Docket: 2004-20(IT)G |
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BETWEEN: |
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WHITECAP LTD., |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeal heard on common evidence with the appeal of
Richard Wedge (2004-19(IT)G), on July 19, 2005
at Charlottetown, Prince Edward Island.
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Before: The Honourable D.G.H. Bowman, Chief Justice |
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Appearances: |
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Counsel for the Appellant: |
Edwin C. Harris, Q.C. |
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Counsel for the Respondent: |
John Bodurtha |
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1998 taxation year is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the $519,000, as well as the legal and accounting fees totalling $782,249 paid by it are deductible expenses on revenue account.
One set of counsel fee will be awarded in favour of both appellants.
Signed at Ottawa, Ontario, this 29th day of July, 2005.
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"D.G.H. Bowman" |
Bowman, C.J.
Docket: 2004-19(IT)G |
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BETWEEN: |
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RICHARD WEDGE, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeal heard on common evidence with the appeal of
Whitecap Ltd. (2004-20(IT)G), on July 19, 2005
at Charlottetown, Prince Edward Island.
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Before: The Honourable D.G.H. Bowman, Chief Justice |
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Appearances: |
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Counsel for the Appellant: |
Edwin C. Harris, Q.C. |
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Counsel for the Respondent: |
John Bodurtha |
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1998 taxation year is dismissed.
One set of counsel fee will be awarded in favour of both appellants.
Signed at Ottawa, Ontario, this 29th day of July, 2005.
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"D.G.H. Bowman" |
Bowman, C.J.
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Citation: 2005TCC480 |
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Date: 20050729 |
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Dockets: 2004-19(IT)G |
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2004-20(IT)G |
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BETWEEN: |
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WHITECAP LTD., |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
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- and - |
BETWEEN:
RICHARD WEDGE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bowman, C.J.
[1] These appeals are from assessments for the appellants' 1998 taxation years. They were heard together on common evidence.
[2] The issues are these:
(a) Can Whitecap Ltd. ("Whitecap") deduct $519,000 which it paid in 1998 to its employees that were members of the Wedge family?
(b) Can Richard Wedge Sr. ("Mr. Wedge") roll the amount that he received from Whitecap ($119,000) into a registered retirement savings plan as a retiring allowance?
[3] The Minister on assessing said no to both questions. I think the answer to (a) is yes and to (b) is no.
[4] An issue that arose on the assessment of Whitecap was the treatment of $703,623 in legal fees and $78,626 in accounting fees incurred in protracted litigation involving other shareholders (the McNeill and McDonald families) of a holding company Clans Limited ("Clans") which owned all of the shares of Hillcrest Housing Limited ("Hillcrest"). The litigation came to an end with a settlement. The respondent now agrees that the legal and accounting fees are deductible and the judgment in this case will reflect this concession.
[5] The background facts and the corporate structures involved are somewhat complex but they can be stated simply for the purposes of these appeals.
[6] Mr. Wedge and his wife Mary each owned three shares of Whitecap and 1500 voting preferred shares. Their children (Brian, Richard Jr., Cindy, Nicolle, Paul and Michelle) each owned 32 shares of Whitecap.
[7] Whitecap was essentially the controlling shareholder of a rather large corporate group of companies which carried on a variety of business enterprises, including land development, ownership of apartment buildings and other ventures. Whitecap was also a one-third shareholder in Clans which owned Hillcrest. Mr. Wedge owned 98% of the shares of Enman Drug Company Limited ("Enman") and his wife owned 2%. Whitecap had no shares in Enman. Enman carried on the pharmacy business under Mr. Wedge, a pharmacist.
[8] The entire family worked from early youth for Enman on nights, weekends and holidays, even after they had moved on to other endeavours. For example one became a real estate agent, one a medical doctor. They also worked for Whitecap and its group of companies, dealing with tenants, repairs, grass cutting and all of the other matters involved in a multi-activity corporate group. I did not find that the evidence on this point was in any way exaggerated or put forward as window dressing for the purposes of this appeal. Nicolle and Brian, as well as Mr. Wedge, testified. I found their evidence credible and indeed understated. The businesses were a family affair. Moreover, the wages were far below what was paid to employees who were not family members.
[9] The payroll was handled entirely by Enman and Whitecap was charged back a portion of the salary and wages expense. Enman also owned the building in which the pharmacy was carried on as well as where the offices and the books and records of the various Whitecap businesses and corporations were housed. Island Hospital Supplies Inc. which was owned by Enman, Mr. Wedge and Brian was also located there.
[10] Things progressed in this way, with the usual vicissitudes that are attendant upon running a variety of business enterprises, until 1996, when the pharmacy business was sold to Shoppers Drug Mart. Enman retained the building until 2001 and some of the inventory that was not sold was kept. Attempts to liquidate it were frustrated by the fact that Shoppers Drug Mart, in reliance upon a non-competition clause in the sale agreement, prevented Enman from doing so.
[11] It is convenient to set out some of the assumptions relied upon by the Minister in denying the deductibility of the $519,000 to the family members. I should however preface my doing so by noting that all or substantially all of the money to pay this amount came from the proceeds of the sale of the shares of Clans to the McNeill family company. This was a part of the settlement of the litigation referred to above.
[12] The assumptions in the Whitecap reply that are relevant to this issue are as follows:
c) Enman Drugs Limited ("Enman") operated a pharmacy;
d) Richard Wedge was a pharmacist and owned 98% of the shares of Enman;
e) Richard Wedge's wife, Mary Wedge, owned 2% of the shares of Enman;
f) Richard Wedge, his wife and his six children were employed by Enman as follows:
Period Age
Richard Wedge 1959 to 1996
Mary Wedge 1959 to 1989
Brian Wedge 1976 to 1996 (13 to 33)
Richard Wedge, Jr. 1974 to 1986 (15 to 27)
Nicolle Wedge 1976 to 1991 (14 to 29)
Paul Wedge 1974 to 1990 (14 to 30)
Cindy Wedge 1980 to 1993 (14 to 27)
Michelle Strain 1973 to 1983 (15 to 25)
g) Enman was sold in 1996 and none of the above listed individuals continued their employment with Enman after 1996;
h) In 1998, Whitecap paid amounts as follows:
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Number of years at Enman $2,000/year (until 1995) |
Number of years at Enman $1,500/year (all years) |
Total Allowance |
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Appellant |
37 |
30 |
119,000 |
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Mary Wedge |
31 |
30 |
107,000 |
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Brian Wedge |
20 |
13 |
59,500 |
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Richard Wedge, Jr |
13 |
13 |
45,500 |
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Cindy Wedge |
14 |
9 |
41,500 |
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Nicolle Wedge |
16 |
13 |
51,500 |
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Paul Wedge |
17 |
15 |
56,500 |
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Michelle Strain |
11 |
11 |
38,500 |
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TOTAL |
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519,000 |
i) The calculation of years of service did not differentiate between full or part time work;
j) The calculation of the amount paid did not differentiate between the duties and responsibilities of the persons listed above;
k) On its 1998 income tax return, the Appellant claimed wage expenses in relation to the payment of amounts listed above;
l) The persons listed above were not employees of the Appellant;
m) The amount of $519,000 was not a payment in respect of the loss of employment of the persons listed in subparagraph (f) but represented a distribution of the assets of the Appellant to its shareholders; and
n) No other former employees of Enman were compensated by Whitecap.
[13] I think a number of the basic assumptions have been demolished. It is true that Mr. Wedge, his wife Mary, and the six children were employed by Enman, albeit beyond the periods mentioned in paragraph (f). However, they were also employed by Whitecap. On this point the evidence is overwhelming. To state, as is done in paragraph (l), that no one in the family was an employee of Whitecap is clearly contrary to the uncontradicted evidence.
[14] The payment to the family employees of Whitecap was commensurate with their years of service and was compensation for the many years in which they worked for no or substantially no pay. It is true, funds of the appellant were distributed to persons who in addition to being employees were also shareholders. This is true however of any distribution by way of salary or bonus to an employee/shareholder. The obvious purpose was to compensate them for work that they had done in the past for little or no pay. The fact that the chartered accountants in calculating the respective entitlements of the family members used, as a component in the formula, the amounts that the Income Tax Act permitted to be rolled into an RRSP does not make these amounts unreasonable or non-deductible.
[15] Nor do I find the amounts to be unreasonable within the meaning of section 67 (Gabco Limited v. M.N.R., 68 DTC 5210 (Ex. Ct.)). The evidence is clear that that is all there was and that the witnesses all thought the amounts were, if anything, too low.
[16] Nor do I draw an adverse inference from the fact that non-family former employees were not paid anything. They had all been paid the going rates for wages. Some had left and one went to work for Shoppers Drug Mart. The $519,000 paid by Whitecap is clearly deductible in 1998. It is simply compensation paid to employees for services rendered.
[17] Less clear, however, is the right of Mr. Wedge to roll the $119,000 that he received into an RRSP. I understand the other family members all rolled the amounts they received into RRSPs but were denied the rollover by the Minister and none have pursued the matter to this court.
[18] The Minister denied the rollover on the basis that the $119,000 paid to Mr. Wedge was not a retiring allowance. "Retiring allowance" is defined in section 248 as follows:
"retiring allowance" means an amount (other than a superannuation or pension benefit, an amount received as a consequence of the death of an employee or a benefit described in subparagraph 6(1)(a)(iv)) received
(a) on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer's long service, or
(b) in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal,
by the taxpayer or, after the taxpayer's death, by a dependant or a relation of the taxpayer or by the legal representative of the taxpayer;
[19] The right to roll it into an RRSP is found in paragraph 60(j.l). This lengthy provision need not be reproduced. Essentially, at least for the purposes of this appeal, the amount of a retiring allowance that can be transferred to an RRSP and deducted is $2,000 times the number of years of employment before 1996 plus $1,500 times the number of years of employment before 1989.
[20] The effect of the position of Whitecap and Mr. Wedge, if sustained, is that the amount is taxed only once, when it is taken out of Mr. Wedge's RRSP: it is deductible by Whitecap when paid, it is included in Mr. Wedge's income as a retiring allowance under section 56(1)(a)(ii) and this inclusion is offset by the deduction under paragraph 60(j.i) and it is then taxed in Mr. Wedge's hands when he takes it out of the RRSP.
[21] The Crown's position, if sustained, is somewhat more draconian and it results in triple taxation - once when the deduction is disallowed to Whitecap, again when Mr. Wedge receives it and is denied the rollover into the RRSP and yet again when he takes it out of the RRSP. The existence of double taxation, not to mention triple taxation, is a troublesome aspect of this case but it should not be a determining factor.
[22] Is the $119,000 a retiring allowance? The answer to this question depends upon whether the amount was paid on or after the retirement of Mr. Wedge. I start from the initial factual premise that Mr. Wedge was an employee of both Whitecap and Enman and that in his employment with both companies he rendered substantial and valuable services to them over many years. His employment as a pharmacist with Enman terminated when Enman's pharmacy business was sold in 1996.
[23] I do not, however, think that it can be said that Mr. Wedge retired from Whitecap, which was, after all, the company that paid him. It continued to operate its large corporate group of companies and his significant functions as an officer and director continued. It is true that paragraph 60(j.1) speaks of a retiring allowance paid to the taxpayer by an employer and it includes in the formula which I summarized above the years of employment by "the employer or a person related to the employer" but this is not an answer to the question whether it is a retiring allowance in the first place. If it is simply salary wages or other remuneration paid by Whitecap to an employee of Whitecap for services he performed, (as I have found it is), I have no difficulty in concluding that it is deductible by Whitecap. If, on the other hand, it is a retiring allowance paid by Whitecap to an employee of Enman (which may well be related to Whitecap under the Income Tax Act but in which Whitecap owns no shares), then it is difficult to reconcile such a finding with my conclusion that it was laid out for the purposes of Whitecap's business.
[24] However, the fact that one conclusion may be inconsistent with another one is not in itself a reason to reject it but it may be a reason to scrutinize it carefully. As stated, the amounts paid to the family members (including Mr. Wedge) by Whitecap were clearly deductible by Whitecap as remuneration for services they rendered to Whitecap. I do not see how the $119,000 paid to Mr. Wedge can at the same time be a retiring allowance paid on his retirement from Enman in respect of long service to Enman.
[25] I have concluded, with some reluctance because of the incidence of double taxation mentioned above, that the payment of $119,000 in Mr. Wedge's hands is not a retiring allowance but is ordinary income from employment. Accordingly his appeal must be dismissed.
[26] The appeal of Whitecap is allowed on the basis that the $519,000, as well as the legal and accounting fees totalling $782,249 paid by it are deductible expenses on revenue account.
[27] So far as the matter of costs is concerned I do not think it is appropriate to award costs against Mr. Wedge and, at the same time to award costs in favour of Whitecap. The cases were heard together and for all practical purposes were one case. In terms of time spent as well as monetary success, Whitecap's success far outweighed Mr. Wedge's lack of success. The fairest result in my view is to award one set of counsel fee in favour of both appellants.
Signed at Ottawa, Canada, this 29th day of July 2005.
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"D.G.H. Bowman" |
Bowman, C.J.
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CITATION: |
2005TCC480 |
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COURT FILES NOS.: |
2004-19(IT)G 2004-20(IT)G |
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STYLE OF CAUSE: |
Whitecap Ltd. and Her Majesty The Queen and Richard Wedge and Her Majesty The Queen |
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PLACE OF HEARING: |
Charlottetown, P.E.I. |
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DATE OF HEARING: |
July 19, 2005 |
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REASONS FOR JUDGMENT BY: |
The Honourable D.G.H. Bowman, Chief Justice |
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DATE OF JUDGMENT AND REASONS FOR JUDGMENT: |
July 29, 2005 |
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APPEARANCES: |
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Counsel for the Appellant: |
Edwin C. Harris, Q.C. |
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Counsel for the Respondent: |
John Bodurtha |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
Patterson Palmer Law |
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Firm: |
Barristers & Solicitors 5151 George Street Halifax, N.S. B3J 2N9
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For the Respondent: |
John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada |