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Citation: 2003TCC409
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Date: 20030714
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Docket: 2002-4731(IT)I
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BETWEEN:
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CLAIRE RILEY,
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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
(Delivered orally from the bench on May 2,
2003,
in Vancouver, British Columbia, and revised for
greater clarity
in Montréal, Québec on July 14th,
2003)
Archambault, J.
[1] Ms. Claire Riley is appealing
income tax assessments issued by the Minister of National Revenue
(Minister) with respect to the 1998 and 1999 taxation
years. The Minister disallowed some of the expenses that were
claimed by Ms. Riley, a self-employed performing artist.
[2] In issuing the assessments, the
Minister relied on certain assumptions of fact, which are set out
in paragraph 14 of the Minister's Reply. Only
subparagraphs b), c), d), k) and l) were admitted by
Ms. Riley at the outset of the hearing.
[3] During the course of the hearing,
some admissions were also made by counsel for the respondent with
respect to the deductibility of certain expenses, and by
Ms. Riley with respect to the non-deductibility of
other expenses. All these expenses are described in
Exhibit A-5. Those admitted as being deductible for
the 1998 taxation year are:
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Taxi
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$ 120.40
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Demo
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32.10
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Demo
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15.00
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Demo
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64.20
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Advertising
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41.73
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Promotion
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7.00
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Union (UBCP)
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477.34
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Union (ACTRA)
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118.29
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Travel expenses (Montreal)
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84.54
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Fax
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345.44
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Rent expenses
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1,884.00[1]
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Utility
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42.59
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[4] Those allowed with respect to the
1999 taxation year are:
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Audio
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$ 44.43
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Photos
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120.84
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Photos
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13.21
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Taxi
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96.56
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Advertising
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44.94
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Advertising
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21.31
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Meals and entertainment
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19.45
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Travel
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195.01
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Fax
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354.34
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Rent
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1,884.001
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Utility
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44.55
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Finally, an amount of $200, which is described as a donation
in Exhibit A-5, was to be allowed as a marketing
expense.
[5] Ms. Riley consented to withdraw
her deductible expense claims with respect to her trip to the
State of Washington in 1998 ($169.25) and her tuition fees ($249)
incurred in 1999. The last-mentioned amount had already
been allowed by the Minister.
Factual Background
[6] As a performing artist, Ms. Riley
provides her services as an actor, narrator, events coordinator
and master of ceremonies and also does voice-overs. She
indicated as well that she is planning to extend her skills to
include musical performances. For the purposes of carrying on her
business, she has hired a talent agent who represents her and
assists her in securing contracts for her services.
Analysis
[7] I would like to state at the
outset that these appeals were made under the Informal Procedure
and accordingly, by law, these reasons for judgment do not have
any precedential value.[2] Although I very rarely make this statement when I
render judgments under the Informal Procedure, I do so here
because I sense a move by the performing arts industry, at least
in British Columbia, to contest the administrative practices of
the Canada Customs and Revenue Agency (CCRA). Such a
contestation raises difficult issues. Many of the expenses
claimed by performing arts artists such as Ms. Riley could
be described as borderline because they have a significant
personal component. If my perception as to the intention of the
performing arts industry is right, I believe that the
contestation of the CCRA's administrative practices should be
done within the framework of an appeal under the General
Procedure as a sort of test case, hopefully with the assistance
of a well-qualified tax lawyer. This lawyer would have to
introduce all the proper and relevant evidence as to what the
expenses are and in what circumstances they were incurred. It is
important that this Court not be left with generalities and vague
statements as to how the trade is being carried on and as to the
purpose for which the expenses were incurred.
[8] Unfortunately, in this case the
evidence was not sufficient to convince me that all the expenses
were actually incurred for business and not personal consumption
purposes. For example, the statements made with respect to the
costs for attending wrap parties did not provide sufficient
evidence to identify which parties had to be attended for
business reasons and which were social activities too remotely
connected to the business aspect. More will be said on this
theme below.
[9] The three provisions[3] of the Income Tax
Act (Act) that are applicable here are:
section 9, which basically states that a taxpayer's
income includes his income from a business, that is, essentially,
the profit; paragraph 18(1)(a), a limitation provision,
which states that no expense can be deducted unless it was
incurred for the purpose of earning income; and finally,
paragraph 18(1)(h), another limitation provision,
which states that no personal or living expenses can be deducted,
except to the extent that these expenses were incurred while
travelling away from home on business.
[10] The greatest difficulty facing
Ms. Riley in her appeals was dealing with this
last-mentioned prohibition in the Act. To illustrate
the scope of that provision, counsel for the respondent relied on
several court decisions. The first, which involved very similar
facts to those in this particular case, is No.
360 v. M.N.R., 16 Tax A.B.C. 31. This is a case of a
taxpayer who was, as described by the Chairman of the Tax Appeal
Board, an "actress, commentator and dramatic artist
. . . a star of the stage, radio and television - and
occasionally of the screen". She was also a person
earning income from a business, self-employed, as it is
more commonly put. The Chairman acknowledged that her success was
due both to "her great talent as an actress and to her charm
and grooming".
[11] The actress in question claimed
expenses with respect to her clothing and that is the description
we find in the Chairman's reasons. The evidence was that she
had to provide her own costumes for modern plays and, in most of
her television engagements, she was required to furnish her own
dresses, which had to be varied and always in the best taste. The
appellant in that case also testified that because her viewers
complained when she wore the same clothes more than once, she had
to buy a large number of dresses and accessories if she wanted to
retain her television contracts. As in the case at bar, it was a
situation where the dresses could be worn not only for business
purposes but also for personal purposes on other occasions. It
was even argued that she had to maintain her reputation as a
well-dressed woman both on and off the stage.
[12] Based on these facts, the Chairman
rendered the following judgment:
The question here has arisen in a great number of cases heard
by this Board. In all such cases it was decided that such
expenses were personal expenses and a deduction was not
allowed. I find nothing in the present case which would
warrant a decision different from the one reached by my
colleagues and myself in similar cases, to wit, that these are
"personal or living expenses" within the meaning of
section 12(1)(h) [at the time] of the Act and consequently
are not deductible.[4]
[13] The other precedent submitted by
counsel for the Respondent is the decision of the Supreme Court
of Canada in Symes v. Canada, [1994] 1 C.T.C. 40.
Symes is not a case dealing with the same kind of expenses
as those claimed in these particular appeals: it deals rather
with child care expenses. However, it does contain a review
of the notion of "personal or living expenses" as found
in paragraph 18(1)(h) of the Act. Writing on
behalf of the majority of the Supreme Court, Mr. Justice
Iacobucci made the following statements as to how one goes about
determining if an expense is a personal or living expense. The
three most relevant paragraphs of his reasons are 76, 77 and
79.
[14] Atpage 59, Mr. Justice Iacobucci
refers to this statement written by Professor Brooks:
If a person would have incurred a particular expense even if
he or she had not been working, there is a strong inference that
the expense has a personal purpose. For example, it is
necessary in order to earn income from a business that a business
person be fed, clothed and sheltered. However, since these are
expenses that a person would incur even if not working, it can be
assumed they are incurred for a personal purpose - to stay alive,
covered , and out of the rain. These expenses do not increase
significantly when one undertakes to earn income.
At pages 59-60, Justice Iacobucci writes:
Since I have commented upon the underlying concept of the
"business need" above, it may also be helpful to
discuss the factors relevant to expense classification in
need-based terms. In particular, it may be helpful to resort to a
"but for" test applied not to the expense but to the
need which the expense meets. Would the need exist apart
from the business? If a need exists even in the absence of
business activity, and irrespective of whether the need was or
might have been satisfied by an expenditure to a third party or
by the opportunity cost of personal labour, then an expense to
meet the need would traditionally be viewed as a personal
expense.
[15] So it is with the benefit of these
dicta that I have approached the matter of deciding, in this
particular case, whether the expenses are deductible. I am not
saying that some of the disallowed expenses can never be allowed.
In respect of some of them, I believe the evidence was not
sufficient to allow one to determine accurately which were
required for business purposes and were not of a personal nature.
For instance, had the costumes or clothing been acquired only for
attending auditions, their cost clearly could have been
considered an expense incurred for business purposes. That was
not the case here. Perhaps a case could have been made for
adopting a different approach than the one taken by the Tax
Appeal Board in 360. With respect to clothing used to a
significant extent in business activities, such as attending
auditions, in such a case, a portion of the expenses could be
considered as a business expense, as was done for the apartment
rental and car expenses. If such a new approach was to be
considered, evidence would be required as to what percentage of
the use of the clothing was for personal purposes and what
percentage was used for business purposes. Such evidence was not
available here. Ms. Riley stated that the clothing required
for her auditions (such as for a doctor's or a news
anchor's role) were not the style of clothes she would
normally wear. However, in her cross-examination, she
acknowledged that her claims for costumes included the cost of
jeans.
[16] When one is dealing with expenses that
have all the appearance of being personal or living expenses, I
believe that the evidence required to reverse this appearance has
to be of a higher level and more specific than just a general
statement such as: "all our lunches that we have with our
colleagues are required to create networking". Furthermore,
I am in general agreement with the following statement which was
made in the appeals officer's letter[5] provided to Ms. Riley and which
dealt with meal and entertainment expenses:
MEALS AND ENTERTAINMENT
Expenses incurred for "networking" activities is a
broad category which could include meetings with friends and
colleagues in the business, to more formal invitations such as
attendance at agency parties, film wrap parties, public relations
events, seminars or workshops. To be deductible for tax purposes,
the reason for a meeting must specifically be for the purpose of
generating revenue. The fact that during an informal gathering
with friends or colleagues, some time is devoted to a discussion
of work opportunities, is not a sufficient reason to allow said
costs for tax purposes. It is the Agency's opinion that
informal gatherings with friends and colleagues, whether it be in
a bar, restaurant or someone's home, has a large personal
component and should therefore be disallowed on that basis.
However, where an actor is required to attend various
functions or public relation events to promote a specific movie
or performance, any expenses directly attributable to that
appearance would be deductible, including the cost of makeup or
hairstyling required for the appearance; any special clothing
required for that engagement that cannot be worn for any other
occasion; and, transportation; meals, board and lodging for
out-of-town engagements.
. . .
[17] For example, if Ms. Riley had to
incur expenses to go to a wrap party following a particular
production in which she had participated, then I would think that
it might be reasonable to conclude that these expenses were
incurred for business purposes. But here the evidence does not
distinguish between those that were just for wrap parties
following productions in which she herself had been involved and
those for parties of her colleagues.
[18] In any event, I am only stating this to
illustrate the difficulty that I was faced with and how
borderline these cases can be. Maybe with better evidence, I
would have been more inclined to allow more expenses. Given the
broad general statements that were given here with respect to
wrap parties, I was not convinced that the costs for attending
these parties, including the cost of clothing worn for such
occasions, should be allowed.
[19] With respect to the television set and
audio system, however, I was satisfied on the evidence that they
were required, at least in part, for the appellant's
business. These expenses are of a capital nature, so they cannot
be fully written off. They can only be amortized by claiming the
proper capital cost allowance (CCA). Given that the items
in question were used in large part for personal purposes, I
estimate such use to be 75 percent, so that 25 percent
of their use can be considered to have been for business
purposes. Basically for the same reason, I will allow
25 percent of the cable expenses that were claimed for 1998
($323.28) and for 1999 ($344.08).
[20] It was admitted by counsel that the
expense of $248 for the microphone and the microphone attachment
were for business purposes. Given that they are capital assets,
they should be amortized and 100 percent of the CCA claimed
should be allowed.
[21] With respect to the interest expenses
claimed, the evidence shows that most of the money borrowed was
in the form of cash advances from VISA and, in all likelihood,
was used for personal purposes. There being no basis for
concluding that this money was used for business purposes, the
full amount of interest is disallowed.
[22] With respect to the "office
expenses", I have allowed a total of $95.86 for 1998 and
$43.06 for 1999. These amounts include the cost of the Friday
edition of the Vancouver Sun ($14.74 for 1998 and $12.06
for 1999), the city maps ($14.53) required in order to get to
auditions, the music CDs ($21.47, representing 25 percent of
their cost), the books (the one dealing with intuition ($9.58)
and The Yes Book ($31.00)), general supplies ($9.58),
video rental ($4.29) and blank video tapes ($5.68). The rest of
the expenses, such as the cost of women's magazines, are
disallowed as being of a personal nature.
[23] The full cost of telephone services
should be treated as a personal expense given that this is an
expense that would have been incurred in any event. Also, I took
into account the fact that the second line for the fax service is
being allowed in total, although it could be used for personal
purposes.
[24] All the expenses that were claimed for
costumes, hair, makeup, dressing room and cleaning are disallowed
because I have concluded that these are personal or living
expenses. As mentioned before, the evidence was not sufficient to
determine which of them could have been deductible. For example,
I would agree that whenever mouthwash was used on a set, its cost
would be deductible, but it represents such a small amount that
it becomes almost irrelevant. Also, if a particular wig had been
bought only to be used for auditions, its cost would have been
allowed. But the evidence does not show this to have been the
case.
[25] I have also concluded that the cost of
tennis lessons is also an expense of a personal nature. These
lessons are too far removed from the process of earning income
from a business. Had they been taken for a particular production,
it would have been a different story.
[26] With respect to the automobile
expenses, on the evidence presented to me, I am prepared to be
more generous. I think it is fair to allow 70 percent of
these expenses. But with respect to the 1998 taxation year, an
adjustment has to be made to the computation of CCA; the amount
of undepreciated capital cost (UCC) appears to be wrong.
The depreciation seems to have been computed on a
straight-line basis rather than on a diminishing basis. The
CCA with respect to the automobile for the 1998 and 1999 taxation
years should be computed in accordance with the rules in the
Act and the regulations thereunder. Surely this should not
create any problem when the Minister issues his new assessments
pursuant to my judgment herein. Should there be a problem,
however, the parties are to so advise the Court.
[27] With respect to the maintenance and
repair costs for the apartment, I have decided against allowing
these costs given the lack of evidence as to what percentage of
them was related to the portion of the apartment used for
business purposes. Also, I have taken into account the fact that
the Minister allowed 20 percent of the rental expenses,
which in my view, is fairly generous.
[28] I have also concluded that the sofa was
a personal item, so I have disallowed the CCA claimed with
respect thereto ($166.92 in 1998). However, the office chair is
considered to be used solely for business purposes and therefore
100 percent of the CCA claimed should be allowed for
1999.
[29] The appeals from the assessments made
under the Act for the 1998 and 1999 taxation years are
allowed, and the assessments are referred back to the Minister of
National Revenue for reconsideration and reassessment on the
basis that, for each of these taxation years, the appellant is
entitled to capital cost allowance with respect to the following
items:
· TV set and
audio system (25% for business purposes);
· Microphone
and attachment and office chair (100% for business purposes);
· Automobile
(70% for business purposes).
The other automobile expenses should be allowed on the basis
that the automobile was used for business purposes in a
proportion of 70%. The appellant is also entitled to the
following additional current expenses:
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1998
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1999
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Advertising/promotion, professional development
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$ 280.43
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$ 541.29
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Cable (25% for business purposes)
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80.82
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86.02
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Business fees
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595.63
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Office expenses
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95.86
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43.06
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Travel
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84.54
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195.01
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Fax
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345.44
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354.34
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Meals
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$ 19.45
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Office/studio
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1,926.59
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1,928.55
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(Minus amount already allowed)
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(1,483.59)
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(1,576.62)
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Additional office/studio
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$ 443
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$ 351.93
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Signed at Montréal, Quebec, on the 14th day of July,
2003.
Archambault, J.
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