In Boutilier v. The Queen, 2007 TCC 96, the taxpayer received trailer fees and reported them as income he had earned. Later, he purported to transfer his fee-earning business to a company. Fees received by the taxpayer were assigned to the company and reported in its income. The Minister reassessed on the basis that subsection 56(4) of the Income Tax Act applied to the transfer of the fees to the company.
Subsection 56(4) provides as follows:
Where a taxpayer has, at any time before the end of a taxation year, transferred or assigned to a person with whom the taxpayer was not dealing at arm’s length the right to an amount (other than any portion of a retirement pension assigned by the taxpayer under section 65.1 of the Canada Pension Plan or a comparable provision of a provincial pension plan as defined in section 3 of that Act) that would, if the right had not been so transferred or assigned, be included in computing the taxpayer’s income for the taxation year, the part of the amount that relates to the period in the year throughout which the taxpayer is resident in Canada shall be included in computing the taxpayer’s income for the year unless the income is from property and the taxpayer has also transferred or assigned the property.
The Court concluded that the taxpayer had simply assigned to the company a right to receive fees and not the right to earn them by providing services (the business). The Court’s conclusion in this regard was fortified by the fact that the company did not incur expenses to earn the fees; rather, the taxpayer incurred them. The Court wrote:
[19] It is central to the Appellant’s argument that the Corporation was set up to provide certain services to existing clients yet it is difficult to establish from the evidence that the Corporation was engaged in servicing clients to earn the fees when it incurred very few expenses. Of the expenses it did claim, there were none relating to rents, wages, employee benefits or other similar expenses which one would normally expect to see. The Appellant’s testimony was that he shared his office with the Corporation but the evidence indicates that the Corporation did not pay any rent for the use of the office. In addition the Appellant stated that the Corporation shared the use of his executive assistants yet, other than in 2000, the Corporation did not incur any wage and benefit expenses.
The Court also noted that the company did not pay anything to the taxpayer for the services the taxpayer supposedly provided to permit the company to earn fees. In fact, the formation of the company did not result in any changes to the taxpayer’s method of carrying on business.
Finally, the Court pointed out that
although it is certainly not determinative, the rapid flow of trailer fees through the Corporation to the Family Trust [that was a shareholder of the Corporation], the beneficiaries of the Trust and eventually back to the Appellant continues to support the existence of the Corporation as a mere receptacle for the flow of income. This is clearly the type of transfer that subsection 56(4) was intended to address.
The Court dismissed the taxpayer’s appeal and upheld the Minister’s reassessment.
