Morin v. Agence du revenu du Québec, 2023 QCCQ 2406

A pharmacist (“Morin”), who previously had operated six pharmacies as proprietorships, agreed with her management company (“377”) that she would incur various of the expenses of the pharmacies as they related to services provided by technicians and support staff, as contrasted to professional staff, as agent for 377 and that the gross profits from the pharmacies would be split on a 30/70 basis between 377 and her. 377 sent quarterly invoices to Morin and issued credit notes for its computed share of the expenses.

Tremblay JCQ confirmed the ARQ position that the $2.5 million in management fees charged by 377 to Morin for the years at issue under the above arrangement were completely non-deductible as they were not incurred for an income-producing purpose: Morin was performing exactly the same functions as before, and the sole effect of the arrangement was to reduce her income by the fee amounts.

However, the ARQ reassessments to deny her deductions, which were made beyond the normal reassessment period, were statute-barred. The ARQ had not established carelessness or neglect given that Morin had sought to implement a plan proposed by her tax advisors and she “could reasonably expect that the structure proposed to her could produce the legal and tax effects envisaged by her professionals” (para. 86, TaxInterpretations translation).

Prior to 2002, a pharmacist (“Morin”) carried on directly and through her employees all of the operations of six pharmacies. A services agreement concluded in 2002 between her and her management company (“377”) provided that various expenses including some of the payroll expenses were incurred by her as agent for 377. At issue was the arrangements respecting the purely pharmaceutical portion of each business (the “dispensary”). It was agreed that Morin was to incur the expenses of the dispensary as they related to services provided by technicians and support staff, as contrasted to professional staff, as agent for 377 and that the gross profits from the dispensary would be split on a 30/70 basis between 377 and Morin - subject to a year end adjustment (which, in fact, never was made) based on the actual relative value of the services performed in each year. 377 sent quarterly invoices to Morin and issued credit notes for its computed share of the expenses.

Tremblay JCQ confirmed the ARQ position that the $2.5 million in management fees charged by 377 to Morin for the 2008 to 2013 taxation years regarding the dispensary operation under the above arrangement were completely non-deductible as they were not incurred for an income-producing purpose. Morin was performing exactly the same functions as before, and the sole effect of the arrangement was to reduce her income by the fee amounts. Tremblay JCQ stated (at paras. 50, 52, TaxInterpretations translation):

In so doing, Ms. Morin had no expectation of receiving any income from the management fees she paid to 377. …

It seems obvious that a reasonable businesswoman, considering only her commercial interests, would not have committed herself to such an expense.