1144020 Ontario Ltd. v. Canada (Minister of National Revenue)

1144020 Ontario Ltd. v. Canada (Minister of National Revenue)
Court (s) Database
Federal Court Decisions
Date
2005-06-07
Neutral citation
2005 FC 813
File numbers
T-2075-03, T-2076-03, T-2077-03, T-2078-03
Decision Content
Date: 20050607
Dockets: T-2075-03
T-2076-03
T-2077-03
T-2078-03
Citation: 2005 FC 813
BETWEEN:
1144020 ONTARIO LIMITED
Applicant
- and -
THE MINISTER OF NATIONAL REVENUE
THEMISTOCLES SAYSON
ALICE SHIELDS
Respondents
REASONS FOR ORDER
DAWSON J.
[1] At issue in these applications for judicial review is whether three requirements for the production of information and documents, issued pursuant to subsection 231.6(2) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c-1 ("Act") and one requirement for the production of information and documents, issued pursuant to subsection 231.2(1) of the Act, should be set aside or varied because they are unreasonable or inappropriate.
BACKGROUND FACTS
The Parties
[2] 1144020 Ontario Limited, the applicant, at all material times, owned and operated the Inn On The Park Hotel and the Holiday Inn Toronto - Don Valley (together, the "Hotel"). Mr. Allibhai is the applicant's chartered accountant.
[3] At all material times, the respondent Mr. Sayson was an auditor with the Verification & Enforcement Division of the Canada Customs and Revenue Agency ("CCRA"). The respondent Ms. Shields was the Director of the Toronto Centre Tax Services Office of the CCRA.
First Audit
[4] Mr. Sayson attended at the applicant's business office in Toronto on various dates from July 1999 through October 1999 to conduct an audit of the applicant's three taxation years ending January 31, 1996 through January 31, 1998. Mr. Sayson reviewed all of the applicant's available books and records for the 1996 to 1998 years, including: a management agreement, invoices and payment records relating to services provided to the applicant by Thistlefield Ltd. ("Thistlefield") during the 1997 and 1998 taxation years; and, directors lists, resolutions and telephone records of the Hotel including documents that indicated the participation of Mr. Andrew Paraskeva in the management and direction of the applicant during the 1997 and 1998 taxation years.
[5] On May 14, 2001, the Minister of National Revenue issued notices of reassessment in respect of each of the 1996 to 1998 taxation years, disallowing, among other things, the deduction of management fees paid to Thistlefield in the 1997 and 1998 taxation years. The applicant filed notices of objection on June 1, 2001, in respect of each of the 1996 to 1998 taxation years and challenged the disallowance of the Thistlefield fees. The Appeals Division of the CCRA ultimately reversed the disallowance of the Thistlefield fees and determined that the applicant properly deducted the Thistlefield fees. In its report in response to the applicant's notices of objection, the Appeal Division of the CCRA set out the rationale for its decision as follows:
The auditor's main reason for disallowing the management fee has no merit. The management company, Thistlefield Limited, is reportedly incorporated under the laws of the British Virgin Islands as represented on the Consulting Agreement dated February 1, 1996.
[...]
Further, the auditor states ... "we are very suspicious as to whether any services were in fact performed by Thistlefield Limited. Furthermore we feel that this may simply be a scheme by the sole shareholder to divert funds from the Canadian Corporation for his personal use". The appeals officer can find no evidence within the auditor's file to support this suspicion or assumption. [...] If evidence becomes available at some future time that confirms the auditor's suspicions as set out above, these taxation years can be reopened and reassessed as "gross negligence and fraud" would have been proven at that time.
Second Audit
[6] Mr. Sayson attended at the applicant's business office on various dates in April and May 2002 to conduct an audit of the applicant's taxation years ending January 31, 1999 through January 31, 2000. Mr. Sayson again reviewed all of the applicant's available books and records for the 1999 to 2000 taxation years, including: a management agreement, invoices and payment records relating to services provided by Thistlefield to the applicant during the 1999 and 2000 taxation years; directors lists, resolutions and telephone records of the Hotel including documents that indicated the participation of Mr. Paraskeva in the management and direction of the applicant during the 1997 through 1999 taxation years; and an agreement, invoices and payment records relating to services provided by Sedko Investment Services ("Sedko") to the applicant during the 1997 through 1999 taxation years.
[7] On October 28, 2002, Mr. Itwar of the CCRA International Tax Directorate sent an e-mail to Mr. Sayson which included the following:
Your concern is that the 1999 taxation year will go statute-barred on December 6 2002 and that CCRA should protect its interest and reassess the 1999 year. You considered requesting a Waiver from the Taxpayer. Your Team Leader, Charles Thompson, however, stated that CCRA's policy is not to request a Waiver to extend the audit period.
Therefore, the decision to reassess the 1999 year rests with your TSO.
However, the facts did not change from the previous audit (1996 to 1998) and ... the TP was successful at the Appeals Division with respect to among other reasons, that the Management Fee amount paid by Canada to the Non-resident person was reasonable.
Specifically, we believe that to propose a reassessment of the 1999 year would be fruitless to pursue. [underlining added]
[8] Notwithstanding, in early November 2002, the CCRA requested that the applicant file a waiver of the normal reassessment period in respect of its 1999 taxation year. The applicant filed the waiver on November 6, 2002 but later, on November 25, 2002, filed a revocation of the waiver. This triggered the running of a six month limitation period for the purpose of the filing of any notice of reassessment by the Minister.
[9] By letter dated May 5, 2003, Mr. Sayson wrote to Mr. Allibhai setting forth the Minister's position that the applicant had failed to provide complete and adequate information and/or documentation. The following comments, among others, were made by the auditor, Mr. Sayson:
1. With respect to the management and/or consulting fee paid to Thistlefield, (which were $1,119,394.19 in 1999 and $ 1,210,995.16 in 2000) the applicant was said by the auditor to have failed to provide a detailed list of the duties and responsibilities actually performed by Thistlefield. The auditor noted that, from information previously provided, it appeared that key managers of the applicant provided, collectively, functions relating to finance, purchasing, strategic planning, overall management, liaison, review of financial statements and general operations. Yet, those were the functions/services the applicant claimed were provided to it by Thistlefield. The auditor also noted advice from the applicant that Thistlefield's principal came to Canada once a year to perform some of the services. The auditor expressed his view that all of the functions/services Thistlefield was obliged to provide could not possibly be provided from outside Canada, or in one visit to Canada, because those functions/services required a physical presence at the business premises. The auditor commented that no advice had been provided by the applicant as to how the applicant came to know the principal of Thistlefield, no "evidence" had been provided on whether the transactions were at arms' length or whether the fee was reasonable. The auditor concluded his comments with respect to Thistlefield by noting that the taxpayer had failed to provide any corroborating evidence to show that the services were actually provided.
2. With respect to the director's fee paid to Mr. Paraskeva in the amount of $600,000, the auditor noted that the applicant had failed to provide any documentation regarding the nature of the services provided, or the basis upon which the amount of $600,000 was calculated.
3. With respect to the deduction on account of monies paid to Sedko in the amount of $700,000, the auditor noted that, so far, he had been given four different names for the entity that received this payment, the applicant had failed to provide a signed copy of the agreement pursuant to which the monies were paid, and the applicant failed to provide any documentation to indicate that the services were actually provided.
[10] The applicant's response to this letter, sent by Mr. Allibhai on May 8, 2003, was to the effect that the requested information had previously been provided. Mr. Allibhai also requested that any reassessment of the applicant's 1999 taxation year allow the "maximum deductions for CCA, ECE and non-capital losses".
[11] On May 16, 2003, the Minister issued a notice of reassessment in respect of the applicant's 1999 taxation year, disallowing, among other things: the deduction of the Thistlefield fees; the director's fee paid to Mr. Paraskeva; and the consulting fees paid to Sedko. In addition, despite the applicant's request, the Minister failed to allow the maximum available deductions for capital cost allowance ("CCA") and cumulative eligible capital ("CEC"), and did not apply the available non-capital losses from the applicant's 2000 and 2001 taxation years.
[12] Mr. Allibhai then alerted Mr. Sayson to the Minister's failure to reassess in accordance with his request. Mr. Sayson responded that the maximum CCA and CEC deductions were not allowed "[i]n view of the fact that the 1999 waiver was revoked". Mr. Sayson also indicated that when the 2000 taxation year "is reassessed", there would not be any non-capital losses to carry back to the 1999 taxation year. Subsequently, however, by letter dated July 29, 2003, CCRA confirmed that the maximum CCA and CEC amounts would be allowed and those adjustments would be processed as soon as possible.
[13] The applicant filed a notice of objection on August 6, 2003.
[14] To date, no reassessment has been filed in respect of the 2000 taxation year.
Third Audit
[15] Mr. Sayson attended at the applicant's business office on various dates in September and October 2003 to conduct an audit of the applicant's taxation year ending January 31, 2001. Mr. Sayson reviewed all of the applicant's available books and records relating to the 2001 year, including: a management agreement, invoices and payment records relating to services provided by Thistlefield to the applicant during the 2001 taxation year; and directors lists, resolutions and phone records of the Hotel indicating the resignation of Mr. Paraskeva as a director of the applicant.
Requirements / Requirement Letters
[16] On October 6, 2003, Ms. Shields issued four letters ("Requirement Letters" or "Requirements") to the applicant. The first Requirement Letter asked that the applicant provide, within 92 days, foreign-based information or documents regarding management/consulting services provided by Thistlefield. The second Requirement Letter asked that the applicant provide, within 92 days, foreign-based information or documents regarding director's fees paid to Mr. Paraskeva. The third Requirement Letter asked that the applicant provide, within 92 days, foreign-based information or documents regarding consulting services provided by Sedko. The fourth Requirement Letter asked that the applicant provide, within 62 days, information or documents regarding management/consulting services provided by Thistlefield, director's fees paid to Mr. Paraskeva, and consulting services provided by Sedko, all in respect of the applicant's 1999 and 2000 taxation years.
[17] These Requirements were the first demands for information made to the applicant pursuant to subsections 231.2(1) and 231.6(2) of the Act.
[18] On October 29, 2003, the applicant's counsel wrote to Ms. Shields. In that letter counsel indicated the dates on which the information and documents demanded in the Requirement Letters had previously been provided to the CCRA. (In this regard, during the course of each audit, representatives of the applicant had answered questions put by the auditor, and Messrs. Sayson and Allibhai had exchanged correspondence whereby the applicant provided information and documents to Mr. Sayson). Counsel also provided answers to those questions contained in the Requirement Letters that, in counsel's view, had not previously been answered by the applicant.
[19] The applicant now says that any information or documents sought in the Requirement Letters, that has not already been provided to the CCRA, cannot be provided because:
1) the information sought is unknown to the applicant;
2) the information or documents sought, if they do exist, cannot be obtained from arm's length non-residents;
3) the information or documents sought do not exist in the detail sought; or
4) the information or documents sought do not exist at all.
[20] The applicant's controller was cross-examined on the affidavit he filed in support of this application. On such cross-examination he agreed that:
1. The Requirements were the first such demands for foreign-based information and documents made to the applicant by the Minister.
2. Some of the information and documents requested in the Requirements had never been requested before. Information not previously provided included the applicant's operating budget for 1999, its operating budget for 2000 and its five-year operating plan for 1999-2004.
ORDER SOUGHT
[21] The applicant, in the notice of application contained in its application record, seeks to have the Requirement Letters set aside or, in the alternative, to have the Court: i) vary the Requirement Letters to delete all questions previously asked by the CCRA and answered by the applicant; ii) declare that the applicant has substantially complied with the foreign-based requirements; and iii) issue an order prohibiting the Minister from taking any action or proceeding, including but not limited to actions or proceedings specified in the Act, against the applicant for failing to respond to the Requirements. In its written submissions, the applicant seeks an order prohibiting the Minister from issuing additional letters under subsections 231.2(1) or 231.6(2) of the Act with respect to the issues covered in the Requirement Letters.
THE RELEVANT LEGISLATION
[22] As noted above, the Requirements were issued pursuant to subsections 231.2(1) and 231.6(2) of the Act. Subsection 231.2(1) and section 231.6 of the Act are set out in the Appendix to these reasons.
THE ISSUES
[23] The applicant raises the following issues for determination in this case:
1. Should this Court set aside or vary the Requirement Letters because the Requirement Letters are unreasonable or inappropriate?
2. In the alternative,
a) Has the applicant substantially complied with the Requirement Letters?
b) Should the respondents be prohibited from taking any action or proceedings against the applicant for failure to respond to the Requirements, or from issuing additional requirements purportedly pursuant to subsection 231.2(1) or 231.6(2) of the Act, with respect to the issues covered by the Requirement Letters?
ANALYSIS
(i) The statutory scheme for a requirement issued pursuant to subsection 231.6(2) of the Act ("foreign-based requirement")
[24] The term "foreign-based information or document" is defined (for the purpose of the section) in subsection 231.6(1) of the Act to be "any information or document that is available or located outside Canada and that may be relevant to the administration or enforcement of this Act, including the collection of any amount payable under this Act by any person" [underlining added].
[25] The legislation therefore requires that in order to secure foreign-based information or documents, the Minister must establish that they "may be relevant to the administration or enforcement of [the] Act". The comprehensive nature of the power conferred pursuant to section 231.6 of the Act was described in the following terms by Mr. Justice Cullen in Merko v. Minister of National Revenue, [1991] 1 F.C. 239 (T.D.) at paragraph 24:
[...] There is no time period within which the data must be requested and clearly it is not obliged to do so during the course of assessing or reassessing the taxpayer, notwithstanding the strong argument made by counsel for the applicant nor the use of the words "assessment" in the copies of the Technical Notes issued by the Department of Finance to accompany the enactment of section 231.6 of the Act. Had Parliament wanted this sweeping power to be confined to the period between the time of the assessment (reassessment) and the notice of objection (or confirming or denying the objection), it would have been an easy matter to say so. They did not. Even after a taxpayer seeks relief in the courts, National Revenue is still able to require the taxpayer or a third party to produce foreign-based information or documents if it is able to maintain it is necessary for administration or enforcement of the Act.
[26] Pursuant to subsection 231.6(5) of the Act, on the application of the person served with a foreign-based requirement, the Court may vary the requirement as the judge "considers appropriate in the circumstances", or may set the requirement aside if the judge is satisfied that the requirement is "unreasonable".
[27] Neither the term "appropriate in the circumstances" nor the word "unreasonable" is defined. What is appropriate or reasonable in any case is a question of fact to be determined upon the evidence. See: Merko, supra at paragraph 19.
(ii) The statutory scheme for a requirement issued pursuant to subsection 231.2 (1) of the Act ("domestic Requirements")
[28] Subsection 231.2(1) of the Act provides that the Minister may issue a requirement pursuant to this subsection "for any purpose related to the administration or enforcement of this Act".
[29] The scope of the Minister's power under the predecessor to this provision was considered by the Supreme Court of Canada in James Richardson & Sons Ltd. v. Minister of National Revenue, [1984] 1 S.C.R. 614. Madam Justice Wilson, writing for the Court at paragraphs 14 and 15, wrote as follows:
14 The language of subsection 231(3) of the Income Tax Act is unquestionably very broad and on its face would cover any demand for information made to anyone having knowledge of someone else's affairs relevant to that other person's tax liability. It would, in other words, if construed broadly, authorize an exploratory sortie into any taxpayer's affairs and require anyone having anything to contribute to the exploration to participate. It would not be necessary for the Minister to suspect non-compliance with the Act, let alone to have reasonable and probable grounds to believe that the Act was being violated as required in subsection 231(4). Provided the information sought had a bearing (or perhaps even could conceivably have a bearing) on a taxpayer's tax liability it could be called for under the subsection.
15 The Canadian Bank of Commerce case, however, makes it clear that the subsection is not to be construed that broadly. It establishes through the majority judgment written by Mr. Justice Cartwright as:
(a) the test of whether the Minister is acting for a purpose specified in the Act is an objective one and has to be decided on the proper interpretation of the subsection and its application to the circumstances disclosed;
(b) the obtaining of information relevant to the tax liability of some specific person or persons whose liability to tax is under investigation is a purpose related to the administration or enforcement of the Act;
(c) it is not necessary that the person from whom the information is sought be one whose liability to tax is under investigation;
(d) the fact that the giving of the information may disclose private transactions involving persons who are not under investigation and may not be liable to tax does not invalidate the Requirement.
[30] This decision was referred to with approval by the Supreme Court of Canada in R. v. McKinlay Transport Ltd., [1990] 1 S.C.R. 627, where the Court upheld the constitutionality of the predecessor to section 231.2.
[31] In AGT Ltd. v. Canada (Attorney General), [1996] 3 F.C. 505 (T.D.) Mr. Justice Rothstein, as he then was, considered the validity and enforceability of notices of requirements issued under subsection 231.2(1) of the Act in circumstances where, among others, it was asserted by the taxpayer that much of the information sought by the Minister was irrelevant and where there were admissions in the cross-examination of the Minister's deponent to that effect. Mr. Justice Rothstein summarized the guiding principles with respect to subsection 231.2(1) as follows, at paragraph 17:
Having considered Richardson and McKinlay, I conclude:
1. The expectation of privacy in relation to business records is relatively low.
2. As long as the Minister's purpose is related to the administration and enforcement of the Income Tax Act, relevance of the material sought to a particular issue is not a prerequisite to a requirements notice under subsection 231.2(1).
3. Documents may be compelled even if they are not required to be prepared or kept under the Income Tax Act.
4. It is not necessary that a requirements notice set out the grounds or particulars for which the documents sought are required.
5. As long as the documents pertain to a genuine inquiry into the tax liability of a person, they may be the subject of a requirements notice under subsection 231.2(1).
[32] Mr. Justice Rothstein's decision was upheld by the Federal Court of Appeal, [1997] 2 F.C. 878. At paragraphs 21, 22, 23 and 24 of that decision, Madam Justice Desjardins for the Court wrote:
21 The appellant claims in essence that although subsection 231.2(1) of the Act has been declared constitutionally valid, each notice of requirement issued under that provision must meet the test of relevancy and reasonableness.
22 The short answer to this contention is that once a statutory provision is declared valid, as was done with respect to subsection 231.2(1) of the Act in McKinlay, the constitutional analysis ends. Only a statutory analysis is then required. It is under this analysis that I now consider the appellant's arguments about relevancy and reasonableness.
23 Under the Income Tax Act, the Minister is concerned with verifying the tax liability of the taxpayer which is first revealed in the taxpayer's return. It will often be "impossible to determine from the face of the return whether any impropriety has occurred in its preparation". Because of the nature of the conduct regulated by the Income Tax Act, there are, in many cases, no ways of determining whether proscribed conduct has been engaged in, short of studying the process by which a suspected corporation or business has made and implemented its decision. Investigatory mechanisms which force corporations and other businesses to divulge what they and only they can know about their internal affairs are part of the state's interest in the enforcement of the Act.
24 While an individual or a corporation's interest in having business strategies kept in confidence is recognized, the balancing no doubt favours the state. Wilson J. in McKinlay recognizes that the "Minister has no way of knowing whether certain records are relevant until he has had an opportunity to examine them". There is an ultimate safeguard. Not all of those documents are necessarily admissible against the taxpayer in a court of law or in another proceeding. Only those in accord with the rules of evidence shall be admissible. [footnotes omitted]
[33] I accept that, from this jurisprudence, the following principles emerge with respect to domestic requirements:
i) The determination of a taxpayer's tax liability is a purpose related to the administration and enforcement of the Act.
ii) In order for a requirement to produce records to be valid, the Minister need not show the records will be relevant; he need merely show the records requested may be relevant.
iii) Relevance is tested by determining whether the particular record requested may be relevant in the determination of a taxpayer's tax liability and not whether the particular record requested is relevant with respect to a particular issue under audit.
(iii) Were the foreign-based Requirements "relevant to the administration or enforcement of the Act" and was the domestic Requirement for a "purpose related to the administration or enforcement of the Act" as required?
[34] The Federal Court of Appeal in Tower v. Minister of National Revenue, [2004] 1 F.C.R. 183 observed, at paragraph 29, that "the determination of a taxpayer's tax liability is a purpose related to the administration and enforcement of the Act. A requirement [issued pursuant to subsection 231.2(1)] is valid if the requested information may be relevant in the determination of the tax liability of the named taxpayer. This is a low threshold."
[35] There is, in my view, no doubt that the applicant's tax liability was under investigation at all material times. Similarly, there is no doubt that the foreign-based Requirements and the domestic Requirement in this case requested information that might be relevant to the determination of the applicant's tax liability. The applicant's lawyer provided answers to the Requirements and made no objection on the basis of the relevance of the information sought or the reasonableness per se of the inquiries. Counsel's objections to the Requirements were based on what was described as "overzealous" actions of the auditor, and upon counsel's view that most of the questions had already been asked and answered.
[36] The subject matter of the foreign-based Requirements having met the prerequisite of being relevant to the tax liability of the applicant, and hence relevant to the administration and enforcement of the Act, the foreign-based Requirements are prima facie valid. Similarly, where the applicant's tax liability was the subject of a genuine and serious inquiry and the domestic Requirement was issued in order to determine its tax liability, the domestic Requirement is prima facie valid.
(iv) Were the Requirements nonetheless unreasonable or inappropriate in the circumstances?
[37] The applicant argues that the foreign-based Requirements were unreasonable or inappropriate, and that the domestic Requirement was not objectively reasonable for the following reasons:
a) the Requirement Letters reflect Mr. Sayson's less than objective attitude towards the applicant;
b) when the Requirement Letters were issued by the Audit Division, the Audit Division had concluded its audit activities with respect to the applicant's 1996 to 2000 taxation years. As a result, the timing of the issuance of the Requirement Letters is not an act which appears to further the administration or enforcement of the Act by the Audit Division of the CCRA;
c) the Requirement Letters sought information previously provided repeatedly to the CCRA; and
d) with respect to the domestic Requirement Letter, the respondents have attempted to circumvent the reasonable time limitations in subsection 231.6(4) of the Act.
[38] In addition, the applicant says that the foreign-based Requirements sought information or documents under the control of, or available to, a non-resident person who was unrelated to the applicant.
(a) The auditor's attitude
[39] The applicant argues that the auditor "took it personally" when the Appeals Division vacated his assessment, disallowing the management fees of $827,473.00 and $945,619.00 paid to Thistlefield for the 1997 and 1998 taxation years. The applicant points to the following examples to establish the auditor's attitude:
1. Notwithstanding the content of Mr. Itwar's e-mail set out above at paragraph 7, the auditor did the following three things which were inconsistent with Mr. Itwar's advice:
i) he asked for the waiver to extend the audit period;
ii) when the waiver was revoked, the auditor issued a reassessment with respect to the 1999 taxation year; and
iii) in such reassessment the auditor disallowed management fees paid to Thistlefield.
2. The auditor ignored the request that, on any reassessment of the applicant's 1999 taxation year, the applicant be allowed the maximum available deductions for CCA and CEC. Further, the auditor gave an illogical reason for failing to accede to the request.
3. This refusal was spiteful and prejudicial to the applicant because, as a large corporation, it was required by subsection 225.1(7) of the Act to pay at least 50% of the tax owing within 90 days of the reassessment.
[40] The applicant notes that the Minister filed no affidavit evidence in opposition to this application, and asks that the Court draw an adverse inference from this.
[41] The applicant put in evidence the audit report for the audit period relating to the 1999 taxation year ("audit report"). This report was signed by the CCRA audit team leader on May 15, 2003 and indicates that it was re-drafted by the auditor on July 22, 2003. It also has as a final page a note with respect to the Requirements (which must, therefore, have been added after October 6, 2003). This report was obtained by the applicant pursuant to the Access to Information Act, R.S.C. 1985, c. A-1. I have no reason to doubt its authenticity and, in my view, it provides the best evidence of the auditor's belief and intentions. Because of the importance placed by the applicant upon the auditor's attitude and intent, a significant portion of the audit report is set out below. There, the auditor wrote:
Among the adjustments made during our previous audit, was the disallowance of $945,619 and $827,473 in Management fees for 1997 and 1998 respectively. These fees were allegedly paid to Thistlefield Limited (U.K.), a British Virgin Island (BVI) registered company, for consulting work allegedly done outside of Canada.
We make the following comments regarding our review of this expense during our previous audit:
i. During the course of the audit, we noticed invoices for management, consulting and marketing fees from Thistlefield Limited, located at 46 Cheyne Court, Royal Hospital Road, London, UK SW3 5TS. It was stated that Thistlefield Limited is a British Virgin Island corporation having offices in London, England.
ii. The only documentary evidence provided to support any work performed by Thistlefield Limited were:
. Monthly invoices from Thistlefield, which showed a description of "management, consulting and marketing fees" and
. A management agreement.
iii. The management agreement provided for the payment of the fees on the basis of a percentage of the gross hotel revenues. Furthermore, with respect to the payment terms, the agreement stated that the payments were conditional upon 1144020 Ontario Limited having the necessary funds available at the time at its sole discretion acting reasonably. The actual payment (by bank draft) of $1,773,088 for the 1997 and 1998 management fees was made on September 9, 1998.
iv. In view of the unusual nature of this arrangement, and the fact that no supporting documents or evidence that any work was performed by Thistlefield Limited were provided by the taxpayer, and our suspicion that the funds were simply being extracted, untaxed, from Canada,
v.
vi. and failing to receive any supporting documentary evidence from the taxpayer that any work was in fact performed by Thistlefield Limited, we disallowed the expense due to lack of corroborating evidence that the services were actually provided and applied Part XIII taxes.
In addition to objecting to other adjustments, the taxpayer objected to the disallowance of the management fees and asked that the Vancouver TSO handle the objection.
The disallowance of the management fees was reversed by Appeals.
It appears that Appeals relied on very limited self-serving documents, which were not present during the course of the audit. They also appear not to have fully considered our concerns regarding the reasonableness of the fees for which there was almost no support, proof or affirmation.
Subsequently, in our follow up audit of the books and records of 1144020 Ontario Limited, we observed that they have deducted as an expense, $1,119,394 and $1,210,995 in 1999 and 2000 respectively in respect of services performed by Thistlefield Limited. (In addition, the taxpayer claimed as an expense, consulting fees in the amount of $700,000 paid to Sedko Investment Services, Inc. (U.S.) and Directors' fee in the amount of $600,000 paid to Andrew Paraskeva in Cyprus.) We have again asked the taxpayer to provide support for the deductibility of these payments. As in the first audit, no corroborating evidence and/or documentation is being provided.
However, the taxpayer is now armed with the Appeals decision, notwithstanding the fact that the decision related to the 1997 and 1998 expenses.
[...]
a) Facts:
The only documentary evidence of the management/Consulting fee expense paid to Thistlefield Limited (U.K.) were monthly invoices from Thistlefield Limited, which showed a description of "management, consulting and marketing fees", a management agreement (as well as an amending agreement to the management agreement) and cancelled cheques for the payment of the bank draft in favour of Thistlefield Limited.
b) Our position on Prior Audit (1996-1998):
In our previous audit for the years 1996 to 1998, the management/consulting fee paid to Thistlefield Limited (U.K.) was disallowed for the following reasons:
i) The only documentary evidence provided to support any work performed by Thistlefield were monthly invoices which showed a description of "management, consulting and marketing fees", a management agreement and cancelled cheques.
ii) The taxpayer failed to provide corroborating evidence to show that the services were actually performed. Documentary evidence, which normally would be expected such as invoices for telephone calls made, copies of reports, individuals who actually provided the services, and other related verifiable third party documentation were requested but none was provided by the taxpayer. (Submissions were made to Appeals, after the audit.)
iii) The issue of reasonableness of the amount paid was not emphasized on the prior year's audit report because the taxpayer failed to demonstrate that the alleged services were "in fact" provided.
iv) Although, we do not have any evidence it is our suspicion that the funds were simply being extracted, untaxed, from Canada,
v) Consideration was also made with respect to our Internet searches, which resulted in no clear confirmation of the entity (Thistlefield Limited) and the individual (M.K. Lakha).
vi) Another factor in our decision was the previous taxpayer's submission, which showed that Thistlefield Limited is an international management company providing services to the hotel industry in the U.S.A. and Europe. However, Mr. Salim Allibhai, the taxpayer's representative, confirmed in writing that Thistlefield Limited did not have a "Website". It is highly unusual for an international organization not to have a website, considering the nature of the business.
[...]
The above-payment to Thistlefield Limited is being disallowed for the following reasons:
a) Notwithstanding Appeals decision in favour of the taxpayer in our previous years audit for the years 1996 to 1998, in this audit we are concerned about the validity of the expenses claimed. The documents we requested should have been provided. We requested the information, to support the expense, but the taxpayer failed to provide the information. Please refer to the correspondence section of this report, specifically our letter to the taxpayer's representative dated March 3, 2003.
b) In our view, what transpired in 1996 to 1998 do not apply to the current years under review and that the merits of the current year under review should be considered independently. Again, the taxpayer failed to provide the information requested.
c)
d) The taxpayer was not able to provide corroborating evidence, which would indicate that the services were actually provided by Thistlefield Limited (U.K.). The taxpayer during the course of the audit £ previously (taxation years 1996, 1997 and 1998) and currently in the audit of the taxation years 1999 and 2000¤ failed to provide supporting documentation to indicate that the services were actually provided. The only support provided by the taxpayer was invoices supposedly from Thistlefield Limited (U.K.), which indicated a description of "management, consulting and marketing fees" and a Consulting agreement.
e) Although, the taxpayer's records indicated that payments were made to Thistlefield Limited, the taxpayer failed to show that the services, if in fact performed, were reasonable under the circumstances. From our research, there are no comparables (from arms' length party and/or uncontrolled party) for this particular expense in the same industry and type of business. Initial data gathered for this type of business (Industry code 7011) showed no similar expense claim for consulting fees.
f) There are a lot of contradictions and/or inconsistencies from the taxpayers' records and submissions: i) When queried as to the functions of the key managers of the Hotel, the duties and responsibilities given were collectively identical to the services supposedly provided by Thistlefield Limited ("TL"). Hence, it is unreasonable to obtain the services of a consultant for services which are already being provided by the key managers of the hotel, ii) When queried as to the identity of the alleged principal of "TL" the taxpayer could not give the full name and current address of M.K. Lakha, iii) It was stated in the taxpayer's submission that the services were performed outside of Canada. But the services/functions allegedly provided by "TL" could not have been provided outside of Canada, as the functions/services require the physical presence of M.K. Lahka in Canada (please refer to the attached consulting agreement dated February 1996), iv) It was also indicated in the submission by the taxpayer that it is a family corporation. However, it was indicated by the taxpayer's representative that the principal of "TL" was not related to any of the Somani's and Sunderji's (the shareholders of the corporation). This was a clear contradiction of the statement about the relationship (that the business is a family corporation).
g) Several written requests were made to the taxpayer for them to provide corroborating evidence, which would show that the services were in fact performed. However, the taxpayer failed to provide requested information. Please refer to the correspondence section of this report, specifically the Agency's letter dated March 3, 2003, which indicated the detailed request for specific documentation/information. In view of the fact, that the taxpayer failed again to provide the information, we requested the issuance of a Director's requirement pursuant to Sections 231.2 and 231.6 of the Income Tax Act.
Subsequently, our request was approved and the requirement letters were sent by registered mail last October 6, 2003. Please refer to the attached Addendum to this T20 report for the subsequent additional audit steps done with respect to this issue.
[42] From this, I take that the auditor:
i) did not believe that the applicant had provided complete or adequate information or documentation;
ii) believed that documentary evidence, which normally would be expected to exist, was not provided; and
iii) did not believe the Thistlefield fees were deductible, notwithstanding the decision of the Appeals Division with respect to other taxation years, which decision was apparently based upon information not provided durin