Citation: 2008TCC45
Date: 20080118
Dockets: 2004-3716(IT)I
2007-933(IT)I
BETWEEN:
VASUNDARA RAGHAVAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1] This appeal by
Vasundara Raghavan concerns the deductibility of amounts claimed as business
expenses for the 2001, 2002 and 2003 taxation years.
[2] In the three
assessments that are under appeal, the Minister of National Revenue disallowed all
business expenses claimed by the appellant in excess of revenues reported, with
the total amounts disallowed being $19,406.79, $26,046.94 and $19,940.00, for
each taxation year respectively.
[3] The respondent
submits that the appellant was not engaged in a bona fide business in
the relevant years, and that any activity of a commercial nature that might
have been conducted was undertaken simply to manufacture tax deductions.
[4] The appellant, a
long-time employee of Bell Canada, seeks to deduct losses in relation to two
computer-related businesses that were allegedly operated for her by her
husband, Gopalachari (Gary) Raghavan. She testified that she was not personally
involved in the ventures except to provide the necessary funding. The
appellant’s husband worked in the businesses on a full-time basis without pay
during the relevant period, it is alleged.
[5] The expenses
that were purportedly incurred can be divided into four groups: (1) hourly fees
paid to the couple’s three children and their former babysitter, (2)
computer-related costs and office supplies, (3) expenses to maintain the home,
and (4) miscellaneous expenses such as life insurance and professional
engineering dues. The fees to the children and babysitter constitute the
majority of the expenses claimed.
Issues
[6] There is no
dispute about the issues to be decided. They are:
- Were
the disallowed expenses made or incurred?
- If yes, were they made or incurred for the
purpose of earning income from a business?
- If
yes, were they reasonable in the circumstances?
Procedural history
[7] The appeal comes
before me as a re-hearing with respect to the 2001 and 2002 taxation years. The
appellant was unsuccessful at the first trial ([2006] 1 C.T.C. 2210), but the
decision was reversed on appeal (2007 D.T.C. 5214) and a new trial was ordered.
[8] At the initial
hearing, Little J. focused on the rather startling disproportion between
expenses and revenues that were reported over a long period of time and he concluded
that the activities did not constitute a business. The decision refers to aggregate
net business losses of $164,087 and aggregate revenues of $4,037 reported over
the period from 1988 to 2003. I would note, parenthetically, that from a family
perspective the reported loss situation may be worse than this because Mr.
Raghavan also reported business losses in some of his tax returns.
[9] In the appeal
court decision, Evans J.A. noted that jurisprudence as to what constitutes a
business has evolved over time. As a result, a long period of losses is no
longer a sufficient reason by itself to conclude that there is no business: Stewart
v. The Queen, 2002 D.T.C. 6969 (S.C.C.).
[10] The new hearing
came before me on December 3, 2007, and a similar appeal for the 2003 taxation
year was heard at the same time. The hearing lasted three days.
Background
[11] The appellant testified
that she owned two businesses during the taxation years at issue.
[12] The first was
described as a website consulting business, which involved providing assistance
to persons setting up their own websites. It is alleged that the business
commenced around 2000 and was wound down after a couple of years when it did
not produce sufficient revenue.
[13] The second
business was described as developing an internet-based interactive educational program
to be used by children and parents. It was stated that the business is still in
the development stage and that it is expected at some point to generate revenues
in the form of subscriptions.
[14] Allegedly, these
businesses were operated by Mr. Raghavan out of the basement of the family
home.
[15] The appellant’s
three children, who were of high school and university age during the relevant
period, purportedly were hired on an hourly basis to assist the businesses by
providing specific computer-related services assigned by their father.
[16] It was also
stated that the family’s former babysitter, Sudha Kothandaraman, was also
engaged to provide services, which were primarily e-mail marketing services,
with fees also paid on an hourly basis.
[17] The children and
the babysitter were purportedly paid in cash on an irregular basis in amounts
totaling over $61,000 during the taxation years at issue.
[18] In addition to
these fees, modest amounts were claimed for the cost of computers and supplies,
and in the 2003 taxation year 30 percent of home-related expenses were claimed
as office expenses. Life insurance premiums and Mr. Raghavan’s professional
engineering dues were also deducted in the 2003 taxation year.
[19] On the revenue
side, the appellant reported earnings from three customers of the website
consulting business during this period, with gross revenues of $3,300.55. The
educational program did not have any customers because it was, and still is, in
the development stage.
Discussion
[20] The appellant
introduced a significant amount of evidence over the course of three days. Additional
material that was in boxes in the courtroom was referred to but not introduced.
Viva voce evidence was provided by the appellant and her husband, the
CRA auditor and appeals officer who handled the assessments, and a professor at
Seneca
College in Toronto who was asked to give expert testimony regarding
internet-based businesses.
[21] The respondent
did not call any witnesses.
[22] I will start with
the testimony of the appellant and her husband. Overall I found their testimony
not comprehensive or cogent enough to be convincing. It was vague and
confusing, and at times implausible.
[23] None of the
Raghavan children testified before me, but the appellant entered into evidence
a transcript of the testimony of two of the children that was given at the
prior hearing. I also found this testimony to be too vague to be convincing.
[24] It is noteworthy
that the testimony of the Raghavan family was vague not just in certain
respects, but in most of the salient details, namely, the nature of the
businesses, a description of the work done by the husband, the children and the
babysitter, the relationship between the Raghavans and the babysitter, and a
description of the services provided for customers.
[25] The testimony regarding the customers provides an
illustration. Mr. Raghavan suggested that
the website consulting business had three customers from the United States
who were obtained through the e-mail marketing efforts of the former babysitter.
No detailed description of the services was provided. As for fees paid by the
customers, Mr. Raghavan testified that two of the customers paid cash by coming
to his home in Mississauga. No satisfactory explanation was provided for that unusual
circumstance. The payment by the purported third customer was also irregular.
This was by cheque, but the cheque contained a notation in different
handwriting to the effect that the amount was to be deposited in the payee’s
bank account. This was also not satisfactorily explained. I did not find any of
this testimony to be convincing.
[26] Another
illustration concerns the alleged cash payments to the children and babysitter.
No banking records were provided in support of these payments. The appellant
testified that she kept some cash in a safe deposit box so that she would not
spend the money, but she was vague as to the details. Mr. Raghavan testified
that his wife kept some money at home so that banking charges could be
minimized. The entire testimony surrounding the alleged payments to the
children and former babysitter was far too vague to be believable.
[27] The appellant tried to diminish the significance of the
losses reported in earlier years by suggesting that they related to other
businesses. The appellant testified that
her husband started the website business around 2000 after he took a course on
website design at Seneca College. However, this appears to be inconsistent with Mr.
Raghavan’s 1997 income tax return in which he represented that his business
activity for that year was “consulting to business on web services.” I was not
persuaded by any of this testimony.
[28] Overall I find
the testimony of the appellant and her husband not to be reliable and the
testimony of the children to be too vague to be of assistance.
[29] I now turn to the
documentary evidence.
[30] The appellant
provided copies of contracts and invoices as support for the fees allegedly
paid to the children and the babysitter. She also provided receipts purportedly
issued to the three customers. My impression of all of this documentation is
that it easily could have been fabricated. I do not find any of it to be persuasive.
[31] The appellant
also introduced receipts for most of the other expenses, photographs of the
basement, and a large number of other documents. As a whole, this evidence
tends to suggest that considerable time was spent on computer-related activity,
but it is not clear from the documents what the nature of the activity was, when
it was undertaken, and who carried it out. Many of the expenses incurred, such
as for computers and internet connections, are consistent with either business
or personal use.
[32] What are the conclusions that should be drawn from
this? Based on the evidence as a whole, I
conclude that the appellant has not established that any fees were incurred, or
paid, to her children or the former babysitter. It is possible that the
children provided some computer assistance to their father, but if they did I
am not satisfied that they were paid for it. None of the fees purportedly paid
to the children or the former babysitter will be allowed.
[33] This deals with the
majority of the expenses claimed. As for the others, there are receipts for
most of these, and the expenses would be deductible if they relate to a bona
fide commercial activity and are reasonable. I would note that counsel for the
respondent referred in argument to a statutory prohibition against the
deduction of home office expenses, but he withdrew the argument after I suggested
that it had not been sufficiently raised in the pleadings.
[34] It is necessary,
then, to consider whether the evidence as a whole is sufficient to establish
that bona fide commercial activities were undertaken during the relevant
period.
[35] As for the
purported website consulting business, the evidence does not come close to
satisfying me that the appellant carried on any such activity in any of the
relevant taxation years, or at all. None of the relevant viva voce evidence
was convincing, and there was not sufficient reliable documentation in support.
[36] More documentary evidence was provided with respect to
the educational program. The appellant
submitted a binder of over 200 pages which, for the most part, appears to list
a large number of computer files (Ex. A-28). It is difficult to reach any
conclusion with respect to this material because I have not been provided with
a cogent description of what is in the files. It simply is not clear whether
the appellant has undertaken a bona fide effort to develop an
income-producing educational program.
[37] The appellant did
offer to make other information available in the form of a CD disk and an
internet presentation. In addition, page 195 of Ex. A-28 also refers to disks. I
do not recall if they were mentioned during the hearing. I note that the
internet presentation was first raised on the third day of the hearing, after
all the evidence in chief had been led. A viewing of this material would have
prolonged this hearing, which as it was lasted three full days. In my view, it
would not be an appropriate use of Court time to extend this hearing beyond the
three days. It is inexplicable to me why the appellant could not have provided evidence
in written form that clearly explained the educational program in sufficient
detail to determine whether it constituted a bona fide commercial
activity.
[38] Where does that
leave us? The appellant has introduced evidence that suggests that a
significant amount of computer-related activity has been undertaken. The
evidence that this activity relates to a bona fide commercial operation
is very weak, but, on the other hand, the expenses that are at issue are quite
small. In these circumstances, I am prepared to give the benefit of the doubt
to the appellant and find that she did carry on a business of developing an
educational software program. This finding should not be viewed as precedential
for subsequent taxation years. In my view, the appellant should have been able
to provide much better written evidence that a bona fide commercial
operation was being carried on.
[39] As for the period
during which this business was carried on, since I do not accept the credibility
of the Raghavans, I will rely on a statement in the appellant’s 2003 income tax
return which suggests that this activity commenced in 2003.
[40] The expenses that have been claimed with respect to the 2003 taxation
year are listed in the respondent’s reply. Some of the expenses have not been
established as incurred (fees to children and babysitter; PEO licensing fees).
Other expenses have not been established as relating to this business (key man
insurance; PEO licensing fees). The remaining expenses claimed relate to
computer costs, supplies, and home office expenses totaling less than $4,000. This
figure is probably excessive because many of the expenses likely have a
substantial personal element. I have concluded that a further deduction of
$2,000 is the best that can be done, and is generous in the circumstances.
[41] Accordingly, for the reasons above I conclude as
follows:
(1)
the appeal for the 2001 and 2002
taxation years will be dismissed;
(2)
the appeal for the 2003 taxation
year will be allowed, and the assessment will be referred back to the
Minister of National Revenue for reconsideration and reassessment on the basis
that the appellant is entitled to a further deduction of $2,000; and
(3)
each party shall bear their own
costs.
Signed at Toronto, Ontario this 18th day of January, 2008.
"J. Woods"
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