Citation: 2007TCC475
Date: 20070816
Docket: 2005-2470(IT)G
BETWEEN:
DAVID A. MORGAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bowie
J.
[1] These appeals are brought from reassessments for
income tax for the taxation years 2000 and 2001. Counsel advised me at the
hearing that the only issue now being pursued by the appellant is his claim
that in computing his income for the years in question, he may deduct the
amounts of $35,000 and $52,500 paid to his wife Karen Morgan under subparagraph
8(1)(i)(ii) of the Income Tax Act (the Act). The
respondent’s position is that the amounts do not qualify for deduction under
that subparagraph, and the amount of the payments were not reasonable, and
therefore their deduction is barred by section 67 of the Act.
[2] The parties
filed a Statement of Agreed Facts at the hearing. It reads as follows:
1. This is an
appeal from the following notices of reassessment (the “Reassessments”);
|
Date of Mailing
|
Taxation Year
|
|
February 9, 2005
|
2000
|
|
February 9, 2005
|
2001
|
2. The facts set
out below are stated as of all times relevant to the matters under appeal
except as otherwise noted.
3. The Appellant
was an individual resident in Canada for the
purposes of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the “Act”).
4. Karen Morgan
was an individual resident in Canada for the
purposes of the Act.
5. The Appellant was married to
Karen Morgan.
6. The Appellant was an employee
of Merrill Lynch Canada.
7. Until July
2000, the Appellant was a financial consultant with Merrill Lynch Canada in St. Catharines, Ontario.
8. From July 2002,
through the rest of the period relevant to this appeal, the Appellant was a
financial consultant and the manager of the Merrill Lynch Canada branch in St. Catharines, Ontario.
9. Merrill Lynch Canada compensated the Appellant by paying salary and
commissions to him.
10. The Appellant’s
commission income was fixed by reference to the volume of the Appellant’s sales
or the contracts he negotiated.
11. The Appellant,
in computing income for the purposes of the Act, deducted the following
expenses in the following amounts (rounded to the nearest dollar) in the
taxation years indicated (collectively, the “Expenses”):
|
Expenses
|
Amount Deducted
in 2000 ($)
|
Amount Deducted
in 2001 ($)
|
|
Accounting and legal fees (for carrying charges)
|
268
|
268
|
|
Advertising and Promotion
|
3,781
|
6,995
|
|
Allowable motor vehicle expenses
|
10,144
|
9,184
|
|
Food, beverages and entertainment
|
1,278
|
1,562
|
|
Lodging
|
791
|
Nil
|
|
Parking
|
76
|
270
|
|
Supplies
|
2,359
|
391
|
|
Other expenses: Salary to Karen Morgan as an
assistant
|
36,066 includes $1,066 bonus to Edmond
Seto
|
2,500
|
|
Other expenses: Licences
|
Nil
|
2,088
|
|
Other expenses: Rental of office equipment
|
3,252
|
4,618
|
|
Other expenses: Other
|
Nil
|
482
|
|
Total
|
58,014
|
78,358
|
12. Karen Morgan
issued invoices to the Appellant charging him for services described on the
invoices. The invoices state that they are for services Karen Morgan rendered
to the Appellant in 2000 and 2001. The Respondent does not accept the invoices
were necessarily issued on the date shown on them or that services were
performed as described in the invoices.
13. The Appellant
paid $35,000 and $52,500 to Karen Morgan in 2000 and 2001 respectively in
payment of the amounts shown on the invoices.
14. Karen Morgan, in
reporting her income for the purposes of the Act in 2000 and 2001,
included the amounts described in paragraph 13.
15. Karen Morgan
later filed a T1 adjustment request for 2000 and 2001 asking that the amounts
described in paragraph 13 be deleted from her income. The Minister acceded to
this request and accordingly issued notices of reassessment for those taxation
years.
16. Karen Morgan was
a registrant for the purposes of the goods and services tax (the “GST”) levied under Part IX of the Excise Tax Act
(Canada).
17. Karen Morgan
collected and remitted GST in respect of the amounts described in paragraph 13.
18. The total amount
of the Expenses deducted in each year was less than the Appellant’s income in
the year from commissions.
19. Merrill Lynch Canada signed a form T2200 certifying that the Appellant
met the conditions set out in section 8 of the Act in each of 2000 and
2001.
20. For the purposes
of this appeal, the parties agree that the Appellant complied with the
requirements of subsection 8(10) of the Act as far as the filing of the T2200 in 2000 and 2001 is concerned.
21. In the
Reassessments, the Minister reassessed the Appellant on the basis that, in
computing his income for employment, he was entitled to deduct only $25,953 in
2000 and $26,217 in 2001 in respect of the Expenses.
22 In the
Reassessments, the Minister denied certain of the Expenses, including in their
entirety, amounts paid to Karen Morgan for her services as an assistant and in
satisfaction of amounts payable under a lease of two laptop computers as
follows:
|
Expense
|
Amount Deducted in 2000 ($)
|
Amount Deducted in 2001 ($)
|
|
Other expenses: Salary to assistant
|
35,000
|
52,500
|
|
Other expenses: Rental of office equipment
|
3,252
|
4,618
|
23. The parties have
agreed that the Reassessments were correct except that the Appellant continues
to maintain he was entitled to deduct in full the amounts he paid to Karen
Morgan for her services as an assistant and in satisfaction of the amounts
payable under the laptop leases.
[3] The appellant in
his evidence described his employment history in some detail, culminating with
his appointment as Branch Manager of the office of Merrill Lynch at St. Catharines, Ontario, in July 2000. Prior to that appointment he had been a
financial consultant in that office. After the appointment he continued to work
as a financial consultant with his own clients, and in addition he assumed
responsibility for supervision of the other financial consultants and for
oversight of the entire office, including the administrative staff. He
personally had some 400 clients whom he continued to serve. He described
the office as consisting at that time of 10 financial consultants in addition
to himself, and a support staff of four. In addition he, as the manager of the
office, was assisted in his work from time to time by an intern or trainee. The
interns were people who were in training to become financial consultants, but
had not yet met the licensing requirements of that position. They were able,
however, to deal with routine telephone inquiries and other simple tasks in the
office. The appellant’s view was that the office did not have adequate
support staff, and that to do his job properly he needed to have an assistant
in addition to the staff employed and paid by Merrill Lynch. His wife Karen
Morgan, he said, was well suited to fill the gap.
[4] Karen Morgan
attended Niagara College, where she studied accounting and computer
software, and thereafter she obtained a degree in Business Communications from Brock University. After graduation, she worked for about three years
at a public accounting firm. In 1990 she started her own business, under the
firm name Complete Business Solutions, providing accounting services to small
businesses. Mr. Morgan testified that this training qualified her to provide
the kind of services that he required, and so he retained her to assist him in
his duties, first when he was a financial consultant, and later in his capacity
as Branch Manager. He began to pay her for this work, he said, in the
mid-1990s.
[5] Perhaps
unwisely, Mr. and Ms. Morgan had no written contract to define the terms of her
employment. The appellant described his wife’s duties as including such things
as reviewing his transactions for the year and reconciling those with his
commission income, reconciling the profit and loss statements for the branch,
reviewing and summarizing for him various financial industry publications,
arranging for seminars and arranging and attending at social events for his
clients. Mr. Morgan taught a course on investment at Frontier College,
and Ms. Morgan’s work included preparation of course materials for it.
[6] There are some
inconsistencies in the evidence of Mr. and Ms. Morgan that cause me concern.
Mr. Morgan testified that in 2000 his wife charged him $30.00 per hour for her
time. He did not explain how that amount was arrived at. Her evidence was that
when she began to work for him she consulted Workopolis.com, an
employment-related website containing information as to the qualifications and
rates of pay applicable to numerous jobs. From this information, she said, she
concluded that with her qualifications she could expect to earn somewhere
between $30,000 and $50,000 per year. At that time, she had three clients of
her bookkeeping business, one of whom she charged $16.00 per hour and the
others $20.00. She decided that she should charge her husband on the basis of
$35,000 per year, working full time for him, except for continuing to serve her
three other clients. She said that her invoices to her husband were not based
on an hourly rate, and that the availability of money from which he could pay
her was one factor in determining the amount and the timing of her invoices, as
was the information that she had found on the Workopolis website.
[7] Exhibit A-1
contains copies of the invoices that Ms. Morgan sent to her husband for work
during the period from January 1, 2000 to December 31, 2001. With each invoice
there are monthly sheets indicating the work done and detailing the hours
worked for each day. She testified that these sheets were prepared by her at the
end of 2004 and the beginning of 2005, long after the time in question. She
said that the original invoices did not contain the particulars of the work
done that now appears in Exhibit A-1. This was added by her later, using her
diaries from the years 2000 and 2001. She also testified that those diaries did
not contain a precise record of the hours worked, nor all the detail that now
appears on the copies of the invoices. The diaries themselves were not entered
as exhibits; Mr. Morgan testified that they were lost in a move. Ms. Morgan
testified that she destroyed them after she prepared the documents that were
made exhibits. Either way, the evidence is less than totally satisfactory, and
it leaves a question as to the degree to which the monthly timesheets should be
considered reliable.
[8] The copies of
invoices and timesheets purport to show that in 2000, Ms. Morgan billed
Mr. Morgan on the basis of $30.00 per hour consistently in each of the four
periods of three months for which she delivered invoices. In fact, these sheets
indicate that she worked exactly 311.5 hours during each of the last three
billing periods. While she testified that she billed on the assumption that her
time was worth about $35,000 per year, in 2000 she apparently billed her husband
that amount for 1,089 hours worked, according to the timesheets. This amounts
to exactly $30.00 per hour plus the associated 7% gst.
[9] Her billings for
2001 as reflected in Exhibit A-1 are less regular. For the first three month
period she apparently billed at the rate of $11.76 per hour for 155 hours. During
the second quarter it was $19.15 per hour for 364.25 hours, and in the third
quarter $26.01 per hour for 357.5 hours. The billing was apparently at $80.35
per hour for 231.5 hours during October and November, and $114.81 per hour for
81 hours during December. This comes to a total of $52,500 (including gst) for
what is shown in Ms. Morgan’s timesheets as 1,430 hours. None of this gives me
great confidence in the accuracy of the documents, although they were entered
into evidence without objection. Nor does it instill confidence in her
testimony; for example, while Ms. Morgan said that she did not bill strictly
according to the hours worked, it appears that she did exactly that throughout
2000. In 2001, viewed globally, her time seems to be billed at an average of
$34.15 per hour, but at a much higher rate in December than in January. I note,
too, that much of the time billed for in December 2001, and some time earlier
as well, was said to have been spent attending social functions
[10] Copies of the
cancelled cheques in payment of the invoices are in the evidence, and they
show, contrary to paragraph 13 of the Statement of Agreed Facts, that of the
$35,000 invoiced for the year 2000, only 25,000 was paid in that year; the
remaining $10,000 was paid by three cheques dated January 15, 2001, May 9, 2001
and May 23, 2001. I have no doubt that Ms. Morgan did some useful work for her
husband during the two years under appeal, but it appears that the amounts that
she invoiced and was paid were driven at least as much by income‑splitting
objectives as by any contractual arrangement.
[11] The appellant’s
counsel has defined the issues in the appeal in the following way at pages 13
and 14 of his written submission:
50. The
Appellant respectfully submits that there are three issues between the parties
to this appeal:
(i) Was
the Appellant required to incur expenses and hire an assistant in the course of
his employment?
(ii) Did
the Appellant incur the Disputed Expenses for the purpose of earning the income
from David’s employment?
(iii) Were
the Disputed Expenses reasonable?
In
my view, question (i) correctly defines the issue as to the appellant’s
entitlement to deduct the amounts that he paid to his wife during the years
under appeal. Subparagraph 8(1)(i)(ii) of the Act 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)
amounts paid by the taxpayer in the year as
…
(ii) 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,
…
to
the extent that the taxpayer has not been reimbursed, and is not entitled to be
reimbursed in respect thereof;
To qualify for a deduction under this provision, the
appellant must show that he was required by his contract of employment to incur
the expenditure. The contract must therefore require that he hire and pay the
assistant.
[12] Although there are decisions to the contrary,
this is the view taken by Bowman A.C.J., as he then was, in Schnurr v. The
Queen,
where he said:
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.
He
went on to say at paragraph 19:
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.
That
the contract must mandate the hiring as well as the paying of the assistant accords
with the plain words of the statute. In the present case the evidence of the
appellant negatives that requirement. The evidence contains a letter dated July
4, 2000 appointing the appellant to the position of Resident Manager of the St. Catharines office of Merrill Lynch. It is silent as to the subject of hiring an
assistant. The forms T2200 signed on behalf of Merrill Lynch and filed by the
appellant answer yes to the question “did you require this employee under a
contract of employment to pay for a substitute or assistant?”. The evidence
established that the forms were completed by Karen Morgan, and the appellant
was unable to say whether the person who signed on behalf of Merrill Lynch in
fact read the completed form. Mr. Morgan testified specifically that he was
“permitted” rather than “required” by the contract of employment to hire and
pay an assistant. Both the English verb “to require” and the verb “obliger”
that appears in the French version of the Act are necessarily
imperative. In view of this testimony of the appellant, it is not possible to
find that it was implicit in the contract that he was “required” to hire an
assistant, and it is equally impossible to find that the amounts that he paid
to his wife come within subparagraph 8(1)(i)(ii).
[13] It
is not necessary to deal with the second issue stated by the appellant, in view
of the appellant’s concession with respect to the computer lease payments, Nor
is it strictly necessary to deal with the third issue, given my conclusion as
to issue number one, but as much of the evidence was directed to that issue, I
shall refer to it briefly. Counsel for the respondent argued that it was not
reasonable for the appellant to pay his wife about 20% of his total income in
the year 2000 and about 30% of it in 2001 for the administrative work described
in her invoices.
[14] The following passage
from the judgment of Cattanach J. in Gabco
Ltd. v. M.N.R.
has long been accepted as a correct statement of the law in connection with
section 67 of the Act:
It is not a
question of the Minister or this Court substituting its judgment for what is a
reasonable amount to pay, but rather a case of the Minister or the Court coming
to the conclusion that no reasonable business man would have contracted to pay
such an amount having only the business considerations of the appellant in
mind.
Considering, too, the rates at which Ms. Morgan billed her
time to her other clients, and considering too that a certain part of the time
for which she billed, particularly in December 2001, was spent attending social
events, I am of the view that no reasonable business person in an arm’s length
relationship would have agreed to the billings that Mr. Morgan paid. The best
measure of what would be reasonable that can be found in the evidence before me
is Ms. Morgan’s evidence that, on the basis of the information she gleaned
from Workopolis.com, $35,000 per year would be a reasonable amount to charge. I am
not overlooking her evidence that in June 2003, she obtained a job at an annual
salary of $55,000 plus bonus. However, she left that job after about four
months, and the evidence is scant about the circumstances of the job and her
separation from it. Assuming that an average work year for an office assistant
is about 1,800 hours, Ms. Morgan worked for her husband for about 60% of a work
year in 2000, and about 80% in 2001. Had I found that the employment satisfied
the requirements of paragraph 8(1)(i)(ii) of the Act, I would
have found the reasonable remuneration for the purposes of section 67 to be
$21,000 for the 2000 taxation year, and $28,000 for 2001.
[15] The
appeals are dismissed, with costs.
Signed at Ottawa, Canada, this 16th day of August, 2007.
“E.A.
Bowie”
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