|
Citation: 2004TCC626
Date: 20040928
Docket: 2004-193(IT)I
|
|
BETWEEN:
|
|
ROBERT LECERF,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
|
REASONS FOR JUDGMENT
(delivered orally from the Bench at
Edmonton, Alberta, on May 18, 2004)
[1] This appeal pursuant to the
Informal Procedure was heard at Edmonton, Alberta on May 18,
2004. The Appellant was the only witness.
[2] The particulars in dispute are set
out in paragraphs 4 and 8 to 16 in the Reply to the Notice of
Appeal. They read:
4. In respect
of paragraph 7 of the Notice of Appeal:
(a) he admits that
Rhoda Smith (hereinafter "Rhoda") was paid $34,000.00
in 2000;
(b) he denies that
Rhoda was paid $23,600.00 in 2001;
(c) he states that
the amounts paid to Rhoda Smith were paid from a bank accounts
for RDL Equipment Services; and
(d) he has no
knowledge of and puts in issue the remainder of the
paragraph.
...
8. In
computing income for the 2000 and 2001 taxation years, the
Appellant deducted rental losses of $40,365.46 and $25,182.33,
respectively, which included the amounts of $34,000.00 and
$23,600.00 as rental expenses, respectively, for amounts paid to
Rhoda for management fees (hereinafter the "Management
Fees"). Details of the rental losses are outlined in
Schedule A attached hereto and forming part of the Reply to the
Notice of Appeal (hereinafter "Schedule A").
9. The
Minister of National Revenue (the "Minister")
reassessed the Appellant for the 2000 and 2001 taxation years to
disallow the Management Fees and reduce the rental losses to
$6,365.46 and $1,582.33, respectively, as the Management Fees
were not incurred for the purposes of earning income from
business and property and were not reasonable in the
circumstances. The Notices of Reassessment were dated June 2,
2003.
10. The Appellant filed a
Notice of Objections to those reassessments, dated July 7,
2003.
11. The Minister confirmed
the reassessments by means of a Notice of Confirmation dated
October 22, 2003 on the basis that the Management Fees were:
(a) not shown to
have been incurred as expenditures to gain or produce income from
a business or property; and
(b) not reasonable
in the circumstances.
12. In so reassessing the
Appellant for the 2000 and 2001 taxation years and in so
confirming those reassessments, the Minister assumed the same
facts as follows:
(a) the Appellant is
the sole shareholder of 774638 Alberta Ltd (the
"Corporation");
(b) the Corporation
owned the property at 4932 - 50th Street in Rocky Mountain House
(the "Property");
(c) the Corporation
rented the Property to the Appellant in the 2000 taxation year
for $8,470.00;
(d) during the 2000
taxation year, the Appellant sublet the Property to Astro-Tech
Electronics for $1,070.00 a month for the months of January
through May, 2000;
(e) the total rent
received by the Appellant from Astro-Tech Electronics in 2000 was
$5,350.00;
(f) Astro-Tech
Electronics was owned and operated by Rhoda;
(g) the Appellant
did not rent the Property after May 2000;
(h) the Appellant
claimed rental losses of $40,365.46 and $25,182.33 in the 2000
and 2001 taxation years, respectively;
(i) included
in the rental losses were the expenses for the Management
Fees;
(j) the
Management Fees were paid to Rhoda;
(k) the Appellant
and Rhoda did not have a written contract regarding the
Management Fees;
(l) Rhoda was
paid $34,000.00 on December 29, 2000 by way of a cheque from
R D L Equipment Services;
(m) Rhoda was paid $600.00
on April 8, 2001;
(n) Rhoda was paid
$23,000.00 on February 1, 2002 by way of cheque from R D L
Equipment Services;
(o) the Appellant
claimed interest expense of $1,274.25 as a rental expense in the
2000 taxation year for interest charged on the Appellant's
two personal lines of credit;
(p) the Appellant
claimed telephone expenses as rental expenses in the 2000 and
2001 taxation years for the line rental of his personal
telephone;
(q) the Appellant
claimed utilities expenses as rental expenses in the 2000 and
2001 taxation years representing 1/8 of his utilities for his
personal residence for his home office; and
(r) Rhoda did not
provide any services to the Appellant in respect of the
Property.
B.
ISSUES TO BE DECIDED
13. The issues are:
(a) whether the
Management Fees were incurred by the Appellant for the purpose of
gaining or producing income from a business or property; and
(b) if the Court
determines that the Management Fees were incurred by the
Appellant for the purpose of gaining or producing income from a
business or property, which is not admitted but denied, whether
the amounts were reasonable in the circumstances.
C.
STATUTORY PROVISIONS, GROUNDS RELIED ON AND RELIEF
SOUGHT
14. He relies on sections
3, 9 and 67, subsection 248(1) and paragraph 18(1)(a) of the
Income Tax Act, R.S.C. 1985, c. 1 (5th Supp) (the
"Act") as amended for the 2000 and 2001 taxation
years.
15. He submits that as the
Management Fees were not incurred for the purpose of gaining or
producing income from a business or property within the meaning
of paragraph 18(1)(a) of the Act the amounts are not
deductible as rental expenses in the 2000 and 2001 taxation
years.
16. He further submits
that if the Courts determine that the Management Fees were
incurred by the Appellant for the purpose of gaining or producing
income from a business or property, which is not admitted but
denied, the amounts were not reasonable in the circumstances as
required by section 67 of the Act.
[3] Assumptions 12 (a) to (q)
inclusive were not refuted.
[4] Having regard to Stewart v. The
Queen, [2002] 2 S.C.R. 645, the Court finds that there is no
evidence that Mr. Lecerf had any personal interest in the series
of transactions described herein. As a result, the Court has no
reason to review the concept of a reasonable expectation of
profit.
[5] That leaves the assessment denying
the expenses claimed on the basis that they were not reasonable
pursuant to section 67 of the Income Tax Act.
[6] In reviewing the question of
reasonableness, the evidence established that:
1. Mr. Lecerf purchased
the property in question on April 4, 1997 for $75,000. He sold it
to his "Corporation" on May 11, 1998 for $75,000 and
the Corporation sold it to a third party on December 19,
2000 for $95,000.
2. Mr. Lecerf and Rhoda
Smith have the same phone number, at Mr. Lecerf's
residence, the charges for which Mr. Lecerf deducted as a
business expense in 2000 and 2001 along with Rhoda Smith's
management fees.
3. Exhibit A-1 is a
picture of the property. It is located in downtown Rocky Mountain
House. It is a one storey commercial premises with about 10
meters frontage which appears to be in average condition. Rocky
Mountain House is a small town in Alberta's foothills about
half-way between Edmonton and Calgary.
4. When Mr. Lecerf bought
the property, it had been rented to the same business for almost
20 years.
5. Mr. Lecerf was working
in construction out of Rocky Mountain House in 1999 when the
management arrangements were made with Rhoda Smith.
6. Respecting 2001, Rhoda
Smith's receipt for $600 on April 8, 2001 calls it
"wages" and Mr. Lecerf's cheque for $2,300 on
February 1, 2002 describes it as "wages". The
alleged invoice from Rhoda Smith to Mr. Lecerf for $2,300 is
dated December 31, 2001 and, in the same handwriting states
"paid by cheq #0185", i.e., the cheque dated February
1, 2002. (Exhibit A-5).
7. Mr. Lecerf testified
that the property had some work done on it under Ms. Smith's
management in 2000 and 2001. But he did not claim any expenses
relating to such work in those years. Nor did he have any
documents or receipts respecting it when asked for them in
cross-examination. These allegations are not accepted by the
Court as being true.
[7] In the Court's view:
1. The alleged management
fees are incredibly high for a $75,000 property in a small rural
Alberta town. The normal rental property management fee, to the
general knowledge of the public, is a contingency fee of around
5% of the rent collected. In this case the only rent Mr. Lecerf
collected in either year was $5,350 from Rhoda Smith's
firm for 5 months for 2000.
2. These alleged
management contracts are not in writing. They do not appear to
represent ordinary or customary market terms and the
"wages" references respecting 2001 are extraordinary.
Moreover the "manager" in 2000 also owned the tenant
business or was the tenant. Thus both years have evidence of
matters that are suspicious and confirm the proposition that the
management fees appear extraordinary and unreasonable.
3. Mr. Lecerf claimed
telephone expenses in addition to the management fees in both
years. In an ordinary property management contract, the manager
would pay the telephone fees at Rocky Mountain House where the
proprietor was outside of the town. If the proprietor was in
town, he would have no business type of reason to deduct
telephone fees.
[8] In the Court's view the
management fees in question were not reasonable in the
circumstances as required by section 67 of the Income Tax
Act.
[9] The appeal is dismissed.
Signed at Kamloops, British Columbia, this 28th day of
September, 2004.
Beaubier, J.
Email this Content