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Docket: 2002-1850(IT)G |
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BETWEEN: |
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PIERA J. SIRACUSA, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
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Appeal heard on December 4, 2003 at Toronto, Ontario.
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Before: The Honourable Justice Gerald J. Rip |
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Appearances: |
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Counsel for the Appellant: |
David J. Rotfleisch |
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Counsel for the Respondent: |
Shatru Ghan |
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JUDGMENT
The appeal from the assessment made under subsection 160(1) the Income Tax Act dated January 30, 1998 and numbered 00067 is allowed, with costs, and the assessment is vacated.
Signed at Ottawa, Canada, this 22nd day of December, 2003.
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"Gerald J. Rip" |
Rip, J.
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Citation: 2003TCC941 |
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Date: 20031222 |
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Docket: 2002-1850(IT)G |
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BETWEEN: |
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PIERA J. SIRACUSA, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Rip J.
[1] The issue in this appeal by Piera J. Siracusa is whether or not she was dealing at arm's length with 470555 Ontario Limited ("Ontario") for purposes of subsection 160(1) of the Income Tax Act ("Act") when Ontario paid her a dividend in 1996 at the time the corporation was liable to pay tax.
[2] Subsection 160(1) provides, among other things, that where a person who is liable for payment of tax transfers property to a person with whom it does not deal at arm's length, the transferee and the transferor are jointly and severally liable to pay the transferor's tax; the transferee's liability is limited to the value of the property he or she received less any consideration paid.
[3] Mrs. Siracusa is of the view that she did deal at arm's length with Ontario when the dividend was declared on January 16, 1996 and paid on January 17, 1996 notwithstanding that she was a shareholder and director of Ontario at the time.
[4] Ontario was incorporated in 1991 by Mr. Siracusa, the deceased husband of Mrs. Siracusa, and two other gentlemen, each having a one-third interest. Ontario owned a building in which it operated what Mrs. Siracusa described as a bar or "beer hall". Ontario also rented rooms on the second floor of the building. Mr. Siracusa managed and administered the business; the other two shareholders operated the bar. Mrs. Siracusa maintained the books of account of Ontario.
[5] In early 1983 Mr. Siracusa became ill with lung cancer. Mrs. Siracusa testified that he knew he was dying. He wanted to keep the family in the business but "he knew I could not handle" running the business. One of the original shareholders had previously died. Mr. Siracusa eventually brought in a third shareholder. At the time of Mr. Siracusa's death in June, 1985, the shareholders and directors of Ontario were Mr. Siracusa, Anastase (Tom) Konstandinu and Frank Catalano. Mr. Catalano held his shares through a holding company. The shareholders and directors were not related.
[6] After her husband's death, the appellant inherited his shares and became a director of Ontario. Mrs. Siracusa described the other two directors as a Greek immigrant and a Sicilian immigrant who did not want a woman interfering in how they ran the business of the corporation. Their attitude, said Mrs. Siracusa, was that women had no place in running a business but it was "O.K. for them to do the books of the business".
[7] The male directors took over total management of Ontario after Mr. Siracusa's death. Mrs. Siracusa continued as a bookkeeper but she said the other two directors made all decisions without consulting her. It is clear that Mrs. Siracusa was not in a position of control of Ontario.
[8] Mrs. Siracusa worked about one day per week from home where she kept the financial records. One day she was asked to bring the books to the business. She said she was reluctant to do so because she would have to go to the business and have contact with the other two shareholders, which she dreaded. Nevertheless she did take the books to Ontario's place of business and commenced working at the business premises.
[9] Mrs. Siracusa said there was "lots of friction between us", meaning the directors, which, she insisted, was caused by how decisions were being made. She reiterated that she found things "very rough". She stated she was not comfortable working with the other two shareholders. Presumably because she was the bookkeeper, Mrs. Siracusa signed the 1996 income tax return for the corporation in her capacity as director. The return was prepared by Ontario's accountant. Ontario's 1996 fiscal year terminated on January 31.
[10] Mrs. Siracusa testified that, at one point, she felt lost and obtained legal advice. The lawyer attended with her at a shareholders' meeting. Mrs. Siracusa said that she wanted a lawyer attending with her because she thought the other two shareholders would be more attentive to her wishes if she showed up "with a man".
[11] In December, 1995, Ontario sold the building and the bar business. The bar had not been doing as well as it had done in earlier years and debt had been piling up. One of the reasons Mrs. Siracusa agreed to the sale was that she wanted to get away from the other shareholders. In any event, all three shareholders decided to sell and the property was sold in December, 1995.
[12] After the sale, Mrs. Siracusa brought all bills and any other financial material in her possession to the lawyer who acted for Ontario on the sale. The net proceeds from the sale were being held by the lawyer in trust. On or about January 16, 1996, Mrs. Siracusa, and Messrs. Konstandinu and Catalano, together with the lawyer, met at the lawyer's boardroom. Apparently all trade bills had been satisfied by Ontario. Mrs. Siracusa testified that at the meeting she said that notwithstanding that all the bills were paid, she thought that there may still be some outstanding bills and was leary of distributing the proceeds of sale immediately. The other two directors and the lawyer said that they should divide the net proceeds immediately. The net proceeds amounted to $45,000. Mrs. Siracusa insisted she continued to object; she said that she wanted to wait. She wanted to leave the money in trust. She and the other directors, she recalled, got into a yelling match. The doors of the boardroom had to be closed because the office staff were being disturbed. She was upset that the lawyer who, she thought, should have been neutral, sided with the other two directors. A directors' resolution declaring and authorizing payment of a capital dividend was prepared by the lawyer. Mrs. Siracusa felt pressured by the others to sign the resolution and eventually did so. She said that she had been taking tranquilizers and other medication as a result of the stress caused by her having to deal with the other two directors.
[13] The resolution declaring the capital dividend contained the recital that:
In the opinion of the directors of the Corporation, there are reasonable grounds for believing that the Corporation is now and would after the payment of the dividend be able to pay its liabilities as they become due and the realizable value of the Corporation's assets after payment of such dividend would be greater than the aggregate of the liabilities and stated capital of all classes.
Subsequent events indicate that this recital was simply "boiler plate" and that in fact Ontario did not have sufficient assets after payment of the dividend to satisfy its debts, in particular, its debt to the Receiver General for Canada on account of income tax.
[14] Mrs. Siracusa testified that during the meeting of January 16, the matter of tax owing by Ontario was not mentioned. "It was not in our mind."
[15] The position of the respondent in assessing Mrs. Siracusa is that since she signed the Directors' Resolution she was not dealing at arm's length with Ontario. The Crown referred to two reported cases of this Court, Fournier v. M.N.R.,[1] and Gosselin v. Canada,[2] both decisions of my colleague Dussault, J. In Fournier the corporation paid the taxpayer a dividend of $45,000 at a time when it owed tax. The Minister of National Revenue assessed the corporation and the taxpayers personally under the provisions of subsections 160(1) and (2). Dussault, J. held that since the taxpayer held only 45% of the shares of the corporation and was not related to either of the other two shareholders, he could not be deemed to be in a non-arm's length relationship with the corporation through the combined operation of paragraph 251(1)(a) and subparagraphs 251(2)(b)(i) and (ii) of the Act. Whether he was in such a relationship became a question of fact. On the facts, Dussault, J. held that the taxpayer and the corporation were not dealing at arm's length. It was all the directors who decided, on advice of the corporation's accountants, the form in which profits would be withdrawn from the company. They therefore acted in concert with a common economic interest, so that the taxpayer in fact could not be considered to have been dealing at arm's length with the corporation.
[16] Similarly, in Gosselin, supra, two equal shareholders, although not related to each other, had, together with the corporation, common interests and were acting in concert. Dussault, J. addressed his mind to the specific transaction which involved the declaration of payment of a cash dividend, which resulted in the transfer of property from the company to the shareholders. He said:
If we consider a company's ultimate interests to be actually the interests of its shareholders or, if you like, of its owners, through the shares in its capital stock that they hold, it is hard to see any separate interests where there are only two shareholders who hold shares of the same class with the same rights and in equal proportions.
[17] I agree with Dussault, J. that to determine whether or not unrelated persons deal at arm's length, one must consider the specific circumstances. On the facts before me, none of the shareholders, directly or indirectly, is related to the other. It is also clear from the evidence that there were serious disagreements between Mrs. Siracusa and the other two directors, that their relationship was severely strained and she felt she could no longer deal with them.
[18] In Gestion Yvan Drouin Inc. v. The Queen,[3] Archambault, J., distinguishing the Fournier and Gosselin appeals, questioned the influence of a shareholder holding only one-third of a corporation's shares:
... The third shareholder-director, the one who holds, for himself, only a third of the voting shares is not in a position to exercise such influence. Whether or not he votes to declare and pay the dividend, his vote is not essential if the shareholder-director exercising control has decided that a dividend will be paid. I find it completely inappropriate in such circumstances to apply subsection 160(1) to the truly minority shareholder-director when he has merely performed his duties as a director.
[19] Mrs. Siracusa's testimony was not challenged in cross-examination. The Crown offered no evidence to contradict Mrs. Siracusa's version of events and her relationship with the other two directors. I found her to be a credible witness and I accept her evidence without exception.
[20] There is no question that Mrs. Siracusa and the other two directors, Messrs. Konstandinu and Catalano were in conflict. Mrs. Siracusa testified that notwithstanding her signature to the Directors' Resolution declaring the dividend, she questioned the propriety of paying the dividend at the time. She described the rancour and tension present at the meeting, she felt the pressure not only from Messrs. Konstandinu and Catalano but also from the lawyer acting for Ontario who supported the two other directors. I think I may fairly infer that the resolution was prepared by this lawyer and the fact that the resolution is preceded by a recital that Ontario has sufficient assets to pay any debts after payment of the dividend corroborates Mrs. Siracusa's testimony with respect to the pressure on her by the two other directors and a lawyer to agree to the dividend. She was not in any position to influence Ontario and was not part of any group that was in a position to influence Ontario.
[21] This is not a situation analogous to the facts in Fournier, supra, where the directors were found to be acting in concert and with a common economic interest. There was no common mind amongst the three directors of Ontario. The comments of Cattanach, J., who considered the question of a directing mind in M.N.R. v. Estate of T. R. Merritt,[4] are instructive:
In my view, the basic premise on which this analysis is based is that, where the "mind" by which the bargaining is directed on behalf of one party to a contract is the same "mind" that directs the bargaining on behalf of the other party, it cannot be said that the parties are dealing at arm's length. In other words where the evidence reveals that the same person was "dictating" the "terms of the bargain" on behalf of both parties, it cannot be said that the parties were dealing at arm's length.
[22] Archambault, J. found in Gestion Yvan Drouin Inc. supra that the acting in concert test illustrates the importance of bargaining between separate parties, each seeking to protect his own independent interest. Thurlow, J. (as he then was) described this test in Swiss Bank Corporation v. M.N.R.[5]:
To this I would add that where several parties-whether natural persons or corporations or a combination of the two-act in concert, and in the same interest, to direct or dictate the conduct of another, in my opinion the "mind" that directs may be that of the combination as a whole acting in concert or that of any one of them in carrying out particular parts or functions of what the common object involves. Moreover as I see it no distinction is to be made for this purpose between persons who act for themselves in exercising control over another and those who, however numerous, act through a representative. On the other hand if one of several parties involved in a transaction acts in or represents a different interest from the others the fact that the common purpose may be to so direct the acts of another as to achieve a particular result will not by itself serve to disqualify the transaction as one between parties dealing at arm's length. The Sheldon's Engineering case, 1955 S.C.R. 637 [55 DTC 1110], as I see it, is an instance of this.
[23] Here, control of Ontario was held by Messrs. Konstandinu and Catalano; the interest of these two shareholders was the interest of Ontario. Mrs. Siracusa was a nuisance, insofar as they were concerned.
[24] The appeal is allowed, with costs, and the assessment is vacated.
Signed at Ottawa, Canada, this 22nd day of December, 2003.
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"Gerald J. Rip" |
Rip. J.
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CITATION: |
2003TCC941 |
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COURT FILE NO.: |
2002-1850(IT)G |
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STYLE OF CAUSE: |
Piera J. Siracusa v. The Queen |
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PLACE OF HEARING: |
Toronto, Ontario |
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DATE OF HEARING: |
December 4, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice Gerald J. Rip |
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DATE OF JUDGMENT: |
December 22, 2003 |
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APPEARANCES: |
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Counsel for the Appellant: |
David J. Rotfleisch |
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Counsel for the Respondent: |
Shatru Ghan |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
David J. Rotfleisch |
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Firm: |
Rotfleisch & Samulovitch |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |