T-877-76
Antoine Guertin Ltée (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Dubé J.—Montreal, December 9
and 10, 1980; Ottawa, January 6, 1981.
Income tax — Income calculation — Deductions — Appeal
from assessments — Whether portion of premiums on life
insurance policy pledged as security for a loan is deductible
Whether salaries paid to two directors reasonable in view of
evidence — Whether the use of charitable institution to whom
plaintiff and its employees gave donations is a sham created
by plaintiff to artificially reduce its income — Income Tax
Act, R.S.C. 1952, c. 148, s. 11(1)(cb)(ii), S.C. 1970-71-72, c.
63, ss. 20(1)(e)(ii), 245(1).
Plaintiff appeals assessments for the years 1970, 1971 and
1972 with respect to life insurance premiums, salaries and
charitable donations. (1) Premiums: it was held that a portion
of the premiums on a life insurance policy—a portion which
represented the cost of a term policy—pledged as security for a
loan was not deductible because these premiums purchased
permanent insurance and that plaintiff was acquiring an asset
of a capital nature. (2) Salaries: the plaintiff paid to its
president's mother and sister (both directors) salaries which
were reduced in each case as being unreasonable. (3) Chari
table donations: in 1972, the Fondation St-Pie, a charitable
organization established by plaintiff's founder, received from
the plaintiff and its employees donations (a portion of which
came from the latter's bonuses). The question is whether the
use of the Fondation was a pure sham created by plaintiff to
artificially reduce its income.
Held, the appeal is allowed. (1) Premiums: an amount equal
to the premium for term life insurance (without surrender
value) corresponding to the debt to be repaid is deductible
under section 20(1)(e)(ii) of the Income Tax Act. It is an
expense incurred in the year in the course of borrowing money
for the purpose of earning income from a business. (2) Salaries:
the evidence indicates that the salaries paid to the president's
mother were not unreasonable, unlike his sister's whose partici
pation and experience were negligible. (3) Charitable dona
tions: this case does not involve a series of fictitious operations.
All transactions between the plaintiff and the Fondation were
entered in the books of both entities and faithfully reported to
the taxation authorities. The Fondation is registered as a
charity under section 110(1)(a) of the Act, which authorizes
the deduction of donations. The principal objective of the
operations was not to reduce the income artificially, but rather
to realize a practical and generous ideal within the framework
of the Act. If there were a presumption of artifice, it has been
rebutted.
Equitable Acceptance Corp. Ltd. v. Minister of National
Revenue [1964] Ex.C.R. 859, distinguished. Snook v.
London & West Riding Investments, Ltd. [1967] 1 All
E.R. 518, considered. Minister of National Revenue v. T.
R. Merritt Estate [1969] 2 Ex.C.R. 51, considered.
INCOME tax appeal.
COUNSEL:
Claude Desaulniers for plaintiff.
Roger Roy and Daniel Verdon for defendant.
SOLICITORS:
Stikeman, Elliott, Tamaki, Mercier & Robb,
Montreal, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following is the English version of the
reasons for judgment rendered by
DuBÉ J.: The plaintiff, incorporated in Quebec
in 1946, operates a feed mill as well as several
farms in St-Pie.
It is appealing the Minister's assessments for the
1970, 1971 and 1972 taxation years with respect to
premiums for insurance on the life of the Presi
dent, Jacques A. Guertin, salaries paid to the
President's mother (Mrs. Antoine Guertin) and to
the President's sister (Mrs. Andrée Gaudreault)
and charitable donations made by the plaintiff and
its employees to the Fondation St-Pie.
1. Insurance premiums
In 1969 the plaintiff borrowed the sum of
$300,000 from the Industrial Development
Bank—to purchase and operate farms—as security
for which the Bank required the transfer of $200,-
000 in insurance on the life of the President and
$100,000 in insurance on the life of the manager,
Émile Cordeau. The Minister allowed the deduc
tion of the term insurance premiums for Émile
Cordeau, but refused to allow the deduction of the
$1,090 in premiums on the President's life on the
ground that these premiums purchased permanent
insurance and that the plaintiff was thus acquiring
an asset of a capital nature.
The plaintiff's accountant explained to the
Court, however, that his client had charged only
the cost of a term policy to expenses and deducted
the remainder from its surplus. For a 20-year term
policy in the amount of $200,000 dated June 15,
1969 for Jacques Guertin, aged 34 at the time, the
annual premium was $1,090. The company's inten
tion was to charge to expenses only that portion of
the premium applicable to the loan. The plaintiff
did not charge the full annual premium of $4,022,
which represents a premium for life insurance with
a surrender value. The figures for 1973 confirm
this intention: the $1,090 premium was reduced to
$1,030.05 since the $200,000 loan had been
reduced to $189,000 at that time.
In my view this part of the premium ($1,090)
should be regarded as an expense incurred in the
year in the course of borrowing money used by the
taxpayer for the purpose of earning income from a
business, in this case a farming business compris
ing land, buildings, machinery and equipment. The
transfer of $200,000 in insurance on the life of the
President, until the debt was repaid, was an essen
tial term of the loan.
A sum equal to the amount of the premium for
the term life insurance (without surrender value)
corresponding to the debt to be repaid is therefore
deductible under subparagraph 11(1)(cb)(ii) of
the old Act [Income Tax Act, R.S.C. 1952, c. 148,
as amended] and subparagraph 20(1) (e) (ii) of the
new Act [S.C. 1970-71-72, c. 63, hereinafter
referred to as the Act], which reads as follows:
20. (1) ...
(e) an expense incurred in the year,
(ii) in the course of borrowing money used by the taxpayer
for the purpose of earning income from a business or
property (other than money used by the taxpayer for the
purpose of acquiring property the income from which
would be exempt),'
In Equitable Acceptance Corporation Ltd. v.
M.N.R., 2 my brother Cattanach J. ruled that pre
miums for insurance policies on the life of the
plaintiff Company's president were not deductible,
' The exception in parentheses does not apply here since it is
not alleged that the income from the farm purchased by the
plaintiff would be exempt from tax.
2 [1964] Ex.C.R. 859.
precisely because this was permanent insurance
which was not restricted to the term of the loan
but covered the entire life of the insured, with a
surrender value, and that therefore such policies
were a lasting asset on which the Company could
borrow money again once the first loan had been
paid off.
Such premiums were of course not deductible;
but an amount equal to the premium for term life
insurance covering the amount of the loan is
deductible both for the President of Antoine Guer-
tin Ltée and for the manager, even if in the former
case the Company purchased permanent insur-
ance—not to avoid tax but to save money—and in
the latter case term insurance.
2. Salaries paid to Mrs. Guertin and Mrs.
Gaudreault
The plaintiff stated it had paid Mrs. Guertin
and Mrs. Gaudreault the following salaries for the
taxation years in question, on which they paid tax:
1970
Mrs. Guertin $17,681.81
Mrs. Gaudreault $13,346.83
1971
Mrs. Guertin $12,631.72
Mrs. Gaudreault $ 8,911.95
1972
Mrs. Guertin $12,994.68
Mrs. Gaudreault $ 9,156.95
The Minister reduced the above salaries to
$3,000 per year, alleging that they were unreason
able in view of the negligible participation of these
two directors of the Company, their minimal
experience and their almost total absence from the
Company's premises.
According to the testimony of Jacques Guertin,
which was not contradicted, his mother had taken
part in establishing the business alongside his
father. She invested some of her own money from
her inheritance in it. From the outset she had seen
to the financing and management of the Company.
Her husband, Antoine Guertin, was concerned
more with the mill machinery and technology. It
was Mrs. Guertin who met the suppliers and
attended conventions.
After the departure of her husband, Mrs. Guer-
tin continued to be involved in the operation of the
business. She met the new President, her son,
every noon for lunch in the family residence locat
ed opposite the mill. It was here that the daily
problems were discussed and solved. She attended
all meetings of the Board of Directors; she went to
the office to see how things were going. She was
the person who signed cheques in the President's
absence. When her husband retired for health
reasons and began taking increasingly long vaca
tions in Grand Bahama and Maine, the contribu
tion of his wife, who had considerable experience,
became increasingly important. In the circum
stances, I do not consider the salaries paid to Mrs.
Guertin to be unreasonable and I think that they
should be accepted by the Minister.
The situation seems to me to be different with
regard to the salaries paid to Mrs. Gaudreault,
however. Mrs. Gaudreault did not even live in
St-Pie, but in the suburbs of Montreal. She did
attend meetings of the Board of Directors and
performed certain services when the Company had
things to be done in Montreal, either with sup
pliers or involving errands on behalf of the Com
pany. The evidence indicated that her participation
was in fact minimal. Her experience in the plain
tiff's business is also negligible. The reduction of
her salary to $3,000 per annum for tax purposes is
therefore reasonable and should be confirmed.
3. Donations to the Fondation St-Pie
The Fondation was incorporated on December
23, 1960 under Part III of the Quebec Companies
Act, R.S.Q. 1941, c. 276. It is a charitable organi
zation recognized by the Department of National
Revenue and registered as number 0133801-03-08.
It gives all its income to foreign missions.
Antoine Guertin, the founder of the plaintiff
Company, also established the Fondation St-Pie.
He appears to have been an extremely religious
person. He initiated the "Chapelet en famille"
(Family Rosary), a program on a Montreal radio
station. Two of his daughters became convent
nuns. He himself tried to become a priest at the
age of 65, a few years before he died. Profoundly
interested in missions, he proved to be a generous
donor, especially with respect to the Brazil Mission
of St -Hyacinthe, a community in his . diocese. It is
this Mission which received the bulk of the reve
nues distributed by the Fondation every year.
During 1972, the only year in which donations are
at issue in this appeal, it received $5,000 of the
$7,336 distributed.
The plaintiff gave the Fondation a cheque for
$12,400 as a charitable donation for the taxation
year in question. During this period the plaintiff
also gave its employees bonuses in the amount of
$111,653.60 and the employees gave the Fonda-
tion a total of $39,155 out of these bonuses as
charitable donations. The Company generally gave
each employee only one bonus cheque each year.
For 1972 the accountant St-Onge took the initia
tive of dividing the bonuses into three parts, one
part for the Fondation, one as a loan to the
plaintiff to be paid into a pension fund for the
employees and the third part representing the bal
ance of the bonus to be kept by the employees.
St-Onge thus gave each employee three cheques
for that year.
According to the defence, [TRANSLATION] "the
use of the Fondation St-Pie, with the employees'
complicity, was a pure sham created by the plain
tiff for the purpose of artificially reducing its
income". The defence added that the sums of
$39,155 and $12,400 [TRANSLATION] "constitut-
ed disbursements in respect of a transaction or
operation that, if allowed, would unduly or artifi
cially reduce the income of the plaintiff, contrary
to section 245(1) of the Act". This section reads as
follows:
245. (1) In computing income for the purposes of this Act,
no deduction may be made in respect of a disbursement or
expense made or incurred in respect of a transaction or opera
tion that, if allowed, would unduly or artificially reduce the
income.
According to his son, the idea of paying bonuses
came to Antoine Guertin when he was reading an
article in the Digest describing the merits of this
system in encouraging employees to participate in
the progress of a business. Bonuses are still being
paid to employees by the plaintiff. According to
the current President, the results are convincing:
there has never been a labour dispute at the mill
and profits are increasing every year.
The list of bonuses is prepared by the Board of
Directors. According to the President the amounts
of the individual bonuses are based on three fac
tors: the increase in the cost of living, the number
of years of service and individual performance.
The total sum to be divided depends on the Com-
pany's profits (1972 was an excellent year).
Antoine Guertin would then take the list and
visit all the employees. With his ardent missionary
zeal he succeeded in convincing them to give gen
erously. It is not impossible, in fact even probable,
that he lured them with the possibility of bonuses
based on the generosity of the donations. For the
year in question a series of Antoine Guertin Ltée
cheques dated November 30, 1972 (the end of the
Company's fiscal year) payable to the employees
were thus endorsed by the latter [TRANSLATION]
"Deposit to the Fondation St-Pie fund". These
cheques totalling $39,155 (together with the Com-
pany's cheque for $12,400) were forwarded to the
Fondation St-Pie's account on that date and depos
ited by the latter on December 22, 1972.
These funds totalling $51,555 were immediately
lent by the Fondation to the plaintiff, which gave
it a new promissory note for the same amount
bearing interest at the rate of 7 per cent. The
Fondation had lent the donations it received in
previous years to the plaintiff on promissory notes
in the same manner. The practice was repeated
from year to year, in November, when the total
amount of the donations was lent to the plaintiff
on a promissory note. In return the plaintiff paid
the Fondation 7 per cent interest, and it was these
revenues that were then distributed to the
missions.
The Fondation regularly files financial reports
and other forms required by the Department of
National Revenue. Any donor may become an
active member of the Fondation once accepted by
the Directors. The Directors are not employees of
the Company, with the exception of Émile Cor-
deau, who was formerly the plaintiffs manager,
and now of Jean St-Onge, his successor as manag
er of the plaintiff and also secretary of the Fonda-
tion. The founder Antoine Guertin did not remain
a Director of the Fondation after its incorporation.
The capital of the Fondation reached $485,000
in 1977 and then remained stable. All this money
is still being lent to the plaintiff and the 7 per cent
interest is still being distributed to the missions.
Cordeau left the plaintiff in 1972 and the Fonda-
tion in 1973. His successor testified that he fol
lowed the tradition established by Cordeau,
including the practice of the donations and loans.
The meetings of the Fondation take place in
St-Onge's office in the plaintiff's mill, and this is
where the Fondation's books are kept.
The Fondation has no premises, offices or
employees. Its only expenses are $10, which it pays
every year to the Quebec Department of Financial
Institutions. The balance of the receipts (the inter
est on the plaintiff's loan) is distributed to the
missions.
According to the testimony of Jacques Guertin,
Yvon Boyer, the Company's chartered accountant
and auditor, and Jean St-Onge, the only three
witnesses at the hearing, the system of employee
bonuses and donations to the Fondation reflects
the intentions of the founder of both bodies, who
was striving for both industrial peace at the plant
and a realization of his spiritual views through the
Fondation.
According to his son, toward the end of his life
Antoine Guertin wanted to give all the Company's
revenues to the Fondation. Jacques Guertin, who
readily admits to being much less religious than
his father, was careful not to agree to this
proposal.
We must therefore determine whether the use of
the Fondation constitutes a pure sham created by
the plaintiff and its employees for the purpose of
artificially reducing income, as the Minister main
tained, or whether the bonuses are legitimate cur
rent expenses, incurred in the course of the Com-
pany's business in order to earn income, and
whether the donations to the Fondation are allow
able deductions.
Unfortunately the two witnesses who could best
have shed light on the situation, the founder and
his wife, are both dead. It is nonetheless evident
from the testimony of the plaintiff's three wit
nesses that Antoine Guertin's essential aims were
achieved: the bonus system guarantees the Com
pany a loyal and efficient staff and the Fondation
now has a constant amount of capital, the annual
income from which is given to the missions. This
successful formula also produces two other benefi
cial results for the plaintiff. First, the payment of
bonuses increases the Company's expenses and
consequently reduces the tax payable; secondly,
the Company benefits from a source of borrowing
at a highly favourable rate.
None of the above transactions is concealed or
illegal. The Fondation has letters patent incor
porating it as a corporation whose objects are to
administer funds and contributions to assist chari
table institutions. In the event of the Corporation's
dissolution its net assets are to be transferred to
organizations having similar aims. The Fondation
is registered as a charity under paragraph
110(1)(a) of the Act, which authorizes the deduc
tion of donations.
With the exception of Cordeau in 1972 (and
now St-Onge), the Directors are not attached to
the Company. The donors do not come exclusively
from the ranks of the Company either; the founder
had also canvassed farmers in the area as well as
suppliers and other clients. There is nothing to
prevent the Fondation from lending its money
elsewhere and it is free to increase its rates once
the promissory note expires. The charter of incor
poration provides that in the event of dissolution
the assets will not go back to the Company but will
go to other organizations dedicated to supporting
missionaries. The Fondation's assets have now
reached a plateau and there is no longer a dedicat
ed worker to collect donations from the employees
or elsewhere.
The money given to the employees in 1972 as
bonuses is entered in the Company's books as such
and appears on the T-4 Forms of these employees
as income. Their charitable donations are also
reported as such. It appears that the founder dis
cussed with each employee, and with the account
ant, the maximum deductible amount that each
employee could give to the Fondation. There is
nothing reprehensible, of course, in informed tax
payers taking maximum advantage of the deducti-
bility of their donations.
Although the donations of the Company and its
employees reduced the plaintiff's income, this does
not mean that these expenses are unreasonable and
unlawful. Analyzed in light of the principal objec
tives initially pursued by the Company and the
Fondation, these donations do not seem to me to
have been made primarily in order to reduce
income, even though this was the result, but chief
ly in order to achieve the objectives already men
tioned. This reduction in income is therefore not
necessarily unrealistic and artificial. 3
The oft-cited passage from Lord Diplock's
judgment 4 in Snook v. London & West Riding
Investments, Ltd. is relevant in this context:
As regards the contention of the plaintiff that the transac
tions between himself, Auto-Finance, Ltd. and the defendants
were a "sham", it is, I think, necessary to consider what, if any,
legal concept is involved in the use of this popular and pejora
tive word. I apprehend that, if it has any meaning in law, it
means acts done or documents executed by the parties to the
"sham" which are intended by them to give to third parties or
to the court the appearance of creating between the parties
legal rights and obligations different from the actual legal
rights and obligations (if any) which the parties intend to
create.
In my view the present case does not involve a
series of fictitious operations, or shams, or eva
sions. It must be remembered that all transactions
between the plaintiff and the Fondation were
entered in the books of both entities and faithfully
reported to the taxation authorities. The principal
objective of these operations, in my view, was not
to reduce the income artificially but rather to
realize the ideal, both practical and generous, pur
sued by Antoine Guertin, within the framework of
the Act. It has not been shown, moreover, that the
plaintiff has gained thereby in income, since it
must not be forgotten that the capital of $485,000
remains the property of the Fondation: the plain
tiff will have to repay its loan some day.
Learned counsel for the defendant also raised
the argument that since the plaintiff and the Fon-
dation are not dealing at arm's length, there is a
3 See Sigma Explorations Ltd. v. The Queen [1975] F.C.
624, at pp. 634-635.
4 [1967] I All E.R. 518, at p. 528.
presumption that these transactions between the
two are artificial, a presumption which it was up to
the plaintiff to rebut. 5 He referred in particular - to
a passage from a judgment of my brother Cat-
tanach J. in M.N.R. v. T. R. Merritt Estate: 6
In my view, the basic premise on which this analysis is based is
that, where the "mind" by which the bargaining is directed on
behalf of one party to a contract is the same "mind" that
directs the bargaining on behalf of the other party, it cannot be
said that the parties are dealing at arm's length. In other words
where the evidence reveals that the same person was "dictat-
ing" the "terms of the bargain" on behalf of both parties, it
cannot be said that the parties were dealing at arm's length.
Once again, even though at the outset the person
of Antoine Guertin dominated both entities, the
situation was no longer the same in the period we
are concerned with. In 1972 the only real tie
between the Company and the Fondation was
Émile Cordeau, who was not a shareholder of the
plaintiff. There is certainly no reason to believe
that he dictated the terms of any bargain between
the two Companies. Moreover, even if there were a
presumption of artifice, it has been rebutted to my
satisfaction by the evidence, which establishes
clearly the genuine existence of charitable dona
tions made for a specific and legitimate purpose.
In the circumstances the appeal should be
allowed and the reassessments issued by the
Department of National Revenue in respect of the
plaintiff for 1970, 1971 and 1972 should be vacat
ed, with the exception of the reduction to $3,000 of
the salary paid to Mrs. Andrée Gaudreault, which
is confirmed; the whole with costs.
5 See Mulder Bros. Sand & Gravel Ltd. v. M.N.R. 67 DTC
475; Spur Oil Ltd. v. The Queen [1981] 1 F.C. 461; Robson
Leather Co. Ltd. v. M.N.R. 77 DTC 5106.
6 [1969] 2 Ex.C.R. 51, at pp. 62-63.
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.