Maurice Desjardins Compagnie Ltée v. Minister of National Revenue, [1987] 1 CTC 2147, 87 DTC 83

Tremblay, T.C.J. [Translation]:—This appeal was heard at Montréal, on January 30, 1986. The matter was taken under advisement on May 21, 1986 after the last written submission of counsel had been filed.

1. Issue

The issue is whether the appellant is justified, in computing the income for the 1980 to 1983 fiscal years, in claiming the benefits of the small business deduction provided for in subsection 125(1) of the Income Tax Act, allowing a tax deduction of 21 per cent. The benefits claimed amount to $16,190 in 1980, $20,733 in 1981, $24,116 in 1982 and $36,408 in 1983.

The respondent disallowed this 21 per cent deduction, maintaining that the appellant’s income was income from a non-qualifying business within the meaning of paragraph 125(6)(f) of the Act and that it was thus entitled only to a tax deduction of 122, per cent. According to the respondent, more than 667, per cent of the income from fees generated by the appellant’s business was derived primarily from services provided to one entity and attributable to services performed by persons who were specified shareholders of the appellant or persons related thereto.

2. Burden of Proof

2.01 The burden is on the appellant to show that the respondent's assessments are incorrect. This burden of proof derives from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v. M.N.R., [1948] C.T.C. 195; 3 D.T.C. 1182.

2.02 The facts presumed by the respondent are set out in subparagraphs (a) to (e) of paragraph 5 of the respondent's reply to the notice of appeal. This paragraph reads as follows:

In assessing the appellant for its 1980, 1981, 1982 and 1983 taxation years, the respondent, the Minister of National Revenue, relied on the following facts, inter alia:

(a) during the 1980, 1981, 1982 and 1983 taxation years, the appellant operated a property management and administration business;

(b) during the years in question, the income from fees generated by the appellant's business was derived primarily from services provided to one entity and attributable to services performed by persons who were specified shareholders of the appellant or persons related thereto;

(c) during the years in question, the appellant’s business was involved in administering properties belonging to its specified shareholders;

(d) during these same years the appellant did not employ in the business more than five (5) full-time employees who were not specified shareholders of the appellant or persons related thereto;

(e) during 1980, 1981, 1982 and 1983, the business operated by the appellant was a non-qualifying business.

3. Facts

3.01 The appellant was incorporated in 1961 for the purpose of carrying on construction activities. A few years later, around 1965, its activities were directed toward full property maintenance and administration.

The contracts signed in 1968 and 1972 and filed as Exhibits R-6 and A-7 confirm this orientation.

Whereas Exhibit 1-6 (1968) spoke only of “administration", Exhibit A-7 (1972) terminating 1-6 speaks of “full administration" entrusted to the appellant. It is true, however, that contract A-7 merely amends contract 1-6. The latter had been entered into with all the owners, including Mr. Louis Desjardins, who owned two properties at the time. After Louis Desjardins had died, a new contract (A-7) was signed in 1972 with his estate with re- spect to the two properties. It was then that the word “full” was added to the word “administration”.

However, full administration in fact applied to all the properties.

The appellant’s fee specified is the same in both contracts, namely six per cent of the rents collected.

3.02 “Full administration” included selecting tenants, signing and administering leases, collecting rents and paying accounts (wages, taxes, insurance, etc.). It also included maintenance, which involved snow removal, painting apartments, mowing the lawn, etc. For this purpose, the appellant owned a car, a truck, five to six snow blowers, three to four lawn mowers and several sets of tools. It was only for specialized work, such as a complete overhaul of the plumbing or the electrical system, that persons other than the ordinary employees were hired.

3.03 According to Mr. Desjardins, the tenants generally went to the superintendents and maintenance men with their problems. New rentals (visiting the premises, etc.) were handled by the superintendent.

According to Mr. Desjardins, the organization was structured and running in such a way that his absence did not affect the administration or maintenance.

3.04 In the years in question, the appellant had a team of 22 employees, 17 of whom were not related either to the shareholders or to persons related to them.

Six people shared the duties of superintendent for 125 apartments. The rest of the team was available for maintenance on all the apartments, which were divided into 12 properties, all built by Louis Desjardins, Maurice Desjardins' father.

These properties are all located on Graham and Hudson Streets in Montréal. The properties are owned by Louis Desjardins’ estate (two) his wife Alexandrina (one) and his four children (nine). The heirs of Louis Desjardins' estate are his wife and his four children, Hélène, Rachel, Alice and Maurice.

3.05 The above facts were related during the examination and cross-examination of Maurice Desjardins, an engineer and principal shareholder (70 per cent of the voting shares) of the appellant. His fellow shareholders are his wife, his six children and his two sisters.

3.06 Mr. Clement Roux, C.A., of the accounting firm Touche & Ross, and Mr. Desjardins both testified that all the money from rents was deposited into a single bank account of the appellant and not into a trust account. It was out of this single account that all the wages were paid to the 22 employees and the other expenses paid.

3.07 According to the accountant Mr. Roux, the business’s gross income from services (fees, equipment, rental income, etc.) could not have been earned as a result of the efforts of a single person to whom the salary listed as an expense was paid. According to the appellant's financial statements, the following amounts appear under the salary and accounting item: 1980: $11,885; 1981: $7,037; 1982: $8,237; 1983: $8,735 (Exhibit 1-1, pages 26 and 29).

According to the appellant's financial statements filed with the tax returns, this gross income and the main expense items for the years in question are as follows:

Income

3.08 Mr. Roux filed as Exhibit A-6 a table entitled “Pro forma table of fees for services and expenses reimbursed with respect to property management” for 1980, 1981 and 1982.

In cross-examination, Mr. Roux admitted that he had not personally checked all the figures in table A-6.

3.09 Several exhibits were filed with regard to the number of employees who worked for the appellant. First there is table 1-7, prepared by Maurice Desjardins. It distinguishes clearly between full-time people (broad line) and part-time people (finer line). Unrelated people are underlined in green and related people in pink. This table corroborates the information found in Exhibit 1-3 (T-4 Supplementaries) and I-4 (list of names and wages for 1980 to 1982). The following tables prepared by counsel for the respondent summarize the facts respecting the number of unrelated employees.

(a) 1980

				Number of Employees
	Number of
Month	Weeks Weeks	Full-time		Part-time	Part-time
Jan	4	5	5	1 (av.16 hours)
Feb.	4		5	1 or 2 (8 or 16 hours)
March	14 to 20/03		4	3 (max. 16 hours)
	other weeks		5	1 or 2 (between 4 and 16 hours)
April	11 to 17/04		4	1 (20 hours)
	other weeks		5	0

			Number of Employees
	Number of
Month	Weeks	Full-time		Part-time Part-time
May to Aug.	18	5 to 7
Sept.	4		5	1
Oct.	4		5	1 (16 hours)
Nov.	01 to 06/11		4	2
	other weeks	2 or 3		0 or 1
Dec.	5	2 or 3		0 or 1
(b) 1981
					Number of Employees
		Number of
Period		Weeks			Full-time	Part-time
01/01 to 15/01		2	2		3	2
16/01 to 12/02		4			4 or 5	2
13/02 to 23/04		10			4	2
24/04 to 30/04		1			5	1
May to August		17			6 to 8	0
01/09 to 08/10		6			5	2
09/10 to 12/11		5			5	0
13/11 to 10/12		4			4	0
11/12 to 31/12		3			5	0
(c) 1982
					Number of Employees
		Number of
Period		Weeks			Full-time	Part-time
01/01 to 11/03		10		5	5	0
12/03 to 18/03		1			4	0
19/03 to 29/04		6			5	0
30/04 to 01/09		18			6 or 7	0
02/09 to 31/12		17			5	0
(d) 1983
					Number of Employees
		Number of
Period		Weeks			Full-time	Part-time
01/01 to 30/04		17		5		0
01/05 to 25/08		17		6	6	0
26/08 to 15/10		8		5		0
16/10 to 31/12		10			6	0

Exhibits 1-7, 1-3 and 1-4 also show that Maurice Desjardins’ children, Martine, Michèle and Louis, received wages from the appellant.

4. Act, Analysis

4.01 Act

The principal provision of the Income Tax Act involved in this appeal is 125(6)(f)(ii). This subparagraph reads as follows:

125. (6) . ..

(f) “non-qualifying business” carried on by a corporation in a taxation year means

(i) ...

(ii) a business of providing services if more than 667,% of the gross income for the year of that business derived from services

(A) is derived from services provided to, or performed for or on behalf of, one entity, and

(B) can reasonably be attributed to services performed by persons who are specified shareholders of the corporation or persons related thereto

unless the corporation employs in the business throughout the year more than five full-time employees who are not specified shareholders of the corporation or persons related thereto, or

4.02 Analysis

4.02.1 In his reassessments, the Minister of National Revenue determined that the appellant had operated a non-qualifying business within the meaning of 125(6)(f) cited above from 1980 to 1983 and that consequently it was not entitled to the small business tax deduction of 21 per cent provided for in 125(1) of the Act, but instead was entitled to the 127, per cent provided for in 125(1.1) of the Act as a non-qualifying business.

4.02.2 The evidence must be analysed on the basis of the following four requirements set out in 125(6)(f):

A— a business of providing services . . .

B— more than 667, per cent of the gross revenue is derived from

services provided to, or performed for or on behalf of, one entity,

C— more than 662, per cent of the gross revenue can be attributed to

services performed by persons who are specified shareholders of the corporation or persons related thereto,

D— the company employs five full-time employees or less who are

not specified shareholders or persons related thereto.

It goes without saying that owing to the strict interpretation that must be given to this provision, all four requirements must be met for it to apply.

A— A business of providing services

4.02.3 There is no dispute on this point between the parties; the appellant is a business providing services.

B— Whether more than 66% per cent of the gross revenue is derived from services provided to, or performed for or on behalf of, one entity

4.02.4 The appellant's gross revenue consists primarily of fees (six per cent of gross rents collected) and equipment rental (para. 3.06).

It appears from the information that over two thirds of the gross revenue is derived from the fees collected.

The respondent criticized the accounting method used by the appellant at length, not the one in the financial statements filed with the tax returns, but the one presented in Exhibit A-6 (para. 3.07). According to this method, both the fees for services and the expenses reimbursed, which are in effect the owners' money, are regarded as income.

In addition, the disbursements for wages, etc., made with the owners' money are regarded as the appellant’s expenses.

The Court must admit that at first glance, on the basis of its form, the method used may be open to criticism.

In substance, however, the appellant, being the owners' agent, acted on their behalf and thus, in my view, meets the requirements of 125(6)(f)(A) of the Act. The services were in effect provided to, “or performed for or on behalf of’’, one entity.

It is obvious that if we subtract the total wages paid to the 22 employees and other expenses appearing on A-6 from the fees received by the appellant, the latter could not survive. It could no doubt insist on a fee of 20 per cent to 30 per cent of the rents collected and absorb all the expenses, but this was not the method used. It could also have asked for only two per cent or three per cent as fees and not done the maintenance work: painting, etc., but merely collected the rents.

4.02.5 The respondent maintained that the full administration mandate applied only to two properties and that management was involved for the other ten (para. 3.01).

The evidence was clear: the services rendered do not consist only in fund management or rent collection, but in maintenance services (para. 3.02), for all the properties. The appellant is well equipped for this purpose.

In my view, whether the appellant used the owners' money to pay the wages and other disbursements in relation to the maintenance services or whether it claimed a larger percentage of the rents collected as fees and deducted the wages and other disbursements from it amounts merely to a difference of form; the substance is the same and the services provided to or performed for the owners meet the requirements of 125(6)(f)(A) of the Act.

C— Whether more than 66 / per cent of the gross revenue can be attributed to services performed by persons who are specified shareholders of the corporation or persons related thereto

4.02.6 If the Court had accepted the respondent's argument that only those services whose costs can be subtracted from the fees received should be regarded as services provided, it is clear that we would then have to conclude that the above requirement had been met. Maurice Desjardins (sole specified shareholder owning ten per cent of the capital stock (125(9)(c)) and his daughter Martine are in effect the only persons who can be considered to have provided the services.

The Court is not of this opinion, however. All the services provided by the other employees, even though they were paid for with the owners' money, fall within the administration responsibilities of the appellant, which has a mandate to this effect. It pays the wages. It also issues the directives and orders to be followed. It is the employer. The T-4 forms (Exhibit I-3) issued for each employee also confirm this.

It is these services as a whole which create goodwill in the properties administered and thus allow the rents collected to be higher and consequently the fees to be higher.

The services provided certainly had an influence on the fact that from 1980 to 1983, the six per cent fees increased from $32,000 to $42,000 (para. 3.07).

In my view, it is erroneous to maintain that condition C enumerated above (125(6)(f)(ii)(B)) has been met.

On the contrary, if we consider not only the wages but also the time of the employees, we can say that probably more than 50 per cent (the appel- lant says 70 per cent) of the gross revenue is derived from services provided by persons not related to the shareholders.

It is therefore not necessary to take the analysis further and determine whether requirement D has been met (especially since it is only an alternative) to conclude that the appellant's business is not a “non-qualifying business". The appellant is therefore not entitled to the 1224 per cent tax deduction provided for in 125(1.1) of the Act but to the 21 per cent deduction provided for in 125(1) of the Act.

5. Conclusion

The appeal is allowed with costs and the matter referred back to the respondent for reconsideration and reassessment in accordance with the above reasons.

Appeal allowed.