http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/71349/index.do
Richard A. Kanan Corporation v. The Queen (April 25, 2014 – 2014 TCC 124) was a case where the taxpayer invoked solicitor-client privilege to refuse to disclose the services provided in connection with bills which it had sought to deduct. The Minister then denied the deduction of any portion of such bills:
[1] The Appellant is appealing reassessments in respect to its 2006 and 2007 taxation years. In both of these taxation years, the Appellant, in calculating its income, deducted legal fees which had been paid to Olson Lemons LLP (“Olson Lemons”), a law firm, and Olson Tax Consultants Inc. (“Olson Tax”), a corporation owned by the law firm and engaged in the business of tax return preparation. The Minister of National Revenue (the “Minister”) denied all of the expenses on the basis that they were made or incurred for the benefit of Richard Kanan, the Appellant’s major shareholder, the shareholder’s spouse and related corporations and that they were not incurred for the purpose of earning income from the business.
[2] To support the deductibility of the expenses, the Appellant provided to the Minister copies of legal invoices and a general description of the legal services. When the Minister advised the Appellant that there was insufficient information to support the deductibility of the claimed expenses and requested greater detail of the legal services and advice provided, the Appellant claimed that the information being required was subject to solicitor-client privilege, which it would not waive.
[3] The only issue is whether there is sufficient evidence, either oral, documentary or both, to support the deductibility of the claimed legal expenses.
[4] Although heard pursuant to the
Tax Court of Canada Rules (Informal Procedure), these appeals have a lengthy history associated with them. Prior to hearing the present appeals, similar appeals were heard by Chief Justice Rip in Calgary in March and December of 2010. Although the Appellants in the appeals before Chief Justice Rip were different than the Appellants in the present appeals, they were utilizing the services of the same law firm, Olson Lemons, and the same tax consulting company, Olson Tax. Consequently, the issue in those appeals, concerning deductibility of expenses, was almost identical to the issue before me.
The only witness called was Mr. Olson, the lawyer for the taxpayer:
[7] Thomas Olson, a partner at Olson Lemons, was the only witness testifying on behalf of the Appellant. He testified that the contents of the legal files, relating to the expenses, were protected by solicitor-client privilege. Since his client had not waived that privilege, he limited his testimony to unprivileged information, claiming that the onus on the Appellant did not require it to disclose any information over which privilege was claimed.
[8] The Respondent claimed that the Appellant provided insufficient information of the work completed. Since this would not satisfy the Appellant’s onus in this Court, then the expenses should not be deductible.
[9] Although the Appellant’s minute book and general ledger had been provided during the audit process, only the T2 corporate tax returns and the invoices for the expenses were introduced into evidence at the hearing. There are nine invoices in issue during this period. They contain no description of the work completed for which fees were charged. Except for charges for disbursements, all invoices simply referenced the work generally as “Fees for Services”.
[10] During the period under appeal, there were essentially three categories of expenses for which invoices were issued:
(a) General Retainer Expenses – described as fees for day-to-day general advice to the Appellant in areas such as tax-related and corporate matters (Transcript, pp. 17-18, 59 and 61);
(b) Preparation of Returns – described as those invoices relating to tax and corporate compliance, accounting and bookkeeping and preparation of returns (Transcript, pp. 105 and 130); and
(c) Projects – described as the identification, analysis and advice given to the Appellant and Olson Tax respecting specific legal issues and transactions, the consequent reporting of these and preparation of the supporting documentation (Transcript, pp. 63-64).
The court set out its understanding of the law as enunciated by Chief Justice Rip:
[16] In
Dr. Mike Orth Inc. v The Queen and the related appeals, Chief Justice Rip reviewed in detail the jurisprudence respecting the onus, which an appellant has in this Court, to establish a prima facie case that “demolishes” the Minister’s assumptions of fact that form the basis of the assessment. If an appellant successfully demolishes those assumptions of fact, the onus shifts to the Minister to rebut the appellant’s prima facie case and prove the assumptions. Chief Justice Rip, at paragraph 20, concluded:
[20] A taxpayer wishing to establish a
prima facie case to demolish all or any of the Minister’s assumptions must not only present evidence of a high degree of probability that must be accepted by the Court but must allow for a fair and open cross-examination of the evidence by Minister’s counsel. Counsel is entitled to vigorously challenge the evidence of the taxpayer by cross-examination. A taxpayer claiming privilege in cross-examination on matters he or she leads in examination-in-chief, thus limiting the cross-examination, must consider possible consequences. A taxpayer claiming privilege who wishes to shift the onus must still make a case that will survive cross-examination.
Following the Orth decision the court disallowed the general retainers since there was no evidence what services were covered.
In the case of the invoices for preparation of tax returns the court also followed Orth and allowed them in full:
[26] In
Dr. Mike Orth Inc v The Queen, Chief Justice Rip allowed the Appellant to deduct its fees to Olson Tax, where those fees related to tax-related and compliance services. Similarly, in the appeals before me, Mr. Olson stated that the services included attendance on the Appellant’s T2 and the ancillary returns together with bookkeeping and reconciliation. This establishes a
prima facie case to support these expenses being deductible. Although Mr. Olson admitted that the firm may have prepared Dr. Kanan’s personal tax returns and those of his family members, he stated, and I have no evidence to the contrary, that they were completed free of charge (Transcript, pp. 112‑113).
Finally, in the case of project billings the court allowed a portion of them (73.33%):
[27] According to Mr. Olson’s testimony, any task, that requires more work than simply picking up the phone and answering a quick question, moves out of the “General Retainer” category and falls instead within the category of so-called “Projects”. Approximately 20 percent of the fees, under this category, related to providing legal advice and analysis in respect to specific transactions during a particular year, including documentation required and necessary reporting. Mr. Olson divided the remaining 80 percent into two sub-categories:
(a) 2/3 (53.33 percent of the 80 percent total) which related to advice on business and tax issues respecting specific transactions together with the preparation of related documents; and
(b) 1/3 (26.67 percent of the 80 percent total) which related to advice on corporate and tax compliance and reporting obligations.
[28] It appears that both the first 20 percent estimate of the fees and the 26.67 percent of the 80 percent relate to legal advice and analysis. The distinction between the categories, however, was unclear and, from the evidence before me, they appear to cover the same items. Mr. Olson attempted to explain the 26.67 percent as relating to the advice that might be required in respect to payment of bonuses, remittance of tax and other reporting obligations. While communication relating to providing such advice is privileged, since I have no evidence to distinguish between these two categories or to confirm these categories represent expenses incurred for the purpose of earning income from business or property and where it appears they duplicate each other, I am allowing only the initial 20 percent of the total amount of fees listed in these “Project” invoices, but not the 26.67 percent of the 80 percent estimate. Of the remaining 53.33 percent of the 80 percent, Mr. Olson’s evidence is that it included some business and legal advice together with drafting documents for specific transactions, such as compensation issues, payment of dividends and adjustments to stated capital. The portion of this 53.33 percent relating to advice or communications, of course, would be privileged. Although there was no attempt to differentiate between the portion attributable to advice and the portion attributable to documentation, the result of the firm’s analysis would be available to CRA in the Appellant’s tax returns and minute book. Therefore, I am allowing 53.33 percent of the invoice amounts as well as the initial 20 percent.
As a result the appeals for 2005 and 2006 were allowed.