Date: 20000925
Dockets: 2000-1144-IT-I, 2000-1145-IT-I
BETWEEN:
ÉRIC DELAGE, GÉRARD DELAGE,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent,
Reasonsfor Judgment
Lamarre Proulx, J.T.C.C.
[1] These appeals were heard on common evidence under the informal procedure. The appellants were assessed under section 160 of the Income Tax Act (the "Act"), which provides that the transferee and transferor are jointly and severally liable to pay the transferor's tax up to an amount equal to the lesser of (a) the amount by which the fair market value of the property at the time it was transferred exceeds the fair market value of the consideration given for the property, and (b) the amount of the transferor's tax liability in the taxation year in which the property was transferred or any preceding taxation year.
[2] There are three amounts involved: (1) the fair market value of the property; (2) the value of the consideration; and (3) the amount of the tax liability.
[3] The issue is whether, given that a dividend was paid to them in the course of the 1994 taxation year, the appellants are required to pay the amount of $12,906.18, being a tax liability of Gestion Paraleg Inc. which subsequently became 9014-2464 Québec Inc. during the 1994 taxation year.
[4] The appellants maintain that the dividend payment was in consideration of services rendered and rely on the decision of this Court in Davis et al. v. The Queen, 94 DTC 1934.
[5] The respondent argues that a dividend is a payment related to the capital stock alone and relies on the Supreme Court of Canada's decision in Neuman v. M.N.R., [1998] 1 S.C.R. 770.
[6] The facts on which the Minister of National Revenue (the "Minister") based his assessment are set out in paragraph 6 of each Reply to the Notice of Appeal (the "Reply"). The two replies are identical and I reproduce that for Gérard Delage's appeal, which reads as follows:
[TRANSLATION]
(a) Gestion Paraleg Inc. was incorporated on June 18, 1990, and operated a new and used vehicle sales and service business;
(b) Gestion Paraleg Inc. was known under that name until November 21, 1994, after which it was called 9014-2464 Québec Inc.; it ceased all business activity on February 28, 1995;
(c) the shareholders and directors of Gestion Paraleg Inc., which subsequently became 9014-2464 Québec Inc. were
(i) the appellant,
(ii) Éric Delage, and
(iii) François Therrien;
(d) the appellant and Éric Delage are father and son, and they form a related group that controls Gestion Paraleg Inc., which subsequently became 9014-2464 Québec Inc.;
(e) on November 27, 1995, a reassessment for the 1994 taxation year was issued against 9014-2464 Québec Inc. whose fiscal year ended on October 31, 1994;
(f) on March 11, 1997, 9014-2464 Québec Inc., whose fiscal year ended on October 31, 1994, owed the Minister $12,906.18 with respect to unpaid tax liabilities for the 1994 taxation year:
(i) federal tax $9,480.54
(ii) interest $3,425.64
$12,906.18
(g) during the 1994 taxation year, the appellant received a dividend totalling $16,500 from Gestion Paraleg Inc., which subsequently became 9014-2464 Québec Inc.;
(h) in computing his income for the 1994 taxation year, the appellant included the amount of $16,500, with gross-up, as dividends;
(i) the payment of a dividend by a corporation to a shareholder is a transfer of property within the meaning of section 160 of the Act;
(j) on March 11, 1997, the Minister held the appellant jointly and severally liable to pay an amount equal to the tax liability for the 1994 taxation year of Gestion Paraleg Inc., which subsequently became 9014-2464 Québec Inc. and whose fiscal year ended on October 31, 1994.
[7] The facts relied upon by the appellants are set out in each one's Notice of Appeal as follows:
[TRANSLATION]
The facts are specifically as follows:
I received a dividend from a company at a time when that company was not in financial difficulty. As a result of a reassessment, the company had tax to pay.
The company did not pay the outstanding taxes.
The Department is applying section 160(1) ITA on the basis that a cash dividend constitutes a transfer of property at less than its fair market value such that section 160(1) applies and the Department therefore holds me liable for the company's taxes.
We know that, in a privately held corporation, it is very common for the shareholders to choose to have their remuneration paid in the form of a dividend or salary. We opted to receive our remuneration in the form of a dividend. You must understand that, if we had opted to receive a salary instead of a dividend, the Department would never have been able to apply section 160(1).
On this point, I refer in particular to Hébert-Davis [sic] (94 DTC 1934).
Moreover, the purpose of this section of the Act is to limit transfers of property between related persons for a consideration differing from the fair market value and, thus, to make both parties liable for payment of the taxes resulting from the transaction.
I will therefore attempt to prove that section 160(1) does not apply to my case.
Joël Lacasse, C.A.
Feb. 22, 2000
[8] This Notice of Appeal had been prepared by the appellant's accountant who was their representative in this case. With the appellant's consent, he did not appear at the hearing of this appeal.
[9] Both appellants testified. They explained that they had been carrying on business for about ten years under the name of Lada Granby Enr. It was a new and used vehicle sales and service business. In 1993 or thereabouts, François Therrien wanted to purchase the assets of the business. It was decided to transfer the assets of Lada Granby Enr. to a corporation. Gestion Paraleg Inc., whose name was changed to 9014-2464 Québec Inc., was a corporation whose letters patent were already in the notary's or accountant's office. The assets were transferred to that corporation. The two appellants and François Therrien became shareholders, with all three having an equal interest They also became the corporation's directors.
[10] The three shareholders continued to work for the business until the contract for the purchase of the assets was finalized. The appellants explained that they were not that concerned with the business and its administration since Mr. Therrien was soon to be its owner. Mr. Therrien endeavoured to find the financing needed for the purchase. The three shareholders regularly paid themselves equal amounts of money during the period from December 23, 1993, to October 1994.
[11] The cheques for those amounts were filed as Exhibit A-1. The amounts varied from one period to the next, but in a given period they are the same for all three shareholders. Exhibit A-2 is a list of all such amounts paid for each payment period. It shows amounts of $400, $700 and $1,000 but most of the payments are $500.
[12] The financial statement for Gestion Paraleg Inc. (Lada Granby Enr.) to October 31, 1994, was produced as Exhibit A-3. Page 4 of that statement, headed [TRANSLATION] "Retained Earnings, initial fiscal year ended on October 31", shows that dividends of $49,500 were issued.
[13] Exhibit A-4 is the contract for the sale of the corporation's assets to François Therrien. The contract is dated April 27, 1995. Ownership and taking possession are retroactive to February 28, 1995. Gérard Delage brought it to the Court's attention that there is a clause on page 4 of the contract providing that the purchaser is to pay the corporation's tax liabilities.
[14] One important fact that did not come out at the hearing because the appellant's testimony was evasive in that regard, but is now clear from the contract of sale concerning the assets (Exhibit A-4), is that the two appellants remained the only shareholders of Gestion Paraleg Inc., which was subsequently called 9014-2464 Québec Inc. and is the tax debtor.
[15] Exhibits I-1 and I-2 are the tax returns of Éric Delage for 1993 and 1994. The return for 1994 shows that Éric Delage reported an actual dividend amount of $16,500. No one was able to say how much tax he had paid on that dividend amount.
[16] Exhibit I-3 is Gérard Delage's tax return. It also shows an actual dividend amount of $16,500. This amount appears on a T5 Supplementary, Statement of Investment Income, issued by Gestion Paraleg Inc. (Lada Granby Enr.). The taxable amount of dividends is $20,625, and the federal dividend tax credit is $2,750. Here as well, it could not be determined what amount of tax had been paid by this appellant on this dividend amount.
[17] Counsel for the respondent referred to the decision of the Supreme Court of Canada in Neuman v. M.N.R., [1998] 1 S.C.R. 770, and to the decision of this Court in 155579 Canada Inc. et al. v. The Queen, [1996] T.C.J. No. 1188. Counsel cited the following passages from the Supreme Court of Canada decision:
57. . . . This approach ignores the fundamental nature of dividends; a dividend is a payment which is related by way of entitlement to one's capital or share interest in the corporation and not to any other consideration. Thus, the quantum of one's contribution to a company, and any dividends received from that corporation, are mutually independent of one another. . . .
With respect, this fact is irrelevant to the issue before us. To relate dividend receipts to the amount of effort expended by the recipient on behalf of the payor corporation is to misconstrue the nature of a dividend. As discussed earlier, a dividend is received by virtue of ownership of the capital stock of a corporation. It is a fundamental principle of corporate law that a dividend is a return on capital which attaches to a share, and is in no way dependent on the conduct of a particular shareholder.
. . .
60. . . . I am not aware of any principle of corporate law that requires in addition that a so-called "legitimate contribution" be made by a shareholder to entitle him or her to dividend income and it is well accepted that tax law embraces corporate law principles unless such principles are specifically set aside by the taxing statute.
Conclusion
[18] Paragraphs 160(1), (2) and (3) of the Act read as follows:
160 Tax liability re property transferred not at arm's length —
(1) Where a person has, on or after May 1, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to
(a) the person's spouse or a person who has since become the person's spouse,
(b) a person who was under 18 years of age, or,
(c) a person with whom the person was not dealing at arm's length,
the following rules apply:
(d) the transferee and transferor are jointly and severally liable to pay a part of the transferor's tax under this Part for each taxation year equal to the amount by which the tax for the year is greater than it would have been if it were not for the operation of sections 74.1 to 75.1 of this Act and section 74 of the Income Tax Act, chapter 148 of the Revised Statutes of Canada, 1952, in respect of any income from, or gain from the disposition of, the property so transferred or property substituted therefor, and
(e) the transferee and transferor are jointly and severally liable to pay under this Act an amount equal to the lesser of
(i) the amount, if any, by which the fair market value of the property at the time it was transferred exceeds the fair market value at that time of the consideration given for the property, and
(ii) the total of all amounts each of which is an amount that the transferor is liable to pay under this Act or in respect of the taxation year in which the property was transferred or any preceding taxation year,
but nothing in this subsection shall be deemed to limit the liability of the transferor under any other provision of this Act.
(2) Minister may assess transferee — The Minister may at any time assess a transferee in respect of any amount payable by virtue of this section and the provisions of this Division are applicable, with such modifications as the circumstances require, in respect of an assessment made under this section as though it had been made under section 152.
(3) Rules applicable — Where a transferor and transferee have, by virtue of subsection (1), become jointly and severally liable in respect of part or all of a liability of the transferor under this Act, the following rules apply:
(a) a payment by the transferee on account of the transferee's liability shall to the extent thereof discharge the joint liability; but
(b) a payment by the transferor on account of the transferor's liability only discharges the transferee's liability to the extent that the payment operates to reduce the transferor's liability to an amount less than the amount in respect of which the transferee was, by subsection (1), made jointly and severally liable.
[19] I am of the opinion that the evidence has not shown that the dividends were issued as a payment of salary to the three shareholders. There was no evidence of any relation between the services rendered and the dividends issued. In fact, the appellants said that they were not all that concerned with the management of the corporation's business since Mr. Therrien was supposed to purchase the corporation's assets. It was mainly he who took care of the administration of the corporation. However, the dividends were always issued in equal amounts. In my view, the evidence showed that, in the circumstances in which the dividends were issued, they were really in the nature of corporate dividends, that is, a payment resulting from ownership of the corporation's capital stock. In those circumstances, I need not determine whether, for the purposes of section 160, work performed can constitute valuable consideration for the issuance of a dividend.
[20] Moreover, since the appellants remained the sole shareholders of the corporation with the tax liability, it was up to them to see to the payment of that debt. They received a substantial payment for the assets of the corporation, although they said that the balance of the sale price was not received. It is clear from Exhibit A-2 that they remained the only two shareholders of the corporation and that the corporation received the sale price. I understand that the purchaser of the shares assumed the tax liabilities in respect of the operation of the business, but that is a question of law to be settled between the purchaser of the assets and the vendor corporation of which the appellants are the principal shareholders.
[21] In my opinion, therefore, it is up to the appellants to pay the tax liability of the corporation of which they are the sole shareholders and, in this sense, the Minister's assessment is correct. It is also correct because, as dividend recipients, the appellants are the transferees under a transfer made by a transferor who is a tax debtor. As such they are jointly and severally liable under section 160 of the Act for the payment of the tax liability to the extent of the amount of the dividends received.
[22] The appeals are dismissed.
Signed at Ottawa, Canada, this 25th day of September 2000.
"Louise Lamarre Proulx"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
[OFFICIAL ENGLISH TRANSLATION]
2000-1144(IT)I
BETWEEN:
ÉRIC DELAGE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of Gérard Delage (2000-1145(IT)I) on August 30, 2000, at Sherbrooke, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Simon Nicolas Crépin
JUDGMENT
The appeal from the assessment made under section 160 of the Income Tax Act, the notice of which bears number 00532 and is dated March 11, 1997, is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 25th day of September 2000.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
2000-1145(IT)I
BETWEEN:
GÉRARD DELAGE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of Éric Delage (2000-1144(IT)I) on August 30, 2000, at Sherbrooke, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Simon Nicolas Crépin
JUDGMENT
The appeal from the assessment made under section 160 of the Income Tax Act, the notice of which bears number 00531 and is dated March 11, 1997, is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 25th day of September 2000.
|
"Louise Lamarre Proulx" |
J.T.C.C.