Tax Court of Canada


Income tax

Business and property income

Taxpayer assessed gross negligence penalties for false statement relating to management fee

After business operated by taxpayer’s almost-wholly owned company ceased operations, he formed new corporation with friend. Friend purchased assets of that new corporation for $450,000, with such proceeds distributed by taxpayer’s company issuing invoice to new corporation for management services of $223,250 and authorizing payment directly to taxpayer. Taxpayer’s income tax return initially did not include management service fee into income and then, on adjusting entry, it was applied against larger shareholder loan account. Company filed corporate tax return, claiming management services amount into income and applying loss carryovers from previous years to wipe out almost all of its business income. Minister assessed taxpayer for unreported management service fees and imposed gross negligence penalties and reassessed company without deleting such amount from its income. Taxpayer and company appealed. Taxpayer’s appeal dismissed; company’s appeal allowed. Parties agreed that company’s reassessment, which led to double taxation of same income, was protective assessment and that one of parties’ appeals should be allowed. There was no written agreement between companies for provision of management services nor between taxpayer and company for provision of his services to new corporation on company’s behalf. There was no legal relationship that existed requiring new corporation to pay company management fee for services rendered by taxpayer. Invoice did not provide any details about services rendered or how “fees” equating to 50 per cent of proceeds of sale were calculated. Taxpayer’s credibility was severely lacking, given inconsistency with his position in prior tax appeal trial that amount he received was his share of profits due as shareholder of new corporation. Alleged agreement to pay company management fees was fabricated just before completion of asset purchase transaction in order to use losses already existing in company and remove funds tax free from company by drawing down from shareholders account. Taxpayer was properly assessed gross negligence penalties as his false statement of not including management fee in his income was made knowingly with awareness that there was no agreement to pay company such fee.

McLeod v. The Queen (2017), 2017 CarswellNat 5225, 2017 TCC 192, F.J. Pizzitelli J. (T.C.C. [General Procedure]).

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