Hamel v. Minister of National Revenue, [1996] 2 CTC 2046, 96 DTC 3216

Lamarre Proulx J.T.C.C.: — The appellant is appealing an assessment by the Minister of National Revenue (the “Minister”). That assessment, bearing number 8332 and postmarked June 7, 1989, was made by the Minister pursuant to section 160 of the Income Tax Act (the “Act”).

The point at issue is whether, in 1984, Réal Hamel Construction Inc. (hereinafter “Hamel Construction”), transferred property, either directly or indirectly, to the appellant in circumstances enabling the Minister to apply section 160 of the Act.

Only Mr. Hamel testified at the hearing.

The appellant was the holder of the shares of Hamel Construction. There was no evidence contradicting subparagraph 3(a) of the Reply to the Notice of Appeal, which reads as follows:

3. In issuing notice of assessment number 8332, the Minister of National Revenue relied, among other things, on the following assumptions of fact:

(a) the appellant holds 50% of the common shares of Réal Hamel Construction Inc.(hereinafter the company); the other 50%of the common shares belong to Les Entreprises Raymond Réal H. Ltée (which is controlled by Réal Hamel, who owns 100% of the common shares);

[Translation.]

Hamel Construction was the owner of a shopping centre that it wanted to sell in 1984. It was in the circumstances surrounding that sale that the events giving rise to the dispute in the present case occurred.

At the time of the acquisition of this shopping centre in 1970, Gaston Allard and the appellant were each owners of half of Hamel Construction’s shares. The appellant became the sole shareholder through the purchase of Mr. Allard’s shares from the Royal Bank in 1976 (Exhibit A-1, tab 19). The Bank had become the owner of Mr. Allard’s shares upon realization of a personal guarantee given by Mr. Allard. The Bank offered to sell the shares to the appellant and he in fact purchased them. For whatever reason, Mr. Allard brought action against Mr. Hamel contesting that sale and, on October 29, 1976, had a caveat registered against the shopping centre owned by Hamel Construction.

In 1984, there was the following litigation between Mr. Allard and Mr. Hamel: a judgment by the Quebec Superior Court in favour of Mr. Allard for an amount of $50,639 in an action for an accounting, and a judgment by the same court awarding him damages of $326,300. These judgments were under appeal before the Quebec Court of Appeal. There was also the caveat registered against the shopping centre property. Mr. Hamel succeeded in Superior Court with respect to the caveat, but Mr. Allard appealed from that judgment. The caveat was therefore not struck out. According to Mr. Hamel’s testimony, the striking out of this caveat was essential to enable Hamel Construction to sell the shopping centre.

A liability of Hamel Construction toward Crédit foncier franco- canadien (Exhibit A-3), dated March 3, 1977, indicates that there was a consolidation of the loans made by that financial institution and an increase of the $525,000 loan to more than $1,200,000. The appellant and his wife personally guaranteed that loan.

A number of Hamel Construction’s documents show that the appellant acted as president of Hamel Construction. Thus, in a loan agreement dated April 26, 1982, filed as Exhibit A-4, Hamel Construction is represented by the appellant in his capacity as president.

On December 20, 1984, Hamel Construction sold the shopping centre for $3,200,000. On that same day, Réal Hamel, as authorized agent of Hamel Construction, authorized a notary to make the payments in accordance with the breakdown of the shopping centre’s selling price, as indicated in Exhibit A-32. Among the persons designated to receive part of the selling price, there was Gaston Allard, who was to get $350,000. It was this payment of $350,000 by Hamel Construction to Mr. Allard, when Hamel Construction had a tax liability of more than $350,000, that gave rise to the assessment in issue against the appellant.

That payment followed the signing that same day of a declaration of out-of-court settlement by Réal Hamel and Gaston Allard and Louise

B. Allard regarding the Superior Court’s award of $50,639.90 in the action for an accounting and the Superior Court judgment awarding Mr. Allard damages of $326,300 (Exhibit A-24). In order to reach that out-of-court settlement, a number of agreements were signed on November 13, 1984. The parties to those agreements were Gaston Allard, Réal Hamel, the intervener Louise B. Allard, Réal Hamel Construction and Laurence

B. Hamel. The appellant signed for Hamel Construction as president.

The agreement filed as Exhibit A-27 reads as follows:

Agreement

Whereas Allard and Hamel are currently involved in litigation before the Court of Appeal, with one proceeding relating to an action for an accounting and the other to an action for damages;

Whereas the intervener also claims that she has an interest in the aforementioned proceedings and that she has an interest in taking part in the present transaction;

Whereas the parties intend to settle amicably the aforementioned proceedings, without admission of liability of any kind whatever;

Whereas a bid is currently pending on the shopping centre known as Plaza Laval, owned by Réal Hamel Construction Inc.;

Whereas Allard claims to have certain rights by reason of the registration of a caveat against the said centre;

Whereas it is in the interest of the parties to compromise;

The parties agree to the following:

1. In consideration of the acceptance of each and every clause provided herein and more particularly of the payment provided for in paragraph 2, Allard undertakes to waive all rights that accrue to him or may accrue to him from the caveat registered against the property of Réal Hamel Construction Inc. known as Plaza Laval;

2. In consideration of the receipt of $350,000 in damages, Allard undertakes to settle out of court and release Hamel in respect of the two cases whose court file numbers appear in paragraph 4 hereof;

3. The parties undertake to sign every document and to take every action necessary in order that the sale of the shopping centre known as Plaza Laval, owned by Réal Hamel Construction Inc., be completed, the undertaking on the part of Allard being conditional upon the execution of what is provided for in paragraph 2 hereof;

4. Furthermore, in consideration hereof, it is understood that the parties give each other general, mutual and final release in respect of any claim or cause of claim that they may have or could have had against one another, and, more particularly, any such claim or cause of claim resulting from the cases bearing

the following court file numbers:

Court of Appeal 200-09-000154-81

Court of Appeal 200-09-00148-814

5. It is understood that any amount currently on deposit with the notary Gilles Giroux, having been so deposited by Allard and registered in his name, will remain with him and will not be deemed to be part of this transaction;

6. It is understood that this document will be valid only in as much as the aforementioned transaction takes place before December 31, 1984, failing which this agreement and every agreement related thereto will be deemed never to have existed;

7. Any release given by the parties hereto covers the capital, interest and costs;

8. Upon the payment provided for in paragraph 2 herein, Réal Hamel alone will have full authority to sign for and on behalf of the company and discharge shall be given in respect of any seizure other than that of the 50% of the shares of Réal Hamel Construction Inc.

[Translation.]

The agreement filed as Exhibit A-28 reads as follows:

Agreement

WHEREAS a bid is currently pending on the shopping centre known as Plaza Laval, owned by Réal Hamel Construction Inc.;

WHEREAS Allard and the intervener claim to have certain rights by reason of the registration of a caveat against the said centre;

WHEREAS, failing the immediate striking out of the registered caveat and the intervention of Allard and the intervener, Réal Hamel Construction Inc. cannot grant the purchaser clear title;

WHEREAS it is urgent and necessary that the sale occur immediately;

WHEREAS it is in the interest of the parties to compromise;

The parties agree to the following:

1. In consideration of payment by Réal Hamel Construction Inc. of the amount of $350,000 in damages, Allard and the intervener undertake to waive all rights that accrue or may accrue to them from the caveat registered against the property of Réal Hamel Construction Inc. known as Plaza Laval;

2. The parties undertake to sign every document and to take every action necessary in order that the sale of the shopping centre known as Plaza Laval, owned by Réal Hamel Construction Inc., be completed, such undertaking on the part of Allard and the intervener being conditional upon the execution of what is provided for in paragraph 1 hereof;

3. This document will be valid only inasmuch as the sale of the shopping centre occurs before December 15, 1984, failing which this agreement will be deemed never to have existed.

[Translation.]

The agreement filed as Exhibit A-29 reads as follows:

Agreement

WHEREAS the parties have signed a number of amicable settlement agreements conditional on the sale of the shopping centre Plaza Laval, owned by Réal Hamel Construction Inc.;

The parties declare that:

The undertaking of Allard and the intervener is conditional upon the one-time payment by Réal Hamel Construction Inc. of $350,000 as damages in full and final settlement of all litigation, claims and causes of claim that the parties may or could have against one another; however, Allard and the intervener reserve the right to continue the proceedings in the case involving the parties and the Royal Bank in accordance with the conditions stated in the agreement dealing with that litigation.

More particularly, payment of the said sum of $350,000 is in settlement

of all claims arising from the cases bearing the following court file numbers:

Court of Appeal 200-09-000154-81

Court of Appeal 200-09-00148-814

[Translation.]

The agreement filed as Exhibit A-30 reads as follows:

Agreement

The parties agree to the following:

1. It is understood that the case bearing court file number 200-09-000161-817 involving the parties and the Royal Bank of Canada more particularly, will be continued before the Court of Appeal failing a subsequent agreement to the contrary;

2. However, nothing in the documents signed this day shall be considered as causing any of the parties hereto to lose any right whatever against any other party in the said case;

3. However, the parties waive all remedies against each other that may result from the decision to be rendered by the Quebec Court of Appeal, except as regards court costs.

[Translation.]

Analysis

This case concerns an assessment made under subsection 160(1) of the Act which reads as follows:

160(1) Where a person has, on or after the 1st day of May, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to

(a) his spouse or a person who has since become his spouse,

(b) a person who was under 18 years of age,or

(c) a person with whom he was not dealing at arm’s length,

the following rules apply:

(d) the transferee and transferor are jointly and severally liable to pay a part of the transferor’s tax under this Part for each taxation year equal to the amount by which the tax for the year is greater than it would have been if it were not for the operation of sections 74 to 75.1, in respect of any income from, or gain from the disposition of, the property so transferred or property substituted therefor, and

(e) the transferee and transferor are jointly and severally liable to pay under this Act an amount equal to the lesser of

(i) the amount, if any, by which the fair market value of the property at the time it was transferred exceeds the fair market value at that time of the consideration given for the property, and

(ii) the aggregate of all amounts each of which is an amount that the transferor is liable to pay under this Act in respect of the taxation year in which the property was transferred or of any preceding taxation year,

but nothing in this subsection shall be deemed to limit the liability of the transferor under any other provision of this Act.

Counsel for the appellant argued as a preliminary point that Mr. Hamel and Réal Hamel Construction were dealing with each other at arm’s length and, as a second point, that there had been no transfer to the appellant at the time of the payment of $350,000 by Réal Hamel Construction to Mr. Allard and that, if there had been such transfer, there had been a valid consideration.

The point respecting arm’s length dealing was that Réal Hamel did not have de facto control in that, Mr. Allard having registered a caveat against Hamel Construction’s property, it was he who in fact controlled and directed the corporation’s actions, the president, Mr. Hamel, being forced to follow.

Counsel for the appellant contended that Hamel Construction would never have paid $350,000 if this caveat had not been registered against the corporation’s only asset. The caveat had remained registered, despite the fact that a decision by the Superior Court in 1981 had ordered it to be struck out, because there had been an appeal from that judgment by Mr. Allard. Counsel for the appellant therefore contended that the payment of $350,000 to Mr. Allard was made in order to have the caveat struck out so that the corporation could sell its shopping centre at the best price.

Counsel for the respondent argued that four conditions are necessary for section 160 of the Act to apply: (1) non-arm’s length dealing, (2) a transfer of property, (3) an absence of consideration and (4) a tax liability of the transferor.

As regards non-arm’s length dealing, counsel argued that the control mentioned in subparagraph 25 l(2)(b)(i) is de jure control. As to the transfer, he contended that this meant any operation in which someone benefitted from a transaction and that by having the sum of $350,000 paid by the corporation, Mr. Hamel was the person who derived the greatest benefit: the personal guarantee given in respect of the loans exceeding $1 million received by Hamel Construction disappeared with the sale of the shopping centre at a good price; the appellant recovered the sum of $100,000 deposited as a guarantee of execution of the judgment ordering the accounting; and he did not have to disburse the sum of $350,000 in execution of the judgments rendered against him by the Superior Court.

As to the tax liability, its existence was not disputed by the appellant.

Section 251 of the Act provides that related persons are deemed not to deal with each other at arm’s length. The related persons in the instant case are a corporation and a person who controlled the corporation. Mr. Hamel controlled the corporation in law and in fact. He was the sole shareholder and there was no legal impediment to the exercise of the power conferred by this status. That the registration of the caveat had caused problems for the corporation does not alter this legal state of affairs. Consequently, this first point raised by counsel for the appellant cannot be accepted.

Counsel for the respondent referred to LaMarche v. Minister of National Revenue, [1983] C.T.C. 2314, 83 D.T.C. 260 (T.R.B.), a case where a spouse repaid loans taken out by the other spouse from a financial institution in order to purchase property of which this other spouse was sole owner. It was decided that the first spouse had made a transfer of property to the second spouse.

Counsel also referred to this Court’s decision in Montreuil v. R., [1996] 1 C.T.C. 2182, (sub nom. Montreuil v. The Queen), 94 D.T.C. 1821, in which Judge Dussault conducted a thorough examination of the meaning of the term “transfert” (transfer) at pages 2195-97 (D.T.C. 1828-31).

Did the payment by the corporation of the sum of $350,000 to Mr. Allard in satisfaction of the amounts for which the Superior Court had given him judgment against the appellant constitute a transfer of property to the appellant? We have seen that the transfer does not have to be made directly to the transferee. There is a transfer if there is impoverishment of the transferor, whether the transfer is made directly or indirectly, and corresponding enrichment of the transferee. It is my view that this is what occurred in the instant case.

The appellant said that he had entered into the agreement solely in order to have the caveat struck out. It must be borne in mind that it was the appellant, not the corporation, who had the most to lose if the corporation did not succeed in selling the shopping centre at a good price. It should also be noted that, as a result of the agreement, the personal actions of both parties were settled and, by means of a payment made by the corporation, release was given from a claim held against the appellant.

Mr. Hamel was personally liable for damages and other amounts owing to Mr. Allard, $350,000 in all, as a result of the Superior Court judgments. It is true that these judgments were appealed from, but, under the terms of the aforementioned agreement, the appellant discontinued those appeals. The judgments thus became enforceable. The agreement provided for the payment of that personal debt of the appellant and would not have been entered into in the absence of such payment. Whatever the reasons that led to the signing of the agreement by the appellant, the fact remains that one of the subjects covered by the agreement was the payment of that personal debt, a condition which the appellant accepted upon signing the agreement. After the out-of- court agreement and the payments made in accordance therewith, the appellant’s indebtedness ceased. He was enriched by the amount of the cancelled debt. In using its money to extinguish a debt of the appellant’s, the corporation transferred to him property equivalent to the amount paid in order to extinguish that debt.

The appeal is therefore dismissed.

Appeal dismissed.