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Citation: 2003TCC824
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Date: 20031105
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Docket: 2003-1956(IT)I
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BETWEEN:
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ANDREW ROBERT MOFFATT,
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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 October 21,
2003, and subsequently revised at Ottawa, Ontario, on November 5,
2003.)
Lamarre, J.
[1] The appellant is appealing the
disallowance of certain expenses and the assessment of a penalty
under subsection 163(2) of the Income Tax Act
("Act").
The workspace-in-home expenses
[2] The only issue in this regard is
whether the appellant can add 150 square feet of the basement to
the portion of his house used for the purpose of earning
income.
[3] Under subsection 18(12) of the
Act, the appellant had to show that his house was his
principal place of business. I agree with the respondent that it
was not. Ms. Dannehl, the auditor for the Canada Customs and
Revenue Agency ("CCRA"), testified that, at the
relevant time, the appellant was advertising his office as being
on McLaren Street (which was not his home address) and giving out
a telephone number there at which he could be reached. He had his
secretary working there and all the equipment necessary for his
office was also there. I thus conclude that the appellant's
principal place of business was not his home.
[4] That being so, the appellant had
to show that he used a portion of the basement exclusively for
the purpose of earning income from business and that he used that
portion on a regular and continuous basis for meeting clients in
respect of the business. This condition is not met either, as it
is clear that if the appellant used a portion of the basement for
storage, he did not meet clients there. So the basement shall not
be included in the workspace used to determine the percentage of
deductible office-in-home expenses.
[5] As for the deduction of a portion
of the cable expense at home, the appellant did not mention to
the auditor at the time of the audit that the cable service was
used in his business. It is difficult to accept today that it
was, as this point was raised well after the audit and could not
be verified.
[6] I therefore maintain the
assessment in this respect, with the exception of an additional
amount of $2,808 that the respondent mistakenly allowed for 1997
and that should have been allowed for 1998.
The entertainment expenses
[7] The Minister has already allowed
half of the entertainment expenses claimed under subsection
67.1(1) of the Act. The appellant is now only claiming the
other half of two restaurant bills, one for $520.87 in 1997 and
another for $329.85 in 1998. The appellant said that these
related to special events for his sole employee and two
subcontractors, one of which was at Christmastime and the other
in May, after the tax season. He has provided the bills in
Exhibit A-1 and he claims that 100 per cent of those expenses is
deductible pursuant to paragraph 67.1(2)(f) of the
Act.
[8] The respondent consented at the
hearing to allow those additional expenses.
The interest expenses
[9] Ms. Dannehl said that the
appellant claimed 100 per cent of the interest expenses he
incurred on all his debts (including interest on numerous credit
cards and on bank account overdrafts). She did not verify that
the borrowed funds were deposited into the appellant's
business account but she traced the use of them to determine what
portion was used for business purposes and what portion was
personal.
[10] She used the same breakdown as was used
by the appellant in his records, that is: gas, meals and
entertainment, and personal expenses (Ms. Dannehl said that
the personal expenses were characterized as drawings by the
appellant in his ledger).
[11] Ms. Dannehl arrived at a proportion of
45 per cent for gas, and meals and entertainment and 55 per cent
for personal expenses. She then totalled the business expenses
claimed and reduced that total by the amount of the expenses
disallowed (such as a portion of the office-in-home expenses and
some bad debts) and by the amount of the personal drawings. By so
doing, she obtained a proportion of 63 per cent of total expenses
that was attributable to business in 1997 and 58 per cent in
1998. She consequently accepted a proportion of
60 per cent of total expenses as being for business
purposes. That is why she allowed 60 per cent of the
interest expenses as being for business purposes.
[12] At the objection level, the appeals
officer verified what proportion of the borrowed funds went into
the business account and he came up with the same result, namely
that 60 per cent was used for business purposes.
[13] The appellant now says that the appeals
officer did not take into account a loan of $9,000 from London
Life and a mortgage of $32,672 on his mother's house. The
detailed statement of loan indebtedness filed by the appellant in
Exhibit A-1 shows that the $9,000 is with respect to an insurance
policy on the life of the appellant. We do not know who the
beneficiary is. This is not proof of a business expense. What we
have here is a loan taken out by the appellant to purchase life
insurance. In my view, this is personal. Indeed, the appellant is
working in sole proprietorship. His associate partner, as he
called him, only shares expenses; they are not operating in
partnership. There is no evidence that the life insurance taken
out by the appellant was for the purpose of earning income from
either a partnership or a business.
[14] With respect to the mortgage on the
mother's house, there is no evidence before me that that
amount was used for business operations and I do not see why I
should add it to the figures already accepted by the appeals
officer.
[15] With respect to the method Ms. Dannehl
used in calculating 60 per cent of total expenses as being
attributable to his business, the appellant said that she wrongly
considered the drawings as being personal expenditures. He said
that he had $80,000 in equity in his business (as per the
financial statement filed for the year ended December 31, 1996)
and that the drawings he made had to be reimbursed to the
business's capital account. My understanding is that he
relied on Singleton v. Canada, [2001] 2 S.C.R. 1046, to
argue that he can draw amounts from his business's capital
account and then deduct the interest expenses incurred in
reimbursing that capital account.
[16] On this point, there is simply not an
iota of evidence that that is what the appellant did. First of
all, he himself characterized the drawings as personal in his
ledger (according to Ms. Dannehl's testimony and the
financial statement for 1996 filed in Exhibit A-1, in
which he deducted the drawings in calculating his equity in the
business). Secondly, there is no evidence at all that he had an
obligation to reimburse the amounts that he withdrew from his
business's capital account for his personal needs. Such an
obligation would in my view be very doubtful in the case of
someone operating in sole proprietorship. Indeed, the appellant
cannot owe anything to himself.
[17] It is my opinion that there is
absolutely no evidence that the borrowed funds were used by the
appellant for the purpose of refinancing his capital account, as
was the case in Singleton, supra. Here there is no
direct link between the borrowed money and the reimbursement of
capital.
[18] In my view, the method used by Ms.
Dannehl was reasonable in the circumstances and the appellant has
not shown on a balance of probabilities that he is entitled to
deduct more in interest expenses than has already been allowed by
the Minister.
Penalties
[19] There is evidence that the appellant,
who is a chartered accountant and earns his living from preparing
financial statements and tax returns for his clients, has a
personal habit of filing his own tax returns based on estimates
of his income and expenses. The appellant acknowledged that he
does so in order to avoid late-filing penalties. There is also
testimony by Ms. Dannehl that he has been doing this at least
since 1991 and that for the years after 1992 she was unable to
trace amended tax returns filed by the appellant showing the
exact figures for the calculation of his taxable income in those
years.
[20] The appellant testified that in 1997
and 1998, the years at issue, he could not prepare his financial
statements on time because his daughter, who was his secretary,
made errors in not registering all the invoices. Ms. Dannehl,
however, testified that she was able to reconcile all invoices
with the bank deposits. In her view, the appellant could easily
have done the same. Furthermore, she noticed that the appellant
had underestimated his income and overestimated his expenses for
the two taxation years 1997 and 1998. The discrepancy was
substantial. Income was understated by $3,992 for 1997 and
$19,294 for 1998. Expenses were overstated by $4,583 for 1997 and
$10,499 for 1998. The appellant did not subsequently amend his
tax returns even though the financial statements for 1997 had
been prepared.
[21] The appellant was the sole proprietor
of his business; he prepared his own income tax and GST returns
and, according to Ms. Dannehl's testimony, all income and
expenses were kept on file.
[22] When she called the appellant for the
first time, he asked for four weeks to prepare his financial
statements for 1998. In Ms. Dannehl's view, if the appellant
was able to file his financial statements within a four-week
period, he could easily have done so in the six months allowed
taxpayers for that purpose.
[23] The appellant said that when he filed
his GST returns the exact figures were provided therewith. In his
view, the GST department could have transferred the figures to
the income tax department of the CCRA in order to adjust his tax
returns. In answer to that, Ms. Dannehl said that the appellant
filed all of his eight quarterly GST returns for 1997 and 1998
late and all at the same time, in February 2000, following a
request by the CCRA. She also said that documents filed for GST
purposes are not necessarily used for amending income tax
returns. I would add that it is the taxpayer's duty to see to
it that all his files with the income tax department are in
order.
[24] I find that the evidence is more than
sufficient to show constant delinquency on the part of the
appellant in respect of his tax obligations. For someone who has
an ethical duty to advise and serve his clients in conformity
with the law, the appellant is far from being a good example.
[25] I therefore conclude from the evidence
that the appellant knowingly or under circumstances amounting to
gross negligence made a false statement or omission in his 1997
and 1998 tax returns and is therefore liable to a penalty under
subsection 163(2) of the Act.
Decision
[26] By consent, the appeals are allowed to
the extent of reducing the appellant's net professional
income by an amount of $260.44 for 1997 and $164.93 for 1998
(representing the other half of the meal and entertainment
expenses) and by a further amount of $2,808 for 1998 (for
workspace-in-home expenses mistakenly allowed for 1997 but in
fact applicable to 1998). In all other respects the assessments
remain unchanged except for the penalty under subsection 163(2),
which should be recalculated in accordance with the
foregoing.
Signed at Ottawa, Canada, this 5th day of November 2003.
Lamarre, J.
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