Guy Tremblay [TRANSLATION]:—The case at bar was heard at Montreal, Quebec on June 8, 1977.
1. Point at Issue
It must be decided whether the respondent is correct in including in the appellant’s income for the 1969 taxation year the sum of $65,810.42, or half the undistributed income on hand of Riverains Transport Inc following the sale by the appellant of his shares in Riverains Transport Inc.
2. Burden of Proof
The appellant has the burden of showing that the respondent’s assessment is unjustified. This burden of proof derives, not from one particular section of the Income Tax Act but from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.
3. Facts
3.1 Until July 1969, the appellant owned 50% of the shares in Riverains Transport Inc, or 20 common shares issued. Mr Marcel Guimond owned the other 50%. This company, which owned about 100 buses, had as its object the transportation of school children.
3.2 Mr Marcel Guimond had the position of president of the company and managed it. The appellant, as well as being vice-president, was in charge of maintenance of the hundred buses.
3.3 During the three years which preceded the sale of the appellant’s shares, evidence was presented that there was almost constant dis- agreement between the two shareholders in the company. According to the appellant, one of the causes was that Mr Guimond took decisions alone, without his consent.
3.4 Because of this situation, as far back as 1967 the appellant requested his lawyer for a legal opinion. It appears from this opinion, which is six pages long, dated November 6, 1967, and filed as No A-1, that the appellant wished to know his legal position in relation to his partner, having regard to the law, the regulations and a signed agreement between the two parties. Two sentences written by the author of the legal opinion speak for themselves about the character of the relations between the appellant and Mr Guimond:
However, if a permanent deadlock develops, one solution would be to submit an application for the liquidation of the company. This is obviously an extreme solution, but one which is available in circumstances in which it is impossible for the company to continue to act.
3.9 The disagreement became more and more bitter until finally Mr Marcel Guimond said to the appellant: “Buy me out or I'll buy you out.’’ He is supposed to have said this in the early months of 1969.
3.6 It was during this period, according to the witness Geoffrey Markus, CA, management consultant to Mr Guimond, that the financial institution RoyNat Ltd, which had been approached about refinancing the buses, refused. It said it was willing to agree only if Mr Guimond bought Mr Champagne’s shares.
3./ On March 25, 1969, following a series of interviews, RoyNat Ltd made an offer of financing (Exhibit I-1) to Riverains Transport Inc. This letter was addressed to the company marked “confidential”, for the attention of Mr Marcel Guimond. In this offer of financing by two series of obligations, A and B, there appear the following conditions:
The proceeds of these obligations will be used to implement the following plan . . .
— refinancing of all-existing liens;
— purchase of preferred shares in the Cie de Gestion Marcel Guimond Ltée (to be incorporated); this company must use the proceeds from the sale of these preferred shares to buy 50% of the common shares in Riverains Transport Inc.
These shares were obviously the ones held by the appellant. RoyNat Ltd allowed until March 31, 1969 for the offer to be accepted.
3.8 The appellant, for his part, does not recall ever hearing about this document.
3.9 Minutes of directors’ and shareholders’ meetings dated April 10, 1969 (photocopies of which were field jointly as No A-4, with five other sets of minutes) show that the offer of financing made on March 25, 1969 was accepted.
According to the appellant, he only signed these minutes on July 31, 1969.
3.10 After discussions with his lawyers on May 3, 1969, the appellant made Mr Marcel Guimond an offer to purchase his shares (filed as No A-2) for the amount of $2,000. Mr Guimond was to study the document and reply before noon on June 25, 1969.
3.11 On June 16, 1969 the appellant and his lawyers made Mr Guimond another offer (Exhibit A-3). This offer is exactly like that of May 3, 1969, except on one point. The first offer contained the following clause in paragraph 5:
5. This offer is made on the express condition that upon accepting it you will provide me with a copy of the undertaking of RoyNat Ltd (hereinafter called “the offer of financing’’), to you or to a company to be incorporated and controlled by you on the date of closure (hereinafter called the “Management Company’’):
(a) to lend either to you or to the Management Company the sum of $125,000 to enable you to finance payment of the price;
(b) to make possible the mortgage provided for in paragraph 9 below.
In the second offer, made on June 16, 1969, paragraph (a) above has been deleted, and the closing date is set at July 31, 1969.
Furthermore, both offers contain the following conditions of payment: $10,000 upon acceptance of the offer, $140,000 at the time of Sale and $50,000 in five annual and consecutive payments, at an interest rate of 9 /4%.
3.12 On June 27, 1969 a trust deed containing about 75 pages, filed as: Exhibit I-3, was signed. It was registered on July 2, 1969, as No 315,184. The title of the deed describes its nature: “Trust deed of a pledge and security mortgage guaranteeing first mortgage obligations of Riverains Transport Inc in favour of The Canada Trust Company.”
This trust deed bears the signature of Marcel Guimond and Colette Champagne for Riverains Transport Inc. Placements Guimond Inc also acted as guarantor.
3.13 On June 25, Mr Guimond accepted the appellant’s offer.
3.14 Mr Guimond’s testimony confirms the appellant’s, to the effect that the latter took no part in the negotiations between RoyNat Ltd and Riverains Transport Inc. “I was the one who was buying out Champagne, he wasn’t involved in it.’’
3.15 According to the testimony of Mr Michel Gendron, director of the Montreal branch of RoyNat Ltd, and that of Mr Geoffrey Markuez, CA, Mr Guimond’s adviser, the appellant was not involved in any way in the discussions between RoyNat Ltd and Riverains Transport Inc, even though the purpose of these discussions was, inter alia, to refinance the buses and to find a way to borrow money to buy the appellant’s shares.
3.16 According to Mr Geoffrey Markuez, CA, since he and Mr Guimond were not experienced in this kind of business, RoyNat advised them to consult a law firm which was familiar with this type of financing and would provide a formula which would be acceptable to RoyNat. Incidentally, this law firm was the same one which had given the appellant a legal opinion on November 6, 1967.
3.17 For the purpose of financing the purchase of shares, a company entitled “Placements Guimond Inc’’ was formed. However, RoyNat Ltd did not wish to lend to this company, according to Mr Markuez. It would only lend to Riverains Transport Inc. It was then decided that Riverains Transport Inc would use part of the borrowed money to buy $140,000 worth of shares in Placements Guimond Inc, and the latter company would buy the appellant’s shares. This condition appears on the Offer of RoyNat Ltd dated March 25, 1969, cited above.
3.18 In order to complete the transactions legally, a series of meetings of the provisional directors, shareholders and permanent directors of Placements Guimond Inc took place on June 27, 1969. The minutes of these meetings were filed jointly as No 1-17. The permanent directors of this company also held two meetings on August 1, 1969; the minutes of these meetings were filed as Nos I-6 and I-7.
3.19 The directors and shareholders of Riverains Transport Inc held meetings on August 1, with a view to completing the transactions. The minutes of these meetings were filed jointly as No A-4, along with the minutes of April 10, 1969.
3.20 According to his testimony, the appellant met with the representatives of RoyNat Ltd, Mr Guimond’s lawyers and his own lawyers on July 31, 1969. It is only then that he is supposed to have become personally acquainted with the agreements concerning the transactions.
3.21 However, evidence was given that his lawyers were aware of the various agreements and transactions between Riverains Transport Inc, RoyNat Ltd and Placements Guimond Inc.
3.22 It was proved that the appellant received the sum of $10,000 at the time of acceptance. It was also proved that the money borrowed by Riverains Transport Inc was used to refinance all existing mortgages and liens, and that on August 1, 1969 400 non-voting preferred shares in Placements Guimond Inc were purchased for $140,000 by Riverains Transport Inc.
3.23 Furthermore, on the same day, August 1, 1969, Placements Guimond Inc purchased all the shares which the appellant held in Riverains Transport Inc for $140,000 with the cheque received from Riverains Transport Inc after it had been endorsed (Exhibit I-13).
3.24 Mr Clement Lussier, CA, the appellant’s accountant since 1974, who had been commissioned, inter alia, to verify the notice of assessment and to establish the value of the shares sold, demonstrated to the Board that the shares sold had an approximate value of $187,000. This figure was not challenged by the respondent.
3.25 On May 23, 1974, the respondent issued a reassessment which included in the appellant’s income the sum of $72,382.51, or half the undistributed income on hand (UIOH) of Riverains Transport Inc, basing this on section 138A of the old Act.
3.26 At the beginning of the hearing before the Board, it was agreed between the parties that the undistributed income on hand of Riverains Transport Inc was $131,620.84, and therefore the respondent only included in the appellant’s income the sum of $65,810.42, or half the UIOH.
3.27 On August 14, 1974 the appellant filed an objection to the notice of reassessment with the respondent. On June 19, 1975 the respondent notified the appellant that he was maintaining the reassessment issued on May 23, 1974.
3.28 On September 12, 1975 the appeal against the respondent’s decision was submitted to the Tax Review Board.
4. Act
The sections on which the respondent bases his assessment are subsections 138A(1), (3), paragraph 38(1 )(a), subsection 8(3), subsection 81(1) and paragraph 139(1 )(a) of the old Act:
138A. (1) Where a taxpayer has received an amount in a taxation year,
(a) as consideration for the sale or other disposition of any shares of a corporation or of any interest in such shares,
(b) in consequence of a corporation having
(i) redeemed or acquired any of its shares or reduced its capital stock, or
(ii) converted any of its shares into shares of another class or into an obligation of the corporation, or
(c) otherwise, as a payment that would, but for this section, be exempt income,
which amount was received by the taxpayer as part of a transaction effected or to be effected after June 13, 1963 or as part of a series of transactions each of which was or is to be effected after that day, one of the purposes of which, in the opinion of the Minister, was or is to effect a substantial reduction of, or disappearance of, the assets of a corporation.^ such a manner that the whole or any part of any tax that might otherwise have been or become payable under this Act in consequence of any distribution of income of a corporation has been or will be avoided, the amount so received by the taxpayer or such part thereof as may be specified by the Minister shall, if the Minister so directs,
(d) be included in computing the income of the taxpayer for that taxation year, and
(e) in the case of a taxpayer who is an individual, he deemed to have been received by him as a dividend described in paragraph (a) of subsection
(1) of section 38.
(3) On an appeal from an assessment made pursuant to a direction under this section, the Tax Appeal Board or the Exchequer Court may
(a) confirm the direction;
(b) vacate the direction if
(i) in the case of a direction under subsection (1), it determines that none of the purposes of the transaction or series of transactions referred to in subsection (1) was or is to effect a substantial reduction of, or disappearance of, the assets of a corporation in such a manner that the whole or any part of any tax that might otherwise have been or become payable under this Act in consequence of any distribution of income of a corporation has been or will be avoided; or.
(ii) in the case of a direction under subsection (2), it determines that none of the main reasons for the separate existence of the two or more corporations is to reduce the amount of tax that would otherwise be payable under this Act; or
(c) vary the direction and refer the matter back to the Minister for reassessment.
38. (1) An individual who was resident in Canada at any time in a taxation year may deduct from the tax otherwise payable under this part for a taxation year 20% of the amount by which
(a) the aggregate of all dividends received by him in the year from taxable corporations in respect of shares of the capital stock of the corporations from which they were received and of all dividends that he is, by subsection (3) of section 8 and section 81, deemed to have received from such corporation in the year, to the extent that the dividends so received or so deemed to have been received,:as the case may be, were included in computing his income for the year,
8. (3) An annual or other periodic amount paid by a corporation to a taxpayer in respect of an income bond or income debenture: shall be deemed to have been received by the taxpayer as a dividend unless the corporation is entitled to deduct the amount so paid in computing its income.
81. (1) Where funds or property of a corporation have, at a time when the corporation had undistributed income on hand, been distributed or otherwise appropriated in any manner whatsoever to or for the benefit of one or more of its shareholders on the winding-up, discontinuance or reorganization of its business, a dividend shall be deemed to have been received at that time by each shareholder equal to the lesser of
(a) the amount or value of the funds or property so distributed or appropriated to him, or
(b) his portion of the undistributed income then on hand.
139. (1) In this Act,
(a) “amount” means money, rights or things expressed in terms of the
amount of money or the value in terms of money of the right or thing;
5. Precedents
Only one judgment has been delivered concerning an assessment based on subsection 138A(1) of the old Act or subsection 247(1) of the new Act. This was the case of Giguère et al v MNR, [1972] CTC 2466; 72 DTC 1392.
6. The problem of the direction
6.1 Subsection 138A(3) cited above makes it quite clear that this Board is hearing an appeal “from an assessment made pursuant to a direction under this section’’.
No evidence was presented to the Board that such a direction existed. What is the nature of this direction? By whom should it be issued? Can it be merely verbal or must it be written? Must this direction be proved? If so, who has the burden of proof, the appellant or the respondent? Can subsection 9(2) of the Tax Review Board Act, dealing with the administration of evidence, be applied to such a case?
6.2 Under the old and the new Acts, not all assessments must be issued under a direction.
For ordinary assessments, subsection 46(1) of the old Act and subsection 152(1) of the new Act simply say this:
The Minister shall, with all due despatch, examine each return of income and assess the tax for the taxation year and the interest and penalties, if any, payable.
In point of fact, only in parts dealing with “tax evasion” does one find these assessments established according to a direction, that is, in Part VI of the old Act and Part XVI of the new Act. Subsections 246(5) and 247(3) of the new Act, like subsections 138(5) and 138A(3) of the old Act, give to the appropriate tribunals the power of confirming, vacating or varying the direction.
Can this direction be verbal? The Board strongly doubts this. How could the Board confirm, vacate or vary a direction if it does not know the exact terms? Is not the best evidence written evidence?
In the Board’s opinion, subsections 138(1) of the old Act and 246(1) of the new Act may provide the answer to these questions:
138. (1) Where the Treasury Board has decided that one of the main purposes for a transaction or transactions effected before or after the coming into force of this Act was improper avoidance or reduction of taxes that might otherwise have become payable under this Act, the Income War Tax Act, or The Excess Profits Tax Act, 1940, the Treasury Board may give such directions as it considers appropriate to counteract the avoidance or reduction.
The Board concludes from this that under these sections the direction must be written document issued by the Treasury Board: This. conclusion is reinforced by the explicit use of the word “direction” in subsections 138(5) and 246(5), in the same context as subsection 138A(3) cited above and this is the very word used in subsection 138(1).
Subsection 138A(3), which gives the Board its mandate in the case at bar, also used the word “direction”, six times in all. Subparagraph 138A(3)(b)(i) refers to the “direction under subsection (1)”, the subsection which is the basis of the reassessment which is the subject of this dispute, as appears from form T7WC appended to the notice of reassessment and the Minister’s notification, as well as the respondent’s reply to the notice of appeal.
Subsection 138A(1), cited above in full by the Board, does not however use the word “direction”; instead, it uses the phrases “in the opinion of the Minister” and “amount . . . as may be specified by the Minister . . . if the Minister so directs”.
These expressions used in the body of a section do not show clearly, in themselves, that the opinion or direction must necessarily be written. However, when another subsection such as subsection 138A(3) refers to this ‘‘opinion’’ not only as a “direction” which is used to make an assessment (“assessment made pursuant to a direction”), but also as a “direction” on which the courts must rule in order to confirm, vacate or vary it, one can hardly conclude that the direction was not written.
Moreover, it is a recognized principle that to interpret words or expressions in a section of an Act, it is usual to have recourse to similar sections in the same Act where the same words are used. Subsection 138(5), which obviously refers to the Treasury Board direction in subsection 138(1), makes it abundantly plain that this is a written document. Therefore the same meaning should be given to the word “direction” used in subsection 138A(3).
Another argument in favour of this thesis of a written document is that Part VI of the old Act, dealing with tax evasion, provides for drastic measures to check tax evasion, and gives very broad discretionary powers which really represent exceptional procedures. Since they have the effect of further restricting taxpayers’ freedoms, these procedures must be clearly established and verifiable by the administrative courts, to ensure that the taxpayer is not subject to arbitrary decisions of the revenue authorities.
The Board is therefore of the opinion that the direction mentioned in subsection 138A(3) must be a written document.
6.3 Must this direction be proved? How can the Board confirm, vacate or vary such a direction if it is not acquainted with it? We cannot become acquainted with it unless it has been entered in evidence. Furthermore, in the case cited above in paragraph 5, Giguere et al v MNR, the direction was cited at length, which implies that it was proved. In many other cases involving Part VI of the Act, the Board noted the citation or reference to the direction. In several cases there is no mention of it, but this does not mean that it was not proved.
6.4 Who has to prove the direction? In R W S Johnston v MNR, cited in paragraph 2 of this judgment, it was held that the appellant had the burden of proof. However, the assessment involved there was an ordinary assessment or reassessment in the sense of section 46 of the old Act and section 152 of the new Act. It was not a special assessment made in compliance with a direction issued by the Minister or the Treasury Board.
The Board considers that in the latter cases the direction preceded the assessment. The assessment can be presumed to be correct in fact and in law, but only after the direction has been proved.
Can the appellant be required to prove the direction? That is not the Board’s opinion. One of the factors which has led the courts to consider that ordinary assessments are correct and valid, and to compel the taxpayer to prove their falsity if he can, is that in theory the taxpayer is the person who is most familiar with his own affairs, and in the best position to explain, demonstrate the facts, produce the appropriate documents, and in fact establish the truth.
In a situation where the direction issued by the Minister must be proved, who is better able to produce it than the respondent? Therefore the respondent must prove the direction.
6.5 In the case at bar, the respondent has not proved the direction. Can the Board use the powers described in subsection 9(2) of the Tax Review Board Act?
Notwithstanding the provisions of the Act under which an appeal is made, the Board is not bound by any legal or technical rules of evidence in conducting a hearing for the purposes of that Act, and all appeals shall be dealt with by the Board as informally and expeditiously as the circumstances and considerations of fairness will permit.
The Board strongly doubts that it may use these powers to presume that the direction has been proved. The problem remains unsolved. How can the Board confirm, vacate or vary the direction if it does not have a copy of it to hand?
If there is no evidence of the direction, the Board must presume that it does not exist. Moreover, it is quite possible that no direction was in fact issued.
6.6 What is the legal consequence of the fact that the direction does not exist?
Does the assessment become void?—or must the burden of proof for the assessment issued be borne by the respondent?
At first glance, the problem does not seem to have an easy solution. However, the Board thinks that in order to solve it, one must consider the role of this direction in its context. As was emphasized above, the direction issued by the Minister is used only in the chapter dealing with tax evasion. It is a special procedure. The legislator wished to grant discretionary powers of an exceptional nature to the Minister of National Revenue, powers which hold the taxpayer in a vise-like grip from which he will have trouble escaping.
This special procedure in taxation must be handled at least in the Same way as the courts handle exceptional procedures, such as seizures before judgment.
Because of the very fact that these procedures are exceptional in common law, the person who uses them must comply strictly with all the conditions governing their use.
The Board concludes from this that the Minister’s direction is an essential condition for the assessment itself to be valid. If it does not exist or cannot be proved, the assessment itself must be presumed illegal and illicit, for the same reason as if an assessment had been issued that did not comply with the direction: as, for example, if the direction gave subsection 138A(1) as the basis of the assessment, whereas this assessment had been issued and calculated in accordance with another section.
In the case at bar, the Board must therefore dismiss the assessment.
6.7 From another point of view, the Board also thinks that another consequence of the fact that the direction does not exist and the assessment is annulled is that the Board simply does not have jurisdiction to make a valid ruling on the substantive law which may. derive from the facts submitted as evidence and the application of subsection 138A(1). The mandate to it by the legislator is to confirm, vacate or vary the direction. If the direction itself does not exist, the mandate does not exist.
6.8 The problem of the direction only arose after the evidence heard before the Board had been summarized. The Board deliberately leaves as part of the judgment the summary of the evidence, to be considered as an obiter dictum.
If the respondent appeals and then proves the direction, as the Board believes must be done, the summary of the evidence may perhaps be useful.
The Board wishes to add obiter that if in fact no direction exists in the case at bar, a direction cannot be issued retroactively.
Since the direction must precede the assessment, if a direction is given after this judgment concerning the case, another assessment must be issued after the direction.
7. Conclusion
The Board declares the assessment invalid and as a result allows the appeal, and the whole is referred back to the respondent for reassessment in accordance with the reasons for judgment cited above.
Appeal allowed.