Poulin v. The Queen

Poulin v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2016-06-14
Neutral citation
2016 TCC 154
File numbers
2013-2554(IT)G, 2013-2555(IT)G
Judges and Taxing Officers
Johanne D’Auray
Subjects
Income Tax Act
Decision Content
Docket: 2013-2554(IT)G
BETWEEN:
GHISLAIN POULIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
Appeal heard on common evidence with the appeal of Herman Turgeon, 2013-2555(IT)G, on September 28, 29 and 30, 2015, at Montréal, Quebec.
Before: The Honourable Justice Johanne D’Auray
Appearances:
Counsel for the Appellant:
Geneviève Léveillé
Laurie Beausoleil
Counsel for the Respondent:
Natalie Goulard
Marissa Figlarz, student-at-law
JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 2007 taxation year is allowed, without costs, and said assessment is vacated, in accordance with the attached reasons for judgment.
Signed at Ottawa, Canada, this 14th day of June 2016.
"Johanne D’Auray"
D’Auray J.
Docket: 2013-2555(IT)G
BETWEEN:
HERMAN TURGEON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
Appeal heard on common evidence with the appeal of Ghislain Poulin, 2013-2554(IT)G, on September 28, 29 and 30, 2015, at Montréal, Quebec.
Before: The Honourable Justice Johanne D’Auray
Appearances:
Counsel for the Appellant:
Geneviève Léveillé
Laurie Beausoleil
Counsel for the Respondent:
Natalie Goulard
Marissa Figlarz, student-at-law
JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 2007 taxation year is dismissed, without costs, in accordance with the attached reasons for judgment.
Signed at Ottawa, Canada, this 14th day of June 2016.
"Johanne D’Auray"
D’Auray J.
Citation: 2016 TCC 154
Date: 20160614
Docket: 2013-2554(IT)G
BETWEEN:
GHISLAIN POULIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Docket: 2013-2555(IT)G
BETWEEN:
HERMAN TURGEON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
D’Auray J.
BACKGROUND
[1] These appeals are filed against reassessments made under the Income Tax Act (the "ITA") regarding the 2007 taxation year, during which the appellants disposed of freeze shares that they held in the corporation Les Constructions de l’Amiante Inc. ("Amiante").
[2] They were sold in a context of reorganization of Amiante’s corporate structure, for the purposes of implementing the terms and conditions of Mr. Ghislain Poulin’s ("Mr. Poulin") gradual departure and integrating Mr. David Hélie ("Mr. Hélie") into the corporation.
[3] The following sales are the subject of these appeals:
A. Mr. Poulin’s sale of 450,004 Class F preferred shares in Amiante to 6847161 Canada Inc. ("Gestion Turgeon") for $450,004;
B. Herman Turgeon’s ("Mr. Turgeon") sale of 388,861 Class D preferred shares in Amiante to Gestion David Hélie Inc. ("Gestion Hélie") for $388,861;
[4] After the disposition of these shares, when calculating their income for the 2007 taxation year, the appellants reported taxable capital gains for which they each claimed a capital gains deduction as qualified small business corporation shares under subsection 110.6(2.1) of the ITA.
[5] The Minister of National Revenue ("Minister") disallowed the capital gains deduction claimed by Mr. Poulin. According to the Minister, Mr. Poulin, Mr. Turgeon and Gestion Turgeon acted in concert without separate interests. They were therefore deemed to have had a non-arm’s length relationship under paragraph 251(1)(c) of the ITA. Consequently, the provisions of section 84.1 of the ITA apply and Mr. Poulin is deemed to have received a dividend of $449,911 during the disposition of the Class F shares in Amiante in 2007.
[6] The Minister also disallowed the capital gains deduction claimed by Mr. Turgeon. According to the Minister, Mr. Turgeon, Mr. Hélie and Gestion Turgeon acted in concert without separate interests. They were therefore deemed to have dealt with one another at arm’s length under paragraph 251(1)(c) of the ITA. Consequently, the section 84.1 provisions apply and Mr. Turgeon is deemed to have received a dividend of $388,861 during the disposition of the Class D shares in Amiante in 2007.
FACTS I. Partial agreed statement of facts [7] On September 25, 2015, the parties filed a partial agreed statement of facts, which is reproduced below:
[translation] PARTIAL AGREED STATEMENT OF FACTS
1. The corporation "Les Constructions de l’Amiante Inc. " ("Amiante") is primarily active in the construction of roads, water supply systems and other related works.
2. Amiante resulted from mergers under the Canada Business Corporations Act: the first, on April 1, 1999, with 3458130 Canada Inc.;1 and the second, on November 1, 2007, with Ghilin Inc. ("Ghilin").2
3. Amiante’s Articles of Incorporation were also amended on May 20, 2005, and on September 26, 2007.3
4. Ghilin was incorporated by Ghislain Poulin on May 26, 2005, under the Canada Business Corporations Act.
5. The company Les Entreprises G.H.T. Inc. ("G.H.T. ") was incorporated by Herman Turgeon on April 25, 1997, under Part IA of the Companies Act of Quebec.
6. The company 6847200 Canada Inc. ("Gestion Poulin") was incorporated on September 26, 2007, by Ghislain Poulin under the Canada Business Corporations Act.
7. The company 6847161 Canada Inc. ("Gestion Turgeon") was incorporated on September 26, 2007, by Herman Turgeon under the Canada Business Corporations Act.
8. The company Gestion David Hélie Inc. ("Gestion Hélie") was incorporated on November 7, 2007, by David Hélie under the Canada Business Corporations Act.
9. On September 19, 2005, Ghislain Poulin and Herman Turgeon were equal shareholders in Amiante.
10. At all relevant times, and up until 2012, Ghislain Poulin and Herman Turgeon were members of Amiante’s Board of Directors.
Corporate reorganization – September 2005
11. As at March 31, 2005, the shareholders and characteristics of the shares held in Amiante were as follows:
Shareholders
Number
of shares
Class
CV
M/B ratio
FMV
G. Poulin
16,949
A
$200
$200
$1,325,000
10
E
$10
$10
$10
H. Turgeon
16,949
A
$200
$200
$1,325,000
10
E
$10
$10
$10
12. In September 2005, Amiante underwent a corporate reorganization with a view to, among other objectives, welcoming Bernard Bilodeau, a key Amiante employee, as a shareholder ("2005 Reorganization").4
13. Among other things, as part of the 2005 Reorganization, 11,512 Class A shares (5,756 per shareholder) in Amiante were converted to Class B shares.
14. Following the 2005 Reorganization, the shareholders and characteristics of the shares held in Amiante were as follows:
Shareholders
Number of shares
Class
CV
M/B ratio
Redemption value
Number of votes
G. Poulin
5,756
B
$68
$68
$450,004
5,756
Ghilin
10,000
A
$100
$100
$100
10,000
11,193
C
$132
$132
$874,996
10
E
$10
$10
$10
H. Turgeon
5,756
B
$68
$68
$450,004
5,756
G.H.T.
10,000
A
$100
$100
$100
10,000
11,193
C
$132
$132
$874,996
10
E
$10
$10
$10
B. Bilodeau
10,000
A
$100
$100
$100
10,000
10
E
$10
$10
$10
15. An Amiante shareholders’ agreement was signed on October 4, 2005.5 That agreement replaced the one signed on March 12, 1991.
16. On November 30, 2005, Amiante and its shareholders signed a Share Redemption Agreement that took effect on October 4, 2005.6
17. Between September 2005 and April 2007, Amiante bought back part of its Class C shares.7
Corporate reorganization – 2007
18. Raymond Chabot Grant Thornton prepared Amiante’s financial statements as at March 31, 2007.8
19. From April 1 to November 7, 2007, several transactions9 were carried out regarding Amiante’s corporate structure in order to, among other things: buy back Bernard Bilodeau’s shares; welcome David Hélie, a key Amiante employee, as a shareholder; modify the shareholder participation breakdown of Amiante share capital; plan for Ghislain Poulin’s eventual retirement; and amend the division of roles and responsibilities within the company.10
20. Among others, the following transactions occurred:
a. On September 26, 2007, Amiante amended its share capital.11
b. As part of the changes made to its share capital, Amiante exchanged some of its shares, including the exchange of each Class B share of Amiante’s former share capital for Class D shares in its new share capital, about 78.17 Class D shares for each Class B share. The 5,756 Class B shares held by Ghislain Poulin and Herman Turgeon respectively were thus exchanged for 450,004 Class D shares. Unlike the Class B shares, the Class D shares carried no voting rights.12
c. On November 1, 2007, Amiante merged with Ghilin.13 Each Class D share held by Ghislain Poulin and Herman Turgeon in the "former" Amiante share capital was converted into a Class D share in the share capital of the merged Amiante.14
d. On November 1, 2007, the 450,004 Class D shares in Amiante held by Ghislain Poulin were exchanged for 450,004 Class F shares in Amiante.15
e. On November 1, 2007, Ghislain Poulin disposed of the 450,004 Class F shares in Amiante in exchange for $450,00416 from Gestion Turgeon.
f. On November 7, 2007, Herman Turgeon disposed of the 388,861 Class D shares in Amiante in exchange for $388,86117 from Gestion Hélie.
21. Deloitte prepared Amiante’s financial statements as at October 31, 2007.18
22. On January 8, 2008, the new Amiante shareholders signed an addendum to the shareholder agreement of October 4, 2005.19
Ghislain Poulin disposed of 450,004 Class F shares in Amiante.
23. The Share Purchase Agreement20 signed on November 1, 2007, between Ghislain Poulin, Gestion Turgeon and Amiante stipulated that the sale price of the 450,004 Class F shares would be payable, among other things, under the following terms and conditions:
a. an amount of $45,000 was payable to Ghislain Poulin on December 21, 2007;
b. the balance of the sale price, i.e. $405,004, would bear interest at 5% per annum commencing on November 1, 2007;
c. the balance of sale was payable through five (5) annual consecutive payments in capital, in the amount corresponding to the higher of:
i. $81,000.80; or
ii. 90% of the sums received by Gestion Turgeon from Amiante; and
d. As payment of the balance sale, Amiante agreed to pay its shareholders annually at least 80% of its annual net profits, in the form of dividends or otherwise, providing that, however, all of the requirements under the Canada Business Corporations Act were met, including, in particular, those related to accounting and solvency tests.
24. On July 18, 2008, Amiante bought back 243,408 of its Class F shares held by Gestion Turgeon for the sum of $243,408. Of that amount, $143,083 was paid by Gestion Turgeon to Ghislain Poulin in repayment of the balance of the sale price.
25. On February 6, 2009, Amiante bought back 151,666 of its Class F shares held by Gestion Turgeon for the sum of $151,666. Of that amount, $131,139 was paid by Gestion Turgeon to Ghislain Poulin in repayment of the balance of the sale price.
26. On February 6, 2010, Amiante bought back 54,930 of its Class F shares held by Gestion Turgeon for the sum of $54,930.
27. The balance of the sale price and interest accrued thereon were paid in full in 2010.
Herman Turgeon disposed of 388,861 Class D shares in Amiante.
28. The Share Purchase Agreement21 signed on November 7, 2007, between Herman Turgeon, Gestion Hélie and Amiante stipulated that the sale price of the 388,861 Class D shares would be payable, among other things, under the following terms and conditions:
a. the balance of the sale price, i.e. $388,861, bore interest at 4% per annum commencing on November 1, 2007;
b. the balance of the sale price was payable based on cash flows generated by Amiante, which agreed to pay its shareholders annually, as payment of the balance of the sale price, at least 80% of its annual net profits, in the form of dividends or otherwise, providing that, however, all of the requirements under the Canada Business Corporations Act were met, including, in particular, those related to accounting and solvency tests.
c. Gestion Hélie committed itself to using 90% of the sums received from Amiante to pay the amount owing to Herman Turgeon.
29. On July 18, 2008, Amiante bought back 44,444 of its Class D shares held by Gestion Hélie for the sum of $44,444.22 Of that amount, $40,000 was paid by Gestion Hélie to Herman Turgeon in repayment of the balance of the sale price.
30. On February 6, 2009, Amiante bought back 27,690 of its Class D shares held by Gestion Hélie for the sum of $27,690. Of that amount, $24,922 was paid by Gestion Hélie to Herman Turgeon in repayment of the balance of the sale price.
31. On February 6, 2010, Amiante bought back 42,000 of its Class D shares held by Gestion Hélie for the sum of $42,000.
32. On February 6, 2011, Amiante bought back 42,000 of its Class D shares held by Gestion Hélie for the sum of $42,000.
33. On March 31, 2012, Amiante bought back 31,500 of its Class D shares held by Gestion Hélie for the sum of $31,500.
34. On December 28, 2012, Amiante bought back 72,438 of its Class D shares held by Gestion Hélie for the sum of $72,438.
Ghislain Poulin’s departure
35. On March 30, 2012, Ghislain Poulin sold his remaining interest in Amiante to Gestion Turgeon for a total sum of $1,370,000.23
36. It was at that point, in late March 2012, that Ghislain Poulin left Amiante for good.
Ghislain Poulin’s assessment
37. Ghislain Poulin reported taxable capital gains of $224,968 resulting from the disposition of 450,004 Class F shares in Amiante. He claimed an equivalent deduction under subsection 110.6(2.1) of the Income Tax Act (the "Act").24
38. The Minister took the position that Ghislain Poulin’s disposition of 450,004 Class "F" shares in Amiante to Gestion Turgeon triggered application of paragraph 84.1(1)(b) of the Act, and thereby created a dividend deemed to be paid in the amount of $449,911.
39. By a Notice of Reassessment dated October 31, 2011, the Minister therefore increased Ghislain Poulin’s taxable income by $562,389 for the 2007 taxation year. The Minister also cancelled the taxable capital gain initially reported and the capital gains deduction claimed by Ghislain Poulin in his income tax return prepared for the 2007 taxation year.25
40. By a Notice of Objection dated November 21, 2011, Ghislain Poulin duly objected to the reassessment made on October 31, 2011.26
41. A Report on Objection was prepared by the Minister.27
42. In a Notice of Confirmation dated March 27, 2013, the Minister confirmed the reassessment dated October 31, 2011.28
Herman Turgeon’s assessment
43. Herman Turgeon reported taxable capital gains of $194,402 resulting from the disposition of 388,861 Class D shares in Amiante. He claimed an equivalent deduction under subsection 110.6(2.1) of the Act.29
44. The Minister took the position that the disposition of 388,861 Class "D" shares in Amiante to Gestion Hélie made applicable paragraph 84.1(1)(b) of the Act, and thereby created a dividend deemed to be paid in the amount of $388,802.
45. By a Notice of Reassessment dated October 31, 2011, the Minister increased Herman Turgeon’s taxable income by $486,003 for the 2007 taxation year. The Minister also cancelled the taxable capital gain initially reported and the capital gains deduction claimed by Herman Turgeon in his income tax return prepared for the 2007 taxation year.30
46. By a Notice of Objection dated November 21, 2011, Herman Turgeon duly objected to the reassessment made on October 31, 2011.31
47. A Report on Objection was prepared by the Minister.32
48. In a Notice of Confirmation dated March 27, 2013, the Minister confirmed the reassessment dated October 31, 2011.33
Audit
49. As part of the audit, the Canada Revenue Agency ("CRA") auditor, Benoit Couillard, and representatives from CRA’s Headquarters exchanged various correspondence regarding the assessments in dispute.34
[The footnotes are reproduced in Appendix 1.]
II. Additional facts [8] It is also important to add certain facts raised during the hearing.
[9] Mr. Poulin was hired as an Amiante employee in 1981 and was responsible for the administrative aspect of the company.
[10] Mr. Turgeon began working for Amiante in 1985. As construction foreman, he was responsible for the construction sites, where he spent most of his time.
[11] At that time, the Amiante shareholders were Mr. Poulin, Étienne Lacasse, Réal Lessard and Armand Lapointe.
[12] In 1997, following numerous reorganizations in Amiante’s corporate structure, Mr. Turgeon became an Amiante shareholder, thus joining Mr. Poulin and Étienne Lacasse; each held 33 1/3% of the common shares.
[13] Étienne Lacasse then retired and left Amiante, leaving Mr. Poulin and Mr. Turgeon as the corporation’s 50% shareholders.
[14] Several conflicts arose between Mr. Poulin and Mr. Turgeon. They disagreed on the strategy to follow regarding the corporation’s future. Mr. Turgeon wanted to attract new shareholders in order to expand and broaden Amiante’s market share, whereas Mr. Poulin apparently preferred the status quo. The differences worsened to the point that, in 2004, Mr. Turgeon was thinking of leaving Amiante and selling his shares to Mr. Poulin. For his part, Mr. Poulin was also preparing exit scenarios, whereby he would leave Amiante and sell his shares to Mr. Turgeon.
[15] That being said, despite their differences, in 2005, Mr. Poulin and Mr. Turgeon decided to accept Bernard Bilodeau ("Mr. Bilodeau") as an Amiante shareholder.
[16] For that purpose, Amiante reorganized its share capital in 2005 and the appellants froze their common shares by converting the value of their common shares into preferred shares. Part of the common shares were converted into Class B preferred shares. Mr. Poulin and Mr. Turgeon each held 5,756 of these Class B preferred shares that had a redemption value of $450,004. That value for the Class B shares matched the amount needed by Mr. Poulin and Mr. Turgeon to claim the capital gains deduction. The remaining common shares were converted into Class C preferred shares. Mr. Poulin and Mr. Turgeon each held 11,193 of these Class C preferred shares that had a redemption value of $874,996.
[17] To complete Amiante’s reorganization, Mr. Poulin, Mr. Turgeon and Mr. Bilodeau each subscribed to 10,000 voting common shares, at $100 each. Thus, following that reorganization, the three shareholders each held 33 1/3% of Amiante’s new voting common shares.
[18] The arrival of Mr. Bilodeau as a shareholder and director did not resolve the conflicts between the shareholders. Mr. Poulin submitted a letter of intent dated December 22, 2006, to Mr. Turgeon and Mr. Bilodeau, whereby he expressed his desire to gradually leave Amiante.
[19] That letter of intent marked the beginning of negotiations that led to Amiante’s 2007 reorganization. Mr. Poulin and Mr. Turgeon each consulted professionals in order to benefit from Amiante’s reorganization, taking into account the gradual departure of Mr. Poulin. It should be noted that once the process began, the appellants only retained the services of Deloitte to conduct the reorganization due to the costs involved.
[20] On April 1, 2007, the Amiante shareholders agreed on the new distribution of the corporation’s share capital. Thus, Mr. Turgeon became Amiante’s majority shareholder with 51% of the common shares; Mr. Poulin reduced his interest in the common shares to 25%; and Mr. Bilodeau, to 24%. The agreement also stipulated that Mr. Poulin would immediately sell his Class B preferred shares to Gestion Turgeon in exchange for a promissory note payable within a maximum deadline of five years, and that the buyback of his portion would be completed on March 31, 2010, the date on which he would leave Amiante for good.
[21] Prior to concluding the April 1, 2007 agreement governing Mr. Poulin’s departure, specifically the sale, by Mr. Poulin of his Class B preferred shares to Gestion Turgeon, the shareholders decided to wait until Amiante’s financial statements were prepared.
[22] However, before the financial statements were prepared, a major conflict arose in September 2007 between Mr. Poulin and Mr. Bilodeau. Mr. Bilodeau immediately quit Amiante and demanded full buyback of his interest. Consequently, the agreement negotiated between the parties regarding Mr. Poulin’s departure was aborted.
[23] In the light of Mr. Bilodeau’s unexpected departure, Mr. Turgeon decided to persuade Mr. Hélie to become an Amiante shareholder and Mr. Poulin agreed to postpone his departure date for two years, to 2012.
[24] Mr. Hélie had been working as a controller for Amiante since June 1, 2004. The purpose of having Mr. Hélie as a shareholder was to ensure that he could take over the work done by Mr. Poulin.
[25] An agreement outlining Amiante’s reorganization and acceptance of Mr. Hélie was signed on September 20, 2007.[1]
[26] Under the 2007 reorganization, Mr. Poulin formed Gestion Poulin on September 26, 2007,[2] Mr. Turgeon formed Gestion Turgeon[3] on September 26, 2007, and Mr. Hélie formed Gestion Hélie on November 7, 2007.
[27] On November 1, 2007, Mr. Poulin sold 450,004 Class F preferred shares to Gestion Turgeon for $450,004. These shares were the Class B preferred shares that were converted into Class D preferred shares in 2007, and exchanged for Class F shares on November 1, 2007. The terms and conditions of the purchase are described in paragraphs 23, 24 and 25 of the partial agreed statement of facts.
[28] On November 7, 2007, Gestion Poulin sold 10.5% of Amiante’s common shares to Gestion Hélie for $1.90.
[29] Also on November 7 2007, Mr. Turgeon sold 388,861 Class D preferred shares to Gestion Hélie for $388,861. These Class D shares were the Class B preferred freeze shares that were converted to Class D shares in 2007. Mr. Turgeon financed the purchase of these shares by Gestion Hélie.
[30] Following certain negotiations regarding the interest rate, in exchange for the 388,861 Class D preferred shares, Gestion Hélie issued Mr. Turgeon a promissory note for $388,861 bearing interest at 4%. The promissory note was payable in accordance with the conditions set out in paragraphs 28 to 34 of the partial agreed statement of facts, i.e. even the share redemptions effected by Amiante.
[31] Following the September 2007 reorganization, Mr. Turgeon held 57.5% of the common shares in Amiante, Mr. Poulin held 32%, and Mr. Hélie, 10.5%.
[32] Under an addendum to the shareholder agreement, on December 20, 2007, it was agreed that Mr. Poulin was required to dispose of all of his remaining shares in Amiante by no later than December 31, 2012, at the time of his planned departure from Amiante. Mr. Poulin also quit Amiante on March 30, 2012, the date on which his shares were bought back.
[33] As stipulated by the share purchase agreements, Amiante bought back the Class F preferred shares held by Gestion Turgeon. Gestion Turgeon had repaid in full the promissory note it had issued to Mr. Poulin using sums resulting from Amiante buying back its shares.
[34] Amiante also bought back most of the Class D preferred shares held by Gestion Hélie for $259,982. Gestion Hélie thus paid that amount to Mr. Turgeon as repayment of the sale price of the preferred shares.[4] During the hearing, Mr. Hélie stated that there was one payment remaining on the promissory note issued by Gestion Hélie to Mr. Turgeon.
[35] On January 27, 2014, Gestion Hélie’s remaining 128,789 Class D shares were transferred to Groupe Profectus Inc.
[36] In 2014, Groupe Profectus Inc. was the parent company of Amiante as well as other corporations controlled by Mr. Turgeon. Ownership of Groupe Profectus Inc.’s shares modelled that of Amiante when it was incorporated and the objective was to form an asset management and protection company. Moreover, Mr. Turgeon was President of Groupe Profectus Inc.
[37] At the hearing, neither Mr. Hélie, nor Mr. Turgeon, nor Amiante’s accountants were able to say whether Gestion Hélie had received consideration in exchange for transferring the Class D preferred shares it had held in Amiante to Groupe Profectus.
ISSUES [38] In order to determine whether the Minister correctly applied section 84.1 of the ITA to the two share dispositions at issue, the Court must address the following issues:
A. In 2007, when the 450,004 Class F shares in Amiante were sold, were Mr. Poulin and Gestion Turgeon in a non-arm’s length relationship?
B. In 2007, when the 388,861 Class D shares in Amiante were sold, were Mr. Turgeon and Gestion Hélie in a non-arm’s length relationship?
APPELLANTS’ POSITION I. Ghislain Poulin [39] Mr. Poulin submits that he correctly reported the taxable capital gain that resulted from the disposition of the 450,004 Class F shares in Amiante.
[40] According to Mr. Poulin, during the negotiations that led to the sale of the Class F shares in Amiante, neither he, nor Mr. Turgeon, nor Gestion Turgeon acted in concert without separate interests.
[41] Indeed, Mr. Poulin had been negotiating his gradual retirement from Amiante since late 2006. Therefore, he wanted to benefit from his interest and did not want to relinquish control of Amiante to Mr. Turgeon until his departure conditions had been fulfilled. That is why the initial agreement dated April 1, 2007, was concluded, which, in the light of the events, was adapted so as to become the final agreement dated September 20, 2007.
[42] It was the April 1, 2007 agreement that led to the sale of shares on November 1, 2007, and which enabled Mr. Poulin to impose conditions on the sale of his shares and on Mr. Turgeon taking over control of Amiante.
[43] Consequently, Mr. Poulin and Mr. Turgeon submit that, when the 450,004 Class F preferred shares were sold to Gestion Turgeon, the parties were acting in their own interests and were dealing with one another at arm’s length. Consequently, the provisions of section 84.1 of the ITA did not apply to Mr. Poulin.
II. Herman Turgeon [44] Mr. Turgeon submits that he correctly reported the taxable capital gain that resulted from the disposition of 388,861 Class D shares in Amiante to Gestion Hélie.
[45] Hence, in computing his income for the 2007 taxation year, he correctly claimed the capital gains deduction provided for in section 110.6 of the ITA.
[46] Indeed, Mr. Turgeon submits that he, Gestion Hélie and Mr. Hélie were dealing with one another completely at arm’s length since they were not related persons within the meaning of subsection 251(2) of the ITA and that they had a de facto arm’s length relationship.
[47] None of the parties to the transaction were acting in concert with one another and the negotiations were conducted so as to protect their respective interests.
[48] On the one hand, Mr. Turgeon wanted to attract Mr. Hélie into Amiante to benefit from his administrative and financial expertise. On the other hand, Mr. Hélie, through Gestion Hélie, apparently wanted to become an Amiante shareholder.
[49] Consequently, the sum of $388,861 received by Mr. Turgeon in exchange for the 388,861 Class D shares in Amiante should not be a deemed dividend under the provisions of section 84.1 of the ITA.
RESPONDENT’S POSITION I. Ghislain Poulin [50] The respondent submits that Mr. Poulin, Mr. Turgeon, as well as Gestion Turgeon, acted in concert, without separate interests, with respect to the sale of 450,004 Class F shares in Amiante.
[51] The balance of the price of sale for the shares was paid entirely with the funds arising from their buyback by Amiante. Thus, Gestion Turgeon simply acted as a conduit for the money flowing from the corporation. Gestion Turgeon had no interest in buying freeze shares whose value was frozen or, on top of that, in paying 5% interest on that amount. According to the respondent, that transaction does not take the form of ordinary business relations between parties acting in their own interests. Gestion Turgeon was merely helping Mr. Poulin claim a capital gains deduction.
[52] Consequently, the respondent argues that Mr. Poulin and Gestion Turgeon are deemed not to have acted at arm’s length under subsection 251(1)(c) of the ITA, which made applicable the provisions of paragraph 84.1(1)(b) of the ITA. Mr. Poulin is therefore deemed to have received a dividend of $450,004 during the 2007 disposition of 450,004 Class F shares in Amiante.
II. Herman Turgeon [53] The respondent submits that Mr. Turgeon, Mr. Hélie, and Gestion Hélie acted in concert, without separate interests, with respect to the sale of 388,861 Class D shares in Amiante.
[54] For the same reasons as those enumerated regarding the transaction carried out between Mr. Poulin and Gestion Turgeon, Mr. Turgeon is allegedly deemed to have received a dividend of $388,802 during the 2007 disposition of 388,861 Class D shares in Amiante.
[55] According to the respondent, Gestion Hélie was simply a middleman for Mr. Turgeon, which enabled him to strip Amiante of its surpluses in order to benefit from the capital gains deduction.
[56] The respondent also argues that Gestion Hélie had no interest in acquiring shares the value of which was not likely to increase, for which no dividend was paid, and for which the payment was subject to 4% interest. According to the respondent, the objective of this transaction was to enable Mr. Turgeon to benefit from the capital gains deduction.
ANALYSIS [57] The following provisions of the ITA are relevant to the cases at bar:
Non-arm’s length sale of shares
84.1 (1) Where after May 22, 1985 a taxpayer resident in Canada (other than a corporation) disposes of shares that are capital property of the taxpayer (in this section referred to as the “subject shares”) of any class of the capital stock of a corporation resident in Canada (in this section referred to as the “subject corporation”) to another corporation (in this section referred to as the “purchaser corporation”) with which the taxpayer does not deal at arm’s length and, immediately after the disposition, the subject corporation would be connected (within the meaning assigned by subsection 186(4) if the references therein to “payer corporation” and to “particular corporation” were read as “subject corporation” and “purchaser corporation” respectively) with the purchaser corporation,
(a) where shares (in this section referred to as the “new shares”) of the purchaser corporation have been issued as consideration for the subject shares, in computing the paid-up capital, at any particular time after the issue of the new shares, in respect of any particular class of shares of the capital stock of the purchaser corporation, there shall be deducted an amount determined by the formula
(A - B) × C/A
where
A is the increase, if any, determined without reference to this section as it applies to the acquisition of the subject shares, in the paid-up capital in respect of all shares of the capital stock of the purchaser corporation as a result of the issue of the new shares,
B is the amount, if any, by which the greater of
(i) the paid-up capital, immediately before the disposition, in respect of the subject shares, and
(ii) subject to paragraphs 84.1(2)(a) and 84.1(2)(a.1), the adjusted cost base to the taxpayer, immediately before the disposition, of the subject shares,
exceeds the fair market value, immediately after the disposition, of any consideration (other than the new shares) received by the taxpayer from the purchaser corporation for the subject shares, and
C is the increase, if any, determined without reference to this section as it applies to the acquisition of the subject shares, in the paid-up capital in respect of the particular class of shares as a result of the issue of the new shares; and
(b) for the purposes of this Act, a dividend shall be deemed to be paid to the taxpayer by the purchaser corporation and received by the taxpayer from the purchaser corporation at the time of the disposition in an amount determined by the formula
(A + D) - (E + F)
where
A is the increase, if any, determined without reference to this section as it applies to the acquisition of the subject shares, in the paid-up capital in respect of all shares of the capital stock of the purchaser corporation as a result of the issue of the new shares,
D is the fair market value, immediately after the disposition, of any consideration (other than the new shares) received by the taxpayer from the purchaser corporation for the subject shares,
E is the greater of
(i) the paid-up capital, immediately before the disposition, in respect of the subject shares, and
(ii) subject to paragraphs 84.1(2)(a) and 84.1(2)(a.1), the adjusted cost base to the taxpayer, immediately before the disposition, of the subject shares, and
F is the total of all amounts each of which is an amount required to be deducted by the purchaser corporation under paragraph 84.1(1)(a) in computing the paid-up capital in respect of any class of shares of its capital stock by virtue of the acquisition of the subject shares.
Arm’s length
251 (1) For the purposes of this Act,
(a) related persons shall be deemed not to deal with each other at arm’s length;
(b) a taxpayer and a personal trust (other than a trust described in any of paragraphs (a) to (e.1) of the definition trust in subsection 108(1)) are deemed not to deal with each other at arm’s length if the taxpayer, or any person not dealing at arm’s length with the taxpayer, would be beneficially interested in the trust if subsection 248(25) were read without reference to subclauses 248(25)(b)(iii)(A)(II) to (IV); and
(c) in any other case, it is a question of fact whether persons not related to each other are, at a particular time, dealing with each other at arm’s length.
[My emphasis.]
[58] As the parties explained during the hearing, the essential question in these appeals is whether a non-arm’s length relationship existed, on the one hand between Mr. Poulin and Gestion Turgeon, and, on the other hand, between Mr. Turgeon and Gestion Hélie, in which case the appeals should be dismissed.
[59] Indeed, the parties have acknowledged that, aside from the non-arm’s length issue, the conditions set out by paragraph 84.1(1)(b) of the ITA were also met in the case of the two dispositions at issue.
[60] I will therefore discuss the issue whether the parties in this case had a de facto non-arm’s length relationship.[5]
[61] In this regard, in Descarries v. The Queen,[6] Justice Hogan recalled that:
. . . the specific rules show that the object, spirit or purpose of section 84.1 of the Act is to prevent taxpayers from performing transactions whose goal is to strip a corporation of its surpluses tax-free through the use of a tax-exempt margin or a capital gain exemption[7].
[62] This comment is consistent with the analysis made by Justice Archambault in Desmarais v. The Queen,[8] where he explained:
A textual and contextual analysis of section 84.1 establishes that – and this is consistent with the Technical Notes of the Minister of Finance – Parliament intended to prevent stripping of the surpluses of an operating company when the mechanism used for this stripping was similar to that used here by Mr. Desmarais. This was the mechanism he used to receive surpluses from an operating company free of tax following a transfer of the shares of this company to a holding company and, following redemption, out of the surpluses received from the operating company, of the shares issued in consideration of the shares of the operating company[9].
[63] However, the de facto non-arm’s length relationship notion, first defined in Peter Cundill & Associates Ltd. v. The Queen,[10] was examined by the Supreme Court of Canada in Canada v. McLarty,[11] where Justice Rothstein wrote:
[62] The Canada Revenue Agency Income Tax Interpretation Bulletin IT-419R2 “Meaning of Arm’s Length” (June 8, 2004) sets out an approach to determine whether the parties are dealing at arm’s length. Each case will depend on its own facts. However, there are some useful criteria that have been developed and accepted by the courts: see for example Peter Cundill & Associates Ltd. v. Canada, [1991] 1 C.T.C. 197 (F.C.T.D.), aff’d [1991] 2 C.T.C. 221 (F.C.A.). The Bulletin provides:
22. . . . By providing general criteria to determine whether there is an arm’s length relationship between unrelated persons for a given transaction, it must be recognized that all-encompassing guidelines to cover every situation cannot be supplied. Each particular transaction or series of transactions must be examined on its own merits. The following paragraphs set forth the CRA’s general guidelines with some specific comments about certain relationships.
23. The following criteria have generally been used by the courts in determining whether parties to a transaction are not dealing at “arm’s length”:
• was there a common mind which directs the bargaining for both parties to a transaction;
• were the parties to a transaction acting in concert without separate interests; and
• was there “de facto” control [by one party over another] (one party’s control over the other)[12].
[My emphasis.]
[64] It is in accordance with this second criterion, that of parties acting in concert without separate interests, that the respondent argues that a non-arm’s length relationship existed between Mr. Poulin and Gestion Turgeon, and between Mr. Turgeon and Gestion Hélie, during the respective sales of their preferred shares.
[65] In Petro-Canada v. Canada,[13] Madam Justice Sharlow of the Federal Court of Appeal, after citing Peter Cundill, stated at paragraph 55 of her reasons that if the "terms of the transactions did not reflect ordinary commercial dealings between vendors and purchasers acting in their own interests, " one must conclude that there was a non‑arm’s length relationship between the parties.
[66] In Gestion Yvan Drouin,[14] at paragraph 75 of his reasons, Mr. Justice Archambault wrote that, in order to determine whether or not parties are acting in concert, without a separate interest, one must examine whether they are acting for their own benefit, or for that of someone else:
. . . a person merely participates in a transaction, not for his own benefit but for someone else’s or, even if he is acting for his own benefit, if he is also acting for someone else in a context of reciprocity. That person is acting without a separate interest and not independently in his own interest[15].
[67] As to which transactions must be examined, the Supreme Court of Canada stated in McLarty that the relationship between the parties to a transaction should be examined in the light of all the relevant facts. Rothstein J. stated the following at paragraph 65:
The Minister states that “it is the relationship between vendor and purchaser at the time of purchase that must be examined, and not the relationship at any other time or with respect to any other transaction” (Minister’s factum on cross-appeal, at para. 26). I am unable to agree with such a restrictive approach. Of necessity, where the acquisition is made by an agent of the purchaser, the purchaser’s connection to the acquisition transaction and to the question of whether the vendor and purchaser were dealing at arm’s length will require that the agreement between the agent and the purchaser be considered. That agreement would normally precede the acquisition agreement (here all documents were signed on December 31, 1992)[16].
[68] Moreover, in RMM Canadian Enterprises Inc. v. Canada,[17] Mr. Justice Bowman broadened the range of facts that must be analyzed in order to conclude that there is a non-arm’s length relationship under paragraph 251(1)(c) of the ITA. Indeed, in that case, the Court concluded that although the negotiations that led to the transaction took place at arm’s length, the parties’ conduct after that transaction apparently showed that the party who helped the other party clearly had no independent role:
What, then, is the situation here? We have a corporation that uses another corporat