Date: 20111214
Docket: A-442-10
A-443-10
Citation: 2011 FCA 352
CORAM: EVANS
J.A.
LAYDEN-STEVENSON
J.A.
MAINVILLE
J.A.
BETWEEN:
LYNCORP INTERNATIONAL LTD.
Appellant
and
HER MAJESTY
THE QUEEN
Respondent
REASONS FOR JUDGMENT
EVANS J.A.
Introduction
[1]
This is an
appeal by Lyncorp International Ltd (Appellant) from a decision of the
Tax Court of Canada, reported at 2010 TCC 532. In that decision, Justice
Campbell Miller (Judge) disallowed certain expenses that the Appellant had
incurred in supplying services, which it claimed to be able to deduct from its
income from property in the taxation years 2002 and 2003.
[2]
The
Appellant said that it had incurred the expenses for the purpose of earning income
from a business or property within the meaning of paragraph 18(1)(a) of
the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (ITA), which provides
as follows.
|
18. (1) In computing the income of a
taxpayer from a business or property no deduction shall be made in
respect of
(a) an outlay or expense except
to the extent that it was made or incurred by the taxpayer for the
purpose of gaining or producing income from the business or property;
...
|
18. (1) Dans le calcul du revenu du
contribuable tiré d’une entreprise ou d’un bien, les éléments suivants
ne sont pas déductibles :
a) les dépenses, sauf dans la
mesure où elles ont été
engagées ou effectuées par le contribuable en vue de tirer un revenu
de l’entreprise ou du bien;
[…]
|
[3]
The
Appellant has narrowed the scope of the appeal to a single question: did the
Judge err in holding that expenses incurred by the Appellant when its sole
owner, David Mullen, travelled by private jet to provide gratuitous services to
corporations in which the Appellant owned shares, were not for the purpose of
enabling it to earn future income from property, namely the shares in the
corporations? Lyncorp had substantial property income from other sources.
[4]
The Judge
also held that these expenses did not entitle the Appellant to input tax
credits (ITC) under subsection 169(1) of the Excise Tax Act, R.S.C.
1985, c. E-15 (ETA) so as to enable it to recover the Goods and Services Tax
(GST) that it had paid for the flight services. He found that these services
were not used in the course of the Appellant’s “commercial activity”.
[5]
The facts
are common to both appeals and are set out at length in the Judge’s reasons.
For present purposes, it suffices to say that the Appellant owned shares in
four corporations. Mr Mullen visited these corporations to provide business
consulting and operational services, for which (with one exception) neither he
nor the Appellant charged a fee. He travelled in an airplane in which the
Appellant had a fractional ownership. The Appellant sought to deduct from its
income the expenses of Mr Mullen’s flights, and to claim ITCs to recover the
GST that it had paid for the supply of the flight services.
[6]
For the
reasons that follow, I would dismiss both the ITA and the ETA appeals. These
reasons apply to both appeals, and a copy will be inserted in both files.
ITA appeal
[7]
The Judge
(at para. 68) put the issue relevant to this appeal as follows:
… does the Appellant’s
investment in shares of the business ventures, with the possibility of
dividends being declared on those shares, support the deduction of the disputed
flight expenses, claimed to have been incurred for the purpose of producing the
dividend income?
[8]
He held
(at para. 73) that the flight expenses related directly to the business income
of the four corporations because they were incurred to make them more
profitable. However, the relationship of the expense to the Appellant’s
property source of income (the shares) was only indirect. He concluded pithily
(at para. 75) by saying:
This generosity was neither a
loan nor an equity investment by the Appellant. It might best be described as
an agreement to pay someone else’s expenses. Equity investments yield dividend
income. Debt investments yield interest income. Free services, with no
obligation to repay, yield only hope. This is not a deductible expense.
[9]
The
Appellant says that the Judge lost sight of the fact that it is sufficient to
claim a deduction under paragraph 18(1)(a) that the Appellant incurred
the expenses to increase the profitability of the corporations for the purpose
of receiving dividend income. The Judge erred, the Appellant argues, by finding
a requirement in paragraph 18(1)(a) that an expense incurred for the
purpose of gaining or producing income from the taxpayer’s property may only be
deducted from income if it is directly related to the property.
[10]
In support
of his argument, counsel relied on the decision of this Court in Canada v.
Byram, 99 DTC 5117 (Byram). The issue in Byram was whether a
taxpayer who had made an interest-free loan to a company in which he held
shares could claim a capital loss on the loan under subparagraph 40(2)(g)(ii)
of the ITA when the loan had been made for the purpose of earning dividends.
[11]
Writing
for the Court, McDonald J.A. stated (at para. 16) that it was not necessary
“for the income to flow directly to the taxpayer from the loan” before the
taxpayer could deduct a capital loss on the loan. He continued (at para. 17):
Such an approach is consistent
with commercial reality. Frequently, shareholders make such loans on an
interest-free basis anticipating dividends to flow from the activities financed
by the loan.
[12]
However,
McDonald J.A. also said (at para. 21):
It is equally clear that the
anticipation of dividend cannot be too remote. …. A deduction cannot be so far
removed from its corresponding income stream as to render its connection to the
anticipated income tenuous at best.
[13]
He found
that a loan by a shareholder was not too remote because shareholders are
directly linked to the corporation’s future earnings and its payment of
dividends. It should be noted that in Byram, the taxpayer and members of
his immediate family were the only shareholders in the company at all material
times.
[14]
While
legal and factual distinctions between Byram and the present case can
readily be drawn, Byram is relevant in that it recognizes that the
connection between an expense incurred by a taxpayer and anticipated dividend
income cannot be tenuous or remote. In Stewart v. Canada, 2002 SCC 46,
[2002] 2 S.C.R. 645, the Court said (at para. 57):
If the deductibility of a
particular expense is in question, then it is not the existence of a source of
income which ought to be questioned, but the relationship between that
expense and the source to which it is purported to relate. (emphasis added)
[15]
It may be
relatively easy to establish a sufficiently close connection between an
interest-free loan by a shareholder and an anticipated dividend. However, the
same is not necessarily true of services provided gratuitously to a corporation
by a shareholder. Much will depend on the particular facts.
[16]
In the
present case, the evidence of the precise nature of the services rendered by Mr
Mullen was sketchy. At one point, the Judge remarked (at para. 33) that Mr
Mullen’s response “did not elaborate in any great detail on his personal
involvement.” Further, following an explanation by Mr Mullen of what he did,
the Judge said: “I was not clear exactly what this all meant.” There were no
agreements between the Appellant or Mr Mullen and the four corporations
respecting the services, and some of the timesheets produced by Mr Mullen seem
not to have been accurate, in that they showed he was working on his “day job”
for the Mullen Group, a large and successful business, when he said that he was
providing services to the other corporations (para. 39). His work for Lyncorp
did not start until late on Friday afternoon (para. 10).
[17]
Finally,
unlike the situation in Byram, to permit the Appellant to deduct the
expenses incurred in its provision of gratuitous services to the four
corporations on the basis of anticipated dividends is not “consistent with
commercial reality”.
[18]
In these
circumstances, we are not persuaded that the Judge committed any error
warranting our intervention when he concluded that the connection between the
Appellant’s claimed expenses and the shares in the corporations as a source of
income was not sufficiently direct to fall within paragraph 18(1)(a). As
the Judge pointed out, the direct connection was between the expenses and the
business of the corporations.
ETA Appeal
[19]
The
question here is whether the Appellant is entitled to recover as an ITC the
amount of GST collected from it by the supplier of the flight services that
were used for Mr Mullen to visit the four corporations when providing business
consulting services.
[20]
A taxpayer
is generally entitled to an ITC when it paid GST “for consumption, use or
supply in the course of commercial activity”: ETA, paragraph 169(1)(c).
The phrase “commercial activity” is defined in subsection 123(1)of the ETA as
“a business carried on by the person … except to the extent to which the
business involves the making of exempt supplies by the person.”
[21]
The Judge
rejected the Appellant’s claim (at para. 77), on the ground that the purpose of
the supply of services was related to the businesses of the four corporations,
not the business of the Appellant. He determined (at para. 78) that the
services were not supplied to the Appellant in the course of its commercial
activity by reference to four factors: the purpose for the input; the person
for whom the input was incurred; the context in which the input was incurred;
and the case law on commercial activity.
[22]
Whether
the input was incurred in the course of commercial activity of the Appellant or
of the four corporations is a question of mixed law and fact. Absent a readily
extricable question of law, this Court can only interfere with the Judge’s
conclusion if he made a palpable and overriding error. I am not persuaded that
he did.
[23]
The Appellant
argues that “business” is very broadly defined in subsection 123(1) and
includes an “undertaking of any kind whatever”, whether or not it is engaged in
for profit. In my view, this does not meet the relevant objection: the
“business”, however broadly defined, must be that of the taxpayer.
Conclusion
[24]
For these
reasons, I would dismiss the appeal with costs.
"John M. Evans"
“I
agree
Carolyn Layden-Stevenson J.A.”
“I
agree
Robert M.
Mainville J.A.”
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