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Citation: 2005TCC651
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Date: 20051025
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Docket: 2004-4528(IT)I
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BETWEEN:
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LAWRENCE WATTS,
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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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For the Appellant: The Appellant himself
Counsel for the Respondent: Michael Appavoo
___________________________________________________________________
REASONS FOR JUDGMENT
(Edited from the transcript of Reasons for Judgment
delivered orally from the Bench at
Toronto, Ontario, on September 15, 2005)
Sarchuk J.
[1] In computing income for each of the taxation years 2000 and 2001, the Appellant sought to deduct losses from Mircom Business Services (Mircom), the main product or service of which was consulting and trading. The expenses initially sought to be deducted totalled $76,107.38 and $61,469.03, respectively. Those amounts were subsequently increased by the Appellant to $83,724.94 and $61,469.03. The expenses disallowed by the Minister of National Revenue in the determination of net business losses in those years amounted to $35,796.74 and $27,475.61, respectively. At the commencement of the trial, the Appellant indicated that he was no longer challenging the disallowance of the expenses as stated above.
[2] In the course of the reassessment, the Minister also disallowed the following expenses claimed by the Appellant: (a) "salaries, wages & benefits" in the amount of $7,231 for the 2000 taxation year, and "administration fees" in the amount of $7,412 for the 2001 taxation year, which were denied on the basis that they had been paid to the Appellant's son who was six and seven years old during the relevant periods; and (b) a reduction of the amount of motor vehicle expenses claimed by the Appellant in those years from $21,480.56 and $21,382 to $2,217.91 and $2,505.97, on the basis that they were personal expenses.
[3] I propose to deal first with the wages in the amounts of $7,231 and $7,412 that the Appellant asserts were paid to his son in the two taxation years in issue. The Appellant testified that:
"The work that was provided for at the time was stuffing envelopes with items for mailing, gathering items for research, limited filing, placing postage on envelopes; and this was done on a regular basis throughout the year. It was obviously work that he was able to do and it was done throughout the year. That's about all I have to say on that point."
In the course of cross-examination, when asked what sort of filing his son was able to do, the Appellant responded:
"He would be able to basically have limited filing. I had different types of folders. He wouldn't actually do it putting it in the file folders, but he would do the filing into, I'm not sure of the term, but baskets, filing in baskets that were sitting on top of the desk for different items to categorize them".
When asked what these were, he responded:
"They would be various things. Some of them would be just items that I had provided guidance as to -- that I had sorted through myself and needed to be sort of set aside for different things. He didn't do enhanced filing in terms of alphabetical or anything like that. But, you know, moving items that were completed that were in a colour coded area into another colour coded area is a fairly simple process."
The Appellant also said that his son would bring items to him that he required for his research. He conceded that his son would not have known how to locate a specific item, but merely would "bring back the basket and I would be able to retrieve it myself".
[4] When asked how the wages paid to the son were determined, he said "basically I just paid him a fixed amount of approximately $600 a month" which,
"Wasn't based on any specific numbers of work. Obviously if he would average four to five hours per week, that would be based on about twenty hours a week or -- yeah, twenty hours a month."
When asked how his son was actually paid for these services, the Appellant said:
"We paid him in amounts that were put aside for him and put into investment accounts at, you know, at various points."
and added that he gave his son cash "all the time", which was used for:
"Whatever kids buy with cash. ... Toys and things like that. What does a six or seven year old use cash for?"
Asked whether that was in addition to the "salary", the Appellant responded:
"On average it probably worked out, you know, it worked out to be included".
and when asked what was meant by his statement "averaged out" he stated:
"Well I didn't take $600 every month and put it aside for him."
and conceded that a retrospective amount primarily determined at the end of the year. No record of these accounts was produced.
[5] I accept that his son performed some minor duties during the relevant period of time, but I note as well that even the simple tasks performed were done at his father's direction and supervision. The Appellant's testimony with respect to the nature of his son's employment indicates a limited performance of marginal duties in respect of which no record was maintained by the Appellant. Notwithstanding the fact that an employee might be a child, husband or wife of a taxpayer, if they are so employed then some record should have been kept in the same fashion as it would have been with respect to an arm's length employee. Thus, the Court is left to speculate as to the actual amount of work done, the time involved, the quality of the work, and more than anything, the value of such work. Given the testimony of the Appellant, and the absence of any supporting evidence whatsoever, I am unable to conclude that the amounts paid to his son was commensurate with the services purportedly rendered by him. In fact, although I am not entirely certain that my calculation is correct, the Appellant's evidence suggests that the son's "wages" were approximately $25 per hour for the services described. In my view that is not commensurate with the nature of the services, and is substantially in excess of the amounts that would have been reasonably paid had the parties been acting at arm's length.
[6] I turn next to the motor vehicle expense claim. The Appellant testified that the motor vehicle was driven 87% of the time "for business use". He further testified that he arrived at that amount based on:
"The mileage that is put on my vehicle is typically during the week when I am doing the business, and typically not on the weekend when I am not doing business."
He observed that the weekend mileage was virtually nil because another "family vehicle" was utilized and, as a result,
"I just based it on the actual amount of time that was spent and took what I felt that was a reasonable percentage of miles that were put on for purposes of earning a business".
[7] Although the Appellant alleged that 87% of the use of the vehicle related to his travels to see clients, he failed to produce a list of clients seen, or a day book, or any other record to support his claim. He also conceded that the income that he earned from this source in 2000 amounted to approximately $2,500 and in the course of cross-examination, the following exchange took place:
Q. So, Mr. Watts, you're suggesting that you travelled to see clients three or four times a day, five days a week, to be paid on a fee for service basis, and only made $2,500.00 in a year?
A. I'm suggesting that the amount of time spent was looking for new clients, not necessarily doing the work for the clients, but actually looking for new clients.
Q. And how many clients did you actually work for in 2000?
A. I believe there's about two that actually worked out to be.
Q. And in 2001 would it be about the same number?
A. Approximately I would think, yes.
[8] I do not believe that it is a particularly onerous task for a person claiming motor vehicle expenses or employment expenses to keep a record of his business trips, the mileage travelled, separate receipts and/or a logbook. The relevant sections of the Income Tax Act (the Act) are precise and set out a formula to be followed in order to claim such expense. And, quite frankly, when this is not done, it is obviously difficult for a taxpayer to recall how many miles he drove on business, how many times the car was used for other matters, and to provide a ratio to the Court that has at least some foundation. This was not done and the evidence before me, even if I were to take a relaxed or liberal view, does not permit me to find in the Appellant's favour. The Appellant's statement that the only way he could respond with respect to the use of the vehicle was "to give you my word that is what it was spent on. I don't have any documentation to prove that". That is not enough.
[9] With respect to the absence of documentary support for an Appellant's case, this Court has referred, on a number of occasions, to subsection 230(1) of the Act, which states:
230(1) Every person carrying on business and every person who is required, by or pursuant to this Act, to pay or collect taxes or other amounts shall keep records and books of account ... in such form and containing such information as will enable the taxes payable under this Act ... to be determined.
Failure to comply with the foregoing does not of itself result in the dismissal of an appeal, but it could interfere with an Appellant's ability to discharge the burden of proof on him, i.e. showing that on a balance of probability, the reassessment is in error. This is particularly so when it comes to motor vehicle expenses, since the Act has a number of provisions which deal with different kinds of uses, what is necessary, what is not necessary, and in fact even deals with the utilization of a vehicle provided by the employer for both business and personal use. The sections are there and the obligation of the taxpayer is made clear therein. If the taxpayer chooses not to comply with subsection 230(1) of the Act and subsequently, relying solely on his recollection as to how much the car was used for business purposes, that simply will not wash. It never has washed and that is not going to change. If a taxpayer does not pay attention to the requirements set out in the Act, he will find himself in the position that Mr. Watts is in today. The only conclusion that can be reached is that the evidence with respect to both of the two issues is far from adequate and does not establish the Appellant's right to deductions as claimed.
[10] Accordingly, the appeals are dismissed.
Signed at Ottawa, Canada, this 25th day of October, 2005.
Sarchuk J.
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