Citation: 2007TCC618
Date: 20071016
Docket: 2004-2749(IT)G
BETWEEN:
HANMAR MOTOR CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bowie
J.
[1] This appeal is
from a reassessment for income tax for the taxation year 1999. In filing its
1999 return, the appellant claimed a loss carryforward from 1998. The Minister
of National Revenue reduced the amount of that carryforward by disallowing the
deduction in the 1998 taxation year of a payment in the amount of $252,297 made
by the appellant in settlement of a dispute under the Employment Standards
Act of Ontario (the ESA).
The appellant takes the position that it made the payment for the purpose of
gaining or producing income, and that it was a payment on current account, and
so is deductible in computing the appellant’s income under the Income Tax
Act (the Act) for the 1998 taxation year. The respondent’s position
is that the expenditure was capital in nature, or alternatively, if it was on
current account, that it was not made for the purpose of gaining or producing
income, and so it may not be deducted by reason of paragraph 18(1)(b),
or alternatively, paragraph 18(1)(a), of the Act.
[2] The appellant is
a manufacturer of motorized recreational vehicles of the kind known
colloquially as motor homes, and it operates in Kitchener, Ontario. At the
relevant time its shares were owned by Jeffrey Hanemaayer, and he and his
father, Jacobus Hanemaayer, were the only directors. Jeffrey Hanemaayer and
Jacobus Hanemaayer owned all the shares of Community Expansion Inc. (CEI), a
real estate holding company, and of 798894 Ontario Ltd. (798), which
manufactured non-motorized recreational vehicles. The appellant owned all the
shares of 1148346 Ontario Ltd. (114), an inactive holding company, and all the
shares of 930943 Ontario Ltd. (930).
[3] 930 was also a
manufacturer of non-motorized recreational vehicles, operating in Dunnville, Ontario. The
appellant had a very significant investment in 930, by way of both equity and
debt. It was managed, rather unsuccessfully, by a group of five directors who
were not otherwise related to the Hanemaayers. CEI
was, at the material time, the owner of premises in Dunnville that it leased to
930. 930 became insolvent and ceased operations in 1995, at which time CEI
exercised its right of distraint as landlord in respect of the machinery and
equipment of 930, much or all of which was subject to liens in favour of the
appellant to secure indebtedness of some $900,000. The circumstances under
which 930 ceased operations left its former employees with unsatisfied claims
for unpaid wages, including vacation pay, severance pay and termination pay.
[4] The unpaid
employees pursued the remedies available to them under the ESA, and on
July 4, 1996 Jody Easson, an Employment Standards Officer, made two Orders
under paragraph 65(1)(c) of the ESA requiring “the employer” to pay a total of $1,155,615.81 to the
former employees of 930. Ms. Easson later amended this amount to $1,077,361.13
by a letter sent to the solicitor for the persons named as employers in the
Orders.
[5] At
that time, the relevant part of paragraph 65(1)(c) read as follows:
65(1) Where an employment standards officer finds that an employee
is entitled to any wages from an employer, the officer may,
…
(c) issue an order in writing to the employer to pay
forthwith to the Director in trust any wages to which an employee is entitled
and such order shall provide in addition for payment by the employer to the
Director of a penalty of 10 per cent of the wages or the sum of $100, whichever
is the greater, …
Section
1 defined the term “wages” to include vacation pay and severance pay, and the
term “employer” was given the following expanded definition:
“employer”
includes,
(a) any owner, proprietor, manager, superintendent,
overseer, receiver or trustee of any activity, business, work, trade occupation,
profession, project or undertaking who has control or direction of, or is
directly or indirectly responsible for, the employment of a person therein, and
(b) any associated or related corporations, individuals,
firms, syndicates or associations treated as one employer under section 12,
where any one has control or direction of, or is directly or indirectly
responsible for, the employment of a person therein,
and includes a
person who was an employer;
Section
12 read:
12(1) Where before or after this Act comes into force,
associated or related activities, businesses, works, trades, occupations,
professions, projects or undertakings are or were carried on by or through more
than one corporation, individual, firm, syndicate or association, or any combination
thereof, and a person is or was an employee of any of such corporations,
individuals, firms, syndicates or associations, or any combination thereof,
such corporations, individuals, firms, syndicates or associations, or any
combination thereof, shall be treated as one employer for the purposes of this Act,
if the intent or effect of the arrangement is to defeat, either directly or
indirectly, the true intent and purpose of this Act.
12(2) The corporations, individuals, firms, syndicates or
associations treated as one employer shall be jointly and severally liable for
any contravention of this Act and the regulations.
The
“employer” was specified in the Orders to be 930943 Ontario Limited, Hanmar
Motor Corporation, Community Expansion Inc., 1148346 Ontario Limited, Mr.
Jeffrey Hanemaayer and Mr. Jacobus Hanemaayer. The named employers applied
under section 68 of the ESA for a review of the Orders. Before that
review was heard, a settlement was reached among the parties whereby the amount
to be paid was reduced from $1,077,361.13 to $252,297, and the named employers
agreed not to pursue the review of the Orders. On November 20, 1998, the
Ontario Labour Relations Board issued a consent Order to implement this
settlement. Before the end of the 1998 taxation year, the appellant satisfied
that Order by making the payment of $252,297 that is the subject of this appeal.
[6] The issue before
me is whether the amount of that payment may be deducted by the appellant in
computing its profit or loss for the 1998 taxation year under the Act.
Of course, any such consideration must take into account the prohibitions found
in paragraphs 18(1)(a) and (b). The relevant provisions of the Act
are:
9(1) Subject to this
Part, a taxpayer's income for a taxation year from a business or property is
the taxpayer's profit from that business or property for the year.
9(2) Subject to section 31, a taxpayer's loss
for a taxation year from a business or property is the amount of the taxpayer's
loss, if any, for the taxation year from that source computed by applying the
provisions of this Act respecting computation of income from that source with
such modifications as the circumstances require.
18(1) In computing the
income of a taxpayer from a business or property no deduction shall be made in
respect of
(a) an outlay or expense except to the
extent that it was made or incurred by the taxpayer for the purpose of gaining
or producing income from the business or property;
(b) an outlay, loss or replacement of
capital, a payment on account of capital or an allowance in respect of
depreciation, obsolescence or depletion except as expressly permitted by this
Part;
[7] I propose to approach the issues before me in the way
adopted by Bowman, A.C.J., as he then was, in International Colin Energy
Corporation v. The Queen.
He said there:
43 The approach outlined by Abbott J. [in
British Columbia Electric Railway Company Limited v. M.N.R., 58 DTC 1022
at pp. 1027-8] is one that has traditionally been followed. One first asks the
question "Was the payment made for the purpose of gaining or producing
income from a business or property?" If the answer is no the question
whether it is on capital account is irrelevant. If the answer is yes the
application of paragraph 18(1)(b) must be considered.
[8] The position of
the appellant, as it was pleaded in its Notice of Appeal and argued at trial,
is that it incorporated 930 in order to manufacture a product line that would
be complementary to the product it was manufacturing at its plant in Kitchener. Mr.
Hanemaayer testified that synergies arising from the co-ownership and operation
of the firms would work to the economic advantage of both, and I accept that as
being so. The argument, then, is that the appellant’s obligation to make the
payment was a legal obligation arising out of and in the ordinary course of the
ownership of the shares of 930, and so was an expense incurred in the course of
the appellant’s business. It is the latter leap of logic that I cannot
adopt.
[9] The Supreme
Court pointed out in Symes v. Canada
that although paragraph 18(1)(a) may be somewhat tautologous, given
that the computation of income or loss under section 9 is required is to be
carried out in accordance with well accepted principles of business practice,
it nevertheless is to be applied in accordance with its ordinary meaning. This
was reinforced some years later in Canderel Ltd v. Canada, where Iacobucci J.
said at paragraph 32:
… the
determination of profit under s. 9(1) is a question of law, not of fact.
Its legal determinants are two in number: first, any express provision of the Income
Tax Act which dictates some specific treatment to be given to particular
types of expenditures or receipts, including the general limitation
expressed in s. 18(1)(a), and second, established rules of law
resulting from judicial interpretation over the years of these various
provisions. (emphasis added)
In
the present context, then, the question becomes this: did the appellant incur
the obligation to make the payment for the purpose of gaining or producing
income, either from its manufacturing business, or from the ownership of the
shares of 930?
[10] The expense in
question here was incurred not only by the appellant, but also by its two
shareholders, its two subsidiaries 930 and 114, and the related company CEI.
There is no doubt that if the wages replaced by the payment had been paid by
930, then they would have been an expense of that company that it could
properly have taken into account in computing its income. Similarly, if 930 had
been in a position to satisfy the Order of the Employment Standards Officer, as
later negotiated down to $252,297, and had it done so, that payment would have
satisfied the joint requirements of section 9 and paragraph 18(1)(a), In
either of these events the amount would properly have been considered to be
compensation paid by 930 for the labour of the workers employed by it in the
production process, and so would have been deductible in the computation of
profit.
[11] The
same cannot be said of any other of the individuals or corporations that were
made liable for the payment by their inclusion in the Order as employers. Their
designation as employers is simply a statutory fiction created for the
financial protection of 930’s employees, and the fact that they are made liable
under provincial law for certain debts of 930 does not carry with it any
characterization of the debt, or of the payment of it, for commercial purposes.
Since the decision of the Supreme Court in British Columbia Power
Corporation v. M.N.R.
it has been clear that for an expenditure to be deductible, it need not be
shown to have a nexus with any specific revenue. It is sufficient that the
outlay in question is shown to have been made in the course of and for the purpose
of carrying out the business of the firm. Expenses for the evaluation of
takeover bids, and communications to shareholders in connection with them,
have been held to meet the test of paragraph 18(1)(a), because that is “… properly
a part of the carrying on of the company’s business of earning income …”. The test was put this way
by Wilson J. in Mattabi Mines Ltd. v. Ontario:
The only thing
that matters is that the expenditures were a legitimate expense made in the
ordinary course of business with the intention that the company could generate
a taxable income some time in the future.
In
my view the payment that the appellant seeks to deduct cannot meet that test.
The only evidence as to the reason for the inclusion of the appellant in the
Orders as an “employer” is this statement by the Employment Standards Officer
in an accompanying narrative:
Order to Pay
issued.
All companies
noted above were named on the Order to Pay subject to Section 1 and 12 of the
Employment Standards Act.
Jeffrey Hanemaayer
and Jacobus Hanemaayer are named personally on the Order to pay as they have
common control and ownership of all companies named above
Section 1
defines employer and section 12 relates to related activities, etc. being
treated as one employer.
Although
somewhat cryptic, this “narrative” does establish that the inclusion of the
appellant in the Orders to Pay derives not from any activity in the course of
operating its own business, but simply as an incident of its ownership of the
shares of 930, and as a consequence of it being one of the group of corporate
entities owned and controlled by Jeffrey Hanemaayer and Jacobus Hanemaayer. I
cannot discern even a remote connection between this payment, made under
compulsion of statute to compensate the workers of the related company 930 for
labour they performed for it, and the revenue earning process of the appellant.
Paying the workers of 930 is no part of the business of the appellant.
[12] I am not
overlooking the synergies that Mr. Hanemaayer referred to in his evidence, but
there can be no synergies after 930 has become insolvent and ceased operations,
as happened before this liability was incurred by the coming into existence of
the Order of the Employment Standards Officer. Even if any such synergies could
be said to have survived the insolvency of 930, the payment could not qualify
as an amount laid out for the purpose of gaining or producing income. At best,
it is a payment that the appellant was required by law to make as an incident
of its ownership of the shares of 930, together with 930’s inability to meet
its wage obligations. An Order under section 12 of the ESA can only be
made if the Officer has concluded that either the intent or the effect of the
arrangement among the persons named as employer was to defeat the intent of
that statute. In the present context, the intent of the ESA is to
protect the employees of 930 in respect of their right to wages as defined in
section 1. It is difficult to see how, in this context, a payment by the appellant
in satisfaction of the Order, as amended by the agreement, could, or could be
intended to, gain or produce income for the appellant from its business. It is
an outlay that was quite unconnected with the production of revenue for the
appellant, and therefore could only have the result of reducing its profit for
the relevant period by the amount of the payment.
[13] Nor, by 1996, could
the outlay have contributed to the production of any income for the appellant
from the shares of 930. By that time 930 was insolvent, it had ceased
operations, and its fixed assets had been subject to distraint by CEI. The
shares were, undoubtedly, not capable of producing any income. The appellant
could not change that state of affairs by making the payment that it was obliged
by law to make.
[14] The appellant
put a great deal of reliance on two decisions of this Court, International
Colin Energy Corporation v. The Queen,
and BJ Services Company Canada v. The Queen. Both of those cases dealt with deductibility of certain
payments made in the course of what ultimately turned out to be the
amalgamation of the taxpayer with another corporate entity. These
circumstances, however, bear no similarity to the present case. It has long
been established that these types of expenditures are not barred by paragraph
18(1)(a): see British Columbia Power Corporation v. M.N.R.
[15] Having
found the amount not to be one paid for the purpose of gaining or producing
income, it is not necessary for me to deal with the Crown’s argument that the
payment was one made on account of capital. If I had to decide that point,
however, I would be inclined to accede to the argument of counsel for the
respondent that the payment, being an involuntary one imposed by law on the
appellant because of its ownership of the shares of 930, is properly viewed as
an incident of ownership of the shares, and so capital in nature.
[16] There are two other matters on which I should comment,
although they were not raised by the parties in argument. The first is a matter
of timing. The appellant claims the deduction in the taxation year 1998, which
is the year in which it made the payment. It seems clear to me, however, that
the liability first arose when Ms. Easson made her Orders in July 1996. When
the Orders were signed, the appellant, along with the other named employers, became
liable “… to pay forthwith to the
Director in trust …” $1,155,615.81, that being the amount ascertained by Ms.
Easson in her Orders This is not a case like M.N.R. v. Benaby Realties Ltd., where the amount of the
proceeds of disposition upon an expropriation was not required to be taken into
income until the taxpayer and the expropriating authority had arrived at an
agreement as to the compensation to be paid, as there was no ascertained amount
to which the taxpayer was entitled before that event. In the present case, the
debt was created by the Orders and the terms of the ESA. That the amount
was later reduced in settlement of the review application does not affect the
fact that there was liability for the full amount during the interim period. I
invited submissions from counsel on this issue during the hearing of the
appeal, but neither of them chose to address the point.
[17] The other issue that was not addressed by counsel at the
hearing is the effect of subsection 12(2) of the ESA, which provides for
joint and several liability of the various individuals and entities named as
employer in the Orders. Although the payment was made by the appellant to
satisfy the debt, it would have been entitled to contribution from the other
named employers.
In view of the conclusion that I have reached as to the first issue, however,
it is not necessary to consider either of these issues further.
[18] The appeal will be dismissed, with costs.
Signed at Ottawa, Canada, this 16th
day of October, 2007.
“E.A. Bowie”
Email this Content