Citation: 2013 TCC 123
Date: 20130424
Docket: 2009-35(IT)I
BETWEEN:
DR. MIKE ORTH INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rip C.J.
Introduction
[1]
In these appeals (Informal
Procedure) from its 2003 and 2004 income tax reassessments Dr. Mike Orth
Inc. ("Orth Inc."), the appellant, declares that the Minister of
National Revenue ("Minister") denied its "deduction for legal
fees", and the reassessments "are based on erroneous assumptions of
fact and law" and that it is entitled to amortize or deduct the legal fees
from its 2003 and 2004 incomes. The appellant relies, inter alia,
on sections 9, 14, 20(1) and 60(o) of Income Tax Act ("Act").
[2]
The appellant states
that the legal fees were accrued during its 2003 and 2004 fiscal year and it
provided the Minister with copies of invoices for the legal fees. However, the
appellant states, the Minister has "insisted on receiving a detailed
description of the specific legal services provided to the corporation in
incurring the legal fees. The detailed description of the specific legal services
and specific legal advice provided to the [appellant] associated with the legal
fees are subject to solicitor‑client privilege which the appellant did
not waive." The appellant declares that it did provide the Minister with a
"general description of the nature of the legal services" as an "alternative
method of substantiating the nature of the legal fees."
[3]
On the other hand, the
respondent complains that the invoices do not satisfy the requirement of
subsection 230(1) of the Act that every person carrying a business
and is required to pay or collect taxes shall keep records and books of account
in such form and containing such information as will enable taxes payable under
the Act to be determined. The respondent states that the Minister cannot
determine from the information on the invoices alone if the fees were
deductible in computing income. Counsel for the respondent states that the
Minister requires a description of the legal services performed for the fees in
issue and has refused to accept the "general description" of the
nature of the legal services provided to the appellant.
[4]
The respondent does not
refute the appellant’s position that the information it seeks is subject to the
solicitor‑client privilege raised by the appellant.
[5]
The invoices in issue
were issued by Olson Lemons LLP ("Olson Lemons"), a law firm, and
Olson Tax Consultants Inc. ("Olson Inc."), a corporation
carrying on the business of preparing tax returns and which is owned by the law
firm. A typical invoice read as follows (subject to changes of amounts):
|
Account
for Legal Services Rendered
|
|
|
|
|
Fee for
services
|
5,000.00
|
|
Total GST
|
350.00
|
|
Total
|
5,350.00
|
|
Less Payment
from Client
|
5,350.00
|
|
Balance Due
|
0.00
|
[6]
Some accounts would
include charges for disbursements and refer to payment out of the law firm’s
trust account.
[7]
Orth Inc. carries
on a medical practice. The principal shareholder of Orth Inc. is
Dr. Michael Orth. The fiscal year-end is June 30.
[8]
These appeals were the
first by three related taxpayers that were scheduled to be heard on
March 15, 2010 for two and half days. The issues in the appeals of the
other two appellants, 371501 B.C. Ltd. ("371 Ltd.") and 4402143
B.C. Ltd. ("440 Ltd."),
are similar to that of the appeals at bar. After several hours of evidence on
the first day of the Orth Inc. appeals, counsel for the parties agreed
that the appeals were "settleable" and undertook to settle the
appeals.
[9]
The appeals were not
settled and the hearing of the Orth Inc. appeal resumed on
December 1, 2010. (The appeals of 371 Ltd. were heard the next day,
the parties agreed that the appeals of 440 Ltd would be settled on the
basis of my reasons in 371 Ltd., subject to issues previously agreed to.)
Privilege
[10]
The appellant has
refused to divulge certain information with respect to invoices in issue
claiming solicitor‑client privilege. In these appeals, appellant's
counsel advises that one of the privilege issues is that the auditor of the
Canada Revenue Agency ("CRA") wanted access to the contents of the
files of the appellant's solicitor. The Crown says the CRA auditor simply
wanted more detail than was on the invoices.
[11]
Again, the Minister has
not questioned the appellant’s right to claim of solicitor‑client
privilege and neither do I. The fisc cannot cast its eyes on documents in a
solicitor's files. However, respondent’s counsel has questioned whether the
appellant has waived solicitor‑client privilege since, she says, it has selectively
revealed some information that may be privileged and hid evidence that may
prejudice its appeals. At the end of the day counsel for respondent did not
pursue the argument.
[12]
The Minister, when making
an assessment, proceeds on assumptions of fact that leads him or her to assess in a
particular manner. The initial onus is on the taxpayer to "demolish"
the assumptions made by the Minister in assessing. The
appellant’s initial burden is only to "demolish" the exact
assumptions made by the Minister but no more.
[13]
Justice L’Heureux-Dubé
explained in Hickman Motors, at paragraph 93, that:
…
this initial onus of "demolishing" the Minister’s assumptions is met
where the appellant makes out at least a prima facie case."
[14]
Once the Minister’s
assumptions have been "demolished" by the appellant, it is the
Minister who has the onus to rebut the prima facie case presented
by the appellant and prove his or her assumptions.
[15]
On the evidence before
me I must determine if the evidence presented by the appellant is sufficient to
demolish all or any of the Minister’s assumptions. Is the evidence lead by the
appellant of a degree that the appellant made out a prima facie
case? What is a prima facie case in an income tax appeal?
[16]
In Amiante Spec.
Inc. v. The Queen,
at paragraph 23, Trudel J.A. quoted Cain J. in Stewart v.
Canada:
A prima facie
case is one "supported by evidence which raises such a degree of
probability in its favour that it must be accepted if believed by the Court
unless it is rebutted or the contrary is proved. It may be contrasted with
conclusive evidence which excludes the possibility of the truth of any other
conclusion than the one established by that evidence".
[17]
Trudel J.A. added,
at paragraph: 24:
Although
it is not conclusive evidence, "the burden of proof put on the taxpayer is
not to be lightly, capriciously or casually shifted", considering that "[i]t
is the taxpayer’s business" (Orly Automobiles Inc. v. Canada, 2005
FCA 425 (CanLII), 2005 FCA 425, paragraph 20). This Court stated that the
taxpayer "knows how and why it is run in a particular fashion rather than
in some other ways. He [or she] knows and possesses information that the
Minister does not. He [or she] has information within his [or her] reach and
under his [or her] control" (ibid).
[18]
Recently Huddart J.A.
of the British Columbia Court of Appeal considered the nature of the burden of
proof incumbent upon a taxpayer in Northern Properties Corp. v. British
Columbia. He described, at
paragraph 33, what is needed to establish a prima facie case, and
how the appellant’s evidence which would otherwise establish a prima facie case
can be effectively challenged by the respondent to prevent the burden from
shifting:
In response to the
taxpayer's submissions, the Crown may adduce its own evidence to prove either
that the assumptions are correct or to show that, even without relying on the
assumptions, the assessment is nevertheless valid: Pillsbury
at 5188; Pollock at 6053. The Crown may also
challenge the taxpayer's evidence, either on cross-examination, or by raising
serious issues of credibility. A court may draw a negative inference "from
the taxpayer's failure to adduce material evidence in the taxpayer's possession
or control" and conclude the taxpayer has not met its initial burden of
disproving one or more of the assumptions: Trac
at para. 31. Once all the evidence is in, the judge must weigh it and first determine whether the taxpayer has met the initial legal burden
with respect to the assumptions. If the taxpayer has failed to meet its burden,
then the Crown need not go on to discharge its conditional legal burden because
the precondition has not been met.
[Emphasis
added.]
[19]
Earlier, in
The Queen v. Peter K.S. Wu, Strayer J.A.
illustrated an instance where the taxpayer’s evidence, to which the taxpayer
did not lead rebuttal evidence, nevertheless failed to establish a prima
facie case. In overturning a decision of the Court that a witness’
testimony despite the witness being evasive, forgetful and unimpressive, must
be accepted as it was the only evidence before the Court, Justice Strayer made
the following comments, at p. 6006:
The
learned judge appears not to have taken into account the onus placed on the
taxpayer by the Minister's assumption that this was one of the purposes of the
payment of the stock dividends to the taxpayer. In other words, the onus here
was on the taxpayer to prove that this was not one of the purposes of the
payment. Yet, after treating the taxpayer's evidence as unsatisfactory, … he
held that as this was the only evidence he had to accept it. He should instead
have considered whether the evidence met the standard of objective
reasonability which was required to overcome the onus on the taxpayer …
(Emphasis added.)
[20]
A taxpayer wishing to
establish a prima facie case to demolish all or any of the
Minister’s assumptions must not only present evidence of a high degree of
probability that must be accepted by the Court but must allow for a fair and
open cross‑examination of the evidence by Minister’s counsel. Counsel is
entitled to vigorously challenge the evidence of the taxpayer by cross‑examination.
A taxpayer claiming privilege in cross‑examination on matters he or she leads
in examination‑in‑chief, thus limiting the cross‑examination,
must consider possible consequences. A taxpayer claiming privilege who wishes
to shift the onus must still make a case that will survive cross‑examination.
[21]
One of the tasks before
me in these appeals, then, is to determine whether the appellant while
maintaining his right to solicitor-client privilege has presented evidence reversing
the onus placed on the appellant by the Minister’s assumptions.
Application to reopen
[22]
In order to promote a
settlement of the appeals, I issued an order on April 18, 2011 that
Orth Inc., 371 Ltd. and 440 Ltd. and their lawyers meet to
reconsider what information they may be willing to provide under a limited and
partial waiver of solicitor‑client privilege and meet with counsel for
the respondent at the office of Olson Lemons in Calgary to review their
position. The appellants in all appeals and respondent were to report back to
the Court in writing by August 31, 2011 (extended to September 30,
2011). In issuing the order, I adopted the interim reasons of Campbell J.
in Richard A. Kanan Corporation v. The Queen.
The parties could not come to any agreement as to any such information. On
October 3, 2011, the appellants requested that their appeals be reopened
for additional evidence and on November 15, 2011 the appellants filed
written submissions in support of their request, including an affidavit of
Mr. Olson. For various reasons the parties could not agree to an earlier date
than December 11, 2012 for the hearing of the motion. On December 10,
2012, the day before the scheduled hearing and over a year after filing its
application to reopen the appeals, the appellants withdrew their application to
reopen their appeals. The respondent has requested that counsel be permitted to
make submissions in respect of costs on the aborted application.
Facts
[23]
Mr. Olson explained
that at the beginning of each fiscal year of the appellant he would review the
work the firm had done earlier for the appellant and, based on the "expertise
it takes to do certain things", determine the anticipated services to the
appellant for the year and fix a fee. The fee would cover all the work or
projects to be performed for the year. The fee would be reviewed with the
client and an engagement letter would follow. If Mr. Olson underestimated
the fee "we eat the difference, if we overstate, we keep the
difference".
[24]
For the 2003 fiscal
year. for example, Mr. Olson fixed a fee of "approximately"
$36,500 to the appellant. For this fee, Olson Lemons engaged to work on
16 different tasks or projects for the appellant during the year. According
to Mr. Olson six of the projects actually dealt with corporate distributions,
three projects concerned the appellant’s capitalization with respect to share
subscriptions, two projects examined the appellant’s risk of being associated
for tax purposes with corporations controlled by siblings of Dr. Orth, one
task analyzed the appellant’s balance sheet, one project reviewed compensation
to be paid by the appellant and three items, which he referred to as "tangential
projects", "dealt more with one of the shareholders of the
corporation and the relationship between the [appellant] and one of its
corporate shareholders", 594962 British Columbia Ltd. ("594
Ltd."). The shareholders "were sort of partly involved and partly
not". Mr. Olson said he had discussions with the client — I
assume the principal of the appellant — and allocated invoices to the
appellant aggregating $25,000 to reflect actual work. "Later, we thought
that it probably should have been more to the [appellant]." Other accounts
were also rendered to the shareholders, he stated.
[25]
Mr. Olson
acknowledged that he did not have a precise method of allocating fees as to
hours or percentage of work. "We look at issues … and make [an] allocation
… [as] best we could". Hourly billing records are maintained but,
Mr. Olson said, the appellant is not billed on an hourly basis.
Mr. Olson had a sense of how long a project will take but "in a
really crude sense". One could say that 13 of the 16 projects related
to the appellant, he surmised. He guessed that the fee to the appellant would "probably
[be] close to 13/16 [of the total fees billed] rather than a laboured analysis
of each distribution".
[26]
The "fixed
fee" also includes the right of the appellant from time to time to ask the
firm’s lawyers "run of the mill questions", usually of general
business issues, said Mr. Olson.
[27]
All the projects are
maintained in one file, for 2003, for example, called "Projects 2003".
"All the things we are going to do are put there … we set a fee for the
entire work."
[28]
Mr. Olson was
"not at liberty to disclose issues discussed with the client". Thus,
Mr. Olson did not answer questions in cross‑examination relating to
the analysis of corporate distributions and shareholder conflicts he mentioned
in examination‑in‑chief. He did say that there were different
shareholders involved and a "corporation has an obligation to be sensitive
to differences among shareholders". He referred to "important issues
that had to be dealt with … fiduciary issues about changing shareholders,
particularly when there were family members involved." As far as any
redemption of shares is concerned, he refused to give reasons for any
redemption, referring respondent’s counsel (and me) to the "results"
recorded in the minute book of the appellant.
[29]
Counsel for the
respondent asked Mr. Olson if, in respect of dividends, the amount invoiced
as part of legal fees pertain to legal advice as to whom the dividends should
be paid or to the "actual work" done to pay those dividends and the
actual payment of the dividends. He replied that the fees were for "the
legal and tax analysis related to paying dividends." For example,
Mr. Olson explained that share provisions must be examined; some shares
contain provisions entitling the owner to a dividend to the disadvantage of
owners of a different class of shares. The retained earnings must be examined,
potential conflicts between shareholders must be considered, records must be
kept, reports must be compiled, resolutions must be drafted, forms must be
filed with governments, a report to the tax preparer how to prepare the tax
return as a result of the dividends is drafted. If a dividend is to be paid on
capital dividend account, then elections must be filed. All this was part of the
work performed for the six distribution projects. The tax work was done by the tax
lawyers at Olson Lemons, corporate matters were assigned to its corporate
lawyers. Mr. Olson could not answer any question relating to corporate
matters since, he said, he is not a corporate lawyer. In preparation for trial,
he did not consult with any corporate lawyer in the firm who may have had
knowledge of the issues.
[30]
With respect to the
project on compensation, Mr. Olson could not "recall" who, if
anyone, was paid salary or bonus in 2003 or 2004 by the appellant. He did state
that compensation is reviewed each year but he could not recall any specifics.
[31]
The balance sheet
analysis for 2003 involved a particular asset and, according to Mr. Olson,
"as I recall, had to do with payables and receivables …". This was
relevant for preparation of the tax return, he stated. The appellant's tax
returns for either 2003 or 2004 were not produced at trial. The respondent
produced financial statements of the appellant that it created to demonstrate
that professional fees represented more than ten per cent of the appellant’s
gross income in each of the years under appeal.
[32]
With respect to the
appellant’s share capital, Mr. Olson advised that Dr. Orth’s spouse
became a shareholder and Dr. Orth acquired preferred shares. He would not
reveal his advice to Mrs. Orth to acquire the shares and to the appellant
to redeem any shares.
[33]
Olson Ltd.,
Mr. Olson advised, "is part of the firm". It is "strictly a
tax return preparation" business. It is the lawyer in the firm who
prepares a report on how to prepare the tax return and Olson Ltd. carries
out the lawyer’s instructions. Olson Ltd. sends out invoices to clients "for
convenience of the client". Mr. Olson could not answer what time
Olson Ltd. spent on the appellant’s matters. In preparing for trial, he
did not review the billing records of Olson Ltd. He could not recall if he
earlier reviewed the appellant’s tax returns prepared by Olson Ltd. for
2003 and 2004.
[34]
During the course of
the audit of the appellant, Mr. Brian Kearl, a lawyer then working at
Olson Lemons, on January 29, 2008, sent copies of invoices from the firm to
the appellant for 2003 and 2004 to the CRA auditor working on the file. The
invoices were for fees for the appellant’s medical practice and investments:
services for corporate compliance and tax compliance for $3,226.37 and
$12,648.15 for 2003 and 2004, respectively and legal services in respect of the
appellant’s business and investments for $33,416.02 and $18,218.71 for 2003 and
2004, respectively.
[35]
About a month later, by
letter dated February 20, 2008, Mr. William Quigley, also then a
lawyer at Olson Lemons, wrote to the CRA and enclosed copies of invoices in
dispute as well as an analysis of the fees charged. He advised that he had
carriage of the appellant’s file and "as these invoices are subject to
solicitor‑client privilege, I have reviewed the relevant time entries in
an effort to summarize them for you such that their deductibility may be
determined". He divided the invoices as follows:
i) Legal advice given to the
appellant relative to annual distributions. (Invoice Nos. 302045, 303032 and
304043 for 2003 and Invoice Nos. 504061 and 606084 for 2004.);
ii) Annual corporate and tax
compliance services provided to the appellant. (Invoice Nos. 304570 for
2003 and Invoice Nos. 406722 and 504597 for 2004.);
iii) Legal advice given to the appellant
relative to annual corporate distributions and other business planning options.
(Invoice Nos. 303031 and 304042 for 2003 and Invoice Nos. 410120,
504060 and 508044.); and
iv) Analyzing the appellant’s current
and future business, financial and tax situation. (Invoice Nos. 301076 for
2003 and Invoice Nos. 401031 and 501213 for 2004.).
[36]
The copies of invoices sent
to CRA by Mr. Kearl and Mr. Quigley were not identical.
Mr. Kearl had included copies of invoices to other corporations related to
the appellant, for example, 594 Ltd. Three invoices originally charged to the
appellant in 2004 were subsequently charged to shareholders of the appellant.
Apparently the appellant’s bookkeeper listed invoices to the appellant that
should have been paid by others. These invoices aggregated $3,215.75.
[37]
The analysis of
professional fees charged to the appellant for each fiscal year referred to: (i) explanation
per General Ledger; (ii) amount per General Ledger; (iii) the invoice
date; and (iv) number and the invoice amount. There are reconciliations to
amounts determined by the bookkeeper. For 2003, an amount (Invoice
No. 304042) for $1,551.55 was deducted in 2004 when it ought to have been
deducted in 2003, Mr. Olson noted.
[38]
In the 2004 analysis
the bookkeeper, according to Mr. Olson, had listed certain invoices "that
we thought … had been assessed to and properly repayable by other related
parties, and so we removed those from the list". The bookkeeper, he added,
also accrued an amount of $20,750 for professional fees that were rendered
after year-end and failed to deduct two other invoices that were paid by the
appellant "at least to the tune of $6,000." Rather than Olson Lemons
issuing a new invoice, the appellant reimbursed 594 Ltd. as it had actually
made the payment to Olson Lemons. The aggregate invoiced amount for 2004 was
thus increased from $20,296.18 to $27,950.57.
[39]
The following invoices,
included with Mr. Quigley’s letter, are in issue:
A) 2003 Taxation Year
(a) Invoice No. 304570, dated
April 15, 2003: from Olson Inc., fee for services: $2,925. (Total after
including charges and disbursements: $3,015.29.)
Mr. Olson stated that this invoice related to tax
compliance, the preparation of the appellant’s 2002 income tax return and
income tax slips. The fee was agreed to after the 2002 year-end. At certain
times Mr. Olson was asked about additional billing for the same task and
explained that "bills go out from time to time" and one cannot look
at a specific invoice to determine the complete fee for the project. Sometimes
the work is more expensive than the invoice amount", he said, referring to
Invoice No. 304570, and would be "pushed up" in a subsequent
account. Some accounts may be paid partly in one year and partly in another. "I
can’t tell you for sure."
(b) Invoice No. 301076, dated
January 29, 2003: fee for services, $2,750. (Total: $2,764.24.)
This invoice relates to advice on various issues in
the carrying on of the business of a medical practice. Mr. Olson referred
to this work as "general advice" in connection with the business,
including employment issues. If an employment lawyer was required,
Mr. Olson would refer the appellant to an employment lawyer. He said this invoice
also included "some general tax issues". He could not recall if it also
related to "property issues".
(c) Invoice No. 302045, dated
February 21, 2003: fee for services $10,000. (Total: $10,015.02.), Invoice
No. 303032, dated March 24, 2003: fee for services $10,000. (Total:
$10,000.62.) and Invoice No. 304043, dated April 25, 2003: fee for
services $5,000.
The fees described in invoices numbered 302045, 303032
and 304043, Mr. Olson testified, related to one retainer and based on an
allocation of services, were borne by shareholders. Two related invoices went
to 594 Ltd. Of the 16 different assignments, 13 of the 16 related to
the appellant, "we thought". Perhaps the three other items related to
both the shareholders and the appellant. Mr. Olson said he believed one of
the issues related to share redemptions for a numbered company and he thought
that the "ultimate shareholder" of that corporation be billed
separately. The fixed fee was allocated amongst shareholders based on what he
thought the services related to.
Mr. Olson produced copies of the two
invoices, numbered 304044 and 305072 in the amounts of $2,675 ($2,500 for fees)
and $5,885 ($5,500 for fees) respectively, sent to 594 Ltd. after the 2003
year-end. Copies of these invoices were included with Mr. Kearl’s letter
but not in Mr. Quigley’s. Mr. Olson explained that these invoices
related to "some work done with respect to some capitalization
issues" of the appellant. Based on the fixed fee charges, "we had
sort of designed this at this rate to be paid by 594". Mr. Olson said
that later in discussions with the client "we suggested that ‘it would be
fine for the client to have some of that paid by [the appellant]’. The amounts
was [sic] ‘paid by 594 initially, and then subsequently … was reimbursed to the
tune of approximately $6,000." Mr. Olson blamed the bookkeeper who "was
confused about the reimbursement, thought it was … the compliance fees."
The bookkeeper deducted the fee that was "properly allocated to
594 Ltd., but should have been shown as a reimbursement",
Mr. Olson explained. This is the reason these invoices were removed from
Mr. Quigley’s enclosures.
(d) Invoice No. 303031, dated
March 24, 2003: fee for service $2,000 and Invoice No. 304042, dated
August 25, 2003: fee for services $1,450. (Total: $1,450.05.)
The fees in these invoices were for services relating
to distributions and the tax consequences of the distributions "and the
business planning options". The distributions were made in 2002 but the
work was completed after year‑end. Invoice No. 303031 also referred
to analyzing if the appellant was associated with another corporation for tax
purposes as well as compensation affecting the small business deduction.
The amount of the fee in Invoice No. 304042 was "inadvertently"
deducted in computing income for 2004. It should have been deducted in computing
income for 2003, according to Mr. Olson.
B. 2004 Taxation Year
(a.1) Invoice No. 406722, dated
June 17, 2004 from Olson Tax Consultants Inc.: fee for services: $3,950.
(Total: $4,056.90.) and Invoice No. 504597, dated April 19, 2005: fee
for services: $5,000. (Total: $5,037.86.)
Invoice No. 406721, dated
June 17, 2004, from Olson Inc.: sent to 594962 British Columbia Ltd. for
fees for services: $1,925.
Copies of these invoices were included with
Mr. Kearl’s letter with respect to business and tax compliance for 2004.
These invoices represent fees for corporate and tax
compliance, filing of tax returns for the appellant’s 2004 taxation year, as
well as advice in connection with the tax returns. The fees were agreed to,
Mr. Olson said, after the work was done and was "deducted … when they
paid us". According to Mr. Olson, Invoice No. 406722 was paid,
No. 504597 was accrued in the appellant’s working papers. Mr. Olson
believed that some or all of the amount was accrued by the client. The items
related to the 2004 fiscal year but billed after. Mr. Olson asserted these
fees, billed by Olson Inc., also covered legal advice. The services in
support of these invoices were performed by Olson Tax in respect of the law
firm’s retainer, said Mr. Olson. I assume the invoice addressed to 594
Ltd. was that which was paid by 594 Ltd. and reimbursed to it by the appellant
for $1,925.
(b.1) Invoice No. 401031, dated
January 12, 2004, fees for services: $2,975. (Total: $3,101.310.) and
Invoice No. 501213, dated February 1, 2005, fees for services:
$2,975. (Total: $3,017.60).
These Invoices are for issues relating to business
planning "and so on", according to Mr. Olson.
The amount in Invoice No. 501213 had been
included in the amount of $18,217.71 for legal services rendered in respect of
the corporation’s business and investments set out in Mr. Kearl’s letter
of January 28, 2007. This invoice was subject to reconciliation efforts by
the appellant’s advisors, according to Mr. Olson.
(c.1) Invoice No. 410120, dated
November 19, 2004, fee for services: $2,000., Invoice No. 504060,
dated April 13, 2005 to Dr. Mike Orth, fee for services $2,500. Invoice
No. 508044, dated August 5, 2005, fee for services: $3,450.
Those fees, Mr. Olson declared, were for advice
in connection with "some current and future distribution strategies"
for the appellant. Some distributions were "post year-end" but advice
was given during the year.
Mr. Olson testified that Invoice No. 504060
, should have been sent to the appellant, not to Dr. Orth personally. The
error was due to similarity in names of the appellant and Dr. Orth.
d.1) Invoice No. 606084, dated
June 16, 2006 sent to 573893 B.C. Ltd., for services $3,750. Also, an
invoice bearing the same number and date was sent to the appellant for $450
(plus disbursements of $12.00.) A copy of the latter invoice was sent to CRA by
Mr. Quigley, the former by Mr. Kearl.
Mr. Olson expanded on Mr. Quigley’s letter
that those invoices were for "legal advice given to the corporation
relative to annual corporate distributions and other business planning options".
According to Mr. Olson the fees were for advice "in connection with
some current and future distribution strategies" for the appellant and
included advice and preparation of documents in connection with the
distributions. While some of the distributions were made during the 2004
taxation year, some were later. However, Mr. Olson stated the advice was
given and documents prepared pursuant to an agreement that had been discussed
before year‑end.
(f.1) Invoice No. 504061, dated
April 13, 2005, fee for services $2,500.
This invoice (and the two numbered 606084 above) are
for legal advice relating to annual corporate distributions, according to
Mr. Quigley’s letter. Mr. Olson agreed, stating that these invoices
dealt with distributions subsequent to the 2004 year-end "but we had
already commenced the … work on it". The fee was discussed with the client
and was accrued in their books; invoices were rendered at a later date.
Appellant's submissions
[40]
Appellant's counsel
submits that his client has demolished the assumptions on which the Minister
assessed the appellant for 2003 and 2004 taxation years. She also
added that the respondent did not make an assumption about whether the
deduction should be in relation to income or capital.
[41]
In counsel's view the
"testimony of Mr. Olson was clear and uncontradicted that the
expenses were incurred to derive income". "The fees", she
explains, "were 'reasonable in the circumstances', in accord with
Mr. Olson's testimony, and where Mr. Olson and the taxpayer are
independent parties, the only conclusion is that the fees are reasonable, or
the taxpayer would not have agreed to them." In this regard, she refers to
Gabco Ltd. v. M.N.R., 68 DTC 5210. approved by the Federal Court of
Appeal in Petro‑Canada v. R., 2004 FCA 158, 2004
CarswellNat 1163, where Cattanach J. stated that it is not for the
Minister or the Court to substitute its judgment for what is reasonable but to
conclude that no reasonable businessman would have agreed to pay such an
amount, having regard only to business considerations.
[42]
Appellant's counsel asserts
that Mr. Olson's testimony was "essentially unchallenged" and
his "credibility was not questioned". During argument I indicated
that Mr. Olson's testimony appeared credible. Counsel declared that the
Minister's assumptions that the expenses claimed were not deductible as an
expense and that the expenses, in any event, were unreasonable pursuant to
section 67 of the Act were demolished. In my view the fact that the
fees were negotiated between parties at arm’s length is a very strong
indication that they are reasonable.
[43]
Counsel also submits
that I "heard the uncontradicted evidence of Mr. Olson, a senior
practitioner and member in good standing of the Law Society of Alberta" as
to what the legal fees were in respect of. Therefore, I assume I am to accept
the appellant's submission that the expenses were for reasons alleged by the
appellant; that they were incurred for the purpose of earning income from a
business within the meaning of subsection 18(1) of the Act.
[44]
Quite frankly, upon
review of the transcript, I was disappointed in Mr. Olson’s testimony. In
many instances he appeared not prepared to answer questions that a lawyer would
reasonably expect to be posed during a cross‑examination. In other
situations he gave weasel word replies. For example, he could not "recall"
or "recollect" who received compensation by way of salary or bonus
from the appellant in 2003 and 2004, although he did "believe" a
bonus was paid in both years. At least one of the invoices was with respect to
how or how much compensation should be paid. He was not aware if Mrs. Orth
"took a salary", although she provided services to the appellant. She
was one of "two people who made a difference in this company", said
Mr. Olson.
[45]
Mr. Olson referred
to the appellant’s minute book on several occasions during his testimony. He
stated that the recording of corporate transactions, declarations of dividends
and share transfers are recorded in the minute book, yet he did not produce the
minute book and any financial statements were produced by the respondent. He
could not recall if the appellant redeemed shares owned by Dr. Orth. He
did state that Dr. Orth "subscribed for a different class of shares,
but I can’t be 100 percent sure. That’s what I thought he did … " I
am not impressed by the fact Olson Lemons was sending out invoices having an
identical number to two different clients in two different amounts. Any
explanation to explain this escaped me. However, where Mr. Olson’s testimony
was clear and unambiguous, I accepted it.
[46]
When questioned about
corporate advice as opposed to tax advice his firm gave affecting the
appellant, Mr. Olson stated that he had no knowledge since corporate matters
were dealt with by corporate lawyers in his firm. He did not meet with the
corporate lawyers to brief himself for trial as one would reasonably expect of
a lawyer.
[47]
In the appellant’s
notice of appeal there is also a suggestion that on relying on section 14
of the Act, perhaps not all expenses claimed were current expenses but
that some of the expenses claimed may be on account of capital.
Mr. Olson's view is that if amounts are not deductible in computing income
they are deductible according to the provisions in section 14 of the Act.
Mr. Olson acknowledged that all fees billed to the appellant were deducted
in computing its income for 2003 and 2004 notwithstanding that it may be that
some of the fees ought to have been capitalized. So what I am offered is a
smorgasbord of fees, some perhaps of a capital expense, all claimed as a
current expense, and no evidence to distinguish one from the other.
Mr. Olson does not inform me which legal expenses he believes may be of a
capital nature and allow me to consider his view.
[48]
Nowhere, not in the
notice of appeal, not in Mr. Olson’s evidence, does the appellant or the
witness suggest, let alone declare, what invoices refer to services respecting
a possible eligible capital expenditure within the meaning of Section 14.
It appears that the appellant’s attitude is that if I find any amount not a
current expense, it is automatically an eligible capital expenditure. I cannot
agree; tax litigation is not a forum where if a judge cannot accept one
position then he or she must accept a party's alternative position.
[49]
I appreciate the
appellant's position that much of the information that may bear on these
appeals is privileged and I respect its right to protect that information.
However, most of Mr. Olson's testimony describing the various invoices in
question which, while interesting, is not illuminating to the extent that I
actually learned the purpose for which the legal fees were incurred and be able
to come to a reasonable conclusion as to whether the fees were incurred for
business or other reasons. Indeed, the invoices themselves may be privileged
yet they were provided to the CRA.
By testifying Mr. Olson, it could be argued, may be deemed to have waived
privilege. Respondent’s counsel did raise the issue as to whether the appellant
did waive solicitor-client privilege by producing evidence otherwise subject to
the privilege but was beneficial to it. The matter was not pursued.
[50]
These appeals were filed
under the Tax Court of Canada Rules (Informal Procedure) ("Rules")
and in accordance with subsection 18.15(3) of the Tax Court of Canada
Act:
…
the Court is not bound by any legal or technical rules of evidence in
conducting a hearing and the appeal shall be dealt with by the Court as
informally and expeditiously as the circumstances and consideration of fairness
permit.
For this reason I preferred to consider the evidence
before me, give the necessary weight and consideration the evidence deserved,
and not open the hearing of the appeals to a formal process, more akin to an
appeal under the General Procedure. My primary concern was to have the hearing
of the appeals proceed in an Informal Procedure process reasonably and as
“informally and expeditiously as the circumstances and consideration of
fairness” permitted.
[51]
Mr. Olson’s evidence,
for the most part, lacked precision. Mere generalities describing the purpose
of the legal fees without additional explanation or corroboration are not
helpful. I felt that I was given partial access to a story, a headline that may
or may not be at all descriptive of the story under the heading. This makes it
difficult for me to agree with appellant's counsel that I have to accept
Mr. Olson's testimony because he is a lawyer and the person who he invoiced
is a client at arm's length. While Mr. Olson's credibility is not in issue,
the evidence he gave is not convincing. I note that the principal of the
appellant did not testify. The appellant did not make out a prima facie
case as described by Trudel J.A. in Stewart
and Huddart J.A. in Northern Properties Corp.
so as to rebut the Minister's assumptions on many of he expenses underlying the
assessments.
[52]
At the end of the day
what I have to determine is what exactly were the services generally described
on the invoices or what reasonably can I find to be the services so described
on the invoices and the taxation year the services related to.
[53]
Among the facts the
Minister assumed in assessing the appellant was that during the years in appeal
"a complicated reorganization of the companies owned by
Dr. Michael Orth, his spouse, his brothers and their spouses, and his
parents took place (the 'Share Reorganization')" and therefore the
Minister concluded that the Share Reorganization was done for estate or tax
planning purposes of Dr. Michael Orth, his spouse, his brothers, his
sisters‑in‑law and his parents. Dr. Orth’s three siblings each
have a business unrelated to that of the appellant. He explained that the
corporations had a "complex cross‑ownership" as a result of
their father, the original shareholder of the non medical business, arranging
for each child to own shares in all corporations, although one child would run
a particular corporation. The corporations did go through a reorganization in
part, Mr. Olson stated, to simplify holdings, to avoid conflict in
dividend distribution and business decisions. The testimony of Mr. Olson
strongly suggests that the purpose of the "reorganization" was not as
much for the business of any corporation as for separating the interests of the
individual shareholders. He declared that the legal work for the reorganization
was performed by Olson Lemons under a retainer separate from the general
retainer the firm had with the appellant but he was reluctant to go into more
detail. Nevertheless, his evidence on this issue was sufficient to demolish the
Minister's assumption.
[54]
As I have mentioned,
the appellant's relevant tax returns were not produced, nor was the minute
book. What was produced were copies of the invoices, correspondence between
Olson Lemons and the CRA, copies of CRA material including some working papers,
income statements and balance sheets of the appellant as of June 30, 2000
to 2004, created in 2005 by the CRA. From this material and the obvious fact
that the appellant prepared and filed its tax returns for 2003 and 2004, it is
clear that the appellant paid salaries, wages and dividends during these years.
The proportion of dividends to net income over the years, except for 2004, was
substantial, frequently exceeding net income. It is reasonable to conclude that
notwithstanding my concern how evidence was presented at trial, Olson Lemons
did provide services to the appellant during the years in appeal for income tax
return preparation and advice on how to structure dividends and compensation, including
tax compliance.
[55]
As set out above, I do
not have sufficient evidence before me to allow the amounts of fees to be
deducted in respect of the following invoices:
2003
i) Invoice
No. 301076:
"General advice" may
include many items, both on income account and on capital account. Where the
legal services are with respect to an employment matter, the fees are
deductible but I cannot determine any allocation or even if these fees were
deductible in computing income because there is no evidence before me, for
example, as to how the fee can reasonably allocated to general advice,
employment issues, "some general tax advice" or property matters.
ii) Invoices Nos. 302045, 303032
and 304043:
These invoices appear to pertain primarily
to shareholder matters.
2004
(i) Invoices No. 401031 and
501213:
A cryptic description of service
for business planning "and so on" does nothing to clarify what the
billed services were for.
(ii) Invoices Nos. 410120, 504060
and 508044:
I am not satisfied that all three
invoices were for "some current and future distribution strategies"
or which of the three invoices were for such "strategies". I also
have difficulty understanding what the services actually related to and whether
the same matters may relate to services referred to in Invoice No. 606084.
(iii) Invoice No. 606084 for $3,750
was sent to 573893 B.C. Ltd. I am not satisfied with the explanation of why the
appellant was to pay this invoice.
(iv) Invoice No. 304042 for $1,450.
According to the appellant this invoice related to the appellant's 2003
taxation year.
[56]
I am confident that on
the balance of probability the fees for services “described” in the following
invoices were properly deducted by the appellant and allow the appeals for 2003
and 2004 accordingly:
2003
i) Invoice No. 304570 for $3,015.29:
While it is not clear whether
this invoice relates to the 2003 taxation year or the 2002 taxation year or
parts of both, the amount was for tax related matters and is a deductible
expense I will give the appellant the benefit of doubt that it relates to 2003.
ii) Invoice No. 303031 for $2,000
and Invoice No. 304042 for $1,450.
2004
a) Invoice No. 406722 for $3,750 and
Invoice No. 504597 for $5,000, Invoice No. 406721 for $1,925.
b) Invoice No. 504061 for $2,500 and
Invoice No. 606084 sent to the appellant for $462 .
The invoices in paragraphs 56 a) and b) are
related to tax return preparation and distributions to shareholders.
[57]
The appeals for 2003
and 2004 will be allowed and the reassessments are referred back to the
Minister for reconsideration and reassessment to allow the appellant to deduct
the amounts set out in paragraph 56 of these reasons.
[58]
Because of the lateness
of the appellant withdrawing its application to reopen the appeals, the
respondent has asked for costs. Each party shall have 30 days from the
date of these reasons to provide me with written submissions as to costs with
respect to the application and its withdrawal, such submissions to be exchanged
by the parties. I draw counsel’s attention to subsection 10(2) of the Rules.
Signed at Ottawa, Canada, this 24th day of April 2013.
"Gerald J. Rip"
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