Edison LLC – Tax Court of Canada finds that a discretionary finder’s fee is not deductible

Two Florida LLCs of two Florida residents effectively had a joint venture to provide bussing services to the Olympic organizing committee for the 2010 Vancouver Olympics. A third LLC (“Edison”) was formed to provide many of the services. Although the documentation purported to make Edison’s key Canadian employee the owner of its shares, this was mere “window dressing” (to make it look like a separate enterprise in the eyes of the organizing committee), so that effectively the beneficial owner of Edison’s shares was one of the two Florida residents (Pouncey).

All of the estimated profits of Edison were made payable to Pouncey’s company pursuant to an agreement which was not prepared until the Olympics were finished. The rationale presented for the full deduction of this amount was that it was for support services provided by Pouncey’s company and for its services in procuring the Olympic contract work for Edison. CRA accepted the deduction of U.S.$400,000 of the fees as relating to support services provided. Pizzitelli J denied the deduction of the U.S.$2.1 million balance on numerous grounds, including that its amount was “discretionary,” stating:

[E]ven if I accept payment can be made for past services, there must at least be some agreement as to the quantum or calculation of such fee or commission in advance in the context of business in order to characterize such payments as such. It is in the very nature of these types of payments that they are calculable on some objective basis and not merely discretionary… .

Neal Armstrong. Summaries of Edison Transportation, LLC v. The Queen, 2016 TCC 80 under s. 18(1)(a) and General Concepts – Window Dressing.