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Citation: 2007TCC599
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Date: 20071205
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Docket: 2006-445(IT)G
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BETWEEN:
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3087-8730 QUÉBEC 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
Angers J.
[1] On November 12, 2003, the Minister of National
Revenue ("the
Minister") assessed the Appellant 3087-8730 Québec Inc. (hereinafter
"3087") under section 160 of the Income Tax Act ("the
Act") in the amount of $42,000. The assessment was made because of a non-arm's
length transfer of assets on January 23, 1995. The transferor, according to the
Minister, is Transport et Excavation MNM Inc. (hereinafter "MNM"). 3087
duly objected to the assessment and has now appealed from it before this Court.
[2] In its pleadings, 3087 had cited the
limitation period as a ground of appeal, but it informed the Court at the
outset of the hearing that it was abandoning this ground. The Appellant
likewise acknowledged the existence of a non-arm's length relationship between
it and MNM, in that the principal shareholders of both companies are spouses
and the market value of the transferred assets, $42,000, is no longer at issue
in the case at bar. According to the Appellant, the issue is whether MNM was
the owner of the assets at the date of the transfer, and, if it was, whether
the Appellant may deduct from the $42,000 the payments it made on the assets
after their acquisition.
[3] The assets in question are a 1987 Case
excavator, model 580K, bearing serial number 17421011 (hereinafter "the
580K") and a 1986 Case excavator, model 125B, bearing serial number
1274589 (hereinafter "the 125B").
[4] It is also admitted that at the time
of the transfer, MNM owed the Minister in unpaid taxes, penalties and interest
an amount greater than the value of the transferred assets; that amount was $88,688.49
at the time the assessment was made on November 12, 2003. MNM ceased operating a
business in 1990 and did not file income tax returns for the 1989 and 1990
taxation years.
[5] 3087 was incorporated on April 6,
1993. According to its majority shareholder, Mary Hutow, 3087 owned only three assets
in 1993, 1994 and 1995: a semitrailer and the 125B and 580K excavators. The
value of those assets, according to the financial statements of 3087, was $100
as at July 31, 1993, $24,311 before
depreciation as at July 31, 1994, and $24,940 before depreciation as at July 31, 1995. I should point out that, under
long-term liabilities in the financial statements, a loan from Credit Case
appears only in the balance sheet dated July 31, 1995. The balance sheet dated July 31, 1994 refers to a bank loan and there is
no long-term debt in the balance sheet dated July 31, 1993, other than an
amount owing to the director.
[6] Ms. Hutow testified that she purchased
the 125B and 580K excavators from Credit Case and made payments on these assets
to Credit Case starting November 5, 1993. She filed a series of nine cheques dating from November 5, 1993 to
June 30, 1995: the first five
are in identical amounts, $2,787.32; the last three, made in June 1995, are for
$1,498.96; and one more, for $2,392.80, was made on December 8, 1994. The
cheques bear a Credit Case account number and, according to Ms. Hutow, are related
to her purchase contract for the two excavators. She was unable to produce her
contract with Credit Case to purchase the 125B and 580K excavators, but she claimed
that she had signed a contract similar to the one in Exhibit A-3. That is a
standard contract with a clause to the effect that Credit Case retains its
ownership until all amounts owing by the purchaser have been paid in full.
[7] She explained, and acknowledged, that
these two excavators had been purchased by MNM in the past and that they had
been covered by a similar financing contract with Credit Case. She also stated
that Credit Case had repossessed the two excavators close to two years before
she made her purchase.
[8] When 3087 made its final payment on June 30, 1995, therefore, it became the owner of
the two excavators, Ms. Hutow said. She subsequently traded the 125B excavator
in 1997 for another asset and a consideration of $18,000 and she also traded
the 580K excavator in April 1998 for a consideration of $24,000. These two
amounts were used to establish the value of the two excavators for assessment
purposes.
[9] According to the information
pertaining to a registration file obtained by the Minister from the SAAQ, MNM
is identified as the registered owner of the 125B excavator from March 31, 1988
to January 23, 1995. The same
information indicates that MNM received licence plates on March 31, 1994 for a
period of 12 months for the two excavators. The registration file also
indicates that 3087 purchased the two excavators on January 23, 1995 and that the 125B excavator
was sold by 3087 on May 13, 1997, the date of the transaction that occurred in
1997 according to the testimony of Ms. Hutow and Exhibits A-3 and A-4.
[10] We note from the MNM financial
statements for the 1986, 1987 and 1988 taxation years that the amount under the
heading [Translation] "equipment leased
under a capital-lease contract" is $112,648 in 1986, $96,556 in 1987 and
$80,464 in 1988, with an initial cost of $128,740. Under the heading [Translation] "specialized machinery", there is an appreciable
increase between 1987 and 1988, from $246,240 to $335,520. The Minister's
representative, who testified at the trial, found that MNM had repaid its debt
in full by June
30, 1988, and
that it was now the owner of the 125B and 580K excavators as of that date. No
representative of Credit Case testified at the hearing.
[11] Counsel for 3087 argued that at the time of the
transfer of the 125B and 580K excavators, MNM was not the owner of these two assets
because they were subject to an instalment sales contract and ownership passed
to MNM only when the final payment was made. He argued, therefore, that at the
time of the transfer, Credit Case was the owner of both excavators and that MNM
could transfer only its commitments under the instalment contract and its eventual
right to obtain ownership from Credit Case on completion of the payments. That
explains why the Appellant is asking that the amount of the assessment be
reduced by the amount of the payments made by 3087.
[12] Counsel for the Respondent acknowledges that if such a
contract existed at the time of the transfer, Credit Case would be the owner
and the matter would be closed. However, he argues that the evidence adduced is
insufficient to support that finding, given the information appearing in the
registration records for the assets in question, the financial statements of
MNM and 3087, and the contradictions noted in Ms. Hutow's testimony.
[13] According to Ms. Hutow, MNM ceased operating a business
in 1990. The excavators in question had been seized by Credit Case and were in
its possession for close to two years before their purchase. She testified that
she purchased the excavators from Credit Case in November 1993 under an instalment
sales agreement. She did not testify about the price that 3087 paid for the
excavators, but she did make payments pursuant to that agreement if we rely on
the cheques tendered in evidence and on her statement that she made further payments
by cheques that she is unable to trace.
[14] According to Ms. Hutow's testimony, therefore, 3087
became the owner of the 125B and 580K excavators once all the payments had been
made, in June 1995, as she submits. However, if 3087 purchased these excavators
from Credit Case in November 1993, how is it that the excavators were not
registered in the Appellant's name until January 23, 1995, more than one year
after the date that Ms. Hutow claims 3087 purchased them and more than five
months after the final payment made to Credit Case which, at that point, no
longer had ownership? In my opinion, the instalment sale does not preclude the
registration of the excavators in the instalment purchaser's name, as of the date
on which the excavators were purchased. So the records should have indicated
the registration of the two excavators in the name of 3087 as of the date of
their acquisition, that is, November 1993 according to Ms. Hutow. Now, in the
instant case the two excavators were registered in 3087's name on January 23,
1995. Furthermore, according to the register, the previous owner was MNM. It is
therefore hard to reconcile Ms. Hutow's version of the facts with the
information contained in the registration file.
[15] Ms. Hutow's testimony that MNM ceased to operate a
business in 1990, that the purchase was made in November 1993, and that the assets
were seized by Credit Case two years before their purchase by 3087, raises some
questions. The documents tendered in evidence indicate that MNM received licence
plates for the two excavators for the period from March 31, 1994 to March 31,
1995. If MNM ceased operating a business in 1990 and the excavators were seized
by Credit Case two years prior to November 1993, how is it that MNM was still
in the picture on March 1, 1994, and needed to register these excavators? The
probable answer is that this company was still the owner.
[16] I find, therefore, that the transfer of the two
excavators was made on January 23, 1995, and that, on a preponderance of evidence, the owner and transferor was MNM
and the transfer was made without consideration to the Appellant, 3087, a
company with which MNM had a non-arm's length relationship. Consequently, 3087
was jointly liable for the taxes payable by MNM on an amount equivalent to the
value of the assets in question. I am not satisfied, either, that the payments
made by 3087 from November 1993 to June 1995 under a contract between 3087 and
Credit Case related to the two excavators or that they were made for the
purpose of fulfilling MNM's obligations to Credit Case, judging by the
information appearing in MNM's financial statements.
[17] The appeal is therefore dismissed with costs.
Signed at Ottawa, Canada, the 5th day of December 2007.
Angers
J.
on this 20th day of February 2008.
François Brunet, Revisor
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