Rao v. R., [1997] 2 CTC 2277

Sobier T.C.J.:

The Appellant appeals from the assessments by the Minister of National Revenue (the “Minister”) for her 1992 and 1993 taxation years whereby the Minister disallowed deductions of real estate consultant’s fees in the amounts of $19,427 and $14,003 respectively, paid by the Appellant in connection with her business.

The Appellant was a self-employed commission real estate salesperson employed by Countrywide Realty Specialists Inc. (“Countrywide”).

The Appellant’s husband was previously qualified as a real estate salesperson but according to her evidence, ceased selling real estate in order to be employed on a regular basis so as to be able to spend more time with their children. The Appellant’s spouse was employed by Canada Post as a letter carrier. His hours of work were from 6:30 a.m. until 1:30 p.m., after which time he was at home and able to tend to the children. After giving the children their dinner, the Appellant maintains that her husband was able to assist her with her work, during the week, in the evenings. He also helped on the week-ends. During the week, Mr. Rao was available from approximately 6:00 p.m. until 10:00 p.m. It is Mr. Rao’s remuneration, characterized by the Appellant as real estate consultant’s fees, which is in issue. It was because of his experience as a salesperson that the Appellant stated that she hired and paid him.

The services which the Appellant claims were performed by her spouse were set out in her Notice of Objection and are as follows:

1) puts up and takes down signs (open house signs & for sale signs)

2) takes paperwork to clients for signatures

3) delivers flyers to hundreds of homes in Mississauga area on an ongoing basis

4) picks up keys from listing agents for houses I will be showing to my clients and returns the keys

5) picks up cheques from clients, takes them to the bank to get them certified and delivers them to lawyers

6) delivers copies of offers from my clients to the listing agent

7) stamps the listing and sold cards

8) responsible for keeping and updating the files of all Mississauga homes sold and homes newly listed

9) responsible for entertaining my clients as necessary

10) picks up gift baskets from store and delivers them to clients and prospects

11) picks up refreshment for open houses (e.g. donuts, muffins) and delivers them to open house locations

12) delivers Christmas gifts

13) since clients’ children are a great distraction when showing houses,

when I pick up the clients, my husband will stay at their house to babysit the children

14) he drives clients to new home sites, he does not represent himself as a

real estate agent to the clients and he does not have to have a licence to perform this duty

15) my husband is fluent in Italian, therefore, he accompanies me on all

showings for the large Italian population in the area so that he can translate

16) picks up paint, wallpaper and repair items for vacant homes I’ve listed that need repairs done

17) wallpapers, paints and repairs listed homes when necessary

18) for homes listed where the vendor is out of town in order to have the

property be presented in an attractive way he cuts and waters the lawn, rakes leaves, etc.

19) has put tar base coating on driveways that were in disrepair.

There was some conflict between what was claimed to be Mr. Rao’s reasons for leaving the real estate field, contained in her Notice of Appeal, and what she stated in her viva voce evidence at the hearing of the appeal.

The following is an excerpt from her Notice of Appeal:

In 1991, due to the major damage inflicted on the real estate industry by the recession, my husband could only earn $11,579 in commissions which left him with $3,766 after expenses. Therefore, he agreed to temporarily have his licence declared inactive (at the end of 1991) until the real estate business had a major upswing. Also due to the recession, my own income had declined so that I was having to work twice as hard in order to make sales. It was an obvious step to have my husband use his great knowledge of the real estate industry to my advantage by working for me. In this way, he could fulfil many duties that I didn’t have time to do, thereby helping me to maintain my level of income and helping our family to survive in these difficult times.

However, her evidence, as stated above, was that her spouse left the real estate business in order to spend more time with their children. While there was no evidence as to the number of hours worked, in argument, and using the total remuneration paid to him and the number of hours it was claimed he worked, it was stated that he was paid at the rate of about $10 per hour. At that rate, Mr. Rao worked about 1,900 hours per year for his wife, which on a 50-week a year would be approximately 35 hours per week. That, coupled with the fact that he worked full-time for Canada Post, would leave him with very little time to spend with the children. In addition, the agent for Mrs. Rao wrote to Revenue Canada on November 4, 1994 and stated:

A portion of the money paid to him comes back into the family unit. She couldn’t afford to pay someone else to do this work. Consequently, if she is unable to deduct this item she will have to terminate her contract with her husband which in turn will cause her to cut back on her open houses resulting in a drastic reduction in her income and hardship for her family.

This is consistent with the scheme of income splitting and not a bona fide employer/employee relationship, since she would not have entered into such an arrangement with a third party with whom she dealt at arm’s length. If one were to take it that he did in fact perform services for her, the price she paid for them in her agent’s view would be too expensive and she would not hire another person at that rate.

In each of the 1992 and 1993 taxation years, the remuneration paid to Mr. Rao was approximately 25 percent of the gross commissions earned by the Appellant. Her own net commissions were approximately 15 percent and 5 percent respectively of gross commissions for those years.

While the services performed as enumerated above may appear menial, the Appellant maintains that his professional advice was also given to her, which she claims was of great value. In fact however, the consultant’s fees were the largest single expense of the Appellant carrying on her business, larger even than the fee she was required to pay to Countrywide and also larger than her automobile expenses.

It seems therefore that the expenses would not be reasonable under the circumstances, and therefore not deductible by reasons of the provisions of section 67 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the “Art”). [1]

On the whole, the unreasonableness of the fees paid to her husband, when coupled with the inconsistencies lead to a problem of credibility on the part of the Appellant, and accordingly, she has failed to discharge the onus placed upon her to show that the Minister’s assessment was incorrect. Accordingly, the appeals are dismissed.

Appeals dismissed.