“When considering the amount of amortization expense, Mr. Evans reduced the amount of amortization expense to $45,000, arguing that it is more consistent with the average for 1618302 over the past five years. He opined that it was a reasonable adjustment considering its impact on corporate income. Mr. Evans makes the point that there is no logic in a corporation spending close to one million dollars in equipment purchases only for the owner to be making less than minimum wage at the end of the year. This is not a reasonable return on the corporate investment. Mr. Evans’ report states that corporate income was adjusted for all years under review.
The amortization expense is also viewed as being unreasonable by Mr. Evans given that the 2018 sale of much of the equipment realized returns that were much higher than the book value. Thus, Jaime’s income for 2018 is significantly higher.
Mr. Clarke disagrees. He has opined that the rate of amortization is consistent with the maximum amounts permitted by Revenue Canada. He also points to the fact that the Guidelines prohibit amortization for real property but not for equipment. In terms of the specific amortization expense amounts, Mr. Clarke testified that the amount of amortization was lower than what CRA allows for 2018 but it was higher for 2019 and 2020. However, based on Exhibit #67, it seems that the dispute only applies to 2019.
Jaime’s accountant, Mr. Mehlman also felt that Jaime’s depreciation is common for similar businesses that have significant assets that can be depreciated. He felt it was common for other similar businesses.
I agree in large part with Mr. Clarke. While I accept that the impact of the amortization expense effectively shelters Jaime from his support obligations, the reality is that the Guidelines specifically prohibit amortization in relation to real property and not for equipment. This is clearly not an oversight. To make an arbitrary reduction in the amortization expense to $45,000 does not find any support in s. 19 of the Guidelines. I am of the view that it is not a principled way of addressing the impact of the amortization expense.
However, the evidence is that Jaime’s amortization expense has not strictly followed the CRA guidelines, and that at least for 2019 and 2020, the amortization expense has exceeded the CRA amounts. I have no evidence to deal with the excessive amortization expense for certain years but I disagree with the approach of arbitrarily reducing the amount to $45,000.
Some inequity is apparent in the fact that the amortization expense does not get added back to Jaime’s income since it is not related to real property. Amortization is a non-cash expense that positively impacts corporate cash flow but negatively impacts available corporate income to the shareholder. A cash flow analysis was done by Mr. Clarke for the years 2015, 2016 and 2017 as part of Exhibit #66. In that report, Mr. Clarke draws a parallel between the cash flow analysis and the level of income imputed by the court in the amount of $82,000.
It is noteworthy that the cash flow analysis in Exhibit #66 provides a range of cash flow that is between $30,000 to $50,000 higher than Jaime’s reported income.
The issue of positive corporate cash flow becomes more relevant when considering the question of imputed income as will be discussed below. In the end, I reject Mr. Evan’s approach to reduce amortization to $45,000.”