Louis Sheff (1984) Inc. v. The Queen

Louis Sheff (1984) Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2003-09-10
Neutral citation
2003 TCC 589
File numbers
2002-834(IT)G
Judges and Taxing Officers
Lucie Lamarre
Subjects
Income Tax Act
Decision Content
Docket: 2002-834(IT)G
BETWEEN:
LOUIS SHEFF (1984) INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals heard on common evidence with the appeals of Louis Sheff (2002-836(IT)G) on November 7 and 8, 2002, at Montreal, Quebec.
Before: The Honourable Justice Lucie Lamarre
Appearances:
Counsel for the Appellant:
André Gauthier
Josée Vigeant
Counsel for the Respondent:
Stéphane Arcelin
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1995 taxation year is allowed and the reassessment issued against the appellant for that year is quashed on the basis that it is statute-barred.
The appeals from the assessments made under the Income Tax Act for the 1996, 1997 and 1998 taxation years are dismissed with costs.
Signed at Ottawa, Canada, this 10th day of September 2003.
"Lucie Lamarre"
Lamarre, J.
Docket: 2002-836(IT)G
BETWEEN:
LOUIS SHEFF,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals heard common evidence with the appeals of Louis Sheff (1984) Inc. (2002-834(IT)G) on November 7 and 8, 2002, at Montreal, Quebec.
Before: The Honourable Justice Lucie Lamarre
Appearances:
Counsel for the Appellant:
André Gauthier
Josée Vigeant
Counsel for the Respondent:
Stéphane Arcelin
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1995 taxation year is allowed and the reassessment issued against the appellant for that year is quashed on the basis that it is statute-barred.
The appeals from the assessments made under the Income Tax Act for the 1996, 1997 and 1998 taxation years are dismissed with costs.
Signed at Ottawa, Canada, this 10th day of September 2003.
"Lucie Lamarre"
Lamarre, J.
Citation: 2003TCC589
Date: 20030910
Docket: 2002-834(IT)G
BETWEEN:
LOUIS SHEFF (1984) INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
2002-836(IT)G
AND BETWEEN:
LOUIS SHEFF,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre, J.
[1] These are appeals from assessments made by the Minister of National Revenue ("Minister") that included in both appellants' income an amount of $22,500 for the 1995 taxation year and $90,000 for each of the 1996, 1997 and 1998 taxation years. The Minister is of the opinion that the amounts in question were paid to Louis Sheff (1984) Inc. ("LS 1984") pursuant to a contract for services entered into on September 13, 1985 between Sheff, Weiser, Perelman & Associates Inc. ("SW") and the appellants and that those amounts are taxable in LS 1984's hands as income pursuant to section 9 of the Income Tax Act ("Act"). The monies having been deposited in the joint personal account of LS 1984's principal shareholder, Louis Sheff, and his wife Sally, the Minister is also of the view that the same amounts are taxable in the hands of Louis Sheff personally, pursuant to subsection 15(1) of the Act, as a benefit conferred upon him by LS 1984.
Facts
[2] The parties filed a Joint Statement of Facts (Exhibit A-1), which reads as follows:
1. According to the September 13th, 1985 agreement (hereinafter "the Agreement"), Mr. Louis Sheff and his spouse, Mrs[.] Sally Sheff, sold their 300 preferred shares and 98 common share[s], being all the shares owned by them in Sheff, Weiser, Perelman & Associates Inc. (hereinafter "the Shares") to their son, Mr. Allan Sheff, and nephew Mr. Joseph Weiser.
∙ Table 7, page 2, September 13th, Agreement
2. The sale of the Shares in Sheff, Weiser, Perelman & Associates Inc. (hereinafter "SW") was the result of disputes and clashes between himself and Mr. Allan Sheff and Mr. Joseph Weiser, each owner of one-third of SW at the time.
∙ Table 17, p. 6, of the French version of the Judgment of the Superior Court of Quebec
3. Among other things, the Agreement stipulates that:
a. Allan Sheff and Joseph Weiser will pay the sum of $120,000 payable to Mr. Louis Sheff at closing by certified cheque, less any sums withdrawn from SW by Mr. Louis Sheff or Sally Sheff over and above their regular payroll salaries during 1985;
b. the sum of $325,000 will be payable to the Estate or as may be directed in the relevant last will and testament of the last surviving of Mr. Louis Sheff and his spouse, but in no event before October 1st, 1995; and
c. SW will pay to Louis Sheff (1984) Inc. (hereinafter "LS1984") the sum of $90,000 per year ($7,500 per month starting on October 1st 1985) payable during the lives of Mr. Louis Sheff and his spouse, for a minimum of 10 years.
∙ Table 7, page 2, September 13th, 1985 Agreement
4. At the time of the sale of the shares, Mr. Louis Sheff was 74 years old and Mrs. Sally Sheff was 70 years old.
5. Shortly following the signature of the Agreement, other disputes arose between Mr. Louis Sheff, Mr. Allan Sheff and Mr. Joseph Weiser.
6. Neither LS1984 nor Mr. Louis Sheff reported any amount paid or payable under the Agreement for the 1985 and 1986 taxation years.
7. On May 21st, 1986 Counsel Gary H. Waxman, Mr. Louis Sheff's representative, obtained from Marcel Chapados, f.s.a., f.i.c.a. from Blondeau & Company, actuaries, an evaluation of the actual value (on September 13th, 1985) of the amounts payable to Mr. Louis Sheff and Mrs. Sally Sheff according to the Agreement. The September 13th, 1985 value of the payments was established at $1,058,619.
∙ Tab 9, Letter from Marcel Chapados, f.s.a., f.i.c.a.
8. On or around September 16th, 1987 the Minister transmitted to Mr. Louis Sheff the result of an evaluation of the fair market value of the shares of SW. On September 13th, 1985 the evaluation of the common shares by the Minister was of the amount of $4,071 each (98 shares x $4,071 = $398,598).
∙ Tab 11, Letter from M. Richard and F. Flibotte in regards of the valuation of the shares, dated September 16th, 1985.
∙ Tab 12, Valuation (with attachments) of the disposition of the Shares in SW
9. On or around November 18th, 1987, Mr. Louis Sheff transmitted a letter to the Minister indicating that he was in disagreement with the September 16th, 1987 valuation. Mr[.] Louis Sheff indicated in his letter that the cash value purchase price was calculated by a licensed actuary to be more than $1,000,000.
∙ Tab 13, Letter of Mr. Louis Sheff in regards of the valuation of the shares of SW.
10. Mr. Sheff personally reported all sums that he considered received or receivable from SW under the terms of the Agreement as being the proceeds of disposition of the Shares in his 1987 taxation year, on a similar basis as the valuation by Blondeau & Company, actuaries, thus reporting a capital gain of $869,416 in regards of such.
∙ Tab 1, Louis Sheff's income tax return for the 1987 taxation year.
11. Due to the circumstances (dispute) surrounding the transaction, the Minister accepted, 1987 to be the effective year of transaction.
12. On July 4th, 1991, the Minister reassessed Mr. Louis Sheff's 1987 taxation year to adjust the proceeds of disposition of the Shares to $1,345,000 (and consequently his capital gain and reserve). The $1,345,000 is the aggregate of $120,000, plus $325,000, plus $900,000 (i.e. $90,000 X 10 years).
13. On or around July 1990, following the refusal of Mr. Louis Sheff to sign a letter to the Minister to the effect that he was rendering services to SW, the tax treatment of the monthly payments of $7,500 resulted in another legal dispute between SW and LS1984. SW stopped making the monthly payments of $ 7,500.
∙ Table 14, Project of letter in regards of the September 13th, 1985 agreement
14. On July 15th, 1992 by way of judgment of the Superior Court of Quebec, the Honourable Justice Victor Melançon ordered SW to continue paying LS1984 the monthly payments of $7,500 contracted by way of the Agreement.
∙ Table 17, Judgment of the Superior Court of Quebec.
15. On November 15th, 1993 the Quebec Court of Appeal rejected the appeal of SW.
∙ Table 18, Judgment of the Court of Appeal of Quebec.
16. On or around January 8th, 1996 (during the course of an audit of Mr. Louis Sheff's 1993 and 1994 taxation years) LS1984 and Mr. Louis Sheff were informed in writing by CCRA to include the monthly payments of $7,500 ($90,000 per year), in LS1984's income, beginning October 1st, 1995.
∙ Tab 21, Letter by Serge Desjardins
17. The cheques in regards of the monthly payments of $7,500 were made in the name of "Louis Sheff (1984) & /or Louis Sheff & /or Sally Sheff". They were signed by LS1984, by Mr. Louis Sheff and by Sally Sheff and were deposited in the joint bank account of Mr. Louis Sheff and Sally Sheff (hereinafter "the bank account").
∙ Tab 8, Example of cheque payable
18. As of October 1st, 1985, Mr. Louis Sheff was the majority shareholder, the president and director of LS1984. Sally Sheff was a director of LS1984.
19. The initial Notice of Assessment of LS1984 for [the] taxation year ended December 31, 1995 was issued September 3, 1996.
20. The initial Notice of Assessment for taxation year 1995 of Mr. Louis Sheff was issued May 30, 1996.
21. By notice of reassessment, the Minister included in LS1984 & Mr. Louis Sheff's income the monthly payments received as of October 1st, 1995 and deposited in the joint bank account of Mr. Louis Sheff and his spouse, accordingly.
22. On February 24, 2000, the CCRA issued a first notice of reassessment to LS1984 for taxation years 1995 to 1998.
23. On February 24, 2000, the CCRA issued a first notice of reassessment to Mr. Louis Sheff for taxation years 1995 to 1998.
24. On January 24, 2001, the CCRA issued notices of reassessment whereby it cancelled the penalties levied under subsection 163(2) of [the] Income Tax Act, but maintained the monthly instalments of $7,500 to be to be [sic] included in the income of LS1984.
[3] It is worthwhile reproducing here the September 13, 1985 agreement ("1985 agreement") signed by Allan Sheff and Joseph A. Weiser on the one hand, and agreed to and accepted by Louis Sheff, Sally Sheff, SW and LS 1984 on the other hand. A copy of it is to be found at Tab 7 of the joint book of documents (Exhibit I-1) and it reads as follows:
ALLAN SHEFF
. . .
-and-
JOSEPH A. WEISER
. . .
September 13, 1985
Mr. Louis Sheff and
Mrs. Sally Kapustin Sheff
. . .
Re: Sheff, Weiser, Perelman &
Associates Inc. (the "Company") and
Louis Sheff (1984) Inc. ("Company B")
Dear Mr. and Mrs. Sheff:
This will confirm our discussions with respect to the captioned matters only as herein set forth, all previous offers and counter offers being hereby expressly revoked:
A. Company
1. Allan Sheff ("A.S.") and Joseph Weiser ("J.W.") hereby purchase all three hundred (300) preferred shares and ninety-eight (98) common shares presently owned by Louis Sheff ("L.S.") and Sally Sheff ("S.S.") being all the shares owned by them in the Company, in consideration of the payment to L.S. at closing by certified cheque of the sum of One Hundred and Twenty Thousand Dollars ($120,000 Cdn) less, if any, sums withdrawn by L.S. and/or S.S. from the Company over and above their regular payroll salaries during 1985.
2. The Company shall pay a consulting fee to Louis Sheff (1984) Inc. ("Company 'B'") the sum of Ninety Thousand Dollars ($90,000 Cdn) per year for and during the lives of L.S. and S.S., but in any event for a minimum of ten (10) years from the date of closing. Such sum shall be payable in equal monthly amounts of Seven Thousand Five Hundred Dollars ($7,500 Cdn) on the first day of each month, the first payment to be made on October 1st, 1985. The responsibility as consultant to the Company shall be limited to the promotion of its image.
3. The sum of Three Hundred and Twenty-Five Thousand Dollars ($325,000 Cdn) shall be paid to the Estate (or as may be directed in the relevant last will and testament of the last surviving of L.S. and S.S.) upon the decease of the last surviving of L.S. and S.S.. Such $325,000 Cdn shall in no event be paid prior to October 1st, 1995, even if both L.S. and S.S. are deceased prior to such date.
B. Company B
1. A.S. and J.W. hereby sell all shares presently held by them in Company B to L.S. and S.S. for the price of One Hundred Dollar[s] ($100 Cdn).
2. L.S. shall have access to all general files which are now part of the portfolio of the Company. This is for the purpose of enabling L.S. to solicit his clients for the sale and service of new and old business in the field of Life Insurance Pension Plans, Registered Retirement Savings Plans, Annuities and other kindred Plans. To facilitate the foregoing, L.S. shall be provided, upon request, with a computer print-out of the Company's clients' names, addresses and telephone numbers.
3. A.S. and J.W. represent and warrant that they will not, themselves or through others, knowingly directly compete with L.S. or this class of business mentioned in the immediately preceding paragraph.
C. General
1. Company shall transfer to L.S. for no consideration at closing the 1983 Oldsmobile 98 Regency vehicle he presently drives, the balance of payment therefor to GMAC to be assumed by L.S. to the exoneration of the Company.
2. Closing shall be held on Thursday, September 19, 1985, at 11:00 a.m., at the offices of Gascon, Gibson, Larose, 1210 Sherbrooke Street, West, 5th Floor, Montreal, Quebec:
i) At closing, all shares being sold hereby shall be endorsed over to the relevant party and they shall sign and execute such other documentation as may be reasonably required by their attornies [sic] in order to effect the transfer of all said shares;
ii) At closing:
a) L.S. shall be elected as a member of the Board of Directors and Chairman of the Company, which positions he may hold for as long as he so desires;
b) S.S. shall resign as a Director and Officer of the Company; and
c) A.S. and J.W. will resign as Directors and Officers of Company B.
iii) L.S. shall be entitled to use and occupy the office at the Company which he presently uses and occupies and shall be entitled to an allowance of Seven Thousand Five Hundred Dollars ($7,500) to refurbish his office and
iv) L.S. shall be entitled to the requisite secretarial services for purposes of his personal affairs.
3. Sheff, Weiser, Perelman & Associates Inc. shall pay all legal fees and expenses relating to this Agreement.
4. The parties shall execute such other documents and do such other acts as may be necessary to give effect to the foregoing.
If the foregoing is acceptable, please indicate by your signature below.
Yours very truly,
________________________ ____________________________
Witness Allan Sheff
________________________ ____________________________
Witness Joseph A. Weiser
Agreed and Accepted this
13th day of September, 1985.
________________________ ____________________________
Witness Louis Sheff
________________________ ____________________________
Witness Sally Sheff
SHEFF, WEISER, PERELMAN &
ASSOCIATES INC.
________________________ Per:_________________________
Witness
LOUIS SHEFF (1984) INC.
________________________ Per:_________________________
Witness
[4] The evidence disclosed that Louis Sheff founded in 1939 a Montreal-based insurance brokerage company that eventually became SW. It was a family business. Louis Sheff's nephew Joseph Weiser joined it at the end of the 1960s, and his son Allan Sheff did so in the mid-70s. The business expanded over the years and, in 1981, Joseph Weiser and Allan Sheff acquired two-thirds of the SW shares for the shares' nominal value. In 1985, Louis Sheff, then almost 75 years old, was convinced by the other two shareholders to sell them the remaining third of the SW shares. According to Louis Sheff, they threatened to bankrupt the business unless he sold his interest. Louis Eidelman, the appellants' accountant, stated that Allan Sheff and Joseph Weiser had threatened the appellant that they would break up the business to start another business on their own if Louis Sheff did not sell his shares. Louis Sheff ultimately agreed to sell and negotiations ensued over the price. Louis Sheff wanted enough money to support his wife, Sally Sheff, and to ensure a comfortable retirement. Allan Sheff testified that he and Joseph Weiser wanted to buy out Louis Sheff and also provide him with the security he needed through either a pension or a retirement allowance for the number of years he had given to the business. After most difficult negotiations, they eventually all agreed on the 1985 agreement.
[5] Allan Sheff had established an approximate value for the whole business of $646,000, one-third of this amount being $215,000 (Exhibit I-1, Tab 12). It was finally agreed that he and Joseph Weiser would pay forthwith $120,000 to buy Louis Sheff's shares and that an amount of $325,000 would be paid to the estate of either Louis Sheff or Sally Sheff upon the decease of the last surviving of the two, but not prior to October 1, 1995. Allan Sheff testified that the purpose of the $325,000 was to leave an estate for his two sisters. It was also agreed, as stated in the 1985 agreement, that a consulting fee of $90,000 per year (payable in equal monthly amounts of $7,500) would be paid to LS 1984 for and during the lives of Louis and Sally Sheff but in any event for a minimum of ten years. That amount was to be paid by SW.
[6] Allan Sheff testified that shortly after the agreement was signed his father wanted to rescind it, saying that it was signed under extreme duress. Nonetheless, he said, Louis Sheff, who had access to an office on the business's premises, went to that office on a regular basis, spoke to clients and gave instructions to the staff. According to Allan Sheff, his father was supposed to provide the benefit of his 50 years of experience in the insurance business to whatever extent he could.
[7] However, the situation became bitter as time passed. This led SW, Allan Sheff and Joseph Weiser in December 1985 to file for an injunction against Louis Sheff to, as I understand it, restrain him from attending at the office. By a judgment dated June 26, 1986, Reeves J. of the Superior Court of Quebec ordered Louis Sheff to [TRANSLATION] "refrain from acting in such a manner as to obstruct or hinder the work of [SW] employees". The judge also stated that it would be up to the officers of SW to assess the situation and determine whether it was in their interests to remain present on the premises if Louis Sheff decided to stay at the office outside reasonable hours. It is worth mentioning here the following comments by Reeves J. preceding the order:
In this context, the Court . . . will first observe that R-1 [1985 agreement] remains a contract that binds the parties. It is the law which the parties have agreed to and they have to abide by it. There are reciprocal obligations in this contract. The Court has no comments to make on whether the contract is executed or not. Each party has its rights and if this give rise to further proceedings, it will be for the tribunal to adjudicate on them as questions are put, submitted to the Court. Some question naturally has arisen to find out whether there have been any steps taken to execute the contract. The evidence reveals that attempts have been made and it is hoped that these will prove fruitful in shortest possible delay. What is the concern of the Court in regarding the injunction, is the interest, the further and continuing interest of the business. This is paramount to the interest of all parties involved in this particular question and should be their guide.
(Exhibit I-1, Tab 9, page 2.)
[8] Despite the bitterness of the situation, between October 1985 and June 1990 SW made the monthly payments of $7,500 to LS 1984 as provided for in the 1985 agreement.
[9] This stream of payments (the $7,500 monthly payments) was the subject of an audit by Revenue Canada (as it was then called) in 1990. Louis Sheff considered those payments as being part of the proceeds of disposition of his shares, and thus declared a capital gain in his 1987 taxation year, based in part, presumably, on an estimate of the value at that time of all the amounts to be received in the future pursuant to the 1985 agreement. In that connection, Louis Sheff obtained a valuation from Blondeau & compagnie, actuaires et conseillers, of the amounts payable to him as per the 1985 agreement and [TRANSLATION] "the present value" of all the amounts thus payable was estimated at $1,058,619 (Exhibit I-1, Tab 10). Based on that value, Louis Sheff declared a capital gain of $869,416 in his 1987 tax return (Exhibit I-1, Tab 1).
[10] SW, now controlled by the younger generation, wanted to expense the $7,500 monthly payments as salary. On January 16, 1990, Revenue Canada asked Louis Sheff to sign a declaration stating that the monthly payments of $7,500 were paid as consulting fees and should not be part of the proceeds of disposition of the shares (Exhibit 1, Tab14). He refused to do so as he did not agree with that statement.
[11] Mr. Serge Clairoux, the auditor for Revenue Canada, finally agreed to consider the sum of all the amounts to be paid to Louis Sheff over a ten-year period pursuant to clause A of the 1985 agreement to be the proceeds of disposition of the shares. He arrived at a figure of $1,145,000, being the aggregate of $120,000, $325,000 and $900,000 ($90,000 x 10 years), less a deduction of $200,000 pursuant to subsection 73(5) of the Act (see notice of reassessment and auditor's report, Exhibit I-1, Tabs 2 and 15).
[12] In Mr. Clairoux's view, the $1,345,000 figure (before the deduction of $200,000) was very close to the 1,2 million dollar value arrived at by Revenue Canada for SW's shares (see business equity valuation made in 1987 by Revenue Canada, Exhibit I-1, Tabs 11 and 12). Louis Sheff finally agreed to settle and to be taxed on a capital gain calculated on the basis of a higher valuation of the sale price of the shares than he had previously claimed ($1,345,000 instead of $1,058,619). Louis Sheff was therefore reassessed accordingly for his 1987 taxation year.
[13] But this settlement (the "1990 settlement") put SW in a bind. If the $90,000 yearly payments were capital, the company could not expense them as salary. Revenue Canada thus denied the salary expense and added a corresponding amount to the adjusted cost base of the shares that Allan Sheff and Joseph Weiser had purchased from Louis Sheff (Exhibit I-1, Tab 23).
[14] The Revenue Canada audit poisoned relations between Louis Sheff and SW. Each accused the other of trying to unfairly shift the tax burden. On July 1, 1990, SW ceased paying the $7,500 per month. Relying on Louis Sheff's denial, in his dealings with Revenue Canada, that he rendered any services to the company, SW claimed that he had repudiated their contract. LS 1984 sued SW to force it to make the $7,500 monthly payments. SW contested that action and, by means of a counterclaim, asked for a declaratory judgment establishing whether the 1985 agreement contained two contracts, one relating to the sale of shares and the other to LS 1984's commitment as a consultant.
[15] In July 1992, Melançon J. of the Superior Court of Quebec upheld the obligation to make the monthly payments and ordered SW to pay LS 1984 back pay. In so doing, he declared that the 1985 agreement constituted a whole of which a part comprised SW's obligation to pay LS 1984 $7,500 per month for and during the lives of Mr. Louis Sheff and Mrs. Sally Sheff, or until October 1, 1995, should they die before that date.
[16] Melançon J. mentioned the following in the course of his judgment, at page 3 of the English version (Exhibit I-1, Tab 17).
Does the document P-1 [1985 agreement] consist of one or two contracts : that is to say, a sale of shares and a committment [sic] as a consultant ?
In the case of Bock & Tétreault Inc. vs Corporation Eagle Lumber (J.E. 88-243, reported in extenso in "Jurisprudence en matière d'obligations," published by Soquij, page 355 and following), jurisprudence has acknowleged [sic] that a contract of sale of shares can also entail a consultant's contract. The defendant, via its shareholders, undertook to pay, from October 1, 1985 on, and this for at least ten years, the sum of $7,500 per month to the plaintiff. As already stated, these payments were interrupted as of July 1, 1990.
The defendant claims to have this right because the plaintiff's principal and sole shareholder claimed not to be providing any services. In actual fact, it appears to the undersigned that the providing of services is not very important in the context. These services are both of a positive nature (to promote the company's image) and of a negative one, as understood by Mr. Louis Sheff, the father and the plaintiff's principal and sole shareholder, that is to say, not to speak against the defendant company, which he did do. It shoul[d] also be noted that nothing in evidence indicates, on the part of the defendant, regarding the plaintiff or its sole shareholder, any request for services whatsoever.
[17] In November 1993, the Quebec Court of Appeal confirmed Melançon J.'s decision. In his 1994 personal tax return, Louis Sheff claimed as a capital loss the legal fees incurred before the Quebec courts in the action launched against SW to recover the $7,500 monthly payments. However, in the course of a second audit, conducted by Revenue Canada in 1995 and 1996 with respect to the appellants' 1993 and 1994 taxation years, Mr. Joseph Waxman, one of the accountants who was acting on behalf of Louis Sheff at the time, argued that the $7,500 monthly payments constituted consulting fees and that the legal fees incurred with respect thereto should be deductible as a business expense (Exhibit I-1, Tab 31). Because Revenue Canada had considered those payments as being part of the proceeds of disposition of the shares payable over a ten-year period ending on October 1, 1995, it first considered the legal fees to be a non-deductible capital expenditure (Exhibit I-1, Tab 20). Finally, in order to settle, Revenue Canada agreed to allow half of the legal fees as a deduction against Louis Sheff's personal income for the 1994 taxation year (Exhibit I-1, Tab 31). In his report, the auditor at the time indicated that Mr. Eidelman acknowledged that the $7,500 monthly payments should be taxed as consulting fees as of October 1, 1995, but was of the view that they should be taxed in Louis Sheff's personal tax return because those amounts were received by LS 1984 [TRANSLATION] "on behalf of" Louis Sheff (see T-2020 report, from Revenue Canada, Exhibit I-1, Tab 19). As a matter of fact, at his discovery and at trial, Louis Sheff was very vague as to why the 1985 agreement stipulated that the $7,500 monthly payments were to be made to LS 1984. At discovery, he mentioned that LS 1984 was never involved in SW's business. He said, however, that LS 1984 was used in order to protect his wife in the event of his death. In Exhibit I-1, Tab 35, pages 12-15, there is the following:
Q. Mr. Sheff, there was an agreement at the effect that $90,000.00 was paid by... to Louis Sheff (1984) Inc.?
A. That's in there.
Q. You recall that?
A. Yes, it's in there.
Q. Why was it paid to Louis Sheff (1984) Inc.? Why it had to be paid to Louis Sheff (1984) Inc.?
A. In the event of my death, I wanted the money to go to her, to protect her.
Me VIGEANT :
Q. I'm sorry, when you say her, can you be more precise?
A. My wife.
Me ARCELIN :
Q. Why was it made through Louis Sheff (1984) Inc.?
A. I couldn't answer that. I've been up nights trying to figure out how that name of Louis Sheff (1984) ever came into the picture. It never had any interest near the business, none whatsoever. I'm still trying to figure that one out.
Q. So, did you participate in any mean... in any way in the negotiation of the September 13th 1985 agreement?
A. I was there.
Q. You were there. Did you participate in the negotiation that led to that agreement that you signed?
A. I must have.
Q. You must have.
A. I must have.
Q. So, you must have but you don't recall the rational?
A. I know I was under extreme pressure.
Q. That we understand, Mr. Sheff. We understand that. You were... there was an assessment that was made... what... Ok, no, sorry, I will rephrase that. When was the first time that you declared revenues, not the revenues, I mean the product of disposition, the gain that you realized on the sell [sic] of those actions? The shares?
A. Louis Adelman (ph) would be in a better position to explain than I could.
Q. Can you repeat that, please?
A. Louis Adelman, the accountant, would be in a better position to explain it that [sic] I could.
. . .
Q. After September... after October 1st... no, on and after October 1st 1995, why neither you or Louis Sheff (1984) Inc. declared any amount received by Sheff, Weiser, Perelman and Associate?
A. I don't see, I cannot understand how Louis Sheff Inc. became involved in this in the first place. I just can't see it. I can't recall any reason for it. Louis Sheff is not... Inc. was never in it, never had any shares, never had any income. They are not in it.
[18] At trial, the question was put to Louis Sheff as follows (transcript, November 7, 2002, page 63):
[36] Q. They were. So, Louis Sheff (1984) was an active business and was an active business that was actually, you're carrying some insurance business through Louis Sheff (1984) company?
A. That is right.
[19] On the expiration of the ten-year period, that is, as of October 1, 1995, Mr. Louis Sheff and his wife, being still alive, continued to receive and are still receiving the $7,500 monthly payments. A monthly cheque drawn on SW's account continued to be made out to the order of LS 1984 and/or Louis Sheff and/or Sally Sheff. All cheques received were endorsed by Louis Sheff for LS 1984, and by Louis Sheff and Sally Sheff personally, and deposited in Louis and Sally Sheff's joint personal account. Neither LS 1984 nor Louis Sheff declared those monthly payments in their income for tax purposes after October 1, 1995. The appellants obtained legal advice in June 1994 stating that:
. . . Since, however, Revenue Canada has accepted in respect of the 1987 taxation year (and subsequent years) to include in the calculation of the capital gain the $90,000 annual payments and the lump sum payment, an argument can be made that subsection 4(4) of the Income Tax Act will preclude Revenue Canada from including such amounts in income in the future since they have already been included in calculating the amount of the taxable capital gain included in your income in 1987 and subsequent taxation years by use of the reserve. We are of the view, therefore, based on this analysis that no amount already included by you in proceeds of sale of the SCo shares should be included in your income in the future.
[Exhibit I-1, Tab 22, page 3.]
[20] Revenue Canada disagreed. By letter dated January 8, 1996, it asked that LS 1984 include the payments in its income starting October 1, 1995. LS 1984 ignored this request and Revenue Canada, that became the Canada Customs and Revenue Agency ("CCRA") on November 1st, 1999,[1] reassessed both LS 1984 and Louis Sheff personally to include in their income the sum of $22,500 for 1995 ($7,500 x 3 months) and $90,000 for each of the 1996, 1997 and 1998 taxation years. LS 1984 was reassessed on the basis that in those years it received consulting fees that had to be included in income pursuant to section 9 of the Act. The same amounts were included in Louis Sheff's income pursuant to subsection 15(1) of the Act, on the basis that a benefit was conferred on him by LS 1984 in those years. The parties admit that Louis Sheff is the majority shareholder of LS 1984. Although it is stated in paragraph 4 of the Notice of Appeal that Louis Sheff owns 75 per cent of LS 1984's common shares, the balance being owned by Mrs. Sally Sheff, this has not been admitted by the respondent and there is no evidence on that point. The appellants appealed the aforementioned reassessments before this Court.
Issue
[21] The main issue is the tax treatment, as of October 1995, of the monthly payments of $7,500 received by the appellants. For 1995, it must also be determined whether Revenue Canada was allowed to reassess the appellants beyond the normal reassessment period.
Appellants' arguments
[22] The appellants have not included the $7,500 monthly payments in their tax returns filed since the 10th anniversary of the 1985 agreement because they firmly believe that they are part of the proceeds of disposition of the shares sold in 1985, which sale was declared in 1987 for income tax purposes. According to the appellants, the cash value of the purchase price of the SW shares had been calculated by a licensed actuary to be over one million dollars (Exhibit I-1, Tab 13). In the appellants' view, the proceeds of disposition were calculated taking into account the $90,000 per year (the $7,500 monthly payments) component at its value at that time and that amount should not be added to their income after the expiration of the ten-year period. Their counsel argued that, when first reassessing the appellants in 1991, pursuant to the 1990 settlement, Revenue Canada accepted for the 1987 taxation year the inclusion of the $90,000 per year component in the proceeds of disposition from the sale of Louis Sheff's SW shares. In counsel's view, the 1990 settlement was comprehensive, that is to say, Louis Sheff has already paid tax on the capital gain based on the proceeds of disposition which included the value at that time of an indefinite stream of $90,000 payments. Since Mr. Sheff has already paid tax, Revenue Canada's efforts amount to double taxation, which is not acceptable pursuant to subsection 248(28) (former subsection 4(4)) of the Act. Under the 1990 settlement, Mr. Sheff paid more tax than was due because Revenue Canada did not discount for inflation the ten guaranteed payments of $90,000 or the payment due at death.
[23] According to the appellants' counsel, Revenue Canada is therefore now estopped from changing its mind and recharacterizing the $90,000 per year payment as consulting fees as it did with respect to the payments made since October 1995. In counsel's view, the $90,000 cannot be treated as both income and a capital gain at the same time. For 1995 particularly, Revenue Canada's reassessment is unreasonable as it taxed the $7,500 monthly payments as a capital gain for the first nine months of the year but, for the last three months of the same year, it taxed monies from the same source as income.
[24] In counsel's view, estoppel bars Revenue Canada from reassessing the same transaction on a basis different from that of its 1990 settlement with Mr. Sheff. To conclude otherwise would be to enable Revenue Canada to disavow the settlement, which confirmed that all proceeds arising from the sale, including the $90,000 per year, gave rise to a capital gain that was declared by Mr. Sheff in his 1987 tax return. Mr. Sheff relied on that settlement as accurately stating all amounts received from SW. This also is a bar to Revenue Canada's reassessing beyond the limitation period for the 1995 taxation year. Furthermore, counsel stated that, according to the evidence, neither Mr. Sheff nor LS 1984 ever rendered any consulting services after 1985 and he argued that the appellants cannot be taxed as though they did.
[25] Counsel also argued that the $90,000 per year should not be reported as a capital gain for each year it was received after 1995 because there was no disposition giving rise to a capital gain in those years. Finally, counsel argued in the alternative that the $90,000 per year received after 1995 could be characterized as a payment made to prevent Mr. Louis Sheff from competing with SW and argued that such a payment is not taxable, as per the decision in Fortino et al. v. The Queen, [1996] T.C.J. No. 1457 (Q.L.), affirmed [1999] F.C.J. No. 1964 (Q.L.).[2]
Respondent's arguments
[26] The respondent, on the other hand, is of the view that the $90,000 per year has been taxable in LS 1984's hands as consulting fees since October 1995, even though it could be argued by the appellants that no services were rendered (which, in counsel's view, is not the case on the evidence). Counsel for the respondent relied on the 1985 agreement and on the judgment of the Superior Court of Quebec forcing SW to pay the $90,000 per year to LS 1984. Counsel put forward his argument notwithstanding the fact that Revenue Canada has in the past considered the $7,500 monthly payments to be part of the proceeds of disposition of Louis Sheff's shares in SW. In counsel's view, Revenue Canada is not bound by previous assessments. The respondent is of the opinion that the appellants freely structured their affairs to produce a certain outcome and, therefore, should be bound by the resulting tax consequences.
[27] The respondent is also of the view that subsection 15(1) of the Act applies and, accordingly, the $90,000 per year should be included in Louis Sheff's income because the cheques made out to the order of LS 1984 and/or Louis Sheff and/or Sally Sheff, and endorsed by the three of them, were deposited in the joint personal account of Louis and Sally Sheff. The money not having been distributed by way of a dividend, the respondent considered that a benefit was conferred by LS 1984 on Louis Sheff personally and the total amount thereof should consequently be included in Louis Sheff's income pursuant to subsection 15(1) of the Act.
[28] The respondent argues in the alternative that if the $7,500 monthly payments are not business income for LS 1984, they are business income for Louis Sheff personally as they were paid in consideration of some kind of services to be rendered by him personally.
[29] The respondent also argues in the further alternative that the $90,000 per year should be included in Louis Sheff's income as an annuity pursuant to paragraph 56(1)(d) of the Act. If the amount in question is not an annuity, counsel argues, it should be taxable as a capital gain pursuant to section 40 of the Act even though no disposition has taken place after 1995. In his view, the share sale agreement was based on the occurrence of future, uncertain events and, accordingly, a capital gain can be included in Louis Sheff's income for each year that he received the $90,000 after October 1995.
[30] Finally, counsel submits that, in filing their income tax returns for the 1995 taxation year, the appellants made with respect to the undeclared consulting fees received from SW a misrepresentation that is attributable to neglect, carelessness or wilful default under paragraph 152(4)(a) of the Act. It was therefore open to Revenue Canada to reassess the appellants for that year.
Analysis
[31] My first comment is that the circumstances of this case as they have unfolded from the beginning resulted in an imbroglio in which each of the parties concerned has tried to interpret in that party's own way the tax consequences of a desperate settlement agreement reached by people having intertwined interests.
[32] It is also my perception that neither Mr. Louis Sheff nor Mr. Allan Sheff wanted to bring back at the hearing memories of the acrimonious relationship that had existed years ago when they were negotiating the departure of Louis Sheff as a shareholder of SW, the company he had founded. Thus, both were vague in describing how the 1985 agreement was finally reached, and what the real intention of each party in drafting that agreement had been. Furthermore, it is my perception as well that