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Citation: 2004TCC421
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Date: 20040614
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Docket: 2003-4482(IT)I
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BETWEEN:
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ALBERT J. AESSIE,
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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
Beaubier, J.
[1] This appeal pursuant to the
Informal Procedure was heard at Saskatoon, Saskatchewan, on June
4, 2004. The Appellant was the only witness.
[2] Paragraphs 1 to 11 and the
introduction outline the matter in dispute. They read:
In reply to the Notice of Appeal for the 1999 and 2000
Taxation Years, the Deputy Attorney General of Canada says:
A.
STATEMENT OF FACTS
1. In respect
of the Notice of Appeal, he admits:
(a) that the
Appellant is a self employed chartered accountant providing
public accounting services;
(b) that the
Appellant provides his services from his residence;
(c) that the
Appellant's spouse provides assistance in the Appellant's
account business and states that her assistance is in the form of
administrative duties;
(d) that the
Appellant deducted fees in respect of services provided by his
spouse in the amount of $34,500 and $38,000 for the 1999 and 2000
Taxation Years, respectively;
(e) that the
Appellant claimed expenses related to the business use of his
residence in the amount of $7,651.83 and 8,224.36 for the 1999
and 2000 Taxation Years, respectively; and
(f) that the
Canada Customs and Revenue Agency (the "CCRA")
disallowed the Appellant's claim for business use of
residence expenses of $5,654 in 1999 and $6,057 in 2000 relying
on paragraph 18(1)(a) of the Income Tax Act (the
"Act").
2. In respect
of the Notice of Appeal, he denies:
(a) that the
Appellant provides services on a regular and continuous full-time
basis; and
(b) that CCRA
disallowed all management fees paid in excess of $8,850 in each
of the 1999 and 2000 Taxation Years.
3. The
remainder of the Notice of Appeal contains reasons and arguments
for the appeal and does not contain any other relevant fact to
admit or deny. Insofar as there may be relevant facts, the same
are denied.
4. The income
tax returns for the 1999 and 2000 Taxation Years were initially
assessed on June 8, 2000 and June 25, 2001, respectively.
5. In
computing income for the 1999 and 2000 Taxation Years, the
Appellant claimed business expenses of $54,629 and 58,047
respectively, which included the following:
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1999
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2000
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Management and Administration Fees
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$34,500
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$38,000
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Home Office Expenses
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$ 7,651
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$ 8,224
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6. By means of
Notices of Reassessment dated August 9, 2002, the Minister of
National Revenue (the "Minister") disallowed business
expenses of $35,706 and $38,567 respectively in the 1999 and 2000
Taxation Years. Included in the business expenses disallowed were
Management and Administration Fees and Home Office Business
Expenses, as detailed in Schedule A, attached to and forming part
of the Reply to the Notice of Appeal, (hereinafter "Schedule
A") as follows:
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1999
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2000
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Management and Administration Fees
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$25,650
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$29,150
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Home Office Expenses
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$ 5,654
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$ 6,057
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The Minister considered that the disallowed management and
administration fees were not reasonable in the circumstances
within the meaning of section 67 of the Income Tax Act
(the "Act") and home office expenses were not
made or incurred for the purpose of gaining or producing income
from a business or property within the meaning of paragraph
18(1)(a) of the Act but were personal or living expenses
of the Appellant pursuant to paragraph 18(1)(h) of the
Act.
7. The
Appellant filed a Notice of Objection to the reassessments,
received October 1, 2002.
8. The
Minister confirmed the reassessments by means of a Notification
of Confirmation dated September 17, 2003.
9. In
reassessing the Appellant for the 1999 and 2000 Taxation Years
and in confirming those reassessments, the Minister assumed the
same facts as follows:
(a) the Appellant is
a chartered accountant operating an accounting practice (the
"Accounting Business");
(b) the Accounting
Business was operated as a sole proprietorship;
(c) the Accounting
Business prepared year end tax returns for 20 - 30 business
clients and the remaining clients were individuals;
Office in Home
(d) the Appellant
claimed home office expenses from the Accounting Business in the
1999 and 2000 Taxation Years as follows:
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1999
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2000
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Home Office Expenses (Schedule A)
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$ 7,651
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$ 8,224
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(e) the Accounting
Business operated from the Appellant's principal residence
located at 133 Columbia Drive in Saskatoon, Saskatchewan:
(f) a farm
partnership and at least one corporation also operated out of the
Appellant's residence;
(g) the Appellant
occasionally used his living room to entertain clients;
(h) some of the
Appellant's clients are also his personal friends;
(i) the
majority of the Appellant's entertaining was done in
restaurants;
(j) no more
than 50% of the Appellant's home telephone expenses were
incurred by the Appellant for the purpose of gaining or producing
income from the Accounting Business in the 1999 and 2000 Taxation
Years;
(k) cable expenses
and expenses relating to the Appellant's cabin at McPhee Lake
are personal or living expenses of the Appellant;
(l) no more
than $1,997 and $2,167 of home office expenses were incurred by
the Appellant for the purpose of gaining or producing income from
the Accounting Business in the 1999 and 2000 Taxation Years
respectively, as detailed in Schedule A; and
(m) not more than 17% of
the square footage of the Appellant's residence is related to
the operation of the Accounting Business, as detailed in Schedule
B, attached to and forming part of the Reply to the Notice of
Appeal (hereinafter "Schedule B");
Management and Administration Fees
(n) the Appellant
reported gross income from the Accounting Business as
follows:
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1999
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2000
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Gross Revenue
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$55,320
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$57,825
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(o) the Appellant
claimed management and administration fees from the Accounting
Business in the 1999 and 2000 Taxation Years as follows:
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1999
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2000
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Management and Administration Fees
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$34,500
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$38,000
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(p) the Appellant
paid management and administration fees to Mayday Management
Incorporated (hereinafter "Mayday");
(q) the
Appellant's wife, Wendy, and her sister are equal
shareholders of Mayday;
(r) Wendy provided
the administrative services on behalf of Mayday;
(s) the management
and administration fees paid to Mayday by the Appellant were
based on available cash flow and tax planning of the
Appellant;
(t)
administrative services provided by Wendy in respect of the
Accounting Business were as follows:
Reception - answering telephone, greeting clients;
Typing;
Tax return assembly, proofing, mailing;
Records - photocopying, filing, faxing, organizing;
Mail - income and outgoing;
Cash receipts including bank deposits;
Supplies - purchase and stocking of office supplies;
Public relations;
Consultation; and
Other administrative activities.
(u) administration
services were not required by the Accounting Business on a
full-time basis;
(v) bank deposits
for the Accounting Business were made only twice a week;
(w) telephone answering
services were provided by the Appellant, Wendy or the answering
machine;
(x) Wendy has no
formal accounting education;
(y) Mayday does not
provide accounting services;
(z) the amounts
reported by the Appellant for providing accounting services in
respect of the Accounting Business are as follows:
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1999
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2000
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Gross Profit
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($ 1,522)
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$677
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(aa) not more than $8,850 of
management and administration fees in the 1999 and 2000 Taxation
Years were reasonable in the circumstances.
B.
ISSUES TO BE DECIDED
10. The issues are:
(a) whether the Home
Office Expenses in excess of the amount allowed by the Minister
were incurred by the Appellant for the purpose of gaining or
producing income from a business or property; and
(b) whether
Management and Administration Expenses in excess of the amounts
allowed by the Minister were reasonable in the circumstances.
C.
STATUTORY PROVISIONS RELIED ON AND RELEIF SOUGHT
11. He relies on sections
3, 9 and 67, subsections 18(12) and 248(1) and paragraphs
18(1)(a) and 18(1)(h) of the Act as amended for the 1999
and 2000 Taxation Years.
[3] Of the assumptions in paragraph 9
(a), (b), (d), (e), (g), (h), (i), (j), (k), (m), (n), (o), (p),
(q), (r), (t), (v), (w), (x), (y) and (z) were not refuted. As to
the rest,
(c)
The Appellant advised and prepared income tax returns for 32
business clients and 284 and 285 individuals in each of 1999 and
2000, respectively. He also managed his farm and a separate
property and business for a separate corporation
"Loumar" in those years.
(f), (l) and (m)
Two separate corporations, the Appellant's (and his
wife's) farm, his chartered accounting business and his
residence were situated at 133 Columbia Drive. The Appellant
detailed his accounting use of the premises, but he did not
detail the other uses of the premises. On an average basis, at
best, the accounting business used the premises for only 1/5 of
its usage. Without clear substantiated evidence as to the other
four usages of 133 Columbia Drive, the evidence before the Court
does not refute assumptions (l) and (m). For this reason, the
assessment of home office expenses is accepted as valid and this
portion of the appeal is dismissed.
(s)
The Appellant testified that part of the management and
administration was based on tax planning. There is no evidence
relating to the "cash flow" concept.
(u)
The accounting business was not full-time. Mayday did not operate
a computer; rather Wendy, as an employee of Mayday, typed the tax
returns and financial statements on an IBM electric
typewriter.
(aa)
Constitutes the remaining subject of the dispute.
[4] Mayday's directors are
unknown, but its sole shareholders are the Appellant's wife
and her sister. Thus, the Appellant and Mayday are related within
the meaning of paragraph 251(2)(b). They are deemed not to
deal with each other at arm's length by paragraph
251(1)(a). Wendy is the only person on behalf of Mayday
who does anything for the Appellant's accounting
practice.
[5] Having stated that, the amount
paid to Mayday in each for these services is, more or less,
$3,000 per month for services that are there for the
Appellant's clients, whether he is there or not. There are no
other payments required of the Appellant, such as employer's
Canada Pension Plan, Employment Insurance, or Worker's
Compensation levies. Nor does he have to pay for statutory sick
leave or holidays. All of these are substantial financial burdens
to a businessman and the Appellant has economized on them by his
contract with Mayday.
[6] Moreover, someone has to be there
for clients when the Appellant is attending to his other
business.
[7] Finally, it should be pointed out
that many professionals and businessmen make less money from
their businesses than their secretaries do. Often that occurs
occasionally. Sometimes it occurs frequently.
[8] The deal with Mayday is a common
and reasonable business deal that is not unusual or untoward in
the business world. It is not appropriate for the Court to
interfere in such a transaction. Therefore the appeal respecting
this matter is allowed.
[9] This matter is referred to the
Minister of National Revenue for reconsideration and reassessment
in accordance with these Reasons. The Appellant is awarded the
sum of $100 on account of his out-of-pocket disbursements
incurred in prosecuting the appeal.
Signed at Calgary, Alberta, this 14th day of June 2004.
Beaubier, J.
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