Date: 20080131
Docket: A-2-07
Citation: 2008 FCA 37
CORAM: DÉCARY
J.A.
LÉTOURNEAU J.A.
NADON
J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
DAVID NISKER
Respondent
REASONS FOR JUDGMENT
LÉTOURNEAU J.A.
Issues
[1]
The
appellant seeks a reversal of a decision rendered by judge Lamarre-Proulx of
the Tax Court of Canada (judge) on December 4, 2006 (2006 TCC 651). The judge
ruled that the respondent, Mr. David Nisker, was entitled to deduct in the
calculation of his income a payment made to settle an action in tort against
him when the events that gave rise to his liability took place at the corporate
level.
[2]
The appellant
raises the following three grounds of appeal at paragraph 39 of her memorandum
of fact and law:
a) whether
the judge erred in concluding that the expense was incurred to protect the
respondent’s business;
b) whether
the judge erred in ruling that the respondent’s activities as a “corporate
officer” constituted business activities; and
c) whether
the judge erred in finding that the corporate veil of 157699 Canada Inc. had
been pierced, thereby entitling the respondent to claim the deduction “as if
the business had been carried on by the taxpayer himself”.
[3]
For the
reasons that follow, I think that each one of these questions must receive an
affirmative answer.
The Facts
[4]
The case
before the Tax Court of Canada proceeded on an agreed statement of facts. The
statement appears at paragraph 3 of the judge’s reasons for judgment. I will
give a summary of the facts relevant to this appeal. But for the sake of
completeness and to give an idea of the scheme
devised by the respondent and other investors which led to
his civil liability and that of corporation 157699 Canada Inc., of which he was
a corporate officer and director, I reproduce the agreed statement:
[3] The facts are
not really in dispute. At the outset of the hearing, an agreed statement of
facts was tendered to the Court. It reads as follows:
1. The
Appellant has been involved in real estate for fifty years. He has acted as a
developer and has owned and managed property, mostly with others. His past
activities include building residential homes, apartment and office buildings
as well as owning hotels, apartment-hotels and shopping centers.
2. Regarding
taxation years 2000 and 2001, his business activities generated a rental income
of approximately twelve million dollars per year ($12,000,000).
3. The
investments, developments and businesses undertaken by the Appellant were
usually undertaken together with others.
4. On May 12,
2003, the Appellant was reassessed for his 2000 and 2001 taxation years and was
refused deductions claimed by him following the payment of an amount of
$350,000 in settlement of legal proceedings.
5. On May 29,
2003, the Appellant filed a notice of objection against these two taxation
years reassessed.
6. On April 19,
2004, the Canada Revenue Agency (hereinafter CRA) confirmed the reassessments
dated May 12, 2003, for the 2000 and 2001 taxation years for the following
reason:
For the
fiscal year end December 31, 2000, the loan amount of $350,000 was not made to
earn income from a business or property. Therefore, this amount cannot be
deducted from income according to paragraph 18(1)(a). This amount does
not qualify as an allowable business investment loss pursuant to paragraphs
39(1)(c), 50(1)(a), 111(1)(b) of the Income Tax Act,
and pursuant to subparagraph 40(2)(g)(ii) of the Income Tax Act,
any resulting capital loss is deemed to be nil.
7. On November
27, 1987, pursuant to an emphyteutic lease, La Corporation Trisud Inc.
(hereinafter "Trisud") sold their rights to 152817 Canada Inc. for an
amount of $8,000,000 payable in two instalments.
8. Under the
agreement, an amount of $2,000,000 was due and payable to Trisud by 152817
Canada Inc. on the sixth anniversary of the closing, plus interest.
9. Regarding
the transaction with Trisud on November 27, 1987, 152817 Canada Inc. was acting
in trust for and on behalf of 149788 Canada Inc.
10. On December 1,
1987, 149788 Canada Inc. sold the rights to the emphyteutic lease to Saviva
Holdings Ltd., 157699 Canada Inc., 146236 Canada Inc. and 144945 Canada Inc.
11. On the same
day, by a prête-nom agreement, unknown by Trisud, 152817 Canada Inc.
acknowledged that it was acting in trust for the new owners which were Saviva
Holdings Ltd., 157699 Canada Inc., 146236 Canada Inc. and 144945 Canada Inc.
12. Since 1997,
the Appellant was an officer and director of 157699 Canada Inc.
13. Since 1987,
Appellant's daughter was the sole shareholder of 157699 Canada Inc. until 1990
when the Appellant's spouse became a shareholder.
14. In the course
of the transaction on December 1st, 1987, 157699 Canada Inc., unknown to
Trisud, acted as a prête-nom for and on behalf of 81008 Canada Inc. which
became owner of a 10% undivided co-ownership interest in the emphyteutic lease.
15. Until June 1,
1992, the Appellant held 163,000 Class "C" preferred shares of 81008
Canada Inc. after which he was not a shareholder.
16. On January 14,
1988, the National Bank of Canada entered into a loan agreement with
152817 Canada Inc. for an amount [of] $5,350,000, to be guaranteed in part by
personal guarantees.
17. The Appellant
personally guaranteed 10% of the amounts owed to the National Bank of Canada.
18. In 1993, 152817
Canada Inc. defaulted and the National Bank of Canada exercised
its security, taking over the rights in the emphyteutic lease.
19. On December
20, 1993, Trisud formally requested repayment of the balance of sale.
20. On March 29,
1994, Trisud filed a writ of summons and declaration in the Superior Court
against 152817 Canada Inc. and David Stein under court file number
500-05-003691-944.
21. On December 9,
1996. Trisud filed an amended writ of summons and declaration adding Saviva Holdings
Ltd., 157699 Canada Inc. and 144945 Canada Inc. as Defendants in the said Court
file number 500-05-003691-944.
22. On December
10, 1999, the Quebec Superior Court rendered judgment in Court file no.:
500-05-003691-944 and condemned 152817 Canada Inc., Saviva Holdings Ltd.,
157699 Canada Inc. and 144945 Canada Inc., jointly and severally, to pay to
Trisud $2,570,024.00
plus interest and costs.
By the same judgment, David Stein was condemned jointly and severally with the
other Defendants to pay $500,000 plus interest and costs.
23. On January 7,
2000, the judgment was inscribed in appeal by 157699 Canada Inc., Saviva
Holdings Ltd. and 144945 Canada Inc. under Court file number 500-09-009116-005.
24. On January 28,
2000, Trisud filed an action in the Superior Court under file number
500-05-003691-944 against Sam Greenberg, the Appellant, Pinchos Freund, Saviva
Holdings Ltd., 2853523 Canada Inc. and 2630-1374 Quebec Inc. in order to
establish the solidary liability of these Defendants with those in court file
no. 500-05-003691-944 (Appeal Court number
500-09-009116-005).
25. On November
30, 2000, a transaction agreement was signed between Trisud, Sam Greenberg, the
Appellant, Saviva Holdings Inc., 2853523 Canada Inc., 2630-1374 Quebec Inc. and
157699 Canada Inc. regarding file 500-05-003691-944 (Appeal Court
no.:500-09-009116-005) and 500-05-055612-004.
26. By said
transaction, 157699 Canada Inc. and Saviva Holdings Ltd. agreed solidarily to
pay to Trisud the sum of $700,000 in final settlement regarding court file
500-05-003691-944 (Appeal Court no. 500-09-009116-005) in consideration of
which Trisud subrogated 157699 Canada Inc. and Saviva Holdings Ltd. to the
extent of 50% each, all of its rights against 152817 Canada Inc., David Stein,
144945 Canada Inc. and Pinchos Freund.
27. By said
transaction, the Appellant and Sam Greenberg obligated themselves solidarily
with Saviva Holdings Ltd. and 157699 Canada Inc. to pay Trisud the said amount
of $700,000.
28. Pursuant to
the transaction, the Appellant paid an amount of $350,000.
29. In
consideration of the payment of $700,000 to Trisud, a Declaration of Settlement
in Court file 500-05-009116-005 was executed.
30. In
consideration of the payment of same, Trisud discontinued its action in court
file 500-05-055612-004 without costs and without further recourse against all
Defendants, including the Appellant.
[5]
The
following schema illustrates the various transactions:
TRISUD
Sale of
emphyteutic lease to
(Nov. 27, 1987)
152817
Prête-nom
for 149788
Prête-nom
Agreement Sale of emphyteutic lease to
(Dec. 1, 1987) (Dec. 1, 1987)
“New owners”: Saviva 157699
146236 144945
Prête-nom
for
81008
[6]
In a
nutshell, the events relevant to this appeal unfolded as follows.
[7]
An
emphyteutic lease of a shopping center was acquired on November 27, 1987. The
sale price was to be paid in installments. The original buyer was 152817 Canada
Inc. (152817), a corporation set up for the acquisition of the emphyteutic
lease and controlled by Mr. Stein, an experienced real estate businessman
unrelated to the Respondent: see Dalphond J.’s reasons for judgment in the
lawsuit La Corporation Trisud Inc. v. 152817 Canada Inc., David Stein,
Saviva Holdings Ltd., 157699 Canada Inc. and 144945 Canada Inc., C.S.
Montréal no. 500-05-003691-944, December 10, 1999, appeal book, volume 1, at
page 115. Unknown to the seller La Corporation Trisud Inc. (Trisud), 152817
was, with respect to this deed of sale, acting in trust for and on behalf of
149788 Canada Inc.: see the appellant’s memorandum of fact and law, at
paragraph 8.
[8]
In a
subsequent transaction dated December 1, 1987, also unknown to the original
seller, 149788 sold its right in the emphyteutic lease to 157699 Canada Inc.
(157699), a corporation of which the respondent was a corporate officer and
director, and other unrelated investors (Saviva Holdings Ltd., 146236 Canada
Inc. and 144945 Canada Inc.), hereinafter the “new owners”. Once again, unknown
to Trisud, 152817 served as a prête-nom for the new owners. The deed of sale
was carefully drafted to ensure to the new owners a secured access to the
income and tax depreciation related to the property, without having to assume
any liability with respect to the balance of the purchase price. As for 152817,
it ended up with no property, no income and no tax benefits but still solely
responsible for the debt owned to Trisud. Consequently, the balance of the
purchase price owing to Trisud was never paid: see Dalphond J.’s reasons for
judgment, supra, at page 121.
[9]
In
December 1999, Dalphond J. of the Superior Court of Quebec rendered a judgment
holding 152817 in breach of its contractual obligations and the new owners
liable in tort. They were condemned to pay, jointly and severally, to Trisud,
the amount of $2,570,024 plus interest. Subsequent to that decision, a lawsuit
was launched by Trisud against the principals and controlling minds of the new
owners personally which included the respondent. This eventually led to a
settlement. The respondent paid half of the $700,000 agreed between the
parties.
[10]
The
role and involvement of the respondent can be summarized as follows: he was a
corporate officer and director since January 14, 1997, of 157699, one of the
new owners of the emphyteutic lease. His daughter was the sole shareholder of
that corporation until 1990 when his spouse also became a shareholder. In the
transaction dated December 1, 1987, 157699 was acting as a prête-nom for and on
behalf of 81008 Canada Inc. (81008). In the course of this transaction, 81008
acquired a 10% interest in the emphyteutic lease. 81008 was a corporation of
which the respondent was at all times an unpaid corporate officer and director:
see amended Reply to the Notice of Appeal, appeal book, at page 40, paragraph
14d). He was also a shareholder until June 1992. The common shareholders of
81008 were at all relevant times the respondent’s spouse, his daughter and his
son. The respondent had also guaranteed personally 10% of a loan by the
National Bank of Canada to 152817. In 1993,
following a default, the bank repossessed the property and the rights under the
emphyteutic lease.
Whether
the judge erred in concluding that the expense was incurred to protect the
respondent’s business
[11]
At
paragraph 31 of her reasons for judgment, the judge concluded that the
respondent settled the proceedings against him for fear of “losing his own
rental properties as well as his reputation as a corporate officer”. With
respect, this conclusion is in part not supported by, and in part contrary to,
the evidence.
[12]
By the
time the appeal before the Tax Court of Canada was heard, the respondent
suffered from illnesses which prevented his from testifying. It is true that
his daughter, Joyce Nisker, testified that her father settled the case because
he was afraid of the risk of having to pay a larger amount and having his
reputation tarnished: see her testimony, appeal book, volume 2, at pages 305
and 308.
[13]
It is
legitimate for a party to a lawsuit to try to limit the amount of damages that
it may have to pay personally. That being said, however, there is no evidence
whatsoever on the record that the respondent would have had to sell income
producing assets to meet his liability for his wrongful act. Indeed, the
respondent’s lawyer testified that, when assessing the risk of having to pay a
larger amount, his client asserted that he had the necessary funds to pay the
larger amount. At pages 261-262 of the transcript, appeal book, volume 2, the
witness said:
Alors lors de cette
rencontre avec lui seul, il se posait encore la question, est-ce que vraiment
il aurait dû faire la transaction personnellement, s’impliquer personnellement
et est-ce qu’il n’aurait pas été mieux d’aller plus avant dans le dossier.
Alors, évidemment je lui ai rappelé que la transaction était conclue, on en
avait discuté beaucoup, mais je lui ai rappelé tous les motifs et le risque
sérieux qu’il avait, si on perdait l’appel, d’être condamné personnellement
à plusieurs millions de dollars, et lui ai rappelé qui si ça arrivait, de
ce que je connaissais de la situation, lui et Sam Greenberg devraient débourser
ces montants-là. Et je me souviens de lui avoir dit : « Écoutez,
je ne connais pas votre situation financière personnelle mais je prends pour
acquis que vous pourriez payer le montant, donc c’est encore plus sérieux comme
risque ». Il a dit oui, ça si j’étais condamné, je pourrais le payer. Et je lui
ai dit : « Le risque est encore plus grand. Si vous me disiez que
vous n’avez pas les fonds, bien, le risque serait théorique ».
[Emphasis added]
[14]
As for the
respondent’s fear of having his reputation tarnished, I agree with counsel for
the appellant that this was already done by the judgment of the Quebec Superior
Court. Justice Dalphond, now on the Quebec Court of Appeal, found that it was
no accident if the new owners could not be held liable for the balance of the
purchase price. This was the plan and the documents were drafted in such a way
that liability would remain with 152817 which had been stripped of all its
assets and had become an empty shell. Except for the initial deed of sale
between Trisud and 152817, the documents relating to the subsequent sale were
not registered to avoid transfer taxes. In addition, no notice of these
documents were given to Trisud: see the reasons for judgment, appeal book,
volume 1, at page 121.
[15]
At page 12 of his
reasons, ibidem, at page 125, Justice Dalphond wrote:
Moreover, the evidence
has shown that Messrs. Stein, Greenberg, Nisker and Freund intentionally
had the deed of transfer drafted in such a way that their companies would not
become liable towards Trisud for the balance of the purchase price.
[Emphasis added]
[16]
The Superior Court
found that, to the knowledge of the new owners and the respondent, 152817
committed a breach of the deed of sale as well as a breach of its obligations
pursuant to the deed of sale. As for the new owners, including the respondent’s
corporation, the Superior Court ruled that they committed a wrongful and
dishonest act for which they had to be held accountable: ibidem, at
pages 125 and 126; see also the decision of Pigeon J. in Trudel v. Clairol
Inc. of Canada, [1975] 2 S.C.R. 236, at pages 241 to 243, quoted by Dalphond
J. at page 13 of his reasons, where Justice Pigeon accepted that “it is an act
of dishonesty to be associated knowingly with a breach of contract”.
[17]
I think the
appellant’s first ground of appeal is well founded.
Whether
the judge erred in ruling that the respondent’s activities as a “corporate
officer” constituted business activities
[18]
The
respondent derived his income from rental properties that he co-owned
corporately or owned personally through his wife, and their management: see
appeal book, volume 2, at pages 288-289, 293, 313 and 330 to 334. He also acted
as an unpaid corporate officer and director of 157699 and 81008. As far as
other corporations are concerned, very little evidence, if any at all, was
provided of the respondent’s role in these corporations in which he had
invested with others. Yet, relying upon a 1969 decision of a US Court of claims,
i.e. Mitchell v. The United
States, 408
F. 2d 435, the judge found that the respondent’s activity as a corporate
officer was a business activity.
[19]
With
respect, the Mitchell case has simply no application in the present
instance. While there is some analogy between the Mitchell case and our
case, there are substantial factual and legal differences which distinguish the
two cases.
[20]
Mr.
Mitchell was sued by a corporation in 1958 for having fraudulently represented
the facts relating to the corporation’s liabilities for Federal income and
excise taxes and for product warranties. He was the president, chief executive
officer and major stockholder of that corporation. In February 1960, the
litigation was settled with the corporation for one million, of which Mitchell
was to pay $678,000.
[21]
He later
sued to recover taxes that he alleged were illegally assessed by reason of the
Internal Revenue Department refusing the deduction of his legal and accounting
expenses necessarily incurred ($135,340.) in defending the lawsuit brought
against him by the corporation. He claimed the deduction of his expenses under
section 162(a) of the Internal Revenue Code of 1954. He contended
that the suit against him by the corporation “constituted an attack upon his
integrity and jeopardized his business activities as a corporate officer”: see
page 1 of the syllabus of the case. Section 162(a) allowed for the
deduction of ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business (emphasis added).
[22]
The
evidence showed that, in addition to his involvement with the corporation which
sued him, Mr. Mitchell was a corporate officer of numerous unrelated
corporations and shareholders during the fifties and sixties from which he
received substantial compensation ($64,000, for example, from four corporations
during the period of 1947-1955): see pages 3 and 4 of the decision.
[23]
In a
majority decision, the Court found that Mr. Mitchell’s primary trade or
business had always been that of being a corporate official of various business
corporations. His investments and managements of real estate projects and
developments were secondary. In the Court’s view, his activity as a corporate
official constituted the carrying on of a trade or business within the meaning
of section 162(a).
[24]
In the
present instance, contrary to Mr. Mitchell, the respondent was not in the
business of marketing himself and selling his services as a corporate
official. Actually, he was not paid as a corporate official of 157699 and 81008
and he, therefore, had no source of income from or connected to that activity
as required by section 3 of the Act: see Stewart v. Canada, [2002] 2
S.C.R. 645, at paragraphs 49, 50 and 53 to 55. As previously mentioned, his
sources of income were from rental properties and their management. They were
unconnected and unrelated to his activity as a corporate officer and director
of 81008 and 157699 of which, in this last instance, he became a corporate
officer and director only in 1997. Furthermore, according to the evidence filed
before the Tax Court, his activities as a corporate officer and director
appeared to be limited to family-related corporations.
[25]
The
appellant also relies upon subsection 248(1) of the Income Tax Act,
R.S.C. 1985, c. 1 (5th Supp.) (Act) to challenge the judge’s ruling.
This subsection excludes from the definition of “business” an office or
employment. In addition, the definition of “office” includes the position of a
corporate director. The subsection reads:
|
“business” includes a profession, calling, trade,
manufacture or undertaking of any kind whatever and, except for the purposes
of paragraph 18(2)(c), section 54.2, subsection 95(1) and paragraph
110.6(16)(f), an adventure or concern in the nature but does not
include an office or employment.
“office” means the position of an individual entitling
the individual to a fixed or ascertainable stipend or remuneration and
includes a judicial office, the office of a minister of the Crown, the
office of a member of the Senate or House of Commons of Canada, a member of a
legislative assembly or a member of a legislative or executive council and
any other office, the incumbent of which is elected by popular vote or is
elected or appointed in a representative capacity and also includes the
position of a corporation director, and “officer” means a person
holding such an office.
|
« enterprise » Sont compris parmi
les entreprises les professions, métiers, commerces, industries ou activités
de quelque genre que ce soit et, sauf pour l’application de l’alinéa 18(2)c),
de l’article 54.2, du paragraphe 95(1) et de l’alinéa 110.6(14)f), les
projets comportant un risque ou les affaires de caractère commercial, à
l’exclusion toutefois d’une charge ou d’un emploi.
« charge » Poste qu’occupe un particulier et qui
lui donne droit à un traitement ou à une rémunération fixes ou vérifiables, y
compris une charge judiciaire, la charge de ministre de la Couronne, la
charge de membre du Sénat ou de la Chambre des communes du Canada, de membre
d’une assemblée législative ou de membre d’un conseil législatif ou exécutif
et toute autre charge dont le titulaire est élu au suffrage universel ou bien
choisi ou nommé à titre représentatif, et comprend aussi le poste
d’administrateur de société; «fonctionnaire » ou «cadre » s’entend de la
personne qui détient une charge de ce genre, y compris un conseiller
municipal et un commissaire d’école.
|
[Emphasis added]
In other words, the appellant says, income gained as a
corporate officer is income from office or employment, not from business. On
the facts of this case, I certainly agree with that submission.
[26]
However, counsel
for the respondent submits that the definition of business does not apply in
the present instance because the respondent was not paid when acting as a
corporate officer and director. He relies on the decision of the Tax Court of
Canada in St-Georges v. R., 2006 D.T.C. 2969 where the Tax Court judge
ruled, at paragraph 22, that the definition of office, in order to apply,
requires as a necessary condition that the corporate director be entitled to a
fixed or ascertainable stipend or remuneration. He submits that the Tax Court
decision was affirmed by our Court in St-Georges v. Canada, 2006 FCA
207.
[27]
It is true
that our Court affirmed the decision of the Tax Court of Canada, but not on the
point raised by counsel for the respondent. Mr. St-Georges was a chartered
accountant and a bankruptcy trustee. He operated under the name of Société
St-Georges Hébert & Compagnie, which he owned and which he used to account
for and declare the income earned. He agreed to act as a director of a
corporation which was a client of his accounting firm. Our Court was of the
view that the accounting services rendered to the corporation by Mr. St-Georges
were not rendered by him on a personal basis, but through his accounting firm.
[28]
In view of
my conclusion that the respondent did not have a source of income connected
with his corporate officer’s or director’s activities, it is not necessary to
decide whether subsection 248(1) of the Act requires that a corporate director
be paid in order to fall within the parameters of the definition. In any event,
either way, that is to say whether the respondent was paid or not as a
corporate director, the amount that he paid in this case as damages resulting
from personal liability in tort is not a business expense under the Act.
Whether
the judge erred in finding that the corporate veil of 157699 Canada Inc. had
been pierced, thereby entitling the respondent to claim the deduction “as if
the business had been carried on by the taxpayer himself”
[29]
The
appellant strongly takes issue with the judge’s conclusion on the piercing of
the corporate veil and the consequence that she drew from that. The essence of
the judge’s analysis is found in paragraphs 41 and 42 of her reasons for
judgment. They read:
[41] In other words, where
in a particular matter the corporate veil is pierced by a court decision, and
the separate liability of a corporation is thereby disregarded so as to include
the individual who is the brain of the corporate entity and thus to find both
the individual and the corporation liable in tort, it is as if with respect to
that particular matter the business had been carried on by both. If the
corporation was entitled to deduct the amount as having been laid out for the
purpose of carrying on business, it follows that, similarly, the individual who
paid the damages in tort would be entitled to a deduction for having incurred
the expense for the purpose of carrying on business.
[42] It was not
disputed that the corporation would have been entitled to deduct the amount
pursuant to sections 3 and 9 of the Act (65302 British Columbia Ltd. (supra)
and McNeill (supra)). It is therefore my view that the
Appellant, who was exposed to the risk of being found liable in tort together
with the company for which he had acted as a corporate officer and who decided
to settle the matter and pay the amount personally, is entitled, as was the
corporate entity, to claim the deduction as if the business had been carried on
by the taxpayer himself.
[Emphasis added]
[30]
From her
analysis of the judgment of Dalphond J. of the Superior Court of Quebec in the
lawsuit against the new owners and 152817, she concluded that the learned
Superior Court judge had pierced the corporate veil to find the respondent
liable in tort: see paragraph 39 of her reasons for judgment.
[31]
Counsel
for the respondent acknowledged in his memorandum of fact and law that it is
not evident that Dalphond J. had the intent of piercing the corporate veil and
that this was the effect of his judgment: see paragraphs 32 and 33 of the
respondent’s memorandum of fact and law. He also conceded that her “analysis
couched in the terms of “piercing”, “lifting” or otherwise disregarding a
corporate “veil” is not particularly helpful”: see paragraph 36 of the
respondent’s memorandum of fact and law.
[32]
Finally,
counsel for the respondent admitted that the language in the second sentence of
paragraph 42 of the judge’s reasons for judgment, supra, is too broad.
However, he submitted that the essence of the statement therein applied to his
client and allowed him “to claim the deduction as if the business had been
carried on by the taxpayer himself”.
[33]
I believe
the judge drew an erroneous conclusion as to the effect of the decision
rendered by Dalphond J. of the Quebec Superior Court. What Dalphond J. said and
found was simply that the respondent was aware of all the transactions that
followed the original deed of sale to avoid assuming liability for the balance
of the purchase price, the content of that deed of sale, the obligations of
152817 pursuant to it, and that this knowledge could be imputed to his company,
i.e. 157699. The following two paragraphs contain in essence what the learned
judge said on the question:
As for
Messrs. Nisker and Freund, they attended the closing where the Deed of Sale was
signed, they discussed the deal with Messrs. Stein and Greenberg and they
executed subsequent documents where they acknowledged the existence of the Deed
of Sale and its registration. Messrs. Stein and Greenberg testified that they
did not want to become liable for the balance of the purchase price. The Court
can infer that they were aware of the content of the Deed of Sale and of the
obligations of 152817 pursuant to it (art. 2848 C.c.Q.). This knowledge can
also be imputed to their respective company.
Moreover the
evidence has shown that Messrs. Stein, Greenberg, Nisker and Freund intentionally
had the deed of transfer drafted in such a way that their companies would
not become liable towards Trisud for the balance of the purchase price.
[Emphasis added]
[34]
Indeed,
the theory of the lifting of the corporate veil has no application here. While some
of the jurisprudence on this theory has been ambiguous at times, probably
because there were situations where an individual was a corporate officer and a
shareholder at the same time, it now seems that the piercing of the corporate
shield is directed towards the shareholders, not the corporate officers. The
respondent was a corporate officer and director of 1577699 which was found
liable as a new owner.
[35]
This is
true under the Civil Code of Quebec, L.Q. 1991, c. 64, as it was under
the former Code, i.e. the Civil Code of Lower Canada. This aspect was
analysed by the reputed author Paul Martel in his seminal book Business
Corporations in Canada, Thomson Carswell, Toronto, 2007, at pages 1-66. Section 1457 of
the Civil Code of Quebec is the source of extra-contractual liability
for corporate director. At pages 1-66, the learned author writes:
We should add to this list article 1457 of the Civil
Code of Québec, which is the only true possible source of civil liability
for corporate directors and which does not require lifting of the corporate
veil to be applied. This “lifting” actually covers shareholders and not
directors as such.
…
On the contrary, a director who participates in
the fault is jointly and severally liable under article 1526 – he cannot hide
behind a mandate. It is neither necessary nor even relevant to invoke lifting
the corporate veil to impose personal liability on a director for an
extra-contractual fault he has committed, or that of the corporation to which
he has contributed. This was true before 1994, and the legislator did not wish
to change this situation when it enacted article 317.
[Emphasis added]
This
analysis has been endorsed by the Quebec Court of Appeal in Brasserie Labatt
Ltée v. Lanoue, [1999] J.Q. no. 1108, J.E. 99-457.
[36]
The respondent chose
to do business through corporations to spread the risks and to diminish the
risk that he could be personally liable to pay large amounts of money: see the
testimony of her daughter, Mrs. Joyce Nisker, appeal book, volume 2, at page
307. Eventually, as the Superior Court of Quebec found, the respondent
overstepped the boundaries and committed a wrongful act for which he was made
personally liable.
[37]
In Kosmopoulos v.
Constitution Insurance Co., [1987] 1 S.C.R. 2, at page 11, the Supreme
Court of Canada reiterated the principle that the lifting of the corporate veil
is to be done in the interests of third parties who would suffer as a result of
those who chose the benefits of incorporation. Wilson J., writing for a
unanimous Court, said:
There is a persuasive argument that “those
who have chosen the benefits of incorporation must bear the corresponding
burden, so that if the veil is to be lifted at all that should only be done in
the interests of third parties who would otherwise suffer as a result of that
choice”.
[Emphasis added]
[38]
In the present
instance, the judge lifted the corporate veil in the interests of the wrongdoer
to grant him a tax benefit to the detriment of all Canadian taxpayers. The
respondent, having sought the benefits of incorporation, I fail to see how and
why, both factually and legally, the carrying on of business by his corporation
157699 can suddenly become a carrying on of business by the respondent
personally so that, as the judge concluded, he can claim “as if the business
had been carried on by the taxpayer himself”, the deduction for an amount paid
as damages resulting from personal liability in tort as a corporate officer.
[39]
Counsel for the
respondent submitted that the conclusion reached by the judge can be supported
by the principles of agency. I do not think so. As the learned author Paul Martel
pointed out in the excerpts previously cited, a corporate director who
participated in a wrongful act cannot find shelter behind the notion of agency
to escape personal liability.
[40]
I should mention here
that, under section 321 of the Civil Code of Quebec, a director of a
corporation is considered to be the agent (“mandataire” translated in English
to “mandatary”) of the corporation. This is to be contrasted with the Act
which, in subsection 248(1), defines “employee” as including an officer and
“officer” as meaning a person holding an office as defined by the word
“office”, which includes the position of a corporation director. It is
difficult to see under the Act how the business of the corporation can become
the personal business of its corporate officer or director who is its employee.
[41]
In any event, coming
back to the notion of agency, an agent acts for a principal. The business of
the principal remains the business of the principal. It is nothing less than a
fiction to say that the carrying on of business by the principal becomes the
carrying on of business by the agent, so that he can claim a deduction for an
expense incurred personally “as if the business had been carried on by the
taxpayer himself”. The Act thrives on legal fictions in the form of deeming
provisions. However, this is one that I have not found in the Act and for which
the respondent has been unable to direct us to a statutory foundation.
[42]
For these reasons, I
would allow the appeal with costs, set aside the decision of the Tax Court of
Canada and, proceeding to render the judgment that should have been rendered, I
would dismiss the respondent’s appeal to the Tax Court of Canada with costs.
“Gilles
Létourneau”
“I
agree
Robert
Décary J.A.”
“I
agree
Marc
Nadon J.A.”
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