Citation: 2012 TCC 63
Date: 20120224
Docket: 2010-595(IT)I
BETWEEN:
THÉRÈSE DESGAGNÉ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Jorré J.
Introduction
[1]
This is an appeal
from reassessments dated August 25, 2008, for the 2006 and 2007 taxation years.
[2]
The appellant is a
lawyer and she regularly appears in civil court proceedings.
[3]
I will examine
separately the evidence and the law applicable to the issues.
Deemed benefits
[4]
The appellant is a
shareholder of the corporation Gestion R.G.T.L. Inc. The common operating costs
of the law firm where the appellant works are paid by Gestion R.G.T.L. Inc.
[5]
During the two taxation
years at issue, the appellant's accounts receivable to Gestion R.G.T.L. were
over $15,000. No interest was charged on this debt.
[6]
The facts I have
described in the preceding paragraph are not in dispute.
[7]
In a commercial context,
a supplier often gives clients a period for paying invoices, for example 30 or
60 days before charging interest. However, it is not normal for a supplier to indefinitely
refrain from charging interest on an account receivable.
[8]
The Minister submits
that, under subsections 15(1) and 15(9) and subsection 80.4(2) of the Income
Tax Act, there is a deemed benefit. The details about the amount of the account
receivable and the calculation of the benefit appear at tab 6 of Exhibit I-1. The
calculation is not in dispute.
[9]
Here are the relevant
provisions of these subsections:
15(1)
Where at any time in a taxation year a benefit is conferred on a shareholder, …
by a corporation …
…
the
amount or value thereof shall … be included in computing the income of the
shareholder for the year.
(9)
Where an amount in respect of a loan or debt is deemed by section 80.4 to be a
benefit received by a person … the amount is deemed … to be a benefit conferred
in the year on a shareholder….
80.4(1)
…
(2)
Where a person … was
(a)
… a shareholder of a corporation,
…
and
by virtue of that shareholding that person … received a loan from, or otherwise
incurred a debt to, that corporation, … the person … shall be deemed to have
received a benefit in a taxation year equal to the amount, if any, by which
(d)
all interest on all such loans and debts computed at the prescribed rate on
each such loan and debt for the period in the year during which it was
outstanding;
exceeds
(e)
the amount of interest for the year paid on all such loans and debts not later
than 30 days after the later of the end of the year ….
[10]
There is no doubt that
these provisions apply in this case. The appellant is a shareholder of Gestion
R.G.T.L. and owed a debt to this corporation; no interest was paid.
Clothing
[11]
The appellant considers
this to be the most important issue. She appears regularly before courts.
[12]
In certain
circumstances, she has to be gowned.
[13]
In other circumstances,
when gowning is not required, the appellant must wear dark clothing. See, for
example, subsection 19(2) of the Rules of the Court of Appeal of Québec in
Civil Matters, the last paragraph of section 36 of the Rules of practice
of the Superior Court of Québec in civil matters and section 8 of the Regulation
of the Court of Québec.
[14]
The appellant bought
black clothing for these purposes.
[15]
The appellant testified
that it is not her style to wear such black clothing and that she wears it to
go to court and she also wears it at work on days when she has to go to court. On
days on which she does not go to court she does not normally wear the clothing
at issue. It is rare that she wears this clothing when she is not on duty.
[16]
During the two years at
issue and previous years, the appellant bought black clothing, added them to class
8 and claimed a class 8 capital cost allowance.
[17]
In previous years, the
appellant also bought other black clothing, gowns, bands and furnishings that
she added to class 8.
[18]
In establishing the
reassessments, the Minister allowed gowns and bands to be included in class 8;
however, the Minister denied the inclusion of the black clothing.
[19]
More specifically, he
denied the inclusion of clothing bought during the two years at issue, and he
reduced the opening balance of class 8 at the beginning of 2006 in such a way
as to exclude the purchase of clothing before 2006 and to include the
depreciated value of the gowns and furnishings. (See, inter alia, tab 8
of Exhibit I‑1, in particular note 1 at the bottom of the first page.)
[20]
In support of her
appeal, the appellant cites Charron v. Canada [1997] T.C.J. No. 1181
(QL), a decision of this Court regarding a lawyer who claimed clothing costs. That
case also refers to the dress code required under the rules of practice of
different courts. In Charron, the Court allowed the expense claimed.
[21]
However, the
circumstances under Charron seemed to be different from those in this
case. In Charron, there was no description of the clothing at issue;
however, the parts of the provisions of the rules cited at paragraph 18 of the
judgment refer only to situations where gowning is required, which would imply
that the clothing at issue was very specialized clothing such as the gown and bands
that, in practice, are only worn in court.
[22]
Intrinsically, the cost
of purchasing clothing is generally a personal expense which is not deductible
under paragraph 18(1)(h) of the Income Tax Act. It is only in
special circumstances that clothing purchases are not considered a personal
expense. (See also the decision by Paris J. in Rupprecht v. The Queen,
2007 TCC 191, at paragraphs 12, 13 and 17 to 19, which was affirmed by the
Federal Court of Appeal, 2009 FCA 314.)
[23]
In this case, we are
not in one of these limited situations where the cost of clothing may be
deducted. Although it is dark clothing, it is still clothing that can be worn
in general at work or elsewhere. It is not very specialized clothing or a
uniform.
[24]
Thus, the Minister
correctly decided not to allow the deduction for clothing expenses.
Adjustment to the class 8 opening balance
[25]
The appellant submits
that the Minister cannot adjust the class 8 opening balance at the beginning of
2006 because it would be in part an adjustment in statute-barred years.
[26]
I cannot accept this
argument because it is settled law that an assessment involves a determination
of the amount of tax payable for a year. An assessment does not establish the
underlying facts for the coming years, including the balance of different
accounts that may be relevant for future assessments.
[27]
In Coastal
Construction and Excavating Ltd. v. Canada, [1996] T.C.J. No. 1102
(QL), Justice Bowman, subsequently the Chief Justice, explained the following:
. .
. The Minister is obliged to assess in accordance with the law. If he assesses
a prior year incorrectly and that year becomes statute-barred this will prevent
his reassessing tax for that year, but it does not prevent his correcting the
error in a year that is not statute-barred, even though it involves adjusting
carry-forward balances from previous years, whether they be loss carry-forwards
or balances of investment tax credits. New St. James Limited v. M.N.R.,
66 DTC 5241; Allcann Wood Suppliers Inc. v. The Queen, 94 DTC 1475. No
question of estoppel arises: Goldstein v. The Queen, 74 DTC 1029.
(This translation of the excerpt is taken from
paragraph 16 of Leola Purdy Sons Ltd. v. The Queen, 2009 TCC 21.)
[28]
As for the amount of
the adjustment, I accept the appellant’s testimony that she bought the
furnishings for her office.
[29]
The appellant also testified
that the reduction of the opening balance should include more than just the
clothing. However, I did not hear any specific evidence regarding past
purchases, even for a few years before the years at issue.
[30]
Class 8 allows a 20% annual
deduction according to the declining balance method; this rate allows a
depreciation of over 60% after five years. Consequently, class 8 purchases made
when the appellant began her practice would have very little effect on the
opening balance in 2006. In contrast, if purchases were made under this class
over the five years preceding the years at issue, these purchases would
probably have a significant impact on the opening balance.
[31]
The appellant started
practising law in 1994. It is undoubtedly difficult to establish the original
purchase costs of the furnishings. However, we would expect the appellant to be
able to provide more detailed evidence regarding the balances and additions to
class 8 during at least a few years before the two years at issue, which might
have made it possible to provide some evidence of a different amount.
[32]
In the absence of
evidence that would enable me to find that the opening balance should be a
larger amount than the amount established by the auditor, there is nothing that
would allow me to find that a different opening balance should be used.
Class 8
[33]
The appellant included
the gown and bands in class 8, perhaps because that is what was done in Charron.
In Charron, it does not seem as though the appropriate class was
discussed, but I considered this issue when drafting these reasons.
[34]
The issue of whether class
8 is the correct class was never raised at the hearing and, therefore, I did
not have the benefit of any submissions by the parties on that issue. However,
in view of subsection 18.5(3) of the Tax Court of Canada Act, and given
that the amount of the taxes affected would be very small, rather than ask the
parties to make additional submissions, I concluded that it would be best to
rule directly on this issue while making it known that I did not have the advantage
of submissions from the parties.
[35]
Class 12 of Schedule II
of the Income Tax Regulations includes in paragraph (i) "a uniform".
[36]
The Nouveau Petit
Robert, 2006, provides the second definition of "uniforme" as
follows:
[Translation]
2.
(1831) specific suit or clothing, required to be worn by a group (professional,
etc.). Bailiff’s uniform, contractor’s uniform. [Translation] "his caricature of a
clergyman’s uniform, homberg, long black frock coat" (Mirbeau).
[37]
Accordingly, the gown
and bands that a lawyer wears in court are covered by paragraph (i) of class
12.
[38]
The gown and bands thus
fall under class 12 which has a higher depreciation rate than class 8.
Interest and bank fees
[39]
In 2006 and 2007, the
appellant claimed interest deductions in the amounts of $4,649.62 and $4,394.68,
respectively. A portion of these amounts were various bank fees and not
interest.
[40]
The auditor accepted
that the bank fees designated as [Translation]
"monthly billing" were for business purposes and allowed a deduction
for these amounts.
[41]
As to the other bank
fees, the auditor concluded that they were related to the line of credit.
[42]
The auditor found that
the current account for the practice typically had little money in it and that,
from time to time, the appellant wrote personal cheques in her name, which
generally generated a bank overdraft. The overdraft was very quickly covered by
a deposit from the line of credit. I also note that when the balance of the
current account was greater than required for immediate needs, the surplus was
used to make payments on the line of credit.
[43]
After noting that the
line of credit was used partly to pay for the cheques to the appellant, the
auditor concluded that the line of credit was used in part for personal
purposes; he evaluated the percentage of personal use at 25%. (See, inter
alia, questions 39 to 53 of the transcript and tab 7 of Exhibit I-1.)
[44]
As evidence, the
appellant filed Exhibits A-2 to A-4 that provide details of various bank fees. I
am satisfied that the amounts of $5.25 and $9.95 on the first pages of these Exhibits
are bank fees exclusively related to the monthly billing. When these amounts
are added to the amounts of the monthly billing calculated by the appellant, it
produces a total of $434.70 in 2006 and $421.33 in 2007, or $14.70 and
$1.33, respectively, more than the amounts used by the Canada Revenue
Agency.
[45]
Thus, the expenses must
be increased by $14.70 in 2006 and $1.33 in 2007.
[46]
The appellant also
testified that she paid personally, and not from the current account of the
practice, certain practice expenses, such as the licence plates, auto
insurance, driver's licence and vehicle maintenance, or the purchase of the
clothing discussed above. Consequently, she submits that even though the personal
cheques in the appellant's name were funded from the line of credit for the practice,
these cheques were used to pay for business expenses and consequently, still
represented a business use of the line of credit.
[47]
I accept the appellant's
testimony that the personal cheques were used to pay expenses of the practice.
[48]
However, the appellant's
evidence does not make any distinction between the amounts withdrawn by cheque
to pay for business expenses and the amounts withdrawn to pay for other
expenses. Moreover, part of the motor vehicle expenses was personal; the denied
clothing expenses were also personal. There may have been other personal
expenses paid with these cheques.
[49]
There is therefore no
doubt that part of the use of the line of credit was personal. Was this use
less than 25%? I do not see what evidence could lead me to determine another
specific percentage. Consequently, there will be no other changes in the amount
of deductible interest.
[50]
There is also $180 in
fees for negotiating credit in 2006 and 2007. These fees are related to the
line of credit. The deductibility of these fees must be established in the same
proportion as the deductibility of interest since the line of credit was used
for commercial and personal purposes. Given that these fees are included in the
interest allowed at 75%, there is no reason to increase the deductible
proportion of these two amounts of $180.
Conclusions
[51]
For these reasons, the
appeal will be allowed, without costs, and the matter will be referred back to
the Minister for reconsideration and reassessment on the basis that:
1. The
gown and bands are to be included in class 12 and not class 8 and,
consequently, the appellant may, if she so chooses, deduct the additional
capital cost allowance.
2. The appellant’s
expenses should be increased by $14.70 in 2006 and $1.33 in 2007.
Signed at Ottawa, Ontario, this 24th day of February
2012.
"Gaston Jorré"
Translation certified true
on this 24th day of July 2012
François Brunet,
Revisor
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