Docket: 2007-1145(IT)I
BETWEEN:
LENORA P. FAGAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals heard on August 7 and 8, 2007
at St. John's, Newfoundland and Labrador
Before: The Honourable
Justice G. A. Sheridan
Appearances:
|
Agent for the Appellant:
|
David
Randell
|
|
|
|
|
Counsel for the Respondent:
|
Selena Sit
|
____________________________________________________________________
JUDGMENT
In accordance with the attached Reasons for Judgment,
the appeals of the assessments of the 1999, 2000 and 2001 taxation years are
allowed, with costs fixed at $200, and the assessments are referred back to the
Minister of National Revenue for reconsideration and reassessment on the basis that
the Appellant is entitled:
1. to motor vehicle recapture
income for 1999 in the amount of $128.71;
2. to a capital loss in respect
of the land allocation for the Elizabeth Property of $1,293.01;
3. to have vacated in their
entirety the "repeat failure to file" penalties under subsection
162(1) of the Income Tax Act;
4. to motor vehicle expenses of
$729.30 in 1999 and of $380.32 in each of 2000 and 2001;
5. to an increase of $600 in the
interest expense allowed by the Minister;
6. to capital additions to the
buildings on the three properties of 95 per cent of the amounts originally
claimed by the Appellant for 1999, 2000 and 2001;
7. to a capital loss (building)
for the Allandale property of $272 and of $5,996 for the Byron property. For
the Elizabeth property, the capital loss (building) shall be calculated by
adding $1,362 to amounts shown for that property in the column entitled "Minister's
Revised Position" in the chart in the Minister's Revised Position for
the Purpose of the Tax Court Hearing on August 7 and 8, 2007 in St. John's,
Newfoundland before Justice Sheridan, reproduced in paragraph 7(d), "Furniture
Additions to the Properties and Calculation of Capital Losses (Building)",
of these Reasons for Judgment;
8. to computer expenses of 20 per
cent of the amount originally claimed by the Appellant;
9. to a business expense claim of
$600 in 2000 and $250 in 2001 in respect of the washer and dryer.
Signed at Ottawa, Canada, this 20th day of August, 2007.
"G. A. Sheridan"
Citation: 2007TCC478
Date: 20070820
Docket: 2007-1145(IT)I
BETWEEN:
LENORA P. FAGAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sheridan, J.
[1] The Appellant, Lenora
Fagan, is appealing the assessment of the Minister of National Revenue of her
1999, 2000 and 2001 taxation years. During those years, the Appellant owned,
operated and ultimately disposed of three rental properties in St. John's, Newfoundland
and Labrador: the "Elizabeth property", the "Allandale property"
and the "Byron property". The Minister disallowed certain claims related
to these properties, each of which is dealt with under the headings set out
below.
[2] The Appellant was
represented by her agent, Mr. David Randell, a Chartered Accountant, with
nearly 30 years of accounting experience. Both the Appellant and Mr. Randell
testified at the hearing. The Appellant was quite distressed, apparently the
effect of having gone through a lengthy illness, the forced sale (at a loss) of
her rental properties and the audit process itself. Her agitated state had an
adverse effect on the clarity and precision of her evidence but I found her to
be nonetheless truthful.
[3] Mr. Randell, by
contrast, was entirely clearheaded and precise in the presentation of his
testimony. He had acted as the Appellant's accountant for several years and
also represented her throughout the auditor's review and the objection process.
I found his evidence entirely convincing. Further, in cross‑examining the
Respondent's witness, he effectively demonstrated the weaknesses in the auditor's
report that had formed the basis for the Minister's assessment.
[4] This last point,
however, ought not to be construed as a criticism of Judy Moores who, as
Team Leader for the Office Examination Division, was called upon to replace the
auditor and another official who had worked on the Appellant's file who, notwithstanding
that the Notice of Hearing had been sent some three months prior, were not
available at the time of the hearing. Ms. Moores became Team Leader in
January 2005. As such, her duties included being available to discuss files
with the auditors and signing off on their final reports. Though Ms. Moores
was straightforward and helpful in her testimony, the force of her evidence was
weakened by the fact that she simply had not been directly involved with the audit
or the objection process. Accordingly, she had to rely on her understanding of the
auditor's actions and her interpretation of her [the auditor's] notes and
reports.
[5] At the conclusion of
his cross-examination, Mr. Randell wished aloud that he had had the benefit of
her assistance during the audit. I can only echo his sentiments; given their mutual
respect for each other's roles and their capacity for listening and compromise,
I am convinced they could have resolved without much difficulty what began as a
relatively simple matter. Instead, the Appellant's file seems to have taken on
a life of its own, becoming unnecessarily complicated, ultimately requiring a
day and a half of litigation to sift through the sort of minutiae that is more appropriately
reviewed at a meeting between auditor and taxpayer.
[6] By the close of the
Appellant's case, however, some progress had been made. Counsel for the
Respondent, Ms. Moores and Mr. Randell were able to resolve some of the items
in dispute, on the terms set out below:
1. motor vehicle recapture income
for 1999 is $128.71;
2. capital loss in respect of the
land allocation for the Elizabeth Property is increased from $936.45 to
$1,293.01 (following the discovery of a departmental calculation error); and
3. the "repeat failure to
file" penalties under subsection 162(1) of the Income Tax Act are
vacated in their entirety.
[7] Turning
now to the items remaining in issue, I make the following findings:
(a) Motor Vehicle Expenses 1999, 2000 and 2001
While I accept the Appellant's statement that she used
her personal motor vehicle to some extent in her property rental business, the
difficulty is that she did not keep a log of any kind to document the
percentage of usage in each year; accordingly, she was unable to provide sufficient
evidence to rebut the assumed motor vehicle expenses of $729.30 in 1999 or to
establish the expenses claimed for 2000 and 2001. At the close of the Appellant's
case, however, the Respondent conceded a motor vehicle expense amount of
$380.32 in each of 2000 and 2001, being a proportion of the amount allowed in
1999. These amounts are reasonable and are fixed accordingly.
(b)
Mortgage Expenses for 1999
The
Minister allowed all but $600 of the $6,933.78 claimed for mortgage expenses in
1999. The auditor refused to allow the full amount on the basis that the
Appellant lacked the documentary evidence to show the $600 had been paid for business
interest. I accept the Appellant's evidence, however, that in addition to the
interest paid on the mortgage, she paid interest on certain smaller business
loans and lines of credit totalling $1,300.
I also accept as Mr. Randell's evidence regarding his general practices and
procedures, and methods employed in the preparation of the Appellant's returns
for the years in question. Accordingly, I have no reason to doubt his testimony
that the amounts shown in Exhibit A-4 accurately reflect information he had
gleaned from the Appellant's business records. The 1999 mortgage interest
expense claim is therefore increased by $600.
(c)
Capital Additions to the Buildings in 1999, 2000 and 2001
The
Minister disallowed 50 per cent of the amount claimed for capital additions to
the Elizabeth, Allandale and Byron properties in 1999, 2000 and
2001. At the close of the Appellant's case, counsel for the Respondent conceded
that the allowable amounts ought to be increased from 50 per cent to not more
than 75 per cent, arguing that the documents relied upon by the Appellant fell
short of justifying the full amounts claimed. Given the relative insignificance
of the alleged flaws in the documentation, the reasonableness of the
explanations for such deficiencies, the large number of receipts provided, the
questionable accuracy of the auditor's conclusions and her (apparent) unwillingness
to accede to Mr. Randell's repeated requests to identify and address her
concerns, I am not completely persuaded by the Respondent's submission. However,
allowing a small percentage for error, I am satisfied that, on balance, there
is sufficient evidence to support the Appellant's entitlement to 95 per cent of
the capital addition amounts originally claimed in respect of the three
properties.
(d)
Furniture Additions to the Properties and Calculation of Capital Losses
(Building)
At
the close of the Appellant's case, counsel for the Respondent advised the Court
that the Respondent had revised the amounts the Minister was prepared to allow
in respect of furniture which had been acquired for use in the partially
furnished rental properties and which was ultimately sold as part of each
rental property. The revised figures were provided for the Court's reference in
a document entitled Minister's Revised Position for the Purpose of the Tax
Court Hearing on August 7 and 8, 2007 in St. John's, Newfoundland
before Justice Sheridan, the
relevant portion of which is set out below:
Allandale
Property
|
Item
|
Claimed by
Appellant as set out
in Exhibit A1
|
Minister's Revised Position
|
Comments
|
|
Furniture in house at time of
conversion
|
$4,700
|
$2,257
|
Based on depreciation
at 20% for Class 8
assets
|
|
Capital additions - 1998
|
$1,985
|
$1,985
|
|
|
Sears – washer
|
$530
|
$530
|
|
|
TOTAL
|
$7,215
|
$4,772
|
|
|
Allocation upon disposition
based on FMV
|
($4,500)
|
($4,500)
|
|
|
Loss
|
$2,715
|
$272
|
|
Elizabeth Property
|
Item
|
Claimed
by Appellant as set
out
in Exhibit A3
|
Minister's
Revised Position
|
Comments
|
|
Fridge
|
$1,362
|
$0
|
Per Mr.
Randall's testimony
|
|
Bowring
furniture, curtains,bedspreads
|
$1,182
|
$236
|
Receipt
at E7
shows
only 1 final amount
|
|
Endtables/entertainment
centre
|
$297
|
$297
|
|
|
Used
furniture
|
$5,000
|
$5,000
|
|
|
TOTAL
|
$7,841
|
$5,533
|
|
|
Allocation upon disposition
based upon FMV
|
($4,000)
|
($4,000)
|
|
|
Loss
|
$3,841
|
$1,533
|
|
Byron Property
|
Item
|
Claimed by
Appellant as set
out in Exhibit A2
|
Minister's Revised Position
|
Comments
|
|
Furniture in house at time of
conversion
|
$9,950
|
$7,650
|
Reduced by 50% the items for
dining
room and
fridge/stove at B3
|
|
Capital expenditures in
preparation for rental
|
$1,086
|
$1,086
|
|
|
Capital additions – 1993
|
$1,710
|
$1,710
|
|
|
Sears – dryer
|
$469
|
$469
|
|
|
Bombay Co. – desk
|
$598
|
$0
|
Not reasonable
|
|
Bombay Co.
|
$322
|
$0
|
Not reasonable
|
|
Grand Warehouse
|
$956
|
$956
|
|
|
Used washer
|
$125
|
$125
|
|
|
Fridge
|
$1,362
|
$0
|
Per Mr. Randall's testimony
|
|
TOTAL
|
$16,578
|
$11,996
|
|
|
Allocation upon disposition
based upon FMV
|
($6,000)
|
($6,000)
|
|
|
Loss
|
$10,578
|
$5,996
|
|
In
my view, for the Allandale and Byron properties, the Appellant has not
presented sufficient evidence to challenge the figures shown in the column "Minister's
Revised Position" in the chart above. Accordingly, the Appellant is
entitled to a capital loss (building) of $272 and $5,996, respectively.
For
the Elizabeth property, however, a further adjustment is required.
In reviewing his papers during the course of the hearing, Mr. Randell realized
that he had inadvertently shown an amount of $1,362 (for the same fridge) in each
of the Elizabeth and Byron properties and conceded that it ought to be deleted from one of
the properties. A review of the figures contained in the chart above for the
Elizabeth and Byron properties in the “Minister’s Revised Position” column reveals
that this amount has been deleted from both properties, thereby disallowing
any amount for the fridge. In my view, this is not correct. Accordingly, in the
calculation of the capital loss (building) for the Elizabeth
property, the amount of $1,362 shall be added to the amounts shown in the "Minister's
Revised Position" column for that property.
(e)
Computer
The
Appellant claimed certain expenses in respect of the purchase of a computer,
printer and computer-related items. The auditor rejected her claim on the basis
that there was no proof that the computer had been used in the Appellant's
rental business. According to her own evidence, the Appellant relied on Mr. Randell
for the preparation of her accounting books and records; what records she kept
herself were more likely to have been handwritten. Further, there was no
evidence of her having possessed or used any accounting software for the
computer. Nonetheless, I am satisfied that the Appellant used the word
processing function of the computer and the other equipment for such things as
business correspondence, invoicing, drafting rental advertisements and so on.
Accordingly, the computer expenses are allowed to the extent of 20 per cent of
the amount claimed by the Appellant.
(f)
Washer and Dryer
As
the above heading illustrates, if ever there was a file that cried out for
meetings between the auditor and the taxpayer, it was this one. In any event,
having carefully reviewed the evidence of the Appellant's business
transactions, I am satisfied on a balance of probabilities that the Appellant
has successfully made her case for the washer and dryer expenses that were rejected
by the auditor. I accept the Appellant's evidence that the dryer was bought
second-hand and its repeated malfunction necessitated the rental of another
dryer. Thus, the claim of both the purchase price and the rental cost during
the same period was not a duplication of an expense as assumed by the auditor.
The Appellant's claims of $600 in 2000 and $250 in 2001 are allowed.
Conclusion
[8] The Appellant asked
for a range of other relief, including action against the alleged bad behaviour
of certain officials, a guarantee of fair treatment from the Canada Revenue Agency
in the future and the recovery of business income and interest lost during the
audit review period. As explained to her at the hearing, none of this is within
the Court's jurisdiction.
[9] Another sore point
for the Appellant was the collapse and seizure of her RRSP accounts by the Collections
Division of the Canada Revenue Agency. Not only did this deplete entirely the
Appellant's life savings, it triggered a fresh tax liability. Quite apart from
these fiscal repercussions, it caused no small amount of anxiety to the
Appellant who is in her 60's and a widow. According to the Appellant, she had
been assured by the Collections officials that her RRSP's would not be touched
during the objection stage. The Appellant testified that, had she been informed
otherwise, she would have borrowed money to reduce her tax liability, thus
avoiding the drastic consequences of having her RRSP's cashed in. She ended up
having to borrow the funds needed when in 2004, the department ultimately
allowed her to restore to some extent her RRSP account for that year. (According
to the Appellant, similar administrative relief was denied in 2005.) It may be
that there is another side to this story but there was no one from the CRA in a
position to challenge the Appellant’s allegations. In any event, it is beyond
the power of this Court to provide any remedy in this regard to the Appellant.
I include her version of events here only because it is consistent with the
other evidence of the rather rough treatment accorded to the Appellant over the
course of the review.
[10] Finally, the
Appellant asked for costs to cover, among other things, her accountant's fees
which, as of the date of this hearing, Mr. Randell estimated would be over
$10,000. These appeals were heard under the Informal Procedure and accordingly,
an order for costs of that magnitude would not be appropriate. Quite apart from
that, no matter how able an agent may be, costs for taxable fees are restricted
to legal counsel. In the circumstances of this case, however, I am
satisfied that an award of costs is justified at least to help defray the cost
of the preparation and production of documents in support of the same claims
she ought reasonably to have been allowed to present to the auditor. Had she been
given that opportunity, such costs (never mind the cost of having Mr. Randell
prepare for and attend at a hearing of a day and a half’s duration) might well
have been avoided.
[11] The appeals are
allowed, with costs fixed at $200, and the assessments are referred back to the
Minister of National Revenue for reconsideration and reassessment on the basis
that the Appellant is entitled:
1. to motor vehicle recapture
income for 1999 in the amount of $128.71;
2. to a capital loss in respect
of the land allocation for the Elizabeth Property of $1,293.01;
3. to have vacated in their
entirety the "repeat failure to file" penalties under subsection
162(1) of the Income Tax Act;
4. to motor vehicle expenses of
$729.30 in 1999 and of $380.32 in each of 2000 and 2001;
5. to an increase of $600 in the
interest expense allowed by the Minister;
6. to capital additions to the
buildings on the three properties of 95 per cent of the amounts originally
claimed by the Appellant for 1999, 2000 and 2001;
7. to a capital loss (building)
for the Allandale property of $272 and of $5,996 for the Byron property. For
the Elizabeth property, the capital loss (building) shall be calculated by
adding $1,362 to amounts shown for that property in the column entitled "Minister's
Revised Position" in the chart in the Minister's Revised Position for
the Purpose of the Tax Court Hearing on August 7 and 8, 2007 in St. John's,
Newfoundland before Justice Sheridan, reproduced in paragraph 7(d), "Furniture
Additions to the Properties and Calculation of Capital Losses (Building)",
of these Reasons for Judgment;
8. to computer expenses of 20 per
cent of the amount originally claimed by the Appellant;
9. to a business expense claim of
$600 in 2000 and $250 in 2001 in respect of the washer and dryer.
Signed at Ottawa, Canada, this 20th day
of August, 2007.
"G. A. Sheridan"
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