Date: 20060607
Docket: A-700-04
Citation: 2006 FCA 207
CORAM: LÉTOURNEAU
J.A.
NOËL
J.A.
PELLETIER
J.A.
BETWEEN:
JEAN-GUY ST-GEORGES
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
NOËL J.A.
[1]
This is an
appeal from a decision of Paris J. of the Tax Court of Canada confirming a
notice of assessment issued for the appellant’s 1994 taxation year by which the
deduction of $187,467 was refused in the calculation of his income.
Brief background
[2]
The
appellant agreed to act as a director of a company by the name of Swecan
Equipment Inc. (subsequently renamed 160088 Canada Inc.) belonging to a client
of his accounting firm. In this capacity, he authorized the payment of an
illegal dividend of $1.9 million for which he was held personally responsible
in a judgment of the Superior Court in December 1993.
[3]
This
judgment was rendered in a legal proceeding instituted by Swecan’s creditors
under the Canada Business Corporations Act, R.S.C., 1985, c.
C-44. The object of this legal proceeding was to have the dividend cancelled
and to hold the directors (including the appellant) liable for its
reimbursement (hereafter “the litigation” or “the legal proceeding”).
[4]
Following
protracted negotiations, the appellant received an acquittance for all
liability resulting from the decision rendered against him, in consideration of
a payment of $250,000. This represented the difference between this payment (as
well as certain other expenses in connection with the litigation) less the
amount of US$100,000 he received from his client as [translation]
“compensation” or
as an [translation] “indemnity” for services rendered or
expenses incurred in relation to the legal proceeding (see paragraph 23 of
the notice of appeal and amended notice of appeal), which the appellant seeks
to have deducted from the calculation of his income.
[5]
The
Minister of National Revenue (the “Minister”) initially refused the deduction
on the ground that the appellant, as a director, held “office” within the
meaning of subsection 248(1) of the Income Tax Act (the “Act”), and no
amount could be deducted as such.
Judgment under appeal
[6]
After
noting that the appellant was not paid to act as a director, Paris J. decided
the appellant did not hold “office” within the meaning of the Act. In fact,
according to the Act, an office must be remunerated position (Merchant v.
The Queen, [1984] 2 F.C. 197).
[7]
However,
in spite of this, he confirmed the notice of assessment on the ground that the
appellant had failed to establish a connection between the dividend and an
enterprise he allegedly operated personally, since he rendered his services through
a company (St-Georges Hébert Inc.). According to the judge, the deduction could
only be claimed by the company.
[8]
Paris J.
added that, in any event, it had not been shown that the declaration of the
illegal dividend, unlike the appellant’s other activities as a director, was
part of the operations of the accounting firm.
Errors alleged
[9]
In support
of his appeal, the appellant submitted that he would never have agreed to act
as a director [translation] “if it were
not for his professional relationship as an accountant” with his client (see
paragraph 11 of the agreed statement of facts). Accordingly, there is a real
and direct connection between the expense claimed and the accounting firm.
[10]
With
regard to the question of who operated this enterprise, the appellant claimed
that Paris J. was bound by paragraphs 20(b) and (c) of the reply to the
amended notice of appeal, in which the following was stated on behalf of the
Minister:
[translation]
20 (b) the appellant
practices his profession as an accountant in an accounting firm which he owns
and which operates under the name of Société St-Georges Hébert & Compagnie;
(c) the
appellant is also the sole shareholder of St-Georges Hébert Inc., a company
which is used by the appellant to account for and declare the income earned,
particularly through the accounting firm and activities as a trustee in
bankruptcy;
[11]
According
to the appellant, the Minister acknowledged in these paragraphs that he
rendered his accounting services on a personal basis and not on behalf of his
company. Accordingly, the judge of the Tax Court could not have reached a
contrary conclusion.
[12]
Finally,
the appellant claimed that the judge of the Tax Court erred in concluding that
the payment of the illegal dividend could be distinguished from the other
services he rendered as a director and was outside the scope of the operations
of the accounting firm.
Analysis and decision
[13]
This
appeal must fail. Paris J. was correct in concluding that the appellant’s
accounting firm was not operated by him personally but by his company.
[14]
I do not
see how subsections 20(b) and (c) of the reply to the notice of appeal can prevent
this result. The evidence does not show who owns the assets of the accounting
office, but it does show that it was the company which operated the accounting
firm and declared the income.
[15]
Obviously,
a company cannot offer its services other than through human beings, and in
this case it was the appellant who offered these services. However, it is clear
that he offered his services through his company and not on a personal basis.
[16]
The
appellant could have claimed the contrary before the Tax Court of Canada but he
would have had to acknowledge that his company had no real existence and that
the income it made was attributable to him personally. He did nothing of the
sort.
[17]
I would
add that it is doubtful that the amount could have been deducted, even from the
income of the appellant’s company. In fact, in filing his income tax return for
the year in issue, the appellant added US$100,000 he received for services
rendered in connection with the legal proceeding to the amount he disbursed for
the litigation and claimed the difference as a net loss resulting from this
case. This shows that the appellant, who was best suited to decide, considered
the receipt and payment of these amounts to be part of a distinct and separate
matter which ended with the settlement of the legal proceeding instituted
against him (on this point, see the broadened definition of the word “business”
in subsection 248(1) of the Act).
[18]
Finally,
for the reasons mentioned at paragraphs 30 to 33 of his reasons, I am of the
opinion that the judge of the Tax Court was entitled to distinguish the
appellant’s activities in connection with the sale of his client’s business
from those in connection with the payment of a dividend.
[19]
I would
dismiss this appeal with costs.
“Marc
Noël”
“I
concur.
Gilles Létourneau J.A.”
“I
concur.
J.D.Denis Pelletier J.A.”
Certified true translation
Michael Palles
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