Tétrault v. MNR, 92 DTC 2240, [1992] 2 CTC 2787, [1992] 2 CTC 2125, [1992] DTC 2235 (TCC)

Garon, T.C.C.J. (orally):—These cases are appeals from reassessments dated June 16, 1989 relating to the 1985, 1986 and 1987 taxation years. By these assessments, the Minister of National Revenue decided that as a result of a transaction dated June 26, 1985, which will be discussed later, the appellant was deemed to have received a dividend of $34,350 at the time of acquisition, according to the respondent, by Audio Ciné Films Inc, the "company", of the common shares belonging to the appellant, the whole in accordance with subsection 84(3) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

c. 63) (the "Act").

I shall now set out the essential facts in relation to these appeals. On January 16, 1985 the appellant, as vendor, Mr. Benoit Lachance, as purchaser, and Mr. Robert Allard, as trustee, entered into a contract. By this contract, the appellant sold to Benoit Lachance 21 common shares of the capital stock of the company for $25,000, of which $1,000 was paid when the contract was signed and the balance was payable:

. . . by equal and consecutive monthly payments of ONE THOUSAND DOLLARS ($1,000) each, on the first day of January, February, March, April, May, October, November and December of each year, the first of which shall become due on the first [sic] February Twenty-three, Nineteen Hundred and eighty-five (1985), and the last of which on January Twenty- three, Nineteen Hundred and eighty-eight (1988), on which date any balance still owing shall become payable.

The said payments shall not bear interest before they are due, but shall bear interest at the rate of twelve per cent (12%) per annum after the due date.

With the privilege for the purchaser of making larger payments or paying the entire amount at any time without notice and without default.

[Translation.]

Clause 3 of this contract reads as follows:

3. The vendor delivers to the trustee 2 certificates for 21 common shares of AUDIO CINÉ FILMS INC, registered in the name of

ROBERT ALLARD, In Trust

and the purchaser agrees that so long as there is a balance owing on the sale price the trustee shall retain the said certificates, registered in his name.

So long as there is a balance owing on the sale price, the trustee shall exercise all the rights and privileges conferred on the shares he holds, including voting rights, but the trustee shall vote such shares in accordance with the instructions of the purchaser, unless such instructions are inconsistent with the terms and conditions hereof or unless the purchaser or the company is in default in respect of any of their obligations and the trustee has received notice of such default from the vendor.

When the trustee receives notice in writing from the vendor or evidence which he considers, in his discretion, to be non-conflicting and satisfactory, to the effect that the purchaser and the company have fulfilled all their obligations hereunder, the trustee shall endorse and deliver to the purchaser the share certificates that he holds.

In the event that the purchaser or the company is in default in respect of any of their obligations hereunder, and that 30 days notice to remedy such default has been given to them but has not been complied with, the vendor shall then have the right and the trustee shall have the obligation to deliver the share certificates he holds to the vendor and the vendor shall have the right to claim from the purchaser the balance of the sale price which is then unpaid, both principal and interest, without, however, having to credit the vendor for amounts paid.

[Translation.]

Before this contract was signed on January 16, 1985, there had been negotiations in which the three shareholders had participated: the appellant, Mr. Maurice Bergeron, as the representative of Granmont Inc, of which he was the sole shareholder, and Mr. Benoit Lachance. The two share certificates representing the appellant's 21 shares were endorsed by him and delivered to the trustee. Mr. Bergeron, a chartered accountant, was also the appellant's adviser with respect to this transaction.

The same day, Granmont Inc. sold to the same Mr. Benoit Lachance 21 common shares of the capital stock of this company, for $25,000. The terms of the sale price were identical to the earlier contract, to which the appellant was a party. Moreover, the wording of the various clauses in this second contract were also identical to that of the clauses of the first contract entered into by the appellant.

On June 26, 1985, another contract was entered into, the parties to which were the appellant, as vendor, Audio Ciné Films Inc, as purchaser, Robert Allard, as trustee, and Benoit Lachance, as guarantor. By this contract, the appellant sold to the company 21 common shares of the capital stock of the company for $25,000 and acknowledged receipt of $5,000 on account. The terms of payment for the balance owing under this contract were described as follows:

WHICH PARTIES HAVE AGREED AS FOLLOWS:

1. The Vendor hereby sells to the Purchaser, who is present and agrees:

Twenty-one (21) common shares of the capital stock of AUDIO CINE FILMS INC, a corporation duly incorporated by letters patent of the Province of Quebec and continued under Part A of the Quebec Companies Act on (hereinafter referred to as the" company”)

2. The present sale is made for and in consideration of the amount of TWENTY- FIVE THOUSAND DOLLARS ($25,000) on account and, deducted from which amount, the Vendor acknowledges receipt, upon execution hereof, of FIVE THOUSAND DOLLARS ($5,000).

With respect to the balance of TWENTY THOUSAND DOLLARS ($20,000) still owing, the Purchaser undertakes and promises to pay to the Vendor, at his place of business located at 630 Sherbrooke St. West, suite 400, Montreal H3A 2M6, by equal and consecutive monthly payments of ONE THOUSAND DOLLARS ($1,000) each, for the months of January, February, March, April, May, October, November and December of each year, beginning in October 1985 ana ending with the final payment in December 1987, on which date any balance still owing shall become payable.

The said payments shall not bear interest before they are due, but shall bear interest at the rate of twelve per cent (12%) per annum after the due date.

With the privilege for the purchaser of making larger payments or paying the entire amount at any time without notice and without default.

[Translation.]

The other clauses of this contract are in many respects similar to those of the contract of January 16, 1985. At the time the contract of June 26, 1985 was signed, Benoit Lachance was the president of the company. Mr. Allard, the trustee under this contract, was a chartered accountant and was acting in this capacity on behalf of the company. It appears from the evidence that he was the instigator of the contract of June 26, 1985.

In a document dated June 19, 1985, filed at the trial, containing various resolutions of the company and signed by Benoit Lachance, it was indicated, inter alia, in the fifth resolution, that Mr. Lachance was the sole and only director of the company. That same resolution indicated that it was the company's intention to redeem the shares in its capital stock, in the following terms:

REDEMPTION OF SHARES IN THE COMPANY HELD BY GRANMONT INC. AND GUY O.TÉTRAULT

It is resolved that the company purchase the shares in the company which were held by Granmont Inc. and Guy O. Tétrault according to the provisions of a draft agreement which has been examined by the sole director and, accordingly, it is resolved that Mister Benoit Lachance be and is hereby authorized to sign the said agreement of purchase of the said shares for and on behalf of the company.

[Translation.]

The last resolution which appears in this document, dated June 19, 1985, gives effect to the resignation of the appellant and of Mr. Maurice Bergeron. The following appears therein:

. . . it is resolved that effect be given to the resignation of Mister Guy O. Tétrault and Mister Maurice Bergeron which was submitted to the company on January 19, 1985 and which took effect on the date the certificate of continuance was issued, that is, June 19, 1985, a copy of which appears in this resolution.

[Translation.]

In paragraph 6(h) of the reply to the notice of appeal it is indicated that in making the assessment the respondent assumed that the company also redeemed 21 shares from Granmont Inc. on June 21, 1985.

We should also note another document, entitled [translation] "Notice to Trustee”, dated June 19, 1988. This document, which was signed by the appellant, reads as follows:

I, the undersigned, GUY O. TÉTRAULT, notary, hereby give notice to Mr. Robert Allard, in his capacity as trustee of 21 shares of the company Audio Ciné Films Inc. under an agreement signed on June 26, 1985, that I have received payment in full of the purchase price stipulated in the said agreement and that the trustee may deliver the above-mentioned shares to Mr. Benoit Lachance, the purchaser described in the contract of June 26, 1985.

The undersigned hereby further states that Robert Allard has fulfilled his obligations as trustee and discharges him from all such obligations.

Signed at Montreal this 19th day of June 1985.

Guy O. Tétrault

Notary

[Translation.]

In his testimony, the appellant stated categorically that he had been advised that the agreement of June 26, 1985 altered the agreement of January 16, 1985 only with respect to secondary matters. Thus the appellant had not believed that it was necessary to examine that contract. The appellant also stated that there had been no negotiations between the parties to the agreement of June 26, 1985 before that contract was signed. The appellant specified that this latter contract was signed at a time in 1985 when his professional activities as a notary took much of his time. He also said that he had noted, for example, that the company was a party to the contract of June 26, 1985 while it was not a party to the contract of January 16, 1985. This new element did not really surprise him, given that in the contract of January 16, 1985, and particularly in paragraphs (c) and (d) of clause 4, and in clause 5, the purchaser, Mr. Lachance, and the company itself entered into undertakings. These provisions of the contract were in a way performance guarantee clauses entered into by the purchaser promising that the company had to fulfil the obligations stated therein.

The respondent's position is set out in paragraph 6(g) of the reply to the notice of appeal, as follows:

The parties to both contracts intended, by signing the second contract on June 26, 1985, to replace the first contract, which had been signed on January 16, 1985, with the second contract;

[Translation.]

The respondent deduced from this proposition that under the contract of June 26, 1985 the shares held by the appellant in the capital stock of the company had been redeemed by it. In support of these two propositions, counsel for the respondent relied on the theory of tacit confirmation of the contract which, she submitted, applied to the contract of June 26, 1985 as a result of the actions or conduct of the parties involved. This theory was specifically enunciated by the Supreme Court of Canada in Racicot v. Bertrand, [1979] 1 S.C.R. 441, 25 N.R. 181. The following portion of the original headnote of this judgment is sufficient to provide us with an understanding of this decision of the Supreme Court of Canada:

On September 19, 1973 Bertrand and Laverdière (the "purchasers") brought an action against Racicot and Couture (the "vendors"), seeking cancellation of the sale of an apartment building which they had purchased from the latter on December 29, 1970. The purchasers alleged that their consent had been vitiated by fraud and also that the building failed to comply with certain provincial and municipal regulations. In the same action, the purchasers sought a joint and several condemnation against the vendors, their predecessors in title, the real estate agent and his employer (the other respondents) for the damages they claimed to have suffered as a result of the same sale.

The substance of the judgment on the question of confirmation of the contract in question is clearly stated by the headnote writer in the following passage:

Even if it were assumed that there was fraud as to the profitability of the building without which the purchasers would not have contracted, the purchasers'" conduct up until their action was brought implied tacit confirmation of the sale. Two conditions are necessary for the confirmation of an act which is voidable, knowledge of the defect and intent to rectify it. In the case of tacit confirmation, the evidence of these two aspects must be indirect or by presumption “du fait de l’homme”. As regards presumption, the trial judge has the same discretion as he has with respect to proof by testimony. In the case at bar, nothing in the record indicates that the assessment of the evidence by the trial judge was incorrect: quite the contrary. The proven facts necessarily lead to the conviction that the purchasers were aware of the misrepresentations shortly after the sale and that their subsequent actions necessarily imply a waiver of their right to take advantage of their defective consent. The conduct of the purchasers, added to their complete silence towards the vendors, clearly implied confirmation of the deed of sale.

This same theory of tacit confirmation of a contract had also been applied by the Supreme Court of Canada earlier in La Compagnie J. A. Gosselin Ltée and J. G. Péloquin, [1957] S.C.R. 15. Counsel for the respondent also drew my attention to the decision of the Tax Court of Canada in Pallan v. M.N.R., [1990] 1 C.T.C. 2257, 90 D.T.C. 1102. On the same point, the confirmation of the contract, I also noted some interesting comments of Jean-Louis Beaudoin, now Mr. Justice Beaudoin, in his Traité sur les obligations, at pages 203 et seq.

On the evidence as a whole, I do not believe that there was tacit confirmation of the validity of the contract of June 26, 1985, by the actions or conduct of the appellant, in particular. The most important factor, on this point, with respect to the appellants conduct, which might constitute confirmation of the deed of June 26, 1985, was the fact that the appellant signed a document entitled "Notice to Trustee” [Translation], referred to earlier, in which it is true he did refer to the agreement signed on June 26, 1985, rather than to the agreement of January 16, 1985. In my opinion, this reference is of little importance, since in any event the appellant acknowledged at that time that the purchase price had been paid in full and that the trustee could deliver the share certificates in question, which he then held, to Mr. Lachance. Because the obligations of the trustee and the terms of payment of the purchase price were substantially the same as those set out in the contract of January 16, 1985, it was of little importance whether, in that document, the appellant referred to the contract of January 16, 1985 or to the contract of June 26, 1985 or to both at once. In any event, if we put ourselves in the position of the appellant, from whose point of view the contract of June 26, 1985 was a copy, with minor alterations, of the contract of January 16, 1985, it was more reasonable and more logical for the appellant, from this point of view, to refer to the contract of June 26, 1985 than to an earlier contract, even though, according to the appellant, it had been altered in respect of secondary points only. At best, this document, the "Notice to Trustee" [Translation], is equivocal, since it describes Mr. Benoit Lachance, and not the company, as the purchaser.

Moreover, as was clearly set out in the passage from the headnote of the Racicot decision, cited above, two conditions are necessary for the confirmation of a deed which is voidable: knowledge of the defect and intent to rectify it. Here, there is no evidence that during the 1985 taxation year, specifically, the appellant was aware of the defect in the deed of June 26, 1985 and intended to rectify such defect. However, it was the assessment for the 1985 taxation year which set aside the capital gain reported by the appellant and added $34,350 as deemed dividend to the income reported by the appellant, under subsection 84(3) of the Income Tax Act. This assessment therefore assumed that the contract of June 26, 1985 was valid and that the contract of January 16, 1985 was null.

Accordingly, I conclude that there was no tacit confirmation of the deed of June 26, 1985 during the years in issue, and particularly not during the 1985 taxation year. It follows that the contract of June 26, 1985 is null and therefore does not operate to transfer ownership of the shares to the company. Indeed, the nullity of the sale by the appellant of the shares in the company on June 26, 1985 flows from the application of Article 1487 of the Civil Code, which sets out the rule that the sale of a thing which does not belong to the seller is null, subject to the exceptions stated therein, which do not apply here.

Counsel for the respondent, when pressed with questions by the Court, seemed to acknowledge that the contract of January 16, 1985 took full effect as of the date it was signed, with respect to the transfer of the right of ownership of the shares in question. There was no clause in this contract, for example, providing for transfer of the right of ownership of the shares in question on a date subsequent to the signing of the contract.

Independently of what has just been said with respect to the theory of tacit confirmation of a contract and the application of this theory to the case at bar, I would like to note that the weight of the evidence tends to support the appellants position, that he believed that the effect of the agreement of June 26, 1985 was to alter non-essential aspects of the contract of January 16, 1985. I reach this conclusion even though the appellants position with respect to his misapprehension as to the legal nature of the deed of June 26, 1985 seems difficult to accept, at first glance, particularly on the part of an experienced legal practitioner. In asserting that the weight of the evidence seems to lend credibility to the appellant's version, I rely on the following facts, inter alia:

1. After the agreement of January 16, 1985, the appellant did not take part in any way in the management of the affairs of Audio Ciné Films; inter alia, he did not attend any meetings of the company's board of directors. However, he did take part in the management of the company for a number of years before that contract was signed.

2. The contract of January 16, 1985 indicates that the appellant received $1,000 when that contract was signed and then it seems other payments were made, probably amounting to $4,000, before the agreement of June 26, 1985 was signed, since the latter agreement states that the appellant had then received $5,000. We might then ask why the purchaser had paid these funds if he had not become the owner of the shares.

3. The document signed by Mr. Lachance on June 19, 1985, containing the text of a number of resolutions, states, inter alia, that the appellant and Mr. Bergeron, the sole shareholder in Granmont Inc., as has already been noted, had submitted their resignations to the company on January 19, 1985, three days after the contract of January 16, 1985 was signed. However, their resignation was not to take effect until June 19, 1985, according to the resolution signed by Mr. Lachance. These two resignations may be easily explained if the shares were sold by the appellant and Granmont Inc. on January 16, 1985.

4. It is also stated in the resolution referred to above that Mr. Lachance is the sole director of the company. According to the testimonial evidence, he was the sole director of the company after the contract of January 16, 1985 was signed. It is reasonable to believe that, by the operation of that contract, Mr. Lachance became the owner of the shares in question. Indeed, Mr. Lachance confirmed in his testimony that he considered himself to be the sole shareholder in the company after January 16, 1985.

5. It was not shown that the appellant might have had any fiscal or other interest in signing the contract of June 26, 1985, which made radical changes to the agreement of January 16, 1985. On the contrary, the contract of June 26, 1985 was clearly to the appellant's disadvantage in fiscal terms.

6. The contract of June 26, 1985 is very similar to the contract of January 16, 1985 in respect of the total purchase price, the terms of payment of the balance of the purchase price, and the obligations and rights of the trustee. The parties to the contract are the same, with one exception, as I noted earlier: the addition of the company Audio Ciné Films Inc., which was not a party to the first contract, but on whose behalf undertakings had been made in the contract of January 16, 1985, as I noted earlier.

7. No evidence was tendered to establish that the company and Mr. Lachance gave any indication or let it be understood, by their actions, that the contract of June 26, 1985 had replaced the contract of January 16, 1985 and that the parties involved considered the contract of January 16, 1985 to be non-existent or of no effect.

From my point of view, these facts, taken together, lend credibility to the conclusion that the appellant divested himself of ownership of his shares on January 16, 1985, in favour of Mr. Lachance, the share certificates having at that time been delivered to a trustee, and that the appellant had no reason or motive to take back ownership of his shares or to be a party to a contract by which he transferred the same shares again, this time to the company Audio Ciné Films Inc.

In conclusion, I am accordingly of the opinion that the agreement of June 26, 1985 did not operate to nullify the contract of January 16, 1985, which continues to have effect, inter alia, with respect to the transfer of the shares in question by the appellant to Mr. Lachance.

For these reasons, the appeals from the assessments are allowed with costs, and the assessments respecting the appellant for the 1985, 1986 and 1987 taxation years are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that during the 1985 taxation year there was only one valid disposition by the appellant of the shares which he held in the company Audio Ciné Films and that the said valid disposition was the disposition by the appellant in favour of Mr. Benoit Lachance under the contract dated January 16, 1985.

Appeal allowed.