Citation:
2014 TCC 204
Date: 20140624
Docket: 2010-637(IT)G
BETWEEN:
EDWARD
BAKER,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR JUDGMENT
Hogan J.
I. Introduction
[1]
This is an appeal by Edward Baker (the
“Appellant”) in respect of his 2001 taxation year. The Minister of National
Revenue (the “Minister”) reassessed the Appellant to include $95,000 in
the Appellant’s income pursuant to subsection 146(9) of the Income Tax
Act (the “Act”). The reassessment was issued on the basis that the
Appellant’s registered retirement savings plan (the “RRSP”) had purchased
shares of Kelso Technologies Inc. (“Kelso”) for a consideration greater than
their fair market value.
[2]
In the Minister’s view, subsection 146(9) of the
Act is unambiguous. The difference between fair market value and the consideration
paid was properly included in the Appellant’s income for that year regardless
of whether the Appellant was complicit in authorizing the transaction. The
Respondent also argues that the evidence allows me to make a factual finding
that the Appellant participated in the transaction because it was presented to
him as a so-called RRSP strip.
[3]
In contrast, the Appellant submits that
subsection 146(9) of the Act is an anti‑avoidance rule. It does not apply
because the Appellant did not intend to avoid tax.
II. Factual Background
[4]
The Appellant operated a successful printing business
for some 35 years until his retirement in 2004. In 2000, while planning a
vacation, the Appellant allegedly unexpectedly met a client who informed him of
an investment seminar for Canadian residents in Cancun, Mexico. Shortly before Christmas, the Appellant attended that three-day seminar. The Appellant
claims to have skipped most of the seminar’s presentations, finding them
largely irrelevant to the concerns of Canadian investors. However, he attended a
part of the presentation given by Cameron Claridge, who appeared at the seminar
as a Canadian speaker. After the presentation, the two discussed RRSP
investment strategies. The Appellant then left his contact information with Mr.
Claridge.
[5]
Shortly after the Appellant’s return to Canada, Mr. Claridge contacted the Appellant, advising him of an investment opportunity in
Kelso. Kelso is a publicly traded company that manufactures train brake parts
among other things. The Appellant conducted some research on Kelso by
consulting its website and speaking with Kelso’s president and CEO, Stephen
Grossman.
[6]
Mr. Claridge advised the Appellant to satisfy
himself that Kelso was a qualified investment for Canadian income tax purposes
by speaking with Bryce Stewart, a lawyer and a director of Kelso. The
Appellant did so and subsequently received a letter from Mr. Stewart confirming
that Kelso was an “eligible corporation” under the Act. The letter also stated
that the fair market value of Kelso’s shares had been recently estimated to be
$20.00 per share.
[7]
The Appellant then set out to purchase 5,000
Class “A” Convertible Voting Preference Shares, Series 1 of Kelso (the “Kelso
Securities”). In order to do so, the Appellant opened a self‑directed registered
retirement savings plan account (the “RRSP Account”) with the Pacific
Coast Savings Credit Union (the “Credit Union”). By a document dated January
25, 2001, the Appellant directed the transfer of $162,849.27 held in his existing RRSP account with TD Canada Trust to the
RRSP Account with the Credit Union. That transfer occurred in March of 2001. By
a letter of direction dated April 20, 2001, the Appellant instructed the Credit
Union to withdraw a sum of $100,000 from the RRSP Account to pay Mr. Stewart
in trust on his behalf, and to accept in exchange delivery of share certificate
A-059 in respect of the Kelso Securities. That exchange took place on April 24,
2001.
[8]
The RRSP purchased the Kelso Securities for $20.00
per share. It purchased them from Robin Sommerville. Ms. Sommerville had
previously purchased the Kelso Securities in a private placement at an issue
price of $1.00 per share on January 25, 2001, three months earlier. That
transaction was one of many similar such private placements. Between late 1999
and early 2001, Kelso issued a succession of Class “A” Convertible Voting
Preference Shares, Series 1, including the Kelso Securities purchased by the
RRSP. Each issuance was made by way of a private placement to Ms. Sommerville
for a purchase price of $1.00 per share. The funds were to be used by Kelso
either as working capital or for the repayment of loans. The date of issuance
and number of shares issued in each private placement were as follows:
|
Date of Issuance
|
Number of Shares Issued
|
|
June 15, 1999
|
10,680
|
|
September 10, 1999
|
25,500
|
|
November 16, 1999
|
30,000
|
|
December 1, 2000
|
25,000
|
|
January 25, 2001
|
25,000
|
|
May 23, 2001
|
25,000
|
[9]
The Kelso Securities were convertible into units
at the rate of one unit for every $0.15 of paid-up capital in the first year
after issuance. The shares were subject to mandatory conversion on the fifth
anniversary of their issue. The conversion rate escalated by $0.05 on each
anniversary date. Each unit consisted of one common share and one non‑refundable
share purchase warrant. Each share purchase warrant entitled the holder to
purchase one additional common share at a price equal to the conversion price
of the Kelso Securities at the time of conversion. During April 2001, the
common shares of Kelso were trading at between $0.07 and $0.11.
[10]
Shortly after the Appellant purchased the Kelso
Securities he became suspicious of Mr. Claridge. The Appellant had expected Mr.
Claridge to take $20,000 of the $100,000 purchase price as commission. Mr.
Claridge failed to explain how he would do so. Also, the Appellant found
communication with Mr. Claridge to be increasingly difficult. Mr. Claridge
failed to return the Appellant’s phone calls or emails. The Appellant became
concerned about Mr. Claridge having access to the balance of the funds in
his RRSP Account and, as a consequence, he transferred the account balance to
RBC Dominion Securities (“RBC”) in April of 2003.
III. Issues
[11]
This appeal raises two issues. The first is
whether the consideration paid by the Appellant’s RRSP for the Kelso Securities
was greater than fair market value. The second is whether subsection 146(9) of
the Act applies so as to increase the Appellant’s income by the difference
between the consideration paid by the RRSP for the Kelso Securities and their
fair market value.
IV. Positions of the
Parties
[12]
The Appellant invites the Court to adopt Justice
Sharlow’s concurring reasons in St. Arnaud v. The Queen. There, Justice Sharlow held
that subsection 146(9) of the Act applies only if a taxpayer intended to avoid
tax; it does not cover an innocent overpayment by the RRSP. The Appellant
contends that the only issue raised by the Minister is the fair market value of
the Kelso Securities. As a result, the Minister bears the burden of
establishing the requisite avoidance purpose of the overpayment for the Kelso
Securities. The Appellant argues that the Respondent has failed to establish
the Appellant’s tax avoidance intention and that subsection 146(9) of the Act therefore
does not apply in these circumstances.
[13]
The Respondent argues that the application of
subsection 146(9) of the Act is mechanical. There is no test of intent or of avoidance
purpose. The Respondent’s position is that subsection 146(9) of the Act
requires an in inclusion income in all cases where the fair market value of
property acquired by an RRSP is less than the consideration paid in exchange
for that property, regardless of whether that difference was intended by the
purchaser. The Respondent submits that this is such a case. Consequently, the
difference between the consideration paid for the Kelso Securities and their
fair market value, which is at minimum $95,000, was properly included in the
Appellant’s income.
[14]
The Respondent further argues that, even if the
Court adopts Justice Sharlow’s concurring reasons in St. Arnaud,
the evidence nonetheless supports an inference that the Appellant purchased the
Kelso Securities as a means to gain control of the RRSP funds while maintaining
the deferral of any income tax payable on those same funds.
V. Analysis
[15]
Subsection 146(9) of the Act provides that where
the trustee of an RRSP purchases property for the trust for more than it is
worth, or sells trust property for less than it is worth, the difference must
be included in computing the annuitant's income for the year. The relevant
provision reads as follows:
Where disposition
of property by trust
(9) Where in a
taxation year a trust governed by a registered retirement savings plan
(a)
disposes of property for a consideration less than the fair market value of the
property at the time of the disposition, or for no consideration, or
(b)
acquires property for a consideration greater than the fair market value of
the property at the time of the acquisition,
the difference
between the fair market value and the consideration, if any, shall be included
in computing the income for the taxation year of the annuitant under the plan.
[16]
The Respondent argues that the effect of
subsection 146(9) of the Act is clear. It requires an in inclusion income in
all cases where the fair market value of property acquired by an RRSP is less
than the consideration paid in exchange for the property. This is true regardless
of the RRSP holder’s intent in authorizing the transaction.
[17]
The Respondent submits that this Court is not
bound by Justice Sharlow’s concurring reasons in St. Arnaud. There, the
appellants were innocent victims of fraud. They had been duped into exchanging
their RRSP or registered retirement income fund (“RRIF”) funds for worthless
shares. The fraudster was ultimately convicted but the appellants’ funds were
never recovered. The Minister reassessed the appellants, including the
consideration paid for those shares in the appellants’ income pursuant to
either subsection 146.3(4) or subsection 146(9) of the Act. At trial, Justice Bowie dismissed the
appeals, concluding at paragraph 30 “that subsection
146(9) is not ambiguous. It applies to transactions such as these where the
annuitant is not seeking to avoid tax while removing value from the registered
fund, but is simply duped into paying good money for valueless shares.”
[18]
On appeal to the Federal Court of Appeal (the “FCA”),
Justices Webb and Trudel overturned Justice Bowie’s decision on the basis that
the appellants’ RRSPs or RRIF had not acquired the shares in question.
[19]
Justice Sharlow issued concurring reasons. While
agreeing with the majority’s reasons, she added that subsection 146(9) of the Act
applies only to the extent that a taxpayer was motivated by an intent to avoid
tax and does not apply to an innocent overpayment for property. In support of
this, Justice Sharlow considered the hypothetical situation of Mary. Mary
directed her RRSP to acquire an investment asset at a price which turned out to
be an overpayment. Under Justice Sharlow’s interpretation of subsection 146(9)
of the Act, the Court must consider Mary’s motivation. If she intended that the
overpayment be made for a tax avoidance purpose then subsection 146(9) of the
Act applies. If her overpayment was innocent then it does not.
[20]
The Respondent contends, however, that Justice
Sharlow’s reasons are not the reasons of the majority of the FCA. Indeed, at
paragraph 7, Justices Webb and Trudel specifically decline to address the
interpretation of subsection 146(9) of the Act.
[21]
Furthermore, the Respondent argues that Justice
Sharlow’s reasons in St. Arnaud are not consistent with
well-established rules of statutory interpretation, namely, that emphasis is traditionally
placed on a textual interpretation of tax statutes on account of their detail
and particularity. As authority for that proposition, the Respondent cites Canada
Trustco Mortgage Co. v. Canada,
at paragraph 12, where McLachlin C.J.C. and Major J. quote the following from
Hogg and Magee (Principles of Canadian Income Tax Law, 2nd ed.,1997):
It would introduce intolerable uncertainty into the Income Tax Act
if clear language in a detailed provision of the Act were to be qualified by unexpressed
exceptions derived from a court's view of the object and purpose of the
provision.
[Emphasis added.]
[22]
In addition, the Respondent relies on further
guidance from the Supreme Court of Canada (the “SCC’) provided in Placer
Dome Canada Ltd. v. Ontario (Minister of Finance). Justice Lebel noted at
paragraph 23:
The interpretive
approach is thus informed by the level of precision and clarity with which a
taxing provision is drafted. Where such a provision admits of no ambiguity in
its meaning or in its application to the facts, it must simply be applied.
Reference to the purpose of the provision “cannot be used to create an
unexpressed exception to clear language”: see P. W. Hogg, J. E. Magee and
J. Li, Principles of Canadian Income Tax Law (5th ed. 2005), at p.
569; Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622. Where, as in
this case, the provision admits of more than one reasonable interpretation,
greater emphasis must be placed on the context, scheme and purpose of the Act.
Thus, legislative purpose may not be used to supplant clear statutory language,
but to arrive at the most plausible interpretation of an ambiguous statutory
provision.
[Emphasis
added.]
[23]
The Respondent argues that subsection 146(9) of
the Act is unambiguous. There are no words such as “knowingly” or “non-arms
length” that would suggest that subsection 146(9) applies only to tax avoidance
situations. Accordingly, it is not the role of this Court to read in an
unexpressed test of intention.
[24]
Furthermore, the Respondent submits that a
contextual and purposive interpretation supports the above textual
interpretation of subsection 146(9) of the Act. The purpose of an RRSP is to
encourage Canadians to save for retirement. To that end, an RRSP provides a tax
deferral through a tax-sheltered environment. Contributions to the RRSP are immediately
deductible by the contributor and the amount contributed is not taxable until
it is withdrawn. In other words, RRSPs allow taxpayers to invest before‑tax
dollars and reinvest their before-tax return on a tax-deferred basis. In
addition to a tax deferral, taxpayers receive the benefit of tax savings if
they are taxed at a lower marginal rate when funds are withdrawn from the plan,
as is often the case after retirement.
[25]
However, the tax deferral is not a tax
exemption. The Respondent suggests that amounts contributed to an RRSP and the
income and gains accrued on these amounts are eventually subject to taxation.
[26]
I note that this statement is overly broad. An
RRSP can lose money by investing in equity or income-earning securities that
fall in value because of credit deterioration or interest rate fluctuations. All
taxpayers share in these losses through forgone tax revenue.
[27]
In support of the foregoing, the Respondent
relies upon the FCA’s reasons in The Queen v. Nunn. There, the appellant, a victim
of fraud, transferred his “locked‑in” RRSP funds to a non-qualified
investment, which was later lost entirely. In spite of the fact that “Mr. Nunn took reasonable steps to ascertain that the investment
was legitimate,”
a unanimous panel of the FCA held that the withdrawal was nevertheless taxable
under the former subsection 146(10) of the Act. Justice Malone noted at
paragraph 22:
By purchasing the
shares in a non-qualified investment, subsection 146(1) was automatically
triggered. Undoubtedly, this result is harsh but it would be unfair to exempt a
taxpayer from his or her tax obligation on the basis of mistake or fraud: Vankerk
v. Canada, [2006
DTC 6199] 2006 FCA No. 371 at paragraph 3. Put simply,
other Canadian taxpayers should not have to bear the financial burden which
arises from unfortunate circumstances such as those that exist here.
[28]
The FCA’s guidance in Nunn was applied by
Justice Paris in Deschamps v. The Queen.
There, the appellant, an unsophisticated investor, in a situation where the
facts were “almost identical to those . . . in Nunn”, purchased shares in a
non-qualified investment. Those shares had no value when they were acquired and
the consideration given for them exceeded their fair market value by $53,300.
Justice Paris, relying upon Nunn, held that the taxpayer was
required to include that amount in his income pursuant to subsection 146(9) of
the Act regardless of the fact that he was the victim of fraud.
[29]
Finally, as further authority for a mechanical
reading of subsection 146(9) of the Act, the Respondent directs this Court to
the trial decision in St. Arnaud. At paragraph 28, Justice Bowie
opined:
. . . an overpayment
for an asset falls to be taxed under subsection 146(9) whether it is in the
nature of an attempted avoidance, through non-arm's length transactions for
example, or one that is on the annuitant's part benign, as here, where the
amounts in question are the subject of a fraud perpetrated on an innocent
annuitant. They are taxed under subsection 146(9) not because the annuitant has
done anything wrong, but because they are tax sheltered funds that have left
the sheltered environment and so must, under the scheme of the Act, and its
specific provisions, be subject to tax. That the scheme of the Act requires the
excess over fair market value to be taxed is no less so because it is the
fraudster and not the annuitant that receives the tax sheltered amount. When
viewed in its context, subsection 146(9) is not at all ambiguous, nor does it
lead to any absurdity.
[30]
Counsel for the Respondent notes that Justice
Bowie’s conclusion was not disturbed by the majority’s reasons on appeal.
[31]
The Appellant’s position is that Justice
Sharlow’s concurring reasons are an alternative ratio, which is binding
upon this Court. In support of this, the Appellant cites a number of
authorities that hold that a lower court is bound by an alternative
ratio of a higher court: Bellamy v. Timbers; United Food and Commercial
Workers, Local 1400 v. Wal-Mart Canada Corp. (c.o.b.Wal‑Mart); Paragon Properties Ltd. v.
Magna Envestments Ltd.;
R. v. J. (J.);
Chliwniak v. Chliwniak.
[32]
The Appellant further submits that the
legislative intent, as reflected by Hansard, clearly indicates that subsection
146(9) of the Act is meant to be an anti‑avoidance provision.
Specifically, counsel for the Appellant directs this Court to the House of
Commons Debates where Mr. Mahoney, Parliamentary Secretary, suggests that “[t]he intent [of subsection 146(9)] is to prevent a trustee
using the [RRSP] to confer a benefit on the annuitant or someone named by him
and thus perpetuating a tax avoidance.”
[33]
Hansard evidence can be of limited assistance in
determining the purpose of legislation. For instance, in Rizzo & Rizzo
Shoes Ltd. (Re),
Iacobucci J. held at para. 35:
Although the
frailties of Hansard evidence are many, this Court has recognized that it can
play a limited role in the interpretation of legislation. Writing for the
Court in R. v. Morgentaler, [1993] 3 S.C.R. 463, at p. 484, Sopinka
J. stated:
. . . until recently the courts have
balked at admitting evidence of legislative debates and speeches. . . . The
main criticism of such evidence has been that it cannot represent the “intent”
of the legislature, an incorporeal body, but that is equally true of other
forms of legislative history. Provided that the court remains mindful of the
limited reliability and weight of Hansard evidence, it should be admitted as
relevant to both the background and the purpose of legislation.
[34]
The reason why limited weight is attached to
Hansard evidence was explained by Judge Bowman (as he then was) in Glaxo
Wellcome Inc. v. The Queen, as follows:
. . . Pronouncements
of politicians consist as a rule of broad generalities and are seldom a
reliable guide in interpreting the specific words of a statute. Seldom do
speeches of politicians in Parliament provide any real enlightenment except
possibly in the broad sense of identifying governmental policy.
[35]
On that basis, I cannot take Mr. Mahoney’s
statement as an unequivocal indication that Parliament intended that the
provision apply only when the Court makes a factual finding that the RRSP
holder authorized the transaction for an avoidance purpose. It is however
worthy of some weight.
[36]
In the Appellant’s view, Justice Sharlow’s
reasons in St. Arnaud are binding on this Court. Those reasons
establish that subsection 146(9) of the Act is an anti-avoidance provision. It
applies only if it can be shown that the RRSP overpaid for securities as part
of a scheme designed to divert funds directly or indirectly to the annuitant of
the plan on a tax-free basis. The Appellant argues that the Canada Revenue Agency
(“CRA”) auditor confirmed on discovery that the only issue in dispute was the
fair market value of the Kelso Securities. Therefore, it falls to the Minister
to establish the avoidance purpose of the transaction.
[37]
The Appellant refers to the following excerpts
from the transcript of Mr. Graschuk’s testimony on discovery as
confirmation of his understanding of the Respondent’s theory of its case:
Read-In of the
Appellant of the Transcript of Gordon Graschuk Page 19, Questions 81-83:
Q. Okay. And in this
case there wasn’t – was the sole issue the value of the shares? Was that the
sole issue that made it non-compliant? Was there anything else?
A. There’s other
issues, but I think from the legislation standpoint that’s the only one
that really matters.
What happened to
that excess amount is interesting. I mean, it’s a fascinating story, I’m sure,
but it’s not relevant. The relevant thing from the provision is did you pay in
excess of fair market value?
Q. No, I understand.
A. If the answer is
yes you have to −
Q. I just want to
know, going into trial, the only issue appears to be that you’re describing is
the fact that the taxpayer overpaid for these shares. That’s the issue that’s
on the table; is that fair?
MR. GOTFRIED: That’s
correct.
. . .
Read-In of the
Appellant of the Transcript of Gordon Graschuk Pages 29-30, Questions 120-122:
Q. What facts are
you replying upon to suggest that – other than the fair market value issue –
that the taxpayer in this case was trying to avoid taxes?
MR. GOTFRIED: I’m going
to – what’s the relevance of that? The Minister hasn’t proceeded based on
GAAR so –
MR. RADNOFF: That’s
fine. If you’re saying that’s not going to be your position at trial, that’s
fine.
MR. GOTFRIED: No.
MR. RADNOFF: You
have to say yes.
MR. GOTFRIED: Yea
[sic], the Minister does not rely on GAAR.
BY MR. RADNOFF:
Q. And so you don’t
– you’re not relying on the fact that is was an avoidance transaction as well;
is that fair?
A. Yes that’s fair.
Q. And are you
suggesting that there was any tax benefit?
MR. GOTFRIED: We’re
not proceeding with the GAAR analysis, so there’s going to be no tax
benefit avoidance transaction. That’s not the position of the Minister.
MR. RADNOFF: Okay.
I’m just going through the headings.
MR. GOTFRIED: Yes.
MR. RADNOFF: It’s
not clear if they’re subsumed under GAAR or if they’re all distinct issues, so
that’s why I’m going through.
MR. GOTFRIED: Okay.
MR. RADNOFF: And
you say no bona fide purpose. Is that an issue that you’ll be advancing at
trial?
MR. GOTFRIED: Not
in the context of a GAAR analysis.
[Emphasis added.]
[38]
It is apparent from the above that Mr. Graschuk
understood that he was being asked to confirm that the Minister would not seek
to defend its assessment using the general anti-avoidance rule found in section
245 of the Act. I cannot construe these remarks as an admission that the
Respondent was prepared to abandon the assumptions in paragraphs 9a) and b) of
the Reply to the effect that the Kelso Securities were promoted and marketed for
the purposes of an arrangement
which would allow investors such as the Appellant to gain control of their RRSP
funds offshore while avoiding tax on the withdrawal.
[39]
The Appellant’s counsel also insists that the
Appellant’s evidence contradicts these assumptions such that the Minister bears
the burden of showing that they are true. For the reasons outlined below, I
attach no weight to the Appellant’s evidence. Therefore, the assumptions stand.
In any event, I believe that the evidence shows, on a balance of probabilities,
that the Appellant acted in a complicit manner in giving his approval to the
transaction because he was led to believe he would receive a collateral
benefit. Therefore, I can decide this appeal without choosing between the two
interpretations of subsection 146(9) of the Act presented by the parties.
[40]
In making my credibility findings in this case,
I find it useful to refer to the following comments in Springer v. Aird
& Berlis LLP:
14 In making
credibility and reliability assessments, I find helpful the statement of
O'Halloran J.A. in R. v. Pressley (1948), 94 C.C.C. 29 (B.C. C.A.):
The Judge is not given a divine insight
into the hearts and minds of the witnesses appearing before him. Justice does
not descend automatically upon the best actor in the witness-box. The most
satisfactory judicial test of truth lies in its harmony or lack of harmony with
the preponderance of probabilities disclosed by the facts and circumstances in
the conditions of the particular case.
15 I also find it
helpful, particularly in this case, the statement of Farley J. in Bank of
America Canada v. Mutual Trust Co. (1998), 18 R.P.R. (3d) 213 at para. 23:
Frequently in cases judges will be
called upon to make findings concerning credibility of witnesses. This usually
is a most difficult task absent the most blatant of lying which is tripped up
by confession, by self-contradictory evidence, by directly opposite material
developed at the relevant time period or by evidence of an extremely reliable
nature from third parties. One is always cognizant that people's perceptions of
the same event can sincerely differ, that memories fade with time, that
witnesses may be innocently confused over minor (and even major) matters as
well as the aspect of rationalization, a very human and understandable imperfection.
A point that a witness may not be sure of initially becomes eventually a point
that the witness is certain about because it fits the theory of his side.
Rationalization will also affect some person's views so that a certainty that a
fact was "A" evolves into a confirmation that that fact was "not
A".
16 In Olympic
Wholesale Co. v. 1084715 Ontario Ltd. [1997] O.J. No. 5482 at para. 3,
Farley J. also made the following statement which I find helpful:
I would like to review the aspect of
assessing credibility and the weighing of evidence, and I do this in a very
general way. … The evidence and the way it is given should be taken in context
and in a balanced way. No one should expect perfection in testimony and it is
often said that evidence which is too consistent may be a sign of it being
artificially constructed. I also recognize that there can be an inadvertent
rationalization of memory to fit what is afterwards said that must have
happened as opposed to actually remembering what did happen. This usually
increases over time …
17 Farley J. used the word "rationalization". I take his
comments to refer to what is often said to be "reconstruction" of
evidence. Reconstruction can be either inadvertent or advertent. In either
case, when it occurs, it is something that the trier of fact must consider in
weighing evidence.
[Emphasis
added.]
[41]
I will consider the Appellant’s evidence and
credibility in this light.
[42]
The Appellant testified that, while planning his
Cancun vacation, he unexpectedly met a client of his printing business who
informed him of a seminar hosted in Cancun on investment strategies for
Canadian residents. The Appellant decided to attend the seminar, in the words
of counsel for the Respondent, to mix business with pleasure.
According to the Appellant, it was only after arriving
in Cancun that he discovered that the seminars were mainly of interest to American
taxpayers.
[43]
According to the Appellant, because the lectures
were of little relevance to Canadian residents, he decided to skip most of the
presentations, preferring pleasure to business. He provided few details on the
actual subject matter of the lectures.
[44]
According to the Appellant, he arrived at the
tail end of Mr. Claridge’s presentation. However, the Appellant did manage to
strike up a conversation with him. The Appellant claims he informed Mr.
Claridge that he was unhappy with the returns on his RRSP portfolio and was
interested in strategies to enhance his returns. This conversation led the
Appellant to provide contact information to Mr. Claridge. The Appellant also
claims that he talked to a Canadian client of Mr. Claridge who was happy with
his investment advice.
[45]
In cross-examination it was shown that the
Appellant registered for the Cancun seminars as part of a seminar vacation package
which cost approximately $8,000. The Appellant omitted this fact in direct examination. It is difficult to imagine that
the Appellant did not consult a description of the program before booking his
trip. It is improbable that the Appellant did not know the subject matter of
the lectures prior to registering for the seminar.
[46]
The CRA auditor testified that he learned that
the Cancun seminar attended by the Appellant was sponsored by an organization
known as the Institute of Global Prosperity (“Global Prosperity”). This organization promotes an aggressive anti-tax philosophy
through audio and in-person seminars, the latter typically held in offshore
locations. According to the witness, Global Prosperity requires its clients to
purchase the audio seminar package as a precondition to attendance at an
offshore conference. The cost is approximately $1,500 for six audio disks. The
CRA auditor testified that he listened extensively to the audio seminars and
prepared a written summary of the highlights of the seminars. His written
summary was presented as part of the Appellant’s read-in evidence. On page 1 of
his report, he summarizes his findings as follows:
The gist of the
Global Prosperity Level 1 education audio tape set is to convince the listener
that income tax legislation in Canada and the U.S.A. is not constitutional (it
has never been passed into law) and thus the payment of income tax is
voluntary. It encouraged listeners to discard their social insurance or social
security numbers, driver’s licenses, and government-issued currency, to become
detached from all government programs including RRSP’s and health care, and to
move title to their worldly possessions to offshore trusts. These offshore
trusts should not be registered in their own names, but registered to IGP
personnel with an agency agreement in place allowing the individual to use the
property they purchased. As the only “business” of the trust is to protect the
personal assets of the individual, the individual can now claim personal living
expenses as business expenses, or so they claim. The tape package insists that
the supply of money in Canada and the U.S.A. is controlled by the so-called
“international banking-cartel” rather than the Bank or Canada or Federal Reserve.
[47]
In light of the above, I believe that the
Appellant was well aware of the subject matter of the seminars when he signed
up for the seminar, but chose to downplay this fact in order to conceal the
reason for the purchase of
Kelso Securities by the RRSP.
[48]
The Appellant’s description of the circumstances
surrounding the purchase of the Kelso Securities is also suspect. Apparently,
Mr. Claridge recommended the
investment because Kelso was on the cusp of developing new brake technology for use in the rail
transportation industry. This appealed to the Appellant and prompted him to
undertake research on Kelso on the Internet. He claims that he spoke with the
CEO of the company on the commercial prospects of the new brake system.
[49]
Satisfied with this limited due diligence, the
Appellant committed $100,000 to the transaction. The Appellant claims he did
not set the price range for the transaction. The Appellant testified that his
only instructions to Mr. Claridge were to purchase as many shares as possible, claiming
that he left all price negotiations to Mr. Claridge.
[50]
The Appellant also acknowledged that he had
agreed to pay Mr. Claridge $20,000 for his investment advice and believed that
this amount would be paid out of the $100,000 to be used for the share purchase. The Appellant claims that it was
unclear how exactly this would be done. At the very least, this admission shows
that the Appellant knew that the RRSP was paying more than fair market value
for the shares. The Appellant offered no reasonable explanation as to why he
was willing to pay such a high fee to Mr. Claridge.
[51]
Assuming that the Appellant carried out Internet
research on Kelso, I find it difficult to believe that he would not have found
Kelso’s financial information, including the reports of its private placement
of the Kelso Securities. These securities were identical to those purchased by
the Appellant at a price of $20.00 each. I find it equally improbable that the
Appellant would have committed a substantial part of his RRSP savings to the
purchase of securities of a small public company at an early stage of its
development without providing Mr. Claridge with instructions on price.
[52]
I note that the Appellant emphasized that his
formal education ended after high school. However, I also note that he owned a
printing business which he ran for 35 years until his retirement, when he turned the printing business over to
his son. He acknowledged that he had 10 employees at that time. It is likely
that the Appellant became a fairly astute business person through building and
running his own business for many years.
[53]
After listening to the Appellant in direct
evidence, I was struck by the fact that he did not acknowledge or suggest that
he may have been tricked by Mr. Claridge in overpaying for the Kelso
Securities. There is also no allegation of fraud or deceit in the Appellant’s
Notice of Appeal. Moreover, it is notable that he brought no action or made no complaint
against either Mr. Claridge or Mr. Stewart, the lawyer who provided him with a
comfort letter regarding the eligibility and fair market value of the Kelso
Securities. The only grievance that the Appellant alluded to in his examination
in chief was that he became unhappy with Mr. Claridge’s services because he was
not returning his calls following the completion of the transaction.
[54]
All of the above undermines the Appellant’s
credibility and leads me to believe that he was less than forthright in his
description of the circumstances leading up to and surrounding the purchase of
the Kelso Securities. The conclusion I draw is that the Appellant was complicit
in the undertaking to acquire the Kelso Securities at a price greater than fair
market value. I infer that this was done because the Appellant was promised by
Mr. Claridge that he would gain access to the funds paid for the Kelso
Securities minus Mr. Claridge’s fee and the actual value of the securities.
Something went wrong with the scheme, prompting the Appellant to move the
balance of his RRSP funds to RBC in Toronto. I suspect that someone else made
off with the funds.
[55]
I agree with the Respondent’s assertion that
objective standards of business-like behaviour are embedded in the concept of
fair market value, which is a term not defined in the Act.
[56]
The courts have accepted the following
definition of fair market value, cited with approval by Justice Rothstein, at
that time a judge of the Federal Court of Appeal:
. . . 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.
[57]
The limited information which the Appellant
claims he consulted suggests that he was either wilfully blind or was not at
all interested in the price paid for the Kelso Securities because he expected a
collateral benefit. It is equally improbable that the Appellant would have left
all price negotiations up to Mr. Claridge without
providing him with any guidelines with regard thereto At the very least, the
evidence shows that the Appellant, and by extension, his RRSP trust, did not act in a manner consistent with the behaviour of an arm’s
length purchaser.
[58]
It is important to note that the Minister will
rarely have access to direct evidence that contradicts a taxpayer’s declaration
of his state of mind in authorizing a transaction. It is equally hard for the
Minister to trace funds once they have been moved offshore. The Appellant
offered no reasonable explanation as to why he authorized the purchase. In this
case, I can rely on the Minister’s assumption because the Appellant failed to
establish on a prima facie basis that the Minister’s assumptions are
wrong. I can also infer from the overall evidence that Mr. Claridge must have
promoted the purchase of the Kelso Securities for the purpose outlined in the
Minister’s assumptions and that the Appellant approved of this strategy. This
inference is consistent with the types of strategies promoted by Global
Prosperity through its audio and offshore seminars.
[59]
In conclusion, and as to the first issue, the
facts demonstrate that the Appellant purchased the Kelso Securities for an
amount significantly in excess of fair market value. I find that the Appellant caused
the RRSP Account to purchase the Kelso Securities, which collectively had a
fair market value of no more than $5,000. Those same Kelso Securities had been
purchased three months earlier for an issue price of $1.00 per share. Around
the time of that purchase, common shares of Kelso were trading on the open
market for between $0.07 and $0.11. Less than a month after the Appellant purchased the Kelso
Securities, similar Class “A” Preferred Shares were issued in a private
placement for a price of $1.00 per share.
[60]
As to the second issue, all of the above
demonstrates that the facts of the instant case are very different than those
considered by Justice Sharlow in the St. Arnaud decision relied on
by the Appellant. Indeed, the evidence supports the inference that the
Appellant had a collateral tax avoidance purpose in directing the withdrawal of
funds from the RRSP Account. I did not find the Appellant credible. His answers
appeared scripted and rehearsed. That being so, the Appellant has failed to
demolish the Minister’s assumption that the Appellant purchased the Kelso
Securities as a means to gain control of his RRSP funds while maintaining the
deferral of any tax payable on those same funds.
[61]
Moreover, the evidence considered as a whole
allows me to infer that the Appellant believed he would receive a collateral
tax benefit when he authorized the purchase of the
Kelso Securities. Therefore, regardless of how I view the application of subsection 146(9) of the Act, the transaction in
issue falls squarely within the circumstances in which Justice Sharlow opined
that it should apply. Therefore, subsection 146(9) of the Act applies in this
case to include in the Appellant’s income for his 2001 taxation year the
difference of $95,000 between the consideration paid for the Kelso Securities
and their fair market value.
VI. Conclusion
[62]
For all of these reasons, the appeal is
dismissed with costs to the Respondent.
Signed at Ottawa,
Canada, this 24th day of June 2014.
“Robert J. Hogan”
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