Citation: 2014 TCC 68
Date: 20140324
Docket: 2012-971(IT)G
2012-830(GST)I
BETWEEN:
ROBERT ANDREW LAVOIE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
and
Docket: 2012-792(IT)G
BETWEEN:
CEILIDH SALES & MARKETING INC.
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
C. Miller J.
[1]
These Appeals involve
three related matters: (i) an Income Tax Act (the "Act")
assessment of Ceilidh Sales & Marketing Inc. ("Ceilidh") for the 2005
and 2006 taxation years, denying certain expenses and capital cost allowance
("CCA") on the basis such deductions were personal and not business
related; (ii) an Income Tax Act assessment against Mr. Lavoie, the
sole shareholder of Ceilidh, for the 2005, 2006 and 2007 taxation years,
including shareholder appropriations from Ceilidh of $69,875 and $36,803 for
2005 and 2006, as well as denying losses from the rental of a
Prince Edward Island ("PEI") cottage property (the
"Cottage") in 2006 and 2007 of $10,192 and $8,052, respectively; and
(iii) a Goods and Services Tax ("GST") assessment of Mr. Lavoie
denying input tax credits ("ITCs") on the Cottage of $9,367.16. Gross
negligence penalties are also in issue.
[2]
To provide some context
to these Appeals, initially the Canada Revenue Agency ("CRA") denied
expenses and CCA of over $93,000 in 2005 and over $102,000 in 2006. Upon
review, the appeals officer allowed an additional $59,389 and $72,501,
respectively. It is unfortunate the Parties could not have closed that gap
further without the necessity of the expense of a trial.
[3]
Mr. Lavoie was the sole
witness for the Appellants. While he presented as a forthright, knowledgeable
and sincere witness, some of his actions suggest he got greedy in claiming
expenses, the deduction of the cost of his wedding being an obvious example. University
educated, he worked as an employee in the agri‑business industry for a
number of years until 2001, when he established Ceilidh as his own
agri-business.
[4]
Ceilidh had a number of
clients but foremost was York Points Farms, what Mr. Lavoie described as a
high-health farming business producing purebred swine. The swine provided
breeding stock and ultimately swine to swine producers both nationally and
internationally for production in the food industry. Ceilidh served as a broker
in the industry, not just with respect to the swine but also with respect to
equipment, feed and other related products connected to the swine industry.
[5]
Mr. Lavoie’s home base was
in the Halifax area, though he was required to travel throughout the Maritimes
visiting swine producers, often in Prince Edward Island. He estimated he
travelled 70,000 kms a year. It was also necessary to show potential clients of
the swine exporters the Canadian farming operations. Part of Mr. Lavoie’s job
as a broker, through Ceilidh, was to entertain foreign clients. This involved
visits to the farms as well as presentations at his office. Mr. Lavoie
provided a detailed explanation of this aspect of his business.
[6]
In 2005 and 2006, Mr.
Lavoie built a three bay garage at his home in Nova Scotia to serve as his
office as well as storage for products involved in the business. Up to that point,
he had used part of his home as a home office. He indicated that some of the
expenses in dispute, such as fencing and landscaping were to ensure the
security of the premises for business purposes as well as ensuring the
attractiveness of the premises to impress potential clients.
[7]
In 2006, Mr. Lavoie
bought the Cottage in PEI initially to serve as a residence for the Lavoie
family. However, Mr. Lavoie’s wife coincidentally received a job promotion that
required the family to remain in Nova Scotia. Mr. Lavoie testified
that he decided to market the PEI Cottage as a vacation property and also to
use it for his business guests. He produced a one-page fax advertising "Cottage/business
accommodation available". This was sent to some of his wife’s co-workers
and some people they knew. There were no takers in 2006 and only 10 nights were
rented out to vacationers in 2007. Mr. Lavoie indicated, however, that
business guests used the Cottage for approximately 40 nights in 2007 and he
would also stay there when on business in Prince Edward Island and would bill
Ceilidh for its use. He suggested he used the property approximately 100 times
for business purposes during the period in question.
[8]
Ceilidh was reassessed
September 22, 2008 by increasing its taxable income by $93,481 and $102,977 for
the 2005 and 2006 taxation years by the disallowance of expenses of $86,141 in
2005 and $92,977 in 2006 and also by adjusting CCA by $7,340 in 2005 and
$10,000 in 2006.
[9]
Ceilidh was reassessed
November 23, 2001 varying the September 22, 2008 reassessments by decreasing
the amounts previously assessed by the amount of $59,389 and $72,501 for 2005
and 2006, respectively. The Minister of National Revenue (the
"Minister") also allowed an addition in the amount of $8,780 to
Ceilidh’s CCA schedule for 2006. This resulted in increases in the amounts of
$34,092 and $30,476 to the amounts Ceilidh reported as taxable income for the
2005 and 2006 taxation years as follows:
2005 2006
Expenses disallowed $27,242 $21,306
Adjustments to CCA $
6,850 $ 9,170
Total $34,092 $30,476
[10]
Mr. Lavoie reported
rental losses from the PEI Cottage of $10,192 and $8,052 for the 2006 and 2007
taxation years.
[11]
Mr. Lavoie was
reassessed on September 11, 2008 by making the following adjustments:
2005 2006 2007
Shareholder appropriations $129,262 $109,304
Rental losses disallowed $
10,192 $8,052
Total $129,262 $119,496 $8,502
[12]
On December 1, 2011,
Mr. Lavoie was reassessed by decreasing the amounts previously assessed as
shareholder appropriations for 2005 and 2006 by the amounts of $59,387 and
$72,501 respectively, resulting in increases of $69,875 and $36,803 to taxable
income for the 2005 and 2006 taxation years.
[13]
The Minister assessed
Mr. Lavoie’s net tax liability by Notice of Assessment dated August 12, 2008,
in respect of Goods and Service Tax/Harmonized Sales Tax ("GST/HST")
returns for the period January 1, 2007 to December 31, 2007, by disallowing
ITCs claimed by Mr. Lavoie, as follows:
Period Ending ITCs GST/HST Net
Tax
Collectible
March 31, 2007 $ 213.62 $
97.02 $ 16.60
June 30, 2007 $ 35.88 $
50.82 $ 14.94 cr
September 30, 2007 $9,295.68 $110.88 $9,184.80
December 31, 2007 $ 91.98 $138.40 $
46.42 cr
Total $9,637.16 $397.12 $9,240.04
[14]
The following chart
indicates the amounts claimed by Ceilidh and the amounts disallowed by the
Respondent:
Issues
[15]
The issues in these
Appeals are:
a) whether Ceilidh is
entitled to expenses in excess of those allowed by the Minister for the 2005
and 2006 taxation years;
b) whether Ceilidh was
liable for gross negligence penalties pursuant to subsection 163(2) of the Income
Tax Act, R.S.C. 1985, c. 1 (5th Supp.) as amended, in
respect of the 2005 and 2006 taxation years;
c) whether Mr. Lavoie
received shareholder benefits from Ceilidh in the amounts of $69,875 and
$36,803 for the 2005 and 2006 taxation years, respectively;
d) whether Mr. Lavoie
incurred losses in the amounts of $10,192 and $8,052 in the 2006 and 2007
taxation years, respectively, with respect to the PEI cottage;
e) whether Mr. Lavoie is
entitled to claim ITCs in respect of the PEI cottage for the period of
January 1, 2007 to December 31, 2007; and
f) whether Mr. Lavoie
was liable for gross negligence penalties pursuant to subsection 163(2) of the Income
Tax Act and section 285 of the Excise Tax Act, R.S.C., c. E-15, as
amended.
Analysis
[16]
The Respondent argues
that the disallowed expenses were personal expenses of Mr. Lavoie. The CRA
disallowed the expenses due to either insufficient documentation, or being
clearly personal, such as approximately $8,400 of expense from Mr. Lavoie’s
wedding (notwithstanding Mr. Lavoie testified he received accounting advice
that such expenses were deductible: he received bad advice). Mr. Lavoie
has conceded such expenses are personal.
[17]
The Appellant argues
that, given Mr. Lavoie’s extensive explanation of his business activity, that
he has clearly established the disallowed expenses were incurred for business
purposes, with a few exceptions. As noted, the Appellant concedes the wedding
expenses; he also recognizes the jewellery expense for his wife and half of his
home landscaping expense was personal.
[18]
I have been left with
the impression that Mr. Lavoie was indeed a busy man. However, his willingness
to consider wedding expenses, hair cuts, jewellery, 100% of his fencing
around his home and the cost of his wife’s trip to the Caribbean all as business
expenses demonstrates a not uncommon confusion of an individual running a small
business; that is, that the individual and business are one and the same and,
therefore, all expenses incurred by the individual are business expenses. It is
just not so.
[19]
Through the audit and
appeals process of Ceilidh’s initial claimed expenses of $175,000 in 2005 and
$160,000 in 2006, the CRA has allowed all but approximately $34,000 and $30,000
(including CCA adjustments) in 2005 and 2006 respectively. The onus is on the
Appellant to prove that the disallowed expenses are legitimate business
expenses. He can do so by identifying each of them and providing an appropriate
receipt along with a plausible explanation as to their connection to the
business for the purpose of producing income. It is insufficient, for example,
to speak in general terms of having to host potential purchasers at home and,
therefore, incurring housekeeping costs without detail of when such costs were
incurred and the corresponding receipts for such housekeeping. Similarly, to
claim significant landscaping costs for the home, on the basis potential buyers
look for a professional setting when visiting is just too tenuous a business
connection. Also, the cost of video games for Mr. Lavoie’s boys with the
explanation they cleaned the office and the truck with no further corroboration,
simply is insufficient to prove the business versus personal purpose.
[20]
One of the difficulties
in this case is that neither side in argument has taken me through the specific
disallowed expenses and advised me, from the Appellant’s perspective the
business purpose and the corroborating evidence, and from the Respondent’s
perspective the personal use or purpose and what corroborating evidence was
lacking to show the business connection. I have been left with some of the
auditor’s and appeals officer’s working papers and left to figure it out
myself. In effect, I am being asked to conduct an audit. To be fair, at the end
of the trial, there was insufficient time for argument and the Parties agreed
to provide written submissions. I offered to provide some initial non-binding
thoughts if they believed that might assist in resolving the issues without
such submissions. They accepted my offer but subsequently were unable to reach
a resolution. This is regrettable. Their written submissions are in general
terms making it difficult to determine the deductibility of the specific
disallowed expenses.
[21]
Having reviewed the
transcript of Mr. Lavoie’s testimony, I accept his explanation that the
following expenses were incurred by Ceilidh for the purpose of earning income:
a) advertising and promotion in 2005 $1,093.00
b) office expenses 2005 $
60.60
(a credible explanation was
provided $ 28.48
for each of these minor amounts) $
36.72
$
9.18
$
17.99
$
15.26
$
31.62
$
52.45
Total $252.30
Plus the following amounts incorrectly recorded as CCA
in 2005:
$158.98
$
37.29
$
60.88
Total $257.15
c) office expenses identified in 2006 $
57.16
(again a credible explanation was
provided) $ 30.99
$
50.83
$
55.26
$
77.48
$
566.93
$
48.66
$
10.96
$
16.59
$
34.99
$
119.77
$
245.00
Total $1,314.62
[22]
With respect to the CCA
claim, construction costs of the garage itself should have been claimed by the
owner of the property, Mr. Lavoie: it was his property. I do not accept
the Appellant’s argument that, based on the case of Rosene v M.N.R., Ceilidh
had beneficial ownership of the property. There was no evidence to support such
a finding. However, there were removable items that were paid for and owned by
Ceilidh and did not attach to the garage as fixtures. I have been satisfied the
following items were used exclusively for business purposes, do not go with the
land and that the expenses were incurred by Ceilidh. Such items I allow for CCA
purposes:
2005
shelving $
714.00
filing cabinets $
279.85
computer $3,046.00
projector $1,099.99
cooler $
149.99
DVD $
229.88
Remote for projector $
199.99
Generator, vacuum and hoses $1,694.92
Total $7,414.61
2006
heater $
599.99
lawn mower $
599.95
camcorder $
819.95
Total $2,029.89
[23]
To be clear, the
Parties did not spell out as precisely as I would have appreciated in their
written submissions exactly what amounts constituted each of the heads of
expense and the CCA in dispute. I have therefore attempted to cobble together
these figures from the exhibits as best I can.
[24]
In summary, I allow
Ceilidh the additional expenses of $1,602.45 in 2005 and $1,314.62 in 2006,
along with CCA on additional capital costs of $7,414.61 incurred in 2005 and capital
costs of $2,029.89 incurred in 2006.
[25]
The shareholder
benefits assessed against Mr. Lavoie are also therefore reduced by these
amounts.
[26]
I conclude that on
balance Mr. Lavoie has not proven that all other expenses, including, for
example, landscaping and fencing, and those clear personal expenses such as the
wedding and jewellery were incurred for purpose of earning or producing income.
[27]
I turn now to the issue
of the disallowed losses from the PEI Cottage. The Respondent argues the Cottage
was not a source of income as it was used primarily by Mr. Lavoie and family
and friends in 2006 and 2007.
[28]
I find the Cottage had
three uses: as a recreation property for the Lavoie family, as an
accommodation for business visitors in connection with Ceilidh’s business, and
as accommodation for Mr. Lavoie when on business in Prince Edward Island,
which was often. Mr. Lavoie testified he treated the Cottage as a business.
During the period in issue, Mr. Lavoie’s uncontradicted evidence was the Cottage
was used approximately 170 days, only 10 of which were solely personal use. Mr.
Lavoie testified that Ceilidh would pay him rent for his use of the Cottage on
business trips. I believe the Appellant that the Cottage was used primarily for
business purposes and therefore, with no evidence challenging how the losses
were calculated, I allow them in full. Having reached the conclusion the Cottage
was part of a commercial activity, and again with no challenge to the ITC
numbers, I allow the GST Appeal, adjusted to take into account the GST required
to collect and remit as originally filed.
[29]
Turning now to the
penalties, subsection 163(2) of the Act reads in part as follows
(section 285 of the Excise Tax Act is similar):
163(2) Every
person who, knowingly, or under circumstances amounting to gross negligence,
has made or has participated in, assented to or acquiesced in the making of, a
false statement or omission in a return, form, certificate, statement or answer
(in this section referred to as a “return”) filed or made in respect of a
taxation year for the purposes of this Act, is liable to a penalty of the
greater of $100 and 50% of the total of …
[30]
Given my finding on the
GST Appeal, it follows there are no penalties against Mr. Lavoie in that
regard. With respect to the gross negligence penalties in Ceilidh’s income tax
Appeal, the Respondent submitted that, as a well-educated businessman, Mr.
Lavoie should have known the disallowed expenses were in fact personal
expenses. Mr. Lavoie offered explanations for several of the expenses claimed,
explanations I have concluded have not been sufficient to justify the deduction
of all of the expenses. It does not automatically follow, however, that he was
grossly negligent in claiming them. This is unlike the Fiscal Arbitrator cases
(for example see my Reasons in Torres v Her Majesty the Queen) where
there is no basis for claiming the losses claimed in those cases. Here, a small
business gets advice, albeit bad advice, that because some business associates
attend your wedding, you can deduct the cost of the wedding. It is naïve and
perhaps greedy to believe the wedding is truly a business expense. As stated
earlier, it is often not clear in the mind of the person running a small
business just how much or little connection to the business is required to
render an expense a deductible expense. I accept that with many of
Ceilidh’s disallowed expenses (fencing around the house for example), Mr.
Lavoie was pushing the envelope, but conclude he was not grossly negligent in
doing so. Simply because he has not proven to me that, on balance, this was a
legitimate business expense, does not mean that there is no arguable basis
whatsoever on which to attempt to deduct it. There is a fine line between the
denial of an expense and the finding of gross negligence in claiming the
expense in the first place.
[31]
There are, however,
some items that are so inherently personal that the circumstances can only be
viewed as grossly negligent if a taxpayer attempts to write them off. One’s
wedding, jewellery for one’s wife and video games for the kids (where there is
no corroborating evidence the latter two items were received as remuneration),
are such expenses. Mr. Lavoie should have known better. I find gross
negligence penalties attach to such expenses.
[32]
Finally, with respect
to the gross negligence penalties assessed against Mr. Lavoie personally,
I likewise conclude the penalties should apply only to the benefit represented
by the wedding, the jewellery and the video games expenses.
Conclusion
[33]
The Appeals are allowed
and referred back to the Minister for reconsideration and reassessment on the
following basis:
a) Ceilidh is entitled
to additional expenses in the 2005 taxation year of $1,602.45 and in the 2006
taxation year of $1,314.62, along with additional CCA based on additional costs
of $7,414.61 in the 2005 taxation year and additional costs of $2,029.89 in the
2006 taxation year;
b) Ceilidh is liable for
gross negligence penalties pursuant to subsection 163(2) of the Act
only in connection with the wedding expense and jewellery expense;
c) Mr. Lavoie received
shareholder benefits from Ceilidh in 2005 in the amount of $69,875 less
$1,602.45 and less the additional CCA for the 2005 taxation year and he
received shareholder benefits in 2006 of $36,802 less $1,014.62 and less the
additional CCA for the 2006 taxation year, the CCA to be determined in
accordance with paragraph 24 of these Reasons;
d) Mr. Lavoie incurred
losses in the amounts of $10,193 and $8,052 in the 2006 and 2007 taxation years
in respect of the rental of the Cottage;
e) Mr. Lavoie is
entitled to ITCs adjusted to take into account the GST required to collect and
remit as originally filed;
f) Mr. Lavoie is not
liable for gross negligence penalties pursuant to section 285 of the Excise
Tax Act;
g) Mr. Lavoie is liable
for gross negligence penalties pursuant to subsection 163(2) of the Act
in connection with the shareholder benefits related to the cost of the wedding,
the jewellery and the video games.
[34]
Given the mixed
success, I make no award of costs.
Signed at Ottawa, Canada, this 24th day of March 2014.
"Campbell J. Miller"
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