Citation: 2006TCC682
Date: 20061214
Docket: 2005-2177(IT)G
BETWEEN:
GESTION LÉON GAGNON INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Lamarre Proulx J.
[1] This
is an appeal concerning the 2001 taxation year.
[2] The issue is whether a company, by issuing
shares with a redemption value higher than their paid-up capital, conferred on
the appellant a benefit under subsection 15(1) of the Income Tax Act
(the “Act”).
[3] The facts considered by the Minister in
making the reassessment are set out in paragraph 12 of the Amended Reply to the
Notice of Appeal (the “Reply”) as follows:
[TRANSLATION]
(a) the appellant’s fiscal year-end is August
31 of each year;
(b) all of the appellant’s shares are held by
Léon Gagnon;
(c) 55% of the voting and participating shares
of the company Centre Financier Iberville/Champlain Inc. (“CFIC”) are held by
Léon Gagnon and 45% by Sylvie Turcotte, his spouse;
(d) on December 19, 2000, CFIC issued
300 Class J shares to the appellant for a consideration of $300;
(e) to acquire these shares, the appellant did
not have to pay, assign or transfer anything other than their acquisition cost
of $300;
(f) these non-voting and non-participating
shares, of which the paid-up capital was $1 per share, were retractable for
$1,000 per share;
(g) by issuing these shares to the appellant,
CFIC conferred on him a benefit of $299,700, i.e. the difference between the shares'
paid-up capital of $300 and their redemption value of $300,000;
(h) moreover, CFIC redeemed these shares held
by the appellant for $300,000 on January 16, 2001, i.e. less than one month
after they were issued.
[4] All of these paragraphs were admitted by
the appellant except for paragraph 12 (g).
[5] I find it useful to
cite immediately section 123.54
of the Companies Act, which reads as follows:
123.54 [Redemption on demand]
A company may acquire fully paid-up shares it has issued
and that, under its articles, it must redeem on demand of a shareholder or on a
fixed date or a date that may be fixed, for a price determined in its articles
or computed in accordance with the method provided in the articles.
[Exception] In no case, however, may a
company pay for the shares where there is reasonable ground to believe that, as
a consequence,
1) it could not discharge its liabilities when due, or
2) the book value of its assets would be less than the aggregate
of its liabilities and the sums necessary for the payment, in case of
redemption or winding-up, of the shares payable by preference or concurrently.
1979, c. 31, s. 27; 1980, c. 28, s. 14.
[6] It is also useful
to know the analogous provisions of the Canada Business Corporations Act.
I cite the definition of “redeemable share” in subsection 2(1), as well as
subsections 36(1) and 36(2), of that Act:
2(1) [Definitions] . . .
“redeemable share” means a
share issued by a corporation
(a) that the corporation
may purchase or redeem on the demand of the corporation, or
(b) that
the corporation is required by its articles to purchase or redeem at a
specified time or on the demand of a shareholder;
36(1) [Redemption of
shares] Notwithstanding subsection 34(2) or 35(3), but subject to
subsection (2) and to its articles, a corporation may purchase or redeem any
redeemable shares issued by it at prices not exceeding the redemption price
thereof stated in the articles or calculated according to a formula stated in
the articles.
36(2) [Limitation] A
corporation shall not make any payment to purchase or redeem any redeemable
shares issued by it if there are reasonable grounds for believing that
(a) the corporation is, or would
after the payment be, unable to pay its liabilities as they become due; or
(b) the
realizable value of the corporation’s assets would after the payment be less
than the aggregate of
(i) its
liabilities, and
(ii) the
amount that would be required to pay the holders of shares that have a right to
be paid, on a redemption or in a liquidation, rateably with or before the
holders of the shares to be purchased or redeemed, to the extent that the
amount has not been included in its liabilities.
[7] Léon Gagnon, president and sole shareholder
of the appellant, explained that at the time of the events in question here,
the appellant was a company whose main activity was investment management.
[8] Mr. Gagnon was president and director of
Centre Financier Iberville-Champlain Inc. (“Centre Financier”). He held 55% of
the shares, and his spouse, Sylvie Turcotte, 45%. This company had a
franchising agreement with Desjardins, Sécurité financière. Centre Financier
managed a team of financial services representatives. Ms. Turcotte looked
after the internal administration of Centre Financier.
[9] In 1999 and 2000, Centre Financier received
from Desjardins a special bonus totalling $300,000. Mr. Gagnon stated that
this amount was included in Centre Financier’s tax return. This was not
questioned by the respondent.
[10] However, neither Mr.
Gagnon nor his spouse wished to keep this money in Centre financier. They
wanted to put it in
safekeeping without triggering any immediate tax consequences. They consulted a
tax expert, Mr. Jean‑Yves Lepage, who suggested an
intercorporate dividend. When the spouses needed the sum or part of it, they
would pay the tax due on the amounts withdrawn.
[11] On June 6, 2000, Centre Financier amended its articles under
Part IA of the Companies Act by adding Class J shares
(Exhibit A‑2). The description of those shares is as follows:
[TRANSLATION]
CLASS J SHARES
(1) Dividends
Subject to section 123.70 of the Companies Act and to the
rights associated with the shares of Classes E to H, the holders of Class J
shares are entitled to receive, at the discretion of the board of directors, an
annual non-cumulative dividend. The board of directors will not be required to
declare at the same time a dividend on any other class of shares. It is the
responsibility of the directors to determine the time and conditions of payment
of any dividend that is declared.
(2) Reimbursement
If for any reason, including voluntary liquidation, forced
liquidation or dissolution, there is a distribution of the corporation’s assets,
the holders of this class of shares are entitled, with preference over holders
of shares of Classes A to D, G and H, but after Class E and F shareholders, to reimbursement
of an amount equal to the redemption price determined below in
paragraph 5.
(3) Additional participation
The shares of this class do not confer any other right of
participation in the company’s profits or asset surpluses.
(4) Voting rights
Subject to the Business Corporations Act, holders of this
class of shares do not, by the simple fact of holding those shares, have the
right to vote at the Company’s shareholder meetings, to attend those meetings or
to receive notice thereof.
(5) Redemption by the Company
Subject to section 123.54 of the Companies Act and any
shareholder agreement, the holders of this class of shares may require that the
Company redeem, within 30 days of a written request to that effect, all or part
of the shares of this class that they hold. The redemption price for each share
will be $1,000.
Following the redemption, the Company must reduce its issued and
paid-up share capital account with respect to this class pursuant to section 123.51
of the Companies Act. For the purposes of this paragraph, the redemption
is deemed completed upon surrender and cancellation of the certificates
representing the shares redeemed.
[12] On December 19, 2000, the appellant
acquired 300 Class J shares issued by Centre Financier for $1 each. It was
because these shares issued for $1 were retractable for $1,000 that the
Minister of National Revenue (the “Minister”) considered that a benefit had
been conferred upon the appellant as a shareholder.
[13] On January 16, 2001, Centre Financier
redeemed the 300 Class J shares and issued a cheque for $300,000. As the
redemption was in favour of the appellant, of which Mr. Gagnon was sole
shareholder, Ms. Turcotte, as a shareholder of Centre Financier, also signed
the redemption resolution and even added the following by hand:
[TRANSLATION]
I declare that I have full knowledge of, and am in agreement
with, this redemption of shares by Gestion Léon Gagnon inc.
Sylvie Turcotte
[14] During cross-examination of
Mr. Gagnon, counsel for the respondent asked the following questions,
which appear on pages 22 to 25 of the transcript:
[TRANSLATION]
[39] Q. Okay. Do you know
why, instead of issuing shares and then redeeming the shares, a dividend was
not declared on the Class J shares?
R. Can you be more specific: a dividend declared
to?
[40] Q. No, but the thing is
you said that the purpose of the planning was to . . . well, transfer
the money, the profits held in Centre financier, to Gestion Léon Gagnon.
R. Yes.
[41] Q. Okay. Through a
dividend.
R. Intercompany.
[42] Q. Intercompany, okay. So
to declare a dividend, first of all the company must be a shareholder if there
is a share issue. Why wasn’t a dividend simply declared on those shares? Do you
know?
R. No, what I do know is that I consulted a tax
expert. We looked at the situation together and the objective was to protect
the capital, to protect the patrimony and to do so without tax consequences,
and that's the recommendation that was made to me, and I applied it.
[43] Q. Okay.
R. I . . . that’s beyond my abilities.
[44] Q. Okay. So with regard
to the resolution providing for the share issue, is it true that the issue
price of the Class G shares was $1 per share?
R. Yes.
[45] Q. It's true?
R. It was $1.
[46] Q. Okay. How was that
decided, that it was $1 per share?
R. There again, it was decided . . . it was on
the recommendation that was made to me.
[47] Q. Okay.
R. I applied the recommendations; I couldn’t
explain the technicalities.
[48] Q. Okay. Now, the class
J shares that were issued, is it true that they have a redemption value of
$1,000 per share?
R. Yes, it's true.
[49] Q. Yes? Okay, how was
that amount of $1,000 per share determined?
R. The same as for the $1 . . . unfortunately that's
beyond me, how it was determined . . .
[50] Q. But the aim was to
take the $300,000 from the operating company and to put it into the
management company, is that right?
R. The aim was to protect the capital and to
protect the family patrimony and to do so without tax consequences.
[51] Q. Okay.
R. And the recommendation was from company A to
company B, the communicating vessels.
[52] Q. Okay. Is it true
that when that transaction was made, the share issue, and the redemption value
was set at $1,000 per share, that is, $300,000 in total, the company had the cash
assets to pay that amount?
R. Centre financier?
[53] Q. Yes.
R. Yes indeed, the company had an accumulated
surplus of a bit more than $300,000.
. . .
[15] Jean‑Yves Lepage is a tax
consultant. He worked occasionally with the representatives of Centre
financier.
[16] Here is his explanation from pages 30 and
32 of the transcript:
[TRANSLATION]
R. Yes, because . . . well, I can say in short that
it was Mr. Gagnon’s objective from the start. It was to say, that money, we
have already . . . the company has already paid its taxes on it, I don’t need
it personally, so I don’t want to pay any tax immediately, I will pay it when I
take the money out. Now, is there a way of transferring or protecting that
money without having to pay tax? And the result, in our opinion, was to say:
Okay, there will be a non-taxable intercompany dividend.
. . .
R. Well we . . . Yes, we looked at it and indeed
there was no advantage for Mr. Gagnon in that situation because the money
went from one company to another. And the tax payable was not reduced because
Mr. Gagnon is not in a better position than he was before, in the sense that
the money is still in a company and he will have to pay tax on the sums that he
takes out of the company. So, whether he takes money from company A or company
B, the end result will be the same. Tax will have to be paid. So, the goal was
not to defer, to eliminate the tax, on the contrary. It was just to . . . protect
the money.
[17] He said that the
description of the characteristics of the Class J shares was done with the help
of a lawyer.
[18] In cross-examination, counsel for the
respondent posed the following questions found at pages 33 to 36 of the
transcript:
[TRANSLATION]
[72] Q. Yes? Can you
explain to us how the $1 issue price of the shares was determined and the
amount, the redemption value of the shares?
R. Well, basically, what we did was, we said,
okay, the amount to be taken out is $300,000. So, we'll issue shares with a par
value of $1 each and redeem them for $1,000 each as indicated by the . . . on
the certificate, and the difference, that’s where the difference, so we
considered that the difference would be an intercompany dividend.
[73] Why did you not, as
they say, roll over Mr. Gagnon’s existing shares instead of issuing new ones?
R. Well, yes. That is something we thought of,
it’s one of the . . .
[74] That’s the normal way
of proceeding.
R. Yes, it is in fact one of the possibilities
we considered, and we came to the conclusion that, yes, that would have worked.
It is, as you say, the normal way of proceeding, but we had . . . of course the
costs would have been higher in that case, whereas this way it was relatively
more simple; all there was to do was to modify the capital stock and redeem the
shares.
[75] Q. Okay, so it
was to avoid money really?
R. Pardon?
[76] Q. It was to
avoid . . .
R. It was to avoid costs.
. . .
[19] Sylvie Turcotte confirmed that ever since
they have been married (27 years now), she and her husband have always
considered themselves as having a single patrimony, and that she was in full
agreement that the amount of $300,000 be included in the appellant’s assets.
[20] Ms. Turcotte added that Centre Financier was sold in
2005. This is how she explained the context of the sale at page 41 of the
transcript:
[TRANSLATION]
[99] . . .
R. Yes, I can explain, it’s very simple. My
spouse had cancer and . . . his assistant stood in for him. And there
was an agreement with that assistant that the . . . it would be gradually
transferred, that he would eventually become the owner. But since, with
everything that was happening, it was like . . . it was a bit difficult for us
at home as well, and him working a lot but not being the owner. So finally we .
. . we sat down, we looked at things, and finally we sold right away.
[21] It would appear that
Centre Financier's shareholders wished to sell their business without the
$300,000 remaining in the assets of the company.
Analysis and
conclusion
[22] As we have seen from
the provisions of the above-cited legislation dealing with companies, corporate
law permits the redemption of shares at a value higher than their issue price.
The redemption price can be set in the articles of incorporation and the amount
be payable on the demand of a shareholder. Certain conditions apply to the
redemption.
[23] Paragraph 15(1)(a)
of the Act reads as follows:
15(1) Benefit conferred on shareholder -- Where
at any time in a taxation year a benefit is conferred on a shareholder, or on a
person in contemplation of the person becoming a shareholder, by a corporation
otherwise than by:
(a) the reduction of the paid-up capital, the redemption, cancellation
or acquisition by the corporation of shares of its capital stock or on the
winding-up, discontinuance or reorganization of its business, or otherwise by
way of a transaction to which section 88 applies;
. . .
the amount or value thereof shall, except
to the extent that it is deemed by section 84 to be a dividend, be included in
computing the income of the shareholder for the year.
[24] The Act sets out the
tax treatment in the case of a share redemption. Accordingly, if there is a
capital gain, subsection 84(3) of the Act provides that the redeeming company
is deemed to have paid a dividend equal to the amount, if any, by which the
amount paid exceeds the paid-up capital.
[25] It was submitted
that it is not the redemption that is in issue here but the share issue. As
soon as soon as the shares were issued, a benefit was conferred and I need not
be concerned with the redemption.
[26] I disagree. It is the
redemption that constitutes the benefit. The redemption is subject to the requirements
of corporate law. It is not automatic.
[27] I find it hard to fathom
the true reasons that led the Minister’s auditors to assess under subsection
15(1) of the Act. They did not testify and their reports were not presented to
me.
[28] I do not see on what
basis I could declare that the mere issuance of shares whose redemption value is
higher than their purchase price constitutes a benefit under
subsection 15(1) of the Act when the redemption, although it is initiated
by the shareholder, is subject to the provisions of the legislation dealing
with companies.
[29] In addition,
subsection 15(1) of the Act provides that there is no benefit if the redemption
is deemed to constitute a dividend under section 84 of the Act, which it would
be under subsection 84(3) of the Act.
[30] It was submitted
that rolling over the shares in Centre Financier into management companies
would have been the normal procedure. It was not explained to me why it was
essential to proceed in this fashion. One might also ask whether a rollover would
have served the purposes of Centre Financier’s shareholders, who wished to
sell, but without including the amount of $300,000.
[31] What is abhorrent to
the underlying policy of the Act is the stripping of the surplus from a
corporation without any tax consequences. But this is not what happened here.
The redemption of a share at a price higher than the issuing price is deemed to
be a corporate dividend.
[32] For these reasons,
the appeal is allowed with costs.
[33] The parties asked that the appeal be classified
as a Category B appeal rather than a Category C appeal given the amount of tax
in issue. This was granted by the Court.
Signed at Ottawa, Canada, this 14th day of December 2006.
“Louise Lamarre Proulx”
on this 18th day
of January 2008.
Erich Klein,
Revisor
Email this Content