1860-3043 Québec Inc. v. Her Majesty the Queen, [1995] 1 CTC 2793, 94 DTC 1685

Archambault J.T.C.C.:—This is an appeal governed by the general procedure from an assessment for the 1987 taxation year. The appellant objected to the inclusion of the sum of $90,000 in its income by the Minister of National Revenue ("the Minister"). This sum represents the taxable portion of the fair market value of the goodwill which the appellant allegedly disposed of to the benefit of Comptabilité Informatique CMA Inc. ("CMA") on February 1, 1987. The appellant claimed that it did not dispose of this goodwill because it owned none of it. It belonged to its shareholder Georges Bégin ("Begin").

Facts acts

Since 1981, Mr. Bégin has been a member of the Corporation Professionnelle des Comptables en Management Accrédités, a CMA, formerly known as RIA. He began practising his profession in his home, and he worked there for three years. He subsequently moved his place of business to the centre Normandie in St-Nicolas. His specialty consisted in preparing financial statements and audit reports, now known as review management reports, for SMBs. He also does income tax returns and provides management advice for those SMBs.

Mr. Bégin made a name for himself by publishing regularly in the Journal de Montréal. He also advertised in regional newspapers under the business name of Georges Bégin et Associés, sometimes with the inscription RIA and sometimes without it.

In 1982, he incorporated Gestion Conseil Georges Bégin Inc. ("the appellant" or "Gestion") and signed a management agreement on September 1, 1982. That contract reads as follows:

MANAGEMENT CONTRACT Signed between

GESTION CONSEIL GEORGES BÉGIN INC.

Hereinafter called:

The Managing Company

And

GEORGES BEGIN, RIA, public accountant

doing business as Georges Bégin et associés

Hereinafter called:

The professional

The parties agree to the following:

—As part of the public accounting services provided by Georges Bégin, RIA, the company undertakes:

. To manage and administer the fees billed by the professional;

. To manage and administer the assets as well as all the expenses of the accounting firm of Georges Bégin, RIA;

. To manage and administer every other asset which the company owns contingent on the approval of its board of directors;

. To provide all the administrative support necessary to the proper operation of the professional services provided by the accounting firm.

COST OF SERVICES

-The company will be remunerated as follows:

. In compensation for the services rendered as part of the accounting firm of Georges Bégin, the company will receive the portion of the profit representing only the technical services provided for the public accounting practice.

The whole will be determined by the public accountant at the end of the year.

THE PARTIES HAVE SIGNED at St-Nicolas, on September I, 1982 GESTION CONSEIL GEORGES BÉGIN INC.

PER Georges Bégin

GEORGES BÉGIN, public accountant

PER Georges Bégin, RIA

[Translation.]

Gestion had some four employees who were technicians with DECs in finance. It was Bégin who met with clients and obtained mandates. Gestion did not advertise in the newspapers and did no clientele development. It was Mr. Bégin himself who confirmed in writing the scope of the mandates he was given, stating the terms and conditions of payment, which was payable to him personally. Those confirmations were signed by Georges Bégin, RIA, public accountant. There was no mention of Gestion in those contracts.

The audit reports were signed by Georges Bégin, RIA, public accountant. No mention of Gestion appeared in those reports. According to Mr. Bégin, his professional corporation required that he sign them personally. His company could not do it. He did very few reports, commonly called ’’notices to the reader”, which represented only four or five per cent of his practice. He refused to do bookkeeping if he did not also prepare the audit reports. The statements of account on paper bearing the letterhead of Georges Bégin et Associés, accountants, RIA were signed by Mr. Bégin. There was no mention of Gestion.

Between 1984 and 1986, Gestion billed services that did not require the signature of a CMA. This practice was discontinued, however, because clients believed they were being billed twice, and this caused confusion. Clients wanted to do business with Mr. Bégin personally. Mr. Bégin alone invoiced clients starting in 1987.

When Mr. Bégin received cheques, he endorsed them and handed them over to Gestion. It was easier for him to manage all his finances in this way. He stated that he was personally responsible for the financial risks of his business. It was he who provided the bank with guarantees.

Mr. Bégin stated that he practised his profession personally, not through Gestion; otherwise he would have lost his licence from his professional corporation. Gestion managed his fees and freely admitted that the adopted method for reporting its income was not orthodox. He stated that if the Minister had disputed this method of proceeding, he would not have been present before this Court in order to challenge it.

Almost all the income received by Mr. Bégin appears in Gestion’s income tax returns and financial statements. In some cases, they do not include certain fees retained by Mr. Bégin. Gestion sometimes paid fees and deducted them as expenses in computing its profits. Gestion’s business is described in its instruments as a business providing various accounting and bookkeeping services or office services. Gestion claimed the small business deduction.

In Mr. Bégin’s 1987 income tax return, his gross professional income appeared as a sum of $3,500. His net income was also $3,500. A similar practice followed in 1988. Mr. Bégin also reported the sum of $4,135 as director’s compensation from Gestion.

In 1985, Mr. Bégin acquired a second office located in Laurier Station. The main assets were goodwill and equipment. Two employees worked there. In 1988, he gave the goodwill of the Laurier Station office to his wife, who rolled it over into a numbered corporation, and Mrs. Bérubé, Mr. Bégin’s wife, sold the shares of that corporation to a former employee of Gestion for the sum of $75,000. The equipment was allegedly sold by CM A for the sum of $5,000.

In 1987, CMA’s sole shareholder was Mrs. Bérubé. The goal sought by Mr. Bégin was to protect himself against personal law suits. The transfer of Gestion’s assets to CMA took place on February 1, 1987. The sale agreement reads as follows:

SALE AGREEMENT

Between

Gestion Conseil Georges Bégin Inc., whose head office is located at 1484 Des Pionniers, St-Nicolas, hereinafter represented by Georges Bégin, who declares that he is duly authorized by the company to sign this agreement;

Hereinafter called "the vendor"

And

Comptabilité Informatique CMA Inc., whose head office is located at 1484 Des Pionniers, St-Nicolas, hereinafter represented by Claire Bérubé, who declares that she is duly authorized by her company to sign this agreement;

Hereinafter called “the purchaser"

The parties agree to the following:

OBJECT OF CONTRACT

The vendor assigns to the purchaser the following assets free of all debt

—Loan made to Georges Bégin in the amount of $60,000

-Rolling stock: Chrysler New Yorker 1983

-Radio Shack computer

-Office furniture and equipment

-Signs

PRICE

Sixty-nine thousand dollars ($69,000)

CONDITION

The purchaser will pay the cost of the provincial sales tax.

TERMS AND CONDITIONS OF PAYMENT

The whole without interest or method of demand repayment planned by the vendor.

In witness of which, the parties have signed at St-Nicolas this February 1, 1987.

VENDOR Gestion Conseil Georges Bégin Inc.

per: Georges Bégin, pres.

PURCHASER Comptabilité Informatique CMA Inc.

per: Claire Bérubé, sec.

WITNESS Lucie Filion

[Translation.]

Having hired Gestion’s employees, CMA subsequently rendered the same services to Mr. Bégin. The latter stated that most of his clients were not aware of the transfer of Gestion to CMA and did not know of CMA’s existence.

Mrs. Marie-Josée Legris, director of customer service with the Corporation Professionnelle des Comptables en Management Accrédités, confirmed that the CMAs had a wide field of practice: in particular public accounting services, management consulting and in certain instances even preparing audit reports, particularly for municipalities and school boards. According to her, a business corporation may not use the title CMA. But such a corporation may be used for certain technical services.

Mr. Benoit Renaud of the Department of National Revenue prepared an appraisal report and estimated the fair market value of Gestion’s goodwill at $180,000 at February 1, 1987, the date of Gestion’s sale to CMA. He assumed that Gestion owned the goodwill because it had reported all the income. He therefore concluded that Gestion carried on a professional accounting business and that that business was transferred to CMA.

Analysis

The burden of proof is on the appellant to show that it did not receive income from the sale of goodwill on February 1, 1987. The Minister presumed that the appellant owned goodwill of at least $180,000 and that it was sold to CMA.

As mentioned above, this conclusion that the goodwill existed was based on the fact that nearly all the income was reported by Gestion and that it was Gestion that carried on the professional business through Mr. Bégin, who presumably had acted as an employee of the appellant.

I agree with the appraisal method of the Minister’s appraiser for determining the fair market value and the amount of that value. In particular, I believe that the empirical method used by the appraiser was adequate. However, he erred in valuing the goodwill which belonged to Mr. Bégin and not to Gestion.

First of all, the sale agreement is silent on the sale of a goodwill in favor of CMA. The sale agreement mentions only the equipment and an outstanding loan. According to the evidence heard, the clientele belonged to Mr. Bégin. It was in fact he whom they came to see. It was Mr. Bégin himself who advertised in the regional newspapers under the business name Georges Bégin et Associés. It was he personally who wrote the column in the Journal de Montréal. It was Mr. Bégin personally who signed the mandates, who billed and who signed the audit reports. In other words, it was he who carried on the professional accounting business.

In order to sign an audit report as an RIA or CMA, he could not carry on this professional business through Gestion. Thus, this part of his professional practice had to be carried on by him. CM As practise a profession with a reserved title governed by the professional code. Following are the comments that appear at page 31 of a study [1] conducted by the Service des affaires juridiques of the Office des professions du Québec concerning professional service companies:

With respect to the professions with reserved titles, section 36 of the Code contains a general prohibition specifying that no person shall use one of the titles enumerated in that section or any title comprising such expression or the equivalent unless he holds a valid permit for that purpose and is entered on the roll of the professional corporation governing the profession. However, a legal person may not hold a permit to practise. It would therefore be guilty of an offence if it adopted a reserved title, without regard to the qualifications of the shareholders or employees acting on the company’s behalf. The consequence of this interpretation is to prevent the members of a professional corporation with a reserved title from forming a company and attributing the reserved title to it.

[Translation.]

Preparing audit reports was Mr. Bégin’s specialty. It is well known that the banks require financial statements prepared by accounting professionals governed by professional corporations. Reports prepared by so-called ordinary accountants do not have the same credibility.

Being able to sign financial statements as a CMA or RIA has advantages for the public. Following is the comment on page 29 of the study cited above:

In practice, the technique of the reserved title is used in cases where the legislature has thought it good to allow the public to choose the person who provides the professional service, whether or not that person belongs to a professional corporation, while guaranteeing that reserved title holders are subject to regulatory standards governing their training and the practice of the profession.

[Translation.]

When Gestion began billing technical services not requiring the title of CMA, this caused confusion. Clients wanted to do business only with Mr. Bégin, whom they considered their accountant. I am convinced that most of the clients did not know of the existence of Gestion or of the role it played.

Based on the evidence which I heard, it appears to me that Gestion’s sole client was Mr. Bégin, and the latter was not bound by a long-term contract. I doubt that one can conclude that goodwill existed in these circumstances. No one would pay for goodwill in order to be entitled to earn income from a single client who could disappear at any time.

In any case, this is not the fact which the Minister presumed in the appraisal and assessment which he made; nor did the Minister appraise what the fair market value of this hypothetical goodwill would be. The respondent did not benefit from any presumption of fact in this matter; the burden of proof was on her. However, no evidence was adduced before the Court respecting this hypothetical goodwill. [2]

However, I can understand that the Minister was misled by the conduct of the appellant and Mr. Bégin, who acknowledged that his method of reporting his income was not orthodox. It seems to me that Mr. Bégin was pursuing incompatible objectives: to satisfy his professional corporation and the professional code by practising his profession personally and to enjoy the benefits of a business corporation, particularly the tax benefits relating to the small business deduction and perhaps even income splitting. The raising of his tax structure seems to me far from adequate. In wanting to pursue too many financial and tax objectives, he made himself vulnerable to a challenge by tax authorities. The assessment of 1987 illustrates my remarks.

I would like to add that professionals are entitled to entrust the management of their practice to management companies, and the tax case law has clearly recognized this. This is what Mr. Bégin appears to have wanted to do. Unfortunately, his implementation was deficient.

Although his method of reporting his professional income leaves much to be desired, the fact remains that I believe the clientele belonged to Mr. Bégin, not to Gestion. For example, it was he who sold the goodwill of the Laurier Station office through his wife.

For these reasons, the appellant’s appeal will be allowed and the assessment will be referred back to the Minister for reconsideration and reassessment on the basis that no goodwill was disposed of by the appellant in 1987. Because of the conduct of Mr. Bégin and the appellant in filing its income tax returns which misled the Minister, I shall not award any costs.

Appeal allowed.