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Citation: 2004TCC684
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Date: 20041013
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Dockets: 2002-2144(IT)G
2002-2145(IT)G
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BETWEEN:
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GRANT SCHNURR,
DARCY SCHNURR,
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Appellants,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Bowman, A.C.J.
[1] These appeals were heard together
and are from assessments for the appellants' 1997, 1998 and
1999 taxation years. The appellants are husband and wife.
[2] Initially, the appeal of
Grant Schnurr raised a number of issues relating to the
deductibility of expenses. All these issues have been abandoned
by the appellant except one relating to the deductibility by
Mr. Schnurr as an employment expense under
paragraph 8(1)(i) of the Income Tax Act of
salary paid to his wife as his assistant.
[3] Paragraph 8(1)(i)
reads:
8(1) In computing a
taxpayer's income for a taxation year from an office or
employment, there may be deducted such of the following amounts
as are wholly applicable to that source or such part of the
following amounts as may reasonably be regarded as applicable
thereto:
...
(i)
dues and other expenses of performing duties -
amounts paid by the taxpayer in the year as
...
(i) office
rent, or salary to an assistant or substitute, the payment of
which by the officer or employee was required by the contract of
employment,
...
[4] Subsection 8(10) reads:
8(10) Certificate of employer -
An amount otherwise deductible for a taxation year under
paragraph (1)(c), (f), (h) or
(h.1) or subparagraph (1)(i)(ii) or (iii) by a
taxpayer shall not be deducted unless a prescribed form, signed
by the taxpayer's employer certifying that the conditions set
out in the applicable provision were met in the year in respect
of the taxpayer, is filed with the taxpayer's return of
income for the year.
[5] Before and during the years in
question the appellant was a successful investment advisor with
the stockbroker firm Nesbitt Thomson (or Nesbitt Burns or BMO
Nesbitt Burns; the name changed periodically).
[6] He hired his wife Darcy as his
assistant and in 1997 paid her a salary of $24,000 and in 1998
and 1999, he paid her an annual salary of $30,000. Payroll
deductions for income tax and Canada Pension Plan premiums were
made and remitted to the Canada Customs and Revenue Agency.
[7] Mrs. Schnurr performed a
number of functions in Mr. Schnurr's business. She
performed secretarial work with respect to the records of clients
that he kept at his home. She attended to mailing of Christmas
cards and to purchasing gifts for clients. She made contacts in
the community to bring her husband clients.
[8] I have no hesitation in finding as
a fact that Mrs. Schnurr's employment by her husband was
genuine and her remuneration was reasonable in relation to and
commensurate with the services that she performed (see Gabco
Ltd. v. M.N.R., [1968] C.T.C. 313). She performed services
that were essential to Mr. Schnurr's services in his
work as an investment counsellor. The amount paid to
Mrs. Schnurr in the overall context of the high income and
substantial business generated by Mr. Schnurr is in fact
rather modest.
[9] I come then to the real point in
this case. To deduct the cost of a salary paid to an assistant,
the employee must meet the conditions in
subparagraph 8(1)(i)(i) that the payment or the
salary to the employee was required by the contract of
employment. Tab 1 of Exhibit A-1 is a letter
dated 30 July, 1992, to the appellant from a
Vice-President of Nesbitt Thomson. It says nothing explicit
about the hiring of an assistant. It was however implicit in the
relationship with Nesbitt Thomson that if Mr. Schnurr is to
generate the sort of business for Nesbitt Thomson that it
expected him to, he is required to hire someone to perform the
type of services that his wife performed. Such a provision need
not be explicitly set out in the agreement between the employer
and the employee.
[10] This view is consistent with the
administrative practice set out in paragraph 1 of
Interpretation Bulletin IT352R2, which reads:
1. Subject to
certification by the employer (see 13 below),
subparagraphs 8(1)(i)(ii) and (iii) allow a taxpayer,
in computing income for a taxation year from an office or
employment, to deduct amounts paid in the year as expenses for
office rent, supplies and salary to an assistant or substitute.
These expenses are deductible provided the following requirements
are met:
(a) the taxpayer is required by the contract of
employment to pay for such office rent or salary, or to provide
and pay for such supplies;
(b) the taxpayer has not been reimbursed and is not
entitled to reimbursement for such expenses;
(c) these expenses may reasonably be regarded as
applicable to the earning of income from the office or
employment; and
(d) in the case of supplies, they are consumed directly
in the performance of the taxpayer's duties of the office or
employment.
Ordinarily, (a) above necessitates that there be an express
requirement within the terms of a written contract of employment.
Nevertheless, such a requirement for the payment of office rent,
supplies or salary to an assistant or substitute may exist where
the taxpayer can establish that it was tacitly understood by both
parties (the taxpayer and the employer) that such payment was to
be made by the taxpayer and was, in fact, necessary under the
circumstances to fulfill the duties of the employment.
[11] It is also consistent with the
decisions of this Court in Baillargeon v. M.N.R., [1990]
T.C.J. 712 and Madsen v. Canada, [2001] T.C.J. 246, the
decision of the Federal Court of Canada in Canada v.
Gilling, [1990] F.C.J. 284 and the Federal Court of Appeal in
Verrier v. Canada, [1990] 3 F.C. 3.
[12] Finally, it is consistent with Nesbitt
Thomson's own administrative practices. The branch managers
of that company routinely signed the certificates required by
subsection 8(10) certifying that the investment advisors
were required under their contract of employment to pay for a
substitute or assistant. Such was the case with the appellant.
For each of the years under appeal, a certificate
(Form T2200) was signed by David Schneider, then Branch
Manager in the Victoria office. The form contains a question as
follow:
10(a) Was this employee required under a
contract of employment to pay for a substitute or assistant?
10(b) Did you repay or will you repay this
employee for any expenses in 10(a) above?
[13] On the form for each of these years,
the box for the first question was ticked "yes" and for
the second question "no".
[14] If the matter had stopped there, this
issue would not have been in Court. The CCRA would simply and
routinely have allowed the deduction. On February 6, 1998,
the Controller of Nesbitt Burns issued a memorandum to the branch
managers, which read as follows:
Please find enclosed the T2200 forms for the IAs in your
branch. The forms have been completed only as to the IA's
name, S.I.N., and commission earnings (question 6.b)). The
forms should be distributed to the individual IAs for completion
of questions 2. through 10.The completed forms should be reviewed
and signed by you in the bottom right corner ("Signature of
employer or authorized officer").
The purpose of form T2200 is to establish a framework to
determine which expenses IA's may claim as deductions from
their commission income when they complete their personal income
tax returns. Generally, for expenses to be deductible they must
meet certain criteria, most important of which is that they must
be "required" under the contract of employment, and the
employee cannot have received any reimbursement. The definition
of the word "required" as used in the Income Tax
Act is key. Under Revenue Canada's definition, it is not
sufficient that an employee have the option of incurring
an expense; rather, it must be "... tacitly understood
by both parties that such payment was to be made by the taxpayer
(employee) and was, in fact, necessary under the circumstances to
fulfil the duties of employment." (Rev. Cda. Interpretation
Bulletin IT-352R).
There are of course legitimate exceptions to the standard
conditions noted above. Exceptions must reflect the IAs true
conditions of employment, and the expense being incurred by the
IA must be necessary to fulfil the duties of employment. Please
keep a copy of all forms signed for your records. In addition,
please forward to the Payroll Department a coy of any form
completed where the area of travel referred to in
question 2. includes locations outside of the IAs provinces
of registration (eg. U.S. Europe etc.) or where any part
of question 10. has been answered "YES".
In the event that the IA's return is audited by Revenue
Canada, you may be contacted and asked to explain in greater
detail the IA's conditions of employment. Please be aware
that under the Income Tax Act, any firm providing an
employee with at T2200 form containing false or misleading
information is liable to pay significant penalties and interest.
In addition, any firm having once been found to have provided
false or misleading information is typically subject to a
significantly higher level of scrutiny in all tax related
areas.
...
[15] On March 13, 2000, an employee of
Nesbitt Burns sent an e-mail to Mr. Schnurr, as
follows:
From:
Natalie Peters (Br. Admin.)
Sent:
Monday, March 13, 2000 3:06 PM
To:
Grant Schnurr
Subject:
T2200
Hi Grant,
With regards to the T2200 signed off by Davie, I missed the
error in your answers to Questions 9 a, b & c. They must
ALL be ticked off as 'NO'. Pls see below.
The definition of the word "required" as used in the
Income Tax Act is key. Under Rev Cda's definition, it is not
sufficient that an employee have the option of incurring an
expense; rather, it must be " ... tacitly understood by
both parties (taxpayer and employer) that such payment was to be
made by the taxpayer [employee] and was, in fact, necessary under
the circumstances to fulfil the duties of the employment."
(Rev Cda Interpretation Bulleting IT-352R,
paragraph 1). This means that not all IA expenses will be
eligible employee expenses.
Please amend your signed copy of the T2200 as Rev Cda may
phone Dave in the future in regard to these forms, and I want to
make sure that it's completed/amended correctly. Sorry!
Thanks!
Sally Green
Acting Br. Admin
Vancouver Island
Phone: 250 351 2412
Fax: 250 361 2465
[16] Shortly before or after
Mr. Schnurr had left the employment of Nesbitt Burns, an
employee of the CCRA submitted a questionnaire to the Branch
Manager, Mr. Schneider, in which Mr. Schneider said
that Mr. Schnurr was not required under his contract of
employment to pay for an assistant. The questionnaire was
completed by an employee, Natalie Peters, in the manner
directed by Mr. Schneider. The answers were
Mr. Schneider's, not Ms. Peters'. She was
merely an amanuensis. Moreover, Mr. Schneider
altered the form for each year that he had signed and struck out
or whited out the "yes" answers that he had previously
given to the questions about Mr. Schnurr's hiring an
assistant and substituted "no" answers and sent the
altered forms to the CCRA. This was done without consulting
Mr. Schnurr or obtaining his concurrence.
[17] Mr. Schneider was not called as a
witness. I regard the questionnaire as pure hearsay and
completely unreliable and the altered forms T2200 as being of no
evidentiary value.
[18] I note in passing that toward the end
of Mr. Schnurr's employment with Nesbitt Burns,
relations between him and Mr. Schneider had deteriorated
drastically. The uncontradicted evidence of Mr. Schnurr and
his wife was that Mr. Schneider was trying to destroy
Mr. Schnurr and the relationship had become poisonous.
Ms. Peters confirmed the acrimonious relationship between
Mr. Schnurr and Mr. Schneider. In the absence of any
testimony from Mr. Schneider, I accept this evidence. In the
result I regard the questionnaire and the changed forms T2200 as
doubly unreliable as I do not think they were prepared in good
faith. The same observation applies to the e-mail of
March 13, 2000. The original forms T2200, in my view,
correctly reflected the terms of the contract of employment
between Mr. Schnurr and his employer. The attempt after the
years in question to change those forms or to allege that the
terms of employment were not as originally stated is simply
unacceptable.
[19] The filing of forms T2200 serves a dual
function: it is a statutory condition precedent to the claiming
of an employment expense deduction under
subsection 8(1)(i) and it provides evidence of the
terms of employment. I doubt that the form is conclusive or
determinative if the evidence showed it to be wrong but it is at
least prima facie evidence. The subsequent
ill-conceived and rather clumsy attempt by Mr. Schneider to
rewrite history retroactively is ineffectual. Indeed, it is
simply no evidence at all. The original forms have the virtue of
consensuality. Both parties agreed to the answers whereas the
unilateral change made subsequently by Mr. Schneider clearly
did not represent a meeting of minds.
[20] The appeals of Grant Schnurr are
allowed, with costs, and the assessments for 1997, 1998 and 1999
are referred back to the Minister of National Revenue for
reconsideration and reassessment to permit the deduction by
Mr. Schnurr of the salary paid to his wife.
[21] Mrs. Darcy Schnurr's
appeals for 1997 and 1999 do not ask for any reduction in tax.
She objects to the fact that the Minister of National Revenue did
not treat her salary received from her husband as income and that
he sent back to her the tax she paid on it. As stated above, I
think she was employed by her husband and her salary was income
from employment. Nonetheless, however commendable may be her
desire to give the tax back to the Minister of National Revenue
and to achieve consistency and symmetry with her husband's
tax position, this Court does not have the power to order the
Minister to increase an assessment (Harris v. M.N.R.,
67 DTC 5332 (Ex. Ct.), affd 66 DTC 5189 (S.C.C.)).
Therefore, the appeals of Darcy Schnurr are dismissed,
without costs.
Signed at Ottawa, Canada, this 13th day of October
2004.
Bowman, A.C.J.
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