Date: 20000113
Docket: 1999-1429-IT-G
BETWEEN:
SAFETY BOSS LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman, J.T.C.C.
[1] These appeals concern two assessments under Part I of the
Income Tax Act for the 1991 and 1992 taxation years as
well as an assessment under Part XIII of non-resident withholding
tax and penalties.
[2] In 1991, the appellant paid a bonus to its president and
99% shareholder, Mr. Michael Miller, who at the time was a
non-resident of Canada. In 1992, it paid a fee to Mr.
Miller's non-resident company. The Minister of National
Revenue disallowed a portion of the bonus paid to Mr. Miller and
of the fee paid to his company on the basis that these amounts
were in excess of the amounts that would have been reasonable had
the parties been dealing at arm's length. In addition, the
Minister treated the amount disallowed as a benefit conferred on
Mr. Miller and accordingly imposed non-resident withholding
tax and a penalty. The issue is whether the Minister was right in
doing so.
[3] The appellant carries on the business of oilfield
firefighting and the capping of blow-out oil and gas wells. Its
fiscal period is August 31.
[4] Michael Miller is an oilfield firefighter. At the time of
the trial he was 55 years old. During the years in question he
was the president and chief executive officer of the appellant,
as well as the owner of 99% of the shares. He bought the company
from his father in 1979. It had been a family company since 1956.
He has had many years of experience in the oil and gas business
and in fighting oil well fires throughout the world. One example
of a large fire that he worked on was the blow-out at Lodge Pole
which burned for 67 days. In 1983, he fought two fires on
offshore rigs off the coast of Iran.
[5] After Mr. Miller's acquisition of Safety Boss in 1979,
the company went through a period of extreme financial difficulty
for about 10 years, probably as the result of the National Energy
Program, which had a devastating effect on the oil and gas
industry in western Canada. Mr. Miller was forced to sell all of
his oil and gas reserves and borrow money simply to keep the
business afloat.
[6] The business of fighting oil and gas well fires is
dangerous in the extreme. It requires extraordinary skill,
endurance and courage. Mr. Miller is the one person who
predominantly contributed to the success of the company.
[7] The following paragraphs in the notice of appeal are
admitted by the respondent:
6. Miller had over 30 years of oilfield experience including
significant experience outside Canada and in particular, in the
Middle East.
7. Miller had developed skills and a personal reputation
worldwide as a person capable of dealing with the most adverse
oil and gas fires. His reputation was particularly strong in the
Middle East because of work he had done in that region.
8. At all relevant times, Miller's duties in connection
with the Business included undertaking all strategic planning,
direct responsibility for negotiating all contracts with
customers and for maintaining good relationships with suppliers,
responsibility to ensure that the contracts of the Business were
completed to an appropriate standard, responsibility for
management of day to day operations for all oilfield firefighting
activities, recruitment of all personnel, purchasing of all
supplies necessary to carry out contracts, and arranging for all
financial aspects pertaining to the Business.
9. Any goodwill of the Appellant in relation to the Business
was attributable to the personal reputation and capabilities of
Miller.
[8] In addition to the above admissions, the following
allegations in the notice of appeal are substantially admitted by
the respondent and, to the extent that they are not admitted,
they have been amply proved in the viva voce evidence:
10. At the end of the 1991 war between Iraq and Kuwait
("Gulf War") the retreating Iraqi troops exploded and
ignited 731 oilwells in Kuwait, creating an ecological disaster
of a magnitude several times greater than anything previously
experienced by mankind.
11. This carnage created by the retreating Iraqi troops had
been anticipated by the Kuwaiti government. By virtue of
Miller's prior personal contact with officials of the Kuwait
Oil Company, his reputation and the work previously undertaken by
him, on February 28, 1991, the Government of Kuwait entered into
an agreement with Miller's company, the Appellant, to
extinguish oilwell fires which were expected to be ignited by the
retreating Iraqi troops. Shortly after the termination of the
Gulf war, the Appellant began performing its contractual duties
in Kuwait.
12. The work undertaken by the Appellant and its staff in
Kuwait was incredibly difficult and dangerous. Miller provided
the extraordinary motivational leadership which sustained the
employees of the Appellant and enabled the Appellant to perform
and complete its contract in Kuwait.
13. The unique hazardous circumstances of the work provided
Miller an opportunity to apply certain original concepts he had
devised for battling oilwell fires. This innovation allowed the
Appellant to extinguish more fires than any other team active in
the Kuwait operation.
[9] Part of the evidence of devastation created by the
retreating Iraqi troops by their blowing up and igniting oil
wells was adduced by means of photographs and videos. It is
difficult to describe the magnitude of the disaster, or of the
task that was undertaken by the appellant under the leadership of
Mr. Miller.
[10] Three other oilfield firefighting companies, all Texas
based were involved: the famous Red Adair's company, Boots
& Coots and Wild Well Control. In addition to all of the
other difficulties that he encountered, Mr. Miller had to put up
with the arrogance and bullying of the Texans, who resented the
intrusion of a Canadian company on what they regarded as their
exclusive bailiwick.
[11] There is no doubt that the contract with Kuwait was
obtained through Mr. Miller's initiative and contacts,
as well as his reputation and skill. There is equally no doubt
that his innovations contributed substantially to the success of
the company. Some of these innovations included mobile monitoring
sheds, huge fire trucks, the use of foam or water as opposed to
explosives, a crane attached to mobile vehicles for use in
inserting a "stinger" into a burning oil well, the
purpose of which was to draw off and ultimately extinguish the
burning oil, and the design of a wide tracked vehicle, the
purpose of which was to separate burning wells from those that
had been extinguished. It was in part as the result of
Mr. Miller's innovations that the appellant capped 180
wells — more than any one else, including the three Texas
companies, even though the appellant arrived several weeks after
the Texans. Mr. Miller's operation was fundamentally
different from that of the Texas companies and this may account
for his success, as well as for the fact that, after the fires
were all put out, the appellant was asked to remain in Kuwait to
do clean up work, whereas the Texans were not. In fact, the fires
were put out in a matter of months, not, as anticipated
originally, years.
[12] It is clear on the facts that the substantial earnings of
the appellant from this work in Kuwait was the direct result of
Mr. Miller's leadership, initiative, intelligence and
business acumen. In saying this, I do not in any way mean to
minimize the skill and courage of the men whom he hired to work
under him. The heat, danger, and gruelling conditions under which
they all worked were indescribable. It was however, Mr. Miller
who inspired them to do so. For this he was awarded the Order of
Canada and was named Oilman of the year by Oilweek magazine.
[13] So much then for the somewhat dramatic background to this
income tax appeal.
[14] On June 28, 1991 Safety Boss International Limited
("SBIL") was incorporated under the laws of Bermuda.
Mr. Miller acquired 11,996 of the 12,000 issued shares. On August
2, 1991 he moved to Bermuda. It is admitted that he became a
non-resident of Canada and became a resident of Bermuda.
[15] On August 30, 1991, the appellant declared a bonus to Mr.
Miller of $3,000,000, and deducted it in computing its
income.
[16] The resolutions of the sole director of the appellant
read as follows:
WHEREAS the Company has benefited greatly through the efforts
of Michael J. Miller, its President, in obtaining, negotiating
and performing the contract with the Government of Kuwait.
AND WHEREAS without the expertise and efforts of its President
the Company would not have acquired the contract or have been in
a position to benefit from it.
AND WHEREAS the Company wishes to recognize in a tangible way
the significant contribution of its President.
NOW THEREFORE BE IT RESOLVED that a bonus in the amount of
$3,000,000.00 be declared to Michael J. Miller effective August
30, 1991.
RESOLVED FURTHER that the bonus be paid within 180 days of the
fiscal year end of the Corporation.
RESOLVED FURTHER that the bonus be deemed to have been earned
by Mr. Miller pro rata from February 28, 1991 to August 30,
1991.
RESOLVED that the officers and directors of the Corporation be
and they are hereby authorized to execute and deliver all
necessary documents, agreements and other papers which may be
requisite or necessary to fulfill the full intent and meaning of
this resolution.
Dated at Al Ahmadi, Kuwait, this 30th day of August, 1991.
[17] The recitals are fully supported by the facts.
[18] The bonus was paid to Mr. Miller before the end of
December 1991. He declared $2,513,513 as income earned in Canada
and subject to Canadian tax, and excluded $486,487. The portion
of the bonus declared by him was arrived at as follows:
155 X $3,000,000 = $2,513,513
185
[19] The precise rationale for this particular method of
allocation was not made particularly clear. The denominator (185)
is roughly the number of days between February 28 and August 30.
The numerator (155) is roughly the number of days in 1991 between
the February 28 and August 2, the day Mr. Miller became a
non-resident. The exact basis of the figure is not particularly
germane to this case, but it is noteworthy that the appellant, on
the advice of his accountant, Mr. Duncan Moodie, adopted a
most conservative position and, notwithstanding his residency in
Bermuda when the bonus was received, declared as subject to
Canadian tax almost 84% of the bonus.
[20] The Minister did not seek to tax Mr. Miller on the
$486,487. Rather, he disallowed a portion of it, $418,987, on the
theory that only $67,500 was a reasonable amount within the
meaning of subsection 69(2) of the Income Tax Act.
[21] The second issue has to do with a fee of $800,000 per
month paid by the appellant to SBIL. On August 30, 1991 Mr.
Miller resigned as president and director of the appellant and
commenced an exclusive employment contract with SBIL, under which
SBIL was to pay him $800,000 per month. On September 1, 1991, the
appellant and SBIL entered into an agreement under which SBIL was
to render services to the appellant for a consideration of
$800,000 per month. As a term of that contract SBIL agreed to
make the services of Mr. Miller available to the appellant.
[22] By November 14, 1991 the fires in Kuwait had been put out
and the appellant's contract with Kuwait came to an end and
the appellant stopped paying SBIL the amounts specified in the
contract. The appellant paid SBIL $800,000 for each of the months
of September and October, 1991 and $373,333 for the 14 days
in November, for a total of $1,973,333.
[23] Of this amount, the Minister allowed as a deduction in
computing the appellant's income for the taxation year ending
August 31, 1992 only $126,000, on the basis that any amount in
excess of this figure that was paid for Mr. Miller's
services was unreasonable.
[24] The Minister treated the amounts of $418,987 and
$1,847,333 disallowed in 1991 and 1992 as benefits conferred by
the appellant on Mr. Miller and subject to withholding tax. He
also imposed a penalty under Part XIII of the Act.
[25] The provision of the Act that is central to the
Crown's position is subsection 69(2) which reads:
(2) Unreasonable consideration. — Where a taxpayer has
paid or agreed to pay to a non-resident person with whom he was
not dealing at arm's length as price, rental, royalty or
other payment for or for the use or reproduction of any property
or as consideration for the carriage of goods or passengers or
for other services, an amount greater than the amount (in this
subsection referred to as "the reasonable amount") that
would have been reasonable in the circumstances if the
non-resident person and the taxpayer had been dealing at
arm's length, the reasonable amount shall, for the purpose of
computing the taxpayer's income under this Part, be deemed to
have been the amount that was paid or is payable therefor.
[26] It is interesting, although perhaps not significant, that
the Minister relied upon subsection 69(2), but not on section 67.
Section 67 allows as a deduction of an outlay or expense only
"to the extent that the outlay or expense was reasonable in
the circumstances."
[27] "Reasonable" in section 67 is a somewhat
open-ended concept requiring the judgement and common sense of an
objective and knowledgeable observer. "Reasonable
amount" in subsection 69(2) as between non-arm's length
persons, is essentially defined as an amount that would have been
reasonable in the circumstances had the non-resident and the
taxpayer been dealing at arm's length.
[28] If there is a difference between the concepts in the two
provisions it is not readily apparent.
[29] If the amounts paid by the appellant to Mr. Miller and
SBIL are not "reasonable amounts" within subsection
69(2), the disallowance of the excessive payments follows
inevitably.
[30] The other two consequences — the withholding tax
and the penalties — are less clear. In light of the
conclusion that I have reached on the main issue it is
unnecessary that I deal with these subsidiary issues, but out of
deference to the submissions made by both counsel, I shall touch
briefly on them.
[31] If the amounts paid are unreasonable the excessive
amount, on the Minister's view, is a benefit conferred by the
appellant on Mr. Miller, a shareholder within subsection 15(1). I
should think this argument would be difficult to resist in the
case of the bonus if it is unreasonable. If it is a benefit under
subsection 15(1), subsection 214(3) would deem it to be a
dividend paid by a corporation resident in Canada where it is a
benefit conferred on a non-resident shareholder, taxable under
subsection 212(2) and subject to the requirement of withholding
by the resident payor under subsection 215(1).
[32] However, in the case of the disallowed fee of $1,847,333
paid to SBIL in the 1992 taxation year, counsel argues that the
benefit, if any, was conferred not on the shareholder, Mr.
Miller, but on his company, SBIL. He contends that to treat an
unreasonable or excessive payment to SBIL as a benefit conferred
on its sole shareholder would constitute an unwarranted piercing
of the corporate veil. While I express no concluded view on the
matter, because I do not need to, I should have thought as a
matter of common sense that the conferral of a benefit on a
corporation, all of the shares of which are owned by a taxpayer,
would constitute a benefit conferred on the taxpayer. It
increases the value of the taxpayer's shareholding in the
corporation that receives the benefit and allows the corporation
to make payments to the shareholder that it could not otherwise
do.
[33] The second subsidiary issue touched on by counsel for the
appellant is the matter of penalty. Subsection 227(8) reads:
(8) Subject to subsection (8.5), every person who in a
calendar year has failed to deduct or withhold any amount as
required by subsection 153(1) or section 215 is liable to a
penalty of
(a) 10% of the amount that should have been deducted or
withheld; or
(b) where the person had at the time of the failure
been assessed a penalty under this subsection in respect of an
amount that should have been deducted or withheld during the
year, 20% of the amount that should have been deducted or
withheld.
Paragraph (b) was amended in 1994, applicable after
1992 to read:
(b) where at the time of the failure a penalty under
this subsection was payable by the person in respect of an amount
that should have been deducted or withheld during the year and
the failure was made knowingly or under circumstances amounting
to gross negligence, 20% of that amount.
[34] Counsel for the appellant contends that the 10% penalty
which was imposed in this case under paragraph 227(8)(a)
is one of strict as opposed to absolute liability and he relies
upon Consolidated Canadian Contractors Inc. v. Canada,
[1998] G.S.T.C. 91 and Pillar Oilfield Projects Ltd. v.
Canada, [1993] G.S.T.C. 49.
[35] Counsel for the respondent submits that in light of
paragraph 227(8)(b), which imposes a higher penalty where
a failure to withhold was made knowingly or under circumstances
amounting to gross negligence, the inference to be drawn is that
the penalty under 227(8)(a) is automatic and absolute and
that no defence of due diligence is available. While I need not
decide the point in this case, I question the correctness of this
proposition, even if the amended version of
paragraph 227(8)(b) applied. I do not think it is
supported by Consolidated Canadian Contractors. Section
285 of the Excise Tax Act contains a more severe penalty
where false statements are made knowingly or under circumstances
amounting to gross negligence and this did not displace the
existence of a defence of due diligence under section 280.
[36] I turn now to the principal issue — whether the
bonus paid to Mr. Miller or the fees paid to SBIL were
"greater than the amount that would have been reasonable in
the circumstances if the non-resident person and the taxpayer had
been dealing at arm's length" within the meaning of
subsection 69(2).
[37] I begin by observing that it is passing strange that so
long as Mr. Miller was a resident of Canada, the Minister did not
question the reasonableness of remuneration paid to him. The 84%
of the bonus allocated by Mr. Miller and his accountant to Mr.
Miller's income taxable in Canada was evidently quite
reasonable in the eyes of the Minister. It was only the 16%
portion, $486,487, allocated to him as a resident of Bermuda,
that caught the Minister's attention. No doubt there is a
practical rationale for what must appear to be a somewhat
anomalous and inconsistent approach by the Minister. The
justification is presumably that so long as the remuneration was
fully taxable in Mr. Miller's hands the deduction by the
company did not result in any loss to the fisc. This position is
understandable but it must be emphasized that the reasonableness
of an expense is not affected by the question whether the amount
is taxable in the hands of the recipient.
[38] The assessment is based on the view that Mr. Miller's
remuneration, whether in the form of the bonus in 1991 or through
the fees paid to SBIL in 1992, should not exceed $2,250 per day
when he was in Kuwait and $750 per day when he was not. The
$2,250 figure was simply $1,500 per day that was paid to another
employee who acted as team leader plus an additional $750 per day
for any managerial duties performed by Mr. Miller.
[39] The premises that form the foundation of the assessments
and the assessments themselves are flawed for a number of
reasons:
(a) They fail to take into account the fact that the existence
of the contract with Kuwait and its fulfilment were attributable
to Mr. Miller. However competent the other employee may have been
he was nonetheless an employee of Mr. Miller's company whom
Mr. Miller hired and directed. That employee did not, to put it
colloquially, bring in the business. He participated in
performing the work that Mr. Miller brought in. To relegate Mr.
Miller to the position of just another employee, when he was the
driving force behind the company without which neither the
company nor its contract with Kuwait would have existed, is both
demeaning to Mr. Miller and commercially unrealistic.
(b) The assessments fail to take into account the years in
which Mr. Miller struggled to keep the company afloat during the
lean years, and in which he accepted no or reduced remuneration.
Indeed, the Minister sought to justify the assessments for 1991
and 1992 by referring to the remuneration Mr. Miller received in
the earlier lean years. I should have thought that precisely the
opposite inference ought to be drawn.
(c) The justification advanced for ignoring the fact that Mr.
Miller was the person who single-handedly brought in the business
is that when he was paid the bonus in 1991 and when his company
was paid a fee of $800,000 per month for about 2½ months
in 1992, the contract was already in place, and therefore what he
did in the past to bring about the company's profits was
simply past history and could have no bearing on what he was to
be paid when, as the result of his efforts, the company was in a
position to pay him amounts that were commensurate with his
contributions to its profits. This theory is not sustainable,
either as a matter of commercial practice or of common sense. It
is quite common to reward valued employees in profitable years in
recognition of services rendered in prior years. In any event,
the contract with Kuwait was entered into in 1991.
(d) What seems obvious to me — and it was evidently not
obvious to the departmental officials — is that the
substantial amounts paid by Kuwait to the Appellant were paid
because of Mr. Miller. It was he who predominantly contributed to
the appellant's profits. He was the rainmaker.
[40] It is interesting to note that in a memorandum dated
December 12, 1994 to the Calgary office of the Department of
National Revenue from the head office, it was accepted that a
withholding tax on the fees under paragraph 212(1)(a)
(management or administration fee or charge) could not be
sustained because of paragraph 212(4).
[41] The memorandum of December 12, 1994 reads in part as
follows:
You have asked for our comments on two possible approaches.
Your first approach would be to apply a 25% withholding tax to
the management fees paid by SBL to Safety Boss International Ltd.
(SBIL). You feel that paragraph 212(4)(b) is not applicable using
the same logic as in the Peter Cundill & Associates Ltd.
case. I have reviewed this case it deals with a paragraph
212(4)(a) exclusion and not a paragraph 212(4)(b) exclusion. Thus
it is our opinion that the Peter Cundill case does not deal with
the same issue as your case. It appears that the taxpayer has
clearly shown that the paragraph 212(4)(b) exclusion is
appropriate and thus no Part XIII tax should be assessed. The
only situation that paragraph 212(4)(b) would not be appropriate
is if the management fee was not reasonable in the circumstances
in which case the 25% withholding tax would be applicable. With
regards to your second approach, we make the following
comments:
The facts are well laid out in Felesky Flynn's letters of
July 18, 1994 and October 24, 1994. SBL made two separate types
of payments for services rendered to it for work on the Kuwait
fire contract. I will deal with each separately.
1. SBL declared a bonus for its fiscal year ended August 31,
1991 in favour of Mr. Miller in the amount of $3,000,000. It was
in connection with Mr. Miller's efforts on the Kuwait
project. Mr. Miller was a resident of Canada for most of this
time and all but $486,587 was reported by Mr. Miller on his 1991
T1. For this reason, I do not feel it is worth while to pursue
the reasonableness of this payment.
2. On September 1, 1991 SBL and SBIL entered into an agreement
whereby SBIL agreed to render services, including Mr.
Miller's services, to SBL in respect of SBL's contract
with the Government of Kuwait. SBL agreed to pay to SBIL, a fixed
fee of $800,000 per month based upon SBIL's obligation to pay
Mr. Miller remuneration of $800,000 per month. SBL expensed
$1,973,333 which covered the 2½ month period ending
November 14, 1991. SBL does not deal at arm's length with
SBIL and thus the management fee must be the reasonable amount as
per subsection 69(2). In order to determine the reasonable
management fee, we suggest that the following steps be taken.
[42] I shall not reproduce the remainder of the memorandum. It
contains a number of suggestions, all of which were ignored by
the Calgary office.
[43] Paragraph 212(4) reads:
(4) For the purpose of paragraph (1)(a),
"management or administration fee or charge" does not
include any amount paid or credited or deemed by Part I to have
been paid or credited to a non-resident person as, on account or
in lieu of payment of, or in satisfaction of,
(a) a service performed by the non-resident person if,
at the time he performed the service
(i) the service was performed in the ordinary course of a
business carried on by him that included the performance of such
a service for a fee, and
(ii) the non-resident person and the payer were dealing with
each other at arm's length, or
(b) a specific expense incurred by the non-resident
person for the performance of a service that was for the benefit
of the payer,
to the extent that the amount so paid or credited was
reasonable in the circumstances.
[44] Paragraph 212(4)(b) is not restricted to arm's
length transactions. All that is required to exclude a fee paid
to non-residents from the ambit of
paragraph 212(1)(a) is that it be in satisfaction of
a specific expense incurred by the non-resident for the
performance of a service that was for the benefit of the payor
and that the amount paid be "reasonable in the
circumstances".
[45] Counsel for the appellant asks in effect: If the Minister
accepts that the fees paid to SBIL are reasonable for the purpose
of subsection 212(4), why do they become unreasonable for the
purpose of subsection 69(2)? I agree there is an inconsistency
here. Income tax appeals are not, however, won solely by
demonstrating inconsistencies in the reasoning of the
departmental officials. They are won by demonstrating that an
assessment is objectively wrong, whether factually or
legally.
[46] Counsel also suggests that subsection 212(4) is more
specific than subsection 69(2), and that therefore subsection
212(4) would exclude the application of section 69(2) on the
principle of generalia specialibus non derogant and that
if the department accepts that 212(4) does not apply, it cannot
then apply subsection 69(2). In light of the conclusion I have
reached, I need not express a concluded view on this point, but I
should have thought that the argument pushes the generalia
specialibus non derogant well beyond its purpose as an aid to
construction.
[47] Subsection 69(2) is aimed at denying under Part I the
deduction of unreasonable payments to non-arm's length
non-residents. Subsection 212(4) is intended to exclude certain
payments from paragraph 212(1)(a). The purpose of the two
provisions is so fundamentally different that it would be
pointless to try to ascribe predominance to one of them.
Moreover, the principle embodied in the Latin maxim is simply
that general words in a later statute should not be construed as
repealing the specific provisions of earlier statutes.
[48] While departmental practice is not determinative it is
sometimes useful to look at it, particularly where the assessment
in question is a departure from a beneficial and sensible
practice. In the 1981 Revenue Canada Round Table, the following
answer was given in response to a question relating to the
reasonableness of salaries and bonuses:
In general, the Department will not challenge the
reasonableness of salaries and bonuses paid to the principal
shareholders-managers of a corporation when
(a) the general practice of the corporation is to distribute
the profits of the company to its shareholders-managers in the
form of bonuses or additional salaries; or
(b) the company has adopted a policy of declaring bonuses to
the shareholders to remunerate them for the profits the company
has earned that are, in fact, attributable to the special
know-how, connections, or entrepreneurial skills of the
shareholders.
[49] Mr. Miller, as noted above, falls squarely within
paragraph (b) of the response.
[50] The determination of the amount of the bonus, the
allocation of 84% to Canada, and the amount of the fee were not
arbitrary decisions. Mr. Moodie, the accountant, made a conscious
effort to leave money in the company for future needs, and to
compensate Mr. Miller for his contribution to the profits.
[51] I revert to the question: Would it have been unreasonable
for an arm's length person to pay to Mr. Miller or SBIL the
amounts that the appellant in fact paid to them? One must not
ignore the fact that Kuwait — clearly at arm's length
with the appellant — in fact paid substantially more for
what were essentially Mr. Miller's services, including
his expertise, experience, know-how, reputation and managerial
skills. The appellant is essentially a one-man company, and,
although it had employees and equipment, it was in many ways a
one-man operation. Had Mr. Miller operated as a sole
proprietorship and received fees from Kuwait out of which he paid
salaries, wages and expenses, his income from the arm's
length source, Kuwait, would have been significantly greater. Yet
it could not have been suggested that Kuwait was paying an
unreasonable fee for his services.
[52] There have been numerous cases on the question of the
reasonableness of expenses. Essentially the determination is one
of fact. I shall refer to only one that sets out the principle
and that has been frequently cited: Gabco Ltd. v. M.N.R.,
68 DTC 5210. At page 5216 Cattanach J. said:
It is not a question of the Minister or this Court
substituting its judgment for what is a reasonable amount to pay,
but rather a case of the Minister or the Court coming to the
conclusion that no reasonable business man would have contracted
to pay such an amount having only the business consideration of
the appellant in mind. I do not think that in making the
arrangement he did with his brother Robert that Jules would be
restricted to the consideration of the service of Robert to the
appellant in his first three months of employment being strictly
commensurate with the pay he would receive. I do think that Jules
was entitled to have other considerations present in his mind at
the time of Robert's engagement such as future benefits to
the appellant which he obviously did.
[53] It has in my view been overwhelmingly established that
the bonus paid to Mr. Miller in 1991 and the fees paid in 1992 to
his company SBIL were fully commensurate with the services
rendered by Mr. Miller and were not in excess of the amounts that
it would have been reasonable to pay had the parties been at
arm's length.[1]
[54] The appeals for the 1991 and 1992 taxation years are
allowed and the assessments under Part I of the Income Tax
Act are referred back to the Minister of National Revenue for
reconsideration and reassessment to permit the deduction in
computing the appellant's income of the bonus paid to Mr.
Miller and the fees paid to Safety Boss International Ltd.
[55] The appeal from the assessment of non-resident
withholding tax under Part XIII of the Income Tax Act
made on October 1, 1998 is allowed and the assessment of tax,
interest and penalties is vacated.
[56] The appellant is entitled to its costs.
Signed at Ottawa, Canada, this 13th day of January 2000.
"D.G.H. Bowman"
J.T.C.C.
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