http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/212770/index.do
Aitchison Professional Corporation v. The Queen (December 1, 2016 – 2016 TCC 281, C. Miller J.).
Précis: The taxpayer corporation invoiced for the legal services of its principal, James Aitchison, a lawyer who owed in excess of $2,000,000 to the Crown in unpaid income taxes. CRA assessed the corporate taxpayer pursuant to subsection 160(1) of the Act on the basis that its principal had transferred in excess of $2,000,000 of assets to it at a time when he was indebted to the Crown for unpaid income taxes. The taxpayer corporation applied for the determination of two points of law under Rule 58 of the Tax Court of Canada (General Procedure) Rules. Justice Campbell Miller rejected the application holding that the matter was sufficiently complex that it “can only be fully and fairly determined with the benefit of examination and cross‑examination of the key players” (para. [17]). Costs of the motion were awarded to the Respondent.
Decision: The taxpayer corporation attempted to frame the issue in very narrow terms:
[6] The Applicant suggests the following key facts underlying the Questions are not in dispute:
a) The Applicant is a professional corporation incorporated under the laws of Ontario in 2003 and was established for the purpose of practising law in Ontario;
b) The Applicant’s directors and shareholders consist of James Aitchison and his daughters, Kelly and Laurie Aitchison, all three of whom are barristers and solicitors licensed to practice law in Ontario;
c) Between 2007 and 2010, Kelly, Laurie and James Aitchison performed legal services for the Applicant, and the Applicant invoiced and collected fees relating to those legal services, but paid no dividends and either no or nominal wages and salary to James Aitchison;
d) A portion of the fees collected by the Applicant throughout this period was attributable exclusively to legal services performed by James Aitchison (the “JA Fees”), which the Minister has assumed exceeded $3 million;
e) The amount of $2,097,770 is the lesser of (a) the amount that the Minister alleges the Applicant to have received from James Aitchison and (b) the amount owed by James Aitchison on account of tax, interest, CPP contributions and penalties;
f) In making the Assessment, the Minister assumed, inter alia, that
(i) the clients in respect of whom James Aitchison performed legal services were clients of the Applicant;
(ii) nevertheless, it was James Aitchison, and not the Applicant, who had the “right to invoice” these clients;
(iii) James Aitchison transferred the “right to invoice” for his legal services between January 1, 2007 and September 30, 2010 to the Applicant;
(iv) James Aitchison’s “right to invoice” was “property”, within the meaning of subsection 248(1) of the Act; and
(v) the fair market value of that “property” was equal to the amount of the JA Fees collected by the Applicant between 2007 and 2010.
Counsel for the Respondent took a rather different view:
[7] The Respondent, in her submissions, refers to Mr. Aitchison’s arrangement “of not being paid” as unusual, and links it to the fact that since 1992 Mr. Aitchison has paid no federal income tax, and as of 2007 was over $2,000,000 in debt to the Minister. This, notwithstanding that, according to the Applicant’s financial records, Mr. Aitchison generated revenues of $911,391, $750,249, $847,108 and $701,926 in 2007 to 2010 respectively.
It was not a matter of much surprise that the Court held that these issues were best dealt with in a trial, not a summary application:
[15] I agree with the Respondent. The question of whether there is a transfer is only determinable by a full examination of the factual circumstances surrounding the Applicant’s arrangement with Mr. Aitchison. Just by way of example, it strikes me how invoicing was handled would be significant. Also, what were the intentions of the Applicant and Mr. Aitchison? More than the key facts identified by the Applicant need to be flushed out. This is best handled through the normal course of examination and cross-examination. This alone is sufficient for me to rule against a Determination solely based on affidavit evidence. Having reached that conclusion, then it strikes me that a Determination based on viva voce evidence involves the same time and expense as a trial. The exception, as noted by the Applicant, is that the Determination would not address the valuation issue. But, that is readily handled by simply bifurcating the trial.
[16] I find further support for the view that a full hearing is required to address the Questions in comments of the Federal Court of Appeal in the case of Manrell v Canada, where the Court addresses the concept of property:
24. Professor Ziff, in Principles of Property Law, 3rd ed. (Scarborough: Carswell, 2000), says this about property at page 2:
Property is sometimes referred to as a bundle of rights. This simple metaphor provides one helpful way to explore the core concept. It reveals that property is not a thing, but a right, or better, a collection of rights (over things) enforceable against others. Explained another way, the term property signifies a set of relationships among people that concern claims to tangible and intangible items. [Underlining added.]
25. It is implicit in this notion of "property" that "property" must have or entail some exclusive right to make a claim against someone else. A general right to do something that anyone can do, or a right that belongs to everyone, is not the "property" of anyone. In this case, the only thing that Mr. Manrell had before he signed the non-competition agreement that he did not have afterward was the right he shares with everyone to carry on a business. Whatever it was that Mr. Manrell gave up when he signed that agreement, it was not "property" within the ordinary meaning of that word.
[17] Establishing the set of relationships, as Professor Ziff puts it, can only be fully and fairly determined with the benefit of examination and cross‑examination of the key players. I do not agree with the Applicant that a limited number of key facts would be sufficient for a court to properly resolve this issue between the Parties.
[18] I concur with the Respondent that the Questions raise “numerous factual underpinnings”, many of which the Respondent suggests are in dispute, such as:
(a) whether Mr. Aitchison or the appellant was retained by his/its clients;
(b) whether Mr. Aitchison held an exclusive right to invoice for his legal services, which he could assign or transfer;
(c) whether the Law Society of Upper Canada’s licensing regulations provide any limitations on invoicing for legal services;
(d) whether the appellant’s income statements are true and accurate; and
(e) whether the appellant’s invoices are true and accurate.
[Footnote omitted]
As a result the application was dismissed with costs to the Respondent.
Comment: This was a game attempt by counsel for the taxpayer but certainly flew in the face of a considerable amount of case law, including prior decisions of Mr. Justice Miller. No surprises here I’m afraid.