Richter v. The Queen, docket 2000-4797-IT-I (Informal Procedure)

Date: 20010626

Docket: 2000-4797-IT-I

BETWEEN:

HAROLD H. RICHTER,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Miller, J.T.C.C.

[1]            This is an appeal by Mr. Harold Richter regarding the deductibility of certain expenses in connection with a variety of business activities carried on by Mr. Richter in the years 1992 to 1997. At the outset of the trial Counsel for the Respondent sought an Order dismissing the 1992 appeal as there was no assessment of the 1992 taxation year, but a notice advising Mr. Richter that no tax was payable. I gave such an Order and the appeal continued just for the years 1993 to 1997.

[2]            Mr. Richter described himself as a salesperson, and it became apparent that what he sold was not particularly significant. He would attempt to sell anything from skin products to steel products, from vitamins to security systems. He indicated that being in the sales business his needs were simple: a car, a phone, an office and inventory. He might have added money to that list as he certainly required some financial support. Indeed the expenses disallowed by the Minister relate primarily to vehicle expenses, phone expenses and interest expenses.

[3]            In 1993 and 1994 Mr. Richter was involved with the sale of three product lines: Naturally Rite, a skin care product; Arland, a security system and Shaklee, vitamin products. In 1995 he dropped the Shaklee line and attempted with a third party to sell steel products overseas. In 1996 and 1997 his business was limited to providing the Naturally Rite and Arland products. While he could generate income from sales, he could also generate income from what he called network marketing; that is, finding other agents to sell the products. His evidence was however that little, if any, income was generated on this latter basis. The product sales and network marketing required that Mr. Richter spend considerable time on the road and on the phone. He maintains that his personal use of his car would have only been five or six percent of total use, although he kept no logs to support that finding. Similarly he testified that almost all his phone activity was of a business nature. He paid the phone company extra for a business line, although the number was the same as his residence number.

[4]            Mr. Richter claims to have financed his sales business by any means possible including obtaining lines of credit, borrowing from friends, borrowing against insurance policies, securing second mortgages, using his wife's inheritance and relying on credit cards.

[5]            What Mr. Richter failed to do, which clearly created difficulties for the Minister when reviewing his objection, was to identify his business expenses separate from personal expenses and to also segregate expenses amongst his different products.

[6]            The following are charts of each of the years under appeal indicating the expenses claimed by Mr. Richter and allowed by the government.

1993 Business Expenses

Expenses	Claimed	Allowed by Appeals
Accounting Fees	$ 100.00	$ 100.00
Advertising, Promo	306.63	306.63
Automobile	9,985.09	4,992.55
Interest	4,711.07	178.70
Office Expenses	3,015.80	3,015.80
Telephone	1,404.95	436.62
Misc. Exp.	75.53	75.53
Total Expenses	$19,599.07	$9,105.83

                                Gross Profit reported                            $11,764.21

                                Less expenses allowed         9,105.83

                                Net Income                                                             $2,658.38

                                Less business use of home exp. 2,658.38

                                Net Income                                                                             Nil

1994 Business Expenses

Expenses	Claimed	Allowed by Appeals
Advertising, Promo	853.72	853.72
Automobile	4,959.27	2,479.64
Interest	6,118.27	285.82
Office Expenses	2,252.54	2,252.54
Telephone	1,437.75	1,030.25
Insurance	1,013.25	1,013.25
Entertainment	179.51	179.51
Misc. Exp.	1,316.55	1,174.22
Total Expenses	$18,130.86	$9,268.95

                                Gross Profit reported                            $19,669.85

                                Less expenses allowed         9,268.95

                                Net Income                                                             $10,400.90

                                Less business use of home exp. 3,516.98

                                Net Income                                                             $6,883.92

1995 Business Expenses

Expenses	Claimed	Allowed by Appeals
Accounting Fees	$ 100.00	$ 100.00
Advertising, Promo	273.06	273.06
Automobile	5,878.68	2,939.34
Interest	7,217.53	179.52
Office Expenses	1,562.18	1,562.18
Telephone	5,183.17	955.52
Insurance	1,006.96	1,006.95
Entertainment	198.24	198.24
Misc. Exp.	1,971.50	10.55
Total Expenses	$23,391.31	$7,225.36

                                Gross Profit reported                            $23,658.95

                                Less expenses allowed         7,225.36

                                Net Income                                                             $16,433.59

                                Less business use of home exp. 2,017.29

                                Revised Net Income                             $14,416.30

1996 Business Expenses

Expenses	Claimed	Allowed by Appeals
Advertising, Promo	186.06	186.06
Automobile	2,902.84	1,451.42
Interest	6,198.51	159.64
Office Expenses	1,386.51	1,386.51
Telephone	2,902.84	847.34
Insurance	1,003.70	1,003.70
Entertainment	160.33	160.33
Total Expenses	$14,740.79	$5,195.00

                                Gross Profit reported                            $11,202.66

                                Less expenses allowed         5,195.00

                                Net Income                                                             $6,007.66

                                Less business use of home exp. 1,836.74

                                Revised Net Income                             $4,170.92

1997 Business Expenses

Expenses	Claimed	Allowed by Appeals
Accounting Fees	$ 100.00	$ 100.00
Advertising, Promo	172.90	172.90
Automobile	4,823.98	2,411.99
Interest	1,839.10	87.11
Office Expenses	2,345.63	2,345.63
Telephone	3,356.31	848.09
Insurance	938.70	938.70
Entertainment	96.41	96.41
Misc. Exp.	674.17	674.17
Total Expenses	$14,347.20	$7,675.00

                                Gross Profit reported                            $8,367.28

                                Less expenses allowed         7,675.00

                                Net Income                                                             $ 692.28

                                Less business use of home exp. 692.28

                                Net Income                                                                             Nil

[7]            The following is the Minister's rationale in disallowing expenses for each of the major categories of expense under dispute, as explained by Ms. Cowle, the Appeals Officer.

Automobile Expenses

[8]            As no log was kept by Mr. Richter the Appeals Officers arbitrarily disallowed fifty percent of the vehicle expenses as being unrelated to the business. There was no dispute as to the total amount of car expenditures. Mr. Richter stated that until 1992 he had always been allowed by Revenue Canada ninety percent business use with no need for a log. Although he felt his use was less than ten percent he had always accepted the ninety percent amount.

Telephone Expenses

[9]            As the Minister was not given any breakdown of personal versus business use, the Minster arbitrarily disallowed twenty-five percent of long distance calls and all other charges other than those relating directly to the business line. The Appeals Officer in her testimony also indicated that the total amounts claimed could not be reconciled to Mr. Richter's receipts. She attributed this to accounting errors in inadvertently adding overdue amounts to current amounts in determining the monthly charge. This had a doubling-up effect in some months.

[10]          In 1995 the telephone bill spiked as it was in this year that Mr. Richter attempted to sell steel products overseas. This required significantly more overseas calls. He was ultimately unsuccessful in this steel venture. As these calls were not connected with the products which generated income, the Appeals Officer did not allow any of them. Such calls amounted to $1,673.79.

[11]          Upon questioning, the Appeals Officer acknowledged the amount allowed as telephone expenses in 1997 was incorrect but should have been $2,508.22. She further admitted omitting to include the monthly business line charge of $45.00 per month for seven months. This would amend the telephone expenses for 1997 to $2,823.22.

Interest Expense

[12]          Interest amounts arose on a variety of lending instruments. Again there is no dispute as to the amount of the expenses. The following sets forth the Appeals Officer's reasons for disallowing the interest expenses.

TD Select line

[13]          The following represents the interest charges from TD Select line:

                1993 - $2,908.27

                1994 - $3,651.44

                1995 - $4,671.79

                1996 - $3,491.50

                1997 - $895.48

These claims were all disallowed as the Appeals Officers could find no substantiation that the borrowed funds were invested in the business, though neither could she find any documentation that the borrowed funds were used personally. Mr. Richter certainly recorded this interest in his business books of record as pertaining to the business.

Royal Trust Line of Credit

[14]          No evidence was presented providing a separate breakdown of these interest charges. The Appeals Officer stated that any interest on this line of $5,000.00 was denied, as the loan was taken out in connection with a product, Metrin, which Mr. Richter had ceased handling in the years in question. She could find no substantiation that the borrowed funds related to any other of Mr. Richter's business activities.

Great West Life

[15]          Mr. Richter borrowed against a personal life insurance policy, but again could not offer documents to support the business use of such funds.

Credit Cards

[16]          Interest on the cards was denied as there was no allocation provided between business and personal use.

1995 Halawaty Loan

[17]          Documentation of this outstanding loan from A. Halawaty made it clear that no interest was due until 1998. The $906.00 claimed as interest by Mr. Richter, he stated was really a fee paid to Halawaty to extend the loan to seven years; however, that agreement with Halawaty was signed in 1999 and not in 1995 when the fee was paid.

[18]          Mr. Richter's testimony generally regarding the interest was that all funds would have been borrowed for business use, although upon cross-examination he acknowledged that a very small amount from the credit cards may have been for his personal use.

Miscellaneous Expenses

[19]          The Appeals Officer testified that for 1995 she denied miscellaneous expenses of $1,960.95 as two claims for $752.73 and $709.84 were completely unsubstantiated and one claim for $498.38 represented a trip to Winnipeg for which there was no evidence of a business purpose. Mr. Richter maintained that the trip to Winnipeg was to establish dealers for the Naturally Rite skin care product.

[20]          While Mr. Richter appeared confused at times and was not as well organized as he might have been, he was a credible witness. He was a small business operator who paid more attention to selling anything that might generate a profit than he did to maintaining separate accounts for each product.

[21]          The Respondent relied on general principles enunciated in Njenga v. The Minister of National Revenue, [1997] 2 C.T.C. 8 and Ekeh v. Her Majesty The Queen, [2000] 2 C.T.C. 2248 for imposing a standard of record keeping required of every taxpayer, failing which the taxpayer ought not to be found on balance to have proven deductible expenditures. In that regard I refer to paragraphs 3 and 4 of Njenga:

3.              The Income tax system is based on self monitoring. As a public policy matter the burden of proof of deductions and claims properly rests with the taxpayer. The Tax Court Judge held that persons such as the Appellant must maintain and have available detailed information and documentation in support of the claims they make. We agree with that finding. Ms. Njenga as the Taxpayer is responsible for documenting her own personal affairs in a reasonable manner. Self written receipts and assertion without proof are not sufficient.

4.              The problem of insufficient documentation is further compounded by the fact that the Trial Judge, who is the assessor of credibility, found the applicant to be lacking in this regard.

and also to paragraph 12 of Ekeh:

12.            A taxpayer claiming a deduction for bad debts should be in a position to prove that the amounts thereof have been included in income for the year in question or for a previous year. Claims for long-distance business calls should be substantiated by more than just submitting the residential phone bills on which they are charged. Providing a list of clients and their location would have been useful to both the auditor and the Court. Business use of an automobile should be supported by a logbook, an appointment book, a list of clients visited or something of that nature. There should at least be provided some credible explanation of the business activities requiring the use of the vehicle. None of this was done.

[22]          In Njenga the Appellant was found not to be credible, which, as the Federal Court of Appeal stated, compounded the lack of documentation. Mr. Richter was in fact credible, and did provide receipts, however did not provide a breakdown of such receipts. I concur with Judge Dussault's suggestion in Ekeh as to what is preferable in assisting the Minister and ultimately this Court in determining the legitimate expenditures. I also note his comment that at least some credible explanation should be provided. I find that Mr. Richter has provided a credible explanation for some of the expenses. His sales business was going in several directions at once and so clearly was he. The very nature of his business required significant use of his vehicle and his telephone. There is no dispute, apart from some doubling-up of some telephone expenditures, which I will get to, that the expenses at issue were made. The difficulty is determining firstly whether they were all made for the purpose of gaining or producing income from the business, and secondly whether they are reasonable. I will deal with each category of expenditure.

1.              Automobile Expenses

Until 1992 Mr. Richter had been recording all his vehicle expenses and claiming ninety percent of them as being related to his business. By the assessment made by Canada Customs and Revenue Agency in 1999 he was advised that only fifty percent would be allowed as he had not kept logs of his actual business-related versus personal-related travel. As already indicated, it would have been preferable had he done so, but he had no reason to believe that it was a requirement until being so advised in 1999. His estimate of less than ten percent personal use based on the nature of the requirements of the business I find to be reasonable. He would be well-advised to maintain logs in the future as he is now well aware of the Minister's view on the subject. I make this finding as it is abundantly clear to me that Mr. Richter's business was all-consuming of his time, and his vehicle was a critical element in that business. I would allow ninety percent of the vehicle expenses for 1993 to 1997.

2.              Telephone Expenses

The evidence regarding the telephone expenses left some real question as to the accuracy of the accounting for such expenses. This was the one area where the Appeals Officer disputed the total amounts of expenses and Mr. Richter was not able to verify the numbers. I do not find Mr. Richter has proven telephone expenses beyond those allowed by the Minister, other than in connection with 1995 and 1997.

In 1995 there was agreement that overseas calls in connection with the sale of steel products amounted to $1,672.79. As no actual sales resulted from these calls, the Minister disallowed the expense. I view Mr. Richter's business as a whole, not as a series of independent businesses based on different product-lines. He was in sales. These calls were made as part of that sales business and I find the $1,673.79 a legitimate deductible expenditure as incurred for the purpose of gaining or producing income.

In 1997 the Appeals Officer acknowledged reversing the numbers allowed versus disallowed, as well as admitting business line expenses for seven months had been improperly disallowed. I therefore allow $2,822.22 instead of $848.09.

3.              Interest Expense

Mr. Richter appears to have begged and borrowed from any source he could get his hands on to keep his business afloat. He unfortunately muddled his credit card expenses between business and personal use and I do not intend at this stage to conduct an audit. He borrowed against a personal life insurance policy and while recording the interest arising as a business expense, provided no documented connection. He borrowed from a friend, Audrey Halawaty but his evidence was not convincing on the nature of the $906.00 payment in regards to that loan. He borrowed from Royal Trust in connection with the Metrin product, but in the years in issue was not selling Metrin, although was still very much in the sales business generally. He had a line from Toronto Dominion, the TD Select Line, on which he incurred significant interest expenses. All of these interest charges may well have been in connection with Mr. Richter's business and laid out in accordance with section 20(1)(c) of the Income Tax Act on money borrowed for the purpose of earning income from a business. I simply cannot tell what relates to what. I am satisfied however that it is reasonable to find that a high percentage did relate to the business. A reasonable approach is to allow the interest in connection with the TD Select Line, but not to allow interest charges stemming from the credit cards, the Halawaty loan, Great West Life loan or the Royal Trust line of credit for the reasons indicated above.

4.              Miscellaneous Expenses

With respect to the miscellaneous expenses Mr. Richter has not provided sufficient proof that the expenses were incurred to gain income to overcome the Minister's assumptions.

[23]          In summary, I allow the appeal in part and refer the matter back to the Minister of National Revenue for reconsideration and reassessment on the basis that the following expenses should be allowed:

Vehicle Expenses                  -                ninety percent of the amounts claimed for 1993 to                                                                         1997

Telephone Expenses            -                an additional $1,673.79 in 1995 for a total of                                                                                    $2,629.31 for 1995

                                                                -                a total of $2,823.22 for 1997

Interest Expense                    -                all TD Select Line interest expenses of                                                                                                             $2,908.27 for 1993

                                                                -                $3,651.44 for 1994

                                                                -                $4,671.79 for 1995

                                                                -                $3,491.50 for 1996

                                                                -                $895.48 for 1997

                Signed at Ottawa, Canada, this 26^th day of June, 2001.

"Campbell J. Miller"

J.T.C.C.

COURT FILE NO.:                                                 2000-4797(IT)I

STYLE OF CAUSE:                                               Harold H. Richter v. The Queen

PLACE OF HEARING:                                         Toronto, Ontario

DATE OF HEARING:                                           June 18, 2001

REASONS FOR JUDGMENT BY:      The Honourable Judge Campbell J. Miller

DATE OF JUDGMENT:                                       June 26, 2001

APPEARANCES:

For the Appellant:                                                 The Appellant himself

Counsel for the Respondent:              Brianna Caryll

COUNSEL OF RECORD:

For the Appellant:                

Name:                     

Firm:                       

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2001-4797(IT)I

BETWEEN:

HAROLD H. RICHTER,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on June 18, 2001 at Toronto, Ontario by

the Honourable Judge Campbell J. Miller

Appearances

For the Appellant:                                         The Appellant himself

Counsel for the Respondent:                         Brianna Caryll

JUDGMENT

          The appeal from the reassessment made under the Income Tax Act for the 1992 taxation year is dismissed.

          The appeals from the reassessments made under the Income Tax Act for the 1993, 1994, 1995, 1996 and 1997 taxation years are allowed, without costs, and the matters are referred to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.

          Signed at Ottawa, Canada, this 26^th day of June, 2001.

"Campbell J. Miller"

J.T.C.C.