Nicole L. Tiessen Interior Design Ltd. v. The Queen

Nicole L. Tiessen Interior Design Ltd. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2021-04-09
Neutral citation
2021 TCC 29
File numbers
2015-3808(IT)G, 2015-3809(IT)G, 2015-3812(IT)G, 2015-3813(IT)G, 2015-3822(IT)G, 2015-3823(IT)G, 2015-3841(IT)G, 2015-3843(IT)G
Judges and Taxing Officers
Siobhan Monaghan
Subjects
Income Tax Act
Notes
Decision Content
Citation: 2021 TCC 29
Date: 20210409
Docket: 2015-3808(IT)G
BETWEEN:
NICOLE L. TIESSEN INTERIOR DESIGN LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2015-3809(IT)G
AND BETWEEN:
NICOLE L. TIESSEN INTERIOR DESIGN SERVICES LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2015-3812(IT)G
AND BETWEEN:
DANIEL REEVES ARCHITECT LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2015-3813(IT)G
AND BETWEEN:
DANIEL REEVES ARCHITECT PROF. SERVICES LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2015-3822(IT)G
AND BETWEEN:
JEFF OLFERT TECHNICAL LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2015-3823(IT)G
AND BETWEEN:
JEFF OLFERT TECHNICAL SERVICES LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2015-3841(IT)G
AND BETWEEN:
CHRISTOPHER WOOD TECHNICAL LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2015-3843(IT)G
AND BETWEEN:
CHRISOPHER WOOD TECHNICAL SERVICES LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent
AMENDED REASONS FOR JUDGMENT
Monaghan J.
I. INTRODUCTION
[1] The only issue in these appeals is whether the Appellants were associated corporations in their 2012 and 2013 taxation years. This matters because if they were their entitlement to the deduction in computing tax, commonly known as the small business deduction (“SBD”), will be affected.
[2] The SBD is available only to Canadian-controlled private corporations in respect of a limited amount of active business income each year. [1] In the relevant taxation years, a corporation’s maximum income eligible for the SBD (called the business limit) was $500,000. Associated corporations must share a single business limit. Similarly, corporate members of a partnership earning active business income may treat only their share of the partnership’s active business income not in excess of $500,000 (called the specified partnership business limit) as eligible for the SBD. Thus, associated corporations, and corporations who are members of a partnership, must share a single business limit effectively limiting the income eligible to be taxed at the SBD rate. In these appeals, both of these business limit sharing rules are relevant.
[3] Four of the Appellants, together with another eleven corporations, were partners (each a “Partnerco”) in aodbt architecture + interior design partnership (the “Partnership”). The other four Appellants and eleven other corporations (each a “Serviceco”) provided services to a single Partnerco. Each Partnerco was owned by a single individual (each a “Principal”) [2] who also controlled a Serviceco established by the Principal.
[4] Thus, in the relevant taxation years, there were 15 pairs of corporations, each pair consisting of a Partnerco and a Serviceco, controlled by a single Principal. The Appellants are four of those pairs. [3] For simplicity, I sometimes refer to the Partnerco and Serviceco controlled by a particular Principal as “a pair”, as “paired” or as “the Principal’s pair.”
[5] Everyone agrees the Partnercos were required to share a single specified partnership business limit to determine each Partnerco’s qualification for the SBD in respect of its share of the Partnership’s active business income. And, the Appellants do not dispute that each pair must share a single business limit. This is the basis on which the Appellants filed their income tax returns for the 2012 and 2013 taxation years.
[6] However, the Respondent and the Appellants part ways on whether all thirty corporations (or, put another way, all fifteen pairs) are associated and so must share a single business limit. The Respondent reassessed the Appellants for their 2012 and 2013 taxation years on the basis they were associated with each other and with the other eleven pairs. [4] In doing so, the Respondent contends that one of the main reasons for the separate existence of the corporations was to reduce taxes payable under the Income Tax Act (Canada) [5] in their 2012 and 2013 taxation years, with the result that they are deemed to be associated.
[7] The reassessments also increased the income of the Appellants that are Partnercos. The Respondent’s position is that certain amounts deducted in computing income of the Partnership were not deductible (the “disputed expenses”). The parties settled that aspect of the appeals prior to the hearing. Accordingly, while my order reflects the parties’ agreement with regard to the disputed expenses, the deductibility of the disputed expenses is not addressed in these reasons.
II. THE APPELLANTS
[8] The Appellants in these appeals consist of four pairs of Partnercos and Servicecos.
[9] The first pair consists of Jeff Olfert Technical Ltd. and Jeff Olfert Technical Services Ltd. The relevant Principal is Jeff Olfert who is a chartered professional accountant (“CPA”). Mr. Olfert is the sole director and sole officer of his Serviceco and his Partnerco, the sole shareholder of his Partnerco, and the controlling shareholder and employee of his Serviceco.
[10] The second pair consists of Christopher Wood Technical Ltd. and Christopher Wood Technical Services Ltd. The relevant Principal is Christopher Wood who is an architectural engineering technologist. Mr. Wood is the sole director and sole officer of his Serviceco and his Partnerco, the sole shareholder of his Partnerco, and the controlling shareholder and employee of his Serviceco.
[11] The third pair consists of Daniel Reeves Architect Ltd. and Daniel Reeves Architect Prof. Services Ltd. The relevant Principal is Daniel Reeves who is a registered architect. Mr. Reeves is the sole director and sole officer of his Serviceco and Partnerco, the sole shareholder of his Partnerco, and the controlling shareholder and employee of his Serviceco.
[12] The fourth pair consists of Nicole L. Tiessen Interior Design Ltd. and Nicole L. Tiessen Interior Design Services Ltd. The relevant Principal is Nicole Tiessen who is an interior designer. She is the sole director, officer and shareholder of her Serviceco and Partnerco, and an employee of her Serviceco.
III. BACKGROUND
(1) Pre-Reorganization
(a) The Corporation
[13] AODBT Olfert Dressel Burnyeat Tracey Architects Ltd. (the “Corporation”) was formed in 1994 [6] and carried on the business of providing architectural and interior design related services. The Corporation had the contracts with clients and employed the professional staff, including the architects, technologists, interior designers and engineers. The Corporation’s shareholders consisted of professional employees (Principals) considered key to the success of the business, and spouses of certain of the senior Principals. [7] Messrs. Olfert, Wood and Reeves and Ms. Tiessen were shareholders (Principals) at the end of 2010.
[14] The Corporation’s share capital was divided into Class A voting non-participating preference shares (“voting shares”) and Class B non-voting shares (“participating shares”). For each ten voting shares a Principal owned, the Principal and/or his spouse collectively owned one participating share. Thus, for example, on December 21, 2010, Mr. Olfert owned 75 voting shares and 5 participating shares, and his spouse owned 2.5 participating shares. In contrast, Mr. Wood, Mr. Reeve and Ms. Thiessen alone owned voting and participating shares in that same 10:1 ratio.
[15] Moreover, the Principals had decided to limit the number of issued participating shares to 100 so changes to ownership were effected by share transfers. Mr. Olfert explained that each spring existing Principals would be canvassed to see who wanted to sell shares and who wanted to increase their shareholding. After that information was collected, the “up and comers” [8] who the Principals thought were ready to become owners would be approached to see if they were prepared to purchase shares. Then the Executive Group would meet to balance out expressed interests. This adjustment of ownership interests occurred annually, at the beginning of November, immediately after the Corporation’s year end (October 31). [9] The shares were purchased and sold by individuals.
[16] The price per share was determined annually and intended to be fair market value. [10] Purchasers would either pay cash (from their own resources or loans) to the selling Principal (or spouse) or, by agreement with the seller, issue a promissory note to pay the purchase price to the seller over time, with interest. This practice for changing ownership interests had been in place for many years.
[17] The Corporation was governed by a unanimous shareholders agreement (“USA”). It distinguished between active and inactive shareholders and included as a defined term “Spousal Shareholders”. The USA required any spouse to vote her shares in the same manner as her husband (Principal) voted his shares. Since the spouse’s shares were not voting shares, this presumably was relevant only where the corporate law provided a vote to holders of non-voting shares. The USA also required the spouse to take the same actions as her husband and precluded independent action. The Corporation’s by-laws provided that voting shareholders had the right to attend shareholder meetings.
(b) MSLP
[18] AODBT Management Services Limited Partnership (“MSLP”) was established in 1997. It provided administrative services to the Corporation, hiring consultants and technicians, employing all the administrative staff, and paying all of the administrative expenses. MSLP charged its costs back to the Corporation with a mark-up, leaving a profit in MSLP. The limited partners of MSLP were family trusts of the Principals. Thus, this arrangement (together with certain spouses owning shares of the Corporation and of Third Avenue Investments Ltd.) permitted income splitting.
(c) Third Avenue
[19] Third Avenue Investments Ltd. (“Third Avenue”) owned the building in Saskatoon out of which the Corporation and MSLP operated and leased space to the business. The Corporation’s shareholders held shares in the Corporation and in Third Avenue in the same relative percentages. Again, some spouses of Senior Principals were shareholders of Third Avenue. However, the collective interest of a Principal and his spouse would be the same in percentage terms as their collective participating share interest in the Corporation. A purchaser of Corporation shares purchased Third Avenue shares in the same proportion.
(2) Reorganization
[20] Commencing in late 2010, through early 2011, the Corporation, MSLP, and Third Avenue undertook a reorganization (the “Reorganization”). The principal steps in the Reorganization are described in the Partial Agreed Statement of Facts. While all of the relevant transactions are not described and no evidence was led to describe the missing details, the particulars of the transactions are in many ways irrelevant to the issue before me. My concern is the reason for the Reorganization, and the resulting thirty corporations, not the transactions that implemented it. Thus, an overview of the Reorganization is sufficient for purposes of these reasons.
[21] The Reorganization involved each Principal establishing a Partnerco [11] and a Serviceco and the creation of the Partnership among the Partnercos in late 2010. New family trusts were settled for the benefit of the family of each Principal except Ms. Tiessen. Each Partnerco was wholly-owned by the Principal. [12] The Principal had voting control of the paired Serviceco, but each Principal’s family trust also subscribed for shares of the Principal’s Serviceco. [13]
[22] In early 2011, through a series of transactions, the Principals [14] ceased to be holders of participating shares in the Corporation [15] and the Partnership acquired the businesses of the Corporation and MSLP. In particular, the Partnership acquired MSLP’s employees, depreciable property and accounts receivable, acquired the Corporation’s assets, and assumed MSLP’s debts. Each of the Principals ceased to be employed by the Corporation, and instead became an employee of his or her Serviceco. MSLP and the family trusts that had been limited partners of MSLP were wound up.
[23] Like the Corporation, the Partnership selected an October 31 fiscal period. The taxation year end of each Partnerco [16] and Serviceco was January 1. Thus, a Partnerco’s share of the Partnership’s income for its October 31, 2011 fiscal period was included in the Partnerco’s income for its taxation year ended January 1, 2012, and its share of the Partnership’s income for its October 31, 2012 fiscal period was included in the Partnerco’s income for its taxation year ended January 1, 2013. [17]
(3) The Post-Reorganization Relationships among the Parties
[24] The partnership agreement governing the Partnership (the “Partnership Agreement”) was signed by each Partnerco and each Principal, in his or her personal capacity. Under that agreement the parties agreed as follows:
each Partnerco and its Principal agreed to devote their full time and attention to the business of the Partnership;
each Principal was required to be employed by their Serviceco;
each Partnerco was required to enter into a service agreement with its paired Serviceco under which the Serviceco agreed to provide the services of the Principal to the Partnerco to ensure the Partnerco was able to fulfill its obligations under the Partnership Agreement; and
each Principal was precluded from competing with, or soliciting clients or staff of, the Partnership.
[25] The Partnership Agreement also contained provisions governing capital accounts, income determination, income allocation, draws and capital contributions, transfer of partnership units, and other matters relevant to the relationship among the partners.
[26] As contemplated by the Partnership Agreement, each Serviceco entered into an employment agreement with its Principal. Under that agreement, the Serviceco was required to pay the Principal an annual salary of at least $3,400. [18]
[27] Each pair entered into a service agreement under which the Serviceco agreed to provide the services of its employee (i.e., the relevant Principal) to the Partnerco to enable it to fulfil its duties and obligations to the Partnership. Each Partnerco agreed to pay its paired Serviceco for those services. However, the amount payable was not specified. Rather, the services agreement provided for a minimum annual base compensation of $1.00 and that the Partnerco would pay compensation reflective of the efforts and skill of Serviceco and of the circumstances that Partnerco would be unable to fulfil its obligations under the Partnership Agreement without the effort, skill and responsibility of Serviceco. In each of their 2012 and 2013 taxation years, the Servicecos received fees from the paired Partnerco well in excess of the minimum annual base compensation.
[28] Each Partnerco was allocated a share of the Partnership’s income for the Partnership’s fiscal periods ending October 31, 2011 and 2012. Each Partnerco paid its paired Serviceco fees for the services provided (i.e., the services of the Principal) and deducted those fees in computing its income for purposes of the Act. Each Serviceco included the fees received from its paired Partnerco in its income and deducted the salary it paid to its Principal. [19]
[29] Messrs. Olfert, Reeves and Wood and Ms. Tiessen all agreed that the Reorganization had no effect on the manner in which they carried out their work day-to-day. Expense reimbursements were made directly by the Partnership to the Principals notwithstanding that they were employees of a Serviceco.
IV. THE APPEALS
(1) The SBD Claims
[30] The income earned by the Partnercos as partners in the Partnership was considered active business income eligible for the SBD, subject to any applicable business limit sharing rules. Because the paired Partnerco and Serviceco were associated, the fees paid by a Partnerco to its paired Serviceco, and deducted by the Partnerco in computing its income, were deemed to be active business income earned by Serviceco. [20] Accordingly that income also was considered eligible for the SBD, subject to any applicable business limit sharing rules.
[31] In computing its taxes payable, each Partnerco claimed the SBD in respect of all of its income. Similarly, each Serviceco claimed the SBD in computing its tax payable on the basis that it was associated with its paired Partnerco but no other corporation. However, the aggregate taxable income of a pair did not exceed $500,000. The result was that all of the income earned by a pair was treated as eligible for the SBD.
(2) Matters not in Dispute
[32] The parties agree that:
(i) prior to the Reorganization, the Corporation’s business limit was $500,000, the Corporation was entitled to the SBD, and the total maximum SBD available to the Corporation was $85,000; [21]
(ii) the aggregate business limit claimed by the Partnercos in respect of their specified partnership income for the Partnership fiscal periods ending October 31, 2011 and October 31, 2012 was $446,900 [22] and $452,704, respectively, resulting in an aggregate SBD claim by the fifteen Partnercos in those years of $75,973 and $76,960, respectively;
(iii) the aggregate business limit claimed by the fifteen Servicecos for their taxation years ended January 1, 2012 and January 1, 2013 was $2,260,576 and $4,563,418, respectively, resulting in an aggregate SBD claim by the Servicecos in those years of $384,298 and $775,781, respectively.
(3) Matter in Dispute
[33] The Respondent’s position is simple. Before the Reorganization the Corporation claimed the SBD. Following the Reorganization, 30 corporations claimed the SBD in respect of income that, but for the Reorganization, would have been earned by the Corporation and MSLP, and presumably the Principals, [23] collectively. As partners in the Partnership, the Partnercos collectively were limited to the same $500,000 business limit as the Corporation had been prior to the Reorganization. However, says the Respondent, the pairs resulting from the Reorganization, and the arrangements between a Partnerco and its paired Serviceco, were intended to permit substantially more income to be taxed at the SBD rate. Thus, says the Respondent, one of the main purposes, if not the only main purpose, for the Reorganization giving rise to the 30 corporations was reduction of taxes by multiplying access to the SBD.
[34] The Appellants concede that the Reorganization leading to 30 corporations results in a reduction of tax through additional access to the SBD. However, they assert that additional SBD was not one of the main reasons for the Reorganization or the separate existence of the Partnercos and Servicecos in the relevant years. Rather, the Appellants submit that the main reasons for the Reorganization (and thus the need for the separate existence of the Partnercos and Servicecos) were:
addressing succession issues, including creating a structure more attractive to recruitment and retention of senior talent;
a desire to remove spouses as direct owners of the “entity” operating the business;
a desire to permit individual financial flexibility (i.e., so a Principal could make financial decisions independently without impacting other Principals);
improving the ability and flexibility of a Principal to independently undertake estate and succession planning within the Principal’s family;
asset protection; and
simplification of the operational side of the business.
[35] The Respondent denies that these were reasons for the Reorganization, or the existence of the fifteen pairs. However, says the Respondent, if any were reasons, nonetheless multiplication of access to the SBD was the main reason for the Reorganization.
(4) Conclusion
[36] The Appellants’ counsel invited me to distinguish between the results of the Reorganization and the purpose as I listened to the evidence because, whatever the result of the Reorganization, what is relevant is its purpose. I agree that what is important in these appeals is the purpose of the Reorganization and the existence of the thirty corporations created to effect it.
[37] However, purpose is to be determined objectively having regard to all the facts and circumstances, not merely the Appellants’ statements. The question to be answered is whether, having regard to all the facts and circumstances, it is reasonable to consider that one of the main reasons for the separate existence of the Partnercos and the Servicecos is the reduction of tax.
[38] For the reasons that follow, I have concluded that at least one of the main reasons for the Reorganization, and for the separate existence of corporations comprising the fifteen pairs, was the reduction of taxes, and in particular greater access to the SBD. Multiplication of the SBD was the reason the Reorganization was proposed and the resulting tax savings presented to the Principals led to the decision to undertake the Reorganization. Most of the reasons advanced by the Appellants for reorganizing were not convincing as main reasons. I believe some were not even relevant to the decision to reorganize. They constitute benefits that the Principals enjoyed, to varying degrees, as a result of the Reorganization, but I have no doubt reduction of taxes was one of the main reasons for it.
V. ANALYSIS
(1) Relevant Law
[39] In reassessing the Partnercos and Servicecos as associated corporations the Respondent relied on subsection 256(2.1). This anti-avoidance rule deems corporations to be associated where it may reasonably be considered that one of the main reasons for the separate existence of two or more corporations in a taxation year is to reduce taxes that would otherwise be payable under the Act.
[40] The provision requires me to identify the reasons for the separate existence of the corporations, not the reasons for establishing them. [24] However, in this case, the reasons for establishing the corporations and their separate existence are inextricably linked because the fifteen pairs were always part of the planned Reorganization and considered necessary to effect it. Thus, the reasons for their creation and separate existence in the relevant years is the same. [25]
[41] The provision also requires me to determine whether one of the main reasons for the separate existence of the corporations was the reduction of tax. To do so, I must assess purpose based on inferences drawn from facts that are ascertainable as well as testimony. The inquiry is an objective one with a focus on the relevant facts and circumstances. This is not to say that statements of intention are irrelevant, but they are not determinative. As the Supreme Court of Canada has put it:
. . . where purpose or intention behind actions is to be ascertained, it must not be supposed that in responding to this question courts will be guided only by a taxpayer’s statements, ex post facto or otherwise, as to the subjective purpose . . . Courts will, instead, look for objective manifestations of purpose, and purpose is ultimately a question of fact to be decided with due regard for all of the circumstances. [26]
And
. . . where purpose or intention behind actions is to be ascertained, courts should objectively determine the nature of the purpose, guided by both subjective and objective manifestations of purpose. [27]
The stated reasons must be objectively reasonable. [28]
[42] Reduction of taxes need not be the sole reason or even the sole main reason for the separate corporations. [29] But, it is clear that it is not enough that the separate existence of the corporations results in a reduction of taxes. The question is whether saving taxes was a main goal or a side effect. [30]
[43] The onus is on the taxpayer to produce an objectively reasonable explanation that none of main reasons was the reduction of taxes. [31] A mere denial of a purpose, even where accompanied by a list of other purposes, by itself is not persuasive.
(2) The Appellants’ witnesses [32]
[44] Although the Principals of all of the Appellants testified, the key witnesses regarding the reasons for and history surrounding the creation of the Partnership and the Reorganization were Mr. Olfert and Frank Baldry, a tax partner at PriceWaterhouse Coopers LLP (“PWC”). Each of Mr. Reeves, Mr. Wood and Ms. Tiessen said they were told the reasons for the Reorganization by Mr. Olfert. None of them were involved in the planning of the Reorganization. None conducted any significant due diligence with regard to what was presented to them. The Reorganization was recommended by Mr. Olfert and senior management at the Corporation and therefore they accepted it. Their testimony about the reasons for the Reorganization was to relate what they were told by others.
[45] Mr. Reeves did not hear about the partnership proposal until August 3, 2010. He remembered it being described at a Principals’ meeting and Mr. Baldry explaining it with diagrams on a screen. A decision to proceed was made no later than August 30, 2010. Mr. Reeves did not recall a formal vote on the Reorganization and said the Principals were pretty informal about decisions. Mr. Reeve said he did not conduct any independent due diligence and was prepared to go along with the proposal because Mr. Olfert and senior Principals were recommending it with professional advice obtained from the Corporation’s accountants and lawyers.
[46] Mr. Wood was at the August 3, 2010 meeting and its continuation on August 30, 2010. However, he has no recollection of what was described or discussed at the meeting or why a change in the organization was being proposed. He recalls being told the purpose of the Reorganization was to change from a corporation to a partnership. [33] He also recalls being advised the reasons for the Reorganization were estate and succession planning, but was not sure when he was told those were the reasons.
[47] Ms. Tiessen did not become a shareholder until after the decision to proceed with the Reorganization was made. She learned about it from Mr. Olfert only a few weeks before she became a shareholder, and after she had investigated buying shares of the Corporation and arranged bank financing for that purpose. Ms. Tiessen recalls Mr. Olfert mentioning multiplication of the SBD, but it was not important to her. Ms. Tiessen said she did not understand the positives or the negatives of the Reorganization.
[48] It is also clear that neither Mr. Wood nor Ms. Tiessen understand the relationships between their paired corporations, nor the reasons for them. They went along because, as they understood it, the proposal was an all or nothing, take it or leave it, proposition. You were either in or you were out.
[49] I have determined that the decision to reorganize into a Partnership was largely driven by a group of senior Principals, of which only Mr. Olfert testified during these appeals. All of the Appellants’ witnesses agreed Mr. Olfert had significant influence when it came to financial matters. Each of Mr. Reeves, Mr. Wood and Ms. Tiessen recognized they had little influence over the decision. While Mr. Reeve and Mr. Wood attended the presentation about the Reorganization, they did not remember much or necessarily understand all of it.
[50] The documentary evidence in these appeals includes minutes from monthly shareholders’ (i.e., Principals’) meetings, [34] emails, corporate records for the Corporation, reports of external consultants engaged by the Corporation to assist with strategic issues and human resources concerns over the 2005 to 2011 period and related materials, agreements relevant to the Reorganization, and documentation prepared by Mr. Baldry. This evidence reflects the issues that concerned the Corporation and the Principals both in the years before the Reorganization and in the 2010-2011 period. These documents provide important context to my determination concerning the main reasons for the Reorganization.
(3) Consultation with PWC
[51] Mr. Baldry was one of the key architects of the Reorganization. He was introduced to Mr. Olfert and the Corporation by Monte Gorchinski, one of Mr. Baldry’s partners at PWC, who had worked with Mr. Olfert and the Corporation for a number of years. Mr. Olfert explained that in late 2009, at his annual post fiscal year-end meeting with Mr. Gorchinski, Mr. Olfert asked for some assistance dealing with certain issues the Corporation was facing. Mr. Gorchinski’s practice was a general accounting practice, not tax. Mr. Gorchinski suggested that they consult with Mr. Baldry and a meeting was arranged. [35]
[52] So what were the issues for which PWC’s help was being sought?
[53] Mr. Olfert testified that the issues he communicated to Mr. Gorchinski were spousal shareholdings and the Principals’ desire to undertake individual financial planning. Mr. Olfert explained that younger Principals needed cash to pay expenses but the older ones wanted to leave money in the Corporation. Yet, none of the meeting minutes, emails or consultants’ reports mention these concerns. Mr. Olfert said these concerns arose in casual conversations and at Principals’ meetings. I am not convinced these are the issues he raised with Mr. Gorchinski.
[54] Mr. Baldry described the principal issue he was consulted about as succession or transition, i.e., attracting new senior level talent and retaining existing talent to replace rainmakers seeking to retire over the succeeding few years. [36] While Mr. Baldry also referred to dissatisfaction that some Principals’ spouses were shareholders, he said he had heard about that informally from a junior Principal at the golf course.
[55] So what does the documentary evidence from that period suggest were the issues Mr. Olfert raised with Mr. Gorchinski?
[56] Mr. Baldry said that after an initial meeting with a new client he typically prepared a written summary that he sent to the client seeking confirmation that his understanding of the issues were in fact the client’s issues. This gave the client the opportunity to correct Mr. Baldry if he had misunderstood the concerns. Consistent with that practice, after his initial meeting with Mr. Olfert, Mr. Baldry prepared a written summary, bearing the title “Transition Issues,” and shared it with Mr. Olfert. [37]
[57] That summary focuses entirely on changes to share ownership and adjustments to remuneration as senior Principals transition out of the practice. [38] It describes the reduction of time commitment and share ownership by senior Principals and the financing concerns around share purchases by younger Principals given the increasing share value. [39] Despite Mr. Olfert’s testimony, Mr. Baldry’s summary does not refer to spouses or independent financial planning. Mr. Olfert confirmed the summary accurately reflected relevant issues at the time. [40] No one suggested that Mr. Baldry’s summary had not captured the issues of concern.
[58] Finally, as described in more detail below, none of the documentation provided by the Appellants from the relevant period refer to spousal shareholders as a concern. The evidence regarding individual financial planning is consistent with it being a result of the Reorganization and an advantage of it suggested to them by Mr. Baldry. There is nothing to suggest it was something the Principals had given any thought to until it was raised by Mr. Baldry.
(a) The Purchaseco Option
[59] The remainder of Mr. Baldry’s summary describes three options for transferring shares: (i) direct share sale; (ii) redemption of the selling Principal’s shares, followed by a subscription for shares by the purchasing Principal; and (iii) a transaction under which a special purpose corporation (“Purchaseco”) owned by purchasing Principals would acquire shares from the selling Principals and would be liable for the financing costs. Purchaseco would be amalgamated with the Corporation so that the interest on the acquisition financing would be deductible in computing the Corporation’s income. [41] Pros and cons of each proposal were summarized. With the exception of financing share purchases, none of the reasons for the Reorganization advanced in these appeals by the Appellants is mentioned in Mr. Baldry’s summary.
[60] Mr. Baldry also prepared another document, “A Primer on Selected Aspects of Taxation relating to Share Transactions.” [42] Mr. Baldry said he prepared it for his first meeting with Principals on February 7, 2010. Mr. Olfert, however, said he had never seen it before the appeals were instituted; he first saw it as part of preparing for the appeals. Thus, it is not clear whether it was shared with the Principals or it was something Mr. Baldry used as a speaking guide. I have accepted that Mr. Baldry prepared it for his presentation to the Principals’ meeting in February 2010. [43]
[61] This primer covers much the same material as the earlier summary with some expanded observations about tax matters: sellers of shares should be eligible for the capital gains exemption, redemptions result in an entirely different tax treatment, so vendors would prefer to sell; and purchasers are mostly concerned with financing, the deductibility of interest and tax-efficient ways to repay principal. It concluded by stating it may be possible to accommodate both sellers and purchasers through structuring and additional temporary complexity. Although the term “Purchaseco” is not used in this document, it is evident the document refers to that option.
[62] The Corporation apparently agreed to further explore the Purchaseco option. The stated advantages were that it would maintain access to the lifetime capital gains exemption for selling Principals while permitting purchasing Principals to repay the purchase debt and interest with after-tax corporate funds, rather than after-tax personal funds. Discussions continued between Mr. Olfert and Mr. Baldry between February and June and it appears the Purchaseco option was further refined by them with reference to the relevant facts. [44]
[63] The minutes for the June 15, 2010 Principals’ meeting indicate that the information necessary to finalize the November 1, 2010 share transfers had been obtained, [45] and that a decision about whether a Purchaseco would be set up needed to be made. Thus, as at June 15, 2010, no decision had been made as to whether to adopt the Purchaseco option or to proceed with the existing practice of direct sales between individuals.
[64] In late June 2010, Mr. Baldry identified a potential problem with the Purchaseco option he and Mr. Olfert were then discussing. In particular, he realized section 84.1 of the Act might apply to certain selling Principals. However, Principals who were selling all of their Corporation shares or who were not selling any of their Corporation shares would not be affected by section 84.1. On June 24, 2010, Mr. Baldry emailed Mr. Olfert identifying the issue and suggesting a solution: Principals who were selling some of their shares would not become Purchaseco shareholders but rather would remain direct shareholders of the Corporation. [46] In that same email Mr. Baldry advised Mr. Olfert that he wanted to meet with Beatty Beaubier, a tax lawyer, to discuss the issue and his solution and that, while Mr. Beaubier was away, Mr. Baldry tentatively had booked a meeting with him for his return on June 30. Mr. Baldry suggested it would be desirable for Mr. Olfert to attend if he was able to do so.
[65] Sometime after this June 24 email, Mr. Baldry met with Mr. Beaubier. [47] However, the parties could not recall whether the corporate partnership idea was raised at this meeting. I find it unlikely that it was. Mr. Baldry said he thought the discussion at the meeting was mostly about section 84.1 and his proposed solution. He also said he thought Mr. Olfert had attended the meeting as suggested. Mr. Olfert said he had first heard of the corporate partnership from Mr. Baldry, not Mr. Beatty, consistent with the partnership proposal not arising until after the June 30 meeting.
[66] Moreover, the minutes for the July 13, 2010 Principals’ meeting state that Mr. Olfert described the Purchaseco option. It is not clear which version of the Purchaseco model he described, although presumably it was the revised version reflecting the suggestion to avoid section 84.1. The minutes record the group’s reaction: “further investigation for simplicity was asked for, but probably going with current model – cash/vendor financing”. Thus, in mid-July the Principals were planning to proceed on November 1, 2010 as they had in the past – with direct sales by Principals to other individuals – because although the Purchaseco model provided some efficiencies in financing the cost of shares, [48] they were looking for something simpler. Mr. Olfert thought the corporate partnership had not been described to him before this meeting. I agree that is probable because, if it had, I would expect it to be mentioned in the minutes.
(b) The August 2010 Principals’ Meetings
[67] However, sometime before the end of July, Mr. Baldry explained the corporate partnership model to Mr. Olfert. Mr. Olfert in turn shared it with some of the senior Principals (referred to as the Executive Group [49] ).
[68] On July 27, 2010, Mr. Olfert emailed Messrs. Gorchinski and Baldry asking them to present the corporate partnership proposal to the Principals at their scheduled meeting on August 3, 2010. The tone of this email is interesting: it relates that Mr. Olfert’s description of the proposal “got them [the Executive Group] all excited,” asks the PWC partners if they are prepared to spend the long weekend preparing a presentation, and expresses a strong desire for their attendance on August 3rd because the next shareholders’ meeting would be in September, not leaving much time before the Corporation’s year end. Mr. Baldry agreed to attend and present at “a fairly high level regarding the tax attributes of the structure”.
[69] Messrs. Gorchinski and Baldry attended the shareholders’ meeting on August 3rd. Mr. Baldry had prepared, and presented, a document titled “Initial Discussion Re Corporate Partnership Possibility,” [50] together with some illustrative examples of tax results arising from it. Diagrams put up on the screen at the meeting by Mr. Baldry to illustrate the proposal, which Mr. Reeves recalled, were not part of the evidence. [51] The document outlined pros and cons of the corporate partnership structure. Some of the reasons the Appellants’ advance for the Reorganization are described as pros of the Reorganization, but not all. The possibility of multiple SBDs and substituting tax at the SBD rate or corporate rate for tax at the personal rate on salaries are mentioned in the document as pros of the plan.
[70] The illustrative examples Mr. Baldry presented are based on a Principal with a 10% ownership interest, and assumed annual earnings of $600,000. They compare after-tax cash from a $600,000 salary paid to a Principal with after-tax cash under the corporate partnership model [52] in circumstances where the Principal and spouse together receive between $100,000 and $200,000 in dividends, each as to 50%, with the balance of the income left in the corporations. Mr. Baldry explained these scenarios were ones Mr. Olfert asked for “reflecting three kinds of typical circumstances of their Principals in terms of how much money they needed to live on annually to support their lifestyle.” [53]
[71] The first column in the illustrative examples is headed “Pre-Reorg” and shows the result of a Principa