Date: 19990629
Docket: A-1019-96
Ottawa, Ontario, Tuesday, June 29, 1999.
DÉCARY J.A.
LÉTOURNEAU J.A.
IN RE THE Income Tax Act
Between:
NICOLE BROUILLETTE,
Appellant,
- and -
HER MAJESTY THE QUEEN,
Respondent.
JUDGMENT
The appeal is allowed. The decision of the Tax Court of Canada is reversed. The case is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant may make use of the provisions of s. 73(5) of the Income Tax Act in respect of the taxation years at issue. The appellant will be entitled to her costs in the Tax Court of Canada and in this Court, but only one set of costs will be payable for the case at bar and for case A-1020-96.
Certified true translation
Bernard Olivier, LL. B.
Date: 19990629
Dockets: A-1019-96 and A-1020-96
DÉCARY J.A.
LÉTOURNEAU J.A.
A-1019-96
IN RE THE Income Tax Act
Between:
NICOLE BROUILLETTE,
Appellant,
- and -
HER MAJESTY THE QUEEN,
Respondent.
_________________________________________________________
A-1020-96
IN RE THE Income Tax Act
Between:
PIERRE MICHEL DE RUELLE,
Appellant,
- and -
HER MAJESTY THE QUEEN,
Respondent.
___________________________________________________________
Hearing at Montréal, Quebec on Thursday, June 17, 1999.
Judgment at Ottawa, Ontario on Tuesday, June 29, 1999.
REASONS FOR JUDGMENT BY: DÉCARY J.A.
CONCURRED IN BY: DESJARDINS J.A.
LÉTOURNEAU J.A.
Date: 19990629
Dockets: A-1019-96 and A-1020-96
DÉCARY J.A.
LÉTOURNEAU J.A.
A-1019-96
IN RE THE Income Tax Act
Between:
NICOLE BROUILLETTE,
Appellant,
- and -
HER MAJESTY THE QUEEN,
Respondent.
_________________________________________________________
A-1020-96
IN RE THE Income Tax Act
Between:
PIERRE MICHEL DE RUELLE,
Appellant,
- and -
HER MAJESTY THE QUEEN,
Respondent.
___________________________________________________________
REASONS FOR JUDGMENT
DÉCARY J.A.
[1] Did the appellants Nicole Brouillette and Pierre Michel de Ruelle do what they had to do for tax purposes in order to make use of the capital gain tax deferral authorized by s. 73(5) of the Income Tax Act ("the Act")1 when a taxpayer transferred to his or her child the shares of a corporation operating an eligible small business? That is the question raised by these appeals, brought from two decisions of the Tax Court of Canada.2
[2] The appellants each appealed from assessments made by the Minister of National Revenue ("the Minister") in respect of their 1987, 1988 and 1989 taxation years. The two appeals were heard on common evidence by the Tax Court of Canada judge, who wrote reasons for judgment applicable to either of the appeals. Each of the appellants appealed to this Court from the judgment rendered and once again the two appeals were joined for hearing. The instant reasons will apply to them both and will be entered in each record.
[3] The subsection in question, which was repealed on December 31, 1987,3 read as follows:
| 73. (5) Aux fins de la présente partie et sauf lorsque les règles exposées au paragraphe 74(2) exigent qu'un gain en capital imposable, tiré de la disposition d'un bien par le contribuable, soit inclus dans le revenu d'une personne autre que le contribuable, lorsque, à une date quelconque, un bien a été transféré par un contribuable à son enfant qui résidait au Canada immédiatement avant le transfert, et que le bien était, immédiatement avant le transfert, une action du capital-actions d'une corporation exploitant une petite entreprise, les règles suivantes s'appliquent :
|
73. (5) For the purposes of this Part, where at any particular time a taxpayer has transferred property to his child who was resident in Canada immediately before the transfer and the property was, immediately before the transfer, a share of the capital stock of a small business corporation, except where the rules in subsection 74(2) require any taxable capital gain from the disposition by the taxpayer of that property to be included in the income of a person other than the taxpayer, the following rules apply:
|
| (a) le contribuable est réputé avoir disposé de l'action à la date du transfert et avoir reçu en contrepartie de cette disposition un produit égal à la fraction, si fraction il y a, |
| (i) de la juste valeur marchande de l'action à cette date |
| qui est en sus du moindre des montants suivants : |
| (ii) le gain en capital du contribuable, autrement déterminé, tiré de la disposition de l'action, ou |
| (iii) le montant du compte des gains cumulatifs d'une petite entreprise pour le contribuable, immédiatement avant le transfert, ou un montant moindre spécifié par le contribuable à l'égard du transfert de l'action; |
| (b) l'enfant est réputé avoir acquis l'action pour un prix égal au produit de la disposition que le contribuable est réputé avoir reçu en vertu de l'alinéa (a); et |
| (c) lorsqu'il a été disposé de deux ou plusieurs actions à la même date, le présent paragraphe s'applique comme si on avait disposé de chaque action séparément dans l'ordre désigné par le contribuable ou, s'il ne fait pas cette désignation, dans l'ordre désigné par le Ministre. |
|
(a) the taxpayer shall be deemed to have disposed of the share at the time of the transfer and to have received proceeds of disposition therefor equal to the amount, if any, by which
| (i) the fair market value of the share at that time |
exceeds the lesser of
| (ii) the taxpayer's capital gain otherwise determined from the disposition of the share, and |
| (iii) the amount of the taxpayer's cumulative small business gains account immediately before the transfer or such lesser amount as the taxpayer specifies in respect of the transfer of the share; |
| (b) the child shall be deemed to have acquired the share at a costs equal to the proceeds of disposition deemed to have been received by the taxpayer under paragraph (a); and |
| (c) where two or more shares have been disposed of at the same time, this subsection applies as if each share had been separately disposed of in the order designated by the taxpayer or if the taxpayer does not so designate, in the order designated by the Minister. |
|
[4] The relevant facts are not in dispute. The appellants married in 1970 and had a son, Thierry, in 1973. In 1978 they founded a company specializing in the sale of coffee, Orient Express Café Ltée ("Orient Express"), in which they held all the shares.
[5] On May 8, 1987 the appellants were separated from bed and board. Between May and August 1987 they undertook to negotiate an agreement by which among other things a separate fund was created for their son in order to cover his education, living expenses and entry into the job market.
[6] In late August 1987 the president of a competing business, A.L. Van Houtte Ltée ("Van Houtte") told the appellants, without being approached by them, that he wished to purchase Orient Express. In early December 1987 the appellants and Van Houtte came to an agreement in principle by which Van Houtte undertook to purchase almost all the shares in Orient Express for $1,801,500.
[7] The appellants wished to minimize their tax liability as far as possible and at the same time confer a benefit on their son. Their legal counsel suggested what the judge described as [TRANSLATION] "an artifice", which enabled them to use the provisions of exemption from capital gains on $500,000 and rollover (or tax deferral) mentioned in s. 73(5), the subsection which ceased to apply on December 31, 1987.
[8] On December 17, 1987 Van Houtte by resolution approved the forthcoming purchase of the shares of Orient Express. The resolution provided for the purchase of the shares of the three [TRANSLATION] "transferors", Ms. Brouillette, Mr. De Ruelle and "Fiducie Thierry Nicolas de Ruelle", in the amount of $1,810,500 payable in three installments.
[9] On December 23, 1987 Orient Express amended its by-laws to split its ordinary shares so as to make the forthcoming transactions possible.
[10] At 1 p.m. on the same day the appellants, by notarial deed, each assigned and transferred 200,000 ordinary shares with a total value of $400,000 to a [TRANSLATION] "Trustee", Claude P. Buisson in return for the sum of $300,000 paid by the trust in the form of demand notes made out by the trust to the two appellants. The appellants' child was the beneficiary of this trust. The trust was given the name "Fiducie de Thierry Nicolas de Ruelle" ("Fiducie Thierry").
[11] Also on December 23, 1987, but at 6 p.m., the appellants and Fiducie Thierry sold Van Houtte almost all the shares in Orient Express, including all those held by Fiducie Thierry, which had a value of $400,000, for the sum of $1,810,500.
[12] It appears from these transactions that for all practical purposes the appellants transferred to Fiducie Thierry in return for the sum of $300,000 shares worth $400,000 which Fiducie Thierry promptly sold to Van Houtte for the sum of $400,000. The appellants considered that they had thereby transferred shares to their child and, relying on the provisions of s.73(5) of the Act, they claimed in their tax return a capital gains exemption worth $50,000 each. The Minister disallowed their claim for an exemption.
[13] Subsequently, both in the Notices of Appeal they filed from the Minister's Notices of Reassessment and in the Tax Court of Canada, the appellants always maintained that the notarial deed of December 23, 1987 was a [TRANSLATION] "trust", "gift inter vivos", "trust gift". The issue was joined between the parties and proceeded on this legal basis.
[14] Like the appellants, the judge found that there was in fact a trust, but from this conclusion he derived a consequence which the appellants did not expect, namely that the trust had the effect of transferring the shares to the trustee rather than to the beneficiary child, with the result that the transfer of shares was not to the child as required by s. 73(5), but to the trustee.
[15] The issue in this Court turned mainly on the legal nature of the notarial deed of December 23, 1987 by which the appellants transferred 400,000 shares to Fiducie Thierry. The appellants argued, contrary to what the deed said and contrary to what they had argued both before the Minister and in the Tax Court of Canada, that the deed did not create a trust. Instead, they maintained that it was an innominate contract, in the nature of a contract to administer the property of another, combined with an indirect gift resulting from a sale of shares at a price less than their fair market value.
[16] I am prepared to assume that the appellants could have thus made an about face and that this about face was not a concealed amendment of their pleadings, simply because I consider the about face was not necessary. I should in no way like to give the impression that a taxpayer can with impunity, in the middle of an action, question the nature of contracts signed by him, which have produced effects in his favour and which he has relied on in support of his original arguments.
[17] In my opinion the case at bar results from a misunderstanding of the meaning to be given to the words "transfer to a child" in s. 73(5) of the Act and the scope of the judgment
of the Supreme Court of Canada in Royal Trust Company v. Tucker.4 Both the judge and the Minister, and now the appellants, appeared to be of the opinion that if there was a trust there was no transfer to the child within the meaning of s. 73(5). I do not agree.
[18] The word "transfer" is not defined in the Act. Thorson P. gave it a very broad meaning in David Fasken Estate v. Minister of National Revenue,5 and that judgment has been subsequently followed, most recently by this Court in The Queen v. Paxton.6 This is what the President of the Exchequer Court wrote, at 592:
| The word "transfer" is not a term of art and has not a technical meaning. It is not necessary to a transfer of property from a husband to his wife that it should be made in any particular form or that it should be made directly. All that is required is that the husband should so deal with the property as to divest himself of it and vest it in his wife, that is to say, pass the property from himself to her. The means by which he accomplishes this result, whether direct or circuitous, may properly be called a transfer . . . |
|
[19] Prima facie, therefore, the word "transfer" does not presuppose any particular form and may be made indirectly. Counsel for the Minister relied on the fact that elsewhere in the Act, for example in ss. 70(6), 73(1), 74(2), 74.1(1) and (2) and 160(1), Parliament expressly used the word "trust" as a basis for arguing that it is not possible to read "transfer by trust" into s. 73(5). I am not persuaded by this argument.
[20] Parliament is deemed to know the existing law. In 1987 it must have known, that at least in Quebec, a transfer of property to a minor child could be made by trust pursuant to art. 981a. of the Civil Code of Lower Canada. As s. 73(5) applied to both minor children and children of legal age, Parliament had no need to state that if minor children were in question the transfer should be made according to the formalities applicable to a transfer to a minor child. Section 74.1(2) dealt with the transfer of property "either directly or indirectly, by means of a trust or by another means whatever, to a person who was under eighteen years of age". These words echo those which Thorson P. read into the word "transfer" though they are not in it. Parliament wished to expressly ensure that a transfer for the benefit of a child who was probably a minor in all provincial jurisdictions would not be threatened by the differences in form which might exist under applicable provincial legislation. This subsection confirms that a transfer to a minor child or for his benefit by a trust is a valid transfer to the child. It also appears to me to confirm that the trust is the means generally used to transfer property to a child. The subsection expressly authorizes other means of transfer than by trust.
[21] I also note that in a judgment rendered only a few days ago,7 this Court was called on to interpret the wording "transferred property, either directly or indirectly, by means of a trust or by whatever other means whatever, to (a) the person's spouse . . . (b) a person who was under 18 years of age" contained in s. 160(1) of the Act. My brother Marceau J.A., speaking for the Court, said the following at para. 3 of his reasons:
| Noting the care taken by Parliament to use a multiplicity of the broadest language in its introductory statement, undoubtedly in order to give its rule the widest possible application " "directly or indirectly by means of a trust or by any other means whatever" " we have no difficulty in concluding that the provision applies when the tax debtor takes the action which initiates the process by which his or her property will ultimately be included in the estate of one or other of those with whom he or she is not dealing at arm's length . . . |
|
I consider that because of the very broad meaning of the word "transfer" given by Thorson P., Marceau J.A.'s observations also apply to s. 73(5), and that the latter comes into effect once the action is taken (here, creating the Fiducie Thierry) "which initiates the process by which his or her property will ultimately be included in the estate" of the child (my emphasis).
[22] The Supreme Court of Canada judgment in Tucker does not have the meaning, so far as the tax provision at issue is concerned, attributed to it by the Minister and the Tax Court of Canada judge.
[23] First, that case favoured a wide and liberal interpretation of arts. 981a. et seq. of the Civil Code of Lower Canada, to allow inter alia for the legislature"s purpose of accomplishing by a gift inter vivos what could already be done by will. In the facts of that case the Supreme Court adopted an interpretation that would protect the rights of an as yet unborn child. The Supreme Court to some extent confirmed that the trust was a special instrument that could be used to confer a benefit on children.
[24] The case then established that acceptance of the trust by the trustee made the creation of the trust irrevocable and that once the deed had been signed the party creating it gave up ownership of the property.
[25] Finally, the case held that Quebec civil law has rejected the English concept of dual ownership in favour of sole ownership vested in a single person, in that case the trustee rather than the beneficiary. However, Beetz J., speaking for the Court, took care to say that "the right of ownership is not the traditional one, since, for example, it is temporary and includes no fructus. It is a sui generis property right . . ."8
[26] As Prof. Sylvio Normand and Jack Gosselin noted in a remarkably well documented article, "La fiducie du Code civil : un sujet d'affrontement dans la communauté juridique québécoise",9 Tucker does not represent [TRANSLATION] "an all-encompassing view of trusts", as they considered that the Court had merely disposed of the case before it. That article made it quite clear that there is nothing absolute in Quebec trust law (at least at the time of the Civil Code of Lower Canada) and that there is scope for accommodation where the circumstances require.
[27] For tax purposes, which are all that interests us here, I do not think it is possible to say that there was no transfer to the child because if Tucker were strictly applied the child would only be the contingent owner of the property transferred. There certainly was a transfer of shares by the parents, and as we have seen that transfer was irrevocable. The child was much more than the contingent owner of the shares or of the proceeds of their sale, as the case might be: he was necessarily their ultimate and indefeasible owner. The aim of the federal legislation was to enable parents to transfer their shares to their children. Such a transfer can only be made in accordance with provincial statutes. If a provincial statute requires that a transfer for the benefit of a child be made to a third party intermediary, in order to protect the child's interests, I consider that for the purposes of s. 73(5) of the Income Tax Act that transfer is made to the child himself. The federal Parliament cannot have intended to exclude from the scope of this subsection parents who in Quebec relinquish their shares for their child's benefit in the way specified by the legislation of Quebec. It is the word "transfer" that is being interpreted here, not the word "trust", and we must be able to interpret the word "transfer" in a way that will make it applicable in Quebec. It is the real nature of the "transfer" that is in question, rather than its form, so much so that we need only re-read ss. 74.1(2) and 160(1) of the Act to see that the trust is only one means of carrying out a transfer.
[28] I am confirmed in my view of the interpretation to be given to the words "transfer to a child" by the fact that in s. 248(3) of the Act the federal Parliament clearly indicated its intention of recognizing the special features of civil law regarding ownership. At the relevant time that subsection provided that property was "beneficially owned" by "a beneficiary in a trust". In its current version the subsection provides, in para. (f ), that in the province of Quebec "property in relation to which any person has . . . a right as a beneficiary in a trust shall . . . be deemed to be beneficially owned by the person".
[29] The Minister's argument and the conclusion of the Tax Court of Canada judge force a taxpayer, who has acted in accordance with the requirements of Quebec law in creating a trust, to try by all possible means to dissolve the legal consequences of the deed creating the trust and to make abstract distinctions that lead nowhere. We need only look at the imaginative efforts undertaken by counsel for the appellants to qualify the contract at issue, once it should no longer be a deed creating a trust, to see how absurd it would be for a transfer never to be able to operate for the purposes of s.73(5) by means of a trust within the meaning of the Civil Code then in effect.
[30] The Minister made an alternative argument. Even if there was a "transfer to a child", that transfer was not of the type covered by s. 73(5). The Minister relied in this regard on the majority judgment of this Court in The Queen v. Paxton,10 in which my brother Robertson J.A. said that in his opinion:
| . . . the type of transfer embraced by subsection 73(5) of the Act is, at a minimum, one which enables the purchaser to exercise the degree of control necessary to determine the ultimate fate of the family business . . . |
|
[31] I do not think that case is relevant as the Court there found that s. 73(5) was not applicable in view of the taxpayer's failure to comply with the requirements relating to the contract on which he was relying, whereas in the case at bar the formal and substantive conditions of the trust have been met. In Paxton the taxpayer had in fact sold his shares to a third party even before transferring them to his children of legal age, who as simple intermediaries had no choice but to hand them over to the third party.
[32] The Minister argued that the agreement in principle arrived at by the parents and Van Houtte in early December 1987 constituted a promise to sell which was equivalent to a sale. That is not what the judge found and I do not feel that the evidence in the record would have allowed him to make such a finding. Fiducie Thierry was created on December 23, 1987 and Van Houtte could not set up a prior contract, if there was one, to which it obviously could not have been a party. What is more, even if the stipulation for another had been possible when that other was essentially a minor child, art. 1028 C.C.L.C. clearly states that the creditor (who would have been Van Houtte) could not in any way compel the other to do what his parents had promised he would do. Fiducie Thierry held the shares for a few hours and then sold them. Section 73(5) does not impose any minimum length of ownership and, in Paxton,11 Roberston J.A. suggested that this could be "for a year or even a millisecond". That is also what Judge Brûlé held in Orr v. M.N.R.12
[33] Further, in the case at bar there is nothing to indicate that the trustee did not act in the best interests of the beneficiary child by selling, as soon as they were acquired, his shares in the family business which the parents had chosen to sell.
[34] In short, I consider that when they created a trust for their child's benefit in the manner prescribed by Quebec law the parents transferred their shares to that child within the meaning of s. 73(5) of the Income Tax Act and can make use of the tax benefit conferred by that subsection.
[35] I would allow the appeals, reverse the judgments of the Tax Court of Canada and refer the cases back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellants may make use of the provisions of s. 73(5) of
the Income Tax Act in respect of the taxation years at issue. I would only award the appellants one set of costs for the Tax Court of Canada and this Court.
I concur.
Alice Desjardins J.A.
I concur.
Gilles Létourneau J.A.
Certified true translation
Bernard Olivier, LL. B.
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
| STYLE OF CAUSE: Nicole Brouillette v. The Queen |
PLACE OF HEARING: Montréal, Quebec
DATE OF HEARING: June 17, 1999
REASONS FOR JUDGMENT BY: Décary J.A.
CONCURRED IN BY: Desjardins J.A.
Létourneau J.A.
DATED: June 29, 1999
APPEARANCES:
Alain Ménard for the appellant
Pascale Berardino
Pierre Cossette for the respondent
SOLICITORS OF RECORD:
Ménard, Mageau, Valiquette for the appellant
Attorneys
Montréal, Quebec
Morris Rosenberg for the respondent
Deputy Attorney General of Canada
Ottawa, Ontario
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
| STYLE OF CAUSE: Pierre Michel Ruelle v. The Queen |
PLACE OF HEARING: Montréal, Quebec
DATE OF HEARING: June 17, 1999
REASONS FOR JUDGMENT BY: Décary J.A.
CONCURRED IN BY: Desjardins J.A.
Létourneau J.A.
DATED: June 29, 1999
APPEARANCES:
Alain Ménard for the appellant
Pascale Berardino
Pierre Cossette for the respondent
SOLICITORS OF RECORD:
Ménard, Mageau, Valiquette for the appellant
Attorneys
Montréal, Quebec
Morris Rosenberg for the respondent
Deputy Attorney General of Canada
Ottawa, Ontario
__________________
1 S.C. 1970-71-72, c. 63, amended by S.C. 1978, c. 42, s. 6 and by S.C. 1979, c. 5, s. 24(1).
2 Brouillette et al. v. The Queen (1996), 97 D.T.C. 624.
3 S.C. 1986, c. 6, s. 36.
4 [1982] 1 S.C.R. 250">[1982] 1 S.C.R. 250.
5 [1948] Ex. C.R 580.
6 (1996), 97 D.T.C. 5012, at p. 5015 (F.C.A.).
7 Riverin v. Her Majesty the Queen (May 18, 1999), A-48-96 (F.C.A.).
* Translation of Riverin not yet requested - TR.
8 Tucker, supra, note 4, at 272-73.
9 (1990) 31 C. de D. 681, at 704.
10 Supra, note 6, at 5016.
11 Ibid.
12 (1989), 89 D.T.C. 557, at 566 (T.C.C.).
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