Bronson Homes Limited v. Minister of National Revenue, [1993] 2 CTC 2060

Margeson, T.C.C.J. (orally):—This matter is for decision, Bronson Homes Ltd. v. M.N.R., 86-1116(IT).

This case arises as a result of reassessment of the appellant (” Bronson") by the Minister, notices of reassessment which are dated February 13, 1984. The respondent reassessed the appellant for its 1980 and 1981 taxation years by disallowing the deduction in 1980 of $350,000 and in 1981 of $18,000 allegedly being deductions for management services fees provided by the taxpayer to two companies in those years. The two alleged management companies were: Marina Developments Ltd. ("Marina") and Denver Homes Ltd. ("Denver"), companies which were basically owned or controlled by Bronson Homes Ltd.

The issues are quite straightforward. Is the appellant entitled to the deduction of the $350,000 in 1980 and $18,000 in 1981 as management fees? In order for the appellant to be successful it must show three things basically:

1. that the fees were paid;

2. the fees that were paid were paid for the purposes of gaining or producing income from its business in the years in question;

3. the fees that were paid were reasonable under all the circumstances and that it was a reasonable amount to set off against the income which was sought to be earned as a result of the expenses.

The first witness to give testimony for the appellant was Mr. Vincent Mon- temurro, who was sworn and testified as to the commencement of the appellant company. The company was formed in 1970, and its purpose was to build custom houses. They were building according to people's demands. Whatever the people wanted they built for them. The people brought their plans to them and then they took it from there and ultimately built the house for them and charged them accordingly. According to Mr. Vince Montemurro, "the client brings in his blueprint and the specifications, we make a contract, then we go and build the house for him.”

They also had some workers, but Mr. Vince Montemurro himself and his partner, Mr. Gino Antonello did 80 per cent of the work.

According to Mr. Vince Montemurro they made the decisions verbally. He said they would sit down and they would decide on what they had to do. "We understood each others duties”, he said, "we worked as long as we had to”, be that five hours, ten hours, 15 hours a day presumably, as long as it took to do the work. He agreed that they had no directors’ or shareholders’ meetings. He thought that he was the president or the secretary. The second witness who gave evidence said he was the secretary, so presumably that would make Mr.

Vince Montemurro the president. They were not too keen on the intricacies of a company, that is according to the Corporations Act, or keeping any records and unfortunately sometimes, specially when the process has become complicated, not keeping minutes and not keeping a more accurate record of what takes place and so on acts to your disadvantage.

Here certainly that can be seen, that the companies did not keep accurate records and there were no records of the company actually presented before me. Some questions were asked about what was included in the company's books and obviously what was there was quite sparse. Mr. Vince Montemurro did say that both parties signed the cheques and he did say in the end, that he thought he was the secretary/treasurer. So I do not know whether that makes the other witness wrong but one of them was secretary/treasurer and one was president.

With respect to marketing, they said they did not do much marketing. He said they advanced basically by word of mouth. They would do a job and if somebody liked it, they would tell somebody else and they would probably get another one. That is about all they put into marketing. It took them about a month from the time a person came to see them before they could get an agreement in place. I do not know whether he means there was a written agreement with the owner or whether it was an oral agreement with the owner. Sometimes as I understand it, they would build the house on the land of the owner and sometimes they would provide the land themselves. No written agreements have been produced before me, so perhaps they were all oral as well.

The appellant did say they had a five-year warranty on their buildings and they had to look after the job long after it was completed, for five years. They looked after the warranties themselves.

In earlier years he said, he got very little pay, between 1970 and 1976. There were some other employees, people like plumbers, electricians, that type of thing. They were all hired on a contract basis. He said he had one finisher working for him. His wife answered the telephone. She did not get any pay at first. She also did some of the journal entries.

In 1976 he said they bought some land and went into land development. In 1976 they started to buy the 15-acre parcel that he talked about. Later on things got bigger, they needed partners, so he took in two other partners, they were Denver Homes Ltd. and Simus Construction. They were each one-third owners of that development. Then they got 70 more acres of land adjacent to the other 15 acres and they needed more partners and things went on from there. There were seven shareholders apparently in that Beaumaris Developments Ltd. project. Other land was purchased and other companies became involved in the projects in which the appellant was also involved, including a 20-unit apartment development at Cold Lake.

Exhibit A-3 was introduced, which was Bronson Homes Ltd. financial statements from 1978. According to the witness these accurately reflected the company's position at the time. The appellant was still building and repairing homes at that time.

In 1978 the witness incorporated another company, having due regard to his wife's desire to have some interest in the company. She became a 50 per cent partner with them, and then they changed the name to Marina Developments Ltd. ("Marina"), and the company is one of the alleged providers of service in the case before me today.

He also said that after 1978 Marina got involved in building 30-suite apartments in Bonnyville, Alberta, as a 1/3 partner with Vega Developments Ltd. That conglomerate was composed of Denver, Belmar Development and Marina.

Exhibit A-4 was introduced, which was a letter and balance sheet of the company “Bronson” depicting the financial picture. In 1979 the witness said Bronson was undertaking its business through myself and my partner". That was the term he used, “by me and my partner". Those words may not seem too significant right now, but as we go on they will become more significant. That was his evidence.

He said Marina was formed in 1978. It was intended by 1980 to 1985 to get out of Bronson and Bronson would be wound down. His wife wanted to be involved in their own company.

He mentioned that in 1978 he got $12,000 from the company himself, his wife got $10,000, and the other partner's wife got $10,000, and in 1979 each of the two partners got $20,000 and apparently their wives got nothing.

He was asked a question, “Did Bronson pay Marina anything?", and the answer he gave was, "there was nothing in writing”. Obviously the question was directed towards the management agreement, if there was one, and he said there was nothing in writing. He was asked “Did Marina do work for Bronson?", and he said, “in some years just work on repairs and the 20-unit apartment in Cold Lake”. He also said Bronson never paid the travelling expenses, Marina did. In 1980 Bronson paid Marina $175,000 and Marina reported it as income and paid some taxes.

Exhibit A-5, dated March 2, 1981 was introduced, the Bronson financial statements, and it was indicated that Bronson had made money in 1981. Again, he said there was a verbal agreement with respect to the management fees. He was asked a question, "Were you surprised that Bronson was paying management fees to Marina and Denver?" His answer was interesting, and he said no he was not because he felt “it was fair where I worked with Bronson all those years for nothing and they were making all that money”. That was the answer that he gave on that.

Exhibit A-6 was introduced, Bronson's financial picture or position in 1981. In the last page of the document it refers to the $18,000 as managerial services, and when asked about it, he said, "I don't know who got it”. He was asked further, "Did Marina get any moneys from Bronson in 1981?" He said "I don't know”.

Exhibit A-7 was introduced, 1982 financial statements for Bronson, and he said he did not know if the $18,000 in 1981 went to Marina or not. He further referred to the fact that the Beaumaris group was hired as a management consultant in 1976 and 1977. This would be for the $4.5 to $5 million project development called Nordex International. They did such things as tendering, underground work, subdivision application, marketing some of the land and sale of some of the R-2 lots. They got three per cent to five per cent as a management fee. It was not brought out, nor was it indicated, that this agreement for this management consultant was in writing, and so I do not have that evidence before me.

In cross-examination he said he was not related to Mr. Antonello. He said that he was an employee of Bronson and attended meetings with Beaumaris Developments. Bronson had one-third of that development and later on one- seventh of the other subsequent syndicate. He said he did not have a personal share of Beaumaris Developments Ltd.

He was referred to a company corporate summary, which is Exhibit R-1, introduced into evidence, dated November 30, 1980 and it was pointed out to him that his name appeared as a shareholder or one of the shareholders of Beaumaris but his evidence was that it is there but it is not correct. He did not have any explanation as to why it was there. Also he was shown November of 1981, again his name appeared as a shareholder and again he said it was incorrect. He said "my name or my company", meaning neither himself nor his company Marina, were personally involved in the Beaumaris Developments. That was his evidence, although the record is there with respect to his name and it remains as such in the corporate summary.

He said there were 34 lots in the first stage or what he considered to be the first stage in the Castle Down area. All the partners had an interest according to the percentage of ownership. He was asked about the sales in 1980 and he said he did not know if the sales referred to the first stage only, or to the second and third stages. Probably he sold seven lots out of the land inventory to which he was referred. It was pointed out that 33 lots were sold in 1980 and another probably in 1981. The evidence later on was that it was sold at less than the other lots.

He was asked again about the $350,000 management fees in 1980. He was asked, "They relate to the 34 lots, is that correct", and he said, “I do not know how it was determined; I do not know whether it came from that one or others", was his answer.

He said 1978 was a busy period for Bronson Homes. It was suggested to him that they made a lot of the decisions and did most of the work in the earlier years, in 1978 and 1979. He said they did, but they made a lot of strategy business in 1977, 1978, 1979, 1980, 1981 and 1982. The latter years, he said, were more difficult and consequently there were a lot of decisions which had to be made because of the economy, things were slowing down.

He was again asked about the records of the company in 1978. It was suggested to him that on Bronson Homes records there was a $350,000 figure set up in the company's books to pay a fee, one-half to him and one-half to his partner, and his indication was it was there but they never did receive it. He was asked further if his accountant, Mr. Gary Koehli, was not concerned about the $350,000 the way it was set up in the books due to tax implications. His answer was," I do not know, I had no knowledge of it. I took the information to them”. It is a very large figure to go unexplained to a person who has such an interest as this witness did in the company, but in any event, that was his evidence.

In 1980 the same figure was reintroduced into the income statement, not having ever been paid out and he was asked why that was and what he knew about it, and he said that he did not know anything about it, he did not know why it was done that way. He said that the $350,000 could be related to the 34 lots. He was asked, "were there journal entries showing this?”, and there was no answer. He was asked further, “was the $350,000 shown as management services and merely put in to offset the revenue?” He said he did not know. It was suggested to him that he was 100 per cent shareholder in Marina, and he said no, as far as he was concerned his wife was suppose to be a 50 per cent shareholder. There was nothing introduced here to show the holdings of the two companies, but his position was that his wife was a 50 per cent holder of the shares in Marina in any event.

He agreed that after 1978 loans were made to Marina and Denver, which were the two companies of himself and his partner. One-half of the loans shown in Exhibit A-5 and Exhibit A-6 were paid to Marina and one-half of them to Denver. He said, though, that Marina was involved in other projects, its own projects. He referred to Grand Centre, which was taken in conjunction with another joint venturer. It was near Cold Lake. With respect to the matter of expenses, he said expenses were paid by the various companies in relation to the proportion of their interest in the companies.

It was suggested to him that one of the reasons why he went and got his own company and his partner did likewise was because there was a dispute with his partner. Nothing much hinges really on that, whether there was a dispute or whether there was not. The fact is that they went out and developed two other companies. It is a bit conflicting as to exactly what problem existed because in essence the two of them seemed to get along fairly well. The second last witness for the company seemed to suggest they had worked all those years together and there was not really anything that he was aware of that was in dispute, although there was some other information that seemed to suggest that. Nothing really rises or falls on that. The fact is that they did develop two other companies. One of the reasons suggested by this witness was that the other partner was more senior to him and he expected him to retire around 1980 or 1981 in any event.

Counsel for the respondent suggested to him that he had said that he was not surprised that there were management fees, and he was asked whether his evidence today was that Marina did provide management services to Bronson in 1980, 1981 and he said it did. He was asked further about an interview with Mr. André Tessier from Revenue Canada on October 20, 1983, in the downtown offices, and he said he recalled it. He was not exactly sure of everything that took place there. It was suggested to him that he was asked the question whether services were provided to Bronson by the two companies in question and that he had said no. He said that services were provided, and he said he may have misunderstood the question, and I asked him at that point in time what he meant, he said they were.talking about agreements and he meant that there were no written agreements.

I will go into it a little later on about what questions were asked and what answers were given. They are significant, there is no question about that, and they do raise some questions with respect to credibility and they will have to be considered. In re-direct he was referred to Exhibit R-1 and he said that he had never seen that before.

Gino Antonello was sworn and also gave evidence. Mr. Gino Antonello said he was a 50 per cent shareholder in Bronson. He and the former witness had been working together for many years to make a living. He reiterated that Bronson was in the custom building business. They did most of the work themselves for many years, and he said he was the President.

Decisions, he said, were made by himself and his partner, they were made during work. They never recorded them, only when it was necessary to put something in writing in order to borrow money from the bank. He said they were incorporated right around 1970. The years 1970 to 1978 were rough times, and he did not get much in the way of wages from the company. Just enough to survive. They also hired trades people. He himself was a carpenter and the previous witness was a journeyman carpenter.

In 1977 they went into land development and land was purchased. His evidence was basically the same on that, through Bronson, Denver and Troika. He said Denver was incorporated in 1976 to get something for the family. He had the same idea as his partner, that they wanted to get the family involved and have something for the family. Regarding the other third partner, Troika, they had no interest in that and Bronson had no interest in it.

He referred to the 15 acres and the subsequent purchase beside the 15 acres. When asked about what services were provided by the company, Denver to Bronson, he said “my understanding was that I would look after some interests and my partner would look after some interests". There were general statements about what services they would provide. Later on he did say that they did any repair work that had to be done and finished off any work that Bronson had to do.

"In 1979 how did Bronson conduct business, who made the decisions?” He said, "my company and my partner's company”. That would be Denver and Marina. What did Denver do for Bronson in 1979, 1980 and 1981? He said, repair work—1979 to 1980, repair work, warranty work, same as my partner". In 1979 and 1980 he said they got paid for the work done for Bronson. He was asked, “Did Denver get paid by Bronson Homes?" He said "yes, when the money was divided”. He did not say when the money was paid out in management fees, he said "when the money was divided” in 1980.

In 1980 Denver got $175,000 from Bronson, why? His answer, and I think it is significant, "all the past years we only got grocery money and then we left all the money in and now we took it out”. He said further, "because in the future we decided that each one would have his own personal company”. It was brought out that Denver reported any income that it allegedly got from Bronson for income tax purposes. He was asked further, in 1981 did Bronson pay Denver? He said he did not know. In 1981 Bronson paid me and my wife personally” (some money that was already referred to). Did Denver pay taxes in 1981 and report it in its income?” He said "yes".

In cross-examination, it was brought out that between 1978 and 1981 Bronson was involved in the Beaumaris project and all 34 lots were sold. The average purchasing price was $25,000 plus or minus, and the average selling price was $35,000 to $40,000 to $42,000 for a single lot.

Each decided to have his own company, meaning himself and his former partner, and when asked again, if this was because of a dispute, he said no. He agreed that Bronson had loaned fairly substantial amounts to Denver in 1980 and 1981. In 1978, again he went back to 34 lots, he said that was the busiest period, and after that there was a decline in activity.

He was asked again about the $350,000 in dispute and if it related to these 34 lots, and he said “it relates to all the company", meaning all the company business, “it was what Bronson had accumulated over all those years. During those years most of the work related to the 34 lots”. He said, "I recall the money was being split in 1978. It showed the split, $175,000 to Denver, not me personally, but it was never paid until 1979 or 1980.

When Bronson loaned Denver the money in 1979, 1980 and 1981, he said Denver pursued its own business. He agreed that his son and daughter were the other shareholders in the company Denver. His position today was that management services were provided by Denver to Bronson. He was asked what those services were, and again he said that it was repair work.

He was referred to the meeting with Mr. André Tessier on October 4, 1983. He was asked if they met and he said he met him at Revenue Canada. He said his son was also present and that they discussed the $350,000. He was asked if he recalled the question if Denver provided any management services for Bronson and that he had then answered no. He did not recall the question.

In redirect he said the services provided were to look after home building that was started and the warranty work; "my partner and I went to the meetings as owners and employees of Bronson".

Then we had the evidence of Mr. Gary Koehli, who was a chartered accountant. He was referred to Exhibits A-4, A-5 and A-6. He identified these as financial statements that he had done for Bronson. He was questioned about the treatment of the $350,000. He said he took over in 1980 from an earlier accountant for the December 1979 period and was not familiar with the workings of the companies before that period of time except from some of the statements that he perused.

He said he asked for the 1978 statements. He noticed that there was a bonus payable recorded for 1978. It was already well into the 1980 year and I checked to see what had been paid, because any amount not paid under section 70 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), (hereinafter referred to as the "Act") would have to come back into income in 1980. He found out that none had indeed been paid. Therefore, in preparing Exhibit A-4, he said he showed it both years. In 1980 it no longer showed up as a bonus payable, but it showed up as an income item. He showed it payable to shareholders. He was asked why, in 1980, it showed as an expense. He said he had little prior knowledge of the company. He asked the other accountant what was going on and he said it was "received". I notice that payments over that amount had been paid to the two companies, Denver and Marina and there were expenses shown from Denver and Marina on behalf of Bronson to over $400,000. He basically took the $350,000 and put it in one year and held over the $50,000 to be applied in the other year.

He said the companies were working together as two independent companies as co-venturers. Bronson was to be phased out. He said it appeared to him that instead of a management bonus to the two individuals, that there was in effect management services paid through the two companies. That was his conclusion, that the reasonable way to look at it was that management services were paid to Marina and Denver through Bronson and that was how they should be recorded for income tax purposes and for accounting purposes and he said he was Satisfied that the records were there to support the payments.

Now, interestingly enough there was no evidence introduced before me to substantiate what the payments were for. There was evidence that there were cheques totalling that amount. Mr. André Tessier, the witness for the Crown gave that evidence, that all he could find were cheques, and the cheques are not before me and there is nothing to indicate what the amounts were paid for. In essence all we have is the fact that there were in the records cheques totalling the amount of over $400,000 which were paid by these two companies apparently on behalf of Bronson. It is on that basis, and also from talking to the partners and shareholders, that he concluded that the amount that was recorded as management fees was actually paid out, and more than that paid out. $350,000 would be put in the years 1980 and 1981, and the other $50,000 would be carried over.

In cross-examination he said he did not know what project the $350,000 referred to. He said he understood it related to the Beaumaris project, not just the 34 lots.

He was referred to Exhibit R-2, which is a letter signed by him to Revenue Canada, which was a response by him to questions from Mr. Tessier, and it was put to him that that letter in essence suggests that the $350,000 related to the 34 lots, and we have no specific answer to that question. He said that the bonus in 1978 and the entries in 1980 and 1981 were different, they were not the same thing. The $350,000 in 1978, he said, is not the same item referred to in the letter of December 8, 1983, which is Exhibit R-2. He said the entry was done to record the payments of over $400,000 made to Marina and Denver by Bronson and to carry $50,000 over to 1982.

He suggested that the parting of the ways had started around 1978.

Most of the payments were made in 1979. He said that $350,000 was brought into income and this certainly had a bearing on his decision, on the decision that he made as to how he was to treat it, although like he said, there was over $400,000 in expenses paid to Denver and Marina by Bronson.

In evidence, counsel for the respondent called Mr. Tessier, whose evidence is very important in this case, and he said that he was familiar with the issues here. His involvement was limited to an audit to look at the amount claimed, that is the $350,000 item and the $18,000 item.

He said he contacted Bronson Homes, Mr. Antonello originally and then Mr. Vince Montemurro, to get documents. He said he wanted cancelled cheques to Marina and Denver, also the minute books. He said nothing was available to support the payment of $350,000 except cancelled cheques. That was his evidence. Nothing in the minute books to support it. He asked for any other papers or documents, such as trial balances for the $350,000. This would have been the original accountant, he asked him, and he referred to the journal entry number five in 1980 and journal entry number four in 1981 of $18,000 and the $350,000 and he said that was basically all the references there were to it.

He said the 1980 journal entry referred to the Beaumaris project, and in 1981 he said he did not remember. He said he asked the accountant about the $350,000 and he referred to the 1978 bonus declared and payable to the individuals which was reversed and not paid, so it had been brought back into income of Bronson Homes. He said he tried to get interviews with both of the principal shareholders of Bronson. He asked if there was any agreement on the matter or whether it was verbal. The answer was no, at that time. He asked if there were any services performed by Denver for Bronson, and the answer was no. He said at that meeting both shareholders, Vincent Montemurro and Gino Antonello were present.

He said he interviewed Mr. Vince Montemurro on October 21, 1983 and the same questions were asked. Was there any agreement, verbal or written between Marina or Bronson in 1980, 1981 and he said, the answer was "none was available”. But then he asked, were there any services or work done by Marina in 1980 and 1981, and the answer was no. There is no dispute about what those answers were.

He said he looked at all three minute books, the Marina, Denver and Bronson, and there was nothing in any of them about the $350,000 or the $18,000. He said he asked the lawyer, who was the son of one of the shareholders about that and he said that it is probably because there was nothing important that happened to that time. Well, $350,000 and $18,000 are certainly items of great significance, I would think. The answer was that there was nothing significant, and there was no rebuttal of that statement given by Mr. Tessier.

He was referred to Exhibit R-3, dated October 31, 1983, which is a letter he wrote to Bronson Homes Ltd. On November 6, 1983, he wrote a letter to Mr. Koehli, which is in evidence here. He referred to it as a proposal and he said Mr. Koehli did not agree with him and he would give him some more information to support the position that Mr. Koehli was taking presumably with respect to the $350,000 and the $18,000. He said he wrote back and the answer is Exhibit R-2 which we have before us.

He said on the basis of his interviews, on the basis of the answers that he received from people that he interviewed, the material that he received from Mr. Koehli and any information he was able to glean from any of the books, he concluded as he did in Exhibit R-3. Basically that was:

Based on the information noted above and due to lack of documentary evidence to support that the management service expenses were in fact incurred by Bronson Homes Ltd. we propose to disallow the expenses as claimed.

In that very letter, of course, he referred to the amount of work that was done, or the amount of work that could have amounted to services provided by the two companies in question for Bronson during the years 1980 and 1981, and paragraph (d) refers to, out of the 34 lots in the Beaumaris project, sales were as follows: 26 lots prior to 1980, seven lots in 1980 and one lot in 1981. That is the information that he used, along with the other material that he had.

He said that he concluded that the $350,000 was not reasonable if it related to seven lots. It was unreasonable for $18,000 in 1981 for one lot. It was clear from the financial statements of the company, that all they got was $304,000 of income in 1980 when they offset $350,000 in management fees and that would be unreasonable. "I concluded there was no expense incurred in 1980 and 1981", and that is what his final position was. He said not only was it unreasonable, it was not there and if it was there it was not reasonable. He based his conclusions on his conversations and from all the material that he had.

In cross-examination he said he did not ask about the contents of the minute books. He said he was focusing on the sales in 1980 and 1981 and about the figure in the 1978 statements of $350,000 that was reversed and brought back into income, and he was concentrating on his interviews with the shareholders. He said he replied to Mr. Koehli's letter of December 8, 1983, that would be Exhibit R-2. That is the letter from Mr. Koehli, and I do not know what he said. It was not brought out and no one sought to bring it out. Counsel for the appellant looked at it but it was not put into evidence.

On redirect he indicated he was relying upon section 67 of the Act and paragraph 18(1)(a) of the Act. I might say before going further that it was agreed at the beginning that the Minister was not going to rely upon one of the sections of the Act which was cited, section 245. The Minister was not relying upon that, so I need not consider that and it was not argued before me. That is a section which talks about tax avoidance and a tax avoidance scheme, and that is not therefore before me and not for my concern.

Mr. Rolf had committed a great deal of his argument to writing, and I will not go over all of it. Needless to say he says that the appellant should succeed in this case. He said that the fact that the bonus referred to in 1978 was referred to as a bonus and that it was payable to individuals and not to the two limited companies should not be of concern here because he said it was brought back into income. He said Mr. Tessier saw nothing to support the payments of over $400,000 but he said they were there. He says that the appellant through Mr. Koehli, gave evidence that there was over $400,000 worth of expenses there and $350,000 went into 1980 and 1981 and $50,000 was put over to be carried forward.

He says that there were cheques issued for the amounts. That is all the evidence there was about the cheques. The cheques were not presented and I do not know what they said, and presumably they were just amounts and may not have specified what they were for. That does not help the cause a great deal, because it does not help me determine whether or not they represented payment for services of the nature in question here, allegedly rendered to Bronson by these two companies.

In respect to another very important portion of the evidence of the two main witnesses, two shareholders of Bronson and of course the chief shareholders of the two companies in question,he said the term or the words used by Mr. Tessier in interviewing these two witnesses were, “was it available?". Well, he says, he obviously must have been referring to a written agreement, because you cannot have available an oral agreement. He said that it was reasonable that the evidence of the two main witnesses should be believed and that there was confusion, if there was anything wrong with what they said, they were confused as to whether he was asking whether there was a written agreement or an oral agreement. When they said no, they meant there was no written agreement.

Well, that is part of the argument and I have to decide what they said and what it means in the total picture. It is certainly right for him to argue that and that is the best face you can put on it.

He said the Crown has argued that there were no services provided and he said, all you have to do is look at how the people operated. Someone was operating Bronson, and it was obvious, he says, that Bronson was being operated through the two other companies, the two service companies. He Says, can you really apply what happened in 1978 and 1979, what have they got to do with it. It has been explained why the figure was there in 1978.

He asks that the appeal be allowed. He says management services were provided indeed to Bronson in 1980 and 1981 by Marina acting through Mr. Vince Montemurro and by Denver acting through Mr. Gino Antonello. These management services were capable of and did enable Bronson to produce income. That is his final position, that the requirements have been satisfied that they were able to produce income, they were directed toward the production of income and that under all the circumstances they were reasonable.

He refers to what he calls the leading case in management service cases. This case, of course, like all others must be looked upon in light of its own facts, and it is not on all fours with the present one. That is why it is so important to get all the facts before the Court. He refers to some of the rules which he extracts come from those cases and says that the case at bar can be distinguished from M.S.S. Inc. v. The Queen, [1987] 1 C.T.C. 130, 87 D.T.C. 5088 (F.C.T.D.) as there was an elaborate sales agreement between the taxpayer and G.M.B.D. Ltée in that case, and the four employees had put into writing other agreements between themselves but they did not have any written agreement about the provision of management services and consequently that in itself makes you sit up and wonder why. It is not the same as in this case.

He said the taxpayer in that case failed to establish that there was a verbal agreement about the provision of and payment for, management services, but he said here I should accept the evidence of the two chief shareholders that there was an agreement and that where their evidence varies or is at variance with Mr. Tessier I should accept their evidence. He says it is true there were no minutes of directors’ meetings or shareholders’ meetings and none referred to in the agreement, but it is not necessary to have those.

He said in the immediately above referred to case it was obvious that there was a put-up job or something akin to that because the management fees allegedly paid in the year in question were proportionately lower than those generally charged as management fees to businesses of the same type for the same period. He says that is another reason why the case was dismissed or the expenses were not allowed.

He says that in the case at bar, none of the factors in M.S.S. Inc., supra, apply. While there was no written agreement for the provision of and payment for services, there was an oral agreement. It governed the business relationship. He says the evidence of the two witnesses themselves is that there was indeed a verbal agreement following the incorporation of Marina and their services would only be provided to Bronson through their respective companies, Marina as referred to and Denver, that Bronson would pay for those services. He also said Mr. Koehli had concluded that as well.

He commented on the possible dispute between the parties, but again I cannot see that as an overriding factor here, and for whatever reason they did go their own separate ways, it appears that they wanted to have their own companies, have more control and look after their own families.

The appellant says that both Denver and Marina carried on other business activities. That they just were not set up for this purpose, which would certainly bring it into greater refute, if all they did was manage these two companies, but he said they had their own business as well, and there is no doubt that that is the case. These were not just shell companies, he said. These were real and active companies.

With respect to the reasonableness, he says the expenses were reasonable, they were commensurate or proportionate to the income produced by Bronson's assets, interests and investments in each of those years. In conclusion he says there was a verbal management agreement between the parties, management services were provided by Marina and Denver pursuant to the verbal agreement, they were intended to and did result in the production of income for Bronson from its assets and interests in 1980 and 1981. They were reasonable and commensurate with the services provided in keeping with the agreement as understood between the parties and the appeal should be allowed.

For the respondent's part, she says there are really two issues. Were the expenses made in order to produce income? She is referring to the relevant sections of the Act, paragraph 18(1)(a), which says:

18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) General limitation.—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;

Then she refers to section 67, which is a section relative to the general limitation on expenses, and it says:

In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.

Indeed, those are the salient features of this particular case.

In order for the appellant to be successful, he must satisfy me on the balance of probabilities that the expenses were three things. One, that the expenses were made, as indicated. Secondly, that the expenses were made to produce income; and thirdly, that the expenses were reasonable.

In his summary, counsel for the appellant suggested that it was not only 1980 and 1981 which were relevant, but the expenses were made for other years, and I questioned him about what section of the Act he was referring to, and of course there was no section of the Act, because it is clear that, according to the normal accounting principles, the expenses in a year should be offset against the income in the year. In this case the expenses were set off in 1980 and 1981 and it is argued they are allowable because they were made to produce income in those years. There is no merit to the suggestion that I can look at other years, other than 1980 and 1981.

Counsel for the respondent says the $350,000 which was alleged to have been expended for the purposes of earning income in 1980 is unreasonable in relation to the amount of income which was produced by the companies in those years. In 1981, there is no evidence as to what services were provided for the $18,000. She says the $350,000 is unreasonable if any services were provided. She said the two main witnesses for the appellant did not give evidence in that regard. In general terms if there were any expenses made they must have been in relation to the repair work and to the general work of Bronson Homes, but she says there was no specific evidence dealing with 1981.

She said further, you have to look at all of that in light of the fact that the $350,000 was set up as early as 1978 and unpaid in 1979 on the company's books. She is saying this makes it suspicious. What we have here is just another book entry for this $350,000 in 1980 and 1981 which is nothing more than the $350,000 which did not get paid over 1978 or 1979, had to go back into income, and that is the only reason.

In 1980 she says the $350,000 went into income under section 70 of the Act, and therefore it was not deductible thereafter in any year.

Her position is that expenses must be charged in the year that they are incurred, and I find no problem with that concept. I accept that as being true, and that is the burden that the appellant has here. Past services do not count. She says in the past it would be more likely, that was before 1980 and 1981, that Bronson would have been provided with services by these two companies, if by anyone, because that is when the company was going at its best. But in 1980 and 1981 things were on the decline.

She asks, what did Marina and Denver do for Bronson in the years in question? She says further that if you really look at the facts, because of the close connection between all the parties in these different companies, that if there was any oral agreement, it was between the two shareholders personally and Bronson. They were acting, not their companies. Their companies had nothing to do with it. It was they who provided the services, if any services were provided.

She says in considering the evidence we must consider seriously the question of credibility. Look at Mr. Tessier's evidence. We should accept Mr. Tessier's evidence over and above that of the appellant’s main witnesses. She says he made it clear as to what amount he was talking about. Here she is referring to the conversations, the meetings that he had with them. They knew what he was talking about. There was no documentary evidence to support it, she said. One would expect there would be some when you are dealing with such a large amount of money. Indeed one would.

She said the only place that the amounts were referred to was the journal entry in 1980, as seen by Exhibit R-3. Here she is referring to 1980, the management fees were recorded by journal entry number five to reflect service on the Beaumaris project, and number four for 1981. All this money, and they only refer to it by way of those two journal entries. If they were available they should have been provided, and they were not provided, nothing was provided to substantiate this claim.

She said the appellant is arguing that Mr. Vince Montemurro and Mr. Gino Antonello attended the meetings on the Beaumaris project on behalf of Bronson's interest, thus they are entitled to be paid the service fees, but she says they relate principally to the 34 lots. Secondly, they were on their own, they were there as their own shareholders, representing their own interests. There is nothing to substantiate any other conclusion, just the viva voce evidence of the two partners, that they were representing Bronson.

She says the expenses were not incurred under paragraph 18(1)(a) because they were not for the purposes of earning income, the evidence does not disclose that they were expended for the purposes of earning income. She said the evidence does not satisfy the burden in that regard. She said there was no income earned during that period or little income earned during that period which would substantiate a finding by me that paragraph 18(1)(a) has been satisfied.

She says there is no evidence as to what work was done. In 1978 she said they were very busy. After that they were winding down the company, in 1980 and 1981. It was more of a company which was providing loans, see Exhibit A-5.

Exhibit A-5 shows what the company was doing in 1980, basically providing the loans to affiliated companies, $464,720 while revenue in 1980 was $304,064. In 1981, revenue was $45,000; loans to affiliated companies were $639,720. What management services could these two companies provide for Bronson? Bronson was just a lending institution at that time. She says any need for management services was provided by Nordex and not by the other two companies.

In summary she says paragraph 18(1)(a) has not been satisfied, there have been no management services provided. She says, you look at the admissions of the partners in that regard, look at the evidence of Mr. Tessier, nothing more than a holding company in 1980 and 1981, and there is no provision in the Act to allow expenses in former years to be considered under section 67 and the expenses were not reasonable.

Now as I indicated before, the burden is on the appellant to satisfy me on a balance of probabilities that he has met all the requirements which I referred to. One, that the expenses were made; two, that the expenses were made for the purposes of earning income; three, that the expenses have been proven; and four, that the expenses were reasonable under the circumstances under section 67. It is not for me to say what evidence has not been presented before me. I have no control over that, but it is the duty of the appellant to establish on a balance of probabilities that all these questions which I have referred to have been answered by it.

In making my decision I pay particular attention to those highlights of the evidence which I have referred to when I was discussing the evidence in general. I pay particular attention to the credibility of the witnesses. Where the evidence is at variance between the witnesses for the appellant, that is, the two principal shareholders, and that of Mr. Tessier for the Minister, I accept the evidence of Mr. Tessier as being more credible. I find that he was a good witness. He was straightforward, he did not try to gild the lily. He spoke from his memory and from his notes, and it seems to me that when he was talking to the witnesses he treated them fairly and did not browbeat them and was attempting to gain information from them which was necessary for him to make the decision that he did, or to make any decision.

I am not satisfied on the basis of the evidence that the appellant has proven on a balance of probabilities that the expenses were indeed made, and one might ask, well what do you expect of the appellant, how can he show that? Well, he could have brought in evidence here, not just cheques, it would have helped if the cheques had been here and they had said anything on them; but he could have brought in evidence before me to show what specific services were provided, how much was provided, how much in each year, what were they provided for. As I say, even the cheques themselves would have been of some significance, but they were not even here.

But on top of that, anybody who is going to spend $375,000 for management fees, is going to have something in writing about it. It does not have to be in writing, I accept that, but even if it were not in writing, one would have to know a lot more about what those services were than the evidence before me dictates that these witnesses knew.

I am not satisfied there was any agreement between the parties at all with respect to management services fees. I am satisfied on the basis of the evidence that the two chief shareholders who were in control of Bronson and the two service companies never really put their mind to the business of service contract at all between their companies. It is more likely, as far as I am concerned, that the true situation is shown from their own evidence, which indicates that they had seen themselves taking very little money out of the company over all the years, and then all of a sudden the money was there and they wanted to get it out. It is more likely that that is why the money came out the way that it did.

It certainly is suspicious when you see $350,000 set up in the books of the company in one year as a bonus payable to the two shareholders and then a couple of years later you see it set up as management fees. It could be proven otherwise but it was not.

The only other evidence on what services were performed is the evidence of the two shareholders themselves, who said in general we did the building and we provided the repair work and we did the warranty work, that's all. There is nothing to corroborate those general statements that that repair work was done. There is no doubt that some work was done, but it could be equally concluded that the work was done by these two individuals themselves acting for themselves or acting out of their interest in Bronson rather than that they were acting for the two so-called service companies.

On the question of reasonableness, I need only go to the balance sheet, to the financial statements themselves during the years in question, which are the only years which are relevant to me, Exhibits A-5 and A-6. The most work that Bronson was doing in 1980 and 1981 was to loan money to its affiliated companies. In 1980, $464,720 and in 1981, $639,720. I go to Exhibit R-3, which is a letter directed to Bronson Homes by Mr. Tessier, and his information comes right from the financial statements themselves, and I can only conclude from all of the evidence given before me that the $350,000 referred to as management fees in 1980 relates principally to the 34 lots in the Beaumaris project. I think I can draw no other conclusion from it, because it is clear from all of the evidence taken together that that is what it relates to. Twenty six of those 34 lots were sold prior to 1980, only seven lots were sold in 1980 and one lot probably postponed until 1981.

In 1980 then, what was the possibility of earning income to the extent necessary to cover an expense of $350,000 in management fees? There was none because the evidence indicates that the income was only $304,064 in 1980. Then you are going to offset $18,000 against income for one lot sold in 1981. There is no way that that amount of expense could justifiably be deducted against any possible income that could have been earned by Bronson in 1980 or 1981. I am not satisfied that the amounts expended were reasonable, and for that and the reasons I have already indicated the appeals are dismissed.

Appeals dismissed.