Business Law, Litigation, Taxation law

Case Comment: Who’s fooling whom about what?

Oct 28th, 2013

By Barry Landy

Charron v. Agence de Revenu du Quebec 2013 QCCQ 8953

Marcel Charron was assessed by the Quebec tax department in 2010 for statute barred taxation years. The ARQ added $31,000 and $32,000 dollars to his income from a business in 2005 and 2006, allegedly in connection with undeclared purchases and sales of real estate. The main issue in the case was exactly how much Charron had failed to declare.

What made the case interesting is Charron’s “business” and how he went about it.

Charron explained to the court that his business was to act as a prête-nom or intermediary to allow clients to purchase properties without putting up any of their own money. The scheme basically involved defrauding lenders who required a 5% down payments from prospective borrowers as a condition to lending.

Here is typically how the scheme would work: A buyer (who had no money) would approach Charron and have him buy a particular property. For example, a M. Roy had Charron buy a property on Notre Dame Street in Gatineau, which Charron purchased for $119,900. Ten days later, Charron re-sold the property to Roy by notarial deed for a declared price of $138,000. Roy borrowed $130,500 from a financial institution, and according to the notarial adjustment sheet, used this money to pay notarial fees, mutation taxes, sundry fees, etc. so that at the end of the transaction, Charron only received $1,452. Roy put up none of his own money and the notary’s trust account showed no other entries or payments in connection with the purchase and sale.

Charron and the ARQ agreed that Charron’s cost for the property was $124,000. The ARQ added to Charron’s income the difference between this amount and the notarial deed sale price of $138,000, namely $14,000. Charron’s took the position that notwithstanding that $138,000 was the price set forth in the notarial deed, the true price was $130,500 and that he had only received $1,452, because the entire transaction between himself and Roy was a simulation.

In short, he alleged a plan to defraud financial institutions, and in fact he made these exact same representations in his notice of opposition and to the appeals branch of the ARQ, but to no avail.

In terms of the evidence he presented at trial, other than his own testimony, both Roy and the notary corroborated his story, at least in connection with the Notre Dame street sale.

In the case of two other sales, the buyers were not around to testify; the only evidence was the notarial trust account activity, where the amount paid to Charron was always significantly less than the price in the notarial deed.

So, unless the buyers were actually paying Charron cash, which he was not declaring, the only other possibility was that Charron clearly was trying to fool various financial institutions, which he seemed to be able to do with some success!

But was he trying to fool the taxman?

Charron pleaded article 1451 of the Civil Code of Quebec: “Simulation exists where the parties agree to express their true intent, not in an apparent contract, but in a secret contract, also called a counter letter. Between the parties, a counter letter prevails over an apparent contract”.

The Civil Code goes on to provide that third persons in good faith may avail themselves of the apparent contract or the counter letter, but was the ARQ a third person in good faith? Was it entitled to say that it could avail itself of the apparent contract?

 The answer, said the court, is sometimes yes and sometimes no. Where the tax department is acting as a tax collector, it is acting as third party so that for collection purposes, the tax department can choose to ignore any counter letter it wants. However, where the tax department is acting in its role as tax assessor, it is not a third party, and is obliged to respect the secret contract, even where that contract was masking a fraud. Of course, Charron was not trying to fool the tax department; he was trying to fool financial institutions into doing 100% financed real estate deals.

 Interestingly enough, the argument of the ARQ that there might have been an undeclared cash payment by Roy or the other buyers to Charron was given short shrift. In Roy’s case, it made no sense, said the Court, that Roy would buy the property from Charron for $138,000, when he could have theoretically bought it 10 days earlier from the seller for $119,900.

 It followed, of course, that Charron’s tax appeal was maintained and the matter referred back to the Minister for re-assessment. The ARQ was not entitled to disregard the secret contract because the secret contract was apparently the true agreement between the parties.

 The moral of the story: With appropriate evidence, your secret contract will stand up to scrutiny by a court, but expect the Quebec tax department to try to put you through the wringer before you get there.

 Barry Landy is a senior litigation lawyer at Spiegel Sohmer who focuses his practice on commercial litigation and is also experienced in the area of media law.