Pat Marcantonio v. Minister of National Revenue, 91 DTC 917, [1991] 1 CTC 2702 (TCC)

Mogan, T.C.J.:—The issue in this appeal is whether certain payments made in 1984 by the appellant to a corporation controlled by his wife are deductible in computing the professional income of the appellant.

The appellant is an optometrist who practises his profession in the towns of Riverview and Sackville, New Brunswick. He examines the eyes of a patient for defects and faults of refraction and he is authorized to prescribe correctional lenses. A patient who is issued a prescription for glasses will go to an optician to have the prescription filled. When the appellant commenced his public practice in Moncton in 1975, he operated only as an optometrist and he had no facility for dispensing frames or lenses. In 1978, when he moved to Riverview, there was no outlet in that community for eye glasses and so he decided to provide the services of an optician and dispense frames and lenses from his office.

In 1979, the appellant opened an office in Sackville, about 35 miles from Riverview. At all relevant times, he practised his profession in both towns. Approximately 50 per cent of his patients would need eye glasses and approximately 50 per cent of those patients who were issued prescriptions for glasses would have the prescription filled by the optician who also worked in the appellant's office. In other words, within the same office, the appellant provided the services of optometrist and optician.

On March 31, 1978, Andrea Enterprises Ltd. (Andrea") was incorporated under the laws of the Province of New Brunswick. All of the issued shares of Andrea are beneficially owned by the appellant's wife. Originally, Andrea provided bookkeeping and office management services to the appellant. The appellant's wife had worked in a bank and, after their children were born, she wanted to go back to some form of business work. She commenced working at the bank on Monday and Friday of each week and she worked two or three of the other days for Andrea.

In 1983, a chain of optical stores invited the appellant to join them as an inhouse optometrist. He declined the proposal but decided that Andrea should become his affiliated retailer for the dispensing of frames and lenses. In 1983, he arranged for Andrea to take over his former " optician business” and to commence selling frames and lenses to the public. From and after 1984, a patient would first come to the appellant for a consultation with him as an optometrist; and if he were to issue a prescription for eye glasses, the patient could then go to a separate counter within the same business premises operated by an employee of Andrea to have the prescription filled.

Prior to 1984, the appellant purchased all of his optometric supplies directly from the various suppliers. In 1983-84, Andrea started to purchase the optometric supplies but they were sold by the appellant in connection with his professional practice. In a typical transaction, the appellant would prepare an invoice and receipt with prescription attached (entered as Exhibit A-2) making the following charges:

Exhibit A-2 was a printed form No. 08664 (serial numbers) displaying the appellant's name, office address in Riverview and telephone number. The prescription and amounts were, of course, filled in by hand. He explained that he would retain the $40 as his professional fee plus 18 per cent of the remaining $137 ($51 plus $86) as a charge to Andrea for rent, heat, light and office supplies; he would then remit the balance to Andrea. The patients would see only the appellant’s name within his office, on his outdoor sign, on his invoice and prescription. The name of Andrea was not displayed and, if a patient were buying eye glasses through the appellant's office, the patient would not know that he or she was buying the frames and lenses from Andrea. In 1984, Andrea sold only to and through the appellant's office.

In computing his income for 1984, the appellant had deducted as an expense the gross amount $176,533 with respect to supplies and materials. Of that gross amount, $155,457 was paid to Andrea and about $21,000 was paid directly to the supplier of contact lenses which Andrea could not sell. By notice of reassessment dated June 6, 1986, the respondent added to the appellant's reported income for 1984 the amount of $42,130 determined as follows:

When making the above reassessment, the respondent assumed that $155,457 exceeded the fair market value of the supplies purchased by the appellant from Andrea and that such amount was not a reasonable cost in the circumstances. The respondent relies on paragraph 69(1)(a) and section 67 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). There is no doubt that the appellant and Andrea were not dealing at arm's length because Andrea was controlled by the appellant's wife. As I understand the above reassessment, the respondent has added to the appellant's reported income for 1984 almost all of the net profit which was reported by Andrea in its 1984 fiscal period. There was no evidence before me as to whether the respondent had issued a reassessment to Andrea to remove from Andrea's reported income for its 1984 taxation year that same amount of profit. I will return to this point later.

Counsel for the appellant argued that the respondent could not ignore Andrea and determine that the appellant was in the business of merchandising optometric supplies on his own account. That argument raises the question as to who was merchandising the optometric supplies (frames and lenses). The ultimate purchaser of the frames and lenses was the patient: the person who came first to the appellant as optometrist to determine if eye glasses were needed. If glasses were in fact needed, the appellant would fill out a form like Exhibit A-2 which is an all-inclusive invoice/receipt and prescription. The prescription is a detachable stub which may be taken to any person who sells frames and lenses. Both the invoice/receipt and the prescription stub display only the appellant's name. A patient who decided to purchase frames and lenses at the appellant's place of business would have no way of knowing that the person who filled the prescription for frames and lenses was an employee of Andrea or that Andrea was the purported vendor of the frames and lenses. The patient would issue a cheque to the appellant for the aggregate amount of the appellant's fee and the price of the frames and lenses. The appellant would cash the cheque and remit to Andrea only the specific amounts for frames and lenses less 18 per cent for rent and other overhead.

In my view, there was a contractual relationship between the appellant and patient with respect to his professional optometrist services and the sale of the frames and lenses but there was no contractual relationship between the patient and Andrea. How could it be said that Andrea was the vendor of the frames and lenses vis-à-vis the patient when the patient did not even know that Andrea existed? Andrea was the vendor of frames and lenses vis-a-vis the appellant but not the patient. With respect to the sale of frames and lenses, the commercial relationship between the appellant and his patient was retailer/ customer whereas the commercial relationship between the appellant and Andrea was retailer/wholesaler. It appears, however, that the appellant was not buying from Andrea at wholesale prices. In fact, the appellant was buying from Andrea at retail prices out of which Andrea paid 18 per cent to the appellant for rent and other overhead. The respondent relies on paragraph 69(1)(a) of the Income Tax Act which provides:

69.(1) Except as expressly otherwise provided in this Act,

(a) where a taxpayer has acquired anything from a person with whom he was not dealing at arm's length at an amount in excess of the fair market value thereof at the time he so acquired it, he shall be deemed to have acquired it at that fair market value;

As stated above, the appellant and Andrea were not dealing at arm's length and were in a retailer/wholesaler relationship with respect to the sale of frames and lenses. That being the case, the "fair market value” of the frames and lenses in their particular relationship was the wholesale price and not the retail price. In other words, the appellant as retailer could not afford to buy the frames and lenses from Andrea at the same price at which he sold them to his patients. I find that the appellant did pay to Andrea for the frames and lenses an amount in excess of their fair market value (i.e., wholesale price) having regard to their retailer/wholesaler relationship. Accordingly, under paragraph 69(1)(a) of the Income Tax Act, the appellant is deemed to nave purchased the frames and lenses at their wholesale price; and the respondent was justified in reducing the appellant's cost of frames and lenses.

Counsel for the appellant relied on the decision of this Court in Smith, Dr. R.L. v. M.N.R., [1987] 1 C.T.C. 2183; 87 D.T.C. 132 in which a chiropractor provided certain professional services and his corporation provided certain therapeutic treatment to his patients. In that case, the chiropractor's fee was inclusive of therapy which was in fact not part of chiropractic treatment; and so he made no extra charge for the therapy. His appeal was allowed and he was permitted to allocate part of his fee to his corporation. In that case, I find no discussion of the question concerning a contract between the patient and the corporation or the value of the therapy provided by the corporation. Also, that case is in conflict with an earlier decision of the Tax Review Board in White, P.F. v. M.N.R., [1979] C.T.C. 2065; 79 D.T.C. 99. These cases are decided primarily on their respective facts. The appellant has failed to prove that the assessment under appeal is in error.

I have decided for the above reasons that this appeal must be dismissed. There was no evidence before me on the question of whether the respondent had issued a reassessment to remove the amount of $42,130 from Andrea's reported income for 1984. I recognize, however, that the dismissal of this appeal would cause an undesirable result if any amount of income reported by Andrea were to be taxed in the hands of both the appellant and Andrea. [1]

Appeal dismissed.