BETWEEN:
and
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Appeal heard on September 9 and 10, 2004 at Montreal, Quebec
Before: The Honourable Justice Brent Paris
Appearances:
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Josée Massicotte |
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JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 1997 taxation year is dismissed, with costs, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 9th day of June, 2005.
BETWEEN:
CALCE HOLDINGS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
[1] The Appellant is a personal holding company of Lorenzo Calce. In 1994 it acquired certain Shares (the "Shares") of 159506 Canada Inc. from Lorenzo's son, John Calce. During its taxation year ending May 31, 1997, the Appellant disposed of the Shares. It says that it disposed of the Shares to an arm's length third party for proceeds of disposition that were equal to their adjusted cost base and therefore had no gain on the sale of the Shares.
[2] The Minister of National Revenue (the "Minister") reassessed the Appellant on the basis that, rather than selling the Shares to a third party, the Appellant sold the Shares back to John Calce on December 19, 1996 for the amount it had originally paid him - $238,000 - and that John Calce immediately disposed of the Shares to the third party for their fair market value of $400,000. Subparagraph 69(1)(b)(i) of the Income Tax Act (the "Act"), R.S.C. c.1 (5th Supp.), deems a person who has disposed of property to a non-arm's length party for less than the property's fair market value to have received proceeds equal to the fair market value. Accordingly, the Minister reassessed the Appellant on the basis that it had deemed proceeds of $400,000, and consequently a capital gain of $162,000, on the disposition of the Shares.
[3] The Appellant admits that it executed an agreement with John Calce dated December 19, 1996 which on its face appears to be a sale of the Shares to him for $238,000 but it claims that the document was a simulation or sham, and that neither party intended that John would become the owner of the Shares. It says that the document was created to permit John Calce to act as a nominee for the Appellant in the subsequent sale of the Shares to the third party and argues that there was no disposition of the Shares by it to John Calce, and that paragraph 69(1)(b) of the Act is of no application in the circumstances.
[4] The parties also disagree on the amount of the Appellant's adjusted cost base of the Shares. The Appellant says that the sale of the Shares by it to the third party triggered an increase to the price that it was required to pay John Calce for the Shares, retroactive to 1994 when it bought the Shares from him. The Respondent says that there was no price adjustment agreement made between the Appellant and John Calce at the time the Appellant acquired the Shares and that any such agreement was arrived at subsequent to the sale and did not form part of the consideration for the sale.
Issues
[5] The issues in this appeal are therefore:
i) whether the purported transfer of the Shares by the Appellant to John Calce dated December 19, 1996 was a simulation and therefore ineffective to transfer the ownership of the Shares to John Calce; and,
ii) if the transfer is found to be a simulation and the Appellant in fact disposed of the Shares to a third party, whether the sale to the third party triggered an adjustment in the cost of those Shares to the Appellant by virtue of a price adjustment agreement between it and John Calce entered into at the time the Appellant purchased the Shares.
Evidence
[6] The Appellant called three witnesses; Lorenzo Calce, John Calce and Harvey Sands, who was Lorenzo Calce's accountant since 1981 and who was involved with the transactions in issue in this appeal.
[7] The evidence showed that 159506 was a company incorporated by Lorenzo Calce. It operated a bus transportation business in Montreal under the name "Autocar Connaisseur". Lorenzo and his two sons, Roberto and John, all worked in the business. Lorenzo was the sole shareholder of 159506 until 1987 when he sold 10% of the Shares to each of his sons, in recognition of their contribution to the success of the business and as encouragement for them to continue to work hard in it.
[8] In 1994, John Calce was separated from his wife and was experiencing financial difficulties. John's ex-spouse had requested an increase in alimony and had made threats to go after either his interest in 159506 or to go after the company itself. Lorenzo became concerned that these difficulties could result in problems for 159506, and his advisors recommended that he buy John's Shares back from him so that John would be able to pay off his debts and so that his ex-wife would be prevented from interfering with the company.
[9] Rather than buying back the Shares personally Lorenzo caused the Appellant to buy them. The Appellant and John Calce entered into an agreement dated "as of February 1, 1994" entitled "Agreement of Retrocession". The agreement showed that the consideration paid for the Shares by the Appellant was $238,000.
[10]It was admitted by the parties that the $238,000 was paid by the Appellant for the Shares at that time.
[11]Harvey Sands, Lorenzo Calce's long-time accountant provided advice to Lorenzo regarding this sale and was involved in arranging the transaction, although the actual Retrocession Agreement was drafted by Lorenzo's lawyers.
[12]Mr. Sands testified that John and Lorenzo agreed on a sale price of $238,000 for the Shares which Mr. Sands said he felt was fair market value of the Shares. However, he also said that in discussions leading up to the agreement John was not "comfortable or happy with the amount that was considered to be the fair market value of the Shares". Therefore, Sands recommended to both parties that they enter into what he called an "anti-flip agreement" which he described as one that would allow the parties to adjust the purchase price of the Shares if it were proved within a certain period of time after the sale that the sale price did not reflect the true value of the Shares. Mr. Sands said that prior to the signing of the Retrocession Agreement, there was a firm agreement between Lorenzo and John that if within five years the Shares were sold for more than $238,000, John would get the excess.
[13]In cross-examination, Mr. Sands said that the anti-flip agreement was not written into the Retrocession Agreement because the problem only arose at the time the documents were being signed and there was no time to redraft the agreement. Mr. Sands also said that he would not have left the meeting at which the Retrocession Agreement was executed without a definite agreement regarding this anti-flip arrangement.
[14]Lorenzo Calce testified that John Calce was reluctant to sell the Shares to the Appellant in 1994 but felt forced to do so because of his personal and financial problems. Lorenzo said that his goal was to be fair to John and to give him the fair value of his Shares. He said that he promised John that he would still be treated equally with his brother Roberto if the Shares were sold later on. He said "in his heart" John continued to own the Shares after 1994 and that nothing changed for John. John continued to work in the business as hard as he had before and was "always part of the business". He said that it was his duty as a father not to give more to one son than to the other and said he was willing to give as much to John as to Roberto because he was working in the company. Lorenzo also said that he agreed to give John the difference between what was paid by the Appellant and what the Appellant was to receive from Coach Canada for the Shares, because John was his son.
[15]Lorenzo said he did not understand the anti-flip agreement and left that matter to the professionals. He admitted that it was possible that the arrangement to increase the sale price paid by the Appellant to John Calce for the Shares may have been first talked about after the sale had been completed, and he did not remember when the five-year period referred to in the agreement was decided upon by the parties.
[16]John Calce testified that he sold the Shares to the Appellant in 1994 so that his family would not be involved in his divorce. He said that his father agreed to treat him the same as his brother, and if the Shares were eventually worth more that he would get the same as his brother. He said that the fact that the anti-flip agreement was not put in writing until 1996 was not done to hide that Agreement from his ex-spouse. He was not certain when the five-year period for the anti-flip agreement was decided upon but said that it had been "discussed in 1994". In cross-examination he said the only thing he recalled about the agreement was that if the Shares were sold in the future he would get the same as his brother.
[17]No document setting out the alleged anti-flip arrangement was drawn up until late 1996.
[18]At that point, a sale of all the Shares of 159506 to 3329003 Canada Inc. ("Coach Canada") for $4 million was being negotiated. Coach Canada was acting at arm's length from the Appellant. According to Mr. Sands, when the negotiations were being finalized, Coach Canada's lawyers noticed that 159506 had not updated its filings with the Quebec Transportation Commission to show the transfer of John Calce's Shares to the Appellant in 1994. Since the Commission's approval was required for the sale, the purchaser requested that the matter be attended to. According to Mr. Sands, it was decided on behalf of the Appellant that rather than updating the company's filings with the Commission, the Appellant would put the Appellant's Shares back into John's name and have him deliver them to the buyer on behalf of the Appellant. In this way, sale documents showing John as one of the vendors would match the Commission's records. He said that in return for agreeing to act as nominee for the company, John Calce requested that the anti-flip agreement that was made in 1994 be put in writing. A memorandum of agreement dated "as of February 1, 1994" and setting out the anti-flip agreement was drafted and executed by the parties at that point .
[19]Another agreement (the "Retransfer Agreement"), transferring the Shares from the Appellant to John Calce, was executed on December 19th, 1996. Mr. Sands said that the Retransfer Agreement was made on the understanding that John Calce was just to accept delivery of the Shares from the Appellant and to deliver them on its behalf to the purchaser.
[20]The Retransfer Agreement included the following clauses:
1.1 Holdings hereby sells, transfers and assigns to JOHN 100 Class A shares in the capital stock of the COMPANY (the "RE-TRANSFERRED SHARES").
1.2 The purchase price ("PURCHASE PRICE") for the RE-TRANSFERRED SHARES is the sum of TWO HUNDRED THIRTY-EIGHT THOUSAND DOLLARS ($238,000.00), payable by JOHN from the first proceeds of the sale by him of the RE-TRANSFERRED SHARES to COACH/CANADA.
1.3 In the event that HOLDINGS or Lorenzo Calce ("LORENZO") is assessed by any taxation authority having jurisdiction in respect of the sale by him to COACH/CANADA of the RE-TRANSFERRED SHARES, other than in respect of the portion thereof payable by him to HOLDINGS as set forth in sub-section 1.2 above, JOHN shall indemnify and hold them harmless from any taxes, interest and/or penalty payable as a consequence thereof.
[21]With respect to the 1996 transactions, John Calce said that he was used as a prête-nom for the sale of the Shares to Coach Canada because his name was still on the Quebec Transportation Commission records for 159506 as a shareholder. He said that he had to sign the documents to "make the transaction look smooth" and that the Transfer Agreement between himself and the Appellant dated December 19th, 1996 was done so that he could sign the sale documents with Coach Canada.
[22]On the contract of sale of all of the Shares of 159506 to Coach Canada, John Calce was shown as one of the vendors along with Lorenzo and Roberto Calce.
[23]John Calce said that when he was asked to transfer the Shares to Coach Canada on behalf of the Appellant he brought up the promise that his father made to him in 1994 and requested that a document be drafted so that he would get the same as his brother. He could not recall any other details of the sale of the 159506 Shares to Coach Canada.
[24]The evidence also showed that, immediately prior to the purchase of all of its Shares by Coach Canada, 159506 declared a $250,000 dividend. John Calce received $25,000 of this dividend and he was reassessed to include that amount in his income.
[25]In the Appellant's Notice of Objection to the reassessment in issue, the Appellant made the following comments with respect to this dividend:
Statement of Relevant Facts
3. In 1997, 159506 was sold to a third party for proceeds equal to $4,250,000 (including a $250,000 dividend payable to the vendor shareholders immediately before the transfer of shares). Consequently, the Taxpayer's 10% interest in the company, subsequent to the payment of the said dividend, had a value of $400,000.
Statement of Reasons for the Objection
12. In addition, as part of the sales proceeds the aforementioned dividend was paid by 159506 just prior to its sale. The Canada Customs and Revenue Agency have consequently assessed John Calce for 10% of the amount of the dividend giving further support that, as a result of the Anti-Flip Price Adjustment Provision, all proceeds of sale were payable to John Calce and that he was in fact the beneficial vendor shareholder. (emphasis added)
[26]An excerpt from the share register of 159506 showing a transfer of the Shares from the Appellant to John Calce on December 19, 1996 was also entered as an exhibit.
Position of the Parties
[27]The Appellant takes the position that the transfer of the Shares from the Appellant to John Calce on December 19th, 1996 was not a disposition for the purposes of the Income Tax Act. It says that the Shares were put in John Calce's name to enable him to act as a prête-nom or nominee of the Appellant to carry out the share sale to Coach Canada, on behalf of the Appellant. Thus, according to the Appellant, it was the true vendor of the Shares to Coach Canada and it received sale proceeds from Coach in the amount of $400,000.
[28]The Appellant also alleges that when John Calce originally disposed of the Shares to the Appellant in 1994, the parties agreed that if the Appellant were to dispose of the Shares within five years at a price higher than $238,000, the Appellant would pay John Calce the excess amount. The Appellant says that by virtue of the sale to Coach Canada, it became obligated to pay John Calce additional consideration of $162,000 relating back to its purchase of the Shares from him in 1994, and that this in turn increased its adjusted cost base from $238,000 to $400,000. According to the Appellant, since this higher adjusted cost base was equal to the proceeds of sale it received from Coach Canada, it did not realize a capital gain on that sale.
[29]The Respondent takes the position that the transfer of the Shares between the Appellant and John Calce on December 19th, 1996 was a disposition for the purposes of the Act, and that this disposition took place at a price of $238,000 even though the fair market value of the Shares was at the time $400,000.
[30]The Respondent relies on paragraph 69(1)(b) of the Act the relevant portions of which read as follows:
(1) Except as expressly otherwise provided in this Act,
...
(b) where a taxpayer has disposed of anything
(i) to a person with whom the taxpayer was not dealing at arm's length for no proceeds or for proceeds less than the fair market value thereof at the time the taxpayer so disposed of it, ...
the taxpayer shall be deemed to have received proceeds of disposition therefor equal to that fair market value;
[31]According to the Respondent, the Appellant is deemed therefore to have received proceeds of $400,000 from the disposition of the Shares to John Calce on December 19th, 1996.
[32]The Respondent also denies that the anti-flip agreement formed part of the consideration for the sale of the Shares and states that the ACB of the Shares to the Appellant was $238,000.
Analysis
[33]The Appellant's capital gain, if any, on its disposition of the Shares in 1996 is the difference between the proceeds that it received from their disposition and the sum of its adjusted cost base and the expenses of disposition. "Disposition" is defined in section 248 of the Act to include any event entitling a taxpayer to "proceeds of disposition", which is defined in section 54 of the Act to include proceeds from the sale of a property. The adjusted cost base of a property (other than a depreciable property) is arrived at by taking into account the taxpayer's original cost (i.e. the price paid to acquire the property) and any adjustments required under section 53 of the Act.
[34]The issues are whether the Appellant disposed of the Shares to John Calce or to Coach Canada, and whether the Appellant's adjusted cost base for those Shares was $238,000 or $400,000. (It appears that no adjustments to the Appellant's original cost were required under section 53 of the Act, and therefore, its cost and adjusted cost base were the same amount.)
1. Disposition of the Shares
[35]In reassessing the Appellant, the Minister assumed that John Calce was not a nominee or mandatory of the Appellant when he acquired in 1996 the Shares in issue and resold them shortly after. Therefore, in order to succeed in this appeal, the Appellant bears the onus of proving that the apparent sale of the Shares by it to John Calce dated December 19, 1996 was a simulation and that the true agreement between the appellant and John Calce was that the Appellant retained ownership of the Shares and John Calce acted as a nominee for it in the sale of the Shares to Coach Canada.
[36]Simulated contracts are dealt with in Article 1451 of the Civil Code of Quebec L.Q. 1991, ch. 64 (C.C.Q.) which reads as follows:
Simulation exists where the parties agree to express their true intent, not in an apparent contract, but in a secret contract, also called a counter letter. Between the parties, a counter letter prevails over an apparent contract.
[37]It has been held that the secret contract referred to in Article 1451 of the Civil Code need not be put in writing (see Gilbert v. Lefaivre (1927), 1943 B.R. 557 at 559).
[38]In Bolduc v. The Queen, 2003 DTC 221, Archambault, J. referred to the two elements - the material element and the element of intent - that must be present in order to show a simulation. These were described by Professor Royer in La preuve civile, 2e éd., Cowansville (Qc), Yvon Blais, 1995 au n ° 1568 in the following terms:
L'élément matériel consiste dans l'existence de deux actes distincts, soit l'acte apparent qui renferme ce que les parties veulent faire croire aux tiers et l'acte secret qui exprime l'accord véritable. Si ce dernier est écrit, on le désigne sous le nom de contre-lettre.
L'élément intentionnel consiste dans la volonté de tromper les tiers sur l'existence ou le contenu d'une convention.
[39]The existence of a simulation therefore depends on a mutual intention of the parties that their rights and obligations be different from what is set out in their written agreement. In order to ascertain the true intention of the parties, regard must be had not only to the statements of the parties, but to their actions as well as all of the surrounding circumstances as objective manifestations of that intention.
[40]In this case, the Appellant alleges that it had a secret verbal contract with John Calce that he would act as nominee for it in the sale of the Shares to Coach Canada and that the Retransfer Agreement would be of no effect between them.
[41]After considering all of the evidence, and particularly that relating to the actions of the parties and all of the surrounding circumstances, I find that the Appellant has failed to prove that it intended to enter into a secret contract with John Calce regarding the ownership of the Shares and their disposition to Coach Canada.
[42]Firstly, the conduct of the Appellant and John Calce was inconsistent with an intention that John Calce act as nominee for the Appellant. The fact that John Calce received the $25,000 dividend on the Shares immediately before the Shares were sold to Coach Canada, and that he did not pay it over to the Appellant, as he would have been required to do had the Retransfer Agreement been a simulation, and the fact that it was included in his income for tax purposes indicates that the parties intended him to become the owner of the Shares under the December 19, 1996 agreement.
[43]Secondly, it is material, in my view, that the Appellant made a representation to the effect that John Calce was the "beneficial vendor shareholder" of the Shares in the sale to Coach Canada in its Notice of Objection in this matter, and further, that no mention of him acting as nominee for the sale of the Shares was made in that document.
[44]No explanation for either the payment of the dividend to John Calce, or the representation in the Notice of Objection was given by any of the Appellant's witnesses.
[45]Furthermore, the Appellant's position that the Retransfer Agreement was intended as a simulation was not corroborated by any documentation made during the period leading up to its execution. Despite the fact that the Appellant had lawyers and accountants working on these transactions and that the agreements were drawn up by its lawyers, there was not one letter, note or other document produced that made reference to the supposed strategy developed by those professionals for dealing with the problem posed by the out of date shareholder information contained in the records of the Quebec Transportation Commission, or to the fact that the Retransfer Agreement would have no effect between the parties, or that John Calce's participation in the sale of the Shares to Coach Canada was as a nominee.
[46]I would also note that paragraph 1.3 of the Retransfer Agreement purported to make John Calce liable to the Appellant or Lorenzo Calce in the event that they were assessed any tax, interest or penalty payable as a consequence of the sale by him of the Shares to Coach Canada. This clause appears somewhat incongruous in a document that was allegedly created only to transfer the Shares back to John and which was not supposed to have any legal effect. This clause in the Agreement seems to go beyond what would have been necessary to create the appearance to Coach Canada and the Quebec Transportation Commission that John Calce was the owner of the Shares.
[47]Therefore, in light of all of these circumstances, I find that the Retransfer Agreement was intended by the parties to result in the sale of the Shares to John Calce for $238,000.
2. Cost of the Shares to the Appellant
[48]The Appellant's second argument, that it became liable to pay additional consideration for the Shares to John Calce pursuant to the anti-flip agreement, was contingent on a finding that the Appellant sold the Shares at a price higher than the amount paid to John Calce at the time of purchase, i.e. $238,000. Since I have found that the Shares were sold to John Calce for $238,000, the anti-flip agreement, if it did exist, would not have been operative.
[49]Had it been necessary to decide the point, however, it is my view that the alleged anti-flip agreement did not form part of the consideration given by the Appellant for the purchase of the Shares from John Calce in 1994.
[50]The evidence of the parties to the transaction was somewhat equivocal. Firstly, both Lorenzo and John Calce had a limited recollection of the promise that was made by Lorenzo Calce when the share sale to the Appellant took place. In cross-examination, John Calce said that the only thing he recalled was if the Shares were sold in the future he would get the same as his brother. Neither he nor Lorenzo Calce were certain that the five-year time period referred to in the anti-flip agreement was in fact decided on February 1st, 1994 and Lorenzo Calce also said it was possible that the agreement for an increase to the sale price of the Shares was discussed after the share sale agreement was done.
[51]Although Mr. Sands said that he would not have left the meeting at which the sale of the Shares by John Calce to the Appellant was executed in February 1994 without a definite agreement, it appears that this was his belief of what he would have done at the time rather than a recollection of what actually took place.
[52]Also, if a definite agreement was reached in 1994 between the Appellant and John Calce regarding an increase to the sale price of the Shares, why was the alleged agreement not put in writing until December 1996? If Mr. Sands had felt as strongly as he said he did about the need to have a definite agreement on February 1st, 1994, it would have been a simple matter to write the promise into the written share sale agreement that was signed, or to have an amendment to the agreement drawn up shortly afterwards. The informality with which the parties say they treated the promise of the additional consideration allegedly given by the Appellant is in contrast to the care they took to document this share sale from John Calce to the Appellant. That agreement, drafted by lawyers is five pages in length. The lack of contemporaneous documentation makes it difficult to accept the contention that such a promise was given when the agreement was entered into or as additional consideration for the transfer.
[53]Mr. Sand's explanation for why the promise was not written into the agreement was not convincing. He first said that the problem only arose at the time the documents were being signed and there was no time to redraft the agreement. However, at another point he said that John Calce made it known in discussions leading up to the agreement that he was not happy with the price he was to get. In that case, it would have been a simple matter to add the anti-flip provision to the Retrocession Agreement prior to its execution.
[54]Furthermore, even if I had accepted that there was a definite promise made by Lorenzo Calce to John Calce in the terms that the Appellant claims there was at the time when the Shares were purchased by the Appellant, I would have been unable to conclude that the promise was given on behalf of the Appellant. Lorenzo Calce repeated several times that the motivation for the promise was his desire to treat each of his sons equally. The evidence supports the view that the promise that was given was a personal one from Lorenzo Calce rather than on behalf of the Appellant. The promise appears to me to have been more in the nature of a reassurance from father to son than that of a binding legal agreement on the Appellant to pay additional consideration for the Shares under certain circumstances.
[55]In my view, the Appellant has not shown that there was any agreement reached with John Calce on or about February 1st, 1994 to pay additional consideration for the Shares beyond the amount set out in the written agreement.
Conclusion
[56]Having determined that the December 19, 1996 Retransfer Agreement between the Appellant and John Calce was not a simulation, I find that the Minister made no error in the calculation of the Appellant's capital gain from the disposition of the Shares in its 1997 taxation year.
[57]The appeal is therefore dismissed with costs.
Signed at Ottawa, Canada, this 9th day of June, 2005.
Brent Paris
Paris, J.
COURT FILE NO.: 2001-1570(IT)G
STYLE OF CAUSE: Calce Holdings Ltd. v. The Queen
PLACE OF HEARING: Montreal, Québec
DATE OF HEARING: September 9 and 10, 2004
REASONS FOR JUDGMENT BY: The Honourable Justice Brent Paris
DATE OF JUDGMENT: June 9, 2005
APPEARANCES:
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Counsel for the Appellant: |
Louis-Frédérick Côte and Josée Massicotte |
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Counsel for the Respondent: |
Bernard Fontaine |
COUNSEL OF RECORD:
Name: Louis-Frédérick Côte and
Josée Massicotte
Firm: Mendelsohn Rosentzveig Shacter
Montreal, Québec
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Ontario