Muhammedi v. The Queen

Muhammedi v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2004-06-23 Neutral citation 2004 TCC 408 File numbers 2003-2694(IT)I Judges and Taxing Officers Terrence O'Connor Subjects Income Tax Act Decision Content Docket: 2003-2694(IT)I BETWEEN: SHAMIN MUHAMMEDI, Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeals heard on January 7, 2004 at Ottawa, Ontario, Before: The Honourable Justice T. O'Connor Appearances: Agent for the Appellant K.E. Koshy Counsel for the Respondent: John Shipley ____________________________________________________________________ JUDGMENT The appeals from the reassessments made under the Income Tax Act for the 1999 and 2000 taxation years are dismissed in accordance with the attached Reasons for Judgment. Signed at Ottawa, Canada, this 23rd day of June, 2004. "T. O'Connor" O'Connor, J. Citation: 2004TCC408 Date: 20040623 Docket: 2003-2694(IT)I BETWEEN: SHAMIN MUHAMMEDI, Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT O'Connor, J. [1] The principal facts and issues arising in these appeals are generally as set forth in the Reply to the Notice of Appeal. It reads as follows: In reply to the Notice of Appeal for the 1999 and 2000 taxation years, filed on July 28, 2003, the Deputy Attorney General of Canada says: A. STATEMENT OF FACTS 1. He admits to the following facts as stated in the Notice of Appeal: a) the Minister of National Revenue (the "Minister") disallowed the amounts of $12,000.00 and $3,500.00 claimed by the Appellant as 'casual labour' for the 1999 and 2000 taxation years respectively; b) the amounts referred to in subparagraph 1(a) were disallowed, in part, on the basis that the payments were not made in 'absolute terms' and said payments were not reasonable; and c) the applicable assessments were confirmed on the basis of paragraph 18(1)(a) and section 67 of the Income Tax Act (the "Act"). 2. He has no further knowledge of the remaining facts as stated in the Notice of Appeal and puts the Appellant to the strict proof therein. 3. In computing income for the 1999 and 2000 taxation years, the Appellant reported net business income in the amounts of $332.00 and $346.00 respectively. 4. By Notices of Reassessment dated August 1, 2002, the Minister reassessed the Appellant's income tax returns for the 1999 and 2000 taxation years and increased the net business income referred to in paragraph 3 herein by the amounts of $12,000.00 and $3,500.00 respectively. 5. In so reassessing the Appellant's income tax returns for the 1999 and 2000 taxation years, the Minister relied on the following assumptions of fact: a) the facts hereinbefore stated and admitted; b) during the period from January 1, 1999 to December 31, 2000 inclusively, the Appellant claimed net business income as stated in paragraph 3 herein with respect to a "Smoke and Gift Shop" (the "Business"); c) the Appellant's spouse, Karim Muhammedi (the "Spouse") actually operated the day to day running of the Business; d) the Spouse was not paid any salary during the 1999 and 2000 taxation years but was paid a 'Management Fee' of $3,500.00 in 1999 only; e) two of the Appellant's children, Rizwan born on February 1, 1982 and Faizan, born on July 1, 1987 (the "Children") helped out in the operation of the Business after school; f) cheques were made out to the Children during the 1999 and 2000 taxation years as shown on the attached Schedule A; g) the cheques referred to in subparagraph 5(f) herein were deposited back into the bank account of either the Business or the Appellant and the Spouse; h) a review of the cheques indicated that not all them had been endorsed by the Children; and i) there was no formal written loan agreement between the Appellant and the Children in regard to the amounts deposited back into the bank accounts as referred to in subparagraph 5(g) herein representing an interest free loan arrangement between said parties. B. ISSUES TO BE DECIDED 6. The issue is whether the Appellant is entitled to deduct in computing income for the 1999 and 2000 taxation years, casual labour expenses in the amounts of $12,000.00 and $3,500.00 respectively. C. STATUTORY PROVISIONS, GROUNDS RELIED ON AND RELIEF SOUGHT 7. He relies on paragraph 18(1)(a) and section 67 of the Act. 8. He submits that the Appellant is not entitled to deduct the amounts of $12,000.00 and $3,500.00 as casual labour expenses in computing income for the 1999 and 2000 taxation years as the Appellant has not shown that said amounts were incurred for the purpose of gaining or producing income within the meaning of paragraph 18(1)(a) of the Act. 9. He further submits that the Appellant and the Children were not engaged in a bona fide business arrangement as: a) the Children were working for their parents and therefore were not working at 'arms-length'; b) the cheques were redeposited into the bank accounts of either the Business or the Appellant and the Spouse and therefore the amounts of said cheques were not considered to have been paid to the Children and they did not have possession and control of the money; and c) there was no written loan agreement between the Appellant and the Children with respect to amounts redeposited into the bank accounts as referred to in subparagraph 9(b) herein. 10. In the event that the Tax Court determines that the amounts of $12,000.00 and $3,500.00 for the 1999 and 2000 taxation years constitutes salaries paid to the children, he further submits that said payments are not reasonable pursuant to section 67 of the Act on the basis of the children's ages, the dates said payments were made and amounts of the payments in comparison to amounts paid to the Spouse during the same period. [2] Testimony was given by the Appellant, by the Spouse, by the Appellant's son, Faisan and by Paul Lepine, the Appeals Officer; numerous Exhibits were filed. Other facts that emerged were that the business was sold in 2001; that the two Children only filed income tax returns with respect to their alleged salaries in 2002 after the audit of the business was conducted; that the Children did actually work; that the parents maintained the alleged salaries in effect were loans back to the parents to be used for the future education of the Children; that there was some confusion as to the hours worked by and the amounts allegedly paid to the Children; that the business was run by the Spouse and that the Appellant had very little to do with the business except having bought it; that cheques to the Children were not issued on a regular basis but rather only when cash was available with adjustments at year end in December. [3] I find the following to be prime considerations: 1. It is clear that the cheques issued to the Children were either not paid to them or upon being paid to them were immediately deposited in bank accounts of either the business or of one or both of the parents. Consequently, they did not take the form of a salary paid to the children such that the monies involved came under their control and possession. The monies in essence remained in the control of the parents and or the business. 2. Although the parents contend the monies were loaned back to the parents, there is no loan documentation. 3. It is difficult to understand how a business that had income in excess of $300,000 in both 1999 and 2000 could have a net profit of only $332.00 in 1999 and $346.00 in 2000. 4. In 1999 no salary was paid to the Spouse, the principal operator of the business and only a Management Fee of $3,500.00 was paid to him in 2000. That enabled the Appellant to certain deductions from her income for the support of her husband. In other words he worked but was not paid a salary and this gave rise to the deductions in favour of the Appellant. 5. The children, although allegedly claiming to have been paid salaries did not declare any amounts on their income tax returns for 1999 and 2000, and in fact only filed returns in 2002 to declare that income. 6. One is left with the impression that what was involved was tax planning designed to reduce, as much as possible, the overall tax burden of the family. This is not necessarily the end of the matter but when the operations are carried out in the fashion that they were it smacks of a sham and does not meet the requirements of paragraph 18(1)(a) and section 67 of the Income Tax Act. [4] The cases cited by the Counsel for the Respondent namely Blake v. M.N.R., 81 DTC 31 (TRB); Slingerland v. M. N. R., 78 DTC 1280 (TRB) and Clarke et al v. M.N.R., 84 DTC 1839 (TCC), all involved situations where children worked for their parents, received cheques for the work, and as in the present case, the monies were circuited back to the parent or parents and never stayed with the children and in all three cases the taxpayers' appeals were dismissed. [5] I can see no substantive difference between the decisions in those three appeals and the facts in the present appeal and I come to the same conclusion as did the judges in those three appeals. [6] Consequently, the appeals are dismissed. Signed at Ottawa, Canada, this 23rd day of June, 2004. "T. O'Connor" O'Connor, J. CITATION: 2004TCC408 COURT FILE NO.: 2003-2694(IT)I STYLE OF CAUSE: Shamin Muhammedi v. Her Majesty The Queen PLACE OF HEARING: Ottawa, Ontario DATE OF HEARING: January 7, 2004 REASONS FOR JUDGMENT BY: The Honourable Justice T. O'Connor DATE OF JUDGMENT: June 23, 2004 APPEARANCES: Counsel for the Appellant: Counsel for the Respondent: COUNSEL OF RECORD: For the Appellant: Name: Firm: For the Respondent: Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada