Emery v. The Queen

Emery v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2003-09-19 Neutral citation 2003 TCC 568 File numbers 2002-2968(IT)I Judges and Taxing Officers Judith Woods Subjects Income Tax Act Decision Content Docket: 2002-2968(IT)I BETWEEN: RICHARD LEO EMERY, Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeal heard on July 23, 2003 at Windsor, Ontario By: The Honourable Justice J.M. Woods Appearances: Agent for the Appellant: David B. McKeand Counsel for the Respondent: Justine Malone ____________________________________________________________________ JUDGMENT The appeal from the assessment made under the Income Tax Act for the 1999 taxation year is dismissed. Signed at Ottawa, Canada this 19th day of September, 2003. "J.M. Woods" J.M. Woods J. Citation: 2003TCC568 Date: 20030919 Docket: 2002-2968(IT)I BETWEEN: RICHARD LEO EMERY, Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT Woods J. [1] Mr. Richard Emery appeals an assessment in respect of the 1999 taxation year that disallowed home office expenses and salaries paid to his wife and children. The question for determination is whether these expenses were required by the contract of employment for the purposes of paragraph 8(1)(i) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the "Act"). [2] The appeal was heard under the Court's Informal Procedure. Facts [3] Mr. Emery was employed by Carmichael Canada Ltd. ("Carmichael") from approximately May, 1998 until November, 1999 at an annual salary of $64,000. His position was branch manager responsible for the area between London, Sarnia and Windsor. [4] Mr. Emery lived in Chatham and worked out of Carmichael's office in London. He explained that the London office was not ideally located since the prime potential customer base was in cities where the automotive-related industries were located, namely, Chatham, Windsor and Sarnia. Mr. Emery stated that Carmichael recognized that London was not the ideal location for the office but that the corporation was committed to it because of a lease of office premises there. [5] Mr. Emery determined that it would make business sense to maintain an office in his home in Chatham since it was closer to customers. In addition to the home office, he had storage space in his garage for inventory. Mr. Emery's wife and three children were employed by him as assistants, providing administrative services and maintaining the facilities. In his tax return for the 1999 taxation year, Mr. Emery claimed $1,712.75 for home office expenses and $22,015.00 for salaries paid to his wife and three children. [6] Mr. Emery spent much of his time at the London office and had an assistant there but worked in the home office each day as well. He explained that his wife kept files in the home office and the information in these files was then duplicated on master files in London. He did not go to the London office on days that he was visiting customers in other cities. [7] There are three documents signed by the employer that are relevant to the issue of whether the home office and salary expenses were required by the contract of employment. 1. A contract of employment dated April 30, 1998 was signed on behalf of Carmichael by the National Sales & Marketing Manager to whom Mr. Emery reported. This document does not refer to a home office and states that all expenses pertaining to company business will be reimbursed in accordance with company procedure. 2. A T2200 form dated November 9, 2000 was signed by Carmichael's paymaster. In this form, Carmichael acknowledged that Mr. Emery was required under the contract of employment to have a home office, pay for an assistant and pay for supplies used in his work. 3. At the request of the Canada Customs and Revenue Agency (the "CCRA") during the audit of Mr. Emery, a questionnaire about conditions of employment was signed by the Director of Human Resources at Carmichael. In this form, the employer indicated that Mr. Emery was not required under the terms of the employment contract to maintain an office or hire an assistant. [8] The questionnaire prepared during the audit was adverse to Mr. Emery's position. It was signed by a person unknown to Mr. Emery and Mr. Emery stated that this person may not have been aware of the terms of employment agreed to by his superior, the National Sales & Marketing Manager. [9] The T2200 form was favourable to Mr. Emery's position. In cross examination Mr. Emery stated that the T2200 form signed by the paymaster on behalf of Carmichael was prepared with Mr. Emery's participation. [10] The Crown introduced into evidence a document prepared by Mr. Emery in support of his tax position. This document states that Carmichael agreed to the use of a home office and storage of inventory in Mr. Emery's garage. This document does not state, however, that these are required under the contract of employment. Mr. Emery's oral testimony was consistent with this document. [11] On cross examination Mr. Emery was asked why Carmichael did not reimburse him for the home office expenses. He explained that he did not know the reason for this but that from his perspective the execution of the T2200 form was a satisfactory arrangement. Statutory Provisions [12] The relevant parts of paragraph 8(1)(i) of the Act read: 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) amounts paid by the taxpayer in the year as .... (ii) 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, (iii) the cost of supplies that were consumed directly in the performance of the duties of the office or employment and that the officer or employee was required by the contract of employment to supply and pay for, Issue [13] The issue is whether the home office expenses and salaries paid by Mr. Emery in the 1999 taxation year were required to be paid by him by his contract of employment. If they were, they would be deductible pursuant to paragraph 8(1)(i) of the Act. The Crown has not put in issue the reasonableness of the expenditures. Analysis [14] Looking at the evidence as a whole, Mr. Emery has not established that he was required by his contract of employment with Carmichael to pay the expenditures for the home office and salaries. [15] In respect to the home office, I find that Carmichael agreed that Mr. Carmichael could maintain a home office because it made business sense to do so. However, that is not sufficient to establish that Mr. Emery was "required" by the contract of employment to maintain the home office. As to the salaries paid to family members, Carmichael was not aware of the quantum of the salaries paid to family members, which exceeded $22,000. Also, it was not established that Carmichael agreed that family members could be employed by Mr. Emery. In the circumstances, I find that Mr. Emery was not required by his contract of employment to pay these salaries. [16] Mr. Emery's oral testimony and the document he prepared in support of his tax position are consistent with the above findings. His evidence was to the effect that Carmichael agreed that he could maintain a home office rather than it being required by the contract of employment. [17] As for the documents signed by Carmichael, I find that they do not support Mr. Emery's position. The documents are inconsistent and no one from Carmichael was called to explain these inconsistencies. The T2200 form is the only document that supports Mr. Emery's position. It was prepared with Mr. Emery's assistance and is contrary to much of the other evidence. [18] The requirement in paragraph 8(1)(i) that the expenditures be required by the contract of employment can be inferred by the circumstances. It is not necessary that the contract of employment specifically refer to them. In McCann v. R.[1], Bowman A.C.J. held that the requirement is satisfied if it is essential that the expenditures be incurred for the duties of employment to be carried out. That principle is of no assistance here. Although Carmichael agreed that it made business sense to have a home office, it was not essential to have one. [19] For these reasons, the appeal is dismissed. Signed at Ottawa, Canada this 19th day of September, 2003. "J. M. Woods" J.M. Woods J. CITATION: 2003TCC568 COURT FILE NO.: 2002-2968(IT)I STYLE OF CAUSE: Richard Leo Emery v. Her Majesty the Queen PLACE OF HEARING: Windsor, Ontario DATE OF HEARING: July 23, 2003 REASONS FOR JUDGMENT BY: The Honourable Justice J. M. Woods DATE OF JUDGMENT: September 19, 2003 APPEARANCES: Agent for the Appellant: David B. McKeand Counsel for the Respondent: Justine Malone COUNSEL OF RECORD: For the Appellant: Name: Firm: For the Respondent: Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada [1] [2002] 3 C.T.C. 2422 (T.C.C.).