Date: 20010306
Docket:
97-3286-IT-G
BETWEEN:
MAURICE
DUVAL,
Appellant,
and
HER MAJESTY THE
QUEEN,
Respondent.
Reasonsfor
Judgment
Tardif,
J.T.C.C.
[1]
This is an appeal concerning expenses that were denied the
appellant for the 1992, 1993 and 1994 taxation years.
[2]
The appellant, a trained engineer with a doctorate, obtained a
contract with the Canadian International Development Agency
("CIDA") for a term of two years.
[3]
Under that contract, the appellant received CAN$74,010 for 1992
and CAN$55,032.95 for the 1993 taxation year. These amounts are
indicated in Exhibit A-1.
[4]
In consideration for the amounts so received, the appellant
taught at the École Polytechnique in Thiès,
Senegal. At the same time, he undertook several initiatives in
the pursuit of which he incurred significant expenses, most of
which were disallowed.
[5]
In assessing the appellant, the Minister of National Revenue (the
"Minister") made the following assumptions of
fact:
[TRANSLATION]
(a)
the appellant was an engineer at all relevant times;
(b)
in 1992 and 1993, the appellant worked for the Canadian
International Development Agency, hereinafter "CIDA",
in Senegal;
(c)
the appellant stopped working for CIDA in September
1993;
(d)
in filing his income tax returns for his 1992 and 1993 taxation
years, the appellant reported professional income¾the
sole source of which was his contract with CIDA¾of
$74,010 for 1992 and $55,033 for 1993, from which amounts he
deducted expenses totalling $30,033 for 1992 and $29,104 for
1993, for net income of $43,976 for 1992 and $25,928 for
1993;
(e)
following an audit, the Minister of National Revenue disallowed
expenses of $25,390 for 1992 and $26,262 for 1993;
(f)
for those years, most of the expenses claimed by the appellant
against his professional income were not in any way related to
his work for CIDA;
(g)
in filing his income tax return for his 1994 taxation year, the
appellant reported no professional income and claimed expenses
totalling $38,024, for a net loss of $38,024;
(h)
the Minister of National Revenue disallowed expenses of $37,251
for 1994;
(i)
the appellant never started up a business during the periods in
issue;
(j)
the expenses of $25,490, $26,626 and $37,251 for 1992, 1993 and
1994 respectively were not made or incurred by the appellant for
the purpose of gaining or producing income from a business or
property.
[6]
The appellant admitted all the facts assumed by the Minister,
with the exception of those stated in subparagraphs (f), (i)
and (j).
[7]
The issue is whether the appellant was entitled to deduct the
expenses that were disallowed for 1992, 1993 and 1994.
[8]
The respondent began by stating that the amount of $5,532 had
indeed been reported for the 1992 taxation year, contrary to her
initial claim, which, she added, had been made in
error.
[9]
The appellant testified that he had devoted only a few hours a
week to his teaching duties. As he had enjoyed a great deal of
free time to get involved in other activities, he testified, he
had made considerable efforts to start up a new business or
obtain various contracts that would turn to account his knowledge
as a consultant. This was all the more important since he was
aware that his status with CIDA was precarious since he had no
guarantee that his contract would be renewed upon its expiry
after a year.
[10]
The appellant indicated that, to secure his economic future, he
had put time and money into obtaining other contracts and
initiating certain projects that might generate income and
eventually become viable and profitable.
[11]
To that end, he set up an office in Dakar and hired an
administrative assistant, who, as it happens, was his
wife.
[12]
In his capacity as a consulting engineer, he made a number of
efforts during his stay in Senegal to obtain contracts that would
enable him to make money from his very high level of engineering
knowledge and expertise.
[13]
He also tried to exploit his extensive technical and scientific
knowledge in projects that might eventually become truly
profitable businesses.
[14]
The evidence showed that the appellant's efforts never
produced concrete results, and so he returned to Canada at the
end of his contract with CIDA.
[15]
Once back in Canada, the appellant continued to offer his
consulting services, all the while thinking about projects that
might become actual businesses.
[16]
The appellant explained through his testimony and numerous
documents, photos and letters that, in the three years in issue,
he was a self-employed worker carrying on his own business, which
consisted in conducting various research projects for specific
purposes, namely establishing one or more profitable
businesses.
[17]
There is no doubt that, during the three taxation years in
question, the appellant wanted to take, and in fact did take, all
kinds of initiatives to ensure his economic survival. Being an
engineering consultant by profession, he moreover had to do as
much prospecting for clients as possible in order to ensure his
own material survival.
[18]
However, the evidence showed that, during the years in issue, the
appellant initiated two kinds of economic activities. First of
all, he solicited contracts that would make use of his expertise
and knowledge as a consultant and bring in professional
fees.
[19]
Second, the appellant took steps whose ultimate purpose was to
start up one or more businesses that could eventually become
profitable, the intent being either to operate them alone or
jointly with someone else or simply to dispose of them once they
were established.
[20]
The appellant clearly never understood the distinction between
the two types of initiatives. In this regard, both the
documentary evidence and his testimony essentially attempted to
show that he was a self-employed worker during the three taxation
years in issue and that, such being the case, he could take all
his expenses without any distinction whatsoever and deduct them
against his income.
[21]
The evidence nevertheless established unequivocally that the
appellant initiated and incurred expenses in practising his
profession as a consulting engineer. He was thus entitled, for
accounting purposes, to enter inherent and relevant expenses.
These expenses could also be deducted from his income provided
they were reasonable, justified and supported by appropriate
receipts.
[22]
Furthermore, the appellant did in fact attempt to start up
certain businesses in both Senegal and Canada. He had truly hoped
to establish one or more businesses which eventually could and
would have to ensure his economic survival.
[23]
However, all the expenses incurred in these initiatives had to be
recorded separately from those incurred in the course of his
professional activities. The former expenses must moreover be
assessed in the context of the provisions relating to
businesses.
[24]
The burden of proof was on the appellant. He had to discharge
this burden by adducing evidence which he alone could furnish.
Such evidence is generally composed of testimony and of documents
which flesh out and support or complete the testimony.
[25]
As the appellant chose to represent himself, the Court attempted
to make him understand that he was nevertheless not exempt from
the obligation to adduce valid and sufficient evidence to support
and prove the validity of his claims.
[26]
In this regard, it was very surprising that he did not call as a
witness his wife, whose wages during the years in issue were a
very significant expense component. If she had testified, she
could have provided details and information highly relevant to
the appeal. I am thinking in particular of the very justification
of her work through a job description, of the nature of the work
performed and, lastly, of details concerning all the activities
with which she was involved.
[27]
The appellant's evidence was deficient in a number of
respects. First of all, as he clearly did not understand the
distinction that must be drawn between expenses incurred in
practising his profession and those incurred for the purpose of
starting up a business, he confused everything and concluded that
all the expenses were and should have been allowable.
[28]
Not only did he make no distinction, he was not even able to
produce all the supporting documents on the ground that he had
lost or mislaid them in his travels.
[29]
The expenses incurred in carrying on his profession could have
been of two kinds. First, they could have been expenses incurred
for the purpose of receiving fees. Second, they could have been
expenses relating to initiatives designed to obtain contracts
calling upon his consulting expertise.
[30]
Lastly, and this appears to have been the main purpose of most of
the expenses, he said that he had tried to set up various
projects with a view to having them become viable, independent
businesses.
[31]
How is one to distinguish between these different fields of
activity?
[32]
On the one hand, it cannot be done on the evidence adduced by the
appellant. On the other hand, certain significant expenses,
including, in particular, the secretarial wages paid, were
apparently attributable to all activity components, that is to
say, as much to the appellant's practice of his profession as
to business start-ups.
[33]
The appellant's reasoning, which was quite simple, could be
expressed as follows: I do not have all the supporting
documentation, but the expenses were reasonable ones which were
in fact incurred. For many reasons, including competition, the
very difficult economic situation and so on, I was unable to earn
any income from my various initiatives. If I had been more
familiar with the Income Tax Act, I could have taken advantage of
certain provisions concerning research and development whose
effect would have been to reduce my tax burden even more
significantly.
[34]
These arguments in support of his appeal are very weak. The Court
must dispose of the appeal not intuitively or on the basis of
fairness, but essentially on the strength of the facts and not
based on assumptions drawn from the supporting
documentation.
[35]
Anyone who wishes to earn, increase and maximize professional or
business income must generally focus his energies on two separate
aspects. He must do everything in his power to obtain new
contracts or to recruit new clients and take steps to minimize
his expenses. The ideal is to exercise tight control over both
components and to seek to strike a fair balance.
[36]
The creation of an imposing structure which generates no income
is necessarily suspect and calls for intelligent and rational
explanation.
[37]
In the instant case, the appellant put in place a structure which
cannot be characterized as totally reasonable. One thing is
certain: it was highly questionable in the most important
respect, and that is the hiring of an administrative assistant.
It would certainly have been possible, indeed more appropriate,
reasonable and realistic, to proceed in a manner that could have
yielded appreciably the same result, but at a substantially lower
cost.
[38]
It is easy to understand why the appellant favoured the scenario
in which he hired his wife. By so doing, he split his income from
the CIDA contract and thus considerably reduced his tax
burden.
[39]
This is not a prohibited choice. However, it would have been
necessary to prove that it was a business decision dictated by
the imperatives of the effective practice of his profession and
necessary for the success of an eventual business.
[40]
In the 1994 taxation year, the appellant's income consisted
of a withdrawal from an RRSP, which makes the appropriateness of
paying his spouse a salary even more dubious. This leads to a
very strong presumption that the sole purpose was to split the
income from the RRSP.
[41]
As his only source of income was an RRSP, the appellant hired his
spouse at an annual salary of nearly $15,000. Was this a
necessary or even useful expense? Did the hiring of his spouse
have the effect of generating income? Why, like many
professionals with substantial professional income, did he not
turn to specialized secretarial services or simply to a message
service.
[42]
The appellant presented no evidence or explanation regarding the
relevance of the employment in question. He did not describe the
work performed by his secretary, who received a relatively large
salary in relation to the very limited commercial and
professional activities¾so
limited in fact that they brought in virtually no
income.
[43]
Even though the Court indicated that the testimony of the person
who had received the salary would have been useful in proving
that salary's appropriateness, the appellant preferred not to
call her as a witness. He merely stated that the salary had
indeed been paid and that the recipient had assumed the inherent
tax liability relating thereto.
[44]
The fact that it was actually paid is, to be sure, an important
element but is not in itself sufficient and does not prove that
it constituted a justified, acceptable and allowable
expense.
[45]
The evidence adduced by the appellant could be summarized as
follows: I am an honest professional and did all I could to
earn my living honourably. To that end, I made necessary outlays
the appropriateness of which should not be questioned or even
discussed, particularly since I could have taken advantage of and
enjoyed much more generous tax benefits under the provisions
concerning research and development. Consequently, the respondent
has an obligation to allow all my expenses, even if I cannot
prove in detail that they were relevant.
[46]
Unfortunately, it is not that simple. Every expense must be
justified, particularly if the facts suggest that the expenses
may have been personal in nature.
[47]
In such a case, it is important that the taxpayer who has been
the subject of an assessment in which certain expenses have been
considered to be personal be able to show on a preponderance of
evidence that those expenses were necessary and required for the
operation of the business or for the practice of the
profession.
[48]
In the instant case, the appellant submitted evidence that was
incomplete, deficient and confused in many respects, to the point
that the Court was scarcely any more able to render judgment
after the appellant had presented the evidence than it had been
before the trial started.
[49]
In the circumstances, having regard to the evidence, it is very
difficult, not to say impossible, to determine objectively which
expenses are allowable and which are not since the evidence was
incomplete, deficient and very insufficient, so much so that a
clear distinction cannot be made.
[50]
Consequently, I have no other choice but to make a determination
regarding the expenses based on an exhibit which the appellant
himself filed in evidence (Exhibit A-11).
[51]
For the 1992 taxation year, the respondent allowed expenses
totalling $4,543.03 and disallowed expenses of $25,490.70 for
total expenses claimed of $30,033.75. For the 1993 taxation year,
the respondent allowed expenses totalling $2,478.66 and denied
expenses of $26,626.08 for total expenses claimed of $29,104.75.
For the 1994 taxation year, the respondent disallowed all the
expenses claimed, which amounted to $38,024.
[52]
The appeal is therefore allowed in that reassessments shall be
made on the basis that the appellant could claim against his
income the amounts of expenses indicated below for the years in
issue:
Year
Expenses
1992
$13,464
1993
$11,798
1994
$19,012
The whole without
costs, and the appellant is entitled to no further
relief.
Signed at Ottawa, Canada, this
6th day of March 2001.
"Alain
Tardif"
J.T.C.C.
Translation certified
true on this 28th day of June 2002.
[OFFICIAL ENGLISH
TRANSLATION]
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
97-3286(IT)G
BETWEEN:
MAURICE DUVAL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on May 8, 2000, at Chicoutimi,
Quebec, by
the Honourable Judge Alain Tardif
Appearances
For the
Appellant:
The Appellant himself
Counsel for the
Respondent:
Michel Lamarre
JUDGMENT
The appeal from the assessments made under the Income Tax
Act for the 1992, 1993 and 1994 taxation years is allowed,
without costs, in accordance with the attached Reasons for
Judgment.
Signed at Ottawa, Canada, this 6th day of March
2001.
J.T.C.C.
Translation certified
true
on this 28th day of June
2002.
Erich Klein, Revisor
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