Minister of National Revenue (Appellant)
v.
Louis Bisson (Respondent)
Trial Division, Pratte J.—Montreal, June 13;
Ottawa, June 28, 1972.
Income tax—Sums paid by company for benefit of share-
holder—Failure to report—Ignorance of law—Whether
"misrepresentation"—Assessment limited to 4 preceding
years—Income Tax Act, section 46(4)(a)(i).
B was the majority shareholder of a company and T the
minority shareholder therein. To settle a dispute between
them, they agreed in 1953 that B should pay T certain sums.
To carry out that agreement the company paid T annual
amounts of $3,000 from 1955 to 1957 and of $5,000 from
1958 to 1965. In 1967 B was assessed to income tax in
respect of the amounts so paid for each of the years 1955 to
1965 inclusive. B did not know that the sum so paid T by
the company formed part of his income.
Held, B was assessable to income tax on the amounts so
paid T by the company on his behalf in the four years
preceding the assessment. He was not however assessable
to tax on the amounts paid before then since there had been
no misrepresentation by him with respect to his income. A
person who makes an error not considered negligent does
not come within the meaning of "misrepresentation" under
section 46(4)(a)(i) of the Income Tax Act.
INCOME tax appeal.
J. C. Sarrazin and Louise Lamarre-Proulx for
appellant.
J. C. Couture, Q.C. for respondent.
PRATTE J.—When he declared his income for
the years 1955 to 1965, respondent did not
allow for the fact that Hull City Transport Ltd.,
a company in which he was the majority share
holder, had paid one Walter F. Thorn annual
amounts of $3,000 from 1955 to 1957, and
$5,000 from 1958 to 1965. Taking the view that
these payments ought to have been included in
respondent's calculation of income (because
they were made for his benefit and with his
consent), appellant on November 28, 1967 gave
him notice of re-assessments for each of the
years 1955 to 1965 inclusive. According to
those re-assessments respondent owed addition-
al tax with interest for each of the years con
cerned, and further, owed the penalty specified
in s. 56(2) of the Income Tax Act R.S.C. 1952,
c. 148, for the years 1960 to 1965. After object
ing to these assessments in vain, respondent
appealed to the Tax Appeal Board, which decid
ed in his favour. It is from that decision of the
Board, rendered on May 12, 1969, that the
Minister of National Revenue is now appealing.
In order to establish the real nature of the
payments that were the basis of the assess
ments cancelled by the Board, the parties
sought, by examining respondent Bisson and by
referring to voluminous documentary evidence,
to reconstruct the history of Hull City Trans
port Ltd. and of the business relationship which
existed between respondent and Walter F.
Thorn. To understand the dispute, only certain
of the facts thus presented need to be known.
Respondent Bisson is a former air pilot who,
at the end of the last war, had no business
experience. He had formed a friendship with W.
F. Thorn, now deceased, who was then a very
active and enterprising financier. At Thorn's
suggestion, Bisson decided to leave aviation and
set up and operate a bus transport business in
the City of Hull in partnership with his friend.
The intention was apparently for Thorn to
finance the business while Bisson handled the
operational side.
As a result of Bisson's efforts the two part
ners in 1946 obtained from the City of Hull a
franchise granting them the right to operate a
bus company within the city limits. This fran
chise was granted for a ten-year period, ending
in 1956, and was renewable on certain condi
tions for another period of ten years.
In September 1946 the two partners trans
ferred their franchise to Hull City Transport
Ltd., a company which they had caused to be
incorporated the previous month.
Thorn was at the time president of Hull City
Transport Ltd., which had undertaken to pay
him an annual salary of $3,000 in that capacity;
Bisson, in addition to being a director of the
new company, was its general manager. I would
add, and this is not without significance, that
shortly afterwards the 100,000 common shares
of the company were distributed almost equally
between them.
The company thus began operating, and the
two partners, Bisson and Thorn, worked togeth
er in the business until, in 1952, a serious
difference arose between them.
In 1952 Thorn owned no more than a single
share of the company's common stock, and he
had not been re-elected to the presidency. He
claimed that Bisson had improperly appropriat
ed his shares under the following circum
stances:
(a) In October 1946, in order to induce a
broker named Simard to sell the preferred
shares of Hull City Transport Ltd., Thorn had
been obliged to transfer 1,000 shares of
common stock in the company to him. Simard
had subsequently sold these shares to Bisson
for $1,000. Thorn contended that Bisson had
acted as his agent in buying back the shares
from Simard, and was consequently under an
obligation to transfer them to him for the sum
of $1,000.
(b) On April 12, 1949, Thorn had met with
financial difficulties. Bisson had loaned him
$26,000, and, in return, Thorn had handed
over to Bisson the certificates, duly endorsed,
for all his common stock (except for one
share). On this occasion Thorn had had
Bisson sign a document that read as follows:
Royal York Hotel,
Toronto, Ontario,
April 12, 1949.
Dear Mr. Thorn,
For my loan to you of $26,000 I acknowledge receipt
of enclosed 49,000 shares Common Stock Hull City
Transport, as security.
I agree that these shares will be returned to you on
payment to me of the $26,000 plus interest and that I
will not take foreclosure of these shares for one year
from this date.
(signed) Louis Bisson.
Some months after expiry of the period of
one year mentioned in this document, Thorn
still had not repaid the amount borrowed.
Bisson then, without requesting payment of
the sum owed to him, simply had the shares
which had been given to him as security
registered in his name. Thorn claimed that
Bisson had acted illegally in so doing, and
that he was obliged, on repayment of the sum
borrowed with interest at the legal rate, to
return the shares.
Bisson, of course, denied Thorn's allegations.
He stated that he had acted for himself in
purchasing the 1,000 shares from the broker
Simard. He contended that, according to the
agreement he had made with Thorn, he was
entitled to take over the shares which had been
given to him as security on April 12, 1949.
Finally, he alleged that Thorn had consistently
refused to pay him certain sums he had under
taken to pay.
This explains why, in 1952, Thorn instructed
his lawyers to take the necessary steps to
recover the common stock in the company
which, according to him, Bisson had unlawfully
appropriated. On March 11, 1953 a notary
acting on Thorn's behalf tendered to Bisson the
sums of $26,000 and $5,089.64 (representing
interest on $26,000 from April 12, 1949, cal
culated at the legal rate), and at the same time
requested Bisson to return the shares given as
security on April 12, 1949. Bisson refused.
Lengthy negotiations ensued between counsel
for Thorn and for Bisson, ending finally in an
agreement under the terms of which the pay
ments of $3,000 and $5,000 were made which
were the basis of the assessments cancelled by
the Tax Appeal Board. This agreement was
recorded in a document signed by Thorn and
Bisson on May 13, 1953. Signature of this con
tract was preceded by adoption of the following
resolution at a meeting of the directors of Hull
City Transport Ltd., held on May 12 and
attended by Bisson:
... The secretary proposed that it was in the interest of
the Company to give immediate consideration to the revi
sion of the Company's agreement with Mr. W. F. Thorn as
stated in the prospectus issued on September 17th, 1946. It
was then considered that:—
WHEREAS the Company has made it a practice to pay
an annual fee to Mr. W. F. Thorn since the Incorporation
of the Company to the amount of $3,000.00 per year;
WHEREAS the valuable services rendered by Mr. W. F.
Thorn to date are above and beyond those normally
called upon to be performed;
WHEREAS the Company, as in the past, might be in a
position to call on W. F. Thorn's help and financial
advice;
WHEREAS the Company could be in a position in the
future, as it has been in the past, to require his financial
help and credit;
WHEREAS the Company could be in a position in the
future, as it has been in the past, to require his valuable
financial advice;
WHEREAS though the original contract was providing
that W. F. Thorn would receive a set salary as president
of the Company and being that W. F. Thorn is no longer
president;
WHEREAS it is in order to revise the above mentioned
contract in order to validate the payments made during
the time he was not president and to continue payment to
him in the future;
WHEREAS it was brought before the meeting that W. F.
Thorn is agreeable to continue to accept $3,000.00 a year
until 1957 inclusively, and then agrees to receive $5,-
000.00 per year until 1966 at which time the aforemen
tioned payments to him will be terminated in conjunction
with the termination of the Company's contract with the
City of Hull.
Therefore it was moved and unanimously carried that the
annual payment of $3,000.00 made to date to W. F. Thorn
be and are hereby ratified and confirmed.
It was further moved and unanimously carried that the
Company continue to pay W. F. Thorn the annual sum of
$3,000.00 a year as before, until 1957 inclusively, and then
$5,000.00 a year until the termination of the contract with
the City in 1966.
It was further moved and unanimously carried that Louis
Bisson be and is hereby authorized to act either personally
or in the name of the Company to complete and ratify this
agreement.
It was further moved and unanimously carried that Louis
Bisson be and is hereby authorized to sign any and all
documents to the above effect....
The day following adoption of this resolution
Thorn and Bisson signed a contract worded as
follows:
THIS AGREEMENT made, in duplicate, this 13th day of
May, A.D. 1953.
BETWEEN:
WALTER FRANCIS THORN, of the City of Moose Jaw,
in the Province of Saskatchewan, Financier, hereinafter
called the PARTY OF THE FIRST PART
OF THE FIRST PART:
LOUIS BISSON, of the City of Hull, in the Province of
Quebec, Manager, hereinafter called the PARTY OF
THE SECOND PART
OF THE SECOND PART:
WHEREAS the Party of the First Part is the beneficial
owner of 49,000 issued and fully paid-up common shares of
the capital stock of Transport Urbain De Hull Ltée—Hull
City Transport Ltd.;
AND WHEREAS the Party of the First Part is presently
indebted to the Party of the Second Part in the sum of
TWENTY-SIX THOUSAND DOLLARS ($26,000.00) in
respect of money loaned by the said Party of the Second
Part to the Party of the First Part together with certain
interest thereon;
AND WHEREAS the Party of the First Part might be
contingently liable to the said Party of the Second Part in
respect of other advances made by the said Party of the
Second Part to the Party of the First Part, the amount
thereof being unknown to the parties hereto and the liability
for which is presently in dispute and contested by the Party
of the First Part;
AND WHEREAS the said Party of the Second Part is
desirous of acquiring by purchase the beneficial interest of
the said Party of the First Part in and to the aforementioned
49,000 issued and outstanding common shares of Transport
Urbain De Hull Ltée—Hull City Transport Ltd. and the said
parties hereto are also desirous of finally settling all matters
presently outstanding between them and have agreed to
such sale and purchase of the aforesaid 49,000 shares of the
issued and outstanding common stock of Transport Urbain
De Hull Ltée—Hull City Transport Ltd. and the final settle
ment of all matters presently outstanding between them on
the terms and conditions as hereinafter in this agreement
expressed;
NOW THEREFORE THIS INDENTURE WIT-
NESSETH that in consideration of the premises and the
covenants hereinafter contained it is agreed between the
parties hereto as follows:-
1. The Party of the First Part doth hereby agree to sell
and the Party of the Second Part doth hereby agree to
purchase all and singular the beneficial interest of the Party
of the First Part, into and out of 49,000 issued, outstanding
and fully paid up common shares of Transport Urbain De
Hull Ltée—Hull City Transport Ltd., at and for the consid
eration hereinafter more particularly expressed and the fur
ther consideration of ONE DOLLAR ($1.00), and further,
for the purpose of buying the peace and good will of the
said Party of the First Part, the Party of the Second Part
agrees to pay to the Party of the First Part the sum of
SIXTY THOUSAND DOLLARS ($60,000.00) payable as
follows:—
Three Thousand Dollars ($3,000.00) on the execution of the
within agreement and Three Thousand Dollars ($3,000.00)
on the 1st day of May, 1954, and like sums of Three
Thousand Dollars ($3,000.00) on the 1st day of May in each
of the years 1955, 1956 and 1957; Five Thousand Dollars
($5,000.00) on the 1st day of May, 1958, and a like sum of
Five Thousand Dollars ($5,000.00) on the 1st day of May in
each and every year thereafter until the balance of the said
sum of Sixty Thousand Dollars ($60,000.00) has been fully
paid and satisfied, without interest; PROVIDED however,
and it is hereby agreed between the parties hereto that
should default occur in the payment of any of the aforemen
tioned sums the then balance owing by the Party of the
Second Part to the Party of the First Part in respect of such
Sixty Thousand Dollars ($60,000.00), shall at the option of
the Party of the First Part, forthwith become due and
payable.
2. In further consideration for the sale by the said Party
of the First Part to the said Party of the Second Part of the
said common shares of Transport Urbain De Hull Ltée—
Hull City Transport Ltd., more particularly referred to in
paragraph numbered I preceding, the Party of the Second
Part doth hereby release and discharge the said Party of the
First Part of and from all liability in connection with a loan
made by the said Party of the Second Part to the said Party
of the First Part in the sum of Twenty-Six Thousand Dollars
($26,000.00) as evidenced by a certain writing bearing date
the 12th day of April, 1949, and the said Party of the
Second Part doth covenant and agree to and with the Party
of the First.Part to execute and deliver to the said Party of
the First Part a general release for such liability in such
form as may required [sic] by the solicitors to the said Party
of the First Part.
3. In further consideration for the sale by the said Party
of the First Part to the Party of the Second Part of the
aforesaid 49,000 shares of the issued and outstanding and
fully paid up common stock of Transport Urbain de Hull
Ltée—Hull City Transport Ltd., as more particularly
referred to in paragraph number I preceding, the said Party
of the Second Part doth hereby release and discharge the
said Party of the First Part of and from all other liability
either contingent or actual that may presently be existing
from the Party of the First Part of and from all other
liability either contingent or actual that may presently be
existing from the Party of the First Part in favour of the
said Party of the Second Part, and the said Party of the
Second Part doth hereby covenant and agree to and with the
said Party of the First Part to execute a general release in
respect of such contingent or other liability in such form as
may be required by the solicitors to the said Party of the
First Part.
4. In consideration of the premises and other good and
valuable consideration the said Party of the First Part doth
hereby release and discharge the said Party of the Second
Part of and from all liabilities, either contingent or actual,
that may presently be existing from the Party of the Second
Part to the Party of the First Part and the said Party of the
First Part agrees to and with the said Party of the Second
Part to execute and deliver to the Party of the Second Part a
general release for such liabilities or other liabilities in such
form as may required [sic] by the solicitor for the said Party
of the Second Part.
5. The Party of the First Part doth hereby irrevocably
appoint the Party of the Second Part as his lawful attorney
for him and in his name, place and stead to transfer or cause
to have transferred on the books of Transport Urbain De
Hull Ltée—Hull City Transport Ltd. one issued and fully
paid up common share of the said Company presently
registered in the name of the said Party of the First Part.
THIS AGREEMENT and everything therein contained
shall endure to the benefit of and shall be binding upon the
parties hereto and their respective heirs, executors, adminis
trators and assigns.
IN WITNESS WHEREOF the Parties hereto have
hereunto set their hands and seals.
SIGNED, SEALED AND DELIVERED
In the presence of
R.E.B. Brocklesby (S) WALTER F. THORN
as to execution
by Walter F. Thorn
François Chevalier as to
execution by (S) LOUIS BISSON
Louis Bisson
Finally, on May 14, 1953, the directors of
Hull City Transport held another meeting and
ratified the contract entered into by Bisson the
previous day. It is worth citing the following
extract from the minutes of that meeting:
. Mr. Louis Bisson reports to the shareholders that, in
accordance with the resolution passed by the Board of
Directors on the 12th of May 1953 concerning the continu
ance of the services of Mr. Thorn to the company, a
satisfactory arrangement has been made with Mr. Thorn to
that effect, which agreement has been made along the same
terms and conditions as mentioned in the resolution.
It was moved and unanimously carried that the company
confirms and ratifies all the commitments undertaken by
Louis Bisson with Mr. Thorn and that said obligations shall
and do hereby become the sole responsibility of the compa
ny....
It is admitted that the annual payments of
$3,000 and $5,000 which were to have been
paid by Bisson under the contract of May 13,
1953, were in fact paid by Hull City Transport
Ltd. The only problem raised in this case is
whether these payments, which clearly were
made with Bisson's consent, were made for his
benefit so that, under s. 16(1), they should have
been included in calculation of his income.
According to appellant, the contract of May
13, 1953 is a contract of transaction, within the
meaning of the Civil Code, concluded between
Thorn and Bisson personally. Under the terms
of this contract, Bisson was personally obliged
to pay Thorn the sums stipulated. In making
these payments Hull City Transport Ltd. thus
paid the debt of respondent Bisson and thereby
with his consent obtained a benefit for him. On
that basis, the sums thus paid by Hull City
Transport Ltd. should, in accordance with s.
16(1), have been included in respondent's
income, just as they would have been had they
been paid to respondent himself.
To this respondent's counsel replied that the
document of May 13, 1953 was only a fictitious
deed which concealed the real nature of the
contract concluded on that day. In fact, he
argued, two contracts were concluded on May
13. Under the first one, Bisson and Thorn
mutually renounced to all claims that each
might have against the other; in the second
Bisson, acting as the agent of Hull City Trans
port, undertook to pay Thorn a salary so that
the latter, though no longer president or share
holder in the company, would continue giving it
the benefit of his experience and advice. If
these agreements were concealed in the manner
described, this, claimed respondent's counsel,
was because Thorn did not want to have to pay
tax on the salary which the company was
undertaking to pay him. In support of this argu
ment respondent's counsel relied on the follow
ing facts:
(a) the fact that Hull City Transport Ltd.
adopted the resolutions of May 12 and 14,
1953, would indicate that, in undertaking to
pay Thorn, Bisson was acting as the compa-
ny's agent;
(b) the fact that Bisson stated that in signing
the contract of May 13, 1953 he thought he
was acting as representative of Hull City
Transport Ltd.; and the fact, also, that Bisson
testified that he and the other directors of the
company had felt it was in the company's
interest to make Thorn happy;
(c) finally, the fact that it is inconceivable
that Bisson, in addition to waiving his claims
against Thorn, would agree to pay him
$60,000 for shares which, according to the
evidence, were worthless.
While examining the evidence and giving it
the interpretation more favourable to respond
ent, I find that the following facts have been
established:
(a) as to the shares given to Bisson as securi
ty, Thorn had a good prima facie claim
against him;
(b) after Thorn demanded the return of the
shares given as security, Bisson had numer
ous discussions with the other directors of
Hull City Transport Ltd.; as a result, he final
ly concluded that, in pressing these claims,
Thorn did not want to get the shares he was
claiming, but really wanted monetary com
pensation; the other directors of the company
had agreed that it was in the company's inter
ests for him to settle his dispute with Thorn,
for if there was no such settlement there was
a risk that Thorn would prevent the company
from obtaining a renewal of its franchise (in
1956), and would not be forthcoming with
advice and assistance which it needed to
acquire a rival company; on this account it
was agreed, long before the contract of May
13, 1953 was signed, that the company would
pay the sums Thorn demanded in return for
waiving his claim against Bisson;
(c) on May 13, 1953 Thorn undertook no
obligation to Hull City Transport Ltd.; how
ever, it appears that, as the company's direc
tors hoped, he did nothing to prevent the
franchise from being renewed, and supported
the purchase by Hull City Transport Ltd. of
the rival company it wished to absorb.
In my opinion only one inference can be drawn
from these facts; it is that, as the price of
waiving his claim against Bisson, Thorn
required that he be paid a sum of money which
Hull City Transport Ltd. in fact paid him. In
paying Thorn the sum of $60,000 stipulated in
the contract of May 13, 1953, Hull City Trans
port Ltd. thus paid part of the price Thorn was
asking for waiving his claim against Bisson. By
so doing the company made payments for
respondent's benefit within the meaning of s.
16(1), and as these payments were made with
respondent's consent, and would have formed
part of his income if they had been made to him
directly, I cannot but conclude that they should
have been included in computing respondent's
income for the years in question.
I would add that I do not feel it is significant
that it may have been in the company's interest
to make a financial contribution to settling the
dispute between Thorn and Bisson. Anyone
who pays another's debt always has a reason
for doing so; that does not change the nature of
his payment, and does not prevent it from being
made for the benefit of a third party.
The conclusion which I have just reached
does not suffice to dispose of the appeal, which
raises two further questions. The first is wheth
er, despite the expiry of the four-year period
prescribed in s. 46(4)(b), appellant could pro
ceed with re-assessments for the years 1955 to
1962; and the second involves determining
whether respondent owes the penalties claimed
from him under s. 56(2).
Appellant could only proceed with re-assess
ments for the years 1955 to 1962 if, in the
words of s. 46(4)(a)(i), respondent had "made
any misrepresentation or committed any fraud
in filing" his return. It is clear that, when he
declared his income for the years in question,
respondent made an error in good faith; he did
not know that the sums paid to Thorn by Hull
City Transport Ltd. formed part of his income.
It has been held on several occasions that a
"misrepresentation", though innocent, justifies
the Minister in proceeding with a re-assessment
at any time (see: M.N.R. v. Taylor 61 DTC
1139; M.N.R. v. Appleby 64 DTC 5199; M.N.R.
v. Foot 66 DTC 5072). However, in all cases
where the courts have so found, the taxpayer,
though he had acted in good faith, had been
clearly negligent. The question thus remains
undecided, whether the Minister may proceed
with a re-assessment after the period of four
years, when the taxpayer has made an innocent
misrepresentation involving no negligence on
his part. If, as appellant's counsel maintained,
even errors committed by a taxpayer entailing
no negligence justified the Minister in proceed
ing with a re-assessment at any time, s. 46(4)
would provide wholly illusory protection to the
taxpayer, since the only case in which he would
benefit from it, undoubtedly very rare, would
be where the re-assessment was designed to
correct an error attributable solely to the
Department itself. If this had been the purpose
Parliament had in mind when it enacted s.
46(4)(a)(i), it is not clear why it provided that
the Minister may proceed with re-assessments
at any time if the taxpayer "has made any
misrepresentation or committed any fraud in
filing the return". In effect, any fraud necessari
ly presupposes a "misrepresentation", and if
the latter word covered every type of inaccu
rate representation, the reference to fraud in the
provision would be totally unnecessary. In my
view, the fact that the legislator referred not
only to "misrepresentation" but to "fraud" indi
cates that, by the first word, he meant innocent
misrepresentation which, without being fraudu
lent, are still culpable in the sense that they
would not have been made if the person com
mitting them had not been negligent. I therefore
conclude that a taxpayer who, without any neg
ligence on his part, commits an error in declar
ing his income, does not make a misrepresenta
tion within the meaning of s. 46(4)(a)(i). When
the Minister seeks to rely on this provision to
proceed with a re-assessment after four years,
he must therefore not only show that the tax
payer committed an error in declaring his
income but also that that error is attributable to
negligence on his part.
In the case at bar appellant, as noted above,
has established that respondent committed an
error in declaring his income for the years in
question. I am not persuaded, however, that this
error involved negligence. The situation result
ing in the payments which respondent was
charged with failing to include in his income
was so confused that the Tax Appeal Board
concluded respondent was right in acting as he
did. In such circumstances, though I differ with
the Board, I must hold that the error committed
by respondent is one which a normally wise and
cautious taxpayer could have committed. For
these reasons I feel that the assessments for the
years 1952 to 1962 inclusive should be
cancelled.
As to the penalties claimed by the Minister
for the years 1960 to 1965, they are due,
according to s. 56(2), only in cases where the
taxpayer has been guilty of fraud or gross negli
gence. It is clear that, in view of what I have
said above, these penalties are not due in the
case at bar.
The appeal will therefore be allowed in part
and the assessments for the years 1963 to 1965
inclusive will be referred back to the Minister
for him to modify them so as not to claim any
penalty from respondent. Each party will pay
his own costs.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.