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Citation: 2003TCC568
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Date: 20030919
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Docket: 2002-2968(IT)I
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BETWEEN:
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RICHARD LEO EMERY,
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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] Mr. Richard Emery appeals an
assessment in respect of the 1999 taxation year that disallowed
home office expenses and salaries paid to his wife and children.
The question for determination is whether these expenses were
required by the contract of employment for the purposes of
paragraph 8(1)(i) of the Income Tax Act,
R.S.C. 1985 (5th Supp.), c. 1 (the "Act").
[2] The appeal was heard under the
Court's Informal Procedure.
Facts
[3] Mr. Emery was employed by
Carmichael Canada Ltd. ("Carmichael") from
approximately May, 1998 until November, 1999 at an annual salary
of $64,000. His position was branch manager responsible for the
area between London, Sarnia and Windsor.
[4] Mr. Emery lived in Chatham and
worked out of Carmichael's office in London. He explained
that the London office was not ideally located since the prime
potential customer base was in cities where the
automotive-related industries were located, namely, Chatham,
Windsor and Sarnia. Mr. Emery stated that Carmichael recognized
that London was not the ideal location for the office but that
the corporation was committed to it because of a lease of office
premises there.
[5] Mr. Emery determined that it would
make business sense to maintain an office in his home in Chatham
since it was closer to customers. In addition to the home office,
he had storage space in his garage for inventory. Mr. Emery's
wife and three children were employed by him as assistants,
providing administrative services and maintaining the facilities.
In his tax return for the 1999 taxation year, Mr. Emery claimed
$1,712.75 for home office expenses and $22,015.00 for salaries
paid to his wife and three children.
[6] Mr. Emery spent much of his time
at the London office and had an assistant there but worked in the
home office each day as well. He explained that his wife kept
files in the home office and the information in these files was
then duplicated on master files in London. He did not go to the
London office on days that he was visiting customers in other
cities.
[7] There are three documents signed
by the employer that are relevant to the issue of whether the
home office and salary expenses were required by the contract of
employment.
1. A contract of employment dated
April 30, 1998 was signed on behalf of Carmichael by the National
Sales & Marketing Manager to whom Mr. Emery reported. This
document does not refer to a home office and states that all
expenses pertaining to company business will be reimbursed in
accordance with company procedure.
2. A T2200 form dated November 9, 2000
was signed by Carmichael's paymaster. In this form,
Carmichael acknowledged that Mr. Emery was required under the
contract of employment to have a home office, pay for an
assistant and pay for supplies used in his work.
3. At the request of the Canada
Customs and Revenue Agency (the "CCRA") during the
audit of Mr. Emery, a questionnaire about conditions of
employment was signed by the Director of Human Resources at
Carmichael. In this form, the employer indicated that Mr. Emery
was not required under the terms of the employment contract to
maintain an office or hire an assistant.
[8] The questionnaire prepared during
the audit was adverse to Mr. Emery's position. It was signed
by a person unknown to Mr. Emery and Mr. Emery stated that this
person may not have been aware of the terms of employment agreed
to by his superior, the National Sales & Marketing
Manager.
[9] The T2200 form was favourable to
Mr. Emery's position. In cross examination Mr. Emery stated
that the T2200 form signed by the paymaster on behalf of
Carmichael was prepared with Mr. Emery's participation.
[10] The Crown introduced into evidence a
document prepared by Mr. Emery in support of his tax position.
This document states that Carmichael agreed to the use of a home
office and storage of inventory in Mr. Emery's garage. This
document does not state, however, that these are required under
the contract of employment. Mr. Emery's oral testimony was
consistent with this document.
[11] On cross examination Mr. Emery was
asked why Carmichael did not reimburse him for the home office
expenses. He explained that he did not know the reason for this
but that from his perspective the execution of the T2200 form was
a satisfactory arrangement.
Statutory Provisions
[12] The relevant parts of paragraph
8(1)(i) of the Act read:
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,
(iii) the cost of supplies that were consumed directly in the
performance of the duties of the office or employment and that
the officer or employee was required by the contract of
employment to supply and pay for,
Issue
[13] The issue is whether the home office
expenses and salaries paid by Mr. Emery in the 1999 taxation year
were required to be paid by him by his contract of employment. If
they were, they would be deductible pursuant to paragraph
8(1)(i) of the Act. The Crown has not put in issue
the reasonableness of the expenditures.
Analysis
[14] Looking at the evidence as
a whole, Mr. Emery has not established that he was required by
his contract of employment with Carmichael to pay the
expenditures for the home office and salaries.
[15] In respect to the home office, I find
that Carmichael agreed that Mr. Carmichael could maintain a home
office because it made business sense to do so. However,
that is not sufficient to establish that Mr. Emery was
"required" by the contract of employment to maintain
the home office. As to the salaries paid to family members,
Carmichael was not aware of the quantum of the salaries paid to
family members, which exceeded $22,000. Also, it was not
established that Carmichael agreed that family members could be
employed by Mr. Emery. In the circumstances, I find that Mr.
Emery was not required by his contract of employment to pay these
salaries.
[16] Mr. Emery's oral testimony and the
document he prepared in support of his tax position are
consistent with the above findings. His evidence was to the
effect that Carmichael agreed that he could maintain a home
office rather than it being required by the contract of
employment.
[17] As for the documents signed by
Carmichael, I find that they do not support Mr. Emery's
position. The documents are inconsistent and no one from
Carmichael was called to explain these inconsistencies. The T2200
form is the only document that supports Mr. Emery's position.
It was prepared with Mr. Emery's assistance and is contrary
to much of the other evidence.
[18] The requirement in paragraph
8(1)(i) that the expenditures be required by the contract
of employment can be inferred by the circumstances. It is not
necessary that the contract of employment specifically refer to
them. In McCann v. R.[1], Bowman A.C.J. held that the requirement is
satisfied if it is essential that the expenditures be incurred
for the duties of employment to be carried out. That principle is
of no assistance here. Although Carmichael agreed that it made
business sense to have a home office, it was not essential to
have one.
[19] For these reasons, the appeal is
dismissed.
Signed at Ottawa, Canada this 19th day of September, 2003.
J.M. Woods J.
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