Date:
20020730
Docket:
2001-4527-IT-I
BETWEEN:
IVANA
CAPPELLETTO,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasonsfor Judgment
McArthur
J.
[1]
The Minister of National Revenue disallowed certain expenses
claimed by the Appellant for her 1996, 1997 and 1998 taxation
years on the basis that they were personal expenses or
unreasonable pursuant to paragraph 18(1)(a) and section 67
of the Income Tax Act.
[2]
The Appellant carried on a graphic arts business out of a 686
square foot condominium loft apartment which she shared with a
friend. Her friend owned the condominium and he paid 50% of the
expenses. Her expense claim was erroneously based on her paying
100% of the condominium expenses.
[3]
Upon agreement, the expenses in dispute narrowed down to the
following:
|
|
1996
|
1997
|
1998
|
|
|
|
|
|
|
Insurance
|
$183
|
$750
|
$750
|
|
Cost
of goods sold
|
|
|
5,000
|
|
Meals
|
499
|
1,955
|
1,570
|
|
Business
use of home
|
2,362
|
3,874
|
4,471
|
|
Motor
Vehicle expenses
|
724
|
1,500
|
3,005
|
|
C.C.A.
|
|
3,921
|
2,907
|
|
Travel
expense
|
1,426
|
3,766
|
1,708
|
|
Reference materials
|
|
4,893
|
2,634
|
[4]
Before analysing the individual expenses, brief general comments
on the distinction between business and personal expenses are
helpful. An expense
is deductible only if the taxpayer incurs it to earn income. Some
expenses are clearly of a pure business nature, raising no
serious issue of deductibility. For example, the cost of goods
sold. Expenses of purely a personal nature such as meals,
personal use of an automobile and personal travel are not
deductible. The primary and predominant purpose of the
expenditure must be scrutinized. In the present case, some
claimed expenditures fall into a grey zone. Most expenditures
give pleasure possibly in the pursuit of profit as in meals,
business use of the home, car expense and travel. What must be
considered is why did the business incur the expenditure. Some of
these can be classified as hybrid expenses incurred partly for
profit and partly for personal enjoyment or consumption. I must
determine which is the dominant factor or make a fair
allocation.
[5]
The Appellant testified on her own behalf and an auditor, Robert
Vance Gill, testified on behalf of the Respondent. What prompted
his audit of the Appellant was the large amount of expenses
claimed against a small income.
[6]
In computing income for the 1996, 1997 and 1998 taxation years,
the Appellant reported income (loss) from the business as
follows:
1996
$ 14,691
1997
$ (19,418)
1998
$ 23,669
[7]
In reassessing the Appellant, the Minister made the following
changes:
1996 increase
by
$15,414
1997 increase
by
$19,387
1998 decrease
by
$ 8,154
[8]
I give considerable weight to the auditor's evidence which
was impressive. He has considerable experience in auditing small
businesses and spent upwards of 100 hours on the present
file, much of it at the Appellant's premises, reviewing
records, viewing the premises and the equipment. There were many
issues resolved before the hearing, many issues remain. The time
consumed to complete the audit is understandable.
[9]
I will deal with the issues in the order enumerated
earlier.
Insurance
[10] Without
difficulty, I accept the Minister's prorating of the premiums
paid to reflect the amounts applicable to the calendar year. It
is clear that an auditor's error benefited the
Appellant.
Cost of
Goods Sold
[11] The
Appellant included a $5,000 freight charge for shipping a large
antique family desk that had been bequeathed to her. The Minister
does not deny that the Appellant uses the desk for business
purposes but states she would have paid the transportation in any
event. Why should the taxpayers share the cost? I find this falls
into the category of "hybrid costs" incurred for profit
and partly for purely personal considerations and allow the
Appellant $2,500.
Meals
[12] The
Appellant's position is that she had an important client in
Coquitlam who she met at a mid-way restaurant, in addition to
other restaurant business meetings. She presented two letters
purportedly from clients to that effect. The Appellant had the
burden of proof. The evidence presented was the general statement
of the Appellant, unsupported but for the letters which of course
were hearsay. The only restaurant receipt presented indicated it
was incurred at 9:00 p.m., an unlikely hour for a business
meeting. These expenses are disallowed entirely.
Business
Use of Home
[13] The
Appellant lived with J. Paul Manson, now her husband,
in a 686 square foot loft condo-apartment. She claimed
approximately 70% of the total apartment expenses, although
Mr. Manson paid 50% of those expenses. It was, in fact,
Mr. Manson's condo. I accept the Minister's position
for the reasons given by the auditor and allow the Appellant 30%
of the apartment costs for business expenses.
Motor
Vehicle Expenses
[14] I accept
the Minister's position as set out in the Reply:
r)
the Appellant did not keep a log of the miles she drove for the
Business;
s)
the Appellant drove no more than 150 kilometres per month for the
Business;
t)
the fair market value of the vehicle on 22nd May 1996,
at the time the Appellant changed the use of the vehicle from
personal only to mixed personal and business, was
$4,500;
u)
the total kilometres driven in the 1996, 1997 and 1998 taxation
years were 3,703, 3,640 and 6,036 respectively;
Capital
Cost Allowance
[15] I accept
the Minister's position as set out in the Reply:
v)
the $1,594 addition to class 10 in the 1997 taxation year related
to furniture acquired for personal use;
w)
the personal property was not at any time used in the
Business;
Travel
Expense
[16] The
Appellant is of Italian ancestry and had spent some 13 years
in Italy from 1982 where she obtained a Master's degree and
worked for 11 years. She claims that it was important to
travel to Italy to keep abreast with colours and styles. In
cross-examination, she admitted that most of this
information was available through modern technology. One of the
transatlantic trips, the cost of which she claimed as a business
expense, was to visit her father in Spain at Christmas. She gave
confusing and conflicting evidence with respect to a property in
Italy. She stated to a bank that she owned property in Italy
valued at C$50,000. At the hearing, she stated that it was a
family property and not worth anything near $50,000. I believe
she explained that she embellished the truth to obtain financing.
The expense of a trip to Edmonton was claimed, yet it was for a
ticket issued to her father. Again, I accept the Minister's
position that apart from $248.37 in 1997, there was no business
purposes for these trips. She provided no supporting documents
and I do not accept her evidence. The swatches of material
presented were of no assistance. I found it difficult to separate
the Appellant's embellishments from reality. For her automobile, she claimed a value
of $14,500 in 1996, yet a car dealership gave it a value of
$3,000, and I believe she sold it for $1,000 in 1997 or 1998. The
Minister, very fairly, allowed a fair market value, as of May
1996 of $4,500.
Reference Materials
[17] The
Appellant stated she purchased designer magazines at a cost of
$4,893, in 1997 and $2,634 in 1998. She presented six or seven
magazines in evidence. They were dated 1996 or 1997. Their total
cost was approximately C$500. I accept the Minister's
position as set out in the Reply as follows:
hh) in
1997 and 1998 the Appellant acquired certain reference and
educational materials at a cost of $4,893 and $2,634 respectively
(the "Reference Materials");
ii)
the purpose of the Reference Materials was to provide design
ideas for current and future projects for the Appellant and her
clients;
jj)
the Reference Materials provided the Business with an enduring
benefit and were class 8 capital expenditures;
and
kk)
expenses in excess of the amount allowed by the Minister were not
incurred for the purpose of gaining or producing income from a
business or property, but were personal or living expenses for
the Appellant.
[18] The
following quotations referred to by the Minister's counsel
apply equally to the present case: Zalzalah (L.) v.
Canada, 95 DTC 5498, wherein Heald J.
stated:
The
plaintiff frankly acknowledged that he did not keep any books or
records during the taxation years here under review. This matter
was also raised in the proceedings before the Tax Court of Canada
where Lamarre Proulx, TCJ stated:
The
Minister cannot and should not allow business deductions that
cannot be proven by documentary evidence. That would bring the
administration of the Income Tax Act in the sphere of
arbitrariness.
I agree
with that view of the matter. Likewise, in the case of
Holotnak v. The Queen, Cullen, J. considered the
requirements of section 230 and stated as follows:
Section
230 of the Act requires taxpayers to keep adequate books and
records.
"Adequate" is not defined but it would seem that these
records should support whatever the taxpayer is claiming for tax
purposes.
The onus of
proof that the expenses were incurred for the purpose of earning
income is on the taxpayer (Wellington Hotel Holdings Limited
v. M.N.R. 73 DTC 5391). Specifically, with regard to
assessments, the onus is on the taxpayer to prove that the
Minister's assumptions and assessments are wrong (Strayer, J.
in Schwarz v. The Queen, 87 DTC 5274) quoting from
Johnston v. M.N.R., [3 DTC 1182] [1948] S.C.R. 486). The
Schwarz case (supra) also involved a situation
where the plaintiff's purchases were not supported by
vouchers. As Strayer, J. points out, the onus is on the taxpayer
to prove wrong the M.N.R.'s reassessment as the taxpayer is
in a better position to prove what actually happened.
The
following statement by McDonald J. in Njenga v. R.,
96 DTC 6593, also applies to the present appeal:
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.
[19] In
conclusion, the appeals for
the 1996 and 1997 taxation years are dismissed and the appeal for the 1998 taxation year is
allowed on the basis that
the Appellant is entitled to claim only freight expenses of
$2,500 under the heading "Cost of Goods Sold". The
Appellant is not entitled to any further relief.
Signed at
Ottawa, Canada, this 30th day of July, 2002.
"C.H. McArthur"
J.T.C.C.
COURT FILE
NO.:
2001-4527(IT)I
STYLE OF
CAUSE:
Ivana Cappelletto and
Her Majesty
the Queen
PLACE OF
HEARING:
Vancouver, British Columbia
DATE OF
HEARING:
June 14, 2002
REASONS FOR
JUDGMENT BY: The Honourable Judge C.H.
McArthur
DATE OF
JUDGMENT:
July 30, 2002
APPEARANCES:
Agent for
the
Appellant:
Eva Y. Lee
Counsel
for the
Respondent:
Victor Caux
COUNSEL OF
RECORD:
For the
Appellant:
Name:
N/A
Firm:
N/A
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-4527(IT)I
BETWEEN:
IVANA
CAPPELLETTO,
Appellant,
and
HER MAJESTY THE
QUEEN,
Respondent.
Appeals heard on June
14, 2002, at Vancouver, British Columbia, by
the Honourable Judge
C.H. McArthur
Appearances
Agent for the
Appellant:
Eva Y. Lee
Counsel for the
Respondent: Victor Caux
JUDGMENT
The appeals from reassessments of tax made under the Income
Tax Act for the 1996 and 1997 taxation years are
dismissed.
The appeal from the reassessment of tax made under the Act
for the 1998 taxation year is allowed and the reassessment is
referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that the Appellant
is entitled to claim only freight expenses of $2,500 under the
heading "Cost of Goods Sold". The Appellant is not
entitled to any further relief.
Signed at Ottawa, Canada,
this 30th day of July, 2002.
J.T.C.C.
Email this Content