BETWEEN:
PLOMBERIE J.C. LANGLOIS INC.
Appellant
and
HER MAJESTY THE QUEEN
Respondent
Hearing held at Montréal, Quebec, on March 14, 2006.
Judgment delivered at Montréal, Quebec, on March 16, 2006.
REASONS FOR JUDGMENT OF THE COURT BY: NOËL J.A.
CONCURRING: DESJARDINS J.A.
LÉTOURNEAU J.A.
Date: 20060316
Docket: A-637-04
Citation: 2006 FCA 113
CORAM: DESJARDINS J.A.
LÉTOURNEAU J.A.
NOËL J.A.
BETWEEN:
PLOMBERIE J.C. LANGLOIS INC.
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT OF THE COURT
NOËL J.A.:
[1] This is an appeal from a decision by Lamarre-Proulx J. of the Tax Court of Canada, dated November 2, 2004, upholding the notices of assessment made under the Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1 (the “Act”) for the appellant’s taxation years 1995 to 1998.
[2] The question in issue is whether René Simoneau “controlled, directly or indirectly in any manner whatever” the appellant within the meaning of paragraph 256(1)(b) of the Act during the relevant period. If that was the case, the appellant must share the deduction for small businesses with several other companies which are also controlled by René Simoneau.
[3] An exhaustive review of the facts is not necessary. Suffice it to say for our purposes that René Simoneau controlled several companies which operated under the name of Groupe Simoneau. Through an investment company, he also held 50% of the appellant’s shares, while the other 50% was held by Richard Hallas, who took care of day-to-day operations.
[4] At its name indicates, the appellant operated in the field of plumbing, which was a complementary activity to that of the other companies held by René Simoneau.
[5] It is obvious that René Simoneau did not have the legal control of the appellant, because Mr. Hallas held 50% of the shares. The question that arose before the Tax Court of Canada was whether, in spite of this lack of legal control, René Simoneau still controlled the appellant within the broader concept of corporate control in subsection 256(5.1):
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256(5.1) For the purposes of this Act, where the expression “controlled, directly or indirectly in any manner whatever” is used, a corporation shall be considered to be so controlled by another corporation, person or group of persons (in this subsection referred to as the “controller”) at any time where, at that time, the controller has any direct or indirect influence that, if exercised, would result in control in fact of the corporation . . . . |
256(5.1) Pour l’application de la présente loi, lorsque l’expression « contrôlée directement ou indirectement de quelque manière que ce soit », est utilisée, une société est considérée comme ainsi contrôlée par une autre société, une personne ou un groupe de personnes—appelé « entité dominante » au présent paragraphe—à un moment donné si, à ce moment, l’entité dominante a une influence directe ou indirecte dont l’exercice entraînerait le contrôle de fait de la société […] |
[6] After having considered the evidence, the judge of the Tax Court of Canada concluded that René Simoneau had de facto control over the appellant during the relevant period. To come to this conclusion, she put a lot of emphasis on the fact that René Simoneau was the sole director of the appellant and, as such, had the last say in any decisions to be made (Reasons, paragraphs 36 and 38 to 40).
[7] In support of its appeal, the appellant above all criticized Lamarre-Proulx J. for having concluded that Mr. Simoneau had the dominant role as a sole director without taking into consideration the unanimous shareholder agreement signed by the two shareholders (Duha Printers (Western) Ltd. v. Canada, [1998] 1 S.C.R. 795 at paragraph 71). Even if René Simoneau was the sole director, the unanimous shareholder agreement neutralized his ability to exercise de facto and de jure control over the appellant. According to the appellant, the judge of the Tax Court of Canada erred in law, because she reached this conclusion without taking this agreement into consideration.
[8] In addition, the appellant submitted that the division of functions between René Simoneau and the other shareholder was in compliance with the business plan. René Simoneau was a proficient director and took care of the administrative tasks. Richard Hallas was a plumbing expert and took care of the appellant’s day-to-day operations.
[9] According to the appellant, the judge of the Tax Court of Canada misunderstood its business plan and the importance of the role played by Richard Hallas when she concluded that the appellant was subject to the de facto control of René Simoneau. Richard Hallas was just as important as Mr. Simoneau as far as the decisions made by the appellant were concerned, and he had just as much influence over it.
Decision
[10] As far as the first ground of appeal is concerned, I do not think that the judge of the Tax Court of Canada ignored the unanimous shareholder agreement. She well understood that this agreement as drafted respected the equal division of the appellant’s share capital and did not benefit one shareholder to the detriment of the other. However, the trial judge was of the opinion that this agreement was to be given little importance, because the parties did not comply with it. For example, she mentioned that clauses 5 and 6 of the unanimous shareholder agreement concerning the financial contribution of the shareholders had been totally ignored (Reasons, paragraph 32).
[11] Counsel for the appellant conceded this fact but submitted that this omission was exceptional. According to him, the rest of the agreement was respected.
[12] With respect, this is not what the evidence showed. For example, the unanimous shareholder agreement specified that any decision made that was not within the ordinary course of the appellant’s business had to be approved by unanimous resolution. No such resolution was submitted, in spite of the evidence which showed that René Simoneau made numerous unusual transactions, disguised as large advances, loans and suretyships, on behalf of the appellant with the other members of the group of companies he controlled.
[13] More specifically, the judge of the Tax Court of Canada mentioned the advances made by the appellant to companies of the Groupe Simoneau, without any interest or repayment terms, in the amount of $84,106 in 1997. Similar advances in a total amount of $53,500 were noted in the financial statements for the year 1998.
[14] The first judge also mentioned that the appellant was a surety for loans contracted by the Groupe Simoneau companies for an amount of $1,969,707 as at April 30, 1997. The amount for which the appellant stood surety was $1,859,225 as at April 30, 1998.
[15] These transactions, which on their face had the effect of diluting the appellant’s assets, were not approved by resolution. In addition, apart from repeating that he trusted Mr. Simoneau, Mr. Hallas did not explain why he was willing to jeopardize the appellant’s assets to guarantee the debts of companies in which he held no shares or why he would have allowed the appellant to make loans to Mr. Simoneau’s companies without interest or repayment terms.
[16] The evidence clearly shows that the unanimous shareholder agreement was not respected in its essential aspects and that the judge of the Tax Court of Canada correctly gave it little significance.
[17] It is also inaccurate to say that the trial judge misunderstood the role played by Mr. Hallas. As she explained in paragraph 38 of her reasons, as the appellant’s principal manager, Mr. Hallas played a very important role. However, this was an operational role, not a decision-making one.
[18] I believe that the evidence allowed the trial judge to conclude that, in spite of the equal division of the appellant’s share capital, Mr. Simoneau was the “controller” of the appellant within the meaning of subsection 256(5.1) and exercised de facto control over it.
[19] I would dismiss this appeal with costs.
“I concur.
Alice Desjardins, J.A.”
“I concur.
Gilles Létourneau, J.A.”
Certified true translation
Michael Palles
FEDERAL COURT OF APPEAL
SOLICITORS OF RECORD
DOCKET: A-637-04
APPEAL FROM AN ORDER OF MADAM JUSTICE LAMARRE-PROULX OF THE TAX COURT OF CANADA, DATED NOVEMBER 2, 2004, DOCKET NUMBER 2001‑1569(IT)G.
STYLE OF CAUSE: PLOMBERIE J.C. LANGLOIS INC.
v. HER MAJESTY THE QUEEN
PLACE OF HEARING: Montréal, Quebec
DATE OF HEARING: March 14, 2006
REASONS FOR JUDGMENT BY: Noël J.A.
CONCURRED IN BY: Desjardins J.A.
Létourneau J.A.
DATED: March 16, 2006
APPEARANCES:
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FOR THE APPELLANT
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FOR THE RESPONDENT
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SOLICITORS OF RECORD:
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Sherbrooke, Quebec
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FOR THE APPELLANT
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Deputy Attorney General of Canada Montréal, Quebec |
FOR THE RESPONDENT
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