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Citation: 2004TCC299
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Date: 20040427
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Docket: 2003-1740(IT)I
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BETWEEN:
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JON BRESLAW
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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
McArthur J.
[1] This is an appeal from the
decision of the Minister of National Revenue disallowing expenses
claimed by the Appellant for the 1997 and 1998 taxation years on
the basis that they were personal and not business expenses. The
Appellant also appeals from an assessment of a capital gain from
the sale of shares.
[2] During the 1997 and 1998 taxation
years, the Appellant was employed as a professor with Concordia
University. In addition he was at the time and remains today, the
sole proprietor of a business, "Econotron", which
markets economic analysis software having its head office in the
Appellant's home.
[3] Hetestified on his own behalf.
Auditors Hubert Degroot and Jean-Claude Roy testified on
behalf of Canada Customs and Revenue Agency (CCRA) as well as
appeals officer, Donald Lecours.
[4] Originally, there were a number of
business expenses in dispute. Many of these were resolved in the
interim between the pleadings being filed and the hearing. At the
outset of trial, I permitted the Minister's amended Reply
relating to the capital gains reassessment.
[5] The Minister performed an audit of
the Appellant's 1998 taxation year resulting in an assessment
that reduced expenses claimed and added a capital gain from the
sale of flow-through shares of Millstream Mines Ltd.
[6] The Appellant argued that the
reassessment for the capital gain is statute-barred because
it was made after the expiry of the three-year limitation. The
Minister relied on subsection 152(4)(a)(i) of the
Income Tax Act to reassess for the capital gain. Any
reassessment beyond the three-year limitation is restricted by
subsection 152(5) to amounts that formed part of the original
assessment or reassessment within the three-year period.
Paragraph 152(4)(a) provides an exception to subsection
152(5) by authorizing the Minister to reassess beyond three years
if the taxpayer made a misrepresentation in filing his or her
return.
[7] The guiding case for allowing an
amended Reply is The Queen v. Canderel Limited[1] where Décary
J.A. stated at paragraph 9:
... while it is impossible to enumerate all the factors
that a judge must take into consideration in determining whether
it is just, in a given case, to authorize an amendment, the
general rule is that an amendment should be allowed at any stage
of an action for the purpose of determining the real questions in
controversy between the parties, provided, notably, that the
allowance would not result in an injustice to the other party not
capable of being compensated by an award of costs and that it
would serve the interests of justice.
[8] In the present case, both Replies
refer to the capital gain arising from the sale of the
flow-through shares. The original Reply unfortunately did not
address the statute-barred issue nor alleged a misrepresentation
under subparagraph 152(4)(a)(i).
[9] For the reasons that follow, the
filing of the amended Reply is allowed. First, the Appellant had
ample notice before the hearing that the Minister was relying on
this section to reassess for the capital gain. Second, the
amended Reply does not raise a new basis for assessment; rather,
it clarifies the statutory grounds for an issue in dispute
between the parties. Third, it is implicit in the facts assumed
by the Minister that he intends to establish that the assessment
for the capital gain is not statute-barred because of a
misrepresentation by the Appellant. Finally, the appeals are
under the more relaxed informal procedure.
[10] The Appellant had time to prepare and
respond to this basis for reassessment.[2] The second reassessment dated
November 15, 2002, over one year before the hearing, put the
Appellant on notice of the statutory grounds for reassessment of
the capital gain. The second reassessment refers to subparagraph
152(4)(i)[3]under
the "explanation of changes" heading. The Appellant
raised this apparent typographical error as grounds for
disallowing the amended Reply. His position was that he was
unable to determine the provision that the Minister was relying
on to reassess for the capital gain. I do not accept this
assertion.
[11] It is obvious that the Minister
intended to refer to paragraph 152(4)(a)(i). Subsection
152(8) deems assessments valid and binding notwithstanding an
error in the assessment. Similarly, section 166 preserves the
validity of assessments notwithstanding irregularities and
informalities in the compliance of directory provisions in the
Act.
[12] The Appellant acknowledged that he was
not surprised by the changes in the amended Reply. Indeed, the
Minister explained to the Appellant that the reassessment of the
capital gain arose under subparagraph 152(4)(a)(i). The
meeting between the parties followed discussions with CCRA after
the Appellant's objection to the second reassessment when he
was informed of the grounds for the reassessment of the capital
gain.
[13] The original Reply made the following
assumptions of fact about the capital gain:
6. In 1998 the
Appellant disposed of his investment in the flow-through shares
issued by Millstream Mines Ltd.
(a) The disposition
of the shares provided an additional taxable capital gain for the
taxation year in the amount of $27,768.75 calculated as
follows:
Total proceeds of
disposition
$37,025.00
Less:
ACB
$ 0.00
Capital
gain
$37,025.00
Taxable capital gain
$27,768.75
(b) The shares were
held in the name of the Appellant and therefore were capital
property of the Appellant.
(c) For the taxation
years prior to the disposition the Appellant claimed the
deductions allowed in relation to the ownership of the
flow-through shares.
(d) Millstream Mines
Ltd. is a corporation listed with the Toronto Stock Exchange and
therefore does not meet the definition of a Small Business
Corporation as it is a public corporation and not a Canadian
Controlled Private Corporation.
(e) The flow-through
shares disposed of by the Appellant were not qualified Small
Business Corporation shares and therefore were not qualified
shares for the purpose of the Capital Gains Exemption
(f) The ACB of
the flow-through shares was Nil.
The amended Reply added the following regarding the
flow-through shares.
(g) The Appellant
did not declare the capital gain on the disposition of the
flow-through shares for the 1998 taxation year.
The issues related to the disposition of the flow-through
shares in the original Reply are listed above (letters (a) to
(e)). The amended Reply also added the following:
(l) Did the
Appellant make a representation that is attributable to neglect,
carelessness or wilful default in filing his income tax return
for the 1998 taxation year.
[14] The original Reply and the amended one
set out the sections of the Act which the Minister relied
on to reassess the capital gain: subsection 38(a),
paragraph 39(1)(a), subparagraph 66.3(1)(b),
subsections 110.6(1), 110.6(2.1) and 165(3).
[15] The assumption of fact that the
Appellant did not declare the capital gain on the disposition of
the flow-through shares for the 1998 taxation year formed the
basis for the allegation of misrepresentation. The original Reply
stated that the flow-through shares were capital property
of the Appellant, that he took a deduction for these shares prior
to 1998, and that the shares were disposed of. The implication
was that the Minister sought an explanation from the Appellant
for the pattern of taking a deduction for these shares and the
nature of the gain upon their sale. I have no difficulty in
concluding that the Appellant is not prejudiced by allowing the
amendment.
[16] Did the Appellant make a
misrepresentation that is attributable to neglect, carelessness
or wilful default in filing his income tax return for the 1998
taxation year? The relevant provision states:
152(4) The Minister may at any time make an assessment,
reassessment or additional assessment of tax for a taxation year,
interest or penalties, ..., except that an assessment,
reassessment or additional assessment may be made after the
taxpayer's normal reassessment period in respect of the year
only if
(a) the
taxpayer or person filing the return
(i) has made
any misrepresentation that is attributable to neglect,
carelessness or wilful default ... .
A useful approach to applying this provision is set out by
Bowman A.C.J. in Sarraf et al. v. M.N.R., 94 DTC 1506 at
pages 1507-08:
... A brief review of the rules relating to the making of
reassessments after the normal reassessment period may be
worthwhile:
(a) where a taxpayer
wishes to attack an assessment as having been made beyond the
normal reassessment period ... the basis of challenge should be
pleaded and it is for the taxpayer to establish a prima
facie case that the reassessment has indeed been made beyond
that period, unless the date of the original assessment is
obvious from the material before the court;
(b) if a taxpayer
has, in a return of income, made a misrepresentation that is
attributable to neglect, carelessness, or wilful default ...
the Minister is entitled under subsection 152(4) of the Income
Tax Act to assess beyond the normal reassessment period. The
Minister's entitlement to reassess beyond the normal
reassessment period must be established by proving the existence
of any of the elements set out in subparagraph
152(4)(a)(i). It is up to the Minister to do so;
(c) if those
elements are established the onus shifts back to the taxpayer
under paragraph 152(5)(b) to establish that the failure to
include in the return an amount included in a reassessment beyond
the normal reassessment period did not result from any
misrepresentation that is attributable to negligence,
carelessness or wilful default.
In each case the shifting onus is a civil one and may be
satisfied by making out a prima facie case which, if
unrefuted by the opposing party, stands.
[17] The second reassessment is more than
three years after the original assessment. The Minister had to
establish a misrepresentation by the Appellant as set out in
subparagraph 152(4)(a)(i).
[18] I accept the evidence of the
Minister's officers, Messrs. Roy and Lecours.
[19] The Appellant claimed 100% of the
deduction for these flow-through shares in years prior to their
disposition in 1998. However, the 1998 disposition of the
flow-through shares was improperly declared by his wife who had a
lower income. A letter from TD Waterhouse Investor Services
(Exhibit R-5) confirms that the trading account from which the
flow-through shares were sold was opened in the name of the
Appellant. The Appellant did not challenge this evidence.
[20] Heprovided a letter from his investment
advisor, Stan Lichman (Exhibit A-2) asserting
that he was not negligent because he had investment advice to
purchase these shares. The letter does not challenge the
Minister's position that the Appellant owned the shares
alone. Nor does it advise the Appellant to declare the capital
gain on the sale of these shares in his wife's income tax
return.
[21] Overall, the Appellant did not demolish
the Minister's assumptions of fact related to the
misrepresentation nor convincingly challenge the evidence given
in court. In his arguments, the Appellant cited Sarraf,
supra and Anchor Pointe Energy Ltd. v. Canada [2002]
T.C.J. No. 502. Both passages relied on, restate the statutory
rules pertaining to reassessments.
[22] I find that the Minister established on
a balance of probabilities that the Appellant misrepresented
reporting the sale of the flow-through shares. The Appellant
owned the shares alone and took a deduction against his income in
the years prior to the sale of the shares and when the shares
were sold, the capital gain was attributed to his wife's
income. The Appellant's misrepresentation was due to wilful
default.
[23] Having allowed the amended Reply and
found that the Minister has established that the Appellant
misrepresented the sale of the flow-through shares, I now turn to
the issue of the capital gain.
[24] The taxability of capital gains is set
out generally under subsection 38(a).[4] For the years in issue the
taxable portion was 75% of the capital gain. Other relevant
legislation includes the following:
110.6(1)
For the purposes of this section,
"qualified small business corporation share" of an
individual (...) at any time (...) means a share of the
capital stock of a corporation that,
(a) at the
determination time, is a share of the capital stock of a small
business corporation owned by the individual... (emphasis
mine)
110.6(2.1) In
computing the taxable income for a taxation year of an individual
(...) who was resident in Canada throughout the year and who
disposed of a share of a corporation in the year or a preceding
taxation year and after June 17, 1987 that, at the time of
disposition, was a qualified small business corporation
share of the individual, there may be deducted such amount as the
individual may claim
125(7)
"Canadian-controlled private corporation" means a
private corporation that is a Canadian corporation other than a
corporation
...
(c) a class
of the shares of the capital stock of which is listed on a
prescribed stock exchange;
248.(1)
"small business corporation", at any particular time,
means, subject to subsection 110.6(15), a particular corporation
that is a Canadian-controlled private corporation.
[25] The Respondent submitted a printout
from the Toronto Stock Exchange indicating that Millstream Mines
Ltd. is a publicly traded company (Exhibit R-6). A
publicly-traded corporation is not a qualified-small business and
thus not a Canadian-controlled private corporation (CCPC).
Therefore, the sale of Millstream Mines Ltd. flow-through shares
does not qualify for the capital gains exemption pursuant to
subsections 110.6(1) and 110.6(2.1).
[26] The Appellant made no argument that the
shares did qualify for the capital gains exemption. The letter
from his investment advisor in reference to the
flow-through shares states:
... I advised Dr. Breslaw that a large portion of the shares
purchased had aged and could be treated as QSBC (Qualified Small
Business Shares) for taxable gain purposes.
It does not set out whether the flow-through shares at issue
form the portion which "could be treated" as qualified
small business shares and is of no assistance.
[27] The Appellant did not challenge this
assumption. The Minister assumed as fact that the adjusted cost
base flow-through shares was nil on the basis of subsection
66.3(1).
[28] The Appellant disposed of the shares
that did not qualify for capital gains exemption. The Minister
correctly determined that the cost of the shares was nil. The
appeal of the reassessment of the capital gain is dismissed. The
Minister did not seek a penalty under subsection 163(2) of the
Act and this is not addressed.
[29] With respect to the business expenses
claimed by the Appellant, the following are the relevant
provisions:
18(1) In computing the income of a taxpayer from a business or
property no deduction shall be made in respect of
(a) an outlay
or expense except to the extent that it was made or
incurred by the taxpayer for the purpose of gaining or producing
income from the business or property; (emphasis added)
...
(h) personal or living
expenses of the taxpayer, other than travel expenses incurred by
the taxpayer while away from home in the course of carrying on
the taxpayer's business;
67 In
computing income, no deduction shall be made in respect of an
outlay or expense in respect of which any amount is otherwise
deductible under this Act, except to the extent that the
outlay or expense was reasonable in the circumstances.
[30] The following amounts were consented by
the Respondent prior to the hearing (Exhibit R-3):
Taxation years
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1997
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1998
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Total Expenses vouched and allowed before to hearing
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$18,603
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$9,891
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Previously allowed
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$4,695
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$3,755
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Increase / additional expenses)
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$13,908
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$6,136
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Maintenance and Expense during hearing
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$3,667
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$858
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Subtotal
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$17,575
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$6,994
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CCA class 8 office furniture
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$547
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$984
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Total additional Expenses
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$18,122
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$7,978
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The following amounts are in dispute:
Taxation Years
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1997
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1998
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Decision required on
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1)
Maintenance & Repair
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$47,520
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$25,753
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x .25
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$11,880
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$6,438
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Allowed above
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$ 3,667
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$858
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Additional Maintenance Sought
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$8,213
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$5,580
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2)
Painting
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$13,104
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. 25%
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$3,276
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UCC $2,948
x .20 $590
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1/2 Yr. Rule .50
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$1,638
$328
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- CCA 20%
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3) Capital Gain on disposal of Millstream shares
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[31] An expense is only deductible if the
taxpayer incurs it to earn income. In some cases, it is obvious
that an expense is of a business nature, raising no serious issue
of deductibility. Often, however, some expenses have both
personal and business characteristics. In this situation, which
is common in home-office cases such as the present one, the
reason that the business incurred the expense must be determined.
The Court's role is to determine if the expense is
predominantly business or personal, or, alternatively, make a
fair allocation.
[32] The position of the Minister was that
the Appellant did not provide documentary evidence to support a
claim that 25% were business expenses incurred for the purpose of
earning income. The Minister allowed the expenses claimed in the
Appellant's 1997 and 1998 tax returns because they could be
vouched for. However, the additional amounts that the Appellant
sought for these years should be denied because they relate to
renovations to the Appellant's home used for personal
purposes.
[33] The Minister relied on the testimony of
Jean-Claude Roy who prepared the Report on Objection by the
Appellant for the 1997 and 1998 assessments. As for the expenses,
Roy stated that many of the vouchers provided to him by the
Appellant were insufficiently detailed.
[34] Donald Lecours testified that he
visited the Appellant's home and calculated the square
footage of the office area. The actual office composed
100 square feet of a 1,789 square foot home. Lecours
accepted that the library and living room were used, in part, for
the business. Lecours used a formula to calculate the expenses
attributable to the business for these areas testifying that the
combined areas used for the business in the Appellant's home
would entitle him to treat 8.6% of the expenses as business
expenses. The Appellant requests 25%.
[35] Hesubmitted a table (Exhibit A-1)
setting out all of the business expenses for Econotron for the
years 1997 to 1999. He stated that in 1997, the Minister allowed
$2,111 for business expenses of heat, electricity and municipal
tax. This expense is listed under the heading "Business Use
of Home," separate from the expenses. Also, the amount
$2,111 is 25% of the total for these expenses which was $8,445.
The Minister did not challenge this. In addition, the Appellant
testified that, later confirmed by Hubert Degroot, of an
agreement between the Appellant and the CCRA that 25% would be
used for allowing certain business expenses.
[36] The Appellant relied on Canada
Steamship Lines Limited v. M.N.R., 66 DTC 5205, and
Interpretation Bulletin IT-128, for support that these were
current expenses because they restored the home to its original
condition. He also cited Nieboer v. Canada, [2000] T.C.J.
No. 232, where the Court found that a proportion of the costs for
repairs to the eaves trough at the home of a taxpayer who
operated a business from the home were current.
[37] I accept the testimony of Roy and
Lecours that a claim of 25% of the expenses as business expenses
is unreasonable. The test is to show how the expenses were
incurred for the purpose of earning income. The Appellant did not
provide evidence to establish that 25% of the expenses were
incurred for the purpose of earning income from the business.
Pursuant to paragraph 18(1)(h), I find that the remaining
amounts claimed by the Appellant are for personal purposes and
thus cannot be deducted. The Minister clearly explained that they
could vouch for the original amounts listed by the Appellant in
his T1 returns for 1997 and 1998. Beyond these amounts, which
have been allowed (see table above), I do not allow the
additional amounts sought by the Appellant.
[38] The final issue is whether a proportion
of a painting's purchase price of $13,104 can be considered a
business expense. If so, the Appellant seeks to deduct the
capital cost allowance (CCA) for the painting. The Minister's
position was that the painting is personal and thus does not
qualify for CCA.
[39] Subsection 20(1) sets out the
deductions permitted in computing income from business or
property and paragraph (a) refers to deductions for the
capital cost of property as allowed by the Regulations.
Schedule II of the Regulations sets out the classes of
property for CCA. Class 8 is considered the "catch-all"
class because it covers tangible capital property that is not
specifically excluded by the exceptions listed under Class 8 or
by Regulation 1102. Generally, artwork such as a painting
acquired by a taxpayer can qualify as a Class 8 asset and be
eligible for CCA at a rate of 20% provided that the artwork was
acquired for the purpose of gaining or producing income; the
artwork is not described in the taxpayer's inventory; the
cost of the artwork to the taxpayer was $200 or more; and the
individual who created the artwork was a Canadian.
[40] The Appellant testified that the
painting is hanging in a room adjoining the library. This room is
a reception area and the Appellant typically meets with clients
in the library. The Appellant argued that having the painting in
the reception area is analogous to the situation of a lawyer who
has art hanging in his law firm. Art used in such contexts helps
to create a particular image of the business for his clients.
Thus, the purchase of the painting was in part an expense
incurred for the purpose of earning income. The Appellant argued
that 25% of the purchase price was a business expense against
which he could deduct CCA.
[41] I agree with the Minister's counsel
that there was no proof that the Appellant had client's
coming to his office and that the painting had a business
purpose. It was for his own personal enjoyment and had no
business purpose.
[42] When the evidence is conflicting, I
accept that of the Minister's witnesses over the Appellant
particularly in light of the Appellant's blatant
manipulations of the flow-through shares which I believe were
reprehensible.
[43] With the exception of amounts consented
to by the Minister prior to the hearing, the appeals are
dismissed.
Signed at Ottawa, Canada, this 27th day of April, 2004.
McArthur J.
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