REASONS
FOR JUDGMENT
Paris J.
[1]
This is an appeal from an assessment made
pursuant to Part IX of the Excise Tax Act (the “Act”).
The issue before the Court is whether the Appellant is entitled to Input Tax
Credits (“ITCs”) of $10,099.74 and $4,632.67,
which it claimed for its reporting periods ending August 31, 2011 and August
31, 2012, respectively. The ITCs represent GST on legal fees paid by the
Appellant.
[2]
The Minister of National Revenue (“Minister” ) denied the ITCs on the basis that the
Appellant did not incur the legal fees in the course of any commercial activity
carried on by it, and that the Appellant is therefore not entitled to the ITCs
pursuant to subsection 169(1) of the Act.
[3]
The relevant portions of subsection 169(1)
read as follows:
169. (1) Subject to this Part, where a
person acquires or imports property or a service or brings it into a
participating province and, during a reporting period of the person during
which the person is a registrant, tax in respect of the supply, importation or
bringing in becomes payable by the person or is paid by the person without
having become payable, the amount determined by the following formula is an
input tax credit of the person in respect of the property or service for the
period:
A × B
where
A
is the tax in respect of the supply, importation or bringing in, as the
case may be, that becomes payable by the person during the reporting period or
that is paid by the person during the period without having become payable; and
B
is…
(c) in any other case, the
extent (expressed as a percentage) to which the person acquired or imported the
property or service or brought it into the participating province, as the case
may be, for consumption, use or supply in the course of commercial activities
of the person.
[4]
The definition of “commercial activity” is found in subsection 123(1) of the Act. The relevant
portion of the definition reads as follows:
“commercial activity” of a person means
(a) a business carried on by
the person (other than a business carried on without a reasonable expectation
of profit by an individual, a personal trust or a partnership, all of the
members of which are individuals), except to the extent to which the business
involves the making of exempt supplies by the person,
. . .
[5]
The Appellant maintains that its commercial
activities included the business of providing management services and that the
legal fees were incurred in relation to that activity.
[6]
The Respondent takes the position that the legal
fees were incurred by the Appellant in part in the course of negotiating the
purchase or sale of shares owned by it and by its shareholders, Viorel
Mazilescu and his spouse Anca Mazilescu, and, in part in the course of
litigating a dispute unrelated to any commercial activity carried on by the
Appellant.
[7]
Mr. Mazilescu owns 75% of the shares and is the
sole director of the Appellant. His spouse, Anca Mazilescu, owns the remainder
of the Appellant’s shares.
[8]
Mr. Mazilescu represented the Appellant at the
hearing and was the only witness.
[9]
During the period in issue, the Appellant and
Mr. Mazilescu between them owned 50% of the shares of two companies: Waycon
Manufacturing Ltd. (“Waycon”) and JAV Entreprises Ltd., (“JAV”). John O’Connell and entities
controlled by him owned the other 50% of the shares of Waycon and JAV.
[10]
Waycon manufactured logging equipment and soil
screens and JAV owned the land and buildings used by Waycon.
[11]
Another company, OMH Innovations Inc. (“OMH”) was owned
equally by O’Connell, Anca Mazilescu and Bradley Hilmoe. OMH distributed
Waycon’s products.
[12]
Mr. Mazilescu and O’Connell were employees of
Waycon, and Anca Mazilescu was an employee of OMH.
[13]
In early 2008, O’Connell was diagnosed with
cancer and took a leave of absence from his position at Waycon. Mr. Mazilescu testified
that he became solely responsible for the management of Waycon, OMH and JAV
until O’Connell returned in 2010. He said that those management duties were
outside his regular employment duties for Waycon and that he performed the
management duties as a consultant on behalf of the Appellant.
[14]
Mr. Mazilescu testified that the Appellant
received management fees of $33,947 in 2008 and $90,000 in 2009 from Waycon and
$100,000 from OMH in 2010 as compensation for the management services. He said
the OMH payment covered three years of management services.
[15]
After O’Connell returned from leave in 2010, the
relationship between him and Mr. Mazilescu began to deteriorate. As a result,
Mr. Mazilescu said that they decided to separate their business interests and began
negotiations to have one of them buy out the other’s interest. Mr. Mazilescu
was represented in those negotiations by Grant Hardwick of the firm Doak
Shirreff LLP.
[16]
The relationship between Mr. Mazilescu and O’Connell
remained strained and, in January 2011, O’Connell brought an application for an
Anton Piller Order against 13 defendants, including the Appellant, the
Mazilescus and another company owned by them, OMH Proscreen Inc. (“Proscreen”).
The Anton Piller Order was granted on January 19, 2011.
[17]
While the Order itself was not put before me, it
appears that the relief granted included an order terminating Mr. Mazilescu’s
employment with Waycon and Anca Mazilescu’s employment with OMH. Litigation
related to the Order continued into 2012 and was ultimately settled in November
2012 with O’Connell buying out Mr. Mazilescu and the Appellant’s interest in
Waycon, JAV and another related company. Mr. Hardwick also represented the
Mazilescus and their companies throughout the litigation and settlement.
[18]
Mr. Mazilescu testified that a separate court
action was brought by O’Connell in respect of matters relating to OMH, and that
that action has not yet been resolved.
[19]
The evidence also showed that, in addition to the
amounts reported by the Appellant as management fees, it reported dividends of
$125,619 in 2008 and $5,619 in 2009 and rental income of $4,200 in 2011 and
$13,407 in 2012. The source of the dividend income was not disclosed at the
hearing, but Mr. Mazilescu confirmed that the rental income was unrelated to the
activities of Waycon, JAV or OMH.
Analysis
[20]
After reviewing the decisions rendered by the
Supreme Court of British Columbia in respect of O’Connell’s application for the
Anton Piller Order and related relief, and after reviewing certain affidavits
sworn by Mr. Mazilescu that were filed in those proceedings, and after
considering the evidence presented by Mr. Mazilescu at the hearing before me, I
conclude that the Appellant has not shown that it is entitled to ITCs in
respect of the legal fees in issue.
[21]
The legal fees incurred by the Appellant up to
the time O’Connell applied for the Anton Piller Order in January 2011 were
incurred for the purpose of negotiating a separation of Mr. Mazilescu’s and O’Connell’s
business interests by way of a buyout of one or the other’s shares. Mr.
Mazilescu admitted in cross-examination that all of the legal fees incurred by
the Appellant in 2010 were related to this potential share transaction.
[22]
Since shares are financial instruments as that
term is defined in subsection 123(1) of the Act, and since supplies
of financial instruments are exempt supplies under the Act, no ITCs in
respect of inputs to supplies of financial instruments are available under
subsection 169(1). This is because the making of exempt supplies is
excluded from the definition of “commercial activities” as set out in paragraph
4 above.
[23]
Also, I find that the legal fees incurred by the
Appellant in the course of litigation commenced in January 2011 have not been
shown to have been related to or connected with any commercial activity carried
on by the Appellant. The Appellant has not produced a copy of the Anton Piller
application made by O’Connell, but it appears that it was based on an alleged
breach by Mr. Mazilescu and his spouse of the provision of a shareholder’s
agreement prohibiting competition with Waycon. Details of the allegations
underlying the application were set out at paragraph 22 of the decision of
Armstrong J. dated June 6, 2011 as follows:
[22] O’Connell sets out details of ten complaints
which are the foundation for the relief claimed in this proceeding. They are:
1. Anca falsely certified a baking
resolution for OMH appointing Viorel as a signing authority.
2. Viorel took $100,000 from OMH
without the consent or knowledge of O’Connell or Hilmoe.
3. Viorel unlawfully removed
confidential information belonging to Waycon Innovation.
4. Viorel and Anca set up OMH
Proscreen to compete directly with OMH.
5. Viorel removed a computer from the
Waycon premises and had it cloned, converting intellectual property of Waycon
and Waycon Innovation.
6. Viorel and Anca caused OMH
Proscreen to sell products manufactured by or for OMH to a German company and
kept the proceeds otherwise belonging to OMH or Waycon.
7. Viorel intentionally or negligently
failed to ensure that welding certifications for Waycon were maintained.
8. Viorel advised Loewen that he was
going to open a new shop, but learned he could not do so because of the
shareholders’ agreement.
9. Viorel and Anca paid their
14-year-old son, Andrei, wages in 2010 in excess of what was agreed to for that
year.
10. $100,000 appears to be missing
from Waycon Innovation. Viorel and Anca manipulated statements to inflate the
value of Waycon.
[24]
The evidence shows that the litigation brought
by O’Connell dealt with conduct of the Mazilescus personally or in connection
with their company, Proscreen. Mr. O’Connell alleged that the Mazilescus set up
Proscreen to compete with Waycon. I find, therefore, that the alleged violation
of the shareholders’ agreement concerned conduct by the Mazilescus that was
unconnected with the Appellant.
[25]
I also find that the Appellant has not shown
that it ever carried on the business of providing management services to Waycon,
OMH or JAV. In the course of the Anton Piller litigation, Mr. Mazilescu deposed
to certain facts relating to the $90,000 he now claims were management fees
earned by the Appellant from Waycon in 2009. In an affidavit dated February 2,
2011, Mr. Mazilescu indicated that the amount of $90,000 paid to the Appellant
by Waycon was an “equalizing draw for personal benefits taken
by O’Connell from Waycon.” Paragraphs
81 and 82 of that affidavit read as follows:
81. In fact O’Connell’s use of Waycon for
personal purposes was so extensive that in-house accounting staff maintained a
separate ledger of personal benefits taken by O’Connell from Waycon.
82. In 2010, those personal benefits were
accumulating to a substantial sum and accordingly, in May of 2010, O’Connell
did personally issue and sign a cheque drawn on the account of Waycon to Andrei
95 in the amount of $90,000.00 representing an equalizing draw for personal
benefits taken by O’Connell from Waycon.
[26]
This material supports the view that the $90,000
paid to the Appellant was not for consulting services rendered by Mr. Mazilescu
while O’Connell was absent from the business. This conflicts directly with Mr.
Mazilescu’s testimony before this Court.
[27]
With respect to the $100,000 that Mr. Mazilescu
claimed the Appellant received from OMH as management fees in 2010, Mr.
Mazilescu in his affidavit of February 2, 2011 stated as follows:
75. As respects the allegation in paragraph
39 that I had wrongfully removed $100,000.00 from the OMH Innovation account,
it is correct that I had in or about the month of May, 2010, removed
$100,000.00 from the account of OMH Innovation. This removal was done with full
disclosure to the outside accountant and was done for the purpose of putting
the funds beyond the reach of Brad Hilmoe. This action was taken for reasons
that include the following:
(a) Hilmoe had on earlier occasions
wrongfully removed funds from OMH Innovations and taken those funds to the United States for either the benefit of OMH USA or himself personally,
(b) by the time of the removal of the
$100,000.00 amount, the agreement in principal to separate the operations of
OMH Innovations from OMH USA was several months overdue in implementation. OMH
Innovations was turning a substantial profit and I did not want to see those
profits eroded by either OMH USA or Hilmoe personally.
[28]
Armstrong J. ultimately ordered the return of
the $100,000 to OMH in those proceedings.
[29]
Mr. Mazilescu’s representation before me
concerning the nature of the payment of this amount by OMH to the Appellant
contradicts his statements in his affidavit.
[30]
No explanation was provided for the
inconsistencies between his affidavit evidence and his testimony in this
matter. On the basis of these inconsistencies, I find that his testimony before
this Court is not reliable.
[31]
Finally, Mr. Mazilescu did not provide any details
of the circumstances of the receipt of the amount of $33,947 reported by the
Appellant on its income tax return for its 2008 taxation year and I am unable
to conclude that the labelling of those amounts as management fees was accurate.
[32]
For these reasons, I find that the Appellant has
not shown that the legal services it acquired during the periods in issue were
for consumption or use in the course of any commercial activity carried on by
it. Therefore, the Appellant is not entitled to the ITCs claimed and the appeal
is dismissed.
Signed at Ottawa,
Canada this 23rd day of October 2015.
“B.Paris”
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