The following are recent Tax Litigation and Estate Administration Court Decisions involving Alpert Law Firm. Click on the name of the decision to read it in PDF format. To get the free Adobe Acrobat Reader, click here.
ESTATE ADMINISTRATION DECISIONS:
Contested Passing of Estate Accounts
TAX LITIGATION DECISIONS:
ALLOWABLE BUSINESS INVESTMENT LOSSES
Alessandro v. Her Majesty The Queen 2007 DTC 1373
The taxpayer made interest free loans to a company called OPHL for several years. All of the shares of OPHL were wholly owned by two companies: (i) AHL, a company whose shares were all held by the taxpayer; and (ii) ABC, a company whose shares were held by the taxpayer’s daughters. The loans to OPHL became bad and the taxpayer claimed an allowable business investment loss (“ABIL”) for the amount of the loans.
The Tax Court of Canada allowed the taxpayer’s appeal holding that the taxpayer was entitled to claim an ABIL. The judge found that the shares of ABC were actually being held in trust for the taxpayer by her daughters. As a result, the taxpayer was the sole shareholder of both of ABC and AHL, which together owned all of the shares of OPHL. Therefore, the taxpayer indirectly controlled 100% of the shares of OPHL. A taxpayer, who controls a company, directly or indirectly, is entitled to claim an ABIL in respect of a loss incurred on a non-interest bearing loan to that company.
CONTESTED PASSING OF ESTATE ACCOUNTS
Bluestein Estate v. Bluestein [2000] O.J. No. 1090
This case involved a contested passing of estate accounts and the determination of claims for additional fees by the estate trustee, who was also a Chartered Accountant. The Court held that the CA was entitled to receive a special fee for Tax Planning Services, in addition to the regular fees generally awarded to an estate trustee. The Court also partially sanctioned the pre-taking of fees by the estate trustee prior to the passing of accounts.
DEDUCTION OF LOSSES
Crolla v. Her Majesty the Queen 2001 DTC 3741
The Tax Court of Canada found that the taxpayer demonstrated a reasonable expectation of profits. Therefore, the taxpayer was allowed to deduct losses incurred from a real estate investment.
DIRECTOR’S LIABILITY ASSESSMENTS
Facchini v. Her Majesty the Queen 2004 TCC 733
The taxpayer was assessed as a Director of a corporation for his alleged failure to remit both Employee Source Deductions and Goods and Services Tax. The Tax Court of Canada found that the taxpayer exercised the degree of care, diligence and skill to prevent the failure of the corporation to remit that a reasonably prudent person would have exercised in comparable circumstances. The taxpayer was held to be an inside director, who was a construction foreman by trade. The Tax Court found that the taxpayer was an uneducated, unsophisticated individual relying on the experience of another director, who managed the office and was responsible for filing the corporation's tax returns.
EMPLOYMENT INSURANCE BENEFITS
Tassone v. Canada (M.N.R.) [2003] T.C.J. No. 624
The Tax Court of Canada found that three children who were employed by a corporation that was owned and operated by their parents were each entitled to receive Employment Insurance Benefits.
EXTENSIONS OF TIME TO FILE AN APPEAL
Adler v. Her Majesty the Queen 98 DTC 1414
The Tax Court of Canada held that the taxpayer was entitled to an extension of time to file a notice of objection.
INDEPENDENT CONTRACTORS
Le Tréport Wedding and Convention Centre Ltd. v. Her Majesty The Queen, 2015 TCC 203
A large catering business, which was co-represented by Alpert Law Firm, engaged approximately 133 workers as bartenders, captains, dishwashers, kitchen helpers, servers, and set-up crew, etc. The Minister assessed the taxpayer for unpaid Employment Insurance premiums and Canada Pension Plan contributions, penalties and interest on the basis that the workers were employees. The taxpayer appealed to the Tax Court of Canada on the grounds that all of the workers were independent contractors.
The Tax Court of Canada allowed the taxpayer’s appeal finding that all of the workers were independent contractors (with the exception of one office worker and one kitchen helper, which the taxpayer conceded at the commencement of the trial). In reaching its decision, the Court held that the intention of the parties is important and used the four factors listed in Wiebe Door Services Ltd. v. The Minister of National Revenue, 87 DTC 5025, to analyze the work relationship between the workers and the taxpayer. The four factors: (i) control, (ii) ownership of tools, (iii) chance of profit and (iv) risk of loss were analyzed with a view to ascertaining whether their working relationship was consistent with that intention.
With regard to the parties’ intentions, the Court found that the witnesses’ competing testimonies were inconclusive. However, the Court found that the four factors point to a conclusion that the workers were independent contractors and not employees. With regard to control, the Court found that the taxpayer did not train the workers beyond an orientation session because (i) most of the workers were experienced; and (ii) those who had never waitressed learned by watching others perform the same services. The taxpayer did not supervise the workers as it merely instructed them on “what” to do but not “how” to do it. The workers were entitled to refuse work shifts, or alternatively arrange for substitutes without repercussions. In addition, the workers supplied reasonable tools of the trade such as “event appropriate apparel”, corkscrews, martini shakers, aprons, shoes, Smart Serve Certificate, even though the taxpayer supplied all the major tools and equipment. Most of the workers also had a chance of profit and risk of loss because they could negotiate their rates of pay and were responsible for the cost of damages from the occasional breakage of dishes or spillage of food.
10Tation Event Catering Inc. v. The Minister of National Revenue 2008 TCC 562
A large catering business, which was represented by Alpert Law Firm, engaged 91 workers as freelance servers, chefs and bartenders. The Minister decided that the workers were employees and assessed the taxpayer for arrears of contributions under the Canada Pension Plan and premiums under the Employment Insurance Act. The catering business appealed to the Tax Court of Canada on the grounds that all of the workers were independent contractors.
The Tax Court of Canada allowed the catering business' appeal on the basis that all of the workers were independent contractors. The Tax Court examined the four factors listed in Wiebe Door Services Ltd. v. The Minister of National Revenue, 87 DTC 5025: control, ownership of tools, chance of profit and risk of loss. It found that all the four factors indicated that the workers were independent contractors.
In examining the control factor, the Tax Court found that all of the workers were experienced individuals who were not trained by the catering business. These workers were not supervised in the performance of their duties. They were assigned their duties by one of the workers designated as a "supervisor," but they were not told how to do the work. The workers provided their own tools, such as clothing, lighters, pins, corkscrews, and bar kits, even though the taxpayer provided some large tools, such as ovens. The workers had a chance of profit and a risk of loss, since they were free to turn down any given assignment and negotiate their hourly rates. The intention of the parties, as evidenced by the same agreement they all signed, was that the parties were independent contractors.
NET WORTH ASSESSMENTS
Cox v. Her Majesty the Queen 2002 DTC 1515
This case involved a taxpayer who had amassed a large amount of investments and had not filed tax returns for many years. The Minister of National Revenue assessed the taxpayer by using the net worth assessment method. The Tax Court of Canada significantly reduced the net worth assessment for the following reasons: (i) the taxpayer was given credit for a series of gifts made by his former girlfriend; (ii) the taxpayer was given credit for an inheritance received from his father; and (iii) the Minister's estimate of the taxpayer's cost of living expenses based on Statistics Canada figures was reduced since they did not accurately reflect the taxpayer's meager lifestyle.
PENALTIES
Cox v. Her Majesty the Queen 2002 DTC 1515
This case involved a taxpayer who had amassed a large amount of investments and had not filed tax returns for many years. The Minister of National Revenue assessed the taxpayer by using the net worth assessment method. The Tax Court of Canada disallowed the imposition of penalties finding that the taxpayer (i) suffered from a psychological illness and (ii) therefore lacked the requisite mental state to form the intention of knowingly, or under circumstances amounting to gross negligence, making a false statement or omission in a tax return.
RCMP ORDERED TO RELEASE DOCUMENTS
Singh v. Her Majesty the Queen 2007 DTC 1500
A taxpayer represented by Alpert Law Firm, required copies of all of his business records in order to fully prepare his defence against a CRA reassessment. The CRA repeatedly refused the taxpayer’s requests to provide him with copies of these documents. The CRA claimed that it was not in possession of these documents, since they had been previously seized by the RCMP from the taxpayer in an unrelated legal proceeding. However, the RCMP had granted the CRA full access to the seized documents in preparing its case against the taxpayer. Alpert Law Firm brought a Motion in the Tax Court of Canada on behalf of the taxpayer and was successful in obtaining orders compelling the RCMP to release the seized documents to the taxpayer and awarding costs against the CRA.
SEARCH WARRANTS
In the matter of Synergy Group (2000) Inc. et al. Ontario Superior Court of Justice File No.: 10446
On August 30, 2012, the Ontario Superior Court of Justice ordered the Canada Revenue Agency (CRA) to return all of the records seized pursuant to a search warrant obtained during a criminal investigation against Synergy Group (2000) Inc., which was represented by Howard Alpert, C.S. of Alpert Law Firm. Synergy Group (2000) Inc. and other taxpayers were alleged by the CRA to have participated in a tax scheme, marketed across Canada, to permit investors to deduct tax losses totaling nearly $200,000,000 during 2004, 2005 and 2006.
On March 16, 2010 the CRA seized records from Synergy's offices acting on a search warrant issued by the Superior Court of Justice pursuant to section 487 of the Criminal Code of Canada, in relation to an ongoing criminal investigation. Subsequently, the CRA made additional Court Applications and the Superior Court of Justice extended the record detention period by over 2 years until May 18, 2012. Synergy made allegations that the method used by CRA to obtain the search warrant violated its Canadian Charter rights by contravening the Supreme Court of Canada decisions in Jarvis and Ling.
The CRA did not institute any further proceedings to extend the period to detain the records. Pursuant to the provisions of subsection 490(9) of the Criminal Code, the Superior Court of Justice issued orders on consent, ordering the CRA to return all of the records that were seized from the taxpayers during the course of the criminal investigation. On September 27, 2012 the records were returned to Synergy and are no longer in the possession of the CRA for purposes of its investigation. "The CRA must respect the guidelines set by the Supreme Court of Canada to protect the Charter rights of taxpayers when obtaining search warrants" stated Mr. Alpert. "This is one of the largest tax cases in Canada."
SHAREHOLDER BENEFITS
Bibby v. Her Majesty the Queen 2009 DTC 1385
The taxpayer, who was represented by Alpert Law Firm, and his immediate family members were all employees of, and shareholders in, an electronics supply business. None of the family members were paid by way of salary. Their practice was to take drawings from time to time throughout the year, and these drawings were accounted for in the company's books by way of a debit to a single, co-mingled shareholders loan account. At the end of each taxation year, the business accrued a portion of these drawings to the taxpayer and his family members as management fees for the purposes of personal income tax reporting. The business was highly profitable during its January 31, 2002 fiscal year and it accrued management fees totaling $322,000 to the taxpayer and his family members. These management fee accruals represented a significant portion of the business's profits and it filed its T-2 corporate tax return on this basis.>
In October 2002, the major retail customer of the business terminated their business relationship. As a result, the business ceased to be profitable and sustained non-capital losses from its operations during 2003 and 2004. Ultimately, the entire business was forced to gradually wind down its operations and terminate its entire business. In early 2003, the taxpayer met with his accountant to discuss the deteriorating financial position of the business. On the advice of its accountant, the business filed two amended T-2 corporate tax returns for 2002 in order to claim a carry-back of the non-capital loses, which were generated during the fiscal year ending January 31, 2003 and 2004. The amended T-2 corporate tax returns for the year ending January 31, 2002 decreased the management fees that had been accrued to the taxpayer and his family members by the sum of $224,000. As a result, the accountant made year end journal entries on January 31, 2002 to decrease the management fees and to correspondingly increase the net income of the business.
The amended T-2 returns were not accepted by the Minister insofar as they related to the amounts included in the income of the taxpayer and his family members for 2002. The Minister reassessed the taxpayer for his 2002 personal income tax return and added $224,000 a shareholders benefit pursuant to subsection 15(1) of the Act, in respect of the abovementioned accrued management fees. The Minister also levied a gross negligence penalty against the taxpayer pursuant to subsection 163(2) of the Act.
The taxpayer appealed to the Tax Court and the appeal was allowed. The Minister was required to delete the $224,000 included in income and erase the penalty. The Tax Court held that subsection 15(1) of the Act did not operate to tax all payments made to shareholders by a corporation, but only those payments actually received from a corporation by shareholders outside the ordinary course of the corporation's business. In the instant case, the management fees that were the subject of the reassessment were amounts earned by the taxpayer and also by the other members of his family, in the normal course of carrying on the business. The Tax Court also noted that for the purposes of section 15 of the Act, it was immaterial whether the amounts were salary, or, as in this case, management fees. What mattered was that the payment was made as remuneration, not simply to benefit a shareholder.
The Tax Court held that while the management fees were not a taxable benefit under subsection 15(1) of Act, they would have been taxable under subsection 6(1) of the Act, but only to the extent that they were actually received by the taxpayer during the 2002 year. Although the Minister was entitled to rely on subsection 6(1) of the Act to support the inclusion of the management fees in the taxpayer's income, it could not do so since: (i) the Notice of Confirmation clearly limited the Minister's reliance to subsection 15(1) of the Act; (ii) the Reply made no mention of subsection 5(1) or 6(1) of the Act and subsection 49(1) of the General Procedure Rules requires that every Reply state the statutory provisions relied on and the reasons intended to be relied on by the Minister; and (iii) the Minister did not explicitly plead that in 2002 the taxpayer received the management fees that were the subject of the reassessment.
Alessandro v. Her Majesty the Queen 2007 DTC 1373
The taxpayer made loans to a company, in which she was the sole shareholder, in order to provide funds for the company to make mortgage payments on a property. Subsequently, the company sold the taxpayer this property in satisfaction of the loans. The Minister reassessed the taxpayer on the basis that the taxpayer had received a shareholder benefit when the property was sold to her, because the value of the property exceeded the value of the loans that she had made to the company. The taxpayer appealed the reassessment.
The Tax Court of Canada allowed the taxpayer’s appeal by reducing the shareholder benefit. There were no cheques evidencing that the taxpayer had made loans to the company, since a number of corporate and financial records had been destroyed in a fire. However, the taxpayer was able to produce other records to corroborate that the mortgage payments had been made. In addition, the company’s accountant also corroborated that the mortgage payments did not come from other family companies. Based on this evidence, the judge made a reasonable inference that the taxpayer had made the mortgage payments and reduced the shareholder benefit accordingly.
SPOUSAL SUPPORT PAYMENTS
Salzmann v. Her Majesty the Queen 2008 TCC 527
The taxpayer, who was represented by Alpert Law Firm, was reassessed for the 2004 taxation year and denied the deduction of the $90,000 retroactive support payment that he had made to his former spouse.
The taxpayer's marriage had broken down in November 2001. In December 2003, the Ontario Superior Court ordered the taxpayer to pay monthly support payments to his former spouse, retroactive to November 2001. The retroactive spousal support payment, which totaled $90,000, was paid by the taxpayer in April 2004 by way of two cheques of $45,000 each. The Minister denied the deduction of the $90,000 retroactive spousal support payment claimed by the taxpayer in his income tax return for the 2004 taxation year.
The Tax Court of Canada allowed the taxpayer's appeal. It held that the $90,000 payment was exactly equivalent to the arrears of spousal support, and therefore could not be considered as anything except arrears.
The Tax Court followed the decision in The Queen v. Sills, 83 DTC 5070, where the Federal Court of Appeal held that as long as a separation agreement provided that amounts were payable on a periodic basis, their character was not changed by the fact that they were not paid on time. Therefore, in this case, the $90,000 payment was deductible as a periodic spousal support payment, pursuant to subsection 56.1(4) and paragraph 60(b) of the Income Tax Act.
The Tax Court also noted that the order of the Ontario Superior Court stated that all spousal support payments ordered for a period prior to the effective date of the court order shall be deductible to the taxpayer and taxable to the former spouse. The Court acknowledged that the Ontario Superior Court cannot bind the Tax Court with respect to an interpretation on support payments. However, it adopted the comments in Hinkelman v. The Queen, 2001 DTC 732, where the Tax Court stated that a Superior Court order should be given full force and effect where possible.
TAX EVASION
In the matter of Synergy Group (2000) Inc. et al. Ontario Superior Court of Justice File No.: 10446
On August 30, 2012, the Ontario Superior Court of Justice ordered the Canada Revenue Agency (CRA) to return all of the records seized pursuant to a search warrant obtained during a criminal investigation against Synergy Group (2000) Inc., which was represented by Howard Alpert, C.S. of Alpert Law Firm. Synergy Group (2000) Inc. and other taxpayers were alleged by the CRA to have participated in a tax scheme, marketed across Canada, to permit investors to deduct tax losses totaling nearly $200,000,000 during 2004, 2005 and 2006.
On March 16, 2010 the CRA seized records from Synergy's offices acting on a search warrant issued by the Superior Court of Justice pursuant to section 487 of the Criminal Code of Canada, in relation to an ongoing criminal investigation. Subsequently, the CRA made additional Court Applications and the Superior Court of Justice extended the record detention period by over 2 years until May 18, 2012. Synergy made allegations that the method used by CRA to obtain the search warrant violated its Canadian Charter rights by contravening the Supreme Court of Canada decisions in Jarvis and Ling.
The CRA did not institute any further proceedings to extend the period to detain the records. Pursuant to the provisions of subsection 490(9) of the Criminal Code, the Superior Court of Justice issued orders on consent, ordering the CRA to return all of the records that were seized from the taxpayers during the course of the criminal investigation. On September 27, 2012 the records were returned to Synergy and are no longer in the possession of the CRA for purposes of its investigation. "The CRA must respect the guidelines set by the Supreme Court of Canada to protect the Charter rights of taxpayers when obtaining search warrants" stated Mr. Alpert. "This is one of the largest tax cases in Canada."