Massicotte c. La Reine

Massicotte c. La Reine
Court (s) Database
Tax Court of Canada Judgments
Date
2006-11-14
Neutral citation
2006 TCC 618
File numbers
2000-587(IT)G
Judges and Taxing Officers
Pierre Archambault
Subjects
Income Tax Act
Decision Content
Docket: 2000-587(IT)G
BETWEEN:
LOUIS MASSICOTTE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
____________________________________________________________________
Appeals heard on common evidence with the appeals from
Les Consultants Pub Création Inc. (2000‑590(IT)G) on
October 20 and 21, 2005, in Québec, and on December 7, 2005, in Montréal, Quebec.
Before: The Honourable Judge Pierre Archambault
Appearances:
Counsel for the Appellant:
Richard Généreux
Counsel for the Respondent:
Nathalie Labbé
____________________________________________________________________
JUDGMENT
The appeals from the assessments under the Income Tax Act for the 1993 and 1995 taxation years are allowed, and the assessments are referred back to the Minister of National Revenue for review and reassessment on the grounds that the $44,650 benefit conferred on the Appellant is to be excluded from his income for 1993, that for 1995 the employment benefit is to be reduced to $239,000, and that the sum of $750 is to be included as a taxable capital gain in that year, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 14th day of November 2006.
"Pierre Archambault"
Archambault J.
Translation certified true
on this 20th day of December 2006.
Monica F. Chamberlain, Translator
Docket: 2000-590(IT)G
BETWEEN:
LES CONSULTANTS PUB CRÉATION INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
____________________________________________________________________
Appeals heard on common evidence with the appeals from Louis Massicotte (2000‑587(IT)G) on October 20 and 21, 2005,
in Québec, and on December 7, 2005, in Montréal, Quebec.
Before: The Honourable Justice Pierre Archambault
Appearances:
Counsel for the Appellant:
Richard Généreux
Counsel for the Respondent:
Nathalie Labbé
____________________________________________________________________
JUDGMENT
The appeals from the assessments under the Income Tax Act with respect to the taxation years ended December 31, 1994, and December 31, 1995, are dismissed.
The appeal from the assessment for the taxation year ended May 31, 1994, is allowed and the assessment is referred back to the Minister of National Revenue for review and reassessment on the ground that in computing its business income for the taxation year ended May 31, 1994, the Appellant is entitled to a deduction of $85,657, all in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, on this 14th day of November 2006.
"Pierre Archambault"
Archambault J.
Translation certified true
on this 20th day of December 2006.
Monica F. Chamberlain, Translator
Citation: 2006TCC618
Date: 20061114
Dockets: 2000-587(IT)G
2000-590(IT)G
BETWEEN:
LOUIS MASSICOTTE,
LES CONSULTANTS PUB CRÉATION INC.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Archambault J.
[1] In these appeals, the issue is primarily a business separation and the tax consequences of the operations related to it. Two businessmen, Louis Massicotte and Michel Audy, agreed in writing (separation agreement), on June 10, 1994, to divide up their direct or indirect participation in the following two corporations: Les Consultants Pub Création inc. (Pub) and L'Im‑Média inc. (Im‑Média). At the time of the division, Mr. Audy held shares in Pub and in Im‑Media through an investment corporation called Gestion Cyrano Inc. (Cyrano).[1] Mr. Massicotte held his shares in Im‑Média directly (Exhibit A‑1, Tab 28) and his shares in Pub through Gestion Amadéus‑Amadéus Ltée (Amadéus).[2] He had acquired the shares in Im‑Média from Amadeus for one dollar several months earlier, that is, on October 1, 1993.[3] He also allegedly held directly the Pub shares in December 1990 (Exhibit A‑1, Tab 19).
Assessments by the Minister
[2] For the 1993 taxation year, the Minister of National Revenue (the Minister) included in Mr. Massicotte’s income a benefit of $44,650 under subsection 15(1) of the Income Tax Act (the Act). This amount corresponded to a credit added on June 30, 1993, to the Amadeus advances account for Mr. Massicotte without him having provided any consideration. For his part, Mr. Massicotte claims that this credit was given to him following his transfer to Amadeus of 4,465 Class C capital shares in Pub. He had previously acquired theses shares from Cyrano in consideration for a reduction of $44,650 in the balance of the sale price of Pub common shares (Class A) that he had sold to Cyrano in December 1990.
[3] In his assessment dated April 15, 1998, for the 1995 taxation year, the Minister included the sum of $240,000 in Mr. Massicotte’s income as a benefit conferred under subsection 246(1) of the Act.[4] This amount corresponds to an adjusting entry dated December 31, 1995, in the Pub "employee advances" account[5] regarding Mr. Massicotte. According to Mr. Massicotte, the amount in question represents the value of a debt that he allegedly transferred to Pub in 1994. The debtor was either Mr. Audy or Cyrano and this obligation is recorded in the separation agreement, but there are no details to explain the nature or circumstances surrounding it. The Minister assumed that the debt had been transferred to Pub on December 31, 1995, because he determined that its fair market value was zero as of that date. In his Reply to the Notice of Appeal, the Minister assumed, as part of his audit, that the benefit had been conferred by Pub. As a result of a motion from the Respondent for permission to amend this reply, Tardif J. allowed a change whereby it was Amadéus —not Pub — that was to be deemed the party that had conferred the benefit on Mr. Massicotte. However, the burden of proof falls on the Respondent to establish this fact. Tardif J. stated the following: "... the fact that the assessment is based on subsection 246(1) of the ITA has no effect on the burden of proof, which shall remain on the Appellants, except however as regards the new fact introduced by the amendment granted".[6]
[4] With respect to the appeals filed by Pub concerning the 1994 and 1995 taxation years, the only outstanding issue involves the Minister’s disallowal of the deduction, for the year ended December 31, 1994, of the sum of $70,000 that Pub claims to have paid to Cyrano as a separation allowance. The Minister allowed that Pub could deduct the sum of $85,657, which had been paid to Cyrano as fees, in computing its income for the fiscal year ended May 31, 1994. Pub dropped its appeal concerning the taxation year ended December 31, 1995.
Background
• Sale of 50% of Pub by Massicotte to Cyrano
[5] Mr. Massicotte met Mr. Audy in 1985 when he was hired as an advertising creator by a company operating a radio station in Québec. At the time, Mr. Audy was the manager of the company. Two years later, Mr. Massicotte set up his own advertising agency, Pub,[7] and according to Mr. Massicotte, that agency was very successful.[8]
[6] In 1990, Mr. Audy approached Mr. Massicotte to join him at Pub. An agreement (1990 contract of sale) was reached on December 12, 1990, whereby Mr. Massicotte sold Cyrano 50% of the Class A shares in Pub for $350,000.[9] The sum of $50,000 was payable nine days later, and the balance of $300,000 was to be paid out of the dividends from Pub. The agreement provided for the payment of a $50,000 dividend within 90 days after June 30, 1991, and was to be taken from a [translation] "dividend guaranteed...by [Pub] and [Mr. Massicotte] but was to be taken from the first $50,000 in profits from fiscal year 1990‑91".[10] Paragraph 11 of the 1990 contract of sale stipulates that, beginning with the end of the fiscal year on June 30, 1992, Cyrano was required to pay Mr. Massicotte its entire share of the declared annual dividends (subject to certain adjustments), and that this would continue until the balance of the selling price was fully paid off, which was to be no later than September 30, 1997.[11] The unpaid balance did not bear any interest.[12]
[7] Under the terms of paragraph 17 of the 1990 contract of sale, the shares acquired by Cyrano were to be converted into Class B shares, a class of shares that enjoyed the same rights and privileges as the Class A shares.[13] It is strange that two classes of shares were created with the same rights. How can there be two separate classes of shares if they both have exactly the same rights and privileges? Clearly this situation was designed to allow dividends to be declared in favour of Cyrano or Amadéus, and no one else. In a way, this arrangement allowed Mr. Massicotte’s share of the profits to be paid to him through Cyrano as the proceeds from the sale of his shares, for which Mr. Massicotte could claim the capital gains exemption of $500,000. This arrangement could be described as a forward strip,[14] and also made it possible to convert the salary of one of the shareholders into a dividend, without having to do it for the other shareholder.
[8] One other curious fact--Mr. Massicotte apparently received more than the agreed-upon sale price of $350,000 from Cyrano for the Pub shares. According to a document faxed by J. M. Fortin[15] to the Minister’s auditor, Mr. Massicotte allegedly received a total of $383,294, or $50,000 a few days after signing, $50,000 in 1991, $40,461 representing the total amount paid "through CP" (i.e., Pub) between August 1, 1992, and December 31, 1992, $150,683 paid under the same conditions in 1993, $47,500 also paid in the same manner in 1994, and $44,650 representing the value of the 4,465 Class C shares given in repayment (no mention of date) (Exhibit A‑1, Tab 38).
• Management of Pub
[9] Under the terms of article 12 of the shareholder agreement, the shareholders were also to be compensated (Exhibit A‑1, Tab 14). According to Mr. Massicotte, they were originally supposed to receive salaries of $115,000, plus possible bonuses of $10,000, for a total of $125,000 even if, in his case, he did not have to devote more than 25 to 30 hours of work a week to the operations of Pub. According to Mr. Audy, each of the two partners received a salary of $100,000. It appears that Mr. Audy’s compensation was paid to Cyrano in the form of fees, even though Mr. Audy acted as Vice-president and General Manager of Pub: $83,930 and $271,339 were paid out in this manner in 1992 and 1993, respectively (Exhibit I‑1, financial statements of Cyrano, Note 8). When Pub’s financial situation worsened, Mr. Massicotte apparently agreed, on August 1, 1992, to allow his salary to be reduced to approximately $15,000 or $25,000.[16] For the 1993, 1994 and 1995 taxation years, Mr. Massicotte’s income-tax returns do not show any employment income from Pub or Im‑Média (Exhibit A‑1, Tabs 1, 3 and 10). He indicated that he had agreed to this salary reduction in order to allow Pub to declare dividends to Cyrano to help pay off the balance of the sale price of the Pub shares sold to Cyrano. However, these agreements do not appear to have had the desired results, since Pub suffered a loss of $111,342 in the fiscal year ending June 30, 1993. As can be seen below in Table 1, Pub paid out just $3,300 in dividends in 1993, and did not pay any at all in 1994! However, it apparently paid $85,657 in fees to Cyrano in 1994 (according to paragraphs 18(f) and (g) of the amended Reply to the Notice of Appeal in the Pub file) and the Minister, at the start of the hearing, conceded that they could be deducted from Pub’s income for 1994.
[10] An analysis of the financial statements of Pub and Im‑Média adduced in evidence reveals the following information:
TABLE 1[17]
Pub
As at June 30
May 31 [18]
Dec. 31.
89
90
91
92
93
94
94
95
Revenues
945,818
1,795,941
2,259,254
3,012,996
2,694,987
1,197,004
623,600
861,043
Profits
15,501
131,327
186,082
7,406
(126,063)
(66,840)
131,714
42,274
After-tax profit
12,701
106,327
149,082
3,300
(111,342)
(54,809)
131,714
30,243
Retained earnings
12,701
119,028
268,110
122,300
7,658
(47,151)
88,493
118,736
dividends
Cl. A
Ø
Ø
Ø
50,000
1,650[19]
Ø
Ø
Ø
Cl. B
Ø
99,110[20]
1,650
Ø
Ø
Ø
Cl. C
Ø
Ø
Ø
Ø
Ø
TOTAL
149,110
3,300
−
−
−
Shares
Cl. A
100
100[21]
50
50
50
50
50
50
Cl. B
50
50
50
50
50
50
Cl. C
99,110
185,410[22]
185,410
185,410
185,410
TABLE 2[23]
Im-Média
30 June 93
31 May 94[24]
31 May 95[25]
Revenues
276,970
444 ,428
1,301,798
Profits
(53,667)
10,410
63,899
After-tax profit
(53,667)
10,410
59,003
Retained earnings
(75,446)
(65,045)
(19,301)
Shares
Cl. A
1,000
1,000
1,000
Cl. B
Ø
Ø
Cl. C
Ø
Ø
• Credit to "Shareholder Advances" account of Amadéus
[11] According to Mr. Massicotte, Cyrano allegedly transferred to him its 4,465 Class C Pub shares on July 1, 1993, in partial payment for what Cyrano owed him for his Class A shares in Pub.[26] Mr. Massicotte then allegedly transferred them to Amadéus. Pub's accountant made the following adjusting entries for the Amadéus fiscal year ended June 30, 1993 (Exhibit A‑1, Tab 40):
13
Investment in Pub
43,000.00
L. Massicotte
43,000
(transfer of shares held by Cyrano
to L.M. and from him to Amadeus)
14
Investment in Pub
1,650
L. Massicotte
1,650
(transfer of pr. shares from L.M. to Amadeus)
[12] Mr. Bureau stated the following in the Pub memo sent to Sylvain Trudel: [translation] "1993 By agreement, the shares held by Cyrano ($43,000)[27] are transferred to Amadéus in consideration for the remainder of the sale price owed by Cyrano to Louis Massicotte. Dated July 1, 1993" (Exhibit A‑1, Tab 26). This memo indicates that other transactions or events must be taken into account, and these include an annual meeting of the shareholders and directors on "September 28" (1993) and the adoption of the "1993‑1994 budget". The document bears the initials of Mr. Massicotte and Mr. Audy, but is not dated. Since the transfer did not take place until "July 1, 1993", that is, immediately after the end of Amadeus’s 1993 fiscal year, it is strange that these shares would have been shown on the Amadeus balance sheet for the fiscal year ended June 30, 1993, and that the "shareholder advances" account, which showed a debit of $41,452 as of June 30, 1992, showed a credit of $7,321 as of June 30, 1993 (Exhibit I‑2)!
[13] Further, it does not appear that the Pub memo was acted upon by the transfer, on July 1, 1993, of the 4,465 Class C shares. First, according to the financial statements of Cyrano as at July 31, 1993, which were prepared by KPMG, Cyrano still held the 4,465 Class C shares (Exhibit I‑1, Note 3 of financial statements). Then, the transfer apparently was only carried out according to the terms of a contract of sale dated May 30, 1994, whereby Cyrano sold Amadéus not only these shares, but also its 350 Class A shares, all for one dollar. An excerpt from the minutes of a meeting of the Cyrano board of directors authorized Mr. Audy, on that same date, to sign the necessary documents for the sale of all these shares (Exhibit A‑1, Tab 29).
[14] As far as the Minister’s auditor is concerned, the adjusting entries in the books of Amadéus relating to the transfer of the Class C preferred shares do not correspond with an actual transfer that was made in 1993, because the transfer did not occur until May 30, 1994, according to the contract of sale between Cyrano, "the vendor", and Amadéus, "the purchaser" (Exhibit A‑1, Tab 27). Also, the auditor did not recognize that the reduction in the price of the shares sold to Cyrano by Mr. Massicotte in 1990 represented the consideration given for the preferred shares because, as stated in the document from Mr. Fortin (Exhibit A‑1, Tab 38), Mr. Massicotte apparently received $33,294 over and above the amount that was owed to him for these shares. According to the auditor, it is unusual for a person to pay more than what they owe. She pointed out that the 1990 contract of sale did not provide for any interest on the unpaid balance of the sale price, and so the excess amount cannot represent interest.
• Separation of Massicotte and Audy
[15] According to an addendum to the shareholder agreement, dated September 29, 1993, the parties agreed that the value of the Pub common shares with voting rights was $500,000 (or $250,000 for each of the two shareholders) — and not more than $700,000, as was the case at the time the shares were purchased in 1990 — for purposes of redemption under the terms of the shareholder agreement (Exhibit A‑1, Tab 24). Mr. Massicotte stated that at the time, relations between him and Mr. Audy had become strained. The two shareholders no longer shared the same philosophy regarding how the business should be run. An atmosphere of mistrust had even settled in between them. Mr. Audy complained that Mr. Massicotte was spending too much of his time on other activities and not enough was devoted to Pub and Im‑Média. As we saw earlier, the financial situation at the time was not the best, either. According to Table 1, Pub suffered a pre-tax loss of $126,063 as at June 30, 1993,[28] and the situation did not improve in the eleven months of the following fiscal year because, by May 31, 1994, losses had reached $66,840. Business income declined, going from $2,694,987 at June 30, 1993, to $1,197,004 at May 31, 1994.
[16] On June 10, 1994, Messrs. Massicotte and Audy, Amadéus, Cyrano and, as intervenors, Pub and Im‑Média, signed the separation agreement which provided primarily for the sale, by Cyrano, for [translation] "one dollar per share", of its shares in Pub [translation] "to MASSICOTTE, AMADÉUS, or any other entity(ies) that they may designate". In addition, Cyrano or Mr. Audy agreed to acquire all the shares in Im‑Média held by Mr. Massicotte for the sum of $70,000. Articles 2 and 3 of this agreement (Exhibit A‑1, Tab 30) read as follows:
[translation]
2. SALE OF PUB SHARES
CYRANO shall sell, effective this date, for the sum of one dollar per share, all its shares in PUB to MASSICOTTE, AMADEUS, or any other entity(ies) that they may designate. Effective this date, CYRANO and AUDY and IM‑MEDIA shall return to PUB any assets or property belonging to it and will settle any invoices or account-to-account transfers as quickly as possible.
3. SALE OF IM‑MEDIA SHARES AND DISCHARGE OF DEBT CYRANO, AUDY agree to acquire all the shares held in Im‑Media by MASSICOTTE since October 1993 for the sum of $70,000, thereby cancelling any previous agreement previous to this agreement binding the parties, and more particularly the non‑competition clause binding CYRANO and AUDY to MASSICOTTE in the shareholder agreement of CONSULTANTS PUB CREATION INC. AUDY and CYRANO acknowledge owing the capital sum of two hundred and forty thousand dollars ($240,000), in the form of a note payable, to MASSICOTTE and or AMADEUS. This sale and this discharge of debt cannot be considered to be complete until CYRANO and AUDY have officially met the following conditions, with the exception of any exchanges described in clauses 3.1 and 3.4 (these must be completed within the next 18 months):[29]
3.1 LEASE
Audy and CYRANO guarantee to AMADEUS and MASSICOTTE that PUB shall be fully released from any commitments related to its current lease with PARC SAMUEL HOLLAND, and this effective from July 1, 1994. Accordingly, AUDY and CYRANO shall enter into negotiations with, and secure the cancellation of the existing PUB lease with, PARC SAMUEL HOLLAND.
Any outstanding rent prior to July 1994 (up to a maximum of $35,000) shall be jointly assumed by PUB and IM‑MEDIA‑CYRANO, but it may be paid in full by PUB in the form of an exchange delivered to SSQ and (or) PARC SAMUEL HOLLAND. These exchanges of services, negotiated by AUDY with SSQ, shall be usable by SSQ at a rate of 50% on any order, excluding media placements, until the remainder is fully used. AUDY, CYRANO and IM‑MEDIA guarantee to reimburse PUB, in the form of barter contracts to be defined and agreed to by PUB, for one-half of the exchange credit that PUB issues to SSQ, up to a maximum of $17,500.
3.2 LINE OF CREDIT
IM‑MEDIA, CYRANO and AUDY shall assume a $100,000 debt that was contracted by PUB with the CAISSE QUEBEC EST, by reducing PUB’s existing line of credit in an amount equivalent to AUDY’s existing surety of the same amount.
3.3 IM‑MEDIA – DROUIN LOAN
CYRANO‑AUDY guarantee to MASSICOTTE that he shall be fully released from its endorsement of the loan that IM‑MEDIA has with YVAN DROUIN, as confirmed in writing by YVAN DROUIN.
3.4 EXCHANGES GUARANTEED
Effective this date, AUDY, CYRANO or IM‑MEDIA agree to pay to MASSICOTTE or his corporations $18,000 worth of barter contracts, to be defined and agreed to by MASSICOTTE.
Further, an amount totalling $20,000 shall be paid to MASSICOTTE or one of his corporations in the form of barter contracts to be defined and agreed to by MASSICOTTE.
3.5 TRANSITION AND NON‑COMPETITION
AUDY, CYRANO and IM‑MEDIA agree to a 60-day transition period beginning July 1, 1994, to allow PUB to retain its clients and to allow the transfer of PUB files in which AUDY, CYRANO and IM‑MEDIA are involved to take place at no risk to PUB.
[Emphasis added.]
• Credit to PUB "employee advances" account
[17] Even if virtually all of the conditions related to the payment of the $240,000 appear to concern only Pub and this amount was supposed to be paid to "Massicotte and (or) Amadéus", Mr. Massicotte felt that it was owed to him. The promissory note referred to in Article 3 of the separation agreement was not submitted. Since he required money to cover his personal needs beginning from the summer of 1994 on, Mr. Massicotte asked Pub to "advance" him the following amounts as payment towards his "salary": $48,553 in 1994, $143,500 in 1995 and $47,947 in 1996, for a total of $240,000. These figures were not contested by the Respondent.
[18] Since he did not want to put Mr. Audy and Cyrano on official notice to pay the $240,000, because they were continuing to make payments on the line of credit, Mr. Massicotte apparently chose instead to transfer this debt to Pub in October or November 1994, following a decision by him and Mr. Chabot, and he apparently told Mr. Chabot to [translation] "do whatever you have to do to transfer the debt" to Pub.[30] Mr. Chabot contradicted this version from Mr. Massicotte. According to him, it was Mr. Massicotte, and he alone, who had decided to make this transfer. If he failed to make an accounting entry for the December 31, 1994, fiscal period, it was because it was too late. We note that this accountant has been working for Mr. Massicotte and his various corporations since the spring of 1994. Also, he was present at the negotiations regarding the separation of Messrs. Massicotte and Audy, which took place on June 10, 1994. Since the balance in the Pub advances account was in a credit position,[31] the accounting entry showing the transfer could be made for the following fiscal period, and this is why he did not do it until the end of the 1995 fiscal period. Therefore, we must believe that he was not aware of this transfer until after the end of the 1994 year and, in all likelihood, after having prepared Pub’s financial statements for December 31, 1994.[32]
[19] Mr. Massicotte, Amadéus and Pub waited until May 3, 1996, to place Mr. Audy and Im‑Média on notice that they were required to pay them the $240,000 because of their failure to comply with the commitments made in the separation agreement. According to Mr. Massicotte, business was good for Im‑Média in the fall of 1994, as can be seen from reading certain magazines from the Québec area carrying advertising that had been prepared by Im‑Média.[33]
[20] Since Mr. Audy and Im‑Média adopted the position that they had met all conditions in the separation agreement and did not comply with the formal notice, the solicitors for Mr. Massicotte instituted an action before the Quebec Superior Court one year later, on June 10, 1997. Even though the action was entered on behalf of Louis Massicotte, Amadéus and Pub, and even though, at the time, the debt had been transferred to Pub in 1994 or 1995, the court was asked to order Mr. Audy and Im‑Média to pay the $240,000 [translation] "to the plaintiff Louis Massicotte"! Mr. Massicotte stated that he did not remember if he had informed his lawyer that the debt had been transferred to Pub.[34] The lawsuit never yielded any results because Im‑Média made an assignment in bankruptcy on February 11, 1998, and Mr. Audy did the same a few days later, on February 16, 1998.[35] Strangely enough, the person shown as the bankruptcy creditor for this amount is also Mr. Massicotte, and not Pub.
[21] Finally, expert witness Lucie Demers testified in connection with the valuation of the $240,000 debt as of December 31, 1995. Essentially, she determined that the debt was valueless [translation] "because of the negative value of the debtors’ net assets" (valuation report, Exhibit I‑6, p. 12). For purposes of her valuation, she had assumed that the $240,000 was owed by Mr. Audy and Im‑Média. She did not take into consideration the impact that would result from a contestation of this debt by Mr. Audy or the conditional nature of the obligation of the debtors who owed the debt.
• $70,000 separation allowance
[22] While the separation agreement is silent on the question of a separation allowance for Cyrano or Mr. Audy, Mr. Massicotte maintained that Pub had agreed on June 10, 1994, to pay this type of allowance to Cyrano. Mr. Audy, for his part, claimed that he had never asked for or received this type of allowance. It must be pointed out that the Minister, after considering the inclusion of this amount in Cyrano’s income, decided in the end not to include it. The auditor explained that she had not seen any supporting documents or bank deposit for Cyrano, as was normally the case for fees received by Cyrano. Furthermore, she found it difficult to explain how Pub would have paid such an allowance, given Mr. Massicotte’s dissatisfaction with Mr. Audy’s performance. Mr. Massicotte did acknowledge that he had not received a separation allowance from Im-Média. According to him, his compensation was the sum of $70,000 he received for his shares.
Analysis
[23] The relevant provisions of the Act that relate to the resolution of this dispute are the following. First, there are those that deal with the taxation of a benefit, specifically paragraph 6(1)(a) and subsections 15(1), (2), (2.1), (2.6) and 246(1) of the Act:
6. (1) Amounts to be included as income from office or employment There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable
(a) Value of benefits - the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment, except any benefit
...
15(1) Benefit conferred on shareholder — 15. (1) Where at any time in a taxation year a benefit is conferred on a shareholder, or on a person in contemplation of the person becoming a shareholder, by a corporation otherwise than by ...
the amount or value thereof shall, except to the extent that it is deemed by section 84 to be a dividend, be included in computing the income of the shareholder for the year.
...
15(2) Shareholder debt — Where a person (other than a corporation resident in Canada) or a partnership (other than a partnership each member of which is a corporation resident in Canada) is
(a) a shareholder of a particular corporation, (b) connected with a shareholder of a particular corporation, or (c) a member of a partnership, or a beneficiary of a trust, that is a shareholder of a particular corporation
and the person or partnership has in a taxation year received a loan from or has become indebted to the particular corporation, any other corporation related to the particular corporation or a partnership of which the particular corporation or a corporation related to the particular corporation is a member, the amount of the loan or indebtedness is included in computing the income for the year of the person or partnership.
15(2.1) Persons connected with a shareholder — For the purposes of subsection 15(2), a person is connected with a shareholder of a particular corporation if that person does not deal at arm's length with the shareholder and if that person is a person other than
(a) a foreign affiliate of the particular corporation; or
(b) a foreign affiliate of a person resident in Canada with which the particular corporation does not deal at arm's length.
15(2.6) When s. 15(2) not to apply -- repayment within one year — Subsection 15(2) does not apply to a loan or an indebtedness repaid within one year after the end of the taxation year of the lender or creditor in which the loan was made or the indebtedness arose, where it is established, by subsequent events or otherwise, that the repayment was not part of a series of loans or other transactions and repayments.
246(1) Benefit conferred on a person— Where at any time a person confers a benefit, either directly or indirectly, by any means whatever, on a taxpayer, the amount of the benefit shall, to the extent that it is not otherwise included in the taxpayer's income or taxable income earned in Canada under Part I and would be included in the taxpayer's income if the amount of the benefit were a payment made directly by the person to the taxpayer and if the taxpayer were resident in Canada, be
(a) included in computing the taxpayer's income or taxable income earned in Canada under Part I for the taxation year that includes that time; or
(b) where the taxpayer is a non-resident person, deemed for the purposes of Part XIII to be a payment made at that time to the taxpayer in respect of property, services or otherwise, depending on the nature of the benefit.
[Emphasis added.]
[24] With respect to the $70,000 claim for a separation allowance, it is essentially a case of applying subsection 9(1) and paragraph 18(1)(a) of the Act. These two provisions read as follows:
9(1) Income — Subject to this Part, a taxpayer's income for a taxation year from a business or property is the taxpayer's profit from that business or property for the year.
18(1) General limitations— In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
(a) General limitation — an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;
[Emphasis added.]
[25] In her initial Reply to the Notice of Appeal, the Respondent advanced an "alternative argument", namely that Pub had conferred a benefit of $240,000 on Mr. Massicotte as an employee, pursuant to paragraph 6(1)(a) of the Act. At the hearing before Tardif J. for the motion to amend her reply, the Respondent had announced that she would be withdrawing this "alternative argument". The reasons for this decision are unclear.
[26] At the start of the hearing, a great deal of time was required to clearly identify the issues involved, because the pleadings of each of the parties did not seem particularly clear to me. It was clear from the position of counsel for Mr. Massicotte that section 246 could not be applied here with respect to the $240,000 credited to the "employee advances" account, because this is a remainderman provision that only applies if the benefit is not taxable under Part I of the Act. This is the exchange that took place at the start of the hearing:
[translation]
HIS HONOUR: So, based on your reasoning, paragraph 6(1)(a) will apply before section 246?
Mr. GÉNÉREUX: It’s obvious.
HIS HONOUR: It is?
Mr. GÉNÉREUX: It’s obvious.
[Vol. I of transcript, page 143]
HIS HONOUR: Okay. So, if it’s taxable….
Mr. GÉNÉREUX: It would be under 6(1)(a), employee benefit, because we're dealing with an appropriation, and if there is an appropriation, it would be by the employee, but otherwise, it would necessarily be a capital gain and nothing else because, then, at that time, there would be a disposition of a property, the cost of which, there are human costs involved there, and also personal costs in connection with that, and we intend to prove that to you, but as to a tax cost, there is none.
[Vol. I of transcript, pages 50‑51. Emphasis added.]
[27] I fully agree with counsel on this interpretation. In fact, if I were to find that there was a benefit arising out of the transfer of the $240,000 debt in 1995 and that that benefit had been conferred on Mr. Massicotte by virtue of his office or employment, it is clear that section 246 would not be applicable.
[28] Being a master in matters of law, I then raised the possibility that I could justify the assessment for 1995 basing myself on paragraph 6(1)(a) of the Act. However, in order to respect the rule of procedural fairness, I had to assure myself that the taxpayer was not caught off guard. Counsel for the Appellants then confirmed that such was not the case:
[translation]
Mr. GÉNÉREUX: I’m not surprised by that, we have already said this in our pleadings.
HIS HONOUR: Yes.
Mr. GÉNÉREUX: All that I was saying at the time was that they had to have the burden of proof on them and then they decided to drop the matter because I was saying that they had the burden of proof for that, because that was not the basis for the assessment—they were changing the very basis of the assessment and, even according to the Court of Appeal, even if subsection 152(9) did not cover that, and now, today, given what has been done, in my opinion, the fact that they have abandoned their position, they no longer wish to plead, and I based myself on that point in coming here today, if we still want to maintain that this was an employee benefit, I said, I think, that procedural fairness would be tainted, and all the more so since I wonder if they could argue that position because the return has been statute-barred and this is an attack against the very basis of the assessment that is in dispute here, but that having been said, when you ask yourself the question, how can the Court be prevented from ruling, even in the absence of any arguments being put forth, because they have dropped the issue, I, I don’t have the precedents in front of me but I have several cases where, especially those that went to appeal, your honour, I agree but …
(Vol. I of Transcript, p. 33)
[29] Further, as counsel for the Appellants has already mentioned himself, it is clear that the amount that was credited in the accounting records of Pub following the transfer of the $240,000 debt was credited to the "employee advances" account. During his testimony, Mr. Massicotte acknowledged not only that he was the President and Director of Pub, and therefore held an office for purposes of the Act, but also that the advances made to him by Pub had been made as payments towards his salary! Moreover, counsel for the Appellants willingly acknowledged that Mr. Massicotte was an employee: [translation] "Finally, it has been admitted for purposes of this case that Mr. Massicotte was the manager and the employee of Pub Création at any relevant point for purposes of this case." (para. 7 of "Appellants’ additional submission"). Therefore, he argues, if Pub conferred a benefit on Mr. Massicotte that benefit was conferred on him by virtue of an office or an employment.
[translation]
HIS HONOUR: ... And you stated that ... your colleague could argue that it is taxable and if it were taxable, it would inevitably be 6(1)(a) ....
...
Mr. GÉNÉREUX:... given that we’re talking about a credit to the "employee" account, the benefit to the employee seems to me to be the other possible argument.
[Vol. I of Transcript, page 60.]
[30] In his oral submission, counsel for the Appellants argued that the Court could not confirm the Minister’s assessment using as a basis paragraph 6(1)(a) of the Act because it would then be a new basis for the assessment and it could not be validly established due to the fact that the return had become statute-barred. I then asked that written comments be submitted to me, and these were sent to me by counsel for the Appellants on February 3, 2006, and by counsel for the Respondent on March 15, 2006; the reply from the Appellants to the supplementary arguments of the Respondent was sent on April 5, 2006. This is what counsel for the Appellants wrote in his supplementary arguments:
[translation]
9. Can a capital gain be taxed in the hands of the Appellant for his 1995 taxation year? According to paragraph 39(1)(a) of the ITA, a capital gain is the gain realized by a taxpayer "to the extent of the amount thereof that would not, … be included in computing the taxpayer's income for the year or any other taxation year"). The issue of whether any of this gain would otherwise be included in computing Mr. Massicotte’s income for the year or for any other year is a question of both fact and law. It has been respectfully submitted that the Court must allow the appeal by Mr. Massicotte and vacate the assessment at issue if it considers that the $240,000 is to be included in computing the taxpayer’s income for 1995 or for any other year pursuant to paragraph 6(1)(a) of the ITA. In effect, the Crown withdrew its argument under paragraph 6(1)(a) of the ITA because it had nothing to do with the basis for the assessment at issue. In fact, what we have here is a reassessment outside the normal assessment period provided for in subsection 152(4) of the ITA;
10. In Pedwell v. Canada (C.A.), [2000] 4 F.C. 616, 2000 CanLII 17141 (F.C.A.), 2000-06-12, A-703-98, the Federal Court of Appeal ruled that the Tax Court of Canada does not have the power to uphold an assessment on any basis other than the one used by the Minister once the statutory period has run out. Here is an excerpt from that ruling:
[15] While the parties referred to a number of older authorities on the issue, Continental Bank now makes it clear (subject to subsection 152(9) [Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1 (as am. by S.C. 1999, c. 22, s. 63.1)] which applies to appeals disposed of after June 17, 1999 and is not relevant here in any event) that the Minister is bound by his basis of assessment. While this case does not involve the Minister advancing a different basis of assessment, I think the principle in Continental Bank is applicable to a judicial determination on a basis different from that in the notice of reassessment.
[16] First, if the Crown is not able to change the basis of reassessment after a limitation period expires, the Tax Court is not in any different position. The same prejudice to the taxpayer results--the deprivation of the benefit of the limitation period. It is not open to that Court or indeed this Court, to construct its own basis of assessment when that has not been the basis of the Minister's reassessment of the taxpayer.
[translation]
11. The Federal Court of Appeal confirmed this principle in a very recent decision, Rezek v. Canada, 2005 FCA 227 (CanLII), 2005-06-17, A‑462-03;A-463-03;A-464-03;A-465-03;A-466-03:
[58] Finally, the convertible hedge as a separate identifiable property constituted a new basis of assessment created by the judge in 2003. The Minister's limitation period for assessing had expired at the latest in 1998. The judge rejected the Minister's partnership basis of assessment and did not make a determination on the Minister's principal/agent basis of assessment, except in the case of Mrs. Scott. Absent the convertible hedge as a separate property finding, the appeals of the spouses would have been allowed. Therefore, the convertible hedge as a separate identifiable property constituted an impermissible new basis