George Robinson v. Minister of National Revenue, [1985] 1 CTC 2054, 85 DTC 84

Taylor, TCJ:—This is an appeal for the years 1979, 1980 and 1981 heard in Regina, Saskatchewan against income tax assessments dealing with the following as outlined in the notice of appeal:

1) CAR EXPENSES (1979, 1980, 1981)

Car expenses on reassessment have been allowed at 25% and were previously claimed at 66%. This pertains to both operating and capital allowance. The basis for reassessment lies in the fact that the taxpayer resides on his farm only seven months of the year instead of the full twelve. However, while this is true, farm business has also been conducted with his car during the other five months. We, therefore, submit that a fair allowance be changed to 50%.

2) WAGES TO SPOUSE (1981)

Wages claimed for his wife at $9,059.24 were reassessed at $4,752.00. This is completely unreasonable in view of his income and the fact that the taxpayer was advised by the tax department, originally, that a proper wage would relate to what he would otherwise pay to a hired man. We submit that the original claim was entirely reasonable and should be allowed in full as originally submitted.

NB A representative of Revenue Canada, made the statement that “the client and auditor agreed the amount allowed was reasonable based on duties performed”. As the auditor in question and in discussion with my client — no such agreement was made. The taxpayer’s wife in fact has always performed considerable farm duties to the extent that the amount paid would represent less (not more) than value given. A review of wages paid throughout the years shows “nil” other than what has been recently claimed for wife’s wages.

3) INTEREST INCOME (1981)

Interest income has been reversed from his wife to the taxpayer. We submit that this should have been left as reported as the interest earnings from capital resulted from a joint effort over the years by both the taxpayer and his wife. You will note that as reported, originally, only */ of the interest was shown in his wife’s name.

4) BUSINESS INVESTMENT TAX CREDIT

Regarding the purchase of the Ford LN700 truck in 1981, a 10% BITC was claimed, which is the applicable rate. The reassessment allows only 7/,%. We request this item be reversed to that originally computed. Regulation 4600 should apply, rather than Regulation 4601, as even though a truck is obviously for transportation, the business is that of farming, not transportation, and therefore, should be regarded as “qualified Property”.

The reply to notice of appeal contained the following:

5. The Minister of National Revenue, when making his reassessments for the Appellant’s 1979 to 1981 taxation years, relied, inter alia, on the following facts:

(a) the Appellant is a grain farmer residing approximately 7 months a year on his farm;

(b) for the relevant years, as part of a Statement of Farm Business, the Appellant claimed 66% of both the total cost incurred in the maintenance of his Ford Lincoln car and capital cost allowance of such car;

(c) for the relevant years, the Appellant also had claimed and was allowed 100% of both the total expenses incurred in the maintenance as well as capital cost allowance of a Ford truck mainly used for farm purposes but also partly used for personal usage;

(d) for his 1981 taxation year, the Appellant also sought to deduct $9,059.24 allegedly paid to his wife as salary for work on the farm;

(e) the Appellant’s spouse’s duties were as follows:

— pick up machinery repairs

— haul seed to field

— haul grain during harvest

— help move farm machinery;

(f) in discussions held prior to the reassessment, the Appellant eventually mentioned to the Respondent that hadn’t he hired his wife he would have otherwise hired help at $8.00 per hour, 9 hours per day for 22 days per month for approximately 3 months per year for a total of $4,752.00;

(g) for his 1981 taxation year, the Appellant reported investment interest income in the amount of $16,049.92 and the Appellant’s wife reported on her own return of income, investment interest income in the amount of $4,952.58;

(h) the Appellant allegedly lent $50,000 to his wife by way of a written demand loan note, dated December 1980, at no charge of interest and without repayment terms;

(i) in fact, the Appellant had transferred to his spouse, the major part of the capital on which interest ran in the amount of $4,952.58; only a capital amount of $4,752.00 received by the Appellant’s wife as wages from her husband was not transferred property;

(j) in his 1981 return of income, the Appellant also claimed business investment tax credit regarding the purchase of a Ford truck LN700 of 10%;

(k) the Appellant purchased that Ford truck to be used principally for the purpose

of transporting passengers, property or passengers and property in Canada.

The appellant in testimony noted that he did use his Ford Lincoln automobile on occasions for picking up machinery parts or going for the mail; that his wife had performed all or more of the services normally expected of a hired man; that the $50,000 amount, allegedly the basis for the “demand loan’’, had always been and remained part of a joint bank account in the names of himself and his wife; and that the Ford LN700 truck was designed and equipped specifically for hauling grain to the elevators, and to do so he needed to use the roads.

While I am aware that the above is only a short summary of the testimony, it seems to point out that for each point at issue, there is more a matter of principle as opposed to specific dollars. I shall deal with each of them in order.

Car Expenses — I am satisfied that the appellant used his ford Lincoln on occasions for business purposes, but I am equally satisfied that its acquisition and utilization was primarily — I would say almost exclusively — for personal purposes. He did have available on the farm other vehicles, not only better suited to the farming purposes but normally at hand for such use. The appellant made the point that he was entitled to purchase a “luxury” vehicle (the Ford Lincoln) if he so desired — and I agree. And when that luxury vehicle is used personally, there can be no complaint. However, when the costs of operating that luxury vehicle for business purposes exceed a reasonable charge (section 67 of the Income Tax Act) the Minister is equally entitled to examine the issue. In this instance there is little if anything to support a charge of 25 per cent of the luxury vehicle costs against the business operation, and certainly nothing which would support a greater charge.

Wages to Spouse — As I see it, the only restraint that the Minister can hope to raise is a question as to the “reasonableness” of the amount paid, and I presume that would be interpreted as “reasonable according to the market place”. To attempt to place a mathematically calculable dimension on a “legitimate expense deduction”, when it also contains elements of income-splitting, is a substantial task for this Court. The personal circumstances surrounding and impinging upon a payment for “wages” by a businessman to his wife, would usually lack the normal reciprocal constraints to be found between unrelated parties, and the possible income tax advantage available would be an evident consideration by at least one party to the arrangement. I doubt there is a viable “market place” in the commercially accepted sense of the word. Is it likely that a wife would “withdraw” her services, based upon a view that a proposed salary was insufficient? And/or would a husband cease to be the main support for his wife in the event an accord on “salary” was not reached? I doubt it. Further the 24-hour a day availability of a wife as a “hired hand” can hardly be equated to any normal working arrangement. And finally, I suppose even performing one act of labour (eg assisting during critical periods of calving or lambing time, for a farmer when no one else was available) where the lack of such assistance could result in serious loss to the farmer, might well, in itself be regarded as worthy of a very substantial recompense. As I see it, therefore, without some definitive and directly comparative indication being provided to the Court which could negate or seriously diminish the viability of a businessman’s charge to his accounts for a “spouse’s wages”, that matter must rest with the businessman. It is difficult for me to perceive of a process whereby either the Minister or the Court can logi- cally attempt to impose limits on that charge. That may not be a very satisfactory view for the Minister, but the rescinding of subsection 74(3) of the Income Tax Act in 1980 left that posture open to the businessman, and unless and until some parameters are placed thereon by either the higher Courts or Parliament it is the view I take of this matter.

It would appear to me that the now rescinded subsection 74(3) of the Act was designed at least partially to prevent the appearance and the beneficial result of “income-splitting”, whether or not, in fact, that had been the objective and purpose for such a charge. In the circumstances of this appeal, I find nothing which would warrant the disallowance of the claim — the recipient definitely made a physical contribution to the income earning potential of the operation, and for doing so, received wages, which were not unreasonable according to the testimony of the appellant. Whether any other amount would also have been reasonable, is not a matter which needs to be addressed by the Court at this time.

Interest Income — This is the most troubling question raised in the appeal, in my opinion. It is possible to examine the particular situation in this appeal, within the context that: (1) there was a demand note; (2) there was no direct allocation or transfer of funds; (3) no interest rate was determined; (4) no definite date was established, etc. It might be possible to determine the issue (and dismiss it) based on the narrow ledge of unacceptability presented by the Minister. But it would serve little purpose, in my view, for this Court to reject the position of the appellant in this matter, merely because the deficiencies noted were alleged by the Minister to be fatal — “no charge of interest and without repayment terms”. No jurisprudence was provided to the Court by the respondent which would serve to invalidate a demand note merely on those grounds. Doing so, to me, would only beg the issue. Certainly this appellant could have easily transferred to a separate bank account in his wife’s name, the $50,000 at issue (in fact, as I understand it, his wife with her own signing authority could have done so at any time). Also a nominal interest rate of say one per cent could be included in the note, without materially affecting the matter; and equally, a due date of a year or two could have been just as possible, and the note could have been renewed at the pleasure of the appellant. I am not convinced the “technicalities”, relied upon by the Minister represent anything more than that

— “technicalities” — crossing the “T’”s and dotting the “I” ’s. The point which might be addressed, is whether the taxing result sought — and according to the appellant effected by him — to reduce his own income to the extent of the interest on the $50,000 note, and direct that income to his wife’s hands, was accomplished by the $50,000 “transaction” between those two parties represented by the demand note.

It was agreed between the parties that when a taxpayer transfers property to a spouse, subsection 74(1) of the Income Tax Act served to deem the income therefrom to remain in the hands of the transferor (see Dunkelman v MNR, [1959] CTC 375; 59 DTC 1242). It was alleged by the appellant’s agent, in the circumstances of this case, that there was no transfer of funds — the $50,000, was only a loan of these funds, for which the demand note was the record, because in fact the funds remained undisturbed in the joint bank account of the taxpayer and his wife. As I understood Mr Sills, he indicated it was on his advice that the funds remained “joint” and “undisturbed” for the precise purpose of asserting tht there was no “transfer” thereby (as he saw it) avoiding the pitfalls of subsection 74(1) of the Act. As I see it, if indeed that argument is valid, then in order to accomplish his objective — to put the interest income from the “not-trans- ferred” $50,000, in the hands of his wife, it would be necessary that Mr Robin- son transfer or assign to her in some form or fashion the “right” to that income. (I leave aside for this decision, the question of whether one could successfully argue that such “right” was property in itself). It would appear to me that Mr Robinson, by virtue of “not transferring” the $50,000 property (his argument) may have left himself quite within the scope of subsection 56(4) of the Act, an entirely different section.

I am keenly aware that this matter (the tax benefits to be gained from alleged “income-splitting”) has received much attention, and it is of course quite possible that I have misunderstood or misinterpreted some relevant provision of the Act. However, I am not persuaded that the effect of subsection 56(4) is muted merely because it is sometimes suggested that a taxpayer “‘lend”’ or “give” (to his spouse) as opposed to “transfer” or “assign” — the words in subsection 56(4). The “loaning” of funds to a spouse — in effect, retaining ownership of certain amounts in the hands of a “lender” while permitting its use to the “borrower” could be at risk from a taxation viewpoint if that process itself is a transaction which falls within the parameters of the complete phrase “transferred or assigned — the right to an amount that would, if the right thereto had not been so transferred or assigned, be included in computing Ais income for the taxation year, because the amount would have been received or receivable by him in or in respect of the year, —” [emphasis added]. Certainly in the instant appeal, there was a transfer or assignment of the right to income which might be earned from the loan — otherwise we would not have an appeal before us. However, was there indeed such a transfer or assignment of “the right to an amount —”? It is possible that one very critical word in that phrase is “an amount” as opposed to what might be more specific “the amount”. In the instant case, the $50,000 which is the subject of the controversy, was at the time the “loan” was made, and the “demand note” taken back, already on deposit in a savings account earning interest, and that is precisely where it remained. I am quite satisfied in these circumstances that it was the intention and purpose of the “loan” transaction to transfer to Mrs Robinson the interest income therefrom, whether “received or receivable”, and that is the result which the parties have reported and continued to sustain at the hearing. I am unable to see how it can be said that the amount of interest involved arising out of this point in this appeal can escape the provisions of subsection 56(4) of the Act. The term “received or receivable” might restrict the application of subsection 56(4) under other circumstances but that is not a direct issue in this appeal, as I see it.

Business Investment Tax Credit — Without pursuing this point in detail, I am satisfied that the principle involved was adequately covered in the case of Davis Funk v MNR, [1983] CTC 2262; 83 DTC 223, which was decided against the taxpayer. In the instant case, the principal purpose of the truck at issue was for transporting property (to local elevators) not for the purpose of farming, even though that property in almost all instances was grain grown on the farm.

In summary, the appeal is allowed in part, in order that the amount claimed as wages paid to his spouse in 1981, should be allowed as a deductible expense to the appellant. In all other respects the appeal is dismissed. The entire matter is referred back to the Minister for reconsideration and reassessment.

Appeal allowed in part.