Citation: 2013 TCC 356
Date: 20131107
Docket: 2012-2689(IT)I
BETWEEN:
JEAN-PIERRE DESMARAIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Favreau J.
[1]
These are appeals, under
the informal procedure, from the reassessments dated June 23, 2010, made by the
Minister of National Revenue (the Minister) under the Income Tax Act, R.S.C.,
1985, c. 1 (5th Supp.) as amended (the Act), in respect of the appellant’s 2003
and 2004 taxation years.
[2]
In making these two
reassessments, the Minister imposed a penalty of $2,500 for each of the 2003
and 2004 taxation years under subsection 162(7) of the Act for failure to file
Form T1134-A within the period prescribed in subsection 233.4(4) of the Act.
[3]
Form T1134-A is an
annual Information Return Relating to Foreign Affiliates that are not Controlled Foreign Affiliates of the taxpayer. The obligation to file Form
T1134-A is imposed by subsection 233.4(4) of the Act, which was introduced into
the Act in 1997 but applicable commencing in the taxation years after 1995. This
form must be filed with the Minister in respect of each foreign affiliate that,
at any time in a taxation year or fiscal period, was not a controlled foreign
affiliate of the taxpayer. The form must be filed by a taxpayer required to do
so within 15 months after the end of the taxation year or fiscal period, as the
case may be.
[4]
In making the
reassessments in issue, the Minister relied on the
following assumptions of fact set out in paragraph 21 of the Amended
Reply to the Notice of Appeal:
[Translation]
(a) On
May 6, 1997, OREX A.G. was incorporated in Liechtenstein.
(b) On February 10, 2004, OREX A.G. was continued under the Canada
Business Corporations Act as “OREX Mines d’Or Ltée” (OREX).
(c) Prior to its continuance in Canada, OREX was a non-resident
of Canada.
(d) Some time prior to December 6, 2003, the appellant
acquired 256 shares of the capital stock of OREX from Omar Fakieh.
(e) The appellant still held those shares when OREX was continued
under the Canada Business Corporations Act.
(f) Prior to its continuance, the capital stock of OREX was
allocated as follows:
|
Shareholder [sic]
|
Number of common shares
|
|
Greymount Associates Ltd.
|
256
|
|
Alexandre Kovalev
|
256
|
|
Jean-Pierre Desmarais
|
256
|
|
Alexei Barbariush
|
112
|
|
Total
|
880
|
(g) Accordingly, and following the continuance of OREX under
the Canada Business Corporations Act, the capital stock of OREX was converted
as follows:
|
Shareholder [sic]
|
Number of common shares
|
|
Greymount Associates Ltd.
|
20,000
|
|
Alexandre Kovalev
|
20,000
|
|
Jean-Pierre Desmarais
|
20,000
|
|
Alexei Barbariush
|
8,775
|
|
Total
|
68,775
|
(h) The principal asset of OREX at the time of its continuance
in Canada consisted of ownership of 68,778,000 Class B shares of the capital
stock of Amour International Mines d’Or Limitée (AIMO).
(i) The fair market value of those 68,778,000 shares, at the
time, was $2,090, 000.
(j) The shares held by OREX represented, at the time, 43.33%
of the voting and participating shares of AIMO’s capital stock.
(k) At the time, AIMO held 429 common shares of the capital stock
of the private corporation Okhotsk Mining and Geological Company (OMGC).
(l) The fair market value of the 429 shares was, at the time,
$8,689,000.
(m) The shares held by AIMO represented, at the time, 20% of
the common shares of OMGC’s capital stock.
(n) The other common shares (1,716 shares) of OMGC’s capital
stock were held by ISPA Polymetal.
(o) During the month of February 2004, ISPA Polymetal sold
538 common shares of OMGC’s capital stock to a third party for US$5,000,000.
(p) During the month of April 2004, OMGC issued 20,592 new shares
for US$33,420,000.
(q) OMGC is a corporation incorporated under the corporate
laws of the Russian Federation.
(r) OMGC held mining licences for the Khanjakan and Yousken gold
and silver mines located in Russia.
(s) Under an objection to another assessment dated May 21,
2010, for the 2004 taxation year, the appellant represented to the Canada
Revenue Agency that the fair market value of OREX at the time of its continuance
in Canada was $1,856,925.
(t) The appellant had previously represented to the Canada
Revenue Agency that the fair market value of OREX at the time of its continuance
was $2,375,000.
(u) Under a settlement reached as part of that objection, the
appellant and the Canada Revenue Agency agreed that the fair market value of OREX
at the time of its continuance was $1,856,925.
[5]
In the Amended Reply to
the Notice of Appeal, the respondent admitted the following facts:
[Translation]
(a) the
acquisition cost of the 256 shares in OREX A.G. that the appellant purchased
from Omar Fakieh, on or about December 3, 2003, was US$200,000 payable by
a demand promissory note;
(b) prior
to OREX A.G.’s continuance in Canada, the balance of the shares in Amour
International Mines d’Or Ltée (AIMO) held by OREX A.G. was 68,775,000 Class “NB” shares;
(c) at
the time of OREX A.G.’s continuance in Canada, the appellant held 256 shares of
OREX A.G., that is, approximately 29% of the company’s issued and outstanding
shares;
(d) at the time of OREX A.G.’s continuance in
Canada,
which
took place on February 10, 2004, the remaining 880 OREX A.G. common shares were
split and as of then represented 68,775 Class “A” shares. The only asset
held by OREX Mines d’Or Ltée (OREX) at the time was the investment in AIMO,
that is, 68,775,000 Class “NB” shares.
[6]
Jean-Pierre Desmarais, senior
counsel with Boscher Derhy Desmarais Godwin, testified at the hearing to
explain that he was not required to file Form T1134-A for the 2003 and 2004
taxation years because, during that period, OREX A.G. was a dormant or inactive
foreign affiliate as defined by the Act and Form T1134-A.
[7]
During the testimony of
Mr. Desmarais, the following documents were filed with the Court:
-the Minister’s decision rejecting
the appellant’s objection (Exhibit A-1);
-the notice of reassessment issued to the appellant for
the year 2003 (Exhibit A-2);
- the notice of reassessment issued to the appellant
for the year 2004 (Exhibit A-3);
-the objection to the notices of reassessment for the
years 2003 and 2004 (Exhibit A-4);
-the appellant’s acknowledgement of debt to Omar
Fakieh dated December 3, 2003 (Exhibit A-5);
-OREX A.G.’s financial statements for the fiscal year
ending December 31, 2002, dated October 29, 2003 (Exhibit A‑6);
-the US dollar exchange rate vis-à-vis the Canadian dollar
as of December 3, 2003, and February 10, 2004 (Exhibit A-7);
-an organization chart showing the share ownership in
OREX A.G. as of December 3, 2003 (Exhibit A-8), which is appended to this judgment;
- the financial statements (balance sheet and notes
only) of OREX for the fiscal year ending December 31, 2004, dated March 30, 2007
(Exhibit A-9);
-AIMO’s non-consolidated financial statements for the
fiscal year ending December 31, 2004, dated July 11, 2005 (Exhibit A-10).
[8]
The appellant is a resident
of Canada who, on December 9, 1994, incorporated AIMO under Part IA of the
Quebec Companies Act. OREX A.G. was incorporated in Liechtenstein on May
6, 1997.
[9]
In December 2003, OREX
A.G. held 49.33% of the shares of AIMO’s capital stock, which, in turn, held a 20%
ownership interest in the capital stock of the Russian company Okhotsk Mining
and Geological Company (Okhotsk). The other 80% of Okhotsk’s capital stock was
held by another Russian company, ISPA Polymetal (ISPA).
[10]
During his testimony, the
appellant indicated that Okhotsk was formed in 1993 to allow the transfer of three
mining licences and one mining licence for a gold mine in Russia to the company.
The licence transfers were made in consideration for shares in Okhotsk, which
were held by AIMO for the purpose of conducting a public offering in Canada. The
investment in Okhotsk was, in 2003 and 2004, AIMO’s only significant asset.
[11]
During his testimony,
the appellant stated that, when he acquired the OREX A.G. shares in December
2003, he was aware that the assets of the company had no value.
[12]
At the time of OREX
A.G.’s continuance in Canada, the appellant was the secretary and director of
the company. According to the appellant, OREX A.G.’s assets on the date of continuance
had no value and that this is why he did not have financial statements prepared
on that date or hire a valuation firm to obtain a valuation report on the value
of the OREX A.G. shares on that date. To support his position that the OREX
A.G. shares had no value, in December 2003 and January 2004, the appellant filed
OREX A.G.’s financial statements for the fiscal year ending December 31, 2002,
which show that the investment in AIMO was entered in the books as having a
value of only one Swiss franc.
[13]
The appellant also indicated
that, during the month of February 2004, ISPA sold 538 common shares of AIMO
to a third party for US$5,000,000 and, during the month of April 2004, issued
shares of its capital stock to increase the value of the shares and dilute its shareholdings
in AIMO, which decreased from 20% to 1.9%. According to the appellant, the
shares were sold and issued to related parties or to parties not dealing at
arm’s length with ISPA and/or its shareholders. AIMO’s financial statements for
the fiscal year ending December 31, 2004, indicate that (a) the company was
incorporated on December 9, 1994, under Part IA of Quebec’s Companies Act;
(b) the company’s accumulated deficit was $19,370,002 as of December 31,
2004, and $18,572,440 as of December 31, 2003; (c) the company’s interest
in Okhotsk consisted of 429 common shares representing 1.90% of the voting and
participating shares; (d) the book value of this investment was $3,869, that
is, the same value as for the fiscal year ending December 31, 2003; and (e) the
capital stock issued consisted of 158,691,061 Class “B” shares with a paid-up capital of $6,551,816.
[14]
The appellant revealed
that, on June 30, 2006, AIMO sold all of its shares in Okhotsk for US$7,500,000,
paid in cash. Prior to the end of the fiscal year ending December 31, 2006, AIMO
was dissolved, and it distributed $1,800,000 to its shareholders. On June 30,
2007, OREX was also dissolved.
[15]
OREX’s financial
statements (balance sheet and notes only) for the fiscal year ending December 31,
2004, dated March 30, 2007, show an investment of 68,775,000 Class “NB” shares
in AIMO valued at $2,375,000 (at fair market value at the time of
continuance) and capital stock, issued and paid for, of 68,775 Class “A” shares
with a paid-up capital of $1,392,600.
[16]
On cross-examination, the
appellant confirmed that the company never paid the US$200,000 promissory
note or acknowledgement of debt to Omar Fakieh for the acquisition of the OREX
A.G. shares.
[17]
Ante Kumanovic, CGA,
LL.M. Fisc., director and tax specialist at Rochon Legault CA, testified at the
hearing and explained that OREX’s balance sheet as at December 31, 2004, was
prepared by the firm Rochon Legault on March 30, 2007, that is, almost three
years after the Okhotsk shares were sold. He also confirmed that he prepared the
memorandum to the Canada Revenue Agency dated May 9, 2008, which summarized the
tax consequences of the continuance of OREX A.G., the dissolution of AIMO and
the dissolution of OREX (Exhibit I-1).
[18]
Mr. Kumanovic also provided
explanations regarding OREX A.G.’s financial statements as at December 31, 2002
(Pièce A-6). Inter alia, he indicated that the investment in AIMO was
entered on the balance sheet as one Swiss franc, that the investment represented
39.43% of the issued and outstanding shares, that the shares’ paid-up capital was
$6,551,816 and, finally, that the company’s accumulated deficit was
$17,969,774.
[19]
The witness also
confirmed that he had not been consulted by the appellant with respect to filing
the T1134-A forms for the 2003 and 2004 taxation years.
[20]
Bic Thu Tran Thi, CBV, a
valuation specialist working for the Canada Revenue Agency, testified at the
hearing as a valuation expert. The appellant did not challenge her expert status,
and the narrative in the expert report dated August 8, 2013, represents this
witness’ testimony. Her mandate was to provide an indication of the fair market
value of the 68,775,000 Class “B” AIMO shares held by OREX as of February 10,
2004, the date of continuance of OREX A.G. The valuation was conducted in July 2009,
several years after the years 2003 and 2004, and does not constitute a formal
opinion as to the fair market value of the shares. The valuator did not contact
ISPA and did not visit the operating mines. She primarily relied on the
information contained in ISPA’s 2004 annual report, which contained the
consolidated financial statements and external auditors’ report for the years ending
December 31, 2003 and 2004.
[21]
The valuator used the adjusted
net asset method to determine the fair market value of the 68,777,500 Class “B”
AIMO shares and the 880 OREX shares. According to the valuator, the fair market
value of the shares of each of the two investment companies was estimated at $2,500,000.
For the Okhotsk shares, the valuator used the discounted cash flow method to determine
their fair market value. According to the valuator’s calculations based on a
number of assumptions, the fair market value of the investment of 20% of the
shares of the company was $8,300,000 as at February 10, 2004.
[22]
Based on the transaction
undertaken by Okhotsk in April 2004, the value of the investment of 20% of the
company’s shares held by AIMO was estimated at $8,689,000 (based on an exchange
rate of US$1.3 on the Canadian dollar). The transaction in question is the one
in which Okhotsk issued 20,592 new common shares of its capital stock for a
total price of US$33,420,000. ISPA subscribed to 14,136 shares for US$22,942,000,
and the other shareholders subscribed to 6,456 shares for US$10,478,000. AIMO did
not participate in the issuance of new shares, which decreased its percentage
of shares from 20% to 1.89%.
Analysis
[23]
The obligation to file
Form T1134-A arises from the application of subsection 233.4(4) of the Act,
which reads as follows:
233.4(4) Returns respecting foreign affiliates. A reporting entity for a taxation year
or fiscal period shall file with the Minister for the year or period a return
in prescribed form in respect of each foreign affiliate of the entity in the
year or period within 15 months after the end of the year or period.
[24]
The term “reporting
entity” for the purposes of section 233.4 of the Act is defined in
subsection 233.4(1) of the Act as follows:
233.4(1) For the
purpose of this section, “reporting entity” for a taxation year or
fiscal period means
(a) a taxpayer resident in Canada (other
than a taxpayer all of whose taxable income for the year is exempt from tax
under Part I) of which a non-resident corporation is a foreign affiliate at any
time in the year;
. .
.
[25]
At the hearing, it was
admitted that the appellant resided in Canada during the 2003 and 2004 taxation
years and that OREX A.G. was at any time in the 2003 and 2004 taxation years a
non-resident corporation that was a foreign affiliate within the meaning of
subsection 95(1) of the Act, of the appellant. Consequently, the appellant was,
in principle, required to file a Form T1134-A for each of the 2003 and 2004
taxation years. The deadline for filing said form was March 31, 2005, for the 2003
taxation year and March 31, 2006, for the 2004 taxation year.
[26]
The appellant did not
file Forms T1134-A because, according to the form’s instructions, he was not
required to do so owing to the fact that OREX A.G. was a “dormant” or
“inactive” foreign affiliate for the purposes of said form, that is, a corporation
a.
that had gross receipts
(including proceeds from the disposition of property) of less than $25,000 in
the year; and
b.
at no time in the year
had assets with a total fair market value of more than $1,000,000.
[27]
The issue, therefore,
is whether the fair market value of OREX A.G.’s assets was, at any time between
December 3, 2003, and February 10, 2004, more than $1,000,000.
[28]
The reassessments that
are the subject of this dispute were issued on June 23, 2010, under subsection 162(7)
of the Act, which states as follows:
162(7)
Failure to comply. Every person (other than a registered charity) or
partnership who fails
(a) to file an
information return as and when required by this Act or the regulations, or
(b) to comply with a duty or obligation
imposed by this Act or the regulations
is liable in respect of each
such failure, except where another provision of this Act (other than subsection
162(10) or 162(10.1) or 163(2.22)) sets out a penalty for the failure, to a penalty
equal to the greater of $100 and the product obtained when $25 is multiplied by
the number of days, not exceeding 100, during which the failure continues.
[29]
Considering that the
reassessments were issued outside the normal reassessment period, the respondent
has the burden of establishing that the appellant made
a misrepresentation attributable to neglect, carelessness, or wilful default
by not filing Forms T1134-A.
[30]
According to the appellant,
the value of the OREX A.G. shares was determined at the time of AIMO’s dissolution,
which occurred on June 30, 2007, well after the reporting periods for Form
T1134-A for 2003 and 2004. The appellant alleged that he had acted in good
faith and that there was no neglect or wilful default
on his part. He took a reasoned and reasonable position during the reporting
periods, even though he later admitted that the AIMO shares held by OREX were
worth over $1,000,000.
[31]
According to the
respondent, the relief provided in Form T1134-A is only administrative relief and
the appellant had the burden of ensuring that the value of the AIMO shares was
less than $1,000,000. The appellant made no effort to try to determine the
value of the shares and only relied on his general knowledge that the shares
had no value even though he acquired them for US$200,000. He did not have the
financial statements of OREX A.G. and OREX for the 2003 and 2004 taxation years
prepared within the prescribed time limits. He did not have OREX A.G.’s tax
returns for the 2003 and 2004 taxation years prepared and did not consult his
accountant about his obligation to file Forms T1134-A. The respondent alleged
that the appellant did not exercise due diligence as he could have filed Forms
T1134-A in 2007 under the Voluntary Disclosures Program. For the respondent,
good faith is not sufficient, and concrete action was required on the
appellant’s part to determine the fair market value of the AIMO shares.
[32]
In light of the facts adduced
in evidence, it appears clear to me that the appellant had in-depth knowledge
of the operations of OREX A.G. and OREX, of AIMO and the private corporation Okhotsk,
which was incorporated to hold mining licences for the two gold and silver mines
located in Russia. He handled OREX A.G.’s continuance in Canada. He was informed
of the financing transactions (share issuance and sales) performed in 2004 by Okhotsk
and its shareholders. He saw AIMO’s financial statements for the year ending
December 31, 2004, along with the 2003 comparative figures, which were prepared
by external auditors on July 11, 2005.
[33]
The appellant acquired the
OREX A.G. shares under very specific circumstances. The acquisition price of
the 256 OREX A.G. shares was set at US$200,000. The shares’ acquisition price
was not paid at the time of acquisition but was the subject of an
acknowledgement of debt in the amount of US$200,000 that would only become payable
within ten days after the appellant received the funds from the proceeds of sale
of AIMO’s securities held by OREX A.G. and the proceeds of sale were distributed
to OREX A.G.’s shareholders, which included the appellant.
[34]
The terms and
conditions of the transaction described above suggest that the value of the OREX
A.G. shares and its investment in AIMO was very dubious. The acquisition price
of the OREX A.G. shares was payable only through the proceeds of disposition of
its investment in AIMO. The shares surely had a certain value at the time of
their acquisition, and it was likely that the value of the shares would
increase in future years for the appellant to have seen fit to acquire them. The
appellant did not assume any financial risk when he acquired the OREX A.G.
shares.
[35]
The transaction performed
in April 2004 by which Okhotsk issued 20,592 new shares to some of its shareholders
for a total consideration of US$33,420,000 enabled it to finance future
transactions. AIMO
was not involved in this financing, and its investment in Okhotsk was
significantly diluted. Even if the appellant had wanted at that point to have this
very minor ownership in a Russian private corporation valued, it would have
been a very arduous task, and the result would surely have been very unreliable.
[36]
The
market value of AIMO’s investment in Okhotsk was only really determined at the
time of the redemption, in August 2006, of the 429 shares for US$7,500,000, and
it was not until then that it became possible to establish with some degree of certainty
the fair market value of OREX’s investment in AIMO.
[37]
In
the circumstances, I am of the view that the appellant made a thoughtful,
deliberate and careful assessment of the value of OREX’s investment
and that he did not make
any misrepresentation attributable to neglect or wilful default by not filing Forms
T1134-A for the 2003 and 2004 taxation years. I do not believe the appellant's interpretation of
the facts can be considered unreasonable in the
circumstances.
[38]
For
these reasons, the appeals are allowed and the reassessments are vacated.
Signed at Ottawa, Canada, this 7th day of November
2013.
“Réal Favreau”
Translation certified true
on this 3rd day of January 2014
Daniela Guglietta,
Translator
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