Citation: 2012 TCC 316
Date: 20120906
Docket: 2011-2616(IT)I
BETWEEN:
TERESA BRUNO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1]
The appellant, Teresa Bruno,
operates Shades N Shutters, which is a business that specializes in supplying
custom window coverings.
[2]
In computing income from the business
for the 2007 and 2008 taxation years, Ms. Bruno deducted the amounts of $18,000
and $7,000, respectively, on account of wages paid to her two children who
provided services for the business.
[3]
The issue is whether this
deduction was properly disallowed by the Minister of National Revenue. The
reassessments also made other adjustments to business income which are not disputed
by Ms. Bruno.
[4]
Ms. Bruno was the only witness at
the hearing.
Background
[5]
The Shades N Shutters business was
established by Ms. Bruno and her husband in 2003. Although both spouses were
involved in the business, there is no suggestion that it was operated in
partnership. Based on the pleadings, it appears that the business was owned by
Ms. Bruno and that her husband provided services as an independent contractor.
[6]
In the 2007 taxation year, Ms.
Bruno reported income from the business in the amount of $11,944. In the 2008
taxation year, she reported a loss from the business in the amount of $16,963.
[7]
Ms. Bruno’s two children were 15-16
and 13-14 in the years at issue and helped out in the business on weekends and
holidays.
[8]
According to Ms. Bruno’s evidence,
the younger child did less skilled tasks such as cleaning and answering phones,
and the older child did mainly clerical work. Both children also spent time
learning sales.
[9]
Ms. Bruno entered into
evidence a summary of the hours worked and wages earned by the
children. Wages were payable at the rate of between $10 and $12 per hour. The
summary showed that the children generally worked store hours on both weekend
days during 2007 and on one weekend day during 2008, as well as on holidays in
both years. The reduction in the hours worked in 2008 was explained by Ms.
Bruno on the basis that the business was not doing as well in that year.
[10]
The wages were not paid by cheque.
Instead, Ms. Bruno paid for some of the children’s personal expenditures which
in aggregate are approximately equal to the wages shown on the summary.
According to Ms. Bruno’s testimony, the expenditures were luxury items that the
children chose to purchase out of the money that they had earned. A list of the
expenditures with a brief description was kept by Ms. Bruno.
[11]
Ms. Bruno stated that her
accountant advised her that she could not take a deduction for expenditures on
the children’s basic needs, but that she could take a deduction for luxury
items. She said that she followed this advice and kept track of the expenses
that would qualify.
[12]
Ms. Bruno testified that she could
veto any of the children’s purchases that were inappropriate but that she
usually approved them.
Analysis
[13]
In order for expenditures of this
nature to be deductible, they must be laid out for the purpose of earning
income and not personal or living expenses of Ms. Bruno.
[14]
The relevant legislation is
contained in paragraphs 18(1)(a) and (h) of the Income Tax Act, which
read:
18. (1)
General limitations
- In computing the income of a taxpayer from a business or property no
deduction shall be made in respect of
(a) general
limitation - an outlay or expense except to the extent that it was made or
incurred by the taxpayer for the purpose of gaining or producing income from
the business or property;
[…]
(h) personal
and living expenses - personal or living expenses of the taxpayer, other
than travel expenses incurred by the taxpayer while away from home in the
course of carrying on the taxpayer’s business;
[15]
At the outset, I would comment
that the Crown did not argue that the wages were unreasonable based on the services
performed and there was virtually no cross-examination of Ms. Bruno on this
point. I will therefore accept that the amounts are reasonable.
[16]
The Crown argued that the
expenditures are not deductible because they are personal or living
expenditures of Ms. Bruno and the children did not have sufficient discretion
over the funds.
[17]
Ms. Bruno suggested in her
testimony that the expenditures are not personal because she would not purchase
luxury items for her children unless they earned the money to pay for them. The
evidence concerning the nature of the expenditures was not detailed enough for
me to be satisfied on this point. It is more likely that the expenditures have
both business and personal elements.
[18]
What is the legal principle that
applies in considering the deductibility of an expenditure that has both
business and personal elements? The leading case is Symes v The Queen,
94 DTC 6001 (SCC), which dealt with the deductibility of child care expenses
incurred by a taxpayer who practiced as a lawyer.
[19]
In considering the interplay
between s. 18(1)(a) and (h), the majority decision in Symes concluded
that the prohibition for personal expenditures in s. 18(1)(h) does not apply to
an expenditure that was laid out for the purpose of earning income. Justice Iacobucci
stated, at page 6014:
Upon reflection, therefore, no test has been proposed
which improves upon or which substantially modifies a test derived directly
from the language of s. 18(1)(a). The analytical trail leads back to its
source, and I simply ask the following: did the appellant incur child care
expenses for the purpose of gaining or producing income from a business?
[20]
Accordingly, if a taxpayer incurs
an expense for the purpose of gaining or producing income from a business, the
deduction will not be prohibited pursuant to s. 18(1)(h) on the basis that it
also has a personal benefit to the taxpayer.
[21]
Applying this principle
to the facts in this case, if the
children are owed wages in reasonable amount, a deduction may be claimed if the
wages are paid in the form of purchasing luxury personal items chosen by the
children.
[22]
As for the Crown’s argument that
the children did not have sufficient discretion over the funds, this argument
is based on the decision of Beaubier J. in Bradley v The Queen, 2006 TCC
500, 2006 DTC 3535. Paragraph 9 of that decision reads:
[9] But
in a related family, parent-child situation, payment must be made and deposited
as it would be to a stranger. The payee must receive and control the alleged
payment in his or her name and be able to use it for his or her benefit without
any further control by the payer. That did not happen in this case.
[23]
This comment suggests that the children must have complete
discretion over the expenditures made. I would respectfully disagree with this
and note that Bradley is not a binding precedent since it was an
informal procedure case. I see nothing wrong with parents having a veto over
expenditures made by their children.
[24]
Turning to the facts of this case,
the difficulty that I have with Ms. Bruno’s argument is that the evidence about
the expenditures was not sufficiently detailed for me to be satisfied, even on
a prima facie basis, that all the expenditures were made for the
children’s benefit, let alone that they were for luxury items.
[25]
The evidence concerning the nature
of the expenditures consisted mainly of Ms. Bruno’s oral testimony and the list
that she prepared. As for the oral testimony, it is self‑serving and not
sufficiently detailed for me to be satisfied on most of the expenditures. As
for the accounting records, a great many of the descriptions of the
expenditures were simply too general to be of great assistance.
[26]
Based on the evidence as a whole,
I am satisfied that some of the expenditures are luxury items for the children’s
benefit. However, the evidence is not detailed enough for me to determine which
items qualify. It is appropriate in these circumstances, where the appeal is
governed by the informal procedure, for the Court to make a rough estimate. On
that basis, I propose to allow a deduction for 50 percent of the amounts
claimed.
[27]
In light of the mixed result, no
costs will be awarded.
Signed at Ottawa, Ontario this 6th day of September
2012.
“J. M. Woods”
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