[OFFICIAL ENGLISH
TRANSLATION]
Date:
20021206
Docket:
1999-3873(IT)G
1999-3874(IT)G
1999-3875(IT)G
1999-3876(IT)G
and 1999-3877(IT)G
BETWEEN:
PHILIPPE
FILLION,
CHARLES
FILLION,
JEAN-MARC
FILLION,
PIERRETTE
RACINE and
SERVICES
FINANCIERS FILLION & ASSOCIÉS INC.,
Appellants,
and
Her Majesty The Queen,
Respondent.
REASONS FOR JUDGMENT
Tardif,
J.T.C.C.
[1] The Court has before it five appeals, which are being heard on
common evidence at the parties' request.
[2] The assessments being appealed from were made on the basis of the
following assumptions of fact:
Docket: Philippe Fillion (1999-3873(IT)G) and
Charles Fillion (1999-3874(IT)G)
[translation]
(a) On January 1,
1993, Jean-Marc Fillion, his spouse Pierrette Racine, and their sons
Charles and Philippe Fillion formed a general partnership, "Société en nom
collectif J.M.F." ("the general partnership");
(b) the capital
invested by each member of the general partnership is $100;
(c) the purposes
of the general partnership are to do business development, to seek out clients,
to do public relations work, and to sell financial products;
(d) during the
taxation years at issue, Jean-Marc Fillion was the only partner who held an
insurance broker's licence;
(e) Jean-Marc
Fillion is the only partner authorized to manage the general partnership;
(f) during the
taxation years at issue, Charles and Philippe Fillion were full-time students
and did no work for the general partnership;
(g) Pierrette
Racine did very little work for the general partnership;
(h) the income of
the general partnership is derived almost exclusively from the company
"Services Financiers Fillion et Associés Inc." ("Services
Financiers");
(i) during the
taxation years at issue, Jean-Marc Fillion was the only shareholder in Services
Financiers;
(j) the main
activity of Services Financiers is selling insurance products;
(k) there is no
set method for allocating income between Services Financiers and the general
partnership;
(l) the general
partnership uses an annual, comprehensive-amount invoicing system;
(m) Jean-Marc
Fillion cashes all professional fees invoiced by the general partnership,
regardless of the work allegedly performed by the other members of the general
partnership or the distribution of profits among the members;
(n) during the
taxation years at issue, the general partnership had no bank account;
(o) according to
the income tax returns of Jean-Marc Fillion and the other partners, the
percentage used to divide income among the partners varies from one year to
another;
(p) given the
capital invested and the work each partner performed in the general
partnership, the allocation of income from the general partnership among
Jean-Marc Fillion and the other members of the general partnership was not
reasonable;
(q) it was not
established that the general partnership performed any operations during the
taxation years at issue;
Docket: Jean-Marc
Fillion (1999‑3875(IT)G)
[translation]
(a) On January 1,
1993, Jean-Marc Fillion, his spouse Pierrette Racine, and their sons
Charles and Philippe Fillion formed a general partnership, "Société en nom
collectif J.M.F." ("the general partnership");
(b) the capital
invested by each member of the general partnership is $100;
(c) the purposes
of the general partnership are to do business development, to seek out clients,
to do public relations work, and to sell financial products;
(d) during the
taxation years at issue, Jean-Marc Fillion was the only partner who held an
insurance broker's licence;
(e) Jean-Marc
Fillion is the only partner authorized to manage the general partnership;
(f) during the
taxation years at issue, Charles and Philippe Fillion were full-time students
and did no work for the general partnership;
(g) Pierrette
Racine did very little work for the general partnership;
(h) the income of
the general partnership is derived almost exclusively from the company
"Services Financiers Fillion et Associés Inc." ("Services
Financiers");
(i) during the
taxation years at issue, Jean-Marc Fillion was the only shareholder in Services
Financiers;
(j) the main
activity of Services Financiers is selling insurance products;
(k) there is no
set method for allocating income between Services Financiers and the general
partnership;
(l) the general
partnership uses an annual, comprehensive-amount invoicing system;
(m) Jean-Marc
Fillion cashes all professional fees invoiced by the general partnership,
regardless of the work allegedly performed by the other members of the general
partnership or the distribution of profits among the members;
(n) during the
taxation years at issue, the general partnership had no bank account;
(o) according to
the income tax returns of Jean-Marc Fillion and the other partners, the
percentage used to divide income among the partners varies from one year to
another;
(p) given the
capital invested and the work each partner performed in the general
partnership, the allocation of income from the general partnership among
Jean-Marc Fillion and the other members of the general partnership was not
reasonable;
(q) it was not
established that the general partnership performed any operations during the
taxation years at issue;
Limited partnership
"Société en commandite Gestion Fillion" ("the limited
partnership")
(r) according to
the financial statements of the limited partnership, Jean-Marc Fillion holds 20
per cent of the shares of the partnership, and his spouse Pierrette Racine
holds 80 per cent of the shares;
(s) in adding
additional income of $14,606 to Jean-Marc Fillion's income for the 1995
taxation year, the Minister of National Revenue relied on the same assumptions
of fact as those set out in subparagraphs (b) to (q) of this document given the
scarcity of available information about the limited partnership;
Business investment loss
(t) in his
income tax return for the 1993 taxation year, Jean-Marc Fillion claimed a
deduction of $22,500 as a business investment loss;
(u) that loss
refers to an investment of $30,000 by Jean-Marc Fillion in "Les Mines
diatissan Ltée";
(v) that
investment was used almost exclusively to acquire assets in Mali;
(w) Jean-Marc
Fillion did not establish that this loss resulted from the disposition of
shares of the capital stock of a small business corporation in accordance with
paragraph 39(1)(c) of the Income Tax Act.
Docket: Pierrette
Racine (1999‑3876(IT)G)
[translation]
(a) On January 1,
1993, Jean-Marc Fillion, his spouse Pierrette Racine, and their sons
Charles and Philippe Fillion formed a general partnership, "Société en nom
collectif J.M.F." ("the general partnership");
(b) the capital
invested by each member of the general partnership is $100;
(c) the purposes
of the general partnership are to do business development, to seek out clients,
to do public relations work, and to sell financial products;
(d) during the
taxation years at issue, Jean-Marc Fillion was the only partner who held an
insurance broker's licence;
(e) Jean-Marc
Fillion is the only partner authorized to manage the general partnership;
(f) during the
taxation years at issue, Charles and Philippe Fillion were full-time students
and did no work for the general partnership;
(g) Pierrette
Racine did very little work for the general partnership;
(h) the income of
the general partnership is derived almost exclusively from the company
"Services Financiers Fillion et Associés Inc." ("Services Financiers");
(i) during the
taxation years at issue, Jean-Marc Fillion was the only shareholder in Services
Financiers;
(j) the main
activity for Services Financiers is selling insurance products;
(k) there is no
set method for allocating income between Services Financiers and the general
partnership;
(l) the general
partnership uses an annual, comprehensive-amount invoicing system;
(m) Jean-Marc
Fillion cashes all professional fees invoiced by the general partnership,
regardless of the work allegedly performed by the other members of the general
partnership or the distribution of profits among the members;
(n) during the
taxation years at issue, the general partnership had no bank account;
(o) according to
the income tax returns of Jean-Marc Fillion and the other partners, the
percentage used to divide income among the partners varies from one year to
another;
(p) given the
capital invested and the work each partner performed in the general
partnership, the allocation of income from the general partnership among
Jean-Marc Fillion and the other members of the general partnership was not
reasonable;
(q) it was not
established that the general partnership performed any operations during the
taxation years at issue;
Limited partnership
"Société en commandite Gestion Fillion" ("the limited
partnership")
(r) according to
the financial statements of the limited partnership, Jean-Marc Fillion holds 20
per cent of the shares of the partnership and his spouse Pierrette Racine
holds 80 per cent of the shares;
(s) in adding
additional income of $14,606 to Jean-Marc Fillion's income for the 1995
taxation year, the Minister of National Revenue relied on the same assumptions
of fact as those set out in subparagraphs (b) to (q) of this document given the
scarcity of information available about the limited partnership;
Docket: Services
Financiers Fillion & Associés inc. (1999-3877(IT)G)
[translation]
(a) during the
taxation years at issue, the main activity of the appellant company was selling
insurance products;
(b) during the
taxation years at issue, Jean-Marc Fillion was the only shareholder in the
appellant company;
(c) during the
taxation years at issue, only Jean-Marc Fillion held an insurance broker's
licence;
(d) according to
the financial statements of the limited partnership "Société en commandite
Gestion Fillion" ("the limited partnership"), Jean-Marc Fillion
holds 20 per cent of the shares of the partnership and his spouse
Pierrette Racine holds 80 per cent of the shares;
(e) the income of
the limited partnership comes exclusively from the appellant company;
(f) there is no
set method for allocating income between the appellant company and the limited
partnership;
(g) during the
taxation years at issue, the limited partnership had no bank account;
(h) all the
alleged management fees of $19,100 were paid to Jean-Marc Fillion;
(i) to justify
the management fees expenditure, the appellant company submitted only two
invoices dated December 31, 1994, that were issued by the limited partnership
to Services Financiers J.M.F. Inc. for $14,300 and $4,800;
(j) the
appellant company provided no details about the work performed by the limited
partnership that would justify the invoicing of these management fees;
(k) it was not
established that the limited partnership performed any operations during the
taxation years at issue;
(l) the
appellant company did not establish that it had incurred the management fees in
order to produce business income during the 1994 taxation year;
(m) the appellant
company did not establish that the amount of the management fees was reasonable
in the circumstances.
[3] At issue are the following points:
Docket: Philippe Fillion (1999-3873(IT)G)
[translation]
At issue is whether the Minister of
National Revenue was right in reducing the income of Philippe Fillion by
$3,000 and $6,000 and adding these amounts to the income of Jean‑Marc
Fillion, the father of the appellant Philippe Fillion, for the 1993 and 1994
taxation years.
Docket: Charles
Fillion (1999-3874(IT)G)
[translation]
At issue is whether the Minister of
National Revenue was right in reducing the income of Charles Fillion by
$6,000 and $5,953 and adding these amounts to the income of Jean‑Marc
Fillion, the father of the appellant Charles Fillion, for the 1993 and 1994
taxation years.
Docket: Jean-Marc
Fillion (1999‑3875(IT)G)
[translation]
1. At issue is
whether the Minister of National Revenue was right in adding the additional
amounts from the partnerships of $15,000, $16,594 and $33,739 to the income of
Jean-Marc Fillion for the 1993, 1994 and 1995 taxation years respectively.
2. At issue is
whether the Minister of National Revenue was right in disallowing the deduction
claimed by Jean-Marc Fillion as a business investment loss on his income tax
return for the 1993 taxation year.
Docket: Pierrette
Racine (1999‑3876(IT)G)
[translation]
At issue is whether the Minister of
National Revenue was right in reducing the income of Pierrette Racine by
$6,000 and $1,314 and adding these amounts to the income of Jean-Marc
Fillion, the spouse of the appellant Pierrette Racine, for the 1993 and 1994
taxation years.
Docket: Services
Financiers Fillion & Associés inc. (1999-3877(IT)G)
[translation]
At issue is whether the Minister of
National Revenue was right in disallowing the management fees expense of
$19,100 claimed by the appellant company for the 1994 taxation year.
[4] I shall therefore dispose of the preliminary application by the
respondent concerning lack of jurisdiction of this Court.
[5] The respondent first raised a point of law, arguing that the Court
did not have jurisdiction regarding the 1993 and 1994 taxation years in the
cases of Pierrette Racine (1999‑3876(IT)G), Charles Fillion (1999-3874(IT)G) and Philippe Fillion (1999-3873(IT)G)
on the ground that no income tax was payable by those persons for those
taxation years.
[6] This issue is relatively simple to decide since the case law has
very clearly stated this Court's jurisdiction on this point. Referring to Bowater
Mersey Paper Co. v. Canada (FCA), [1987] F.C.J. No. 427, and Canada
v. Consumer's Co., [1987] 2 F.C. 60, and agreeing with the
findings of these two decisions, I allow the respondent's application and find
that this Court does not have jurisdiction to hear the appeals of Pierrette Racine (1999‑3876(IT)G),
Charles Fillion (1999-3874(IT)G) or Philippe Fillion (1999-3873(IT)G) concerning
the January 30, 1997, reassessments for the 1993 and 1994 taxation
years since those reassessments do not indicate any income tax payable.
Facts
[7] Jean-Marc Fillion has worked in the field of insurance and
financial services for many years. In the early 1970s, business was not very
brisk and Jean-Marc Fillion's spouse did the bookkeeping, provided secretarial
services and answered the telephone, without pay.
[8] They had two sons: Charles in 1975 and Philippe in 1980. The place
of business was located in the family home. Starting in 1977, Jean‑Marc Fillion's
professional work was performed for and on behalf of Services Financiers
Fillion et Associés inc., incorporated on May 20, 1977.
[9] The appellant requested the co-operation of Daniel Massé, a tax
consultant, to set up one or more vehicles that would enable him to include the
members of his family in the financial activities generated by his work.
[10] In January 1993, the appellant Jean-Marc Fillion set up a general
partnership called "Société en nom collectif J.M.F." Setting up this
general partnership was part of a plan to ultimately interest his two sons in
taking over the business and to show his appreciation for his spouse's
significant contribution on a volunteer basis when the business was starting
up. The members of the general partnership were Jean-Marc Fillion, his spouse
Pierrette Racine, and their two sons Charles and Philippe. The members each
invested only $100 in the new general partnership.
[11] In February 1994, a limited partnership called "Société en
commandite Gestion Fillion" was set up and had the same purpose.
[12] There again, the unpaid contribution and support of Pierrette Racine were taken into account and she was given 80 per
cent of the shares of the limited partnership, and her spouse Jean‑Marc Fillion was
given 20 per cent of the shares.
[13] Pierrette Racine was the general partner and her spouse Jean-Marc
Fillion was the limited partner.
[14] In providing and explaining reasons for the plan he set up on the
advice of Mr. Massé, Jean-Marc Fillion said that he wanted to express his
appreciation and gratitude for his spouse's significant contribution to the
business and to make preparations for the continuance of the business by
involving his sons, so that they would become interested in the development and
continuance of the family business.
[15] Business continued to expand. In order to meet the needs of an
increasing number of clients and the various requirements of a general agency
contract with the company "La Maritime" (La Maritime), Jean-Marc
Fillion opened a second office in Charlesbourg; a third party, Ms. Long,
was responsible for providing secretarial services at this new office.
[16] Under the contract with La Maritime, Jean-Marc Fillion had hired
agents, who made financial investments with La Maritime. Jean-Marc Fillion
earned a commission on all transactions performed by himself and by the agents
with whom he had subcontracted.
[17] Contracts underwritten by La Maritime accounted for approximately
90 per cent of business. How and in what proportion were commissions paid
out? Did La Maritime absorb the cost of certain expenditures incurred by the
appellant? Were the various agents who were hired by the appellant paid
directly by La Maritime, or by the appellant? What was the appellant's
administrative burden in managing the commissions paid out by La Maritime?
These and many other questions remained unanswered, and the few responses
obtained did not significantly clarify things.
[18] According to the testimony of the appellant Jean-Marc Fillion and
his tax consultant, setting up the various entities made it possible to achieve
two major objectives: to show appreciation for the contribution and the very
significant co-operation of Jean-Marc Fillion's spouse and to allow Jean-Marc
Fillion to prepare for and strengthen the reality of the family business in
anticipation of having his sons, who were quite young when the two new entities
were set up, get involved at some point.
[19] The professional fees generated by Jean-Marc Fillion's work were
paid either to himself or to the management company "Services Financiers Fillion & Associés inc." In this way,
all income from Jean‑Marc Fillion's
work was transferred to certain entities on various terms and conditions, in
respect of which very few explanations were provided: the appellants merely
stated, repeated and insisted that the amounts indicated had indeed been paid
to and received by the recipients, who had performed work that fully justified
the various amounts received.
[20] All the transfers were made through the appellant Jean-Marc
Fillion by means of cheques made out to him that he endorsed and cashed; he
remitted the cash to the various recipients in the amounts indicated on their
income tax returns. In providing and explaining reasons for his omnipresence in
these transactions, Jean‑Marc Fillion said that he acted as a duly
authorized person, that is, as a mandatary, a manager, a trustee or an
administrator. No documentary evidence or accounting records establishing
consistency and plausibility were adduced.
[21] In proving that the payments were made and received and in
explaining why they were made, the appellants essentially fell back on the
various income tax returns filed with the respondent for the taxation years at
issue.
[22] Nearly all the financial transactions were made using the same
bank account, often by means of cash payments supposedly made in exchange for
work performed, the quality and quantity of which were never actually
established.
[23] Although Jean‑Marc Fillion's spouse and two sons timidly
stated that they took part in decision-making, the explanations provided were
certainly not determinative on this point since the balance of the evidence
shows that all the decisions were unequivocally made by Jean-Marc Fillion. Nor
was Jean-Marc Fillion able to rationally explain the criteria used to
distribute the various payments and transfers.
[24] Jean-Marc Fillion was the directing mind; he alone made all
the decisions about the partnerships with the co-operation of his advisor
Mr. Massé. A number of highly relevant questions were directed to
Jean-Marc Fillion in order to ascertain the criteria, reasons, or bases relied
on in determining the allocations and transfers.
[25] The responses given in answer to these nonetheless fundamental
questions did not provide any objective or rational formula. These responses
referred for example to appreciation for past services, motivation,
encouragement, family solidarity, and the continuance of the business. Work
actually performed was never the main criterion; moreover, the responses
concerning the work were vague, confused and very imprecise. Here again, there
were no payroll records or records of any sort to establish the extent of the
work or when it was performed.
[26] It would nonetheless have been very easy to explain each person's
workload and how the work performed was remunerated by given amounts,
particularly since it could have been expected that the appellants would
eventually be called on to provide reasons for their involvement.
[27] The evidence adduced never established why or, more importantly,
how the allocations were determined. Reference was made to support,
co-operation, and solidarity as evidenced by a high degree of availability in
answering the telephone, running errands, doing cleaning and helping with
certain mailings, but no explanations were provided about any of these duties. Moreover,
no specific details were provided about when any of these duties were carried
out or how much of this work was performed.
[28] In substance, I did not believe the explanations given. In my
opinion, everything was orchestrated to minimize the tax burden. The evidence
adduced, which is essentially testimonial, neither reflected nor supported the
information the appellants gave to the respondent.
[29] It is important to briefly note some deficiencies.
·
There was no evidence
of payment of the capital outlays, notwithstanding the fact that these were
quite small.
·
There was no evidence
of a bank account.
·
There was no evidence
concerning when, how and why the appellants Philippe Fillion and
Charles Fillion received the amounts indicated on their income tax returns
and in what form they received them.
[30] The facts were related so as to reflect the information sent to
Revenue Canada. Brief and vague explanations, hesitations and confusion are not
very effective means of discharging the burden of proof that lay on the
appellants.
[31] In order to substantiate their claims, the appellants would have
had to establish on the balance of evidence that the income generated by
Jean-Marc Fillion's professional work had been divided in an objective,
rational and plausible manner in accordance with the work performed by the
recipients of the amounts of money transferred.
[32] Concerning the quality and quantity of the work, it was not
sufficient to state that the work had been performed and remunerated. Given the
nature of these cases, it was essential to establish in a plausible manner that
the work had been performed and reasonably paid for, that it was useful and
relevant in light of the purposes of the business, and that the remuneration
had actually been paid.
[33] In assessing reasonableness, it is necessary if not indispensable
to be able to rely on a minimum of information from which one or more
conclusions may be drawn. Although assessing reasonableness is a subjective
exercise, it calls for and indeed demands the consideration of objective
factors that will form the basis of the analysis.
[34] In addition, none of the recipients were able to give an
acceptable explanation that there was consistency between the work supposedly
performed and the amounts received. The only evidence adduced concerning the
payments was that everything had been declared to the respondent; that evidence
is not very convincing, particularly since the amounts recorded were very
advantageous for the members of the Fillion family.
[35] In this case, could the payments and transfers be described as or
determined to be reasonable? Subsection 103(1.1) of the Income Tax Act
("the Act") provides as follows:
Agreement to share
income, etc., so as to reduce or postpone tax otherwise payable
103. (1) Where the
members of a partnership have agreed to share, in a specified proportion, any
income or loss of the partnership from any source or from sources in a
particular place, as the case may be, or any other amount in respect of any
activity of the partnership that is relevant to the computation of the income
or taxable income of any of the members thereof, and the principal reason for
the agreement may reasonably be considered to be the reduction or postponement
of the tax that might otherwise have been or become payable under this Act, the
share of each member of the partnership in the income or loss, as the case may
be, or in that other amount, is the amount that is reasonable having regard to
all the circumstances including the proportions in which the members have
agreed to share profits and losses of the partnership from other sources or
from sources in other places.
Agreement to share
income, etc., in unreasonable proportions
(1.1) Where two or
more members of a partnership who are not dealing with each other at arm's
length agree to share any income or loss of the partnership or any other amount
in respect of any activity of the partnership that is relevant to the
computation of the income or taxable income of those members and the share of
any such member of that income, loss or other amount is not reasonable in the
circumstances having regard to the capital invested in or work performed for
the partnership by the members thereof or such other factors as may be
relevant, that share shall, notwithstanding any agreement, be deemed to be the
amount that is reasonable in the circumstances.
[36] Subsection 103(1.1) of the Act applies to the members
of a partnership who are not dealing with each
other at arm's length. The income shared
among these partners must be in respect of an activity of the partnership.
In addition, the share must be reasonable and must meet certain criteria, such
as the capital invested in or work performed
for the partnership or such other factors as may be relevant.
[37] In this case, it is difficult if not impossible to conclude that
the "shared" amounts were in respect of an activity of the
partnership, since it was not possible to establish clearly what the activities
or purposes of each partnership were. That evidence was essential, not
secondary as the appellants, at least on the basis of the evidence they
adduced, appear to believe.
[38] Although the respondent argued that the expression
"reasonable in the circumstances" refers to an objective test, I
consider it difficult if not impossible to assess reasonableness using an
essentially objective approach. On the other hand, the respondent
is right to challenge the essentially subjective approach used by Mr. Massé.
[39] Mr. Massé explained the fact that
Pierrette Racine was given less money than her sons, even though the general
partnership's income increased from year to year, by stating that Jean-Marc
Fillion relied more on his sons than on his spouse for the continuance of the
business.
[40] Mr. Massé also argued that valuation
of Pierrette Racine's work should be based on Jean-Marc Fillion's valuation of
the work of his sons. I found it very surprising to hear someone make such
statements after it was argued that Pierrette Racine had been involved as a
very high-level partner whereas the age of one of her sons discredits any claim
that his work was strategic or indeed essential.
[41] According to Mr. Massé, the amount of income distributed
should not exceed 15 per cent to 20 per cent because the
reasonableness test might not be met. This approach is inappropriate and
arbitrary, and one can readily imagine a host of situations in which this
sharing formula would produce absurd results.
[42] Mr. Massé's testimony shows that Jean-Marc Fillion's criteria
for dividing the partnerships' incomes were based, not at all on the capital
invested by each member or the work performed for the partnership, but on
Jean-Marc Fillion's personal assessment for the purpose of achieving his own
objectives, which were clearly to divide his income among the members of his
family and therefore minimize the tax burden. If this were not his objective,
evidence proving that should have been adduced, and this was not done.
[43] Clearly, the real objective was a tax saving, which in itself was
not at all irregular. However, the facts would have had to be consistent and
plausible.
[44] I am satisfied that the only criterion taken into account was the
recipients' tax rate and that the work performed had absolutely no bearing on
the income sharing. Rather than share the amounts on the basis of work actually
performed and compute the income tax afterwards, it appears that the available
income was distributed so as to minimize the family tax burden by involving
each family member. After sharing the income and declaring it on the
recipients' income tax returns, the appellants tried to explain that the income
earned was justified, reasonable and had been received.
[45] Tax planning calls for complete compliance with all the applicable
legislative provisions and hinges on practical, plausible, reasonable facts. In
other words, it is not enough to set up a model, an organizational chart, or a
series of items, the amounts of which are essentially the result of accounting
transactions.
[46] Amounts entered in accounting items must reflect reality. In this
case, the facts are quite simple; the balance of evidence has established that
the only source of income during the taxation years at issue was the activity
of Jean‑Marc Fillion. The income was then transmitted to various
partnerships that redistributed all of it among the appellants in exchange for
their work. The evidence has established that the quantity, quality and
relevance of the paid work were less than secondary.
[47] Determining whether a transaction or share amount is reasonable
suggests that one or more comparisons can be made with one or more similar,
comparable situations. The evidence has not made such comparisons possible.
[48] Nor has there been any evidence regarding the consequences of that
work. Was the work essential? Did it benefit the partnerships? Was it, or could
it have been performed differently? What were the purposes of the partnerships?
What were the partnerships' expectations of the recipients of the income?
Responses to all these questions were indeed not essential, but they would have
made possible some kind of analysis that could have determined whether the
entire setup had been reasonable.
[49] Jean-Marc Fillion and his advisor Mr. Massé clearly set up
and arranged various legal vehicles in order to lower the tax payable on the
income generated solely by the professional work of Jean‑Marc Fillion.
In itself, this planning was legitimate and theoretically acceptable,
particularly since it could reflect entirely laudable and acceptable
objectives: remunerating work actually performed at its fair value and making
it possible for the family business to expand.
[50] Theoretically, the entire setup could be law-abiding and legal.
However, the facts, procedure, transactions, accounting, transfers and various
allocations would have had to reflect unequivocally a factual, reasonable
reality. Where was the evidence to this effect?
[51] I assign no probative value to the evidence for the following
reasons in particular:
·
The December 31,
1994, invoice for management fees of $19,100 contains few details, is
unsupported by documentation, and was prepared and issued in the last few hours
of the fiscal year.
·
All the persons
concerned and involved were members of the same family; they were not dealing
with each other at arm's length. Their self-interested testimony should have
been supported, completed and confirmed by satisfactory evidence.
·
The transfers were
made by cheques issued to Jean-Marc Fillion personally who distributed all these
amounts in accordance with his own assessment.
·
The appellants
completely refused to co-operate with the person responsible for the audit and,
in particular, refused to provide the agreements and financial statements of
the limited partnership. Jean-Marc Fillion also did not allow the auditor to
visit the place of business located in the family home.
·
The business
relations between the limited partnership and the management company were never
described or explained, except in unsupported statements that Pierrette Racine
had worked and continued to work hard and had earned what she had received.
·
Jean-Marc Fillion and
his spouse were never able to describe, in even a rudimentary way, the work
performed by Pierrette Racine. They claimed that work had been performed and
remunerated. For whom? When? How? The answers to these questions did not seem
important since this was never established; more importantly, the appellants
repeatedly showed impatience and frustration with the questions aimed at
obtaining these answers.
·
Although
theoretically the members of the family were supposed to be key players, the
situation was in fact quite the opposite; these persons had absolutely no say
in management or administration. How can Jean-Marc Fillion's omnipresence in all
the transactions be explained? He argued that he acted inter alia as an
agent, a representative, a mandatary and a trustee. On what basis was he
authorized to act in that capacity? The evidence did not answer this question.
·
Mr. Massé argued
that the amount of income allocated should not exceed 15 to 20 per cent,
adding that section 103 of the Act provided for two approaches—one
objective and the other subjective. On this point, he stated as follows:
[translation]
" ... subjective in the
sense that when the work of one partner is to take over from the father, the
father has greater responsibilities and motivation to interest the son. I mean,
if the father wants his son, because he has a talent for sales, to be a
salesperson and not an accountant, the father will likely pay the son more to
encourage him to continue along that path."
·
As was the case with
all the percentages he referred to, the approach by Mr. Massé was
essentially arbitrary.
·
Quite regularly
during the hearing, Jean-Marc Fillion made general statements about fundamental
aspects of the appeals, without ever documenting those statements or supporting
them with information that was nonetheless essential. I refer in particular to
the source of the income and the description of the work performed by the
family members.
·
The partnerships set
up under the plan had no bank accounts and were not registered in a way that
would enable a third party to be aware of their existence.
[52] There is no doubt that the facts adduced in support of the appeals
do not meet the reasonableness test. Everything was thrown together without
distinction, and the only criterion was without a doubt the tax bite.
[53] I do not doubt that the members of the Fillion family occasionally
performed work, but it would have been important to establish what work they
did and, most importantly, for which entity they did it. Each time the Court
tried to find out or obtain the answers to these questions, the standard answer
was given: "They worked; they were paid; they received the money as
declared on their income tax returns."
[54] The amounts of income paid to the family members were usually
lower than the basic personal exemption and obviously ensured that no income
tax was payable on those amounts of income.
[55] There is no doubt in my mind that Jean-Marc Fillion split his
income by means of the partnerships. Exhibit A-3 is quite revealing about
the complete lack of consistency. Indeed, the income of the limited partnership
increased each year; as well, although all the appellants strongly emphasized
that Pierrette Racine made a phenomenal contribution, it appears that her
income for the 1994 and 1995 taxation years was lower than the income of her
sons, then aged 14 and 19.
[56] As for the 1993 taxation year, in which the favourable treatment
resulting from Pierrette Racine's considerable involvement when the family
business was starting up was strongly emphasized, it appears that she was given
the same amount as was her son Charles. Exhibit A-3 also shows that, during
the 1994 and 1995 taxation years, Philippe, then aged 14 or 15, received as
much as did his brother, who was then 18.
[57] According to Jean-Marc Fillion and his financial advisor, at year
end the partnership's income was distributed in a fair and reasonable manner,
with no records or documents to guide in the nature or amounts of the shares.
At each year-end, all income was withdrawn from the partnerships.
[58] The evidence has established that the criteria used by Jean-Marc
Fillion did not meet the test set out in subsection 103(1.1) of the Act.
[59] Although the reasonableness test is not a simple mathematical
exercise and suggests that a number of factors will be taken into
consideration, it must nevertheless have an acceptable and reasonable basis in
operations that are comparable to generally recognized economic activities.
[60] On the issue of what is "reasonable", in Archbold v.
Canada, [1995] T.C.J. No. 111, the Honourable Judge Lamarre
Proulx wrote as follows, at paragraph 8:
The share of the
profits and of the losses which may appear reasonable for a husband who draws
his income from an employment and wishes to help his wife start a family
business is not reasonable within the meaning of subsection 103(1.1) of the Act.
In the context of the Income Tax Act, reasonable means reasonable business
wise.
[61] The transfers made by Jean-Marc Fillion were not reasonable; they
were generous and characterized by appreciation and may have shown family
solidarity, but they were certainly not reasonable within the meaning of
subsection 103(1.1) of the Act and, more importantly, they were not
warranted by the evidence adduced.
[62] In The Queen v. Friedberg, [1991] F.C.J. No. 1255 (Tab H),
the Federal Court of Appeal made the following comment:
In tax law, form
matters. A mere subjective intention, here as elsewhere in the tax field, is
not by itself sufficient to alter the characterization of a transaction for tax
purposes. If a taxpayer arranges his affairs in certain formal ways, enormous
tax advantages can be obtained, even though the main reason for these
arrangements may be to save tax (see The Queen v.
Irving Oil, 91 D.T.C. 5106, per
Mahoney J.A.). If a taxpayer fails to take the correct formal steps,
however, tax may have to be paid. If this were not so, Revenue Canada and the
courts would be engaged in endless exercises to determine the true intentions
behind certain transactions. Taxpayers and the Crown would seek to restructure
dealings after the fact so as to take advantage of the tax law or to make
taxpayers pay tax that they might otherwise not have to pay. While evidence of
intention may be used by the Courts on occasion to clarify dealings, it is
rarely determinative. In sum, evidence of subjective intention cannot be used
to 'correct' documents which clearly point in a particular direction.
[63] Jean-Marc Fillion claimed a business investment loss in 1993.
[64] That claim is the result of an outlay of $30,000 to purchase
shares in the company "Les Mines diatissan Ltée". The appellant
provided very little information about the nature of his outlay, mainly
emphasizing that he had taken advantage of information according to which the
experiment would prove to be successful financially speaking. He clearly knew
little about the company.
[65] The relevant facts were established by the testimony of
Jocelyn Duchesne, an auditor with the Canada Customs and Revenue Agency
(C.C.R.A.), who conducted an investigation and carried out an exhaustive
analysis of the file of Les Mines diatissan Ltée. The following uncontradicted
facts emerged from his investigation:
·
The investors were
divided into two groups: the first was made up of persons who had invested
under a joint venture arrangement; the second, including the appellant, was
made up of investors who had purchased capital shares of the company.
·
The only fixed assets
of Les Mines diatissan Ltée were located in Mali.
All the company's activities were carried on in that foreign country.
[66] On the basis of these facts, can we conclude that the appellant
was eligible to claim a business investment loss?
[67] First, it is appropriate to refer to the relevant provisions of
the Act, that is, paragraph 39(1)(c), which refers to
section 248 of the Act:
Meaning of capital
gain and capital loss
39. (1) For the
purposes of this Act,
...
(c) a
taxpayer's business investment loss for a taxation year from the disposition of
any property is the amount, if any, by which the taxpayer's capital loss for
the year from a disposition after 1977
(i) to which
subsection 50(1) applies, or
(ii) to a person
with whom the taxpayer was dealing at arm's length
of any property that
is
(iii) a share of the
capital stock of a small business corporation, or
(iv) a debt owing to
the taxpayer by a Canadian-controlled private corporation (other than, where
the taxpayer is a corporation, a debt owing to it by a corporation with which
it does not deal at arm's length) that is
(A) a small business
corporation,
(B) a bankrupt
(within the meaning assigned by subsection 128(3)) that was a small business
corporation at the time it last became a bankrupt, or
(C) a corporation
referred to in section 6 of the Winding-up Act that was insolvent (within the
meaning of that Act) and was a small business corporation at the time a
winding-up order under that Act was made in respect of the corporation,
exceeds the total of
(v) in the case of a
share referred to in subparagraph 39(1)(c)(iii), the amount, if any, of the
increase after 1977 by virtue of the application of subsection 85(4) in the
adjusted cost base to the taxpayer of the share or of any share (in this
subparagraph referred to as a "replaced share") for which the share
or a replaced share was substituted or exchanged,
(vi) in the case of
a share referred to in subparagraph 39(1)(c)(iii) that was issued before 1972
or a share (in this subparagraph and subparagraph 39(1)(c)(vii) referred to as
a "substituted share") that was substituted or exchanged for such a
share or for a substituted share, the total of all amounts each of which is an
amount received after 1971 and before or on the disposition of the share or an
amount receivable at the time of such a disposition by
(A) the taxpayer,
(B) where the
taxpayer is an individual, the taxpayer's spouse or common-law partner, or
(C) a trust of which
the taxpayer or the taxpayer's spouse or common-law partner was a beneficiary
as a taxable
dividend on the share or on any other share in respect of which it is a
substituted share, except that this subparagraph shall not apply in respect of
a share or substituted share that was acquired after 1971 from a person with
whom the taxpayer was dealing at arm's length,
(vii) in the case of
a share to which subparagraph 39(1)(c)(vi) applies and where the taxpayer
is a trust referred to in paragraph 104(4)(a), the total of all amounts each of
which is an amount received after 1971 or receivable at the time of the
disposition by the settlor (within the meaning assigned by subsection 108(1))
or by the settlor's spouse as a taxable dividend on the share or on any other
share in respect of which it is a substituted share, and
(viii) the amount
determined in respect of the taxpayer under subsection 39(9) or 39(10), as the
case may be.
Definitions
248. (1) In this Act,
...
"small
business corporation", at any particular time, means, subject to
subsection 110.6(15), a particular corporation that is a Canadian-controlled
private corporation all or substantially all of the fair market value of the
assets of which at that time is attributable to assets that are
(a) used
principally in an active business carried on primarily in Canada by the
particular corporation or by a corporation related to it,
(b) shares of
the capital stock or indebtedness of one or more small business corporations
that are at that time connected with the particular corporation (within the
meaning of subsection 186(4) on the assumption that the small business
corporation is at that time a "payer corporation" within the meaning
of that subsection), or
(c) assets
described in paragraphs 248(1) "small business corporation" (a) and
248(1) "small business corporation" (b),
including, for the
purpose of paragraph 39(1)(c), a corporation that was at any time in the
12 months preceding that time a small business corporation, and, for the
purpose of this definition, the fair market value of a net income stabilization
account shall be deemed to be nil;
[68] The appellant's loss
cannot be determined as a business investment loss because the investment was
essentially used to make acquisitions in Mali and, as a result, all or
substantially all of the fair market value of the assets was not attributable
to assets used principally in an active business carried on primarily in Canada
by the particular corporation or by a corporation related to it.
[69] Essentially, in order to substantiate his claim of loss, the
appellant stated that he made the investment knowing that, although highly
risky, it was likely to make him a millionaire quickly. This type of motivation
or explanation is certainly not sufficient to conclude that his claims are
correct. Therefore, the business investment loss in the amount of $22,500
should be disallowed.
Management fees
[70] Counsel for the appellant Jean-Marc Fillion argued strenuously
that disallowing the management fees expenditure of $19,100 for the 1994
taxation year resulted in double taxation.
[71] Stating that the disallowance of the $19,100 expense
constitutes double taxation first requires proof of the soundness of the
premise that the expenditure was allowable.
[72] In order to claim an expense, it is not enough to make an
accounting entry backed by a vague invoice. In order to deduct an expense from
income, it must be established that the evidence was real, fully supported and
justified and, moreover, that the expenditure was incurred in order to produce
business income in accordance with paragraph 18(1)(a) of the Act.
[73] As was the case with the other aspects of the appeals, the
appellant was unable or simply unwilling to explain the relevance of the
nonetheless significant expense of $19,100. He simply stated that to earn money
you had to spend money, a statement that in itself is not necessarily false,
but is certainly not sufficient to establish that this was a genuine
expenditure.
[74] If the appellant had provided certain details, explained why and
how he arrived at this amount and, at the same time, had connected it in some
way to his income, the Court might have been able to make certain corrections
but the evidence was so deficient that it is not possible to make any
correction, if only to confirm that it was appropriate to disallow the
management fees expense established by the appellant at $19,100.
[75] It seems appropriate to reproduce the provisions of
section 67 and paragraph 18(1)(a) of the Act, which
read as follows:
General limitation
re expenses
67. 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.
General limitations
18. (1) In computing
the income of a taxpayer from a business or property no deduction shall be made
in respect of
General limitation
(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;
[76] The burden of proof was on the appellants. The assessments that
were appealed from were made on the basis of many assumptions of fact. In order
to win their case, it was not enough for the appellants to simply deny these
assumptions of fact. They had to establish, on the basis of documented evidence
and reasonable, plausible explanations, the merits of their respective claims.
[77] In this case, the evidence was not only completely deficient and
unsupported by objective documents or facts; it was also essentially made up of
general, often confused and even contradictory explanations. None of the
appellants gave specific, explicit testimony about the facts forming the basis
for the assessments that are the subject of these appeals.
[78] Indeed, the appellants indicated their disagreement, stated their
frustrations and criticized the conclusions reached by the respondent; but they
never rebutted those conclusions by adducing in evidence any information that
was justified, justifiable or, most importantly, that was reasonable.
[79] I must dispose of the appeals on the basis of the evidence, the
burden of which was on the appellants. It is not possible to make any
corrections whatsoever to the assessments made by the respondent on the basis
of the evidence adduced.
[80] For all these reasons, the appeals are dismissed. Since the
appeals were heard on common evidence, the respondent will have her costs on
the basis of one case alone, that of the appellant Jean-Marc
Fillion (1999‑3875(IT)G).
Signed at Ottawa,
Canada, this 29th day of October 2002.
J.T.C.C.
Translation
certified true
on
this 28th day of January 2004.
Sophie
Debbané, Revisor
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