Citation: 2013 TCC 124
Date: 20130424
Docket: 2009-715(IT)I
BETWEEN:
371501 B.C. LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
and
Docket: 2009-789(IT)I
BETWEEN:
440214 B.C. LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rip C.J.
[1]
As in the appeals of Dr. Mike
Orth Inc. v. The Queen ("Dr. Orth"), the basic
issue in the Informal Procedure appeals of 371501 B.C. Ltd.
("371" or "appellant") and 440214 B.C. Ltd.
("440") is whether purported expenses were incurred by the appellants
for the purpose of earning income from a business; the expenses claimed are for
professional fees rendered by a law firm. The taxation years in appeal are
2003 and 2004.
[2]
The fees for services
charged to 440 in issue in its appeals are similar to the subject matters
represented by fees for services invoiced to 371 and that are appealed by 371.
The respondent and 440 have agreed that the appeals of 440 will follow my
treatment of corresponding invoices in the 371 appeals, exclusive of Goods and Services
Tax. The
corresponding invoices are described in paragraph 16 of these reasons.
[3]
The appeals of 371 were
heard immediately after that of Dr. Orth. Much of the evidence is
the same, counsel are the same, the appellant's witness, Thomas Howard Olson,
is the same. Frequently in both evidence and argument reference was made to the
Dr. Orth's appeals. Mr. Olson is the appellant's solicitor and
principal in the law firm Olson, Lemons LLP. Indeed, the issue underlying
the reason for the assessments by the Canada Revenue Agency ("CRA")
is the same, that of solicitor‑client privilege. The appellant states
that while it had provided officials of CRA with copies of the invoices for the
legal services rendered it has refused to provide the CRA with the latter's
request for detailed description of the specific legal services provided since
such information is privileged. One of the major differences between the
appeals at bar and those of Dr. Orth is that in these appeals I
have been provided with the appellant's income tax returns, including its financial
statements for the years in issue. This helped me in considering the appeals at
bar.
[4]
The respondent
complains that the invoices do not satisfy the requirement of
subsection 230(1) of the Income Tax Act (“Act”) that every
person carrying a business and is required to pay or collect taxes shall keep
records and books of account in such form and containing such information as
will enable taxes payable under the Act to be determined. The respondent
states that the Agency cannot determine from the information on the invoices
alone if the fees were deductible in computing income. The CRA requires a
description of the legal services performed for the fees in issue charged. The
respondent, however, does not refute the appellant’s position that it is
entitled to invoke solicitor‑client privilege in the course of litigation.
[5]
Notwithstanding the
appellant's rightful exercise of solicitor‑client privilege, the
appellant still has the onus of proof in its appeals to demolish the Minister's
assumptions leading to the assessments. In Dr. Orth, I made the
following comments which apply here as well:
[12] The
Minister, when making an assessment, proceeds on assumptions of fact that leads him or her to
assess in a particular manner. The initial onus is on the taxpayer to
"demolish" the assumptions made by the Minister in assessing. The appellant’s initial
burden is only to "demolish" the exact assumptions made by the
Minister but no more.
[13] Justice
L’Heureux-Dubé explained in Hickman Motors, at paragraph 93, that:
… this initial onus
of "demolishing" the Minister’s assumptions is met where the
appellant makes out at least a prima facie case."
[14] Once the
Minister’s assumptions have been "demolished" by the appellant, it is
the Minister who has the onus to rebut the prima facie case
presented by the appellant and prove his or her assumptions.
[15] On the
evidence before me I must determine if the evidence presented by the appellant
is sufficient to demolish all or any of the Minister’s assumptions. Is the
evidence lead by the appellant of a degree that the appellant made out a prima facie
case? What is a prima facie case in an income tax appeal?
[16] In Amiante
Spec. Inc. v. The Queen,
at paragraph 23, Trudel J.A. quoted Cain J. in Stewart v.
Canada:
A prima facie
case is one "supported by evidence which raises such a degree of
probability in its favour that it must be accepted if believed by the Court
unless it is rebutted or the contrary is proved. It may be contrasted with
conclusive evidence which excludes the possibility of the truth of any other
conclusion than the one established by that evidence".
[17] Trudel J.A. added, at
paragraph: 24:
Although it is not
conclusive evidence, "the burden of proof put on the taxpayer is not to be
lightly, capriciously or casually shifted", considering that "[i]t is
the taxpayer’s business" (Orly Automobiles Inc. v. Canada, 2005 FCA
425 (CanLII), 2005 FCA 425, paragraph 20). This Court stated that the
taxpayer "knows how and why it is run in a particular fashion rather than
in some other ways. He [or she] knows and possesses information that the
Minister does not. He [or she] has information within his [or her] reach and
under his [or her] control" (ibid).
[18] Recently
Huddart J.A. of the British Columbia Court of Appeal considered the nature of
the burden of proof incumbent upon a taxpayer in Northern Properties Corp.
v. British Columbia.
He described, at paragraph 33, what is needed to establish a prima facie
case, and how the appellant’s evidence which would otherwise establish a prima
facie case can be effectively challenged by the respondent to prevent the
burden from shifting:
In response to the
taxpayer's submissions, the Crown may adduce its own evidence to prove either
that the assumptions are correct or to show that, even without relying on the
assumptions, the assessment is nevertheless valid: Pillsbury
at 5188; Pollock at 6053. The Crown may also
challenge the taxpayer's evidence, either on cross-examination, or by raising
serious issues of credibility. A court may draw a negative inference "from
the taxpayer's failure to adduce material evidence in the taxpayer's possession
or control" and conclude the taxpayer has not met its initial burden of disproving
one or more of the assumptions: Trac at para. 31. Once all
the evidence is in, the judge must weigh it and first determine whether the
taxpayer has met the initial legal burden with respect to the assumptions. If
the taxpayer has failed to meet its burden, then the Crown need not go on to
discharge its conditional legal burden because the precondition has not been
met.
[Emphasis added.]
[19] Earlier, in The Queen v. Peter K.S. Wu,
Strayer J.A. illustrated an instance where the taxpayer’s evidence, to
which the taxpayer did not lead rebuttal evidence, nevertheless failed to
establish a prima facie case. In overturning a decision of the Court
that a witness’ testimony despite the witness being evasive, forgetful and
unimpressive, must be accepted as it was the only evidence before the Court,
Justice Strayer made the following comments, at p. 6006:
The learned judge
appears not to have taken into account the onus placed on the taxpayer by the
Minister's assumption that this was one of the purposes of the payment of the
stock dividends to the taxpayer. In other words, the onus here was on the
taxpayer to prove that this was not one of the purposes of the payment. Yet,
after treating the taxpayer's evidence as unsatisfactory, … he held that as this
was the only evidence he had to accept it. He should instead have considered
whether the evidence met the standard of objective reasonability which was
required to overcome the onus on the taxpayer …
(Emphasis
added.)
[20] A taxpayer
wishing to establish a prima facie case to demolish all or any of
the Minister’s assumptions must not only present evidence of a high degree of
probability that must be accepted by the Court but must allow for a fair and
open cross‑examination of the evidence by Minister’s counsel. Counsel is
entitled to vigorously challenge the evidence of the taxpayer by cross‑examination.
A taxpayer claiming privilege in cross‑examination on matters he or she
leads in examination‑in‑chief, thus limiting the cross‑examination,
must consider possible consequences. In other words, a taxpayer claiming
privilege who wishes to shift the onus should make sure he or she has a strong prima facie
case that will survive cross‑examination.
[21] One of the
tasks before me in these appeals, then, is to determine whether the appellant
while maintaining his right to solicitor-client privilege has presented
evidence making a prima facie case that reverses the onus placed on
the appellant by the Minister’s assumptions.
[6]
Mr. Olson
explained that on notification by the CRA of an audit of a client, his standard
practice is to determine what records are being sought and have the client send
them to his office. The documents would then be organized "in a meaningful
way" to assist the auditor. The auditor would be invited to Olson Lemons
office to review the documents and where photocopy and other assistance were
available. The minute books and general ledger of the client were
"always" at the law office and available to the CRA. Original
documents are maintained at the law firm; copies are made at CRA's request.
This is standard practice in respect of all clients, those located in Calgary as well as other parts of Canada. Sometimes, if the file is not too
"voluminous”, copies of the documents are sent to the CRA.
[7]
In 2003 the appellant
was carrying on business of removing and disposing of industrial waste in the Cranbrook, B.C. area under the corporate name Scanland's Vacuum Tankers Ltd. In 2004, on
disposing of its business, the appellant changed its corporate name and became
"primarily" an investment company.
[8]
The shareholders of the
appellant are James Orth and Mrs. Orth. Mr. Olson believes,
"if I recall correctly", that the children were shareholders through
a family trust. Mr. Olson also believed that siblings and family members
owned some shares in the appellant.
[9]
The appellant's fiscal year-end
is October 31.
[10]
During the course of
the audit on March 9, 2007, Mr. J. Amm, an auditor with the CRA
and a witness in these appeals, wrote to a Mr. B. Kearl, a lawyer at
Olson Lemons, setting out his audit proposal which allowed a deduction in 2003
for professional fees of $6,640.33 for "tax compliance" in
2002, year‑end preparation of financial statements and tax returns,
according to Mr. Olson. For 2004, Mr. Amm proposed allowing the
appellant to deduct $2,140 for accounting fees and $5,962 for "tax
compliance" in respect of 2003.
[11]
Mr. Amm advised
that the CRA could not allow other fees for the more general descriptions
"general matters, tax advice, and legal fee accrual" suspecting they
were for personal services provided to shareholders. Mr. Olson was not
aware if Mr. Amm raised the question whether certain invoices were in
respect of capital expenses as opposed to current expenses.
[12]
Mr. Olson denied
that personal services were provided to shareholders. He said any work done for
a shareholder would be billed to the shareholder. If work is done to determine
how dividends are to be paid to shareholders based on the personal
circumstances of shareholders it is the corporation that is billed, however.
[13]
The CRA did allow
expenses claimed for the preparation of the corporation's income tax returns.
The CRA disallowed "unsupported claims for professional fees" of
$10,269 and $37,184 in assessing 2003 and 2004 taxation years respectively. The
CRA also denied "unsupported claims for insurance expenses" of
$15,982 and $9,479 in assessing 2003 and 2004 respectively. The validity of the
insurance claims is not before me.
[14]
At trial, there was only
one invoice in dispute for the 2003 taxation year and six invoices for the 2004
taxation year. As in Dr. Orth's appeals, all invoices are "Fee
for Services" plus disbursements.
[15]
For purposes of trial
the appellant included in its Book of Documents two schedules, one for 2003 and
the other for 2004, prepared for trial describing the deductions claimed in
each year as follows.
2003
|
Date
|
Invoice #
|
CRA Page
No.
|
Amount
(exclusive of GST)
|
Explanation
|
Tax Return
Analysis
|
Document Preparation & Tax Advice
|
|
Oct. 21-2003
|
310063
|
000180
|
$5,962
|
- share subscription
- compensation
- dividends
|
$3,280
|
$2,682
|
2004
Date
|
Invoice #
|
CRA Page
No.
|
Amount
(exclusive of GST)
|
Explanation
|
Tax Return
Analysis
|
Document Preparation & Tax Advice
|
|
Apr. 05-2004
|
404064
|
000188
|
$13,833
|
- 1/3 of
invoice for sale of business
|
$
0
|
$13,833
$
986
|
|
Jun. 01-2004
|
406037
|
000189
|
$
986
|
|
Dec.22-2003
|
312032
|
000185
|
$
7,893
|
- compensation
- dividends
- new classes
of shares
- taxable
income analysis resulting from sale
|
$5,504
|
$
8,255
|
|
Jan. 27-2004
|
401079
|
000186
|
$
4,776
|
|
May 30-2004
|
405071
|
000187
|
$
1,000
|
|
Apr. 19-2005
|
504591
|
|
$
1,500
(of
total $5,043)
|
- tax return
- accrual
|
$1,500
|
$
0
|
[16]
The corresponding
invoices issued to 440 and 371 are described in the letter of agreement amongst
the parties and referred to in paragraph 2 of these reasons as follows:
|
Taxation Year
|
4401214 BC
|
Regarding
|
371501 BC
|
|
2003
|
Invoice No. 310065
$1,033
$1,033
$1,033
$2,530
|
Bonus/Compensation
Share
Subscription
Dividends
Legal Analysis
– Tax Return
|
Invoice No. 310063
$894
$894
$894
$3,280
|
|
2004
|
Invoice
No. 404064
1/3 of 41,500=$13,833
Invoice No. 406037
1/3 of $2,956.70=$986
|
Sale of Business
Sale of Business
|
Invoice No. 404064
1/3 of $41,500=$13,833
Invoice No. 406037
1/3 of $2,956.70=$986
|
|
2004
|
Invoice No. 408555
$1,075
$1,075
$3,103
|
Bonus/Compensation
Dividends
Legal Analysis – Tax Return
|
Invoice No. 312032,
401079, 405071
25% of $8,255 *
25% of $8,255 *
$5,504
|
|
2004
|
Invoice No. 504595
$1,500
|
Tax Returns
(accrued)
|
Invoice No. 504591
$1,500
|
* Invoices Nos. 312032, 401079 and 405071 also include other
legal services not relevant to 440's appeal for 2004.
[17]
Much of the information
described on these documents are matters of public record, stated
Mr. Olson, and not subject to solicitor‑client privilege. I understand
that "public record", according to Mr. Olson, includes such
documents as tax returns, financial statements and the minute book. While the
appellant’s tax returns were filed, the minute book was not.
[18]
The only invoice for 2003
is Invoice No. 0310063, dated October 21, 2003: fee for services and
disbursements of $5,961.96. The $5,961.96 was divided between the amount of
$426.82 and $3,280. The amount of $426.82 was allocated as to one‑third
each to bonus and compensation, share subscription and dividends. The $3,280
was for a legal analysis of the tax return.
[19]
The "tax return analysis"
in 2003, Mr. Olson explained, concerned "a report that was done up in
connection with the compensation, dividends and share subscription"
prepared by lawyers for either the client to pay the dividend or compensation
and make proper source deductions or for the accountants to know what forms
were to be completed "and any other reporting issues".
[20]
The appellant did not
have a general retainer with Olson Lemons. The fee for the actual services,
three in number, were fixed. However Olson, Lemons undertook a tax return
analysis that "included consequences of these items as well as other
issues such as association and so on".
[21]
In reply to a question
by me, Mr. Olson replied that the fee in this invoice, No. 0310063
included allocation of one third each as to share subscription, compensation
and dividends. Tax return analysis takes more time since it may include general
tax advice, association analysis and related corporate analysis that are not
part of the public record. A review of exhibits does not indicate any share
subscription in 2003. I note that the shareholder information is the same in
both the 2003 and 2004 tax returns. While advice on share subscriptions does
not require shares to be actually subscribed, Mr. Olson did not, in my opinion,
explain even in clear general terms the services rendered. He did, however,
testify that his firm amended the appellant's Articles to substitute the firm's
"style" of shares for those originally stated in the Articles. I do
not know if this is what Mr. Olson referred to as "share subscription".
[22]
The 2004 taxation
year invoices:
(a) Invoice No. 0404064, dated
April 5, 2004: fee for services, $41,500
This invoice, says the appellant, was for the
preparation of legal documents for the sale of company assets and was deducted
from income as a current expense. Mr. Olson acknowledged the error, that
it was the fault of the appellant's bookkeeper, and stated that this fee ought
to have been deducted in the calculation of proceeds of disposition.
Mr. Olson believed that the result of deducting the fees from income would
be similar to deducting the fees against the proceeds of disposition, given the
amount of recapture of over $1,000,000 triggered by the sale. Technically the
appellant ought not have deducted the fee from income, Mr. Olson opined. The
fee was to be shared by three different taxpayers who were vendors of their
respective businesses to the same purchaser. The appellant's share of the invoice
was $14,801.67. The three vendors and the purchaser of the businesses all
entered into one agreement of purchase and sale. Mr. Olson testified that
the vendors agreed, between themselves, on allocation of the values of each of
these businesses. Mr. Olson could not recall if there was a fourth vendor
as well, but that he acted for three of the vendors, including the appellant
and 440.
The amount paid to Olson Lemons for the sale of the
business is not allowed as a deduction in computing income from a business but may
be deducted from proceeds of disposition and any recaptured depreciation shall
be included in the appellant's income.
The agreement of purchase and sale provided for
certain shareholders of the vendors to execute a "non compete"
agreement with the purchasers. Mr. Olson could not recall which
shareholders were required to sign nor if they were billed personally on the
transaction. There is no evidence that any shareholder received more than
nominal consideration for agreeing not to compete and the Crown did not allege
any amount.
(b) Invoice No. 0406037, dated June 1,
2004: fee for services $1,250 plus charges and disbursements of $1,706.70 for
a total of $2,956.70. One-third of this invoice is chargeable to 371, that is,
$986.
The fee represented by this invoice was for "some
clean‑up" done to finalize the sale of the business, it too was
split three ways. This will be treated similarly to Invoice No. 0404064.
What the "clean up" included is not in evidence and, in any
event, relates to a capital expenditure.
[23]
Mr. Olson stated
that because of the state of the appellant's business "we had to prepare
for purposes of the reporting of the sale how all this … these proceeds were
to be reported on an income tax return". He recalled that "the reporting
of this year was a little more complex because not only did we have to do the
association analysis, and so on, and the compensation, but there's also some
additional reporting in connection with the sale".
[24]
The following three
invoices relate to projects or assignments by Olson Lemons on a fixed fee
basis. Invoices were issued on interim account:
(c) Invoice No. 0312032, dated
December 22, 2003: fee for services of $7,500 plus charges and
disbursements $483.04 = $7,983.04
(d) Invoice No. 0401079, dated
January 27, 2004: fee for services of $4,750 plus disbursements of $25.72 =
$4,775.72
(e) Invoice No. 0405071, dated
May 30, 2004: fee for services $1,000.
These invoices are described in the schedule for 2004
as billed for compensation, dividends, new classes of shares and taxable income
analysis resulting from the sale. Of the $13,759, the amount of $5,504 is
described as "tax return analysis" and $8,255 is described as "document
preparation and tax advice".
[25]
The "tax return
analysis", explained Mr. Olson, was a legal memorandum about the
issues that needed to be reported on the income tax return. This would include
matters such as compensation, including bonuses to be paid, source deductions,
dividend reporting that would require a T4 slip and have to be reported on the
corporation's tax return. It would, declared Mr. Olson, also "include
an analysis of the way to represent proceeds of disposition and how that has to
show up on a tax return, as well as some analysis generated from the sale so
the company could make its … could file accordingly".
[26]
Mr. Olson
described "share subscription" as an issue that is personal to each
corporation and "we discuss these issues with the corporation". The
issues include such as consequences from issuing shares, type of shares
appropriate for the corporation's objectives; if shares are issued, documents
are prepared. He did not think that the "mere issuance of shares" has
an impact on a shareholder by itself. He explained further:
Certainly, what
we're trying to understand here is if the corporation has an interest in
issuing shares, our -- our goal is to understand, from our instructions, the
types of shares that can be issued, what its priorities are, and so on, in
connection with other shares that may already be outstanding, understanding
with the client the limitations in connection with those shares and the
obligations that come from those shares.
So, there are a
range of issues, but there is no tax consequence that comes to a shareholder
from subscribing shares, of which I'm aware, other than potentially causing
association issues, but we would deal with that with the client in the
association analysis.
[27]
Also, Mr. Olson stated, an
association analysis of a corporate client on a fixed cost basis may be
performed by Olson Lemons more than once a year, as required, at no extra fee.
[28]
A dividend analysis would include
a review of such items as refundable dividend and tax on hand account, Mr.
Olson explained. In reply to a question by respondent's counsel as to what proportion
of advice would relate to the effect of a dividend on shareholders,
Mr. Olson "was not quite sure" of the question although he
acknowledged "that's one of the many things we look at".
[29]
As far as the agreement of
purchase and sale of the business of the appellant and others was concerned,
Mr. Olson could not recall how the draft of the agreement came about since
one of the business lawyers in the firm was involved. Respondent's counsel
queried Mr. Olson as to the parties to the agreement, specifically if he
ever acted for one of the vendors. He did not believe he ever acted for one of
the vendors, Scanland's Excavating Ltd, and could not "recall if we
represented …" that corporation in the transaction of purchase and sale.
He testified that he was not involved in the file and he did not review his
firm's legal files with respect to the sale in 2004.
[30]
I was a bit taken aback
that notwithstanding Mr. Olson's firm analysed how the proceeds of
disposition from the sale of the business be treated, the legal fees concerning
the actual transaction were deducted as a current expense when his firm knew it
was a capital transaction.
[31]
In reply to a question
I put to Mr. Olson, he stated that the amount of $7,500 in Invoice No.
0312032 was for the work preparing Articles of Amendment of the appellant and
discussing same with the client and suggested it "would probably be
comparable to the compensation and dividend analysis", probably one quarter
of the fees related to the Articles of Amendment and one quarter to each of
dividend, new shares, compensation and taxable income analysis from the sales.
Olson Lemons "simply substituted our (standard) shares" in place of
shares prepared by another firm on incorporation. Mr. Olson stated that
"splitting it four ways is a reasonable way to … get to a ballpark figure
…". However, since the firm did not bill on a "time-spent basis"
he was unable to ascertain how the fee of $8,255 ought to be allocated on a
particular basis. For example, he could not indicate what portion of the $8,255
could be attributable to the taxable income analysis from the sale.
(f) Invoice No. 0504591, dated
April 19, 2005: fee for services $5,000.
[32]
This invoice was sent out
after the 2004 year-end for services provided in 2004. Of the total amount $5,000,
only $1,500 is in issue.
Mr. Olson testified that this invoice related to
an account issued after year‑end for preparation of the appellant's T2
tax return for 2004. A fee had been agreed to and payments had been made
towards it, he said. Work had commenced prior to the 2004 year‑end. The
amount was accrued. Mr. Olson suggested that "$1,500 would be
reflective of the work that had likely been done by the time fiscal year‑end
had actually arrived in connection with the preparation of the return". A
deduction is allowed for work that is done, not "likely" to have been
done. I would disallow this claim.
[33]
Counsel for the
respondent questioned Mr. Olson on his billing entries. He replied that
work done on a fixed cost basis is based on "the work we'll be doing".
He explained that he negotiates with the client and sets the fixed fee. The
billing is therefore "not entirely helpful" because "it's not
broken down in time records like I like to break it down …" Description of
the work done could be brief or "not so brief". Mr. Olson
claimed that simply by looking at time records is not useful.
[34]
Fees are calculated on
when the work was done, anticipating costs to cover the work. The time records
were not broken down by task but one "might glean what task was being
done, so you could probably figure out some of those, but many of them, you
can't". Mr. Olson conceded that the entries were not very helpful
"if you're trying to do an allocation" of the actual work performed.
But he thought his anticipation of costs was comparable to that of a home
builder's anticipation of costs.
[35]
In his audit of the
appellant, Mr. Amm reviewed documents he would normally review in a
similar audit: financial statements, corporate tax returns, personal tax
returns of shareholders, general ledgers, year‑end trial balances and
adjusting journal entries, sale of business equipment, capital cost allowance,
payroll records, solicitor's expenses, insurance and professional fees. In
fact, all documents Mr. Amm requested from the appellant were provided to
him and the appellant was allowed to deduct from income all expenses claimed
except for certain insurance premiums and most legal fees "for which we
did not have adequate documentation to the description or the reasons for the
fees". Legal fees for preparation of year‑end financial statements
and corporate tax returns were allowed as a deduction.
[36]
Mr. Amm was in
touch with Mr. Kearl at the Olson, Lemons office and acknowledged that Mr. Kearl
provided him with descriptions of legal sources provided in addition to the
descriptions of the invoices. Mr. Amm was of the view that the additional
descriptions such as "general matters" or "tax advice" was
not helpful to determine if the fees were paid to earn income from a business
of the appellant.
[37]
Mr. Kearl did
invite Mr. Amm to attend at Olson Lemons' office in Calgary if he wished
to see any other documents. Mr. Kearl did send him some other material
including an analysis of legal fees but with similar descriptions of the fees:
tax advice, general matters, tax compliance. While Mr. Amm still was not
satisfied with these descriptions, he did not get in touch further with
Mr. Kearl but proceeded with the reassessments.
[38]
The argument of
appellant's counsel, as well as cross‑examination of Mr. Amm,
stressed that the CRA may not have aggressively pursued the appellant for
additional information to satisfy its demands on the appellant. No matter what
documents were provided to the CRA auditor, the responses from the CRA auditor
were that he wanted more particulars, according to Mr. Olson. In
performing the audit, counsel argued, the CRA was aware of the deduction and
payment of dividends, the payment of compensation, the sale of the business,
share subscription, among other things.
[39]
As counsel for the
appellant acknowledged, it is a very fine line that a lawyer must walk when the
CRA calls upon the lawyer for copies of invoices sent to clients or for
information on a particular transaction that went through that lawyer's office.
Certainly the lawyer's file is beyond the reach and sight of the CRA. And
copies of invoices sent to clients are not for CRA's review. These
are privileged documents and information a lawyer may not release to the CRA
without the approval of the client whose affairs are under review by the fisc.
[40]
At the same time,
however, the CRA must have minimum information of what transpired within a
taxpayer's business so that it may assess with a reasonable degree of
confidence and authority. It is not incumbent on the CRA, however, to chase a
taxpayer for information. Definitely, however, solicitor‑client privilege
owned by a taxpayer cannot be violated by the CRA in the course of its audit of
the taxpayer.
[41]
This appeal was filed
under the Tax Court of Canada Rules (Informal Procedure) ("Rules")
and in accordance with subsection 18.15(3) of the Tax Court of Canada
Act:
…
the Court is not bound by any legal or technical rules of evidence in
conducting a hearing and the appeal shall be dealt with by the Court as
informally and expeditiously as the circumstances and consideration of fairness
permit.
[42]
While the appellant
claimed solicitor‑client privilege on details of the amounts paid to
Olson Lemons, the appellant, as in the Dr. Orth appeal was not
reticent to produce copies of the Olson Lemons invoices, which themselves may
be privileged. Nor was Mr. Olson reluctant to discuss the sale of the
appellant's business. Because these appeals, like those of Dr. Orth's,
were heard under the Informal Procedure, I preferred to consider what evidence
was produced as opposed to disallowing evidence or opening up the trial to a
more formal procedure than Parliament intended on enacting the Rules. My
primary concern was to deal with the appeal hearing reasonably and "as
informally and expeditiously as the circumstances and consideration of
fairness" permitted.
[43]
I would therefore allow
the following:
A) 2003 – Invoice
No. 0310063
As I wrote earlier, I was unable to find any evidence
of share subscriptions which, Mr. Olson stated, was included amongst the
services charged by him. I will accept his testimony that his firm's shares
were simply substituted for similar shares that were originally issued. Also, consideration
and dividends were paid. I would therefore allow two‑thirds of the
expenses claimed, that is, $3,977.
B) 2004 – Invoice
No. 0404064
i) The fee with respect to a
disposition of a capital asset cannot be deducted as a current expense. It is
to be treated as a capital expenditure.
ii) Invoice No.
0406037
This was also a capital expenditure and should be
treated as such.
iii) Invoices Nos.
0312032, 0401079 and 0405071
(These invoices also include other legal services not
relevant to 440’s appeals.) The amounts of these invoices aggregated $13,759.
Here too, the fees were for services relating to income tax matters, including
a tax return analysis. I have had difficulty distinguishing tax return
analysis, as defined by Mr. Olson, from advice Mr. Olson’s law firm gave to its
accountants to prepare the returns. Is there a duplication of work? In any
event, they both relate to the making and review of the tax return, a
deductible expense, and the fee ought to be allowed.
[44]
The appeals for 2003
and 2004 will therefore be allowed and the assessments are referred back to the
Minister for reconsideration and reassessments to permit the appellant to
deduct, in computing its income for 2003 and 2004,
a) the amount of $3,977 in computing
its income for its 2003 taxation year; and
b) the amount of $13,759 for its 2004
taxation year.
[45]
As in Dr. Orth,
the appellants in the appeals at bar made an application to reopen their
appeals for additional evidence but, at the last hour, withdrew their
application. The respondent has asked for costs as a result. Each
party shall have 30 days from the date of these reasons to provide me with
written submissions as to costs with respect to the applications and their
withdrawal, such submissions to be exchanged by the parties. The submissions
may be made jointly with those in Dr. Orth.
Signed at Ottawa, Canada, this 24th day of April 2013.
"Gerald J. Rip"
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