Citation: 2010TCC294
Date: 20100607
Docket: 2008-2245(IT)I
BETWEEN:
S. ROSS KEUS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2008-2246(IT)I
BETWEEN:
T. BRUCE KEUS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2008-2248(IT)I
BETWEEN:
CORNELIUS KEUS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally from the bench on April 9, 2010, in Halifax, Nova Scotia.)
V.A. Miller, J.
[1]
At the hearing of these
appeals, Cornelius Keus withdrew his appeal. The appeals of Ross Keus (Ross)
and Bruce Keus (Bruce) were heard on common evidence.
[2]
The issues in these
appeals were whether the following outlays or expenses were made or incurred by
the Appellants for the purpose of gaining or producing income from business:
|
|
2000
|
2001
|
2002
|
|
Bookkeeping
|
|
$10,498.75
|
$2,000.00
|
|
Interest
|
$15,308.28
|
15,508.48
|
16,178.31
|
[3]
The only provision of
the Income Tax Act relied on by the Respondent, was paragraph 18(1)(a)
which reads:
18. (1) General limitations -- 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;
[4]
Ross and Bruce are
brothers. They are commercial fishermen who have worked as partners since April
1, 1996 under the name Keus Brothers (the “Partnership”). It was their evidence
that in April, 1996 they purchased a fishing enterprise from Garfield Robbins
for the amount of $200,000.
[5]
The brothers did not
have the money to complete the purchase and their parents assisted them in
acquiring the necessary funds. It was their evidence that their father and
mother, Cornelius and Elizabeth Keus, gave them approximately $135,000 which
they raised by mortgaging their home to CIBC for approximately $100,000 and by
borrowing approximately $35,000 on a demand loan from CIBC. Ross and Bruce used
the fishing vessel and equipment as collateral to borrow the remaining $65,000
which was necessary to complete the purchase. This evidence was not shaken on
cross examination and it was confirmed by Cornelius Keus.
[6]
Prior to 2001, the firm
of Yonker & Roche prepared the Appellants’ income tax returns. Marian
Scriven became the bookkeeper for the Partnership in February 2001. She stated
that she was hired to set up the books for the Partnership as Yonker and Roche
had been engaged to prepare income tax returns only. They had never prepared
any books for the Partnership. It was her evidence that she prepared and filed
amended returns for the Appellants’ 1996, 1997, 1998 and 1999 taxation years
and that she prepared and filed the original returns for the Appellants’ 2000,
2001 and 2002 taxation years.
[7]
Ms. Scriven stated that
her fees for preparing the books and the tax returns were $2,000 for each year.
She stated that she was paid $10,000 in 2001. She required that the Appellants
pay her $4,000 up front. She received $4,000 in February 2001 and the remaining
$6,000 sometime in 2001. She received the majority of her payments by bank
transfers. It was her evidence that she did not want cheques as it was a
problem to cash cheques from a different province. The Appellants reside in Prince Edward Island and Ms. Scriven resides in Nova Scotia.
[8]
In addition to the
books and the income tax returns, Ms. Scriven prepared two documents for the
Appellants in 2001 - a Partnership Agreement and a document titled Confirmation
of Financing. She stated that her fee for preparing these documents was
$498.75.
[9]
The only documentary
evidence that was presented to the court to substantiate that the Appellants
paid any fees to Ms. Scriven were two cheques. Both cheques were dated December
13, 2001; one cheque was for the amount of $500 and the other was for the
amount of $498.75. Ms. Scriven stated that the cheque in the amount of $500 was
part of her fees for preparing the General Ledger and income tax returns for
the 2002 taxation year.
[10]
I note that in 2000 and
2002, no accounting fees were claimed as an expense in the calculation of the
Partnership income. Ms. Scriven stated that she included the accounting fees in
the item titled Miscellaneous on the Statement of Fishing Income and Expenses.
In 2001, the amount of $2,498.50 was claimed as an accounting expense by the
Partnership.
[11]
I have reviewed the
Statement of Fishing Income and Expenses and the General Ledger which were
prepared by Ms. Scriven for the Partnership for each year in issue. I find that
both the Statements of Fishing Income and Expenses and the General Ledgers are
riddled with errors.
[12]
As an example, the
accounting fees paid to Yonker & Roche in 2000 were listed in the Statement
of Fishing Income and Expenses and the General Ledger as Miscellaneous. In
2000, the interest and bank charges were listed in the General Ledger as
$7,389.02 whereas this item was reported in the Statement of Fishing Income and
Expenses as $15,389.02. Ms. Scriven estimated that the Partnership had incurred
an additional $8,000 in interest expenses. In 2001, the total interest and bank
charges on the General Ledger were $8,557.61. On the Statement of Fishing
Income and Expenses for 2001, the Partnership reported an interest expense of
$15,557.61. This amount included interest amounts which were claimed twice;
ineligible interest expenses; and, estimated interest expenses.
[13]
Counsel for the
Respondent stated that Ms. Scriven did not act with due diligence when she
prepared the General Ledgers and the Statements of Income and Expenses for the
Partnership. I agree. However, the Appellants should not suffer because of Ms.
Scriven’s errors. I do believe that the Partnership did have Ms. Scriven file
amended returns. I also believe that the Partnership paid her the amount of
$2,000 for preparing the General Ledger and income tax returns for each year.
The Partnership is entitled to deduct the amount of $10,498.75 and $2,000 in
2001 and 2002 respectively.
[14]
The Appellants have
given documentary evidence to satisfy me that Cornelius and Elizabeth did have
a mortgage on their home and that they, the Appellants did make the mortgage
payments in April, May, July, August, September, October, November and December
2000, and June 2001.
[15]
In the document titled
Confirmation of Financing, the Appellants confirmed that they were responsible
for making the payments on the loan secured by the mortgage on their parents’
home. The difficulty faced by the Appellants is that the interest expenses for
the loans of $100,000 and $35,000 were not incurred by the Appellants as is
required by paragraph 18(1)(a) of the Act. These interest expenses were
incurred by Cornelius and Elizabeth Keus and are not deductible by the
Appellants.
[16]
After reviewing all of
the evidence, I have concluded that the Partnership did receive a loan
(#4565150) in the amount of $65,000 from the CIBC in 1996. I have also
concluded that the proceeds of this loan was used to purchase the fishing
enterprise from Garfield Robbins in 1996. There was no evidence given with
respect to the amount of interest paid on this loan in 2000. In 2001 and 2002,
the Partnership is entitled to deduct an interest expense for this loan in the
amount of $3,127.29 and $2,549.48 respectively.
[17]
The Respondent has
conceded (a) that the Partnership borrowed the amount of $100,980 in 2002 to
purchase a new fishing vessel and an engine; (b) that the Partnership incurred
an interest expense in the amount of $1,718.49 for this loan (#4565355); and
(c) that the Partnership also incurred an expense of $150.00 to register this loan.
[18]
The Partnership claimed
an expense for banking service charges in 2001 in the amount of $171.14. This
amount is reasonable and is allowed.
[19]
In 2001 and 2002, the
Partnership claimed an interest expense on a loan (#9052928208) that was used
to purchase a truck. The evidence, at the hearing of these appeals, established
that this truck was purchased by Ross and not the Partnership. The evidence
also established that the truck was used by Ross in the fishing business. In
the Reply to Notice of Appeal, the Respondent stated that the vehicles used in
the fishing operation by the Appellants were used 100% for business purposes. I
have concluded that Ross is entitled to deduct the interest expense incurred
with respect to the truck. The interest expense was $752.36 and $922.33 in 2001
and 2002 respectively.
[20]
In conclusion the
Partnership is entitled to deduct bookkeeping fees in the amount of $10,498.75
and $2,000 in 2001 and 2002 respectively. It is also entitled to deduct
interest and banking fees in the amount of $3,298.43 and $4,417.97.
[21]
Bruce and Ross are each
entitled to deduct 50% of the Partnership expenses.
[22]
For all of the reasons
stated above, the appeals are allowed as follows:
a)
In 2001 and 2002, Bruce
is entitled to deduct bookkeeping fees in the amount of $5,249.38 and $1,000
respectively; and, interest and banking fees in the amount of $1,649.22 and
$2,208.99 in 2001 and 2002 respectively;
b) In 2001 and 2002, Ross is entitled to deduct
bookkeeping fees in the amount of $5,249.37 and $1,000 respectively; and,
interest and banking fees in the amount of $2,401.58 and $3,131.31
[23]
Each party shall bear
its own costs.
Signed at Ottawa, Canada, this 7th day of June 2010.
“V.A. Miller”
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