Date: 20060316
Docket: A-637-04
Citation: 2006 FCA 113
CORAM: DESJARDINS
J.A.
LÉTOURNEAU
J.A.
NOËL
J.A.
BETWEEN:
PLOMBERIE
J.C. LANGLOIS INC.
Appellant
and
HER MAJESTY
THE QUEEN
Respondent
REASONS FOR JUDGMENT OF THE
COURT
NOËL J.A.:
[1]
This is an
appeal from a decision by Lamarre-Proulx J. of the Tax Court of Canada,
dated November 2, 2004, upholding the notices of assessment made under the
Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1 (the “Act”) for the
appellant’s taxation years 1995 to 1998.
[2]
The
question in issue is whether René Simoneau “controlled, directly or indirectly
in any manner whatever” the appellant within the meaning of paragraph 256(1)(b)
of the Act during the relevant period. If that was the case, the appellant must
share the deduction for small businesses with several other companies which are
also controlled by René Simoneau.
[3]
An
exhaustive review of the facts is not necessary. Suffice it to say for our
purposes that René Simoneau controlled several companies which operated under
the name of Groupe Simoneau. Through an investment company, he also held 50% of
the appellant’s shares, while the other 50% was held by Richard Hallas, who
took care of day-to-day operations.
[4]
At its
name indicates, the appellant operated in the field of plumbing, which was a
complementary activity to that of the other companies held by René Simoneau.
[5]
It is
obvious that René Simoneau did not have the legal control of the appellant,
because Mr. Hallas held 50% of the shares. The question that arose before
the Tax Court of Canada was whether, in spite of this lack of legal control,
René Simoneau still controlled the appellant within the broader concept of
corporate control in subsection 256(5.1):
|
256(5.1)
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 . . . .
|
256(5.1)
Pour l’application de la présente loi, lorsque l’expression « contrôlée
directement ou indirectement de quelque manière que ce soit », est
utilisée, une société est considérée comme ainsi contrôlée par une autre société,
une personne ou un groupe de personnes—appelé « entité dominante »
au présent paragraphe—à un moment donné si, à ce moment, l’entité dominante a
une influence directe ou indirecte dont l’exercice entraînerait le contrôle
de fait de la société […]
|
[6]
After
having considered the evidence, the judge of the Tax Court of Canada concluded
that René Simoneau had de facto control over the appellant during the
relevant period. To come to this conclusion, she put a lot of emphasis on the
fact that René Simoneau was the sole director of the appellant and, as such,
had the last say in any decisions to be made (Reasons, paragraphs 36 and 38 to
40).
[7]
In support
of its appeal, the appellant above all criticized Lamarre-Proulx J. for having
concluded that Mr. Simoneau had the dominant role as a sole director without
taking into consideration the unanimous shareholder agreement signed by the two
shareholders (Duha Printers (Western) Ltd. v. Canada, [1998] 1
S.C.R. 795 at paragraph 71). Even if René Simoneau was the sole director, the
unanimous shareholder agreement neutralized his ability to exercise de facto
and de jure control over the appellant. According to the appellant,
the judge of the Tax Court of Canada erred in law, because she reached this
conclusion without taking this agreement into consideration.
[8]
In
addition, the appellant submitted that the division of functions between René
Simoneau and the other shareholder was in compliance with the business plan.
René Simoneau was a proficient director and took care of the administrative
tasks. Richard Hallas was a plumbing expert and took care of the appellant’s
day-to-day operations.
[9]
According
to the appellant, the judge of the Tax Court of Canada misunderstood its
business plan and the importance of the role played by Richard Hallas when she
concluded that the appellant was subject to the de facto control of René
Simoneau. Richard Hallas was just as important as Mr. Simoneau as far as
the decisions made by the appellant were concerned, and he had just as much influence
over it.
Decision
[10]
As far as
the first ground of appeal is concerned, I do not think that the judge of the
Tax Court of Canada ignored the unanimous shareholder agreement. She well
understood that this agreement as drafted respected the equal division of the
appellant’s share capital and did not benefit one shareholder to the detriment
of the other. However, the trial judge was of the opinion that this agreement
was to be given little importance, because the parties did not comply with it.
For example, she mentioned that clauses 5 and 6 of the unanimous shareholder
agreement concerning the financial contribution of the shareholders had been
totally ignored (Reasons, paragraph 32).
[11]
Counsel
for the appellant conceded this fact but submitted that this omission was
exceptional. According to him, the rest of the agreement was respected.
[12]
With
respect, this is not what the evidence showed. For example, the unanimous
shareholder agreement specified that any decision made that was not within the
ordinary course of the appellant’s business had to be approved by unanimous
resolution. No such resolution was submitted, in spite of the evidence which
showed that René Simoneau made numerous unusual transactions, disguised as
large advances, loans and suretyships, on behalf of the appellant with the
other members of the group of companies he controlled.
[13]
More
specifically, the judge of the Tax Court of Canada mentioned the advances made
by the appellant to companies of the Groupe Simoneau, without any interest or repayment
terms, in the amount of $84,106 in 1997. Similar advances in a total amount of
$53,500 were noted in the financial statements for the year 1998.
[14]
The first
judge also mentioned that the appellant was a surety for loans contracted by
the Groupe Simoneau companies for an amount of $1,969,707 as at April 30, 1997.
The amount for which the appellant stood surety was $1,859,225 as at April 30, 1998.
[15]
These
transactions, which on their face had the effect of diluting the appellant’s
assets, were not approved by resolution. In addition, apart from repeating that
he trusted Mr. Simoneau, Mr. Hallas did not explain why he was willing to
jeopardize the appellant’s assets to guarantee the debts of companies in which
he held no shares or why he would have allowed the appellant to make loans to
Mr. Simoneau’s companies without interest or repayment terms.
[16]
The
evidence clearly shows that the unanimous shareholder agreement was not
respected in its essential aspects and that the judge of the Tax Court of
Canada correctly gave it little significance.
[17]
It is also
inaccurate to say that the trial judge misunderstood the role played by Mr.
Hallas. As she explained in paragraph 38 of her reasons, as the appellant’s
principal manager, Mr. Hallas played a very important role. However, this was
an operational role, not a decision-making one.
[18]
I believe
that the evidence allowed the trial judge to conclude that, in spite of the
equal division of the appellant’s share capital, Mr. Simoneau was the
“controller” of the appellant within the meaning of subsection 256(5.1) and
exercised de facto control over it.
[19]
I would
dismiss this appeal with costs.
“Marc
Noël”
“I
concur.
Alice Desjardins, J.A.”
“I
concur.
Gilles Létourneau, J.A.”
Certified
true translation
Michael
Palles
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