Citation: 2010 TCC 408
Date: 20100806
Docket: 2006-3533(IT)G, 2007-2496(IT)G
and 2007-2611(IT)G
BETWEEN:
STANLEY
LABOW, DANNY S. TANASCHUK
and MARCANTONIO CONSTRUCTORS INC.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bowie J.
[1] The appeals of
Stanley Labow, Danny Tanaschuk and Marcantonio Constructors Inc. (“MCI”) from
reassessments under the Income Tax Act
(the Act) were heard consecutively over a total of 10 days. Parts of
the evidence of two witnesses, William Johnston and Sylvain Parent, were, by
agreement of the parties, common to all three proceedings. The facts in each
case, although not identical, are similar, and a number of the legal issues are
common to all.
[2] The Minister of
National Revenue (the Minister) raised the reassessments under appeal as a
result of the participation by each of the appellants in what were referred to in
the evidence as group sickness and accident insurance trusts and plans I shall
refer to these as the trusts and the plans. By the reassessments the Minister
denied to the appellants the deductions from income that they had claimed on
account of their accrued liabilities to the trusts arising out of the plans. In
the case of Stanley Labow, the reassessments also included in his income
for each of the taxation years 1997, 1998 and 1999 the income of the trust attributable
to his contributions to it. In the case of Danny Tanaschuk the
reassessments under appeal did not include trust income in his income, but the
reassessment for 1999 disallowed his claim to deduct professional fees
associated with the trust. In the case of MCI, the reassessments only
disallowed the contributions to the trusts. The amounts in issue in each of the
appeals are the following:
|
Name
|
Year
|
Amount
|
Explanation
|
|
Labow
|
1996
|
$150,000
|
Contribution to the Trust
disallowed
|
|
|
1997
|
247,691
|
Contribution to the Trust
disallowed
|
|
|
|
1,320
|
Trust income attributed to the
appellant
|
|
|
1998
|
23,646
|
Trust income attributed to the
appellant
|
|
|
1999
|
47,619
|
Trust income attributed to the
appellant
|
|
|
|
|
|
|
Tanaschuk
|
1998
|
$149,000
|
Contribution to the Trust
disallowed
|
|
|
1999
|
171,000
|
Contribution to the Trust
disallowed
|
|
|
|
9,735
|
Professional fees disallowed
|
|
Marcantonio
|
1999
|
$544,500
|
Contribution to the Trust
disallowed
|
|
|
2000
|
709,500
|
Contribution to the Trust
disallowed
|
|
|
|
|
|
[3] It is common
ground that these reassessments were all made beyond the normal reassessment
period defined by subsection 152(3.1) of the Act. The respondent relies
on subparagraph 152(4)(b)(iii), and in the alternative subparagraph
152(4)(a)(i), to justify the reassessments. The reassessments having
been made outside the normal reassessment period, the respondent has the onus
of proof in respect of the Minister’s entitlement to raise the reassessments.
What must be proved is either a misrepresentation that is attributable to
neglect, carelessness, or willful default, or fraud, in relation to the subject
of the reassessments, or alternatively, that the taxpayer and the trustees were
not dealing with each other at arm’s length.
[4] Prior to the scheduled
trial date, the respondent brought a motion seeking a ruling as to the order in
which the parties should lead evidence at trial. The respondent’s view was that
the appellants should lead their evidence first, notwithstanding that the reassessments
were made outside the normal reassessment period, and notwithstanding the
judgment of Bowman J (as he then was) in Farm Business Consultants Inc.
v. The Queen.
The motion was dismissed, and the respondent filed a Notice of Appeal to the Federal
Court of Appeal. To avoid the inevitable delays that this appeal would cause, the
appellants elected to lead their evidence first. As a result, the trials proceeded
before me with the appellants’ witnesses testifying before any evidence was called
by the respondent. At the conclusion of the appellants’ evidence, the respondent
elected not to call any witnesses. As Bowman J. pointed out in Farm Business
Consultants, the respondent, if required to call evidence first, could, and
doubtless would, have called the individual appellants and Mr. Filoso, a
director of MCI, and cross‑examined them pursuant to Rule 146. The evidence
before me would have been essentially the same.
[5] At the trial all the appellants specifically waived
the privilege attaching to their communications with Mr. Johnston as to the
trusts and plans.
[6] Unlike employee
pension plans, employer contributions to employee sickness and accident insurance
plans are not accorded special treatment under the Act. The appellants’
claims to deduct their contributions to these plans are based on the
proposition that the contributions are ordinary business expenses, laid out for
the purpose of gaining or producing income, the deduction of which is not
prohibited by any provision of the Act.
[7] The respondent
argues that the contributions are not deductible expenses on a number of
alternative grounds.
(i)
The trusts and the plans were
shams;
(ii)
The contributions were not laid
out for the purpose of gaining or producing income;
(iii)
The contributions were payments on
account of capital;
(iv)
The amounts of the contributions
to the trusts were unreasonable;
(v)
The amounts were contributions to
employee benefit plans, the deduction of which is prohibited by paragraph
18(1)(a) of the Act.
(vi)
If the contributions were in fact
contributions to genuine employee group sickness or accident insurance plans,
they were consideration for insurance in respect of years after the years in
which they were paid, and so not deductible by reason of subparagraph 18(9)(a)(iii)
of the Act.
The
respondent asserts that the income of the trust in the years 1997, 1998 and
1999 is properly attributed to Dr. Labow by the operation of subsection 75(2)
of the Act.
[8] As to Danny
Tanaschuk’s claim that he is entitled to deduct professional fees paid in
connection with the trust funds from his income, the appellant’s position is
that they were amounts expended for the purpose of gaining or producing income,
and so deductible. The respondent’s position is that their characterization
should be determined according to the characterization of Dr. Tanaschuk’s
contributions to the trust.
[9] These three
appellants are among some 75 clients of William Johnston, an Ottawa
solicitor, for whom he has established similar plans, ostensibly to provide
medical and disability insurance to selected employees of the clients. Mr.
Johnston gave evidence, applicable to all three proceedings, in which he
described in some detail the background to the establishment of these plans,
and specifically how he and Sylvain Cloutier, an actuary, adopted and developed
the concept of creating the plans for small entrepreneurial clients. Mr.
Johnston has considerable experience in establishing pension plans for this
type of client, and in his evidence he described disability insurance plans as
being similar to pension plans in that both have income replacement as their
goal. I think it is fair to say that Mr. Johnston views it as a serious flaw in
Canada’s tax policy that there is specific provision in the Act for the
establishment of registered pension plans with favourable income tax treatment,
but no analogous legislation to provide for health and disability insurance
plans. His plans are, in his mind, designed to remedy this statutory lacuna.
[10] Contributions to
employee medical and disability insurance plans are, of course, deductible from
income under the provisions of the Act, provided they satisfy the
requirement that the expenditure is made for the purpose of gaining or
producing income from the employer’s business, and that they are not prohibited
by some other provision of the Act. The Canada Revenue Agency has
published its view of the relevant law in an Interpretation Bulletin. From Mr. Johnston’s
evidence I understand that he considers the CRA view of the law to be unduly
restrictive. Clearly, the respondent considers that the plans established by
Mr. Johnston do not qualify for the deduction of contributions. These are
not test cases in any formal sense, but it is obvious that a significant number
of taxpayers who have established similar plans in similar circumstances will
be affected by their ultimate outcome.
[11] I should say, in
fairness to Mr. Johnston, that both in his reporting letters to his clients and
in his evidence before me, he expressed the view that if at some future time
one of his plans were to be terminated and the funds returned to the employer,
then the amounts contributed to the trust and deducted by the employer in
computing income would have to be taken into income by the employer at that time.
The tax benefit in that case, therefore, would be in the nature of a
postponement of the incidence of tax until that later event took place.
[12] In each of these
cases the appellants had an existing relationship with an accountant who
introduced them to Mr. Johnston, who offered to establish a plan for them. In
brief, the elements of establishing such a plan consist of the following:
(a)
the creation of a trust, the
trustee being a trust company in either the Cayman Islands or Bermuda, to hold
and invest the funds contributed by the employer, and to make payments of
benefits under the plan in accordance with its provisions;
(b)
the creation of a plan, in which an
employer can elect to participate in respect of one or more specific named
employees, with specific provisions as to the benefits to be paid from the
trust fund. There can be more than one employer participating in a plan and
contributing to the trust associated with it, but in that case the trustee is
required to maintain separate accounts for each employer, and to make any
payments of benefits only from the account of the employer of the recipient of
the payments. The potential benefits to employees are income replacement in the
event of inability of the employee to work due to sickness or accident, and
payment of medical, dental and vision care expenses for the employee and the
employees dependants, to the extent that they are not payable under some other
health care scheme. Disability benefits are funded by contributions during the
first and second year of the employer’s participation in the plan, in amounts
determined by an actuary. Medical, dental and vision care expenses are funded
by the employer on a pay-as-you-go basis, which is to say that the trustee pays
these claims and then invoices the employer for the amount paid;
(c)
an election by the employer to
participate in the plan, naming the employee (or employees) who are to be
entitled to benefits under the plan, and agreeing to make contributions to the
trust fund according to the recommendation of the actuary. In the case of
Marcantonio the plans were specific to one employer. Two trusts (the MGAS trust
and the 509 trust) were created to fund the plans. The only members of the plans
were two of the directors of Marcantonio and each plan was funded with a single
contribution;
(d)
an actuarial valuation prepared by
the firm Welton Beauchamp, Parent, Inc. quantifying the contributions required
to be made by the employer to the Plan to fund the disability benefits; and
(e)
one or more invoices from the trustee
to the employer, in the amounts recommended by the actuary, which, under the
terms of the plan, created the liability of the employer to make the
contributions, and payment of those invoices by the employer.
There
are some differences in the documents created for these three taxpayers, but
there is also a high degree of similarity among them. I conclude from the
evidence of Mr. Johnston that it was his intention that all of these schemes
should work in essentially the same way, and that the differences in the
documentation simply represent evolution of the precedents that he used.
[13] Mr. Johnston and Mr. Parent gave evidence for the
appellants, some of which was an overview of their development of these and
similar plans. By agreement of the parties, this formed part of the evidence of
all three appellants. Mr. Johnston also gave evidence that was specific to each
of the three appellants’ cases, and Mr. Parent and Joann Williams, an actuary
employed in his office, testified specifically in relation to the actuarial
advice that they gave in each case. Mr. Parent gave that advice in relation to
Dr. Labow’s plan, and Ms. Williams gave the advice in relation to the other two
plans. Dr. Labow and his wife Rosalind Labow testified in the Labow case, as did
Dr. Tanaschuk in his case and Dominic Filoso in the Marcantonio case. No
witnesses were called by the respondent.
[14] Under these circumstances, I am required to decide on
the preponderance of the evidence before me whether the facts bring the case within
subparagraph 152(4)(a)(i) or subparagraph
152(4)(b)(iii) of the Act, and on that basis whether the Minister
was entitled to reassess as he did. In view of the nature of Minister’s
allegations, consideration of the question whether the taxpayers made any
misrepresentation that is attributable to neglect, carelessness or willful
default, or committed any fraud in filing their returns, necessarily requires
an examination of the true nature of the contributions that they made to the
trusts: see Lacroix v. The Queen.
the
Labow appeals
[15] Stanley Labow is
a surgeon with a busy practice in the city of Ottawa. He was reassessed for
the taxation years 1996, 1997, 1998 and 1999 to disallow the deductions that he
had claimed for his contributions to the trust in 1996 and 1997, and to include
the income of the trust on his contributions to it in his income for 1997, 1998
and 1999.
[16] At the relevant
time, he was chief of plastic and reconstructive surgery at the Ottawa Hospital, and
an assistant professor of surgery at the University of Ottawa Faculty of
Medicine. He did not have an office in the hospital, but carried on his
practice at an office nearby which he shared with another surgeon. He had three
employees during the years with which these appeals are concerned, all of whom
worked for him on a part-time basis. One of these was his wife, Rosalind Labow.
The other two were unrelated to him, and each of them worked half-time. They
shared a job, the main duties of which were booking appointments for patients
and operating room time, recordkeeping and the general office correspondence.
Rosalind Labow has a PhD in bio-chemistry and is on the faculty of the University of Ottawa, where she runs a research laboratory at the Heart Institute. Her
salary from the University in 1996 and 1997 was approximately $80,000 per year.
In addition to that she worked about 20 hours per week for her husband, for
which she was paid $20,000 per year. This work consisted of keeping Dr. Labow’s
curriculum vitae up-to-date, and ensuring that it was updated
appropriately with the University, the medical associations and other
accrediting bodies, looking after the financial aspects of his practice, and
acting as his liaison with his accountant, Mr. Katz, and his office staff.
[17] At some time in
the fall of 1996, Mr. Katz introduced the Labows to Mr. Johnston and
suggested that Dr. Labow consider establishing a plan for his wife. The
suggestion was adopted, and the trust and the plan that resulted are at tabs 1
and 2 of Exhibit A-1. They are a document styled Memorandum of Agreement, dated
October 21, 1996, that was entered into between “William Johnston on
behalf of all Participating Employers” and Royal Bank of Canada Trust Company
(Cayman) Limited (“RBCC”) as Trustee, and a Health and Welfare Insurance Plan
executed by William Johnston (presumably on behalf of the participating
employers) and effective October 31, 1996. It is said in the Trust Agreement
that the Plan is annexed to it as Schedule “A”, and certainly the two must be read
together.
[18] The trust agreement
creates a trust fund consisting of the employer contributions, and the income
from them, to be administered by the trustee. The fund is to be used
exclusively to provide benefits to the participating employees and their
dependants. The trustee is given the usual powers to invest the funds, and has
the usual duty to keep records and to account. The employer is given the right
to replace the trustee upon one month’s written notice. Paragraph 8(c) of the
trust agreement provides:
8(c) The Employer and any person claiming by, through or under
the Employer shall have no right, title or interest in or to the Trust Fund or
any part hereof nor any claim against the Trustee in respect of the Trust Fund,
it being the intent that all contributions made by the Employer or for which it
is liable shall be free of any interest or claim whatsoever of or by the
Employer and no part of the contributions shall be returned to the Employer or
be subject to the debts, liabilities or obligations of the Employer or be
considered part of the assets or property of the Employer.
Paragraph
9 provides that the employer and the trustee may, by agreement, amend the trust
agreement.
[19] Article II of the
Plan provides that its purpose is to make dental insurance, disability
benefits, and eligible medical expense benefits available to certain employees
of participating employers, and the dependants of those employees, and that the
trust fund is to be used for that and no other purpose. Participating employers
are employers who have filed a written notice that they will participate in the
Plan.
[20] Article 9.01 of the Plan provides that the employer
“shall select, from time to time, a Trustee to administer the Plan”, and that
the trustee must be independent of the employer. Article 9.03 provides that the
trust funds “shall not from [sic] any part of the revenue of [sic]
assets of any Participating Employer”, and that the funds may only be used for
the benefit of participating employees and their dependants. Article 9.04
provides that;
9.04 The Assets of each Participating Employer shall be kept
separate from the assets of all other Participating Employers and shall be used
only for the purpose of providing benefits payable hereunder to Participating Employees
of the Participating Employer.
[21] Those benefits
are specified in Article V. A participating employee who is unable to work
because of sickness or accidental injury is entitled to income replacement
benefits equal to 75% of weekly earnings up to age 70. A participating
employee, and dependants of the employee, are entitled to reimbursement for
dental, medical and vision care expenses that are not otherwise reimbursed by a
provincial medical insurance plan. The entitlement to benefits is limited by
paragraph 5.6, however:
5.6
Notwithstanding any other provision of this plan, benefits are
only payable to an employee to the extent that the Employers [sic]
Participating Account, as determined solely by the Administrator, has
sufficient assets to make such payment or part payment.
[22] The funding of benefits is governed by Article VII.
ARTICLE
VII
PAYMENT
OF BENEFITS
7.01
The Employer shall, from time to time, make such payments to the
Trustee as shall be necessary to provide the benefits referred to in Articles V
and VI hereof. The Trustee shall, each year, send an invoice for payment of the
amount recommended by the actuary for that year. The Employer shall, upon
receipt of the invoice, be immediately liable to pay the invoice.
7.02
The benefits referred to in Articles V and VI hereof shall be
funded by the Employer by contributions payable at such intervals as may be
agreed upon between the Employer and the Trustee. All contributions hereunder
shall be credited to the Participating Employer’s Account. Such contributions
shall be in the amounts sufficient to fund for such term as the Actuary considers
appropriate under accepted actuarial principles, the total disability benefits
to be provided and shall be maintained in a segregated account by the Trustee.
The Trustee shall cause to be prepared from time to time (but not less than
every three years) an actuarial valuation of the segregated account by an
actuary who is a Fellow of the Canadian Institute of Actuaries or the Society
of Actuaries. Employer contributions may only be made on the basis of such
actuarial valuation.
The
effect of these limitations (and of paragraph 9.04) is that a claim by an
employee, whether it is for income replacement in the case of disability, or
for dental, medical or vision care expenses, can only be paid from the
contributions to the trust made by the employer of that employee, and any
income produced by those contributions.
[23] Article XI of the
Plan is headed modification or
termination of the plan, and it is of sufficient significance that I
reproduce it here in its entirety:
ARTICLE
XI
MODIFICATION
OR TERMINATION OF THE PLAN
11.01 A
Participating Employer has agreed to participate in this plan for the benefit
of their Participating Employees and has the expectation that it will continue
indefinitely but reserves the right at any time and for any reason whatsoever
and [sic] to cease their participation in the Plan in whole or in part;
provided that no amendment shall increase the duties or liabilities of the
Trustee without their written consent and provided further that there shall be
no amendment of section 11.02 hereof without the prior approval of the Trustee
and all then Participating Employees.
11.02 The
discontinuance of contributions of itself shall not constitute termination of
an Employee’s Participation in the Plan but in the event that the Employer has
notified the Trustee of its intention to terminate their participation in the
Plan, the Trustee shall, with all reasonable dispatch, use and apply the assets
remaining in the Participating Employer’s Account held in the Trust Fund,
firstly, for the purpose of paying all reasonable and necessary expenses
incurred in the termination of the employer’s participation, and secondly to
satisfy all outstanding liabilities that may exist prior to the date of
termination. Any balance remaining in the Participating Employer’s Account
which cannot be so applied shall be refunded to that Participating Employer.
11.03 Notwithstanding
any other provisions of this plan, a Participating Employer has absolutely no
interest in law or equity in any assets held in any other Participating
Employer’s Account under this plan. The interest of a Participating Employer is
limited to the assets held [sic] that Employer’s Participating Employer
Account.
11.04 When no property
remains in the hands of the Trustee, the Plan shall terminate.
[24] Mr. Johnston and
Mr. Parent described the way in which the required contributions to the trust
were determined. Once the decision had been made that an employer would enter
into a Plan for an employee, the employer would establish the amount that he
could afford to contribute to the plan in the first year, and he would advise
Mr. Johnston of this, and of the particulars concerning the sex and age, and
the salary of the employee. Mr. Johnston would pass this information on to Mr.
Sylvain Parent, or Ms. Joann Williams. Mr. Parent is the principal of the firm
of actuaries Welton Beauchamp, Parent Inc., and Ms. Williams works for that
firm. They are both Fellows of the Society of Actuaries. For each employee
covered by a Plan, one or other of them would calculate the contributions that
the employer had to make to the trust in order to fund the potential liability
of the trust in the event of a disability claim by the employee. Crucial to
this calculation is the assumption made by the actuary as to the event of a
claim, and its timing.
[25] Mr. Parent
explained that as the actuary charged with advising the Trustee as to the
required contributions, it was his duty to base his calculations and his advice
on conservative assumptions as to future claims. Generally, the contributions
were payable in two annual installments, and Mr. Parent and Ms. Williams
discharged their duty by assuming that the participating employee would be
totally disabled at the end of the second year of the Plan, and would remain so
until age 70 when the benefit period expired. Having made this assumption, and
assumptions as to the rate of income that the fund would produce and the rate
of inflation, it required only a simple calculation, applying an actuarial
table to account for the possibility that the disabled employee would not live
until the end of the benefit period, to establish the sum required at the assumed
date of disability to fund the payments to age 70. Once that amount was
established, and the employer had specified the amount of the first year
contribution, another simple calculation established the amount that the
employer was required to contribute in the second year.
[26] One other assumption was required in order to arrive at
the quantum of the contributions. In most cases, Mr. Johnston advised the
actuaries that they should assume that a 50% rate of taxation would be applied
to earnings of the trusts.
[27] Article VII of
the Plan provides that the trustee shall invoice the employer in the amount
recommended by the actuary, whereupon the amount immediately becomes due and
owing. It was this invoice that created the liability to the trust that the
appellant recorded as a payroll cost. Exhibit A-1 Tab 5 is the Actuarial
Valuation prepared by Sylvain Parent on December 5, 1996, “as at January 1,
1996” for Dr. Labow’s plan. Mr. Parent calculated the required contributions to
be made by Dr. Labow in respect of the coverage for his wife based on these assumptions:
Interest rate: 7% per annum net of
expenses;
Salary increases: 5.5% each year;
Inflation: 4.0% annually;
Mortality: none
prior to disability, and GAM 1983 after disability; and
Incidence of disability: total
permanent disability occurring at the end of the second year following the
valuation date.
[28] Mr. Parent’s
evidence was that he was told either that the disability benefit for Rosalind
Labow was to be $29,000, or that Dr. Labow’s total contribution to the plan was
to be $400,000. He could not remember which. It is improbable that he was told
that the benefit was to be $29,000; that could only be so if her income from
Dr. Labow was $38,667. I am satisfied that the first year contribution had been
fixed by Dr. Labow at $150,000, and that Mr. Parent was told that the total
contribution was to be $400,000. His computation was made in order to establish
that this would support a benefit of at least $15,000, which in fact it would.
In fact, the contribution of $397,696 recommended by Mr. Parent in his
valuation was almost double the amount that would have been required to provide
disability payments at the maximum level provided for in the Plan.
[29] Having taken the
decision late in 1996 to follow the advice of Mr. Johnston and Mr. Katz, and
having determined that he would fund the trust in the first year to the extent
of $150,000, Dr. Labow signed a Notice of Participation on December 3, 1996. It
specified that his wife Rosalind Labow was to be his only employee entitled to
benefits under the Plan, and it made explicit reference to Dr. Labow’s
right to terminate the plan according to Article XI. On December 5, Mr. Parent
signed his actuarial valuation. For some reason that the evidence does not
explain, the trustee issued its invoice to Mr. Johnston on December 1, 1996,
before the Notice of Participation had been signed by Dr. Labow, and in the
amount of $75,000 rather than $150,000. It is clear, however, that Dr. Labow
did in fact remit to the trustee the first year contribution of $150,000 and
the second year contribution of $247,696.
[30] Some time in 1998
Mr. Johnston, exercising his powers under paragraph 5(c) of the trust,
removed RBCC as trustee and appointed Continental Trust Corporation Limited of Hamilton,
Bermuda as the new trustee in substitution for it. The evidence of Stanley and
Rosalind Labow makes it clear that this was done at their request, if not
insistence. They were, it seems, distressed by the large number of
communications regarding financial transactions in relation to the trust fund
that the trustee was sending to them, The concern went beyond that, however. As
Rosalind Labow put it in her evidence:
… we had some
concern about the way the RBC Trust Cayman was handling our funds and we spoke
to Gary [Katz] who spoke to Bill [Johnston] and at some point in time Bill made
a decision to change our participation in the trust company and chose another.
[31] As I have said above, the question whether there has
been a misrepresentation of the kind contemplated by subparagraph 152(4)(a)(i)
can only be considered in the light of the particular circumstances of the
case. That requires a consideration of the question whether Dr. Labow made the two contributions to the
trust for the purpose of gaining or producing income from his medical practice.
In my view the answers to the latter question is in the negative, for the
reasons that follow.
[32] The reliability
of witnesses who have a substantial stake in the outcome of the proceedings in
which they give evidence cannot be taken for granted, but must be tested
against the known objective facts. The following passage from the judgment of
O’Hallaran J.A. in R. v. Pressley
was recently adopted by Newbould J. in Fiorillo v. Krispy Kreme
Doughnuts, Inc.:
The Judge is
not given a divine insight into the hearts and minds of the witnesses appearing
before him. Justice does not descend automatically upon the best actor in the
witness-box. The most satisfactory judicial test of truth lies in its harmony
or lack of harmony with the preponderance of probabilities disclosed by the
facts and circumstances in the conditions of the particular case.
This
approach to the evidence commends itself to me, as it did to Justice Newbould.
[33] There are more
than a few circumstances of this case that are inconsistent with the
appellant’s contention that Dr. Labow became a participating employer in the
Plan, and funded the trust to the extent of almost $400,000, for the purpose of
gaining or producing income.
[34] First, there was
no commercial reason for Dr. Labow to spend $400,000 to provide Rosalind Labow
with disability and medical insurance. She had worked for him for many years
without it, and he had no reason to think that she would not continue to do so.
She had no need for insurance. She had disability insurance through the
university that would provide her with more than $50,000 per year in the event
of disability. Moreover, any benefits that Rosalind might ever receive under
the Plan could only be paid from the funds contributed to it by her husband
(together with any accretions through income or capital gain produced by those
contributions). Articles 5.6 and 9.04 of the plan make it very clear that no
employee covered by the plan can ever be paid benefits except from the
contributions of that employee’s employer. It is difficult to see how there
could be any commercial purpose to Dr. Labow entering into such an arrangement.
This plan did not provide the usual benefit of risk sharing that is the
hallmark of insurance contracts, where many people contribute to a fund that
pays benefits only to the unfortunate few who suffer a loss.
[35] Second, the
appellant did not make a considered judgment as to whether entering into the plan
could be of commercial benefit to his practice, or as to whether he should
extend the “coverage” to his other secretaries. Rosalind was paid somewhere
between $65 and $80 per hour; his other two secretaries were paid much less per
hour of work. There is no reason to believe that Rosalind, had she chosen to
stop working for her husband, could not have been easily replaced by someone
competent to do the work she did at the same or a lesser rate of pay. The fact
that he did not extend the benefit of the plan to his two part-time secretaries
itself suggests that the coverage of Rosalind under the plan was a personal and
not a commercial matter. The appellant’s only reason for entering into the plan
for Rosalind’s benefit, according to his own evidence, was because Mr. Katz and
Mr. Johnston recommended it. I infer that their recommendation had much
more to do with tax planning than with human relations considerations.
[36] Third, the
appellant did not attempt to compare the “cost” of Mr. Johnston’s plan with the
cost of purchasing similar coverage for his wife from an insurance company.
This would be remarkable indeed if Dr. Labow had considered that his
contributions to the plan were an expenditure rather than an off-shore
investment. It seems unlikely that he would have spent $400,000 for a benefit
that his wife really had no need for without some comparative data, if it had
truly been an outlay in the nature of an expense and not simply a way of
accumulating capital in a tax-free jurisdiction.
[37] Fourth, Dr. and
Mrs. Labow clearly considered the funds held in the hands of the Trustee in the
Caribbean to be their funds. They exhibited concern about the number of trades
entered into by RBCC. In her evidence-in-chief, Rosalind Labow spoke of the
concern that she and her husband had about “… the way that RBC Trust
(Cayman) was handling our funds…”. In considering contribution to the trust,
the question never was “how much do I have to pay to provide a key employee
with a benefit?” Rather it was “how much do I want to contribute to the trust
fund?” That is why Dr. Labow actually contributed almost twice the amount that
would have been necessary to provide the defined maximum benefit under the plan.
No one seems to have noticed that Mr. Parent calculated the required
contribution on the basis of a salary of $39,000, rather than Rosalind’s actual
salary of $20,000. Such a mistake would surely have been detected if the
transaction were a true purchase of insurance rather than a means of off-shore
saving.
[38] Whether Dr.
Labow’s intention was simply to accumulate wealth in a tax‑free
jurisdiction, or was to provide medical and disability insurance benefits to
his wife as he maintained in his evidence, his contributions to the trust were
not made for the purpose of gaining or producing income. I do not believe that
his motivation was to provide his wife with medical and disability insurance,
but, even if that were so, it was certainly not in the capacity of employee,
but rather in the capacity of wife, that he provided her with the benefits. He
would never have made contributions of this magnitude to a trust to benefit an
arm’s length employee.
[39] The circumstances
satisfy me that Dr. Labow decided to participate in the plan, and made his
contributions to the trust, for purely personal reasons having nothing to do
with gaining income from his medical practice, and that as a result the
contributions do not qualify as expenses of the business and are not deductible
in computing the profit from the business.
[40] There remains the
question whether the Minister was entitled to assess Dr. Labow
beyond the three-year normal reassessment period. Subparagraph 152(4)(a)(i)
of the Act reads:
152(4) The Minister may at any time make an assessment,
reassessment or additional assessment of tax for a taxation year, interest or
penalties, if any, payable under this Part by a taxpayer or notify in writing
any person by whom a return of income for a taxation year has been filed that
no tax is payable for the year, except that an assessment, reassessment or
additional assessment may be made after the taxpayer’s normal reassessment
period in respect of the year only if
(a) the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to
neglect, carelessness or willful default or has committed any fraud in filing
the return or in supplying any information under this Act, or
This
provision is limited in its effect by subparagraph 152(4.01)(a)(i):
152(4.01) Notwithstanding subsections (4) and (5), an
assessment, reassessment or additional assessment to which paragraph (4)(a),
(b) or (c) applies in respect of a taxpayer for a taxation year
may be made after the taxpayer’s normal reassessment period in respect of the
year to the extent that, but only to the extent that, it can reasonably be
regarded as relating to,
(a) where paragraph 152(4)(a) applies to the
assessment, reassessment or additional assessment,
(i) any misrepresentation made by the taxpayer or a person who
filed the taxpayer’s return of income for the year that is attributable to
neglect, carelessness or willful default or any fraud committed by the taxpayer
or that person in filing the return or supplying any information under this Act,
…
[41] Dr. Labow’s
income tax returns for the taxation years 1996 and 1997 certainly contained
misrepresentations as to the amount of his professional income. His return for
1996 discloses his professional income both in the Statement of Professional
Activities (Form T2032) that is part of the printed T1 General Individual
Income Tax Return (the T1), and in financial statements for the practice
prepared by Mr. Katz and appended to the T1. In 1997, the Form T2032 simply
shows the net professional income declared of $86,820 “as per F/S”. The
computation of it is revealed only in the financial statements appended. In
1996, he declared professional income of $135,147 and in 1997 of $86,820, in
contrast to the $321,665 that he had declared in 1995. The major element
causing this substantial decrease in his professional income is the increase in
salary expense from $62,888 in 1995 to $217,760 in 1996, and $317,278 in 1997.
The reason for these increases is that the 1996 and 1997 salary expenses are
inflated by the inclusion there of his two contributions to the trust. There is
nothing in either return that would reveal to the reader that these amounts
described as salary expense include contributions to a trust to fund a plan for
his wife, the purpose of which had nothing to do with gaining or producing
income. That is a misrepresentation, as it represents a contribution made to
the trust fund for purely personal reasons as being a business expense.
[42] Dr. Labow said in
his evidence that he met with Mr. Katz each year to review his returns and sign
them, but that he relied entirely on Mr. Katz to complete the returns correctly,
and that he did not have either the expertise or the time to review the returns
in any detail. It is clear, however, that Dr. Labow must have known that these
contributions to the trust were being deducted as business expenses; he said in
his evidence that he could not have afforded to make the payments if they were
not deductible. He also must have known, if he had given it any thought at all,
that he was not making those payments because they would in some way advance
his business. For the reasons that I have given, I have no doubt that he
understood the reason for entering into the plan, and making the contributions
to the trust, was entirely personal. While Dr. Labow was content in his
evidence to say that he simply relied on Mr. Katz and Mr. Johnston, he
was, at best, willfully blind to the reality of these transactions. Quite
clearly, subparagraph 152(4)(a)(i) applies to permit the Minister
to reassess at any time. Undoubtedly, it took the Minister a surprisingly long
time to issue those reassessments; however, where the requirements of the
subparagraph are met, there is no time limit that applies. The words “at any
time” mean exactly that: see Canada v. Addison & Leyen.
[43] Dr. Labow has
also been reassessed in 1997, 1998 and 1999 to include the income produced by
his account in the Trust in his income for those years. The amounts in question
are:
1997 $
1,320.00
1998 $23,646.00
1999 $47,619.00
Ms.
Kamin suggested in argument that these amounts had been wrongly computed, but
they were admitted before trial in the Appellant’s response to a Request to
Admit Facts, and so are not now open to question.
[44] Subsections
75(2) and (3) of the Act provide as follows:
75(2) Where, by a trust created in any manner whatever since
1934, property is held on condition
(a) that it or
property substituted therefor may
(i) revert to the
person from whom the property or property for which it was substituted was
directly or indirectly received (in this subsection referred to as “the
person”), or
(ii) pass to persons
to be determined by the person at a time subsequent to the creation of the
trust, or
(b) that,
during the existence of the person, the property shall not be disposed of
except with the person’s consent or in accordance with the person’s direction,
any income
or loss from the property or from property substituted for the property, and
any taxable capital gain or allowable capital loss from the disposition of the
property or of property substituted for the property, shall, during the existence
of the person while the person is resident in Canada, be deemed to be income or a loss, as the case may be, or a taxable
capital gain or allowable capital loss, as the case may be, of the person.
75(3) Subsection 75(2) does not apply to property held
in a taxation year
(a) by a trust
governed by a deferred profit sharing plan, an employee benefit plan, an
employees profit sharing plan, a registered disability savings plan, a
registered education savings plan, a registered pension plan, a registered
retirement income fund, a registered retirement
savings plan, a registered supplementary unemployment benefit plan, a
retirement compensation arrangement or a TFSA;
(b) by an
employee trust, a related segregated fund trust (within the meaning assigned by
paragraph 138.1(1)(a)), a trust described in paragraph (a.1) of
the definition “trust” in subsection 108(1), or a trust described in paragraph
149(1)(y);
(c) by a trust that
(i) is not resident in Canada,
(ii) is resident in a
country under the laws of which an income tax is imposed,
(iii) is exempt under
the laws referred to in subparagraph 75(3)(c)(ii) from the payment of income tax to the
government of the country of which the trust is a resident, and
(iv) was established
principally in connection with, or the principal purpose of which is to
administer or provide benefits under, one or more superannuation, pension or
retirement funds or plans or any funds or plans established to provide employee
benefits;
(c.1) by a qualifying environmental trust;
or
(d) by a prescribed
trust.
[45] The Minister
relies on subparagraph 152(4)(b)(iii) for the authority to reassess
during the three-year period following the normal reassessment period.
152(4) The Minister may at any time
make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any,
payable under this Part by a taxpayer or notify in writing any person by whom a
return of income for a taxation year has been
filed that no tax is payable for the year, except
that an assessment, reassessment or additional assessment may be made after the
taxpayer’s normal reassessment period in respect of the year only if
(a) …
(b) the
assessment, reassessment or additional assessment is made before the day that is
3 years after the end of the normal reassessment period for the taxpayer in
respect of the year and
(i) …
(iii) is
made as a consequence of a transaction involving the taxpayer and a
non-resident person with whom the taxpayer was not dealing at arm’s length, …
[46] Can it be said
that Dr. Labow’s share of the income of the trust in the three years in
question is a consequence of a transaction or transactions involving Dr. Labow
and a non-resident person with whom he was not dealing at arm’s length? In my
view it can, because the income was the direct result of Dr. Labow’s
contributions to the trust to obtain coverage for his wife. Article 5(c) of the
trust gives the employer the power to replace the trustee upon 30 days’ notice.
By the terms of the trust, both Dr. Labow as a participating employer and Mr.
Johnston, his solicitor and representative under the terms of the trust, could
exercise that power of removal and replacement. In fact, Mr. Johnston did so at
the behest of Dr. Labow. Dr. Labow therefore had control of the trust, with the
result that he and the trust were clearly not operating at arm’s length. The Minister was therefore
empowered by subparagraph 152(4)(b)(iii) to reassess at any time up to
three years following the normal three-year reassessment period.
[47] The trust
specifically provides in paragraph 11.02 that on termination of an employer’s
participation in the plan, trust funds may revert to the employer. The income
of the appellant’s share of the trust fund is therefore deemed to be his
income, unless it is excepted by the provisions of subsection 75(3). The
appellants acknowledged in argument that the plans in issue here are not
“employee benefit plans” under the Act,
as the definition of that term excludes a group sickness or accident insurance
plan and a private health services plan. The appellant argues that the trust
property is excluded from the operation of subsection 75(2) by paragraph
75(3)(b) because it is a trust described in paragraph (a.1) of the definition
of trust in subsection 108(1). This exclusion would apply only to the last year
under appeal.
A trust … all
or substantially all of the property of which is held for the purpose of providing benefits to individuals each of whom
is provided with benefits in respect of, or because of, an office or employment
or former office or employment of any individual.
In
my view, this trust cannot meet that definition for the simple reason that, as
I have found above, if the purpose of the plan was to provide any benefits
to Rosalind Labow, then those benefits were not provided to her because of her
office or employment, but because she was married to the appellant.
Consequently, subsection 75(2) applies, and the income of the trust is taxable
to Dr. Labow.
[48] It is apparent from
the evidence of Dr. Labow and Rosalind Labow that they must both have been
aware that the trust fund was producing income each year. I have already
found that Dr. Labow was aware that the purpose of the fund was personal and
not for the benefit of his medical practice. It follows that he should have
been aware that he was required to report that income each year. It is an
admitted fact that Dr. Labow did not review his income tax returns for the four
years under appeal personally before he signed them. It is not adequate for him
simply to say, as he did, that he relied on his accountant. The obligation to
report is a personal one that cannot be avoided in that way. His failure to
include the trust income in his return each year, therefore, is a misrepresentation
attributable to neglect or carelessness, and it makes subparagraph 152(4)(a)(i)
applicable. For both these reasons the Minister was entitled to reassess when
he did.
the
Tanaschuk appeals
[49] Danny Tanaschuk
is a radiologist. He is appealing income tax reassessments for the years 1998
and 1999. Those reassessments disallowed his contributions to a plan
established for him and his wife by Mr. Johnston in 1998. At that time he was
Chief of Radiology at the Riverside Hospital in Ottawa, and one of four equal partners in a partnership
consisting of himself and three other radiologists, and known as Riverside
Imaging Associates (RIA). His wife, Danielle Lafortune, and the wives of
the other three partners were employees of the partnership, Ms. Lafortune
on a full-time basis, doing the billing and the reconciliation for all the
partners, as well as the maintenance of her husband’s accreditation,
correspondence and scheduling. The other partners’ wives worked on a part-time
basis. In 1998 the hospitals in Ottawa were merging, and Dr. Tanaschuk was
named the interim Chief of Diagnostic Imaging for the merged Ottawa Hospital. This involved him in a great deal of administrative
and committee work in addition to his professional responsibilities. During
this period Ms. Lafortune took on substantial additional duties, working
for her husband in connection with the merger. She worked some 20 to 30 hours
per week for RIA, and was paid was paid $2,000 per month by RIA. In 1998 she
was paid $1,750 per month for the additional work that she did in connection
with the hospital merger, and this was increased to $2,500 per month in 1999.
These latter amounts were paid to her by Dr. Tanaschuk, not RIA, as the work
was not done in connection with the partnership’s practice.
[50] Towards the end
of 1997, Mr. Katz proposed to Dr. Tanaschuk and the other partners of RIA that
they should establish a plan that would provide disability and health care
benefits to their wives. In early 1998, Mr. Johnston made a detailed proposal
to them of a plan that would provide disability coverage for the employees of
the partnership, and medical, dental and vision care benefits for the employees
and their dependants.
[51] Dr. Tanaschuk
testified that he found Mr. Johnston’s proposal attractive because he had some
history of medical problems, and a family history that suggested he would have
more medical problems in the future. He said that he had looked at other
possible medical insurance plans, but that he had not found any of those available
to him to be satisfactory.
[52] It was in March 1998 that Dr. Tanaschuk and one of his
partners decided to participate in Mr. Johnston’s proposed plan. Dr. Tanaschuk,
on behalf of RIA, and William Johnston, as Administrator, signed a
Participation Agreement, to be effective as of March 15, 1998. That agreement
refers to the Bermuda Professional Health and Welfare Trust established on
March 1, 1998, and it names Danielle Lafortune as the only employee
participating in the plan. Paragraph 3 and 4 read as follows:
3. The Employer shall be
solely liable for the cost, as determined by HWT’s actuary, of all benefits
accrued under the Plan by any of its employees.
4. Should an Employer not
have sufficient funds to pay for any of its liabilities under the Plan, it is
hereby acknowledged that the Administrator will reduce any or all benefits that
have been credited to any employee or former employee under the Plan.
[53] As Dr. Tanaschuk’s wife was the only employee named in
this Participation Agreement, and as RIA was named as the employer, Dr.
Tanaschuk agreed with the partners that he alone would make the financial
contributions to the trust that were required under the plan. Accordingly, on
December 14, 1998 he signed a document titled Indemnification. It reads as
follows:
I, Dr. Danny Tanaschuk, hereby agree
to indemnify RIVERSIDE IMAGING ASSOCIATES, for all costs associated with the
participation of RIVERSIDE IMAGING ASSOCIATES in the Bermuda Professional HWT
(“HWT”) that are related to the membership of Danielle Lafortune in the HWT.
These costs include, but are not limited to, the
contributions made to the HWT by RIVERSIDE IMAGING ASSOCIATES, all fees
associated with the membership in the plan and any taxes, interest, penalties
that RIVERSIDE IMAGING ASSOCIATES IS required to pay by Revenue Canada.
[54] There was a good deal of discussion during the trial
about what document actually was the trust agreement that governed the plan to
which Dr. Tanaschuk subscribed. There are in evidence two documents, each
styled “DEED OF SETTLEMENT
between Arthur Morris and Continental Trust Corporation Limited of Hamilton, Bermuda”. One is Tab 1 of Exhibit A-1 and
the other is Exhibit A-3. Both state on their face that they were made on March
1, 1999. Both are signed by Arthur Morris, the settlor, and by a director on
behalf of Continental Trust, but with no indication of when they were signed.
[55] Mr. Johnston’s explanation of this is that Exhibit A-3
was in fact signed on or about March 1, 1998, and that it was replaced by
Exhibit A-1, Tab 1 on or about August 1, 2000, because there were a number of
errors in the original document that had to be corrected. Mr. Johnston was
clearly of the view that the latter document governed the plan. Whether it was
open to Mr. Morris and Continental Trust to change the document in this way is
not something that I need to decide. The changes that were made are
inconsequential for purposes of these appeals. I shall consider the matter as
though Exhibit A-1, Tab 1 governed the plan from the outset.
[56] Dr. Tanaschuk, ostensibly on behalf of RIA, made two
contributions to the trust. His first contribution was $149,000 and the second
was $170,000.
Dr. Tanaschuk testified that Mr. Johnston had told him at the early stages
of discussions that his required contribution, based on his wife’s age and
income, would be in the range of $300,000 to $320,000. He decided to contribute
$149,000 in the first year and the balance, which the actuary would determine,
in the second year. These payments were wired from the RIA bank account to the
trustee in Bermuda, but the first was deducted from Dr. Tanaschuk’s allocation
of partnership income at the 1998 year end, and the second was paid by Dr. Tanaschuk
to the partnership by a draft drawn on his bank account in November 1999, and
then wired from RIA to Bermuda.
[57] By the time that second contribution was made in
November 1999 Dr. Tanaschuk had been appointed Chief of Radiology at the Montfort Hospital, which did not become
part of the amalgamated Ottawa Hospital. He withdrew from the RIA
partnership to take up this position at the end of June 1999, and his wife
ended her employment by RIA at the same time. Dr. Tanaschuk was in the rather curious
position, then, of contributing some $170,000 to a Health and Welfare Trust in
Bermuda, under the terms of a Health and Welfare Plan on behalf of an employer
from whom he had severed all connection, for the benefit of an employee who had
left the employment of that employer some four or five months previously.
[58] Joann Williams
did the valuation computation for the plan to which Dr. Tanaschuk
subscribed in the name of RIA. In fact she did three separate computations. The
first was done on or about December 18, 1998. In that document she recommended
a single payment of $149,000 to be made in the first year of the plan, 1998, to
sustain a benefit of 75% of the employee’s earnings, up to a maximum of $9,633
per annum. Ms. Lafortune at that time was earning $20,000 per annum from RIA,
so $9,633 was less than 50% of her earnings. It is clear from her evidence, and
also from that of the appellant, that Dr. Tanaschuk had made the decision that
he would contribute $149,000 in the first year. That payment had in fact been
made before the RIA yearend, which was 31 March, 1998. Ms. Williams did no
more than verify that this contribution of $149,000 would not exceed what would
theoretically be required to fund 75% of her salary until age 70 in the event
of her becoming disabled. Her starting point was the agreed upon $149,000.
[59] On May 18, 1999
Ms. Williams produced her second valuation for this Plan. This time it was
based upon presumed earnings by the employee of $30,000 per annum, and a single
contribution to be made in the first year of the plan, which of course was 1998.
Her opinion was that a single contribution of $313,505 remitted on January 1,
1998 would sustain a benefit of $11,748, which, together with the maximum
disability benefit available under the Canada Pension Plan, would yield 75% of
Ms. Lafortune’s supposed $30,000 salary. Ms. Williams did not know, apparently,
that Dr. Tanaschuk had already made a payment of $149,000 to the trustee prior
to March 31, 1998. Nor did she know that within less than two months Ms.
Lafortune would no longer be employed by RIA, or that her salary from RIA was
actually $24,000 per year. She simply used the spreadsheets that Mr. Parent had
developed, the assumptions that she was given by Mr. Johnston, and her own
assumption, similar to that of Mr. Parent, that it was prudent to assume that
the employee would be totally and permanently disabled at the end of the third
year of the plan.
[60] Ms. Williams
produced her third valuation report on May 27, 1999. By this time she had been
made aware of the first year payment that had been made, and that the intent
was that there would be two contributions made in the first two years totaling
about $300,000. It appears that in her third valuation Ms. Williams did in fact
compute the amount of the second contribution to be $170,262, rather than
starting with that number and working towards the annual income required to
justify it, as she had done in preparing the first valuation. However, it also
appears that the goal of a total contribution of $300,000 made in two
installments had been conveyed to her, and that certain assumptions were made
with a view to maximizing the required second contribution. These included
using a pension mortality table rather than a disability mortality table,
providing for a 4% per year inflation of the disability benefit payments,
although the plan did not provide any adjustments for inflation, and the
assumption, on Mr. Johnston’s direction, that the trust income would be taxed
at 50%. All these had the effect of inflating the required second contribution.
So too did the assumption that Ms. Lafortune’s salary was $30,000 per annum
when in fact RIA was paying her only $24,000. Based on these assumptions, Ms.
Williams opined that the required contribution in the second year of the plan
was $170,262. Strangely, the trustee invoiced RIA for that amount by a document
dated March 30, 1999, two months before the date of Ms. Williams’ third
valuation.
[61] The Bermuda Professional Health and Welfare Trust and
Plan to which Dr. Tanaschuk subscribed is different in wording from the
one to which Dr. Labow subscribed, but not significantly so, except for
the winding-up provision. The clauses relating to contribution and benefits are
essentially the same. The Trustee is required to maintain separate accounts and
asset pools for each employer who participates. The disability benefit is
payable only upon disability of the employee, and other benefits for dental,
health and vision care are available to the employee and dependants. In the
event of disability of the employee, benefits are to be paid from the trust
fund established by the employer. Dental, health and vision care benefits are
only payable if the services are not available without charge under another
scheme. If such benefits are paid by the trust for an employee or dependant, it
is on a pay-as-you-go basis, which is to say that the trust will pay the
benefit to the employee, and then invoice the employer for the cost of it plus
an administrative charge. The employer then becomes liable to contribute that
amount to the trust fund.
[62] The winding-up provision is somewhat different. The
Bermuda plan provides in paragraph 9:
9. Winding-up of the Plan
(a) The Plan shall be wound-up on
the earlier of:
(i)
the Termination Date;
(ii)
the passing of a resolution of
the Employer, subject to the prior simultaneous written consent of the
Protector (unless the Employer shall be in receivership or liquidation) to
wind-up the Plan at an earlier date; and
(iii)
the service of written notice by
the Protector on the Trustee to wind-up the Plan at an earlier date.
(b) If the Plan is wound-up,
the Trustee shall after payment of all costs, charges and expenses of
administration and winding-up and payment of such taxes, if any, apply the
assets of the Trust Fund in accordance with paragraph 6 of the Professional
Health and Welfare Trust.
The termination date is defined to be the termination date
of the trust, which in turn is defined in subparagraph 1(o) of the trust deed:
(o) ¨Termination Date¨ means
such date from the date hereof as the Protector may in his absolute discretion
by deed delivered to the Trustee prior to the date so determined;
[63] In effect, then, either the employer, with the consent
of the protector, or the protector alone, can effect a winding-up of the plan.
In that event, paragraphs 4, 5 and 6 of the trust deed apply:
4.
Objects
The Objects of this trust are:
(a)
to supply the Trust Property for
the Purposes in accordance with Clause 5; and
(b)
subject to and in default of the
foregoing (as originally framed or as reformed) to apply the Trust Property for
charitable purposes.
5.
Purposes
(a)
The Purpose for which this trust
[sic] is to ensure payment of those benefits provided for under the
Health & Welfare Plan if they become due and payable;
(b) The Trustee
and the Protector jointly shall have power to resolve any uncertainty as to the
Purpose or to the mode of execution of the trusts created by or under this
trust.
(c) The
Trustee shall endeavor to carry out the Health & Welfare Plan and shall act
accordingly in dealing with the Trust Property.
(d)
In
so far as the Health & Welfare Plan is unspecific as to the Trustee action
and does not require the Trustee to act as directed by another, or to delegate
to another, the Trustee shall have a discretion to act as they think fit having
regard only to the letter and spirit of the Health & Welfare Plan.
(e)
If
in the Trustee’s option compliance with the letter of the Health & Welfare
Plan would be contrary to the spirit of the Health & Welfare Plan whether
because of changed or unforeseen circumstances or otherwise, the Trustee shall
adhere to the spirit rather than the letter of the Health & Welfare Plan
and act accordingly, but the Trustee shall notify in writing the Protector and
if time permits, shall do so before acting.
6.
Termination Date
Notwithstanding any
other provision hereof the Trustee shall on the Termination Date hold the Trust
Fund upon trust for the Final Repository absolutely to the intent that there
shall be no resulting trusts of the Trust Fund. It is hereby declared that the
inclusion of the Final Repository as an entity which could take an interest in
the Trust Fund is only for the purpose of excluding any possibility of a
resulting trust of the Trust Fund and not with the intention of giving any
benefit to the Final Repository except in the event of a failure of the trusts
hereby declared in favour of the Objects. Failing the appointment of a Final
Repository, the Trustee shall stand possessed of the Trust Fund for such
charity or charities absolutely as the Trustee shall by deed or deeds revocable
or irrevocable executed on or before the Termination Date but not revocable
thereafter appoint and, in default of appointment for general charitable
purposes to the intent that there shall be no resulting trusts of the Trust
Fund.
The
“final repository” is a defined term in the trust deed:
“Final Repository”
means the person, if any, (other than the Protector or a person who is a
resident of Canada for purposes of the Income Tax Act) appointed by the Protector at any
time after the date of this trust but before the Termination Date by deed
delivered to the Trustee.
[64] The Protector under the Bermuda plan was Mr. Johnston, or upon his death or incapacity,
Mr. Katz. Mr. Johnston was also named as the Administrator under the plan.
[65] Dr. Tanaschuk was asked on cross-examination about his
expectations in respect of the $320,000 that he contributed to the trust. His
first answer was to the effect that he expected that health care costs would
deplete the funds. When confronted with his answer given on his examination for
discovery, he agreed that he had been told that there were two options on
termination of the plan:
Q. All right. In that plan,
certainly in the plan if the members, your wife ceased to be an employee or an
employee of the plan no longer applied to her, in that event what did you
expect would happen to the money?
A. It was explained that there
were a number of options: one was a charitable contribution, the other was that
the money would be repatriated. The balance of what was left in the trust, if
there was any, could be repatriated back to Canada with tax implications.
Q. Repatriated to you, in
other words?
A. Yes.
[66] It is not at all clear to me how, within the terms of
the trust, the funds would be returned to Dr. Tanaschuk or his estate. It is
clear, however, that when he signed the participation agreement, and when he
made the payments, he did so based on advice that when the plan was terminated
the funds remaining in his participating employer account would be returned to
him, less any amounts paid for disability benefits to his wife. I do not
believe that he intended that any remaining funds should be allowed to go to
charity. He viewed the funds in the participating employer account as his
funds. In fact, it was not the trustee, but Dr. Tanaschuk, who made the
original investment decision in respect of his participating employer account.
Speaking of the trustee’s advice to him in February 1998, he testified as
follows:
Q. Did you discuss investment strategies with
him?
A. Not on that particular
meeting but earlier on, back in Ottawa, in February, we had asked Colin what
would happen with the money and he said that initially what he does with all
the funds is they get put in a money market fund with the Bank of Bermuda and
then depending on what you want and what they suggest, he says they can remain
in the Bank of Bermuda or we can propose a number of different vehicles and
possibly grow in value of the funds.
He went through, I think three different scenarios where
he had directed clients to, and the one that we elected to go with was a
Fidelity World Advisor offshore fund.
Mr. Johnston said in that part of his testimony that became
evidence in all three appeals that it was the intention in setting up these plans
that on termination the funds in the employer’s trust account would be returned
to the employer, and that “… the rules require a re-inclusion in the tax year
of the employer that the termination occurs.”
In the same context he said:
There is no certainty that the funds will be used
for the disability, and at the end of the day, they should come back to the
employer and the employer should have a re-inclusion. Assumptions are made all
the time, and if they don’t happen, there are mechanisms in place that require
re-inclusion of the income back to the original deductions”.
While this statement is far from precise, and it was not
followed up, it does satisfy me that Mr. Johnston had good reason to believe
that the trustee would, directly or indirectly, return the balance of the
account to the employer upon a winding-up of the plan, notwithstanding
paragraphs 4, 5 and 6 of the trust deed, and that he advised Dr. Tanaschuk
accordingly. I do not believe that he would have agreed to participate, and to
contribute $320,000 to the trust, without some assurance of that kind.
[67] I find that neither RIA nor Dr. Tanaschuk entered into
the participation agreement under the Bermuda Professional Health & Welfare
Trust for the purpose of providing disability or medical insurance to Danielle
Lafortune in her capacity as an employee of the RIA partnership, or of her
husband. In reality, it was not the partnership but Dr. Tanaschuk who subscribed to the plan, and he did so not to
provide insurance to an employee, but for the purpose of accumulating income or
capital gains, or both, in a tax-free jurisdiction, and so that tax on the
contributions could be deferred until some later time when these amounts would
be returned to Dr. Tanaschuk
or his estate. The first contribution was not made by the partnership, which
was Ms. Lafortune’s employer, but by her husband. When the second contribution
was made in November 1999, Ms. Lafortune was no longer employed by RIA, and
Dr. Tanaschuk had withdrawn from the partnership.
[68] Paragraph 5(a) of the Plan provides the following:
5(a) Any member shall cease to
be covered for any or all of the Benefits set forth in this Plan on the date
they cease to be an employee of the Employer notwithstanding that the Plan is
still in existence.
Ms. Lafortune ceased to be an employee of RIA, the employer
named in the participation agreement, at the end of June 1999. She therefore
was not covered after that date for any of the benefits which the plan was
supposedly created to provide to her. Despite that, Dr. Tanaschuk, apparently
without complaint, sent the trustee the second contribution in the amount of
$170,000 in November 1999. If this were a real plan of insurance, rather than a
savings device, he surely would not have made that payment.
[69] Quite clearly, the participation of RIA, or Dr.
Tanaschuk, in the Bermuda Health & Welfare Trust had nothing to do with
gaining or producing income. The amounts of $149,000 in the 1998 taxation year
and $170,000 in the 1999 taxation year were not expended to provide a benefit
to an employee; no sensible person would have made those payments for that
purpose under those circumstances. Only because Danielle Lafortune was his
wife, and only because he expected the return of the $320,000, hopefully with accretions,
at some time in the future, did Dr. Tanaschuk enter into this scheme and make
those two payments.
[70] Dr. Tanaschuk was reassessed for the two taxation years
in issue on December 1, 2003, beyond the normal reassessment period of three
years. The respondent relies on both subparagraphs 152(4)(a)(i) and
152(4)(b)(iii) to justify the assessments.
[71] It is clear that
in filing his income tax returns for 1998 and 1999, Dr. Tanaschuk did not
reveal the substantial payments to the trustee that he had deducted in the
computation of his income. In both those years he prepared and filed his
returns himself. His original return for 1998 is not in evidence, but his
working copies of both returns are at Tab 35 of Exhibit A-1, and the filed
return for 1999 is at Tab 29. It is not disputed that the filed return for 1998
is identical in substance to the working copy that is in evidence.
[72] In 1998 Dr.
Tanaschuk declared a gross professional income of $149,702, and a net
professional income of 95,395.94. The statement of professional activities that
is part of the return reveals a number of expenses claimed that account for the
difference; of these the only one that refers in any way to salaries or
benefits is line 9060 “Salaries wages and benefits (including employer’s
contributions)”. Here Dr. Tanaschuk entered 1750 x 12 = $21,000, which was
the salary that he paid to Ms. Lafortune for her work in connection with the
hospital amalgamation. The source of the amount of $149,702 is the financial
statements of RIA for the year ended March 31, 1998. These are in evidence at
Tab 4 of Exhibit A-1. Dr. Tanaschuk did not include a copy of the RIA
financial statements with his 1998 return. Even if he had done so, they would
not have revealed to the Minister that he had paid $149,000 by way of a
purported employee benefit. In the partnership income statement the $149,000 is
subsumed in Salaries and benefits of $247,551. That in itself is misleading as
it was not an expense of the partnership at all. In the statement of partners’
capital the allocation of the partnership income of $1,045,808 is shown as
$298,702 to each of the other three partners, and $149,702 to Dr. Tanaschuk
with no explanation in the statement, or by way of a note to the reader, of the
reason that his share of net income is less than that of each of his three
partners by $149,000. Even if the financial statements had been given to the
Minister along with the return, it would not have been apparent that Dr. Tanaschuk
was claiming to deduct $149,000 from his income as payment for a purported
employee benefit. In plain terms, the return that he filed failed to disclose
half his income. The evidence clearly established that Dr. Tanaschuk had been
told by Mr. Johnston that the Canada Revenue Agency was likely to consider
that the payments were not deductible. In those circumstances Dr. Tanaschuk’s
return amounts to willful misrepresentation, and so entitles the Minister to
reassess beyond the normal three year period.
[73] The evidence with
respect to disclosure, or more correctly the lack of it, in the 1999 income tax
return is essentially the same as that for 1998. Dr. Tanaschuk prepared and
filed his return himself. He reported gross professional income of $242,865.25
and net professional income of $130,452.50. The statement of professional
activities claims a deduction of $45,000 for wages and severance pay, and there
is no disclosure in the return of the claim to deduct $170,000 as an employee
benefit expense. Nor do the financial statements reveal that this payment was
made or why. On the statement of partners’ capital all four partners are shown
to have been credited with different amounts as their shares of the net income.
Dr. Tanaschuk’s share is $170,000 less than Dr. Mendell’s share, but there
is no explanation of the difference. The evidence was unclear as to whether
Dr. Tanaschuk filed the 1999 financial statements of RIA along with his
1999 return, but even if he had done so they would not have revealed to the
reader that there was a claim to deduct 170,000 as an employee benefit. As in
1998, the effect was to fail to disclose more than half his income for the
year. The Minister is entitled to reassess 1999 beyond the three year period.
[74] The claim to
deduct professional fees of $9735 in the 1999 taxation year is found in the
statement of professional activities, where they are described as legal,
accounting and other professional fees. The printed form makes it clear that
only business expenses are to be listed. Had the expenses related to a genuine
business expense then they would be appropriately claimed and adequately
described. However, the fees charged for the establishment and maintenance of
the trust, like the contributions to the trust, were not amounts expended for
the purpose of the appellant’s business, and to list them as business expenses
was a misrepresentation. In view of the advice that Mr. Johnston had given him
at the outset that the Canada Revenue Agency would probably consider the trust
contributions not to be deductible as business expenses, to list either the
contributions themselves or the associated fees as business expenses without
making known what they were paid for does not satisfy the appellant’s
obligation to
…
thoughtfully, deliberately and carefully assess the situation and file[s] on
what he believes bona fide to be the proper method …
The
Minister was therefore entitled to reassess with respect to the professional
fees.
the
Marcantonio appeals
[75] MCI is a firm
engaged in the construction industry in the Ottawa area. Its principal business is the installation of
steel studs, drywall and acoustic tile. The shares are owned equally by Pantaleone
Marcantonio ("Leone"), Carlo Marcantonio, Giuseppe Marcantonio and
Domenico Filoso. The three Marcantonios are brothers and Mr. Filoso is their nephew.
Until September 28. 1999, Leone and Carlo were the two directors of the
company; on that date, Giuseppe and Mr. Filoso became directors.
[76] Domenico Filoso was in charge of the business and
financial side of MCI, Leone was in charge of estimating and obtaining new
business, and Giuseppe and Carlo were the site supervisors. In 1999, Mr. Filoso’s
salary was $60,950 and in 2000 it was $69,800. Giuseppe Marcantonio’s salary
was $67,950 in 1999 and $81,800 in 2000.
[77] According to the evidence of Domenico Filoso, the
company had created a group sickness and accident insurance plan for Leone and
Carlo at some time in the late 1990s, to which the company made a payment of
$300,000. In 1999 Mr. Johnston, along with the accountants for MCI,
suggested a second plan with a contribution of approximately $500,000. Mr.
Filoso and Giuseppe Marcantonio then became directors, according to Mr. Filoso,
so that they could be the individuals covered by the second plan.
[78] This second trust and plan, referred to in the evidence
as the Marcantonio Group Accident and Sickness, or MGAS Trust and Plan, was
created by a Deed of Settlement dated December 1, 1999 between MCI and
Continental Trust Corporation Limited of Hamilton, Bermuda. The property initially
settled on the trust was $100.
[79] This trust deed is not significantly different from the
Tanaschuk deed that is described above. The role of the protector is now called
the enforcer, and William Johnston was the original enforcer, with Rob Rock of Ottawa, one of MCI’s accountants, named
to replace him in case of death or incapacity. The termination date is stipulated
to be 100 years from the date of the trust deed, but under clause 9 of the plan,
the employer or the enforcer can cause the plan to be wound up, in which event
the trustee is required to apply the assets according to paragraph 6 of the
trust. That paragraph 6 is identical to paragraph 6 of the trust in the
Tanaschuk case found above. The MGAS trust and plan, unlike the others I have
described earlier, has only one employer, MCI, and only two members, Giuseppe
Marcantonio and Domenico Filoso. Hence there is no reference to participating
employers or participating employee accounts.
[80] The benefit provisions of the MGAS plan are essentially
the same as those of the multi-employer plans, except that under the MGAS plan
the dental, medical and vision benefits but not the disability benefit, are
payable post‑employment as well as during employment. The disability
benefit is limited to 75% of the employee’s salary, but subject to an overall
limitation that the benefit is payable only if there is trust property
available from which to pay it, and also to a gross amount maximum payment established
according to an actuarial valuation.
[81] By a deed of settlement dated December 1, 2000, MCI
created another trust and plan known as the Marcantonio 509 Group Accident and Sickness
Trust. The trustee again is Continental Trust Corporation Limited of Hamilton, Bermuda. The enforcer of this trust was
Hil S. de Frias of Hamilton, Bermudas. The terms of the 509 trust and
plan are almost identical to those of the MGAS trust and plan. The only
significant differences are that the 509 trust makes no reference to a final
repository, and clause 6 of it is somewhat different as a result, and the
addition of clause 15 to the 509 plan. These read as follows:
6. Termination Date
Notwithstanding any other provision hereof, the
Trustee shall on the Termination Date hold the Trust Fund upon trust for such
charity or charities absolutely as the Trustee shall by deed or deeds revocable
or irrevocable executed on or before the Termination Date but not revocable
thereafter appoint and, in default of appointment for general charitable
purposes to the intent that there shall be no resulting trusts of the Trust
Fund.
15. Refund of Payments
The Trustee may, in its sole discretion, refund out
of the capital of the Trust, to a person, other than the Employer or a person
related as defined under Canadian Income Tax Act Law, designated by both
the Trustee and the Enforcer.
As with the MGAS trust and plan, MCI is the only employer
and Giuseppe Marcantonio and Domenico Filoso are the only employees who
are members of the 509 plan.
[82] The contributions to be made to the MGAS and 509 trusts
by MCI were not determined by an actuarial calculation of the fund required to
provide benefits. The decision was made by the appellant that it would
contribute $500,000 to the MGAS trust, and on December 1, 1999, Continental
Trust Corporation, as trustee of the MGAS trust, invoiced MCI for that amount.
On December 15, 1999, MCI passed a resolution establishing the MGAS plan in
accordance with the trust. For reasons that are obscure, the company then set
up an accrued liability in respect of the plan in the amount of $545,500 which was
reflected in the 1999 profit and loss statement, and in the appellant’s T2
income tax return for 1999, as a component of “management salaries expense”.
The payment of $500,000 was made to the trustee by wire on November 28, 2001.
[83] Similarly, the determination that the contribution to
the 509 trust would be in the amount of $754,000 was made by the appellant, not
as the result of any actuarial computation but on the basis that this was the
amount that it could afford to, and wanted to, contribute. In spite of this,
the invoice from the trustee to MCI dated December 1, 2000 reads as follows:
INVOICE
Date: December
1, 2000
To: Marcantonio
Constructors Inc.
From: Continental
Trust Corporation Limited as Trustee of the Marcantonio 509 Group Accident and
Sickness Trust in accordance with the actuarial evaluation prepared by Welton
Beauchamp Parent Inc.
Total
Owing: CDN$754,000
[84] It is quite clear from the evidence of Mr. Johnston
given in the Marcantonio appeals that the decision to contribute $500,000 to
the MGAS trust and $750,000 to the 509 trust was made by Mr. Filoso on behalf
of MCI in consultation with Mr. Johnston, and that these amounts were not
determined on the basis of any actuarial requirement to fund a benefit of 75%
of the salaries of Giuseppe Marcantonio and Domenico Filoso in the event of
their disability. Once agreed on, these numbers were given to Joann Williams,
and she was asked to confirm that these contributions were not excessive,
having regard to the salaries of the two individuals. This is clear from the
testimony of Mr. Johnston and Ms. Williams. Nevertheless, Ms. Williams
provided actuarial cost certificates for both trusts
that purported to certify $500,000 and $750,000 as the funding required to
provide the gross annual maximum payments of $24,338 for each of Giuseppe
Marcantonio and Domenico Filoso under the MGAS plan and $37,436 for each under
the 509 plan.
[85] Although Mr. Filoso testified that he believed that medical,
dental and vision expenses were payable by the trustee from the trust property,
it is clear that no provision was made by Ms. Williams for funding these
benefits. No claims were made by either Mr. Filoso or Mr. Marcantonio, but as
with the Labow and Tanaschuk trusts, it is clear that had claims been made then
the trustee, if it were to adhere to sound actuarial principles, would have had
to invoice the employer for the amounts of those claims.
[86] At Tabs 29 and 31 of Exhibit A-1 are two documents, one
dated November 30, 2003 and the other dated December 17 2003, whereby
Continental Trust Corporation Limited ceased to be the trustee of the 509 trust
and the MGAS trust, respectively, and was replaced in that capacity by Landmark
Trust (Bermuda) Limited. By that time, Mr. de Fias had replaced Mr. Johnston as
the enforcer of the MGAS trust. It appears from the evidence of both Mr. Filoso
and Mr. Johnston that this change of trustee was effected by Mr. de Frias as the
enforcer, exercising his power under clause 3 of the First Schedule to each of
the trust deeds, not on his own initiative, but to give effect to a decision
arrived at jointly by Mr. Filoso and Mr. Johnston.
[87] Neither Mr. Filoso nor Mr. Johnston would acknowledge
that it was MCI that made the decision to replace Continental Trust with
Landmark Trust as trustee. However, they did agree that both were unhappy with
Continental Trust’s reporting, that Mr. Johnston thought that it would be a
good idea to replace Continental, and that they discussed it. I infer from
their evidence that Mr. de Frias was willing to, and did, replace the trustee
to implement a decision made by Mr. Filoso on the advice of Mr. Johnston, and
that Mr. Filoso did have the de facto power necessary to replace the trustee
at will.
[88] I turn now to the question whether the appellant’s contributions
of $500,000 and $750,000, respectively to the MGAS and 509 trusts were made for
the purpose of gaining or producing income from the appellant’s business. The appellant’s
position is that these liabilities were incurred to provide Giuseppe Marcantonio
and Domenico Filoso, as management employees, with a group accident and
sickness insurance plan, and that the contributions were determined in
accordance with standard insurance principles and actuarial standards and
practices. In my view, the evidence does not permit that conclusion.
[89] The salary of Mr. Filoso in 1999 was $60,950. In 2000,
it was $69,800, Mr. Marcantonio’s salary in 1999 was $67,950. In 2000, it was
$81,800. It is simply nor credible that an employer would spend four and a half
times the aggregate of the salaries of the two employees for the two years in
question to provide them with a plan to provide disability income and the
medical, dental and vision care benefits not otherwise available to them under
provincial Government plans.
[90] This is all the more improbable when considered in the
light of Mr. Filoso’s evidence concerning the appellant’s contributions to
the Plasterers’ and Cement Masons’ Trust Funds and the Acoustical and Drywall
Trust Funds on behalf of its unionized employees. According to Mr. Filoso, the
company’s contributions in total to these funds to provide disability and
health and welfare benefits (and possibly pension benefits as well – his
evidence is unclear as to that) for the two‑year period 2007 and 2008 was
“in excess of $1.3 million for those two years”,
and for 1999 and 2000, it would have been “… somewhat less than that, but it
would be the same sort of magnitude …”.
[91] In other words, the “cost” to provide the benefit to
Mr. Marcantonio and Mr. Filoso was approximately the same as the cost to
provide a similar, or perhaps greater, benefit to the entire unionized work
force of “…somewhere around 80 employees, 60 to 80 employees”.
If the appellant’s purpose was to provide Mr. Marcantonio and Mr. Filoso with a
benefit in their capacity as employees, it would have done so at considerably
less cost.
[92] Mr. Filoso testified that one of the primary reasons
that he and Giuseppe Marcantonio were made directors of the appellant on
September 28, 1999 was so that they could participate in the MGAS plan. At that
time, they each owned 25% of the equity in the company, as did each of the
other two directors. The four shareholders/directors were all closely related.
The wives of two of the directors and the sister of the Marcantonio brothers
also held management positions within the company, but they were not provided
with any accident and sickness plan. The inference that I draw is that if MCI intended
to confer any benefit on Giuseppe Marcantonio and Domenico Filoso by
establishing the MGAS and 509 trusts and plans, it was not to do so as an
element of their employment remuneration, but in their capacity as shareholders
and directors. The expenditures therefore do not satisfy the requirement of
paragraph 18(1)(a) of the Act.
[93] This is borne out, too, by the fact that the amounts of
the contributions to the two trusts were fixed not by an actuarial computation
of the cost of the benefit to be provided, but by a corporate decision as to
the amount that the appellant could afford to and wished to contribute. The appellant’s
statement of operations for 1999 shows pre-tax income of $73,845, after
accruing the $544,500 contribution to the MGAS trust as a component of
“management salaries”. Without that accrual, the operating profit would have
been $585,315 and the income before taxes, including interest income, would
have been $618,345. In other words, in 1999, the appellant chose to contribute
93% of its operating profit (88% of its total pre-tax income) to the MGAS
trust, purportedly to provide an employee benefit to Giuseppe Marcantonio and
Domenico Filoso. In 2000, the corresponding percentages were 75% and 68%. It is
not believable that the appellant would make such a business decision.
[94] Clauses 4, 5 and 6 of the MGAS trust deed provide as
follows:
4. Objects
The Objects of this trust are:
(a)
to apply the Trust Property for
the Purposes in accordance with Clause 5, and
(b)
subject to and in default of the
foregoing (as originally framed or as reformed) to apply the Trust Property for
charitable purposes.
5.
Purpose
(a)
The Purposes for which this
trust is established are to carry out the Group Accident and Sickness plan and
for greater certainty the Trustee may, in the fulfillment of this purpose,
acquire any contract of insurance wherein the Insurer assumes the liability to
pay the benefits provided under the Group Accident and Sickness plan.
(b) The Trustee and the Enforcer
jointly shall have power to resolve any uncertainty as to the Purposes or to the
mode of execution of the trusts created or under this trust.
(c) The Trustee shall endeavour
to carry out the Plan and shall act accordingly dealing with the Trust
Property.
(d) In so far as the Plan is
unspecific as to the Trustee action and does not require the Trustee to act as
directed by another, or to delegate to another, the Trustee shall have a
discretion to act as they think fit having regard only to the letter and spirit
of the Plan.
(e) If in the Trustee’s
opinion, compliance with the letter of the Plan would be contrary to the spirit
of the Plan whether because of changed or unforeseen circumstances or
otherwise, the Trustee shall adhere to the spirit rather than the letter of the
Plan and act accordingly, but the Trustee shall notify in writing the Enforcer
and if time permits, shall do so before acting.
6.
Termination Date
Notwithstanding any other provision hereof, the Trustee
shall on the Termination Date hold the Trust Fund upon trust for the Final Repository
absolutely to the intent that there shall be no resulting trusts of the Trust
Fund. It is hereby declared that the inclusion of the Final Repository as an
entity which could take an interest in the Trust Fund is only for the purpose
of excluding any possibility of a resulting trust of the Trust Fund and not
with the intention of giving any benefit to the Final Repository except in the event
of a failure of the trusts hereby declared in favour of the Objects. Failing
the appointment of a Final Repository, the Trustee shall stand possessed of the
Trust Fund for such charity or charities absolutely as the Trustee shall by
deed or deeds revocable or irrevocable executed on or before the Termination
Date but not revocable thereafter appoint and, in default of appointment for general
charitable purposes to the intent that there shall be no resulting trusts of
the Trust Fund.
[95] Clauses 4 and 5 of the 509 trust are identical to those
of the MGAS trust. Paragraph 6 of it reads:
6. Termination Date
Notwithstanding any other provision hereof, the
Trustee shall on the Termination Date hold the Trust Fund upon trust for such
charity or charities absolutely as the Trustee shall by deed or deeds revocable
or irrevocable executed on or before the Termination Date but not revocable
thereafter appoint and, in default of appointment for general charitable
purposes to the intent that there shall be no resulting trusts of the Trust
Fund.
[96] In the case of each trust, the plan is the Third
Schedule, and clause 9 of it provides for winding-up of the plan.
9. Winding-up of the Plan
(a) The Plan shall be wound-up on the earlier
of:
(i) the Termination Date;
(ii) the passing of a
resolution by the Employer, subject to the prior simultaneous written consent
of the Enforcer (unless the Employer shall be in receivership or liquidation)
to wind-up the Plan at an earlier date; and
(iii) the service of written
notice by the Enforcer on the Trustee to wind-up the plan at an earlier date.
(b) If the Plan is wound-up,
the Trustee shall after payment of all costs, charges an expenses of
administration and winding-up and payment of such taxes, if any, apply the
assets of the Trust Fund in accordance with paragraph 6 of the Marcantonio 509 Group
Accident and Sickness Trust.
[97] It would appear from these provisions, and the
stipulation in clause 1(o) of each of the trusts that the termination date is
100 years following the date of the declaration of trust, that the trust property
could not revert to the appellant. It is clear, however, from the evidence of
Mr. Filoso and Mr. Johnston that the appellant did not intend that on a
winding-up of the plan, $1.25 million, plus any subsequent accretions, would pass
to some unnamed charity.
[98] Questioned as to what would take place upon a voluntary
winding-up of the plans by resolution of the directors of the appellant,
Mr. Johnston clarified the real intentions of the appellant:
THE WITNESS: So we would
wind the plan up, and all the assets would be surplus. At that point, the trust
would have to be amended to name who would get - - you’d have to do amendments
to the trust in order to name who would get the surplus.
So you unlock the surplus at that point, if there is
any, and you would name whoever could get it, which would – you know, the
intention – because when you wind the plan up, GASP does an automatic
re-inclusion of the amount deducted by the employer, because the assumptions
that were made of disability proved incorrect, didn’t pan out.
So GASP – and there’s a number of other scenarios
where, you know, assumptions are made that don’t pan out. So if it doesn’t pan
out, then it’s my understanding – I’m not an accountant, but GASP would require
a re‑inclusion of that back into the hands of the employer.
So the employer should get the money back, but that requires
an amendment, sir, to the – Your Honour, to the trust.
JUSTICE BOWIE: Which, the protector and the trustee
can do that?
THE WITNESS: Correct. And that’s the intention.
JUSTICE BOWIE: Or if there’s
no amendment – well, if the money goes to charity.
THE WITNESS: Correct, but
that certainly wasn’t the intention or the spirit of it.
JUSTICE BOWlE: Okay, I guess
as long as the protector and the trustee - -
ANSWER: Correct.
JUST BOWIE: - - aren’t
very fond of the Bermudian Red Cross, then the money can –
THE WITNESS: Correct. Absolutely,
and it’s totally up to them. It’s not up – the legal responsibility is on the protector
and the trustee.
[99] Mr. Filoso’s evidence was to the same effect:
Q. Was
it your understanding that you could wind up the plan, should it be your decision?
When I say you, I apologize. I mean MCI.
A. I
guess, if we became deceased, the plan could be wound up. I guess that we could
do that. Or, for whatever other reasons I guess we could have.
Q. Financial
difficulties?
A. I
don’t know that we would have done it for that. I don’t know what the
parameters would have been for us to wind up the plan.
Q. Turn
to page 5 of the same tab, paragraph 6, under Termination Date. Did you read
this paragraph with Mr. Johnston?
A. As
I just said, I can’t specifically remember reading each paragraph with Mr.
Johnston.
Q. Did
you discuss what might happen to the funds, should you choose to wind up the
plan?
A. My
understanding, as I have mentioned earlier, is that if the plan was would up,
that the funds would come back to Marcantonio and would be treated as income to
Marcantonio.
Q. Did you ever anticipate
that it might go to charity instead?
A. I
can’t say that. Our intent was to use the plan for its intended purpose. That
was our intent was to use the plan for what it was set up to do. I can’t say
that I went through every other case that could have possibly happened, no.
[100] No doubt, Mr. Filoso’s assertion that “[o]ur intent was
to use the plan for its intended purpose … to use the plan for what it was set
up to do” was intended to mean that the plan was simply established to provide
himself and Giuseppe Marcantonio with disability, medical, dental and
vision benefits. I think it extremely likely that if that were the true
intention that it would have been done by establishing a plan to which the
appellant was the only contributor and its two shareholder/directors were the
only persons admitted or admissible. Considering all the evidence, I think it
much more probable that the appellant’s true intention was to accumulate wealth
in a tax-free jurisdiction until such time as it was expedient to return the
trust property to the appellant in Canada, albeit on a taxable basis, at that later time. Tax deferral, in other
words, was the objective.
[101] For the foregoing reasons, I conclude that the
appellant’s contributions to the trusts were not made for the purpose of
gaining or producing income, and that paragraph 18(1)(a) of the Act therefore
precluded deduction of those contributions in the computation of the
appellant’s income. I turn now to the question whether the Minister was entitled
to reassess the appellants as he did, after the expiry of the normal three-year
reassessment period.
[102] The respondent relies on both subparagraph 152(4)(a)(i)
and subparagraph 152(4)(b)(iii). In my view, the requirements of both
are satisfied and either one entitles the Minister to reassess.
[103] The appellant’s income tax return for the 1999 taxation
year is in evidence at Tab 6 of Exhibit A-1. Incorporated as part of that
return are the financial statements of the appellant for the year ended
December 31, 1999. The net income declared by the appellant is $198,483. This
amount is computed on Schedule 001 and the starting point for that computation
is the income before income taxes of $73,845, derived from the Statement of
Operations. The
largest overhead expense in that Statement of Operations is described as
Management Salaries - $920,220. This amount includes within it the $504,500
accrued contribution to the MGAS trust.
[104] Similarly, the net income declared by the appellant for
the 2000 taxation year is computed on Schedule 001 of the return, and the
starting point for it is the net income of $263,279 derived from the Statement
of Operations. The
Management Salaries expense is shown there to be $1,355,950 of which $709,500
is the accrued contribution to the 509 trust.
[105] Thus, the appellant claimed to deduct the two amounts of
$544,500 in 1999 and $709,500 in 2000 by describing them as management salaries.
For the reasons I have given, I find that these two amounts were not amounts
that could properly be deducted from the appellant’s income at all.
[106] The failure of the appellant to disclose in its returns
for 1999 and 2000 the very large accruals to these two purported employee
health and welfare plans must be considered in the light of Mr. Johnston’s
advice given to Mr. Filoso, who was the appellant’s officer responsible for
financial and taxation matters, including signing and filing the corporation’s
returns. In his two letters of opinion (Exhibit A-1, Tabs 18 and 19), which are
virtually identical, he states, after discussing his own and Revenue Canada’s divergent views as to the
validity of these deductions:
[The Revenue Canada] opinions are not based on law
and as a result, do not have force of law. They do, however, indicate that
Revenue Canada would challenge the GASP should they be made aware of it.
These letters were written after the income tax returns for
1999 and 2000 had been filed, but Mr. Johnston had given essentially the same
advice to Mr. Filoso when the establishment of these trusts was first discussed
with him in 1999.
[107] Viewed in that light, the failure of the appellant to
disclose that more than $500,000 in 1999 and more than $700,000 in 2000 was
being deducted from income on account of accrued liabilities to the MGAS and
509 trusts is nothing less than deliberate misrepresentation. Mr. Filoso, in
his evidence, took the position that the income tax returns were prepared by
qualified and experienced accountants, and that he simply relied on their
advice in signing them. However, the officer signing the income tax returns
cannot avoid his obligation in this way. He must:
… demonstrate a reasonable effort on his part in the
circumstances and within his own framework of comprehension and competence to understand
the component elements of that final result.
Mr. Filoso admitted in
his evidence that when signing the appellant's income tax returns he did no
more than take a quick look through them. This is not adequate care in any
circumstances. In this case he clearly knew that the amounts in question were
being deducted as that was central to the decision to contribute them to the
trusts in the first place, and he knew too that Revenue Canada, if it knew
about them, would almost certainly consider them to be amounts that were not
deductible. Taxpayers are, of course, entitled to claim as deductions items as
to which they and the Minister hold different views, but they are not entitled
to do it in a way that conceals from the Minister the fact that the deduction
has been claimed. The taxpayer knows of the issue between them, and the
Minister is entitled to know of it too. To conceal it in the way that the
appellant did here is more than negligence or carelessness. It is wilful
default, and it entitles the Minister to reassess beyond the normal time for
doing so.
[108] The Minister’s reassessments of MCI are also authorized
by subparagraph 152(4)(b)(iii) as they are consequent upon transactions:
… involving the taxpayer and a non-resident person
with whom the taxpayer was not dealing at arm’s length.
My conclusion that the taxpayer had the power to, and did,
effect the change of the trustee from Continental Trust to Landmark Trust must
lead to the conclusion that MCI and the trustee did not deal with each other at
arm’s length.
[109] Ms. Kamin argued that subparagraph 152(4)(b)(iii)
was enacted specifically to apply to transfer pricing cases, and cited the June
1987 White Paper on Tax Reform in support. The legislative history may of course,
shed light on the true intended meaning of ambiguous legislation. Where the
statutory language applies to the facts of the case, however, then the plain
words must be given their full effect.
other grounds
[110] The respondent has
pleaded numerous other grounds upon which she contends that the assessments may
be sustained. In view of my conclusion that the contributions to the trusts in
each of these cases were not made for the purpose of gaining or producing
income I do not propose to deal with each of the alternatives. I will, however,
address the respondent’s argument that the plans and the trusts were shams, and
therefore should be ignored for tax purposes.
[111] In each of these
three cases the respondent has alleged that the trusts and the plans were
shams. In the Labow appeals sham was pleaded as an assumption made by
the Minister in assessing, based on four facts said to have been assumed. These
are found in subparagraph 16(n) of the Further Amended Reply:
Sham
n) the
Plan was a sham for the following reasons;
i)
the Appellant still held the funds;
ii) the Appellant never had the intention of creating an insurance
plan;
iii) the
Plan was created to produce a deduction;
iv) the
Plan did not pay any benefits during the relevant period;
The
definition of sham that is generally accepted for purposes of taxation law is
that of Diplock, L.J., found in Snook v. London and West Riding Investments
Ltd.:
As regards the
contention of the plaintiff that the transactions between himself,
Auto-Finance, Ltd. and the defendants were a "sham", it is, I think,
necessary to consider what, if any, legal concept is involved in the use of
this popular and pejorative word. I apprehend that, if it has any meaning in
law, it means acts done or documents executed by the parties to the
"sham" which are intended by them to give to third parties or to the
court the appearance of creating between the parties legal rights and
obligations different from the actual legal rights and obligations (if any)
which the parties intend to create. One thing I think, however, is clear in
legal principle, morality and the authorities (see Yorkshire Railway Wagon
Co. v. Maclure (16); Stoneleigh Finance, Ltd. v. Phillips (17), that
for acts or documents to be a "sham", with whatever legal
consequences follow from this, all the parties thereto must have a common
intention that the acts or documents are not to create the legal rights and
obligations which they give the appearance of creating. No unexpressed
intentions of a "shammer" affect the rights of a party whom he
deceived. …
[112] As to the first of
the factual allegations, the evidence shows clearly that the trustee held the
funds, although the appellant did control the trustee through his power of
removal and replacement given in the trust deed. As to the second, it turns on
the question whether a one employer plan, or a multi-employer plan under which
each employer’s employees have access only to that employer’s segregated fund
to satisfy their claims, can properly be described as an insurance plan. As to
the third allegation, I do not accept Dr. Labow’s evidence on that point, and
it is therefore not shown to be an incorrect assumption by the Minister. The
fourth assumption is clearly correct. However, none of this necessarily brings
the trust and the plan within the Snook definition of a sham, because it
does not show that Dr. Labow and the trustee shared a common intention that the
documents not create the legal rights and obligations that are set out in them.
[113] In the cases of
Tanaschuk and MCI the allegations of sham are pleaded not as being based on
facts assumed by the Minister in assessing, but as an alternative ground in
support of the assessments added by the Deputy Minister of Justice in pleading.
The respondent therefore bears the onus of proof regarding sham in those cases.
In the Amended Reply in the Tanaschuk case it is pleaded this way in
paragraph 21:
21
The purported creation of the Trust and Plan relied upon by the
Appellant was a sham, in that it was intended to give the appearance of
creating between the parties legal rights and obligations different from the
actual legal rights and obligations, if any, which the parties intended to
create, because the parties to that Trust and Plan did not intend that
the funds subject to it were to provide any benefits to the Appellant’s
employees, but were rather intended to be available for the future use of the
Appellant and his spouse in her personal capacity.
In the Further Amended Reply in the MCI appeals
the pleading is similar:
19 In the further alternative, the Trusts
and Plans were shams, in that they were intended to give the appearance
of creating between the parties legal rights and obligations different from the
actual legal rights and obligations, if any, which the parties intended to
create, because the parties to the Trusts and Plans did not intend that the
funds subject to them were to be used to provide any benefits to the
Appellant’s employees, but were rather intended to be available for the future
use by the Appellant or its shareholders.
The
evidence is far from clear that the trusts and the plans in these cases were
not intended to create the legal relations that they appear to create. I have
found that the appellants intended that the funds would be “repatriated” at
some time, but that does not preclude the possibility that the trustee might receive
and honour claims in the meantime. It is not clear from the evidence how, or on
what authority, Mr. Johnston thought that the trusts could be amended if
the plans were to be wound up at some future time. He was not asked to explain
this, and he did not do so. The proper law of the trusts according to their
express terms is the law of Bermuda, and neither party called any evidence as
to the applicable Bermudian law. I note, too, that under the terms of the
trusts in the Tanaschuk and MCI appeals the trustee, with the
consent of the protector, or the enforcer in the case of MCI, may change
the proper law of the trust to that of some other jurisdiction of its choosing.
All these circumstances make me disinclined to express any conclusion as to the
sham issue.
[114] The respondent also
advanced as alternatives a number of other grounds in support of the
reassessments, but in view of my conclusion with respect to paragraph 18(1)(a)
of the Act it is not necessary to deal with these.
[115] The appeals of all
the appellants for all the years under appeal are dismissed. The respondent is
entitled to costs, including a counsel fee for two counsel for 10 days of
trial. If the parties are unable to agree as to the apportionment of the
liability among the appellants, or as to the appropriate disposition of costs
in the appeals of Guiseppe Marcantonio and Domenico Filoso that were allowed on
consent at the beginning of the trial, then they may each file written
submissions, not to exceed six pages.
Signed at Ottawa, Canada, this 6th day of August, 2010.
"E.A. Bowie"
Email this Content