Donald Blake v. Minister of National Revenue, [1981] CTC 2020, 81 DTC 31

Guy Tremblay:—This was heard in Toronto, Ontario, on October 2, 1980.

1. Point at Issue

The point is whether the appellant, a poultry farmer, is correct in claiming as salary $26,200 paid to his four children: $1,100 each in 1974, $1,950 each in 1975 and $3,500 each in 1976.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessments are not correct. This burden of proof results especially from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. The Facts

The facts are not in dispute:

3.01 Throughout the 1974, 1975 and 1976 taxation years the appellant was a poultry farmer.

3.02 In 1970, the appellant purchased a farm in Wiarton, Ontario, and built broiler pen barns. In February 1974, he purchased another farm in Scotland, Ontario. During 1974, Mr Blake stayed and Scotland and built his first broiler pen barn there, which meant that Mrs Blake and the children had to operate the broiler pen barns in Wiarton, Ontario.

3.03 Mrs Blake and the children moved to Scotland in April 1975 and a hired man was employed to attend to the broiler operation in Wiarton. The ap- pellant had to travel extensively to instruct the hired man. He sold the farm in Wiarton in November 1975.

3.04 In 1974, 1975 and 1976, the appellant paid certain sums to each of his four children. The appellant’s children’s ages ranged from seven years of age to 13 years of age in 1974. The children then immediately returned the sums to their father with no definite arrangements being made for repayment to the children.

3.05 The appellant issued on December 30,1974, a cheque in the amount of $1,100 to each of his four children: Wendy, Cindy, Donna and Caroline. These cheques were drawn on the appellant’s current account number 7882-003 at the Royal Bank of Canada, Wiarton, Ontario, subsequently endorsed by the children and re-deposited to the account of Mrs Sylvia Blake, the taxpayer’s wife, account number 9283, at the Royal Bank of Canada, Wiarton, Ontario on January 2, 1975.

3.06 The appellant issued on December 29, 1975, a cheque for $1,950 to each of his four children. These cheques were drawn on the appellant’s current account number 4602-003 at the Royal Bank of Canada, Scotland, Ontario, and were subsequently endorsed by the children and deposited to their respective accounts at the Royal Bank of Canada, Scotland Ontario. Cheques were then issued back to the taxpayer from each of the four children as follows:

These amounts added up to $7,650 which was then deposited back to the appellant’s account at the Royal Bank of Canada on December 30, 1975.

3.07 The appellant issued on December 15, 1976, a cheque for $3,500 to each of his four children. These cheques were drawn on the appellant’s current account number 4602-003, at the Royal Bank of Canada, Scotland, Ontario, and were subsequently endorsed by the children, and redeposited on December 17,1976 to the appellant’s account at the Royal Bank of Canada.

3.08 No interest was provided on this debt.

3.09 According to the appellant, the children spent 2 to 3 hours every day, mainly, to feed the birds. The appellant raised and sold more than 112,844 birds in 1974; 108,794 in 1975 and 147,895 in 1976. If the children would not have fed them, an adult would have been obliged to do it.

3.10 The appellant’s accountant said that on the T-4 summary filed with the respondent, the salary paid was declared.

3.11 In the Fall of 1977, a company was incorporated by the appellant:“Don-Syl Farm Ltd”. Since January 1, 1978, the farming business was owned by the corporation. It seems that the transfer of the business was made to the company. A balance sheet showing the assets and liabilities of the appellant was prepared. It is dated January 1, 1978. In the liabilities, one can read:

No agreement, however, was filed to show that the company became the new debtor of the debt.

3.12 The appellant said that in 1971 and 1972 he had paid the children in cash $1,000 each and had borrowed the money from them. However, an auditor of the respondent had told him in 1973 that the expense would be disallowed because he had no records. In 1974, 1975 and 1976, the appellant paid his children by way of cheques.

3.13 Concerning the money borrowed from the children in 1971,1972,1974, 1975, and 1976 the appellant has never signed a recognition of debt. He says he is waiting for this judgment allowing the deduction before signing the recognition of debt and registering a mortgage in their favour.

4. Law—Case—Comments

4.1 Law

The main provision of the Income Tax Act involved in the present case is paragraph 18(1)(a) which reads as follows:

In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

4.2 Case

The parties referred to the case of:

Maarteen Slingerland v MNR, [1978] CTC 2343; 78 DTC 1280.

4.3 Comments

4.3.1 The crux of the matter is whether the appellant considers the money borrowed from his children as an actual loan or only as a scheme to make a deduction.

What are the elements of the adduced evidence which are in favour of and against the appellant’s thesis?

4.3.2 In favour of the appellant’s thesis are:

(a) cheques were paid to the children for work done by them (paras 3.05, 3.06 and 3.07). Was the work done substantial enough to justify the salary? If the children had not done it, an adult employee would have been required to do it. Was this work substantial enough to pay $14,000 ($3,500 x 4) in salary in 1976? The Board doubts this;

(b) the appellant says that the money returned to his account from the children’s accounts was done as a loan. The amounts are not in dispute.

4.3.3 Elements which are against the appellant’s thesis, that is in favour of the non existence of the debt, are:

(a) there is no recognition of debt signed by the appellant, nor a registered mortgage (para 3.13).

It is perfectly clear to the Board that if the present judgment disallows the deductions, the appellant shall never consider the said “debt” as an actual debt and shall never reimburse it:

(b) there is no interest provided on the loans;

(c) there is no evidence that the appellant’s wife received a salary despite the fact that, at least in the 1974 and during more than 3 months in 1975, she operated the Broiler Pen Barns in Wiarton, Ontario.

Was it because the salary to a spouse is not deductible according to the Income Tax Act that no salary was paid to her?

4.3.4 According to the Income Tax Act, the first requirement to allow the deduction of an expense as salary is that the said expense be actual.

The Board has very serious doubts that the transfer of the amounts of money from the appellant’s account at the end of the year to the children’s account, and the return a few hours later of the same amount to the appellant’s account could be considered as a salary.

Moreover, in confirmation of the Board’s doubts, there is no serious written evidence that the children lent the said money to the appellant.

The adduced evidence is more to the effect that it is a scheme to increase the appellant’s deductions for the computation of his income, and not an actual expense. Indeed according to him, there shall be an actual debt only if the Board considers the salaries as deductions.

The Board does not create the facts which permit the deduction; the Board only states from the evidence those facts that exist. From the adduced evidence it is far from clear that the loans from the children are actual and hence that the money transferred to them was salary.

The Board concludes that the appellant has not reversed the burden of proof.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.