McEntyre Estate v. R., [1997] 2 CTC 2472, 97 DTC 245

Lamarre Proulx T.CJ.:

These appeals are made by way of the informal procedure. They concern the taxation years 1990 and 1991. In the beginning of the Notice of Appeal, there was a reference to the 1989 taxation year but there was no income tax return and no assessment for that year and therefore if there was an appeal for that year, it is quashed as having no valid ground.

The question at issue concerns the deductibility of trustee fees in the amount of $20,000 for each of the years 1990 and 1991.

There was another question at issue for the year 1990 and it concerned the inclusion in the calculation of the Appellant’s income of an amount of $2,922.30 received as annuity payments from the Teacher’s Insurance and Annuity Association (“T.I.A.A.”). At the outset of the hearing, Counsel for the Respondent informed the Court that the Respondent consented to judgment on this point, in that this amount did not need to be included in the Appellant’s income for the 1990 taxation year.

Mr. John McEntyre, whose fees are at issue, represented the Appellant at the hearing and testified on its behalf. Mr. Roy King, an auditor for the Department of National Revenue, testified at the request of Counsel for the Respondent.

The facts upon which the Minister of National Revenue (the “Minister”) relied in making the assessment respecting the trustee fees are described at paragraph 16 of the Reply to the Notice of Appeal (the “Reply”), as follows:

TRUSTEE FEES

h) in each of the 1990 and 1991 taxation years the Appellant deducted $20,000.00 as trustee fees;

i) the said amounts of $20,000.00 were paid to the Administrator in each of the said taxation years allegedly on account of the cost of maintaining a rental apartment in Montreal and other expenses incurred by the Administrator;

j) the said amount of $20,000.00 were not amounts paid for advice as to the advisability of purchasing or selling a specific share or security of the Appellant, or for services in respect of the administration or management of share or securities of the Appellant;

k) the administrator’s principal business is not advising others as to the advisability of purchasing or selling specific shares or securities nor does it include the provision of services in respect of the administration or management of shares or securities;

l) the amounts of $20,000.00 claimed by the Appellant are not deductible as fees paid to an investment counsel in the 1990 and 1991 taxation years;

In the Appellant’s Notice of Appeal, here is what is stated respecting the Same issue:

1. Trustee Fee Deductions

Trustee fee deductions have been claimed in the T3 returns. Notwithstanding that the reassessments disallowed the executor (sic) fees, trustee fees are justified. The trustee was hired by the beneficiaries as he had experience to manage the portfolio in order to produce income; and he had just left a previous employer, thus, was able to make this new job his only business.

Furthermore as a gesture of compromise to Revenue Canada, he offered ((8/8/94) to halve the claimed deductions if they accepted the other half; thus, to simplify the settlement he would accept their 1991 reassessment if they accepted the original 1990 return, which now (1/2/96) has all its other issues settled except for this trustee fee deduction which is of the order of $9,505.00.

Mr. John McEntyre, the Appellant’s representative, is Lucienne McEntyre’s son. He has two sisters, Louise McEntyre West and Lynn McEntyre Comerford. The three were equal beneficiaries of the estate.

Exhibit A-l is a note prepared for the hearing and signed by the two sisters stating the following:

This is to testify that in the Fall of 1989, LOUISE WEST and LYNN COMERFORD, beneficiaries of the Estate of Lucienne McEntyre, hired JOHN G. McENTYRE to administer and manage, invest and reinvest the assets of the Estate.

Furthermore, it was agreed that the Estate pay him a salary equivalent to the one he was earning at Northern Telecom where he was just laid off.

Exhibit A-2 is a letter from Northern Telecom to the Appellant’s representative informing him that his employment was terminated as of the date of the letter that is March 29, 1989. He was to continue to receive his salary for a period of 27 weeks. (His annual salary was in the range of $70,000.00). In addition, a lump sum amount equivalent of 14 weeks of salary was to be paid to him if, at the end of the aforementioned period, he had not found employment. Mr. McEntyre said that he did not ask for this lump sum payment because by then he began working as an investment counselor on a self-employment basis.

Exhibit A-3 is a letter dated February 12, 1992 from a firm of investment consultants located in Calgary, Alberta addressed to Mr. McEntyre. It says the following:

As per our telephone conversation, I have enclosed an invoice for advisory services to December 31, 1991 as per our agreement. If you write to Monica Suche, she will pay it from the Research Capital Account.

This will confirm that from January 1 - December 31, 1992, you will manage the portfolio yourself and that no fee will be payable to Touche, Thomson & Yeoman Investment Consultants Ltd.

This letter was produced for the purpose of demonstrating that in the years 1990 and 1991, Mr. McEntyre had a business of investment counseling, although the letter refers to the year 1992, when Mr. McEntyre was supposed to manage the portfolio himself. However, attached to this letter was an invoice dated February 17, 1993 for the year 1992 for an amount of $4,580.00.

Exhibit R-l is a letter addressed to Mr. McEntyre from a departmental assessing section of estates. It is dated December 9, 1991. It asked among other things, that the breakdown of the trustee fees of $20,000.00 be submitted. A first answer came from Mr. McEntyre on January 1, 1992. It is Exhibit R-2. It stated that the amount of $20,000.00 was composed of $13,403.00 of rent paid for the estate apartment and of $5,900.00 of a further trustee fee paid to Mr. McEntyre.

Exhibit R-3 is Lucienne McEntyre’s will, in date of March 6, 1984. Exhibit R-4, is constituted of a judgment of verification dated August 28, 1989 and of another will dated July 2, 1988. This latter will was not presented to the Court as a codicil of the will dated March 6, 1984. At any rate, whether there is one or two valid testamentary documents has no bearing on the issue of this appeal.

Exhibit R-5 is another letter from a Minister’s agent in the Audit Division and it was signed by Mr. R.S. King. Again it put among four questions a more detailed question as to the break down of the trustee fees paid to Mr. McEntyre. Despite several other requests by Mr. King, Mr. McEntyre never replied to the question. On May 17, 1994, the Appellant was reassessed and the expenses claimed as trustee fees were disallowed.

Mr. McEntyre said that his services were required by the other beneficiaries to invest the capital of the estate. The value of this capital was approximately $1,227,000.00. He affirmed that he had become a full time investment counselor. The fee of $20,000.00 per year would have been based on apparently the going rate that a trust company charges for administering estates, 1 1-2% of the value of the estate. Without adducing evidence, he said that his work would have been to buy and sell securities, research the investment market, the tax matters and attend seminars. No business income other than the trustee fees at question was reported by Mr. McEntyre in his income tax returns and this income was shown by one entry made in the return without even a summary calculation of a statement of income of the business of investment counselling.

Analysis

Paragraph 20(1 )(W?) of the Income Tax Act (the “Art”) reads as follows: (1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(bb) an amount other than a commission paid by the taxpayer in the year to a person

(i) for advice as to the advisability of purchasing or selling a specific share or security of the taxpayer, or

(ii) for services in respect of the administration or management of shares or securities of the taxpayer,

if that person’s principal business

(iii) is advising others as to the advisability of purchasing or selling specific shares or securities, or

(iv) includes the provision of services in respect of the administration or management of shares or securities;

The evidence clearly showed that Mr. McEntyre was not in the business of investment counselling, a business, for the purposes of the Act, being a commercial undertaking carried on with a reasonable expectation of profit. Even assuming that Mr. McEntyre was in that type of business, he would have had to show what services he had provided regarding the administration or management of the shares or securities of the estate. He did not do it although he was requested many times by the Minister’s agents to do it.

Paragraph 18(1)(«) of the Act reads as follows:

(1) 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 of property;

The evidence showed that the amount of $20,000 of annual trustee fee was agreed to by the other beneficiaries of the estate. There was no explanation of how this amount in part or in totality was related to the income earning process of the estate. No evidence was adduced as to any action of Mr. McEntyre regarding the income earning process of the estate portfolio.

Therefore, the appeal is quashed for the year 1989, for the year 1990, it is allowed for the part concerning the annuity income but it fails on all other aspect and the appeal for the year 1991 is dismissed. The whole without costs.

Appeal dismissed.