Citation: 2006TCC618
Date: 20061114
Dockets: 2000-587(IT)G
2000-590(IT)G
BETWEEN:
LOUIS MASSICOTTE,
LES CONSULTANTS PUB CRÉATION INC.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Archambault J.
[1] In these appeals,
the issue is primarily a business separation and the tax consequences of the
operations related to it. Two businessmen, Louis Massicotte and
Michel Audy, agreed in writing (separation agreement), on June 10,
1994, to divide up their direct or indirect participation in the following two
corporations: Les Consultants Pub Création inc. (Pub) and L'Im‑Média
inc. (Im‑Média). At the time of the division, Mr. Audy held
shares in Pub and in Im‑Media through an investment corporation called
Gestion Cyrano Inc. (Cyrano).
Mr. Massicotte held his shares in Im‑Média directly (Exhibit A‑1,
Tab 28) and his shares in Pub through Gestion Amadéus‑Amadéus Ltée (Amadéus). He had acquired the shares in Im‑Média
from Amadeus for one dollar several months earlier, that is, on October 1,
1993. He
also allegedly held directly the Pub shares in December 1990 (Exhibit A‑1,
Tab 19).
Assessments by the
Minister
[2] For the 1993
taxation year, the Minister of National Revenue (the Minister) included
in Mr. Massicotte’s income a benefit of $44,650 under subsection 15(1) of
the Income Tax Act (the Act). This amount corresponded to a
credit added on June 30, 1993, to the Amadeus advances account for
Mr. Massicotte without him having provided any consideration. For his
part, Mr. Massicotte claims that this credit was given to him following
his transfer to Amadeus of 4,465 Class C capital shares in Pub. He had
previously acquired theses shares from Cyrano in consideration for a reduction
of $44,650 in the balance of the sale price of Pub common shares (Class A)
that he had sold to Cyrano in December 1990.
[3] In his assessment
dated April 15, 1998, for the 1995 taxation year, the Minister included the sum
of $240,000 in Mr. Massicotte’s income as a benefit conferred under
subsection 246(1) of the Act.
This amount corresponds to an adjusting entry dated December 31, 1995, in the
Pub "employee advances" account
regarding Mr. Massicotte. According to Mr. Massicotte, the amount in question
represents the value of a debt that he allegedly transferred to Pub in 1994.
The debtor was either Mr. Audy or Cyrano and this obligation is recorded in the
separation agreement, but there are no details to explain the nature or
circumstances surrounding it. The Minister assumed that the debt had been
transferred to Pub on December 31, 1995, because he determined that its fair
market value was zero as of that date. In his Reply to the Notice of Appeal,
the Minister assumed, as part of his audit, that the benefit had been conferred
by Pub. As a result of a motion from the Respondent for permission to amend this
reply, Tardif J. allowed a change whereby it was Amadéus —not Pub —
that was to be deemed the party that had conferred the benefit on Mr.
Massicotte. However, the burden of proof falls on the Respondent to establish
this fact. Tardif J. stated the following: "... the fact that the assessment is based on
subsection 246(1) of the ITA has no effect on the burden of proof, which shall
remain on the Appellants, except however as regards the new fact introduced by
the amendment granted".
[4] With respect to the
appeals filed by Pub concerning the 1994 and 1995 taxation years, the only
outstanding issue involves the Minister’s disallowal of the deduction, for the
year ended December 31, 1994, of the sum of $70,000 that Pub claims to have
paid to Cyrano as a separation allowance. The Minister allowed that Pub could
deduct the sum of $85,657, which had been paid to Cyrano as fees, in computing
its income for the fiscal year ended May 31, 1994. Pub dropped its appeal
concerning the taxation year ended December 31, 1995.
Background
• Sale of 50% of
Pub by Massicotte to Cyrano
[5] Mr. Massicotte
met Mr. Audy in 1985 when he was hired as an advertising creator by a
company operating a radio station in Québec. At the time, Mr. Audy was the
manager of the company. Two years later, Mr. Massicotte set up his own
advertising agency, Pub,
and according to Mr. Massicotte, that agency was very successful.
[6] In 1990,
Mr. Audy approached Mr. Massicotte to join him at Pub. An agreement (1990
contract of sale) was reached on December 12, 1990, whereby
Mr. Massicotte sold Cyrano 50% of the Class A shares in Pub for $350,000. The sum of $50,000 was payable
nine days later, and the balance of $300,000 was to be paid out of the
dividends from Pub. The agreement provided for the payment of a $50,000
dividend within 90 days after June 30, 1991, and was to be taken from a [translation] "dividend guaranteed...by
[Pub] and [Mr. Massicotte] but was to be taken from the first $50,000 in
profits from fiscal year 1990‑91".
Paragraph 11 of the 1990 contract of sale stipulates that, beginning with
the end of the fiscal year on June 30, 1992, Cyrano was required to pay
Mr. Massicotte its entire share of the declared annual dividends (subject
to certain adjustments), and that this would continue until the balance of the
selling price was fully paid off, which was to be no later than September 30,
1997.
The unpaid balance did not bear any interest.
[7] Under the terms of
paragraph 17 of the 1990 contract of sale, the shares acquired by Cyrano
were to be converted into Class B shares, a class of shares that enjoyed the
same rights and privileges as the Class A shares. It is strange that two
classes of shares were created with the same rights. How can there be two
separate classes of shares if they both have exactly the same rights and
privileges? Clearly this
situation was designed to allow dividends to be declared in favour of Cyrano or
Amadéus, and no one else. In a way, this arrangement allowed
Mr. Massicotte’s share of the profits to be paid to him through Cyrano as
the proceeds from the sale of his shares, for which Mr. Massicotte could
claim the capital gains exemption of $500,000. This arrangement could be
described as a forward strip,
and also made it possible to convert the salary of one of the shareholders into
a dividend, without having to do it for the other shareholder.
[8] One other curious
fact--Mr. Massicotte apparently received more than the agreed-upon sale
price of $350,000 from Cyrano for the Pub shares. According to a document
faxed by J. M. Fortin
to the Minister’s auditor, Mr. Massicotte allegedly received a total of
$383,294, or $50,000 a few days after signing, $50,000 in 1991, $40,461
representing the total amount paid "through CP" (i.e., Pub) between
August 1, 1992, and December 31, 1992, $150,683 paid under the same conditions
in 1993, $47,500 also paid in the same manner in 1994, and
$44,650 representing the value of the 4,465 Class C shares given in
repayment (no mention of date) (Exhibit A‑1, Tab 38).
• Management of Pub
|
TABLE
1
|
|
Pub
|
As at
June 30
|
May 31
|
Dec.
31.
|
|
|
89
|
90
|
91
|
92
|
93
|
94
|
94
|
95
|
|
Revenues
|
945,818
|
1,795,941
|
2,259,254
|
3,012,996
|
2,694,987
|
1,197,004
|
623,600
|
861,043
|
|
Profits
|
15,501
|
131,327
|
186,082
|
7,406
|
(126,063)
|
(66,840)
|
131,714
|
42,274
|
|
After-tax profit
|
12,701
|
106,327
|
149,082
|
3,300
|
(111,342)
|
(54,809)
|
131,714
|
30,243
|
|
Retained earnings
|
12,701
|
119,028
|
268,110
|
122,300
|
7,658
|
(47,151)
|
88,493
|
118,736
|
|
dividends
|
Cl. A
|
Ø
|
Ø
|
Ø
|
50,000
|
1,650
|
Ø
|
Ø
|
Ø
|
|
|
Cl. B
|
|
|
Ø
|
99,110
|
1,650
|
Ø
|
Ø
|
Ø
|
|
|
Cl. C
|
|
|
|
Ø
|
Ø
|
Ø
|
Ø
|
Ø
|
|
TOTAL
|
|
|
|
149,110
|
3,300
|
−
|
−
|
−
|
|
Shares
|
Cl. A
|
100
|
100
|
50
|
50
|
50
|
50
|
50
|
50
|
|
|
Cl. B
|
|
|
50
|
50
|
50
|
50
|
50
|
50
|
|
|
Cl. C
|
|
|
|
99,110
|
185,410
|
185,410
|
185,410
|
185,410
|
|
TABLE
2
|
|
|
Im-Média
|
30
June 93
|
31 May
94
|
31 May
95
|
|
|
Revenues
|
|
276,970
|
444 ,428
|
1,301,798
|
|
|
Profits
|
|
(53,667)
|
10,410
|
63,899
|
|
|
After-tax profit
|
|
(53,667)
|
10,410
|
59,003
|
|
|
Retained earnings
|
|
(75,446)
|
(65,045)
|
(19,301)
|
|
|
Shares
|
Cl. A
|
1,000
|
1,000
|
1,000
|
|
|
Cl. B
|
|
Ø
|
Ø
|
|
|
|
Cl. C
|
|
Ø
|
Ø
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
• Credit to
"Shareholder Advances" account of Amadéus
[11] According to Mr. Massicotte, Cyrano allegedly transferred
to him its 4,465 Class C Pub shares on July 1, 1993, in partial payment
for what Cyrano owed him for his Class A shares in Pub.
Mr. Massicotte then allegedly transferred them to Amadéus. Pub's accountant made
the following adjusting entries for the Amadéus fiscal year ended June 30, 1993
(Exhibit A‑1, Tab 40):
|
13
|
|
Investment in Pub
|
43,000.00
|
|
|
L. Massicotte
|
|
43,000
|
|
(transfer of shares held by Cyrano
to L.M. and from him to Amadeus)
|
|
|
|
14
|
|
Investment in Pub
|
1,650
|
|
|
L. Massicotte
|
|
1,650
|
|
(transfer of pr. shares from L.M. to Amadeus)
|
|
|
[12] Mr. Bureau
stated the following in the Pub memo sent to Sylvain Trudel: [translation] "1993 By
agreement, the shares held by Cyrano ($43,000) are transferred to
Amadéus in consideration for the remainder of the sale price owed by Cyrano to
Louis Massicotte. Dated July 1, 1993" (Exhibit A‑1,
Tab 26). This memo indicates that other transactions or events must be
taken into account, and these include an annual meeting of the shareholders and
directors on "September 28" (1993) and the adoption of the "1993‑1994
budget". The document bears the initials of Mr. Massicotte and
Mr. Audy, but is not dated. Since the transfer did not take place until
"July 1, 1993", that is, immediately after the end of Amadeus’s 1993
fiscal year, it is strange that these shares would have been shown on the
Amadeus balance sheet for the fiscal year ended June 30, 1993, and
that the "shareholder advances" account, which showed a debit of
$41,452 as of June 30, 1992, showed a credit of $7,321 as of June 30, 1993
(Exhibit I‑2)!
[13] Further, it does not
appear that the Pub memo was acted upon by the transfer, on July 1, 1993, of
the 4,465 Class C shares. First, according to the financial statements of
Cyrano as at July 31, 1993, which were prepared by KPMG, Cyrano still held the
4,465 Class C shares (Exhibit I‑1,
Note 3 of financial statements). Then, the transfer apparently was only carried out
according to the terms of a contract of sale dated May 30, 1994, whereby Cyrano
sold Amadéus not only these shares, but also its 350 Class A shares, all
for one dollar. An excerpt from the minutes of a meeting of the Cyrano board of
directors authorized Mr. Audy, on that same date, to sign the necessary
documents for the sale of all these shares (Exhibit A‑1, Tab 29).
[14] As far as the
Minister’s auditor is concerned, the adjusting entries in the books of Amadéus
relating to the transfer of the Class C preferred shares do not correspond with
an actual transfer that was made in 1993, because the transfer did not occur
until May 30, 1994, according to the contract of sale between Cyrano, "the
vendor", and Amadéus, "the purchaser" (Exhibit A‑1,
Tab 27). Also, the auditor did not recognize that the reduction in the
price of the shares sold to Cyrano by Mr. Massicotte in 1990 represented
the consideration given for the preferred shares because, as stated in the
document from Mr. Fortin (Exhibit A‑1, Tab 38),
Mr. Massicotte apparently received $33,294 over and above the amount
that was owed to him for these shares. According to the auditor, it is unusual
for a person to pay more than what they owe. She pointed out that the 1990
contract of sale did not provide for any interest on the unpaid balance of the
sale price, and so the excess amount cannot represent interest.
• Separation of
Massicotte and Audy
[15] According to an
addendum to the shareholder agreement, dated September 29, 1993, the
parties agreed that the value of the Pub common shares with voting rights was
$500,000 (or $250,000 for each of the two shareholders) — and not more
than $700,000, as was the case at the time the shares were purchased in
1990 — for purposes of redemption under the terms of the shareholder
agreement (Exhibit A‑1, Tab 24). Mr. Massicotte stated
that at the time, relations between him and Mr. Audy had become strained.
The two shareholders no longer shared the same philosophy regarding how the
business should be run. An atmosphere of mistrust had even settled in between
them. Mr. Audy complained that Mr. Massicotte was spending too much
of his time on other activities and not enough was devoted to Pub and Im‑Média.
As we saw earlier, the financial situation at the time was not the best,
either. According to Table 1, Pub suffered a pre-tax loss of $126,063 as
at June 30, 1993,
and the situation did not improve in the eleven months of the following fiscal
year because, by May 31, 1994, losses had reached $66,840. Business income
declined, going from $2,694,987 at June 30, 1993, to
$1,197,004 at May 31, 1994.
• Credit to PUB
"employee advances" account
[17] Even if virtually all of the conditions related to the
payment of the $240,000 appear to concern only Pub and this amount was supposed
to be paid to "Massicotte and (or) Amadéus", Mr. Massicotte felt
that it was owed to him. The promissory note referred to in Article 3 of the
separation agreement was not submitted. Since he required money to cover his
personal needs beginning from the summer of 1994 on, Mr. Massicotte asked
Pub to "advance" him the following amounts as payment towards his
"salary": $48,553 in 1994, $143,500 in 1995 and
$47,947 in 1996, for a total of $240,000. These figures were not contested
by the Respondent.
[18] Since he did not want to put Mr. Audy and Cyrano
on official notice to pay the $240,000, because they were continuing to make
payments on the line of credit, Mr. Massicotte apparently chose instead to
transfer this debt to Pub in October or November 1994, following a decision by
him and Mr. Chabot, and he apparently told Mr. Chabot to [translation] "do whatever
you have to do to transfer the debt" to Pub. Mr. Chabot contradicted this
version from Mr. Massicotte. According to him, it was Mr. Massicotte,
and he alone, who had decided to make this transfer. If he failed to make an
accounting entry for the December 31, 1994, fiscal period, it was because it
was too late. We note that this accountant has been working for
Mr. Massicotte and his various corporations since the spring of 1994.
Also, he was present at the negotiations regarding the separation of
Messrs. Massicotte and Audy, which took place on June 10, 1994. Since the
balance in the Pub advances account was in a credit position, the accounting entry showing the
transfer could be made for the following fiscal period, and this is why he did
not do it until the end of the 1995 fiscal period. Therefore, we must believe
that he was not aware of this transfer until after the end of the 1994 year
and, in all likelihood, after having prepared Pub’s financial statements for
December 31, 1994.
[19] Mr. Massicotte, Amadéus and Pub waited until May
3, 1996, to place Mr. Audy and Im‑Média on notice that they were
required to pay them the $240,000 because of their failure to comply with
the commitments made in the separation agreement. According to
Mr. Massicotte, business was good for Im‑Média in the fall of 1994,
as can be seen from reading certain magazines from the Québec area carrying
advertising that had been prepared by Im‑Média.
[20] Since Mr. Audy and Im‑Média adopted the
position that they had met all conditions in the separation agreement and did
not comply with the formal notice, the solicitors for Mr. Massicotte
instituted an action before the Quebec Superior Court one year later, on June
10, 1997. Even though the action was entered on behalf of
Louis Massicotte, Amadéus and Pub, and even though, at the time, the debt
had been transferred to Pub in 1994 or 1995, the court was asked to order
Mr. Audy and Im‑Média to pay the $240,000 [translation] "to the plaintiff
Louis Massicotte"! Mr. Massicotte stated that he did not remember if
he had informed his lawyer that the debt had been transferred to Pub. The lawsuit never yielded any results
because Im‑Média made an assignment in bankruptcy on February 11, 1998,
and Mr. Audy did the same a few days later, on February 16, 1998. Strangely enough, the person shown as
the bankruptcy creditor for this amount is also Mr. Massicotte, and not
Pub.
[21] Finally, expert witness Lucie Demers testified in
connection with the valuation of the $240,000 debt as of December 31, 1995.
Essentially, she determined that the debt was valueless [translation] "because of the
negative value of the debtors’ net assets" (valuation report,
Exhibit I‑6, p. 12). For purposes of her valuation, she had
assumed that the $240,000 was owed by Mr. Audy and Im‑Média. She did
not take into consideration the impact that would result from a contestation of
this debt by Mr. Audy or the conditional nature of the obligation of the
debtors who owed the debt.
• $70,000
separation allowance
[22] While the separation agreement is silent on the
question of a separation allowance for Cyrano or Mr. Audy, Mr. Massicotte maintained that Pub had
agreed on June 10, 1994, to pay this type of allowance to Cyrano.
Mr. Audy, for his part, claimed that he had never asked for or received
this type of allowance. It must be pointed out that the Minister, after
considering the inclusion of this amount in Cyrano’s income, decided in the end
not to include it. The auditor explained that she had not seen any supporting documents or
bank deposit for Cyrano, as was normally the case for fees received by Cyrano.
Furthermore, she found it difficult to explain how Pub would have paid such an
allowance, given Mr. Massicotte’s dissatisfaction with Mr. Audy’s
performance. Mr. Massicotte did acknowledge that he had not received a
separation allowance from Im-Média. According to him, his compensation was the
sum of $70,000 he received for his shares.
Analysis
[23] The relevant provisions of the Act that relate
to the resolution of this dispute are the following. First, there are those
that deal with the taxation of a benefit, specifically paragraph 6(1)(a)
and subsections 15(1), (2), (2.1), (2.6) and 246(1) of the Act:
6. (1) Amounts to be included as income
from office or employment There
shall be included in computing the income of a taxpayer for a taxation
year as income from an office or employment
such of the following amounts as are applicable
(a) Value of
benefits - the value of board, lodging and other benefits of any kind
whatever received or enjoyed by the
taxpayer in the year in respect of, in the course
of, or by virtue of an office or employment, except any benefit
...
15(1) Benefit conferred on shareholder — 15. (1) Where at any time in a
taxation year a benefit is conferred on a shareholder, or on a person in
contemplation of the person becoming a shareholder, by a corporation
otherwise than by ...
the amount or value thereof shall, except to the extent that it is deemed by section 84 to be a
dividend, be included in computing the income of the shareholder for the
year.
...
15(2) Shareholder debt — Where a person (other than
a corporation resident in Canada) or a partnership (other than a partnership
each member of which is a corporation resident in Canada) is
(a) a
shareholder of a particular corporation, (b)
connected with a shareholder of a particular corporation, or (c)
a member of a partnership, or a beneficiary of a trust, that is a shareholder
of a particular corporation
and the
person or partnership has in a taxation year received a loan from or has
become indebted to the particular corporation, any other corporation
related to the particular corporation or a partnership of which the particular
corporation or a corporation related to the particular corporation is a member,
the amount of the loan or indebtedness is included in computing the
income for the year of the person or partnership.
15(2.1) Persons
connected with a shareholder — For the purposes of subsection 15(2),
a person is connected with a shareholder of a particular corporation if that
person does not deal at arm's length with the shareholder and if that person is
a person other than
(a) a
foreign affiliate of the particular corporation; or
(b) a
foreign affiliate of a person resident in Canada with which the particular corporation
does not deal at arm's length.
15(2.6) When s. 15(2) not to apply
-- repayment within one year — Subsection 15(2) does not apply to a loan or an indebtedness repaid within one year after the end of the
taxation year of the lender or creditor in which the loan was made or
the indebtedness arose, where it is established, by subsequent events or
otherwise, that the repayment was not part of a series of loans or other
transactions and repayments.
246(1) Benefit conferred on a person— Where at any time a person confers a benefit, either directly or indirectly, by any means whatever, on a
taxpayer, the amount of the benefit shall, to the extent that it is not
otherwise included in the taxpayer's income or taxable income earned in
Canada under Part I and would be included in the taxpayer's income if
the amount of the benefit were a payment made directly by the person to the
taxpayer and if the taxpayer were resident in Canada, be
(a) included in computing the taxpayer's income or
taxable income earned in Canada under Part I for the taxation year that
includes that time; or
(b) where the taxpayer is a non-resident
person, deemed for the purposes of Part XIII to be a payment made at
that time to the taxpayer in respect of property, services or otherwise,
depending on the nature of the benefit.
[Emphasis added.]
[24] With respect to the $70,000 claim for a separation
allowance, it is essentially a case of applying subsection 9(1) and
paragraph 18(1)(a) of the Act. These two provisions read as follows:
9(1) Income — Subject to this Part, a
taxpayer's income for a taxation year from a business or property is the
taxpayer's profit from that business or property for the year.
18(1) General
limitations— In computing the income of a taxpayer
from a business or property no deduction shall be made in respect of
(a) General
limitation — an outlay or
expense except to the extent that it was made or incurred by the
taxpayer for the purpose of gaining or producing income from the business
or property;
[Emphasis added.]
[25] In her initial Reply to the Notice of Appeal, the
Respondent advanced an "alternative argument", namely that Pub had
conferred a benefit of $240,000 on Mr. Massicotte as an employee,
pursuant to paragraph 6(1)(a) of the Act. At the hearing before Tardif
J. for the motion to amend her reply, the Respondent had announced that she
would be withdrawing this "alternative argument". The reasons for
this decision are unclear.
[26] At the start of the hearing, a great deal of time was
required to clearly identify the issues involved, because the pleadings of each
of the parties did not seem particularly clear to me. It was clear from the
position of counsel for Mr. Massicotte that section 246 could not be
applied here with respect to the $240,000 credited to the "employee
advances" account, because this is a remainderman provision that only
applies if the benefit is not taxable under Part I of the Act. This is the
exchange that took place at the start of the hearing:
[translation]
HIS HONOUR: So, based on your reasoning,
paragraph 6(1)(a) will apply before
section 246?
Mr. GÉNÉREUX: It’s obvious.
HIS HONOUR: It is?
Mr. GÉNÉREUX: It’s obvious.
[Vol. I of transcript, page 143]
HIS HONOUR: Okay.
So, if it’s taxable….
Mr. GÉNÉREUX: It
would be under 6(1)(a), employee benefit, because we're dealing with an
appropriation, and if there is an appropriation, it would be by the
employee, but otherwise, it would necessarily be a capital gain and nothing
else because, then, at that time, there would be a disposition of a property,
the cost of which, there are human costs involved there, and also personal
costs in connection with that, and we intend to prove that to you, but as to a
tax cost, there is none.
[Vol. I of
transcript, pages 50‑51. Emphasis added.]
[27] I fully agree with counsel on this interpretation. In
fact, if I were to find that there was a benefit arising out of the transfer of
the $240,000 debt in 1995 and that that benefit had been conferred on
Mr. Massicotte by virtue of his office or employment, it is clear that
section 246 would not be applicable.
[28] Being a master in matters of law, I then raised the
possibility that I could justify the assessment for 1995 basing myself on
paragraph 6(1)(a) of the Act. However, in order to respect the rule of
procedural fairness, I had to assure myself that the taxpayer was not caught
off guard. Counsel for the Appellants then confirmed that such was not the
case:
[translation]
Mr. GÉNÉREUX: I’m
not surprised by that, we have already said this in our pleadings.
HIS HONOUR: Yes.
Mr. GÉNÉREUX: All
that I was saying at the time was that they had to have the burden of proof on
them and then they decided to drop the matter because I was saying that they
had the burden of proof for that, because that was not the basis for the
assessment—they were changing the very basis of the assessment and, even
according to the Court of Appeal, even if subsection 152(9) did not cover that,
and now, today, given what has been done, in my opinion, the fact that they
have abandoned their position, they no longer wish to plead, and I based myself
on that point in coming here today, if we still want to maintain that this was
an employee benefit, I said, I think, that procedural fairness would be
tainted, and all the more so since I wonder if they could argue that position
because the return has been statute-barred and this is an attack against the
very basis of the assessment that is in dispute here, but that having been
said, when you ask yourself the question, how can the Court be prevented from
ruling, even in the absence of any arguments being put forth, because they have
dropped the issue, I, I don’t have the precedents in front of me but I have
several cases where, especially those that went to appeal, your honour, I agree
but …
(Vol. I of
Transcript, p. 33)
[29] Further, as counsel for the Appellants has already
mentioned himself, it is clear that the amount that was credited in the
accounting records of Pub following the transfer of the $240,000 debt was credited
to the "employee advances" account. During his testimony,
Mr. Massicotte acknowledged not only that he was the President and
Director of Pub, and therefore held an office for purposes of the Act,
but also that the advances made to him by Pub had been made as payments towards
his salary! Moreover, counsel for the Appellants willingly acknowledged that
Mr. Massicotte was an employee: [translation] "Finally, it has been admitted for purposes of
this case that Mr. Massicotte was the manager and the employee of Pub
Création at any relevant point for purposes of this case." (para. 7
of "Appellants’ additional submission"). Therefore, he argues, if Pub
conferred a benefit on Mr. Massicotte that benefit was conferred on him by
virtue of an office or an employment.
[translation]
HIS HONOUR: ...
And you stated that ... your colleague could argue that it is taxable and if it
were taxable, it would inevitably be 6(1)(a) ....
...
Mr. GÉNÉREUX:...
given that we’re talking about a credit to the "employee" account, the
benefit to the employee seems to me to be the other possible argument.
[Vol. I of
Transcript, page 60.]
[30] In his oral submission, counsel for the Appellants
argued that the Court could not confirm the Minister’s assessment using as a
basis paragraph 6(1)(a) of the Act because it would then be a new
basis for the assessment and it could not be validly established due to the
fact that the return had become statute-barred. I then asked that written
comments be submitted to me, and these were sent to me by counsel for the
Appellants on February 3, 2006, and by counsel for the Respondent on March 15,
2006; the reply from the Appellants to the supplementary arguments of the
Respondent was sent on April 5, 2006. This is what counsel for the Appellants
wrote in his supplementary arguments:
[translation]
9. Can a capital gain be
taxed in the hands of the Appellant for his 1995 taxation year? According
to paragraph 39(1)(a) of the ITA, a capital gain is the gain realized by
a taxpayer "to the extent of the amount thereof
that would not, … be included in computing the taxpayer's income for the year
or any other taxation year"). The issue of whether any of this gain would otherwise be included
in computing Mr. Massicotte’s income for the year or for any other year is a
question of both fact and law. It has been respectfully submitted that the
Court must allow the appeal by Mr. Massicotte and vacate the
assessment at issue if it considers that the $240,000 is to be
included in computing the taxpayer’s income for 1995 or for any other year
pursuant to paragraph 6(1)(a) of the ITA. In effect, the Crown
withdrew its argument under paragraph 6(1)(a) of the ITA because
it had nothing to do with the basis for the assessment at issue. In fact, what
we have here is a reassessment outside the normal assessment period
provided for in subsection 152(4) of the ITA;
10. In
Pedwell v. Canada (C.A.), [2000] 4 F.C. 616, 2000 CanLII 17141 (F.C.A.),
2000-06-12, A-703-98, the Federal Court of Appeal ruled
that the Tax Court of Canada does not have the power to uphold an assessment on
any basis other than the one used by the Minister once the statutory period has
run out. Here is an excerpt from that
ruling:
[15] While the parties referred to a
number of older authorities on the issue, Continental Bank now
makes it clear (subject to subsection 152(9) [Income Tax Act,
R.S.C., 1985 (5th Supp.), c. 1 (as am. by S.C. 1999, c. 22, s. 63.1)] which
applies to appeals disposed of after June 17, 1999 and is not relevant here in
any event) that the Minister is bound by his basis of assessment. While
this case does not involve the Minister advancing a different basis of
assessment, I think the principle in Continental Bank is applicable
to a judicial determination on a basis different from that in the notice of
reassessment.
[16] First, if the Crown is not able
to change the basis of reassessment after a limitation period expires, the Tax
Court is not in any different position. The same prejudice to the taxpayer
results--the deprivation of the benefit of the limitation period. It is not
open to that Court or indeed this Court, to construct its own basis of
assessment when that has not been the basis of the Minister's reassessment of
the taxpayer.
[translation]
11. The Federal Court of Appeal
confirmed this principle in a very recent decision, Rezek
v. Canada, 2005 FCA 227 (CanLII),
2005-06-17, A‑462-03;A-463-03;A-464-03;A-465-03;A-466-03:
[58] Finally, the convertible hedge as a separate identifiable
property constituted a new basis of assessment created by the judge in 2003.
The Minister's limitation period for assessing had expired at the latest in
1998. The judge rejected the Minister's partnership basis of assessment and did
not make a determination on the Minister's principal/agent basis of assessment,
except in the case of Mrs. Scott. Absent the convertible hedge as a separate
property finding, the appeals of the spouses would have been allowed.
Therefore, the convertible hedge as a separate identifiable property
constituted an impermissible new basis of assessment after the limitation
period for assessing had expired (see Pedwell v. Canada (C.A.),
[2000] 4 F.C. 616 at paragraphs 13 to 16).
[Emphasis added by counsel.]
...
[translation]
13. In the case at bar, it is respectfully submitted that the Crown
abandoned the argument based on paragraph 6(1)(a) of the ITA since it
was incompatible with the basis of the assessment under subsection 246(1) of
the ITA. The Respondent could not cite paragraph 6(1)(a)
of the ITA because it was essentially a reassessment (another basis) and the
taxation years at issue had become statute-barred. Further, the employee benefit must be included in the year in which the
amounts are received by the taxpayer. The Crown therefore made a strategic
decision in withdrawing its argument based on paragraph 6(1)(a) of the ITA.
Furthermore, it is interesting to point out the words of the auditor,
Christiane Desroches, in her examination-in-chief (hearing of October 21,
2005, afternoon, p. 33). Below are a number of excerpts from the examination in
which the auditor was also of the opinion that the employee benefits should be
included in the year in which the amounts were received:
...
14. In her pleading, the
Respondent’s representative, Ms. Labbé, seemed to argue that a benefit under
paragraph 6(1)(a) of the ITA must be included in the year in which it is
receivable. This
proposal is incompatible with the state of the law. In this regard, we
refer the Court to MNR v. Rousseau, 60 DTC 1236 (Tab 19 of the
Appellants’ book of authorities). The Honourable Judge Bowman stated as follows
in Dudek v. The Queen, 2003 TCC 157 (CanLII), 2003-03-2,
2002-1693(IT)I:
[2] For reasons that are
unclear to me, the employer issued him a T4A for the year 2000 showing a
retiring allowance of $14,900.00. This I find unconscionable. I suppose they
did it because they thought they would get the deduction earlier. Whatever
their reason, it is contrary to the facts. The Tax Department, on the other
hand, says, "Well, it says 2000 on their form, therefore it must be
2000". In my view, the Tax Department should have taxed him in the year
2001. This is one example of the CCRA's mindless application of forms.
They say, "The T4A says 2000; therefore, it must clearly be 2000".
Well, they are wrong. The authority for this proposition, that retiring
allowances and income from employment are taxable when received and not when
receivable, is a decision of the Exchequer Court by Mr. Justice Fournier in M.N.R.
v. Rousseau, 60 DTC 1236. For the last 40 odd years it has been accepted
as good law in support of the proposition that employment income is taxed on a
"received" basis, and not a "receivable" basis.
[Emphasis added by counsel.]
[translation]
15. Ms. Labbé, representing the
Attorney General of Canada, withdrew her argument based on paragraph 6(1)(a)
of the ITA (employee benefit) during the proceedings. In fact,
that argument had been specifically pleaded by the Crown in its Reply to the
Notice of Appeal, but was subsequently withdrawn. In so doing, the Crown committed
to not attempt to support the assessment at issue based on a purported employee
benefit;
...
17. In Canderel Ltd v.
Canada, the Crown had admitted during the proceedings that the expense at
issue had not been paid "as capital", but the Crown requested an
amendment to the Reply to the Notice of Appeal in order that it might argue
that the expense at issue was a capital expense which could not be claimed
under paragraph 18(1)(b) of the ITA, could not be deducted
(except what is allowed under 20(1)(b)). It appears that Mr. Justice
Décary of the Federal Court of Appeal expressed the opinion that even if the
new argument were allowed by the Court, the Crown’s admission prevented it from
winning its case because it had not sought leave to withdraw this admission.
Here is how Décary J.A. expressed himself on this point:
Furthermore, the proposed amendment, while drafted 'in the
alternative', is obviously not an alternative argument. The Trial Judge would
logically dispose of the capital expenditure issue it before disposing of the
timing issue. As conceded by counsel for the appellant, the Trial Judge,
were he to deal first with the proposed issue as might be expected, would not
even be in a position to rule in favour of the appellant on that issue because
the appellant had admitted that the expenses were not an account of capital and
had not sought leave to withdraw the admission. Counsel recognized, and I
quote: 'The amendment cannot stand with the admission'. He expressed, however,
the opinion that the motion to amend implicitly constitutes a motion to
withdraw the admission. We cannot agree. The case-law is clear: an admission
may be withdrawn, but with leave of the Court, and we simply cannot find in
this instance that leave was implicitly sought, assuming for the sake of
discussion that it could have been so.
With an admission on file which is inconsistent and
irreconcilable with the proposed amendment, what will the Trial Judge and the
respondent do if the proposed amendment is granted? On what basis will the
respondent prepare itself for the continuation of the trial? How can it rely on
an admission the appellant obviously intends to ignore? How can an alternative
argument be made when such argument is contrary to admissions agreed upon by
both parties and upon which the trial proceeded and which have not been
withdrawn? Surely, such an embarrassing pleading constitutes an 'injustice'
within the meaning of the rule respecting amendments and does not in any way
help in determining the real question in controversy.
[Emphasis added by
counsel.]
[translation]
18. To summarize, the Court
should allow the appeal by Mr. Massicotte for 1995 because the Respondent has
not demonstrated that a benefit was conferred by Gestion Amadéus-Amadéus on Mr.
Massicotte in accordance with subsection 246(1) of the ITA.
[Emphasis added,
except as otherwise indicated.]
[31] In her written comments, counsel for the Respondent
stated as follows:
[translation]
9. However,
the Respondent contends that the Court has the authority to maintain the
assessment made with respect to Mr. Massicotte based on a section of the
Act or a different argument from the one used by the Minister in support of his
assessment.
10. To
illustrate this, the Respondent refers to the decision by Tardif J.T.C.C. in Trudel-Leblanc,
which was affirmed by the Federal Court of Appeal. In that case, the only issue
before the Tax Court of Canada was who should report the income from the sale
of medication: the pharmacist or Trugesvi corporation, of which the pharmacist
was the sole shareholder?
...
11. The
Minister had taxed the income in the hands of the pharmacist. The only
ground for supporting the assessments was the fact that the Pharmacy Act stipulated
that only a pharmacist could purchase or sell medications and own a pharmacy.
Therefore, from 1994 to 1998, a corporation, even though it was held by a
pharmacist, was unable to purchase or to sell medication as part of its
operations.
...
12. Tardif
J.T.C.C. ruled that the reason given by the Minister in support of the
assessments was not sufficient to amend or to confirm the assessments
under appeal. However, the judge maintained the assessments on the ground
that, based on the evidence presented, it was the pharmacist who had
earned the income from the sale of medications and not the corporation. In
so ruling, the Honourable Judge set out the following principles:
16. The
correctness of the assessments must be determined on the basis of the facts and
circumstances relating to the allocation of the said incomes and, as the
Appellant has argued, in accordance with the Income Tax Act.
…
28. Can
the assessments that are the subject of this appeal be vacated because of the
auditor's admission that the process leading to the assessment originated when
it was noted that the Pharmacy Act had not been complied with?
29. The
only question at issue is whether the assessments were correct or not under the Income
Tax Act.
[translation]
13. Ms.
Trudel-Leblanc appealed this decision before the Federal Court of Appeal. Basing
herself on Pedwell, she argued that the Tax Court of Canada did not have
the power to maintain the assessments for a reason other than the one given by
the Minister.
14. The
Federal Court of Appeal affirmed the decision by Tardif J.T.C.C. It pointed
out the difference with Pedwell, indicating that Tardif J. did not
refer to a transaction other than the one used by the Minister in issuing the
assessments. Tardif J.T.C.C’s finding was based on evidence adduced at
trial by Ms. Trudel-Leblanc herself. The Federal Court of Appeal pointed out
that Ms. Trudel-Leblanc had had the opportunity to make known her viewpoint
with regard to the debate before the Tax Court of Canada. As a result, she
did not suffer any prejudice.
...
15. It
should be noted that in Pedwell, which was cited by Ms. Trudel‑Leblanc,
the Federal Court of Appeal ruled that the Tax Court of Canada could not
broaden the scope of an assessment to include transactions that the Minister
had not considered in making the original assessment. The Respondent argues
that Pedwell does not apply in this case. In effect, if the Court
decides that the benefit was conferred on Mr. Massicotte under paragraph 6(1)(a),
and not under subsection 246(1), it will do so based on evidence adduced at
trial. We should note that this evidence had been taken for granted by the
Minister in making the assessment at issue here, and the Appellants are aware
of its existence. Therefore, the Appellants suffer no prejudice, a fact
which they acknowledged at the hearing held on December 7, 2005.
16. The
Respondent is also relying on the words of Bowman J. in Labourer’s
International Union of North America, Local 527 Members’ Training Trust Fund v.
Canada, [1992] T.C.J. No. 466. Basing himself on the Supreme Court of Canada
decision in C. (G.) v. V. F. (T.), Bowman J. stated that the Court is
not bound by the concessions made by the parties on a question of law. This
is what Bowman J. wrote on the subject:
Parties to an action may agree on certain facts and this
agreement may form the basis for a judicial admission by which the presiding
judge will be bound. Parties cannot, however, make a judicial
admission on a point of law, because "the Court may not be bound by
error in an admission by the parties as to the law...". The court is
not bound by concessions on points of law. In C. (G.) v. V. F. (T.),
… Beetz J., delivering the unanimous judgment of the Supreme Court of Canada,
stated:
|
|
At the hearing,
counsel for the appellants conceded that the award of custody to a third
person would amount to a declaration of partial deprivation and that it was
therefore necessary to establish the existence of serious cause within the
meaning of art. 654 C.C.Q. for giving custody to someone other than the
person having parental authority. This concession on a point of law is not
binding on the Court.
|
...
[translation]
17. Bowman
J. continued, pointing out that the Court is the master interpreter of the
law, and the parties cannot dictate to it which principles of law should be
applied. He wrote as follows:
The issue of the validity of this trust is a
question of law because it must be determined in accordance with principles of
law and because it is an issue of standing which, in itself, is a question of
law. Despite submissions made by counsel for the Respondent, parties to an
action cannot make a judicial admission on a point of law. …Moreover, even
where an issue does not go to the court's jurisdiction or the standing of one
of the parties, the court must still decide the case on the basis of the
law. It cannot fulfil that obligation if it is forced to accept without
question doubtful propositions of law, or to base its determinations on flawed
legal premises or an ill-conceived articulation of the issues merely because of
some agreement between the parties. The Tax Court of Canada has original
jurisdiction over areas governed by public statutes of wide application. The
effect of its judgments in many instances goes beyond the narrow dispute
between the Minister and the particular taxpayer. Its judgments bear upon the
interpretation of fiscal statutes and their application to taxpayers generally.
Moreover, a decision in favour of a particular appellant will result in a
payment out of the Consolidated Revenue Fund not otherwise authorized by
Parliament. … This court is a court of law; it is not a private
arbitration tribunal to which the parties can dictate the law.
...
[translation]
26. In
the case at bar, the
Respondent maintains that the benefit received or enjoyed by Mr. Massicotte was a credit of
$240,000 to his "Advances" account with Consultants Pub
Création. In consideration for this credit, Mr. Massicotte transferred a debt
to the company, the fair market value of which was zero. These transactions
were carried out using adjusting entries on December 31, 1995 (Tab 42) and it
was during the 1995 taxation year that the $240,000 benefit was received or
Mr. Massicotte took advantage of a benefit of $240,000 pursuant to the terms
of paragraph 6(1)(a) of the Act.
[Emphasis
added.]
[32] I believe that the position defended by counsel for the
Respondent is well founded. In my view, the basis of the assessment is the fact
that Mr. Massicotte received or enjoyed a benefit. The fact that the
Minister clumsily justified his assessment, citing section 246 or subsection
15(1), rather than paragraph 6(1)(a) of the Act as the basis,
cannot be considered to constitute a new basis for the assessment. It is true
that the conditions for applying these sections are not entirely the same.
Specifically, as was seen earlier, in order for section 246 to apply, the
benefit must not be includable in income under any of the provisions of Part I
of the Act. In order for subsection 15(1) of the Act to apply,
Mr. Massicotte would have had to have been a Pub shareholder, which is not
the case: Amadéus is the sole shareholder of Pub. It is evident from the file
that the benefit could be included in Mr. Massicotte’s income under
paragraph 6(1)(a) of the Act. Moreover, that was one of the points
made by counsel for Mr. Massicotte in arguing in favour of the
non-applicability of section 246 of the Act. He himself acknowledged that
Mr. Massicotte was an employee and that the amount was credited to the
"employee advances" account. This can be seen clearly in the documentary
evidence that he himself adduced (Exhibit A‑1, Tab 42). At the
very start of the hearing, he acknowledged that he was not surprised by such an
argument. In addition, he indicated that his position had earlier been that the
burden of proof was on the Respondent with respect to the existence of the
elements needed to support the application of paragraph 6(1)(a) of
the Act.
[33] At any rate, even if justifying the assessment using
paragraph 6(1)(a) could be considered a new basis, the first reason
for eliminating the argument from counsel for Mr. Massicotte based on the
approach in Pedwell v. Canada (C.A.), [2000] 4 F.C. 616, 2000
CanLII 17141, which followed the rule set out in Continental Bank of Canada
v. Canada, [1998] 2 S.C.R. 358, 98 DTC 6501, is that Parliament
quickly amended the Act to reject the approach of the Supreme Court of Canada.
In effect, it added subsection 152(9), which applies to appeals resolved
after June 17, 1999, and reads as follows:
152(9) Alternative basis for assessment— The
Minister may advance an alternative argument in support of an assessment at
any time after the normal reassessment period unless, on an
appeal under this Act
(a) there
is relevant evidence that the taxpayer is no longer able to adduce without
the leave of the court; and
(b) it is not appropriate in the
circumstances for the court to order that the evidence be adduced.
[Emphasis added.]
[34] Even if the Minister’s reassessment for 1995 was dated
April 15, 1998, Mr. Massicotte’s appeal is resolved as of the date of this
judgment, which is more than seven years after the coming into force of
subsection 152(9) of the Act. Here are the remarks concerning this subsection
in the explanatory notes for the 1999 bill (Bill C‑72; S.C. 1999,
c. 22, s. 63.1):
New subsection 152(9)
of the Act is intended to ensure that the Minister of National Revenue may
advance alternative arguments in support of an income tax assessment after the
normal reassessment period has expired. This amendment is proposed in
light of remarks by the Supreme Court of Canada in the case of The
Queen v. Continental Bank of Canada to the effect that the Crown is not
permitted to advance a new basis for assessment after the limitation
period has expired.
The limitations
found in paragraphs 152(9)(a) and (b) are intended to import the
Court protection afforded to taxpayers that an alternative argument cannot
be advanced to the prejudice of the right of a taxpayer to introduce relevant
evidence to rebut the argument.
Subsection 152(9)
is subject to other limitations in the Act, including subsection 152(5)
which prevents the Minister from including amounts in a taxpayer's income which
were not included prior to the expiration of the taxpayer's normal reassessment
period.
This subsection
applies to appeals disposed of after Royal Assent.
[Emphasis added.]
[35] We should also point out that the decision in Pedwell
was handed down by the Federal Court of Appeal on June 12, 2000, in connection
with a decision by the Tax Court of Canada that had been rendered before June
17, 1999, namely on October 29, 1998 (Pedwell v. Canada, [1998] T.C.C.
No. 982 (QL), 99 DTC 63). Rezek v. Canada, 2005 FCA 227 (CanLII),
involved an appeal from a judgement of this Court rendered on September 9, 2003
(Hayes v. The Queen, 2003 TCC 93 (CanLII), [2004] 1 T.C.C. 2605,
2003 DTC 1205), but makes no mention of subsection 152(9) of the Act,
unlike Pedwell. In my opinion, the approach taken in Rezek is not
in compliance with the new legislative provision in effect for all appeals
resolved after June 17, 1999.
[36] We should also point
out that other decisions by the Federal Court of Appeal adopt a different
approach from the one used in Rezek and in Pedwell. Obviously,
there is Trudel‑Leblanc v. Canada, [2004] F.C.A. No. 480 (QL),
which was referred to in the written comments by counsel for the Respondent.
She nicely summarized the relevant facts in that case. There is one other
decision by the Federal Court of Appeal that deserves mention, namely Smithkline
Beecham Animal Health Inc. v. Canada, [2000] F.C.A. No. 270 (QL),
2000 DTC 6141. In it, Sharlow J.A. confirmed that Bonner J.T.C.C. of this Court was correct to
qualify the proposed amendment to the proceedings as an alternative argument in
support of the assessment and stated that subsection 152(9) of the Act allowed
the alternative argument to be raised.
[37] It is interesting to
point out the following remarks by Bonner J.T.C.C. in Smith Kline Beecham Animal Health Inc. v. Canada,
[1999] T.C.C. No. 762 (QL), a decision handed down on November 4, 1999, at
paragraphs 14 to 16 of his reasons for order:
14 In my view Continental Bank
was never authority for the proposition that the Minister is, when
defending an appeal from an assessment after the expiry of the subsection 152(4)
period, confined within a conceptual prison called "basis of
assessment" comprising only the facts and statutory provisions relied upon
by the assessor [the Minister]. In my view Continental Bank is an
application of the long standing rule governing litigation in appellate
courts which rule prevents litigants from raising points on appeal which were
not pleaded and argued in the trial court. Appellate courts cannot be
expected to deal with a new issue on appeal resting on an evidentiary record
which is deficient by reason of the failure to plead and direct evidence to
that issue. Here the Respondent seeks leave to amend well before the
commencement of the trial. The situation is in no way analogous to Continental
Bank.
15 Furthermore, nothing said in Continental Bank suggests that
subsection 152(4) has a bearing on the amendment which the Respondent seeks.
Subsection 152(4) restricts the right of the Minister to "...reassess or
make additional assessments, or assess tax, interest or penalties...". The
amendment now in question would not effect a reassessment of tax. Rather it
is an attempt to defend the existing assessment of tax by asserting that, on
the facts already pleaded, liability is imposed by a provision of the Act other
than that relied on by the assessor [the Minister].
16 It is long settled law that the validity of an assessment depends
on the application of the statute to the facts and not on the assessor's
[the Minister’s] analysis. It is, I believe, unlikely that it was
the intention of the Court in Continental Bank (supra) to
overrule decisions such as Minden (supra) and Riendeau (supra)
without referring to them. Accordingly, I am of the opinion that nothing
said in Continental Bank can apply to prevent the Minister from relying
on section 245 in the present case.
[Emphasis added.]
[38] We should remember that Thorson P. wrote in M.N.R.
v. Minden, 62 DTC 1044, at page 1050:
...In considering
an appeal from an income tax assessment the Court is concerned with the
validity of the assessment, not the correctness of the reasons assigned by the
Minister for making it. An assessment may be valid although the reason
assigned by the Minister for making it may be erroneous. This has been
abundantly established.
[Emphasis added.]
[39] It should also be pointed out that the Federal Court of
Appeal wrote the following in Canada v. Riendeau, [1991] F.C.A.
No. 559 (QL), [1991] 2 C.T.C. 64, 91 DTC 5416:
In the
present case, the amounts assessed remained the same throughout. What is
disputed is that the assessments were originally said to have been made on the
basis of repealed subsection 74(5) of the Act which, the appellant says,
rendered the assessments invalid notwithstanding that the Minister afterward
corrected this mistake by confirming the assessments on the basis of sections 3
and 9 of the Act.
In our view, the Minister's mental process in making an
assessment cannot affect a taxpayer's liability to pay the tax imposed by the
Act itself. He may correct a mistake. The trial Judge was right in rejecting
the appellant's argument and in determining that the Minister was entitled to
confirm the reassessments in question.
[Emphasis added.]
[40] Finally, two other Tax Court of Canada decisions
deserve mention-- Sauvé v. The Queen, 2000 DTC 2003 [English
version], and Blanchette v. The Queen, 2003 DTC 875. In the first
one, the Minister had included in the taxpayer’s income, as a taxable capital
gain, 50% of an amount of interest. Dussault J.T.C.C. wrote, at page 2005:
…[T]he amount added as business income included only the $6,000 in
compensatory damages and the interest received on that amount (minus the legal
fees paid). In addition, only the interest received on the capital
invested, minus the legal fees paid (representing 50 per cent of the amount of
the interest) was considered a capital gain, seventy-five per cent of
which was included in the taxpayers' income. This approach, of course, was
clearly wrong, but, relying on subsection 152(9) of the Act, counsel for
the Minister argued that the amount received was actually includable interest.
He acknowledged, of course, that the amount of the assessment could not be
increased in any way. ...
On this question, which is something of a
preliminary one, I believe that the respondent can indeed rely on the
provisions of the new subsection 152(9) to advance a new argument in
support of the assessment, which means -- as has been held many times -- in
support of the very amount of tax assessed. …
[Emphasis added.]
[41] And
at page 2006, Dussault J.T.C.C. added:
... Since the assessments made cannot be
varied by adding extra amounts to make up for the fact that only 75 percent of
the net amount received as interest on the reimbursed capital invested was
included in income, I can only conclude that the amount that was included in
income and that represented interest must in fact remain as income.
[Emphasis added.]
[42] In Blanchette Garon C.J.T.C. also applied the
same interpretation of subsection 152(9) of the Act to allow the
Minister to raise alternative arguments in his Reply to the Notice of Appeal.
In that case, the Department had disallowed the claim for certain expenses,
assuming that the corporation existed but that its partners were silent
partners. In his Reply to the Notice of Appeal, the Minister raised a new
argument in support of his assessment. He maintained that the corporation did
not exist; the taxpayers objected to this alternative argument because they
felt that this was a new basis for the assessment. Here is how Garon C. J.
expressed himself at paragraphs 20 and 21 of his decision:
[20] In my view, the Minister of National Revenue is entitled
in the instant case to argue that the partnerships in question are
non-existent and that, if they do exist, they are limited partnerships. This
evidence, if accepted by the judge, would establish that the assessed
amount is not too high. The respondent is not asking that the Minister of
National Revenue be authorized to amend the assessments or, if I may put
it in more technical terms, is not asking that the appeals be dismissed and
that the assessments be referred back to the Minister of National Revenue for
reconsideration and reassessment. ...
[21] If I accepted the proposition put forward by the applicants, it
would follow that the respondent could advance an alternative argument under
subsection 152(9) of the Act--and present any
evidence supporting it--only if the effect of that argument would be to
justify the specific amount of the assessment under appeal. If it led to
the determination of an amount of tax greater than that assessed, if only by a
few dollars, that argument would be inadmissible. To accept such a proposition,
it seems to me, would be to introduce an arbitrary and artificial element into
the assessment appeals system. Furthermore, subsection 152(9) of the Act is
general in scope; it does not make the presentation of an alternative argument
in support of an assessment conditional on that argument's resulting in a
determination corresponding exactly to the amount of the assessment under
appeal.
[43] To summarize, what is at issue is the amount of tax
determined in the assessment. If this amount can be justified by other
provisions of the Act, it is possible to do so. The purpose of the exercise is
to ensure that the amount of tax determined by the Minister is justified in
law. Canadian taxpayers need pay only what they are required to pay under the
Act. The fact that one of the Minister’s auditors may have erred with respect
to the justification for her assessment does not necessarily mean that it is
incorrect. Adopting an excessively procedural approach would make it possible
for the wealthiest taxpayers to resort to the services of the cleverest tax
lawyers, who could, by pleading procedural considerations, successfully contest
assessments even if, in law, those assessments were otherwise well founded. In
that situation, all Canadian taxpayers would be forced to make up for the
shortfall resulting from this approach.
[44] If this procedural approach were to be applied to the
facts in this appeal, would tax fairness and justice be well served if the
outcome would be to allow a taxpayer to appropriate $240,000 from his own
corporation, without having to pay any tax at all, while the other Canadian
taxpayers are obliged to pay income tax when they receive either a salary or
dividends from their corporations?
[45] It must be remembered that the role of a judge is to
ensure that assessments made by the Minister comply with the Act. If, on his
own authority, a judge cited a section of the Act or a legal principle
that allowed a taxpayer to successfully contest a Minister’s assessment, it is
my view that few persons would be opposed. Therefore, why should a judge
refrain from citing this type of rule or statutory provision in order to
justify a Minister’s assessment? The fundamental role of a judge is to remain
impartial. In my view, if a judge were to intervene only when such an action
had the potential to prove advantageous for a taxpayer, that action would go
against his or her duty to remain impartial.
[46] I believe that the approach that I am adopting is
consistent with the one described by Rinfret J. of the Court of Queen’s Bench
(now the Quebec Court of Appeal) in Poulin v. Laliberté, [1953]
Q.B. 8, at pages 9 and 10:
[translation]
The issue is this:
What exactly is justice?
Must a judge
listen to the testimony, hear the arguments and limit himself to ruling solely
on the basis of the evidence and the arguments that are presented to him by the
counsel for the parties, all without uttering a word?
If he notices
that, through inability or ignorance, a counsel inadvertently fails to present
a piece of evidence or make an argument, must the judge render a decision that he knows
to be inequitable for the parties?
Must the client
suffer as a result of the ineptitude of his counsel?
Some would say
yes; they are of the school that the judge must keep strictly and steadfastly
to what is presented to him and that it is the counsel, not the judge,
who are in charge of the trial.
The other theory
maintains, on the contrary, that the only person in charge of the trial is
the judge and it is up to the judge to direct it in the best interests of
justice. To do this, the judge must consider all the facts, even those that
others, for one reason or another, have failed to present; he must raise
questions of law, even if they are not presented to him, provided that, in
each case, he allows the parties or their counsel an opportunity to debate
them.
The law or, if we
will, justice is not a matter of surprises or technicalities.
It is the
judge's duty to shed as much light as possible on the issue, rectify the situation and compensate
for the lawyer's ineptness or ignorance, as required. This is how I
understand justice.
However, the
judge must not cause the parties to lose their vested rights, and it is by
exercising his discretion that he can ensure that they are protected.
[Emphasis added.]
[47] Author Jean‑Claude Royer, in La preuve
civile, 2nd ed., Cowansville, Quebec: Les Éditions Yvon Blais inc.,
1995, favours this approach:
[translation]
204 — Conclusion — The courts
have generally adopted the interventionist theory set forth by Rinfret J. That
doctrine favours seeking greater justice, even if it brings harm to the
accusatory and contradictory trial system. Moreover, it corresponds more to
modern social ideas inspired by a more objective conception of the law, which
has led to a legislative evolution destined to increase the role of the judge.
[Emphasis added.]
[48] It is important to
stress that a judge’s intervention must take place within the framework of
acquired rights, as was noted in Poulin, and respect the rule of
procedural fairness. If an alternative argument is put forward, the other party
must not be caught by surprise and must be given an opportunity to either
adduce the facts as evidence, or to argue against this alternative argument.
Obviously, in this context, the judge must remain faithful to his duty of
impartiality. He cannot become counsel for one of the two parties. By politely
approaching the various witnesses with an openness of spirit, and, while
seeking the truth, being as vigilant with respect to the witnesses of one party
as to the other, he will be able to discharge his duty of impartiality.
[49] At the start of the hearing, I asked counsel for
Mr. Massicotte if there was a problem with respect to the relevant
taxation year regarding the inclusion of the benefit that could result from the
transfer of the $240,000. If there were to be a taxable benefit pursuant to section
246 of the Act, he was not contesting the fact that 1995 was the relevant year.
However, his position changed in the event there were to be a taxable benefit
pursuant to paragraph 6(1)(a) of the Act.
[50] The position defended by this counsel is that taxation
of employment income must necessarily be based on the actual receipt of funds
by the employee. To support his position, he cited M.N.R. v. Rousseau,
60 DTC 1236, French reasons at p. 1241, and Phillips v. Canada,
[1994] T.C.C. No. 597 (QL), 95 DTC 194, which confirm that compensation
paid to an employee is only taxable when received by the employee. Accordingly,
a bonus promised by an employer does not have to be included in the employee’s
income if the employee did not actually receive it.
[51] However, the issue here is not the extent to which the
compensation (salary and bonus) received by Mr. Massicotte constitutes
income to which section 5 of the Act applies. Instead, we must determine here
whether an employee or an officeholder received or enjoyed a benefit by virtue
of his office or employment, pursuant to paragraph 6(1)(a) of the
Act. In my view, the approach that must be used here is the one used by the
Federal Court of Appeal in Kennedy v. Canada, [1973] F.C. 839. In that
decision, the Court of Appeal was forced to apply subsection 8(1) of the Income
Tax Act (R.S.C. 1952, c. 148), which, as of 1972 became subsection
15(1) of the Act. Here is how Jackett C. J. expressed himself on the
significance of a benefit given to a shareholder, within the meaning of
subsection 8(1) (now 15(1) of the Act):
10 A preliminary point should be
mentioned in connection with 1965. As has already been indicated, the
assessment was based on the assumption that the appellant purchased a property
worth $344,000 from his own company for $259,000 and that payment of the price
was effected by the appellant assuming mortgages in the sum of $311,000 and
being given back a promissory note for $53,000. The appellant says that,
even if these factual assumptions are all correct, to the extent of the amount
of $53,000 the benefit has not been "conferred" until the money is
in fact paid and none of it was paid in 1965. In support of this
contention, the appellant relies on authorities regarding the question as to
when amounts such as dividends, interest and rent become "income" for
purposes of income tax legislation. In my opinion, the question involved in
that sort of case is not the same as the problem under section 8(1). In the
case of "income", it is assumed, in the absence of special provision,
that Parliament intends the tax to attach when the amount is paid and not when
the liability is created. (The courts naturally react against taxation
before the income amount is in the taxpayer's possession.) Here, the
question is when a "benefit" has been "conferred"
within the meaning of those words in section 8(1). In my view, when a debt
is created from a company to a shareholder for no consideration or inadequate
consideration, a benefit is conferred. (The amount of the benefit may be a
question for valuation depending on the nature of the company.) On the other
hand, when a debt is paid, assuming it was well secured, no benefit is
conferred because the creditor has merely received that to which he is
entitled. I am, therefore, of the opinion that the $53,000 promissory
note must be taken into account for the purposes of section 8(1) in the
year in which it created an indebtedness from the company to the appellant,
namely, 1965.
[Emphasis added.]
[52] Paragraph 6(1)(a)
of the Act refers not to a benefit conferred, but to a benefit received, by a
taxpayer or enjoyed by a taxpayer but there is no incompatibility between these
expressions. On the contrary, one is the reverse of the other. When there is a
question of a benefit conferred, the situation has to be looked at from the
viewpoint of the provider of the benefit. When there is a question of the
receipt or enjoyment of a benefit, it has to be looked at from the viewpoint of
the receiver of the benefit. In other words, if a benefit was conferred by one
person on another, this means that the receiver received it or enjoyed it.
Therefore, to the extent that Mr. Massicotte's transfer of the $240,000 debt to
Pub was made in return for consideration, the value of which exceeds the fair market
value of the debt, there is a benefit that has been conferred directly by Pub,
and that benefit was received or enjoyed by Mr. Massicotte from the very
instant that an obligation to pay the consideration arose.
[53] Further, counsel for
Mr. Massicotte argues that his client acted in good faith and had no
intention of profiting from the transaction in question. He bases himself on Robinson
v. M.N.R., 93 DTC 254, a ruling in which Rowe D.J.T.C.C. of this Court
ruled that the taxpayer had no intention of appropriating $64,022 in company
funds for his own use. Here is what Rowe D.J.T.C.C. stated at pages 257
and 258:
Subsection 15(1) contemplates an
appropriation for the benefit of a shareholder and/or a benefit or advantage conferred
on a shareholder by a corporation. The Appellant was the sole
shareholder of the corporation and must either be responsible for taking unto
himself or setting aside for a special purpose something of value from the
corporation or, as the directing mind of the corporation, be responsible for
the bestowing or granting of a benefit, and at the same time in his personal
capacity agree to accept it and adapt it for his own use. Although it is the
same mind operating in both instances, the Appellant while wearing his
shareholder's hat did nothing consistent with taking, or appropriating a
benefit, and, as Director and President, when exercising control over the
corporation, did not intend to have conferred anything on himself, and
as a putative recipient, he was an unwilling and uninformed beneficiary. The
accountants, in erroneously recording a transaction, were not acting
pursuant to any direction to achieve such an end on behalf of either the
corporation or the Appellant as a shareholder. Clearly, the record keeping
was not in accord with the facts and ran counter to the intent of the Appellant
at the outset when he undertook to correct an error by depositing into
the corporate bank account funds which truly belonged to it. He was discharging
his duty as trustee made necessary by the inadvertent act of the payor in
making him the payee of the cheque. ...
In order for there
to have been an appropriation,
the Appellant must have "appropriated". Black's Law Dictionary,
Sixth Edition, defines "appropriate" as:
To make a thing
one's own; to make a thing the subject of property; to exercise dominion over
an object to the extent, and for the purpose, of making it subserve one's own
proper use or pleasure.
It is apparent that the words used in subsection 15(1) refer to some form
of action with a strong component of intent and certainly cannot be seen
to embrace an event that is the result of mutual mistake between the parties,
that is, the shareholder and the corporation, when the mistake is the result of
an act or omission of a third party operating in good faith but on a faulty
premise.
[Emphasis added.]
[54] Obviously, if an accountant makes an adjusting entry
that does not correspond with reality and, as a result, that entry is
erroneous, in such circumstances the provisions such as those found in
paragraph 6(1)(a) or subsection 15(1) of the Act cannot be
applied. On the other hand, there is no question here of any accounting errors.
In this situation, the adjusting entries on the books of Amadéus and of Pub
were made based on instructions from Mr. Massicotte or one of his
employees, Mr. Bureau, apparently to avoid the application of
subsection 15(2), as allowed under subsection 15(2.6) of the Act when
advances are repaid within one year following the taxation year in which the
debt was created.
[55] In my view, in order for paragraph 6(1)(a)
of the Act to apply, it is not a requirement that the taxpayer had intended to
confer a benefit upon himself. That is not a requirement that was dictated by
the federal Parliament. Objectively speaking, if it can be determined that a
benefit was conferred on a person or – if we look at it from another
angle—that the person received or enjoyed that benefit, the amount of any
such benefit must be included in income to the extent that the other conditions
set out in the relevant sections are met.
[56] Now, we need to apply these rules and this approach to
the relevant facts in this appeal.
(A) The
$240,000 credit to the "employee advances" account in 1995
• Contradictory
evidence and credibility of key witnesses
[57] The appeals by
Mr. Massicotte and by Pub raise serious issues of credibility. The Court
heard contradictory evidence from the two former partners,
Messrs. Massicotte and Audy. In general, the testimony from
Mr. Massicotte was much less credible than that of Mr. Audy.
[58] According to
Mr. Massicotte, the $240,000 amount described in Article 3 of
the separation agreement was compensation that took into account several items,
including, primarily, the $240,000 salary (that is, two times $120,000) that he allegedly waived in 1993 and
1994, compensation of $200,000 on account of the early departure of
Mr. Audy
and compensation of $50,000 for Mr. Audy’s failure to comply with the
non-competition agreement
and for alleged harm to the reputation of Mr. Massicotte and alleged moral
damages.
All this represents a great deal of money (at least $490,000) as well as a staggering number of
possible explanations! But which of these explanations actually applies to what
the parties agreed to on June 10, 1994? The explanations appear to have been
provided after the fact. In Mr. Audy’s case, he claims that the $240,000
represented the outstanding amount that Cyrano owed Mr. Massicotte for the
Pub shares acquired in 1990. This balance allegedly resulted after the payment
of the first $50,000 several days after the contract was signed, followed by
the payment out of the dividend of $50,000 paid out in July 1991, leaving a
balance of $250,000. (A further $10,000 may have been paid at some other point
after July 31, 1993.)
The parties intended that Cyrano be released from the obligation to pay off
this balance.
[59] Mr. Massicotte stated that not only was he fully
paid for the shares, but he also received $33,294 over and above what was
due him. Further, no interest was payable on the unpaid balance. All this
raises doubts regarding the accuracy of Mr. Massicotte’s story!
[60] One other reason that gives cause for doubting the
accuracy of Mr. Massicotte’s story, according to which nothing was owed to
him with respect to the balance of the proceeds of the sale of Pub shares to
Cyrano, is that Cyrano’s obligation to pay off this balance on or before
September 30, 1997, was limited to its share of the dividends paid out by Pub.
Because for several years Pub had suffered losses or earned little in the way
of profit, it is not surprising that Pub paid out little in the way of
dividends to Cyrano. As seen in Table 1 and notes 10, 19 and 20 above, the only
dividends Pub paid to Cyrano between 1990 and 1995 were the one for $50,000 in
July 1991, and the one for $1,650 in July 1992. How would Cyrano have been
able to pay out $40,461 from August 1, 1992 to December 31,
1992, $150,683 in 1993 and $47,500 in 1994? Furthermore, Cyrano had no interest
in paying off the balance of the sale price because it bore no interest. It is
therefore plausible that Mr. Audy’s version of the facts is the correct
one.
[61] In addition,
Mr. Audy’s story is supported by the Cyrano financial statements prepared
by KPMG, which show that at July 31, 1992, and at July 31, 1993,
long-term debt for the Pub shares amounted to $250,000! Finally, at the time Mr. Audy
testified, he was not even aware of the alleged $383,294 that his company,
Cyrano, had apparently paid for these shares!
[62] Both former partners
stated during their testimony that they had sold their shares by signing
two share sales agreements on May 30, 1994, one for the shares in Im‑Média,
between Mr. Massicotte (vendor) and Mr. Audy (purchaser), the other
for the Pub shares, between Cyrano (vendor) and Amadéus (purchaser). At the
very least, they misled one another by making such statements because, from all
appearances, both agreements were backdated. Even if it states that the closing
date [translation] "shall
be May 30, 1994, at 2:00 p.m." for the sale of the Pub shares by
Cyrano, and [translation]
"at 3:00 p.m." for the sale of the Im‑Média shares by
Mr. Massicotte, and the parties declared that [translation] "they have signed
at Québec, this 30th day of May, 1994" (Exhibit A‑1, tabs
27 and 28, Article 2 and in fine), Mr. Massicotte
acknowledged, prior to the start of the arguments, that they may have been
signed after June 10, 1994. The clues were too numerous to be able to
deny such a finding of fact.
[63] First, in the separation
agreement dated June 10, 1994, drafted by Mr. Massicotte himself, the
parties agreed specifically that Cyrano would sell [translation] "effective this date", all Pub
shares that it held to [translation]
"Massicotte, Amadéus, or any other entity(ies) that they may name".
If the sale of the Pub shares by Cyrano to Amadéus had actually taken place on
May 30, 1994, how is it that on June 10, that is, 11 days later, no one
knows if the shares will be sold to Mr. Massicotte, to Amadéus or to any
other entity that they may name? How is it possible to stipulate that the sale
takes place "effective this date", that is, June 10, 1994, if the
sale has already taken place on May 30, 1994? Similarly, in
paragraph 3 of the separation agreement "Cyrano, Audy" agree to
acquire all the shares in Im‑Média held by Mr. Massicotte for the sum of $70,000, whereas
according to one of the agreements dated May 30, 1994, it was Mr. Audy who
acquired the 500 Class A shares in Im‑Média. Why did the agreement
not read "Mr. Massicotte sells" these shares effective
this date? [translation] "Agree
to acquire" seems to indicate that the sale had not even taken place
on June 10, 1994!
[64] It is more than
likely that the sales agreements were drawn up after June 10, 1994, and then backdated to May 30, 1994, to accommodate the rules
regarding corporate changes of control, according to which a new fiscal year
begins whenever such a change is made. It was more convenient for the parties and their accountants that the
acquisition of control of Pub by Amadéus and of Im‑Média by Mr. Audy take
place at the end of May (or thereabouts) than in June, when they finalized the
separation agreement.
[65] One other
requirement that does not conform to reality is the one in the agreement
concerning the sale of the Im‑Média shares, whereby the vendor, Mr. Massicotte, acknowledges that he
received the $70,000 sale price on May 30, 1994. The evidence showed
instead that Mr. Massicotte received this amount in two equal payments,
one on June 21, 1994 and the other on July 14, 1994. The funds
required for these two payments came from Pub, in two cheques, for
$35,000 each, which it gave in two steps to the accountant for
Mr. Audy and Cyrano.
It had to be done this way because Pub did not have sufficient funds in the
bank to pay the $70,000.
[66] Furthermore, even
though Mr. Audy signed
the agreement to purchase the Im‑Média shares at the stated price of
$70,000 (Exhibit A‑1, tabs 28 and 30), he claims that it does not
reflect reality, because he stated that the Pub and Im-Média shares were worth
only one dollar, the only amount that had been agreed upon. It was
Mr. Massicotte who had allegedly asked that the price for the Im‑Média
shares be shown as $70,000. This $70,000 sale price was paid by means of the
$70,000 payment that Pub made to the accountant (in all likelihood on behalf of
Cyrano or Mr. Audy), the amount which Mr. Massicotte described as a
severance allowance. Mr. Audy stated that he had agreed to go along with
this ruse after having been assured by his accountant that it was not an
illegal transaction.
[67] In presenting his
arguments, counsel for Mr. Massicotte attacked Mr. Audy’s credibility
because Mr. Audy had allegedly contradicted himself in the following portions
of his testimony. The questions being asked involved Article 3 of the
separation agreement, specifically the 18-month period and the commitments
referred to in that article. According to Mr. Audy, the 18-month period
applied only to the exchanges referred to in articles 3.1 and 3.4 of that
agreement:
[translation]
Q. As far as you were concerned,
then, when it states: these must be settled within 18 months, as far as
you were concerned, that meant what? Was it 3.1 and 3.4? How do you interpret
that?
A. No. In my mind, when I read
this document again, that did not refer to 3.1 and 3.4 but to 3.2, and to 3.3.
[Vol.
IV of the transcript, page 23.]
[68] Further on, in
talking about exchanges (of services) that he had offered Mr. Massicotte,
Mr. Audy said this:
[translation]
Q. Was
any part agreed to?
A.
There was a small part that was agreed to and it was that clause where we had
more than eighteen (18) months to close it.
[Vol. IV of the transcript, p. 30.]
[69] In my opinion, we
should not see here an indication of bad faith on the part of Mr. Audy.
Given the wording of Article 3, which is far from being clearly written by
Mr. Massicotte, one can easily understand that he was misled with regard
to the scope of this article. Further, the nervousness which often accompanies
a witness testifying in court could also explain this misinterpretation of the
agreement. Also, I needed Mr. Massicotte’s explanation before I myself was
able to understand the 18-month period that applied to the exchanges provided
for in articles 3.1 and 3.4.
[70] When he testified,
Mr. Audy denied having told the Minister’s auditor that the $70,000 paid
by Pub to Cyrano was a gift. Counsel for Mr. Massicotte asked that a
portion of the audit report from the Im‑Média file (company that was
merged with Cyrano) be read to Mr. Audy. In it the auditor stated that she
could not accept the argument that the $70,000 represented a gift, because
these were [translation] "two
arm’s-length parties that were bickering" (Q. 1168, p. 299,
Vol. 2 of the transcript). Counsel for Mr. Massicotte saw in that
response a contradiction with Mr. Audy’s testimony, but it was never
established that Mr. Audy was present at the meeting with the auditor.
Also, the auditor only identified one person who was present at the meeting, a
tax expert for Mr. Audy. Therefore, there is no evidence that
Mr. Audy made such a statement and that he contradicted himself.
[71] In my view, none of
the portions selected by counsel for Mr. Massicotte is probative with
regard to Mr. Audy’s lack of credibility. However, all the evidence shows
that it is not easy to grant a great deal of credibility to some of the
statements by Mr. Massicotte or to certain of the documents that he
prepared.
• Nature of the
$240,000 debt
[72] Regarding the various contradictory accounts of the
true nature of the $240,000, Mr. Audy’s account appears to me to be more
plausible than Mr. Massicotte’s. It is difficult to believe that Mr.
Massicotte would have received $33,294 over and above what he was entitled
to. I believe rather that the discharge of the debt described in Article 3
of the separation agreement referred to the balance of the selling price of the
Pub shares to Cyrano in 1990. It is entirely plausible that in 1990
Mr. Massicotte had inflated the value of the Pub shares sold to Cyrano to
$350,000 in order to perform a term strip and that, given the failure of
their partnership, he had to waive the unpaid balance of the selling price of
those shares. Further, Mr. Audy stated that the price had been inflated.
According to him, it was easy to manipulate the revenues of an advertising firm
by adding or not adding revenues at the end of the fiscal year. We should add that the sale of 50% of the Pub shares in December 1990 by
Mr. Massicotte to Cyrano for $350,000 reveals a market value of
$700,000 for all the common shares of Pub (the Class A shares), for a
ratio of 5.9 to 1, compared with the retained earnings of $119,000. The
after-tax profits realized by Pub for its first two fiscal years were $12,701
for 1989 and $106,327 for 1990 (or $119,028 in total). The ratio
therefore rises to 6.6 to 1, compared with the 1990 profits, and to 11.8 to 1,
for the average profits for the first two fiscal years of Pub. These ratios in
my view are very high
for well-established businesses similar to Pub and, therefore, even higher for
a company that has only been in operation for two years!
[73] However, it is
possible that Mr. Massicotte may have wanted to ensure that writing off
his $240,000 debt consisting of the balance of the 1990 sale price of his
shares was in effect a writing‑off only to the extent that Mr. Audy
was successful in having the lease cancelled, where he would ensure that
Mr. Massicotte was released from his backing of the loan made by Im‑Média,
and where Im‑Média, Cyrano and Mr. Audy would assume their share of
Pub’s $200,000 line of credit from which Mr. Audy and Cyrano, from all
appearances, benefited within the framework of the company’s operations. We
need to remember that a substantial amount of fees was paid to Cyrano during
this period.
[74] Further, the
separation agreement was not intended to create a debt in favour of Pub and
Mr. Massicotte. Instead, it was designed to release Mr. Audy and
Cyrano from one such debt. This release, as we saw earlier, depends on several
conditions being met. If the $240,000 amount really represented compensation
for the salary which Mr. Massicotte claims to have waived (the first
reason mentioned by Mr. Massicotte in his testimony at the hearing), why would he have waived it if
Mr. Audy and/or Cyrano were able to keep their commitments that are set
out in Article 3 of the separation agreement? According to Mr. Audy,
meeting these commitments did not pose a problem.
[75] Also, the discharge
is worded strangely. It is contained in Article 3, entitled [translation] "Sale of shares Im‑Média
and discharge of debt", which deals with the sale of the Im‑Média
shares, and not in Article 2, which deals with the shares in Pub, the primary
beneficiary of the discharge conditions. Also, Article 2 does not specify
the nature of this debt. Therefore, all parties are free to put forward their
own contradictory interpretations on that issue.
• Date of transfer
of the $240,000 debt
[76] Mr. Massicotte
contends that the transfer of the $240,000 debt to Pub took place in late
1994 or early 1995 with the help of Mr. Chabot, his accountant, but Mr. Chabot
denies being involved in the decision to make this transfer. In my view, if the
adjusting entry was not made for the fiscal year ending on December 31,
1994, it was because Mr. Chabot had not been told about the transfer, at
least until the first few months of 1995. Also, the Minister assumed that the
transfer of the debt took place on December 31, 1995; it was therefore up to
Mr. Massicotte to produce evidence to the contrary. The evidence that he
provided was not sufficient to demolish this assumption on the part of the
Minister.
There was no legal transaction to give effect to the transfer. Faced with a
lack of probative evidence, I conclude that the debt was transferred on
December 31, 1995.
• Fair market value
of the $240,000 debt
[77] Unfortunately for
him, Mr. Massicotte did not supply any expert witnesses to counter the
assessment of the Minister’s expert or to justify a market value of $240,000
for the debt as of December 31, 1995. In my view, he did not do this because no
credible assessor would have been able to confirm as high a value! Furthermore,
I believe that the zero value set by the Respondent’s expert is rather reasonable.
Obviously, there is the possibility that the debt is worth slightly more.
Gamblers are prepared to purchase lottery tickets even though the chances of
winning are much lower than the chances Pub had of recovering a portion of the
$240,000. In my view, $1,000 represents an arbitrary figure that is far
removed from the $240,000 figure defended by Mr. Massicotte, but it still
has the advantage of being higher than the zero value used by the Minister. It
is important to remember that this value was based strictly on the inability of
the debtors to discharge an obligation to pay $240,000, and this was because of
the negative value of their respective net assets.
[78] Counsel for
Mr. Massicotte indeed attempted to attack the probative value of this
opinion by stating that the assessment of the ability of the debtors to pay had
been based strictly on net assets, and not on existing assets. Obviously, any
attempt to value an asset is a perilous exercise. This is even truer when one
is dealing with a debt such as the one that is at issue here, but I will point
out here that the expert had assumed that the $240,000 debt corresponded to a
debt of Mr. Audy or of Cyrano, and that she did not take into account the
potentially litigious nature of the debt or its conditional nature. Cyrano and Mr. Audy have always
felt, since June 10, 1994, that this amount would never be paid. The fact that
the sale price of the Pub shares was inflated in 1990 supports such a position.
According to Mr. Audy, all the conditions necessary for the discharge of
this debt to take place would be realized and, apart from the one relating to
the repayment by Cyrano of its share of the line of credit, had indeed been
realized. Up until the time of its bankruptcy, Cyrano (which later became Im‑Média)
was making regular payments on this debt.
It is not necessary to decide here the extent to which the claims of
Mr. Audy and Cyrano were well founded. In any case, the claim for payment
of this conditional debt could be contested by Mr. Audy and, in order to
obtain payment, legal proceedings could be required. Who would have paid
$240,000 for this type of debt under these circumstances? In view of the high
costs associated with seeking remedy through the courts and the delays that
this would involve, and in view of the fact that the debt bore no interest, the
value of the debt was greatly diminished.
[79] Counsel for
Mr. Massicotte placed a great deal of emphasis on the fact that it was in
the best interests of Pub to acquire this debt in order to facilitate repayment
of the $100,000 line of credit. In my view, these interests go no further than
the payment to Mr. Massicotte of an amount greater than the value of his
debt. No one spends $240,000 to get $68,000. Under the terms of the separation
agreement, Pub was already entitled to require that Cyrano and Mr. Audy
assume responsibility for repaying the line of credit up to a maximum of
$100,000.
• Nature of the
$240,000 benefit conferred on Mr. Massicotte
[80] Mr. Massicotte
confirmed that the advances recorded by Pub in the "employee
advances" account (Exhibit A‑1, Tab 39) were paid to him
between May 1994 and December 1996. These advances represent payments towards
his salary. As a result of the transfer of the $240,000 debt,
Mr. Massicotte hoped to repay the advances and avoid, under
subsection 15(2.6), the taxation provided for in subsection 15(2) of the
Act. In effect, as a result of the adjusting entries made on December 31,
1995, his account had a credit balance of $125,358, and then it was Pub who
owed money to Mr. Massicotte. Here is the reconciliation done by the
auditor using data that she was able to obtain, with a great deal of
difficulty, from Pub (Exhibit A‑1,
Tab 42, p. 1):
|
Reconciliation of this amount with the
accounting records of Consultants Pub Création Inc
|
|
|
|
|
|
|
|
Employee
Advances account #11 490 – balance before adjustment
|
106,985.57 See p. 2
|
|
|
|
|
|
|
|
A/E # 3471
|
31/12/1995
|
Employee
Advances
|
- 2 343.85
|
|
|
A/E # 3472
|
31/12/1995
|
Employee
Advances
|
10 000.00
|
|
|
A/E # 3473
|
31/12/1995
|
Employee
Advances
|
- 240 000.00
|
- 232
343.85
|
|
Employee
Advances account #11 490 – balance after adjustments
|
- 125
358.28
|
|
|
|
|
|
|
|
|
[81] This credit balance
is shown on Pub's balance sheet at December 31, 1995. The financial statements were
approved by Mr. Massicotte because he was the sole director of Pub in
March 1996,
and he attached them to Pub’s return of income, which he signed as President on
March 15, 1996.
[82] Since I consider the
$240,000 debt to be worth $1,000 at the time of the transfer in December
1995, and Pub credited Mr. Massicotte’s employee advances account with
$240,000, Pub therefore conferred a benefit of $239,000 on him. In my view,
this amount must be included in Mr. Massicotte’s income under
paragraph 6(1)(a) of the Act. This is a benefit that
Mr. Massicotte received in 1995. His estate grew by $239,000 at the
time of this transfer. How can it be argued that he did not "receive"
or "enjoy" a benefit under such circumstances when the $240,000
credit repaid $114,642 ($106,986 + $10,000 − $2,344), which was
the balance in the advances account prior to this credit, and created a credit
balance of $125,358.28 which Mr. Massicotte could withdraw from Pub
whenever he wanted, just as if it were a deposit in a bank or credit union? This
is in fact what Mr. Massicotte did.
[83] It must be
remembered that as a result of the transfer of his debt Mr. Massicotte
realized a capital gain of $1,000, because he received proceeds of disposition
in the amount of $240,000, from which must be deducted his tax cost (adjusted
cost base) of zero
and the sum of $239,000, which must be reported as income from an employment.
Three quarters of the capital gain must be included in his income as a taxable
capital gain, pursuant to section 38 of the Act.
(B) $44,650 credit in 1993
[84] Mr. Massicotte’s
assessment for 1993 included in his income a benefit arising out of a $44,650
credit from Amadéus to the shareholder advances account (Mr. Massicotte, in
this case). According to Mr. Massicotte, this credit corresponds to the
consideration paid by Amadéus for the transfer of the 4,465 Class C
preferred shares which Mr. Massicotte had previously acquired from Cyrano.
[85] Obviously, if we were to rely solely on the May 30,
1994, sale agreement, the transfer of these shares would not have occurred in
1993, but in May 1994. Further, it would have been made directly from Cyrano to
Amadéus, but we know that this agreement was backdated and that it was
apparently drawn up pursuant to the June 10, 1994, agreement. What is troubling
is the fact that Cyrano apparently sold all its shares in Pub for one dollar,
under this same agreement. However, the separation agreement does not provide
any details as to which shares were included in [translation] "all the shares" held by Cyrano. If,
in the mind of Cyrano, the only shares it had left were the 350 Class A
shares, the provision that the sale was for the sum of one dollar per share, or
$350, could be almost consistent with the statement by Mr. Audy, who
stated that the Pub shares were not worth more than one dollar. Since
Mr. Massicotte drew up the separation agreement, it is highly possible
that he gave poor expression to the agreement by the parties when he stated [translation] "one dollar per
share" rather than "$1.00" for [translation] "all the common and preferred shares",
as was stated in the May 30, 1994 sales agreement (Exhibit A‑1,
Tab 27, p. 2). At the time the agreement was signed, Mr. Audy
should have seen that he was not being given the sum of $350 and, if he had
truly been entitled to that amount, he would certainly have found the error.
Since that does not appear to have happened, I have concluded that one dollar
for all the common (Class A) shares was the agreed-upon price.
[86] However, I cannot come to the same conclusion with
respect to the 4,465 Pub Class C shares. According to the separation
agreement, Cyrano agreed to personally pay down a portion of the Pub line of
credit, that is, $100,000. If this debt is removed from its balance sheet,
Pub’s book value was no longer -$47,151 (See Table 1 above). Since the
4,465 Class C shares are shown on the books of Cyrano and the indicated
cost is $44,650, one must assume that this cost was borne by Cyrano, even if
Mr. Audy was unable to remember having invested this amount in Pub through
Cyrano. Further, even if he did not remember that Cyrano had transferred
$43,000 worth of shares (Class C preferred) [translation] "to Amadeus in consideration of the
remainder of the sale price owed by Cyrano to Louis Massicotte. Dated July
1, 1993", he recognized his initials beside this notation on
the Pub memo (Exhibit A‑1, Tab 26) and stated: [translation] "Well, I don’t
remember, but I initialled it, and so it must be" (Vol. IV of the
transcript, page 160). It is therefore unlikely that these shares would have
been transferred for just one dollar. We need to remember, also, that the
issued and paid-up capital of Pub included preferred shares worth
$185,410 (Exhibit A‑1, Tab 4, Note 6 of the Pub
financial statements). Therefore, it appears to me more likely that the account
given by Mr. Massicotte and confirmed by Mr. Audy is correct, that is,
that Cyrano had agreed to transfer its 4,465 Class C shares in Pub to
Mr. Massicotte in repayment of the outstanding balance of the sale price
of the Pub shares. Since these shares had a paid-up capital and value of
$44,650, Cyrano would therefore have paid in all $144,650 for the 350 Pub
Class A shares, which appears to me a more reasonable price than the
$350,000 figure that had been agreed upon in the 1990 contract of sale.
[87] The most plausible explanation in support of the
transfer of the 4,465 preferred Class C shares by Cyrano to Amadéus for
one dollar in May 1994 is that this transfer only gave effect to the
transfer described in the Pub memo. I therefore conclude that the
$44,650 credited to the shareholder advances account of Amadéus was in
consideration of the transfer by Mr. Massicotte of the 4,465 Class C
shares to Amadéus, contrary to what had been assumed by the Minister. Since the
Reply to the Notice of Appeal is silent with respect to the fair market value
of these shares as of the transfer date, and since I am unable to determine on
the basis of the evidence adduced, a fair market value that is different from
the amount credited to the shareholder advances account at Amadéus, I can only
conclude that subsection 15(1) of the Act applies here.
[88] However, the transfer date is, from all appearances,
after June 30, 1993, contrary to what is indicated in the financial
statements of Amadéus. First, the Pub memo itself shows July 1, 1993 as the
date of the transfer to Amadéus. The same transfer date appears in another memo
from Mr. Bureau to Mr. Trudel regarding the updating of Amadeus’s [translation] "company book" (Amadéus
memo) (Exhibit A‑1, Tab 25). This memo — like the Pub
memo — is undated, but the invoice is similar to the one in the Pub memo.
Also, much of the wording in the two documents is similar.
[89] Further, these two memos were, from all appearances,
issued after July 1,1993, because they describe transactions or events
that occurred on December 16, 1993, in the case of the Amadéus memo, and on
September 28 (1993), in the case of the Pub memo, which was the date of the
annual shareholders’ meeting.
[90] Therefore, it is likely that the Pub memo was drafted
and initialled after September 28 (1993), and that the one for Amadéus was
drafted after December 16, 1993. These memos—even the one concerning Pub,
which has been initialled— do not establish that there had been an agreement among
the parties on July 1, 1993, or at any other date. Furthermore, it is even
possible that these memos were written in 1994, after the separation agreement
of June 10, 1994, in order to
update the Pub minute book before making the distribution provided for by this
agreement, and that the transfer of the 4,465 shares did not take place
until 1994. In addition, the updating covered the period from 1991 to 1993. One
fact is clear—the 4,465 Class C shares appear on the Cyrano balance sheet
as at July 31, 1993.
[91] If, as I believe, the transfer of the 4,465 Class C
shares did not take place until after July 31, 1993, probably in 1994, the
credit recorded in the Amadeus shareholder advances account on June 30, 1993,
does not reflect reality. Therefore, instead of a credit balance
of $7,321, the advances account had a negative balance of
$37,329 ($7,321 – $44,650), which, from all appearances, could have
given rise to the application of subsection 15(2) of the Act. It is possible to
avoid including in the income of an individual, such as Mr. Massicotte, a
loan from a corporation, such as Amadéus, with which the individual has a
non-arm’s-length relationship provided the individual repays the corporation in
the taxation year following the one in which the loan was granted. It is
therefore possible that a portion of the debit balance of $41,452 at
June 30, 1992, would have had to have been included in
Mr. Massicotte’s income for the year(s) in which the amount was paid to
him. The only thing that we can be sure of is that we are not dealing with the
year 1993, but rather with a year prior to 1993, and that year is not covered
by the appeals before the Court. Therefore, subsection 15(2) of the Act
cannot be used to support the addition of the sum of $44,650 to Mr. Massicotte’s
income for 1993. The assessment for 1993 is therefore incorrect.
(C) Claim
by Pub for severance payment for the fiscal year
ending December 31, 1994
[92] In my view, in order
to determine whether Pub is permitted to claim the $70,000 expense in computing
its income for its fiscal year ended December 31, 1994, it is
necessary to determine the true nature of the amount. Mr. Massicotte
argued that it was paid out as a severance payment to Cyrano because of the
departure of Mr. Audy, who had been the General Manager of Pub. This
amount was part of the arrangements regarding the severance of the interests
held by Messrs. Audy and Massicotte in Pub and Im-Média.
[93] Mr. Audy denies
that he and Cyrano received any such allowance. In support of his argument, he
pointed to the fact that the Im‑Média shares were not worth $70,000. If
he had agreed to pay $70,000, it was out of a sense of courtesy to
Mr. Massicotte and because Pub had previously given him the same amount.
Also, the [TRANSLATION] "commitment discharge agreement", dated June
10, 1994, which is the same date as the separation agreement, establishes a
direct link between the payment from Pub to Cyrano and the payment from Audy to
Massicotte (Exhibit A‑1, Tab 31). The $70,000 payment by Audy to
Massicotte for the alleged purchase price of the Im‑Média shares was
conditional upon payment of that amount by Pub to Cyrano. In fact, this amount
was never even given to Cyrano—it simply passed through the trust account of
its accountants.
[94] In order to
determine who is telling the truth and thereby determine the true nature of the
$70,000 paid by Pub to Cyrano, let us examine the versions of the facts put
forward by each of the former partners.
• Value of Pub shares and value of Im‑Média
shares
[95] Mr. Massicotte claims that he had asked Cyrano
for $100,000 for his shares in Im‑Média, but in the end he agreed to
accept $70,000 because this was the amount of the unused balance of his
capital-gains exemption. Again according to Mr. Massicotte, his (common)
shares in Im‑Média were worth $70,000 at the time he sold them to
Mr. Audy in June 1994, which means that all the Im‑Média shares were
worth $140,000, whereas the same shares had been worth one dollar when
Mr. Massicotte acquired them from Amadéus on October 1, 1993, just eight
months previously. He justified this sudden increase in the value of these
shares by his personal involvement in the operations of Im‑Média, in
particular by helping to obtain a certain advertising contract with a magazine.
According to Mr. Massicotte, that contract, which was to enable Im‑Média
to realize substantial profits, was allegedly signed in or around December 1993
or January 1994. The contract was supposed to start on August 31, likely 1994,
and result in a tripling of Im‑Média sales for 1995, and increase the
value of all the common shares to $140,000!
[96] No evidence was adduced to corroborate
Mr. Massicotte’s testimony regarding this wonderful contract. Nor were
there any commercial valuation experts come forth to testify in support of this
type of valuation. Even after Im‑Média merged with Cyrano on June 1,
1994, Im‑Média remained in a deficit position at May 31, 1995, with a
deficit of $19,301. It is true that revenues at Im‑Média rose
substantially by May 31, 1995, compared with May 31, 1994. They multiplied 2.93
times but a large increase in revenues is no guarantee of profitability. By way
of example, we could cite the fact that Pub revenues for 1993 were nearly
triple what they had been in 1989, but Pub earned profits of $15,501 in
1989 and suffered a loss of $126,063 in 1993. We should add that the
profitability of advertising firms seems subject to numerous vagaries, because,
as can be seen from an examination of Pub’s financial statements, its (after-tax)
profits, which were $106,327 in 1990, actually rose to $149,082 in
1991, but fell to $3,300 in 1992, and turned to losses of $111,342 in
1993 and $54,809 in 1994.
[97] Mr. Audy argued
that the Im‑Média shares were not worth more than one dollar. He felt
that the Pub shares and the Im‑Média shares were worth the same amount
and Amadéus paid Cyrano just one dollar for the Pub shares. At first glance,
this point of view seems justified because both companies were losing money at
the time. In the case of Pub, the deficit at May 31, 1994, was $47,151
(Table 1) and Im‑Média’s deficit at May 31, 1994 (i.e. before the
merger) was $65,045 (Table 2).
If we deduct from Pub’s liabilities the $100,000 which Cyrano was supposed
to assume under the terms of the separation agreement, Pub’s value would go
from a negative value of $47,151 to a positive value of $52,849. However,
Cyrano, which had no apparent relationship to Mr. Massicotte or Amadéus,
agreed to sell its Pub shares to Amadéus for one dollar. With respect to
Im-Média, there is no evidence that Mr. Massicotte or anyone else had assumed a
portion of its indebtedness. Its deficit therefore remained at $65,045. From
this admittedly incomplete analysis, the Pub shares appear to be worth more
than the Im-Média shares. Amadéus acquired the Pub shares for one dollar. In my
view, Mr. Audy’s valuation of the Im-Média shares appears much more probative,
and this is the one that I will use.
• Severance
allowance
[98] Mr. Audy stated that
he had never asked for a separation allowance when he severed his ties with
Mr. Massicotte or when he left Pub. During the audit, one of Pub’s
representatives had initially told the auditor that the amount was for fees
(for services) owed to Cyrano. It was not until later that the $70,000 was
described as a severance allowance. There is no evidence that Mr. Audy
suffered any prejudice or that he was entitled to a severance allowance. It
must also be added that there was no written agreement and therefore nothing to
document the reasons for the payment of this type of amount to Cyrano by Pub.
Strangely, there is no mention in the separation agreement of the payment of this $70,000 by Pub as a
severance allowance! Nor is there any release showing that Mr. Audy or Cyrano
waived any lawsuits for damages resulting from Mr. Audy’s cessation of
employment as General Manager of Pub after the partners separated. It is most
unusual to pay a severance allowance without first obtaining a release.
[99] I believe that it
was out of courtesy, as he stated, that Mr. Audy agreed to the arrangement put
into place by Mr. Massicotte, an arrangement whereby Pub paid Cyrano the
$70,000 to finance the payment of this alleged price of $70,000 for the Im‑Média
shares. This arrangement allowed Mr. Massicotte to withdraw $70,000 from
Pub on a tax-free basis, using his capital-gains exemption. Furthermore,
Mr. Massicotte admitted that this figure matched his remaining
capital-gains exemption. Obviously, if a severance allowance had actually been
paid to him, Mr. Audy or Cyrano would have had to include it in their
income, which, from all appearances, neither Mr. Audy nor Cyrano were
prepared to accept. Mr. Massicotte was therefore able in this manner to
appropriate $70,000 from Pub. In my view, the Minister could very well have
considered the $70,000 as a benefit received from Pub in 1994, which
Mr. Massicotte reported as the proceeds of disposition of his shares in Im‑Média.
This is what the Minister's auditor had intended to do for the 1993 taxation
year, the year in which Mr. Massicotte came into possession of these same
Im‑Média shares for one dollar. The auditor had stated that she proposed
adding $70,000 to Mr. Massicotte’s income under subsection 15(1) of the
Act because she felt the shares were worth $70,000 in October 1993 and
Amadéus had conferred on him a taxable benefit. Although the analysis and the
relevant taxation year are different, the result would have been the same.
[100] In conclusion, Pub
has not succeeded in proving, on a balance of probabilities, that this sum
represented an expense that was incurred for the purpose of earning income from
a business. On the contrary, I believe that Mr. Massicotte appropriated to
himself the sum of $70,000 by simulating a sale of Im‑Média shares for
$70,000. The payment by Pub of this amount was part of the scheme.
[101] In my view, it is not necessary to use
subsection 246(1) of the Act to include the $239,000 benefit in
Mr. Massicotte’s income because paragraph 6(1)(a) of the Act
requires that the amount of the benefit be included. If I was wrong to conclude
thusly, I would conclude that this benefit should be included under subsection
246(1) of the Act. I would then conclude without any hesitation whatsoever that
the $239,000 benefit was conferred indirectly on Mr. Massicotte by
Amadeus, and that if Amadeus had done it directly, the value of the benefit
would have been included in Mr. Massicotte’s income, under subsection
15(1) of the Act. Mr. Massicotte, as a shareholder, controlled Amadéus,
and Amadéus controlled Pub. Also, during the period that Pub was held jointly
by Amadéus and Cyrano, any decisions regarding the allocation of Pub income
among its shareholders, whether this be in the form of salaries, bonuses,
dividends, or some other form, had to be taken by the shareholders under the
terms of Article 49 of the shareholder agreement. It is true that at the
time the debt was transferred to Pub by Mr. Massicotte, Amadéus was the
sole shareholder in Pub and that the shareholder agreement was null and void. On
the other hand, Article 49 provides a very good illustration of the role played
by the shareholders in the management of Pub, and it is entirely reasonable to
believe that this method of operation continued, even after the two
shareholders parted ways. Further, the December 31, 1995, financial
statements show that Pub owed Mr. Massicotte $125,358 (Exhibit A‑1,
Tab 8, Note 5 of the financial statements) and these financial
statements were sent to the shareholder of Pub, namely Amadéus, which was
required to approve them.
[102] For all the above reasons, the appeals by Pub relating to
the taxation years ended December 31, 1994 and December 31, 1995, are
dismissed. Mr. Massicotte’s appeal of the assessment for the 1993 taxation
year and his appeal of the assessment for the 1995 taxation year, as well as
the appeal by Pub of the assessment for the taxation year ending on May 31,
1994 are allowed. These assessments are referred back to the Minister for
review and reassessment based on the assumption, in Mr. Massicotte’s case,
that the benefit of $44,650 is to be excluded from his income for 1993,
that for 1995 the employment benefit is to be reduced to $239,000 and that
$750 is to be included as a taxable capital gain for that year, and, in
the case of Pub, that it is entitled, in computing its business income for the
taxation year ending May 31, 1994, to a deduction of $85,657.
103] At the request of counsel for Mr. Massicotte,
costs can be covered under a separate order.
Signed at Ottawa, Canada, this 14th day of November
2006.
"Pierre Archambault"
Translation certified true
on this 20th day of December 2006.
Monica F. Chamberlain, Translator
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