Chwialkowski v. The Queen, docket 2000-2421-IT-G

Date: 20011123

Docket: 2000-2421-IT-G

BETWEEN:

JERZY CHWIALKOWSKI,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Lamarre, J.T.C.C.

[1]            These are appeals against assessments made by the Minister of National Revenue ("Minister") under the Income Tax Act ("Act") for the appellant's 1996, 1997 and 1998 taxation years. In computing his income for those years, the appellant reported business losses of $84,095 in 1996, $84,174 in 1997 and $139,799 in 1998. In assessing the appellant on August 10, 1999, the Minister adjusted the appellant's business income as follows:

	1996	1997	1998
Total Income (Loss) Previously Assessed	(84,095)	(84,174)	(139,799)
Add
Interest Income reported as business income			(1,003)
Expenses Disallowed (GST)			2,606
Automobile Expenses Disallowed			2,257
Office in the Home Expenses Disallowed	3,240	3,240	10,196
Losses Taken as Expenses	93,730	87,784	168,269
Unreported Royalties	1,384	675	632
GST Reported on Consulting Services	______	______	(3,360)
TOTAL	98,354	91,699	179,597
Net Business Income	13,383	7,525	39,798
Revised Total Income	14,259	7,525	40,801

[2]            The appellant objected to these assessments and the Minister reassessed the appellant's tax liability on April 11, 2000 as follows:

a)        for the 1996 taxation year, he decreased the Appellant's net business income, as previously re-assessed on 10 August 1999, by $1,237 which resulted in revised taxable income in the amount of $13,022;

b)        for the 1997 taxation year, he decreased the Appellant's net business income, as previously re-assessed on 10 August 1999, by $226 which resulted in revised taxable income in the amount of $7,299;

c)        for the 1998 taxation year, he decreased the Appellant's net business income, as previously re-assessed on 10 August, by $2,911 and allowed a carry forward for business-use-of-home expenses in the amount of $3,069 which resulted in revised taxable income in the amount of [$37,890].

[3]            The amounts at issue before me are the unreported royalties, the home expenses, the losses from previous years taken as expenses and automobile expenses disallowed.

[4]            In assessing the appellant, the Minister relied upon the following assumptions of fact:

a)        the Appellant had two businesses: a book publishing business and a consultant business;

b)        the Appellant also did consulting work through his corporation JCA Limited;

c)        in 1996, 1997 and 1998 taxation years, the Appellant received royalty income from his publisher, Da Capo Press Inc., and did not include the amounts of $1,384 in 1996, $675 in 1997 and $632 in 1998 in his income;

d)        The Appellant did not keep a record of the total distance travelled and distance travelled in the year to earn business income;

e)        the Appellant's use of his car for business purposes is no greater than 50%;

f)         the Appellant's business use of his personal residence is no greater than 33%;

g)        the losses from previous years which were claimed as business expenses in the 1996, 1997 and 1998 taxation years relate to expenses allegedly incurred for business purposes during a twenty year period beginning in 1976 and ending in 1996;

h)        the Appellant used his personal residence for the purpose of earning income from the publishing business and the consulting business;

i)         for the years 1996 and 1997, 33% of the Appellant's house expenses were claimed by JCA Limited;

j)         in 1998, the reasonable business portion of work-space-in-home expenses relating to the consulting business should not exceed the 33%;

k)        in 1996, 1997 and 1998, the reasonable business portion of the work-space-in-home expenses relating to the publishing business should not exceed 1/12 of the total expense.

[5]            In 1996 the appellant, who is an architect by profession, published with Da Capo Press Inc. (a publisher in New York, U.S.A.) a book that is a catalogue of classical music compositions, on which, according to his testimony, he had worked from his home for 20 years.

[6]            As he never made any money from that book during all those years and on the advice of some people at Revenue Canada, as it was then called, the appellant never claimed any expenses with respect to the book against his other income. In 1995 he received a US$3,000 advance from Da Capo Press Inc. He filed his 1995 income tax return together with a statement of income and expenses in which he declared 40 per cent of that advance ($1,656), claimed $92,000 in expenses from previous years (1976-1995) and showed a loss of $90,344. For some reason he did not enter the loss so claimed on the first page of his 1995 tax return; as a result he was assessed for 1995 on his employment and interest income only, without the loss being taken into account. The appellant did not object to that assessment and the year 1995 is therefore now closed.

[7]            For the years 1996, 1997 and 1998, the appellant also only declared 40 per cent of the royalty income from his book. In assessing the appellant the Minister included the other 60 per cent (see amounts added to income as per paragraph 3(c) above) and the appellant no longer disputes those inclusions. The appellant explained that he had included only 40 per cent of his royalty income because, in his view, the other 60 per cent related to work done on his book in previous years. He did not know that he had to include the royalty income in the year of reception.

[8]            For 1996, 1997 and 1998, the appellant claimed the expenses from previous years ($92,000) against his income from his book and he added the current expenses for each year (including 1/6 of his home expenses for 1996 and 1997 and 1/12 of his home expenses for 1998). The expenses from previous years were disallowed. However, the current expenses (other than the home expenses) and 1/12 of his home expenses were accepted as a deduction against the appellant's net income from his book. As a result, the business portion of home expenses allowed with respect to the book amounts to $1,570.81 for 1996, $1,536.79 for 1997 and $1,424.05 for 1998 (see Exhibit R-3).

[9]            However, subsection 18(12) of the Act restricts the deduction of expenses incurred by an individual in respect of a home office. Subsection 18(12) reads as follows:

418(12)3

              (12) Work space in home. Notwithstanding any other provision of this Act, in computing an individual's income from a business for a taxation year,

(a) no amount shall be deducted in respect of an otherwise deductible amount for any part (in this subsection referred to as the "work space") of a self-contained domestic establishment in which the individual resides, except to the extent that the work space is either

(i) the individual's principal place of business, or

(ii) used exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business;

(b) where the conditions set out in subparagraph (a)(i) or (ii) are met, the amount for the work space that is deductible in computing the individual's income for the year from the business shall not exceed the individual's income for the year from the business, computed without reference to the amount and sections 34.1 and 34.2; and

(c) any amount not deductible by reason only of paragraph (b) in computing the individual's income from the business for the immediately preceding taxation year shall be deemed to be an amount otherwise deductible that, subject to paragraphs (a) and (b), may be deducted for the year for the work space in respect of the business.

[10]          Thus, home expenses are deductible only to the extent of the appellant's net income from the book for the year (paragraph 18(12)(b)). Such expenses can be carried forward to subsequent years and applied against the net income from the book on the condition that the work space be used in those years in such a manner as to meet the criteria set forth in either subparagraph 18(12)(a)(i) or subparagraph 18(12)(a)(ii).

[11]          Here, the appellant's net income as a writer, before home expenses, amounted to $1,237 in 1996 and $226 in 1997. In 1998 there was a loss of $322. Therefore, the Minister allowed a carry-forward of home expenses to subsequent years of $3,068.65 (see Exhibit R-1, Tab 19). At the hearing the appellant agreed with the portion of 1/12 of home expenses relating to his book. The assessments will therefore remain unchanged in that respect.

[12]          With respect to the expenses incurred in previous years ($92,000), the appellant gave a breakdown of those expenses in the statement of income and expenses that he attached to his 1995 tax return (Exhibit R-1, Tab 1). Those expenses include in-home workspace, stereo equipment, records, books, CDs, computer expenses and supplies, research trips, research, and pre-editing services. The appellant has no vouchers for any of those expenses, and for most of them the breakdown does not indicate in which year the expense was incurred. As I explained to the appellant at the hearing, he cannot carry-forward business expenses for more than seven years (see paragraph 111(1)(a) of the Act). Furthermore, other expenses are capital in nature (for example, the computer and stereo equipment) and cannot be deducted entirely in the year in which they were incurred but have to be depreciated over the years, if those expenses can reasonably be justified.

[13]          Although, it seems plausible that the appellant incurred some pre-editing services costs before the publication of his book, the amount claimed is quite significant in comparison to the revenue subsequently generated from the book. Indeed, the appellant claims that he disbursed $30,000 in four years for research and pre-editing services provided by others. It is quite difficult to understand why he did not keep receipts for such large expenses, especially when one considers that the appellant very meticulously proved the expenses relating to his home (see Exhibit R-1, Tabs 2, 3 and 4). Under the circumstances, the absence of vouchers in support of the amount of $30,000 claimed with respect to the "pre-editing services costs" and other expenses appears to me to be irreconcilable with the manner in which the appellant justified his home expenses.

[14]          In a letter the appellant sent to Mr. H.C. Beaulac at the Canada Customs and Revenue Agency on February 14, 2000 (Exhibit A-1, Tab 3), the appellant alluded to the fact that he did not have receipts for expenses incurred before 1990. No explanation is given for not providing receipts for the pre-editing services costs that he claimed to have incurred between 1992 and 1996 or for any other expenses incurred during that period. The appellant also said in that letter that he "near-starved in order to finish and publish the Catalog, living well below the poverty line" (see page 2, paragraph 4 in Exhibit A-1, Tab 3). I do not understand how, if this was the case, the appellant was able to pay by himself such major expenses, and if he did pay them, why he did not see fit to keep and provide his vouchers (receipts, cancelled cheques, bank account or credit card statements).

[15]          It is the appellant who has the burden of showing that he incurred the expenses he claimed and the high figures he brought forward necessitate in my view more than a simple statement by him that he did in fact incur the expenses. The appellant is responsible for documenting his affairs in a reasonable manner and his own unproven assertions are not sufficient to support his claims (see Njenga v. The Queen, 96 DTC 6593 (F.C.A.)). In the circumstances, I do not find that I am in a position to accept the expenses claimed for the previous years as they were presented to me. However, the respondent having accepted that 1/12 of the home expenses were attributable to the publication of the book, it would seem that the appellant should be able to carry forward 1/12 of the home expenses incurred since 1988 (the year subsection 18(12) of the Act, which permitted the carry-over of such expenses to future years to be applied against income from the business in question only, was implemented) and to apply that portion of the expenses against the income from his book in future years, provided all the conditions in subsection 18(12) are met.

[16]          In parallel with the book publishing activity, in 1996 and 1997 the appellant was working as an architect from his home. He did this through an incorporated entity, JCA Limited, which declared all income and claimed all expenses in relation to the architectural consulting business. The appellant claimed 33 per cent of his home expenses through JCA Limited and that was accepted by the Canada Customs and Revenue Agency.

[17]          In 1998 JCA Limited ceased declaring income and the appellant started another consulting business under the name of Suncan Consultants. This was a research type of business that was again operated from his home. He claims that 50 per cent of the home expenses were business expenses.

[18]          The appellant explained that he used 100 per cent of his basement and half of the main floor for his research work in his consulting business. In cross-examination he admitted, though, that the laundry room and the furnace room were located in the basement. He used another room upstairs for the work done on his book. He had a few computers (I think he said at least four) with printers, some of which were also used by members of his family, and he used the main floor to meet with his clients during the day.

[19]          During the year at issue (1998), the appellant's wife and one of their two daughters lived in the house, and the other daughter lived there for portions of the year only. The appellant and his family had only one car. At first, the appellant claimed 100 per cent of the car expenses as relating to business use but then reduced that proportion to 90 per cent. However, the appellant did not keep a logbook of his personal and business travel. In his testimony, he said that he used the car so rarely for private purposes that it was not worth writing it down.

[20]          For the same reasons that I gave for disallowing the expenses incurred in previous years and claimed by the appellant as having been incurred for the publication of his book, I cannot accept more than has already been allowed the appellant by the respondent for car expenses. The respondent allowed 50 per cent of the expenses claimed by the appellant although he did not keep any record of the distances travelled to earn business income. I find this percentage more than reasonable taking into account that the appellant was living with his wife and daughters, the latter both being old enough to drive, and there was only one car for the whole family.

[21]          With respect to home expenses claimed in relation to the consulting business for 1998, the respondent has accepted 33 per cent of the total home expenses in that regard. I find that percentage appropriate taking into account the fact that this was the proportion initially claimed by the appellant for his architectural and his consulting businesses, both operated from his home (see also the letter sent by the appellant to Mr. Kal Malhotra at the Canada Customs and Revenue Agency on February 21, 2000, Exhibit A-1, Tab 4, page 2, paragraph 2) and that the appellant was allowed an extra 1/12 of his home expenses with respect to the publication of his book that year. The appellant was living in the house with his wife and daughters and I find that one third of the house allocated for business purposes is reasonable in the circumstances.

[22]          I will therefore dismiss the appeals, with costs, for the taxation years at issue. However, I will simply note that the appellant should be able to carry forward and apply against the income from his book in future years 1/12 of the home expenses incurred between 1988 and 1995 for the purpose of earning income from the book (based on the home expenses reported by the appellant in his statement of income and expenses filed with his 1995 tax return, Exhibit R-1, Tab 1), provided that all the other conditions required by subsection 18(12) of the Act are met for the years to which those expenses can be carried forward.

Signed at Ottawa, Canada, this 23rd day of November 2001.

"Lucie Lamarre"

J.T.C.C.

COURT FILE NO.:                                                 2000-2421(IT)G

STYLE OF CAUSE:                                               Jerzy Chwialkowski v. The Queen

PLACE OF HEARING:                                         Ottawa, Ontario

DATE OF HEARING:                                           October 24, 2001

REASONS FOR JUDGMENT BY:                      The Honourable Judge Lucie Lamarre

DATE OF JUDGMENT:                                       November 23, 2001

APPEARANCES:

For the Appellant:                                                 The Appellant himself

Counsel for the Respondent:              Gatien Fournier

COUNSEL OF RECORD:

For the Appellant:                

Name:                               

Firm:                 

For the Respondent:                             Morris Rosenberg

                                                                Deputy Attorney General of Canada

                                                                                Ottawa, Canada

2000-2421(IT)G

BETWEEN:

JERZY CHWIALKOWSKI,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on October 24, 2001, at Ottawa, Ontario, by

the Honourable Judge Lucie Lamarre

Appearances

For the Appellant:                      The Appellant himself

Counsel for the Respondent:      Gatien Fournier

JUDGMENT

          The appeals from the assessments made under the Income Tax Act for the 1996, 1997 and 1998 taxation years are dismissed, with costs.

Signed at Ottawa, Canada, this 23rd day of November 2001.

"Lucie Lamarre"

J.T.C.C.