Notes
Indexed as:
Hudon v. Canada
[2001] F.C.J. No. 1616
2001 FCA 320
Dockets A-744-99, A-767-99, A-768-99, A-125-00, A-126-00
Federal Court of Appeal
Montréal, Quebec
Richard C.J. and Desjardins and Décary JJ.A.
Heard:October 10, 2001.
Judgment:October 29, 2001.
(67 paras.)
Counsel:
Pierre Barsalou and Sébastien Rheault, for the appellants.Valérie Tardif, for the respondent.
The judgment of the Court was delivered by
¶1 DESJARDINS J.A.:—These are appeals of a judgment of the Tax Court of Canada (Harquail v. Canada, [1999] T.C.J. No. 715 (Q.L.)) which dismissed the appellants' appeals from assessments made with respect to the following taxation years: 1989, 1990 and 1991 for Messrs. Scanlan and Girard and for Mrs. Girard, 1989 and 1990 for Mr. Harquail, 1990 and 1991 for Mr. Hudon.For the purpose of this appeal, the assessments will simply be referred to as being for the years 1989, 1990 and 1991.
¶2 By assessments for the 1989 taxation year, the Minister of National Revenue denied the appellants the capital gains deduction provided for by subsection 110.6 (2.1) of the Income Tax Act (the "Act") on the disposition of "qualified small business corporation share[s]" within the meaning of subsection 110.6(1) of the Act.The assessments for the 1990 and 1991 taxation years are only consequential to the 1989 assessments.
¶3 Since the appeals were heard together, one set of reasons will be issued with copies of these reasons to be filed in each of the Court files.
The issue
¶4 The only issue in these appeals is whether Arnaud Properties Limited ("Arnaud Properties") or Hall River Power Corporation ("Hall River") met the criteria of being an "active business" as that phrase is found in the definition of "qualified small business corporation share" in subsection 110.6(1) of the Act, throughout the twenty-four months immediately preceding the date on which the shares of the capital stock of Arnaud Properties were sold, namely February 24, 1989.
¶5 "Active business" under subsection 248(1) means "any business carried on by the taxpayer other than a specified investment business or personal service business". The respondent conceded that neither Arnaud Properties nor Hall River carried on a specified investment business or a personal services business.The question, therefore, is whether Arnaud Properties or Hall River carried on business during the relevant time.
The relevant legislation
¶6 Subsection 110.6(2.1) of the Act allows for a capital gain deduction in favour of an individual, resident in Canada, who disposed of a share of a corporation that was a "qualified small business corporation share".That phrase in turn is defined in subsection 110.6(1) of the Act in the following manner:
Income Tax Act
110.6(1) / For the purposes of this section,"qualified small business corporation share". - "qualified small business corporation share" of an individual (other than a trust that is not a personal trust) at any time (in this definition referred to as the "determination time") means a share of the capital stock of a corporation that,
(a) / at the determination time, is a share of the capital stock of a small business corporation owned by the individual, the individual's spouse or a partnership related to the individual,
(b) / throughout the 24 months immediately preceding the determination time, was not owned by anyone other than the individual or a person or partnership related to the individual, and
(c) / throughout that part of the 24 months immediately preceding the determination time while it was owned by the individual or a person or partnership related to the individual, was a share of the capital stock of a Canadian-controlled private corporation more than 50% of the fair market value of the assets of which was attributable to
(i) / assets used in an active business carried on primarily in Canada by the corporation or by a corporation related to it,
[My emphasis]
* * *
Loi de l'impôt sur le revenu110.6(1)Les définitions qui suivent s'appliquent au présent article.
"action admissible de petite entreprise" - "action admissible de petite entreprise" S'agissant d'une action admissible de petite entreprise d'un particulier (à l'exception d'une fiducie qui n'est pas une fiducie personnelle) à un moment donné, action du capital-actions d'une corporation:
a) / qui, à ce moment donné, est une action du capital-actions d'une corporation exploitant une petite entreprise, dont le particulier, son conjoint ou une société liée au particulier est propriétaire;
b) / qui, tout au long de la période de 24 mois qui précède le moment donné, n'est la propriété de nul autre que le particulier ou une personne ou société qui lui est liée; et
c) / qui, tout au long de la partie de la période de 24 mois qui précède le moment donné, où l'action est la propriété du particulier ou d'une personne ou société qui lui est liée, est une action du capital-actions d'une corporation privée dont le contrôle est canadien et dont plus de 50% de la juste valeur marchande de l'actif est attribuable à des éléments visés aux sous-alinéas (i) ou (ii) :
(i) / des éléments utilisés dans une entreprise que la corporation ou une corporation qui lui est liée exploite activement, principalement au Canada,
[Je souligne]
¶7 The phrases "small business corporation", "active business" and "business", in turn, are thus defined in subsection 248(1) of the Act:
248(1) of the Act:"Small business corporation". - "small business corporation" at any particular time means a particular corporation that is a Canadian-controlled private corporation all or substantially all of the fair market value of the assets of which at that time was attributable to assets that were
(a) / used in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it,
[...]
"Active business". - "active business", in relation to any business carried on by a taxpayer resident in Canada, means any business carried on by the taxpayer other than a specified investment business or a personal services business.
"Business". - "business" includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2 and paragraph 110.6(14)(f), an adventure or concern in the nature of trade but does not include an office or employment.
[My emphasis]
* * *
248(1) de la Loi :"corporation exploitant une petite entreprise" - "corporation exploitant une petite entreprise" s'entend d'une corporation privée dont le contrôle est canadien et dont la totalité, ou presque, de la juste valeur marchande des éléments d'actif est attribuable, à la date donnée, à des éléments qui sont:
a) / soit utilisés dans une entreprise que la corporation ou une corporation liée à celle-ci exploite activement principalement au Canada,
[...]
"entreprise exploitée activement". - "entreprise exploitée activement", relativement à toute entreprise exploitée par un contribuable résidant au Canada, désigne toute entreprise exploitée par le contribuable autre qu'une entreprise de placement désignée ou une entreprise de prestation de services personnels.
"entreprise" ou "affaire". - "entreprise" ou "affaires" comprend une profession, un métier, un commerce, une industrie ou une activité de quelque genre que ce soit et, sauf pour l'application de l'alinéa 18(2)c), de l'article 54.2 et de l'alinéa 110.6(14)f), un projet comportant un risque ou une affaire de caractère commercial, mais ne comprend pas une charge ou un emploi.
[Je souligne]
The facts
¶8 In 1969, a corporation known as the Gulf Pulp and Paper Inc., which operated a pulp mill and owned forest concessions and rights to develop the hydroelectric potential of the Rivière Ste-Marguerite near Clarke City, Quebec, transferred those assets which consisted of land and buildings to Arnaud Properties.Its hydroelectric assets and hydroelectric development rights on the Rivière Ste-Marguerite were transferred, for legal reasons, to Hall River a wholly-owned subsidiary of Arnaud Properties.The parties admitted that the hydroelectric assets owned by Hall River represented during the period in issue 100% of that company's assets and 90% or more of the overall assets of Arnaud Properties.
¶9 In 1973, the shareholders of Arnaud Properties developed a business plan for the company.At the outset, the plan involved the sale of lots, specifically building lots. Some forty lots were sold between 1973 and 1975.A few sales took place after that time.
¶10 Arnaud Properties did nothing but sell lots.It believed, however, that it could dispose of the lots more easily if electricity could be supplied to the residents at a lower cost.To do so, customers had to be found to make the development of First Falls on the River Ste-Marguerite profitable.One of the potential customers was Hydro-Québec. Hydro-Québec, however, had a policy of not purchasing electricity from independent producers.The other possible customer was Iron Ore.
¶11 Numerous efforts were made at the time and in subsequent years by both Arnaud Properties and Hall River to promote the development of the hydroelectric potential of the Rivière Ste-Marguerite.
¶12 In October 1978, Hall River commissioned a study to determine the feasibility of developing First Falls.The study, done by Montreal Engineering Company Limited at a cost of $10,000, concluded that developing First Falls was technically feasible, but that it would not be profitable to do so given the inefficiency of the existing generators.The cost of development was estimated at $7,000,000.Particular mention was made of three problems; the technology of certain facilities was obsolete; the falls produced an irregular current; and it was Hydro-Québec's policy that any electricity produced by an independent producer had to be used by the producer for its own purposes and could not be resold to third parties.
¶13 On November 10, 1979, Arnaud Properties instructed Mr. Harquail to examine three options:
(1) / the expropriation of the development site by Hydro-Québec;(2) / the sale of rights and property connected with the hydroelectric project to Iron Ore; and
(3) / the operation as a joint venture with Iron Ore and Hydro-Québec.
¶14 Fifteen thousand dollars was made available to enable Mr. Harquail to carry out these instructions.
¶15 The third option would have enabled Arnaud Properties to circumvent Hydro-Québec's policy since Arnaud Properties could have resold, so to speak, the electricity to one of the proposed partners: Iron Ore and Hydro-Québec.
¶16 In April 1980, Mr. Harquail, in his capacity as agent of Arnaud Properties, took part in a meeting with representatives of Iron Ore and Hydro-Québec to discuss the work and costs associated with this hydroelectric project. Following another meeting held in June 1980, Hydro-Québec undertook a study relating to the temporary regulation of the Rivière Ste-Marguerite, in response to a request by Hall River and Gulf Power, a subsidiary of Iron Ore.The study recommended that Hydro-Québec undertake the project.Despite the study's conclusions, Hydro-Québec decided not to pursue the project, but instead, to develop the Grande-Baleine project.
¶17 Since a joint venture operation with Hydro-Québec was no longer possible, Arnaud Properties turned to Iron Ore which had just built a new plant in Sept-Iles. Representatives of Arnaud Properties and Hall River held discussions with representatives of Iron Ore in 1981 and 1982.
¶18 In 1986, there was a change of provincial government.Hall River immediately approached the new government and exposed to it the possibilities and problems of the past regarding the development of First Falls.Mr. Harquail testified that they "received a very sympathetic hearing from the ministers of the Crown at that time". (Transcript, vol. 3, tab 55, at 615-16).
¶19 On February 18, 1987, Hydro-Québec adopted a new "politique d'achat" allowing the purchase of power from small producers in the province, subject to price negotiations.By then, the cost of the project to develop First Falls was estimated at $17,000,000 but, according to Mr. Harquail, he had foreseen no problems in obtaining the necessary financing.
¶20 A meeting of the directors of Hall River was held on July 2, 1987.It was decided that Messrs. Harquail and Girard would be representing Hall River in its negotiations with Hydro-Québec.Mr. Harquail explained that after July 1987 things were starting to move quite quickly.There was a lot of interest from possible participants both for construction and financing, and it was important that he and Mr. Girard be cloaked with sufficient authority to move ahead and meet these interested parties in an authoritative fashion. (Transcript, vol. 3, tab 55 at 620).
¶21 On July 7, 1987, Mr. Harquail, in his capacity as vice-president of Hall River, sent a letter to a vice-president of Hydro-Québec.The letter stated its interest to meet with representatives to discuss the procedures and requirements for a possible comprehensive agreement on the sale of electricity.This, it said, "would enable the Company to go forward [...] with the planning/development and construction" of First Falls.In turn, on August 20, 1987, Hydro-Québec sent to Mr. Harquail, in his capacity as vice-president of Hall River, a copy of its new policy for purchasing electricity produced by small power plants owned by third parties in Quebec, adopted on February 18, 1987, after the new provincial government came to power. Hydro-Québec was prepared to purchase electricity at 2.86 cents per kilowatt/hour, while Hall River wanted to sell electricity at 4.2 cents per kilowatt/hour.