|
Citation: 2004TCC623
|
|
Date: 20040917
|
|
Docket: 2004-214(IT)I
|
|
BETWEEN:
|
|
DOUG A. HAMPSON,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
|
____________________________________________________________________
For the Appellant: The Appellant himself
Agent for the Respondent: Andrew Majawa
(Student-at-law)
____________________________________________________________________
REASONS FOR JUDGMENT
(Delivered
orally from the Bench at
Vancouver, British Columbia, on July 14, 2004)
Bowie J.
[1] This
case concerns the deductions from income claimed by the Appellant in connection
with his income from self-employment as a psychologist in the taxation year
1999. His employment as a psychologist was largely, but not entirely, under a
contract with the Correctional Services of Canada, and his revenue was $60,756.
Against that he claimed expenses of $46,224, leaving him with a net income of
$14,532.
[2] He
was reassessed on October 28, 2002, and substantial amounts of the expenses
that he had claimed were disallowed, with the result that the Minister assessed
him for a net income in respect of his self-employment of $48,798. On further
reassessment that was reduced to $48,754 on October 14, 2003. At that point
there were five items that had been disallowed in whole or in part, and this
appeal is about the Appellant's entitlement to those specific deductions. I
will deal with them in the order in which they appear on Schedule A to the
Minister's Reply to the Notice of Appeal, which sets out the numbers conveniently.
[3] The
first item is an amount of $700 claimed as bad debt expense. The Appellant in
his work for Canadian Correctional Services does work with inmates and former
inmates of penal institutions. He explained that this $700 was the aggregate of
a number of amounts that he had loaned from time to time to inmates to assist
them in one way or another, and which had not been repaid to him. Quite apart
from any issues of timing, the Appellant is not in the money-lending business,
and therefore, to be entitled to any such deduction he would have to bring it
within paragraph 20(1)(p) of the Income Tax Act. An amount can
only be brought within 20(1)(p) if it can be shown to have been brought
into income in the year, or in a prior year. The evidence in this case
establishes, I think, on a balance of probabilities that that amount was never
brought into income by the Appellant. And so his appeal in respect of that
amount fails.
[5] The
next item that is in issue is a claim for $16,000 for what is described as
management and administration expense. The evidence reveals that the claim is
actually in respect of amounts that the Appellant claims to have paid to his
wife to assist him in his work. He produced as Exhibit A-6 a list of tasks that
made up the work for which he claimed to have paid her this amount. As I
understand it, this list was made up not to provide any guidance to her in the
work she was expected to do, but to attempt to establish for the auditor that
she did some work that was worthy of compensation. It consists of such things
as receiving and responding to phone calls and e-mails, scheduling
appointments, "keeping in touch with me regarding immediate needs",
assisting in designing and constructing professional reports, proofreading, and
assisting in crisis intervention. On cross-examination the Appellant agreed
that the latter item was to a large extent simply providing the kind of support
that spouses generally provide to each other in respect of a difficult day at
the office, if I can paraphrase. Other items on the list were assisting in
public relations activities (reading press releases, keeping me aware of
current events), which on cross-examination turned out to be, as I understood
the Appellant, bringing to his attention any news items that she saw concerning
inmates or former inmates in respect of whom the Appellant was concerned under
his contract; paying bills and keeping receipts current, which I think can
fairly be said to be more household bills than any bills relating entirely to
the Appellant's professional obligations; and contract negotiations and hosting
and entertaining professional contact visits.
[6] The
Minister's position is, first of all, that this really amounts to little or
nothing more than any stay-at-home spouse would do without compensation;
secondly, that the money was never paid; and thirdly, that if it had been paid
and if there had been duties, it would have been an unreasonable amount to pay
for those services. The Appellant's evidence aimed at showing that the amounts
were paid consisted of Exhibit A-1, which is the statements of the joint bank
account in the name of the Appellant and his wife for the 1999 calendar year,
supplemented by Exhibit A-3 which is said to extract from the entries the
amounts that the Appellant's wife withdrew from the bank account for her own
benefit to comprise the $16,000 in question, and an additional $2,684.08 as
well. That list contains such things as car payments on the car that the
Appellant said belonged to his wife; payments to the Mennonite Educational
Institute for the fees of their two children who attended that school; half of
the mortgage payments made on the house in their joint names; $40 on April 1st
for a driver's license; intermittent loan interest payments; other payments
that were simply never particularized, such as $34 for something called
Nutrizoo, $10 for Athabasca, $100 for Peewee, and $19 for something called
Mountain West, and $955 apparently to pay a MasterCard bill. These look to me
far more like normal household expenses than the payment of a salary for
administrative duties.
[7] When
pressed on this during the audit of his affairs, the Appellant apparently
produced a cheque written to his wife in May 2002 for $16,000, which one might
suspect was re-deposited by her to the same joint bank account, although the
evidence falls short of clearly establishing that. But the Appellant's
willingness to enter into that transaction at all in 2002, it seems to me quite
clearly puts the lie to his proposition that the transactions listed on Exhibit
A-3 constitute his payment of $16,000 by way of salary to his wife.
[8] I
will come back to that item in a moment when I deal with an item concerning
payments alleged to have been made to the Appellant's children, but for the
moment I move on to the next item that was in dispute, which was $837 claimed
by the Appellant as an expense under the head of Meals and Entertainment. That
is cumulatively recorded on Exhibit A-10. Exhibit A-10 is about two and a
quarter pages of itemized expenditures ranging from a low of $1.55 at Starbucks
for a cup of coffee with Joe McKenna, to a high of $110 for supper with Dale
Sawatzky at Earl's in White Rock. The Appellant explained that these
expenditures were largely in two categories. Some were to entertain employees
of the Correctional Services with whom he dealt on a day-to-day basis and who,
he hoped, would be helpful in obtaining future contracts, and perhaps a few
other people unrelated to the Correctional Services whom he entertained for essentially
the same purpose. Others were to entertain a few people engaged in the same
type of work that he was engaged in himself, with whom he exchanged views and
information over coffee or meals. A third category was former inmates with whom
he was involved in his work for the Correctional Services.
[9] The
Crown's submission is that of the $881 claimed, which is half of the total
amount said to have been expended, $44 was allowed, and that represents all
that can be said to have been spent for the purpose of gaining or producing
income. I think that is a rather narrow view of the purpose of gaining or
producing income, and I am inclined to think that, with one notable exception,
these are legitimate expenditures that could be put under the rubric of business
promotion or discussions involving business matters.
[10] The
one notable exception is an expenditure of $82 at the Spaghetti Factory when
the Appellant and his wife and two children had supper there on May 24. The
Appellant's justification of the claim was that as his wife and children worked
for him, they were entitled to something that might be considered analogous to
an annual office party, and this was it. I disagree. As will become evident in
a moment, I do not consider that the Appellant's wife and children worked for
him to any significant extent at all, and I can see no legitimate justification
for that particular expenditure. The meals and entertainment as claimed at $881
will be reduced by $41. The Appellant is entitled to a deduction of $840 for
meals and entertainment.
[11] The
next item is a claim in respect of office expense. I was advised at the
beginning of the trial that the parties had reached an agreement on that item.
The Minister had disallowed $4,185 being the cost of a computer that was
claimed as an expense. The parties are agreed that the Appellant is entitled to
claim capital cost allowance in respect of that item in the amount of $860.55,
which is computed on the basis of a capital cost of $4,185, subject to the
half-year rule within the Class 10 pool.
[12] The
remaining item is $12,500 that the Appellant claims to have paid to his two
children for their services. The Appellant's son, at the relevant time, was
14 years old and his daughter 9 or 10 years old. His son was in grade 9
and his daughter in grade 4 or grade 5. The Appellant's position is that he
paid $7,000 to his son for services which he described somewhat vaguely, but
would come under the general rubric of assistance in connection with computer
programming, computer software and the like. Whether the Appellant went so far
in his evidence as to say that his son wrote computer programs or not is not
entirely clear to me, given the vagueness of his description of what his son
did. I have no doubt that his son is a bright young fellow, or was a bright
young fellow at that age, and that there were probably lots of things about the
operation of computers that he understood and could perform better than his
father. Nevertheless to justify expenditures of $7,000 for his services
requires a good deal more evidence than there is before me today.
[13] First
of all there is the question whether the money was paid at all, to either his
son or his daughter. Exhibits A-4 and A-5 are two receipts, one signed by his
son, one signed by his daughter, both dated December 31, 1999, both worded in a
way that appears more adult than childlike, the relevant words of which are:
I have received a total of $5,500 from Doug
Hampson for services that I have render [sic] in regards to Mr. Hampson's
business.
signed
by XXXXX, and:
I have received $7,000 in cash payments from
Doug Hampson for services that I have rendered in regard to Mr. Hampson's
business.
signed
by XXXXX.
[14] Now
it came out during the cross-examination of Mr. Hampson that the payments he
claims to have made to his son consisted of such things as paying his son's
school fees, and credits, vaguely described, towards the possible future
ownership by his son of what he called "the family truck". It is
perfectly clear from the evidence that there was no payment, or series of
payments, made to XXXXX totalling $7,000 during the year 1999, and there was no
payment, or series of payments, totalling $5,500 paid by Mr. Hampson to XXXXX
during the year 1999. He said in respect of XXXXX as well, when asked to
particularize the payments, that some part of it went to the payment of her
school fees. The Appellant's evidence overall was evasive, conflicting and
intended I think to confuse and obfuscate. But the bottom line insofar as the payments
that he claims to have made to his wife and to his two children in respect of
services that they are said to have performed for him, is this. The Appellant
said that his contract with the Canadian Correctional Services paid him $58,500
for 15 hours of work per week during the year. He billed the Correctional
Services on that basis, and this came to $75 per hour. He then looked at the
amount that would have been his annual rate of pay if he had been on salary as
a psychologist with the Correctional Services, and concluded, rightly or
wrongly, that that salary would have worked out to $32 per hour. He then
rationalized that the difference of $43 per hour must be the value of the (as
he put it) support provided by his wife and two children to assist him in
performing the contractual services, and that they should therefore be paid an
aggregate amongst them of that $43 per hour, which computed to $28,500 for the
year. He did not elaborate to any great extent on how he divided that amongst
the three of them to produce $12,500 for the two children and $16,000 for his
wife. He did not enter into any written contract with any of them, either
specifying the work to be done or the amounts to be paid. He did not produce
any kind of record that would substantiate that transactions of the kind he
imagined in fact took place. He had no record and made no estimate of the
amount of time that any of the three of them spent on the so-called duties for
which they were supposedly being remunerated. His daughter's duties, he said,
were to clean his office, a 10' x 12' room in the family home, and to assist in
cleaning his vehicle. In my view the claims that these amounts were payment for
services rendered are simply false.
[16] The
Appellant's income tax return was filed electronically, but Mr. Majawa put to
him during cross-examination a reconstruction of that income tax return, which
the Appellant accepted as being accurate. It shows those amounts of $16,000 for
management and administration expenses and $12,800 for salaries and wages. I am
not quite sure what the $300 difference is, but apparently there was $300 that
was allowed by the Minister in assessing. Having regard to the Appellant's
evidence, those two claims strike me as being best described as fictional. The
Minister has apparently not assessed any penalties in respect of those amounts,
and the Appellant may perhaps consider himself fortunate in that regard. No
amount should be allowed in respect of the payments claimed to have been made
to the Appellant's wife and two children, because I am not persuaded by the
evidence that any payments were actually made to any of them in respect of
services. If any such payments had been made, I have no doubt whatsoever that
they would not pass the test of reasonableness as it was laid down many years
ago by Mr. Justice Cattanach in Gabco v. M.N.R.
[18] In
the result therefore, the appeal will be allowed, to allow the Appellant
additional deductions of $840 for meals and entertainment, and capital cost
allowance in the amount of $860.55. If I could make an award of costs against
the Appellant I would do so, but as this is an informal procedure appeal, the Act
prohibits that.
Signed at Ottawa, Canada, this 17th
day of September, 2004.
Bowie
J.
Email this Content