Date:
20080507
Docket: A-280-07
Citation: 2008 FCA 174
CORAM: DESJARDINS
J.A.
LÉTOURNEAU
J.A.
BLAIS
J.A.
BETWEEN:
GISÈLE MARCEAU DUMAIS
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
LÉTOURNEAU J.A.
Issues
[1]
The appeal
raises the following two issues:
(a) Did Justice
Lamarre of the Tax Court of Canada err in concluding that the appellant had
received a $42,000 benefit within the meaning of subsection 15(1) of the Income
Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (Act)?
(b) Was the
judge correct to uphold the penalty for gross negligence assessed by the
Minister of National Revenue (Minister) under subsection 163(2) of the Act?
Facts
[2]
The
appellant is the sole shareholder and director of Société Ceaumais Inc.
(Company), a company whose financial and fiscal year-end is January 31. On July 11, 2000, the Company bought a
building from the Caisse populaire Desjardins. The building, located at 1540
Cadillac in Québec, Quebec, had been put up for sale for non-payment of $66,000
in hypothec instalments. On August 9, 2000, the Company sold the building to
the appellant by notarial act; the price stipulated in the contract was
$132,000, of which $90,000 was paid on the same day by means of a hypothecary
loan obtained by the appellant, and the balance of $42,000 was the [translation]
“repayment of advances made by the buyer to the seller prior to this
date, and in respect of which full and final release is granted” (emphasis
added).
[3]
However,
in the Company’s financial statements for the fiscal year ending January 31,
2000, a debt of $22,522.82 is shown for the item [translation] “owing to director” under
liabilities on the balance sheet. For the fiscal year ending January 31, 2001, this amount not only did not
go down, but increased to $26,022.30.
[4]
For the
fiscal year ending January 31, 2002, there was no longer an “owing to director”
item under liabilities. Instead, there was an account [translation] “owing to a shareholder” in
the amount of $27,043. This amount increased to $37,371 for the fiscal year ending
January 31, 2003. At January 31, 2004, it had
risen to $41,401.
[5]
Since the
Company’s closing balance sheets for the year ending January 31, 2001, and for subsequent years
appeared to show that the appellant had granted no release to the appellant,
the Minister finally assessed the appellant for the equivalent of the $42,000
amount as a benefit conferred to a shareholder in accordance with subsection
15(1) of the Act.
Analysis of the appellants’ submissions
(a) Legal compensation
[6]
Despite
the laudable efforts of counsel for the appellant, I am not satisfied that the
judge made an error warranting our intervention.
[7]
The
appellant submitted that, under article 1673 of the Civil Code of Québec
(C.C.Q.), compensation of the two existing debts between the seller and the
buyer had been effected by operation of law. It was his contention that the
failure to make the appropriate corrections to the financial statements was simply
a mistake and did not amount to gross negligence.
[8]
Finally, the
appellant submits that the judge erred in ruling that she had waived compensation.
[9]
At the
hearing, counsel for the respondent abandoned reliance on the fact that there might
have been a waiver of compensation by the appellant. He submits that, even if one
accepts that compensation was effected by means of the transaction for the
amount of $22,522.82 appearing under liabilities on the Company’s balance sheet
as an amount owning to the director, the appellant nevertheless received a
$42,000 benefit, which he explains as follows.
[10]
The amount
of the compensation claimed in the act of sale was $42,000, while the amounts
owed to the appellant by the Company for advances totalled only $22,522.82. Therefore,
a difference of $19,417.98 remains as a benefit. The appellant acknowledges
that there is a benefit in this amount and made the respondent a settlement
offer on this basis.
[11]
However,
according to counsel for the respondent, this amount not only did not disappear
from the liabilities on the Company’s balance sheet, it continued to increase
in subsequent years. It rose from $22,522.82 in 2000 to $26,022.30 in 2001,
$27,043 in 2002, $37,371 in 2003 and $41,401 in 2004. Accordingly, he submits
that since the Company’s debt to the appellant still appears on the Company’s
books, the appellant could still seek repayment of that debt, without tax
consequences, for advances owed to her. This constitutes a benefit of $42,000
consisting of the $19,417.98 amount acknowledged by the applicant and the
$22,522.82 debt appearing in the Company’s financial statements from the year
2000 onward.
[12]
The judge
did not err in accepting the respondent’s argument to the effect that the
appellant could still be reimbursed for the unextinguished debt owed to her by
the Company for the advances.
[13]
I also
agree with the judge’s conclusion that the appellant knew or ought to have
known that a benefit was being conferred on her as a result of the transaction,
especially since the $42,000 amount claimed as advances made to the Company did
not exceed $22,522.92 at that time. At paragraph 18 of her reasons for decision,
the judge writes the following in support of her conclusion:
[18] The
appellant is the sole shareholder and director of Ceaumais. She managed to
detect a mistake in her own tax return for 2000 and that mistake was enough for
her to refrain from filing the return within the time fixed by the Act. There
were few transactions involving Ceaumais during 2000. The appellant should have
verified that the transaction involving the building in question was properly
reflected both in the financial statements and in Ceaumais’s income tax return.
Indeed, no capital gain was reported, and this should have drawn the appellant’s
attention. She testified that she had decided to transfer the building so that
it would be under her own name in order, among other things, to avoid paying
tax on the capital. The appellant is not without business sense, and, in my
opinion, she was aware, or at least should have been aware, of the fact that
she was receiving a benefit when she took possession of a building worth
$132,000 without the amount of the debt to her that was set off being reflected
in Ceaumais’s financial statements. In my view, the fact that the situation was
not remedied thereafter, either in the financial statements or in Ceaumais’s
income tax return, confirms all the more that this was not simply an error.
Upholding of the penalty
[14]
Being of
the view that this was not simply an error, the judge concluded that,
considering the substantial amount in dispute and the fact that the appellant
knew that the Company did not owe her $42,000 at the time of the transaction,
there was gross negligence within the meaning of subsection 163(2) of the
Act.
[15]
I could
not say that the judge misunderstood the notion of gross negligence or
incorrectly applied it to the facts of the case.
Conclusion
[16]
For these
reasons, I would dismiss the appeal with costs.
“Gilles
Létourneau”
“I
concur in these reasons.
Alice
Desjardins J.A.”
“I
concur.
Pierre
Blais J.A.”
Certified
true translation
Michael
Palles
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