Date: 20000307
Dockets: 98-1202-IT-G; 98-903-IT-G
BETWEEN:
DO HEE LIM, MICHEL D. LECOURS,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent,
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] These appeals were heard on common evidence. The appeal in
the case of Michel Lecours concerns the 1989 taxation year,
while the taxation year in issue in Do Hee Lim's
case is 1993.
[2] The point at issue in both appeals is whether, in
circumstances in which shares are issued and subscribed for as
fully paid in consideration of past services, this consideration
must be included in the income of the person to whom the shares
are issued.
[3] According to paragraph 17 of the Reply to the Notice
of Appeal (the "Reply"), the facts considered by the
Minister of National Revenue (the "Minister") in the
case of Michel Lecours are as follows:
[TRANSLATION]
(a) The appellant was the shareholder and director of New Asia
Investment Corporation Inc. and New Asia Management Corporation
Inc. during the period in issue;
(b) On July 21, 1989, the appellant received
14 common shares of New Asia Investment Corporation Inc. in
consideration of professional services which the appellant had
rendered to the corporation;
(c) The stated capital of these 14 common shares was
$100,000;
(d) Again on July 21, 1989, the appellant sold these
14 shares of New Asia Investment Corporation Inc. to New
Asia Management Corporation Inc. and received as consideration
100,000 common shares of New Asia Management Corporation
Inc.;
(e) The stated capital of these 100,000 common shares was
$100,000;
(f) The 14 common shares of New Asia Investment
Corporation Inc. were worth $100,000 on July 21, 1989;
(g) The appellant knowingly, or under circumstances amounting
to gross negligence, failed to include the fair market value of
these 14 common shares in his income in his return of income
for the 1989 taxation year, resulting in the assessment of a
penalty under subsection 163(2) of the Income Tax
Act;
(h) The appellant made a misrepresentation attributable to
neglect, carelessness or wilful default or committed a fraud in
filing his return of income for the 1989 taxation year.
[4] The facts assumed in making the reassessment of
Do Hee Lim are set out in paragraph 12 of the
Reply as follows:
[TRANSLATION]
(a) The appellant provided her professional services to New
Asia Investment Corporation Inc.;
(b) The commissions for the appellant's services were paid
in accordance with the terms set out in the agreement signed on
September 17, 1990 between the appellant and New Asia
Investment Corporation Inc.;
(c) Under that agreement, on September 2, 1993, the
appellant received 12 Preferred Series II shares of New
Asia Investment Corporation Inc. in consideration of the
professional services that she had rendered to the
corporation;
(d) The stated capital of these 12 Preferred
Series II shares was $200,000;
(e) The 12 Preferred Series II shares were worth
$200,000 on September 2, 1993.
[5] The witnesses in this case were the appellants,
Louis Lockhead, an assistant vice-president at Montreal
Trust, Réjean Bouchard, trustee in the bankruptcy of
New Asia Management Corporation Inc., and Dae Geun Kim,
owner of an oriental grocery store in Côteau du Lac.
René Parenteau, an auditor with Revenue Canada,
testified at the request of counsel for the respondent. As some
of the testimony was not relevant to the point at issue, I will
report only the testimony that was relevant.
[6] Two books of documents were filed as
Exhibits I-1 and I-2 respectively. Exhibit I-1
concerns Michel Lecours, and Exhibit I-2,
Do Hee Lim. The appellant filed 13 exhibits.
[7] Michel Lecours explained to the Court that he was the
sole shareholder of both corporations, New Asia Investment
Corporation Inc. and New Asia Investment Corporation Inc. The two
corporations had been incorporated in order to participate in the
immigrant investor program introduced by the Government of
Quebec. The corporations operated in the field of time-share
condominium units.
[8] In 1989, Michel Lecours subscribed for the capital
stock of New Asia Investment Corporation Inc. in the amount of
$100,000. This $100,000 subscription is described at tab 13
of Exhibit I-1:
. . .
I hereby subscribe for and agree to take up, fourteen (14)
common shares in the capital of your Corporation the amount of
one hundred thousand dollars ($100,000) in full payment of the
said common shares be added to the stated capital in payment for
professional services which I have rendered to the
Corporation.
. . .
[9] This subscription was accepted for New Asia
Investment Corporation Inc. on July 21, 1989 by
Michel Lecours, who was its sole shareholder (tab 13,
Exhibit I-1). The appellant Lecours suggested that the
shares had not been issued for past services but for future
services. He explained that he had devoted a great deal of time
to and made a number of trips for the business once it was
incorporated. He filed no documentary evidence concerning revenue
and expenditure for professional services past or future.
[10] In 1994, the appellant Lecours claimed a business
investment loss in the amount of the $100,000 subscription,
relying on the exhibit described in paragraph 8 of these
Reasons as evidence of the purchase of the shares. At the
hearing, he did not seek to amend this claim.
[11] In the case of Do Hee Lim, counsel for the
respondent relied on the agreement at tab 8 of
Exhibit I-2 by which New Asia Management Corporation
Inc. retained the services of Do Hee Lim and confirmed
the commission that would be paid to her on investments made by
immigrant investors or immigrant entrepreneurs on the date the
money was transferred to the project. Counsel for the respondent
also relied on a resolution of the board of directors of New Asia
Investment Corporation Inc. granting Do Hee Lim a
certificate for 12 preferred shares in consideration of a
sum of $200,000 plus other consideration. This resolution, which
appears at tab 10 of Exhibit I-2, reads as
follows:
. . .
THAT, in consideration of a sum of 200 000 $ plus
other consideration transferred to the corporation, a certificate
of twelve (12) Preferred Series II shares be issued to and in
favour of Mrs. Do Hee Lim and that the proper corporate
inscriptions be done to that effect.
. . .
[12] This resolution was accepted by the corporation's
sole shareholder, Michel Lecours, on September 2, 1993
(Exhibit I-2, tab 10). Counsel for the respondent also
relied on the transcript of an examination of
Do Hee Lim conducted in another legal proceeding. This
was an examination conducted under article 544 of the
Code of Civil Procedure, in which Do Hee Lim admitted that
the shares had been assigned to her for $200,000 in payment of
commissions which were owed her under the aforementioned
agreement.
[13] The Minister added this amount of $200,000 in computing
Ms. Lim's income for 1993. However, the Minister's
office considered that, under paragraphs 50(1)(b),
39(1)(c) and 38(c), the appellant Lim had incurred
for 1994 a deductible business investment loss of $131,648 out of
the $200,000 amount of the subscribed shares. This loss was
considered in computing Ms. Lim's income for 1993.
Despite this loss carry-back, the appellant Lim's taxable
income for 1993 increased from $11,075.96 to $77,289. The
appellant Lim did not claim the loss for 1994.
[14] According to the financial statements of New Asia
Investment Corporation Inc., which were filed at tabs 11 and
12 of Exhibit I-2 and tabs 15 and 17 of
Exhibit I-1, in 1992 and 1993, the corporation
incurred net losses of $2,096 and $44,893 respectively. For the
period ending on October 23, 1994, the loss was $34,733.
There was no expert report to prove the $100,000 and $200,000
values stated in subparagraphs 17(f) and 12(e) of the
Replies. The appellants both asserted that the shares had no
actual or market value in 1989 and 1993. No evidence was adduced
to the contrary.
[15] The appellant Lecours claimed that if he had handed over
an immovable in exchange for the shares, the cost of the shares
would not have been added to his income. In addition, he
continued to contend that the shares were not issued to him for
past services but for future services.
[16] The appellant Lim stated that she had in fact rendered
services to the corporation. She had accepted the issued shares
because they were a form of recognition of the value of the
services she had so provided. (It may be useful to note that she
was the spouse of the appellant Lecours at the time.) However,
the appellant Lim knew perfectly well that the issued shares had
no actual value. She also asserted that it was not she who had
claimed the business investment loss in 1994 and that she had in
fact objected to that claim.
[17] Counsel for the respondent argued that, in 1989, the
appellant Lecours had received shares issued and subscribed for
in the amount of $100,000 as consideration for services rendered.
The appellant Lecours never filed a statement of his revenue and
expenditures with respect to his professional services. In those
circumstances, the total amount of $100,000 must be included in
his income. It should also be noted that the appellant Lecours
claimed the acquisition cost of the shares as a business
investment loss in 1994. As to the appellant Lim, counsel for the
respondent argued that she had accepted the issued shares as
payment for services she had rendered to the corporation and that
that payment must therefore be included in her income.
Analysis
[18] The corporations concerned were incorporated under the
Canada Business Corporations Act. Subsections 25(3)
and (4) of that Act read as follows:
25(3) [Consideration] A share shall not be issued until
the consideration for the share is fully paid in money or in
property or past services that are not less in value than the
fair equivalent of the money that the corporation would have
received if the share had been issued for money.
25(4) [Consideration other than money] In determining
whether property or past services are the fair equivalent of a
money consideration, the directors may take into account
reasonable charges and expenses of organization and
reorganization and payments for property and past services
reasonably expected to benefit the corporation.
[19] In La compagnie au Québec, Volume I,
Wilson & Lafleur, Martel Ltée publisher, the paragraph
entitled [TRANSLATION] "Shares issued for consideration
other than money", reads as follows, at
page 14-16:
[TRANSLATION]
. . . the company may also accept property or services in lieu
of money as consideration for the shares it issues. In that case,
the directors must determine by resolution that the property or
services offered represent the "fair equivalent" of
money up to the total nominal amount of the shares to be issued.
Only if the goods or services constitute this "fair
equivalent" can the company issue the shares as fully
paid. . . .
. . .
The company may issue fully-paid shares only for a
consideration of actual and present property or actual past
services. It may not issue shares in return for future services,
for example. . . .
[20] As just stated, a corporation may accept property or
services in lieu of money as consideration for the shares it
issues. I will first summarily dispose of the matter regarding an
immovable or property, since this is an argument to which the
appellant Lecours appeared to be attached. The appellant Lecours
referred to no provisions of the Income Tax Act (the
"Act") and, from my reading and understanding of
the Act, I am not certain there are no tax consequences
when ownership of an immovable or property is transferred from an
individual to a corporation.
[21] As to the issuing of shares for services, the passage
cited in paragraph 19 of these Reasons states that, in
corporate law, shares may not be issued as fully paid unless the
services have actually been rendered. I did not see any
discussion in that text of the tax consequences of such an issue,
and at the hearing I was not informed regarding accounting
practice with respect to this practice which is common in
corporate law.
[22] Must a person include in his income the consideration for
the past services for which the shares were issued?
[23] Subsection 25(1) of the Canada Business
Corporations Act reads as follows:
[Issue of shares] Subject to the articles, the
by-laws and any unanimous shareholder agreement and to
section 28, shares may be issued at such times and to such
persons and for such consideration as the directors may
determine.
[24] The text cited in paragraph 19 of these Reasons
states at page 12-17:
[TRANSLATION]
1 — Freedom as to the issue price. There can be
no discount or premium on the sale of this share since its issue
price is not determined by the company's instrument of
incorporation. The setting of this price is left to the board of
directors' discretion.
[25] The setting of the issue price of the shares is left to
the directors' discretion. It therefore seems clear that the
setting of the issue price of the shares does not determine the
market value of the shares issued. In any case, counsel for the
respondent ignored the notion of actual or market value.
Certainly, in my view, if the market value of the issued shares
had been equal to their issue price, the parties would not be
before this Court.
[26] When the shares have a definite market value, the answer
to the question under consideration will without a doubt be
affirmative. In the case of shares having no value, I believe the
reasoning that must be used to decide this kind of question will
depend on the taxpayer's conduct. If the shareholder shows by
his actions that the acquisition cost of the shares is the amount
of the consideration given for past services, he will have to
include in his income the amount he received for past services at
the time the shares were purchased. If he has incurred expenses
in order to earn this income, the onus will be on him to
establish their amount, if those expenses are deductible. I will
say here that whether payment was made for future services as the
appellant suggests (although this is not permitted in corporate
law, as stated in paragraphs 19 and 21 of these Reasons) or
for past services, there would be no difference in the tax
treatment of the transaction.
[27] If, however, at the time of disposition of the shares,
either actual, or deemed as a result of the corporation's
bankruptcy or insolvency, a shareholder does not report an acquisition cost of the shares which is
equivalent to past services, he will not have to include the
consideration for past services in his income. It seems to me
that one way to proceed for a shareholder wishing to ensure that
an issue of shares for past services has no tax consequences
would be to state in the share purchase document that, for tax
purposes, the cost of the shares is nil. That was not done in
this case. However, this omission does not necessarily determine
the outcome of these appeals: in my opinion, the taxpayer's
subsequent conduct must be considered.
[28] I used this type of reasoning in Beck v. M.N.R.,
[1992] 2 C.T.C. 2085, and in Orlando v. The Queen,
99 DTC 1201. In the first decision, the taxpayer asked that
no account be taken of the payment of a claim which he held
against a corporation, which payment was made by the issue in
1984 of shares of that corporation which, according to him, were
of no value. In 1983, the taxpayer had deducted the amount of
that claim as a bad debt. The Minister added it to his income for
1984 since, according to a document signed in 1984, the taxpayer
had accepted the share issue in payment of his claim. In 1989,
the appellant claimed, in respect of those shares, a business
investment loss in the amount of the debt paid by their issue. I
held that, as a result of the appellant's conduct in claiming
the loss in 1989, the consideration paid to the appellant through
the shares issued indeed represented the value of the cancelled
debt. However, in the second decision, Orlando, supra, I
held that, by his actions, the appellant had shown that he
considered as nil the acquisition cost of shares issued and
subscribed for in payment of advances made by the taxpayer to the
corporation. The normal principle would have been that shares of
no value cannot constitute payment of a debt unless, as a result
of the taxpayer's actions, the acquisition cost of the shares
becomes the consideration for which the shares were issued and
subscribed.
[29] In the instant cases, we are dealing with one situation,
that of Mr. Lecours, which is similar to that in
Beck, supra, and another, that of
Do Hee Lim, which is similar to that in Orlando,
supra. In 1994, Mr. Lecours claimed a business
investment loss based on the amount of $100,000. He thus felt
that he had actually paid $100,000 to acquire the shares, namely
the consideration he received in 1989 for his services.
Do Hee Lim did not act in the same manner. Although she
received shares with an issue price of $200,000 in 1993, she
claimed no business investment loss in the year of the
corporation's bankruptcy. It was the Minister's officer
who included a claim for that amount for her in 1994. He did so,
one might think, in view of the enormity of adding $200,000 to
the appellant's income in 1993 for shares which had no market
value.
[30] In the case of Mr. Lecours, I must also decide
whether the penalty assessed for 1989 under
subsection 163(2) of the Act is justified. Having
heard the evidence, I am of the view that what was involved was
more a lack of understanding on the appellant's part, of the
effect that the issue of these shares in payment of past services
would have on his personal income than any genuinely malicious
intent. It is therefore not appropriate to apply
subsection 163(2) of the Act. However, the appellant
made a misrepresentation in 1989 and the Minister thus had the
power to reassess for that year, which otherwise would have been
outside the normal assessment period.
[31] The appeal of Mr. Lecours is allowed to the extent
of setting aside the penalty but in no other respect. Do Hee
Lim's appeal is allowed. The whole without costs.
Signed at Ottawa, Canada, this 7th day of March 2000.
"Louise Lamarre Proulx"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
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