Jack Crichton v. Minister of National Revenue, [1985] 2 CTC 2090, 85 DTC 488

Cardin, TCJ:—The appeal is from reassessments with respect to the 1980 and 1981 taxation years. The basic facts are not disputed and are summarized in the Minister’s reply to the notice of appeal as follows:

A. STATEMENT OF FACTS

1. With respect to the Appellant’s Notice of Appeal the Respondent specifically denies that commission income of $18,000.00 in 1980 and $8,000.00 in 1981 was the income of Scarburn Fells Corporation (“Scarburn”), a company incorporated under the laws of the Province of Ontario on February 14, 1979, with a fiscal year end of June 30.

2. By Notice of Reassessment dated June 28, 1983, the Respondent included in the income of the Appellant for the 1980 taxation year $22,000.00 and for the 1981 taxation year $4,000.00 representing commission income earned in those years by the Appellant from Midwest Silo Systems Ltd (“Midwest”).

3. By Notices of Objection dated August 4, 1983, the Appellant objected to the Reassessments referred to in paragraph 2 herein.

4. The Respondent, by notice dated December 22, 1983, confirmed the Reassessments referred to in paragraph 2 herein.

5. By Notice of Appeal dated January 9, 1984, and filed with the Tax Court of Canada on January 19, 1984, the Appellant appeals to this Court from the Reassessments referred to in paragraph 2 herein.

6. In reassessing the Appellant as aforesaid, the Respondent relied upon the following assumptions or findings of fact:

(a) from 1976 and during the 1979, 1980 and 1981 taxation years the Appellant was employed as a sales manager by Midwest. The Appellant was remunerated by both salary and commission;

(b) during the 1979 taxation year the Appellant in his capacity as sales manager earned commission income and bonuses from Midwest in the amount of $26,045.37;

(c) in the Appellant’s 1980 taxation year and at the direction of the Appellant, Midwest reduced its commissions owing to the Appellant by paying $22,000.00 to Scarburn, a Company controlled by the Appellant;

(d) in the 1981 taxation year and at the direction of the Appellant, Midwest reduced its commissions owing to the Appellant by paying $4,000.00 to Scarburn;

(e) as of the end of the Appellant’s 1981 taxation year commission income earned by the Appellant in the 1979 taxation year in the amount of $45.37 remained unpaid;

(f) during the period from 1979 to 1981 inclusive, Scarburn provided promotional services to Midwest. Scarburn received $18,000.00 in 1981 in consideration of the services provided, representing $6,000.00 per year for the three- year period;

(g) Scarburn provided no other services to Midwest and there was no employment contract between Scarburn and Midwest;

(h) in his 1980 and 1981 Income Tax Returns the Appellant reported no commission income;

(i) in its 1979 Income Tax Return Scarburn reported no commission income;

(j) in its 1982 Income Tax Return Scarburn reported no income.

B. STATUTORY PROVISIONS UPON WHICH THE RESPONDENT RELIES AND THE REASONS WHICH HE INTENDS TO SUBMIT

7. The Respondent relies, inter alia upon Section 3 and Subsection 5(1) of the Income Tax Act, RSC 1952, Chapter 148, as amended (the “Act”).

8. The Respondent submits that commission income of $22,000.00 in 1980 and $4,000.00 in 1981 has been properly taken into account in computing the Appellant’s income in accordance with the provisions of Section 3 and Subsection 5(1) of the Act.

The appellant’s position is that he was wrongly assessed in that income attributed to him in the 1980 and 1981 taxation years was the income of Scarburn Fells Corporation (“Scarburn”).

At the outset of the hearing counsel for the respondent informed the Court that the amount of $18,000 received by Scarburn in 1981 (subparagraph 6(f) of the reply to the notice of appeal) was no longer contested by the Minister. However, there was some disagreement between the parties as to the exact nature of the services that had been rendered by Scarburn which was never clarified.

The appellant had some experience in the sale of farming equipment when he was employed by Midwest Silo Systems Ltd (“Midwest”) in the autumn of 1976. During the period of 1976 to 1978 the appellant was the only salesman for the company and he looked after the promotional aspect of the business as well as making sales.

Mr Calvin Schmidt, the president and principal shareholder of Midwest, confirmed in his testimony the appellant’s evidence that the business having expanded, more salesmen were needed. In 1978 the appellant was given one share in the company and became a director. He was also appointed general sales manager and was responsible for the recruiting and training of a sales force which at one point numbered five salespersons. The appellant was also responsible for all sales promotions and advertising as well as overseeing all the sales made by the sales force personnel.

The appellant's remuneration was on the basis of a fixed salary and a commission on gross sales, ie on sales of all the salesmen for whose performance the appellant was ultimately responsible. Mr Schmidt admitted that he was particularly interested in the construction aspect of the business and left the appellant virtually in charge of all matters related to sales.

The amounts of $22,000 paid to Scarburn by Midwest in 1980 and $4,000 in 1981 were commissions that had been earned in the 1979 taxation year.

Prior to the incorporation of Scarburn the appellant’s wife, Marguerite, has assisted her husband in his sales by typing, keeping records and making appointments for him with prospective purchasers. After Scarburn’s incorporation early in 1979 the appellant’s wife was employed on a full-time basis (40 hours per week) and her duties were increased to include sale promotions by mail, preparing nutritional brochures composed by the appellant, answering phone calls with respect to advertising sent out, and making reservations and appointments, not only for her husband but for all Midwest salesmen as well. The appellant’s wife stated that she was eventually paid by Midwest for her services.

The appellant’s daughter also worked for Scarburn in 1979 for more than 15 hours a week on an irregular basis. She did bookkeeping, typed advertising letters dictated by the appellant and passed on information by phone and gave leads to the salesmen on prospective buyers. She stated that the sale of 18 silos had resulted from the appellant’s home activities.

Mr Schmidt's evidence was that he was unaware of the existence of Scarburn until April of 1980 when he was asked by the appellant to make out the commission cheques of $18,000 (and $4,000 in 1981) to Scarburn. He admitted that he knew that the appellant worked on the road and in his home to a considerable extent and he had no objection to whatever arrangements the appellant may have made. Mr Schmidt's only concern and requirement was that sales be effectively generated.

However, Mr Schmidt admitted that Midwest had no contract, written or verbal, with Scarburn and the amounts paid to Scarburn in 1980 and 1981 were, as far as the company was concerned, commissions earned by the appellant as sales manager on exactly the same basis as agreed upon in 1978.

The appellant argued that he directed and operated his sales activities from his home in Shelburne and that, as a director of Midwest, he was authorized to make arrangements with Scarburn so that, with the help of his wife and daughter, he could generate a maximum of sales. He contended that his commission was on the basis of gross sales and not on his personal sales and therefore it is Scarburn who earned the commission income and not himself.

As I see it, the appellant was in charge of all sales as sales manager and employee of Midwest. The nature of the appellant’s responsibilities and the basis of his remuneration were the same in 1979, 1980 and 1981 as they were in 1978 when the number of salesmen was increased. The appellant’s overall remuneration from 1979 to 1981 ranged from $40,000 to $44,000, of which $18,000 to $20,000 per year was by way of commissions. There can be no doubt that the appellant’s wife and daughter were indeed most helpful in generating and effecting sales for the appellant, but neither were employees of or under contract with Midwest. Neither was Scarburn. Even though Mr Schmidt had no objection to the arrangements made by the appellant for the generation of sales and agreed to pay commissions to Scarburn at the request of the appellant, there was no contractual relationship or obligation between Midwest and Scarburn. Indeed Scarburn would have had no legal recourse if Midwest had refused to pay the commissions. The only binding contract that existed was between Midwest and the appellant.

Moreover there was agreement by the parties that $18,000 representing $6,000 a year for a period of three years, was in fact paid by Midwest to Scarburn for services over and above the $26,000 of commission income, the quantum in issue for the two years under appeal. Counsel for the appellant on several occasions made the point that neither the appellant’s wife nor daughter intended to work for nothing. Apparently they were remunerated by Midwest although the appellant failed to establish how and why Scarburn was paid $18,000 as its own income.

As suggested by counsel for the respondent, the $26,000 commission income is taxable in the hands of the taxpayer who earned it — the taxpayer who earned it can only be the one who had a binding contractual relationship with Midwest. In my opinion the evidence is clear that the appellant alone was party to the contract with Midwest and he earned the commission income.

I conclude therefore that the respondent did not err in including in the appellant’s income the amounts of $22,000 and $4,000 for each of the taxation years of 1980 and 1981 respectively.

The appeal is dismissed.

Appeal dismissed.