BETWEEN:
and
Hearing held at Montréal, Quebec, on June 1, 2006.
Judgment delivered at Ottawa, Ontario, on June 7, 2006.
REASONS FOR JUDGMENT BY: NOËL J.A.
CONCURRED IN BY: LÉTOURNEAU J.A.
PELLETIER J.A.
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
[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.
“I concur.
Gilles Létourneau J.A.”
“I concur.
J.D.Denis Pelletier J.A.”
Certified true translation
Michael Palles
FEDERAL COURT OF APPEAL
SOLICITORS OF RECORD
DOCKET: A-700-04
STYLE OF CAUSE: JEAN-GUY ST-GEORGES v.
HER MAJESTY THE QUEEN
PLACE OF HEARING: Montréal
DATE OF HEARING: June 1, 2006
REASONS FOR JUDGMENT BY: NOËL J.A.
DATED: June 7, 2006
APPEARANCES:
Christopher R. Mostovac FOR THE APPELLANT
Mounes Ayadi FOR THE RESPONDENT
SOLICITORS OF RECORD:
STARNINO MOSTOVAC FOR THE APPELLANT
Montréal, Quebec
JOHN H. SIMS FOR THE RESPONDENT
DEPUTY ATTORNEY
GENERAL OF CANADA
Montréal, Quebec