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Docket: 1999-4257(IT)I |
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BETWEEN: |
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LINDA SPENCER, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN,
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Respondent. |
____________________________________________________________________
Appeals heard together on common evidence with the appeals of Robert J. Spencer (2001-891(IT)I) on February 5, 2003 at London, Ontario
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Before: The Honourable Judge Terrence O'Connor |
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Appearances: |
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Agent for the Appellant: |
Bill Fehr |
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Counsel for the Respondent: |
George Boyd Aitken |
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JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1993, 1994 and 1995 taxation years are allowed, without costs, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the losses suffered by the partnership carried on by the two Appellants shall be $20,049 for 1993 which includes an amount of $4,877 for legal expenses; $25,744 for 1994 and $20,395 for 1995 and these losses for the three years in question are to be divided 75 per cent to Robert J. Spencer and 25 per cent to Linda Spencer, the whole in accordance with
the reasons set forth in the attached Reasons for Judgment.
Signed at Ottawa, Canada this 26th day of June 2003.
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"T. O'Connor" |
J.T.C.C.
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Docket: 2001-891(IT)I |
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BETWEEN: |
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ROBERT J. SPENCER, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeals heard together on common evidence with the appeals of Linda Spencer (1999-4257(IT)I) on February 5, 2003 at London, Ontario
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Before: The Honourable Judge Terrence O'Connor |
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Appearances: |
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Agent for the Appellant: |
Bill Fehr |
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Counsel for the Respondent: |
George Boyd Aitken |
____________________________________________________________________
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1993, 1994 and 1995 taxation years are allowed, without costs, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the total net losses suffered by the partnership carried on by the two Appellants shall be $20,049 for 1993 which includes an amount of $4,877 for legal expenses; $25,744 for 1994 and $20,395 for 1995 and these losses for the three years in question are to be divided 75 per cent to Robert J. Spencer and 25 per cent to Linda Spencer, the whole in accordance with
the reasons set forth in the attached Reasons for Judgment.
Signed at Ottawa, Canada this 26th day of June 2003.
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"T. O'Connor" |
J.T.C.C.
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Citation: 2003TCC343 |
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Date: 20030626 |
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Docket: 1999-4257(IT)I |
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BETWEEN: |
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LINDA SPENCER, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN,
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AND BETWEEN: |
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Docket: 2001-891(IT)I
ROBERT J. SPENCER, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN,
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Respondent. |
REASONS FOR JUDGMENT
O'Connor, J.T.C.C.
[1] The Appellants commenced operating an embroidery business in 1988 in partnership. The partners, being husband and wife, were not dealing with each other at arms' length. At commencement the share of each partner was established at 50 per cent and that continued in 1988, 1989 and 1990. In 1991 the partnership changed to an 85-15 split and in 1992 it changed to a 90-10 split, in each case in favour of Robert. The 90-10 split continued through the 1993, 1994 and 1995 years.
[2] The partnership had certain losses in 1993, 1994 and 1995. The parties have agreed that the total net losses, exclusive of certain amounts of additional interest, to be discussed later, were $20,049 in 1993, $25,744 in 1994 and $20,395 in 1995. The figure $20,049 in 1993 does not emerge from the pleadings nor the evidence. It is explained in a letter of the Department of Justice to this Court with a copy to the agent for the Appellants. It reads in part as follows:
...
(a) the deduction of legal expenses should be allowed in the amount of $4,877.52;
(b) this deduction of legal expenses should be used to calculate the loss of the partnership operating as Personal Designs for the 1993 taxation year, therefore, the loss for the 1993 taxation year of the partnership would be $20,049.52; ...
[3] The Minister of National Revenue ("Minister") contends that the 85-15 and 90-10 splits are unreasonable and that what is reasonable, based upon the input of the respective partners was 50-50. The Minister refers to subsections 103(1) and 103(1.1) of the Income Tax Act ("Act") which read as follows:
103: Agreement to share income, etc., so as to reduce or postpone tax otherwise payable.
(1) Where the members of a partnership have agreed to share, in a specified proportion, any income or loss of the partnership from any source or from sources in a particular place, as the case may be, or any other amount in respect of any activity of the partnership that is relevant to the computation of the income or taxable income of any of the members thereof, and the principal reason for the agreement may reasonably be considered to be the reduction or postponement of the tax that might otherwise have been or become payable under this Act, the share of each member of the partnership in the income or loss, as the case may be, or in that other amount, is the amount that is reasonable having regard to all the circumstances including the proportions in which the members have agreed to share profits and losses of the partnership from other sources or from sources in other places.
(1.1) Agreement to share income, etc., in unreasonable proportions. Where two or more members of a partnership who are not dealing with each other at arm's length agree to share any income or loss of the partnership or any other amount in respect of any activity of the partnership that is relevant to the computation of the income or taxable income of those members and the share of any such member of that income, loss or other amount is not reasonable in the circumstances having regard to the capital invested in or work performed for the partnership by the members thereof or such other factors as may be relevant, that share shall, notwithstanding any agreement, be deemed to be the amount that is reasonable in the circumstances.
[4] The main issue therefore in these appeals is the allocation of the partnership losses.
[5] With respect to the split between the partners the following is noted.
1. Linda had no income in 1993, 1994 and 1995 (only certain losses) whereas Robert had the following employment incomes, namely, $51,135 in 1993, $55,610 in 1994 and $91,496 in 1995.
2. As a result of claiming 90 per cent of the partnership losses Robert became entitled to income tax refunds of $15,029 in 1993, $17,471 in 1994 and $28,376 in 1995. The foregoing facts do not by themselves mean that the Appellants were engaged in tax planning so as to allocate as much as possible of the losses to Robert but they are to be considered in the overall picture, when one attempts to ascertain what is a reasonable allocation.
3. Robert had a full-time job, with Casco Inc. working sometimes 36 hours a week and sometimes longer and in 1995 he worked 1000 hours of overtime. This reduced the amount of time he could devote to the partnership.
4. Linda developed skills in embroidery and although her time for partnership activities was limited by the fact she had to care for a nephew with Attention Deficit Disorder she still had some time for the partnership business.
5. Linda alone appears as one of the creditors in the list of creditors prepared by Deloitte & Touche (Exhibit R-11) in respect of one of the partnership's bankrupt debtors, Vortex Apparel.
6. Other invoices (Exhibits R-12 and R-13) and loan documentation (Exhibit R-14) were addressed to Linda.
7. Linda was heavily involved with income tax and accounting matters of the partnership. She also took some sales, orders and placed stock orders.
8. Although Robert supplied the financing totalling approximately $200,000, Linda was a guarantor of several loans to the partnership.
[6] Based on the foregoing it is relatively clear that Linda contributed to the partnership much more than 10 per cent. The various Exhibits, in particular R-12 to R-14 and the evidence indicate that Linda was more active in the business than the Appellants maintain.
[7] It is true that the majority if not all of the financing, totalling approximately $200,000 for the business, was provided by Robert and that he exercised greater management in the business than Linda. However, it must not be forgotten that the business began to turn a profit in 1996 and that from and after the year 1996 the business was operated as a sole proprietorship of Linda. Admittedly, Linda in the years in question, could not spend as much time in the activities of the business but she definitely did contribute and turning a profit in 1996 and subsequent years, when Linda ran the business alone, suggests that she must have contributed more than 10 per cent in 1993, 1994 and 1995.
[8] On balance therefore I find that Linda contributed considerably more than 10 per cent to the operations of the business in the years in question and consequently I am of the opinion that the reasonable apportionment for the years 1993, 1994 and 1995 is 25 per cent for Linda and 75 per cent for Robert.
[9] I have been influenced in coming to the foregoing conclusion by the decision of this court in Leung v. Canada, [1997] T.C.J. No. 792 and Zalesky v. Canada, [2000] T.C.J. No. 457. In Leung the Court, on the issue of reasonable allocation pointed out that the onus is on the taxpayer to prove the reassessment wrong and in Zalesky, a reasonable allocation between husband and wife in circumstances not unlike those in these appeals was held to be 75-25 not 100 per cent for the husband as was claimed.
[10] Another issue in these appeals is that the Appellants, although not claimed on their respective returns, seek to add the following to the interest amounts already claimed, namely $9,074 in 1993 which when added to the interest claimed on the 1993 return of $12,226 would make a total of $21,300; $8,043 in 1994 which when added to the interest claimed on the 1994 return in the year of $13,900 would make a total of $21,943; $13,927 in 1995 which when added to the interest claimed on the 1995 return in the year of $7,200 would make a total of $21,127.
[11] At a point in time when the partnership was audited, which occurred prior to the decision of the Supreme Court of Canada in Stewart v. Her Majesty the Queen, [2002] S.C.J. No. 46, ("Stewart")there was a possibility that the Minister would deny the Appellants' losses in their entirety on the grounds there was no reasonable expectation of profit. It is possible that this is the reason the Appellants only claimed the reduced amounts of interest on their returns for the three years in question. The Appellants wish to increase their losses by adding the additional amounts of interest. Counsel for the Respondent points out that the Appellants knew of the total amounts of interest, deliberately did not claim those amounts, that the reassessment was based on the amounts of interest claimed in the returns, that the Appellants only raised these additional amounts in 2001, notwithstanding that the audit had been completed in 1996 and notwithstanding that Revenue Canada by letter of July 23, 1997 required the Appellants, under threat of a summary conviction and fines, to file documents pertaining to 1993, 1994 and 1995 (Exhibit R-4) to which letter the Appellants did not respond. That letter was followed by a further letter of October 17, 1992 (Exhibit R-5), to which there was also no response.
[12] Counsel for the Respondent in argument submitted, in part, as follows:
MR AITKEN: Your Honour, the Crown's position on this comes down to the simple matter of Returns being filed by the taxpayer. Revenue Canada, relying on those Returns, to its detriment, and the Tax Court, the Crown, finding itself today in the face of new evidence some ten years after the fact.
As we have discussed in cross-examination, these amounts were identified, your honour. These are not interest expenses that came from another source or they were another creditor that was unknown. These were existing creditors. The taxpayer chose to claim certain amounts of those expenses, which were not the full amounts.
Returns were filed and they were certified. If I'm not mistaken the evidence has established that Mr. Fehr was in fact advising the taxpayers prior to the 1993 year. So the taxpayers had the benefit of an accountant.
In those Returns amounts were claimed in respect of, for example, the Bank of Montreal loan, a loan through the Bank of Nova Scotia for a mortgage, the LEAD loan. Those seem to be the three ones that we focus on.
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The information with respect to those loans was readily ascertainable and, your honour, as a matter of fact as we've established, the amounts were known. ...
We have not seen an explanation of the difference. It has not been offered, any explanation as to where these amounts come from. What they are attributable to. No piece of evidence establishing that they were even paid has been offered.
What we have are - - before you - - are unsubstantiated allegations of any amount being paid and deducted without proof of their being incurred and evidence as to their purpose.
With all this information available the parties waited until 2001 to send information. At the earliest 2001, to the Justice lawyer. That being said, a requirement to produce books and records was issued on July 23rd, 1997 and a follow-up letter with proposed adjustments was sent on October 2nd, 1997.
To my mind, your honour, those would be the flags. That would be the time to dig back in the records to find out if it's in your child's binder. Take a look through the basement to see if there's anything you've missed. Especially if it's $9,000 in one year, $8,000 in the second and $14,000 in a year. Those are significant amounts, your honour.
And as a result of all the foregoing, I submit to you that this is a clear case where estoppel by representation should be applied to exclude this evidence.
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Reasonable expectation of profit was an issue that has been conceded in terms of there being a business at the appeals level. It was conceded. Had there been an additional 9,000, 8,000 and $14,000 in expenses for interest, perhaps that decision would have been different, for Revenue Canada, leaving aside the possible success of a re-op argument today, of course, in light of Stewart. However, that being said, the position would have been different.
In my opinion the position of Counsel for the Respondent is correct and the Appellants are estopped from claiming the additional amounts of interest in each year. Looked at from another point of view, the issue of additional amounts of interest is not properly before this Court.
[13] Consequently the appeals are allowed to the extent of and in accordance with these reasons. There shall be no costs.
Signed at Ottawa, Canada this 26th day of June 2003.
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"T. O'Connor" |
J.T.C.C.
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CITATION: |
2003TCC343 |
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COURT FILE NOS.: |
1999-4257(IT)I 2001-891(IT)I |
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STYLE OF CAUSE: |
Linda Spencer v. The Queen Robert J. Spencer v. The Queen |
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PLACE OF HEARING: |
London, Ontario |
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DATE OF HEARING: |
February 5, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Judge T. O'Connor |
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DATE OF JUDGMENT: |
June 26, 2003 |
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APPEARANCES: |
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Agent for the Appellants: |
Bill Fehr |
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Counsel for the Respondent: |
George Boyd Aitken |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |