Every now and then we hear a case involving a dentist getting into trouble. Here’s one such case that centred around the deductibility of management and consulting expenses.
In Bessette c. Agence du revenu du Québec, [2014] J.Q. No. 5524, a Quebec dentist had her dental clinic pay “consulting fees” to a separate company that she also owned (Les Nathalie Bessette Inc. Services). That company was itself owned by Bright Eyes Management Inc., which was owned 100% by Ms. Bessette. And we’re not talking a little chump change here: from 2004-2006, those management fees totalled over $473,000!
Revenue Quebec denied the deductibility of the management fees. And Quebec Court Judge Brigitte Gouin agreed. The Court found that the management fees were extremely high, not justifiable (e.g. not based on operations of the business), and there was no evidence of any services actually provided by Les Nathalie Bessette Inc. Services for those fees.
For an expense to be deductible, it must be reasonable and incurred for the purpose of earning business income. Although there were written contracts that documented the payment of fees in exchange for consulting services, there were no services (or property or anything else) rendered by Les Nathalie Bessette Services Inc.
Importantly, the Court held that “[t]he creation of a separate legal entity, or the creation of a company must be much more than an accounting industry that may benefit from a tax perspective. It must be consistent and correspond to real operations. Accountability income generated by economic activity is not a discretionary decision accountants or anyone else. It must correspond to reality and unequivocally especially when there may be confusion due to the different status of the individual who controls the two (2) entities.” The Court found that the management fees constituted discretionary income allocation from the dental practice to another corporation to reduce the tax liability of the dental practice. Therefore, Revenue Quebec was correct in refusing the requested deduction.
Moral of the story: dentists should be weary about the advice they receive from certain professionals. Business expenses need to be reasonable, legitimate / justified, and cannot be based on shell companies and empty contracts.
