Executive Summary: Key Legal and Evidentiary Issues

• Revenu Québec issued reassessments against Simon Hébert-Blanchard and 9299475 Canada Inc. on the basis that two Gatineau buildings were sold below fair market value (FMV) between related persons.
• Central to the dispute was determining the FMV of 60, rue des Noisetiers and 133, rue Marengère as of February 20, 2018, under articles 111, 422 and 424 of Quebec's Taxation Act.
• Under article 1014 of the Taxation Act, a tax assessment enjoys a presumption of validity, which the taxpayer must rebut with prima facie evidence showing a degree of precision and probability.
• Competing expert evidence was pivotal: the plaintiffs' expert (Michel Paquin) valued the buildings at $2,050,000 and $1,055,000 with a 9% discount for sales without legal warranty, while the defence expert (Charles Lepoutre) valued them at $2,400,000 and $1,200,000.
• Revenu Québec's auditor relied only on municipal assessments and six comparables per building, without a real estate valuation expert, an approach the Court found imprecise and without scientific basis.
• The Court also found the transactions were not conducted between related persons, since Mr. Hébert-Blanchard never controlled the company; Mr. Vachon and Ms. Gagné together held 66?% of the voting shares.

Facts of the case

Simon Hébert-Blanchard (M. SHB) works in real estate, specifically residential rental housing. In 2015, he joined forces with Jean-Michel Vachon and Mr. Vachon's mother, Diane Gagné, and on June 11, 2015, the three formed 9299475 Canada Inc. ("929 Canada") to operate a real estate investment business, each holding an equal share of the company through trusts. From 2015 to 2018, 929 Canada acquired various residential rental buildings. When the three associates parted ways in 2018, 929 Canada sold two buildings to M. SHB: 60, rue des Noisetiers and 133, rue Marengère, both in Gatineau. Revenu Québec took the position that these sales were not made at fair market value (FMV), that they occurred between related persons, that 929 Canada conferred a benefit on its shareholder, and that the company failed to correctly declare the proceeds of disposition in computing its capital gain or loss. It therefore issued two reassessments: one against M. SHB dated September 22, 2022, and one against 929 Canada dated September 27, 2022. Both taxpayers challenged their reassessments before the Court of Québec, and the two files proceeded on a joint hearing.

Statutory provisions at issue

The dispute turned on several provisions of Quebec's Taxation Act (LI). Article 111 LI requires that a benefit conferred by a corporation on a shareholder be included in the shareholder's income, the benefit being the difference between the agreed sale price and the FMV. Articles 422 and 424 LI refer specifically to the notion of FMV, and Revenu Québec also invoked them, together with articles 232 and 234 LI, to modify 929 Canada's capital gain. Article 1014 LI gives tax assessments a presumption of validity, and article 1049 LI governs the penalties Revenu Québec sought to impose. The Taxation Act does not define FMV, so the Court applied the jurisprudential definition from the Federal Court of Appeal's decision in Nash: essentially, the highest price an owner could reasonably expect in a normal sale, in an unpressured market, between willing and arm's-length buyers and sellers.

The court's reasoning and analysis

Applying the burden-of-proof framework from the Quebec Court of Appeal's decisions in Alertpay and Delorme, the Court held that M. SHB had to present prima facie evidence, with a degree of precision and probability, that he did not acquire the buildings for less than their FMV. On the evidence, Revenu Québec's auditor had relied solely on a comparison with municipal assessments and six comparable sales per building; she acknowledged at trial that she had established a "market trend" rather than a market value, a notion the Court noted does not exist in the statute. Revenu Québec retained no valuation expert before issuing the reassessments. The Court preferred the evidence of the plaintiffs' expert, Michel Paquin, who applied the cost, income and parity (comparison) methods, accounted for each building's specific problems — an unstable soil condition and structural cracking at 60, rue des Noisetiers, and a sewer backup and agricultural drain problem at 133, rue Marengère — and established through a market study that sales made without legal warranty transact at about 9% below normal. He valued 60, rue des Noisetiers at $2,050,000 and 133, rue Marengère at $1,055,000 as of February 2018, before applying the 9% abatement. By contrast, the defence expert, Charles Lepoutre, valued the buildings at $2,400,000 and $1,200,000, but minimized the documented soil problem, was unaware of the water damage and drain issue, and applied no discount for the absence of legal warranty; the Court found this affected his credibility. Since M. SHB paid $1,916,658 for 60, rue des Noisetiers and $926,461 for 133, rue Marengère, the Court concluded the gaps with the retained FMVs were not significant, that the buildings were acquired at their FMV on February 20, 2018, and that no benefit was conferred under article 111 LI. The Court further held that the transactions were not between related persons: M. SHB never controlled 929 Canada, the issuance of the class J shares was a simulation that did not change control, Mr. Vachon and Ms. Gagné together held 66?% of the voting shares, and none of the three factual non-arm's-length criteria from the Supreme Court's McLarty decision were present. Consequently, 929 Canada had correctly declared the proceeds of disposition, and there was no factual or legal basis for the penalty under article 1049 LI.

Ruling and overall outcome

The Court granted both applications and annulled the two reassessments — assessment number MT202317C01 dated September 22, 2022, against M. SHB, and assessment number 1008 dated September 27, 2022, against 929 Canada — the whole with legal costs, making Simon Hébert-Blanchard and 9299475 Canada Inc. the successful parties. On costs, the judgment specifically recognized the plaintiffs' right to recover the $18,964 they paid in fees for the expert Paquin as legal costs, since Revenu Québec's audit approach, lacking any scientific or technical foundation, had forced them to retain an expert. Beyond the annulment of the reassessments and these recoverable expert fees, the judgment does not quantify a total monetary award, and the overall amount of the annulled assessments is not specified in the decision.