Mauril Simard v. Her Majesty the Queen (Informal Procedure), [1993] 2 CTC 2605

Garon, T.C.C.J.:—This appeal is governed by the informal procedure established by the Tax Court of Canada Act and the Rules of this Court.

It is an appeal from an assessment by the Minister of National Revenue dated August 8, 1990 for the 1988 taxation year. In that assessment, the Minister of National Revenue included in the appellant's income under subsection 15(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") the value of a benefit, which he estimated at $26,350, conferred by the business corporation Réfrigération Mauvelin [sic] Ltée on the appellant in his capacity as shareholder. That corporation has borne the name Gestion Mauvalin lnc.,"Mauvalin", since May 26, 1992. More specifically, that benefit, according to paragraph 4 of the reply to the notice of appeal, arose from the fact that Mauvalin’s account of advances in respect of the appellant, one of the items of which, an amount of $122,775, represented the price of shares of public corporations acquired with Mauvalin’s funds between July 27 and August 10, 1987 on behalf of the appellant, was reduced on March 24,1988 by that same amount of $122,775, following the transfer of those same shares which the appellant apparently made that same day to Mauvalin, when their fair market value stood at $96,425. In other words, the difference of $26,350 between the fair market value of the shares in question on March 24, 1988 and the purchase price of those same shares in July and August 1987 constitutes, according to the respondent, the value of the benefit conferred on the appellant by Mauvalin.

Facts

The appellant is the principal shareholder, sole director and officer of Mauvalin, a corporation which operates in the field of air conditioning and refrigeration of supermarket equipment” [translation]. It also sells and repairs hotel, restaurant and grocery store equipment. Mauvalin's fiscal year ends on April 30. On July 21, 1987, Mauvalin issued a cheque for $125,000 to the order of the appellant. On July 28, 1987, that amount was deposited in the appellant's personal bank account. During the summer of 1987, more precisely between July 27 and August 10, 1987, the appellant purchased blue chip stock market securities in his own name. The appellant acquired these shares of public corporations through his broker Lévesque, Beaubien Inc. at a cost of $122,775. [1] The appellant transferred those shares to the business corporation Mauvalin at a time that remains to be determined and proceeded with the necessary entries on April 30, 1988 in order to reduce the “shareholder advances" account by the amount of $122,775. During his testimony, the appellant provided the Court with explanations concerning the relatively long time interval between the purchase of those shares in his name and the transfer of those same shares to Mauvalin. Specific events — the death of the appellant's brother and the appellant's stay abroad for reasons of illness during the fall of 1987 — delayed the transfer of the shares to Mauvalin.

Concerning the transfer of the shares, a letter dated March 11, 1988 addressed to the appellant and signed by Mrs. Hélène Francoeur, an employee of Lévesque, Beaubien Inc., was filed in evidence establishing that the transfer of the shares by the appellant to the corporation took place on December 31, 1987. The relevant passage of that letter reads as follows:

Enclosed please find a copy of your personal account statement showing that the securities held in this account were transferred to the account of your company Mauvalin Réfrigération Ltée on December 31, 1987, as you had requested.

[Translation.]

The testimony of Mrs. Nathalie Côté and Mr. Pierre-Albert Potvin, C.A., must also be taken into account. Relying on the statement of account to March 31, 1988 and an examination of the records of the brokerage firm in question, the witness Nathalie Côté indicated that the Lévesque, Beaubien Inc. employee who dealt with the appellant at the time had necessarily received instructions to transfer the shares to the corporation on December 31,1987. It is interesting to note, furthermore, that Mrs. Côté explained in her testimony that it was necessary at the relevant time to hold a duly authorized resolution issued by the officers of a corporation in order to be able to open an account with that brokerage firm in the name of a business corporation. According to the evidence, then, it would appear that the brokerage firm concerned transferred shares on behalf of a business corporation only if it had in its possession a resolution authorizing that transaction dated the same day as the transaction or transfer. This precaution helped prevent unfortunate situations in which certain transfers or other transactions authorized by resolutions might be cancelled by subsequent resolutions. This information concerning Lévesque, Beaubien Inc.’s practice supports the appellant's thesis that the transfer of the shares indeed took place on December 31, 1987. Furthermore, it should be noted that Mr. Pierre-Albert Potvin, C.A., a partner in the accounting firm retained by the appellant and Mauvalin, supported the appellant's version concerning the fact that December 31, 1987 was indeed the date on which the shares in question were registered in Mauvalin's name by the brokerage firm.

I should also mention a letter dated July 9, 1990 from Mr. Gilbert Gravel, vice-president and director of the firm then styled Lévesque Beaubien Geoff rion Inc. That letter appears to confirm the fact that the appellant was acting for Mauvalin at the time the shares were acquired, and, where it is indicated that "corrections were made at the start of 1988” [translation], it is rather ambiguous as to the moment the shares were registered in Mauvalin’s name. This letter filed by the respondent, which was more than two years subsequent to the relevant events, is at best of very secondary importance.

Claims of the appellant

The appellant admitted in his testimony that he had received from Mauvalin and deposited in his personal account a sum of $125,000. The appellant also admitted that the securities had been issued in his name. The appellant argued that, as principal shareholder, he did business on behalf of the company. The appellant claimed that the securities acquired during the summer of 1987 had been inadvertently issued in his own name and that those securities should have been registered in the corporation's name. The appellant contended that he had acted as Mauvalin's agent. He added that he had never intended to appropriate Mauvalin's funds.

Claims of the respondent

The respondent claimed, first, that, on July 21, 1987, Mauvalin made an advance of $125,000 to the appellant, which was deposited in the latter’s bank account, and, second, that, between July 27 and August 10, 1987, the appellant personally purchased shares in public business corporations through his broker at a cost of $122,775. As mentioned above, the respondent also argued in paragraph 4 of the reply to the notice of appeal that the appellant transferred his shares to Mauvelin [sic] on March 24, 1988 for the amount that he had initially paid, that is the sum of $122,755, whereas the fair market value of the shares was $96,425 [2] and that the corporation had therefore conferred a $26,350 benefit on the appellant in his capacity as shareholder.

Lastly, the respondent rejected the appellant's arguments, saying that the appellant did not have the power to commit Mauvalin at the time of the purchase of the shares here in question, since there existed no resolution by Mauvalin indicating the existence of a mandate between Mauvalin and the appellant. According to the respondent, the date on which the adjusting entry was made is not relevant since the value of the benefit within the meaning of subsection 15(1) is considered at the time the reduction was made in the "shareholder advances" account. As a secondary argument, which counsel for the respondent did not put forward in his oral argument, the respondent relied on subsection 6(1) of the Income Tax Act in contending that the said benefit had been granted to the appellant in his capacity as an employee.

Analysis

The Court must first determine the moment at which the shares purchased in the appellant’s name became Mauvalin's property.

If one accepts the mandate theory put forward by the appellant, the corporation would have been the holder of the shares purchased in the appellant's name for the price of $122,755 from the moment they were acquired in July and August 1987. According to the respondent's position stated by his counsel in his oral argument, after the additional evidence was provided during the hearing of this appeal, the shares were transferred to Mauvalin on December 31,1987.

In my view, the evidence shows conclusively that Mauvalin was, at the very least as of December 31, 1987, the holder of the shares acquired in July and August 1987 in the appellant's name. Examination of the resolution of December 30, 1987 and the statement of account of Lévesque, Beaubien Inc. to March 31, 1988 confirm that this conclusion is correct. That account shows that the appellant disposed of the shares on December 31, 1987. The testimony of Mrs. Nathalie Côté of Lévesque, Beaubien Inc., who explained that no "corporate account" [translation], to use her terminology, was opened unless a resolution by the corporate body in question bearing the date of the day in question was provided to Lévesque, Beaubien Inc., also supports this conclusion. The appellant's affidavits bearing various dates and stating that "the transfer of shares completed on March 8, 1988 from my personal account to that of the company had been requested a number of months earlier, at the time the security's value was at least equal to its cost" [translation] may be explained by the fact that the appellant did not have all the necessary information when he signed those affidavits, the texts of which had been prepared by his accountant. The specific and concurring evidence presented at the hearing of this appeal must prevail over the affidavits signed by the appellant more than two years after the events described therein, and at a time when he was not in possession of all the necessary documentation, to the extent that there is an incompatibility with a piece of evidence that relies on contemporary documents. Furthermore, counsel for the respondent himself appears to have rallied to this point of view in the course of his oral argument. The text of the resolution of December 30, 1987 had been misplaced and was found by the appellant only a short time before this case was heard. It should be remembered in this connection that the appellant was absent from his work and out of the country for a number of weeks in the fall of 1987.

According to counsel for the respondent, even if this transfer had been made on December 31, 1987, the assessment was indeed correct because the important time was when the shareholder advances account was reduced in respect of the appellant. This approach appears to me to have no foundation.

First of all, one must take into account the fact that the assessment relies on subsection 15(1) of the Income Tax Act. If the corporation had conferred a benefit on the appellant by reason of the appellant's appropriation of the sum of $125,000 in July 1987, it is at that time that the benefit was conferred, not some time in 1988. The benefit would then have been $125,000. In addition, the value of that benefit would have been reduced on December 31, 1987, when the transfer of the shares acquired in July and August 1987 in the appellant's name was made to the corporation on December 31,1987. The benefit would then have been valued at some $27,740, that is the difference between the cost of the shares on the day they were purchased in July and August 1987 and their fair market value on the day of the transfer on December 31,1987. [3] If a benefit was conferred on the appellant by the corporation, it was so conferred in 1987, not in 1988. It should be borne in mind that, in the assessment here under appeal, the benefit was computed on the difference between the purchase price of the shares and their fair market value on March 31, 1988, not on the total amount of funds of the corporation allotted to the appellant.

In addition, it is far from certain whether subsection 15(1) applies to the instant case, if the respondent's version of the facts is accepted. On a few occasions during his oral argument, counsel for the respondent spoke of an advance and of a loan by the corporation to the appellant. If the true nature of the transaction conducted between the appellant and Mauvalin on July 21, 1987 is that of an advance of funds or a loan, it is subsection 15(2) of the Act that would apply, not subsection 15(1). That advance of funds would have had tax consequences only if the debt had not been repaid at the latest in the year following the end of the creditor corporation's taxation year during which the debt had been incurred. However, the advance of funds on July 21,1987 was here made during the corporation's taxation year ended April 30, 1988. The appellant therefore could have paid back that debt on April 30,1989 at the latest without having to include anything in his income. In the case of nonrepayment, that amount should have been included in the appellant's income for the 1989 taxation year, not before that.

Having regard to the circumstances of the instant case, the reduction of the shareholder advances account on April 30, 1988 is without interest in tax terms as regards the 1988 taxation year for two reasons. First, this is a situation in which subsection 15(2) would likely apply to the computation of the appellant's income; this entry would only show a repayment of the debt in the amount indicated, preventing to that same extent application of subsection 15(2) to the computation of the appellant's income for the 1989 taxation year. Second, if the purpose of the entry was to take into account the transfer to the corporation of the shares acquired in the appellant’s name, it then merely reflected a transaction or an operation which occurred on December 31, 1987. It can have no tax effect because only the transaction of December 31, 1987 could have tax consequences. The moment at which that transaction was noted in the accounting entries made a few months later was without importance.

It appears clear to me from the foregoing that the assessment for the 1988 taxation year is incorrect on the ground that no benefit was conferred by the corporation on the appellant during 1988. If some benefit to which subsection 15(1) is likely to apply — which is far from certain — was conferred on the appellant by the corporation, having regard for the attribution of the sum of $125,000, it was conferred in 1987, not in 1988.

Furthermore, based on the evidence as a whole, the thesis of the appellant that the latter was acting on Mauvalin's behalf appears to me conceivable. The appellant’s conduct, his numerous consultations over the years with his outside accountant concerning matters pertaining to the management of the corporation's affairs, his prudence regarding investments in which the corporation could commit itself, the corporation’s policy on the appellant's remuneration and some of the documentary evidence lead me to conclude that the appellant had no intention of appropriating the corporation's funds, but that he had instead decided that the corporation itself should acquire the shares in question. Tacit ratification of an improper act, it is known, may be inferred from the gestures, acts, actions and general attitude of a principal who shows the firm intention to accept the actions taken by his agent, as the Quebec Court of Appeal indicated in Frenette et Frères Ltée v. Flamidor Corp., J.E. 79-815 (C.A.). It is also known that ratification has the effect of being retroactive to the moment the ratified act was carried out. That effect applies to the person who contracted with the agent. It also applies to third parties unconnected with the act, unless they suffer loss. In the instant case, I am inclined to believe that ratification may be inferred from all the circumstances surrounding the purchase of the shares in question and the course of the subsequent events concerning the treatment of those same shares.

In my assessment of the evidence as a whole, I note that the appellant appeared to me to be an entirely credible witness, and I accept his version of events. The testimony of the accountant, Mr. Potvin, corroborated the appellant's version in its essential aspects, and I have no doubts as to its veracity.

Before concluding, I note that there were irregularities in the respondent's position. According to paragraph 4 of the reply to the notice of appeal, the important date was March 24, 1988, when there was, in particular, a reduction in the account of advances. According to the auditor's testimony, in making the assessment, he considered that the benefit had been conferred on the appellant by Mauvalin on April 30, 1988. But he took the fair market value of the snares at April 30, 1988 (in the absence of evidence of the value of those shares on that date) to be that which had been determined on March 31, 1988.

I am therefore of the view that the assessment has no foundation. For these reasons, the appeal is allowed, with costs, and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant received no benefit from Mauvalin during 1988.

Appeal allowed.