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Citation: 2004TCC640
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Date: 20040920
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Docket: 2001-1545(IT)G
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BETWEEN:
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WILLIAM R. REDRUPP,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Mogan J.
[1] The Appellant is a chartered
accountant who engaged in the public practice of his profession
from 1961 until the mid-1990s. When computing his income for the
taxations years 1993, 1994 and 1995, he deducted significant
amounts as business expenses, carrying charges and farm losses.
Upon reassessment, the Minister of National Revenue
("MNR") disallowed as deductions most of those amounts.
The Appellant has appealed from the reassessments under the
Rules of General Procedure in this Court. The years under
appeal are 1993, 1994 and 1995. The only issues are whether
particular amounts are deductible in computing income.
[2] Certain basic facts were admitted
in the pleadings or otherwise proved. At all relevant times, the
Appellant was a partner in PriceWaterhouse, an international
accounting firm well known in Canada and other countries. In each
year under appeal, the Appellant earned as a partner in his firm
professional income exceeding $275,000. For 1995, the Appellant
claimed a "provision against income" of $42,160 which
appears to be a deduction with respect to a doubtful debt. The
Appellant was a partner in a farming operation with two other
persons owning properties contiguous to his; and he managed both
the partnership and the farms. A summary of the relevant amounts
taken from the Appellant's income tax returns (Exhibit A-1,
Tabs 1, 2 and 3) is set out in the table below.
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1993
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1994
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1995
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Professional Income (PW)
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$290,350
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$289,175
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$354,664
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Business Expenses
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127,435
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130,749
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177,824
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Net Professional Income (line 137)
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162,915
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158,426
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176,840 *
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Farm Loss (line 141)
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64,377
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63,394
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73,154
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Carrying charges (line 221)
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34,820
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37,113
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42,259
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* discrepancy of $4,196 with line 137 on 1995 tax return.
[3] The Notice of Appeal does not
contain any details with respect to the various expenses which
appear to be in dispute. The Notices of Reassessment for 1993 and
1994 are in Exhibit R-1, Tabs 8 and 9 but there are no statements
of adjustment to show what expenses were allowed or disallowed.
The Notice of Confirmation is part of Exhibit R-1, Tab 10 but it
contains only total amounts. I will rely on copies of the
income tax returns (Exhibit A-1, Tabs 1, 2 and 3; and Exhibit
R-1, Tabs 1, 2 and 3) to set out what I think are the total
business expenses including the doubtful debt amount for
1995.
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1993
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1994
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1995
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Automobile Expenses
(fuel, insurance, repairs)
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27,810
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22,695
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21,633
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Interest Paid (investment in PW)
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42,980
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46,216
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49,368
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Entertainment
$27,206 x 80%
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21,764
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--
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--
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$32,190 x 50%
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--
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16,095
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--
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$29,860 x 50%
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--
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--
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14,930
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Business use of Residence
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25,913
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25,631
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32,422
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Legal
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--
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13,840
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12,920
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Capital Cost Allowance
(CCA automobile)
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8,968
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6,272
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4,391
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Provision against income
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_______--
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_______--
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42,160
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Total Business Expenses
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$127,435
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$130,749
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$177,824
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[4] According to the Respondent's
Reply and the Confirmation (Exhibit R-1, Tab 10), in the
reassessments under appeal, the MNR allowed as deductible 25% of
automobile expenses and CCA, plus 10% of amounts claimed for
entertainment, but did not allow the deduction of any other
business expenses. Also, the MNR disallowed all carrying charges
but allowed the restricted farm loss. The table below contains a
summary of the amounts in dispute.
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1993
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1994
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1995
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Automobile Expenses
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27,810
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22,695
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21,633
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Automobile CCA
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8,968
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6,272
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4,391
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Total Automobile
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36,778
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28,967
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26,024
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25% allowed
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9,194
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7,242
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6,506
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Entertainment claimed
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21,764
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16,095
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14,930
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10% allowed
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2,176
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1,609
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1,493
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Business Expenses claimed
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127,435
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130,749
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177,824
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Less: Portion allowed
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11,370
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8,851
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7,999
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Expenses in dispute
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116,065
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121,898
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169,825
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Farm loss claimed
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64,377
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63,394
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73,154
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Restricted loss allowed
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8,750
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8,750
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8,750
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Farm loss in dispute
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55,627
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54,644
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64,404
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Carrying Charges (line 221)
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$34,820
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$37,113
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$42,259
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The carrying charges deducted on line 221 of the income tax
returns are different from and in addition to the amounts of
"interest paid" contained in the total business
expenses (see table in paragraph 3).
[5] The table in paragraph 4 shows
that the amounts in dispute are significant with respect to the
Appellant's professional income from PriceWaterhouse (see
table in paragraph 2), his total business expenses (see table in
paragraph 3), and his claimed farm losses (see table in paragraph
4). In support of his position, the Appellant made the following
statements in his Notice of Appeal dated May 1, 2001:
In each of 1993, 1994 and 1995 the taxpayer earned business
professional income (PW) exceeding $275,000 per year and incurred
expenses related to such income in the form of automobile, home
office, entertainment, legal and interest incurred on debt
related to partnership interest with PriceWaterhouse.
Each year the taxpayer provided a detailed analysis
accompanying the 1993, 1994 and 1995 income tax returns for each
element of expense claimed by type of charge and
month.
(page 2)
The business expenses claimed were reasonable in amount,
particularly given the level of income of the taxpayer, his
global business activities and
responsibilities.
(page 2)
In summary on business expenses (professional) the issues are
reasonableness of amounts and evidence of
expenditures.
(page 5)
The business expenses incurred and shown with respect to 1993,
1994 and 1995 were supported by detailed analyses of expenses by
month and source of charge and filed with the taxpayer's
income tax return for each year.
(page 10)
[6] The Appellant produced a binder of
15 documents (Exhibit A-1) in which Tabs 1, 2 and 3 are copies of
his T1 General income tax returns for 1993, 1994 and 1995,
respectively. Similarly, the Respondent produced a binder of
12 documents (Exhibit R-1) in which Tabs 1, 2 and 3 are
copies of the Appellant's T1 General income tax returns for
1993, 1994 and 1995, respectively. The parties are in agreement
that, in each tax return as filed, there was a one-page schedule
listing the business expenses shown in the table in paragraph 3
above. For example, I will duplicate the schedules from all three
income tax returns.
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1993 Expenses
Automobile - Fuel, insurance, repairs
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$27,810
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Interest - investment in PriceWaterhouse
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42,980
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Business use of residence (one-third)
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25,913
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Business entertainment - 80% of $27,206
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21,764
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Capital cost allowance
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8,968
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$127,435
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1994 Expenses
Interest: Investment in PriceWaterhouse
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$46,216
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Legal
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13,840
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Automobile - fuel, repairs, insurance, etc.
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22,695
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Capital cost allowance - automobile
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6,272
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Business meal & entertainment -
50% of $32,190
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16,095
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House expenses - $76,893
-- Business use (one-third)
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25,631
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$130,749
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1995 Expenses
Provision against partnership income
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$42,160
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Interest - investment in PriceWaterhouse
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49,368
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Legal costs
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12,920
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Automobile - capital cost allowance
- fuel, repairs, insurance, interest
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4,391
21,633
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Business meals, entertainment -
50% of $29,860
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14,930
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House expenses - $81,054
-- Business use (40%)
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$32,422
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$177,824
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The Facts
[7] According to the Appellant's
Exhibit A-1 and his oral testimony, his income tax returns for
1993 and 1994 (Tabs 1 and 2) included one-page summaries
month-by-month of four specific expenses (i) interest on
PriceWaterhouse loan; (ii) entertainment; (iii) automobile; and
(iv) business use of home. Also, Exhibit A-1 and his oral
evidence indicate that his return for 1995 (Tab 3) had one-page
summaries month-by month for entertainment, automobile and
business use of home (no summary for interest on PriceWaterhouse
loan). This is where the parties disagree. The Respondent claims
that when the T1 General returns were filed, they included no
month-by-month summaries of any specific expenses. The Respondent
claims that the returns as filed contained only the schedules
reproduced in paragraph 6 above. Carmela Catizzone, the appeals
officer at Revenue Canada who reviewed the Appellant's
Notices of Objection, testified at the hearing. She stated that
Revenue Canada could not locate the Appellant's 1995 income
tax return but she was adamant in stating that the 1993 and 1994
returns, as filed, did not contain any month-by-month summaries
of specific expenses. Ms. Catizzone thought that she first
recalled seeing the month-by-month summaries at her
examination for discovery in June 2003.
[8] The month-by-month summaries
described in paragraph 7 must be seen in the context of the
Appellant's oral testimony. I will summarize his evidence
concerning the preparation of his income tax returns. He prepares
his own returns writing by hand the required amounts. When he
comes to a specific business expense like
"entertainment", he assembles all of the relevant
invoices or receipts and consolidates the totals, month-by-month,
on a spreadsheet under different categories across the top of the
sheet like University Club, York Downs Golf Club, Mad River Golf
Club (near Collingwood), Granite Club, American Express Credit
Card and Home. When the spreadsheet is complete, upon a fresh
schedule, he records the monthly totals under all categories to
arrive at his aggregate entertainment expenses for the year. Good
examples of this operation appear in Exhibit A-1, Tab 1 (sixth
page in the Court copy) where the aggregate for 1993 is $27,206;
and Tab 2 (eleventh page in the Court copy) where the aggregate
for 1994 is $32,190.
[9] Continuing the summary of the
Appellant's evidence, he attached copies of the fresh
schedules to his income tax returns; filed the returns; and kept
the original spreadsheets with the underlying relevant invoices
and receipts. When he received a Notice of Assessment from
Revenue Canada with respect to a particular taxation year which
did not challenge his business expenses, he would destroy or
throw away any invoices, receipts and spreadsheets related to
that year. He claims that this is why, during the audit (January
to October 1997) of his tax years 1993, 1994 and 1995, he was not
able to produce any receipts to prove any of his claimed
expenses. I will leave aside for now the disagreement between the
parties as to whether the month-by-month summaries were included
in the income tax returns, as filed, because the summaries are
not third party documents like an invoice or receipt. They do not
prove that any particular amount was charged to the Appellant or
paid by him.
[10] There is a wealth of evidence
concerning the Appellant's extensive practice as a chartered
accountant and his success as a partner of PriceWaterhouse. He
graduated from the University of Toronto in 1958 with a degree in
Commerce and Finance. He articled at PriceWaterhouse
("PW") and was admitted to the Ontario Institute of
Chartered Accountants in 1961. He was employed as a professional
accountant in the "audit" stream of PW commencing in
1961. He was promoted to supervisor in 1964 and manager in 1967.
He was then sent to Boston for a year. Upon his return from
Boston, he was asked to open a PW office in London, Ontario. The
practice which PW had in London in 1968/1969 was primarily an
audit practice of Canadian subsidiaries of U.S. parent companies.
The Appellant's basic assignment was to hold and expand that
practice.
[11] In the accounting profession, PW had
stiff competition in London around 1968/1969 because there were
well-established offices of other national accounting firms and
many strong local firms. The Appellant started in London with
only three chartered accountants including himself. In the early
1970s, he expanded into agriculture, corporate finance and income
tax. In the area of corporate finance, he helped clients to
borrow for the acquisitions of new business and real estate. This
work involved the valuation of a business, the development of a
business plan, determining the amount of a specific loan and how
long it would take to repay. The Appellant became experienced in
negotiating the terms of loans with banks and other financial
institutions on behalf of PW clients. He combined this expertise
with the agricultural business of many clients who were in the
production of primary food products like beef, pork, poultry and
crops. Agriculture is a big business in southwest Ontario from
Hamilton west to London and Windsor and north to Georgian
Bay.
[12] The Appellant's work in London was
recognized in 1971 when he became a partner of PW. In 1985, when
the London office had about 50 chartered accountants, he was
asked to come back to the Toronto office of PW to continue his
work in the corporate finance group. He purchased a home at 408
Russell Hill Road in Toronto and had an office at the PW location
in First Canadian Place (corner of Bay and King Streets). He
continued with PW until 1994 when he retired and commenced his
own business as a consultant in the area of corporate finance.
Because the fiscal period of PW ends in January, he reported his
1994 earnings as a partner of PW in the calendar year 1995. The
Appellant was widely recognized as an expert in corporate
finance. In 1993, he was asked by a client in Germany to assist
in the privatization of the coal mines in Romania. He went to
Germany; worked on the project; and submitted a proposal but PW
was not given the assignment. Similarly, he went to China with a
client to advise on a project there.
[13] I am satisfied on the evidence that the
Appellant is a competent, well-respected and successful
professional accountant, particularly in the area of corporate
finance. Indeed, his competence in his chosen profession is one
of his stumbling blocks in this Court. Revenue Canada has
challenged the Appellant on all of the amounts in dispute
summarized in paragraph 4 above. I will set out as a ratio and
percentage the aggregate of all amounts in dispute for each year
(paragraph 4 above) in relation to the Appellant's income as
a partner in PW:
1993:
206,512
=
71%
290,350
1994:
213,655
=
74%
289,175
1995:
276,488
=
78%
354,664
Those percentages speak for themselves. When the Appellant was
deducting in each year a total of three amounts (business
expenses, farm loss and carrying charges) which exceeded 70% of
his income from PW, he might have expected and, in my view, he
ought to have expected that those amounts would be challenged by
Revenue Canada. His failure to retain relevant invoices and
receipts for a reasonable time (perhaps the three-year normal
reassessment period) runs against him. The audit for the three
years under appeal commenced in January 1997, well within the
time to reassess 1993 and subsequent years; and yet the Appellant
could not produce any invoices or receipts for 1995, the most
recent year in the audit.
Analysis
[14] The Appellant faces questions of
credibility, reasonableness and common sense. The amounts in
dispute are high and not proven. The best evidence would be an
invoice from the creditor, a cancelled cheque, a receipt or other
proof of payment. The best evidence was not presented in Court.
Instead, we have only schedules in the handwriting of the
Appellant with his oral explanation as to how they were prepared.
The Appellant has significant experience as a professional
auditor going back to his early years at PW from 1961 to 1967.
When this appeal was heard in the spring of 2004, the Enron
scandal was front-page news. From the witness stand, the
Appellant commented as an aside that his audit teams at PW had a
good "nose for fraud", and they would have detected the
fraud at Enron long before it became public. A professional
accountant with a keen scent for fraud should know the importance
of original third party documents like invoices and receipts.
[15] Keeping good business records is not
only a matter of common sense but is also required under
subsection 230(1) of the Income Tax Act which states in
part:
230(1) Every person carrying on business and every
person who is required, by or pursuant to this Act, to pay
or collect taxes or other amounts shall keep records and books of
account ... at the person's place of business or
residence in Canada ... in such form and containing such
information as will enable the taxes payable under this
Act ... to be determined.
The need to retain and produce original documents has been
confirmed by the Courts on many occasions. In Njenga v. The
Queen, 96 DTC 6593, the Federal Court of Appeal stated:
The Income tax system is based on self monitoring. As a public
policy matter the burden of proof of deductions and claims
properly rests with the taxpayer. The Tax Court Judge held that
persons such as the Appellant must maintain and have available
detailed information and documentation in support of the claims
they make. We agree with that finding. Ms. Njenga as the Taxpayer
is responsible for documenting her own personal affairs in a
reasonable manner. Self written receipts and assertion without
proof are not sufficient.
[16] I will not permit the deduction of the
amounts in dispute based on the Appellant's schedules and
oral testimony alone. Certain amounts, in particular, cry out for
verification. There is nothing to support the interest claimed to
have been paid on money borrowed to invest in PW when the amount
of interest deducted each year exceeds $42,000. Men of the
Appellant's stature do not borrow from loan sharks! They
borrow from banks or other financial institutions which are
regulated and required to maintain extensive books and records.
The Appellant should have been able to produce bank records or
other similar documents to prove the payment of such interest.
Exhibit A-1, Tab 4 is a one-page schedule for 1994
purporting to show the interest paid month-by-month on an
investment of $385,000 in PW. The aggregate interest for the year
($49,368) was deducted by the Appellant in his 1995 fiscal year.
To whom was the interest paid? How was it paid? By cheque? By
direct withdrawal each month from the Appellant's bank
account? The income tax audit for 1993-1994-1995 began in January
1997. At that time, the Appellant should have been able to verify
the significant amounts of interest deducted as business expenses
in each year. He did not verify any such amounts.
[17] There is nothing to support the
carrying charges which exceed $34,000 in each year. The Appellant
claimed that part of the carrying charges was interest on money
borrowed to contribute to an RRSP but he did not seem to realize
that such interest is specifically not deductible under a
provision of the Act.
[18] The Appellant gave extensive evidence
with respect to the business use of his car. I am persuaded that
the Appellant uses his car frequently in connection with his
business. I am troubled, however, by the absence of receipts and
his claim that one car was used exclusively for business. If
there were receipts to prove the total operating costs of his car
each year, I would be inclined to allow 66% of such costs as
deductible. In the absence of receipts, I will permit the
deduction of 45% of the amount which he claimed as automobile
expenses and CCA. In other words, I will increase the deduction
for automobile expenses granted in the reassessments under appeal
from 25% to 45%.
[19] In the reassessments, the Minister
allowed the Appellant to deduct only 10% of the amounts claimed
for "entertainment". For many, many years, there has
been a long-established practice of writing the name of the
client or guest on the credit card receipt, private club voucher
or ticket (game or theatre) when a person is entertained. I do
not understand or accept the Appellant's failure to follow
that long-established practice and produce acceptable receipts
naming his guests. I am inclined to think that the Appellant
spent more than 10% of the claimed amounts but, again in the
absence of receipts, I would allow only 30% of the claimed
amounts. I will increase the deduction for entertainment expenses
granted in the reassessments under appeal from 10% to 30%.
[20] At the hearing, the Appellant produced
two invoices (Exhibit A-1, Tab 8 and 9) from the law firm Weir
& Foulds showing that he was billed for law costs of
$2,247.54 plus $6,225.11 in 1994 concerning a dispute and later
agreement with PW. I will allow the Appellant to deduct his
proven legal costs of $8,472.65 in 1994.
[21] The Appellant's claims with respect
to business use of his home are, in my view, exaggerated. I do
not doubt that he used his home at times for business purposes
but it must be remembered that, in 1993 and 1994, he was a senior
partner in a prominent national and international accounting
firm; and he had an office in First Canadian Place, Toronto.
Having regard to subparagraphs 18(12)(a)(i) and (ii) of
the Act, the work space in his home was not his principal
place of business. I do accept, however, that there was a work
space in his home "used exclusively for the purpose of
earning income from business and used on a regular and continuous
basis for meeting clients". I conclude from the approximate
drawings of his home floor plans (Exhibit A-1, Tab 5) and his
oral testimony that he used about 15% of his home (the office on
the second floor) for business purposes.
[22] In the absence of receipts (same old
problem when the Appellant is a highly qualified accountant!), I
reject out of hand the very high annual operating costs ($75,000
to $80,000) which he attributed to his home. I am satisfied from
the evidence of the Appellant himself and the appeals officer
(Ms. Catizzone) that certain of those costs were of a capital
nature; and the aggregate is much too high. On an arbitrary
basis, I will reduce the annual home operating costs to $40,000
per year, and permit the Appellant to deduct 15% of that amount
($6,000 per year) for business use of the home in each year under
appeal.
[23] In his 1995 income tax return, the
Appellant deducted the amount $42,160 which he described as
"Provision against partnership income (see attached)".
He attached a copy of his letter to PW dated June 14, 1996 which
is Exhibit A-1, Tab 12 in this appeal. The Appellant's letter
refers to an earlier letter from PW dated April 22, 1996 which is
Exhibit A-1, Tab 10. The best description of the amount $42,160
appears on the second page of a letter dated June 13, 1996 from
PW to the Appellant (Exhibit A-1, Tab 11). And finally, a letter
dated July 29, 1998 from PW to the Appellant (Exhibit A-1, Tab
13) shows that the amount $42,160 (or $42,967.76 as it is
described in some documents) was not paid to the Appellant until
July 1998. In evidence and argument, the Respondent did not
dispute the truthfulness of any statement made in the letters
which are Exhibit A-1, Tabs 10, 11, 12 and 13.
[24] I am satisfied that, when the Appellant
retired from PW in late 1994, there was a genuine dispute between
him and his partnership concerning this amount $42,160. The PW
partnership showed it as a 1995 distribution even though it was
not paid to the Appellant until July 1998. If the Appellant was
required to include the amount $42,160 as part of his 1995 net
business income (see box 18 on form T5013, part of Exhibit A-1,
Tab 3; and see also Exhibit A-1, Tab 12), then in my view he was
entitled to deduct in 1995 that same amount $42,160 as a reserve
for a doubtful debt under paragraph 20(1)(l) of the
Act. When he in fact received the amount $42,160 in July
1998, he was required to include that amount in his 1998 income
under paragraph 12(1)(d) of the Act.
[25] The Appellant did not report the
$42,160 as part of his 1998 income. In fairness to him, he would
have filed his 1998 income tax return in the spring of 1999 and,
by that time, he would have received his 1995 Notice of
Reassessment dated March 9, 1998 disallowing his deduction of the
$42,160 "provision". When Ms. Catizzone testified, the
following exchange occurred between her and the Appellant's
counsel:
Q Now dealing
with the partnership income and dealing with the deferral, Mr.
Redrupp ultimately did provide you with letters on that
particular issue. You did have the letters we had.
A. With respect to
the provision?
Q. Yes.
A. Yes.
Q. With respect to
the $42,000 provision.
A. Yes.
Q. And why did you
not allow that deduction?
A. I was prepared to
allow it if he had included it in the 1998 income tax return.
Q. So you are saying
as long as it can be moved to 1998 you are happy that it could be
deducted in 1995.
A. Yes.
I will allow the Appellant to deduct in 1995 the amount
$42,160 which he attempted to deduct when filing his return for
that year. One of the counsel suggested that the Appellant may be
reassessed for 1998 (the year when he actually received the
$42,160) to include that amount in income notwithstanding the
passage of time if subsection 152(4.3) applies. I think the
Appellant may be reassessed for 1998 in any event.
Farm Losses
[26] The Appellant claims that farming was
his chief source of income within the meaning of section 31 of
the Act. On this issue, the cornerstone of the law is the
decision of the Supreme Court of Canada in Moldowan v. The
Queen, 77 DTC 5213. Writing for the Court, Dickson J. as
he then was stated at pages 5215-5216:
Whether a source of income is a taxpayer's 'chief
source' of income is both a relative and objective test. It
is decidedly not a pure quantum measurement. A man who has farmed
all of his life does not cease to have his chief source of income
from farming because he unexpectedly wins a lottery. The
distinguishing features of 'chief source' are the
taxpayer's reasonable expectation of income from his various
revenue sources and his ordinary mode and habit of work. These
may be tested by considering, inter alia in relation to a
source of income, the time spent, the capital committed, the
profitability both actual and potential. A change in the
taxpayer's mode and habit of work or reasonable expectations
may signify a change in the chief source, but that is a question
of fact in the circumstances.
[27] Since 1977, many decisions in the
Federal Court of Appeal and this Court have adopted the
three-pronged test of time spent, capital committed and
profitability as the basis for determining chief source of
income. Around 1960, the Appellant's father had purchased a
60-acre farm north of Creemore and south of Collingwood about 130
kilometres north of Toronto. In 1964, the Appellant purchased
some adjoining lands: 100 acres beside his father's farm and
40 acres behind it. In 1975, he purchased a further 75-acre farm
nearby. In the years under appeal, the original 60 acres were
owned by the Appellant's mother and some of the adjoining
land was owned by his wife. It is acknowledged that the Appellant
managed the farm operation on behalf of all three family members.
Accordingly, the net farm loss was allocated among the three
owners as follows:
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1993
|
1994
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1995
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Appellant
|
$64,377
|
$63,394
|
$73,154
|
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His wife
His mother
|
901
1,734
|
1,024
1,826
|
968
4,689
|
|
Net farm loss
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$67,012
|
$66,244
|
$78,811
|
[28] In 1961, the Appellant purchased his
first Hereford cattle which he described as "horned".
In 1970, he fixed up the original 60 acres with new fences; sowed
grain on 30 acres; and used 30 acres for pasture. In the 1960s
and 1970s, he acquired more knowledge by attending courses put on
by the Government of Ontario or certain feed companies. In 1980,
he increased the size of the herd with more cows and calves and,
in 1994, purchased his first high quality ("first
class") bull then only four months old. The young bull was
quarantined in the United States for a time and came to Canada in
1995. The Appellant stated that, in 1993, he would have had from
40 to 60 head of cattle: about 60 from January to May and about
40 from June to January.
[29] The Appellant claims that he spent
one-third of his time at the farm. That may be true for the year
2004 when this appeal was heard but it is simply not believable
for the years under appeal 1993, 1994 and 1995. In 1993 and 1994,
the Appellant was a senior partner at the main Toronto office of
PW (in First Canadian Place). He stated that when he moved from
London to Toronto, his main thrust was to "take public"
certain entrepreneurs who previously had private corporations.
Those projects require meetings with the client, a chartered
bank, and most important the investment banker who will work on
the prospectus and advise upon the securities to be sold to the
public. It is high-level work for accountants, lawyers and
investment bankers.
[30] The Appellant stated that when he left
PW at the end of 1994, he was the biggest earner in their
corporate finance group. I believe him. He is intelligent,
competent, hard working and a successful professional accountant.
That success does not come from spending one-third of one's
time at a farm 130 kilometres from home and office. That success
comes from being available to slug it out in the corporate milieu
of Bay Street. Each trip to the farm would require at least one
hour in transit each way, going and coming. Also, the Appellant
belongs to the Mad River Golf Club near Collingwood and near his
farm. On his entertainment spreadsheet, the Mad River Golf Club
was one of the locations where he incurred expenses. He stated
that his visits to Mad River Golf Club were mainly to entertain
at meals and not to play golf. That may be true but any time
spent at the Mad River Golf Club was time not spent at the farm.
I find that the Appellant spent less than one-third of his time
at the farm.
[31] According to Exhibit A-1, Tab 4, the
Appellant had $385,000 invested in PW in 1994. That amount is not
surprising given his success as a partner in that firm. Also, he
had an undisclosed amount invested in the family home at
408 Russell Hill Road, Toronto, a preferred residential
neighbourhood. It is probable that he had additional amounts
invested in some of the private clubs he belonged to: Granite,
University, York Downs Golf and Mad River Golf. Those clubs were
used in connection with his professional life as indicated in the
"entertainment" spreadsheet. Membership in such clubs
would not contribute to the success of his farming endeavour.
[32] During the years under appeal,
ownership of the lands used for farming was divided among the
Appellant, his wife and his mother. There is no evidence on the
amount which the Appellant himself had invested in his portion of
the farm partnership. Accordingly, it is not possible to compare
the amount which the Appellant had invested in farming with the
amounts which the Appellant had invested in his professional
business and his city home. The amount invested in the city home
is relevant because, for the fulltime farmer, the home is an
integral part of the farm. Also, the Appellant had a residence of
some kind at his farm. In the absence of evidence to the
contrary, I am satisfied that the Appellant had a substantially
greater amount of money invested in PW, his Toronto home plus his
private clubs than the amount invested in his share of the farm
partnership.
[33] The last of the three-pronged test is
profitability. I will extract from the farm income statements
incorporated into Exhibit A-1, Tabs 1, 2 and 3 the amounts
reported as revenue, expenses and loss:
|
|
1993
|
1994
|
1995
|
|
Farm revenue
|
$31,895
|
$28,878
|
$33,041
|
|
Farm expenses
|
98,907
|
95,122
|
111,852
|
|
Farm Loss
|
$67,012
|
$66,244
|
$78,811
|
In each year, the expenses (including a moderate amount for
CCA) were more than three times the revenue. There is no
documentary evidence that the farm produced a profit in the 10
years before 1993 or in any year after 1995. In other words,
there is no evidence that the farm has shown a profit at any time
in the last 20 years. I am not directing my mind to
"reasonable expectation of profit". I am simply
wondering how a farm which does not show a profit for 20 years
can ever be regarded as a "chief source of income" in
any one of the latter 10 years when the principal owner or
partner earns a generous income each year from a non-farming
source.
[34] In Donnelly v. The Queen, 97 DTC
5499, Robertson J.A. referred to taxpayers "who earn their
income in the city and lose it in the country". Those words
certainly describe Mr. Redrupp because he is very much a city
man. He drives only a Mercedes, even when going from Toronto to
his farm, and that fact would distinguish him from the vast
majority of farmers in Canada. In Taylor v. The Queen,
2002 DTC 7596, the Federal Court of Appeal qualified what
Robertson J.A. said about "substantial profits from
farming" in Donnelly, but did not depart from the
three-pronged test.
[35] In the Reply to the Notice of Appeal,
the Respondent states that the Appellant did not incur farm
expenses in the amounts he claimed in the years under appeal.
This again puts in issue the question of verifying amounts paid.
I have considered the Appellant's claim with respect to
"chief source of income" by applying the three-pronged
test from Moldowan as if there were no issue concerning
proof of payment. In other words, even if all farming expenses
were proved as having been paid, I would still conclude that
farming was not the Appellant's chief source of income in any
of the years under appeal.
[36] I will allow the appeals for 1993, 1994
and 1995 only for the purpose of granting the Appellant limited
relief by permitting additional deductions for automobile
expenses (see paragraph 18 above), entertainment expenses (see
paragraph 19 above, law costs (see paragraph 20 above), business
use of home (see paragraph 22 above) and the
"provision" amount of $42,160 in 1995. I will make no
order as to costs because the relief which the Appellant obtained
in each year under appeal is much less than one-half of the
amounts in dispute.
Signed at Ottawa, Canada, this 20th day of September,
2004.
Mogan J.
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