REASONS
FOR JUDGMENT
Pizzitelli J.
[1]
The Appellant is a corporation incorporated in
Florida on December 22, 2008 that was specifically formed for and operated
under an extra‑provincial licence in British Columbia to carry on the
business of leasing, managing and operating transit buses with drivers for the
2010 Winter Olympic and Paralympic Games (the “Games”)
held in Vancouver in February and March of 2010. The Appellant was denied
business expenses totalling $2,238,550 for its 2010 taxation year ($2,100,000
US of the $2,500,00 US claimed) on the basis such expenses were not incurred
for the purpose of gaining or producing income pursuant to subsection 18(1)(a)
of the Income Tax Act ( the “Act”),
or, in the alternative, that if such expenses were so incurred that they were
not reasonable pursuant to section 67 of the Act; the consequence of
which is the Appellant was reassessed as having net income for such year of
approximately $1,923,331 instead of a loss of $891,806.
[2]
More specifically, the Minister of National
Revenue (the “Minister”) assumed that these
specific funds, received as income from Gameday Canada Inc. (“Gameday” ) for providing its services to the Games
were transferred to another Florida corporation, iTransit Inc., (“iTransit”) pursuant to an arrangement to effectively
pay for shares sold from the previous sole shareholder of the Appellant, one
Mr. M. Pouncey (“Pouncey”) to the next sole shareholder,
one Mr. R. Hill (“Hill”) as will be more fully
canvassed later, or in the alternative, that these funds were not expended for
the purpose of gaining or producing income.
[3]
The Minister assumed in paragraph 26 of its
Reply, the following relevant facts, inter alia, pertaining to these
issues:
…
i) on April 30, 2009, Pouncey transferred ownership of the
Appellant to Hill, who then became the sole shareholder of the Appellant;
j) in particular, Hill agreed to pay US$2,100,000 to
Pouncey to purchase his interest in the Appellant;
…
s) Pouncey established the Appellant and secured the Gameday
Agreement before Hill’s involvement with the Appellant;
t) iTransit did not secure the Gameday Agreement for the
Appellant, and did not provide any services to the Appellant in respect of the
securing of the Gameday Agreement;
…
bb) on May 4, 2009, the Appellant and iTransit entered into an
agreement respecting the Gameday Agreement, which provided for payment of US$2,500,000
by the Appellant to iTransit;
cc) the Appellant paid US$400,000 to iTransit in exchange for
iTransit providing the Appellant with personnel management, office support and
onsite support in Vancouver, B.C. (the “Support Services”);
dd) the Appellant also purported to pay US$2,100,000 to
iTransit for iTransit’s purported assistance to secure a busing services
contract with Gameday (the “Purported Commission”);
…
hh) of the total operating expenses claimed for the 2009 and
2010 taxation years, the Appellant‘s claim for professional fees included
Support Services and the Purported Commission together totalling US$2,500,000;
ii) with respect to the Support Services, the Appellant
incurred US$200,000 as an expense in each of its 2009 and 2010 taxation years;
jj) the Appellant did not incur expenses in excess of
US$200,000 in each of the 2009 and 2010 taxation years with respect to the
Support Services for the purpose of gaining or producing business income;
kk) the Appellant did not incur expenses with respect to the
claimed Purported Commission in the amount of US$2,100,000 (i.e. CDN$2,238,550)
in the 2010 taxation year for the purpose of gaining or producing business
income.
…
[4]
The parties entered as an Exhibit AR1, a Partial
Statement of Agreed Facts and Issues attached hereto as Schedule 1. From such statement
and the evidence not in dispute between the parties, I intend next to set out
the background to the dispute in issue.
I. Background
[5]
Mr. Anthony Vitrano (“Vitrano”),
a Florida resident was the sole shareholder of Gameday Connection, Inc. (“Gameday US”), a Florida corporation in the business
of providing transportation and traffic logistics for large sporting events
such as the Super Bowl, the Daytona 500, professional sports games and the
Olympics, essentially being hired by the organizers of these events to “move people to, from and around the events” as
counsel for the Appellant put it in opening argument. After moving to an
Orlando street in 2005 Vitrano met his neighbour, Pouncey, and the two
discovered as they got to know each other over the ensuing few years that both
were involved in the bus business in some manner, with Pouncey having
experience working for companies that bought and sold buses or for restaurants
arranging for bus tours to eat there.
[6]
Vitrano agreed to invest in a new company proposed
by Pouncey that would have the distribution rights and be involved in
manufacturing a new bus with characteristics involving a shorter length and
lower profile to ease access and egress from the bus for the benefit of wheel
chair and other users that would benefit from such design, which was being
designed by a former engineer from Daimler Chrysler, called the “Brevi Bus”. In addition, the new corporation would
buy older buses and refurbish them, a business having few competitors and, due
to a need identified by Vitrano, would also act as a procurement contractor for
Gameday US, essentially contracting with motor coach companies to supply buses
and drivers for Gameday US’s contracted events. As Vitrano testified, this
procurement involved often approaching 10, 20 or 30 motor coach companies to
supply their motor coaches, a time consuming ordeal that he preferred to
subcontract out to third parties known as “bus brokers”
but with whom he was experiencing quality and pricing problems. The new Florida
corporation incorporated by Pouncey in 2007 was iTransit, and for an investment
of $350,000 Vitrano became a 30 percent shareholder while Pouncey retained
70 percent. While the Brevi Bus manufacturing goal was not realized,
iTransit did in fact go on to buy and refurbish older buses and effectively
became the procurement arm for Gameday US in supplying motor coaches with
drivers and mechanics as needed for such Gameday’s contracted events.
[7]
In 2007 Vitrano began negotiating with the
Vancouver Olympic Organizing Committee (“Vanoc”),
charged with organizing the 2010 Winter Olympics and Paralympics in Vancouver, to
provide transportation and traffic logistics and, after being short listed as a
bidder, was advised he was to be awarded the contract for same. Consequently,
Vitrano caused Gameday Management Group, Inc. to be incorporated in March 2008
in Canada (“Gameday Canada”) which entered into
the contract with Vanoc in July of that year. Although initially only involving
the supply of motor coaches to move the dignitaries, athletes and officials,
Vanoc was concerned it would not meet its commitments to the International
Olympic Committee (“IOC”) to have about 85
percent of its transit bus requirements in place by the end of 2008, which
normal transit buses were used to move spectators and security personnel, and
so, after further negotiations, Gameday Canada agreed to assume such role as
well within a budget agreed to with Vanoc.
[8]
Since neither Gameday US, Gameday Canada nor
iTransit were in the business of running an operational full-fledged bus
company, that involved leasing buses and insuring, licensing and maintaining
them as well as hiring drivers, Pouncey incorporated the Appellant to do so as
sole shareholder and employed Hill who clearly had past experience in not only
operating a coach company but in starting one from scratch as well as
experience in operating in past Olympic games. Vitrano had a contact, Shuttle
Bus Leasing, a Riverside California based entity (“SBL”)
that owned a large number of buses that had supplied his needs in a previous
Olympics and could provide the roughly 300 transit type buses that would
be needed for Vanoc, although a few other suppliers were tapped as well.
[9]
The Appellant entered into two separate
agreements with Gameday Canada for a total gross income of about $21,000,000
dated December 29, 2008 for Vanoc’s transit needs and dated November 13, 2009
for busing RCMP security personnel; the latter which Gameday Canada had agreed
to provide as a subcontractor to another corporation. Notwithstanding that the
Appellant was only incorporated on December 22, 2008 in Florida, the evidence
is that Pouncey, Vitrano and one of Vitrano’s staff, Don Jordan, had been
negotiating such contract in the Appellant’s name since October, 2008, which
was the explanation given by the Appellant’s witnesses as to why the
Appellant’s name appeared on a draft contract dated October, 2008, before the
Appellant’s incorporation; an explanation that seems credible and within the
ambit of normal business practices in my view.
[10]
The other relevant contract in the dispute
involves a contract between the Appellant and iTransit dated May 4, 2009 (the “iTransit Agreement”) pursuant to which the Appellant
purportedly agreed to pay iTransit the sum of $2,500,000; primarily, according
to the evidence of Pouncey, to cover iTransit’s substantial costs incurred in providing
support services to the Appellant or for its benefit before, during and after
the Games and to some extent to compensate it for its assistance in helping it
obtain the Gameday contracts. It is this contract and more so the payment
required thereunder that forms the basis for the main dispute between the parties
and the Minister’s assumptions above referred to.
[11]
Gameday Canada paid installments to the
Appellant throughout 2009 and 2010 as “deposits”
which under the respective contracts was not considered earned until the
services were supplied, thus the reason the Appellant claimed a reserve in 2009
and took the entire amount into income in 2010. There is no dispute as to the
validity of such reserve.
[12]
After completion of the Games however, Gameday
Canada and Vanoc were in dispute over the quality and cost of the contracted
services, of which approximately $3,900,000 related to services of the
Appellant and entered into mediation regarding amounts owed to it. As a result,
Gameday Canada settled on a reduction of amounts owed to it from Vanoc which
left Gameday Canada not in a position to pay the full contractual sums owed to
the Appellant pursuant to the Gameday contracts. Consequently, the Appellant
settled with Gameday Canada for a reduction in the payment owing to it of about
$700,000 which together with its purported losses of $600,000 on its inability
to cancel buses leased from SBL after Gameday cancelled the need for them with
the Appellant; its purported costs of about $400,000 in extra cost incurred to
repaint buses damaged from removal of Vanoc decals on the transit buses, as
well as other unforeseen costs, the Appellant experienced $2,000,000 - $2,500,000
of unexpected lost revenue. Consequently, the Appellant was not able to pay the
entire amount of $2,500,000 purportedly owing to iTransit pursuant to the iTransit
Agreement, who ended up subsequently writing off about $333,0000.
[13]
The Appellant purported to pay the roughly
$2.17M sum to iTransit by offsetting so called “loans”
made by it to iTransit over the 2009 and 2010 period, although the
characterization of these payments or transfers to iTransit is questionable. As
Mr. Lewis Robbins (“Robbins”), who essentially
acted in the capacity of Chief Financial Officer in charge of all bookkeeping
and accounting for both entities explained, these were not payments that were
expected to be repaid nor to bear interest, but were logged as “loans” in their records on their accountant’s advice.
II. The
Law
[14]
There is no dispute as to the interpretation of
the Act’s sections in play in this matter, namely section 9, subsection
18(1)(a) and section 67 which read as follows:
Income or Loss from a Business or Property
Basic Rules
SECTION 9
(1) Income. Subject to this Part, a taxpayer’s income for a taxation year from
a business or property is the taxpayer’s profit from that business or property
for the year.
(2) Loss. Subject to section 31, a taxpayer’s loss for a taxation year from
a business or property is the amount of the taxpayer’s loss, if any, for the
taxation year from that source computed by applying the provisions of this Act
respecting computation of income from that source with such modifications as
the circumstances require.
(3) Gains and losses not included. In
this Act, “income from a property” does not include any capital gain from the
disposition of that property and “loss from a property” does not include any
capital loss from the disposition of that property.
Deductions
Section 18:
(1) General
limitations. 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;
…
Rules Relating to Computation of Income
SECTION 67: General limitation re expenses.
In computing income, no deduction shall be made in respect of an
outlay or expense in respect of which any amount is otherwise deductible under
this Act, except to the extent that the outlay or expense was reasonable in the
circumstances.
[15]
It should be noted that there is really no
dispute as to the applicability or legal interpretation of these provisions.
There is no dispute that section 9 requires the inclusion of profits or losses into
a taxpayers income from business or property and hence amounts that are
deductible in computing profit under generally accepted business principles are
generally deductible in computing business income for income tax purposes
subject to the prohibitions against such deduction otherwise set out in Part I
of the Act, predominantly pursuant to sections 18 and 67, as a
consequence of the “Subject to this Part” (language
that starts off subsection 9(1) above). See Canderel Ltd. v The Queen,
[1998] 1 S.C.R. 147 at paragraph 53 and Canadian Imperial Bank of Commerce v
The Queen, 2013 FCA 122, 2013 DTC 5098 at paragraphs 27-28.
[16]
There is also no dispute that an expense may
result in a loss as explained in paragraph 57 of Symes v The Queen, [1993]
4 SCR 695, 94 DTC 6001 and so in the context of this case, the fact the Appellant
claimed a $891,000 loss after claiming the expenses in dispute is not
determinative of the deductibility of such expenses. It is also not disputed
that the test to determine whether an expense is deductible derives specifically
from the wording of paragraph 18(1)(a) itself, namely whether the expense was
incurred for the purpose of gaining or producing income and as the Appellant
has pointed out, relying on Ludco Enterprises Ltd v The Queen, [2001] 2
SCR 1082 and Symes above, a taxpayer need only have an ancillary purpose
of earning income, a gross concept, and such “purposes
is ultimately a question of fact to be decided with due regard for all the
circumstances” as set out in paragraph 68 of Symes:
68 As in other areas of law where purpose or intention behind actions
is to be ascertained, it must not be supposed that in responding to this
question, courts will be guided only by a taxpayer’s statements, ex post facto
or otherwise, as to the subjective purpose of a particular expenditure. Courts
will, instead, look for objective manifestations of purpose, and purpose is
ultimately a question of fact to be decided with due regard for all of the
circumstances. For these reasons, it is not possible to set forth a fixed list
of circumstances which will tend to prove objectively an income gaining or
producing purpose….
[17]
There is also no dispute that finders fees or
commissions laid out to secure or induce a party to enter into a contract such
as a lease or debenture purchase have been found to be deductible business
expenses pursuant to paragraph 18(1)(a) where the Courts have found such
expenses were incurred for the purpose of gaining or producing income. See Canderel,
Canada Permanent Mortgage Corp. v MNR, 71 DTC 5409 and Befega Inc. v
MNR, [1972] FCJ No. 23, 72 DTC 6170.
[18]
With respect to the interpretation of section
67, there is no dispute that such section works to deny a deduction that is
otherwise permitted under section 9 and not prohibited under paragraph 18(1)(a)
to the extent it is unreasonable, either due to its quantity or type in
relation to the taxpayers business. The test of reasonableness enunciated by
the Supreme Court decisions in Gabco Limited v MNR, 68 DTC 5210, is
whether “a reasonable business man would have
contracted to pay such amount having only the business consideration of the
appellant in mind”, an objective test of reasonableness that is not
intended to second guess the business acumen of a business person but rather
place the reasonable businessman into the shoes of the businessman being questioned.
[19]
As indicated, the application and interpretation
of the applicable law above is not generally in dispute between the parties who
both agree the issues to be decided will be determined on the findings of fact.
III. Position
of the Parties
[20]
The Appellant takes the position that it had a
contractual obligation with iTransit to pay it a fee of $2,500,000 US pursuant
to the iTransit Agreement, did in fact pay it by offsetting $2,166,324 against
amounts it claims were owed by iTransit to it, and that this amount was a fee
for the support services rendered to it by iTransit pursuant to such
contractual obligations, that included assistance to it in obtaining the first Gameday
contract. Moreover, the Appellant argues that there was no agreed upon
breakdown of such $2.5M fee between $400,000 for support services and
$2,100,000 for commission to secure the Gameday contract as assumed by the
Respondent. Specifically, the Appellant denies any portion of the amount was to
fund a $2.1M purchase price for shares in the Appellant transferred by Pouncey
to Hill as assumed by the Respondent, arguing there were no funds paid for such
share transfer by the Appellant for the benefit of Pouncey.
[21]
The Respondent takes the position that the
deduction denied represents the purchase price for the shares in the capital
stock of the Appellant transferred by Pouncey to Hill disguised as a commission
payable by the Appellant to iTransit for the benefit of Pouncey and hence were
not funds expended for the purpose of gaining or producing income. In the
alternative argues the Respondent, if such funds did not represent a share
purchase payment for the benefit of Mr. Pouncey, nor more than $400,000 was
expended to compensate iTransit for any services it provided to the Appellant
during the period in question.
[22]
I will discuss the issue of whether any portion
of the denied deduction represents a share purchase price paid by the Appellant
for the benefit of Pouncey and thereafter whether the denied amount reflects
actual and reasonable compensation for support services provided by iTransit to
the Appellant.
1.
The Share Purchase
[23]
The evidence supports the fact that Pouncey
transferred his shares in the Appellant to Hill sometime in 2009 although the
exact dates and reasons therefore are not entirely agreed upon between those
parties. Both Pouncey and Hill testified of such transfer and that Pouncey
resigned as managing director of the Appellant. The Appellant submitted
documentary evidence of the resignation of Pouncey as a member and managing
member dated December 23, 2008, the day after incorporation, as well as an
Operating Agreement for the Appellant dated December 22, 2008 which was signed
by Hill and which shows Hill as the initial member having 100 shares for a
contribution of $1.00. It is clear from the evidence of Hill and Pouncey that Hill
was not even employed by or agreed to join the Appellant until the end of the
first week or so of February, 2009 so he could not have signed any
documentation on December 22 and 23 2008, respectively. While Pouncey did not
have explanation for why the documents were dated so early, there was no
dispute by either of them that they were backdated and not signed on the
indicated dates. Moreover, filings of Articles of Amendment signed April 28, 2009
and an annual report signed July 21, 2009 by Hill for the State of Florida
indicate both of them were listed as managing members at least until July 21, 2009.
Hill testified he became the sole member or shareholder sometime after that and
would have signed the backdated documents put before him by Pouncey because he
was his boss and requested him to do so. This propensity to backdate documents
is evident with respect to the main contract between the Appellant and iTransit
for the $2.5M fee in issue and frankly leads me to question the credibility of
the Appellant and its witnesses.
[24]
Dates aside, while Pouncey suggested the purpose
of the transfer was to give Hill, who had been hired for his experience in
building and running an operating bus company, a sense of ownership amongst
other reasons, none of which were satisfactorily explained, he also admitted
that he had not disclosed this ownership sentiment to Hill which frankly makes
his assertions incredulous. Frankly, his testimony on this issue was vague and
unconvincing. Hill’s testimony was more direct and credible and I accept his
reasons for the transfer as being that he accepted the shares and managing
member position solely at Pouncey’s request to comply with his boss’s desire and
because Pouncey had indicated he did not wish to be seen to be the owner of the
Appellant before Vanoc out of concern it be perceived as a possible conflict of
interest.
[25]
Moreover, I am satisfied that there was
essentially no intention to unconditionally transfer full legal and beneficial
ownership of the shares or membership to Hill nor for any consideration as the
parties executed a Membership Agreement dated December 30, 2009 made between
the Appellant, Hill and Pouncey that contained the following recitals:
Whereas, for certain business purposes and
other reasons known to the Parties, Hill is currently the sole Member of Edison
Transportation, LLc; and
Whereas, for certain business purposes and
other reasons known to the Parties, Hill agrees that upon Pouncey’s written
demand Hill shall transfer all membership interest in Edison to Pouncey;
Whereas it is
the intention of the Parties that any profits or losses generated by Edison
shall ultimately flow to Pouncey.
[26]
The Membership Agreement provides that Pouncey
hold harmless and indemnifies Hill from any potential liability arising out of
Hill’s management, ownership and operation of Edison, including from related
income taxes generated by Edison, employment taxes and other taxes, actions,
suits, debts or any other matter other than gross negligence and provides that
Hill will transfer all membership interest in Edison to parties or entities
designated by Pouncey. There was no consideration mentioned in the agreement
and both Hill and Pouncey testified there was to be none because no
consideration was paid in the first place. The “business
reasons and purposes known to the parties” mentioned in the recitals for
the share ownership and transfer back to Pouncey was to effectively hide Pouncey’s
interest in the Appellant from Vanoc to avoid perceptions of conflict of
interest as Hill credibly testified. The fact Vanoc may have known Vitrano and
Pouncey had interests in iTransit and so there was nothing to hide from Vanoc
does not prove Vanoc knew Edison was really owned by Pouncey and it would be
then senseless for Pouncey to have taken steps to transfer his shares to Hill
and cause initial corporate documents to be backdated to show Hill as the
initial member and director if that were the case. I further accept as credible
Hill’s testimony that it was he who wanted the protection of the Membership
Agreement, particularly the indemnity for agreeing to be shown as the sole
member, in order to protect himself due to concerns he expressed about the
financial impact and possible insolvency the transfer of funds from the
Appellant to iTransit or related companies was having on the Appellant.
[27]
Whatever moral or legal consequences relate to Pouncey’s
avoidance of disclosing his interest in the Appellant to Vanoc or any other
party for that matter is frankly not relevant to the issues to be decided in
this appeal; save as they relate to Pouncey’s credibility or determining the
issue as to whether a share price was paid or payable to Pouncey for his shares.
[28]
In my opinion the backdating of documents and
the terms of the Membership Agreement confirm that the transfer of shares by
Pouncey to Hill was nothing but window dressing to hide Pouncey’s involvement
in the Appellant before Vanoc and no consideration was paid or was payable by
Hill to Pouncey, who could demand their return for basically no consideration.
Moreover, if an arm’s length transfer had occurred, it would make no sense for
Hill to be expecting to be indemnified for his actions as owner. Finally, the
evidence is clear that Hill considered Pouncey his boss having final word on
all matters throughout the entire period of his relationship with the
Appellant, i.e. before, during and after the Olympic games and needed his or
Robbins permission to make large expenditures.
[29]
Accordingly, the evidence does not support the
Respondent’s assumptions found in paragraph 26(j) above that Hill agreed to pay
$2.1M for the shares to Pouncey. Although the assumption there was a transfer
is proven, such assumption has no bearing on the issue of whether the expenses
claimed by the Appellant are valid, which I will discuss later on.
[30]
Let me add at this point that the Minister had
good cause to reasonably assume the sum of $2.1M was to compensate Pouncey for
his shares. The evidence is clear that Mr. Bryan Hubbell, the Canadian accountant
for the Appellant hired to deal with the Canada Revenue Agency (“CRA”) during the audit, confirmed in writing to the
auditor, in correspondence dated December 17, 2011 that enclosed a memorandum
wherein the Appellant answered questions posed by the CRA auditor that included
the following statement:
…Full ownership of Edison Transportation, LLC
was transferred to Mr. Hill. In exchange, iTransit would charge a 10% of the
gross value of the contract as a commission for not only securing the contract,
but for giving Mr. Hill the opportunity to create a bus company from scratch
that would have instantaneous credibility of having worked as part of an
Olympic event….
[31]
The words “in exchange”
clearly refer to the transfer of ownership to Hill, and can possibly be interpreted
to suggest such funds were consideration for such transfer. Moreover, Hill
himself made admissions on discovery that suggested the purpose of those funds
was to pay for the shares, notwithstanding that he and all the other
Appellant’s witnesses contradict that in their testimony at trial.
[32]
However, viewing the evidence and documentation
on the whole, I cannot conclude the payment of $2.1M US represents a payment
for shares. The inconsistencies in evidence clearly suggest however that the Appellant
and its witnesses seemed quite willing to adapt their explanation from time to
time to suit their needs.
2.
The Deductibility of the $2.5M Claimed Expenditure
[33]
The Appellant claims a total deduction of $2.5M for
total support services and commissions reflected as professional fees paid by
the Appellant in 2010. While the Appellant denies that there was any breakdown
of that total fee; specifically as $400,000 for support services and $2,100,000
for commissions as assumed by the Respondent, it is clear that regardless of
any purported characterization or allocation of same, the Appellant did not pay
a total of $2.5M to iTransit. The Appellant’s own evidence is that $2,166,324
was offset against amounts iTransit owed to the Appellant and that the balance
of $333,000 was never paid because of the earlier mentioned shortfall of
contractual funds paid by Gameday Canada to it. Apart from the claimed set off
there is no evidence the balance of the fee was paid. Accordingly, the maximum
claim of the Appellant for the denied expenses in issue in this appeal must be
reduced accordingly as a starting point, there being no determinative evidence
before me that such difference was adjusted for after 2010.
[34]
With respect to the deductibility issue, counsel
for the Appellant has argued that in order to find for the Respondent in this
appeal, the Court must either find that there was no valid agreement for the
Appellant to pay iTransit $2,500,000 or that iTransit did not procure the
Gameday contract for the benefit of the Appellant and hence would not be
entitled to any payment, be it a finder’s fee or commission, for same.
a)
Validity of iTransit Agreement
[35]
The Appellant’s main argument and evidence in
favour of the deduction is based on the testimony of Pouncey and to some
extent, of Robbins, the effective financial officer of both the Appellant and iTransit,
that on or about May 4, 2009 they met with their lawyers and accountants
together with Hill and discussed the fee to be paid by the Appellant to
iTransit. Pouncey’s testimony was clear that the amount primarily reflected the
cost to iTransit in providing support services to the Appellant, before, during
and after the Games and thereafter to recognize the assistance granted in
helping the Appellant secure the contract with Gameday Canada. An agreement
dated May 4, 2009 was executed between the parties with the Appellant agreeing
to pay a $2,500,000 fee and setting out the supporting role iTransit was to
provide in return for same in rather broad, boiler plate- like and very general
terms.
[36]
Specifically, the Appellant argues that the
Respondent admitted both in its pleadings and assumed in its Reply that this
agreement was effective May 4, 2009 and so cannot deny its validity. Specifically
the Respondent in paragraph 1 of its Reply admits the facts stated in paragraph
1.38 of the Notice of Appeal, which reads as follows:
1.38 Effective
May 4, 2009, Edison entered into a written agreement with iTransit (the
“iTransit Agreement”).
[37]
Similarly, paragraph 26(bb) contains the
following assumption:
bb) on May 4, 2009,
the Appellant and iTransit entered into an agreement respecting the Gameday
Agreement, which provided for payment of US$2,500,000 by the Appellant to
iTransit;
[38]
I am not prepared to find that the iTransit Agreement
was effective May 4, 2009 nor that it is valid and reflects the agreement
between the parties based on such pleadings accepted by the Minister or the
above assumption in the Reply alone for two main reasons.
[39]
Firstly, the Respondent, pursuant to paragraph 2
of its Reply, specifically denies the facts contained in paragraphs 1.39, 1.40
and 1.41 of the Notice of Appeal, which facts read as follows:
1.39. Under the iTransit Agreement, iTransit was required to
assist Edison with securing the Gameday Agreements and with providing the
services Edison was required to perform under the Gameday Agreements.
1.40 iTransit performed the services required of it under the
iTransit Agreement.
1.41 In particular, iTransit performed at least the following
services for Edison:
• Assisting
in obtaining one or both Gameday Agreements….
[40]
It is clear to me that the Respondent did not
admit the terms of the iTransit Agreement from such denial so in such context
could not have admitted the validity of such Agreement. At best, I can only
conclude the Respondent was agreeing such Agreement was executed on May 4, 2009
regardless of its validity.
[41]
Moreover, the evidence from the CRA auditor is
also clear that she was not made aware by the Appellant, of the fact of such ex
post facto signing and thus had no reason to assume it was signed on any
other date. It follows that not having been informed otherwise by the Appellant
during audit or before preparing its Reply, and the fact the Agreement was backdated
and only signed in late 2010, that there was no reason to plead the Agreement
was a sham as the Appellant suggests the Respondent should have.
[42]
Secondly, and more importantly, this Court is
not bound by false facts pleaded by the Appellant. In Hammill v The Queen,
2005 FCA 252, 2005 DTC 5397, Noel J.A., in refuting the submission by the
appellant’s counsel therein that the Court was bound by the facts as admitted,
stated at paragraph 31:
31 In an
appeal against an assessment under the Act, the outcome does not belong to the
parties. Public funds are involved and the Tax Court is given, in the first
instance, the statutory mandate to confirm or vary the assessment based on the
facts, proven or admitted. In this respect, while the Court will not generally
look behind a formal admission, the parties cannot by agreement dictate the
outcome of a tax appeal. The Tax Court is not bound by an admission which is
shown, through properly tendered evidence, to be contrary to the facts.
[43]
The evidence is clear and not disputed by the
Appellant that this Agreement was not prepared until sometime in 2010 and not
executed until late in 2010, several months after the completion of the Games
and the start of correspondence with the CRA regarding a Regulation 105 (withholding
taxes) audit but several months before the Appellant was formally notified by
the CRA of the T4 audit to commence against it that led to this matter.
[44]
However the Appellant argues that despite any
backdating of the Agreement, the parties effectively honoured the terms thereof
and so their actions give effect to the late signed Agreement and support its
validity. The Appellant also argues that the parties were occupied with the demands
of the business and it was not unusual as we have seen to execute documents
later than their purported dates so such late preparation and execution does
not derogate from the fact their actions carried out the Agreement.
[45]
No explanation was given as to why it took so long
to prepare and execute an Agreement that was to reflect what was described as a
meeting around May 4, 2009 with the Appellant’s lawyers, accountants and Hill
to address compensation for the costs iTransit had expended in support of the
Appellant’s contractual duties other than an unconvincing argument by counsel
that they habitually signed or backdated documents as a matter of course and
abided by its terms and so no adverse inference should be made as to such
backdating.
[46]
Both Vitrano and Pouncey testified that the
draft agreement between Gameday Canada and the Appellant dated October, 2008
was in contemplation of the Appellant being formed and the final agreement
signed in December, 2008 after its incorporation and surely after prior
negotiation. A second bus provider agreement was signed with Gameday Canada in
November of 2009 for the RCMP security transit needs prior to the provision of
such services. The Appellant signed employment and consulting agreements with
certain of its employees, including Ryan Bradley and Cullen, Scahill &
Company for their services in 2009, as well as a membership agreement with
Robert Hill in 2009. A napkin agreement with Hill was even prepared to engage
his services as VP of operations for the Appellant in January of 2009 before
the start of his employment in February of 2009 notwithstanding that it was
never formalized. In all the Appellant seemed adept and experienced at preparing
and executing agreements to reflect its business dealings in advance, not after
the fact, yet with respect to an agreement to pay out $2.5M to iTransit, it
seems to have waited until close to the end of its 2010 fiscal year. When one
considers the amount of the $2.5M fee referred to in the iTransit Agreement was
fairly close in amount to its projected profit from the Olympic Games, it seems
incredible to me that it would not have been front and centre prior to the
provision of services if in fact a large payment or commission was intended. I
am not satisfied it was. It would appear to me to be an afterthought, something
to legitimize the payment of amounts that had been made to iTransit for over
two previous years to fund its operations, payments of which caused Hill to
express concern over the solvency of the Appellant and protect himself through
the execution of a Membership Agreement granting him an indemnity as earlier
mentioned. Frankly, I fail to see how the backdating of corporate documentation
showing Hill to be the initial shareholder and member of the Appellant in
December of 2008, more than a month before he was even hired, should be
considered documents the parties honoured. It is clear their intention was to
hide or deceive the reality of ownership. It would seem to me that it would be
more appropriate to suggest such backdating was for an ulterior purpose and does
not give Pouncey or iTransit any real credibility to argue the iTransit
Agreement was not backdated for similar purposes.
[47]
It seems incredulous that iTransit officials and
their professional advisors, together with the Appellant’s representative,
Hill, would meet to determine and confirm such compensation on or about May 4, 2009
and yet took over a year to ink an agreement void of any details relating to
the formulation and calculation of the $2,500,000 fee they met to discuss when
they would have been in a position to know almost all the details that formed
the basis of that amount. Again, Pouncey’s testimony was clear that the amount
primarily reflected the cost to iTransit in providing support services to the
Appellant, before, during and after the Games and to thereafter recognize the
assistance granted in helping the Appellant secure the contract with Gameday
Canada and so at the time of preparation and signing of the Agreement in late
2010 the details of such reimbursable costs would have been known. What is even
more incredulous however is that during this trial absolutely no documentary
evidence by way of receipts, vouchers , credit card statements or other
supporting documentation was tendered in support of any expenses for which
iTransit was seeking reimbursement.
[48]
Finally, the said agreement does not break down
what portion was contemplated for support services versus what portion was for
its assistance in securing the Gameday Canada contract and most of the Appellant’s
witnesses deny there was any such allocation. On the one hand the Appellant
argues that a finder’s fee or commission would be a totally acceptable expense,
relying on court decisions in support of such assertion which were not
disputed, yet there is no effort in a purported $2.5M agreement to set out on
what basis of such finder’s fee or commission would be calculated let alone its
final amount, not even almost two years after the agreement was supposedly
found or secured by iTransit and iTransit would be aware of its financial
position.
[49]
The Appellant argued that a finder’s fee or
commission is deductible relying on cases such as Canderel and Canada
Permanent Mortgage Corp. earlier discussed and is not required to correlate
to the Appellant’s profit or source of income in reliance on former Chief
Justice Bowman’s decision in Bush Associates Ltd. v The Queen, 2010 TCC
159, 2010 DTC 1160, at paragraph 34. Even though Bush dealt with the
payment of bonuses to individual shareholders and not to finders fees or
commissions and so is distinguishable, I do not take issue with the Appellant’s
argument that a finder would not be expected to take a reduced finder’s fee or
commission simply because through no fault of his, the operator lost money;
this in the context of addressing the auditor’s reasons for not finding there
was a commission payable since it was not subject to adjustment. Such argument
however presumes there was an agreed commission or finder’s fee to begin with,
at least a formula, consistent with the facts in Canderel or Canada
Permanent Mortgage Corp. I am not swayed by the Appellant’s argument that
treatment of finder’s fees or commissions should be equated with the payment of
discretionary bonuses to shareholders usually made after the company’s year-end
to reward shareholders or officers and directors for past service; however,
notwithstanding my disagreement with such analogy, even if I accept payment can
be made for past services, there must at least be some agreement as to the
quantum or calculation of such fee or commission in advance in the context of
business in order to characterize such payments as such. It is in the very
nature of these types of payments that they are calculable on some objective
basis and not merely discretionary. Frankly, the Appellant seems to be
inconsistent on this matter. Pouncey and Robbins testified so as to deny there
was any set amount payable for commissions, thus rendering its very concept in
doubt, so much so that they took issue with Hubbell’s correspondence to the CRA
with respect to characterizing any portion of the alleged fixed $2.5M fee as
commissions of $2.1M. Whatever characterization one may give to the fee in
question or one may draw from the evidence, what is clear is that the Appellant
has not met the onus of demolishing the Minister’s assumption found in paragraph
26( kk) of the Reply:
kk) the
Appellant did not incur any expenses with respect to the claimed Purported
Commission in the amount of US$2,100,000 (i.e.CDN$2,238,550) in the 2010
taxation year for the purposes of gaining or producing business income;
[50]
Aside from the lack of details, I note an
inconsistency between agreed upon facts and the terms of the iTransit
Agreement. Section IV of the said Agreement deals with compensation and
contains the following terms:
... Edison
agrees to pay ITransit the sum of Two million five hundred thousand dollars ($2,500,000).
During the course of this contract, Edison may from time to time make
payments to iTransit….(Emphasis added)
[51]
It is clear from the plain wording of the
agreement that payments would be made during the “course
of this contract”, which would run from May
4, 2009 onwards as its term. Notwithstanding this, the parties agreed in
paragraph 1.67 of the Partial Statement of Agreed Facts and Issue that:
…Edison recorded, for accounting purposes,
the $US 2.5 million as an accrued account payable, payable to iTransit on the following
dates:
30 January 2009 $US
250,000
…
as well as three other payments of $US
500,000, $1,125,000 and $625,000 on November 30, 2009, January 15, 2010 and
April 30, 2010.
[52]
It is clear that both the invoice of January 30,
2009 is prior to the date of the Agreement which makes no reference to existing
credits on account, and that all the payments were allegedly invoiced as of
April 30, 2010, about 6 months or so before the Agreement was signed, yet no
mention of such being made therein, notwithstanding the fact the parties had
clear knowledge of the such facts.
[53]
There was evidence of many transfers of funds
from the Canadian and American bank accounts of the Appellant to iTransit but
there is no correlation in amounts between the above referred to invoices and
these payments that might assist in linking the two. When one considers Hill’s
testimony that he expressed concerns funds being transferred to iTransit might
affect the ability of the Appellant to conduct its contracted obligations, it
seems clear there was no connection between these payments and invoices. If
these were expected and agreed upon payments, Hill would have had no
justification for concern.
[54]
Moreover, Hill, who was present throughout the
testimony of all other witnesses for the Appellant, testified that he was
neither present at the purported meeting between Pouncey, Robbins, the lawyer
and accountant nor had any role in determining the amount of such fee,
obviously in contradiction to the evidence of Pouncey and Robbins. Hill
testified he signed the May 4, 2009 agreement in late 2010 because he was asked
to sign it, just as he had done with the backdated share documentation above
referenced. Notwithstanding that counsel for the Appellant has argued that
since Robbins was a mere employee and had no interest in the outcome of this
matter that his testimony should be believed over that of Hill, the evidence is
clear that Hill was nothing more than an employee of the Appellant who reported
to Pouncey and at times to Robbins and I am inclined to find his testimony more
credible than that of Robbins whose other testimony contradicted the representations
of Hubbell to the CRA, when there was evidence he either prepared such
representations or was involved in their preparations, as will be discussed in
greater detail later. Moreover, Hill was the representative of the Appellant at
the trial, was clearly charged with the day to day running of its operations
during the relevant period and was a witness of the Appellant as well. It
speaks little of the overall credibility of the Appellant’s assertions when its
own witnesses testify in such a contrary manner regarding the iTransit
Agreement and its terms.
[55]
The Appellant also argues that iTransit booked
the $2.5M fee into its income based on the evidence of a profit and loss
statement spanning two years from January 1, 2009 to December 31, 2010, as well
as Pouncey’s evidence that he took iTransit’s taxable income into his own
income in his US tax returns due to the fact iTransit was an “S” type
corporation that for US tax purposes would flow its profits to its
shareholders. This evidence was given chiefly in response to addressing the CRA
auditor’s expressed concerns in its audit report that Edison was set up as a
tax avoidance entity. The Respondent suggested the CRA auditor made no effort
to follow up on these assertions that the $2.5M fee was accounted for in
iTransit’s financial statements and tax returns and thus had no reasonable
basis for the tax avoidance concern she expressed. The problem I have with this
evidence is that no explanation was given as to why a profit and loss
statement, with an indication it was printed out in 2011, would span a two year
period rather than individual December 31 yearend that was in evidence for
iTransit, nor why the booked $2.5M fee had no ledger number attached to it in
such statement when each of the other entries, for each other income and
expense type had one, suggesting there was no such ledger. No financial
statements of iTransit showing such inclusion or taxes to be paid as a result
are in evidence. Moreover, Pouncey, whose overall evidence I did not find very
credible, made a bold assertion that he included the fee in his income without
submitting any evidence such as the tax returns he alluded to to corroborate his
evidence. Pouncey’s assertion is also inconsistent with the fact Vitrano owned
30 percent of iTransit, and this one wonders why he would include it all in his
income. Moreover, there is no evidence whether iTransit had any profits for
2010 to include in his income; it could just as easily have had losses to
offset such income inclusion. We are left to speculate or to connect the dots
without any factual underpinnings for same. I place little weight on this
evidence but more importantly, the inclusion of amounts for US tax purposes
does not determine their treatment for Canadian tax purposes. Even if that were
the case, such would not be determinative of the issue herein of whether the
payment was incurred in order to gain or produce income or that it was reasonable.
[56]
From the Appellant’s perspective, no signed
financial statements of the Appellant were put into evidence other than what
appear to be profit and loss statements printed out in 2011 that disclose
detailed expense accounts for a multitude of items but not specifically for any
reimbursable expenses to iTransit, although entries for professional fees
amounted to approximately $700,000 in 2009 and $1,800,000 in 2010 without any
explanation or notes what these are for. A spreadsheet submitted into evidence
for the two year period suggests professional fees of $2.5M were booked.
Accordingly, iTransit refers to them as consultant’s fees in its records, while
the Appellant books them as professional fees paid, notwithstanding that both
entities were financially overseen by Robbins acting for both entities, while
Pouncey described the fees as being primarily reimbursement for iTransit’s cost
of supplying services.
[57]
There are in addition a multitude of entries in
the Appellant’s 2009 and 2010 ledger showing transfers to iTransit of “loans” which Robbins testified were not really loans
and never intended to be repaid, all adding further confusion to this hodge-podge
approach to accounting. If such amounts did not reflect obligations to be
repaid to the Appellant from iTransit, then on what basis would the Appellant
have offset its obligation to pay the $2.5M contractual fee against such
amounts? If they were not intended to be repaid, is it not logical to assume
they represented a distribution of profits in some form?
[58]
The Appellant admitted they failed to keep
proper records as explanation for the lack of details. That may be the case,
but to suggest, as Pouncey did, that the $2.5M figure was arrived at a meeting
with his financial officer, Robbins, and his accountant and lawyer with Hill
present as an amount to reflect primarily reimbursement for costs and some
profit, would suggest there was some background information to justify these
costs. None was proffered and neither was their accountant called to testify in
support of such evidence.
[59]
Based on the above, I cannot find that the parties
actions and the factual evidence support the Appellant’s contention that there
was a valid agreement for the Appellant to pay iTransit $2.5M US in place on or
effective on May 4, 2009, either in writing or by action of the parties other
than an ex post facto agreement made in late 2010 to which I can give no
weight, consistent with the Federal Court of Appeal’s decision in Bomag (Canada)
Limited v The Queen, [1984] FCJ No. 608, 84 DTC 6363, where that Court gave
no legal effect to an agreement purportedly entered into between a taxpayer and
its parent corporation to justify the characterizing what was found to be a
capital outlay into an expense. At pages 6368 to 6369, Urie J. stated:
The learned
Trial Judge found the agreement to be self-serving and of no probative value. I
agree. It is obviously a document which was designed, after the fact, to put
the best possible light for tax and other purposes on the transaction entered
into between Bomag Germany and its subsidiary, the Appellant. It may be safely
ignored. The true nature of the transaction can be derived from the valid
documentation and evidence adduced….
[60]
In this case, the iTransit Agreement is an ex
post facto agreement with vague terms, unrealistically so in light of the
knowledge of the parties at the time of its execution, and inconsistent with
the actions of the parties throughout the period of its alleged duration.
b)
Whether iTransit Secured the Gameday Contract
for the Appellant
[61]
The Appellant’s main argument is based on the
assertion that iTransit secured the first Gameday contract in December of 2008
due to Pouncey’s attendance at meetings with Vanoc and Gameday in his capacity
as owner of iTransit and his involvement while wearing his “iTransit hat” before such time in negotiating a draft
agreement in October of 2008 on behalf of the Appellant even before it was
incorporated which lead to the December 23, 2008 Gameday Agreement signed.
[62]
It should be noted that one of the main reasons
the Respondent relied upon taking the position iTransit did not secure this
agreement with Gameday was that the iTransit Agreement was dated May 4, 2009, 5
months after the Gameday Agreement was signed and so it could not have secured
this contract. The Respondent admitted is was not aware of the fact a draft
agreement dated October 2008 with the Appellant’s name on it, before its incorporation,
was being negotiated, however still argues and assumes that Pouncey and not
iTransit secured the Agreement.
[63]
The Appellant seems to raise a paradox with this
issue. On the one hand it argues that a pre-incorporation contract can be
negotiated before a corporation comes into existence by others on its behalf,
yet takes issue with the Respondent’s argument that any such pre-incorporation
contract could only have been negotiated by Pouncey while wearing his “Edison” hat since he was the initial officer,
director and shareholder of the Appellant. In effect says the Appellant, there
was only one hat Pouncey could wear, his iTransit hat, since Edison was not yet
in existence. Otherwise stated, it appears the Appellant is arguing that a
contract can be negotiated on behalf of a corporation before its formal
existence, but that its ultimate directors or shareholders cannot do so on its
behalf as they had no hat to wear yet, a position I find frankly without merit
and illogical. I take judicial notice of the fact that most pre-incorporation
contracts are in fact negotiated by the planned shareholders or directors of a
corporation, since they are the people having an interest therein.
[64]
It is of course, ultimately a question of
evidence as to who secured the first Gameday contract for the Appellant. I find
that the evidence clearly points to Pouncey having secured that contract on
behalf of the future Edison for several reasons:
1. There
is no determinative evidence that Pouncey attended the December 2, 2008 meeting
with Vanoc in any other capacity other than as part of the Gameday contingent.
The agenda for such meeting lists him as a representative of Gameday. His own
evidence is that he was there on behalf of iTransit to assist Gameday in light
of the fact iTransit was Gameday’s procurement arm for motor coaches, which seems
reasonable. There is no evidence he attended to represent iTransit for the
purpose of acting on behalf of Edison to be incorporated. Moreover, the
evidence is that although Vanoc gave the go ahead to Gameday to secure transit
buses from SBL on its behalf on December 2,2 008 that lead to the Gameday
agreement with Edison after its incorporation, the evidence is clear the
parties were talking about this much sooner and in fact Pouncey and Gameday
were negotiating a draft agreement on behalf of Edison as early as October, 2008,
which counsel for the Appellant considered the most important document in this
trial. It is clear to me Pouncey was wearing his Edison hat in negotiating that
contract on behalf of Edison.
2. In
evidence and in argument, the Appellant admitted that Pouncey stated to Vitrano
that neither iTransit nor Gameday were in a position to operate a full‑fledged
bus operation and that “I can provide the solution”.
It was not iTransit can do it, but “I”. This
must either be Pouncey acting for Pouncey or for the corporation he discussed
setting up to run that operation with Vitrano, i.e. Edison. In my opinion, he
was clearly advocating for Edison to be the bus operator through his efforts
and was logically wearing his Edison hat.
3. The
evidence of Vitrano and Pouncey is that neither iTransit nor Gameday were in a
position to operate a full-fledged bus company as such business was not the
business of either. If iTransit was not in a position to operate a bus company
needed, why would Pouncey be wearing an iTransit hat after specifically
disavowing iTransit’s availability to involve itself in such operation.
[65]
In my opinion, the evidence is more compatible
with Pouncey using his efforts on behalf of Edison, a corporation specifically
targeted for incorporation to run the bus operations as its “raison d’etre” as the Appellant has argued, rather
than indirectly for Edison through iTransit. At the very least, I cannot say
the Appellant has demolished the Minister’s assumption in this regard found in
26(t) above.
[66]
Based on my findings above and having regard to
the argument of the Appellant that if I did not accept that there was a valid
agreement pursuant to which the Appellant was obliged to pay iTransit $2.5M, or
if I did not accept that iTransit secured the first Gameday contract for the
Appellant, that this appeal would be lost; I must dismiss the appeal of the
Appellant and it would not be necessary for me to determine whether the amounts
claimed were reasonable pursuant to section 67 of the Act; however, I
wish to make some comments on same.
c)
Reasonableness of Expenditures
[67]
There is no dispute that iTransit did supply
some support services to the Appellant. Clearly, iTransit and the Appellant
shared office space in Orlando and shared some staff for bookkeeping and
accounting as the services of both Robbins and an assistant were made available
to both companies. Clearly, the evidence confirms that Pouncey and Robbins
urgently went to Vancouver to take over Hill’s management role of the
operations when Hill became seriously ill in December of 2009 and stayed at
least a few weeks. Clearly, iTransit staff accompanied the Appellant to Chicago
to hold fairs to attract drivers for the buses they would be using for the Olympics.
There is no doubt Pouncey accompanied Vitrano to Vancouver to pursue and gain
the bid for Gameday US, through Gameday Canada, to supply the transportation
and logistics services to Vanoc, from which ultimately flowed the need to
create a bus operations company, the Appellant, and hire Hill to run it,
probably at iTransit’s expense since the Appellant was not yet in existence.
[68]
There is also no doubt Hill was hired to run the
operations of the Appellant at a salary of $125,000 per year plus benefits and
performance bonuses linked to the Appellant’s profitability from the Games,
because each of Vitrano and Pouncey agreed that he had the necessary experience
to do so and was needed for that purpose. There is no doubt from the W-2 US
compensation summaries issued by the Appellant and put into evidence that both
Pouncey and Robbins were employed by the Appellant and received some salary in
2009. There is also no doubt that the Appellant also employed a R. Bradley, S. Brumfield
and G. Scahill (through her consulting company) to provide operational and
general skills, supervisory, office and human resources services to the
Appellant for the Olympic operations while sharing some staff in Orlando within
offices it shared with iTransit, including the service of Robbins, who, as
earlier referred to, acted as de facto chief financial officer of both
companies and A. M. who worked under him. It seems clear that the Appellant not
only had the experienced executives in Hill and Mr. Brumfield as his director
of operations, but had hired the necessary office and human resources talent
that allowed it to operate and at one point have over 700 employees in its hire
during the peak Olympic Games schedule. On the face of it, it seems entirely
reasonable to conclude that the Appellant was sufficiently and expertly staffed
to enable it to run the full-fledged bus operations it was intended and created
to run. In fact, in argument, the Appellant agrees it was able to do so, only
argues at the same time could not have done so without the assistance of iTransit.
[69]
There is also no doubt that funds were
transferred, both ways between the Appellant and iTransit. In fact, the
evidence of the Appellant’s bank records indicate that at least $1.4M was
transferred in the relevant period from the Appellant’s U.S account to iTransit
and $36,000 directly to Pouncey. However, Hill, together with Robbins confirmed
that transfers went both ways clearly suggesting the close relationship between
the two entities. Having regard to the fact that the Appellant made an
accounting entry dated December 31, 2010 offsetting $2,166,324 owed by iTransit
to it clearly evidences that the flow of monies went far more from the
Appellant to iTransit, suggesting the financial support at least was from the
Appellant to iTransit rather than vice versa.
[70]
The simple fact is the Respondent has assumed
that no more than $400,000 was paid to iTransit for the support services it
provided and the onus is on the Appellant to justify a higher amount and that
any such amounts were expended for the purpose of gaining or producing income
and if so, that they were reasonable. The Appellant has not remotely come close
to demolishing the Minister’s assumptions. The Appellant has not provided any
credible advice that it received support services greater than $400,000, let
alone any specific amount. The Appellant has not tendered into evidence receipts,
complete signed financial statements or any other reasonable evidence detailing
what services were received from iTransit and at what cost that would form the
basis of the reimbursement Pouncey alluded to earlier. All we have is an
agreement dated May 4, 2009, prepared and signed long after that date, more
than a year, that contains a total $2.5M fee, at a time when the Appellant and
iTransit would be in a position to know exact amounts of the cost of any
services provided. Recalling the evidence of Pouncey himself who indicated that
the fee reflected primarily the cost of the services iTransit supplied to the
Appellant, and was arrived at after a meeting with the company lawyer and
accountant as well as Hill who denied being present, one would expect some
corroborating evidence in support of that. As earlier mentioned, in the
circumstances, I gave this agreement little weight.
[71]
I have no concrete and reliable evidence before
me from which I can conclude the fee of $2.5M was related primarily to the
costs iTransit incurred in supplying support services, let alone even confirm
$400,000 was spent to do so. The Appellant has not met the onus of
demonstrating it spent more than the $400,000 assumed by the Respondent.
[72]
Moreover, there is evidence from the Appellant’s
side that only $400,000 was spent. In dealing with the CRA, Hubbell, the accountant
for the Appellant, sent responses and made representations to the affect that the
fee essentially consisted of $400,000 for support services and $2.1M for
commissions. Pouncey specifically denies he gave any such instructions to Hubbell
and disagrees with his own representatives representations to the CRA.
Moreover, he and Robbins specifically deny any specific allocation of the $2.5M
specifically for commissions notwithstanding that the evidence shows Robbins
prepared or was at least involved in the preparations of such representations
that were given to Hubbell for disclosure to the CRA. I find it incredulous to expect
me to believe their own accountant made errors in representations to the
auditor in writing and then not even call him as a witness to testify to same.
I am inclined to accept Hubbell’s written representations to the CRA on their
face value that $400,000 was the agreed fee for support services provided
particularly since this information is found in a memorandum he forwarded from
his client, which the evidence shows was either prepared by Robbins or reviewed
by him, and this is no doubt the basis of the Respondent’s assumptions of fact
in this regard. If Hubbell was not providing information he received from his
client then the Court is essentially being asked to assume he made it up, which
is not credible. The Appellant could have called him as a witness to clarify
the matter but did not, so I must infer Hubbell based his representation on
information obtained from his client, the Appellant and accepted it on face
value.
[73]
Considering there is evidence iTransit did
supply some support services and some evidence that it was worth $400,000 as
above, it seems reasonable for the CRA to have agreed to allow such amount for
expenses reimbursed by the Appellant. The fact it did so without requiring
further documentary proof does not mean the Respondent was acknowledging the
iTransit Agreement to be valid in any way as counsel for the Appellant seems to
have argued. The Respondent did not rely on such agreement as the basis for
allowing the amount of $400,000 since it makes no mention of any amount. The
Respondent based its decision on the evidence of the support services iTransit
appears to have supplied to the Appellant that was predominantly able to
fulfill its obligations on its own.
[74]
Regardless of how competent and skillful counsel
for the Appellant may be in argument, there must be foundational evidence to
support the facts he presumes to take as true. I do not find the Appellant has
met the onus of demolishing the Minister’s assumptions that no more than
$400,000 was paid to iTransit for any support services provided.
[75]
Accordingly, the appeal is dismissed with costs
to the Respondent.
Signed
at Ottawa, Canada, this 6th day of April 2016.
“F.J. Pizzitelli”
Email this Content