St-Georges c. La Reine

St-Georges c. La Reine Court (s) Database Tax Court of Canada Judgments Date 2004-11-23 Neutral citation 2004 TCC 688 File numbers 2000-5020(IT)G Judges and Taxing Officers Brent Paris Subjects Income Tax Act Decision Content Docket: 2000-5020(IT)G BETWEEN: JEAN-GUY ST-GEORGES, Appellant, and HER MAJESTY THE QUEEN, Respondent. [OFFICIAL ENGLISH TRANSLATION] Appeal heard on May 7, 2004, at Montréal, Quebec. Before: The Honourable Justice B. Paris Appearances: Counsel for the Appellant: Christopher R. Mostovac Counsel for the Respondent: Mounes Ayadi JUDGMENT The appeal from the assessment made under the Income Tax Act for the 1994 taxation year is dismissed with costs in accordance with the Reasons for Judgment attached hereto. Signed at Ottawa, Canada, this 23rd day of November 2004. "B. Paris" Paris J. Translation certified true on this 28th day of February 2005. Daniela Possamai, Translator Citation: 2004TCC688 Date: 20041123 Docket: 2000-5020(IT)G BETWEEN: JEAN-GUY ST-GEORGES, Appellant, and HER MAJESTY THE QUEEN, Respondent. [OFFICIAL ENGLISH TRANSLATION] REASONS FOR JUDGMENT ParisJ. [1] The Appellant is a chartered accountant and trustee in bankruptcy. In 1988, he agreed to act as director of a company belonging to a client of his firm. Because of some of his actions as director, he was sued and ordered to pay damages. In his computation of income for 1994, the Appellant claimed a loss of $187,467, the amount he paid as a result of the order plus legal costs, less certain amounts received for services rendered during the course of the litigation. The Minister of National Revenue (the "Minister") disallowed the loss and the Appellant appealed that decision. [2] The amount of the loss suffered by the Appellant was not contested by the parties. The sole issue was whether or not the net amounts he was ordered to pay in costs and damages can be deducted as business expenses. [3] The Appellant claimed that the disputed amounts were paid as part of his accounting business because he agreed to act as director at the request of one of his corporate clients. [4] As for the Respondent, Her Majesty the Queen submitted that the damages awarded by the Court and the legal costs were not expenses incurred by the Appellant to earn business income, but were rather incurred by him as a director, and that those amounts could not therefore be deducted in computing his business income. Evidence [5] At the hearing, the parties filed an agreed statement of facts in which the following facts were admitted: [Translation] 1. The Appellant is a chartered accountant and a trustee in bankruptcy. 2. During 1994, the Appellant worked as an accountant at an accounting firm he owns. 3. The Appellant is also the sole shareholder of the company St-Georges Hébert Inc. which was used by the Appellant as a vehicle to account for and report all income generated by his accounting firm and trustee activities. 4. In his income tax return for the 1994 taxation year, the Appellant reported at line 130 (other income) the amount of $94,579.00, representing the amounts he withdrew from St-Georges Hébert Inc., which, according to him, represented his net income from accounting and trustee activities. 5. The Appellant reported at line 232 of his income tax return for the 1994 taxation year the amount of $187,467.00, as "other deductions." 6. The amount of $187,467.00 mentioned in the foregoing paragraph represents the net loss reported by the Appellant for an amount he was ordered to pay following a decision by the Quebec Superior Court on December 23 [sic], 1993, in Standal's Patents Ltd. (hereinafter "Standal"). 7. By its decision, the Quebec Superior Court ordered the Appellant in his capacity as a director, jointly and severally with the other directors of 160088 Canada Inc. (formerly Sweecan), to reimburse to Standal the amount of $1.9 million corresponding to illegally declared dividends. 8. Although the Appellant appealed the decision mentioned above to the Quebec Court of Appeal, the appeal was abandoned/dismissed, and for the purposes of this case before the Tax Court of Canada, the Appellant accepted the Court's findings and did not plan to contradict the information contained therein. . . . .[1] 10. For the services rendered for the preparation, involvement and assistance related to the trial of Standal, the Appellant allegedly received remuneration/compensation of US$100,000.00 from Mr. Pinat. 11. As for the transaction for which the Appellant and other directors were held liable, the Appellant was appointed director to facilitate the transaction and had it not been for his professional accounting relationship in the circumstances, he would have never agreed to act as director. 12. Following his conviction in December 1993 by the Superior Court, the Appellant negotiated a settlement with Standal's lawyers, a settlement which resulted in the issuance of a release in consideration of a payment of $250,000.00 by the Appellant. [6] The Appellant was the only witness at the hearing. He told the Court that Gaston Pinat, the sole shareholder in 160088 Canada Inc. ("160088") through a holding company (151095 Canada Inc.) had been a client of his accounting firm since 1960 and that in about 1986 or 1987, Mr. Pinat advised him that he intended to sell his businesses. Therefore, Mr. Pinat asked the Appellant to provide accounting services for the sale. [7] After meeting with several prospective purchasers, Mr. Pinat accepted an offer to purchase the assets of 160088. When the sale was being finalized, the lawyers acting for the purchasers noticed that 160088 had only one director while it was required by its articles of incorporation to have three directors. At their request, and in order to facilitate the sale, the Appellant agreed to act as one of the three directors of 160088. He said that he was asked, along with the company lawyer, Moe Ackman, to act as director exclusively for the purpose of completing the transaction. He reiterated that he would not have agreed to act as director had it not been for his accounting relationship with Mr. Pinat. [8] The Appellant's firm received $75,000 in fees for work relating to the sale of the assets, that is to say, for about 500 hours of work over the course of a year. No remuneration was paid to the Appellant for his role as director of 160088. [9] The evidence also revealed that after the sale of 160088's assets, the Appellant participated as director in the declaration of a dividend of $1,900,000 by 160088 in favour of its shareholder 151095 Canada Inc., of which Mr. Pinat owned all the shares. [10] Subsequently, Mr. Pinat had the money transferred to other companies under his control and finally to a bank account in Cayman Islands. [11] At the time of the declaration of the dividend, Standal Patents Ltd. was suing 160088 in Federal Court for patent infringement. The case, which dated back to 1980, was decided in favour of Standal on July 20, 1989, and the Federal Court ordered 160088 to pay to Standal the amount of $760,000 with interest. The decision was upheld by the Federal Court of Appeal on April 12, 1992. [12] However, Standal could not proceed to execute his judgment because 160088 did not have any assets. Therefore, Standal sued 160088, its shareholder and directors in the Quebec Superior Court and requested from the Court an order voiding the dividend declared by 160088 and ordering the directors and shareholder to reimburse to 160088 the amount of $1,900,000. [13] The Quebec Superior Court rendered a judgment on December 22, 1993, ordering the Appellant in his capacity as a director, jointly and severally with the other directors, to reimburse to Standal the amount of $1,900,000 as requested. [14] The decision of the Quebec Superior Court was appealed but the Court of Appeal required the Appellants to deposit $2,000,000 with the Court before the appeal could proceed. The Appellants were unable to provide a deposit satisfactory to the Court and their appeal was dismissed. [15] Following the dismissal of the appeal, the Appellant concluded an agreement with Standal under which he paid to it $250,000, in settlement of the amount he was ordered to pay by the Quebec Superior Court. Argument [16] Counsel for the Appellant stated that the Appellant's relationship with 160088 was that of accountant for the company acting in the sale of its assets, and that it was in this context that he was asked to act as director to sign a document to complete the sale. He said that the evidence showed that the Appellant would not have agreed to act as director of 160088 had it not been for the fact that he was providing accounting services to the company and its shareholder. For that reason, it is not possible to dissociate his role as director of 160088 from his role as accountant for that company and for Mr. Pinat. [17] According to counsel for the Appellant, the latter had an overall commercial purpose in acting for 160088. His agreeing to act as director and signing the sale document as director was an integral part of, and within the scope of, his role as an accountant. Therefore any liability that accrued to him as a result of what he did as director was necessarily the result of the commercial activities by which he earned business income. [18] The Appellant's counsel also said that the only income that the Appellant earned from 160088 was by way of accounting fees, and that he was not paid to act as director. Therefore, the only source of income to which the expenses could relate was the Appellant's accounting business. Although the Income Tax Act (the "Act") provides that an office is a separate source of income from business, counsel argues that the Appellant's position as director of 160088 was not an "office" within the meaning of that term because the appellant was not paid to act in that capacity. The definition of "office" in subsection 248(1) of the Act reads as follows: "office"- means the position of an individual entitling the individual to a fixed or ascertainable stipend or remuneration . . . and also includes the position of a corporation director; . . . [19] Counsel also argued that acts carried out by the Appellant as director for 160088 must be viewed in the context of the accounting services he was hired to perform which was to effect the sale of the company's assets. In his view, those acts were out of the ordinary for an accountant but done nonetheless to complete the transaction he was working on and to assist his client. Analysis [20] To succeed in this appeal, the Appellant is required to establish that the amounts in issue were not expenses related to an office held by him, but rather expenses incurred by him in the course of carrying on a business. Generally, damages are deductible as a business expense when the conduct for which the Court allowed them is part of the taxpayer's business operations.[2] [21] If the appellant's directorship with 160088 was an office within the definition of that term in section 248(1) of the Act, it follows that his activities as a director would constitute a distinct source of income to him under the Act. Sections 5 to 8 of the Act govern the computation of income from an office and permit only limited deductions. Losses in relation to liability incurred while holding an office are not one of the permitted deductions. [22] However, I agree with the Appellant's counsel that a director of a corporation who is not entitled to any remuneration for acting in that capacity does not hold an office as defined in the Act. The definition of "office" in the Act includes the condition that the position sought to be so qualified must entitle the holder to a "fixed or ascertainable stipend or remuneration." This condition is mandatory.[3] It was not disputed that the Appellant was not entitled to receive any pay for acting as a director, and therefore it follows that his directorship with 160088 was not an office within the meaning of the Act. [23] The next issue that must be determined is whether the action taken by the appellant as director of 160088 that gave rise to the award of damages was within the scope of a business carried on by him. This is a two-fold issue: was the appellant carrying on a business, and if so, was the expense that he deducted incurred for the purpose of producing income from that business? [24] Unfortunately, I am of the view that the Appellant has failed to show a nexus between the declaration of the dividend by him and the other directors of 160088 and any business carried on by the appellant personally. It appears that the accounting services related to the sale of the assets were provided to Mr. Pinat and 160088 through a company belonging to the Appellant, St-Georges Hébert Inc., and not by the Appellant himself. [25] The Appellant testified that Mr. Pinat had been a client of his accounting firm since approximately 1960 and that his firm received $75,000 for the work related to the sale of assets. According to the Minister's assumption in subparagraph 20(c) of the reply to the amended notice of appeal, the income of the firm was reported as the income of St-Georges Hébert Inc. This would mean that the fees that were paid by Mr. Pinat to the Appellant's accounting firm for services relating to the sale of the assets of 160088 were reported as income of St-Georges Hébert Inc., as part of its business rather than as part of a business carried on by the Appellant. [26] The evidence supports the view that the Appellant became a director of 160088 in the context of providing accounting services to Mr. Pinat through his accounting firm and therefore through St-Georges Hébert Inc.: the Appellant said that his appointment as director of 160088 was solely for the purpose of enabling the asset sale to take place without delay. There was nothing to show that the Appellant was operating an accounting business personally in parallel to the one he ran through his firm and St-Georges Hébert Inc. or that he was earning business income personally from Mr. Pinat or 160088 at that time. [27] I am aware that the Appellant received US$100,000 from Mr. Pinat for services he rendered during the lawsuit that was brought by Standal, and that he reported this income personally in his 1994 tax return by deducting it from the damages that he paid to Standal, but this alone is not sufficient to prove that he was operating a business personally at the time that he participated in the declaration of the dividend in 1988. There is nothing to show that this payment was received in the course of an ongoing activity that included the declaration of the dividend. [28] Moreover, although it is not determinative, the Appellant reported the net loss from the damages awarded by the Court, after taking into account the receipt of the payment from Mr. Pinat, under the category of "other deductions" on his return, rather than as a loss from a business or from a profession. [29] Since it has not been shown that at the time the dividend was declared the Appellant was carrying on a business personally, the damage award and related fees cannot be said to have been incurred by him for the purpose of earning business income and are not deductible in the computation of his income. [30] Even if I had arrived at the conclusion that the accounting work done by the Appellant for Mr. Pinat and 160088 was done on his own behalf rather than on behalf of his firm, it would not follow that the amounts at issue were deductible by him. The onus is on the Appellant to show that the declaration of the dividend for which he was later found liable was an act done in the course of carrying on a business on his own behalf. I am not satisfied that he has met that onus. [31] It is clear that the sale of 160088's assets and the declaration of the dividend were separate transactions that occurred several months apart. Although the dividend was said to have been declared on February 1, 1988, according to the Quebec Superior Court: At best, the declaration of dividend for $1,900,000.00 was made in September 1988, and all of the documents of 160088 which are dated February 1, 1988 were drafted after this date . . . .[4] [32] No evidence was filed concerning the Appellant's motivation in continuing to act as a director of 160088 after the asset sale was completed and participating in declaring the dividend. All that I have before me is the Appellant's statement that he became a director to complete the sale of the assets. This purpose cannot be attributed to the declaration of the dividend, and in the absence of any evidence of how it related to the business purportedly carried on by the Appellant, there is no basis for allowing him to deduct the amounts in issue. [33] It is hard to imagine circumstances in which a director's purpose in declaring a dividend would be to earn income from a separate unrelated business operated by the director. In this case, no such circumstances have been shown. [34] For all of these reasons, the appeal is dismissed with costs. Signed at Ottawa, Canada, this 23rd day of November 2004. "B. Paris" Paris J. Translation certified true on this 28th day of February 2005. Daniela Possamai, Translator CITATION: 2004TCC688 COURT FILE NO.: 2000-5020(IT)G STYLE OF CAUSE: Jean-Guy St-Georges and H.M.Q. PLACE OF HEARING: Montréal, Quebec DATE OF HEARING: May 7, 2004 REASONS FOR JUDGMENT BY: The Honourable Justice B. Paris DATE OF JUDGMENT: November 23, 2004 APPEARANCES: For the Appellant: Christopher R. Mostovac For the Respondent: Mounes Ayadi COUNSEL OF RECORD: For the Appellant: Name: Christopher R. Mostovac Firm: Ravinsky Ryan Montréal, Quebec For the Respondent: Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada [1] To facilitate the understanding of the facts, I omitted paragraph 9 of the agreed statement of facts, which reads as follows: For the accounting services rendered in the sale of Sweecan's assets, the Appellant allegedly billed Mr. Pinat and/or one of his companies $75,000.00. [2] 65302 British Columbia Ltd. v. Canada, [1999] 3 S.C.R. 804, Imperial Oil Ltd. v. M.N.R., [1947] C.T.C. 353, McNeill v. Canada, [2000] 4 F.C. 132. [3] Merchant v. The Queen, [1984] 2 F.C. 197, at 201-02. [4] Exhibit I-1, tab 5: reasons for judgment in Standal's Patents Ltd. v. 160088 Canada Inc. et al., at pp. 48 and 49.