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Citation: 2004TCC408
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Date: 20040623
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Docket: 2003-2694(IT)I
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BETWEEN:
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SHAMIN MUHAMMEDI,
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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
O'Connor, J.
[1] The principal facts and issues
arising in these appeals are generally as set forth in the Reply
to the Notice of Appeal. It reads as follows:
In reply to the Notice of Appeal for the 1999 and 2000
taxation years, filed on July 28, 2003, the Deputy Attorney
General of Canada says:
A.
STATEMENT OF FACTS
1. He admits
to the following facts as stated in the Notice of Appeal:
a) the
Minister of National Revenue (the "Minister")
disallowed the amounts of $12,000.00 and $3,500.00 claimed by the
Appellant as 'casual labour' for the 1999 and 2000
taxation years respectively;
b) the amounts
referred to in subparagraph 1(a) were disallowed, in part, on the
basis that the payments were not made in 'absolute terms'
and said payments were not reasonable; and
c) the
applicable assessments were confirmed on the basis of paragraph
18(1)(a) and section 67 of the Income Tax Act (the
"Act").
2. He has no
further knowledge of the remaining facts as stated in the Notice
of Appeal and puts the Appellant to the strict proof therein.
3. In
computing income for the 1999 and 2000 taxation years, the
Appellant reported net business income in the amounts of $332.00
and $346.00 respectively.
4. By Notices
of Reassessment dated August 1, 2002, the Minister
reassessed the Appellant's income tax returns for the 1999
and 2000 taxation years and increased the net business income
referred to in paragraph 3 herein by the amounts of $12,000.00
and $3,500.00 respectively.
5. In so
reassessing the Appellant's income tax returns for the 1999
and 2000 taxation years, the Minister relied on the following
assumptions of fact:
a) the facts
hereinbefore stated and admitted;
b) during the
period from January 1, 1999 to December 31, 2000 inclusively, the
Appellant claimed net business income as stated in paragraph 3
herein with respect to a "Smoke and Gift Shop" (the
"Business");
c) the
Appellant's spouse, Karim Muhammedi (the "Spouse")
actually operated the day to day running of the Business;
d) the Spouse
was not paid any salary during the 1999 and 2000 taxation years
but was paid a 'Management Fee' of $3,500.00 in 1999
only;
e) two of the
Appellant's children, Rizwan born on February 1, 1982 and
Faizan, born on July 1, 1987 (the "Children") helped
out in the operation of the Business after school;
f)
cheques were made out to the Children during the 1999 and 2000
taxation years as shown on the attached Schedule A;
g) the cheques
referred to in subparagraph 5(f) herein were deposited back into
the bank account of either the Business or the Appellant and the
Spouse;
h) a review of
the cheques indicated that not all them had been endorsed by the
Children; and
i) there
was no formal written loan agreement between the Appellant and
the Children in regard to the amounts deposited back into the
bank accounts as referred to in subparagraph 5(g) herein
representing an interest free loan arrangement between said
parties.
B.
ISSUES TO BE DECIDED
6. The issue
is whether the Appellant is entitled to deduct in computing
income for the 1999 and 2000 taxation years, casual labour
expenses in the amounts of $12,000.00 and $3,500.00
respectively.
C.
STATUTORY PROVISIONS, GROUNDS RELIED ON AND RELIEF
SOUGHT
7. He relies
on paragraph 18(1)(a) and section 67 of the Act.
8. He submits
that the Appellant is not entitled to deduct the amounts of
$12,000.00 and $3,500.00 as casual labour expenses in computing
income for the 1999 and 2000 taxation years as the Appellant has
not shown that said amounts were incurred for the purpose of
gaining or producing income within the meaning of paragraph
18(1)(a) of the Act.
9. He further
submits that the Appellant and the Children were not engaged in a
bona fide business arrangement as:
a) the
Children were working for their parents and therefore were not
working at 'arms-length';
b) the cheques
were redeposited into the bank accounts of either the Business or
the Appellant and the Spouse and therefore the amounts of said
cheques were not considered to have been paid to the Children and
they did not have possession and control of the money; and
c) there was
no written loan agreement between the Appellant and the Children
with respect to amounts redeposited into the bank accounts as
referred to in subparagraph 9(b) herein.
10. In the event that the
Tax Court determines that the amounts of $12,000.00 and $3,500.00
for the 1999 and 2000 taxation years constitutes salaries paid to
the children, he further submits that said payments are not
reasonable pursuant to section 67 of the Act on the basis of the
children's ages, the dates said payments were made and
amounts of the payments in comparison to amounts paid to the
Spouse during the same period.
[2] Testimony was given by the
Appellant, by the Spouse, by the Appellant's son, Faisan and
by Paul Lepine, the Appeals Officer; numerous Exhibits were
filed. Other facts that emerged were that the business was sold
in 2001; that the two Children only filed income tax returns with
respect to their alleged salaries in 2002 after the audit of the
business was conducted; that the Children did actually work; that
the parents maintained the alleged salaries in effect were loans
back to the parents to be used for the future education of the
Children; that there was some confusion as to the hours worked by
and the amounts allegedly paid to the Children; that the business
was run by the Spouse and that the Appellant had very little to
do with the business except having bought it; that cheques to the
Children were not issued on a regular basis but rather only when
cash was available with adjustments at year end in December.
[3] I find the following to be prime
considerations:
1. It is clear that the cheques issued
to the Children were either not paid to them or upon being paid
to them were immediately deposited in bank accounts of either the
business or of one or both of the parents. Consequently, they did
not take the form of a salary paid to the children such that the
monies involved came under their control and possession. The
monies in essence remained in the control of the parents and or
the business.
2. Although the parents contend the
monies were loaned back to the parents, there is no loan
documentation.
3. It is difficult to understand how a
business that had income in excess of $300,000 in both 1999 and
2000 could have a net profit of only $332.00 in 1999 and $346.00
in 2000.
4. In 1999 no salary was paid to the
Spouse, the principal operator of the business and only a
Management Fee of $3,500.00 was paid to him in 2000. That enabled
the Appellant to certain deductions from her income for the
support of her husband. In other words he worked but was not paid
a salary and this gave rise to the deductions in favour of the
Appellant.
5. The children, although allegedly
claiming to have been paid salaries did not declare any amounts
on their income tax returns for 1999 and 2000, and in fact only
filed returns in 2002 to declare that income.
6. One is left with the impression
that what was involved was tax planning designed to reduce, as
much as possible, the overall tax burden of the family. This is
not necessarily the end of the matter but when the operations are
carried out in the fashion that they were it smacks of a sham and
does not meet the requirements of paragraph 18(1)(a) and
section 67 of the Income Tax Act.
[4] The cases cited by the Counsel for
the Respondent namely Blake v. M.N.R., 81 DTC 31 (TRB);
Slingerland v. M. N. R., 78 DTC 1280 (TRB) and Clarke
et al v. M.N.R., 84 DTC 1839 (TCC), all involved
situations where children worked for their parents, received
cheques for the work, and as in the present case, the monies were
circuited back to the parent or parents and never stayed with the
children and in all three cases the taxpayers' appeals were
dismissed.
[5] I can see no substantive
difference between the decisions in those three appeals and the
facts in the present appeal and I come to the same conclusion as
did the judges in those three appeals.
[6] Consequently, the appeals are
dismissed.
Signed at Ottawa, Canada, this 23rd day of June, 2004.
O'Connor, J.
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