Graham v. The Queen, docket 2001-517-IT-I (Informal Procedure)

Date: 20010910

Docket: 2001-517-IT-I

BETWEEN:

WILLIAM W. GRAHAM,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Beaubier J.T.C.C.

[1]            This appeal pursuant to the Informal Procedure was heard in Prince Rupert, British Columbia on August 21, 2001. The Appellant testified. The Respondent called the auditor on this file, Robert McCliggott. The Appellant's proper address for Court purposes is:

                                Unit 2

                                2806 Keefer Avenue

                                Terrace, British Columbia

                                V8G 2L2

[2]            Paragraphs 3 to 11 inclusive of the Amended Reply to the Notice of Appeal read:

3.              In filing his 1988 income tax return the Appellant reported a rental loss of $45,231.62.

4.              In the 1988, 1990 and 1991 taxation years the Appellant claimed legal fees against professional income in the amounts of $10,547.91, $3,454.67, and $7,945.00 respectively.

5.              The Minister reassessed the Appellant by Notices dated 15th March 1994 to disallow:

a)              amounts claimed as rental expenses relating to 19 Irving Avenue ("Irving"):

Revenue	As filed $6,600.00	As revised $5,375.00	Change $(1,225.00)
Expenses
Property taxes	$    921.67	$    746.56	$    175.11
Maintenance	961.90	184.42	777.48
Interest	5,988.11	6,202.46	(214.35)
Insurance	528.00	427.68	100.32
Utilities	1,012.31	0.00	1,012.31
Lease payments	4,500.00	0.00	4,500.00
Legal fees	2,226.15	0.00	2,226.15
Terminal loss	0.00	1,530.00	(1,530.00)
Total expenses	$16,138.14	$ 9,091.12	$ 7,047.02
Loss	$(9,538.14)	$(3,716.12)	$ (5,822.02)

b)             all the amounts claimed as renting expenses related to 49 Clarendon Avenue ("Clarendon"):

Revenue	As filed 4,600.00
Expenses Property taxes	$    1,124.07
Maintenance	21,889.97
Interest	12,780.71
Insurance	452.49
Utilities	1,277.24
Lease payments	0.00
Legal Fees	2,769.00
	$ 40,293.48
Loss	$ (35,693.48)

and

c)              legal fees claimed against accounting income:

1988	As filed	As allowed	Change
Jim's Special Parts	$ 3,023.95	$ 3,023.95	$     0.00
Beasley vs. Graham	4,302.54	0.00	4,302.54
Palermo, et al vs Graham	3,077.54	0.00	3,077.54
Unidentified	143.88	0.00	143.88
	$ 10,547.91	$ 3,023.95	$ 7,523.96

1990	As filed	Allowed	Change
McGrath Canada	$    415.00	$    415.00	0.00
McGrath Canada	83.50	83.50	0.00
Palermo, et al vs Graham	1,602.60	0.00	1,602.60
Palermo, et al vs Graham	841.70	0.00	841.70
	$ 2,942.80	$    498.50	$ 2,444.30

1991	As filed	Allowed	Change
Palermo, et al vs Graham	$ 7,500.00	$      0.00	$ 7,500.00
Unidentified	445.00	0.00	445.00
	$ 7,945.00	$      0.00	$ 7,945.00

6.              The Appellant filed Notices of Objection to the reassessments dated 15th March 1994. By Notice dated 4th December 2000 the Minister further reassessed the Appellant to increase the terminal loss for 1988 from Irving by $1,530 to $3,060 and to eliminate penalties on the following amounts:

1988 legal fees	$ 143.67
1990 legal fees	$ 511.87
1991 legal fees	$1,567.80

7.              In so reassessing the Appellant, the Minister relied on the following assumptions:

a)              the facts admitted and stated above;

                TERMINAL LOSS AND RENTAL LOSS

b)             in October 1986 the Appellant purchased a property at 19 Irving Avenue in the City of Ottawa ("Irving") at a cost of $175,000. There were two dwelling units in the building, one of which he rented to relatives, and one of which he occupied;

c)              in June 1987 the Appellant, together with Donna Beasley ("Beasley"), purchased 49 Clarendon Avenue in the City of Ottawa ("Clarendon") which he occupied, together with his two children, Beasley and her two children. The Appellant and Beasley each had a 50% interest in Clarendon. Beasley and her children moved out of Clarendon in February 1988 and the property was put on the market;

d)             in May 1988 the Appellant moved back to Irving because repairs to structural damage in Clarendon's foundations made the house uninhabitable.

e)              Clarendon was sold in September 1988;

f)              the cost to the Appellant of Irving was a total of $175,000;

g)             in July 1988 the Appellant sold Irving for $175,000;

h)             the Appellant incurred real estate commissions of $10,500 on the sale of Irving with $7,440 being in respect of the land and $3,060 being in respect of the building;

i)               at the material times the value of the Irving land was $124,000;

j)               at the material times the value of the Irving building was $51,000;

k)              the Appellant sold Irving in July 1988 and calculated, but did not claim, a terminal loss of $8,750;

l)               the fair market value of Irving, both at the time of purchase and at the time of sale, the fair market value was $51,000 for the building and $124,000 for the land;

m)             the amount of $2,226.15 claimed as legal fees with respect to Irving was not incurred;

                LEGAL FEES

n)             the Appellant applied to the Supreme Court of Ontario for a ruling as to the division of the net proceeds from the sale of Clarendon, between the Appellant and Beasley;

o)             the Appellant commenced a lawsuit against Joseph Palermo, Aldo Blasioli and Antonio Giamberardino the vendors of Clarendon (the "Vendors") in order to recover the costs incurred in the repairs to the foundations;

p)             at no time was Clarendon a rental property of the Appellant;

q)             the Appellant deducted, as expenses incurred in earning accounting income, legal fees paid in the suit against the Vendors in the following amounts:

                                1988                         $ 3,077.54

                                1989                         $ 2,444.30

                                1990                         $ 7,500.00;

r)              the legal fees paid in the suit against the Vendors were not incurred to earn income from a business or a property but were personal or living expenses of the Appellant;

s)              the Appellant deducted in 1988, as expenses incurred in earning accounting income, legal fees in the amount of $4,302 which related to the action with Beasley;

t)              the legal fees described in s) above, were not incurred in order to earn income from a business or a property but were personal or living expenses of the Appellant;

u)             the legal fees disallowed were all expenditures relating to Clarendon or were unsupported;

                PENALTIES          

v)             the Appellant was charged with, and convicted of, fraud with respect to the taxes relating to:

1988
Rental loss	$ 35,693.48
Legal fees	7,380.08
Total	$ 43,073.56
1990
Legal fees	$ 2,444.30
1991
Legal fees	$ 7,945.00

B.             ISSUES TO BE DECIDED

8.              The issues are whether:

a)              the Minister's calculation of the terminal loss on Irving is correct; and

b)             whether any portion of the disallowed legal expense is allowable.

C.             STATUTORY PROVISIONS RELIED ON

9.              He relies on section 9, subsections 13(21) and 20(16) and paragraphs 18(1)(a) and 18(1)(h) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the "Act").

D.             GROUNDS RELIED ON AND RELIEF SOUGHT

10.            He respectfully submits that the values of the Irving land and building are as determined by the Minister and the terminal loss as calculated by the Minister is correct.

11.            He further submits that no portion of the legal fees claimed was incurred in order to earn income from a property or business and that the legal fees were personal or living expenses of the Appellant.

[3]            None of the assumptions were refuted by the evidence.

[4]            In particular, the Appellant raised a number of issues, which are dealt with as follows:

1.              49 Clarendon Avenue ("Clarendon") was the personal residence of the Appellant and Ms. Beasley with whom he lived common-law. They broke up and Clarendon was sold in September, 1988. The legal fees the Appellant deducted respecting Beasley arose solely because of their common-law relationship and the possibility that she had an interest in Clarendon. They are not deductible from income.

2.              The litigation with Palermo concerned the foundation of Clarendon. Palermo sold Clarendon to the Appellant and was found liable for about $13,000 in damages for what Mr. Graham described as "repairs" in cross-examination. Mr. Graham had also sued Palermo for damages for lost income from a suite in the Irving property, which he occupied upon vacating Clarendon. However the claim for damages relating to Irving was, at best, remote and only arose from the true claim which related to the "concealment of the defect and the repairs thereto" at Clarendon. Thus the Palermo suit was not related to an income-producing asset of the Appellant.

3.              The Appellant values the adjusted cost base of 19 Irving Avenue ("Irving") as $185,000. He paid $175,000 for it, but states that it was worth more when he purchased it. On the evidence before the Court he was a bona fide purchaser for value without notice of any extra value of the property in an arm's length transaction. He did not submit any appraisal of the property by a qualified appraiser and had he, such an appraisal would have little weight in the circumstances of such a sale and purchase. In addition the Appellant submitted that he capitalized the cost of converting Irving into two legal suites as a duplex. However there is no evidence by way of documents or additional testimony supporting this, nor do his income tax returns in evidence support this allegation. Because of the false claims in other respects in this appeal, he is not believed without submitting supporting evidence respecting such an allegation. On the evidence, the adjusted cost base of Irving was $175,000.

4.              The Appellant offered no evidence in support of the claim of    $143.88 and therefore it is not allowed.

[5]            The Appellant's Notice of Appeal specifically did not contest the penalties.

[6]            The appeals are dismissed in their entirety.

                Signed at Saskatoon, Saskatchewan, this 10^th day of September, 2001.       

"D. W. Beaubier"

J.T.C.C.

COURT FILE NO.:                                                 2001-517(IT)I                         

STYLE OF CAUSE:                                               William W. Graham v. The Queen

PLACE OF HEARING:                                         Prince Rupert, British Columbia

DATE OF HEARING:                                           August 21, 2001

REASONS FOR JUDGMENT BY:      The Honourable Judge D. W. Beaubier

DATE OF JUDGMENT:                                       September 10, 2001

APPEARANCES:

For the Appellant:                                                 The Appellant himself                                         

Counsel for the Respondent:              Johanna Russell

COUNSEL OF RECORD:

For the Appellant:                

Name:                               

Firm:

                         

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2001-517(IT)I

BETWEEN:

WILLIAM W. GRAHAM,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeals heard on August 20, 2001 at Prince Rupert, British Columbia by

the Honourable Judge D. W. Beaubier

Appearances

For the Appellant:                                         The Appellant himself

Counsel for the Respondent:                         Johanna Russell

____________________________________________________________________

JUDGMENT

          The appeals from the reassessments made under the Income Tax Act for the 1988, 1990 and 1991 taxation years are dismissed in accordance with the attached Reasons for Judgment.

          Signed at Saskatoon, Saskatchewan, this 10^th day of September, 2001.

"D. W. Beaubier"

J.T.C.C.