Citation: 2011 TCC 130
Date: 20110301
Docket: 2007-2677(IT)G
BETWEEN:
ANDRÉ RAIL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
McArthur, J.
[1]
This is an appeal from
reassessments made under the Income Tax Act (the Act) for the 2001, 2002
and 2003 taxation years. The Minister of National Revenue (the Minister)
disallowed expenses of $52,259 for 2001, $60,745 for 2002 and $77,449 for 2003.
The Notice of Appeal deals only with the disallowed expenses. The total amount
at issue in this appeal is approximately $41,232.
[2]
For the years in
question, Dr. Rail (the appellant) reported a gross income ranging from
$308,000 to $336,000. The gross income amounts were all accepted by the
Minister, but the expenses mentioned above were disallowed. The reassessments
were issued based on the results of a Revenu Québec audit.
[3]
More specifically, the
Minister alleges that the appellant is unable to justify the following
expenses:
|
|
2001
|
2002
|
2003
|
|
Purchase
|
$5,877
|
$12,193
|
$12,818
|
|
Maintenance –
office
|
$6,406
|
$5,873
|
$9,214
|
|
Renovations
|
$1,314
|
$2,548
|
$3,270
|
|
Equipment –
office
|
$1,152
|
$1,206
|
$1,231
|
|
Books/magazines
|
$359
|
$458
|
$857
|
|
Courses/conferences
|
$4,651
|
$3,163
|
$4,551
|
|
Clothing –
office
|
$5,243
|
$4,515
|
$3,776
|
|
Stamps/stationery
|
$1,924
|
$2,466
|
$3,111
|
|
Telephone
|
$1,040
|
$1,029
|
$1,186
|
|
Advertising
|
$4,325
|
$3,724
|
$3,696
|
|
Insurance
|
$12,039
|
$11,065
|
$12,658
|
|
Rental of
equipment
|
$3,500
|
$3,500
|
$4,475
|
|
Miscellaneous/other
|
$1,305
|
$4,003
|
$9,074
|
|
Donations
|
$3,124
|
$4,427
|
$6,766
|
|
Professional
fees
|
|
$575
|
$310
|
|
Furniture
|
|
|
$456
|
Total disallowed expenses
|
$52,259
|
$60,745
|
$77,449
|
[4]
The Minister assumed
that the appellant was unable to demonstrate the existence of these expenses,
that they were personal or that they had been claimed twice. For example, among
other things, the appellant claimed telephone bills for his cottage and his
home and purchases of clothing, perfume, jewellery and alcohol.
[5]
By disallowing those
expenses, the Minister brought the appellant's profit margin to the Canadian
average. Indeed, the appellant's net profit margin earned from his profession
between the 1997 and 2004 taxation years was always lower than that of dental
professionals in Canada (10% to 25% for the appellant compared to
about 30% on average in Canada). With the adjustments proposed by the
Canada Revenue Agency (CRA), the appellant's net profit margin would be
adjusted to 36%. The numbers vary somewhat depending on the data and documents
produced by the appellant and the respondent. The Minister did not provide
valid explanations as to why he had based himself solely on a national average
in making the appellant's reassessment.
[6]
The appellant is a
dentist who has been practicing dentistry in La Sarre, Quebec
(population 9,000) since 1976. In 1982, he practiced dentistry with
4 other dentists in about 12 employees. Over the years, the dentists parted
their separate ways and the clinic closed down. Fierce competition to keep the
staff and clients ensued between former partners. The appellant thus decided to
lower his rates to 20% below the recommended rates.
[7]
During the years at
issue, the appellant worked without a hygienist because there was a shortage in
Quebec. He did the hygienist’s work himself, which took up a
large part of his time. A significant number of his clients were covered by the
Quebec health insurance plan the rates for which are lower
than the rates normally charged by dentists. From 1997 to 2003, the appellant
had cataracts. He was forced to reduce the number of hours he worked. According
to the appellant, these facts largely explain his lower profit margin.
[8]
The appellant employed
his spouse, his two teenage children as well as a fourth person to help him practice
his profession. The appellant attended dentistry conferences twice a year in
the Québec, Montréal and Trois-Rivières areas, accompanied by the members of
his team.
[9]
The appellant claims to
have operated an administrative office at his residence. He also deducted in
his expenses the cost of gasoline and the cost of operating his vehicle to
travel between his dentist office and his private home (14 kilometres between
the two).
[10]
The appellant testified
that he does not work naked with only a lab coat for clothing. He wears pants,
shirts and ties. He deducts from his gross income the cost of clothes that he
classifies as [Translation]
"for office use only". The clothes come mostly from stores such as
Holt Renfrew and Georges Rech. The appellant explained that he buys his clothes
from those stores because they can handle being washed at high temperatures,
which he had to do frequently.
[11]
As a dentist, the
appellant is subject to very high standards of hygiene and asepsis in
accordance with article 3.01.06 of the Code of ethics of dentists.
The information document on infection control for dentists states on page 6
that staff must wear [Translation]
"a lab coat or another clean protective garment". The appellant
stated that buying clothes from high-end stores constitutes a necessary expense
to satisfy the standards of hygiene.
[12]
During the years at
issue, the appellant spent several hundred dollars on gifts for his employees.
Most of those gifts were given to his former spouse who worked with him. The
gifts were not small: for example, expensive clothes and perfume from Holt
Renfrew and Parfumerie Paris, jewellery from Bijouterie Pépites d'Or and
products from SAQ. He considers that those expenses had to be incurred in order
to keep his staff.
[13]
At the preliminary
stages of the hearing, the appellant submitted a box containing all the
invoices without organizing them first. In addition, on
February 3, 2010, Justice Jorré held a case management
conference. The respondent asked at that time that the appellant meet his
undertakings. They consisted in providing his financial statements and
submitting supporting documents for the expenses in an organized manner. They
had to be attached to an explanatory page describing the amount and the nature
of the expense in detail and also be categorized by expense type.
[14]
Justice Jorré granted
the appellant an extension to enable him to meet his undertakings. The
appellant undertook to provide the requested items in an organized manner.
[15]
The appellant stated
that he had spent evenings and weekends over a three‑month period
organizing his files. He appeared at the hearing accompanied by his former
spouse and his accountant with a very impressive and orderly testimonial aid.
Most of the expenses referred to were accompanied by either a proof of purchase
such as an invoice or a proof of payment such as a copy of a cheque. At the
hearing, he spread out on the table invoices and receipts in chronological
order. The appellant and the witness were easily able to find the documents when
they were asked to justify the expenses.
[16]
The audit had been
conducted by Revenu Québec accounting officers, who, unfortunately, were not
called as witnesses. The respondent's witness, Mr. Pageau, was a CRA
officer, who relied on the conclusions of his peers from the provincial agency,
and it seems that he had never met them. He admitted that he had not thoroughly
analyzed the available documents. It would seem that no Crown representative
had done more than quickly glance at the voluminous documents.
[17]
Although the appellant
came to Court with the documents organized and accompanied by detailed
explanatory pages, some of the expenses were put in the wrong category of
supporting documents. For example, in the office maintenance category can be
found invoices for employee expenses, gifts to employees and representation
expenses. In the [Translation]
"Stamps and stationery" category, for 2001, a $172.54 purchase from
Holt Renfrew and a $330.69 purchase of men's clothing from Georges Rech can be
found. In 2001 and 2002, employees' RRSP payments of over $1,000 are entered
under advertising and donations. Mistakes of those types are frequently found
throughout the appellant's files. The appellant acknowledged this but, for the
sake of clarity, preferred not to change the categories of expenses that are at
issue in this case. He also acknowledged that some of the expenses were not
business expenses.
[18]
The appellant explained
that he had been forced into bankruptcy by the Province of Quebec and, under the circumstances, he does not have the
means to pay for adequate representation.
Issues
[19]
The issues are as
follows:
(1) Can the appellant submit his evidence
at the hearing even though no relevant facts were alleged in the Notice of
Appeal?
(2) Was the Minister justified in issuing a
notice of reassessment for the 2001 taxation year outside of the normal
reassessment period?
(3) Is the appellant entitled to the
expenses that were disallowed?
(4) Can the penalties be imposed?
(5) What class of proceedings does this
appeal belong to?
Analysis
(1) Submission of evidence at the hearing
[20]
The respondent alleges
that the appellant could not submit evidence at the hearing because no relevant
facts that could serve as the basis for his appeal had been alleged in the Notice
of Appeal. It is true that the Notice of Appeal does not allege many facts. The
appellant simply stated that he objects to the assessment, would demonstrate
that he had incurred the expenses claimed and requested that the notices of
assessment be vacated or reduced.
[21]
There is a duty to
allege relevant facts in the pleadings since the opposing must be cognizant of the
case it will have to meet at the hearing; thus the parties are not to be taken
by surprise. If one of the parties does not disclose any relevant facts, it
does not have the right to provide any evidence relative to those facts at the
hearing.
[22]
However, this is not a
case where, having disclosed the facts on which he was going to base his
appeal, the appellant failed to note some important facts, taking the opposing
party by surprise. In this case, the appeal contains no facts, but the
respondent has been cognizant of the situation since the commencement of the
proceedings and she suffered no harm.
[23]
In addition, although
the application does not really set out any material facts, the Notice of
Appeal clearly discloses a reasonable cause of action. The appellant stated in
his Notice of Appeal that he had incurred expenses in earning a professional
income and that he had the appropriate supporting documents. That is a material
fact (having supporting documents), which can be proven in Court.
[24]
It was open to the
respondent to file a motion with the Court in order to force the appellant to
allege more facts relevant to the appeal and, if he refused to comply, request
that the appeal be dismissed. It is too late at the hearing stage to request
that the appeal be dismissed on the basis of a technical objection to the
pleadings.
(2) Reassessment
[25]
Was the Minister
justified in issuing a notice of reassessment for the 2001 taxation year
outside of the normal reassessment period?
[26]
The reassessment for
the 2001 taxation year was made outside of the normal reassessment period.
In her Reply to the Notice of Appeal, the respondent presented the relevant
facts clearly enough so that the appellant would know the facts on the basis of
which the reassessment was made after the normal reassessment period. I am of
the opinion that the respondent has discharged her burden of proof with respect
to making a reassessment outside of the normal reassessment period.
[27]
The appellant has not been
acting with due diligence in calculating his income. First, it is clear that
his accounting system was deficient and that errors were inevitable. Second, an
order from Justice Jorré was necessary to ensure that the cheques, invoices and
other proofs of payment were systematically categorized and organized. Some
categorization errors remain to this day. That disorder resulted in the fact
that the documents supporting the expenses were inaccessible thus complicating
the CRA's auditing work. This disorder is equivalent to negligence.
[28]
In addition, several
thousand dollars in expenses for each year were not business expenses,
according to the appellant himself. Those sums are not insignificant and should
not have been disputed in Court. It was not until the day of the hearing that
the appellant made these admissions. In short, although it was done in good
faith, it is clear that the appellant showed a certain degree of negligence. The
Minister was thus justified in making a reassessment outside the normal
reassessment period for 2001.
(3) Expenses
[29]
The most difficult
question that must be answered is whether the appellant is entitled to the
expenses that had been disallowed.
[30]
Subsection 18(1) of the
Act reads as follows:
General limitations
18(1) In computing the income of a taxpayer from a business or
property no deduction shall be made in respect of
General limitation
18(1)(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;
[31]
That subsection of the
Act very clearly provides that personal expenses are not deductible in
calculating income earned from a business or profession. Only expenses made or
incurred by the taxpayer for the purpose of gaining or producing income from a
business or property are deductible.
[32]
Section 67 of the Act
reads as follows:
General limitation re expenses
67. In computing income, no deduction shall be made in respect of an
outlay or expense in respect of which any amount is otherwise deductible under
this Act, except to the extent that the outlay or expense was reasonable in the
circumstances.
[33]
Several comments should
be made before I review the expenses. This matter should never have been taken
all the way to the Tax Court of Canada as it was presented. It should have been
settled when the appellant had organized his files in an orderly manner
sometime before the hearing. It is a waste of time for the Court to be
individually examining hundreds of documents. I am not an auditor or an
accountant. As Judge Bowman pointed out in Merchant v. Canada, ". . . the
court is not the place to perform an income tax audit". In this type of
case, Judge Bowman recommended the following approach:
7 Where
a large number of documents, such as invoices, have to be proved it is a waste
of the court's time to put them in evidence seriatim. The approach set
out in Wigmore on Evidence (3rd Ed.) Vol IV, at s. 1230 commends itself:
s.
1230(11): ... Where a fact could be ascertained only by the inspection of a
large number of documents made up of very numerous detailed statements
-- as, the net balance resulting from a year's vouchers of a treasurer or a year's
accounts in a bank-ledger -- it is obvious that it would often be practically
out of the question to apply the present principle by requiring the production
of the entire mass of documents and entries to be perused by the jury or read
aloud to them. The convenience of trials demands that other evidence be allowed
to be offered, in the shape of the testimony of a competent witness who has
perused the entire mass and will state summarily the net result. Such a
practice is well-established to be proper.
8 This
passage was cited with approval by Wakeling J.A. in Sunnyside Nursing Home
v. Builders Contract Management Ltd. et al., (1990) 75 S.R. 1 at p. 24
(Sask. C.A.) and by MacPherson J. in R. v. Fichter, Kaufmann et al., 37
S.R. 128 (Sask. Q.B.) at p. 129. I am in respectful agreement.
[34]
Unfortunately, we do
not have testimony of a competent and independent witness who has perused the
entire mass of documents and who can state summarily the net result. The
respondent did not call as witness the Revenu Québec auditor who had conducted
the audit.
[35]
A reassessment based on
a provincial average without a more thorough analysis of the file is
fundamentally flawed. I believe it is a question of common sense. A general
average cannot be used to ignore the particular constraints of an individual.
In addition, there no evidence has been offered as to the manner in which the
averages have been calculated. For example, the analysis does not seem to take
into account the differences that might exist between a dentist practicing in
outlying areas and one practicing in downtown Montréal.
[36]
The appellant clearly
demolished the Minister's assumptions, on which he had based himself in
disallowing the expenses at issue. The appellant has prima facie shown
that the majority of the expenses has been incurred for the purpose of earning
an income and that they had not been claimed twice. The burden of proof has
thus shifted to the respondent. She did not file any rebuttal documentary
evidence and did not call any witnesses with personal or direct knowledge of
the case. Therefore, she has not refuted the evidence prima facie
established by the appellant.
[37]
Accordingly, I assume
that all of the expenses at issue are eligible business expenses except those
that are clearly not, that are unreasonable or that were not sufficiently
justified. I will discuss in more detail those expenses that must be disallowed
below.
[38]
It is unfortunate that
the appellant represented himself and did not call witnesses to corroborate
some of his evidence. It would have been wise for the appellant to call his
children as witnesses. I am sceptical about the nature of some of the payments.
For example, his teenage son and daughter had employee expense accounts and the
appellant also contributed to their RRSP accounts. The appellant presented his
expenses and other bonuses as expenses aimed at retaining his workforce. In the
absence of more convincing evidence, I cannot accept that the amounts given to
the children were incurred for the purpose of earning an income or were
reasonable.
[39]
In addition, he is
seeking to deduct gifts given to employees (most of which were given to his
former spouse), which included perfume, jewellery, hairdresser, cosmetics, baby
accessories, alcohol and clothes bought at various high‑end stores. Those
items clearly appear to be personal expenses, and unreasonable in all cases.
Those items are found throughout the various categories of invoices. I
therefore deduct these amounts from the various categories.
[40]
The expenses for
courses and conferences were necessary to the appellant in order for him to
continue his training in accordance with accepted practices and to attract
clients who are interested in his dentistry skills. Those are expenses incurred
in order to earn an income. Nonetheless, it seems that part of those expenses
is not business expenses. Indeed, the presence of the appellant's entire family
at the seminars, especially the two children, seems quite questionable.
The children did not testify in Court, and it is difficult to see why they
needed to attend dentistry seminars. Under these circumstances, 25% of the
expenses disallowed for the courses and conferences will be upheld.
[41]
I do agree with the
appellant when he says that his work requires him to wear clothes under his lab
coat. However, in most cases, personal expenses such as clothes, food and
lodging do no constitute business expenses within the meaning of
paragraph 18(1)(a) of the Act because they are proscribed by
paragraph 18(1)(h) of the Act.
[42]
In Rupprecht v. Canada, a certified
financial planner, alleging that he needed appropriate clothing, tried to pass
off as business expenses suits, ties, shirts and accessories bought at
Ermengildo Zegna, an exclusive men’s wear shop. The expenses totalled over
$6,000 in 1999 and $2,400 in 2001. Justice Paris ruled that clothes are prima
facie a personal expense and added the following:
19 It
is necessary to determine whether an expense is of a personal nature regardless
of whether it relates to any property maintained by the taxpayer. 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. I conclude that the clothing in issue was used by the appellant as
personal wear in everyday business and therefore its cost is not deductible.
[43]
The documents filed in
evidence by the appellant mention nothing about the clothes that a dentist
should wear under his lab coat or other protective garment. The recommendation
for weekly cleaning concerns only the protective garment. I would also point
out that the document filed by the appellant states that the protective garment
must be bleached. Common sense tells me that surely the appellant did not
bleach his suits, ties and shirts. In the absence of more convincing evidence,
the clothing expenses must be disallowed.
[44]
Alleging to have an
administrative office in his home, the appellant is claiming expenses related
to his principal residence such as his personal telephone line and travel
between his home and the dental office. For instance, the appellant cites Cumming
v. MNR, where it was stated that a doctor's travel
expenses for travel between his home and the hospital where he works are
accepted as a deduction if he has no office at the hospital and has to take
care of the administrative part of his practice at his home.
[45]
Subsection 18(12)
of the Act, which was not in effect when the decision in Cumming was
rendered, provides 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;
[46]
The appellant's home is
not his principal place of business and is not used on a regular and continuous
basis for meeting clients. Under these circumstances, the appellant had no
administrative office at his home and all the expenses claimed in relation to
that office must be disallowed.
[47]
The appellant made
several donations to various organizations such as the Église Évangélique Mennonite
de Rouyn-Noranda, Canadian Cancer Society, Club de l'amitié des handicapés
Secteur La Sarre, The War Amps, etc.
[48]
Unfortunately, the
evidence does not show that those expenses were incurred for the purpose of
earning an income from them or that they were part of the appellant's business
development plan.
[49]
Finally, the appellant
is seeking to add some invoices that were not considered at the time of his
audit. I am not prepared to accept those amounts. First, they are not at issue
in this appeal. Secondly, the amounts that are being added are, for the most
part, non‑deductible. Thus, the expenses that the appellant added to his
income, such as those related to the administrative office and those incurred
for the appellant's travel between his dental office and the administrative
office are not eligible business expenses as seen earlier.
[50]
In conclusion, I found
the appellant and his former spouse to be credible witnesses. I am of the view
that the appellant has proven that most of the disallowed expenses for the
years at issue, namely, $52,259 in 2001, $60,745 in 2002 and $77,449 in 2003
are business expenses deductible from his income. Only some of the expenses are
not deductible business expenses. I will therefore subtract the expenses shown
in the table above that are not deductible for the reasons stated above. In
addition, the expenses that were not deductible, according to the appellant
himself, and had been added by mistake should be reduced. I will therefore address
the expenses by category and in the order they are listed in the table at the
beginning of the judgment (see Appendix A for calculations).
(4) Penalties
[51]
Another issue I must rule
on is that of the assessment of a penalty under subsection 163(2) of the
Act. Subsection 163(3) provides that the burden of establishing the facts
justifying the assessment of a penalty is on the Minister. The auditors who had
conducted the audit were not called as witnesses, and it is not sufficient that
someone else, in this case, Mr. Pageau, who had nothing to do with the
audit or the original assessment, testified that the appellant had been grossly
negligent. Such testimony amounts to hearsay and is not admissible in evidence.
Therefore, the Minister has not discharged his burden of proof.
(5) Class of proceedings for the appeal
[52]
Under subparagraph 1(a)(i)
of Tariff A of Schedule II of the Tax Court of Canada Rules (General
Procedure), the class of proceedings for this appeal is class A
because the aggregate of all amounts in issue in this appeal is $41,232. No
evidence to the contrary has been adduced.
[53]
For all of these
reasons, Dr. Rail's appeals for the 2001, 2002 and 2003 taxation
years are allowed, without costs, and the reassessments are referred back to
the Minister of National Revenue for reconsideration and reassessment on the
basis that the appellant is entitled to the deduction of his expenses for
earning a professional income in the amount of $33,349.50 for 2001, $42,959.25
for 2002 and 47,011.59 for 2003.
Signed at Ottawa,
Canada, this 1st day of March 2011.
"C.H. McArthur"
on this 9th day of
May 2011
François Brunet, Revisor
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