Date: 20001003
Docket: T-147-95
IN THE MATTER of the Income Tax Act
BETWEEN:
DONAT FLAMAND INC.
Applicant
- and -
HER MAJESTY THE QUEEN
Respondent
REASONS FOR ORDER AND ORDER
BLAIS J.
[1] These are appeals by a number of applicants from the decision of the Tax Court of Canada dated September 23, 1994 in regard to the income tax reassessments issued by the Minister of National Revenue.
[2] There are nine cases before the Court. However, pursuant to the direction of Denault J. on April 28, 2000, the parties agreed to argue docket T-147-95 and the resulting judgment will apply to the other dockets (T-140-95, T-141-95, T-143-95, T-144-95, T-145-95, T-146-95, T-148-95 and T-149-95). Counsel for the applicants filed an undertaking to the effect that the applicants agree that the judgment to be rendered in Donat Flamand Inc. v. Her Majesty the Queen (T-147-95) applies and will be filed on record in each case.
FACTS
[3] On October 10, 1984, Mr. James Beadle, a Vancouver lawyer, incorporated 283571 B.C. Ltd. for a potential client. Following the incorporation, Mr. Steve Parent of Multitech Industries Inc. approached Mr. Beadle for the purpose of obtaining a charter for "Agri-Can".
[4] On October 23, 1984, 283571 B.C. Ltd. requested a change in name for "Agri-Can" retroactive to October 10, 1984.
[5] On the same day, Mr. Derek Darling, an accountant acting on behalf of Agri-Can, submitted a request for the purpose of finding out whether the debt obligations Agri-Can wished to issue qualified under subsection 194(4.2) of the Income Tax Act (ITA). In support of this request was a letter by Mr. Pek, an accountant, to Mr. Grant McDonald of Multitech, a letter by Mr. Pek to Mr. Parent of Multitech and two letters from Mr. Darling to Mr. Parent.
[6] On December 11, 1984, Revenue Canada issued an opinion stating that the issue of the debentures was in conformity with the transitional measures of October 10, 1984.
[7] On December 28, 1984, in the context of a scientific research and experimental development financing contract (the contract) under which debentures in the amount of two million dollars were issued to various investors, the applicants purchased a debenture from Agri-Canada Research Corp. on the terms prescribed in the contract and more particularly on the condition that the corporation make the designation contemplated in subsection 194(4) of the ITA within the periods and in the form prescribed.
[8] Agri-Can undertook to pay the expenditures in the amount of no less than $2,000,000.00 and to effect the payment of the tax in the amount of $1,000,000.00 owing under Part VIII of the ITA when the said tax became payable. Agri-Can also undertook not to avoid or try to avoid the payment of the said tax in any way whatsoever.
[9] A trust agreement was signed under which Agri-Can delivered to the trustee $1,000,000.00 for it to hold in order to pay the tax owing by Agri-Can under the ITA, where applicable, to pay to Agri-Can all or part of the said sum subject to certain terms, and more particularly upon the delivery by Agri-Can of certificates detailing the scientific research and experimental development expenditures that it had made.
[10] On December 28, 1984, Agri-Can filed with the respondent the prescribed designation under subsection 194(4) of the ITA and on February 28, 1985, the respondent issued to Agri-Can an assessment under Part VIII of the ITA.
[11] In June 1987, Mr. S. Blacklock, a representative of the respondent, sent a letter to the applicant indicating to it that the designation might not be in conformity with subsection 194(4) of the ITA.
[12] Here are the particulars of each case:
T-140-95 (Alain Rousseau v. Her Majesty the Queen)
For the 1984 taxation year, the applicant claimed a tax credit of $17,000 pursuant to the purchase of a $50,000 debenture. This credit was refused on July 20, 1988, when a reassessment was issued. On September 22, 1988, the Minister issued a reassessment cancelling the taxable capital gain of $1,425, replacing it by the recognition of an allowable business investment loss of $11,075.
T-141-95 (Jean Louis Malouin v. Her Majesty the Queen)
For the 1984 taxation year, the applicant claimed a tax credit of $17,000 pursuant to the purchase of a $50,000 debenture. This credit was refused on May 30, 1988. On August 31, 1988, the Minister issued a reassessment cancelling the declared business income of $3,500, replacing it by a business loss of $21,500.
T-143-95 (AndréImbeau v. Her Majesty the Queen)
For the 1984 taxation year, the applicant claimed a tax credit of $17,000 pursuant to the purchase of a $50,000 debenture. This credit was refused on June 2, 1988. On December 19, 1989, the Minister issued a reassessment cancelling the taxable capital gain of $1,425, replacing it by the recognition of an allowable business investment loss of $11,075.
T-144-95 (Serge Godin v. Her Majesty the Queen)
For the 1984 taxation year, the applicant claimed a tax credit of $17,000 pursuant to the purchase of a $50,000 debenture. This credit was refused on May 23, 1988. On March 19, 1990, the Minister issued a reassessment cancelling the taxable capital gain of $1,425, replacing it by the recognition of an allowable business investment loss of $11,075.
T-145-95 (RenéBrochu v. Her Majesty the Queen)
For the 1984 taxation year, the applicant claimed a tax credit of $17,000 pursuant to the purchase of a $50,000 debenture. This credit was refused on May 30, 1988. On August 31, 1988, the Minister issued a reassessment cancelling the taxable capital gain of $1,425, replacing it by the recognition of an allowable business investment loss of $11,075.
T-146-95 (Jean Pierre Delwasse v. Her Majesty the Queen)
For the 1984 taxation year, the applicant claimed a tax credit of $17,000 pursuant to the purchase of a $50,000 debenture. This credit was refused on June 6, 1988. On November 27, 1988, the Minister issued a reassessment recognizing a business loss of $21,500.
T-147-95 (Donat Flamand Inc. v. Her Majesty the Queen)
For the 1984 taxation year, the applicant claimed a tax credit of $125,000 under section 127.3 of the ITA pursuant to the purchase of an Agri-Can debenture in the amount of $250,000. This credit was refused on May 24, 1988 when a reassessment was issued, leaving intact the $7,100 claimed for taxable capital gain. On September 8, 1989, the Minister upheld the refusal, cancelled the aforesaid capital gain, replacing it by the recognition of an allowable business investment loss of $55,400.
T-148-95 (Laurien Gagnon v. Her Majesty the Queen)
For the 1983 and 1984 taxation years, the applicant claimed a tax credit of $1,831.39 and $13,618.80 respectively, pursuant to the purchase of a $50,000 debenture. For the 1985 taxation year, the applicant claimed a capital loss of $1,970 attributable to the unused part of the tax credit. On July 6, 1988, the credits were refused and on August 16, 1988, the Minister issued a reassessment for 1984, cancelling a taxable capital gain of $1,425 and replacing it by the recognition of an allowable business investment loss of $11,075.
T-149-95 (Donald Béliveau v. Her Majesty the Queen)
For the 1984 taxation year, the applicant claimed a tax credit of $34,000 pursuant to the purchase of a $100,000 debenture. This credit was refused on September 20, 1988 when a reassessment was issued cancelling a taxable capital gain of $3,500 and replacing it by the recognition of an allowable business investment loss.
[13] In September 1989, the Minister upheld the reassessments on the basis that the Agri-Can Research Corp. securities failed to meet the requirements of subsection 194(4) of the ITA because they were issued after October 10, 1984 and that they failed to qualify for the grandfathering provisions of subsection 194(4.2) of the ITA.
[14] The applicants appealed the Minister's decision to the Tax Court of Canada.
APPEAL DECISION
[15] Lamarre-Proulx T.C.J. accepted the argument that subsection 194(4.2) of the ITA applied retroactively.
[16] She held there was no evidence to rebut the Minister's presumption of fact that there were no arrangements, evidenced in writing, for the issue of the debt obligations purchased by the appellants that were substantially advanced by October 10, 1984. She noted that in the absence of the key witnesses she could draw a negative inference that these witnesses could not have proved the contrary.
[17] In her opinion, the Minister could reassess the applicants for damage caused by another as he had done, notwithstanding the exercise of due diligence on their part. The judge noted that no cases had been cited showing the contrary, nor was she aware of any.
[18] The judge noted that the Minister had acted with all the diligence required by law, that he thought he was obliged to act in confidentiality under the requirements of section 241 of the Act, and that there was no legal argument that he should not have acted accordingly.
[19] The judge dismissed the appeals.
APPLICANTS'SUBMISSIONS
[20] The applicants submit that the debentures were qualifying investments within the meaning of subsections 194(4) and 194(4.2) of the ITA, more particularly because the debentures constituted debt obligations issued before 1986 in accordance with arrangements, evidenced in writing, for the issue of the debt obligation that were substantially advanced before October 10, 1984.
[21] The applicants submit that they qualify for the credits because the respondent accepted the designation made by Agri-Can at the time the first assessment was issued on February 28, 1985 and the subsequent revocation of this designation cannot affect the tax credit allowed to the applicant under section 127.3 of the ITA.
[22] The applicants argue that they took all the necessary and reasonable steps to ensure that Agri-Can complied with all the ITA provisions for making a designation under subsection 194(4) of the ITA. They submit that in circumstances where the actions and movements of a third party may affect the applicants' tax situation, the latter are entitled to a defence of due diligence.
[23] The applicants suggest that the issuance by Revenue Canada, on December 11, 1984, of an opinion to the effect that the contemplated issue of debentures by Agri-Can would satisfy the transitional measures contemplated by Department of Finance Release No. 84-151 of the Department of Finance dated October 10, 1984, led the applicants to purchase the debentures. The respondent cannot subsequently refuse the credit, therefore.
[24] The applicants suggest that the Minister failed to issue his reassessment with all due diligence and precluded the possibility of any valid dispute of the assessment by the applicant by refusing to indicate to the applicants the reasons why the respondent was refusing the designation made by Agri-Can and by not allowing it to make all of the necessary representations.
[25] The applicants submit that the issuance of the reassessment and the refusal of the credit constitute an abuse of justice on the part of the respondents.
RESPONDENT'S SUBMISSIONS
[26] The respondent argues that she is not bound by the opinion she issued on December 11, 1984 because that opinion was obtained on the basis of misrepresentation.
[27] She notes that the Minister's agents were unable to obtain corroboration as to the truthfulness of the two documents emanating from Mr. Pek in support of the request for an opinion or in respect of the dates appearing on these documents.
[28] The respondent further notes that the two documents emanating from Mr. Darling are antedated. She says the secretary who typed these documents was not working for Healy and Darling until October 22, 1984.
[29] The respondent submits that there is no agreement in writing signed by Agri-Can prior to October 11, 1984, nor any arrangement, evidenced in writing, for the issue of the applicant's debt obligation that was substantially advanced before October 10, 1984.
[30] The respondent submits that she properly refused the research tax credit, given that the debt obligation purchased by the applicant was not the subject of a valid designation within the meaning of subsection 194(4) of the ITA.
ADMISSION
[31] The applicants conceded at the outset of the hearing that the letters dated September 13 and September 24, 1984 and signed by Healy and Darling Chartered Accountants had been antedated.
ISSUES IN DISPUTE (as formulated by the parties at the pre-trial conference)
[32] 1. Were there sufficient arrangements, evidenced in writing, substantially advanced before October 10, 1984, for the issue of the debenture by the corporation to the applicant for the corporation to make a designation under subsections 194(4) and (4.2) of the Act, thereby allowing the applicant to obtain the scientific research and experimental development tax credit in section 127.3 of the Act?
2. Did the applicant further qualify, in its 1984 taxation year, for the said tax credit once the corporation had made and filed with the respondent a designation in the prescribed form under subsection 194(4) of the Act or once this designation had been upheld by assessment of the respondent issued to the corporation under Part VIII of the Act, irrespective of whether this designation was subsequently revoked or cancelled by the respondent?
3. Did the respondent issue its reassessment to the applicant with due diligence, in view of all the circumstances, and if not, does the absence of due diligence to that effect constitute a reason for setting aside the reassessment issued by the respondent to the applicant?
4. Is the applicant entitled to a defence of due diligence in circumstances in which a tax credit is refused to it as a result of acts or omissions of a third party and without the applicant being responsible?
1st question:
Were there sufficient arrangements, evidenced in writing, substantially advanced before October 10, 1984, for the issue of the debenture by the corporation to the applicant for the corporation to make a designation under subsections 194(4) and (4.2) of the Act, thereby allowing the applicant to obtain the scientific research and experimental development tax credit in section 127.3 of the Act?
[33] Section 127.3 of the ITA provides a tax credit for scientific research:
| 127.3(1) There may be deducted from the tax otherwise payable under this Part by a taxpayer for a taxation year an amount not exceeding the aggregate of
(a) his scientific research tax credit for the year; and
(b) his unused scientific research tax credit for the taxation year immediately following the year.
(2) Definitions.- For the purposes of this Act,
(a) "scientific research tax credit"- scientific research tax credit" of a taxpayer for a taxation year means the aggregate of all amounts each of which is an amount equal to
(i) where the taxpayer is a corporation, 50%, or
(ii) where the taxpayer is an individual other than a trust, 34% of an amount designated by a corporation under subsection 194(4) in respect of
(iii) a share acquired by the taxpayer in the year where the taxpayer is the first person, other than a broker or dealer in securities, to be a registered holder thereof,
(iv) a bond, debenture, bill, note, mortgage , hypothec or similar obligation (in this section and in Part VIII referred to as a "debt obligation") acquired by the taxpayer in the year where the taxpayer is the first person, other than a broker or dealer in securities, to be a registered holder thereof, or
(v) a right acquired by the taxpayer in the year where the taxpayer is the first person, other than a broker or dealer in securities, to have acquired that right,
less any amount required by subsection (5) to be deducted in computing the taxpayer's research tax credit for the year;
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127.3(1) Un contribuable peut déduire de l'impôt qu'il est par ailleurs tenu de payer en vertu de la présente Partie pour une année d'imposition, un montant ne dépassant pas le total de
a) son crédit d'impôt pour la recherche scientifique; et
b) la partie inutilisée de son crédit d'impôt pour la recherche scientifique et le développement expérimental pour l'année d'imposition suivant l'année.
(2) Définitions. Pour l'application de la présente loi
(a)"Crédit d'impôt pour la recherche scientifique et le développement expérimental" -"crédit d'impôt pour la recherche scientifique et le développement expérimental" auquel a droit un contribuable pour une année d'imposition représente le total de toutes les sommes égales à :
(i) lorsque le contribuable est une corporation, 50 %, ou
(ii)lorsque le contribuable est un particulier autre qu'une fiducie, 34 %, d'un montant désigné par une corporation, en vertu du paragraphe 194(4), à l'égard
(iii) d'une action acquise par le contribuable durant l'année et dont il est le premier détenteur enregistré, exception faite d'un courtier ou d'un négociant en valeurs;
(iv) d'une obligation, d'un effet, d'un billet, d'un mortgage, d'une hypothèque ou de toute autre semblable obligation (appelé au présent article et dans la Partie VII "créance") acquis par le contribuable durant l'année et dont il est le premier détenteur enregistré, exception faite d'un courtier ou d'un négociant en valeurs, ou
(v)d'un droit acquis par le contribuable durant l'année et où il est le premier détenteur, exception faite d'un courtier ou d'un négociant en valeurs, à avoir acquis ce droit,
moins tout montant qui doit être déduit en vertu du paragraphe (5) dans le calcul du crédit d'impôt pour la recherche scientifique et le développement expérimental du contribuable pour l'année.
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[34] Section 194 of the ITA provides:
| 194(1) Every corporation shall pay a tax under this Part for a taxation year equal to 50% of the total of the aggregate of all amounts each of which is an amount designated under subsection (4) in respect of a share or debt obligation issued by it in the year or a right granted by it in the year.
(2) In this Act, the "Part VIII refund" of a corporation for a taxation year means an amount equal to the lesser of
(a) the aggregate of
(i) the amount, if any, by which the scientific research tax credit of the corporation for the year exceeds the amount, if any, deducted by it under subsection 127.3(1) from its tax otherwise payable under Part I for the year, and
(ii) such amount as the corporation may claim, not exceeding 50% of the amount, if any, by which
(A) the aggregate of all expenditures made by it after April 19, 1983 and in the year or the immediately preceding taxation year each of which is an expenditure other than an expenditure prescribed for the purposes of paragraph 127(10.1)(c), claimed under paragraph 37(1)(a) or (b) to the extent that such expenditure is specified by the corporation in its return of income under Part I for the year
exceeds the aggregate of
(B) the aggregate of all expenditures each of which is an expenditure made by it in the immediately preceding taxation year , to the extent that the expenditure was included in determining the aggregate under clause (A) and resulted in
(I) a refund to it under this Part for the immediately preceding taxation year,
(II) a deduction by it under subsection 37(1) for the immediately preceding taxation year, or
(III) a deduction by it under subsection 127(5) for any taxation year, and
(C) twice the portion of the aggregate of amounts each of which is an amount deducted by it in computing its income for the year or the immediately preceding taxation year under section 37.1 that can reasonably be considered to relate to expenditures that were included in determining the aggregate under clause (A); and
(b) the refundable Part VIII tax on hand of the corporation at the end of the year.
(3) In this Act, "refundable Part VIII tax on hand" of a corporation at the end of a taxation year means the amount, if any, by which
(a) the aggregate of the taxes payable by it under this Part for the year and all preceding taxation years
exceeds
(b) the aggregate of its Part VIII refunds for all preceding taxation years.
(4) Every taxable Canadian corporation may, by filing a prescribed form with the Minister at any time on or before the last day of the month immediately following a month in which it issued a share or debt obligation or granted a right under a scientific research financing contract (other than a share or debt obligation issued or a right granted before October, 1983, or a share in respect of which the corporation has, on or before that day, designated an amount under subsection 192(4)) designate, for the purposes of this Part and Part I, an amount in respect of that share, debt obligation or right not exceeding the amount by which
(a) the amount of the consideration for which it was issued or granted, as the case may be,
exceeds
(b) in the case of a share, the amount of any assistance (other than an amount included in computing the scientific research tax credit of a taxpayer in respect of that share) provided, or to be provided by a government, municipality or any other public authority in respect of, or for the acquisition of, that share.
(4.2) Notwithstanding subsection (4), no amount may be designated by a corporation in respect of
(a) a share issued by the corporation after October 10, 1984, other than
(i) a qualifying share issued before May 23, 1985, or
(ii) a qualifying share issued after May 22, 1985 and before 1986
(A) under the terms of an agreement in writing entered into by the corporation before May 23, 1985, other than pursuant to an option to acquire the share if the option was not exercised before May 23, 1985, or
(B) as part of a lawful distribution to the public in accordance with a prospectus, preliminary prospectus or registration statement filed before May 24, 1985 with a public authority in Canada pursuant to and in accordance with the securities legislation of Canada or of any province and, where required by law, accepted for filing by that public authority;
(b) a share or debt obligation issued or a right granted by the corporation after October 10, 1984, other than a share or debt obligation issued or a right granted before 1986
(i) under the terms of an agreement in writing entered into by the corporation before October 11, 1984, other than pursuant to an option to acquire the share, debt obligation or right if the option was not exercised before October 11, 1984, or
(ii) where arrangements, evidenced in writing, for the issue of the share or debt obligation or the granting of the right were substantially advanced before October 10, 1984;
or
(c) a share or debt obligation issued, or a right granted, at any time after June 15, 1984, by a corporation that was an excluded corporation (within the meaning assigned by subsection 127.1(2) ) at that time.
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194(1) Toute corporation doit payer en vertu de la présente partie, pour une année d'imposition, un impôt égal à 50 % du total de tous les montants désignés en vertu du paragraphe (4) à l'égard d'une action ou d'une créance émise par elle ou d'un droit consenti par elle durant l'année.
(2) Dans la présente loi, le "remboursement de la partie VIII " d'une corporation pour une année d'imposition désigne le moins élevé des montants suivants :
(a) le total de
(i) l'excédent éventuel du crédit d'impôt pour la recherche scientifique et le développement expérimental de la corporation pour l'année sur le montant éventuel déduit par cette dernière en vertu du paragraphe 127.3(1), de son impôt pour l'année payable par ailleurs en vertu de la Partie I,
(ii) du montant que la corporation peut réclamer, sans dépasser 50 % du montant de l'excédent éventuel
(A) de l'ensemble des dépenses faites par la corporation dans l'année ou dans l'année d'imposition précédente, après le 19 avril 1983, dont chacune représente une dépense (à l'exclusion d'une dépense prescrite pour l'application de la définition de "dépense admissible" au paragraphe 127(9)) déduite en vertu de l'alinéa 37(1)a) ou b), dans la mesure où la corporation indique cette dépense dans sa déclaration de revenu en vertu de la partie I pour l'année,
sur le total
(B) de toutes les dépenses engagées par la corporation durant l'année d'imposition précédente dans la mesure où chacune de ces dépenses a été comprise dans le calcul du total visé à la disposition (A) et a donné lieu à
(I) un remboursement à la corporation en vertu de la présente partie pour l'année d'imposition précédente,
(II) une déduction par la corporation en vertu du paragraphe 37(1) pour l'année d'imposition précédente, ou
(III) une déduction par la corporation en vertu du paragraphe 127(5) pour une année d'imposition quelconque, et
(C) le double de la fraction du total des montants dont chacun représente un montant que la corporation déduit dans le calcul de son revenu pour l'année ou pour l'année d'imposition précédente en application de l'article 37.1 et qui peut raisonnablement être considéré comme se rapportant à des dépenses comprises dans le calcul du total visé à la disposition (A);
(b) l'impôt de la partie VIII remboursable en mains de la corporation à la fin de l'année.
(3) dans la présente loi, "impôt de la partie VIII remboursable en mains d'une corporation" à la fin de l'année d'imposition représente le montant de l'excédent éventuel
(a) du total des impôts payables par cette corporation en vertu de la présente partie pour l'année et les années d'imposition antérieures;
sur
(b) le total de ses remboursements de la partie VIII pour toutes les années d'imposition antérieures.
(4) Toute corporation canadienne imposable peut, sur présentation à une date quelconque d'une formule prescrite auprès du Ministre, au plus tard le dernier jour du mois suivant le mois où elle a émis une action ou une créance ou accordé un droit en vertu d'un contrat de financement pour la recherche scientifique et le développement expérimental (autre qu'une action, une créance émise ou un droit accordé avant octobre 1983 ou une action à l'égard de laquelle la corporation a, avant ou au plus tard à ce jour, désigné un montant en vertu du paragraphe 192(4)) désigner, aux fins de la présente partie et de la partie I, un montant à l'égard de cette action, de cette créance ou de ce droit, ne dépassant pas le montant de l'excédent éventuel
(a) de la valeur de la contrepartie pour laquelle l'action ou la créance a été émise, ou le droit accordé, selon le cas,
sur
(b) dans le cas d'une action, le montant de toute aide (à l'exclusion d'un montant inclus dans le calcul du crédit d'impôt pour la recherche scientifique et le développement expérimental d'un contribuable relativement à cette action) fournie, ou devant être fournie, par un gouvernement, une municipalité ou tout autre corps public en ce qui concerne l'action ou l'acquisition de celle-ci.
(4.2) Par dérogation au paragraphe (4), aucun montant ne peut être désigné par une corporation :
(a) au titre d'une action que la corporation émet après le 10 octobre 1984, à l'exclusion d'une action admissible
(i) émise avant le 23 mai 1985, ou
ii) émise après le 22 mai 1985 et avant 1986
(A) soit aux termes d'un accord écrit conclu par la corporation avant le 23 mai 1985, autrement que conformément à une option d'achat de l'action si cette option n'a pas été levée avant le 23 mai 1985,
(B) soit dans le cadre d'un appel public légal à l'épargne conforme à un prospectus, à un prospectus préliminaire ou à une déclaration d'enregistrement, produit avant le 24 mai 1985 auprès d'un organisme public du Canada suivant la législation fédérale ou provinciale sur les valeurs mobilières et, si la loi le prévoit, approuvé par un tel organisme public;
(b) au titre d'une action ou créance émise par la corporation après le 10 octobre 1984 ou d'un droit consenti par la corporation après cette date, à l'exclusion d'une action ou créance émise avant 1986 ou d'un droit consenti avant 1986 :
(i) soit aux termes d'un accord écrit conclu par la corporation avant le 11 octobre 1984, autrement que conformément à une option d'achat de l'action, de la créance ou du droit si cette option n'a pas été levée avant le 11 octobre 1984,
(ii) soit conformément à des arrangements écrits sur le point d'aboutir avant le 10 octobre 1984 concernant l'émission de l'action ou de la créance ou l'octroi du droit; ou
(c) au titre d'une action ou créance émise ou d'un droit consenti à un moment postérieur au 15 juin 1984, par une corporation qui est une corporation exclue (au sens du paragraphe 127.1(2)) à cette date.
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[35] Although subsection 194(4.2) came into force only in 1986, the Federal Court held in First Fund Genesis Corp. v. Canada (1991), 42 F.T.R. 167 that it had a retroactive effect:
However, upon a thorough reading of all of the relevant sections of Part VIII of the Act, I find that I am in substantial agreement with Crown counsel that ss. 194(4.2) must also by necessary implication apply retroactively. ...Likewise, in the present case, I believe that the term "substantially advanced" cannot be interpreted in a vacuum. Rather its interpretation must reflect the nature and the scope of the subject matter with which ss. 194(4.2) is dealing, i.e. the issue of shares and debt obligations to finance scientific research.While I do not find it strictly necessary to decide for the purposes of the present judgment, I am inclined to accept the plaintiff's argument that the term "substantially", as it appears in ss. 194(4.2)(b), has a relative rather than an absolute connotation. To my mind, the issue of whether arrangements were "substantially advanced" calls for a determination by this Court of whether the arrangements had been advanced or had progressed to a sufficiently measurable degree. In other words, there must have been more than just nominal or insignificant progress made by the parties towards securing an S.R.T.C. transaction.
[36] Joyal J. then reviewed the following criteria in order to determine whether an arrangement between the parties was substantially advanced before October 10, 1984:
1. The maximum amount of the designation was known;
2. The type of security which would be provided to investors was also known (a debenture or a promissory note);
3. The approximate issue price was also known;
4. The details of Dell's proposed scientific research program were sufficiently known to make it qualify for purposes of ss. 194(4.2).
[37] The applicant called Mr. Lucien Gaignard, a chartered accountant, who worked closely on this case with the different parties more than fifteen years ago.
[38] Mr. Gaignard explained that it was the Toronto office of Price Waterhouse that had informed the Quebec City office that an investment could be made in Vancouver which could qualify for the tax benefits related to research and development.
[39] Mr. Gaignard explained how his clients had been led in good faith to invest in the project proposed by Multitech Industries Inc. of Vancouver through a local brokerage house, Andersen Bentley Securities Ltd.
[40] In the context of his work, Mr. Gaignard said, he became acquainted with most of the documents, including inter alia the letters of Mr. Pek dated September 4 and 12, 1984 and some letters of Healy and Darling dated September 13 and 24, 1984, and the business plan appended to the latter letter as well as the request for opinion letter dated October 23, 1984 and in particular the reply by Mr. R.B. Day of Revenue Canada, dated December 11, 1984.
[41] The latter letter stated unambiguously that the work undertaken by "Agri-Can Research Corp" satisfied the transitional provisions established on October 10, 1984:
Provided that our understanding of the facts and proposals is correct, it is our opinion that the financing arrangements outlined above will, with respect to the issue of a scientific research debt obligation with a selling price of $2,000,000, satisfy the aforementioned transitional provisions in that they constitute "agreements in writing entered into on or before October 10, 1984 or arrangements evidenced in writing and subtantially advanced" before October 10, 1984 within the meaning of the Department of Finance Release No 84-151 dated October 10, 1984.
(Letter of December 11, 1984 from Mr. R.B. Day to Mr. D. Darling, page 3.)
[42] Upon receiving a copy of this letter, Mr. Gaignard contacted Mr. Day to satisfy himself that there was no negative angle and that he had indeed issued this letter of December 11, 1984. In addition, Mr. Gaignard also verified, through Mr. Toselli of the Vancouver office of Price Waterhouse, that the lawyer and the accountant involved in the transaction were not the subject of any complaint or inquiry and was satisfied with the replies he received.
[43] Finally, Mr. Gaignard asked Healy and Darling, Agri-Can's outside auditors, to confirm the truthfulness of the information contained in the letter dated October 23, 1984, which was done by the letters dated December 21, 1984 and December 27, 1984.
[44] The transaction was ultimately completed and finalized on December 28, 1984, to the satisfaction of all parties.
[45] Mr. Gaignard's testimony was simple, concise and direct - in a word, completely credible.
[46] However, among the documents used to obtain the "comfort letter" of December 11, 1984, at least two letters had been antedated, and in particular the letter of September 24, 1984, leaving a false impression as to the progress of the file prior to October 10, 1984.
[47] It seems to me, in fact, that if the actual state of the file's progress had been depicted to the Department of Revenue, the Department would never have issued the letter of December 11, 1984, and there is good reason to believe that the investors would never have followed through on their proposed investment.
[48] Mr. Gaignard did his job and took lots of precautions, but the people he was dealing with did not have the same deontological criteria, to say the least. It is obvious to me that the letter of December 11, 1984 was obtained under false representations and that the reply to the first question, namely, whether there were sufficient arrangements, evidenced in writing, substantially advanced before October 10, 1984, is negative.
2nd question
Did the applicant further qualify, in its 1984 taxation year, for the said tax credit once the corporation had made and filed with the respondent a designation in the prescribed form under subsection 194(4) of the Act or once this designation had been upheld by assessment of the respondent issued to the corporation under Part VIII of the Act, irrespective of whether this designation was subsequently revoked or cancelled by the respondent?
[49] The Act provides, in section 152:
| 152(1) The Minister shall, with all due dispatch, examine a taxpayer's return of income for a taxation year, assess the tax for the year, the interest and penalties, if any, payable and determine
(a) the amount of refund, if any, to which the taxpayer may be entitled by virtue of section 129 , 131, 132 or 133 for the year; or
(b) the amount of tax, if any, deemed by subsection 119(2), 120(2), 122.2(1), 127.1(1), 127.2(2) or 144(9) to have been paid on account of the tax under this Part for this year.
152(4) The Minister may at any time assess tax, interest or penalties under this Part or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the taxation year, and may
(a) at any time, if the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or
(ii) has filed with the Minister a waiver in prescribed form within 4 years from the day of mailing of a notice of an original assessment or of a notification that no tax is payable for a taxation year,
(b) within 7 years from the day referred to in subparagraph (a)(ii), if
(i) an assessment or reassessment of the tax of the taxpayer was required pursuant to subsection (6) or would have been required if the taxpayer had claimed an amount by filing the prescribed form referred to in that subsection on or before the day referred to therein,
(i) there is reason, as a consequence of the assessment or reassessment of another taxpayer's tax pursuant to this paragraph or subsection (6), to assess or reassess the taxpayer's tax for any relevant taxation year, and
(c) within 4 years from the day referred to in subparagraph (a)(ii), in any other case,
reassess or make additional assessments, or assess tax, interest or penalties under this Part, as the circumstances require, except that a reassessment, an additional assessment or assessment may be made under paragraph (b) after 4 years from the day referred to in subparagraph (a)(ii) only to the extent that it may reasonably be regarded as relating to the assessment or reassessment referred to in that paragraph.
(6) Where a taxpayer has filed for a particular taxation year the return of income required by section 150 and an amount is subsequently claimed by him or on his behalf for the year as
(f) a deduction under section 127.3(1) in respect of his unused scientific research tax credit for a subsequent taxation year,
by filing with the Minister, on or before the day on or before which the taxpayer is, or would be if a tax under this Part were payable by him for that subsequent taxation year, required by section 150 to file a return of income for that subsequent taxation year, a prescribed form amending the return, the Minister shall reassess the taxpayer's tax for any relevant taxation year (other than a taxation year preceding the particular taxation year) in order to take into account the deduction claimed.
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152(1) Le ministre, doit, avec toute la diligence possible, examiner la déclaration de revenu d'un contribuable pour une année d'imposition, fixe l'impôt pour l'année, l'intérêt et les pénalités payables, s'il en est, et déterminer
(a) le montant du remboursement, s'il en est, auquel il a droit en vertu des articles 129, 131, 132 ou 133, pour l'année, ou
(b) le montant d'impôt qui est réputé en vertu du paragraphe 119(2), 120(2), 120.1(4), 122.2(1), 127.1(1), 127.2(2), 144(9) ou 164(6) avoir été versé au titre de l'impôt en vertu de la présente partie pour l'année.
152(4) Le ministre peut, à une date quelconque, fixer des impôts, intérêts ou pénalités en vertu de la présente Partie, ou donner avis par écrit, à toute personne qui a produit une déclaration de revenu pour une année d'imposition, qu'aucun impôt n'est payable pour l'année et peut,
(a) à une date quelconque, si le contribuable ou la personne produisant la déclaration:
(i) a fait une présentation erronée des faits, par négligence, inattention ou omission volontaire, ou a commis quelque fraude en produisant la déclaration ou en fournissant quelque renseignement sous le régime de la présente loi, ou
(ii) a adressé au ministre une renonciation, selon le formulaire prescrit, dans un délai de 4 ans de la date de la mise à la poste d'un avis de première cotisation ou d'une notification portant qu'aucun impôt n'est payable pour une année d'imposition,
(b) dans un délai de 7 ans à compter du jour visé au sous-alinéa (a)(ii) lorsque
(i) une cotisation ou une nouvelle cotisation de l'impôt du contribuable a été exigé conformément au paragraphe (6), ou l'aurait été, en application de ce paragraphe, si ce n'avait été de la production par le contribuable de la formule prescrite visée à ce paragraphe au plus tard à la date qui y est mentionnée, ou
(ii) il y a lieu, à la suite de l'établissement de la cotisation ou d'une nouvelle cotisation de l'impôt d'un autre contribuable conformément au présent alinéa ou au paragraphe (6), d'établir une cotisation ou une nouvelle cotisation de l'impôt du contribuable pour toute année d'imposition pertinente, et
(c) dans un délai de 4 ans à compte du jour visé au sous-alinéa (a)(ii), dans tous les autres cas,
procéder à de nouvelles cotisations ou en établir de supplémentaires, ou fixer des impôts intérêts ou pénalités en vertu de la présente Partie, selon que les circonstances l'exigent, sauf qu'une nouvelle cotisation supplémentaire ou une cotisation peuvent être établies en vertu de l'alinéa (b) plus de 4 ans après la date visée au sous-alinéa (a)(ii) seulement si cette mesure peut être raisonnablement considérée comme se rapportant à la cotisation ou à la nouvelle cotisation visée à cet alinéa.
(6) Lorsqu'un contribuable a produit la déclaration de revenu exigée par l'article 150 pour une année d'imposition et que, par la suite, une somme est demandée pour l'année par lui ou pour son compte à titre de :
(f) déduction, en application de l'article 127.3(1) à l'égard de la partie inutilisée de son crédit d'impôt pour la recherche scientifique et le développement expérimental pour une année d'imposition subséquente en produisant auprès du Ministre, au plus tard le jour où le contribuable est tenu, ou le serait s'il était tenu de payer de l'impôt en vertu de la présente partie pour cette année d'imposition subséquente, de produire en vertu de l'article 150 une déclaration de revenu pour cette année d'imposition subséquente, une formule prescrite modifiant la déclaration, le Ministre doit fixer de nouveau l'impôt du contribuable pour toute année d'imposition pertinente (autre qu'une année d'imposition antérieure à l'année donnée) afin de tenir compte de la déduction demandée.
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[50] The applicant argues that the designation made by the corporation under subsections 194(4) and (4.2) of the Act had resulted in the crystallization of the tax credit that was issued following this designation and that the cancellation for any reason whatsoever, even if this designation had been obtained by misrepresentation, can in no case result in the cancellation of the tax credit through the issue of a reassessment.
[51] The respondent, referring to the provisions of the Act, argues that under section 127.3, a taxpayer may deduct from the tax he is otherwise required to pay, a tax credit for scientific research and experimental development. Under subparagraph 127.3(2)(a)(ii), the taxpayer may deduct an amount designated by a corporation under subsection 194(4) in respect of ... (iv) a bond, debenture, bill, note, mortgage, hypothec or similar obligation (in this section and in Part VIII referred to as a "debt obligation") acquired by the taxpayer in the year where the taxpayer is the first person to be a registered holder thereof.
[52] However, subsection 194(4.2) specifies that the designation must be excluded and that no amount may be designated by a corporation in respect of a debt obligation that is not consistent with arrangements, evidenced in writing, that were substantially advanced before October 10, 1984.
[53] The implication of these various provisions is that if the designation to which a corporation proceeds is an excluded designation from the outset, under subparagraph 194(4.2)(b)(ii), the respondent does not see how the taxpayer could claim that the right to the tax credit had been crystallized through the operation of a designation that was unlawful from the start.
[54] It must be conceded that this thinking is completely reasonable and that the hypothesis advanced by the applicant, to the effect that, once the designation is made by the corporation, the debentures are crystallized and the Department could no longer issue an assessment to cancel it if some irregularity or fraud were demonstrated, simply cannot hold water, and I reject it.
[55] The reply to the second question is likewise rendered in the negative.
3rd question
Did the respondent issue its reassessment to the applicant with due diligence, in view of all the circumstances, and if not, does the absence of due diligence to that effect constitute a reason for setting aside the reassessment issued by the respondent to the applicant?
[56] Notwithstanding the applicant's laudable efforts, it has failed to demonstrate any negligence whatsoever on the part of the Department of Revenue, which conducted a painstaking investigation, given the circumstances, and with little or no collaboration on the part of certain stakeholders. The reply to the third question is likewise rendered in the negative.
4th question
Is the applicant entitled to a defence of due diligence in circumstances in which a tax credit is refused to it as a result of acts or omissions of a third party and without the applicant being responsible?
[57] The parties cite the application of section 195:
| 195(1) Every corporation that is liable to pay tax under this Part for a taxation year shall, on or before the day on or before which it is required to file its return of income under Part I for the year, file with the Minister a return for the year under this Part in prescribed form.
(2) Where, in a particular month in a taxation year, a corporation issues a share or debt obligation, or grants a right, in respect of which it designates an amount under section 194, the
corporation shall, on or before the last day of the month following the particular month, pay to the Receiver General on account of its tax payable under this Part for the year an amount equal to 50% of the total of all amounts so designated.
(5)Where a corporation that is liable to pay tax under this Part in respect of a share or debt obligation issued or a right granted by it wilfully, in any manner whatever, evades or attempts to evade payment of the tax and a purchaser of the share, debt obligation or right or, where the purchaser is a partnership, a member thereof, knew or ought to have known, at the time the share, debt obligation or right was acquired, that the corporation would wilfully evade or attempt to evade the tax, for the purposes of section 127.3, the share , debt obligation or right shall be deemed not to have been acquired.
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195(1) Toute corporation tenue de payer l'impôt en vertu de la présente partie pour une année d'imposition doit, au plus tard le jour où elle doit produire sa déclaration de revenu en vertu de la partie I pour l'année, produire auprès du Ministre une déclaration pour l'année en vertu de la présente Partie selon le formulaire prescrit.
(2)Lorsque, dans un mois donné d'une année d'imposition, une corporation émet une action ou une créance, ou accorde un droit, à l'égard de laquelle ou duquel elle désigne un montant en vertu de l'article 194, elle doit, dans le mois qui suit le mois donné, payer au receveur général au titre de son impôt payable en vertu de la présente partie pour l'année un montant égal à 50 % du total des montants ainsi désignés.
(5) Lorsqu'une corporation tenue de payer de l'impôt en vertu de la présente partie, à l'égard d'une action ou d'une créance qu'elle a émise, ou d'un droit qu'elle a accordé, sciemment, d'une manière quelconque, élude ou tente d'éluder le paiement de l'impôt et lorsque l'acheteur de l'action, de la créance ou du droit ou, lorsque l'acheteur est une société, un membre de la société savait ou aurait dû savoir, au moment où il a acquis l'action, la créance ou le droit, que la corporation, sciemment, éluderait ou tenterait d'éluder l'impôt, l'action, la créance ou le droit est réputé ne pas avoir été acquis aux fins de l'article 127.3.
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[58] As counsel for the applicants conceded, the only available case law on the defence of due diligence is in regard to an initial assessment. The respondent, for its part, suggests that there is no further need to probe this due diligence defence in regard to a reassessment since no evidence was submitted that the delay might have resulted directly in a loss of documentation, which conceivably might have entitled the taxpayers to raise the defence of due diligence.
[59] I subscribe to this argument of the respondent, and accordingly the 4th question shall be answered in the negative.
[60] It is clear to me that the turn in the situation in this case has indeed been very frustrating for the applicants, who were taken in by some unscrupulous partners, but the key issue is whether the taxpayers were or were not entitled in law to take advantage of a provision in the Act, and if they are unable to demonstrate that they met the Act's criteria to qualify for a tax benefit, as was their responsibility, it follows that the Department of Revenue was fully entitled to cancel a tax credit that flowed directly from a designation made by a corporation on the basis of misrepresentation.
CONCLUSION
[61] Notwithstanding my sympathy for the investors, who have lost several hundred thousand dollars in this venture, it is impossible in the circumstances to allow the applicants' action. The action is therefore dismissed.
[62] In regard to costs, the applicants' counsel asked that the costs be awarded in one case only, since there was an agreement among the nine applicants concerning the distribution of the costs in this matter. The respondent's counsel suggested that he had no objection to the costs being allowed in only one case, provided that the other applicants be joint and several. I think these two suggestions are acceptable, and I will therefore award costs in favour of the respondent in docket T-147-95 only; however, the applicants in the associated actions T-140-95, T-141-95, T-143-95, T-144-95, T-145-95, T-146-95, T-148-95 and T-149-95 shall be liable for the payment of the said costs, jointly and severally with the applicant in docket T-147-95.
Pierre Blais
J.
OTTAWA, ONTARIO
October 3, 2000
Certified true translation
Suzanne M. Gauthier, LL.L., Trad. a.
FEDERAL COURT OF CANADA
TRIAL DIVISION
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET NO: T-147-95
STYLE: Donat Flamand Inc. v. Her Majesty the Queen
PLACE OF HEARING: Québec, Quebec
DATE OF HEARING: September 5, 2000
REASONS FOR ORDER OF BLAIS J.
DATED: October 3, 2000
APPEARANCES:
Jules Turcotte for the applicants
Daniel Marecki for the respondent
SOLICITORS OF RECORD:
Beauvais, Truchon et Associés for the applicants
Québec, Quebec
Morris Rosenberg for the respondent
Deputy Attorney General of Canada
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