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Citation: 2004TCC685
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Date: 20041013
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Dockets: 2000-4207(IT)G
2000-4225(IT)G
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BETWEEN:
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ROBERT BILODEAU,
ROND POINT LINCOLN MERCURY (1989) INC.,
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Appellants,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Lamarre Proulx J.
[1] These appeals were heard on common
evidence. For Rond Point Lincoln Mercury (1989) Inc., the
taxation years at issue are 1995 and 1996; for Robert Bilodeau,
1996 and 1997.
[2] The first issue is whether Rond
Point Lincoln Mercury (1989) Inc. was entitled to deduct the
legal fees paid to defend Mr. Bilodeau against charges under the
Criminal Code of unlawful sexual conduct and whether those
payments should be included as part of Mr. Bilodeau's income,
under section 6 of the Income Tax Act (the "Act").
[3] The second issue involves cash
withdrawals credited to petty cash. The issue is whether
kickbacks were paid to a car rental company for the acquisition
of vehicles from Rond Point Lincoln Mercury (1989) Inc. These
payments were allegedly made in cash to one of the shareholders
of the acquiring company.
[4] The third issue is whether the
loss realized on the disposition of property acquired for the
personal use of a shareholder of Rond Point Lincoln Mercury
(1989) Inc. can be considered, following a series of exchanges, a
business loss.
[5] With regard to the first issue,
the charges made against Mr. Bilodeau involved a sexual assault
and an indecent act done in the presence of a person with intent
to insult or offend that person. The sexual assault allegedly
occurred in November 1993 during a trip to bring vehicles to an
auction sale. The indecent act was allegedly done during a road
test in July 1996.
[6] Two rulings dated February 2,
2001, numbers 963 and 960, were filed as Exhibit A-1.
In both cases, Mr. Bilodeau had testified and offered his version
of the events. In the first case, his testimony and the documents
produced clearly showed the judge presiding over the hearing that
the complainant's version was not credible. As for the second
complaint, the judge had to decide between two versions without
any supporting documentary evidence. He ruled that he was not
convinced beyond all doubt as to the commission of the
offence.
[7] Mr. Bilodeau has been in
automobile sales since 1986. In 1996, he was the President and
CEO of Rond Point Lincoln Mercury (1989) Inc., as well as one of
its employees. The evidence showed that he was an excellent
salesman. He was also the sole shareholder of Rond Point Lincoln
Mercury (1989) Inc.
[8] It was in 1996 that Mr. Bilodeau
became subject to the above charges. Mr. Bilodeau stated
that he required the services of a lawyer to defend his
reputation and that of the business for which he was the
president and sole shareholder.
[9] Mr. Bilodeau stated that the
charges stemmed from the malicious intentions of a former
associate within the company. He said that he had to dismiss that
associate in 1994 because of the abusive way in which he applied
the guarantees offered by the manufacturer of the automobiles
sold by Rond Point Lincoln Mercury (1989) Inc. In this regard,
the manufacturer made claims of $50,000 and $20,000 against Rond
Point Lincoln Mercury (1989) Inc.
[10] When the charges were laid in November
1996, Mr. Bilodeau fell into a deep depression and sought refuge
in the Montréal area. He was hospitalized for
approximately six weeks and remained in Montréal for
approximately six months. He returned for the preliminary
investigation held around March 20.
[11] To illustrate the torment Mr. Bilodeau
felt and the connection between him and Rond Point Lincoln
Mercury (1989) Inc., transcripts of radio broadcasts on November
26 and 27 and December 2, 1996, reporting on the charges
against Mr. Bilodeau were filed as Exhibit A-3.
[12] Exhibit A-2 is a graphic
description of the vehicles sold each month from 1993 to 1997.
The purpose of this exhibit is to show that sales dropped
slightly after Mr. Bilodeau left.
[13] No one from the Ford corporation, for
which Rond Point Lincoln Mercury (1989) Inc. was a dealership,
had contacted Mr. Bilodeau following the charges. Nonetheless,
Mr. Bilodeau felt it was worthwhile to offer them an
explanation.
[14] The second issue involves kickbacks
allegedly paid in cash to Nolicam, a car rental company in
Chicoutimi. According to Mr. Bilodeau, one of Nolicam's
shareholders had allegedly asked him to add $1,000 to the invoice
of each vehicle and to pay him $1,000 in cash. The amounts were
allegedly paid by either Mr. Bilodeau or Mr.
Michel Pelletier, the sales director. The controller or his
assistant placed the money into envelopes, using funds allocated
to petty cash.
[15] Mr. Bilodeau was unable to show on
Exhibit A-2-the compilation of monthly vehicle sales from
1993 to 1997-which months contained vehicles for which kickbacks
were allegedly paid. He could not remember.
[16] He did, however, describe the scheme. A
vehicle that was actually sold for $20,000 would have a selling
price of $21,000 indicated on the contract. Nolicam paid the
total amount indicated on the sales contract by cheque. The
$1,000 was then paid in cash to Mr. L. P. at his request.
[17] Mr. L. P., who at the time was
president of Nolicam, testified. He stated that Nolicam was
created in 1990 as a car and truck rental company. He and one
other person were the shareholders, holding 51 and 49 percent of
the shares respectively. He was president until 1998. He
confirmed that Nolicam did indeed purchase vehicles from Rond
Point Lincoln Mercury (1989) Inc.
[18] Counsel for the Appellants asked him
whether it was possible that, at that time, either he or his
associate told Mr. Bilodeau or Mr. Pelletier that he wanted
the invoice to be increased by a certain amount and that that
amount had been placed in an envelope, in cash, and paid to Mr.
L.P. personally. The witness categorically denied this. He said
that his associate only wanted to pay the lowest price and that
he would never have allowed such an underhanded deal.
[19] Moreover, the witness was stunned by
the number of vehicles (35) sold by Rond Point Lincoln Mercury
(1989) Inc. to Nolicam in 1995. He thought that Nolicam had
purchased 20, but 35 seemed astonishing.
[20] The third issue pertains to a boat
acquired by Mr. Bilodeau's associate while on vacation in Florida
in February and March 1994. When he returned in April 1994, he
brought back a boat that he had purchased in Florida on behalf of
Rond Point Lincoln Mercury (1989) Inc. He had transferred funds
to himself from Rond Point Lincoln Mercury (1989) Inc.'s
accounts, according to Mr. Bilodeau, without his knowledge.
The purchase invoice for the boat was filed as Exhibit A-5.
It is dated February 8, 1994. The price is US$29,000.
[21] At that time, the conflict was
escalating between the shareholders. Mr. Bilodeau informed
his associate that he would sell the boat.
[22] The sale did not occur. At one point,
he heard that someone might be interested in buying a boat.
According to Mr. Bilodeau, that person told him that he was
prepared to accept the boat in exchange for a camper. The camper
was not selling either. It was exchanged for a larger camper.
That camper was registered. It was used to attend truck shows in
June 1996. In July came the flooding. Mr. Bilodeau allowed
one of his employees who had lost his house to use the camper
temporarily. The camper was sold in the fall of 1996.
[23] Mr. Bilodeau confirmed that Rond Point
Lincoln Mercury (1989) Inc. did not make any claim against the
associate for purchasing the boat for his personal use without
the knowledge of the other shareholder.
[24] Mr. Michel Pelletier began working
for Rond Point Lincoln Mercury (1989) Inc. in 1978. In 1986, he
became the sales director. In 1992, when Mr. Bilodeau
acquired the shares of Rond Point Lincoln Mercury (1989) Inc.,
the witness was no longer working for Rond Point Lincoln Mercury
(1989) Inc. He then returned to work for the company in the same
position. He confirmed Mr. Bilodeau's testimony regarding the
dispute between the two associates, the attempts to sell the
boat, and the cash payments made to Mr. L.P.
[25] Mr. Bilodeau's criminal attorney, Rond
Point Lincoln Mercury (1989) Inc.'s controller, and the office
clerk also testified. In general, they corroborated
Mr. Bilodeau's testimony: the lawyer testified about the
first issue, and the other two witnesses testified about the
other two issues. Furthermore, the lawyer stated that civil
proceedings had been launched against the Crown prosecutors and
other persons involved in the criminal suit but that, ultimately,
they had been dropped.
[26] Mr. Danny Drolet, a Canada Customs
and Revenue Agency auditor, had begun his audit in April 1998. He
also testified at the request of counsel for the Appellants.
[27] He stated that although the boat had
been acquired for personal use, it had been added to the
inventory upon return from Florida, which is contrary to the Act.
With regard to the kickbacks paid to Nolicam, he saw the stock
cards, where $1,000 was indicated with an internal receipt in
petty cash. There was no document indicating that it had been
paid to Nolicam. In such cases, the amounts should be added to
the principal shareholder's income. That is what he would have
liked. But in view of Mr. Bilodeau's explanations, he gave him
the benefit of the doubt. To allow Rond Point Lincoln Mercury
(1989) Inc. to deduct those amounts, he told either the
accountant or Mr. Bilodeau to ask Nolicam or Mr. L.P. to
sign a statement indicating that those amounts had been received.
This was not done. It could have been deducted, but he needed to
have documentary evidence. In this case, the documentary evidence
would have consisted of a receipt from someone acknowledging
receipt of the amounts.
[28] With regard to the first issue, i.e.,
the legal fees, the auditor admitted that the events at issue are
events that took place within the framework of
Mr. Bilodeau's work. However, he added that his alleged
actions were not part of his job description.
[29] Counsel for the Appellants referred to
the following rulings, interpretation bulletin, and technical
interpretation: 166 v. M.N.R., [1954] 10 Tax A.B.C.
285; Transocean Shipping & Coal Co. Inc. v. M.N.R.,
24 Tax A.B.C. 262; Car Strip Ltd. v. M.N.R., [1967]
Tax A.B.C. 361; St-Germain v. M.N.R., 83 DTC 36 (Tax
Review Board); and Border Fertilizer (1972) Ltd. v.
M.N.R., [1987] 2 C.T.C. 183,
IT-99R5 (Consolidated) - Legal and Accounting
Fees, and 2003-0035475 - Technical Interpretation
(External).
[30] From the interpretation bulletin, he
cited paragraph 30 entitled "Legal Expenses of Employees Paid by
Employers":
30. An employer may deduct the legal expenses incurred in
defending an employee, officer or director against charges of
having committed an illegal or wrongful act in the ordinary
course of carrying on the employer's business. This could
include expenses incurred in relation to allegations of offences
under business practices or competition law. See for example, the
criteria set out in The Car Strip Ltd. v. MNR, [1967]
Tax A.B.C. 361, 67 DTC 259 and the decision of the
Federal Court, Trial Division, in Border Chemical Company
Ltd. v. The Queen, [1987] 2 CTC 183, 87
DTC 5391.
[31] Counsel for the Respondent referred to
the following rulings: Car Strip Ltd. v. M.N.R., [1967]
Tax A.B.C. 361; Border Fertilizer (1972) Ltd. v. M.N.R.,
[1987] 2 C.T.C. 183; Clemiss (A.) v. M.N.R., [1992]
2 C.T.C. 232; 412237 OntarioLtd. v. R.,
[1994] 1 C.T.C. 2177; and Strachan v. R., [2000]
3 C.T.C. 2863.
[32] Counsel for the Respondent pointed out
that the charges were against Mr. Robert Bilodeau
personally, that they had nothing to do with the normal carrying
on of Rond Point Lincoln Mercury (1989) Inc.'s business, that
they did not pose an inherent risk to the operation of the
business, and that they did not stem from the normal exercise of
Mr. Robert Bilodeau's duties. Rond Point Lincoln Mercury (1989)
Inc. did not spend $47,955 in 1996 and $40,768 in 1997 for the
purpose of earning income. Moreover, those amounts paid by Rond
Point Lincoln Mercury (1989) Inc. on behalf of Mr.
Robert Bilodeau constitute a taxable benefit for him.
[33] With regard to the benefit taxed under
section 6 of the Act, counsel for Mr. Bilodeau referred to
the following rulings: Huffman v. The Queen, [1990]
2 C.T.C. 132 (F.C.A.); Clemiss (A.) v. M.N.R., [1992]
2 C.T.C. 232; and Strachan v. The Queen, [2000]
3 C.T.C. 2863.
[34] Specifically, he referred to
paragraph 10 in Huffman:
Based on this passage, the learned Trial Judge set out the
test which he applied to the facts at bar (A.B. p. 99):
It is therefore necessary to consider whether the facts here
show that there was a material acquisition conferring an economic
benefit on the taxpayer.
He then proceeded to review the evidence and to make the
findings of fact referred to supra. In applying the Savage test
as enunciated supra to the factual situation at bar, he stated
(A.B. p. 102):
Based on the jurisprudence defining benefit in s. 6(1)(a) of
the Income Tax Act, I am unable to conclude in these
circumstances that the plaintiff received a benefit. The
plaintiff was required, in order to carry out his duties as a
plainclothes officer and receive a salary as such, to incur
certain expenses regarding his clothing, and reimbursement of
these expenses should not be considered as conferring a benefit
under s. 6(1)(a) of the Act. ... The taxpayer was simply
being restored to the economic situation he was in before his
employer ordered him to incur the expenses.
[35] With regard to the cash kickbacks,
counsel for the Respondent pointed out that Rond Point Lincoln
Mercury (1989) Inc. did not submit any documentary evidence. As
for the third issue, the Respondent's position is that the
property is personal-use property and never really was inventory
property. Counsel for the Respondent relied on the ruling in
Installations GMR Inc. v. Q., 2003 DTC 387.
Analysis and conclusion
[36] I will begin with the second and third
points at issue.
[37] With regard to the kickbacks allegedly
paid in cash to Nolicam in 1995, the evidence has shown that they
were not paid to Nolicam. According to the scheme described, they
were allegedly paid to one of Nolicam's associates without the
knowledge of the other associate. When the auditor arrived at
Rond Point Lincoln Mercury (1989) Inc. in April 1998, that would
have been the time to present convincing evidence, if any. That
did not happen. The cars had been sold in 1995. Even the number
of vehicles sold to Nolicam is uncertain. There was no reason why
definitive evidence as to that number could not be produced.
[38] There was nothing more than testimonial
evidence regarding the kickbacks, both in terms of the payment
and the number of vehicles involved. This is not sufficient to
convince me that payments in the amount of $35,000 were made in
1995, in cash, to Mr. L.P. to promote the sale of the
vehicles.
[39] With regard to the loss incurred on the
sale of the boat, I believe that the Respondent's position should
be accepted. There was no evidence of change in use of the
personal property acquired by Rond Point Lincoln Mercury (1989)
Inc. in 1994 in accordance with the Act. There is no entry, in
Rond Point Lincoln Mercury (1989) Inc.'s books, showing the
deemed disposition of the personal property and its subsequent
acquisition for the purposes of inclusion in the inventory. The
only entry made was that in the inventory when the boat arrived,
a boat acquired for personal use by one of Rond Point Lincoln
Mercury (1989) Inc.'s managers.
[40] Let us now consider the issue of the
legal fees. The evidence has shown that the sexual assault and
indecent act with which Mr. Bilodeau was charged, if they
occurred, allegedly took place while carrying out his work
activities and that Mr. Bilodeau was acquitted of both
charges.
[41] As I began deliberating, I was of the
opinion that in circumstances involving acts of a sexual nature,
acquittal was a major factor in whether an employer deducts the
legal fees incurred to defend an employee.
[42] Existing jurisprudence allows for the
deduction of legal fees incurred to defend an employee who has or
has allegedly committed unlawful acts while performing his
duties. Until now, the unlawful acts considered were those that
went against any regulation whatsoever related to the work
activity. The alleged act remained linked to the employee's
sphere of activity.
[43] Tax jurisprudence does not appear to
have yet dealt with the deductibility of legal fees incurred to
defend an employee accused of unlawful sexual acts committed in
the course of his work activities.
[44] In the case of an alleged act that is
not inherently linked to work activities, if the person is found
guilty, the person has committed an act that is outside the
sphere of work. A sexual act is necessarily outside an employee's
sphere of activity.
[45] At the time the decision was made to
incur legal fees to defend its president and employee, Rond Point
Lincoln Mercury (1989) Inc. knew that the alleged acts were acts
committed in the course of work activities. The company believed
him to be innocent and falsely accused. Furthermore, our legal
system upholds the principle of the presumption of innocence of
any accused.
[46] It is true that if these acts were
committed, they are not inherently linked to work activities.
Moreover, if an employee or president is falsely accused of
sexual misconduct in the exercise of his duties, the only issue
at stake is the performance of the individual's work
activities.
[47] It therefore seems to me that the
employer is entitled to defend an employee or a president with
respect to the performance of work activities. Such an expense
must be part of the costs of work.
[48] The fact that the employee is later
found guilty does not prevent the deduction of legal fees
incurred to defend the employee against the charges.
Deductibility is determined at the time the expense is incurred.
It is deductible if it is related to work activities.
[49] Is Mr. Bilodeau required to include
these amounts as a benefit within the meaning of section 6 of the
Act?
[50] A salary is deducted by the employer as
an expense, but the salary must be included in the calculation of
the employee's income. It is therefore not surprising that the
expense for legal fees is included in the calculation of the
employer's income but must be included in the calculation of the
employee's income as a benefit.
[51] There was a trial. The witnesses were
heard and the judge ruled that the charges were unfounded. The
charges arose from a trip to sell automobiles at auction and a
road test. In both cases, the context was specific to the work
activities. These were not acts allegedly committed while
carrying on a work activity, such as a truck driver who drives
while intoxicated, but rather acts that were allegedly committed
while carrying on a normal work activity.
[52] With regard to the inclusion of the
legal fees, it is my opinion that the acquittal or culpability of
the employee is a determining factor. If the employee is found
guilty of the alleged acts, these are acts not part of the
employee's job description, hence the legal fees are fees that
should have been incurred by the employee personally. Because
they were paid by the employer, they must be included in the
calculation of the employee's income as a benefit under section 6
of the Act.
[53] If the person is found innocent, the
principles of Huffman apply. There is no economic benefit
conferred on an employee unfairly accused of sexual misconduct
while carrying on his duties. In the case at hand, the charges
were brought against Mr. Bilodeau personally but were dismissed.
These were therefore not personal legal fees and do not need to
be included in the calculation of Mr. Bilodeau's income.
[54] Mr. Bilodeau's appeal is allowed. With
regard to Rond Point Lincoln Mercury (1989) Inc., the company is
entitled to deduct the legal fees. For the other two issues, the
assessments are upheld.
Signed at Ottawa, Canada, this 13th day of October
2004.
Lamarre Proulx J.
Translation certified true
on this 31st day of January 2005.
Colette Dupuis-Beaulne, Translator
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