Date: 20000125
Dockets: 98-498-IT-I; 98-499-IT-I
BETWEEN:
MARIA C. EKEH, EZEKIEL C. EKEH,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent,
Reasons for Judgment
P.R. Dussault, J.T.C.C.
[1] These appeals were heard together under the informal
procedure of this Court.
[2] The appeal of Maria Ekeh is from an assessment for the
1992 taxation year. By that assessment the Minister of National
Revenue (the “Minister”) disallowed an amount of
$2,732.00 (50% of $5,465.00) claimed as maintenance and repair
expenses with respect to a basement apartment in the
appellant’s residence and treated the same as capital
expenditures.
[3] The appeals of Ezekiel Ekeh are from assessments for the
1991, 1992 and 1993 taxation years. By those assessments the
Minister disallowed professional expenses in the amounts of
$15,493.00, $19,683.00 and $19,933.00 respectively for the years
in question.
[4] For 1992, the Minister also disallowed an amount of
$2,732.00 (50% of $5,465.00) as maintenance and repair expenses
with respect to a basement apartment in the appellant’s
residence and treated the same as capital expenditures.
[5] As the question of the nature of the expenses with respect
to the apartment, which is raised in the appeal of Maria Ekeh, is
also in issue in the appeal of Ezekiel Ekeh for his 1992 taxation
year, I will only refer to the Reply to the Notice of Appeal (the
“Reply”) filed in his case.
[6] In assessing the appellant, the Minister made the
assumptions of fact stated in paragraph s. 11.(a) to (gg) of the
Reply. Those paragraphs read as follows:
(a) the facts hereinbefore admitted or stated;
RENTAL EXPENSES
(b) on July 31, 1992, the Appellant and his spouse purchased
the Property for $175,000.00;
(c) at all material times, the Property was the principal
residence of the Appellant, his spouse and their three
children;
(d) from July 1, 1992 to December 31, 1992, the Appellant and
his spouse rented out the basement of the Property (the
"Basement Apartment"), reported gross rental income in
the amount of $1,470.00, maintenance and repairs expenses in the
amount of $5,465.88, other rental expenses in the amount of
$2,744.21 and net rental loss in the amount of $6,740.09;
(e) in or around September 1992, the Appellant and his spouse
incurred expenses to renovate the Basement Apartment to make it
suitable for rental purpose as follows:
C.L. Plumbing And Drain $3,425.00
C.L. Plumbing And Drain 1,050.00
Bath/Shower 360.00
Stove 250.00
Doors/Painting
340.00
Total $5,425.00
(f) the amounts paid to C.L. Plumbing and Drain were incurred
for construction of walls in kitchen area, for installation of
insulation of all outer walls, drywalls, all pipes and waste line
for vanity, bath tub and washing machine, for supply and
installation of doors for laundry room and bedroom in the
Basement Apartment;
(g) the Basement Apartment could not be rented out without the
renovation;
(h) in the 1992 taxation year, the Basement Apartment was
rented out for 3 months after the renovation was completed;
(i) the claimed maintenance and repairs expenses were capital
outlays or expenditures;
(j) the renovated Basement Apartment was a property of Class 1
of Schedule II of the Income Tax Regulations (the
"Regulations");
Professional Expenses
(k) at all material times, the Appellant was a full time
employee of the Ontario Ministry of Agriculture (the
"Employer");
(l) in the 1991, 1992 and 1993 taxation years, the Appellant
operated the Consulting Business, including preparation of income
tax returns and purported consulting and research activities as
an intermediary between Canadian suppliers and African purchasers
of goods such as foodstuffs and pharmaceutical products;
(m) the Appellant did not provide any books and records to
support gross income reported and only provided documentation
regarding some of the expenses claimed;
(n) in the 1991 taxation year, the Appellant incurred $245.00
for typing assignment and sought to claim as advertising
expenses;
(o) in the 1992 taxation year, the Appellant claimed various
food expenses including $397.00 for frozen beef and $266.00 for
numerous cases of beers as meals and entertainment expenses;
(p) the Appellant and his family only owned one motor vehicle
(the "Vehicle") and the Appellant used the Vehicle for
driving to the Employer's place of business;
(q) in the 1991, 1992 and 1993 taxation years, the Appellant
did not maintain a log book for the use of the Vehicle but sought
to claim 90%, 90% and 75% of the vehicle expenses for the
Consulting Business;
(r) at all material times, the Appellant's use of the
Vehicle for the Consulting Business was minimal;
(s) in the 1991 taxation year, the Appellant incurred travel
expenses in respect of a trip to Lagos, Nigeria in the amount of
$2,292.00;
(t) the travel expenses claimed by the Appellant were not
incurred for the purpose of gaining or producing income from a
business or property but were personal or living expense;
(u) in the 1991, 1992 and 1993 taxation years, the Appellant
claimed bad debts in the amounts of $1,820.00, $7,470.06 and
$5,865.58 (the "Debts");
(v) the Appellant did not include the amount of the Debts in
computing his income from the Consulting Business;
(w) the Appellant did not take any legal action to collect the
Debts;
(x) in the 1993 taxation year, the Appellant claimed data and
market research expenses in the amount of $4,013.00 for
feasibility study of supplying African customers with goods such
as foodstuffs and pharmaceutical products from Canada;
(y) the Appellant did not provide any documentation to support
the data and market research expenses or that any foreign
business activities existed in the 1992 and 1993 taxation
years;
(z) in the 1991, 1992 and 1993 taxation years, the Appellant
claimed office expenses in the amounts of $6,403.51, $4,624.73
and $3,965.76, respectively;
(aa) the Appellant provided documentation to support some of
the expenses claimed as office expenses including expenses for
home telephone line, numerous long distance calls, Time magazine,
a cabinet and an used air conditioner;
(bb) the disallowed office expenses were not incurred, or if
incurred, were not incurred to earn income, were capital in
nature, or personal or living expenses of the Appellant;
(cc) in the 1992 and 1993 taxation years, the Appellant
claimed business use of home expenses in the amounts of $2,633.15
(13.67% of total expenses in the amount of $19,272.95) and
$4,159.89 (25% of total expenses in the amount of $16,639.55),
respectively;
(dd) the Appellant maintained a small office by partitioning
his master bedroom and it pertained to not more than 10% of the
Property;
(ee) during each taxation year, the Appellant used his home
office for not more than 3 months during the tax season;
(ff) in the 1991, 1992 and 1993 taxation years, the
Appellant's business use of home expenses were $250.00,
$222.00 and $415.00, respectively;
(gg) expenses claimed by the Appellant in respect of the
Consulting Business in excess of $8,832.00, $9,624.97 and
$9,225.50 allowed by the Minister in the 1991, 1992 and 1993
taxation years, as shown in Schedules "A",
"B" and "C" attached hereto,[1] respectively, were not made or
incurred, or if made or incurred, were not made or incurred by
the Appellant for the purpose of gaining or producing income from
a property or business, were capital in nature, personal or
living expenses of the Appellant, or not reasonable in the
circumstances.
[7] I will deal first with the amount of $2,732.00 claimed by
each appellant (for a total of $5,465.) as maintenance and repair
expenses described in paragraph 11.(e) of the Reply. Despite the
assertion by Mr. Ekeh that the basement was already finished, the
evidence is clearly that the amount of $5,425.00 was paid for a
major renovation of the basement apartment in the
appellants’ residence (Exhibits R-2 and R-3). By any
standard, such expenses as those described in paragraph 11.(e)
and 11.(f) of the Reply would have been paid for the purpose of
improving the existing property and acquiring capital property.
They are definitely capital and not current in nature.
[8] Secondly, as to the professional expenses disallowed in
1991, 1992 and 1993, it is important to note that the appellant,
although he is an accountant, does not maintain any books or
records despite his assertion that he does. None were submitted
in evidence. The various documents provided are such that they
would not enable a reasonable person to ascertain, with a minimum
degree of accuracy, either his income or the expenses which he
would be entitled to deduct. Everything seems to be in a complete
state of disarray. The appellant himself admits that he is not
keeping the “best records” and that he has “a
lousy bookkeeping” system although he says that he is an
honest man and that he never intended to cheat. He blames the
situation on the lack of resources to hire an assistant. One of
the problems here is a severe lack of source documents.
[9] Schedules A, B and C to the Reply indicate for the years
1991, 1992 and 1993 that only 36.7%, 18.9% and 16.7% of the
expenses claimed were supported by vouchers. However, the
appellant was allowed 36%, 32.8% and 31.6% of the expenses
claimed for each of the years in question. Most of the expenses
disallowed were so disallowed because they were either not
supported by vouchers, or were personal in nature. At this point,
it might be useful to reproduce comments made by Mr. Chakraborty,
the auditor, in his report. The report was filed in evidence as
Exhibit R-1, Tab 4 and Mr. Chakraborty referred to it during his
testimony as to why each of the expenses claimed was disallowed.
At page 6 he states:
In addition to the preparation of tax returns, the taxpayer
also maintains that his business, (Blue Chips Management and
Accounting), acts as an intermediary between Canadian suppliers
and African purchasers, of goods such as foodstuffs and
pharmaceutical products. However, despite repeated requests, the
taxpayer was unable to provide any objective documentation to
support any business activity of this nature. The taxpayer did
provide a business plan (see Exhibit 1) and he also provided
approximately 20 questionnaires which he stated are used to gauge
the interest of Canadian suppliers. However, all the
questionnaires provided were blank, except one. Moreover, the
taxpayer is vague as to who his clients are, what exactly are the
services he provides, and how exactly he gets paid. Based on
these facts, expense claims relating to this aspect of the
taxpayer’s business have been restricted. Although the
taxpayer is reporting income from this activity, there is no
source documentation as to how this income was calculated, nor
what was required in order to earn the income.
Despite being a tax preparer, the taxpayer’s own records
are severely lacking. The taxpayer has absolutely no source
documents regarding income, either foreign or domestic. The
taxpayer only retains source documents regarding expense claims,
and many are of a questionable nature.
Finally, it is noted that many cheques written by the taxpayer
are under the name “Globe Enterprises.” The taxpayer
explained that this was a previous business venture that has
since stopped operating, however the taxpayer still maintains and
uses the bank account.
[10] On numerous occasions, both before and after the
commencement of the hearing, which had to be interrupted for many
months, the appellant was given an opportunity to present
documents that would help to substantiate the expenses claimed,
but to no avail. The documents presented in evidence are
basically the same as those reviewed by the auditor.
[11] At the hearing, the appellant fumbled through his papers
for almost two days trying to provide more cogent evidence, but
without success. Some of the documents provided are totally
useless, when not self-serving (Exhibits A-5 and A-14). The
explanations offered are incomplete and unconvincing. They are
sometimes contradictory and sometimes vague if not outright
confusing.
[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.
[13] Referring to a market survey and entering blank
questionnaires as evidence of that survey does not get one very
far, especially when the explanation offered is that the
questionnaires are blank because the information that should
appear thereon is secret.
[14] When a 4-page document purporting to be a market research
report for which a sum in excess of $4,000. has been paid is
provided to an auditor, one would at least expect a credible
explanation to be forthcoming when the auditor considers the
payment unreasonable. Here again the appellant failed.
[15] Credibility is obviously an issue. For example, when the
appellant insists that he maintains a 15 x 20 ft home office on
the second floor of his residence while Exhibit A-1 indicates
that the largest room on the second floor is the master bedroom
which is 3.89 x 3.16 m or 12.76 x 10.37 ft, one is left wondering
to what extent the appellant has been exaggerating all his
business expenses.
[16] Thus, for example, despite the explanations offered by
the appellant as to the minimal use of his automobile for
personal purposes, I am not prepared to accept his claim that the
commercial use of his vehicle was 90%, 90% and 75% for 1991, 1992
and 1993 respectively. As I said before, the appellant does not
maintain a logbook and does not even seem to have an appointment
book.
[17] When the appellant claims an amount of $245.00 for
advertising expenses in 1991 and the document provided in support
(Exhibit A-15) relates to miscellaneous typing, mostly of a
49-page assignment at $5.00 a page, for a total of $225.00 (the
amount should have been $245.00), the inescapable conclusion is
that the appellant is indeed claiming expenses that are personal
in nature despite his assertion to the contrary. I would add here
that receipts filed with the appellant’s 1991 tax return
show that he was registered as a student with the Certified
General Accountants Association of Ontario during that year
(Exhibit R-1, Tab 1).
[18] The foregoing examples are sufficient to illustrate the
point.
[19] Another feature of the appellant’s affairs is that
many cheques purportedly in payment of expenses of the business
carried by him under the name of Blue Chips Management &
Financial Consulting and Associates International are drawn on a
bank account in the name of Globe Enterprises. Although the
auditor mentions in his report that he had been informed that
this was a previous business operated by the appellant and that
the appellant was still using the bank account for Blue Chips,
the relation between the two businesses was never explained by
the appellant.
[20] Subsection 230(1) of the Income Tax Act provides
as follows:
SECTION 230: Records and books.
Every person carrying on business and every person who is
required, by or pursuant to this Act, to pay or collect taxes or
other amounts shall keep records and books of account (including
an annual inventory kept in prescribed manner) at the
person’s place of business or residence in Canada or at
such other place as may be designated by the Minister, in such
form and containing such information as will enable the taxes
payable under this Act or the taxes or other amounts that should
have been deducted, withheld or collected to be determined.
[21] Obviously, this was not done in the present case.
Considering the evidence submitted I am not convinced on a
balance of probabilities that the assessments disallowing
business expenses in the amounts of $15,493.00, $19,683.00 and
$19,933.00 for the 1991, 1992 and 1993 taxation years
respectively are wrong.
[22] I might add here some comments made by the Federal Court
of Appeal in Njenga v. R., [1997] 2 C.T.C. 8. At page 9,
paragraphs 3 and 4, it is said:
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.
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.
[23] In circumstances such as these, which closely resemble
those of the present case, a taxpayer has no one but himself to
blame for his misfortune. As both an accountant and a tax
preparer, the appellant should have been well aware of his
responsibilities.
[24] The appeals are dismissed.
Signed at Ottawa, Canada, this 25th day of January 2000.
“P.R. Dussault”
J.T.C.C.
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