Traitement de déchets JRG Inc. v. The Queen

Traitement de déchets JRG Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2009-02-02
Neutral citation
2009 TCC 67
File numbers
2005-1757(GST)G
Judges and Taxing Officers
Pierre Archambault
Subjects
Part IX of the Excise Tax Act (GST)
Decision Content
Docket: 2005-1757(GST)G
BETWEEN:
TRAITEMENT DE DÉCHETS JRG INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
____________________________________________________________________
Appeal heard on common evidence with the appeal of Fertigel Inc. (2005‑1758(GST)I) on February 28 and February 29, 2008,
and on September 22 and September 23, at Montréal, Quebec
Before: The Honourable Justice Pierre Archambault
Appearances:
Counsel for the Appellant:
Jean-Pierre Gagné
Counsel for the Respondent:
Frank Archambault
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under the Excise Tax Act, notice of which bears the number 6895161 and is dated September 23, 2004, for the period from January 1, 1996, to April 30, 2004, is allowed, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant was entitled to the ITCs claimed.
The Appellants are entitled to only one set of costs.
Signed at Ottawa, Canada, this 2nd day of February 2009.
"Pierre Archambault"
Archambault J.
Translation certified true
On this 28th day of June 2009
François Brunet, Reviser
Docket: 2005-1758(GST)I
BETWEEN:
FERTIGEL INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
Appeal heard on common evidence with the appeal of
Traitement de déchets JRG Inc. (2005‑1757(GST)G)
on February 28 and February 29, 2008,
and on September 22 and September 23, 2008, at Montréal, Quebec
Before: The Honourable Justice Pierre Archambault
Appearances:
Counsel for the Appellant:
Jean-Pierre Gagné
Counsel for the Respondent:
Frank Archambault
JUDGMENT
The appeal from the assessment made under the Excise Tax Act, notice of which bears the number 4780901 and is dated August 5, 2004, for the period from December 20, 2002, to October 31, 2003, is allowed, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant was entitled to the ITCs claimed.
The Appellants are entitled to only one set of costs.
Signed at Ottawa, Canada, this 2nd day of February 2009.
"Pierre Archambault"
Archambault J.
Translation certified true
On this 28th day of June 2009
François Brunet, Reviser
Citation: 2009 TCC 67
Date: 20090202
Dockets: 2005-1757(GST)G
2005-1758(GST)I
BETWEEN:
TRAITEMENT DE DÉCHETS JRG INC.,
FERTIGEL INC.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH translation]
REASONS FOR JUDGMENT
Archambault J.
[1] Traitement de Déchets JRG Inc. (TD) and Fertigel Inc. are appealing from assessments made by the Ministère du Revenu du Québec (MRQ) on behalf of the Minister of National Revenue (the Minister) in connection with the Goods and Services Tax (GST). The relevant period for TD's appeal is January 1, 1996, to April 30, 2004, and the relevant period for Fertigel's appeal is from December 20, 2002, to April 30, 2004.[1] The assessment of Fertigel is dated August 5, 2004, and the assessment of TD is dated September 23, 2004.
[2] Although the Minister initially audited Fertigel, and began auditing TD after his audit of Fertigel was finished, I will reproduce paragraph 15 of the Respondent's Reply to TD's Notice of Appeal, which sets out the assumptions of fact on which the Minister relied in making his assessment:
[translation]
(a) The Appellant was a GST registrant from January 1, 1996, to April 30, 2004.
(b) The Appellant supposedly operated a business that processed and transformed liquid pig manure into an environmentally friendly fertilizer.
(c) During the period in issue, the Appellant claimed input tax credits (hereinafter ITCs) to which it was not entitled.
(d) In the course of the fiscal years ended October 31, 1999, 2000, 2001, 2002 and 2003, the Appellant sold no goods or services whatsoever.
(e) To this day, the Appellant has obtained no government authorization for the production and marketing of its environmentally friendly fertilizer.
(f) The Appellant has no factory, production centre or laboratory for the development and production of its product.
(g) The Appellant has no marketing agreement for the sale of its product.
(h) The Appellant does not have adequate financial resources and does not have any serious potential investors to carry out its business project.
(i) The Appellant has no sales agreements with potential customers for the purchase of its product or services.
(j) The Respondent's representatives tried, without success, to obtain documents from Roland Gingras, the Appellant's representative, such as proofs of research expenditures, proofs of equipment purchase expenditures, a business plan, market studies, a budget, etc., which would show that a business was being carried on.
(k) In the light of the foregoing, the Respondent's representatives concluded that the Appellant was not entitled to the ITCs because the Appellant was not engaged in any commercial activities for any of the period in issue.
(l) Indeed, the ITCs claimed by the Appellant relate essentially to gasoline, telephone, restaurant, and electrical expenses.
(m) Accordingly, the Respondent's representatives determined that the Appellant had claimed a total of $37,069.01 in ITCs to which it was not entitled for the period in issue.
(n) The net tax amount of $37,069.01 generated interest in the amount of $12,945.88 and penalties in the amount of $30,441.26.
(o) In addition, on September 15, 2004, the Respondent's representative confirmed to the Appellant that its GST number was cancelled.
[3] The only facts to which counsel for TD admitted are the facts set out in subparagraph 15(b), except for the word "supposedly", which he denies; subparagraph 15(c), except for the phrase "to which it was not entitled", which he denies; and subparagraph 15(o). The facts on which the Minister relied in the Fertigel file are essentially the same as the facts in the TD file. However, the amount in issue is much larger in the TD file; indeed, the ITCs disallowed by the Minister in respect of TD total $37,069.01, while the total disallowed in respect of Fertigel is only $1,573.60.
[4] Before the hearing began, counsel for the Respondent tendered a document in which he specified the issues, which are essentially the same in both matters. Here is what he wrote in respect of TD's appeal:
[translation]
A. TRAITEMENT DE DÉCHETS JGR [sic] INC.
(1) Did the Appellant engage in activities of a commercial nature, entitling it to input tax credits for the entire period in issue, that is to say, from January 1, 1996, to April 30, 2004?
2.) If so, did the Appellant claim input tax credits to which it was not entitled, for the entire period in issue, that is to say, from January 1, 1996, to April 30, 2004?
[Emphasis added.]
[5] The issue of the basis on which the ITCs were disallowed was raised at the hearing. It is clear from the Minister's assumptions of fact that the question whether there was a commercial activity was at the heart of the decision to disallow them. Actually, the auditor's worksheets, contained in his books of documents,[2] clearly state that TD and Fertigel's ITCs were disallowed because there was [translation] "no commercial activity".[3] Indeed, none of the Minister's factual assumptions, set out in his replies to the Notice of Appeal, contain any statement to the effect that expenses for which ITCs were claimed were personal expenses. Consequently, I notified counsel for the Respondent that the onus was on her to prove that the expenses for which the ITCs were disallowed were personal in nature, whether in whole or in part.
Statement of facts
• General remarks
[6] Before going over the facts disclosed by the evidence, certain preliminary remarks should be made. The key witness for the two Appellant companies was Roland Gingras, their directing mind. Mr. Gingras was the manager, director and majority shareholder of both companies. Unfortunately, his testimony was far from satisfactory. A great deal of his testimony consisted in a very general and rather vague discussion of the activities carried on by the two companies. Some of his answers, including those explaining why his project to convert liquid manure into fertilizer never got off the ground, were surprising to say the least, and raise doubt as to their plausibility. I will come back to them later. In addition, Mr. Gingras was often unable to provide the clarifications needed to get a clear idea of the situation. He was often unable to answer questions as important as those concerning the share capital of the two companies, and those concerning the disappearance, from TD's profit and loss statement for the 2000 fiscal year, of a long‑term debt totalling $245,866.[4] Lastly, it is difficult to determine whether the project in which the two Appellants were engaged was a viable business project, a far-off dream, or a deception. On the other hand, several documents were adduced, which, when combined with Mr. Gingras's testimony, paint the following broad portrait of the events that unfolded from 1995 to 2008.
• Mr. Gingras' documentary and testimonial evidence
[7] Mr. Gingras was born in May 1938 and has no college diploma or university degree. He finished Grade 11. Given his year of birth, Mr. Gingras was 57 years old in January 1996, which was the beginning of TD's relevant period. He is now 70. Mr. Gingras says that he was a broker for 30 years, specifically, from 1960 to 1990, in the paper and containerboard field. However, this assertion is erroneous. It leaves out a period in which Mr. Gingras seems to have reoriented his activities to other sectors, notably home, industrial and agricultural heating as well as the environment and novel waste reclamation technologies. This information can be found in his résumé, contained in a business plan prepared by Samson Bélair/Deloitte & Touche (the Samson Bélair report). According to that résumé, he worked in the paper industry from 1957 to 1983. The description of the new activities referred to above covers the period from 1983 to 1995. The résumé also refers to management experience acquired as President and CEO of a company known as P.M.V.F. Inc.
[8] In a decision dated August 31, 1992, the Commission des valeurs mobilières du Québec (the Commission) prohibited Roland Gingras, Valorisation P.M.V.F. Inc.[5] and 14 numbered companies from engaging in any activity aimed at distributing the shares of those companies, because Mr. Gingras had distributed shares without a prospectus to 618 shareholders, in violation of section 11 of the Securities Act, which enabled him to raise approximately $2 million.[6] Mr. Gingras also pleaded guilty to 25 charges in relation to those activities (see Exhibit I‑13). Lastly, on November 26, 1998, he pleaded guilty to a charge of having, by deceit, falsehood or other fraudulent means, whether or not it is a false pretence, defrauded the public or any person of any property, money or valuable security or any service, in violation of subsection 380(1) of the Criminal Code. He was sentenced on April 29, 1999 (see Exhibit I‑4).
[9] The source of the funds that financed TD's activities is unclear. Some funds were advanced by the bank under circumstances described further below. Mr. Gingras said that he had roughly $300,000 in savings. During the relevant periods, his income seems to have been limited to a QPP pension and Old Age Security.[7] Some shares of Fertigel were sold, but the amount of the consideration received by Mr. Gingras has not been determined.[8]
[10] In 1984, Mr. Gingras reportedly met one Edoardo Marchese, an Italian engineer living in France. Mr. Marchese would currently be about 76 years old. Together with another French resident named Dominique Pugliese, he reportedly owns a company called Kheper Biotechnologies (Kheper), headquartered in Vigneux‑sur‑Seine in France. In a patent licence contract between Kheper and Fertigel, signed on March 18, 2003,[9] Mr. Pugliese is described as Kheper's manager. According to this document, Kheper is the holder and owner of French invention patents, one dated March 10, 1994, and the other dated February 6, 1996,[10] [translation] "for the purpose of producing fertilizer using animal waste and other substances as raw materials" (Exhibit A‑6, page 2). The process uses [translation] "polymer gel crystals with a high capacity for retaining water or other biological substances. Although technically similar to other existing polymer gels, these gels have the major advantage of being non-toxic and biodegradable."[11] Mr. Gingras stated that he discovered the use of polymer gel for converting liquid manure to fertilizer and that he entered into a partnership with Mr. Marchese and Mr. Pugliese, who undertook scientific research and technological development (R&D) in France and assumed the cost of registering the patents not only in Europe, but also in the United States and elsewhere. Mr. Gingras claims that, under an agreement between him and the Kheper group, the ownership rights in the patent would be transferred to him upon payment of $1.2 million. However, there is no written document to support this statement.
[11] In the mid-1990s, Mr. Gingras reportedly tried to interest hog producers in his animal waste conversion process, which purportedly helped protect the environment upstream and convert this waste into fertilizer products downstream. The oldest document adduced in evidence which attests to this effort is a letter of intent dated January 24, 1995, from F. Ménard Inc. of L'Ange‑Gardien, Quebec (Exhibit A‑10). That company notified Mr. Gingras that it was interested in the project, and raised the possibility of renting its site to Mr. Gingras and providing quantities ranging from 5 000 000 to 25 000 000 gallons (presumably of liquid manure, because the letter does not specify what is involved). The letter states that if the results were conclusive, F. Ménard Inc. would be open to discussing future commitments.
— TD
[12] On April 20, 1995, Mr. Gingras signed an application for $50,000 in funding from the business start-up investment program of the Société de développement industriel du Québec (SDI); the application was submitted on behalf of Traitement de déchets I.G.M. Inc. (Exhibit A‑14). The business of that company is described as [translation] "processing of liquid pig manure and hog slurry". The application states that the company's management includes Mr. Gingras as president; "Groupe Ménard" as director; Mr. Marchese, an engineer, as vice-president; and Yves Marchand, an agronomist, as director. Allegedly, Mr. Gingras held 55% of the corporation, Groupe Ménard held 25% and Mr. Marchand held 20%. However, the company did not exist at the time that the application was submitted, because TD was only incorporated on November 15, 1995, under the business name 9028‑0074 Québec Inc.[12] The name of that company was changed to TD on February 6, 1996 (Exhibit I‑1, tab 4, and Exhibit A‑5). An account statement from Mr. Drapeau discloses that he provided professional services in relation to a business start-up project (TD) from April 27, 1995, to January 9, 1996, and that, during this period, he had telephone conversations not only with Mr. Gingras, but also with François Ménard (Exhibit I‑1, tab 16, pages 33-35). The fees totalled $5,950 plus tax.
[13] The Samson Bélair Report is not dated, but contains a notice to the reader dated October 13, 1995, concerning the compilation of financial forecasts. The report describes a project for liquid manure and slurry processing facilities, and includes financial forecasts. Among other things, the report projects product sales totalling $740,000 for the fiscal year commencing on October 1995 and ending on September 30, 1996, as well as $50,000 in revenue in from products to be processed, for a total of $790,000. One of the assumptions utilized by Samson Bélair is that production would begin in October 1995, end in December 1995, and restart in April 1996. The report also states that the forecasting was prepared by the people responsible for project. It anticipates $75,000 in technical and technological support expenses, including $25,000 in R&D expenses. Lastly, the report states that TD is seeking a $50,000 loan as part of the SDI business start-up investment program. The loan was to be used to support the operating funds and to acquire capital assets. It also refers to wage subsidies of roughly $25,000 for 35 weeks of work and to a $20,000 non-repayable loan from the Société québécoise de développement de la main‑d'oeuvre (SQDM). On September 29, 1995, a representative of the Travail‑Québec regional office for the Laurentians/Lanaudière region wrote Mr. Gingras to inform him that the self‑employment support initiative's project approval committee had conditionally approved his start-up project, the conditions being that the financing would be obtained for the project and that the committee received a technical opinion from a specialist certifying that the liquid manure treatment process was not harmful to the environment. According to Mr. Gingras, this favourable expert opinion was given by Pierre Desmarais. However, according to the Samson Bélair report, the expert was a dietician! (Exhibit A‑42, document 4, note 6.)
[14] There is also a letter from the Ministère de l'Environnement et de la Faune dated December 6, 1995, in which a division head notifies Mr. Gingras of the relevant environmental rules concerning his project to use gel crystals to process slurry and manure. The letter also states that it may be necessary to apply for an authorization certificate if there is a chance that water contaminated by manure will be discharged into the environment (Exhibit A‑20).
[15] On January 7, 1996, Mr. Gingras signed, on behalf of TD, an application for a guarantee under the SDI's Programme d'aide au financement des entreprises (refundable tax credit financing component) (Exhibit A‑15). The document states that the company was incorporated on November 15, 1995, and that its activities began on January 11, 1996. The amount that SDI is requested to guarantee is $115,000. The application states that the money is to be used to finance an R&D project that will cost $505,042,[13] and is expected to commence on January 11, 1996, and end on October 31, 1996. This application for $505,042 to finance R&D expenses is quite surprising, because it was made barely a few months after the Samson Bélair Report, which anticipated, on the basis of forecasts made by the project proponent, namely, Mr. Gingras himself, that there would be a commercial operation that would generate annual revenues of $790,000 commencing in October 1995.
[16] The R&D activities were to be carried out in L'Ange‑Gardien, at the F. Ménard Inc. farm. The application for the guarantee states that Mr. Gingras was the president, CEO and R&D director, that he held 50% of the common shares of TD, and that his wife, Ms. Dagenais, held the rest. The total refundable tax credits for this R&D project were estimated at $133,846.
[17] The Appellants adduced no banking documentation showing that the loans were obtained. However, in TD's financial statements for the fiscal year ended October 31, 1997, prepared by Réjean Paillé, CSA, note 2 contains the details of long-term debts on TD's balance sheet.[14] Note 2 refers to a $50,000 loan guaranteed by SDI, and describes the loan as "Paillé Plan loan, repayable by means of monthly interest payments . . . the principal is repayable after three years of a five-year period have elapsed." The note also refers to a $126,000 equipment loan (EL), 90% of which is guaranteed by the federal government. In addition to these government‑guaranteed loans, there is a $50,000 loan from an individual, bringing the total, as at October 31, 1997, to $245,866. The individual in question was apparently a friend of Mr. Gingras', and according to Mr. Gingras' testimony, that friend was not a TD shareholder. Apparently, this loan was never repaid.
[18] A bill from Mr. Drapeau for legal fees, dated January 18, 1996, describes the services rendered for $2,500, plus tax, with a view to obtaining financing from a banker.[15]
[19] Although Mr. Gingras states that the demonstration of the conversion of liquid pig manure into fertilizer took place at the F. Ménard Inc. farm in the fall of 1995, it is more likely that this demonstration took place in late winter 1996. Indeed, there is an $800 invoice from the engineer Mr. Marchese in relation to February 1996; this invoice can be found at Exhibit I‑1, tab 16, page 4. The invoice is dated March 4, 1996, and consists of various professional fees and accommodation expenses for the period from February 15 to February 25, 1996, all of which, as I have said, total $800. Mr. Marchese's plane tickets, which also cost $800, were added to these charges. The invoices adduced as Exhibit I‑1, tab 16, also include an invoice for the rental of a Tempo shelter on March 8, 1996. Photographs of a demonstration under such a shelter, including a series numbered 3A through 3J, can be found among the photographs produced at Exhibit A‑12. According to Mr. Gingras, this demonstration lasted three months and the R&D program was successful. However, it is alleged that TD refused to begin processing the liquid manure commercially because F. Ménard Inc. demanded exclusive rights! No representative of that company testified to corroborate this account of the facts. It is alleged that the equipment in the photographs was taken out of service following the demonstration.
[20] During his testimony, Mr. Paillé recognized the Tempo shelter and the equipment used at the F. Ménard Inc. farm in L'Ange‑Gardien. He said that part of the equipment used for the demonstration had been manufactured by Atelier la Corne d'or, which belonged to an engineer named Mr. Couture. That company had been unable to finish the work due to financial problems. Only two invoices were submitted as evidence to justify the $330,773 cost of "prototype equipment" indicated on the balance sheet of October 31, 1996 (Exhibit A‑47, page 2): an invoice from L'Atelier la Corne d'or inc., dated June 11, 1996, for oxygenation and mixing tanks, a drying unit and a bagging system, for a total amount of $82,500 (Exhibit A‑40); and an invoice from B.N. Métal Inc., a company based in Saint‑Mathieu‑de‑Beloeil, dated May 15, 1997, in the amount of $41,850. This second invoice was for an automated drying system and a drying oven.[16] Mr. Paillé stated that the invoice for $82,500 was paid by bank draft, as shown by the handwritten note on Exhibit A‑40.
[21] The documents tendered in evidence also include an invoice for $7,888.49, issued by B.N. Métal Inc., and dated July 26, 1996. However, that invoice is for equipment sold to Atelier la Corne d'or Inc. of Sainte‑Agathe-des-Monts (see Exhibit I‑1, tab 16, at page 104).
[22] It should be noted that, on May 13, 1997, the Canada Revenue Agency (CRA) appraisal department prepared an eligibility report regarding the taxation year ended October 31, 1996 (Exhibit A‑9). It refers to R&D expenses totalling $387,000.[17] The project described in it relates to a process to make fertilizer with liquid pig manure. The issue was whether the work done fulfilled the requirements of the definition of R&D in the Income Tax Act (ITA). The report describes the project as follows:
[translation]
. . . The process is based on a plastic resin capable of absorbing 400 to 1,000 times its own weight in liquid manure. This resin is made from petroleum under a patented process. In addition to transporting nutrients contained in the liquid manure, it regulates soil moisture levels by quickly absorbing rainwater and releasing it directly to the roots of the plants based on their needs, over a period of up to 90 days in the soil. It is completely degraded after about five years.
[See Exhibit A‑9, page 3.]
[23] According to the appraiser, this process is a technological advance. At page 4 of the report, the author writes:
[translation]
During the visit, which took place in the hangar where the equipment and materials were stored, Mr. Gingras did not have the work-related documentation,[18] which had mostly been prepared by BIOAGVET, a subcontractor. Consequently, I was unable to consult it. However, the explanations given by Mr. Gingras, and the evidence, in the form of photographs, samples, equipment and materials, convinced me that the work had involved systematic investigation by competent personnel.
[Emphasis added.]
[24] According to Mr. Paillé's testimony, some CRA auditors suggested that he modify his financial statements to reflect the fact that $330,773 of TD's $505,042 R&D expenses had to be capitalized because they were not eligible R&D expenses because the prototype could be used as part of a commercial operation. Consequently, Mr. Paillé prepared new financial statements in which an amount of $330,773 appears as a capital asset under "Equipment-Prototype" and the remaining expenses, namely $174,269 in R&D expenses, were entered on the balance sheet as "Other Assets".
[25] The financial statements for the fiscal years 1997 through 2003 were adduced as Exhibit I‑1, at tabs 5 through 11, and as Exhibit A‑7.[19] In addition, among the invoices tendered in evidence by TD, there is an invoice dated June 13, 1996 (Exhibit A‑24) from Natasha Cournoyer for the creation of the Fertigel logo in the design and writing of a brochure, for a total of $724. There is also an account statement from SubitoPresto, dated February 7, 1997, concerning, among other things, the design of the [translation] "Fertigel bag", which had been the subject of an invoice dated August 21, 1996, and to the design and production of a Fertigel colour document, which was the subject of an invoice for $2,566.45 dated September 9, 1996. That document is also signed by Ms. Cournoyer. There are also cheques for the $600 amounts paid regularly for the services of Marc Leblond during the summer and fall 1996; in all probability, Mr. Leblond's remuneration was financed by the SQDM program, which was under the authority of the Ministère de la Sécurité du revenu.
[26] During the fall of 1996, Réjean Paillé wrote a letter to the policy advisor to the Deputy Premier of Quebec and Minister of State for the Economy and Finance concerning the TD file. In the letter, he refers to investments of $86,262 as at August 31, 1996, which were increased to $103,562 as at October 31, 1996. The amount of $86,262 consists of $10,000 in share capital and a $76,262 shareholder loan. Mr. Paillé's letter states that the $33,000 equipment loan (EL) balance as at August 31, 1996, was used in September and October 1996 to pay for the equipment from B.N. Métal. It also states that a new application for a $100,000 EL was submitted to the National Bank for the financing of the $124,850 bid with respect to the drying oven.
[27] The 1997 financial statements provide the details of the $134,638 in R&D expenses. It refers to general expenses, such as rent, professional fees, general costs, entertainment expenses and automotive expenses (general expenses); the only expense that could be tied directly to R&D is $821 for [translation] "rental of equipment to assemble prototype" (see Exhibit I‑1, tab 5, page 7). There are also bookkeeping fees invoiced by Samson Bélair for the months of January, November and December 1997 (Exhibit I‑1, tab 16, at pages 24‑25). Mr. Paillé also billed TD $1,200 in fees for the work done in August 1997 (ibid., at page 27). He also adduced excerpts from accounting records made with the Fortune 1000 software for the months of November 1996 to January 1997 (Exhibit A‑43).
[28] The only documentation concerning the year 1997 that I was able to find in the Appellant's documentary evidence is a bill from Mr. Drapeau for legal services rendered in September 1997 in connection with the review of settlement documents and the preparation of a licence contract; the fees in question total $1,260. Another bill, dated August 22, 1997, discusses $1,000 in fees related to the preparation and drafting of contracts. In that bill, Mr. Drapeau refers to a telephone conversation with the Mazda representatives. (See Exhibit I‑1, tab 16, at pages 39 and 41.)
[29] The R&D expenses for 1998 total $81,896. There are only general expenses in this regard. There are no expenses for the rental of equipment for the assembly of a prototype. The only invoice that I have found which could be directly related to R&D is an invoice for $17, dated April 2, 1998, and issued to Mr. Gingras in relation to an analysis of manure and compost (see Exhibit I‑1, tab 15). There is also $2,690 in accounting fees to Mr. Paillé for 12 months of accounting in 1998 (Exhibit I-1, tab 16, at page 29). And there are invoices for the rental, by TD, of a Mazda vehicle (Exhibit I‑1, tab 16, at pages 88 and 90).
[30] The financial statements for 1999 list R&D expenses, all of which are general, totalling $17,162, including $6,745 in entertainment expenses and $5,220 for automotive expenses. The expenses for which there are invoices in the Respondent's book of exhibits include an account statement from an agronomist named Sylvie Moreau, dated September 13, 1999, an addressed to JRG Inc., for an amount of $3,660 for 30.5 hours of services consisting in a preliminary feasibility study regarding the making of fertilizer gel crystals using liquid pig manure (Exhibit I‑1, tab 16, at page 2). The invoice states that the services were rendered in August 1999. According to the Minister's auditor, who spoke with Ms. Moreau, this $3,660 expense is not listed in the 1999 financial statements because TD did not pay it.
[31] There is also an invoice dated October 18, 1999, addressed to Mr. Gingras and JRG Inc., in relation to the rental of a semi-trailer for $15,000 from Demix Béton (Exhibit I-1, tab 16, at page 91).
[32] For the fiscal years ended October 31 2000, 2001 and 2002, the financial statements refer to R&D expenses totalling $63,822 for 2000, including $41,254 on account of prototype depreciation; $55,801 for 2001, including $33,004 on account of prototype depreciation; and $65,879 for 2002, including $26,403 on account of prototype depreciation. Expenses other than depreciation total roughly $22,000 in 2000 and 2001, and nearly $40,000 in 2002; all of these are (seemingly) general expenses, and the largest of them, in 2000 and 2001, were approximately $7,000 for automotive expenses and $6,000 for entertainment expenses. The largest expenses for 2002 are $13,096 for sundry purchases and supplies, $13,051 in entertainment expenses, and $7,884 in automotive expenses. There are no rental expenses for the period from 2000 to 2002.
[33] The only indication of any activity by TD in 2000 is a partnership proposal submitted by the Vice-President of the Chamber of Agriculture of the province of Taounate, in Morocco. The document refers to Fertigel, but makes no reference to TD or Mr. Gingras. There is, however, a reference to Fertinova, a corporation registered in July 2000, of which Mr. Gingras is not a shareholder, but of which Mr. Marchese is a director! (See Exhibits A‑23, I‑4, I‑5 and I‑6). The interrelationship between TD and Fertinova was not explained clearly. Apparently, the latter is a competitor of the former!
[34] According to Mr. Paillé, the amounts owed to the National Bank and guaranteed by SDI were written off by TD in 2000 without having been paid. Mr. Paillé did not know whether the materials and equipment that belonged to TD had been seized. The amount of $50,000 that was advanced by a third party was also written off. According to Mr. Paillé, the third party in question was content to deduct a business investment loss on its tax return.
[35] There is also an account statement dated May 31, 2001, issued by Agri Ventes Brome Ltée., and addressed to TD, for a total of $26,841.08 (Exhibit I‑1, tab 16, at page 102). The statement does not specify the nature of the property or service provided, and no explanation was given at the hearing.
[36] There is an invoice in the amount of $106, addressed to TD, and dated April 10, 2002, for testing done by Biolab (Exhibit I‑1, tab 16, at page 17). Another invoice, dated November 15, 2002, in the amount of $100, is for the rental of a pump for six days (Exhibit I‑1, tab 16, at page 13).
[37] The analysis of TD's financial statements as at October 31, 2003, shows that the "equipment prototype" item, which pertains to equipment and materials the undepreciated value of which was $105,612 in 2002, disappeared from the company's balance sheet for 2003. However, the same equipment and materials, with the same undepreciated value, can be found in Fertigel's books (see note 2 of Fertigel's financial statements as at October 31, 2003, Exhibit A‑11, page 4).
Fertigel
[38] According to Mr. Paillé, TD transferred this asset to Fertigel, along with most of its R&D expenses. Consequently, the transfer was allegedly made after October 30, 2002, possibly in November 2002, but certainly not later than October 31, 2003. According to a worksheet made by Mr. Paillé, as well as Fertigel's financial statements as at October 31, 2003 (Exhibits A‑49 and A‑11), Fertigel issued one million Class A common shares for $330,000 in paid‑up capital. These shares[20] were issued in consideration of the transfer of the prototype equipment, valued at $105,612; of the $197,700 that "JRG" had paid on account of R&D; and of the $30,093 in expenses incurred on behalf of Fertigel from November 1, 2002, to October 31, 2003. The bizzare thing is that, according to Fertigel's minute book (Exhibit A‑36), Roland Gingras subscribed for 750,000 Class C shares on May 24, 2002, at a price of $0.20 per share, and his cousin René Gingras subscribed for 250,000 Class C shares at the same price, which would translate to $200,000 in paid‑up capital.[21] Furthermore, these Class C shares were supposedly subscribed for at a time that they did not exist. Indeed, the Class C shares were only created, by certificate of modification, on June 13, 2002 (Exhibit A‑36). The date of May 24, 2002, is also inconsistent with the rollover that supposedly took place subsequent to October 31, 2002. Consequently, the financial statements, prepared by Mr. Paillé, are wholly inconsistent with the Fertigel minute book, prepared by its legal counsel, Mr. Drapeau.
[39] Fertigel's initial declaration, dated January 23, 2002, states that its activities consist in the manufacture of environmentally‑friendly fertilizer and the processing of liquid manure (Exhibit I‑2, tab 8). However, its financial statements (Exhibit A‑11) describe its activities as R&D. Roland Gingras is listed on the initial declaration as the sole director and shareholder of the company, which was incorporated on January 18, 2002.
[40] One of the documents that reveal some activity carried on by Fertigel is a one‑page document which breaks down the elements involved in the construction of a pilot plant and sets out their costs. The document appears to have been faxed by the engineer Mr. Marchese on January 9, 2002, a few days before Fertigel was incorporated (Exhibit A‑28). The anticipated total cost is $351,000.
[41] In 2002, Fertigel solicited Quebec government departments in order to acquaint them with its liquid pig manure processing technology and obtain financial aid for its pilot plant. Exhibit A‑35 contains some correspondence in this regard, including a letter dated March 19, 2002, from the Director of Environment and Sustainable Development, at the Ministère de l’Agriculture, des Pêcheries et de l’Alimentation (MAPAQ), addressed to Mr. Gingras, "President" of Fertigel Québec Inc., inviting Fertigel to submit its technology for analysis by a Technology Transfer Group set up by the Fédération des producteurs de porcs du Québec. The letter states that if the group's assessment is positive, MAPAQ might be able to guide Fertigel and support it in its efforts to obtain financing from various bodies such as the Société générale de financement, SDI, the Ministère de l’Industrie et du Commerce, or the Ministère de la Recherche, de la Science et de la Technologie.
[42] There was also a preliminary analysis certificate from Biolab dated April 18, 2002, addressed to Fertigel (actually written as Sertigel Inc.). This is an analysis of solids, nitrogen, phosphorus and potassium (Exhibit A‑24).
[43] In addition, on October 8, 2002, MAPAQ's Director, Environment and Sustainable Development, sent a letter to Fertigel Inc. in response to a request dated September 18, 2002, concerning a pilot project for the Fertigel plant. The Director pointed out to Mr. Gingras that he had not received the results of his submissions to the Technology Transfer Group, and reminded Mr. Gingras that it was important to submit the project to the group so that it could assess his technology's potential. The director also told him that the information that he had provided [translation] "does not allow us to assess whether MAPAQ can support the start-up of a pilot plant on the basis of [his] technology" (Exhibit A‑35, letter dated October 8, 2002).
[44] There is also an invoice for $160 issued on October 25, 2002, to Vertigel, for a 48‑inch by 72‑inch sign (Exhibit I‑1, tab 16, page 65). In addition, Fertigel purchased five business plan notebooks for a total of $60 on October 29, 2002, and 50 colour photocopies for $175 (Exhibit I‑1, tab 16, at page 68).
[45] On November 13, 2002, MAPAQ's Assistant Deputy Minister, Training, Agro‑Environment and Technology, wrote to Mr. Gingras in connection with his letter to the Minister dated October 1, 2002, concerning his pilot liquid pig manure processing plant, and invited him to pursue discussions with the Director, Environment and Sustainable Development (Exhibit A‑35).
[46] On November 20, 2002, Maison Le Sieur billed Fertigel $180 for catering services for 30 people (Exhibit I‑1, tab 16, page 97). (See the Journal de Montréal article discussed below.)
[47] On November 27, 2002, the Coopérative de gestion des engrais organiques de Lanaudière (Cogenor) informed Fertigel that it had learned about the proposed establishment and assessment of a pig slurry processing centre in Berthierville, in the Lanaudière region. It wrote: [translation] "As a regional cooperative organization (made up of more than 350 member farms) whose mission is the agri‑environmental management of organic and mineral fertilizers, COGENOR Lanaudière supports this project." The letter stated that Cogenor was interested in participating directly in the project as a partner, particularly in relation to the [translation] "agricultural application of the manure gels and the field evaluation of their agronomic effectiveness" (Exhibit A‑13). When asked to comment on this letter, the director of Cogenor informed the Minister's auditor, in a letter dated July 19, 2004, that it was [translation] "simply moral support to a project proponent seeking solutions to liquid pig manure surpluses." He also stated that the letter did not constitute an agreement on the commercial sale of Fertigel products or the supply of liquid manure by Cogenor member producers (Exhibit I‑3).
[48] There is an article from the December 2, 2002, issue of the Journal de Montréal newspaper which reports on an interview with Mr. Gingras. It states that Fertigel will construct its first plant (which will be a small one) and hire roughly a dozen employees to market its fertilizer. The article says tha