Citation: 2005TCC747
Date: 20051209
Docket: 2004-4430(IT)I
BETWEEN:
THÉRÈSE ST‑HILAIRE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Archambault J.
[1] This is the sad
story of a woman who needed money to finance her return to school and who,
after responding to a newspaper advertisement, got caught up in a scheme that
was to allow her to withdraw part of her registered retirement savings plan (RRSP)
tax free. The Minister of National Revenue (Minister) established
a new assessment for Thérèse St‑Hilaire's 1999 taxation year and, in
accordance with paragraphs 146(10)(a) and 146(10)(c) of the Income
Tax Act (Act), included the amount of $48,200, the fair
market value of an alleged non‑qualified investment made with Ms.
St-Hilaire's RRSP in the capital stock of the company 3563545 Canada Inc.
(3563). Alternatively, in support of his assessment that the RRSP assets
were used as a guarantee for a loan obtained from Financière Telco Inc. (Telco)
and, in accordance with paragraphs 146(10)(b) and 146(10)(d), the
Minister claims that the $48,200 should be included in Thérèse St‑Hilaire's
income.
Facts
[2] Ms. St‑Hilaire agreed to take early retirement
from Bell Canada in 1996 and transferred
around $46,000 to her RRSP from her employer's retirement fund. However, she
could not touch this money before she turned 55. This type of arrangement is
called a "locked-in retirement fund" (LRF).
[3] Since Ms. St‑Hilaire
could not find a new job and she had received all the employment insurance
benefits to which she was entitled, she decided to go back to school. To pay
for her tuition and expenses during her studies, Ms. St‑Hilaire made
withdrawals from her RRSP, except for the LRF. According to her statements, she
claimed these withdrawals in her income. Since they were not enough and she
could not touch her LRF, in October 1998, she noticed an ad in the Journal
de Québec stating that a company offered loans from $10,000 as long as the
loans could be guaranteed by an RRSP, LRF or other investment. She made an
appointment with a representative of the company, Mr. Arsenault, whom she met
in an office on chemin Sainte-Foy.
[4] Mr. Arsenault
testified at Ms. St-Hilaire's request. He
said that he had taken steps to obtain a loan to finance the construction of an
apartment building to be owned by a not-for-profit organization, and that he
had contacted Telco, which had a business office in Laval, Quebec. He stated that he had
only worked for this company for 10 to 15 weeks. However, Mr. Arsenault did not
recall meeting Ms. St‑Hilaire. She, however, stated that Mr. Arsenault
left a good impression because of his humanitarian goals, namely housing
battered women. Mr. Arsenault then allegedly explained that she would have to
transfer her LRF to the Laurentian Bank and that the lending company would
manage the locked‑in RRSP because under no circumstances could the funds
of such an RRSP be withdrawn before the beneficiary turned 55. After asking
Mr. Arsenault many questions to reassure herself that this arrangement was
legitimate, and taking a few days to think, Ms. St‑Hilaire met with Mr.
Arsenault again on October 21, 1998, and signed the T2033 form to have her
locked-in RRSP transferred from Investors Group to the Laurentian Bank—more
specifically, to one of its branches in Toronto. In her March 6, 2001, letter
to the Minister's auditor, Ms. St‑Hilaire recounted these facts:
[translation]
...
On October 21,
1998, Mr. Arsenault had me sign many papers including the attached T2033(F)
form to have my LRF transferred from Investors Group to the Laurentian Bank.
He informed me of
the many fees for this transaction; I authorized Financière Telco to hold the
following amounts: $6,700.69 + $469.05 GST + $537.72 QST, for service and
administration fees for the CFM consultant (attachment 2).
The Laurentian
Bank asked for $1000.00 in my account, which would be managed by
Georges Doualan (broker for CFM).
CFM kept 20% of
the transaction as an additional guarantee, $9.6K. Réal Arsenault came to my home to
deliver my certified check on January 11, 1999. I took note of the exact amount
of the check.
I signed the
contract (attachment 2) with a few changes as you can see. The contract did not
contain exactly what we discussed. We agreed that the first year I could repay
only the interest and that I would start payments the following year.
I gave Mr.
Arsenault an authorization for pre-authorized payments starting on February 15,
1999, to January 15, 2000, for $160.67 per month; and another for $696.23
starting February 15, 2000, to January 15, 2006.
At no time did
TELCO use this payment method. On many occasions, I tried to contact Mr.
Arsenault but there was never any reply. Again and again, my attempts all went
unanswered. On February 14, 2001, I put a stop to my pre‑authorized
payments (attachment 3).
The only RRSP
statement is dated June 30, 1999 (attachment 4).
On February 14,
2001, further to your letter, I phoned Georges Doualan, (broker for CFM/TELCO)
so ask him if my LRF was still registered, and he confirmed this. I asked him
if there was someone I could speak to again from the company CFM/TELCO, and he
gave me the name of Jean Leduc, who was in charge of my LRF,
number [omitted for publication]. I asked him why the government wanted to
tax my LRF when it was not useable. He told me to discuss this with Mr. Leduc,
since he no longer made transactions for this company.
Regarding the
transfer of my LRF from Investor to the Laurentian bank, I discussed this with
Danielle Tremblay in Montréal at [number omitted for publication]. She was
the resource person for this transaction. Mr. Arsenault was responsible for
recruiting through newspapers, signing contracts and delivering the check to
Québec.
[5] The documentary
evidence showed that the Laurentian Bank received an authorization dated
December 15, 1998, to
invest $48,200 in a small company, namely 3563. In a letter to the Tax Deferral
Plans Service at this bank, Ms. St‑Hilaire acknowledged that the
bank's responsibility was limited to signing the receipt of the shares
certificate and cashing the amounts of the dividend or product of the share
buyback. Ms. St‑Hilaire also agreed, in case the company 3563
defaulted, to provide the necessary amounts for any legal proceeding that could
be instituted by the RRSP against the company. In another letter dated the same
day, addressed to the Laurentian Bank's Trust Department for individuals,
Ms. St‑Hilaire gave the necessary authorization to purchase
1,928 shares of capital stock in 3563 at $25 each for a total of $48,200.
[6] During her direct
examination, Ms. St‑Hilaire acknowledged her signature on each of these
two letters. However, she stated that they were blank letters that she had
signed and the handwritten notations indicating the number of shares, name of
the company and the amount invested were made afterwards by someone else.
During her cross-examination, Ms. St‑Hilaire changed her version to
state that some of the typed paragraphs had been added afterwards. According to
Ms. St‑Hilaire, she would never have authorized the purchase of
these shares of 3563. In support of her claims, Ms. St‑Hilaire
produced a complaint she had filed with the Autorité des marchés financiers (Authority)
on October 11, 2005, a few days before the hearing of her appeal. Counsel for
the Respondent gave her a letter dated September 23, 2005, with copies of the
two December 15, 1998, letters. In her complaint to the Authority, Ms. St‑Hilaire
asked that her file be examined to review the "authenticity" and the
"non-authorization to transform [her] LRF to shares."
[7] In a letter also
dated December 15, 1998, Jean‑Marie St‑Jacques, on behalf of
3563, informed the Laurentian Bank that Ms. St‑Hilaire had purchased
1,928 category B shares of capital stock in 3563 using her
self-administered RRSP and that payment of these shares, in the amount of
$48,200, was to be made to 3563 and delivered to an office in Laval, Quebec.
Attached to this letter was an accountant's report, by Mr. Laniel, establishing
the value of the shares of 3563 and their admissibility as investments under an
RRSP. Mr. Laniel later stated, in a statutory declaration signed July 21, 2000,
that his report was given without a verification of the operations of 3563 and
that he was not able to justify the opinions found therein, including the one
regarding the value of the shares. As for the investment in 9056‑8072
Québec Inc., Mr. Laniel also stated in his statutory declaration that this
company did not have any activity and that the arrangement allowed [translation] "the investor [to
receive] part [of an] amount invested as a loan." According to the
auditor, who testified at the hearing, this statement was also true of 3563
(Exhibit I‑10).
[8] A share certificate
for 3563 delivered to the Laurentian Bank as trustee for Ms. St-Hilaire is
dated December 15, 1998 (Exhibit I‑3, Tab 5). The evidence does
not show, however, when the check was delivered by the Laurentian Bank to 3563.
All that was shown was that on January 31, 1999, 3563 purchased
336 category G shares of Telco for the amount of $933,600. These were non‑voting
shares.
The stock register for Telco shows that a certain Jean Tremblay held
10,000 category A shares of Telco. He
also held 51% of the category A voting shares of 3563, and Mr. St‑Jacques
held 49%. In
addition to Ms. St-Hilaire's RRSP, were those of 49 other people who held
category B shares of 3563, for a total of 42,350 shares, representing a
subscribed capital of $1,058,750.
[9] According to Telco's
bank statements, an amount of $222,542 was deposited on January 8, 1999.
This amount was from category B shareholders of 3563 and included $46,754 from
Ms. St-Hilaire's RRSP.
That same day, Telco's account was debited by certified check for $30,842.54.
This amount corresponds to the net amount of the loan Ms. St-Hilaire received
from Mr. Arsenault.
[10] According to the
alleged loan contract
signed on January 8, 1999, between Telco and Ms. St‑Hilaire, she
acknowledged receipt of a $38,560 loan that day. She authorized Telco to
withhold from this amount $6,700.69 plus GST of $469.05 and QST of $537.72
(for a total of $7,707.46) for service and administrative fees at CFM. The amount given to Ms. St‑Hilaire
represents the net amount after subtracting these fees and taxes. According to the alleged loan
contract, she agreed to pay interest at 5% starting January 8, 1999, and to
repay $619.70 monthly, for a seven-year period. The parties amended the
repayment terms so that, contrary to what is in the contract, an amount of
$160.67 would be paid monthly for 12 months, towards the interest, and that the
capital would be repaid over six years at $696.23 per month, representing a
total reimbursement of $52,056, capital and interest.
[11] As mentioned above,
Ms. St-Hilaire gave a bank authorization allowing Telco to reimburse itself
every month. However, Telco did not make any withdrawals as payment of either
capital or interest. Ms. St-Hilaire stated that not only did she not pay any
capital or interest to Telco, but she also informed the Caisse populaire that
she opposed payment on February 14, 2001, after having learned a few days
earlier that the Minister was to include an additional $48,200 to her income.
[12] In his February 8,
2001, letter, Gino Vita, Minister's auditor, justifies including the
amount as follows: he gives the reason that the investment in 3563 does not
meet the criterion of an "admissible investment" and that the alleged
loans were offered simply in exchange for shares of 3563, which led him to
conclude that, [translation]
"…if this loan really existed...the ownership of your
RRSP would be the loan guarantee." (Emphasis added). Moreover, the
auditor mentioned the possible application of the anti-avoidance provision in
subsection 245(1) of the Act and found that the amount of the RRSP
withdrawal should be considered income under paragraph 56(1)(h) of
the Act.
[13] In addition to
making an opposition to the payment of capital and interest regarding her loan,
Ms. St-Hilaire filed a complaint with the Québec City police on January 9, 2002, for
economic fraud of $18,000. The complaint was filed against Jean and
Danielle Tremblay and Mr. Arsenault. Ms. St‑Hilaire did not
explain how she came to the amount of $18,000, but the $9,600 that CFM was to
hold as a guarantee, added to the amount of the fees paid to CFM (plus taxes),
namely $7,707.46 represents a total of $17,307.46. The $30,842.54 she received
represents 64% of the amount allegedly invested by Ms. St-Hilaire's RRSP in
3563. Moreover, in a letter dated October 14, 2005, addressed to this Court
asking for a postponement of her hearing, Ms. St-Hilaire indicated that the
criminal complaint filed January 9, 2002, had been suspended because Mr.
Arsenault had not yet been found. Further to searches carried out by a private
investigator, she managed to have him served with a subpoena requiring him to
appear at the hearing of this appeal, and Ms. St-Hilaire indicated in her
letter that she had advised the Québec municipal police. Finally, Ms. St‑Hilaire
submitted to evidence a letter from an Ontario lawyer introducing a class action
against many persons, including Jean Tremblay, Telco, CFM, the Laurentian
Bank and 3563. The lawyer wrote in this letter: "The number of Defendants continues to grow
as time progresses, as does the number of victims of the RRSP scam."
[14] During his
testimony, Mr. Vita claimed that Mr. Tremblay's group of companies (Groupe
Tremblay) had implemented a strategy to take funds from RRSPs, that the
group used recruiters and advertised in local papers. The money was invested in
the group's companies and the amounts returned to the RRSP holders represented
65% of the amount transferred to the group. According to an organization chart
prepared by Mr. Vita, the group was made up of over ten companies Mr. Tremblay
controlled. According to the findings of his investigation, the alleged loans
made by Telco were not, in general, repaid by the taxpayers who had been
recruited into the scheme.
[15] Mr. Vita also
described the activities of 3563 and Telco to show they were not related to the
operation of an active company. A letter signed by Mr. Tremblay confirms that
the only activity of 3563 was to hold Telco shares (Exhibit I‑7,
Tab 3). As for Telco's activities, an careful analysis of its financial
statements and some of its accounting records showed that Telco declared false
income and deducted false expenses to give the impression it operated an active
company. In particular, "income from contracts" of $1,213,022 appeared
on the financial statements to January 31, 1999, and represented false income
that was offset by expenses for "purchases and sub-contracts" of
$1,097,969 that were only accounting entries, and the operations to which they
refer were for another of the Groupe Tremblay's companies (see Exhibit I-8, in
particular Tabs 1, 3 and 4). Moreover, according to Mr. Vita's analysis,
"interest income" of $679,639 that appears in these financial
statements was interest Telco did not receive and had no intention of
collecting.
Analysis
[16] In my opinion, Ms.
St-Hilaire's appeal must be allowed because the amount the Minister included in
her income was erroneous. However, this does not mean that nothing should be
included in her income. The Minister established an assessment for Ms.
St-Hilaire based on subsection 146(10) of the Act, including $48,2000 in
the income, which represented the market value of either an alleged
non-qualified investment, or the RRSP property that was used as a guarantee of
an alleged loan obtained from Telco. In my opinion, there are two reasons to
find that this subsection does not apply in this case. First, the Minister
included $48,2000 in the income from the 1999 taxation year, whereas he did not
establish that the alleged non-qualified investment was acquired in 1999. The
following is set out by subsection 146(10) of the Act:
146(10)
Where acquisition of non-qualified investment by trust —
Where at any time in a taxation
year a trust governed by a registered retirement savings plan
(a) acquires a non-qualified
investment, or
(b) uses or permits to be used any
property of the trust as security for a loan,
the fair market value of
(c) the non-qualified investment at
the time it was acquired by the trust, or
(d) the property used as security at
the time it commenced to be so used, as the case may be, shall be included
in computing the income for the year of the taxpayer who is the annuitant under
the plan at that time.
[Emphasis added.]
[17] It is either the
time the non-qualified investment was acquired or the time it commenced to be
used as a loan guarantee that must be considered when determining the fair
market value of the property and the year this value is to be added to the
income. In the statement of facts at paragraph 5 of the Reply to the Notice of
Appeal (reply), the Respondent's agent did not indicate that the date of
acquisition of the alleged non-qualified investment was in 1999 or that the
payment of shares occurred in 1999. However, in subparagraph 5(e) of the Reply,
there is a reference to the December 15, 1998, letter that states the Appellant
had purchased shares in 3563. The burden of proof was again on the Respondent
to determine the date of acquisition of Ms. St-Hilaire's alleged RRSP
investments. Counsel for the Respondent claims that the shares in 3563 could
not have been acquired in 1998 unless their cost had been paid in whole. Even
if this argument had merit, the evidence presented by the Respondent does not
establish, on a balance of probabilities, that the payment was only made in
January 1999. All the evidence shows is that the check from the Laurentian
Bank, where Ms. St‑Hilaire's RRSP amount originated, was likely not
deposited to 3563's bank account until the beginning of 1999, on January 8,
1999 (Exhibits I-4 and I-5, Tab 1). In fact, there is a deposit of $229,425 on
3563's bank statement, but no details are provided regarding this deposit. The
only deposit slip produced was that of Telco, dated January 8, 1999, regarding
a deposit of $222,542 made from 3563's funds and that likely included an amount
paid from Ms. St-Hilaire's RRSP. It is therefore possible that the checks could
have been delivered to 3563 by the Laurentian Bank before January 1, 1999, but
that 3563 only deposited them eight days later. In such a case, the acquisition
of the alleged shares of 3563 would have occurred in 1998 and not in 1999.
Additionally, the certificate delivered by 3563 is dated December 15, 1998, and
this date corresponds to the date that appears on a letter sent by 3563 to the
Laurentian Bank, which mentioned that Ms. St-Hilaire "purchased"
1,928 category B shares of 3563. As a result, the Respondent did not establish
that the Minister's assessment was valid with respect to the application of
subsection 146(10) of the Act.
[18] At any rate, even if
the evidence had shown that the alleged acquisition of shares in 3563 had been
made in January 1999, I would still come to the conclusion that these shares
were not a genuine "non-qualified investment" within the meaning of
subsection 146(10) of the Act. In my opinion, Ms. St‑Hilaire's RRSP
did not acquire a genuine investment and Telco did not grant a genuine loan to
Ms. St-Hilaire. The loan, as with the shares in 3563, was a sham since the
perpetrators of the scam never genuinely intended for Ms. St-Hilaire's RRSP to
hold an investment or for a loan to be granted. In fact, as counsel for the
Respondent has admitted, the true goal of the operations was to
"offload" part of Ms. St-Hilaire's RRSP to her, tax-free.
[19] The evidence that
the loan was not genuine can be found in the fact that the amount given by
Telco to Ms. St-Hilaire was never repaid by Ms. St-Hilaire and that Telco,
although it had the authorization to debit Ms. St-Hilaire's bank account to pay
the interest and capital of the loan, never did so. A loan is so defined at
article 2314 of the Civil Code of Québec:
2314. The simple loan is a contract by which
the lender hands over a certain quantity of money or other property that is
consumed by the use made of it, to the borrower, who binds himself to return
a like quantity of the same kind and quality to the lender after a certain
time.
[Emphasis added.]
[20] Based on the
evidence presented before me, I find that, on a balance of probabilities, Telco
never intended on making a loan since it never intended on asking for the
repayment of the capital or collecting interest. The genuine intention of Telco
was to return part of Ms. St-Hilaire's RRSP to her. Telco was able to gain
possession of the money held in this RRSP by setting up another sham, the
purchase of 1,928 category B shares of 3563. Moreover, Ms. St‑Hilaire
claims she never authorized the purchase of such shares. It is true that
subsection 146(1) defines a "non-qualified investment", in relation
to a trust governed by a registered retirement savings plan, as "property
acquired by the trust after 1971 that is not a qualified investment for the
trust." Clearly, this definition and that of a "qualified
investment"[15] target assets and investments.
This term is defined in the Canadian Oxford Dictionary as "the act
or process of investing money…" and "invest," as "apply or
use money (esp.) for profit". In this case, when the representative of
3563 informed the Laurentian Bank that Ms. St-Hilaire had purchased shares
in 3563, he did not intend, as one of the perpetrators of the scheme, to use
the capital "for profit." Rather, it was a pretext or window dressing
to justify withdrawing money from the RRSP to the Laurentian Bank so that the
money went from Ms. St-Hilaire's RRSP to Ms. St‑Hilaire through 3563
and Telco, after a 36% "commission" deduction. This description of
operations corresponds to that given by counsel for the Respondent at
paragraphs 13 to 17 of her written arguments:
[translation]
13. Financière Telco Inc. simply offloaded to people part of
the investment they made in related companies through their RRSPs minus a
commission that it kept. The income that appears on the financial
statements of Financière Telco Inc. is mainly accounting entries that exist
simply to create the illusion that activities were carried out. (Testimony
of Gino Vita, statements of income of Financière Telco Inc. and accounting
documents)
14. On or around January 7, 1999, the Appellant obtained a $30,842.54
loan from Financière Telco Inc. (Loan agreement)
15. The loan arrangement was merely offered in return for the
purchase of shares in
3563545 Canada Inc.
through the Appellant's RRSP. (Testimony of Gino Vita)
16. The Appellant never repaid the loan or paid interest on this
loan. (March 6, 2001, letter)
17. Because of the scheme described above, the Appellant
could withdraw from her RRSP without paying taxes.
[Emphasis added.]
[21] If the Minister's
assessment cannot be justified by subsection 146(10) of the Act, it could,
however, be justified by subsection 146(8), which states:
146(8) Benefits taxable. There shall be included in
computing a taxpayer's income for a taxation year the total of all
amounts received by the taxpayer in the year as benefits out of or under
registered retirement savings plans, other than excluded withdrawals (as
defined in subsection 146.01(1) or 146.02(1)) of the taxpayer and amounts that
are included under paragraph (12)(b) in computing the taxpayer's income.
[22] In fact, the
evidence showed that Ms. St-Hilaire received $30,842.54 by certified check on
January 8, 1999, and this amount was a benefit received under an RRSP in 1999,
the year referred to in the assessment. In my opinion, even if Ms. St‑Hilaire
did not participate with fully informed knowledge in the scheme to withdraw
this amount from her RRSP, the fact is that she has held $30,842 from her RRSP
since January 8, 1999. She has never paid any interest on this alleged loan and
she never had to repay the amount. Moreover, I also believe that this amount
will never be repaid to Telco.
[23] To me, this seems to
be a more appropriate approach for assessing Ms. St‑Hilaire than
that adopted by the Minister. The only amount she received was $30,842,54.
Moreover, it must be noted that adding an RRSP to the income of an annuitant
following the acquisition of a non-qualified investment is done to discourage
the acquisition of non-qualified investments through RRSPs. As counsel for the
Respondent mentioned, subsection 146(6) of the Act sets out that such
annuitants have the right to deduct the lesser of the amount included in the
income according to subsection 146(10) and the proceeds of disposition of
the non-qualified investment when calculating their income. However, in this
case, the disposition of shares of 3563 could not give a proceed of disposition
equal to the amount included in Ms. St-Hilaire's income since the perpetrators of the scheme
took part of the amount withdrawn from the RRSP (36%). Since the perpetrators
profited from the trust of the taxpayers who participated in the scheme and it
is unlikely that Ms. St-Hilaire's RRSP can recover this part of the amount
withdrawn, the solution proposed by the prosecution is very likely to be
ineffective. Taxing only the amounts Ms. St-Hilaire held seems fairer to me
since the resulting effect is to not tax the amounts she lost to Groupe
Tremblay.
[24] Clearly, if the
class action were to allow Ms. St-Hilaire's RRSP to recover part of the $17,307
it lost in this scheme, such an amount would not be taxable, unless it was
given to her instead of her RRSP.
[25] Before concluding,
it must be noted that the Minister's alternative argument cannot be considered
in this case. This argument was that an amount was used by the RRSP as a
guarantee for a loan to Ms. St-Hilaire. In this case, we cannot say that Ms.
St-Hilaire's RRSP was used to guarantee a loan granted to her since, first of
all, as I found above, there was no real loan granted to Ms. St-Hilaire.
Moreover, the amount in question was not used as a guarantee since it was
distributed in its entirety: 64% to Ms. St‑Hilaire and 36% to the
perpetrators of the scheme.
[26] For all these
reasons, Ms. St-Hilaire's appeal is allowed without costs, and the assessment
is referred back to the Minister for reconsideration and reassessment taking
into consideration that the amount to be included in Ms. St-Hilaire's income
under section 146 of the Act must be reduced to $30,842.54.
Signed at Ottawa, Canada, this
9th day of December 2005.
"Pierre Archambault"
on this 5th day of
January 2006
Elizabeth Tan,
Translator
Email this Content