Date: 20000925
Dockets: 2000-1144-IT-I, 2000-1145-IT-I
BETWEEN:
ÉRIC DELAGE, GÉRARD DELAGE,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent,
Reasonsfor
Judgment
Lamarre Proulx, J.T.C.C.
[1] These
appeals were heard on common evidence under the informal
procedure. The appellants were assessed under section 160 of the
Income Tax Act (the "Act"), which
provides that the transferee and transferor are jointly and
severally liable to pay the transferor's tax up to an amount
equal to the lesser of (a) the amount by which the fair
market value of the property at the time it was transferred
exceeds the fair market value of the consideration given for the
property, and (b) the amount of the transferor's tax
liability in the taxation year in which the property was
transferred or any preceding taxation year.
[2]
There are three amounts involved: (1) the fair market value of
the property; (2) the value of the consideration; and (3)
the amount of the tax liability.
[3]
The issue is whether, given that a dividend was paid to them in
the course of the 1994 taxation year, the appellants are required
to pay the amount of $12,906.18, being a tax liability
of Gestion Paraleg Inc. which subsequently became
9014-2464 Québec Inc. during the 1994 taxation
year.
[4]
The appellants maintain that the dividend payment was in
consideration of services rendered and rely on the decision of
this Court in Davis et al. v. The Queen, 94 DTC
1934.
[5]
The respondent argues that a dividend is a payment related to the
capital stock alone and relies on the Supreme Court of
Canada's decision in Neuman v. M.N.R., [1998]
1 S.C.R. 770.
[6]
The facts on which the Minister of National Revenue (the
"Minister") based his assessment are set out in
paragraph 6 of each Reply to the Notice of Appeal (the
"Reply"). The two replies are identical and I reproduce
that for Gérard Delage's appeal, which reads as
follows:
[TRANSLATION]
(a)
Gestion Paraleg Inc. was incorporated on June 18, 1990, and
operated a new and used vehicle sales and service business;
(b)
Gestion Paraleg Inc. was known under that name until
November 21, 1994, after which it was called 9014-2464
Québec Inc.; it ceased all business activity on February
28, 1995;
(c)
the shareholders and directors of Gestion Paraleg Inc., which
subsequently became 9014-2464 Québec Inc. were
(i)
the appellant,
(ii)
Éric Delage, and
(iii)
François Therrien;
(d)
the appellant and Éric Delage are father and son, and they
form a related group that controls Gestion Paraleg Inc., which
subsequently became 9014-2464 Québec Inc.;
(e)
on November 27, 1995, a reassessment for the 1994 taxation year
was issued against 9014-2464 Québec Inc. whose fiscal year
ended on October 31, 1994;
(f)
on March 11, 1997, 9014-2464 Québec Inc., whose fiscal
year ended on October 31, 1994, owed the Minister $12,906.18 with
respect to unpaid tax liabilities for the 1994 taxation year:
(i)
federal
tax
$9,480.54
(ii)
interest
$3,425.64
$12,906.18
(g)
during the 1994 taxation year, the appellant received a dividend
totalling $16,500 from Gestion Paraleg Inc., which subsequently
became 9014-2464 Québec Inc.;
(h)
in computing his income for the 1994 taxation year, the appellant
included the amount of $16,500, with gross-up, as dividends;
(i)
the payment of a dividend by a corporation to a shareholder is a
transfer of property within the meaning of section 160 of the
Act;
(j)
on March 11, 1997, the Minister held the appellant jointly and
severally liable to pay an amount equal to the tax liability for
the 1994 taxation year of Gestion Paraleg Inc., which
subsequently became 9014-2464 Québec Inc. and whose fiscal
year ended on October 31, 1994.
[7]
The facts relied upon by the appellants are set out in each
one's Notice of Appeal as follows:
[TRANSLATION]
The facts are specifically as follows:
I received a dividend from a company at a time when that company
was not in financial difficulty. As a result of a reassessment,
the company had tax to pay.
The company did not pay the outstanding taxes.
The Department is applying section 160(1) ITA on the basis
that a cash dividend constitutes a transfer of property at less
than its fair market value such that section 160(1) applies and
the Department therefore holds me liable for the company's
taxes.
We know that, in a privately held corporation, it is very common
for the shareholders to choose to have their remuneration paid in
the form of a dividend or salary. We opted to receive our
remuneration in the form of a dividend. You must understand that,
if we had opted to receive a salary instead of a dividend, the
Department would never have been able to apply section
160(1).
On this point, I refer in particular to
Hébert-Davis [sic] (94 DTC 1934).
Moreover, the purpose of this section of the Act is to limit
transfers of property between related persons for a consideration
differing from the fair market value and, thus, to make both
parties liable for payment of the taxes resulting from the
transaction.
I will therefore attempt to prove that section 160(1) does not
apply to my case.
Joël Lacasse, C.A.
Feb. 22, 2000
[8]
This Notice of Appeal had been prepared by the appellant's
accountant who was their representative in this case. With the
appellant's consent, he did not appear at the hearing of this
appeal.
[9]
Both appellants testified. They explained that they had been
carrying on business for about ten years under the name of Lada
Granby Enr. It was a new and used vehicle sales and service
business. In 1993 or thereabouts, François Therrien
wanted to purchase the assets of the business. It was decided to
transfer the assets of Lada Granby Enr. to a corporation. Gestion
Paraleg Inc., whose name was changed to 9014-2464
Québec Inc., was a corporation whose letters patent were
already in the notary's or accountant's office. The
assets were transferred to that corporation. The two appellants
and François Therrien became shareholders, with all
three having an equal interest They also became the
corporation's directors.
[10] The three
shareholders continued to work for the business until the
contract for the purchase of the assets was finalized. The
appellants explained that they were not that concerned with the
business and its administration since Mr. Therrien was soon
to be its owner. Mr. Therrien endeavoured to find the financing
needed for the purchase. The three shareholders regularly paid
themselves equal amounts of money during the period from December
23, 1993, to October 1994.
[11] The
cheques for those amounts were filed as Exhibit A-1. The
amounts varied from one period to the next, but in a given period
they are the same for all three shareholders.
Exhibit A-2 is a list of all such amounts paid for
each payment period. It shows amounts of $400, $700 and $1,000
but most of the payments are $500.
[12] The
financial statement for Gestion Paraleg Inc. (Lada Granby
Enr.) to October 31, 1994, was produced as
Exhibit A-3. Page 4 of that statement, headed
[TRANSLATION] "Retained Earnings, initial fiscal year ended
on October 31", shows that dividends of $49,500 were
issued.
[13]
Exhibit A-4 is the contract for the sale of the
corporation's assets to François Therrien. The
contract is dated April 27, 1995. Ownership and taking possession
are retroactive to February 28, 1995. Gérard Delage
brought it to the Court's attention that there is a clause on
page 4 of the contract providing that the purchaser is to pay the
corporation's tax liabilities.
[14] One
important fact that did not come out at the hearing because the
appellant's testimony was evasive in that regard, but is now
clear from the contract of sale concerning the assets (Exhibit
A-4), is that the two appellants remained the only shareholders
of Gestion Paraleg Inc., which was subsequently called
9014-2464 Québec Inc. and is the tax debtor.
[15]
Exhibits I-1 and I-2 are the tax returns
of Éric Delage for 1993 and 1994. The return for
1994 shows that Éric Delage reported an actual
dividend amount of $16,500. No one was able to say how much tax
he had paid on that dividend amount.
[16]
Exhibit I-3 is Gérard Delage's tax
return. It also shows an actual dividend amount of $16,500. This
amount appears on a T5 Supplementary, Statement of Investment
Income, issued by Gestion Paraleg Inc. (Lada Granby Enr.). The
taxable amount of dividends is $20,625, and the federal dividend
tax credit is $2,750. Here as well, it could not be determined
what amount of tax had been paid by this appellant on this
dividend amount.
[17] Counsel
for the respondent referred to the decision of the Supreme Court
of Canada in Neuman v. M.N.R., [1998] 1 S.C.R. 770, and to
the decision of this Court in 155579 Canada Inc. et al. v. The
Queen, [1996] T.C.J. No. 1188. Counsel cited the
following passages from the Supreme Court of Canada decision:
57. . . . This approach ignores the fundamental nature of
dividends; a dividend is a payment which is related by way of
entitlement to one's capital or share interest in the
corporation and not to any other consideration. Thus, the quantum
of one's contribution to a company, and any dividends
received from that corporation, are mutually independent of one
another. . . .
With respect, this fact is irrelevant to the issue before us. To
relate dividend receipts to the amount of effort expended by the
recipient on behalf of the payor corporation is to misconstrue
the nature of a dividend. As discussed earlier, a dividend is
received by virtue of ownership of the capital stock of a
corporation. It is a fundamental principle of corporate law that
a dividend is a return on capital which attaches to a share, and
is in no way dependent on the conduct of a particular
shareholder.
. . .
60. . . . I am not aware of any principle of corporate law that
requires in addition that a so-called "legitimate
contribution" be made by a shareholder to entitle him or her
to dividend income and it is well accepted that tax law embraces
corporate law principles unless such principles are specifically
set aside by the taxing statute.
Conclusion
[18]
Paragraphs 160(1), (2) and (3) of the Act read as
follows:
160 Tax
liability re property transferred not at arm's length
—
(1)
Where a person has, on or after May 1, 1951, transferred
property, either directly or indirectly, by means of a trust or
by any other means whatever, to
(a)
the person's spouse or a person who has since become the
person's spouse,
(b)
a person who was under 18 years of age, or,
(c)
a person with whom the person was not dealing at arm's
length,
the following rules apply:
(d)
the transferee and transferor are jointly and severally liable to
pay a part of the transferor's tax under this Part for each
taxation year equal to the amount by which the tax for the year
is greater than it would have been if it were not for the
operation of sections 74.1 to 75.1 of this Act and section 74 of
the Income Tax Act, chapter 148 of the Revised Statutes of
Canada, 1952, in respect of any income from, or gain from the
disposition of, the property so transferred or property
substituted therefor, and
(e)
the transferee and transferor are jointly and severally liable to
pay under this Act an amount equal to the lesser of
(i)
the amount, if any, by which the fair market value of the
property at the time it was transferred exceeds the fair market
value at that time of the consideration given for the property,
and
(ii)
the total of all amounts each of which is an amount that the
transferor is liable to pay under this Act or in respect of the
taxation year in which the property was transferred or any
preceding taxation year,
but nothing in this subsection shall be deemed to limit the
liability of the transferor under any other provision of this
Act.
(2)
Minister may assess transferee — The Minister may at any
time assess a transferee in respect of any amount payable by
virtue of this section and the provisions of this Division are
applicable, with such modifications as the circumstances require,
in respect of an assessment made under this section as though it
had been made under section 152.
(3)
Rules applicable — Where a transferor and transferee have,
by virtue of subsection (1), become jointly and severally liable
in respect of part or all of a liability of the transferor under
this Act, the following rules apply:
(a)
a payment by the transferee on account of the transferee's
liability shall to the extent thereof discharge the joint
liability; but
(b)
a payment by the transferor on account of the transferor's
liability only discharges the transferee's liability to the
extent that the payment operates to reduce the transferor's
liability to an amount less than the amount in respect of which
the transferee was, by subsection (1), made jointly and severally
liable.
[19] I am of
the opinion that the evidence has not shown that the dividends
were issued as a payment of salary to the three shareholders.
There was no evidence of any relation between the services
rendered and the dividends issued. In fact, the appellants said
that they were not all that concerned with the management of the
corporation's business since Mr. Therrien was supposed
to purchase the corporation's assets. It was mainly he who
took care of the administration of the corporation. However, the
dividends were always issued in equal amounts. In my view, the
evidence showed that, in the circumstances in which the dividends
were issued, they were really in the nature of corporate
dividends, that is, a payment resulting from ownership of the
corporation's capital stock. In those circumstances, I need
not determine whether, for the purposes of section 160, work
performed can constitute valuable consideration for the issuance
of a dividend.
[20] Moreover,
since the appellants remained the sole shareholders of the
corporation with the tax liability, it was up to them to see to
the payment of that debt. They received a substantial payment for
the assets of the corporation, although they said that the
balance of the sale price was not received. It is clear from
Exhibit A-2 that they remained the only two
shareholders of the corporation and that the corporation received
the sale price. I understand that the purchaser of the shares
assumed the tax liabilities in respect of the operation of the
business, but that is a question of law to be settled between the
purchaser of the assets and the vendor corporation of which the
appellants are the principal shareholders.
[21] In my
opinion, therefore, it is up to the appellants to pay the tax
liability of the corporation of which they are the sole
shareholders and, in this sense, the Minister's assessment is
correct. It is also correct because, as dividend recipients, the
appellants are the transferees under a transfer made by a
transferor who is a tax debtor. As such they are jointly and
severally liable under section 160 of the Act for the
payment of the tax liability to the extent of the amount of the
dividends received.
[22] The
appeals are dismissed.
Signed at Ottawa, Canada, this 25th day of September 2000.
"Louise Lamarre Proulx"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
[OFFICIAL ENGLISH TRANSLATION]
2000-1144(IT)I
BETWEEN:
ÉRIC DELAGE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal
of Gérard Delage (2000-1145(IT)I)
on August 30, 2000, at Sherbrooke, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
For the
Appellant:
The Appellant himself
Counsel for the
Respondent:
Simon Nicolas Crépin
JUDGMENT
The
appeal from the assessment made under section 160 of the
Income Tax Act, the notice of which bears number 00532 and
is dated March 11, 1997, is dismissed in accordance with the
attached Reasons for Judgment.
Signed at Ottawa, Canada, this 25th day of September 2000.
J.T.C.C.
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