REASONS
FOR JUDGMENT
Jorré J.
Introduction
[1]
This is essentially an expense case.
[2]
The Appellant, Dylan Everett, an actor, was
about 14 to 16 years old during the years in issue. Mr. Everett appeals
from assessments of his 2009, 2010 and 2011 taxation years.
[3]
Shenanigans Media Inc. (“Shenanigans”) is owned
by Mr. Everett. The corporation appeals from a reassessment of its
taxation year ending on July 31, 2011, its first taxation year.
[4]
The assessments disallowed various expenses
claimed by Mr. Everett or by Shenanigans. In the case of Mr. Everett
the assessments included in his income shareholder benefits from Shenanigans.
[5]
The first day of the hearing was extremely
confusing as to exactly what was claimed, what was allowed by the Minister of
National Revenue and what was disallowed by the Minister. It has taken quite
some effort to establish what was claimed and what was in dispute.
[6]
It will be useful to first set out the overall
picture for each year in dispute. The table below sets out the expenses originally
claimed by Mr. Everett (DE) or Shenanigans (S), the amount allowed by the
Minister (the amount allowed by the Minister at either the audit stage and/or
the objection stage), the difference between the first two amounts and the
amount in dispute at the end of the hearing (after taking account of
concessions made by the parties):
|
Taxation Year
|
Total Expenses Claimed
|
Total Expenses Allowed
|
Difference Between
Amount Claimed and Allowed
|
Amount in Dispute
at the End of the Hearing
|
|
2009 (DE)
|
$38,571
|
$23,010
|
$15,561
|
$6,415
|
|
2010 (DE)
|
$23,227
|
$17,069
|
$6,158
|
$3,793
|
|
2011 (S)
|
$32,337
|
$6,186
|
$26,151
|
$12,433
|
|
Totals
|
$94,135
|
$46,265
|
$47,870
|
$22,641
|
[7]
With respect to shareholder benefits the table
below shows the amount originally assessed by the Minister, the amount of the
reduction in the shareholder benefits as a result of the objection stage and the
amount in dispute at the end of the hearing:
|
Taxation year
|
Shareholder Benefits Assessed
|
Reduction at the Objection Stage
|
Amount in Dispute at the End of the
Hearing
|
|
2010
|
$513
|
—
|
$513
|
|
2011
|
$48,014
|
$31,747
|
$16,267
|
[8]
It is worth remembering that Shenanigans’ 2011
taxation year ends on July 31 and overlaps Mr. Everett’s 2010 and
2011 taxation years.
[9]
Of the $31,747 reduction in shareholder benefits
by the Appeals Division, an amount of $26,809 relates to expenses incurred by
Shenanigans to acquire a vehicle for Mr. Everett’s mother; this is the
vehicle in respect of which we will see a claim for capital cost allowance (CCA)
below. The remainder of the reduction comprises makeup and hair and wardrobe
expenses that were allowed by the Appeals Division because they were considered
to have been incurred for business purposes.
[10]
Below I set out in more detail the disputed
expenses:
|
Taxation Year
|
Category
|
Total Expenses
Claimed
|
Total Expenses
Allowed
|
|
2009 (DE)
|
Advertising
|
$2,566
|
$2,566
|
|
|
Business Promotion
|
$2,129
|
$1,006
|
|
|
Makeup/Hair
|
$3,342
|
$1,671
|
|
|
Management/Chaperone
|
$10,000
|
$10,000
|
|
|
Research and Development
|
$1,554
|
—
|
|
|
Rent
|
$2,010
|
$2,000
|
|
|
Travel
|
$13,957
|
$4,261
|
|
|
Wardrobe
|
$3,013
|
$1,506
|
|
2010 (DE)
|
Business Promotion
|
$1,378
|
$347
|
|
|
Makeup/Hair
|
$1,518
|
$759
|
|
|
Management/Chaperone
|
$14,000
|
$10,000
|
|
|
Research and
Development
|
$463
|
—
|
|
|
Rent
|
—
|
$4,000
|
|
|
Travel
|
$3,209
|
$634
|
|
|
Wardrobe
|
$2,659
|
$1,329
|
|
2011 (S)
|
Automobile
|
$2,753
|
—
|
|
|
CCA Automobile
|
$2,576
|
—
|
|
|
Makeup/Hair
|
$2,431
|
$1,251
|
|
|
Entertainment
|
$2,618
|
$870
|
|
|
Research and Development
|
$2,387
|
$148
|
|
|
Travel
|
$13,158
|
$695
|
|
|
Wardrobe
|
$6,414
|
$3,222
|
[11]
It should be noted that:
– The 2009 advertising
expenses consist of purchases of gifts to the cast and crew of productions Mr.
Everett worked on.
– During the hearing the Respondent conceded $832 in
additional expenses for 2010 which are categorized under business promotion
above, thereby further reducing the amount in dispute.
– At the hearing, the Appellants abandoned the
remaining travel expenses in dispute in the three years.
– In 2010 an amount of $14,000 was claimed as management
or chaperone expenses. The Minister allowed $10,000. In addition, the Minister
found that of the $14,000 an amount of $4,000 was in fact a rental expense;
that amount of $4,000 was allowed as a rental expense. Accordingly, there is no
dispute regarding the $14,000.
– It is unclear whether the automobile expenses
claimed in 2011 are $2,329 (shown in the income statement — Exhibit A-16) or
the $2,753 referred to in the letter from the Appeals Division (Exhibit A-14).
The table shows the higher number.
– Makeup and hair expenses of $2,431 claimed in 2011
are referred to as supplies in the reply although they, in fact, appear to be
primarily makeup and hair expenses.
– Entertainment
expenses of $2,618 claimed in 2011 included some meals. During the objection
stage, Shenanigans’ claim was reduced to less than the amount allowed by the
Minister. However, a portion of the original claim was shifted into the
category of supplies.
[12]
The next table sets out only the above items
that are still in dispute except for two very straightforward items. First,
there was the $10 remaining in dispute with respect to rent in 2009; nothing in
the evidence has persuaded me that the additional $10 should be allowed. Second,
there is the automobile CCA issue in 2011. The evidence is quite clear that the
automobile is not owned by Shenanigans; the vehicle is owned by Mr. Everett’s
mother and, accordingly, the company cannot claim CCA on an automobile that it
does not own.
[13]
Finally, it must be noted that the amount in the
last column, “amount in dispute at the end of the hearing”, takes account not
only of concessions made at the hearing but also of the changes in the position
of the Appellants prior to filing the notices of appeal.
|
Taxation Year
|
Category
|
Total Expenses Claimed
|
Total Expenses Allowed
|
Difference
Between Amount Claimed and Allowed
|
Amount in Dispute at the End of the Hearing
|
|
2009 (DE)
|
Business Promotion
|
$2,129
|
$1,006
|
$1,123
|
$402
|
|
|
Makeup/Hair
|
$3,342
|
$1,671
|
$1,167
|
$1,238
|
|
|
Research and Development
|
$1,554
|
—
|
$1,554
|
$1,229
|
|
|
Wardrobe
|
$3,013
|
$1,506
|
$1,507
|
$3,536
|
|
2010 (DE)
|
Business Promotion
|
$1,378
|
$347
|
$1,031
|
$580
|
|
|
Makeup/Hair
|
$1,518
|
$759
|
$759
|
$1,039
|
|
|
Research and Development
|
$463
|
—
|
$463
|
$664
|
|
|
Wardrobe
|
$2,659
|
$1,329
|
$1,330
|
$1,510
|
|
2011 (S)
|
Automobile
|
$2,753
|
—
|
$2,753
|
$2,600
|
|
|
Makeup/Hair
|
$2,431
|
$1,251
|
$1,180
|
$2,636
|
|
|
Entertainment
|
$2,618
|
$870
|
$1,748
|
—
|
|
|
Research and Development
|
$2,387
|
$148
|
$2,239
|
$2,091
|
|
|
Wardrobe
|
$6,414
|
$3,222
|
$3,192
|
$2,530
|
[14]
In summary, the expenses in dispute are the
amounts shown in the right‑hand column, a total of about $20,000 plus the
shareholder benefits of somewhat less than $17,000 shown above. I will deal
with the different categories of expenses in turn.
General Principles
[15]
In respect of business expenses there are, among
others, two important principles set out in paragraphs 18(1)(a) and (h)
of the Income Tax Act (Act):
18(1) In computing the income of a taxpayer
from a business or property no deduction shall be made in respect of
(a) an outlay or expense except to
the extent that it was made or incurred by the taxpayer for the purpose of
gaining or producing income from the business or property;
. . .
(h)
personal or living expenses of the taxpayer, other than travel expenses
incurred by the taxpayer while away from home in the course of carrying on the
taxpayer’s business;
[16]
As a result, when claiming business expenses it
is necessary to show, first, that the expenses were incurred and, second, that
they were made for the purpose of producing in the business and were not
personal or living expenses except, of course, to the extent that the expenses are
not contested. Here, the amounts in dispute are centred on the second element.
Specific Expenses
Wardrobe and Makeup/Hair Expenses
[17]
As Justice Paris of this Court said in Rupprecht
v. The Queen:
Expenses relating to one’s personal
appearance are the very essence of a personal expense and involve choices made
by a taxpayer in preparing him or herself for work.
[18]
Because of the inherently personal nature of
clothing, it is accepted in the case law that normally clothing can only be
claimed if it is not suitable for general wear or if it has special features
uniquely necessary for the work. Thus, items such as period costumes, chef’s
uniforms, lawyer’s gowns, jackets with company names or logos and safety
related clothing are deductible. However, clothing that is generally worn is
not deductible and, for this purpose, it does not matter what an individual
prefers to wear when not at work.
[19]
During the period in issue Mr. Everett was in
two television series and was obliged to make various promotional appearances.
More generally, when in public, he had to maintain a certain public image and
dress accordingly.
[20]
He was provided with clothes by the production
companies for the actual filming of the two television shows.
[21]
However, he had to provide his own clothes at
promotional appearances and if he went to audition for a role. In some lower
budget productions an actor might have to wear his own clothes but it is not
clear to me whether this occurred to Mr. Everett in the years in question.
[22]
The wardrobe expenses might better be described
as clothing expenses.
[23]
The receipts provided at trial showed ordinary
clothes that might well be worn by anyone of Mr. Everett’s age from such stores
as Sport Chek, H&M, American Eagle, the Bay and Foot Locker. There were
also expenses for his mother, such as shoes and an evening dress. The clothing in question was used at
promotional events and was also used more generally.
[24]
I accept that Mr. Everett had to maintain a
certain image. Many people, whether they are employees or are self-employed,
feel that they need to maintain a certain image both at work and in many public
spaces and as a result may not dress as they would in private. That does not,
of itself, convert an inherently personal expense into a business expense.
[25]
There is nothing in the evidence before me to
suggest something unique about the clothing expenses in issue that would take
the disputed amount or any portion of it out of the category of non-deductible
clothing and into an exceptional situation where the clothing might be
deductible.
[26]
In addition, in the three years in issue a total
of about $12,000 was originally claimed for clothes and the Minister allowed a
total of about $6,000, half the amount of that claim. Based on the evidence
before me, the Minister appears to have been more than reasonable.
[27]
Grooming is also of inherently personal nature and
analogous principles apply. Again I simply did not hear or see evidence that
would allow a conclusion that there was reason to consider all or part of the
disputed expenses to be outside of ordinary living expenses. To give one
example, it was not suggested that there was a purchase of makeup that was
specifically formulated to deal with studio lighting that would not be usable
elsewhere.
[28]
In the three years in issue, a total of about $7,291
was claimed for makeup and hair expenses and the Minister allowed about $3,610,
half the amount of that claim. Again, on the evidence before me, the Minister
appears to have been more than reasonable.
Research and Development Expenditures
[29]
The description “research and development” does
not really convey what these expenses are. The expenditures in question are for
attending movies, purchasing DVDs and purchasing books. Mr. Everett
explained that he used these purchases in two ways in his profession.
[30]
First, he has not taken acting classes and he
watches movies to see how other actors perform. At one point he purchased
Michael Jackson videos in order to study dance moves, some of which he had to
replicate on a show. He also has watched movies and read books, for example, in
order to prepare for auditions for a role in a sequel to an existing movie.
[31]
These expenses are difficult to classify
because, on the one hand, there would normally be a personal element but, on
the other hand, such expenses can be a reasonable way to prepare for an
audition or to help study and improve one’s craft as an actor. On balance, I
accept that, in principle, such an expenditure can be a deductible expenditure.
[32]
The question then becomes one of the specific evidence
and conclusions to be drawn from it. The difficulty is this. Some of the expenditures
in this group are no doubt valid, but not only do we have only some evidence
linking the expenditures claimed to the purposes just described, but it is
clear that some expenditures are problematic based on the available evidence.
Specifically, there are a number of movie theatre admissions claimed. Many are,
based on the amount, for one person, but many others look like they are likely
for two or more persons, based on the amount. I can understand in principle Mr. Everett
wanting to see a movie for one of the two reasons mentioned, but in the absence
of any evidence of why he is paying for any additional person, there is no
reason to conclude that there is a business reason for the presence of the
additional person.
[33]
As a result I am only persuaded that a portion
of these expenditures is deductible.
[34]
The two Appellants claimed a total of $4,404 in
the three years; the Minister only allowed $148 in this category, all of which
was in respect of the 2011 assessment of the company. In the course of discussions
between the parties prior to the appeals to this Court, the Appellants produced
itemized listings of expenses. In
those listings the itemized claims for research and development totalled
$3,499; in 2010 the listing was for more than the original claim.
[35]
It is not clear what portion is properly
deductible although some clearly is. Looking through the listings it seems
reasonable to increase the amount allowed as follows: for 2009 the amount allowed will be
increased from $0 to $500, for 2010 the amount allowed will be increased from
$0 to $300 and for 2011 the amount allowed will be increased by $452 from $148
to $600.
Business Promotion
[36]
In 2009 the original claim for this category
consisting of meals and entertainment was $2,129. However, subsequently Mr. Everett
modified his claim
in two ways. First, Mr. Everett increased his claimed expenses to $2,815, but
he then decreased his claim by applying the 50% rule contained in section 67.1
of the Act, thereby reducing the claim to $1,408.
[37]
As a result, the claim is for $1,408 and the
Minister allowed $1,006 resulting in an amount of $402 in dispute.
[38]
In 2010 the original claim was $1,378 in this
category.
[39]
The revised claim for 2010 was $1,343. However, the unreduced amount
included the $832 in crew gifts conceded by the Respondent. The crew gifts are
not subject to section 67.1 and we must add back the $416 reduction. This means
the actual claim is $1,759.
[40]
In 2010 the Minister has allowed $347 and
conceded $832 for a total of $1,179; consequently, the remaining amount in
dispute in this category is $580.
[41]
This category of business promotion includes
meal and entertainment expenses. The evidence suggests that the expenses are a
mixture of business promotion and of meals consumed by Mr. Everett.
[42]
The evidence, while supportive of the general
notion that some of these meal expenses are deductible, provided little by way
of specifics. The Minister allowed some of the expenses.
[43]
In the claimed amounts in 2009 there are amounts
totalling over $400 for Jet Boat Tours, Nightmares and Marineland in Niagara
Falls. The Appellant’s mother said that these expenses were incurred during a
promotional tour on behalf of one of the two shows that Mr. Everett worked
on in the years in question. There were no details provided and I have some difficulty
in imagining why Mr. Everett, if he was doing a promotion for a show,
would be paying for entry to these places. On the evidence I have, the
reasonable inference is that these expenses were simply incurred to visit these
places and are personal.
[44]
In both 2009 and 2010 there are listed expenses
of about $100 and $135 for EB Games. Mr. Everett’s mother said that these
expenses were incurred for him to have games in his trailer at the production
site of the television shows. This is clearly a personal expenditure and is not
part of the process of earning acting income.
[45]
In 2010 there are also four movie receipts
listed in this category, ranging from about $14 to $44; they were not part of
the research and development expense listing. They are personal in nature and
not deductible. In
2010 there is an expenditure of about $70 at GameStop; it is not clear what
this is and I am not satisfied that it is a deductible expense.
[46]
In 2009, of the expenses totalling about $500 for
Jet Boat Tours, Nightmares, Marineland and EB Games which are clearly personal,
Mr. Everett claimed about $250. Since
the $250 amount of claimed expenses is clearly not deductible, that leaves
about $150 of meal expenses in the category in dispute. In the absence of specifics with
respect to the meals claimed as promotion expenses, Mr. Everett has not
demonstrated that I should allow all or any part of the remaining $150.
[47]
There will be no change in respect of this
category of expenses in 2009.
[48]
Turning to 2010, of the remaining $580 in
dispute, an amount of about $150 consisting of EB Games, Cineplex and GameStop is
not deductible.
This leaves $430 of meal expenses in dispute. Again there are few specifics
with respect to the meals claimed as promotion expenses; generally Mr. Everett
has not demonstrated that I should allow all or any part of the remaining $430.
There is one exception to this; because it is not clear to me that the dinner
with Mr. Everett’s U.S. agent was allowed, I will allow the item, an
expenditure of $198.
This is in addition to the $832 amount conceded by the Respondent.
Automobile Expenses
[49]
Shenanigans claimed a net amount of $2,329 for
automobile expenses, consisting
of $5,087 less a reimbursement of $2,758 received from the television
production company.
The Minister’s assumption was that no more than $2,600 was spent on business
automobile expenses. This amount was computed on the basis of an assumed total
of 5,000 business kilometres during Shenanigans’ fiscal year multiplied by 52
cents per mile.
[50]
Since the expense, in the Minister’s view, was
about the same as the reimbursement, the expense was simply disallowed.
[51]
In order to demonstrate that a higher amount
should be allowed, Shenanigans would have had to demonstrate in a specific way
that the actual business mileage was higher. The evidence on this was quite
general and there was neither a logbook nor any other specific evidence to
establish higher business mileage.
[52]
As a result, there is no reason to make any
change in respect of this expense.
Entertainment (2011)
[53]
Shenanigans originally claimed an expense of
$2,618 under this heading. The Appellant subsequently revised its position and
claimed a listed total of $704. This
expense appears to consist entirely of meals.
[54]
Given that the revised claim is less than the
$810 allowed by the Minister, there is no reason to increase the expense.
[55]
It should be noted that a good part of the
original expense as claimed on the return was reclassified and claimed under supplies.
I am not satisfied that any of these reclassified items should be allowed.
Shareholder Benefits
[56]
The shareholder benefits can only be reduced to
the extent that there are reductions in any of the disallowed amounts which
were included in the shareholder benefits.
[57]
Above I concluded that Shenanigans was entitled
to an additional deduction of $452 in research and development expenses and
that will be reflected in an equivalent reduction in shareholder benefits assessed
in Mr. Everett’s taxation year.
[58]
Finally, Mr. Everett argued, if I understood
correctly, that the shareholder benefits assessed on him should be eliminated
by simply reducing the balance of the shareholder loan account in his favour by
an offsetting amount. While Mr. Everett produced no evidence on this, the
Respondent filed Exhibit R‑7, a document prepared by the auditor that,
among other things, sets out the shareholder contributions.
[59]
Shenanigans cannot simply eliminate the
remaining shareholder benefits by adjusting the shareholder loan account
retroactively so as to reduce by an equivalent amount the amount the company
owes to Mr. Everett. Mr. Everett made contributions to the company in
cash and in kind. The contributions in kind were in two forms: goods, such as
clothes supplied to the company, and the payment of expenses on behalf of the
company, such as meals.
[60]
Some of those contributions in kind are business
expenditures while others are not and were disallowed to the company and
treated as shareholder benefits. There was a conscious decision to treat those
expenditures in kind as contributions to the company and I do not see any basis for
treating the contributions in kind of the disallowed expenses any differently
from the contributions in kind of the allowed expenses. Mr. Everett is of
course able to withdraw his contributions to the company in the future.
Conclusion
[61]
Accordingly, both appeals will be allowed to a
limited extent without costs.
[62]
Mr. Everett’s appeal for the 2009, 2010 and 2011
taxation years will be allowed and referred back to the Minister for reconsideration
and reassessment on the basis that:
1. in
the 2009 taxation year, Mr. Everett is entitled to an additional deduction
of $500 in research and development expenses;
2. in
the 2010 taxation year, Mr. Everett is entitled to an additional deduction
of $1,330, consisting of $300 in research and development expenses and $1,030
in business promotion expenses;
3. in
the 2011 taxation year, Mr. Everett is entitled to a reduction of $452 in
shareholder benefits assessed.
[63]
Shenanigans’ appeal for the taxation year ending
on July 31, 2011 will be allowed and referred back to the Minister for
reconsideration and reassessment on the basis that the Appellant is entitled to
an additional deduction of $452 in research and development expenses.
Signed at Ottawa, Canada, this 15th day of September 2017.
“Gaston Jorré”
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