T.C. 691
. . . . He also set out the reasons why he did not follow the
decision in Davis [et al. v. The Queen, 94 DTC 1934]. I concur
with him in this respect.
12
. .
. If Référium had really paid Mr. Pauzé a
salary, it should have made source deductions and could have been
required to pay certain payroll taxes. If the amount of $70,000
actually represented consideration for services rendered, that
is, a salary, it would have been subject to a higher tax than if
it were a dividend. . . .
13
As I
conclude that the sum of $70,000 was paid as a dividend and was
not paid for consideration, I have no choice but to uphold the
assessment.
[19] Judge
Bell of this Court also addressed this question in 155579
Canada Inc. v. Canada, [1996] T.C.J. No. 1188
(Q.L.):
6
It is agreed that Amalgamated 99, 78 Canada and 79 Canada did not
deal with each other at arm's length during all material
times. In June, 1987 Amalgamated 99 received $11,130,000 on the
sale of its common shares of Sharp. Amalgamated 99 then paid
substantial sums as dividends to 78 Canada and 79 Canada. . . .
After unsuccessful actions by the Department of National Revenue
to collect tax, it issued notices of assessment, in August, 1993
to each of the Appellants in the sum of $425,598.46 pursuant to
section 160 of the Act in respect of the payment in March, 1988
of dividends to 78 Canada in the sum of $2,277,148 and to 79
Canada in the sum of $1,380,089.
. . .
8
. . . Subsection 160(2) provides that the Minister "may at
any time" assess a transferee in respect of any amount
payable by virtue of section 160. An assessment under that
section, therefore, is made separate from the assessment
provisions of section 152 and the limitation period imposed by
subsection 152(4) does not apply. Accordingly, the
Appellants' submissions in this regard fail.
. .
.
11
Appellants' counsel submitted that if there had been a
transfer of property there was consideration for the dividend in
that the services provided by both McDorman and Daly to Sharp
were worth substantially more than the amounts paid to them by
Sharp. He relied on the decisions in Davis v. Her Majesty the
Queen, 94 D.T.C. 1934 and Her Majesty the Queen
v. McClurg, 91 D.T.C. 5001. In Davis, T Inc. paid cash
dividends to the taxpayers who were its only two shareholders,
such dividends being paid in lieu of salaries for their full time
services to the company. This Court, in considering the
application of section 160 of the Act, found that consideration
can be given in exchange for dividends. Specifically at page 1938
the Court said,
It is within the
discretion of the directors to declare dividends in exchange for
consideration. I find that at the time of the declaration of the
dividends, the Appellants had committed their future services to
the benefit of the business and in fact the dividends were not
paid until the services were rendered.
. . .
14
I do
not interpret the words of Dickson, C.J. as meaning that
consideration can be given in exchange for dividends. The McClurg
case was not concerned with section 160 but rather with
subsection 56(2) dealing with the payment or transfer of property
pursuant to the direction of or with the concurrence of a person
for the benefit of the recipient. That subsection does not use
the word "consideration" as does subsection 160(1).
Indeed, subsection 160(1) speaks of the "fair market value .
. . of the consideration given for the property". . . . It
appears that the learned Chief Justice looked to the motivation
for paying the dividend, namely recognition of contribution,
rather than having sought to characterize Wilma McClurg's
efforts as consideration for that dividend. Had that been his
objective, he could have achieved it easily in precise and
unequivocal terms. He seems to have seen her efforts as the
reason for, not as the consideration for, payment of the
dividend. A dividend is a payment related, by way of entitlement,
simply to the interest of the payee as a shareholder. [See
Re: Telsten Services Limited (1981), 39 CBR (NS) 68
(S.C.O) and Re Carson, [1963] 1 O.R. 373 (H.C.O.).]
Accordingly, with respect, I do not concur with the finding in
the Davis case and I do not accept the submission of
Appellants' counsel that consideration was given for the
dividends received by them. . . .
[20]
Finally, Judge Bonner of this Court also considered this
matter in Ruffolo v. Canada, [1998] T.C.J. No. 714
(Q.L.):
7
It is clear that the first of the Appellants' arguments
cannot succeed. The word "consideration" in
subparagraph 160(1)(e)(i) is to be given its ordinary meaning,
namely, something given in payment. Nothing in the statutory
context or in the purpose which underlies section 160 suggests
otherwise. The right to payment of a debt which is satisfied and
therefore disappears when the debt is paid cannot be said to have
been given up by the creditor in payment for the payment. When a
dividend is paid by a corporation to a shareholder property flows
in one direction only. The right of a shareholder to receive
payment of a dividend which has been declared flows from his
status as shareholder and not from any consideration given by
him. Nothing in the decision of the Supreme Court of Canada in
Neuman v. The Queen [98 DTC 6297] supports the
Appellants' position.
[21] The
appellant and his accountants, for reasons of their own, made the
choice and decided that dividends would be and ought to be paid
annually to the appellant, who ran the company.
[22] No
matter what interpretation or meaning they give to the payment of
those dividends, the fact remains that there was indeed a
transfer within the meaning of the Act and the case
law.
[23] The
evidence also showed that there was a tax liability at the time
the dividends were paid; ultimately, the appellant controlled the
transferor. All of the conditions for the application of
subsection 160(1) have been met and, thus, the analysis and
conclusions behind the assessment now under appeal were
correct.
[24] For all
these reasons, the appeal must be dismissed.
Signed at
Ottawa, Canada, this 12th day April 2001.
J.T.C.C.
Translation certified
true on this 31st day of October 2002.
Erich Klein,
Revisor
[OFFICIAL
ENGLISH TRANSLATION]
2000-1255(IT)I
BETWEEN:
ROGER
GAZAILLE,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeal heard
on March 12, 2001, at Sherbrooke, Quebec, by
the
Honourable Judge Alain Tardif
Appearances
For the
Appellant:
The Appellant himself
Counsel
for the
Respondent:
Dany Leduc
JUDGMENT
The appeal from the assessment made under section 160 of the
Income Tax Act for the 1996 and 1997 taxation years,
notice of which bears number 13192 and is dated December 10, 1999, is dismissed in accordance with the attached
Reasons for Judgment.
Signed at
Ottawa, Canada, this 12th day of April 2001.
J.T.C.C.
Translation certified
true on this 31st day of October 2002.
Erich Klein,
Revisor
[OFFICIAL
ENGLISH TRANSLATION]
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