Citation: 2008TCC591
Date: 20081027
Docket: 2007-2582(IT)I
BETWEEN:
SLAWOMIR PODLESNY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally from the Bench on October 23, 2008)
Woods J.
[1] Please let the
record show that these are reasons delivered orally in the matter of Slawomir
Podlesny and Her Majesty the Queen.
[2] In his notice of appeal, Mr. Podlesny appeals a
reassessment dated December 11, 2006 which was made in response to an objection
to an earlier reassessment. Both reassessments relate to the 2003 taxation
year. I mention this procedural history because there was some debate during
the hearing as to which reassessment was under appeal. I am satisfied that the
reassessment dated December 11, 2006 is properly before this Court pursuant to
s. 165(7) of the Income Tax Act.
[3] The appeal concerns the deductibility of expenses
related to Mr. Podlesny’s practice as a physiotherapist. During the relevant
year, that practice was carried on in two ways, as an employee of Para-Med
Health Services and as an independent practitioner with the taxpayer having his
own patients.
[4] There are many issues in the appeal and I will attempt
to deal with each in turn in these reasons.
Office expenses
[5] I will first deal with office expenses. Certain of the
items claimed as office expenses in Mr. Podlesny’s income tax return have been
disallowed. The total amount disallowed is $1,268.79 and the items are detailed
in Exhibit R-4.
[6] The first item identified in the exhibit is an amount
of $189.98 for undocumented items. The disallowance of these items was not
disputed at the hearing and no adjustment will be made for it.
[7] The second of the disallowed items is an expense for
textbooks in the amount of $148.73. At the hearing, the deductibility of this
amount was conceded by the Crown and therefore it will be allowed.
[8] The last of the office expense items in dispute is
described in the exhibit as photo supplies and cartridge. The total amount is
$930.08.
[9] The taxpayer submits that the photo expenses are
proper business expenses because he takes photographs of his patients for
various business reasons. The reasons include showing photographs of the
therapy to the patients’ families at conference meetings, for use at a nursing
home as marketing material, and for training assistant therapists. A large
number of photographs were entered into evidence to support this testimony.
[10] I believe that the CRA did not have the benefit of the
photographs during the audit and did not have time to consider them before the
hearing. In any event, at the hearing the Crown took the position that the
photographs do not adequately demonstrate a business purpose.
[11] I have concluded that the deduction claimed for photo
supplies should be allowed. Although it is troubling if the photographs were
not provided to the CRA during the audit, the taxpayer’s explanation for the
purpose of the photographs is plausible and I will accept it.
[12] I would also comment that it is not clear to me
whether the photos relate to the taxpayer’s business or his employment. As
there was no discussion of this during argument, I have not considered it, nor
have I considered whether this makes a difference as regards to deductibility.
[13] I think that deals with all of the disputed office
expenses. To summarize, the taxpayer will be allowed two additional deductions.
The first is $148.73 for textbooks and the second is $930.08 for photo
supplies.
Legal fees
[14] The next issue relates to legal fees in the amount of
$3,518.67. This item relates to fees paid to a lawyer in London to
represent the taxpayer at a hearing in Toronto in a claim against the taxpayer’s former employer.
The claim was unsuccessful.
[15] The question is whether the legal fees qualify for
deduction under paragraph 8(1)(b) of the Act. Under this section,
legal fees are deductible if they are incurred to collect or establish a right
to salary or wages owed.
[16] The applicable legal principle as to whether an amount
is deductible under paragraph 8(1)(b) is stated in Loo v. The Queen,
a Federal Court of Appeal decision reported in 2004. At paragraph 5 of that
decision Justice Sharlow makes it clear that it is not relevant in considering
paragraph 8(1)(b) as to whether wages or salary are actually owed or
not. It is the purpose for incurring the fees that is the relevant question. If
the purpose is to pursue a claim for salary or wages owed, then the deduction
is allowed.
[17] This is relevant because it appears that the auditor
did not apply this test and disallowed the deduction solely because the
taxpayer had not been successful in his claim and therefore there was no salary
actually owed. I refer to a letter from the auditor dated May 25, 2005, which
is part of Exhibit A-2. I would also note that the auditor, in taking this
approach, was following the administrative practice as set out in Interpretation
Bulletin IT 99–R5.
[18] Although the auditor applied the wrong legal test,
this does not mean that the taxpayer should necessarily succeed on the legal
fees issue. But the actions of the auditor are significant because the Crown
has the burden to prove facts if they were not assumed at the assessment or
objection stage. In this case, the assumption made by the Minister to support
the reassessment was that there was not in fact any wages owed. I refer to
paragraph 7(m) of the Reply.
[19] Because this assumption does not support the
reassessment, it follows that the Crown has the burden at the hearing to
establish the facts that would support the reassessment.
[20] The Crown has failed to satisfy that burden. In
fairness to counsel for the Crown, she did not realize at the hearing that she
had this burden. The Loo decision was not brought to my attention by
either party and I only reviewed it after the hearing.
[21] After having concluded that the Crown should bear the
burden, I now turn to the evidence regarding the purpose of the lawsuit.
Unfortunately it is murky. The taxpayer introduced a letter that he wrote to
his former employer on September 23, 2002 in which he complained
about an increased workload and made an application for severance pay. However,
I do not know what relation this letter has to the actual claim that was
adjudicated. The taxpayer chose not to put into evidence the actual decision of
the tribunal even though it appears that he had it with him in the courtroom.
During his testimony, I asked the taxpayer what the nature of his claim was. He
indicated that he was not clear on that point although he indicated that part
of it was likely for severance.
[22] It appears that what has happened in this case is that
neither the taxpayer nor the Crown focused on the proper test as set out in Loo
and therefore neither introduced sufficient evidence on which I could determine
the nature of the lawsuit. Based on the evidence as introduced, it does seem
possible that the taxpayer did make a claim for unpaid salary based on an
increased workload.
[23] In these circumstances, I conclude that the Crown has
not satisfied the burden of establishing that the purpose of the lawsuit did
not include a claim for unpaid salary. Therefore the taxpayer’s claim for a
deduction for the legal fees should succeed.
CCA on Honda
[24] The next issue concerns the appropriate amount of
capital cost allowance for a Honda Accord which was used for business purposes.
[25] The background regarding this issue is as follows. The
Honda was purchased in 2001 and the taxpayer began to use it for business
purposes in 2002. His claim for capital cost allowance in the 2002 taxation
year was allowed, subject to the half‑year rule.
[26] Mr. Podlesny submits that an arithmetic error has been
made in the CCA calculation for the 2003 taxation year and that an adjustment
should be made.
[27] I have spent considerable time trying to piece
together the background to this issue based on the limited evidence before me.
There was no mention of this issue in the Reply.
[28] I have concluded that some adjustment should be made
to the capital cost allowance. I come to this conclusion with some reluctance
because the matter could have been, and should have been, more clearly
elucidated by the taxpayer.
[29] I have concluded, though, that the matter was
sufficiently raised in the taxpayer’s letter of August 1, 2006 (Exhibit A-5)
and in the notice of appeal and that it should be considered in this appeal.
[30] I have concluded that capital cost allowance on the
Honda Accord for the 2003 taxation year should be computed in accordance with
Mr. Podlesny’s letter dated August 1, 2006. This results in capital cost
allowance of $7,925, subject to the pro-ration for personal use which is
discussed below.
[31] Counsel for the Crown argued that this result does not
properly take into account the effect of the change of use rule in paragraph
13(7)(b). The Crown may be correct in this but I do not think it would
be appropriate to take this into account because the issue was not discussed in
the Reply. I do not think that it would be fair to make this type of adjustment
without giving Mr. Podlesny an opportunity to consider it.
[32] Finally, before concluding on this issue, I would
comment that because the evidentiary record on this issue is poor, my
conclusion should not be considered as binding on the calculation of capital
cost allowance for later taxation years. In particular, I was not able to
reconcile the cost of the vehicle as submitted by the taxpayer with the invoice
for the Honda that was introduced into evidence. There may be some explanation
for this, but it was not discussed at the hearing.
Cadillac interest
[33] I now turn to the next issue which concerns a
deduction for interest incurred to finance a Cadillac automobile.
[34] In his income tax return, the taxpayer claimed a
deduction for interest incurred to finance the acquisition of a Cadillac CTS
which was used for employment purposes. The interest amount claimed, which was
$722.88, was disallowed.
[35] The reason for the disallowance was not specifically
stated in the Reply. During her testimony, the auditor stated that during the
audit the taxpayer presented an invoice for the Cadillac but it was in the
daughter’s name and not the taxpayer’s. At the hearing, the taxpayer introduced
what appears to be the same invoice and it included the name of the taxpayer in
handwriting.
[36] I do not think that this is sufficient reason to
disallow the interest. Capital cost allowance on this vehicle has been allowed
to Mr. Podlesny and there is no real doubt that he paid the cost of the vehicle
and any financing charges associated with it. The interest deduction will be
allowed.
CPP/EI contributions
[37] I now turn to the issue of a deduction for CPP/EI
contributions. Mr. Podlesny seeks a deduction in the amount $849.05 for
contributions made to CPP and EI.
[38] This issue, like the issue with the CCA on the Honda Accord,
took counsel for the Crown by surprise at the hearing. It was not discussed in
the Reply.
[39] However, the issue was clearly raised by the taxpayer
in his letter to the CRA dated August 1, 2006 and inferentially it was raised
in the notice of appeal. I conclude that it should have been raised in the
Reply.
[40] The Crown did not provide a satisfactory explanation
for why this deduction should be disallowed and accordingly I propose that the
deduction be allowed.
Business use of
automobiles
[41] I now turn to the issue of the business versus
personal use of three vehicles owned by Mr. Podlesny.
[42] In his income tax returns for the 2003 taxation year,
Mr. Podlesny claimed deductions for the business and employment use of three
automobiles, a Cadillac CTS, a Honda Accord, and a BMW. He claimed that he used
all these vehicles in the course of his work as a physiotherapist.
[43] The reassessment has allowed expenses with respect to
all three vehicles but it reduced the expenses on the basis that the business
and employment use of the vehicles had been overestimated by the taxpayer.
[44] Subsequent to the hearing, I discovered that there was
some background to this issue in a decision of then Associate Chief Justice
Bowman. His decision dealt with automobile expenses for the 2000 and 2001
taxation years of Mr. Podlesny. It would have assisted me greatly if either
party had brought this decision to my attention but neither did. I assume that
both thought that the decision was not relevant but it certainly provided
useful background.
[45] The only issue that the Crown has raised with respect
to the vehicles in this appeal is whether the taxpayer has overstated his
estimate of business and employment mileage for the three vehicles. The Crown
submits that the mileage is grossly overstated and has imposed penalties on the
basis that the overstatement was made knowingly.
[46] In making the assessment, the Minister assumed that
the distances recorded in the taxpayer’s travel log book were exaggerated.
[47] This assumption is presumed to be true unless the
taxpayer can establish otherwise and the taxpayer has not convinced me that
this assumption is incorrect.
[48] There are several reasons for this.
[49] First, the purported business and employment use of
the three vehicles is extremely high: 98.30 percent for the Cadillac, 88
percent for the Honda and 97.50 percent for the BMW. I would also note
that the taxpayer did not have another automobile available for personal use.
This in itself is not sufficient to dismiss the taxpayer’s claim but it does
require the taxpayer to submit convincing evidence that his figures are accurate.
This has not been done.
[50] In addition, I consider it very significant that the
taxpayer did not keep a contemporaneous record of the distance traveled for
business or employment. The auditor testified that during the audit she had to
give the taxpayer time to come up with an estimate of the mileage based on
appointments listed in the taxpayer’s appointment book. Further she stated that
the appointment book was not provided to her, even though she had requested it.
I accept the auditor’s evidence on this point and prefer it to the taxpayer’s
because it was much more detailed and cogent.
[51] The taxpayer admitted that he refused to provide the
appointment book to the auditor and gave reasons of confidentiality for this.
On the other hand, deductions claimed by taxpayers need to be verified on audit
from reliable records and this was not done in this case.
[52] In addition, I note that the auditor had checked a
number of the distances claimed by the taxpayer and the auditor determined that
the distances had been grossly inflated, often being double the distance it
took the auditor to drive the route.
[53] The taxpayer explained that he often did not take a
direct route to his work because he sought out routes that were less traveled
and therefore they were more reliable in terms of time and they were safer.
[54] The main problem that I have with the taxpayer’s
testimony on this point is that it is self-interested testimony which has not
been corroborated in any way. I do not find the self-serving evidence
sufficiently convincing in the circumstances of this case. The taxpayer could
have arranged for an independent witness to check the routes and provide some
support for this testimony but this was not done.
[55] I conclude that the taxpayer’s estimates have been
exaggerated. However, that does not mean that the business and employment use
as computed by the Minister should be accepted. The CRA used distances from
mapquest for this purpose and applied it to the trips that the taxpayer
purported to have made.
[56] I believe that the CRA was wrong to simply apply
mapquest distances. I think it is very plausible that the taxpayer would
sometimes take a route different than a direct route for the reasons that he
stated. The problem that I have, though, is that there is no reliable evidence
as to what routes were actually taken.
[57] In these circumstances, I have concluded that an
arbitrary adjustment should be made to the reassessment. I conclude that it is
appropriate to increase the business and employment percentage by ten percent
over the figures that the CRA used for purposes of the reassessment. That would
mean that the percentages should be 62.61 percent for the Cadillac, 71.05
percent for the Honda and 78.68 percent for the BMW.
[58] The remaining issue is the penalties which have been
imposed with respect to this issue. I have concluded that they should be
vacated. I have also come to this conclusion reluctantly because the very low
percentage of personal use claimed by the taxpayer defies common sense.
However, business mileage is very difficult to determine after the fact. The
main problem that Mr. Podlesny has is that he did not keep a contemporaneous
travel log. However, I do not think that this justifies the imposition of gross
negligence penalties. The claim that Mr. Podlesny made appears to be aggressive
indeed, but I am not satisfied that it reaches a standard of gross negligence.
[59] That concludes my reasons in this matter. I will issue
a judgment allowing the appeal and referring it back to the Minister for
reassessment.
Signed at Toronto,
Ontario this 27th day of October 2008.
“J. Woods”
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