Docket: 2008-2192(IT)I
BETWEEN:
DARRELL HYSKA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on January 28, 2009 at Edmonton, Alberta
By: The Honourable
Justice Judith Woods
Appearances:
|
Agent for the Appellant:
|
Jack Isaman
|
|
Counsel for the Respondent:
|
Robert Neilson
|
____________________________________________________________________
JUDGMENT
In respect of
assessments made under the Income Tax Act for the 2004 and 2005 taxation
years, it is ordered that:
1. the appeal in respect of the 2004 taxation
year is allowed, and the assessment is
referred back to the Minister of National Revenue for reconsideration and
reassessment on the basis that the appellant is entitled to an additional deduction in respect of advertising in the amount of $2,000; and
2. the appeal in respect of the 2005 taxation year is dismissed.
Each
party shall bear their own costs.
The
Registry is directed to refund the Court’s filing fee to the appellant.
Signed at Ottawa, Canada this 2nd day
of February 2009.
“J. Woods”
Citation: 2009TCC71
Date: 20090202
Docket: 2008-2192(IT)I
BETWEEN:
DARRELL HYSKA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally from the Bench on January 30, 2009)
Woods J.
[1] These are reasons delivered orally in the matter of
Darrell Hyska and Her Majesty the Queen.
[2] The appeal relates to income tax assessments for the
2004 and 2005 taxation years.
[3] Mr. Hyska is a full time firefighter in Edmonton who
operates two businesses out of his home as well. One of the businesses is a
lawn care business carried on under the name Trim Lawn and the other is a
woodworking business called Emerald Heirlooms.
[4] This appeal relates to the disallowance of certain
expenses claimed in relation to the two businesses. In the two years under
appeal, the appellant claimed business losses of over $20,000 for Trim Lawn and
over $40,000 for Emerald Heirlooms.
[5] The amounts that were disallowed by the Minister were
just over $12,000 for Trim Lawn and just over $11,000 for Emerald Heirlooms.
[6] The appellant disputes some of the items that were
disallowed and I will consider each of these separately.
Stone work and watering
[7] The first item concerns an expense for stones used in
landscaping at the appellant’s residence. In the income tax return for the 2004
taxation year, the appellant claimed a deduction for these stones as an
advertising expense in the amount of $13,187 in relation to the Trim Lawn
business. The advertising expense also included small amounts for watering and
flowers.
[8] According to the testimony of the auditor, which I
accept, the appellant had submitted to her during the audit that this was the
cost of a stone wall built around the home.
[9] A picture of the wall was entered into evidence. The
appellant also submitted invoices for stone in the amount of $13,187.
[10] The assessment for the 2004 taxation year disallowed
approximately 90 percent of the expense claimed. It was considered that the
stone wall was largely a personal expense.
[11] At the hearing, the appellant testified that he was
not claiming the full cost of the wall but only eight percent. He was only
claiming the cost of a retaining wall erected at the back of the house, he
said. The auditor had no knowledge of this during the audit.
[12] The appellant explained that the back wall was being
expensed because it was used as a learning tool to show potential customers how
to work with stone themselves. He said he earned money from this activity by
making plans for customers and by purchasing stones for them to build their own
walls.
[13] Based on the evidence presented, I am not satisfied
that the cost of the stones for the retaining wall at the back of the home was
$13,187 as submitted by the appellant. Even if that was the cost, I conclude
that there was a predominant personal element to the expenditure.
[14] Since the appellant was in a lawn care business, I
believe that an advertising expense somewhat higher than that allowed by the
auditor would be in order. Somewhat arbitrarily, I propose to increase the
deduction allowed by $2,000.
[15] Before concluding on this issue, I wish to note that
the appellant has not satisfied me that it would be appropriate to take a
significant deduction for the use of the back wall as a learning centre. I am
not convinced from the evidence that this business use was a significant aspect
to the use of the wall.
Shop costs
[16] The next issue concerns expenses relating to the use
of a garage. The appellant claimed costs in relation to an attached garage in
the home which was used for both businesses.
[17] In the 2005 taxation year, the Minister disallowed
most of the expense claimed for these costs in computing the loss from the
Emerald Heirlooms business. The amount disallowed was $2,116.98.
[18] One of the items in dispute is an expenditure for
ceiling fans. The expense is about $700. The assessment did not disallow the
expense in its entirety but it considered the cost as a capital item. I agree
with this categorization.
[19] The other items that were disallowed in respect of the
garage space were utilities. For purposes of the assessment, these expenditures
were treated as relating to a work space in the home. The effect of this
categorization is that the deduction is deferred until a year in which income
from the business is earned. The relevant provision is subsection 18(12).
[20] I agree with the treatment of the utilities by the
Minister. It is consistent with other cases in this Court dealing with work
space in a garage and it makes sense to treat expenses common to the entire
home as subject to the restriction in s. 18(12).
[21] In the result, I agree with the treatment of shop
costs in the assessment.
Cost of purchases
[22] The next item in dispute relates to the deduction for
purchases of wood made by Emerald Heirlooms in the 2005 taxation year.
[23] The assessment reduced the deduction allowed by the
amount of $2,473.63.
[24] I agree with the Minister in respect of this
adjustment.
[25] In filing its income tax return for 2005, the
appellant deducted all wood purchases made in the year without taking opening
or closing inventory into account. This was not a proper computation of profit.
[26] For purpose of the assessment, the auditor made an
estimate of what the cost of goods sold in the year was likely to be based on
the information provided to her. This was allowed as a deduction and she
labelled the excess as ending inventory.
[27] The question here is what is the cost of goods sold in
the year. The appellant’s method of computing this was inaccurate and in the
circumstances I think the approach taken for purposes of the assessment was
appropriate.
Vehicles
[28] The last item in dispute relates to motor vehicles.
[29] According to the evidence, the appellant had three
vehicles available: a truck, a van and a car.
[30] According to the testimony of the auditor, for
purposes of the assessment truck expenses were allowed in full, van expenses
were allowed to the extent of 25 percent, and no car expenses were allowed.
[31] The auditor’s explanations for making these
adjustments was reasonable. The appellant has not satisfied me that any
adjustment in his favour is warranted.
[32] I would also specifically mention that the auditor
testified that she similarly apportioned capital cost allowance that was
claimed in relation to the van.
[33] The appellant testified that he did not deduct any
capital cost allowance on the van. If this is true, then some adjustment to the
assessment is justified. The problem that I have, though, is that the appellant
did not provide any supporting documentation to show that he had not claimed
capital cost allowance on the van. This should have been relatively easy to do
and I conclude that the appellant has not dislodged the Minister’s assumption
in this regard. Without some supporting evidence, no adjustment is appropriate
with respect to capital cost allowance.
[34] In the result, the appeal in respect of the assessment
for the 2004 taxation year will be allowed, and the assessment will be referred
back to the Minister to allow an additional deduction for advertising in the
amount of $2,000. The appeal in respect of the 2005 taxation year will be
dismissed.
[35] As for costs, each party shall bear their own.
Signed at Ottawa,
Canada this 2nd day of February 2009.
“J. Woods”
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