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_______________________________________________________________
Appeals heard on common evidence with the appeals of Bryan Foster (2002-552(IT)I) on August 6 and 8, 2002 at Vancouver, British Columbia
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JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1997 and 1998 taxation years are allowed, without costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Vancouver, British Columbia, this 30th day of January 2003.
J.T.C.C.
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Appeals heard on common evidence with the appeals of Engel Foster (2002-550(IT)I) on August 6 and 8, 2002 at Vancouver, British Columbia
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JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1997 and 1998 taxation years are allowed, without costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Vancouver, British Columbia, this 30th day of January 2003.
J.T.C.C.
REASONS FOR JUDGMENT
Little, J.
FACTS:
[1] The appeals were heard together on common evidence.
[2] Bryan Foster ("Bryan") and Engel Foster ("Engel") were partners in the Bryan and Engel Foster Partnership (the "Partnership"). Bryan and Engel are husband and wife.
[3] The Partnership owns a parcel of land located at 63870 Flood-Hope Road, (the "Property") in the town of Hope, British Columbia.
[4] The building and assets located on the Property are owned by Foster Holdings Ltd. ("Holdings"). The shares of Holdings are owned by Bryan and Engel.
[5] Silver-Hope Mini Storage (1995) Ltd. ("Silver-Hope") owns and operates a mini storage business at the Property. Silver-Hope's business is operated out of the building owned by Holdings. The shares of Silver-Hope are owned by Bryan and Engel.
[6] The Partnership leases the Property to Holdings for $1,000.00 per month. Holdings also pays as additional rent the municipal taxes levied on the land and buildings, plus water rates and insurance premiums. The rent of $1,000.00 (and the specified additional items) were paid by Holdings to the Partnership in the 1997 and 1998 taxation years.
[7] Pursuant to an Agreement dated December 27, 1995 a company by the name of Mar-Terr Enviro Research Ltd. (the "Manager") was retained by the Partnership as exclusive agent to rent or lease and manage the Property. The shares of the Manager are owned by Bryan.
[8] According to the Appellants' Notices of Appeal the Partnership paid a management fee to the Manager in the amount of $36,000.00 in each of the 1997 and 1998 taxation years. However, according to the income tax return of Bryan for 1998 (Exhibit A-8) the management fee paid in that year was $14,000.00.
[9] The Manager paid the following salaries to Engel:
1997 - $18,510.00 1998 - 8,090.00
[10] By Agreement dated December 15, 1995 the Partnership leased furniture, a computer and other office equipment from the Manager for a fee of $1,000.00 per year.
[11] The members of the Partnership, Holdings, Silver-Hope and the Manager filed income tax returns for the 1997 and 1998 taxation years.
[12] The fees or salaries referred to above were reported by the parties when they filed their income tax returns.
[13] Travel expenses and motor vehicle expenses were claimed by the members of the Partnership.
[14] By Notice of Reassessment dated January 4, 2001 (the "Reassessments") the Minister of National Revenue (the "Minister") reassessed the 1997 and 1998 taxation years of Bryan and Engel. According to the statement in the Notices of Appeal the following expenses were disallowed in the Reassessments:
B. ISSUES
[15] Are the following expenses deductible by the Partnership?
(a) Management fees of $36,000.00 for each of the 1997 and 1998 taxation years;
(b) Office expenses of $1,000.00 per year for each of the 1997 and 1998 taxation years;
(c) Travel expenses of $27.85 and $13.45 for each of the 1997 and 1998 taxation years;
(d) Motor vehicle expenses of $234.25 and $341.08 for each of the 1997 and 1998 taxation years.
C. ANALYSIS
[16] At the commencement of the hearing, counsel for the Appellants advised the Court that the Appellants were reducing their claim for the management fee paid to the Manager in 1998 from $36,000.00 to $14,00.00. However, counsel for the Appellants stated that the Appellants maintain that they are entitled to deduct the management fee of $36,000.00 that was paid by them to the Manager in the 1997 taxation year.
[17] Max Weder, counsel for the Appellants, also stated that the agreement dated December 15, 1995 between Bryan and Engel and the Manager (Exhibit A 6) contained a mistake. Mr. Weder said that paragraph 4 of the agreement should state that the rent payable to the Manager for the miscellaneous assets (office equipment, computer, etc.) should be $1,000.00 per year rather than $1,000.00 per month.
[18] Counsel for the Appellant admitted that the corporate structure that was established was unusual. I agree. Counsel said that if Silver-Hope (the operator of the mini-storage facility) had paid the management fee to the Manager there would not be a problem. Counsel for the Appellant also stated that Holdings, in essence, became a flow through entity for members of the Partnership. I cannot accept the proposition that Holdings was, in essence, a flow through entity for the Parnership. I must recognize the corporate structure that the parties, for whatever reason, put in place.
[19] During the argument counsel for the Respondent said:
But essentially, the Appellants' submission here is that the evidence demonstrates that the fee that was paid to Mar-Terr (the Manager) is to earn income, and it's reasonable in the circumstances.
[20] It will be noted that the management fee paid by the Partnership to the Manager was $36,000.00 in 1997 and $14,000.00 in 1998. When it is recognized that the only income of the Partnership in this situation was the amount of $12,000.00 that it received from Holdings in each of 1997 and 1998. I do not believe it could be said that the management fees of $36,000.00 and $14,000.00 paid by the Partnership to the Manager was reasonable.
[21] From the evidence that was presented, I find that Bryan and Engel should be allowed the following deductions:
[22] The Minister is instructed to issue Notices of Reassessment to allow the expenses outlined above.
[23] From an analysis of the above facts it will be noted that the Manager was paid management fees of $36,000.00 in 1997 and $14,000.00 in 1998 but pursuant to this Judgment Bryan and Engel will only be allowed to deduct management fees of $10,000.00 ($5,000.00 each) for the 1997 and 1998 taxation years. Under the circumstances as outlined in this Judgment, I believe that the Minister should permit the Manager to file amended income tax returns for the 1997 and 1998 taxation years to reduce the management fees received from the Partnership to a total of $10,000.00 for each year.
Signed at Vancouver, British Columbia, this 30th day of January 2003.
J.T.C.C.
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| SOURCE: http://decision.tcc-cci.gc.ca/en/2003/html/2003tcc2002550.html | Generated on 2003-03-03 |