Citation: 2006TCC395
Date: 20061025
Docket: 2002-331(IT)G
BETWEEN:
ALBERT VAILLANCOURT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1] This is an appeal
from an assessment made on November 22, 2000, under
subsection 160(1) of the Income Tax Act ("the Act"). The
assessment seeks $204,500 from the Appellant on account of amounts paid to him
by his son René Vaillancourt from May 1, 1996, to
December 31, 1998. The Appellant provided no consideration for these
payments by his son, and is not challenging the assessment as such. The dispute
between the parties pertains solely to the merits of the Notice of Reassessment
for the year 1995 issued against the transferor on July 5, 2000, and,
in particular, the deductibility of the commissions paid in respect of transactions
involving shares of Les Laboratoires Aeterna Inc. ("Aeterna").
[2] The parties filed
an amended agreement in court setting out the statements made in the preceding
paragraph and adding that the Respondent will reconsider the assessment against
the Appellant under section 160 of the Act on the basis that the net
business income of $383,336.80, which was added to the transferor's income as
"Commissions on Aeterna share transactions", should be reduced by $60,000,
and that the penalties and interest in connection with this business income are
to be reduced accordingly. The Respondent also consented to the deduction of
the $2,500 in legal fees paid by René Vaillancourt as expenses related to the
purchase or sale of the Aeterna shares.
[3] Thus, the conflict
between the parties is limited to the Appellant's request that the net business
income added to the income of the transferor, his son René Vaillancourt, and
the penalties and interest, be reduced further. Thus, the Court must determine
whether it should be found that:
1) René
Vaillancourt paid a $100,000 commission to his brother Alain Vaillancourt in
1995 in recognition and consideration of his alleged efforts to attract
purchasers of Aeterna shares;
2) René
Vaillancourt gave Éric Dupont 75 thousand‑dollar bills as a commission on
the sale of Aeterna shares; and
3) René
Vaillancourt gave Denis Godin a $3,500 cheque in payment of a commission on René Vaillancourt's
purchase of shares held by Placement A2Z24, represented by Gaétan R. Girard.
[4] During the hearing
of this case, which took place on June 9, June 10, September 19,
September 20 and December 6, 2005, the Court allowed the
Appellant to challenge the penalties imposed by the Respondent on the
transferor even though the amended agreement between the parties did not state that
these penalties were in issue.
[5] This case dates
back to 1995. René Vaillancourt said that he found out that a block of
Aeterna shares was for sale, and that these shares would soon gain value on the
stock exchange. Having already profited from his shares in the company in issue,
he allegedly wanted other relatives and friends to benefit as well.
Since the number of shareholders was limited to 50, René Vaillancourt created
a partnership called Avaren which purchased 413,337 shares at a cost of $2,776,483.
The members of the Avaren partnership paid a higher amount, namely
$3,159,820, which accounts for the difference of $383,336 that was added to René Vaillancourt's
income by the assessment of July 5, 2000.
[6] René Vaillancourt is
an accountant by training and has been an internal auditor with the Quebec
workers' compensation board (CSST) since 1990. However, he was on leave of absence from his
employment from November 1999 to March 2002, when he went to the Bahamas
to get married and settle. He acknowledged that, upon leaving, he was
aware that he was being audited by the Canada Customs and Revenue Agency (CCRA)
because he had spoken with one of its officials. However, he said that he only
became aware of the assessment upon his return in March 2002. His brother
allegedly kept his mail during his absence and paid his bills. He added that he
had no contacts during his trip and says that he did not ask his brother
whether he had received anything from the CCRA. In his testimony on this point,
he said that his brother managed to reach him but that it was too late to
object to the assessment by that time.
[7] René Vaillancourt
claimed that he applied for an extension of time in which to object to the
assessment. He allegedly sent a letter to this effect, but was unable to find it
and provide a copy it. The principal ground of his objection, if he had been
able to make it, would have been that the auditor did not allow him to deduct
the expenses incurred in 1995 from the income added to the amount reported on
his return. It must be noted that René Vaillancourt's income tax return
for the year 1995 makes no reference to the income that the CCRA added by virtue
of the assessment of July 5, 2000, let alone expenses.
[8] Indeed, René
Vaillancourt filed an amended tax return for the year 1995 on
May 21, 1999. The purpose of the return was to report a capital gain that
was realized before he left for the Bahamas. He retained a tax consultant in
connection with the return, supposedly because he wanted to leave with a clear
conscience. This amended return does not mention income derived from the Aeterna
project either. Upon being questioned about this fact, René Vaillancourt declared
that he forgot to compile the information on the project because he thought
that he had handed everything over to his tax consultant.
[9] On October 8, 2003,
René Vaillancourt faxed a letter to the person who was then his lawyer,
explaining that according to his records, some $175,709 in profit had been
realized. He deducted a $80,000 commission and a $47,855 commission from this
account, along with $25,000 in interest expenses, $2,500 in legal fees, and
$2,500 in other administrative fees, leaving a net profit of $17,855. Indeed,
he confirmed the commission amounts of $80,000 and $47,855 at the examination
for discovery of December 16, 2003, except that he said that the
amount of $47,855 was subject to change but that he was certain of the $80,000
amount. He said that one of his commissions was paid in shares, but did not
know which one. At the examination for discovery, he was unable to say who the
commissions were paid to and when they were paid. He added that if the
commissions were paid in cash, he did not have the date of the payments. He
undertook to check into all these facts.
[10] On February 4, 2005,
René Vaillancourt's lawyer sent a letter to the Tax Litigation Directorate
to follow up on the undertakings given at the examination for discovery. With
respect to the commissions, the letter states that an investigation disclosed
that the commission was not $80,000, but $100,000, and was paid to Alain Vaillancourt
in shares in consideration of his involvement. With respect to the date of
payment, the letter states that there is no exact date but that the transaction
took place at the time that the corporation became a publicly held corporation.
The letter also states that there was no precise calculation in connection
with that commission. The second commission of $75,000 was supposedly paid to Éric
Dupont. When he sold 250,000 shares, Avaren benefited from a 10% discount on
the price of $8.00 per share, that is to say, $0.80 per share, and according to
René Vaillancourt, Éric Dupont asked for a commission of $0.30 per share, or $75,000.
[11] I should also note
that on March 18, 2005, in another letter sent to the Tax Litigation
Directorate, counsel for the Appellant specified that the $75,000 commission
was hand-delivered to Éric Dupont in cash at the "Momento" restaurant
in Québec. Counsel repeated that this commission followed a major sale of a
block of shares by Éric Dupont in consideration of the commission. The letter
repeats that $100,000 worth of shares were transferred to Alain Vaillancourt in
recognition of and as compensation for his assistance in finding purchasers for
the Aeterna shares. This would explain the $100,000 commission, and, in support
of this assertion, an undated writing by Alain Vaillancourt is attached to
the letter. Alain Vaillancourt confirmed that he received a commission worth
$90,000 to $100,000 upon the sale of Aeterna shares in 1996.
[12] Later on, Alain
Vaillancourt signed a declaration on May 18, 2005, stating that he
received a $100,000 commission from René Vaillancourt in 1995 for his
efforts in attracting new investors. He further attests that he remitted
$75,000 in thousand‑dollar bills to René Vaillancourt in 1995 for
payment to Éric Dupont as a commission. The notes came from the
Royal Bank in Drummondville, and the funds were from cheques payable to Avaren
and endorsed by Alain Vaillancourt.
[13] Two days later, on
May 20, Alain Vaillancourt signed a second declaration. In it, he confirmed
that he received the $100,000 commission from his brother, and provided more
details about the agreement entered into with him. In particular, he said
that his brother told him that the share price would be $8.00 and included
brokerage fees. His brother confirmed to him that he would be paid a commission
of $0.80 per share for each investor he attracted to the project. He confirmed
that he attracted most of the investors to the project and that they paid him by
making a cheque to the order of Avaren or of him personally. He asserted with
certainty that the amount of the commission was $100,000, that he keeps
stringent accounting records in connection with his affairs, and that he
recalls very well the amount received as a commission during the year 1995. He
repeated that he gave his brother René $75,000 in thousand‑dollar bills
so that René would give the money to Éric Dupont.
[14] In his testimony,
René Vaillancourt specified that the commission paid to his brother Alain was $100,000
and that it was paid out of the cheques issued to him by the Avaren partners
for the purchase of the shares. His brother cashed the cheques, kept his
commission and sent the balance to Avaren. He confirmed the agreement
concerning the purchase of the block of Éric Dupont's shares and the
remittance of $75,000 in commission to Mr. Dupont. He offered in evidence a
receipt from Denis Godin for a $3,500 commission, which he found this year by
accident. The receipt is dated January 19, 1995, but provides no
details.
[15] He acknowledged that
he is the source of the information contained in the letters that his lawyer
sent to the director of tax litigation. He testified that he asked his brother
for the information and that this is why it was now possible for him to be more
specific than he was during his examination for discovery or when he provided
information to his lawyer. When René Vaillancourt was cross-examined about his
contradictions, including the fact that, at the examination for discovery, he
did not know to whom the commissions had been paid, he said that he wanted to
speak to his brother and wanted to be certain of the amount. On re‑examination,
he added that he did not state a name at the examination for discovery because
he did not want to get anyone in trouble. He wanted to speak to Éric Dupont and
his brother. He did not know whether his brother had reported his commission on
his income tax return. He provided more details and testified that the
agreement with his brother was that they would share the commission equally. He
could not explain why his lawyer's letter of February 4, 2005, to the director
of tax litigation stated that there was no precise calculation of the
commission payable to his brother Alain and did not mention the equal sharing
of the commission.
[16] As for the $75,000
commission paid to Éric Dupont, René Vaillancourt testified that
Mr. Dupont wanted the amount in cash so that he could carry out a 250,000‑share
transaction. After checking into the matter, he is now certain of the amount
that he paid Éric Dupont. Since the transaction took place on
April 28, 1995, he is now also certain that the commission was paid in
May 1995. When questioned again about the source of the funds, he
responded that he would have to ask his brother. He specified to his brother
the amount that he needed, but not the amount of the notes. He asked his
brother for this money because his brother could obtain it, whereas he could
not do so because his relationship with the bank was not very good.
[17] Thus, René
Vaillancourt apparently went to Montréal in April or May 1995 on business,
and, upon his return, he went to his brother Alain's residence in Drummondville
in the late afternoon. He did not know how long he stayed there. His brother gave
him a small letter-sized envelope which he believes was white, but he is not
100% certain. The envelope contained 75 thousand‑dollar bills.
He does not recall whether the bills were held together with an elastic
band. When questioned about the letters from his lawyer dated February 4
and March 18, 2005, which stated that this commission was $60,000, he
said that his lawyer misinterpreted the information and did not understand what
happened.
[18] He did not know
whether he kept the envelope containing the 75 thousand‑dollar bills
on his person, or whether he put it in his car. When he got home, he placed the
money in a strongbox until his appointment with Éric Dupont two to ten days
later.
[19] In his examination‑in‑chief,
René Vaillancourt was asked about his reaction to Éric Dupont's request, and he
said that the transaction involved millions of dollars and that $75,000 was
nothing. He himself was a millionaire, and he was returning a favour. He
felt that this was reasonable. He added that he earned $200,000 in commissions
during the transaction involving Éric Dupont. His brother Alain received $100,000,
Eric Dupont received $75,000
and he was left with $25,000, which he said compensated him for his efforts.
[20] When cross-examined
about the amount of the commission payable to Éric Dupont, René
Vaillancourt said that he did not ask Mr. Dupont for explanations and was not
given any during their conversation. He added that the amount was arbitrary and
that the information contained in his lawyer's letter dated February 4,
2005, set out a calculation that he did himself. He personally determined that
it was $0.30 per share for $250,000. He gave the envelope to Éric Dupont
at the door of the Momento restaurant following a dinner. He remembered
that it was in May because there was no snow.
[21] Alain Vaillancourt
said that in 1995, his brother René asked him whether he knew investors who
wanted to make some good money on Aeterna shares. He himself had done well
with these shares in 1994, and now he wanted those he knew to benefit. Indeed,
he contacted 175 of the 217 Avaren partners who purchased Aeterna shares. He said
that he and his brother did not want to make money from these transactions, but
he acknowledged that they did.
[22] With respect to the
purchase of the block of shares from Éric Dupont, including the profit of $0.80
per share, it was Luc Dupont, Éric's brother, who informed him about the profit
because he was not aware of it. His brother and he agreed to share the profit
equally, but he insisted that he just wanted to help out and had no intention
of making money from the deal.
[23] The Avaren partners
thus bought their Aeterna shares through René and Alain Vaillancourt by
using Avaren as a go-between. The shares were purchased by certified cheque
payable to Alain or René Vaillancourt.
The cheques payable to Alain were cashed and he gave the money to René, less
his share or commission. He confirmed in clear terms that he received a
$100,000 commission and that he used it to purchase Aeterna shares.
[24] Upon being
cross-examined with respect to his first writing, in which he stated that he
received a $90,000-$100,000 commission in 1996, Alain Vaillancourt acknowledged the
error, but maintained that the amount of $100,000 was within this range and
said that he made a mistake as to the year. As for the stringent
accounting that he referred to in his declaration of May 20, 2005, he
said that he asked René if it would be useful for him to retain it all.
His brother allegedly told him no, and he threw everything away, probably
in 2000. He was questioned about the declaration of
May 18, 2005, where he said that the amount of $75,000 was from
cheques payable to Avaren and endorsed by him, and about the declaration of
May 20, 2005, where he attested that the amount was from cheques
payable to Alain Vaillancourt. He was asked who told him about the error,
and he replied that he discovered the error himself and that it was not his
lawyer who found out about it, as had been suggested to him.
[25] Alain Vaillancourt confirmed
that his brother René asked him on the telephone, while in transit, to free up
$75,000 in order to pay Éric Dupont a commission. He said that his brother René
did not have the money to do so. Since he had good dealings with the Royal
Bank in Drummondville, and, in order to do Éric Dupont a favour, he managed
to obtain $75,000. However, he said that he never found out why René wanted this
money, but trusted him. He said that he was not surprised, but, rather, "struck"
by the request.
[26] He went up to the
teller at the Royal Bank and asked for 75 thousand‑dollar bills. The
money was handed to him personally, and he put it in his coat, brought it home,
placed it on his bookcase and called René. René came by on Friday at suppertime
and he gave him a small folded white envelope containing the $1,000 bills. René
told him that he remitted the money to Éric Dupont that weekend or the following
week. He had no other discussions with his brother René concerning Éric Dupont's
commission and said that he never managed to figure out the reason for the
commission.
[27] On
cross-examination, Alain Vaillancourt said that he cashed certified cheques
payable to him in order to obtain the $75,000. It took only about twenty
minutes to secure the funds at the bank. He asked for 75 thousand‑dollar
bills. He remembers the colour of the bills and the white colour of the
envelope. He placed the money, without an elastic band around it, in his
trouser pockets. He had a windbreaker, not a suit jacket. He ended his
testimony by saying that he personally put the money in an envelope at his
home, that the bank did not put the money in the envelope, and that he was not
offered an envelope.
[28] Éric Dupont is the
chairman of Aeterna's board of directors. He testified, and the Respondent offered
a solemn affirmation that he made on May 17, 2005. In that
affirmation, Éric Dupont said, just as he did in his testimony, that he never
asked René Vaillancourt for any cash payment in respect of the share
capital of Aeterna that he sold, never received any such payment from him, never
asked him for any commission in respect of the sale of those shares, and never
received such a commission from him.
[29] Éric Dupont testified
that on April 28, 1995, he sold Avaren a total of 250,000 Class A shares
of Aeterna for a total selling price of $1,800,000. He also referred to two
other sales of Aeterna shares to Avaren which took place on
March 2, 1995. He said that he paid Avaren, represented by René
Vaillancourt, a $12,000 commission related to sales of Aeterna shares in the
previous year, that is to say, 1994. He also managed to reiterate this
information after examining his accounting and tax records and his tax returns
for the 1994 and 1995 taxation years.
[30] Éric Dupont has
known René Vaillancourt since 1993 or 1994. He was more familiar with René's
brother Ghislain, with whom he worked on creating a foundation to help cancer
patients. He also knows Alain Vaillancourt. He believed that Avaren partners were
all members of the Vaillancourt family. When he was cross-examined about his
ties to the Vaillancourt family, Éric Dupont said that he was not aware of
certain specific events and suggested that his brother Luc might have been the
one who looked after those things. He recalls that Alain had some scientific
knowledge. He recalls being at the Vaillancourt brothers' parents' house for
their housewarming. As for whether he had a meal with René Vaillancourt, he
says that he might have, though he rarely dined with shareholders. They
preferred to see him work. He did not go to the Momento restaurant often. It
was especially his brother who went there more regularly.
[31] When the hearing
resumed on December 6, 2005, the Appellant, in rebuttal, called Alain Vaillancourt back to
the witness stand. He explained his involvement in Aeterna's scientific
research in late 1999 and early 2000. He was asked to test a new product with
his patients, and Aeterna later invited him to deliver a presentation at its
lab. However, he was unable to make it because of inclement weather.
[32] Alain Vaillancourt was
questioned again about the delivery of the 75 thousand‑dollar bills
to his brother René. He now said that on May 5, 1995, he arranged to
have a bank draft prepared, payable to René Vaillancourt for the purchase of Aeterna
shares. The copy of the bank draft purchaser's receipt was offered in evidence (Exhibit A-11)
and contains the names of the investors who paid money to purchase Aeterna shares
through Avaren, and the amount that each of those investors paid. The total of
all the amounts paid was $257,000, but the bank draft was only for $207,000. Alain Vaillancourt
explained that he took the difference, that is to say, $50,000, and that the
other $25,000 was from an investor named Gaston Houle. However, he was unable
to obtain documents proving the source of the $25,000.
[33] Alain Vaillancourt explained
that he had been called upon to look for documents in connection with another
file, and that it was only a few days before his testimony on the resumption of
the hearing of this case that he contacted his brother René, who sent him a copy
of the bank draft purchaser's receipt (Exhibit A‑11) to which
I referred in the preceding paragraph. The bank draft bears original
handwritten notes stating the names of the investors and the amount of each
investment, for a total of $257,000, including $50,000 in thousand‑dollar
bills.
[34] On cross-examination,
Alain Vaillancourt confirmed that the $75,000 was obtained from the bank on the
same day, but from two different sources: $50,000 from the bank draft, and
$25,000 following the endorsement of a $25,000 cheque payable to him and signed
by Gaston Houle. He added that he called the bank in advance to ask them to
prepare 75 thousand‑dollar bills because the bank was not authorized to
keep so many banknotes of that denomination. During this cross‑examination,
counsel for the Respondent offered a copy of two $25,000 cheques signed by Gaston
Houle and payable to René Vaillancourt: a cheque dated
April 13, 1995, and another cheque dated April 21, 1995,
for the purchase of Aeterna shares. Upon being asked whether it was one of those
cheques, Alain Vaillancourt answered that he recalled that Gaston Houle wrote
him a $25,000 cheque and that he used it to complete the $75,000. He added that
Gaston Houle was an investor he knew and that he was testifying to the best of
his recollection. As for the fact that his brother René was in possession of the bank draft
purchaser's receipt, he answered that he must have sent it to him, but does not
know why.
[35] Guylaine Yergeau is
a customer service representative at the only Royal Bank branch in Drummondville.
She has been working there since 1989. She serves customers during business
hours, and orders money after the branch closes for the day. She knows Alain Vaillancourt but sees
him less often than his wife, who goes to the bank each week.
[36] She testified that
in 1995, the branch where she worked kept only four or five thousand‑dollar
bills regularly, that there was no minimum, and that such bills have not been
circulated to customers in the past two or three years. She recalls having
ordered thousand‑dollar bills in 1995, but never more than ten such bills
for a customer. They had to be ordered three or four days in advance if the
branch did not have any. In 1995, it was the branch's practice to hand out
large denominations or large amounts (exceeding $2,000 or $3,000) in an office,
not at the counter.
[37] During her years of
service at the bank, she never saw a customer deposit several thousand‑dollar
bills and another customer come in to ask for such bills soon enough thereafter
for the bank to still have them in its possession.
[38] On
cross-examination, she recognized the purchaser's receipt in respect of the
$207,000 bank draft payable to René Vaillancourt. The bank will only issue such
a draft if it is sure that it is in possession of the funds for the customer
who requests it. She does not know the handwriting of the annotations, and
cannot explain why the purchaser's signature is not on the copy of the receipt.
[39] This entire matter
began with an audit of Aeterna by the Quebec tax authorities. During the audit,
it was discovered that René Vaillancourt registered the business name Avaren on
February 24, 1994, and that he purchased and resold, at a profit, through
Avaren, more than 300,000 common shares of Aeterna. René Vaillancourt's
tax returns made no reference to these transactions.
[40] Roger Boisvert, one
of the auditors, met René Vaillancourt a few times. One such time was October 19, 1998, when he was able to
get more details about the transactions. Specifically, it was discovered that René
Vaillancourt had been investing in securities for several years but that his
tax returns made no mention of these investments except to the extent that he
claimed financial and interest costs of investments without reporting
practically any investment income or any capital gains or losses from the years
1991 through 1997 inclusively.
[41] Maurice Hammond is
an investigator. He met René Vaillancourt at his request twice. The first
meeting took place on March 18, 1999. At the meeting, he notified René
Vaillancourt of his investigation and of the fact that he had met nearly 80% of
the Avaren investors and had managed to reconstruct the price of the shares
bought and the price of the shares sold. Mr. Hammond submitted that the
numbers are based on an average and that if he had continued his investigation,
the total would have increased. René Vaillancourt explained to him the
background of his interest in Aeterna and informed him that he had not reported
his capital gain for the Avaren transactions because he had incurred capital
losses, had given his tax consultant a mandate to calculate his gains and
losses, and would provide the results as soon as the calculation was complete.
He also spoke about the application of section 85 to a block of Aeterna shares
giving rise to a capital gain, and said that he considered himself entitled to
the capital gains exemption until April 1999.
[42] The second meeting
took place on May 25, 1999. René Vaillancourt arrived with his tax consultant,
who filed a T2057 rollover form under section 85 of the Act, a table of
capital gains and losses realized in the course of the years 1987 through 1993,
and copies of amended T1 tax returns for the years 1995, 1996 and 1997.
These documents did not reveal any information about Avaren, and when the
investigator raised the subject, the tax consultant was surprised.
Mr. Vaillancourt and the consultant withdrew from the meeting for a few
moments, and, upon returning, René Vaillancourt said that he did not make any
money from that and the consultant said that the disposition of shares by
Avaren was omitted from the amended returns on the basis that the shares in
question were held in trust for his brothers. It certainly is true that the
amended returns do not refer to any transactions involving Avaren's shares.
[43] Maurice Hammond heard
nothing from René Vaillancourt or his tax consultant from May 1999 to May
2000. The investigation continued, and he tried to talk to René Vaillancourt in
May 2000. He went to his home and learned from the neighbour that he had sold
his house. Upon going to Mr. Vaillancourt's place of work, Mr. Hammond was
informed that he had left for Mexico on a two‑year leave and that he had married a
Mexican woman in November 1999. He planned to settle in the Bahamas as a
securities broker. Mr. Hammond was told that it was unlikely that he would
return to his job at the end of his leave. Mr. Hammond met René's brother Réjean,
a Revenue Canada employee, who refused to give him René's address.
[44] The notice of
assessment against René Vaillancourt was issued on July 5, 2000, and
sent to his address on record with the CCRA. Mr. Hammond received a call
from lawyer Daniel Bourgeois two days later, on July 7, 2000.
Mr. Bourgeois told him that he represented René Vaillancourt and, on the same
day, faxed him a mandate from René Vaillancourt authorizing him to represent
him in dealings with Revenue Canada to discuss, negotiate and contest any
notice of assessment, statement of account, writ of seizure or other process
involving any taxation year.
[45] While this was
unfolding, the investigators were aware that money was being transferred from René Vaillancourt
to the Appellant. They therefore made a demand for payment and assessed the
Appellant on July 7, 2000. Mr. Hammond and another investigator met
the Appellant. He went to their office by bicycle and the demand for payment
was submitted to him. The Appellant told the investigators that René was
in Mexico and would not be coming back to Canada. Mr. Hammond specified that
before meeting the Appellant, they contacted his son Réjean, who works for Revenue
Canada, to ask him if he
wanted to come with his father, given his age. He did not come with his father,
and he said that if anything happened, he would hold the investigators
responsible.
[46] On July 10, 2000, Mr.
Bourgeois met with investigators Maurice Hammond and André Tremblay. He wanted
to obtain information about the assessments, because he had nothing concerning
his client. Accordingly, the investigators explained how the shares purchased
and sold through Avaren were being treated, namely as business income; that
other transactions, carried out in 1993, were being treated as capital gains
transactions; and that the tardy election under section 85 was accepted. Mr. Bourgeois
was also given explanations regarding the issue of collection, because René Vaillancourt
had left Canada. Mr. Bourgeois
was asked for René Vaillancourt's telephone number but refused to provide
it. There were no subsequent meetings with Mr. Bourgeois.
[47] During the two
meetings with the investigators, René Vaillancourt never raised the issue of
the commission expenses that he is now claiming. With respect to the $100,000 commission
paid to Alain Vaillancourt, Mr. Hammond obtained Alain Vaillancourt's tax
returns for the 1995 and 1996 taxation years and found no reference to this
commission. He was not assessed because he went bankrupt in 2001.
[48] Mr. Hammond was
notified of the commissions in January 2005 by counsel for the Respondent,
and the amounts were different. Mr. Hammond also checked Éric Dupont's tax
return and found nothing under this category; in his solemn affirmation of May 17, 2005, Mr. Dupont denies
receiving such a commission.
[49] It was in January
2005, the same month that he was told about the other two commissions, that
Mr. Hammond was told about the commission paid by René Vaillancourt
of Placement A2Z24, represented by Gaétan R. Girard, to Denis Godin
for the purchase of shares. Mr. Hammond examined the documentation in his
possession and could see that $3,500 was debited from René Vaillancourt's
account. The cheque for René Vaillancourt's payment to Denis Godin, which
bears the remark "commission", was offered in evidence, but without
further information, as was a cheque for $66,500 from René Vaillancourt to Gaétan
Girard bearing the remark [TRANSLATION] "shares". Mr. Hammond
did not receive any information or confirmation from Denis Godin about this
matter. Mr. Hammond said that Denis Godin purchased no shares and did not know
the meaning of the remark "commission" written on the cheque.
[50] As for the purchases
of shares by Gaston Houle, Mr. Hammond traced two cheques for $25,000 (Exhibits
I-3 et I-4) made by Gaston Houle to René Vaillancourt, and no cheques
payable to Alain Vaillancourt.
[51] According to Mr.
Hammond, René Vaillancourt must have known that he had
realized a considerable gain from the Aeterna share transactions carried out
through
Avaren, and his failure to report this income could only have been intentional.
The documentation that he examined, which was provided to him by René Vaillancourt,
clearly shows that he made money, and contradicts the statement that he made at
the meeting with Mr. Hammond and his accountant in May 1999, to the effect that
he did not make any money on the transactions.
[52] Mr. Hammond also said
that René Vaillancourt is no neophyte. He has been trading in shares since
1986. He is aware of securities commission rules. Aeterna was a closely‑held
corporation, and he was aware of the 50‑shareholder maximum which gave
rise to the creation of Avaren. According to his employer, René Vaillancourt wanted
to settle in the Bahamas as a securities broker. In 1992, he was enrolled
as a financial management student, and appeared to be familiar with the Income
Tax Act because he explained the application of sections 48.1 and 85.1
at the meetings. He also knows accounting; Mr. Hammond noted that
René Vaillancourt's financial statements stated that his net worth at
May 31, 1996, was $3.8 million (Exhibit I-1, tab 5).
[53] Mr. Hammond
also took the number of transactions in issue into account. There were
more than 200 transactions in 1995, and these involved 217 clients and almost
400,000 shares. The percentage of reported income in relation to unreported
income is 700%.
[54] Should it then be found
that the transferor, René Vaillancourt, paid three commissions to the three
named persons, that is to say, Alain Vaillancourt, Éric Dupont and Denis
Godin, in the amounts of $100,000, $75,000 and $3,500, respectively? Should the
penalties imposed by the Minister on René Vaillancourt's unreported net
business income be confirmed as well? Was the testimony given, especially that
of the brothers René and Alain Vaillancourt, reliable and credible evidence based on
which the first question can be answered in the affirmative?
[55] The evidence adduced
at trial leaves no doubt that the version of the facts given by René
Vaillancourt with respect to this entire matter took so many different turns
with the passage of time that I am convinced that, if the hearing had been
postponed another time, a different version would, in all probability, have
been provided.
[56] According to René and
Alain Vaillancourt, profit was not a motive in the purchase of the Aeterna
shares. They wanted their friends and family to benefit. Yet Avaren (René
Vaillancourt) realized a profit of $383,336.80, less the $60,000 plus legal
fees that the Minister recognized as expenses. Even if the commission expenses
that he is claiming today were allowed, net taxable income would result. René Vaillancourt
included no income from Avaren in his 1995 tax return or the tax return that he
amended in 1999. He says that he did not make any money on this and that there
was a trust.
[57] René Vaillancourt testified
that after leaving Canada, he was unaware of the assessment of July 5, 2000 against him, and that
he only found out about it when he returned in March 2002. He allegedly applied
for an extension, but cannot adduce the letter substantiating that application.
What is certain is that he did not appeal from his assessment. And yet, the
auditor's evidence discloses that on July 7, he received a phone call
from Daniel Bourgeois during which he was told that he represented René
Vaillancourt and was duly authorized to represent him in dealings with Revenue
Canada. In fact, there was a meeting with Mr. Bourgeois on July 10,
2000, and everything about the assessment of July 5, 2000, was
explained to him at that time.
[58] On October 8, 2003,
René Vaillancourt sent a fax to his lawyer referring to an $80,000 commission
and a $47,855 commission for the first time. He did not name the people to whom
the commissions were paid and did not mention the $3,500 commission paid to Denis
Godin. He declared that the profit was $175,709. Today, he does not dispute
that the profit was $383,336. In December 2003, when he testified
under oath at the examination for discovery, he said that the $47,855 was
subject to change but that he was certain of the $80,000 amount. He said that
one of the commissions was paid in shares, but he did not know which. He could
not say whom the commissions were paid to. Later, it was learned that the
amount of $80,000 was actually $100,000 and was paid in shares to his brother Alain Vaillancourt
when Aeterna became a publicly held corporation, although there was no precise
calculation of the commission. It was also learned that the $47,855 commission
was actually a $75,000 commission paid to Éric Dupont. Later on, it was learned
that this commission was paid in cash in the form of 75 thousand‑dollar
bills in a Québec restaurant. The most surprising thing in this whole story is
that René Vaillancourt, upon writing to his lawyer on
October 8, 2003, or, worse still, upon testifying under oath at the
examination for discovery, was unable to recall the people to whom the
commissions had been paid. Later, however, he said that he did not want to put
those people in trouble and that he wanted to talk to them first. Thus, he knew
who they were.
[59] After it was established
that a $100,000 commission was paid to Alain Vaillancourt in Aeterna
shares, it was learned that it was actually paid in cash. It was paid from the
cheques written out to him by the Avaren partners; or was it the cheques made
out to Avaren? Alain Vaillancourt said that he kept stringent accounting
records, yet he said that the commission was $90,000 to $100,000, and he later
said that it was $100,000. These were the same stringent accounting records
that Alain Vaillancourt threw away, probably in 2000, on the instructions
of his brother René, who was outside Canada at the time and supposedly told him that there was
no point in keeping them. Yet the assessments were made in 2000, and it might
have been useful to keep the records if such records existed. It must also be
recalled that the Vaillancourt brothers were not seeking to make a profit and
that they agreed to share their undesired profits equally. Thus, the profit
should have been split in two, and each should have reported his share in his
income. Neither of them did this. Was this a shared profit or a paid
commission? In his declaration, Alain Vaillancourt also said that a commission
of $0.80 per share was paid to him for each investor that he attracted to the
project. Thus, this is far from a 50/50 split. Alain Vaillancourt did not report this
$100,000 commission in his 1995 and 1996 income. In fact, he never reported it.
[60] The thing about this
matter that is strange, to say the least, is Alain Vaillancourt's reaction
upon being asked by his brother to free up $75,000 in order to pay a commission
to Éric Dupont. He was supposedly not surprised, but, rather, [TRANSLATION]
"struck" by the request. He also said that he never found out why René
wanted the money, and that he did not have other discussions with his brother
about the subject; he said that he never managed to understand, and yet his
brother told him that he paid the money to Éric Dupont. For his part, René Vaillancourt
said that he did not ask Éric Dupont for any explanations regarding his request
for a $75,000 commission. In my opinion, this situation is strange to say the
least.
[61] In order to obtain
the 75 thousand‑dollar bills, Alain Vaillancourt cashed $75,000 worth of certified
cheques payable to him. He went to the bank and, in less than 20 minutes,
obtained 75 thousand‑dollar bills, which he placed in his coat. He
remembers the colour of the bills and the fact that the envelope was white. He
said that he supplied the envelope himself because the bank gave him the bills
without an envelope or an elastic band. However, on cross‑examination, he
said that he placed the 75 thousand‑dollar bills in his trouser pockets. When he came
back to testify upon the resumption of the trial, he said that, a few days
earlier, he had contacted his brother, who sent him a copy of the purchaser's
receipt of a $207,000 bank draft payable to René Vaillancourt and dated
May 5, 1995. Alain Vaillancourt
now remembers that he cashed $257,000 worth of cheques written by Avaren
investors, and that the difference between the amount of $207,000 and the
amount of $257,000 is the $50,000 that he obtained in the form of
50 thousand‑dollar bills. The other $25,000 is from a cheque from Gaston Houle,
another investor, but he does not have the documents.
[62] It must be recalled
that René Vaillancourt asked his brother Alain to supply him with the $75,000
because he did not have the means to do so. Yet, on May 5, he sent René a
$207,000 bank draft, payable to him, using the money from $257,000 worth of
certified cheques. Why didn't Alain Vaillancourt simply obtain a $257,000
bank draft and send it to René? How is it that the receipt issued to the
purchaser, Alain Vaillancourt, was found in René Vaillancourt's possession
a few days before the trial resumed? Who wrote the investors' names in pen on
the purchaser's receipt? What is the date of the payment or of the $257,000
worth of cheques which were written by the investors named on the receipt?
Where are the documents that can substantiate the $25,000 that Gaston Houle
paid to Alain Vaillancourt to complete the $75,000?
[63] Alain Vaillancourt's
version of the facts is no more reliable than that of his brother René. Like
René's version, it contains contradictions and implausible statements that do
nothing but undermine his credibility to such an extent that it is impossible
to determine where the truth lies. In my opinion, a mere reading of the summary
of his testimony is enough to reach this conclusion. A recapitulation of the
following versions should suffice:
1 − He
testified that he and his brother did not intend to make a profit, but that is
exactly what happened.
2 − He
was supposed to split this profit equally, but the evidence does not point to
this.
3 − Alain Vaillancourt
kept stringent accounting records. His brother is the one who told him that he
could throw everything out in 2000, while he was outside Canada. His
declarations refer to a $90,000 to $100,000 commission and he made a mistake as
to the year.
4 − Was
the commission paid in shares or in cash?
5 − Did
the $75,000 intended to pay Éric Dupont come from cheques payable to Avaren or
Alain Vaillancourt, or did it consist of a $50,000 withholding from the $207,000
bank draft made out to René Vaillancourt, plus $25,000 from a cheque
written by investor Gaston Houle?
6 − Why
was the purchaser's receipt in René Vaillancourt's possession even though
the purchaser was Alain Vaillancourt?
7 − Alain Vaillancourt
said that he obtained the $75,000 because his brother did not have the means to
do so. Yet Alain had just sent René a $207,000 bank draft. If the total amount
of the cheques was $257,000, why did he not simply send that amount to his
brother?
8 − Did
Alain Vaillancourt place the 75 thousand‑dollar bills in his trousers or
his coat? Did he receive them at the counter or in an office? Is it possible
that he was handed this cash without being given or offered an envelope? (See
Ms. Yergeau's testimony.)
9 − He
remitted $75,000 in cash to his brother to pay Éric Dupont and claims
not to understand. He was not surprised, but [TRANSLATION] "struck" by
the request.
10 − He
did not report this $100,000 commission in his 1995 and 1996 income.
[64] Éric Dupont's
credibility was not impeached during his testimony, and neither was Ms. Yergeau's.
Even if it was to Éric Dupont's advantage to deny having received such an
amount of money as a commission upon the sale of his shares, he struck me as a
responsible and forthright person whose credibility was not weakened to such an
extent that I must reject his testimony.
[65] In view of these
circumstances, the Appellant has not succeeded in persuading me, on a balance
of probabilities, that his son René Vaillancourt paid his other son
Alain Vaillancourt a $100,000 commission in recognition and consideration
of Alain's involvement in attracting purchasers of Aeterna shares, nor that he
gave Éric Dupont 75 thousand‑dollar bills in 1995 as a commission in
respect of the sale of Aeterna shares.
[66] Furthermore, the
Appellant has not satisfied me that René Vaillancourt paid
Denis Godin $3,500 as a commission in respect of the purchase, by René Vaillancourt,
of shares held by Placement A2Z24, represented by
Gaétan R. Girard. The documentary evidence adduced is insufficient to
establish a connection with this transaction, and, given the number of share purchase
and sale transactions carried out by René Vaillancourt during those years,
the amount can be something quite different. In my opinion, Denis Godin
and Gaétan Girard are the only ones who could have enlightened the Court
with respect to all this, but the Appellant did not call them to testify. Based
on this, I conclude that their testimony would not have been favourable.
[67] In addition,
René Vaillancourt was imposed a penalty under subsection 163(2) of
the Act, which reads:
163(2) False
statements or omissions. Every person who, knowingly, or under
circumstances amounting to gross negligence, has made or has participated in,
assented to or acquiesced in the making of, a false statement or omission in a
return, form, certificate, statement or answer (in this section referred to as
a "return") filed or made in respect of a taxation year for the
purposes of this Act, is liable to a penalty of the greater of $100 and 50% of
the total of
. . .
[68] Thus, the onus is on
the Minister to prove, on a balance of probabilities, that the imposition of a
penalty on René Vaillancourt, the transferor in the case at bar, was
warranted under the circumstances. It must therefore be shown that René Vaillancourt,
knowingly, or under circumstances amounting to gross negligence, made a false
statement or omission in his income tax return.
[69] René Vaillancourt
did not report the income that he derived from the Aeterna share transactions
through Avaren in his 1995 tax return or in the return that he amended on
May 21, 1999, for the years 1995, 1996 and 1997. His explanation
for his failure to report this income remained nebulous; he said that he forgot
to compile the information and that he thought he had handed everything to his
tax consultant. It must be borne in mind that René Vaillancourt is an
accountant by training, and has been an internal auditor at the CSST since
1990. René Vaillancourt met auditor Roger Boisvert on October 19,
1998, at which time it was learned that René Vaillancourt had been
investing in securities for several years, specifically from 1991 to 1997, and
that none of his tax returns mentioned these investments, except to claim the
financial expenses and interest paid for the purpose of making investments.
[70] René Vaillancourt
also met with Mr. Hammond, the investigator, on March 18, 1999, at
which time he was apprised of the fact that Mr. Hammond had met with
almost 80% of the Avaren investors. He was content to tell Mr. Hammond
that he did not report capital gains because he had incurred losses in previous
years and would provide a report about this. A few days after filing his
amended 1995 income tax return, he and his tax consultant met with Mr. Hammond
again, and the Avaren question was once again raised. Following a discussion
with René Vaillancourt, and to the tax consultant's surprise,
Mr. Hammond was told that René Vaillancourt had not made any money and
that this was a trust that had been set up for his brothers. René Vaillancourt
knew that this was false.
[71] Thus, in light of
these few events and René Vaillancourt's conduct after these meetings, it
is clear to me that René Vaillancourt never intended to report a penny of
income or expenses in relation to the purchase and sale of Aeterna shares
within Avaren. In addition, and as he admitted, it is clear that he made a
profit; and even if I allowed the expenses that he is claiming, the profit
would be large. René Vaillancourt never considered it important to account
for the Aeterna share purchases by Avaren because he is having trouble reconstructing
everything. Thus, he failed to report this income, and, in my opinion, he did
so knowingly or under circumstances amounting to gross negligence according to
the pronouncement of Strayer J. in Venne v. The Queen, No. 7-815-82,
April 9, 1984, 84 DTC 6247 (F.C.T.D.), that is to say, the negligence must be
more serious than a mere failure to exercise reasonable care. There must be a
significant degree of negligence tantamount to intentional acting — recklessness
as to whether the Act is complied with or not. René Vaillancourt acted in
such a manner in the case at bar.
[72] Consequently, the
appeal is dismissed, and the Respondent shall be entitled to her costs.
Signed at Ottawa, Canada, this
25th day of October 2006.
"François Angers"
Translation
certified true
on this 30th day
of January 2008.
Françoi Brunet, Revisor
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