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Citation: 2004TCC57
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Date: 20040210
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Docket: 2003-1741(IT)I
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BETWEEN:
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GILL GAUTHIER,
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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
Woods J.
[1] In the
1998 and 1999 taxation years, Gill Gauthier was the proprietor of
a construction business in Prince Albert, Saskatchewan. He
appeals income tax reassessments that disallowed various
deductions, many of which were claimed as business expenses.
[2] The Minister disallowed many of
the expenses because there was not sufficient documentation to
verify that the expenses were incurred and that they were
incurred for business purposes. Mr. Gauthier claimed business
expenses of $81,841 and $94,939 for the 1998 and 1999 taxation
years respectively. In the reassessments, the Minister of
National Revenue increased the amount allowed for the 1998
taxation year to $83,610 and decreased the amount allowed for the
1999 taxation year to $70,106.
[3] Before discussing the specific
items in dispute, I would comment generally that I have
difficulty accepting many of Mr. Gauthier's submissions. By
his own admission, Mr. Gauthier improperly claimed deductions in
income tax returns for expenses incurred in renovating his
personal residence. Further, by his own admission, improper
claims were made in a GST application for a new housing rebate.
In that application, some construction costs on homes belonging
to customers of the construction business were claimed as
construction costs on Mr. Gauthier's personal residence. Mr.
Gauthier stated that his common-law spouse would have completed
the GST application form but presumably the details of the
expenses would have been obtained either from Mr. Gauthier's
records or from Mr. Gauthier himself. In addition, Mr.
Gauthier's testimony at the hearing was generally vague and
imprecise and he did not submit any supporting documents. At
times, the testimony changed to fit the facts as established by
the Crown.
[4] Against this background, I will
now consider the items in dispute under the headings used in
schedules attached to the reply to the notice of appeal.
1998 Material and Tools
[5] In computing income for the 1998
taxation year, Mr. Gauthier deducted $29,789 on account of
material and tools. The Minister allowed only $24,922, the amount
that could be substantiated by receipts. In respect to items that
were not supported by receipts, Mr. Gauthier suggests that he
sometimes paid cash or that perhaps the receipts had been
misplaced. He does not remember specific items except for one,
the purchase of a brake machine for which there was no
receipt.
[6] I would conclude that the amount
disallowed by the Minister has not been established by Mr.
Gauthier as a business expense incurred. There was no supporting
evidence for any of the expenses and the only expense that Mr.
Gauthier could recall, the brake machine, would have been on
capital account. Accordingly, I would agree with the reassessment
with respect to material and tools for the 1998 taxation
year.
1998 Labour
[7] In computing income for the 1998
taxation year, Mr. Gauthier claimed a deduction of $13,689 on
account of amounts paid to workers. In the reassessment, the
Minister arbitrarily disallowed 15 percent of this amount because
Mr. Gauthier's records were incomplete and it was not
possible to verify that none of the amount claimed was incurred
in renovating Mr. Gauthier's home. Mr. Gauthier stated that
he incurred as business expenses more than what was allowed by
the Minister but he admitted that he did not have the records to
prove it.
[8] In all the circumstances of this
case, I would conclude that Mr. Gauthier has not established the
deductibility of labour expenses in excess of what was allowed in
the reassessment for the 1998 taxation year.
1998 and 1999 Shop Rent
[9] The Minister reduced the amount
deductible for rent on business premises from $966 to $759 for
the 1998 taxation year and from $1,669 to $771 for the 1999
taxation year. During the hearing, Mr. Gauthier conceded that the
reassessment of shop rent was correct and accordingly, I would
agree with the reassessments.
1998 and 1999 Subtrades
[10] In reassessing amounts that Mr.
Gauthier deducted as payments to subtrades, the Minister
increased the deduction from $17,478 to $25,974 for the 1998
taxation year and decreased the deduction from $23,604 to $8,975
for the 1999 taxation year. There are three items in dispute -
payments to Neufeld Building Movers Ltd., Dymterko Enterprises
and Paulsen Concrete.
[11] Neufeld Movers - Mr.
Gauthier paid $27,810.23 to Neufeld Building Movers Ltd. to move
three houses from Manitoba to Saskatchewan. This amount was
claimed as a business expense for the 1998 taxation year. One of
the houses was Mr. Gauthier's home and in the GST application
for the new housing rebate, one-half of the amount paid to
Neufeld Movers was claimed as a moving expense of the personal
residence. In the income tax reassessments, the Minister
disallowed a deduction for one-third of the amount paid to
Neufeld Movers as a reasonable allocation to the personal
residence. Mr. Gauthier suggested at the hearing that a one-fifth
allocation would be more appropriate because it was more
difficult and more costly to move another house that was
significantly larger. He testified that the mover had told him
that approximately 50 percent of the price was attributable to
the larger home.
[12] I would conclude that the apportionment
by the Minister is reasonable in the circumstances. After taking
insupportable and inconsistent positions in the income tax return
and the GST application, I do not think that it is sufficient for
Mr. Gauthier to merely suggest that one-fifth is an appropriate
apportionment to the personal residence. In the circumstances,
Mr. Gauthier should have had some supporting documentation for
the one-fifth apportionment.
[13] In addition to challenging the quantum
of the moving costs that were deductible, Mr. Gauthier suggests
that part of the amount paid to Neufeld Movers should be
deductible in 1999 instead of 1998 as claimed in the return. He
stated that approximately one-half of the total price was paid by
cheque in early December, 1998 but Neufeld Movers did not
cash it until the next year. Mr. Gauthier explained that the
moving company was required not to cash the cheque until the work
was completed which was in 1999. Mr. Gauthier did not submit any
documents or other evidence in support of this position.
Accordingly, I would conclude that Mr. Gauthier has not
established that the expense was incurred in 1999 and not 1998 as
originally claimed in the income tax return.
[14] Dymterko Enterprises
- In the reassessments, the Minister disallowed a deduction of
$3,079.50 which was paid to Dymterko Enterprises for excavation
work. The ground for the disallowance was that this amount was
claimed in the GST application as an expense incurred to excavate
the personal residence. At the hearing, Mr. Gauthier first
suggested that this amount was not claimed as a deduction in the
income tax return, but he later conceded that it was. This
concession confirms that the reassessment is correct in this
regard.
[15] Paulsen Concrete -
The Minister also disallowed a deduction of $3,798 which was paid
to Paulsen Concrete because this amount was claimed in the GST
application as an expense for concrete on the personal residence.
Mr. Gauthier suggested that the GST entry was incorrect because
he had used another company for concrete on his house and the
date of the invoice did not correspond with when the work was
done on the house. No supporting evidence was provided.
[16] I would not give Mr. Gauthier the
benefit of the doubt with respect to this item. In view of the
errors in the income tax return, the GST application and in view
of testimony that was vague and contradictory, I would conclude
that Mr. Gauthier has not established that the amount of $3,798
paid to Paulsen Concrete is a business expense.
1999 Truck Lease
[17] In computing income for the 1999
taxation year, Mr. Gauthier deducted an amount of $5,102 paid for
a truck lease. In the reassessment, the Minister allowed only
$3,757 of this amount. At the hearing, the Crown conceded the
deductibility of the full amount except for the December lease
payment of $672. The December payment was disallowed because the
construction business had been shut down in November and Mr.
Gauthier commenced full time employment in North Battleford at
that time. Mr. Gauthier stated that he was finishing certain jobs
in his spare time during December.
[18] I would conclude that allowing a
deduction for 25 percent of the December lease payment is
reasonable.
1999 Cell Phone
[19] In the reassessment for the 1999
taxation year, the Minister allowed a deduction for Mr.
Gauthier's cell phone charges except for the amount of $250
incurred in December. The expense for this month was considerably
higher than any other month and Mr. Gauthier explained that this
was on account of long distance charges from his new place of
employment in North Battleford.
[20] Although Mr. Gauthier may have incurred
some long distance charges in connection with the construction
business during this time, there was insufficient evidence to
prove what these expenses were. I would conclude that allowing a
deduction for 25 percent of the December cell phone charges,
which is the same percentage that I have allowed on the truck
lease, is the most reasonable in the circumstances.
1999 Material and Tools
[21] Mr. Gauthier claimed a deduction of
$24,881 for material and tools in computing income for the 1999
taxation year. In the reassessment, the Minister allowed only
$18,950. The reassessment was based on an arbitrary allocation to
personal expenses of 75 percent of the expenses claimed for the
first three months of the year. The reason for the Minister's
high allocation to personal expenses was that there was no
business revenue generated during this period. Mr. Gauthier
stated that, although part of the amount claimed for the first
three months was personal, the amount disallowed in the
reassessment was excessive because during that time he made
expenditures on jobs coming up.
[22] There was no supporting evidence before
me to support Mr. Gauthier's claim. Without proper records of the
amount allocable to the personal residence, I would conclude that
the Minister's allocation is reasonable.
1999 Home Office and Storage
[23] Mr. Gauthier stated that he used one
room in his house for paper work related to the business and he
used the basement, garage and backyard for storage. In his 1999
income tax return, Mr. Gauthier deducted 25 percent of the costs
of maintaining the home (including telephone expenses) as
business expenses. At the hearing, Mr. Gauthier suggested that it
would be appropriate to increase this to 40 percent. In the
reassessment, the Minister allowed only 12.5 percent, partly on
the basis of what the Minister considered a reasonable allocation
and partly because some of the expenses appeared high and there
was no supporting documentation.
[24] The Minister's allocation of 12.5
percent appears to be low but I am not satisfied that Mr.
Gauthier's suggestion of 40 percent is reasonable. First,
there is no basis on which the telephone charges should be
allocated. Secondly, very few of the home expenses should be
attributed to the backyard. Thirdly, I do not believe that the
use of a basement for storage justifies allocating all home
expenses, including telephone charges, on a proportionate square
footage basis with the living areas. In the circumstances, I
believe that the 25 percent allocation originally claimed by Mr.
Gauthier is the most reasonable in the circumstances.
1999 GST Payments
[25] In computing income for the 1999
taxation year, the Minister disallowed a deduction of $1,980 that
was paid as goods and services tax (GST) on business supplies.
The ground for the disallowance was stated in a written
submission by counsel for the Crown received subsequent to the
hearing. The submission is a little difficult to understand. The
Crown suggests that the taxpayer was allowed input tax credits
for the GST paid and the input tax credits must be included in
income under subsection 248(16) and paragraph 12(1)(x).
However, the Crown does not suggest that there should be an
income inclusion for the input tax credits. Instead, the Crown
suggests that this somehow justifies the disallowance of the
deduction for GST paid. I disagree. The Crown does not dispute
that the GST was paid as a business expense and therefore I see
no reason to disallow the deduction.
[26] As for input tax credits, subsection
248(16) requires input tax credits claimed by a taxpayer to be
included in computing income as government assistance under
paragraph 12(1)(x). Subsection 248(16) reads in part as
follows:
(16) For the purposes of this Act, other than this subsection
and subsection 6(8), an amount claimed by a taxpayer as an
input tax credit or rebate with respect to the goods and
services tax in respect of a property or service shall be deemed
to be assistance from a government in respect of the property or
service that is received by the taxpayer ...
(emphasis added)
[27] There is no evidence properly before me
that input tax credits have been claimed by Mr. Gauthier and
therefore there is no basis on which I can conclude that the
input tax credits should be included in income under subsection
248(16) and paragraph 12(1)(x).
1998 and 1999 Support Payments
[28] Mr. Gauthier paid support payments to
his former spouse of $6,313 and $5,000 in the taxation years at
issue. These amounts were disallowed by the Minister because
there was no court order or written agreement governing the
payments. Mr. Gauthier submitted that it was unfair to disallow
such large amounts on this ground.
[29] There is no basis on which I can allow
a deduction simply on the basis of fairness. I would conclude
that the reassessments with respect to the support payments are
correct.
Interest and Penalty
[30] At the hearing, Mr. Gauthier stated
that he disagreed with the reassessment of interest on the tax
owing and a late filing penalty. He did not provide an
explanation for this, notwithstanding my invitation for him to
make a written submission after the hearing. In the
circumstances, I would conclude that the reassessments of
interest and penalty are correct.
* * * *
[31] The appeal is allowed, without costs,
and the reassessments are referred back to the Minister of
National Revenue for reconsideration and reassessment on a basis
consistent with these reasons.
Signed at Ottawa, Canada, this 10th day of February, 2004.
J.M. Woods J.
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