Citation: 2009 TCC 152
Date: 20090424
Docket: 2008-2161(IT)I
BETWEEN:
LOUIS MARTIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1]
This appeal pertains to
the 2003 and 2004 taxation years.
[2]
The issues for
determination, for the 2003 and 2004 taxation years, are
(a)
whether the amounts of $25,704
and $11,675, deducted by the Appellant on account of "client fees and
disbursements" for those respective taxation years, constitute
"eligible capital property", and
(b)
whether the Minister
was justified in disallowing the amounts of $25,704 and $11,675, deducted by
the Appellant for those respective taxation years on account of "client
fees and disbursements", and
(c)
whether the Minister
was justified in including the amounts of $25,704 and $11,675, deducted by the
Appellant on account of "client fees and disbursements" for those
respective taxation years, in computing the "cumulative eligible
capital".
[3]
In order to justify the
assessments under appeal, the Respondent relied on the following assumptions of
fact:
[TRANSLATION]
(a)
During the taxation years in issue, the
Appellant operated a chartered accountancy firm (hereinafter "the
business").
(b)
The business had roughly 10 workers.
(c)
The Appellant has been a chartered accountant
for roughly 20 years.
(d)
The Appellant's main clients were charities.
(e)
During the taxation years in issue, the business
was located at 655 32nd Avenue, Lachine, Quebec.
(f)
During the taxation years in issue, the business
also provided bookkeeping, consulting, and tax return preparation services.
(g)
During the taxation years in issue, the
Appellant personally did the accounting for his business.
(h)
The Appellant claimed the amounts of $174,274
and $114,734 on account of "client fees and disbursements" for the
taxation years 2003 and 2004, respectively.
(i)
The Appellant's file was audited by one of the
Minister's auditors (hereinafter "the auditor").
(j)
During his audit, the auditor analysed the
contracts under which the Appellant acquired clients from other accounting
firms.
(k)
After analysing these contracts, the auditor
determined that their acquisition procured a future lasting benefit.
(l)
The client purchase contracts stated that in
order to facilitate the transition of clients, the Appellant had to hire, for a
period of 12 months, the person from whom he was purchasing clients.
(m)
In certain client purchase contracts, the
Appellant agreed to retain the services of certain employees of the seller's
business.
(n)
In certain contracts, the Appellant purchased
furniture and equipment and work in progress; and he sometimes even kept the
seller's place of business.
(o)
The auditor therefore disallowed the amounts of
$25,704 and $11,675 claimed by the Appellant on account of "client fees
and disbursements" for the 2003 and 2004 taxation years, respectively, and
included them in computing the "cumulative eligible capital" of
the business.
[4]
As far as the evidence
is concerned, the Court heard the testimony of the Appellant Mr. Martin and
that of Claude Gravel, a chartered accountant who is now retired. The Appellant
explained that he opened his accounting firm in the 1970s.
[5]
After some time, the
Appellant noticed that his firm's structure and work capacity required him to
increase his volume of business, so he undertook various efforts to increase
his clientele.
[6]
In furtherance of this
objective, he made certain acquisitions by contracts under which his firm
effectively expanded its number of clients. The instant matter pertains to
these agreements.
[7]
In his Notice of
Appeal, the Appellant makes the following arguments:
[TRANSLATION]
14. The Appellant submits that the Assessments and the
decision on the objection are not well-founded in facts and in law for the
following reasons, inter alia.
15. The Appellant submits that the offers to serve the
Accountants' clients were in no way accessory to the purchase of other assets
held by the Accountants (although the Appellant may have inappropriately
asserted the contrary in one case in order to reach a settlement with the
Respondent.).
16. The Appellant submits that he only offered to serve the Accountants'
clients, and nothing more.
17. The Appellant further submits that the amounts paid to the
Accountants were never established in advance, but were always contingent on
the services rendered by the Appellant.
18. Lastly, the Appellant submits that the offers to serve the
Accountants' clientele were made for the purpose of earning income.
19. In light of the foregoing, the Appellant submits that the
commissions paid to the Accountants were current expenses, fully deductible
from his income for the 2003 and 2004 taxation years.
20. The Appellant therefore submits that the Assessments
should be vacated and that new notices of assessment should be issued, allowing
the commission expenses that he paid to the Accountants and claimed.
[8]
The Appellant explained
in detail how he proceeded with the various accountants with whom he entered
into agreements, and he adduced almost all those agreements in evidence. Under
the agreements, which allowed the Appellant to work for new clients and obtain
fees from them, the Appellant paid the transferring accountants a commission
that varied based on the agreement in question. The amount paid to the transferring
accountants was based essentially on the amount of fees collected and not on
the amount of fees billed.
[9]
The agreements
contained a fee payment schedule, which spread out the payments on a percentage
basis. The schedule varied from one agreement to another.
[10]
The Appellant explained
that the differences between the agreements reflected the specific requirements
of each accountant, and the quality of the accounts to be transferred to the
Appellant.
[11]
For example, he said
that for some clients whose accounts were transferred, the work consisted essentially
in preparing a year-end tax return, while other accounts involved far more
complex work that was much more attractive (notably in terms of client loyalty)
and generated much higher fees.
[12]
The evidence discloses that
two types of contract were used for these agreements. Initially, a notarial
contract for what was characterized as a [TRANSLATION] "sale of a
business" was used, and subsequently, a private writing drawn up by the
Appellant and entitled [TRANSLATION] "Offer to Purchase Your
Clientele" was used.
[13]
Both forms of contract contained
a percentage-based arrangement. I will reproduce the contents of each of these arrangements:
Notarial contract
[TRANSLATION]
. . .
In connection with accounting clients, review
engagements, and clients for whom the Seller's services consist in preparing
income tax returns, but not including special mandates, the Purchaser agrees to
make quarterly payments to the Seller, the amount of which shall be 20% of the
fees collected. These payments shall be made for a period of five (5) years,
effective February 1, 1998.
Private writing entitled [TRANSLATION] "Offer to
Purchase Your Clientele"
3.
For accounting services, financial statement
preparation and income tax return preparation, the amounts that we offer you
shall be paid quarterly and shall be equal to 22.5% of fees collected during
the quarter, for a period of two (2) years. The quarterly payments
shall be made on the anniversary of the date on which the files are transferred.
The selling price is thus subject to adjustment based on the fees collected.
[14]
Certain aspects could
vary from one contract to another. The agreements with Jean-Serge Gervais and Albert
Kassis specifically provided for the purchase of furniture. They also provided
that the sellers would continue to work, subject to certain conditions which
generally gave the sellers a great deal of flexibility, clearly with a view to
developing the new clients' loyalty to the Appellant's firm.
Some accountants saw these agreements as an opportunity to retire
gradually.
[15]
Although there was no
specific and set price for the "purchase" of the clientele, and there
were no non-competition or penalty clauses, these contracts were clearly for
the "purchase" of clientele, and this is consistent with the title of
the contract and its ultimate objective, admitted to by the Appellant, of
increasing his firm's business.
[16]
The Appellant submits
that the accountants Kassis and Gervais considered the amounts paid to be
income.
[17]
The Appellant stated
that the amounts paid were considered income for the transferring accountants. Mr. Gravel
was the only person to testify in this regard.
[18]
Mr. Gravel was of the
opinion that the Appellant would continue to serve his clients well. Although
the title of the letter of agreement was [TRANSLATION] "Offer to Purchase
Your Clientele", Mr. Gravel says that he never sold anything; he merely
transferred his clients' files to Mr. Martin's business.
[19]
In consideration for
this, Mr. Gravel received a fee equal to 22.5% of the fees from each client who
was formerly his but was now billed by Martin & Cie. He treated these fees
as income and reported them as such in his income tax returns.
[20]
Mr. Martin asserted
that the vast majority of the "purchased" clients remained clients of
Martin & Cie.
The retention rate varied from firm to firm, but Martin & Cie could
expect to keep at least 30% of the clients of the firms in question (and he
kept more than 80% of one particular firm's "purchased" clientele).
[21]
The Appellant unequivocally
admitted that his intent was to obtain a lasting benefit for his business. This
is a significant element that militates against the argument that the expenses
were current in nature.
[22]
As for the commission on
or percentage of fees collected, the Appellant submitted that this approach, namely
paying or receiving a commission, was a very common practice among
professionals, including lawyers. The Appellant, an accountant by training,
said that he consulted certain tax specialists to ensure that the accounting
treatment of the fees was proper, that is to say, that the fees were current
expenses for the Appellant and employment income in the sellers' hands.
[23]
In tax matters, the wording
and content of an agreement, the intention of the parties to the agreement, the
circumstances, the context, the knowledge of the parties and many other
elements are important and can even be determinative.
[24]
The Appellant referred
to the numerous insurability-related decisions in which the courts have noted
the importance of a more thorough analysis of an employment agreement — an analysis that goes beyond the words and
the intent expressed by the parties and examines whether the facts are
consistent with the wording.
[25]
I agree completely with
this approach, though I would add that the courts have nonetheless neither dismissed
nor disregarded the importance of the contractual document or documents,
especially when the parties have highly relevant skills and knowledge. The
ideal situation in these matters is of course when all the facts are consistent
with the wording of the agreements.
[26]
Although the Appellant is
not a legal professional, he is, by virtue of his professional training, no
novice in the field of taxation. And although his training does not make him an
expert in legal terminology, the Appellant was nonetheless able to understand
the tax consequences of the choice or choices made.
[27]
Generally speaking, the
sellers could continue doing professional work in exchange for hourly
compensation. This was a sort of transitional arrangement that would eventually
lead to a complete cessation of their activities. That remuneration had nothing
to do with the commission on the fees billed to and paid by the new clients.
[28]
The agreements marked
the end or cessation of the business of the accountants who transferred their
clients to the Appellant. If the seller wished to continue working, he could do
so under an agreement that had nothing to do with the contracts contemplated by
the instant appeal. Such agreements were ad hoc agreements that
reflected the interests of both parties.
[29]
For the Appellant, these
ad hoc agreements made it possible to achieve a smoother client
transition and retain a higher percentage of clients transferred from other
firms. The arrangement enabled the transferring accountants to stay active, but
have fewer responsibilities, until they gradually retired altogether.
[30]
In order to accept the
Appellant's argument, one would have to exclude from the analysis all the
documents, the context and the circumstances, and consider only one element,
namely the commission percentage. And even then, one could not take into
account the term of the agreements, which discredits the Appellant's
interpretation.
[31]
The theory that this is
a very widespread practice, the existence of which the Court acknowledges, has
absolutely nothing to do with the Appellant's modus operandi.
Indeed, there are numerous situations in which a commission can be paid and justified.
[32]
I do not believe that
the commission arrangement chosen can, in and of itself, be decisive as to
the nature of the expense in the case at bar. In fact, the duration, the terms
and conditions, and the context argue much more strongly in favour of the
theory that this was a staggered payment of a selling price than the theory
that it was a current operating expense such as a salary.
[33]
In light of the
evidence, it appears that most of the facts support the Respondent's position and
the assessments. I would cite the following, for example:
·
The unambiguous and
very telling contents of the notarial deeds.
·
The Appellant's admission
that he agreed with the Respondent's interpretation of certain transactions.
·
The clear and, once again,
unambiguous wording of the agreements under private writing prepared by the
Appellant, who was not a tax law specialist, but was nonetheless a chartered
account, a significant part of whose work has tax connotations.
·
The context, subject,
circumstances, purpose and effect of the writings point to a single objective:
a lasting expansion of clientele.
[34]
It seems to me that the
Appellant's intention in the case at bar was very clearly identified in the
agreements that he drafted and was a party to. Granted, he did want the tax
consequences to be different, and this led him to the idea of a
percentage-based commission for periods of varying duration.
[35]
This approach is
suspect even on its face and loses all validity when the term of the
agreements, which ranges from two to five years, is taken into account.
Statutory provisions
[36]
The Appellant cites
several provisions of the Income Tax Act (ITA), namely sections 3, 4, 9,
13, 14, 18, 20, 52, 53, 54 and 67 and subsection 248(1) of the ITA. The
Appellant stresses paragraphs 22, 23 and 24 of his Response, as well as
subsection 14(5), paragraph 18(1)(b) and section 54 of the ITA.
[37]
Subsection 14(5) is a definition,
which reads as follows:
"eligible capital
expenditure" of a taxpayer in respect of a business means the portion of
any outlay or expense made or incurred by the taxpayer, as a result of the
transaction occurring after 1971, on account of capital for the purpose of
gaining or producing income from the business, other than any such outlay or
expense
(a) in respect of which any
amount is or would be, but for any provision of this Act limiting the quantum
of any deduction, deductible (otherwise than under paragraph 20(1)(b)) in
computing the taxpayer's income from the business, or in respect of which any amount
is, by virtue of any provision of this Act other than paragraph 18(1)(b),
not deductible in computing that income,
(b) made or incurred for
the purpose of gaining or producing income that is exempt income, or
(c) that is the cost of, or
any part of the cost of,
(i) tangible property of
the taxpayer,
(ii) intangible property that is
depreciable property of the taxpayer,
(iii) property in respect of which
any deduction (otherwise than under paragraph 20(1)(b)) is permitted in
computing the taxpayer's income from the business or would be so permitted if
the taxpayer's income from the business were sufficient for the purpose, or
(iv) an interest in, or right to
acquire, any property described in any of subparagraphs (i) to (iii),
but, for greater
certainty and without restricting the generality of the foregoing, does not
include any portion of
(d) any amount paid or
payable to any creditor of the taxpayer as, on account of or in lieu of payment
of any debt or as or on account of the redemption, cancellation or purchase of
any bond or debenture,
(e) where the taxpayer is a
corporation, any amount paid or payable to a person as a shareholder of the
corporation, or
(f) any amount that is the
cost of, or any part of the cost of,
(i) an interest in a
trust,
(ii) an interest in a partnership,
(iii) a share, blonde, debenture,
mortgage, hypothecary claim, note, bill or other similar property,
(iv) an interest in, or right to
acquire, any property described in any of subparagraphs (i) to (iii).
[38]
The Appellant referred
to the decision in Burian,
where the Minister did not want to allow the deductions claimed by the
appellants because he felt that they were related to a capital expenditure. In
addition, the Appellant cites the fact that the appellants in Burian went
to see an accountant to obtain a valuation of the custom, which was not done in
the case at bar.
[39]
In Burian, the
Court held that the purchase of the client list belonging to accountants was a
capital expenditure:
In my opinion . . . the plaintiffs were in
reality acquiring, or endeavouring to acquire, an opportunity for potential
future custom or business . . . The purpose . . .
was to bring into the existing business a further asset or advantage with the
expectation of lasting benefit. The transaction . . . was
to strengthen and expand the plaintiffs' business entity, the profit-yielding
subject. It therefore affected the capital structure, and the expenditure of
$20,000 was rightly treated as an outlay of capital.
[40]
The Appellant also cites
the decision of the Federal Court of Appeal in Gifford. At first
instance, the Tax Court of Canada judge held that the purchase of a client list
was a current expenditure. The Federal Court of Appeal reversed this decision
on the ground that the judge below did not take binding precedent into account.
[41]
As a criterion for
determining whether a client list is a current expenditure or a capital expenditure,
the Federal Court of Appeal relied on the decision in Johns‑Manville Canada, which expounded
on the question of whether a payment should be considered a current or capital
expenditure.
[42]
One of the most
important passages from Johns-Manville reads:
At
one time, the test applied by the courts in discriminating as between revenue
and capital was the "once and for all" test. This test was adopted by
Viscount Cave L.C. in British Insulated and Helsby Cables, Ltd. v. Atherton,
[1926] A.C. 205, at p. 213. Viscount Cave observed that the finding of revenue
or capital was a question of fact, but then concerned himself with the answer
to the question because of an imprecise finding below. The test he adopted at
p. 213 was "to say that capital expenditure is a thing that is going to be
spent once and for all, and income expenditure is a thing that is going to recur
every year", although he recognized that this test was not "to be, a
decisive one in every case". Later on at pp. 213‑14 the Lord
Chancellor elaborated:
...where an
expenditure is made, not only once and for all, but with a view to bringing
into existence an asset or an advantage for the enduring benefit of a trade,
I think that there is a very good reason (in the absence of special
circumstances leading to an opposite conclusion) for treating such an
expenditure as properly attributable not to revenue but to capital..
[Emphasis
added.]
[43]
The approach to be
undertaken is these matters is not an essentially mathematical one; there is no
hard-and-fast test, and it is absolutely essential to take all the facts into
consideration.
[44]
In Gifford, the
Federal Court of Appeal analysed the cases concerning the tax treatment of
client lists. According to the Federal Court of Appeal, the authority on the
subject is the decision in Cumberland Investments.
[45]
There, the appellant
paid $150,000 for a list of clients and sought to deduct it as a current
expense. The Appellant in the case at bar also referred to that case, stressing
that it involved a single payment.
[46]
At paragraph 4 of the
decision in Cumberland Investments, the following is stated:
. . . There is the fact that the payment is of the once and for all kind.
To buy out competitors was not a recurring need or constant demand of the
appellant's operation of receiving applications and writing insurance. But that
is what the expenditure was for. It was a lump sum payable to a competitor
to persuade him to yield up his business and goodwill and thus not an ordinary expense
incident to the insuring process as were, for example, the commissions allowed
to agents for their services. And if it be
assumed . . . that the advantage to be gained was for the
benefit of the appellant's business operation . . . it
seems to me that it was not anticipated that it would be a short lived
advantage but must have been expected to be one that would be of enduring
benefit to the business.
[47]
A little farther on,
the following is added:
The advantage sought in this instance, it seems to me, was twofold;
(1) to enlarge the income earning structure of the Appellant by gaining access
to a number of new sub-agents capable of diverting applications for insurance
to it and (2) to eliminate a competitor.
[48]
In the end, the Federal
Court of Appeal held that the amount paid should be considered a capital
expense. The Appellant in the case at bar submitted that serious reservations
should be expressed as to the relevance of that decision, because the client lists
in the case at bar had no pre-determined value.
[49]
The Appellant also
argued that the decision of the Supreme Court of Canada in Shell Canada Ltd. supported his
position as to the desired and manifest intent of the parties.
[50]
The Appellant specifically
cites paragraph 45 of that judgment:
45 However,
this Court has made it clear in more recent decisions that, absent a specific
provision to the contrary, it is not the courts' role to prevent taxpayers from
relying on the sophisticated structure of their transactions, arranged in such
a way that the particular provisions of the Act are met, on the basis that it
would be inequitable to those taxpayers who have not chosen to structure their
transactions that way. This issue was specifically addressed by this
Court in Duha Printers (Western) Ltd. v. Canada, [1998] 1 S.C.R. 795,
at para. 88, per Iacobucci J. See also Neuman v. M.N.R.,
[1998] 1 S.C.R. 770, at para. 63, per Iacobucci J. The courts'
role is to interpret and apply the Act as it was adopted by Parliament. Obiter
statements in earlier cases that might be said to support a broader and
less certain interpretive principle have therefore been overtaken by our
developing tax jurisprudence. Unless the Act provides otherwise, a taxpayer
is entitled to be taxed based on what it actually did, not based on what it
could have done, and certainly not based on what a less sophisticated taxpayer
might have done.
[51]
In the case at bar, the
Appellant and the sellers were not novices; while they were perhaps not tax
experts, they were most certainly better informed and better advised than the
average taxpayer.
[52]
It is well-known that
accountants, unlike other taxpayers whose work does not touch upon such matters,
are familiar with certain important aspects of tax law, and their profession
would be difficult to practice without at least some knowledge of taxation.
[53]
Consequently, the
argument that the Appellant should not be penalized owing to the fact that he
is not a tax expert is not particularly persuasive, especially since the tax
treatment of a transaction or its consequences is essentially based on the
relevant facts, not the taxpayer's knowledge.
[54]
The Appellant submits
that the fees are expenses only if they are collected. In his submission, there
was no sale, but rather an agreement to serve clients in exchange for a
commission.
[55]
By way of example in
support of his argument, the Appellant cites referrals between lawyers and
other professionals who exchange certain clients. This was neither helpful nor
relevant, because remuneration in the form of a commission can be used in a
multitude of situations.
[56]
In fact, the example can
be disregarded for the sole reason that, in such a case, the commission is
payable only once and the payment received in exchange occurs only once or for
each mandate.
[57]
A referral between
lawyers does not necessarily procure an enduring benefit for the lawyer's
business, whereas in the instant case, several payments were made so that the
clients "purchased" from the firms would remain with Martin &
Cie.
[58]
In fact, I believe that
lawyers hesitate to refer one of their clients to a competitor who has a form
of expertise that they lack, for fear of losing their client to that
competitor, thereby creating an enduring and permanent benefit in which
subsequent mandates generate no commissions.
[59]
Johns-Manville established a fundamental test in
determining whether an outlay is current or capital in nature. The test is
whether or not the outlay procures an enduring benefit to the business
concerned.
[60]
In the instant case,
the Appellant stated that the retention rate for the acquired clients varied
from 30% to 80%, depending on the type of file. In this regard, it is
clear that the benefit would be less attractive in certain situations; however,
the longevity or duration of the benefit was nonetheless something tangible.
[61]
In fact, the retention
rate does not strike me as important, as long as there is a certain percentage,
however minimal, especially since the percentage in question was the principal
criterion for determining the consideration. Moreover, the responsibility as to
loyalty essentially rested on the Appellant's ability to keep the new clients
obtained under the agreement. As far as the question of consideration is
concerned, this element is not decisive of the nature of an expense.
Conclusion
[62]
To sum up, the
Appellant's arguments are centered on the fact that there was not just one
payment, but several payments, for the client lists. Under some of the case
law, there may be a presumption of sorts that the existence of several payments
points to a current expense, not a capital outlay.
[63]
In addition to this argument,
the Appellant repeatedly stressed that there was no pre-determined amount for
the acquisition of a client list. When the Appellant's accounting firm did
accounting work for the other party's client, and the fees billed for the work
were collected, the agreed commission was paid.
[64]
The only truly
compelling argument raised by the Appellant was regarding the agreed terms of
payment, under which payments were staggered. At first glance, this approach would
appear to support a finding that the expenditure is current in nature. However, once
the analysis goes beyond mere form, this initial perception changes, and a
different conclusion emerges.
[65]
In conclusion, the
Appellant's arguments, which are based essentially on form, must be rejected in
favour of an analysis of all the facts, which shows that there is a marked
discordance between form and substance. The enduring benefits from the various
transactions were, in fact, derived outside the usual course of the Appellant's business.
The fact that the payments spanned a two-year period, and were not determinate,
does not in any way change the ultimate objective, which was undeniably to
obtain an enduring benefit.
[66]
The Appellant merely staggered
the payment of a capital expense over several months. He argued that the
payment was recurring and was therefore a current expense. The staggering of
payments did not change the ultimate objective, which was essentially to obtain
a lasting benefit.
[67]
Using the statements
that the Appellant made to the Minister upon objecting to the assessment, one
can see that Mr. Martin considered the expenses to be capital in nature (Exhibit I‑1,
tab 5) and that his intention was to acquire the [TRANSLATION]
"purchased" clientele of the firms (Exhibit I‑1, tab 7). These documents
demonstrate the Appellant's intent upon drafting them, and contradict the
arguments that he is making in Court.
[68]
The Respondent
submitted, correctly in my view, that the transactions which gave rise to the
assessment were not current in nature, or within the usual parameters of the
business's activities. Indeed, there is a great difference between the delivery
of accounting services to the public and the making of an agreement for the
purpose of expanding one's clientele.
[69]
For all these reasons,
the appeal is dismissed.
Signed at Ottawa, Canada, this 24th day of April 2009.
"Alain Tardif"
Translation
certified true
on this 9th day of
June 2009.
Brian McCordick,
Translator
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