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Citation: 2004TCC693
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Date: 20041015
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Docket: 2002-2902(IT)G
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BETWEEN:
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625041 ONTARIO LIMITED,
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Appellant,
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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
Woods J.
[1] 625041 Ontario Ltd. is a
closely-held real estate corporation based in London, Ontario. It
appeals an income tax reassessment that disallowed its claim to a
small business deduction of $31,406 for the 1997 taxation year.
The main issue is whether the appellant employed more than five
full-time employees throughout the year.
[2] 625041 Ontario has owned and
managed real estate in London since 1985. In its financial
statements for the relevant period, June 1, 1996 to May 31, 1997,
its gross income was reported to consist of (1) rents and common
area charges in the amount of $557,865, (2) management fees in
the amount of $20,000, and (3) interest in the amount of $926.
During this time the corporation owned or managed 10 to 13 rental
properties with about 55 commercial and residential units in
total. The president of the corporation was Peter Stavrou and the
corporation employed several members of the Stavrou family.
[3] Peter Stavrou testified that the
business was very active and required the full-time participation
of the family members, all working more than 40 hours per
week. He was the president of the corporation and oversaw
the operations. His daughter Alexandra was responsible for the
administrative side of the business and worked out of the
corporation's office located in the basement of Peter Stavrou's
home where Alexandra also lived. Peter Stavrou's wife, Bessy,
acted as an assistant, helping out in the office, running errands
and accompanying her husband to inspect properties. Peter
Stavrou's sons, Tom and Tim, did the physical labour involving
the repair, maintenance and construction of buildings, and Tom's
wife, Noula, assisted her husband doing cleaning, painting and
other lighter construction work.
[4] In order for rental income to be
considered active business income for purposes of the small
business deduction, the business must not be a "specified
investment business." This is defined in subsection 125(7) as
follows:
"specified investment business" carried on by a
corporation in a taxation year means a business ... the
principal purpose of which is to derive income (including
interest, dividends, rents and royalties) from property but,
..., does not include a business carried on by the
corporation in the year where
(a) the corporation employs in the business throughout the
year more than 5 full-time employees ...
[5] 625041 Ontario submits that its
business does not constitute a "specified investment business"
because it employed six persons on a full-time basis throughout
the 1997 taxation year - Peter Stavrou, his wife Bessy, his three
children, Tom, Tim and Alexandra, and his daughter-in-law,
Noula.
[6] Counsel for the Crown stated at
the outset of the hearing that she had doubts whether Noula, Tim
or Bessy Stavrou worked on a full-time basis throughout the year
but, after hearing the testimony of the family members, she
decided to restrict her argument to Noula and Tim Stavrou
only. I will accordingly restrict my findings to these two
individuals.
[7] The parties are in agreement that
625041 Ontario has the burden of proof with respect to Tim
Stavrou's employment but that the Crown has the burden with
respect to Noula Stavrou's employment because this was not a
basis on which the assessment was made.
[8] In addition to this main issue,
counsel for the appellant raised a secondary issue concerning the
interpretation of "specified investment business" and argued that
a specified investment business should not include a business
that is as active as that carried on by 625041 Ontario even if
its main source of income is rents and it does not employ more
than five full-time employees. The basis for the argument, as I
understand it, is the reference to "income from property" in the
definition of "specified investment business." It was suggested
that since an active business does not generate "income from
property," an active rental business is not intended to be
denied the small business deduction. Counsel did not press the
argument, however, noting that the case law was against it. The
Federal Court of Appeal disposed of this issue in Lerric
Investments Corp. v. The Queen, 2001 D.T.C. 5169 and it is
not necessary that I consider it further.
[9] I turn now to the evidence
concerning the employment of Tim and Noula Stavrou. The Crown's
case depends to a great extent on their remuneration as evidenced
by T4 slips and copies of pay cheques.
[10] The following chart sets out the gross
remuneration reported on T4 slips for the family members for the
calendar years 1996 and 1997.
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Gross Remuneration on T4 Slips
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1996
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1997
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Peter Stavrou
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$16,000
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$24,000
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Bessy Stavrou
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24,000
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24,000
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Alexandra Stavrou
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24,000
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32,760
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Tom Stavrou
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20,472
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29,259
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Noula Stavrou
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12,344
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20,898
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Tim Stavrou
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3,750
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10,355
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[11] The remuneration cheques for the family
members for the relevant period, June 1, 1996 to May 31, 1997,
that were introduced into evidence are summarized in the
following chart.
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SUMMARY OF CHEQUES
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Date of cheque
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Tim
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Noula
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Peter
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Bessy
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Tom
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Alexandra
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June, 1996*
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$795
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$1,581
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$1,581
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$1,160
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$1,581
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July
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732
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1,581
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1,581
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1,086
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1,581
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August
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944
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1,581
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1,581
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1,290
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1,581
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September
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1,020
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1,590
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1,590
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1,447
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1,590
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October
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733
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1,095
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November
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1,014
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1,590
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1,360
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1,590
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December
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$1,502
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1,041
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1,590
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1,447
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1,590
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January, 1997
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1,502
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944
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1,590
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1,295
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1,590
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February
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573
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1,600
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1,600
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872
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1,600
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March
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1,511
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1,045
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1,600
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1,600
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1,456
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1,600
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April
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1,511
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872
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1,600
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1,600
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1,236
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1,600
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May
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1,110
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1,600
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1,600
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1,456
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1,600
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June
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872
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1,600
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1,600
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1,136
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1,600
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* This month is
outside the relevant taxation year because the June cheque
corresponds with services rendered in May.
[12] Alexandra Stavrou assembled these
cheques at the request of the Crown and they appear to be
relatively complete. Except for remuneration paid to Peter and
Tim Stavrou, the remuneration was consistently paid in the first
few days of the month following the month in which services were
rendered. Peter Stavrou did not receive any remuneration near the
end of 1996 for tax-planning reasons.
[13] The only evidence that supported the
appellant's position that Tim and Noula Stavrou were employed on
a full-time basis throughout the 1997 taxation year was
self-interested testimony by the family members and documents
prepared in the course of the appeal process. All of the family
members testified at the hearing, four of them being called by
the Crown. With few exceptions, the family members' testimony was
evasive and unconvincing. In general, they testified to
having little knowledge or recollection about their remuneration.
Peter Stavrou managed the business and set the remuneration and
his recollections were particularly vague.
[14] Based on the evidence as a whole, I
find that Tim Stavrou was not employed by the appellant
throughout the 1997 taxation year and that Noula Stavrou was
employed only on a part-time basis during the 1997 taxation year.
My reasons are as follows.
[15] I will consider Tim Stavrou's
employment first. He earned $3,750 in 1996 and $10,355 in 1997.
Tim Stavrou and his father testified that Tim worked on a
full-time basis for 11 months in the 1997 taxation year, with one
month off (May 1997) for surgery.
[16] There are only four remuneration
cheques in evidence for the relevant period, each for just over
$1,500. If those cheques represented remuneration for the prior
month's services, they would be evidence of employment only
for the months of November, December, February and March.
[17] As for the months of June, July and
August, 1996, Peter and Tim Stavrou testified that Tim agreed to
work these three months on a full-time basis without pay in
return only for the use of an apartment and meals at the family
home. They referred to this as a "probationary period,"
presumably meaning that it was to be temporary. Several months
earlier, Peter Stavrou discovered that his son had a prescription
drug addiction. Tim was not living in London and did not work for
625041 Ontario in the first part of 1996. Sometime around April,
according to the testimony, Tim agreed to work full-time without
monetary remuneration because his father did not trust him with
cash.
[18] There are several difficulties with
this story, not the least of which is that it is improbable that
the son would work full-time essentially for room and board.1 There was no
explanation why his father did not withhold the funds and pay him
later. There were also very few details concerning the
arrangement and what details were provided were vague and at
times contradictory. For example, the witnesses indicated that
the "probation" was to be a three month arrangement but that it
started in April, implying that it lasted more than four
months.
[19] Another difficulty is that this story
was mentioned to the Canada Revenue Agency for the first time
only at the objection stage - it appears that there was no
mention of it at the audit stage. No satisfactory explanation was
given why this was so.
[20] In addition, there is little evidence
that the apartment was intended as remuneration. Tom and Noula
Stavrou also lived in an apartment owned by the appellant for a
period of time and Alexandra lived with her parents. Accordingly
Tim's use of an apartment was likely no more of a benefit than
other family members received from time to time.
[21] As for the months of September and
October, 1996, Peter and Tim Stavrou testified that Tim worked on
a full-time basis during these months and received remuneration
in the form of one cheque for $1,502 that was received early in
December. There was no explanation why the remuneration was so
low, less than Tom Stavrou earned for doing the same type of work
and less than Noula Stavrou was paid for simply assisting her
husband with lighter work. There was also no explanation why the
remuneration was delayed and why there was one cheque issued for
two months work when the rest of the family were paid regularly
every month. In my opinion, there is not sufficient
evidence to establish that Tim Stavrou was employed during
September and October.
[22] As for January and April, 1997, I also
find that there is insufficient evidence that Tim Stavrou was
employed during these months. The T4 slip for 1997 indicates that
Tim Stavrou was paid a total of approximately $10,000 in 1997.
The testimony by Peter and Tim Stavrou suggested that he was paid
for ten months, all but May and December. Again, it seems
unlikely that Tim Stavrou would have been paid such a low amount
considering what Tom and Noula Stavrou were paid. Accordingly, I
find that Tim Stavrou worked less than 10 months during 1997 and
there is no credible evidence as to which months he did work.
[23] As a result, I find that the evidence
falls far short of establishing that Tim Stavrou was employed
throughout the 1997 taxation year.
[24] As for Noula Stavrou, I find the
testimony that she worked over 40 hours per week on a regular
basis unconvincing. I would conclude that she was employed only
on a part-time basis during the 1997 taxation year. This
conclusion is based on the low amount of remuneration received
for some months in the relevant period, for which there was no
satisfactory explanation.
[25] Unlike the remuneration paid to Peter,
Bessy and Alexandra Stavrou for administrative work, the
remuneration paid for labour to Tom, Noula and Tim Stavrou varied
on a monthly basis. (Tim Stavrou's cheques don't show
this but Alexandra Stavrou testified to this.) Where remuneration
for construction labour varies, it often reflects an hourly wage.
In Noula Stavrou's case, the cheques ranged from $573 to $1,110
per month. Several of the family members were asked to explain
these variances. Their testimony was vague and contradictory.
Noula Stavrou testified that she never questioned what she was
paid and had no knowledge of the reason for the variances.
Alexandra, who issued the cheques, stated that she made out the
cheques for whatever amounts her father told her and that she had
no knowledge of the basis for the payments. In a small family-run
business, I find it unlikely that Alexandra would not know the
general basis on which the amounts were determined. Peter
Stavrou's testimony was perhaps the most important because he
determined the remuneration. He was reluctant to admit that the
remuneration varied at all. The following is an excerpt from his
cross examination on this point:
Q. How often are they [family members] paid?
A. Once a month I believe.
Q. And there's no questions asked; there's a specific cheque,
always the same amount?
A. I would say so, yes.
Q. So basically, if I take a T4 and I divide it by twelve,
that would mean that they're paid monthly the same amount?
A. Sometimes we would change that amount.
Q. Notwithstanding how many hours?
A. Notwithstanding how many hours, that's correct.
[26] The Crown stated that it had the burden
to establish that Noula Stavrou was not employed on a full-time
basis throughout the 1997 taxation year. In my opinion it has
been established that Noula Stavrou worked only part-time during
that year. Her remuneration varied substantially from month to
month and often was lower than what might be expected if she were
employed on a full-time basis.
[27] The finding that Tim Stavrou was not
employed throughout the year may be sufficient to dispose of this
appeal because 625041 Ontario only had five employees throughout
the year, not more than five as required by the legislation. In
any event, when Noula Stavrou's part-time employment is also
taken in account, the corporation only had four full-time
employees throughout the year which is clearly not
sufficient.
[28] The appeal is dismissed, with
costs.
Signed at Ottawa, Canada this 15th day of October, 2004.
Woods J.
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