http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/120134/index.do
6051944 Canada Inc. v. The Queen (October 15, 2015 – 2015 TCC 180, Favreau J.).
Précis: The appellant claimed, and was denied, GST input tax credits (ITC’s) on management fees paid to related corporations. The appellant appealed the denial of ITCs to the Tax Court:
[2] Based on the assessment dated January 11, 2013, the following amounts were assessed:
|
Adjustments to calculating
the reported net tax
Net interest
|
$41,000.00
$6,800.30
|
|
Total owing
|
$47,800.30
|
[3] The adjustments to calculating the net tax reported in the amount of $41,000 are attributable to the input tax credits (ITCs) claimed and obtained in excess or without entitlement relative to an amount of $820,000 in management fee expenses that are ineligible due to their unreasonable nature under section 169 and subsection 170(2) of the ETA.
The Court rejected the Minister’s argument that the fees were unreasonable under the circumstances and allowed the appeal.
Decision: The appellant operated a large and successful construction business. Commencing in 2004 it paid management fees to companies owned by its two principals, Germain Pigeon and his son, Eric:
[13] In his testimony, Mr. Pigeon indicated that his management company had begun billing the appellant for management fees in 2004. Before 2004, the appellant paid him a salary and a bonus. Mr. Pigeon confirmed that, in the 2008, 2009 and 2010 fiscal years, the appellant paid the following management fees:
|
2008
|
1,250,000
|
625,000
|
625,000
|
|
2009
|
1,770,000
|
885,000
|
885,000
|
[14] Usually, the appellant equally divided the management fees between the management companies. For the fiscal year ending on July 31, 2010, the management fees were paid on the basis of 60% to the management company controlled by Eric Pigeon and 40% to the management company controlled by Germain Pigeon and were determined based on five months of operations, namely, from August 1, 2009, to December 31, 2009.
[15] Mr. Pigeon justified the difference in the management fee amounts by the fact that he retired on December 31, 2009, at the age of 70, which meant that Eric had to put more hours into the appellant’s business during that fiscal year. In the circumstances, it was reasonable to allocate the larger part of the management fees to him.
The Court rejected the Minister’s argument that the amount of fees paid was unreasonable:
[26] As Germain Pigeon explained in his testimony, the management companies and their shareholders acted as a central bank in funding the appellant’s operations. In the 2007, 2008, 2009 and 2010 fiscal years, the advances given to the appellant by a related company under shared control were $343,000, $2,050,957, $520,000 and $1,354,645 respectively. These advances were granted without interest and without a planned repayment method and represented the cost of lots sold to the appellant. In addition, the shareholders granted the appellant advances of $400,000 during the 2008 and 2009 fiscal years. The advances did not include interest or repayment conditions. Mr. Pigeon also stated that he and his son had personally endorsed bank loans taken out by the appellant many times.
[27] Without the services provided by the management companies and their shareholders, the appellant would not be able to operate its business. The appellant’s licence with the Régie du bâtiment du Québec is based on Germain Pigeon’s qualifications.
[28] The appellant paid the management fees essentially to protect its assets against the risks associated with operating its construction business. The primary motivation sought by the management companies and their respective shareholders is not to defer the taxation of income earned by the appellant because there is only a slight carryover due to the fact that both management companies’ fiscal years end on January 31. Except for this income tax carryover, the use of the management companies does not provide an advantage with respect to the taxation of the income generated by the appellant’s business. What is deductible for the appellant is taxable for the management companies at the same federal taxation rate.
[29] The comparison criteria used by the Minister, namely, the average of the salaries and bonuses paid during the three preceding years and increased to account for inflation and the management fee amounts paid in 2008 and 2010, are not relevant for determining whether the consideration paid by the appellant for the services received is reasonable in the circumstances. In addition, the use of management fees paid in respect of the 2010 fiscal year as a comparable is completely inappropriate given that they are based only on five months of the appellant’s operations.
[30] In light of the foregoing, the management fees paid by the appellant in respect of the 2009 fiscal year are fully justified for the services obtained and are reasonable in the circumstances.
[31] The appeal is allowed and the assessment dated January 11, 2013, is vacated.