Lacroix, DJ:
1 Joseph Lorenzo Guay of the City of Montreal died on January 19, 1962. He was president of J L Guay Limitée. He held 43 shares of the J L Guay Limitée construction company. As a matter of fact, he was a minority shareholder, because his son Léon personally held 140 shares of the same company; the very few remaining shares were held by some relatives.
2 Notwithstanding the fact that this legal situation existed, the unrefuted evidence quite clearly indicates that the father, Lorenzo Guay, actually wielded the authority in the company, and despite the difference in the number of shares held by the shareholders, he was the one who made the decisions; in other words, as expressed by one witness, “He was the boss”.
3 When this case was heard before us the parties filed by consent, in lieu of an inquiry, all the evidence that had been adduced before the Tax Review Board. In analysing all this evidence, it can be said that even if the other shareholders (the son and other relatives) did not give their formal consent to the transactions and activities of the father, the “boss”, they certainly deferred to Joseph Lorenzo Guay's wishes.
4 This being the case, it does seem that on several occasions Joseph Lorenzo Guay dealt alone and directly with customers, without always handing over to the company what he received from those customers.
5 The Department of National Revenue, alerted to Mr Guay's dealings—in a manner not specified in the evidence, and during Mr Guay's lifetime—seized all of the company's books and documents in order to make a complete investigation of his activities. The investigation was actually begun while Mr Guay was still alive, but it was not completed until long after his death in 1962. Upon Mr Guay's death the executors set the assets of his estate at $240,998.54, and the liabilities at $81,767.26, leaving net assets of $159,231.28. Later the Minister of National Revenue (Taxation) set the net value of the estate at $231,766.35. After taking certain statutory deductions into account he set the estate tax at $18,329.63 plus interest in the amount of $6,529.92, making a total of $24,859.55. This assessment was varied in March 1972, the net value of the estate being set at $142,288.92, and the total assessment, with interest, at $11,161.99.
6 The investigation conducted by the Department of National Revenue took several years, and it was not until 1968 that the findings of this investigation were made known, findings which plaintiffs contended had an enormous effect on the value of the estate set by defendant, not only in September 1969 but also in his reassessments in March 1972.
7 The investigation conducted by the Department of National Revenue revealed that Mr Joseph Lorenzo Guay owed the company, of which he was a shareholder and president, sums of money for advances that had been made to him, and for expenses; in the same investigation it was further established that Mr Guay had appropriated company earnings in the amount of $183,507.99, of which the company had apparently been unlawfully and unjustly deprived, and that consequently this sum should be added to the liabilities of the estate of Joseph Lorenzo Guay.
8 As a matter of fact, plaintiffs contended that in setting the income tax of J L Guay Limitée the Minister of National Revenue added the said amount of appropriations, namely $183,507.99, to the earnings of the company, which had to pay tax thereon, and in arriving at the income of the deceased Joseph Lorenzo Guay for tax purposes, the Department acknowledged that any amount of the said appropriations that the estate of the deceased repaid to the company, either by paying directly or by payment of the company's taxes, would not be added by the Department to the deceased's income for tax purposes. As a matter of fact, the sum of $108,616.80, representing a portion of the income tax of J L Guay Limitée, was submitted as having been agreed upon as representing a portion of the liabilities of the estate of Joseph Lorenzo Guay, and this sum of $108,616.80 was regarded by defendant as an amount the estate had to reimburse as repayment for the deceased's appropriations, and the Department did not add this sum to the deceased's income.
9 Plaintiffs therefore submitted that defendant, the Minister of National Revenue, had acknowledged for income tax purposes that the $183,507.99 in appropriations was a sum which the deceased, Joseph Lorenzo Guay, owed J L Guay Limitée at the time of his death, and consequently, plaintiffs concluded that this debt was deductible in the computation of the aggregate net value of the estate under the Estate Tax Act.
10 The income tax agreement, whereby the estate of the deceased Joseph Lorenzo Guay would pay $108,616.80, appears in the evidence in Exhibit A-6, at pages 80 to 82 of the joint evidence.
11 Defendant contended that it was not a civil debt that Mr Guay owed the company, but that Mr Guay had received these amounts—the total of the appropriations—because of presumptive dividends constituting income to the shareholder, and that this provision of the law, namely, section 8 of the Income Tax Act, does not in any way affect the rights of action at civil law that may exist between the estate of the deceased Joseph Lorenzo Guay, and J L Guay Limitée, with the result that this sum of $183,507.99 cannot constitute a liability of the estate. As a further argument defendant contended that even if a debt existed, a civil remedy would be prescribed.
12 This whole case apparently turns, therefore, on the question of whether this amount of $183,507.99, which according to the findings of the Department of National Revenue investigation, Mr Guay received but did not deliver to the company, constitutes a debt which under the law would give the company a remedy against the estate for payment and reimbursement of the aforementioned sum.
13 An appeal was brought against the assessments made by the Department of National Revenue in respect of the value of the deceased's estate which, we now know, included as an asset the amount of the appropriations, namely $183,507.99. This appeal was heard in Montreal on June 28, 1973 before the Tax Review Board, and the decision was handed down on November 21, 1973. The decision dismissed plaintiff's appeal, and ruled that the amount of the appropriations did not constitute a debt under paragraph 5(1)(a) of the Income Tax Act, and that consequently the sum was not deductible from the assets of the estate.
14 I believe we can adopt the legal proposition submitted by plaintiffs, to the effect that the director of a limited company is actually a mandatary within the meaning of the provisions of Articles 1710 et seq of the Civil Code. This is what Perrault states in Vol II of his Traité de Droit commercial, at pages 492 et seq, to wit:
(Translation)
In relation to the shareholders, directors can be considered as mandataries. In our law we can accept the theory expressed by Baudry- Lacantinerie and Wahl (Traité de Droit civil, 3rd ed, vol 24, No 393).
15 It is a question of an action brought against the directors by the shareholders, namely an action based on a contractual agreement.
16 That would therefore mean that in his capacity as a director, Mr Guay had accepted the mandate to collect moneys that were owing to the company, for which he had necessarily to render an account. This proposition would seem to rule out the defence's contention with respect to prescription, because if that were the case it would involve a contractual obligation, and the prescription period would be 30 years.
17 Moreover, the appropriations that Mr Guay had allegedly made unlawfully and wrongfully would be, in short, a fault in failing to execute his mandate, and it would seem to us that all this would be recoverable by a civil action.
18 The defence claimed that it was not a question of illegal appropriations but of “dividends” within the meaning of section 8 of the Income Tax Act. If these actually were dividends, they would necessarily have to be distributed to all the shareholders, and the full amount could not be distributed to the estate or bank account of a single shareholder. We find it somewhat difficult to accept the proposition.
19 The income tax agreement that was concluded (A-6) nevertheless had some bearing on the nature of the dealings that took place between the company and Mr Joseph Lorenzo Guay. It is apparently for this reason that the Department of National Revenue acknowledged that the sum of $183,507.99 was owed by the estate and, furthermore, constituted an asset of the company. The agreement respecting the $108,616.80 was accepted by the parties and, as a matter of fact, the estate has already paid the sum of $30,000 in repayment of the appropriations, or on account of the sum of $108,616.80.
20 The arguments that were submitted to the Tax Review Board dealt mainly with the nature of the appropriations, by saying that they did not constitute a debt in the true meaning of the word, and they relied mainly on the Exchequer Court decision in Beament Estate v Minister of National Revenue, [1969] Ex. C.R. 407 et seq;[1968] C.T.C. 558, 69 D.T.C. 5016.
21 In interpreting the nature of these appropriations as we have done, we consider that we are not at variance with the Beament decision, which involved determining the value of the shares a father left to his two sons.
22 Jackett, J [as he then was] found that the concept underlying the words “debts” and “encumbrances” did not cover all of the obligations and responsibilities of a deceased person which must be met and honoured by his estate. He took the opportunity of defining the word “debt”, by saying that it was “the sum payable in respect of liquidated money demand, recoverable by action”. In the case at bar the assessments made by the Department of National Revenue established that there were amounts owing to the company under three headings, to which we have already referred:23 The statement that there was an amount owing for appropriations obviously referred, in accordance with the definition given in Beament to a “money demand” that the company was entitled to require from Joseph Lorenzo Guay, or his estate.
24 The amount of this money demand was liquidated by the Department itself and set at $183,507.99. It would appear that in such a case it cannot be said—and we say so very respectfully, having regard to the opinions expressed by the Tax Review Board—that it is not a question here of a debt, or “a sum payable in respect of liquidated money demand, recoverable by action”.
25 In saying this we feel that we are in no way at variance with the decision handed down in Beament (supra). We are all the more inclined to accept this idea since it was confirmed by the Department of National Revenue itself when it came to consider the $183,507.99 in appropriations for income tax purposes, and the amount was made an asset of the company and an obligation of the estate (A-6).
26 FOR THESE REASONS, we rule that the action should be upheld and the appeal allowed, that the estate tax assessments of September 12, 1969 and March 6, 1972, with respect to the estate of Joseph Lorenzo Guay, are vacated, and that the sum of $183,507.99, being the amount of the appropriations of the deceased Joseph Lorenzo Guay, is acknowledged as a debt of the estate and complies with the provisions of sections 5 and 6 of the Estate Tax Act.
27 The whole with costs against the respondent.
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