Citation: 2009 TCC 278
Date: 20090522
Docket: 2008-3147(IT)I
BETWEEN:
DONALD S. TOBIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1] The appellant,
Donald Tobin, appeals an assessment made under the Income Tax Act
for the 2005 taxation year. At issue is the deductibility of expenses relating
to a sole proprietorship which operated under the name Freight Class 101
Consulting (the “Business”).
[2] The amounts for which Mr. Tobin seeks deductions are
summarized in a written submission that was filed after the hearing (Appellant’s
submission, para. 97). There are a large number of relatively small
expenditures involved, which in aggregate total $20,591.55.
[3] The assessment at issue allowed deductions in the
aggregate of only $2,941.14. The remainder of the amounts claimed were
generally assumed by the Minister not to have been incurred, or not to have been
related to the Business.
[4] At the hearing, the Minister made some concessions
which were relatively minor. The revised amounts are summarized in a written
submission filed after the hearing (Respondent’s submission, Appendix B). As the
summary appears to contain a clerical error, I will not confuse matters by
setting out the revised position.
[5] I would also mention that Mr. Tobin’s submission filed
after the hearing contained a number of factual statements that were not
mentioned at the hearing. I have not taken these into account.
Discussion
[6] It is acknowledged by the Minister that the Business
was a bona fide business that commenced in 2005. The only issue is the
proper amount of expenses that are deductible.
[7] Mr. Tobin has
the initial onus to disprove the assumptions on which the assessment was based.
He was the only witness at the hearing.
[8] The Business was in a preparatory state in 2005 and no
revenues were earned. Mr. Tobin was also employed in that year on a full-time
basis as an account executive with a freight company operating in Canada under
the name Con‑way Canada Express.
[9] The nature of the Business and the activities
undertaken in 2005 were summarized by Mr. Tobin in a letter to the Canada
Revenue Agency during the audit (Ex. R-1). Below is the relevant excerpt:
Freight Class 101 Consulting is a company I started to formulate in
January 2005. I started working on developing a course outline and talking
to customers in early months of 2005. I was at that time employed by Con-Way
Canada Express a division of Con-Way/CNF Corp from the USA. In Canada we
calculate our freight rates via size and weight or density. To and from the USA
there is a far more complicated set of rules that do not always make common
sense. In 2005 I was working toward giving classes to companies and individuals
to teach them about the rules and classification on freight that moves between
the USA and Canada. To this end I would have meetings with people I knew in the
industry, as well as many customers and discuss their knowledge and needs in
regards to International freight. This included meetings where I would
entertain and ask them for their time and knowledge in areas such as purchasing
procedures, shipping and receiving procedures and any problems they have had
with freight rates and classification.
[10] One of the main issues in this appeal is whether the
disallowed amounts reasonably relate to the Business or are in the nature of
personal expenditures. If the expenses are personal, the deduction is
disallowed by paragraph 18(1)(h) of the Act.
[11] For the most part, Mr. Tobin sought to establish the
connection between the expenses and the Business through his own testimony.
[12] In order for self-interested testimony such as this to
be sufficient proof, the testimony needs to be straightforward, complete,
detailed and cogent. In many respects, Mr. Tobin’s testimony fell far short of
this mark.
[13] The conclusion that I have reached is that the deductions
allowed by the Minister are generally fair.
[14] I now turn to specific items.
Start date of business
[15] In making the assessment, the Minister assumed that
the Business commenced on June 1, 2005. Expenses incurred prior to that time
were accordingly disallowed.
[16] For purposes of this appeal, the parties reached a
compromise agreement on a commencement date. The date is agreed to be March 1,
2005 and the Minister’s written submission has taken this into account.
Pick up truck
[17] Mr. Tobin claims deductions in relation to a pick up
truck, which according to his testimony was used for purposes of the Business. He
submits that the truck was used 90 percent of the time for business purposes, for
a total of approximately 17,000 business kilometers.
[18] According to Mr. Tobin’s written submission, the
deductions claimed with respect to the truck are: $2,184 for fuel, $586 for
insurance, $2,371.94 for maintenance and repairs, and capital cost allowance in
the amount of $4,012.75.
[19] The Minister disagrees with this claim in two
respects.
[20] First, the Minister has assumed that the business use
of the truck did not exceed 30 percent.
[21] Second, the Minister assumed that the business-related
expenditures on maintenance and repairs are $742.30 (Reply, para. 12(o)). This
was increased to $1,032.30 as a result of the change in commencement date (Respondent’s
Submission, para. 56).
[22] I would first mention a problem with the computation
by the Minister of the deduction for maintenance and repairs.
[23] In the
assessment, the Minister allowed a
deduction for maintenance and repairs of only 30 percent of $742.30 (Reply,
para. 11). It is not appropriate to make this personal use reduction because
the Minister had assumed, according to the Reply at least, that $742.30 represents
the business portion only.
[24] As
regards all of the truck expenditures,
the main issue is the proportion of business use. My conclusion is that the
Minister’s assumption of 30 percent business use should not be disturbed.
[25] I would first note that Mr. Tobin did not make a
mileage log available in support of his claim for 90 percent business use of
the truck. Although a negative inference is often warranted in these circumstances,
I have not done so because Mr. Tobin provided a plausible explanation for
the loss of the relevant records.
[26] Although I have not made a negative inference from the
failure to produce a log, I have nevertheless not been convinced by Mr. Tobin’s
position regarding the business use of the truck. My reasons are as follows.
[27] By way of
background, the truck had belonged to Mr. Tobin’s common‑law spouse before they commenced living together around
March 2005. At times during the testimony, Mr. Tobin referred to the vehicle as
his spouse’s. However, he did claim, and was allowed, capital cost allowance
with respect to the vehicle. It appears that the Minister did not question the purported
ownership of the vehicle during the audit.
[28] In
addition to having use of the truck, Mr.
Tobin also had use of a Con-way company car. It was available for any use and
Con-way reported a $3,000 taxable benefit in respect of “personal use” in
2005.
[29] There was some suggestion at the hearing that Mr.
Tobin paid for personal use of the Con‑way car but I do not think that
this is supported by the evidence as a whole.
[30] In his written submission, Mr. Tobin brings up the
possibility (which was not raised during the testimony) that he and his spouse
may have had other automobiles available to them. At page 18 he states:
[…] I have not
been asked nor did I testify to the availability of other autos for our use. I
testified that I sold the 1999 Chevy Tahoe in December of 2004. Do you think
that Ms. Moir [common-law spouse] would be without a vehicle having release[d]
the Chevy truck to me for business use? There is also no testimony in the
record as to the ability of Ms. Moir to operate a vehicle at all times in 2005.
The Respondent seems to be in the habit of forming assumptions without fact and
is creating a scenario without proper information or foundation to support
their version of events.
[31] This submission is contradictory to a statement made
by Mr. Tobin in a letter to the CRA written during the audit process. In that
letter (Ex. R-1), Mr. Tobin states:
[…] In 2005 we
had three vehicles at our disposal, a 1999 Chevy Tahoe, license (DAH051) also
the 2001 Chevy Truck (USL844) and a car provided to me from Con-way Canada
express.
[32] There are
a couple of problems with these statements. First, the reference to the 1999
Tahoe in the letter to the CRA appears to be misleading at best. This vehicle
was sold in 2004. Also, the letter makes
no mention of another vehicle, as suggested in Mr. Tobin’s submission to the
Court.
[33] At best these statements are misleading, and I find them to be troubling in relation to the reliability of Mr.
Tobin’s testimony in general.
[34] In
addition to this, when the evidence regarding the use of vehicles is considered
as a whole, the amount of business use
that is claimed, 17,000 kilometers, seems very high.
[35] It is difficult to understand how Mr. Tobin could
conveniently and economically use the truck in connection with the Business. It
makes more sense for the Con-way car to be used throughout the business day,
unless the truck was needed for a particular use relating to the Business.
[36] Mr. Tobin did provide an explanation as to how he used
the Con-way car and the truck but I did not find the explanation to be
convincing.
[37] Mr. Tobin’s employment as an account executive with
Con-way required him to be on the road visiting customers on a constant basis.
A company car was made available for this purpose, and there was no restriction
on its use.
[38] Much of
the activity in relation to the Business occurred during the regular work day
when Mr. Tobin was also engaged in Con-way business. There was also an overlap
between Con-way’s customers and persons whom Mr. Tobin would want to contact in
connection with the Business.
[39] I accept that the truck was needed for the Business on
occasion, for example for safety demonstrations, but I am not satisfied that
the Business need was a common occurrence.
[40] The Minister has agreed to deductions relating to the
truck based on 30 percent business use. I am not satisfied that further deductions
are warranted.
[41] Based on the foregoing, the expenditures that should
be allowed with respect to the truck are 30 percent of the following: (1)
$2,184 for fuel, (2) $586 for insurance, and (3) $4,012.75 for capital cost
allowance. In addition, a deduction for maintenance and repairs on the truck in
the amount of $1,032.30 should be allowed.
[42] Regarding capital cost allowance on the truck, I would
mention that Appendix B of the Minister’s submission appears to contain an
error because CCA has not been reduced for personal use. This is inconsistent
with the assumptions in the reply and it appears to be a clerical error in
Appendix B. The CCA should be pro-rated to take personal use into account.
Legal fees
[43] During his testimony, Mr. Tobin abandoned a claim for
a deduction in the amount $187.50 for legal fees.
[44] It is unclear to me from the written submission whether
Mr. Tobin now wishes to revive this claim. If that is the case, I am afraid
that it is too late.
[45] Mr. Tobin also made a claim for $60 in respect of a
building permit for renovations to his home and yard. I am not satisfied that
this reasonably relates to the Business.
Rent
[46] A deduction on account of rent in the amount of $278
was disallowed by the Minister. This claim has been abandoned.
[47] During
his testimony, however, Mr. Tobin stated
that he is also claiming a deduction for $104.86 on account of storage for one
month. The expenditure is likely included as part of office expenses, he stated.
I am not satisfied that the storage charge is reasonably attributable to the
Business as opposed to being a personal expense. It should not be allowed.
Interest
[48] A deduction for interest in the amount of $2,190 is
being claimed. It is suggested that $657 relates to the truck and that the
balance should be allocated to working capital for the Business.
[49] The Minister disallowed the deduction in its entirety.
[50] I would
agree with the Minister on this issue.
[51] In order for interest to be deductible, it is
necessary to trace the direct use of the borrowed money to a business use. The
evidence as a whole is insufficient to satisfy this requirement.
[52] Mr. Tobin testified that the borrowed money relates to
a line of credit which was obtained prior to 2005 for the purpose of purchasing
the Tahoe that was sold in 2004. I understand that the sale proceeds from the
Tahoe, $8,750, were used to purchase a principal residence. Mr. Tobin suggests
that this should be attributed to business use because he received his spouse’s
truck, or at least use of it, in return.
[53] It may have been possible to trace some of the
borrowed money to the truck if the evidence had clearly established that the
spouse had transferred beneficial ownership of the truck to Mr. Tobin in
exchange for giving up an interest in the home. The evidence was insufficient
to establish this.
[54] As for the balance of the borrowed money, there is not
sufficient evidence which traces this to a business use.
[55] The deduction for interest was properly disallowed by
the Minister.
General business expenses
[56] Mr. Tobin claims a deduction for expenses totaling
$4,614 under the category “Business.” During the hearing, Mr. Tobin did not
dispute that $2,810 of this amount should be capitalized in respect of
equipment purchases.
[57] The position of the Minister is that a total of $1,077
should be allowed as current expenses and that $2,810 should be treated as the
cost of capital expenditures.
[58] Mr. Tobin submitted a list of the expenses that were
incurred. A large number of them seem to be personal expenses. There is not a
sufficient evidentiary basis to allow a greater deduction than what the
Minister has allowed.
Meals and entertainment
[59] Mr. Tobin is claiming deductions for meals and
entertainment in the amount of $999.79 on the basis that this represents
one-half of business-related meal and entertainment expenses.
[60] The Minister’s position is that the deduction should
not exceed $471.49.
[61] Mr. Tobin testified that he incurred these expenses to
solicit customers for the Business, develop a client base and to make sure that
he understood the customer’s needs.
[62] The Minister has allowed approximately one-half of the
expenses claimed. In the absence of more detailed evidence, there is not a
sufficient basis to allow a greater deduction than what the Minister has agreed
to.
Cell phone
[63] Mr. Tobin claims a deduction for cell phone use in the
amount of $921.48.
[64] In the assessment, the Minister did not allow any part
of this but the Minister now concedes a deduction in the amount of $200.
[65] I accept that more than $200 of cell phone charges
reasonably relate to the Business. In the absence of better evidence, I am
prepared to accept an arbitrary increase to $400 as a reasonable deduction for
business use of a cell phone.
Travel
[66] In the income tax return, Mr. Tobin claimed a
deduction for business‑related travel in the amount of $2,026.16. All of
this was disallowed by the Minister.
[67] Mr. Tobin did not attempt to justify all of these
amounts at the hearing. What he did claim is an amount for air fare and car
rental for a week long trip that he and his spouse took to Nevada. Part of
the trip was admittedly personal.
[68] Mr. Tobin introduced into evidence a letter from an acquaintance
in Nevada which stated that he had met with Mr. Tobin in Nevada about
investing in the Business.
[69] I accept that this meeting took place, but I am not
satisfied that the business aspect of the Nevada trip was a substantial part. In particular, I do not
accept Mr. Tobin’s evidence that the business meeting lasted several days.
[70] In my view, the Minister was correct not to allow a
deduction for any part of this trip. If a taxpayer conducts a small amount of
business on what is essentially a personal trip, in my view the expenses of the
trip do not thereby become deductible. It is a matter of degree, but in this
case, I am not satisfied that the trip had a sufficient business connection to
justify a deduction.
Parking
[71] An expense of $11.70 for parking has been conceded by
the Minister.
Home expenses
[72] The parties agree that the home expenses have been
properly disallowed.
Conclusion
[73] As a result, the appeal will be allowed, and the
assessment will be referred back to the Minister to make the following
adjustments:
(a)
with respect to the truck,
deductions should be allowed for 30 percent of the following: (1) $2,184 for
fuel, (2) $586 for insurance, and (3) $4,012.75 for capital cost
allowance. In addition, a deduction for maintenance and repairs on the truck in
the amount of $1,032.30 should be allowed;
(b)
with respect to general business
expenses, a total of $1,077 should be allowed as current expenses and $2,810
should be considered as the cost of capital expenditures on equipment;
(c)
with respect to meals and
entertainment, a deduction should be allowed in the amount of $471.49;
(d)
with respect to a cell phone, a
deduction in the amount of $400 should be allowed; and
(e)
with respect to parking, a
deduction in the amount of $11.70 should be allowed.
[74] As for costs, each party shall bear their own.
Signed at Toronto, Ontario this
22nd day of May 2009.
“J. Woods”
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