Dimane Enterprises Ltd. v. R. – TCC: Employee profit sharing plan a sham

Bill Innes on Current Tax Cases

http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/99246/index.do New Window

Dimane Enterprises Ltd. v. The Queen (November 10, 2014 – 2014 TCC 334) was a case involving deductions for contributions to an employee profit sharing plan in the taxation years ending October 31, 2004 and October 31, 2005.

[1] The issue in the current appeal is whether the Appellant is entitled to deduct amounts it allegedly paid as contributions to an employee profit-sharing plan.

[2] Richard Arab is the president and sole director of the Appellant. Mr. Arab is a professional engineer who has worked in the Alberta oil and gas industry for over 35 years. In 2002, he retired from his employment with an oil and gas company.

[3] On June 30, 2002, Mr. Arab incorporated the Appellant to carry on the business of providing consulting services to companies operating in the oil patch. During the relevant period, Mr. Arab, his spouse Jeannette Arab and their children Jason, Lauren, Kathryn and Jonathan were the shareholders of the Appellant.

[4] The company provided the majority of its services to major oil and gas companies. The services involved project management, production operations, joint venture work, and property reviews. The only office of the Appellant was located in a room in the Arabs’ residence.

[5] Mr. Arab testified that during the relevant period each of his four children was an employee of the Appellant. The Respondent does not accept that the four children were employees of the Appellant.

[6] In 2004, Jason was 23 years old, Lauren was 21 years old, Kathryn was 14 years old and Jonathan was 13 years old.

[7] Mr. Arab testified that the Appellant paid Jason wages of $1,200 in each of 2004 and 2005. His duties were to mow the lawn and shovel the walk in front of their home. Lauren was also paid wages of $1,200 in each of 2004 and 2005. Her primary duty was to make some journal entries in the books of the Appellant. I heard testimony that she also ran computer simulations for the company. I have given no weight to this portion of Mr. Arab’s testimony since the software was not owned by either the Appellant or Lauren.

[8] Kathryn and Jonathan were paid wages of $600 in each of 2004 and 2005. Kathryn’s duties were to clean the Appellant’s office and sort the mail. The mail included family mail and mail for the Appellant. Jonathan’s duties were to shred documents, take out the garbage, “crop” some pictures and perform some internet searches.

The appellant allocated $103,000 to the four children in 2004 and $130,000 in 2005:

[15] In summary, Richard, after discussions with Jeannette [his wife], allocated the $130,000 transferred by the Appellant to the EPSP in respect of its 2004 fiscal year as follows: $27,000 to Richard, $25,000 to Jeannette, $24,000 to each of Kathryn and Jonathan and $15,000 to each of Jason and Lauren.

[17] In summary, Richard, after discussions with Jeannette, allocated the $130,000 transferred by the Appellant to the EPSP in respect of its 2005 fiscal year as follows: $55,000 to each of Kathryn and Jonathan and $10,000 to each of Jeannette and Richard.

All of the money ultimately ended up in the hands of Mr. Arab, allegedly to reimburse him for expenses incurred for the benefit of his children.

The court was not persuaded:

[45] In my view, none of Richard and Jeannette’s children contributed to the Appellant’s profit in 2004 and 2005. They simply did not provide any services to the Appellant. The alleged services – shovelling snow, mowing the lawn, cleaning rooms, sorting mail – were tasks (or chores) that children perform for their parents. If the children provided these services to anyone, they provided them to their parents, not the Appellant.

[46] Richard Arab agreed that the EPSP did not allocate funds to recognize the contributions of his children to the Appellant’s profit. This is illustrated by the following exchanges between Mr. Arab and counsel for the Respondent:

Q So the amount of the allocation made to the employees of Dimane were [sic] based on an arbitrary amount determined solely by you; is that correct?

A Correct.

. . .

Q Were the allocations or payments that were out of the plan to the employees designed to recognize the contributions of the eligible participants or the employees that were selected to be part of the plan to the profitability of Dimane Enterprises Ltd.?

A No, it would not have been done on that basis because my understanding is the distribution of the EPSP was at the sole discretion of the trustees.

[47] I have concluded, after considering all of the evidence before me, particularly the evidence I have just discussed, that the Appellant’s EPSP was a sham. There was no sharing of the Appellant’s profits with Richard Arab’s children. The actual transactions were the payment of the amounts in question, through various bank accounts, by the Appellant to Richard Arab.

As a result the appeal was dismissed with costs.