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Date: 20030130
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Dockets: 2002-550(IT)I
2002-552(IT)I
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BETWEEN:
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ENGEL FOSTER,
BRYAN FOSTER,
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Appellants,
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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
Little, J.
FACTS:
[1] The appeals were
heard together on common evidence.
[2] Bryan Foster
("Bryan") and Engel Foster ("Engel") were
partners in the Bryan and Engel Foster Partnership (the
"Partnership"). Bryan and Engel are husband and
wife.
[3] The Partnership
owns a parcel of land located at 63870 Flood-Hope
Road, (the "Property") in the town of Hope, British
Columbia.
[4] The building and
assets located on the Property are owned by Foster Holdings Ltd.
("Holdings"). The shares of Holdings are owned by Bryan
and Engel.
[5] Silver-Hope Mini
Storage (1995) Ltd. ("Silver-Hope") owns and operates a
mini storage business at the Property. Silver-Hope's business
is operated out of the building owned by Holdings. The shares of
Silver-Hope are owned by Bryan and Engel.
[6] The Partnership
leases the Property to Holdings for $1,000.00 per month. Holdings
also pays as additional rent the municipal taxes levied on the
land and buildings, plus water rates and insurance premiums. The
rent of $1,000.00 (and the specified additional items) were paid
by Holdings to the Partnership in the 1997 and 1998 taxation
years.
[7] Pursuant to an
Agreement dated December 27, 1995 a company by the name of
Mar-Terr Enviro Research Ltd. (the "Manager") was
retained by the Partnership as exclusive agent to rent or lease
and manage the Property. The shares of the Manager are owned by
Bryan.
[8] According to the
Appellants' Notices of Appeal the Partnership paid a
management fee to the Manager in the amount of $36,000.00 in each
of the 1997 and 1998 taxation years. However, according to the
income tax return of Bryan for 1998 (Exhibit A-8) the management
fee paid in that year was $14,000.00.
[9] The Manager paid
the following salaries to Engel:
1997 - $18,510.00
1998 - 8,090.00
[10] By Agreement dated
December 15, 1995 the Partnership leased furniture, a computer
and other office equipment from the Manager for a fee of
$1,000.00 per year.
[11] The members of the
Partnership, Holdings, Silver-Hope and the Manager filed income
tax returns for the 1997 and 1998 taxation years.
[12] The fees or salaries
referred to above were reported by the parties when they filed
their income tax returns.
[13] Travel expenses and
motor vehicle expenses were claimed by the members of the
Partnership.
[14] By Notice of
Reassessment dated January 4, 2001 (the
"Reassessments") the Minister of National Revenue (the
"Minister") reassessed the 1997 and 1998 taxation
years of Bryan and Engel. According to the statement in the
Notices of Appeal the following expenses were disallowed in the
Reassessments:
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Expenses Disallowed
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1997
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1998
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Management fee
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$ 36,000.00
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$ 36,000.00
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Office Expenses
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1,000.00
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1,000.00
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Travel Expenses
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27.85
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13.45
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Motor Vehicle Expenses
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234.25
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341.08
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Additions to Partnership's
Income
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$37,262.10
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$37,354.53
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Additions to Partners
Income
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1997
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1998
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Bryan Foster
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$18,631.05
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$18,677.27
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Engel Foster
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$18,631.05
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$18,677.27
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B.
ISSUES
[15] Are the following
expenses deductible by the Partnership?
(a) Management
fees of $36,000.00 for each of the 1997 and 1998 taxation
years;
(b) Office expenses
of $1,000.00 per year for each of the 1997 and 1998 taxation
years;
(c) Travel expenses
of $27.85 and $13.45 for each of the 1997 and 1998 taxation
years;
(d) Motor vehicle
expenses of $234.25 and $341.08 for each of the 1997 and 1998
taxation years.
C.
ANALYSIS
[16] At the commencement of
the hearing, counsel for the Appellants advised the Court that
the Appellants were reducing their claim for the management fee
paid to the Manager in 1998 from $36,000.00 to $14,00.00.
However, counsel for the Appellants stated that the Appellants
maintain that they are entitled to deduct the management fee of
$36,000.00 that was paid by them to the Manager in the 1997
taxation year.
[17] Max Weder, counsel for
the Appellants, also stated that the agreement dated December 15,
1995 between Bryan and Engel and the Manager
(Exhibit A 6) contained a mistake. Mr. Weder said
that paragraph 4 of the agreement should state that the rent
payable to the Manager for the miscellaneous assets (office
equipment, computer, etc.) should be $1,000.00 per year rather
than $1,000.00 per month.
[18] Counsel for the
Appellant admitted that the corporate structure that was
established was unusual. I agree. Counsel said that if
Silver-Hope (the operator of the mini-storage facility) had paid
the management fee to the Manager there would not be a problem.
Counsel for the Appellant also stated that Holdings, in essence,
became a flow through entity for members of the Partnership. I
cannot accept the proposition that Holdings was, in essence, a
flow through entity for the Parnership. I must recognize the
corporate structure that the parties, for whatever reason, put in
place.
[19] During the argument
counsel for the Respondent said:
But essentially, the Appellants'
submission here is that the evidence demonstrates that the fee
that was paid to Mar-Terr (the Manager) is to earn income, and
it's reasonable in the circumstances.
[20] It will be noted that
the management fee paid by the Partnership to the Manager was
$36,000.00 in 1997 and $14,000.00 in 1998. When it is recognized
that the only income of the Partnership in this situation was the
amount of $12,000.00 that it received from Holdings in each of
1997 and 1998. I do not believe it could be said that the
management fees of $36,000.00 and $14,000.00 paid by the
Partnership to the Manager was reasonable.
[21] From the evidence that
was presented, I find that Bryan and Engel should be allowed the
following deductions:
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Bryan Foster
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1997
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1998
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Management Fee
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$5,000.00
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$5,000.00
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Office Expense
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500.00
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500.00
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Travel Expense
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13.92
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6.72
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Motor Vehicle Expense
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117.12
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170.54
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Engel Foster
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1997
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1998
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Management Fee
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$5,000.00
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$5,000.00
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Office Expense
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500.00
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500.00
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Travel Expense
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13.92
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6.72
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Motor Vehicle Expense
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$117.12
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$170.54
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[22] The Minister is
instructed to issue Notices of Reassessment to allow the expenses
outlined above.
[23] From an analysis of
the above facts it will be noted that the Manager was paid
management fees of $36,000.00 in 1997 and $14,000.00 in 1998 but
pursuant to this Judgment Bryan and Engel will only be allowed to
deduct management fees of $10,000.00 ($5,000.00 each) for the
1997 and 1998 taxation years. Under the circumstances as outlined
in this Judgment, I believe that the Minister should permit the
Manager to file amended income tax returns for the 1997 and 1998
taxation years to reduce the management fees received from the
Partnership to a total of $10,000.00 for each year.
Signed at Vancouver, British Columbia, this
30th day of January 2003.
J.T.C.C.
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