Date: 20010418
Docket: 2000-2579-IT-I
BETWEEN:
KIM L. S. MADSEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Beaubier, J.T.C.C.
[1] This appeal pursuant to the Informal Procedure was heard at Victoria, British Columbia, on April 2, 2001. The Appellant was the only witness. The Appellant has appealed the disallowance of a salary which he alleges he paid to his wife of $12,000 in each of 1996 and 1997. Paragraphs 7 and 8 of the Reply to the Notice of Appeal set out the issues. They read:
7. In so reassessing the Appellant, the Minister made the following assumptions of fact:
a) expenses in excess of the amount allowed by the Minister were not incurred for the purpose of gaining employment income, but were personal or living expenses of the Appellant;
b) the Appellant is employed as a salesman and is remunerated, in part, by commissions;
c) the Appellant was required to pay his own expenses;
d) the Appellant was reimbursed for expenses which had been approved by his employer;
e) the Appellant travelled in Alberta and British Columbia;
f) the Appellant was required to work away from his employer's premises;
g) the Appellant was reimbursed upon providing his employer with proof of payment of expenses;
h) the Appellant was required to rent an office or to use part of his home as an office;
i) the Appellant was not required by his contract of employment to pay a substitute or an assistant; and
j) the Appellant did not make payments to his spouse for assistance.
B. ISSUES TO BE DECIDED
8. The issues are whether:
a) the Appellant paid his wife for office services: and
b) if the Appellant did pay his spouse, which is not admitted but is expressly denied, is he allowed to deduct $12,000 in each year.
[2] Assumptions 7(b), (c), (e), (f) and (h) are correct.
[3] Respecting the remaining assumptions, the Court finds:
(a) The Appellant sells sophisticated pulp and paper equipment which require him to make highly technical examinations of 65 pulp and paper plants in Alberta and British Columbia, do estimates, prepare bids, submit them to his employer in the United States of America and inspect them from time to time. His employer has no Canadian office. The Appellant has a room and storage space in his home which is his employer's sole information storage source in Canada. The home is also the Appellant's permanent telephone number. His wife answers the telephone and retrieves and checks information for him from the files at their home when he is on the road. In the Court's view his wife's services were necessary for his work as was the work place in his home. Monies expended for this were not personal or living expenses. They were for the job.
(d) and (g) The Appellant was not reimbursed for these or for other expenses. He was paid a base salary of $25,000 per year. His real income was his commissions from sales for his work in a very technical and competitive industry in which every sale was a competitive bid in a sophisticated industry. The Appellant would be fired if he did not produce sales in sufficient volume.
(i) The Form T-2200 for both years have this question answered "no" –
(a) Do you require this employee under a contract of employment to:
... pay for a substitute or assistant"
That answer is correct. But the office in home requirement plus the extreme travelling nature of his job – successive days on the road to distant and remote plants every week – implies that his wife or someone must retrieve information and answer the telephone sooner or later every working day. His wife did this and his employer did not have to pay for that service. In fact, the nature of his employment contract was that his wife or someone like her was required for this job. Exhibit A-1, Tab 2, a letter from his employer puts it in the negative:
Stowe Woodward has no objection to Kim Madsen hiring his wife to help with his job, provided there is no responsibility or obligation on the part of Stowe Woodward.
The Court finds that in fact, Mrs. Madsen was required under Kim’s contract of employment to substitute for him or assist him in his job when he was outside of his home and home office. The actions of Stowe Woodward merely reflect the legal exigencies of government employment and tax laws that might adversely affect international corporations operating in Canada or elsewhere around the world.
The spouse’s payment for her work occurred as follows: Kim’s employer paid Kim by depositing his salary in Madsens’ joint account. Kim’s wife, Diana, simply used the account for withdrawals and cheques as she chose. That was her pay. She did not get a formal monthly or biweekly cheque or other form of direct payment. Their accountant recorded the $12,000 per year annually as payment to Diana for work under contract, so withholdings were not necessary and the normal employee stipulations did not apply.
Thus, the question before the Court is properly expressed in
subparagraphs 8(a) and (b) of the Reply. Were the amounts paid by
Kim within paragraph 8(1)(i) of the Income Tax Act?
No evidence was led to contradict Kim’s testimony that his
wife was not his employee, but was a contract worker.
[4] Subparagraph 8(1)(i) allows an employee to deduct
amounts paid by the taxpayer in the year as
...
(ii) ... salary to an assistant ... the payment of which ... was required by the contract of employment,
(emphasis added)
[5] "Salary" is defined in the Oxford Dictionary as "fixed regular payment made by an employer to an employee in return for work". There is no employer-employee relationship alleged by the Appellant and he did not pay Diana a fixed regular payment. Nor did Diana's services constitute "supplies consumed" within subparagraph 8(1)(i)(iii) of the Income Tax Act.
[6] In the Court's view Diana's services and Kim's position are virtually identical to those described by Lamarre Proulx, J.T.C. in Baillargeon v. Minister of National Revenue, [1990] T.C.J. No. 712 (Q.L.) when she said:
As the appellant's agent notes, the respondent does not dispute that the appellant's wife worked for the appellant, that the amount of remuneration was reasonable in the circumstances, or that the amount was actually paid to her. The respondent's only argument is that the appellant was not required, under his contract of employment, to pay the salary of an assistant.
In the case of a fixed-remuneration contract of employment, I have no doubt that it would be necessary for that obligation to be mentioned in the contract of employment. In a case of employment where the individual is remunerated entirely by commissions, all the expenses that the employee can or must incur in order to earn his income are not necessarily set forth in the contract of employment.
According to the evidence, there was no written contract of employment. The appellant's employer provided him with a small office or location with a telephone. There was one secretary for some twenty employees. According to the appellant's testimony, the location of the office was not permanent. The employees could be moved from one place to another. The only permanent office was in the appellant's house, as was his only permanent assistant. She received and issued securities, collected payments, remitted cheques to pay income to holders of securities, kept contracts, and handled reception and telephone calls.
[7] However, in this case the Respondent does dispute whether Kim ever paid Diana. Kim's salary was deposited to what is obviously the family's joint household account upon which either Kim or Diana could draw. No satisfactory evidence was tendered to establish that Diana withdrew or otherwise used $12,000 per annum from the account for her own benefit. Certainly, no formal payment of the $12,000 per year ever occurred and, on the evidence before the Court, it may be that none of it was ever paid. Kim had as much right to the contents of their joint account as did Diana.
[8] The only evidence of payment to Diana is in the statements filed for income tax purposes by their accountant. As Bowman, J. said in Ed Sinclair Construction & Supplies Ltd. et al. v. Minister of National Revenue 92 DTC 1163 at 1169:
In addition the Minister sought to tax Mr. Sinclair on $50,750 credited to his loan account by Prosperous Investments. It would appear from paragraphs 6(p) and (q) of the Reply, which set out the Minster's so-called "assumptions" that he assumed that the mere fact of crediting to a shareholder loan account gives rise to taxation in the hands of the principal shareholder, irrespective of whether the shareholder or employee has appropriated any funds from the account or whether the crediting of the account affects in any way the legal relationship with the corporation or indeed whether the shareholder has condoned or even knows of the bookkeeping entry. A mere bookkeeping entry in a loan account by itself does not constitute a taxable event unless there is something more, such as receipt. In Gresham Life Society Co. Ltd. v. Bishop, 1902 4 TC 464 at 476, Lord Brampton said:
My Lords I agree with the Court of Appeal that a sum of money may be received in more ways than one e.g. by the transfer of a coin or a negotiable instrument or other document which represents and produces coin, and is treated as such by business men. Even a settlement in account may be equivalent to a receipt of a sum of money, although no money may pass; and I am not myself prepared to say that what amongst business men is equivalent to a receipt of a sum of money is not a receipt within the meaning of the Statute which your Lordships have to interpret. But to constitute a receipt of anything there must be a person to receive and a person from whom he receives and something received by the former from the latter, and in this case that something must be a sum of money. A mere entry in an account which does not represent such a transaction does not prove any receipt, whatever else it may be worth.
In this case it does not prove payment either.
[8] For these reasons, the appeal is dismissed.
Signed at Regina, Saskatchewan, this 18th day of April, 2001.
"D. W. Beaubier"
J.T.C.C.