Citation: 2009 TCC 149
Date: 20090312
Dockets: 2008-1485(IT)I
2008-1486(IT)I
BETWEEN:
ETLEVA MALLTEZI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
AND BETWEEN:
EDUART MALLTEZI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1] Eduart Malltezi and his wife, Etleva Malltezi, appeal
assessments relating to losses incurred through Mr. Malltezi’s efforts to
manufacture and sell a glass cleaning machine. The assessments relate to 2002,
2003 and 2004.
[2] The amount of the business losses that are being
claimed are as follows. Mr. Malltezi claims losses of $21,698 for 2002,
$20,193 for 2003, and $9,016 for 2004. Mrs. Malltezi claims losses of $19,541
for 2002, $20,194 for 2003, and $7,472 for 2004.
The issues
[3] At the beginning of the trial, there was some uncertainty
as to the relief that was being sought by the appellants.
[4] The uncertainty was not with the business losses that
were claimed. It was about other items that were claimed and were disallowed by
the Minister. For Mr. Malltezi, the assessments also disallowed
professional losses. For Mrs. Malltezi, the assessments also disallowed
professional losses and a claim for a GST rebate.
[5] Mr. Malltezi represented both appellants at the
hearing. He was unfamiliar with tax matters but he confirmed that the
professional losses were a duplication of the business losses and should not
have been claimed. He did not know whether a GST rebate was available and left
that in the Court’s hands.
[6] The issues, then, are as set out below.
(a)
Are the appellants entitled to
business losses?
(b)
If so, what are the proper amounts
that are deductible?
(c)
Is Mrs. Malltezi entitled to a GST
rebate?
Are the appellants entitled
to business losses?
[7] In the reply, the Minister submits that the expenses
incurred by the appellants were not incurred for the purpose of earning income
because the appellants did not carry on a business or commercial activity.
[8] Mr. Malltezi, the only witness at the hearing,
provided a significant amount of evidence to show that he and his wife were
carrying on a bona fide commercial activity in partnership during the
taxation years at issue.
[9] I find that Mr. Malltezi was a credible witness and I
accept his testimony. I would also note that the testimony was extremely
well-supported by corroborating documentation.
[10] The background to the losses is set out in a prepared
statement that Mr. Malltezi read during his testimony. The relevant parts
are reproduced below.
1.
On April 2001, I opened a Business named GLASS EQUIPMENT BUILT,
with Business license as a sole proprietorship, effective March 2001.
2.
Since expenses for this Business were family contribution from the
beginning, we decided to write down a Partnership Agreement between each
other; my [w]ife and myself. Therefore the business changed from sole
proprietorship to partnership on January 2002.
3.
We rented a unit in industrial area: Unit # 35, 2299 Drew Rd.
Mississauga, Ontario. A lease Agreement for the pr[e]mises
above term from May 15, 2001 to May, 2004 signed: on April
2001.
4.
A Business plan was prepared for horizontal glass washing machine.
5.
A design and draft for manufacture was prepared.
6.
The machine was built and here are the pictures of the machine taken in
our shop and in the exhibition show.
7.
After the machine was built, was sent to exhibition WIN-DOOR on November
14, 15, 16 2001 which we can prove by showing the bills paid to Canadian
window & door Manufactures Association , [Mendelssohn] (transportation
company) who took the machine to the Exhibition show and Freeman decorating
Ltd. bills for expenses in the booth.
8.
Market research was done using internet, discussions with individuals
who visited the show, yellow pages, flyers and business cards, handed over in
exhibition.
9.
On April 2003 we hired a company named sybervision media to build
a web page with pictures and all contact information’s for this machine, and
the business itself.
10. In order
to be up to the market’s need I upgraded and redesigned the machine, and here
are some drawings for universal Glass Washer.
11. Here are
some pictures of this machine manufactured taken in our shop and in exhibition
show on November, 2005.
12. Here is a
bill paid to Mc kenzie, darg Ltd. Photography for photos taken in exhibition.
13. The
universal Glass Washer machine is sent to exhibition win-door on November
2005 and to prove that we have the bills paid to Canadian window & door
manufactures Association and [Mendelssohn] (Transportation Company) who took
the machine in the show.
14. After each
exhibition we had calls from some companies, asking for price and technical
information. On the last exhibition in 2005 there was a great interest for
universal washer. An order was placed for the same machine but different
dimension from Berdick Windows and Doors (Manitoba).
15. Machine
was build and delivered to the c[u]stumer, Instruction manual was prepared, and
Machine was return back in a month due to the damages made by the
transportation.
16. Besides
building the machine, since we were not getting any result in business we asked
for more: To rebuild old glass washer and service in those machines, but the
hours of operation we were offering 5-9 afternoon every day and all weekends
wasn’t enough for a success business. We added this kind of offer in our flyers
and delivered door to door or faxed to them.
[11] It is difficult to know why in making the assessments
the Minister concluded that this was not a commercial activity. It is a moot
point, however, because counsel for the Minister properly conceded during
argument that there was a bona fide commercial activity.
[12] Instead, counsel for the Minister argued that the
business had not commenced during the taxation years at issue because the
machine was just at the development stage.
[13] At the outset, I would make a preliminary comment that
this argument should have been mentioned at the opening of the hearing before
the evidence was led. Fortunately, I do not think that there was any prejudice
in this particular case because Mr. Malltezi’s evidence was so detailed. But as
a point of procedure, any new arguments that a party anticipates making should
be raised at the opening of the hearing.
[14] Turning to the merits of the argument, the Minister
submits that the business did not commence until after 2004. I disagree with
this submission.
[15] In my view this business commenced when Mr. Malltezi
took significant steps towards developing this product. It certainly commenced
prior to January 1, 2002 which is the beginning of the period at
issue. Before that time, business premises had been leased and the first
version of the machine had been built.
[16] A bona fide business was conducted throughout
the taxation years at issue and the deduction of losses should not be
disallowed on this basis.
What are the proper amount of
losses that may be deducted?
[17] The calculation of the business losses by the
appellants was a bit of a mess. Mr. Malltezi admits this.
[18] The appellants used the tax preparation services of
H&R Block in 2002. Some expenses were improperly deducted in that year.
Even more improper deductions were claimed in 2003 and 2004 when the appellants
decided to save money and prepare their own returns.
[19] In any event, I conclude that the following
adjustments should be made to the business losses that were claimed in the
income tax returns.
(a)
There should be no deduction for
cost of goods sold in any of the taxation years at issue. The machine was not
sold until 2005.
(b)
There should be no deduction for
bad debts in any of the taxation years at issue.
(c)
There should be no deduction for
motor vehicle expenses in any of the taxation years. These expenses relate to
travel between home and work which is a personal expense.
[20] During the hearing, Mr. Malltezi admitted that the
professional losses should not have been claimed and I do not need to consider
this.
Is a GST rebate available to
Mrs. Malltezi?
[21] As mentioned above, Mr. Malltezi did not make any
submissions regarding the GST rebate. He put this matter in the hands of the
Court.
[22] Counsel for the Minister informed me that this rebate
is available for expenses incurred directly by a partner in a partnership. If
that is the case, there is not sufficient evidence on which I could conclude
that this rebate is available here. I conclude that the GST rebate should be
disallowed.
Conclusion
[23] As a result of these findings, the conclusions that I
have reached are summarized below.
(a)
Mrs. Malltezi’s appeal with
respect to the GST rebate claim for 2003 will be dismissed.
(b)
The appeals with respect to
assessments made under the Income Tax Act for the 2002, 2003 and 2004
taxation years will be allowed, and the assessments will be referred back to
the Minister for reconsideration and reassessment to allow deductions for the
expenses claimed except for: (1) all professional losses, (2) all deductions
for cost of goods sold, (3) all bad debt expenses, and (4) all motor
vehicle expenses.
[24] There will be no order as to costs.
Signed at Toronto, Ontario this
12th day of March 2009.
“J. Woods”
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