https://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/365065/index.do
Mikhail v. The Queen (March 1, 2019 – 2019 TCC 49, Monaghan J.).
Précis: Mr. Mikhail and his wife were the shareholders of 1526818 Ontario Inc., carrying on business as Queenslake Pharmacy, (the Corporation). CRA conducted a targeted audit of the pharmacy industry. As a result, Mr. Mikhail filed amended returns for 2010 and 2011 and his wife filed amended returns for 2012 and 2013. Those returns reported the unreported income of the Corporation in each of those year taking the form of rebates (the Rebates) from drug suppliers and manufacturers. The Mikhails and the Corporation each appealed their reassessments for those years, the main point being the argument that the Corporation should not be taxed on the same income reported by the individual shareholders. A lesser point at issue was the quantum of the Rebates.
The Court held that the Corporation, not the Mikhails, was taxable on what it termed In-Kind Rebates (traveller’s cheques, gift cards and prepaid credit cards) since they were used in the Corporation’s business and not appropriated by the Mikhails. Other non-cash Rebates were taxable only in the hands of the Mikhails, not the Corporation. The Court accepted that the cash rebates were placed in the Corporation’s cash register and were reported as income of the Corporation. The Court accepted the CRA’s assumptions as to the amount of the Rebates.
There was no order as to costs.
Decision: This decision is a bit difficult to follow as it has somewhat of a disjointed approach. The issues are stated thus:
[8] Accordingly, there are five issues in this Appeal:
- Were the Rebates paid to or enjoyed by Mr. and Ms. Mikhail and, if so, was it in their capacity as shareholders or did such payments constitute remuneration for services;
- If the Rebates were paid to or enjoyed by the Mikhails, are the payments deductible by the Corporation in computing its income;
- Was the amount added to income the correct amount of unreported Rebates;
- Is the Minister entitled to reassess Mr. Mikhail beyond the normal reassessment period for his 2010 and 2011 taxation years; and
- Is the Minister entitled to reassess the Corporation beyond the normal reassessment period for its 2010, 2011, and 2012 taxation years.
The result is stated as follows:
[40] For the above reasons:
- The appeal by the Corporation of the notice of reassessment dated March 31, 2016 for the taxation year ended October 31, 2013 is quashed;
- The appeal by the Corporation of the reassessments of its 2010, 2011 and 2012 taxation years is dismissed;
- The appeal by Younan Mikhail of the reassessments of his 2010 and 2011 taxation years is allowed;
- The appeal by Hellen Mikhail of the reassessments of her 2012 and 2013 taxation years is allowed; and
- No costs will be awarded to any party.
The Corporation’s 2013 appeal was quashed because it was an appeal of a nil assessment. The Corporation’s other appeals were dismissed insofar as the In-Kind Rebates, but not, it would seem, the other Rebates paid by cheque which were properly included in the income of the Mikhails. The appeals of the Mikhails were allowed but it would seem only to the extent of deleting the In-Kind Rebates they had previously reported. The quantum of the Rebates was left undisturbed. It was not necessary to open Mr. Mikhail’s otherwise statute-barred 2010 and 2011 taxation years since the In-Kind Rebates were not included in his income for those years. The Corporation’s 2010, 2011 and 2012 taxation years were not statute-barred because of the corporation’s negligence in not reporting the In-Kind Rebates.
There was no order as to costs, presumably because the result was somewhat of a mixed bag.