January 27, 2012

Nielsen Development Co. Ltd., Golden King Enterprises Ltd., and Jason Lo v. Her Majesty the Queen

2009 DTC 1219
Neutral Citation: 2009 TCC 160
Tax Court of Canada
Date: March 20, 2009

Court File Nos. 2007-2665(IT)G, 2007-2667(IT)G, and 2007-2669(IT)G (General Procedure)

Deductions and inclusions in income — Management fees — Shareholder’s benefits — Whether management fees paid by one corporate taxpayer to corporation in non-arm’s length relationship were reasonable — Whether amounts received by individual taxpayer from second corporate taxpayer constituted shareholder’s benefit or repayment by that corporate taxpayer of shareholder’s loan — Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), ss. 15(1), 18(1)(a), 67.

Facts: The individual taxpayer, J, owned all of the shares of the corporate taxpayer Golden King Enterprises Limited (“Golden King”). The taxpayer’s wife, P, owned Mountain Tai Investments Company Limited (“Mountain Tai”). Golden King owned all of the shares of the corporate taxpayer Nielsen Development Company Limited (“Nielsen”). Nielsen owned and operated an inn (the “PoCo Inn”). Nielsen paid Mountain Tai management fees of $275,000 for 2003 and $300,000 for 2004 (the “Management Fees”) to manage the PoCo Inn using the services of P, who was thoroughly experienced in managing hotel operations. In computing its income for 2003 and 2004, Nielsen sought to deduct all of the Management Fees paid to Mountain Tai. In reassessing Nielsen for 2003 and 2004, the Minister disallowed the deduction of all but $51,671 and $53,251, respectively, of the Management Fees claimed. In reassessing J, the Minister included in his income $20,503 as a shareholder’s benefit from Golden King. On their appeals to the Tax Court of Canada, the taxpayers raised a number of issues, all of which were settled or adjourned pending the Court’s determination of the said Management Fees and shareholder’s benefit issues.

Held: Nielsen’s appeal was allowed, and J’s appeal was dismissed. None of the parties provided evidence as to what similar institutions to Mountain Tai might charge as management fees to operate inns such as the PoCo Inn. Nor could the Court substitute its opinion for that of Nielsen as to what an appropriate management fee might be in the circumstances of this case. J was a reasonable businessman and P’s evidence was compelling, accurate, and unwavering. The services provided by Mountain Tai through P were complete and hands on, P was on site or available virtually all of the time, the PoCo Inn was run efficiently under her supervision, her efforts were much more intense than one might expect from a standard management company, and, under her, the PoCo Inn was very profitable. There was also a management service contract between Nielsen and Mountain Tai. All of the foregoing factors led to the conclusions that the Management Fees were reasonable under s. 67 of the Act, and that they were fees that a reasonable business person would have contracted to pay having only Nielsen’s business interests in mind. They were therefore fully deductible by Nielsen. Conversely, J was unable to establish, on a balance of probabilities, that the $20,503 he received from Golden King consisted of cash advances for Golden King’s business purposes, as opposed to amounts intended for his personal use. Nor was the $20,503 a repayment by Golden King of a shareholder’s loan it owed to J. The $20,503 was therefore properly included in J’s income as a shareholder’s benefit. However, a consent judgment giving effect to an agreed statement of issues signed by the parties on January 16, 2009 should be approved by the Court. The Minister was ordered to reassess accordingly.