Citation: 2011 TCC 226
Date: 20110428
Dockets: 2009-320(IT)I
2009-321(IT)I
BETWEEN:
BIG BAD VOODOO DADDY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Favreau J.
[1]
These two appeals were
heard together on common evidence by way of the informal procedure.
[2]
The issues to be
decided are if the Minister of National Revenue (the “Minister”) correctly
determined, under the Income Tax Act, R.S.C. 1985, c. 1
(5th Supp.) as amended (the “Act”), the taxable income of the
Appellant for the 2003 and 2004 taxation years and the Part I tax payable, the
Surtax and Part XIV tax payable for the 2003 and 2004 taxation years and the
penalties for the late filing of the income tax return for the 2003 taxation
year.
Background information
[3]
The Appellant filed its
income tax return for the 2003 taxation year on March 24, 2005.
[4]
By way of the Notice of
Assessment issued on April 13, 2005, the Minister determined the Part I tax payable
in the amount of $12,364, by providing a credit for taxes withheld at source of
$17,258, by assessing a late filing penalty in the amount of $2,500 and by providing
a refund in the amount of $2,394.
[5]
By way of the Notice of
Reassessment issued on January 3, 2007, the Minister maintained the
Part I tax payable and the late filing penalty as assessed on
April 13, 2005 and assessed additional Part XIV tax payable in the
amount of $5,968 and interest of $1,051.68 for a total of $7,019.68.
[6]
By way of the Notice of
Objection received by the Minister on January 26, 2007, the Appellant
objected to the reassessment of the 2003 taxation year and submitted an amended
income tax return for the 2003 taxation year.
[7]
On October 31,
2007, the Minister confirmed the reassessment of January 3, 2007 on the
basis that the Appellant failed to demonstrate that it had incurred expenses in
the amount of $38,048.
[8]
The Appellant filed its
income tax return for the 2004 taxation year on July 5, 2005.
[9]
By way of the Notice of
Assessment issued on October 5, 2005, the Minister determined the Part I
tax payable in the amount of $1,665, by providing a credit for taxes withheld
at source of $1,533 and instalments of $495.
[10]
By way of the Notice of
Reassessment issued January 3, 2007, the Minister maintained the Part I
tax payable as assessed on October 5, 2005 and assessed additional Part
XIV tax payable in the amount of $880 and interest of $129.56.
[11]
By way of Notice of
Objection received by the Minister on January 26, 2007, the Appellant
objected to the reassessment of the 2004 taxation year and submitted an amended
income tax return for the 2004 taxation year.
[12]
On October 31,
2007, the Minister confirmed the reassessment of January 3, 2007 on the
basis that the Appellant failed to demonstrate that it had incurred expenses in
the amount of $5,444.
[13]
In order to establish
the reassessment and the confirmation for the 2003 taxation year, the Minister
relied on the following assumptions of fact:
a) The Appellant is a branch of Big Bad
Voodoo Daddy LLC a non resident (sic), United States of America,
Limited Liability Corporation;
b)
The activities of the Appellant in Canada are
the performance of jazz concerts located during the year at various locations
across Canada;
c)
In filing the Income tax return for the 2003
taxation year the Appellant reported a gross income of $80,816 and expenses
totalling $44,580 with a net income of $36,236 (detail per Annex 1);
d)
In filing the amended Income tax return with the
Notice of Objection the Appellant revised the gross income to $36,236 and
revised the category and total of expenses to $38,048 and net income to
($1,812) (detail per Annex I);
e)
In filing the Income tax return, on which the
initial assessment of April 13, 2005 was based, the Appellant had failed
to include the Schedule 20 – Part XIV Branch Tax and thereby failed
to include the Part XIV tax in the (sic) establishing the total tax
payable for the 2003 taxation year;
f)
By way of reassessment issued on January 3,
2007 the Minister revised the total tax payable for the 2003 taxation year by
assessing the Part XIV tax in the amount of $5,968 (detail per Annex 1);
g)
Upon the request by the objection agent to
provide the documentation in support of the revised expenses, as per amended
Income tax return, and the allocation of such expenses to the income earned in Canada, the Appellant failed to provide any
supporting documentation or allocation of expenses in support of its revised
claims for the income earned in Canada.
[14]
In order to establish
the reassessment and confirmation for the 2004 taxation year, the Minister
relied on the following assumptions of fact:
a) The Appellant is a branch of Big Bad
Voodoo Daddy LLC a non resident, United States of America, Limited
Liability Corporation;
b)
The activities of the Appellant in Canada are
the performance of jazz concerts located during the year at various locations
across Canada;
c)
In filing the Income tax return for the 2004
taxation year the Appellant reported a gross income of $45,476 and expenses
totalling $40,291 with a net income of $5,185 (detail per Annex 1);
d)
In filing the amended Income tax return with the
Notice of Objection the Appellant revised the gross income to $4,185 and
revised the category and total of expenses to $5,444 and net income to ($259)
(detail per Annex 1);
e)
In filing the Income tax return, on which the
initial assessment of October 5, 2005 was based, the Appellant had failed
to include the Schedule 20 – Part XIV Branch Tax and thereby failed
to include the Part XIV tax in the establishing the total tax payable for
the 2004 taxation year;
f)
By way of reassessment issued on January 3,
2007 the Minister revised the total tax payable for the 2004 taxation year by
assessing the Part XIV tax in the amount of $880 (detail per Annex 1);
g)
Upon the request by the objection agent to
provide the documentation in support of the revised expenses, as per amended
Income tax return, and the allocation of such expenses to the income earned in Canada, the Appellant failed to provide any
supporting documentation or allocation of expenses in support of its revised
claims for the income earned in Canada.
[15]
The litigious points in
these appeals concern the deductibility of salaries paid by a Limited Liability
Company (“LLC”) to its partners and the lack of supporting documentation for
the claims of salary expenses.
Analysis
[16]
Ms. Nadine Benny, legal
assistant with R.A.M. Management – Attorneys at Law, testified at the
hearing. She confirmed that the firm has been taking care of the Appellant’s
withholding tax matters in Canada since 2005 which includes the processing of
Regulation 105 waivers for their performance dates in Canada and the supervision of their Canadian income tax
returns. She was not personally involved in the 2003 and 2004 tax matters of
the Appellant and to her knowledge, no Regulation 105 waivers have been
obtained by the firm for the 2003 and 2004 taxation years.
[17]
In terms of documentary
evidence, an e‑mail from Mr. Dick Shumaker dated July 5, 2010 was
produced as Exhibit A‑1, which confirmed that each member of the Big
Bad Voodoo Daddy partnership had been drawing a monthly salary of $7,500 USD
since 2003. Examples of Regulation 105 waivers obtained for the 2006 and
2007 taxation years were produced as Exhibit A‑2. The 2006 waiver
was in respect of expenses for shows in Canada from November 16, 2006 to
December 21, 2006 – the salary component for band members amounted to
$52,500 USD (7 members at $7,500 each). The 2007 waiver was in respect of
expenses for the February 24, 2007 show in Brampton, Ontario and the salary
component for band members was $24,500 USD (7 members at $3,500 each).
[18]
In her testimony,
Ms. Benny confirmed that the band performed five shows in Canada in 2003 while travelling across the country and
performed only two shows in Canada in 2004.
[19]
Concerning the amended income
tax returns filed for the 2003 and 2004 taxation years by the former U.S. accountant of the band, Ms. Benny considered the
additional expenses claimed as clearly not reasonable in the circumstances.
[20]
According to her, a
salary of $1,000 USD per day per member for the Canadian events in 2003 and
2004 would be reasonable in the circumstances and would be consistent with the
salaries that have generally been allocated to the Appellant’s partners over
recent years.
[21]
Mr. Patrick McIver, an
appeals officer with the Canada Revenue Agency (the “CRA”) testified at the
hearing and stated that the first U.S. accountant of the Appellant forgot to
claim the expenses made or incurred with respect to the Canadian shows and that
the second U.S. accountant never raised the salary component of the expenses
although additional expenses were claimed. He also referred to the fact that
the second accountant never substantiated the claim for the additional expenses
and that is the reason why the amended income tax returns were not accepted by
the CRA.
[22]
Mr. McIver also
mentioned that a U.S. LLC cannot deduct for Canadian tax purposes, the salaries
paid to members of the LLC because a U.S. LLC is a partnership for U.S. federal income tax purposes and a corporation for
Canadian tax purposes. Mr. McIver's understanding was that the CRA considers
that the salaries paid to members of the partnership represent a distribution
of net income from the partnership and are not deductible business expenses.
[23]
Business expenses are
generally deductible in computing the income of a taxpayer from a business or
property to the extent that the expenses were made or incurred by the taxpayer
for the purpose of gaining or producing income from the business or property (subsection 9(1)
and paragraph 18(1)(a) of the Act).
[24]
Every person carrying
on business is required to keep books and records of accounts to enable the
Minister to determine the taxes payable under the Act or taxes that
should have been deducted, withheld or collected. This requirement is found in subsection 230(1)
of the Act which reads as follows:
230. (1) Records and books -- Every person carrying on business and
every person who is required, by or pursuant to this Act, to pay or collect
taxes or other amounts shall keep records and books of account (including an
annual inventory kept in prescribed manner) at the person's place of business
or residence in Canada or at such other place as may be designated by the
Minister, in such form and containing such information as will enable the taxes
payable under this Act or the taxes or other amounts that should have been
deducted, withheld or collected to be determined.
[25]
Regulation 105 waiver
application authorizes the Canadian taxpayer who is about to make a payment to a
non‑resident for services provided in Canada,
to not withhold the 15% tax on the fees payable to the non‑resident. As
the waiver request is based on an estimation of income versus expenses directly
related to services provided in Canada, any changes to the contracted fees or
period of service invalidate the waiver. In such a case, the Canadian taxpayer
is then responsible for the 15% withholding at source on the gross amount of
any payments to the non‑resident unless the non‑resident files
another waiver request with the CRA. The Canadian taxpayer is required to
prepare a T4A‑NR slip for each non‑resident paid and to give to
each one a copy of the slip. The T4A‑NR will show the fees paid and taxes
deducted for the non‑resident.
Conclusion
[26]
Contrary to Mr.
McIver's understanding, the long-standing position of the CRA is that a U.S.
LLC is treated as a corporation for all purposes of the Act regardless
of whether the LLC is treated as a corporation or a partnership for U.S. tax
purposes (see the article published by Mark J. Rosen and Paul R. Delongchamp
entitled “Forming an Operating Limited Liability Companies Canadian and US
Tax Considerations” at the bottom of page 19). Therefore, nothing
would prevent the Appellant from deducting, for Canadian income tax purposes,
the salaries paid to its members provided that the requirements of the Act
are otherwise met.
[27]
In this case, the
determination of the salary component of the expenses has been based on
estimates by taking into account the allocations made in subsequent years. The
claims for salaries were not substantiated and no supporting documents were
provided. There is no evidence of the salaries being paid nor evidence of any bank
deposits for such amounts.
[28]
Considering the lack of
supporting evidence, the salary component of the expenses claimed in the 2003
and 2004 taxation years cannot be deducted in computing the income of the
Appellant. Consequently, the Minister correctly determined under the Act,
the taxable income of the Appellant for the 2003 and 2004 taxation years and
the Part I tax payable, the Surtax and Part XIV tax payable for the 2003 and
2004 taxation years and the penalties for the late filing of the income tax
return for the 2003 taxation year.
[29]
Consequently, the
appeals are dismissed.
Signed at Montreal, Quebec, this 28th day of April 2011.
"Réal Favreau"
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