Doug Burns Excavation Contracting Limited v. Minister of National Revenue, [1983] CTC 2566

St-Onge, T C J [ORALLY]:—The appeals of the Doug Burns Excavation Contracting Limited came before me on July 18, 1983, in the City of Halifax, Nova Scotia and the issue is whether the appellant was right in paying bonuses of $15,000 in 1979 and $100,000 in 1978 to Lynda Burns, the spouse of the appellant company’s majority shareholder.

According to the Minister, those bonuses were not expenses incurred by the appellant for the purpose of earning income within the meaning of paragraph 18(1 )(a) of the Income Tax Act, SC 1970-71-72, c 63, as amended. He also contends that they were not reasonable in the circumstances and were made only to reduce the appellant’s income within the meaning of subsection 245(1) of the Income Tax Act.

The facts of these appeals are set forth in the reply to the notice of appeal at paragraphs 2 to 6 inclusive which read as follows:

2. By Notices of Reassessment both dated February 26, 1982, the Respondent reassessed the Appellant’s income tax liability for its 1978 and 1979 taxation years by disallowing a deduction in the following amounts:

1978 — $100,000.00

1979 — $ 50,000.00

3. By Notices of Objection dated May 25, 1982, the Appellant objected to the reassessment of its 1978 and 1979 taxation years.

4. By Notice of Reassessment dated October 13, 1983, the Respondent reassessed the Appellant’s 1979 taxation year:

(a) by allowing a portion of the deduction for bonus expense in the amount of $35,000.00;

(b) and by disallowing a portion of the deduction claimed as bonus expense in the amount of $15,000.00.

5. By Notification of Confirmation dated October 13, 1982, the Respondent confirmed the reassessment of the Appellant’s income tax liability for its 1978 taxation.

6. In so reassessing the Appellant’s income tax liability for his 1978 and 1979 taxation years the Respondent relied, inter alia, upon the following assumptions of fact:

(a) At all material times the Appellant’s fiscal year was from January 1 to December 31;

(b) At all material times the issued and outstanding voting shares of the Appellant were owned as follows:

Shareholder	No of Shares	Percentage
Douglas F Burns	97	93.27%
Lynda A Burns	1	0.96
Robert E Burns	5	4.81
John Burns Limited	1	0.96
TOTAL	104	100.00%

(c) At all material times Lynda A Burns was the legal spouse of Douglas F Burns;

(d) At all material times Lynda Burns and Douglas Burns were directors of the Appellant;

(e) In 1978 and 1979 the Appellant employed Lynda Burns under a contract of employment to perform general clerical functions and paid her a reasonable salary as follows:

1978 — $ 8,900.00

1979 — $13,260.00

(f) In 1978 and 1979 there was no term of the contract of employment which required the Appellant to pay Lynda Burns any amount in excess of the salary she received weekly;

(g) In 1978 and 1979 the Appellant also employed an office manager, Carol Burns, and receptionist, Carol-Ann Burns, who were each paid a reasonable salary in both years as follows:

Office Manager	—	$14,560 (approx)
Receptionist	—	$11,440 (approx)

(h) On December 28, 1978, the Appellant’s directors passed the following resolution:

THAT the Company (Appellant) set up a bonus payable for the 1978 fiscal year in the amount of $350,000.00, said bonus to be paid to the employees on or before the 31st December, AD 1979, in such amounts as the Board of Directors shall determine in its absolute discretion and to have the effect of reducing the Company’s taxable income below $150,000.00.

(i) On December 28, 1979, the Appellant’s directors passed the following resolution:

THAT the Company (Appellant) set up a bonus payable for the 1979 fiscal year in the total amount of $133,700.00, said bonus to be paid to employees on or before the 31st of December, AD 1980, in such amounts as the Board of Directors shall determine in its absolute discretion and to have the effect of reducing the Company’s taxable income below $150,000.00.

(j) The allocation of the alleged bonus in 1978 and 1979 was made as follows:

	1978	1979
Lynda Burns	$100,000	$ 15,000
Douglas Burns	$208,855	$118,700

(k) The declaration by the Appellant of the alleged bonus to Lynda Burns in 1978 and 1979 was made in order to create a deduction which would unduly or artificially reduce the Appellant’s income;

(l) The declaration by the Appellant of the alleged bonus to Lynda Burns in 1978 and 1979 was not a bona fide expense made for the purpose of gaining or producing income from a business;

(m) The declaration by the Appellant of the alleged bonus to Lynda Burns in 1978 and 1979 was not a reasonable expense in the circumstances;

(n) The declaration by the Appellant of the alleged bonus to Lynda Burns in 1978 and 1979 was a gift.

At the hearing, the respondent has substantiated the main allegations of his reply to the notice of appeal.

The appellant company was incorporated in 1976 to take over the business of another company, John Burns Limited, which was in the coal handling business. Mr Douglas Burns, the son of John, became the majority shareholder with 97 shares and his wife, a Director, with one share. John had six sons. Douglas was the only one interested in taking over the business of his father. He had been a foreman for him for some years. In 1978 and 1979 the size of the appellant company’s business had increased substantially. It had an investment close to $600,000. The cost of the fixed assets was some $2,000,000 and income before tax was, in round figures, $200,000 in 1977, $457,000 in 1978 and $216,000 in 1979.

In 1978, the appellant company had from 40 to 50 employees, a foreman, 3 office employees, 20 to 25 heavy pieces of equipment, 15 trucks and the employees were working on 4 shifts at 4 different sites:

(1) Victoria Junction

(2) Lincoln

(3) International Coal Piers, and

(4) Mullens Coal Bank.

There was also a foreman at the Mullens Coal Bank and Victoria Junction sites and Mr Douglas Burns was travelling from one site to the other. In 1976, his salary was $200 a week, then, when the appellant company became prosperous, the Directors decided to pay the following bonuses and salary:

DOUG BURNS EXCAVATION CONTRACTING LIMITED

	Company
	Income
	Before	Owner’s Bonuses
	Bonus &	Payable			T-1 Incomes
Year	Tax Tax	Allocation	Amt		Doug	Lynda
1977	$303,500	Doug	$85,000	approx salary	$ 20,500	$ 7,000
1978	$766,000	Doug	$208,855	approx salary	$ 19,500	$ 8,900
		Lynda	100,000	1977 bonus	85,000
			$308,855		$104,500	$ 8,900
1979	$350,000	Doug	$118,700	approx salary	$ 19,500	$14,000
		Lynda	15,000	1978 bonus	125,895	75,000
			$133,700		$145,395	$89,000

1980	$ 29,000	—	approx salary $ 20,000		$13,500
			1978 bonus	82,900	25,000
			1979 bonus	10,000	15,000
				$112,960	$53,500
1981	$(185,000)	—	approx salary $ 10,125		$13,260
			1979 bonus	108,000	—
				$118,825	$13,260
Remuneration for services each year				Doug	Lynda
1977				$105,500 $ 7,000
1978				228,355	108,900
1979				138,200	29,000
1980				20,000	13,500

Douglas Burns was the key man of the company. His responsibility was to make sure that the work was done every day. He prepared the bids to get the contracts, arranged all the financial transactions with the bank and was in charge if all the operations of the appellant company.

His wife’s responsibility was to go to the office to see if everything was in order and to keep her husband aware of the office needs. She also cosigned the cheques, made the deposits at the bank, picked up the mail, discussed jobs with her husband and replaced the two office employees at noon-hours. At home, around 2 o’clock, she also received numerous phone calls with respect to the appellant company’s business. She also assisted at numerous directors’ meetings and she guaranteed the loans at the bank. According to her husband, her involvement was important to increase the income of the company.

Counsel for the appellant argued that the bonuses of $100,000 in 1978 and $15,000 in 1979 paid to Lynda Burns are deductible under paragraph 18(1 )(a) of the Income Tax Act, because the evidence has shown that she worked very hard and much more than an ordinary secretary. Her work was at the office and at home twenty-four hours a day and seven days a week. Her involvement had a great deal to do to earn the profits of the company and although it was not equal to that of her husband, her effort was of a key importance.

She was more than a secretary, she was a director and involved in the board of directors’ meetings. She had also guaranteed the debt of the company. Then, he referred the Court to numerous cases to show that the bonuses were not gifts but legitimate expenses not paid to reduce taxes but to remunerate Lynda Burns for her work.

Counsel for the respondent did not quarrel with the fact that some bonuses can be claimed as legitimate expenses but argued that, in the case at bar, the bonuses paid to Lynda Burns were not legitimate expenses because:

(1) they were not spent to earn income within the meaning of paragraph 18(1 )(a) of the Income Tax Act;

(2) they were not reasonable and consequently prohibited by section 67 of the Income Tax Act:

(3) they were incurred to reduce the appellant’s income which is prohibited by section 245 of the Income Tax Act.

She also argued that the appellant company had no legal obligation to pay bonuses to Lynda Burns and there was nothing in evidence to indicate any basis for such payments. What she did over and above the other em- ployees was to open the mail and to do the banking to preserve confidentiality; but the evidence has revealed that Carol Ann Burns, the receptionist, did the same thing.

She admitted that Lynda Burns had a value but she was paid a salary comparable to the other emploees of the office. According to her, it is obvious that the appellant company would have never paid a bonus of $100,000 to the answering service or the foreman who was also on call twenty-four hours a day. Lynda burns did not decide anything. She did not have any input into the income earning process and did not manage anything. Consequently, for these reasons the bonuses paid to her were not expenses to earn income, and if so, they were not reasonable.

After hearing the evidence in this case, the Court is of the opinion, that the decision should be based purely on a question of fact. It is obvious, from the evidence adduced, that the input of Lynda Burns into the income producing process of the appellant company does not justify the payment of such substantial bonuses. As already mentioned by counsel for the respondent, there was no legal binding obligation to pay such bonuses and Lynda Burns did not do anything to justify such payments. She was paid the salary she deserved and her husband was the only one who was responsible for the substantial increase in the appellant company’s income. He was the only one who had the training and experience to achieve such a goal.

The fact that his wife had to guarantee the loans at the bank does not prove anything since all the assets were held jointly by the husband and the wife. She did not invest any money in the company and, had she been paid a dividend, she would have received it just for one share. The husband was the only one who could receive bonuses. He was the key man and had 97% of the shares.

For these reasons, the Court decides that the bonuses paid to Lynda Burns are not expenses to earn the appellant company’s income and consequently the appeals are dismissed.

Appeal dismissed.