Date: 20000824
Docket: 97-128-IT-G
BETWEEN:
SYLVIE TREMBLAY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Tardif, J.T.C.C.
[1] This is an appeal from an assessment bearing number 08750 issued on August 31, 1995. The Minister of National Revenue (the "Minister") made the assessment in the amount of $33,936.77 under subsection 160(1) of the Income Tax Act (the "Act"); this was done as a consequence of transfers of funds by Denis Côté Entrepreneur Peintre Inc. to the appellant between July 5, 1988 and September 6, 1990.
[2] The respondent contends that the transfers of funds amounting to $37,310.93 were made for no consideration by the appellant.
[3] As of August 31, 1995, Denis Côté Entrepreneur Peintre Inc.'s tax liability to the Minister was $33,936.77, including tax, interest and penalties.
[4] In making the assessment, the Minister made the following assumptions of fact:
[TRANSLATION]
(a) during the 1988, 1989 and 1990 taxation years, the appellant was Denis Côté's wife;
(b) during the 1988, 1989 and 1990 taxation years, Denis Côté was the sole shareholder of Denis Côté Entrepreneur Peintre Inc.;
(c) between July 5, 1988 and September 6, 1990, Denis Côté Entrepreneur Peintre Inc. transferred a total of $37,310.93, taken from income not reported by it, to the appellant's personal bank account (number 2478) at the Caisse populaire St-Marc de Bagotville;
(d) this transfer of funds amounting to $37,310.93 was made for no consideration by the appellant;
(e) by notice of reassessment dated September 3, 1992, the Minister of National Revenue determined the amount of tax, penalties and interest for which Denis Côté Entrepreneur Peintre Inc. was liable for its taxation years ending on May 31, 1988, May 31, 1989 and November 30, 1989, as follows:
|
Taxation year |
Tax |
Penalties |
Interest |
Total |
|
May 31, 1988 May 31, 1989 Nov. 30, 1989 TOTAL |
$1,277 $6,023 $4,263 $11,563 |
$1,780.00 $2,611.34 $2,026.00 $6,417.34 |
$1,966.63 $4,097.40 $2,322.56 $8,386.59 |
$5,023.63 $12,731.74 $8,611.56 $26,366.93 |
(f) as of August 31, 1995, Denis Côté Entrepreneur Peintre Inc.'s tax liability vis-à-vis the Minister of National Revenue totalled $33,936.77 in tax, penalties and interest.
[5] The point at issue is whether the appellant is liable for $33,936.77 under section 160 of the Act.
160. Tax liability re property transferred not at arm's length.
(1) Where a person has, on or after May 1, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to
(a) the person's spouse or a person who has since become the person's spouse;
(b) a person who was under 18 years of age, or
(c) a person with whom the person was not dealing at arm's length,
the following rules apply:
(d) the transferee and transferor are jointly and severally liable to pay a part of the transferor's tax under this Part for each taxation year equal to the amount by which the tax for the year is greater than it would have been if it were not for the operation of sections 74.1 to 75.1 of this Act and section 74 of the Income Tax Act, chapter 148 of the Revised Statutes of Canada, 1952, in respect of any income from, or gain from the disposition of, the property so transferred or property substituted therefor, and
(e) the transferee and transferor are jointly and severally liable to pay under this Act an amount equal to the lesser of
(i) the amount, if any, by which the fair market value of the property at the time it was transferred exceeds the fair market value at that time of the consideration given for the property, and
(ii) the total of all amounts each of which is an amount that the transferor is liable to pay under this Act in or in respect of the taxation year in which the property was transferred or any preceding taxation year,
but nothing in this subsection shall be deemed to limit the liability of the transferor under any other provision of this Act.
[6] The appellant and his spouse testified in support of the appeal. The evidence showed that the appellant had secretarial training and possessed what she described as limited knowledge in administration; she testified that she had studied to become a real estate agent.
[7] The appellant, who is Denis Côté's spouse, purchased the family residence as sole owner in 1977. Unlike her husband, she enjoyed stable and regular income.
[8] Starting in 1976, her spouse, Denis Côté, a painter by training, began carrying on his occupation as a contractor through a corporation. He subsequently worked as a painter for a company which he had founded under the firm name "Denis Côté Entrepreneur Peintre Inc." He was moreover the company's sole shareholder and director.
[9] The appellant performed the clerical work required by the operation of the company. She collaborated in making estimates and prepared certain reports and the pays. She also made deposits and performed basic administrative duties. Most of the accounting work was entrusted to professionals.
[10] She was generally paid weekly, by cheque. She testified that, on some occasions, she had not been compensated for her services as the company was unable to pay her. The appellant stated that, generally speaking, she had received annual remuneration of approximately $12,000 from the company. At the same time, she worked for "Service de secrétariat de Chicoutimi" on a freelance basis.
[11] Denis Côté Entrepreneur Peintre Inc. was wholly directed and controlled by Denis Côté and had its offices in the family residence. It also occupied the residence's garage, which it used as a warehouse. There was no lease nor an agreement respecting payment of rent for use of the garage.
[12] The appellant said she had never received any rent. On this matter of rent, the respondent filed in evidence a single cheque for $350 marked "rent". The company paid a third party $100 a month for the use of another warehouse elsewhere in the municipality.
[13] The appellant was generally neither involved in nor associated with the company's decision-making or the determination of its orientations. All the decisions were made by her spouse.
[14] The appellant testified that she had been called upon on two occasions to take part in setting the company's finances in order. She said that, to that end, she had taken out two large loans to help or improve the company's financial health. The evidence showed that the appellant had indeed taken out two loans secured by a mortgage on the residence of which she was the sole owner.
[15] On January 26, 1987, she took out the first loan of $52,200 (Exhibit A-4), the proceeds of which were allocated as follows (Exhibit A-5):
- Repayment of a loan taken out at the
time the residence was purchased $12,549.61
- Notarial and miscellaneous fees related
to the $52,200 loan $ 2,500.00
- Amount available from loan proceeds $37,150.39
Total $52,200.00
[16] The appellant testified that the amount of $37,150.39 had benefited the company; it had been used to pay the line of credit and constituted working capital. In her notice of appeal, the appellant contended that she had repaid $20,489.39 on the line of credit.
[17] However, the documentary evidence showed that the money from the first loan was used in an entirely different manner. It was instead invested in the company through shares issued in her spouse's name. Those shares were subsequently redeemed by the company.
[18] The second loan (Exhibit A-8), in the amount of $52,275, taken out on March 18, 1992, was used, according to the appellant, to repay the outstanding balance of the loan of January 1987, and $8,108.79 in new money was injected into the company in the sense that it was applied against the business's line of credit. However, the documentary evidence did not confirm the appellant's interpretation on this point.
[19] In overall terms, the appellant contended that the proceeds of the two loans had essentially been used to clean up the company's finances. Although the amounts involved were substantial, the appellant never asked for or obtained from the company or her spouse any documents or certificates confirming the advances or loans granted. No terms of repayment were set out. The evidence never showed that the company was in debt to the appellant.
[20] According to the appellant, those amounts had been advanced for the company and for its benefit. In actual fact, the funds obtained through the loans were handed over to her spouse, who decided as he pleased how to use them.
[21] The evidence also established that the company was directed and managed exclusively by her spouse. When the appellant's cooperation was required, she received specific instructions from her spouse. It was also shown that the appellant never took the initiative in the management of the company's affairs.
[22] The evidence revealed that some income was not entered in the current accounting and was deposited to the appellant's account.
[23] On her spouse's instructions, the appellant occasionally deposited some company cheques to her account and she sometimes withdrew amounts at the counter according to her spouse's instructions. The cash thus obtained was used to make clandestine payments to workers or contractors.
[24] There was no indication in the evidence that the appellant had asked the company to repay any amount following the two loans. She never mentioned any concerns about the payment of the debts or spoke of discussions, talks or agreements with her spouse concerning the amounts advanced following the two loans, which, she said, had become two loans to the company. She never took any subsequent action on the loans.
[25] Although bank account No. 2478 used by the company for the parallel accounting was described and defined as a joint account, there was no documentary evidence to support this contention. The appellant claimed that it was an account for which she was responsible, adding however that it had been a joint account at certain times, which were not identified or specified. She also testified that she had given her spouse a power of attorney to use the account in question at other times. If the rights and obligations with respect to this account were amended, it would have been important to prove this and especially to specify at what periods.
[26] The appellant knew the origin of the funds deposited to her account. She admitted several times that she had carried out her spouse's instructions to the letter in depositing cheques and making withdrawals. She said that the money withdrawn was generally used to make clandestine payments for the services of a number of workers or contractors employed by Denis Côté Entrepreneur Peintre Inc.
[27] The appellant's contentions may be summarized as follows: she took out two loans secured by a mortgage on her residence, and the proceeds of those two loans benefited and were enjoyed by either her spouse or his company, her conclusion being that she had grown poorer by an overall amount exceeding $40,000 for the benefit of one or the other. What is more, she contended that the precise identification of her debtor was not important and in no way lessened the reality or altered the character of the debt owed her.
[28] Continuing her reasoning, the appellant argued that the fact she had grown poorer as a result of the two loans had created a genuine debt payable by the company and/or her spouse in view of the fact that they had benefited from those loans. She argued that the transfers totalling more than $40,000 are not subject to section 160 of the Act as they were essentially amounts owed and payable to her, and she concluded that she had not benefited from the transfers since she considered them mere repayments.
[29] The appellant also contended that the account was a joint account and thus it could not be concluded that the entire amounts had benefited her.
[30] In that regard, I do not believe that it can be concluded on a preponderance of evidence that it was a joint account. The appellant's testimony does not in any way support such a claim.
[31] The appellant stated a number of times that she controlled the account to which money from the company's business activities had been deposited. In other words, she alone controlled the account. This is particularly clear from testimony in which she described her bank accounts. Furthermore, she stated that, unknown to her spouse, the account was exclusively hers at various times. She also mentioned that she had given her spouse a power of attorney affording him access to her account, thus contradicting the contention that the account was a joint one, since the holder of such an account does not need a power of attorney from the co-holder to gain access to it. The appellant further indicated that all the transactions pertaining to the deposits of funds from the company were faithfully conducted in accordance with her spouse's instructions.
[32] The Court did not understand why the documents setting up this account were not filed. It would have been easy to have a representative of the financial institution testify to make known the evolution, the history and the various characteristics of this account during the periods in issue. On the matter of the joint account, I think it useful to cite the comments by the Honourable Judge Garon of this Court in Liliane Obadia v. The Queen, 96-503(IT)G, April 16, 1998 (98 DTC 1578):
[27] To begin with, it has been clearly established by the courts that the existence of a joint account does not make the co-signatories of the account joint owners of the money shown in the account. One should look instead at the original agreement made when the account was opened.
[33] In the next paragraph, Judge Garon referred to the judgment by Phelan J. of the Superior Court of Quebec in Desrosiers c. Héritiers de feu Albert Laroche et une autre, [1977] C.S. 25, at page 26, in which is found the following:
[TRANSLATION]
To determine the mutual rights of depositors reference must be made to the original agreement, the agreement concluded when the joint account was opened. Did they intend to make the sum of money so deposited their joint property? Did one of them intend to make the other depositor his agent or mandatary, whether for consideration or gratuitously? Did he or she intend a gift? In each case it is necessary to look at the intent of the parties and apply the general rules of the civil law on mandate, gift or a stipulation for a third party.
[34] Further on, in paragraph 29 of his judgment, Judge Garon added:
It follows from the foregoing that in the instant case the money deposited in the joint account from the appellant's personal account is the appellant's property, as no agreement was entered in evidence establishing any special arrangement between the appellant and Mr. Obadia as to the ownership of this money when the joint account was opened and subsequently.
[35] Ultimately the appellant's spouse transferred her property. If the account had been a joint account, this transfer of property would likely have had direct impact on the account. The evidence is utterly silent on this point however.
[36] Given the weight of the evidence, the Court cannot find that the account was a joint one.
[37] The appellant may not have been skilled or knowledgeable regarding the subtleties and rules of the operation of a business through a corporate structure. But can that justify a virtually complete absence of any consistency and transparency in her own affairs?
[38] The preponderance of evidence shows that the appellant's advances of funds benefited the company and they did because her spouse had so decided. He had complete and total freedom as to the use of the funds from the appellant's two loans, and also as to the company's deposits. The company never certified through any resolutions, acknowledgement of debt or other means the existence of any debt to the appellant.
[39] Accepting the appellant's claims as to the use of the funds advanced would have the effect of contradicting valid written instruments, that is to say, the company's financial statements for 1988, 1989 and 1990. Indeed, the company never admitted, acknowledged or recorded the fact that it was the appellant's debtor.
[40] The appellant admitted that the amounts totalling approximately $40,000, which were the property of the company, had been deposited to her account. She also admitted that with her personal knowledge the account had been used in parallel accounting for the company the purpose of which was to exclude certain income from the company's books and to make clandestine payments to certain workers or service suppliers.
[41] A company is a separate legal entity with rights and obligations which cannot be confused with the rights and obligations of those who direct it or hold the shares from which flows its corporate status.
[42] The appellant of course made advances, but whom did they actually benefit and how were they passed along? The appellant contends that they were injected into the company.
[43] If the advances benefited the company, that resulted from a decision by the appellant's spouse, who chose to use them in that manner; he could have done otherwise.
[44] I find wholly inappropriate the argument that the appellant made herself poorer for the company's benefit. She may have advanced funds to one or the other of the company or her spouse, but certainly not indiscriminately. To accept that reasoning would be in effect to categorically deny the reality of corporate status. The appellant's reasoning no doubt stems from the fact that her spouse transferred his property with all the direct consequences that had on his assets.
[45] A taxpayer may not arbitrarily decide to characterize certain transactions in accordance with his own interests, depending on the circumstances. The creation of a company confers a certain number of tax benefits, but also requires meeting certain obligations, the most basic of which is no doubt recognition of the company's separate legal personality.
[46] The company, all of whose shares were the property of the appellant's spouse, had a separate legal personality. That is a basic legal reality which utterly discredits the appellant's assessment of the situation, expressed by her counsel as follows:
[TRANSLATION]
And I do not think that it is the goal—and this is what we submit to you—of section 160 of the Income Tax Act, or that it is fair that a taxpayer who is owed a certain amount or who is owed a certain amount by a business or an individual whose name is Denis Côté, should also be required, without having been repaid, to pay another creditor of those taxpayers who has not been paid either. In fact, section 160 of the Income Tax Act seeks to . . . or enables Revenue Canada or the tax authorities to take out of the assets of someone who has received benefits without any consideration from a taxpayer who owes taxes, to take those amounts which have been sheltered from payment of tax as a result of a non-arm's-length relationship.
Such is not the case here, Your Honour. Ms. Tremblay may have received certain amounts from Mr. Côté or from the business, but she already held claims and rights against Mr. Côté or the business that amounted to as much as $45,000.
So where section 160 provides that the transferee is liable to pay under the Act an amount equal to the lesser of . . . .
Indeed, Your Honour, Ms. Tremblay thought she was lending money to the company in 1987. According to the financial statements, the money was not accounted for in that way, and this took place without her knowledge. Instead, shares were issued to Mr. Côté. Does the fact that the money . . . that the company issued shares to Mr. Côté and Mr. Côté thus became Ms. Tremblay's debtor for the same amount of money, does that alter the argument I am advancing under section 160? I do not think so, Your Honour, because the business is a business with a single shareholder, a single director, and both the business and the shareholder owe the tax authorities money. So regardless of which of the two received the loan from Ms. Tremblay, the fact remains that, in overall terms, in general terms, Ms. Tremblay's patrimony was reduced by an amount of $45,000, which was lent either to the business or to Mr. Côté, but was in any event injected into the operations of the business.
Ultimately was it the business which benefited from it or Mr. Côté? I believe that, for Ms. Tremblay and from the standpoint of the philosophy underlying section 160, it is all the same. Ms. Tremblay cannot be required to pay under section 160 tax owed by either Mr. Côté or Denis Côté Entrepreneur Peintre Inc., having reduced her personal assets by $45,000.
(My emphasis.)
[47] I believe it is relevant to cite the comments by Pigeon J. of the Supreme Court of Canada in Appleby v. M.N.R., [1975] 2 S.C.R. 805, at page 813:
Ever since Salomon v. Salomon & Co., it has been accepted that although the shares of a limited company may be beneficially owned by the same person who also manages it, its business is nevertheless in law that of a distinct entity, a legal person having its own rights and obligations. The Income Tax Act unmistakably implies that this rule holds good for tax purposes.
[48] The appellant's spouse could not ignore the existence of the company of which he held all the shares. A company was created in order to take advantage of certain benefits. The creation of this distinct legal personality required that the interested party be consistent in the administration of that entity, which was separate from his personal affairs. Neither the appellant nor her spouse could act as though the company had not existed. On this important question, Wilson J. of the Supreme Court of Canada wrote as follows in Kosmopoulos v. Constitution Insurance Co., [1987] 1 S.C.R. 2, at pages 10 and 11:
As a general rule a corporation is a legal entity distinct from its shareholders: Salomon v. Salomon & Co., [1897] A.C. 22 (H.L.) The law on when a court may disregard this principle by "lifting the corporate veil" and regarding the company as a mere "agent" or "puppet" of its controlling shareholder or parent corporation follows no consistent principle. The best that can be said is that the "separate entities" principle is not enforced when it would yield a result "too flagrantly opposed to justice, convenience or the interests of the Revenue": L.C.B. Gower, Modern Company Law (4th ed. 1979), at p. 112.
. . .
There is a persuasive argument that "those who have chosen the benefits or incorporation must bear the corresponding burdens, so that if the veil is to be lifted at all that should only be done in the interests of third parties who would otherwise suffer as a result of that choice": Gower, supra, at p. 138.
Citing these remarks in Lachapelle v. M.N.R., 90 DTC 1876, Judge Brulé of this Court added the following comment made by Professor Bruce Welling in his text Corporate Law in Canada — The Governing Principles (1984), at page 140:
[TRANSLATION]
It is still common in Canada to see judges speaking, obiter, of "piercing the corporate veil" despite warnings from high authority that this is not a permissible practice. Perhaps this terminology can now be laid to rest as the C.B.C.A. type of statutes have come into force in most Canadian jurisdictions. We now are in a situation whereby most corporate statutes specifically state that corporations have the rights of natural persons and also provide that the issue of a certificate of incorporation is to be taken as conclusive evidence that the corporation has come into existence. It therefore seems clearly arguable on a statutory basis, as well as through reliance on Salomon's case, that judges simply do not have the power to ignore the separate existence of a corporation in the name of some unarticulated notion of justice and fair play.
[49] The scheme put in place by the spouse of the appellant, and with her complicity, to use her account to conduct parallel transactions and thwart the tax authorities, should definitely have alerted the appellant and induced her to obtain one or more documents that would have created consistency and transparency, particularly since substantial amounts were involved. The evidence never showed that the company making the transfers owed any debt to the appellant. The evidence instead showed that the proceeds of her loans had benefited her spouse.
[50] The burden of proof was on the appellant. She did not prove convincingly that the company, which was controlled entirely by her spouse, had benefited from the loans; rather, the evidence showed that the proceeds of the loans had benefited her spouse, who decided to invest them in the company.
[51] On the preponderance of evidence, the appellant and her spouse organized their affairs by having three separate sets of finances—those of the appellant, those of her spouse and those of the company—no doubt hoping to derive certain benefits from that arrangement.
[52] That kind of planning was entirely legitimate. However, it presupposed that the interested parties conduct their personal affairs accordingly. The appellant would have liked this Court not to take into account the manner in which the parties decided to organize their affairs. The conclusion sought by the appellant would imply that this Court should essentially rely on fairness in reaching its determination. However, given the documentary evidence and the weight of the testimony, it cannot do so.
[53] The evidence showed that the appellant's spouse used and is using the company he created to shirk his responsibilities. It revealed that the proceeds of the two loans were entrusted to him, after which he did with them as he pleased in the company. As her spouse had transferred her property, the appellant contends that the company was indebted to her. In other words, she argues that her claim may be set up against the company and thus concludes that the transfers made were for a consideration of equal value so that they were not subject to section 160 of the Act.
[54] The evidence never established any direct legal relationship between the appellant and the company which was wholly controlled by her spouse. The Court must consider what the appellant actually did, not what she might have done or wanted to do. In this regard, there is no doubt that the proceeds of the loans benefited her spouse, not the company. The holder of the possible claim was not the appellant, but rather her spouse.
[55] Her spouse's bankruptcy had direct and fatal consequences for the appellant's claim, hence the importance of imputing the debt to, or setting it up against, the company.
[56] Since on the weight of both the testimony and the documentary evidence it is impossible to do so, there is no doubt that the transfers which the appellant received were so received for no consideration. In other words, the appellant, who was the transferee under subsection 160(1) of the Act, was enriched at the expense of the fisc.
[57] For these reasons, the appeal is dismissed with costs to the respondent.
Signed at Ottawa, Canada, this 24th day of August 2000.
"Alain Tardif"
J.T.C.C.
Translation certified true on this 31st day of October 2001.
[OFFICIAL ENGLISH TRANSLATION]
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
97-128(IT)G
BETWEEN:
SYLVIE TREMBLAY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on September 2, 1999, at Chicoutimi, Quebec, by
the Honourable Judge Alain Tardif
Appearances
Counsel for the Appellant: Jean Dauphinais
Counsel for the Respondent: Valérie Tardif
JUDGMENT
The appeal from the assessment made under section 160 of the Income Tax Act, notice of which is dated August 31, 1995, and bears number 08750, is dismissed with costs to the respondent in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 24th day of August 2000.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 31st day of October 2001.
Erich Klein, Revisor