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Citation: 2004TCC638
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Date: 20041015
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Docket: 2004-277(IT)I
2004-278(IT)I
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BETWEEN:
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LINDA DORE and ROGER J. DORE,
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Appellants,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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_______________________________________________________________
Agent for the Appellants: Linda Dore
Agent for the Respondent: Katy Grist
(Student-at-law)
_______________________________________________________________
REASONS FOR JUDGMENT
(Delivered orally from the Bench on
July 16, 2004, at Vancouver, British Columbia)
Bowie J.
[1] During 1998, 1999 and 2000, Roger
and Linda Dore operated a business out of their home as a 50/50
partnership. They sold Watkins products for household use by
direct sale, and they rented out certain pieces of equipment,
such as power washers, for those who required them infrequently
and did not therefore wish to purchase them. These appeals are
concerned with the computation of the losses of the business
during each of these three years. The amounts at issue are set
out in seven schedules attached to the Replies filed by the
Minister. I propose to deal with the items disallowed at the
partnership level. Each Appellant's income will be affected
to the extent of 50% of the adjustments to be made.
[2] The only disagreement as to
revenues arises in 1998 when the last reassessment added $117.86
to the revenue reported. The Appellants are entitled to have that
amount removed from income on the basis of Ms. Dore's
evidence. I did not hear any explanation as to the reason for
making that change. The Appellants are also entitled to succeed
as to the amount of $2.78 of inventory. Ms. Dore said that they
did a physical count of the inventory and I have no reason to
disbelieve that it was done correctly, therefore $120.64 is
removed from revenues.
[3] Seven items of expense are
disputed in the computation for 1998. They were all expenses that
were disallowed in part by the assessor. There also was initially
a dispute as to the capital cost allowance as adjusted by the
assessor, but during the course of the hearing Ms. Dore agreed
that the Minister's computation of capital cost allowance
would be accepted.
[4] I will now deal with the expense
items. The first one is advertising and promotion, of which
$152.93 was disallowed. This relates primarily to grocery items
purchased for dinners to which prospective customers were
invited, and some other minor items. These claims are not
unreasonable, and I am satisfied that they were sufficiently
business-related to be deductible under
paragraph 18(1)(a) of the Act.
Additional expense of $152.93 is allowed on that
account.
[5] Second, office expenses of $194.67
were disallowed. Ms. Dore's evidence satisfies me that these
were all reasonable and business-related expenses, with the
exception of an amount of $45.01 which the Appellants spent to
have their kitchen chairs recovered. In my assessment of her
evidence this was more in the nature of a personal expenditure
than business-related. The Appellants are entitled to an
additional $149.66 under that head.
[6] The third item is the wages that
the Appellants paid to their children, which were, as I
understood it, disallowed on the basis of reasonableness under
section 67. The Appellants' children are a 12-year-old boy
and a 7-year-old girl or, more accurately, they were those
ages at the relevant time. The Appellants paid $25 per month to
their son and $15 per month to their daughter to perform duties
to assist them in the partnership business. There is no question
that the amounts were paid. The children were paid an allowance
by their parents before this business came into being, and they
were paid an allowance after the business had ceased to exist.
These amounts were incremental, and Ms. Dore described duties
that they performed. Reasonableness is properly to be assessed on
the basis of the test set down by Mr. Justice Cattanach in
Gabco Ltd. v. M.N.R.[1] He said there that to be disallowed as
unreasonable, an expense must be such that no reasonable business
person would have contracted to pay the amount for the work done,
or services rendered, having only business considerations in
mind. The amounts involved here are small. The son is paid
significantly more than their daughter because his duties were
significantly greater than their daughter. And while they did not
punch a time clock, I am satisfied that the remuneration is
reasonably commensurate with what they did for it. An additional
$240 in expenses is therefore allowed under that head.
[7] The fourth item in 1998 is $129.96
claimed to be deducted in connection with the expenses of a trip
taken by the two Appellants and their two children from their
home in Vancouver to the Okanagan Valley. I was told that the
actual amount claimed was that paid for highway tolls and
campground fees. Ms. Dore said the trip was for business
purposes, specifically to promote the business by enlisting two
specific people at their destination as salespersons. I am not
persuaded that business was a predominant or even necessarily a
significant motive for this trip. The trip and its description
sounds much more like a family vacation than business travel. It
was properly disallowed under paragraph 18(1)(h).
[8] The fifth item is training, meals
and entertainment amounting to $555.11 which was disallowed;
$283.00 of that related to courses taken to improve skills of the
Appellants and I think can be said they have had a reasonable,
legitimate business purpose, and so it should be allowed. The
balance of this item relates to amounts paid for dinners eaten by
the Appellants and their two children at local restaurants. Ms.
Dore described these events, which took place monthly, as
business meetings at which the whole family discussed ways to
improve the performance of their business, and at the same time
spread out on their table in the restaurant various brochures and
other materials provided by the Watkins company. She said that
these attracted the attention of nearby diners, and that they
promoted the products to those diners, as well as to the
proprietors of the restaurants, and thereby advanced the
interests of their business. I am mindful of the caution
expressed by Mr. Justice Iacobucci in Symes v. Canada,[2] as to the
scrutiny that should be given to items of expense that appear to
have a highly personal element about them, and like the trips to
the Okanagan Valley, I regard these dinners as much more in the
nature of a family evening dining out than of a business meeting.
In my view they should not be subsidized by the fisc, and were
properly disallowed as being personal expenses. Therefore,
$283.00 of additional expenses are to be added under the head of
training, meals and entertainment.
[9] The sixth item for 1998 relates to
goods and services tax (GST) and provincial sales tax (PST)
disallowed in respect of specific items of expense otherwise
disallowed. To the extent that taxable items were disallowed by
the assessor, she also disallowed the taxes paid. To the extent
that the Appellants succeed in respect of such items in these
appeals, they are entitled to a further adjustment related to the
GST and PST.
[10] The seventh item is motor vehicle
expense, of which $933.09 was disallowed in the year 1998. I
propose to leave motor vehicle expense for the moment and deal
with it later in my reasons. So exclusive of that item, the
Appellants succeed in respect of the 1998 taxation year to the
extent of $946.23 plus the GST and PST associated with the
taxable items that I have allowed.
[11] I turn now to the 1999 taxation year.
Five items of expense other than motor vehicle expense were
disallowed in that year. The first is advertising and promotion
for $52.53. Of this amount, $34.09 appears to have expended for
business-related entertaining and can reasonably be allowed. The
remainder, if I understood Ms. Dore's evidence correctly, was
for what she called a "staff meeting", and like those
in 1998, it was properly disallowed. So under that head, a
further $34.09 is allowed.
[12] The second item is office expenses of
$61.15 disallowed. As I understood the evidence, this related to
the purchase of a can of paint, and 50% of the charges for the
Appellant's internet connection in their house. The internet
connection is the only internet access in the house, it was not
located in the one room of the house used as an office for the
businesses, and Ms. Dore said it was mainly used for business and
that they preferred to have it outside the office so that if it
were used by the children at all, it would be in an area where
there was some supervision. Clearly it had some personal use, I
have no doubt that it also had significant business use. The
assessor allowed it on the basis of 50% business and 50%
personal, and the evidence has not persuaded me that she was
wrong in that. So far as the can of paint is concerned, Ms. Dore
was unable to tell us what was painted with the can of paint. It
was properly disallowed.
[13] The third item is the children's
salaries, and as in 1998 I would allow those as a reasonable
business expense.
[14] The fourth item is another trip from
Vancouver to the Okanagan Valley. Ms. Dore's evidence as to
the purpose of the trip was not greatly different from her
evidence with respect to the trip the previous year. The amount
of $67.41 is obviously but a modest portion of what was spent on
the trip. There was no particular rationale that I could
understand for charging that amount against the business, along
with the automobile expense, and not any of the other amounts
expended. In any event, I would consider it to be personal, and
so properly disallowed.
[15] That brings me to the fifth item for
1999 which is training, meals and entertainment amounting to
$1,301.52. The largest item here was $895.00 paid for vocational
testing for Roger Dore. Ms. Dore's evidence was that this
vocational testing was something that the Watkins people, as she
called them, recommended. He also took courses in speed-reading,
which she said would assist him in reading repair manuals, and
courses in English. I consider all of these to be personal
expenditures. They certainly have no direct relationship to the
business. They may very well assist Mr. Dore in selecting another
line of endeavour, and they may assist him in his personal
reading pursuits. They may assist him in his communication
skills, but the connection to the business is tenuous at best,
and I would regard them as personal expenses, properly
disallowed.
[16] An amount of $120.76 for entertaining
clients is properly allowable as a business expense, as is an
additional amount of $34.09. The total additional increment to be
allowed as expenses, therefore, for 1999, subject to my later
consideration of motor vehicle expenses and home office expense,
is $634.85.
[17] In the year 2000 there were three items
in dispute over and above the motor vehicle and office in the
home expenses. The first one was $982.27, of which Ms. Dore
conceded $536.12 was properly disallowed, leaving $446.15 in
dispute. Mr. Dore took a computer course that cost $300. The
computer was certainly used in the course of the business and I
would consider that to be a legitimate business expense. The
other items that were disallowed in the year 2000 were of a
personal nature, relating to personal education or skills
training and testing, together with one-half of the internet
charges. In my view these were all properly disallowed as being
personal in nature; therefore $300 is allowed under that
head.
[18] The second item is supplies of $129.62.
These were disallowed, at least in part, for lack of receipts.
They range from some very minor items to some more significant
ones, but Ms. Dore's evidence satisfies me that the amounts
were, in fact, expended and that in general they had a legitimate
business purpose, and so I would allow an additional $129.62,
making a total of $429.62 to be permitted as expenses in the year
2000. The third item for that year is, again, the associated GST
and PST.
[19] This brings me to the motor vehicle
expense claims. The Appellants used two vehicles, both for
personal and for business use, during the three relevant years.
They needed vehicles for use in such things as visiting
customers, delivering product, delivering equipment that was
being rented to customers, and picking up equipment from rental
companies that was being sub-rented to customers. Mr. Dore used a
pickup truck in connection with the rental business, and also to
go to his full-time job and back. Mrs. Dore used a van to go to
her part-time job and back, and the van was also used for
business.
[20] Ms. Dore explained that during the
years prior to 1998 they had kept mileage logs for these
vehicles, and for reasons that seemed to be associated with
advice given to them by someone, they discontinued keeping those
mileage logs. Some partial logs were kept for about six months of
1998 for the van, and a lesser period for the pickup truck. For
reasons that defy logic, the Appellants concluded that on their
estimate they used the van 90% of the time for business and the
pick-up truck about 10% of the time for business, and that they
should therefore claim 100% of the expenses related to the van,
and none of the expenses related to the truck as business
expenses. This, of course, is not any record of actual use, but
simply a guesstimate based on partial information. Business
people who use personal vehicles for business need to keep
accurate logs of their mileage actually driven, if they expect to
be entitled to deduct all the costs of operating those vehicles
for business purposes. Estimates made at yearend by subtracting
an amount estimated to be the personal use from the annual total
mileage driven are only that, estimates. Generally, they tend to
be generous to the estimator.
[21] I note again what Mr. Justice Iacobucci
had to say on that subject in Symes, supra. I believe that
to be the case here. A case in point would be the trips to the
Okanagan Valley, the motor vehicle expense of which was included
in that claimed generally for motor vehicle expense, and would
have inflated the claim. The assessor also made an estimate. She
based it on the logs that were available for the part of the year
1998 and extrapolated the information that she was able to obtain
from those. She added the percentage of business use that she
computed for the van, which was 60%, and that for the truck,
which was 11%, and applied that 71% to the expenses reported for
the van, and allowed the product of that. She was forced into
that kind of estimate because she could only work with the data
provided, and the actual expenses for the pickup truck were
simply not available to her. The van, on the evidence of Ms.
Dore, was a more expensive vehicle to operate than was the truck.
Its capital cost was approximately twice that of the truck. The
obvious fallacy in this approach works in favour of the
Appellants, I should think. I consider that the assessor's
approach was the best that she could be expected to do with the
data available to her, and it is probably slightly generous to
the Appellants. My understanding was that the other two years
were calculated on essentially the same basis. Certainly the
Appellants have failed to discharge the onus on them to show that
the business-related motor vehicle expenses exceeded those
allowed by the assessor.
[22] Turning now to the office in the home
expenses, the Appellants' evidence was that their house has
an area of 2,600 square feet and that one room in that house, and
part of the garage, were used for business purposes. The room
used as an office, Ms. Dore said, was an area of 150 square feet.
The car is a one-car garage, the house has nine rooms in total.
Ms. Dore claims that 10% of the house expenses should be allowed
for the office in the home. She seemed to base this on the fact
that one room out of nine was used for business. The assessor
applies the percentage of area, 150 square feet is 5.7% of 2,600
square feet, which she rounded up to 6%. In my view, the
percentage of the area of a house is a much fairer way to
estimate the apportionment of expenses of the home to be allowed
against the business income when part of that home is used for
the business. Rooms obviously vary greatly in size. The 0.3%
between 5.7 and 6, in my view, adequately accounts for the use of
approximately half of the garage for business purposes.
[23] There was some minor dispute having to
do with landscaping and lawn care expenses, which Ms. Dore argued
ought to have been included in the estimate of home office
expenses. Their relationship to the business I would have thought
somewhat tenuous. To the extent that they are an expense, as part
of the aggregate expenses of the household their effect annually
at 6% would be minimal. Considering that the Appellants were not
entitled to deduct all of their expenses for the office in the
home in any of the three years under appeal, but only a portion
thereof with the balance to be carried forward to later years,
even if Ms. Dore had persuaded me that she was correct as to
those particular items, they would not affect the assessments for
the years that are under appeal.
[24] In summary, then, the appeals will be
allowed, the assessments will be referred back to the Minister of
National Revenue for reconsideration, and reassessment on the
basis that the partnership income will be adjusted as follows:
for the year 1998, additional expenses totaling $946.23 plus any
related GST and PST shall be allowed. For 1999, additional
expenses of $634.85 plus any related GST and PST will be allowed.
For the year 2000, an additional $429.62 of expenses plus the
related GST and PST will be allowed. The amounts by which the
incomes of each of the Appellants are to be reduced will, of
course, be one-half of those amounts. There will be no
order as to costs.
Signed at Ottawa, Canada, this 15th day of October, 2004.
Bowie J.
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