Date: 20020524
Docket:
2001-1523-IT-I
BETWEEN:
BRIAN
SCHUMAKER,
Appellant,
and
HER MAJESTY THE
QUEEN,
Respondent.
____________________________________________________________________
For the Appellant:
The Appellant himself
Agent for the
Respondent: Lorraine Edinboro (Student-at-law)
____________________________________________________________________
Reasonsfor
Judgment
(Delivered orally
from the Bench on May 1, 2002, at Toronto, Ontario)
Sarchuk J.
[1]
These are appeals of
Brian Schumaker with respect to assessments for his 1995 and 1996
taxation years in which the Minister of National Revenue
disallowed the deduction of certain business expenses incurred by
him in the operation of a tanning salon and a financial
consulting practice.
[2]
I turn first to the expenses claimed with
respect to the tanning salon. In the spring of 1987, Briker
Holdings Ltd. (Briker Ltd.), an Alberta company owned solely by
the Appellant entered into an agreement with 325861 Alberta Ltd.
(325861) to purchase the rights to use the registered trademark,
Fabutan; to establish a Fabutan suntan studio and to purchase
certain tanning equipment as set out in Schedule "B" to
the agreement. Schedule "A" to the agreement entitled
Briker Ltd. to locate its initial studio in the City of Etobicoke
and in fact that was done.
[3]
According to the Appellant Briker Ltd. could
not carry on business in Ontario and thus, the Appellant
registered the name Briker Holdings (Grab-A-Tan)
(Holdings) under the Ontario Business Names Act. Holdings
was a partnership in which the Appellant was to receive 90% of
the profits and his wife the remaining 10%. In 1987, they began
to operate the studio in Etobicoke and continued to do so until
April 1, 1996 when it was sold to Robert and Todd Morgan. It is
appropriate to mention at this point of time that during the
latter part of 1996, the purchaser defaulted under the terms of
the agreement. It appears that the studio was closed by the
landlord and the purchasers locked out. During that period of
time the assets as well as the books of account and records, etc.
were disposed of by the landlord without giving notice to the
Appellant and according to him, without having the proper
authority to do so. The absence of supporting documents for some
of his claims was one of the fallouts of the foregoing
events.
[4]
I return now to the deductions claimed with
respect to the tanning salon business. In reassessing the
Appellant, a number of deductions claimed by the Appellant were
disallowed. I propose to deal with these in order with the first
item being rent. In the 1995 and 1996 taxation years, the
Appellant and his wife deducted rent expenses of $17,770 and
$9,000, respectively, of which the Minister disallowed $6,170 and
$6,000. The amount allowed by the Minister in 1995 was based on
the production of receipts amounting to $11,600. According to the
auditor, no explanation was provided regarding the balance with
the exception of a comment by the Appellant that the difference
may have related to home office and storage expenses. With
respect to 1996, the Appellant produced receipts totalling $3,000
and on this basis the balance of $6,000 was disallowed.
Mr. Mayadunne, the auditor, had also been shown a letter
from the landlord (Exhibit A-8) setting out the lease terms, but
observed that the payment receipts provided to the Appellant by
the landlord for that year did not match the amounts set out in
Exhibit A-8. These receipts were returned to the Appellant and
have not been produced in court. I must also note that the letter
(Exhibit A-8) suggests that the tenant, Briker Ltd., may
have been in arrears at that time and that arrears payments would
be required for some period. Exhibit A-8 presented by the
Appellant may set out the lease terms correctly but it is by
itself incapable of establishing the actual amounts that were
paid. Thus on balance, the evidence adduced by the Appellant does
not justify a revision of the amounts allowed by the
Minister.
[5]
I turn next to the issue of wages. In 1996,
the Appellant and his wife deducted the amount of $2,868 for
wages. In each case, when I refer to both of them making the
deduction, it is understood that 90% and 10%, respectively, was
the allocation in terms of the amounts claimed by the Appellant
and his wife, respectively. The full amount claimed was
disallowed because no supporting records or other documentation
was produced. At trial, the Appellant filed 14 receipts which he
was able to locate totalling $2,218.50 (Exhibit A-12). With
the exception of three receipts all are dated in the month of
March 1996. The Appellant testified his wife was ill and unable
to work and that part-time help was required in the tanning
salon and that these receipts reflect that fact.
[6]
My review of the documents submitted leads to the conclusion that
two of the receipts are questionable.
Receipt number 4831 is dated November 1, 1997 and reflects a
payment of $200 for babysitting. Receipt 4808 for $100 is dated
December 20, 1995 and although the writing is unclear, appears to
be a reimbursement of some sort but does not have any
relationship to salary or wages. The balance of the receipts are
adequate proof of payment of wages by the Appellant and he will
be entitled to a deduction in the taxation year 1996 of his 90%
share on account of wages amounting to $1,918.50.
[7]
Automobile
Expenses: In 1995, the Appellant and his wife deducted
expenses in respect of the tanning salon business for automobile
use totalling $5,068. This claim relates to two vehicles, a van
and a Supra which I understand to be a smaller vehicle. The
Appellant was the primary user of the van in 1995 in relation to
both the tanning salon operations and more particularly, in his
consulting business. Fifty percent of the amount claimed
was disallowed by the auditor on the basis that there was no log
book and no substantive evidence as to the amount of use adequate
to warrant an allowance over and above that. The
Appellant testified that no logs were kept during the years in
issue. He endeavoured to show the percentage of use of the
vehicle for his consulting business by analyzing his customer
sales in 1995, 1996 and 1997. Using data reflecting these sales
he maintains that in 1995, he would have been justified in
claiming in excess of $3,500 based on $.35 per kilometre (or
$2,875 at $.28 per kilometre). He further argued that this was
probably less than what he would have been entitled to claim if
he had kept daily logs.
[8]
The failure to keep logs did not appear to be
of much concern to the Appellant. However, there is a basic
principle to be considered with respect to expenses such as
these. To be deductible, motor vehicle expenses and indeed all
expenses must be reasonable in the circumstances and supportable
by vouchers. A taxpayer is not expected to keep every last
receipt nor does the court expect him to produce every one but,
some records must be maintained. It has been held on a number of
occasions that a claim by an individual for motor vehicle
expenses calculated on a cents per kilometre basis is not
acceptable. Here the vehicles are not the same and the expenses
incurred in driving a van may well be greater than those incurred
with respect to a small car like a Supra or Volkswagen. To expect
to be able to claim vehicle costs on an arbitrary "X"
cents per kilometre is not acceptable.
[9]
To support a claim for motor vehicle expenses
a record should be kept of the distances travelled for business
purposes which should contain sufficient information to enable
the Appellant to deal with the situation he finds himself in, in
this particular case. Taxpayers have certain responsibilities
with respect to establishing their expenses and if they do not
fulfil them, there is not much that can be done. Absent such
evidence, there is no basis upon which additional expenses could
be allowed over and above what the Minister has already
permitted, which was 50%. I might add that given the complete
absence of records, it would not have been particularly
surprising if the Minister had decided to disallow all of the
vehicle expenses.
[10]
I turn next to the issue of capital cost
allowance. In computing income for the 1995 and 1996 taxation
years, the Appellant deducted the amount of $2,585 in the 1995
taxation year as CCA and terminal losses in the amounts of
$10,340 and $3,703 in respect of Class 8 and Class 10 assets in
1996, respectively. The Minister disallowed the deduction of the
Appellant's share of the CCA for 1995 and his share of the
terminal loss in 1996. With respect to the Class 8 assets, the
disallowance was based on the assumption that although the
Appellant and his wife were operating a tanning salon as a
partnership (Holdings), the purchase and sale agreement indicated
that the owner of the Class 8 assets was Briker Ltd., a
corporation under the laws of Alberta. Furthermore, the Appellant
did not provide any receipts, invoices or purchase agreements or
other documentation capable of showing proof of his ownership of
the Class 8 assets. The Appellant for his part maintains that the
tanning business and tanning equipment were not the property of
the corporation since the corporation had divested itself of the
ownership of the property in order to permit Holdings, the
partnership, to carry on business in Ontario. As proof, the
Appellant submitted a copy of an application to register Briker
Holdings (Grab-A-Tan) under the Business Names
Act. He also argued that all funds to purchase the equipment
were provided by him and produced cheques dated April 28, 1987
payable to the vendor, 325861.
[11]
I have some difficulty with his
submission. The cheques produced were for $7,500 and $22,796, the
exact amounts which were paid to the vendor, 325861, with respect
to the purchase by Briker Ltd. of the franchise and tanning
equipment. All that indicates is that the funds were advanced by
the Appellant to Briker Ltd. to enable it to complete the
acquisition of the franchise and equipment. Whatever arrangement
may have existed between Briker Ltd. and the Appellant with
respect to the funds advanced (if any) has not been established.
On the other hand, the agreement (Exhibit A-2) clearly indicates
that the purchaser and owner of the equipment was Briker
Ltd.
[12]
The Appellant relies on what he says was a
letter to the Royal Bank in which reference is made to the
"release" by Briker Ltd. of the equipment in issue to
the Appellant. This he said was necessary to satisfy some
unspecified loan requirements. First, there is some question
regarding the genesis of this document. Furthermore, there is in
my view, nothing in the agreement (Exhibit A-2) which
entitled him to unilaterally, and without the consent of the
vendor, 325861, release his interest in the agreement to a third
party. It is an accepted fact that the
Appellant carried on business in Ontario in partnership with his
wife operating as "Holdings". This fact, however, does
not alter the status of Briker Ltd. as the legal owner of the
assets acquired from 325861 used in the tanning business. I also
note that a sixth bed was purchased in February 1998 and was
shipped to Fabutan Suntan Studios at the Etobicoke address, a
designation which only Briker Ltd., was permitted and entitled to
use pursuant to the franchise agreement. On the evidence
I can reach no other conclusion but that the Class 8 assets
were the property of Briker Ltd. and thus, the Appellant was not
entitled to claim CCA or terminal losses with respect to these
assets in 1995 and 1996.
[13]
The Appellant further argued that CCA was
allowed with respect to these items in previous years and urged
the court to find that the Minister was bound by these previous
allowances. There is a substantial body of case law in which the
courts have consistently held that a concession made in one year
in the absence of any statutory provisions to the contrary does
not preclude the Minister from taking a different view in a later
year. As was stated in Admiral Investment Ltd., v. the
Minister of National Revenue, and has been repeated any number of
times since then, an assessment is conclusive as between the
parties only in relation to the assessment for the year in which
it is made. in Gilbert v. the Minister of National
Revenue, (1991) 2 C.T.C. 2319. Judge Rip
observed:
The treatment for tax purposes of expenses claimed in earlier
years is not before me and I am not bound by how the respondent
may have treated similar claims in previous years. After all, the
respondent is not the arbiter of what is right or wrong in tax
law.
Quite simply this means that if the Minister
inadvertently or incorrectly allowed certain amounts as a
deduction in prior years, that is not binding on this Court.
Rather, it is necessary for the Court to consider the facts
before it for the particular taxation year under appeal and on
that basis, determine whether a particular disallowance or
allowance of a particular item comes within the scope of a
particular section. If it does, a taxpayer may be entitled to a
deduction. If it does not, he is not so entitled. The court
cannot simply say, "Oh, well, the Minister made a mistake
before, therefore, we are going to make the same
mistake".
[14]
Regarding the Class 10 assets, the two
vehicles were owned by the Appellant. Absent any reasonable
evidence as to the percentage of business use as contrasted to
personal use, I cannot find that the Minister's allowance of
50% CCA was wrong. The CCA claimed with respect to the computers
was allowed to the maximum extent permissible and no issue arises
there.
[15]
The next issue to be dealt with is the
disallowance of deductions claimed with respect to the
Appellant's consulting business. No changes were made for the
1995 taxation year. Thus, this issue relates only to the 1996
taxation year in which the Appellant deducted $4,357 for rent
(home office) and $3,686 for telephone and utilities. No
documentation was provided to support the amounts claimed. It is
accepted that the residence used was a small three bedroom
property in which the Appellant, his wife and I believe five
children resided. During the audit, the Appellant provided a
rough sketch of the house with room dimensions and specifically
indicated the area allocated for business purposes. The auditor,
using that information, calculated that 10% of the total area had
been utilized for business purposes. Absent any additional
relevant information, he allowed 10% of the rental cost as
reasonable home expenses. He also allowed 100% of the telephone
cost on the basis that this was essential to the Appellant's
business and 10% of all remaining utilities. Since no additional
evidence was produced by the Appellant, I cannot disagree with
this conclusion. Accordingly, the amounts in issue were properly
disallowed.
[16]
I wish to deal with two other matters. The
Appellant, in his Notice of Appeal, raised what was referred to
as the Charter issue in paragraphs 34, 35 and 36. The issue as
stated appears to question whether the federal government has
constitutional authority to levy direct taxes. There are two
aspects to this issue. The first is that before a Charter issue
can be determined by this court the Rules require that notice be
given to each and every one of the Attorneys General of every
province and to the Attorney General of Canada. The practice in
this court has been to initially review the substance of the
constitutional claim and determine whether it has any merit or
arguable basis. If it does, an adjournment is granted to permit
the Appellant to comply with the Rules.
[17]
I have considered the issue raised on behalf
of the Appellant and find nothing whatsoever of any legal merit
therein. The decisions cited by the Appellant's accountant in
the Notice of Appeal are stale-dated, have been overruled and
have no legal standing. On the other hand, in Caron v. The
King, the Privy Counsel, which was the
final arbiter in those years, ruled that subsection 92(2), which
is the section dealing with the province's right to impose
direct taxation, does not prevent the federal government from
levying direct taxes. A review of the law on this subject since
1927 as discussed in Hogg on Constitutional Law suggests
that there have been no decisions that have changed the position
expressed in Caron. The Appellant's reliance on some
earlier cases is completely misplaced and there is simply no
merit in the position advanced.
[18]
I have one further comment and that relates to
the issue of the Appellant's wife's appeal which was
indirectly raised in his Amended Notice of Appeal. I am referring
specifically to paragraphs 24 and 29 where the Notice of Appeal
states:
24.
Since these matters pertain also directly to the reassessment of
the spouse of the Appellant, that we move to have the decisions
of this court binding equally upon the reassessment of the spouse
of the Appellant.
29.
Should the reassessment be vacated or amended, and accordingly
the respective reassessment of the Spouse of the
Appellant?
This is a totally inappropriate pleading and has no place
in this appeal. I have no jurisdiction to deal with another
taxpayer's appeal which is not itself before me.
[19]
For the foregoing reasons, the appeal for 1995 is dismissed and
the appeal for 1996 is allowed in part.
Signed at Ottawa, Canada, this 24th day of
May, 2002.
"A.A. Sarchuk"
J.T.C.C.
COURT FILE
NO.:
2001-1523(IT)I
STYLE OF
CAUSE:
Brian Schumaker and Her Majesty
the Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
April 29, 30 and May 1, 2002
REASONS FOR JUDGMENT
BY: The Honourable Judge A.A.
Sarchuk
DATE OF
JUDGMENT:
May 9, 2002
APPEARANCES:
For the
Appellant:
The Appellant himself
Agent for the
Respondent:
Lorraine Edinboro (Student-at-law)
COUNSEL OF RECORD:
For the
Appellant:
Name:
N/A
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
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