Foster v. R., [1999] 4 CTC 2176, 99 DTC 374

Tardif T.C.J.:

These are appeals from assessments for the 1991, 1992 and 1993 taxation years for Steve Foster personally (the “appellant”), and for the 1992 and 1993 taxation years for the company Steve Foster Expert en Sinistres Inc. Counsel for the parties agreed to proceed on common evidence. The two cases are in fact related.

The facts may be summarized fairly simply. The appellant Steve Foster carries on his profession for the company Steve Foster Expert en Sinistres Inc. He controls that company in that he holds all of its shares. He is also the only director of the company. In addition to carrying on activities connected with providing property loss and damage appraisals, the company owns some buildings and rents out commercial space. Lastly, it has a substantial portfolio of shares listed on the stock exchange, which led the ac- countant with Samson, Belair, Deloitte & Touche to say that this was a management company.

Steve Foster is a very active and dynamic businessman, and has two partners, Jacques Bouchard and Guy Racine. In September 1989, they decided to purchase a company doing business under the name Brasserie Joliet Inc., a thriving and very popular bar owned by a Mr. Marc Lafond.

That business had something in common with the appellant and his company: all three did business with the same accountant, Mario Blouin of the firm Samson, Bélair, Deloitte & Touche.

Substantial capital was needed in order to complete the Joliet transaction. In addition to a significant personal outlay, the new partners, who were equal shareholders in the company Gestion 34 Inc., which was purchasing all of the shares held by Mr. Lafond in Brasserie Joliet Inc., had to provide a joint and several guarantee to a number of creditors, including the vendor, who was taking back a mortgage for the balance of the sale price, and the Caisse Populaire de Haute Rive.

When Steve Foster had purchased a new home, Steve Foster Expert en Sinistres Inc. advanced him a substantial sum. The appellant, who owned /3 of the shares in Gestion 34 Inc., which operated the bar, decided to repay Steve Foster Expert en Sinistres Inc. the money it had advanced to him, by transferring to it all of his shares in Gestion 34 Inc. in payment of the debt.

After consulting his accountant, Mario Blouin, the appellant assigned to and rolled over into Steve Foster Expert en Sinistres Inc.his shares in Gestion 34 Inc.; he thereby repaid the money advanced to him by Steve Foster Expert en Sinistres Inc. According to the appellant and his accountant, the two amounts were substantially the same. The accountant simply told the appellant that the rollover had to be done at the fair market value of the investment.

In the course of the transaction, it was determined that the value of the shares in Gestion 34 Inc. had appreciated by nearly $2,000 at the time of the rollover. The evidence established that the appellant had reported that profit in his income tax return for the taxation year in which it was realized.

The fair market value of the investment was determined somewhat arbitrarily. The accountant said that he had no reason to think that business had gone downhill, even though the financial statements were nearly six months old. A time lag of this sort was certainly important, given that the company operating the Brasserie Joliet made an assignment of its assets barely six months later.

On this point, the appellant’s partner also said that sales were very high, although he said in the same breath that in early January 1991, barely two months before the rollover, the business was not covering its costs.

The rollover was carried out pursuant to a resolution (Exhibit A-1) reading as follows:

[TRANSLATION]

Resolution of the Board of Directors of “Steve Foster Expert en Sinistres Inc.”

ADOPTED ON November 1, 1990

BE IT RESOLVED that the shares held by Steve Foster in the Brasserie Joliet Inc. be transferred to Steve Foster Expert en Sinistres Inc. The value of the shares is set at forty thousand dollars ($40,000.00) plus five thousand dollars ($5,000.00) relating to an additional investment made by Steve Foster. The corporation will issue no cheque to Steve Foster as the forty-five thousand dollars ($45,000.00) will go to reduce the debt owing to the Corporation by Steve Foster.

Entry in the Book

BE IT RESOLVED that a copy of the foregoing resolution be entered and retained in the minute and resolution book of the board of directors, in accordance with section 112(2) of the Canada Business Corporations Act.

Validity

I, the undersigned, declare that I am the sole director of the company, and therefore the only person empowered to vote at meetings of the board of directors. Consequently, the above resolution, signed by myself below, has the same force as if it had been adopted at a meeting of the board of directors, in accordance with section 112(1) of the Canada Business Corporations Act.

ADOPTED AND SIGNED al Baie-Comeau, November 1, 1990.

The resolution refers to a total figure of $45,000. According to the preliminary submissions at the hearing, that figure should have been $40,000, given that it was comprised of the following:

This resolution is a key point in the case. It should be noted that it makes no mention of or reference to the guarantees associated with the transferred assets. It was also established that the transfer had not been reported to the beneficiaries of those guarantees.

The appellant’s partner in the Brasserie Joliet, Jacques Bouchard, in fact said that he had been informed by Foster only after the transfer was completed. He also said that his consent had not been required. According to his testimony, he was unaware of whether the company operating the bar had imposed any restrictions on the transfer of its shares.

In fact, the rollover of shares into Steve Foster Expert en Sinistres Inc. was completed on the sly, with only the appellant and his accountant having knowledge of it.

Why was the existence of the guarantees ignored? Why was nothing done to get the creditors in question involved? Why was there no attempt to get a discharge from the creditors, releasing Steve Foster personally? Why was it not clearly and explicitly stated that Steve Foster Expert en Sinistres Inc. was releasing Steve Foster personally from all guarantees given in respect of the acquisition of the shares being transferred? Why was it not provided that Steve Foster Expert en Sinistres Inc. would be responsible for any consequences, payments or losses incurred by Steve Foster personally in the performance of the guarantees, in the event that they were enforced?

The answer to all these questions was provided by the accountant. Mario Blouin had several things to say in that regard. First, he said that the guarantees automatically followed the assets that were transferred. He contended that this was normal, natural and usual in such a situation. He also asserted that the guarantees followed what he described as the wealth, and he said that this was so usual that he did not think it appropriate or necessary to warn the appellant or advise him to obtain a discharge from the creditors. According to the accountant, it was so normal and usual that it was not even necessary to mention it in the transfer agreement; he also said it was automatic, that the guarantees, being ancillary to the transfers, followed the transferred assets. Lastly, he said that this was such a normal thing that it was not necessary for it to be specified in order for it to be both accepted and acceptable.

Armed with the support, opinion and analysis of his accountant, the appellant subsequently testified that he had consulted his accountant and that he had relied on his assessment, which was that everything was regular, proper and done by the book.

After the bankruptcy of the Brasserie Joliet Inc., the creditors who had been given guarantees reacted quickly; they went after the appellant person- ally, as he was plainly more solvent and in a better financial position than the other two shareholders, Mr. Bouchard and Mr. Racine. The creditors completely ignored the fact that ownership had been transferred when the shares were rolled over. One would therefore have to think that the creditors did not agree with the opinion of Blouin the accountant. This is particularly surprising in that Steve Foster Expert en Sinistres Inc. was unquestionably very solvent.

The post-bankruptcy period proved to be especially rich in events illustrating the quality and nature of the actions taken by the appellant Steve Foster personally.

When the creditors took steps to secure repayment on the basis of the guarantees, they gave no thought to Steve Foster Expert en Sinistres Inc.; the creditors rightly relied on their rights under the guarantees. Steve Foster Expert en Sinistres Inc. had nothing to do with the creditors’ claims. The company had no liability with respect to those claims, which were made by the creditors who held guarantees that could be executed only against the appellant.

This is plain from the case hearing file no. 655-05000113-910 in the Superior Court, district of Baie-Comeau; moreover, several letters were sent to the appellant Steve Foster personally. The appellant also signed correspondence and release documents, with no mention being made of Steve Foster Expert en Sinistres Inc., even though, according to him, that company was solely responsible for the payments made pursuant to those guarantees.

There are no facts and no documentary evidence to support the appellant’s contention that Steve Foster Expert en Sinistres Inc. had assumed liability under the guarantees. On the advice of his accountant, the appellant acted as if the guarantees had been transferred at the same time as the shares.

This is an entirely untenable interpretation; contrary to what the accountant may have claimed or argued, the guarantees did not automatically follow the wealth.

In order for the guarantees to be enforceable against Steve Foster Expert en Sinistres Inc., there would have had to have been an express stipulation regarding the guarantees; indeed, any informed and prudent person would have got the creditors involved for the purpose of securing a release from such guarantees.

Receiving bad advice does not have the effect of improving the quality of the transactions carried out. In fact, the Department acted properly in assessing on the basis of the facts disclosed in the documents. The courts have repeatedly held that taxpayers may organize and plan their affairs in such a way as to take advantage of the provisions of the Act, as long as they follow and fully adhere to their planning. Often, however, taxpayers try to organize their affairs in a less than clear manner so that they can permanently keep their options open.

In the instant case, the respondent was entirely justified in assessing as she did; the Department of National Revenue was not required to take into account any assumptions, insinuations or intentions. This is an area in which the rules are simple and clear, although apparently not known to the accountant. There is no doubt that the appellant must bear the consequences of the imprudent and ill-informed advice given by his accountant.

Consequently, as regards this aspect of the case, the assessment is fully justified and correct, in that it follows directly from the actions and transactions of the appellants. An assessment must be made on the basis of what was done, and not of what the taxpayers wanted to do, thought they had done or intended to do.

The other issue underlying these appeals relates to the date of the transfer of 9,000 shares in the company Biochem. The appellant contends that the effective date of the transfer is March 1, 1991, when the value of the said Biochem shares was $15 /s. At that time, Steve Foster Expert en Sinistres Inc. was the sole owner of the shares.

The respondent contended that the effective transfer of the shares took place on June 13 of that year, when the unit value had risen to $24.25, an appreciation of nearly $10 per share. Consequently, $61,593 was added to the income of Steve Foster Expert en Sinistres Inc. for the 1992 taxation year as an additional taxable capital gain; the additional amount represented the appreciation in value of the shares as described above.

The facts and circumstances relating to the share transfer were established through the testimony of Lorraine Tremblay, Steve Foster’s spouse, Michel Grenier, a securities broker with Lévesque, Beaubien, Geoffrion, and the appellant himself.

I give no weight to the testimony of Michel Grenier, who demonstrated that he would stop at nothing to please clients who paid him substantial commissions, including the appellant. Michel Grenier himself gave the ex- ample of a case in which he had altered the registration date of a deposit into an RRSP account.

Mr. Grenier had little regard for formalities. He said that the Foster family’s portfolio was quite large, so large that he had daily discussions and conversations with Steve Foster concerning the performance of his portfolio. Grenier said he had been informed of Lorraine Tremblay’s plan to purchase a substantial number of shares in Biochem, and he indicated that he had been informed that the time of the sale was to coincide with the end of the fiscal year of Steve Foster Expert en Sinistres Inc., namely February 1991.

While acknowledging that a transaction worth nearly $25,000 was an important transaction, Mr. Grenier hastened to add that the transfer that Steve Foster Expert en Sinistres Inc. and Ms. Tremblay wanted to arrange was of no great interest to him, as he would be receiving no commission; he testified that what was involved was essentially a book entry.

Mr. Grenier also said that he had faithfully carried out the instructions received from Steve Foster in his capacity as spokesperson for the company and from Ms. Tremblay with respect to the Biochem shares; he stated that he had filled in the documents and given instructions for the transfer to be made on March I. He also indicated that the transfer they wanted to make was conditional on an account being opened in Ms. Tremblay’s name.

As time went by and the transfer did not appear on the monthly reports, Mr. Grenier said that he had on several occasions reassured Ms. Tremblay, who was concerned about the fact that she was not getting her own statements following the transfer.

He testified that as a result of Ms. Tremblay’s and her spouse’s insistence, he investigated why the transfer had not been carried out. He essentially reiterated the explanations given in an affidavit (Exhibit I-7) that he signed on October 31, 1994, at the accountant’s request, in the course of discussions with Revenue Canada. I consider it useful to reproduce the content of that affidavit:

[TRANSLATION]

Affidavit

I, Michel Grenier, aged 37 years, a securities broker residing at 602 Bélanger, Baie-Comeau, do solemnly affirm on my honour as follows:

Steve Foster is a client of mine. I have been an investment adviser for a number of years. Mr. Foster holds several accounts: one for his RRSP, one for his Registered Education Savings Plan, one for his corporation in the name of Steve Fos- ter Inc., another personal account, and at one time he also had an “REA” account. Although a majority of the accounts in question were very active, that is, he conducted transactions on those accounts on an ongoing and regular basis, the largest was his corporation’s account.

Since the end of the 1980s and the early 1990s, Mr. Foster had held a number of Biochem shares and warrants in his accounts. In fact, a large majority of my clients held Biochem shares. In my opinion, this security had enormous potential, and I hoped that it would make a lot of money for my clients.

During the 1990-1991 Christmas holiday period, I met with Mr. Foster and his wife Lorraine Tremblay. I suggested that she acquire the Biochem shares, and explained to her the very attractive possibilities of growth in the value of the securities of that company, whose activities at that time were focused primarily on research with respect to, and the manufacture of, an anti-AIDS drug. According to the information I had at the time, the performance of Biochem’s shares should have been excellent. In fact, during the same period, I had a very large number of my clients buy those shares.

In early 1991, in about January or February, during a conversation I had with Steve Foster, he told me that his wife Lorraine Tremblay was interested in purchasing some Biochem shares. However, because both Mr. Foster personally and his corporation already held a large quantity of such shares, and he did not want to increase his holdings, it was agreed that his corporation would transfer 9,000 Biochem shares to Ms. Tremblay. In addition, by arranging it this way, there were no brokerage fees. Mr. Foster then explained to me that in order to avoid tax and administrative complications, he wanted the transfer not to take place until March 1, 1991, which was the beginning of his corporation’s new fiscal year. I noted all this down. At that time we were extremely busy, particularly since it was the height of the RRSP contribution period.

Our clients receive a monthly statement for all accounts they hold. They normally receive the statements in about the second week of the following month. In May, during a conversation I had with Mr. Foster, he told me that his wife had not yet received hers. I answered that it was normal that there would be this kind of delay. Nonetheless, I checked into it and I then realized that the transfer had not been completed since Ms. Tremblay did not yet have a personal account with Levesque, Beaubien, Geoffrion. I was convinced that I had given the order to my assistant, Josée Ouellet. Unfortunately, she could not remember the order. It must be pointed out that at that time hundreds of transactions were being conducted at our office every week. When I checked into it further, I even found that I still had in my possession the margin account agreement that I had had Ms. Tremblay sign on March 1, 1991. I was convinced that a copy of the document and an application to open an account had already been forwarded to our Montreal office, but I cannot explain how it happened that the account had not been opened earlier. I therefore sent a new application and explained to Mr. Foster and Ms. Tremblay that there was no problem in terms of the transaction date of March 1, 1991. Another similar situation had moreover previously arisen in respect of another client concerning his RRSP. That client was to make a contribution from his personal account into his RRSP account. For some unexplained reason, the transaction was not carried out. After the deadline, he realized that he had not received his contribution confirmation. I was able to rectify the situation retroactively so that the client in question was not unfairly penalized.

To summarize, I solemnly affirm that the request to transfer shares was made to me in early 1991, to be carried out on March 1 of that year. The delay was therefore simply the result of an administrative or clerical error.

Unfortunately, we cannot say whether the error occurred at the Baie-Comeau, Chicoutimi or Montreal offices, which were where administrative matters of this nature were routed at Lévesque, Beaubien, Geoffrion.

Michel Grenier

Sworn before me at Baie-Comeau, this 31 st day of October 1994

Commissioner for taking

oaths

The testimony of Lorraine Tremblay lacked detail and was often hesitant; nonetheless, her testimony overall was consistent and credible.

The appellant’s wife, who was very involved in the administration of the business that her husband managed and controlled, played a somewhat passive role in relation to decision-making. Her role was primarily to carry out the appellant’s instructions at the administrative level. She undoubtedly did not decide to acquire the shares on her own initiative, just as she undoubtedly did not select the date of the transfer. On the other hand, the Court believes that she was indeed a party to the transaction and gave her informed consent to it.

Since she plainly does not have her spouse’s expertise or experience in buying and selling shares, she relied on him, and this does not operate to vitiate or even dilute her consent.

Indeed, some aspects of her testimony may be suspect. I refer in particular to her exemplary patience and tolerance in the matter of the delays. I agree that this kind of tolerance might be explained by a sort of passive complicity in the actions of her spouse, who had orchestrated the time of the sale in such a way as to secure the best of two worlds. That was all the more possible as he could count on the services of an unscrupulous broker who was prepared to do anything to serve the interests of important clients such as the appellant.

Steve Foster testified, and gave reasonable and plausible explanations in reply to each of the relevant questions. He explained the origins of the transaction, spoke of his spouse’s interest and described the general enthusiasm about the Biochem shares.

He also pointed out that the discussions had started in November and December. He had said at that time that it was in the interest of Steve Foster Expert en Sinistres Inc. that the sale of the 9,000 shares be carried out after the end of the company’s fiscal year on February 28, and so the date of March 1 was chosen for the transfer.

The broker responsible for the transaction stated that he had been advised of the parties’ decision as to the date. The appellant and his spouse say that when the time came, they instructed the broker to proceed, as is confirmed by a resolution (Exhibit A-3) the content of which is as follows:

[TRANSLATION I

Reolution of the Board of Directors of “Steve Foster Expert en Sinistres Inc.”

ADOPTED ON MARCH 1, 199]

BE IT RESOLVED that the corporation sell to Lorraine Tremblay of 1608 Mélèze, Baie-Comeau, nine thousand (9,000) shares that it holds in the Biochem company at their present market value of $15.125, for a total of one hundred and thirty-six thousand one hundred and twenty-five dollars ($136,125). To avoid brokerage fees, the corporation authorizes the firm Lévesque, Beaubien, Geof- frion to transfer the 9,000 shares directly from its account into Lorraine Tremblay’s account. Lorraine Tremblay will pay the corporation interest at the rate of 12.5% per year on the amounts owing, until repayment in full. Such interest shall be payable every three (3) months, or within a shorter time in the event that the principal amount is repaid.

Entry in the Book

BE IT RESOLVED that a copy of the foregoing resolution be entered and retained in the minute and resolution book of the board of directors, in accordance with section 112(2) of the Canada Business Corporations Act.

Validity

I, the undersigned, declare that I am the sole director of the company, and therefore the only person empowered to vote at meetings of the board of directors. Consequently, the above resolution, signed by myself below, has the same force as if it had been adopted at a meeting of the board of directors, in accordance with section 112(1) of the Canada Business Corporations Act.

ADOPTED AND SIGNED at Baie-Comeau, March 1, 1991.

The usual forms were filled in at the broker’s office. They included in particular the guarantee agreements (Exhibits A-7 and A-8) and a margin account agreement (Exhibit A-6).

Despite the instructions, the resolution and the completed forms regarding the opening of an account in Lorraine Tremblay’s name, no transfer was entered on the broker’s books, as indicated by the April and May interim reports (Exhibit A-l 1). The transfer appeared for the first time on the statement dated June 30, 1991. The report shows that the 9,000 shares in IAF Biochem Int’! Inc. were transferred on June 13, 1991.

Steve Foster testified that he had brought the situation to Michel Grenier’s attention on a number of occasions. Each time, Mr. Grenier told him that this was normal and usual, and that he had nothing to be worried about; this reassured him and made him feel confident that the transaction had validly taken place on March 1, 1991, as agreed.

After a few months, at the insistence of the appellant and his wife, Grenier checked into it; he found that nothing had been done to carry out the parties’ intention as to the 9,000 Biochem shares. He got things moving again and the transaction was ultimately registered on June 13, 1991.

A share transfer is not a complicated procedure; such transactions are generally more important to the parties than to the person responsible for carrying them out, for whom it is essentially a routine matter.

In the instant case, I admit that I have some reservations as to the clarity and specificity of the instructions that may have been given Grenier. On the other hand, having regard to the numerous transactions and virtually daily conversations, it seems likely to me that the parties agreed as to the date of the transfer and that the broker failed to execute their instructions. In any event, the date the shares were registered with the broker essentially provides an indication of a possible transfer date; it is not absolute proof that the transfer of ownership took place at the time the transfer was registered at the brokerage firm.

The actual date of the transfer of ownership is the date on which the two parties, the vendor and purchaser, reached an agreement. It would certainly have been preferable that the registration date correspond to the transfer date so as to avoid any ambiguity and, most importantly, to confirm the transfer.

The transfer of ownership was the subject of a duly adopted resolution dated March 1, 1991. That resolution could indeed have been prepared and dated at a later time. There is however no evidence of that and I have no compelling reason to reject the explanations given by the appellant and his spouse. On a balance of probabilities, the transfer of the Biochem shares took place on March 1, 1991 and not on June 13, the date when the transfer was registered at the brokerage firm.

The appeal is therefore allowed in that the transfer of the 9,000 Biochem shares took place on March 1, 1991.

Consequently, the appeal is allowed in part and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant did in fact receive as a benefit conferred on a shareholder, for the 1991 and 1992 taxation years, the amounts that the company paid on his behalf pursuant to his personal guarantees, and also on the basis that the transfer of the 9,000 shares in I.A.F. Biochem Inc. took place on March 1, 1991 and not on June 13, 1991, the whole without costs.

Appeal by individual taxpayer dismissed; appeal by corporate taxpayer

allowed.