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Dockets: 2001-2106(IT)G 2002-3202(IT)G |
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BETWEEN: |
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ALAIN MARCEAU, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. [OFFICIAL ENGLISH TRANSLATION] |
____________________________________________________________________
Appeals heard on May 3, 2004, at Quebec City, Quebec.
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Before: The Honourable Justice François Angers |
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Appearances: |
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For the Appellant: |
The Appellant himself, Alain Marceau |
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For the Respondent: |
Janie Payette |
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JUDGMENT
The appeals of the assessments pursuant to the Income Tax Act for the 1996, 1997 and 1998 taxation years are allowed, without costs, and the assessments are referred to the Minister of National Revenue for reconsideration and reassessment based on the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 27th day of September 2004.
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"François Angers" |
Angers, J.
Translation certified true
on this 19th day of January 2005.
Wendy Blagdon, Translator
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Citation: 2004TCC585 |
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Date: 20040927 |
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Dockets: 2001-2106(IT)G 2002-3202(IT)G |
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BETWEEN: |
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ALAIN MARCEAU, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Angers, J.
[1] The Appellant was appealing from the assessments of his 1996, 1997 and 1998 taxation years. The two dockets were heard on common evidence and certain changes to the Replies to the Notices of Appeal somewhat modified the issues. To this end, I am reproducing the facts assumed by the Minister of National Revenue and the parties' position on each:
Docket 2001-2106(IT) G
1999 and 1997 taxation years
Allowable Business Investment Loss claimed
a) the Appellant did not loan Polyclinique Médico-Santé Inc. $5,000 and if he did, it was a non-interest bearing loan not subject to any repayment provisions and the debt was not uncollectible at the end of the 1998 taxation year; (denied)
Employment expenses claimed
b) the Appellant is an employee of the London Life Insurance Company; (accepted)
c) the Appellant's duties involve selling life insurance; (accepted)
d) the Appellant is required under his contract of employment to cover his own expenses; (accepted)
e) the Appellant is normally required to carry out the duties of his employment somewhere other than at his employer's place of business; (accepted)
f) the Appellant's remuneration consists, in all or part, of commissions based on the volume of sales made; (accepted)
g) the Appellant received $131,594 in remuneration from the London Life Insurance Company during the 1998 taxation year; (accepted)
h) the Appellant is not reimbursed or paid an allowance for his travelling expenses; (accepted)
i) the Appellant claimed a $68,182 deduction from his employment income for expenses he incurred as a salesman during the 1998 taxation year; (accepted)
j) although the Appellant did not provide the prescribed form signed by the London Life Insurance Company with his 1998 tax return to certify his conditions of employment, the Minister of National Revenue allowed $26,984 (now $30,441) of the $68,182 deduction claimed for expenses incurred as a salesman; (denied)
k) the Minister of National Revenue, however, disallowed the other $41,198 (now $37,741) deduction claimed for expenses incurred as a salesman as follows:
Commission paid to a corporation
l) the London Life Insurance Company paid the Appellant $131,594 in remuneration for life insurance contracts sold by the latter during the 1998 taxation year; (accepted)
m) the Appellant claimed a $30,000 deduction for sales commission he says he paid 9071-2852 Québec Inc. for its participation in the signing of certain life insurance contracts; (denied)
n) the Appellant incorporated this corporation on December 2, 1998; (accepted)
o) the Appellant and a trust whose beneficiary is the Appellant's son are the corporation's shareholders; (accepted)
p) the Appellant is a director of the corporation; (accepted)
q) the corporation was not involved in selling any life insurance contracts for which the Appellant claims to have paid the $30,000 in commissions; (denied)
r) the Appellant did not pay the corporation $30,000 and if he had, it was not with a view to earning income from his employment with the London Life Insurance Company; (denied)
Legal fees
s) the Appellant claimed a deduction for the $500 he paid Me Céline Plante during the 1998 taxation year for the services she rendered as part of the incorporation of Bégin, Marceau, Morin Gestion Privée Inc.; (accepted)
t) this is not an expense incurred in the course of earning income from his employment with the London Life Insurance Company; (accepted)
Small policies paid (consent to judgment)
[u and v] [...]
Entertainment expenses
w) of the $2,846 in expenses the Appellant incurred during the 1998 taxation year for food, beverages or entertainment, $1,426 was spent on entertainment as part of his employment with the London Life Insurance Company, $361 on leisure and $1,059 in personal expenses; (denied)
[ ... ]
Automobile expenses
bb) the Appellant spent $6,484 on motor vehicle related expenses during the 1998 taxation year; (accepted)
cc) the Appellant used this vehicle in the course of his employment with the London Life Insurance Company and for personal purposes; (accepted)
dd) the Appellant did not keep a record of the kilometres he travelled as part of his employment during the 1998 taxation year; (denied)
ee) 60% of his expenses, or $3,890, was incurred as part of his employment with the London Life Insurance Company and the other 40% of these expenses was personal; (denied)
Parking
ff) the Appellant incurred $98 in parking expenses for the purpose of earning income from his employment with the London Life Insurance Company during the 1998 taxation year; (denied)
Software
gg) the Appellant did not pay $159 to purchase a computer software package during the 1998 taxation year, and if he had, it was not for the purpose of earning income from his employment with the London Life Insurance Company; (denied)
Docket 2002-3202(IT) G
1998 taxation year
Allowable Business Investment Loss
a) there is no documentation of the Appellant's subscription to shares of Industrie d'émaillage Acryteck Inc.; (denied)
b) there is documentation of the Appellant's payment for this share subscription; (denied)
c) no share certificate certifies that these shares were issued to the Appellant; (accepted)
Life insurance premium for certain clients: (consent to judgment)
[d to n] [...]
23. Subject to the foregoing plea, the Deputy Attorney General of Canada adds the following:
Allowable Business Investment Loss
a) the Appellant made a $15,000 personal loan to Mr. Alain Gamache on March 14, 1994; (denied)
b) there was never any question of the Appellant purchasing shares of Industrie d'émaillage Acryteck Inc.; (denied)
c) Mr. Gamache subsequently assigned his property pursuant to the Bankruptcy and Insolvency Act as did Industrie d'émaillage Acryteck Inc.; (accepted)
d) the Appellant made a $10,128 claim in connection with the bankruptcy of Industrie d'émaillage Acryteck Inc., but not Mr. Gamache's bankruptcy, with a view to obtaining a tax benefit, that is, an Allowable Business Investment Loss; (denied)
e) the Appellant also signed a letter for Mr. Gamache, when the latter was experiencing financial problems with a view to making this tax benefit plausible. (denied)
1996
[2] The Respondent disallowed the Appellant's $123,481 deduction for life insurance premiums he paid for clients in the 1996 taxation year. In the amended Reply to the Notice of Appeal, the Respondent now allows the deduction and therefore consents to the judgment. The 1996 taxation year is therefore no longer at issue and the appeal for that year is allowed through consent.
1997
[3] In 1997, the Appellant was disallowed a deduction similar to that for the 1996 taxation year. In its amended Reply to the Notice of Appeal, the Respondent allowed the $74,173 deduction. At the beginning of the hearing, the Respondent informed the Court that the $5,000 the Appellant paid Mr. Lofti Ghattas in life insurance premiums (or commissions) had been allowed and added to the $74,173. The sole issue before this Court is whether the Appellant is entitled to deduct an $11,250 allowable business investment loss in the 1997 taxation year.
1998
[4] The Appellant was allowed, in the amended Reply to the Notice of Appeal, a $3,457 deduction the Respondent had previously disallowed for life insurance premiums he had paid. The Respondent also informed the Court that it had agreed to allow a $2,589 deduction for commissions paid to individuals, which had previously been disallowed. For his part, the Appellant abandoned the portion of his appeal involving the $500 legal fees and the $710 in entertainment expenses he had been disallowed.
[5] Based on the assessment of March 8, 2001 for the 1998 taxation year, the following is a summary of the expenses claimed by the Appellant which he is still disallowed:
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Allowable Business Investment Loss |
$3,750 |
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Commissions paid to a corporation |
$30,000 |
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Automobile expenses |
$3,281 |
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Parking |
$502 |
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Software |
$159 |
[6] During the taxation years at issue, the Appellant was an employee of the London Life Insurance Company. He was assigned to selling life insurance and carried out his duties other than at his employer's place of business. His remuneration consisted in whole or in part of commissions based on his volume of sales. He was required, under his contract of employment, to cover his own expenses and he did not receive any reimbursement from his employer.
[7] In 1997, he was disallowed an $11,250 deduction claimed as an Allowable Business Investment Loss. This dates back to 1995. The Appellant met Mr. Alain Gamache, a representative from Industrie d'émaillage Acryteck Inc. (Acryteck). The latter wanted to obtain certain research and development tax credits and wanted the Appellant to do it for him. The Appellant has an MFisc. from the Université de Sherbrooke and has some experience in this area. It was agreed that the Appellant's fee would be 15% of the amounts he was going to collect as tax credits.
[8] Acryteck was, however, having financial problems and this was when the Appellant decided to invest $15,000 in the firm with a view to providing assistance. He therefore wrote a cheque for $15,000, but it was payable to
Mr. Alain Gamache. In return, he was supposed to receive from Mr. Gamache either newly issued redeemable common or preferred shares of Acryteck entitling the holder to a 10% dividend rate. The Appellant did not provide the cheque which, it would seem, he dated 1994. The Appellant says that it was obviously a mistake. He did, however, indicate 1994 in his 1997 tax return as the year in which he acquired shares, without indicating the number or class of shares. The Appellant says he was eventually supposed to receive preferred shares. He cannot explain why he wrote the cheque to Alain Gamache instead of Acryteck. The Appellant did not provide any evidence that the funds given to Alain Gamache were deposited into Acryteck's accounts.
[9] When he did not receive any share certificates, the Appellant went to meet with Alain Gamache, who informed him that the lawyer hired to issue the share certificates had been disbarred and was unable to complete the task. On April 1, 1996, the Appellant received an $11,000 cheque from Alain Gamache drawn on the Acryteck account and payable to the Appellant. There was a note on the cheque to the effect that it was a cash repayment of a loan and there were instructions not to cash the cheque because Acryteck did not have enough funds. On June 18 that same year, the Appellant received a second cheque from Acryteck in the amount of $5,000. There was a note on it to the effect that it was a repayment of a loan balance and there were identical instructions on it, that is, not to cash it because there were not enough funds in the account. Both cheques were never in fact cashed.
[10] The Appellant testified that it was a repayment for the preferred shares to which he was supposed to subscribe and later he added that it was to redeem the preferred shares. No rescission from Acryteck was entered as evidence confirming that the Appellant had purchased shares. In fact, it is important to point out that the Appellant also mentioned in his testimony that he took steps with Alain Gamache to purchase this debt obligation. He corrected himself and mentioned the redemption of preferred shares. This same mistake was also made in Paragraph 31 of the Appellant's Notice of Appeal, which reads as follows:
21. In 1994, a $15,000 cheque was made out to Mr. Alain Gamache to invest in Industrie d'émaillage Acryteck in consideration for the corporation's debt or share capital. Based on trust, this amount was supposed to lead to a subscription to a debt, but based on Mr. Gamache's arguments, the amount was supposed to be put toward shares of the corporation. Mr. Gamache declared personal bankruptcy shortly after the transaction. The firm's president was then informed of the investment in the corporation's share capital.
[11] Throughout his testimony, the Appellant seemed to confuse debt and credit with share capital or subscription to a debt.
[12] On November 8, 1996, Alain Gamache assigned his property pursuant to the Bankruptcy and Insolvency Act. Acryteck suffered the same fate and assigned its property pursuant to the same Act on April 1, 1997. The assignment of Acryteck's property was signed by Mr. Michel Pageau, the then President of Acryteck. Mention was made of the Appellant's financial claim to $10,128, which represents his fees for the services rendered to Acryteck in connection with the tax credits. The Appellant had no financial claim in the assignment of Alain Gamache's property.
[13] During the audit in 1999, the Appellant asked Alain Gamache to confirm what they had agreed to when the $15,000 was advanced to the latter. An undated letter was faxed to the Appellant on September 20, 1999. In this letter, the author, who did not testify, discussed the Appellant's investment in Acryteck's share capital. This same author had nonetheless indicated on the cheques dated April 1, 1996 and June 28, 1996 that they were loan repayments.
[14] The audit of the Appellant began on December 14, 1998. This audit covered the 1996 and 1997 taxation years. On September 21, 1999, the Appellant was orally informed that he had to file his tax returns for the 1998 taxation year, and on September 22, 1999, he was so informed in writing. The Appellant filed his 1998 tax return on November 30, 1999, at the Quebec City Tax Centre. After some confusion and the objection were resolved, the appealed assessment for 1998 is dated March 8, 2001.
[15] On his 1998 tax return, the Appellant deducted, among other things, a $3,750 business investment loss which he was disallowed. I will come back to the other disallowed expenses in 1998 later. Mr. Pierre Trépanier, who was the operations manager of the Polyclinique Médico-Santé Inc. in 1997 and 1998, explained the steps the Appellant took. During the period at issue, 1996, a Ms Veilleux was operations manager.
[16] According to Mr. Trépanier, the Polyclinique Médico-Santé Inc. (Polyclinique) rented an office in 1996 from a firm called Germain-des-Prés in Quebec City. This office became too small and the Polyclinique had to purchase a building; the purchase was to close on December 16, 1996. Since he needed financial assistance until he purchased the building, Mr. Trépanier applied for loans he termed temporary. This is how he approached the Appellant. The goal was to borrow money temporarily and to repay it afterward by issuing shares. Under cross-examination, he admitted that the shares would be in a new corporation to be incorporated with a view to purchasing the building. These two corporations would then be amalgamated.
[17] On August 28, 1996, the Appellant gave the Polyclinique a cheque for $5,000. Mr. Trépanier said the interest rate on this loan was supposed to be 10%. He described this cheque as a subscription cheque and did not provide any further details. There is nothing written on the cheque itself to clarify the situation. In 1998, the Polyclinique experienced financial problems and was unable to repay its creditors, including the Appellant. Under cross-examination, Mr. Trépanier said that the Appellant had the choice when the building was purchased to purchase shares of the new corporation or be repaid. He also said that no terms or conditions of repayment were negotiated with the Appellant.
[18] The Polyclinique's financial statements were entered as evidence. Under the long-term debt heading, there is a $5,000 debt to an unidentified individual and there are no terms or conditions of repayment or interest. The accountant was allegedly given this information by Ms. Veilleux or on behalf of Mr. Trépanier; Mr. Trépanier says that it was the debt to the Appellant. The Appellant said that he did not have any documentation on the loan because he trusted the people and he did not have the energy to get any from them.
[19] Is there an Allowable Business Investment Loss (ABIL) in these two cases? In Gill v. Canada, [1998] T.C.J. no 765 (Q.L.), Mr. Justice Brulé from our court defined an ABIL as follows in Paragraph 14:
A business investment loss is a loss incurred on a disposition of capital property under the conditions set forth in paragraph 39(1)(c). The following conditions must be met. Firstly, the capital property must be a share of a "small business corporation" or a debt owed to the taxpayer by such a corporation. Secondly, the shares or debt are, unless subsection 50(1) applies, disposed of to a person dealing with the taxpayer at arm's length.
[20] The analysis of the first condition must be continued by examining the definition of "small business corporation" in subsection 248(1) of the Income tax Act (the "Act"). We are referred in subparagraph 248(1)(a) of this definition to subsections 248(1) and 125(7) for the definition of "active business". These two definitions, in virtually identical terms, themselves refer us to the definitions of "specified investment business" and "personal services business" in subsection 125(7) of the Act.
[21] In order to be able to determine whether the second condition specified by Mr. Justice Brulé is met, it is also necessary to determine whether there was a "disposition" of the shares or debt. Pursuant to subsection 50(1) of the Act, there may be a deemed disposition in a number of situations. In Roy v. Canada, [2002] T.C.J. No 134 (Q.L.), Mr. Justice Tardif of our court summarized it all as follows in Paragraph 17:
There is a deemed disposition of a debt where the debt becomes a bad debt. There is a deemed disposition of a share where the corporation that issued the share (1) becomes a bankrupt; (2) becomes insolvent within the meaning of the Winding-up Act and in respect of which a winding-up order under that Act has been made in the year or; (3) is insolvent at the end of the year and neither the corporation nor a corporation controlled by it carries on business.
[22] Last, the taxpayer who wants to claim an ABIL must prove that the debt was acquired for the purpose of earning income. Failing this, the loss incurred may be deemed nil pursuant to subparagraph 40(2)(g)(ii) of the Act.
[23] The following are the relevant legal provisions:
39. (1) For the purposes of this Act,
[...]
(c) a taxpayer's business investment loss for a taxation year from the disposition of any property is the amount, if any, by which the taxpayer's capital loss for the year from a disposition after 1977
(i) to which subsection 50(1) applies, or
(ii) to a person with whom the taxpayer was dealing at arm's length
of any property that is
(iii) a share of the capital stock of a small business corporation, or
(iv) a debt owing to the taxpayer by a Canadian-controlled private corporation (other than, where the taxpayer is a corporation, a debt owing to it by a corporation with which it does not deal at arm's length) that is
(A) a small business corporation,
(B) a bankrupt (within the meaning assigned by subsection 128(3)) that was a small business corporation at the time it last became a bankrupt, or
(C) a corporation referred to in section 6 of the Winding-up Act that was insolvent (within the meaning of that Act) and was a small business corporation at the time a winding-up order under that Act was made in respect of the corporation,
[. . .]
40(2) Notwithstanding subsection 40(1),
[. . .]
(g) a taxpayer's loss, if any, from the disposition of a property, to the extent that it is
(i) a superficial loss,
(ii) a loss from the disposition of a debt or other right to receive an amount, unless the debt or right, as the case may be, was acquired by the taxpayer for the purpose of gaining or producing income from a business or property (other than exempt income) or as consideration for the disposition of capital property to a person with whom the taxpayer was dealing at arm's length,
[. . .]
50.(1) For the purposes of this subdivision, where
(a) a debt owing to a taxpayer at the end of a taxation year (other than a debt owing to the taxpayer in respect of the disposition of personal-use property) is established by the taxpayer to have become a bad debt in the year, or
(b) a share (other than a share received by a taxpayer as consideration in respect of the disposition of personal-use property) of the capital stock of a corporation is owned by the taxpayer at the end of a taxation year and
(i) the corporation has during the year become a bankrupt (within the meaning of subsection 128(3)),
(ii) the corporation is a corporation referred to in section 6 of the Winding-up Act that is insolvent (within the meaning of that Act) and in respect of which a winding-up order under that Act has been made in the year, or
(iii) at the end of the year,
(A) the corporation is insolvent,
(B) neither the corporation nor a corporation controlled by it carries on business,
(C) the fair market value of the share is nil, and
(D) it is reasonable to expect that the corporation will be dissolved or wound up and will not commence to carry on business
and the taxpayer elects in the taxpayer's return of income for the year to have this subsection apply in respect of the debt or the share, as the case may be, the taxpayer shall be deemed to have disposed of the debt or the share, as the case may be, at the end of the year for proceeds equal to nil and to have reacquired it immediately after the end of the year at a cost equal to nil.
54: "disposition'' of any property, except as expressly otherwise provided, includes
(a) any transaction or event entitling a taxpayer to proceeds of disposition of the property,
(b) any transaction or event by which,
(i) where the property is a share, bond, debenture, note, certificate, mortgage, agreement of sale or similar property, or an interest in it, the property is redeemed in whole or in part or is cancelled,
(ii) where the property is a debt or any other right to receive an amount, the debt or other right is settled or cancelled,
[. . .]
125(7)
"specified investment business" carried on by a corporation in a taxation year means a business (other than a business carried on by a credit union or a business of leasing property other than real property) the principal purpose of which is to derive income (including interest, dividends, rents and royalties) from property but, except where the corporation was a prescribed labour-sponsored venture capital corporation at any time in the year, does not include a business carried on by the corporation in the year where
(a) the corporation employs in the business throughout the year more than 5 full-time employees, or
(b) any other corporation associated with the corporation provides, in the course of carrying on an active business, managerial, administrative, financial, maintenance or other similar services to the corporation in the year and the corporation could reasonably be expected to require more than 5 full-time employees if those services had not been provided;
125(7) "personal services business" carried on by a corporation in a taxation year means a business of providing services where
(a) an individual who performs services on behalf of the corporation (in this definition and paragraph 18(1)(p) referred to as an "incorporated employee"), or
(b) any person related to the incorporated employee
is a specified shareholder of the corporation and the incorporated employee would reasonably be regarded as an officer or employee of the person or partnership to whom or to which the services were provided but for the existence of the corporation, unless
(c) the corporation employs in the business throughout the year more than five full-time employees, or
(d) the amount paid or payable to the corporation in the year for the services is received or receivable by it from a corporation with which it was associated in the year;
125(7) "active business carried on by a corporation" means any business carried on by the corporation other than a specified investment business or a personal services business and includes an adventure or concern in the nature of trade;
248(1) "active business", in relation to any business carried on by a taxpayer resident in Canada, means any business carried on by the taxpayer other than a specified investment business or a personal services business;
248(1) "small business corporation", at any particular time, means, subject to subsection 110.6(15), a particular corporation that is a Canadian-controlled private corporation all or substantially all of the fair market value of the assets of which at that time is attributable to assets that are
(a) used principally in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it,
(b) shares of the capital stock or indebtedness of one or more small business corporations that are at that time connected with the particular corporation (within the meaning of subsection 186(4) on the assumption that the small business corporation is at that time a "payer corporation" within the meaning of that subsection), or
(c) assets described in paragraphs 248(1) "small business corporation" (a) and 248(1) "small business corporation" (b),
including, for the purpose of paragraph 39(1)(c), a corporation that was at any time in the 12 months preceding that time a small business corporation, and, for the purpose of this definition, the fair market value of a net income stabilization account shall be deemed to be nil;
[24] The Appellant's testimony concerning the two transactions for which he claims an ABIL is very ambiguous, to say the least. He had tremendous trouble during the whole hearing pinpointing his thoughts. It is difficult to determine, for the transaction with Acryteck, the year in which the cheque was written and the fact that it was payable to Alain Gamache, not Acryteck, whose shares to which he was supposed to be subscribing. Were shares purchased from Alain Gamache or Acryteck? Did the corporation finally receive these funds or not? No share certificate was issued and reference is made on both uncashed cheques to a loan. The Appellant later testified that he wanted to purchase the debt obligation or redeem preferred shares.
[25] The Appellant did not call any witnesses who could confirm anything; he provided an undated letter from Alain Gamache during the audit which indicated that the Appellant's investment had been credited to Acryteck's share capital. Alain Gamache did not testify and I attach little significance to this element of proof.
[26] Faced with this ambiguity, it is difficult to identify the exact nature of the transaction. The capital property seems to be a debt obligation, not shares of Acryteck's share capital. No shares were issued to the Appellant. The $1,500 cheque written to Mr. Alain Gamache did not create a debt obligation for a small business corporation.
[27] It is also very difficult to identify the exact nature of the transaction involving the Polyclinique. Was it a loan or a subscription to shares of the Polyclinique or another corporation to be incorporated? No share certificate was issued in the Appellant's name. If it was a loan, no repayment terms were discussed. Was the Polyclinique a small business corporation? The Appellant did not provide any evidence in connection with this issue.
[28] As a result of these ambiguities, the Appellant did not discharge the burden of proof on him. For these reasons, I conclude that the Appellant did not incur an Allowable Business Investment Loss in the 1997 and 1998 taxation years.
[29] A second deduction the Appellant was disallowed for the 1998 taxation year is described as being $30,000 in commissions paid to a corporation. The Appellant testified that his contract of employment with his employer did not reflect reality because he had his own office and he did not have the same status as an employee. He therefore asked his employer in September 1998 whether he could change his status on the grounds that he had all the skills. He wanted to incorporate a business that was going to become his employer's representative. This request was however delayed and it was not until March 22, 1999 that London Life signed an agreement entitled "Convention du représentant constitué en société [representative incorporation agreement]" with 71-2852 Québec Inc., a corporation whose shares are held by the Appellant and with a trust the beneficiary of which is his son. It was incorporated on December 7, 1998. The Respondent entered this document as evidence.
[30] The Conseil des assurances de personnes [personal insurance council] issued two certificates to 9071-2852 Québec Inc., one on March 15, 1999 and another on April 30, 1999. These certificates are identical and certify that 9071-2852 complied with the provisions of the Act Respecting Market Intermediaries and the By-Law of the Conseil des assurances de personnes and that 9071-2852 is authorized to conduct activities as a firm.
[31] The Appellant entered into evidence a guide published by London Life on incorporating a business, which explains among other things the steps to be taken to incorporate. I have provided the following copy of this guide with a view to illustrating the process and its legal repercussions:
Steps to incorporation
1. Submit an application for incorporation in writing to the regional director. The application must be approved by the regional director, the regional vice-president and the senior vice-president.
2. Select a corporate name following a name search and establish a corporate name in accordance with provincial regulations.
3. Incorporate detailing the objects of the corporation and share capital structure, and issue shares to the intended shareholders
4. Prepare and execute a written employment agreement between the new corporation and its principal employee (the advisor).
5. Complete an application from Field Operations, terminal 304, for licensing of the corporation. This completed document should be returned to Field Operations along with details of incorporation, including the articles of incorporation and the date of incorporation.
6. In addition to the above documents, Field Operations also requires a letter of direction for an absolute assignment or a copy of a buy/sell agreement between the individual advisor and the corporation in order to pay future commissions to the corporation and to transfer existing commissions from the individual advisor account to the corporate account.
7. The letter of direction should outline that future commissions and renewals have been transferred from the individual advisor to the corporation. The agreement should also indicate that the individual advisor has waived all rights to any and all commissions and that all policies are to be transferred.
8. Following submission of the absolute assignment or buy/sell agreement, all subsequent commissions will be paid to the corporation, including first year commission and second and third year individual life renewal commissions. Tax implications of this absolute assignment should be reviewed with a tax advisor.
9. Field Operations will forward for signature two copies of the Incorporated Representative Sales Agreement once the incorporated license has been issued. An authorized official of the corporation should sign and return both copies of the agreement to Field Operations, Terminal 314. One copy of the incorporated agreement will be returned to the incorporated advisor signed by an authorized official of London Life.
10. Ask Field Operations, Terminal 304, for an application for the group insurance policy for incorporated advisors. Fill out and return the application from Great West.
11. Open a corporate bank account for pay deposits and obtain a corporate telephone listing, corporate stationery and business cards.
12. Display the corporate name on building directories and, where practical, on office entrances.
[32] Once the Appellant had made this decision in September 1998, he decided to transfer his commissions for October, November and December 1998 to his corporation. When he received a total of $131,594 in commissions from London Life for 1998, he simply took three quarters of his annual income and arbitrarily set the commission amount at $30,000. Based on his testimony, his corporation already covered his operating expenses and had allegedly taken on his contracts with his employer. On December 15, 1998, 9071-2852 produced a $30,000 invoice for commissions up to December 31, 1998.
[33] To pay for the transfer of his commissions, he explained that he transferred to his corporation the right to purchase lots that he had personally agreed to purchase from the Caisse populaire Saint-Thomas d'Aquin. The Appellant gave the Caisse populaire in question two cheques, one on November 12, 1998, for $25,000 and another on December 18, 1998 for $15,000, as deposits to purchase the lots.
[34] The transaction was carried out on March 11, 1999. A transfer document indicating 9071-2852 as the purchaser was provided. The Appellant said that the $40,000 indicated in the statement of adjustments was an instalment paid to the vendor. The Appellant also said that this instalment is the total of the two above-mentioned cheques, that is, $30,000 for an invoice from 9071-2852 and $10,000 for an advance to his corporation, 9071-2852. No documents were provided from 9071-2852 to confirm these statements.
[35] The Appellant's version of the facts once again lacks credibility and it is surprising to see the ease with which he organizes his affairs. Based on the documentary evidence provided, corporation 9071-2852, which was incorporated by the Appellant, was able to receive commissions only between March 15 and April 30, 2000. Corporation 9071-2852 Québec Inc. was incorporated on December 7, 1998. The $30,000 the Appellant said he transferred to his corporation was in fact simply a transfer of commissions, and therefore constituted income. It was therefore not disbursed for the purpose of earning employment income. In the case at hand, it is also merely an estimate that in no way reflects reality.
[36] The Appellant did not corroborate any of his testimony with any type of documentary evidence to show that the payment was in fact made to 9071-2852 Québec Inc. No management contract signed by the Appellant and 9071-2852 nor proof that his corporation had taken over the contracts with London Life prior to March 1999 was provided. In my opinion, this is not an expense incurred for the purpose of earning employment income pursuant to paragraph 8(1)(f) of the Act. The Minister was therefore right to disallow this expense.
[37] With regard to his automobile expenses, the Appellant stated in his tax return that he travelled 20,000 kilometres in 1998, 18,000 km for business purposes and 2,000 km, personal. In his testimony, using his agenda for 1998, he recalculated the trips he made in 1998 and based on these new calculations, he arrived at 20,500 kilometres. He did not take note of the total number of kilometres he put on his car for the year, and he therefore could not calculate the kilometres he travelled for personal purposes. He does not, however, think he exceeded the 24,000 kilometres he was allowed under his lease agreement. In total, he maintained that the situation was the same the previous year for which he claimed 90% of his expenses.
[38] For his part, during the audit, the auditor had nothing with which he could establish a usage percentage for personal purposes as the Appellant did not provide any record of his travel. He therefore arbitrarily allowed 60% of automobile expenses. However, the Appellant testified that he had two automobiles and rarely used his car for personal purposes, except to get to work, a distance of about six kilometres.
[39] Among his automobile expenses, the Appellant claimed $2,000 for fuel. The auditor reduced this amount to $1,265, based on the Appellant's vouchers. The Appellant did not submit as evidence at the hearing any justification for the missing $735. The auditor did not allow the $750 in car insurance costs as the Appellant had not provided a receipt and did not do so at the hearing.
[40] The auditor allowed only $98 of the $600 total the Appellant claimed under the parking expenses heading. He entered as evidence additional parking receipts for a total of $161.04 as well as other receipts totalling $47. The Respondent consented to these latter two amounts. The last thing the Appellant said in this regard was that the money had been put into parking meters, which did not issue receipts.
[41] The Appellant is responsible for proving the expenses he claimed. It is clear in the case at hand that the Appellant uses completely arbitrary and approximate figures because he did not keep any records with which he can prove the distance travelled during his taxation year and the work-related percentage. He also did not provide any evidence to justify the $735 in gas expenses he claimed in addition to the $1,265 the auditor allowed him. The same is true for the parking expenses at meters. The Appellant did not provide any explanation to justify this expense and even less so how the total expense is a round number like $600. This also occurs with some of his other expenses. The Minister's position is therefore reasonable under the circumstances.
[42] The last expense disallowed by the auditor is the purchase of a $159 software package for which the Appellant has no receipt. The Appellant said he paid his brother, Sylvain Marceau, cash. It is a corporate tax return software package, which I feel has nothing to do with an expense incurred for the purpose of earning employment income. The Minister was therefore correct to disallow this expense.
[43] The appeals are allowed in part and the assessments are referred to the Minister of National Revenue for reconsideration and reassessment. In view of the divided success, there will be no award of costs.
Signed at Ottawa, Canada, this 27th day of September 2004.
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"François Angers" |
Angers, J.
Translation certified true
on this 19th day of January 2005.
Wendy Blagdon, Translator
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CITATION: |
2004TCC585 |
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COURT DOCKET NO: |
2001-2106(IT)G 2002-3202(IT)G |
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STYLE OF CAUSE: |
Alain Marceau |
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PLACE OF HEARING: |
Quebec City, Quebec |
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DATE OF HEARING: |
May 3, 2004 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice François Angers |
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DATE OF JUDGMENT: |
September 27, 2004 |
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APPEARANCES: |
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For the Appellant: |
The Appellant himself, Alain Marceau |
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For the Respondent: |
Janie Payette |
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SOLICITOR OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |