Pazner Scrap Metals Company Limited v. Minister of National Revenue, [1991] 2 CTC 2295, 91 DTC 1153

Rip, T.C.J.:— The issue in this appeal is whether the appellant, Pazner Scrap Metals Company Ltd. ("Scrap"), ought to be allowed to deduct an amount of $103,725 in computing income for 1987 on the basis the amount was an expense, referred to as management fees, incurred for the purpose of gaining or producing income from the appellant's business in accordance with paragraph 18(1)(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

At all relevant times Scrap carried on the business of dealing in and recycling scrap metal on Drouillard Road in an area of Windsor, Ontario, known as Ford City, Scrap is located behind a Ford Motor Company of Canada Ltd. engine plant.

In 1987 all the issued shares of Scrap were owned by 532967 Ontario Ltd., a holding company. The holding company's common shares were owned as to 53 per cent by the Sulby Pazner Family Trust and as to 47 per cent by the Ben Pazner Family Trust. Sulby Razner and Ben Pazner owned 57 per cent and 43 per cent, respectively, of the preferred shares of the holding company. The directors of Scrap were—and are—Sulby Pazner, Ben Pazner and Rita Pazner, wife of Sulby Pazner. Sulby and Ben Razner are half-brothers. Sulby Razner managed Scrap's administration and Ben Pazner managed its yard operations. The company's fiscal year end is December 31.

Pazner New and Used Materials Ltd. ("N & U"), formerly R. & R. Peer New and Used Metals Ltd. ("R & R"), at all relevant times purchased for resale new and used materials at various sites in the Windsor area. The appellant also says N & U provided it with management services for a fee which, in 1987, represented approximately one-third of Scrap's profits for that year. This company's year end is August 31.

N & U's premises were also located on Drouillard Road but were separated from Scrap's by a railway right of way.

The shareholders of N & U were Rita Pazner, who owned 53 per cent of the issued shares and Reva Pazner, wife of Ben Pazner, who owned 47 per cent of the shares. Rita Pazner was president of N & U and in 1987 was employed on a full-time basis by the company. Reva Pazner was not employed by N & U and, according to witnesses, never attended at its premises.

Stephen Cheifetz has practised law in Windsor since 1983. He is also the son-in-law of Sulby and Rita Razner. Scrap and N & U were his clients in 1987 and still are. Cheifetz testified he drafted management agreements between Scrap and N & U. The first agreement was prepared in 1985.

Cheifetz recalled he started acting for the companies in 1984 and "got involved” with the companies. He had worked summers while at law school for both Scrap and N & U and was familiar with the businesses they carried on. He stated that he frequently was present at Scrap's premises “to deal with different issues". At the premises and at the Razner's residence he said, he would often hear Rita Pazner and Sulby Razner discuss business. He "realized New and Used was providing services to Scrap without compensation".

Accordingly, Cheifetz suggested to his parents-in-law that N & U be compensated for Mrs. Razner's advice and labour on behalf of Scrap and in December, 1985 drafted for their consideration a management agreement using the form of agreement his law firm was using at the time. He could not recall the exact date in December 1985 the agreement was executed by Scrap and R & R but the agreement was effective from December 17, 1985. The agreement recited that R & R has "access to the necessary management skills in conjunction with its business" and was prepared to provide Scrap with such services. Under the agreement Scrap engaged R & R and R & R accepted “such engagement and agree(d) to perform those services and other obligations required of it”. The compensation to be paid for the services was to be determined by Scrap and was to be paid prior to December 31 in each year during the term of the agreement.

Cheifetz declared that he "didn't set up the mechanics as well as [he]should have" and soon after his firm merged with another firm, which "had a larger tax practise and better forms of agreements which reflected reality more" he decided to redraft the agreement using a new form. Also, by that time, R & R had changed its name and Cheifetz wished the company's new name to be set out on the management agreement.

A second management agreement was prepared by Cheifetz and was executed by the parties to the agreement, Scrap, N & U and Rita Pazner, on August 31, 1987. A resolution of the directors of Scrap on August 31 authorized the company to enter into the agreement. Sulby Pazner signed the agreement in his capacity as president of Scrap, Rita Razner signed the agreement on behalf of N & U in her capacity as president and also signed the agreement in her personal capacity. Cheifetz testified he was confident the agreement was executed on August 31 because it is "practice for the resolution and the document to be executed at the same time". He stated that he preferred the revised agreement “because it more particularly reflected reality” in that "it set out in more detail how things were to be done". The revised agreement provides that:

. . .the Manager shall provide to the Corporation the executive, managerial and consultant services of tne Party of the Third Part herein and the other employees of the Manager."

Rita Pazner is the party of the third part.

The revised agreement stipulates that Scrap is to pay N & U management fees as follows:

(a) a basic annual fee of $12,000;

(b) upon the closing of the books of the Corporation at the end of each fiscal year of the Corporation there shall be allocated to the Manager such share of the net profits of the Corporation before taxation for such fiscal period related to the value of the services rendered by the Manager as the Board of Directors of the Corporation in their absolute discretion shall determine.

The basic fee shall be paid to the Manager not less often than annually and in such instalments as the Manager shall request. Any share of the net profits so allocated as herein provided shall be paid by the Corporation to the Manager at such time after such allocation as made as the Board of Directors shall determine, but, in any event, not later than the end of the immediately succeeding fiscal year after such allocation is made.

Rita Razner's functions at N & U were described by Cheifetz, Roger Miller, the companies' accountant, and Sulby Pazner. Cheifetz stated that N & U's largest sales item was fluorescent lighting. N & U also sold office equipment, lockers, metal pipe and electrical wires. When Mrs. Razner becomes aware a building is about to be demolished, Cheifetz explained, she visits the building to purchase the lighting and other material for resale by N & U. On the site she observes material which may be used by Scrap and would inform Sulby Pazner of the opportunity to purchase those items. She also caused N & U to supervise the management of Scrap's office and its bookkeeping. Rita Pazner attended conventions on behalf of Scrap in the United States and Canada and made "good contacts", according to Cheifetz.

Cheifetz said that at the time he lived in Toronto, when he articled for a law firm in that city, Rita Pazner would travel to Toronto to visit proposed demolition sites. He would drive her to the sites where she would "check out deals for Scrap”.

At home, Cheifetz testified, the Pazners discussed whether any particular deal was worthwhile and if certain items ought to be purchased by Scrap. Mrs. Pazner would inform her husband where “good deals" were available; for example, a company going out of business may be selling all its equipment and fixtures. He described Sulby Pazner as a trader who does not always take his wife's advice "but he listens to her". Mr. Pazner, Cheifetz said, “talks to me about most of the deals he does".

Miller testified that Mrs. Pazner worked for N & U in the office, served the retail trade at the counter and was kept occupied on the telephone. Miller said he would visit the premises of N & U at least once a month, after telephoning Mrs. Pazner. Sulby and Ben Pazner, he said, were located at Scrap's premises. Whenever a meeting concerning Scrap was held which required Mrs. Pazner’s presence she would go over to Scrap. She would attend meetings at which profitability, bad debts and office staff were to be discussed. Mrs. Razner, he stated, also tried to reconcile staff problems.

Sulby Pazner testified his wife took care of his books when he first started peddling scrap. He remembered she worked “in a trailer in the yard with the ids on the side". She stopped working to take care of the children, but once the children were grown up she came back to work to run N & U. Now, he said, she works for “both businesses” checking bills and invoices, amongst other things, and visits sites to see what scrap is available”. "We [talk] about business at home. . . Mr. Pazner confirmed he "is on the phone most of the time dealing . . . Ben takes care of the back end of the yard. . .”.

Apparently during his audit of Scrap, an auditor employed by the respondent was given a copy of a third management agreement, between Scrap, N & U and Rita Pazner having substantially the same terms as the second agreement except it was to take effect on December 5, 1985. Cheifetz explained that when he prepared the second agreement he had "a selling job to do" on Sulby Razner. “If the new agreement was so good . . . Sulby Razner wanted it to go back to 1985". Cheifetz said he told Pazner he would prepare such an agreement only if the original agreement, executed in 1985, remained in Scrap's minute book "so there would be no misconception [the original] was never in existence".

The amount of the management fee was recommended by Miller. Cheifetz insisted he was not involved in making this decision. As Cheifetz described it, Sulby and Ben Pazner met Miller to discuss the fee and determine the amount. Miller then wrote Cheifetz, what he referred to as an accountant's letter, to advise him of the management fee and request him to prepare the necessary documentation, including preparation of the necessary corporate resolutions to reflect the various transactions and decisions of the directors. Cheifetz "assumes" the letter from Miller was received within six months from the end of Scrap's 1987 fiscal year but he could not recall the date of the letter. He recalled receiving the letter but could not find it prior to the trial.

Cheifetz believes a resolution of the directors of Scrap was prepared authorizing the payment of the management fee for 1987. However, the resolution too cannot be found. Cheifetz explained that Scrap was amalgamated with another corporation in 1989 and the current minute book is that of the amalgamated company, which has the same name as the appellant. The minute book of the pre-amalgamated corporation, he declared, was put in his firm's dead files and as of the day prior to the trial, could not be found. There was a facility in his firm's office, Cheifetz explained, to prepare the corporate resolutions; when prepared, the resolution would be reviewed bY a lawyer and then sent to the client for execution. It was his practice, he explained to respondent's counsel, to put the accountant's letter in the minute book when the resolution was mailed out to the client for execution.

Cheifetz also stated his firm has a separate file for each client corporation. The file would normally contain the accountant's letter. He could not find Scrap's file, although he said it was previously shown to officials of the respondent. He said he was "sure" he produced Miller's letter to an officer at the Appeals Section of Revenue Canada. As far as Cheifetz is concerned he produced all the minute books and relevant documentation to Revenue Canada.

Unknown to Cheifetz a copy of the letter from Miller to Cheifetz was in the hands of counsel for the respondent during his cross-examination. Counsel eventually produced the letter during his cross-examination of Miller.

Miller carries on his profession in Windsor. His first contact with Scrap and N & U was in 1980 when a partner of the accounting firm at which he was then employed died and he was assigned the files of the two corporations. In March 1987 he left the firm because, he said, the firm was breaking apart due to substantial lawsuits initiated against the partners and he was doing partner's work but was not being paid accordingly. He joined another firm but a year later left to open his own firm. When he worked on the companies" accounts he dealt with the Pazner brothers and Rita Pazner.

During the summer of 1987, after he left his old firm, Miller met Sulby Razner and later on Razner “got in touch with me". Ben Pazner telephoned Miller and a meeting was arranged between Miller, Sulby Pazner, Ben Pazner and Rita Razner. Miller was requested to take over the accounts of the two companies.

Miller's attempts to obtain the companies' files from his old firm were futile, he said. He recalled he was not having success in obtaining all the material from the companies' erstwhile accounting firm notwithstanding his efforts since mid-1987. He only started receiving "parts of files" in December 1987 and January 1988 after his employer at the time wrote to the firm with respect to a master list of clients advising the senior partner that if he received no response he would report the situation to the Ontario Institute of Chartered Accountants. Miller stated he started working on the files again in January or February of 1988 to complete the 1987 year of Scrap.

The former accounting firm retained the companies' files for 1985 and 1986; Miller personally obtained these files from a former partner after the former firm was dissolved.

The 1986 financial statements of Scrap make no provision for payment of a management fee to N & U. Miller acknowledged that he did "90 per cent of the field work for Scrap but didn't wrap up the work . . . (which) . . . was usually done by a partner. . . He said he prepared the company's trial balances for 1986 as well as schedules. In none of the draft statements he prepared did he provide for a management fee because "no one instructed me one way or another". He left the firm before the final meeting took place between a partner of the accounting firm and the directors of Scrap to settle the financial statements. The “big, import entries (are left to) the end," after meeting the client, and therefore did not appear in any draft statement.

Sometime between March 12 and March 28, 1988, according to Miller, he met in Sulby Razner's office with the Pazner brothers to obtain approval of Scrap's draft financial statements he prepared for Scrap's 1987 fiscal year and to fix the management fee for the period. Rita Razner did not attend the meeting, said Miller, since he believed she was in a conflict situation as director of bot companies. Miller declared he is sure such a meeting took place because there were “lots of items to take care of and I cannot finish the statements until I meet with the owners".

At the meeting Miller recommended a management fee. There were two criteria he said he used in calculating the fee: to preserve the small business deduction for Scrap and to reward N & U for "deals" it directed to Scrap, which resulted in Scrap's sales and profits increasing from the previous year. Scrap's profit for 1987, before tax, was $263,194 after provision of the management fee of $111,725; the amount of the fee included the fixed amount of $12,000 set out in the agreement. The company's profit in 1986, when no management fee was deducted, was $187,083.

Because no management fee had been paid in 1986 Miller said he recommended the amount of the fee for 1987 also include the fee that ought to have been paid in 1986. Of the management fee of $111,725, the amount of $53,334 was attributed to the period January 1, 1986 to December 31, 1986. The sum of $33,551 was attributed to the period January 1, 1987 to August 31, 1987 and $25,700 was attributed to the period September 1, 1987 to December 31, 1987.

N & U had losses in 1986 and 1987 and, said Miller, even with the management fee added to its income, N & U had no taxable income in those years. N & U filed amended income tax returns for 1986 and 1987 to include the fees in income.

In calculating the management fee for the periods December 5, 1985 to August 31, 1986 and September 1, 1986 to August 31, 1987 Miller assumed the 75 per cent of the work performed by Rita Razner and two employees of N & U was for Scrap. He therefore allocated 75 per cent of their salaries to the management fee. The totals were $36,577 for the first period and $49,448 for the second period, the aggregate being $86,025.

For the period September 1, 1987 to December 31, 1987 Miller appears to have performed several operations in arriving at a management fee. Firstly, his working papers reflect calculations consistent with the previous two periods: 75 per cent of salaries was allocated to the management fee; this calculation came to $14,671. This amount was increased by 15 per cent to total $16,872. He then also increased the latter amount by 15 per cent, for a total of $22,500. An amount of $18,000 was also written on his working papers, in the same column as the calculation of $22,500. He finally recommended a fee for this period of $25,700. In cross-examination, he replied he was "not sure where the 15 per cent is from". Miller did not know the origin of the $18,000; however it appears to represent the wages paid to two employees of N & U, $13,615, increased by 15 per cent, that is, to $15,657, which latter amount was also increased by 15 per cent, to $18,005. Miller stated he may have arrived at the amount of $25,700, the management fee recommended for the last period, by increasing the $22,500 by an additional 15 per cent. Finally he admitted he played with the figures to bring the management fee to an amount, which when deducted from Scrap's income, would enable Scrap to qualify for the small business deduction.

Miller declared in redirect evidence that in his view Revenue Canada's policy at the time he calculated the management fees was to allow a 15 percent write-up of actual expenses in determining such fees. He also stated that in subsequent years the management fees were "approximately pro rata" to what they were to Scrap's income in 1987; in 1988 management fees were $32,600 on net income of $239,000 and in 1989 the fees were $15,752 on net income of $150,000.

Sulby Pazner recalled the problem he was having with his accountant in 1986 and the change to Miller's firm. He acknowledged receiving a letter from Miller in March 1988 enclosing Scrap's draft financial statements and Miller's recommendations. He confirmed the amount of the management fee was determined by Miller and “it looked good to me . . . okay for the profit". Pazner declared that without his wife's efforts the business would not be successful.

Mr. Antonio DiBartolomeo is an auditor with the respondent and had worked for over two years for a national accounting firm. He audited N & U and Scrap's 1987 accounts and was responsible for preparing the assessment in issue. He confirmed N & U included management fees of $36,580 and $49,445 in its income for 1986 and 1987 respectively and that N & U had no taxable income in those two years.

DiBartolomeo recalled several meetings he had with Cheifetz and the difficulty he experienced in obtaining information. He stated the last entry in N & U's minute book was dated September 6, 1985 and in Scrap's minute book was February 19, 1985. He made photostatic copies of these entries.

Di Bartolomeo said he asked Cheifetz for correspondence and any documentation the accountants of Scrap and N & U may have sent but Cheifetz did not provide them. On November 28, 1988 he visited the original accountants for the companies and met with one of the partners. There were no records referring to management fees and the partner told him that in preparing the 1986 statements for Scrap no management fee was considered, but that was not to say there was no management agreement. The partner provided Di Bartolomeo with copies of his working papers.

Two weeks later DiBartolomeo met Miller and Cheifetz and Cheifetz explained to him the sequence of management agreements. Cheifetz told him resolutions of Scrap and N & U were being prepared for review by Revenue Canada but DiBartolomeo did not follow this up. Cheifetz also informed him that the original financial statements of N & U for the period ending August 31, 1987, filed with its 1987 income tax returns, did not provide for the management fees since the directors had not approved the fees as at the date of the statements.

Revenue Canada did allow, DiBartolomeo testified, a management fee of $4,000 for the four-month period September 1, 1987 to December 31, 1987. The $4,000 represented one-third of the $12,000 of the management fee fixed by the management agreement. The balance was disallowed, he explained, because Scrap failed to show a liability to pay. Obviously Revenue Canada took the position the agreement was in force only from August 31, 1987. The management agreement provides for procedures of payment and Revenue Canada saw no evidence procedures were followed; thus the respondent's officials did not consider Pazner had a liability to pay any additional fee to N & U.

Counsel for Scrap was of the view that the respondent's officials misinterpreted the management agreement of 1987 in that the agreement only provides for a specific payment to N & U of the basic management fee of $12,000. The liability for the balance of the fee is determined not by the agreement but by the directors of Scrap. Thus the respondent erred when he concluded Scrap had no liability to pay.

Scrap's counsel submitted the reasonableness of the management fee was not questioned by the respondent. respondent's counsel disagreed; one of the assumptions relied on by the respondent in assessing was that “the management fees claimed as a deduction in 1987 were not reasonable”. Counsel for the respondent correctly stated that there was no evidence to refute his client's assumption.

The appellant's counsel also asked me to find that a meeting between Miller and the Pazner brothers to discuss the management fee took place in March 1988. I am satisfied that on the balance of probability such a meeting did take place. Miller was forthright in his evidence candidly explaining, amongst other things, how he calculated the management fee. The evidence of Miller and Sulby Pazner was credible and there is no reason not to conclude the events described by them did in fact occur. I should mention that Cheifetz withstood the aggressive cross-examination by respondent's counsel with respect to the accountant's letter and the preparation of corporate resolutions arising from the letter. His replies were consistent. As a result of respondent's counsel producing the letter during the cross examination of Miller, Cheifetz' evidence was corroborated on at least one major point. I am satisfied Cheifetz' viva voce evidence of events, including discussions with representatives of the respondent and of documents prepared or provided to the respondent, ought to be accepted.

Minister's counsel referred the Court to several cases [1] in support of the proposition there was no obligation for Scrap to pay a fee to N & U since the terms of the management agreement were not strictly followed. In his view there must be a “meticulous crossing of t's . . . and [dotting] of i's" for Scrap to fulfil its obligations.

When parties at arm's length enter into agreements it is not uncommon for them to carry on the relationship created by the agreement without referring on any regular basis to any specific terms in the agreement. If the relationship is profitable to a party, that party will usually tolerate an action or inaction by the other party that in fact may be contrary to what is provided in the agreement. So long as the parties are content, none of them will pay close attention to the terms of the agreement. Only when conflict arises do the parties run for the agreement.

However, the situation is different where parties do not act at arm's length, the main reason being that the economic interests of the two parties are the same. An agreement between parties not at arm's length is often reduced to writing because a third party, the respondent for example, may be affected by the relationship created. In such a case the parties are expected to adhere to all the terms of agreement since any violation of any one provision of the agreement may indicate to the third party, the parties are not acting pursuant to its terms in general: Rose v. The Queen, op cit, at page 80 (D.T.C. 5087).

In the case at bar counsel for the respondent alleges it was not enough that a meeting was held in March 1988 between Miller and the Pazners to fix the management fee. The agreement—that is, the agreement dated August 31, 1987—provided the fee was to represent a share of the net profits of Scrap related to the value of the services rendered by N & U as the Board of Directors of Scrap were to determine. The Board of Directors of Scrap did not determine the value of the services rendered by N & U as required by the agreement, he submitted, because there was no meeting of the Board of Directors. No resolution of the directors of Scrap was adduced in evidence either allocating any net profits to N & U or determining the value of the services rendered by N & U.

Counsel for the appellant says the meeting with Miller was a directors' meeting and at this meeting the fee was determined. I have indicated that I have accepted evidence that a meeting took place. Even if a formal meeting of directors did not take place, the appellant's submission would not be fatal. In Ontario a directors' meeting is not required to pass a resolution; the directors may pass a resolution by signature of all the directors. The question, then, is whether the directors passed the required resolution at a meeting or by their signatures. Cheifetz said he prepared a resolution but it has been misplaced; for reasons already indicated, I shall accept this as fact.

I now wish to address the question of reasonableness. All of Cheifetz, Miller and Sulby Pazner testified Rita Pazner provided important services to Scrap. I am prepared to accept their conclusion as evidence since it was not opposed. However, there was no evidence of services provided to Scrap under the management agreement by the employees of N & U, other than. that of Mrs. Pazner. I have no idea what the other two employees did. I must therefore delete from the calculation of management fees any reference to salaries of these two employees.

I also do not know how Miller arrived at the proportion of work performed by Mrs. Razner; the 75 per cent allocation was simply Miller's opinion. Evidence as to the services provided by Mrs. Razner related primarily to the services she provided to Scrap. Other than visiting sites to determine what product N & U could purchase, her attendance at the counter and talking on the telephone, the description of services provided to N & U by Mrs. Pazner was not very enlightening. I cannot even guess as to what hours Mrs. Pazner devoted to each corporation, the type of work and the relative importance of the work she provided to each corporation. Bearing in mind Miller's goal in setting a fee to permit Scrap to be eligible for the small business deduction I am leery of accepting his view that Mrs. Pazner devoted 75 per cent of her efforts to Scrap.

Mrs. Pazner was present at the trial but did not testify. Her testimony may have permitted me to appreciate to a greater degree her value to Scrap. I infer that because she did not testify, although she was available to testify, her evidence would not have been favourable to the appellant. [2]

The respondent alleged in his Reply to the Notice of Appeal that the management fees which relate to Scrap's 1986 taxation year are not deductible in computing its taxation income for its 1987 taxation year.

A related issue is what agreement, if any, was in force during Scrap's 1986 taxation year, the agreement executed in 1985 or the agreement executed in 1987, effective in 1985.

At no time prior to 1986 did Scrap pay a management fee. No fee was fixed by Scrap under the original agreement, effective December 17, 1985, for the two-week period of December 17, 1985 to December 31, 1985. The third management agreement prepared by Cheifetz, that is, the agreement prepared subsequent to the agreement of August 31, 1987, was effective December 5, 1985. No fee for the period December 5, 1985 to December 31, 1985 was determined by the directors of Scrap.

Sulby Pazner impressed me as an astute and worldly businessman. Cheifetz took a more than professional interest in Scrap and N & U; his father-in-law, he said, consulted him on most of the transactions undertaken by Scrap. Mrs. Pazner was described by witnesses as a knowledgeable person. All these people were aware of the agreement between Scrap and R & R executed in 1985. Yet not one of them brought the agreement to the attention of the companies' accountant when Scrap's 1985 and 1986 financial statements or R & R's 1986 financial statements were being prepared. No effort was made to determine a management fee for those periods. The partner of the accounting firm at the time was not aware of any management agreement. I can only conclude that notwithstanding the execution of the very first agreement the parties did not act on the relationship intended to be created by that agreement until August 31, 1987, when the second agreement was signed. The problems being experienced by, and with, the accountants cannot in these circumstances be a legitimate reason for not considering the terms of a management agreement if the appellant was acting on the agreement during its 1986 fiscal year and prior to August 31, 1987.

As far as the third agreement is concerned I can only consider it relevant if on December 5, 1985, the purported effective date of the agreement, there was a service contract and relationship between Scrap, R & R and Mrs. Pazner. An agreement which is made effective at a date prior to its execution cannot affect the fact the relationship purported to be created by the agreement may not have existed at that date. An "ex post facto" arrangement cannot create something that did not exist during the relevant period: Rose v. The Queen, op cit, at page 75 (D.T.C. 5088).

My findings therefore are:

(a) there is no evidence to support the claim that 75 per cent of Mrs. Razner's services were provided to Scrap. Because she provided services to N & U as well as to Scrap through N & U, I shall assume she provided services equally to each of the companies; that is, 50 per cent of her services were provided to Scrap;

(b) there is no evidence that any of the services of N & U's other employees were provided to Scrap;

(c) the calculation of the management fee by Miller for the period August 31, 1987 to December 31, 1987 was arbitrary and had no relation to reality;

and

(d) N & U commenced providing services to Scrap on August 31, 1987.

As a result of my findings, I need not consider whether Scrap may deduct in computing its income for 1987, expenses incurred in its 1986 fiscal year.

Therefore the appeal will be allowed, without costs, and the assessment will be referred back to the respondent for reconsideration and reassessment to allow a management fee of $7,427, calculated as follows:

(a) $4,000 being the portion of the basic fee for one-third of the year, and

(b) $2,980 being one-half of Mrs. Razner's salary for the period August 31, 1987 to December 31, 1987; and

(c) $447, being a 15 per cent write up on 50 per cent of Mrs. Pazner’s salary to reflect administrative and other costs to N & U of providing her services to Scrap. I do not find that a 15 per cent write up is unreasonable in the particular circumstances of this appeal.

Appeal allowed.