Date:
20021105
Docket:
2001-1824-IT-I
BETWEEN:
UMESH
JHA,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
Angers,
J.T.C.C.
[1]
This is an appeal of a reassessment for each of the
appellant's 1996 and 1997 taxation years. The Minister of
National Revenue (the "Minister"), in the reassessment,
disallowed motor vehicle expenses and work space in home expenses
which the appellant had claimed against rental income. In 1996,
these expenses were $4,301.09 for the motor vehicles and
$8,869.74 for the work space. In 1997, they were $7,694.33 and
$5,949.03 respectively. In reassessing, the Minister relied on
the following assumptions of fact set out in paragraph 6 of the
Reply to the Notice of Appeal, which were either admitted or
denied as indicated:
(b)
in the 1996 and 1997 taxation years, the appellant had the
following rental properties: (admitted)
|
Property Address
|
Number
of
Units
|
Management Fee
Expenses Claimed
|
Net
Income/ (Loss)
Claimed
|
|
|
|
1996
|
1997
|
1996
|
1997
|
|
40-50
Rutledge Street,
Bedford,
Nova Scotia
|
21
|
28,236
|
29,736
|
(3,814)
|
(4,565)
|
|
131-4711
Jane St.,
Toronto,Ontario
|
1
|
5,343
|
4,781
|
(3,814)
|
(3,547)
|
|
66 Sydney
Rd, London
England
|
1
|
0
|
0
|
(852)
|
(1,947)
|
|
40-42
Regal Road,
Dartmouth, Nova Scotia
|
2
|
0
|
0
|
365
|
(3,912)
|
|
5575 5589
Morris St,
Halifax,
Nova Scotia
|
16
|
0
|
0
|
6,607
|
8,088
|
|
5A B
Withrod Drive,
Halifax,
Nova Scotia
|
2
|
0
|
0
|
(5,677)
|
(3,588)
|
|
12 Dover
Crt, Dartmouth,
Nova
Scotia
|
1
|
0
|
0
|
(3,776)
|
(5,048)
|
|
1005 55
Centre Ave,
Toronto,
Ontario
|
1
|
4,021
|
4,347
|
1,800
|
(4,046)
|
|
2104 260
Queens Way
Toronto
Ontario
|
1
|
2,760
|
2,070
|
(92)
|
642
|
|
1905 270
Queens Way
Toronto
Ontario
|
1
|
2,580
|
2,801
|
(5,541)
|
(9,171)
|
(c)
in 1996 and 1997 taxation years, the Appellant claimed total
rental losses from these properties in the amounts of $38,200.59
and $54,820.60 respectively; (admitted)
Work Space in Home Expenses
(d)
the Appellant claimed work space in home expenses against income
from property in 1996 and 1997 in the amounts of $8,869.74 and
$5,949.03 respectively; (admitted)
(e)
the Appellant did not meet tenants on an ongoing or continual
basis at his home office; (denied in part)
Motor Vehicle Expenses
(f)
at all material times the Appellant owned a Volvo and a Mercedes;
(admitted)
(g)
the Appellant claimed to use the Volvo when handling the affairs
of his rental properties and the Mercedes for his psychiatric
practice; (admitted)
(h)
the Appellant claimed motor vehicle expenses in 1996 and 1997
against income from property in the amounts of $4,301.09 and
$8,833.90 respectively; (admitted)
(i)
of the $4,301.09 in 6(h) above, $2,064.89 was for interest
expense; (admitted)
(j)
the Volvo was a late 1980's model and the original vehicle
loan had been paid off several years before 1996;
(denied)
(k)
the interest amount of $2,064.89 was therefore disallowed as
there was no documentation to show it had been incurred for the
purpose of earning income; (denied)
(l)
the remaining amount of $2,236.20 (4,301.09 - 2,064.89) was
disallowed as insufficient documentation was supplied to confirm
the expense was incurred to earn income; (denied)
(m)
the Appellant claimed additional motor vehicle expenses against
his professional income in 1996 in the amount of $6,452.11;
(admitted)
(n)
the Appellant incorporated his professional practice in January
of 1997, and claimed no motor vehicle expenses against his
professional income on his 1997 personal tax return;
(admitted)
(o)
the Appellant did not maintain adequate records to support the
motor vehicle expenses claimed; (denied)
(p)
in 1997, the Appellant supplied receipts to support only
$4,558.28 of the $8,833.90 claimed for motor vehicle expenses;
and (denied)
(q)
in the absence of proper records to support that the expense was
incurred to earn income, an amount of 25%, or $1,139.57 was
allowed as reasonable in 1997; (denied)
[2]
The onus is on the appellant to establish on a balance of
probabilities that the expenses claimed are valid and allowed
under the Income Tax Act (the
"Act").
[3]
The appellant has been a psychiatrist and family physician since
1976. He has also invested in real estate and owns rental
properties as described in paragraph 6(b). After a number of
years, his wife resigned from her job and became manager, medical
secretary and receptionist for the appellant. They eventually
built a house with 12 rooms to accommodate his practice, the
real estate operations and their family. It is a
three-storey house. The ground floor houses the
appellant's medical practice and there is a two-door
garage on that level. One third of the house is needed for the
medical practice and less than one third for managing the real
estate operations; the rest is for the family's use. The
garage is used to store building materials for repairs and
various supplies.
[4]
The appellant explained that three rooms are needed for the real
estate operations. One room is an office in which leasing and
financial records and tenant information are kept and bookkeeping
is done. Another is used for meetings with building supervisors,
rental agents and others. The third, the double garage, is for
storage. The appellant did not meet all his tenants, for he had
an agent, but on occasion, he would meet with some of them at his
home.
[5]
In 1994, the appellant borrowed money to provide funds for his
real estate operations as these were not profitable. The loan
served to consolidate all his debts and his house was mortgaged
as collateral for the loan.
[6]
The appellant produced in evidence a logbook for both taxation
years detailing the trips made with his motor vehicles and the
kilometers travelled. He testified under cross-examination that
the logbook had been prepared by his bookkeeper,
Robert Hume, and that it contained the appellant's
recollection of what had taken place. The log was not kept on a
daily basis as the appellant found that too cumbersome. He could
not recall when it had been prepared but said it was compiled by
Mr. Hume using his diary. The appellant testified that his
motor vehicles were only used for personal purposes twice during
the years in issue and it was to travel to P.E.I. In his tax
return for 1996 the appellant claimed 95% of the expenses for one
of his motor vehicles and deducted those expenses from his rental
income. He claimed 100% of the expenses for the other motor
vehicle, which he deducted with respect to his medical practice.
The appellant did not remember, for 1996, what proportion of the
motor vehicle expenses he claimed for the vehicle used in his
rental operations. Although he produced a log showing the
kilometers driven, he could not say how many kilometers the car
had in fact travelled.
[7]
The appellant's bookkeeper, Robert Hume, testified that he
keeps the books and records for the real estate operations. He
attends at the home of the appellant every Tuesday to process the
rental payments and pay the bills. He testified that the meetings
with condo management and with tenants are held in the living
room but that the records are kept in an office on the main floor
of the house. Mr. Hume said he provides the bookkeeping
information, and in particular the necessary receipts, to the
accountant for the preparation of appellant's tax returns. He
had no receipts or other documents with him when he testified.
The receipts concerning the motor vehicles are divided between
the medical practice and the real estate operations according to
the information given to him by the appellant. He acknowledged
having prepared the logbook for the motor vehicles
(Exhibit A-4) but said he had no personal knowledge of
the kilometers travelled and relied on what the appellant told
him. Nor did he have any involvement in determining the
percentage attributed to personal use.
[8]
The first issue has to do with whether the work space in home
expenses were properly disallowed by the Minister. In order for
the appellant to claim those expenses, he must establish that
they were incurred for the purpose of earning income from a
business rather than rental income or income from property.
Subsection 18(12) of the Act, which deals with this issue,
reads as follows:
(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.
[9]
The appellant must therefore establish that his real estate
operations are in fact a business operation. There is no doubt
that the appellant has a substantial number of rental units in
both Nova Scotia and Ontario. He uses an agent to rent these
units and needs a bookkeeper to attend to the rental property
operations at least once a week. The evidence, however, does not
disclose any information on what services are actually being
provided or supplied by the appellant to the tenants or on the
extent of such services. The determination of when ownership of
real property becomes a business is a question of fact. In
Walsh and Micay v. Minister of National Revenue, 65 DTC
5293, it was said at page 5296:
In my
view, prima facie the perception of rent as land owner is
not the conduct of a business, but cases can arise where the
extent of the various services provided by the landlord under the
terms of a leasing contract and the time and labour devoted by
him are such that the rental paid by the tenant can be regarded
as in a substantial measure payment for such services as well as
for the use of the property and the interrelation of the use of
the premises with the use of such services may be so extensive
that the whole sum could readily be regarded not as mere rental
of property, but as true receipts of a business of providing
apartment suites and services to tenants. It is a question of
fact as to what point mere ownership of real property and the
letting thereof has passed into commercial enterprise and
administration.
[10] In
Exchequer Court of Canada's decision in Wertman v.
Minister of National Revenue, 64 DTC 5158, Thurlow J.
commented as follows on this issue at page 5167:
. . . There
may well be cases wherein the extent of various services provided
by the landlord under the terms of the leasing contract is such
that the rental paid by the tenant can be regarded as in a
substantial measure a payment for such services as well as for
the use of the property and the interrelation of the use of the
premises with the use of such services may be so extensive that
the whole sum paid could readily be regarded not as mere rental
of property but as true receipts of a business of providing
apartments and services to tenants but I do not regard this as a
case of that kind.
[11] In the
instant case, the evidence presented by the appellant is, as
suggested above, insufficient to allow me to conclude that the
real estate operations are of such a nature as to allow one to
characterize them as a commercial or business venture. The
expenses for work space in home were therefore properly
disallowed by the Minister for both taxation years.
[12] On the
second issue, the Minister disallowed the appellant's motor
vehicle expenses on the basis that they were not substantiated.
For the 1996 taxation year $2,064.89 out of a total motor vehicle
expense claim of $4,301.09 was interest. For 1997, the Minister
disallowed part of the motor vehicle expenses claimed as no
proper records to support the claim were submitted. The Minister
nevertheless allowed 25% of these expenses as being reasonable
under the circumstances.
[13] The
appellant testified that, when he borrowed money in 1994, it was
to consolidate his debts. As a result, the Minister submits, the
loans on both vehicles were paid off and the interest deduction
claim for the 1996 taxation year is unfounded. The appellant
produced an annual mortgage statement for the years 1995, 1996
and 1997 showing the annual amount of interest he paid on his
mortgage, but nothing in those statements relates to interest
paid on a motor vehicle loan. The appellant suggested that the
accountant took a portion of that annual interest amount as the
interest relating to his cars but was unable to explain how the
calculations were made and what numbers were actually used to
come up with the $2,064.89 interest payment on the motor
vehicles. The accountant did not testify.
[14] As for the
remaining automobile expenses, no documents or records were
produced other than the logbook which was created after the fact.
The appellant found it too cumbersome to maintain a logbook or to
keep proper records. With regard to the receipts provided to the
Minister, other than saying that he used one vehicle for personal
purposes only 5% of the time and the other 100% of the time for
his medical practice, the appellant was unable to establish that
the motor vehicle expenses were incurred to earn income from a
business or property as required by the Act.
[15] In
421229 Ontario Ltd. v. The Queen, [1995] 1 C.T.C. 305,
Reed J. of the Federal Court - Trial Division noted at page
308:
. . . I
note, however, that the income tax system is a self-assessment
system. All the information concerning the taxpayer's affairs
is in the knowledge of the taxpayer. In such circumstances, once
the Minister has proven the facts which exist in this case, there
can be no complaint about the onus of proof to disprove the
conclusions which arise therefore being on the
taxpayer.
[16] In the
present case, the appellant did not provide the evidence needed
to substantiate the motor vehicle expenses claimed. The logbook
is not accurate other than as reflecting routine daily trips and
it fails to document personal trips the appellant made to P.E.I.
in the taxation years in issue. The logbook provides no details
as to the mileage on each vehicle at the beginning or end of each
year. The amounts claimed reflect 100% of the expenses for one
car and 95% for the other. I cannot imagine these percentages to
be accurate in these particular circumstances. In the absence of
evidence in that regard, I cannot allow a greater proportion of
these expenses than that allowed by the Minister nor can I allow
expenses for interest when there is no evidence to support a
claim for them.
[17] As Mr.
Justice McDonald of the Federal Court of Appeal held in Njenga
v. The Queen, 96 DTC 6593, the burden of proof of deductions
and claims properly rests with the taxpayer. Appellants must thus
maintain and have available detailed information and
documentation in support of the claims they make. In the present
case, the appellant must certainly have had motor vehicle
expenses but he was unable to establish the amounts thereof or in
what reasonable proportions they were divided between personal
use and use for earning income, nor was he able to show whether
they were expenses incurred to actually gain or produce income
from a business or property.
[18] In light
of the above, the appeals are dismissed.
Signed at
Ottawa, Canada, this 5th day of November 2002.
J.T.C.C.COURT FILE
NO.:
2001-1824(IT)I
STYLE OF
CAUSE:
UMESH JHA
and Her Majesty The Queen
PLACE OF
HEARING:
Halifax, Nova Scotia
DATE OF
HEARING:
June 28, 2002
REASONS FOR
JUDGMENT
BY:
The Honourable François Angers
DATE OF
JUDGMENT:
November 5, 2002
APPEARANCES:
For the
Appellant:
The Appellant himself
Counsel for
the
Respondent:
Dominique Gallant
COUNSEL OF
RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-1824(IT)I
BETWEEN:
UMESH
JHA,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeals
heard on June 28, 2002 at Halifax, Nova Scotia, by
the
Honourable Judge François Angers
Appearances
Counsel for
the
Appellant:
The Appelant himself
Counsel for
the
Respondent:
Dominique Gallant
JUDGMENT
The appeals from the assessments made under the Income Tax
Act for the 1997 and 1997 taxation years are
dismissed.
Signed at
Ottawa, Canada, this 5th day of November 2002.
J.T.C.C.
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