[OFFICIAL ENGLISH
TRANSLATION]
Citation: 2012 TCC 336
Date: 20121105
Docket: 2008-3789(GST)G
BETWEEN:
DANIEL MARCOTTE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Rip, C.J.T.C.C.
[1]
These are the appeals
of Daniel Marcotte (Appellant) of the assessments issued under section 325
of the Excise Tax Act (ETA). Two notices of assessment dated
October 17, 2007 and a third one dated October 23, 2007 cover
the periods from April 1, 2004 to March 31, 2005, April 1, 2005
to March 31, 2006, and April 1, 2006 to December 31, 2006.
[2]
Mr. Marcotte is
the sole director and shareholder of the corporation 3634451 Canada Inc. (hereinafter
"JORA"), which specializes in the construction of buildings
consisting of 3 to 14 rental housing or condo-type units.
[3]
In the fall of 2003, the
Appellant informed Mr. Picard, an employee of the Ministère du Revenu du Québec (hereinafter "Revenu Québec"), about a
particular issue, namely that he was building five rental income buildings on
his behalf, on behalf of JORA and, I understand, on behalf of his brother Guy Marcotte
and Gail Maloney, a JORA employee, on adjacent lands. At the time, the
Appellant foresaw certain difficulties fulfilling his self-assessment obligations,
in accordance with the ETA, due to the fact that the buildings were clearly
going to be ready on different dates. In addition, since the five buildings had
been built on adjacent sites, it was difficult, even impossible, to divide up
the construction costs per building.
[4]
The evidence submitted shows
that negotiations had taken place between Mr. Marcotte, Ms. Maloney and Mr. Picard.
Moreover, it appears from a letter from Mr. Marcotte to Mr. Picard dated
January 19, 2004 that Mr. Marcotte and Ms. Maloney were
acting as representatives of JORA at the time and not on their own behalf.
[5]
According to the Appellant,
he had then agreed with Mr. Picard to treat the five buildings in question
as a housing complex. According to the agreement, the self-assessments for those
five buildings were all to be done by January 31, 2004.
[6]
On January 28, 2004,
the "GST New Residential Rental Property Rebate" forms for the five
buildings in question were sent to Revenu Québec. The GST and QST rebates, jointly,
amounted to $858,678.66.
[7]
After the forms were
sent, the Appellant instructed Revenu Québec to retain the input tax credits to
which he was entitled to act as a set-off. Those credits amounted to $349,162.91.
[8]
On August 18, 2004,
JORA issued a cheque to Revenu Québec in the amount of $500,000 to pay off the balance,
to within a few thousand dollars. That cheque was cashed by Revenu Québec on
August 19, 2004.
[9]
After dividing the
amount of the cheque into two portions of $250,000 each, intended as GST and
QST, Revenu Québec applied the entire amount of the cheque received against the
balance of JORA's account.
[10]
During the 2005 and 2006
taxation years, three dividends were paid by JORA to the Appellant, as follows:
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— on March 31, 2005
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$100,000
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— on March 31, 2006
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$100,000
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— on December 31, 2006
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$200,000
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[11]
The Appellant’s
attorney acknowledged that, for the purposes of the appeal, the three dividends
paid by JORA had been paid to a non-arm's length party.
[12]
On March 31, 2007,
Revenu Québec showed an amount of $53,691.14 standing to the credit of JORA with
respect to its GST balance.
[13]
In the summer of 2007, the
Appellant expressed the view that the $500,000 payment remitted on August 18, 2004
should not have been applied by Revenu Québec exclusively against JORA's tax
liabilities, but that part of the payment should have instead been applied
against the tax liabilities of Gale Maloney, Guy Marcotte, the
Appellant's brother, and the Appellant personally.
[14]
Thus, after being urged
by his brother and Ms. Maloney, the Appellant initiated negotiations in
October 2007 with Revenu Québec to modify the apportionment of the cheque cashed
on August 19, 2004.
[15]
Following the discussions
in October 2007, the apportionment accepted by the Appellant and made by Revenu
Québec on December 17, 2007 was as follows:
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Gale Maloney
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$ 61,852.79
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Daniel Marcotte
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$285,975.38
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Guy Marcotte
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$ 38,564.21
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3634451 Canada inc. (JORA)
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$113,607.62
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[16]
Following the new
apportionment of the $500,000 cheque in December 2007, Revenu Québec then made
a retroactive adjustment to JORA's GST balance. Based on the view that JORA's
tax liability had, accordingly, never been paid in full following the
August 18, 2004 payment, Revenu Québec then determined that, as at the
date when the three aforementioned dividends were issued, JORA was indebted to
the Respondent for the following amounts:
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— as at March 31, 2005
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$146,642.92
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— as at March 31, 2006
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$150,516.51
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— as at December 31, 2006
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$161,785.12
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[17]
Therefore, on
October 17, 2007, Revenu Québec issued two assessment notices to the
Appellant for $46,612.41 and $45,642.61 respectively, in accordance with
section 325 of the ETA. A third assessment notice was issued to the Appellant
on October 23, 2007 for $89,949.17, again under section 325 of the
ETA.
[18]
The Respondent based the
assessments at issue on the following presumptions and factual findings:
a) When each dividend was paid
to the Appellant by JORA, the Appellant was not at arm's length with JORA;
b) For the period from April 1, 2004
to March 31, 2005, even though JORA was indebted to the Respondent
for an amount exceeding that sum, it paid the Appellant an amount of $100,000 as
a common dividend;
c) Given that JORA's debt under paragraph b)
comes from two sources, namely, one debt owed to the provincial Crown and
another owed to the Respondent, the benefit received by the Appellant was established
in the same proportion as the amount that the JORA corporation owed the
Respondent through application of the ETA, such that the Appellant was assessed
for an amount of $46,612.41;
d) For the period from April 1, 2005
to March 31, 2006, even though JORA was indebted to the Respondent
for an amount exceeding that sum, it paid the Appellant an amount of $100,000 as
a common dividend;
e) Given that JORA's debt under paragraph d)
comes from two sources, namely, one debt owed to the provincial Crown and
another owed to the Respondent, the benefit received by the Appellant was established
in the same proportion as the amount that the JORA corporation owed the
Respondent through application of the ETA, such that the Appellant was assessed
for the amount of $45,642.61;
f) For the period from April 1, 2006
to December 31, 2006, even though JORA was indebted to the Respondent
for an amount exceeding that sum, it paid the Appellant an amount of $200,000 as
a common dividend;
g) Given that JORA's debt under paragraph f)
comes from two sources, namely, one debt owed to the provincial Crown and
another owed to the Respondent, the benefit received by the Appellant was established
in the same proportion as the amount that the JORA corporation owed the
Respondent through application of the ETA, such that the Appellant was assessed
for the amount of $89,949.17.
Issue
[19]
The only real issue in
these appeals, with respect to the three notices of assessment issued under
section 325 of the ETA, involves determining whether, at the time that each
of the three aforementioned dividends was paid to the Appellant, JORA was
liable for an amount under the ETA for the reporting period that includes the time of the transfer or for the
prior reporting periods.
[20]
Initially, the issue
identified in the written submissions revolved around the matter of whether a
salary in the form of a dividend could be assessed under section 325 of
the ETA. The Appellant contended that the work he performed for his company was
sufficient consideration. However, that argument was abandoned at the hearing. The
two parties then stated that the only remaining issue was the one described in
paragraph 19 herein.
Appellant's claims
[21]
The Appellant is of the
opinion that, if it had not been for the agreement negotiated between the parties
in October 2007 authorizing a new apportionment of the $500,000 paid by JORA
in August 2004, the Respondent would in no way have been able to claim
that, when each of the three dividends was paid to the Appellant, JORA was
liable for an amount under the ETA for the reporting period that
includes the time of the transfer or for the prior reporting periods.
[22]
The Appellant points
out that, on March 31, 2007, Revenu Québec showed an amount of $53,691.14
standing to the credit of JORA with respect to its GST balance. JORA had that
positive balance until the amounts arising from the new apportionment in October 2007
were redistributed, which was done on December 17, 2007.
[23]
The Appellant therefore
maintains that no amount of money was owed by JORA to the Respondent until the
time when the Minister carried out the new apportionment, i.e. in
December 2007. Thus, the Appellant claims that no amount of money was owed
by JORA to the Respondent at the time when the dividends were paid to the
Appellant in March 2005, March 2006 and December 2006.
Respondent's claims
[24]
The Respondent first
points out that it was specifically on the Appellant's prompting that a new
apportionment of the $500,000 payment was accepted in October 2007 and
carried out in December of the same year.
[25]
The Respondent also
stresses that there had never been a true final and irrevocable payment of JORA's
debt. The Respondent is of the opinion that the evidence, in the form of an admission
by the Appellant, shows that the $500,000 payment had never been made
exclusively for the purpose of paying off JORA's debt, in that one part of it
should instead have been applied against the tax liabilities of Gale Maloney,
Guy Marcotte and the Appellant personally.
[26]
The Respondent believes
that the evidence shows that JORA's intention on August 18, 2004 was not
to pay off its tax liabilities.
[27]
The Respondent
therefore maintains that, when the dividends were issued, JORA's tax liability
was $146,642.92 on March 31, 2005, $150,516.51 on March 31, 2006,
and $161,785.12 on December 31, 2006 and that, consequently, the
notices of assessment of October 17, 2007 and October 23, 2007
for $46,612.41, $45,642.61 and $89,949.17, respectively, are in keeping with
section 325 of the ETA.
Analysis
[28]
Subsection 325(2)
of the ETA enables the taxation authorities to assess a transferee in respect
of any amount payable by reason of section 325. Subsection 325(1) sets out
the circumstances in which it may be applied. It is worded as follows:
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325.(1) Where at any time a person transfers property, either
directly or indirectly, by means of a trust or by any other means, to
(a) the transferor’s spouse or common-law partner or an
individual who has since become the transferor’s spouse or common-law
partner,
(b) an individual who was under eighteen years of age,
or
(c) another person with whom the transferor was not
dealing at arm’s length,
the transferee and transferor are jointly and
severally liable to pay under this Part an amount equal to the lesser of
(d) the
amount determined by the formula
A - B
where
A is the amount, if any, by which the fair
market value of the property at that time exceeds the fair market value at
that time of the consideration given by the transferee for the transfer of
the property, and
B is the amount, if any, by which the
amount assessed the transferee under subsection 160(2) of the Income Tax Act in respect of the property exceeds the amount paid by the transferor in respect of the amount so assessed, and
(e) the
total of all amounts each of which is
(i) an amount that the transferor is liable to pay or remit
under this Part for the reporting period of the transferor that includes that
time or any preceding reporting period of the transferor, or
(ii) interest or penalty for which the transferor is liable as
of that time,
but nothing in this subsection limits the liability of
the transferor under any provision of this Part.
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325(1) La personne qui transfère un
bien, directement ou indirectement, par le biais d'une fiducie ou par tout
autre moyen, à son époux ou conjoint de fait, ou à un particulier qui l'est
devenu depuis, à un particulier de moins de 18 ans ou à une personne avec
laquelle elle a un lien de dépendance, est solidairement tenue, avec le
cessionnaire, de payer en application de la présente partie le moins élevé
des montants suivants:
a) résultat du calcul suivant:
A
- B
où :
A représente l'excédent éventuel de la juste
valeur marchande du bien au moment du transfert sur la juste valeur
marchande, à ce moment, de la contrepartie payée par le cessionnaire pour le
transfert du bien,
B l'excédent éventuel du montant de la cotisation
établie à l'égard du cessionnaire en application du paragraphe 160(2) de la Loi
de l'impôt sur le revenu relativement au bien sur la somme payée par le
cédant relativement à ce montant;
b) le total des montants représentant
chacun :
(i) le montant dont le cédant est
redevable en vertu de la présente partie pour sa période de déclaration qui
comprend le moment du transfert ou pour ses périodes de déclaration
antérieures,
(ii) les intérêts ou les pénalités
dont le cédant est redevable à ce moment.
Toutefois, le présent paragraphe ne limite en rien la
responsabilité du cédant découlant d'une autre disposition de la présente
partie.
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[29]
The constituent elements
of section 325 of the ETA are similar to those found in section 160 of the
Income Tax Act. The transferor must first and foremost have a tax
liability at the time of the transfer.
[30]
As my colleague Judge Angers
indicated in Michel Beauchamp v. The Minister of National Revenue,
2008 TCC 420, at paragraph 12, the tax liability for the purpose
of section 325 is "the amount that the transferor owes under the ETA for
the reporting period in which the transfer took place and for the prior
reporting periods of the transferor." The ETA also provides for monthly
and quarterly reporting periods.
[31]
However, in the present
case, JORA had no liability under the ETA for its reporting periods including
the dates that the dividends were issued, or for its prior reporting periods. In
fact, JORA did not become liable to pay any amount under the ETA until the date
when the negotiations for the new application of the $500,000 payment began, which
was in October 2007.
[32]
In my view, part of the
solution to the issue at hand is found in the Civil Code of Québec (hereinafter
the "CCQ"). The relevant sections are worded as follows:
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1564 Where the debt consists of a sum of money, the debtor
is released by paying the nominal amount due in money which is legal tender
at the time of payment.
He is also released by remitting the amount
due by money order, by cheque made to the order of the creditor and certified
by a financial institution carrying on business in Québec, or by any other
instrument of payment offering the same guarantees to the creditor, or, if
the creditor is in a position to accept it, by means of a credit card or a
transfer of funds to an account of the creditor in a financial institution.
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1564 Le débiteur d'une somme d'argent est libéré par la
remise au créancier de la somme nominale prévue, en monnaie ayant cours légal
lors du paiement.
Il est aussi libéré par la remise de la somme prévue au moyen d'un
mandat postal, d'un chèque fait à l'ordre du créancier et certifié par un
établissement financier exerçant son activité au Québec ou d'un autre effet
de paiement offrant les mêmes garanties au créancier, ou, encore, si le
créancier est en mesure de l'accepter, au moyen d'une carte de crédit ou d'un
virement de fonds à un compte que détient le créancier dans un établissement
financier.
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1568. A debtor who pays his debt is entitled to an acquittance
and to the turning over of the original title of the obligation.
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1568. Le débiteur qui paie a droit à une quittance et à la remise du
titre original de l'obligation.
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1671. Obligations are extinguished not only by the causes of
extinction contemplated in other provisions of this Code, such as payment,
the expiry of an extinctive term, novation or prescription, but also by
compensation, confusion, release, impossibility of performance or discharge
of the debtor.
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1671. Outre les autres causes d'extinction prévues ailleurs dans ce
code, tels le paiement, l'arrivée d'un terme extinctif, la novation ou la
prescription, l'obligation est éteinte par la compensation, par la confusion,
par la remise, par l'impossibilité de l'exécuter ou, encore, par la
libération du débiteur.
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[33]
Among the facts in this
case, the $500,000 cheque issued on August 18, 2004 by JORA to Revenu
Québec was not accompanied by any specific instructions regarding how the payment
should be applied. It was a cheque from JORA. In the negotiations between Mr. Marcotte
and Mr. Picard in 2004, Mr. Marcotte was acting as a representative
of JORA and not on his own behalf or on behalf of his brother or Gail Maloney.
[34]
On August 19, 2004,
when the cheque was cashed, Revenu Québec applied the entire amounts received
against JORA's tax liabilities.
[35]
Revenu Québec then issued
a statement of account showing an amount of $53,691.14 to the credit of JORA with
respect to its GST balance.
[36]
It was not until the
summer of 2007 that the Appellant, after receiving the assessments at issue,
expressed dissatisfaction regarding how the $500,000 were originally apportioned
in 2004. For three years, nobody questioned the fact that the payment in 2004 was
a payment from JORA.
[37]
However, as indicated
in the first paragraph of section 1564 of the CCQ, the
debtor of a sum of money is released by paying the creditor the nominal amount due.
[38]
When the Appellant
first expressed dissatisfaction regarding the apportionment of the $500,000, in
the summer of 2007, he had to be considered as having already implicitly agreed
to a release regarding the payment's initial apportionment.
[39]
In Trudel v. National
Bank of Canada, 2006 QCCS 1172, the Superior Court of Québec states, firstly,
that section 1568 of the CCQ is a generality for any
form of liability and, secondly, that a release given by a creditor does not
necessarily have to take a certain form. (See paragraphs 28 and 29.)
[40]
The statement of
account issued by Revenu Québec clearly indicated JORA's new GST balance and
unequivocally showed the use of the amounts received. That statement of account
was very definitely available to the Appellant, who could have challenged Revenu
Québec's apportionment, if he had seen fit to do so. However, the Appellant
instead chose to remain silent for more than three years.
[41]
As a result, the
updating of JORA's file with respect to GST inevitably amounted to a release, within
the meaning of the CCQ, made by Revenu Québec. The Appellant's extended silence,
as JORA's sole shareholder and director, had to be perceived as implied acceptance
of the release.
[42]
Since payment is a cause
for release from debt specifically provided for in the CCQ, JORA's tax liabilities
were extinguished following the cashing of the cheque in August 2004.
[43]
The fact that discussions
undertaken in the fall of 2007 gave rise to a new apportionment of the funds in
no way changes the fact that, when the dividends were paid, JORA's tax
liability was indeed extinguished. The change in the payment's application as subsequently
granted by Revenu Québec could have given rise to a new tax liability, but that
"new liability" started to accrue in the fall of 2007, which was when
the parties reached an agreement.
[44]
Therefore, I am of the
opinion that, when JORA paid the dividends to the Appellant in March 2005, March
2006 and December 2006, it was not liable for an amount under the ETA for its
reporting period that includes the time of the transfer
or for its previous reporting periods.
[45]
The notices of
assessment issued under section 325 of the ETA were therefore unfounded, and
the appeals are allowed without costs. The parties are required to provide the
Court with written submissions regarding the awarding of costs in these appeals
by October 25, 2012.
[46]
The
outcome of this judgment may seem unfair for the taxation authorities. After
all, the Appellant's success is attributable to the acceptance, by the taxation
authorities and by the Appellant himself, of JORA's entire 2004 payment being
applied to the balance of JORA's account. However, three years later, Revenu
Québec restructured the payment to the Appellant's advantage and to JORA's detriment,
without JORA's apparent approval.
Signed at Ottawa, Canada, this 5th day of
November 2012.
“Gerald J. Rip”
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