Citation: 2010 TCC 640
Date: December 15, 2010
Docket: 2007-4188(IT)G
BETWEEN:
SAEL INSPECTION LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Little J.
A. FACTS
[1]
The Appellant was
incorporated in the Province
of Alberta on March 29, 1982.
[2]
Barry Singleton (“Barry”)
was the President and sole shareholder of the Appellant in the years under
appeal.
[3]
Barry and his brother,
Bryan Singleton (“Bryan”), were the Directors of the Appellant in
the years under appeal.
[4]
The Appellant’s fiscal
year end is March 29.
[5]
The Appellant is in the
business of oil and gas pipeline consulting.
[6]
The Appellant entered
into a consulting agreement (the “Agreement”) with Aniger Consulting Inc.
(“Aniger”) on March 20, 2000.
[7]
100 percent of the
shares of Aniger were owned by Regina Gajecki (“Regina”).
[8]
Regina was the common-law spouse of Barry and is
now the wife of Barry.
[9]
In 1999, Barry, his
brother Bryan and their respective companies entered into a contract to provide
the engineering services to assist in the construction of the Canadian portion
of the Alliance Pipeline Project (the “Project”).
[10]
The Project was a
proposed pipeline to carry natural gas from Fort St. John, British Columbia to Chicago, Illinois. The
proposed pipeline was to go across a portion of the Province of British Columbia, through the Province of Alberta
and through a portion of the Province of Saskatchewan. The proposed pipeline was
to cross into the United
States near Estevan, Saskatchewan.
[11]
The cost of the Project
was estimated to be $5 Billion. The Canadian portion of the Project was
estimated to be $1.8 Billion.
[12]
The Project was
completed under budget.
[13]
Aniger invoiced the
Appellant for the consulting services provided for the following periods:
|
Period
|
Amount
|
GST
|
Total
|
|
Dec. 1, 1999 – Nov. 30, 2000
|
$260,000.00
|
$18,200.00
|
$278,200.00
|
|
April 1, 2000 – March 31, 2001
|
$275,000.00
|
$19,250.00
|
$294,250.00
|
|
April 1, 2001 – March 31, 2002
|
$280,000.00
|
$19,600.00
|
$299,600.00
|
|
TOTAL
|
$815,000.00
|
$57,050.00
|
$872,050.00
|
[14]
Pursuant to the
Agreement, Aniger was to be paid $15,000.00 per month by the Appellant.
[15]
Pursuant to the
Agreement, Aniger was paid bonuses of $95,000.00 in 2001 and $100,000.00 in
2002. (Note: These bonuses were in addition to the amounts shown in
paragraph [13] above.)
[16]
The Minister of
National Revenue (the “Minister”) maintains that the Appellant contracted with
various professionals to provide drafting and other professional consulting
services to the Appellant.
[17]
The Minister also
maintains that Aniger did not perform consulting services to the Appellant as claimed,
since other individuals were contracted to do this work.
[18]
In the alternative, the
Minister maintains that if Aniger did perform the consulting services to the
Appellant as claimed, the amounts paid to Aniger were grossly inflated.
[19]
The Minister also
disallowed the following expenses:
|
Disallowed Expense
|
March 29, 2001
|
March 29, 2002
|
|
Auto insurance – personal vehicles
|
$ 2,498.00
|
$ 442.00
|
|
Clawback of portion of meals and entertainment
expenses
|
$ 4,903.00
|
$ 4,740.00
|
|
Hotel expenses re North Bay trip
|
$ 4,211.00
|
|
|
Flights re North Bay trip
|
$ 7,694.00
|
|
|
Repairs to Jaguar
|
|
$ 99.00
|
|
CCA re 1998 Dodge
|
|
$ 2,442.00
|
|
Unreasonable consulting expenses
|
|
$246,386.00
|
|
Unreasonable consulting expenses
|
|
$250,641.00
|
[20]
The Minister also
imposed penalties pursuant to subsection 163(2) of the Income Tax Act
(the “Act”).
B. ISSUES
[21]
The issues are whether:
a) the Minister
correctly assessed the Appellant by including in its income the amount of
$497,027.00 in respect of a deduction disallowed for consulting expenses paid
to Aniger in the 2002 taxation year;
b) the Minister
correctly assessed the Appellant by including in its income the amount of
$11,905.00 in respect of deductions disallowed as travel expenses claimed in
the 2001 taxation year; and
c) the Minister
correctly reassessed the Appellant by imposing penalties pursuant to subsection
163(2) of the Act in respect of disallowed travel expenses and
disallowed consulting expenses in the Appellant’s 2001 and 2002 taxation years.
C. ANALYSIS AND DECISION
[22]
During the hearing, the
following additional facts were established:
1. The Appellant paid Aniger on an
annual basis.
2. Regina submitted timetables to the Appellant in which she
stated that she worked the following hours for Aniger:
2001 - 1,644 hours
2002 - 1,560 hours
3. Regina is employed on a full-time basis with Atco Gas as a Clerk
C in the Land and Claims Department.
4. The average hourly
wage paid to Aniger by the Appellant (including monthly salary and yearly
bonus) was $167.00 per hour for 2001 and $179.00 per hour for 2002.
5. Regina’s average hourly wage for her full-time employment at
Atco Gas for 2002 was $25.00 per hour.
6. The Minister
maintains that the Appellant contracted with various professionals to provide
drafting and other professional consulting services on the Project.
7. The other
contractors retained by the Appellant were paid between $20.00 to $35.00 per
hour for their services.
8. The other
contractors retained by the Appellant were required to provide monthly
invoices, including daily hours worked and details pertaining to the Project
services provided.
9. The invoices
provided to the Appellant by Aniger were provided on an annual basis.
[23]
The Minister maintains
that Aniger did not perform the consulting services as claimed since other
individuals were contracted to do this work (see Reply, paragraph 17(gg)).
[24]
In the alternative the
Minister maintains,
Alternatively, if Aniger did perform the Consulting Services for
SAEL as claimed, then the amounts paid to Aniger were grossly inflated given
her qualifications, the type of services provided, and the amounts paid to
other contractors providing higher level services on the project.
(Reply, paragraph 17(hh))
[25]
Based upon the
evidence, I have concluded that Aniger did perform a considerable amount of
work for the Appellant as outlined in the Agreement. However, I agree with the
argument made by counsel for the Respondent that the fees paid by the Appellant
to Aniger were inflated. Based upon the evidence that was presented, the
relationship between Regina and Barry, the substantial fees paid to Regina by
the Appellant compared with the fees received by Regina from Atco Gas and other
relevant facts, I have concluded that the amounts paid to Aniger by the
Appellant should be determined as follows:
|
|
|
Deduct
|
Amount Allowed
|
|
2002
|
$250,641.00
|
$75,000.00
|
$175,641.00
|
|
$246,386.00
|
$75,000.00
|
$171,386.00
|
Travel Expenses
[26]
In 2001, the Appellant
claimed a deduction of $7,694.00 in airfare expenses and $4,211.00 in hotel expenses
related to a trip to North
Bay, Ontario.
[27]
Barry testified that
one of the main reasons he and other employees of the various companies took
this trip was for business purposes, i.e., to attend a strategy session.
[28]
The Minister maintains
that the main reason for the trip from Calgary to North Bay was to celebrate the 80th birthday of the mother of Barry and Bryan
and the mother or relative of other employees of the companies.
[29]
I have concluded that
50 per cent of these expenses should be allowed as business expenses and 50 per
cent of these expenses should be recognized as personal expenses.
Meals and Entertainment Expenses
[30]
The Appellant claimed a
deduction for meals and entertainment expenses in the amount of $9,480.00 in
the 2002 taxation year.
[31]
The Minister maintains
that the Appellant knew, or ought to have known, that 50 per cent of the meals
and entertainment expenses that were claimed were not allowable deductions
pursuant to section 67.1 of the Act.
[32]
I agree with the
Minister’s position and, therefore, 50 per cent of these expenses should be
disallowed.
Insurance Expenses
[33]
The Appellant claimed
the following insurance expenses:
|
Vehicles
|
2001
|
2002
|
|
1989 Jaguar
1986 Ford Bronco
1995 Dodge Stealth
|
$2,498.00 (total)
|
$442.00 (total)
|
The Minister disallowed this claim. I agree with the
position taken by the Minister.
Capital Cost Allowance on 1998 Dodge Ram
[34]
The Appellant claimed Capital
Cost Allowance (“CCA”) of $2,442.00 in the 2002 taxation year and the Minister
disallowed this amount. I agree with the position taken by the Minister.
Repairs to the 1989 Jaguar
[35]
The Appellant claimed
$99.00 in the 2002 taxation year and the Minister disallowed this amount. I
agree with the position taken by the Minister.
Penalties
[36]
The Minister assessed
penalties in the following situations:
1. Consulting fees
paid by the Appellant to Aniger in the amount of $497,027.00 in the 2002
taxation year;
2. Amounts disallowed
for travel expenses in the amount of $11,905.00 in the 2001 taxation year;
3. Insurance expenses of
$2,498.00 in the 2001 taxation year and $442.00 in the 2002 taxation year;
4. CCA of $2,442.00 in the 2002
taxation year; and
5. Repairs in the amount of $99.00 in
the 2002 taxation year.
[37]
The Minister imposed
penalties under subsection 163(2) of the Act. In support of the
penalties, counsel for the Respondent said in her argument:
My friend is correct, Venne is the key decision. …
(see Venne v. The Queen, 84 D.T.C.
6247)
(Transcript, page 584, lines 1 - 2).
Counsel for the Respondent then quoted from paragraph
37 of the Venne decision:
Gross negligence must be taken to involve greater neglect than
simply a failure to use reasonable care. It must involve a high degree of
negligence tantamount to intentional acting, an indifference as to whether or
not the law was complied with.
(Transcript, page 584, lines 13 – 19)
[38]
At page 591 of the
transcript, counsel for the Respondent said:
In the penalty recommendation report, part of her reason for
supporting it was that they had previous interaction with the CRA.
(Transcript, page 591, lines 5 – 7)
(Note: The reference to “they” in the above
quote was a reference to Barry and Bryan and their companies.)
[39]
Counsel for the
Respondent filed a copy of an Audit Report for the Singletons for an earlier
period but did not file a copy of the T-401 Report. In connection with the
failure of the Respondent to file a copy of the T-401 Report, I said:
JUSTICE: Well, I don’t want to see the Crown file a half of a
document. You can’t file an audit report and say, “Well, there’s the story.
He’s done it before.” Give me the full report, not just the audit report. Let’s
see the T4-1 [sic] report or the Appeals Section report. This is just
half the story. …
(Transcript, page 590, lines 7 – 13)
[40]
Later on during the
hearing, I referred to the audit and said:
JUSTICE: … How was it finally resolved? That’s what I’m
concerned about.
(Transcript, page 592, lines 19 – 21)
(Note: Counsel for the Respondent said that
they could not find the T-401 Report or the Appeals Section Report.)
[41]
In re-examination of
Mr. Nagy, counsel for the Appellant referred to the earlier Audit Report and
said:
Q. First, my friend took you to an earlier audit, and you
mentioned that during the course of that audit, there were errors by the auditor,
and they were required to apologize?
A. That’s right.
Q. Can you tell us about that?
A. Well, there were a number of issues, and then there was a
statement made by a CAR – CRA auditor – that looking at it would lead to the
belief that the taxpayer or – or not necessarily carrying out their duties and
responsibilities as a – as a taxpayer.
So, we confronted the auditor, and – and the subsequent
individual, the supervisor, and they indicated to us that they would retract
the statements in a letter, ‘cause we proved that they were erroneous, they
were wrong. And we never, ever did get that letter, and we phoned her a couple
of times, and never, ever got the letter.
(Transcript, page 305, lines 4 – 23)
[42]
Based on the evidence
presented, I am not convinced that the penalties that were imposed should
apply. All of the penalties should be deleted.
Costs:
[43]
Counsel for the
Appellant argued that solicitor/client costs should be awarded in this situation.
[44]
In Young v. Young,
[1993] 4 S.C.R. 3, the Supreme Court of Canada
said:
Solicitor‑client
costs are generally awarded only where there has been reprehensible, scandalous
or outrageous conduct on the part of one of the parties. …
[45]
Solicitor/client costs
are only awarded in extreme and unusual circumstances. In my opinion, this is
not a situation where solicitor/client costs should be awarded.
[46]
With respect to party
to party costs, I have concluded that, since success has been divided, no costs
should be allowed.
Signed at Vancouver, British Columbia, this 15th day of December 2010.
“L.M. Little”
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