Germaine Gagnon v. Minister of National Revenue, [1982] CTC 2481, 82 DTC 1447

Guy Tremblay [TRANSLATION]:—This case was heard at Quebec City, Quebec on March 10, 1981.

1. Point at issue

According to the pleadings, the issue is whether the appellant is entitled to include in her 1976 income only the sum of $10,148.04 and not the sum of $18,975.96 that she was assessed by the respondent. Each of the parties contended that these sums represent the interest portion included in the amount of $31,284.79 received by the appellant from Comont Ltée, pursuant to a decision handed down on October 18,1976 by Jacques Lacourciere, J of the Quebec Superior Court. In paying the said sum, Comont Ltée was subrogated to the rights and obligations of Mrs Ghislaine Morin-Tremblay. Mrs Ghislaine Morin-Tremblay on August 20, 1970 had in fact sold her rights and obligations in the shares of “Les Liqueurs Douces de Hauterive Ltée” to Comont Ltée, shares that she herself had purchased on June 2, 1970 from the appellant Mrs Germaine Gagnon. This purchase was made for $72,000, $27,500 of which was in cash. The balance of the principal, that is, $44,500 plus interest, was to have been paid in 429 payments of $192 each, with a final payment of $132, for a total of $82,500.

The Superior Court judgment upheld the validity of this data. The total interest received is therefore $38,000 ($82,500 - $44,500).

The respondent contended that the appellant had already received as interest the sum of $19,024.04, prior to receiving $31,284.79 in October 1976. He therefore deduced that the balance of interest, that is $18,975.96 ($38,000 - $19,024.04), is included in the said amount of $31,284.79 received on October 27, 1976.

For her part, the appellant argued that there had been a miscalculation in the agreement and that the balance of interest was $10,148.04 and not $18,975.96.

2. Burden of proof

2.01 The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof derives not from one particular section of the Income Tax Act, but from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 The facts alleged by the respondent are outlined in subparagraphs (a) to (i) of paragraph 5 of the respondent’s reply to the notice of appeal, which reads as follows:

5. In assessing the appellant for the 1976 taxation year, the respondent relied, inter alia, on the following assumptions of fact:

(a) by notarial deed dated June 2, 1970, the appellant made over to Mrs Ghislaine Morin all the shares that she held in “Les Liqueurs Douces de Hauterive Ltée” for the sum of $72,000;

(b) under this contract, the purchaser was to pay the sum of $27,500 in cash, and the balance of the sale price was to be paid in 429 weekly payments of $192 and a final payment of $132 at a prescribed interest rate of 6 per cent;

(c) by notarial deed dated August 20, 1970, concluded between Mrs Ghislaine Morin and Comont Ltée, the latter proceeded to purchase all the shares in “Les Liqueurs Douces de Hauterive Ltée”;

(d) under the terms of the notarial contract dated August 20, 1970, Comont Ltée admitted having examined the notarial deed dated June 2, 1970 and undertook to comply with all and singular the clauses and conditions thereof, and in particular, to make the weekly payments owing to the said Mrs Germaine Gagnon;

(e) in a Superior Court decision dated October 18, 1976, pursuant to a notion in incidental improbation filed by Comont Ltée against the notarial deed dated June 2, 1970, Jacques Lacourciére J concluded that the real rate of interest was not 6 per cent, but rather corresponded to an actual rate of 18.3 per cent, and that Comont Ltée, being bound by this notarial deed, was obliged to make each one of the 429 weekly payments of $192 as well as the final payment of $132;

(f) in October 1976, pursuant to the Superior Court decision, Comont Ltée issued a cheque for $31,284.49 to the order of Mrs Germaine Gagnon, in full and final payment for the shares of “Les Liqueurs Hauterive Ltée”;

(g) as a result of the sale of the shares that she held in “Les Liqueurs Hauterive Ltée”, Mrs Germaine Gagnon received a total amount of $110,000;

(h) the interest collected by the appellant following the sale of her shares totalled $38,000, that is, the difference between the amount collected ($110,000) and the sale price of the shares ($72,000);

(i) in his reassessment dated December 19, 1979, the Minister of National Revenue added to the appellant’s income for the 1976 taxation year the sum of $18,975.96, the difference between the interest collected as a result of the sale of her shares and the amount of $19,024.04, previously assessed as interest income.

3. Facts

3.01 The appellant admitted subparagraph (a) of the facts alleged by the respondent and cited above, with the exception of the part dealing with the amount of $72,000.

3.02 She further admitted subparagraphs (b), (c) and (d) of the facts alleged by the respondent.

3.03 She admitted subparagraph (e) but maintained that this decision must be understood in its entirety.

3.04 She also admitted subparagraphs (f) and (g) of the facts alleged by the respondent.

3.05 As for subparagraph (h), she admitted only the sum of $110,000 and denied the rest.

3.06 As for subparagraph (i), she admitted that a reassessment had been issued but maintained that it was erroneous in fact and in law.

3.07 The appellant testified that her husband, Louis-Philippe Gagnon, died in 1967 leaving her the shares in “Les Liqueurs Douces de Hauterive Ltée”. She continued to manage the company for a while, but on June 2, 1970, owing to the state of her health, she sold the said shares to Ghislaine Morin- Tremblay, the wife of Mr Bruno Tremblay, by a contract executed before François Rainville, a notary (Exhibit 1-1).

3.08 On the same day, June 2, 1970, and before the same notary, a contract was entered into by Mrs Germaine Carré-Gagnon and “Les Liqueurs Douces de Hauterive Ltée” (Exhibit 1-3) whereby the said company borrowed from Mrs Gagnon the sum of $40,000. This sum was initially made payable without interest in 207 weekly payments of $192. It will be noted, however, that the words “without interest” have been deleted. An interest rate of 6% was added and is included in the 207 payments.

3.09 On August 20, 1970, Mrs Ghislaine Morin-Tremblay sold the shares in “Les Liqueurs Douces de Hauterive Ltée” to Comont Ltée (Exhibit I-4). The sale price was $72,276.55 — $30,000 in cash with the balance payable to Mrs Germaine Carré-Gagnon in accordance with the contract of June 2, 1970 (Exhibit 1-1).

3.10 The October 18, 1976 decision by Lacourcière, J was filed as Exhibit A-1. This involved a ruling on a notion in incidental improbation filed against the deed of sale dated June 2, 1970 between Mrs Germaine Carre- Gagnon and Mrs Ghislaine Morin-Tremblay, particularly paragraph 3 (Exhibit 1-1).

Originally, that is before the signing of the contract, this paragraph had been drafted by the notary in the following manner:

3. PRICE. This sale is made for the price of one hundred and ten thousand dollars ($110,000); (1) the vendor acknowledges having received the sum of twenty-seven thousand five hundred dollars ($27,500) on account of the same, and release therefor is hereby given. (2)

(3) As for the balance, to wit, the sum of eighty-two thousand five hundred dollars ($82,500), it shall be payable without interest in four hundred and twenty-nine

(429) consecutive weekly payments of one hundred and ninety-two dollars ($192) each and a final payment of one hundred and thirty-two dollars ($132). The first of these instalments shall become due and payable on

The purchaser reserves the right to repay the balance due in whole or in part at any time, without giving notice or being penalized therefor.

When the parties visited the office of the notary, the following changes were made (the handwritten addition is italicized below):

3. PRICE. This sale is made for the price of ore (1) hundred and ten thousand dollars ($44-07000): the vendor acknowledges having received the sum of twentyseven thousand five hundred dollars ($27,500) on account of the same, and release therefor is hereby given. (2)

(3) As for the-baianee, te wit, the sum of eighty-twe thousand five hundred -dollars ($82,590), it shall be payable witheut interest in four hundred and twenty-nine

(429) consecutive and weekly payments of one hundred and ninety-two dollars ($192) each and a final payment of one hundred and thirty-two dollars ($132). The first of these instalments was paid on May 1, 1970 and shall continue until payment is made in full.

The purchaser reserves the right to repay the balance due in whole or in part at any time, without giving notice or being penalized therefor.

The deleted words were replaced as follows. Note (1 ) in the margin reads:

(1) seventy-two thousand dollars (72,000)

Note (2) in the margin reads:

(2) As for the balance, to wit, the sum of forty-two thousand five hundred dollars ($44,500), it shall bear interest at the rate of six per cent (6%) per annum calculated annually and payable in advance on a weekly basis from the instalments on the principal hereinafter provided for.

The following is a lengthy extract from the judgment delivered by Lacourcière, J, pages 3, 4 and 5 of Exhibit A-1:

The attorney for the defendant-applicant submitted in oral argument that the notarial deed dated June 2, 1970 includes a correction in the margin which differs substantially from the deleted writings, and that it is these latter passages which convey the intention of the parties.

If we place these texts side by side, we observe that the amount paid in cash, that is, $27,500, is the same in both versions.

It is further apparent that the method of payment of the balance, whether $82,500 in the original version or $44,500 in the amended version, is repayable in the same manner and by weekly payments in the same amount.

In other words, the payment schedule for the balance is identical in both versions.

The economic explanation of the situation derives from the fact that in the original version, the balance is arrived at through a consolidation of the principal and interest, even though it is stipulated that the balance does not carry interest, whereas in the amended version, the balance indicated carries interest at a rate of six per cent calculated annually and in advance.

According to actuarial evidence, the payment schedule in the amended version represents the application of an unscientific rate of interest, which is higher than an actual rate of interest.

This would make it possible in the instant case to say that the real rate of interest is not six per cent, but rather corresponds to an actual rate of 18.3 per cent.

It is on this point that one may appreciate the defendant’s interest in maintaining that the amended version is not accurate, and that the number of weekly instalments is not the number that the parties intended to stipulate.

To establish the validity of the motion, however, it is not enough merely to note this difference.

If injury did in fact occur, the party injured at the time of the signing of a contract is the purchaser of the shares, Mrs Ghislaine Morin-Tremblay, who was not called upon to testify.

With the exception of the actuary, Mr Henri Dionne, the only witness summoned by the defendant- applicant to testify on her behalf was the mis-en-cause Rainville, the notary.

The notary Rainville, stated that the correction he entered in the margin was inconsistent with the instructions he received from the parties upon the signing of the contract.

He fully realized this amendment was at variance with the initial draft, and that the calculation upon which the amendment was based is not the one that he would have made himself and is not in general use.

What is more, the amendment was prepared on the basis of figures compiled and submitted by the husband of the defendant Gislaine Morin-Tremblay, who was acting as the latter’s adviser.

The notary stated that he did not understand the figures submitted by Mr Tremblay, but acquiesced in view of the representations made by the parties and their agreement.

In the circumstances, how can anyone say that the contract, in its final version, includes a falsification if it expresses the will of the parties?

Furthermore, in the first instance, it is the purchaser who is in a position to lodge a complaint, whereas the defendant-applicant, who had nothing to do with the signing of the contract dated June 2, 1970, did sign the subsequent contract, that of August 20, 1970, and stated that she had “examined the said deed of sale before Mr François Rainville . . . and undertakes to comply with all and singular the Clauses and conditions thereof, and in particular, to make the weekly payments owing to the said Mrs Germaine Carré-Gagnon . ..”

Consequently, on the basis of the evidence submitted by both sides, it cannot be established that the drafting of the deed signed by the parties was such as to set forth the agreement that the parties did not intend to sign.

FOR THESE REASONS,

THE COURT:

DISMISSES with costs the motion in improbation made by the defendant Co- mont Ltée.

3.11 Also filed as Exhibit A-2 was form T7W-C(Q), accompanying the notice of assessment issued on October 11, 1977. The relevant portion thereof is cited below:

It should be noted that the T7W-C(Q) pertaining to the notice of reassessment issued on December 19, 1979, the assessment on appeal, was not filed nor was it received by the Board with the 1976 return. The form received by the Board is the one filed as Exhibit A-2.

3.12 Mr Michel Duchesneau, an accountant and witness for the appellant, explained that, as he said, the annuity totalling $82,500 (that is, 429 instalments of $192 plus a final instalment of $132) plus the cash payment of $27,500 equals $110,000. As the respondent subtracted the sum of $72,000 that he regarded as principal (that is, $44,500 according to the correction in contract I-1,, plus $27,500 paid in cash), there remains a balance of $38,000 for interest. This sum is broken down as follows: an initial amount of $8,876 taxed from 1970 to 1976 exclusive; a second amount of $10,148.04 that has already been taxed by a notice of assessment dated October 11, 1977, agreed to by the appellant; and finally, a third amount of $18,975.96 taxed by a notice of reassessment dated December 19, 1979. It is this latter amount that is currently on appeal.

3.13 For his part, Mr Duchesneau maintained that the amount of the principal is not $72,000 but $90,975.96, that is, $27,500 plus $63,475.96 (that is, the discounting of $192 per week or $9,984 per annum for 8 /4 years at 6%) contained in Schedule A of the T7W-C(Q), reproduced in the previous paragraph.

If one takes into account the $8,876 in interest included in 1970 to 1976 exclusive and the $10,148.04 taxed in 1976 by the notice of assessment dated October 11, 1977, the total amount received works out at $110,000. Consequently, there are no grounds for taxing a further amount of $18,975.96.

3.14 Testifying on behalf of the respondent, Mr Jean Langevin stated that Comont Ltée, the purchaser of the shares (Exhibit I-4), identified the cost of the shares in its financial statements as $72,276.55.

Mr Claude Bazinet, the president of Comont Ltée, also gave testimony to this effect. The financial statements of this company for 1976 and 1977 (Exhibit 1-5) confirm this fact.

3.15 A promise of sale between Les Edifices Norco Inc and the appellant was filed as Exhibit 1-2. This document was dated April 21, 1970 and involved the shares in Les Liqueurs Douces de Hauterive Ltée. The price decided upon was $150,000 and is broken down as follows:

In the end, this agreement was not given effect between the parties.

4, Act — comments

4.01 Act

The provision of the Income Tax Act involved in the case at bar is paragraph 12(1 )(c), which stipulates that interest must be included in income. The principle of this provision, however, is not at issue here. Rather, the issue is as to what amount constitutes the interest.

4.02. Comments

4.02.1 Of the sum received of $110,000, what amount represents the interest?

Briefly, the main argument in support of the appellant’s contention is that the deleted passages in the contract of sale (Exhibit 1-1, para 3) best conveyed the intention of the parties and that the judgment delivered by La- courciére, J (para 3.10) did not recognize the amount of $72,000.

Lacourcière, J did not expressly state in his ruling that he did not recognize the amount of $72,000. He did refer, however, to a payment on account of $27,500 and to the balance of $44,500 in the amended version, which amounts to $72,000; the findings of the judgment would indicate that the amendments were desired by the parties and are thus legal.

It should also be noted that although the instalments paid on the balance were identical, both before and after the amending of the contract, the amendment clearly specified that interest was included in the said instalment. The instalments were in fact based on a normal rate of interest of 6% and an actual rate of 18.3%.

4.02.2 Both parties admitted that the appellant had in fact received $110,000. Contract I-1 specifically states that the principal is $72,000.

In addition to contract 1-1, which was upheld by the Superior Court decision (para 3.10), contract of sale I-4 (para 3.09) and the promise of sale (Exhibit I-2, para 3.15) also stipulate a value of $72,000.

Finally, the testimony of the president of Comont Ltée, Mr Claude Bazinet, and the financial statements of the said company further confirm that the price was in fact $72,000.

As a result, the difference between the amount received of $110,000 and the principal of $72,000, that is, $38,000, can only represent interest. Of that amount, $18,975.96 must apply to the 1976 taxation year. The assessment of the respondent must be upheld.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.