Section 67


Peach v. Canada, 2016 FCA 173

s. 67 to be applied on an expense-by-expense basis

Before sending the case back to the Tax Court for redetermination of the s. 67 issue, Trudel JA stated (at paras. 5-7):

Under section 67, the Judge…considered globally whether the expenses were reasonable and accepted that…some of the expenses should be allowed to the extent they matched the appellant’s commission income. He did not have regard to the particular expenses and the appellant’s explanation for them.

Stewart makes it clear (at paragraph 57) that under section 67, unreasonable expenses can be eliminated or reduced to make them reasonable.

We are not satisfied that the Judge asked himself that question, namely whether the actual expenses in this case were unreasonable and what reduction in the appellant’s claimed expenses might be necessary in order to be reasonable.

Beaudry v. The Queen, 2010 DTC 1266 [at 3853], 2008 TCC 17, aff'd Romar v. The Queen, 2010 DTC 5076 [at 6816], 2009 FCA 48

The taxpayers deducted the price to develop antibodies for diagnostic kits. The price amounted to $1.75 million per antibody. Evidence showed that the usual development cost of an entire diagnostic kit was between $640,000 and $1,330,000, and that the antibodies only represented 10% of the total cost. There was also evidence that the prices had been set with little regard to the final product of the development.

Angers J. concluded that no reasonable businessperson would have paid what the taxpayers did, and under s. 67 disallowed the deductions entirely.

Hammill v. Canada, 2005 DTC 5397, 2005 FCA 252

The taxpayer purchased gems for an amount in excess of their worth, and then paid a total of $1,651,766 in charges purportedly made to secure a sale of the gems (which never occurred).

After finding that the expenses were not deductible because the gem operation of the taxpayer was not a business. Noël J.A. went on to indicate that section 67 could have been applied as well to deny the deduction of the expenses given that the Supreme Court in the Stewart case had indicated that s. 67 could be applied to eliminate an expense, as well as to limit the deductible quantum.

Petro-Canada v. Canada, 2004 DTC 6329, 2004 FCA 158

A joint exploration corporation which was dealing at arm's length with its two shareholders (who were acting in concert with each other) acquired seismic data from one of the two shareholders at a purchase price substantially in excess of fair market value and on non-commercial terms. In finding that this was not an appropriate case to apply section 67 (but after having found that s. 69(1)(a) applied to reduce the cost of the seismic data to the joint exploration corporation) Sharlow J.A. stated (at p. 6339) that "I am unable to agree with the Crown that it necessarily follows that paying more than fair market value is unreasonable".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) joint purchase with no separate interests 119
Tax Topics - Income Tax Act - Section 66.1 - Subsection 66.1(6) - Canadian exploration expense - Paragraph (a) no plan to use purchased seismic data 144
Tax Topics - General Concepts - Purpose/Intention purpose test satisfied even if multiple purposes 77

Global Communications Ltd. v. Canada, 99 DTC 5377 (FCA)

S.67 would have applied to reduce a purported expenditure on CEE (if, in fact, it had qualified as CEE) from $15 million to $1.8 million because the latter figure was the value of the data.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 66.1 - Subsection 66.1(6) - Canadian exploration expense - Paragraph (a) no exploration use of seismic data by taxapyer 256

Shell Canada Ltd. v. Canada, 99 DTC 5669, [1999] 3 S.C.R. 622

In refusing to apply s. 67 to interest that was found to be reasonable in amount for purposes of the reasonableness limitation expressed in s. 20(1)(c), McLachlin J. stated (at p. 5678):

"... it seems to me that Parliament intended s. 67 to apply primarily to those deductions claimed under the provisions of the Act that do not have their own internal limiting clauses ... . Where the applicable provision has its own internal reference to 'reasonableness', as does s. 20(1)(c)(i), s. 67 could not apply without distorting the plain meaning of the more specific provision."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Substance legal relationships prevail over economic realities 201
Tax Topics - General Concepts - Tax Avoidance taxpayers entitled to rely on structure of their transactions 170
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) borrowing in legal substance was in weak currency 174
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Foreign Exchange FX hedging gain was capital gain as hedged borrowing was on capital account 225
Tax Topics - Statutory Interpretation - Specific v. General Provisions 96

Mohammad v. The Queen, 97 DTC 5503 (FCA)

The taxpayer had his acquisition of a co-ownership interest in a residential property by assuming his share of a first mortgage and by borrowing money for the balance of the purchase price. Mogan TCJ. had applied s. 67 to disallow the deduction of the interest paid on the personal loan, and found that, after such adjustment, the taxpayer had a reasonable expectation of profit. In finding that this use of s. 67 was improper, Robertson J.A. stated (at p. 5509) that s. 67 "cannot be invoked to limit an otherwise deductible expense on the ground that it is excessive or disproportionate in relation to revenues".

Graves v. The Queen, 90 DTC 6300 (FCTD)

Counsel for the Crown argued that costs incurred by the taxpayers in attending conventions in the United States were unreasonable given the minimal profitability of their business, which did not show a profit for the two taxation years in question and for the decade thereafter. MacKay J., in allowing the deductions, stated that "it would be inappropriate to view their profit and loss experience with the hindsight of ten years, a longer time span that is available to the Minister or the Tax Court whose decisions are herein at issue".

Maduke Foods Ltd. v. The Queen, 89 DTC 5458 (FCTD)

bonus amounts to family members were completely disproportionate to services rendered

Accrued remuneration incurred by a family-owned corporation for two weeks per year of work at the store by the wife of one of the minority shareholders (of $50,000 per annum for the 1982 to 1984 taxation years of the corporation) and for one month's work each year by each of her four children (ranging from $12,500 to $20,000 for those taxation years) was found to be "completely out of proportion to what others receive for working in the store", and the deductible amount was reduced, taking into account the countervailing consideration that "it is not reasonable to limit their remuneration to what was paid to non-family members". Strayer J. added:

"I accept that it may be appropriate in a given taxation year to vary the amount of a bonus depending on the success of the business during that year, and also to build some factor of recognition of past service and future commitment into the amount of a bonus, (provided that one is not in fact specifically paying, in one year, expenses incurred for earning income in other years)."

Irving Oil Ltd. v. The Queen, 88 DTC 6138, [1988] 1 CTC 263 (FCTD), aff'd 91 DTC 5106 (FCA)

expense fell within reasonable range

An individual ("K.C. Irving") who controlled the taxpayer and an arm's length supplier of Middle East crude ("Socal") sought to share the non-Canadian profits realized by a Bermudan company ("Irvcal") controlled equally by K.C. Irving and Socal. This was done by having Socal sell crude oil to Irvcal at Socal's cost and, then, by having Irvcal sell it to the taxpayer at a price within, but not exceeding, the fair market value range.

The outlay by the taxpayer was reasonable in amount. "Had the plaintiff paid double the price in order to 'gain security of supply' ... the agreement with the benefits as consideration would surely precipitate an enquiry as to whether it was reasonable or not. However a fair, competitive market price or one within the reasonable range, whether f.o.b. or c.i.f., is the quintessence of what is 'reasonable in the circumstances' of the real world."

The Queen v. Chrapko, 84 DTC 6544, [1984] CTC 594 (FCTD), rev'd 88 DTC 6487, [1988] 2 CTC 342 (FCA)

It was found that the Minister could have invoked section 67 (if he had done so on a timely basis) to deny the deduction of a portion of an employee's travelling expenses on the basis "that it is unreasonable to permit a taxpayer who otherwise qualifies under S.8(1)(h) to live away from all places of employment and in turn, to deduct the cost of travel to all of them."

Antoine Guertin Ltée v. The Queen, 81 DTC 5268, [1981] CTC 351 (FCTD), aff'd 87 DTC 5458, [1988] 1 CTC 117 (FCA)

A sister of the taxpayer's president attended meetings of the board and performed various errands on behalf of the taxpayer. A reduction for tax purposes of her salary during the early 1970's, from $13,000 or $9,000 per annum to $3,000 per annum, was confirmed. (s.67 not explicitly cited.)

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Old 93

Tobias v. The Queen, 78 DTC 6028, [1978] CTC 113 (FCTD)

Expenditures amounting to approximately $106,000 incurred by the taxpayer over an 8 year period in an unsuccessful search for buried pirate treasure were reasonable. "[T]he plaintiff had assured himself to his satisfaction that there was a distinct possibility that treasure might be found, despite the failure of his predecessors, by the use of more modern methods and equipment. Regardless of the high degree of uncertainty as to the success of the project the prospect of the very substantial reward would compensate the plaintiff for the time, money and risk involved."

Gabco Ltd. v. MNR, 68 DTC 5210, [1968] CTC 313 (Ex Ct)

"unreasonable" if no reasonable business would have paid it

A successful family-owned construction company followed a policy of paying bonuses to its employees in proportion to their shareholdings, which in turn were issued to them in proportion to their perceived contribution to profitability. The president and largest shareholder of the company hired his younger brother, who was 19 years old and had a dismal academic record, to act as his right-hand man. In accordance with the company's remuneration policy, the younger brother received bonuses and other remuneration which ranked second only to that received by the president. Before finding, in light of evidence that the two brothers worked together very well as a team and that the younger brother made a valuable contribution to the business, that the amount of remuneration paid to him was not unreasonable, Cattanach J. stated (p. 5216) that:

"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 businessman would have contracted to pay such an amount having only the business consideration of the appellant in mind."

Frontenac Shoe Ltée v. MNR, 63 DTC 1129 (Ex Ct)

The taxpayer's controlling shareholder who in his spare time had developed a detailed catalogue to facilitate sales of shoes by the taxpayer, sold his copyright in the catalogue to the taxpayer in consideration for the right to receive 3.5% of the taxpayer's direct sales of shoes until such time as he received a specified total. Although the stated purpose of the catalogue was to enable the taxpayer to largely do without its travelling salesmen, the payments to the shareholder substantially exceeded the level of commissions that the taxpayer previously had been paying. Noel J. suggested that a reasonable fee would have been based on the commission levels previously paid plus an additional amount based on anticipated increased sales, and referred the quantum of deduction back to the Minister for reassessment on this basis.

See Also

Gervais Auto Inc. v. Agence du revenu du Québec, 2021 QCCA 459

interest rate fell within a reasonable range

The taxpayer financed its inventory of used automobiles held for resale through unsecured loans from the family Holdcos that were its shareholders. When the ARQ reviewed the deductibility of the loan interest of 10% p.a., the taxpayer provided a very brief letter from Desjardins stating that for an unsecured “cash flow” loan the interest rate in 2015 would fall in the range of 9% to 12%, and then a more detailed letter from its accountants (Deloitte) that, based on Moody’s metrics, concluded that an interest rate for such loans should fall in the range of 7.89% to 12.39%. The ARQ reassessed to deny the claimed interest in excess of 7.89%, having regard to the Quebec equivalent of ITA s. 67 (TA s. 420).

Before reversing the decision below to confirm these reassessments, the Court of Appeal stated (at para. 13, TaxInterpretations translation):

The appellant was not required to make out a prima facie case that the 7.89% rate was unreasonable but, rather, that the assumption, on which the respondent relied in assessing it, that the 10% interest rate deducted from its income for the taxation years in issue was not "reasonable in the circumstances," … was prima facie … unsound.

Since the 10% rate actually used fell within what the above evidence indicated was a reasonable range, such a prima facie case had been established – so that the onus shifted to the ARQ, which had “failed to demonstrate by a preponderance of the evidence that the 10% interest rate was unreasonable within the meaning of TA section 420.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) 10% interest rate on unsecured loans from shareholders was not unreasonable 503
Tax Topics - General Concepts - Onus Court of Appeal free to re-weigh the evidence once the failure of the trial judge to apply onus correctly was established 318

Banque Laurentienne du Canada v. The Queen, 2020 CCI 73

Crown failed to bring expert evidence as to the reasonableness of the fees

In order to finance an acquisition, Laurentian Bank issued subscription receipts to two private placement investors (the Caisse for $100 million and a labour fund for $20 million) at a subscription price representing a 2% discount to the market trading price, and with the subscription proceeds being held in trust until the closing of the acquisition, at which point, the subscription receipts were converted, without further payment, into common shares of the Bank. The Bank was required by the subscription agreements to pay “transaction fees” to the investors of 4% of the subscription amounts on the closing.

Ouimet J found that as the Minister, in denying the deductibility of the transaction fees under s. 20(1)(e), had not assumed that the fees were unreasonable in amount, so that the burden was on the Crown to establish that the fees were not deductible under s. 67. In finding that the Crown had not met its burden, he stated (TaxInterpretations translation, paras. 96-97):

Usually, when the value of one or more services is in question, the testimony of one or more experts is required to enable the court to determine the value of each of the services provided. A review of comparable transactions is also usually necessary, especially where the respondent alleges that certain terms of a transaction are unreasonable. This is also useful in order to allow the Court to make, if necessary, to an otherwise unreasonable amount, the necessary adjustments.

The respondent did not do any of these things. In any event, it has not submitted any evidence that this type of analysis was done either by the Minister or at her request.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e) fees paid by the issuer of subscription receipts to the investors themselves were deductible under s. 20(1)(e) 291

Gervais Auto Inc. v. Agence du revenu du Québec, 2019 QCCQ 5894, rev'd 2021 QCCA 459

taxpayer could not displace ARQ assessment of interest on basis of low point in interest-rate range provided by taxpayer's expert

The taxpayer financed its inventory of used automobiles held for resale through unsecured loans totaling $6 million from its shareholders, bearing interest at 10% p.a. When the ARQ reviewed the deductibility of the interest, the taxpayer provided a letter from its accountants (Deloitte) that concluded, based on Moody’s metrics, that an interest rate for such loans should fall in the range of 7.89% to 12.39%. The ARQ reassessed to deny the claimed interest in excess of 7.89%.

After referring to the Quebec equivalent of s. 67, and in finding that the taxpayer had not met its burden of establishing that such assessments were incorrect, Allen JCQ stated (at paras. 63-64, TaxInterpretations translation):

How can the plaintiff challenge the presumption of correctness of the notices of assessment where the 7.89% rate, considered to be reasonable and adopted by the defendant, falls within the range that its own expert considered to be a reasonable rate based on the current rates in the market for obligations with similar considerations and risks during the period in litigation?

Doubtless, the rate of 7.89% corresponds to the lowest rate in the range, but it nonetheless is within that range and cannot be considered to be prima facie unreasonable.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) a 10% interest rate on an unsecured loan was unreasonably high 391

Alberta v ENMAX Energy Corporation, 2018 ABCA 147

test of whether the amount was objectively reasonable

After quoting from Gabco, and in concluding that the reference is s. 20(1)(c)(i), as it applied for the purposes of computing payments to be made by tax-exempt power companies in lieu of income taxes, to a reasonable rate of interest referred to an arm’s length interest rate, the Court stated (at para. 86):

Gabco frames the inquiry in terms of whether no reasonable business person would have contracted to pay the disputed interest. However, the question is not whether there is some imaginable business person who might have agreed to do so even if 99% of reasonable business persons would not have done so. Therefore, we would refine the test this way: would a reasonable business person have contracted to pay the disputed amount of interest taking into account only the business interests of the borrower? This accords with the requirement in Gabco that the test must be objective and with how that test has been applied in later cases: see e.g. Safety Boss Ltd v Canada, 2000 CanLII 216 (TCC), [2000] 3 CTC 2497 at para 27 (FC); TransAlta Corp v Canada, 2012 FCA 20 (CanLII) at paras 74-78, 426 NR 27. In other words, was the interest paid objectively reasonable? Under the Balancing Pool Payments regime, the answer to this question may also require a court to consider whether the terms of the loan were objectively reasonable to the extent those terms affected the interest rate.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) interest on a loan from a tax-exempt parent should be at an arm’s length rate reflecting implicit parental credit support 470
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(2) arm’s length interest rate to sub could not be manipulated by structuring the loan as a junk bond without implicit parental credit support 264
Tax Topics - General Concepts - Tax Avoidance right to structure affairs to reduce taxes (or, here, payments in lieu) inapplicable where consumer assistance purpose defeated 172
Tax Topics - Statutory Interpretation - Hansard, explanatory notes, etc. purpose inferred in part from Legislative Assembly statement of Minister 81

Bell v. The Queen, 2016 TCC 175

bonuses received by a spouse handling back office functions were disproportionate to her contribution

A husband-wife team owned and managed a construction firm doing work in the general Vancouver area with the husband managing the business development and construction work and the wife handling the administrative and human resources work. In order to take advantage of her being a status Indian (he was not), the admin office was moved to the reserve which was closest to Vancouver. (Her own band was on a different reserve.)

The Crown did not challenge the Indian Act exemption for the regular salary paid to her (of approximately $100,000 per annum, which approximated her husband’s salary), nor did it challenge the deductibility of the bonusing of all of the firm’s remaining profits to her, including a $2 million bonus in 2008, but did challenge the exemption to her of those bonuses.

In finding that her bonuses were taxable to the taxpayer, Woods J found (at paras 57-58):

[T]here was no evidence…that the bonuses were…intended…to reasonably compensate the Appellant for her duties of employment. …

[T]he Appellant received remuneration through her bi-weekly pay that was roughly equivalent to Mike’s remuneration, except for 2008 when the Appellant’s regular pay exceeded Mike’s. In order for the bonuses to be reasonable in the circumstances, the Appellant should have made a greater contribution to Reel Steel than Mike. As discussed below, I find that the evidence does not support this.

Locations of other summaries Wordcount
Tax Topics - Other Legislation/Constitution - Federal - Indian Act - Section 87 excessive bonuses not connected to reserve 644

ENMAX Energy Corp. v. Alberta, 2016 ABQB 334, rev'd 2018 ABCA 147

Gabco test implies a range

Before finding that interest payable by the appellant on a subordinated intercompany note bearing interest at 11.5% was in a “reasonable amount” as required by s. 20(1)(c) notwithstanding that it may have exceeded an arm’s length rate, Poelman J stated (at para. 117):

The Gabco test adopts the perspective of the borrower’s business considerations… . Thus, it refers to a particular set of circumstances, including the actual legal arrangement establishing the interest obligation. It does not make it impossible for taxing authorities to challenge a deduction, because it limits deductibility to the amounts reasonable business persons would contract to pay. Its phraseology infers, however, that there will usually be a range.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) 11.5% interest rate on unsecured intercompany note was reasonable under s. 20(1)(c) notwithstanding that this exceeded an arm’s length rate of around 8.5% 483
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(2) arm's length comparables for intercompany interest rate not dispositive 284

Anderson v. The Queen, 2016 TCC 106 (Informal Procedure)

principle of deference, in reviewing s. 67 expense deductibility, to presumed taxpayer business acumen is not absolute

The taxpayer commenced to act as an independent distributor of coffee for a company (“Organo Gold”), which was a multi-level marketing enterprise. As he would be compensated for products sold by his sub-agents, he incurred travel, accommodation and meal expenses (claimed to be $64,142) and deducted these as a business loss on his 2011 return, which also included employment income of $116,849 from his (unrelated) full time job.

Smith stated (at paras. 35, 37):

If the Minister concludes that [expenditures] are unreasonable in the sense that “no reasonable business man would have contracted to pay that amount” (Gabco, supra), then, notwithstanding the business acumen of the business owner, the expenditures may be denied in whole or in part relying on section 67. …

[T]he presumed existence of business acumen should not be treated as absolute, irrefutable or sacrosanct.

Smith allowed the taxpayer’s claim for travel expenses of $30,418, stating (at para. 51):

There is an obvious connection to the source of income, and while the amount is substantial, I am unable to conclude that it was unreasonable in the circumstances… .

The taxpayer also paid U.S.$15,000 to a prospective salesman, supposedly with a phenomenal sales record, mostly as an enticement to become a sub-agent and as an advance on his future commissions.

Smith J stated (at para 62):

I find that “no reasonable business man would have contracted to pay that amount” (Gabco, supra), certainly not without a more detailed business agreement.

6051944 Canada Inc. v. The Queen, 2015 TCC 180 (Informal Procedure)

management fee not excessive for ETA purposes

A private company with a new home construction business with revenues in the $12M to $16M range had a profitable 2009 fiscal year and when the 2009 accounts were prepared, accrued and paid management fees to its two shareholder-management companies of $1.8M rather than the fees in the $1M to $1.2M range, as had been accrued and paid for nearby years. CRA claimed that the enhanced fee was "merely a profit distribution mechanism," and denied input tax credits on the portion of the fees in excess of $1M under ETA s. 170(2) (an analogue of ITA s. 67, although Favreau J stated (at para. 23) that "the jurisprudence addressing section 67 of the [ITA] is not relevant…because the text of section 67 is different.")

In allowing the appeal, Favreau J referred to the value of the services provided and the resulting profitability of the business, and did not engage with the CRA concern that essentially the same services were provided each year. He also noted that for income tax purposes, what was deductible to the company was includible in the income of the management companies at the same federal rate of income taxation.

See summary under ETA, s. 170(2).

McLarty v. The Queen, 2014 DTC 1162 [at 3556], 2014 TCC 30

leveraged purchase of seismic data at arm's length was presumptively reasonable

On December 31, 1993, the taxpayer and other parties to a joint venture acquired (through the joint venture operator ("507") the rights to exploit a body of seismic data (which had been previously sold the same day for $805,000 in cash) in consideration for $975,000 cash and a $5,525,000 promissory note (payable only out of 50% of net licensing revenues and 20% of any production cash flow generated out of any petroleum rights acquired by the joint venture) - which the Minister conceded was not a contingent liability. After the receipt of licensing revenues (mostly in the first three years) which (as to 50% thereof) were cumulatively less than the note interest, in 2006 the data was sold for $560,000 resulting in the forgiveness of $7,080,471 of the note balance including accrued interest.

After quoting with approval (at para. 62) a statement in Petro-Canada that "I am unable to agree…that it necessarily follows that paying more than fair market value is unreasonable," Favreau J found that the Minister had not established that the $6,500,000 paid by the joint venture participants for the seismic data was unreasonable, and so could not limit the taxpayer's deduction under s. 67 (the limit the Minister sought was the cash component plus 50% of net licensing revenues received). Given that the transaction had been at arm's length, the onus was on the Minister to establish that the fair market value of the data was lower than the $6.5 million purchase price, which the Minister had not done (para. 64). Favreau J also stated (at para. 65):

The fact that the revenues from the licensing of the Seismic Data amounted to $1.8 million over a three-year period supports a value for the Technical Data at the time of their acquisition by the Joint Venture in excess of $975,000.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Agency participations contrary to agreement were disregarded 111
Tax Topics - General Concepts - Illegality participations contrary to agreement were disregarded 113
Tax Topics - General Concepts - Sham sham cannot apply to just part of transaction 145
Tax Topics - General Concepts - Tax Avoidance sham cannot apply to just part of transaction 145
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) revenues 10% of interest 186

Tri-O-cycles Concept Inc. v. The Queen, 2013 DTC 1084 [at 467], 2009 TCC 632

After finding that the taxpayer had been carrying on a business of developing pedal and steering systems for adult tricycles, Paris J found that there was no evidence to suggest that $50/hour was unreasonable for the taxpayer to pay its sole director, shareholder and employee, who had a background in business and industrial design, to develop prototypes and perform various development- and patent-related tasks.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Start-Up and Liquidation Costs lengthy development period preceding first revenue 206

Massicolli v. The Queen, 2013 DTC 1049 [at 266], 2012 TCC 344

The taxpayer was a securities broker for National Bank Financial ("NBF"), and worked there with another investment advisor ("Auger") in the what they styled as the "Auger-Massicolli" partnership. As part of a client retention and lead management strategy, he would mail clippings from newspapers and magazines to clients. These clippings were generated by their spouses, who were the sole employees of a corporation ("Sydwood") whose two equal shareholders were corporations controlled by an Auger or the taxpayer's family trust. The two partners paid fees to Sydwood of 0.15% per month (2% per annum) of assets the two partners "generated," for the Sydwood "research" services.

The taxpayer deducted research fees of $134,697 and $152,199 in computing his employment income for 2003 and 2004 as business expenses, and his commission income for those years was $463,510 and $376,262. Paris J. disallowed the deductions in full under s. 67. Among the reasons listed were that:

  • NBF provided similar reports for $20 per mailing, and the taxpayer could not establish that it was reasonable not to use them instead - i.e. that the Sydwood reports were superior, or that the NBF fees would have been greater;
  • the research fees were greatly in excess of Sydwood's cost ($50,000 a year for salaries, plus some financial publication subscriptions); and
  • the taxpayer's claim that 0.15%-0.40% per month was the competitive rate for similar report-generating services was unsubstantiated.

Ruff v. The Queen, 2012 TCC 105

The taxpayer, a lawyer, was bilked of $400,000 by scam artists, posing as clients, who induced him to pay for "processing " fees in connection with the recovery of a supposed container in the Ivory Coast containing US$8.5 million of cash. Webb J. found that as it was not reasonable in the circumstances for the taxpayer to have believed that the container was real, the amounts expended by him also were not reasonable, and their deduction was denied in full by s. 67.

Bilous v. The Queen, 2011 DTC 1126 [at 710], 2011 TCC 154

The individual taxpayer was the principal shareholder of the corporate taxpayer, a canola farm supplier with annual sales in the tens of millions. Sheridan J. found that the taxpayers' expenses in establishing and operating a snowmobile museum were deductible as business expenses and capital cost allowances, because the costs were incurred to promote the canola business. In reaching that conclusion, she noted that the individual taxpayer often used the topic of snowmobiles as a "conversational in" to build a rapport with potential customers (who, being canola farmers, were often snowmobilers themselves), and that the costs in operating the museum were small compared to the taxpayers' revenue. Moreover, given that the costs had a clear connection to earning business income, the Court could not second-guess the taxpayers' business judgment.

Noel v. The Queen, 2011 DTC 1056 [at 313], 2011 TCC 27

The taxpayer, an independently practising lawyer, paid his wife $45,000 in the year as remuneration for bookkeeping and office management services. The Minister disallowed the taxpayer's deduction of the remuneration on the basis that the sporadic manner of its payment suggested an income-sharing arrangement rather than salary. In allowing the deductions, Hogan J. stated (at para 14):

The ITA does not require that a salary be paid on a regular basis.

Bertomeu v. The Queen, 2006 DTC 3441, 2006 TCC 85

A firm of architects of which the taxpayer was a partner was entitled to deduct the full amount of management fees that it paid to a management corporation of which the taxpayer was the sole shareholder equal in amount to the cost of the administrative and management services rendered to the firm plus a 15% surcharge thereof and a further charge of 3% of all amounts invoiced by the management corporation to the firm's clients.

Humphrey v. The Queen, 2006 DTC 2730, 2006 TCC 168 (Informal Procedure)

The taxpayer was assessed for amounts that she embezzled from her employer in 2000, declared bankruptcy because of this claim against her and, after her discharge (without having paid any of the assessment), began paying back to her employer the amount she had taken pursuant to a court order.

In finding that the taxpayer was not entitled to deduct amounts paid by her pursuant to the court order by virtue of s. 67, Bowman C.J. indicated (p. 2734) that under "a textual, contextual and purposive interpretation", it would be "unreasonable for her to be able to deduct the repayments of amounts on which she has never paid tax."

Manchester v. The Queen, 2005 DTC 1429, 2005 TCC 402

Directors' fees that were paid to children of the taxpayer's shareholders for serving as directors of the corporation, with the amount paid to them being related to their personal expenses and being unrelated to any level of services provided by them to the corporation (which mostly were minimal) were deductible only to the extent of $1,500 per year per director, with the exception of one of the directors who was capable of making a more significant contribution to the taxpayer's business.

McLarty v. The Queen, 2005 DTC 217, 2005 TCC 55, rev'd 2006 DTC 6340, 2006 FCA 152, aff'd supra.

Before going on to find that the purchase price for seismic data acquired by the taxpayer did not exceed its fair market value, Little J. indicated (at p. 229) that "since this was an arm's length transaction, and the expense was reasonable this is not an issue of fair market value" and that "given the highly speculative nature of the oil and gas exploration industry, the fact that seismic data is very difficult to value as well as the experience of Mr. Sapieha [the promoter] in the oil and gas exploration industry, this is not an appropriate case to question the participant's business judgment".

Mépalex v. The Queen, 2004 DTC 2232 (TCC)

Bonuses paid to children of the taxpayer's controlling shareholders that clearly were unreasonable in amount in relation to the services rendered by them were not deductible notwithstanding a position of the taxpayer (that was not accepted by Lamarre Proulx T.C.J.) that the bonuses should be attributed to the parent managers pursuant to s. 56(2) and, as a result, considered reasonable in relation to the services rendered by such managers.

Shaver v. The Queen, 2003 DTC 2112, 2004 TCC 10

After finding that expenses incurred by the taxpayer in connection with a trip to Las Vegas by him and six other people including his wife and some Amway distributors were not deductible by virtue of not being incurred for an income-producing purpose, Lamarre J. went on to indicate that even if s. 18(1)(a) had not prohibited the deduction of the expenses, the expenses were so excessive as to be unreasonable and therefore non-deductible by virtue of s. 67, given that the expenses incurred for the trip represented one-third of gross income for the year.

Costigane v. The Queen, 2003 DTC 254, 2003 TCC 67

A family trust was established which employed, on a part-time basis, three individuals previously employed full-time in the taxpayer's dental practice, and charged an administration fee to the taxpayer equal to four times the cost to it of employing the three individuals.

Miller T.C.J. found that the 15% mark-up allowed by the Minister was reasonable, whereas the deduction of the full amounts by the taxpayer was not.

Gagnon v. The Queen, 99 DTC 845 (TCC)

Before finding that expenses incurred by the taxpayer were deductible, Bowman TCJ. stated (at p. 849):

"Expenses are not unreasonable simply because they are substantial. Here, they were commensurate with the anticipated returns. For an expense to be unreasonable it must, based upon objective criteria and comparison, be one that a reasonable businessperson would not have incurred having in mind only the commercial advantage sought ... ."

Halifax Green Elevator Ltd. v. The Queen, 96 D.T.C 1178 (TCC)

Lease performance guarantee fees paid by the taxpayer to an affiliated corporation ("CMM") resident in the Dutch Vigin Islands were found to be deductible, in the face of an argument of the Crown that the non-resident affiliate had little or no assets, given that back-up guarantees given to ("CMM") constituted a valuable asset of CMM, even if a contingent one.

Fehrenbach v. MNR, 95 DTC 860 (TCC)

The taxpayer, who was a partner in a law firm, deducted that portion of the expenses attributable to a condominium in a ski area represented by the days of alleged business use (i,e., making the condominium available to clients or potential clients) divided by the total number of days the condominium was in use. After finding that the expenses were not deductible by virtue of paragraph 18(1)(h) and by virtue of their failure to satisfy the requirements of paragraph 18(1)(a), Margeson TCJ. went on to note that the expenses claimed were unreasonable in amount (asking, at p. 868, "what reasonable businessman would incur such a capital expenditure as this, merely on the unfounded expectation that he might attract some new clients, without having any idea of the level of success of such action"), and went on to indicate that if the expenses were deductible, the most reasonable apportionment formula was that proposed by the Crown (i.e., the number of days of business use divided by 365).

Canadian Propane Gas & Oil Ltd. v. MNR, 73 DTC 5019, [1972] CTC 566 (FCTD)

With respect to the statutory predecessor of s. 68, Cattanach J. stated (p. 5028):

"I should think that 'reasonable' as used in the context of section 20(6)(g) does not mean from the subjective point of view of the Minister alone or the appellant alone, but rather from the point of view of an objective observer with the knowledge of all the pertinent facts."

Administrative Policy

May 2016 Alberta CPA Roundtable, Q.15

deduction by corporation of rents/reimbursements paid for use of office in shareholder’s home

What is the CRA policy on rental claims by a corporation for use of a workspace in a shareholder’s residence? Consider: a monthly payment based on estimated cost reimbursement for costs related to the workspace in the individual’s home; or a reimbursement of actual costs, e.g., of a portion of mortgage interest, property tax, insurance, maintenance, utilities, based on the pro rata square footage usage; or a rental payment. CRA responded:

In each of the examples, a monthly payment based on estimated or actual costs related to a work space in home could be deducted by the corporation, if reasonable in the circumstances. Generally, we would evaluate reasonableness in relation to the actual costs incurred by the shareholder. We would also expect, at a minimum, that the space is needed to file records, book appointments, take business phone calls and perform other administrative functions, as the case may be, and that there is no other space available to the corporation. …

Even though [IT-352R2, paras. 2-8] refers to employee expenses, the same principles would apply in an employee/shareholder situation. Therefore, no mortgage interest or...CCA...should be claimed.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) reasonable rents for tangible use of shareholder's home not a benefit 294

5 January 2016 External T.I. 2015-0622991E5 - Reasonableness of intercorporate management fees

reasonableness of management fee paid by opco to management holdco following 6051944

The 6051944 Canada Inc. case found that a fee paid by a private company (engaged in a new home construction business) to its two shareholder-management companies), which was significantly higher than for other years when operating profits had been lower, was reasonable for ETA purposes (rather than being "merely a profit distribution mechanism," as alleged by the Crown). In response to a query on whether CRA would revisit its position on the reasonableness of management fees paid by an operating company to a holding company that is owned by an individual who is the ultimate operator/manager, CRA stated:

…[T]his GST/HST case was heard under the…informal procedure and therefore has limited precedential value. Accordingly, there are no plans to undertake a review of the CRA’s position on the above-noted issue for income tax purposes. The determination of whether any outlay or expense is reasonable under section 67 of the Income Tax Act is primarily a question of fact and can only be determined once all the facts and circumstances are known.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 170 - Subsection 170(2) no change in policy re fees paid to managment holdcos following 6051944 127

20 February 2013 External T.I. 2012-0473051E5 F - Frais de gestion versés à un conjoint

determining reasonableness of spousal management fee entails a “comparison to an amount paid for similar services according to industry standards”

In the course of a general discussion of fees paid by the taxpayer for management services of the taxpayer’s spouse, CRA stated:

The determination of the reasonableness of an amount for purposes of section 67 includes a consideration, among other things, of the nature and extent of the services actually provided by your spouse and their comparison to an amount paid for similar services according to industry standards. In addition, the reasonableness of an expense in computing the rental income of a capital property is based on the gross income of the rental property.

19 October 2012 External T.I. 2012-0440071E5 - Section 67 of the Income Tax Act

correlative income reduction to recipient where s. 67 denial

CRA affirmed its position in 1986 Conference Report, Question 39. Where part of an intercompany management fee or similar charge is disallowed under s. 67 ("perhaps on the basis of a different interpretation of reasonableness"), CRA stated:

In the absence of special situations, such as abuses, it is the department's policy not to tax the same amount twice. This policy may have application where the issue concerns the matter of reasonableness. Where a taxpayer has been reassessed for a disallowance pursuant to section 67 and the reasonable amount has been reported by the recipient corporation, the department will, upon receipt of a written request from the recipient, make the appropriate adjustment(s) granting alleviation provided that the recipient agrees to refund the excess to the taxpayer.

In the event that the recipient resides in a treaty country, "competent authority assistance may be requested to negotiate offsetting or corresponding adjustments in order to relieve the double taxation."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 214 - Subsection 214(3) - Paragraph 214(3)(a) corresponding adjustment to recipient 146

20 May 2010 External T.I. 2009-0352801E5 F - Caractère raisonnable - honoraires de gestion

factors reviewed in considering reasonableness of management fees

When asked as to the reasonableness of management services charged to a professional partnership by a corporation owned by shareholders related to the partners, CRA stated:

[W]e cannot make a determination as to whether a fee paid is reasonable in the circumstances without knowing all the relevant facts, including the type of business of the taxpayer, the type of services provided, the time required to provide those services, and the availability and cost of similar services that might be provided by other businesses.

13 May 2010 External T.I. 2009-0343971E5 F - Société de services pour les professionnels

deductibility of management fees paid by professional practice to services corporation

Amendments to the Professional Code of Quebec resulted in several professional orders allowing their members to carry on their professional business through a corporation. CRA stated:

Where a professional order has adopted a by-law allowing its members to carry on their professional business through a corporation, we are generally of the view that a related management corporation may perform actual real management and administrative services for their professional business in relation to expenses directly related to their professional practice. The deduction of management fees is not, however, subject to special legislative rules. To be deductible, management fees must in accordance with paragraph 18(1)(a) have been incurred by a taxpayer for the purpose of earning income from a business or property, subject to section 67 which limits the deduction to an amount that is reasonable in the circumstances. In general, reasonable management fees correspond to the fair market value of the services rendered.

1 February 2010 Internal T.I. 2010-0354671I7 F - Frais de gestion à une fiducie

CRA policy of not challenging reasonableness of bonuses paid by CCPC to an individual holding through Holdco does not apply where individual holds through trusts

The Corporation (a CCPC) pays management fees (including a bonus component) to a non-Alberta trust (“Trust A”) whose beneficiary is an Alberta trust (“Trust B”), whose sole beneficiary is the sole shareholder of Corporation and/or his family. Trust B pays tax on its distributions from Trust A, and distributes the remaining amounts to its beneficiary as capital distributions. Would CRA question the reasonableness of the amounts paid by Corporation to Trust A, and would its position change if the sole shareholder were not the sole beneficiary of Trust B? After noting its policy in ITTN Nos. 22 and 30 that CRA “would not challenge the reasonableness of compensation paid by a CCPC to an individual who is a shareholder of the corporation (whether directly or indirectly through a holding company), provided that the individual is actively engaged in the activities of the corporation and is resident in Canada,” it stated:

[T]he CRA's policy applies only where salaries and bonuses are paid directly by the CCPC to individuals who are, directly or indirectly, shareholders of that CCPC. Consequently, the CRA would therefore reserve the right to challenge the reasonableness of the management fees that are paid to Trust A, which amounts are distributed to Trust B and ultimately to the sole shareholder of the corporation, whether or not that shareholder is the sole beneficiary of Trust B.

2004 Ruling 2004-0092931R3 - Deductibility Shareholder Manager Remuneration

Ruling that a Canadian-controlled private corporation, which historically had paid large bonuses each year to its shareholder-managers and key employees to reduce its active business income to an amount approximating its share of the business limit, could pay deductible bonuses to such individuals out of recapture of depreciation realized on a sale of the majority of its business assets.

2004 Ruling 2004-008619 -

A favourable ruling on the deductibility of shareholder/manager remuneration paid out of income triggered from the proceeds of a sale of business assets.

2004 Ruling 2004-0072741R3 - ATR-Shareholder/Manager Bonus&Non-Capital Loss

Favourable ruling re deductibility of a shareholder/manager bonus that would create a non-capital loss to be carried back.

10 October 2003 External T.I. 2003-0030025 F - RETRIBUTION VERSEE AUX GESTIONNAIRE

The position in Income Tax Technical News, No. 22 applies to distributions out of income earned from all types of businesses including an inactive business, and does not apply to a corporation that does not carry on a business and pays remuneration from its property income.

15 May 2001 External T.I. 2001-0072825 - OWNER - MANAGER REMUNERATION

"It may generally be concluded that the CCRA will not normally challenge reasonableness of salaries or bonuses paid out of business profits to owner-managers who are actively engaged in the day-to-day business operations of a CCPC. On the other hand, if they are paid for example, to holding companies or low-rate family members, then they will always be subject to closer scrutiny."

26 March 2001 External T.I. 2001-0064055 - DEDUCT. OF MANAGERS BONUSES&SALARIES

In response to a question as to whether the CCRA position on the reasonableness of a manager's bonus applies where he holds shares through a holding company that is partly owned by family members, the Agency stated that "one of the primary factors to be considered when determining the reasonableness of the amount of salary and/or bonus is the recipient's contribution to the business. Where a corporation pays a salary and/or bonus out of business profits to a manager who is actively engaged in the business of the corporation, it is unlikely that the reasonableness of the deduction will be questioned unless it results in an undue tax advantage".

10 April 2000 External T.I. 2000-0013085 - REASONABLENESS OF MANAGER BONUS

The position at 1981 CR, Q. 42 does not apply to managers who hold their shares through a holding company.

May 1998 Advanced Life Underwriting Round Table, Q. 1, No. 9807000

The policies of Revenue Canada on the payment of salaries and bonuses to the principal shareholder-manager of a CCPC also will apply in determining the reasonableness of the contribution made by a company to an RCA in respect of benefits to be received by its principal shareholder-managers.

7 March 1995 External T.I. 9428355 - ACTIVE SHAREHOLDER BONUSES

Discussion of criteria applied for determining reasonableness of bonuses paid to shareholders of a corporation.

23 June 1994 External T.I. 9403465 - SEMINAR EXPENSES

The amount in respect of a four-day seminar held during a 12-day European cruise for self-employed professionals will be deductible to the extent that it does not exceed the amount that would have been incurred if the seminar had been held in the usual manner in the locale where the participants normally attended such seminar.

2 April 1993 T.I. (Tax Window, No. 30, p. 8, ¶2486)

Re deductibility of bonus paid by Opco for management services of its holding company provided by the only shareholder of the holding company, and of a similar bonus paid by the holding company to that shareholder.

93 C.R. - Q. 21

The deductibility of management fees or bonuses paid by a company to its shareholder (which is a partnership) providing the employees necessary to carry on the relevant work, will depend on whether the conditions in ss.18(1)(a) and 67 are met.

3 March 1992 Memorandum (Tax Window, No. 17, p. 8, ¶1775)

RC will consider applying s. 67 to reduce the amount of the deduction of an employer for a per-kilometre car allowance paid to an employee where the size of the allowance may not take into account the fact that the car is owned by the employer rather than the employee.

91 C.R. - Q.25

Where shareholders are employees of Holdco which, in turn, provides management services to Opco, any fees paid to the corporate shareholder managers by Opco must be reasonable in light of the services actually rendered by Holdco through its employees, in order to be fully deductible. The resulting profits of Holdco may be distributed to the shareholder-employees of Holdco where the general practice of the corporation is to distribute profits of the company to shareholder-employees in the form of bonuses or additional salary.

91 C.R. - Q.26

There are no guidelines to determine the reasonableness of bonuses paid out of investment income.

21 October 1991 T.I. 912692

Management fees paid by a professional practitioner to a related corporation generally will be considered deductible if they do not exceed 115% of the reasonable cost incurred by the corporation. A mark-up on outlays or expenses attributable directly to the practice of the profession would be considered unreasonable.

31 December 1990 T.I. (Tax Window, Prelim. No. 2, p. 13, ¶1053)

Discussion of deductibility of bonuses received directly or indirectly by the shareholders of a holding company.

90 C.R. - Q56

Affirmation of the 81 guidelines respecting bonusing down to the $200,000 limit.

27 April 1990 T.I. (September 1990 Access Letter, ¶1417)

Where all the shares of Opco are owned by Holdco, and all the shares of Holdco are owned by individuals who are employees of Opco, then any management fees paid to Holdco by Opco must be reasonable in light of the services actually rendered by Holdco through its employees, in order for the management fee to be deductible by Opco. However, the RC position set out in the 1982 Revenue Canada Round Table will be applicable to bonuses paid by Holdco to one of its shareholders in recognition of his contribution to Opco.

86 C.R. - Q.39

Where a taxpayer has had the deduction of part of an intercompany expense denied pursuant to section 67, RC will upon the receipt of a written request from the recipient make the appropriate adjustments provided that the recipient agrees to refund the excess.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(28) 13

85 C.R. - Q.16

The decision in Grant Babcock and Doug Burns are not at variance with RC's guidelines re the reasonableness of salaries.

84 C.R. - Q.82

Remuneration from a corporation to its principal shareholder-manager and to employees other than his family will not generally be considered excessive where it is the practice to distribute corporate profits to shareholder-employees or employees or where corporate policy is to recompense the shareholder-manager(s) for corporate profits that are attributable to his special contribution.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2) 29

81 C.R. - Q.42

Guidelines re reasonableness of salaries and bonuses paid to an employee-shareholder.

80 C.R. - Q.22

In a non-arm's length situation, a reasonable retiring allowance would be an amount not in excess of 50% of the last five years' compensation less the amount he is entitled to receive on retirement in respect of DPSPs, RPPs, and RRSPs.

80 C.R. - Q.40

Re reasonableness of salary paid to a spouse.

79 C.R. - Q.6

RC will not give a ruling as to the reasonableness of soft costs.


Alex Klyguine, "Income Splitting After the New Private Corporation Proposals: Salaries Paid to Family Members", Canadian Tax Focus (Canadian Tax Foundation), Vol. 8, No. 1, February 2018, p. 1

Salaries not included in split income (p. 1)

The private corporation proposals, which expand the tax on split income to certain dividends paid to family members, leave intact the existing rules for the deductibility of salaries: salaries continue not to be included in split income.

Gabco test (p. 1)

In Gabco … [t]he court established a frequently quoted (most notably, in Transalta Corporation v. Canada, 2012 FCA 20) test for reasonableness… .

Implications of Gabco test (pp. 1-2)

[I]t may be justifiable and reasonable to pay a non-arm's-length person an amount in excess of an amount that would be paid to an arm's-length person if the non-arm's-length person exhibits, for example, a degree of loyalty and commitment that an arm's-length person could not….

Another interesting aspect of the Gabco quotation is its negative phrasing: if an unreasonable amount is one that no business person would have chosen, then it appears to be sufficient for a finding of reasonableness "if a single reasonable business person can be found or reasonably imagined to exist who would have allocated the purchase price as did the taxpayer in question"…

Peters, "Innovative Share Conditions and Family-Owned Enterprises - Emerging Income Tax Issues", 1991 Conference Report, p. 8:15

Discussion of situation where bonuses are paid to shareholders precisely in proportion to their shareholdings.