Citation: 2009TCC382
Date: 20090804
Docket: 2006-3850(IT)G
BETWEEN:
DEBORAH LECAINE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb, J.
[1]
In filing her income tax returns
for 2001 and 2002 the Appellant claimed losses in relation to three different
activities – Le Caine Enterprises, Data Entry Select and a rental property. The
Appellant was reassessed to deny all of the expenses claimed in relation to Le
Caine Enterprises and the rental property and all but $1,580 of the expenses
claimed in relation to Data Entry Select. The issue is what expenses, if any,
may be claimed by the Appellant in computing her income for 2001 and 2002 in
relation to Le Caine Enterprises and Data Entry Select in addition to the wage
expense of $1,580 that was allowed in relation to Data Entry Select and whether
the rental property was a source of property income for the purposes of the Income
Tax Act (the “Act”). The Appellant was reassessed on a limited basis.
The impact that this will have on the determination of the expenses that may be
claimed in this case is also an issue.
Le Caine Enterprises
[2]
The Appellant was carrying on
business as a sole proprietorship under the name Le Caine Enterprises. The
Appellant provided her five bedroom house located at 141 Conrad Road
in Lawrencetown, Nova Scotia to the Department of Community Services (Nova Scotia)
(“Community Services”) so that they could provide a place for children with
emotional problems to stay for a few days or weeks. In 2000 the Appellant had
several meetings with one or more individuals from Community Services and she
decided to make her home available. She had determined that her home could
accommodate up to five individuals at one time with the crisis intervention
team. She had also determined that if there were at least two children in the
home, the revenue would cover the expenses and she could possibly make a small
profit.
[3]
In early 2001 the Appellant
started to make the house ready. She put in smoke alarms and fire extinguishers
and removed her personal belongings. Sometime during the first few months of
2001 the Appellant moved out of this house and moved in with friends. Later in
July 2001 she moved into an apartment where she stayed until April 2002 at
which time she again stayed with friends. The Appellant did not move back into
the house until 2007. The Appellant could not be in the house at the same time
as it was being used by Community Services.
[4]
In May of 2001 the first children
were accommodated in her house. The use of her house by Community Services
continued through the summer of 2001 to November 1, 2001. She was only paid for
the time that Community Services had children at the house. After November 1,
2001 Community Services did not use her house to accommodate children. She
continued to maintain the premises so that the house would be available for use
by Community Services. She tried to find out why Community Services stopped
using her house but she was unsuccessful in obtaining an explanation. Although
she continued to try to convince Community Services to use her house, they did
not do so. In April 2002 she started considering whether the house could be
used for some other business.
[5]
The following are the
amounts that were included as revenue and expenses in the Appellant’s tax
returns and the amount of the expenses that have been denied by the Canada
Revenue Agency (“CRA”) and the net affect of the reassessment:
|
|
2001
|
2002
|
|
Revenue:
|
$6,450
|
$0
|
|
Expenses claimed by the
Appellant:
|
($31,331)
|
($25,833)
|
|
Income (Loss) claimed by
the Appellant:
|
($24,881)
|
($25,833)
|
|
Expenses Denied by CRA:
|
$31,331
|
$25,833
|
|
Income (Loss) following the
reassessment:
|
$6,450
|
$0
|
[6]
As a result of the denial by the
Respondent of all of the expenses claimed in relation to Le Caine Enterprises,
the income of the Appellant for 2001 is equal to the reported revenue arising
in relation to this activity in 2001. The Respondent is accepting that this
activity was a source of business income, however the Respondent is not
accepting that any expenses were incurred by the Appellant to earn this
business income. It seems to me that given the nature of the business that it
is only reasonable that the Appellant would have incurred some expenses in
order to earn this income.
[7]
The Appellant submitted a
spreadsheet during the hearing that provided a breakdown of the expenses that
she had claimed, which was the same breakdown as counsel for the Respondent
included in written submissions filed before the commencement of the Hearing.
This breakdown was as follows:
|
Item:
|
2001
|
2002
|
|
Delivery, freight &
express
|
$368.72
|
|
|
Insurance
|
$292.00
|
$534.00
|
|
Interest
|
$9,238.92
|
$7,438.54
|
|
Maintenance & Repairs
|
$2,852.41
|
$1,236.81
|
|
Office Expenses
|
$36.82
|
$67.83
|
|
Supplies
|
$832.67
|
$632.85
|
|
Property taxes
|
$1,193.69
|
$1,177.05
|
|
Travel
|
$3,036.80
|
|
|
Telephone & Utilities
|
$10,225.26
|
$11,622.73
|
|
Capital Cost Allowance
|
$3,253.60
|
$3,123.46
|
|
Total:
|
$31,330.89
|
$25,833.27
|
[8]
The Notice of Appeal that was
filed does not disclose any facts related to the amounts claimed. The Material
Facts as set out in the Notice of Appeal are as follows:
Material Facts
4. The
Appellant filed Income Tax Returns for the taxation year ended April 30, 2001
and an Income Tax Return for the taxation year ended April 30, 2002, claiming
expenditures for business expenses related to Le Caine Enterprises (crisis
intervention), Data Entry Select and a rental property at 135 Conrad Rd.
Year
2001:
Business
Expenses (line 135) in the amount of $33,179.74
Rental Expenses (line 126) in the
amount of $8001.22
Year 2002:
Business Expenses (line 135) in
the amount of $25,874.97
Rental Expenses (line 126) in the
amount of $8,143.46
5. By notice of Reassessment, the Respondent disallowed the
Appellant's business & rental Expense claims for the Assessed Years of 2001
& 2002.
[9]
In the Reply that was filed, the
only assumptions that were made in relation to Le Caine Enterprises were the
following:
8. In
so assessing the Appellant and confirming the assessment, the Minister relied
on the following assumptions:
a) the
facts admitted above;
b) during
the years under appeal, the Appellant owned two houses located 135 and 141
Conrad Road, West Lawrencetown, Nova Scotia;
c) the
Appellant provided emergency housing for youth involved with the Nova Scotia
Department of Community Services (“Community Services”) using the trade name Le
Caine Enterprises;
d) the
Appellant used the house located 141 Conrad Road to provide emergency housing
and received $50 when used by Community Services;
e) the
Appellant ceased operating Le Caine Enterprises in 2002 and did not provide any
emergency housing during the 2002 taxation year;
f) for
the 2001 and 2002 taxation years the Appellant claimed the amounts of $31,330.89
and $25,833.27, respectively, as expenses of Le Caine Enterprises;
g) during the 2001 and 2002 taxation years the Appellant did
not incur any expenses in respect of Le Caine Enterprises;
[10]
The Respondent in the Reply only
referred to paragraphs 18(1)(a) and subsection 230(1) of the Act.
In the “Grounds Relied On” section of the Reply, the Respondent submitted that
the Appellant had not incurred “outlays or expenses for the purpose of gaining
or producing income from business and property as required by paragraph 18(1)(a)
of the Act”. It appears that throughout the audit the Appellant was not
fully cooperative and the lack of documentation provided by the Appellant led
the auditor to a conclusion that the Appellant had not incurred the expenses
that were claimed. This failure to provide documentation continued after the
Notice of Appeal was filed. However it would appear that at some point prior to
the hearing a significant number of receipts and other documentation were
disclosed. These were submitted at the hearing as Exhibits on consent. As well
counsel for the Respondent submitted a pre-hearing brief in which the various
items claimed as expenses were identified and therefore the Respondent had
knowledge of the various amounts that comprised the expenses that had been
claimed.
[11]
The focus of the Hearing was on
whether the amounts had been incurred and if the amounts were incurred, whether
such expenditures were incurred for the purpose of earning income from the
business.
[12]
Counsel for the Respondent in argument
placed a great deal of emphasis on the onus of proof and that the Appellant had
the onus of proving that the amounts had been incurred and for those amounts
that had been incurred, that the Appellant had the onus of proving that such
expenditures had been incurred for the purpose of earning income.
[13]
In del Valle v. Minister
of National Revenue [1986] 1 C.T.C. 2288, 86 DTC 1235, Justice Sarchuk made
the following comments:
11 The
Johnston case (supra), was considered in Hillsdale Shopping
Centre Limited v. Minister of National Revenue, [1981] C.T.C. 322,
81 D.T.C. 5261 and at 328 (D.T.C. 5266) Urie, J. made the following comments:
If a taxpayer,
after considering a reassessment made by the Minister, the Minister's reply to
the taxpayer's objections, and the Minister's pleadings in the appeal, has not
been made aware of the basis upon which he is sought to be taxed, the onus of
proving the taxpayer's liability in a proceeding similar to this one would lie
upon the Minister. This defect may be due to a number of reasons such as a lack
of clarity on the part of the Minister in expounding the alleged basis of the
taxability which could include an attempt by the Minister to attach liability
on one of two or more alternative bases thus failing to make clear to the
taxpayer the assumption upon which he relies.
12 I
believe this is the approach which should be followed in the case at bar. In my
view the respondent has failed to allege as a fact an ingredient essential to
the validity of the reassessment. There is no onus on the appellant to disprove
a phantom or non-existent fact or an assumption not made by the respondent.
13 While
it was possible for the respondent to have alleged further and other facts the
respondent did not choose to do so in this case but simply relied on the facts
assumed at the time of the reassessments. I emphasize that if the respondent
had alleged such further or other facts the onus would have been on him to
establish them. (See Minister of National Revenue v. Pillsbury
Holdings Limited, [1965] 1 Ex. C.R. 678, [1964] C.T.C. 294).
14 The
facts relied upon do not support the reassessments. For these reasons the
appeal is allowed and the matter is referred back to the respondent for
reassessment on the basis that the sum of $5,100 was improperly added in
computing the appellant's income in each of her 1980 and 1981 taxation years.
[14]
In Pollock v.
The Queen, [1994] 1 C.T.C. 3, 94 DTC 6050, Justice Hugessen, on behalf of
the Federal Court of Appeal, made the following comments:
It is, of course, the general rule that every party to
litigation in this Court must plead the facts upon which he relies in such a
way as to put his opponent fairly on notice of the case he has to meet. Where a
party's pleadings are so inadequate as to disclose no case at all he runs the
risk of having them struck out and of losing for that reason. That rule is
quite irrelevant here. There is no question in the present case of the
Minister's pleadings being inadequate or of the appellant not knowing clearly
and beyond any possibility of doubt the basis upon which he was reassessed.
That basis was and is that the appellant's dealings in shares of the companies
in question constituted for him an adventure in the nature of trade so as to
make the profits therefrom taxable as income.
The special position of the assumptions made by the Minister in
taxation litigation is another matter altogether. It is founded on the very
nature of a self-reporting and self-assessing system in which the authorities
are obliged to rely, as a rule, on the disclosures made to them by the taxpayer
himself as to facts and matters which are peculiarly within his own knowledge.
When assessing, the Minister may have to assume certain matters to be different
from or additions to what the taxpayer has disclosed. While the Minister's
assumptions, if any, are generally made in the pleadings, that is not always
the case and we have seen, in this very record, an example of the taxpayer
taking pains to demolish assumptions which the Minister had not pleaded. Where
pleaded, however, assumptions have the effect of reversing the burden of proof
and of casting on the taxpayer the onus of disproving that which the Minister
has assumed. Unpleaded assumptions, of course, cannot have that effect and are
therefore, in my view, of no consequence to us here.
The burden cast on the taxpayer by assumptions made in the pleadings
is by no means an unfair one: the taxpayer, as plaintiff, is contesting an
assessment made in relation to his own affairs and he is the person in the best
position to produce relevant evidence to show what the facts really were.
Where, however, the Minister has pleaded no assumptions, or where
some or all of the pleaded assumptions have been successfully rebutted, it
remains open to the Minister, as defendant, to establish the correctness of his
assessment if he can. In undertaking this task, the Minister bears the ordinary
burden of any party to a lawsuit, namely to prove the facts which support his
position unless those facts have already been put in evidence by his opponent.
This is settled law
[15]
Justice Rothstein in The Queen
v. Anchor Pointe Energy Ltd. 2003 DTC 5512 stated that:
[23] The pleading
of assumptions gives the Crown the powerful tool of shifting the onus to the taxpayer
to demolish the Minister's assumptions. The facts pleaded as assumptions must
be precise and accurate so that the taxpayer knows exactly the case it has to
meet.
[16]
In Loewen 2004
FCA 146, Justice Sharlow, on behalf of the Federal Court of Appeal, made the
following comments:
11 The constraints on the Minister that
apply to the pleading of assumptions do not preclude the Crown from asserting,
elsewhere in the reply, factual allegations and legal arguments that are not
consistent with the basis of the assessment. If the Crown alleges a fact
that is not among the facts assumed by the Minister, the onus of proof lies
with the Crown. This is well explained in Schultz v. R.
(1995), [1996] 1 F.C. 423, [1996] 2 C.T.C. 127, 95 D.T.C. 5657 (Fed. C.A.) (leave to appeal refused, [1996]
S.C.C.A. No. 4 (S.C.C.)).
[17]
Leave to appeal the
decision of the Federal Court of Appeal in Loewen to the Supreme Court
of Canada was refused (338 N.R. 195 (note)).
[18]
In Hickman Motors Ltd. v. Her
Majesty the Queen, [1997] S.C.J. No. 62, Justice L’Heureux-Dubé of
the Supreme Court of Canada made the following comments in relation to an
Appellant's onus of “demolishing” the Minister’s assumptions:
92 ... The Minister, in making assessments,
proceeds on assumptions (Bayridge Estates Ltd. v. Minister of
National Revenue (1959), 59 D.T.C. 1098 (Can. Ex. Ct.), at p. 1101) and the
initial onus is on the taxpayer to “demolish” the Minister's assumptions in the
assessment (Johnston v. Minister of National Revenue, [1948]
S.C.R. 486 (S.C.C.); Kennedy v. Minister of National Revenue
(1973), 73 D.T.C. 5359 (Fed. C.A.), at p. 5361). The initial burden is
only to “demolish” the exact assumptions made by the Minister but no more:
First Fund Genesis Corp. v. R. (1990), 90 D.T.C. 6337 (Fed.
T.D.), at p. 6340.
(emphasis
added)
[19]
Therefore it is very important
that the assumptions clearly and accurately state the facts assumed by the
Minister as the initial burden on the Appellant “is only to “demolish” the
exact assumptions made by the Minister and no more”. Taxpayers should know the
basis on which they have been reassessed. In this case the only assumption made
that provides any basis for the denial of the expenses claimed was that “the
Appellant did not incur any expenses”. Therefore the initial burden on the
Appellant was only to “demolish” this assumption and show that the expenses had
been incurred. If an expense was incurred, then the Respondent, in this case,
had the onus of proving that the expenditure was not incurred for the purpose
of earning income since the only assumption that was made by the Respondent was
that the amounts had not been incurred.
Le Caine Enterprises –
Delivery, freight & express
[20]
The amount claimed as “delivery,
freight & express” is a portion of the amount that the Appellant paid for a
new vehicle that she acquired. In the schedule that she had prepared she
indicated that the following amounts had been charged to her in relation to the
purchase of her vehicle:
Freight &
delivery $895.00
Gas Admin Fee $99.00
Tire Tax $15.00
Excise – Air
Conditioning $100.00
License,
registration & transfer fee $65.00
HST $2,445.60
Total: $3,619.60
[21]
In the schedule she indicated that
the amounts totaled $3,919.60 but these items only total $3,619.60. There was
no explanation for this discrepancy of $300. Of this amount, the Appellant
claimed $368.72 (which is approximately 10% of this total amount) as an expense
in computing her income for 2001. I accept the Appellant’s testimony that these
amounts had been incurred but it seems obvious to me that these amounts would
have been added to the capital cost of the vehicle if the vehicle was used in
carrying on this business, and not claimed as an expense.
[22]
The capital cost of a depreciable
property is included in determining the undepreciated capital cost of that
property. “Capital cost” is not defined in the Income Tax Act (the “Act”).
In the text “Principles of Financial Accounting a Conceptual Approach” by
Finney and Miller, 1968 it is stated at page 245 that:
Incidental
costs. The cost of an asset includes not only the basic, or purchase,
price, but also related, incidental costs such as the following: costs of title
searches and legal fees incurred in the acquisition of real estate;
transportation, installation and breaking-in costs incident to the acquisition
of machinery; storage, taxes and other costs incurred in aging certain kinds of
inventories, such as wine; and expenditures made in the rehabilitation of a
plant purchased in a run-down condition.
And at page 198:
Determination
of cost. As a general statement, it can be said that the cost of an asset
is measured by, and is equal to, the cash value of the consideration parted
with when acquiring the asset. As applied to fixed asset acquisitions, cost
includes all expenditures made in acquiring the asset and putting it into a
place and condition in which it can be used as intended in the operating
activities of the business. Thus, the cost of machinery includes such items as
freight and installation costs in addition to its invoice price.
[23]
In “Accounting Standards in
Evolution”, 2nd ed., by Milburn and Skinner, 2001, it is stated at
page 188 – 189 that:
The majority
of tangible capital assets are purchased from external sources. The chief
element of cost, then, is the invoiced price less any applicable cash or trade
discounts. The chief costing problem lies in ensuring that costs incidental to
acquisition and costs of making the asset capable to serve are capitalized...
With respect to equipment, costs include all customs duties and taxes,
transportation inward, insurance in transit, foundations and installation
costs, and other charges for testing and preparation.
[24]
The cost of a capital asset should
be determined for the purposes of the Income Tax Act in the same manner
as it is for accounting purposes. The purpose of determining the capital cost
of an asset for the purposes of the Income Tax Act is to determine the
amount that should be added to the undepreciated capital cost and then
amortized over time by claiming capital cost allowance (“CCA”) in accordance
with the Income Tax Regulations. There is no reason why the incidental
costs (such as freight) would be added to the cost of a capital asset for
accounting purposes but not included for the purpose of determining the capital
cost of the asset for the purposes of the Act. In each case the
objective is to determine the total cost of the asset that should be
capitalized.
[25]
The incidental costs listed above
were incurred by the Appellant in acquiring the vehicle and should have been
added to the cost of the vehicle.
If the vehicle was being used to earn income from the business, the appropriate
percentage of the total cost of acquiring the vehicle, based on the percentage
that the vehicle was being used in carrying on the business, could then have
been used to claim CCA determined in accordance with the Income Tax
Regulations. It was not appropriate to simply deduct these incidental costs
as current expenses. In this case, the Appellant did not include the vehicle in
the CCA schedule that she filed with her tax return for 2001 or 2002.
[26]
However, this was not the basis
upon which the Appellant was reassessed nor was this basis advanced at any time
by the Minister. Therefore, it cannot form the basis of a reassessment of the
Appellant. In Pedwell v. The Queen, 2000 DTC 6405, [2000] 3
C.T.C. 246, Justice Rothstein, writing on behalf of the Federal Court of
Appeal, stated as follows:
15 While
the parties referred to a number of older authorities on the issue, Continental
Bank of Canada now makes it clear (subject to subsection 152(9) which
applies to appeals disposed of after June 17, 1999 and is not relevant here in
any event) that the Minister is bound by his basis of assessment. While this
case does not involve the Minister advancing a different basis of
assessment, I think the principle in Continental Bank of Canada is
applicable to a judicial determination on a basis different from that in
the notice of reassessment.
16 First,
if the Crown is not able to change the basis of reassessment after a limitation
period expires, the Tax Court is not in any different position. The same
prejudice to the taxpayer results - the deprivation of the benefit of the
limitation period. It is not open to that Court or indeed this Court, to
construct its own basis of assessment when that has not been the basis of the
Minister's reassessment of the taxpayer.
17 Second,
while it is open to the Minister to change the basis of assessment before the
limitation period expires, where he does not do so, in my respectful opinion,
the Tax Court Judge is bound by the assessment at issue before the Court.
Fairness requires that the taxpayer be given a reasonable opportunity to
contest a new basis of assessment. If the Tax Court Judge decides on a basis of
assessment not at issue during the court proceedings, the taxpayer is deprived
of that opportunity.
18 Here,
on his own motion, the Tax Court Judge, in his decision and after the
completion of the evidence and argument directed to the Minister's basis of
assessment, changed the basis of that assessment without the appellant having
the opportunity to address the change. This is clear because the Tax Court
judgment allowed the appellant's appeal, i.e. found that there was no
appropriation of property which was the basis of the Minister's assessment, but
then referred the matter back to the Minister to reassess on the basis that the
Euler proceeds and the Landpark deposit were appropriated. What has taken place
is tantamount to allowing the Minister to appeal his own reassessment.
19
I do not say that the Minister cannot assess in the alternative.
However, that was not done here.
[27]
While subsection 152(9) of the Act
(to which Justice Rothstein refers) may have been available to the Minister to
advance an alternative argument in support of the reassessment of the
Appellant, this subsection is only available if the Minister advances such
alternative argument. Since the Minister did not advance any alternative
argument to deny these expenses on the basis that they should have been
capitalized, it is not open for me to do so. However since I have concluded (as
noted below) that the expenses related to the motor vehicle were not incurred
for the purpose of earning income, these amounts are not deductible in
computing her income for 2001.
Le Caine Enterprises – Insurance
[28]
The amount claimed for insurance
in the amount of $292 for 2001 relates to insurance on the house used in
carrying on this business. The only invoice that the Appellant submitted in relation
to the insurance on the premises used in carrying on the Le Caine Enterprises
business was the invoice dated June 2, 2002 for the period from August 8, 2002
to August 8, 2003. While the Appellant also submitted copies of statements for
several different bank accounts, it is impossible to tell from the bank
statements whether a particular payment was for the insurance on this property.
[29]
This claim illustrates the lack of
documentation supplied by the Appellant. There is no invoice and no cancelled
cheque to show that insurance was paid for any part of 2001 or the first seven
months of 2002 or the amount of the insurance for any part of 2001 or the first
seven months of 2002. The only period covered by the one invoice that was
submitted for the insurance on this property is for the period commencing in
August 2002.
[30]
In Wainberg v. The Queen
[2004] 1 C.T.C. 2417, 2003 D.T.C. 1395, Justice Bowie made the following
comments:
3 Counsel
for the Respondent referred me to the decision of the Federal Court of Appeal
in Njenga v. The Queen. That case held that a taxpayer who
ignores the requirement under the Act to maintain and have available detailed
information and documentation to support the claims that they make should
expect to have considerable difficulty discharging the burden of proving those
claims. The need to support oral testimony with documents is certainly not
absolute, however. If the taxpayer is a credible witness, the case may be made
simply on oral evidence, if it is sufficiently convincing.
[31]
In The Continental Insurance
Company v. Dalton Cartage Company Limited, [1982] 1 S.C.R. 164, Chief
Justice Laskin stated as follows:
Where there is
an allegation of conduct that is morally blameworthy or that could have a
criminal or penal aspect and the allegation is made in civil litigation, the
relevant burden of proof remains proof on a balance of probabilities. So this
Court decided in Hanes v. Wawanesa Mutual Insurance Co., [1963] S.C.R.
154. There Ritchie J. canvassed the then existing authorities, including
especially the judgment of Lord Denning in Bater v. Bater, [1950] 2 All
E.R. 458, at p. 459, and the judgment of Cartwright J., as he then was, in Smith
v. Smith and Smedman, [1952] 2 S.C.R. 312, at p. 331, and he concluded as
follows (at p. 164):
Having regard to the above authorities, I am of opinion that the
learned trial judge applied the wrong standard of proof in the present case and
that the question of whether or not the appellant was in a state of
intoxication at the time of the accident is a question which ought to have been
determined according to the "balance of probabilities".
It is true
that apart from his reference to Bater v. Bater and to the Smith and
Smedman case, Ritchie J. did not himself enlarge on what was involved in
proof on a balance of probabilities where conduct such as that included in the
two policies herein is concerned. In my opinion, Keith J. in dealing with the
burden of proof could properly consider the cogency of the evidence offered to
support proof on a balance of probabilities and this is what he did when he
referred to proof commensurate with the gravity of the allegations or of the
accusation of theft by the temporary driver. There is necessarily a matter of
judgment involved in weighing evidence that goes to the burden of proof, and a
trial judge is justified in scrutinizing evidence with greater care if there
are serious allegations to be established by the proof that is offered. I put
the matter in the words used by Lord Denning in Bater v. Bater, supra,
at p. 459, as follows:
It is true that by our law there is a higher standard of proof in
criminal cases than in civil cases, but this is subject to the qualification
that there is no absolute standard in either case. In criminal cases the charge
must be proved beyond reasonable doubt, but there may be degrees of proof
within that standard. Many great judges have said that, in proportion as the
crime is enormous, so ought the proof to be clear. So also in civil cases. The
case may be proved by a preponderance of probability, but there may be degrees
of probability within that standard. The degree depends on the subject-matter.
A civil court, when considering a charge of fraud, will naturally require a
higher degree of probability than that which it would require if considering
whether negligence were established. It does not adopt so high a degree as a
criminal court, even when it is considering a charge of a criminal nature, but
still it does require a degree of probability which is commensurate with the
occasion.
I do not
regard such an approach as a departure from a standard of proof based on a
balance of probabilities nor as supporting a shifting standard. The question in
all civil cases is what evidence with what weight that is accorded to it will
move the court to conclude that proof on a balance of probabilities has been
established.
(emphasis
added)
[32]
In Hickman Motors Limited v.
The Queen, [1997] 2 S.C.R. 336, Justice L'Heureux-Dubé stated as
follows:
92
It is trite law that in taxation the standard of proof is the civil
balance of probabilities: Dobieco Ltd. v. Minister of National Revenue,
[1966] S.C.R. 95, and that within balance of probabilities, there can be
varying degrees of proof required in order to discharge the onus, depending on
the subject matter: Continental Insurance Co. v. Dalton Cartage Co.,
[1982] 1 S.C.R. 164; Pallan v. M.N.R., 90 D.T.C. 1102 (T.C.C.), at p.
1106.
[33]
In the recent decision of the
House of Lords of In re Doherty, [2008] UKHL 33, Lord Carswell
stated as follows:
25. The phrase
“degree of probability” was picked up and repeated in a number of subsequent
cases – see, for example, In re Dellow’s Will Trusts [1964] 1 WLR 451,
455, Blyth v Blyth [1966] AC 643, 669 and R v Secretary of State for
the Home Department, Ex p Khawaja [1984] AC 74, 113-4 – and may have caused
some courts to conclude that a different standard of proof from the balance of
probabilities or a higher standard of evidence was required in some cases. In
so far as such misunderstanding has occurred, it should have been put to rest
by the frequently-cited remarks of Lord Nicholls of Birkenhead in In re H
(Minors). Immediately after the passage which I have quoted from his
opinion, he went on at pages 586-7:
“When assessing the
probabilities the court will have in mind as a factor, to whatever extent is
appropriate in the particular case, that the more serious the allegation the
less likely it is that the event occurred and, hence, the stronger should be
the evidence before the court concludes that the allegation is established on
the balance of probability. Fraud is usually less likely than negligence.
Deliberate physical injury is usually less likely than accidental physical
injury. A stepfather is usually less likely to have repeatedly raped and had
non consensual oral sex with his under age stepdaughter than on some occasion
to have lost his temper and slapped her. Built into the preponderance of
probability standard is a generous degree of flexibility in respect of the
seriousness of the allegation.
Although the
result is much the same, this does not mean that where a serious allegation is
in issue the standard of proof required is higher. It means only that the
inherent probability or improbability of an event is itself a matter to be
taken into account when weighing the probabilities and deciding whether, on
balance, the event occurred. The more improbable the event, the stronger must
be the evidence that it did occur before, on the balance of probability, its
occurrence will be established … No doubt it is this feeling which
prompts judicial comment from time to time that grave issues call for proof to
a standard higher than the preponderance of probability.”
…
27. Richards LJ expressed the
proposition neatly in R (N) v Mental Health Review Tribunal (Northern
Region) [2005] EWCA Civ 1605, [2006] QB 468, 497-8, para 62, where he said:
“Although there is a single
civil standard of proof on the balance of probabilities, it is flexible in its
application. In particular, the more serious the allegation or the more serious
the consequences if the allegation is proved, the stronger must be the evidence
before a court will find the allegation proved on the balance of probabilities.
Thus the flexibility of the standard lies not in any adjustment to the degree
of probability required for an allegation to be proved (such that a more
serious allegation has to be proved to a higher degree of probability), but in
the strength or quality of the evidence that will in practice be required for
an allegation to be proved on the balance of probabilities.”
In my opinion this paragraph
effectively states in concise terms the proper state of the law on this topic.
I would add one small qualification, which may be no more than an explanation
of what Richards LJ meant about the seriousness of the consequences. That
factor is relevant to the likelihood or unlikelihood of the allegation being
unfounded, as I explain below.
28. It is recognised by
these statements that a possible source of confusion is the failure to bear in
mind with sufficient clarity the fact that in some contexts a court or tribunal
has to look at the facts more critically or more anxiously than in others
before it can be satisfied to the requisite standard. The standard
itself is, however, finite and unvarying. Situations which make such heightened
examination necessary may be the inherent unlikelihood of the occurrence taking
place (Lord Hoffmann’s example of the animal seen in Regent’s Park), the
seriousness of the allegation to be proved or, in some cases, the consequences
which could follow from acceptance of proof of the relevant fact. The
seriousness of the allegation requires no elaboration: a tribunal of fact will
look closely into the facts grounding an allegation of fraud before accepting
that it has been established. The seriousness of consequences is another facet
of the same proposition: if it is alleged that a bank manager has committed a
minor peculation, that could entail very serious consequences for his career,
so making it the less likely that he would risk doing such a thing. These are
all matters of ordinary experience, requiring the application of good sense on
the part of those who have to decide such issues. They do not require a
different standard of proof or a specially cogent standard of evidence, merely
appropriately careful consideration by the tribunal before it is satisfied of
the matter which has to be established.
(emphasis
added)
[34]
In the recent decision of the
House of Lords of In re B (Children), [2008] UKHL 35, Lord Hoffmann
stated as follows:
14. Finally, I should say
something about the notion of inherent probabilities. Lord Nicholls said,
in the passage I have already quoted, that —
“the court will have in mind as
a factor, to whatever extent is appropriate in the particular case, that
the more serious the allegation the less likely it is that the event occurred
and, hence, the stronger should be the evidence before the court concludes that
the allegation is established on the balance of probability.”
15. I wish to lay some stress
upon the words I have italicised. Lord Nicholls was not laying down any rule of
law. There is only one rule of law, namely that the occurrence of the fact in
issue must be proved to have been more probable than not. Common sense,
not law, requires that in deciding this question, regard should be had, to
whatever extent appropriate, to inherent probabilities.
(emphasis
added)
[35]
And in the same case Baroness Hale
of Richmond stated as follows:
70. …Neither the seriousness of
the allegation nor the seriousness of the consequences should make any
difference to the standard of proof to be applied in determining the facts. The
inherent probabilities are simply something to be taken into account, where
relevant, in deciding where the truth lies.
(emphasis added)
[36]
It seems to me that these cases
are consistent and the issue in a civil case (which will include the current
appeal) will be whether the evidence as presented is sufficient to satisfy the
trier of fact, on a balance of probabilities, that the person who has the burden
of proof has established what is required of him or her. In analyzing the
evidence that has been presented, the probability or improbability of the event
that is in issue is a factor that can be taken into account. The more
improbable the event the stronger the evidence that would be required. Conversely
it would also seem to me that a person may be able to establish, on a balance
of probabilities, that a highly probable event occurred based on weaker
evidence than would be required to establish that an improbable event had
occurred.
[37]
In this case it seems logical that
the Appellant would have insured the property used in carrying on the Le Caine
Enterprises business in 2001. Since the annual insurance cost was $534 in 2002
this amount will be used for 2001. The Appellant was living in the property
located at 141 Conrad Road for the first few months of 2001. The exact date that
she vacated these premises so that they could be used by Community Services is
not clear. The Appellant submitted copies of the stubs from the cheques for the
payments made by Community Services for the use of the house. Since the
earliest reference on any of the stubs is to the period from May 13 – May 20,
2001, it would appear that the property was first used during this week of May
13 – 20, 2001. As a result the Appellant must have vacated the house prior to
that week and therefore I find that the Appellant had vacated the house by
April 30, 2001.
[38]
As a result, it seems to me that
the insurance costs for the period from January 1, 2001 to April 30, 2001 would
have been for the period while the Appellant was still using the house as her
residence. As a result, the insurance costs for this period would have been
personal expenditures and not incurred for the purpose of earning income.
[39]
Based on the stubs from the
payment cheques, the house was used by Community Services for the following
periods in 2001:
|
Time Period
|
Amount Received
|
|
May 13 – May 20
|
$400
|
|
May 21 – May 27
|
$350
|
|
May 28 – June 3
|
$350
|
|
June 4 – June
10
|
$350
|
|
June 11 – June
17
|
$350
|
|
June 18 – June
24
|
$350
|
|
June 25 – July 1
|
$350
|
|
July 2 – July 8
|
$350
|
|
July 16 – July 22
|
$350
|
|
July 20 – July 22
|
$150
|
|
July 23 – July 29
|
$350
|
|
July 30 – August 1
|
$150
|
|
July 30 – August 3
|
$250
|
|
September 6 – September 9
|
$200
|
|
September 10 – September 16
|
$350
|
|
September 17 – September 20
|
$200
|
|
September 17 – September 23
|
$350
|
|
September 24 – September 30
|
$350
|
|
October 1 – October 7
|
$350
|
|
October 8 – October 14
|
$350
|
|
October 15 – October 21
|
$350
|
|
October 22 – October 28
|
$350
|
|
October 29 – November 1
|
$200
|
|
Total:
|
$7,150
|
[40]
The total of the cheques received
by the Appellant for the use of her property at 141 Conrad Road exceed the
amount included by her as revenue by $700. No explanation was provided for this
discrepancy nor was this discrepancy even noted by either party. It appears
that no one took the time to calculate the total of the amounts as stated in
the cheque stubs. Since the Respondent cannot appeal the reassessment, the income of the
Appellant cannot be increased as a result of her appeal and therefore no
adjustment will be made to reflect this discrepancy of $700.
[41]
The last period that the house was
used by Community Services was the period from October 29 to November 1, 2001.
The Appellant attempted to find out if they were planning to use her house
again but she was unsuccessful in arranging for Community Services to use her
house after November 1, 2001. By April of 2002, the Appellant had started to
consider other uses for the house. Since there were some gaps in the periods
that it was being used (one week in July (July 9 – 15) and most of the month of
August), it seems to be that the Appellant could still be considered to be
carrying on business for some time after November 1, 2001 but by the end of April
of 2002 (which would have been 6 months since it had last been used by
Community Services and which would indicate that the failure to use the
property was not simply based on the winter season), it would be reasonable to
assume that Community Services were no longer interested in using this
property. Since the only activity of this business was providing the house to
Community Services, once it became clear that Community Services would no
longer be using this house, the business ceased to be carried on.
[42]
While it is not possible to
ascertain an exact date that the business of Le Caine Enterprises ceased (and
hence the amount spent on the house insurance would then not be an amount
incurred for the purpose of earning income) it seems to me that the business of
Le Caine Enterprises should be considered to have continued until the end of
April 2002. In the Reply it was assumed that the business ceased operating in
2002 and it seems logical that the business continued at least for a few months
in 2002. While the Appellant stated that she started considering other uses for
the house in April 2002, she did not take any steps in relation to any
alternate use of the house. It seems to me that the fact that she was
considering alternate uses for the house in April 2002 indicates that she
realized at that time that Community Services would no longer be using this
house and therefore April 30, 2002 will be date that this business ceased to be
carried on by the Appellant.
[43]
Therefore the home insurance
expense for the period from May 1, 2001 to April 30, 2002 will be allowed as an
expense, allocated as follows:
|
|
2001
|
2002
|
|
Insurance
|
$356
|
$178
|
[44]
As a result, the amount allowed
for insurance for 2001 is greater than the amount claimed by the Appellant.
There is no prohibition on increasing the amount allowed as an expense (and
hence decreasing the tax liability) beyond the amount claimed by the taxpayer.
Le Caine Enterprises -
Interest
[45]
The Appellant had several bank
accounts and it is not entirely clear which account was used for Le Caine
Enterprises. It appears from the bank statements that were submitted as
Exhibits that the cheques that she received from Community Services were
deposited into the same bank account as her pay from her employment. The
Appellant had two jobs in 2001 – she worked full time for the Bank of Nova
Scotia and part time at Loomis. It also appears that transfers were made from
this account to another account.
[46]
Interest charges on the various
bank accounts and her credit cards were claimed as an expense. The Appellant’s
explanation was that she would not have incurred the interest charges if she
would not have been carrying on this business. If she would not have been
carrying on the business she would have had sufficient funds to cover her
personal expenditures. However since she had incurred expenses to prepare the
house for Community Services and in living at another location, she no longer
had sufficient funds to cover her personal expenditures and she incurred
interest charges in relation to her bank accounts and her credit cards. However
it would appear that these interest charges relate to her personal expenditures
and not business expenditures. The indebtedness was incurred to pay for
personal expenditures and therefore the interest was not incurred for the
purpose of earning income. The direct use to which the borrowed funds were put
was to pay for personal expenditures.
[47]
Although paragraph 20(1)(c) of the
Act was not referred to by either party, it seems to me that this
paragraph must have been relied on by the Appellant in deducting her interest
expense and therefore the application of this section must be examined even
though there was no direct reference to this section.
[48]
In The Queen v. Bronfman
Trust [1987] 1 S.C.R. 32, then Chief Justice Dickson, on behalf of the
Supreme Court of Canada stated that:
21 The interest
deduction provision requires not only a characterization of the use of borrowed
funds, but also a characterization of "purpose". Eligibility for the
deduction is contingent on the use of borrowed money for the purpose of earning
income. It is well established in the jurisprudence, however, that it is not
the purpose of the borrowing itself which is relevant. What is relevant,
rather, is the taxpayer's purpose in using the borrowed money in a particular
manner: Auld v. Minister of National Revenue, 62 D.T.C. 27
(T.A.B.). Consequently, the focus of the inquiry must be centered on the use to
which the taxpayer put the borrowed funds.
…
27 As I have
indicated, the respondent Trust submits that the borrowed funds permitted the
Trust to retain income-earning properties which it otherwise would have sold in
order to make the capital allocations to the beneficiary. Such a use of
borrowings, it argues, is sufficient in law to entitle it to the interest
deduction. In short, the Court is asked to characterize the transaction on the
basis of a purported indirect use of borrowed money to earn income rather than
on the basis of a direct use of funds that was counter-productive to the Trust's
income-earning capacity.
28 In
my view, neither the Income Tax Act nor the weight of judicial authority
permits the courts to ignore the direct use to which a taxpayer puts borrowed
money. One need only contemplate the consequences of the interpretation sought
by the Trust in order to reach the conclusion that it cannot have been intended
by Parliament. In order for the Trust to succeed, s. 20(1)(c)(i) would have to
be interpreted so that a deduction would be permitted for borrowings by any
taxpayer who owned income-producing assets. Such a taxpayer could, on this
view, apply the proceeds of a loan to purchase a life insurance policy, to take
a vacation, to buy speculative properties, or to engage in any other
non-income-earning or ineligible activity. Nevertheless, the interest would be
deductible. A less wealthy taxpayer, with no income-earning assets, would not
be able to deduct interest payments on loans used in the identical fashion.
Such an interpretation would be unfair as between taxpayers and would make a
mockery of the statutory requirement that, for interest payments to be deductible,
borrowed money must be used for circumscribed income-earning purposes.
[49]
In the subsequent decision of the
Supreme Court of Canada in The Queen v. Singleton [2001] 2 S.C.R.
1046, [2002] 1 C.T.C. 121, 2001 DTC 5533, (which followed the decision of the
Supreme Court of Canada in Shell Canada Ltd. v. The Queen [1999]
3 S.C.R. 622), Justice Major, writing on behalf of the majority, stated that:
29 It
is now plain from the reasoning in Shell that the issue to be determined
is the direct use to which the borrowed funds were put. "It is irrelevant
why the borrowing arrangement was structured the way it was or, indeed, why the
funds were borrowed at all" (Shell, supra, para. 47).
[50]
It appears that the direct use of
the borrowed funds was to finance personal expenditures and it is not relevant
that she had to borrow these funds because she had spent money to prepare the
house and to relocate herself and her daughter so that the house could be
available for Community Services.
[51]
As a result the interest incurred
in relation to the overdrafts on her bank accounts and her credit cards is not
deductible.
[52]
The Appellant also indicated that
she was paying interest on a house loan of $24,600 (in addition to the mortgage
on the property). The house loan was used to pay down the mortgage on the
property. The interest incurred in relation to this debt for the period from
May 1, 2001 to April 30, 2002
is deductible. Therefore the Appellant will be entitled to claim a deduction of
$638.62 in computing her income for 2001 and a deduction of $305.97 in
computing her income for 2002.
[53]
There was also a mortgage on the
property located at 141 Conrad Road. The Appellant, together with her brother and her
sister, inherited this property from their mother. The Appellant bought out her
siblings’ interest in the property. As noted above, this house was used by the
Appellant as her residence for the first part of 2001 and, although the exact date
is not known, it appears that she ceased to occupy this house as her residence
by the beginning of May, 2001. The interest incurred on the mortgage on the
property, which presumably was incurred to buy out her siblings’ interest in
the property, for the period from May 1, 2001 to April 30, 2002 would be
deductible in computing her income.
[54]
The mortgage statements submitted
as Exhibits only indicate the total amount paid as interest for 2001 and 2002
(which would decrease for each month during the year as the principal amount is
reduced). The total amount paid as interest for 2001 was $4,597.15 and for 2002
was $4,136.58. There was also a significant principal payment of $24,600 in
2001 (from the housing loan) which would reduce the interest for the period after
this payment was made. It appears that the housing loan was incurred (and the
principal payment on the mortgage was made) before May 1, 2001 (before the
Appellant had vacated the house). Since the maturity date of the mortgage was
April 1, 2006, the same rate of interest would have been applicable in 2001 and
2002. The total interest paid in 2002 (which would reflect interest paid after
the principal reduction of $24,600) will be used as an estimate of the annual
interest paid (after the principal reduction of $24,600 is taken into account).
Based on this, the amount of interest that would be deductible for 2001 would
be 66.7% of $4,137 or $2,758 and for 2002 would be 33.3% of $4,137 or $1,379.
[55]
As a result the total amount that
will be deductible as interest in computing the Appellant’s income for 2001 and
2002 is:
|
|
2001
|
2002
|
|
Interest on Housing Loan
|
$639
|
$306
|
|
Interest on Mortgage
|
$2,758
|
$1,379
|
|
Total:
|
$3,397
|
$1,685
|
Le Caine Enterprises – Maintenance & Repairs
[56]
The items included in maintenance
and repairs were the following:
|
|
2001
|
2002
|
|
Mobile Wash (washing
the siding)
|
$161.00
|
|
|
Sears carpet &
upholstering cleaning services
|
$376.05
|
|
|
PCO Services
|
$258.75
|
|
|
Cole Harbour Glass
|
$25.87
|
|
|
Gas for lawn tractor, mower
& snipper
|
$180.00
|
|
|
Surround shower installed
in bathroom – faucets replaced
|
$535.00
|
|
|
Terrell Clyke labour –
cutting grass, shoveling driveway
|
$1,250.00
|
$600.00
|
|
Miscellaneous items –
vacuum cleaner belt, bags, weather stripping
|
$65.74
|
|
|
Items purchased at Canadian
Tire and Wal-Mart
|
|
$663.79
|
|
|
$2,852.41
|
$1,263.79
|
[57]
I accept the Appellant’s testimony
that she incurred all of the amounts listed above for 2001 and the amount for
Terrel Clyke’s labour for 2002. The business was the provision of the house
located at 141 Conrad Road to Community Services for its use as a temporary
place of lodging for young adults. The cleaning (washing the siding and Sears
cleaning services) and pest control services would be incurred for the purpose
of earning income as the house would have to be clean and pests would have to
be controlled. The grounds would also have to be maintained to make the
property presentable or accessible (the grass would have to be cut during the
spring, summer and fall and the driveway shoveled in the winter). The amount
incurred for the surround shower would be an amount incurred to prepare the
house for use by Community Services.
[58]
The amount paid to Terrell Clyke
for labour included an amount paid for a basketball camp for his brother. The
Appellant indicated that both Terrell Clyke and his brother provided labour
(mowing the lawns and shoveling the snow). Therefore the payment for the
basketball camp was either payment for the labour provided by either Terrell
Clyke or his brother and was part of their compensation. The amount paid to
Terrell Clyke (and presumably his brother) in 2002 was slightly less than
one-half of the amount paid to them in 2001. Since the property is considered
to be used in carrying on the business for twice as long in 2001 as it was in
2002, the full amount of $600 will be allowed for 2002 as the quantum of the
payments to them correlates to the amount of time that the property was
considered to be used to earn income in these years.
[59]
The assumptions of fact as set out
in the Reply do not include any assumption that any of the amounts were
unreasonable or that the amount incurred for the surround shower was on account
of capital nor was any argument advanced that any of the amounts should be
disallowed on the basis that they were not reasonable or were on account of
capital. The only arguments (and hence the bases for the reassessment) were
that the amounts had not been incurred or if incurred, the expenditures were
not made for the purpose of earning income. Since I find that these amounts
were incurred for the purpose of earning income, the reasonableness of these
amounts or whether they were on account of capital are not matters that can be
considered since the Minister did not base the reassessment on a finding or an
argument that the amounts were not reasonable or were on account of capital nor
did the Respondent raise these issues.
[60]
However, it is not clear what
items were purchased at Canadian Tire and Wal-Mart in 2002. There is a separate
claim for cleaning supplies so either these items are not cleaning supplies or
there was a duplicate claim. The Appellant has not established that she
incurred these costs in addition to the amounts claimed for cleaning supplies
and therefore the amounts claimed for items purchased at Canadian Tire and
Wal-Mart in 2002 cannot be claimed as an expense by the Appellant in computing
her income for 2002.
[61]
As a result the following amounts
are allowed as expenses for maintenance and repairs in computing the
Appellant’s income for 2001 and 2002:
|
|
2001
|
2002
|
|
Maintenance and Repairs
|
$2,852
|
$600
|
Le Caine Enterprises –
Office Expenses
[62]
The amounts claimed for office
expenses for 2001 and 2002 were small. It seems reasonable that some office
expenses would be incurred and therefore the amounts of $37 for 2001 and $68
for 2002 will be allowed as a deduction in computing her income for 2001 and
2002 respectively.
Le Caine Enterprises -
Supplies
[63]
The amount claimed as supplies for
2001 includes two amounts identified as Business Depot for $160.10 and $126.52.
I accept the Appellant’s testimony that she incurred these amounts. Since a
business will require some supplies these amounts will be allowed as a
deduction.
[64]
The balance of the amount claimed
for supplies for 2001 ($546.05) was identified as amount paid for miscellaneous
cleaning supplies. Since the house was occupied by different individuals in
2001, it seems obvious that the house would have to be kept clean and that
cleaning supplies would be purchased. Therefore the full amount claimed of
$546.05 will be allowed as an expense in computing her income for 2001.
[65]
For 2002, the total amount claimed
of $632.85 was identified as cleaning supplies. It is not clear why the cost of
cleaning supplies was greater in 2002 when no one was occupying the house than
it was in 2001 when the house was being used by Community Services. Since the
house is to be considered to be used in the business for one-third of 2002,
approximately one-third of this amount or $210 will be allowed for cleaning
supplies for 2002.
Le Caine Enterprises –
Property taxes
[66]
The assumptions made in the Reply
included the assumptions that the Appellant owned the property located at 141 Conrad Road,
the Appellant used this house to earn income by providing emergency housing to
Community Services and this business did not cease until 2002. The only
assumption that indicates any reason for denying the expenses (which would
include the property taxes) was that the expenses were not incurred. It is not
logical to assume that a person would own property in Nova Scotia and
not incur property taxes. It seems obvious to me that property taxes were
incurred and the amount incurred for property taxes for the period from May 1,
2001 to April 30, 2002 will be allowed as a deduction. As a result, 66.7% of
$1,193.69 or $796 will be allowed as an expense for property taxes for 2001 and
33.3% of $1,177.05 or $392 will be allowed as an expense in 2002.
Le Caine Enterprises -
Travel
[67]
The amount claimed as travel
represented the estimated cost of the Appellant traveling to and from the
property in Lawrencetown. However, this travel would be from her home to 141
Conrad Road or perhaps on occasion from her place of employment to 141 Conrad
Road and then to her home. In any event, it appears that this travel is travel
to this work location from her home or from this work location to her home. In Mott
v. The Queen [1988] 2 C.T.C. 127, 88 D.T.C. 6359 a taxpayer had claimed the costs related to his
airplane that he used to commute from his home to his farm. Justice Denault of the Federal Court Trial Division
stated as follows:
The Court now turns to the
deductibility of the aircraft expenses for the years 1980 and 1981. The
plaintiff charged 75% of the operating expenses of the aircraft as a deduction
in his income. The Minister disallowed $9,820.67 in 1980 and $5,317.36 in 1981.
The plaintiff purchased the aircraft in the fall of 1979 for the specific
purposes of travelling more quickly and efficiently to and from his orchard. He
used it until 1983 to commute from his residence (Summerland) or his office (Penticton)
to his orchard (Keremeos). The years 1982 and 1983 are not in dispute since on
the advice of his accountant he did not claim these expenses as deductions in
those years, even though he still owns and uses the aircraft. In the material
years, particularly in 1981, the plaintiff claimed $5,317.36 in his statement
or orchard operations but they were entirely disallowed by the Minister.
According to section 18(1) of the
Act, no expense is deductible unless it is incurred for the purpose of gaining or
producing income from the business. It is now well established that travelling
expenses incurred for the purpose of commuting between one's place of residence
and his place of business is not deductible (Henry v. M.N.R. 72
D.T.C. 6005 (S.C.C.)). So to the extent that the aircraft expenses were
incurred for the purposes of travelling from the plaintiffs home in Sumerland,
B.C. to his orchard, they clearly fall in the class of commuting expenses to go
to a place of business and therefore are not deductible.
Moreover, the
expenses of travelling between one's residence and his business en route to
another business, and back, are also not deductible ( Sargent v. Barnes,
[1978] 1 W.L.R. 823). Consequently, the aircraft expenses incurred for purposes
of travelling between the plaintiffs place of business, namely his law practice
in Penticton and his other place of business, namely the farm, are also not
deductible because it involved commuting between two different businesses and
the residence.
[68]
In this case the travel costs
appear to be the costs of routine travel to the work location from her
residence or from the work location to her residence. As a result, no amount
will be allowed for travel costs.
Le Caine Enterprises –
Telephone & Utilities
[69]
The Appellant was paying the bills
for a number of cell phones, land lines and a pager. The Appellant was unable
to match the account statements that were submitted for the cell phones with
any particular cell phone. Based on the copies of the invoices that were submitted
the following appear to be the phones for which amounts were claimed:
|
Phone Company
|
Type
|
Period of Time
|
Notes
|
|
MTT – 464-1884
|
Land line
|
July 24, 2001 – July 15,
2002
|
Phone at Horizon Court
Apt.
|
|
MTT – 434-3847
|
Land line
|
January 3, 2001 – September
6, 2002
|
Although the address is 135 Conrad Rd
this appears to be the phone at 141
Conrad Road
|
|
MTT Mobility
|
Cell phone
|
January 10, 2001 – June /
July 2002
|
|
|
Rogers AT&T
|
Pager
|
April 4, 2001 – October 4,
2002
|
|
|
Rogers AT&T
|
Cell Phone
|
August 15, 2001 – September
15, 2002
|
Basic charge appears to be
$22.68 / month
|
|
Rogers AT&T
|
Cell Phone
|
April 22, 2001 – September
22, 2002
|
Monthly charges vary from
$45.10 to $118.28
|
[70]
Two of the cell phones were
provided to Terrell Clyke and his brother. They mowed the lawn in the spring,
summer and fall and shoveled snow during the winter. There is no indication
that they were related to the Appellant. The Appellant stated that she only
claimed the basic monthly charge for these phones and that Terrell and his
brother were instructed that they could only use the phones for their own use
when the calling was free (evenings and weekends). The Appellant would call
them on these phones to arrange for them to mow the lawn or shovel the
driveway.
[71]
It seems to me that the provision
of the cell phones to Terrell and his brother was simply part of their
compensation for mowing the lawns and shoveling the driveway. The difficulty in
this case is determining the amount that should be allowed as the Appellant was
unable to identify which account was for the cell phones that were provided to
Terrell and his brother. Since it seems logical that these two phones would be
acquired at the same time, since the charges for the last phone listed above
appear to indicate that the bill was for two phones (only the first page of
each invoice was submitted), and since the timing of the acquisition of these
phones coincides approximately with the time that the Appellant vacated the
premises located at 141 Conrad Road, I will assume that the last item identified
above represents the account for the two phones that were the ones for Terrell
and his brother.
[72]
The monthly charges for these
phones vary significantly from $45.10 to $118.28 (excluding HST). No
explanation was provided for the variance in the charges or whether the
Appellant deducted the excess charges from the amounts that were otherwise paid
to Terrell and his brother. Since they were only to use the phones for their
own personal use during the times that the calls were free, presumably the
Appellant could have recovered the excess charges by deducting the amount of
such charges from the amounts that would otherwise be paid to them. As a result
the amount that will be allowed will be $45.10 + $6.77 (HST) = $51.87 per month
for the period from May 1, 2001 to April 30, 2002 or $415 for 2001 and $207 for
2002.
[73]
The Appellant submitted various account
statements for the land line phone located at 141 Conrad Road. The following
table lists the amounts as shown on the statements that were submitted and the
amounts that will be allowed as a deduction in computing the Appellant’s income
for 2001 and 2002:
|
Bill Date
|
Amount on the Statement
|
Amount Allowed for 2001
|
Amount Allowed for 2002
|
|
May 6, 2001
|
$51.12
|
$10.22
|
|
|
June 6, 2001
|
$48.34
|
$48.34
|
|
|
July 6, 2001
|
$49.22
|
$49.22
|
|
|
August 6, 2001
|
$39.48
|
$39.48
|
|
|
September 6, 2001
|
$41.18
|
$41.18
|
|
|
October 6, 2001
|
$51.14
|
$51.14
|
|
|
November 6, 2001
|
$46.08
|
$46.08
|
|
|
December 6, 2001
|
$36.46
|
$36.46
|
|
|
January 6, 2002
|
$39.36
|
$31.74
|
$7.62
|
|
February 6, 2002
|
$36.51
|
|
$36.51
|
|
March 6, 2002
|
$44.37
|
|
$44.37
|
|
April 6, 2002
|
|
|
$36.51
|
|
May 6, 2002
|
|
|
$29.21
|
|
Total:
|
|
$353.86
|
$154.22
|
[74]
The invoices for April 6, 2002 and
May 6, 2002 were not included but there was an invoice for August 6, 2002 which
indicates that the telephone was still connected. The amounts for April and
May, 2002 are estimated based on the lowest monthly amount of $36.51. Since the
basic monthly charge (including HST) was $35.21 in the invoice dated February
6, 2002 and the same amount of $35.21 was the amount charged in the invoice
dated March 6, 2002, this amount did not vary based on the number of days in
the month. The invoices dated May 6, 2001, January 6, 2001 and May 6, 2002 were
prorated based on the number of days in the relevant time period. Since it was
a condition imposed by Community Services that a land line be available at the
house (which seems like a logical and reasonable condition given the nature of
the use of the house by a crisis intervention team and emergency housing for young
individuals), the cost of the land line located at 141 Conrad Road will be
allowed as a business expense.
[75]
The Appellant used the pager in
the business. She indicated that she needed the pager so that Community
Services could contact her at any time if they needed to use the house. If
Community Services needed the house they would need it on short notice. The
pager costs incurred for the period from May 1, 2001 to April 30, 2002 will be
allowed. The charges for the pager were $13.74 per month (including HST).
Therefore the amount that will be allowed will be 8 x $13.74 = $109.92 for 2001
and 4 x $13.74 = $54.96 for 2002.
[76]
One of the other cell phones
(either the MTT Mobility phone or the Rogers AT&T phone) was held by the
Appellant’s son. It is not clear how he was involved in the business. The
Appellant indicated that she provided him with a phone so that she could
contact him if she needed him to check on the property. However there was no
indication of how often that would happen. As well, while the Appellant
indicated that the property located at 135
Conrad Road (which was adjacent to the
property located at 141 Conrad Road) was rented to the Appellant’s son and his
girlfriend, the Appellant indicated that he would not stay there very often. It
seems to me that the cell phone was provided to the Appellant’s son because he
was her son and so that she could contact him wherever he might be and not for
the purposes of earning income. As a result no amount will be allowed for this
cell phone.
[77]
The land line for the apartment
was claimed as part of the expenses related to Data Entry Select and no amount
will be allowed for this phone in determining the income related to Le Caine
Enterprises.
[78]
This still leaves one cell phone
that has not been accounted for (either the MTT Mobility phone or the Rogers
AT&T phone). Since the Appellant was unable to explain how this other cell
phone was used to earn income and since all of the phones and the pager used in
relation to the business have been accounted for, no amount will be allowed for
this phone.
[79]
In the schedule prepared by the
auditor for the CRA, certain amounts were listed as amounts for propane and oil
for the property located at 141 Conrad
Road. The following table lists the
amounts as shown on the schedule prepared by the CRA auditor and the amounts
that will be allowed as a deduction for the period from May 1, 2001 to April
30, 2002:
|
Date
|
Item
|
Amount Shown on the
CRA Auditor’s Schedule
|
Amount Allowed for
2001
|
Amount Allowed for
2002
|
|
June 21, 2001
|
Propane
|
$136.09
|
$136.09
|
|
|
September 13, 2001
|
Propane
|
$200.96
|
$200.96
|
|
|
December 6, 2001
|
Propane
|
$175.82
|
$175.82
|
|
|
May 9, 2002
|
Propane
|
$273.11
|
|
$273.11
|
|
May 9, 2001
|
Oil
|
$198.49
|
$85.07
|
|
|
June 11, 2001
|
Oil
|
$176.63
|
$176.63
|
|
|
July 27, 2001
|
Service Charge
|
$3.48
|
$3.48
|
|
|
August 18, 2001
|
Oil
|
$52.04
|
$52.04
|
|
|
October 27, 2001
|
Oil
|
$146.45
|
$146.45
|
|
|
November 20, 2001
|
Oil
|
$220.40
|
$220.40
|
|
|
December 31, 2001
|
Oil
|
$201.25
|
$201.25
|
|
|
January 2, 2002
|
Oil
|
$234.90
|
|
$234.90
|
|
January 17, 2002
|
Oil
|
$202.71
|
|
$202.71
|
|
January 28, 2002
|
Service Charge
|
$3.97
|
|
$3.97
|
|
January 31, 2002
|
Oil
|
$186.92
|
|
$186.92
|
|
February 14, 2002
|
Oil
|
$251.33
|
|
$251.33
|
|
February 27, 2002
|
Service Charge
|
$12.68
|
|
$12.68
|
|
February 15, 2002 – April
30, 2002
|
|
|
|
$700.00
|
|
Total:
|
|
|
$1,398.19
|
$1865.62
|
[80]
Since as noted above, the
assumptions made in the Reply included assumptions that the property was used
to earn income from Community Services it is not at all clear why these
expenses were denied since the auditor for CRA acknowledged that the amounts
listed in the third column of the table above had been incurred. These amounts
will be allowed as noted above. As well, it seems logical that oil would have
been used to heat the house for the period from February 15, 2002 to April 20,
2002. In 2001 the amount incurred for oil during March and April was over
$1,000. In March and April 2002 the house was unoccupied so the amount should
be less. The amount that will be allowed for oil for the period from February
15, 2002 to April 30, 2002 will be $700.
[81]
The Appellant also submitted
copies of invoices from Nova Scotia Power for the property located at 141 Conrad Road.
These invoices indicated the following charges for electricity:
|
Service Period
|
Amount
|
Amount Allowed for
2001
|
Amount Allowed for
2002
|
|
April 9, 2001 – June 8,
2001
|
$99.62
|
$65
|
|
|
June 8, 2001 – August 10,
2001
|
$124.17
|
$124
|
|
|
December 11, 2001 –
February 11, 2002
|
$69.67
|
$24
|
$46
|
[82]
There are significant gaps in the
periods covered by the electricity bills as presented. However it is not
logical to assume that there was no electricity at the house while it was being
used. The bill for the period from June 8, 2001 to August 10, 2001 includes a
connect charge of $18.00 (which would be $20.70 including HST). Deducting this
from the bill leaves a charge for electricity of $103.47. As a result, it
appears that when the house was occupied, the average monthly charge for
electricity was approximately $50 (including HST). Therefore for the period
from August 10, 2001 to November 1, 2001, the amount of $135 will be allowed.
The bill for the period from December 11, 2001 to February 11, 2002 indicates
that the average monthly charge for the time when the house was unoccupied was
approximately $35. Therefore the amount of $46 will be allowed for the period
from November 1, 2001 to December 10, 2001 and $90 will be allowed for the
period from February 11, 2002 to April 30, 2002.
[83]
The only other item included in
telephone and utilities were charges for accessing the internet. I accept that
the Appellant used the internet in carrying on her business as she used the
internet to pay the bills related to the business. The Appellant’s teenaged
daughter also lived with her during these years. I do not accept that her
teenaged daughter did not also use the internet. In the schedule prepared by
the Appellant she indicated that the monthly charges for accessing the internet
were $26 until November 2001 and then were $17. Since it seems more likely than
not that the internet would have been used mainly for personal purposes by either
the Appellant or the Appellant’s daughter, in this case I will allow 25% of the
costs of accessing the internet as a business expense.
[84]
The Appellant stated that she
lived with friends after she vacated the property located at 141 Conrad Road
in 2001 until she moved into the apartment located at Horizon Court.
She moved into this apartment in late July 2001. It seems to me that it is more
likely than not that while the Appellant was living with her friends the
Appellant did not incur charges for the internet so no amount will be allowed
for the months of May to July 2001 for internet charges.
[85]
As a result, for internet charges,
25% x $26 x 3 months = $20 will be allowed for the months of August to October
2001 and 25% x $17 x 2 months = $8 will be allowed for the months of November
and December 2001 (for a total deduction of $28 for 2001) and 25% x $17 x 4
months = $17 will be allowed as a deduction for 2002.
[86]
The following amounts will
therefore be allowed as a deduction for Telephone & Utilities in computing
the Appellant’s income for 2001 and 2002:
|
Item
|
Amount Allowed for
2001
|
Amount Allowed for
2002
|
|
Cell Phone – Terrell Clyke and his brother
|
$415
|
$207
|
|
Land line – 141 Conrad Road
|
$354
|
$154
|
|
Pager
|
$110
|
$55
|
|
Propane & Oil
|
$1,398
|
$1,866
|
|
Electricity – May 1 – June
8, 2001
|
$65
|
|
|
Electricity
– June 8 – August 10, 2001
|
$124
|
|
|
Electricity – August 10 –
November 1, 2001
|
$135
|
|
|
Electricity – November 1,
2001 – December 10, 2001
|
$46
|
|
|
Electricity – December 11 –
December 31, 2001
|
$24
|
|
|
Electricity - January 1 –
February 11, 2002
|
|
$46
|
|
Electricity – February 11 –
April 30, 2002
|
|
$90
|
|
Internet
|
$28
|
$17
|
|
Total for Telephone &
Utilities
|
$2,699
|
$2,435
|
Le Caine
Enterprises –CCA
[87]
Given the assumptions made in the
Reply, there is no logical basis for denying the CCA claimed by the Appellant
for 2001. Since it was assumed that the Appellant owned the building, the
building was used to earn income, and the business did not cease until 2002, on
what basis was the CCA claimed for 2001 denied? It seems obvious to me that
once these assumptions were made that CCA should have been allowed. No
assumptions were made that the capital cost of the building should have been a
different amount than was used by the Appellant. Simply referring to an assumption
that the amount was not incurred does not imply that the fair market value of
the property (as of the time of the application of the change in use rules in
subsection 13(7) of the Act) was not equal to the capital cost of the
building as stated by the Appellant. There is no reference in the Reply to
subsection 13(7) of the Act nor is there any reference to the change in
use rules and there is nothing to indicate that the Appellant was reassessed on
the basis that the fair market value of the property (as of the time of the
application of the change in use rules in subsection 13(7) of the Act)
was not equal to the capital cost of the building as stated by the Appellant. Therefore
this cannot form the basis of a reassessment of the Appellant.
[88]
There is also no reference in the
Reply to subsection 1100(2) of the Income Tax Regulations. It is obvious
from the evidence presented at the hearing that the Appellant was living in the
property located at 141 Conrad Road at the beginning of 2001 and changed the
use of this property to a business use. As noted above, although the exact date
that the Appellant moved out of the property is not known, it was obviously
before May 13, 2001. This change in use from a personal residence to a business
use (to gain or produce revenue) would have resulted in a deemed disposition of
the property pursuant to subsection 13(7) of the Act. Since the property
would then be deemed to be acquired during the 2001 taxation year, the rules in
subsection 1100(2) of the Income Tax Regulations would be applicable and
the amount that would be allowed for CCA would be one-half of the amount that
would otherwise be applicable.
[89]
In my opinion the failure of the
Respondent to refer at all to subsection 1100(2) of the Income Tax
Regulations precludes the application of this section in determining the
amount of CCA that the Appellant may claim. Since the reduction of the CCA that
may be claimed would arise as a result of the application of a provision of the
Income Tax Regulations that was not considered by the Minister, this
would form a new basis for the reassessment and since the Minister did not
raise this basis, I cannot raise it.
The Reply does not disclose any logical reason for denying CCA and the
assumptions lead to a conclusion that CCA should be allowed. To apply the half
year rule to deny one-half of the CCA claimed for 2001 would be applying an
alternative basis that was not advanced by the Minister.
[90]
As a result the provisions of
subsection 1100(2) of the Income Tax Regulations will not be applied and
the amount of CCA that will be allowed for 2001 will be $3,254.
[91]
Subsection 1100(3) of the Income
Tax Regulations limits the amount of CCA that may be claimed if the
taxation year is less than 12 months. Since the Appellant is an individual, if
the fiscal period for Le Caine Enterprises does not coincide with the calendar
year then pursuant to subsection 1104(1) of the Income Tax Regulations the
reference to taxation year in subsection 1100(3) of the Income Tax
Regulations will be read as the fiscal period. Therefore if the fiscal
period of Le Caine Enterprises is less than 12 months in 2001, the CCA claim
would be based on the number of days in the fiscal period. However, again this
subsection of the Income Tax Regulations was not raised by the Minister
as a basis for the reassessment and therefore cannot be applied to support the
reassessment or any part of the reassessment.
[92]
In any event, in this case, it
would appear that even if this subsection would have been raised that it may
not have affected the outcome. In Harquail v. The Queen, 2001 FCA 320,
2001 DTC 5630, [2002] 1 C.T.C. 25, Justice Desjardins of the Federal Court of
Appeal made the following comments on behalf of the Federal Court of Appeal.
62 It is not easy to delimit the content of
the concept of carrying on business. One can see two outside parameters where
the carrying on of business does not occur: on the one hand, when a company,
which has been incorporated, has not actually commenced operation and, on the
other hand, when a company has become dormant and is only holding annual
meetings and filing its returns so as to avoid the forfeiture of its charter.
There are, in between, some activities, however, which are signs that a company
is operating and which should fall within the spectrum of the concept of
carrying on business, even though, for example, the activities are carried on
for the purpose of reaching an agreement which eventually is not reached or
even though they do not result in the earning of income.
63 In this line of reasoning, I find helpful
the comments made by Jackett J. in Canada Starch Co. v. Minister of National
Revenue (1968), 68 D.T.C. 5320 (Can. Ex. Ct.), at 5324 -25. While this
case turns on the notion of deductible business expenses or capital outlay, the
following, which throws some light on the issue of carrying on business, was
said:
[ . . . ] Similarly, in my view, expenses of other
measures taken by a businessman with a view to introducing particular products
to the market-such as market surveys and industrial design studies-are also
current expenses. They also are expenses laid out while the business is
operating as part of the process of inducing the buying public to buy the goods
being sold.
[emphasis added by Justice Desjardins]
64 Again, in Bowater Power Co. v.
Minister of National Revenue (1971), 71 D.T.C. 5469 (Fed. C.A.), at 5481, a
case dealing also with deductible business expenses and capital outlay, Noël,
A.C.J. stated:
[ . . . ] While the hydroelectric development, once
it becomes a business or commercial realty is a capital asset of the business
giving rise to it, whatever reasonable means were taken to find out whether
it should be created or not may still result from the current operations of the
business as part of the every day concern of its officers in conducting the
operations of the company in a business-like way. I can, indeed, see no
difference in principle between all of these cases.
[emphasis added by Justice Desjardins]
65 In
my view, Hall River was carrying on business without interruption since 1978.
It was constantly on the look-out for a market to develop its hydroelectric
potential. Hall River, therefore, meets the requirement of subsection 110.6(1)
of the Act, both in terms of “active business” and in terms of the relevant
period, namely “throughout that part of the 24 months immediately preceding the
determination time while it was owned by the individual”.
[93]
In this case it appears that the
Appellant may have started the business in the fall of 2000 when she had
discussions with representatives from Community Services about using her
property. As a result, it appears that the limitations in subsection 1100(3) of
the Income Tax Regulations may not have been applicable if the Minister
would have raised this argument.
[94]
Subsection 1100(11) of the Income
Tax Regulations also limits the amount of CCA that may be claimed if the
property is a rental property. Subsection 1100(14) of the Income Tax
Regulations provides as follows:
(14) In this section and section
1101, “rental property” of a taxpayer or a partnership means
(a) a building owned by the
taxpayer or the partnership, whether owned jointly with another person or
otherwise, or
…
if, in the taxation year in
respect of which the expression is being applied, the property was used by the
taxpayer … principally for the purpose of gaining or producing gross revenue
that is rent...
(14.1) For the purposes of
subsection (14), gross revenue derived in a taxation year from
(a) the right of a person or
partnership, other than the owner of a property, to use or occupy the property
or a part thereof, and
(b) services offered to a person
or partnership that are ancillary to the use or occupation by the person or
partnership of the property or the part thereof
shall be considered to be rent
derived in that year from the property.
(14.2) Subsection (14.1) does not
apply in any particular taxation year to property owned by
…
(b) an
individual, where the property is used in a business carried on in the year by
the individual in which he is personally active on a continuous basis
throughout that portion of the year during which the business is ordinarily
carried on; or
…
[95]
In this case, even though counsel
for the Respondent described the property as a rental property in his
pre-hearing submissions, no reference was made to these subsections of the Income
Tax Regulations nor were any arguments made in relation to these
provisions. As a result these provisions cannot be used to support the
reassessment of the Appellant.
[96]
In any event it appears that the
Appellant was personally active in the business on a continuous basis and
therefore that the provisions of subsection 1100(14.1) of the Income Tax
Regulations would not apply and since the amount paid to the Appellant
would be for the use of her property and ancillary services (cleaning etc.),
the restrictions in subsection 1100(11) of the Income Tax Regulations would
not be applicable.
[97]
For 2002, as noted above, it
appears that the Appellant ceased to carry on business as of the end of April
2002. It is not clear why CCA was denied for 2002.
[98]
Subsection 1100(1) of the Income
Tax Regulations provides, in part, as follows:
1100. (1) For the purposes of
paragraphs 8(1)(j) and (p) and 20(1)(a) of the Act, the following deductions
are allowed in computing a taxpayer's income for each taxation year:
(a) subject to subsection (2),
such amount as he may claim in respect of property of each of the following
classes in Schedule II not exceeding in respect of property
(i) of Class 1, 4 per cent,
…
of the
undepreciated capital cost to him as of the end of the taxation year (before
making any deduction under this subsection for the taxation year) of property
of the class;
[99]
As a result of the provisions of
subsection 20(1.1) of the Act, the definitions in subsection 13(21) of
the Act apply to these Regulations. The definition of undepreciated
capital cost is in subsection 13(21) of the Act and without an actual or
a deemed disposition of the property in 2002 this property would still be part
of the undepreciated capital cost of property of Class 1 of Schedule II as of
the end of 2002 and therefore the Appellant would be entitled to claim CCA in
relation to this property.
As well the provisions of subsection 1102(1) of the Income Tax Regulations
do not result in this property not being included in Class 1 as of the end of
2002 since the property was acquired (as a result of the provisions of
paragraph 13(7)(b) of the Act) in 2001 for the purpose of gaining
or producing income.
[100]
However, the basis of the
reassessment was that the amounts had not been incurred. There is no reference
anywhere to the deemed disposition rules in subsection 13(7) of the Act.
As a result the potential application of the deemed disposition rules cannot
form the basis of the reassessment. Since there was no actual disposition of
the property in 2002, without a deemed disposition the property would remain as
part of Class 1 of Schedule II.
[101]
In any event, the deemed
disposition rules in subsection 13(7) of the Act require that the
taxpayer use the property for another purpose. Paragraph 13(7)(a) of the
Act provides as follows:
(7) Subject to subsection 70(13),
for the purposes of paragraphs 8(1)(j) and (p), this section, section 20 and
any regulations made for the purpose of paragraph 20(1)(a),
(a) where
a taxpayer, having acquired property for the purpose of gaining or producing
income, has begun at a later time to use it for some other purpose, the
taxpayer shall be deemed to have disposed of it at that later time for proceeds
of disposition equal to its fair market value at that time and to have
reacquired it immediately thereafter at a cost equal to that fair market value;
[102]
In this case it appears that the
Appellant did not use the property for any other purpose in 2002 and continued
to hold it in anticipation of finding some other business use for this property
as she was considering other business options for this property in 2002.
[103]
In Hewlett Packard (Canada)
Ltd. v. The Queen 2004 D.T.C. 6498, Justice Noël of the Federal Court of
Appeal stated that:
28 I
agree with the reasoning of the Tax Court Judge. It seems clear that a change
of use pursuant to paragraph 13(7)(a) requires that the asset in issue be used
"for some other purpose", and no such other purpose was evidenced in
this case.
[104]
Since the property was not used
for any other purpose in 2002, it appears that the change in use rules in
paragraph 13(7)(a) of the Act would not apply in any event, even
if the Minister had raised this as a basis for the reassessment.
[105]
As a result the Appellant will be
allowed to claim CCA for 2002 in the amount of $3,123.
Le Caine
Enterprises - Summary
[106]
As a result, the
following amounts will be allowed as deductions for expenses in determining the
Appellant’s income related to Le Caine Enterprises in 2001 and 2002:
|
|
2001
|
2002
|
|
Insurance
|
$356
|
$178
|
|
Interest
|
$3,397
|
$1,685
|
|
Maintenance & Repairs
|
$2,852
|
$600
|
|
Office Expenses
|
$37
|
$68
|
|
Supplies
|
$833
|
$210
|
|
Property taxes
|
$796
|
$392
|
|
Telephone & Utilities
|
$2,699
|
$2,435
|
|
CCA
|
$3,254
|
$3,123
|
|
Total Expenses Allowed:
|
$14,224
|
$8,691
|
Data Entry Select
[107]
The following table summarizes the
revenue reported, expenses claimed, expenses denied by CRA and the result of
the reassessment related to Data Entry Select:
|
|
2001
|
2002
|
|
Revenue:
|
$1,848
|
$0
|
|
Expenses claimed by the
Appellant:
|
($3,429)
|
($42)
|
|
Income (Loss) claimed by
the Appellant:
|
($1,581)
|
($42)
|
|
Expenses Denied by CRA:
|
$1,849
|
$42
|
|
Income (Loss) following
reassessment:
|
$268
|
$0
|
[108]
The only assumption of facts in
the Reply related to Data Entry Select that indicates the facts that were
assumed that led to the denial of these expenses was that the Appellant did not
have any business expenses in addition to the amount that was allowed for
wages. In the “Grounds Relied On” section of the Reply the Respondent stated
that the Appellant was “not entitled to deduct additional business expenses in
2001 and 2002 in respect of Data Entry Select because she did not incur outlays
or expenses for the purpose of gaining or producing income from business and
property as required by paragraph 18(1)(a) of the Act”.
[109]
Data Entry Select was a sole
proprietorship through which the Appellant provided training for people to
provide data entry services and provided data entry operators to Loomis. The
Appellant was working full time at a bank and also working part time at Loomis.
She recognized a need at Loomis for data entry operators. She provided data
entry operators to Loomis until Loomis decided to have this service provided in
Ontario and her service contract with Loomis was terminated in August 2001.
After August 2001 the Appellant did not have any customers for Data Entry
Select and the only activity related to Data Entry Select was that the
Appellant would approach people if the opportunity arose, about the possibility
of providing data entry services. The Appellant was unable to identify how
often that would occur but did make it clear that since she was working full
time at the bank and had another job (in addition to Le Caine Enterprises) that
she did not have the time to do anything in relation to Data Entry Select.
[110]
It is not clear when the business
of Data Entry Select commenced. The largest amount claimed that is in dispute
was $1,248.52 for telephone and utilities. The Appellant claimed these in
relation to the apartment that she had at Horizon
Court. She indicated that the office for
this business was in this apartment. She included charges for electricity
related to this apartment for the period from April – June 2001. However based
on her testimony and the fact that the telephone for the apartment was not
connected until July 24, 2001, she did not move into the apartment until late
July 2001.
[111]
The Certificate of Registration
issued under the Partnerships and Business Names Registration Act (Nova Scotia)
shows that the date of registration of the business name was June 4, 2001. The
Appellant claimed $96 which included the cost of the NUANS search (to determine
if the name would be available for the Appellant) and the cost of registration
as deductible expenses. Since these are clearly not personal costs, there is no
basis for denying the deduction for these costs. Since the Minister did not
advance any argument that these may be on account of capital, this cannot form
the basis of the reassessment and these amounts ($96 in total) will be allowed
as an expense in determining her income for 2001.
[112]
The Appellant had opened a bank
account for Data Entry Select on July 5, 2001. The Appellant incurred service
charges of $38.40 in relation this account for the period from July 5, 2001 to
December 31, 2001 and $50.90 in 2002. Since this account was set up for this
business, these amounts will be allowed as an expense in determining her income
for 2001.
[113]
The Appellant claimed 50% of
certain meal expenses. There were three separate charges for $15.12, $24.82 and
$38.41 for a total of $78.35 of which one-half or $39.17 was claimed by the
Appellant. I accept the testimony of the Appellant that these were related to
the business of Data Entry Select as she was meeting with representatives of
Loomis to discuss the possibility of providing data entry services to Loomis
and therefore the amount as claimed will be allowed as an expense in
determining her income for 2001.
[114]
The Appellant claimed the cost of
tax software ($32.84) as a deductible expense. The Appellant did not have the
receipt for this purchase. The tax return for 2001 was submitted as an Exhibit
and it appears obvious that this return was prepared using tax software. As a
result I accept that the Appellant incurred this amount. Since the software was
used to prepare the income statement for this business (as well as the income
statement for Le Caine Enterprises), it seems to me that this was not a
personal expense. Since the only basis for the reassessment of the Appellant
was that the Appellant did not have any business expenses in addition to the
amount that was allowed for wages and since the Respondent only referred to
paragraph 18(1)(a) of the Act, this amount will be allowed as an
expense.
[115]
The Appellant stated that she
incurred $133.31 in purchasing supplies such as file folders, T4 envelopes,
invoice forms, paper etc. I accept her testimony and I will allow $133.31 as an
expense for office supplies.
[116]
The Appellant claimed 75% of the
cost of traveling to Sydney, Nova Scotia to
attend a funeral as a business expense. A Loomis employee who was only 27 years
of age died following a massive heart attack. It seems to me that the decision
to attend any funeral is a personal decision and the reason that a person
attends a funeral will depend on the relationship or connection of that person
to the deceased. Some people who had a direct connection or relationship with
the deceased would presumably attend the funeral to grieve or for closure.
Others who had an indirect connection would presumably attend to express
condolences and show support for family and friends of the deceased and others
may attend to show respect. It does not seem to me that a person would (or
should) attend a funeral to solicit business. It would be little comfort to the
family of the deceased to learn that any person attended the funeral for the
purpose of earning income. The Appellant is not entitled to deduct these travel
costs in computing her income
[117]
The amount claimed for telephone
and utilities include amounts for electricity for the apartment (including
estimated electricity costs for the period before she moved into the
apartment), telephone costs, internet charges and rent for 9 months. Since the
Appellant did not move into the apartment until late July 2001, none of these
costs for any period prior to that time may be claimed as they were not
incurred.
[118]
The Minister did not argue that
the Appellant’s principal place of business was not the office in the apartment
nor did the Respondent, in the Reply or at any time, refer to subsection 18(12)
of the Act. Therefore the restrictions contained in subsection 18(12) of
the Act cannot form the basis of the resassessment. I accept the
Appellant’s testimony that she maintained an office in the apartment and that
it was used for the purpose of carrying on this business. I also accept the
Appellant’s submission that the office represented 10% of the space. However,
it seems to me that once the contract with Loomis was terminated in August 2001
and the sole activity related to this business was the Appellant discussing the
possibility of providing data entry services with individuals as and if the
occasion arose, I do not accept that the office in the apartment was used for
the purpose of earning income after August 2001 and therefore the costs related
to the office incurred after August 2001 are not deductible.
[119]
Therefore only the costs incurred
for one month will be allowed. The cost of electricity for August appears to be
$26.26 and the rent for August was $855. Therefore 10% of these costs will be
allowed or $88.
[120]
With respect to the telephone and
internet charges, it seems to me that the telephone would be used personally as
well as for the business. Since, after the contract with Loomis was terminated
in August 2001, the Appellant was only discussing the business with people she
met, if the occasion arose, the telephone would not be used in the business at
all any time after the end of August 2001. As a result I will allow 50% of one
month’s phone bill or 50% x $41.95 = $21 as an expense for the telephone. It
appears to me that the charges for the internet were considered as part of the
expenses for Le Caine Enterprises and no additional amount will be allowed for
Data Entry Select.
Data Entry
Select - Summary
[121]
As a result, the
following amounts will be allowed as a deduction for expenses in determining
the Appellant’s income related to Data Entry Select in 2001 and 2002:
|
|
2001
|
2002
|
|
Wages (Allowed by CRA)
|
$1,580
|
|
|
NS Companies Office fees
|
$96
|
|
|
Bank Service fees
|
$38
|
$51
|
|
Meal & Entertainment
|
$39
|
|
|
Office Expenses – tax
software
|
$33
|
|
|
Supplies
|
$133
|
|
|
Home office
|
$88
|
|
|
Telephone
|
$21
|
|
|
Total Expenses Allowed:
|
$2,028
|
$51
|
Rental Property
[122]
The following table summarizes the
revenue reported, expenses claimed, expenses denied by CRA and the result of
the reassessment related to the property located at 135 Conrad Road:
|
|
2001
|
2002
|
|
Revenue:
|
$1,100
|
$4,600
|
|
Expenses claimed by the
Appellant:
|
($8,001)
|
($8,143)
|
|
Income (Loss) claimed by
the Appellant:
|
($6,901)
|
($3,543)
|
|
Expenses Denied by CRA:
|
$8,001
|
$8,143
|
|
Income (Loss) following
reassessment:
|
$1,100
|
$4,600
|
[123]
The rental property was adjacent
to the property of the Appellant which was used in the business carried on by
Le Caine Enterprises in Lawrencetown. The property was rented to the
Appellant's son and his girlfriend. It would appear that the Appellant's son
did not stay at these premises the entire time. There are also some concerns related
to the property itself and in particular in relation to the well. The water
could not be consumed. As well the carpets had to be replaced and the back step
had separated from the house. The Appellant stated that the property could not
be rented to anyone else.
[124]
The Appellant indicated that her
son would pay for certain expenses related to the property in lieu of paying
rent. However there is no indication that these amounts that were spent by the
Appellant's son or his girlfriend on the property were treated by the Appellant
as part of the rent. If a tenant pays an expense related to the property in
lieu of paying rent, it seems to me that it is the same as paying rent to the
landlord and should be accounted by the landlord in the same manner as if the
rental cheque was written directly to the landlord. The monthly rent was $800.
However the total rental income reported by the Appellant for 2001 was only
$1,100. The Appellant’s son and his girlfriend moved into this house in January
2001 and therefore the rental income for the year should have been
approximately $9,600 (depending on when they moved in during January). The
amount reported for 2001 was less than two month’s rent. For 2002, the rental
income reported was only $4,600 or less than 6 months rent.
[125]
With respect to the rental
property the Respondent raised an additional argument that since the property
was rented to family that it was a cost sharing arrangement or personal and the
expenses were not incurred for the purpose of earning income. However if the
Respondent accepts that the Appellant had a source of income in relation to the
rental property then it seems to me that the expenses incurred in order to earn
income from that source must be allowed. If the Respondent is arguing that for
the purpose of determining whether the expenses are deductible there was no
source of property income then the revenue received should not have been
included in income. If the rental of the property is not a source of property
income then neither the revenue nor the expenses would be claimed by the
taxpayer. If the rental of the property is a source of income then the revenue
and the related expenses would be claimed by the taxpayer.
[126]
In Stewart v. The Queen,
[2002] 3 C.T.C. 439, 2002 DTC 6983, the Supreme Court of Canada stated
as follows:
5 It
is undisputed that the concept of a “source of income” is fundamental to the
Canadian tax system; however, any test which assesses the existence of a source
must be firmly based on the words and scheme of the Act. As such, in order to
determine whether a particular activity constitutes a source of income, the
taxpayer must show that he or she intends to carry on that activity in pursuit
of profit and support that intention with evidence. The purpose of this test is
to distinguish between commercial and personal activities, and where there is
no personal or hobby element to a venture undertaken with a view to a profit,
the activity is commercial, and the taxpayer's pursuit of profit is
established. However, where there is a suspicion that the taxpayer's activity
is a hobby or personal endeavour rather than a business, the taxpayer's
so-called reasonable expectation of profit is a factor, among others, which can
be examined to ascertain whether the taxpayer has a commercial intent.
…
21 It
well-accepted that the Canadian tax system adopted the concept of “source” from
the English taxation statutes, and that the Act has always referred to income
from various “sources”…
…
48 In
our view, the determination of whether a taxpayer has a source of income, must
be grounded in the words and scheme of the Act.
49 The
Act divides a taxpayer's income into various sources. Under the basic
rules for computing income in s. 3, the Act states:
3. The income of a taxpayer for a
taxation year for the purposes of this Part is his income for the year
determined by the following rules:
(a) determine the aggregate of
amounts each of which is the taxpayer's income for the year
. . . from a source inside or outside Canada, including,
without restricting the generality of the foregoing, his income for the year
from each office, employment, business and property;
. . . [Emphasis added.]
With respect to business and
property sources, the basic computation rule is found in s. 9:
9.(1) Subject to this Part, a
taxpayer's income for a taxation year from a business or property is his profit
therefrom for the year.
(2) Subject to section 31, a
taxpayer's loss for a taxation year from a business or property is the amount
of his loss, if any, for the taxation year from that source computed by
applying the provisions of this Act respecting computation of income from that
source mutatis mutandis.
50 It
is clear that in order to apply s. 9, the taxpayer must first determine whether
he or she has a source of either business or property income. As has
been pointed out, a commercial activity which falls short of being a business
may nevertheless be a source of property income. As well, it is clear
that some taxpayer endeavours are neither businesses nor sources of property
income, but are mere personal activities. As such, the following two-stage
approach with respect to the source question can be employed:
(i) Is the activity
of the taxpayer undertaken in pursuit of profit, or is it a personal endeavour?
(ii) If it is not a
personal endeavour, is the source of the income a business or property?
The first stage of the test
assesses the general question of whether or not a source of income exists;
the second stage categorizes the source as either business or property.
…
52 The
purpose of this first stage of the test is simply to distinguish between
commercial and personal activities, and, as discussed above, it has been
pointed out that this may well have been the original intention of Dickson J.'s
reference to “reasonable expectation of profit” in Moldowan. Viewed in this
light, the criteria listed by Dickson J. are an attempt to provide an objective
list of factors for determining whether the activity in question is of a commercial
or personal nature. These factors are what Bowman J.T.C.C. has referred to as
“indicia of commerciality” or “badges of trade”: Nichol, supra, at p. 1218.
Thus, where the nature of a taxpayer's venture contains elements which suggest
that it could be considered a hobby or other personal pursuit, but the venture
is undertaken in a sufficiently commercial manner, the venture will be
considered a source of income for the purposes of the Act.
53 We
emphasize that this “pursuit of profit” source test will only require analysis
in situations where there is some personal or hobby element to the activity in
question. With respect, in our view, courts have erred in the past in applying
the REOP test to activities, such as law practices and restaurants, where there
exists no such personal element: see, for example, Landry, supra, Sirois,
supra, Engler v. R. (1994), 94 D.T.C. 6280 (Fed. T.D.). Where the nature of an
activity is clearly commercial, there is no need to analyze the taxpayer's
business decisions. Such endeavours necessarily involve the pursuit of profit.
As such, a source of income, by definition, exists, and there is no need to
take the inquiry any further.
54 It
should also be noted that the source of income assessment is not a purely
subjective inquiry. Although in order for an activity to be classified as
commercial in nature, the taxpayer must have the subjective intention to
profit, in addition, as stated in Moldowan, this determination should be made
by looking at a variety of objective factors. Thus, in expanded form, the first
stage of the above test can be restated as follows: “Does the taxpayer intend
to carry on an activity for profit and is there evidence to support that
intention?” This requires the taxpayer to establish that his or her predominant
intention is to make a profit from the activity and that the activity has been
carried out in accordance with objective standards of businesslike behaviour.
55 The
objective factors listed by Dickson J. in Moldowan at p. 486 were (1) the
profit and loss experience in past years, (2) the taxpayer's training, (3) the
taxpayer's intended course of action, and (4) the capability of the venture to
show a profit. As we conclude below, it is not necessary for the purposes of
this appeal to expand on this list of factors. As such, we decline to do so;
however, we would reiterate Dickson J.'s caution that this list is not intended
to be exhaustive, and that the factors will differ with the nature and extent
of the undertaking. We would also emphasize that although the reasonable
expectation of profit is a factor to be considered at this stage, it is not the
only factor, nor is it conclusive. The overall assessment to be made is whether
or not the taxpayer is carrying on the activity in a commercial manner.
However, this assessment should not be used to second-guess the business
judgment of the taxpayer. It is the commercial nature of the taxpayer's
activity which must be evaluated, not his or her business acumen.
…
60 In
summary, the issue of whether or not a taxpayer has a source of income is to be
determined by looking at the commerciality of the activity in question. Where
the activity contains no personal element and is clearly commercial, no further
inquiry is necessary. Where the activity could be classified as a personal
pursuit, then it must be determined whether or not the activity is being
carried on in a sufficiently commercial manner to constitute a source of income.
(emphasis added)
[127]
In this case since the property in
question was not in a state where it could be rented to an arm’s length person,
it was rented to the Appellant’s son and his girlfriend, and the reported
rental income only represented less than thirty percent (30%) of the rental
income that should have been collected for the months for which the house was
purportedly rented, it appears to me that this arrangement was a personal
pursuit. As a result, it does not constitute a source of income and therefore
the revenue should not have been included in the Appellant’s income and the
amounts incurred in relation to this property are not deductible. Therefore the
net income from the rental property should be nil.
Conclusion
[128]
The appeal is allowed, without
costs, and the matter is referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that the net income of the
Appellant for 2001 and 2002 related to Le Caine Enterprises, Data Entry Select
and the property located at 135 Conrad
Road is as follows:
Le Caine Enterprises
|
|
2001
|
2002
|
|
Revenue:
|
$6,450
|
$0
|
|
Minus: Expenses
|
($14,224)
|
($8,691)
|
|
Net Income (Loss):
|
($7,774)
|
($8,691)
|
Data Entry Select
|
|
2001
|
2002
|
|
Revenue:
|
$1,848
|
$0
|
|
Minus: Expenses
|
($2,028)
|
($51)
|
|
Net Income (Loss):
|
($180)
|
($51)
|
Property located at 135
Conrad Road – “Rental
Property”
|
|
2001
|
2002
|
|
Revenue:
|
nil
|
nil
|
|
Minus: Expenses
|
nil
|
nil
|
|
Net Income:
|
nil
|
nil
|
Signed at Halifax, Nova Scotia,
this 4th day of August 2009.
“Wyman W. Webb”
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