Schnurr v. The Queen

Schnurr v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2004-10-13 Neutral citation 2004 TCC 684 File numbers 2002-2144(IT)G Judges and Taxing Officers Donald G.H. Bowman Subjects Income Tax Act Decision Content Docket: 2002-2144(IT)G BETWEEN: GRANT SCHNURR, Appellant, and HER MAJESTY THE QUEEN, Respondent. Appeals heard together with the appeals of Darcy Schnurr (2002-2145(IT)G)) on September 30, 2004 at Victoria, British Columbia. Before: The Honourable D.G.H. Bowman, Associate Chief Justice Appearances: Counsel for the Appellant: D. Laurence Armstrong Counsel for the Respondent: Kristy Foreman Gear JUDGMENT It is ordered that the appeals made under the Income Tax Act for the 1997, 1998 and 1999 taxation years are allowed, with costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment to permit the deduction by Mr. Schnurr of the salary paid to his wife. Signed at Ottawa, Canada, this 13th day of October 2004. "D.G.H. Bowman" Bowman, A.C.J. Docket: 2002-2145(IT)G BETWEEN: DARCY SCHNURR, Appellant, and HER MAJESTY THE QUEEN, Respondent. Appeals heard together with the appeals of Grant Schnurr (2002-2144(IT)G)) on September 30, 2004 at Victoria, British Columbia. Before: The Honourable D.G.H. Bowman, Associate Chief Justice Appearances: Counsel for the Appellant: D. Laurence Armstrong Counsel for the Respondent: Kristy Foreman Gear JUDGMENT It is ordered that the appeals made under the Income Tax Act for the 1997 and 1999 taxation years are dismissed, without costs. Signed at Ottawa, Canada, this 13th day of October 2004. "D.G.H. Bowman" Bowman, A.C.J. Citation: 2004TCC684 Date: 20041013 Dockets: 2002-2144(IT)G 2002-2145(IT)G BETWEEN: GRANT SCHNURR, DARCY SCHNURR, Appellants, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT Bowman, A.C.J. [1] These appeals were heard together and are from assessments for the appellants' 1997, 1998 and 1999 taxation years. The appellants are husband and wife. [2] Initially, the appeal of Grant Schnurr raised a number of issues relating to the deductibility of expenses. All these issues have been abandoned by the appellant except one relating to the deductibility by Mr. Schnurr as an employment expense under paragraph 8(1)(i) of the Income Tax Act of salary paid to his wife as his assistant. [3] Paragraph 8(1)(i) reads: 8(1) In computing a taxpayer's income for a taxation year from an office or employment, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto: ... (i) dues and other expenses of performing duties - amounts paid by the taxpayer in the year as ... (i) office rent, or salary to an assistant or substitute, the payment of which by the officer or employee was required by the contract of employment, ... [4] Subsection 8(10) reads: 8(10) Certificate of employer - An amount otherwise deductible for a taxation year under paragraph (1)(c), (f), (h) or (h.1) or subparagraph (1)(i)(ii) or (iii) by a taxpayer shall not be deducted unless a prescribed form, signed by the taxpayer's employer certifying that the conditions set out in the applicable provision were met in the year in respect of the taxpayer, is filed with the taxpayer's return of income for the year. [5] Before and during the years in question the appellant was a successful investment advisor with the stockbroker firm Nesbitt Thomson (or Nesbitt Burns or BMO Nesbitt Burns; the name changed periodically). [6] He hired his wife Darcy as his assistant and in 1997 paid her a salary of $24,000 and in 1998 and 1999, he paid her an annual salary of $30,000. Payroll deductions for income tax and Canada Pension Plan premiums were made and remitted to the Canada Customs and Revenue Agency. [7] Mrs. Schnurr performed a number of functions in Mr. Schnurr's business. She performed secretarial work with respect to the records of clients that he kept at his home. She attended to mailing of Christmas cards and to purchasing gifts for clients. She made contacts in the community to bring her husband clients. [8] I have no hesitation in finding as a fact that Mrs. Schnurr's employment by her husband was genuine and her remuneration was reasonable in relation to and commensurate with the services that she performed (see Gabco Ltd. v. M.N.R., [1968] C.T.C. 313). She performed services that were essential to Mr. Schnurr's services in his work as an investment counsellor. The amount paid to Mrs. Schnurr in the overall context of the high income and substantial business generated by Mr. Schnurr is in fact rather modest. [9] 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. [10] This view is consistent with the administrative practice set out in paragraph 1 of Interpretation Bulletin IT352R2, which reads: 1. Subject to certification by the employer (see 13 below), subparagraphs 8(1)(i)(ii) and (iii) allow a taxpayer, in computing income for a taxation year from an office or employment, to deduct amounts paid in the year as expenses for office rent, supplies and salary to an assistant or substitute. These expenses are deductible provided the following requirements are met: (a) the taxpayer is required by the contract of employment to pay for such office rent or salary, or to provide and pay for such supplies; (b) the taxpayer has not been reimbursed and is not entitled to reimbursement for such expenses; (c) these expenses may reasonably be regarded as applicable to the earning of income from the office or employment; and (d) in the case of supplies, they are consumed directly in the performance of the taxpayer's duties of the office or employment. Ordinarily, (a) above necessitates that there be an express requirement within the terms of a written contract of employment. Nevertheless, such a requirement for the payment of office rent, supplies or salary to an assistant or substitute may exist where the taxpayer can establish that it was tacitly understood by both parties (the taxpayer and the employer) that such payment was to be made by the taxpayer and was, in fact, necessary under the circumstances to fulfill the duties of the employment. [11] It is also consistent with the decisions of this Court in Baillargeon v. M.N.R., [1990] T.C.J. 712 and Madsen v. Canada, [2001] T.C.J. 246, the decision of the Federal Court of Canada in Canada v. Gilling, [1990] F.C.J. 284 and the Federal Court of Appeal in Verrier v. Canada, [1990] 3 F.C. 3. [12] Finally, it is consistent with Nesbitt Thomson's own administrative practices. The branch managers of that company routinely signed the certificates required by subsection 8(10) certifying that the investment advisors were required under their contract of employment to pay for a substitute or assistant. Such was the case with the appellant. For each of the years under appeal, a certificate (Form T2200) was signed by David Schneider, then Branch Manager in the Victoria office. The form contains a question as follow: 10(a) Was this employee required under a contract of employment to pay for a substitute or assistant? 10(b) Did you repay or will you repay this employee for any expenses in 10(a) above? [13] On the form for each of these years, the box for the first question was ticked "yes" and for the second question "no". [14] If the matter had stopped there, this issue would not have been in Court. The CCRA would simply and routinely have allowed the deduction. On February 6, 1998, the Controller of Nesbitt Burns issued a memorandum to the branch managers, which read as follows: Please find enclosed the T2200 forms for the IAs in your branch. The forms have been completed only as to the IA's name, S.I.N., and commission earnings (question 6.b)). The forms should be distributed to the individual IAs for completion of questions 2. through 10.The completed forms should be reviewed and signed by you in the bottom right corner ("Signature of employer or authorized officer"). The purpose of form T2200 is to establish a framework to determine which expenses IA's may claim as deductions from their commission income when they complete their personal income tax returns. Generally, for expenses to be deductible they must meet certain criteria, most important of which is that they must be "required" under the contract of employment, and the employee cannot have received any reimbursement. The definition of the word "required" as used in the Income Tax Act is key. Under Revenue Canada's definition, it is not sufficient that an employee have the option of incurring an expense; rather, it must be "... tacitly understood by both parties that such payment was to be made by the taxpayer (employee) and was, in fact, necessary under the circumstances to fulfil the duties of employment." (Rev. Cda. Interpretation Bulletin IT-352R). There are of course legitimate exceptions to the standard conditions noted above. Exceptions must reflect the IAs true conditions of employment, and the expense being incurred by the IA must be necessary to fulfil the duties of employment. Please keep a copy of all forms signed for your records. In addition, please forward to the Payroll Department a coy of any form completed where the area of travel referred to in question 2. includes locations outside of the IAs provinces of registration (eg. U.S. Europe etc.) or where any part of question 10. has been answered "YES". In the event that the IA's return is audited by Revenue Canada, you may be contacted and asked to explain in greater detail the IA's conditions of employment. Please be aware that under the Income Tax Act, any firm providing an employee with at T2200 form containing false or misleading information is liable to pay significant penalties and interest. In addition, any firm having once been found to have provided false or misleading information is typically subject to a significantly higher level of scrutiny in all tax related areas. ... [15] On March 13, 2000, an employee of Nesbitt Burns sent an e-mail to Mr. Schnurr, as follows: From: Natalie Peters (Br. Admin.) Sent: Monday, March 13, 2000 3:06 PM To: Grant Schnurr Subject: T2200 Hi Grant, With regards to the T2200 signed off by Davie, I missed the error in your answers to Questions 9 a, b & c. They must ALL be ticked off as 'NO'. Pls see below. The definition of the word "required" as used in the Income Tax Act is key. Under Rev Cda's definition, it is not sufficient that an employee have the option of incurring an expense; rather, it must be " ... tacitly understood by both parties (taxpayer and employer) that such payment was to be made by the taxpayer [employee] and was, in fact, necessary under the circumstances to fulfil the duties of the employment." (Rev Cda Interpretation Bulleting IT-352R, paragraph 1). This means that not all IA expenses will be eligible employee expenses. Please amend your signed copy of the T2200 as Rev Cda may phone Dave in the future in regard to these forms, and I want to make sure that it's completed/amended correctly. Sorry! Thanks! Sally Green Acting Br. Admin Vancouver Island Phone: 250 351 2412 Fax: 250 361 2465 [16] Shortly before or after Mr. Schnurr had left the employment of Nesbitt Burns, an employee of the CCRA submitted a questionnaire to the Branch Manager, Mr. Schneider, in which Mr. Schneider said that Mr. Schnurr was not required under his contract of employment to pay for an assistant. The questionnaire was completed by an employee, Natalie Peters, in the manner directed by Mr. Schneider. The answers were Mr. Schneider's, not Ms. Peters'. She was merely an amanuensis. Moreover, Mr. Schneider altered the form for each year that he had signed and struck out or whited out the "yes" answers that he had previously given to the questions about Mr. Schnurr's hiring an assistant and substituted "no" answers and sent the altered forms to the CCRA. This was done without consulting Mr. Schnurr or obtaining his concurrence. [17] Mr. Schneider was not called as a witness. I regard the questionnaire as pure hearsay and completely unreliable and the altered forms T2200 as being of no evidentiary value. [18] I note in passing that toward the end of Mr. Schnurr's employment with Nesbitt Burns, relations between him and Mr. Schneider had deteriorated drastically. The uncontradicted evidence of Mr. Schnurr and his wife was that Mr. Schneider was trying to destroy Mr. Schnurr and the relationship had become poisonous. Ms. Peters confirmed the acrimonious relationship between Mr. Schnurr and Mr. Schneider. In the absence of any testimony from Mr. Schneider, I accept this evidence. In the result I regard the questionnaire and the changed forms T2200 as doubly unreliable as I do not think they were prepared in good faith. The same observation applies to the e-mail of March 13, 2000. The original forms T2200, in my view, correctly reflected the terms of the contract of employment between Mr. Schnurr and his employer. The attempt after the years in question to change those forms or to allege that the terms of employment were not as originally stated is simply unacceptable. [19] The filing of forms T2200 serves a dual function: it is a statutory condition precedent to the claiming of an employment expense deduction under subsection 8(1)(i) and it provides evidence of the terms of employment. I doubt that the form is conclusive or determinative if the evidence showed it to be wrong but it is at least prima facie evidence. The subsequent ill-conceived and rather clumsy attempt by Mr. Schneider to rewrite history retroactively is ineffectual. Indeed, it is simply no evidence at all. The original forms have the virtue of consensuality. Both parties agreed to the answers whereas the unilateral change made subsequently by Mr. Schneider clearly did not represent a meeting of minds. [20] The appeals of Grant Schnurr are allowed, with costs, and the assessments for 1997, 1998 and 1999 are referred back to the Minister of National Revenue for reconsideration and reassessment to permit the deduction by Mr. Schnurr of the salary paid to his wife. [21] Mrs. Darcy Schnurr's appeals for 1997 and 1999 do not ask for any reduction in tax. She objects to the fact that the Minister of National Revenue did not treat her salary received from her husband as income and that he sent back to her the tax she paid on it. As stated above, I think she was employed by her husband and her salary was income from employment. Nonetheless, however commendable may be her desire to give the tax back to the Minister of National Revenue and to achieve consistency and symmetry with her husband's tax position, this Court does not have the power to order the Minister to increase an assessment (Harris v. M.N.R., 67 DTC 5332 (Ex. Ct.), affd 66 DTC 5189 (S.C.C.)). Therefore, the appeals of Darcy Schnurr are dismissed, without costs. Signed at Ottawa, Canada, this 13th day of October 2004. "D.G.H. Bowman" Bowman, A.C.J. CITATION: 2004TCC684 COURT FILES NOS.: 2002-2144(IT)G, 2002-2145(IT)G STYLES OF CAUSE: Grant Schnurr and Her Majesty the Queen Darcy Schnurr and Her Majesty the Queen PLACE OF HEARING: Victoria, British Columbia DATE OF HEARING: September 30, 2004 REASONS FOR JUDGMENT BY: The Honourable D.G.H. Bowman, Associate Chief Justice DATE OF JUDGMENT AND REASONS FOR JUDGMENT: October 13, 2004 APPEARANCES: Counsel for the Appellant: D. Laurence Armstrong Counsel for the Respondent: Kristy Foreman Gear COUNSEL OF RECORD: For the Appellant: Name: D. Laurence Armstrong Firm: Armstrong Nikolich, Barristers & Solicitors Victoria, B.C. For the Respondent: Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada