Cousins v. R., [1998] 1 CTC 3278

Mogan T.C.J.:

The appeals of Paulette Cousins (Paulette), Gregory Cousins (Gregory) and Greg Cousins Construction Ltd. (the company) were heard together on common evidence. The taxation years under appeal are 1993 and 1994 for Paulette and Gregory (wife and husband), and for the company, the reassessments of the taxation years ended January 31, 1994 and January 31, 1995 are under appeal. The issues herein relate to the deductibility of certain amounts by the company which were recorded as payable to the two children of Paulette and Gregory, and whether such amounts should be added to the reported incomes of Paulette and Gregory. The Appellants have elected the informal procedure.

Paulette and Gregory grew up on farms and, around 1975, they developed an oilfield construction business. Paulette was the only witness. She described the business as being one of constructing and reclaiming oilfield leases, constructing pipelines and operating tanker trucks. Apparently, in 1993 and 1994, the company had three or four tanker trucks and also operated gravel trucks.

Paulette and Gregory live in a dwelling about three miles west of Carnduff, Saskatchewan, on land adjoining the land owned by Gregory’s family. About one-quarter of a mile from the dwelling, there is a yard and a shop available for servicing the vehicles and other equipment of the company and it comprises a number of buildings: These buildings were not described in detail but apparently they are large enough to accommodate the repair and maintenance of the equipment.

The shares of the company are owned on a 50/50 basis by Paulette and Gregory. They are the directors, officers and shareholders of the company, Gregory being the president and Paulette being the secretary. She described her work as being that of office manager. She does all of the relevant administrative work for the company. Also, she has one full-time assistant who records the accounts payable and accounts receivable and looks after the payroll.

The company has been very successful. Apparently, its gross revenue has grown from about $500,000 in 1992 and 1993 to close to $4 or $5 million in 1997. An enterprise of that kind obviously requires a lot of management and there is no question that Paulette and Gregory have dedicated much of their waking hours to the management, operation and development of the company. Gregory is the supervisor of the staff out in the field doing the various things that are done with heavy equipment in oilfield construction as well as operating tanker trucks and gravel trucks.

The issues in these appeal are about amounts paid to the two children of Paulette and Gregory. Specifically, Lisa Cousins was born on August 29, 1984, and Paul Cousins was born on April 14, 1986. For the 1993 taxation year, each of the children was paid compensation of $6,500 by the company and for the 1994 taxation year, each of the children was paid $6,400 by the company. Those amounts were deducted by the company in computing its income and were reported as payable to Lisa and Paul.

In the assessments under appeal, the Minister of National Revenue disallowed the company the deduction of $13,000 ($6,500 each to Paul and Lisa) in its 1993 taxation year and the deduction of $12,800 ($6,400 each to Paul and Lisa) in its 1994 taxation year. The Minister added those amounts to the reported incomes of Paulette and Gregory ($6,500 each for the 1993 taxation year and $6,400 each for the 1994 taxation year) on the basis that the two children had not earned the money and that the deductions by the company were methods of appropriating corporate funds to the shareholders, Paulette and Gregory. The issues, therefore, are whether these amounts were earned by the children and what was reasonable in the circumstances.

Paulette Cousins testified at some length as to what the children did. She emphasized that it is a family business and that they did do work in a family context. She said there was a shop, yard and office and the children helped in all those facilities. They helped keep the yard clean, did what she called a mail run, did filing and photocopying in the office, ran errands and looked after the storing of some supplies in the shop. She described how they would sort out nuts and bolts in bins so that a person would not have to waste time looking for them. They cleaned up around the shop and the yard and even cleaned the trucks a bit. Paulette also stated that if the children did not do this work they would have had to hire someone else to do it.

The company currently has about 45 employees. In the years under appeal, Paulette could not be precise as to how many employees the company might have had but she thought it was greater than 20. The employees were paid an hourly wage and did not punch a time clock per se, like in a factory, but they recorded their own hours and turned in a diary at the end of each week showing the hours they had worked. It appears that with respect to the staff out in the field, Gregory would have an idea of whether those hours were reasonable and from a managerial point of view, could monitor those hours. Paulette, of course, would know what was going on in the office. There were no time sheets kept for Lisa and Paul in 1993 or 1994, nor was there a recorded rate of pay for them at that time. Apparently, after the audit was completed by Revenue Canada raising the issues in these appeals, time sheets were prepared for Lisa and Paul, not with the idea of showing what hours they actually had worked, but showing the hours that they could possibly have worked apart from their other duties like going to school, sleeping and eating. Apparently, these time sheets which were not produced as exhibits at the hearing showed that the children could have worked two hours per day from Monday to Friday during the school week and as much as five hours or more on each of Saturday and Sunday. Although these sheets were prepared after the audit, it would lead one to think that Lisa could have worked 10 hours from Monday to Friday and a minimum of 10 hours on a weekend. Therefore, that would be 20 hours per week, 80 hours per month and 960 hours per year. I will round that up to 1,000 hours per year. Since Lisa was paid $6,500 in the 1993 taxation year, that amount would be in the range of $6.50 per hour. The same would apply to Paul.

Paulette stated that the children could work both before and after school and whenever the parents worked. She stated that the children did not have any outside interests, although further testimony from her confirmed that Lisa was taking organ lessons and figure skating; and Paul had Boy Scouts once a week and liked to work at computers.

Lisa and Paul were not paid on the same basis as the regular employees of the company who were paid weekly, bi-weekly or monthly at an hourly rate. Paulette described how the children would want certain things. She gave as an example the organ that Lisa wanted to play. She began taking lessons and playing on the same organ that her mother had learned on but, in an age of high technology and subject to the advertising pressures of this age, Lisa decided that she wanted a more sophisticated organ. Therefore, when Paulette was of the opinion that Lisa had worked long enough to have earned the price of the organ, a new organ was purchased with company funds for approximately $5,000. That amount was charged to Paulette’s shareholder loan account. At the end of the 1993 taxation year, the company issued a cheque to Lisa for $6,500 which she endorsed to Paulette, who then deposited it back into the company account for credit to her shareholder loan account. Therefore, Paulette’s shareholder loan account which went down with the purchase of the organ during the year would be reimbursed and brought back up by the deposit of Lisa’s salary cheque which was endorsed to Paulette.

The same kind of thing applied to Paul. Paulette gave as an example the fact that since he was keenly interested in computers, the company purchased a computer, a printer and a Nintendo game on the same basis. Paulette and Gregory held out these “wish lists” to the children so that they would work hard and, when they put in enough effort, these things would be bought by the company, charging the costs to the shareholder loan accounts. At year end, the cheques issued to the children would be endorsed back to the parents so that they could be deposited in the company to reimburse the shareholder loan accounts of Paulette and Gregory.

As I mentioned above, the question comes down to whether the amounts paid to Lisa and Paul were reasonable. I propose to deal with each taxation year separately. In the 1993 taxation year, Lisa and Paul were each paid $6,500. During that year, Lisa was eight years old until August, when she turned nine and Paul was six years old until April, when he turned seven. In the 1994 taxation year, Lisa and Paul were each paid $6,400, Lisa being nine years of age until August and Paul being seven years old until April. These amounts paid to Lisa and Paul are so unreasonable in all of the circumstances that the appeals will have to be dismissed.

I regard these amounts as not only unreasonable but outrageously unreasonable. At the beginning of 1993, Lisa was eight years old which is about the age a child might be in grade two or three; and Paul,was six years old which is about the age of a child starting school, and yet I am told that they did all of the duties mentioned above. I must state in all candor that I find Paulette’s evidence “puffing”, expanded and not credible in terms of children that age earning that much money. In 1994, Lisa was nine and Paul was seven, and the same routine applied in that year.

The amounts paid to Lisa and Paul, as pointed out by counsel for the Respondent, are almost identical with the base amount of non-refundable tax credits which were available to every citizen of Canada in 1993 and 1994. In my view, that is not a coincidence. I have to infer from all of the circumstances that these amounts were basically “plugged in” as the maximum amounts which could be shown as having been earned by children and not attract any tax in their hands. These amounts were used in a family context to pay for personal benefits that one might expect in a family such as this: e.g. Lisa learning to play the organ and Paul having an attraction to computers.

Paulette made a comment in evidence to which I attach much significance: “For them, it has never been considered like work because it was family time together.” I believe that to be true. It is a family business where the parents are hard-working, industrious, committed and obliged to spend a lot of time in the business. Therefore, the time they have with their children is integrated into their working time, but it is the working time of the parents and not the working time of the children. The fact that the children are given casual jobs to do, running errands, sweeping the floor, doing a mail run, sticking a piece of paper in the photocopy machine, in my opinion is just part of family life. It is part of the sociological elements of living together as a family and has nothing to do with taking children of this age and putting them on the payroll like any other employee or pretending that they are part of the whole commercial enterprise. That is why I find Paulette’s evidence to be “puffing”. I have no doubt that Lisa and Paul are responsible children because their parents are responsible and they probably worked together as a family team. They spend a lot of time together, but that does not make them commercial elements in the ongoing enterprise of the company. The mother’s evidence is overreaching.

I find that the amounts paid to Lisa and Paul were unreasonable in all of the circumstances. The appeals are dismissed on the basis that the amounts were not paid by the company for the purpose of gaining or producing income. To the extent that such amounts were paid to the children, they were appropriated by the parents.

With regard to the amounts of $6,500 paid to each child in 1993 and $6,400 paid to each child in 1994, the purported hours worked and the inability to record an hourly wage, Paulette said in evidence: “I just knew what a reasonable amount was”. I do not believe that. I do believe that she had sophisticated advice from the accountants who reviewed the books and records for the company; and that each amount was “plugged in” to the non-refundable tax credits.

Paulette also said: “I feel that they earned every cent of it.” It is not a question of what she felt, it is a question of what children that age are permitted to do. In many provinces, there are child labour laws which would prohibit children this age being put out to work. The fact that they, as co-operative children, want to help their parents in the family enterprise does not make them commercial factors. All appeals herein are dismissed.

Appeal dismissed.