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Citation: 2004TCC283
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Date: 20040408
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Docket: 2002-4155(IT)I
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BETWEEN:
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LINDA GILBERT,
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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
Margeson, J.
[1] These are appeals from the
reassessment of the Minister of National Revenue
("Minister") for the 1996 and 1997 taxation years,
concurrent Notices of which were dated April 7, 2000. By the
reassessments, the Minister included gross business income in the
amounts of $23,272.50 and $18,347.84 respectively, allowed
expenses in the amounts of $10,957.69 and $11,442.19
respectively, assessed unreported net business income in the
amounts of $12,314.81 and $6,905.65 respectively, and imposed
penalties pursuant to subsection 163(2) of the Income Tax
Act ("Act") in the amounts of $783 and
$348.50 respectively.
[2] In further reassessing the
Appellant pursuant to subsection 165(3) of the Act for the
1996 and 1997 taxation years, concurrent Notices of Reassessment
thereof dated July 11, 2002, the Minister allowed deduction of
additional rental expenses in the amount of $1,500 for each of
the 1996 and 1997 taxation years and correspondingly reduced the
gross negligence penalties by the amounts of $124.10 and $123.10
respectively.
[3] The Minister took the position
that any amount of expenses claimed by the Appellant in excess of
the amounts of $12,457.69 and $12,942.19 for the years 1996 and
1997 respectively, were not made or incurred for the purpose of
earning income and that they were personal or living
expenses.
[4] The Appellant took the position
that the expenses claimed in excess of the amounts allowed by the
Minister in the 1996 and 1997 taxation years were made or
incurred by the Appellant to earn income from a business. She
should be allowed to deduct them.
[5] Further, the Appellant took the
position that the Minister included in 1996 income, for 1995
work in progress, the amount of $2,180 and did not allow
deduction for an allowance for bad debt of $3,200.
[6] At the commencement of the trial
the parties agreed to allow into evidence, by consent, Exhibit
A-1, which was the auditor's list of disallowed receipts;
Exhibit A-2, which was a mileage log and expense listing; Exhibit
A-3, calendars for the 1996 and 1997 years; Exhibit A-4, map of
Prince Edward Island ("PEI") with client sites noted;
Exhibit A-5, a Notice of Appeal with Schedule attached and
Exhibit A-6, a bundle of office expense receipts.
[7] The Appellant testified that she
was a chocolatier and a chartered accountant as well as a
part-time student. She agreed that in 1997 she had $18,347.84 of
income which was the amount assessed by the Minister for that
year. Everything else appeared to be in dispute.
[8] She also contended that the
Minister should have allowed a deduction of $3,200 in the 1996
taxation year as an allowance for bad debt. This was a specific
invoice for Design International, which was eleven months overdue
at the time the tax return was due and so it was excluded from
income. The company subsequently did file for bankruptcy and she
received less than $100 for that invoice five years later.
Therefore, it should not be included in her income for that year
which was assessed in the amount of $23,272.
[9] With respect to the expense claim
for office supplies, the Appellant said that she produced
receipts for all of these expenses and they were all deductible.
Some of them might have to be classified as a business gift or
business development advertising but they are deductible.
[10] Counsel for the Respondent was prepared
to concede that a certain proportion of the expenses claimed were
deductible but the Appellant took the position that all of the
receipts submitted were all related to business and none of them
were personal so the trial had to continue. The parties agreed
that there were receipts for all of the items claimed and that it
was not disputed that the amounts were expended but the only
question was whether or not they were deductible as business
expenses.
[11] There were some exceptions to that,
particularly with respect to the category of "office"
where there were three items where there were no receipts. This
was for the year 1996.
[12] With respect to office expense, the
Appellant said that she has one room, and clients come to her
office. Sometimes she gives them tea, coffee, juice or water. She
has a large window and in front of that window is where they put
the recycling bins so that she normally puts flowers or plants in
the window so that you are not looking at the recycling bins.
Some of the expenses were related to this office.
[13] With respect to the claim for office
expense in the amount of $132.18, there were no receipts. She
said that she paid them by credit cards. One was for $63.03 paid
to Business Depot for computer software. It was related to a tax
problem that she had. The purchase was for fish (coat hangers)
hooks for people to come in and hang up their coats. It was
purchased from one of her clients, Pottery By the Sea. Another
part of the expenses was for paper or cartridges for the
computer. She also had a receipt for glasses that she had
purchased for her clients.
[14] The expenses for books would have been
for professional development. One of the expenses for $12.60 was
for the Rossignol Winery. She said that she went there for the
purpose of trying to contract Mr. Rosssignol as one of her
clients. Wine was given to her client who had introduced her to
Mr. Rossignol. Another item was an umbrella which she bought for
herself on the way to an appointment as it was raining. The
amount of $7.86 was for a paper pad and envelopes that were
bought in Montreal en route. They were used in her business.
[15] One item for $22.34, was for the
purchase of two cassettes which were produced by one of her
clients. She bought them to gain more information about her
client. The amount of $6.42 was a payment made for sending faxes.
Other amounts were for books that she purchased as reference
material or sometimes for business development, the art of
advertising, promotion or professional presentation.
[16] One item was for a chocolate bar that
she had eaten. The amount of $68.99 was for a briefcase. The
amount of $15.90 was for a bread pan that she used as a plant and
flower holder in her office. The briefcase was for business
purposes. She did not know what this $54.33 item was for. The
amount of $18.04 was for a child's book. She could not be
more specific. It would be a gift for a client.
[17] Her rationale in purchasing those items
was that she has many clients who tell her about their families.
She thought that this book would be appropriate for her
client's family. The $125.09 item was for Edwards Books. She
claimed that these were all books that would help her to be
better in her business. They were books about office
management.
[18] She could not specifically remember
what every one of the receipts totalling $154.90 were for, except
the $57.49 which she admitted was personal. However, the rest,
she said, were all receipts for business purposes such as
envelopes, which she buys at the corner store, computer paper, or
water for her clients. She only put them in the file because they
had been spent for business.
[19] She had made a personal commitment to
the chocolate factory and wanted to implement a business plan for
it. That would be her first priority. However, she knew that
after that, she wanted to come back and become more involved in
the company because she thought it had more potential. During the
period of what could be referred to as her transition period, the
implementation of the business plan, her first commitment was to
the chocolate factory and her second commitment was to keep the
clients that she had so that when she did move into doing less
chocolates, she would still have a business to go to. This meant
that she had to maintain her chartered accountant dues, her
insurance and other costs.
[20] She had some clients in Toronto and
some in PEI. Approximately 60 to 70 percent of her income comes
from Toronto from two regular clients and the rest is spread
between Toronto and PEI. During this time she had a primary
commitment to work at the chocolate factory, at the same time
that she was maintaining the clients that she had so that when
the chocolate factory commitment lessened, she would be able to
develop her business.
[21] In the years 1996 and 1997 she was
physically doing a lot of chocolate factory work. She was going
to Toronto to deal with her clients as well. She would squeeze in
the PEI clients while she was there and then go back to Toronto,
as needed, to keep the clients that she had. Her two main clients
were associations and they do monthly reports to their boards of
directors so that generally she had to be in Toronto once a month
to deal with that. That was the reason why she was travelling
back and forth between Montreal and PEI so much. She also had a
client who lives primarily in PEI but performs in Halifax. She
would have to meet him sometimes in Halifax.
[22] She referred to the interest expense
item and said that Canada Customs and Revenue Agency
("CCRA") was disallowing an amount which was credit
card interest and she provided summaries of all of her credit
card expenses in 1996. She referred to Schedules A-3 and
A-4, which were attached to her Notice of Appeal.
[23] She noted what were personal expenses
and these were usually repaid, so that the expenses which she is
claiming, are all business expenses and she paid them on the
credit card. The Minister disallowed all credit card
interest.
[24] Regarding telephone expenses, after
meeting with counsel for the Respondent, she determined that the
auditor had based the telephone allowance on a sample of three
months, January, February and March for long distance, and she
calculated that 50 percent was for business and 50 percent
was for personal. She had the telephone receipts in Court. She
believed that the telephone in PEI should be fully deductible as
it is an expense. They had separate business telephones for the
chocolate factory. They had a separate business telephone for the
family. The disputed bill was for a third telephone.
[25] The $1,206.02 item, which was
disallowed, was related to three different parts. There was a
telephone in PEI used strictly for business. The number was
658-2008 and 658-2006 for the children. The one claimed was
entirely for the business. It was agreed that the amounts were
all expended. In PEI three telephones ring at both businesses, at
her office in the chocolate factory, and it also rings in her
office and in her house. The primary listing was under "Ron
Gilbert". That was the telephone that she used. That was the
telephone that she paid for. That was the telephone that was
necessary for her business. She paid for the telephone
personally. She did not bring the receipts. She had the telephone
bill showing that they were paid, that is all. The matter of how
they were paid was in issue.
[26] She insisted that all of the expenses
for the PEI telephone were business expenses. Further, she said
that the auditor allowed none of her basic line in Toronto as a
business expense, even though it is the only telephone that she
had. The message part and a percentage of the basic service
should be a business expense.
[27] For the telephone in Toronto, the
auditor did not allow any of the basic costs but because she had
a message service and because it was required, she believed that
75 percent of the basic telephone should be considered a business
expense. She did not believe that the auditor allowed telephone
calls between PEI and Toronto, which was a substantial part of
the long distance charges. The sprint long distance was all
business and she reiterated that 75 percent of the Toronto bill
should be allowed and all of the PEI bill.
[28] With respect to auto expenses, they
were set out in Exhibit A-2. Counsel for the Respondent agreed
that the number of miles that were recorded were correct although
he disputed the amount of the claim when the Appellant was
claiming 99 percent for business. The Minister disallowed trips
to the airport because he felt that the travel between PEI and
Toronto was not a business expense, but all of those trips to the
airport or to Moncton, to catch a train and the bus and the
mileage required to travel was part of her business expense. This
included the trips from her office to the airport.
[29] The Minister allowed 50 percent of the
cost of the flights. According to her, the auditor considered her
mileage, allowed some, identified specific trips that she said
were not business trips and came up with a different percentage
for business and personal mileage. The auditor identified trips
to the airport and trips made to clients, where there was no
money generated and concluded these were not business trips. She
used that in determining the percentage of mileage for business
and the percentage of mileage for personal.
[30] The $1,874 of disallowed expenses were
all related to business trips to the airport and the business
trips to clients. Sometimes she would take the train from Moncton
because it was cheaper. She also took the bus from Warden to
Moncton, which was cheaper. All of these trips to Moncton were
related to the beginning or end of her trip to Toronto.
[31] She went through each of the items
contained in her Exhibit A-2 that were disallowed by the Minister
and explained why each one of those was related to business. She
even identified the clients and where she had to go. They had two
cars on PEI and she had access to another car at all times other
than the one being claimed. She did not claim any automobile
expenses prior to July of 1996 because that is when she bought
the car in issue. She did incur expenses during that period of
time related to business.
[32] In the year 1997, the Minister
disallowed $3,502.17 as automobile expenses. She went over her
log for 1997 and specifically identified clients, distances and
related these expenses to clients that she either had or was
attempting to obtain. She used specific and detailed references
in each case and explained why the expense should have been
deductible. She was meticulously familiar with each of these
entries. Her explanations covered the total amount of $3,502.17,
which was disallowed by the Minister. The Minister had allowed
basically 50 percent of the expenses claimed.
[33] She contested the Minister's
position in only allowing one-half of the travel claim of
$2,208.12, saying that she had receipts for those items and they
all related to business. Her position was that she did not
include personal travel in her claim. All of the amounts claimed
were for business. These were either airfare, train fare or car
rental. These were itemized in her documentation.
[34] She indicated that she made a trip to
Kelowna to do some work for a Michael Bird, who was a computer
programmer. He apparently was her client in Toronto and was
relocating to Kelowna so she went out there to do his year-end
but also in the hopes of developing further work. All of her
travel expenses related to clients. They generally relate to
travel to and from PEI, and in the winter it would be for early
flights. No claim was made for personal trips as they were not
included in the list.
[35] With respect to travel expenses in the
year 1997, she referred to Schedule B-1 of Exhibit A-5 and
said that the expenditures were made for the purposes of her
business. She was able to give specifics with respect to these
expenditures. She was also able to describe the names of the
clients to whom the expenses related. She also referred to items
expended on car rental, Toronto Transit Commission, parking and
taxi receipts in Toronto.
[36] She disagreed with the penalties being
levied against her. According to her figures there was no income
but there was a loss. She considered the accounting business and
the bookkeeping business to be in a holding pattern. She did not
deduct the loss in her tax return because she concluded that the
Minister might decide that there was no reasonable expectation of
making a profit and therefore the expenses may not have been
allowed. She did not deduct the loss because she felt that the
loss was mainly because she was not devoting the time she should
to the business and therefore the expectation of profit issue
might arise. There were no issues with respect to her business or
her husband's business for the years 1993, 1994 and 1995.
[37] The only reason that there was extra
income was because some of the expenses were not allowed. If the
expenses are deductible as she claimed, then there was no profit,
there was a loss, and therefore there should be no penalties. In
1996, according to her calculations, she had a loss of $3,642.35
and in 1997 a loss of $2,333.93. She believed that the expenses
claimed were reasonable and necessary, they were all documented
except for an automobile expense claim of $100 where there was a
mistake in the receipt and there was one payment at Canadian Tire
that she did not have a receipt for but it was for tires. Those
are the only items for which there was no documentation.
[38] After the matter was adjourned and
brought back for hearing at Toronto, Linda Gilbert was
cross-examined. With respect to the $2,180.00 item, she said that
it was for work in progress from 1995. She hoped to deduct it but
she was unable to say whether it was included in income or
not.
[39] With respect to the bad debt of $3,200,
again, she said that this was owed by Design Company. She did
work in 1996 and sent out an invoice and tried to collect the
money. They went into bankruptcy. She provided the name of the
Trustee to the Minister. In 2001 she received $95 from the
Trustee. She used her best judgment in deciding that it was not
collectible.
[40] In cross-examination she claimed that
the travel expenses were 100 percent related to business. She now
lives in Toronto and this was the case in 1996 and 1997. Her
medical coverage is in Toronto. She lived with her daughter and
claimed an equivalent-to-spouse deduction.
[41] She went to PEI to do work and returned
to Toronto and did work there as well. She also worked in a
chocolate factory in PEI. She received employment income. It took
a lot of time to do her work in PEI. She had some family in PEI.
She went to PEI for the purpose of visiting family, to work and
to work in the chocolate factory. She spent large
"chunks" of time in PEI. All of the trips that were
claimed were to PEI and Toronto except for the one to Kelowna,
British Columbia. This was for work that she did for
Michael Bird. She charged $395 for the work and she was
there a week. She claimed no other expenses. She stayed with her
client. She was expecting this to be a very lucrative
contract.
[42] With respect to her office expenses,
she was referred to the item for $209.24 and she agreed that it
contained no name. She did not keep corner store receipts, but it
would be for the office. With respect to the interest charge,
this stems from her use of her credit card for business purposes.
In 1996 it related to the Royal Bank and the Toronto-Dominion
credit cards. In 1997 it related to the Royal Bank,
Toronto-Dominion and Mastercard accounts. These accounts were in
her and her husband's name.
[43] In 1996 there was no zero balance on
the accounts when she started using them for business purposes.
In 1997 the Mastercard and Toronto-Dominion accounts had zero
balances. She used these cards for personal accounts and her
husband used them as well. However, the personal accounts were
paid right away so that there would be no interest or very little
interest charged to the account. These expenses are mostly for
her accounting business and were travel expenses. The chocolate
factory had its own financing.
[44] With respect to telephones, the only
issue was with respect to what businesses the telephones were
used for. She was claiming 100 percent of the use of the
telephone for long distance purposes for 1996 for the Bell
invoice. She calls the number in PEI to collect her messages.
This telephone was located at the chocolate factory. However, the
primary purpose of the telephone was for her business. She
maintained that she did not chat with her husband or her children
on this telephone.
[45] For the Toronto telephone, she was
claiming 75 percent of the home telephone basic bill plus all
costs of the long distance charges. With respect to the PEI
telephone number (902) 658-2006, this was in the name of Ron
Gilbert. It also was connected to the chocolate factory. It was
not listed. It rang in her office, the house and the chocolate
factory.
[46] With respect to other expenses, the
$100 that she claimed should be disallowed. She was wrong in
claiming that. Further, she could not find the receipt for the
Canadian Tire amount.
[47] She referred to the automobile, which
she purchased and used to travel to PEI. She deducted personal
miles from it and claimed the balance. 20 percent of the expenses
related to going from Toronto to PEI. She did not need a car in
Toronto. It was cheaper to drive to PEI then to go by some other
means and then she kept it there for business purposes. She went
there to deliver the car for business purposes.
[48] She has been a chartered accountant
since 1980. She has prepared income tax returns for people but it
is not her expertise. She did some in 1996 and 1997. In 1996 and
1997 she made income from accounting but she made no profit. She
reported her income for every year except 1996 and 1997, except
perhaps 1995.
[49] She was aware of the reasonable
expectation of profit test and that is why she did not report
income on her return. In 1995 she was in PEI more than other
years. She did not report income in 1996 and 1997. She knew that
she was not making money. There were things that she could have
claimed but she did not.
[50] In 1996 she had a list of sales and
after looking at her expenses she knew that it was hopeless so
that is one of the reasons why she did not report her expenses
and income. She may have claimed a loss subsequent to the audit.
She was not sure about 1995 but the auditor did review it. Her
experience gave her the knowledge that she needed to conclude
that she would not have made a profit in the years in
question.
[51] She did not develop a profitable client
basis on PEI but hoped to and hoped to make a choice. She did not
want to give up her clients as she would not get them back.
[52] Exhibits R-3 and R-4 were admitted by
consent. These were the 1996 and 1997 T1 General returns for the
Appellant respectively. They do not provide any net or gross
figures for the business.
[53] In July, August and November the
chocolate factory was working. In the year 1996, about 51 percent
of her travel was for personal purposes and in 1997 it was only
about 10 percent.
[54] When she considered the credit card
interest claim, very little was related to personal use.
Argument of the Respondent
[55] Counsel said there were three
issues:
1. What was the total
amount of income in the years 1996 and 1997? He concluded that
the proper amount of income in 1996 was $23,272.50 and the proper
amount of income in 1997 was $18,347.84.
2. Did the Minister
properly determine the deductions?
3. Were the penalties
imposed under subsection 163(2) proper?
[56] In considering the 1996 taxation year,
he referred to the Reply to the Notice of Appeal, Exhibit A and
said that as a result of documents tendered by the Appellant and
the position taken by her, the Minister has changed its mind and
the Appellant is entitled to more deductions than the Minister
initially allowed. He tendered a revised summary of items in
issue with respect to the years in question, setting out the
amounts that the Minister was prepared to allow, the basis for
same and the amounts that the Minister was still contesting.
[57] With respect to the income, there was
no dispute with respect to 1997 and that remained at $18,347.84.
However, with respect to 1996 there were two items in dispute.
The Minister added on the amount of $2,180 as work in progress
during 1995 whereas the Appellant wanted to deduct it. The
Appellant took the position that it must be reported in previous
years and taken out this year. However, it had not been shown by
the evidence that it was added into income in previous years,
that it was included before, therefore it must be added on to the
year 1997.
[58] With respect to the $3,200 figure for
bad debt, the Appellant wanted to deduct it. However, it must be
added in first and then taken out when it becomes a bad debt.
There was no proof that it was included in the 1996 income. The
company that owed it went bankrupt at a later date. She also
received a small amount of money on the debt one year later.
[59] The Respondent's argument was that
it was not a bad debt in 1996. The Appellant did not prove it. It
was taken into income in 1996. The evidence suggests that it was
not bad in 1996. It may be in 2001.
[60] With respect to travel expenses,
counsel for the Respondent argued that at least 50 percent were
for personal business. The real issues were her trips to PEI. She
was there to serve clients but she was also there to work in the
chocolate factory and she was there to visit her own family. If
she was in PEI to work in the factory, then the trips back there
were not related to her business. The Minister arrived at the 50
percent figure because of the fact that she had clients in PEI.
The auditor allowed 50 percent.
[61] With respect to the trip to British
Columbia, they were allowing only 50 percent because she was
there only one week and she only billed $350 for the work. This
was reasonable in the circumstances.
[62] With respect to the 1997 taxation year,
the arguments are the same. The Minister has already allowed
$3,645.51 for travel expenses. This is more than 50 percent
of what the Appellant was claiming and the Minister was staying
with that position.
[63] With respect to office supplies, the
only items disallowed were those items for which the Minister was
not satisfied that there were adequate receipts.
[64] With respect to the matter of interest,
the main issue is with respect to the interest charge on the
credit cards. These were personal credit cards. They were used to
make personal purchases for the Appellant and her husband. The
cards are in the names of the Appellant and her husband. There is
no way of knowing when the interest occurred, why it occurred and
there is no evidence satisfactory to connect up the expense to
the business.
[65] These amounts were allowed by the
auditor with respect to the bank account and not for the credit
cards. If any of the amounts are allowed for the credit cards, it
should only be 50 percent. Like the travel, a large portion of
the credit card interest was personal.
[66] With respect to the telephone, the
Minister allowed 50 percent of the long distance telephone calls
whereas the Appellant wanted 100 percent. The auditor went
through the bills and found that they related to the chocolate
factory. This was not for business purposes (by and large). The
telephone rang in the house and the factory. She talked to her
husband and other members of the family. She has not shown that
this was a legitimate expense for business.
[67] With respect to the basic telephone
service in Toronto, the auditor concluded that this was all or
nothing. It was her own home telephone and you would have had to
have a telephone in any event even if she was not in business.
This is completely personal. There is no evidence to how much was
personal and how much was business.
[68] With respect to the telephone in PEI,
the Minister disallowed the amounts of $779.53 in 1996 and
$764.13 in 1997 because the telephone was in the husband's
name. It rang in three places. The Appellant has not shown that
the PEI number was used for business purposes.
[69] With respect to motor vehicle expenses,
the auditor made an error with respect to capital cost allowance.
The Minister is now prepared to allow the amount of $795 in 1996
and the amount of $980 in 1997.
[70] The amount of $542.83 which was
disallowed, related to invoice discrepancies. The disallowance of
$1,213.20 related to mileage where there was no income reported.
The $706.09 amount which was disallowed, is the mileage which was
deemed to be personal.
[71] Overall, the Appellant has given some
evidence with respect to the items which she claimed and many of
them were not for the purpose of producing income from a
business. They were not business related. The evidence was not
satisfactory. The onus has not been met except with respect to
the items that the Minister allowed.
[72] In the year 1996, the Minister
disallowed the amount of $1,032.48 for motor vehicle expenses
because he concluded that this was personal. This included a trip
from Toronto where the car was purchased. It was allegedly left
in PEI for business purposes. If this contained a business
element then it should not be allowed except to the extent of the
50 percent.
[73] Regarding penalties, he argued that
these penalties should stand because the Appellant was a
chartered accountant and should be familiar with the requirements
of the Act. She reported income from the chocolate factory
but not from her business. Testimony indicated that she had an
ongoing business. He said that she was sure that she was not
going to have any net income. This was not so.
[74] Under section 230 of the Act,
the taxpayer is required to keep adequate records. There were not
adequate records kept here. She did not know what she earned and
spent in each year. There was no way for the CCRA agent to find
out what she was going to earn. If she did not do it knowingly,
then she was grossly negligent in acting like she did.
[75] He referred to the case of
Cline-Schuit v. Canada, [2001] T.C.J. No. 869 at
paragraph 24 in support of this position. In that case
Bowie, J. found that since the returns were prepared by
members of her staff, the taxpayer reviewed them herself before
they were filed, and she knew that there were personal expenses
that had been charged against her business income, he drew the
inference from these facts and from the absence of proper
records, that she was reckless, at best, in signing and filing
her returns. In that case the taxpayer did file a return but in
the case at bar the Appellant only filed for her employment
income. She said that she did not believe that she would earn
income but this is not an excuse. The appeal should be dismissed
with respect to the penalties.
Argument on Behalf of the Appellant
[76] With respect to the work in progress,
she said that an audit was done by CCRA. She is on the accrual
method. Therefore, the income of $2,180.00 belonged in the
previous year. It was 1995 work in progress and should have been
reported in the 1995 year. It does not belong in 1996.
[77] With respect to the bad debt claim for
$3,200, this account was 11 months overdue and therefore it
was reasonable to consider it as a bad debt in 1996. She had not
received any payment on it. Subsequent events proved her to be
correct.
[78] With respect to the travel, the
Minister only allowed 50 percent of the travel. This was not
correct. She testified in respect to her travel and she should be
allowed 100 percent.
[79] In regard to the credit card, the same
thing applies. The personal charges were paid as they occurred
and there would be no interest charge on them.
[80] Regarding the telephone, she used the
Toronto telephone for business purposes. The auditor called her
in Toronto. Many taxpayers have such a telephone and can use the
expense. The argument that you need a telephone anyway and
therefore you should not be able to use it for business is not
reasonable.
[81] In PEI, there were three telephones;
the chocolate factory, her home and her personal telephone. They
are under the same name in order to obtain a better rate. The
auditor was aware of the three telephones. She only claimed for
the one telephone and she made business calls on her personal
telephone.
[82] She presented the mileage log to
support her automobile expense claims. She gave evidence about
the purpose for the trips. A 50 percent allowance by the Minister
is not reasonable or realistic. It did not matter that she was
not able to obtain business every time. The receipts that she
presented were legitimate. She does not have the missing receipt
but she has the credit card reference that she paid that amount
to Canadian Tire.
[83] Penalties should be deleted. She knew
that she was going to have a loss. Her books were adequate to
tell her that she would have a loss and therefore she did not
have to report anything. That was her position.
[84] She presented all of these documents at
the time of the audit or to the review officer. If all of her
expenses were allowed, there would be no income and therefore it
would not possible that there be a penalties.
[85] The appeals should be allowed, with
costs.
Analysis and Decision
[86] This is a case where it should not have
been necessary to proceed to trial. Certainly, it is a case where
two full days of trial time on two different occasions, should
not have been necessary. Even as late as the end of the first day
of trial, the Court gave to the parties a considerable
opportunity to try and resolve some of the outstanding issues,
but they were largely unsuccessful. This was reflective of the
intransience of both parties from the beginning.
[87] There is enough blame to go around for
both parties. The Appellant certainly was to blame for not filing
her Statement of Income and Expenses. She is a chartered
accountant and was experienced in business files, and even if she
was not an expert in tax matters, she did indicate that she had
done some tax returns. In any event, she should have known that
under the Act, it is necessary for businesses to keep
adequate records and receipts. She should have known that when
the time comes and the Minister questions a taxpayer's income
or deductions, the taxpayer has to come up with adequate receipts
and records.
[88] In this case, the Appellant took the
position that she was not going to have any net income and
consequently she would not have to file a Statement of Income and
Expense for her business. However, one must ask how she concluded
that the Minister was going to be able to determine whether the
expenses that she was claiming were proper and, at the end of the
day, whether or not there was any net income. This is the purpose
of the Act requiring proper records of accounting to be
kept for businesses and individuals and, in not doing so, the
Appellant sowed the first seeds of discontent.
[89] Further, she argued that she was aware
of the "reasonable expectation of profit test" and was
concerned that if she filed a return that some of the expenses
might not be allowed. This was unreasonable on her behalf and,
again, her actions obviously instigated the investigation and
audit which took place and which gave rise to this action.
[90] There should have been much more
communication between the Appellant and the authorities at CCRA,
long before this matter came to trial. Certainly, at the audit
stage, the objection stage and the appeal stage there should have
been sufficient opportunity for the parties aptly to discuss
these differences if they had approached it in a reasonable
manner. They should have been able to resolve a large number of
the outstanding issues. Fortunately, for the Court, by the end of
the hearing, the Respondent was able to produce a Revised Summary
of Items in Issue which went a long way to assisting the Court in
deciding the issues in this case. As it stands, the Court had to
basically conduct a new audit in the matter and without the
Revised Summary of Items in Issue, the Court's task would
have been even more difficult.
[91] The Court is aware of the fact that
distance must have played some part in preventing the parties
from communicating to any large extent since the audit took place
in PEI, the auditor was located in PEI, and the Appellant was
travelling between Toronto, PEI, Halifax, British Columbia and
other parts of the country. Perhaps it was difficult for the two
sides to meet. However, the Court is satisfied there was not any
great motivation to do so.
[92] The Appellant said that she made
records available to the Respondent at the time of the audit. If
that were the case, then many of these issues should have been
resolved before trial.
[93] The auditor was not present in Court to
give evidence on this issue or any other issues and so the
evidence of the Appellant is all that the Court has on that
matter.
[94] In any event, the Court is satisfied
that the Appellant did keep records, in some cases very
meticulous records, and these records should have been sufficient
to allow many of the issues to have been resolved.
[95] There can be no doubt that the
Appellant was involved in a business during the years in
question, that she made legitimate expenses to earn income and
that she incurred expenses that were innate to the business for
which she was claiming expenses. On the other hand, the Appellant
was at fault in not keeping completely separate her expenses
which she alleged were incurred for the purposes of her business
and those expenses which would have been incurred for personal
reasons, family reasons, her employment with the chocolate
factory or the business of the chocolate factory.
[96] This inter-mingling of expenses and
charges took place with respect to travel, office supplies,
interest, telephone and motor vehicles. In spite of the fact that
the Appellant kept meticulous logs, and in many cases was able to
point with specificity to clients that she was either servicing
or hoping to service, there still was some personal use of the
motor vehicle and such expenses are not deductible for the
purpose of her business.
[97] On the other hand, the Court is
satisfied that the Minister has taken too firm a position on the
matters in issue and that some of the expenses that should have
been allowed were denied by the Minister and were still in issue
at the end of the trial.
[98] The Court will deal first of all with
the matter of unreported sales or income. With respect to the
matter of $2,180 which is still in dispute, relating to work in
progress for work done in 1995, the Appellant seeks to deduct
this amount. The Minister argued that it must be shown to have
been reported in the previous year's income in order for it
to be deducted in the 1996 taxation year. The Court can see no
reason for including this amount in the 1996 taxation year. This
business was on the accrual method and if the Minister was
questioning this amount, he should show it in 1995. This amount
should be deducted from the total income in the taxation year
1996.
[99] Further, the Minister says that the
amount of $3,200, as a bad debt, should not be deductible because
the Appellant has not been able to show that this amount was
added into income in the previous year, or that the debt had
become bad under the Act.
[100] The Court is not satisfied that the Appellant has
established on a balance of probabilities, that the amount of
this debt was included in income in previous years. That is the
Appellant's responsibility to do. She cannot rely upon the
Minister and the Minister's audit to supply this proof.
Consequently, that amount will be left in income in the year 1996
and the appeal in that regard is dismissed and the Minister's
assessment is confirmed.
[101] With respect to travel in the year 1996, the Court
is satisfied that some of this travel was personal. However, it
is not satisfied that 50 percent of the travel was personal. A
more reasonable figure would be 25 percent in both years.
Therefore, the appeal will be allowed in that regard and the
Appellant will be entitled to deduct 75 percent of the claimed
expenses. For the 1996 taxation year, she will be entitled
to deduct the amount of $5,718.18. For the 1997 taxation year,
she will be allowed to deduct the amount of $5,176.74.
[102] With respect to office supplies, there are items
here which were clearly not deductible and others were
questionable. The Court will allow the Appellant to deduct a
further 25 percent of the disputed amount. For 1996, she may
deduct $2,676.28.
[103] With respect to interest, this is a very difficult
area since the Appellant's records really show no break down
at all except her own evidence that she paid off the personal
items quickly and therefore there would be no interest on those
accounts. The Court will allow her to deduct 50 percent of the
interest claimed in 1996 of $1,135.61 or $567.80. In the year
1997, the Appellant will be entitled to claim as interest expense
the amount of $411.92, or one-half of the $823.85 claimed.
[104] With respect to telephones, as indicated above,
there were no clear records kept of when the telephones were used
for the Appellant's business, when they were used for the
Chocolate factory business or when they were for personal use.
Clearly, all of these telephones must have been used for all
purposes and under the circumstances, it is impossible to
determine exactly what was personal, business or otherwise.
Consequently, the Court will allow one-third of the total charges
to deduct for business purposes amounting to $440.79 in the year
1996 and $413.49 in the year 1997.
[105] With respect to the motor vehicle expense, the
Court will allow a further 25 percent of the amount claimed in
addition to the amount conceded by the Minister or an additional
$936.25 for a total expense claim in 1996 of $2,807.25. In the
year 1997, the Court will allow a further 25 percent of the
amount claimed in addition to the amounts conceded by the
Minister or an additional $1,441.56 for a total expense of
$3,705.65.
[106] The following amounts have all been conceded by
the Minister. The Appellant will also be entitled to claim
deductions of $754.15 for office supplies in the year 1997;
$232.15 in the year 1996 for promotion and meals; $507.97 in the
year 1997 for promotion and meals; $518.95 for professional
development in the year 1996; $1,305.15 for dues in the year
1996; $1,402.16 for dues in the year 1997; rent of $2,640 in the
year 1996; rent in the amount of $2,670 in the year 1997; capital
cost allowance of $795 in the year 1996 and $980 in the year
1997.
[107] In light of the circumstances of this case, as set
out earlier in these reasons for judgment, the Court will make no
order as to costs.
Signed
at Vancouver, British Columbia, this 8th day of April,
2004.
Margeson, J.
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