Aitchison Professional Corporation v. R. – TCC: Provision of legal services free to a related professional corporation not a transfer of “property” for the purposes of section 160

Aitchison Professional Corporation v. R. – TCC:  Provision of legal services free to a related professional corporation not a transfer of “property” for the purposes of section 160

Aitchison Professional Corporation v. The Queen (July 6, 2018 – 2018 TCC 131, Graham J.).

Précis:  James Aitchison is a lawyer who owed at the time of trial in excess of $2,000,000 in federal income tax plus interest.  He has not paid any federal income tax since 1992.  In December of 2003 he and his two daughters, both lawyers, incorporated Aitchison Professional Corporation (APC).  It appears that since that date all fees for his legal advice have been billed by APC which has provided him little or no compensation for his work.

[2]  In 2012, the Minister of National Revenue assessed APC for almost $2.1 million pursuant to section 160 of the Income Tax Act. The assessment was premised on the assumption that James had transferred property worth more than $3 million to APC for little or no consideration between January 1, 2007 and September 30, 2010. The Respondent alleges that the property transferred was what the Respondent describes as James’ “right to invoice for legal services”.

In short Justice Graham found that Mr. Aitchison had transferred “services” to APC, not property and that accordingly section 160 of the Act did not apply.  Thus the appeal of APC was allowed, with costs.

Decision:   The Court concluded that whether Mr. Aitchison was viewed as an unpaid employee of APC or a “volunteer”, the transfer at issue was one or services, not property, for the purposes of section 160 of the Act:

[18]  Having acted in accordance with the terms of his or her contract, an employee has a right to payment pursuant to the terms of that contract. That right, more accurately described as a salary receivable, is “property”. Had James and APC agreed that James would be paid $200,000 per year and had James later waived his right to receive that payment, James could have been said to have transferred property (i.e. his salary receivable) to APC. However, the Respondent is not alleging that such a transfer occurred nor is there any evidence that it did. All of the evidence indicates that APC never agreed to pay James any salary and that James never sought any salary from APC.

[19]  By definition, volunteers are not compensated for their work. While employees should, of course, be fairly compensated for their work, their right to compensation flows from the employment contracts that they negotiate. The right to negotiate is a right that everyone possesses and that is enforceable against no one. It is not “property”. If an employee negotiates a poor contract, the potential salary that he or she leaves on the table is not “property” that he or she has transferred to his or her employer. It is simply a lost opportunity. An employee does not have an enforceable right to the salary that he or she never negotiated. This is true even if an employee agrees to work for free. The size of the lost opportunity does not change its character.

Moreover there was no allegation that Mr. Aitchison was a sole practitioner and the APC structure was merely a sham:

[24]  It is important to highlight that the Respondent did not argue that James was carrying on business as a sole practitioner. Therefore, I have not considered whether James transferred a “right to invoice for legal services” in that role. If James were a sole practitioner, there are two things that could be captured by the description “right to invoice for legal services”. First, the right of a lawyer who has performed legal services to issue a bill to his or her clients for those services is “property”. Such a right is more commonly referred to as work in progress. The “work in progress of a business that is a profession” is specifically included in the definition of “property”.  Second, the right of a lawyer to receive payment for legal services that he or she has provided to his or her client and for which he or she has invoiced is also “property”. Such property is more commonly referred to as an account receivable.

[25]  I heard evidence over the course of the trial about APC’s retainer agreements, invoices, accounting and advertising. I also heard evidence about the transactions by which the Aitchisons rolled their respective law practices to APC in 2003 and the manner (or lack thereof) in which salary and dividends were determined. I have not repeated that evidence in these Reasons for Judgment because, in my view, most of it relates to the question of whether James was carrying on business as a sole practitioner and thus has little bearing on the actual issue pled by the Respondent. There was certainly significant evidence that could have supported the position that James was carrying on his practice as a sole practitioner, that the clients were his clients, that his use of APC was a sham and that he transferred his work in progress to APC every time he was ready to invoice a client. However, I acknowledge that, because the Respondent did not plead that James was carrying on his practice as a sole practitioner and did not plead that James’ use of APC was a sham, APC did not introduce evidence that it would have needed to counter that argument. Had I had the benefit of complete evidence on this point, the evidence may have painted a different picture.

[Footnote omitted]

While the result was “distasteful” (para. [28]) Justice Graham cautioned Parliament on the dangers of amending section 160 to include a reference to “services”:

[32]  This case demonstrates that there is clearly a gap in section 160. It cries out for that gap to be fixed. However, I would caution Parliament against inadvertently extending the reach of section 160 too broadly. Simply amending section 160 to cause it to cover the non-arm’s length provision of services may have undesired consequences.

[33]  I think most taxpayers would understand that buying their child a car at a time that they owe tax is something that Parliament wants to discourage and would accept that, under the current version of section 160, their child could be assessed for the lesser of the value of the car and the tax debt. I imagine most taxpayers would recognize that, while harsh, this outcome is a reasonably just deterrent against transferring assets to family members and an effective collection mechanism should a taxpayer do so.

[34]  On the other hand, I am not sure that most taxpayers would view driving their child to soccer practice at a time that they owe tax as something that should subject their child to liability under section 160. Yet, if Parliament drafts section 160 in too broad a manner, that is exactly what would happen. Driving someone someplace is a service. Providing that service to a non-arm’s length person for no consideration at a time that the provider owed tax would, if section 160 were simply amended to add services, subject the recipient to liability for the lesser of the value of the ride and the provider’s outstanding taxes.

[35]  While the foregoing is an extreme example, it begs the question of where the Minister would draw the line. Is painting a sibling’s deck a big enough service? How about helping your uncle move? If a tax debtor spent all of his or her free time caring for his or her aging parents, would the Minister assess the parents for the fair market value of that care? If a tax debtor were a stay-at-home parent, would the Minister assess his or her spouse for the fair market value of the unpaid childcare and domestic services provided to the family?

[36]  In the circumstances, I urge Parliament to proceed with any amendments to section 160 with care.

Comment:  This is an odd decision that appears to cry out for examination by the Federal Court of Appeal.  Subsection 160(1) (which is not set out in the decision) has a broad linguistic reach and is clearly an anti-avoidance provision:

160 (1) Where a person has, on or after May 1, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to …

The narrow interpretation embraced by Justice Graham reminds one of the decision of the Exchequer Court in Dunkelman v. M.N.R., [1960] Ex. C.R. 73 dealing with attribution on non-arm’s length transfers.  That decision held that a transfer did not include a loan.  Dunkelman was an exemplar of the literalist approach found in early Canadian tax jurisprudence.  It seems clear that the literalist approach has been supplanted by the modern approach adopted by the Supreme Court of Canada in Canada Trustco Mortgage Co. v. Canada, [2005] 2 SCR 601, 2005 SCC 54, at para. 10, per the Chief Justice and Major J.:

The interpretation of a statutory provision must be made according to a textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole.

While the Crown’s language of “right to invoice for legal services” may not be the most felicitous it clearly refers to either work in progress or accounts receivable (or both), which are forms of property that can be assigned whether as security or absolutely and include property coming into existence at a future date: 

12 (1) A security agreement may cover after-acquired property.

Personal Property Security Act, R.S.O., 1985. 

“Monetary obligations incurred in favour of a trader and in the ordinary course of his business are “book debts”.

[Footnote omitted]

Security Interests in Secured Obligations, Benjamin Geva, Canadian Bar Review, 60.1, (1982):  151-171 at p. 155

Those of us old enough to have practiced prior to April 1, 1976 will recall that a General Assignment of Book Debts was a very familiar form of business financing with its own separate statute in Ontario and other provinces.  Had Mr. Aitchison purported to assign his work in progress and accounts receivable (book debts) to APC that assignment would clearly have been a transfer of “property” for the purposes of subsection 160(1).

Does the peculiar structure he settled upon pass the “textual, contextual and purposive analysis” test of the Supreme Court or is it merely another thinly veiled form of transfer of property “either directly or indirectly, by means of a trust or by any other means whatever”? 13 years after the Canada Trustco decision I do not think Mr. Aitchison should be too sanguine about this decision surviving on appeal.

On a somewhat more positive note such an interpretation would allay Justice Graham’s fears of children and elderly family members being dogged for taxes on car rides and elder care provided by tax indebted relatives.