In my recent blog post on the Newmont Canada Corporation decision I examined the importance that the Federal Court of Appeal attached to credible evidence put forward by taxpayers in tax appeals. The recent decision of Justice Woods in the Tax Court in Bruno v. The Queen is a good illustration of a fair and balanced approach to weighing that evidence.
The taxpayer, Mrs. Bruno, had a business that specialized in supplying custom window coverings. During the 2007 and 2008 taxation years she employed two of her children in the business on a part-time basis and paid them (in the aggregate) $18,000 and $7,000, in each respective year, for their services.
Justice Woods summarized the evidence as follows:
[6] In the 2007 taxation year, Ms. Bruno reported income from the business in the amount of $11,944. In the 2008 taxation year, she reported a loss from the business in the amount of $16,963.
[7] Ms. Bruno's two children were 15-16 and 13-14 in the years at issue and helped out in the business on weekends and holidays.
[8] According to Ms. Bruno's evidence, the younger child did less skilled tasks such as cleaning and answering phones, and the older child did mainly clerical work. Both children also spent time learning sales.
[9] Ms. Bruno entered into evidence a summary of the hours worked and wages earned by the children. Wages were payable at the rate of between $10 and $12 per hour. The summary showed that the children generally worked store hours on both weekend days during 2007 and on one weekend day during 2008, as well as on holidays in both years. The reduction in the hours worked in 2008 was explained by Ms. Bruno on the basis that the business was not doing as well in that year.
[10] The wages were not paid by cheque. Instead, Ms. Bruno paid for some of the children's personal expenditures which in aggregate are approximately equal to the wages shown on the summary. According to Ms. Bruno's testimony, the expenditures were luxury items that the children chose to purchase out of the money that they had earned. A list of the expenditures with a brief description was kept by Ms. Bruno.
[11] Ms. Bruno stated that her accountant advised her that she could not take a deduction for expenditures on the children's basic needs, but that she could take a deduction for luxury items. She said that she followed this advice and kept track of the expenses that would qualify.
[12] Ms. Bruno testified that she could veto any of the children's purchases that were inappropriate but that she usually approved them.
The Crown's position was short and to the point:
[15] At the outset, I would comment that the Crown did not argue that the wages were unreasonable based on the services performed and there was virtually no cross-examination of Ms. Bruno on this point. I will therefore accept that the amounts are reasonable.
[16] The Crown argued that the expenditures are not deductible because they are personal or living expenditures of Ms. Bruno and the children did not have sufficient discretion over the funds.
Justice Woods dismissed the Crown's arguments that the children did not have sufficient discretion over the application of the funds:
[22] As for the Crown's argument that the children did not have sufficient discretion over the funds, this argument is based on the decision of Beaubier J. in Bradley v The Queen, 2006 TCC 500, 2006 DTC 3535. Paragraph 9 of that decision reads:
[9] But in a related family, parent-child situation, payment must be made and deposited as it would be to a stranger. The payee must receive and control the alleged payment in his or her name and be able to use it for his or her benefit without any further control by the payer. That did not happen in this case.
[23] This comment suggests that the children must have complete discretion over the expenditures made. I would respectfully disagree with this and note that Bradley is not a binding precedent since it was an informal procedure case. I see nothing wrong with parents having a veto over expenditures made by their children.
Her conclusion on this point seems unimpeachable. There is little merit in the suggestion that a minor child must have entirely unfettered discretion as to what to do with his or her earnings in order for those amounts to constitute the child's income. Would it be any less the child's income if the parents could veto a decision by the minor to purchase a pit bull or pay for hang-glider lessons?
On the broader issue whether wages paid to children were deductible, Justice Woods relied upon the Symes decision of the Supreme Court of Canada:
[19] In considering the interplay between s. 18(1)(a) and (h), the majority decision in Symes concluded that the prohibition for personal expenditures in s. 18(1)(h) does not apply to an expenditure that was laid out for the purpose of earning income. Justice Iacobucci stated, at page 6014:
Upon reflection, therefore, no test has been proposed which improves upon or which substantially modifies a test derived directly from the language of s. 18(1)(a). The analytical trail leads back to its source, and I simply ask the following: did the appellant incur child care expenses for the purpose of gaining or producing income from a business?
[20] Accordingly, if a taxpayer incurs an expense for the purpose of gaining or producing income from a business, the deduction will not be prohibited pursuant to s. 18(1)(h) on the basis that it also has a personal benefit to the taxpayer.
[21] Applying this principle to the facts in this case, if the children are owed wages in reasonable amount, a deduction may be claimed if the wages are paid in the form of purchasing luxury personal items chosen by the children.
Justice Woods then turned to what was undoubtedly the most difficult aspect of this case: weighing and assessing the taxpayer's evidence.
[24] Turning to the facts of this case, the difficulty that I have with Ms. Bruno's argument is that the evidence about the expenditures was not sufficiently detailed for me to be satisfied, even on a prima facie basis, that all the expenditures were made for the children's benefit, let alone that they were for luxury items.
[25] The evidence concerning the nature of the expenditures consisted mainly of Ms. Bruno's oral testimony and the list that she prepared. As for the oral testimony, it is self-serving and not sufficiently detailed for me to be satisfied on most of the expenditures. As for the accounting records, a great many of the descriptions of the expenditures were simply too general to be of great assistance.
[26] Based on the evidence as a whole, I am satisfied that some of the expenditures are luxury items for the children's benefit. However, the evidence is not detailed enough for me to determine which items qualify. It is appropriate in these circumstances, where the appeal is governed by the informal procedure, for the Court to make a rough estimate. On that basis, I propose to allow a deduction for 50 percent of the amounts claimed.
On the one hand she accepted that the services were provided; that the children's labour actually constituted a tangible benefit to the business. On the other hand the taxpayer had not put forward a sufficiently strong case to persuade Justice Woods that there was not an element of personal benefit to the parents. As a result she split the difference and allowed 50% of the salary expenses claimed.
While the Bruno decision is an informal procedure case and involved relatively small amounts, in my view it clearly illustrates the difficulty a trial judge has in assessing the evidence of a credible witness dealing with difficult or imprecise facts. It further demonstrates the importance of careful preparation of witnesses and the documentary evidence that must be introduced. Finally, it shows once more that counsel must have a finely-tuned ear to anticipate and deal with the types of issues that will likely concern the trial judge.
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