Conforbel Canada Limitée v. Minister of National Revenue, [1994] 1 CTC 2070

Garon, J.T.C.C.:—This is an appeal from a reassessment of the Minister of National Revenue respecting the appellant's 1983 taxation year. In that assessment, the respondent included in the appellant's income the sum of $151,722.82 received by the appellant from the Commission de la santé et de la sécurité du travail du Québec ("CSST").

It is important to describe the circumstances surrounding the receipt of this sum of $151,722.82 by the appellant.

The appellant was incorporated as a business corporation on October 16, 1981 under the Canada Business Corporations Act, S.C. 1974-75, c. 33. The corporation's fiscal year ended on February 28. On October 21, 1981, the appellant signed a contract with the corporation Construction Fitzpatrick Limitée ("Construction Fitzpatrick") for the construction of a national monument to Algeria's independence, in Algeria. The appellant was created solely for the purpose of performing this contract. This contract of October 21,1981 took the form of a letter of the same date signed by the appellant and Construction Fitzpatrick and addressed to the appellant, "Attention: Évariste Mathieu, President". Omitting the introductory portion, this letter reads as follows:

This letter constitutes the agreement entered into by Construction Fitzpatrick Limitée and Conforbel Canada Inc., whereby the parties agree as follows: for the construction of the National Monument to Algeria’s Independence, in Algeria:

1. Conforbel shall provide full services for making forms and pouring concrete for the work described above, both in Algeria and in Canada.

2. For the purposes of this contract, the work includes the three complete concrete sheets composing the monument.

3. Conforbel shall use every means in its possession and shall make all the necessary arrangements to ensure that the forming and concrete work are complete by June 15, 1982 in Algeria.

4. Conforbel shall notify Fitzpatrick in writing of any event resulting in a delay or affecting the above date of June 15, 1982.

5. The work on the monument's superstructure shall begin no later than January 1, 1982, in Algeria.

6. Évariste Mathieu shall be personally in charge and shall be responsible for bringing the operation to a successful conclusion.

7. Should the date of June 15,1982 be exceeded, Conforbel agrees to continue the work until it is fully completed. However, if the work continues beyond October 15, 1982, Conforbel shall be entitled to receive an additional fee for the period exceeding October 15, 1982. This fee shall be consistent with the original fee and is hereby fixed at $55,000 per month starting on October 15, 1982.

8. The work will be of the type cost of the work plus a fixed fee for Conforbel. The terms and conditions of payment shall be determined in the coming days. It is agreed that the primary intention of these terms and conditions is that Conforbel will not have to finance the work after November 1, 1981, considering the urgent need to start the work immediately.

9. For the cost of the work, Construction Fitzpatrick Ltée agrees to pay Conforbel the following amounts for the work on the dates stated below:

	MAXIMUM	PAID TO CONFORBEL BY
PERIOD	AMOUNT	CONSTRUCTION FITZPATRICK
October 20 to November 3	$161,000	October 30, 1981
November 3 to November 10	$160,000	November 10, 1981
November 10 to November 17	$160,000	November 17, 1981
November 17 to November 24	$160,000	Payment on a regular basis
INSTALLATION TRIALS

Starting on November 3, 1981, $100,000 spread over the period ending November 17, 1981.

The whole upon submission of invoices for outlays or payroll.

The fees of Conforbel Canada Inc. shall be in the amount of $550,000 paid as follows: $100,000 on November 25, 1981 and the balance of $450,000 in 30 equal and consecutive instalments of $15,000 commencing on December 1, 1981 and ending on June 30, 1982, of which:

Ten thousand dollars shall be deposited in the name of Évariste Mathieu as a guarantee of full execution of the work.This money and the interest thereon shall belong by right to Évariste Mathieu.

The money held back as a guarantee of the execution of the work shall be released as follows and at the moments described below:

— $50,000 plus interest earned from the time the elements of the monument are ready to be swung onto the ring linking them;

— $100,000 plus interest earned from the moment the structure is ready to receive the dome;

— $150,000 plus interest earned at the end of the work.

It is understood that this agreement contains no penalty clause for delays, but that a bonus of $5,000 per calendar day shall be paid to Évariste Mathieu for each day saved prior to June 15, 1982 for the end of the work on the superstructure.

10. It is understood that Conforbel Canada Inc. will afford Fitzpatrick every opportunity for any hearing or audit in its offices. Billing formalities remaining to be established between the parties.

11. As discussed, having regard to the latitude granted Conforbel Canada Inc. in the purchase of materials for the project, it is essential that the cost of those materials be at all times purchased [sic] at competitive prices.

12. Any other work that could be required of Conforbel, such as the crypt or the walls adjacent to the monument, are not included in this agreement. In the following three months, this will be described, and an arrangement will be reached with Conforbel respecting its additional fee.

The terms of payment of the present agreement remaining unchanged.

(signature)	(signature)
E. Mathieu	A.G. Abby
President	Senior Vice-President
CONFORBEL CANADA INC.	CONSTRUCTION FITZPATRICK LTEE
	[Translation.]

At the time the contract was signed, Ginette Mathieu was apparently the appellant's sole shareholder. However, according to an excerpt of the minutes "of an extraordinary general meeting of the shareholder" of the appellant held on October 19, 1981, France M. Labrosse, Ginette Mathieu's sister, was apparently the sole owner of the appellant's shares. Ginette Mathieu was also the appellant's president and secretary, although her father, Évariste Mathieu, signed the contract of October 21, 1981 in which he described himself as president of the appellant. Furthermore, at the aforementioned October 19, 1981 meeting of the appellant’s shareholder, it was "resolved that EVARISTE MATHIEU of 8255, 14e Avenue, St-François, Laval, Quebec, be appointed 'honorary president' for the entire duration of the ‘Algerian Independence Monument' project". The following was also stated:

It is resolved by the company's sole shareholder to approve, confirm and ratify all the commitments which ÉVARISTE MATHIEU enters into with the company ‘FITZPATRICK CONSTRUCTION Ltd./LIMITÉE' on behalf of ‘CONFORBEL (CANADA) INC.'

[Translation.]

Ginette Mathieu did not become director of the appellant until 1991. Évariste Mathieu, for his part, was director of the appellant in the period at issue.

Although the evidence was not clear on matters pertaining to the ownership of the appellant's shares or to the role and duties of certain individuals Within the appellant corporation at various times, it nevertheless appears that Évariste Mathieu was the one who played the most important role on the appellant's behalf with respect to the performance of this contract. The last subparagraph of paragraph 9 of the contract in question reveals Évariste Mathieu's role; it was provided that a bonus would be directly payable to him by Construction Fitzpatrick, in the following terms:

It is understood that this agreement contains no penalty clause for delays, but that a bonus of $5,000 per calendar day shall be paid to Évariste Mathieu for each day saved prior to June 15, 1982 for the end of the work on the superstructure.

[Translation.]

It was also Évariste Mathieu who was in charge of negotiations on this contract for the appellant. At paragraph 6 of that same contract it is stated that "Évariste Mathieu shall be personally in charge and shall be responsible for bringing the operation to a successful conclusion.” A total sum of $300,000 was paid directly to Mr. Mathieu by Construction Fitzpatrick pursuant to this contract.

Ginette Mathieu also worked as a part-time manager for the appellant in 1981 and 1982, except for a period of a few months in 1981 when she worked full-time. Ginette Mathieu was not remunerated by the appellant for her work in 1982 or 1983; however, she did receive a salary for the work she performed in 1981. It should also be noted in passing that Ginette Mathieu's nine brothers and sisters all carried out tasks as part of the performance of this contract and were remunerated accordingly.

It was established that Construction Fitzpatrick acted as general contractor and Lavalin International was the foreman in this monument building contract. The contract which bound Construction Fitzpatrick to Lavalin International was of the same nature as that which had been entered into by the appellant and Construction Fitzpatrick. It was a "cost-plus" contract, as it was called during the hearing of this appeal.

For the purposes of the performance of the work provided in the contract, the appellant retained the services of 75 to 100 employees during a period of roughly six months. It was also established that the appellant made advances to the CSST and made instalments during the performance of this contract. It was explained that it was impossible at the start of the work to foresee exactly what amounts should be paid to the CSST as contributions in respect of the wages to be paid under the contract. It should be recalled that no contribution was payable to the CSST in respect of the part of an employee's remuneration which exceeded a certain amount on a weekly basis and also a certain other level on an annual basis. At some point, the appellant's comptroller, André Grimard, realized that the appellant had made excess contributions to the CSST. He then brought the situation to the attention of Évariste Mathieu, of Régent Mathieu, Évariste Mathieu's son, and of Ginette Mathieu's brother, who was at that time the boss of Mr. Grimard, at least according to the latter. Ginette Mathieu was not apprised of this situation by Mr. Grimard in 1982 for the simple reason that the latter saw her only very occasionally and he had no discussions with her concerning matters pertaining to this contract.

On October 12, 1982, the appellant's comptroller filed a claim in the amount of $151,722.82 with the CSST. This claim was in respect of an overpayment of contributions to the CSST during 1981 and 1982, the total of which amounted to $140,268.38. The amount of $151,722.82 also included certain penalties and interest amounting to $11,454.44. On November 9, 1982, the CSST sent the appellant a first cheque in the amount of $140,268.38 in respect of the excess contributions paid. That cheque was deposited to the appellant's bank account by Évariste Mathieu on November 10, 1982. That first cheque was followed during 1983 by a second cheque for $11,454.84 in respect of the penalties and interest pertaining to the excess contributions.

It was also established that, in a document entitled Wages and Incidental Expenses 1981/1982”, prepared for the appellant, a document which was handed over to Construction Fitzpatrick by the latter in December 1982 or at the very start of January 1983, no mention was made of the amount of $151,722.82, the major portion of which had then been received by the appellant from the CSST. Furthermore, mention was made in that same document of the amounts of $121,755.87 and $170,340.21 paid to the CSST by the appellant as labour cost items for the appellant. That same document entitled "Wages and Incidental Expenses 1981/1982" served as the basis for the Construction Fitzpatrick account dated January 4, 1983 sent to the appellant. That same document had previously been discussed between the appellant's officer and that of Construction Fitzpatrick. As a result, the information contained in the appellant's document "Wages and Incidental Expenses 1981/82” showed surplus earnings by the appellant of $31,056.53. That same amount was one of the items in the Construction Fitzpatrick account of January 4, 1983 to the appellant. That account established a total of $25,819.73 to be refunded by the appellant to Construction Fitzpatrick.

It is not without interest to mention that a legal action was brought by Construction Fitzpatrick against the appellant in 1983 to claim this sum of $25,819.73. Furthermore, another legal action was instituted against Construction Fitzpatrick and the appellant by a certain Albert Simard upon his dismissal when he had been employed either by Construction Fitzpatrick or by the appellant to perform certain tasks pertaining to the performance of this contract in Algeria. That action was settled out of court in 1986.

In the action launched against the appellant by Construction Fitzpatrick for the sum of $25,819.73, the sum received from the CSST by the appellant which normally should have been refunded by the appellant to Construction Fitzpatrick, was not taken into account. No mention of the repayment made or to be made by the CSST of the sum of $151,722.82 appeared in the "List of Outstanding Items Delaying the Final Account Between Conforbel Canada Inc. and Construction Fitzpatrick Ltée". This list was filed by the appellant pursuant to a commitment made at the time of the preliminary examination of Évariste Mathieu conducted by Construction Fitzpatrick's attorney. The testimony of Réjean Tardif, who was then comptroller of Construction Fitzpatrick, confirmed that he and the latter corporation had not been informed of the refund of the sum of $151,722.82 made by the CSST to the appellant. It was following discussions with Mr. Grimard and with the aid of a document, "Wages and Incidental Expenses 1981/1982”, prepared by the officer of the appellant, that Réjean Tardif was able to submit the account of January 4, 1983 amounting to $25,819.73. Incidentally, Construction Fitzpatrick did not have to pay contributions to the CSST in respect of its employees, whose numbers may have reached 700 during the performance of its contract, since Construction Fitzpatrick had taken out an industrial injury insurance policy covering its employees.

In order to view the whole in a fair perspective, it must be borne in mind that, at the relevant time, Construction Fitzpatrick had an office located near the appellant's plant in Montreal where all the invoices and other vouchers pertaining to the expenditures made by the appellant under this contract were audited. The bank reconciliations were also done monthly by Construction Fitzpatrick.

Lastly, the testimony of André Grimard, who was the appellant's comptroller from its founding until early 1983, shed a decisive light on the appellant's attitude with respect to its claim against the CSST and its failure to inform Construction Fitzpatrick of the existence of that claim and of the fact that the CSST had paid the major part of that claim in November 1982 and the balance of $11,454.44 a few months later.

Mr. Grimard indicated that, in sending his claim to the CSST when he did in October 1982, thus a few months after completion of the work provided under the contract, he wanted, in his own words, to create an opportunity for his employer to make surplus income. This statement with respect to the goal sought by the appellant was made by Mr. Grimard on a few occasions. If that claim had been made earlier and in the normal course of business, it would have been settled earlier by the CSST, and Construction Fitzpatrick would have been able to realize its right to payment of that claim given that Construction Fitzpatrick had access to the books and, in particular, to the bank account of the appellant.

As mentioned above, Évariste Mathieu was aware of the appellant's right to a refund of excess contributions paid to the CSST, and it will be remembered that it was he who deposited the cheque for $140,268.38 in the appellant's bank account in November 1982. Régent Mathieu had also been made aware of this situation respecting the appellant's claim on the CSST before the end of the work.

Appellant's claims

Counsel for the appellant acknowledged that the appellant's claim on the CSST for $151,722.82, followed by its actual receipt of that amount subsequently in two separate instalments, constituted income for the appellant's 1983 taxation year because it was not disputed that the accrual basis of accounting applies in such cases. He added, however, that the appellant was entitled to a deduction for the same amount given that it was required to pay that same sum to Construction Fitzpatrick. Counsel for the appellant emphasized that an objective test had to be applied with respect to the entitlement to the deduction and that the appellant's intention in 1982 and 1983 not to reimburse Construction Fitzpatrick was of no importance. The application of sections 78 and 80 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") to certain special situations was also put forward for the appellant. Counsel for the appellant also invoked a number of judicial decisions in support of his observations, including the following: Meteor Homes Ltd. v. M.N.R., [1960] C.T.C. 419,61 D.T.C. 1001 (Ex. Ct.); Times Motors Ltd. v. M.N.R., [1969] S.C.R. 501, [1969] C.T.C. 190, 69 D.T.C. 5149; and The Queen v. Metropolitan Properties Co., [1985] C.T.C. 169, 85 D.T.C. 5128 (F.C.T.D.).

Respondent's claims

The respondent argued that, with respect to the Revenue Department, the appellant was not entitled to a deduction of the amount of $151,722.82 since the appellant had behaved in such a manner in its relations with Construction Fitzpatrick that the latter was not informed of the existence of the appellant's claim on the CSST and did not claim the amount paid or to be paid by the CSST from the appellant. The respondent relied, in particular, on the judgments in Curlett v. M.N.R., [1961] C.T.C. 338, 61 D.T.C. 1210 (Ex. Ct.); R. v. Poynton, [1972] C.T.C. 411, 72 D.T.C. 6329; and Gurd's Products Ltd. v. The Queen, [1985] 2 C.T.C. 85, 85 D.T.C. 5314 (F.C.A.).

Analysis

The evidence shows, indisputably in my view that, during 1982 and 1983, the appellant took the necessary steps with respect to the collection of excess contributions by the CSST in order to camouflage the existence of the claim of $151,722.82 in the eyes of Construction Fitzpatrick. In acting in this manner, the appellant expected not to have to refund this $151,722.82 when it had itself received this amount from the CSST. The evidence is overwhelming on this point. I would like to mention, in particular, the fact that, after the CSST's payment to the appellant of the major portion of the overpayment of contributions in November 1982, the appellant's officer, who then had discussions with his counterpart at Construction Fitzpatrick with a view to settling the final account between these two corporations, knowingly refrained from mentioning this obligation which the appellant had in respect of Construction Fitzpatrick to refund the amount of $140,268.38 already received from the CSST and the amount of $11,454.44 to be received upon its receipt in respect of this surplus of contributions paid to the CSST by the appellant.

In assessing the evidence as a whole, I am greatly influenced by the testimony of André Grimard, who was a disinterested witness, at least with respect to the outcome of the instant case. This witness appeared to be honest and entirely credible. I am therefore persuaded that, through the actions of its officers, the appellant wished to obtain a financial advantage in that, on the one hand, it would receive payment of the sum of $151,722.82 and, on the other hand, in all probability, would not have to refund that same amount to Construction Fitzpatrick, notwithstanding the appellant's legal obligation to make that refund to the latter corporation.

It is indisputable that the existence of this claim of the appellant on the CSST in the amount of $151,722.82 constituted income for the appellant for its 1983 taxation year, as, incidentally, counsel for the appellant acknowledged. I am also of the view that the appellant was not entitled in these circumstances to a deduction for the same amount for the purpose of computing its income for that same year 1983 since the appellant did not intend to discharge that debt and, at that time, it appeared that in all probability the appellant would not have to pay out the amount in question. Allowing the appellant a deduction in these circumstances would be tantamount to not taking into account the economic fact that the appellant actually realized a financial benefit during its 1983 taxation year in respect of this claim on the CSST at the expense of Construction Fitzpatrick. In finding as I have just done, I can only acknowledge the income opportunity that was established for the appellant through the actions of its officers during its 1983 taxation year in particular.

Although the point for determination in Poynton cited above was whether a certain sum constituted income within the meaning of the Income Tax Act, whereas the point at issue in the instant case concerns the appellant's right to deduct a certain amount for the purpose of computing its income, the comments of Mr. Justice Evans of the Ontario Court of Appeal at page 417 ff (D.T.C. 6334 ff) in Poynton, supra, seem appropriate and may be of some utility in assessing the instant situation.

I am therefore of the view that the assessment of the Minister of National Revenue is correct with respect to the taxation element of that assessment.

At the start of the hearing of this appeal, I was informed that there was no longer any objection on the subject of the penalty component of this assessment. Furthermore, during a teleconference subsequent to the hearing of this appeal, counsel for the parties confirmed for me that, having regard to my finding on the taxation component of the assessment in issue, I had only to dismiss the present appeal.

Appeal dismissed.