Citation:2007TCC431
Date: 20071207
Docket: 2006-2703(IT)I
BETWEEN:
PHYLLIS JENSEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
McArthur J.
[1] These are appeals
from reassessments by the Minister of National Revenue for the Appellant’s
2001, 2002 and 2003 taxation years. The issue is whether the Appellant is
entitled to deduct certain business expenses in calculating her taxable income
for each year and whether she understated income from her business by $19,250
in 2001, $34,947.04 in 2002 and $23,168.46 in 2003.
[2] The Appellant is an
impressive retired elementary school teacher. In her retirement, she has built
a successful business programming curriculums that are well received by
elementary school teachers and beneficial for their young students. She taught
in several Alberta schools for 35 years
retiring in 2004. She remained involved in the education of children developing
and marketing curriculum material throughout Alberta, and on occasion,
elsewhere in Canada. She started her business, Rodeo Chaps, in 1991 on a part-time basis
until her retirement when it became a fulltime occupation for her.
[3] Her husband, Ron
Mann, got involved in the management of the business from 1999 onward. He is a
retired engineer with business experience, but has no formal training in
accounting. He rejected the work of professional accountants in favour of doing
it himself, in what he feels is the common sense way.
[4] In 2004, the
Minister audited the Appellant and her husband which led to reassessments for
both of them. Upon his request, Mr. Mann’s appeal was heard separately
immediately following the Appellant’s. Obviously, there was considerable common
evidence.
[5] The matters in
question include the following:
(a) Whether
Ms. Jensen understated her income from business by $19,250 for 2001, $39,947.04
for 2002 and $23,168.46 for 2003;
(b) Whether
Ms. Jensen is entitled to a deduction for expenses in excess of the amount
allowed for:
(i) meals
and entertainment for 2002;
(ii) office
and supplies for 2002;
(iii)
subcontracts/manager
contract for 2003;
(iv)
supplies
for 2003;
(v)
advertising
and promotion/travel for 2003;
(vi)
business
tax, fees, etcetera for 2002 and 2003;
(vii)
motor
vehicle for 2002 and 2003; and
(viii)
work
space in home for 2001, 2002 and 2003.
Analysis
[6] The primary
question is whether the Appellant understated her income from business by
$19,250 for 2001, $39,947.04 for 2002 and $23,168.46 for 2003.
[7] The Appellant and
her husband both testified and they were represented by counsel. The Appellant
was involved with the making and marketing of the elementary school curriculum
material. Mr. Mann had a more administrative and consulting role in his wife’s
business.
[8] The proceeds of
curriculum Visa sales were deposited directly into a bank account in Ron Mann’s
name alone. This is where the most serious problem arises. Proceeds from sales
using other payment options were deposited in a different bank account held
under the Appellant’s name. The sales revenues deposited in Mr. Mann’s account
were not reported by the Appellant in her synoptic journal but they were expensed
as wages or management fees for Mr. Mann’s services. Mr. Mann included
those revenues in his personal income. He felt this was the simplest way to get
paid for his services. There was no intention on their part to evade income
tax. It appeared to them to be a simple method for paying Mr. Mann for his
services.
[9] To accurately
report the transactions, the Appellant should have included the Visa sales in
her revenues and then expensed amounts paid to Mr. Mann as wages or management
fees for his services. By not reporting Visa sales and taking an expense for
payments made to Mr. Mann, the Appellant inadvertently underreported income. I
have no doubt that the Appellant is honest, but it is obvious that her income
was not properly reported.
[10] Both the Appellant
and Mr. Mann testified that, in their opinions, Visa revenues were reported in
Ms. Jensen’s synoptical journal, without being able to actually prove it. I
believe they are confused in this regard. Some revenues were not reported during
the years in issue but have been subsequently. Her revenues were understated
for the 2001, 2002 and 2003 taxation years as follows:
|
|
2001
|
2002
|
2003
|
|
Sales as reported by the Appellant
|
$93,283.38
|
$95,831.94
|
$80,422.35
|
|
Unreported
revenue (Visa sales)
|
$19,780.00
|
$35,431.00
|
$27,608.00
|
|
GST correction
|
-
|
$6,708.24
|
-
|
|
Subtotal
|
$113,063.38
|
$137,971.18
|
$108,030.35
|
|
Visa handling
fees
|
-$530.00
|
$-922.00
|
-$875.00
|
|
Other income
adj.
|
-
|
$6,270.20
|
$3,564.54
|
|
Gross income
|
$112,533.38
|
$130,778.98
|
$103,590.81
|
|
|
|
|
|
|
Gross income as
reported
|
-$92,283.38
|
-$95,831.94
|
-$80,422.35
|
|
Difference
|
$19,250.00
|
$39,947.04
|
$23,168.46
|
[11] Further, Visa
handling fees and charges were not claimed by the Appellant. Those expenses are
in the amounts of $530 for 2001, $922 for 2002 and $875 for 2003, and must be
taken into account in reassessing the Appellant.
[12] The Appellant
over-deducted goods and services tax by an amount of $6,708.24 when she
computed her gross business income for the 2002 taxation year. Evidence suggests that the Appellant was periodically
reporting her revenues inclusive of GST in her synoptical journal and at the
end of the year, GST would be deducted. The total sales revenues of the
Appellant were calculated and reported as follows:
|
Sales revenues reported in the synoptical journal
|
$109,718.00
|
|
GST included in sales revenues:
|
($7,177.81)
|
|
Sales revenues net of GST
|
$102,540.19
|
|
Duplicate deduction of GST
|
($6,708.24)
|
|
Sales revenues as reported
|
$95,831.95
|
[13] On the issue of
underreported income, the Appellant did not present any relevant evidence to
rebut the findings of the auditor. Again,
this seems to be another accounting mistake and I do not believe that the Appellant
intended to over-deduct goods and services tax.
[14] I will now deal with
whether the Appellant is
entitled to deductions for expenses in excess of those allowed for 2001, 2002
and 2003.
Meals and entertainment for 2002
[15] Counsel for the
Appellant, acknowledged that pursuant to subsection 67(1), the meals and
entertainment expenses should be reduced by 50% from $428.46 to $214.23 for the
2002 taxation year.
Office and supplies for 2002
[16] The Appellant
claimed a deduction in the amount of $15,446.44 for office and supplies
expenses for the taxation year 2002. After review, the Minister allowed an
amount of $7,448.82. I am prepared to give the Appellant the benefit of the
doubt and allow her an $11,940 deduction, but I cannot grant her the full
amount as originally claimed since some of the expenses are clearly personal or
capital in nature. However, I am accepting part of her evidence and that of her
husband in this regard.
[17] Among personal
expenses, the Appellant claimed for the food and care of nine dogs they owned
at the time. According to Mr. Mann, their dogs were for security purposes, but
the Respondent also submitted evidence that the Appellant’s home was already
protected with an alarm. Perhaps, the
dogs added to their home security, but nine dogs is clearly exaggerated.
Sub-contracts/manager contract for
2003
[18] For the 2003
taxation year, the Appellant claimed two separate deductions of $4,133.12 and
$24,492.02, respectively for subcontracts and a manager contract, which
represent a total expenditure of $28,625.14. Ms. Jensen erroneously deducted
$28,425.14 when computing her income and, therefore, she is entitled to a
deduction for the difference of $200.
[19] An amount of
$15,866.73 was claimed in 2003 as an expense for a manager contract but this
was in fact a bonus already expensed in 2002, and paid in 2003. In other words,
Ms. Jensen expensed a bonus in 2002 which was not paid to Mr. Mann until 2003,
and then she expensed the same amount again but as a manager contract. The
audit also revealed that an amount of $1,707.80 was erroneously considered as a
GST return in relation to the manager contract adjusted. In retrospect, the
amount allowed by the Minister as an expense for a manager contract in 2003
should be $10,533.09, as follows:
|
Manager contract claimed
|
$24,492.02
|
|
Bonus expensed in 2002
|
($15,866.73)
|
|
Error in addition
|
$200.00
|
|
GST return erroneously deducted
|
$1,707.80
|
|
Sub-contracts and manager contract allowed
|
$10,533.09
|
Again, there was little or no evidence to rebut the
Minister’s assumption.
Supplies for 2003
[20] The Appellant
claimed a deduction in the amount of $10,669.49 for supplies expenses for the
2003 taxation year. The auditor testified that some of these expenses were in
fact not incurred or, if incurred, they were personal or capital expenditures
in nature. The Minister allowed $2,860.12 for the 2003 taxation year. While the
Appellant’s position was unclear and presented with generalities, I accept that
there were additional legitimate expenses and increase the amount allowed to
$5,353.20.
Advertising and promotion/travel
for 2003
[21] With respect to
advertising and promotion, the Appellant claimed an expense of $1,714.16 for
the 2003 taxation year. During the same taxation year, the Appellant also
claimed an amount of $2,658.63 for travel expenses. In computing her income,
Ms. Jensen did not claim as a separate amount any expenses incurred for meals
and entertainment, therefore it was completely expensed.
[22] The auditor has
shown that a total amount of $2,465.00 computed as advertising and
promotion/travel was in fact a personal or living expense of the Appellant and,
therefore, not deductible. Ms. Jensen confirmed on cross‑examination that
she went to San Francisco, claimed the full amount as a business expense while approximately 70% of
the expenditure was in fact personal. Such mistakes lead to scepticism.
[23]I find that the
Appellant should only be entitled to an expense of $1,867.79 for advertising
and promotion/travel, as shown below, rather than the $4,372.79 claimed.
|
Advertising and promotion
expenses as claimed
|
$1,714.16
|
|
Travel expense as claimed
|
$2,658.63
|
|
Subtotal
|
$4,372.79
|
|
Meal and entertainment
restriction ($80.45 x 50%)
|
($40.00)
|
|
Personal expense not allowed
|
($2,465.00)
|
|
Advertising and
promotional/travel expenses allowed
|
$1,867.79
|
Business tax, fees, etc. for 2002 and
2003
[24] In regard to amounts
claimed for business tax, fees, etc., in the 2002 and 2003 taxation years, the Minister’s
auditor found that some expenses were either personal or had already been taken
as a motor vehicle expenditure. As for the 2003 taxation year, no evidence was
presented to rebut the findings of the auditor and the reassessment in this
regard is correct.
Motor vehicle for 2002 and 2003
[25] The evidence
presented at trial shows that there was no logbook or documentation backing up
the motor vehicle claims for the 2002 and 2003 taxation years. With respect to
motor vehicle expenses, the Appellant’s claim was first rejected by the auditor,
but the appeals officer allocated a business use representing 62% of the total
use of the vehicle for 2002 and 2003. Ms. Jensen claims a business use
representing 75% of the total use for 2002 and 65% for 2003.
[26] I find that the
amount allocated by the appeals officer was fair. The parties are not far apart.
The Appellant proposes that 75% for 2002 or 65% for 2003 would be more
appropriate than the amount of 62% allocated by the Minister for those years.
Her testimony revealed that she was a fulltime teacher at the time, and
travelled from her home close to Leduc to her school in Edmonton, approximately 24
kilometres of commuting every day. Commuting is a personal expense.
Work space in home for 2001, 2002
and 2003
[27] The Appellant’s
exhibit and photographs explained by Mr. Mann in his testimony are certainly
helpful keeping in mind they were taken about two years after the period in
question. By the Appellant’s own admission, the space used by Rodeo Chaps has
increased considerably over the years.
[28] The Appellant first
claimed 17% of her housing expenses as a business expenditure for 2001, 22% for
2002 and 23% for 2003. At the appeal stage, she increased her claims for 2002
and 2003 to an expenditure representing 47% of her housing expenses. Following
review, the appeals officer allocated an amount representing 35% for 2002 and
2003.
[29] I agree with the
following comments of Archambault, J. in Lachance v. Canada:
In my opinion, merely carrying on a
business in a private residence and using some of its rooms in the course of
that business does not necessarily mean that all expenses relating to those
rooms may be deducted. A number of factors must be taken into account,
including the space occupied, its quality and the frequency of its use. Space
located in a basement is not of the same quality as space on the ground floor.
The use of that space for household purposes as well as the need for that space
to provide a minimal degree of comfort for the occupants of that residence must
also be considered.
The evidence here, without doubt,
indicates that some areas and rooms in the home clearly met the above criteria
and, therefore, the Appellant should be entitled to consider part of her
housing expenses as business expenditures accordingly. Her home contained in
excess of 3,600 square feet of living space. The Appellant has not established
that the 35% allowed by the Minister was inaccurate and that she should be
entitled to more.
Conclusion
[30] For the most part, the
Appellant’s problems boil down to accounting errors made in reflecting income
and expenditures, the most significant one being with respect to the Visa sales
described earlier. The Act does not provide any specific accounting
method to be followed in order to calculate profit from a business, but over
the years the Courts have set guidelines that must be followed. This does not mean
that a taxpayer must follow the generally accepted accounting principle
(“GAAP”) as stated by the Supreme Court of Canada in Canderel Ltd. v. R., since these are
not rules of law but interpretive aids. A taxpayer is free to adopt any
accounting method which is not inconsistent with:
(i)
the
provisions of the Act;
(ii) established
case law principles or rules of law; and
(iii) well-accepted
business principles.
One must keep in mind that the main
object remains to have an accounting method that presents an accurate picture
of a taxpayer’s profit for a given year and the Appellant did not achieve that.
[31] In her Notice of
Appeal and final argument, the Appellant in essence, asked for fairness and
equity. The Tax Court of Canada is not a court of equity. This is far from
saying that we cannot be fair. I do not pretend to be an auditor or an
accountant and some of my conclusions may appear to be rough and ready. They
are based on what I believe is commercial common sense and fairness from the
sketchy evidence provided.
[32] Accordingly, the appeals for 2001, 2002 and 2003 are
allowed in part, with costs to the Respondent. The reassessments are referred
back to the Minister for reconsideration and reassessment on the basis that the
Appellant is entitled to deduct an amount of $11,940 for supplies in 2002 and
$5,353 for supplies in 2003. In addition as stated in paragraph 11, the
Appellant is entitled to deduct Visa charges of $530 in 2001, $922 in 2002 and
$875 in 2003.
Signed at Ottawa, Canada, this 7th day of December, 2007.
“C.H. McArthur”
Email this Content