[OFFICIAL ENGLISH
TRANSLATION]
Date:
20020906
Docket:
2001-3229(IT)I
BETWEEN:
ROBERT
BOULANGER,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre Proulx, J.T.C.C.
[1] This is an appeal under the
informal procedure for the 1996 to 1999 taxation years.
[2] The point at issue is
whether the expenses incurred by the appellant during the years in issue were
incurred in order to earn income from his business, which is his architectural
practice.
[3] The facts of this case are
described as follows in paragraphs 2, 3, 5 and 8 of the Reply to the Notice of Appeal
(the "Reply"):
[TRANSLATION]
2. In computing his
income for the 1996, 1997, 1998 and 1999 taxation years, the appellant deducted
the amounts of $9,575, $22,747, $24,516 and $22,457, respectively, claimed as
losses from a professional practice.
3. By notice of
reassessment dated October 30, 2000, in computing the appellant's income
for the 1996 taxation year, the Minister of National Revenue (the
"Minister") disallowed an amount of $4,888 claimed as expenses of a
professional practice.
. . .
5. By notice of
reassessment dated October 30, 2000, in computing the appellant's income
for the 1997, 1998 and 1999 taxation years, the Minister disallowed the amounts
of $22,747, $24,516 and $22,457, respectively, claimed as losses from a
professional practice.
. . .
8. In making those
reassessments, the Minister assumed, in particular, the following facts:
General and background
(a) the appellant is an architect and
has more than 45 years' experience in the field;
(b) during the years in issue, the
appellant offered architectural services under the name
"J. Robert Boulanger – Architect";
(c) during the years in issue, the
appellant occupied part of his family residence located at 115 Rue Vimy
Nord in Sherbrooke to carry on his professional activities;
(d) pensions and RRSPs have been the
appellant's main sources of income since 1992;
. . .
Audit of the Statement of
Revenue and Expenditure for the 1996, 1997 and 1998 taxation years
(e) analysis
of the various expenses claimed resulted in a reduction of those losses:
1996 1997 1998
(i) expenses
disallowed [claimed]
(a) office expenses and
stationery $1,061 $2,440 [$2,780] $960
(b) advertising and
entertainment expenses 770 736 [736] 589
(c) telephone 471 277 [1,159] 267
(d) automobile expenses 2,586 2,989 [6,647] 2,149
(e) rent [warehouse] 1,500 [1,500] 1,500
(f) interest, bank charges 0 4,681 [4,681] 5,687
(g) CCA computer 0 0 3,512
$4,888 $12,623 $14,664
(ii) amended
losses
annual
loss claimed $9,575 $22,747 $24,516
less:
disallowed expenses 4,888 12,623 14,664
revised annual loss $4,687 $10,124 $9,852
(f) the amount
disallowed for each of the disallowed expenses comes from a review of the
calculation of the personal portion;
Evaluation
– Reasonable expectation of profit
(g) the
gross income reported by the appellant from architectural-related activities
was as follows during the 1987 to 1999 taxation years:
(i) 1987 $122,544
(ii) 1988 $146,845
(iii) 1989 $204,506
(iv) 1990 $259,164
(v) 1991 $258,458
(vi) 1992 $138,827
(vii) 1993 $75,497
(viii) 1994 $82,845
(ix) 1995 $95,282
(x) 1996 $25,623
(xi) 1997 $741
(xii) 1998 $3,121
(xiii) 1999 $722
(h) the
appellant reported the following amounts in respect of net income and losses
from his professional activities during the 1987 to 1999 taxation years:
(i) 1987 $19,965
(ii) 1988 $44,708
(iii) 1989 $75,731
(iv) 1990 $88,359
(v) 1991 $98,503
(vi) 1992 ($15,644)
(vii) 1993 $11,989
(viii) 1994 $16,528
(ix) 1995 ($31,014)
(x) 1996 ($9,575)
(xi) 1997 ($22,747)
(xii) 1998 ($24,516)
(xiii) 1999 ($22,457)
(i) during the
taxation years in issue, the appellant did not sign more than five contracts a
year;
(j) the
appellant attributed the drastic decline in his turnover to the following
factors:
(i) strong
competition in the region;
(ii) for
Province of Quebec contracts, architects are selected for a project from a
central registry, following which each architect submits his or her bid;
(k) during the years
in issue, the appellant did not hire any employees;
(l) examination of the day planners
for the taxation years in issue showed that most of the appellant's schedule
was devoted to personal activities;
(m) the appellant had no reasonable
expectation of making a profit from the activity connected with architectural
services during the period from 1997 to 1999;
(n) the expenses assumed annually for
the activity connected with architectural services for the 1997, 1998 and 1999
taxation years constituted the appellant's personal or living expenses and were
not incurred by the said appellant to gain income from operating a professional
practice.
[4] In the Notice of Appeal,
the points raised are as follows:
[TRANSLATION]
. . .
I was not even able to substantiate my
expenses or discuss them because she also said that the cuts were minor and
that it was better to abide by the disallowance of the net professional losses
for 1997, 1998 and 1999. Here again, I noticed that her decision was
irrevocable and that, because of my age and the prevailing economic situation,
there was no reasonable hope of obtaining new work and capitalizing on it.
At her request, I gave her all the
documents she wanted and submitted to her my financial statements for 2000 with
all the relevant details. She was very surprised to see that, despite those
predictions, I did not have losses but indeed had a net profit.
. . .
In my case, I suspect there was
discrimination as a result of my age, and that is contrary to the "Charter
of Rights". . . .
[5] The findings sought by the
respondent are stated in paragraphs 11, 12 and 13 of the Reply, as follows:
[TRANSLATION]
11. He contends that
the expenses assumed annually for the activity connected with architectural
services for the 1997, 1998 and 1999 taxation years constituted the appellant's
personal or living expenses and were not incurred by the said appellant for the
purpose of gaining income from a professional practice but that they constituted
personal expenses for the said appellant within the meaning of the Act.
12. He contends that,
if the Court were to find that the expenses claimed annually for operating the
activity connected with architectural services were incurred by the appellant
during the 1997 and 1998 taxation years for the purpose of gaining business
income or producing an income from a business, expenses totalling $12,623 and
$14,664, respectively, were not deductible because they constituted personal
expenses.
13. He contends that
the Minister is entitled to disallow an amount of $4,888 in respect of expenses
incurred in operating the activity connected with architectural services for
the 1996 taxation year.
[6] The witnesses were the appellant and Chantal Boisvert for
the respondent.
[7] The appellant has been an architect since 1953. From
1954 to 1961, he was employed at an architectural firm. From 1961 to 1979, he
worked with two other partners. From 1979 to 1993, he practised alone at an
office outside his family residence. From 1993 to the present, he has carried
on his profession at that residence.
[8] He admitted
subparagraphs 8(a) to (d)
and 8(g) to (k) of the Reply. With respect to the gross income indicated in
subparagraph 8(g) of the Reply, the appellant told the Court that, in 2000
and 2001, he had earned gross income of $17,929 and $16,612 for net earnings of
$878 and $1,273.
[9] He filed the financial
statements to December 31, 2000, and to December 31, 2001, as Exhibits A‑1 and A‑2. No
accountant's name appears on the statements. It must therefore be considered
that they were prepared by the appellant or under his immediate guidance. For
2000, it should be noted that expenses were $8,000 less than for the two
previous years. Gross income amounted to $17,929, whereas it was $722 and
$3,121 in the two previous years. Of that amount of $17,929, $14,153.90 was in
accounts receivable.
[10] According to the financial
statements for the year ending on December 31, 2001, gross income was $16,612 and expenses were
$16,101. There was $11,345.87 in accounts receivable.
[11] With respect to
subparagraph 8(i) of the
Reply, the appellant said that he had signed nine contracts in 1996, none in
1997 and 1998, one in 1999 and two in each of the years 2000 and 2001.
[12] The appellant filed, as Exhibit A‑3, a list
of architectural works done and potential clients met from October 11,
1993, to June 12, 2002. He opened 21 files for that purpose.
[13] With respect to
subparagraph 8(j) of the
Reply, the appellant said that there were 30 architects in the region.
[14] As to subparagraph 8(k) of the Reply, the
appellant explained that, when needed, he would retain the services of a
draftsman. Thus, for a contract to transform a seniors residence in
Bromptonville in 2001, he had retained the services of a draftsman for $700.
[15] As Exhibit A‑4, he filed a letter dated
April 18, 1997, to the Centre universitaire de santé de l'Estrie
concerning his professional fees. In it, he agreed to reduce
seven invoices totalling $41,223.90 to a single invoice for $28,450 in
exchange for immediate payment. The first invoice was dated September 30,
1996, and the last, February 28, 1997.
[16] Chantal Boisvert is
now an objections officer. She acted in this case as an auditor. Her report was
filed as Exhibit I‑1.
It shows that the appellant has his name listed in the yellow pages of the
telephone directory under the heading "Architect". He is still a
member of the Province of Quebec Association of Architects, even though he no
longer has to pay dues since he is over 70 years of age. He still has
liability insurance because he has to keep it for 10 years after he has
terminated his architectural activities. His name is on the central registry of
architects kept by the Government of Quebec.
[17] The appellant says he seeks work from municipal,
school and provincial authorities and from hospitals and educational
institutions. He also solicits his former clients annually. He acknowledged
that he spends seven months of the year at his summer home in Ste‑Catherine
d'Hatley, Magog, but said that he regularly spends approximately 35 hours
a week at his office in his Sherbrooke residence. He keeps up to date on what
is going on in his profession. For example, he has taken courses on the
National Building Code.
[18] I note two questions from
the [TRANSLATION] "Questionnaire
on Professional Activities,"
included in Exhibit I‑1: question 2B and his answer, as well as
question 10A and his answer, which read as follows:
[TRANSLATION]
2. B. At
first, what were your long-term objectives? If your business has not progressed
as planned, explain why.
Business very
good until 1991. Slowdown from 1991 to 1996. Very little work since 1996.
. . .
10. A. Give
the specific reasons for the losses incurred to date. Report any exceptional
situations such as fire, flood, theft, etc. as well as the dates in question.
The
losses were caused by the lack of income versus the regular office overhead in
anticipation of obtaining a contract.
[19] The auditor explained that
with respect to the use of the residence, the appellant had claimed 75 percent of the area of the
residence. She considered that he used at most 37 percent, considering the
plans of the house and the fact that he had no employees. As to automobile use,
she allowed 35 percent on the basis of the small number of contracts and the
fact that the appellant’s office was the usual place of work, whereas the
appellant had claimed 68 percent. She considered the interest on the bank
loans as a personal expense because the nature of the operations and the site
did not require bank loans. In her view, they were loans taken out for living
expenses.
Conclusion
[20] This Reply was prepared on October 25,
2001, and the decision of the Supreme Court of Canada in Stewart v. Canada,
[2002] S.C.J. No. 46 (Q.L.), was rendered on May 23, 2002. I quote
paragraph 53 from that decision:
We emphasize that this "pursuit of
profit" source test will only require analysis in situations where there
is some personal or hobby element to the activity in question. With respect, in
our view, courts have erred in the past in applying the REOP test to activities
such as law practices and restaurants where there exists no such personal
element: see, for example, Landry, supra; Sirois, supra; Engler v.
The Queen, 94 D.T.C. 6280
(F.C.). Where the nature of an activity is clearly commercial, there
is no need to analyze the taxpayer's business decisions. Such
endeavours necessarily involve the pursuit of profit. As such, a
source of income by definition exists, and there is no need to take the inquiry
any further.
[21] In the current state of the
law as determined by the supreme legal authority of this country, I must
consider the practice of the architectural profession by an architect entitled
to carry on that profession as a source of income. Under sections 3 and 9
and paragraph 18(1)(a),
the appellant is entitled to deduct the expenses incurred for the purpose of
gaining income from practicing his profession.
[22] Section 67 of the Act was not raised by the
respondent. That section provides that, in computing income, no deduction shall
be made in respect of an outlay or expense in respect of which any amount is
otherwise deductible under the Act, except to the extent that the outlay
or expense was reasonable in the circumstances. This provision must be raised
in the reply to the notice of appeal because it requires relevant evidence for
it to apply.
[23] However, paragraph 18(1)(h) was raised, and I must
consider it. The personal portion of the expenses may not be claimed.
[24] I will consider each class
of expenses disallowed on this point, starting with office expenses and
stationery. The auditor analyzed the expenses on the basis of the invoices and
found that approximately $200 to $300 in stationery expenses could be allowed
each year for business purposes. I accept the auditor's findings because, in
the financial statements prepared by the appellant for 2000 and 2001 (Exhibits A‑1
and A‑2), the appellant entered the same amount.
[25] As to the annual average of
$750 in advertising and entertainment expenses, the auditor completely
disallowed them. I find that the expenses claimed were not excessive because
the appellant must appear in public life for the purposes of carrying on his
profession.
[26] As to the telephone and
automobile expenses, the percentages determined by the auditor for business and
personal use seem valid to me.
[27] The auditor completely
disallowed the warehouse expenses. I believe they are connected with the
appellant's continuing professional activity. They can be allowed.
[28] With respect to the
interest on bank loans, the onus was on the appellant to explain clearly how
those loans were connected to his professional practice. I had no clear
evidence on that point. They cannot be allowed.
[29] As to the use of the
residence by the appellant for business purposes, I find that the percentage
determined by the auditor is correct.
[30] The 1999 taxation year is
in issue. The auditor conducted no analysis of personal expenses for that year.
Business expenses must be computed in the same way as those of the previous
year, with the required adjustments.
[31] The appeals are allowed and the assessments are referred back to
the Minister for reconsideration and reassessment on the basis of the
conclusions stated in paragraphs 24 to 31 of these Reasons.
Signed at Ottawa, Canada, this 6th day of September 2002.
J.T.C.C.
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