http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/120693/index.do
Andrei 95 Holdings Ltd. v. The Queen (October 23, 2015 – 2015 TCC 224, Paris J.).
Précis: The appellant incurred legal fees during the course of a dispute between it, its shareholders and the shareholder of other businesses in which they were involved. The appellant claimed ITCs on those legal fees on the basis that it was engaged in the commercial activity of providing consulting services and the legal fees were incurred during the course of that commercial activity. The Tax Court rejected the evidence of commercial activity and found that the expenses were not subject to ITCs. As a result the appeal was dismissed.
Decision: The evidence was that the legal fees at issue were incurred during the course of a nasty battle between business associates:
[6] The Respondent takes the position that the legal fees were incurred by the Appellant in part in the course of negotiating the purchase or sale of shares owned by it and by its shareholders, Viorel Mazilescu and his spouse Anca Mazilescu, and, in part in the course of litigating a dispute unrelated to any commercial activity carried on by the Appellant.
[7] Mr. Mazilescu owns 75% of the shares and is the sole director of the Appellant. His spouse, Anca Mazilescu, owns the remainder of the Appellant’s shares.
[8] Mr. Mazilescu represented the Appellant at the hearing and was the only witness.
[9] During the period in issue, the Appellant and Mr. Mazilescu between them owned 50% of the shares of two companies: Waycon Manufacturing Ltd. (“Waycon”) and JAV Entreprises Ltd., (“JAV”). John O’Connell and entities controlled by him owned the other 50% of the shares of Waycon and JAV.
[10] Waycon manufactured logging equipment and soil screens and JAV owned the land and buildings used by Waycon.
[11] Another company, OMH Innovations Inc. (“OMH”) was owned equally by O’Connell, Anca Mazilescu and Bradley Hilmoe. OMH distributed Waycon’s products.
…
[15] After O’Connell returned from leave in 2010, the relationship between him and Mr. Mazilescu began to deteriorate. As a result, Mr. Mazilescu said that they decided to separate their business interests and began negotiations to have one of them buy out the other’s interest. Mr. Mazilescu was represented in those negotiations by Grant Hardwick of the firm Doak Shirreff LLP.
[16] The relationship between Mr. Mazilescu and O’Connell remained strained and, in January 2011, O’Connell brought an application for an Anton Piller Order against 13 defendants, including the Appellant, the Mazilescus and another company owned by them, OMH Proscreen Inc. (“Proscreen”). The Anton Piller Order was granted on January 19, 2011.
[17] While the Order itself was not put before me, it appears that the relief granted included an order terminating Mr. Mazilescu’s employment with Waycon and Anca Mazilescu’s employment with OMH. Litigation related to the Order continued into 2012 and was ultimately settled in November 2012 with O’Connell buying out Mr. Mazilescu and the Appellant’s interest in Waycon, JAV and another related company. Mr. Hardwick also represented the Mazilescus and their companies throughout the litigation and settlement.
The Court rejected the concept that the appellant had provided consulting services to Waycon, OMH or JAV:
[25] I also find that the Appellant has not shown that it ever carried on the business of providing management services to Waycon, OMH or JAV. In the course of the Anton Piller litigation, Mr. Mazilescu deposed to certain facts relating to the $90,000 he now claims were management fees earned by the Appellant from Waycon in 2009. In an affidavit dated February 2, 2011, Mr. Mazilescu indicated that the amount of $90,000 paid to the Appellant by Waycon was an “equalizing draw for personal benefits taken by O’Connell from Waycon.” Paragraphs 81 and 82 of that affidavit read as follows:
81. In fact O’Connell’s use of Waycon for personal purposes was so extensive that in-house accounting staff maintained a separate ledger of personal benefits taken by O’Connell from Waycon.
82. In 2010, those personal benefits were accumulating to a substantial sum and accordingly, in May of 2010, O’Connell did personally issue and sign a cheque drawn on the account of Waycon to Andrei 95 in the amount of $90,000.00 representing an equalizing draw for personal benefits taken by O’Connell from Waycon.
[26] This material supports the view that the $90,000 paid to the Appellant was not for consulting services rendered by Mr. Mazilescu while O’Connell was absent from the business. This conflicts directly with Mr. Mazilescu’s testimony before this Court.
[27] With respect to the $100,000 that Mr. Mazilescu claimed the Appellant received from OMH as management fees in 2010, Mr. Mazilescu in his affidavit of February 2, 2011 stated as follows:
75. As respects the allegation in paragraph 39 that I had wrongfully removed $100,000.00 from the OMH Innovation account, it is correct that I had in or about the month of May, 2010, removed $100,000.00 from the account of OMH Innovation. This removal was done with full disclosure to the outside accountant and was done for the purpose of putting the funds beyond the reach of Brad Hilmoe. This action was taken for reasons that include the following:
(a) Hilmoe had on earlier occasions wrongfully removed funds from OMH Innovations and taken those funds to the United States for either the benefit of OMH USA or himself personally,
(b) by the time of the removal of the $100,000.00 amount, the agreement in principal to separate the operations of OMH Innovations from OMH USA was several months overdue in implementation. OMH Innovations was turning a substantial profit and I did not want to see those profits eroded by either OMH USA or Hilmoe personally.
[28] Armstrong J. ultimately ordered the return of the $100,000 to OMH in those proceedings.
Since the appellant had not demonstrated that the legal fees were incurred during the course of a commercial activity carried on by it the appeal was dismissed:
[32] For these reasons, I find that the Appellant has not shown that the legal services it acquired during the periods in issue were for consumption or use in the course of any commercial activity carried on by it. Therefore, the Appellant is not entitled to the ITCs claimed and the appeal is dismissed.