Date: 19990425
Docket: 1999-21-IT-I
BETWEEN:
H.R. NIEBOER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
(Delivered orally from the Bench at Fredericton, New
Brunswick, on Tuesday, January 25, 2000)
Hamlyn, J.T.C.C.
[1] This is in the matter of H. Nieboer and Her Majesty the
Queen; and the appeal notice relates to 1993, 1994, 1995, 1996
and 1997 taxation years. The Amended Reply to the Notice of
Appeal was filed on consent of the Appellant. The Appellant has
withdrawn her Notice of Appeal for the 1993 taxation year, and I
understand the Appellant has agreed to the Minister amending the
Reply to the Notice of Appeal to include the 1997 taxation
year.[1]
[2] By Notice of Assessment dated July 27, 1998, the
Minister assessed the Appellant's 1997 income tax return,
adding $2,920 received from the Royal Conservatory of Music to
the amount of self-employed income reported by the
Appellant.
[3] By Notices of Reassessment dated
November 18, 1997, the Minister reassessed the
Appellant's 1994, 1995 and 1996 income tax returns to
disallow expenses totalling $9,995; $13,995 and $3,586,
respectively, claimed by the Appellant against her professional
income.
[4] The Appellant filed a valid Notice of Objection to the
1994, 1995 and 1996 assessments and by Notices of Reassessment
dated September 15, 1998, the Minister varied the 1994,
1995 and 1996 assessments to permit the deduction of $2,840;
$4,532 and $2,391, respectively, which were previously
disallowed.
[5] The Appellant filed a valid Notice of Objection to the
1997 taxation year on November 9, 1998 to which the
Minister did not reply. In response to that objection the
Minister has conceded the position and has stated that the
Minister erred in his pleading of the Reply, by adding the amount
of $2,920 to the 1997 business income as the Appellant already
had included that same amount in the gross business income report
at the time of filing her 1997 return.
The Appeal
[6] In response to the reassessments resulting from the Notice
of Objection for 1994, 1995 and 1996, the Appellant filed with
this Court a brief document dated October 14, 1998
which reads in part: “Re: 1993 and 1994 Tax Reassessments
and appeal of 1995, 1996, 1997 Tax Reassessments.”
[7] This is an “appeal to the Tax Court of
Canada.” ... “My reasons for appealing are primarily
because Revenue Canada is disallowing business expenses as
personal expenses.” The Appellant, in the document filed
with the Court as Exhibit R-2, expanded on her view of the
reassessments in the letter to Revenue Canada, and she also
expanded in relation to the expenses in her filed
Exhibits A-1, A-2 and A-3.
Minister's Assumptions
[8] In the Minister's pleading are contained the
Minister's assumptions. The assumptions were reviewed with
the Appellant, and I will read the assumptions (a) through to (u)
with the response of the Appellant as given in the course of the
proceeding:
(a) the Appellant was a self-employed music teacher
during the 1994, 1995 and 1996 taxation years;
The Appellant said in addition to being a music teacher, she
was a performer, a conductor, an adjudicator, and an
examiner.
(b) the majority of the Appellant's professional income
reported in the 1994, 1995 and 1996 taxation years was derived
from private lessons and a contract with
St Andrews Church as choir director and organist;
In addition, the Appellant added she also derived income from
performing, conducting, adjudicating, and examining.
(c) the Appellant's contract with
St. Andrews Church was terminated in 1996;
The Appellant stated that the termination was
January 1996.
(d) the Appellant claimed amounts in the 1994 and 1995
taxation years as business expenses for which she did not provide
documentation to support her claim that the amounts were incurred
to earn income from a business;
She stated emphatically, ‘No, this was not true.’
She said she accounted for the receipts and had developed working
papers based on receipts.
(e) the said amounts referred to in paragraph (d) claimed
by the Appellant were not incurred by the Appellant for the
purpose of gaining or producing income from a business;
The Appellant stated her schedules showed it was incurred for
this purpose.
(f) the Appellant claimed amounts in 1994 and 1995 taxation
years relating to personal expenses as business expenses and
capital additions;
The Appellant said they were not personal expenses and she
disagreed with the capital addition assessments.
(g) the said amounts referred to in paragraph (f) claimed
by the Appellant were not incurred by the Appellant for the
purpose of gaining or producing income from a business but were
personal expenses of the Appellant;
The Appellant said: ‘No, they were not personal
expenses.’
(h) in the 1994 and 1995 taxation years the Appellant claimed
amounts relating to capital additions to her personal residence
and studio/recording equipment as current business expenses;
The Appellant disagreed with this assumption and said the
expenses were for repairs and maintenance.
(i) the said amounts referred to in paragraph (h) relate to a
capital outlay and accordingly are considered to be additions to
the capital cost of the assets;
She said in her response that the previous paragraph response
applied to this one.
(j) the Appellant was entitled to claim a current expense in
relation to these capital outlays limited to the amount
calculated on a prescribed rate and business usage percent in
accordance with section 13 and regulation 1100 of the
Act and the Appellant chose not to make this claim;
She agreed with the assumption.
(k) the Appellant resided in an apartment located at
267 St. George Street, Toronto
(“Apt 1”) from January 1993 to
August 1993;
She said while she believed the 1993 taxation year was statute
barred, she also had in this dwelling a business use and
therefore had a claim of business use of home expenses.
(l) the Appellant resided in an apartment at
19 Forest Hill Road, Fredericton
(“Apt 2”) from August 1993 to
August 1994;
She said, yes, she resided there; but there was also in her
view a business use in relation to that dwelling.
(m) the Appellant resided in a house located at
184 Forest Hill Road, Fredericton (the
“House") from September 1994 until at least
December 1996;
She agreed with the assumption; but also maintained there was
business use of the dwelling.
(n) the Appellant claimed amounts for ‘business use of
home’ in the 1994, 1995 and 1996 taxation years based on
business use percentages of: 100% for Apt 1 and Apt 2
in 1993; 50% for Apt 2 in 1994 and 50% for the House in
1994, 1995 and 1996;
She said this was erroneous, she claimed only 50%. The Court
will comment on this evidence later in this Judgment.
(o) the actual business use percentages based on the area and
usage exclusive to earning income from business was: 5% for
Apt 1; 25% for Apt 2 and 40% for the House;
The Appellant disagreed with the allocations.
(p) amounts were claimed by the Appellant as business expenses
in the 1994 and 1995 taxation years relating to Apt 2 and
the House;
She agreed with the assumption.
(q) the said amounts referred to in paragraph (p), were not
deductible in full as business expenses however they were allowed
as ‘business use of home’ expenses calculated at the
applicable actual business use percentages;
She agreed with that paragraph.
(r) the ‘business use of home’ amounts claimed by
the Appellant in the 1994, 1995 and 1996 taxation years were not
deductible as claimed and reduced amounts were allowed based on
recalculations made by applying the actual business use
percentages to revised amounts;
The Appellant agreed with that paragraph and its outcome.
(s) in the 1995 taxation year the Appellant claimed a
carryforward of ‘business use of home’ amount from
the 1993 taxation year;
She said that is what she understood had happened and she
believed that it was credited by a concept known as
‘rolling balances’.
(t) the Appellant’s claim in the 1995 taxation year of
the carryforward of the ‘business use of home’ amount
from the 1993 taxation year is not permitted in accordance with
paragraph 18(12)(c) of the Act which requires that the
said amount must be claimed in the immediately following taxation
year in which there is business income against which to claim
it;
She said that her comment in relation to the previous
paragraph applied to this paragraph.
(u) in 1997 the Appellant failed to report self employed
income of $2,920 from the Royal Conservatory of Music.
The parties agreed that this issue had now been resolved and
will be reflected in the decision part of this judgment.
Issues as Defined by the Pleadings
[9] The issues were set forth in the Amended Reply. The first
issue was whether the unsupported amounts claimed by the
Appellant as business expenses in the 1994 and 1995 taxation
years were properly disallowed as they were not shown to be
incurred for the purpose of gaining or producing income from a
business.
[10] Secondly, whether the amounts relating to personal
expenses claimed by the Appellant as business expenses and
capital additions in the 1994 and 1995 taxation years were
properly disallowed as they were not incurred for the purpose of
gaining or producing income from a business and they were
personal or living expenses.
[11] Thirdly, whether the amounts relating to capital items
claimed as current expenses in the 1994 and 1995 taxation years
were properly disallowed and capitalized as they were outlays in
respect of a capital expenditure.
[12] Fourthly, whether the ‘business use of home’
amounts allowed in 1994, 1995 and 1996 taxation years were
calculated using the actual percentages of business use of the
Appellant’s homes had been properly reduced to reflect the
portion of the homes used exclusively to earn income from a
business.
[13] Fifthly, whether the carryforward of the 1993
‘business use of home’ amount was properly disallowed
in the 1995 taxation year and allowed in the 1994 taxation
year.
[14] And sixthly, whether the amount of $2,920 was properly
added to the Appellant’s 1997 reported net business income
(now resolved).
The Focus of the Analysis
[15] Basically the focus of the appeal as stated by the
Appellant was directed towards deductible expenses and to whether
expenses were on capital account or current account.
[16] Generally speaking, if an expense is deductible for
accounting purposes, then it will be deductible for tax purposes
unless there is a specific income tax provision disallowing the
deduction.
[17] If an outlay or expense is made or incurred by a taxpayer
in accordance with the principles of commercial trading or
accepted business practice and is made or incurred for the
purpose of gaining or producing income from his business, its
amount is deductible for income tax purposes.
[18] Thus, to be deductible, an expenditure must satisfy two
tests: (1) it must be incurred for the purpose of gaining or
producing income from a business or property; (2) it must be a
current, rather than a capital, expense.
Capital v. Current Expenses
[19] What is the difference between a capital or current
expense? There is no single definitive or conclusive test for
determining whether an expenditure is of a capital or revenue in
nature; however, essentially expenditures can be on account of
capital, if they are incurred to bring assets of enduring value
into existence.
Documentation
[20] The Court was asked to deal with is the question of
documentation. The Respondent said that the Appellant did not
provide the tax authorities with the necessary documentation to
support her claim that the amounts were incurred to earn an
income from a business.
[21] A basic feature of the Canadian tax system is that the
taxpayers are relied upon to voluntarily report their income for
each taxation year and to estimate the tax payable thereon. One
of the results of this tax self-assessing system is that the
taxpayer has the burden of proving that an assessment is
incorrect because it is assumed that the taxpayer has all of the
basic data under his or her control upon which a correct
assessment can be made.
[22] This rule is being reinforced by subsection 230(1) of the
Act which clearly states:
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.
Analysis
[23] In terms of analysis, on the question of documentation I
conclude in general that the Appellant has sufficient
documentation to support her expense claims that she has made
with some exceptions; however the question remains, are the
expenses claimed within the provisions of the Income Tax
Act (“the Act”).
Meals and Entertainment
[24] First of all, dealing with meals and entertainment, and
promotional expense claims for the 1994 and 1995 taxation years,
the Minister denied some of the Appellant’s meal and
entertainment and promotional expense claims on the basis that
they were not incurred for the purpose of gaining or producing
income from a business, and that they were personal expenses of
the Appellant.
[25] The Appellant’s evidence indicated that each
expenditures could be related to her business activities; could
be identified and shown to be directed to specific clients or
client groups. As well, her expenditures were directed to
organizations she worked with, including the Royal Conservatory
of Music and a particular church.
[26] I find that through several documents there is a
conclusion to be drawn that the expenses have been documented and
while somewhat extensive, they were expended for the purpose of
gaining or producing income from her business. The Court will
deal with the specific amounts that are allowed at the conclusion
of these Reasons for Judgment.
Clothing
[27] In terms of other expenses including costumes, clothing,
hair, cosmetics, stockings, glasses for the 1994 and 1995
taxation years, the Appellant’s evidence was directed that
these expenditures were all related to her business activities as
a performer or an adjudicator, and did not form part of her day
to day attire or day to day use; however, I have reviewed the
expenditures and the documents that have been filed. The itemized
expenses are highly personal and I conclude these expenses in all
instances were personal choice items and the specifics of the
purchases as found in Exhibit R-4 does not lead the Court
to the Appellant’s assertion. I find these expenses were
personal expenditures. There is an exception in relation to the
Appellants organ shoes, but I could not ascertain from the
evidence the detail of the organ shoes expenses and so they are
disallowed.
Professional Development and Concert Tickets
[28] The Appellant maintained that her attendance at concerts
was part of her professional development and her attendance at
seminars was part of her professional development. I had some
problems with this part of the claim. The specifics of the
disallowed expenses related to items that were either unspecified
or unclear, and on the evidence they were not directly addressed
by the Appellant, and as such I conclude that they were not
deductible for the 1994 taxation year.
[29] For the 1994 taxation year the question of concert
tickets – the Appellant’s evidence was that these
tickets related to expenditure for students who attended concerts
as part of their curriculum with the Appellant and reported back
to the Appellant in relation to the concerts. The expenditure was
$117 and I find it to be a business expenditure.
Music Expenditures
[30] The Music Expenditures for 1994 and 1995 related to music
scores, to batons, to pipes, the tapes, the CDs, et cetera. The
Appellant’s position is that these expenditures were for
business activities and this essentially was not challenged by
the Respondent; however, the Appellant maintains the music
expenditures did not have a useful life of more than one year and
that they were currently consumed. The Respondent’s
position was the music expenditures had a larger life, had an
enduring benefit, and such expenditures were to be treated as
capital outlays pursuant to the Act.
[31] Once again my function is to review the evidence that was
tendered. The Court concludes that the expenditures titled under
the heading of music were capital in nature. They form part of
the Appellant’s assets and in accordance with the
Act should be capitalized.
Studio and Recording Expenses
[32] The Appellant sought to deduct expenses in relation to
her studio by stating expenditures for Christmas trees, Christmas
decorations, tapes, rechargeable batteries, drapes et cetera;
were for the exclusive use of her business clients.
[33] After hearing all the evidence and reviewing
Exhibit R-4, the Court’s conclusion is that
these expenditures were not related, except in a peripheral way,
to the gaining or producing of income. They were personal to the
Appellant and the Court finds that these expenditures
characterization for tax purposes should be personal and not
deductible as business expenses.
Garden Expenses
[34] For the 1995 taxation year $2,439.45 was claimed as
business use home expenses to landscape the Appellant’s
property. The Court is not convinced that these expenditures were
for the purpose of gaining or producing income, although once
again the Appellant argued that they were and it was tailored to
her specific clientele. The Court concludes on the totality of
the evidence that these expenses were personal for the Appellant
and therefore not deductible.
Repairs and Maintenance
[35] Also, for the 1995 taxation year under the heading of
repairs and maintenance – this was a general category that
had several things in it – insecticide, felt pads, snow
shovelling, cleaning supplies, sand paper, glue, curtain rods,
rubber boots, et cetera. The Court concludes from the evidence
and the totality of the evidence that these expenditures were
related to daily living costs and were personal to the Appellant;
however, the Court concluded that there were certain exceptions
and finds that these expenditures have been proven and this goes
back to the documentation point, that in relation to certain
renovations $636 should be allowed on capital account; $30 in
relation to piano tuning should be allowed as a current expense;
$284 in relation to an eaves trough should be allowed as a
current expense; and $31.60 in relation to a sump pump expenses
should be allowed as a current expense.
Business Use of the Home
[36] Now we come to business use of the home for 1993, 1994,
1995 and 1996. The reason 1993 is included is because of the roll
over provision that is provided in the Act and that
affects 1994 and the subsequent years.
[37] The question is, what are the total expenses and what
square footage of use in the Appellant’s various homes was
used for the business use of the home?
[38] Now going back to the Amended Reply and interpreting the
Reply to Notice of Appeal the Appellant claimed amounts for work
space in the home in the 1994, 1995 and 1996 taxation years based
on the following business use percentages. In 1993, apartment 1,
100%; apartment 2, 100%. In 1994, apartment 2, 50%;
house, 50%. In 1995, house, 50%. In 1996, house, 50%.
[39] The Minister assumed the percentage of the total square
footage of the home that the Appellant used for business purposes
was as follows: for 1993 the apartment 5%; for apartment 2, 25%.
For 1994, apartment 2, 25%; for the house, 40%. In 1995 for the
house, 40%. For 1996, 40%.
[40] In this area I had some problems with the evidence; and
the percentage use is a question of reviewing the evidence and
finding an answer. Apartment 1 in Toronto was apparently a
very small apartment, and the Appellant’s client’s
base was not that large. There seems to be some argument between
the Appellant and the Crown how much it was, but it was not a
large client base. The Appellant from the evidence and from what
I saw in the documentation that was filed as exhibits, lived in
virtually the same area that was used for the business use of the
home. Apartment 2 in Fredericton was a larger apartment and
the client base was much bigger and in that same space the
Appellant also used as her personal living space.
[41] The evidence of the Appellant on this issue (square
footage usage) was conflicting in that the Appellant said in
relation to apartment 1 in Toronto (and the Fredericton
apartment) she only claimed 50%; whereas her tax return according
to the tax return that was filed, was a claim of 100%. This
caused the Court some difficulty.
[42] There was also some conflict in relation to the
Fredericton property (the “house”) as to the amount
of taxes that were paid. The Appellant’s evidence was one
figure, the Crown’s evidence was another figure, and I have
resolved that question in finding that the Crown’s position
was not dislodged.
[43] In Exhibit R-5 the Minister develops a
percentage for the business use of the home. In his determination
he took into account the common areas, and took into account
personal use; in another taxation year in relation to the
Fredericton house; the Minister also accounted for another
unrelated business use, that is, a room and board operation.
[44] In summary, the Minister concluded that the Toronto
apartment (apt. 1) the business in the home use was 5%, for the
Fredericton apartment (apt. 2), 25%, and for the Fredericton
house 40%. The Appellant’s argument was that the music
business clients had full and extensive use of the
Appellant’s business facilities and that her allotment is
correct and should be accepted. However, the Court had to
consider all the use evidence including the common use areas and
the evaluation of evidentiary conflicts. The Court finds the
evidentiary conflicts were resolved in favour of the
Crown’s position; as the Court concludes that the
Minister’s use assumptions which the Appellant had the onus
to dislodge have not been dislodged; and on that basis the
Minister’s allotment of percentage uses were correct.
Decision
[45] For the 1994 taxation year, the appeal is allowed and is
referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that the Appellant
is entitled to deduct $2,588 for meals and entertainment and $177
for tickets. The amount of $2,159 expended for music and supplies
is on capital account.
[46] For the 1995 taxation year, the appeal is allowed and
referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that the Appellant
is entitled to deduct $1,595 for meals and entertainment, $30 for
piano tuning, $284 for maintenance and repair of the eaves and
$31.60 for maintenance and repair to the sump pump. The amount of
$2,224 expended for music and supplies is on capital account. The
amount of $636 for renovations, repairs and maintenance is on
capital account.
[47] For the 1996 taxation year, the appeal is dismissed.
[48] For the 1997 taxation year, the appeal is allowed and
referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that the Minister
erred in adding $2,920 to the Appellant’s 1997 business
income.
Edited and signed at Ottawa, Canada,
this 25th day of April 2000
"D.Hamlyn"
J.T.C.C.
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