Raynald Lauzier v. Her Majesty the Queen, [1996] 3 CTC 2440 (Informal Procedure)

Watson D.J.T.C.C.: — This appeal, heard under the informal procedure at Sherbrooke, Quebec on April 23, 1996, was made against a reassessment by the Minister of National Revenue (the “Minister”) for the 1990 taxation year.

In his tax return for the 1990 taxation year the appellant reported a taxable dividend of $7,500 and a taxable capital gain of $47,985 and claimed a dividend tax credit of $999.75 and a capital gains deduction in the amount of $46,735.

On July 11, 1994 the Minister issued the appellant a notice of reassessment for the 1990 taxation year cancelling the taxable capital gain, disallowing the capital gains deduction and adding to the appellant’s income an additional taxable dividend of $81,944 with an additional dividend tax credit of $10,926, and imposing a late filing penalty of $599.72.

In arriving at this reassessment the Minister relied on the following allegations of fact:

(a) on February 27, 1990, at a special meeting of Gestion R. Lauzier Inc., it was resolved that in May 1990 the corporation would declare and pay a $6,000 dividend on the 10 Class A shares held by the appellant;

(b) on February 27, 1990, at the said special meeting of Gestion R. Lauzier Inc., it was resolved that Jean Roberge would assume the position of director in this corporation;

(c) on February 28, 1990, at another special meeting of Gestion R. Lauzier Inc., attended by the only two directors of the corporation, Jean Roberge and the appellant, it was resolved to transfer 10 Class A shares and 250 Class D shares, completely tax free, from the capital stock of the said corporation to Logis Jeunesse Inc.;

(d) in May 1990, the appellant sold 10 Class A shares and 250 Class D shares, completely tax free, and representing 100 percent of the issued capital stock of Gestion R. Lauzier Inc., to Logis Jeunesse Inc. for the sum of $67,990;

(e) on May 23, 1990 the appellant cashed a cheque from Logis Jeunesse Inc. in the amount of $67,990 in payment for the purchase of the said shares;

(f) on May 23, 1990 Gestion R. Lauzier Inc. paid Logis Jeunesse Inc. the sum of $67,990 to repurchase the said shares;

(g) for the purposes of these transactions the purchaser Logis Jeunesse Inc. was represented by its president, Jean Roberge;

(h) prior to this transaction Jean Roberge was the accountant for the appellant and Gestion R. Lauzier Inc., in addition to being a director of the latter from February 27, 1990 onwards;

(i) the purpose of this share sale by the appellant to Logis Jeunesse Inc. was to take advantage of the capital gains exemption;

(j) Jean Roberge and Raynald Lauzier acted in concert for a common purpose and without separate interests, thereby creating a de facto relationship of dependence in respect of this transaction involving the sale of shares by the appellant to Logis Jeunesse Inc.;

(k) immediately after this disposition Gestion R. Lauzier Inc. was associated with Logis Jeunesse Inc., since the latter held all the voting shares of Gestion

R. Lauzier Inc.:

(1) in view of the foregoing, Logis Jeunesse Inc. is deemed to have paid the appellant and the latter to have received a dividend amounting to $65,555, of which the sum of $81,944 is taxable.

[Translation.]

At the hearing of the appeal, the appellant admitted the allegations made in subparagraphs (a) to (c), (e) to (g) and (k) and denied the facts alleged in subparagraphs (d), (h) to (j) and (1).

The appellant and Mr. Roberge were two witnesses giving evidence on behalf of the Appellant.

The appellant stated that insofar as paragraph d) above was concerned, the date of sale of his shares was February 29, 1990 and not May 1990, although the cheque of $67,990 was deposited only in May 1990. He could not recall when he ceased to be president of Gestion R. Lauzier Inc. (“GLI”). He recalls signing minutes of GLI dated February 28, 1990 stating that he ceased to be president of GLI on May 23, 1990, and signing the minutes of May 23 when his resignation was accepted effective May 23, 1990.

Insofar as paragraph h) above is concerned, Mr. Roberge became the personal accountant of the appellant sometime in 1991 but he could not recall when Mr. Roberge became GLI’s accountant or became a director of GLI.

When the appellant decided to cease his personal activities and to sell his shares in GLI, he relied on the advice of various accountants on how to sell his shares to take advantage of the capital gains exemption. When he sold his shares to Logis Jeunesse Inc. (“LJI”) he was aware that he would claim the capital gains exemption but did not know there was a relationship between LJI and others, including Mr. Roberge. He recalls meeting Mr. Roberge sometime in March 1990 and that the minutes dated February 27, 1990 were actually done in March 1990 and backdated to February 27, 1990.

Mr. Roberge stated that he became a director of GLI sometime in March 1990. The reason for backdating the minutes to February 27, 1990 was to permit him to produce and sign GLI’s income tax return, due at the end of February 1990, as a director even though he did not in fact become a director until sometime in March 1990. He had no contact with the appellant in February 1990. Mr. Roberge became GLI’s accountant when he, not the appellant, hired himself. The minutes nominating him director, retroactively, on February 27, 1990 was to permit him to do what he later did.

According to Mr. Roberge, he had been hired by the appellant only once, and that was in March 1991 in order to prepare the appellant’s personal income tax return for 1990.

Mr. Roberge had purchased the shares of LJI from a Mr. Levesque on February 14, 1990 for $1 so that he could have a company charter readily available for future use of one of his clients. When LJI purchased the appellant shares in GLI for $67,990, it borrowed this amount from GLI and gave it a note; it then paid the appellant the $67,990 for his shares. On May 23, 1990, GLI then bought back the shares from LJI, using the same note that had been given by LJI. LJI’s one and only transaction was the purchase of shares from the appellant and the resale of these shares to GLI on May 23, 1990. Mr. Roberge claimed that this purchase and resale was done primarily to produce an economic gain for himself while at the same time, but only secondarily, to give the appellant an opportunity to benefit from the capital gains exemption. Some time later, when Revenue Canada issued GLI a refund cheque for approximately $5,000 for amounts that had accumulated as a credit in GLI’s income tax account, Mr. Roberge then transferred part of this $5,000 from GLI’s bank account to LJI’s account and then he issued himself cheques totalling approximately $4,000 from both accounts. This was the economic gain that he received for his part in these transactions.

There was one witness on behalf of the respondent, the person who had done the audit on behalf of the Minister. In a discussion he had with Mr. Roberge on June 6, 1994, he was told by Mr. Roberge that the purpose of the purchase of the GLI shares from the appellant and the immediate resale was to allow the appellant to take advantage of the capital gains exemption and that, further, by giving the appellant a good service, he could hope to keep him for a long time as a client. No mention was made at that time of the so-called economic advantage realized by Mr. Roberge in the amount of approximately $4,000 for arranging the various transactions that gave the appellant the opportunity to claim the capital gains exemption rather than declaring a dividend and paying the taxes on it.

It is clear to me that Mr. Roberge dealt with the various funds in both GLI and LJI as if they were his own funds and that he received approximately $4,000 for setting up and carrying out the complicated transactions set out above. With Mr. Roberge as the common link, the appellant was not in fact dealing with LJI at arm’s length. The only reasonable explanation for what went on is that the parties involved were acting in concert to give the appearance of a sale of shares by the appellant to give him the chance to claim the capital gains exemption to which he wad not really entitled. Mr. Roberge acted on behalf of GLI by appointing himself as a director in early March 1990, appointing himself as its accountant, backdating the documents and then representing the interests of both GLI and LJI.

The appellant had the burden of establishing on a balance of probabilities that when the Minister considered the amount received by the appellant as a dividend pursuant to section 84.1 of the. Income Tax Act rather than as a capital gain, he erred in fact and in law.

Taking into consideration all the circumstances of this appeal, including the testimony, admissions and documentary evidence, and in light of the case law, I am satisfied that the appellant has failed in this burden. Furthermore, I am satisfied that the Minister has met his onus of establishing that the penalty imposed was justified.

The appeal is accordingly dismissed.

Appeal dismissed.