Jean-Marc Chaput v. Minister of National Revenue, [1981] CTC 2134

D E Taylor [TRANSLATION]:—This appeal was filed following the tax assessments for the years 1972 to 1975 inclusive and was heard in the city of Montreal (Quebec) on June 12, 1980. In arriving at these assessments the Minister of National Revenue included the following amounts in his calculation of the appellant’s income:

1972 — $28,488

1973 — $35,569

1974 — $40,667

1975 — $57,051

During the taxation years 1972 to 1975 inclusive the appellant was a shareholder in “Placements J M Chaput Ltée”, a company which held the majority of the shares of “Permanse Ltéé” (“Permanse”), which, in turn, had acquired all of the shares of “Stafex Ltée” (“Stafex”). In 1970 and 1971 these companies became insolvent. For the years 1972 to 1975 the amounts at issue came from the operation of a company formed under the name “J M Chaput et Associés” (“the company”). Among other things the respondent’s assessments were based on sections 3, 9, paragraphs 18(1)(a) and (h) and section 248 of the Income Tax Act (SC 1970-71-72, c 63, as amended).

Amendments

The following is the appellant’s argument as presented in his notice of appeal:

Permanse was engaged in the business of placing and training personnel while Stafex was engaged in seeking and selecting personnel under a franchise granted by a third party.

In order to repay their creditors in an orderly manner and avoid bankruptcy, these companies considered it advisable to carry on with the profitable aspect of their business, namely thre training of personnel, under the name of J M Chaput et Associés.

J M Chaput et Associés always acted as agent and nominee for the said companies and the income attributed to the appellant was the income of the said companies for each of the said taxation years.

The respondent’s line of reasoning is as follows:

During the years 1972 to 1975 inclusive, “Permanse Ltée” and “Stafex Ltée” ceased operation.

In June 1971 the appellant and his wife formed a company under the name “J M Chaput et Associés”.

The appellant and his wife were the only two members of the company.

During the taxation years at issue, the appellant operated a personnel management training business.

The appellant alone operated this business for each of the years concerned in the appeal.

The fees were to paid to “J M Chaput et Associés” and were deposited in a bank account opened under the same corporate name.

During the entire period at issue the actions of the appellant in relation to the said business are attributable only to himself and not to “Stafex Ltéé” or “Permanse Ltée”, both of which had ceased operation, or to the appellant’s wife, who did not contribute in any way whatsoever to the operation of the business.

The income from this business was thus earned solely by the efforts of the appellant.

After six hours of listening to the appellant’s agent question the witnesses and present supporting documents, the Board ruled that this evidence did not show that Mr Chaput and Associates had acted as authorized representatives of the insolvent companies. The essential point was simply to determine whether or not a taxpayer receiving an income could allocate this same income to other taxpayers for income tax purposes either by using financial statements and tax returns or by distributing the money that was earned to the other taxpayers. This question must be decided legally and requires no further details here. The Board asked the appellant’s agent to present his arguments in writing, citing precedents in support of them.

The Board quotes as follows from this written argument.

Permanse Ltée is the parent company to which are linked Stafex Ltd, Cameo Girl and several other divisions all with the same focus: the personnel aspect of business. A clientele is built up and the services of Permanse Ltée and Stafex Ltd, which is to say the appellant himself, Jean-Marc Chaput, are in demand. The products or services — training courses, motivational lectures and so on — are the property of the companies and are given by Jean-Marc Chaput, Art Woodhouse, Donald Sproule and the other employees or shareholders. Chaput tries to meet the demand while his associate, Céline Gratton-Chaput, also a shareholder and vice- president of Permanse, takes care of the texts for the lectures or talks, does the administrative work, sets the fees and makes up the timetables. She also looks after the advertising, working in particular with Jean-Marc Chaput, the appellant in this case. All the income produced by the services or talents of Jean-Marc Chaput goes to make up the income of Permanse Ltée and Stafex Ltd as does the income produced by Art Woodhouse, Donald Sproule and other members of the companies’ personnel.

From 1968 to 1971 all income produced by Jean-Marc Chaput goes to benefit Permanse Ltée or Stafex Ltd and the expenses incurred are taken as deductions.

Permanse Ltée and Stafex Ltd operate simultaneously for one year until, in 1971, the debts accumulate, the bank loans are called in, Mr and Mrs Sproule demand payment of their claims and the furniture, equipment and even the bank account (Royal Bank) are seized.

All the appellant’s advisers (lawyers, accountants) tell him that bankruptcy is the most advantageous solution from every point of view. However, this solution is rejected by the appellant and by Céline Gratton-Chaput, vice president of Permanse and shareholder in Placements J-M Chaput.

She has worked for Permanse Ltée and Stafex Ltd and contributed to all of the operations. She is not willing to give up. She believes in the future of the company even after the seizures. Only Jean-Marc Chaput and one salesman remain. Therefore Céline Gratton-Chaput, vice-president of Permanse, believes that the only solution is to continue selling courses and motivational lectures with one salesman and Jean-Marc Chaput and to carry on with the operations of Permanse Ltée and Stafex Ltd. It should be noted that the courses, the lectures and the clientele remain the property of Permanse Ltée and Stafex Ltd.

In order to operate the companies it is necessary to open a bank account other than that of the companies, which has been seized from all sides. That is why on July 9, 1971 an account is opened at the Caisse Populaire St-Maurice in Duvernay (exhibit A-3) under the name of “Jean-Marc Chaput et Associés Enrg” (exhibit i-7). This account is administered by Céline Gratton-Chaput (exhibit A-3), who is the only person emplowered to sign cheques and administer the said account. The couple’s residence at 600 Du Verger, Duvernay, Laval becomes the registered office of the companies. The appellant gives courses and lectures to the clients of Permanse Ltée and Stafex Ltd. Céline Gratton-Chaput, vice-president of Permanse, signs the contracts, finalizes the agreements, sets the fees, makes the appointments and pays the bills of Permanse Ltée and Stafex Ltd. In fact, working out of this new place of business, they go on selling the same product to the same clients but with Dame Céline Gratton-Chaput alone administering the account at the Caisse Populaire St-Maurice. This was understood and stated by the witness at the time of the hearing. As the learned Chariman has noted, Mrs Gratton-Chaput acted not only as a wife but also as an administrator, a businesswoman, as she was obliged to do as vice-president of Permanse Ltée, which continued to have the same legitimate business purpose.

Beginning in July 1971 the bank account in the name of “Jean-Marc Chaput et Associes Enrg” was used to pay some of the debts of Permanse Ltée and Stafex Ltd, as appears in exhibits i-1 and i-2.

If the appellant had not acted as he did but had kept the income for himself, the Department could properly have taxed Mr Chaput on the grounds that he was profiting from an advantage conferred on a shareholder.

In order to avoid having his earnings taxed as an advantage conferred on a shareholder, the appellant had to continue acting according to the principle he had been following since 1968, that is paying all the income produced by the lec- tures and courses given by Mr Chaput into Permanse or Stafex and never forgetting that these courses and lectures were the property of Permanse Ltéé and/or Stafex Ltd, which was 100% controlled by Permanse.

If Mr Chaput had appropriated the income in question, that is the income from the courses, lectures and clientele belonging to Permanse Ltee and Stafex Ltd, the minority shareholders of Permanse Ltée (26%), which is a public company could have sued Mr Jean-Marc Chaput, as well as the vice-president Dame Céline Gratton-Chaput, for fraudulent misuse of funds and appropriation of goods belonging to the company.

The expenses that the companies had to incur in order to earn the income were claimed as allowable expenses.

In preparing his assessment Mr Héroux went against this principle of continuity by assuming that the income of Jean-Marc Chaput et Associés must belong to Mr Chaput personally. The evidence shows, Mr Chairman, that from 1968 to 1972 inclusive, although certain cheques were made out to Jean-Marc Chaput, the income was always credited to Permanse and Stafex and used for their benefit. The Department has never disputed this point (1968 to 1971) and cannot do so now.

Conclusion:

We submit that the appellant has proved beyond any doubt that from 1968 to 1975 there was always continuity in the operations of Permanse Ltée and Stafex Ltd. in fact it has been clearly shown that Permanse Ltée and Stafex Ltd were never “dormant” or “inactive” companies. This continuity is even greater in the case of the services being provided. The business of Permanse Ltée and/or Stafex Ltd was the sale of courses, lectures, talks. These courses, these works, belonged to Permanse and/or Stafex Ltd. The appellant, Jean-Marc Chaput, is only the instrument, the person who gives the courses. From 1972 to 1975 the appellant continued to give the same course, the same lectures, the same talks. He was therefore working for Permanse Ltée and Stafex Ltd. These courses, these works, these lectures were given to clients of Permanse Ltée and/or Stafex Ltd.

In addition, from the point of view of accounting, from 1968 to 1971 all the income from the appellant’s courses or lectures is attributed to Permanse or Stafex Ltd. From 1972 to 1975 this continuity remained completely unbroken from an operational point of view with all the income produced or earned by Jean-Marc Chaput being paid into Stafex Ltd or Permanse Ltée and the appellant’s personal income being taken from these two companies.

Furthermore, all agreements signed by Dame Céline Gratton-Chaput or by Jean- Marc Chaput were signed on behalf of Permanse Ltée or Stafex Ltd since the product, the works, the courses given by the appellant belonged to Permanse Ltée and Stafex Ltd. This makes every agreement, every contract “bona fide".

Only the respondent, through his representative Mr Héroux, who testified at the hearing, tried to break this continuity, which he refused to accept for the years 1972 to 1975 inclusive while tacitly accepting it for the years 1968 to 1971.

We respectfully submit that the appellant has proved:

A the continuity of operations from 1972 to 1975 inclusive;

B the regularity with which the income produced by the appellant was entered

in the same way year after year;

C the use of the money earned from 1972 to 1975;

D the legitimacy of the commercial operations.

Unlike the appellant in William W Fotheringham v MNP,[ 1977] CTC 2372; 77 DTC 275, the appellant in this case has proved the continuity of the facts, the accounting and the results as well as the legitimacy of the companies’ operations and of his own conduct.

It follows from all of the above facts that every agreement is a “bona fide’’ “transaction”.

Conclusions

In my opinion the viewpoint indicated in Fotheringham, which was cited by Mr Viau, is precisely the opposite of what he alleges. In that case the appellant, who was an individual, had entered into pertinent contracts with third parties on behalf of the companies that he directed, as he was legally entitled to do. Because of these agreements he claimed that for taxation purposes the income belonged to the companies rather than to him personally. The decision of the Board in his case, however, was as follows ([1977] CTC 2385; 77 DTC 283):

The company could not be, should not be and, in fact, was not the responsible party under this agreement. That responsible party was the appellant himself.

The following appears on pages 2384 and 282-283 respectively:

Dealing with this issue as seen by counsel for the appellant and quoted earlier, the Board is of the opinion that the question is not “whether or not Mr Fotheringham . . . is entitled to either create a company for this purpose or to make use of an existing one”. It is clearly the right of any individual to create or use a corporate structure for business purposes. That question, more appropriately phrased, would be whether or not such a corporate structure, its purpose and the conduct of its affairs related to activities for which the company could be, should be and, in reality, was responsible. A corporation, for purposes of the Income Tax Act, is a person, although artificially created through legislation, separate and distinct from the persons (both corporate and individual) who may form its participating and controlling body as shareholders or directors. For various reasons the legislators in Canada have provided a format for the taxing of the financial results of the operations of a corporation, distinct from the schedules applicable to most other persons. Utilization of this separate taxing structure should require evidence supporting the establishment, in fact as well as in law, of a corporation having the separate identity indicated above.”

In the case at issue no evidence was presented to the Board to show that either Permanse or Stafex had legally participated in the activities of J M Chaput et Associés during the years 1972 to 1975 and in fact these companies neither earned nor received the income in question. The fact that some of the money in question may have been used to pay the debts of the companies (incurred before 1972) changes nothing in favour of the appellant. This principle may be found in Lagacé v MNR, [1968] CTC 98; 68 DTC 5143.

Decision

The appeal is dismissed.

Appeal dismissed.