Réjean Lagacé v. Minister of National Revenue, [1993] 1 CTC 2662, 93 DTC 1144

Lamarre Proulx, T.C.CJ.:—The appellant has appealed from a reassessment by the respondent Minister of National Revenue (the"Minister") for the 1985 taxation year.

The issue is whether in 1985 a corporation, Gaspé Lee (Restaurant) Inc., hereinafter referred to as the corporation, conferred a taxable benefit, within the meaning of subsection 15(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), in the amount of $17,866 on the appellant, as a shareholder of the corporation.

We must also determine, first, whether the appellant is estopped from appealing the respondent's reassessment by virtue of the fact that he agreed to a settlement in respect of a proposed assessment. He was assessed in accordance with the proposed assessment which was agreed to, and he subsequently appealed that assessment.

Let us first consider the preliminary objection. The facts were described as follows in paragraphs 3, 4, 5 and 8 of the reply to the notice of appeal:

3. The appellant objected to the reassessment by notice of objection dated April 6, 1989;

4. In response to that notice of objection, discussions were held between officials of the Department of National Revenue and the appellant and/or his representative and a settlement was reached between the parties by which the appellant agreed to withdraw his notice of objection on condition that the penalty of $676.25 was cancelled, as set out in the letter from the authorized representative of the appellant, a copy of which is attached to this reply to the notice of appeal;

5. Subsequent to this negotiated settlement, the Minister of National Revenue made a reassessment, notice of which was sent to the appellant on December 11, 1989, in accordance with the settlement reached between the parties;

8. The respondent submits that the appellant is estopped from appealing the reassessment of December 11, 1989, since that reassessment was made in accordance with a settlement reached between the parties, and accordingly the parties had concluded a transaction within the meaning of the provisions set out in articles 1918 et seq. of the Civil Code of Lower Canada;

[Translation.]

It is useful to reproduce the text of the agreement on which the Minister is relying:

October 17, 1989

Mr. Martial Labbé

Objections and Appeals

Revenue Canada, Taxation

165 de la Pointe aux Lièvres Sud

Quebec City, Quebec

G1K 7L3

Re: Réjean and Carole Lagacé

P.O. Box 1118

New Richmond, Quebec

GOC 2B0

Dear Sir:

I am writing further to our recent telephone conversation concerning the above-mentioned case.

We agree to withdraw the notices of objection filed, on condition that the Department lift the 163(2) penalty on the notices of assessment dated March 23, 1989.

Yours truly,

Robert Proulx, C.G.A.

Tax adviser Raymond, Chabot, Martin, Paré

RP/tr

[Translation.]

Is this an agreement such as was found in Smerchanski v. M.N.R., [1977] 2 S.C.R 23, [1976] C.T.C. 488, 76 D.T.C. 6247, in which the taxpayer had waived his right of appeal for the purposes of the settlement, and in which the Supreme Court of Canada held such a waiver by the taxpayer to be valid? Could this agreement be described as a waiver of a right of appeal? If we consider the text of the waiver signed by Mr. Smerchanski, it was positive (S.C.R. 28, C.T.C. 492, D.T.C. 6249):

. . .I do hereby admit my liability for the amount of the same and I do hereby waive any right of appeal I now or may have in regard to any of the said reassessments.

Chief Justice Laskin stated at page 31 (C.T.C. 494, D.T.C. 6251):

Since it is not contested that a taxpayer may validly waive his rights of appeal against a tax assessment and that no question of public policy is involved to preclude such a waiver. . . .

In any event, the Minister is not arguing that the appellant has waived his right of appeal. He is arguing that this is a transaction which has the authority of res judicata. I stated my views on this point in Yott v. M.N.R., [1991] 2 C.T.C. 2001, 91 D.T.C. 608, at pages 2003-04 (D.T.C. 610), in holding that such an agreement is not in the nature of a transaction within the meaning of articles 1918 et seq. of the Civil Code of Lower Canada:

I do not believe that either of the parties to an agreement to settle a case involving an assessment has the legal capacity to give such agreement the authority of res judicata. I see nothing in the Income Tax Act (the "Act") which would give the Minister the authority to enter into an agreement with a taxpayer which would have the authority of res judicata.

I am not saying that the Minister cannot enter into agreements with taxpayers which bind one party or the other, as described in the Smerchanski decision, cited by counsel for the respondent, but I do not believe that such agreements have the authority of res judicata. Moreover, in our taxation system, tax is owed not by virtue of an agreement, but by virtue of the provisions of the Act. A transaction, as stated in article 1918 of the Civil Code of Lower Canada, cited above, is a contract. The content of a consent to judgment is not binding on the Court, which retains its power to determine whether it is in accordance with the Act. This is the substance of Galway v. M.N.R., [1974] C.T.C. 454, 74 D.T.C. 6355, the principles of which were recently adopted by Judge Rip in Boger v. M.N.R., [1989] 1 C.T.C. 2110, 89 D.T.C. 15. It must also be noted that if it had the authority of res judicata, I would not again have to give the judgment that the respondent is seeking in his motion.

I find that the agreement, if agreement there be, is not in the nature of a transaction within the meaning of the articles of the Civil Code of Lower Canada cited above.

Let us now move on to the issue in this appeal. The facts on which the Minister relied in assessing the appellant are described in paragraph 6 of the reply to the notice of appeal, as follows:

6. In making the reassessment for the appellants 1985 taxation year, the respondent Minister of National Revenue assumed the following facts, inter alia:

(a) on October 4, 1985, Messrs. Lucien Bolduc, Jean-Claude Langis and Stéphane Barriault sold 269 common shares of the company Gaspé Lee (Restaurant) Inc. to the appellant, Carole Vézina and Johanne Vézina for a price of $18,000;

(b) the 269 shares acquired by the appellant, Carole Vézina and Johanne Vézina were divided as follows:

	Number of shares	Price
Appellant	267	$17,866
Carole Vézina	1	67
Johanne Vézina	1	67
	269	$18,000

(c) the agreement between the parties entitled "sale of shares agreement” did not refer to any transfer of assets, receivables or rights of any nature whatsoever other than the transfer of 269 ordinary shares of the company Gaspé Lee (Restaurant) Inc.;

(d) in October 1985, the company Gaspé Lee (Restaurant) Inc. took out a loan from the Federal Business Development Bank and out of this loan paid the $18,000 owing by the appellant and Carole Vézina and Johanne Vézina to the vendors under the sale of shares contract concluded on October 4, 1985;

(e) the appellant paid nothing to acquire the said shares and the company

Gaspé Lee (Restaurant) Inc. therefore conferred a benefit of $17,866 on him;

[Translation.]

With respect to paragraphs (c) and (d), the appellant argued that he acquired a debt in an amount equivalent to the price of the shares, in support of which he entered Exhibit A-2, which reads as follows:

December 22, 1988

Mr. Réjean Lagacé

New-Richmond, Quebec

GOC 2B0

Re: Gaspé Lee (Restaurant) Inc.

Dear Mr. Lagacé:

For your information, please note that at the time of the transaction concluded on October 7, 1985, under which the shares of the company Gaspé Lee (Restaurant) Inc. were transferred to you, that also included the company's receivables, and accordingly we acknowledge having transferred the receivables and shares to you for the sum of $18,000.

We hope that this will be entirely to your satisfaction.

Yours truly,

Lucien Bolduc

Jean-Claude Langis

Stéphane Barriault

[Translation.]

Counsel for the respondent objected to the introduction of this document because none of the signatories were present to testify. I allowed it to be entered, taking the objection under advisement.

The evidence indicated that it was correct that the former shareholders had a claim against the corporation in the approximate amount of $18,000. However, the evidence also clearly indicated that the vendors of the shares established their incomes for the year in issue on the basis that the amount received from the appellant was the proceeds of disposition of their shares. As regards the corporation, the shareholder's claim was considered to be the cancellation of a debt, that is, an extinguished debt.

Paragraph 2 of the sale contract, Exhibit A-1, describes the property sold as being the shares of the corporation, and the sale price described in paragraph 3 is $18,000. I reproduce below paragraphs 2 and 3(a) of the sale of shares agreement (the agreement") :

(2) The vendor hereby sells, transfers and conveys to the purchaser, who hereby purchases, 269 common shares, having a nominal value of $100 each, of the share capital of the company Gaspé Lee (Restaurant) Inc. (hereinafter referred to as "the company”), representing 93 per cent of the common outstanding shares of the company.

(3)(a) $18,000 in cash, on the closing date; of that $18,000, the debts set out in the schedule hereto shall be paid by the vendor. Moreover, the purchaser assumes the long term debt which the vendor has taken out from the Royal Bank of Canada.

[Translation.]

The schedule reads as follows:

Canada

Province of Quebec

District of Bonaventure

This is the list of debts referred to in the sale of the shares of the company "Gaspé Lee (Restaurant) Inc.” held by Messrs. Lucien Bolduc, Jean-Claude Langis and Stéphane Barriault, to Réjean Lagacé, Carole Vézina and Johanne Vézina, to wit:

— Ville de New-Richmond, tax arrears:	$442.40
— Inspector General of Financial Institutions:	$45
— Mr. Réal Gauthier, lawyer:	$718.17

IN WITNESS WHEREOF, we have signed at New-Richmond, this seventh day of October, 1985.

Lucien Bolduc

Jean-Claude Langis

Stéphane Barriault

Réjean Lagacé

Carole Vézina

Johanne Vézina

[Translation.]

Paragraph 5(f) of the agreement, Exhibit A-1, indicates that there will be in the documents given to the purchaser by the vendors:

(f) A general and final release by the vendors to the company;

[Translation.]

Exhibit A-3 describes the terms of an offer for a bank loan to the appellant in the amount of $40,000, to finance, particularly the $18,000 cost of the purchase of the shares of the corporation. Exhibit A-4 indicates that the beneficiaries of the bank loan were the appellant and the corporation. It was admitted that the bank account used for this loan was an account which related only to the business of the corporation and not to that of the appellant.

Subsection 15(1) of the Act reads as follows:

Where in a taxation year

(a) a payment has been made by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction,

(b) funds or property of a corporation have been appropriated in any manner whatever to, or for the benefit of, a shareholder, or

(c) a benefit or advantage has been conferred on a shareholder by a corporation,

otherwise than

(d) on the reduction of capital, the redemption, cancellation or acquisition by the corporation of shares of its capital stock or the winding-up, discontinuance or reorganization of its business, or otherwise by way of a transaction to which section 88 applies,

(e) by the payment of a dividend or a stock dividend,

(f) by conferring on all holders of common shares of the capital stock of the corporation a right to buy additional common shares thereof, or

(g) by an action described in paragraph 84(1)(c.1) or (c.2),

the amount or value thereof shall, except to the extent that it is deemed to be a dividend by section 84, be included in computing the income of the shareholder for the year.

The appellant's representative put forward two arguments.

The first was that the mortgage loan which was used to purchase the shares and to establish an operating fund for the corporation was made jointly to the appellant and the corporation, and that the loan was therefore a personal loan to the appellant.

The second argument was that the shares had no value and that the amount paid was paid to reimburse the vendor shareholders for their claim against the corporation.

The first argument is contradicted by the facts. The funds were in fact paid to the corporation, and it was the corporation which repaid the principal and interest on the loan. The appellant did not take possession of the funds and did not personally repay the loan.

With respect to the second argument, the subsequent letter from the vendors, Exhibit A-2 (even if it were admissible, and I shall deal with this point later), does not explain the situation, that is, at what price were the shares transferred, what was the price of the claim? Moreover, it is clear on the facts that the vendors treated the transaction as a sale of shares and cancellation of a debt and not as reimbursement or payment of a claim.

I am of the view that the respondent's objection to the production of Exhibit A-2 is well founded. This letter amounted to written testimony, which is prohibited, unless there are exceptional circumstances relating to reliability and necessity, such as, for example, the death of the signatory, which circumstances do not exist here (see R. v. Smith, [1992] 2 S.C.R. 915, 15 C.R. (4th) 133). Otherwise, the rules of evidence require that [translation] "a witness be heard before the court in the presence of the adverse party, who must have the opportunity to cross-examine him or her." [1]

The appellant attempted, by producing this subsequent letter from the vendors, Exhibit A-2, to alter the terms of the agreement of sale, Exhibit A-1. On this point, assuming that the introduction of Exhibit A-2 was admissible testimony, counsel for the respondent referred to the decision of the Supreme Court of Canada in Alexis Nihon Co. v. Dupuis, [1960] S.C.R. 53, in which the learned Mr. Justice Taschereau stated, at pages 58 and 59:

I believe that this evidence which it was attempted to introduce is inadmissible in view of the precise terms of article 1234 C.C., which provides that testimony cannot in any case be received to contradict or vary the terms of a valid written instrument. In the case at bar, the written instrument of January 16, 1950 is a validly made written instrument which is complete in itself. When the terms of a contract are clear and unambiguous, no testimony may be received for the purpose of interpreting the document, or of determining what the parties intended to say but, unfortunately, did not set down in the written instrument.

[Translation.]

She also referred to the Précis de la preuve, [2] at page 206:

Another case where article 1234 C.C. does not apply is when the issue is the interpretation of a written instrument: it is clearly admitted that to interpret a written instrument is not to contradict it, and that in order to find the true intention of the parties, testimony may be used. However, it is not permissible, on the pretext of interpreting a written instrument, to try to give to clear and unambiguous terms a different meaning from the meaning clearly expressed therein.

[Translation.]

Counsel for the respondent referred to the following passage from Adam v. M.N.R., [1985] 2 C.T.C. 2383, 85 D.T.C. 667, at pages 2384-85 (D.T.C. 668-69), in arguing that a taxpayer cannot retroactively alter the effects of a legal agreement to which he or she has validly subscribed:

The salary, once received, cannot for tax purposes become anything else. Mr. Adam cannot by any "ex post facto" act alter the destination of the moneys, or the purpose for which they were paid to him and received by him. See Malkin v. M.N.R., [1942] C.T.C. 135 at 144; 2 D.T.C. 587 at 591; Alepin v. The Queen, [1979] C.T.C. 360 at 364; 79 D.T.C. 5259 at 5262. An adjustment to the books of account of a taxpayer cannot render null that which has transpired. Past events cannot be ignored. That is not to say a taxpayer cannot make entries in his books of account to reflect adjustments to his accounts as and when they take place. .. .

However no taxpayer has the right to retroactively alter events when it best suits his purposes although there is no question he may prospectively plan events to suit these purposes: this is sometimes called tax planning. While I may sympathize with Mr. Rabinovitch's desire to minimize his client's taxes and the uncertainty in tax law during 1982, I am of the view that the retroactive adjustments to accounts is not a valid tax planning scheme, and I must therefore dismiss the appeal.

It goes without saying that the appellant could have purchased the shares for $1 and guaranteed repayment of the former shareholders' claim against the corporation. The legal effects would have been different, in terms both of the purchaser and of the vendors and the corporation, but this is not the approach which the parties to the share purchase agreement chose to take. The appellant cannot retroactively alter the legal effects of an agreement with respect to which the evidence has clearly established, as regards the vendors, that what they sold was their shares, for the sum of $18,000, and that accordingly, under the provisions of clause (F) (quoted above) of the agreement (Exhibit A-1), they cancelled all their claims against the corporation.

The evidence also clearly established that the money lent for the purpose of the appellant's acquisition of the shares was paid to the corporation and not to the appellant, and that it was the corporation which repaid the principal and interest, and not the appellant. The appellant's acquisition of the shares was admitted at the outset.

The Court therefore concludes that the respondent correctly assessed the appellant in accordance with subsection 15(1) of the Act.

The appeal is dismissed.

Appeal dismissed.