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Reference: 2004TCC168
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Date: 20040415
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Docket: 2001‑1712(IT)G
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BETWEEN:
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AMBULANCES B.G.R. INC.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Bédard J.
[1] The
Minister of National Revenue (the "Minister") disallowed the
Appellant's deduction of bonuses of $161,639, $125,000 and $75,000 for the
taxation years ending March 31, 1995, March 31, 1996, and
March 31, 1997, respectively because he held, relying on
paragraph 18(1)(a) and section 67 of the Income Tax Act (the
"Act"), that these bonuses were not expenses incurred or made
for the purpose of producing income from the business and that they were not
reasonable expenses in the circumstances. The Appellant is appealing these
assessments.
Statement of Facts
[2] During
the taxation years ending March 31, 1995 and
March 31, 1996, the Appellant operated an ambulance service business
in Saint‑Hyacinthe, Acton Vale and Drummondville. During this period, it employed approximately
85 individuals and owned 12 ambulances.
[3] Roger Fontaine
was the Appellant's sole shareholder. He had two children, Eve and
Patrice. They worked for the Appellant.
[4] Eve Fontaine
received a salary of $38,025 per year ($731.26 per week) from the Appellant on
February 22, 1996. Patrice Fontaine received nothing from the
Appellant in the form of salary during the period at issue.
[5] The
Appellant sold the business on April 1, 1996. As a result, the
Appellant did not operate a business during the 1997 taxation year that ended
on March 31, 1997.
[6] Les
Ambulances G.M.R. Inc. ("G.M.R ."),
a company fully owned by Roger Fontaine's spouse, operated an ambulance
service in the Granby region. G.M.R. owned four ambulances and employed
approximately 15 individuals. G.M.R. was managed at the Appellant's head
office.
[7] During
the years at issue, the Appellant paid the following amounts as bonuses:
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1995
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1996
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1997
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Eve Fontaine
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$136,639
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$50,000
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Patrice Fontaine
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$50,000
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$100,000
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$75,000
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Roger Fontaine
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$80,000
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$200,000
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$300,000
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Total:
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$266,639
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$350,000
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$375,000
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[8] The
Minister disallowed the deduction of the following bonuses:
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1995
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1996
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1997
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Eve Fontaine
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$136,639
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$50,000
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Patrice Fontaine
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$25,000
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$75,000
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$75,000
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Roger Fontaine
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$0
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$0
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$0
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Total
disallowed:
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$161,639
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$125,000
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$75,000
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Analysis and
conclusion
[9] In
her Reply to the Notice of Appeal, the Respondent alleges that the bonuses are
not expenses incurred or made by the Appellant for the purpose of producing an
income from the business and that they are not reasonable expenses for the
following reasons:
(i) the Appellant paid the bonuses to Roger Fontaine's children
so that the Appellant's net income would be less than $200,000 in order to
benefit from the lower taxation rate granted to small businesses;
(ii) the Appellant did not determine the amount of the bonuses
payable to Roger Fontaine's children until the end of each fiscal year for
each of the years at issue;
(iii) the children were not shareholders in the Appellant during the
years at issue;
(iv) during the years at issue, Patrice Fontaine devoted 50% of
his efforts to the Appellant's business, 45% of his efforts to the business of
Granites William Inc. and 5% of his effort to the business of Monuments
Daudelin Inc.;
(v) during the years at issue, the Appellant paid bonuses to the
members of Roger Fontaine's family only and not to the other employees,
including the company's chief executive officer and the supervisors.
[10] In addition, in her closing address, Counsel for the Respondent claims
that the $136,000 bonus paid to Eve Fontaine in 1995 was unreasonable
considering that the bonus paid to her father, the Appellant's only
shareholder, was only $80,000 for the same period. She also submits that the
$70,000 bonus paid in 1997 by the Appellant to Patrice Fontaine was
unreasonable since he only worked the equivalent of one fourth of the year.
Finally, she argued that the reasonableness of the bonuses ought to be studied
in terms of the test devised in Gabco Ltd. v. Minister of National Revenue,
1968 CarswellNat 285, [1998] C.T.C. 313, [1968]
2 Ex. C.R. 511, which reads:
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.
[11] I wish to stress that Roger Fontaine and his two children
testified with a great deal of conviction and emotion. Their testimony seemed
credible and true to me.
[12] Firstly, the Appellant convinced me that the services for which the
bonuses were paid were real. The evidence showed that Eve Fontaine was the
Appellant's controller and that as such, she took care of billing and the
collection of accounts receivable. She was the only person authorized to sign
the Appellant's cheques. She also managed the Appellant's labour relations. In
this capacity, she oversaw the implementation of two collective agreements that
proved to be very complex in this instance. She set work schedules for the
ambulance attendants and managed the transport of patients between hospitals.
In addition, she was often called upon to manage crisis situations, which
usually occurred in serious highway accidents. The Appellant could count on
her availability 24 hours per day, seven days per week. Moreover,
Eve Fontaine testified that the Appellant had regularly called on her
services outside normal work hours and that she slept with her pager. She
worked from 50 to 70 hours per week.
[13] The evidence also showed that Patrice Fontaine was available as
well 24 hours per day, seven days per week. He mainly looked after
equipment management, i.e. the purchase and repair of ambulances. He saw
that the ambulances were in good condition and had the necessary equipment on
board at all times. He also looked after the Appellant's public relations. Like
his sister, he was regularly called upon to manage crisis situations that could
occur in major accidents. Finally, he played a significant role in the
Appellant's employee relations when they learned, during 1996, that the
Appellant was negotiating the sale of the business. It was he who calmed and
reassured the employees. The evidence also showed that, in 1997,
Roger Fontaine represented the Appellant in discussions and negotiations
pertaining to complaints made by the buyer following the purchase of the
business from the Appellant. He also took care of collecting the Appellant's
accounts receivable and settling grievances during the sale of the business.
[14] Roger Fontaine and his two children also convinced me that the
performance of Eve Fontaine and her brother Patrice played a material role
in the Appellant's financial success. The children were not mere employees.
They were key managers of the business, like their father, although they were
not shareholders in the Appellant. They managed the Appellant in their father's
absence. In fact, the evidence showed that the father had to be away frequently
to take care of his other businesses, in the Corporation des Ambulances du
Québec, in which he was especially involved, and the 1996 negotiation of the
sale of the Appellant's business. The children were the Appellant's relief
employees. Finally, it is appropriate to point out that they were in no way
under the control or direction of the chief executive officer.
[15] In my opinion, the Minister ruled that the bonuses paid in 1995 and
1996 to Roger Fontaine's children were unreasonable because he had
mistakenly failed to consider the relationship between the remuneration that
they received during these years and previous years and their outstanding
effort, even if Roger Fontaine's son only devoted 50% of his effort to the
Appellant's business and if his sister managed G.M.R. for free. It is
appropriate to recall that Eve Fontaine's annual salary for the years 1995
and 1996 was only $38,000 and her brother Patrice received no salary from the
Appellant during 1995, 1996 and 1997. However, the evidence has shown that the
chief executive officer received an annual salary of $70,000 from the Appellant
although his workload and responsibilities were less than those of the
children. I am also of the opinion that the Minister was incorrect to not
consider that there was an element of catch-up in the payment of these bonuses.
The children expected to receive significant bonuses. During the previous
years, the children had contributed in an outstanding manner to the company's
financial success without receiving appropriate compensation. The father had
promised his children that he would remedy the situation as soon as the
Appellant's financial situation was healthy. He had convinced them that the
Appellant first had to pay its debts before paying bonuses.
Conclusion
[16] The Appellant convinced me of the following facts:
(i) the services for which the bonuses were paid were real;
(ii) the performance of Eve Fontaine and her brother Patrice
played a material role in the Appellant's financial success;
(iii) moreover, the remuneration they received during the periods at
issue did not take into account their outstanding contribution during this same
period;
(iv) the bonuses were expected and deserved compensation for their
outstanding contribution during the previous years, which had not been
remunerated at fair value.
I thus conclude that the Appellant has met its obligation to show that, on
the balance of probability, the bonuses paid to Eve Fontaine and to her
brother Patrice for the fiscal years ending December 31, 1995, 1996
and 1997, were expenses made for the purpose of producing an income from the
business and that they were reasonable in the circumstances. In fact, I could
not arrive at the conclusion that any reasonable businessman having only the
best business interests of the Appellant in mind would not have contracted to
pay similar bonuses.
[17] The appeals from the
assessments under the Income Tax Act for the 1995, 1996 and
1997 taxation years are allowed and the assessments are referred back to
the Minister of National Revenue for reconsideration and reassessment.
Signed at Ottawa, Canada this
15th day of April 2004.
Bédard J.
Translation certified true
on this 20th day of August 2004.
Sharon Winkler Moren,
Translator
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