Date: 20020213
Docket:2001-654-IT-I,
2001-782-IT-I
BETWEEN:
ANTHONY KAUPE,
ELIZABETH KAUPE,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Agent for the Appellants: Mr. Peter
Chwalisz
Counsel for the Respondent: Brent Cuddy
____________________________________________________________________
Reasons for Judgment
(delivered orally from the Bench on
November 22, 2001 in Toronto, Ontario)
Chief Judge Garon, T.C.C.
[1] These are appeals from income tax
reassessments for the 1995 and 1996 taxation years in the case of
the Appellant Anthony Kaupe, and for the 1994, 1995 and 1996
reassessments in the case of the Appellant Elizabeth Kaupe.
[2] Both Appellants and their agent,
Mr. Peter Chwalisz, testified at the hearing of these
appeals.
[3] Paragraph 11 of the Reply to the
Notice of Appeal in the case of the reassessments involving the
Appellant Anthony Kaupe sets out the assumptions made by the
Minister of National Revenue in support of the reassessments.
Paragraph 11 of the said Reply reads as follows:
(a) in the 1995 and
1996 taxation years, the Appellant operated as a sole
proprietorship a painting and decorating business named
Paintex;
(b) for the 1995 and
1996 taxation years, the Appellant's claimed telephone
expenses allegedly incurred by Paintex were in respect of his
personal residential telephone service to the extent of $1,205.00
for the 1995 taxation year and $1,533.00 for the 1996 taxation
year;
(c) for the 1996
taxation year, the Appellant claimed wage expenses allegedly
incurred by Paintex in respect of his spouse, his son (age 13 in
1996) and his mother-in-law in the following amounts:
Spouse
$ 2,400
Son
$ 6,420
Mother-in-law
$ 8,000
Total
$16,820
(d) the Appellant
did not pay his spouse, his son and his mother-in-law the amount
of $16,820.00 (the "Wage Amount") he claimed as wage
expenses for the 1996 taxation year;
(e) in the 1995 and
1996 taxation years, the Appellant, his spouse, their son and his
mother-in-law resided at the same address;
(f) the
disallowed Wage Amount and telephone expenses were not made or
incurred for the purpose of gaining or producing income from a
business or property;
(g) the expenses
disallowed by the Minister were not reasonable in the
circumstances;
(h) the disallowed
Wage Amount and telephone expenses were personal or living
expenses of the Appellant.
[4] The Appellant's agent admitted
the allegations in subparagraphs (a), (c) and (e) and denied the
other subparagraphs in paragraph 11 of the Reply to the Notice of
Appeal with the exception of subparagraph (d) in respect of which
he stated that he did not know if the allegation therein was
correct or not.
[5] Paragraph 10 of the Reply to the
Notice of Appeal in the case of the Appellant Elizabeth Kaupe
sets out the assumptions made by the Minister. The said paragraph
10 reads thus:
(a) for the 1994, 1995 and 1996
taxation years, the Appellant reported gross income, expenses and
net business income in respect of her secretarial and real estate
agent activities as follows:
1994
1995
1996
Gross
Income
$17,896.97
$18,336.50
$16,537.30
Expenses
Pager
$
471.50
$
86.08
$ -
Desk
fee
2,053.35
597.68
-
Secretarial &
marketing
7,000.00
5,500.00
-
Interest
884.29
746.32
694.46
Office
180.47
60.00
38.50
Telephones
871.36
962.97
694.65
Automobile
expenses
1,491.47
269.95
116.88
Capital cost allowance
automobile
2,570.62
1,799.44
1,259.70
computer
_____-___
______-____
___577.40
Total
Expenses
$15,522.96
$10,022.44
$_3,381.59
Net
Income
$_2,374.01
$_8,314.06
$13,155.71
(b) the secretarial
and marketing expenses claimed by the Appellant for the 1994 and
1995 taxation years in the amounts of $7,000.00 and $5,500.00
respectively were in respect of wages she allegedly paid to her
mother;
(c) the Appellant
did not pay her mother the amounts of $7,000.00 and $5,500.00
(the "Wage Amounts") she claimed as secretarial and
marketing expenses for the 1994 and 1995 taxation years;
(d) the Wage Amounts
claimed by the Appellant as secretarial and marketing expenses
for the 1994 and 1995 taxation years were not for services
actually rendered to assist the Appellant's business to earn
income;
(e) the Appellant
did not maintain a log book of the distance driven nor did she
maintain a breakdown of the employment, business and personal use
kilometres driven in the 1994, 1995 and 1996 taxation years;
(f) the
Appellant's automobile expenses for the 1994, 1995 and 1996
taxation years did not exceed the amounts of $447.00, $81.00 and
$35.00 respectively;
(g) the
Appellant's capital cost allowance for the 1994, 1995 and
1996 taxation years, in respect of her automobile, does not
exceed the amounts of $771.00, $540.00 and $378.00
respectively;
(h) the disallowed
Wage Amounts and automobile expenses were not made or incurred
for the purpose of gaining or producing income from a business or
property;
(i) the
expenses disallowed by the Minister were not reasonable in the
circumstances;
(j) the
disallowed Wage Amounts and automobile expenses were personal or
living expenses of the Appellant.
[6] The Appellant's agent admitted
subparagraphs (a), (b) and (e) of paragraph 10 of the Reply
to the Notice of Appeal and denied all of the other
subparagraphs. In the case of subparagraph (c) of paragraph 10 of
the Reply to the Notice of Appeal, the agent testified that the
amounts referred to in this subparagraph were paid indirectly by
the Appellant to her mother.
[7] With regard to the Appellant
Anthony Kaupe there are two issues.
[8] The first issue has to do with the
deduction from income of the telephone expenses claimed by this
Appellant in respect of the 1995 and 1996 taxation years. The
Appellant deducted the amounts of $1,205.00 for the 1995 taxation
year and $1,533.00 for the 1996 taxation year.
[9] The evidence shows that the
Appellant had two telephone lines at the time; one was used
almost exclusively for sending and receiving faxes. The line
primarily used for faxes was used almost exclusively for business
purposes. The other line was utilized for both personal and
business purposes.
[10] Having regard to the evidence, I find
that the amounts claimed as a deduction from income for telephone
expenses have been established. Counsel for the Respondent did
not attempt to offer any persuasive argument challenging the
correctness of this conclusion.
[11] The second issue has to do with the
wage expenses allegedly incurred by the Appellant for the 1996
taxation year in respect of his spouse, his son and his
mother-in-law. The following amounts were deducted by the
Appellant in this regard:
Spouse
$ 2,400.00
Son
$ 6,420.00
Mother-in-law
$ 8,000.00
Total:
$16,820.00
[12] First, the amounts were not actually
paid by the Appellant Anthony Kaupe to his spouse, his son and
his mother-in-law respectively. Reference was made on some
occasions in the agent's testimony, for instance, to the
phrase that these individuals in question "were paid
indirectly" by the Appellant Anthony Kaupe in return for the
services the said individuals had performed during the 1996
taxation year in connection with the Appellant's painting
business.
[13] In this regard, I entertain no doubt
that the Appellant's wife, his son and his mother-in-law
provided services during 1996 in connection with the painting
business. There is no doubt either that the Appellant Anthony
Kaupe could have entered into a valid contract of employment with
these three persons and expenses in this regard would have been
deductible if the amount of such expenses was reasonable. Also,
there may be circumstances where legitimate expenses could be
deductible in computing income from a business, even if the
payments regarding thereto were not made pursuant to a legal
obligation.
[14] In the present case there is, for
instance, some evidence that there was some kind of an
arrangement between the Appellant Anthony Kaupe according to
which the son would be permitted to attend a private school if he
was willing to provide services at a certain level in relation to
his father's painting business.
[15] I am not however persuaded that the
method used by the Appellant's agent and accountant, to
determine the amounts claimed as a deduction in respect of the
1996 taxation year, was not arbitrary. The evidence in this
regard does not satisfy me that a commercial connotation should
relate to the services rendered in 1996 by the persons referred
to above. These services were rendered in the context of a family
setting. Also, the lack of records or of any sort of paper trail
would make it impossible to determine with reasonable accuracy
the amounts that could be considered on a broad view of the
matter to have been paid.
[16] In this connection, I am of the view
that the observations made by Judge Mogan of this Court in the
case of Cousins v. R., [1998] 1 C.T.C. 3278, are
applicable here. This was a case where young children were
providing assistance to two individuals who were spouses and
shareholders in a family corporation. In that case, the latter
corporation claimed the deduction of salaries paid to the
children as employment expenses. Judge Mogan said this at page
3282:
... I have to infer from all of the circumstances that these
amounts were basically "plugged in" as the maximum
amounts which could be shown as having been earned by children
and not attract any tax in their hands. These amounts were used
in a family context to pay for personal benefits that one might
expect in a family such as this: e.g. Lisa learning to play the
organ and Paul having an attraction to computers.
[17] I therefore conclude that the Appellant
Anthony Kaupe is not entitled to deduct the amount of $16,820.00
in respect of the services provided by his wife, his son and his
mother-in-law during the said year.
[18] I would also add, before dealing with
the reassessments involving the Appellant Elizabeth Kaupe, that
the Court did not have the benefit of the testimony of the
mother-in-law and the son of the Appellant Anthony Kaupe who were
parties to these arrangements. Their evidence could have been
useful.
[19] With respect to the Appellant Elizabeth
Kaupe, there are three issues.
[20] The first issue has to do with the
automobile expenses, the deduction of which was claimed by this
Appellant for the 1994, 1995 and 1996 taxation years. The amounts
deducted were $1,491.47 for 1994, $269.95 for 1995 and $116.88
for 1996.
[21] The evidence establishes that the
Appellant Elizabeth Kaupe incurred automobile expenses for
purposes relating to her business as a real estate agent in each
of the years in question and also in connection with her
employment for St. Casimir Church during the same years. In
particular, a fair amount of travelling was done by the Appellant
in relation to her business as a real estate agent, especially
during the 1994 taxation year.
[22] I am satisfied on the evidence that the
Appellant Elizabeth Kaupe has incurred these expenses in each of
the three years in issue. Again, counsel for the Respondent did
not appear to disagree with this conclusion.
[23] The second issue has to do with the
deduction of the amounts claimed by the Appellant in respect of
the capital cost allowances relative to automobiles. The amounts
deducted by the Appellant in this regard are the following:
1994
1995
1996
$2,570.62
$1,799.44
$1,259.70
[24] Both parties agreed that the
aforementioned amounts were representing 90% of the total amounts
that could be claimed if the automobiles had been used
exclusively for the purposes of the Appellant's business and
her employment for the Church in respect of the undepreciated
capital cost of property falling within the automobiles
class.
[25] The Appellant Elizabeth Kaupe testified
that to the best of her knowledge with respect to an automobile
purchased in 1993, a Mazda, she used it between 75% and 90%
during the three years in question for purposes relating to her
business as a real estate agent and in the course of her
employment for the St. Casimir Church.
[26] I accept her evidence. I am satisfied
that the following amounts, which I have rounded, could be
deducted for each of the years mentioned below:
1994
1995
1996
$2,300.00
$1,600.00
$1,100.00
[27] The third issue relates to the
deduction of the amounts of $7,000.00 and $5,500.00 for the 1994
and 1995 taxation years respectively in respect of the amounts
allegedly paid by the Appellant Elizabeth Kaupe to her
mother.
[28] As in the case of the Appellant Anthony
Kaupe with regard to the amounts deducted in respect of the
services rendered by his wife, his son and his
mother-in-law, the amounts deducted by the Appellant
Elizabeth Kaupe were not actually paid to her mother. It was
submitted on behalf of the Appellant Elizabeth Kaupe that
the amounts of $7,000.00 and $5,500.00 were paid indirectly to
her mother. Here again I have no doubt that the mother rendered
services to the Appellant Elizabeth Kaupe in connection with her
business as a real estate agent or her employment activities.
There was in my view no contract of employment between the latter
Appellant and her mother. The Appellant's mother was not
called as a witness and her testimony could have thrown some
light on the matter. Also, the amounts in question appear to me
to be arbitrary. There is a total lack of records in this
respect. The services were provided in the context of a family
setting.
[29] The comments made by Judge Mogan in the
case of Cousins referred to earlier are also applicable
with regard to the deduction of amounts claimed by the Appellant
Elizabeth Kaupe for services rendered by her mother.
[30] I therefore come to the conclusion that
the Appellant Elizabeth Kaupe is not entitled to deduct the
amounts of $7,000.00 and $5,500.00 in computing her income for
the 1994 and 1995 taxation years in respect of the services
provided by her mother in these two years.
[31] To sum up, the Appellant Anthony Kaupe
is entitled to deduct the following amounts in respect of the
years mentioned below relative to the telephone expenses, that
is:
1995
1996
$1,205.00
$1,533.00
[32] The reassessment for the 1996 taxation
year is confirmed in every other respect.
[33] The Appellant Elizabeth Kaupe is
entitled to deduct the following amounts in respect of the years
indicated below with regard to automobile expenses:
1994
1995
1996
$1,491.47
$269.95
$116.88
and the following amounts in relation to capital cost
allowance in respect of the property of the class comprising the
automobiles:
1994
1995
1996
$2,300.00
$1,600.00
$1,100.00
[34] The reassessments for the 1994 and 1995
are confirmed in all other respects.
[35] For these reasons the appeals from the
reassessments of the Appellant Anthony Kaupe for the 1995 and
1996 taxation years are allowed and the assessments are referred
back to the Minister of National Revenue for reconsideration and
reassessment in accordance with these reasons.
[36] The appeals of the Appellant Elizabeth
Kaupe from the reassessments for the 1994, 1995 and 1996 taxation
years are allowed and the reassessments are referred back to the
Minister of National Revenue for reconsideration and reassessment
to the extent set out in these reasons.
[37] Each party shall bear his or her own
costs in respect of this litigation.
Signed at Ottawa, Canada, this 13th day of February 2002.
C.J.T.C.C.
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