Date: 20040329
Dockets: A-3-03
A-4-03
Citation: 2004 FCA 135
CORAM: DESJARDINS J.A.
BETWEEN:
JEAN-MARC FILLION
Appellant
and
HER MAJESTY THE QUEEN
Respondent
BETWEEN:
SERVICES FINANCIERS FILLION & ASSOCIÉS INC.
Appellant
and
HER MAJESTY THE QUEEN
Respondent
Hearing held at Québec, Quebec, on March 29, 2004.
Judgment delivered from the bench at Québec, Quebec, on March 29, 2004.
REASONS FOR JUDGMENT OF THE COURT: LÉTOURNEAU J.A.
Date: 20040329
Dockets: A-3-03
A-4-03
CORAM: DESJARDINS J.A.
BETWEEN:
JEAN-MARC FILLION
Appellant
and
HER MAJESTY THE QUEEN
Respondent
BETWEEN:
SERVICES FINANCIERS FILLION & ASSOCIÉS INC.
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT OF THE COURT
(Delivered from the bench at Québec, Quebec, on March 29, 2004)
[1] These are two consolidated appeals (A-3-03 and A-4-03) raising three different issues: the reasonableness of the appellant's splitting the income between him, his wife and his two children, the deductibility of a business investment loss from an investment of $30,000 in a mine in Mali, and the deductibility of the amount of $19,100 for management fees.
THE REASONABLENESS OF SPLITTING THE INCOME
[2] On the first issue, the Minister of National Revenue (Minister) relied on subsection 103(1.1) of the Income Tax Act (Act) and alleged that the allocation between the members of the partnership, who were not at arm's length, was not reasonable under the circumstances considering the capital invested in the partnership, or the work performed for the partnership by the beneficiaries of the income splitting.
[3] Tardif J.T.C.C., of the Tax Court of Canada, after hearing the testimony of the appellants and their advisor, found that there was a lack of evidence as to the very bases for splitting and allocating the revenues, and that the appellants lacked credibility in the explanations that they gave about the work done and the monies received. Evidently, the judge did not believe that the amounts allocated to the family members had, in fact, been paid by Mr. Fillion. There was no proof of payment and, for example, no bank account open in the name of the children, one of whom was supposed to have received $6,000 in a single year when he was only 13 or 14 years old. At paragraphs 24 to 28 and 31, he writes:
[24] Jean-Marc Fillion was the directing mind; he alone made all the decisions about the partnerships with the co-operation of his advisor Mr. Massé. A number of highly relevant questions were directed to Jean-Marc Fillion in order to ascertain the criteria, reasons, or bases relied on in determining the allocations and transfers.
[25] The responses given in answer to these nonetheless fundamental questions did not provide any objective or rational formula. These responses referred for example to appreciation for past services, motivation, encouragement, family solidarity, and the continuance of the business. Work actually performed was never the main criterion; moreover, the responses concerning the work were vague, confused and very imprecise. Here again, there were no payroll records or records of any sort to establish the extent of the work or when it was performed.
[26] It would nonetheless have been very easy to explain each person's workload and how the work performed was remunerated by given amounts, particularly since it could have been expected that the appellants would eventually be called on to provide reasons for their involvement.
[27] The evidence adduced never established why or, more importantly, how the allocations were determined. Reference was made to support, co-operation, and solidarity as evidenced by a high degree of availability in answering the telephone, running errands, doing cleaning and helping with certain mailings, but no explanations were provided about any of these duties. Moreover, no specific details were provided about when any of these duties were carried out or how much of this work was performed.
[28] In substance, I did not believe the explanations given. In my opinion, everything was orchestrated to minimize the tax burden. The evidence adduced, which is essentially testimonial, neither reflected nor supported the information the appellants gave to the respondent.
( . . . )
[31] In order to substantiate their claims, the appellants would have had to establish on the balance of evidence that the income generated by Jean-Marc Fillion's professional work had been divided in an objective, rational and plausible manner in accordance with the work performed by the recipients of the amounts of money transferred.
[4] Moreover, the judge raised a number of anomalies and facts undermining the reasonableness of the allocation of income effected by the appellant. For example, and we will limit ourselves to three, Mr. Fillion's wife who, according to him, made a considerable contribution to the partnership, was receiving less income than the incomes of his two sons, then aged 14 and 18 years old. The 14-year-old son received as much as his 18-year-old brother. The amounts paid to the family members were just short of the basic personal exemptions, so that there was no tax to pay.
[5] Essentially, on this first point of the appeal, the appellant is asking us to reassess the evidence and to substitute our assessment of the facts for that made by the trial judge. We are not empowered to accede to this request in the absence of evidence of a patently unreasonable error made by the trial judge: Housen v. Nikolaisen, [2002] 2 S.C.R. 235. The appellant could not provide any evidence of this kind.
THE BUSINESS INVESTMENT LOSS OF $22,500
[6] The appellant bought shares of the company "Les Mines Diatissan Ltée" whose fixed assets were located in Mali. In 1993, he disposed of his shares and claimed a business investment loss of $22,500.
[7] Based on the evidence before him, the trial judge found that the investment had been used to make acquisitions outside Canada. Accordingly, the investment did not satisfy the definition of "small business corporation" contained in subsection 248(1) of the Act, which requires that all or part of the fair market value of the assets be attributable to assets that are used principally in an "active business carried on primarily in Canada" by a Canadian-controlled private corporation. The appellant could not, therefore, claim the benefit of paragraph 39(1)(c) of the Act.
[8] We have not been persuaded that this finding of mixed fact and law by the judge of the Tax Court of Canada was not supported by the evidence.
[9] The appellant argued before us that it was, rather, an adventure in the nature of trade and that the loss qualified as such. This is not how he, himself, characterized his investment before the Tax Court of Canada, and no evidence was adduced before the court of first instance that would support his submission today.
THE DEDUCTIBILITY OF THE AMOUNT OF $19,500 FOR MANAGEMENT FEES
[10] To dispose of this ground of appeal, we need only reproduce paragraphs 72 to 74 of the decision by the trial judge:
[72] In order to claim an expense, it is not enough to make an accounting entry backed by a vague invoice. In order to deduct an expense from income, it must be established that the evidence was real, fully supported and justified and, moreover, that the expenditure was incurred in order to produce business income in accordance with paragraph 18(1)(a) of the Act.
[73] As was the case with the other aspects of the appeals, the appellant was unable or simply unwilling to explain the relevance of the nonetheless significant expense of $19,100. He simply stated that to earn money you had to spend money, a statement that in itself is not necessarily false, but is certainly not sufficient to establish that this was a genuine expenditure.
[74] If the appellant had provided certain details, explained why and how he arrived at this amount and, at the same time, had connected it in some way to his income, the Court might have been able to make certain corrections but the evidence was so deficient that it is not possible to make any correction, if only to confirm that it was appropriate to disallow the management fees expense established by the appellant at $19,100.
[11] For these reasons, the appeals in dockets A-3-03 and A-4-03 will be dismissed, with only one set of costs. However, the respondent will also be entitled to her disbursements in each of the two files.
Gilles Létourneau
J.A.
Certified true translation
Kelley A. Harvey, BA, BCL, LLB
FEDERAL COURT OF APPEAL
SOLICITORS OF RECORD
DOCKETS: A-3-03 and A-4-03
STYLES OF CAUSE: JEAN-MARC FILLION v. HER MAJESTY THE QUEEN and SERVICES FINANCIERS FILLION ET ASSOCIÉS INC. v. HER MAJESTY THE QUEEN
PLACE OF HEARING: QUÉBEC, QUEBEC
DATE OF HEARING: MARCH 29, 2004
CORAM: DESJARDINS J.A.
LÉTOURNEAU J.A.
NADON J.A.
REASONS FOR JUDGMENT LÉTOURNEAU J.A.
OF THE COURT:
DATE OF REASONS: MARCH 29, 2004
APPEARANCES:
Gaëtan Drolet FOR THE APPELLANTS
Sophie-Lyne Lefebvre FOR THE RESPONDENT
SOLICITORS OF RECORD:
Gaëtan Drolet FOR THE APPELLANTS
Sainte-Foy, Quebec
Department of Justice Canada FOR THE RESPONDENT
Montréal, Quebec