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Docket: 2002-2019(IT)I
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BETWEEN:
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DOROTHY HOLLINGSWORTH,
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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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____________________________________________________________________
Appeals heard on January 8, 2003, at Toronto,
Ontario.
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Before: The Honourable Judge E.A. Bowie
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Appearances:
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Agent for the Appellant:
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Raymond F. Sim
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Counsel for the Respondent:
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Nimanthika Kaneira
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____________________________________________________________________
JUDGMENT
The
appeals from assessments of tax made under the Income Tax
Act for the 1997, 1998 and 1999 taxation years are allowed,
with costs, if any, and the assessments are referred back to the
Minister of National Revenue for reconsideration and reassessment
on the basis that in computing her income for the years 1997,
1998 and 1999, the Appellant is entitled to deduct losses from
her employment by Know the World Tours Organizers Inc. of $3,943,
$7,993 and $8,675, respectively, and the Appellant is entitled to
the goods and services tax rebate as claimed in each of those
years.
Signed at Ottawa, Canada, this 18th day of March, 2003.
J.T.C.C.
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Citation: 2003TCC134
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Date: 20030318
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Docket: 2002-2019(IT)I
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BETWEEN:
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DOROTHY HOLLINGSWORTH,
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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
Bowie J.
[1] These appeals are brought from
reassessments of the Appellant for income tax for the years 1997,
1998 and 1999. The issue they raise is whether the Appellant may,
when computing her income under section 3 of the Income Tax
Act (the Act), take into account a loss from her
office, or employment, as president of a company from which she
derived no income in the years under appeal. In my view she is
entitled to do so, and her appeals must be allowed. A subsidiary
and related issue is whether the Appellant is entitled to a goods
and services tax (GST) rebate under section 253 of the Excise
Tax Act in respect of the amount of her vehicle expenses that
are subject to GST.
[2] Ms. Hollingsworth started a
business organizing tours for affinity groups of various kinds in
1991. She operated it as a proprietorship until 1994. In November
of that year, she incorporated the business, principally to
protect herself from personal liability as she was entering into
very substantial contracts for the travel costs for some quite
large groups. Since then she has been the sole shareholder and
the president of Know the World Tours Organizers Inc. (KWTO).
[3] Since its inception, Ms.
Hollingsworth has devoted most of her time to developing her
business. Since 1991, she has organized more than 50 group tours,
and a considerable number of individual and family tours. The
groups for which she has organized tours have been as small as
two and as large as 40. She and her husband have done most of the
work involved, and up to the end of the period with which these
appeals are concerned they did it alone and without remuneration.
Only recently has she added a paid employee, and started to pay a
modest salary to herself and her husband. Prior to that, the
company, although doing a substantial volume of business, made
little profit. Ms. Hollingsworth contributed substantial working
capital in the early years. In 1999 the company made a modest
profit, and its prospects appear to be good. During the years
with which the appeals are concerned, she paid herself no salary,
simply because the company at that time could not afford to do
so. It was always her intention that when there were profits she
would take a reasonable salary.
[4] The Appellant testified that her
agreement with the company required that she use her private
automobile while conducting the company's business, and that she
pay the expenses of doing so without reimbursement. As is common
when people enter into contracts with corporations of which they
are the directing mind, the terms of her contract with KWTO were
not reduced to writing. However she did file the prescribed form
declaration of conditions of employment with her income tax
return for 1997, signed by herself as president of KWTO,
attesting that she was required to pay her own expenses, and that
she received neither reimbursement nor an allowance for them. She
also testified that she spent most of her time developing
business, which frequently involved visiting representatives of
potential group tours, and travel suppliers, meeting people at
the airport, and other trips away from her office, which is
located in her home.
[5] Initially, the Respondent took the
position that the Appellant had not incurred the expenses that
she claimed in the three taxation years under appeal, that if she
had incurred them they were not incurred for the purpose of
earning income from a source of employment income, but instead
were personal or living expenses, and finally that if all else
failed they were not deductible because they were not reasonable.
The Minister rejected the claim for a GST rebate on the basis
that the expenditures were personal expenditures. At the
conclusion of the evidence, counsel for the Respondent stated
that she was satisfied that the Appellant had in fact incurred
the expenses, and that they were not personal expenses but were
incurred by the Appellant for the purpose of carrying out her
duties as President of KWTO. She opposed the appeal simply on the
basis that the Appellant did not have any income from employment
by the company in the years under appeal and, therefore, was not
an employee of the company, and did not have employment with the
company that qualified as a source of income for the purposes of
sections 3 and 5 of the Act.
[6] The provisions of the Act
that are relevant are set out in full in
Appendix "A". It is sufficient, however, to know
that sections 3 and 5 provide that, in computing income for the
year, a taxpayer may take into account "loss for the year from an
office, employment, business or property", and that a taxpayer's
loss for a taxation year from an office or employment is the
amount of the taxpayer's loss, if any, for the taxation year from
that source. It is no longer disputed that the Appellant drove
her automobile for the purpose of discharging her duties as the
president of KWTO, or that in doing so she incurred expenses of
$3,943, $7,993 and $8,675, respectively, in 1997, 1998 and 1999.
The Respondent's opposition to the appeals, as I understood
counsel, is grounded entirely in two propositions. The first is
that a person cannot have a source of employment income in any
given year unless she has employment income from that source in
the year. The second is that a person cannot be an "employee" of
a company unless she receives remuneration from the company.
[7] I shall deal with the latter point
first. The words "employee", "office" and "officer" are
defined in section 248 of the Act in the following
way:
248(1) In this Act,
"employee" includes officer.
"office" means the position of an individual entitling the
individual to a fixed or ascertainable stipend or remuneration
and includes a judicial office, the office of a minister of the
Crown, the office of a member of the Senate or House of Commons
of Canada, a member of a legislative assembly or a member of a
legislative or executive council and any other office, the
incumbent of which is elected by popular vote or is elected or
appointed in a representative capacity and also includes the
position of a corporation director, and "officer" means a person
holding such an office;
It is clear from these definitions that Ms. Hollingsworth, who
was undoubtedly an officer of the corporation at all material
times, must at the same time have been an employee for purposes
of the Act: see Scott v. Canada.[1] The Respondent's position
is without any merit.
[8] I am also of the view that the
Appellant's employment must be considered to be a source of
income, even though she derived no income from it in the relevant
years. The appropriate analogy is to a business that produces no
profit for its owner. It will nevertheless be considered to be a
source of income if it is carried on as a commercial activity and
in pursuit of profit, and not for personal reasons.[2] The Appellant devoted
most of her time during the years under appeal to furthering the
commercial interests of KWTO. She was engaged for only a few days
in each year as a supply teacher, and that only to assist the
principal for whom she had worked at an earlier time. She
certainly carried out her duties for the company in a
businesslike way, and with a view to making the company's
business profitable. It was always the Appellant's intention that
when the business became profitable, it would pay her a salary.
Her employment by KWTO was a source of income in the relevant
years, and the Appellant is, therefore, entitled to deduct her
losses from that source from her income from other sources for
the purpose of determining her income under section 3 of the
Act. She is also entitled to the GST rebate provided for
in section 253 of the Excise Tax Act in relation to
her motor vehicle expenses incurred in the course of her
employment for each year. There was no dispute as to the
computation of these rebates.
[9] The appeals are allowed and the
reassessments are referred back to the Minister for
reconsideration and reassessment on that basis. The Appellant is
entitled to her costs, if any.
Signed at Ottawa, Canada, this 18th day of March, 2003.
J.T.C.C.
APPENDIX "A"
The relevant sections of the Act read:
3 The
income of a taxpayer for a taxation year for the purposes of this
Part is the taxpayer's income for the year determined by the
following rules:
(a) determine
the total of all amounts each of which is the taxpayer's
income for the year (other than a taxable capital gain from the
disposition of a property) from a source inside or outside
Canada, including, without restricting the generality of the
foregoing, the taxpayer's income for the year from each
office, employment, business and property,
(b) determine
the amount, if any, by which
(i) the total
of
(A) all of the
taxpayer's taxable capital gains for the year from
dispositions of property other than listed personal property,
and
(B) the taxpayer's
taxable net gain for the year from dispositions of listed
personal property,
exceeds
(ii) the amount, if
any, by which the taxpayer's allowable capital losses for the
year from dispositions of property other than listed personal
property exceed the taxpayer's allowable business investment
losses for the year,
(c) determine
the amount, if any, by which the total determined under paragraph
(a) plus the amount determined under paragraph (b)
exceeds the total of the deductions permitted by subdivision e in
computing the taxpayer's income for the year (except to the
extent that those deductions, if any, have been taken into
account in determining the total referred to in paragraph
(a)), and
(d) determine
the amount, if any, by which the amount determined under
paragraph (c) exceeds the total of all amounts each of
which is the taxpayer's loss for the year from an office,
employment, business or property or the taxpayer's allowable
business investment loss for the year,
and for the purposes of this Part,
(e) where an
amount is determined under paragraph (d) for the year in
respect of the taxpayer, the taxpayer's income for the year
is the amount so determined, and
(f) in any
other case, the taxpayer shall be deemed to have income for the
year in an amount equal to zero.
5(1) Subject to this Part, a
taxpayer's income for a taxation year from an office or
employment is the salary, wages and other remuneration, including
gratuities, received by the taxpayer in the year.
8(1) In computing a
taxpayer's income for a taxation year from an office or
employment, there may be deducted such of the following amounts
as are wholly applicable to that source or such part of the
following amounts as may reasonably be regarded as applicable
thereto:
(a) ...
(h.1) where the taxpayer, in
the year,
(i) was
ordinarily required to carry on the duties of employment away
from the employer's place of business or in different places,
and
(ii) was required
under the contract of employment to pay motor vehicle expenses
incurred in the performance of the duties of the office or
employment,
amounts expended by the taxpayer in the year in respect of
motor vehicle expenses incurred for travelling in the course of
employment, except where the taxpayer
(iii) received an
allowance for motor vehicle expenses that was, by reason of
paragraph 6(1)(b), not included in computing the
taxpayer's income for the year, or
(iv) claimed a deduction
for the year under paragraph (f);
248(1) In this Act,
"employee" includes officer.
"office" means the position of an individual entitling the
individual to a fixed or ascertainable stipend or remuneration
and includes a judicial office, the office of a minister of the
Crown, the office of a member of the Senate or House of Commons
of Canada, a member of a legislative assembly or a member of a
legislative or executive council and any other office, the
incumbent of which is elected by popular vote or is elected or
appointed in a representative capacity and also includes the
position of a corporation director, and "officer" means a person
holding such an office;
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COURT FILE NO.:
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2002-2019(IT)I
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STYLE OF CAUSE:
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Dorothy Hollingsworth and Her Majesty the Queen
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PLACE OF HEARING:
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Toronto, Ontario
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DATE OF HEARING:
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January 8, 2003
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REASONS FOR JUDGMENT BY:
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The Honourable Judge E.A. Bowie
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DATE OF JUDGMENT:
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March 18, 2003
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APPEARANCES:
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Agent for the Appellant:
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Raymond F. Sim
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Counsel for the Respondent:
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Nimanthika Kaneira
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For the Appellant:
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Name:
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N/A
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For the Respondent:
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Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
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[1]
94 DTC 6193 (F.C.A.) per Heald J.A. at p. 6196.
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