Labow v. The Queen

Labow v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2010-08-06
Neutral citation
2010 TCC 408
File numbers
2006-3533(IT)G
Judges and Taxing Officers
Eric A. Bowie
Subjects
Income Tax Act
Decision Content
Docket: 2006-3533(IT)G
BETWEEN:
STANLEY LABOW,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals heard on May 5, 6, 7, 8, 12, 13, 14, 15, and
June 4 and 5, 2009, at Ottawa, Canada
By: The Honourable Justice E.A. Bowie
Appearances:
Counsel for the Appellants:
Shelley J. Kamin and
Kimberley Cunnington-Taylor
Counsel for the Respondent:
Luther P. Chambers Q.C. and
Jennifer Neill
____________________________________________________________________
JUDGMENT
The appeals from reassessments made under the Income Tax Act for the 1996, 1997, 1998 and 1999 taxation years are dismissed, with costs.
Signed at Ottawa, Canada, this 6th day of August, 2010.
"E.A. Bowie"
Bowie J.
Docket: 2007-2496(IT)G
BETWEEN:
DANNY S. TANASCHUK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals heard on May 5, 6, 7, 8, 12, 13, 14, 15, and
June 4 and 5, 2009, at Ottawa, Canada
By: The Honourable Justice E.A. Bowie
Appearances:
Counsel for the Appellants:
Shelley J. Kamin and
Kimberley Cunnington-Taylor
Counsel for the Respondent:
Luther P. Chambers Q.C. and
Jennifer Neill
____________________________________________________________________
JUDGMENT
The appeals from reassessments made under the Income Tax Act for the 1998 and 1999 taxation years are dismissed, with costs.
Signed at Ottawa, Canada, this 6th day of August, 2010.
"E.A. Bowie"
Bowie J.
Docket: 2007-2611(IT)G
BETWEEN:
MARCANTONIO CONSTRUCTORS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals heard on May 5, 6, 7, 8, 12, 13, 14, 15, and
June 4 and 5, 2009, at Ottawa, Canada
By: The Honourable Justice E.A. Bowie
Appearances:
Counsel for the Appellants:
Shelley J. Kamin and
Kimberley Cunnington-Taylor
Counsel for the Respondent:
Luther P. Chambers Q.C. and
Jennifer Neill
____________________________________________________________________
JUDGMENT
The appeals from reassessments made under the Income Tax Act for the 1999 and 2000 taxation years are dismissed, with costs.
Signed at Ottawa, Canada, this 6th day of August, 2010.
"E.A. Bowie"
Bowie J.
Citation: 2010 TCC 408
Date: 20100806
Docket: 2006-3533(IT)G, 2007-2496(IT)G
and 2007-2611(IT)G
BETWEEN:
STANLEY LABOW, DANNY S. TANASCHUK
and MARCANTONIO CONSTRUCTORS INC.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bowie J.
[1] The appeals of Stanley Labow, Danny Tanaschuk and Marcantonio Constructors Inc. (“MCI”) from reassessments under the Income Tax Act[1] (the Act) were heard consecutively over a total of 10 days. Parts of the evidence of two witnesses, William Johnston and Sylvain Parent, were, by agreement of the parties, common to all three proceedings. The facts in each case, although not identical, are similar, and a number of the legal issues are common to all.
[2] The Minister of National Revenue (the Minister) raised the reassessments under appeal as a result of the participation by each of the appellants in what were referred to in the evidence as group sickness and accident insurance trusts and plans I shall refer to these as the trusts and the plans. By the reassessments the Minister denied to the appellants the deductions from income that they had claimed on account of their accrued liabilities to the trusts arising out of the plans. In the case of Stanley Labow, the reassessments also included in his income for each of the taxation years 1997, 1998 and 1999 the income of the trust attributable to his contributions to it. In the case of Danny Tanaschuk the reassessments under appeal did not include trust income in his income, but the reassessment for 1999 disallowed his claim to deduct professional fees associated with the trust. In the case of MCI, the reassessments only disallowed the contributions to the trusts. The amounts in issue in each of the appeals are the following:
Name
Year
Amount
Explanation
Labow
1996
$150,000
Contribution to the Trust disallowed
1997
247,691
Contribution to the Trust disallowed
1,320
Trust income attributed to the appellant
1998
23,646
Trust income attributed to the appellant
1999
47,619
Trust income attributed to the appellant
Tanaschuk
1998
$149,000
Contribution to the Trust disallowed
1999
171,000
Contribution to the Trust disallowed
9,735
Professional fees disallowed
Marcantonio
1999
$544,500
Contribution to the Trust disallowed
2000
709,500
Contribution to the Trust disallowed
[3] It is common ground that these reassessments were all made beyond the normal reassessment period defined by subsection 152(3.1) of the Act. The respondent relies on subparagraph 152(4)(b)(iii), and in the alternative subparagraph 152(4)(a)(i), to justify the reassessments. The reassessments having been made outside the normal reassessment period, the respondent has the onus of proof in respect of the Minister’s entitlement to raise the reassessments. What must be proved is either a misrepresentation that is attributable to neglect, carelessness, or willful default, or fraud, in relation to the subject of the reassessments, or alternatively, that the taxpayer and the trustees were not dealing with each other at arm’s length.
[4] Prior to the scheduled trial date, the respondent brought a motion seeking a ruling as to the order in which the parties should lead evidence at trial. The respondent’s view was that the appellants should lead their evidence first, notwithstanding that the reassessments were made outside the normal reassessment period, and notwithstanding the judgment of Bowman J (as he then was) in Farm Business Consultants Inc. v. The Queen.[2] The motion was dismissed, and the respondent filed a Notice of Appeal to the Federal Court of Appeal. To avoid the inevitable delays that this appeal would cause, the appellants elected to lead their evidence first. As a result, the trials proceeded before me with the appellants’ witnesses testifying before any evidence was called by the respondent. At the conclusion of the appellants’ evidence, the respondent elected not to call any witnesses. As Bowman J. pointed out in Farm Business Consultants, the respondent, if required to call evidence first, could, and doubtless would, have called the individual appellants and Mr. Filoso, a director of MCI, and cross‑examined them pursuant to Rule 146. The evidence before me would have been essentially the same.
[5] At the trial all the appellants specifically waived the privilege attaching to their communications with Mr. Johnston as to the trusts and plans.
[6] Unlike employee pension plans, employer contributions to employee sickness and accident insurance plans are not accorded special treatment under the Act. The appellants’ claims to deduct their contributions to these plans are based on the proposition that the contributions are ordinary business expenses, laid out for the purpose of gaining or producing income, the deduction of which is not prohibited by any provision of the Act.
[7] The respondent argues that the contributions are not deductible expenses on a number of alternative grounds.
(i) The trusts and the plans were shams;
(ii) The contributions were not laid out for the purpose of gaining or producing income;
(iii) The contributions were payments on account of capital;
(iv) The amounts of the contributions to the trusts were unreasonable;
(v) The amounts were contributions to employee benefit plans, the deduction of which is prohibited by paragraph 18(1)(a) of the Act.
(vi) If the contributions were in fact contributions to genuine employee group sickness or accident insurance plans, they were consideration for insurance in respect of years after the years in which they were paid, and so not deductible by reason of subparagraph 18(9)(a)(iii) of the Act.
The respondent asserts that the income of the trust in the years 1997, 1998 and 1999 is properly attributed to Dr. Labow by the operation of subsection 75(2) of the Act.
[8] As to Danny Tanaschuk’s claim that he is entitled to deduct professional fees paid in connection with the trust funds from his income, the appellant’s position is that they were amounts expended for the purpose of gaining or producing income, and so deductible. The respondent’s position is that their characterization should be determined according to the characterization of Dr. Tanaschuk’s contributions to the trust.
[9] These three appellants are among some 75 clients of William Johnston, an Ottawa solicitor, for whom he has established similar plans, ostensibly to provide medical and disability insurance to selected employees of the clients. Mr. Johnston gave evidence, applicable to all three proceedings, in which he described in some detail the background to the establishment of these plans, and specifically how he and Sylvain Cloutier, an actuary, adopted and developed the concept of creating the plans for small entrepreneurial clients. Mr. Johnston has considerable experience in establishing pension plans for this type of client, and in his evidence he described disability insurance plans as being similar to pension plans in that both have income replacement as their goal. I think it is fair to say that Mr. Johnston views it as a serious flaw in Canada’s tax policy that there is specific provision in the Act for the establishment of registered pension plans with favourable income tax treatment, but no analogous legislation to provide for health and disability insurance plans. His plans are, in his mind, designed to remedy this statutory lacuna.
[10] Contributions to employee medical and disability insurance plans are, of course, deductible from income under the provisions of the Act, provided they satisfy the requirement that the expenditure is made for the purpose of gaining or producing income from the employer’s business, and that they are not prohibited by some other provision of the Act. The Canada Revenue Agency has published its view of the relevant law in an Interpretation Bulletin.[3] From Mr. Johnston’s evidence I understand that he considers the CRA view of the law to be unduly restrictive. Clearly, the respondent considers that the plans established by Mr. Johnston do not qualify for the deduction of contributions. These are not test cases in any formal sense, but it is obvious that a significant number of taxpayers who have established similar plans in similar circumstances will be affected by their ultimate outcome.
[11] I should say, in fairness to Mr. Johnston, that both in his reporting letters to his clients and in his evidence before me, he expressed the view that if at some future time one of his plans were to be terminated and the funds returned to the employer, then the amounts contributed to the trust and deducted by the employer in computing income would have to be taken into income by the employer at that time. The tax benefit in that case, therefore, would be in the nature of a postponement of the incidence of tax until that later event took place.
[12] In each of these cases the appellants had an existing relationship with an accountant who introduced them to Mr. Johnston, who offered to establish a plan for them. In brief, the elements of establishing such a plan consist of the following:
(a) the creation of a trust, the trustee being a trust company in either the Cayman Islands or Bermuda, to hold and invest the funds contributed by the employer, and to make payments of benefits under the plan in accordance with its provisions;
(b) the creation of a plan, in which an employer can elect to participate in respect of one or more specific named employees, with specific provisions as to the benefits to be paid from the trust fund. There can be more than one employer participating in a plan and contributing to the trust associated with it, but in that case the trustee is required to maintain separate accounts for each employer, and to make any payments of benefits only from the account of the employer of the recipient of the payments. The potential benefits to employees are income replacement in the event of inability of the employee to work due to sickness or accident, and payment of medical, dental and vision care expenses for the employee and the employees dependants, to the extent that they are not payable under some other health care scheme. Disability benefits are funded by contributions during the first and second year of the employer’s participation in the plan, in amounts determined by an actuary. Medical, dental and vision care expenses are funded by the employer on a pay-as-you-go basis, which is to say that the trustee pays these claims and then invoices the employer for the amount paid;
(c) an election by the employer to participate in the plan, naming the employee (or employees) who are to be entitled to benefits under the plan, and agreeing to make contributions to the trust fund according to the recommendation of the actuary. In the case of Marcantonio the plans were specific to one employer. Two trusts (the MGAS trust and the 509 trust) were created to fund the plans. The only members of the plans were two of the directors of Marcantonio and each plan was funded with a single contribution;
(d) an actuarial valuation prepared by the firm Welton Beauchamp, Parent, Inc. quantifying the contributions required to be made by the employer to the Plan to fund the disability benefits; and
(e) one or more invoices from the trustee to the employer, in the amounts recommended by the actuary, which, under the terms of the plan, created the liability of the employer to make the contributions, and payment of those invoices by the employer.
There are some differences in the documents created for these three taxpayers, but there is also a high degree of similarity among them. I conclude from the evidence of Mr. Johnston that it was his intention that all of these schemes should work in essentially the same way, and that the differences in the documentation simply represent evolution of the precedents that he used.
[13] Mr. Johnston and Mr. Parent gave evidence for the appellants, some of which was an overview of their development of these and similar plans. By agreement of the parties, this formed part of the evidence of all three appellants. Mr. Johnston also gave evidence that was specific to each of the three appellants’ cases, and Mr. Parent and Joann Williams, an actuary employed in his office, testified specifically in relation to the actuarial advice that they gave in each case. Mr. Parent gave that advice in relation to Dr. Labow’s plan, and Ms. Williams gave the advice in relation to the other two plans. Dr. Labow and his wife Rosalind Labow testified in the Labow case, as did Dr. Tanaschuk in his case and Dominic Filoso in the Marcantonio case. No witnesses were called by the respondent.
[14] Under these circumstances, I am required to decide on the preponderance of the evidence before me whether the facts bring the case within subparagraph 152(4)(a)(i) or subparagraph 152(4)(b)(iii) of the Act, and on that basis whether the Minister was entitled to reassess as he did. In view of the nature of Minister’s allegations, consideration of the question whether the taxpayers made any misrepresentation that is attributable to neglect, carelessness or willful default, or committed any fraud in filing their returns, necessarily requires an examination of the true nature of the contributions that they made to the trusts: see Lacroix v. The Queen.[4]
the Labow appeals
[15] Stanley Labow is a surgeon with a busy practice in the city of Ottawa. He was reassessed for the taxation years 1996, 1997, 1998 and 1999 to disallow the deductions that he had claimed for his contributions to the trust in 1996 and 1997, and to include the income of the trust on his contributions to it in his income for 1997, 1998 and 1999.
[16] At the relevant time, he was chief of plastic and reconstructive surgery at the Ottawa Hospital, and an assistant professor of surgery at the University of Ottawa Faculty of Medicine. He did not have an office in the hospital, but carried on his practice at an office nearby which he shared with another surgeon. He had three employees during the years with which these appeals are concerned, all of whom worked for him on a part-time basis. One of these was his wife, Rosalind Labow. The other two were unrelated to him, and each of them worked half-time. They shared a job, the main duties of which were booking appointments for patients and operating room time, recordkeeping and the general office correspondence. Rosalind Labow has a PhD in bio-chemistry and is on the faculty of the University of Ottawa, where she runs a research laboratory at the Heart Institute. Her salary from the University in 1996 and 1997 was approximately $80,000 per year. In addition to that she worked about 20 hours per week for her husband, for which she was paid $20,000 per year. This work consisted of keeping Dr. Labow’s curriculum vitae up-to-date, and ensuring that it was updated appropriately with the University, the medical associations and other accrediting bodies, looking after the financial aspects of his practice, and acting as his liaison with his accountant, Mr. Katz, and his office staff.
[17] At some time in the fall of 1996, Mr. Katz introduced the Labows to Mr. Johnston and suggested that Dr. Labow consider establishing a plan for his wife. The suggestion was adopted, and the trust and the plan that resulted are at tabs 1 and 2 of Exhibit A-1. They are a document styled Memorandum of Agreement, dated October 21, 1996, that was entered into between “William Johnston on behalf of all Participating Employers” and Royal Bank of Canada Trust Company (Cayman) Limited (“RBCC”) as Trustee, and a Health and Welfare Insurance Plan executed by William Johnston (presumably on behalf of the participating employers) and effective October 31, 1996. It is said in the Trust Agreement that the Plan is annexed to it as Schedule “A”, and certainly the two must be read together.
[18] The trust agreement creates a trust fund consisting of the employer contributions, and the income from them, to be administered by the trustee. The fund is to be used exclusively to provide benefits to the participating employees and their dependants. The trustee is given the usual powers to invest the funds, and has the usual duty to keep records and to account. The employer is given the right to replace the trustee upon one month’s written notice. Paragraph 8(c) of the trust agreement provides:
8(c) The Employer and any person claiming by, through or under the Employer shall have no right, title or interest in or to the Trust Fund or any part hereof nor any claim against the Trustee in respect of the Trust Fund, it being the intent that all contributions made by the Employer or for which it is liable shall be free of any interest or claim whatsoever of or by the Employer and no part of the contributions shall be returned to the Employer or be subject to the debts, liabilities or obligations of the Employer or be considered part of the assets or property of the Employer.
Paragraph 9 provides that the employer and the trustee may, by agreement, amend the trust agreement.
[19] Article II of the Plan provides that its purpose is to make dental insurance, disability benefits, and eligible medical expense benefits available to certain employees of participating employers, and the dependants of those employees, and that the trust fund is to be used for that and no other purpose. Participating employers are employers who have filed a written notice that they will participate in the Plan.
[20] Article 9.01 of the Plan provides that the employer “shall select, from time to time, a Trustee to administer the Plan”, and that the trustee must be independent of the employer. Article 9.03 provides that the trust funds “shall not from [sic] any part of the revenue of [sic] assets of any Participating Employer”, and that the funds may only be used for the benefit of participating employees and their dependants. Article 9.04 provides that;
9.04 The Assets of each Participating Employer shall be kept separate from the assets of all other Participating Employers and shall be used only for the purpose of providing benefits payable hereunder to Participating Employees of the Participating Employer.
[21] Those benefits are specified in Article V. A participating employee who is unable to work because of sickness or accidental injury is entitled to income replacement benefits equal to 75% of weekly earnings up to age 70. A participating employee, and dependants of the employee, are entitled to reimbursement for dental, medical and vision care expenses that are not otherwise reimbursed by a provincial medical insurance plan. The entitlement to benefits is limited by paragraph 5.6, however:
5.6 Notwithstanding any other provision of this plan, benefits are only payable to an employee to the extent that the Employers [sic] Participating Account, as determined solely by the Administrator, has sufficient assets to make such payment or part payment.
[22] The funding of benefits is governed by Article VII.
ARTICLE VII
PAYMENT OF BENEFITS
7.01 The Employer shall, from time to time, make such payments to the Trustee as shall be necessary to provide the benefits referred to in Articles V and VI hereof. The Trustee shall, each year, send an invoice for payment of the amount recommended by the actuary for that year. The Employer shall, upon receipt of the invoice, be immediately liable to pay the invoice.
7.02 The benefits referred to in Articles V and VI hereof shall be funded by the Employer by contributions payable at such intervals as may be agreed upon between the Employer and the Trustee. All contributions hereunder shall be credited to the Participating Employer’s Account. Such contributions shall be in the amounts sufficient to fund for such term as the Actuary considers appropriate under accepted actuarial principles, the total disability benefits to be provided and shall be maintained in a segregated account by the Trustee. The Trustee shall cause to be prepared from time to time (but not less than every three years) an actuarial valuation of the segregated account by an actuary who is a Fellow of the Canadian Institute of Actuaries or the Society of Actuaries. Employer contributions may only be made on the basis of such actuarial valuation.
The effect of these limitations (and of paragraph 9.04) is that a claim by an employee, whether it is for income replacement in the case of disability, or for dental, medical or vision care expenses, can only be paid from the contributions to the trust made by the employer of that employee, and any income produced by those contributions.
[23] Article XI of the Plan is headed modification or termination of the plan, and it is of sufficient significance that I reproduce it here in its entirety:
ARTICLE XI
MODIFICATION OR TERMINATION OF THE PLAN
11.01 A Participating Employer has agreed to participate in this plan for the benefit of their Participating Employees and has the expectation that it will continue indefinitely but reserves the right at any time and for any reason whatsoever and [sic] to cease their participation in the Plan in whole or in part; provided that no amendment shall increase the duties or liabilities of the Trustee without their written consent and provided further that there shall be no amendment of section 11.02 hereof without the prior approval of the Trustee and all then Participating Employees.
11.02 The discontinuance of contributions of itself shall not constitute termination of an Employee’s Participation in the Plan but in the event that the Employer has notified the Trustee of its intention to terminate their participation in the Plan, the Trustee shall, with all reasonable dispatch, use and apply the assets remaining in the Participating Employer’s Account held in the Trust Fund, firstly, for the purpose of paying all reasonable and necessary expenses incurred in the termination of the employer’s participation, and secondly to satisfy all outstanding liabilities that may exist prior to the date of termination. Any balance remaining in the Participating Employer’s Account which cannot be so applied shall be refunded to that Participating Employer.
11.03 Notwithstanding any other provisions of this plan, a Participating Employer has absolutely no interest in law or equity in any assets held in any other Participating Employer’s Account under this plan. The interest of a Participating Employer is limited to the assets held [sic] that Employer’s Participating Employer Account.
11.04 When no property remains in the hands of the Trustee, the Plan shall terminate.
[24] Mr. Johnston and Mr. Parent described the way in which the required contributions to the trust were determined. Once the decision had been made that an employer would enter into a Plan for an employee, the employer would establish the amount that he could afford to contribute to the plan in the first year, and he would advise Mr. Johnston of this, and of the particulars concerning the sex and age, and the salary of the employee. Mr. Johnston would pass this information on to Mr. Sylvain Parent, or Ms. Joann Williams. Mr. Parent is the principal of the firm of actuaries Welton Beauchamp, Parent Inc., and Ms. Williams works for that firm. They are both Fellows of the Society of Actuaries. For each employee covered by a Plan, one or other of them would calculate the contributions that the employer had to make to the trust in order to fund the potential liability of the trust in the event of a disability claim by the employee. Crucial to this calculation is the assumption made by the actuary as to the event of a claim, and its timing.
[25] Mr. Parent explained that as the actuary charged with advising the Trustee as to the required contributions, it was his duty to base his calculations and his advice on conservative assumptions as to future claims. Generally, the contributions were payable in two annual installments, and Mr. Parent and Ms. Williams discharged their duty by assuming that the participating employee would be totally disabled at the end of the second year of the Plan, and would remain so until age 70 when the benefit period expired. Having made this assumption, and assumptions as to the rate of income that the fund would produce and the rate of inflation, it required only a simple calculation, applying an actuarial table to account for the possibility that the disabled employee would not live until the end of the benefit period, to establish the sum required at the assumed date of disability to fund the payments to age 70. Once that amount was established, and the employer had specified the amount of the first year contribution, another simple calculation established the amount that the employer was required to contribute in the second year.
[26] One other assumption was required in order to arrive at the quantum of the contributions. In most cases, Mr. Johnston advised the actuaries that they should assume that a 50% rate of taxation would be applied to earnings of the trusts.
[27] Article VII of the Plan provides that the trustee shall invoice the employer in the amount recommended by the actuary, whereupon the amount immediately becomes due and owing. It was this invoice that created the liability to the trust that the appellant recorded as a payroll cost. Exhibit A-1 Tab 5 is the Actuarial Valuation prepared by Sylvain Parent on December 5, 1996, “as at January 1, 1996” for Dr. Labow’s plan. Mr. Parent calculated the required contributions to be made by Dr. Labow in respect of the coverage for his wife based on these assumptions:
Interest rate: 7% per annum net of expenses;
Salary increases: 5.5% each year;
Inflation: 4.0% annually;
Mortality: none prior to disability, and GAM 1983 after disability; and
Incidence of disability: total permanent disability occurring at the end of the second year following the valuation date.
[28] Mr. Parent’s evidence was that he was told either that the disability benefit for Rosalind Labow was to be $29,000, or that Dr. Labow’s total contribution to the plan was to be $400,000. He could not remember which. It is improbable that he was told that the benefit was to be $29,000; that could only be so if her income from Dr. Labow was $38,667. I am satisfied that the first year contribution had been fixed by Dr. Labow at $150,000, and that Mr. Parent was told that the total contribution was to be $400,000. His computation was made in order to establish that this would support a benefit of at least $15,000, which in fact it would. In fact, the contribution of $397,696 recommended by Mr. Parent in his valuation was almost double the amount that would have been required to provide disability payments at the maximum level provided for in the Plan.
[29] Having taken the decision late in 1996 to follow the advice of Mr. Johnston and Mr. Katz, and having determined that he would fund the trust in the first year to the extent of $150,000, Dr. Labow signed a Notice of Participation on December 3, 1996. It specified that his wife Rosalind Labow was to be his only employee entitled to benefits under the Plan, and it made explicit reference to Dr. Labow’s right to terminate the plan according to Article XI. On December 5, Mr. Parent signed his actuarial valuation. For some reason that the evidence does not explain, the trustee issued its invoice to Mr. Johnston on December 1, 1996, before the Notice of Participation had been signed by Dr. Labow, and in the amount of $75,000 rather than $150,000. It is clear, however, that Dr. Labow did in fact remit to the trustee the first year contribution of $150,000 and the second year contribution of $247,696.
[30] Some time in 1998 Mr. Johnston, exercising his powers under paragraph 5(c) of the trust, removed RBCC as trustee and appointed Continental Trust Corporation Limited of Hamilton, Bermuda as the new trustee in substitution for it. The evidence of Stanley and Rosalind Labow makes it clear that this was done at their request, if not insistence. They were, it seems, distressed by the large number of communications regarding financial transactions in relation to the trust fund that the trustee was sending to them, The concern went beyond that, however. As Rosalind Labow put it in her evidence:
… we had some concern about the way the RBC Trust Cayman was handling our funds and we spoke to Gary [Katz] who spoke to Bill [Johnston] and at some point in time Bill made a decision to change our participation in the trust company and chose another.[5]
[31] As I have said above, the question whether there has been a misrepresentation of the kind contemplated by subparagraph 152(4)(a)(i) can only be considered in the light of the particular circumstances of the case. That requires a consideration of the question whether Dr. Labow made the two contributions to the trust for the purpose of gaining or producing income from his medical practice. In my view the answers to the latter question is in the negative, for the reasons that follow.
[32] The reliability of witnesses who have a substantial stake in the outcome of the proceedings in which they give evidence cannot be taken for granted, but must be tested against the known objective facts. The following passage from the judgment of O’Hallaran J.A. in R. v. Pressley[6] was recently adopted by Newbould J. in Fiorillo v. Krispy Kreme Doughnuts, Inc.:[7]
The Judge is not given a divine insight into the hearts and minds of the witnesses appearing before him. Justice does not descend automatically upon the best actor in the witness-box. The most satisfactory judicial test of truth lies in its harmony or lack of harmony with the preponderance of probabilities disclosed by the facts and circumstances in the conditions of the particular case.
This approach to the evidence commends itself to me, as it did to Justice Newbould.
[33] There are more than a few circumstances of this case that are inconsistent with the appellant’s contention that Dr. Labow became a participating employer in the Plan, and funded the trust to the extent of almost $400,000, for the purpose of gaining or producing income.
[34] First, there was no commercial reason for Dr. Labow to spend $400,000 to provide Rosalind Labow with disability and medical insurance. She had worked for him for many years without it, and he had no reason to think that she would not continue to do so. She had no need for insurance. She had disability insurance through the university that would provide her with more than $50,000 per year in the event of disability. Moreover, any benefits that Rosalind might ever receive under the Plan could only be paid from the funds contributed to it by her husband (together with any accretions through income or capital gain produced by those contributions). Articles 5.6 and 9.04 of the plan make it very clear that no employee covered by the plan can ever be paid benefits except from the contributions of that employee’s employer. It is difficult to see how there could be any commercial purpose to Dr. Labow entering into such an arrangement. This plan did not provide the usual benefit of risk sharing that is the hallmark of insurance contracts, where many people contribute to a fund that pays benefits only to the unfortunate few who suffer a loss.
[35] Second, the appellant did not make a considered judgment as to whether entering into the plan could be of commercial benefit to his practice, or as to whether he should extend the “coverage” to his other secretaries. Rosalind was paid somewhere between $65 and $80 per hour; his other two secretaries were paid much less per hour of work. There is no reason to believe that Rosalind, had she chosen to stop working for her husband, could not have been easily replaced by someone competent to do the work she did at the same or a lesser rate of pay. The fact that he did not extend the benefit of the plan to his two part-time secretaries itself suggests that the coverage of Rosalind under the plan was a personal and not a commercial matter. The appellant’s only reason for entering into the plan for Rosalind’s benefit, according to his own evidence, was because Mr. Katz and Mr. Johnston recommended it. I infer that their recommendation had much more to do with tax planning than with human relations considerations.
[36] Third, the appellant did not attempt to compare the “cost” of Mr. Johnston’s plan with the cost of purchasing similar coverage for his wife from an insurance company. This would be remarkable indeed if Dr. Labow had considered that his contributions to the plan were an expenditure rather than an off-shore investment. It seems unlikely that he would have spent $400,000 for a benefit that his wife really had no need for without some comparative data, if it had truly been an outlay in the nature of an expense and not simply a way of accumulating capital in a tax-free jurisdiction.
[37] Fourth, Dr. and Mrs. Labow clearly considered the funds held in the hands of the Trustee in the Caribbean to be their funds. They exhibited concern about the number of trades entered into by RBCC. In her evidence-in-chief, Rosalind Labow spoke of the concern that she and her husband had about “… the way that RBC Trust (Cayman) was handling our funds…”. In considering contribution to the trust, the question never was “how much do I have to pay to provide a key employee with a benefit?” Rather it was “how much do I want to contribute to the trust fund?” That is why Dr. Labow actually contributed almost twice the amount that would have been necessary to provide the defined maximum benefit under the plan. No one seems to have noticed that Mr. Parent calculated the required contribution on the basis of a salary of $39,000, rather than Rosalind’s actual salary of $20,000. Such a mistake would surely have been detected if the transaction were a true purchase of insurance rather than a means of off-shore saving.
[38] Whether Dr. Labow’s intention was simply to accumulate wealth in a tax‑free jurisdiction, or was to provide medical and disability insurance benefits to his wife as he maintained in his evidence, his contributions to the trust were not made for the purpose of gaining or producing income. I do not believe that his motivation was to provide his wife with medical and disability insurance, but, even if that were so, it was certainly not in the capacity of employee, but rather in the capacity of wife, that he provided her with the benefits. He would never have made contributions of this magnitude to a trust to benefit an arm’s length employee[8].
[39] The circumstances satisfy me that Dr. Labow decided to participate in the plan, and made his contributions to the trust, for purely personal reasons having nothing to do with gaining income from his medical practice, and that as a result the contributions do not qualify as expenses of the business and are not deductible in computing the profit from the business.
[40] There remains the question whether the Minister was entitled to assess Dr. Labow beyond the three-year normal reassessment period. Subparagraph 152(4)(a)(i) of the Act reads:
152(4) The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, except that an assessment, reassessment or additional assessment may be made after the taxpayer’s normal reassessment period in respect of the year only if
(a) the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to neglect, carelessness or willful default or has committed any fraud in filing the return or in supplying any information under this Act, or
This provision is limited in its effect by subparagraph 152(4.01)(a)(i):
152(4.01) Notwithstanding subsections (4) and (5), an assessment, reassessment or additional assessment to which paragraph (4)(a), (b) or (c) applies in respect of a taxpayer for a taxation year may be made after the taxpayer’s normal reassessment period in respect of the year to the extent that, but only to the extent that, it can reasonably be regarded as relating to,
(a) where paragraph 152(4)(a) applies to the assessment, reassessment or additional assessment,
(i) any misrepresentation made by the taxpayer or a person who filed the taxpayer’s return of income for the year that is attributable to neglect, carelessness or willful default or any fraud committed by the taxpayer or that person in filing the return or supplying any information under this Act, …
[41] Dr. Labow’s income tax returns for the taxation years 1996 and 1997 certainly contained misrepresentations as to the amount of his professional income. His return for 1996 discloses his professional income both in the Statement of Professional Activities (Form T2032) that is part of the printed T1 General Individual Income Tax Return (the T1), and in financial statements for the practice prepared by Mr. Katz and appended to the T1. In 1997, the Form T2032 simply shows the net professional income declared of $86,820 “as per F/S”. The computation of it is revealed only in the financial statements appended. In 1996, he declared professional income of $135,147 and in 1997 of $86,820, in contrast to the $321,665 that he had declared in 1995. The major element causing this substantial decrease in his pro