Date: 20040115
Dockets: A-556-02/A-551-02
Citation: 2004 FCA 15
CORAM: DESJARDINS J.A.
LÉTOURNEAU J.A.
NADON J.A.
A-556-02
BETWEEN:
RALPH E. FARAGGI
Appellant
and
HER MAJESTY THE QUEEN
Respondent
______________________________
A-551-02
BETWEEN:
ROBERT LANGLOIS
Appellant
and
HER MAJESTY THE QUEEN
Respondent
Hearing held at Montréal, Quebec, January 15, 2004.
Judgment delivered from the bench at Montréal, Quebec, January 15, 2004.
REASONS FOR JUDGMENT OF THE COURT: LÉTOURNEAU J.A.
Date: 20040115
Dockets: A-556-02/A-551-02
Citation: 2004 FCA 15
CORAM: DESJARDINS J.A.
LÉTOURNEAU J.A.
NADON J.A.
A-556-02
BETWEEN:
RALPH E. FARAGGI
Appellant
and
HER MAJESTY THE QUEEN
Respondent
______________________________
A-551-02
BETWEEN:
ROBERT LANGLOIS
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT OF THE COURT
(Delivered from the bench at Montréal, Quebec, January 15, 2004)
LÉTOURNEAU J.A.
[1] We are of the opinion that the appeals in cases A-556-02 and A-551-02 should be dismissed.
[2] Ruling on a question of law submitted to the Tax Court of Canada under section 58 of the Rules of that Court, Chief Judge Garon concluded that the issue he had to analyze could not put an end to the litigation since there was an allegation by the Minister of National Revenue (the Minister) that the transactions leading to the election made by the appellants under subsection 83(2) of the Income Tax Act were sham transactions or part of a series of sham transactions. The election made by the appellants, the Minister argues, were part of this sham and were its end result, so it is not enforceable against him.
[3] More specifically, the Minister alleges that the appellants, through a substantial number of business corporations, provided that capital gains would be generated on paper ($233,687,633) so that the non-taxable portion of the capital gains ($116,843,831.55) would accumulate in capital dividend accounts. This principal allegation is supported by further, more specific allegations concerning the sham or token transaction orchestrated by the appellants, in the Minister's opinion.
[4] The Chief Judge expressed his conclusion in these words, at paragraph 31 of his decision:
While at first glance it flows from my analysis that there is an inconsistency between the assessments under appeal and subsection 83(2) of the Act, when read with subsection 184(2) of the Act, it is essential to determine whether or not the elections by private corporations under subsection 83(2) of the Act constituted a "sham" or are an integral part of a series of operations leading up to a "sham". The response to the question on which the Appellants applied to the Court for a ruling pursuant to section 58 of the Tax Court of Canada Rules (General Procedure) cannot, therefore, put an end to the case. Accordingly, a hearing on the merits of these appeals will be necessary.
[5] The appellants ask that we uphold the finding made by the Chief Judge that the assessments issued by the Minister are incompatible with subsection 83(2) of the Act.
[6] We are not persuaded that the Chief Judge ruled categorically on the allegation of incompatibility since it was his opinion that the reply to this question depended on whether or not there was a sham.
[7] In this regard, the appellants argue that subsection 83(2) contains only three conditions, that these conditions were complied with in this case, and that it is not a requirement of this subsection that there be no sham.
[8] The notion of token transaction or sham underlies the interpretation and application of the Act. A taxpayer is entitled to so arrange and organize his affairs as to reduce or alleviate his tax liability. But the transactions or operations that lead to these benefits must be genuine. "[T]he courts", says the Supreme Court of Canada, "will not permit the taxpayer to take advantage of deductions or exemptions which are founded on a sham transaction": Canada v. Antosko, [1994] 2 S.C.R. 312, at page 325.
[9] The courts must satisfy themselves of the validity and reality of the transactions when it is alleged that they are simulated and therefore invalid. In The Queen v. Daly, [1981] C.T.C. 270, at page 279, this Court cited approvingly this passage by our colleague Mr. Justice Urie in Atinco Paper Products Ltd. v. The Queen, 78 DTC 6387, at page 6395:
I do not think that I should leave this appeal without expressing my views on the general question of transactions undertaken purportedly for the purpose of estate planning and tax avoidance. It is trite law to say that every taxpayer is entitled to so arrange his affairs as to minimize his tax liability. No one has ever suggested that this is contrary to public policy. It is equally true that this Court is not the watch-dog of the Minister of National Revenue. Nonetheless, it is the duty of the Court to carefully scrutinize everything that a taxpayer has done to ensure that everything which appears to have been done, in fact, has been done in accordance with applicable law. It is not sufficient to employ devices to achieve a desired result without ensuring that those devices are not simply cosmetically correct, that is correct in form, but, in fact, are in all respects legally correct, real transactions. If this Court, or any other Court, were to fail to carry out its elementary duty to examine with care all aspects of the transactions in issue, it would not only be derelict in carrying out its judicial duties, but in its duty to the public at large.
[10] Confronted with allegations of a sham, the Chief Judge had no choice at this stage but to order the continuation of the proceedings in order to obtain a determination on the merits.
[11] Furthermore, we are satisfied that the Chief Judge had jurisdiction to order, as he did, the continuation of the proceedings if the conditions of Rule 58 were not fulfilled.
[12] As it happens, we agree with the Chief Judge that the allegations of a sham vitiating the transactions in question, and the election under 83(2) of the Act that resulted, require evidence of facts that will certainly be challenged, and which have not yet been established. Hence the necessity for a hearing on the merits.
[13] The appeals will be dismissed with costs in the cause.
"Gilles Létourneau"
J.A.
Certified true translation
Suzanne Gauthier, C.Tr., LL.L.
FEDERAL COURT OF APPEAL
SOLICITORS OF RECORD
DOCKETS: A-556-02/A-551-02
STYLE:
BETWEEN: A-556-02
RALPH E. FARAGGI
Appellant
and
HER MAJESTY THE QUEEN
Respondent
______________________________
BETWEEN: A-551-02
ROBERT LANGLOIS
Appellant
and
HER MAJESTY THE QUEEN
Respondent
PLACE OF HEARING: Montréal, Quebec
DATE OF HEARING: January 15, 2004
REASONS FOR JUDGMENT
OF THE COURT:
(DESJARDINS, LÉTOURNEAU, NADON, JJ.A.)
DELIVERED FROM THE BENCH BY: LÉTOURNEAU J.A.
APPEARANCES:
Ralph E. Faraggi
(representing himself)
FOR THE APPELLANT
Robert Langlois
(representing himself)
FOR THE APPELLANT
Daniel Marecki
FOR THE RESPONDENT
SOLICITORS OF RECORD:
Morris Rosenberg
Deputy Attorney General of Canada
Montréal, Quebec
FOR THE RESPONDENT