Law Times

Law Times • augusT 20, 2018 Page 3 www.lawtimesnews.com CRA loses attempt to collect $2 million in taxes BY MICHAEL MCKIERNAN For Law Times T he Canada Revenue Agency has lost its at- tempt to collect on an Oshawa, Ont. lawyer's outstanding $2-mllion tax bill via the law firm he owns with his two daughters. According to Tax Court Jus- tice David Graham's ruling in Aitchison Professional Cor- poration v. The Queen, James Aitchison, a lawyer with 40 years of experience in real estate, busi- ness and tax law, has not paid any federal income tax since emerg- ing from bankruptcy in 1992. Despite generating more than $3 million for APC between 2007 and 2010, Aitchison took no salary or dividends for most of the years in question while his daughters, who are also lawyers in the same office, took home more than $1 million in salary and dividends. The CRA delivered a notice of assessment to the firm for $2.1 million in 2012, invoking s. 160 (1) of the Income Tax Act, which comes into play when taxpay- ers transfer property to spouses, minors or other people dealt with at non-arm's length, claim- ing Aitchison had transferred to APC his "right to invoice for le- gal services." But Graham ruled the CRA's claim must fail because the right to invoice falls outside the definition of "property" under s. 160. "The Respondent is trying to take something that is clearly the provision of a service and make it a transfer of property," Graham wrote in his July 6 judgment, characterizing Aitchison as a volunteer or employee of APC. "If an employee negotiates a poor contract, the potential sal- ary that he or she leaves on the table is not 'property' that he or she has transferred to his or her employer. It is simply a lost op- portunity," the judge added. Describing the outcome as "distasteful," the judge neverthe- less warned the federal govern- ment not to overreact legisla- tively. "It was clear to me that, start- ing in 2003, James had one over- riding goal: defeating the CRA by diverting all of what would otherwise have been his in- come to his daughters," Graham wrote. "This case demonstrates that there is clearly a gap in section 160. It cries out for that gap to be fixed. However, I would caution Parliament against inadvertently extending the reach of section 160 too broadly. Simply amend- ing section 160 to cause it to cover the non-arm's length pro- vision of services may have un- desired consequences," he added. Adrienne Woodyard, a part- ner in the tax law group at DLA Piper Canada LLP, acted for APC. Had the court accepted the CRA's arguments, she said in a statement to Law Times, it would have turned "upside down the manner in which legal pro- fessional corporations and their owners file for tax purposes." "It would follow from that theory that a lawyer practising through a professional corpo- ration must recognize the dis- position of property — i.e., his or her 'right to invoice' to the corporation — every time the corporation issues an invoice for the lawyer's services," Woodyard said, noting that the case was unlike many others involving s. 160, which typically see an oth- erwise non-taxable gift made to a family member. "In this case, tax was paid both by the corporation and Mr. Aitchison's daughters on the profits derived from the legal services that Mr. Aitchison per- formed," Woodyard continued. Dean Blachford, a tax litiga- tor with Hazlow Law in Ottawa, who was not involved with the case, says the CRA was always fighting an uphill battle. Still, he understands why it took the case to trial. "They were on tenuous ground, but there was a bit of a grey area in terms of what's con- sidered property," he says. Blachford frequently repre- sents family members and busi- ness partners who benefited from transfers targeted by the CRA under s. 160, and he says the clause is already a formidable weapon for tax collectors with- out further additions. "A lot of people call it the teeth of the Income Tax Act because it's such a broad and aggressive provision and there are all sorts of ways it can be punitive. I see a lot of innocent people pulled in," he says. David Rotf leisch, founder of tax law firm Rotf leisch & Samu- lovitch PC, says the case is just the latest in a line of inappropri- ate enforcement actions by the CRA. "I am delighted by this result because it was a gross overreach by the CRA to have attempted to apply s. 160 in these circum- stances," he says. "From the point of view of taxpayers, we don't like it that someone has avoided pay- ing millions, but the law is the law and s. 160 only applies in cer- tain limited circumstances." The fact situation that led to the assessment is so rare that he questions whether any amend- ment to the ITA is called for. "It's arguably applicable to other professions, but they'd need to be all working in the same profession to recreate this very specific set of circumstanc- es," Rotf leisch says. "Any attempt to legislate is likely to backfire and create a whole lot of new problems for ordinary people." But William Innes, a tax liti- gator with Rueters LLP in Toron- to, says the case is ripe for appeal, calling Graham's decision a "nar- row interpretation" of s. 160 (1). "I don't think an amendment is necessary," he says. "I'd be very surprised if there is no appeal, because it's not a result that will sit well with the general public reading the decision." A Department of Justice offi- cial declined to comment, noting that the Crown still has until Oc- tober to launch an appeal. LT NEWS Visit gpllm.law.utoronto.ca Questions? gpllm@utoronto.ca Master the law. Canada's leading law school offers a graduate degree in four unique streams: Business Law Canadian Law in a Global Context Innovation, Law and Technology Law of Leadership Apply today. Untitled-1 1 2018-05-10 10:52 AM Any attempt to legislate is likely to backfire and create a whole lot of new problems for ordinary people. David Rotfleisch

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