The Queen (Plaintiff)
v.
Simard-Beaudry Inc. (Defendant)
and
Simard & Frères Cie Ltée (Mise en cause)
Trial Division, Noël A.C.J.—Montreal, June 10;
Ottawa, October 5, 1971.
Income Tax—Tax liability assumed by purchaser of tax
payer's assets—Subsequent re-assessment--Additional taxes
levied—Whether covered by contract—Waivers of time limi
tation on re-assessment of taxpayer signed by purchaser,
whether effective—Quebec Civil Code, Art. 1173.
By a contract made in Montreal on December 15, 1964,
the mise en cause sold part of its assets to defendant
company, which in part consideration therefor assumed all
the debts of the mise en cause including its liability for
income tax incurred prior to January 1, 1965. In 1969 the
mise en cause was re-assessed for additional income tax of
more than one million dollars for a number of years prior to
1965. The Crown sued defendant for payment of the
amount due pursuant to s. 118 of the Income Tax Act.
Some of the additional amounts assessed were based on
alleged fraud or misrepresentation by the mise en cause.
Held, defendant was liable to the Crown for the additional
taxes as re-assessed.
1. Defendant's undertaking to pay the debts of the mise
en cause was a genuine stipulation for the benefit of third
persons under Art. 1173 of the Quebec Civil Code. Proulx
v. Leblanc [1969] S.C.R. 765, applied.
2. The debt for the additional taxes of the mise en cause
dated not from the date of the re-assessment but from the
date when the mise en cause earned the income.
3. Waivers of the time limitation on re-assessment signed
by defendant for the mise en cause under s. 46(4)(a) (ii) of
the Income Tax Act were binding on defendant.
4. The provisions of the Quebec Civil Code respecting
bulk sales (Arts. 1569 et seq.) were inapplicable.
INCOME tax appeal.
Gaspard Côté and P. 011ivier for plaintiff.
Julian Chipman, L. Y. Fortier and Jean
Claude Couture for defendant.
Non A.C.J.—By this information Her
Majesty the Queen claims from the defendant
payment of the sum of $1,048,371.39, being the
total amount due and payable by the mise en
cause as additional income tax, with the interest
and penalties provided by the Act, for the years
1954, 1955, 1956, 1957, 4 1958, 1959, 1960,
1961, 1962, 1963 and 1964.
Re-assessments were in fact issued by the
Minister on August 14, 1969, in respect of the
returns of the mise en cause for the years in
question, setting the additional amounts owed
for taxes by the mise en cause at the aforemen-
tionedsum.
Plaintiff's action against defendant, Simard-
Beaudry Inc., is based on a private agreement
(Exhibit P-5) concluded in Montreal on Decem-
ber 15, 1964, under which the mise en cause,
Simard & Frères Cie Ltée, sold defendant a
portion of its assets—the property, rights and
other assets thus sold being set out in Appendix
A to the said agreement—for payment of the
sum of $542,041.18 (paid by a promissory note)
and other considerations.
According to the agreement, as a condition
thereof, and in consideration of the aforesaid
sale, defendant, in its capacity of purchaser,
assumed and undertook'to pay and discharge all
the debts and obligations of every kind or sort
whatsoever of the mise en cause, including any
liability for income and corporation taxes
incurred prior to January 1st, 1965, except as
may arise under section 138A' of the Income
Tax Act. It is worthwhile reproducing 'below
clause 2(a) of the said agreement:
2. In consideration of this sale, conveyance and cession
the Purchaser does by these presents
(a) assume and undertake to pay and discharge all the
debts and obligations of the Vendor of every kind and
sort whatsoever including any liability for income and
corporation taxes incurred prior to January 1, 1965,
except as may arise under section 138A of the Income
Tax Act, but excluding the obligations enumerated in
Schedule B annexed hereto to form part hereof and which
obligations are not assumed by the Purchaser, the Pur
chaser undertaking to fulfill all contracts, understandings
and obligations of every sort and nature of the Vendor
(save those relating to the excepted obligations enumerat
ed in Schedule B) and the Purchaser indemnify and
protect the Vendor against all responsibility, proceedings,
claims and demands relating thereto;
(b) deliver to the Vendor herewith in payment of the
purchase price of the sale of assets, its non-interest
bearing promissory note in the principal amount of $542,-
041.18 payable on or before March 15, 1965.
The notices of re-assessment were delivered
personally to the mise en cause on August 14,
1969, in care of Mr. John Lawrence, 5 Place
Ville-Marie, Montreal, Que.; a copy of each of
these notices was also delivered personally on
the same day"to defendant.
The mise en cause, Simard & Frères Cie
Ltée, having received a request in due form,
refuses or neglects to pay the amount claimed
in the notices of assessment, which amount has
been a debt due to the plaintiff, under the
provisions of s. 118 of the Income Tax Act,
since September 15, 1969.
By a letter dated December 2, 1969, defend
ant Simard-Beaudry Inc. was called upon to
discharge this debt, under the terms of its agree
ment with the mise en cause, in favour of the
latter's creditors, including the plaintiff, who
alleges that she is"entitled in fact and in law to
claim payment of the sum of $1,048,371.39
from the defendant in view, she says, of the
stipulation for the benefit of third persons con
tained in the deed of sale.
Defendant, on the other hand, admits it was a
party to the said agreement," but denies every
thing not in accordance with this agreement.
It states that it is in no way required to pay
any amount fixed by the re-assessments issued
by the Minister of National Revenue. It submits
that the provisions of clause two of the agree
ment between defendant and the mise en g cause
do not in fact constitute a stipulation for the
benefit of third persons in plaintiff's favour,
and adds that the latter may not plead the
provisions of this agreement in the present
action. Defendant further alleges that tax
assessments with respect to the mise en cause
were either 4 issued in pursuance of s. 46(4)(a)(i)
of the Income Tax Act, or are statute-barred.
Defendant further submits that, if interpreted
correctly, the clause in the agreement entails no
responsibility on the part of the mise en cause
for a tax debt resulting from any misrepresenta
tion made or fraud committed by the mise en
cause. In defendant's submission, clause two of
the agreement embraces liability only for taxes
incurred in the ordinary course of business, and
levied by valid assessments, correcting, for
example, errors in computation, taxes due,
valuation of assets, depreciation allowances,
reserves for bad debts, and other accounting
problems. Finally, it maintains that any under
taking or agreement by defendant to pay a debt
resulting from misrepresentations made or
fraud committed by the mise en cause would be
contrary to public policy, null and void, and that
such a debt could not be sued for at law. f'
Plaintiff in her reply denies paragraph eight
of the amended defence as drafted, namely that
the re-assessments are issued under s.
46(4)(a)(i) of the Income Tax Act, or else are
statute-barred, adding that the assessments for
1954, 1955, 1956, 1957, ,1958, 1959, 1960 and
1964 were issued under s. 46(4)(a)(i) 2 of the
Income Tax Act, and the remainder under s.
46(4)(a)(ii) 2 of the same Act. She states that the
waivers necessary for this purpose were filed
by the mise en cause for 1963, and by the
defendant, on behalf of the mise en cause, for
1961"' and 1962. As to defendant's contention
that clause two of the agreement may not be
interpreted as encompassing liability by the
mise en cause for tax due as a result of misre
presentation or fraud by the mise en cause,
plaintiff denies this, further adding that at the
time in'question defendant could not have been
unaware that the mise en cause was liable to
re-assessment for income tax, for 1953 and
subsequent years, depending on the conclusions
of the audit which the provincial authorities
were then in the process of carrying out.
In my view the position taken by defendant
may be summarized as follows. A contract can
only bind persons who are parties thereto, and
as plaintiff was not a party to the agreement
concluded with Simard & Frères Cie Ltée, she
has no remedy against the latter. This agree
ment does not contain a stipulation for the
benefi0of third persons and even if it did, or
had that effect, it could not afford grounds for
plaintiff's claiming the amounts she is presently
claiming, as defendant undertook to pay only
the debts of Simard & Frères Cie Ltée existing
at the date the agreement (Exhibit P-5) was
signed, i.e. December 15, 1964. Now at that
date, though the mise en cause had not been
assessed by the Province of Quebec for. the
years preceding, it had been assessed by the
Minister of National Revenue up to 1961. It
states that the stipulation was not supposed to
include liability beyond the assessments which
had been issued by that date. It is true that s.
118 of the Act states that
118. All taxes, interest, penalties, costs and other
amounts payable under this Act are debts due to Her
Majesty and recoverable as such in the Exchequer Court of
Canada or any other court of competent jurisdiction or in
any other manner provided by this Act.
but, submits counsel for the defendant, this
section applies to the taxpayer only, and not to
a third party such as defendant.
In the submission of defendant's counsel it
would be unfair to permit the Crown to claim
from defendant now the re-assessed amount of
the debt owed by the mise en cause, an amount
which defendant was unable to challenge. This
would amount to a unilateral act which defend
ant did not have the opportunity or the right to
challenge.
Counsel for the defendant, referring to Art.
1569 of the Civil Code, which deals with the
bulk sale of a business, claims to find support
therein for the position he takes. If in fact, he
says, the purchaser obtains affidavits from the
vendor containing the names and addresses of
all the vendor's creditors, and pays the latter,
the purchaser is not responsible for the ven
dor's debts which may arise subsequently. It is
clear, he submits, that as the re-assessments in
this case did not exist at the time the business
of the mise en cause was sold, the latter could
not state that there was a sum payable for
taxes. Defendant, he contends, can have no
greater liability here because it only took over,
by the agreement, those debts which it would
have been required to pay if it was acting in
accordance with the requirements of a bulk
sale. He further submits that the Crown is not
obliged to plead under the stipulation in the
agreement, but if it does so it must take the
stipulation with the rights existing at the time of
the agreement, at which time, he adds, there
was no claim for tax. The stipulation here is too
indefinite, he contends, and when the agree
ment was made there was no amount owing to
the Crown. If, he says, the Minister of Revenue
had not exercised his right of assessment
against the mise en cause, he would have had
no right to claim the amount so arrived at from
defendant. His only remedy, in the submission
of counsel for the defendant, would be to sue
the mise en cause, because the Crown, in sup
port of its claim against defendant, is relying
only on a cause of action arising after the
agreement.
The rights of a third party such as defendant,
counsel for the defendant pursues, are not the
same as those of a taxpayer, for a taxpayer's
assessment goes back, he says, to the date on
which the income was received and its amount
determined by re-assessment, but as for the
third party, the only rights that can be exercised
against it may very well be those which existed
at the time the agreement was concluded.
Counsel for the defendant also submits that
an agreement must not be interpreted so as to
include an obligation to pay amounts owing as a
result of fraud or misrepresentation, and more
over, he adds, even if it had this effect, it is
contrary to public policy for such a clause to be
upheld. He further submits that the waivers
signed by Simard-Beaudry Inc. on behalf of the
mise en cause for 1961 and 1962 are invalid
because they were not signed by the taxpayer,
and that, as counsel for the Crown has stated
that the assessments are not all based on fraud
or misrepresentation, the plaintiff must rely for
those years on the waivers filed in this Court
under s. 46(4)(a)(ii) of the Act. Moreover, he
says, the assessments for some years indicate
that there are penalties to be paid, and if such is
the case the Minister must rely for those years
on fraud or misrepresentation, as penalties may
be imposed only under s. 56(1) and (2) of the
Act, which deals with tax evasion or statements
or omissions in a return. It cannot be taken for
granted, he states, that Simard-Beaudry Inc.
assumed such a liability under the agreement
concluded between it and the mise en cause,
and the agreement should contain more explicit
language in order to lead to such a conclusion.
Indeed, pursues counsel for the defendant, if
Simard-Beaudry Inc. cannot be held responsible
for the fraud and penalties of Simard & Frères
Cie Ltée, the Crown cannot claim from defend
ant the amounts owing as a result of said fraud
and penalties.
Finally, in the submission of counsel for the
defendant, it would be inconceivable to hold
that, by the agreement, defendant had undertak
en to accept liability for the assessments and
re-assessments which might or might not be
issued in respect of the vendor without having
any right to control such assessment.
It seems to me, firstly, that since the decision
of the Supreme Court in Proulx et al. v. Leblanc
et al. [1969] S.C.R. 765, it must be accepted
that an agreement in which an individual under
takes to pay another's debt is a genuine stipula
tion for the benefit of third persons, even if this
stipulation in such a case is made by means of
an imperfect delegation of payment, under Art.
1173 of the Civil Code.
It is also interesting to note that in the case of
a stipulation for the benefit of third persons a
right over the new debtor is vested in the credi
tor at the moment the agreement between the
stipulator and the promisor is made, because
the acceptance he must then supply does not
create it: [TRANSLATION] "for him, such accept
ance is simply adherence to the transaction
already completed and a means of ensuring its
irrevocability". See Planiol et Ripert, Vol. VII,
2nd Ed., Esmein, p. 682, n. 1279. As for delega-
tion, it is only when the creditor has consented
to the transaction that his right exists.
It was in fact held by Pigeon J. in the above-
mentioned case that when the seller of an
immovable stipulates that a part of the price
shall be payable to a third party, who may or
may not already be a privileged creditor or
mortgagee on the immovable sold, he makes
this stipulation a condition of the deed to the
benefit of a third party, who is free to accept.
His acceptance is generally inferred from the
fact that he receives payments from the new
debtor without protest. The effect of this
acceptance by the new debtor, however, is not
to release the original debtor, because here the
delegation does not result in novation unless it
is clear that the creditor intended to discharge
the debtor making the delegation. Indeed, nova-
tion is never presumed, and it would be unlikely
for the creditor to release the original debtor
since he would have no interest in doing so.
This, in my view, disposes of defendant's first
argument that this is not a stipulation for the
benefit of third persons.
As to his second argument, namely that the
debt arising from re-assessment of the taxpayer
dates only from the time that the taxpayer is
assessed, and that it did not, accordingly, exist
at the time the agreement was made, it seems to
me that the answer to this is that the general
scheme of the Income Tax Act indicates that
the taxpayer's debt is created by his taxable
income, not by an assessment or re-assessment.
In fact, the taxpayer's liability results from the
Act and not from the assessment. In principle,
the debt comes into existence the moment the
income is earned, and even if the assessment is
made one or more years after the taxable
income is earned, the debt is supposed to origi
nate at that point. Here the re-assessments
issued on August 14, 1969, for income earned
in previous years seem to me to be at most a
confirmation or acknowledgment of the
amounts owing for these earlier years. Indeed,
in my opinion, the assessment does not create
the debt, but is at most a confirmation of its
existence. It also seems to me that the Court
must assume that Simard & Frères Cie Ltée
owes the amounts for which it was assessed,
since these amounts have not been challenged
by the taxpayer, nor, moreover, by the defènd-
ant in this action, who could, however, have
done so, since copies of the re-assessments in
respect of the mise en cause were supplied to
defendant the same day as they were delivered
to the mise en cause. The amounts so assessed,
which were not challenged, are thus debts owed
by the taxpayer as from the end of each of the
years in question.
Defendant maintains that it can only be held
responsible under the agreement for debts
which existed when the latter was signed. The
amounts claimed under the re-assessments were
in fact due at that time, since, as we have just
seen, these amounts became debts at the end of
each of the years in question, though the
defendant may actually have been unaware of
them when the agreement was made. Further,
the language of the agreement does not distin
guish between apparent debts and concealed
debts. Indeed, if reference is made to the terms
of this agreement, we see that it concerned the
sale of a universality of rights, including the
assets and the liabilities, the latter being neces
sarily linked up with the former. An appendix to
the agreement includes a list of the tangible and
intangible property sold by Simard & Frères Cie
Ltée, including the rights which the latter might
have in an entire series of contracts enumerated
in Part B of Appendix A to the agreement. This
Appendix contains a valuation of the property
sold, but does not men tion the value of the
rights transferred under each of the contracts
listed in paragraph B of the Appendix. It can be
seen from reading this agreement that the mise
en cause intended to close down its operations
and business and that all that remained was to
liquidate. In fact, the secretary of Simard &
Frères Cie Ltée, in a letter dated November 17,
1969, addressed to the Department of Justice,
stated that the company was defunct as soon as
its assets were sold, and that subsequently its
officers and administrators had only to give the
necessary instructions to dissolve it. Under arti
cles 1, 2(a) and 7 of the agreement, defendant
intended to purchase only the property in
Appendix A, but it appears that for all practical
purposes it also intended to continue under its
own name the business of Simard & Frères Cie
Ltée without carrying out a merger between the
two companies. To attain this end, therefore,
Simard-Beaudry Inc. not only took over all the
debts of the mise en cause, but, as it states in
the agreement, undertook to fulfil any other
obligations which might devolve on Simard &
Frères Cie Ltée. The legal effect of such an
agreement, namely the sale of an accumulation
of property with an undertaking by the purchas
er to discharge the vendor's obligations, even if
this included those resulting from misrepresen
tation or tax fraud, does not seem to me to be in
any way contrary to public policy or in deroga
tion of the Act.
Defendant's argument that the waivers signed
by it for the mise en cause for 1961 and 1962—
as regards which it claims that there were no
misrepresentations or fraud and where, as a
result, the prima facie presumption of validity
of the assessments would not apply—are not
valid because they were not signed by the tax
payer cannot be raised here. Defendant held
itself out as the agent, or apparent agent, of the
mise en cause, and plaintiff, relying on these
waivers, subsequently allowed the four years
specified in s. 46(4) to elapse with respect to
the years in question. In the circumstances
plaintiff is in no position to plead the invalidity
of these waivers. Moreover, I do not think it is
too surprising that the waivers were signed by
the purchaser of the rights and property of the
vendor, since the purchaser, in which some of
the persons having an interest also had interests
in the mise en cause, is the very same company
which continued the vendor's operations and
must have collected the profits therefrom.
Defendant seeks to rely on the provisions
governing bulk sales in support of its position. I
fail to see how these' provisions can be of
assistance to the defendant. In the first place, it
has often been held that Arts. 1569 et seq. of
the Civil Code (Bulk Sales) do not apply to the
outright sale of a business for which the pur
chaser undertakes to pay the debts, and the
provisions ° of these articles cannot be adapted
to the case of a sale of the assets on condition
of assuming the liabilities, as we have here. See
D'amours v. Darveau [1933] S.C.R. 503 at page
506, and Mathieu v. Martin [1922] R.L.N.S.
111. Then, as will be seen below, the' terms
themselves of clause two of the agreement do
not limit creditors to those who were known
when the agreement was signed. As we have
seen, defendant sought to argue that it intended
to commit itself, and in fact did commit itself,
only to paying those debts which existed or
were known at the date of the agreement. I feel,
however, that it is attempting here to introduce
a distinction into clause two of the agreement
which is not there. In fact, this clause clearly
states that defendant (i.e. the purchaser)
... does...
(a) assume and undertake to pay and discharge all the
debts and obligations of the Vendor of every kind and sort
whatsoever including any liability for income and corpora
tion taxes incurred prior to January 1, 1965, except as
may arise under section 138A of the Income Tax Act, but
excluding the obligations enumerated in Schedule B
annexed hereto to form part hereof and which obligations
are not assumed by the Purchaser, the Purchaser under
taking to fulfil all contracts, understandings and obliga
tions of every sort and nature of the Vendor (save those
relating to the excepted obligations enumerated in
Schedule B) and the Purchaser will indemnify and protect
the Vendor against all responsibility, proceedings, claims
and demands relating thereto. (The italics are mine.)
This clause seems quite clear, and I feel that
apart from the exclusion made for a tax debt
falling under s. 138A, namely one which is con
nected with dividend stripping, defendant
voluntarily assumed all the tax liabilities of the
mise en cause, without restriction. I do not feel
it even necessary to inquire whether or not
Simard-Beaudry Inc. realized the extent of the
vendor's tax obligations., The letter of Decem-
ber 14, 1964, from the auditors for the mise en
cause (Exhibit P-6), clearly indicates at this date
that its tax obligations for 1953 and subsequent
years could' be augmented, since it states that:
The provincial authorities are in the process of making an
examination of the income tax returns for the years from
1953 onward and the additional taxes, if any, which may
result from this examination can not be determined at this
date. (The italics are mine.)
Moreover, having purchased the vendor's rights
and assets, it was only normal for it to assume
its obligations, and if necessary indemnify it
and even protect it from any liability, as it
undertook to do in clause two of the agreement.
Accordingly, defendant ÿ shall pay the plaintiff
the sum of $1,048,371.39 with interest and
costs.
The section which deals with dividend stripping.
2 46. (4) The Minister may at any time assess tax, interest
or penalties under this Part or notify in writing any person
by whom a return of income for a taxation year has been
filed that no tax is payable for the taxation year, and may
(a) at any time, if the taxpayer or person filing the return
(i) has made any misrepresentation or committed any
fraud in filing the return or in supplying any informa
tion under this Act, or
(ii) has filed with the Minister a waiver in prescribed
form within 4 years from the day of mailing of a notice
of an original assessment or of a notification that no tax
is payable for a taxation year,
re-assess or make additional assessments, or assess tax,
interest or penalties under this Part, as the circumstances
require.
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.