Date: 20010418
Docket: 2000-2579-IT-I
BETWEEN:
KIM L. S. MADSEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Beaubier, J.T.C.C.
[1]
This appeal pursuant to the Informal Procedure was heard at
Victoria, British Columbia, on April 2, 2001. The Appellant was
the only witness. The Appellant has appealed the disallowance of
a salary which he alleges he paid to his wife of $12,000 in each
of 1996 and 1997. Paragraphs 7 and 8 of the Reply to the Notice
of Appeal set out the issues. They read:
7.
In so reassessing the Appellant, the Minister made the following
assumptions of fact:
a)
expenses in excess of the amount allowed by the Minister were not
incurred for the purpose of gaining employment income, but were
personal or living expenses of the Appellant;
b)
the Appellant is employed as a salesman and is remunerated, in
part, by commissions;
c)
the Appellant was required to pay his own expenses;
d)
the Appellant was reimbursed for expenses which had been approved
by his employer;
e)
the Appellant travelled in Alberta and British Columbia;
f)
the Appellant was required to work away from his employer's
premises;
g)
the Appellant was reimbursed upon providing his employer with
proof of payment of expenses;
h)
the Appellant was required to rent an office or to use part of
his home as an office;
i)
the Appellant was not required by his contract of employment to
pay a substitute or an assistant; and
j)
the Appellant did not make payments to his spouse for
assistance.
B.
ISSUES TO BE DECIDED
8.
The issues are whether:
a)
the Appellant paid his wife for office services: and
b)
if the Appellant did pay his spouse, which is not admitted but is
expressly denied, is he allowed to deduct $12,000 in each
year.
[2]
Assumptions 7(b), (c), (e), (f) and (h) are correct.
[3]
Respecting the remaining assumptions, the Court finds:
(a)
The Appellant sells sophisticated pulp and paper equipment which
require him to make highly technical examinations of 65 pulp and
paper plants in Alberta and British Columbia, do estimates,
prepare bids, submit them to his employer in the United States of
America and inspect them from time to time. His employer has no
Canadian office. The Appellant has a room and storage space in
his home which is his employer's sole information storage
source in Canada. The home is also the Appellant's permanent
telephone number. His wife answers the telephone and retrieves
and checks information for him from the files at their home when
he is on the road. In the Court's view his wife's
services were necessary for his work as was the work place in his
home. Monies expended for this were not personal or living
expenses. They were for the job.
(d) and (g) The Appellant was not reimbursed for these or for
other expenses. He was paid a base salary of $25,000 per year.
His real income was his commissions from sales for his work in a
very technical and competitive industry in which every sale was a
competitive bid in a sophisticated industry. The Appellant would
be fired if he did not produce sales in sufficient volume.
(i)
The Form T-2200 for both years have this question answered
"no" –
(a)
Do you require this employee under a contract of employment
to:
... pay for a substitute or assistant"
That answer is correct. But the office in home requirement
plus the extreme travelling nature of his job – successive
days on the road to distant and remote plants every week –
implies that his wife or someone must retrieve information and
answer the telephone sooner or later every working day. His wife
did this and his employer did not have to pay for that service.
In fact, the nature of his employment contract was that his wife
or someone like her was required for this job. Exhibit A-1, Tab
2, a letter from his employer puts it in the negative:
Stowe Woodward has no objection to Kim Madsen hiring his wife
to help with his job, provided there is no responsibility or
obligation on the part of Stowe Woodward.
The Court finds that in fact, Mrs. Madsen was required under
Kim’s contract of employment to substitute for him or
assist him in his job when he was outside of his home and home
office. The actions of Stowe Woodward merely reflect the
legal exigencies of government employment and tax laws that might
adversely affect international corporations operating in Canada
or elsewhere around the world.
The spouse’s payment for her work occurred as follows:
Kim’s employer paid Kim by depositing his salary in
Madsens’ joint account. Kim’s wife, Diana, simply
used the account for withdrawals and cheques as she chose. That
was her pay. She did not get a formal monthly or biweekly cheque
or other form of direct payment. Their accountant recorded the
$12,000 per year annually as payment to Diana for work under
contract, so withholdings were not necessary and the normal
employee stipulations did not apply.
Thus, the question before the Court is properly expressed in
subparagraphs 8(a) and (b) of the Reply. Were the amounts paid by
Kim within paragraph 8(1)(i) of the Income Tax Act?
No evidence was led to contradict Kim’s testimony that his
wife was not his employee, but was a contract worker.
[4]
Subparagraph 8(1)(i) allows an employee to deduct
amounts paid by the taxpayer in the year as
...
(ii) ... salary to an assistant ... the
payment of which ... was required by the contract of
employment,
(emphasis added)
[5]
"Salary" is defined in the Oxford Dictionary as
"fixed regular payment made by an employer to an employee in
return for work". There is no employer-employee relationship
alleged by the Appellant and he did not pay Diana a fixed regular
payment. Nor did Diana's services constitute "supplies
consumed" within subparagraph 8(1)(i)(iii) of the Income
Tax Act.
[6]
In the Court's view Diana's services and Kim's
position are virtually identical to those described by Lamarre
Proulx, J.T.C. in Baillargeon v. Minister of National
Revenue, [1990] T.C.J. No. 712 (Q.L.) when she said:
As the appellant's agent notes, the respondent does not
dispute that the appellant's wife worked for the appellant,
that the amount of remuneration was reasonable in the
circumstances, or that the amount was actually paid to her. The
respondent's only argument is that the appellant was not
required, under his contract of employment, to pay the salary of
an assistant.
In the case of a fixed-remuneration contract of employment, I
have no doubt that it would be necessary for that obligation to
be mentioned in the contract of employment. In a case of
employment where the individual is remunerated entirely by
commissions, all the expenses that the employee can or must incur
in order to earn his income are not necessarily set forth in the
contract of employment.
According to the evidence, there was no written contract of
employment. The appellant's employer provided him with a
small office or location with a telephone. There was one
secretary for some twenty employees. According to the
appellant's testimony, the location of the office was not
permanent. The employees could be moved from one place to
another. The only permanent office was in the appellant's
house, as was his only permanent assistant. She received and
issued securities, collected payments, remitted cheques to pay
income to holders of securities, kept contracts, and handled
reception and telephone calls.
[7]
However, in this case the Respondent does dispute whether Kim
ever paid Diana. Kim's salary was deposited to what is
obviously the family's joint household account upon which
either Kim or Diana could draw. No satisfactory evidence was
tendered to establish that Diana withdrew or otherwise used
$12,000 per annum from the account for her own benefit.
Certainly, no formal payment of the $12,000 per year ever
occurred and, on the evidence before the Court, it may be that
none of it was ever paid. Kim had as much right to the contents
of their joint account as did Diana.
[8]
The only evidence of payment to Diana is in the statements filed
for income tax purposes by their accountant. As Bowman, J. said
in Ed Sinclair Construction & Supplies Ltd. et al. v.
Minister of National Revenue 92 DTC 1163 at 1169:
In addition the Minister sought to tax Mr. Sinclair on $50,750
credited to his loan account by Prosperous Investments. It would
appear from paragraphs 6(p) and (q) of the Reply, which set out
the Minster's so-called "assumptions" that he
assumed that the mere fact of crediting to a shareholder loan
account gives rise to taxation in the hands of the principal
shareholder, irrespective of whether the shareholder or employee
has appropriated any funds from the account or whether the
crediting of the account affects in any way the legal
relationship with the corporation or indeed whether the
shareholder has condoned or even knows of the bookkeeping entry.
A mere bookkeeping entry in a loan account by itself does not
constitute a taxable event unless there is something more, such
as receipt. In Gresham Life Society Co. Ltd. v. Bishop,
1902 4 TC 464 at 476, Lord Brampton said:
My Lords I agree with the Court of Appeal that a sum of money
may be received in more ways than one e.g. by the transfer of a
coin or a negotiable instrument or other document which
represents and produces coin, and is treated as such by business
men. Even a settlement in account may be equivalent to a receipt
of a sum of money, although no money may pass; and I am not
myself prepared to say that what amongst business men is
equivalent to a receipt of a sum of money is not a receipt within
the meaning of the Statute which your Lordships have to
interpret. But to constitute a receipt of anything there must be
a person to receive and a person from whom he receives and
something received by the former from the latter, and in this
case that something must be a sum of money. A mere entry in an
account which does not represent such a transaction does not
prove any receipt, whatever else it may be worth.
In this case it does not prove payment either.
[8]
For these reasons, the appeal is dismissed.
Signed at Regina, Saskatchewan, this 18th day of
April, 2001.
"D. W. Beaubier"
J.T.C.C.
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