REASONS FOR JUDGMENT
Tardif J.
[1]
This is an appeal pursuant to a notice of
assessment for the 2009, 2010 and 2011 taxation years based on: rejected
employment expenses, including expenses related to the use of an office at the
appellant’s personal residence, car expenses and fees paid to his spouse for
2009 and 2010.
[2]
The appellant admitted that all the components
of the assessment under appeal are correct, with the exception of the fees paid
to his spouse of $76,190 for the 2009 taxation year and $93,235 for the 2010
taxation year, amounts which were claimed as disbursements for fees paid to his
spouse and that the appellant considers to be eligible expenses. The amounts
were billed on a monthly basis via invoices containing few details.
[3]
According to the appellant, disbursements of
$76,190 and $93,235 were to cover fees for support work, collaboration and
business development, with the ultimate objective of increasing revenues,
making them eligible expenses to be deducted from his business income.
[4]
The appellant was first employed as an insurance
agent and quickly became a broker. His career path finally led him to become a
financial planner. He worked as a financial planner for several companies
headquartered in Toronto.
[5]
His territory was generally eastern Canada
starting at the Ontario border; in other words, he did business in Quebec and
the maritime provinces.
[6]
He was generally paid a base salary plus
commission. The base salary and percentage of commissions varied depending on
the companies retaining his services.
[7]
He explained that his spouse, Nathalie Scott,
with whom he had been married for over 10 years, billed him for fees via a
monthly invoice from a company bearing her name, i.e., Nathalie Scott, his
spouse.
[8]
Fees were paid for two types of services. When
the appellant testified, he added a third. The work involved making and
preparing corporate gifts for clients and prospective clients.
[9]
In that regard, his spouse had to use her
imagination to make individual, distinctive and personalized purchases and
prepare various arrays, which meant she had to be familiar with the gift
recipients. The gifts could include fruit, wine, cigars or cognac, depending on
the situation.
[10]
According to the appellant, Ms. Scott also
prospected, organized appointments, managed the agenda and provided
administrative support such as booking rooms, flights, etc.
[11]
The appellant also stated that his spouse
prepared and dealt with logistics such as room rentals, invitations, caterers,
information kits, etc. during certain presentations.
[12]
The appellant also said that his wife was
involved in organizing certain social and recreational events, such as
go-karting, snowmobiling and skeet shooting competitions and a very important
activity in Bromont, host of an internationally renowned equestrian festival.
Also, in more general terms, she accompanied him at most of the activities in
which he participated in order to project a positive image of his family values
to his existing and prospective clients.
[13]
Despite her organizational skills, discipline
and great attention to nuances and details, the appellant explained that his
spouse, Ms. Scott, did not like management to the extent that he had to conduct
the incorporation procedures on his own. He obtained his wife’s Quebec Sales
Tax (QST) and Goods and Services Tax (GST) numbers. He was the one who completed
the reports to which the registrants are subject, even Ms. Scott’s income
tax returns. A very significant and singular fact: he even prepared the
invoices and their contents. In other words, he was the one who looked after
everything connected with Ms. Scott’s business. Ms. Scott had
absolutely nothing to do with the management of her business; the appellant
took care of everything.
Remuneration or payment of fees
[14]
The appellant did not give his spouse anything
at all, including any cheques or cash and did not make any deposits into her
bank account. He used his own credit card statements to explain that
Ms. Scott made purchases using a credit card in her own name based on her
own credit file.
[15]
As payment or in consideration of fees, at the
end of the month, he paid the amounts owing, in which part of the expenditures
had been made by Ms. Scott. The evidence showed that these were often
personal expenses, but also family expenses, including food. The account
statements in question list essentially personal expenses for both the wife and
husband, and leisure and family expenses.
[16]
In other words, everything went on the credit
card including grocery expenses. The appellant paid the amount owing without
making a distinction. He argued that this was the method used to pay the fees
owed to Ms. Scott. Ms. Scott had no control over or latitude
regarding the amounts allegedly paid for her fees.
Accountability
[17]
The accounting, allocation or assignment of the
responsibility for the items listed on the credit card statements was never
established in detail. In other words, all the expenses incurred by the
appellant and his spouse were paid with a credit card: they each had their own
credit card based on a single file and account held by the appellant. When they
came due, the appellant paid all amounts for the expenses incurred. The portion
regarding Ms. Scott was also paid in lieu of payment of the fees. This was
not proven, but I assume that the appellant prepared fee invoices based on the
amounts paid. The appellant submitted that it was the only way in which he was
paying for the cost of the fees. In response to questions from the Court, he
said that he had never given his wife any cheques or cash, adding, however,
that he did have some cash in a safe to which she had access. Concretely, it
seems that Ms. Scott never took advantage of it.
[18]
Ms. Scott also testified at the respondent’s
request. From the outset, she contradicted the appellant. She said that she did
indeed fulfill some of the duties and responsibilities that the appellant had
previously described. However, she basically maintained that this was a
collaboration, her normal involvement as a spouse. She even said that, at the
start of their union, the appellant expected her to act as she always had
before they were married, that is to say, no responsibilities outside the
family home.
[19]
She said that the appellant controlled her very closely.
He took care of everything not at her request, but out of habit. She argued
that she had agreed to collaborate and back and support him to the best of her
ability. She acknowledged that she accepted the arrangements imposed by the
appellant. She also admitted that she had collaborated, contributed and
participated in some activities in the course of the appellant’s business.
[20]
Ms. Scott was very clear about the amount
of the fees. She said that she had never been involved in any discussions,
negotiations or transactions regarding the value of the services. She admitted
that the appellant paid the bills, adding that she never had any money of her
own. The sole purpose of her personal bank account was to receive an indemnity
pension for her two children from a previous marriage.
[21]
She admitted that she had signed all the
documents at the appellant’s request, but clearly indicated that she was not
the author thereof.
[22]
Although the relationship between Ms. Scott
and the appellant was obviously strained as a result of a difficult divorce,
Ms. Scott seemed fairly serene. She did not show any malice that would
tend to discredit her testimony.
[23]
In view of the evidence, the appellant and
Ms. Scott went through a period of great turbulence in their relationship
as a result of their divorce.
Analysis
[24]
At first glance, the first impulse would be to
determine the credibility of the two main witnesses, the appellant and
Ms. Scott. Admittedly, some assertions and statements were filled with
such tension that they affected their reliability to a certain extent. However,
I do not think this tension amounted to anything that would cause either
testimony to be rejected.
[25]
The evidence regarding the undisputed facts is
largely sufficient to dispose of the appeal.
[26]
These facts include:
●
The absence of a genuine contract between the
parties;
●
The absence of a precise definition of the
tasks;
●
The absence of specific evidence as to when the
work was performed;
●
The conspicuous absence of work justifying such
high fees;
●
The absence of evidence of a correlation between
the work described and an increase or even impacts on income;
●
The absence of evidence regarding the necessity
and/or usefulness of the work;
●
The absence of negotiations, talks and
discussions on an agreement regarding an offer of service;
●
The absence of evidence regarding the
reasonableness of the amounts claimed as fees;
●
The total absence of proof of payment of fees;
●
The total absence of a link between the invoices
and the supposed payment of fees.
[27]
There is no doubt that the appellant’s spouse
collaborated, contributed and did her part as a spouse for the appellant. In
the context of the appellant’s affairs, Ms. Scott was available and very
flexible, and in general collaborated fully, no doubt with spontaneity and
enthusiasm.
[28]
She participated and helped organize social
functions and events. She understood and accepted that her role involved
demonstrating that the appellant was a serious, reliable person with strong
human and family values. In other words, she fully agreed to support the
appellant’s wish to bolster his image as a family man.
[29]
According to preponderance of the evidence, during
the 2009 and 2010 taxation years, Ms. Scott, the appellant’s wife, acted
as a generous, responsible spouse who fully benefited from the standard of
living provided by the appellant.
[30]
Ms. Scott’s commitment to the appellant was
simply something that she freely agreed to provide at no charge. She had never
negotiated or required any fees in return for the provision of defined services
determined by the appellant alone. Indeed, Ms. Scott has never received,
included, asked for or demanded fees. This was essentially a scheme dreamed up,
designed and implemented unilaterally by the appellant.
[31]
Consequently, the absence of consent completely
contradicts the existence of any employment contract.
[32]
Even if Ms. Scott had wanted to cash on her
availability or participation, it should have been defined and framed, and the
consideration should have been in line with the value of the services rendered,
reasonable and consistent with the market.
[33]
The consideration should have been paid to her
in actuality, in full and on a regular basis. Finally, it would have been
necessary that she be completely free to use the amounts received as she saw
fit. The appellant did not have the right to decide everything on his own.
[34]
In any kind of bona fide contract, the parties
must be free and involved in all components of the contract, which clearly was
not the case in this instance.
Penalties
[35]
Contrary to what he attempted to demonstrate,
the appellant is not a novice in matters fiscal. He received a very large
salary from the sale of financial products, which he himself described as “tax
shelters.”
[36]
It is quite impossible for someone with such
financial knowledge to be unaware of the basic tax rules governing eligible
business expenses.
[37]
He even claimed that the first time he heard the
phrase “income splitting” was when his ex-spouse used it.
[38]
The scheme put in place and used by the
appellant was conceived and thought out unilaterally by the appellant. The
amounts involved were so large that he also retained control over these amounts
through the credit card. That allowed him to maintain full control over
expenses at all times and enabled him to respond quickly.
[39]
He prepared the income tax returns of the
company created for his spouse and his spouse’s returns. The appellant knowingly
and wilfully established that strategy to reduce his tax burden, knowing full
well that he would in fact retain the full enjoyment of his income.
[40]
His system allowed him to deduct essentially
personal expenses such as food. This meant that all his family responsibilities
were covered.
[41]
Clearly, according to preponderance of the
evidence, the appellant knowingly committed gross negligence in the treatment
of his income, which also fully justifies imposing the penalties set out in
subsection 163(2) of the Income Tax Act, R.S.C. 1985, c. 1 (5th
Suppl.).
[42]
For these reasons, the appeal is dismissed with
costs in favour of the respondent and the penalties imposed are confirmed to be
well founded.
Signed at
Ottawa, Canada, this 27th day of October 2016.
“Alain Tardif”
Translation certified true
On this 23rd day of June 2017
François Brunet, Revisor
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