eCaseNote 2006 No. 08


Truckbase Corp. v. R, [2006] 3 C.T.C. 2409

This case illustrates that certain business-related legal and accounting fees previously understood to be shareholder benefits, including those associated with corporate reorganizations and revisions to shareholder agreements, may be considered deductible business expenses under the Income Tax Act in appropriate circumstances, and we felt that it would be of interest to our business clients.

Tom Grabowski was a director of a group of corporations named Silvacom Group of Corporations, which included Truckbase Corporation.

For the 2001 taxation year, the Silvacom Group incurred legal and accounting fees for, among other services, the conversion of Truckbases’s common shares owned by Grabowski and others to preferred shares, the creation of family trusts, the issuance of new Truckbase common shares to each of the family trusts and the review and redrafting of all the Silvacom corporations’ Unanimous Shareholder Agreements (USAs). For the 2001 fiscal year, legal and accounting fees totalled $74,485.05, $28,236.62 of which was allocated to Truckbase. Truckbase deducted $16,942.00 of the $28,236.62 as a current expense and the remaining balance as a capital expense.

Canada Revenue Agency (CRA) reassessed Grabowski’s income to include benefits of $30,260.00 for the 2001 taxation year. These funds related to a portion of the legal and accounting fees paid by the Silvacom Group and that were considered to be shareholders benefits because they were incurred for personal estate planning purposes. The $16,942.00 deducted by Truckbase was disallowed.

Grabowski argued that the reorganization of Silvacom Goup was a necessary business expense. CRA argued that the legal and accounting fees that related to the reorganization represented shareholders benefits to Grabowski under s. 15(1) of the Income Tax Act. CRA also argued that, while the revision of the USAs was done in the interest of preserving the business, the expenditure was not in the interest of earning income and therefore there should be no capital deduction allowed.

The Tax Court found that the legal and accounting fees incurred were not a shareholder benefit to Grabowski and could be deducted by Truckbase under s. 9(1) of the Income Tax Act. The Court held that USAs play a role in both the earning of income and the productivity of a business. Chief Justice McArthur stated:

I believe the costs incurred for the Shareholder Agreements were for the purpose of a bona fide business reorganization which facilitated effective management, good governance and protection for the Silvacom Group against any disruption due to the disability of key employee/shareholders.

He continued:

Therefore, I conclude that the professional fees were incurred to earn ‘income’ as set out in paragraph 18(1)(a). These expenses were an integral part of Truckbase’s business and were made for the purposes of gaining or producing income within the meaning of the section.

The Crown further argued that the expenses were capital expenses and thus not deductible under s. 18(1)(b) of the Income Tax Act. The Court disagreed. Chief Justice McArthur stated:

The Appellants drafted the initial shareholder agreements which were meant to outline which operational decisions required shareholder consent, restrict sales of shares, set out procedures to be followed in the event of death or disability of a key shareholder, and provide dispute mechanisms, amongst other things, which were initially a capital expense. These initial agreements were not functioning properly and as such, were ‘repaired’ through the incurring of various professional fees…The legal fees for the restoration of the Agreements can be viewed as current expenses and deductible under subsection 9(1) of the Act. The fees will not be subject to the restrictions with respect to the deductibility of capital expenses set out in paragraph 18(1)(b).

The legal and accounting fees were paid in the interest of ‘earning’ income and for ‘repairs’ to the USAs. Thus, the Court concluded that the fees were not shareholders benefits or capital expenses and were appropriately deducted.

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