Date: 19991021
Docket: ITA-8660-98
IN RE the Income Tax Act,
| AND IN RE one or more assessments made by the minister of National Revenue pursuant to one or more of the following statutes: the Income Tax Act, Canada Pension Plan and Employment Insurance Act, |
AGAINST:
9055-2563 QUEBEC INC.
(doing business from time to time under the name
"RESTAURANT BAR COUNTRY CLUB"),
Judgment debtor,
9000-8384 QUEBEC INC.,
Objector.
REASONS FOR ORDER AND ORDER
BLAIS J.
[1] This is an application by the objector 9000-8384 Quebec Inc. asking the Court to declare the seizure of the property concerned in the case at bar null and void.
FACTS
[2] The judgment debtor, the company 9055-2563 Quebec Inc., owes the Department of National Revenue the sum of $27,518.81 pursuant to a certificate filed in the record of this Court on October 22, 1998.
[3] On October 22, 1998 the Registry of this Court issued a writ of seizure directing a bailiff of the province of Quebec to execute the said certificate against the debtor"s movable property.
[4] A bailiff proceeded to execute the said writ of seizure on November 17, 1998 by seizing the judgment debtor"s movable property at its principal place of business, the Restaurant-Bar Country Club located at 2030 route 170, St-Bruno, Lac-St-Jean, Quebec.
[5] On December 14, 1998 the objector in the case at bar, namely 9000-8384 Quebec Inc. filed a motion objecting to the said seizure and claiming that it owned all the property seized in the case at bar.
[6] The two parties" arguments may be summarized as follows.
[7] The Minister of National Revenue argued essentially that the judgment debtor 9055-2563 Quebec Inc. and the objector 9000-8384 Quebec Inc. are both duly incorporated companies which in fact form an undeclared partnership under the provisions set out in the Civil Code of the province of Quebec.
[8] The Minister of National Revenue relied in particular on the Supreme Court"s judgment in Beaudoin-Daigneault v. Richard ,1 which laid down the three requirements on which a court must rely in determining the existence of a partnership, and in the case at bar the Minister argued that the three requirements were met.
[9] The arguments of the objector and the judgment debtor were that there was no evidence of the existence of such a partnership and that the facts in the case at bar clearly established that the judgment debtor and the objector had no intention whatever to form a partnership, and that all the documents filed by the objector showed that the existence and the property of both companies were entirely separate.
[10] The objector maintained that it was only acting as lessor of the building and the furniture and equipment belonging to it, which were used by the judgment debtor in operating its restaurant bar business.
[11] The objector maintained that it had no managerial or administrative control over the operation of the restaurant by the judgment debtor and that it had absolutely no share in the distribution of the judgment debtor"s profits or losses, only collecting the rent it was owed.
[12] For his part, the Minister of National Revenue argued that the fact that the objector had opened an account in a financial institution to deposit money from the judgment debtor and that the GST and QST numbers were not changed after the judgment debtor decided to cease leasing the building and equipment, as well as the payment by the objector of a number of invoices owed by the judgment debtor after it had ceased operations, clearly showed the intention to form a partnership and their joint liability in the circumstances.
POINT AT ISSUE
[13] Did the legal situation of the two companies, the judgment debtor and the objector, meet the requirements laid down in Beaudoin-Daigneault v. Richard, and does it follow that they formed a partnership?
ANALYSIS
[14] The Court proceeded to analyse the facts surrounding the operation of the restaurant-bar, which may be summarized as follows.
[15] The objector operated the Restaurant-Bar Country Club, located at 2030 route 170, St-
Bruno, Lac-St-Jean, from April 18, 1994 onwards.
[16] As of September 19, 1997, the objector concluded a leasing contract with Dorothée Verreault, Daniel Audet and Sylvie Paradis for the leasing and operation of the Restaurant-Bar Country Club.
[17] Under that contract the objector provided the lessees with the building and furniture of the establishment which the lessees undertook to operate.
[18] It appeared from the evidence that Dorothée Verreault, Daniel Audet and Sylvie Paradis incorporated the judgment debtor on October 2, 1997 and it was this company which in fact undertook to operate the Restaurant-Bar Country Club.
[19] The evidence disclosed that there was no written contract between the objector and the judgment debtor or between the judgment debtor and its lessees governing the leasing and operation of the Restaurant-Bar Country Club by the judgment debtor.
[20] The uncontradicted evidence was that the shareholders and directors of the judgment debtor, Ms. Verreault and Mr. Audet, were already at the relevant time during operation of the business employed by the objector at the Restaurant-Bar Country Club, and had been so before the leasing contract was concluded on September 19, 1997. Ms. Verreault was the accountant for the business and Mr. Audet was the cook. Ms. Paradis is Mr. Audet"s spouse.
[21] It appeared that as of September 1997 the new managers, Verreault, Audet and Paradis, began operation of the restaurant bar using the objector"s building, furniture, trade name and liquor licence and continuing to employ most of the employees already employed by the Restaurant-Bar Country Club.
[22] It appeared that in the next few months the directors Verreault, Audet and Paradis tried to obtain a liquor licence in the name of their company, the judgment debtor, but without success. It appeared to be established that their precarious financial position prevented them from obtaining this licence in their own names and so they continued to operate with the licence held by the objector.
[23] As regards the use of an account in a financial institution to deposit money obtained by the judgment debtor through payments made to the restaurant by credit or debit cards, the evidence appeared to show that it was once again difficult for the three new partners to have an account opened in their company"s name, first of all for the use of credit or debit cards, especially because of their precarious financial position.
[24] At first sight, the description of the aforementioned facts might tend to show that the two companies did in fact form a partnership, since it was possible to determine the contribution of each partner, namely the building, equipment, trade name, liquor licence and bank account for credit cards by the objector and the daily operation of the business by the three newly associated employees, whose work and expertise was their contribution.
[25] The second test involves the distribution of losses and profits. It appeared at once that the business, under the responsibility of the three new partners, operated for a short period and did not appear to have produced any profit, since invoices were paid both by one of the directors and by the objector after the judgment debtor ceased operations; however, does the fact of withdrawing from a joint bank account money collected from credit and debit cards as well as the payment of certain receipts after the business closed down constitute sufficient evidence to meet the test of distribution of the losses and profits of the business?
[26] In my opinion, the answer to this question is no. First, it seems clear that the use of the bank account for debit and credit card purposes was a purely practical arrangement, since the three new partners would have had a lot of difficulty operating the business if they could not accept credit or debit cards, and as they could not establish sufficient credit to obtain an account with the financial institutions, the assistance of the objector in this case was very useful, but it does not lead to the conclusion that there was a distribution of losses and profits.
[27] Secondly, the fact that the objector paid a number of invoices as well as the fact that one of the partners in the judgment debtor also paid certain invoices must be examined in terms of the operation of a restaurant bar.
[28] It seemed important to the objector for the business to continue even after the difficulties encountered by the judgment debtor, and keeping suppliers is extremely important in such a business if it is to continue in operation.
[29] In this regard, the payment of invoices for beer, soft drinks, electricity and bread did not in my opinion indicate that there was a distribution of profits or losses, but instead that there was sound administrative management to ensure that suppliers did not boycott the business and continued to deliver goods so it would go on operating.
[30] The fact that it continued to operate with the same GST and QST numbers until changes could be made also seems a natural way of limiting the disruption with customers and suppliers.
[31] The same applies to the trade name, as it seems much easier for a business to go operating with the same trade name to ensure the loyalty of its customers.
[32] The third test is the intention to act jointly: were the arguments put forward by the judgment creditor conclusive?
[33] The Minister of National Revenue suggested that before joining to form the judgment debtor company, Ms. Verreault was the accountant employed by the objector company and looked after the accounting for several other businesses owned by Mr. Tremblay, the objector"s principal shareholder and director.
[34] Mr. Audet was the cook and was also an employee of the objector company.
[35] Ms. Paradis was Mr. Audet"s spouse, but not an employee of the objector company.
[36] The evidence appears to have shown that Ms. Verreault continued doing the accounting for the two companies, namely the objector and the judgment debtor, and also for Mr. Tremblay"s other businesses.
[37] It seemed clear to the Minister of National Revenue that the two companies had not changed the use of the trade name in any way and the judgment debtor continued operating the liquor licence held by the objector, although it had tried to obtain its own licence, and despite the fact that criminal proceedings were brought against the objector as the result of improper use of its licence.
[38] The Minister of National Revenue argued that the objector company did not act simply as a lessor, but as a partner, supplying all its services, namely the trade name, the liquor licence and the joint account. Additionally, according to his testimony Mr. Tremblay, the objector company"s president and shareholder, [TRANSLATION] "would make his rounds".
[39] Despite the many indications given by the Minister of National Revenue, the Court is not persuaded that the two parties demonstrated a clear intention to act jointly consistent with the requirements of precedent.
[40] In short, although in the circumstances appearances may suggest otherwise, the Court is not persuaded that the judgment debtor and the objector intended to act, or did act, as an undeclared partnership and should be treated as such in accordance with the provisions of the Quebec Civil Code.
[41] The joint liability argument made by the Minister of National Revenue must also be dismissed, as the Court does not consider that the two businesses, the judgment debtor and the objector formed a partnership within the meaning of the Civil Code.
[42] The Court further dismisses the argument based on art. 317 of the Quebec Civil Code suggesting that "in no case may a legal person set up juridical personality against a person in good faith if it is set up to dissemble fraud, abuse of right or contravention of a rule of public order".
[43] In the circumstances it seems clear that the parties at bar never intended to commit fraud: they were three persons acting in good faith two of whom already worked in a business and were in a position to know about the functioning and operation of a restaurant-bar business.
[44] These three individuals consciously decided to get into business and to form a company to operate the business, and in good faith they entered into a leasing contract for the building and equipment.
[45] Despite their legitimate efforts, it did not work out and after sustaining losses they had to give the keys back to the owner. It is understandable that in order to obtain credit from certain suppliers one of the parties, Ms. Verreault, had to personally stand surety and after the business closed down repay the money owed under her personal sureties.
[46] It is significant that the owner of the building and equipment, Mr. Tremblay, the president and shareholder of the objector, tried to help them by letting them use the trade name, his liquor licence and a bank account so they could accept credit and debit cards. Can he be blamed for giving such assistance in the circumstances?
[47] The fact that the owner of the building and equipment continued operating the business after the judgment debtor ceased operations on December 10, 1998, as there were already several reservations for the holiday period, seems quite legitimate and justified if only to limit the
damage, as the owner had not been paid all the rental owed at the time of closure.
[48] Although the facts may demonstrate some carelessness regarding certain existing legislation, in particular the improper use of the liquor licence, that question des not directly concern the Court except in determining whether the two companies did form a partnership at the time, and that was not the case.
[49] For these reasons, the COURT:
| ". allows the objector"s motion objecting to the seizure; |
| ". quashes the seizure made on November 17, 1998. |
[50] The whole with costs.
OTTAWA, ONTARIO
October 21, 1999
Certified true translation
Bernard Olivier, LL. B.
FEDERAL COURT OF CANADA
TRIAL DIVISION
NAMES OF COUNSEL AND SOLICITORS OF RECORD
| STYLE OF CAUSE: INCOME TAX ACT v. 9055-2563 QUEBEC INC. and 9000-8384 QUEBEC INC. |
PLACE OF HEARING: QUÉBEC
| DATE OF HEARING: SEPTEMBER 24, 1999 |
REASONS FOR ORDER BY: BLAIS J.
DATED: OCTOBER 21, 1999
APPEARANCES:
| ETIENNE TRÉPANIER FOR THE JUDGMENT CREDITOR |
| JEAN HUDON FOR THE OBJECTOR |
SOLICITORS OF RECORD:
MORRIS ROSENBERG FOR THE JUDGMENT CREDITOR
DEPUTY ATTORNEY GENERAL OF CANADA
OTTAWA, ONTARIO
| LAROUCHE, LALANCETTE, PILOTE FOR THE OBJECTOR |
& BOUCHARD
ATTORNEYS
ALMA, QUEBEC
__________________
1 [1984] 1 S.C.R. 2">[1984] 1 S.C.R. 2.
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