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Citation: 2005TCC61
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Date: 20050117
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Docket: 2003-3934(IT)I
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BETWEEN:
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TANIA MONICA FUNK,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Hershfield J.
[1] This is an appeal from an
assessment of the Appellant's 1999 taxation year that was
confirmed on the basis that the Appellant was an employee of her
former husband's construction company (the Company) in which she
had a 49% shareholder interest and on the basis that as an
employee of the Company she had earned $30,000.00 employment
income for the year. The Appellant denies being an employee of
the Company and receiving $30,000.00 in the year.
[2] For a number of years before the
subject year the Appellant was being "booked" as having
income from the Company. The determination of that income was
made without her input by the Company's accountant. The
accountant determined her income based on reconciling, on a
family basis, the shareholders' loan account to ensure a zero
balance at the end of each year. As between the Appellant and her
husband she was allotted income on a tax effective basis.
[3] In the year in question, Company
funds had been applied to the personal benefit of the Appellant
and her husband but, using the family basis for reconciling the
loan account, no attempt was made to allocate benefits to one
shareholder or the other based on actual benefits received. If
the net family benefit loan account balance was $100,000.00 she
would be allotted income of $30,000.00 to take advantage of low
rates of tax on the first bracket of income. The accountant
testified at the trial that that was how her income for 1999 was
determined in April 2000. He testified that he did not remember
ever talking to the Appellant about this tax effective regime.
Indeed his testimony tended to confirm that he not only never
talked to her about her allotted income in 1999 but that he never
talked to her about it in any other year. Her tax returns were
filed by his firm electronically so she did not sign returns
represented as hers. There was no evidence at the hearing that
she had signed authorizations for the filing of her returns. A
reporting letter went out to each of the Appellant and her
husband in April 2000 setting out their reported income for 1999
but both such letters were sent in a single envelope. That is,
the evidence is that no reporting letter was ever sent to the
Appellant in a separate envelope addressed to her.
[4] The Appellant and her husband
separated on January 1, 2000 and the Appellant was faced with a
tax liability based on the income declared on her return. To add
to the Appellant's plight, the Company went into bankruptcy
so I am led to believe that she is left with no recourse against
the Company and with an ex-husband who has left her and her
children struggling financially.
[5] The events that are material to
this appeal do not stop there. In 2000 there were proceedings
before the Court of Queen's Bench of Manitoba (Family
Division). Counsel for the Respondent confronted the Appellant
with two affidavits that she had signed in the course of those
proceedings in April 2000. He did this after she had testified
that she only received some $1,000.00 from the Company in 1999
and that she performed no services and held no office. However,
the affidavits made in April of 2000 together acknowledged that
she received a wage of $24,000.00 "on paper" from the
Company (presumably for 1998) for services she provided as a
secretary and that the Company had paid for her automobile
payments, fuel and insurance and for other household expenses
such as dog food and a garden tractor. On cross-examination by
Respondent's counsel the Appellant admitted to doing small
tasks for the Company such as signing the occasional cheque and
answering the home office telephone but she insisted she did not
know of her being paid as an employee until the litigation in
family court all started. She said her lawyer on the domestic
matter received copies of her tax returns and Company financial
information in 2000 and that was the first she learned of the
income allotted to her in a prior year. That is, it was only
after her separation that she became aware of the income allotted
to her for 1998 in the amount of $24,000.00. This was not an
acknowledgement of $30,000.00 allotted for 1999. This is
supported by the affidavits themselves which acknowledge a
$24,000.00 wage, not a $30,000.00 wage, and by the fact that the
allotment for 1999 was made by the accountant without her input
or her lawyer's knowledge at or about the same time, or
after, she signed the affidavits.
[6] It is also important to note,
however, that, on cross-examination, when confronted with her own
bank statements, the Appellant acknowledged that her receipts
from the Company in 1999 were $9,350.00, not the $1,000.00 she
first testified to. She admitted these monies were deposited to
her account by the Company for household expenses. While being
caught up in this way, the Appellant did not strike me as
dishonest in the sense that she was trying to lie to the Court.
Her testimony and attitude were that of a person desperately
needing to find justice in a situation that had taken advantage
of her naïvety. She had been subjected by persons and
circumstances to regimes she likely had no control over. I accept
as well that she likely never addressed her mind to and therefore
likely never understood the legal affect and subtleties of these
tax driven events.
[7] Still, I could not be faulted for
finding, by virtue of her less than candid evidence, that the
Appellant knew more than she was admitting. However, I need not
go that far. Her affidavits admit to performing services for
compensation which is to say she was employed by the Company
regardless of her limited understanding of the arrangement and
lack of control over it. She understood that well enough to sign
an affidavit to that effect in 2000 when realities were
uncluttered by the tax bill currently facing her. She not only
admitted to being an employee but she acknowledged benefiting
from arrangements made on her behalf in respect of services
performed regardless how minimal those services may have been.
Her ignorance of the consequences of that is not relevant. She
knew she had provided some services to the Company. Her
naïve, trusting acquiescence to letting her husband and the
Company's accountant dictate her commercial relationship with
the Company creates a bar to her now denying liability for the
consequences of acts done by them on her behalf. That, together
with an assumption in the Reply that she was employed by the
Company in 1999, is sufficient for me to find that she has not
met her burden to disprove that assumption.
[8] Regardless of such finding, I do
not find her bound to report the $30,000.00 allotted her in April
2000. At best the evidence supports her acquiescence to a salary
of $24,000.00 for the year. Can it reasonably be found that she
acquiesced to a raise in April 2000 for the prior year when she
was by then already in court fighting her estranged husband with
no hope of getting anything out of such raise except a tax bill?
Further and more importantly, employees are only taxed on
receipts in the year. Declared or acknowledged salary
entitlements are not relevant and in this case the evidence does
not support even $24,000.00 of receipts in 1999 in my view.
[9] The $30,000.00 amount,
although assumed in the Reply to be compensation received in
1999, is nothing more than a number the accountant entered on the
books after the end of the year. The Appellant's affidavit,
relied on heavily by the Respondent, admitted only wages "on
paper" in respect of the 1998 year. That underlines that in
general terms the tax-planning regime being employed by the
Company was acknowledged by the Appellant in 2000 as only having
"on paper" results. It was a denial of
"receipts" even before the current tax issue was known
to the Appellant or her family law lawyer. Further, the
accountant, testifying for the Respondent, acknowledged that
these were in fact "paper" entries not based at all on
individual receipts. The $30,000.00 was an artificial number
picked to reconcile a shareholders' loan account maintained
on a family basis. While the burden of proof rests with
the Appellant in these matters, it is clear that she has
satisfied that burden to the extent necessary to be free of the
only related assumption relied on by the Minister which was a
salary receipt of $30,000.00. This opens the door to my valuing
certain benefits received. The assumptions direct me to regard
such benefits as benefits from employment as opposed to benefits
qua shareholder.
[10] So what amount was received in the
year? The allocation of benefits in the shareholders' loan
account being done on a family basis makes it impossible to
determine with any exactness the amount paid to or for the
benefit of the Appellant in the year. A company can make payments
for any number of things in a family situation that cannot
readily be determined, where there is no express agreement, to be
for one or another's benefit. The higher income earner in
many cases takes responsibility for such things as household
expenses and mortgage payments on the family residence. If that
is the husband/father, why not attribute or impute benefits to
him when company payments benefit the family? In any event, I
will impute no receipt to the Appellant in a case like this for
housing, entertainment, food and household expenses except to the
extent that there is evidence of a receipt by the Appellant of
funds over which she had control.
[11] On this basis there are only two
categories of receipts that the Appellant is obliged to recognize
as income receipts in 1999: cash receipts of $9,350.00 (even
though for household expenses, she had control over the use of
such funds); and, car payments and expenses for the
Appellant's personal use vehicle. I have no evidence of the
actual payments by the Company or of the value of the benefit
relating to the personal use vehicle which was a new or
relatively new SUV or other similar vehicle but there is a
benefit-in-kind the value of which is properly included in
income for the year. In the circumstances of this case I am
encouraged to give the Appellant the benefit of any doubt on the
value of this benefit. On that basis, recognizing some
approximations in the process employed by me, I would value the
personal use vehicle benefit at $6,000.00. This brings gross
employment receipts in the year to $15,350.00.
[12] Accordingly the appeal is allowed,
without costs, on the basis that the Appellant's employment
income received in the 1999 taxation year was $15,350.00.
Signed at Ottawa, Canada, this 17th day of January 2005.
Hershfield J.
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