Citation: 2007TCC532
Date: 20070907
Docket: 2006-3275(IT)I
BETWEEN:
FREDERICK M. CROSS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1] The Appellant
carries on a sole proprietorship business as a painter. The Appellant was
reassessed for 2000, 2001 and 2002 in relation to the expenses that he had
claimed in relation to this business. The issue, as stated in paragraphs 8 and
9 of the Reply, is whether the Appellant is entitled to claim the expenses as
submitted or whether the expenses were not deductible under either paragraph
18(1)(a) or paragraph 18(1)(h) of the Income Tax Act
(“Act”).
[2] In the Reply it is
stated in paragraph 3 that:
By Notices of Reassessment dated February
20, 2004, the Minister reassessed the Appellant’s 2000, 2001 and 2002 taxation years
and increased the Appellant’s business income by $11,381; $9,160 and $19,731,
respectively.
[3] It is also stated
that following the filing of the Notice of Objection by the Appellant the
Minster confirmed the reassessments.
[4] Paragraph 6 of the Reply
states as follows:
The amounts in dispute are attached as
Schedule “A”.
[5] The only
assumptions that were made by the Minister are outlined in paragraph 7 of the
Reply and these are as follows:
In so reassessing and confirming the 2000, 2001 and 2002 taxation
years, the Minister made the following assumptions of fact:
a) the Appellant is the sole owner of a
proprietorship, which performs painting, wallpapering and decorating; and
b) the expenses claimed were the personal and
living expenses of the Appellant.
[6] The Schedule “A”
which is attached to the Reply lists for each of the three years various
expense categories with, for each year, three columns, one entitled
“Requested”, one entitled “Allowed” and a third entitled “WP”. For the
year 2000 the total amount listed as “Requested” in Schedule “A” is
$26,427.56. The total amount shown as “Allowed” in Schedule “A” is $10,031.75.
The difference between these two amounts is $16,395.81 However in paragraph 3
of the Reply the amount that was stated as the adjustment to business income
was $11,381.
[7] For 2001, the total
amount listed as “Requested” in Schedule “A” is $35,956.87, the total amount shown
as “Allowed” in Schedule “A” is $16,812.96 and the difference between these two
amounts is $19,143.91. However in paragraph 3 of the Reply it is stated that
the amount by which his income was adjusted was $9,160.
[8] For 2002, the total
amount listed as “Requested” is $40,303.91, the total amount shown as “Allowed”
is $18,414.45 and the difference between these two amounts is $21,889.46. However
in paragraph 3 of the Reply it is stated that the amount by which his income
was adjusted was $19,731.
[9] Therefore for each
year the adjustments to business income as stated in paragraph 3 of the Reply
do not correspond to the amounts that are stated to be in dispute in Schedule
“A”.
[10] The explanation that
was provided by counsel for the Respondent was that there was a discrepancy
between the amounts that the Appellant had claimed during the audit process and
the amounts that had been claimed on the tax return. The following tables
summarize for each of 2000, 2001 and 2002 the “Expense” categories as listed in
Schedule “A” to the Reply, the amounts “Requested” by the Appellant during the
audit as stated in Schedule “A” to the Reply, the amounts “Allowed” following
the audit as stated in Schedule “A” to the Reply and the amounts claimed by the
Appellant in his tax returns for each of these years:
2000
|
Expenses
|
Requested by the Appellant during the audit
|
Allowed following the audit
|
Claimed by the Appellant in his tax return
|
|
Purchases
|
4,662.00
|
4396.65
|
4,662.00
|
|
Advertising
|
667.00
|
628.95
|
667.00
|
|
Bad debts
|
0
|
0
|
0
|
|
Insurance
|
594.00
|
594.00
|
594.00
|
|
Maintenance & repairs
|
0
|
0
|
0
|
|
Meals & entertainment
|
33.50
|
0
|
33.50
|
|
Motor Vehicle
|
8,280.42
|
1,524.06
|
7,960.46
|
|
Office Expenses
|
613.00
|
264.90
|
613.00
|
|
Supplies
|
9.50
|
9.50
|
9.50
|
|
Legal, accounting
|
73.00
|
0.00
|
73.00
|
|
Rent
|
0
|
0
|
0
|
|
Telephone
|
504.00
|
0.00
|
504.00
|
|
Other
|
121.90
|
121.90
|
121.90
|
|
CCA
|
5,152.76
|
2,589.06
|
536.45
|
|
Business Use of Home
|
5,716.48
|
8.66
|
4,166.98
|
|
(less GST included)
|
|
(105.93)
|
|
|
|
26,427.56
|
10,031.75
|
19,941.79
|
2001
|
Expenses
|
Requested by the Appellant during
the audit
|
Allowed following the audit
|
Claimed by the Appellant in his
tax return
|
|
Purchases
|
6,226.93
|
6,097.28
|
4,516.00
|
|
Advertising
|
69.00
|
69.00
|
69.00
|
|
Bad debts
|
499.34
|
499.34
|
0
|
|
Insurance
|
2,754.00
|
544.00
|
2,754.00
|
|
Maintenance & repairs
|
963.00
|
0
|
963.00
|
|
Meals & entertainment
|
531.00
|
1.45
|
531.00
|
|
Motor Vehicle
|
6,860.74
|
3,009.70
|
8,777.13
|
|
Office Expenses
|
1,498.00
|
229.67
|
1,498.00
|
|
Supplies
|
17.00
|
17.00
|
17.00
|
|
Legal, accounting
|
605.00
|
604.55
|
605.00
|
|
Rent
|
980.00
|
0
|
980.00
|
|
Telephone
|
614.00
|
0.00
|
614.00
|
|
Other
|
0
|
0
|
0
|
|
CCA
|
2,571.58
|
4,237.93
|
543.85
|
|
Business Use of Home
|
11,767.28
|
1,635.33
|
5,734.76
|
|
(less GST included)
|
|
(128.29)
|
|
|
|
35,956.87
|
16,816.96
|
27,602.74
|
2002
|
Expenses
|
Requested by the Appellant during
the audit
|
Allowed following the audit
|
Claimed by the Appellant in his
tax return
|
|
Purchases
|
13,123.45
|
7,691.62
|
13,123.45
|
|
Advertising
|
1,051.00
|
1,051.00
|
1,051.00
|
|
Bad debts
|
376.33
|
376.33
|
376.33
|
|
Insurance
|
1,202.77
|
648.00
|
1,202.77
|
|
Maintenance & repairs
|
760.36
|
0
|
760.36
|
|
Meals & entertainment
|
614.11
|
76.11
|
614.11
|
|
Motor Vehicle
|
5,744.25
|
2,965.59
|
3,585.36
|
|
Office Expenses
|
1,885.68
|
123.61
|
1,885.68
|
|
Supplies
|
0
|
0
|
0
|
|
Legal, accounting
|
1,134.20
|
567.10
|
1,134.20
|
|
Rent
|
0
|
0
|
0
|
|
Telephone
|
707.55
|
0.00
|
707.55
|
|
Other
|
91.05
|
91.05
|
91.05
|
|
CCA
|
1,236.34
|
3,290.30
|
1,236.34
|
|
Business Use of Home
|
12,376.82
|
1,725.63
|
12,376.82
|
|
(less GST included)
|
|
(191.89)
|
|
|
|
40,303.91
|
18,414.45
|
38,145.02
|
[11] For each of the
first two years there is still a discrepancy between the amount determined as
the difference between the total amount claimed by the Appellant in his tax
returns and the total amount allowed and the amount as stated in the Reply as
the amount by which his income was increased. For 2000 this amount is as
follows:
|
Total of the amounts claimed by the Appellant in his tax return:
|
$19,941.79
|
|
Total of the amounts allowed by CRA:
|
$10,031.75
|
|
Difference:
|
$ 9,910.04
|
|
Amount as stated in the Reply as the amount by which the business
income was increased:
|
$11,381.00
|
|
Unexplained discrepancy:
|
$1,470.96
|
For 2001 this amount is as follows:
|
Total of the amounts claimed by the Appellant in his tax return:
|
$27,602.74
|
|
Total of the amounts allowed by CRA:
|
$16,816.96
|
|
Difference:
|
$10,785.78
|
|
Amount as stated in the
Reply as the amount by which the business income was increased:
|
$ 9,160.00
|
|
Unexplained discrepancy:
|
($1,625.78)
|
[12] For 2002 the total amount
as claimed by the Appellant in his tax return minus the total amount allowed
following the audit does correspond to the adjustment to the business income as
stated in the Reply.
[13] The only explanation
that was provided by the Respondent in relation to the additional unexplained
discrepancies for 2000 and 2001 was that these amounts related to GST. The
appeals officer for the Canada Revenue Agency (“CRA”) stated that the increase
in the adjustment to the business income from $9,910.04 to $11,381 for 2000 was
for GST that the Appellant had collected. However GST that the Appellant had collected
would not be revenue of the Appellant.
[14] Subsection 221(1) of
the Excise Tax Act provides as follows:
Every person who makes a taxable supply
shall, as agent of Her Majesty in Right of Canada, collect the tax under
Division II payable by the recipient in respect of supply.
[15] As well subsection
222(1) of the Excise Tax Act provides as follows:
Subject to subsection (1.1), every person who collects an amount as
or on account of tax under Division II is deemed, for all purposes and despite
any security interest in the amount, to hold the amount in trust for Her
Majesty in right of Canada, separate and apart from the property of the person
and from property held by any secured creditor of the person that, but for a
security interest, would be property of the person, until the amount is
remitted to the Receiver General or withdrawn under subsection (2).
[16] As a result it is
clear that under the Excise Tax Act any amounts collected as GST are not
income of the Appellant as these amounts are collected as agent for Her Majesty
in Right of Canada and are to be held in trust for Her Majesty in Right of
Canada. Any GST that was collectible by the Appellant would be reported on his
GST return, not his income tax return. There was no evidence submitted with
respect to whether the Appellant was registered for GST in 2000. His total sales
for 2000 were $29,783 which is within the small supplier limit for the purposes
of the Excise Tax Act. For the other two years his total sales were in
excess of $48,000 for each of these two years.
[17] As noted above the
only assumptions made by the Respondent in the Reply relate to the fact that
the Appellant carried on his business as a sole proprietorship and the expenses
claimed were personal expenses of the Appellant.
[18] In Pollock v.
The Queen, [1994] 1 C.T.C. 3, 94 DTC 6050, Hugessen J.A., on behalf of
the Federal Court of Appeal, made the following comments:
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.
[19] In Loewen
2004 FCA 146, Sharlow J.A., 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.)).
(emphasis added)
[20] 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)).
[21] Since no assumptions
were made in relation to this “GST adjustment” the onus of proof to
establish the facts on which the adjustment is based rested with the Respondent
and the Respondent has failed to satisfy this onus of proof.
[22] Therefore the
adjustment for 2000 to increase the business income by the unexplained
discrepancy between $9,910.04 and $11,381 is not allowed.
[23] With respect to
2001, the amount stated in the Reply as the amount in dispute is $9,160. This
is a smaller amount than is determined by deducting from the amounts claimed in
the Appellant’s tax return, the amounts allowed as noted in Schedule “A” to the
Reply. Again, this negative adjustment was not explained adequately by the
Respondent. However in this case if the negative adjustment were to be reversed
this would increase the amount of taxes that would be owing by the Appellant.
As a result this adjustment is not allowed and the amount of business income
that is in dispute will be the amount as stated in the Reply or $9,160.
[24] Justice Hamlyn in
the case of Valdis, [2001] 1 C.T.C. 2827, stated the following in
paragraph 21:
21 In Millette
c. R., Judge Lamarre Proulx reaffirmed that this Court cannot entertain
an appeal that contemplates increasing an Appellant's tax liability. She stated
at paragraph 72:
It is accepted in the case law that this Court cannot
increase the amount of the Minister's assessment because that would be tantamount
to the Minister appealing the assessment, which he cannot do. The Minister
cannot appeal his own assessment: Harris v. M.N.R., 64 DTC 5332, at p.
5337; Shiewitz v. M.N.R., 79 DTC 340, at p. 342; and Abed v. The Queen, 82
DTC 6099, at p. 6103. (emphasis added)
[25] Therefore since the
amount of business income in dispute as stated in the Reply is $9,160 and since
the Minister is not permitted to appeal their own assessment, the amount of
income will not be increased from the $9,160 as a result of this unexplained
adjustment and for the purpose of this appeal the amount in dispute is $9,160
of business income.
[26] At the commencement
of the hearing counsel for the Respondent acknowledged that the Respondent was
also agreeing to additional adjustments to the Appellant’s income. These are as
follows:
2000
- additional motor
vehicle expenses allowed: $6,756.00;
2001
- additional motor
vehicle expenses allowed: $3,851.00;
- additional meals and
entertainment expenses allowed: $ 224.95;
2002
- additional motor
vehicle expenses allowed: $2,778.66;
- additional meals and
entertainment expenses allowed: $ 487.95.
[27] The other items of
expenses that were dealt with during the hearing are the items as discussed
below.
Purchases
[28] The only year in
which there was a significant difference between the amount requested by the
Appellant and the amount allowed for purchases was 2002 in which there was
$13,123.45 requested but only $7,691.62 was allowed. The Appellant stated that
all of the purchases that he had made were for the purpose of earning income
and were related to his business. The Appeals Officer stated that the amounts
that had been denied in relation to the purchases were denied for a variety of
reasons including a reclassification of some of the items claimed to the other
categories, a two-door mahogany cabinet that was classified as office furniture
in the amount of $200 and various items identified as personal expenses such as
toothpaste, toothbrushes, hand cream, shaving cream, socks, t-shirts, etc.
[29] Justice Iacobucci of
the Supreme Court of Canada in Symes v. R., 1993 CarswellNat 1178, [1994] 1 C.T.C. 40, 94 DTC
6001, 161 N.R. 243, [1993] 4 S.C.R. 695, 19 C.R.R. (2d) 1, 110 D.L.R.
(4th) 470
made the following comments in relation to paragraphs 18(1)(a) and
18(1)(h) of the Act:
52 Even without distinguishing Bowers, supra,
in this fashion, however, I believe that I should move beyond paragraph
18(1)(h) of the Act and the traditional classification of child care in the
analysis of whether child care expenses are truly personal in nature. The
relationship between expenses and income in Bowers, supra, was subsumed
in that case, as it was in cases to follow, within an apparent dichotomy. As
stated by Professor Arnold, "The Deduction for Child Care Expenses", supra,
at page 27:
The
test established by the case for distinguishing between personal and living
expenses involved a determination of the origin of the expenses. If the
expenses arose out of personal circumstances rather than business circumstances
the expense was a non-deductible personal expense
There
are obvious tautologies within this approach. "Personal expenses" are
said to arise from "personal circumstances", and "business
expenses" are said to arise from "business circumstances". But,
how is one to locate a particular expense within the business/personal
dichotomy?
And further:
76 It may also be relevant to consider whether a
particular expense would have been incurred if the taxpayer was not engaged in
the pursuit of business income. Professor Brooks comments upon this
consideration in the following terms (at page 258)
If
a person would have incurred a particular expense even if he or she had not
been working, there is a strong inference that the expense has a personal
purpose. For example, it is necessary in order to earn income from a business
that a business person be fed, clothed and sheltered. However, since these are
expenses that a person would incur even if not working, it can be assumed they
are incurred for a personal purpose -- to stay alive, covered, and out of the
rain. These expenses do not increase significantly when one undertakes to earn
income.
77 I recognize that in discussing food, clothing
and shelter, I am adverting to a "but for" test opposite to the one
discussed earlier. Here, the test suggests that "but for the gaining or
producing of income, these expenses would still need to be
incurred". I must acknowledge that because it is a "but for"
test, it can be manipulated. One can argue, for example, that "but for
work, the taxpayer would not still require expensive dress
clothes". However, in most cases, the manipulation can be easily rejected.
Continuing with the same example, one can conclude that the expense of clothing
does "not increase significantly" (Brooks, supra, at page 258)
in tax terms when one upgrades a wardrobe. Alternatively, one can focus upon
the change in clothing as a personal choice. Or, finally, considering that all
psychic satisfactions represent a form of consumption within the ideal of a
comprehensive tax base, one can focus upon the increased personal satisfaction
associated with possessing a fine wardrobe.
...
79 Since I have commented upon the underlying
concept of the "business need" above, it may also be helpful to
discuss the factors relevant to expense classification in need-based terms. In
particular, it may be helpful to resort to a "but for" test applied
not to the expense but to the need which the expense meets. Would the need
exist apart from the business? If a need exists even in the absence of business
activity, and irrespective of whether the need was or might have been satisfied
by an expenditure to a third party or by the opportunity cost of personal
labour, then an expense to meet the need would traditionally be viewed as a
personal expense. Expenses which can be identified in this way are expenses
which are incurred by a taxpayer in order to relieve the taxpayer from personal
duties and to make the taxpayer available to the business. Traditionally,
expenses that simply make the taxpayer available to the business are not
considered business expenses since the taxpayer is expected to be available to
the business as a quid pro quo for business income received. This
translates into the fundamental distinction often drawn between the earning or
source of income on the one hand, and the receipt or use of income on the other
hand.
[30] Justice Lamarre
Proulx in Gaouette v. Her Majesty The Queen,
[2004] 2 C.T.C. 2851, stated as follows:
13 In Rouillard
v. Canada, [1999] T.C.J. No. 650, I
analyzed the nature of personal expenses. That case involved a service man who
had claimed a deduction in respect of the haircuts required by his position. I
considered the analysis made by Iacobucci J. in Symes v. Canada, [1993] 4 S.C.R. 695, and held as
follows at paragraphs 7 and 8:
(7) It may be seen from this
analysis that the test - any expense that would not be incurred but for the
business constitutes a business, not a personal expense - is a test that may be
useful but is virtually impossible to apply in view of the variety of choices
that individuals may make. I believe that what is stated to be the traditional
test is the test which should be adopted because it applies equally to
everyone. According to this test, if I interpret it correctly, any expense that
must be made by a person in order to report for work will be considered a
personal expense. Certain positions require that one be well dressed but each
person determines the amount of money that person wishes to invest in clothing.
Some positions require a neat personal appearance. Some individuals may be able
to provide the kind of care needed to achieve this on their own, while others
need the help of persons specializing in the field. Some live far from their
place of work, while others live closer but their housing may be more
expensive. As Baron Pollock wrote in Bowers v. Harding, (1891) 3 Tax Cas. 22
(Q.B.), in a passage cited in paragraph 6 of these reasons:
When a man and his wife accept an office
there are certain detriments as well as profits, but is in no sense an
expenditure which enables them to earn the income in the sense of its being
money expended upon goods, or in the payment of clerks, whereby a tradesman or
a merchant is enabled to earn an income.... If we were to go into these
questions with great nicety we must consider the district in which the person
lives, the altitude at which he lives, the price of meat, and the character of
the clothing that he would require, in many places indeed the character of the
services and the wages paid to particular servants, and the style in which each
person lives, before we could come to any conclusion.
(8) I believe it must be concluded
that all expenses incurred in order to report to one's normal place of work for
one's usual duties are personal expenses incurred as a quid pro quo for
remuneration. In the case of servicemen, their employment agreement requires
them to be available for their work activities with regulation haircuts and
well-maintained clothing. The salaries they receive are the quid pro quo for
this availability to comply with the regulations. Thus, if the income in
question were business income, it would appear to be certain that the appellant
would not be entitled to the deduction because the expense would be of a
personal nature.
14 For the same
reasons, I find that hairdressing, manicure and dry cleaning expenses are
personal expenses and, under paragraph 18(1)(h) of the Act, are not deductible.
[31] It would appear that
many of the expenses that have been denied were correctly denied under either
paragraph 18(1)(a) or paragraph 18(1)(h) of the Act. The
Appellant had referred to other items that had been denied and were not listed
in the notes of the auditor. Without the receipt for the particular item or
further evidence concerning the item and the amount paid it is impossible to
determine the amount that was spent on any of the other individual items or
whether the amount spent on such item was a personal expense of the Appellant.
[32] As well the
Appellant testified that it was his understanding that many of the expenses
have been denied because the receipts were faded. However in this particular
case because the Appellant had claimed various items that were personal in nature
and because there were other discrepancies in the amounts as claimed by the
Appellant (including claiming insurance twice and claiming an amount
significantly in excess of the actual interest expense incurred which were
discussed below) I find that the Appellant has not satisfied the onus on him to
establish that any adjustments should be made to the purchases. As a result the
purchases will remain as allowed by the CRA.
Insurance
[33] For 2000 the amount
claimed for insurance was the same as the amount that was allowed. However the
Appellant in 2001 claimed $2,754 for insurance but only $540 was allowed. The
amount claimed included not only liability insurance for operating the business
but also the insurance related to his automobile. The Appellant also claimed
the insurance for the automobile as part of the motor vehicle expenses and
hence the amount claimed for automobile insurance was claimed twice. Therefore
no adjustment will be made to the insurance for 2001.
[34] In 2002 the
discrepancy between the insurance claimed and the amount allowed related to
life insurance that the Appellant had purchased. The Appellant has a daughter
from a previous marriage and in the course of the divorce proceedings the
lawyer for the Appellant’s former spouse had insisted that the Appellant obtain
life insurance. The life insurance was not acquired for the purpose of gaining
or producing income from the business but is related to the personal
obligations of the Appellant and hence the amount paid for life insurance is
not a deductible expense. As a result no adjustment is made to the amount for
the insurance for 2002.
Maintenance and Repairs
[35] In 2000 no amount
was claimed by the Appellant for maintenance and repairs. In 2001, $963 was
claimed and in 2002, $760.36 was claimed. Neither amount was allowed. The
Appellant explained the maintenance and repairs item as an amount that probably
related to the condominium and that the amount claimed probably related to the
amount that the Appellant had to spend in relation to water damage that was
done to the condominium. However there is no evidence with respect to the
actual amount that the Appellant incurred and in relation to these items I find
that the Appellant has failed to satisfy the onus of proof that was on him to
establish on the balance of probabilities that these amounts were incurred for
the purpose of earning income. As well no explanation was provided as to why
amounts would have been incurred in two different years assuming that the
damage only incurred in one.
Meals and Entertainment
[36] As a result of the
concessions made by counsel for the Respondent at the beginning of the hearing
most of the meals and entertainment expenses have been allowed. However the
portion that has not been allowed related to individual claims for coffee that
the Appellant would purchase on his way to the job site. These would be
personal expenses as they would be incurred in order for the Appellant to
report to work.
Office Expenses
[37] For each year the
amount claimed for office expenses exceeded the amount allowed. The Appellant’s
submissions on the office expenses were only general submissions. The reduction
in the amount for office expenses related to a lack of receipts that totalled
the amount claimed and items that were reallocated to the business use of the
home. As noted above, without any further evidence from the Appellant, the
Appellant has failed to satisfy the onus of proof that is on him to establish
that any adjustment should be made to the amounts allowed for office supplies.
Legal Accounting and
Other Professional Fees
[38] The dispute in
relation to the accounting fees related to the amount incurred in 2002. The
Appellant claimed $1,134.20 and the amount that was allowed was one-half of
this amount or $567.10. The invoice from the accountants showed a total charge
of $1,134.20, including GST. The amount before GST was $1,060. The items listed
included “critique of bookkeeping matters and result in reporting of findings
to client” and various other items related to the preparation of the tax
returns for both the Appellant and his common-law partner. The invoice also
referred to “various meetings and discussions regarding RRIF and RRSP matters”.
[39] The Appellant
testified that only a small portion of the time would have been related to the
RRIF and RRSP matters and the bill was reduced by $150 so that the invoiced fee
did not include the preparation of the tax return for his common-law partner.
As a result the Appellant testified that the full amount of $1,060 (before GST)
related to the accounting work for the business. The burden of proof which is
on the Appellant and on the balance of probabilities I find that the amount that
should have been allowed as a business expense for accounting fees for 2002 should
have been 90% of the $1,060.
Telephone Expenses
[40] No amount was
allowed by CRA in relation to the telephone expense that was claimed by the
Appellant. The Appellant testified that he used the telephone only for business
purposes. However he also testified that he used the telephone to call his
daughter who was not living with him. His daughter was born in 1986 and
therefore during the years under appeal she would have been four to six years
of age. Therefore it is clear that the telephone was used, at least in part,
for personal expenses. The Appellant testified that he had two telephone lines
during the years under appeal. One was used as a fax line and the other was
used for making telephone calls. The Appellant also testified that he did not have
a cell phone and therefore the only telephone that he had to contact customers
or potential customers was the telephone line in the condominium. As a result I
find that the Appellant should have been entitled to a business expense for the
use of the telephone and, in this particular case, I will allow 90% of the
amount claimed for the telephone for each year. The adjustments for the
telephone expense will be as follows:
|
|
2000
|
2001
|
2002
|
|
Amount claimed:
|
$504.00
|
$614.00
|
$707.55
|
|
90% of the Amount claimed:
|
$453.60
|
$552.60
|
$636.80
|
Capital Cost Allowance
[41] In 2000 more was
claimed for capital cost allowance than was allowed as a result of the audit.
However in 2001 and 2002 more was allowed for capital cost allowance than was
actually claimed by the Appellant. The Appellant has not satisfied the onus on
him of establishing whether any adjustment should be made to the amount allowed
for capital cost allowance. The Appellant had raised issues with respect to the
amount that he spent for a ladder, a light fixture and computer software. It
was noted by counsel for the Respondent and by the witness for the Respondent
that capital cost allowance had been allowed for the ladder and the light
fixture. The only item for which no capital cost allowance was permitted was
the computer software. This related to $700 that was spent by the Appellant to
acquire computer software that was on a laptop that his common-law partner
acquired when her employment with Fidelity Investments was terminated. However
there is no indication with respect to the allocation of that $700 between the
operating system software and the application software. This allocation would
have to be made in order to determine whether or not the amount spent for the
software would be under Class 12 under Schedule II of the Income Tax
Regulations (“Regulations”) or some other class. Class 12 of
Schedule II to the Regulations provides in part as follows:
Property not included in any other class that is ...
(o) computer software acquired after
May 25, 1976, but not including systems software ...
[42] Therefore that part of the $700 that was paid for systems
software would not be included in Class 12. That part of the $700 that was paid
for applications software would be included in Class 12. Since there was no
evidence with respect to the allocation of the amount spent on software between
systems software and applications software, no amount can be allowed for the
computer software for any of the years under appeal. Once the allocation has
been determined, the Appellant can add the appropriate amount to the proper
classes under Schedule II to the Income Tax Regulations.
Business Use of Home
[43] Counsel for the Respondent acknowledged that the
Respondent was agreeing that the Appellant’s home was the principal place of
business of the Appellant. The only issue that counsel for the Respondent
raised in relation to this matter was whether the percentage allocation
proposed by the Appellant was appropriate. Based on the summary prepared by the
auditor which was introduced as an exhibit, the Appellant was proposing that
56% of the expenses related to his home were business expenses while the
position of the Respondent was that this amount should only be 10%.
[44] The Appellant rented an apartment in 2000 and later in
2000 acquired a condominium. The condominium in question is a two-bedroom
condominium occupied by both the Appellant and his common-law partner. There
were, including the bathroom, a total of five rooms in the condominium. The
Appellant did not produce any sketch or outline showing the layout of the
condominium nor did the Appellant introduce into evidence his calculations
concerning the business use. The Appellant stated that the same percentage use
would apply to the apartment.
[45] Counsel for the Respondent conceded that the amount
used by the CRA was simply a guess and the CRA had not done their own
calculations of the amount nor had anyone from the CRA viewed the premises of
the Appellant. The Appellant testified that he used one of the bedrooms as his
office and did all of the paperwork for the business from that office. He also
indicated that he would contact potential clients from the home and that he
would store various tools at the home and had also acquired a garden shed for
the balcony to be used to store various items. It seems to me, however, that
56%, in the absence of any more evidence concerning the use or an outline or
sketch, to be too high an amount to be allowed for business use of the home. It
also seems to me that 10% is too low an amount. As a result I will allow 33% of
the expenses related to the home to be deducted as business expenses.
[46] However in relation to this there is another matter
related to the interest on the mortgage on the condominium. The Appellant
claimed that in 2002 the total interest on the mortgage was $13,369.81. However
according to the mortgage statement which was introduced in evidence the actual
amount of interest incurred in 2002 was only $5,195.27. Therefore the expenses
related to the condominium for 2002 shall be reduced by this amount by which
the interest expense was over-stated.
[47] As a result the following is a summary of the
adjustments to be made in relation to the business use of the home:
|
|
2000
|
2001
|
2002
|
|
Total Expenses (as claimed by the Appellant):
|
$10,208.00
|
$21,208.20
|
$22,101.46
|
|
Adjustment for interest
that was overstated:
|
|
|
($8,174.54)
|
|
Revised Total expenses:
|
$10,208.00
|
$21,208.20
|
$13,926.92
|
|
Personal portion (67%):
|
$6,839.36
|
$14,209.49
|
$9,331.04
|
|
Net amount for the business
use:
|
$3,368.64
|
$6,998.71
|
$4,595.88
|
|
Amount allowed by CRA:
|
$8.66
|
$1,635.33
|
$1,725.63
|
|
Adjustment to be made:
|
$3,359.98
|
$5,363.38
|
$2,870.25
|
Conclusion
[48] As a result of the foregoing, the appeals in relation
to the reassessments in relation to the 2000, 2001 and 2002 are allowed and the
following adjustments are to be made to the additional business income that was
added to the Appellant’s income for each of these years:
2000
|
Amount as stated in the
Reply as the amount by which the business income was increased:
|
$11,381.00
|
|
Unexplained discrepancy:
|
($1,470.96)
|
|
Additional motor vehicle
expenses allowed:
|
($6,756.00)
|
|
Additional telephone
expenses allowed:
|
($453.60)
|
|
Additional business use of
home expenses allowed:
|
($3,359.98)
|
|
Revised adjustments to the
income as reported by the Appellant:
|
($659.54)
|
2001
|
Amount as stated in the
Reply as the amount by which the business income was increased:
|
$ 9,160.00
|
|
Additional motor vehicle
expenses allowed:
|
($3,851.00)
|
|
Additional meals &
entertainment expenses allowed
|
($224.95)
|
|
Additional telephone
expenses allowed:
|
($552.60)
|
|
Additional business use of
home expenses allowed:
|
($5,363.38)
|
|
Revised adjustment to the
income as reported by the Appellant:
|
($831.93)
|
2002
|
Amount as stated in the Reply as the amount by which the business
income was increased:
|
$19,731.00
|
|
Additional motor vehicle expenses allowed:
|
($2,778.66)
|
|
Additional meals & entertainment allowed
|
($487.95)
|
|
Additional Legal and Accounting expenses allowed (90% x $1,060 -
$567.10):
|
($386.90)
|
|
Additional telephone expenses allowed:
|
($636.80)
|
|
Additional business use of home expenses allowed:
|
($2,870.25)
|
|
Revised adjustment to the income reported by the Appellant:
|
$12,570.44
|
[49] For two of the three years the adjustments made herein
will reduce the income below the amount that was originally reported by the
taxpayer in his tax return. While as noted above, this Court cannot increase
the amount of the Minister’s assessment, there is no prohibition on this Court
reducing the income of the Appellant to an amount that is below the amount as
originally reported by the Appellant. It is the assessment of tax that is
appealed to this Court pursuant to subsection 169(1) of the Act. Subsection
171(1) of the Act provides that this Court may allow an appeal and vary
an assessment or refer the assessment back to the Minister for reconsideration
and reassessment. There is no limitation placed upon the result of that
variance or the result that would arise from referring the matter of the
assessment back to the Minister for reconsideration and reassessment.
[50] In Anchor Pointe Energy Ltd. v. R., 2007 FCA
188, Létourneau J.A. noted the following:
32... while it is true that assessment, reassessment
and confirmation refer to three specific actions by the Minister under the Act
in the process of determining the tax liability of a taxpayer, the word
“assessment” also refers to the product of that process. Hugessen J.A. nicely
described the two meanings of the word in Canada v. Consumers’ Gas Co. [1987]
2 F.C. 60 (F.C.A.). At page 67 he wrote:
What is put in issue on an appeal to the courts
under the Income Tax Act is the Minister’s assessment. While the word
“assessment” can bear two constructions, as being either the process by which
tax is assessed or the product of that assessment, it seems to me clear, from a
reading of sections 152 to 177 of the Income Tax Act, that the word is
there employed in the second sense only. This conclusion flows in particular from
subsection 165(1) and from the well established principle that a taxpayer can
neither object to nor appeal from a nil assessment.
33 I agree with the motions
judge that the appeal is not from the confirmation of the assessment. The
appeal is, to use the words of Hugessen J.A., from the product of the
assessment: see also Parsons v. M.N.R., supra, at page 814 where
Cattanach J. held that the “assessment by the Minister, which fixes the quantum
and tax liability, is that which is the subject of the appeal”. That product
refers to the amount of the tax owing as initially assessed or determined, and
subsequently confirmed. From the perspective of the process itself, the
assessment pursuant to sections 152 to 165 is not completed by the Minister
until, within the time allotted by the Act, the amount of the tax owing
is finally determined, whether by way of reconsideration, variation, vacation
or confirmation of the initial assessment:
[51] Since it was confirmed in this
appeal that the total amounts that were being taken into consideration by the
Minister were all the amounts claimed by the Appellant whether claimed in the
tax return or claimed during the audit process, the final product of that
“assessment” was the confirmation by the Minister of the amounts as assessed
after reviewing all of the amounts requested by the Appellant. However since
all of the amounts as requested were put in issue before this Court if the
result, as it was in this case, is a finding that the Appellant is entitled to
claim additional expenses such that the amount of his income for two of the
years is reduced to an amount that is less than the amount that was reported in
his tax returns for those years, then that is simply the result of this appeal
process and the Appellant should be reassessed for 2000 and 2001 for an amount
that is less than the amount as originally reported.
[52] As a result the appeal is
allowed in relation to the matters as noted above, without costs.
Signed at Halifax, Nova Scotia, this 7th day of September 2007.
"Wyman W. Webb"
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