[OFFICIAL ENGLISH
TRANSLATION]
Date:
20020308
Docket:
2001-1988(IT)I
BETWEEN:
OMER
G. LÉGER,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers, J.T.C.C.
[1] These
are appeals, which the appellant instituted under the informal procedure, from
assessments made for his 1996 and 1997 taxation years. The Minister of National
Revenue (the "Minister") disallowed the appellant expenses totalling
$22,705 and $15,302 respectively on the ground that they were not incurred for
the purpose of gaining or producing income from the business or, in the
alternative, on the ground that the appellant never earned income against which
he could declare those amounts as expenses.
[2] The
appellant is now semi-retired but works as an insurance agent for
Assomption-Vie. He told the Court the ideas he had had and the steps he had
taken in 1996 to start up a business. He was aware that Quebec bus operators
knew little about the Francophone regions of New Brunswick and Prince Edward
Island. Motor coach buses departed mainly from Montréal and Québec, with stops
in Edmundston or Grand Falls, New Brunswick. The next day, the buses would
reach Prince Edward Island. On the return, they would pass through the Gaspé
region without making another stop in New Brunswick.
[3] The
appellant therefore had in mind to change the destinations by organizing bus
trips himself. In this way, he wanted to ensure that passengers spent at least
four evenings in New Brunswick and one in Prince Edward Island. Originally from
the Acadian region, the appellant wanted to benefit from the various tourist
attractions in his area and promote them at the same time. It should be pointed
out that the appellant is a former minister of tourism for New Brunswick.
[4] He
therefore registered a certificate of business on January 1, 1996, under
the name [translation]
"Destination Acadia", the objects of the business being to organize
trips and activities and to promote tourism. He wanted to manage his business
from Moncton, New Brunswick.
[5] The
appellant explained the steps he had taken to promote his business in the
province of Quebec and the difficulties he had encountered. He filed
correspondence confirming some of the steps he had taken. One letter confirms
that he had four or five consultations with a Québec lawyer concerning his
business plan. Other letters confirmed that he had approached certain travel
agencies in Montréal and Charlesbourg. There is no doubt that his plan had the
support of tourist stakeholders in New Brunswick, as indicated by the
correspondence filed in evidence.
[6] A
letter dated March 28, 1996, from the Office de la protection du
consommateur du gouvernement du Québec appears to have diminished the
appellant's resolve. The letter was in response to a letter from the
appellant's lawyer inquiring into Quebec's requirements with respect to
soliciting customers residing in Québec for the purpose of selling organized
tour packages to Acadia. The appellant was informed in the letter from the
Office de la protection du consommateur that he had to hold a Quebec travel
agent's licence and register with the clerk of the Superior Court of Québec
under the Act respecting the legal publicity of sole proprietorships,
partnerships and legal persons (S.Q. 1993, c. 48). We may conclude
from the evidence that the appellant did not comply with those requirements.
[7] The
appellant informed the Court that he had nevertheless continued his efforts by
visiting travel agencies in Quebec, although there was no specific information
regarding the results of his efforts. He admitted that his business had
generated no income during the two taxation years. Since he had not realized
initially how complex his plan was, he eventually decided to abandon it. The
appellant still believes in his plan and is convinced that it would have
succeeded.
[8] All
those efforts resulted in expenses. Those expenses are the ones that he
deducted from his other income for the two years in issue. The appellant filed
no receipts in support of those expenses, although the evidence shows that he
had produced receipts for the Minister's auditor. The appellant had drawn no
distinction between receipts for expenses incurred in selling insurance and
those incurred in carrying out the "Destination Acadia" activities.
[9] On
cross-examination, he admitted that the information he had given his accountant
in order to prepare his income tax returns had been based on approximate
figures, which he himself had calculated. Since he had combined the expenses,
it was therefore impossible for him to distinguish between those incurred for
insurance sales and those incurred for his business activities.
[10] The receipts provided to the auditor refer solely to gasoline
purchases and restaurant meals. Most of the receipts come from businesses in
the Moncton area. The appellant explained that he would buy a full tank of gas
in his area before leaving. According to the auditor, the receipts under the
heading "Entertainment" do not state the name of the person with whom
he was meeting.
[11] The respondent had the Minister's auditor, Jean‑Luc Gagnon,
testify in this case. After reviewing the appellant's file and financial
statements, Mr. Gagnon communicated with the appellant and obtained
additional information in order to complete his audit.
[12] Mr. Gagnon explained the analysis he had conducted of the
expenses reported by the appellant. He had divided the expenses under various
headings, based on the information gathered. The table he prepared is
reproduced below:
|
1996
|
Claimed
|
Allowed
|
Disallowed
|
|
Advertising
|
$5,500.00
|
$825.00
|
$4,675.00
|
|
Meals and
entertainment*
|
$300.00
|
|
$300.00
|
|
Automobile
|
$16,741.80
|
$2,462.00
|
$14,280.00
|
|
Office
|
$500.00
|
$75.00
|
$425.00
|
|
Accounting and legal
fees
|
$713.60
|
$614.00
|
$100.00
|
|
Travel*
|
$4,300.00
|
$588.00
|
$3,711.00
|
|
Telephone and
utilities
|
$ 840.00
|
$ 126.00
|
$ 714.00
|
|
Assessment of
November 18, 1999
|
$28,895.40
|
$4,690.00
|
**$24,205.00
|
|
|
|
|
|
|
Assessment of
January 4, 2001
|
|
$1,500.00
|
($1,500.00)
|
|
|
|
$6,190.00
|
**$22,705.00
|
* The Minister included meals, hotel and
entertainment under the "Travel" item.
** Differences due to figures rounded-off.
|
1997
|
Claimed
|
Allowed
|
Disallowed
|
|
Advertising
|
$2,306.50
|
$347.00
|
$1,960.00
|
|
Taxes, licence and
fees
|
$20.00
|
$3.00
|
$17.00
|
|
Meals and
entertainment
|
$1,239.09
|
$375.00
|
$864.00
|
|
Automobile
|
$14,154.36
|
$2,072.00
|
$12,082.00
|
|
Office
|
$268.99
|
$41.00
|
$228.00
|
|
Accounting and
lawyer's fees
|
$220.00
|
$110.00
|
$110.00
|
|
Travel*
|
$800.37
|
$279.00
|
$521.00
|
|
Telephone and
utilities
|
$ 1,200.00
|
$180.00
|
$ 1,020.00
|
|
Assessment of
November 18, 1999
|
$20,209.31
|
$3,407.00
|
**$16,802.00
|
|
|
|
|
|
|
Assessment of
January 4, 2001
|
|
$1,500.00
|
($1,500.00)
|
|
|
|
$4,907.00
|
**$15,302.00
|
** Differences due to
figures rounded-off.
[13] The auditor stated that he had disallowed the appellant's expenses for
the two taxation years primarily because there were no supporting documents.
Furthermore, it was impossible for him to distinguish between the appellant's
expenses relating to his commissions as an insurance agent and those relating
to the steps he had taken to start up his business. In addition, as mentioned,
most of the expenses had been incurred in the Moncton area.
[14] The auditor therefore disallowed the appellant's advertising, office,
telephone and utilities expenses because no supporting documents had been
filed; however, he allowed 15 percent of that amount as reasonably
incurred by the appellant in his efforts to start up his business.
[15] Under the item "Travel", which includes meals and
entertainment, the appellant supplied receipts totalling $3,954 for the year.
Most of the receipts came from commercial establishments in the Moncton area
and no explanation about them was given. On the whole, the auditor allowed
25 percent of half of the total receipts as expenses incurred by the
appellant in his efforts to establish his business.
[16] Under the item "Automobile", the appellant declared expenses
of $16,741.80, whereas the receipts provided totalled $3,543. The receipts in
question were for gasoline purchases and repairs. Under those two sub-headings,
the appellant had expenses of $7,500 in gas and $450 in repairs. The receipts
therefore did not correspond to the amount reported. The auditor therefore
allowed an amount equal to 25 percent of the appellant's commission income
of $1,324.09, that is, $331. Of the balance of $16,741.80, less $331, he
allowed 15 percent in respect of expenses relating to the steps taken by
the appellant to set up his business.
[17] The last item concerns accounting and legal fees. The auditor was
given two receipts. The first, made in respect of a payment of $513.60, dealt
with the preparation of a pro forma document and was allowed. The second
receipt, for $200, concerned the preparation of the appellant's 1996 income tax
returns. The auditor disallowed half of that amount on the ground that it was a
personal expense. He therefore allowed $614 in respect of expenses relating to
the appellant's efforts to establish his business.
[18] For 1997, the auditor proceeded in the same manner with the expenses
that were reported, the receipts that were provided, and the percentages of
expenses incurred for steps taken by the appellant to set up his business that
were allowed. Of the $20,209 reported by the appellant, $3,405 was allowed and
$16,802 was disallowed. In a subsequent assessment dated January 4, 2001,
the Minister allowed the appellant to deduct an additional amount of $1,500 for
each of the taxation years in appeal.
[19] In his summation, counsel for the respondent acknowledged that the
appellant had incurred expenses for the purpose of gaining or producing
business income. She argued, however, that the onus was on him to prove that
his expenses were indeed related to business income. She submitted that the
evidence adduced by the appellant on that point was clearly insufficient.
Having kept no books of account or records that could show the number of trips,
the destinations, the expense amounts and so forth, it was impossible to
analyze the evidence. Furthermore, the receipts provided dealt mainly with
expenses incurred directly in the area where the appellant resided. The
appellant had provided no details on his meetings with certain stakeholders in
Quebec. The appellant admitted that the amounts unsubstantiated by receipts
were in fact estimates of his expenses.
[20] The appellant, for his part, argued that the expenses reported had
been incurred. He admitted that he could not prove all the efforts he had made,
but he contended that he had taken a number of steps. He acknowledged that he
did not have the necessary receipts but that the figures had not been chosen
randomly. The expenses relating to his activities were justified, and he noted
that nowadays he keeps his receipts.
[21] In her Reply to the Notice of Appeal, the respondent contends, inter
alia, that the expenses the appellant was denied are not allowable since
they are not expenses incurred by the appellant for the purpose of gaining or
producing income from the business in accordance with paragraph 18(1)(a)
of the Income Tax Act (the "Act"), which reads as
follows:
SECTION 18: General
limitations.
(1) In computing the income
of a taxpayer from a business or property no deduction shall be made in respect
of
(a) General limitation — an outlay or expense
except to the extent that it was made or incurred by the taxpayer for the
purpose of gaining or producing income from the business or property;
[22] In actual fact, however, the Minister arbitrarily allowed the
appellant to deduct a percentage of reported expenses since he agreed that some
of the expenses reported had been incurred for the purpose of earning business
income. The Minister allowed the appellant to deduct only a percentage of his expenses
on the ground that no supporting documents had been filed.
[23] The appellant admitted that he had not recorded his travels and had
very few receipts in support of the expenses reported. He acknowledged that
most of the expenses were estimates that he had made, and he claimed that he
had indeed incurred expenses in the course of his efforts.
[24] The onus was on the appellant to show that the Minister's assessments
for the two taxation years were incorrect. Although I found the appellant to be
a highly credible person, he was unable to demonstrate that the expenses he had
deducted in his income tax returns were real. The little evidence that the
appellant adduced respecting his trips and their frequency and his outside
meetings cannot justify the amounts he reported as expenses. The comments by
Reid J. in 421229 Ontario Ltd. v. The Queen, [1995]
1 C.T.C. 305, at page 308, are worth recalling:
"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 therefrom being on the taxpayer."
[25] It should also be kept in mind that, throughout this entire affair,
the appellant earned no income. In fact, the requirements of the Office de la
protection du consommateur du gouvernement du Québec of March 28, 1996,
and the lack of evidence that the appellant complied with them lead the Court
to wonder why the appellant reported so many advertising, travel and automobile
expenses after that date. I find that the position taken by the Minister's
auditor in the circumstances regarding the expenses reported by the appellant
was very reasonable.
[26] For these reasons, the appeals instituted from the assessments for the
1996 and 1997 taxation years are dismissed.
Signed at
Ottawa, Canada, this 8th day of March 2002.
J.T.C.C.
Translation
certified true
on this 20th day of
May 2003.
Sophie Debbané,
Revisor
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