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Dockets: 2002-232(IT)G |
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BETWEEN: |
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ANDRÉE LAROCHELLE, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
[OFFICIAL ENGLISH TRANSLATION]
___________________________________________________________________
Appeal heard on February 25, 2004, and April 5, 2004, at Québec, Quebec
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Before: The Honourable Justice Alain Tardif |
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Appearances: |
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Counsel for the Appellant: |
Robert Marcotte |
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Counsel for the Respondent: |
Nathalie Lessard |
JUDGMENT
The appeal of the Notice of Assessment under subsection 160(2) of the Income Tax Act, bearing number 19704, a copy of which was sent on January 18, 2002, is dismissed, with costs, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 14th day of May 2004.
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"Alain Tardif" |
Tardif J.
Translation certified true
on this 15th day of November 2004.
Shulamit Day, Translator
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Citation: 2004TCC360 |
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Date: 20040514 |
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Docket: 2002-232(IT)G |
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BETWEEN: |
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ANDRÉE LAROCHELLE, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1] This is an appeal from an assessment made under section 160 of the Income Tax Act ("Act"). The Notice of Assessment in the amount of $116,940.04, bearing the number 19704, was made after a transfer of the single share in the corporation "Les Assurances Gérard Pelchat Inc." held by Gérard Pelchat, spouse of the Appellant, the transferee. The transfer was made in exchange for payment of a consideration of $10, the face value of the share when it was issued, at the time the business was incorporated.
[2] The issue here is to determine whether the Appellant is jointly and severally liable with Gérard Pelchat, under section 160 of the Act, for payment of Mr. Pelchat's tax debt of $116,940.04 under the Act with respect to the 1994, 1995 and 1996 taxation years.
[3] The appeal was initiated by submission of the Appellant's claims, expressed as follows:
[translation]
(2) The APPELLANT was, in 1996, the spouse of Gérard Pelchat (hereinafter the "spouse");
(3) The APPELLANT's spouse holds an insurance broker's licence;
(4) Prior to November 13, 1984, the APPELLANT's spouse had been personally operating an insurance brokerage since 1979;
(5) The corporation Les Assurances Gérard Pelchat Inc. (hereinafter the "Corporation") was incorporated on November 13, 1984;
(6) The Corporation sells insurance and investment funds;
(7) When the Corporation was incorporated, its sole shareholder and director was the APPELLANT's spouse, who held one common share in the Corporation, which had been issued for a consideration of ten dollars ($10.00);
(8) The APPELLANT's spouse never sold or otherwise transferred his interests in his insurance brokerage business to the Corporation, including specifically the client list and any goodwill;
(9) From March 1 to July 23, 1985, the interests of the APPELLANT's spouse in the Corporation were exercised via nominees. For this purpose, the following transactions were entered in the Corporation books:
(a) On March 1, 1985, the APPELLANT's spouse transferred the common share he held in the Corporation to Claude Feuiltaut for a consideration of ten dollars ($10.00) and resigned as president and secretary of the Corporation.
(b) On March 1, 1985, the Corporation issued a common share at the price of ten dollars ($10.00) to Johanne Laberge Feuiltaut and the Corporation's head office was transferred to 9450 Henri-Bourassa, in Charlesbourg.
(c) From March 1, 1985, to July 23, 1985, the APPELLANT's spouse acted as vice-president of the Corporation but did not hold any shares in the Corporation. Claude Feuiltaut was the president and Johanne Laberge Feuiltaut was the secretary.
(d) On July 23, 1985, Claude Feuiltaut and Johanne Laberge Feuiltaut transferred their common shares to the APPELLANT's spouse for a total consideration of twenty dollars ($20.00) and resigned as directors of the Corporation. The Corporation's head office was then transferred to the APPELLANT's spouse's address, and he became the Corporation's president and sole shareholder;
(10) The Corporation's balance sheet, as at October 31, 1996, prepared by Jacques Amyot, CGA, indicated the following values (in dollars):
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ASSETS |
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Short-term |
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Cash |
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2,919 |
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Accounts receivable |
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5,600 |
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8,519 |
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Long-term (amortized cost) |
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Equipment |
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838 |
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Computer |
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935 |
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1,773 |
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10,292 |
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LIABILITIES |
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Short-term |
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Accounts payable and accrued liabilities |
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0 |
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Tax payable |
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0 |
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0 |
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Shareholders' Equity |
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Issued and paid-up share capital |
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20 |
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Retained Earnings |
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Starting balance |
10,265 |
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Plus: net profit |
7 |
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10,272 |
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10,292 |
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10,292 |
(11) On November 28, 1996, the APPELLANT's spouse resigned as director of the Corporation;
(12) On November 28, 1996, the APPELLANT's spouse transferred the common share he held in the Corporation to the APPELLANT for the price of ten dollars ($10.00) by a resolution entered in the Corporation minutes book (hereinafter the "transfer to the APPELLANT");
(13) At the time the Corporation's common share was transferred to the APPELLANT, the APPELLANT's spouse did not enter into any non-competition or non-solicitation agreement, nor did he enter into any employment contract with the APPELLANT or the Corporation;
(14) The Corporation has not held an insurance broker's licence either before or after the date of the transfer to the APPELLANT;
(15) The APPELLANT has not held an insurance broker's licence either before or after the transfer to the APPELLANT;
(16) The Corporation has always operated its business using the licence belonging to the APPELLANT's spouse;
(17) In January 1999, the APPELLANT's spouse declared bankruptcy;
(18) On February 23, 2000, Revenue Canada (hereinafter the "Agency") issued the Corporation a Notice of Reassessment increasing the Corporation's taxes payable by $2,846.51 for the fiscal year ending October 31, 1996;
(19) On February 23, 2000, Revenue Canada (hereinafter the "Agency") issued the Corporation a Notice of Reassessment increasing the Corporation's taxes payable by $6,699.20 for the fiscal year ending October 31, 1997;
(20) After a Notice of Objection, on December 14, 2000, the Agency issued the Corporation a Notice of Reassessment adjusting the Corporation's taxes payable to $2,390 for the fiscal year ending October 31, 1996;
(21) After a Notice of Objection, on December 14, 2000, the Agency issued the Corporation a Notice of Reassessment adjusting the Corporation's taxes payable to $6,322 for the fiscal year ending October 31, 1997;
(22) On April 30, 2001, the Ministère du revenu du Québec issued the Corporation a Notice of Reassessment increasing the Corporation's taxes payable by $1,070 for the fiscal year ending October 31, 1996;
(23) On April 30, 2001, the Ministère du revenu du Québec issued the Corporation a Notice of Reassessment increasing the Corporation's taxes payable by $2,683 for the fiscal year ending October 31, 1997;
(24) On June 20, 2001, the Minister issued the APPELLANT Notice of Assessment No. 19704 in the amount of $116,940.04 with respect to the "obligation under subsection 160(1) of the Income Tax Act in the amount of $116,940.04 with respect to the sale of a common share in "Les Assurances Gérard Pelchat Inc." on November 28, 1996, between Gérard Pelchat and Andrée Larochelle";
(25) On July 9, 2001, the APPELLANT duly submitted a Notice of Objection to Notice of Assessment number 19704 issued on June 20, 2001;
[4] In response to the Notice of Appeal, the Respondent listed the following assumptions of fact, which were relied upon to make and uphold the assessment. These facts are listed in paragraph 25 of the Reply to the Notice of Appeal.
[translation]
(a) "Les Assurances Gérard Pelchat Inc." (hereinafter "Assurances G.P.") was incorporated on November 13, 1984, under Part 1A of the Companies Act;
(b) When it was incorporated, Assurances G.P. issued one common share in the name of Gérard Pelchat at the cost of $10;
(c) Assurances G.P. did not issue any other shares between November 13, 1984, and November 28, 1996;
(d) On November 28, 1996, Gérard Pelchat sold his common share in Assurances G.P. to the Appellant (hereinafter the "transfer") for a consideration of $10 paid by her;
(e) At the time of the transfer, Gérard Pelchat was the Appellant's spouse;
(f) The fair market value of the only share of the capital stock of Assurances G.P., as at November 28, 1996, was $190,000;
(g) Gérard Pelchat had a tax debt to the Minister for the 1994, 1995 and 1996 taxation years;
(h) This tax debt owed by Gérard Pelchat totalled $116,940.04 as at June 20, 2001, distributed as follows:
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Taxation Year |
1994 |
1995 |
1996 |
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Taxes |
$17,509.26 |
$23,641.54 |
$24,708.68 |
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Employment Insurance |
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Penalties |
$10,298.16 |
$14,271.47 |
$615.12 |
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Interest |
$11,413.70 |
$10,239.98 |
$4,142.13 |
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Total |
$39,321.12 |
$48,152.99 |
$29,465.93 |
(i) Gérard Pelchat declared bankruptcy on January 26, 1999, and his tax debt remained unpaid;
(j) Before and after the transfer, Assurances G.P. had clients, the source of its commission and fees income;
(k) In its tax returns, Assurances G.P. indicated income from commissions and fees (before operating costs) for each taxation year ending on the following dates:
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Taxation year |
Income from commissions and fees
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October 31, 1994 |
$83,608 |
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October 31, 1995 |
$131,953 |
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October 31, 1996 |
$82,726 |
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October 31, 1997 |
$139,500 |
(l) On October 8, 1996, Assurances G.P. and Assurances Bertrand Carrier Inc. (hereinafter "Assurances B.C.") signed an agreement by which they agreed, specifically, to refer certain clients to each other and to share, in equal proportions, the commissions and bonuses received with respect to the client files referred in this manner;
(m) Furthermore, the agreement provided for the buyback of clients, for $400,000, by Assurances G.P. or Assurances B.C. in the event of the death of Bertrand Carrier in the former case, or the death of Gérard Pelchat in the latter case. This agreement was supported by 10-year life insurance contracts on the lives of Bertrand Carrier and Gérard Pelchat, the beneficiaries of these policies being Assurances G.P. and Assurances B.C. respectively;
(n) In the liabilities section of his balance sheet for the fiscal year ending October 31, 1996, Assurances G.P. indicated a nil balance under tax payable.
[5] With respect to her work experience, the Appellant testified that she had participated in some of the office work for insurance proposals; she ensured that all the relevant information required by the corporation to which the proposal was being submitted was on the insurance proposal. She described her work as follows:
[translation]
Years 1996-1997
For Assurances Gérard Pelchat Inc. and Assurances Bertrand Carrier Inc. (to a lesser degree)
My duties involved meeting clients to finalize documents and forms, and sending them to the companies involved.
Conducting follow-up on files, and delivering contracts to clients.
Printing the clients' investment statements, sending them by mail or delivering them in person (for the most important clients).
Client reception at the office.
Training another employee for the office work so that in the future I could fully concentrate on working on the road.
[6] In fact, the Appellant had very little knowledge in the field of administration. She did not differentiate between her spouse as a person and in his capacity as director of the corporation "Les Assurances Gérard Pelchat Inc." For her, they were one and the same.
[7] She did not really understand why she became the owner of the only share in the corporation "Les Assurances Gérard Pelchat Inc." She did not know where the consideration came from and she knew even less about the implications of the transfer.
[8] She relied totally and completely on her spouse, obeyed his instructions and blindly gave him everything that had to do with accounting, administration, the corporation's business and especially the various assessment notices. Moreover, she stated that she was not in any way concerned by the Notices of Assessment that gave rise to this appeal.
[9] The evidence showed that the Appellant gave her spouse access to her entire financial wealth, and she did not oversee him in any way.
[10] The Appellant's spouse, who has a university diploma in administration, also testified. As part of his professional activities, the Appellant described himself as someone who was only comfortable with simple things. He stated that he never wanted to become involved in complicated files, and that he preferred to leave such files to his colleagues.
[11] He stated that he introduced himself to his clients as a simple advisor, and offered products that were equally simple and unsophisticated. He also mentioned that he was unaware of the requirements related to keeping and recording the minutes of a corporation. According to him, both his personal affairs and those of the corporation, of which he was the sole shareholder prior to the transfer, were administered informally.
[12] He presented a whole series of explanations to justify the low value of the only share in circulation, which he had sold to the Appellant, his spouse, for its face value of $10. Specifically, he stated that he could have walked away from the corporation and created a new one for a minimal cost. He then set aside this assumption and instead said that his spouse was becoming a bit more involved, in the hopes that the corporation could eventually build itself a reserve or an undistributed fund. He also stated that as the result of poor investments, he wanted to protect the corporation's reputation.
[13] Broadly speaking, Gérard Pelchat indicated that the share transferred to his spouse had no value because, he was of the opinion that the corporation he controlled did not have any clients, and if it did, that had no effect on the corporation's value. In other words, Mr. Pelchat asserted that, without his personal participation and involvement, the corporation he controlled would have no market value. He maintained that he managed all his clients so well that he could have taken them all from the corporation if it were ever abandoned or given to a third party, or if his share was attached; it would then become a corporation without clients or income, and consequently, without any value.
[14] At the time of the transfer, he did not consult anyone to determine the fair market value (FMV) of the transferred share, which conferred control of the corporation.
[15] Describing himself as an investment resource person, the Appellant's spouse believed he was, above all, competent to provide investment ideas. He avoided complexity and the suggestions he made to his clients were generally very simple.
[16] His clients were mainly seniors, some quite elderly. They gave him their savings, which he invested in various ways, concentrating mainly on investments such as term deposits, and including pooled investment funds and mutual funds. Although he was required to keep a registry of clients, the corporation had none, for the simple reason that he was unaware that he was required to keep a registry/registries.
[17] The income generated by his work was shared between the corporation and him. There were no rules or agreement between the corporation and him with respect to splitting the fees and the manner in which that should be done. The only item that was explained clearly was the fact that commissions from the sales of mutual funds could not be allocated to a corporation; for this reason, he personally cashed the commissions from such sales. With respect to the remainder, the Appellant himself stated that the corporation operated informally.
[18] After an audit, he was subject to an assessment that revealed unreported income; he then became liable for a significant tax debt exceeding $100,000 with interest and penalties. After the assessment, he assigned his property.
[19] The evidence also revealed that, several years earlier, in 1986, fearing he would be prosecuted, he assigned his share to third parties in order to protect the corporation's wealth from any potential suit resulting from his insolvency.
[20] Gérard Pelchat testified in a very peculiar manner for someone who has a university education in administration and several years of investment experience.
[21] He stated that he did not know the difference between credits and debits, that he did not know that the corporation had to have a list of clients and a series of very precise records, and that he was not aware of and did not understand the importance of recording the minutes of a corporation.
[22] He had no record or agreement with respect to sharing the fees between himself and the corporation he controlled. It was carried out without any specific criteria, as the mood took him.
[23] Although, according to Gérard Pelchat, the corporation he controlled had no value, on October 8, 1996, he signed an agreement with a colleague, a certain Bertrand Carrier. The agreement provided as follows:
[translation]
PARTNERSHIP AGREEMENT
BETWEEN
ASS. GÉRARD PELCHAT INC. AND ASS. BERTRAND CARRIER INC.
Whereas Assurances Gérard Pelchat Inc. and Assurances Bertrand Carrier Inc. refer certain investment, life insurance and wage loss insurance clients to one another. It is agreed that:
Remuneration:
Ass. Gérard Pelchat Inc. and Ass. Bertrand Carrier Inc. shall pay each other, as consideration for referrals, an amount equal to 50% of the commissions and bonuses collected on each of the files referred unless a prior agreement has been made. Renewals shall be made under the same conditions, with the exception of investment renewals. These shall remain the property of Gérard Pelchat or Bertrand Carrier.
Refund:
Should any commissions or bonuses (laps) be refunded, the partners agree to reimburse one another the prorated amount of the sums received.
Transfer of a living partner's files:
If, for one reason or another, this agreement should be terminated, the files referred by Ass. Gérard Pelchat Inc. shall be returned to it without any conditions. In the case of the total disability of either partner, (as stipulated in their wage loss insurance contract), the able partner shall continue operations; therefore, all files shall become referrals. The disabled partner may nevertheless sell its client list to whomever it wishes, under whatever conditions it desires, after having offered its partner the right of first refusal at the same price and conditions.
Transfer of files in case of death:
Upon the death of either partner, with the agreement of the estate of the deceased, a client buyback for the price of four hundred thousand dollars ($400,000) shall take place. This agreement is supported by life insurance contracts with TransAmerica, with a death benefit of $500,000. The remainder ($100,000) shall be retained by the survivor as coverage of the key person.
The identifiers on the TransAmerica policies: Gérard Pelchat # 080000649 and Bertrand Carrier # 080000659.
[24] According to Gérard Pelchat, the content of the agreement is not relevant or useful in determining the FMV of the share that he transferred to his spouse. The content of the agreement had been prepared by the co-signer, Bertrand Carrier, allegedly a very competent individual. It might have been interesting to hear Mr. Carrier's version. The Appellant chose not to have him testify.
[25] What was the FMV of the share that was transferred, the share that resulted in the assessment being challenged by the Appellant in this appeal?
[26] It is much easier to define FMV than to determine it.
[27] A definition from the Federal Court is likely to have unanimous support. It was given by the Honourable Justice Cattanach, in Henderson Estate and Bank of New York v. M.N.R., 73 DTC 5471, at page 5,476:
The statute does not define the expression 'fair market value' I do not think it necessary to attempt an exact definition of the expression as used in the statute . . . That common understanding I take to mean the highest price an asset might reasonably be expected to bring if sold by the owner in the normal method applicable to the asset in question in the ordinary course of business in a market not exposed to any undue stresses and composed of willing buyers and sellers dealing at arm's length and under no compulsion to buy or sell. I would add that the foregoing understanding as I have expressed it in a general way includes what I conceive to be the essential element which is an open and unrestricted market in which the price is hammered out between willing and informed buyers and sellers on the anvil of supply and demand.
[Emphasis added.]
[28] Here, the FMV of the sole share must be determined; it granted total control over the business of the corporation involved, and thus it is important to analyze the assets, liabilities and future outlook of the corporation.
[29] Assigning a value to a single share that grants control of a corporation is very difficult for many reasons. First, there are no really trustworthy reference criteria because the potential data is infinite.
[30] In real estate, there is the advantage of some objectivity to the approaches used; I am referring in particular to the building site, the materials used, the year of construction, the quality of the maintenance, the general condition of the premises, the size, the income, and, finally, comparable buildings.
[31] There is nothing equally reliable with which to value the corporation shares, especially when dealing with small private corporations. The Court must analyze the work of experts as a function of their experience, considering all the relevant factors and the significance given to the various aspects of the expertise presented to the Court.
[32] Before analyzing the process that established the FMV of the transferred share, it seems appropriate to recall that this determination implies an assumption that the seller must have done, and been ready to do, everything possible in order to obtain the highest attainable consideration for the asset the seller has decided to convey and transfer.
[33] Conversely, it must be assumed that the buyer will take all possible precautions to ensure that the minimum price is paid and that no events or surprises will be encountered in the future that might result in unanticipated expenses or adverse consequences.
[34] Section 160 of the Act reads as follows:
Tax liability re property transferred not at arm's length
160.(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 common-law partner or a person who has since become the person's spouse or common-law partner,
(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 in 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.
[Emphasis added.]
[35] Although section 160 of the Act does not give rise to many issues of interpretation, it is appropriate to recall that Parliament's ultimate goal was to ensure that debtors of a tax debt do not deplete their wealth by transferring it, in whole or in part, without equivalent consideration to a spouse or anyone else with whom they do not have an arm's length relationship.
[36] To this effect, it is relevant to refer to extracts from certain decisions. First, in Algoa Trust v. Canada, [1993] T.C.J. No. 15 (Q.L.), the Honourable Justice Rip said the following at page 10:
The purpose of section 160 is to foil an attempt by a taxpayer who is liable to pay any amount under the Act to avoid the fisc by transferring property otherwise available to satisfy the liability to one of three groups of persons, including a person with whom he or she was not dealing at arm's length.
[37] In Biderman v. Canada, [2000] F.C.J. No. 194 (Q.L.), the Honourable Justice Létourneau of the Federal Court of Appeal said the following at paragraph 37:
. . . Section 160 of the Act is an anti-avoidance provision with respect to transfers. Its purpose "is to prevent a taxpayer from defeating the claim of the Minister to unpaid taxes by transferring his assets to a spouse, or certain other persons, for little or no consideration" [See Note 28 below].
[38] In Hewett v. Canada, [1997] F.C.J. No. 1541 (Q.L.), the Honourable Justice Strayer said the following at paragraphs 1 and 2:
We are all of the view that this appeal should be dismissed.
We agree with the learned Tax Court judge that the purpose of section 160 of the Income Tax Act is to prevent a taxpayer from defeating the claim of the Minister to unpaid taxes by transfering [sic] his assets to a spouse, or certain other persons, for little or no consideration. In our view, this means that the "property" referred to in the section must be that property interest of the taxpayer that would have been available to the Minister for attachment had the transfer not taken place.
[39] There is another concern with respect to the transfer of property described in section 160 of the Act: when should the FMV of property be determined?
[40] In this respect, the Courts clearly recognized, as I said in Bergeron v. Canada, [2003] T.C.J. No. 535, that the time of transfer is similar to the specific moment at which a camera shutter clicks and the valuation must be made with respect to the situation in the seconds preceding this click.
[41] This nuance is important in that it permits an understanding that the value of the transferred property must have the same value in the wealth of the transferor as it does in that of the transferee. In other words, the FMV of the property being transferred, and subject to section 160 of the Act, must be the same and cannot be changed.
[42] This is a fundamental requirement, since a seller could very well stipulate a series of clauses providing all kinds of assumptions, rights, obligations, servitudes, etc., all making the transferred property completely valueless, or considerably decreasing its value, thereby modifying the FMV of the property at the time of transfer. The transferred property could therefore have all or a portion of its value cut, which is in complete contradiction to the purpose of section 160 of the Act.
[43] In this case, we are dealing with a very specific operation, in that this is one share, which confers control of the activities of the "Les Assurances Gérard Pelchat Inc." corporation. Equally specific is the fact that the transfer was not subject to any agreement including the usual clauses for an operation of this nature.
[44] In fact, despite the rights and obligations arising from the transfer, the parties did not think it appropriate to formalize the content of the agreement in writing, even if only to record the transfer in the minutes of the corporation.
[45] Although the operation was not conducted in a simplistic and unusual manner, it should be analyzed and assessed as if it were a normal, typical, everyday legal act between two parties at arm's length from one another.
[46] The Appellant maintains that the verbal agreement contained nothing specific or particular, except for the fact that the transfer was made in exchange for a $10 consideration. In her opinion, the verbal contract did not have any provisions either with respect to income, debts or obligations, or with respect to restricting competition. In other words, this was a verbal contract that could have been recorded in writing as follows: "Gérard Pelchat sells to Andrée Lachapelle his share, the only share of the corporation in circulation, in exchange for a consideration of $10, and hereby gives release."
[47] The Appellant strongly asserted that these are the only factors of the operation that should be taken into consideration in establishing the FMV. With respect to assets that are of no great importance, worth about $10,000, the Appellant asserted that they should not be included in the components for establishing the FMV since these were assets that could and must compensate for potential tax debts or other eventualities.
[48] Accepting the Appellant's claims would be tantamount to accepting the principle that the parties to an operation subject to the provisions of section 160 of the Act may agree upon a whole series of assumptions that would have the effect of considerably reducing the FMV of the transferred property, or even totally eliminating it, which is contrary to the letter as well as the spirit of section 160.
[49] For the Appellant, the FMV of the transferred share was essentially symbolic. In support of her claims, she advanced two main arguments.
[50] The first, and clearly most important, is that any consideration would have been inappropriate since it would have been sufficient for the transferor to contact all the corporation's clients and ask them to continue to do business with him in his capacity as an individual, rather than as a representative of the corporation affected by the transferred share, thereby ruining any hopes of deriving a profit as a result of the share transfer.
[51] I do not accept this argument. The sale of the controlling share has no meaning or raison d'être unless the transferor expressly renounces direct or indirect solicitation of the corporation's clients for a specific period of time and within a specific area.
[52] The second argument is that the client base had no value, given that the main business of the transferor was the sale of term deposits. According to the Appellant's expert, this was a specific financial product that had no attraction or interest for a potential buyer.
[53] This is also a totally ludicrous argument. It is public knowledge that people buy simple lists of names. In this case, Mr. Pelchat stated that his clients were mainly seniors. It is not unreasonable to assume that seniors are generally very discrete with respect to their assets and therefore do not shop around a great deal when their term deposits mature. Therefore, it is not irrational to think that loyalty upon renewal would be the rule, rather than the exception.
[54] I agree that such a product may be different. I agree that it may be of less value than a car insurance contract. However, I simply do not believe that such a product has no value. Furthermore, it strikes me as completely ridiculous to make such a bizarre assertion.
[55] The Appellant held that the FMV should be established as a function of the verbal contract with two elements, the object, which is the share, and the consideration, which is $10.
[56] Since the contract was a verbal one, it is therefore necessary to analyze the facts and circumstances in such a way as to identify the intention of the parties. In this respect, the evidence essentially constitutes the self-serving testimony of Gérard Pelchat.
[57] The transfer was not something spontaneous and ill-considered, carried out without reflection. On the contrary, the transfer was the result of a considered and self-serving decision. Fully aware of the consequences of his actions, and in particular, well aware of his possible tax debt, Mr. Pelchat's desire was essentially to protect the wealth of the corporation he controlled from his possible financial difficulties caused by a significant tax debt. As an informed businessman, he anticipated and prepared everything in such a way as to prevent the corporation he controlled from being affected by his insolvency.
[58] Under such circumstances, it is obvious that the totality must be presented so that the FMV of the share be null. To avoid any ambiguity or issues of interpretation that would arise from a document, it became advantageous to do everything verbally, in which case any interpretation would become speculation.
[59] However, given the situation, Mr. Pelchat's skill and his experience a few years earlier, the purpose and goal of the transfer of the share was indubitably to avoid payment of the tax debt. In order to make the project attractive, it was essential to provide a scenario in which the share was transferred for a minimal, or essentially symbolic, consideration.
[60] In this case, under subsection 160 of the Act, I have to establish the FMV based on the assumption that this must be an operation conducted in a normal, everyday business context.
[61] The Appellant retained the services of Pierre-André Rodrigue as an expert with Services Multi-Alliance Inc. to establish the FMV of the share that was the subject of the transfer.
[62] The Court very quickly noted that Mr. Rodrigue had very little experience with which to perform his mandate. The process he used was simplistic and undocumented.
[63] Furthermore, the proportion used to establish the value, not of the share but of the business operated by the corporation issuing the share, was essentially arbitrary and in no way supported by appropriate documentation.
[64] He tried as best as he could to justify his approach and the process he used. The explanations he submitted were confusing, arbitrary, and for the most part, absolutely unjustified.
[65] Despite all his efforts, Mr. Rodrigue had neither the experience nor the expertise to perform the work entrusted to him. He essentially reached his conclusion as a function of the Appellant's expectations, which required him to support simply unsustainable, if not ridiculous, conclusions.
[66] Mr. Rodrigue did not have the expertise to submit the work that he presented. In order to compensate for this inadequacy, his work could have been meticulous, but no, it was very perfunctory and quite shallow with respect to unverified data, which the evidence in fact demonstrated to be neither exact nor reliable. I therefore do not accord any value or probative force to the conclusions, which are utterly incredible.
[67] The Appellant's expert made the following errors:
· He took at face value the data provided to him by the Appellant's spouse, an individual with a clear self-interest in the matter.
· He did not validate the data, although it formed the basis for his opinion.
· The evidence established that the data in question had come from Mr. Pelchat's flawed memory. He used incomplete deposit slips to help him remember, which is totally unacceptable.
· The evidence also demonstrated that the notorious document he used was full of errors and contained incorrect information, yet that information was quite significant since it constituted the very foundation upon which the FMV was based.
· He had no valid experience to enable him to submit work of acceptable quality.
· Having an interest in a particular area does not mean that one is an expert.
· He did not understand the nature of the mandate, which involved establishing the FMV of the share that was transferred.
· A lawyer by profession, he was unfamiliar with the provisions of the law relating to the obligation to keep a list of clients and various records with strict requirements.
· According to him, the fact that the corporation had clients had no effect on the FMV. Such a conclusion is all the more surprising since it is public knowledge that some corporations buy what are essentially lists of names.
[68] These are some of the weaknesses I noted, which are largely sufficient for me to set aside from the evidence anything arising from Mr. Rodrigue's testimony. Consequently, I see no interest in continuing or completing my assessment of this testimony.
[69] Lucie Demers, an expert witness recognized by the Court, described her professional experience, which has spanned several years.
[70] During her training, Ms. Demers had, and continues to have, access to a great deal of data and information that would complete and improve her knowledge in the field of securities valuation.
[71] Clearly enthusiastic and passionate about the field, Ms. Demers' work was extensive.
[72] From the start, Ms. Demers' task was a difficult one. In fact, during the process leading to the assessment, she made a decision that established the FMV based on an approach that was probably very cursory and, clearly, not very well documented.
[73] Therefore, the work she presented to the Court had to confirm the accuracy of her first valuation at the time of the assessment. In addition to this difficulty, I cannot ignore the fact that Ms. Demers has always worked for the Respondent, thereby acting indirectly as judge and party.
[74] I have already addressed this issue previously and I do not think that it prevents an employee of Canada Customs and Revenue Agency (CCRA) from acting as an expert, but I do believe that this is an obstacle that must be overcome by very high quality work, in order to avoid any conclusion that the work was adulterated by an assessment that had been determined prior to the start of the work required to prepare the expert report.
[75] Certainly, any expert whose services are retained becomes bound in a business relationship with the person who is responsible for paying the fees needed to prepare the expert opinion. On the other hand, this is a one-time relationship with no past or future, whereas an expert working for CCRA is constantly learning with the mandate conferred by the valuation work.
[76] My comments also take into account the fact that any individual recognized as an expert should normally have the mental quality and capacity for objectivity, to ensure that the findings are essentially the result of facts assumed as part of the challenge faced when preparing the expert report.
[77] Things become somewhat more complicated when the expert producing the expertise is the same person who intervened at the time of the assessment.
[78] I understand that when the assessment was made, it was not realistic to request such a highly documented and exhaustive valuation as that presented during a court hearing, for the practical reason that the vast majority of files do not require a hearing before this Court.
[79] Some issues may be raised by the fact that an expert, who provided a first valuation on the basis of experience and a consideration of the facts that were readily available, is then asked to do much more extensive work for the Court, with an obligation to prepare for a very close, if not tough cross-examination.
[80] In this case, Ms. Demers submitted reliable work with real concern for objectivity. She wanted to ground her conclusions or validate her claims based on facts external to her own analysis. However, in this respect, the cross-examination drew out some clear weaknesses and deficiencies. I am referring in particular to several documents and some information taken out of context and that lacked the relevance they were given.
[81] That being said, Ms. Demers' work was of better quality than that of Mr. Rodrigue. First, she understood the nature of the mandate, which involved determining the FMV of the share that was transferred. She also obtained genuine data. The Appellant's expert did not do so, but he could and should have.
[82] From Ms. Demers' work, I retain the formula of the income available over four years. For these four years, the income of the "Les Assurances Gérard Pelchat Inc." corporation was as follows:
|
Year |
Income $ |
|
1993 |
68,296 |
|
1994 |
83,608 |
|
1995 |
131,953 |
|
1996 |
82,726 |
|
Total |
366,583 |
[83] Thus, the average income was $91,645.75, or the total of the four years ($366,583), divided by four, which equals $91,645.75. The average is therefore $91,645.75.
[84] It is reasonable to use double the income to set the FMV of such a business, which is $183,291.50. With respect to weighting, I retain and deduct 30% to account for random items which may affect such an operation, thereby reducing the value to $128,304.05, to which must be added the amount of the corporation's assets, $10,292, for a total of $138,596.05. I therefore set the FMV of the transferred share at $138,596.05; the whole with costs.
Signed at Ottawa, Canada, this 14th day of May 2004.
|
"Alain Tardif" |
Tardif J.
Translation certified true
on this 15th day of November 2004.
Shulamit Day, Translator