Citation: 2006TCC295
Date: 20060525
Docket: 2005-656(IT)I
BETWEEN:
REAKES ENTERPRISES LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
2006-657(IT)I
AND BETWEEN:
ANDREW REAKES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
2006-740(GST)I
AND BETWEEN:
REAKES ENTERPRISES LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Beaubier, J.
[1] These appeals were heard together on common evidence at Calgary, Alberta, on May 17, 2006. Andrew Reakes, the Appellant and the sole shareholder and director of Reakes Enterprises Ltd. ("R.E.L.") was the only witness. Three issues are the subject matter of the appeals:
1. A one week Mexico time share condominium, on which capital cost and interest deduction was denied to R.E.L. and assessed as a shareholder benefit to Andrew Reakes.
2. Premiums paid on a life insurance policy on Andrew Reakes which were denied deduction to R.E.L. and assessed as a shareholder benefit to Andrew Reakes.
3. Various travel expenses in 2001 and 2002 which were denied to R.E.L. and assessed as a shareholder benefit to Andrew Reakes.
[2] In the course of the hearing, the following items were admitted by Respondent's counsel to be deductible expenses of R.E.L.:
Travel Expenses, Exhibit A-2, page 4/5
|
|
Amount
|
GST
|
|
Halfway Ranch
|
$120
|
$8
|
|
American Express
|
810
|
57
|
|
Andy's Visa
|
729
|
51
|
|
Bay Motor Hotel
|
920
|
64
|
|
Andy's American Express
|
495
|
35
|
In addition, Appellant's counsel withdrew the claim for capital cost allowance for the condominium. These matters are referred to the Minister of National Revenue to be dealt with accordingly as exceptions to the remainder of the decision in these appeals.
[3] Paragraphs 10 to 18 inclusive of the Reply to the Notice of Appeal of R.E.L. (2005-656(IT)I) set out the matters in dispute. They read:
10. The Minister reassessed the Appellant's 2001 and 2002 taxation years on February 27, 2004, as detailed on the Attached Schedule "A" to:
a) Disallow capital cost allowance of $509 and $489, respectively (the "CCA");
b) disallow interest for time-share of $13,439 and $5,029, respectively (the "Interest");
c) disallow insurance premiums of $2,072 in each year (the "Premiums"); and
d) disallow travel expenses of $3,924 and $4,216, respectively (the "Travel Amounts").
11. The Appellant objected to the reassessments by serving on the Minister a Notice of Objection dated March 16, 2004, received, by the Minister on March 22, 2004.
12. The Minister confirmed the Appellant's 2001 and 2002 taxation years by Notification of Confirmation dated November 29, 2004.
13. In so reassessing tax for the Appellant's 2001 and 2002 taxation years and in confirming those reassessments, the Minister assumed the same facts as follows:
a) the Appellant operates a flooring store in Williams Lake, B.C. (the "Business");
b) the Appellant operates the Business under the name "Consumers Carpet Warehouse";
c) Andrew Reakes is the sole director, sole shareholder, President and employee of the Appellant (the "Shareholder");
d) the Shareholder conducts the day to day activities of the Business;
e) the Shareholder's spouse Rhonda Reakes ("Rhonda") maintains the books and records of the Business with the assistance of an office clerk;
f) the Appellant issues pre-numbered invoices to track sales;
g) sales invoices are recorded on a computerized bookkeeping system at the end of the day;
h) bank deposits are completed at the end of the day;
a) on about February 7, 1999, the Shareholder and Rhonda purchased a time share in Mexico (the "Time Share");
i) the total cost for the Time Share was US$8,711.25;
b) financing of $7,404 at 16% per annum was obtained to pay towards the purchase of the Time Share;
c) financing of $7,404 at 16% per annum was obtained to pay towards the purchase of the Time Share;
j) the Shareholder and Rhonda had title to the Time Share;
k) the Time Share was a right to the use and enjoyment of a vacation unit;
Capital Cost Allowance
d) in 2001 and 2002, the Appellant claimed capital cost allowance respecting the Time Share of $509 and 489, respectively, as detailed on the attached Schedule "A";
e) the Appellant claimed the Time Share as a Class 1 depreciable property;
f) the Time Share was not a depreciable property of the Appellant;
Interest
g) in 2001 and 2002, the Appellant claimed interest on long term debt respecting the Time Share of $13,439 and $5,029, respectively, as detailed on the attached Schedule "A";
h) the Appellant did not earn any income from the Time share;
i) the Time Share was for the personal use of the Shareholder;
a) the Interest was not an expense of the Appellant;
Insurance Premiums
l) in each of 2001 and 2002, the Appellant claimed insurance premiums respecting the Shareholder of $2,072 as detailed on the attached Schedule "A";
m) the Appellant insured the life of the Shareholder (the "Policy")
n) the beneficiary of the policy was Rhonda;
o) the Policy was not obtained to secure a business asset or liability of the Appellant; and
Travel
p) in 2001 and 2002, the Appellant claimed travel expenses of $10,126 and $5,341, respectively, as detailed on the attached Schedule "A";
q) of the travel expenses claimed by the Appellant $3,924 in 2001 and $4,217 in 2002 were personal in nature.
B. ISSUES TO BE DECIDED
14. The issue is whether the Minister properly disallowed the CCA, Interest, Premiums and Travel Amounts.
C. STATUTORY PROVISIONS RELIED ON
15. He relies on sections 3 and 9, subsections 111(1) and 248(1) and paragraphs 18(1)(a), 18(1)(h), 20(1)(a) and 20(1)(c) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the "Act") and Part XI of the Income Tax Regulations.
D. GROUNDS RELIED ON AND RELIEF SOUGHT
16. He respectfully submits that the Premiums and Travel Amounts were not incurred for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(1)(a) of the Act but were personal or living expenses of the Appellant within the meaning of paragraph 18(1)(h) of the Act.
17. He further submits that the Minister properly disallowed the Interest under paragraphs 18(1)(a) and 20(1)(c) of the Act as the interest was not incurred by the Appellant for the purpose of gaining or producing income from a business or property.
18. He further submits that the Minister properly disallowed the CCA as he properly calculated the Appellant's entitlement to capital cost allowance and allowed the maximum capital cost allowance for the 2001 and 2002 taxation years pursuant to subsection 20(1)(a) of the Act and Regulation 1100 of the Income Tax Regulations.
[4] On February 21, 1995 Andrew purchased the insurance policy in his own name and named his wife, Rhonda as the beneficiary. (Exhibit R-1). It covered:
|
Non occupational loss
|
Injury/Illness
|
$1,500/month
|
|
Business overhead
|
Injury
|
$1,000/month
|
|
Accidental death and dismemberment
|
|
$25,000 per lifetime
|
On March 20, 2004 benefit was transferred to R.E.L. (Exhibit A-17) This was about a year after the audit report was completed on August 29, 2003. (Exhibit A-1).
[5] On February 7, 1999 Andrew and Rhonda Reakes purchased the time share condominium in Mexico, financed with interest at 16% per annum. On January 27, 2005 they transferred it to R.E.L. (Exhibits A-11 and A-10). The transfer was after Andrew's Notice of Objection was filed.
[6] Similarly the alleged R.E.L. vehicles which formed part of the travel issues in these appeals were all purchased or leased in Andrew's and Rhonda's names. However Andrew also had two other older vehicles during the years in question.
[7] On the evidence before the Court, assumptions 13(a) to (o), inclusive, as quoted in paragraph [3] hereof were not refuted.
[8] Andrew testified particularly that he and Rhonda had never used the Mexican time share personally. They twice traded its usage for time shares in British Columbia to which R.E.L. awarded use to winners of two prizes to customers. That was established to the satisfaction of the Court. Nonetheless, Andrew and Rhonda were the owners of the time share for almost 6 years and they had the power to dispose of it as they saw fit. They were entitled to trade it or to use it or not for one week each year. They chose not to use it. They were the owners with all the rights of owners. Whether they traded usage in other years is not in evidence.
[9] The facts are that Andrew and Rhonda purchased and owned the insurance policy and time share for about 9 years and had R.E.L. pay for them. It was a consistent pattern of behavior and ownership by them which persisted with the vehicles. They only transferred titles after the audit began and reassessments were evident. It has been said by the Federal Court of Appeal that "in tax law, form matters." That is so because it is clear evidence of the intent and action of the taxpayers. Had Andrew died before the transfers, the benefit of the insurance and the time share would have been Rhonda's and no one would have been the wiser. Andrew, Rhonda and R.E.L. knew that. Andrew is, practically speaking, R.E.L.. He knew what these contracts said when he signed them. So did Rhonda. They had been in business for years. Both the contracts existed for years in individual names. Andrew and Rhonda knew that R.E.L. was paying for them and deducting the payments as expenses. The contracts speak for themselves. As a result, all of the appeals are dismissed with exception of the matters described in paragraph [2] hereof as stated therein and with the exception of matters relating to the travel expenses outlined in assumption 13 (p) and (q) quoted in paragraph [3] of these Reasons.
[10] With respect to the outstanding matters relating to travel, Andrew and R.E.L. never kept log books on the vehicles. They did not leave them overnight at the business premises, in part because of break-ins in the area. The remaining travel expenses not dealt with in paragraph [2] hereof are:
|
|
Amount
|
GST
|
|
Cash, Shareholder
|
$ 556
|
$39
|
|
Cash, Shareholder
|
365
|
26
|
|
Cash, Fields
|
79
|
6
|
|
American Express, Jenny
|
488
|
34
|
|
Cash (one-time vendor)
|
200
|
14
|
|
American Express, Jenny
|
458
|
32
|
|
American Express, Jenny
|
56
|
4
|
|
American Express, Jenny
|
320
|
22
|
|
American Express, Shareholder
|
348
|
24
|
|
Andy's American Express
|
557
|
39
|
|
4777 Cash for travel
|
100
|
7
|
|
Rhonda's Visa
|
1,023
|
72
|
[11] Andrew testified that the amounts "Rhonda's Visa $1,023, GST $72" related to an inspection trip that he and Rhonda took to Kelownato inspect a Sears franchise there. R.E.L. considered entering into a Sears franchise primarily because Sears guarantees its credit and purchases. The cost of the franchise was $150,000 and R.E.L. decided against it. The Court believes Andrew and this claim for a deduction is allowed in these appeals.
[12] Andrew did not give a satisfactory explanation of the "Cash" amounts and GST so as to relate them to R.E.L.'s business. He stated that "American Express, Jenny" amounts and GST related to Rhonda and would have been adjusted in her loan account in R.E.L., but this was not established in evidence, although a letter from R.E.L.'s accountant was filed as an Appellant's exhibit. "Rhonda's Visa, $1,023, GST $72" is an exception to this finding. The Appellants failed to meet the onus of proof upon them respecting these remaining matters. Andrew did testify that while the couple's in-laws lived in Vancouver and Calgaryand they alternated driving visits there for holidays. Trips to those two cities were also allegedly made at the same time to visit wholesalers. However, no specific evidence of this, such as invoices of supplies purchased, was tendered to substantiate Andrew's testimony. In these circumstances, the remaining claims not described in paragraphs [2] and [11] hereof are denied.
[13] The appeals are allowed to the extent described herein and are referred to the Minister of National Revenue for reconsideration and reassessment accordingly.
Signed at Ottawa, Canada, this 25th day of May 2006.
"D.W. Beaubier"
Email this Content