O'Flynn v. The Queen

O'Flynn v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2005-04-01 Neutral citation 2005 TCC 230 File numbers 2004-2977(IT)I Judges and Taxing Officers Theodore E. Margeson Subjects Income Tax Act Decision Content Dockets: 2004-2977(IT)I BETWEEN: TERRANCE O'FLYNN, Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeals heard on common evidence with the appeals of Richard Stanton (2004-2979(IT)I) and Prism Flow Products Inc. (2004-2980(IT)I) on February 7, 2005 at Edmonton, Alberta Before: The Honourable Justice T. E. Margeson Appearances: Counsel for the Appellants: James C. Yaskowich Counsel for the Respondent: Leslie Akst ____________________________________________________________________ JUDGMENT The appeals from the assessments made under the Income Tax Act ("Act") for the 1999, 2000 and 2001 taxation years are allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the amounts of $2,025, $2,700 and $675 in the 1999, 2000 and 2001 taxation years, respectively, were not properly included in his income pursuant to subsections 15(1) and 56(2) of the Act. As the Appellant has been substantially successful in this appeal, he shall have his costs, to be taxed on a party to party basis. The Appellant's costs shall be taxed as one Bill of Costs together with Richard Stanton and the Prism Flow Products Inc. Signed at Ottawa, Canada, this 1st day of April 2005. "T. E. Margeson" Margeson J. Dockets: 2004-2979(IT)I BETWEEN: RICHARD STANTON, Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeals heard on common evidence with the appeals of Terrance O'Flynn (2004-2977(IT)I) and Prism Flow Products Inc. 2004-2980(IT)I on February 7, 2005 at Edmonton, Alberta Before: The Honourable Justice T. E. Margeson Appearances: Counsel for the Appellants: James C. Yaskowich Counsel for the Respondent: Leslie Akst ____________________________________________________________________ JUDGMENT The appeals from the assessments made under the Income Tax Act ("Act") for the 1999, 2000 and 2001 taxation years are allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the amounts of $2,025, $2,700 and $675 in the 1999, 2000 and 2001 taxation years, respectively, were not properly included in his income pursuant to subsections 15(1) and 56(2) of the Act. As the Appellant has been substantially successful in this appeal, he shall have his costs, to be taxed on a party to party basis. The Appellant's costs shall be taxed as one Bill of Costs together with Terrance O'Flynn and Prism Flow Products Inc. Signed at Ottawa, Canada, this 1st day of April 2005. "T. E. Margeson" Margeson J. Dockets: 2004-2980(IT)I BETWEEN: PRISM FLOW PRODUCTS INC., Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeals heard on common evidence with the appeals of Richard Stanton (2004-2979(IT)I) and Terrance O'Flynn (2004-2977(IT)I) on February 7, 2005 at Edmonton, Alberta Before: The Honourable Justice T. E. Margeson Appearances: Counsel for the Appellants: James C. Yaskowich Counsel for the Respondent: Leslie Akst ____________________________________________________________________ JUDGMENT The appeals from the assessments made under the Income Tax Act ("Act") for the 2000 and 2001 taxation years are allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the following bases: In the taxation year 2000 the total amount disallowed to the Appellant should be $726.36 with respect to policy numbers 978,020, 951020, 978022, 951021, 978021, 978023, 2251879, 951022, 2251888 and 951023. In the taxation year 2001, the amounts that should be disallowed to the Appellant with respect to the same policies should be $2,905.44. Further with respect to the premiums for the listed plan, the Appellant is entitled to deduct these disallowed amounts pursuant to paragraph 18(1)(a) of the Act. Signed at Ottawa, Canada, this 1st day of April 2005. "T. E. Margeson" Margeson J. Citation: 2005TCC230 Date: 20050401 Docket: 2004-2977(IT)I BETWEEN: TERRANCE O'FLYNN, Appellant, and HER MAJESTY THE QUEEN, Respondent, Docket: 2004-2979(IT)I AND BETWEEN: RICHARD STANTON, Appellant, and HER MAJESTY THE QUEEN, Respondent, Docket: 2004-2980(IT)I AND BETWEEN: PRISM FLOW PRODUCTS INC., Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT MargesonJ. [1] It was agreed at the outset that these matters would all be heard on common evidence. [2] In the taxation years 1999, 2000 and 2001 the Minister reassessed the Appellant, Terrance O'Flynn, for amounts paid on his behalf to Alberta Dental Service Corporation ("ADSC"), as benefits received from 674418 Alberta Ltd. through Prism Flow Products Inc. ("Corporation"). The Minister alleged that the Appellant was a 50% shareholder of the shares of 674418 Alberta Ltd. and by virtue of his capacity as a shareholder directed the Corporation to make the payments to ADSC for his benefit. [3] Likewise, for the same year, the Minister reassessed the Appellant, Richard Stanton, to add to his income amounts received from 674420 Alberta Ltd. through the Corporation. The Minister alleged that Richard Stanton and his wife each owned 50% of the shares of 674420 Alberta Ltd. and by virtue of his capacity as a shareholder Richard Stanton directed the Corporation to make the payments to ADSC for his benefit. [4] With respect to the Appellant Corporation, the Minister reassessed it for the taxation years 2000 and 2001 to disallow expenses paid to ADSC in the amounts of $5,870 and $5,400 claiming that the payments were solely for the benefit of Terrance O'Flynn and Richard Stanton. [5] The Minister further reassessed the Appellant Corporation by denying expenses in the amounts of $9,284 and $9,299 alleging that these payments were solely for the benefit of Terrance O'Flynn and Richard Stanton. The Minister relied upon the provisions of paragraph 18(1)(a) of the Income Tax Act ("Act"), alleging that these expenses were not incurred for the purpose of gaining or producing income from a business or property. [6] Richard Stanton testified that the Corporation sells valves and oil field equipment for the oil and gas industry throughout the country but it is mostly centred in western Canada, particularly in the province of Alberta. He and Terrance O'Flynn were 50% owners in the Corporation. He was more involved in sales and marketing new products while Terrance O'Flynn was more involved with the banking side of the business. The Corporation has a warehouse office facility which contains their inventory. He was familiar with the issues before the Court with respect to the assessed benefits and the insurance policies. [7] From the beginning the Corporation had a "Quik Card" policy which was paid into by the Corporation to provide health benefits to staff members. In the early days the Corporation was having difficulty attracting valuable staff members to the business because it had no benefit package in place. This was of concern so it had to implement a satisfactory benefit package. [8] When prospective employees were interviewed these benefits would be discussed. This witness attended all of these interviews. He could not remember all of the employees but was familiar with Ray Van Twuyver who he said was employed there in the year 2000. He interviewed him. The question of benefits did not come up at that interview. This worker was looking to make a change from his then employer, Canada Bread Company. He did not remember if other items came up at that meeting or not. [9] During the interviews Terrance O'Flynn discussed the benefit package with the prospective employees. This included wages, benefits and holidays. Terrance O'Flynn was more involved in hiring specific individuals. [10] Richard Stanton was referred to Exhibit A-1 which was an insurance policy, number H0951020. This was a policy with Maritime Life Assurance Company and he was the named insured. It came into effect on August 12, 1996. [11] He identified Exhibit A-2 which was a life insurance policy number H0978020 in which he was also the named insured. This showed the Corporation as the owner. The policy was with Maritime Life Assurance Company and dated December 23, 1999. He did not know why it was obtained in the first place. They had received advice about obtaining it. Terrance O'Flynn dealt with the insurance issues. [12] In cross-examination he was referred to Exhibit R-1 which was a List of Employees of the Corporation for the years 1997 to 2001. He was not aware of the dental package but it would have been explained by their broker. There was a three month waiting period before one could take advantage of the benefits in this plan. He was referred to the name Greg Smith who was a full-time office employee and was shown to be included on the Zurich plan after three months. He explained that this person was not included on the plan during the review period because he had not been employed there long enough at that time. [13] Some of the prospective employees did not want to go on to the dental plan because their spouses had plans. Details of the plan would not be discussed. This witness was present at the interviews. No notice was sent to the workers telling them that the three months had expired and they were now eligible to take advantage of the plan. No documents were sent out explaining the dental plan to prospective workers. [14] Exhibit R-2 was a statement from ADSC to the Corporation showing what payments were made by the Corporation under the dental plan. The cardholders referred to there were himself, his son, Terrance O'Flynn and his children. These were the only people who benefited from the plan for the period 01/10/2000 to 31/01/2001. [15] Exhibit R-3 was an agreement between ADSC and the Corporation with respect to dental plan group number 1957-XX. This covered the benefits in effect during the period in issue. He was referred to in paragraph 10 of the agreement which required that "The Employer shall compile and furnish to ADSC on or before the first day of each month that this Agreement is in force a list of all Eligible Members showing the unique identification number of the employee, the name, date of birth and sex of the employees, and the names, dates of birth and sex of all dependents of the employee." He did not know whether this list was ever furnished to ADSC. [16] Appendix "A" attached to the agreement was a list of benefits payable under the plan. It provided for 100% recovery at current suggested rates with a $1,000 maximum per year, per family. This covered basic and major services combined. [17] Appendix "B" showed how the monthly payments to the insurance company were to be calculated. This was based upon the estimated average annual claims and administration overhead charges. Using these projections they calculated an estimated annual cost which was divided by 12 months and remitted in total monthly payments of $140. He agreed that the more people that were on the list the more the cost would increase. The fewer number on the plan, the amount would be reduced and the premium would likewise be reduced. [18] He was referred to the last page of Exhibit A-1 and said that the proposed insured was Richard Stanton and that according to the designation the insured was the proposed owner unless it was indicated otherwise. That slot was not filled in. [19] He was also referred to Exhibit A-2 at page 6.1 which indicated "that the owner of the policy may exercise all the rights, options and privileges granted by this policy or permitted by us". It also provided that the beneficiary could be changed by the owner at any time. [20] He confirmed that an amendment to the application indicated that his salary was based upon 50% of the profit of the Corporation and that his personal salary was at least $100,000 on average in 1997, 1998 and expected to be the same in 1999. He also agreed that the policy provided that the benefits were taxable to the beneficiary, which was him. [21] In redirect he said that he could not say if Terrance O'Flynn met with the candidates for employment alone or not. He did not know if notice of eligibility was sent out after three months. [22] Terrance O'Flynn testified that the Corporation was primarily involved in selling valves to oil companies. It commenced operation in September of 1995. It has grown over the years. It started with three partners in business with $1,000,000 annual sales. This has increased to 12 to 14 employees with $10,000,000 in sales. The employees of the Corporation came in over a period of time. [23] The Corporation was always looking for "value added" employees. It was always a challenge in the business. It took the Corporation two to three years to really start growing. When a prospective employee is considering coming with the Corporation, they have questions involving security, whether or not the Corporation would be successful in the long term, wages, the benefits, holidays and where their office was located. The hardest condition to meet for the employees was that of security, the so-called "sound company syndrome" and the matter of benefits. When they talked about benefits, especially to sales people, the matter of the health plan, salary and holidays always came up. [24] In the early days the Corporation was unable to provide the benefits that prospective employees sought and consequently they lost some very good candidates. Later they tried to do something about it. They listened to suppliers of plans and instituted the first dental plan. [25] He referred to Exhibit R-3 and said that that was a dental plan which was taken out as of June 1, 1996. It was noted that the Corporation had not signed the agreement with ADSC and he could not explain why that was so. However, the Corporation was covered by it. Any person who had passed the probationary period was eligible to join the plan. [26] He was referred to Exhibit R-1, the list of employees of the Corporation and said that Bryce Readman had the plan explained to him. He was not interested in it. Catherine Forester was aware of it and had it explained to her. She did not participate in the plan. She was to be covered by her future husband's plan. [27] Dennis Halisky was informed about the policy and he declined it. His wife had a good plan and he was happy with it. Tammy Marrazzo was told about the plan as well. She was very temporary. She was not eligible for the plan. [28] The normal probationary period for the plan was three months. There were some exceptions. An experienced person may start right away. If they designated a person as temporary, benefits would not be available to that person. [29] Linda Carstairs was advised of the plan. She was not interested in it. Her husband had a plan covering them. She is now the controller of the Corporation and the office manager. [30] Doug Munro was advised and he was not interested. Ray Van Twuyver was advised about the plan but he declined it. He had other coverage with his old employer (Canada Bread Company). [31] Greg Smith and Ty Sanders were advised about the plan as well. They came into the employ of the Corporation when it was talking about increasing its coverage with Zurich Insurance Company. These persons never signed up for the dental plan but they did for the Zurich plan. It came into effect in February 2001. [32] The corporate policy was that if a person declined coverage it was not a final thing. They would have been allowed to join later if they changed their mind. [33] He was referred to Exhibit A-3, which was the insurance plan between the Corporation and Maritime Life Assurance Company. The person insured was himself. It came into force on August 12, 1996. Exhibit A-4 was another plan between Maritime Life Assurance Company and the Corporation. The person insured was Terrance O'Flynn. It was in force as of December 23, 1999. [34] He was asked why the Corporation took out the insurance plans referred to in Exhibits A-3 and A-4 and he said that they were disability insurance plans that they took out in 1996 and were increased in value for coverage in 1999. His position was that he wanted the Corporation to be protected if he became disabled and could not perform his functions. In that event the insurance policy would provide funds for the Corporation to hire someone else to perform his functions. [35] He was asked what type of problems they expected from the management point of view and he said that there was a problem of being able to continue the business if he became sick. Both he and Richard Stanton were "lead guys" in their business and they would have had to find someone else to do their work. This witness covered the financial side and dealt with main purchases and inside sales. Richard Stanton was the "outside sales guy". [36] They had an open interview process with respect to prospective employees. The prospective employees would direct questions at both he and Richard Stanton, then he took over the "nitty gritty" side. Sometimes he interviewed possible workers by himself. He told them everything that would have been explained if both he and Richard Stanton had been there together. [37] The dental plan provided dental coverage for the employees and their families. The Corporation made monthly payments to "Quik Card" or ADSC. They collected an administration fee. Then he said that he was not sure about that process. [38] In cross-examination he was asked what he would tell prospective employees about the plan. He would tell them that there was a dental plan. He might go into it at varying lengths depending upon the employee and his questions. If they said that they were not interested, they moved on to the next topic. He was referred to the employee, Tammy Marrazzo. He said that initially it looked like she would be a permanent employee. [39] He did not ask the prospective employees why they declined the coverage. He reviewed Exhibit R-3, the dental plan. He was referred particularly to paragraph 26 which provided that when benefits provided under their plan were available to an eligible member under any other dental benefits or dental insurance plan, the benefits of the other plan would be deemed payable prior to the application of benefits under the Corporation's plan. The amount payable under the plan would be limited to the extent that the total amount available under all coverages would not exceed 100% of the allowable expenses. [40] He confirmed that as far as he knew the Corporation did not provide the list of eligible employees as required by paragraph 10 of the plan. They did have a list of all of the employees but he did not have it with him. [41] After the probationary period was up there was no memo sent out about joining the plan and it may not have been discussed any further with the prospective employees. No documents were provided to prospective employees after they were hired. He turned the matter over to Linda after she was hired but before that he and Richard Stanton did most of the work. If someone decided to come into the company, it would pay the whole premium for them. [42] With respect to the insurance plan, Exhibit A-4, it was agreed that the control of the policy was by the owner. The beneficiary was named as the owner or otherwise the estate of the owner. He agreed that the disability benefits were taxable to the person insured. He was a person insured. Further, he agreed that under paragraph 6.1, control of the policy was by the owner and that the owner might change the name of the beneficiary. If the owner's name was left blank, then the owner was the insured. [43] He agreed that the designated beneficiary was his spouse. During the period under review a change of beneficiary form was not in force. After the amendment the proposed owner and beneficiary was the Corporation. [44] In redirect he agreed that during the period under review he was the insured person but the intention was that the Corporation be the beneficiary. In Exhibit A-3 his spouse was shown in the application as the beneficiary. He did not know why she was shown there. That was not the intent. He agreed that the transfer of ownership took place after the audit which gave rise to the present matters. [45] Robert Joseph Frost testified that he was a certified financial planner. The appellants were all clients of his. He met with them annually or every two to three years with respect to insurance, investments, cash flow planning and insurance. He referred to Exhibit A-3 and said that the insured was Terrance O'Flynn and the owner was the Corporation. Terrance O'Flynn would have received the benefits under Exhibit A-3 until the changes took place. This policy came into effect in 1996. The owner was Terrance O'Flynn and the insured was Terrance O'Flynn. This was an income loss replacement plan. The Corporation had no interest in the policy up to 2003. [46] With respect to Exhibit A-4, dated October 29, 1999, this policy provided additional disability insurance. It was an accident benefits/sickness policy. The beneficiary was Terrance O'Flynn. The provisions were the same as in the policy under which Richard Stanton was the insured. He agreed that the payments were taxable to the beneficiary and deductible by the Corporation. [47] Ray Van Twuyver was a shipper-receiver for Canada Bread Company. He worked for the Corporation in June or July of 2001 when he quit. During the interview process he said that they discussed his skills, the company's offer and the salary and benefits program. His benefits at the Canada Bread Company were better. He was an hourly employee. He told the Corporation that he would not take their benefits package until his benefits at Canada Bread Company fell off. [48] He did not know who would be paying the premiums. His employment with the Corporation continued for the rest of the year and his benefits with Canada Bread Company fell off. He spoke to Terrance O'Flynn and Richard Stanton about picking up their benefit plan. He gave the form to the bookkeeper. [49] In cross-examination he said that the Corporation's plan provided full coverage for the dental and 80% for prescription drugs. With respect to hospitalization, it was 100% for a private ward. He paid part of the premiums and the company paid a portion. He did not know that the Corporation's dental plan would be paid entirely by the Corporation. Around the year 2001 he went on the plan. He continued to work for Canada Bread Company for at least one shift until he left the Corporation and returned to Canada Bread Company where he is still employed. [50] Linda Carstairs testified that she was the controller for the Corporation. She started working there in January of 1999. She applied for the job. It was a one girl office. She was interviewed by Richard Stanton and Terrance O'Flynn. She has 17 years overall office experience in the same industry. The Corporation offered her a wage and benefits package and dental plan. She did not need it. She was told that it was always open to her if she wanted to join. She never needed it. Benefits were not important to her. She did believe that she had the option of going on the plan later on. She agreed that the plan was based on usage and that the Corporation would get a rebate on the bill if all of the premiums were not used up. She received quarterly statements. [51] She identified an Enrollment Card for the dental plan, Exhibit A-5. If an employee when onto the plan, she would fill this form out. The Corporation does not have this form now. They have a Manulife plan in which the application form has more depth. The plan started in February 2001 and provided for prescriptions, disability and life insurance. Employees were told about it. It was compulsory. She arranged to have all forms filled out. She gave this to everyone. Everyone took it except Dennis Halisky and she did not take the prescription drugs part of the plan which was optional. However, everyone had to be on part of it. The premium was paid by the Corporation. She never gave a package out about the dental plan. [52] Brenda Marie Salo was an auditor with Canada Customs and Revenue Agency ("CCRA"). She was the objections officer assigned to these files. The two issues were the insurance policies and whether or not the premiums on the dental plan were benefits to the members. [53] She reviewed Exhibit R-1, the list of employees and she questioned who the participants were. She noted that the Corporation undertook to supply a monthly listing as to who the members were. The auditor presented a statement of benefits from the plan for a four month period. She reviewed the plan as well. Then she said that the auditor received another statement for a further four month period. The taxpayer also provided a list of four employees who had opted out of the plan. She said that the first 10 names on Exhibit R-1 were affected by the plan. [54] She did not see any letter with respect to opting into the plan. She concluded that only two people participated in the plan and they were Mr. O'Flynn and Mr. Stanton and their families. It was a group plan established in 1996. She did not get an answer as to why all the employees except two opted out of it. [55] She was referred to Exhibit A-1, which was the Maritime Life Assurance plan. The Corporation had claimed expenses for two people. The auditor did not get copies of the insurance policies and so he denied them. She was told at the objection stage that the Corporation had insurance on the key employees. If something happened to them they would have someone to replace them. [56] Their agent brought in documents for both Terrance O'Flynn and Richard Stanton. She reviewed Mr. Stanton's policy only. Richard Stanton was the owner. It was a type of disability insurance and the premiums are not deductible. No reason was given to her for these plans. She reviewed a disability policy which was Exhibit A-2. This policy was being taken by a shareholder rather than an employee. It provided disability benefits. This was not deductible since it was personal. She also reviewed Exhibits A-3 and A-4. [57] In cross-examination she said that she concluded that they were not shareholder benefits at the end of the day. [58] At the conclusion of evidence the parties were given time to consider the matter and they did come to an agreement with respect to the issue regarding the insurance policies on the shareholders. They agreed that for the year 2002 with respect to policy numbers 978020, 951020, 978022, 951021, 978021, 978823, 2251879, 951022, 225188 and 951023 the total amount disallowed to the Appellant Corporation should have been $726.36. With respect to the year 2001, in regard to the same policies, they agreed that the total amount disallowed to the taxpayers should be $2,905.44. [59] That left in contention, the issue of the expenses related to the dental benefits. Argument on Behalf of the Appellants [60] In the case of Spicy Sports Inc. v. Canada, [2004] T.C.J. No. 333, McArthur J. found that dental premiums paid by the corporation were not deductible because they were provided solely on the basis of the recipient being a shareholder and not as an employee. That case is distinguishable from the present case because the payments here were qua employee. [61] In the case at bar the evidence makes it clear that the benefits were available to everyone who was an employee. It was not a rich plan. The employees testified that the benefits were available to all of them. In any case where the prospective employee did not join the plan, they had a valid reason for not doing so. Some had another plan, some did not take it for their own reasons. However, they could come back in at a later date. Part of the last plan was compulsory. The evidence is clear and consistent in that respect. [62] As can be seen from Exhibit R-3 at paragraph 26, there was no topping up. The total amount available under all coverages could not exceed 100% of the allowable expenses. The benefits under the other plan had to be payable prior to the application of benefits under the plan of the Corporation here. From its inception the benefits of the policy were available to all. They were advised that they could come in at a later date qua employees if they wished to. There were no special benefits to the Appellants here. [63] The appeals should be allowed and the benefits should not be taxable to the Appellants, Terrance O'Flynn and Richard Stanton, and should be deductible by the Appellant Corporation. [64] With respect to the matter of costs, counsel argued that he was substantially successful and therefore should be allowed costs. Argument on Behalf of the Respondent [65] Counsel for the Respondent argued that the principals of the Corporation and their families were the only ones capable of benefiting from this dental plan during the whole period in issue. All of the other people either had not worked long enough or had opted out. Since the Corporation did not explain it in a clear fashion to their prospective employees, one must be suspicious as to whether or not the plan was really open to all employees. Further, there was a possible topping up of the plan since there was 100% coverage provided under paragraph 26. Further, there was a lack of detail disclosed by the Corporation to prospective employees. [66] The Appellant could have produced more evidence as to the disclosure to the employees. Consequently, in practice, the benefits of the policy were only available to Richard Stanton and Terrance O'Flynn and their families. Under the provisions of paragraph 6(1)(a) these expenses did not qualify as being deductible. [67] To be deductible, the payments must have been expended for a business purpose. One must ask the question, "what was the business purpose here?" Counsel was prepared to admit that the avowed purpose of making it available to attract other better qualified employees to the company could have been a business purpose. However, in light of the failure of the company to make the benefits more apparent to prospective employees, these expenditures were not for business purposes. [68] She referred to the case of Prefontaine v. Canada, [2001] T.C.J. 94 at paragraph 10 in support of her position. In accordance with that finding she stated that as the expenditures relate to the provisions of paragraph 18(1)(a) of the Act, the Appellant has not shown that there was a business purpose and the Minister was correct in not allowing them as a deduction. In Prefontaine, supra, Justice McArthur at paragraph 10 said: For the cost of insurance to be a deductible business expense, there must be some reasonable, factual connection between the carrying on of the business and the payment of the premiums. These amounts were not paid to benefit the business but to benefit the beneficiaries. They money was not expended to gain income. The connection between benefiting the Appellant or her husband and the insurance costs is far too tenuous. These premiums are not deductible. [69] Further, counsel stated that subsection 56(2) is applicable to the present case as well as the provisions of subsection 15(1) of the Act. She argued that the Corporation was controlled by Mr. Stanton and Mr. O'Flynn and their wives. They were the only ones who benefited from these payments. [70] She also referred to the case of Peddle v. R., 2004 CarswellNat 729, 2004 TCC 226, 2004 DTC 2459, [2004] 2 C.T.C. 3111 and in particular paragraph 33 where Campbell J., referring to the decision of Cattanach J. in Fraser Cos. v. R. (1981), 81 DTC 5051 (Fed. T.D.) sets out the following four preconditions that must be satisfied in order for subsection 56(2) to apply: 1. There must be a payment or transfer of property to a person other than the taxpayer. 2. The payment or transfer is pursuant to or with the concurrence of the taxpayer. 3. The payment or transfer must be for the taxpayer's own benefit or for the benefit of some other person on whom the taxpayer desired to have the benefit conferred. 4. The payment or transfer would have been included in computing the taxpayer's income if it had been received by him instead of the other person. She argued that all four criteria are satisfied in the case at bar. [71] This section allows one to look through the effect of holding companies. The Appellants were not shareholders in the Corporation but at the same time they controlled it through the holding company the same way as if they were shareholders. [72] In theory, the Appellant indicated that the plan was available to other employees and to all persons who might become employees but their actions indicate the contrary. Actions speak louder than words. [73] The Minister properly denied the expenses under the provisions of paragraph 18(1)(a) and properly assessed a benefit under subsection 15(1) because the Appellants were the only people who benefited in effect. [74] In reply counsel for the Appellant said that "you can lead a horse to water but you cannot make him drink" in reference to the fact that benefits of the dental plan were available to all prospective employees if they wished to take advantage of them. It was not the Corporation's fault that they decided to decline to be a participant in the policy. [75] In considering the Respondent's position that the Appellants tried to hide the benefits of the plan from prospective employees because they did not want the workers to know that it was available to them, he agreed that they did not push the plan as much as they could have but he asked, "but what else could they do?" To ask them to do more would have been unreasonable. Two witnesses testified to the effect that the benefits of the policy were available to all those persons who wished to take advantage of it. [76] With respect to the business purpose test, counsel stated that expenditures made for the purpose of attracting suitable employees to the Corporation are expenses made for business purposes. Prefontaine, supra, is not relevant to the factual situation in the present case. In that case it was a matter of life insurance and its deductibility was governed by another section of the statute. [77] In the case at bar, the inclusion in income of the amount paid is a separate question. This is governed by the provisions of subparagraph 6(1)(a)(i) which makes the expenditure non-includable in income if it complies with those provisions. The de facto situation in the present case ensures that the amounts in question are not includable in income under that provision. [78] If this benefit was available to the Appellants here, qua employee, it was not includable in income under subsection 56(2) as a benefit and is deductible to the Corporation under the provisions of subparagraph 6(1)(a)(i) of the Act. Analysis and Decision [79] With respect to the remaining issues, the Court is satisfied that these appeals must succeed. The Court accepts the arguments of counsel for the Appellants that the expenditures were made by the Corporation on behalf of the non-corporate employees qua employees of the Corporation. The Court is satisfied that these payments come within the provisions of subparagraph 6(1)(a)(i) of the Act and is satisfied that they are derived from the contributions of the taxpayer's employer under a group sickness or accident insurance plan or a private health services plan and as such are not a benefit to the Appellant taxpayers as envisaged by the provisions of this subparagraph. Therefore, they need not be included in the income of the Appellants, Terrance O'Flynn and Richard Stanton. [80] The Court does not accept the argument of counsel for the Respondent that these benefits were not available to every employee who wished to take advantage of the plan. Just because almost all of the employees, for some reason or other, decided not to participate in the plan, does not mean that the plan was not available to all of them. The evidence of the witnesses makes it quite clear that it was open to all who became employees of the Corporation who wished to take advantage of it. [81] Further, the Court is satisfied that it should not accept the argument of counsel for the Respondent where she stated that the Corporation in some way did not advertise the availability of the policy in a sufficient way or in some way attempted to hide the availability of these benefits from all of the employees except families of the two Appellants and that therefore the benefits were not available to all of the employees. [82] The evidence does not bear this out and is quite to the contrary. The Court has no difficulty at all in accepting the evidence of the witnesses that this plan was available to all persons who wished to take advantage of it when they became eligible. The mere fact that more of the employees did not want to take advantage of it casts no improper reflection upon the Corporation or the other two Appellants in this case. [83] Further, the Court is satisfied that neither the Corporation, Mr. Stanton nor Mr. O'Flynn could have, or should have, done anything more to make the prospective employees aware of the possible benefits of being a member of this plan. [84] With respect to the second part of the issue, that is, the right of the Corporation to deduct these expenses, the only issue is whether or not the expenditure was for the purpose of gaining or producing income from a business or property under the provisions of paragraph 6(1)(a) of the Act. The answer to this question turns on whether the Court is satisfied that the only ones capable of enjoying the benefits of these expenditures were the Appellant shareholders and their families or whether or not these benefits were available to all employees once they became eligible. The Court has already answered that question and finds that the benefits were available to all, not only to these two Appellant shareholders and their families and that the reason for making the expenditures in the first place was for the very valid business purpose of attracting suitable employees to the Corporation. This position was made quite clear by the evidence of the two shareholders that testified in Court and whose evidence has not been challenged in any way. Their evidence is accepted by the Court as they stated it. [85] In the end result the expenses are deductible by the Corporation under the provisions of paragraph 6(1)(a) of the Act. [86] The appeals are allowed and the matters are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Court finds with respect to the insurance issue, in the year 2000, the total amount disallowed to the Corporation should be the amount of $726.36 with respect to policy numbers 978020, 951020, 978022, 951021, 978021, 978023, 2251879, 951022, 2251888 and 951023. [87] With respect to the same policies, during the year 2001, the amounts to be disallowed to the corporate taxpayer should be $2,905.44. [88] Further, the appeals are allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis of the Court's finding that with respect to premiums payable for the dental plan, the Corporation is entitled to deduct these payments under paragraph 18(1)(a) of the Act. [89] With respect to the Appellant, Terrance O'Flynn, the amounts of $2,025, $2,700 and $675 in the 1999, 2000 and 2001 taxation years were not properly includable in income pursuant to subsections 15(1) and 56(2) of the Act. [90] With respect to the Appellant, Richard Stanton, the amounts of $2,025, $2,700 and $675, respectively, for the years 1999, 2000 and 2001 were not properly includable in the Appellant's income. [91] Since the Appellants have been substantially successful in these appeals, they shall be allowed their costs, to be taxed on a party to party basis, to be taxed as one Bill of Costs. Signed at Ottawa, Canada, this 1st day of April 2005. "T. E. Margeson" Margeson J. CITATION: 2005TCC230 COURT FILE NOS.: 2004-2977(IT)I, 2004-2979(IT)I and 2004-2980(IT)I STYLE OF CAUSE: Terrance O'Flynn v. The Queen Richard Stanton v. The Queen Prism Flow Products Inc. v. The Queen PLACE OF HEARING: Edmonton, Alberta DATE OF HEARING: February 7, 2005 REASONS FOR JUDGMENT BY: The Honourable Justice T. E. Margeson DATE OF JUDGMENT: April 1, 2005 APPEARANCES: Counsel for the Appellant: James C. Yaskowich Counsel for the Respondent: Leslie Akst COUNSEL OF RECORD: For the Appellant: Name: James C. Yaskowich Firm: Felesky Flynn For the Respondent: John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada