Garage Montplaisir Ltée v. Minister of National Revenue, [1998] 1 CTC 51, 96 DTC 6557

Tremblay-Lamer J.:

The plaintiff is appealing from the judgment rendered on July 27, 1992 by Judge Lamarre-Proulx of the Tax Court of Canada, which dismissed the plaintiffs appeal from notices of reassessment issued to it by the Minister of National Revenue for the 1985 and 1986 taxation years.

I. The Facts

Garage Montplaisir Ltée (hereinafter ““G.M. Ltée”) was incorporated in 1964 and since then has been operating a General Motors dealership in Drummondville. It sells new and used vehicles. It also sells automobile parts and operates a repair shop. It was operating this dealership in particular during the 1985 and 1986 taxation years.

Pinard & Pinard (1974) Ltée (hereinafter “Pinard Ltée”) was founded in 1927. It operated a Ford dealership, in which capacity it provided services similar to those offered by G.M. Ltée.

In 1982, owing to serious financial difficulties, Pinard Ltée had no alternative but to get rid of its Ford dealership. The company then concentrated on the sale of used vehicles. During 1983, in an effort to rationalize its operations, Pinard Ltée reduced its staff significantly.

These initiatives, however, proved insufficient. Prior to June 1984, Pinard Ltée had disposed of all its tangible assets, including its building. It had also terminated all its employees. Since 1978, Pinard Ltée had accumulated losses totalling $1,187,864.00.

The documentary evidence [1] reveals that, on December 22, 1983, Gestion Georges Pinard Inc. signed a promise to sell the shares of Pinard Ltée, in the amount of $800.00, to Pierre Larocque. This agreement also included a commitment to pay Georges Pinard the sum of $44,200.00 if the losses of Pinard Ltée eligible for carryover could be deducted following the takeover.

Although Mr. Larocque testified that he acquired the said shares at that time, the documentary evidence [2] persuades me that this transaction took place in June 1984. Mr. Larocque claimed to have no knowledge of the statement of facts prepared by his counsel in the details of his notice of objection. It does not seem credible to me that counsel would have his client sign a document without first having him confirm the accuracy of the statement of facts, which he obviously obtained from his client.

In the months following the acquisition, certain sales were entered in the books of Pinard Ltée. This limited selling of used cars took place between July and October but did not continue after this period. The evidence [3] reveals that all the cars were sold by G.M. Ltée to Pinard Ltée, which resold them the same day to a third party for the same amount. I conclude from this evidence that these were sales on paper only and that, apart from these sales, no sales were in fact made in 1984.

During November and December 1984, there was no commercial activity because during this period, even telephone service to Pinard Ltée was cut off. On January 1, 1985, G.M. Ltée and Pinard Ltée were amalgamated. The plaintiff, Garage Montplaisir Ltée (hereinafter “Montplaisir Ltée”), was the product of this amalgamation.

In preparing its income tax returns for the 1985 and 1986 taxation years, the plaintiff sought to deduct from its taxable income, as non-capital losses, the losses accumulated by the business carried on by Pinard Ltée. It claimed deductions of $429,175.00 for 1985 et $380,174.00 for 1986.

II. Relevant Legislative Provisions

The solution to the problem that the case at bar raises is to be found in the interpretation to be given in subsection 111(5) of the Income Tax Act* [4] (hereinafter the “Act”), which reads as follows on the date relevant to these proceedings:

111. (5) Where, at any time, control of a corporation has been acquired by a person or persons (each of whom is in this subsection referred to as the “purchaser”) :

(a) such portion of the corporation’s non-capital loss or farm loss, as the case may be, for a taxation year ending before that time as may reasonably be regarded as its loss from carrying on a business is deductible by the corporation for a particular taxation year ending after that time

(i) only if that business was carried on by the corporation for profit or a reasonable expectation of profit

(A) throughout the part of the particular year that is after that time, where control of the corporation was acquired in the particular year, and

(B) throughout the particular year, in any other case, and

(ii) only to the extent of the aggregate of

(A) the corporation’s income for the particular year from that business and, where properties were sold, leased, rented or developed or services rendered in the course of carrying on that business before that time, from any other business substantially all the income of which was derived from the sale, leasing, rental or development, as the case may be, of similar properties or the rendering of similar services, and

(B) the amount, if any, by which

(I) the aggregate of the corporation’s taxable capital gains for the particular year from dispositions of property owned by the corporation at or before that time, other than property that was acquired by the corporation within the two-year period ending at that time from the purchaser or a person who did not deal at arm’s length with the purchaser,

exceeds

(II) the aggregate of the corporation’s allowable capital losses for the particular year from dispositions described in subclause (I); and

III. The Issue

The parties agree that the issue in the case at bar is whether the business carried on by Pinard Ltée was carried on by the plaintiff Montplaisir Ltée for profit or a reasonable expectation of profit throughout the 1985 and 1986 taxation years.

IV. The Parties’ Arguments

Counsel for the plaintiff argued that by hiring Georges Pinard and his son Marcel as salesmen on commission, Montplaisir Ltée carried on the business of Pinard Ltée. Counsel further argued that even though all the tangible assets of Pinard Ltée had been liquidated prior to the acquisition, certain intangible assets remained. These intangible assets consisted principally of the experience and reputation of Georges Pinard and of his son Marcel. Counsel pointed out that the integration of Pinard Ltée enabled the plaintiff to increase significantly the volume of its business and thereby increase its profits.

Counsel for the defendant argued that the issue was whether the hiring of Mr. Pinard alone was sufficient to warrant a finding that the business carried on by Pinard Ltée was continued by the plaintiff, given that the tangible assets (equipment, building, stock) were sold and the business was nothing more than an “empty shell”. He stated that Mr. Pinard could not, by himself, ensure the continuation of the business. He also pointed out that, during the 1985 and 1986 taxation years, Mr. Pinard was merely an employee of the plaintiff. As for his son Marcel, the evidence was unclear as to whether he was working for Montplaisir Ltée or for Montplaisir Auto Ltée, a car leasing business. Counsel repeated that hiring the father and son was not in itself sufficient to warrant a finding that Pinard Ltée’s business was in fact continued or reactivated.

V. Decision of the Tax Court of Canada

In preparing its income tax returns for the 1985 and 1986 taxation years, the plaintiff sought to deduct from its taxable income, as non-capital losses, some of the losses accumulated by Pinard Ltée. The Department of National Revenue would not allow the plaintiff to deduct the losses in question. It therefore issued reassessment notices. The plaintiff appealed from the Department of National Revenue’s decision to the Tax Court of Canada. Judge Lamarre-Proulx dismissed the plaintiff’s appeal on the ground that the employing by a business of a key person from another business does not constitute, by itself, the continuation of the latter business. [5]

Judge Lamarre-Proulx concluded as follows: [6]

The carryover of losses after a takeover is allowed, provided the business which sustained the losses is continued or reactivated. It is that business which must be reactivated. The purpose of the provision in the Act in question is not the carryover of losses as such but the strengthening or survival of a declining business. Accordingly, it must be shown that it was this declining business which was operated at a profit or with a reasonable expectation of profit, otherwise the losses may not be carried over. On the facts of the instant case, it is not possible to conclude that the appellant reactivated the Pinard business or that he integrated its activities into its own business.

The plaintiff, Montplaisir Ltée, is appealing from this judgment.

VI. Analysis

The question here, as I stated earlier, is whether the plaintiff Montplaisir Ltée carried on the business of Pinard Ltée for profit or a reasonable expectation of profit during the 1985 and 1986 taxation years. To answer this question in the affirmative, I would have to accept the argument that the plaintiffs employing Mr. Pinard and his son was by itself sufficient to permit the continuation of the business carried on by Pinard Ltée

Apart from this fact, there is nothing in the evidence to indicate that Garage Montplaisir continued in any significant way the business of Pinard Ltée. The fact that Mr. Pinard maintained a sales licence and a trade sign which, however, the plaintiff did not use, is not decisive. The name Pinard was not added to the name Montplaisir Ltée. The employees of Pinard Ltée were not hired. Finally, Mr. Pinard was not a member of the board of directors of Montplaisir Ltée. In fact, no commercial activity of Pinard Ltée was carried on after October 1984 [7] The only commercial activities during the year were the sales on paper that took place between July and October. Mr. Pinard admitted himself that after he was hired by Montplaisir Ltée, he no longer had any connection with Pinard Ltée.

What is the purpose of subsection 111(5) of the Act? I agree with Judge Lamarre-Proulx [8] that “the purpose of the provision ... in question is not the carryover of losses as such but the strengthening or survival of a declining business”. The Act therefore allows one business that is attempting to put another business back on its feet to deduct losses, provided the latter business is still being operated.

In my opinion, it is not possible that Parliament intended to allow one business to purchase another business for a nominal sum and to deduct the enormous losses of the business purchased within the framework of a similar business when the purchaser clearly is no longer carrying on the business it acquired.

Employing Mr. Pinard, and even his son, as a salesman at Montplaisir Ltée is not sufficient in itself to enable me to say that the business that Pinard Ltée carried on was continued or reactivated.

The facts of the case at bar are similar to those in Garage Henri Brassard Ltée v. Minister of National Revenue^ [9] In the latter case, Garage Henri Brassard Limitée operated a garage in the Montreal district. This company suffered losses in 1954. On December 18, 1954, the company’s directors decided that it would be better for the company to cease operations and for its assets to be liquidated accordingly, and these actions were taken. A few years later, the shares of this company were sold. Following this sale, the company’s name was changed and its head office was moved. The purchaser sought to deduct the losses that the company had accumulated prior to December 18, 1954. The Minister of National Revenue refused to allow the deductions. The company appealed from this decision to the Exchequer Court, which dismissed its appeal on the ground that the business that had incurred the losses was not the business that the company had begun to operate. Fournier J. concluded as follows:

In short, the appellant, under a new name and with a new head office, acquired a business enterprise which it began to operate with new shareholders, directors and officers. It could not start up again the business it had before as it had definitely discontinued business operations at Lachine and as it had disposed of all its assets. It was therefore another business which the appellant began to operate at St-Mare des Carrières.

The appellant in the case at bar, like the appellant in the above-cited case, acquired a business that had ceased its commercial activities, liquidated its assets and terminated its employees. The acquisition of a salesman, even the most successful, cannot in itself constitute evidence of the acquisition of a functioning business.

For these reasons, I conclude that, in the case at bar, the plaintiff could not rely on subsection 111(5) of the Act to claim deductions of $429,175.00 and $380,174.00 for the 1985 and 1986 taxation years. Accordingly, I am dismissing the plaintiff’s appeal, the whole with costs.

Appeal dismissed.