BETWEEN:
and
____________________________________________________________________
Appeals heard on May 15, 2006, at Victoria, British Columbia.
Before: The Honourable Justice Theodore E. Margeson
Appearances:
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Heather Wellman |
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Counsel for the Respondent: |
Susan Wong |
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JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1997 and 1998 taxation years are allowed and the matter is referred back to the Minister of National Revenue for reassessment and reconsideration on the basis that during the years in question, 1997 and 1998, the Appellant was entitled to claim the deduction of employment expenses paid to his assistant, $26,900 and $29,600, respectively, in those years as an expense.
The appeals from the assessments made under the Act for the 1999 and 2000 taxation years are dismissed.
The Appellant is entitled to costs of this action to be taxed.
The Appellant is not entitled to any further relief.
Signed at New Glasgow, Nova Scotia, this 6th day of July 2006.
BETWEEN:
WILLIAM LONGTIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
[1] In computing income for the 1997 and 1998 taxation years, the Appellant claimed a deduction of employment expenses of $49,531 and $44,392 respectively. These amounts included $26,900 and $29,600 respectively, claimed as salary to an assistant.
[2] The Minister disallowed these amounts, "Assistant Amounts". The Notices of Reassessment were dated December 10, 2001 and from this assessment this appeal was taken.
[3] The Appellant was employed by Albany International Canada Inc. ("the Company") as a sales person in the pulp and paper supplies business.
[4] He was concerned with the western Canadaregion and indicated that sales and service people in that region reported to him. Further, he called on customers and looked after collections. There were seven sales people in all in his territory in addition to himself.
[5] There were many competitors offering similar products and pricing was very important. He was paid a combination of salary plus commission together with performance commissions. His base salary in 1997 and 1998 was $100,000 and his commission was $50,000. His salary represented about sixty percent of his total income and the shares and commission portion represented about forty percent of his total income.
[6] It was very important that sales continued to grow.
[7] In the years in question, the Appellant was on the road for four days per week except for one week when he stayed locally and this occurred every sixth week. In total he was on the road over 200 days per year.
[8] His office was located in his home. There was a company office in Vancouverduring these years but it does not exist any longer. He was required to maintain an office in his home as a condition of his employment. He was reimbursed for most of his expenses although, if he went over the budget, he was responsible for it personally.
[9] Entertainment was an essential part of his duties and a considerable portion of this took place in his own home. It was very common to have entertainment in his home. The personal relations between the customer and the sales person were very important.
[10] In his home office he had a fax machine, filing cabinets and samples of his products. The home office was over 1,000 square feet and also contained office furniture, telephone, couch and chairs, catalogues and voluminous supplies. It was impossible to take all the samples on the road with him.
[11] In the years in question he had a portable computer but it did not have a high speed connection and he did not take it on the road with him. He could not perform his duties without this office in his home.
[12] He retained his wife as an assistant and he considered her to be an essential part of his work. He and his wife would discuss company business during the week and on Sunday night before he left the next day to go on the road. She would fax him material and telephone him while he was on the road and would have contact with the company's offices.
[13] The employer knew that his wife was working for him. It interviewed her as well as the Appellant before he was hired. Entertainment was very important in this kind of business. All of his customers and the people at the head office knew his assistant and they also worked with her. The Vice-President and General Manager of the company was familiar with her as well. He often discussed the necessity of having an assistant.
[14] He introduced a letter from his company dated October 10, 2000 referable to the issue of assistants. He was questioned with respect to the duties of his assistant and he said that she attends to telephone calls in the office both on the office line and on her own line; she sets up the computer for e-mails; gives him a hard copy of it; faxes material to him with respect to benefits, contacts at the plant; keeps track of expenses and looks after the daily organization of the office.
[15] With respect to entertainment, they entertained considerably. His wife set up the restaurant reservations. When they had a major party, which occurred every year at Christmas time she organized that reception even when it was in Vancouver. He could not have done his job for long without his assistant. There was a direct correlation between his assistant and the success of his sales.
[16] His assistant was paid by cheque and cash at the rate of $2,000 per month as well as receiving extra bonuses at Christmas.
[17] His company would not pay for the services of an assistant. He referred to the issues of liability and severance as two of the reasons why the assistant was not employed by the company and was not paid for by the company.
[18] In cross-examination he said that he was sales and service manager and had seven people under him since 1993. Before that he had his own business in Australia.
[19] His commissions were based on regional sales volume. With respect to the Christmas parties, these parties are larger than normal entertainment parties.
[20] With respect to Exhibit A-2, the letter from the company, the company elected not to make it a final version and it is referred to as a draft on the front of the letter. This apparently was the advice that the company had received from its lawyers.
[21] He was referred to Exhibit R-1, Tab 1 and identified his signature on the taxation return for 1997. His employment income was $131,522.65. He had commissions of $29,500. He identified his T4 for 1997 found at page 6 of this Exhibit. He had other taxable allowances of $13,272.65. He could not say what that amount represented.
[22] The amount of $26,900 claimed as office support services was his wife's payment for her services to him. Similar information was referred to him with respect to his 1998 taxation return and he agreed with the material contained therein. He was questioned with respect to his income for the years 1999 and 2000. These references were objected to by his counsel and after argument the Court allowed the Respondent to put in evidence with respect to his T2200 and his Statement of Expenses only. Anything else on the income tax return was not admitted into evidence.
[23] He admitted that he did not use an assistant in the year 2000 and he does not use one today. His wife was working more for her own store and has her own company. He did not hire any other assistant during those years. His wife was still doing work for him but was not being paid.
[24] In redirect he indicated that he retained the services of an accountant in Vancouver. Around the year 2000 he questioned his competence and his honesty. He was filing improper expense claims and at the end of the day the accountant was sued by the Appellant. This suit was settled in favour of the Appellant. The difficulty with his assistant was one of the reasons why he did not claim expenses for his wife for the year 2000 and thereafter.
[25] Carman Longtin testified that she was a mother, was retired and was working for her husband. During the years in question she had to take care of all telephone calls, look after the laptop computer (which was not efficient) and use the fax machine extensively. She went into the office for one hour during the morning and one hour during the afternoon. She would contact her husband if any problems arose; she took telephone calls from the customers and staff and then continued to work in the evenings from 9:00 to 11:00 or 9:00 to 2:00 a.m. downloading information, sending out e-mails and leaving messages on her husband's cell phone. She conveyed urgent messages to him when he was on the road and faxed information to him at his motel. There were times when she had to phone Albanyor Montreal because she could not solve some of the issues that confronted her.
[26] She received many telephone calls on her own telephone. She then went to her home office and sent messages out to her husband. She estimated that she did 20 hours of work per week and she had to be available when her husband called.
[27] Public relations were very important to her husband's business and she had to look after many functions at her own house. She bought Christmas presents for the clients, arranged parties at hotels and once a year they had a lobster party for over 75 people. She had to look after all of that.
[28] She did the basic expense accounts, paid the bills, reconciled the Visa accounts and made sure the bills were paid on time.
[29] She filed income tax returns for the 1997 and 1998 years and claimed the money that she received from her husband. When Revenue Canadadid not allow her husband to claim the deductions she became tired of the process. Even though she claimed income and paid taxes, she did not get a refund.
[30] In cross-examination she said that she started Carmen's Fashions in 1999 which was a clothing consignment store. She worked 9:00 a.m. to 2:00 p.m. and had a full staff due to the fact that she also provided services for her husband.
Argument on Behalf of the Appellant
[31] The Appellant took the position that these expenses were deductible to the Appellant under the provisions of paragraph 8(1)(f) of the Income Tax Act.
[32] The Appellant's employment met all of the conditions set out in subparagraphs 8(1)(f)(i), (ii), (iii) and (iv). He provided the certificate T2200 in accordance with subsection 8(10).
[33] He opined that the main argument of the Respondent was set out in the Reply in paragraph 10(f)(iv). The argument there was that the Appellant was not required to pay for an assistant and consequently could not claim the expenses paid to his wife during the years in question.
[34] Further he submitted that the Appellant has met all of the requirements of subparagraph 8(1)(i)(ii) because he was required under his contract of employment to pay for the services of an assistant, either "explicitly" or "implicitly" under that contract of employment.
[35] He further submitted that paragraph 15 of the Reply was not a statement of fact but was argument and was not a presumption.
[36] He admitted that the Appellant had no written contract but there need not be one. He referred to the case of Gaetan Baillargeon v. M.N.R., 90 DTC 1947. That decision is in support of his position. The factual situation in that case was almost exactly the same at the case at bar. The Court did allow a claim for the commissions paid by the taxpayer to his wife and indicated that they were deductible because she did perform necessary work for him, even though his contract of employment did not specifically contain a requirement that he pay a salary to an assistant.
[37] He also referred to the case of Madsen v. Canada, [2001] T.C.J. No. 246. In that case, at the end of the day, Beaubier J. concluded that "the nature of his employment contract was that his wife or someone like her was required for this job ..." The issue in that case was exactly the same as the one at bar even though the appeal was dismissed because there was no evidence that the Appellant had paid out the money that he sought to deduct. This is not the case here.
[38] He also referred to the case of The Queen v. Wayne Gilling, 90 DTC 6274 in support of his position. In the case of Schnurr v. Canada, [2004] T.C.J. No. 565, Bowman A.C.J.T.C. indicated at page 3,
I come then to the real point in this case. To deduct the cost of a salary paid to an assistant, the employee must meet the conditions in subparagraph 8(1)(i)(i) that the payment or the salary to the employee was required by the contract of employment. Tab 1 of Exhibit A-1 is a letter dated 30 July, 1992, to the appellant from a Vice-President of Nesbitt Thomson. It says nothing explicit about the hiring of an assistant. It was however implicit in the relationship with Nesbitt Thomson that if Mr. Schnurr is to generate the sort of business for Nesbitt Thomson that it expected him to, he is required to hire someone to perform the type of services that his wife performed. Such a provision need not be explicitly set out in the agreement between the employer and the employee.
Counsel argued that the facts on the evidence in the case at bar are the same as these. It dictated that the Appellant was required to hire such an assistant in order to perform his work even though the T2200 does not reflect that. As pointed out in Schnurr, supra, form 2200 is not conclusive or determinative if the evidence showed it to be wrong, but it is at least prima facie evidence.
[39] Here the evidence shows that the T2200 answers do not accurately reflect the true factual situation.
[40] The appeals should be allowed and the matter remitted to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is entitled to deduct the amount paid to his wife for assistant services in the years in question.
Argument on Behalf of the Respondent
[41] Counsel for the Respondent argued that the whole matter can be boiled down to the provisions of subparagraph 8(1)(i)(ii) and whether or not the contract of employment required the Appellant to have an assistant and to pay for that assistant. The employer has prepared a T2200 form and has ticked off "no" in the section questioning whether or not the employee was required to pay for an assistant.
[42] She also referred to the case of Schnurr, supra, particularly at paragraph 19 and concluded that the filing of the form T2200 is a statutory condition precedent to the claiming of an employment expense. She was prepared to concede that A.C.J. Bowman indicated that the form is not conclusive or determinative if the evidence showed it to be wrong but it is at least prima facie evidence.
[43] The Minister took the position that the requirements of subparagraph 8(1)(i)(ii) have not been fulfilled in this case because the contract of employment did not require the Appellant to pay for an assistant. Therefore, the Appellant was not required to pay for an assistant "explicitly" and he was not required to pay for an assistant "implicitly".
[44] She also referred to the case of Bober v. Canada, [1997] T.C.J. No. 467 and said that the Court there was indicating that where the employment situation is more akin to that of independent contractor, the Court will be more likely to interpret the requirement of the contract to pay for an assistant more liberally. She further argued that that case is of limited relevance to the case at bar because it deals with the issue as to whether or not the taxpayer was required to be away from his place of employment. Further, the discussion in paragraph 8 of that decision related to the particular facts of that case.
[45] With respect to Denis Verrier v. Her Majesty the Queen, 90 DTC 6202, that case concluded that where the work situation more clearly parallels the work of an independent contractor than an employee, the Court is more likely to look behind the answers given in the form T2200.
[46] Also in Madsen, supra, the Court was more likely to find an implied term of the contract where the employment situation was more closely related to that of an independent contractor than to an employee.
[47] She also said that it is significant that the evidence before this Court indicated that the Appellant did not require an assistant in 1999 and 2000 even though expenses were relatively equal or greater to the years in issue.
[48] She referred to the provisions of paragraph 8(1)(f) and said that the soft spot in the Appellant's position is the requirement of subparagraph 8(1)(f)(i) which requires that under the contract of employment the taxpayer was required to pay his own expenses.
[49] Her position was that the appeals should be dismissed and the Minister's assessment confirmed.
[50] In reply counsel for the Appellant said that Interpretation Bulletin refers to the significance of the payment and not the obtaining of the assistant. Here the payment was required as indicated by the letter in Exhibit A-2 at page 2.
[51] With respect to paragraph 8(1)(f) the Appellant here was paid in whole or in part by commission so there was no weakness in that part of his argument. In so far as years 1999 and 2000 were concerned these were irrelevant as there were changed circumstances. Whether the Appellant already had paid the tax and whether he was required to pay his expenses was not challenged.
Analysis and Decision
[52] Counsel for the Appellant makes two arguments. Firstly, he argues that the appeals should be allowed because the Appellant has met the requirements of paragraph 8(1)(f) of the Act. Consequently the expenses can be deducted on the basis that the Appellant was required to pay for his own expenses under a contract of employment. Further, the expenses can be deducted under the provisions of subparagraph 8(1)(i)(ii).
[53] In the alternative he says that the Appellant is entitled to claim the deductions he seeks because the Appellant was not only required to pay for the services of the assistant but was required to have the services of an assistant in order for him to properly conduct his business. The argument is that if he did not have such an assistant then he would not have been able to carry on his business and would have lost his job in a short period of time.
[54] With respect to the alternative argument, the Court is not in agreement. Although the evidence does indicate that the Appellant's employer preferred that he have an assistant, probably believed that it would be better if he had an assistant and also preferred that he use the services of his wife who they had interviewed and had obviously concluded would have been a satisfactory assistant, but the Court is not satisfied that they required him to have an assistant, nor is the Court satisfied that the business would have failed and he would have lost his job had he not had the services of the assistant.
[55] This is confirmed by the fact that in subsequent years the Appellant was able to carry on with his business without the services of his wife, certainly on a paid basis, and obviously to a much lesser extent than he used her services during the years in question, and he did not lose his job and the business did not fail.
[56] The Court is satisfied that the Appellant could have continued to have carried on his business in the years in question without the services of his wife as assistant although it certainly would have been much more difficult for him to do so. The Court is not convinced on the evidence as a whole that the company required him to have the services of an assistant during the years in question under the contract of service.
[57] Paragraph 8(1)(f) sets out the requirements of the taxpayer and it only requires that he be required under the contract of employment to pay his own expenses.
[58] The Court is perfectly satisfied on the basis of all of the evidence that the Appellant has met that requirement and the other requirements of paragraph 8(1)(f) and these were deducible sales expenses.
[59] The Court is further satisfied that under the provisions of subparagraph 8(1)(i)(ii), in order for the Appellant to deduct the assistant's salary, he need only show that under his contract of employment he was required to pay her salary. There is no need for him to show that his contract of employment required him to have an assistant.
[60] The cases which have been referred to are very helpful. To the extent that the parties interpret those cases to mean that the taxpayer must be required under the contract of employment to have an assistant and to pay for the assistant rather than to just pay for the assistant, this Court is satisfied that such an interpretation is not merited by the relevant sections.
[61] Insofar as this Court is concerned the Appellant has met the requirements of the sections referred to and the Court is satisfied that he was ordinarily required under the contract of employment to pay the assistant's expenses under subparagraph 8(1)(i)(ii) and that he pay the amount to the assistant or substitute. He has fulfilled these requirements.
[62] The expenses which the Appellant claimed are deductible under both of the above-referred to provisions.
[63] The appeal will be allowed and the matter will be remitted to the Minister of National Revenue for reassessment and reconsideration on the basis that during the years in question, 1997 and 1998, the Appellant was entitled to claim the deduction of employment expenses paid to his assistant, $26,900 and $29,600, respectively in those years as an expense.
[64] The appeals from the assessments made under the Act with respect to the 1999 and 2000 taxation years are dismissed.
[65] The Appellant is entitled to his costs of this action to be taxed.
[66] The Appellant is not entitled to any further relief.
Signed at New Glasgow, Nova Scotia, this 6th day of July 2006.
"T. E. Margeson"
Margeson J.
STYLE OF CAUSE: WILLIAM LONGTIN AND HER MAJESTY THE QUEEN
PLACE OF HEARING: Victoria, British Columbia
REASONS FOR JUDGMENT BY: The Honourable Justice T. E. Margeson
DATE OF JUDGMENT: July 6, 2006
APPEARANCES:
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Counsel for the Appellant: |
D. Laurence Armstrong and Heather Wellman |
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: |
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Counsel for the Respondent: |
Susan Wong |
COUNSEL OF RECORD:
Firm: Armstrong Nikolich
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada