Irving Goldhar, Executor of the Estate of the Late Mary Goldhar v. Minister of National Revenue, [1988] 1 CTC 2187, 88 DTC 1149

Bonner, T.C.J.:—The appellant appeals from assessments of income tax for the 1981, 1982 and 1983 taxation years. During those years Mary Goldhar carried on the business of a fish merchant under the name Poole’s Quality Fish Market (hereinafter "Poole's"). During the period in question Mary Goldhar was ill and was confined first to a nursing home and later to a hospital. Consequently, her business was managed for her by her son Irving Goldhar and his son Mark Goldhar. At all relevant times Irving Goldhar held a power of attorney from Mary Goldhar.

During the years in issue Irving and Mark Goldhar were both employed by Riverside Fisheries Limited (hereinafter “Riverside”). The shareholders of Riverside were Irving Goldhar and his two sons. Riverside carried on the business of a wholesale dealer in fish caught in the Great Lakes. Both Riverside's business and the Poole's business were carried on using separate premises in the same building.

In calculating her income from the Poole’s business Mary Goldhar claimed deductions in respect of fees charged by Riverside primarily for supervision and management services rendered by Irving and Mark Goldhar. The amounts charged were:

Further, Mary Goldhar claimed deductions in respect of wages paid to her employee John McDermott, a bookkeeper.

In assessing tax for the years under appeal the respondent disallowed part of the amounts claimed for supervision and management services. Further, the respondent disallowed part of the deduction claimed in respect of the wages paid to the bookkeeper. The relevant amounts were:

He explained his action in respect of the bookkeeper’s wages on the form T7W-C accompanying the notices of assessment as follows:

John McDermott's wages have been allocated between Poole's Fish Market and Riverside Fisheries Limited based on revenues. Previously, Poole's claimed Mr. McDermott's wages in totality even though the major portion of his time would have been spent working on Riverside’s behalf.

Following the filing of objections to the assessments the respondent confirmed the assessments for 1981 and 1982. He reassessed tax for 1983, but does not appear to have changed his treatment in respect of the supervision and management fees and the bookkeeper's wages. The respondent pleaded that he made the assessments on the basis of findings or assumptions that the amounts disallowed were not expenses incurred for the purpose of gaining or producing income from the appellant's business and further that they were unreasonable in the circumstances. He relied on paragraph 18(1)(a) and section 67 of the Income Tax Act which provide:

18 (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property.

67. In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.

Irving Goldhar testified that the Poole’s business was started in 1926. It involved the sale of fish both to retail customers and to hotels and restaurants. In order to operate, the business staff was required to buy and sell the fish, to hire and supervise a staff of about seven persons who worked on the counter in the retail premises, to keep financial records and look after banking and payroll, to order inventory and to advertise and otherwise promote sales. The staff retained to do the work included John McDermott, the bookkeeper who was hired in 1970. Irving and Mark Goldhar filled supervisory and management roles and, as well, helped at the sales counter. The counter staff included at least, from time to time, Sally Goldhar, wife of Irving Goldhar. Her salary was paid by Riverside.

The business of Riverside, according to Irving Goldhar, was separate and distinct from Poole's. It involved a relatively small number of purchases and resales of fish. However, each transaction involved rather substantial quantities. Riverside had fewer than a dozen accounts in all. In May of 1983 Riverside ceased to do business due to a cash flow problem.

Riverside paid all of the salary or wages received by Irving, Mark and Sally Goldhar during the years in question. In each of those years the amount of the management fee charged to Poole’s was approximately two times the total salary paid by Riverside to Irving and Mark Goldhar.

The amount charged for management fees was arrived at following discussions between Irving Goldhar and the accountant. Mr. Goldhar was unable to give any precise description of the nature of the input received from the accountant or of the process by which the figures were arrived at. He indicated that the amounts charged were intended to reflect the services rendered by himself, his wife and his son. He added that the services rendered to Riverside by Poole’s employee, Mr. McDermott, were considered as well. He admitted that it was his desire to leave as much money as possible with Riverside, a company whose business was in difficulty.

The salaries paid by Riverside to Irving and Mark Goldhar during the three years were, in total,

Irving Goldhar testified that because of the financial situation of Riverside he did not draw all of the salary to which he was entitled.

It is apparent that Irving Goldhar was in a position to manipulate the financial results of the Poole's and Riverside businesses in such a way as to reduce Mary Goldhar’s profits by redirecting costs from Riverside to Poole's. If and to the extent that he did so by imposing on Poole's, costs which exceeded an amount which is reasonable in the circumstances, section 67 of the Income Tax Act would apply to prohibit the deduction of the excess. Equally, any such excess cost could hardly be said to have been incurred for the purpose of gaining or producing income from the Poole’s business and the paragraph 18(1)(a) prohibition would apply.

The respondent appears to have disallowed management fees as he did largely because of the fact that the amounts charged to Poole's substantially exceeded the salaries paid by Riverside to the two Goldhars. That analysis overlooks the contribution of Sally Goldhar, difficult though that may be to measure and evaluate by reason of the vague quality of the evidence. Furthermore, the respondent's approach ignores the fact that the cost to a businessman of goods or services which he resells often has little to do with the price for those services which the market will bear. Next, it will be noted that Irving and Mark Goldhar did not draw from Riverside the full salaries to which they were entitled. The fact that they refrained from doing so because of Riverside's financial position does not diminish the value of their services. Finally, it will be noted that Irving and Mark Goldhar were in a unique position to fill in for Mary Goldhar during her illness. It must be remembered that Mary Goldhar was not an ordinary employee. She was the proprietor of the Poole's business. Irving and Mark Goldhar obviously possessed the knowledge and the experience without which the Poole’s business could not have been operated at all. When it is remembered that Irving and Mark Goldhar each devoted approximately one-half of their normal eight to nine hour working days to the Poole's operation the amounts charged by Riverside do not appear to be high at all.

In Gabco Limited v. M.N.R., [1968] C.T.C. 313; 68 D.T.C. 5210, Cattanach, J. considered the applicability of subsection 12(2) of the former Income Tax Act* [2] to arrangements for remuneration of a person who was a major shareholder of the family construction company which employed him. At page 323 (D.T.C. 5216) Cattanach, J. pointed out that:

It is not a question of the Minister or [t]his 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 consideration of the appellant in mind.

Applying that test I find that the respondent erred in failing to allow the management fees.

I turn next to the question of the wages of Mr. McDermott, the bookkeeper. Although he worked for Poole’s for many years it appears that a very substantial part of his time was spent on Riverside business. There was no evidence given bearing directly on the allocation of his time between the two operations. Mr. McDermott testified that shortly after Riverside ceased operations in May 1983 he was let go due to lack of work. Thus, at least some part of Mr. McDermott's salary could not properly be regarded as a cost of carrying on the Poole’s business. As previously noted, Irving Goldhar testified that the services rendered to Riverside by Mr. McDermott were considered in arriving at the management fee. I find that evidence of little assistance. Mr. Goldhar was quite unable to say what management fee would have been charged were it not for Mr. McDermott's services and on what basis the adjustment was made. Thus, there is no evidentiary foundation for a conclusion that the respondent erred in allocating Mr. McDermott's wages on the basis of the revenues of each of the businesses.

For the foregoing reasons the appeals will be allowed with costs and the assessments referred back to the respondent for reconsideration and reassessment on the basis that management fees of $30,000 for 1981, $24,000 for 1982 and $24,000 for 1983 were properly deductible. The appellant is entitled to no further relief.

Appeals allowed in part.