Citation: 2007TCC384
Date: 20070628
Docket: 2006-902(IT)I
BETWEEN:
TARIK ALSAADI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Mogan J.
[1] In each of the 2002 and 2003 taxation years,
the Appellant was well employed in the City of Mississauga, earning salary income in excess of $60,000. In computing income for
those two years, the Appellant deducted an amount which he called a loss in
respect of a business which he started in 2000, and continued to operate over a
six‑year period until 2005. Revenue Canada
reassessed the Appellant to disallow the deduction of the amounts claimed as
business losses, and the Appellant has appealed to this Court from those
reassessments. He has elected the informal procedure.
[2] The amounts involved are significant. In
the year 2002, the Appellant had employment income in the range of $65,000 to
$75,000 and he deducted a business loss of $17,083. In 2003, he again had employment
income in that range, and deducted a business loss of $23,371.
[3] By way of background, the Appellant and his
wife came to Canada from Syria in 1996, claiming refugee status. He spent
a long time being qualified as a landed immigrant, and in that time he could
not travel, but he did find useful employment soon after coming to Canada. In 2004, he was granted landed immigrant status and
in 2006, he became a Canadian citizen. He made it clear how much he treasures
his Canadian citizenship.
[4] In 2000, the Appellant registered the
business name “TH Import/Export” as a sole proprietorship in Ontario, and was granted an Ontario
business license under that name on December 15, 2000. A business name was
created, but the Appellant did not incorporate. As the name implies, he wanted
to get into the import/export business. He hoped he would be able to export
goods to his mother country, Syria, because he knew what kind of things people
in Syria might want to buy from Canada which would not be available in Syria
and, vice versa, certain products that might be purchased at a modest
price in Syria, and brought to Canada for resale.
[5] The Appellant’s inability to travel in the years 1996 to
2004 meant that he could not go back to Syria to develop a market but he had to
work from Canada via email and telephone. When he became a
Canadian citizen, he went to Sweden in 2006, and met with some people he knew,
but that did not result in any significant sales.
[6] In the years under appeal, there were no
significant sales abroad, nor was there evidence of importing anything of
significance. The sales which were claimed to be effected in connection with
this activity were really goods purchased in and around Mississauga, Ontario and sold either in the Appellant’s home
primarily, or in activities related to the neighbourhood where he lived. What
the Appellant claimed to be the thrust of his business when he started it (import/export)
was not an activity that ever materialized in terms of importing goods for sale
in Canada, or exporting goods for sale outside of Canada.
[7] The activity that the Appellant described
was what I would call domestic sales in the home. He said that he and his wife
would have what he called home parties and, in connection with those, he or his
wife would buy goods at retail at stores such as Wal-Mart, which is a well
known discount vendor in Canada and the US. They
would go to certain stores that had special sales, particularly early Saturday
mornings or late Sunday mornings, and buy goods that were on sale at bargain
prices. They would then bring them to their home and invite about 20 people over
for what they call a home party, and have these items for sale in their home.
[8] The Appellant’s wife also testified. She
described herself as having taken an accounting course at Sheridan College, a community college in Mississauga. She said that she kept the books for this activity
and in particular, at these home sales she would record the items sold and the
amounts received. Every sale was in cash and she said she collected the cash
and sometimes would deposit it or use a portion of it to go out and buy more
goods. How she was able to keep an account of this is puzzling because,
generally speaking, a person has to be a meticulous bookkeeper to take cash in
on one afternoon or evening, and then use some of it for business purchases in
the next few days. She said that she noted each sale in her book, but she did
not bring it to Court, nor was there any evidence of the most elementary recordkeeping
in connection with this activity.
[9] Buying at retail
for resale in the home did not
sound like a reasonable proposition. This is only an inference I draw based on
common sense, for people to buy at retail and sell at retail in their house,
when the people invited to the home could buy the same product by going to
Wal-Mart, or other retail stores at a time when they were having sales. Also,
there did not seem to be any distinction between buying what I would call a
packaged good, like soap, cereal, cosmetics or laundry detergent, where a
person can really buy it, confident in keeping the product, and buying other
things like garments which might have to be adjusted or exchanged. I should
think that there would be a great distinction in the retail market as to what
kind of products you could safely buy for resale in the home, and what would
not be a safe buy at all.
[10] There was no evidence from the Appellant
and his wife, who both testified in English, although their mother tongue is
not English, that they made these distinctions and were careful about doing so.
The invoices presented as evidence of their business were in many respects
evidence of ordinary household products that would be purchased to maintain any
home. The Appellant and his wife have three sons between the ages of 14 and
three; the youngest being born in 2004.
[11] I concluded from the evidence of the Appellant
and his wife that the activity did not have the badges of business for a
variety of reasons. One is the unlikelihood of operating a successful business
by buying at retail and selling at retail in the home. Another reason is based
on credibility. There were a couple of areas where I did not believe the wife. She
said that early on, when she would go to Wal‑Mart or any store where she
bought some products for personal use, and other products on the same bill for
business use, she would put the letter “P” beside personal use, and the
business ones she would either circle or mark differently. In all of the
documents presented to Revenue Canada, some of which were photocopied and entered
as Exhibit R-7, there was no indication of that.
[12] When I put this thought to the agent who
argued this appeal, he said it was because all those invoices had only business
purchases on them, so they did not have to be marked with a “P”. If that is the
way she did it, I would have thought that at the time the documents had been
presented to Revenue Canada, they would have been anxious to demonstrate
items marked with a “P” for personal use and others marked with a circle for
business use, to demonstrate how careful they were being. The fact that the Appellant
produced in Court many new invoices, which had been marked “P” or circled for
business purposes, is not as credible because we do not know when the “P” was
put on. It could have been put on last weekend. I would have found this whole
area of evidence more believable if there had been documents submitted to
Revenue Canada showing that distinction being made, when so many of the
invoices reviewed by Revenue Canada were items of ordinary household use.
[13] That was brought out by the auditor from
Revenue Canada who also testified. He said that when he
was first asked to review the returns for 2002 and 2003, he sent a letter to
the Appellant on August 31, 2004 asking for invoices, the business registration
certificate, banking records and for the completion of a questionnaire. There
was a meeting about two months later on November 18 with the Appellant and his
representative, at which these items were discussed and again, even then, in
the questionnaire of 2004, many of the answers had this import/export phrase as
if that were the current activity. But today, almost all of the evidence in Court
related to home parties.
[14] I did not find the
Appellant or his wife believable. They said they would have home parties twice a month about every two
weeks. They would invite 20 people, and at least 10 would show up. Sometimes
people would show up with friends. That takes a lot of organization. People who
are going to have two parties a month, or at least 24 a year, I believe would
have a diary or a calendar or an appointment book. They would log when these
parties were held, about how many came, and if there were costs of feeding them
(perhaps ordering in pizza). There was a total absence of that kind of
recordkeeping. Just bland statements floating in the air that they would have
these home parties and they would be selling.
[15] What really puts a cloud over the Appellant’s
case is that, among the expenses claimed in the two years under appeal was a so-called
administration fee paid to the Appellant’s wife ($8,100 in 2002 and $8,700 in
2003) because she worked so hard. The evidence was that she worked harder than
he did, and she indicated how many hours she put in. Maybe the business was
hers and not his. Maybe she ought to have been regarded as the proprietor. If
one steps back and looks at the situation cynically from an income tax point of
view, it does not make much sense for her to own the so-called business because
she does not have any other income that I am aware of. By paying his wife $8,000
a year, and claiming a loss, the $8,000 comes off the husband’s income, which
is in the generous range of $65,000 to $75,000, and it is reported by the wife.
She did acknowledge that she had filed tax returns reporting these amounts but
unless she had other income, such an amount would be virtually tax-free in her
hands.
[16] What really makes the compensation to the
wife unreasonable is that in the year 2002 when she was paid a management fee
of $8,100, the gross revenue from the so-called business was $1,429. In 2003,
when she was paid a management fee of $8,700, the gross revenue of the business
was $3,200. Those amounts, in a tightly knit family of husband, wife and three
sons, are so very unreasonable, they do not make any sense at all in terms of
trying to get a business off the ground and make it operate to earn a profit.
[17] Surely, at that point in time, if they were
anxious to show a profit in this business, they would consider that their
efforts were what is sometimes called sweat equity, and did not require
monetary compensation, either to the husband or to the wife. It was those
amounts which the Appellant claims that he paid to his wife that really make
this whole enterprise so unbelievably unreasonable. I do not think there was a
commercial venture here at all.
[18] The Revenue Canada
auditor testified that although $800 was claimed for advertising in 2002, he
could find no vouchers to support it. Also, he said that there was an interest
charge of $980 with vouchers, however, he could not find where the money was
borrowed in connection with this business. Naturally, he disallowed the $8,100
payable to the wife. There was motor vehicle expense of $4,100 which had a
voucher, but he disallowed it all because he could not find how the business
would need a car driving around that much to produce $1,400 worth of revenue.
[19] And 2003 is similar. Advertising was claimed
at $642, but the auditor could find no vouchers for it. Indeed, the evidence
was that the Appellant had no record of who his customers were. He and his wife
would phone up people but there is no customer list, no continuous solicitation
record, no diarization record of who comes, who buys, who to rely on, who might
come back to buy again, and who not to invite back because they never buy
anything. In 2003, the interest claimed was $3,144. Again, the auditor
acknowledged it had a voucher, but he did not allow any of it as an expense because
he could not find how the money borrowed which caused that interest to be paid
was in any way tied in with this so-called business. He naturally disallowed
the management fee of $8,700 to the wife. He found that the motor vehicle
expenses of $2,512 had a voucher, but he disallowed it all for the same reasons
as the previous year. Why does a person need to drive around to the extent of
$2,500 for a couple of parties every month?
[20] If there were in fact two parties every
month, and I have grave doubts concerning the credibility of both the Appellant
and his wife as to whether they had 24 parties a year, the revenue does not
look like they had. But even if they did, they should have concluded long ago that
those parties were not a reasonable means of generating income.
[21] The Stuart case, recently decided in
the Supreme Court of Canada, has a bearing on this kind of activity because it
states, in effect, that unless there is a hobby, a person is entitled to deduct
business losses if it can be shown that the activity producing the losses was
carried out in a commercial manner and had the badges of business. I do not
find that level of commercial activity here; certainly not enough to justify
the losses involved.
[22] The Respondent put into evidence the losses claimed
by the Appellant from the so-called business in adjoining years. The amounts
there are revealing:
|
Year
|
Total Revenue
|
Loss
|
|
2000
|
375
|
7,965
|
|
2001
|
Nil
|
14,780
|
|
2002
|
1,429
|
17,083 – under appeal
|
|
2003
|
3,200
|
23,371 – under appeal
|
|
2004
|
5,242
|
13,695
|
|
2005
|
6,412
|
16,418
|
With respect to the two years under appeal, I might
observe that in 2003, the loss was more than seven times the revenue, and in
2002 the loss was about eleven times the revenue. Also, in 2004 the revenue was
up to $5,242 and the loss claimed was $13,695. In 2005, the revenue was up to
$6,412 but the loss was increased to $16,418. In the six years shown above, the
total revenue was approximately $16,700, which included 2001 with no revenue at
all, but the losses deducted against the Appellant’s income were approximately
$93,300. The aggregate losses again are more than five times the revenue
generated in those years.
[23] Including the years under appeal, there was not
enough commercial activity nor enough badges of business for me to find that
the activity was carried on like a business. It seems to me that the object of
the activity in the first four years was having a loss to deduct against what
would otherwise be a generous salary in the hands of the Appellant. There was
no evidence of recordkeeping, a diary, a calendar, orderly deposit slips, a
separate bank account; nothing to indicate that the Appellant and his wife were
really trying to keep the accounting records for this activity separate and
distinct from what I would call ordinary housekeeping.
[24] I accept without qualification the
credibility of the auditor, Mr. Patel. I was satisfied that he went through
this matter professionally and carefully from his description of the invoices such
as Canadian Tire, Home Depot, Wal‑Mart, Sears and retail stores that one
visits in the normal course of operating a family household. There were no
invoices to show buying wholesale or attempting to source supplies from a
supplier where the price would be below retail.
[25] In my view, the whole activity lacked credibility and
the badges of business. For these reasons, the appeals are dismissed.
Signed at Ottawa, Canada, this 28th day of June, 2007.
“M.A. Mogan”
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