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Citation:2005TCC489
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Date: 20050805
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Docket: 2004-513(IT)I
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BETWEEN:
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HONG XIAO,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Sheridan,
J.
[1] The Appellant, Xiao, appealed the
reassessments made by the Minister of National Revenue of her 2000 and 2001
taxation years in which he disallowed employment expenses claimed by Ms. Xiao
for “compensation” to clients, work space in home, office equipment leasing and
transportation costs.
[2] As a preliminary matter, counsel for the
Respondent advised the Court that in the Notices of Reassessment for each of
the taxation years, the employment expense amounts allowed had been understated
by $2,073.83 for 2000 and $803.86 for 2001. On this basis alone, the Crown
submitted that the appeals ought to be allowed and the matter referred back to
the Minister for reconsideration and reassessment to allow the deduction of these
additional amounts. In respect of the issues raised in Ms. Xiao’s Notice of
Appeal, however, the Minister’s position was that her appeals ought not to be
allowed. Counsel for the Respondent argued that although Ms. Xiao had satisfied
the threshold criteria to claim employee deductions under subparagraph 8(1)(f)
of the Income Tax Act, she had not met her evidentiary burden of
substantiating such expenditures; or alternatively, that even if they were
incurred, it was not for the purpose of earning employment income, nor were
they reasonable under subsection 67 of the Act.
[3] In Schedule “A” to the Reply to the Notice
of Appeal are set out the amounts claimed by Ms. Xiao, the amounts allowed by
the auditor and/or by the Appeals Officer following the filing of Ms. Xiao’s
Notice of Objection. Summarized in chart form below is the history of the
claims in respect of the four categories above:
For 2000:
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Category
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Claimed
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Audit Amount
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Appeal Amount
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Total Allowed
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Compensation
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10,772.50
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0.00
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No
Change
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0.00
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Work space
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7,993.17
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715.50
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No
Change
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715.50
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Office Equipment
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10,178.43
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0.00
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5,778.00
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5,778.00
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Transportation
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735.00
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0.00
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No
Change
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0.00
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For 2001:
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Category
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Claimed
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Audit Amount
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Appeal Amount
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Total Allowed
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Compensation
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1,800.00
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0.00
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No
Change
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0.00
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Work space
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1,659.12
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445.54
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No
Change
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445.54
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Office Equipment
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437.13
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0.00
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437.13
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437.13
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Transportation
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1,755.22
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0.00
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No
Change
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0.00
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[4] As can be seen from the above chart, Ms. Xiao
was partially successful at the departmental appeals stage in substantiating
the amounts claimed. At the hearing, she argued that she ought to have been
allowed the full amounts, although most important to her were the
“compensation” amounts in 2000 and 2001. To succeed in these appeals, Ms. Xiao
had the burden of proving the Minister’s assumptions wrong. This task was made
difficult by Ms. Xiao’s failure to comply with her obligation under the Income
Tax Act to keep adequate books and records to support the claims made.
[5] Ms. Xiao represented herself and was the
only witness to testify. She immigrated to Canada from China in 1991. She had some university-level education in China and took one year of accounting at Seneca College before beginning work as a
securities broker in 1998. In 2000 and 2001, she continued to be employed in
this position although by that time, her employer was known as Westminster
Securities Inc. Ms. Xiao worked out of an office in the home she shared with
her husband Weizhen Tang whose business, Weizhen Tang and Associates Inc., was
also conducted from the residence. Although her main contact with clients was
at meetings or seminars conducted at her home office, Ms. Xiao
occasionally had to call on clients; for this purpose, she used a car rented
from Weizhen Tang and Associates Inc. Ms. Xiao did not maintain what would
be considered normal accounting journals of her business transactions. Her
records‑keeping consisted of making notes from time to time of some
expenditures in separate (but unidentified and not produced) “books” and of
putting some invoices (also not produced) in files for her accountant’s
reference at tax time. Many of her dealings were in cash, a method she
explained was not considered out of the ordinary in China. It is against this background that each of the four categories is
considered below.
1.“Compensation”
to Clients
[6] In 2000, Ms. Xiao was required to pay to
her employer Westminster
$10,772.50 as reimbursement for the company’s share of an arbitration award
made to a dissatisfied client. I accept her evidence that Westminster looked to her for payment and
that in due course the company was reimbursed. The only question is whether Ms.
Xiao herself made this expenditure. In support of her assertion that she paid
this amount, Ms. Xiao put in evidence a copy of a letter describing the
arbitration result, a bank draft in this amount payable to Westminster and a copy of a letter from a
former Westminster
representative
to counsel for the Respondent confirming the payment. Ms. Xiao testified that
because she didn’t have the money at the time, she borrowed the $10,772.50 from
a close family friend. Because she borrowed from a friend rather than a bank,
she had no receipts or other documents that would normally evidence the
transaction. In addition to having no documentary evidence to substantiate her
version of events, she was unable to call her friend to testify at the hearing
because he was out of the country. She testified that she made two payments
plus interest. She added that she paid partly in cash by cashing her commission
cheques and partly in kind, on one occasion by buying a computer for her
friend’s immigrant parents and assisting them in other ways to make their way
in their newly adopted country. This, she said, is enough between friends. It
is not enough, however, to support her claim that she incurred the cost of the
reimbursement.
[7] In 2001, Ms. Xiao was again confronted
with unhappy clients. Because of her close relationship with them, this time on
her own initiative, she decided to reimburse them for their investment losses
of $1,800. Describing this expense as “client compensation”, Ms. Xiao produced
photocopies of two receipts, one for $500 and another for $1,300 to show she
had paid these amounts. The difficulty with these receipts is that they are
made out to either Weizhen Tang or Weizhen Tang and Associates Inc. I do
not accept Ms. Xiao’s explanation that this was merely an oversight because her
husband happened to be the person who answered the door the day the clients
came to pick up the money and make out the receipts, especially since each
receipt bears a different date. From her testimony, it is clear that both Ms. Xiao
and her husband have sufficient business experience to have understood the
importance of ensuring a receipt to be used in support of a deduction the
Appellant herself described as important, be made in favour of the actual
payor.
[8] Ms. Xiao argued that for transactions
between friends, formal records‑keeping is not necessary. When the
objective is to support employee expense deductions under the Act,
especially for transactions between the taxpayer and friends or family, books
and records sufficiently adequate to substantiate such claims are crucial to
the taxpayer’s success. On the evidence presented, I am not satisfied that Ms. Xiao
personally paid the “compensation amounts” claimed in 2000 or in 2001.
2. Work Space in
Home
[9] Ms. Xiao and her husband and two children
live in a detached two-storey four-bedroom house. In 2000, Ms. Xiao claimed 25
percent of the total amounts paid for mortgage interest and other such costs in
respect of the Xiao‑Tang residence. In 2001, she claimed only 8 per cent
although the nature of the business was the same and the same area of the house
was used for office purposes.
After noting this discrepancy, the Minister reassessed allowing a deduction
based on the 8 per cent calculation for both years. Ms. Xiao testified
that the lesser amount was claimed in 2001 because she had worked for Westminster for only a few weeks in 2001.
She objected to this reduction saying that the Appeals Officer had
misinterpreted the information
she provided showing the square footage of the house and failed to understand
what areas were dedicated to office use. On cross‑examination, Ms. Xiao
explained that the living room and dining room were used exclusively for her
home office as well as the kitchen for preparation of coffee and snacks during
seminars. Though pressed to explain what portion of the same space was used for
her husband’s home-based business, Ms. Xiao could be no more specific than to
say it was a very small part because Weizhen Tang and Associates Inc. did not
need much space. There was no other evidence before the Court to show the floor
plan or dimensions of the rooms. The department’s calculations were based on information
easily available to and provided by the Appellant herself. I am not satisfied
that Ms. Xiao discharged the onus of rebutting the Minister’s assumptions for
either 2000 or 2001 to permit me to reach a different conclusion than that
already assessed by the Minister.
3. Office
Equipment Leasing
[10] In 2000 and 2001, Ms. Xiao leased computer
software from her husband’s business, Weizhen Tang and Associates Inc., in
respect of which she claimed expenses of $10,178.43 in 2000 and $437.13 in
2001. The Minister allowed the full amount for 2001 and approximately half of
the deduction claimed in 2000. Ms. Xiao argued that she was entitled to
the full deduction. Although invoices
for the leasing charges from Weizhen Tang and Associates Inc. to Ms. Xiao were
put in evidence, Ms. Xiao had no bookkeeping records, cancelled cheques,
banking statements for herself or Weizhen Tang and Associates Inc. to show that
the amounts shown in the invoices had been paid. Entered as an exhibit was a
copy of a list of payments,
hand-written by Ms. Xiao for Agency officials setting out the payments
made. There is no direct co-relation between the amounts shown in the invoices
and those in the hand‑written list. Ms. Xiao explained that she had
referred to “payment slips” when preparing the list for the CRA official but
these documents were not put in evidence. As was the case above, the evidence
before me is insufficient to support claims in excess of what was allowed by
the Minister, especially for transactions occurring between non-arm’s length
parties.
4. Transportation
Expenses
[11] In 2000, Ms. Xiao claimed transportation
expenses of $735 for miscellaneous costs such as gas and parking tickets; in
2001, $1,755.22 which included rental costs paid to Weizhen Tang and Associates
Inc. for the use of a car owned by her husband’s company. Although at odds with
Ms. Xiao’s earlier evidence that most of her work was with clients at her home
office, her testimony was that driving became a necessity in 2001 when
Westminster moved its office from Toronto to Oakville. In any
event, the primary problem she faced in proving her entitlement to these
deductions was again, the lack of documentation to show these amounts were
actually paid. Ms. Xiao testified that she had shown cancelled cheques to the
CRA official but she did not feel it necessary to bring them to the hearing.
Consequently, there was nothing before me to support her assertion that she had
paid her husband’s company for the use of the company car.
[12] For the reasons set out above, these
appeals are allowed and referred back to the Minister for reconsideration and
reassessment on the basis that the Minister ought to have allowed employment
expenses of $2,073.83 for 2000 and $803.86 for 2001 as set out in paragraph 16
of the Reply to the Notice of Appeal.
Signed at Ottawa, Canada, this 5th day of August
2005.
Sheridan,
J.
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