Citation: 2011TCC349
Date: 20110712
Docket: 2010-3174(IT)I
BETWEEN:
KENNETH J. DOLEMAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller J.
[1]
This appeal results from the
reassessment of the Appellant’s 2004 and 2005 taxation years. The issues are:
a)
Whether the Appellant’s Bed and
Breakfast (“B & B”) operation is part of a self-contained domestic
establishment and the work space in home expenses are restricted in accordance
with subsection 18(12) of the Income Tax Act (the “Act”).
b)
Whether the Minister was correct
in determining that 25% of the Appellant’s property was used for the B&B operation.
c) Whether the business expenses
incurred by the Appellant were greater than those allowed by the Minister.
[2]
The only witnesses at the hearing
were the Appellant and his accountant, Stan Pacak.
Self-Contained Domestic Establishment
[3]
Subsection 18(12) of the Act
reads as follows:
18(12) Work
space in home --
Notwithstanding any other provision of this Act, in computing an individual's
income from a business for a taxation year,
(a) no
amount shall be deducted in respect of an otherwise deductible amount for any
part (in this subsection referred to as the "work space") of a
self-contained domestic establishment in which the individual resides, except
to the extent that the work space is either
(i)
the individual's principal place of business, or
(ii) used
exclusively for the purpose of earning income from business and used on a
regular and continuous basis for meeting clients, customers or patients of the
individual in respect of the business;
(b)
where the conditions set out in subparagraph (a)(i) or (ii) are met, the
amount for the work space that is deductible in computing the individual's
income for the year from the business shall not exceed the individual's income
for the year from the business, computed without reference to the amount and
sections 34.1 and 34.2; and
(c) any
amount not deductible by reason only of paragraph (b) in computing the
individual's income from the business for the immediately preceding taxation
year shall be deemed to be an amount otherwise deductible that, subject to
paragraphs (a) and (b), may be deducted for the year for the work
space in respect of the business.
[4]
The phrase self-contained domestic
establishment is defined in section 248 of the Act as follows:
“self-contained domestic establishment”
“self-contained domestic establishment” means a
dwelling-house, apartment or other similar place of residence in which place a
person as a general rule sleeps and eats;
[5]
The question is whether
the Appellant’s B & B operation is part of the self-contained domestic
establishment in which the Appellant resides. Where it is found that a
taxpayer’s business is contained in his home, the aim of subsection 18(12) is
to limit the amount of home maintenance expenses that the taxpayer can deduct
for the work space in his home. Those expenses are limited to the income earned
in the year from the business.
[6]
In July 1996, the Appellant
purchased, a fully restored, circa 1898 Victorian stone house (the “Property”)
in Swan River, Manitoba. It was his evidence that he purchased the
Property with the intention of operating a B & B business within it. The
Property was a two storey home with a finished basement and an unfinished
attic. In furtherance of his intention, the Appellant constructed two bedrooms,
a bathroom and a sitting area in the attic of his Property. For safety
purposes, the office of the Fire Commissioner required that he install an
exterior door and a deck from the second floor. This exterior door on the
second floor could not be used to access the Property from outside as there was
no staircase from it to the ground.
[7]
The rooms in the attic and a
bedroom on the second floor were used almost exclusively for the B & B operation.
When there was a guest in the second floor bedroom, he shared the only bathroom
on that floor with the Appellant and his family. On the main floor of the
Property, B & B guests shared the living room, dining room, study, washroom
and hallway with the Appellant and his family. There was no separate entrance
for the B & B guests nor were there any separate, self-contained, living
quarters for the Appellant and his family.
[8]
The Appellant’s business was a
true B & B operation. That is, the B & B accommodations were within the
Appellant’s home and he and his family shared their living quarters with their
guests.
[9]
Both parties relied on the same
cases to support their positions.
[10]
The Appellant stated that the
facts in Rudiak v. The Queen[1]
were “somewhat similar” to those in the present appeal. He read the
following portion from paragraph 7 of that decision:
(b) the
kitchen was used to make the breakfast for guests of the bed and breakfast;
(the guest did not use or occupy the kitchen. The prepared breakfast was served
in the guest's dining room);
(c) the
laundry room served both the bed and breakfast and personal use; (this is
accurate but again the guests did not use the Appellant's laundry room);
The Appellant stated that in his B & B operation,
as in Rudiak, access to the kitchen and laundry room was restricted.
[11]
Counsel for the Respondent relied
on Rudiak, Denis v. R[2],
and Vallee-Moczulski v. R[3]
to demonstrate the circumstances that were necessary to find that subsection
18(12) did not apply.
[12]
In Rudiak, the taxpayer had
purchased an older residence for the purpose of establishing and operating a B
& B. He renovated the home for the B & B and he also constructed a
separate apartment to provide living quarters for him and his wife. The private
residence was off-limits to the guests. It contained its own private garage and
entrance, eating area, family room, bathroom and bedroom. The guest area was
self-contained with three bedrooms with ensuite bathrooms, a dining room for
the guests, a sitting area and verandah.
[13]
I find that the B & B
operation in the present appeal is distinguishable from that in Rudiak.
The Appellant’s B & B operation was carried on in a portion of his family
home. In Rudiak, the B & B business was carried on in a separate
self-contained area. As stated by McArthur T.C.J. at paragraph 8 of his
decision:
The bed and
breakfast guest premises and the Appellant's living area were physically
separate. The business was carried on in the renovated confines of the original
house. The Appellant and his wife's place of residence was wholly-contained
within the newly-constructed addition to the rear of the business premises. The
guests did not use this separate residence. The Appellant did use his private
kitchen and laundry facilities and a small garage area for the business, but I
find that this does not detract from the Appellant's position that it was minor
in comparison to the overall picture. The fact remains that the guests did not
use the kitchen, laundry area or office.
[14]
The Appellant also stated that his
operation is similar to that in Denis in that his family does not reside
in the entire house. They do not occupy the areas designed, built and used for
the B & B operation. They only occasionally use these rooms for friends and
family at family gatherings.
[15]
In the present appeal, the
Appellant’s family may not reside in the attic space and the one bedroom on the
second floor which were used for the B & B operation; but, the B & B
guests shared all of the Appellant’s residence except a sunroom on the first
floor and the three family bedrooms on the second floor.
[16]
Based on all of the evidence, I conclude
that the Appellant’s B & B operation is a part of a self-contained domestic
establishment and his work space in home expenses were properly limited.
Allocation of Business/Personal Use of Property
[17]
The Appellant submitted a floor
plan of the Property which included the square footage of each room.
[18]
He calculated that 68% of the
Property was used for the B & B operation. However, he “adopted a more
conservative approach” and claimed only 50% of all operating expenses for the
year as business expenses.
[19]
It was the Minister’s position
that the business use of the Property was 25%. This allocation was based on the
area of the Property used for business purposes and the occupancy rate of the B
& B.
[20]
In 2004 and 2005, the B & B
operation had guests for 30 nights (8% of the year) and 47 nights (12% of the
year) respectively. Based on these figures, the Minister assumed that the
Appellant had an average occupancy rate of 10% in the years at issue. The
Minister then calculated the portion of the Property which was used only for
business and the business portion of the Property which was shared by the B
& B operation and the Appellant and his family. The following chart
illustrates the Minister’s calculation.
|
|
Square Feet
|
100% Business
Use
|
Business
Portion of Shared Space
|
Personal
Portion of Shared Space
|
100% Personal
Use
|
|
Basement
|
|
|
|
|
|
|
Workout
|
300
|
|
30
|
270
|
|
|
Laundry
|
132
|
|
13.2
|
118.8
|
|
|
Office
|
198
|
|
19.8
|
178.2
|
|
|
Balance
|
370
|
|
|
|
370
|
|
Main
|
|
|
|
|
|
|
Dining
|
300
|
|
30
|
270
|
|
|
Study
|
300
|
|
30
|
270
|
|
|
Living
|
300
|
|
30
|
270
|
|
|
Kitchen
|
300
|
|
30
|
270
|
|
|
Sunroom
|
265
|
|
|
|
265
|
|
Second Floor
|
|
|
|
|
|
|
Guest Room
|
150
|
150
|
|
|
|
|
Washroom
|
68
|
|
6.8
|
61.2
|
|
|
Common
|
231
|
|
23.1
|
207.9
|
|
|
Bedrooms
|
751
|
|
|
|
751
|
|
Third
|
|
|
|
|
|
|
Guest Room
|
360
|
360
|
|
|
|
|
Washroom
|
100
|
100
|
|
|
|
|
Den
|
200
|
200
|
|
|
|
|
Total
|
4325
|
810
|
212.9
|
1916.1
|
1386
|
|
Percentage of
Total
|
18.73%
|
4.92%
|
44.30%
|
32.05%
|
|
The business
use of the Property was determined to be 25% (based on 18.73% + 4.92%)
|
[21]
In 2004 and 2005, the Appellant’s
B & B was a part time operation. It had guests for one month and one and
one-half months in 2004 and 2005 respectively. I find that the Minister’s
allocation of 25% business use of the Property is reasonable in these
circumstances.
Business Expenses
[22]
The Appellant disagreed with the
amounts allowed for motor vehicle expenses. They were $109 and $75 in 2004 and
2005.
[23]
As he did not have all of the
receipts, he had estimated that his motor vehicle expenses were $902 and $1,405
in 2004 and 2005 respectively.
[24]
At the hearing, the Appellant
asked that he be permitted to claim the automobile allowance rate permitted by
the Canada Revenue Agency in each of the years as it is obvious that his
expenses in each of the years had to be greater than the amount allowed. I
agree with the Appellant.
[25]
Both parties agreed that the
Appellant drove 1,459 kilometers and 850 kilometers for business in 2004 and
2005 respectively. The automobile allowance rates in 2004 and 2005 were 42
cents and 45 cents.
[26]
The appeal is allowed to increase
the Appellant’s motor vehicle expenses to $612.78 and $382.50 in 2004 and 2005.
In all other respects, the appeal is dismissed.
Signed at Ottawa, Canada, this 12th day of July 2011.
“V.A. Miller”
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