Docket: 2002-2821(IT)G
BETWEEN:
QUALI-T-TUBE ULC INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
____________________________________________________________________
Appeal
heard on October 14, 2004, at Montréal, Quebec.
Before: The Honourable
Justice B. Paris
Appearances:
|
Counsel for the Appellant:
|
Louis Tassé
|
|
Counsel for the Respondent:
|
Marie Bélanger
|
____________________________________________________________________
JUDGMENT
The appeal from the assessment made
under the Income Tax Act for the 1999 taxation year is allowed on the
basis that the Appellant's cost of labour should be reduced by an amount equal
to its pro rata share of $191,081 (that is, one-half of the salary paid
to Ms. Bazelais in 1999) and on the basis of the Respondent's concessions,
which are set out in the appendix to these Reasons for Judgment.
Signed at Ottawa, Canada, this 4th day of August 2005.
"B. Paris"
Translation certified true
on this 27nd day of February, 2006.
Garth McLeod, Translator
Docket: 2002-2824(IT)G
BETWEEN:
QUALI-T-TUBE INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
____________________________________________________________________
Appeal heard on October 14, 2004, at
Montréal, Quebec.
Before: The Honourable Justice B. Paris
Appearances:
|
Counsel for the Appellant:
|
Louis Tassé
|
|
Counsel for the Respondent:
|
Marie Bélanger
|
____________________________________________________________________
JUDGMENT
The appeal from the assessment
made under the Income Tax Act for the 1999 taxation year is allowed on
the basis that the Appellant's cost of labour should be reduced by an amount
equal to its pro rata share of $191,081 (that is, one-half of the salary
paid to Ms. Bazelais in 1999) and on the basis of the Respondent's concessions,
which are set out in the appendix to these Reasons for Judgment.
Signed at
Ottawa, Canada, this 4th day of August 2005.
"B. Paris"
Translation certified true
on this 27nd day of February, 2006.
Garth McLeod, Translator
Docket: 2002-2826(IT)G
BETWEEN:
QUALI-T-FAB ULC INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
____________________________________________________________________
Appeal heard on October 14, 2004, at
Montréal, Quebec.
Before: The Honourable Justice B. Paris
Appearances:
|
Counsel for the Appellant:
|
Louis Tassé
|
|
Counsel for the Respondent:
|
Marie Bélanger
|
____________________________________________________________________
JUDGMENT
The appeal from the assessment
made under the Income Tax Act for the 1999 taxation year is allowed on
the basis that the Appellant's cost of labour should be reduced by an amount
equal to its pro rata share of $191,081 (that is, one-half of the salary
paid to Ms. Bazelais in 1999) and on the basis of the Respondent's concessions,
which are set out in the appendix to these Reasons for Judgment.
Signed at
Ottawa, Canada, this 4th day of August 2005.
"B. Paris"
Translation certified true
on this 27nd day of February, 2006.
Garth McLeod, Translator
Docket: 2002-2827(IT)G
BETWEEN:
QUALI-T-FAB INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
____________________________________________________________________
Appeal heard on October 14, 2004, at
Montréal, Quebec.
Before: The Honourable Justice B. Paris
Appearances:
|
Counsel for the Appellant:
|
Louis Tassé
|
|
Counsel for the Respondent:
|
Marie Bélanger
|
____________________________________________________________________
JUDGMENT
The appeal from the assessment
made under the Income Tax Act for the 1999 taxation year is allowed on
the basis that the Appellant's cost of labour should be reduced by an amount
equal to its pro rata share of $191,081 (that is, one-half of the salary
paid to Ms. Bazelais in 1999) and on the basis of the Respondent's concessions,
which are set out in the appendix to these Reasons for Judgment.
Signed at
Ottawa, Canada, this 4th day of August 2005.
"B. Paris"
Translation certified true
on this 27nd day of February, 2006.
Garth McLeod, Translator
Citation: 2005TCC373
Date: 20050804
Docket: 2002-2821(IT)G
BETWEEN:
QUALI-T-TUBE ULC INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
2002-2824(IT)G
QUALI-T-TUBE INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
2002-2826(IT)G
QUALI-T-FAB ULC INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
2002-2827(IT)G
QUALI-T-FAB INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Paris J.
[1] Subsection 125.1(2) of the Income Tax Act,
R.S.C., c. 1, 5th Suppl. ("the Act") provides that a
taxpayer may deduct from its tax payable an amount equal to 7 percent of
its manufacturing and processing profits. A taxpayer's manufacturing and
processing profits are computed using the formula set out in the Income Tax
Regulations, C.R.C. 1978, c. 945 ("the Regulations").
[2] The Minister of
National Revenue made adjustments involving various amounts used in computing
the four appellants' manufacturing and processing profits for the years to
which these appeals pertain, and reassessed them to reduce their
manufacturing and processing deductions. The appellants have appealed from
those reassessments.
[3] At the hearing, the
parties' counsel noted that certain issues had already been the subject of an
agreement (as stated in the Appendix to these reasons) and that the only
adjustments still in issue pertained to the computation of the appellants'
labour costs, which represent one of the variables in the formula used to
calculate manufacturing and processing profits.
[4] The only issue in
this case is whether the management fees that the four Appellant corporations
paid to a related corporation should be considered part of the four
corporations' cost of labour when calculating that cost for the purpose of
determining their manufacturing and processing profits.
[5] The appeals were
heard on common evidence.
Background
[6] The appellants were
part of a group of companies that were all directly or indirectly held by Frank Talarico.
[7] Mr. Talarico owned all the shares of
Quali-T-Groupe Inc. ("Groupe") and Talfrank Inc.
[8] Groupe, in turn, owned all the shares of
two of the appellants, Quali‑T‑Tube Inc. ("Tube
Inc.") and Quali-T-Fab Inc. ("Fab Inc."). It also owned all
the shares of Quali‑T‑Galv Inc. ("Galv Inc.") and Quali‑T‑Groupe
International USA Inc. ("Groupe USA").
[9] Talfrank Inc. owned all the shares of the
other two appellants, namely Quali‑T‑Tube ULC ("Tube
ULC") and Quali-T-Fab ULC ("Fab ULC").
[10] Fab Inc., a subsidiary of Groupe, owned all
the shares of Quali‑T‑Fab U.S.A. Inc. ("Fab USA").
[11] The corporations
were primarily engaged in the production and sale of metal products. In particular,
until the middle of 1999, Tube
Inc. and Fab Inc., both of which are appellants, operated a business that
produced steel tubes. In the middle of 1999, their commercial activities were
transferred to the other two appellants, namely Tube ULC and Fab ULC,
respectively, as part of a corporate restructuring.
[12] Groupe provided management services to most
of the corporations in question, including the appellants. Talfrank Inc. also
provided management and consulting services to several Talarico corporations.
In 1997, 1998 and 1999, Groupe's entire income was derived from the management
fees that the appellants and Galv Inc. paid it.
[13] The management fees
that each of the appellants and Galv Inc. paid during the years under appeal
are specified below:
|
|
1997
|
1998
|
1999
|
|
Tube Inc.
|
$962,500
|
$897,250
|
$388,050
|
|
Fab Inc.
|
0
|
$269,000
|
$219,420
|
|
Tube ULC
|
0
|
0
|
$174,810
|
|
Fab ULC
|
0
|
0
|
$64,060
|
|
Galv Inc.
|
0
|
$23,948
|
$80,240
|
|
Total
|
$962,500
|
$1,190,198
|
$926,580
|
Reassessments
[14] The Respondent
called Claude Charpentier, the
Canada Revenue Agency auditor who prepared the reassessments in issue, to
testify.
[15] In reassessing the
appellants, he assumed that all the expenses that Groupe had incurred during
the years in issue were incurred as an intermediary for the benefit of the
appellants and Galv Inc.,
and that each Appellant was required to pay management fees to Groupe in order
to bear its share of these expenses.
[16] The following is his
calculation of each Appellant's annual share of Groupe's expenses based on the
percentage of the total management fees that each appellant paid to Groupe:
|
|
1997
|
1998
|
1999
|
|
Tube Inc.
|
100.00%
|
75.38%
|
41.88%
|
|
Fab Inc.
|
0
|
22.60%
|
23.68%
|
|
Tube ULC
|
0
|
0
|
18.87%
|
|
Fab ULC
|
0
|
0
|
6.91%
|
|
Galv Inc.
|
0
|
2.02%
|
8.66%
|
|
Total
|
100.00%
|
100.00%
|
100.00%
|
The auditor then calculated the total
expenses which Groupe incurred on behalf of the appellants and Galv Inc. and
which qualified as costs of labour under section 5202 of the Regulations.
This amount includes wages, fringe benefits and management fees paid each year
by Groupe, as shown in the following table:
|
|
1997
|
1998
|
1999
|
|
Wages
|
$122,777
|
$444,888
|
$493,770
|
|
Fringe benefits
|
$53,089
|
$23,239
|
$35,014
|
|
Management fees
|
$464,007
|
$547,720
|
$333,909
|
|
Total
|
$785,114
|
$1,015,847
|
$862,693
|
The management fees were paid to Talfrank Inc. on account of management
services rendered to the appellants and to Galv Inc.
[17] The auditor
allocated the costs of labour between the appellants and Galv Inc. using the same percentage
that each corporation's payment of management fees is of the total management
fees paid to Groupe each year.
[18] For example, in 1997, 100% of the management fees paid
to Groupe were paid by Tube Inc. The auditor therefore allocated the entirety
of Groupe's labour costs to Tube Inc. for 1997. Likewise, in 1998, 75.38%
of the total management fees paid to Groupe were paid by Tube Inc., so the
auditor allocated 75.38% of Groupe’s cost of labour to Tube Inc. for that year.
[19] Lastly, the auditor
added each Appellant's share of Groupe's cost of labour to each Appellant's respective cost of labour.
[20] When the auditor
allocated Groupe's cost of labour among the appellants, he assumed that
Groupe's total cost of labour had been incurred in the same proportions as
those stated with regard to the management services rendered to the appellants
and to Galv Inc.
[21] Consequently, he included, in
each Appellant's cost of labour, their share of management fees paid on account of Groupe's cost of labour.
The amounts were included as money paid for their management and
administration.
The appellants' evidence
[22] Elaine Bazelais, the president of
Groupe, testified for the appellants. During the years under appeal, she
was also the president of Tube Inc., Fab Inc. and Galv Inc., and a
vice-president of Fab USA Inc. and of Groupe USA.
[23] Ms. Bazelais also managed the Appellant
corporations, Galv Inc. and even Groupe, and she had certain management duties
with Fab USA and Groupe USA. Her entire salary was paid by Groupe. She
received $164,150 in 1997, $185,418 in 1998 and $382,161 in 1999.
[24] Ms. Bazelais stated that her duties with
regard to Groupe USA were minimal, but that she had devoted some of her time to
Fab USA's affairs during the years under appeal.
[25] In 1999, Groupe sold the shares of Galv Inc.
to an unrelated third party. Ms. Bazelais said that she participated very
actively in the sale of Galv Inc. and that her work in this regard pertained to
due diligence, environmental studies, human- resource issues and the production
of all necessary documents. She was also involved in the corporate
restructuring of 1999. She said that she devoted one-half of her overall time
to issues unrelated to the management of the Appellant corporations.
She also estimated that she devoted 15% of her time to issues not
involving the appellants’ activities in 1997, and 25% of her time to such
issues in 1998.
Applicable statutory provisions
[26] The manufacturing
and processing profit tax credit is set out in subsection 125.1(1) of the Act, which provides:
125.1. (1) There may be deducted from the tax otherwise payable
under this Part by a corporation for a taxation year an amount equal to 7% of
the lesser of
(a) the amount, if any, by which the corporation's Canadian
manufacturing and processing profits for the year exceed, where the corporation
was a Canadian-controlled private corporation throughout the year, the least of
the amounts determined under paragraphs 125(1)(a) to 125(1)(c) in respect of
the corporation for the year, and
(b) the amount, if any, by which the corporation's taxable
income for the year exceeds the total of
(i) where the corporation was a Canadian-controlled private
corporation throughout the year, the least of the amounts determined under
paragraphs 125(1)(a) to 125(1)(c) in respect of the corporation for the year,
(ii) 10/4 of the total of the amounts that would be deductible under
subsection 126(2) from the tax for the year otherwise payable under this Part
by the corporation if those amounts were determined without reference to
section 123.4, and
(iii) where the corporation was a Canadian-controlled private
corporation throughout the year, its aggregate investment income for the year
(within the meaning assigned by subsection 129(4)).
[27] The formula for
computing the "Canadian
manufacturing and processing profits" of a taxpayer is found at section
5200 of the Regulations:
5200. Subject to section 5201, for the
purposes of paragraph 125.1(3)(a) of the Act, "Canadian
manufacturing and processing profits" of a corporation for a taxation year
are hereby prescribed to be that proportion of the corporation's adjusted
business income for the year that
(a) the aggregate of its cost of
manufacturing and processing capital for the year and its cost of manufacturing
and processing labour for the year,
is of
(b) the aggregate of its cost of
capital for the year and its cost of labour for the year.
[28] This formula can be
expressed more simply as
CMMP
= ABI × (MPC + MPL)/(C + L)
where
CMMP = Canadian
manufacturing and processing profits
ABI =
Adjusted business income
MPC = Cost of
manufacturing and processing capital
C =
Capital cost
MPL = Cost of
manufacturing and processing labour for the year
L =
Cost of labour
Thus, since the "cost of labour" variable is
part of the denominator in this formula, an increase in the taxpayer's cost of
labour will result in a decrease in its manufacturing and processing profits,
which, in turn, will result in a decrease in its manufacturing and processing
profit tax credit.
[29] The phrase
"cost of labour" is defined in section 5202 of the Regulations.
The relevant part of this definition is drafted as follows:
"cost of labour" of a corporation for a taxation year
means an amount equal to the aggregate of
(a) the salaries and wages paid or
payable during the year to all employees of the corporation for services
performed during the year, and
(b) all other amounts each of which is
an amount paid or payable during the year for the performance during the year,
by any person other than an employee of the corporation, of functions relating
to
(i) the management or
administration of the corporation
. . .
The appellants' argument
[30] The appellants
object to the inclusion, in their cost of labour under section 5202 of the Regulations,
of any amount that they paid Groupe as management fees for services provided to
them by Groupe and Talfrank
Inc.
[31] The appellants argue
that the scope of paragraph (b) of the definition of the term "cost
of labour" is not broad enough to encompass payments made to a corporation
because the amounts must be paid for
the performance
. . . by any person . . . of functions relating to
(i)
the management or administration of the
corporation
. . .
[Emphasis
added.]
[32] Thus, this is a
question of statutory interpretation that involves the meaning to be given to
the term "person" in the applicable provision.
[33] According to counsel
for the appellants, the word "person" in this context cannot be
interpreted so as to include a corporation because a corporation cannot perform
management or administrative functions. Only individuals can do so.
If Parliament had wanted to include amounts paid to a corporation for services
rendered by its employees, it would have specified this, as it did in
subsection 402(7) of the Regulations, which reads as follows:
(7) Where a corporation pays a fee to another person under an
agreement pursuant to which that other person or employees of that other
person perform services for the corporation that would normally be
performed by employees of the corporation, the fee so paid shall be deemed to
be salary paid in the year by the corporation and that part of the fee that may
reasonably be regarded as payment in respect of services rendered at a
particular permanent establishment of the corporation shall be deemed to be
salary paid to an employee of that permanent establishment. (Emphasis added.)
[34] Counsel also
referred to the definitions of "labour expenditure" and
"Canadian labour expenditure" in subsections 125.4(1) and 125.5(1) of the Act, which read,
in part:
"labour expenditure" of a
corporation for a taxation year in respect of a property of the corporation
that is a Canadian film or video production . . .
. . .
(b) that portion of the remuneration
(other than salary or wages and other than remuneration that relates to
services rendered in the preceding taxation year and that was paid within 60
days after the end of that preceding year) that is directly attributable to
the production of property, that relates to services rendered after 1994
and in the year, or that preceding year, to the corporation for the stages of
production, from the final script stage to the end of the post-production
stage, and that is paid by it in the year or within 60 days after the end of
the year to
(i) an individual who . . .
(ii) another taxable Canadian corporation, to
the extent that the amount paid is attributable to and does not exceed the salary
or wages of the other corporation's employees for personally rendering services
for the production of the property, ,
"Canadian
labour expenditure" of a corporation for a taxation year in respect of an
accredited production means . . .
. . .
(b) that
portion of the remuneration (other than salary or wages and other than
remuneration that relates to services rendered in the preceding taxation year
and that was paid within 60 days after the end of that preceding year) that is
directly attributable to the production, that relates to services rendered in
Canada after October 1997 and in the year, or that preceding year, to the
corporation for the stages of production of the production, from the final
script stage to the end of the post-production stage, and that is paid by it in
the year or within 60 days after the end of the year to a person or a
partnership, that carries on a business in Canada through a permanent
establishment (as defined by regulation), and that is
(i) an individual . . .
(ii) another corporation that is a taxable
Canadian corporation, to the extent that the amount paid is attributable to
and does not exceed the salary or wages paid to the other corporation's
employees at a time when they were resident in Canada for personally rendering
services in Canada in respect of the accredited production,
. . .
[Emphasis added.]
[35] Counsel for the
appellants submits that these are two examples of situations in which
Parliament chose to refer expressly to amounts paid to a corporation for
services rendered by its employees. In his view, if Parliament had intended for
section 5202 to include, in the payor's cost of labour, payments made to a
corporation for services rendered by its employees, it would have used terms
analogous to those used in these provisions.
[36] In addition, he says
that the scope of the word "person" in the definition of "cost
of manufacturing and processing labour" (another variable in the formula
that is used to determine manufacturing and processing profits) in section 5202
of the Regulations has previously been restricted to designating an
"individual" in Louben
Sportswear Inc. v. The Minister of National Revenue, 79 DTC 531. The
definition reads as follows:
"cost of manufacturing and
processing labour" of a corporation for a taxation year means 100/75 of
that portion of the cost of labour of the corporation for that year that
reflects the extent to which
(a) the
salaries and wages included in the calculation thereof were paid or payable to
persons for the portion of their time that they were directly engaged in
qualified activities of the corporation during the year, and
(b) the
other amounts included in the calculation thereof were paid or payable to
persons for the performance of functions that would be directly related to
qualified activities of the corporation during the year if those persons were
employees of the corporation,
but the amount so calculated shall not
exceed the cost of labour of the corporation for the year;
[37] In Louben, D.E. Taylor of the Tax
Review Board, while acknowledging the broad scope of the definition of
"person" in subsection 248(1) of the Act, had no choice but to
find that this word, as used in the definition of "cost of manufacturing
and processing labour", could not include corporations because
"employment" can only be held by an "individual" (a term
defined in subsection 248(1) as a person other than a corporation). Although
the case at bar does not involve the same variable in the above-mentioned
formula, counsel for the Appellant submits that this Court should not draw a
distinction between these two variables in the same formula. In his view,
an imbalance would be created if one did otherwise.
[38] The appellants also
raise the fact that a double counting problem may arise in computing the
"cost of labour" of each member of a group of related corporations
where each member is seeking a manufacturing and processing profit tax credit. Paragraph 18 of Interpretation
Bulletin IT-145R discusses this problem and the administrative mitigation
that the Canada Revenue Agency will grant in such situations:
18. A problem will occur in a group of associated corporations where
one corporation acts as a "paymaster" for the others. To mitigate the
double counting effect that will occur when two associated corporations include
the same wages in their cost of labour, the CCRA will allow the company paying
the salaries and wages to treat these amounts as net of amounts received or
receivable from associated corporations in respect of these expenses, provided
that this is done for both qualified and non-qualified activities carried on by
the employees.
[39] The double counting
problem referred to in Interpretation Bulletin IT‑145R would arise where an employee of one of
the related corporations renders services to another related corporation. The
salary paid by the first corporation to that employee would be added to its
cost of labour in accordance with paragraph (a) of the definition of the
phrase "cost of labour" in section 5202 of the Regulations.
The payments or reimbursements that the second corporation makes to the
first corporation for these services would also be added to the second
corporation's cost of labour under paragraph (b) of this definition.
[40] While Groupe cannot claim
a manufacturing and processing profit tax credit in the case at bar — it
does not engage in activities in those fields — counsel for the
Appellant submits that if Groupe were an operating company entitled to the
credit, both Groupe and its
subsidiaries would be required to include, in their cost of labour, the wage
and labour costs related to the management services rendered to the appellants.
He submits that Parliament could not have intended this, and that if the word
"person" were interpreted so as to apply only to individuals, this
double counting problem would be eliminated.
[41] In sum, counsel for
the appellants submits that by accepting his interpretation, this Court would
enable the appellants to claim a larger credit, and that this is in keeping
with the underlying intent of section 125.1 of the Act, which is to give
Canadian manufacturers and processors an advantage over foreign competitors (Canada v. Hawboldt Hydraulics (Canada) Inc. (Trustee of),
[1995] 1 F.C. 830, at pages 846-47; 94 DTC 6541, at page 6548
(C.A.)).
[42] In the alternative,
the appellants submit that if management fees paid to a corporation are
included in the definition of the phrase "cost of labour", the
portion of the management fees paid to Groupe which should be added to their cost of labour is smaller than what the
Minister assumes. According to the appellants, the Minister erred in assuming
that all of Groupe's wage and fringe benefit costs were attributable to the
management and administration of the appellants and Galv Inc. The evidence
adduced discloses that Elaine Bazelais spent 15% of her time in 1997, 25%
of her time in 1998 and 50% of her time in 1999 performing duties unrelated to
the management of the appellants. Consequently, counsel submits that Groupe bore
only a part of her salary for the benefit of the appellants, and that this is
the only part that can be attributed to the appellants' cost of labour.
Analysis
[43] The first question
is whether there is, as the appellants claim, any ambiguity in the wording of
the definition of the term "cost of labour". If so, in interpreting
the term, I will have to attempt to ascertain what Parliament intended when it
enacted the definition. However, if the wording is clear and unambiguous, I
will have to give effect to it as drafted, and it will be unnecessary for me to
inquire into Parliament's intent.
[44] In the case at bar,
counsel for the appellants submits that it cannot be determined, from the
wording of the definition of "cost of labour", whether the term
"person" includes corporations.
[45] I do not agree. The
term "person" is defined in section 248 of the Act and that
definition includes corporations. That definition applies to the Regulations, and applies to
the case at bar, except if it leads to an absurd result. I am not convinced
that any absurdity whatsoever would result from interpreting the word
"person" in such a way that it encompasses corporations.
[46] As for the wording
of the definitions "labour expenditure" and "Canadian labour
expenditure" in subsections 125.4(1)
and 125.5(1), and the wording of subsection 402(7) of the Regulations,
I do not see anything that could assist the appellants. The two definitions are
in no way analogous to section 5202 of the Regulations, and, although
the wording of subsection 402(7) of the Regulations is somewhat
similar, the objectives pursued by Parliament in each instance are not the
same. When interpreting a particular word contained in a statute or in
regulations as complex as the Act and the Regulations, it is not
helpful to compare that word or phrase with another one that has been taken out
of context from an unrelated provision.
[47] Moreover, the
reference, in subsection 402(7)
of the Regulations, to services performed by a corporation or by employees
of that corporation, is redundant, because the services performed by a
corporation include services performed by its employees. The functions
performed by management or employees who are acting on behalf of a corporation
are deemed to be acts of the corporation itself.
[48] In addition, I am
not convinced that the decision of D.E. Taylor in Louben, supra, is of any help to the appellants.
Indeed, Mr. Taylor was not
commenting on the definition of the term "cost of labour"; rather, he
was commenting on the definition of the term "cost of manufacturing and
processing labour", which is different in at least two respects. I will
reproduce the relevant portions of the two definitions to simplify the
comparison:
|
"cost of labour"
. . .
(b) all other amounts each of
which is an amount paid or payable during the year for the performance during
the year, by any person other than an employee of the corporation, of
functions relating to
. . .
(iii) a service or function that would normally be performed by an
employee of the corporation,
|
"cost of manufacturing and
processing labour"
. . .
(b) the other amounts included in the calculation thereof were paid or
payable to persons for the performance of functions that would be directly
related to qualified activities of the corporation during the year if those
persons were employees of the corporation,
|
[49] Based on this
comparison, it can be seen that the definition of "cost of labour"
does not specify the party to whom the "other amounts" must be paid
and does not contain the term "employees" which led Mr. Taylor to
conclude that the word "persons" in the definition of "cost of
manufacturing and processing labour" does not include corporations. One is
tempted to think that the drafters of these definitions were aware of these two
distinctions, and that they chose to define the two expressions differently.
[50] It is also my view
that the appellants' argument regarding the double counting of amounts paid by
one member of a group of corporations for services rendered to another member
of the group cannot succeed.
[51] While the
appellants' argument would eliminate double counting for the two corporations,
it would also remove the amounts from the cost of labour of the taxpayer to
which the management services were rendered and which actually bore the cost of
these services. On the other hand, the corporation that provided the services
to the related company, and was reimbursed for these services, would
nonetheless be required to add the cost of wages to its cost of labour.
[52] This is the opposite
of the result achieved by applying the administrative mitigation granted by the
Minister under paragraph 18 of Interpretation Bulletin IT‑145R. Based on the stated policy,
the corporation that has clearly benefited from the management services and has
borne the costs of those services must add this cost to its cost of labour. The
administrative mitigation appears to be more finely tuned to the presumed
objective of the provision than the idea of interpreting the word
"person", as used in the expression "cost of labour", to
mean what counsel for the appellants proposes that it means.
[53] In my opinion, the
meaning of the term "person" in this definition is clear and
unambiguous. A simple reading of the provision discloses nothing that suggests
that the functions could not be performed by a corporation, which, in turn,
relies on its employees. In the absence of ambiguity, it is unnecessary for me
to consider the appellants' argument regarding the general objective of
section 125.1. Suffice it to say that the general purpose of the provision
cannot justify an interpretation that runs counter to the clear wording of a
related provision.
[54] Consequently, I find
that the Minister did not err in including the amounts paid to Groupe in the
appellants' cost of labour. This reasoning would apply, by extension, to the
amounts that Groupe paid to Talfrank
Inc. for management services rendered to the appellants.
[55] In the alternative,
the appellants submit that the Minister erred in attributing to the appellants'
cost of labour the entire salary that Groupe paid Ms. Bazelais.
[56] Counsel for the
Respondent did not contest the assertion that only that part of
Ms. Bazelais' salary that pertains to the management and administration
functions that she performed for the appellants should be added to the
appellants' cost of labour.
However, she submitted that Ms. Bazelais' testimony alone is not sufficiently
credible to establish which part of her time was devoted to issues related to
the appellants. Ms. Bazelais did not record her hours of work during the years
in issue, and she relied entirely on her own memory of the facts for this
period.
[57] After hearing Ms. Bazelais' testimony, I am
satisfied that her estimate that she spent roughly half her working hours in
1999 either on the sale of Galv Inc. shares or on the restructuring of the
Talarico corporations, is accurate. Ms. Bazelais stated that it was
relatively easy for her to make this estimate for 1999 because it was based on
specific recollections of facts that were outside the scope of Groupe's normal
management activities.
[58] In contrast, her
estimates for 1997 and 1998 were less precise. She referred to her
Groupe-related management activities and her supervision of Fab USA's sole
employee, and to the fact that she had attended certain client meetings with
that worker. However, she did not explain how she arrived at the estimate that
she spent 15% of her time on these activities in 1997 and 25% of her time on
them in 1998. She was content to say that she was basing herself on what she had done and on the
hours that she had worked. No specifics were provided. In light of the evidence
before me, I have doubts regarding the portion of Ms. Bazelais' time that
was devoted to issues unrelated to the appellants' activities in 1997 and 1998.
Although Ms. Bazelais made a positive impression on me, and I find
that she was an entirely credible witness, she did not seem particularly
certain of her estimates concerning her work in 1997 and 1998. In the absence
of additional analysis and verification of her work during those years, I find
that the appellants have not discharged their obligation to prove which part of
Ms. Bazelais' work was not related to their activities.
[59] In summary, the
appeals will be allowed on the basis that each of the appellants' pro rata
shares of the amount of $191,081 (that is, one-half of the salary paid to
Ms. Bazelais in 1999) should be subtracted from their cost of labour,
and on the basis of the
concessions made by the Respondent and set out in the Appendix to these Reasons
for Judgment.
Signed at Ottawa, Canada, this 4th day of August 2005.
"B. Paris"
Translation
certified true
on this 22nd
day of February, 2006.
Garth McLeod,
Translator
Appendix
The parties have agreed that the percentage
of the salaries paid by the appellants to the employees whose names are set out
below, which should be added to their respective "cost of manufacturing
and processing labour", is as follows:
Quali-T-Tube Inc. and Quali-T-Tube ULC:
Albert Couture 25%
Stéphane Ferland 45%
Johanne Vadnais 50%
Quali-T-Fab Inc. and Quali-T-Fab ULC:
Richard Hébert 70%
Gino Boucher 70%
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