Citation: 2010TCC429
Date: 20100819
Docket: 2004-2298(IT)I
BETWEEN:
SUSAN V. MORRISON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND BETWEEN:
2004-2297(IT)I
DAVID L. MORRISON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb, J.
[1]
The Appellants filed a
notice of appeal to this Court in which they indicated that they were each
appealing the assessment (or reassessment) of their tax liability for 1997,
1998 and 1999. An affidavit of an officer of the Canada Customs and Revenue
Agency (as it was at the time that the affidavit was sworn) was filed with the
Court. In this affidavit the officer stated that there was no record of either
Appellant filing a notice of objection to the assessment of their 1997 taxation
year nor was there any record of David Morrison filing a notice of objection in
relation to the reassessment of his 1999 taxation year.
[2]
Subsection 169(1) of the Income
Tax Act (the “Act”) provides as follows:
169. (1) Where a taxpayer has served notice of objection to an
assessment under section 165, the taxpayer may appeal to the Tax Court of
Canada to have the assessment vacated or varied after either
(a) the Minister has confirmed the assessment or reassessed,
or
(b) 90 days have elapsed after service of the notice of objection and the
Minister has not notified the taxpayer that the Minister has vacated or
confirmed the assessment or reassessed,
but no appeal under this section may be instituted after the expiration
of 90 days from the day notice has been mailed to the taxpayer under section
165 that the Minister has confirmed the assessment or reassessed.
[3]
In Bormann v. The Queen,
2006 DTC 6147, the Federal Court of Appeal stated as follows:
3 Section 169(1) of the Income Tax Act obliges a
taxpayer to serve Notice of Objection in order to appeal an assessment. In
other words, service of a Notice is a condition precedent to the institution of
an appeal.
4 As mentioned, the appellant did not serve a Notice of
Objection nor is there evidence that the appellant made an application to the
Ministry to extend the time to file a Notice of Objection.
5 Once it is clear that no application for an extension of
time was made, the law is clear that there is no jurisdiction in the Tax Court
to further extend the time for equitable reasons.
Minister of National Revenue v. Minuteman Press of Canada Co.,
88 DTC 6278, (F.C.A.).
6 As a result, there is no basis upon which it can be said
that the Tax Court Judge erred in quashing the appellant's appeals for the 1992
to 1998 taxation years.
[4]
The Appellants did not
introduce any evidence to suggest that they had served a notice of objection in
relation to the assessment of their tax liability for 1997 or in relation to
the reassessment of David Morrison’s 1999 taxation year or that they had made
any application to extend the time within which a notice of objection may be
served. As a result the appeals related to the assessment of their 1997
taxation year and the reassessment of David Morrison’s 1999 taxation year are
quashed.
[5]
The only assessments or
reassessments that are properly before this Court are therefore the
reassessments of the Appellants’ 1998 taxation year and the reassessment of
Susan Morrison’s 1999 taxation year.
[6]
The Appellants,
together with Rex Woollard, had started a software development company,
Training Innovations Inc. (“TI”). In 1997 they collectively sold 51% of the
shares of TI to ADGA Limited (“ADGA”). Prior to the sale of a controlling
interest in TI to ADGA, the taxation year of TI ended on April 30. As a result
of the acquisition of control of TI, TI also had a taxation year that appears
to have ended on September 30, 1997.
[7]
Because TI was
experiencing cash flow problems, the Appellants had deferred the payment of
salaries that they had earned. The amount of such accrued salaries was as
follows:
|
|
Accrued salaries as of April 30, 1997
|
Accrued salaries for the period from May
1, 1997 to September 30, 1997
|
|
Susan Morrison
|
$51,226
|
$29,352
|
|
David Morrison
|
$38,655
|
$26,152
|
[8]
Schedule 4.28 to the
agreement related to the sale of the shares of TI to ADGA provided that:
(a) Accrued salaries to April 30, 1997
The accrued salaries owing to the Vendors to April 30, 1997 are
allocated as follows:
|
Vendor
|
Accrued Salary Owing
|
|
Susan Morrison
|
$51,226
|
|
David Morrison
|
$38,655
|
|
Rex Woollard
|
$38,655
|
|
Total
|
$128,536
|
Prior to closing, the Corporation will pay the net amounts owing
after required government withholding amounts to the Vendors with respect to
the amounts referred to above. The Vendors will then advance to the Corporation
the amounts received. The Corporation will repay these advances without
interest following receipt of the corresponding investment tax credits claimed.
If the investment tax credits received are less than the amount claimed, there
will be a proportionate reduction of the amount payable to the Vendors and the
balance of the advance will be forgiven by the Vendors.
On or before November 15, 1997, the Purchaser will, on behalf of the
Corporation, pay to the government the amounts required to be withheld with
respect to the above-described payments. This payment shall be considered to be
an advance from the Purchaser to the Corporation on the terms and conditions of
the Loan Documentation.
The amount of the investment tax credits claimed with respect to the
period ended April 30, 1997 is as follows:
|
Ontario
|
$49,378
|
|
Federal
|
$155,624
|
|
Total
|
$205,002
|
(b) Accrued Salaries – May 1, 1997 to September 30, 1997
The same procedure as described above will apply for the accrued
salaries to the Vendors totalling $81,756 for the period May 1, 1997 to
September 30, 1997 with the following amendments:
(a) the accrued salaries owing to the Vendors are allocated
as follows:
|
Susan Morrison
|
$29,352
|
|
David Morrison
|
$26,152
|
|
Rex Woollard
|
$26,152
|
|
Total
|
$81,656
|
(b)
on or before April 15, 1998, the Corporation
will pay the net amounts owing to the Vendors as follows:
|
Susan Morrison
|
$15,352
|
|
David Morrison
|
$14,152
|
|
Rex Woollard
|
$14,152
|
(c)
on or before April 15, 1998, the Purchaser will,
on behalf of the Corporation, pay to the government the amounts required to be
withheld with respect to the above-described payments;
(d)
the investment tax credits claimed are as
follows:
|
Ontario
|
$32,000
|
|
Federal
|
$105,000
|
|
Total
|
$137,000
|
[9]
In 1997 an amount was
remitted as source deductions in relation to the accrued salaries owing as of
April 30, 1997 and a cheque for the balance was issued to the Appellants. The
Appellants then provided a cheque to TI or ADGA for the same amount as the
cheque that was issued to them. This amount was then credited to their respective
shareholder’s accounts. The amount that was remitted as source deductions and
the amount that was credited to the shareholders’ accounts (following the issuance
of the cheque by TI (or ADGA) and the immediate return of the same amount to
the company by a separate cheque) for each Appellant was as follows:
|
|
Amount Remitted as source deductions
|
Amount credited to the shareholder’s
account
|
Total
|
|
Susan Morrison
|
$25,400
|
$25,826
|
$51,226
|
|
David Morrison
|
$19,300
|
$19,355
|
$38,655
|
[10]
For the accrued
salaries owing for the period from May 1, 1997 to September 30, 1997, no
cheques were issued to either Appellant. In 1998 an amount was remitted for
source deductions and the balance was simply credited to their respective
shareholder’s accounts. These amounts were as follows:
|
|
Amount Remitted as source deductions
|
Amount credited to the shareholder’s
account
|
Total
|
|
Susan Morrison
|
$14,990
|
$14,362
|
$29,352
|
|
David Morrison
|
$13,990
|
$12,162
|
$26,152
|
[11]
Subsection 5(1) of the Act
provides that:
5. (1) Subject to this Part, a taxpayer's income for a taxation
year from an office or employment is the salary, wages and other remuneration,
including gratuities, received by the taxpayer in the year.
(emphasis added)
[12]
In Phillips v. The
Queen, 95 DTC 194, [1994] T.C.J. No. 597, Justice Bowman (as he then
was) stated that:
18 The unilluminating and confusing
method of accounting and the lack of any logic in the method of reporting
income cannot determine the outcome of this case. The fact remains that the sum
of $69,263 which the Minister included in his income in 1986 was not received
by him in that year. It is true that as controlling shareholder he could have
required the company to pay it to him but he did not do so. Employment
income must be received, not receivable, to be taxed. The decision in Minister
of National Revenue v. Rousseau, [1960] C.T.C. 336, 60 D.T.C. 1236 (Ex. Ct.), is too firmly entrenched in our
law to permit any erosion of the principle for which it stands.
19 Nor can I accept that the mere
bookkeeping entry of moving the amount of bonus owing to Mr. Phillips from
“bonus payable” to “due to shareholder” connotes receipt. Accounting entries
are supposed to reflect reality, not create it and, as Lord Brampton said in Gresham
Life Society Co. Ltd. v. Bishop, [1902] 4 T.C. 464 at page 476:
But to constitute a receipt of anything there must be a person to
receive and a person from whom he receives and something received by the former
from the latter, and in this case that something must be a sum of money. A mere
entry in an account which does not represent such a transaction does not prove
any receipt, whatever else it may be worth.
(emphasis added)
[13]
Therefore the accrued
salaries will be included in the income of the Appellants as and when the
accrued salaries were received by the Appellants.
[14]
It is the position of
the Appellants that they did not receive the accrued salaries and therefore the
amounts for the accrued salaries should not have been included in computing
their income. It is not entirely clear whether the Appellants were referring to
the total amount for the accrued salaries ($51,226 for Susan Morrison in
1997, $29,352 for Susan Morrison in 1998, $38,655 for David Morrison in
1997 and $26,152 for David Morrison in 1998) or only the portion that was
credited to their respective shareholder’s accounts. In any event it seems
clear that they did receive the portion that was remitted as source deductions
as these amounts were paid on their behalf by TI or ADGA. In The Queen
v. Hoffman, [1985] 2 F.C. 541 Justice Rouleau
of the Federal Court, Trial Division stated that:
If the
proposition that income must be in the actual possession of the employee before
it can be taxed is correct, then I would have to conclude that an employee's
contributions to Canadian or provincial pension plans, deducted at source by
the employer, are not income in the hands of the employee. Jurisprudence does
not support this proposition.
In Lucien
Gingras v. M.N.R. [unreported decision dated March 26, 1973] the Tax
Review Board noted (at page 4):
[Translation]
The expression "touché" (received) does not necessarily
mean that the full amount of the salary must be physically received by the
payee or be deposited in full in his bank account.
According to
the interpretation of s. 5 it is sufficient to say that the amount of the
salary was paid by the employer either to the employee himself or to his
benefit, or that it was handed over to a third party under a federal or
provincial statute.
[15]
Therefore the amounts
remitted as source deductions would be considered to be received by the
Appellants for the purposes of the Act. The issue in this case is
whether the amounts that were credited to the respective shareholder’s accounts
were received by the Appellants and if so, when such amounts were received.
[16]
Since the Appellants
did not serve a notice of objection in relation to the assessment of their tax
liability for 1997, this assessment cannot be appealed to this Court. Therefore
the question of whether the Appellants had received in 1997 the amounts that
were “paid” to them by cheque but which they were obligated to immediately
return to the same company and which were then credited to their respective shareholder’s
accounts in 1997, is not a question that is properly before me.
[17]
In 1998, the following
amounts were credited to the shareholders’ accounts for accrued salaries:
|
|
Amount credited to the shareholder’s
account
|
|
Susan Morrison
|
$14,362
|
|
David Morrison
|
$12,162
|
[18]
It is the Respondent’s
position that the Appellants received these amounts because they were credited
to their respective shareholder’s accounts.
[19]
It appears that at the
time that these amounts were credited to the shareholders’ accounts, the company
was indebted to the Appellants and therefore the credit simply increased the
amount owing to the Appellants. If the credit would have been used as a set-off
against amounts that the Appellants owed to the company, then the Appellants
would have received the amount of such credit (to the extent that the amount
owing by the Appellants was reduced). Justice Bonner in Armstrong v. Minister
of National Revenue, [1988] 1 C.T.C. 2019, 88 DTC 1015 stated that:
4 Although the foregoing and other
parts of the appellant's testimony are self-contradictory,* I gather from all
that the appellant said, taken in context, that she agreed, albeit reluctantly,
to permit her husband to discharge his obligation to pay maintenance by way of
set off against the appellant's obligation to pay the $5,700….
5 The appellant did not assert for
purposes of this appeal that she did not owe the $5,700 to her husband. Her
argument was, “... I am disputing the fact that I was charged income tax on
money that I never received ...” As I understood the appellant's argument, it
rested on the premise that no amount can be said to be received unless there
has been a payment by cash or by cheque. That premise, in my view, is
incorrect. The set off arrangement did involve receipt by the appellant of an
amount within the meaning of paragraph 56(1)(b). The word “amount” is defined
by subsection 248(1) of the Income Tax Act as follows:
248(1) In this Act,
“amount” means money, rights or things expressed in terms of the
amount of money or the value in terms of money of the right or thing, ...
Each month the appellant received, by means of the set off
arrangement, the amount by which her indebtedness to her husband was
diminished. In Trinidad Lake Asphalt Operating Company, Limited v. Commissioners
of Income Tax for Trinidad and Tobago, [1945] A.C. 1, the Privy Council
considered the question whether there was a “transmission” of income derived
from a source within the colony when a company within that colony agreed to set
off a debt owing by a non-resident shareholder to the company for goods
supplied by it against the amount of a dividend declared by the company on its
shares. At page 10 Lord Wright said:
Was there, then, such a transmission? No actual money passed. If the
dividend had been transmitted by a banker's draft sent by the appellant to
Barber it could not have been questioned that the dividend had been
transmitted, but the two companies might do their own banking transactions
between themselves and dispense with the intervention of banking facilities.
The transaction involved the sending to Barber by the appellant, and receipt by
Barber from the appellant, of the dividend. This was effected by the agreement
that payment should be made by cancellation of the debt for goods supplied. This
method had been mutually agreed before the dividend was declared. The agreement
was carried out by each party making corresponding entries in its books. These
were not merely bookkeeping entries. They represented the actual receipt of the
dividend by Barber, and the actual payment of it by the appellant to Barber,
and concurrently, the actual receipt by the appellant from Barber of payment of
his debt for goods supplied. The composite and joint transaction in principle
satisfies the description of a payment by Mellish L.J. in In re Harmony
& Montagu Tin & Copper Mining Co., Spargo's Case (I). “Nothing is
clearer,” he said, “than that if parties account with each other, and sums are
stated to be due on the one side, and sums to an equal amount due on the other
side of that account, and those accounts are settled by both parties, it is
exactly the same thing as if the sums due on both sides had been paid. Indeed,
it is a general rule of law, that in every case where a transaction resolves
itself into paying money by A. to B., and then handing it back again by B. to
A., if the parties meet together and agree to set one demand against the other,
they need not go through the form and ceremony of handing the money backwards
and forwards.” This statement gives a description of what is often called a
settlement in account or a set off, the word not being there used in the
technical sense of the statutes of set off. There is actual, not merely
notional or constructive payment of the indebtedness on either side.
(* denotes a footnote reference that was in the original text but
which has not been included)
[20]
Therefore if the
Appellants would have been indebted to TI immediately prior to the amount being
credited to their respective shareholder’s accounts, then there would not have
been any need to have TI issue a cheque to the Appellants for the accrued
salaries and then have the Appellants issue a cheque to TI to pay the amounts
that they owed to TI. The mutual debts could be set-off against each other
without the actual flow of funds and the Appellants would have been considered
to have received the amount that was set-off against their debt to the company.
[21]
However, in this case
it does not appear that the amounts credited to the shareholders’ accounts were
applied against an amount owing by the Appellants but rather the amount
credited simply increased the amount payable by the company to the Appellants.
The Respondent introduced a document that is stated to be the “Training
Innovations Inc. Minority Shareholder Loans as at September 22, 1999”. This
document indicates that the balance that was payable by TI to Susan Morrison as
of May 31, 1998 was $33,366. There were three debit entries totalling $28,400
and two credit entries totalling $24,620 to bring the balance forward to
December 31, 1998 but there was no indication of the dates for these
various entries. This document was introduced by the Respondent who did not
call any witnesses and in particular did not call anyone from ADGA to explain
the entries. In this situation it seems to me that the amounts paid or payable
as reflected in these entries that adjusted the balance payable at May 31, 1998
to reflect the balance payable at December 31, 1998 should be considered to be paid
or payable at the same time and therefore the additional entries simply reduce
the amount payable to Susan Morrison by $3,781. As a result of these additional
entries, the balance stated to be payable to Susan Morrison as of December 31,
1998 was $29,585. For David Morrison the amounts that were payable to him were
$22,887 as of May 31, 1998 and $18,625 as of December 31, 1998.
[22]
Since the agreement of
purchase and sale provided that the accrued salaries for the period from May 1,
1997 to September 30, 1997 were to be paid on or before April 15, 1998, it
appears that the balance as of May 31, 1998 reflects the credits to the shareholders’
accounts of $14,362 for Susan Morrison and $12,162 for David Morrison in
relation to these accrued salaries. Since this schedule is the one that was
apparently used as support for the cheques that were issued to the Appellants
on October 29, 1999 and since there are no other entries in this schedule for
the credits for the accrued salaries, the credits for the accrued salaries must
have been included in determining the May 31, 1998 balance. The opening balance
as stated on the schedule is that as of May 31, 1998. There was no indication
that any amounts were credited to the account after the credit for the accrued
salaries (which presumably was dated April 15, 1998) and on or before May 31,
1998) and therefore it seems that it was more likely than not that the amount
that was payable by the company to Susan Morrison immediately following the
credit for the accrued salaries made on or about April 15, 1998 was at least
$33,366.
[23]
Since the respective
balance payable to each Appellant immediately following the credit for accrued
salaries and as of December 31, 1998 was greater than the respective amounts
credited to their shareholder’s accounts and since it appears that the amount
payable to the Appellants would not, at any time in 1998 after the credits were
applied to the accounts, have been less than the amount of these credits, the
credits made in 1998 simply reflected an increase in the amount payable to each
Appellant and it was not paid prior to the end of 1998. Therefore the amounts
credited to the shareholders’ accounts in 1998 were not received
by the Appellants in 1998 and therefore should not have been included in their
income in 1998.
[24]
The Appellants had also
introduced a schedule that was identified as “Training Innovations Inc. Amounts
Payable to Shareholders December 1998” which indicated that as of December 1,
1998, Susan Morrison owed the company $20,102. However this schedule showed the
two credits for the accrued salary amounts separately (with an indication that
the amounts for the accrued salaries were not payable until the ITC’s were
received). It is inconsistent to state that the net bonus is not payable until
the ITC’s are received (which presumably had not occurred by December 1, 1998)
but yet at the same time to take the position that these amounts had been paid
to the Appellants prior to this date and that they had received these amounts.
This schedule also cannot be reconciled with the other schedule which indicated
that it was as of a later date (September 22, 1999). Using the amounts from the
schedule dated December 1998, the balance that would be determined as of May
31, 1998 (including the two credits for accrued salaries) is approximately equal
to the balance as at May 31, 1998 according to the 1999 schedule ($33,481 v.
$33,366) if the debit amount for the Pre-Sept. 1997 expenses ($9,740) is
included but the debit amount ($20,040) for the adjustments to assets May 31,
1998 is not included. This debit amount of $20,040 does not appear in the 1999
schedule. If the debit amount for the adjustments to assets May 31, 1998 is
included the discrepancy between the two amounts stated to be the balance as of
May 31, 1998 is significant ($13,441 v. $33,366). It seems to me that the 1999
schedule is the one that should be used as it was prepared later and it was the
schedule that presumably supported the issuance of the cheques to the
Appellants on October 29, 1999 as payment of the balance in their respective
shareholder’s accounts. The balance stated to be payable to the Appellants
according to the 1999 schedule corresponds to the amounts of the cheques issued
to the Appellants.
[25]
The Respondent also
introduced a copy of cheques that were issued to Susan Morrison and David
Morrison and that were dated October 29, 1999. It appears that these apparently
paid the balance then owing in the shareholders’ accounts. However, since these
cheques were not dated until 1999 they cannot support a finding that these
amounts were received in 1998.
[26]
The Appellants also
submitted that the amounts payable for the accrued salaries were reduced
because the tax credits claimed by TI were reduced by the Canada Customs and Revenue
Agency (as they were then). It is the position of the Respondent that the
accrued salaries were paid to the Appellants and that the subsequent reduction
in the amounts payable to the Appellants was not a reduction to the accrued
salaries payable but rather a charge to the Appellants to reflect the reduction
in the assets of the company.
[27]
However, it seems to me
that there is a direct link between the accrued salaries and the tax credits
claimed by the company. The agreement of purchase and sale provided for a
reduction in the amount payable if the investment tax credits received were
less than the amount claimed. The Appellants testified that it was
their clear understanding that their accrued salaries were tied to the tax
credits claimed and although the agreement referred to a proportionate
reduction of the amount payable to them, it was their understanding that the
company reduced the amount payable for their accrued salaries by the same amount
as the amount by which the tax credits were reduced. The Respondent also
introduced a letter from ADGA dated May 9, 2000 in which it is stated
that:
Susan and David Morrison, as well as Rex Woollard, were the original
shareholders of TI. They were owed wages by the company for the tax years ended
April 30, 1997 and September 30, 1997, prior to the acquisition by ADGA. As
part of the purchase transaction, ADGA agreed to honour these accrued wages and
to release payment once outstanding R & D Investment Tax Credits relating
to the two years were collected. In addition, they agreed to indemnify ADGA
against unbooked claims against the company relating to activities that
occurred before ADGA’s acquisition of control.
[28]
It seems to me that
there is a clear link between the payment of the accrued salaries and the tax
credits claimed by the company and that any reduction in the tax credits would
reduce the salaries that would be paid. It appears that the following were the
amounts that were debited to the shareholders’ accounts in relation to the
reduction in the tax credits (and hence reduced the salaries payable):
|
Entry to adjust
balance at May 31, 1999
|
Susan
Morrison
|
David
Morrison
|
|
1997 ITC
assessment (estimated)
|
($26,368)
|
($23,484)
|
[29]
Although it is not
entirely clear, it appears that the shareholders’ accounts were not reduced
until 1999 to reflect the reduction in the tax credits that were received. It
also appears that the reduction in the shareholders’ accounts for the shortfall
in the tax credits was less than the amount that was credited to the
shareholders’ accounts for the accrued salaries. The following table sets out the
amounts credited to the shareholders’ accounts in relation to the accrued
salaries and the amounts debited in relation to the reduction in the tax
credits received by the company:
|
|
Susan Morrison
|
David
Morrison
|
|
Credit for
accrued salaries as of April 30, 1997:
|
$25,826
|
$19,355
|
|
Credit for
accrued salaries for the period May 1 – September 30, 1997:
|
$14,362
|
$12,162
|
|
Total credits
for accrued salaries:
|
$40,188
|
$31,517
|
|
Debit for
reduction in tax credits received:
|
($26,368)
|
($23,484)
|
|
Net credit for
accrued salaries:
|
$13,820
|
$8,033
|
[30]
Therefore it appears
that the Appellants did receive a portion of the amounts credited for accrued
salaries in 1999 when the balance of the shareholders’ accounts was paid to
them. There were a number of debits to the shareholders’ accounts and some of
the accrued salaries would have been used as a set-off against amounts payable
by the Appellants to the company.
[31]
The amounts that were
credited to the shareholders’ accounts in 1998 (and which are not included in
their income for 1998) cannot now be added to their income for 1999 because the
Minister cannot appeal his assessment.
[32]
It seems to me that the
Appellants were required to repay in 1999 a portion of the amount that had been
included in their income in 1997. It also seems to me that in determining the
amount that an individual has received as salary, that any amount that the
individual is required to repay should be taken into account. For example,
assume that an individual is employed for the period from January to May in a particular
year. Assume that the individual during those months received a salary of $12,000
per month ($60,000 in total). Assume that it is a condition of his employment
that if he leaves his job and works for a competing firm that he will be
required to repay a portion ($2,000 for each month that he was employed) of the
salary that he has received. Assume the individual leaves the employment at the
end of May to work for a competing firm and that, as agreed, he repays $10,000 ($2,000
x 5 months) to his then former employer. In this situation it seems to me that
the amount that should be included in income as the salary received for this
period is $50,000, not $60,000. It does not seem to me that it would have been
the intention of Parliament to tax that individual on the basis that he had
received $60,000 when $10,000 of that amount is repaid to the employer. If the
initial payment and subsequent repayment occur in different years, then it
seems to me that in the subsequent year the amount received for salary or wages
should be net of any amount that was included in income in a previous year and
is repaid in that subsequent year.
[33]
In this case, in
relation to the reassessments issued for the 1999 taxation year, only the
reassessment of Susan Morrison’s income for 1999 is under appeal to this Court.
It seems to me that since a portion of the amount that was included in her
income for 1997 as accrued salaries was subsequently repaid in 1999, that the
amount that she received in 1999 as salary should be reduced by the amount that
was previously included in her income and repaid in 1999.
[34]
There is no breakdown
of the adjustment of $26,368 for the reduction in the tax credits to show what
portion of this relates to the accrued salaries as of April 30, 1997 and
what portion relates to the accrued salaries for the period May 1, 1997 to
September 30, 1997. It will therefore be assumed that this relates
proportionately to these two amounts. Therefore the amount that will be
considered to relate to the accrued salaries as of April 30, 1997 will be:
|
Credit for
accrued salaries as of April 30, 1997:
|
$25,826
|
|
Total credits
for accrued salaries:
|
$40,188
|
|
Percentage of
total:
|
64%
|
|
Portion of debit
that relates to these accrued salaries (64% of $26,368):
|
$16,876
|
[35]
Therefore the amount of
salary that Susan Morrison received for the purposes of the Act for 1999
should be reduced by $16,876. No adjustment will be made to the amount of the
reduction in accrued salaries for the period from May 1, 1997 to September 30,
1997 because the accrued salaries for this period, as a result of this
decision, will not be included in her income.
[36]
The Appellants had also
claimed various deductions in computing their income from employment in 1998
and 1999. These amounts arose because ADGA or TI made other adjustments to
their shareholder’s accounts for liabilities and expenses of TI that ADGA
stated were the responsibility of the Appellants. It seems to me that there is
no provision of section 8 of the Act that will permit the Appellants to
deduct these amounts in computing their income from employment. Subsection 8(2)
of the Act provides that:
(2) Except as permitted by this section, no deductions shall be made
in computing a taxpayer's income for a taxation year from an office or
employment.
[37]
Since these amounts are
not deductible under any part of section 8, these amounts are not deductible by
the Appellants in computing their income from employment. It seems to me that perhaps
these could have been considered to be adjustments to the purchase price but
this was not argued by the Appellants and there was no evidence of how the gain
on the sale of the shares was reported. There is a reference in the memo from
ADGA attached to the fax dated September 3, 1999 that refers to “$140,000
remaining from the acquisition of the TI shares by ADGA” but there was no
indication of whether all of the gain arising from the sale of shares (which
presumably was a capital gain) was reported in 1997 or whether a reserve was
claimed pursuant to subsection 40(1) of the Act and a portion of the
gain was claimed in 1998 or 1999. Since the 1997 taxation year is not under
appeal, no adjustment could be made to any capital gain that may have been
reported in that year. If no capital gain was reported in 1998 by the
Appellants or in 1999 by Susan Morrison, any capital loss that might arise in
those years would not affect the assessment of their tax liability since
capital losses could only be deducted against capital gains. Without any
evidence that any capital gains were reported by the Appellants in 1998 or by
Susan Morrison in 1999, no adjustment will be made in relation to these claims.
[38]
The Appellants had also
raised the issue of royalty income and had submitted that they had not received
the royalty income. This relates to an amount of $14,866 for Susan Morrison.
The amount for David Morrison was $13,239 in 1999, however the reassessment of
his tax liability for 1999 is not under appeal to this Court.
[39]
In any event it seems
to me that these amounts were paid in 1999. There was a credit to the
shareholders’ accounts in 1999 for the royalty payments. The balance of the
shareholders’ accounts (after taking into account all of the debits and
credits) appears to have been paid to the Appellants on October 29, 1999.
Although the amount of the cheque issued to each Appellant ($22,710 to Susan
Morrison and $12,502 to David Morrison) was less than the amount that they were
expecting, the amount reflects all of the debits made to these accounts. The
debits reflected the amounts payable by the Appellants to the company.
Therefore the credits were used in part to pay the amounts payable by the
Appellants to the company and the balance that was payable to the Appellants
(after the reduction for the amounts payable by the Appellants) was paid by cheque
to the Appellants. If the Appellants dispute whether they should have been
charged for all of the amounts for which they were charged (and which were
debited to their respective shareholder’s accounts), this is a matter that
would have to be resolved between the Appellants and ADGA.
[40]
As a result the
Appellants appeals are allowed and the matter is referred back to the Minister
of National Revenue for reconsideration and reassessment on the basis that:
(a)
Susan Morrison’s income
from employment for 1998 is reduced by the amount of $14,362;
(b)
David Morrison’s income
from employment for 1998 is reduced by the amount of $12,162; and
(c)
Susan Morrison’s income
from employment for 1999 is reduced by the amount of $16,876.
[41]
The Respondent shall
pay each Appellant costs in the amount of $750.
Signed at Ottawa, Canada, this 19th day of August, 2010.
“Wyman W. Webb”
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