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Citation: 2003TCC713
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Date: 20031003
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Docket: 2002-1417(IT)I
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BETWEEN:
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ALAIN PETIT,
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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
Lamarre, J.
[1] This is an appeal from an assessment made on February 16, 1996, by the Minister of National Revenue ("Minister") against the Appellant for the 1993 taxation year. The Appellant claimed a business loss of $24,975, which was disallowed. In so disallowing the loss, the Minister relied upon the facts set forth in paragraph 5 of the amended Reply to the Notice of Appeal, which read as follows:
[translation]
(a) on or about December 15, 1993, the Appellant signed a purchase contract (the "Contract") for Corps et Ame products (the "Activities") for an amount of $25,000;
(b) under the terms of the Contract, the vendor was the Groupe Garydox Ltée;
(c) the Contract was signed by the Appellant and Constantin Roy on behalf of the Groupe Garydox Ltée;
(d) in reality, the Appellant paid only $8,500;
(e) the Appellant's actual purpose was not to handle Corps et Ame products;
(f) the Appellant did not intend to market Corps et Ame products;
(g) the Appellant did not commit any amount of money beyond his $8,500 investment;
(h) the Appellant did not incur a loss of $24,975;
(i) by means of this subterfuge, the Appellant's debt was eliminated by the vendor (difference between the $25,000 contract and the $8,500 investment);
(j) by means of this subterfuge, the Appellant obtained tax relief in excess of his investment;
(k) the contract is a subterfuge; and
(l) by means of this subterfuge, the Appellant had no reasonable expectation of profit; and
The Respondent raised a new fact in paragraph 6 of the amended Reply to the Notice of Appeal, which reads as follows:
[translation]
SUBJECT TO THE ABOVE, THE RESPONDENT ADDS THE FOLLOWING:
6. The Appellant, like many other people, in fact invested in a tax shelter for which no registration number had been obtained from the Minister.
[2] According to Exhibit I-2, on December 15, 1993, the Appellant allegedly purchased a non-exclusive licence from the Groupe Garydox Ltée ("Garydox") giving him the right to exploit products known under the trade name Corps et Ame. This sales contract indicates that the Appellant was operating under the company name Kanico Enrg. and that the non-exclusive licence was allegedly acquired for an amount of $25,000 (a flat-rate royalty of $5,000 and an additional investment of $20,000 for which the Appellant was to increase his profit margin for each additional $1,000 in excess of the base rate of $5,000 by means of a 1% discount on the wholesale price of the products sold). The cost of acquiring the licence included logistical support, described as including administration, marketing and promotional support (see the executive summary in the business plan for "Corps et Ame" licencees, Exhibit A-2, page 4). Of this $25,000, the Appellant allegedly paid an amount of $8,500 by cheque made out to Garydox and dated January 7, 1994. The balance of $16,500 was allegedly borrowed from a corporation named Saxon International ("Saxon"). The sales contract (Exhibit I-2) also indicates that the Appellant allegedly took out liability insurance from Venture Insurance. At the same time, the Appellant had the option of increasing his profit margin percentage on the licence over the course of the following year (1994) by agreeing to pay an additional amount of $25,000 before the end of 1994. It may be appropriate to note here that the agreement signed on December 15, 1993, was entered into for a period of one year and that it could be renewed with the same terms and conditions for one or more additional one-year periods at an additional cost of $1 per year. Thus, the second option indicated above, that of paying an additional amount of $25,000 in 1994, was an option completely open to the Appellant.
[3] In fact, the Appellant was never required to repay the amount of $16,500 that he had borrowed from Saxon. According to testimony by the Appellant and his spouse, Hélène Roy, the liability insurance that he had taken out when the contract was signed allegedly absorbed the debt. That insurance was allegedly taken out to cover repayment of the debt in the event that the Appellant was no longer able to obtain Corps et Ame products. The Appellant and his spouse state that they learned in early 1994 that the products were contaminated and were not available on the market. However, they were unable to provide documents supporting this. The Appellant and his spouse then stated that they had never been able to obtain Corps et Ame products, as the goods were seized from Constantin Roy, who was holding the goods in inventory. That seizure occurred during a criminal investigation by the Ministère du Revenu du Québec ("MRQ") into the sale of tax shelters by various promoters, including Constantin Roy. The latter is the Appellant's father-in-law and controlled Garydox. As the promoters in question were related to Constantin Roy, the investigation was conducted in the name of the Roy family or group.
[4] As regards the Appellant, he earned only $45 in sales of Corps et Ame products in 1993 (which corresponds to the sale of two or three products to members of his family). In 1994, the Appellant carried out no activities related to Corps et Ame products as a result of the problems mentioned above. No financial statement was produced in 1994 for this activity. In 1993, the financial statement prepared by Garydox, Exhibit I-3, indicates a gross income of $54.21 (sales of $45 and rebate of $9.21 (see Exhibit I-4)), a cost of $29.25 for the merchandise sold and expenditures of $25,000, the cost of acquiring the licence, resulting in a net loss of $24,975.04, the amount in question in this appeal. It goes without saying that, as a result, the Appellant did not expend an additional amount of $25,000 in 1994.
[5] A certificate of non-exclusive licence was allegedly given to Kanico Enrg. on December 15, 1993, (Exhibit I-1) and a business plan prepared by Garydox was submitted to the Corps et Ame licencees (Exhibit A-2). That business plan describes the product, indicates a target geographic market and provides an analysis of various scenarios regarding potential profits or losses in the first year, as well as the tax aspects, attempting to demonstrate that the cost of acquiring the licence could be deemed a deductible expense for the purposes of the Income Tax Act ("Act"). No explanation was provided at the hearing regarding how these scenarios were established, particularly regarding the cost of inventory or the amount of commissions. Prima facie, they do not necessarily coincide with what is indicated in the sales contract.
[6] Furthermore, the business plan indicates that a market study showing the profits to be made in the first year is available for consultation. Despite this, the Appellant indicated at the hearing that he had no idea what profits he could have earned on this investment and how many years it would take to recover the initial investment. The business plan also describes the role of the company, Distribution internationale Corps et Ame ("D.I.C.A."), responsible for the Corps et Ame product distribution network, and the role of the Centre de coordination de recherche scientifique internationale ("C.C.R.S.I."), offering a scientific research and experimental development service.
[7] The Appellant called as a witness Gérard Doire, the MRQ investigator who led the criminal investigation into the sale of tax shelters by the Roy group. Mr. Doire's testimony shows that the group of promoters in question sold tax shelters to 718 investors who claimed more than 20 million dollars in tax losses in 1993 (see Exhibits I-8 and I-9 and the Roy family audit report, Exhibit A-1, tab 3). During the investigation, it was found that each investor in fact only invested 32 per cent of the indicated amount in a research and development project or non-exclusive marketing licences for various products (including Corps et Ame products on a small scale) (see Exhibit I-6). Through a stratagem involving the creation of several corporations and registered companies, investors deducted the total amount of the investment that they claimed to have made, thus making a profit from the tax refund resulting from the hypothetical tax loss. The investigation dealt mainly with taxpayers who had organized their financing through the company 2910161 Canada Inc., which ran C.C.R.S.I. Following the investigation, all investors who had invested in a project examined by the investigation received a letter from the Canada Customs and Revenue Agency (CCRA) advising them that their investment did not entitle them to any tax deductions.
[8] The letter received by the Appellant is dated September 20, 1995 and reads as follows:
ALAIN JM PETIT
213, DES CENSITAIRES
VARENNES, QC
J3X 2C4
Object: Partnership loss: KANICO
Year ended December 31, 1993
Sir/Madam,
We have conducted an audit of the above mentioned partnership. The partnership sub-contracted with 2910161 Canada Inc (C.C.R.S.I.) in order to carry out on behalf of the partnership, a scientific research and experimental development ("SR & ED") project and/or, in order to buy a non-exclusive licence. Following a series of transactions, the partners/investors actual disbursement was, at the most, only 32% of the subscription price.
We have concluded that:
1) The partnership did not carry on a business with an expectation of profit.
2) The expenses of the partnership are not deductible for income tax purposes and the loss is disallowed.
3) The loss attributed to each member has been revised to nil.
Based on our review of the facts involved in this case, we contend that the investments by the partners were primarily tax-motivated. The investors immediately received an offset equivalent to 68% of the subscription amount. The tax refund expected by the taxpayer exceeded the actual 32% cash investment and as such, met the taxpayers' primary tax-motivated intention of investing in the partnership.
If a capital gain has been declared by you pursuant to the sale of the shares of CTM Development Ltd, this capital gain is not recognized for Income Tax purposes since the transactions lack commercial reality, and offend the "object and spirit" of the relevant provisions of the ITA. The gain will be annulled and accordingly, the capital gains exemption will be restored.
Furthermore, the Department is relying on anti-avoidance doctrines of "substance over form" and "commercial reality" to disallow these expenses.
Jurisprudence to support this position include:
1) Colgate Palmolive - Peet Co Ltd v. The King 1933 1 DTC 238 at 241 (SCC)
2) Dominion Taxicab Association v. M.N.R. 54 DTC 1020 at 1021 (SCC)
3) The Queen v. P.B. Bronfman Trust 87 DTC 5059, at 5067 (SCC)
4) Richard Stursberg v. M.N.R., 1990 1 CTC 2335, at 2344 (TCC)
5) Bowes & Cocks Limited v. M.N.R. 89 DTC 341 (TCC)
6) Maurice Moloney v. Her Majesty the Queen, 92 DTC 6570 (FCA)
A 30 day delay is allowed in order to submit written representations. At the expiration of the delay, a notice of reassessment will be mailed to you covering the above mentioned points. The taxes payable resulting from these changes are subject to interest at the prescribed rate.
If you are in disagreement with the notice of reassessment, you may file a notice of objection within one year of the due date for filing your return or 90 days from the date on the notice of reassessment, whichever is later. If a notice of objection has already been filed for this taxation year, the issuance of a notice of reassessment will have the effect of rendering your previous notice of objection void. If this is the case, we recommend that you file a new notice of objection immediately after reception of the reassessment.
Yours truly,
Revenue Canada Taxation
Specialized Audit
[9] The Appellant, who states that he did not understand the scope of the letter because he had not contracted with the C.C.R.S.I. and had never purchased shares in CTM Development Ltd., did not submit any representations to the CCRA at that time. In the Roy family audit report completed on February 5, 1996, for taxation year 1993 by Gabriel Caponi and another CCRA auditor, they found that the investors targeted in the investigation had purchased tax shelters for which no registration number had been granted in accordance with the Act. They also found that the main objective of the investors was tax-related and that there was no commercial reality associated with their investment (see Exhibit A-1, tab 3). The Appellant thus received a notice of assessment dated February 16, 1996, (Exhibit A-1, tab 2) disallowing the loss in question for the 1993 taxation year. He objected to the assessment on May 14, 1996.
[10] Mr. Caponi explained that the Appellant had been included in the group of investors targeted in the investigation because he had invested in the purchase of Corps et Ame products through Garydox, which was controlled by Constantin Roy. However, because the Appellant had not used the same financing channels as the other investors, i.e., C.C.R.S.I., the Appellant was not the subject of a specific audit. However, the assessment was upheld because the Appellant had followed the same model as the other investors by paying only a portion, 34 per cent, of the investment amount, while the loss claimed was equal to 100 per cent of that amount.
[11] The Appellant claims that he never invested in a tax shelter and that such was not his intent. He claims that he invested in a marketing licence for skin products for the purpose of gaining income. His wife already had experience in the sale of similar products, Nuskin (although these have no connection to Corps et Ame products), and the two were considering adding a new product line to this activity. It must be noted that, according to the tax returns filed by the Appellant in 1993 and 1994, sales of Nuskin products generated losses in both years (see Exhibits I-3 and I-5).
[12] As regards Corps et Ame products, the Appellant states that he was approached by his father-in-law, Constantin Roy, whom the Appellant has known since he was 16, and that he had no reason not to trust him. He admits, however, that Constantin Roy advised him that investing in Corps et Ame products would entitle him to a tax refund that could cover the basic investment.
[13] Furthermore, Mr. Caponi also indicated during his testimony that he was never able to locate the company Saxon and that he had not seen the loan contract between Saxon and the Appellant. In addition, the report by the Inspector General of Financial Institutions, filed as Exhibit I-10, shows that Kanico Enrg. was only registered on January 7, 1994, and was officially struck off on October 8, 1997. It also indicates that the date on which operations began was January 7, 1994. Furthermore, Mr. Doire stated that there were two searches, one in May 1993 for the 1992 taxation year and the other in February 1996 for the 1993 taxation year. There was no seizure in 1994, contrary to the testimony of the Appellant and his spouse, Hélène Roy. Finally, we see in Exhibit I-3, at page 10, that the Appellant and his spouse reported income of $11,172 from the company Placements Etteloc Inc. According to the testimony of Mr. Doire, this company, also controlled by Constantin Roy, managed all of the companies created by the Roy group as part of the stratagem used for the sale of tax shelters (see transcription, page 110).
[14] CCRA did not advise the Appellant until June 20, 2000, that it intended to uphold the assessment established for the 1993 taxation year following his objection on May 14, 1996. The Appellant's file was placed on hold while awaiting decisions in other cases deemed similar to his. The Appellant does not seem to have been advised of the reason for his file being on hold prior to the letter dated June 20, 2000.
Arguments of the Parties
[15] The Respondent first claimed that the loss claimed by the Appellant is not deductible because he invested in a tax shelter for which no registration number had been obtained from the Minister as required by subsections 237.1(1), 237.1(2) and 237.1(6) of the Act. These provisions read as follows:
SECTION 237.1:
(1) Definitions. In this section,
...
"tax shelter" - "tax shelter" means any property in respect of which it may reasonably be considered having regard to statements or representations made or proposed to be made in connection with the property that, if a person were to acquire an interest in the property, at the end of any particular taxation year ending within 4 years after the day on which the interest is acquired,
(a) the total of all amounts each of which is
(i) a loss represented to be deductible in computing income in respect of the interest in the property and expected to be incurred by or allocated to the person for the particular year or any preceding taxation year, or
(ii) any other amount represented to be deductible in computing income or taxable income in respect of the interest in the property and expected to be incurred by or allocated to the person for the particular year or any preceding taxation year, other than any amount included in computing a loss described in subparagraph (i),
would exceed
(b) the amount, if any, by which
(i) the cost to the person of the interest in the property at the end of the particular year,
would exceed
(ii) the total of all amounts each of which is the amount of any prescribed benefit that is expected to be received or enjoyed directly or indirectly of the interest in the property, by the person or another person with whom the person does not deal at arm's length
but does not include property that is a flow-through share or a prescribed property.
►237.1(2)◄
(2) Application. A promoter in respect of a tax shelter shall apply to the Minister in prescribed from for an identification number for the tax shelter unless an identification number therefor has previously been applied for.
►237.1(6)◄
(6) Deduction disallowed. In computing the amount of income, taxable income or taxable income earned in Canada of, or tax or other amount payable by, or refundable to, a taxpayer under this Act for a taxation year, or any other amount that is relevant for the purposes of computing that amount, no amount may be deducted in respect of an interest in a tax shelter unless the taxpayer files with the Minister a prescribed form containing prescribed information, including the identification number for the shelter.
[16] The benefits set forth by regulation to which paragraph 237.1(1)(b), supra, refers are listed in subsection 231(6) of the Income Tax Regulations, which reads as follows:
INFORMATION RESPECTING TAX SHELTERS
231. [...]
(6) For the purposes of paragraph (b) of the definition "tax shelter" in subsection 237.1(1) of the Act, "prescribed benefit" in relation to a tax shelter means any amount that may reasonably be expected, having regard to statements or representations made in respect of the tax shelter, to be received by or made available to a person (in this subsection referred to as "the purchaser") who acquires an interest in the tax shelter, or a person with whom the purchaser does not deal at arm's length, which receipt or availability would have the effect of reducing the impact of any loss that the purchaser may sustain by virtue of acquiring, holding or disposing of the interest in the tax shelter, and includes such an amount
(a) that is, either immediately or in the future, owed to any other person by the purchaser or a person with whom the purchaser does not deal at arm's length, to the extent that
(i) liability to pay that amount is contingent,
(ii) payment of that amount is or will be guaranteed by, security is or will be provided by, or an agreement to indemnify the other person to whom the amount is owed is or will be entered into by
(A) a promoter in respect of the tax shelter,
(B) a person with whom the promoter does not deal at arm's length, or
(C) a person who is to receive a payment (other than a payment made by the purchaser) in respect of the guarantee, security or agreement to indemnify,
(iii) the rights of that other person against the purchaser, or against a person with whom the purchaser does not deal at arm's length, in respect of the collection of all or part of the purchase price are limited to a maximum amount, are enforceable only against certain property, or are otherwise limited by agreement, or
(iv) payment of that amount is to be made in a foreign currency or is to be determined by reference to its value in a foreign currency and it may reasonably be considered, having regard to the history of the exchange rate between the foreign currency and Canadian currency, that the aggregate of all such payments, when converted to Canadian currency at the exchange rate expected to prevail at the date on which each such payment would be required to be made, will be substantially less than that aggregate would be if each such payment was converted to Canadian currency at the time that each such payment became owing,
(b) that the purchaser or a person with whom the purchaser does not deal at arm's length is entitled at any time to receive, directly or indirectly, or to have available
(i) as a form of assistance from a government, municipality or other public authority, whether as a grant, subsidy, forgiveable loan, deduction from tax or investment allowance, or as any other form of assistance, or
(ii) by reason of a revenue guarantee or other agreement in respect of which revenue may be earned by the purchaser or a person with whom the purchaser does not deal at arm's length, to the extent that the revenue guarantee or other agreement may reasonably be considered to ensure that the purchaser or person will receive a return of all or a portion of the purchaser's outlays in respect of the tax shelter,
(c) that is the proceeds of disposition to which the purchaser may be entitled by way of an agreement or other arrangement under which the purchaser has a right, either absolutely or contingently, to dispose of the interest in the tax shelter (otherwise than as a consequence of the purchaser's death), including the fair market value of any property that the agreement or arrangement provides for the acquisition of in exchange for all or any part of the interest in the tax shelter, and
(d) that is owed to a promoter, or a person with whom the promoter does not deal at arm's length, by the purchaser or a person with whom the purchaser does not deal at arm's length in respect of the acquisition of an interest in the tax shelter,
but, except as otherwise provided in subparagraph (b)(ii), does not include profits earned in respect of the tax shelter.
[17] Thus, a tax shelter exists if a taxpayer acquires a property and if the amount of loss claimed as a deductible in calculating the taxpayer's income for that property is greater than the value of the benefits prescribed by regulation. The Respondent suggests that, if repayment of the borrowed money is not required under an agreement aimed at compensating the lender under certain conditions, as is suggested here, that is a benefit prescribed by regulation. Thus, in the case at bar, the Respondent claims that an amount of $25,000 was allegedly reported as a deductible loss in calculating the Appellant's income. The Appellant only expended an amount of $8,500 and was not required to repay the difference of $16,500 as a result of the liability insurance clause in the contract. The Respondent thus suggests that the amount of loss indicated ($25,000) exceeds the real cost for the Appellant ($8,500) and that, as a result, it is a tax shelter for which no registration number was obtained.
[18] The Respondent also claims that the Appellant did not operate a business with Corps et Ame products and that the loss claimed is thus not deductible. The Respondent claims that the sales contract is pure subterfuge and that the Appellant never truly intended to market those products. According to the Respondent, all documents regarding the sale of Corps et Ame products by the Appellant are a façade to give the impression of such activity, in the same way as the stratagem was designed surrounding the investments in projects sold by the Roy group. When the main motive for investment is to obtain a tax benefit, it cannot be called commercial activity (see Moloney v. Canada, [1992] F.C.J. No. 905 (Q.L.), cited with approval from the Supreme Court of Canada in Walls v. Canada, [2002] S.C.J. No. 47 (Q.L.)).
[19] The Respondent suggest that the Appellant incurred no financial risk, as the tax refund that he thought he would receive from the federal and provincial governments would have netted him $12,500 (i.e., 50% of the loss claimed because the Appellant's income was enough to be subject to a maximum combined rate of 50 per cent), while he had only invested $8,500, thus making a profit of $4,000 from the tax refund.
[20] The Appellant claims that he never intended to invest in a tax shelter. He states that he purchased the licence in good faith for the purpose of selling Corps et Ame products. He cites R. v. Jarvis, 2002 S.C.C. 73, 295 N.R. 201, to claim that the evidence obtained by CCRA during the criminal investigation into the Roy group and recounted in the testimony of Mr. Doire should not be placed on record in this appeal. Finally, he claims that the CCRA was not diligent in processing his file, as a period of at least four years passed between when he filed his notice of objection and the response by the CCRA.
Analysis
[21] In terms of the argument raised by the Respondent that the Appellant had invested in a tax shelter for which no registration number was obtained, the burden of proof rests on the Respondent, as these are new facts that were raised after the assessment was made and that were only alleged when the amended Reply to the Notice of Appeal was filed (see this Court's order dated May 27, 2003).
[22] The evidence in this regard is unclear. Constantin Roy, the promoter, was not at the hearing. The Appellant stated that he was told of a tax deduction that might cover his investment. However, the documentary evidence provided as part of the sale of the licence for Corps et Ame products is not clear in establishing that the amount of the loss claimed, as being deductible in calculating the Appellant's income from acquiring the non-exclusive licence, would be greater than the actual cost for the investor. Furthermore, Mr. Caproni clearly stated that no specific audit was conducted regarding the Appellant to determine that he had invested in a tax shelter. Under the circumstances, I find that the Respondent did not demonstrate on a balance of probabilities that the Appellant invested in a tax shelter as defined in subsection 237.1(1) of the Act.
[23] In terms of the admissibility of Mr. Doire's testimony, I am of the opinion that the Jarvis ruling, cited supra by the Appellant, cannot be used to exclude this evidence in this case. That case dealt with such things as the exclusion of evidence by application of subsection 24(2) of the Canadian Charter of Rights and Freedoms as part of a process related to penal offences set forth in section 239 of the Act. In such a case, the Act sets forth a pre-authorization process in subsection 231.3(1) when the main purpose of an examination is to establish the taxpayer's penal liability. The taxation officer must thus obtain a search warrant to conduct the investigation. This seems to be what was done in the penal investigation into the Roy group led by Mr. Doire. This was not questioned by the Appellant at the hearing, nor was the legality of the method used to obtain the evidence presented by Mr. Doire in his testimony in this case. What the Supreme Court of Canada says in Jarvis is that, if the CCRA simultaneously conducts an administrative audit (as is the case when it makes a new assessment under the Act to establish an amount of tax payable by a taxpayer) and criminal investigation, investigators cannot avail themselves of information obtained pursuant to the audit powers subsequent to the commencement of the investigation into penal liability in order to establish such penal liability. In other words, as soon as there is a penal investigation, investigators must obtain the necessary authorization in order to conduct their investigation into the taxpayer's penal liability.
[24] Such is not the situation here. The Appellant is appealing an assessment made as part of an administrative audit. The Minister can thus obtain information from third parties pursuant to the broad powers vested him under subsection 231.1(1) of the Act (see Jarvis, supra, at page 3 and page 20, paragraph 53). In Donovan v. Canada, [2000] F.C.J. No. 809 (Q.L.), paragraph 11, the Federal Court of Appeal ruled that the discretionary power of a court to exclude tainted evidence was limited in a civil court, where freedom is not threatened and the obligation to pay taxes is the only issue. A fortiori, there is, in my opinion, no prohibition against using evidence obtained legally during a criminal investigation into similar transactions by the same promoter in order to establish a taxpayer's fiscal obligation, insofar as that evidence is relevant to the issue at hand. In the case at bar, the Respondent wishes to use evidence that was legally obtained during the criminal investigation into the Roy family to demonstrate that the Appellant used a stratagem similar to the one the Roy group suggested to other investors, in order to discredit the Appellant's claim that the transaction was authentic. In my opinion, this evidence from the testimony of Mr. Doire is fully relevant and admissible as evidence, as it was Constantin Roy, an influential member of the Roy group, who directly contracted with the Appellant for him to enter into the transaction before us today. Furthermore, in terms of the admissibility of the evidence, article 2857 of the Quebec Civil Code sets forth the following general principle:
Art. 2857. All evidence of any fact relevant to a dispute is admissible and may be presented by any means.
[25] I also deem the evidence is sufficiently relevant to the question at hand to be admissible (see Sopinka, Lederman and Bryant, The Law of Evidence in Canada, Toronto, Butterworths, 1992, chapter 11, pages 515-516 and the decision handed down by Sarchuk, J. of this court in Erlich v. Canada, [1998] T.C.J. No. 1124 (Q.L.)). Furthermore, I retained only those elements of Mr. Doire's testimony that relate to the modus operandi of the Roy group promoters. That is why, at my suggestion, Counsel for the Respondent withdrew the specific evidence regarding the cases of other taxpayers (who were not present at the hearing, at any rate) who had invested in Corps et Ame products through the Roy group.
[26] This leads me to the Respondent's other argument, that the acquisition contract for the non-exclusive licence for marketing Corps et Ame products was subterfuge. In this case, it is the Appellant who must prove the contrary, as this is a fact alleged in the amended Response to the Notice of Appeal on which the Minister relied in disallowing the loss claimed at the time of the assessment.
[27] I am of the opinion that the evidence presented at the hearing amply demonstrates that the Appellant had no real intention of marketing Corps et Ame products. He had no experience in this area. He made no inquires as to the profits that he might make from the sale of the products. In 1993, two or three products were allegedly sold to family members. No other serious steps were taken to attempt to market the product. The Appellant had no products in inventory, stating that he relied entirely on Constantin Roy.
[28] Furthermore, the credibility of the Appellant and his spouse, Hélène Roy, is questionable in many regards. The matter of contaminated products was not raised by them when they filed the notice of objection in May 1996, but only on July 6, 2000, in a letter to the CCRA in response to their decision of June 20, 2000, to uphold the assessment (see documents attached to the Notice to Appeal). In addition, according to Mr. Doire, no one advised him of this during his investigation, which was conducted in 1996 for the 1993 taxation year (see transcript, at page 191).
[29] The Appellant also stated that he was unable to obtain Corps et Ame products in 1994 due to the seizure of goods from Constantin Roy. Goods had already been seized from Mr. Roy in May 1993, before the Appellant acquired the licence. The second seizure did not occur until February 1996. The testimonies of the Appellant and his spouse do not seem credible on this matter.
[30] The Appellant also presented no tangible evidence regarding the actual existence of the loan from Saxon; the CCRA auditor, Mr. Caponi, was never able to locate that company. Neither was any evidence provided regarding the actual existence of Venture Insurance, which allegedly covered the loan from Saxon. The Appellant simply stated that everything had been arranged by Constantin Roy. The Appellant could not even remember any exchange of documents with those two companies. In light of the evidence presented regarding the stratagems organized by the Roy group (including Constantin Roy) through C.C.R.S.I. for 718 investors who were presented with various mechanisms for making a profit from the expected tax refund, we can infer that the two companies in question (Saxon and Venture Insurance) were simply a front aimed at helping the Appellant profit from the same type of stratagem as the other investors. Furthermore, the Appellant admits that he was never required to repay the loan of $16,500. The Appellant was also not unaware of C.C.R.S.I., as direct mention was made of it in the business plan submitted to him (Exhibit A-2). It is thus possible to infer that the Appellant was aware of this stratagem when he agreed to sign the contract with Garydox, particularly as Garydox was controlled by Constantin Roy who also controlled another company, Placements Etteloc Inc., which managed all companies created by the Roy group in selling tax shelters. We see that the Appellant reported income in the amount of $11,172 from Placements Etteloc Inc. on his 1993 tax return (Exhibit I-3, page 10). In my opinion, this is another element that tends to demonstrate that the Appellant was very likely aware of the entire stratagem proposed by Constantin Roy and that he wished to benefit in the same way as the other investors.
[31] Finally, Kanico Enrg. was not registered until January 1994 and did not yet exist in 1993. Furthermore, the report by the Inspector General of Financial Institutions indicates January 7, 1994, as the date on which it began operations. Thus, in 1994, the evidence shows that there was no activity related to Corps et Ame products. This is another element that sheds serious questions on the Appellant's actual intention to market the Corps et Ame products proposed by his father-in-law, Constantin Roy.
[32] Furthermore, the fact that the Appellant's spouse had some experience with Nuskin products does not convince me that the Appellant started a new business venture with Corps et Ame products. They were already operating at a loss with the Nuskin products and I doubt, without the tax incentive, that the Appellant would have invested an additional $25,000 in a similar line of products.
[33] Jurisprudence recognizes that, when the sole purpose of an activity is to obtain a tax refund, it cannot be called commercial activity (see Moloney and Walls, supra).
[34] In my opinion, the Appellant has not demonstrated on the balance of probabilities that he actually intended to market Corps et Ame products. The theory of subterfuge seems well-founded. In this case, the Appellant cannot claim to have suffered a loss of $24,975, as he has not demonstrated the actual existence of such a business. The assessment is therefore well-founded as regards the loss being disallowed.
[35] Finally, the Appellant stated that the CCRA was not diligent in processing his file, as four years passed between when he filed his notice of objection and the response from CCRA. Pursuant to section 169 of the Act, the Appellant could have appealed to the Tax Court of Canada after 90 days had elapsed after service of his notice of objection and the Minister had not notified him in any way. He did nothing. I note, however, that CCRA admitted, in a letter to the Appellant on September 7, 2001, that there had been delays in processing his file (Exhibit A-1, tab 6). At that time, CCRA proposed waiving a portion of the interest on the new assessment pursuant to fairness provisions once all recourse to appeal had been exhausted. Pursuant to subsection 220(3.1) of the Act, the Appellant could then have asked that the Minister exercise his discretion in waiving a portion of the interest on this tax debt.
[36] For all these reasons, the appeal is dismissed.
Signed at Ottawa, Canada, this 3rd day of October 2003.
J.T.C.C.
Translation certified true
on this 18th day of March 2004.
Gerald Woodard, Translator
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