http://decisions.fca-caf.gc.ca/site/fca-caf/decisions/en/item/63504/index.do 
The Queen v. 9101-2310 Québec Inc.[1] (October 18, 2013) was an appeal of a Tax Court decision which held that subsection 160(1) of the Income Tax Act[2] did not apply to a transfer of funds by a tax debtor to the corporate respondent, 9101-2310 Québec Inc.:
[7] Mr. Pratte described the circumstances leading to the deposit into 2310’s account as follows (testimony of Mr. Pratte, transcript, Appeal Book, Vol. 2 at page 295, lines 15 to 25, and at page 296, lines 1 and 2):
[translation]
It came out that the . . . It happened in Amos, and at one point, Alain came and said, “Look, I’ve settled.” That’s what he told us. We had a beer on Friday or Thursday: “I’ve settled, etcetera, etcetera.” Then later, at one point, we were all alone, and he said, “So, I have a cheque for $305,000, and I don’t have a bank account.” Because we knew what was going on, you know? Everything was seized, I think, at that time. So, I thought about it, and I told him, “Well, maybe one of my companies could help you out by depositing it and managing it for you. . . .
[8] The cheque was deposited in 2310’s account. The TCC judge does not explain how the cheque was delivered, but according to the evidence, Mr. Garneau endorsed the cheque made out in his name by the insurance company and gave it to Mr. Pratte, who then deposited it in 2310’s account (testimony of Mr. Pratte, transcript, Appeal Book, Vol. 2 at page 296, lines 7 to 11, at page 298, lines 19 to 25, and at page 299, lines 1 to 7; deposit slip, Appeal Book, Vol. 1 at page 154).
[9] In order to confirm that the money remained his, Mr. Garneau signed a letter addressed to Mr. Pratte in his capacity as president of 2310, dated March 23, 2002, the contents of which read as follows (Appeal Book, Vol. 1 at page 70):
[translation]
I hereby request that, through your company, you manage the money that I deposit in your account for the purpose of paying my accounts due or that become due in the future.
II therefore release you from liability for income tax and other implications of the effects that may result.
[10] Mr. Pratte explained that he was the one who had requested this letter. He recounts the discussions he had with Mr. Garneau on this subject as follows (testimony of Mr. Pratte, transcript, Appeal Book, Vol. 2 at page 296, lines 11 to 17):
[translation]
So, well, sign me a paper to the effect that this has nothing to do with me. I’ll put it in that account because you need a bank account, and when you ask me for cheques, I’ll write you cheques for the amount you want because I don’t want this to have any real-life impact . . . .
The funds were subsequently all paid to the tax debtor (Mr. Garneau) or at his direction. The tax debtor went bankrupt and CRA sought to collect the unpaid tax balance from 9101-2310 Québec Inc.
The Tax Court found that there had been no effective transfer by Mr. Garneau since he retained ownership and control over the funds. The Tax Court also found that there was no basis to support liability based on the civil law concept of “simulation”.
The Federal Court of Appeal disagreed and allowed the appeal on the basis of “simulation”:
[34] To dispose of the appeal, it is enough to refer to the testimony of Mr. Pratte before the TCC judge, according to which the cheque was given to Mr. Pratte and deposited in 2310’s account in order to prevent the funds from being seized in the hands of the tax debtor. The only inference that can be drawn from this testimony is that the FBDB would have seized these funds if Mr. Garneau had let it be known that they belonged to him. In the present case, in giving the endorsed cheque to Mr. Pratte so that he could deposit it in 2310’s account, the tax debtor gave the impression that the money belonged to 2310 despite the fact that, according to the agreement with Mr. Pratte, the money remained his. This amounts to a simulation within the meaning of article 1451 of the C.C.Q.:
1451. 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.
1451. Il y a simulation lorsque les parties conviennent d’exprimer leur volonté réelle non point dans un contrat apparent, mais dans un contrat secret, aussi appelé contre-lettre.
Entre les parties, la contre-lettre l’emporte sur le contrat apparent.
[35] When the Minister takes collection action, he may avail himself of the apparent contract, just as the FBDB could have done (Transport H. Cordeau Inc. v. Canada, [1999] F.C.J. No. 1659 (FCA) (QL); Garas c. Canada (Procureur général), 2009 QCCS 2838, aff’d 2011 QCCA 528; Vigneault v. Canada, [2001] T.C.J. No. 880 (QL); Bolduc v. Canada, [2002] T.C.J. No. 664 (QL), aff’d 2003 CAF 411). Such is the effect of article 1452 of the C.C.Q.:
1452. Third persons in good faith may, according to their interest, avail themselves of the apparent contract or the counter letter; however, where conflicts of interest arise between them, preference is given to the person who avails himself of the apparent contract.
1452. Les tiers de bonne foi peuvent, selon leur intérêt, se prévaloir du contrat apparent ou de la contre-lettre, mais s’il survient entre eux un conflit d’intérêts, celui qui se prévaut du contrat apparent est préféré.
…
[38] The TCC judge’s comments at paragraph 68 of his reasons to the effect that it is difficult to see how a third party could have been misled by the arrangement is contradicted by the evidence because the desired objective in respect of the FBDB—as the TCC judge himself identified it—was achieved. Moreover, as is explained above, the only reason for keeping the set-up in place after the settlement with the FBDB had been reached was that it remained effective as against other creditors.
[39] Regarding the existence of a non-arm’s length relationship between the tax debtor on the one hand and Mr. Pratte and his company on the other, the evidence could not be any clearer. Mr. Pratte, by allowing the tax debtor to use 2310’s bank account to conceal the fact that the tax debtor was the true owner of the deposited funds, worked in concert with the tax debtor, acting strictly as a front (testimony of Mr. Pratte, Appeal Book, Vol. 2 at page 303, lines 18 to 25). A non-arm’s length relationship may arise from the legal relationship between the parties or from the factual situation (Swiss Bank Corporation v. M.R.N., [1974] S.C.R. 1144). Based on the facts the tax debtor was not dealing at arm’s length with Mr. Pratte and his company.
[40] Finally, it is true that the Minister did not raise simulation in his reply to the notice of appeal, but this does not preclude the appellant’s argument (Reasons at paragraph 67). The evidence adduced before the TCC judge shows that the arrangement was designed to remove the amount of the cheque from the tax debtor’s assets and place it beyond the reach of his creditors, and the TCC judge was obliged to make a finding that is consistent with this evidence. In my opinion, the TCC judge drew a conclusion that was contradicted by the evidence in holding that there was no simulation.
[41] It follows that the Minister was entitled to rely on the apparent transfer made by the parties. Thus the liability of 2310 is engaged by the combined effect of article 1452 of the C.C.Q. and subsection 160(1).
The court also addressed the question of whether its earlier decision in Canada v. Livingston[3] would operate to permit the application of subsection 160(1) of the ITA. The court held that the Tax Court had correctly concluded that Livingston was based on common law principles and did not apply in Québec:
[53] The rule to be gleaned from this decision, as I understand it, is that the transfer of legal title in a sum of money may give rise to a transfer for the purposes of subsection 160(1) where it is intended to conceal the fact that the tax debtor is the beneficial owner of this sum and thwart the tax authorities’ collection efforts.
[54] It is neither necessary nor appropriate to consider the merits of this rule in the context of the present case because being based on the common law, it does not apply in Quebec. The TCC judge’s task was to analyze the legal relationship between the parties in accordance with the C.C.Q., which is what he did.
…
[60] I believe it useful to add that the sole purpose of subsection 160(1) is to protect the integrity of the tax debtor’s patrimony. This provision has been described as a draconian measure because it applies even if the transfer is made in good faith – i.e. not for tax reasons – and because it allows tax to be collected from a person other than the primary debtor, without any time limitation and without regard to what may have happened to the property transferred or its value since the transfer. In short, subsection 160(1) protects the tax authorities against any vulnerability that may result from a transfer of property between non-arm’s length persons for a consideration that is less than fair market value regardless of the circumstances which give rise to the transfer.
[61] Given the intended purpose, there is no basis for applying subsection 160(1) where the tax debtor’s patrimony remains intact. The problems stemming from simulated property transfers are undeniable, but they are not among the problems that subsection 160(1) was intended to solve. In contrast, articles 1451 and 1452 of the C.C.Q. which were designed to foil simulation, do address these problems, where applicable.
This decision is very interesting from an academic viewpoint but would seem to have no application to transactions governed by the common law.
[1] 2013 FCA 241.
[2] R.S.C. 1985, c. 1 (5th Supp.), as amended (the “ITA”).
[3] 2008 FCA 89.