Citation: 2011 TCC 84
Date: 20110210
Dockets: 2010-29(IT)I
2010-30(IT)I
BETWEEN:
ROBERT W. TIEDE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
AND BETWEEN:
MYRNA D. TIEDE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1]
Robert and Myrna Tiede appeal in
respect of assessments made under the Income Tax Act. The appeals relate
to deductions claimed by the appellants in relation to a rental property and to
deductions claimed by Mr. Tiede as expenses of a photography business.
[2]
Mr. Tiede’s appeal relates to the
2003, 2004 and 2005 taxation years. Mrs. Tiede’s appeal relates to the 2004 and
2005 taxation years.
Photography activity
[3]
Prior to the taxation years at
issue, Mr. Tiede was employed by Atomic Energy of Canada Ltd. (AECL) in Pinawa, Manitoba.
In February 2003, AECL announced that it was laying off staff at that location
and Mr. Tiede’s employment was terminated effective early June 2003.
[4]
Shortly after the layoff
announcement was made in February 2003, Mr. Tiede concluded that his days at
AECL were numbered and he decided to pursue self-employment in the field of
photography. He had been keenly interested in photography as a hobby for many
years.
[5]
Business plans were immediately
commenced in February 2003. The area of photography that Mr. Tiede chose
involved significant preliminary work because he did not have the equipment or
the training in that particular field – digital imaging. In addition, extensive
renovations were required to Mr. Tiede’s basement to accommodate the
photography equipment.
[6]
The preliminary activities were
actively pursued beginning in February 2003. The plans were interrupted,
however, in September 2003 when AECL offered to cancel Mr. Tiede’s layoff. Mr.
Tiede accepted their offer and he has been employed by AECL since that time.
[7]
Subsequent to his re-employment,
Mr. Tiede continued with the photography activity but at a much different pace
and not with the expectation that products or services would be brought to
market in the near future. Even now, Mr. Tiede continues to take photographs on
semi-annual trips but he has no definite timeframe for when he might be in a
position to sell them.
[8]
In the 2003, 2004 and 2005
taxation years, Mr. Tiede claimed deductions as business expenses in the
aggregate of $11,135.11, $4,121.11, and $8,941.33, respectively. In this
period, no revenues were generated except for $43.15 for passport photos which
Mr. Tiede undertook in order to earn some revenue at the suggestion of his
accountant.
[9]
The respondent submits that the
assessments correctly disallowed the losses claimed by Mr. Tiede because the
business never reached the commencement stage. Alternatively, the respondent
submits that there are specific provisions of the Act that disallow many
of the expenses in any event.
[10]
I will deal with each of these
issues separately.
[11]
As for whether the business commenced
at all, the conclusion that I have reached is that a business did commence
early in February 2003. However, I am not satisfied that the business continued
throughout the relevant taxation years. In my view, the business ceased to
exist in September 2003 when Mr. Tiede decided to return to AECL.
[12]
The decision of Bowman J. (as he
then was) in Gartry v. The Queen, 94 DTC 1947 (TCC) provides a useful
description of the test that should be applied in determining whether a
business has commenced. At page 1949, he stated:
[…] In determining when a business has commenced, it is not
realistic to fix the time either at the moment when money starts being earned
from the trading or manufacturing operation or the provision of services or, at
the other extreme, when the intention to start the business is first formed.
Each case turns on its own facts, but where a taxpayer has taken significant
and essential steps that are necessary to the carrying on of the business it is
fair to conclude that the business has started. […]
[13]
In this case, I am satisfied that
Mr. Tiede took significant steps early on towards bringing products and
services to market within a reasonable timeframe. Early in 2003, he developed
plans for the photography business and throughout the spring and summer he
actively pursued these plans by buying equipment, undertaking training, and beginning
renovations to his basement. If events had not unfolded as they did with AECL, I
expect that Mr. Tiede would have been in a position to market photography
products and services in a relatively short period of time. As a matter of
common sense, Mr. Tiede should be able to deduct reasonable business expenses
during the period that the business was being actively pursued.
[14]
The situation changed
significantly, however, when Mr. Tiede decided to go back to AECL. No longer
did he have a definite plan to bring products or services to market within a
relatively short period of time. The activity from that point bore more characteristics
of a personal endeavour (a hobby) than a commercial pursuit.
[15]
Mr. Tiede submits that the nature
of his plans did not change; he continued to pursue the activity with the goal
of eventually selling photography products and services. He submits it was only
the time frame to bring it to market that changed.
[16]
I cannot agree with this
characterization. Almost eight years have passed since this business plan was
first developed and Mr. Tiede’s plans still remain in the formative stages. As
a matter of common sense, the nature of the undertaking changed fundamentally
from being an active business to a personal endeavour in the fall of 2003. I
would note that photography has been a long-time pastime of Mr. Tiede and the
activity involved pleasurable aspects beyond picture-taking (i.e., trips to
vacation destinations or to relatives).
[17]
In the circumstances, expenditures
that were claimed for 2003 that are reasonably attributable to the period up to
the time AECL offered to take Mr. Tiede back (mid-September) will be allowed to
the extent that they are otherwise deductible under the Act. No
deductions will be allowed for expenditures after this time.
[18]
The expenditures claimed by Mr.
Tiede for 2003 are listed in Schedule A to the reply. They are reproduced below.
|
|
2003
|
|
|
|
|
Advertising
|
$ 116.27
|
|
Delivery,
Freight
|
18.95
|
|
Meals and
Entertainment
|
144.80
|
|
Office
|
546.33
|
|
Supplies
|
908.13
|
|
Travel
|
2,770.22
|
|
Telephone and
Utilities
|
432.81
|
|
Professional
Development
|
629.15
|
|
Portfolio
Development
|
4,038.01
|
|
Capital Cost
Allowance
|
1,530.44
|
|
Total Expenses
|
$ 11,135.11
|
[19]
I now turn to whether these claims
satisfy the other requirements of the Act.
[20]
Starting with portfolio
development in the amount of $4,038.01, this claim will be disallowed in its
entirety. This item relates to photographs taken in years prior to 2003 and Mr.
Tiede was not certain how the amount was calculated by the accountant. I am not
satisfied by the evidence that the prior photographs actually became business
assets, and in any event there was insufficient proof as to the cost or value
of this property.
[21]
As for travel, in the summer of
2003 Mr. Tiede and his wife took three trips: an Alaskan cruise, a trip to Calgary, and a
trip to Waterton Park. On the Alaskan cruise, Mr. Tiede was enrolled in a
photography course and on the other trips he spent time taking photographs.
[22]
The deduction for the cost of the trips
to Calgary and Waterton Park will be disallowed in their entirety as personal
expenses which were not incurred in the course of the business. Even though a
business had commenced, I am not satisfied that these trips were connected to
it.
[23]
Mr. Tiede had a long history of
taking photographs on vacations and I am not satisfied that these trips were
any different. Mr. Tiede testified that the photographs would be part of his
stock photos for sale. However, I am not satisfied that the business plans had
advanced to the stage that these photographs became part of the business
assets. These photographs, like photos taken in prior years, remained Mr.
Tiede’s personal assets that might at some point in the future become business
assets.
[24]
As for the Alaskan cruise, I am
satisfied that the cost of tuition for the photography course is a business
expense ($2,175.48), but I am not satisfied that the travel costs qualify as
such. The problem is that there was no evidence as to whether it was necessary
for Mr. Tiede to take this training in a vacation-type setting. I propose to
allow 50 percent of the cost of room and board on the cruise ($550). This recognizes
that Mr. Tiede would have incurred some travel costs regardless of where the
course was offered. No other expenses in relation to the Alaskan cruise will be
allowed.
[25]
The Alaskan cruise expenses should
not be allowed on current account, however. The training provided by the
photography course is a capital item, and the expenses ($2,725.48) should be
treated as eligible capital expenditures.
[26]
Regarding the meal expenses, I am
not satisfied that they were incurred primarily for business purposes. They
will be disallowed as personal expenses.
[27]
Regarding capital cost allowance
(CCA), capital cost additions to Class 12 in the amount of $674.56 should be
allowed in accordance with the receipts provided (Exhibit A-30).
[28]
The other expenses claimed for the
2003 taxation year will be allowed. As a result, for the 2003 taxation year Mr.
Tiede will be entitled to deduct a business loss based on: deductions on
current account in the amount of $2,022.49, capital cost additions in respect of
Class 12 property in the amount of $674.56, and eligible capital expenditures
in the amount of $2,725.48. Appropriate adjustments should be made to reflect
that the business ceased in September 2003.
Rental property
[29]
In the 2004 and 2005 taxation
years, Mr. and Mrs. Tiede claimed losses in connection with a bungalow that was
purchased in May 2004 and used as a rental property. The main floor was rented
to the Tiedes’ two children and the basement was occupied beginning August 2004
by two tenants who were not related to the Tiedes.
[30]
The children’s rent was $625 per
month for the main floor and the basement tenants paid $595 per month. The
respondent accepts that the rents are fair market value.
[31]
In their tax returns for 2004 and
2005, Mr. and Mrs. Tiede claimed aggregate rental losses in the amounts of
$6,143.96 and $7,404.70, respectively. The losses were allocated equally
between them.
[32]
Some of the expenditures claimed
were disallowed by the Minister, with the result that the aggregate annual
losses were reduced to $965.54 and $96.16, respectively. Mrs. Tiede was also
allowed an additional deduction of $52.
[33]
A breakdown of the amounts claimed
by the appellants and allowed by the Minister is set out in a schedule to the
replies. It is not necessary to reproduce it in these reasons.
[34]
There are three items in dispute:
(1) office expenses, (2) management and administration fees, and (3)
maintenance and repairs.
[35]
I would also mention certain
adjustments that were made by the Minister that are no longer in dispute: (1)
the appellants concede the disallowance of a deduction for travel expenses, (2)
the respondent concedes the capital cost of a vacuum cleaner and appliances,
and (3) the appellants concede that the cost and legal fees for the land
portion of the property does not qualify for capital cost allowance.
[36]
Turning to the amounts in dispute,
as for office expenses, the amounts claimed were $265.65 in 2004 and $517.40 in
2005. These amounts do not actually represent office expenses as indicated in
the tax returns. They are cable and internet charges in respect of the rental
property paid by the appellants. The deductions will be allowed.
[37]
As for maintenance and repairs,
the majority of expenses relate to the costs of painting the rental property.
This was a project undertaken by the entire family. The expenses claimed relate
to supplies and a $10 per hour labour charge for the children’s painting
services.
[38]
The maintenance and repair expense
for 2004 was $5,318.51. It was not
claimed as a current deduction but was treated as capital cost of Class 1
property for capital cost allowance purposes.
[39]
The expense for 2005 was
$3,360.10. One-half of this amount ($1,680.05) was deducted as a current
expense and the balance was treated as capital cost of Class 1 property.
[40]
The Minister has not allowed any
capital cost in respect of maintenance and repairs for 2004 or 2005. However, a
current deduction in the amount of $1,137 was allowed for the 2005 taxation
year.
[41]
In the replies, the respondent put
in issue the capital cost reported in the returns. This is in error in my view
because the capital cost did not affect the assessments. No capital cost
allowance was claimed in either 2004 or 2005. Since these appeals were heard
under the informal procedure, I propose to comment on the capital cost so that it
might provide assistance for future taxation years. However, my comments in
this respect are not binding and will not be reflected in the formal judgments.
[42]
For the purpose of analyzing the
maintenance and repairs expenditures, I will separately review the cost of
supplies and the children’s labour.
[43]
As for the cost of maintenance supplies
in 2004, the respondent conceded at the hearing that the amounts claimed should
be added to Class 1. The concession was made because the appellants produced
appropriate receipts at the hearing. This amount is $2,637.79.
[44]
As for the cost of maintenance supplies
in 2005, the Minister rejected certain receipts as being for personal items.
They include things such as family meals and cat litter. I agree that the
disallowance of these items is appropriate. The cost of supplies should be
reduced from $1,389.20 to $1,137.
[45]
As for the cost of labour in 2004
and 2005, the Minister takes the position that no amounts were paid to the
children. I disagree with this. The appellants did not pay cash to the children
for their painting services but the amounts did reduce the amount owing for
rent. This form of payment is acceptable as long as the record keeping is
proper. I have no reason to believe that it was not.
[46]
Accordingly, I would conclude that
the capital cost claimed for maintenance and repairs for 2004 in the amount of
$5,318.51 is proper.
[47]
As for maintenance and repairs for
2005, the total expenditures are labour of $1,804 and supplies in the amount of
$1,137. I propose that the aggregate amount, $2,941, be divided equally between
current expense and capital cost. The current deduction allowed for 2005 is
therefore $1,470, which is $333 more than what was allowed by the Minister. An
additional deduction of $333 will be allowed.
[48]
I now turn to the management and
administration fees. This was a monthly charge in the amount of $400
purportedly paid to the children who were living in the rental property. The
amounts that were deducted are $2,800 for the 2004 taxation year and $5,040 for
the 2005 taxation year.
[49]
The Minister disallowed the
deduction on two grounds, first, that the fees were not paid, and second, that
the amounts were unreasonable.
[50]
As for whether the fees were paid,
I am satisfied that they were. As with the fees for painting services, the
management and administration charges reduced the amount of rent owing. I see
nothing wrong with this arrangement.
[51]
The respondent also submitted that
the fees should be disallowed as being unreasonable. In light of the
relationship between the parties, it is reasonable to scrutinize the
deductions. To the extent that they exceed what any reasonable business person
would pay, the excess should be disallowed pursuant to section 67 of the Act:
Gabco Ltd. v. MNR, 68 DTC 5210 (Ex Ct), at 5216.
[52]
Based on my notes from the hearing,
Mr. Tiede testified that this amount was paid for extra services provided by
the children in respect of the maintenance of the property. Such services
included cleaning, snow removal, inspections and repairs. The amount paid
represents 40 hours per month at $10 per hour.
[53]
The problem that I have with this
expenditure is that there are no back up records to justify the amounts paid.
No records were kept of the nature of the services and the time spent. Without
these records, it is impossible to be satisfied that the fees are reasonable. I
would also note that aggregate fees paid to the children (painting and
management) virtually offset the rent that was charged. I am not satisfied that
this is reasonable without having proper supporting records. No amount will be
allowed for management and administration.
[54]
When the above adjustments
relating to the rental property are taken into account, the appellants should
be allowed additional deductions in the amounts of $265.65 and $850.40 for the
2004 and 2005 taxation years, respectively. These amounts should be allocated
equally so that each appellant would be entitled to additional deductions in
the amount of $132.83 for the 2004 taxation year and $425.20 for the 2005
taxation year.
Conclusion
[55]
As a final comment, I would note
that some of the items above are based on approximations rather than a
meticulous review of the mountain of receipts which Mr. Tiede introduced into evidence.
In taking this approach, some of my estimates may result in a windfall to the
appellants and in other cases the adjustments may be to their detriment. I have
endeavoured to, on balance, be generous to the appellants. I would also comment
that Mr. Tiede did a commendable job in organizing the receipts for the Court.
[56]
In the result, the appeal of Mr.
Tiede for the 2003, 2004 and 2005 taxation years will be allowed, and the
assessments will be referred back to the Minister of National Revenue for reassessment.
For the 2003 taxation year, Mr. Tiede will be entitled to deduct a business
loss based on: deductions on current account in the amount of $2,022.49,
capital cost additions in respect of Class 12 property in the amount of
$674.56, and eligible capital expenditures in the amount of $2,725.48. For the
2004 and 2005 taxation years, Mr. Tiede will be allowed additional deductions
in the amounts of $132.83 and $425.20, respectively.
[57]
The appeal of Mrs. Tiede will also
be allowed, and the assessments will be referred back to the Minister of
National Revenue for reassessment on the basis that Mrs. Tiede is entitled to additional
deductions for the 2004 and 2005 taxation years in the amounts of $132.83 and
$425.20, respectively.
[58]
The parties will bear their own
costs.
Signed at Ottawa, Canada this 10th
day of February 2011.
“J. M. Woods”
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