Tax Court of Canada Judgments

Date: 20020516

Docket: 1999-5017-IT-G

BETWEEN:

ROSARIO POIRIER INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

ReasonsFOR Judgment

Archambault, J.T.C.C.

[1]            Rosario Poirier Inc. (RPI) has instituted an appeal from income tax assessments made by the Minister of National Revenue (Minister) for the 1994, 1995, 1996 and 1997 taxation years (relevant period). In computing the income tax owed by RPI, the Minister disallowed a portion of the small business deduction (SBD). The respondent contends that RPI is not entitled to the disallowed portion of the SBD because it was a corporation associated, within the meaning of the Income Tax Act (Act), with another corporation, Trab Inc. (Trab), during the relevant period. According to the respondent, RPI controlled Trab directly or indirectly in any manner whatever. Except for 1995, that is the sole ground advanced by the respondent in support of the Minister's assessments. With regard to 1995, the respondent argues in addition that RPI could not appeal from the Minister's assessment since no tax was payable. RPI admitted through its counsel that it could not appeal from a "nil" assessment.

The facts

[2]            Rosario Poirier, who is a farmer's son and has very little education, lives in St-Alphonse, a village located on the Gaspé Peninsula, in Bonaventure County. It was there that he founded a sawmill. RPI was incorporated as a business corporation under letters patent issued on March 19, 1973, and, on December 23, 1993, its existence was continued under Part IA of the Quebec Companies Act. As from February 18, 1994, Mr. Poirier held 80 percent of RPI's common shares, while his son, Luc Poirier, held the rest. Luc Poirier has also been a member of RPI's board of directors since that time. It would appear that Rosario Poirier had previously held all the shares of RPI. In February 1994, he converted all the common shares he then held into preferred shares valued at $888,300. This reorganization of RPI's capital has all the hallmarks of a partial estate freezing. Considering its modest beginnings, RPI appears to have been very successful, and Rosario Poirier is justifiably proud of it.

[3]            At first, RPI itself cut and transported the timber. It owned a truck for hauling the logs from the forest to the sawmill. The finished products were transported by a public carrier. Luc Poirier apparently began to drive the truck as soon as he was 18 years old. He left school after Secondary II, at the age of 16. In the summer, he worked at the sawmill as a pallet truck operator and, in the winter, he drove the truck or worked as a skidder operator in the woods, according to what was required at the time.

[4]            When Luc Poirier reached his twenties, his father wanted him, so he said, to acquire experience in running a corporation and to have greater financial security in the event RPI could no longer provide him with work. His father therefore encouraged him to buy, on August 10, 1988, all the shares of Trab from a certain Boudreault for $6,000. Trab owned only two assets at the time, an old timber transport truck worth approximately $200 and a timber transportation permit worth approximately $5,500. Neither Rosario Poirier nor Luc Poirier remembered how the Trab share purchase had been financed.

[5]            Shortly after Luc Poirier purchased Trab, that corporation acquired RPI's truck for the sum of $1. Luc Poirier admitted that this was a gift in disguise. He said that the truck had little economic value. Even though RPI had transferred ownership of its truck to Trab, RPI's employees continued to drive it.

[6]            It was moreover Rosario Poirier who selected the first driver for Trab's truck. Luc Poirier said he had handled maintenance of the truck on Saturdays with the help of another RPI employee, but he received no salary from Trab for that service. In general, the truck was mainly used during the logging period. At first, it was used chiefly for daytime transportation, but later on it was used 24 hours a day, five days a week.

[7]            During the relevant period, RPI was virtually Trab's only customer. In Trab's financial statements for the fiscal years ended on May 31, 1994 and 1995 it is noted that: [TRANSLATION] "The corporation earns all its timber transportation income from an affiliated corporation." Starting in 1996, the statement read as follows: [TRANSLATION] "The corporation earns all its timber transportation and equipment rental income from an affiliated corporation." According to a statement of fact, which was admitted, in the Reply to the Notice of Appeal, 92 percent, 88 percent and 100 percent of Trab's income for the 1995, 1996 and 1997 fiscal years respectively came directly from RPI, whereas other income came from transportation provided for persons who had contacted Rosario Poirier.

[8]            In particular, in the fall of 1995, Trab transported timber for 9011-6989 Québec Inc. (JGT) for $12,075. The shareholder of JGT, one Jean-Guy Thériault, had communicated with Rosario Poirier concerning the transportation of logs to be loaded onto a ship. The following year, Trab also provided transportation for Entreprises Bernard Lepage (EBL), a business belonging to a personal friend of Rosario Poirier's. In his testimony, Luc Poirier said he did not remember this last transportation contract.

[9]            Luc Poirier admitted that he had not bid on other transportation contracts. When asked why Trab had not expanded by acquiring other trucks and serving other customers, he answered that he did not like getting up at night to repair a broken down truck—nor, presumably, did he like getting up to replace truck drivers either.

[10]          In addition to being Trab's sole shareholder, Luc Poirier has also been its only director from 1988 to the present, except during a brief one-year period starting in June 1994 when his father was also on the board of directors. When questioned on the management of Trab, Luc Poirier had difficulty providing precise answers. He said that RPI's secretary and the accountant for both RPI and Trab had handled all matters pertaining to management.

[11]          One of the facts on which the Minister relied in making his assessment was that Luc Poirier had confirmed in a telephone conversation with the Minister's auditor that [TRANSLATION] "it's more Rosario Poirier who looks after Trab." In his testimony, Luc Poirier did not deny that conversation with the auditor. Furthermore, resolutions by Trab's board of directors dated May 6 and June 23, 1992, gave Rosario Poirier and his wife, Sergine Dugas, authority to sign all documents considered necessary and also to make any decisions relating to Trab.[1]

[12]          The two main, if not the only, administrative duties performed by Luc Poirier were signing Trab's cheques for the few expenses it occasionally paid and choosing a replacement truck every three years. When purchasing one of those trucks, Luc Poirier said, he selected one with a bigger engine than the one his father had suggested to him. To explain his lack of involvement in managing Trab, Luc Poirierdescribed himself as being more a man for working in the field. Since 1991, Luc Poirier has worked for RPI on a full-time, year-round basis. Although he has the title of production manager at RPI, his duties consist mainly in doing equipment, maintenance, driving a pallet truck, replacing, as necessary, employees who operate the sawmill equipment, or planning the logging. He is remunerated by the week, as is his father. His only employment income comes from RPI. The other employees of that corporation are paid by the hour.

[13]          According to Rosario Poirier, he does not get involved in running Trab. He merely advises his son, whom he considers his right-hand man, confidant and hunting and fishing partner. He added that he knew nothing about trucks and, as evidence of that, stated that he had consulted more knowledgeable members of his family when he had had to purchase trucks in the past. However, the evidence shows that Rosario Poirier was present when Trab obtained the loan to finance the purchase of the first new truck to replace the truck acquired from RPI. Rosario and Luc Poirier stated that neither Rosario Poirier nor RPI had provided a guarantee for the loan.

[14]          Other facts reveal that Rosario Poirier was more involved in running Trab than he was prepared to acknowledge. In addition to being the person who appears to have negotiated the two timber transportation contracts with JGT and EBL, it was he who handled the collection of the transportation charges. Fearing that Trab would not be paid for the services it had provided to JGT, Rosario Poirier obtained a personal letter of guarantee from Mr. Thériault. When JGT did not pay the $12,075 it owed Trab, it was RPI, not Trab, that sent JGT a formal demand for payment. Thanks to Rosario Poirier's business sense and experience, Trab was JGT's only supplier to be paid.

[15]          The ordinary administrative duties at Trab are generally the responsibility of Rosario Poirier's secretary, who is an employee of RPI. In particular, it was she who, with the help of Trab's outside accountant (the same as RPI's), prepared Trab's invoices for the transportation provided to RPI.[2] Trab's operating expenses, that is, salaries,[3] fuel, oil and grease, were paid by RPI. Those expenses were then billed to Trab at irregular intervals: often every month, but sometimes the invoices were for periods of two or five months. In addition, the T4 slips for the truck drivers were prepared by RPI. In addition to using RPI's administrative services and its staff, Trab also used the same premises and telephone. Trab was not listed in the telephone directory.

[16]          For Luc Poirier, the acquisition of Trab provided a source of supplementary income. According to its financial statements, Trab made net profits of approximately $32,000 in 1994 and 1995, $135,549 in 1996 and $146,774 in 1997. Shareholders' equity increased from $157,718 in 1994 to $190,095 in 1995, $304,253 in 1996, $441,427 in 1997 and $527,628 in 1998. Those profits from the transportation done for RPI enabled Trab to pay Luc Poirier dividends of $9,000 on June 1, 1995, and January 4, 1996, and $28,000 on January 4, 1998. With those dividends, Luc Poirier was able to acquire a trailer and a rental property.

[17]          In addition, it was admitted that RPI and Trab lent each other money when there was a cash shortage and that no interest was charged on such loans. Luc Poirier stated that Trab was paid on the basis of the quantity of timber hauled for RPI and that the price was fixed in accordance with the market rate. From May to December 1994, Trab's transportation charges to RPI were below the market rate, and an adjustment of $2/m³ had to be made in December 1995. In the St-Alphonse region, there are at least two other sawmills and at least two log haulage businesses.

Positions of the Parties

[18]          Counsel for the respondent contends that RPI controlled Trab directly or indirectly in any manner whatever during the relevant period since Trab was economically very dependent on RPI at that time. Furthermore, Trab's operations were closely integrated into those of RPI.

[19]          Counsel for RPI recognizes that his client exercised influence over Trab's activities. However, that influence was not sufficient for RPI to have control in fact of Trab. It was, argues counsel, Luc Poirier who made the important decisions for Trab and exercised predominant influence in the conduct of the affairs of that business. According to counsel, if subsection 256(5.1) of the Act were to be construed liberally, it could apply to cases not contemplated by the legislator. As a particular example, he cited the case of the American government which, through the adoption of tax measures, could even bring about the sawmill's closure.

[20]          In the alternative, counsel for RPI contends that, even if it could be concluded that there was control in fact by virtue of the application of subsection 256(5.1) of the Act, such a conclusion is not possible where control in law exists, as is the case here. As Luc Poirier controls 100 percent of Trab's shares, no one else can exercise control in fact over that corporation. In other words, it cannot be found that there is control in fact unless one person has control in law of a corporation. Counsel bases this interpretation on the wording of subsection 256(1.2) of the Act, the effects of which are limited to subsections 256(1) to (5). Subsection 256(5.1) thus escapes the application of subsection 256(1.2). Counsel for RPI points out that the rule stated in this last subsection was adopted as a result of the decision in Southside Car Market Ltd. v. The Queen, [1982] 2 F.C. 755, 82 DTC 6179, in which it was held that there could not be two parallel controls held by two separate persons or groups of persons. In this instance, there could not exist at the same time control in law exercised by Luc Poirier and control in fact exercised by RPI.

Analysis

[21]          The only issue is whether Trab was controlled directly or indirectly in any manner whatever by RPI during the relevant period. If it was, the Minister's assessment must be confirmed. If not, RPI would be entitled to the full amount of the SBD which it claimed. If such control was exercised, Trab and RPI would have been associated corporations during the relevant period.

[22]          The relevant provisions in the instant case are the following, found in section 256:

256. (1) Associated corporations — For the purposes of this Act, one corporation is associated with another in a taxation year if, at any time in the year,

(a) one of the corporations controlled, directly or indirectly in any manner whatever, the other;

(b) both of the corporations were controlled, directly or indirectly in any manner whatever, by the same person or group of persons;

(c) each of the corporations was controlled, directly or indirectly in any manner whatever, by a person and the person who so controlled one of the corporations was related to the person who so controlled the other, and either of those persons owned, in respect of each corporation, not less than 25% of the issued shares of any class, other than a specified class, of the capital stock thereof;

(d) one of the corporations was controlled, directly or indirectly in any manner whatever, by a person and that person was related to each member of a group of persons that so controlled the other corporation, and that person owned, in respect of the other corporation, not less than 25% of the issued shares of any class, other than a specified class, of the capital stock thereof; or

(e) each of the corporations was controlled, directly or indirectly in any manner whatever, by a related group and each of the members of one of the related groups was related to all of the members of the other related group, and one or more persons who were members of both related groups, either alone or together, owned, in respect of each corporation, not less than 25% of the issued shares of any class, other than a specified class, of the capital stock thereof.

(1.2) Control, etc. — For the purposes of this subsection and subsections (1), (1.1) and (1.3) to (5),

(a)    a group of persons in respect of a corporation means any two or more persons each of whom owns shares of the capital stock of the corporation;

(b)    for greater certainty,

(i)       a corporation that is controlled by one or more members of a particular group of persons in respect of that corporation shall be considered to be controlled by that group of persons, and

(ii)      a corporation may be controlled by a person or a particular group of persons notwithstanding that the corporation is also controlled or deemed to be controlledby another person or group of persons;

(c)    a corporation shall be deemed to be controlled by another corporation, a person or a group of persons at any time where

(i)                    shares of the capital stock of the corporation having a fair market value of more than 50% of the fair market value of all the issued and outstanding shares of the capital stock of the corporation, or

(ii)                  common shares of the capital stock of the corporation having a fair market value of more than 50% of the fair market value of all the issued and outstanding common shares of the capital stock of the corporation

are owned at that time by the other corporation, the person or the group of persons, as the case may be;

(d)    where shares of the capital stock of a corporation are owned, or deemed by this subsection to be owned, at any time by another corporation (in this paragraph referred to as the "holding corporation"), those shares shall be deemed to be owned at that time by any shareholder of the holding corporation in a proportion equal . . .

(e)    where, at any time, shares of the capital stock of a corporation are property of a partnership, or are deemed by this subsection to be owned by the partnership, those shares shall be deemed to be owned at that time by each member of the partnership in a proportion equal . . .

(f)     where shares of the capital stock of a corporation are owned, or deemed by this subsection to be owned, at any time by a trust,

                          (i) . . .

            (A) . . . shall be deemed . . .

(g)    in determining the fair market value of a share of the capital stock of a corporation, all issued and outstanding shares of the capital stock of the corporation shall be deemed to be non-voting.

(5.1) Control in fact — 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, except that, where the corporation and the controller are dealing with each other at arm's length and the influence is derived from a franchise, licence, lease, distribution, supply or management agreement or other similar agreement or arrangement, the main purpose of which is to govern the relationship between the corporation and the controller regarding the manner in which a business carried on by the corporation is to be conducted, the corporation shall not be considered to be controlled, directly or indirectly in any manner whatever, by the controller by reason only of that agreement or arrangement.

[23]          The respondent relies here on paragraph 256(1)(a) of the Act in concluding that RPI and Trab were associated. Subsection 256(5.1) states the meaning and scope of the notion of control exercised directly or indirectly in any manner whatever. The purpose of that provision is to expand the concept of control defined in the case law (in particular in Buckerfield's Ltd. v. M.N.R., 64 DTC 5301, 5303, and M.N.R. v. Dworkin Furs (Pembroke) Ltd., 67 DTC 5035)¾which had limited it to control in law¾by adding the notion of control in fact which had been excluded by the courts. A corporation will be "controlled, directly or indirectly in any manner whatever" where a controller (RPI) has any direct or indirect influence that, if exercised, would result in control in fact of that corporation (Trab in the instant case). This is a question of fact.

[24]          In my view, such a situation in fact exists here. The indicators of such influence over Trab are as follows. First of all, pursuant to a resolution by Trab's board of directors, Rosario Poirier has been authorized since May 6, 1992, to sign all documents considered necessary and to make any decisions pertaining to Trab. Rosario Poirier has control in law of RPI and, by virtue of that resolution, RPI may, through Rosario Poirier, exercise managerial rights with respect to Trab.

[25]          Furthermore—and this is the key factor—Trab is to a large degree economically dependent on RPI. That dependence stems from the fact that RPI is Trab's only customer. The financial statements moreover confirm this: "The corporation earns all its timber transportation income from an affiliated corporation." This dependence exists even where the transportation service is not being provided to RPI, as in the case of the haulage done for EBL and JGT. If RPI decided to terminate the transportation contract, Trab would find it hard to continue operating its business, for lack of customers. It would then quickly have to find others, which is not necessarily easy in the St-Alphonse region. As a result, RPI is in a position to exercise influence such as to be able to control Trab in fact.

[26]          Another indicator of this control is the integration of Trab's activities with those of RPI. All the personnel required for the operation of Trab's business are RPI employees. The cost of the services provided by those employees was subsequently reimbursed by Trab. Trab has no place of business separate from RPI's. Another indicator is the extent of Rosario Poirier's involvement in running Trab. In particular, it was he who negotiated the transportation contracts with JGT and EBL and who took the steps to obtain payment of the amounts to which Trab was entitled. It must be added that Luc Poirier, Trab's sole shareholder, is an employee of RPI and earns all his employment income from RPI. Trab paid him no employment income. Not only was Luc Poirier a full-time employee of RPI, but his activities had very little connection with those of Trab. Other RPI employees had more to do with operating Trab. Lastly, Luc Poirier is the son of Rosario Poirier, who has control in law of RPI. These are all facts which afford a better understanding of Trab's economic dependence on RPI.

[27]          In the circumstances, I think it clear that RPI is a controller having an influence that, if exercised, not only would result in control in fact, but here actually did enable RPI to have control in fact of Trab.

[28]          Invoking in particular Southside Car Market Ltd., supra, counsel for RPI contends in the alternative that there could not be simultaneous control of Trab by RPI and Luc Poirier in view of the fact that Luc Poirier had control in law of 100 percent of Trab's voting shares. In my view, that decision by the Federal Court-Trial Division is irrelevant to the interpretation of paragraph 256(1)(a) of the Act. In Southside Car Market Ltd., two corporations, A and B, were controlled by Mr. W. Another corporation, D, was held equally by Mr. W and another taxpayer. The Minister relied on paragraph 256(1)(b), as it was drafted at the time,[4] in concluding that A, B and D were associated with each other. Cattanach J. concluded that the first two corporations were controlled by one person, while corporation D was controlled by a group of persons. In Cattanach J.'s view, the three corporations would have had to be controlled by the same person or group of persons. He writes as follows at pages 769 and 770 F.C. (page 6186 DTC):

                In my view it is implicit from the language quoted that if a single person owns a sufficient number of shares in a company, there is no necessity to consider the question of fact as to what group of persons owns such a number of shares. Thus, if a single person owns sufficient shares to exercise control, resort to whether a group of persons holds control is precluded. The condition precedent to the consideration of control in a group is that no single person has control.

                That, in my view, is the precise meaning of paragraph 256(1)(b).

The interpretation problem in Southside Car Market Ltd. does not arise in the instant case. Moreover, the same paragraph of subsection 256(1) of the Act is not involved here.

[29]          In my view, paragraph 256(1)(a) is clear and precise and leaves no doubt as to its meaning. Once one corporation controls another directly or indirectly in any manner whatever, those two corporations are associated with one another. The fact that another taxpayer had control in law of Trab is irrelevant here since RPI had control in fact under paragraph 256(1)(a) of the Act.

[30]          Furthermore, under subparagraph 256(1.2)(b)(ii) of the Act, there is nothing to prevent one from concluding that a corporation (RPI) has control in fact of another (Trab) within the meaning of paragraph 256(1)(a) of the Act, even if another person (Luc Poirier) exercises control in law over the latter corporation. Subparagraph 256(1.2)(b)(ii) of the Act clearly applies to paragraph 256(1)(a). In other words, it is not necessary for subsection 256(1.2) of the Act to refer to subsection 256(5.1). Reference to subsection 256(1) is sufficient.

[31]          Consequently, RPI's appeals shall be dismissed, with costs to the respondent.

Signed at Ottawa, Canada, this 16th day of May 2002.

"Pierre Archambault"

J.T.C.C.

Translation certified true on this 11th day of June 2002.

[OFFICIAL ENGLISH TRANSLATION]

Erich Klein, Revisor

[OFFICIAL ENGLISH TRANSLATION]

1999-5017(IT)G

BETWEEN:

ROSARIO POIRIER INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard at Québec, Quebec, on November 19, 2001, by

the Honourable Judge Pierre Archambault

Appearances

Counsel for the Appellant:                             Robert Marcotte

Counsel for the Respondent:                         Daniel Marecki

JUDGMENT

          The appeals from the assessments made under the Income Tax Act for the 1994, 1995, 1996 and 1997 taxation years are dismissed with costs to the Respondent.

Signed at Ottawa, Canada, this 16th day of May 2002.

"Pierre Archambault"

J.T.C.C.

Translation certified true

on this 11th day of June 2002.

Erich Klein, Revisor