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Citation: 2004TCC665
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Date: 20041012
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Docket: 2004-894(IT)I
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BETWEEN:
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TIMOTHY KIM,
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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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AMENDED REASONS FOR JUDGMENT
The text of the original judgment issued on
September 30, 2004
has been amended and the changes have been
integrated
in the body of this document.
Rip J.
[1] Mr. Timothy Kim appeals income tax
assessments for 1997, 1998 and 1999 in which the Minister of
National Revenue did not allow the deduction of purported
commission expenses paid in calculating his income. Mr. Kim
was unable to produce business records relating to the years in
appeal as they were destroyed in a fire that damaged his home in
December 2000. The respondent states that the commission
expenses were disallowed for reasons other than they could not be
substantiated by records.
[2] Mr. Kim carries on business
selling books for Books are Fun ("Books"), an affiliate
of Readers Digest. Books supplies the products and Mr. Kim sells
the products for a commission of approximately 22 per cent. The
Books products include general interest books, cook books,
children's books, New York Times best sellers as
well as gift items. About 85 per cent of Mr. Kim's products
are from Books. Sales are made to employees of businesses and
schools. Mr. Kim takes a selection of products to a school or
business where it is available to the employees for about a week.
The employees pursue the material at their leisure and order from
the selection. Mr. Kim or one of his salespeople return the
following week with the ordered products and accept payment in
cash or cheque.
[3] At the end of the week Mr. Kim
"tallies up" what was sold, compares sales to orders
and deposits the total amount to a Books bank account, not his
own.
[4] Books, according to Mr. Kim,
determines the prices, pays a commission to Mr. Kim and, at the
end of the year, issues Mr. Kim a T4A form for income tax
purposes.
[5] Mr. Kim stated he engages other
people as subcontractors to sell books and he, in turn, pays them
a commission, which may vary among the subcontractors. Two of
these people in the years in appeal were Henry See and his wife
Annabelle[1].
Apparently income earned by the Sees was included in
Richdale Sales Ltd. ("Richdale's") income. The
Sees' position is that Richdale carried on the business of
selling the product, not themselves. Mr. Kim explained that a
person like Mr. See would take products from him to show to
customers in the same way as did Mr. Kim. According to Mr. Kim he
could not stop Mr. See from selling products at any price the
latter desired; Mr. See was not restricted to sell at a fixed
price. Mr. See would fill the orders and collect payment. At
the end of each week the money from the transactions would be
compared to the cost of the books. If the payments included cash,
Mr. See would take cash to satisfy his commissions, which
approximated 15 per cent. Mr. Kim would deposit cheques from
the Sees in lieu of the excess cash they received. He would
deposit the cheque in his account and write a personal cheque
from his account to the Sees.
[6] If there were not enough cash to
satisfy the commissions in full, Mr. Kim said he would write Mr.
See a cheque; if the amount was in excess of commissions earned,
Mr. See would write Mr. Kim a cheque for the difference. Mr. Kim
did not send a form T4A to Mr. See at the time because, he
stated, he did not think that he was required to do so.
[7] All of Mr. Kim's documents
with Mr. See were destroyed in a home fire in 2000. The
respondent admits the fire occurred. Mr. Kim said the lost
documents included agreements for Mr. See to sell at a fixed
commission, spread sheets tracking sales and records of cash
payments to Mr. See.
[8] Mr. Kim produced copies of
certified cheques for the three months September, October and
November 1997 issued by him to Mrs See. Mr. Kim obtained these
copies from his bank; due to the high cost of getting copies from
the bank he restricted the cheques to a three month period. The
cheques total $1,136.43 and, Mr. Kim alleges, represent amounts
of commissions paid to the Sees to make up for a shortfall in
cash.
[9] As far as Mr. Kim was concerned he
was dealing with the Sees. He was not aware that they
incorporated Richdale to sell books and sundry products until the
tax authority so informed him. The Sees had not provided him with
a business number for Richdale (for goods and services tax
("GST") or provincial tax purposes) or any other
indication that Richdale was carrying on the business.
[10] The Canada Customs and Revenue Agency
("CCRA") assessed Mr. Kim on the bases that he sold
products to Mr. See at a fixed cost and the difference between
what Mr. See sold the products and what Mr. See paid to Mr. Kim
was gross profit to Mr. See; Mr. Kim paid no commissions to Mr.
See. Mr. Kim's position is that the difference was a
commission.
[11] Respondent's counsel produced a
"Weekly Purchase Report" for Mr. See for each of
the weeks ending March 12 and 19, 1999. The reports were prepared
by Mr. See. Total sales for March 12 are stated to be $1,508.93.
A notation describes commission to be 21.26 per cent. For the
week of March 19, total sales are $1,102.53 and commission is
stated at 22.91 per cent. Mr. Kim stated that the amounts of
$1,508.93 and $1,102.53 are 85 per cent of the gross sales.
[12] Mr. Kim explained that when he received
a Weekly Purchase Report he would reconcile what was reported to
the inventory that was sold. He recalled that the Sees would
usually come to his home and give him a transaction record and a
Weekly Purchase Report. Mr. Kim also had a receipt book. The Sees
would give him all cheques payable to Books. They also would
write a cheque for any cash they received, less their commission.
Mr. Kim declared he did not receive cash from the Sees at that
time. Even if the Sees received 80 per cent of their sales in
cash, they would pay Mr. Kim by cheque. Mr. Kim stated that
"we are a cash business" and assumed anyone receiving
cash would want to deposit it to their bank account as soon as
possible instead of leaving it at home. Mr. Kim, in turn, would
issue a cheque to Books. Cheques from customers also were payable
to Books.
[13] Notwithstanding that such
subcontractors may have sold books for more than the price
recommended by Books, the commission was based on the recommended
price, any excess was retained by the subcontractor, according to
Mr. Kim.
[14] Sometime during the audit of Mr. Kim by
CCRA, Mr. Kim convinced Mr. See to sign three statements,
one for each 1997, 1998 and 1999, to the effect that Mr. See
was an independent contractor who earned commission income in the
year.
[15] Mr. Kim and Mr. See, or Richdale, today
are competitors. When the Sees worked with Mr. Kim, they
generated 30 to 35 per cent of Mr. Kim's business.
[16] Mr. See testified that Mr. Kim did not
pay him any commission. "I made a profit." As far as
Mr. See is concerned he would acquire books from Mr. Kim at a
discount of 25 per cent of the recommended price; he would sell
at the recommended price. The 25 per cent discount represented
his profits.
[17] Mr. See testified that he received both
cash and cheques from customers. He would deposit the cheques and
cash into the joint bank account he had with Mrs. See; he would
then write a cheque to Mr. Kim for the amount owed.
[18] Mr. See explained the various columns
in the Weekly Purchase Report. The report would include the total
units sold and the cost to Mr. See of each unit together
with the cost to him of each book title. Mr. See
testified his cost per book is 25 per cent of the suggested
price; for example, he paid Mr. Kim $75 for $100 of
merchandise. He paid Mr. Kim only the $75. Mr. Kim, he stated,
never paid him anything. For March 19, the total cost to him was
$1,102.53. The description "total sales" meant,
according to Mr. See, his cost of the books, the amount he had to
pay to Mr. Kim, plus tax, plus any deductions for books he gave
free to customers or lost books. The description
"commission" of 22.91 per cent, refers to his net
profit, Mr. See claims. Since he had to pay Mr. Kim
half of his cost for the free books and lost books, which during
the week of March 19 aggregated $22.76, and tax, which was
$77.18, his profit was reduced from 25 per cent to 22.91 per
cent.
[19] Only half of the usual purchase price
was paid for books that Mr. See lost or chose to give away.
It also appears that Mr. See was not required to add sales
tax to the cost of the books he received at a discount.
[20] The term "commission" on the
Weekly Report and other documents, Mr. See stated, is an
industry term used by other publishers he deals with.
[21] Mr. See, upon being provided with
copies of cheques payable to Mrs. See by Mr. Kim, insisted the
cheques did not represent commissions but "might be from
overpayments". He explained that "sometimes I do
receive cheques that are payable to Books Are Fun, instead of
Richdale Sales. He gave the cheque payable to Books to Mr. Kim
for deposit to the credit of Books and Mr. Kim reimbursed him for
any difference above his cost. Cheques payable to Richdale as
well as cash were deposited to Richdale's bank account,
according to Mr. See.
[22] Mrs. See testified that any cheques
payable to Books were given to Mr. Kim and Mr. Kim
"returns the money to us" by cheque. Mr. Kim also
issued cheques to the Sees when there were errors in calculations
or on the spreadsheet "that we overpaid him". The Sees
denied receiving any cash from Mr. Kim.
[23] Mr. John Robert Omand who worked as an
independent agent for Mr. Kim one day a week since 1997 said he
knew how "commissions were paid" and he received a
commission of 20 per cent of his sales.
[24] The issue before me is not necessarily
one of credibility but, rather a difference in interpretation by
Mr. Kim and the Sees of their relationship. I believe that Mr.
Kim's view is the correct view: Mr. See acted as a
subcontractor for Mr. Kim.
[25] According to the evidence the Sees were
allowed to return books they did not sell and they did not have
to pay Mr. Kim for the books until they were sold.
Notwithstanding that the Sees had to pay a portion of the cost of
books lost or given away, their cost was at least half of what
they would have had to pay to Mr. Kim if the books had been
sold[2]. Also, no
GST of seven per cent was paid by the Sees on account of lost or
free books; the GST was paid only on the total sales. If Mr. Kim
was a wholesaler, as the Sees and the respondent allege, the Sees
would be liable for GST on all the supplies it acquired from Mr.
Kim.
[26] Mr. See distinguishes a commission and
profit based on whether he retains the cash or has to give cash
to Mr. Kim and is then remunerated. How one is paid is not
determinative of whether the payment is a commission or something
else, profit, for example. Mr. See's explanation of why he
signed the statements for 1997, 1998 and 1999 indicates his
position:
He told me that he needs this for his filing of income tax, to
report it. That's what he told me. And so as I kept saying,
call it commission, call it profit, call it discount, I
calculated that, yes, this is more or less the amount I would
have made from him. I am not denying it. I am just saying I did
not receive commission directly from him from that amount.
[27] Because Mr. See believes he
retained the money that would be due to him in any event (instead
of giving Mr. Kim the money and then having Mr. Kim write him a
cheque for a "commission") he believes Mr. Kim did not
pay him a commission. On the facts, however, it appears that the
Sees were paid a commission and the payments of the commissions
are deductible by Mr. Kim in computing his income for 1997,
1998 and 1999.
[28] The appeals are allowed with costs, if
any.
Signed
at Ottawa, Canada, this 12th day of October 2004.
Rip J.
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