Citation: 2010 TCC 449
Date: 20100827
Docket: 2008-1387(IT)G
2009-470(GST)G
BETWEEN:
GREGORY J. WELCH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
D'Arcy J.
[1]
The Appellant has
appealed income tax reassessments in respect of his 2003 and 2004 taxation
years and a GST assessment in respect of his reporting periods that began on
January 1, 2003 and ended on December 31, 2004.
[2]
The issues in both appeals arise from the
payment of certain amounts by the Appellant to Cactus Cowboys Inc. (the
"Cactus Cowboys Payments"). I will first consider the income tax
appeal.
Overview of income tax issues
[3]
The first income tax issue is the deductibility
by the Appellant of the Cactus Cowboys Payments.
[4]
The Appellant is a 62-year-old lawyer who,
during the relevant years, practised law as a sole practitioner in Winnipeg, Manitoba. He provided legal
services to clients located in Manitoba and Ontario. The
Appellant testified that in 2003 and 2004 his Manitoba practice focused on real estate law, corporate law, family law, and
estate work. He noted that he had had an extensive motor vehicle personal
injury practice in Manitoba prior to 1994; however, he stopped practising in
this area once Manitoba adopted
a no-fault insurance system.
[5]
The Appellant testified that his Ontario practice was a general legal
practice. He provided advice in respect of real estate law, family law, and
personal injury claims. As will be discussed shortly, the issues in these
appeals involve his Ontario
personal injury practice.
[6]
Cactus Cowboys Inc. ("Cactus Cowboys")
was incorporated in 1996. It originally had three shareholders, including
the Appellant. On October 16, 1998, the Appellant purchased the shares of the
other two shareholders. From 1999 onwards, the Appellant was the sole
shareholder, director, and officer of the company.
[7]
From 1998 to 2004, Cactus Cowboys incurred
losses from its horse racing and stable activities. These losses equalled
$96,826 in 2003 and $170,036 in 2004.
[8]
The Appellant made the Cactus Cowboys Payments
in 2003 and 2004 in respect of invoices issued by Cactus Cowboys. Each invoice
was for "all consulting services rendered to this date" and contained
a reference to a specific Ontario client of the Appellant. The invoices contained no other
description of the services provided by Cactus Cowboys to the Appellant. Payments
in respect of these invoices totalled $92,028 in 2003 and $163,712 in 2004. The
payments were roughly equal to the amounts the Appellant billed his Ontario clients.
[9]
The Appellant did not report the fees he earned
from his Ontario clients in his
2003 and 2004 income tax returns, nor did he claim deductions in those years with
respect to the Cactus Cowboys Payments. He testified that this was an error made by his
accountant and that he had always intended to include in his taxable income the
fees he earned from his Ontario
clients and to claim an offsetting deduction for the Cactus Cowboys
Payments.
[10]
The Minister reassessed Cactus Cowboys on April
3, 2007. The reassessment removed the Cactus Cowboys Payments from Cactus
Cowboys' income.
[11]
The Minister reassessed the Appellant with
respect to his 2003 and 2004 taxation years on March 29, 2007. The
reassessments denied the Appellant a deduction for the Cactus Cowboys Payments.
This was accomplished by including in the Appellant's income the fees he earned
in the relevant years from his Ontario clients and not allowing any deductions for the Cactus Cowboys
Payments.
[12]
It is the Appellant's position that the Cactus
Cowboys Payments were made for services rendered by Cactus Cowboys to the
Appellant. Counsel for the Appellant argued that when the Appellant rendered
the services he did so in his role as an employee of Cactus Cowboys and not in
his personal capacity as a lawyer. He argued that the Cactus Cowboys Payments
were deductible since they were made in order to allow the Appellant to earn
income and were reasonable.
[13]
It is the Respondent's position that no services
were rendered by Cactus Cowboys to the Appellant. The only services
rendered were those rendered by the Appellant to his clients. The Respondent
argued that the Appellant was merely attempting to move income earned in his
law practice to Cactus Cowboys, which had substantial non-capital losses.
[14]
The second income tax issue concerns the
inclusion in the Appellant's income of certain amounts specified on invoices
issued by the Appellant.
[15]
In each of the 2003 and 2004 taxation years, the
Appellant issued a single invoice to Cactus Cowboys for "professional
services rendered." The invoices contained no other description of the
services. One invoice, dated December 3, 2003, was for $12,500 plus
GST. The second invoice, dated December 30, 2004, was for $28,000 plus
GST.
[16]
The Appellant included the $12,500 and $28,000
when calculating his taxable income for the 2003 and 2004 taxation years
respectively. Similarly, Cactus Cowboys deducted the $12,500 and $28,000
when calculating its taxable income for those years.
[17]
In reassessing the Appellant and Cactus Cowboys,
the Minister did not adjust the amounts included in the Appellant's income or
the amounts deducted by Cactus Cowboys.
[18]
The Appellant' s counsel argued that by denying
the deduction of the Cactus Cowboys Payments and including in income the
$12,500 and $28,000 the Appellant invoiced to Cactus Cowboys, the Minister is
double-counting the amounts the Appellant billed in respect of the work
performed for his Ontario clients.
[19]
Counsel for the Respondent argued that the
Appellant's invoices to Cactus Cowboys were legitimate invoices for
professional services rendered by the Appellant.
The Law
[20]
As counsel for the Appellant stated in his
closing argument, this is a case that is to be decided on its facts.
[21]
The Appellant has the onus of establishing that
the Cactus Cowboys Payments were made for services rendered by Cactus Cowboys, that
those services, if they were in fact rendered, were acquired by the Appellant
for the purpose of earning income from his law practice and, finally, that the
Cactus Cowboys Payments were reasonable.
The Appellant's testimony
[22]
The parties filed a Joint Book of Documents;
however, the Appellant's testimony constituted most of his evidence with
respect to the Cactus Cowboys Payments.
[23]
The Appellant began his testimony by summarizing
his involvement with the Ontario personal injury system. He noted that in late 1996 Ontario introduced a new compensation
system for individuals who suffered injuries in automobile accidents. The Appellant
described the new system as a hybrid system; it had a no‑fault component,
but if certain tests were satisfied, the injured party could pursue a tort
action.
[24]
Apparently, the system was complicated and, in
the Appellant's words, required a person with special knowledge.
[25]
The Appellant represented his first Ontario personal injury client in January 1998
and, by the summer of 1998, four other individuals retained him for advice with
respect to Ontario personal
injury claims. He realized that this was an excellent source of new work and
began acquiring the required knowledge.
[26]
He testified that he did not personally acquire
the required knowledge. Instead, in his view, Cactus Cowboys acquired that
knowledge. It did so through the Appellant, who, in his capacity as an
employee of Cactus Cowboys, attended numerous seminars hosted by the Law
Society of Upper Canada and the Independent Insurance Adjusters Association of
Ontario. He also called a number of lawyers in Thunder Bay to discuss the
new Ontario legislation.
[27]
The Appellant testified that in 1998 and 1999
Cactus Cowboys paid for copies of the Ontario legislation, paid his seminar
fees, paid for the hotel rooms he stayed in while attending the seminars, and paid
the entertainment expenses he incurred when attending the seminars. He provided
no documentary evidence to support his testimony.
[28]
According to the Appellant, after he acquired
the required knowledge, Cactus Cowboys began to provide expertise and expert
advice with respect to the settlement of automobile injury claims under the Ontario legislation. The Appellant noted that
prior to 2008 non‑lawyers were allowed to provide advice regarding the Ontario legislation.
[29]
The Appellant "got the idea" to use
Cactus Cowboys in 1998. He approached his accountant for advice. The accountant
thought it would be "OK" to use a corporation such as Cactus Cowboys to
acquire the expertise with respect to the Ontario legislation. The Appellant did not provide any documentation
evidencing the advice provided by the accountant.
[30]
The Appellant testified that Cactus Cowboys
provided its services primarily to his law practice. He testified that Cactus
Cowboys provided him with advice relating to such issues as the interface
between accident benefits under the Ontario legislation and amounts that
were required to be paid by the tortfeasor's insurance company, how to deal
with situations where there were no claims under the legislation, and how to
determine which insurance company was liable for the injuries suffered by his
client.
[31]
He testified that he did not enter into a
written contract with Cactus Cowboys. In fact, it appears that there was
no correspondence between Cactus Cowboys and the Appellant with respect to the
nature of the services provided by Cactus Cowboys. In addition, the Appellant
did not provide the Court with copies of written memorandums, emails or other
correspondence evidencing Cactus Cowboys' work product. The only written
evidence before the Court regarding services being provided by Cactus Cowboys was
copies of invoices issued by Cactus Cowboys to the Appellant.
[32]
The Appellant testified that Cactus Cowboys
billed him on completion of each matter, since that was the point in time at
which the Appellant was paid by the relevant insurance company (it appears that
most, if not all, clients retained the Appellant on a contingency basis). The
Joint Book of Documents contained examples of such billings. The Appellant
explained that each of the billings occurred as follows:
·
The Appellant billed
his individual client a certain amount for legal fees plus disbursements plus
GST.
·
Either on the same day
as the individual client was billed, or within one or two days, Cactus Cowboys
billed the Appellant an amount equal to the legal fees billed to the client
plus the disbursements shown on the invoice that were subject to GST.
·
The Appellant recovered
his fees from the settlement amounts paid by the relevant insurance company. Once
the Appellant recovered his fees from the settlement payment, he paid the
amount invoiced by Cactus Cowboys in respect of the particular client.
[33]
Each of the invoices issued by the Appellant to
his clients summarized the various legal services provided by the Appellant.
The invoices referred to such things as attending examinations for discovery,
drafting documents, service of documents, and telephone conversations. None of
the invoices issued by Cactus Cowboys to the Appellant contained a
description of the nature of the services provided, other than a general
comment that the particular invoice was for "all consulting services
rendered to this date."
Analysis
[34]
I will begin my analysis by noting that, for the
reasons discussed below, I have given very little weight to the oral
testimony of the Appellant.
[35]
My concerns with the Appellant's oral evidence
are illustrated by his testimony with respect to the following: Cactus Cowboys
retaining third parties, Cactus Cowboys providing services to lawyers other
than the Appellant, and the nature of the work performed by Cactus Cowboys.
Cactus Cowboys providing services to lawyers other
than the Appellant
[36]
The Appellant testified that Cactus Cowboys
provided consulting services to other lawyers. In a letter to the CRA auditor
dated February 23, 2007,
Mr. Robert Lee of Aikins, MacAulay & Thorvaldson, one of the
Appellant's lawyers, stated, "However, in the past, the Corporation
[Cactus Cowboys] has provided consulting services to other parties on a no-fees
basis, in the hope of growing its consulting business."
[37]
During cross-examination, the witness,
contradicting his lawyer, stated that Cactus Cowboys provided advice to some
third parties on a for-fee basis, "dependent on the type of opinion
that was being requested and certainly whether that opinion had to be in
writing or not."
The story changed once again when the Court questioned the Appellant.
[38]
After the Appellant confirmed that Cactus
Cowboys provided opinions to third parties for a fee, I asked him how a legal
opinion could be provided on Cactus Cowboys' letterhead. The Appellant appeared
to state that the written document was not an opinion but rather a summary of
what he believed was the situation under the Ontario system.
[39]
The Appellant did not produce any invoices or
other documentation evidencing billings by Cactus Cowboys to third parties. Further,
he did not provide the Court with copies of the written advice he claimed
Cactus Cowboys provided to the third parties. When asked by counsel for the
Respondent why he had not produced such evidence, he stated that, since the
Respondent did not request the information, he did not feel any need to file it
with the Court.
Cactus Cowboys retaining third parties
[40]
The Appellant testified that Cactus Cowboys
retained Ontario lawyers to
provide it with advice in areas where it lacked the required expertise. He
provided two examples.
[41]
The first example related to advice purportedly
provided to Cactus Cowboys in 2004. The Appellant testified that Cactus Cowboys
retained a law clerk employed by an Ontario law firm to research an issue that had arisen in a personal injury
matter. The only documentary evidence provided by the Appellant in that regard was
a copy of a cheque for $2,402.
The Appellant testified that Cactus Cowboys issued the cheque to the law firm
that employed the law clerk. The "re" line of the cheque was blank. Although
the Appellant testified that the law clerk provided a written opinion to Cactus
Cowboys, the Appellant did not provide the Court with a copy of the written
opinion. The Appellant could not recall whether the opinion was addressed to
him (i.e. his legal practice) or to Cactus Cowboys. Further, the Appellant did
not produce a copy of any other written or electronic communication between
Cactus Cowboys and the law clerk (or the clerk's firm), or a copy of the
invoice issued by the law firm.
[42]
The second example related to advice purportedly
provided in 2004 to Cactus Cowboys by the Ontario law firm of Martin, Scrimshaw, Scott. Once again, the Appellant
provided no documentary evidence to support his testimony, other than a copy of
a Cactus Cowboys cheque to the law firm. He did not provide the Court with
copies of the opinion, of correspondence with the law firm, or of the bill
issued by the law firm. He could not recall the issue researched or the name of
the related file.
The nature of the work performed by Cactus Cowboys
[43]
The foundation of the Appellant's case was his
testimony that Cactus Cowboys provided advice to him in respect of
individuals who had suffered injuries in motor vehicle accidents. Tab 20 of the
Joint Book of Documents contained twenty-five sample invoices issued by Cactus
Cowboys to the Appellant in 2004. Each invoice contains a reference line,
which, the Appellant testified, identifies the relevant client of the
Appellant. For example, the Cactus Cowboys' invoice at page 1 of Tab 20 of the Joint
Book of Documents is for $3,733 plus GST for "all consulting services
rendered to date" in respect of a client of the Appellant who is
identified on the reference line as "Besyk." The Appellant testified
that "Besyk" was an individual who had suffered personal injuries in
an automobile accident in Ontario.
[44]
The difficulty I have with the Appellant's
testimony on this point is that seven of the twenty-five invoices in Tab 20
reference a client of the Appellant that is a corporation. Obviously, the
corporations did not suffer injuries in automobile accidents. When he was asked
to explain this discrepancy, I found the Appellant to be evasive. He stated
that he had not reviewed these files and could not remember what services he had
provided to the corporate clients.
[45]
The invoices in Tab 20 are not consistent with
the Appellant's testimony that the Cactus Cowboys Payments related to advice
provided in respect of individuals. However, the invoices are consistent with a
November 1, 2006 memorandum sent by the Appellant's accountant to the CRA
auditor. The accountant states in the memorandum that "Greg's [the
Appellant's] law practice generates fees from Manitoba and Ontario, fees from Greg's Ontario litigation practice are reported in Cactus Cowboys Inc., business
number 894925031RC0001. All other fees are reported in Greg's personal tax
return, specifically schedule T2124."
[46]
The Joint Book of Documents contained two
financial documents, which the Appellant identified as statements of earnings
for his Ontario practice. These documents
show that the Cactus Cowboys Payments equalled the total revenue earned by the
Appellant from his Ontario
clients. The Appellant testified that, in addition to personal injury advice,
he provided legal advice to his Ontario clients with respect to real estate and family law matters.
[47]
On the basis of this documentary evidence, I
have concluded that the Cactus Cowboys Payments related to all of his Ontario legal practice, not just the
personal injury portion of the practice.
[48]
The above three examples of the Appellant's
testimony are consistent with a significant portion of his testimony. They
illustrate why I have placed little weight on his oral testimony.
[49]
I am particularly concerned about the fact that
nearly all of the Appellant's evidence consists of viva voce evidence, namely,
his own testimony. He did not provide any documentary evidence with respect to
the activities of Cactus Cowboys. In particular, he failed to produce:
·
any written or
electronic communication between Cactus Cowboys and the Appellant evidencing an
agreement for the provision of services by Cactus Cowboys to the Appellant;
·
any documentary
evidence that the Appellant was an employee of Cactus Cowboys;
·
any documents, such as
copies of memorandums, letters or emails, evidencing the work product produced
by Cactus Cowboys.
[50]
The Appellant is an experienced litigator who
knows the importance of documentary evidence. The Appellant did not explain why
he did not produce the documentary evidence discussed above. I have consequently
drawn a negative inference from this failure: either the documentation does not
exist or, if it does exist, it is inconsistent with his testimony.
[51]
As noted previously, the onus is on the Appellant
to establish that he made the Cactus Cowboys Payments in consideration of
services rendered by Cactus Cowboys. He has not satisfied this onus. There
is no reliable evidence before me to support a finding of fact that Cactus
Cowboys rendered services to the Appellant.
[52]
After considering all of the evidence, I have
concluded that the only services provided were the legal services provided by
the Appellant to his clients.
[53]
The Appellant's counsel argued that cases such
as the present one turn on their facts. He is correct. The evidence before me
does not support the Appellant's position. The evidence supports the position
of counsel for the Respondent that the Appellant was merely attempting to move
income earned in his law practice to Cactus Cowboys.
[54]
The second income tax issue relates to the
inclusion in the Appellant's income of amounts invoiced by the Appellant to
Cactus Cowboys.
[55]
The Appellant testified that it was not
"fair" for Cactus Cowboys to retain 100% of the fees and
disbursements billed to his Ontario clients. He decided that Cactus Cowboys should pay an amount to him
as consideration for his legal services. He determined that approximately 15%
of the amounts billed to his clients represented a reasonable consideration for
his legal services. He testified that he then issued invoices for $12,500 and
$28,000 in the last month of 2003 and 2004 respectively. Copies of the invoices
were included in the Joint Book of Documents. The invoices describe the
services provided as follows: "For all professional services provided to
you in respect of Cactus Cowboys."
The Appellant did not provide the Court with any documentary evidence to tie
the Cactus Cowboys Payments to his annual invoices issued to Cactus Cowboys.
[56]
On the basis of the evidence before the Court, I
agree with counsel for the Respondent that the invoices appear to be legitimate
invoices for services rendered. The invoices refer to all professional services
rendered in respect of Cactus Cowboys. It is clear from the financial
statements included in the Joint Book of Documents that Cactus Cowboys' stable
and horse operations were substantial. Normally, such substantial operations
require, at some point in time, legal advice. As a result, I see no reason why
I should remove from the Appellant's taxable income legal fees from a valid
invoice issued by a lawyer (the Appellant) for legal services.
[57]
For the foregoing reasons, the Appellant's
appeals with respect to the income tax issues are dismissed, with costs to the
Respondent.
GST Appeal
[58]
The Appellant did not report on his GST returns
for the reporting periods that began on January 1, 2003 and ended on December
31, 2004 (the "GST Reporting Periods") any net tax in
respect of his Ontario clients.
He did not report any GST collected or collectable and did not claim any input
tax credits.
[59]
In assessing the Appellant for the GST Reporting
Periods, the Minister increased the Appellant's net tax by $17,901.80, that is,
the amount of GST collected or collectable on the supplies made by the
Appellant to his Ontario
clients. The Minister did not allow any input tax credits in respect of the
Cactus Cowboys Payments.
[60]
Both parties accepted the fact that the
Appellant paid Cactus Cowboys GST in respect of the Cactus Cowboys Payments, that
Cactus Cowboys remitted the GST, and that such GST equalled the GST payable by
the Appellant's Ontario
clients.
[61]
It was the Respondent's position that the
Appellant could not claim input tax credits under subsection 169(1) of Part IX
of the Excise Tax Act (the "GST legislation") since he did not
acquire services from Cactus Cowboys. The Cactus Cowboys Payments were simply a
transfer of funds. Counsel for the Respondent also relied upon the fact that
the GST in respect of the Cactus Cowboys Payments had been refunded by the CRA
to Cactus Cowboys.
[62]
It is not clear to me upon what basis the
Minister refunded the GST to Cactus Cowboys. Subsection 225(1) of the GST legislation
requires a person to add to his or her net tax all amounts collected or
collectable by the person as or on account of tax. It is clear from the
invoices included in Tabs 19, 20 and 22 of Exhibit R-1 that the amounts in
question were collected by Cactus Cowboys as tax and thus were remittable under
subsection 225(1) of the GST legislation. I am not aware of any provision in
the GST legislation that grants the Minister the discretion to refund to a
registrant tax that the registrant has properly remitted. Section 232 of the
GST legislation allows a registrant, such as Cactus Cowboys, to claim a
credit when it refunds tax collected in error and issues a credit note in
prescribed form. The Appellant testified that this did not occur, and the
Respondent did not argue that Cactus Cowboys refunded the tax to the Appellant
or that it issued a prescribed credit note.
[63]
Whether or not the CRA refunded tax to Cactus
Cowboys is irrelevant when one is determining whether the Appellant was
entitled to credits in respect of the Cactus Cowboys Payments.
[64]
In assessing the net tax of the Appellant, the
Minister was required under subsections 296(2) and (2.1) of the GST legislation
to take into account any allowable input tax credits or rebates that the Appellant
was entitled to claim during the applicable reporting period. In other words,
the Minister was under a statutory obligation to audit to net tax.
[65]
The Appellant paid amounts to Cactus Cowboys on
account of tax. However, Cactus Cowboys did not make a supply to the
Appellant. As a result, all of the tax paid by the Appellant in respect of the
Cactus Cowboys Payments was paid in error. The Appellant was entitled to claim,
under section 261 of the GST legislation, a rebate with regard to the tax
paid in error. When assessing the net tax of the Appellant, the Minister was
required under subsection 296(2.1) of the GST legislation to apply the
allowable rebate for the tax paid in error against the net tax of the
Appellant.
[66]
For these reasons, the appeal with respect to the
assessment made under the GST legislation for the reporting periods of the
Appellant that began on January 1, 2003 and ended on December 31,
2004 is allowed, without costs. The assessment, dated March 15, 2007, is
referred back to the Minister of National Revenue for reconsideration and
reassessment on the basis that the Minister was required to reduce the net tax
of the Appellant by the amount of GST the Appellant paid during the assessed
reporting periods in respect of the Cactus Cowboys Payments.
Signed at Antigonish, Nova Scotia, this 27th day of August 2010.
“S. D’Arcy”
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