Citation: 2009TCC155
Date: 20090317
Docket: 2007-1971(IT)G
BETWEEN:
BLACKBURN RADIO INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller, J.
[1]
The issues in this
appeal are (a) whether the reassessment dated April 13, 2004 was statute
barred; and if not, (b) whether the Appellant is entitled to deduct from its
income in the taxation year ended August 31, 1999, a Bonus in the amount of
$7,621,517 which was paid by Blackburn Group Incorporated (“BGI”), a
predecessor corporation of the Appellant, to one of its employees.
[2]
In reassessing the Appellant,
the Minister of National Revenue (the “Minister”), in error, included the
amount of $7,681,517 in the Appellant’s income.
[3]
The Blackburn Group
Inc. (“TBGI”) and its successor corporation, BGI, were located in London, Ontario and carried on business as private equity
investment management companies. I will hereinafter refer to TBGI and BGI as
the Appellant. The Appellant is a Canadian-controlled private corporation.
The Corporate Group
[4]
Between 1993 and 1999,
the Appellant owned all or a majority of the shares of various operating
companies in two lines of business: media and information services. The
Appellant earned its revenues from management fees, dividends and gains from
the sale of its investments.
[5]
Although the Appellant
was a family company, its Board of Directors (“the Board”) consisted of
non-family members who had diverse backgrounds and expertise. Mr. Bruce
Pearson, a management consultant, testified that he was a member of the Board
from 1982 to 2007. He held various positions with the Appellant and in 1992 he
became Chairman of the Board and CEO of the company. He described the expertise
of the members of the Board and the workings of the Board. He stated that the
Board was very active in all of the Appellant’s businesses. It kept control of
all funds. It met quarterly and made all decisions with respect to the
Appellant’s business, including which investments should be pursued, strategic
management of the investments, budgeting for the investments and divestiture of
the investments.
[6]
This appeal involves
the companies which were in the business of information services. In particular,
it involves companies called Blackburn Marketing Services (US) Inc. and Carfax.
I will describe the corporate events that gave rise to the relationship between
these companies.
[7]
Prior to August 1993,
the Appellant held 100% of the shares in two U.S.
domestic corporations, Urban Decision Systems (“UDS”) and Blackburn Marketing
Services (U.S.) Inc. which operated under the name of National Research Bureau
(“NRB”). NRB owned approximately 85% of the shares of Carfax, and VRH Inc.
(“VRH”) was a wholly-owned U.S. subsidiary of Carfax. On August 31, 1993,
the Appellant incorporated Blackburn Marketing Services Holdings Inc. (“BMSI
Holdings”), a United States (U.S.) domestic corporation. On the same day, it
transferred its shares in UDS and NRB to BMSI Holdings in exchange for shares
of BMSI Holdings. A diagram which shows this relationship is attached to these
reasons as Appendix “A”.
[8]
Bruce Pearson stated
that the shares were placed in BMSI Holdings so as to create a consolidated
group for U.S. corporate income tax purposes. It was his
evidence that some of the U.S. companies were operating at a profit but
Carfax was operating at a loss. Once the shares were placed in BMSI Holdings,
there was only one corporate tax return that had to be filed in the U.S.
[9]
On November 2, 1993,
NRB sold shares of Carfax to an arm’s length party, R.L. Polk & Co. Ltd.
(“Polk (US)”), so that the ratio of shares between NRB and Polk (US) was 65:35.
A diagram which shows this transaction is attached to these reasons as Appendix
“B”.
[10]
On January 7, 1997, UDS
and all of the assets of NRB (except the shares of Carfax) were sold to arm’s
length parties. On August 31, 1997, NRB was merged/liquidated into BMSI
Holdings. The legal entity thus merged retained the name Blackburn Marketing
Services (US) Inc. (“BMSI (US)”). Consequently the shares of Carfax previously
held by NRB became held by BMSI (US). A diagram which shows this relationship
is attached as Appendix “C”.
[11]
BMSI (US), like its
predecessor BMSI Holdings, did not have any employees and did not carry on
business. It did have a board of directors but it was the evidence of all
witnesses, that the board had no independent decision-making authority with
respect to the companies whose shares it held. All decisions with respect to
the BMSI companies were made by the Board of the Appellant.
Long-term incentive Plan
[12]
William D. Goldstein
was employed by the Appellant since 1989. He stated that his duties included
finding investment opportunities for the Appellant, negotiating and completing
the investments and providing general supervision and management of those
investments. He was also responsible for finding profitable ways for the
Appellant to sell the investments. His duties were assigned to him by the Board
and the decision to purchase or sell an investment was made by the Board.
[13]
Pearson testified that
Goldstein wanted to get away from the day-to-day operations of the business.
After 4 years of negotiations, the Appellant and Goldstein signed an Employment
Agreement (the “Agreement”) on September 1, 1993. In that Agreement, the
Appellant agreed to provide Goldstein’s services to the BMSI companies.
[14]
In accordance with the
Agreement, Goldstein received an annual salary and benefits from the Appellant.
He was also entitled to incentive compensation in accordance with both a
short-term incentive plan and a long-term incentive plan. The purpose of the
incentive compensation plan was to “reward Goldstein based on the short-term
performance of the BMSI companies, as well as the long-term appreciation in the
value of the BMSI companies.” The long-term incentive payments to Goldstein
were described as performance units that could be redeemed for 12% of the
increase in value of the Appellant’s share of all BMSI companies subsequent to
August 31, 1993. The right to receive the long-term incentive payments was
triggered by the occurrence of certain events including, the sale of the
Appellant’s interest in any of the BMSI companies.
[15]
Goldstein stated that
from his point of view, the long-term incentive plan was the main part of the
Agreement as the Appellant did not offer an employee stock option plan and he
received only an annual salary and a few short-term benefits.
[16]
Pearson stated that
Goldstein was given the long-term incentive plan because his duties included
finding opportunities for investment, monitoring the investments and insuring
that if the investment was not successful, the loss suffered by the Appellant
would be minimal. It was his opinion that Goldstein “did the job brilliantly”.
[17]
It was the evidence of
both Pearson and Goldstein that the investment and management services provided
by Goldstein under the Agreement were always provided to the Appellant and not
to BMSI Holdings or BMSI (US).
Management Services Agreement
[18]
On November 2, 1993,
the Appellant entered into a Management Services Agreement (MSA) with BMSI
(US), Carfax and VRH whereby the Appellant would perform general management services,
financial and accounting services, human resource and payroll services as well
as certain other administrative and corporate services for Carfax and VRH. The
MSA provided a method for calculating the cost that would be charged to Carfax
and VRH for the provision of the services. The MSA specified that Goldstein and
another executive of the Appellant, would be responsible for the general
supervision and management of the operations of Carfax and VRH. As compensation
for the services of senior management (which included Goldstein), the Appellant
agreed to charge no more than $190,000 annually. It was Goldstein’s evidence
that he provided strategic management only, and not the day-to-day management
of Carfax and VRH.
[19]
The MSA provided for a
charge that would have been used toward the short-term incentive plan of
Goldstein. There was no evidence as to whether or not any amount was ever paid
to the Appellant that would be used for the short-term incentive. There was no
charge in the MSA that related to the long-term incentive plan that the
Appellant provided to Goldstein.
[20]
Pearson stated that
Polk (US), who owned 35% of Carfax, was not only aware of the MSA but that he
actively participated in its negotiation. It was his evidence that Polk (US)
would not agree to Carfax making any contribution towards the long-term
incentive plan with Goldstein. By way of a letter dated, October 7, 1993,
Pearson reassured Stephen Polk, the owner of Polk (US), that the long-term
incentive plan with Goldstein would “not impact on you …as it will only apply
to the (Appellant’s) share of the value of those assets”.
[21]
Pearson testified that
Polk (US) and Carfax were in the same business. He said that Stephen Polk knew
that when the Appellant was ready to sell its shares in Carfax, Goldstein would
probably set up a competition between Polk (US) and a third party for those
shares. Stephen Polk knew that there would be a conflict situation as Goldstein
would always put the Appellant’s interest first. As it turned out, Stephen Polk
was correct.
Sale of Carfax
[22]
On July 30, 1999, BMSI
(US) sold its shares in Carfax to Polk (US). This sale triggered the payment of
a long-term incentive bonus in the amount of $7,681,517 (the “Bonus”) to
Goldstein. It was the evidence of all witnesses that the sale of Carfax shares
required the approval of the Board and that the board of directors for BMSI
(US) had no involvement in the decision.
[23]
The capital gain
resulting from the sale was reported by BMSI (US) in the US. The Appellant reported the Bonus as an expense and
deducted only the amount of $7,621,517 from its income. Goldstein testified
that he reported the Bonus in his income and paid taxes on it. At all relevant
times, Goldstein was a resident of Canada.
[24]
The Minister reassessed
the Appellant by notice dated April 13, 2004 for its taxation year ending
August 31, 1999 by adding back the entire Bonus on the basis that it was an
expense incurred on behalf of a related non-resident corporation. In the Reply
to the Fresh Amended Notice of Appeal, the Respondent submitted the following:
19. He further submits that the Incentive Payment, calculated on the
value of the increase of BMSI(US)’s investment, is directly related to capital
gains realized by BMSI(US) on the sale of shares in Carfax. Accordingly, the
Incentive Payment deducted by the Blackburn Group Incorporated in its 1999
taxation year did not relate to Blackburn Group Incorporated and should be
allocated to and reimbursed by BMSI(US) and/or Carfax.
20. He further submits that from 1993 to 1999, Mr. Goldstein, as an
employee of The Blackburn Group Inc. and Blackburn Group Incorporated, was in
charge of managing and building businesses and investment portfolios including
Blackburn Polk Marketing Services Inc. and several US companies, notably, Carfax, that were owned by BMSI(US). Whether or
not separate employment contracts or management services agreements existed, by
virtue of the provisions of Mr. Goldstein’s services to Carfax, the value of
the shares in Carfax held by BMSI(US) increased such that the capital gains
were realized by BMSI(US) on the disposition of shares in Carfax. Based on this
fact, he submits The Blackburn Group Inc. and Blackburn Group Incorporated
transacted with BMSI(US) to provide services to, inter alia, Carfax. Furthermore,
under the Management Services Agreement, The Blackburn Group Inc. and Blackburn
Group Incorporated transacted with inter alia, Carfax, to provide the
services of senior managers, including Mr. Goldstein’s, to Carfax. Accordingly,
he submits that The Blackburn Group Inc. and Blackburn Group Incorporated
transacted with non-arm’s length, non-resident parties, namely BMSI(US) and
Carfax, in reference to the provision of Mr. Goldstein’s services to Carfax, on
terms or conditions made or imposed, in respect of the transactions that differ
from those that would have been made between persons dealing at arm’s length,
for purposes of paragraph 247(2)(a) of the Act.
Issues
[25]
The first issue that
must be determined is whether the reassessment dated April 13, 2004 was out of
time. The Appellant was initially assessed for its taxation year ended August
31, 1999 by notice dated March 24, 2000. The normal reassessment period expired
on March 24, 2003. The Minister reassessed beyond the three year normal
reassessment period on the basis that the extension in subparagraph 152(4)(b)(iii)
of the Income Tax Act (the “Act”) applied in this situation. The
relevant statutory provisions are paragraph 152(3.1)(b) and
subparagraphs 152(4)(b)(iii) and 152(4.01)(b)(iii) which read:
(3.1) Definition of "normal reassessment
period" -- For the
purposes of subsections (4), (4.01), (4.2), (4.3), (5) and (9), the normal
reassessment period for a taxpayer in respect of a taxation year is
(…)
(b) in any other case, the
period that ends 3 years after the earlier of the day of mailing of a notice of
an original assessment under this Part in respect of the taxpayer for the year
and the day of mailing of an original notification that no tax is payable by
the taxpayer for the year.
(…)
(4) Assessment and reassessment [limitation period] -- The Minister may at any time make an
assessment, reassessment or additional assessment of tax for a taxation year,
interest or penalties, if any, payable under this Part by a taxpayer or notify
in writing any person by whom a return of income for a taxation year has been
filed that no tax is payable for the year, except that an assessment,
reassessment or additional assessment may be made after the taxpayer's normal
reassessment period in respect of the year only if
(…)
(b) the assessment,
reassessment or additional assessment is made before the day that is 3 years
after the end of the normal reassessment period for the taxpayer in respect of
the year and
(…)
(iii) is made as a consequence of
a transaction involving the taxpayer and a non-resident person with whom the
taxpayer was not dealing at arm's length,
(4.01) Assessment to which para. 152(4)(a) or (b)
applies -- Notwithstanding
subsections (4) and (5), an assessment, reassessment or additional assessment
to which paragraph (4)(a) or (b) applies in respect of a taxpayer
for a taxation year may be made after the taxpayer's normal reassessment period
in respect of the year to the extent that, but only to the extent that, it can
reasonably be regarded as relating to,
(…)
(b) where paragraph (4)(b)
applies to the assessment, reassessment or additional assessment,
(…)
(iii) the
transaction referred to in subparagraph (4)(b)(iii),
[26]
In SMX Shopping Centre Ltd. v.
R.[1],
Sharlow J.A. discussed section 152 of the Act and at paragraphs 18 and 24 she
stated the following:
18 Subparagraph
152(4)(b)(iii) asks whether there is reason, "as a consequence of a
transaction involving the taxpayer and a non-resident person with whom the
taxpayer was not dealing at arm's length," to assess or reassess the
taxpayer's tax for any relevant taxation year. If the answer is yes, the
reassessment can be made within the extended reassessment period but, according
to paragraph 152(4.01)(b)(iii), only to the extent that the reassessment
may reasonably be regarded as relating to the transaction referred to in
subparagraph 152(4)(b)(iii).
(…)
24 In
the context of subparagraph 152(4)(b)(iii) of the Income Tax Act,
the word "transaction" must be interpreted to include a transaction
that the taxpayer alleges forms the factual foundation for a deduction claimed
in an income tax return. Thus, for example, if a taxpayer claims to be entitled
to a deduction for a particular expense it has paid, and the payment of the expense
(assuming it occurred), would have involved the taxpayer and a non-resident
person with whom the taxpayer was not dealing at arm's length, the Minister has
the legal authority to reassess within the extended reassessment period to
disallow the deduction. That legal authority does not disappear if the taxpayer
later denies that the expense was paid, or fails to prove that it was paid.
[27]
It is the Respondent’s position
that the reassessment is as a consequence of all the transactions which gave
rise to the Bonus. These transactions involved the Appellant, BMSI (US), a
non-resident, and Goldstein. At paragraph 30 of his Written Representations,
Counsel for the Respondent wrote:
30. In
addition, since the directing mind is the same for both the appellant and the
US Sub, the corporate decision to reward Mr. Goldstein by redeeming 12% of the
increase value of the shares sold by the US Sub using the funds of the
appellant constitutes a transaction or a series of transactions which for all
purposes resulted in $7,681,517 of the appellant’s income to be voluntarily
transferred to the US Sub.
[28]
At the discovery of the
Respondent’s representative, counsel for the Appellant asked ‘what was the
“transaction” between the Appellant and BMSI (US) that the reassessment is a
consequence of?’ The question was taken under advisement and the response was
given in writing as:
The provision
of Mr. Goldstein’s ongoing strategic services by Blackburn Group Incorporated
to BMSI (US) to increase the value of its US holdings without receiving any
compensation from BMSI (US) for the long-term incentive amount (an amount that
was tied directly to the increase in value of BMSI (US)’s holdings) that
Blackburn Group Incorporated paid to Mr. Goldstein.
[29]
Counsel for the Respondent relied on
the decision of Justice Thurlow in Minister of National Revenue v. Granite
Bay Timber Co.[2]
to state that the word “transaction” was wide enough to include an arrangement.
In conclusion on this issue, counsel stated that by virtue of subsection
247(11) of the Act, the definition of the word “transaction” in section 247
applies to that word as it is used in subparagraph 152(4)(b)(iii).
[30]
First, I disagree that the
definition of the word “transaction” in section 247 applies to that word as it
is used in section 152. The relevant subsections in 247 read as follows:
247. (1) Definitions
-- The definitions in this subsection apply in this section.
"transaction"
includes an arrangement or event.
(11) Provisions
applicable to Part -- Sections 152, 158, 159, 162 to 167 and Division J of
Part I apply to this Part, with such modifications as the circumstances
require.
[31]
From the preamble in
subsection 247(1), it is clear that the defined terms in that subsection apply
only to section 247. Also subsection 247(11) ensures that the assessment,
payment, penalty, refund, objection and appeal provisions in Part I of the Act
apply to Part XVI.1[3].
Its reference to sections in Part I of the Act does not import all of the
defined terms in section 247 into those sections in Part I of the Act.
[32]
Second, it is my
opinion that the word “transaction” as it is used in subparagraph 152(4)(b)(iii)
does not include an arrangement.
[33]
The word “transaction”
is defined in both sections 245 and 247 to include an arrangement or event. In Canadian
Pacific v. R[4].,
Sexton J.A. said the following:
By the
definition in subsection 245(2) a transaction includes an arrangement or event.
Thus the definition of transaction is extended to include circumstances that
would not strictly be considered to be a transaction within the normal meaning
of that term.
[34]
Based on the above and
using a textual, contextual and purposive approach[5] to the
interpretation of the word “transaction” in subparagraph 152(4)(b)(iii), I
conclude that it does not include an arrangement. It is also my opinion that
the word “transaction” in subparagraph 152(4)(b)(iii) does not include a series
of transactions. If the Act had intended that a series of transactions would be
included, it would have specifically stated it as it did in other sections such
as the Avoidance Transaction section.[6]
[35]
There is no general
definition of the word “transaction” in section 248 of the Act but it is
defined in the Canadian Oxford Dictionary as follows:
1 a. a piece of esp. commercial business done; a deal (a
profitable transaction).
b. N Amer. = TRADE 4b.
c. the management of business etc.
2. (in pl.) published reports of discussions, papers read,
etc., at the meetings of learned society.
[36]
The “transaction”
described by the Respondent (see paragraph 28 above) did not take place.
Rather, Goldstein’s investment services were provided to the Appellant and his
supervisory services were provided to Carfax. These were different hats that
Goldstein wore. The Bonus paid to Goldstein related to the investment services
that he provided to the Appellant.
[37]
The question now
becomes whether in the 1999 taxation year, there was a transaction or a piece
of commercial business done between the Appellant and a non-resident person
with whom the Appellant was not dealing at arm’s length.
[38]
In this appeal, there
was evidence of three transactions that took place in 1999. In the first
transaction, the Appellant made the decision that BMSI (US) would sell its
shares in Carfax. In the second transaction, BMSI (US) sold its shares in
Carfax to Polk (US). The Appellant was not a party to this transaction. As
counsel for the Respondent argued, BMSI (US) was a legal entity and it was the
legal owner of the shares in Carfax. In the third transaction, the Appellant
paid Goldstein the Bonus.
[39]
In the circumstances of
this appeal, the reassessment was made as a consequence of the payment of the
Bonus by the Appellant to Goldstein. However, Goldstein was an arm’s length
employee of the Appellant and he was a resident of Canada.
It is my opinion that subparagraph 152(4)(b)(iii) of the Act did not
permit the Minister to reassess the Appellant’s 1999 taxation year within the
extended reassessment period.
[40]
As this decision will
resolve the appeal, I will not comment on the transfer pricing issue which was
also raised.
[41]
The appeal is allowed
with costs.
Signed at Halifax,
Nova Scotia, this 17th day of March 2009.
“V.A. Miller”
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