Citation: 2011 TCC 142
Date: 20110310
Docket: 2010-285(IT)I
BETWEEN:
JEAN-MICHEL EMOND,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Paris J.
[1] These appeals
were filed in respect of the appellant's 2004 and 2005 taxation years. The
Minister of National Revenue (the Minister) disallowed the deduction of employment
expenses in the amount of $19,445 for 2004 and $4,260 for 2005 as well as the
deduction of $23,596 in rental losses, which the appellant claimed for the 2005
taxation year.
Employment expenses
[2] The appellant
worked as a commissioned employee-salesman. He sold videos to video rental
stores in Quebec and Ontario. As part of his job, he had to travel a great
deal, and his employer paid him an allowance of $5,371 in 2004 and $4,260 in
2005, to help pay for his travel expenses. He did not include that allowance in
computing his income for either year at issue.
[3] In his tax
returns, the appellant claimed travel expense deductions of $26,242 for 2004
and $11,232 for 2005 relative to his employment. The table below shows the
amounts claimed by the appellant and the amounts the deduction of which was disallowed
by the Minister:
|
|
2004
|
2005
|
|
|
Claimed
|
Disallowed
|
Claimed
|
Disallowed
|
|
Motor vehicle
expenses
|
12,249
|
6,853
|
|
|
|
Legal and
accounting fees
|
100
|
|
|
|
|
Meal and drink
expenses
|
1,205
|
|
1,402
|
|
|
Parking expenses
|
235
|
|
|
|
|
Loan payment
|
4,516
|
4,516
|
|
|
|
Hotel
|
437
|
|
|
|
|
Flight
|
757
|
|
|
|
|
Vehicle rental
|
285
|
|
|
|
|
Cell phone
|
1,410
|
|
|
|
|
Telephone
|
631
|
|
|
|
|
Passport, visa
and insurance
|
1,800
|
1,800
|
|
|
|
Interest fees
|
1,407
|
1,406
|
|
|
|
Miscellaneous
|
273
|
|
|
|
|
Office expenses
|
|
|
2,000
|
|
|
Travel expenses
|
|
|
7,830
|
|
|
Home office
expenses
|
934
|
|
|
|
|
Non-taxable
allowances received
|
|
5,370
|
|
4,260
|
|
TOTAL
|
26,242
|
19,445
|
11,232
|
4,260
|
[4] The Minister
disallowed the deduction of $6,853 in motor vehicle expenses for 2004 on the
basis that the appellant used his vehicle for business purposes only 45% of the
total time he used his vehicle, not 90% of the time as the appellant claimed. The
deduction of the payment of $4,516 in respect of a loan was disallowed on the
basis that the payment was actually a payment on account of capital relative to
the purchase of the appellant's vehicle. In addition, the deduction of $1,800, described
as expenses relative to "passport, visa and insurance", as well as
the deduction of $1,406 in interest fees were disallowed given that the amounts
in question were not expenses incurred to earn income from employment.
[5] The Minister also deducted from the total
expenses claimed for each of the years at issue the amount of the allowance
received by the appellant from his employer, which he had not included in his
income.
[6] The
statutory provision that applies in this case is paragraph 8(1)(f) of
the Income Tax Act (the Act), which provides for the deduction of some
expenses by commissioned salespeople. The provision reads as follows:
8(1)(f) where the taxpayer
was employed in the year in connection with the selling of property or
negotiating of contracts for the taxpayer’s employer, and
(i)
under the contract of employment was required to pay the taxpayer’s own
expenses,
(ii)
was ordinarily required to carry on the duties of the employment away from the
employer’s place of business,
(iii)
was remunerated in whole or part by commissions or other similar amounts fixed
by reference to the volume of the sales made or the contracts negotiated, and
(iv)
was not in receipt of an allowance for travel expenses in respect of the
taxation year that was, by virtue of subparagraph 6(1)(b)(v), not
included in computing the taxpayer’s income,
amounts expended by the taxpayer in the year for the
purpose of earning the income from the employment (not exceeding the
commissions or other similar amounts referred to in subparagraph 8(1)(f)(iii)
and received by the taxpayer in the year) to the extent that those amounts were
not
(v) outlays,
losses or replacements of capital or payments on account of capital, except as
described in paragraph 8(1)(j),
(vi)
outlays or expenses that would, by virtue of paragraph 18(1)(l), not be
deductible in computing the taxpayer’s income for the year if the employment
were a business carried on by the taxpayer, or
(vii)
amounts the payment of which reduced the amount that would otherwise be
included in computing the taxpayer’s income for the year because of paragraph
6(1)(e);
. . .
[7] In his testimony, the
appellant confirmed that, in 2004, he had used his car almost exclusively for
activities related to his job. He did not keep a logbook for the use of his
vehicle, but he provided a reconstruction of his travel (Exhibit A-1) where it
was indicated that he had travelled 50,833.7 kilometres in total and that
5,194.8 of them (10%) constituted travel from his home to his employer's place
of business, which he had described as personal travel. The appellant stated
that he went directly from his employer's place of business to see his clients
before returning home. He therefore treated all the kilometres travelled,
except for his travel from home to his employer's place of business, as being
related to his job.
[8] At the hearing, counsel for
the respondent agreed that the appellant had successfully proven that, in 2004,
80% of his car travel was attributable to activities related to his job in
2004. Counsel for the respondent argues, however, that, in addition to the
travel from his home to his employer's place of business, the travel from his
last appointment of the day to his home should be treated as personal.
[9] The appellant argues that,
because he also worked from home, the travel from his last appointment of the
day to his home should also be considered to be related to his job. For her
part, the respondent argues that the total amount of motor vehicle expenses
should be reduced by $568, that is, the difference between the amount claimed
as car insurance stated in the list of vehicle costs attached to the
appellant's 2004 tax return and the amount paid by the appellant for car
insurance according to the Assurance Desjardins statement provided by the
appellant.
Analysis: travel expenses
[10] It has been held that, when
a taxpayer has to work from home, which therefore becomes a regular place of
work, travel from and to the home constitutes travel done as part of the job.
See Toutov v. The Queen
and Campbell v. The Queen.
Consequently, the expenses related to that travel may be deducted under paragraph
8(1)(f) of the Act. The appellant's testimony, according to which he
regularly worked at his home office, was not disputed by the respondent. I note
also that the Minister allowed the deduction of his home office expenses. For
that reason, I find that the appellant was able to prove that the travel at
issue that he had done with his vehicle was related to the duties of his job
and that he is entitled to deduct 90% of the expenses related to his vehicle in
computing his income for 2004.
[11] As stated by the respondent,
the amount should be reduced so that it represents the amount actually paid for
car insurance based on the numbers on the Desjardins statement. The total
amount of the deduction claimed as motor vehicle expenses for 2004 is $12,249. This
amount should be reduced by 90% of $568 (that is, $511), which leaves $11,738. Given
that the Minister has already allowed a deduction of $5,396, the appellant is
entitled to an additional deduction of $6,342 as motor vehicle expenses.
[12] I cannot allow the
appellant's claim to deduct the amount of $4,516 as the repayment of the
balance of his car loan. This payment clearly represented a payment on account
of capital, and subparagraph 8(1)(f)(v) prevents the deduction of that
type of payment.
[13] The evidence presented by
the appellant regarding the deduction he claimed under "passport, visa and
insurance" was confusing, deficient and not sufficient to establish the
nature or the purpose of the expenses in question. The appellant has therefore
not discharged his burden of proving that those expenses had been incurred in
order to earn income.
[14] The amounts deducted as
interest included interest on an unpaid balance of at least one of the
appellant's credit cards as well as on annual fees, fees for exceeding the
credit limit and life insurance for that same card. In support of his deduction
claim, the appellant filed in evidence a handwritten calculation sheet and part
of a credit card bill. Unfortunately, it is impossible to establish what
proportion of the items on the handwritten list of expenses were related to the
appellant's job. Consequently, no part of the deduction claimed may be allowed.
[15] I also find that the
Minister correctly treated the travel expense allowance that the employer paid
the appellant. Under subparagraph 8(1)(f)(iv) of the Act, in order for a
taxpayer to be entitled to deduct travel expenses, he or she should not be
receiving a reasonable allowance for travel expenses from his or her employer. If
he or she receives an allowance that is not considered reasonable the taxpayer
must include it in computing his or her income under paragraph 6(1)(b)
of the Act. The respondent acknowledged that the allowance received by the
appellant was not reasonable and that the appellant was therefore entitled to
deduct the travel expenses related to his employment. We would obtain the same
net result if we reduce the amount of the deduction claimed by the appellant as
travel expenses by the allowance amount. This method was endorsed by the Court
in Vienot v. The Queen.
Rental losses
[16] The next issue deals with
the deduction of rental losses of $23,596 claimed by the appellant for 2005. The
Minister disallowed the deduction on the basis that the property to which the
loss was related was not a source of income for the appellant.
[17] In July 2005, the appellant
bought a 10-room inn in Saint-Zénon, Quebec, for $550,000. At around the same
time, he started a company called Le Zénon Inc. in order to operate the inn, which
had a bar and a restaurant.
[18] The evidence reveals that
the appellant lives at the inn and has operated it on behalf of the company
since he purchased it. It seems that the business venture has not been
financially successful for the company despite all of the appellant's efforts. The
appellant's partner, Lise Hamel, has also spent a great deal of time at the inn
with her daughter and has helped the appellant operate the business. For a
time, her daughter's horse was on the property. According to Ms. Hamel, the
business was planning to establish an equestrian centre as part of the inn's
activities. According to the witnesses, the appellant lives in the inn's
basement, and Ms. Hamel and her daughter stay in a room on the first floor when
they are at the inn.
[19] The company did not pay rent
to the appellant in 2005. The appellant stated that it had not made enough
money to pay rent during that year. Nothing in the evidence suggests that the
company paid rent to the appellant in the course of the following years. No
rental expenses are entered for the period at issue in the financial statements
of the company for its fiscal year ending May 31, 2006. No other financial
statements were filed in evidence. Based on what is stated at paragraph 7(n) of
the Reply to the Notice of Appeal, the appellant reported a gross rental income
of $20,160 in his personal tax return for the 2006 taxation year, but it had
not been established whether it was the amount received as rent from the
company. That income tax return was not filed in evidence at the hearing, and
the evidence showed that in 2006 the appellant rented out the house he owned in
Terrebonne. It is therefore impossible to establish whether part of the rental
income reported represented rent received for the property in Saint-Zénon.
[20] The agreements concluded
between the appellant and his company regarding the use of the property are
unclear. In their testimony, the appellant and Ms. Hamel stated that a
lease had been established between the appellant and the company, but they
could not provide a copy of it to the Court given that the document was with
counsel representing the appellant in another matter. The appellant did not say
what the rent amount was, but Ms. Hamel said that it was $4,000 per month. However,
at the audit stage, the appellant's representative told the auditor that the
rent was $2,000 per month and that no lease had been signed. In addition, at
the audit stage, the appellant was asked to answer a number of questions
concerning the claim for a deduction of rental losses including the amount of
rent that he was asking for. He did not respond. In response to the question of
how the rent amount had been established, the appellant wrote [Translation] "through the amount of
the hypothec." In addition, as previously mentioned, no amount of rent
paid or to be paid was entered for the period at issue in the financial
statements for the fiscal year ending on May 31, 2006.
Submissions: rental losses
[21] The respondent argues that
the property was not a source of income for the appellant in 2005 and that, as
a result, he cannot take his losses into account in computing his income under
the Act. Counsel for the respondent stated that the ownership and use of the
property by the appellant had at least two personal aspects: he lived there and
let his company operate it without paying rent. Accordingly, following the
Supreme Court's decision in Stewart v. The Queen, it is necessary to take into
account the commercial nature of the use the appellant made of the property.
Counsel for the respondent argues that, because the appellant chose to allow
the company to use the property without paying rent, he did not use the
property in a commercial manner. Accordingly, the property cannot be considered
as a source of income for the appellant.
[22] Alternatively, the
respondent argues that, if the property really was a source of income, the
losses were less significant than the appellant reported. The respondent
questions the amount of the deduction claimed as interest.
[23] In his submissions, the
appellant seemed to see the distinction between himself and his company, Le
Zenon Inc., somewhat unclearly maintaining that he intended to operate the inn
as a business and was therefore entitled to deduct the rental losses. His
submissions focused mostly on the efforts that Ms. Hamel and he had deployed in
order to make the inn a success as well as the difficulties that they had had
to overcome. He maintains that, even though he had worked hard, he lost money in
the business and that it would be fair to let him deduct the rental losses at
issue.
Analysis: rental loss
[24] In Stewart, the
Supreme Court of Canada ruled that, to establish that a taxpayer's activities
are a source of income within the meaning of the Act, whether they consist of a
business or a property, they must be undertaken in pursuit of profit. The
Supreme Court's analysis of the criterion to apply in order to determine
whether a business or property exists as a source of income is found at
paragraphs 48 to 51 of that decision:
48 In our view, the determination of whether a
taxpayer has a source of income, must be grounded in the words and scheme of
the Act.
49 The Act divides a taxpayer’s income into various
sources. Under the basic rules for computing income in s. 3, the Act
states:
3. The income of a taxpayer for a taxation year for the
purposes of this Part is his income for the year determined by the following
rules:
(a) determine the aggregate
of amounts each of which is the taxpayer’s income for the year ... from a
source inside or outside Canada, including, without restricting the
generality of the foregoing, his income for the year from each office,
employment, business and property; [Emphasis added.]
With respect to business and property sources, the basic
computation rule is found in s. 9:
9. (1) Subject to this Part, a taxpayer’s income for a
taxation year from a business or property is his profit therefrom for the year.
(2)
Subject to section 31, a taxpayer’s loss for a taxation year from a business or
property is the amount of his loss, if any, for the taxation year from that
source computed by applying the provisions of this Act respecting computation
of income from that source mutatis mutandis.
50 It is clear that in order to apply s. 9, the
taxpayer must first determine whether he or she has a source of either business
or property income. As has been pointed out, a commercial activity which falls
short of being a business, may nevertheless be a source of property income. As
well, it is clear that some taxpayer endeavours are neither businesses, nor
sources of property income, but are mere personal activities. As such, the
following two-stage approach with respect to the source question can be
employed:
(i)
Is the activity of the taxpayer undertaken in pursuit of profit, or is it a
personal endeavour?
(ii) If it is not a personal endeavour, is the source of the income a
business or property?
The first stage of the test assesses the general question
of whether or not a source of income exists; the second stage categorizes the
source as either business or property.
51 Equating “source of income” with an activity
undertaken “in pursuit of profit” accords with the traditional common law
definition of “business”, i.e., “anything which occupies the time and attention
and labour of a man for the purpose of profit”: Smith, supra, at
p. 258; Terminal Dock, supra. As well, business income is
generally distinguished from property income on the basis that a business
requires an additional level of taxpayer activity: see Krishna, supra,
at p. 240. As such, it is logical to conclude that an activity undertaken in
pursuit of profit, regardless of the level of taxpayer activity, will be either
a business or property source of income.
[25] The Supreme Court also
stated the following at paragraph 54:
54 It should also be noted that the source of income assessment is not a
purely subjective inquiry. Although in order for an activity to be classified
as commercial in nature, the taxpayer must have the subjective intention to
profit, in addition, as stated in Moldowan, this determination should be
made by looking at a variety of objective factors. Thus, in expanded form, the
first stage of the above test can be restated as follows: “Does the taxpayer
intend to carry on an activity for profit and is there evidence to support that
intention?” This requires the taxpayer to establish that his or her
predominant intention is to make a profit from the activity and that the
activity has been carried out in accordance with objective standards of
businesslike behaviour.
[26] In this case, as noted by
counsel for the respondent, it must be established how the appellant, not the
company, used the property. The appellant chose to purchase it in his own name
rather than going through the company; he cannot ignore that choice when it
does not suit his interests. The Court cannot ignore the existence of the
company. In law, the business that it operated was separate from the rental
activity carried out by the appellant. This point was established as follows by
the Supreme Court of Canada in Appleby v. The Minister of National Revenue,
[1975] 2 S.C.R. 805, [1974] C.T.C. 693, 74 D.T.C. 6514 to 813 (C.T.C. 698,
D.T.C. 6517):
Ever
since Salomon v. Salomon & Co., it has been accepted that although
the shares of a limited company may be beneficially owned by the same person
who also manages it, its business is nevertheless in law that of a distinct
entity, a legal person having its own rights and obligations. The Income Tax
Act unmistakably implies that this rule holds good for tax purposes.
[27] Thus, the rental activity
carried out by the appellant must in itself be carried out with a view to
making a profit or in a commercial manner in order to be a source of income
within the meaning of the Act.
[28] In my view, the appellant
did not satisfy the first requirement established by the Supreme Court in Stewart;
that is, he did not prove that he had the subjective intention to make a profit
when he provided his company's property so that it could use it to operate its
business. The evidence seems to show that the appellant intended to rent out
the property to the company in exchange for rent that was roughly equal to the hypothec
payments, namely, a little over $2,000 per month. This is consistent with the
statements of the appellant's representative to the auditor regarding the rent amount
as well as the answer provided by the appellant to the question he was asked in
writing regarding how the rent amount had been established. This amount was
insufficient, however, to cover all the appellant's other expenses, such as
insurance, taxes and maintenance. For 2005, the appellant claimed the deduction
of expenses related to the property, including hypothecary interest of $4,000
per month. There is no reason to believe that the appellant did not know that
the rent amount would not be sufficient to cover expenses and that it would
result in losses. The only conclusion that can be drawn is that the appellant
did not intend to make a profit from renting the property to his company.
[29] I am not satisfied of the
existence of an agreement specifying that the company had to pay rent of $4,000
per month. At least, it did not exist during the 2005 taxation year. This
amount was not mentioned to the auditor, and the appellant did not mention it
in the questionnaire he had filled out for the auditor. In addition, this
amount does not seem to be included in the amount reported by the appellant as
rental income and was not recognized as an expense in the company's financial
statements.
[30] Even if an agreement stating
that the company had to pay rent of $4,000 per month did exist, it was not
proven that it could be expected that the agreement would result in a profit
for the appellant. The loss of $24,838 for 2005 was recorded by the appellant
between July 15 and December 31 of that year, that is, for a period of five and
a half months, which means that it cost the appellant over $4,000 per month to
maintain the property.
[31] The behaviour adapted by the
appellant afterwards also leads to the conclusion that he was not carrying out rental
activities in a commercial manner. He does not seem to acknowledge that the
company owed him unpaid rent or that he had not tried to find a new tenant when
his company was unable to generate enough revenue to pay rent.
[32] For these reasons, I unfortunately
find that the appellant is not entitled to the deduction that he had claimed for
rental losses for 2005.
[33] If I had found in favour of
the appellant on this issue, I would not have reduced the amount of the
deduction claimed by the loss amounts. I accept the appellant's evidence that
the interest the deduction of which he claimed was made up of two parts:
interest from the first hypothec for the inn as such and interest from the
second hypothec that the appellant took out for his house in Terrebonne in
order to recover the balance of the purchase price of the inn.
[34] The appeal is allowed to the
extent that the deduction claimed by the appellant for travel expenses related
to his employment must be increased by $6,342 for the 2004 taxation year.
[35] After the hearing ended, the
appellant sent other documents to the registry of the Court asking that they be
taken into account. The respondent objected to the hearing being reopened in
order to allow new documents to be added to the record.
[36] Only one of these documents seemed
as if it could be helpful in making findings on the issues before me in this
case. It was a copy of a motion filed on behalf of the appellant in another matter.
The motion contained a statement according to which there had indeed been an
agreement stating that the appellant's company had to pay rent of $4,000 per
month. However, as counsel for the respondent stated, it was not irrefutable
evidence that the agreement had existed. In addition, it contradicted other
evidence before me on the issue.
[37] Moreover, nothing implies
that the appellant did not have access to the documents before the hearing.
[38] For these reasons, I find
that it would not be in the best interests of justice to re-open the hearing to
allow these documents to be filed. Therefore, I decline to do so.
Signed at Ottawa, Canada, this 10th day of March 2011.
"B.Paris"
Translation certified true
on this 31st day of October 2012
Margarita Gorbounova, Translator
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