Marc Cayer v. Minister of National Revenue, [1990] 1 CTC 2562, 90 DTC 1468

Rip, T.C.J.: — This is an appeal from an income tax assessment for the 1986 taxation year, in which the Minister of National Revenue, the respondent, added the amount of $10,699.78 to the income of Marc Cayer, the appellant, on the grounds that the amount was a benefit deemed to have been received under subsections 15(1) and 15(9) [1] of the Income Tax Act ("Act").

Mr. Cayer was a shareholder in the companies Marc Cayer Inc. ("MCI") and Services Sanitaires de I'Outaouais Inc. ("'SSOI"). [2] The fiscal year for both MCI and SSOI ended November 30.

As a shareholder in SSOI, the appellant received an interest-free loan from SSOI. Neither the date nor the exact amount of the loan was established from the evidence. Mr. Cayer stated that effective December 23, 1985 the monthly balance that he owed to SSOI was $133,930 less than the amount on which the Minister based the interest calculation. The Minister assumed that the monthly balance of the loan for the 1986 taxation year was as follows:

On December 19, 1985, MCI declared a capital dividend of $133,930 [TRANSLATION] “payable immediately". In its election in respect of a capital gains dividend, MCI declared that December 23, 1985 was [TRANSLATION] "the first day on which any part whatever of the dividend was paid". The election was mailed to the respondent on December 19 or 20, 1985.

On December 23,1985, SSOI owed approximately $189,674 to MCI.

The appellant stated that the dividend from MCI was paid to him on December 23, 1985, even though no payment was made in cash or property. The accountant for MCI testified that he had not entered the dividends in MCI’s books until December 1986 or January 1987, that is, after the end of the 1986 taxation year.

In his notice of appeal, the appellant stated that the purpose of the dividend was to repay in full his debt to, and credit his account with, SSOI. He accordingly arranged for the amount of $133,930 to be paid to SSOI. As a result, he stated, the amount of $133,930 was payable by MCI to SSOI, adding that since SSOI owed MCI approximately $189,674 on December 23, 1985 and MCI owed SSOI $133,930 as of the same date, both debts, being legally liquidated and demandable, were extinguished by compensation on December 23, 1985. The appellant concluded that MCI paid SSOI $133,930 on December 23 and that, as a result, his debt to SSOI was reduced by $133,930; therefore, Mr. Cayer paid SSOI $133,930 on December 23, 1985 through MCI.

member of such partnership,

exceeds the aggregate of

(c) the amount of interest for the year paid on all such loans and debts no later than 30 days after the end of the year, and

(d) any portion of the aggregate determined in respect of the year under paragraph (b) that is reimbursed in the year or within 30 days after the end of the year by the debtor to the person or entity who made the payment referred to in paragraph (b).

In assessing the appellant, the Minister assumed that MCI paid its dividend to SSOI on November 30, 1986, as is shown in SSOI's books and records. [3]

The only document introduced as evidence was the election in respect of a dividend paid on a capital account. The Court had no chance to see and consider the financial statements of SSOI and MCI for their 1985 fiscal year, their minute-books, or their other books and records. Mr. Cayer could not explain the methods of payment between SSOI and MCI; he indicated that the accountant looked after this and referred any questions on the subject to the accountant.

The accountant was Mr. Daniel Amyotte, CA, an associate of Levesque, Marchand. He testified that MCI required very little work on his part and that the work was done in December and January after the end of the fiscal year. He did not audit MCI. On the other hand, SSOI was an active company that required an audit.

Mr. Amyotte explained that all the details were [TRANSLATION] "normally" recorded in the MCI ledger at year-end and sorted out after the end of the fiscal year, so that the dividend was recorded in the ledger after the end of the 1986 fiscal year, probably in January 1987. When the accounts were done, the dividend was credited to Mr. Cayer along with his debt to SSOI, which was cancelled; the debt was credited between the two companies. The amount owed to Mr. Cayer was applied against the amount owed to SSOI. He stated that MCl's debt was reduced in SSOI's books. In fact, the three debts were adjusted up to the value of the amount of the dividend, effective December 23, 1985.

Counsel for the appellant submits that MCI paid the $133,930 dividend to Mr. Cayer on December 23, 1985. He acknowledges there is no written documentation to support his submission. However, he argues the dividend was declared on December 19, 1985 for the purpose of reducing Mr. Cayer's debt toward SSO]. Counsel stated that since Mr. Cayer controlled both SSOI and MCI, payment of the dividend and the inter-corporate transactions described earlier were directed by Mr. Cayer, adding that when closely related companies such as SSOI and MCI are involved, the intention of the majority shareholder, who also happened to be the director, should be sufficient to cause these companies to act. In Mr. Cayer's mind, he concludes these transactions took place.

I have difficulty with the counsel's submission. In my view, even in, perhaps particularly in, closely related companies involving shareholders, transactions that may affect third parties should be authorized or confirmed in writing from the outset. Related persons should conduct transactions between them in the same way as unrelated persons. Brulé, J. faced a similar problem to the one in the present case in Barnes v. M.N.R., [1986] 2 C.T.C. 2079; 86 D.T.C. 1546 on appeal. His comments at page 1549 (D.T.C. 2082) follow:

I would like to underline before I conclude that even if the book entries had indicated a transaction on behalf of both shareholders, it might not have been sufficient to rule in favour of the appellant. The evidence shows that the entries were made some time after the transaction was completed. A question could then have been raised, under this hypothesis, as to whether they would have pictured accurately the intention of the parties at the time of the transaction. The role of the Court is to base its judgment on the transaction as it occurred and not on what the taxpayer chose to report a few months after everything was completed. In the case at bar this question is not raised in view of the conclusion that I have already reached but I would not like to leave the impression that the Court condones situations where documents relating to a transaction, especially in cases where a corporate entity is involved, are filled out much after the pertinent events.

In Gannon v. M.N.R., [1988] 1 C.T.C. 2422; 88 D.T.C. 1282, Bonner, J. concluded at page 2424 (D.T.C. 1284):

Nothing in the evidence in the present case suggests the existence of any agreement or contract calling for the liquidation of the indebtedness on the note by means of payments made to the appellant. An agreement between a company and its shareholders is not formed by a mere fleeting thought in the mind of the individual who controls it.

In the present case, Mr. Cayer could not explain to the Court the series of events which took place between MCI, SSOI and himself and referred any questions on the subject to Mr. Amyotte.

The evidence is insufficient to allow me to conclude that on December 23, 1985 Mr. Cayer ordered MCI to [TRANSLATION] "pay" him the dividend. This would be sufficient to dismiss the appeal. Other transactions may, however, have occurred later that day to indicate that the dividend was paid.

Counsel for the appellant argued that his client delegated MCI to become the new debtor of SSOI and that this released him from his debt to SSOI. Article 1173 of the Civil Code of Québec (“Code”) provides that:

The delegation by which a debtor gives his creditor a new debtor who obliges himself toward the creditor does not effect novation, unless it is evident that the creditor intends to discharge the debtor who makes the delegation.

An obligation is discharged inter alia by novation. Articles 1169,1171 and 1174 state:

1169 Novation is effected:

2. When a new debtor is substituted for a former one who is discharged by the creditor;

1171 Novation is not presumed. The intention to effect it must be evident.

1174 The simple indication by the debtor of a person who is to pay in his place . . . does not effect novation.

Once MCI became SSOI's debtor, argued counsel for the appellant, the debts between the two companies were extinguished by compensation in so far as their respective amounts corresponded. Articles 1187 and 1188 of the Code stipulate:

1187 Where two persons are mutually debtor and creditor of each other, both debts are extinguished by compensation which takes place between them in the case and manner hereinafter declared.

1188 Compensation takes place by the sole operation of law between debts which are equally liquidated and demandable and have each for object a sum of money or a certain quantity of indeterminate things of the same kind and quality.

So soon as the debts exist simultaneously they are mutually extinguished in so far as their respective amounts correspond.

These submissions of the appellant suffer from the same insufficiency of evidence as does the dividend payment. [TRANSLATION] “Perfect delegation is an agreement whereby a debtor obtains his release by obliging another person in his place, whom the creditor accepts as debtor": Mignault, P.B., Le Droit civil canadien, vol. V, p. 608. The author gives the following example: [TRANSLATION] “Discharge me, I say to you, from the debt I owe you, and Paul, whom I present to you, will oblige himself, in my place. You accept". [TRANSLATION] “This type of novation is called perfect delegation”, wrote the former justice of the Supreme Court of Canada. [TRANSLATION] "The creditor must accept a new debtor and discharge his former debtor in order for novation to occur". There is absolutely no evidence, no director's resolution of SSOI, for example, to discharge Mr. Cayer from his debt and accept MCI as the new debtor, no correspondence or memoranda from an adviser to this effect, to indicate that perfect delegation, that is, novation, occurred.

Mr. Cayer's testimony has not persuaded me in the least that what he had in mind was anything more than a fleeting thought concerning the transaction on December 19, 1985 or four days later. Mr. Cayer had no clear or evident intention of doing what his accountant would have had him do. Neither payment of the dividend, nor perfect delegation on the part of Mr. Cayer toward SSOI and MCI occurred.

Novation is not presumed (Code 1171). The intention to effect novation and the consent of the parties thereto must be evident. In Rémy v. Gagnon, [1971] C.A. 554 at 557, Rivard, J. notes that article 1171 is satisfied if the creditor's intention is clearly expressed or implied. Also, in Simoneau v. Roy, [1965] K.L. 193, at page 201, Lesage, J. of the Superior Court in bankruptcy, comments:

[TRANSLATION]

Although novation is not presumed, the deed itself need not refer to it by name. It is sufficient that the intention to effect it be evident.

I cannot find any intention to effect perfect delegation on the part of Mr. Cayer, SSOI and MCI.

The appeal must be dismissed.

Appeal dismissed.