Dearman v. The Queen, 2003 TCC 70 (Informal Procedure)

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Appeals heard on January 22, 2003 at Moncton, New Brunswick

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JUDGMENT

The appeals from the reassessments made under the Income Tax Act for the 1997, 1998 and 1999 taxation years are dismissed.

Signed at Edmundston, New Brunswick, this 25th day of February 2003.

J.T.C.C.

REASONS FOR JUDGMENT

Angers, J.T.C.C.

[1]      This is an appeal from assessments relating to the Appellant's 1997, 1998 and 1999 taxation years. The Appellant was not entitled to claim certain losses from his business operation known as "Dearman's Lodge Rentals" for amounts of $5,454.83 in 1997, $7,575.45 in 1998 and $2,085.96 in 1999, on the basis that the Appellant did not make a bona fide attempt to rent the cabin during forty-six weeks of each year and that the expenses were personal in nature and not for the purposes of earning income.

[2]      The Appellant is a self-employed commissioned sales representative for Investors Group. In October of 1996, he purchased a cabin located in Collingwood, Nova Scotia, on the number 101 Trans-Canada snowmobile trail for his own personal use. The cabin stood on leased land, near the trail. Given that it was located one kilometre from the Cumberland Snowmobile Association, the Appellant decided to rent the cabin as a business. On February 14, 1997, the Appellant had a name search conducted and on April 2, 1997, a business name registration certificate under "Dearman's Lodge Rentals" was issued by the Registrar of Joint Stock Companies of Nova Scotia.

[3]      The Appellant testified that no expenses were claimed for tax purposes prior to February 14, 1997. He ran some ads in the Community Trading Post, a local publication, and posted ads at the corner store the whole time that he operated the cabin.

[4]      In April 1997, the Appellant and his spouse separated and the months that followed completely changed his plans with respect to rental business. The Appellant admits that at that point the business was dormant. His time was so occupied by the separation proceedings, the division of the matrimonial assets and the care of his son that although the ads were still running, the cabin was on the "back burner". He also admits to not using it personally or to using a snowmobile and an A.T.V. that he had bought to rent with the cabin. He did use his personal A.T.V.

[5]      According to the Appellant, the rentals were limited in number since the cabin itself, lacking indoor plumbing, had limited rental possibilities. The Appellant went to great lengths to establish that he had not used the cabin personally. He was too preoccupied with his son's activities and other things and had no time to operate the business. Had he had the time, the Appellant says that the business would have succeeded.

[6]      The Appellant did not keep a guest register. He rented the cabin at $100 a week although no set rate was ever established. He rented the cabin about three weeks each year. The Appellant had previously informed the auditor for Canada Customs and Revenue Agency that he had rented it six weeks each year. The six weeks turned out to be the total number of weeks for the entire business operation.

[7]      The Appellant also rented the cabin in exchange for beer and admits not reporting the income. The ads he produced in evidence were facsimiles of what he had used. That fact was only disclosed on cross-examination.

[8]      In the Appellant's income tax returns for 1997 and 1998, only $350 was reported as revenue from the rental of the cabin for each year while the expenses were $6,477 and $8,74.42 respectively. The cabin was sold in November 1998 but his 1999 tax return indicates that the business activities were carried out the entire year. In fact, the Appellant's cross-examination revealed a series of incidents leading this Court to believe that the Appellant did not take too seriously his duty to file accurate income tax returns and to provide information and documents that are correct, complete and that fully disclose his income for the taxation years in issue. Tab 4 of Exhibit R-1 is a copy of the Appellant's reassessment for taxation year 1997. It indicates that a wage expense of $6,500 claimed by the Appellant was disallowed. The employee in question was never hired by the Appellant. In fact, quite a few discrepancies in the Appellant's tax return for the years in issue were raised on cross-examination, such as hockey trips claimed as business expenses and others.

[9]      The Appellant informed the Court that he did not review his tax returns before signing them and that he relied on those who prepared them. According to the Appellant, that situation has now changed.

[10]     The end result of an audit conducted by Karen Hennessey, Tax Auditor for the Canada Customs and Revenue Agency, saw about 11% of the Appellant's expenses allowed on the basis that the cabin was rented six weeks out of fifty-two. The evidence disclosed that it was actually three weeks out of fifty-two.

[11]     The onus is on the Appellant to establish that the expenses claimed were for the purpose of earning income. The evidence presented does not support such a claim. The Appellant admitted that he had no time to run the rental business because of circumstances beyond his control and that the cabin itself was difficult to rent because of its lack of proper facilities. Having regard to all the circumstances of this case, I find that the expenses giving rise to the loss were properly allowed by the Minister of National Revenue and the apportionment to be most reasonable. The appeal is therefore dismissed.

Signed at Edmundston, New Brunswick, this 25th day of February 2003.

J.T.C.C.