Citation: 2011 TCC 373
Date: 20110729
Docket: 2009-250(IT)I
BETWEEN:
BARB MORRISSEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
D'Auray J.
[1]
The questions to be
decided in these appeals are:
Motor vehicle expenses
Whether the appellant was entitled to deduct
the amount of $13,264 for the 2003 taxation year and the amount of $11,551 for the
2004 taxation year as motor vehicle expenses;
Unreported income
Whether the Minister of National Revenue properly
included the amounts of $12,790 and $12,221 in the appellant’s business income
for the 2003 and 2004 taxation years respectively;
Advertising, donations, bonuses and gifts
Whether the appellant was entitled to deduct
as advertising, donation, bonus and gift expenses the amount of $2,914 for the
2003 taxation year and the amount of $1,448 for the 2004 taxation year;
Bad debt
Whether the appellant was entitled to deduct
as a bad debt the amount of $1,998 for the 2004 taxation year;
Home office expenses
Whether the appellant was entitled to deduct
as home office expenses a portion (amounts of $3,112 and $4,991 for the 2003
and 2004 taxation years respectively) of the expenses incurred for her
residence;
Facts
[2]
The appellant, Barb Morrissey,
is a distributor of newspapers and other publications.
[3]
During the years under
appeal she was in charge of distributing the National Post in the
Kitchener-Waterloo area.
[4]
The appellant also distributed
for S&G the Kitchener-Waterloo Real Estate News, (hereinafter
referred to as the KW Real Estate News).
[5]
The appellant’s work
for the National Post consisted of meeting the driver who came from
Toronto with the papers to the depot location in Kitchener. She then unloaded and distributed the papers to other drivers, who in
turn delivered the papers to still other drivers at different locations or
checkpoints from where the National Post was distributed in the Kitchener-Waterloo
area. All the drivers for the National Post were hired by the appellant
as independent contractors. The appellant also took care for the National
Post of the paperwork and client complaints, and if she found out during
the day that papers had not been delivered, for the National Post she would
deliver those papers herself. The appellant testified that she would occasionally
also have to drive to a checkpoint if a driver called in sick or was for some
other reason unable to get there. She testified that out of a total of ten deliveries,
one would require that she drive to a checkpoint.
[6]
The drivers were paid
by the appellant at a set rate determined by the National Post.
[7]
During the years under
appeal she also did some work for S&G, a business owned by Gary Bumstead.
The appellant had an oral agreement with Mr. Bumstead whereby she agreed to
pick up and distribute the KW Real Estate News for S&G. For that purpose however,
the appellant used drivers hired by S&G. She was not responsible for handling
customer complaints; Mr. Bumstead was. The appellant testified that she
was remunerated by S&G through direct deposits into her account. She then
paid S&G’s drivers in cash at a rate determined by S&G. She paid the
drivers as a convenience to Gary Bumstead.
Analysis
Motor vehicle expenses
[8]
In filing her income
tax returns for the 2003 and 2004 taxations years, the appellant claimed as
motor vehicle expenses amounts of $13,264 and $11,551 respectively. She
reported that she used her vehicle for business purposes 90% of the time in
2003 and 95% of the time in 2004.
[9]
The auditor responsible
for the audit of the appellant testified for the Minister of National Revenue. She
explained that she disallowed all the motor vehicle expenses claimed by the appellant
for both years. She did so because she did not agree that the appellant’s place
of business was her residence. She also stated that the appellant did not keep any
logbooks and that the documents presented and the explanations given by the appellant
were so confusing that she could not determine the amounts that were
deductible.
[10]
The evidence
demonstrated that the appellant had to travel for business purposes for the National
Post. Using Google Maps, the appellant was able to show the number of
kilometres she had to travel every day from her residence to the depot location
and occasionally to the different checkpoints.
[11]
Counsel for the Crown
disputed the kilometres claimed by the appellant and pointed to car maintenance
invoices which showed fewer kilometres. However, at trial it was clearly
demonstrated that there were errors in the kilometres shown on those invoices.
[12]
I agree with counsel
for the appellant that the appellant’s residence was her place of business. I
also agree with his calculations (found in Exhibit A-7) based on the number of
kilometres that the appellant had to travel during the years in issue. Those
figures appear reasonable in light of the evidence given at trial and the type
of work performed by the appellant.
[13]
The appellant is
therefore entitled to deduct motor vehicle expenses in the amounts of $10,168.77
for the 2003 taxation year and $8,390.35 for the 2004 taxation year.
Unreported income
[14]
The amounts included by
the Minister of National Revenue in the appellant’s business income were in
relation to the work that the appellant performed for S&G in picking up and
delivering the KW Real Estate News. The Minister of National Revenue included
the amounts of $12,790.20 for the 2003 taxation year and $12,221 for the 2004 taxation
year.
[15]
The appellant testified
that S&G paid her by means of direct deposits in her bank account. She then
took some of that money to pay the S&G’s drivers. Those drivers were paid
in cash by the appellant. In reporting her income from the work she did for
S&G, she entered only the net amounts in her general ledger, namely $9,500 and
$6,750 for the 2003 and 2004 taxation years respectively. The appellant
explained that the additional income represented what she had paid to S&G’s
drivers on behalf of Gary Bumstead.
[16]
The auditor explained
why she included the amounts of $12,790 and $12,221 in the appellant’s business
income for the 2003 and 2004 taxation years respectively.
[17]
For the 2003 taxation
year, the auditor did not rely on invoices, as no invoices were found or given
to her by the appellant. She reviewed three bank statements. On the basis of three
deposits made by S&G in the appellant’s bank account, she estimated the
revenue received from S&G during the year: see Exhibit R-1, Tab 9, p. 55.
[18]
For the 2004 taxation
year, she reviewed the bank statements and noted that the direct deposits
received from S&G amounted to $17,832.05. She also reviewed the invoices,
which totalled $20,278.27: see Exhibit R-1, Tab 9, p. 58.
[19]
The auditor did not
deduct any amount for the payments that the appellant says she made to the
S&G’s drivers. The auditor indicated that she did not have any documents
with respect to the amounts so paid. The appellant did not provide her with a
list of the drivers or with their names, nor did she indicate their pay rate
and how much was paid to each driver. No documentary evidence was produced at
trial by the appellant; she merely stated that she had to pay the S&G’s
drivers. When asked, the appellant could not remember the rate of pay or how
many drivers she paid.
[20]
I agree with Justice Bowman,
as he then was, who stated in 620247 Ontario Ltd. v. Canada, 1995
CarswellNat 27, [1995] G.S.T.C. 22 (Tax Court of Canada (Informal Procedure)),
at paragraphs 6 and 8:
6 I shall endeavour to summarize the
evidence. In a case involving a challenge to a GST assessment the onus of proof
is the same as in an income tax appeal. Where the issue is one of fact, as it
is here, the appellant has the onus of establishing on a balance of
probabilities that the assessment is wrong. No question of law is raised in
this case and it is of course inappropriate to speak of onus of proof where the
issue is one of law. [ … ]
8 The assessment is based upon the
assumption that the bank deposits are about as accurate an indication of the
sales as one is likely to get, given that the appellant kept no books and its
only record of sales was the sales slips, which were incomplete and essentially
in an unsatisfactory state. It may be a fair surmise that some of the bank
deposits came from sources other than sales but the evidence simply does not
establish how much. In a case of this type, which involves an attempt by the
Department of National Revenue to make a detailed reconstruction of the
taxpayer's business, it is incumbent upon the taxpayer who challenges the
accuracy of the Department's conclusions to do so with a reasonable degree of
specificity. That was not done here. A bald assertion that the sales could not
have been that high, or that some unspecified portion of the bank deposits came
from other sources is insufficient. I am left with the vague suspicion that the
chances are that the sales figures computed by the Minister may be somewhat
high, but within a range of indeterminate magnitude. This is simply not good
enough to justify the allowing of the appeal. If I sent the matter back for reconsideration
and reassessment the same evidentiary impasse would result. I must therefore
conclude that the appellant has failed to meet the onus of showing that the
assessment is wrong.
[21]
The same is true in the
present appeal: If I were to send the matter back for reconsideration and
reassessment the same evidentiary impasse would result.
[22]
The income added by the
Minister of National Revenue for the 2003 and 2004 taxation years was therefore
properly included using the only method available to the auditor, namely a
reconciliation of the bank deposits and the invoices when the latter were available.
[23]
With respect to the
amounts paid to drivers, Justice Bowman’s remarks also hold true. It is impossible
for me to determine the amounts that were paid to the S&G’s drivers. As the
auditor stated, they could already have been deducted under the subcontractors
account.
[24]
In Njenga v. R.,
[1997] 2 C.T.C. 8, 96 DTC 6593 (Federal Court of Appeal), at paragraph 3, McDonald
J. A. speaking for the court, stated:
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.
[25]
I would also add that while
it may not be illegal to pay in cash, when a taxpayer chooses to pay in cash he
or she should be all the more careful to ensure that payment can be proven if a
deduction is claimed. Here, the appellant did not succeed in reversing the
burden of proof as she was not able to demonstrate how much she paid the
S&G’s drivers on behalf of Gary Bumstead.
[26]
Therefore, the amounts
of $12,790 for the 2003 taxation year and $12,221 for the 2004 taxation year
were properly included in the appellant’s income by the Minister of National
Revenue.
Advertising, donations, bonuses and gifts
[27]
The Minister of
National Revenue disallowed the advertising, donation, bonus and gift expenses
claimed for the 2003 and 2004 taxation years.
[28]
With respect to bonuses
and gifts, the appellant testified that in the 2003 and 2004 taxation years she
gave performance bonuses and gifts to some of her drivers who delivered the National
Post. She testified that she gave $2,689.32 in the 2003 taxation year and
$3,350 in the 2004 taxation year.
[29]
The appellant stated
that she gave bonuses and gifts in the form of Tim Horton cards, Walmart
cards and boxes of Laura Secord chocolates to show her appreciation to the
drivers.
[30]
There were journal
entries in the general ledger of the appellant reflecting the amounts given as
bonuses and gifts: see Exhibits A-3 and A-5. Copies of cancelled cheques were
also tendered in evidence.
[31]
The documents submitted
are in line with the testimony of the appellant. The appellant should therefore
be entitled to deduct under section 9 of the Income Tax Act the amounts
that she gave to her drivers in the form of bonuses and gifts.
[32]
The appellant claimed
as advertising expenses donations she made to charitable organizations. The
amounts are $225 in the 2003 taxation year and $561.76 in the 2004 taxation
year. The link between the donations and advertising was not established in evidence.
I am not satisfied, in light of the evidence, that these donations were made
for the purpose of gaining or producing income from the appellant’s paper
distribution business. Accordingly, the donations are not deductible.
Home office expenses
[33]
The appellant claimed the
amounts of $3,112 for the 2003 taxation year and $4,991 for the 2004 taxation
year as home office expenses. The Minister of National Revenue allowed $906.37
for the 2003 taxation year and $911.27 for the 2004 taxation year.
[34]
At trial, the appellant
presented a plan of her house. The appellant’s home is 1,710 square feet. I am satisfied
on the evidence presented at trial that the appellant was using 201 square feet
of her home as an office. Therefore, she is entitled to deduct as home office
expenses the amounts of $1,521.97 for the 2003 taxation year and $1,530.20 for the
2004 taxation year.
Bad debt
[35]
The appellant is
claiming a deduction of $1,998 for her 2004 taxation year as a bad debt expense.
The appellant stated that she loaned the money to one of her drivers, Donna Wagler,
for the purpose of buying a vehicle. The appellant testified that it is
impossible to collect that amount from Ms. Wagler. The only document that she
tendered was a copy of a cancelled cheque for $2,000 dated June 18, 2004 and
payable to the order of Ms. Wagler. There is no annotation on the cancelled
cheque to indicate its purpose: see Exhibit A-8, appellant’s Document Brief,
Tab 8.
[36]
Counsel for the respondent
established through cross-examination that Ms. Wagler barely worked for
the appellant. Ms. Wagler was paid $500 and $140.27 by the appellant for
the 2003 and 2004 taxation years respectively: see appellant’s Document Brief,
Tab Q, pp. 13 and 14.
[37]
I agree with the respondent
that the evidence does not establish that the loan was made for the purpose of
gaining or producing income from a business under section 9 of the Income
Tax Act; it was a personal loan.
[38]
First, there is no
documentary evidence as to the purpose of the cheque; second, Ms. Wagler
barely worked for the appellant; third, Ms. Wagler did not testify. The appellant
stated that she could not testify because her mental health did not permit her
to do so.
[39]
I therefore reject the
argument of the appellant that the purpose of the loan was to protect and
increase the appellant’s existing business. In any event, it could not have
been a bad debt, since the appellant does not meet the conditions of paragraph
20(1)(p) of the Income Tax Act in that the amount claimed was
never included in her income.
Costs
[40]
Under the informal
procedure, costs are governed by subsection 18.26 of the Tax Court of Canada Act (the
Act) and sections 10 to 14 of the Tax Court of Canada Rules (Informal
Procedure) (the Rules).
Section 18.26 of the Act reads:
18.26 (1) The
Court may, subject to the rules, award costs. In particular, the Court may
award costs to the appellant if the judgment reduces the aggregate of all
amounts in issue or the amount of interest in issue, or increases the amount of
loss in issue, as the case may be, by more than one half.
Consideration of offers
(2) The Court may, in deciding whether to
award costs, consider any written offer of settlement made at any time after
the notice of appeal is filed.
Section 10 of the Rules reads:
10. (1) The
Court may determine the amount of the costs of all parties involved in any
proceeding, the allocation of those costs and the persons required to pay them.
(2) The Court may award costs to the
respondent, in an amount not exceeding the amounts listed in section 11, only
if the actions of the appellant unduly delayed the prompt and effective resolution
of the appeal.
(3) The Court may direct the payment of
costs in a fixed sum, in lieu of any taxed costs.
[41]
I agree with the
appellant that the above provisions do not prevent the Court from awarding costs to an appellant where the appeal results in a reduction of the
amounts assessed of less than one half.
The tariff is found at section 11 of the Rules:
11. On
the taxation of party and party costs the following fees may be allowed for the
services of counsel
(a) for the preparation of a
notice of appeal or for advice relating to the appeal, $185;
(b) for preparing for a hearing,
$250;
(c) for the conduct of a hearing,
$375 for each half day or part of a half day; and
(d) for the taxation of costs,
$60.
[42]
At the end of the
trial, the appellant requested that I award him costs above the tariff. He
submitted a bill of costs amounting to $6 752.
[43]
Counsel for the
respondent then asked for, and was granted, permission to submit written
submission on costs. The appellant filed written submissions in reply. Each
party then filed an additional letter with the responding to each other’s
earlier submissions.
[44]
I understood that the
main reason the appellant was seeking costs above the normal tariff was because
she considered that the respondent had failed to concede some deductions
despite the suggestion of the Associate Chief Justice Rossiter at a pre-trial conference
that she do so. The appellant pointed out that no new substantive new evidence
was offered and no new arguments were unveiled during the trial.
[45]
In response to this
argument, the counsel for the respondent wrote in her written submissions at
paragraph 4 that:
[…] the Appellant’s pre-trial memo failed to fully outline the
Appellant’s position. It provided the appellant’s position in respect of
business-use-of-home and vehicle expenses but neglected to mention the other
issues in dispute, such as unreported income, subcontractor expenses, bad debt expenses
and advertising expenses. The respondent could not make a settlement offer or
assess the sustainability of the parties’ position without knowledge of the
Appellants position. In turn, the Appellant never made an offer of settlement
despite being fully apprised of the Respondent’s position.
[46]
In response to the
respondent’s written submissions, the counsel for the appellant in his written
submissions raised additional arguments to support his claim for costs in
excess of the tariff. At paragraph 3 of his submissions, he stated:
3. Costs
above the tariff rate are justified due to the unreasonable positions taken
by and conduct of the respondent which prolonged and increased the costs of
these proceedings as follows:
a) Failure to accept the appellant’s
reasonable position at the pre-trial.
b) The refusal of counsel for the respondent
to communicate with the appellant’s counsel.
c) The breach of professional conduct on the
part of counsel for the respondent which is outlined below.
d) The refusal of the respondent to concede to
any issues in this appeal, despite the directions of both the pre-trial and
trial judges.
[47]
I have carefully read
the correspondence exchanged between the parties in which the possibility of
settlement was raised. The correspondence was included in the parties’ written
submissions on costs. What emerges from reading the documents is that the
parties misunderstood each other and failed to respond clearly to each other’s
correspondence. What is also clear is that neither party made an offer of
settlement. The appellant may have wished to do so but at the end of the day
never did.
[48]
I have summarized the
correspondence below to show that although counsel for the parties may have
been exchanging letters, they were not communicating:
·
In a letter to the
Court dated July 19, 2010, the appellant requested the Court to schedule a
pre-trial conference and indicated that: “Our view is that the matter can be
settled before trial if the issue as to business expenses is settled.”
Although the letter is addressed to the Court and not to the respondent, the
respondent was copied on the letter. There is no indication on the record as to
whether the respondent followed up as to what the appellant meant by “the
matter can be settled before trial if the issue as to business expenses is
settled.”
·
After the pre-trial
conference, by letter dated October 4, 2010, the appellant sought the
respondent’s confirmation on what had been decided at the pre‑trial
conference. At the end of the letter, counsel for the appellant wrote: “My
client looks forward to resolving this matter with you according to the very
strong suggestion of His Honour.”
·
By letter dated
October 7, 2010, the respondent disagreed with the appellant’s recollection of
what had occurred at the pre-trial conference with respect to some items. In
response to the appellant’s request to resolve the matter, the respondent
indicated a preference for “an holistic approach in our settlement
discussions and will be mindful of the amounts claimed and the reasons that
they are claimed.” However, in closing, the respondent wrote, in addition
to the above, “my understanding is that you are agreeable with the other
expenses and the unreported income assessed”.
·
In response to the
October 7th letter, the appellant, by letter dated November 10, 2010, addressed
some of the pre-trial issues in dispute and asked the respondent to respond to particular
issues. However, the appellant did not respond to the respondent’s request to
indicate whether he agreed “with the other expenses and the unreported
income assessed”.
·
In response to the
November 10th letter, the respondent by letter dated November 24, 2010, refers
the appellant to her letter of October 4, 2010, although the appellant had
asked her to respond to each issue mentioned in the November 10th letter. Attached
to the November 24th letter are invoices from the auditor that related to the
vehicle of the appellant. Counsel for the respondent had previously stated that
the CRA did not have copies of these invoices.
·
On November 24, 2010,
the appellant wrote to the respondent requesting a second pre-trial conference.
At the first pre-trial conference, Associate Chief Justice Rossiter had
indicated that if a second pre-trial conference were needed, it had to be
arranged before December 1, 2010.
·
In response, by letter
dated November 28, 2010, the respondent advised the appellant that it opposed the
request for a second pre-trial conference.
·
By letter dated
November 30, 2010, the appellant made another request to the Court for a second
pre-trial conference.
·
By letter dated
December 3, 2010 to the Court, the respondent opposed the second request for a
pre-trial conference, but failed to send a copy of this letter to the
appellant.
[49]
The appellant’s
request for a second pre-trial conference was denied by the Court on December
14, 2010.
[50]
As I stated earlier,
the correspondence between the parties shows a failure on the part of each
party to respond to the other. Both parties could have, but never did, make a
written offer of settlement as contemplated by subsection 18.26 (2) of the Act.
I do not consider what was written by the appellant or for that matter by the
respondent, as written offers of settlement.
[51]
The appellant relies
on Walsh v. R., 2010 CarswellNat 470, in support of its request for
costs above the tariff. In Walsh, Justice Sheridan after stating that “in
the absence of special circumstances, costs are to be awarded in accordance
with the tariff”, found special circumstances justifying an award in excess
of the tariff in the failure of the Minister of National Revenue to accept the
settlement offer made by Mr. Walsh. Justice Sheridan was of the view that
because both the facts and the law in the case were clear and since no new
evidence was introduced or new arguments presented at trial, the Walsh appeal
should have not proceeded.
[52]
Special circumstances
depend on the facts of each case. In my view, the circumstances of this case
differ from those in Walsh. First, Walsh was not an informal
procedure appeal but a general procedure appeal. As a result, discovery was
conducted and it was evident from the discovery that the facts did not support
the legislative pre-conditions for assessing the taxpayer. In the present
appeal, the facts were not settled by discovery. The appellant did not maintain
proper books and records and at times did not have any documents to support the
deductions claimed.
[53]
Second, in Walsh
there was only one issue to be decided. In this appeal, there were several
factual issues that remained to be decided. Finally, in Walsh there was
an offer of settlement; here there was none.
[54]
With respect to the
allegation that respondent refused to communicate with counsel, there is no
evidence before me to establish this. It is clear that the parties’ counsel
replied to each other’s letters. As for the allegation that the respondent’s counsel
did not responding to the appellant’s counsel’s phone calls, I do not have any
evidence before me to support this allegation.
[55]
Nor do I do have
evidence before me establishing professional misconduct on the part of the
respondent’s counsel. It is clear that a copy of the letter that the respondent
sent to the Court on December 3, 2010 opposing a second request for a pre-trial
conference should have been sent to the appellant. It was explained by the
acting director of the Toronto office of the Department of Justice that
this occurred through inadvertence. I will give counsel for the respondent the
benefit of the doubt. It should be noted, that counsel for the respondent had
earlier advised the appellant that she would oppose any request for a second pre-trial
conference.
[56]
As to the invoices
relating to the appellant’s vehicle that she sent to the appellant after
stating earlier that CRA did not have them. I do not have any explanation,
except that the she sent the invoices to the appellant on November 24, 2010
well before the trial date on May 9 and 10, 2011. As to the fact, that she sent
the written submissions on costs on May 24, 2011, instead of one week after the
trial date as discussed at the end of the trial, knowing that the counsel for
the appellant would be in vacation, again I do not have any evidence that the respondent
acted in bad faith.
[57]
I agree with counsel
for the appellant that some issues should have been settled before the trial
and I said so during the trial. The documentary evidence tendered at trial with
respect to the deductions relating to the motor vehicle expenses and the home
office was the same as what was given to the respondent. A trial might have
been shortened if the respondent had shown more willingness to settle some issues.
[58]
However, I am of the
view that the failure of the respondent to settle some of the issues in this
case does not amount to special circumstances. As mentioned earlier, there was
no settlement offer made by the appellant, there were a number of issues raised
by the facts and not all the facts had been clearly resolved before the appeal.
[59]
Both parties referred
to the pre-trial conference in their written submissions. I did not give any
weight to either party’s submissions based on the pre-trial conference. In my
view what happens at a pre-trial conference should remain confidential. I agree
with the comments of Justice Carthy of the Ontario Court of Appeal, in Bell
Canada v. Olympia & York Developments Ltd.
where he stated at pp 144-145:
Pre-trials were designed to provide the court
with an opportunity to intervene with the experience and influence of its
judges to persuade litigants to reach reasonable settlements or refine the
issues. None of that would be possible without assurance to the litigants that
they can speak freely, negotiate openly, and consider recommendations from a
judge, all without concern that their positions in the litigation will be
affected.
[…] The pre-trial judge was seeking to
persuade the parties to a settlement on a basis that appeared reasonable to him
at the time. His opinions should not be taken as depriving the parties of
the right to make their own assessments as to their best interests and to form
their own opinions as to the likely outcome […].
[60]
In light of the above
facts and that the aggregate of all amounts in issue were reduced by more than
one half, costs will be granted in accordance with the tariff.
[61]
The appeals are
therefore allowed and I refer the matter back to the Minister of National Revenue
for reconsideration and reassessment on the basis that the appellant is
entitled:
·
to deduct motor vehicle
expenses in the amounts of $10,168.77 for the 2003 taxation year and
$8,390.35 for the 2004 taxation year;
·
to deduct bonus and
gift expenses in the amounts of $2,689.32 for the 2003 taxation year and
$3,350 for the 2004 taxation year;
·
to deduct as home
office expenses the amounts of $1,521.97 for the 2003 taxation year and
$1,530.20 for the 2004 taxation year.
[62]
In all other respects
the appeals are dismissed.
[63]
Costs are granted in
accordance with the tariff.
Signed at Ottawa, Canada, this 29th day of July 2011.
“Johanne D’Auray”
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