Date: 20010214
Docket: 1999-1841-IT-I
BETWEEN:
ROSE PREFONTAINE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Agent for the Appellant: Maurice Prefontaine
Counsel for the Respondent: James Yaskowich
____________________________________________________________________
Reasons for Judgment
(Delivered orally from the Bench at Edmonton, Alberta, on
January 26, 2001)
McArthur J.
[1]
This appeal is from an assessment of tax for the
Appellant’s 1994 taxation year. The sole issue is whether
certain expenses claimed were incurred for the purpose of gaining
or producing income from a residential business. There is no
issue with respect to reasonable expectation of profit. At the
outset of the hearing, the Appellant presented a motion to strike
out the Reply to the Notice of Appeal which motion was denied and
reasons will be given separately therefor. I understand from the
Appellant that a similar appeal for the 1993 taxation year was
settled during a hearing in February 2000. The Appellant's
spouse, Maurice Prefontaine, acted as her agent. She remained
throughout the hearing and appeared to take copious notes. He is
the manager of the properties and most knowledgeable with respect
to the issues. He alone gave evidence.
[2]
The Appellant is a full-time employee with a human resources
department. In 1985, she was transferred and moved to Edmonton
from Prince George, British Columbia with her two daughters. Mr.
Prefontaine remained in Prince George for five years winding up
his litigation law practice of 10 years and selling substantial
real estate holdings. He moved to Edmonton in 1989 or 1990 when
the Appellant commenced the present real estate property
business.
[3]
In 1994, the Appellant owned four units in three properties in
Edmonton from which she declared income as follows:
|
Property
|
Rental Income
|
|
11207 – 79 Avenue (Upper Apt.)
|
$9,600
|
|
11207 – 79 Avenue (Lower Apt.)
|
6,500
|
|
9046 – 94 Street
|
6,025
|
|
4652 – 43A Avenue
|
6,000
|
|
Total
|
$28,125
|
The property at 79 Avenue contained two apartments, 94 Street
was a single family older home and 43A Avenue is the residence of
the Appellant and her family, containing one rental unit for a
border on the main floor. The issue is whether the expenses in
excess of the amount allowed by the Minister were incurred by the
Appellant for the purpose of gaining or producing income from a
business or property. The Minister of National Revenue concedes
that the Appellant had a rental business with a reasonable
expectation of profit. Counsel for the Respondent simplified and
clarified the issues by filing the "Position of the
Respondent" dated January 24, 2001, which I include in its
entirety as Schedule "A" to these Reasons for
Judgment.
[4]
While Mr. Prefontaine expressed regret, if not bitterness,
because the Minister did not agree with his position prior to
trial, he presented evidence together with passing reference to
supporting documentation that filled seven banker's boxes and
were stacked on a shelf trolley in the courtroom. Most of it was
of no assistance. Photocopies of hundreds of invoices were
meticulously kept in binders. But for the wages to the
Appellant's daughters, Michelle and Yvette, the Minister did
not deny the amounts of the expenditures but disagreed with their
characterization. The most notable items in dispute, taken from
paragraph 12 of the Respondent's Position, are as
follows.
[5]
The Appellant claimed 57% of the family home at 43A Avenue
attributable to office for the rental business as well at 18.5%
of the home for a border. The Minister is prepared to allow 30%
of the amount claimed to office in addition to the 18.5% claimed
for the border. In 1990, the Appellant had a two-story plus
basement home built for herself, husband and two children and a
border. Exhibit A-1 is a sketch or floor plan of each floor.
Including the basement, the total area of the home is 3,800
square feet. The Appellant claims that the entire basement (1,240
square feet except for a small common area) is used for business.
No allowance in her allocation was made for this being inferior
space. The main floor is approximately 1,650 square feet of
which, it is agreed, the border uses just in excess of 600 square
feet and the Appellant claims another 600 square feet for
business purposes. From the upper floor which is 910 square feet,
the Appellant claims 525 square feet for business purposes.
Therefore, of the home’s total 3,800 square feet, the
Appellant claims over 75% including the 18.5% for the border. The
two-car garage is 465 square feet, and the Appellant claims
50% of this space for business.
[6]
The home office claim boils down to a question of what is
reasonable under the circumstances. The Appellant is claiming
about 2,000 square feet of her home for the operation of a very
small rental business involving four tenants. I believe larger
rental businesses operate very efficiently with the use of
one-half of that support space. In Mohammad v. The Queen,
97 DTC 5503, an observation was made by Robertson J. which is of
assistance to the present circumstances. At page 5509, he
stated:
When evaluating the reasonableness of an expense, one is
measuring its reasonableness in terms of its magnitude or
quantum. Although such a determination may involve an element of
subjective appreciation on the part of the trier of fact, there
should always be a search for an objective component. When
dealing with interest expenses, the task can be objectified
readily. For example, it would have been open to the Minister to
challenge the amount of interest being paid on the $25,000 loan
had the taxpayer agreed to pay interest in excess of market
rates. The reasonableness of an interest expense can thus be
measured objectively, namely, by reference to market rates.
Similarly, the Minister might want to confront a taxpayer who
seeks to deduct 3/4 of the interest paid on a mortgage loan
pertaining to a duplex in which the taxpayer is residing in one
of the two identical units. Once again, the reasonableness of the
interest expense being claimed can be measured objectively by
reference to area (assuming, of course, that the rental value of
a square meter in one part of the property is equal to that in
another): see generally Narine v. R., [1995] 2 C.T.C.
2055 (T.C.C.).
I concede that there will be instances where the objective
component will be difficult to isolate and, therefore, practical
experience informed by common sense will have to prevail. Such is
true in respect of those expenses deemed to be unreasonable
because they are believed to be excessive or extravagant: see
Cipollone, supra, where the taxpayer, a
“humourologist”, sought to deduct, for example,
significant clothing costs against modest income. Similarly, one
can debate ad nauseam what constitutes a reasonable lunch
expense or weigh the perceived need of a taxpayer to purchase a
Rolls Royce rather than a Chevrolet, Lincoln or a Mercedes-Benz.
The problem is that one’s understanding of extravagance
will be influenced as much by one’s professional and
business experiences, taken together with personal expectations
informed by a particular lifestyle, as by pragmatic
considerations related to the objects of the Act.
...
Section 67 of the Income Tax Act provides that to be
deductible, expenses must be reasonable under the circumstances.
The Appellant may use more than 30% of her house for business
but, I find that is excessive. The 30% allocation suggested by
the Minister is more than fair and reasonable.
[7]
Paragraph 12 c) of the Respondent's Position states that the
Appellant claimed approximately $1,460 for stationery and
photocopy expenses. Most of this charge was expended for an
action before the Court of Queen’s Bench, an appeal to the
Alberta Court of Appeal and for appeals to the Tax Court of
Canada. Subsection 60(o) of the Act provides for
the deduction of amounts paid by the taxpayer in the year in
respect of fees or expenses incurred in preparing, instituting
and prosecuting an objection to a tax assessment. Mr. Prefontaine
testified that one-half of the $1,460 expended was for a tax
appeal or appeals. It may not have been necessary or expended
wisely but I accept that it was incurred and one-half of such
expense does meet the provisions of subsection 60(o).
The Respondent had agreed to allow approximately $220. The only
evidence as to the amount spent pursuant to subsection
60(o) was that of Mr. Prefontaine who stated 50% of the
$1,460. Somewhat reluctantly, I accept his amount of $730. His
statement is corroborated by hundreds of copies. My reluctance
herein arises from a belief that the differences could have been
settled without litigation. It would appear that the Appellant
and her representative are overly litigious.
[8]
Most often, I believe, the Appellant's litigation does not
serve a useful purpose. I state this having reviewed the action
by the Appellant in the Court of Queen’s Bench basically
for an Order preventing the Minister’s representatives from
assessing her rental business documentation during an audit. The
Appellant’s statement of claim was struck as being an abuse
of process by the Court of Queen’s Bench. There was an
appeal to the Alberta Court of Appeal. This action was not for
the purpose of earning income from a property pursuant to
paragraph 18(1)(a) of the Act. A certificate from
the Registrar of that Court states that the appeal has been taken
off the list. Other actions pursued have ended with similar
results.
[9]
In paragraph 12 i) of the Position of the Respondent, the
Appellant claims the amount of $2,366 being 75% of $3,155 claimed
as salaries to her two daughters, Michelle who was 17 in 1994 and
Yvette who was 12. Michelle is now, I understand, successfully
employed as an accountant and business administrator and Yvette
apparently is living at home and has learning or psychological
difficulties. No doubt Michelle did provide services to the
business and was paid for this work. I am not satisfied from the
evidence, however, that these services were as extensive as
claimed. Michelle did not give evidence. The Minister’s
position is that this expenditure is not deductible. The business
could ill afford to pay for secretarial help. In 1994, Michelle
was in full-time attendance at school and taught music lessons
earning $20 an hour. One of the rental units was vacant for
several months during the summer of 1994 and I accept that she
did substantial cleaning up and yard work. I find that wages to
Michelle of $1,925 is unreasonable under the circumstances yet I
am prepared to make an estimate as to what may be reasonable and
allow total wages and salaries of $500. I cannot ignore that she
did render valuable services to the business. With respect to
Yvette, there is insufficient evidence to establish that she was
paid any money or that she earned a wage or salary and she was
only 12 years old in 1994.
[10] The
fourth issue is paragraph 12 j) which states that the Appellant
claimed $1,357 being 60% of the amount of $2,262 claimed as
management and administrative fees incurred for life insurance.
The Appellant purchased $100,000 of insurance on her
husband’s life and he, a lesser amount on her life,
contending that: (a) if he died, she would no longer have free
management services that he was rendering and would need the
$100,000 to save the business; and (b) if she predeceased her
husband, he would need the proceeds of her policy to pay off a
$37,000 mortgage and other debts. For the cost of insurance to be
a deductible business expense, there must be some reasonable,
factual connection between the carrying on of the business and
the payment of the premiums. These amounts were not paid to
benefit the business but to benefit the beneficiaries. The money
was not expended to gain income. The connection between
benefiting the Appellant or her husband and the insurance costs
is far too tenuous. These premiums are not deductible.
[11] Another
issue was the deduction disallowed contained in paragraphs 12 g)
and h). The Appellant paid $3,257 in legal fees and $1,111 to an
engineering firm defending and counter-claiming in a lien action
with respect to their home which was built in 1990. The Appellant
had refused to pay the contractor $75,000, claiming shoddy
workmanship and the action was settled in 1995. I find the legal
fees were not expended to earn income and are not deductible. As
in the insurance claim, the connection to earning income is too
remote.
[12] With
regard to the remaining expenses, I agree with the
Minister’s position set out in Schedule "A"
attached hereto. Briefly dealing with the expenses set out in
paragraph 12 b): the water and sewer expenses are properly
attributable to home and personal use; 12 d): the $28 office
expense related to the Court of Queen's Bench action and is
disallowed for the same reasons as set out in remarks with
respect to paragraph 12 c); 12 e): $274 claimed for a second
phone is unreasonable. Surely one phone for the small business is
more than sufficient; 12 f): the Appellant claimed $192 to repair
a frozen outside water tap on her home. This was used for the
garden and perhaps to wash cars and I find this expense is
personal.
[13] In
paragraph 7 of Schedule "A", the Appellant maintained
two automobiles, a van and a Cavalier. The Minister accepted that
the automobiles were each used 60% in the rental operation with
the remaining 40% for personal use. Given the evidence, I find
that this is a fair, if not a generous disposition.
[14] In
conclusion, the Position of the Respondent is accepted in its
entirety but for paragraph 12 c) where a $730 deduction is
allowed for stationery and photocopy expenses and for paragraph
12 i) where a $500 deduction is allowed for salary and wages. The
appeal is allowed only to adopt the Respondent's Position
(Schedule "A") with the two changes referred to. This
being an appeal under the informal procedure with limited
success, no costs are awarded.
Signed at Ottawa, Canada, this 14th day of February, 2001.
"C.H. McArthur"
J.T.C.C.
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