REASONS FOR JUDGMENT
(Revised transcript of the
reasons delivered orally
at 2:00 p.m. on
July 25, 2008, at Québec, Quebec)
[1] HIS HONOUR:
Good day. I am going to render my judgment in Pierre‑Luc Vachon
v. Her Majesty the Queen.
Issue
[2] Pierre‑Luc Vachon
is appealing from two assessments dated April 13, 2006, both of which
were made under section 325 of the Excise Tax Act.
[3] The first
assessment, which concerns transfers the Minister alleges were made by 9079‑4652 Québec
Inc. (Transport Marco Vachon) to the Appellant between November 5, 2003,
and February 6, 2005, is for $1,787.01.
[4] The second
assessment, which concerns transfers the Minister alleges were made by 9090‑3758 Québec
Inc. (Salon de Quilles Le Sommet) to the Appellant between July 24,
2002, and July 26, 2003, is for $4,127.24.
[5] I will
refer to the two companies from now on as "9079" and
"9090", respectively.
[6] The
Minister's Reply was filed late, with the result that, under
subsection 18.3003(2) of the Tax Court of Canada Act, the
allegations of fact contained in the Notice of Appeal are presumed to be true.
The Respondent therefore started first.
[7] The Respondent
called two witnesses, Pierre‑Luc Vachon, the Appellant, and
Pierre Magnan, a collection officer with Revenu Québec.
Mr. Magnan has been working at Revenu Québec for 14 years.
[8] The Appellant did not
call any witnesses.
[9] Various
documents were entered into evidence during the trial. They are numbered A‑1
and I‑1 to I‑11. Near the beginning of the trial, Exhibit I‑1,
which contains various documents at tabs 1 to 10, was marked I‑1 for
identification only, but all the documents were recognized and entered into
evidence during the trial.
[10] Subsection 325(1)
provides in part as follows:
(i) where
at any time a person transfers property
(ii) to
another person with whom the transferor was not dealing at arm's length, the
transferee and transferor are jointly and severally liable to pay an amount
equal to the lesser of
(a) first,
the amount by which the fair market value of the property exceeds the fair
market value of the consideration given for the property, and
(b) second,
the total of the following amounts:
(1) an
amount that the transferor is liable to pay or remit for the reporting period
of the transferor that includes that time or any preceding reporting period,
and
(2) interest
or penalty for which the transferor is liable as of that time.
The other parts of the
subsection do not apply in the context of this case.
[11] The Appellant argued
that the assessments must be vacated for three main reasons:
·
First,
the Respondent has not shown that the Appellant was not dealing with the
two numbered companies at arm's length.
·
Second,
consideration was given for the transfer.
·
Third,
in any case, the Respondent has not shown that, at the time of the transfers,
the transferors, that is, the two numbered companies, were liable to pay
or remit an amount that was at least equal to the value of the transferred
property.
The transfers
[12] I will start
with the issue of the transfers. Mr. Magnan explained that he had obtained
the transaction history for the Appellant's bank account at the Laurentian Bank
(Exhibit I‑1, tab 5), the deposit slips for the account
(Exhibit I‑1, tab 8) and copies of any cheques deposited
(Exhibit I‑1, tabs 6 and 7). He used that information to draw
up the table at tab 4 of Exhibit I‑1, which shows the date of
each deposit, the amount, who made the deposit, the origin of the deposit and,
in the case of cheques, who signed them and to whom they were payable.
[13] The table includes some
deposits that are not relevant to this case. There is a dispute parallel to
this one between the Appellant and Revenu Québec over the QST and source
deductions for Quebec income tax. The first and third columns of deposits in
the table are the ones relevant to this case. The total of the first is
$10,825, and the total of the third is $9,775. Those amounts are relevant to
the GST, the QST and source deductions. The amounts in the other columns of
deposits that do not concern us are relevant to source deductions.
[14] Since the amounts in
the two columns that concern us are relevant to Revenue Canada and Revenu
Québec, they were prorated by Mr. Magnan, and the share attributable to
the GST was $4,127.24 for 9090 and $1,787.01 for 9079.
[15] I am satisfied that the
amounts in columns 1 and 3 were transferred by one numbered company
or the other as indicated and on the date indicated.
[16] During his testimony,
the Appellant confirmed that Germain Vachon is his father and Marco Vachon
is his cousin.
Amounts that 9090
was liable to pay or remit
[17] I will now look at the
issue of the amounts that the transferors were liable to pay or remit, starting
with 9090. To establish the amount that 9090 was liable to pay or remit,
Mr. Magnan relied on the department's computer system and the notice of
assessment dated June 4, 2004 (Exhibit I‑1, tab 2). That
assessment is for the period of July 1, 2001, to July 31, 2003, a
period of 25 months.
[18] There is no evidence to
indicate 9090's reporting period or the specific periods in which the company
allegedly became liable to pay or remit the GST amounts totalling the GST
amount contained in the assessment.
[19] Subsection 325(1)
of the Excise Tax Act clearly states that it concerns amounts that the
transferor is liable to pay or remit for the reporting period that includes the
transfer or any preceding period. This means that a transfer during a period
may potentially underlie an assessment based on what the transferor is liable
to pay or remit for a reporting period that includes the time of the transfer
and ends after the time of the transfer.
[20] It is always necessary
to establish the reporting period and the amount the transferor is liable to
pay or remit for that period or any preceding period.
[21] Without looking at the Act
in detail, it may be said briefly that reporting periods may be monthly,
quarterly or yearly, depending on the circumstances. They can never be 25‑month
periods (see the definition in subsection 123(1) as well as
sections 245 et seq. of the Act).
[22] A single notice of
assessment may cover several reporting periods, as here, but to determine the
amount the person is liable to pay or remit in such cases, the reporting period
and the GST payable for each reporting period included in the assessment should
be established. In this case, evidence to this effect was required. In a
typical case where a reply is filed on time or, alternatively, where the Court
allows the respondent to file the reply out of time, such information should be
part of what the Minister has established and should be disclosed to the
taxpayer, for example by including it in the findings or assumptions of fact
set out in the reply.
[23] 9090 was assessed on
June 4, 2004, in a context in which it had not filed a tax return after
July 31, 2001. If I understood the argument correctly, the Respondent
tried to convince me that in such circumstances I should interpret
"reporting period" as the period covered by the assessment. In spite
of the passage I was quoted from a case decided by the Federal Court of Appeal,
which the Respondent acknowledged had a different context, I cannot accept this
argument. The provisions of the Act are very clear in defining
"reporting period". Ultimately, the period must be monthly, quarterly
or yearly.
[24] Accordingly, I must
conclude that we do not know the period or periods in which 9090 became liable
to pay or remit amounts totalling the GST amount contained in the assessment.
Since the shortest reporting period is one month, all I can conclude is
that, in the period that includes the transfer of $1,300 on July 25, 2003,
which was the last transfer, 9090 was liable to pay or remit $45,845 for
that period or any preceding period.
[25] Conversely, I must
conclude that, for all the transfers from 9090 to the Appellant prior to
July 25, 2003, it has not been established that 9090 was liable to pay or
remit any amount.
[26] It seems likely to me
that the Minister has the information he would need to establish the reporting
period and the details of the GST amounts owed for each reporting period, since
the Minister must necessarily have relied on certain information or assumptions
of fact in making the assessment.
Amounts that 9079
was liable to pay or remit
[27] The issue is
different for the amounts that 9079 was liable to pay or remit. For the
purposes of the assessment, information was obtained from the department's
computer system. That information is at page 2 of tab 2 of
Exhibit I‑1. The amounts in that table were taken to be the amounts
that 9079 was liable to pay or remit. Mr. Magnan could not confirm whether
an assessment had been made for the periods shown in the table.
[28] In argument, the
Appellant greatly stressed the fact that, in establishing the amounts the two
numbered companies were liable to pay or remit, Mr. Magnan had calculated
the transfers at tab 4 and the amounts that the companies were liable to
pay or remit at tab 3 and had not done a separate calculation of the
amounts that each company was liable to pay or remit at the time of each
transfer.
[29] This is true, but I do
not see how it in itself leads to the conclusion that there was no amount owed
to justify including a specific transfer in the assessment. The question still
remains whether, for the reporting period in which the transfer occurred or any
preceding period, the company in question was liable to pay or remit the
amounts that justified including the transfer. Assessing this depends on the
evidence and not the process used in making the assessment.
[30] In the case of 9090, we
have seen that, apart from the period that included the transfer of
July 25, 2003, the evidence adduced does not make it possible to determine
whether that company was liable to pay or remit any amounts. In the case of
9079, the situation is very different, except as regards a separate issue which
I will raise shortly.
[31] For each transfer, it
must be determined in light of the available evidence whether the transferor
was liable to pay or remit an amount. This can be done with 9079. Take, for
example, the $995 transferred from 9079 to the Appellant on June 30, 2004.
It was the third transfer by 9079, and the three cheques in question total
$3,095 (see tab 4). Was 9079 liable to pay or remit amounts equal to or
greater than $3,095 for the reporting period that included June 30, 2004,
or any preceding reporting period?
[32] Looking at page 2
of tab 2, it can be seen that June 30, 2004, is during the period
ending on July 31, 2004. For that period, 9079's debt is $10,189.91. The
debt is even higher if the three preceding periods are added, and it might
therefore be concluded that the company was liable to pay or remit an amount
equal to or greater than the transfer that occurred on June 30, 2004. The
exercise can be done for the other amounts, and I have not been shown that 9079
was not liable to pay or remit any amount for the various transfers in
question.
[33] Relying on case law,
particularly Gaucher v. The Queen, a decision by the Federal
Court of Appeal on November 16, 2000, the
Appellant also argued that he can challenge the underlying assessment of the
company. He also referred to case law concerning the Minister's burden of proof
and the Minister's duty to inform taxpayers of assumptions and findings of
fact.
[34] Gaucher is a
decision relating to section 160 of the Income Tax Act, and since
the Appellant did not challenge an underlying assessment, I do not have to
decide whether it applies here.
[35] In the case
of 9079, since there was no assessment, Gaucher would not apply anyway, because
without an assessment the amount that 9079 is liable to pay or remit is a fact
that can be challenged like any other fact.
[36] As for the
burden of proof, the courts have established the circumstances in which the
burden is borne by the taxpayer or the Minister. In any event, owing to the
circumstances of the Reply, the burden in this case was reversed at the start
of the trial.
[37] The following question
was raised: have 9079's reporting periods been established? The first column at
page 2 of tab 2 is worded [translation]
"CHX period end date", and the dates in that column are
three months apart. I conclude that the taxpayer had a quarterly period
ending on the dates shown.
[38] However, in considering
all of these issues, I have asked myself the following question: is this table
sufficient to find that 9079 was liable to pay or remit the amounts shown?
[39] I am not talking about
the issue of interest or penalties and the dates on which those amounts are calculated.
[40] I am confining myself
to the first column, which represents the GST. All we know is that the amounts
shown are in the computer system, but Mr. Magnan could not tell us whether
an assessment had been made. He explained that a GST assessment is not always
made; often, the amount of net tax in the taxpayer's GST return is entered in
the system.
[41] The fact remains that
we have no direct evidence of the origin of those amounts.
[42] Imagine a situation in
which a creditor sues a debtor for an unpaid debt. For example, a bank might
sue an individual for non‑payment of the principal and interest on a
loan. Would it be enough simply to prove that the computer system shows that
there is a debt, and nothing more? I do not think so. I think it would also
have to be established that there is a basis for the debt, that is, that a loan
was made and funds were advanced.
[43] The context
is different here from a bank making a loan, but it is at least necessary to
establish one of two things:
·
either
(as with 9090) it is established that an assessment was made and an amount is
therefore owed under the Act (and, if necessary, details are provided
concerning the periods and amounts) or
·
alternatively,
if what is involved is simply the amount of GST reported by the company for the
period, this fact is specifically established either through the GST return or
through information from the electronic file showing that what was entered in
the system is an amount or amounts from the taxpayer's GST return(s). In this
second situation, the amount(s) would be presumed valid.
[44] We do not have such
evidence here, and I find that the evidence before me does not show that 9079
was liable to pay or remit the amounts indicated at page 2 of tab 2.
Was there consideration
for the transfer?
[45] We have in evidence the
amounts the two companies deposited in Pierre‑Luc Vachon's account
(see the cheques and deposit slips at tabs 6, 7 and 8 of Exhibit I‑1).
Most the cheques were signed and deposited by Germain Vachon.
[46] We also have the lease
between the Appellant and his father, Germain Vachon.
[47] The Appellant argued
that the transfers were rent under the lease and that the lessee's use was the
consideration for the payments. However, 9090 and 9079 were not lessees and did
not use the house in question.
[48] In the absence of other
evidence, a payment made by a company to an individual is evidence of a
transfer of property, that is, the amount in question, from the company to the
individual. When I raised this point, the Respondent submitted that I had to
take account of the fact that paragraph 4(e) of the Notice of Appeal was
presumed to be true under subsection 18.3003(2) of the Tax Court of
Canada Act. That paragraph reads as follows:
[translation]
The Appellant did
receive property from 9090‑3758 Québec Inc. and 9079‑4652 Québec
Inc. from 2002 to 2005. Those amounts were received in connection with a lease
entered into by the Appellant and Germain Vachon on June 20, 2002, as
can be seen from the said lease filed as Exhibit R‑4.
[49] This paragraph as
written does not help the Appellant, since it does not allege that, with
respect to those payments, the two numbered companies were acting merely
as intermediaries that paid the Appellant amounts they owed Germain Vachon.
[50] I conclude that the
property was that of the numbered companies. This might be consistent with
instructions from Germain Vachon to make payments to cover his lease
obligations, but it does not mean that the funds were not the companies' funds.
[51] There was therefore no
consideration. The parties emphasized other evidence concerning the issue of
whether the payments were related to the lease, but since no payments were made
by Germain Vachon or for Germain Vachon out of amounts the companies
owed him, I do not have to consider those other points.
Is there a non‑arm's
length relationship?
[52] Germain Vachon is
the Appellant's father and, in light of section 126 of the Excise Tax
Act and section 251 of the Income Tax Act, there are two issues
that arise in determining whether a non-arm's length relationship exists.
[53] First, at the time of
the transfers, did Germain Vachon control the numbered company that made
the payment or, alternatively, as a question of fact, were the numbered companies
and the Appellant not dealing with each other at arm's length at the time of
the transfers?
9090
[54] First, I
will summarize Exhibits I‑10 and I‑11.
·
In
Exhibit I‑10, at page 1, there is a resolution by the
shareholders of 9090 dated August 15, 2001. According to the resolution,
the shareholders were informed of the share transfers to Germain Vachon
approved by the directors that day, and the shareholders ratified those
transfers. The document also states that, following Marco Vachon's resignation,
Germain Vachon was voted in as director. The resolution is signed by
Germain Vachon, who stated that he was the sole shareholder.
·
At
page 2 of Exhibit I‑10, there is another resolution by 9090
signed by Germain Vachon stating that he was the sole director. The
resolution states that Germain Vachon was voted in as chairman. This
resolution is also dated August 15, 2001.
·
At
page 3 of Exhibit I‑10, there is a document, again dated
August 15, 2001, stating that Germain Vachon accepted the mandate of
director.
·
Exhibit I‑11
is a questionnaire signed by Marco Vachon and dated August 12, 2004,
with other documents appended to it. In the questionnaire, Marco stated that he
had been appointed a director of 9090 on April 25, 2000, and had ceased to
be a director on August 15, 2001. One of the appended documents is a
letter written to 9090 on August 15, 2001, and signed by
Marco Vachon, in which he resigned as director.
If these were the only
documents, it would be obvious that Germain Vachon controlled 9090 given
that the relevant period for 9090 is July 25, 2002, to July 25, 2003.
The situation becomes more complicated when we look at tab 9 of
Exhibit I‑1, which contains other documents taken from the
Enterprise Register, which are often contradictory:
·
Tab 9
shows that the company was incorporated on April 28, 2000, by
Jacques A. Vachon, its founder.
·
Jacques Vachon
signed the initial declaration on May 3, 2000; he stated that he was the
director, and he did not refer to any shareholders.
·
This
did not change in the annual declaration for 2000 signed by Jacques Vachon
on November 9, 2000.
·
An
amending declaration signed by Jacques Vachon on May 7, 2001, was
filed in May 2001 and stated that Jacques Vachon was withdrawing as
director and being replaced by Marco Vachon. Marco Vachon was listed
as the sole shareholder.
·
This
did not change in the annual declaration for 2001 signed by Marco Vachon
on February 18, 2003, and filed on February 20, 2003.
·
The
annual declaration for 2002 was filed on February 20, 2002, and signed by
Marco Vachon on February 18, 2002. There were no changes, and I note
that the dates were the same as in the annual declaration for 2001.
·
An
amending declaration was received by the corporate service, Québec division, on
May 23, 2003, and filed in the Enterprise Register on August 8, 2003.
That declaration was signed by Germain Vachon on May 23, but the year
of the signature is not very legible and could be 2000, 2002 or 2003. According
to that declaration, Germain Vachon replaced Marco Vachon as director
and was the sole shareholder.
·
An
annual declaration for 2003 was filed on February 13, 2004, and signed by
Germain Vachon on a date that is not legible. There were no changes.
·
Another
amending declaration was filed on a date that is not legible (see the stamp
marks on the bottom right, seal on the first page) and entered in the
Enterprise Register on October 17, 2003. It was signed by
Marco Vachon on September 26, 2003. That declaration stated that
Germain Vachon was withdrawing as director and being replaced by
Marco Vachon, who became the sole shareholder again.
[55] It is impossible to
reconcile all these declarations and Exhibits I‑10 and I‑11.
The Appellant argued that it is necessary to establish the non‑arm's
length relationship each time a transfer occurred. I agree.
[56] In light of
my findings on the amounts that 9090 was liable to pay or remit, the only time
when there was a transfer and it has been established that 9090 was liable was
July 25, 2003. On that date, all of the documentation is consistent,
whether it is at tab 9 of Exhibit I‑1 or in Exhibit I‑10
or I‑11. There is no doubt that Germain Vachon was the shareholder
on that date.
[57] As for the other
periods, certain things stand out when one looks at all of the evidence. The father,
Germain Vachon, signed all the cheques and controlled 9090 during at least
part of the time in question. The relationship between the father and
Marco Vachon, a cousin, was such that, for reasons unknown to us, one or
the other of them signed a series of documents that cannot be reconciled in
terms of determining the dates on which each of them was a shareholder and
director.
[58] Finally, and very
importantly, during the relevant period of a year and a half, the company paid
the Appellant $10,825 without consideration. Apart from the issue of whether
Germain Vachon controlled 9090 based on the rules found in the Income
Tax Act, I have no difficulty concluding from all this evidence that 9090
and the Appellant had a de facto non‑arm's length relationship
during the period of July 25, 2002, to July 25, 2003. Their conduct
was not that of persons who were dealing with each other at arm's length.
9079
[59] In the case of 9079,
the period in question is November 6, 2003, to February 25, 2005.
There are 10 payments by cheque, and Marco Vachon signed the first
one on November 6, 2003. All the other cheques were signed by
Germain Vachon between May 31, 2004, and February 25, 2005.
[60] The documents (at
tab 10 of Exhibit I‑1) from the Enterprise Register are in
evidence. All the problems that exist with the documents for 9090 do not exist
in the case of 9079.
[61] I will not summarize
all the documents except to note that, after the founder transferred the
company to Marco Vachon, Marco Vachon remained the sole director and
shareholder at all times until the amending declaration filed in
September 2004 and signed by Germain Vachon on 02‑02‑04,
that is, February 2, 2004, or February 4, 2002. I note that the form
indicates that the date must be written as year, month, day, but I am not
drawing any conclusion from that. According to the amending declaration,
Germain Vachon replaced Marco Vachon as the sole director and
shareholder. However, one thing is rather difficult to understand. The annual
declaration for 2003 that was filed on February 13, 2004, according to the
stamp on the first page, was signed by Marco Vachon on February 13,
2004, after Germain Vachon signed the amending declaration. That annual
declaration for 2003 stated that Marco Vachon was the sole director and
shareholder.
[62] Since Germain Vachon
signed the amending declaration no later than February 2, 2004, there can
be no doubt that he controlled 9079 at the time of all the transfers except the
first one. Moreover, as in the case of 9090, if I consider all the evidence,
including the fact that 9079 did not receive any consideration for the
payments, I am satisfied that persons dealing with each other at arm's length
would not conduct themselves in this way. A company would not transfer money to
someone without consideration. There is therefore a non‑arm's length
relationship.
Conclusion
[63] To summarize
my conclusions:
1. I
am satisfied that the transfers by the two companies in question occurred
on the dates in question;
2. I
conclude that there was no consideration and that the fair market value of the
transfers is therefore equal to the amount of the payments;
3. the
companies and the Appellant were not dealing with each other at arm's length at
the time of the various transfers.
[64] However, on the issue
of the amounts that the numbered companies were liable to pay or remit at the
time of each transfer, in the case of 9079, the evidence adduced did not
establish that 9079 was liable to pay or remit amounts of GST at the time of the
various transfers.
[65] In the case of 9090,
the evidence adduced showed that, when $1,300 was transferred on July 25,
2003, 9090 was liable, for the period or any preceding period, to pay or remit
a much higher amount, about $45,000, but the same evidence did not establish
that the company was liable to pay or remit amounts at the time of the other
transfers made by it.
[66] Accordingly,
the appeals are allowed and
·
assessment
PQ‑2006‑8800 dated April 13, 2006, which concerns the
transfers by 9079, is vacated,
·
in
the case of assessment PQ‑2006‑8796 dated April 13, 2006, the
entire matter will be referred back to the Minister for reconsideration and
reassessment in accordance with these Reasons,
with costs in
accordance with the tariff in section 10 of the Tax Court of Canada Rules
(GST). Thank you.
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