Citation: 2010 TCC 637
Date: December 15, 2010
Docket: 2007-4187(IT)G
BETWEEN:
ANIGER CONSULTING INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Little J.
A. FACTS
[1]
The Appellant was
incorporated under the laws of the Province of Alberta
on November 27, 1996.
[2]
Regina
Gajecki (“Regina”) purchased
100 per cent of the shares of the Appellant on February 1, 2000.
[3]
Regina is the sole
shareholder and Director of the Appellant.
[4]
In the years under
appeal, Regina was employed on a full-time basis by Atco
Gas Ltd. as a Clerk C.
[5]
In the years under
appeal, Regina was the common-law spouse of Barry
Singleton (“Barry”). Regina is now the wife of Barry.
[6]
SAEL Inspection Ltd.
(“SAEL”) was incorporated under the laws of the Province of Alberta on March 29, 1982.
[7]
Barry was the sole
shareholder and President of SAEL during the years under appeal.
[8]
In 1999, Barry, his
brother Bryan Singleton (“Bryan”) and their respective companies entered
into a contract to provide the engineering services to assist in the
construction of the Alliance Pipeline Project (the “Project”).
[9]
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.
[10]
The cost of the Project
was estimated to be $5 Billion. The Canadian portion of the Project was
estimated to be $1.8 Billion.
[11]
The Project was
completed under budget.
[12]
The Appellant entered
into a consulting agreement with SAEL (the “Agreement”) on March 20, 2000.
[13]
The Agreement provided
that the Appellant would provide various services to SAEL.
[14]
Regina was the only employee of the Appellant.
[15]
Regina maintains that she provided all of the
services to SAEL for the Appellant.
[16]
The Minister of
National Revenue (the “Minister”) maintains that the Appellant and SAEL are not
associated corporations within the meaning of the Income Tax Act (the
“Act”).
[17]
Regina earned employment income of $47,690.70
from Atco Gas Ltd. in 2001 and she earned employment income of $30,000 from the
Appellant in 2001.
[18]
100 per cent of the
income of the Appellant in the years under appeal was derived from the
consulting services that were provided by the Appellant to SAEL.
[19]
The Appellant invoiced
SAEL for the consulting services on the following basis:
|
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
|
[20]
The Appellant was paid
by SAEL for the consulting services.
[21]
SAEL also paid bonuses to
the Appellant of $95,000.00 in 2001 and $100,000.00 in 2002.
[22]
Pursuant to the
Agreement, the Appellant was to be paid $15,000 per month by SAEL.
[23]
SAEL paid the Appellant
on an annual basis.
[24]
The Appellant had no
additional clients during the years under appeal.
[25]
The Appellant did not
own any fixed assets, such as a computer, or any office equipment that would be
used by the Appellant to complete the work performed for SAEL.
[26]
In reviewing the tax status
of the Appellant, the Minister has concluded that, but for the existence of the
Appellant, Regina would have been regarded as an employee of
SAEL.
[27]
The Minister has also
concluded that the consulting services provided to SAEL by the Appellant were
the personal services of Regina.
[28]
The Minister maintains
that the Appellant was not entitled to claim the small business deduction in
the years under appeal.
[29]
In the 2001 and 2002
taxation years, the Appellant claimed a number of business expenses.
[30]
The Minister denied the
business expenses claimed by the Appellant.
B. ISSUES
[31]
The issues are whether:
a) The Appellant was
operating a personal services business in the 2001 and 2002 taxation
years;
b) The Minister
properly denied the Appellant the small business deduction for the 2001 and
2002 taxation years; and
c) The Minister
properly disallowed expenses in the amount of $6,000.00 and $10,516.00 for the
2001 and 2002 taxation years respectively.
C. ANALYSIS
[32]
During the hearing, the
following points were also established:
1. The 2002 bonus paid
to the Appellant by SAEL was accrued in full on the books of SAEL as at March
29, 2002. As a result of this arrangement, the Appellant was paid eight months
in advance of the completion of the term of the Agreement.
2. According to the
calculation of the Canada Revenue Agency (“CRA”) auditor, the average hourly
wage paid to the Appellant by SAEL (including monthly salary and yearly
bonuses) was $167.00 per hour for the 2001 year and $179.00 per hour for the
2002 year.
3. 100 per cent of the
Appellant’s income in the years under appeal was derived from the consulting services
performed by the Appellant for SAEL.
4. Regina’s average hourly wage for her full-time employment at
Atco Gas Ltd. for 2002 was $25.00 per hour.
5. SAEL hired various
individuals to provide drafting and other professional services on the Project.
6. The other parties that
SAEL contracted with on the Project were paid between $20.00 to $35.00 per hour
for their services on the Project.
7. The other parties
SAEL contracted with on the Project were required to provide monthly invoices,
including the hours worked on a daily basis and details relating to the
services that were provided.
8. The invoices that
the Appellant provided to SAEL were provided on an annual basis with little or
no detail on the hours worked, nor on the services provided to SAEL for the
Project.
[33]
In the Reply to the
Notice of Appeal, at paragraph 18, the Minister states:
18gg) Aniger did not perform the Consulting
Services for SAEL as claimed, as other individuals were contracted to do this
work.
[34]
In the Reply to the
Notice of Appeal filed by the Minister for SAEL, at paragraph 18, the Minister
said:
18hh) 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 performed, and the amounts paid
to other contractors providing higher level services on the project.
CONCLUSION
[35]
After considering the various
points as outlined above, I have concluded as follows:
1. The Appellant was
operating a personal services business in the 2001 and 2002 taxation years. It
therefore follows that the Appellant is not entitled to claim the small business
deduction for those years;
2. The test to
determine whether a company is a personal services business is found in subsection
125(7) of the Act. The question that must be asked, for the purpose of
this section, is:
…whether the incorporated employee [Regina] would reasonably be regarded as an officer or employee of [SAEL] …
but for the existence of the Corporation [i.e. the Appellant]…
[36]
In reaching the
conclusion that the Appellant’s business was a personal services business, I
have noted the following facts:
(a) The close
relationship between Barry and Regina, i.e., she was a common-law spouse during
the years under appeal and she is now married to Barry. (Note: Barry
owned 100 per cent of the shares of SAEL and Regina
owned 100 per cent of the shares of the Appellant);
(b) The fact that Regina was working on a full-time basis at Atco Gas during
the day and she claims that she was working for the Appellant at night and on
the weekend. There is a credibility question on this point;
(c) The fact that Regina received $25.00 an hour at Atco Gas and $167.00 an
hour from Aniger. In other words, is it reasonable to think that a person can
work enough hours in their spare time and receive an amount for their spare
time work that is five times the amount that they received in their regular
full-time job? There is a credibility question on this point;
(d) It was also noted
that other people who were doing the same type of work that Regina claims to
have done for Aniger on the Project were being paid $25.00 to $30.00 per hour;
(e) The Appellant was
billing SAEL on an annual basis. The Appellant did not have to provide an
invoice in a timely manner;
(f) The Appellant did
not require any capital assets or have any financial requirements in order to
provide the services to SAEL; and
(g) The Appellant did
not employ more than five full-time employees. Regina
was the only employee of the Appellant.
[37]
I have reviewed various
legal authorities dealing with a personal services business. In my opinion, the
decision of the Federal Court of Appeal in Dynamic Industries Ltd. v. The
Queen, 2005 D.T.C. 5293, is applicable in this case. At paragraph 41,
the Court said,
… the interposition of a corporation between the recipient of a
service and the individual who personally performs the service could result in
an unreasonable tax advantage resulting in part from a lower corporate tax rate
that is significantly lower than the personal tax rate and in part from
opportunities for income tax splitting. …
[38]
The wording contained
in subsection 125(7) of the Act basically requires a Court to ignore the
actual relationship of the parties and determine what the parties would have
done had they set up a different relationship. I have, therefore, concluded
that Regina would reasonably be regarded to be an
employee of SAEL.
[39]
I also refer to the
following Court decisions in support of my conclusion that the Appellant’s
business was a personal services business:
(a) 609309
Alberta Ltd. v. The Queen, 2010 D.T.C. 1136; and
(b) 1166787 Ontario Ltd. v. The
Queen, 2008 D.T.C. 2722.
[40]
In the Reply, the
Minister maintained that the Appellant did not perform the consulting services
for SAEL (see paragraph [33] above). I disagree. I have concluded that the
Appellant did perform work for SAEL as outlined in the Agreement.
Expenses
[41]
The following expenses
are involved:
|
|
2001
|
2002
|
|
Accounting and Legal Expenses
|
$2,049.00
|
$2,682.00
|
|
Automobile expenses
|
$3,600.00
|
$3,600.00
|
|
Premises Costs
|
$2,400.00
|
$2,400.00
|
|
Portfolio Management Fee
|
-
|
$1,834.00
|
[42]
In Dynamic, the
Court noted that otherwise deductible business expenses are not deductible at
the corporate level as a result of the restrictions contained in paragraph 18(1)(p)
of the Act.
[43]
Based on the wording
contained in paragraph 18(1)(p) of the Act, I have concluded that
the Appellant is not allowed to deduct the expenses outlined in paragraph [41]
above.
[44]
It should be noted that
when the Minister reassessed Barry for the 2002 taxation year, he included as a
benefit the amount paid by SAEL to the Appellant for consulting services
provided by the Appellant. (Note: This amount was also included by the Minister
in the Appellant’s income.)
[45]
However, during the
hearing, Counsel for the Respondent indicated that the Reassessment against
Barry would be reduced to eliminate the imposition of benefits under subsection
56(2) of the Act in the income of Barry. Counsel for the Respondent provided
the Court with a letter dated May 11, 2010 which reads, in part, as follows:
… the Respondent is formally conceding the imposition of 56(2)
benefits on Mr. Singleton regarding the unreasonable portion of the fees
paid to Aniger.
Costs
[46]
Counsel for the
Appellant argued that solicitor/client costs should be awarded in this
situation.
[47]
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. …
[48]
A large number of Court
decisions have made similar comments. In my opinion, this is not a case where
solicitor/client costs should be awarded.
[49]
With respect to party
to party costs, I have concluded that, since success has been divided, no costs
should be allowed.
[50]
The appeal is allowed,
without costs, and the Minister is to make the adjustments as outlined above.
Signed at Vancouver, British Columbia, this 15th day of December 2010.
“L.M. Little”
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