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Citation: 2004TCC773 |
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Date: 20041124 |
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Docket: 2002-2256(IT)G
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BETWEEN: |
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DIANE DU-PERRÉ, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Lamarre J.
[1] The Appellant is appealing from an assessment established by the Minister of National Revenue (the "Minister") under section 160 of the Income Tax Act (the "Act") claiming $32,866. Section 160 states:
SECTION 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 common-law partner or a person who has since become the person's spouse or common- law partner,
(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 therefore, 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.
[2] In this August 16, 2001, assessment, the Minister holds the appellant and her spouse Louis Leclair jointly and severally liable for the taxes (including penalties and interest) owed by Mr. Leclair during a transfer of the shares of the corporation 173832 Canada Inc. (the "company") and an "amount owing to the shareholder" on December 28, 1996, in favour of the Appellant (see assessment of April 16, 2001, Exhibit I-1, tab 24).
[3] In addition, in the Reply to the Notice of Appeal (the "Reply"), the Respondent reported assumptions of fact relied upon to assess the Appellant and refers not only to the December 28, 1996, transfer, but to a number of transfers, between December 28, 1996, and June 6, 1997. These assumptions are found in paragraph 3 of the Reply:
[translation]
(a) Louis Leclair (the "Spouse") has been married to the Appellant since September 1993; (admitted)
(b) between December 28, 1996, and June 6, 1997, the Spouse transferred his stock in the company 173832 Canada Inc. to the Appellant; (admitted)
(c) between December 28, 1996, and June 6, 1997, the Spouse transferred his account receivable for the company 173832 Canada Inc. to the Appellant;
(d) the transferred goods listed in paragraphs 3(b) and 3(c) above (the "goods") had a fair market value of $65,000.00;
(e) the Spouse received $100.00 from the Appellant as consideration for the Goods; (admitted)
(f) on August 16, 2001, the Spouse's debt to the Minister for the taxation years 1995 and 1996 was $32,866.72; and
(g) the Appellant and the Spouse are jointly and severally responsible for the Spouse's tax payments for the taxation years 1995 and 1996.
[4] The parties admit that the Appellant and her Spouse had each had 100 shares in the Company (for a total of 200 shares) since December 1, 1994. On December 28, 1996, Louis Leclair transferred 80 shares of the company to the Appellant for an $80 consideration. On June 6, 1997, he transferred his remaining 20 shares to her for a consideration of $20.
[5] The parties also do not contest that the 80 shares transferred on December 28, 1996, had a value of $8,044 and the 20 shares transferred on June 6, 1997, had a value of $3,190.
[6] The parties did not make any representations on the amount Louis Leclair owed in taxes at the time of the transfer, $32,866, and I take this silence to mean that this amount is not being challenged.
[7] The Appellant's challenge involves two issues. First, she feels that since the assessment established in her name only makes reference to the December 28, 1996, transfer, the benefit received in the June 6, 1997, transfer of shares cannot be used after the assessment date. I will address this argument immediately.
[8] On one hand, even if the Minister had only considered the December 28, 1996, transfer at the time of the assessment, the benefit received by the Appellant at the time was, according to the report of the expert produced by the Respondent, $51,145 [($8,044 + $43,181) - $80], and therefore far greater than the $32,866 Louis Leclair owed at that time, which allowed for the Appellant to be assessed under section 160 of the Act.
[9] On the other hand, the Minister is free to raise any argument in support of his assessment as long as there is no prejudice to the Appellant by the surprise effect of the Minister's new allegations (see Loewen v. R., 2004 CarswellNat 960, 2004 F.C.A. 146, 2004 DTC 6321).
[10] Here, the evidence shows that the evaluation preceding the assessment focused on two transfers of shares. The auditor from the Canada Customs and Revenue Agency ("CCRA") even helped the Appellant and Louis Leclair update the documentation required during these two transfers of shares. In the Reply, the Respondent relied on the transfer of shares and the "amount owing to the shareholder" to the Appellant's benefit, on the two dates mentioned above. The expert retained by the Appellant evaluated the shares on those two dates. There is therefore no surprise effect related to the Minister's new allegations.
[11] I am therefore dismissing the Appellant's first argument that the Respondent cannot rely on the benefit the Appellant received during the June 6, 1997, transfer to justify establishing the assessment.
[12] The Appellant's key argument is based on the fact that although her spouse transferred all his shares to her, he did not transfer the "amount owing to the shareholder" account that appears on the company's balance sheet, worth $47,979 on December 28, 1996, and June 7, 1997. She said that on one hand, this account should really not even exist. She explained that the account had been created by the accountant to account for the contribution of the couple's personal goods (office supplies, equipment). She claimed that since the Minister added a taxable benefit for the personal use of these goods, then the Minister does not consider these as the company's belongings. As a result, she feels that there is no "amount owing to the shareholder" at the time the shares were transferred, and that no such entry should appear on the balance sheet.
[13] Her accountant, Raymond Robillard, said he wrote the value of the personal goods the couple transferred to the company in the "amount owing to the shareholder" account and that he assumed that this account was owing to the Appellant and her spouse, for one half each.
[14] Louis Leclair confirmed that an "amount owing to the shareholder" account existed, and added that the amount owed by the company was payable solely to him and he never transferred this account to the Appellant.
[15] Robert Prévost, one of CCRA's auditors who worked on this case, said he asked for justifications on this position. The Appellant and her spouse asked Mr. Robillard to meet with him. Mr. Robillard apparently justified the "amount owing to the shareholder" account with the document submitted as Exhibit I-4, called, "Analysis of the source of advances."
[16] This document show that a $50,000 loan and a $20,000 line of credit existed. According to a bank statement from the National Bank of Canada("NBC"), for Les constructions Leclair, a company belonging solely to Louis Leclair, the $50,000 loan was allegedly credited to its account on May 2, 1995 (Exhibit I-5). In another NBC bank statement for the same company, Les constructions Leclair, a line of credit of $18,000 had been used as of February 29, 1996 (Exhibit I-6).
[17] In the "Analysis of the source of advances" (Exhibit I-4), there is also an indication of a transfer of fixed assets (furniture and equipment). In light of this document, Mr. Prévost accepted that an "amount owing to the shareholder" account existed, in the amount of $70,148 in 1995 and $57,997 in 1996 (see balance sheet attached to the declaration of income for 1996, Exhibit I-1, tab 15). It must be pointed out that following the adjustments made by Mr. Prévost (Exhibit A-1), the "amount owing to the shareholder" account was reduced to $47,979 as of December 31, 1996. This figure was used by the Appellant's expert in the evaluation of the shares on December 31, 1996.
[18] After verification, the Minister found that the advances to the company came mainly from Louis Leclair since he personally borrowed the amounts invested. Moreover, following the sale of the shares to the Appellant, the "amount owing to the shareholder" account remained on the company's balance sheet even if Louis Leclair was no longer a shareholder of the company as of June 6, 1997. This account fluctuated until 2003, when the account was reduced to zero. The Minister then considered that by transferring his shares, Louis Leclair also transferred the "amount owing to the shareholder" account to the Appellant.
[19] This was confirmed by documents prepared by a CCRA auditor, on the faith of information provided by Mr. Leclair and signed by the Appellant and Mr. Leclair. In these documents, Exhibit I-1, tabs 13 and 18, Louis Leclair acknowledges that he transferred his shares to the Appellant and that the transfer included the transfer of the "amount owing to the shareholder" account, pro rata to the shares sold. Mr. Prévost said that the documents (Exhibit I-1, tabs 13 and 18) were prepared as a follow up to a document Mr. Leclair sent to the CCRA auditor to establish the conformity of the "amount owing to the shareholder" account with the distribution of shares (Exhibit I-1, tab 23). Mr. Leclair and the Appellant acknowledge that the amounts in this document were taken from the company's financial statements. Moreover, attached to the document is an acknowledgement by Louis Leclair that he was donating all his shares in the company to the Appellant in exchange for his nearly unilateral participation in the development of the business. He said this included all the company's cash value (Exhibit I-1, tab 23, page 2).
[20] The Appellant and Mr. Leclair now say they did not understand the signification of these documents, which they signed at the request of the CCRA auditor. They say she told them to sign them so that the file could be closed, and that there would be no tax consequences.
[21] It is true that the auditor was not at the hearing to help the court understand the role she played in the conclusion of this case.
[22] I must note, however, that Louis Leclair has a master's degree in project management and a university degree in economics. The company was in the business of offering accounting, finance, tax, and business management services, and had been doing so since around 1992. I must also point out that Louis Leclair went bankrupt in April 1999 and that he took care not to state that he held a financial claim to the company on his statement of bankruptcy. Today, he claims that he never transferred this claim to his spouse. He states that this omission on his statement of bankruptcy occurred because in his mind, this claim and even the company's shares were worth nothing. Ironically, this contradicts the expert report that he himself ordered and that gives the 100 shares of the company, transferred to the Appellant, a value of $11,234 ($8,044 + $3,190). He acknowledges that the inherent value of the "amount owing to the shareholder" account was $47,979 on the date the shares were transferred.
[23] Moreover, the evidence shows that the bookkeeping was insufficient. Mr. Prévost said the audit was particularly long because of confusion through all Mr. Leclair's personal accounts, his personal company, Les constructions Leclair, and the business run by the company, Les consultants Leclair. Mr. Leclair himself stated that he did not have a personal bank account and that he used his company's accounts.
[24] In my opinion, Mr. Leclair knew perfectly well what he was doing when he signed the document stating he was transferring not only his shares, but also the "amount owing to the shareholder" to the Appellant. I was not convinced that Mr. Leclair thought the "amount owing to the shareholder" account had no value when he signed his statement of bankruptcy. The best evidence of this is that the account was not eliminated from the company's balance sheets, but rather it was liquidated over the years. This could not have been done if he had not transferred it to the Appellant, since it would have been an asset in the statement of bankruptcy. All this also contradicts the Appellant's version that the account did not exist and should not have appeared in the balance sheets when the shares were transferred.
[25] I therefore find that the evidence is clearly sufficient to conclude that Louis Leclair deliberately transferred his shares and the "amount owing to the shareholder" account to the Appellant, his spouse.
[26] As for whether this account was owing equally to the Appellant and Mr. Leclair before the shares were transferred, contradictions between the testimony given by Mr. Robillard, the Appellant and Mr. Leclair, along with the documentary evidence submitted by the Respondent, cannot allow me to conclude that the Appellant was partial creditor of this account before the shares were transferred.
[27] In fact, the documentary evidence tends to show that Mr. Leclair took out a personal loan and then invested the product of the loan into the company. I agree with counsel for the Respondent that without documentation showing the precise quantum that might have been invested personally by the Appellant, and considering the contradictions raised earlier in the testimony, it is difficult to find that the Appellant contributed anything to the company, considering the facts.
[28] I therefore find that Louis Leclair transferred the entire "amount owing to the shareholder" account to the Appellant between December 28, 1996, and June 6, 1997. Since the portion of the fair market value of the transferred goods exceeds the value of the consideration given by the Appellant at the time of the transfer and the "amount owing to the shareholder" account exceeds the amount Mr. Leclair owed in taxes at the time, the Appellant and Mr. Leclair are jointly and severally liable for the tax debt owed by Mr. Leclair at the time of the transfer, in accordance with section 160 of the Act.
[29] The assessment established for the Appellant is therefore confirmed.
[30] The appeal is denied with costs.
Signed at Ottawa, Canada, this 24th day of November 2004.
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"Lucie Lamarre" |
Lamarre J.
Translation certified true
on this 8th day of February 2005.
Elizabeth Tan, Translator
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REFERENCE: |
2004TCC773 |
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COURT FILE No.: |
2002-2256(IT)G |
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STYLE OF CAUSE: |
Diane Du-Perré v. Her Majesty the Queen |
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PLACE OF HEARING: |
Ottawa, Ontario |
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DATE OF HEARING: |
October 25, 2004
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DATE OF JUDGMENT: |
October 26, 2004 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice Lucie Lamarre on November 24, 2004 |
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APPEARANCES: |
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For the Appellant: |
Annie Hallée |
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For the Respondent: |
Gatien Fournier |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
Annie Hallée |
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Firm: |
Dufour Isabelle Leduc Bouthilette Lapointe Beaulieu |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |