Tax Court of Canada Judgments

Docket: 2004-894(IT)I

BETWEEN:

TIMOTHY KIM,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeals heard on August 6, 2004 in Vancouver, British Columbia

Before: The Honourable Justice Gerald J. Rip
Appearances:
For the appellant:	The appellant himself
Counsel for the respondent:	Gavin Laird

____________________________________________________________________

JUDGMENT

          The appeals from the assessments made under the Income Tax Act for the 1997, 1998 and 1999 taxation years are allowed with costs, if any, and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant may deduct commissions claimed in calculating his income.

          Signed at Ottawa, Canada, this 30^th day of September 2004.

"Gerald J. Rip"

Rip J.

Citation: 2004TCC665

Date: 20041012

Docket: 2004-894(IT)I

BETWEEN:

TIMOTHY KIM,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

AMENDED REASONS FOR JUDGMENT

The text of the original judgment issued on

September 30, 2004

has been amended and the changes have been integrated

in the body of this document.

Rip J.

[1]      Mr. Timothy Kim appeals income tax assessments for 1997, 1998 and 1999 in which the Minister of National Revenue did not allow the deduction of purported commission expenses paid in calculating his income. Mr. Kim was unable to produce business records relating to the years in appeal as they were destroyed in a fire that damaged his home in December 2000. The respondent states that the commission expenses were disallowed for reasons other than they could not be substantiated by records.

[2]      Mr. Kim carries on business selling books for Books are Fun ("Books"), an affiliate of Readers Digest. Books supplies the products and Mr. Kim sells the products for a commission of approximately 22 per cent. The Books products include general interest books, cook books, children's books, New York Times best sellers as well as gift items. About 85 per cent of Mr. Kim's products are from Books. Sales are made to employees of businesses and schools. Mr. Kim takes a selection of products to a school or business where it is available to the employees for about a week. The employees pursue the material at their leisure and order from the selection. Mr. Kim or one of his salespeople return the following week with the ordered products and accept payment in cash or cheque.

[3]      At the end of the week Mr. Kim "tallies up" what was sold, compares sales to orders and deposits the total amount to a Books bank account, not his own.

[4]      Books, according to Mr. Kim, determines the prices, pays a commission to Mr. Kim and, at the end of the year, issues Mr. Kim a T4A form for income tax purposes.

[5]      Mr. Kim stated he engages other people as subcontractors to sell books and he, in turn, pays them a commission, which may vary among the subcontractors. Two of these people in the years in appeal were Henry See and his wife Annabelle[1]. Apparently income earned by the Sees was included in Richdale Sales Ltd. ("Richdale's") income. The Sees' position is that Richdale carried on the business of selling the product, not themselves. Mr. Kim explained that a person like Mr. See would take products from him to show to customers in the same way as did Mr. Kim. According to Mr. Kim he could not stop Mr. See from selling products at any price the latter desired; Mr. See was not restricted to sell at a fixed price. Mr. See would fill the orders and collect payment. At the end of each week the money from the transactions would be compared to the cost of the books. If the payments included cash, Mr. See would take cash to satisfy his commissions, which approximated 15 per cent. Mr. Kim would deposit cheques from the Sees in lieu of the excess cash they received. He would deposit the cheque in his account and write a personal cheque from his account to the Sees.

[6]      If there were not enough cash to satisfy the commissions in full, Mr. Kim said he would write Mr. See a cheque; if the amount was in excess of commissions earned, Mr. See would write Mr. Kim a cheque for the difference. Mr. Kim did not send a form T4A to Mr. See at the time because, he stated, he did not think that he was required to do so.

[7]      All of Mr. Kim's documents with Mr. See were destroyed in a home fire in 2000. The respondent admits the fire occurred. Mr. Kim said the lost documents included agreements for Mr. See to sell at a fixed commission, spread sheets tracking sales and records of cash payments to Mr. See.

[8]      Mr. Kim produced copies of certified cheques for the three months September, October and November 1997 issued by him to Mrs See. Mr. Kim obtained these copies from his bank; due to the high cost of getting copies from the bank he restricted the cheques to a three month period. The cheques total $1,136.43 and, Mr. Kim alleges, represent amounts of commissions paid to the Sees to make up for a shortfall in cash.

[9]      As far as Mr. Kim was concerned he was dealing with the Sees. He was not aware that they incorporated Richdale to sell books and sundry products until the tax authority so informed him. The Sees had not provided him with a business number for Richdale (for goods and services tax ("GST") or provincial tax purposes) or any other indication that Richdale was carrying on the business.

[10]     The Canada Customs and Revenue Agency ("CCRA") assessed Mr. Kim on the bases that he sold products to Mr. See at a fixed cost and the difference between what Mr. See sold the products and what Mr. See paid to Mr. Kim was gross profit to Mr. See; Mr. Kim paid no commissions to Mr. See. Mr. Kim's position is that the difference was a commission.

[11]     Respondent's counsel produced a "Weekly Purchase Report" for Mr. See for each of the weeks ending March 12 and 19, 1999. The reports were prepared by Mr. See. Total sales for March 12 are stated to be $1,508.93. A notation describes commission to be 21.26 per cent. For the week of March 19, total sales are $1,102.53 and commission is stated at 22.91 per cent. Mr. Kim stated that the amounts of $1,508.93 and $1,102.53 are 85 per cent of the gross sales.

[12]     Mr. Kim explained that when he received a Weekly Purchase Report he would reconcile what was reported to the inventory that was sold. He recalled that the Sees would usually come to his home and give him a transaction record and a Weekly Purchase Report. Mr. Kim also had a receipt book. The Sees would give him all cheques payable to Books. They also would write a cheque for any cash they received, less their commission. Mr. Kim declared he did not receive cash from the Sees at that time. Even if the Sees received 80 per cent of their sales in cash, they would pay Mr. Kim by cheque. Mr. Kim stated that "we are a cash business" and assumed anyone receiving cash would want to deposit it to their bank account as soon as possible instead of leaving it at home. Mr. Kim, in turn, would issue a cheque to Books. Cheques from customers also were payable to Books.

[13]     Notwithstanding that such subcontractors may have sold books for more than the price recommended by Books, the commission was based on the recommended price, any excess was retained by the subcontractor, according to Mr. Kim.

[14]     Sometime during the audit of Mr. Kim by CCRA, Mr. Kim convinced Mr. See to sign three statements, one for each 1997, 1998 and 1999, to the effect that Mr. See was an independent contractor who earned commission income in the year.

[15]     Mr. Kim and Mr. See, or Richdale, today are competitors. When the Sees worked with Mr. Kim, they generated 30 to 35 per cent of Mr. Kim's business.

[16]     Mr. See testified that Mr. Kim did not pay him any commission. "I made a profit." As far as Mr. See is concerned he would acquire books from Mr. Kim at a discount of 25 per cent of the recommended price; he would sell at the recommended price. The 25 per cent discount represented his profits.

[17]     Mr. See testified that he received both cash and cheques from customers. He would deposit the cheques and cash into the joint bank account he had with Mrs. See; he would then write a cheque to Mr. Kim for the amount owed.

[18]     Mr. See explained the various columns in the Weekly Purchase Report. The report would include the total units sold and the cost to Mr. See of each unit together with the cost to him of each book title. Mr. See testified his cost per book is 25 per cent of the suggested price; for example, he paid Mr. Kim $75 for $100 of merchandise. He paid Mr. Kim only the $75. Mr. Kim, he stated, never paid him anything. For March 19, the total cost to him was $1,102.53. The description "total sales" meant, according to Mr. See, his cost of the books, the amount he had to pay to Mr. Kim, plus tax, plus any deductions for books he gave free to customers or lost books. The description "commission" of 22.91 per cent, refers to his net profit, Mr. See claims. Since he had to pay Mr. Kim half of his cost for the free books and lost books, which during the week of March 19 aggregated $22.76, and tax, which was $77.18, his profit was reduced from 25 per cent to 22.91 per cent.

[19]     Only half of the usual purchase price was paid for books that Mr. See lost or chose to give away. It also appears that Mr. See was not required to add sales tax to the cost of the books he received at a discount.

[20]     The term "commission" on the Weekly Report and other documents, Mr. See stated, is an industry term used by other publishers he deals with.

[21]     Mr. See, upon being provided with copies of cheques payable to Mrs. See by Mr. Kim, insisted the cheques did not represent commissions but "might be from overpayments". He explained that "sometimes I do receive cheques that are payable to Books Are Fun, instead of Richdale Sales. He gave the cheque payable to Books to Mr. Kim for deposit to the credit of Books and Mr. Kim reimbursed him for any difference above his cost. Cheques payable to Richdale as well as cash were deposited to Richdale's bank account, according to Mr. See.

[22]     Mrs. See testified that any cheques payable to Books were given to Mr. Kim and Mr. Kim "returns the money to us" by cheque. Mr. Kim also issued cheques to the Sees when there were errors in calculations or on the spreadsheet "that we overpaid him". The Sees denied receiving any cash from Mr. Kim.

[23]     Mr. John Robert Omand who worked as an independent agent for Mr. Kim one day a week since 1997 said he knew how "commissions were paid" and he received a commission of 20 per cent of his sales.

[24]     The issue before me is not necessarily one of credibility but, rather a difference in interpretation by Mr. Kim and the Sees of their relationship. I believe that Mr. Kim's view is the correct view: Mr. See acted as a subcontractor for Mr. Kim.

[25]     According to the evidence the Sees were allowed to return books they did not sell and they did not have to pay Mr. Kim for the books until they were sold. Notwithstanding that the Sees had to pay a portion of the cost of books lost or given away, their cost was at least half of what they would have had to pay to Mr. Kim if the books had been sold[2]. Also, no GST of seven per cent was paid by the Sees on account of lost or free books; the GST was paid only on the total sales. If Mr. Kim was a wholesaler, as the Sees and the respondent allege, the Sees would be liable for GST on all the supplies it acquired from Mr. Kim.

[26]     Mr. See distinguishes a commission and profit based on whether he retains the cash or has to give cash to Mr. Kim and is then remunerated. How one is paid is not determinative of whether the payment is a commission or something else, profit, for example. Mr. See's explanation of why he signed the statements for 1997, 1998 and 1999 indicates his position:

He told me that he needs this for his filing of income tax, to report it. That's what he told me. And so as I kept saying, call it commission, call it profit, call it discount, I calculated that, yes, this is more or less the amount I would have made from him. I am not denying it. I am just saying I did not receive commission directly from him from that amount.

[27]    Because Mr. See believes he retained the money that would be due to him in any event (instead of giving Mr. Kim the money and then having Mr. Kim write him a cheque for a "commission") he believes Mr. Kim did not pay him a commission. On the facts, however, it appears that the Sees were paid a commission and the payments of the commissions are deductible by Mr. Kim in computing his income for 1997, 1998 and 1999.

[28]    The appeals are allowed with costs, if any.

          Signed at Ottawa, Canada, this 12^th day of October 2004.

"Gerald J. Rip"

Rip J.

CITATION:

2004TCC665

COURT FILE NO.:

2004-894(IT)I

STYLE OF CAUSE:

Timothy Kim v. The Queen

PLACE OF HEARING:

Vancouver, British Columbia

DATE OF HEARING:

August 6, 2004

AMENDED REASONS FOR JUDGMENT BY:

The Honourable Justice Gerald J. Rip

DATE OF JUDGMENT:

September 30, 2004

APPEARANCES:

For the appellant:

The appellant himself

Counsel for the respondent:

Gavin Laird

COUNSEL OF RECORD:

For the appellant:

Name:

Firm:

For the respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

---