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Citation: 2003TCC7
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Date: 20030225
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Docket: 2000-2073(IT)G
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BETWEEN:
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VIVIANE TRUDEL-LEBLANC,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Tardif, J.T.C.C.
[1] This is an appeal for the 1994, 1995 and 1998 taxation years.
[2] A pharmacist since the early 1970s, the appellant has carried out her professional activities, beginning in August 1974, as the sole proprietor of a pharmacy in Bonaventure. In November 1977, on the advice of her accountants, she created a company under the name of Trugesvi Inc.
[3] From the time the company was incorporated, she continued to practice her profession in substantially the same manner except that she began to deposit all cheques made out to her into the new account of Trugesvi Inc., of which she owned all the shares. In return, the company paid her a salary of $56,300 in 1994; $56,300 in 1995; and $55,817 in 1998.
[4] This was a conventional pharmacy with the usual two components: one called the dispensary, selling prescription medications, and the other, basically commercial, involving the sale of a variety of products.
[5] The appellant contended that Trugesvi Inc. had operated the pharmacy over the years; the company reported all income, including income from the sale of prescription medication and the amounts of the fees she received personally as a pharmacist.
[6] During the years at issue, section 27 of the Pharmacy Act provided that only a pharmacist could buy and sell medication. Consequently, at the time the reassessments were made, it was prohibited for a company, even if controlled by a pharmacist, to buy and sell medication in the course of its commercial activities.
[7] Clearly, neither the appellant nor her accountants were familiar with the restrictive provisions of the Act to which pharmacists were subject, since they created Trugesvi Inc., the purpose of which was to operate the pharmacy. In other words, the new corporation substituted for the appellant for everything involving the operation of the pharmacy, which the appellant had personally operated hitherto.
[8] After the company was created, the appellant continued to act in substantially the same manner, that is, without taking the corporate reality into account with the exception that all of the transactions, including those relating to the payment of her personal fees, went through the company account.
[9] She invoiced the Régie de l'assurance maladie du Québec in her own name; she received cheques in this capacity and deposited them in the company account. Everything flowed through the company account. The same was true for the purchases of medications ordered in her personal capacity but paid for by company cheques.
[10] The questions that sought to differentiate the two asset bases did not lead to convincing results. On several occasions, I noted that the appellant clearly made no distinction between her personal affairs and those of the company of which she was the sole shareholder.
[11] The excerpts of the appellant's testimony clearly indicate this:
(at pages 24 and 25) - (Viviane Trudel examined by Mr. Lévesque)
[TRANSLATION]
...
Q. You are aware today, they spoke to you, the people from the Canada Customs and Revenue Agency, that the Pharmacy Act did not allow, at least at the time, a corporation to be the owner of a pharmacy. Is this correct?
A. Repeat the question.
Q. You were told that a corporation, according to the Pharmacy Act, could not be the owner of a pharmacy.
A. Well, I said a pharmacist or a partnership of pharmacists, well, that is to say, a corporation. For me, the corporation was me; I did not make a distinction.
Q. But in terms of the Act, did you have problems with the Ordre des pharmaciens?
A. No, not at all, I never had problems with them.
Q. Did they come inspect you?
A. Yes, but that was to check the pharmacy's practice.
Q. They never spoke to you about that.
A. No.
...
(from pages 27 to 30) (Viviane Trudel examined by Mr. Lévesque)
[TRANSLATION]
...
Q. In terms of operating this way, did ... who told you to operate that way as a corporation or why did you incorporate yourself in 1977?
A. Well, it was the accountant who told us that it was better to be incorporated.
Q. Was there an agreement at the time as to what you were supposed to do, how this was supposed to work?
A. No, everything was, since I was the owner one hundred per cent (100%), well, things worked as they had always worked.
...
Q. With Familiprix, to become a part of this company, to be associated with them, to have the Familiprix sign, did you not have to buy the shares ...
A. Yes, indeed.
Q. ... of that company?
A. Yes.
Q. Who bought those shares?
A. If I remember correctly, they are in the name of Vivianne Trudel.
...
André A. Lévesque:
O.K., we are going to give this to you, Your Honour. It is marked separately from the tax return, so perhaps this would be easier.
André A. Lévesque:
Q. So, I am showing you, Ms. Trudel, a financial statement from your company, Trugesvi, at November 30, 1995.
A. Un huh.
Q. And more particularly, page 8. Under investments in the company, you can see: "Shares of Familiprix". You could see forty-two thousand one hundred one (42,101) shares at August 31, 1995; then over here, you see the value of $21,000. So, those shares, I just asked you who had bought them; if I look at the financial statement, I see it is the corporation.
A. Yes.
Q. Is this the case?
A. Yes, indeed, well, that is, the company bought all of the shares ...
Q. The company what?
A. ... bought all the ... what was, what was supposed to be bought.
Q. So, in terms of the association with Familiprix, it was your corporation that had purchased the shares of Familiprix.
A. Yes, I think so.
...
(at pages 33 and 34) (Viviane Trudel cross-examined by Mr. Roy)
[TRANSLATION]
...
Q. And you said that it was an accountant who suggested that you create that corporation.
A. Yes.
Q. Was it a management corporation?
A. Yes, for us that's what it was; it was a management corporation.
Q. Yes, well, what was the purpose of creating a management corporation?
A. the purpose ...
Q. I can help you out. First you said: "To manage the responsibilities."
A. Maybe, yes.
Q. What does that mean?
A. Manage the responsibilities, that is, maybe also from a tax point of view, I don't know, Sir.
Q. You say maybe also from a tax point of view. So, if I understand rightly, also, Ms. Trudel, in this establishment you had two operations, so to speak; on the one hand, you had the laboratory or what is it called--the dispensary, in technical language.
...
(from pages 39 to 41) (Viviane Trudel cross-examined by Mr. Roy)
[TRANSLATION]
Q. So, Ms. Trudel, I would like to draw your attention to the clause ... the file, in the last document that I have just shown you, I-1-19. Clause 4.3. Do you want to read it aloud: 4.3 on the document.
[TRANSLATION]
A. "It is understand by the parties that the goodwill and the stocks of medications both for over-the-counter sales and for the laboratory are specifically sold by Viviane Trudel to Jean-Claude Landry, i.e., from pharmacist to pharmacist."
Q. 4.3, The Court.
It is understood by the parties that the goodwill and the stocks of medications both for over-the-counter sales and for the laboratory are specifically sold by Viviane Trudel to Jean-Claude Landry, i.e., from pharmacist to pharmacist."
Who asked for that clause to be included?
A. It must be the ...
Q. Doesn't that ring a bell?
A. For the moment, I did not pay attention to that.
Q. Well, it's because you said in chief that it was ... the inventory was in Trugesvi.
A. Yes.
Q. But, in reality, are they in Trugesvi? Aren't you the one personally who had them, you had those inventories?
A. Yes, but, for me, it was Trugesvi who had all that, all that in stock. It was ...
Q. For you, it was Trugesvi.
A. Well, of course, that's right.
Q. But in reality ...
A. Maybe ... it was in my name, that's for sure.
Q. It was in your name.
A. Well, the company was in my name.
Q. No, no, no, I'm talking about the inventory.
A. The inventory, yes.
Q. The inventory was in your name. Is that right?
A. Well, for me, everything was sold, all the stock, all the merchandise was in the name of Trugesvi, I mean ...
Q. But the goodwill was in whose name?
A. The company's, I imagine.
Q. Well, why is it you ...
A. Well, I don't know, it seems to me ...
Q. ... yourself personally who sold the goodwill.
A. I can't say, I didn't really pay attention to that at the time.
Q. You didn't pay attention to that. Do you have ... do you remember that you would have had an inventory taken ...
A. Yes.
Q. ... of the merchandise in the pharmacy. Yes, you remember that, by Inventaires de l'Estrie.
A. Yes, that's right.
Q. ... does this mean anything to you?
A. Yes.
...
(from pages 50 to 55) (Viviane Trudel cross-examined by Mr. Roy)
[TRANSLATION]
...
Q. Well, you see, there, I think these are the invoices or the orders made to Familiprix. Whose name was it in, who made the order?
A. Well, it's marked "Viviane Trudel Leblanc".
Q. It's marked "Viviane Trudel Leblanc".
A. That's exactly right.
Q. It isn't Trugesvi who made the order.
A. No.
Q. Never?
A. No.
...
Q. Therefore, it is you personally who ordered the medications for Familiprix. Now, in the examination for discovery, you said, "Viviane Trudel," that in Familiprix, Familiprix sells only to pharmacies; it's only pharmacists who are on the board of directors.
A. Yes.
Q. Is that right?
A. Yes.
...
Q. Was there an agreement between Trugesvi and Familiprix?
A. No.
Q. No, there was no agreement between Trugesvi and Familiprix. There was one between you and Familiprix.
A. Yes.
Q. Between you personally.
A. Personally, yes.
Q. On your examination for discovery, Ms. Trudel, I asked you whether there was a contract between yourself and the Trugesvi corporation.
A. No.
Q. There was no contract. You answered: "I wouldn't think so."
A. No, there wasn't.
...
Q. Did you know that you could not operate, well, operate, practice your profession as a pharmacist under a corporate name.
A. Well, in my opinion, I was practising in my name.
Q. In your name. So, for you, the corporation and yourself ...
A. Well, it was the same thing.
Q. Let's put the question differently. You were personally the owner of the pharmacy before the incorporation, which was in 1977, that's right, November 30, 1977. The only change that took place, if I understand correctly, is that after '77 you took the money and you received your income; you paid your expenses out of the Trugesvi account, right?
A. Yes.
Q. Before that, you operated the exact same way.
A. Yes.
Q. It was the same thing.
A. Yes, it was.
Q. The only thing that changed is that ...
A. That's what was changed.
Q. ... Trugesvi was in the picture and you say--you knew that you were receiving a salary, you were also receiving dividends when you had decided to pay one to yourself, is that correct?
A. Yes.
Q. Yes, that's right. And that Trugesvi was filing tax returns.
A. Yes.
Q. That's right.
A. Yes.
Q. So, there was no change in the operations as such. Is that correct?
A. No.
(page 59) (Viviane Trudel cross-examined by Mr. Roy)
[TRANSLATION]
...
Q. But had you ... at some point reported the corporate reality of your organization to Familiprix.
A. No. You mean reported?
Q. Notified them that the part of the goods, apart from the medications, what is usually found in a pharmacy in general, that, that was operated under the... through a corporation, a company?
A. No.
...
(at pages 64, 65 and 66)
(Viviane Trudel on re-direct by Mr. Lévesque)
[TRANSLATION]
...
THE COURT:
Q. Tell me, Ms. Trudel.
A. Yes.
Q. For city hall, you have a licence, when a person operates a business within a municipality, you are supposed to have a licence. Was the name of the company registered in ... with the municipality?
A. I don't remember, wait a minute. I think it was in my name, it seems to me.
Q. Then, say, at some point, advertisements are often made in the weeklies, the parish newsletter or that kind of thing, did the company's name appear in certain places?
A. No.
Q. Was I correct in understanding that the company's name was only indicated on the printed cheques?
A. The cheques, yes, that's right.
Q. Are there other places where in fact someone who was not from the area, for example, could see that there was a company that was involved more or less directly in this?
A. No.
Q. It was the only document, the cheque.
A. Yes, to my knowledge, maybe there were others, but ...
Q. In the phone book, for example, was the company name indicated?
A. No.
Q. It was always under your own name.
A. Yes.
Q. Alright. Thank you. You may go back to your seat.
...
(at pages 71 to 75)
(Michel Bernier, accountant, cross-examined by Mr. Roy)
[TRANSLATION]
...
Q. O.K., for whose goodwill--Trugesvi's goodwill or Viviane Trudel's goodwill?
A. I don't want to divide it up because the company existed, it made profits; therefore it had goodwill. On the other hand, in the pharmacy business, pharmacists in fact sell goodwill.
Q. Personally.
A. Personally.
Q. O.K., that's what we are doing here, right?
A. Yes, but is it $300,000 for Ms. Trudel's goodwill or is it $150,000--I don't know.
Q. O.K.
A. I can't give you, I can't tell you this exactly. But there was a sale of goodwill by Ms. Trudel but that does not mean that there was no goodwill in the company as well.
Q. No, no, that isn't the issue. Here, the $300,000 is for Ms. Trudel's goodwill. This is an amount of $300,000 for her personal goodwill.
A. Anyway, as seller, the result was the same.
...
A. The inventory of medications, it was one hundred ...
Q. $151,000.
A. I can explain that.
Q. Yes.
A. O.K. It's because at the time ... the sale price for the shares, according to the contract, included the inventory, O.K. In negotiating with Revenue Canada, Revenue Canada told us: "Well, Ms. Trudel has to be the one who sells the inventory." Therefore, it was negotiated so that the company sold the inventories to Ms. Trudel and she resold them to Mr. Landry. O.K., so, she, however, she had to buy the inventories from the company because for this to work, for there not to be a benefit conferred, this has to hold together.
So, at the time, Revenue Canada was saying: "Ms. Trudel should have taxed herself on amounts of money." The liquid assets are in the corporation, O.K. The corporation therefore owes Ms. Trudel some amounts of money. And on the amounts of money that the corporation owed her at the time, they reduced the purchase of inventory. The upshot of all that was that there was a balance owed to Ms. Trudel. However, the purchaser of the corporation, there was no question of him paying these amounts of money to Ms. Trudel since he had already paid to a large extent $1,037,000 because there was a balance from the sale price, but the purchaser did not want to pay an additional amount.
Therefore, we told ourselves, well, Ms. Trudel, since Revenue Canada has already taxed her on those amounts, give us a capital loss on this amount of money, which will never be collected; there would be double taxation if that happened. And, in fact, Revenue Canada gave us the loss to avoid a double excise tax. This is a fairly brief summary, but that's it.
Q. I have no further questions, Your Honour.
...
[12] The appellant contended that section 27 of the Pharmacy Act should not be taken into consideration in allocating the income that was the basis of the assessment, which is the subject of this appeal. Section 27 reads as follows:
27. Subject to sections 28 to 30, only a pharmacist, a partnership of pharmacists or a joint-stock company all of the shares of which are held by one or more pharmacists and all of the directors of which are pharmacists may be owner of a pharmacy and buy and sell medications as owner of a pharmacy.
[13] She claims that only the Income Tax Act can and must be taken into consideration to determine a person's income to avoid discrimination since the Act applies to all Canadians, who are subject to very different laws depending on their province of origin.
[14] To explain her reasoning, she makes a whole set of assumptions that highlight examples of discrimination and injustice tending to show that all Canadians would not be treated equally by the Income Tax Act if it were necessary to take into account the laws, the content of which varies from province to province, even from some regions to other regions.
[15] Indeed, Nathalie Picard, in charge of the appellant's file for the respondent, explicitly acknowledged that her analysis, and the resulting assessments, had been based on section 27 of the Pharmacy Act. I do not believe this is sufficient to vacate or confirm the assessments from which the appeal resulted.
[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.
[17] In the light of the evidence, it seems that the accountants whose services were called on for and during the creation of the company gave the appellant minimal explanations about the legal effects of the new corporate entity.
[18] The creation of a separate legal entity or the creation of a corporation is far more than an accounting process that may have tax advantages. It must be coherent and above all consistent with its real operation.
[19] It seems that at the time there was no agreement or contract to provide for the parties' rights and obligations, that is, those of the appellant and those of the new entity. Are we to conclude or assume that the appellant's activities were all automatically transferred to the new company?
[20] On this nevertheless fundamental question, the evidence does not enable us to draw any conclusions whatsoever. The preponderance of the evidence, the only evidence available, is that the creation of the company did not involve genuine significant changes. The appellant simply continued to operate the business. The same was true with respect to employee and client relations, to advertising and to invoicing. This is very clear from the excerpts reproduced above.
[21] What is more, in the transaction at the end of which she transferred all her shares, the following was provided for in clause 4.3: (Exhibit I-1, Tab 19, p. 3)
[TRANSLATION]
4.3 It is understood by the parties that the goodwill and stocks of medications both for over-the-counter sales and for the laboratory are specifically sold by Viviane Trudel to Jean-Claude Landry, i.e., from pharmacist to pharmacist.
[22] The appellant benefited from the goodwill personally; all these elements are revealing regardless of what the accountant who testified thinks, namely, that the sale of goodwill in the appellant's name was an insignificant technicality.
[23] Imputing the income generated by an economic activity is neither a technicality nor a decision in the discretion of the accountants or other persons; it must correspond to and be in line with reality, and this must be unambiguous, especially when there may be confusion due to the various statuses of the natural person who controls the two entities.
[24] In the case at bar, the appellant personally operated a pharmacy. In 1977, she incorporated Trugesvi Inc., so that all the commercial and professional activities would be carried on therein.
[25] As the facts show, the appellant has, with some qualifications, continued to practice her profession the same way as before the company was incorporated, except that she opened an account in the company name in which she deposited all of the cheques she received for her professional practice.
[26] The appellant's good faith is not in question. She evidently followed the advice of her accountants who concluded that a corporate status would reduce her tax burden.
[27] I strongly doubt that the accountants explained the consequences of incorporation. Too often, some accounting and tax professionals have a tendency to assume that the facts should be shaped by accounting entries whereas, in reality, the figures should reflect the facts, not the contrary.
[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.
[30] During the years at issue, it was not possible for pharmacists to practice their profession within a corporation. This was not, moreover, the only profession subject to such constraints.
[31] Although it is not my job to assess whether such limiting provisions are judicious, I believe, without fear of error, that the ultimate objective of those provisions is assigning liability inherent in the practice of various professions.
[32] These provisions prohibit a corporation from performing or carrying out actions by an individual who cannot be seen, whereas one of the fundamental characteristics of the professions to which they apply is and must be that it is an intuitu personae relation, that is, centered on the physical person carrying out the actions.
[33] Counsel for the appellant listed examples where the Minister had taxed income from illegal and even criminal businesses. He also cited cases where penalties had been allowed as deductible expenses in the context of commercial activities.
[34] I agree with all these examples, which furthermore could have been far more numerous. However, I do not believe that those precedents are relevant to this case.
[35] All of the examples or precedents submitted by the appellant involved income-producing activities performed within the business by accountable persons, who were themselves behind the incomes that were taxed.
[36] To accept the appellant's reasoning would mean allowing a taxpayer to direct or transfer all or part of his income arising from his own activities to any other taxpayer, which would obviously produce some fairly peculiar situations.
[37] In the case at bar, the appellant decided to incorporate a company to transfer to it all of her commercial activities. She maintains that she also transferred to the company her professional activities. Why? When? How?
[38] The evidence, the burden of which lay with the appellant, did not answer any of these questions, which were nevertheless fundamental. Indeed, the evidence revealed that she had transferred the income from her profession by depositing it into the company account. By virtue of what did she so act?
[39] What did she get in return? Under what conditions? None of this was established.
[40] The preponderance of the evidence is that a company was incorporated in 1977. Following the creation of the company, nothing really changed with the exception that the personal cheques flowed through the company account; the purchases of medications continued to be made personally by the appellant.
[41] Although the creation of a company is a mere formality that for some does not change much, in reality, it involves establishing a distinct legal personality that produces fundamental rights and obligations that must be respected.
[42] These rights and obligations must also be stated and defined. This does not mean implementing a routine determined by the accountant and thinking that performing it repeatedly will produce realities that may be opposable against third persons. Having recourse to corporate status requires an organizational structure, which ensures a genuine independence. The corporation's legal relationships with another entity must all be clearly defined and respected.
[43] In the case at bar, the appellant did not change her operating habits, undoubtedly in good faith, other than that she deposited her personal cheques in the company account in return for which the company paid her a salary.
[44] A person cannot simply deposit his pay cheques in another person's bank account and claim, even years after, that the deposits constituted income for the recipient of the said deposits.
[45] The routine performed over a long period once Trugesvi Inc. was incorporated, consistent with the tax returns filed during this period, was the appellant's chief argument that every thing was in order.
[46] It was never established that the company had reached an agreement providing for all of the terms and conditions with respect to the rights and obligations of each party.
[47] I do not believe that an intention, no matter how laudable, is sufficient to find that there is a genuine contract and, particularly so, when the same natural person controls and directs the two legal entities present.
[48] For the accountant in the case, the company was first and foremost an important component of a tax planning exercise; it could certainly be an interesting vehicle so long as all of the responsibilities of the stakeholders were clearly laid down and defined. To receive the benefits, one must meet all the requirements.
[49] The appellant received cheques for her professional work. The revenues so received were her exclusive property. She could not, on her own, decide that this was taxable income in the hands of the other taxpayer, the corporation, even though she was its sole shareholder and director.
[50] To accept the reasoning and arguments submitted by counsel for the appellant, it would have first been necessary to prove the existence of a contract in which all of the activities, both commercial and professional, would henceforth be performed by the corporation, Trugesvi Inc. Second, the contract should have been reported to all of the payers of amounts referred to as income of the corporation.
[51] On that basis, there is no doubt that it would have been company income even if part of the income had come from illegal activities. As an example, fees paid unlawfully to a pharmacist struck from his Order's roll are in fact fees taxable as income even though collected illegally.
[52] In the case at bar, the appellant personally received income; she could not, on her own, attribute them to another legal entity. Income must be taxed in the hands of the person who is entitled to it and who receives it.
[53] The appellant personally received the income on the basis of which the assessments were made; she therefore had to tax herself on this income. For these reasons, the appeal is dismissed with costs to the respondent.
Signed at Ottawa, Canada, this 25th day of February 2003.
J.T.C.C.
Translation certified true
on this 29th day of March 2004.
Sophie Debbané, Revisor
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