Renaud Francoeur and Dominique Langis v. Her Majesty the Queen (Informal Procedure), [1993] 2 CTC 2440

Garon, T.C.C.J.:—These appeals are governed by the informal procedure established under the Tax Court of Canada Act ana the Rules of this Court. They were heard on common evidence.

These are appeals instituted from assessments made by the Minister of National Revenue for the 1986 taxation year. One of those assessments bears the date April 27,1990 and concerns the appellant Renaud Francoeur, and the other, dated May 8, 1990, addresses the appellant Dominique Langis. In each of those assessments, the Minister of National Revenue included in business income the gain realized by each of them on the disposition of lots of scientific material during 1986. In their respective income tax returns, the appellants had considered that they had made a capital gain on the disposition of that material in 1986.

In the following statement of facts, I reproduce, in some instances with changes, large excerpts of the written arguments for the respondent and the appellants which were forwarded to the Court with letters dated respectively September 21 and October 13, 1992.

On August 29, 1986, 2321-5205 Québec Inc. (the "company"), doing business under the corporate name “Le Naturaliste”, purchased for the sum of $1,000 assets consisting of scientific material the market value of which was subsequently appraised at $220,000. On September 24, 1986, each of the appellants signed a contract with the company entitled "memorandum of agreement"[translation] in which each of them agreed to purchase from the company, which in turn agreed to sell to them, a lot of scientific material the market value of which was supposed to be at least $10,000. The memorandum of agreement binding the company and the appellant Dominique Langis — in all respects similar to the Memorandum of agreement signed between the appellant Renaud Francoeur and the company — is reproduced below:

MEMORANDUM OF AGREEMENT

ENTERED INTO AT RIMOUSKI, SEPTEMBER 24, 1986.

BETWEEN:

THE COMPANY 2321-5205 QUEBEC INC., a corporation legally constituted under Part IA of the Companies Act, doing business under the name and corporate name “LE NATURALISTE", having its head office at Rimouski, district of Rimouski, here represented by Georges Gilbert, its president, duly authorized for these purposes by a resolution of its board of directors, a copy of which is appended hereto;

Hereinafter called: “ THE VENDOR”

AND:

DOMINIQUE LANGIS, attorney, domiciled and residing at Rimouski, district of Rimouski;

Hereinafter called: "THE PURCHASER".

WHICH PARTIES EXPRESSLY AGREE TO THE FOLLOWING MEMORANDUM OF AGREEMENT:

1. The vendor agrees to sell to the purchaser, who agrees to purchase, from the signature of the present Memorandum of agreement until no later than December 31, 1986, a lot of scientific material with a market value of at least $10,000.

2. The vendor also agrees to provide the purchaser, during the same period as provided in paragraph 1 above, the following documents:

(a) an itemized list of the material included in the purchaser's lot, including quantities, descriptions, catalogues and values;

(b) photocopies of the pages of the catalogues used for the appraisal of each item included in the purchaser's lot.

3. The vendor also agrees, still within the period stated in paragraph 1 above, to contact the World University Service of Canada, which is a charity duly registered with the federal and provincial revenue departments, for the purpose of having it accept the gift made to it by the purchaser of a lot of a minimum market value of $10,000 and of having it issue to the purchaser/donor in return for this gift a receipt which will enable her to claim a tax deduction for the same amount as the gift, that is $10,000, from the federal and provincial revenue departments.

4. The vendor also agrees to serve as an intermediary between the purchaser and the World University Service of Canada for the purposes of proceeding on its own with the delivery of the gift of the lot of scientific material into the hands of that charity within the same time period as that stated in paragraph 1 above, thus discharging the purchaser of all liability for the transportation of the said lot to the place of business of the World University Service of Canada.

5. The selling price of the said lot of scientific material shall be $3,000 plus provincial tax of 9 per cent, the whole payable in cash to the vendor by the purchaser once the latter is in legal and physical possession of her receipt enabling her to claim a $10,000 tax deduction from the federal and provincial revenue departments.

6. Furthermore, the purchaser shall remit to the vendor in the same time period as that stated in paragraph 5 [sic] above, the sum of $100 representing the cost of transportation of the said lot of scientific material.

7. The vendor guarantees the purchaser that the World University Service of Canada is a charity duly registered with the federal and provincial revenue departments and that it is duly empowered to issue charitable receipts permitting their holders to claim tax deductions.

8. The vendor denies, however, any liability with regard to the purchaser with respect to the tax savings which she may realize by means of the receipt which is remitted directly to her by the World University Service of Canada in accordance with paragraph 3 above.

IN WITNESS OF WHICH THE PARTIES HAVE SIGNED THIS MEMORANDUM OF AGREEMENT IN TWO (2) COPIES AT RIMOUSKI ON THIS 24TH DAY OF SEPTEMBER 1986.

"THE VENDOR"	2321-5205 QUEBEC INC.
	PER: (SIGNATURE)
	GEORGES GILBERT
"THE PURCHASER"	(SIGNATURE)
	DOMINIQUE LANGIS
	[Translation.]

"The World University Service of Canada” (the “University Service"), a registered charity, which was interested in purchasing these assets for educational purposes in third world countries, indicated to the company that it was prepared to accept a gift of those assets and to issue charitable receipts for a total amount of $220,000.

The company then divided the inventory into 19 lots of $10,000 and six lots of $5,000 and offered them to persons who were prepared to pay 30 per cent of the value of the lot in return for a charitable receipt, which indicated the value of that material. A second receipt corresponding to one per cent of the value of the lots sold was to be issued to the purchasers to cover the transportation costs which would have to be assumed by the latter.

As appears from the memorandum of agreement of September 24, 1986 signed by each appellant, each of them agreed to purchase a lot of scientific material from the company for the sum of $3,000, plus provincial tax of $270, even though the market value of the lot purchased was at least $10,000. The $3,000 selling price was payable to the company in cash by each of the appellants. This purchase price and the transportation costs were payable only when each appellant had obtained an income tax receipt enabling it to claim the $10,000 deduction.

In accordance with the memorandum of agreement, the company took the necessary steps to have the University Service accept the gift of scientific material of each of the appellants and issue a receipt for $10,000, enabling the appellants to claim a tax deduction in the same amount in their income tax returns to be filed with the two federal and provincial departments concerned.

In accordance with that same memorandum, the company delivered the scientific material to the University Service before December 31, 1986 in order to discharge each appellant of any liability with respect to the transportation of that material. In December 1986, the company also forwarded to each appellant a purchase invoice accompanied by a list and appraisal of the scientific material in question. Each appellant paid this invoice upon receiving the charitable receipt issued by the University Service in December 1986.

At the time the memorandum was signed, the appellant Dominique Langis was a practising attorney and was not engaged in the buying and selling of scientific material. Nor did the appellant Renaud Francoeur operate a scientific material business. The appellants had not been party to transactions involving the disposition of scientific material either before or after the events in question.

The appellants have had no relation of any kind whatever with the company, either directly, or indirectly, apart from the contract which each of them signed with it on September 24, 1986. They did not know at the relevant time, and do not now know, the nature of that company's activities.

The appellant's admitted — the testimony of the appellant Dominique Langis was entirely unequivocal on this subject — that they acquired this scientific material with the intention of subsequently making a gift of it to the University Service and thus receiving a tax benefit.

In their income tax returns for the 1986 taxation year, each appellant claimed and was allowed a deduction for charitable gifts in the amount of $10,000. Part of that deduction, however, was deferred to the 1987 taxation year. Each of the appellants also declared a capital gain in the amount of $6,730 to take into account the appreciation realized on the disposition of that material. This appreciation was computed as follows: proceeds of disposition and value of gift/$10,000 [sic] less cost of acquisition/[sic] $3,270 = capital gain/[sic] $6,730. In addition, the appellants claimed a deduction in the calculation of their respective taxable incomes in respect of the capital gain in question, thus taking advantage of the provisions of section 110.6 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

Claims of the appellants

The appellants argued that the evidence showed they had intended both to purchase the lot of scientific material and to make a gift of it to the University Service and that the ultimate purpose of these transactions was to derive a tax benefit from them. The nature of the legal transactions was not thereby changed, they argued. The appellants added that the transaction did not have the characteristics of a business transaction. It was specified, in particular, that the purpose of the purchase of the material was not to earn business income, and in fact no income was derived from the transaction. It was added that the transaction entailed no element of speculation or risk. This transaction could not have resulted in any loss. In their written arguments, the appellants relied on the proposition that the intention to obtain a tax benefit does not make it possible to lend the transaction the nature of income.

Claims of the respondent

Counsel for the respondent advanced the proposition that the disposition of the scientific material to the University Service constituted a business transaction and that the gain realized by the appellants on the disposition concerning each one of them constituted business income. In making these claims, counsel for the respondent relied on the very broad scope of the word “business” defined in subsection 248(1) of the Income Tax Act and on the fact that the charitable receipt was, in the circumstances, in the nature of a consideration. This disposition of the material in favour of the University Service had the characteristics of a business transaction: speculation, circulation or agency. It was also argued that the disposition in favour of the University Service was not a gift, but rather an exchange, in that the gift would not have been made to the organization in question if the receipt had not been provided by that same organization. In a word, according to counsel for the respondent, this last aspect gave the transaction concerning the disposition of the scientific material in favour of the charity in question the nature of trade.

Analysis

The question that must be examined here is not "to determine whether a tax benefit constitutes business income or a capital gain” [translation], as counsel for the respondent claimed at page 12 in fine of her written argument. The nature of that tax benefit, which resulted from the fact that each appellant was entitled in the computation of taxation income to a deduction within the limits permitted by paragraph 110(1)(a) of the Income Tax Act, does not have to be studied or clarified as such. The assessments under appeal do not rely on such a proposition. It is perhaps not pointless to reproduce below subparagraph 4(k) of the reply to the notice of appeal in the record of the appellant Dominique Langis:

(k) the appellant's income for the 1986 taxation year was revised to convert the capital gain into a net business profit, based on the following computation:

Consideration deemed received

F.M.V. of asset	$10,000
Transportation costs	100
	$10,100
less
Cost of asset	$ 3,000
Sales tax	270
Transportation	100
Net business profit	$ 6,730
	[Translation.]

Subparagraph 4(k) of the reply to the notice of appeal in the record of the appellant Renaud Francoeur is virtually identical to subparagraph 4(k) produced above.

Nor is there any debate as to the market value of this scientific material; that value was admitted by the respondent. The charitable deduction granted by the Minister of National Revenue to each of the appellants in the computation of their taxable income was not the subject of this dispute either. Instead, I must determine whether the purchase of this scientific material by each appellant under the contract of September 21, 1986 and the disposition of that same material to the charity in December 1986 resulted in business income or a Capital gain.

The evidence clearly showed that the appellants did not acquire and dispose of the scientific material in order to realize a profit in the manner of a person who operates a business. They acquired this asset for the purpose of making a gift of it to a charity, provided they were assured that receipts would be issued for tax purposes. It is clear from the evidence that the appellants never purchased this scientific material in order to resell it at a profit. The appellant Dominique Langis characterized what was realized by each appellant as a consequence of the disposition of this material in favor of the charity in question as an illusory profit. This proposition appears to me to be accurate since it resulted from the application of subparagraph 69(1 )(b)(ii), which establishes a fiction by providing, “where a taxpayer has disposed of anything. . .to any person by way of gift inter vivos, he shall be deemed to have received proceeds of disposition therefor equal to that fair market value”. The purchase and disposition of this material entailed no financial risk or element of speculation for the appellants. As a result, no profit in a business sense was envisaged by the appellants at any time whatever. For each of the two appellants, this purchase of material followed by a disposition in favour of a charity was also an isolated transaction.

I am not inclined to believe, as the respondent argued, that one can call the contract signed between each appellant and the University Service a contract of exchange, the receipt being the consideration provided by the University Service. The contract of exchange, as we know it, is necessarily a contract conveying ownership in the sense that “the parties respectively give to each other one thing for another", as provided in article 1596 of the Civil Code. It should also be borne in mind that, according to article 1059 of the Civil Code, "Those things only which are objects of commerce can become the object of an obligation,” and, consequently, of a contract, such as a contract of exchange. The receipt does not appear to me to be a” thing”, within the meaning of these last articles, ownership of which may be transferred by one of the coexchangers to the other. This receipt is not a commercial instrument or a debt security, but rather a means of proof, purely and simply an attestation of a legal transaction which took place at the time the charity took possession of the scientific material in question. It should be borne in mind that the receipt in itself confers on no one who has it in his possession any entitlement to a deduction in the computation of his taxable income because the Minister of National Revenue could rightly or wrongly have disallowed the deduction in the calculation of the taxable income of the taxpayers concerned. It was only subsequently, at the time of the assessments by the Minister of National Revenue, that the appellants received a tax benefit. This contract appears to me to be rather a contract of gift because it appears obvious that there was animus donandi in the appellants’ relations with the University Service. It is true that, in Réjean Gagnon v. The Queen, 91-38(IT) and Guy Dutil v. The Queen, 91-42(IT) (unreported decisions both dated July 25, 1991), Judge Dussault expressed doubts, although without determining the question, as to “whether such a gift even exists in the true sense when the taxpayer's sole motivation is clearly to enrich himself, not impoverish himself”. In accordance with section 18.28 of the Tax Court of Canada Act, these last judgments of this Court delivered in respect of appeals governed by the informal procedure do not constitute precedents. The Federal Court of Appeal made the following comments in Friedberg v. Canada, [1992] 1 C.T.C. 1, 92 D.T.C. 6031 at page 3 (D.T.C. 6033):

It is clear that it is possible to make a “profitable” gift in the case of certain cultural property. Where the actual cost of acquiring the gift is low, and the fair market value is high, it is possible that the tax benefits of the gift will be greater than the cost of acquisition. A substantial incentive for giving property of cultural and national importance is thus created through these benefits. But not every gift will be found to benefit from these provisions. It all depends on how the transaction is characterized, for one cannot give what one does not own.

I am not convinced in any case that the respondent may now be allowed to claim that the contract binding each appellant to the University Service was not a contract of gift, when the Minister of National Revenue, in assessing each appellant for that same 1986 taxation year, recognized in each case that there had been a gift, by allowing to each appellant the deduction for gifts to registered charities in the calculation of their taxable income. See also subparagraphs (e), (f) and (i) of paragraph 4 of the reply to the notice of appeal in the records of both appellants.

It is perhaps not necessary to determine the nature of the contract signed between each of the appellants, on the one hand, and the University Service, on the other hand, given that it is reasonable to conclude, having regard to all the facts, that the appellants did not enter an undertaking in the nature of trade within the meaning of subsection 248(1) of the Act.

In coming to this conclusion, I adopt the attitude which I held in Loewen v. M.N.R., [1990] 1 C.T.C. 2133, 90 D.T.C. 1009 (T.C.C.). At that time, I relied on a judgment of the Federal Court-Trial Division, in Colville-Reeves v. The Queen, [1981] C.T.C. 512, 82 D.T.C. 6005, and two decisions by the House of Lords in Bishop v. Finsbury Securities Ltd., [1966] 3 All E.R. 105, 110 Sol. Jo. 636, and FA & AB Ltd. v. Lupton, [1971] 3 All E.R. 948, 115 Sol. Jo. 849.

Having regard to all the circumstances, I therefore come to the conclusion that the purchase and disposal by each appellant of this scientific material did not constitute "an adventure or concern in the nature of trade" within the meaning of subsection 248(1) of the Income Tax Act.

Judgment

For these reasons, the appeals are allowed, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the gain realized by each appellant on the disposition of the scientific material constituted a capital gain.

Appeals allowed.