Date: 20010507
Docket: 2000-3396-IT-I
BETWEEN:
ROBIN D. WHITE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1] These are appeals for the 1995 and 1996 taxation years.
[2] The Appellant and his wife an operated Amway business for the 1995 and 1996 taxation years. The Appellant paid his minor sons to work as subcontractors in the Amway business (the "Business").
[3] By Notices of Assessment dated April 29, 1996 and May 8, 1997, the Minister initially assessed the Appellant's income tax returns for the 1995 and 1996 taxation years respectively.
[4] By Notices of Reassessment dated April 19, 1999, the Minister reassessed the Appellant's income tax returns for the 1995 and 1996 taxation years and, along with other adjustments, disallowed subcontractor fees in the amount of $1,200 in each of the said taxation years.
[5] In reassessing the Appellant, the Minister made the following assumptions of fact (assumptions (a) to (h) were admitted by the Appellant):
(a) during the 1995 and 1996 taxation years the client operated an Amway business (the "Business") in an equal partnership with his wife, Lorraine White;
(b) the Appellant reported gross sales from the Business of $5,886 and $5,680 in the 1995 and 1996 taxation years respectively;
(c) the Appellant paid to his sons Nick White and Josh White a total of $4,600 and $4,800 in the 1995 and 1996 taxation years respectively;
(d) the Appellant deducted, from the income from the Business, only $2,400 as subcontractor fees in each of the 1995 and 1996 taxation years with respect to the amounts paid to his sons;
(e) the Appellant did not keep any time records of the hours worked by his children;
(f) the cheques that were issued to the Appellant's children were endorsed both by the children and by the Appellant;
(g) the cheques issued to the Appellant's sons were in sequential order in two series 1 to 38 and 66 to 115;
(h) during the 1995 taxation year the Appellant's children were 7 and 9 years old;
(assumptions (i) to (l) were not admitted by the Appellant)
(i) the amounts paid to the sons were tax motivated rather than on the fair market value of any services provided;
(j) the sons did not have discretion as to how the amounts paid to them were spent;
(k) given the volume of sales in the Business the services of the Appellant's sons were not required;
(l) the amounts paid to the Appellant's sons were not deductible as they were not reasonable in the circumstances.
[6] The issue is whether the Appellant is entitled to deduct subcontractor fees in the amounts of $2,400 in computing the income from the Business for each of the 1995 and 1996 taxation years.
[7] The Minister pleads that subcontractor fees deducted from the income from the Business, in the amounts of $2,400, in each of the 1995 and 1996 taxation years are not allowable expenses pursuant to section 67 of the Income Tax Act (the "Act") and that the subcontractor fees were not incurred for the purposes of gaining or producing income from the business or property, and consequently, were not deductible pursuant to paragraph 18(1)(a) of the Act.
[8] The Appellant states he hired his sons in 1995 and 1996 (7 and 9 years old in 1995) as subcontractors. Their duties were:
(i) to answer the telephone when he or his wife could not,
(ii) to relay business messages,
(iii) to take business messages,
(iv) to assist with pick up, transporting and storage of business materials, and
(v) to assist with the cleaning of the business use of the home and assist with 'child care' of children of clients and business associates when the clients and business associates were in the Appellant's home for business purposes.
[9] The rate of pay was to be $50/week per child subcontractor. The work week was estimated to be 10 hours per week.
[10] The Appellant reasoned this was adequate for services rendered and was below the minimum wage.
[11] The Appellant stated the services performed by the child subcontractors allowed he and his wife to devote their free time to other duties in their Amway business.
[12] In the 1997 taxation year, the Appellant stated he and his wife "laid off" the child subcontractors.
[13] The child subcontractors were paid by cheques that were kept by the children in their bedroom and were not deposited in a bank account. The Appellant stated if they wished to buy an item they would bring the cheques to a parent to negotiate, if the purchase was acceptable, the cheques were negotiated to make the proposed purchase.
[14] The Appellant did not deny there was an apparent tax advantage to this child subcontractor relationship.
[15] The business in 1995 had a volume of gross sales of $5,886 and net losses of $16,957 and in 1996 volume of gross sales of $5,679 and net losses of $8,866.
[16] The number of customers in 1995 and 1996 was approximately 22 from 14 households including three customers who were relatives of the Appellant and his wife.
CONCLUSION
[17] I conclude from the evidence the payment for services rendered by the children subcontractors was motivated in part by the perceived tax advantage to the Appellant.
[18] The method of payment of non-deposited cheques was as follows: if they (the children) wished to buy something, they had to bring the cheques to a parent to negotiate. If the purchase was acceptable the parents provided the funds. Thus, I conclude, the children did not have the discretion to use the funds as they wished. Therefore, I conclude the funds were not paid over to the children freely to use as they saw fit without controls.
[19] Further, I conclude several of the services purportedly rendered in the parents' presence; for example, accompanying the parents to pick up materials was related more to personal choice than expended for the purpose of producing income from the business.
[20] The amounts paid fell into a category of children's personal allowances rather than fees for services rendered.
[21] For these reasons, I find the expenditures purportedly made to pay for the children subcontractor fees were not incurred for the purpose of gaining or producing income from the Appellant and his spouse's Amway business.
[22] On the issue of the reasonableness, if I had included that the expenses were incurred for the purpose of gaining or producing income (which I do not) I would further find, given the business size, the low volume level of sales, the high expense losses, the small customer base, it was not reasonable for this business or the taxation years in question to incur such relatively high expenses for such marginal services.
[23] The appeals are dismissed.
Signed at Ottawa, Canada, this 7th day of May 2001.
"D. Hamlyn"
J.T.C.C.