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Citation: 2005TCC230
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Date: 20050401
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Docket: 2004-2977(IT)I
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BETWEEN:
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TERRANCE O'FLYNN,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent,
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Docket: 2004-2979(IT)I
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AND BETWEEN:
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RICHARD STANTON,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent,
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Docket: 2004-2980(IT)I
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AND BETWEEN:
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PRISM FLOW PRODUCTS INC.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
MargesonJ.
[1] It was agreed at the outset that
these matters would all be heard on common evidence.
[2] In the taxation years 1999, 2000
and 2001 the Minister reassessed the Appellant, Terrance
O'Flynn, for amounts paid on his behalf to Alberta Dental
Service Corporation ("ADSC"), as benefits
received from 674418 Alberta Ltd. through
Prism Flow Products Inc.
("Corporation"). The Minister alleged that the
Appellant was a 50% shareholder of the shares of 674418
Alberta Ltd. and by virtue of his capacity as a shareholder
directed the Corporation to make the payments to ADSC for his
benefit.
[3] Likewise, for the same year, the
Minister reassessed the Appellant, Richard Stanton, to add
to his income amounts received from 674420 Alberta Ltd.
through the Corporation. The Minister alleged that
Richard Stanton and his wife each owned 50% of the shares of
674420 Alberta Ltd. and by virtue of his capacity as a
shareholder Richard Stanton directed the Corporation to make the
payments to ADSC for his benefit.
[4] With respect to the Appellant
Corporation, the Minister reassessed it for the taxation years
2000 and 2001 to disallow expenses paid to ADSC in the amounts of
$5,870 and $5,400 claiming that the payments were solely for the
benefit of Terrance O'Flynn and Richard Stanton.
[5] The Minister further reassessed
the Appellant Corporation by denying expenses in the amounts of
$9,284 and $9,299 alleging that these payments were solely for
the benefit of Terrance O'Flynn and Richard Stanton. The
Minister relied upon the provisions of paragraph 18(1)(a)
of the Income Tax Act ("Act"), alleging
that these expenses were not incurred for the purpose of gaining
or producing income from a business or property.
[6] Richard Stanton testified that the
Corporation sells valves and oil field equipment for the oil and
gas industry throughout the country but it is mostly centred in
western Canada, particularly in the province of Alberta. He and
Terrance O'Flynn were 50% owners in the Corporation. He was
more involved in sales and marketing new products while Terrance
O'Flynn was more involved with the banking side of the
business. The Corporation has a warehouse office facility which
contains their inventory. He was familiar with the issues before
the Court with respect to the assessed benefits and the insurance
policies.
[7] From the beginning the Corporation
had a "Quik Card" policy which was paid into by the
Corporation to provide health benefits to staff members. In the
early days the Corporation was having difficulty attracting
valuable staff members to the business because it had no benefit
package in place. This was of concern so it had to implement a
satisfactory benefit package.
[8] When prospective employees were
interviewed these benefits would be discussed. This witness
attended all of these interviews. He could not remember all of
the employees but was familiar with Ray Van Twuyver who he said
was employed there in the year 2000. He interviewed him. The
question of benefits did not come up at that interview. This
worker was looking to make a change from his then employer,
Canada Bread Company. He did not remember if other items came up
at that meeting or not.
[9] During the interviews Terrance
O'Flynn discussed the benefit package with the prospective
employees. This included wages, benefits and holidays. Terrance
O'Flynn was more involved in hiring specific individuals.
[10] Richard Stanton was referred to
Exhibit A-1 which was an insurance policy, number
H0951020. This was a policy with Maritime Life Assurance Company
and he was the named insured. It came into effect on August 12,
1996.
[11] He identified Exhibit A-2 which was a
life insurance policy number H0978020 in which he was also
the named insured. This showed the Corporation as the owner. The
policy was with Maritime Life Assurance Company and dated
December 23, 1999. He did not know why it was obtained in
the first place. They had received advice about obtaining it.
Terrance O'Flynn dealt with the insurance issues.
[12] In cross-examination he was
referred to Exhibit R-1 which was a List of Employees of the
Corporation for the years 1997 to 2001. He was not aware of the
dental package but it would have been explained by their broker.
There was a three month waiting period before one could take
advantage of the benefits in this plan. He was referred to the
name Greg Smith who was a full-time office employee and was
shown to be included on the Zurich plan after three months. He
explained that this person was not included on the plan during
the review period because he had not been employed there long
enough at that time.
[13] Some of the prospective employees did
not want to go on to the dental plan because their spouses had
plans. Details of the plan would not be discussed. This witness
was present at the interviews. No notice was sent to the workers
telling them that the three months had expired and they were now
eligible to take advantage of the plan. No documents were sent
out explaining the dental plan to prospective workers.
[14] Exhibit R-2 was a statement from ADSC
to the Corporation showing what payments were made by the
Corporation under the dental plan. The cardholders referred to
there were himself, his son, Terrance O'Flynn and his
children. These were the only people who benefited from the plan
for the period 01/10/2000 to 31/01/2001.
[15] Exhibit R-3 was an agreement between
ADSC and the Corporation with respect to dental plan group number
1957-XX. This covered the benefits in effect during the period in
issue. He was referred to in paragraph 10 of the agreement which
required that "The Employer shall compile and furnish to
ADSC on or before the first day of each month that this Agreement
is in force a list of all Eligible Members showing the unique
identification number of the employee, the name, date of birth
and sex of the employees, and the names, dates of birth and sex
of all dependents of the employee." He did not know whether
this list was ever furnished to ADSC.
[16] Appendix "A" attached to the
agreement was a list of benefits payable under the plan. It
provided for 100% recovery at current suggested rates with a
$1,000 maximum per year, per family. This covered basic and major
services combined.
[17] Appendix "B" showed how the
monthly payments to the insurance company were to be calculated.
This was based upon the estimated average annual claims and
administration overhead charges. Using these projections they
calculated an estimated annual cost which was divided by 12
months and remitted in total monthly payments of $140. He agreed
that the more people that were on the list the more the cost
would increase. The fewer number on the plan, the amount would be
reduced and the premium would likewise be reduced.
[18] He was referred to the last page of
Exhibit A-1 and said that the proposed insured was
Richard Stanton and that according to the designation the
insured was the proposed owner unless it was indicated otherwise.
That slot was not filled in.
[19] He was also referred to Exhibit A-2 at
page 6.1 which indicated "that the owner of the policy may
exercise all the rights, options and privileges granted by this
policy or permitted by us". It also provided that the
beneficiary could be changed by the owner at any time.
[20] He confirmed that an amendment to the
application indicated that his salary was based upon 50% of the
profit of the Corporation and that his personal salary was at
least $100,000 on average in 1997, 1998 and expected to be the
same in 1999. He also agreed that the policy provided that the
benefits were taxable to the beneficiary, which was him.
[21] In redirect he said that he could not
say if Terrance O'Flynn met with the candidates for
employment alone or not. He did not know if notice of eligibility
was sent out after three months.
[22] Terrance O'Flynn testified that the
Corporation was primarily involved in selling valves to oil
companies. It commenced operation in September of 1995. It has
grown over the years. It started with three partners in business
with $1,000,000 annual sales. This has increased to 12 to 14
employees with $10,000,000 in sales. The employees of the
Corporation came in over a period of time.
[23] The Corporation was always looking for
"value added" employees. It was always a challenge in
the business. It took the Corporation two to three years to
really start growing. When a prospective employee is considering
coming with the Corporation, they have questions involving
security, whether or not the Corporation would be successful in
the long term, wages, the benefits, holidays and where their
office was located. The hardest condition to meet for the
employees was that of security, the so-called "sound
company syndrome" and the matter of benefits. When they
talked about benefits, especially to sales people, the matter of
the health plan, salary and holidays always came up.
[24] In the early days the Corporation was
unable to provide the benefits that prospective employees sought
and consequently they lost some very good candidates. Later they
tried to do something about it. They listened to suppliers of
plans and instituted the first dental plan.
[25] He referred to Exhibit R-3 and said
that that was a dental plan which was taken out as of June 1,
1996. It was noted that the Corporation had not signed the
agreement with ADSC and he could not explain why that was so.
However, the Corporation was covered by it. Any person who had
passed the probationary period was eligible to join the plan.
[26] He was referred to Exhibit R-1, the
list of employees of the Corporation and said that
Bryce Readman had the plan explained to him. He was not
interested in it. Catherine Forester was aware of it and had it
explained to her. She did not participate in the plan. She was to
be covered by her future husband's plan.
[27] Dennis Halisky was informed about the
policy and he declined it. His wife had a good plan and he was
happy with it. Tammy Marrazzo was told about the plan as well.
She was very temporary. She was not eligible for the plan.
[28] The normal probationary period for the
plan was three months. There were some exceptions. An experienced
person may start right away. If they designated a person as
temporary, benefits would not be available to that person.
[29] Linda Carstairs was advised of the
plan. She was not interested in it. Her husband had a plan
covering them. She is now the controller of the Corporation and
the office manager.
[30] Doug Munro was advised and he was not
interested. Ray Van Twuyver was advised about the plan but he
declined it. He had other coverage with his old employer (Canada
Bread Company).
[31] Greg Smith and Ty Sanders were advised
about the plan as well. They came into the employ of the
Corporation when it was talking about increasing its coverage
with Zurich Insurance Company. These persons never signed up for
the dental plan but they did for the Zurich plan. It came into
effect in February 2001.
[32] The corporate policy was that if a
person declined coverage it was not a final thing. They would
have been allowed to join later if they changed their mind.
[33] He was referred to Exhibit A-3, which
was the insurance plan between the Corporation and Maritime Life
Assurance Company. The person insured was himself. It came into
force on August 12, 1996. Exhibit A-4 was another plan between
Maritime Life Assurance Company and the Corporation. The person
insured was Terrance O'Flynn. It was in force as of
December 23, 1999.
[34] He was asked why the Corporation took
out the insurance plans referred to in Exhibits A-3 and A-4 and
he said that they were disability insurance plans that they took
out in 1996 and were increased in value for coverage in 1999. His
position was that he wanted the Corporation to be protected if he
became disabled and could not perform his functions. In that
event the insurance policy would provide funds for the
Corporation to hire someone else to perform his functions.
[35] He was asked what type of problems they
expected from the management point of view and he said that there
was a problem of being able to continue the business if he became
sick. Both he and Richard Stanton were "lead guys" in
their business and they would have had to find someone else to do
their work. This witness covered the financial side and dealt
with main purchases and inside sales. Richard Stanton was
the "outside sales guy".
[36] They had an open interview process with
respect to prospective employees. The prospective employees would
direct questions at both he and Richard Stanton, then he
took over the "nitty gritty" side. Sometimes he
interviewed possible workers by himself. He told them everything
that would have been explained if both he and Richard Stanton had
been there together.
[37] The dental plan provided dental
coverage for the employees and their families. The Corporation
made monthly payments to "Quik Card" or ADSC. They
collected an administration fee. Then he said that he was not
sure about that process.
[38] In cross-examination he was asked
what he would tell prospective employees about the plan. He would
tell them that there was a dental plan. He might go into it at
varying lengths depending upon the employee and his questions. If
they said that they were not interested, they moved on to the
next topic. He was referred to the employee, Tammy Marrazzo. He
said that initially it looked like she would be a permanent
employee.
[39] He did not ask the prospective
employees why they declined the coverage. He reviewed Exhibit
R-3, the dental plan. He was referred particularly to paragraph
26 which provided that when benefits provided under their plan
were available to an eligible member under any other dental
benefits or dental insurance plan, the benefits of the other plan
would be deemed payable prior to the application of benefits
under the Corporation's plan. The amount payable under the
plan would be limited to the extent that the total amount
available under all coverages would not exceed 100% of the
allowable expenses.
[40] He confirmed that as far as he knew the
Corporation did not provide the list of eligible employees as
required by paragraph 10 of the plan. They did have a list of all
of the employees but he did not have it with him.
[41] After the probationary period was up
there was no memo sent out about joining the plan and it may not
have been discussed any further with the prospective employees.
No documents were provided to prospective employees after they
were hired. He turned the matter over to Linda after she was
hired but before that he and Richard Stanton did most of the
work. If someone decided to come into the company, it would pay
the whole premium for them.
[42] With respect to the insurance plan,
Exhibit A-4, it was agreed that the control of the policy was by
the owner. The beneficiary was named as the owner or otherwise
the estate of the owner. He agreed that the disability benefits
were taxable to the person insured. He was a person insured.
Further, he agreed that under paragraph 6.1, control of the
policy was by the owner and that the owner might change the name
of the beneficiary. If the owner's name was left blank, then
the owner was the insured.
[43] He agreed that the designated
beneficiary was his spouse. During the period under review a
change of beneficiary form was not in force. After the amendment
the proposed owner and beneficiary was the Corporation.
[44] In redirect he agreed that during the
period under review he was the insured person but the intention
was that the Corporation be the beneficiary. In Exhibit A-3 his
spouse was shown in the application as the beneficiary. He did
not know why she was shown there. That was not the intent. He
agreed that the transfer of ownership took place after the audit
which gave rise to the present matters.
[45] Robert Joseph Frost testified that he
was a certified financial planner. The appellants were all
clients of his. He met with them annually or every two to three
years with respect to insurance, investments, cash flow planning
and insurance. He referred to Exhibit A-3 and said that the
insured was Terrance O'Flynn and the owner was the
Corporation. Terrance O'Flynn would have received the
benefits under Exhibit A-3 until the changes took place. This
policy came into effect in 1996. The owner was
Terrance O'Flynn and the insured was Terrance
O'Flynn. This was an income loss replacement plan. The
Corporation had no interest in the policy up to 2003.
[46] With respect to Exhibit A-4, dated
October 29, 1999, this policy provided additional disability
insurance. It was an accident benefits/sickness policy. The
beneficiary was Terrance O'Flynn. The provisions were the
same as in the policy under which Richard Stanton was the
insured. He agreed that the payments were taxable to the
beneficiary and deductible by the Corporation.
[47] Ray Van Twuyver was a
shipper-receiver for Canada Bread Company. He worked for
the Corporation in June or July of 2001 when he quit. During the
interview process he said that they discussed his skills, the
company's offer and the salary and benefits program. His
benefits at the Canada Bread Company were better. He was an
hourly employee. He told the Corporation that he would not take
their benefits package until his benefits at Canada Bread Company
fell off.
[48] He did not know who would be paying the
premiums. His employment with the Corporation continued for the
rest of the year and his benefits with Canada Bread Company fell
off. He spoke to Terrance O'Flynn and Richard Stanton
about picking up their benefit plan. He gave the form to the
bookkeeper.
[49] In cross-examination he said that the
Corporation's plan provided full coverage for the dental and
80% for prescription drugs. With respect to hospitalization, it
was 100% for a private ward. He paid part of the premiums and the
company paid a portion. He did not know that the
Corporation's dental plan would be paid entirely by the
Corporation. Around the year 2001 he went on the plan. He
continued to work for Canada Bread Company for at least one shift
until he left the Corporation and returned to Canada Bread
Company where he is still employed.
[50] Linda Carstairs testified that she was
the controller for the Corporation. She started working there in
January of 1999. She applied for the job. It was a one girl
office. She was interviewed by Richard Stanton and Terrance
O'Flynn. She has 17 years overall office experience in the
same industry. The Corporation offered her a wage and benefits
package and dental plan. She did not need it. She was told that
it was always open to her if she wanted to join. She never needed
it. Benefits were not important to her. She did believe that she
had the option of going on the plan later on. She agreed that the
plan was based on usage and that the Corporation would get a
rebate on the bill if all of the premiums were not used up. She
received quarterly statements.
[51] She identified an Enrollment Card for
the dental plan, Exhibit A-5. If an employee when onto the plan,
she would fill this form out. The Corporation does not have this
form now. They have a Manulife plan in which the application form
has more depth. The plan started in February 2001 and provided
for prescriptions, disability and life insurance. Employees were
told about it. It was compulsory. She arranged to have all forms
filled out. She gave this to everyone. Everyone took it except
Dennis Halisky and she did not take the prescription drugs part
of the plan which was optional. However, everyone had to be on
part of it. The premium was paid by the Corporation. She never
gave a package out about the dental plan.
[52] Brenda Marie Salo was an auditor with
Canada Customs and Revenue Agency ("CCRA"). She was the
objections officer assigned to these files. The two issues were
the insurance policies and whether or not the premiums on the
dental plan were benefits to the members.
[53] She reviewed Exhibit R-1, the list of
employees and she questioned who the participants were. She noted
that the Corporation undertook to supply a monthly listing as to
who the members were. The auditor presented a statement of
benefits from the plan for a four month period. She reviewed the
plan as well. Then she said that the auditor received another
statement for a further four month period. The taxpayer also
provided a list of four employees who had opted out of the plan.
She said that the first 10 names on Exhibit R-1 were affected by
the plan.
[54] She did not see any letter with respect
to opting into the plan. She concluded that only two people
participated in the plan and they were Mr. O'Flynn and
Mr. Stanton and their families. It was a group plan established
in 1996. She did not get an answer as to why all the employees
except two opted out of it.
[55] She was referred to Exhibit A-1, which
was the Maritime Life Assurance plan. The Corporation had claimed
expenses for two people. The auditor did not get copies of the
insurance policies and so he denied them. She was told at the
objection stage that the Corporation had insurance on the key
employees. If something happened to them they would have someone
to replace them.
[56] Their agent brought in documents for
both Terrance O'Flynn and Richard Stanton. She reviewed
Mr. Stanton's policy only. Richard Stanton was the owner. It
was a type of disability insurance and the premiums are not
deductible. No reason was given to her for these plans. She
reviewed a disability policy which was Exhibit A-2. This policy
was being taken by a shareholder rather than an employee. It
provided disability benefits. This was not deductible since it
was personal. She also reviewed Exhibits A-3 and A-4.
[57] In cross-examination she said
that she concluded that they were not shareholder benefits at the
end of the day.
[58] At the conclusion of evidence the
parties were given time to consider the matter and they did come
to an agreement with respect to the issue regarding the insurance
policies on the shareholders. They agreed that for the year 2002
with respect to policy numbers 978020, 951020, 978022,
951021, 978021, 978823, 2251879, 951022, 225188 and 951023 the
total amount disallowed to the Appellant Corporation should have
been $726.36. With respect to the year 2001, in regard to the
same policies, they agreed that the total amount disallowed to
the taxpayers should be $2,905.44.
[59] That left in contention, the issue of
the expenses related to the dental benefits.
Argument on Behalf of the Appellants
[60] In the case of Spicy Sports Inc. v.
Canada, [2004] T.C.J. No. 333, McArthur J. found that dental
premiums paid by the corporation were not deductible because they
were provided solely on the basis of the recipient being a
shareholder and not as an employee. That case is distinguishable
from the present case because the payments here were qua
employee.
[61] In the case at bar the evidence makes
it clear that the benefits were available to everyone who was an
employee. It was not a rich plan. The employees testified that
the benefits were available to all of them. In any case where the
prospective employee did not join the plan, they had a valid
reason for not doing so. Some had another plan, some did not take
it for their own reasons. However, they could come back in at a
later date. Part of the last plan was compulsory. The evidence is
clear and consistent in that respect.
[62] As can be seen from Exhibit R-3 at
paragraph 26, there was no topping up. The total amount available
under all coverages could not exceed 100% of the allowable
expenses. The benefits under the other plan had to be payable
prior to the application of benefits under the plan of the
Corporation here. From its inception the benefits of the policy
were available to all. They were advised that they could come in
at a later date qua employees if they wished to. There were no
special benefits to the Appellants here.
[63] The appeals should be allowed and the
benefits should not be taxable to the Appellants, Terrance
O'Flynn and Richard Stanton, and should be deductible by
the Appellant Corporation.
[64] With respect to the matter of costs,
counsel argued that he was substantially successful and therefore
should be allowed costs.
Argument on Behalf of the Respondent
[65] Counsel for the Respondent argued that
the principals of the Corporation and their families were the
only ones capable of benefiting from this dental plan during the
whole period in issue. All of the other people either had not
worked long enough or had opted out. Since the Corporation did
not explain it in a clear fashion to their prospective employees,
one must be suspicious as to whether or not the plan was really
open to all employees. Further, there was a possible topping up
of the plan since there was 100% coverage provided under
paragraph 26. Further, there was a lack of detail disclosed
by the Corporation to prospective employees.
[66] The Appellant could have produced more
evidence as to the disclosure to the employees. Consequently, in
practice, the benefits of the policy were only available to
Richard Stanton and Terrance O'Flynn and their families.
Under the provisions of paragraph 6(1)(a) these expenses
did not qualify as being deductible.
[67] To be deductible, the payments must
have been expended for a business purpose. One must ask the
question, "what was the business purpose here?" Counsel
was prepared to admit that the avowed purpose of making it
available to attract other better qualified employees to the
company could have been a business purpose. However, in light of
the failure of the company to make the benefits more apparent to
prospective employees, these expenditures were not for business
purposes.
[68] She referred to the case of
Prefontaine v. Canada, [2001] T.C.J. 94 at
paragraph 10 in support of her position. In accordance with that
finding she stated that as the expenditures relate to the
provisions of paragraph 18(1)(a) of the Act, the
Appellant has not shown that there was a business purpose and the
Minister was correct in not allowing them as a deduction. In
Prefontaine, supra, Justice McArthur at paragraph
10 said:
For the cost of insurance to be a deductible business expense,
there must be some reasonable, factual connection between the
carrying on of the business and the payment of the premiums.
These amounts were not paid to benefit the business but to
benefit the beneficiaries. They money was not expended to gain
income. The connection between benefiting the Appellant or her
husband and the insurance costs is far too tenuous. These
premiums are not deductible.
[69] Further, counsel stated that subsection
56(2) is applicable to the present case as well as the provisions
of subsection 15(1) of the Act. She argued that the
Corporation was controlled by Mr. Stanton and Mr. O'Flynn and
their wives. They were the only ones who benefited from these
payments.
[70] She also referred to the case of
Peddle v. R., 2004 CarswellNat 729, 2004 TCC 226,
2004 DTC 2459, [2004] 2 C.T.C. 3111 and in particular paragraph
33 where Campbell J., referring to the decision of
Cattanach J. in Fraser Cos. v. R. (1981), 81 DTC 5051
(Fed. T.D.) sets out the following four preconditions that must
be satisfied in order for subsection 56(2) to apply:
1. There must
be a payment or transfer of property to a person other than the
taxpayer.
2. The payment
or transfer is pursuant to or with the concurrence of the
taxpayer.
3. The payment
or transfer must be for the taxpayer's own benefit or for the
benefit of some other person on whom the taxpayer desired to have
the benefit conferred.
4. The payment
or transfer would have been included in computing the
taxpayer's income if it had been received by him instead of
the other person.
She argued that all four criteria are satisfied in the case at
bar.
[71] This section allows one to look through
the effect of holding companies. The Appellants were not
shareholders in the Corporation but at the same time they
controlled it through the holding company the same way as if they
were shareholders.
[72] In theory, the Appellant indicated that
the plan was available to other employees and to all persons who
might become employees but their actions indicate the contrary.
Actions speak louder than words.
[73] The Minister properly denied the
expenses under the provisions of paragraph 18(1)(a) and
properly assessed a benefit under subsection 15(1) because the
Appellants were the only people who benefited in effect.
[74] In reply counsel for the Appellant said
that "you can lead a horse to water but you cannot make him
drink" in reference to the fact that benefits of the dental
plan were available to all prospective employees if they wished
to take advantage of them. It was not the Corporation's fault
that they decided to decline to be a participant in the
policy.
[75] In considering the Respondent's
position that the Appellants tried to hide the benefits of the
plan from prospective employees because they did not want the
workers to know that it was available to them, he agreed that
they did not push the plan as much as they could have but he
asked, "but what else could they do?" To ask them to do
more would have been unreasonable.
Two
witnesses testified to the effect that the benefits of the policy
were available to all those persons who wished to take advantage
of it.
[76] With respect to the business purpose
test, counsel stated that expenditures made for the purpose of
attracting suitable employees to the Corporation are expenses
made for business purposes. Prefontaine, supra, is
not relevant to the factual situation in the present case. In
that case it was a matter of life insurance and its deductibility
was governed by another section of the statute.
[77] In the case at bar, the inclusion in
income of the amount paid is a separate question. This is
governed by the provisions of subparagraph 6(1)(a)(i)
which makes the expenditure non-includable in income if it
complies with those provisions. The de facto
situation in the present case ensures that the amounts in
question are not includable in income under that provision.
[78] If this benefit was available to the
Appellants here, qua employee, it was not includable in income
under subsection 56(2) as a benefit and is deductible to the
Corporation under the provisions of subparagraph
6(1)(a)(i) of the Act.
Analysis and Decision
[79] With respect to the remaining issues,
the Court is satisfied that these appeals must succeed. The Court
accepts the arguments of counsel for the Appellants that the
expenditures were made by the Corporation on behalf of the
non-corporate employees qua employees of the Corporation.
The Court is satisfied that these payments come within the
provisions of subparagraph 6(1)(a)(i) of the
Act and is satisfied that they are derived from the
contributions of the taxpayer's employer under a group
sickness or accident insurance plan or a private health services
plan and as such are not a benefit to the Appellant taxpayers as
envisaged by the provisions of this subparagraph. Therefore, they
need not be included in the income of the Appellants,
Terrance O'Flynn and Richard Stanton.
[80] The Court does not accept the argument
of counsel for the Respondent that these benefits were not
available to every employee who wished to take advantage of the
plan. Just because almost all of the employees, for some reason
or other, decided not to participate in the plan, does not mean
that the plan was not available to all of them. The evidence of
the witnesses makes it quite clear that it was open to all who
became employees of the Corporation who wished to take advantage
of it.
[81] Further, the Court is satisfied that it
should not accept the argument of counsel for the Respondent
where she stated that the Corporation in some way did not
advertise the availability of the policy in a sufficient way or
in some way attempted to hide the availability of these benefits
from all of the employees except families of the two Appellants
and that therefore the benefits were not available to all of the
employees.
[82] The evidence does not bear this out and
is quite to the contrary. The Court has no difficulty at all in
accepting the evidence of the witnesses that this plan was
available to all persons who wished to take advantage of it when
they became eligible. The mere fact that more of the employees
did not want to take advantage of it casts no improper reflection
upon the Corporation or the other two Appellants in this
case.
[83] Further, the Court is satisfied that
neither the Corporation, Mr. Stanton nor Mr. O'Flynn
could have, or should have, done anything more to make the
prospective employees aware of the possible benefits of being a
member of this plan.
[84] With respect to the second part of the
issue, that is, the right of the Corporation to deduct these
expenses, the only issue is whether or not the expenditure was
for the purpose of gaining or producing income from a business or
property under the provisions of paragraph 6(1)(a) of the
Act. The answer to this question turns on whether the
Court is satisfied that the only ones capable of enjoying the
benefits of these expenditures were the Appellant shareholders
and their families or whether or not these benefits were
available to all employees once they became eligible. The Court
has already answered that question and finds that the benefits
were available to all, not only to these two Appellant
shareholders and their families and that the reason for making
the expenditures in the first place was for the very valid
business purpose of attracting suitable employees to the
Corporation. This position was made quite clear by the evidence
of the two shareholders that testified in Court and whose
evidence has not been challenged in any way. Their evidence is
accepted by the Court as they stated it.
[85] In the end result the expenses are
deductible by the Corporation under the provisions of paragraph
6(1)(a) of the Act.
[86] The appeals are allowed and the matters
are referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that the Court
finds with respect to the insurance issue, in the year 2000, the
total amount disallowed to the Corporation should be the amount
of $726.36 with respect to policy numbers 978020, 951020, 978022,
951021, 978021, 978023, 2251879, 951022, 2251888 and 951023.
[87] With respect to the same policies,
during the year 2001, the amounts to be disallowed to the
corporate taxpayer should be $2,905.44.
[88] Further, the appeals are allowed and
the matter is referred back to the Minister of National Revenue
for reconsideration and reassessment on the basis of the
Court's finding that with respect to premiums payable for the
dental plan, the Corporation is entitled to deduct these payments
under paragraph 18(1)(a) of the Act.
[89] With respect to the Appellant, Terrance
O'Flynn, the amounts of $2,025, $2,700 and $675 in the 1999,
2000 and 2001 taxation years were not properly includable in
income pursuant to subsections 15(1) and 56(2) of the
Act.
[90] With respect to the Appellant, Richard
Stanton, the amounts of $2,025, $2,700 and $675, respectively,
for the years 1999, 2000 and 2001 were not properly includable in
the Appellant's income.
[91] Since the Appellants have been
substantially successful in these appeals, they shall be allowed
their costs, to be taxed on a party to party basis, to be taxed
as one Bill of Costs.
Signed
at Ottawa, Canada, this 1st day of April 2005.
Margeson J.
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