Date: 20010412
Docket: 2000-1255-IT-I
BETWEEN:
ROGER GAZAILLE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Alain Tardif, J.T.C.C.
[1] This is an appeal concerning the 1996 and 1997 taxation years. The disputed assessment was made pursuant to section 160 of the Income Tax Act (the "Act").
[2] The assessment was increased substantially through the addition of interest. Accordingly, this Court will also have to decide whether the interest was correctly computed.
[3] The appellant testified himself and called Michel Lafrance to testify in his capacity as an accountant. Mr. Lafrance, who was very familiar with the appellant's case, admitted from the outset that the interest had been correctly computed even though the amount thereof is very substantial in comparison with the principal amount of the assessment.
[4] Mr. Lafrance laid great stress on the matter of the dividends paid to the appellant. According to Mr. Lafrance, this was basically the process or method used to pay the appellant's salary for the work he did for Gazaille, Belleau et associés Inc.
[5] The witness said that the company was fully capable of paying such a dividend at the time dividends were normally paid; he also said that, when the dividends for the years at issue were paid, it was accepted as a fact that the company would be able to pay all the taxes it owed. He was very insistent in arguing that there was no bad faith whatsoever and in showing that there was an unequivocal intent to repay all the company's debts eventually.
[6] However, he admitted that the company's financial situation was very precarious at the time, so much so that the directors-namely the appellant and his financial advisors-were in liquidation mode. He repeated that their reviews, analyses and assessments gave them hope that all creditors, including Revenue Canada, would be repaid in full with respect to their various claims.
[7] The appellant, for his part, testified that he has always fulfilled his responsibilities toward the Canadian tax authorities. He even estimated the taxes he has paid during his working life at close to $1.5 million.
[8] He also repeated that he has always been in good faith and honest and that he really did everything he could to prevent the company's collapse. Moreover, the evidence shows that the appellant was the victim of a defrauder (who was given a severe sentence for fraud), and that this hurt the company the appellant controlled.
[9] The appellant also explained that he did not make an assignment of his property and that he repaid all the victims of the fraud. Finally, he took issue with the astronomical amount of interest being claimed, which is greater than the principal, adding that he found it unfair, unreasonable and somewhat excessive to have to pay taxes even though he self-assessed when and after the dividends were paid.
Analysis
[10] The evidence focused mainly on fairness and sympathy factors. The appellant has certainly achieved his goal in this regard, since I have no doubt that he was always in good faith and did not want to evade taxes. He did not deliberately try to evade his tax liabilities. Nevertheless, I must point out that this Court is obliged to render judgment on the basis of the only real facts available to it and the applicable law.
[11] In the instant case, the arguments based solely on good faith, reasonableness, fairness, the total absence of bad faith, and excessiveness are not admissible, since the Act's provisions are clear and very specific.
[12] Moreover, the appellant and his witness, Mr. Lafrance, never disputed the basis for the assessment; it was even admitted that the interest had been correctly computed. It was also admitted that the company had paid the dividends that gave rise to the application of section 160.
[13] Given the admission concerning the interest, the Court must confirm the validity of that significant component of the assessment, especially since the Court has no jurisdiction to vary or cancel the interest added to an assessment. That is a discretion that Parliament has conferred on the Department.
[14] Only the Federal Court has jurisdiction to judicially review the exercise of that discretion. The Tax Court of Canada has no jurisdiction if the interest has been correctly computed.
[15] As regards the basis for the assessment, Mr. Lafrance was very insistent that too much importance should not be attached to the characterization of the chosen means as a "dividend", since what was actually involved was basically a salary paid by that means.
[16] However, he did admit that dividends were indeed paid. A dividend is not a salary but is truly a benefit related to one's capital or share interest in a company. This fact was very clearly stated by Iacobucci J. in Neuman v. M.N.R., [1998] 1 S.C.R. 770:
57 Dickson C.J. seemed to be of the view that the character of a shareholder's dividend income is to be determined by that shareholder's level of contribution to the corporation. This approach ignores the fundamental nature of dividends; a dividend is a payment which is related by way of entitlement to one's capital or share interest in the corporation and not to any other consideration. Thus, the quantum of one's contribution to a company, and any dividends received from that corporation, are mutually independent of one another. La Forest J. made the same observation in his dissenting reasons in McClurg [v. Canada, [1990] 3 S.C.R. 1020] (at p. 1073):
With respect, this fact is irrelevant to the issue before us. To relate dividend receipts to the amount of effort expended by the recipient on behalf of the payor corporation is to misconstrue the nature of a dividend. As discussed earlier, a dividend is received by virtue of ownership of the capital stock of a corporation. It is a fundamental principle of corporate law that a dividend is a return on capital which attaches to a share, and is in no way dependent on the conduct of a particular shareholder.
. . .
64 To summarize, it is inappropriate to consider the contributions of a shareholder to a corporation when determining whether s. 56(2) applies. Dividends are paid to shareholders as a return on their investment in the corporation. . . .
[18] A dividend is not a salary; this question was dealt with very explicitly in Pauzé v. Canada, [1998] T.C.J. No. 560 (Q.L.), a case in which Judge Archambault of this Court stated the following:
3 . . . It was his accountant who determined at the end of Référium's fiscal year whether the advances would be treated as a dividend or as salary. . . .
4 In the fiscal year ending February 28, 1991 Référium paid Mr. Pauzé a dividend of $70,000. . . . Mr. Pauzé admitted that Référium had closed down its operations around December 1992. From that time on, he continued operating his executive search business through a new company.
5 Référium's accountant, Mr. Morin, also testified at the hearing. . . . Mr. Morin admitted that it was common practice in some independent businesses to advance money to their sole shareholders, and before the end of the financial year, to treat these advances as a dividend. He stated that there was no particular advantage to declaring dividends rather than paying a salary during those years. However, he admitted that the payment of a dividend conferred a benefit on Mr. Pauzé in terms of liquidity since there were no source deductions in the case of a dividend. He further admitted that when a company pays a dividend it does not have to contribute to Quebec's health insurance plan or to the Quebec Pension Plan.
. . .
8 Contrary to the argument of counsel for Mr. Pauzé, I am not bound by Mr. Pauzé's testimony that he received employment income from three separate sources, namely in the form of a base salary, the reimbursement of expenses and advances treated as dividends. The question this Court has to resolve is one of mixed law and fact. As Mr. Pauzé was both an employee and the sole shareholder in Référium, he could be paid both as an employee and as a shareholder. . . .
9 Furthermore, I have no doubt that Référium really intended to pay its sole shareholder a dividend. The company was advised by a chartered accountant who was fully aware of the difference between a salary and a dividend. . . . The accountant also knew that when a company pays a dividend it does not have to make source deductions and may avoid paying certain payroll taxes. In paying the $70,000 dividend Référium did in fact wish to pay a dividend, not to pay money in consideration of services rendered.
10 As my colleague Judge Dussault said in Gosselin v. R., 1996 CanRepNat 2472 (TaxPartner, Carswell CD-ROM), at paragraph 16, a company which pays dividends does not receive any consideration from its shareholders. . . .
11 My colleague Judge Bell also adopted the same approach in 155579 Canada Inc. et al. v. The Queen, 97 D.T.C. 691 . . . . He also set out the reasons why he did not follow the decision in Davis [et al. v. The Queen, 94 DTC 1934]. I concur with him in this respect.
12 . . . If Référium had really paid Mr. Pauzé a salary, it should have made source deductions and could have been required to pay certain payroll taxes. If the amount of $70,000 actually represented consideration for services rendered, that is, a salary, it would have been subject to a higher tax than if it were a dividend. . . .
13 As I conclude that the sum of $70,000 was paid as a dividend and was not paid for consideration, I have no choice but to uphold the assessment.
[19] Judge Bell of this Court also addressed this question in 155579 Canada Inc. v. Canada, [1996] T.C.J. No. 1188 (Q.L.):
6 It is agreed that Amalgamated 99, 78 Canada and 79 Canada did not deal with each other at arm's length during all material times. In June, 1987 Amalgamated 99 received $11,130,000 on the sale of its common shares of Sharp. Amalgamated 99 then paid substantial sums as dividends to 78 Canada and 79 Canada. . . . After unsuccessful actions by the Department of National Revenue to collect tax, it issued notices of assessment, in August, 1993 to each of the Appellants in the sum of $425,598.46 pursuant to section 160 of the Act in respect of the payment in March, 1988 of dividends to 78 Canada in the sum of $2,277,148 and to 79 Canada in the sum of $1,380,089.
. . .
8 . . . Subsection 160(2) provides that the Minister "may at any time" assess a transferee in respect of any amount payable by virtue of section 160. An assessment under that section, therefore, is made separate from the assessment provisions of section 152 and the limitation period imposed by subsection 152(4) does not apply. Accordingly, the Appellants' submissions in this regard fail.
. . .
11 Appellants' counsel submitted that if there had been a transfer of property there was consideration for the dividend in that the services provided by both McDorman and Daly to Sharp were worth substantially more than the amounts paid to them by Sharp. He relied on the decisions in Davis v. Her Majesty the Queen, 94 D.T.C. 1934 and Her Majesty the Queen v. McClurg, 91 D.T.C. 5001. In Davis, T Inc. paid cash dividends to the taxpayers who were its only two shareholders, such dividends being paid in lieu of salaries for their full time services to the company. This Court, in considering the application of section 160 of the Act, found that consideration can be given in exchange for dividends. Specifically at page 1938 the Court said,
It is within the discretion of the directors to declare dividends in exchange for consideration. I find that at the time of the declaration of the dividends, the Appellants had committed their future services to the benefit of the business and in fact the dividends were not paid until the services were rendered.
. . .
14 I do not interpret the words of Dickson, C.J. as meaning that consideration can be given in exchange for dividends. The McClurg case was not concerned with section 160 but rather with subsection 56(2) dealing with the payment or transfer of property pursuant to the direction of or with the concurrence of a person for the benefit of the recipient. That subsection does not use the word "consideration" as does subsection 160(1). Indeed, subsection 160(1) speaks of the "fair market value . . . of the consideration given for the property". . . . It appears that the learned Chief Justice looked to the motivation for paying the dividend, namely recognition of contribution, rather than having sought to characterize Wilma McClurg's efforts as consideration for that dividend. Had that been his objective, he could have achieved it easily in precise and unequivocal terms. He seems to have seen her efforts as the reason for, not as the consideration for, payment of the dividend. A dividend is a payment related, by way of entitlement, simply to the interest of the payee as a shareholder. [See Re: Telsten Services Limited (1981), 39 CBR (NS) 68 (S.C.O) and Re Carson, [1963] 1 O.R. 373 (H.C.O.).] Accordingly, with respect, I do not concur with the finding in the Davis case and I do not accept the submission of Appellants' counsel that consideration was given for the dividends received by them. . . .
[20] Finally, Judge Bonner of this Court also considered this matter in Ruffolo v. Canada, [1998] T.C.J. No. 714 (Q.L.):
7 It is clear that the first of the Appellants' arguments cannot succeed. The word "consideration" in subparagraph 160(1)(e)(i) is to be given its ordinary meaning, namely, something given in payment. Nothing in the statutory context or in the purpose which underlies section 160 suggests otherwise. The right to payment of a debt which is satisfied and therefore disappears when the debt is paid cannot be said to have been given up by the creditor in payment for the payment. When a dividend is paid by a corporation to a shareholder property flows in one direction only. The right of a shareholder to receive payment of a dividend which has been declared flows from his status as shareholder and not from any consideration given by him. Nothing in the decision of the Supreme Court of Canada in Neuman v. The Queen [98 DTC 6297] supports the Appellants' position.
[21] The appellant and his accountants, for reasons of their own, made the choice and decided that dividends would be and ought to be paid annually to the appellant, who ran the company.
[22] No matter what interpretation or meaning they give to the payment of those dividends, the fact remains that there was indeed a transfer within the meaning of the Act and the case law.
[23] The evidence also showed that there was a tax liability at the time the dividends were paid; ultimately, the appellant controlled the transferor. All of the conditions for the application of subsection 160(1) have been met and, thus, the analysis and conclusions behind the assessment now under appeal were correct.
[24] For all these reasons, the appeal must be dismissed.
Signed at Ottawa, Canada, this 12th day April 2001.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true on this 31st day of October 2002.
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
2000-1255(IT)I
BETWEEN:
ROGER GAZAILLE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on March 12, 2001, at Sherbrooke, Quebec, by
the Honourable Judge Alain Tardif
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Dany Leduc
JUDGMENT
The appeal from the assessment made under section 160 of the Income Tax Act for the 1996 and 1997 taxation years, notice of which bears number 13192 and is dated December 10, 1999, is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 12th day of April 2001.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true on this 31st day of October 2002.
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]