Haight-Smith v. The Queen, docket 2001-1195-IT-I (Informal Procedure)

Date: 20020923

Docket: 2001-1195-IT-I

BETWEEN:

BARBARA HAIGHT-SMITH,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Amended Reasons for Judgment

Little, J.

A.             FACTS

[1]            These appeals are from assessments or reassessments made under the Income Tax Act (the "Act") in respect of the Appellant's 1997, 1998 and 1999 taxation years.

[2]            The Appellant maintains that she commenced to operate a cosmetic business in 1973 (the "Business"). The Business was operated by the Appellant and her husband, Edward Smith from their home in Kamloops, British Columbia. Mr. Smith, the Appellant's husband, presented evidence for the Appellant. Mr. Smith testified that the Appellant operated the Business as a sole proprietorship and that the Business has operated continuously since 1973.

[3]            Mr. Smith also testified that the Appellant became involved in a business with the Nigerian Petroleum Corporation in the early 1990's. Mr. Smith stated that the investment in the Nigerian Petroleum Corporation was unsuccessful. In the Notice of Appeal the Appellant had claimed the following losses from the investment in the Nigerian Petroleum Corporation:

                  Security deposits                                                                   $875,000.00

                  Incorporation fees                                                                   30,000.00

                                                                                                                   $905,000.00

During the hearing of the appeal Mr. Smith stated that the amount of the loss suffered on the investment in Nigerian Petroleum Corporation was $600,000.00. He admitted that he had claimed the wrong number in dealing with the loss suffered by the Appellant (See transcript p. 118, lines 17-20).

[4]            The Appellant reported the following revenue and expenses from the Business for the 1997, 1998 and 1999 taxation years:

(a)           1997 Taxation Year

Revenue                                                 $ 4,039.07

Expenses                                                $24,897.11

Loss                                        $20,808.08

By Notice of Reassessment dated the 14th day of December 1998 the Minister of National Revenue (the "Minister") reduced the business loss to $8,703.58.

By Notice of Reassessment dated the 7th day of April 2000, the Minister reduced the business loss by $12,742.82.

                (b)            1998 Taxation Year

                Revenue                                 $ 3,498.12

                Expenses                                $20,093.62

                                Loss                        $16,604.50

By Notice of Reassessment dated the 26th day of March 1999 the Minister assessed the Appellant's return as filed.

                By Notice of Reassessment dated the 7th day of April 2000 the Minister reassessed the Appellant, disallowing all of the expenses claimed by the Appellant.

                (c)            1999 Taxation Year

                Revenue                                 $ 2,837.40

                Expenses                                $26,022.33

                                Loss                        $23,184.93

                By Notice of Assessment dated the 13th day of April 2000 the Minister assessed the 1999 income tax return as filed.

[5]            The Appellant filed Notices of Objection for the 1997 and 1998 taxation years on the 15th day of April 2000 and the Appellant filed a Notice of Objection for the 1999 taxation year on the 12th day of July 2000. When the Appellant filed the Notices of Objection she provided the Minister with revised losses for the 1997, 1998 and 1999 taxation years.

[6]            When Mr. Smith met with officials of the Canada Customs and Revenue Agency (the "CCRA") to discuss the Appellant's Notices of Objection for the 1997 and 1998 taxation years he claimed the following additional expenses:

(a)            Nigerian Investment

                                   Investment Loss

                                Security Deposit                                                                   $ 875,000.00

                                Incorporation Fees                                                                               30,000.00

                                                                                                                                                $ 905,000.00

                (b)            Cumulative Eligible Capital Cost

                                Allowance for Secret Formulations

                                and Trademarks                                                                     $ 275,000.00

In the Notice of Appeal the Appellant stated that the values for Secret Formulas and Trade Marks were:

                                                Secret Formula                                                       $150,000.00

                                                Trademarks                                                                            $125,000.00

B.             TAX ISSUES

[7]            Was the Appellant carrying on a business in the 1997 and 1998 taxation years?

[8]            If the Appellant was carrying on a business in the 1997 and 1998 taxation years, is the Appellant allowed to deduct any of the expenses that were disallowed by the Minister in 1997 and 1998 in connection with the Business?

[9]            Is the Appellant entitled to claim a deduction for cumulative eligible capital in connection with the trademarks?

[10]          Is the Appellant entitled to claim a deduction for cumulative eligible capital in connection with the development of secret formulas?

[11]          Is the Appellant entitled to claim a deduction in connection with the loss of $600,000.00 suffered in the investment in Nigerian Petroleum Corporation?

C.             ANALYSIS

[12]          Was the Appellant carrying on a business in the 1997 and 1998 taxation years

I have considered the testimony of Mr. Smith on behalf of the Appellant. In connection with the business operated by the Appellant I have noted a significant decline in revenue but an increase in expenses from 1996 forward:

                                                                Revenue                                  Expenses

                1996                                         $8,914.00                                                 $21,350.00

                1997                                         4,039.00                                  20,808.00

                1998                                         3,489.00                                  16,604.00

                1999                                         2,837.00                                  23,184.00

                2000                                         830.00                                    58,777.00

(Note: For the purposes of this appeal, I am only dealing with the 1997 and 1998 taxation years. Counsel for the Respondent stated that the Appellant's 1999 taxation year was assessed by the Minister as filed.

[13]          While the Appellant's revenue from the cosmetic business in 1997 and 1998 was declining significantly and the expenses were increasing, I have concluded that the Appellant was operating a business in the 1997 and 1998 taxation years. (Note: My decision that the Appellant was carrying on a business only applies to the 1997 and 1998 taxation years. The determination of whether a taxpayer is carrying on a business depends upon the relevant facts in the particular year.)

[14]          If the Appellant was carrying on a business in the 1997 and 1998 taxation years, what expenses are deductible?

I have concluded that the following expenses should be allowed to the Appellant in the 1997 and 1998 taxation years:

1997 Taxation Year

                                                                                                                Claimed                  Allowed

                  Automobile Expenses                                                               $1,494.24                                 $631.18

                  Telephone                                                                                     1,285.13                                   114.71

                  Office Supplies                                                                         479.95                                          473.67

                  Parking Toll                                                                                 88.00                                            41.00

                  Advertising/Promotion                                                           137.92                                            11.82

                  Postage                                                                                        84.46                                            84.46

                  Delivery and Freight Expenses                                              164.13                                          155.78

                  Accounting                                                                               500.00                                       500.00

                                                                                                                                                                           $2,012.62

                  The Appellant is also to be allowed expenses of $2,029.59 re. the office in the home (see Exhibit R-4). Total expenses to be allowed to the Appellant for the 1997 taxation year will be $4,039.03.

1998 Taxation Year

                                                                                                                Claimed                  Allowed

                  Automobile Expenses                                                               $1,311.66                                 $280.54

                  Telephone                                                                                 940.26                                          106.25

                  Office Supplies                                                                         376.61                                          355.85

                  Postage                                                                                        49.25                                            50.07

                  Delivery and Freight Expenses                                              292.15                                          45.63

                                                                                                                                                                       $838.34

[15]          The Appellant is also to be allowed to deduct certain of the expenses re. the office in the home (as restricted by subsection 18(12) of the Act).

[16]          Total expenses to be allowed to the Appellant for the 1998 taxation year will be $3,489.12.

[17]          In reaching my conclusion as to the expenses to be allowed I have noted the following facts:

1.               The Appellant did not keep proper records nor vouchers (see evidence of Ellen Engenspurger (Transcript page 288).

2.               Many of the expenses claimed by the Appellant would appear to be personal or living expenses not connected with the operation of the Business.

3.               With respect to the expenses referred to above, I have accepted the testimony of Sonja Mitchell called as a witness by the Respondent.

(Note: Mr. Smith referred to legal expenses paid by the Appellant and suggested that the legal expenses should be deductible. However, there was no evidence provided to indicate that the legal expenses were incurred in connection with the business carried on by the Appellant.)

[18]          Re: Cumulative Eligible Capital - Re. Trademarks- $125.000.00

At the hearing of the Appellant's appeal, Mr. Smith stated that he had not retained any records to prove that the Appellant incurred costs totalling $125,000.00 for trademarks.

[19]          With respect to trademarks the following exchange occurred during the hearing of the Appellant's appeal

His Honour, Let's just talk about what you have by way of costs related to trademarks or formulas,

Mr. Smith, Like I say, my costs I just have to estimate because I can't prove them, because they've been done, it's long time ago. (See Transcript p. 100)

               

[20]          In my opinion, the Appellant has not met the onus to prove that the amount claimed of $125,000.00 was spent on trademarks. The appeal will be dismissed on this issue.

[21]          Cumulative Eligible Capital Re. Secret Formulas

Mr. Smith, the Appellant's husband, testified that he had no documents to establish that the Appellant spent $150,000.00 developing secret formulas.

[22]          In connection with the amount claimed by the Appellant to develop secret formulas Mr. Smith said:

Now, maybe in the early years when we done (SIC) all this designing and planning and building and stuff like that, we didn't keep track of the dollars as we should have, maybe, and we didn't, because we were both working at different jobs, my wife was working at her job, I was working at a different job and we were going on weekends to work with the chemist and .......... and different people like that into developing the line. (See Transcript p. 58)

[23]          At page 65 of the transcript the following exchange occurred:

Mr. Smith, ...then we made a mistake, maybe, that we didn't really keep the exact tabulated records of how much we spent on the market development, how much we spent on the research.

His Honour, Let me just tell you again, Revenue officials can only work with the information provided by the taxpayer ... The point is unless you have some hard evidence or some facts or some documents, they can't accept a figure out of thin air.

                At page 67 of the transcript:

His Honour, ...it's your job as the Appellant's representative to provide evidence to the court showing what you want to have the Court consider.

Mr. Smith, I understand that your Honour, and I just explained to you going back that far when all that work was done, we have no records of it.

[24]          In my opinion, the Appellant has not met the onus to prove that the amount of $150,000.00 was spent in developing secret formulas. The appeal will be dismissed on this issue.

[25]          Loss of $600,000.00 Re Nigerian Transaction

In considering this claim the following points should be noted:

(a)            During the appeal the following exchange occurred:

Miss Sidhu, ...again you don't really have anything to show that you actually incurred an expense?

Mr. Smith, He had most of the stuff, and then as I said ... yeah, and like I said earlier, I got kidnapped and all the documents I had when I went to get our money was taken. (Transcript p. 206)

(b)         The Appellant filed a declaration of bankruptcy under the Bankruptcy Act in 1987. The income reported by the Appellant to Revenue Canada from 1987 to 1990 would not support an investment of $600,000.00.

(c)         To support the claim that $600,000.00 was lost in Nigeria, Mr. Smith filed copies of cheques issued by Navana Canada Inc. The cheques totalled $25,000.00 (Exhibit A-22). Mr. Smith also filed a copy of a Promissory Note in the amount of $3,775,000.00 issued by Navana Canada Inc. and dated January 22, 1993. During the hearing Ms. Ellen Engenspurger of the C.C.R.A. testified for the Respondent. At page 299 of the transcript Ms. Engenspurger said:

Mr. Smith advised that he uses this one ... in the name of Navana Canada Inc. as his personal account.

From the evidence before me it would appear that the alleged investment in Nigerian Petroleum Corporation may have been made by Mr. Smith and not by the Appellant.

(d)             There were no bank records or other evidence filed with the Court to establish that the Appellant made an investment in Nigerian Petroleum Corporation.

The Appeal will be dismissed on this issue.

[26]          The appeal will be allowed to allow the following expenses:

                                                                                                1997                        1998

                  Expenses allowed                                                     $4,039.03                    $3,489.12

(See paragraph 14, above) In all other respects the appeal will be dismissed.

Signed at Vancouver, British Columbia, this 23rd day of September 2002.

"L.M. Little"

J.T.C.C.

COURT FILE NO.:                                                 2001-1195(IT)I

STYLE OF CAUSE:                                               Barbara Haight-Smith and

                                                                                                Her Majesty the Queen

PLACE OF HEARING:                                         Kamloops, British Columbia

DATE OF HEARING:                                           June 13, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge L.M. Little

DATE OF AMENDED

REASONS FOR JUDGMENT:                             September 23, 2002

APPEARANCES:

Agent for the Appellant:                     Edward C. Smith

Counsel for the Respondent:              Jasmine Sidhu

COUNSEL OF RECORD:

For the Appellant:                

Name:                               

Firm:                 

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2001-1195(IT)I

BETWEEN:

BARBARA HAIGHT-SMITH,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on June 13, 2002 at Kamloops, British Columbia, by

the Honourable Judge L.M. Little

Appearances

Agent for the Appellant:                     Edward C. Smith

Counsel for the Respondent:              Jasmine Sidhu

JUDGMENT

                The appeals from assessments made under the Income Tax Act for the 1997, 1998 and 1999 taxation years are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Amended Reasons for Judgment.

Signed at Vancouver, British Columbia, this 23rd day of September 2002.

"L.M. Little"

J.T.C.C.