Taylor T.C.J.:
1 This is an appeal heard in London, Ontario, on June 12, 1997, against an assessment under the Income Tax Act (the “Act”) in which the amounts of $20,000 for each of the years 1992, 1993 and 1994 had been disallowed as deductions claimed as “salaries” from income of Mr. Artinger as a professional engineer operating his own business. The amounts at issue allegedly were compensation for the services provided by the Appellant's wife for such things as telephone answering, bookkeeping, banking, preparing invoices and typing, indeed general office assistance during each of the years.
2 The Appellant's gross income was substantial — ranging between $70,000 and $80,000 per year. It is clear from the testimony and documentation that he required such assistance on an on-going basis. It is equally clear from the legislation and case law that he was entitled to claim amounts similar to this for deduction in these general circumstances. The difficulty arises from the method by which the charge against income apparently was made, and the claim recorded in the filed statement of income and expenses. Although claimed as “salary” the Appellant pointed out that he had not made required deductions — income tax, unemployment insurance, etc. from the amounts. In addition, the amount each year ($20,000) actually had not been paid as such to his wife. It had been determined by him that such an amount annually would be appropriate and reasonable compared to other similar office functions of which he had knowledge. His procedure was to regularly — it seemed every couple of weeks — transfer from his “business” bank account to their “personal” bank account, amounts which were required for the household and personal purposes, which amounts also included the “salary” at issue above. There was no particular pattern to these transfers, nor was any record kept of which part was “household” and which part was “salary”. The Appellant also pointed out that the reason he had not made any regular salary payments to his wife (as contrasted with the transfers noted above) during his first year in business — 1992 — was that he was not at all certain he was going to have enough business income to sustain any specific agreed upon payment during the year, and only at the end of the year did he conclude that he would have a profit against which the amount of $20,000 could be and should be charged. This uncertainty during 1992, however, did not reduce in any way Mr. Artinger's requirement to have the services his wife provided, even in this early stage of the business. He continued the same practice for 1993 and 1994, since there did not appear to have any objection to it from Revenue Canada, until the matter was raised in July 1995. At the year end his wife reported the $20,000 together with any other small amounts of income she might have had as her income and paid tax on it.
Analysis
3 In reviewing the case, I will quote directly from the Respondent's Reply to the Notice of Appeal:
A.7. In so reassessing the Appellant, the Minister made the following assumptions of fact:B. Issues to be Decided
8. The issue is whether the disallowed expenses were incurred by the Appellant for the purpose of gaining or producing income from a business or property.
C.10. He (the Respondent) submits that disallowed expenses were not incurred for the purpose of gaining or producing income from a business or property with the meaning of paragraph 18(1)(a) of the Act but were personal or living expenses of the Appellant within the meaning of paragraph 18(1)(h) of the Act.
4 In effect, the assessment at issue and the argument of the Respondent is that - since the amount involved, $20,000 per year, was not paid directly and regularly to Mr. Artinger's wife by him, out of the business bank account, in a clearly obvious fashion as “salary”, it is excluded from deductibility by virtue of section 18(1)(h) of the Act— as “personal or living expenses”.
Analysis and Conclusion
5 From my perspective I am satisfied from the evidence and testimony that:(a) the office services were vital to the business of Mr. Artinger,
(b) such services were provided regularly and on a continuing basis throughout each year,
(c) the amount at issue is not unreasonable,
(d) the purpose of using the office services was the “gaining or producing of income”, and
(e) there was not the slightest element of deception or subterfuge.
6 Certainly, even given the explanations provided by the Appellant, this was not the best method of recompensing his wife for her services to ensure its deductibility. But the process by which it was accomplished, as I understand it, would have been that the regular transfers as drawings from his business bank account to the personal account on which both he and his wife had signing authority. To regard $20,000 each year of these drawings as salary to his wife when properly recorded and reported does not seem to me to be unrealistic. I do not think that any of the critical words in the section of the Act noted above outlay, expense, made, incurred should be so narrowly interpreted in the circumstances of this case so as to deny the taxpayer this proper deduction.
7 The appeal is allowed.
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