Citation: 2014 TCC 119
Date: 20140423
Dockets:
2010-71(IT)G
2010-70(IT)G
BETWEEN:
GUY GERVAIS,
LYSANNE GENDRON,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Jorré J.
Introduction
[1]
In this case, Guy
Gervais and Lysanne Gendron, are appealing from reassessments for the 2002
taxation year.
[2]
The appeals were heard
on common evidence. There is no real disagreement on the facts.
A simplified overview of
the dispute
[3]
There is no dispute
regarding the amounts at issue, and to simplify this overview, I will round off
the numbers.
[4]
At the beginning of
2002, Mr. Gervais was a shareholder in a family business. Ms. Gendron, his
spouse, was not a shareholder.
[5]
In the summer of 2002,
an arm’s length company, BW Technologies Ltd., offered to buy the business, and
the shareholders, Mr. Gervais and his brother Mario Gervais, accepted the
offer to purchase before September 26, 2002.
[6]
On September 26, 2002,
Mr. Gervais sold one million of his shares in the family business to Ms.
Gendron for $1,000,000, the fair market value of the shares, and elected to
realize his gain by disposing of his shares,
which resulted in Ms. Gendron’s adjusted cost base being $1,000,000.
[7]
Ms. Gendron knew that
the offer to purchase had been accepted before she became a shareholder, and at
the time that she purchased the shares, she was intending to sell them a few
days later.
[8]
Four days later, on
September 30, 2002, Mr. Gervais gave gratuitously to Ms. Gendron one
million of his shares,
and there was a rollover under subsection 73(1) of the Income Tax Act.
As a result, he did not realize a gain, and Ms. Gendron was deemed to have
purchased the shares at Mr. Gervais’s adjusted cost base, which was a
small amount. For the purposes of this review, let us say that the amount was
$0.
[9]
Seven days after the donation,
on October 7, 2002, Ms. Gendron sold all of her shares in the family
business to BW Technologies for $2,000,000.
[10]
In her income tax
return for the 2002 taxation year, Ms. Gendron included a capital gain in
respect of the sale of shares. In calculating her gain, she applied the
mechanism in subsection 47(1) of the Act. Consequently, she considered that the
cost of all of her shares in the family business was
$1,000,000. She made the following calculations in her return:
|
|
Proceeds of disposition
|
$2,000,000
|
|
minus:
|
Adjusted cost base
|
($1,000,000)
|
|
|
Capital gain
|
$1,000,000
|
|
minus:
|
Portion of the gain attributed to
Mr. Gervais
|
($500,000)
|
|
|
Ms. Gendron’s capital gain
|
$500,000
|
|
|
Taxable capital gain
|
$250,000
|
|
minus:
|
Capital gain deduction
|
($250,000)
|
|
|
Final result
|
$0
|
[11]
Consequently, Ms.
Gendron paid no taxes on her disposition of the company’s shares and half of
the gain was attributed to Mr. Gervais.
[12]
According to the
Minister of National Revenue (Minister), this result does not comply with the
Act, and
(a) The
gain made by Ms. Gendron in selling her shares should be taxed as income, not
as a capital gain.
or,
alternatively,
(b) The
capital gain should be removed from Ms. Gendron’s income and added to that of
Mr. Gervais as a capital gain under the general anti‑avoidance rule.
[13]
According to the
appellants, both appeals should be allowed.
The facts
[14]
Vulcain Alarme inc., a
medium-sized family business, was sold in 2002.
[15]
In May or June 2002,
when BW Technologies made the first offer to purchase the business, Mr. Gervais
and his brother Mario were shareholders; Ms. Gendron was not a
shareholder.
[16]
After certain
transactions described below, on October 7, 2002, BW Technologies purchased the
business from, among others, Mr. Gervais and Ms Gendron.
[17]
In her income tax
return for the 2002 taxation year, Ms. Gendron reported a capital gain in
respect of the sale of her shares in the business. She used the capital gain
exemption.
[18]
The Minister made a
reassessment in respect of Ms. Gendron on the basis that her gain from the sale
of shares was income, not a capital gain.
[19]
The Minister reassessed
Mr. Gervais, applying the general anti‑avoidance rule in order to
include the gain realized by Ms. Gendron in Mr. Gervais’s income as a
capital gain.
[20]
The Minister concedes
that he cannot be correct in both appeals.
[21]
The Vulcain corporation
is a family company started by Mr. Gervais’s father, Clément Gervais. Vulcain
is, among other things, a manufacturer of toxic gas monitors. They are most
often used to measure carbon monoxide in parking garages.
[22]
When the business was
first started, his father and mother worked together, and the office was
located in the basement of the family home.
[23]
Since he was 14 years
old, Mr. Gervais has worked in the family business in the summers.
[24]
Mr. Gervais is an
engineer by trade. After his studies at the École Polytechnique, he started working at the family
business.
[25]
In 1988, when he
started working for the business, the company office moved from the basement of
the family home to the garage; there were four employees including his father
and him.
[26]
When he started, the
sales were around $750,000 to $800,000, 20% lower than the best year two years before
that.
[27]
After that, the
business grew significantly. The business moved from the garage to a
3,600-square-foot facility. In 2000, there were about 100 employees.
Partial Agreements on the Facts
[28]
The parties filed
Partial Agreements on the Facts. The facts are reproduced below. To make the statement of
facts more logical, I have also added some facts from evidence other than
the Partial Agreements on the Facts; I have indicated the additions in
footnotes.
The parties agree that the
facts listed below are true
[29]
Vulcain was
incorporated on February 29, 1968, under Part IA of the Quebec Companies Act
by Clément Gervais.
[30]
Vulcain operated a
business in the field of manufacturing toxic gas and explosives detectors.
[31]
On or about February
16, 1983, Guy Gervais acquired a common share of Vulcain for $10. Since then,
the share capital of the corporation has been held by Clément Gervais and his
three sons, Guy, Mario and Robert.
[32]
Guy Gervais and Lysanne
Gendron were married in 1987.
[33]
In 1988, Guy Gervais
became a director of Vulcain.
[34]
From 1968 until the
outright sale of the Vulcain shares to BW Technologies in 2002, Vulcain share
capital was always held by Clément Gervais and/or his sons.
[35]
On January 26, 2001, a
unanimous agreement of Vulcain’s shareholders was signed by Clément Gervais,
Mario Gervais and Guy Gervais.
[36]
In 2002, Guy Gervais was
the sole director of Vulcain.
[37]
In 2002, BW
Technologies presented an offer to purchase with the goal of acquiring Vulcain.
[38]
In May or June 2002,
the appellants learned from an intermediary’s letter that a company wanted to
purchase Vulcain. Soon after, they learned that it was BW Technologies in
Calgary.
[39]
Some time later, the
president of BW Technologies came to visit the company.
[40]
On June 12, 2002, a
confidentiality agreement was signed between BW Technologies and Vulcain.
[41]
Several weeks after the
visit of the president of BW Technologies, the appellants received an offer to
purchase for approximately $7,500,000. The offer provided a two‑week
period in which to respond to it and came at about the time when the appellants
were getting ready to go on a trip to Maine.
[42]
There was a non-binding
offer to purchase signed on August 31, 2002, which was amended on September 26,
2002.
[43]
The offer to purchase
the entire share capital was accepted by Vulcain’s shareholders, Guy Gervais and
Mario Gervais, before September 22, 2002.
[44]
Lysanne Gendron was
aware of the offer to purchase and knew that it had been accepted by the
shareholders before she became a shareholder.
Modifications
made to the share capital
[45]
On August 26, 2002,
Vulcain’s only two shareholders were Guy Gervais and Mario Gervais, with the shares divided as follows:
(a) Guy
Gervais held 790,000 common class A shares and 5,120 preferred class I shares;
and
(b) Mario
Gervais, Guy Gervais’s brother, held 200,000 common class A shares and 5,120 preferred
class I shares.
[46]
On or about September
26, 2002, Guy Gervais converted his 790,000 common class A shares into
2,087,778 preferred class E shares and 4,168,192 common class B shares.
[47]
For the purposes of the
Act, Guy Gervais elected to use the tax rollover mechanism set out in section
85 of the Act.
[48]
On or about September
26, 2002, Mario Gervais also converted his 200,000 common class A shares into
1,583,790 preferred class E shares.
[49]
The preferred class E
shares included, among other things, the following rights, privileges and
restrictions: non-voting, non-participating, preferential and non-cumulative
monthly dividend of 1% per month calculated on the “redemption value” with
preference over class A, B, F, and G shares, but after class D, H, I and J
shares, redeemable at the request of the shareholder or by mutual consent.
[50]
On conversion, each of
the class E and B shares had a fair market value of $1 per share.
[51]
On September 26, 2002,
Vulcain authorized the transfer of 4,168,192 common class B shares held by Guy
Gervais to 9120-9957 Québec inc.
[52]
On September 26, 2002,
Guy Gervais transferred his 4,168,192 common class B shares to 9120-9957
Québec, a corporation in which he held all of the share capital.
[53]
For the purposes of the
Act, Guy Gervais elected to use the tax rollover mechanism set out in section
85 of the Act with regard to this transfer.
[54]
Before September 26,
2002, Lysanne Gendron was not a shareholder in Vulcain.
[55]
As shown in the
document entitled [Translation] “Share
Purchase Agreement” dated September 26, 2002, Guy Gervais sold 1,043,889
preferred class E shares to Lysanne Gendron for $1,043,889.
[56]
The agreement sets out
that Lysanne Gendron could not [Translation]
“assign her rights and obligations hereunder to any person without the prior
consent of Guy Gervais to that effect”
and that, without Guy Gervais’s permission, Lysanne Gendron could not
sell her shares to anyone other than BW Technologies.
[57]
As shown in the share
purchase agreement, Lysanne Gendron had to pay the purchase price by giving Guy
Gervais a promissory note payable within five years with an annual interest of
4.5%.
[58]
Article 2.2 of the
agreement provides for five equal payments of $208,777 on December 31, 2002,
2003, 2004, 2005 and 2006 plus interest (article 2.3). Lysanne Gendron
made the payments.
[59]
For the purposes of the
Act, in his tax return for 2002, Guy Gervais chose not to take advantage of the
provisions in subsection 73(1) of the Act. Consequently (for the purposes of
the Act):
(a) since
the adjusted cost base of these shares is $43,889, Guy Gervais realized a
capital gain of $1,000,000, and
(b) the
adjusted cost base of the shares purchased by Lysanne Gendron was $1,043,889.
[60]
As shown in a notarial
act dated September 30, 2002, Guy Gervais gave gratuitously to Lysanne
Gendron 1,043,889 preferred class E shares.
[61]
For the purposes of the
Act, Guy Gervais did not choose to have his transaction performed on September
30, 2002, be exempt from the application of subsection 73(1) of the Act. Consequently
(for the purposes of the Act):
(a) Guy
Gervais is deemed to have disposed of shares for an amount equal to the
adjusted cost base of the shares, namely, $43,889, and
(b) Lysanne
Gendron is deemed to have acquired shares for an amount equal to the adjusted
cost base of the shares, namely, $43,889.
[62]
From September 26 to
October 7, 2002, Lysanne Gendron did not intend to keep the shares of Vulcain
as an investment.
[63]
From September 26 to
October 7, 2002, Lysanne Gendron did not intend to hold the shares of Vulcain over
the long term and was not planning to earn property income from them.
[64]
Lysanne Gendron knew
that she would not receive any dividends relative to the Vulcain shares during
the period from September 26 to October 7, 2002.
[65]
On September 26, 2002,
Lysanne Gendron’s intention was to sell the Vulcain shares she held on or about
October 7, 2002, when the contract to sell Vulcain’s entire share capital to BW
Technologies would be signed.
[66]
When Lysanne Gendron
bought the shares, she did not have the financial means to pay for the shares,
but she could do so because she was going to resell the shares to BW
Technologies.
Sales
of Vulcain shares to BW Technologies
[67]
On or about October 7,
2002, BW Technologies acquired the entire share capital of Vulcain for a total
of $7,850,000.
[68]
As shown in the
contract of sale, the price was broken down as follows:
(a) $2,087,778
for 2,087,778 preferred class E shares held by Lysanne Gendron;
(b) $5,120
for 5,120 preferred class I shares held by Guy Gervais;
(c) $5,120
for 5,120 preferred class I shares held by Mario Gervais;
(d) $4,168,192
for 4,168,192 common class B shares held by 9120-9957 Québec; and
(e) $1,583,790
for 1,583,790 common class B shares held by Mario Gervais.
Guy Gervais’s and Lysanne
Gendron’s tax returns
[69]
In her income tax
return for the 2002 taxation year, Lysanne Gendron established the average
cost of 2,087,778 preferred class E shares at $1,087,778 ($1,043,889 + $43,889)
by applying the mechanism provided in subsection 47(1) of the Act and reported
a capital gain calculated as follows:
|
Proceeds
of disposition
|
$2,087,778
|
|
Adjusted
cost base
|
($1,087,778)
|
|
Capital
gain
|
$1,000,000
|
|
Expenses
incurred for the disposition
|
($13,809)
|
|
Capital
gain
|
$989,191
|
|
Capital
gain allocated to Guy Gervais
|
($486,191)
|
|
Capital
gain after allocation
|
$500,000
|
|
Taxable
capital gain
|
$250,000
|
|
Capital
gain deduction
|
($250,000)
|
|
Net
|
0
|
[70]
In his income tax
return for the 2002 taxation year, Guy Gervais reported a capital gain
calculated as follows:
|
1st disposition/Lysanne
Gendron/
September 26, 2002
|
|
|
Proceeds of disposition
|
$1,043,889
|
|
Adjusted cost base
|
($43,889)
|
|
Capital gain
|
$1,000,000
|
|
|
|
|
2nd disposition/gift
to Lysanne Gendron/
September 30, 2002
|
|
|
Proceeds of disposition
|
$43,889
|
|
Adjusted cost base
|
($43,889)
|
|
Capital gain
|
0
|
|
|
|
|
Sale to BW
Technologies
|
|
|
Proceeds of disposition
|
$5,120
|
|
Adjusted cost base
|
($5,120)
|
|
Capital gain
|
0
|
|
|
|
|
Total capital gain
|
$1,000,000
|
|
Expenses incurred for the disposition
|
($13,809)
|
|
Capital gain
|
$989,191
|
|
Capital gain allocated to Guy Gervais
|
$486,191
|
|
Capital gain after allocation
|
$1,472,382
|
|
Provision requested
|
($788,953)
|
|
Capital gain
|
$683,429
|
|
Taxable capital gain
|
$341,714
|
|
Capital gain deduction
|
($158,720)
|
[71]
In 2002, the maximum
amount that Guy Gervais could claim as a capital gain deduction was $158,720,
namely, the balance available in respect of this deduction.
Adventure or concern in the
nature of trade
[72]
On September 26, 2002,
Lysanne Gendron:
(a) knew
the terms and conditions of the sale of the entire share capital of Vulcain to
BW Technologies;
(b) knew
the sale price that had been negotiated between BW Technologies and Vulcain
and/or Vulcain’s shareholders;
(c) knew
the time limit set for the sale of Vulcain’s shares to BW Technologies; and
(d) knew
that a significant profit would be made from the sale of Vulcain’s shares and,
specifically, the preferred shares.
[73]
The above paragraph is
the last one from the Partial Agreements on the Facts.
Other facts
[74]
Ms. Gendron had worked
as a salaried employee at Vulcain since 1992, but she had had some involvement
in the company before then.
[75]
Ms. Gendron was very
active in the business. In the early 2000s, she was in charge of all of its management.
Among other things, she was in charge of human resources at the New York and
Toronto offices. She was constantly talking with Mr. Gervais about
operations and about all of the important decisions that the business had to make.
[76]
When the business
bought the shares of Mr. Gervais’s father, money had to be borrowed and securities
given. Ms. Gendron agreed, among other things, to a hypothec on the family
home as security.
[77]
Mr. Gervais testified
that when they had made the decision to sell, they had decided to get advice
from the law firm McCarthy Tétrault.
[78]
He asked their legal
counsel to do three things:
(a) to
advise them during the negotiations to ensure that their interests are
protected;
(b) to
advise them on the taxation aspects; and
(c) to
advise them regarding Mr. Gervais’s wish to recognize Ms. Gendron’s contribution
so that she may receive $1,000,000.
[79]
McCarthy Tétrault
proposed the transaction structure and the appellants accepted it.
[80]
Mr. Gervais and Ms.
Gendron were both present at the meetings with McCarthy Tétrault.
Analysis
The possibilities
[81]
Before analyzing the
various arguments, it will be useful to give an overview of the various
possible outcomes of the issues raised by the appeals before me and to
establish the link between the possible outcomes and the consequences of the
outcome of one appeal for the other.
[82]
The respondent concedes
that if she is correct with regard to one of the assessments, the other appeal
must be allowed.
[83]
In Ms. Gendron’s case,
the following issues are raised:
(a) Does
the gain realized by Ms. Gendron constitute income or a capital gain?
(b) Is
the gain realized by Ms. Gendron on the sale of the shares that she had
purchased necessarily of the same nature as the gain realized on the shares
that she had received as a gift?
(c) If the
nature of the gain realized on the shares purchased is different from that
realized on the shares received as a gift, can section 47 of the Act apply and,
if not, what is the consequence?
(d) Based
on the response, what is the consequence for Mr. Gervais?
[84]
The first issue in Mr.
Gervais’s appeal is whether the general anti-avoidance rule applies and,
second, if that is the case, what is the consequence?
[85]
I will examine the case
of Ms. Gendron first, because, if all of the gain she realized may be allocated
to Mr. Gervais, Mr. Gervais cannot have received a “tax benefit” within the
meaning of section 245 of the Act and the general anti‑avoidance rule
cannot apply.
Lysanne Gendron – income or
capital gain?
[86]
The issue of
characterizing the gain and the issue of whether the sale of the shares that
Ms. Gendron purchased and the sale of the shares that she received as a gift should
be characterized in the same way are related, and I will examine these issues
at the same time.
[87]
The essential facts may
be summarized as follows:
(a) Ms.
Gendron actively participated in the management of Vulcain. She knew about the
negotiations with BW Technologies regarding the sale of Vulcain to BW Technologies;
she discussed it a great deal with Mr. Gervais.
(b) Ms.
Gendron purchased half of her shares in Vulcain and received the other half as
a gift.
(c) Ms.
Gendron had to pay for the shares that she had purchased in five instalments
spread over a five‑year period.
(d) Ms. Gendron
had intended to resell her shares to BW Technologies before she had bought them
and received them as a gift.
(e) When
she purchased her Vulcain shares and when she received Vulcain shares as a gift
a few days later, she knew that BW Technologies was going to purchase all of
her shares in a few days.
(f) The
shares purchased and the shares received as a gift were sold to BW Technologies
less than two weeks after the acquisition.
[88]
These circumstances are
fairly different from the classic circumstances where we must distinguish
between the realization of a capital property or an investment and a gain
resulting from an adventure in the nature of trade. The role of the Court is to
apply the principles to these circumstances.
[89]
There is a rich case
law on the issue of whether a sale results in a capital gain from a realization
of an investment or income from an adventure in the nature of trade.
[90]
Authors Hogg, Magee and
Li summarized the main principles of the issue.
[91]
The following are
typical examples of properties the disposition of which gives rise to a capital
gain:
(a) an
investment: for example, stocks and bonds held long-term in order to earn
income;
(b) in the
case of an individual, a property held for his or her personal use such as a
painting or a cottage;
(c) a
capital asset owned by a business, for example, a factory used to manufacture
furniture by the business.
[92]
The shares at issue are
not at all similar to such properties.
[93]
Intent plays a key role
in characterizing a sale. Accord if to Hogg, Magee and Li:
On the basis of the jurisprudence,1 the issue of
whether an isolated transaction is in the nature of trade turns on the
intention of the taxpayer at the time when he or she acquired the property. If
that intention was something else, for example, to hold the property as an
income-earning investment, or to use the property as a capital (fixed) asset in
a business, or to use the property for personal purposes, then the subsequent
sale of the property will be treated as a capital transaction.
1 Irrigation
Industries, . . . , being an exception.
The shares acquired
[94]
The facts related to
the shares that Ms. Gendron acquired are inconsistent with an investment and do
not favour the conclusion that it was a sale as capital:
(a) Even
before Ms. Gendron acquired the shares, she had intended to resell them within
a very short time.
(b) The
shares produced no income while she held them.
(c) The
shares were resold less than two weeks after they were acquired.
[95]
The three indicia I have
just listed support a characterization as income. A fourth indicia favouring a
characterization as income is the absence of investment by Ms. Gendron at
the time of the purchase; she paid Mr. Gervais over a period of five
years.
[96]
A usual indicia of an
adventure in the nature of trade seems to be missing. Normally, one would
expect there to be the objective to make a profit from the resale of shares. Here,
no gain or loss was expected from the resale of the shares, and Ms. Gendron
resold the shares at the same price as their purchase price.
[97]
I say “seems to be missing”
because, although the purchase and resale produced no gain on the disposition
of the shares, Ms. Gendron gained a financial benefit: she resold the shares
purchased very quickly, but given that she paid Mr. Gervais with interest
over a period of five years, she obtained the benefit of very advantageous cash
flow.
[98]
Therefore, there was no
profit on the resale, but there was still a financial benefit. Businesses often
seek to improve their cash flow, and an increase in cash flow is an indicia in
the nature of trade.
[99]
It is important to note
that profit as an objective is an indicia, but not an essential condition for
finding that this is an adventure in the nature of trade.
[100] Traditionally, the nature of the property
in question, namely, the shares, is considered to be an indicia of an
investment.
However, the circumstances in this case are such that the fact that the nature
of the property is shares has only a small impact.
[101] When this principle is applied to the
shares purchased, it is difficult to see how this could be anything other than
income. Although there was no gain or loss on the disposition of the shares
purchased, the indicia point very strongly in favour of characterizing the sale
as income.
[102] However, I must consider the Supreme Court
of Canada decision in Irrigation Industries Ltd. v. M.N.R.
[103] Ms. Gendron attributes a great deal of
importance to Irrigation Industries. This is very understandable given
that the majority decision seems to suggest that there is an extremely strong
presumption that the acquisition of shares of a business gives rise to the
acquisition of a capital asset that generates a capital gain when the shares are
sold, unless there are strong indications to the contrary.
[104] In Irrigation Industries, 4,000
shares were purchased in February 1953,
and 2,400 of those shares were sold between March 10 and 13, 1953. The 4,000
shares were treasury shares.
[105] The 1,600 remaining shares were sold in
June 1953. Of the total purchase price of $40,000, an amount of $37,000 –
almost the entire price – was financed through a bank overdraft.
[106] Before the purchase of the shares, the
company had borrowed $50,000 from the bank to finance the purchase of a
building and was expecting to obtain a mortgage of $75,000 on the building. The
$75,000 was intended to be used to repay the overdraft and to reduce the amount
of the bank loan.
[107] Shortly after the purchase of the shares,
the bank informed Irrigation Industries that it could obtain a mortgage of only
$40,000 and that it had to repay the overdraft. Soon after receiving that
information, the company decided to sell the 2,400 shares and to use the money
to repay the overdraft.
[108] In June, the company sold the remaining
1,600 shares and reduced the bank loan.
[109] I do not believe that, under the doctrine of
Irrigation Industries, I must conclude in these circumstances that we
are dealing with an investment rather than an adventure in the nature of trade
for the reasons below.
[110] Except for one aspect, the majority and the
minority in Irrigation Industries do not seem to disagree on the
applicable principles and, in particular, they seem to accept the principles pronounced
in M.N.R. v. Taylor.
[111] The difference is that the majority attaches
a great deal of importance to the nature of the property acquired. The majority also attaches
importance to the following:
. . . In my opinion, a
person who puts money into a business enterprise by the purchase of the shares
of a company on an isolated occasion, and not as a part of his regular
business, cannot be said to have engaged in an adventure in the nature of trade
merely because the purchase was speculative in that, at that time, he did not
intend to hold the shares indefinitely, but intended, if possible, to sell them
at a profit as soon as he reasonably could. I think that there must be clearer
indications of “trade” than this before it can be said that there has been an
adventure in the nature of trade.
[112] It is important to note that, in the
excerpt cited above, it is accepted that an isolated transaction may constitute
an adventure in the nature of trade.
[113] If the majority decision had to be
understood as standing for the principle that an intention to quickly resell a
share is not a clear indicia of an adventure in the nature of trade, the
decision would be difficult to reconcile with the case law before and after the decision was rendered.
[114] However, I do not believe that this is the
right manner to read the decision because the entire excerpt of Irrigation
Industries above must be taken into account, in particular, the following: “in
that, at that time, he did not intend to hold the shares indefinitely”.
[115] When we read the in its sentence entirety,
the principle stated is simply that the mere fact that a person acknowledges
that, one day, he or she will probably resell shares is not sufficient to make
it an adventure in the nature of trade. That is an accepted principle.
[116] Even if the decision is understood in that
way, it is still difficult to understand why the majority believed that
something else was needed to find that it was an adventure in the nature of
trade given the reminder of the case law.
[117] In any event, there are two important
differences between the facts od the present case and the facts of Irrigation
Industries. First, in most cases when the purchased shares already exist,
the seller terminates his or her investment in the company and the purchaser
replaces the seller. In Irrigation Industries, the situation was
different because, by buying treasury shares, Irrigation Industries did more than
just acquire an investment: it increased the issuing company’s capital.
[118] Economically, this has different
consequences that those of buying an existing share because, in almost all
cases, when someone buys existing shares of a company, this has no effect on
the company’s capital.
[119] Purchasing treasury shares, which increases
the issuing company’s capital, is an indicia of an investment.
[120] In this case, Ms. Gendron had not purchased
treasury shares.
[121] Second, in this case, there are “clearer”
indicia of an adventure in the nature of trade. Not only were shares resold
short-term, but the resale of the shares to BW Technologies had also been
planned in advance. I do not see how there could be a “clearer” indicia than
the resale of shares that was planned before the purchase.
[122] Consequently, Irrigation Industries
is not applicable and, given that the indications point strongly to an
adventure in the nature of trade, I find that this is an adventure in the
nature of trade and that the gain on the sale of the shares purchased is
income.
Shares received as a gift
[123] As for the shares that Ms. Gendron received
gratuitously, she realized the entire gain. She monetized the value of the
shares received as a gift, but she did not make a regular commercial profit.
[124] The respondent insisted a great deal on the
fact that Ms. Gendron had exactly the same intention regarding the
purchased shares as those received as a gift.
[125] That is not altogether accurate. Ms.
Gendron had the same intention to quickly resell all of the shares; however, there
is a difference in the manner they were acquired. In the one case, the
intention was to purchase the shares, and in the other, to accept a gift.
[126] There is a distinction between the two.
[127] Two questions arise:
(a) Does accepting a gift with the intent to resell
the thing received very quickly give rise to income or a capital gain?
(b) Is the answer different in this case because it
is part of a series of transactions, which also includes the purchase and
resale of other shares by Ms. Gendron?
[128] Ms. Gendron received half of the shares in
question as a gift in accordance with the Civil Code of Quebec.
[129] Receiving a gift or an inheritance is very
different in nature from buying property to resell. The intention to accept is
not at all the same as an intention to purchase, as the decision to give
something rests with the donor and not with the person who receives the gift.
[130] Simply wanting to realize the value of the
gift by reselling the property received, even if it is done quickly and even if
the intention existed before the gift was received, does not mean that the sale
of the property is an adventure in the nature of trade. There hasto be more.
[131] For example, the mere fact that a child who
is expecting to inherit the family cottage intends to resell it as quickly as
possible because he wants to reduce the mortgage on his home does not mean that
the sale of the cottage is an adventure in the nature of trade.
[132] Therefore, the nature of the sale must be
assessed differently, since the person who receives a gift naturally cannot
have made an investment. Consequently, certain indicia when property is bought
do not apply in the case of a gift.
[133] There are no other indicia here that would
favour the finding that this is an adventure in the nature of trade. For
example, Ms. Gendron made no effort to add value to the shares received as a
gift.
[134] Ms. Gendron brought to my attention a
Quebec Court of Appeal case, Fiducie Charbonneau c. Québec (Sous-ministre du
Revenu),
which is a very interesting case. Following the death of Mr. Charbonneau,
the trust received what was originally farmland that Mr. Charbonneau had used
in the past and had since stopped using. Before his death, he had sold two
parcels of the land. After his death, the trust sold some lots. The Court of
Appeal found that all the trust had done was realize the land, which Mr.
Charbonneau had begun doing, and agreed with the trust that the sales resulted
in a capital gain.
[135] The Court of Appeal also referred to
Interpretation Bulletin IT-218R “Profits, capital gains and losses from the
sale of real estate, including farmland and inherited land and conversion of
real estate from capital property to inventory and vice versa”:
Farmland and Inherited
Land
23. The sale, en bloc or
piecemeal, by a taxpayer of
(a) farmland regularly
used by the taxpayer for the purpose of gaining or producing income from a
farming business carried on by the taxpayer, or
(b) land inherited by the
taxpayer
will generally give rise
to a capital gain or loss, as the case may be, to the taxpayer except where,
for example, the taxpayer
(c) converts such land to
a trading property (see 24 below), or
(d) acquired the land
referred to in (a) with the intention of reselling it for profit at a
propitious time (see 5 above).
Evidently, the Canada Revenue Agency’s
interpretation cannot change the law, but it can be considered.
[136] If inheriting land usually results in a
capital gain or loss, logically, and no more, this is also generally true, in
the absence of other factors, for property received as a gift or inheritance in
the family context.
[137] There does not seem to be very much case
law on this issue. This is probably because it is generally accepted that a
mere resale, and nothing more, of property received as a gift or inherited, even
if it is done shortly after the property was acquired, is a sale that results
in a capital gain.
[138] The disposition of shares received as a
gift took place in the larger context of the sale of Vulcain to BW Technologies,
but the fact that Ms. Gendron facilitated the sale to BW Technologies does
not change the nature of the sale for her.
[139] Consequently, the sale of the shares
received as a gift is a capital gain.
[140] Ms. Gendron argued that the nature of the
shares that she had sold had to remain the same as if Mr. Gervais had sold them
by analogy with the decisions of the Supreme Court of Canada in Continental
Bank Leasing Corporation v. Canada
and Canada v. Continental Bank of Canada. Given my conclusion, it is
not necessary that I examine this argument.
Section 47 of the Act
[141] It is clear that section 47 applies only to
capital gains for two reasons. On the one hand, the section is part of
Subdivision c of Division B of Part I of the Act, that is, the part that deals
with taxable capital gains and allowable capital losses. On the other hand,
section 47 sets out the rules for computing the “adjusted cost base”; adjusted
cost base is a concept used by the Act for calculating capital gains.
[142] Given my conclusion that the disposition of
purchased shares results in income and that the disposition of shares received
as a gift results in a capital gain, section 47 does not apply.
[143] Because section 47 cannot apply, the cost
of the shares received as a gift is $0, and the cost of the shares purchased is
simply what Mr. Gervais had paid.
[144] For that reason, with regard to the shares
purchased, Ms. Gendron’s gain is $0.
[145] With regard to the shares received as a
gift, the result is that Ms. Gendron realized a capital gain of $1,000,000 all
of which must be allocated to Mr. Gervais under section 74.2 of the Act.
[146] Accordingly, Ms. Gendron has no taxable
gains resulting from the sale of her shares.
[147] I note that one consequence of this result
is that Ms. Gendron did not use her capital gain exemption under section 110.6
of the Act, which she would be able to use in the future.
Guy Gervais — general
anti-avoidance rule
[148] Given that the entire gain of Ms. Gendron
is allocated to Mr. Gervais, it is clear that there cannot be any “tax
benefit” under the general anti-avoidance rule and that, as a result, the rule
cannot be applied. Therefore, it is not necessary for me to examine the
potential application of this rule.
[149] The practical result for Mr. Gervais is the
same as that of the Minister’s assessment, according which Ms. Gendron’s
entire gain must be included in his income.
Conclusion
[150] In conclusion, the result is that Ms.
Gendron should not be taxed on any gain, but that Mr. Gervais should be taxed
on the entire gain.
[151] The Court will communicate with the parties
in order that the appropriate draft judgments be prepared to give effect to
this decision.
The Court will also communicate with the parties regarding the costs.
Signed at Ottawa, Ontario, this 23rd day of
April 2014.
“Gaston Jorré”
Translation certified true
on this 29th day of July
2014
François Brunet, Revisor
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