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Citation: 2004TCC734
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Date: 20041102
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Docket: 2001-1569(IT)G
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BETWEEN:
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PLOMBERIE J.C. LANGLOIS INC.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
LamarreProulx J.
[1] This appeal pertains to the 1995
to 1998 taxation years.
[2] The issue is whether the appellant
and one or more other corporations were controlled, directly or
indirectly, in any manner whatever, by the same person within the
meaning of paragraph 256(1)(b) and
subsection 256(5.1) of the Income Tax Act
(the "Act").
[3] If so, the appellant and the other
corporations would be associated corporations within the meaning
of section 256 of the Act. This would entail consequences
with respect to the application of section 125 of the Act, a
section that pertains to the small business deduction, which the
appellant was disallowed.
[4] It was admitted that the
appellant's shareholders were Les Placements
René Simoneau Inc. and Richard Hallas, and that
each shareholder owned 50% of the shares.
René Simoneau holds 100% of the shares in
Les Placements René Simoneau Inc. Appendix A of
the Reply to the Notice of Appeal describes the organization
charts of the various Groupe Simoneau corporations.
The description is not contested.
[5] The respondent submits that
René Simoneau is the "controller" who had
direct or indirect influence that, when exercised, resulted in
the control in fact of the appellant within the meaning of
subsection 256(5.1) of the Act. In the Minister's
submission, there is control in fact, if not in law.
Naturally, the appellant contests the allegation that
Mr. Simoneau had control in fact of the appellant.
It claims that the two shareholders had equal influence and
that any imbalance was in favour of Mr. Hallas.
[6] In his testimony,
René Simoneau discussed the history of the appellant,
which is engaged in the business of industrial, commercial and
institutional plumbing.
[7] René Simoneau met
Jean-Claude Langlois in 1990 while the first plant of
Bouilloire et Soudure Rive-Sud Inc., a company 100% of the
shares of which are owned by Les Placements René
Simoneau Inc., was being built. Plomberie Roger Langlois
obtained the plumbing contract for the construction project.
Jean-Claude Langlois was working for the business of
his father Roger Langlois. Richard Hallas was carrying
out the plumbing work.
[8] Shortly thereafter,
Jean-Claude Langlois asked Mr. Simoneau to start
up a plumbing business with him. An agreement was reached:
Mr. Simoneau would look after the administration
and Jean-Claude Langlois would be responsible for
the operational management.
[9] The business relationship was
short-lived. To summarize briefly what followed,
Mr. Simoneau repurchased Mr. Langlois' shares and
transferred them to Mr. Hallas, whose services he wanted to
secure. As of November 30, 1992, Mr. Hallas
held 50% of the appellant's shares.
[10] A book of documents containing nine
tabs was tendered as Exhibit A-1.
The shareholders' agreement, dated
November 30, 1992, is at tab 2. There are three parties
to the agreement: the two shareholders, and the appellant
corporation, represented by its president
René Simoneau, who also signed on behalf of the
corporation as its secretary.
[11] The appellant admits that
Mr. Simoneau has always been the corporation's only
director and is its chairperson and secretary. The documents
produced as Exhibit I-1 also confirm this.
[12] Mr. Simoneau explained that
Mr. Hallas is in charge of the operational management of the
appellant, i.e. all plumbing-related business. He
makes bids, provides estimates, hires staff and looks after the
purchase and maintenance of equipment and tools.
[13] The appellant has the licences that it
needs to carry on business thanks to the special skills of
Mr. Hallas.
[14] Mr. Simoneau is responsible for
office management, advertising, wages and invoices, cheque
signing, banking matters and the line of credit. Suppliers'
invoices are subject to prior approval by Mr. Hallas.
[15] Mr. Simoneau testified that he was
not related to Mr. Hallas, and that Mr. Hallas was not
involved in any of the other Groupe Simoneau companies during the
years in issue. Today, Mr. Hallas owns 18% of Groupe
Simoneau shares.
[16] Mr. Simoneau concluded his
testimony by stating that he does not believe that he controls
the appellant because he is not knowledgeable about plumbing, and
that Mr. Hallas' function in that area is just as
important as his, if not more so.
[17] Under cross-examination,
Mr. Simoneau was shown the business cards of various Groupe
Simoneau employees. The names of four companies appear on
each card: Bouilloire et Soudure Rive-Sud Inc.,
Plomberie J.C. Langlois Inc., Les Constructions
René Simoneau and Combustion Rive-Sud Ltée. Counsel
for the respondent also showed the witness the documents printed
from the website, some speeches, and some articles from 1997. All
of these documents portray Mr. Simoneau as the
"controller." Reference is made to the appellant as a
Groupe Simoneau affiliate. The witness responded that all of
this was for image. The business cards and other publicity
materials were produced as Exhibit I-4.
[18] The appellant's office is located
in the same place as the office of Bouilloire et Soudure
Rive Sud Inc., a corporation 100% of the shares of which are
owned by Les Placements René Simoneau Inc. The
appellant is charged rent. The rent was apparently determined
based on its revenues. Secretarial costs were shared on a basis
that was not explained. Some employees of Bouilloire et Soudure
Rive-Sud Inc. frequently worked for the
appellant.
[19] In this connection, counsel for the
respondent produced Exhibit I-7, which consists of
invoices from one company to another showing considerable
relationships between the appellant and Bouilloire. As another
example, she cited the financial statements of April 30,
1998, which were produced along with the other statements as
Exhibit I-5. At paragraph 13 of the "Notes
complémentaires" (accompanying notes) it is stated
that the company entered into the following transactions with
related companies: [TRANSLATION] Sales and miscellaneous
revenues, $222,517; Purchases and miscellaneous services,
$654,053. Mr. Simoneau stated that the shared expenses were
apportioned with Mr. Hallas' consent.
[20] Exhibit I-3 consists of
various line of credit authorizations, by the bank, for the
appellant and other Groupe Simoneau corporations. These
authorizations show that René Simoneau and the other
Groupe Simoneau companies gave sureties. For example, on
February 9, 1996, a credit line of $345,017 was authorized
for the appellant. Sureties were given by Les Placements
René Simoneau Inc., Bouilloire et Soudure
Rive-Sud Inc., Les Constructions René Simoneau
Inc. and René Simoneau personally. Mr. Simoneau
signed on behalf of all these entities. A document, dated
October 31, 1996, shows that $1,084,000 in financing
was authorized for Les Constructions René Simoneau
Inc. The credit was secured by Les Placements
René Simoneau Inc., Bouilloire et Soudure
Rive-Sud Inc., Plomberie J.C. Langlois Inc. (the
appellant) and René Simoneau personally. There are a
few other documents of the same nature.
[21] Paragraph 4 of the accompanying
notes of the financial statement for the year ending
April 30, 1997, is entitled "Placements"
(investments). It reads: [TRANSLATION] Advances to private
companies without interest or repayment terms: $84,106.
Paragraph 12 is entitled
"Éventualité" (contingency) and reads:
[TRANSLATION] "The company is guaranteeing loans of other
private companies. On April 30, 1997, these loans
totalled $1,969,707. If the company is obliged to satisfy a claim
associated with these guarantees, the amount of which cannot be
specified, the resulting loss will be reported in the earnings
statement for the fiscal year in progress."
[22] The next witness was
Richard Hallas. He is now construction site director and
vice-president of Groupe Simoneau. His testimony did not differ
from Mr. Simoneau's. He stated that the agreement
between him and Mr. Simoneau was that he would look after
the plumbing and that Mr. Simoneau would be the financier
and manager. He had seen that Mr. Simoneau was successful in
business, and let him take care of administration.
[23] He never signed any bank sureties for
loans, advances or lines of credit. In fact, he joined
forces with Mr. Simoneau so that Mr. Simoneau would be
the financier. Be that as it may, two indemnification and surety
agreements were produced at tabs 6 and 7 of
Exhibit A-1. The last agreement produced at tab 6
is dated December 21, 1998, and reads: [TRANSLATION]
"Richard Hallas is a personal guarantor exclusively for
sureties issued for Plomberie J.C. Langlois Inc."
[24] However, Mr. Hallas explained that
he and Mr. Simoneau spoke about jobs, sales and profits on a
daily basis. He said there was no agreement that
René Simoneau would be the only de facto
directing mind because there was no way that he could be the only
directing mind of something that belonged to both of them.
[25] With respect to the absence of formal
shareholders' meetings, he said that such meetings were
unnecessary because he and René would see each other
daily. However, he admitted that he did not know about the
activities of the board of directors because Mr. Simoneau
was the sole director.
[26] Counsel for the respondent tendered
Exhibit I-6, which consists of payments by the
appellant to Plomberie R.H. Inc., a corporation all of whose
shares were held by Mr. Hallas. There was no explanation of
the basis on which the claims of Plomberie R.H. Inc. were made.
Mr. Simoneau approved all these payments.
[27] Alain Lafond, an architect in
private practice, testified for the respondent. He held 50% of
the shares of Les Constructions René Simoneau Inc.
and paid nothing for them. Thanks to his shareholding over a
three-year period, the company was able to work in the
construction field. However, he did not participate in the
operations of the business. He did not even have an office
there.
Arguments
[28] Counsel for the appellant noted that it
must be determined whether the relationship between the two
shareholders was characterized by the existence of a
"controller" who had a direct or indirect influence,
which, when exercised, would result in the control in fact of the
appellant corporation. He argued that the two shareholders
determined the framework of their relationship on the basis of
complete equality and that this Court must accept this equality
as it did in Multiview Inc. v. The Queen,
97 DTC 1489. He referred to the shareholders' agreement,
found at tab 2 of Exhibit A-1. According to that
agreement, the shareholders are equal. Moreover, in practice,
each of them brings his own qualities and advantages to the
table. Mr. Hallas is a nuts-and-bolts man and
Mr. Simoneau has the acumen for administration. This, it is
alleged, is a situation characterized by interdependence, in
which the shareholders communicate with each other daily and give
each other information.
[29] Counsel for the respondent referred to
the decision of Bowman T.C.C.J., in
Société foncière
d'investissement Inc. v. Canada, [1995] T.C.J.
No. 1568 (Q.L.), particularly paragraphs 8 and 10 of
the decision:
8 Since
these decisions, other words have been added for the clear
purpose of broadening the concept of control, in particular the
words "directly or indirectly in any manner whatever".
So far as I know, the point has not been decided, but I would
have thought that it could reasonably be argued that these words
necessarily include the idea of de facto control of a corporation
in the case of a person who does not hold more than 50 per cent
of the shares but has a controlling influence, whether economic,
contractual or moral, over a corporation's affairs. It is
hard to imagine words with a broader meaning.
. . .
10 I am persuaded
that the resolutions adopted by the other shareholders had the
effect of giving Mr. Allain practically absolute control over the
affairs of S.F.I. During the years in which the resolutions were
in effect, he had complete authority to manage all aspects of the
corporation's commercial and financial dealings. I admit that
the other shareholders had the power to divest him of this
authority, but as long as he was permitted to exercise it he was
in a position of unlimited control.
[30] She said that she does not intend to do
an actual analysis of the shareholders' agreement to
determine whether the shareholders were in a situation of
equality. But she does argue that, by granting sole directorial
authority to one shareholder, the other shareholder was granting
him all his authority. She noted that Mr. Hallas has
admitted he did not know what Mr. Simoneau was doing as the
sole director. The evidence showed that Mr. Simoneau was the
one who decided on the allocation of common expenses to the
various corporations he managed. For example, he was the one
who determined the cost of renting the building in which the
appellant carried on business, and the portion of the secretarial
costs. He was the one who committed the appellant when
financing the other Groupe Simoneau businesses. In sum, he had
full power to manage and bind the appellant. Mr. Hellas'
operational management cannot, in her submission, amount to
control of a corporation.
[31] In reply, counsel for the appellant
argues that the shareholders in Société
foncière d'investissement Inc., supra,
had given the director carte blanche, which they did not do in
the case at bar. He refers to section 11(g) of the
shareholders' agreement:
[TRANSLATION]
11. Any by-law or
resolution of the company's directors that has one of the
following direct or indirect purposes or effects shall, to be
valid, require ratification by a unanimous resolution of the
shareholders:
...
(g) any decision
other than an administrative decision made in the company's
ordinary course of business.
[32] Counsel for the respondent then
referred to sections 5 and 6 of the shareholders'
agreement. In her submission, those provisions are very different
from what happened in reality and they show how very little
importance should be given to the agreement:
CONTRIBUTION
5. Any
investment which the board of directors, acting in the best
interests of the company, determines is necessary from time to
time for the proper administration of the Company, shall be
invested by the Shareholders in proportion to their holdings of
Class "A" shares, at no interest. Should the
circumstances require that one of them make an advance greater
than the required proportion, the portion of the
Shareholder's advance that exceeds that proportion shall bear
interest at the rate of certificates of deposit issued for a
period of one (1) year by the financial institution with which
the company is doing business at that time, such rate being
subject to review on an annual basis.
6. Should
personal endorsements and guarantees by the shareholders become
necessary to secure the Company's loans or obligations, the
shareholders shall provide such an endorsement or guarantee in
proportion to their holdings of the Company's Class
"A" shares.
Conclusion
[33] Paragraph 256(1)(b) and
subsection 256(5.1) of the Act reads as follows:
256(1) Related corporations - For the purposes of this
Act, one corporation is associated with another in a taxation
year if, at any time in the year
. . .
(b) both of
the corporations were controlled, directly or indirectly in any
manner whatever, by the same person or group of persons
256(5.1) Control in fact - For the purposes of this
Act, where the expression "controlled, directly or
indirectly in any manner whatever," is used, a corporation
shall be considered to be so controlled by another corporation,
person or group of persons (in this subsection referred to
as the "controller") at any time where, at that time,
the controller has any direct or indirect influence that, if
exercised, would result in control in fact of the corporation,
except that, where the corporation and the controller are dealing
with each other at arm's length and the influence is derived
from a franchise, licence, lease, distribution, supply or
management agreement or other similar agreement or arrangement,
the main purpose of which is to govern the relationship between
the corporation and the controller regarding the manner in which
a business carried on by the corporation is to be conducted, the
corporation shall not be considered to be controlled, directly or
indirectly in any manner whatever, by the controller by reason
only of that agreement or arrangement.
[34] The evidence has disclosed that there
were two shareholders, each of whom had an equal number of
shares. Thus, neither had de jure control. I quote from
Duha Printers v. Canada,
[1998] 1 S.C.R. 795, at p. 838, where the
Supreme Court of Canada set out the meaning that should be
ascribed to de jure control:
. . .
(2) The general test
for de jure control is that enunciated in
Buckerfield's, supra: whether the majority
shareholder enjoys "effective control" over the
"affairs and fortunes" of the corporation, as
manifested in "ownership of such a number of shares as
carries with it the right to a majority of the votes in the
election of the board of directors".
[35] With respect to the notion of
de facto control in section 256 of the Act,
I quote from the same decision, at p. 824:
. . . As such, a simple test such as that which
has been followed since Buckerfield's is most
desirable. If the distinction between de jure and
de facto control is to be eliminated at this time, this
should be left to Parliament, not to the courts. In fact,
while it is not directly relevant to the outcome of this appeal,
I would observe nonetheless that Parliament has now recognized
the distinction between de jure and de facto
control, adopting the latter as the new standard for the
associated corporation rules by means of s. 256(5.1) of the
Income Tax Act, enacted in 1988.
[36] In the case at bar, did one of the
shareholders exercise de facto control of the appellant? I
must find that there was, during the years in issue, but a single
director. Who could exercise control over the appellant, if not
this sole director? Counsel for the appellant referred
to Multiview, supra, but there, the two
equal shareholders were also equal directors, which the
shareholders in the instant case are not.
[37] The powers of the sole director in the
instant case are vast. I do not intend to repeat everything that
counsel for the respondent said, since she simply restated the
facts presented in evidence. I agree with her description of the
evidence and would merely add that Mr. Simoneau was the
chairperson of the board and it secretary.
[38] As its principal manager,
Mr. Hallas undoubtedly played a very important role in the
appellant corporation. However, that role is not associated with
the idea of control over a corporation. It is an operational
role, not a decision-making role. The decision-making
role belongs to the director of a corporation, and it is the one
that is associated with the notion of control in fact of a
corporation.
[39] G. Cornu, dir.,
Vocabulairejuridique, 2d ed. (Paris: Presses
universitaires de France, 1990) defines the word
"contrôle" in a manner that I find
interesting, at p. 207:
[TRANSLATION]
• 3 Dominion
over the management of a business or organization; power ensuring
the one who has it a dominant influence in the direction of a
group, a corporation, etc., or the orientation of its future.
[40] In my opinion, Mr. Simoneau
exercised such dominion over the appellant. As the sole director,
he had the power that ensured him a dominant influence in the
direction of the appellant. The other shareholder, being an equal
shareholder, had the power to remove this authority from him, but
did not do so during the years in issue. In conclusion, during
those years, Mr. Simoneau exercised control in fact of the
appellant within the meaning of subsection 256(5.1) of the
Act. As far as the parties were concerned, this was the only
point that I had to decide in the instant case.
[41] Consequently, the appeals are dismissed
with costs.
Signed at Ottawa, Canada, this 2nd day of November
2004.
Lamarre Proulx J.
Translation certified true
on this 13th day of January 2005.
Jacques Deschênes, Translator
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