DR W F Shaw v. Minister of National Revenue, [1978] CTC 3230, [1979] DTC 26

The Chairman:—The appeals of Dr William F Shaw are from assessments in respect of the 1973 and 1974 taxation years in which the Minister of National Revenue, by Notice of Assessment dated March 1st, 1976, disallowed expenses of $1,753.20 claimed by Hudson Medical Center for its 1973 taxation year, and expenses in the amount of $1,482.10 claimed by the appellant as promotional and entertainment expenses for his 1974 taxation year. The total of these expenses, $3.235.30, was added to the appellant’s 1974 income. The respondent also disallowed an amount of $2,578 claimed by Hudson Medical Center as promotional expenses; an amount of $400.68 claimed by the appellant as promotional expenses; and an amount of $400 claimed by the appellant as professional fees for the 1974 taxation year. The respondent further disallowed an amount of $3,152 from an amount of $9,332 claimed by the appellant as alimony payments to his estranged Wife.

At the hearing the appellant accepted as being not deductible the amount of $400.68 which was for telephone calls to his wife in Vancouver.

I also understood the appellant to state that the amount referred to in paragraph 2, subparagraph (e) of the Reply of Notice of Appeal was included in the amount of $2,578.66 claimed as promotional expenses by the Hudson Medical Center in the 1974 taxation year.

There are, therefore, three issues to be determined:

1. Whether the expense of $400 claimed by the appellant as legal fees was properly disallowed by the Minister.

2. Whether the amount of $2,578.66 claimed by Hudson Medical Center as promotional expenses can be deducted pursuant to paragraph 18(1 )(a) of the Income Tax Act SC 1970-71-72, c 63, as amended, or whether they are non-deductible personal expenses falling under section 18(1 )(h) of. the-Act.

3. Whether the amount of $3,152 paid by the appellant to his estranged wife constituted alimony. payments within the meaning of paragraph 60(b) and section 60.1 of the Act.

I will deal with each of these issues separately. The deductibility of expenses of $400 described as the payment of legal fees—The appellant stated in cross-examination that he personally had claimed the $400 legal fees and that that amount was not included in the $2,000 legal fee expenditure claimed by Hudson Medical Center. This in fact contradicted a statement made by the appellant earlier that the $400 had been paid in respect of the filing of the Medical Center’s Minutes.

The appellant, in claiming that it was not a charge related to his divorce, was unable to state what in fact the $400 he claimed was paid for. On the basis of the evidence adduced it is impossible for the Board to decide whether or not the $400 claimed as an-expense was deductible. Since the burden of proving that the expense was deductible rests with the appellant and since he has failed to satisfy that onus, I must conclude that the Minister of National Revenue properly disallowed the expenditure of the $400 as a deductible expense.

The second issue is whether the amount of $2.578.66 described by the appellant in his income tax return as promotional and entertainment expenses comes within the meaning of paragraph 18(1)(a) or whether they are personal expenses.

The evidence is that the appellant, a dentist, is the principal shareholder of Hudson Medical Center Inc. The dental clinic comprises four dentists including the appellant with a staff of 8 to 9 employees.

The appellant testified that the large number of dentists and staff and the problem of correlating their individual duties within the period of the office hours, made it necessary to hold monthly meetings. The meetings were not held in the office but in nearby restaurants and golf clubs. The expenses at these meetings for food and drinks for the dentists and staff were charged to and paid for by Hudson Medical Center. The yearly Christmas party given for the dentists and staff inclusive was also paid for by Hudson Medical Center. The appellant contends that the staff meetings were necessary and since the meetings had to take place during the lunch hour, the cost of the food and drinks was paid for by the Center and charged as an operating expense as it was related to the earning of income.

Counsel for the respondent contends that the expenses were not incurred by the appellant for the purpose of gaining or producing income and that furthermore they were unreasonable.

Finding of Facts

Counsel for the respondent introduced as witness Mr Gilles La- branche, tax assessor with the Department of National Revenue, who had audited the appellant’s records. The witness stated that he had verified the appellant’s cash disbursements relative to promotional and entertainment expenses as well as those of Hudson Medical Center.

For the Medical Center, there were 39 entertainment expense payments in 1973 and 29 in 1974. From the appellant's personal records there were 25 such cash disbursements for entertainment. The witness was able to give an example of the entertainment expenditures taken from the appellant and from the Center’s records:

All these expenses and others were deducted by Hudson Medical Center and by the appellant as operating charges, incurred for the purpose of earning or producing income from a business and were directly related to what the appellant had claimed to be the necessary monthly staff meetings.

It is obvious that the expenditures were made more often than what would have been required for a monthly staff meeting and the amounts of $29 or $45 do not reflect what might be paid for drinks and lunch for some 15 people. The appellant explained that the amount of $29 could be for the office coffee fund, and that might well be, but I have serious doubts as to whether that could be considered as an expense to earn income.

Although I can appreciate the desirability of having good working relationships with colleagues and members of one’s staff, from the evidence before me I have no difficulty in coming to the conclusion that even if the expenditures did coincide with the alleged regular monthly staff meetings, the nature of the expenses were not incurred for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(1)(a) and they are totally unreasonable as operational expenditures. In my opinion the evidence indicates clearly that the expenses were personal in nature and the appellant has not succeeded in convincing the Board that they could be realistically considered as operational expenses of the Medical Center.

The last issue is whether the amount of $3,152 was properly disallowed as alimony payments within the meaning of paragraph 60(b) and section 60.1 which read as follows:

60. There may be deducted in computing a taxpayer’s income for a taxation year such of the following amounts as are applicable:

(b) Alimony payments.—an amount paid by the taxpayer in the year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, as alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children of the marriage, if he was living part from, and was separated pursuant to a divorce, judicial ‘separation or written separation agreement from, his spouse or former spouse to whom he was required to make the payment at the time the payment was made and throughout the remainder of the year.

60.1. Where, after May 6, 1974, a decree, order, judgment or written agreement described in paragraph 60(b) or (c), or any variation thereof, has been made providing for the periodic payment of an amount by the taxpayer to or for the benefit of his spouse, former spouse or children of the marriage in the custody of the spouse or former spouse, the amount or any part thereof, when paid, shall be deemed to ‘have been paid to and received by the spouse or former spouse if the taxpayer was living apart from the spouse or former spouse at the time the payment was received and throughout the remainder of the year in which the payment was received.

The appellant and his spouse signed a separation agreement on December 12, 1973. For purposes of this appeal the pertinent part of the agreement reads:

. . . respondent (appellant in the instant appeals) shall pay to petitioner $438 per month for the support of herself and the minor. children.

(Exhibit R-1).

On June 20 the appellant and his spouse further agreed that the payment of $538 per month would continue until September 1, 1974. The agreement also provided that the appellant pay an alimentary allowance of $300 per month for each of the three minor children, ie, $900 per month; an additional alimentary allowance of $300 per month until the spouse earned a salary of at least $300 per month; the appellant was to pay half the cost of moving the household effects to the spouse’s new home in Vancouver; the appellant was liable for all income taxes payable by the spouse so that the spouse would receive $1,200 net per month (Exhibit R-2).

Mr Champlain Gauvin, a group head in the assessing. section of the Department of National Revenue, who took part in the audit of the appellant’s books, testified that the cash disbursements for 1974 indicated that the total amount of alimony payments was $9,332 as claimed by the appellant in his return. The alimony payments were as follows:

In assessing the appellant the Minister of National Revenue allowed a deduction of $438 per month from January to September 1974 as indicated in the agreement of December 12, 1973, ie, an amount of $3,504.

For the months of September, October, November and December, the respondent allowed the amount actually paid, ie, $2,700. On this basis the respondent allowed a total amount of alimony payments for the year of $6,204, disallowing the additional amount of $3,152 Claimed by the appellant.

The appellant claimed that by agreement with his spouse he had consented to pay and had paid all of her moving expenses to Vancouver. The agreement signed June 20 requires the appellant to pay half of the moving costs but there is no evidence of any agreement that the appellant was to pay the full costs of the moving. Moreover, the cost of moving the spouse’s household goods is not an alimony or allowance payable on a periodic basis for the maintenance of the spouse or the children even though it may have been a condition of the separation agreement.

The respondent properly deducted the amount of alimony payments that was provided for in the agreement of December 12, viz $438 a month from January to September 1974. He would not, pursuant to paragraph 60(b) and section 60.1 have been justified in allowing more than had been stipulated in the contract. From September to December 1974 notwithstanding that the agreement which was then in effect provided an alimentary allowance up to $1,200 a month, the appellant did not pay more than $2,700 for the four months and that payment was allowed. The alleged payment by the ‘appellant of income tax payable by the spouse on the maintenance payments, though stipulated in the agreement of June 20, is also not an alimony or maintenance payment within the meaning of the Income Tax Act.

The exemption of paragraph 60(b) and section 60.1 of the Act must be applied strictly and the only amounts of alimony or maintenance payments that are deductible are those that are stipulated in a decree, order or judgment of a competent tribunal or amounts consented to by the parties in a written agreement, and fall within the meaning of alimony and maintenance pursuant to paragraph 60(b) and section 60.1 of the Act.

It would be contrary to the intent and purpose of paragraph 60(b) and section 60.1 to average, as the appellant seemed to suggest, all payments stipulated in both the separation agreements and somehow allow the deduction on that figure. Some question arose as to what the appellant’s spouse’s tax assessment was in 1974. Not only was there no reliable evidence as to what the appellant’s spouse might have been assessed, it is completely irrelevant to the appeal before the Board.

Decision

I hold therefore that the appellant did not establish to the satisfaction of the Board that the expense of $400 in legal fees was in law deductible; that the amount of $2,578.66 claimed by the appellant was not expenses incurred for the purpose of earning income but were personal expenses and that the amount of $3,152 claimed by the appellant as alimony or maintenance payments in 1974 was properly disallowed by the respondent.

The appeal is, therefore, dismissed.

Appeal dismissed.