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Federal Tax - Deductions. 2093271 Ontario Inc. v. Canada
In 2093271 Ontario Inc. v. Canada (Fed CA, 2024) the Federal Court of Appeal considered (and dismissed) an appeal from the Tax Court, which had in turn dismissed an appeal of income tax re-assessments. In these quotes the court considers several issues respecting "management fee expenses" invoices as business deductions:[3] On the advice of their tax advisor, the appellants claimed deductions for management fee expenses. The Tax Court found that there were no written or oral agreements for the provision of management services. It further found that the tax advisor determined the amounts charged each year. These amounts were not based on any measurable factors, but rather on the amount of the paying company’s income. In almost all cases, invoices were issued on the last day of the paying company’s taxation year. The invoices contained no detail as to the services provided or who had provided them. In response to Mr. Bonin’s inquiry of the appellants’ tax advisor concerning the claimed deductions, the tax advisor stated that they were "“okay.”"
[4] The appeals to the Tax Court raised three issues: (1) whether the amounts claimed as management fees were deductible in computing income under paragraph 18(1)(a) of the ITA; (2) whether the appellants were liable for gross negligence penalties under subsection 163(2) on the basis that they were wilfully blind or grossly negligent with respect to the false statements in their claims to deduct management fees; and (3) whether reassessments of certain taxation years of some of the appellants, which would otherwise be statute-barred as falling beyond the normal reassessment period, were open to the Minister under subparagraph 152(4)(a)(i) because those appellants had made misrepresentations attributable to "“neglect, carelessness or wilful default.”"
[5] The Tax Court determined that (1) the amounts claimed were not deductible; (2) the appellants were liable for gross negligence penalties; and (3) the Minister had validly opened up the taxation years in question. The appellants submit that the Tax Court erred in law in addressing each of the three issues. We can see no reviewable error.
[6] In alleging error on the first issue, the appellants submit that the Tax Court failed to consider all the relevant facts, and confined itself to considering only Mr. Bonin’s testimony and certain financial statements. The reasons of the Tax Court do not bear out this submission. The Tax Court also expressly considered, among other things, the absence of contracts for the management services, the invoices on which the appellants relied, and the evidence of a bookkeeper. Moreover, first instance courts are presumed to have considered and assessed all of the evidence before them: Mahjoub v. Canada (Citizenship and Immigration), 2017 FCA 157 at paras. 67-69.
[7] In challenging the decision on the second issue, the appellants acknowledge that the Tax Court recognized the correct test for wilful blindness, but submit that the Court failed to apply it. That test, as the Tax Court stated (at page 13 of its reasons), is subjective in nature, and authorizes the Court to impute knowledge to a taxpayer "“in circumstances where the taxpayer becomes aware of the need for inquiry but declines to make the inquiry because the taxpayer does not want to know, or studiously avoids, the truth”": Wynter v. Canada, 2017 FCA 195 at paras. 13, 16; Canada v. Paletta, 2022 FCA 86 at para. 66. The Tax Court found (at pages 16 and 17 of its reasons) that the appellants made only minimal inquiries, despite the "“several red flags that ought to have aroused further suspicion and caused further inquiry.”"
[8] The appellants submit that the Tax Court should have concluded, applying the correct test, that there was no wilful blindness, "“because there is no evidence that Mr. Bonin had any suspicion that the claim for management fees expense [sic] was a false statement”" (Appellants’ memorandum, p. 11). The appellants further submit that the Tax Court erred by relying on its finding (at page 15 of its reasons) that "“[a] businessman like Mr. Bonin ought to have questioned further”" without finding actual suspicion on Mr. Bonin’s part. However, this phrase, and the statement that the "“red flags … ought to have aroused further suspicion”" (emphasis added), supply the requisite finding of suspicion. While the appellants also appear to challenge the Tax Court’s finding based on the weight it assigned to the evidence, it is not this Court’s role on appeal to reweigh it.
[9] Although, as the Tax Court noted, its finding on wilful blindness meant that the appellants also met the threshold for opening up an otherwise statute-barred year, it nonetheless went on to address the third issue, and the question of gross negligence.
[10] The appellants say that, in doing so, the Tax Court failed to apply the proper test for gross negligence. They rely in particular on the statement of the test in Venne v. The Queen, 1984 CanLII 5717 (FC), [1984] C.T.C. 223. But the Tax Court specifically referred to Venne, and the Tax Court’s statement of the test is both not inconsistent with Venne and consistent with this Court’s more recent statements; see, for example, Wynter at paras. 18-21 and Paletta at paras. 65-68. Indeed, in the specific part of the Tax Court’s statement of the test with which the appellants take issue, at page 18 of its reasons, the Court recites verbatim this Court’s statement of the test in another recent decision, Deyab v. Canada, 2020 FCA 222 at para. 62. We see no reviewable error in the Tax Court’s statement of the test for gross negligence. . Potash Corporation of Saskatchewan Inc. v. Canada
In Potash Corporation of Saskatchewan Inc. v. Canada (Fed CA, 2024) the Federal Court of Appeal considered a Tax Court ruling denying the income tax deductibility of payments made as "base payments paid to the province of Saskatchewan under The Mineral Taxation Act, 1983", here focussing on ITA 18(1)(a) [Deductions - General limitations]:IV. Analysis
[17] In order for PCS to be successful in this appeal, it would be necessary to find that neither paragraph 18(1)(a) of the Act nor paragraph 18(1)(m) of the Act prohibited the deduction of the base payments by PCS.
[18] As noted above, paragraph 18(1)(a) of the Act is a general limitation that restricts a deduction for an outlay or expense to the amount thereof that was made or incurred for the purpose of gaining or producing income from a business or property. If the base payments were not made or incurred for the purpose of gaining or producing income from the business being carried on by PCS, then they cannot be deducted in computing the income of PCS.
[19] The formula to calculate the base payment was the rate of tax multiplied by the quantity of potash sold or otherwise disposed of (subsection 5(2) of the PPTS). While the PPTS prescribed a minimum rate of tax (and therefore, even if there was no profit, there would still be a rate of tax), there was no prescribed minimum quantity of potash sold or otherwise disposed of. If no potash was sold or otherwise disposed of in a particular year, there would be no base payment for that year.
[20] Therefore, in order to incur the base payment, PCS had to sell or otherwise dispose of potash. As noted by the Tax Court Judge (at paragraph 6 of his reasons), PCS only produced potash for sale. The witness for PCS at the Tax Court hearing also confirmed that the base payment was calculated based on the quantity of potash that was sold. As a result, the base payment was only incurred by PCS as a result of a sale of potash by PCS. There was no “other disposition” of potash by PCS.
[21] Since the issue in this appeal is whether PCS can deduct the base payment in determining its income for the purposes of the Act, what resulted in the base payment being incurred by PCS is relevant. The application of the base payment to a different taxpayer, who may have incurred the base payment as a result of some other event that would be considered to be a disposition for the purposes of the PPTS, is not relevant in determining whether PCS is entitled to the deduction. The tax consequences to PCS are to be determined based on what PCS did that resulted in it incurring the base payment. As noted by the Supreme Court of Canada in Shell Canada Ltd. v. Canada, 1999 CanLII 647 (SCC), [1999] 3 S.C.R. 622, 4 C.T.C. 313, at paragraph 45:Unless the Act provides otherwise, a taxpayer is entitled to be taxed based on what it actually did, not based on what it could have done, and certainly not based on what a less sophisticated taxpayer might have done. [22] PCS labels as “red herrings” the Tax Court Judge’s focus on the base payment only being incurred on a sale of potash and the requirement to use the profit of PCS to determine if the rate of tax would be the minimum tax rate, the maximum tax rate or somewhere in between. PCS argues that it could not carry on business if it did not pay the base payment.
[23] However, the argument that not paying the base payment could result in PCS not being able to continue to carry on its business is based on the consequences of not paying the base payment, and not on whether the base payment was incurred for the purpose of gaining or producing income. The same argument concerning the consequences of failing to pay the base payment could also be made with respect to provincial income taxes. If a person were to not pay provincial income taxes incurred as a result of carrying on a business, the particular province may well commence collection actions, which could result in the closure of the business.
[24] However, there is no dispute that provincial income taxes are not deductible in computing income for the purposes of the Act. In Roenisch v. Canada (Minister of National Revenue - M.N.R.) (1930), 1930 CanLII 311 (CA EXC), [1931] Ex.C.R. 1, at page 4, [1931] 2 D.L.R. 90, (Roenisch) Justice Audette stated:It is self-evident that the amount of the income tax paid to the province is not an expense for the purpose of earning the income, within the meaning of 6a [now paragraph 18(1)(a)]. When such payment of taxes is made to the province, it is not so made to earn the income, it is paid because there is an income showing gain and profit. [25] This argument that the failure to pay a tax that could lead to the possible consequence of losing a business is not sufficient, in and of itself, to establish that the base payment was incurred for the purpose of gaining or producing income.
[26] PCS, in paragraph 47 of its memorandum, submits that the Tax Court should have considered the following paragraph from Roenisch, 1930 CanLII 311 (CA EXC), [1931] Ex.C.R. 1, at page 5:As was said, in the case of The Crown v. D. and W. Murray Ltd. [(1909) 11 W.A. Law Reports 92, at p. 95], the remarks made by Sir Henry James, when Attorney-General, in the case of Last v. London Assurance Corporation [(1885) 10 A.C. 438], apply to the present case. He says:
The test is this ― if there is an expenditure which would be made in any case, from which profits may accrue, the expenditure may be deducted; but an expenditure which will not be incurred unless there is a profit is not an expenditure in order to earn a profit.
[emphasis was added by PCS in its memorandum] [27] PCS, in addressing this test in its memorandum, does not refer to the first part of the test which described “an expenditure which would be made in any case, from which profits may accrue”. Therefore, PCS does not address how income or profits could accrue from making the base payment.
[28] Instead, PCS focuses on the obligation to pay the base payment even if PCS did not realize a profit (because the PPTS prescribed a minimum rate of tax). There are two responses to this argument.
[29] First, this argument does not take into account the second component of the formula to determine the amount of the base payment. The base payment is the rate of tax multiplied by the number of tonnes of potash sold or otherwise disposed of. PCS only incurred the base payment because it sold potash, which resulted in income being gained. If PCS did not sell any potash, then no base payment would be incurred.
[30] The second response to PCS’ argument related to Roenisch is that the argument appears to equate income with profit for the purposes of paragraph 18(1)(a) of the Act. However, paragraph 18(1)(a) of the Act refers to income. The word profit does not appear in this paragraph. The test under paragraph 18(1)(a) of the Act is whether the base payment was made or incurred for the purpose of gaining or producing income. Therefore, the meaning of “income” for the purposes of paragraph 18(1)(a) of the Act is relevant.
[31] In Ludco Enterprises Ltd. v. Canada, 2001 SCC 62, the Supreme Court noted that the Act does not define “income”:[57] The Income Tax Act does not define the term “income”. The Act speaks of “net income”, “taxable income”, and income from different sources, but it neither identifies nor describes the legal characteristics of “income”; it only speaks of what is to be included or excluded from income. Similarly, tax theorists have proposed many different definitions of “income” distinguishable by their varying degrees of inclusiveness. The common feature of all the definitions of income, whether derived from tax law, economic theory or the dictionary, is that “income” is a measure of gain: see V. Krishna, The Fundamentals of Canadian Income Tax (6th ed. 2000), at pp. 97-100. [32] The Supreme Court concluded, at paragraph 61, that “income”, for the purposes of paragraph 20(1)(c) of the Act, “does not refer to net income, but to income subject to tax. In this light, it is clear that ‘income’ in s. 20(1)(c)(i) refers to income generally, that is, an amount that would come into income for taxation purposes, not just net income”.
[33] In Novopharm Ltd. v. Canada, 2003 FCA 112, Justice Rothstein, writing on behalf of this Court, concluded that the comments of the Supreme Court in Ludco applied equally to the meaning of “income” in paragraph 18(1)(a) of the Act:[20] The Minister submits that paragraph 18(1)(a) is generally aimed at deductions of outlays which are not profit motivated. However, I think the rationale outlined by Iacobucci J. in Ludco, as to why income in subparagraph 20(1)(c)(i) is not equivalent to profit or net income, is equally applicable to paragraph 18(1)(a). Nowhere in the language of paragraph 18(1)(a) is a quantitative test suggested. Nor is there any support in the words of paragraph 18(1)(a) that suggests a judicial assessment of the sufficiency of income. And, as with subparagraph 20(1)(c)(i), such an assessment would be too subjective where certainty is to be preferred. For these reasons, I am of the opinion that the view of Pigeon J. in Lipson, supra, to the extent that it may have been applied to paragraph 18(1)(a), must now be considered to have been superseded by the rationale in Ludco. [34] Therefore, “income”, for the purposes of paragraph 18(1)(a) of the Act, does not mean “profit” or “net income”. Rather, “income”, for the purposes of paragraph 18(1)(a) of the Act, means an amount that would be included in computing income for the purposes of the Act. As a result, in applying the test adopted by the Exchequer Court in Roenisch (“an expenditure which will not be incurred unless there is a profit is not an expenditure in order to earn a profit”) to paragraph 18(1)(a) of the Act, the references to “profit” must be read as “income”. The test would then be:... if there is an expenditure which would be made in any case, from which [income] may accrue, the expenditure may be deducted; but an expenditure which will not be incurred unless there is [income] is not an expenditure in order to earn [income]. [35] For PCS, the base payment was an expenditure that would not have been incurred unless it sold potash, which produced income. The base payment was therefore not an expenditure in order to earn income.
[36] PCS refers to the decision of the English Court of Appeal in Harrods (Buenos Aires), Ltd. v. Taylor-Gooby (Inspector of Taxes) (1964), 41 T.C. 450, 43 A.T.C. 6 (CA). In that case, Harrods (Buenos Aires), Ltd. (Harrods) was incorporated in the United Kingdom and carried on business in Argentina. Argentina imposed a tax on the capital of corporations that carried on business in Argentina through an “empresa estable”. The premises where Harrods carried on its business was an “empresa estable”. The tax was paid regardless of whether the corporation earned a profit.
[37] All three judges of the Court of Appeal, in separate reasons, agreed that the tax was deductible by Harrods in computing its income for the purposes of the Income Tax Act (UK), 1952, 15 & 16 Geo VI & I Eliz II, c. 10. Wilmer, L.J., stated at page 466:It was the establishment of the “empresa estable” which attracted the tax, which was payable regardless of whether profits were, in fact, made … Liability to the tax in the present case was an incident to the establishment of the Company's “empresa estable”, and as such it was a liability incurred wholly and exclusively for the purposes of the trade carried on there. [38] Harrods’ liability to pay the tax did not arise on the sale of any products, but rather simply by having the establishment in Argentina. Diplock, L.J. confirmed the significance of the imposition of the tax in Argentina as a result of Harrods having an establishment there (at page 469):Liability to the tax does not depend upon whether profits are made or not. It is a payment which the company is compelled to make if it has a business establishment in the Argentine at all, and it must have a business establishment if it is to carry on its trade. [39] The tax was imposed in Argentina as a result of Harrods simply having an establishment in that country. Therefore, there is a significant distinction between the tax under consideration in Harrods (Buenos Aires), Ltd. v. Taylor-Gooby (Inspector of Taxes) and the base payment imposed by the Province of Saskatchewan. While in both cases the tax is imposed regardless of whether the taxpayer has a profit, the triggering event for the imposition of the tax in Argentina was the establishment of a store in Argentina by Harrods. In this appeal, the triggering event is not the establishment of a mine in Saskatchewan, but the sale of potash. PCS gained or produced its income by selling potash. The base payment was not incurred for the purpose of making the sale of potash; rather, it was incurred as a consequence of the sale of potash.
[40] PCS also argues that Cogema confirms that a tax on the value of potash sold is deductible. In Cogema, the amounts in issue were paid under The Corporation Capital Tax Act (Saskatchewan), S.S. 1979-80 c. C-38.1 (the surcharge). The surcharge in Cogema was imposed on the value of the sales of uranium yellowcake. As noted by the Tax Court Judge, at paragraph 6, “[t]he surcharge was not paid at the time of production of the ore or of the yellowcake. It was paid at the time of sale of that yellowcake”.
[41] The only provision of the Act that was in issue in Cogema was paragraph 18(1)(m). In particular, the issue was whether the surcharge was paid in relation to the production of minerals. The Tax Court Judge found that the surcharge was in relation to the sale of minerals and not the production of minerals:[15] ... the surcharge related to Cogema’s actual sale of the mineral and not its right to remove the mineral from the ground. The surcharge was a sales tax and was in relation to the sale of minerals, not the production of minerals. [42] Paragraph 18(1)(a) of the Act was not considered by the Tax Court in Cogema. The Tax Court Judge simply referred the matter back to the Minister of National Revenue for reconsideration and reassessment. The Tax Court Judge did not state that the amounts in issue were deductible in computing Cogema’s income:[16] The appeals are allowed and these matters are referred back to the Minister of National Revenue for reconsideration and reassessment pursuant to these Reasons. [43] In dismissing the appeal in Cogema, this Court provided brief reasons supporting the conclusion that the surcharge was a tax in relation to the sale of minerals and not the production of minerals:[1] We have not been persuaded that the amounts paid by the respondent pursuant to the Corporation Capital Tax Act of Saskatchewan (the Saskatchewan Act) in respect of which the respondent sought a deduction under the Income Tax Act constitute amounts that may reasonably be regarded as being in relation to the production in Canada of minerals.
[2] Rather, we agree with Beaubier J., that the amounts paid by the respondent to the Province of Saskatchewan under the Saskatchewan Act were taxes in relation to sales of minerals and not the production of minerals. [44] Since in Cogema neither the Tax Court nor this Court considered paragraph 18(1)(a) of the Act, Cogema does not assist in determining whether a tax in relation to the sale of minerals was incurred for the purpose of gaining or producing income.
[45] In this appeal, PCS gained or produced income by selling potash. The base payments were imposed based on the quantity of potash sold by PCS in a particular year. The base payments were not made or incurred for the purpose of making any sale of potash, but rather as a consequence of making such sale. Hence, the base payments were not made or incurred for the purpose of gaining or producing income but rather as a result of PCS gaining or producing income by selling potash.
[46] Since paragraph 18(1)(a) of the Act results in a denial of the deduction in issue, there is no need to consider whether paragraph 18(1)(m) of the Act would also have denied such deduction.
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