Date: 20020213
Docket:2001-654-IT-I,
2001-782-IT-I
BETWEEN:
ANTHONY KAUPE,
ELIZABETH KAUPE,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Agent for the Appellants: Mr. Peter Chwalisz
Counsel for the Respondent: Brent Cuddy
____________________________________________________________________
Reasons for Judgment
(delivered orally from the Bench on
November 22, 2001 in Toronto, Ontario)
Chief Judge Garon, T.C.C.
[1] These are appeals from income tax reassessments for the 1995 and 1996 taxation years in the case of the Appellant Anthony Kaupe, and for the 1994, 1995 and 1996 reassessments in the case of the Appellant Elizabeth Kaupe.
[2] Both Appellants and their agent, Mr. Peter Chwalisz, testified at the hearing of these appeals.
[3] Paragraph 11 of the Reply to the Notice of Appeal in the case of the reassessments involving the Appellant Anthony Kaupe sets out the assumptions made by the Minister of National Revenue in support of the reassessments. Paragraph 11 of the said Reply reads as follows:
(a) in the 1995 and 1996 taxation years, the Appellant operated as a sole proprietorship a painting and decorating business named Paintex;
(b) for the 1995 and 1996 taxation years, the Appellant's claimed telephone expenses allegedly incurred by Paintex were in respect of his personal residential telephone service to the extent of $1,205.00 for the 1995 taxation year and $1,533.00 for the 1996 taxation year;
(c) for the 1996 taxation year, the Appellant claimed wage expenses allegedly incurred by Paintex in respect of his spouse, his son (age 13 in 1996) and his mother-in-law in the following amounts:
Spouse $ 2,400
Son $ 6,420
Mother-in-law $ 8,000
Total $16,820
(d) the Appellant did not pay his spouse, his son and his mother-in-law the amount of $16,820.00 (the "Wage Amount") he claimed as wage expenses for the 1996 taxation year;
(e) in the 1995 and 1996 taxation years, the Appellant, his spouse, their son and his mother-in-law resided at the same address;
(f) the disallowed Wage Amount and telephone expenses were not made or incurred for the purpose of gaining or producing income from a business or property;
(g) the expenses disallowed by the Minister were not reasonable in the circumstances;
(h) the disallowed Wage Amount and telephone expenses were personal or living expenses of the Appellant.
[4] The Appellant's agent admitted the allegations in subparagraphs (a), (c) and (e) and denied the other subparagraphs in paragraph 11 of the Reply to the Notice of Appeal with the exception of subparagraph (d) in respect of which he stated that he did not know if the allegation therein was correct or not.
[5] Paragraph 10 of the Reply to the Notice of Appeal in the case of the Appellant Elizabeth Kaupe sets out the assumptions made by the Minister. The said paragraph 10 reads thus:
(a) for the 1994, 1995 and 1996 taxation years, the Appellant reported gross income, expenses and net business income in respect of her secretarial and real estate agent activities as follows:
1994 1995 1996
Gross Income $17,896.97 $18,336.50 $16,537.30
Expenses
Pager $ 471.50 $ 86.08 $ -
Desk fee 2,053.35 597.68 -
Secretarial & marketing 7,000.00 5,500.00 -
Interest 884.29 746.32 694.46
Office 180.47 60.00 38.50
Telephones 871.36 962.97 694.65
Automobile expenses 1,491.47 269.95 116.88
Capital cost allowance
automobile 2,570.62 1,799.44 1,259.70
computer _____-___ ______-____ ___577.40
Total Expenses $15,522.96 $10,022.44 $_3,381.59
Net Income $_2,374.01 $_8,314.06 $13,155.71
(b) the secretarial and marketing expenses claimed by the Appellant for the 1994 and 1995 taxation years in the amounts of $7,000.00 and $5,500.00 respectively were in respect of wages she allegedly paid to her mother;
(c) the Appellant did not pay her mother the amounts of $7,000.00 and $5,500.00 (the "Wage Amounts") she claimed as secretarial and marketing expenses for the 1994 and 1995 taxation years;
(d) the Wage Amounts claimed by the Appellant as secretarial and marketing expenses for the 1994 and 1995 taxation years were not for services actually rendered to assist the Appellant's business to earn income;
(e) the Appellant did not maintain a log book of the distance driven nor did she maintain a breakdown of the employment, business and personal use kilometres driven in the 1994, 1995 and 1996 taxation years;
(f) the Appellant's automobile expenses for the 1994, 1995 and 1996 taxation years did not exceed the amounts of $447.00, $81.00 and $35.00 respectively;
(g) the Appellant's capital cost allowance for the 1994, 1995 and 1996 taxation years, in respect of her automobile, does not exceed the amounts of $771.00, $540.00 and $378.00 respectively;
(h) the disallowed Wage Amounts and automobile expenses were not made or incurred for the purpose of gaining or producing income from a business or property;
(i) the expenses disallowed by the Minister were not reasonable in the circumstances;
(j) the disallowed Wage Amounts and automobile expenses were personal or living expenses of the Appellant.
[6] The Appellant's agent admitted subparagraphs (a), (b) and (e) of paragraph 10 of the Reply to the Notice of Appeal and denied all of the other subparagraphs. In the case of subparagraph (c) of paragraph 10 of the Reply to the Notice of Appeal, the agent testified that the amounts referred to in this subparagraph were paid indirectly by the Appellant to her mother.
[7] With regard to the Appellant Anthony Kaupe there are two issues.
[8] The first issue has to do with the deduction from income of the telephone expenses claimed by this Appellant in respect of the 1995 and 1996 taxation years. The Appellant deducted the amounts of $1,205.00 for the 1995 taxation year and $1,533.00 for the 1996 taxation year.
[9] The evidence shows that the Appellant had two telephone lines at the time; one was used almost exclusively for sending and receiving faxes. The line primarily used for faxes was used almost exclusively for business purposes. The other line was utilized for both personal and business purposes.
[10] Having regard to the evidence, I find that the amounts claimed as a deduction from income for telephone expenses have been established. Counsel for the Respondent did not attempt to offer any persuasive argument challenging the correctness of this conclusion.
[11] The second issue has to do with the wage expenses allegedly incurred by the Appellant for the 1996 taxation year in respect of his spouse, his son and his mother-in-law. The following amounts were deducted by the Appellant in this regard:
Spouse $ 2,400.00
Son $ 6,420.00
Mother-in-law $ 8,000.00
Total: $16,820.00
[12] First, the amounts were not actually paid by the Appellant Anthony Kaupe to his spouse, his son and his mother-in-law respectively. Reference was made on some occasions in the agent's testimony, for instance, to the phrase that these individuals in question "were paid indirectly" by the Appellant Anthony Kaupe in return for the services the said individuals had performed during the 1996 taxation year in connection with the Appellant's painting business.
[13] In this regard, I entertain no doubt that the Appellant's wife, his son and his mother-in-law provided services during 1996 in connection with the painting business. There is no doubt either that the Appellant Anthony Kaupe could have entered into a valid contract of employment with these three persons and expenses in this regard would have been deductible if the amount of such expenses was reasonable. Also, there may be circumstances where legitimate expenses could be deductible in computing income from a business, even if the payments regarding thereto were not made pursuant to a legal obligation.
[14] In the present case there is, for instance, some evidence that there was some kind of an arrangement between the Appellant Anthony Kaupe according to which the son would be permitted to attend a private school if he was willing to provide services at a certain level in relation to his father's painting business.
[15] I am not however persuaded that the method used by the Appellant's agent and accountant, to determine the amounts claimed as a deduction in respect of the 1996 taxation year, was not arbitrary. The evidence in this regard does not satisfy me that a commercial connotation should relate to the services rendered in 1996 by the persons referred to above. These services were rendered in the context of a family setting. Also, the lack of records or of any sort of paper trail would make it impossible to determine with reasonable accuracy the amounts that could be considered on a broad view of the matter to have been paid.
[16] In this connection, I am of the view that the observations made by Judge Mogan of this Court in the case of Cousins v. R., [1998] 1 C.T.C. 3278, are applicable here. This was a case where young children were providing assistance to two individuals who were spouses and shareholders in a family corporation. In that case, the latter corporation claimed the deduction of salaries paid to the children as employment expenses. Judge Mogan said this at page 3282:
... I have to infer from all of the circumstances that these amounts were basically "plugged in" as the maximum amounts which could be shown as having been earned by children and not attract any tax in their hands. These amounts were used in a family context to pay for personal benefits that one might expect in a family such as this: e.g. Lisa learning to play the organ and Paul having an attraction to computers.
[17] I therefore conclude that the Appellant Anthony Kaupe is not entitled to deduct the amount of $16,820.00 in respect of the services provided by his wife, his son and his mother-in-law during the said year.
[18] I would also add, before dealing with the reassessments involving the Appellant Elizabeth Kaupe, that the Court did not have the benefit of the testimony of the mother-in-law and the son of the Appellant Anthony Kaupe who were parties to these arrangements. Their evidence could have been useful.
[19] With respect to the Appellant Elizabeth Kaupe, there are three issues.
[20] The first issue has to do with the automobile expenses, the deduction of which was claimed by this Appellant for the 1994, 1995 and 1996 taxation years. The amounts deducted were $1,491.47 for 1994, $269.95 for 1995 and $116.88 for 1996.
[21] The evidence establishes that the Appellant Elizabeth Kaupe incurred automobile expenses for purposes relating to her business as a real estate agent in each of the years in question and also in connection with her employment for St. Casimir Church during the same years. In particular, a fair amount of travelling was done by the Appellant in relation to her business as a real estate agent, especially during the 1994 taxation year.
[22] I am satisfied on the evidence that the Appellant Elizabeth Kaupe has incurred these expenses in each of the three years in issue. Again, counsel for the Respondent did not appear to disagree with this conclusion.
[23] The second issue has to do with the deduction of the amounts claimed by the Appellant in respect of the capital cost allowances relative to automobiles. The amounts deducted by the Appellant in this regard are the following:
1994 1995 1996
$2,570.62 $1,799.44 $1,259.70
[24] Both parties agreed that the aforementioned amounts were representing 90% of the total amounts that could be claimed if the automobiles had been used exclusively for the purposes of the Appellant's business and her employment for the Church in respect of the undepreciated capital cost of property falling within the automobiles class.
[25] The Appellant Elizabeth Kaupe testified that to the best of her knowledge with respect to an automobile purchased in 1993, a Mazda, she used it between 75% and 90% during the three years in question for purposes relating to her business as a real estate agent and in the course of her employment for the St. Casimir Church.
[26] I accept her evidence. I am satisfied that the following amounts, which I have rounded, could be deducted for each of the years mentioned below:
1994 1995 1996
$2,300.00 $1,600.00 $1,100.00
[27] The third issue relates to the deduction of the amounts of $7,000.00 and $5,500.00 for the 1994 and 1995 taxation years respectively in respect of the amounts allegedly paid by the Appellant Elizabeth Kaupe to her mother.
[28] As in the case of the Appellant Anthony Kaupe with regard to the amounts deducted in respect of the services rendered by his wife, his son and his mother-in-law, the amounts deducted by the Appellant Elizabeth Kaupe were not actually paid to her mother. It was submitted on behalf of the Appellant Elizabeth Kaupe that the amounts of $7,000.00 and $5,500.00 were paid indirectly to her mother. Here again I have no doubt that the mother rendered services to the Appellant Elizabeth Kaupe in connection with her business as a real estate agent or her employment activities. There was in my view no contract of employment between the latter Appellant and her mother. The Appellant's mother was not called as a witness and her testimony could have thrown some light on the matter. Also, the amounts in question appear to me to be arbitrary. There is a total lack of records in this respect. The services were provided in the context of a family setting.
[29] The comments made by Judge Mogan in the case of Cousins referred to earlier are also applicable with regard to the deduction of amounts claimed by the Appellant Elizabeth Kaupe for services rendered by her mother.
[30] I therefore come to the conclusion that the Appellant Elizabeth Kaupe is not entitled to deduct the amounts of $7,000.00 and $5,500.00 in computing her income for the 1994 and 1995 taxation years in respect of the services provided by her mother in these two years.
[31] To sum up, the Appellant Anthony Kaupe is entitled to deduct the following amounts in respect of the years mentioned below relative to the telephone expenses, that is:
1995 1996
$1,205.00 $1,533.00
[32] The reassessment for the 1996 taxation year is confirmed in every other respect.
[33] The Appellant Elizabeth Kaupe is entitled to deduct the following amounts in respect of the years indicated below with regard to automobile expenses:
1994 1995 1996
$1,491.47 $269.95 $116.88
and the following amounts in relation to capital cost allowance in respect of the property of the class comprising the automobiles:
1994 1995 1996
$2,300.00 $1,600.00 $1,100.00
[34] The reassessments for the 1994 and 1995 are confirmed in all other respects.
[35] For these reasons the appeals from the reassessments of the Appellant Anthony Kaupe for the 1995 and 1996 taxation years are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons.
[36] The appeals of the Appellant Elizabeth Kaupe from the reassessments for the 1994, 1995 and 1996 taxation years are allowed and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment to the extent set out in these reasons.
[37] Each party shall bear his or her own costs in respect of this litigation.
Signed at Ottawa, Canada, this 13th day of February 2002.
|
"Alban Garon" |
C.J.T.C.C.
COURT FILE NO.: 2001-654(IT)I
2001-782(IT)I
STYLE OF CAUSE: ANTHONY KAUPE and
Her Majesty The Queen AND
ELIZABETH KAUPE and
Her Majesty The Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: November 20, 2001
REASONS FOR JUDGMENT BY: The Hon. Alban Garon
Chief Judge
DATE OF JUDGMENT: November 30, 2001
APPEARANCES:
Agent for the Appellants: Mr. Peter Chwalisz
Counsel for the Respondent: Brent Cuddy
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada