Date: 20000823
Docket: 98-1640-IT-G
BETWEEN:
AZIZ MÉRABET,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
P.R. Dussault, J.T.C.C.
[1] I
am rendering my judgment in the case of Aziz Mérabet
(Court file No. 98-1640(IT)G), and I do so by
referring—as I asked you to do for the purposes of your
arguments—to the Reply to the Notice of Appeal, in which
the various issues are dealt with. I will begin with
paragraph 12, which reads as follows:
[TRANSLATION]
Must the interest income of $10,567, $11,133 and $8,137 be
added to the appellant's income for the 1991, 1992 and 1993
taxation years, respectively?
[2]
My decision on this is yes. Those amounts must be included in the
appellant's income. The respondent used
subsection 56(4.1) of the Income Tax Act ("the
Act"), which seems to me to be applicable here in
view of the evidence provided.
[3] I
hasten to add that it would have been possible simply not to add
that income and to disallow all the interest paid—thus, not
to add the interest earned by Mr. Mérabet's son,
which was added to Mr. Mérabet's income, and to
disallow all the interest paid, since there is definitely no
reasonable expectation of earning income where 12 percent
interest is paid to receive interest at a rate of
8 percent.
[4]
The mathematical result would have been exactly the same as
adding income under subsection 56(4.1) and disallowing just the
excess interest of $1,799 for 1991 and $6,281 for 1993.
[5]
This also takes into account paragraphs 17 and 18 of the Reply to
the Notice of Appeal.
[6] I
turn now to paragraph 13, which reads as follows:
[TRANSLATION]
For the 1991 to 1993 taxation years, can the appellant deduct
from his income rental losses of $8,635 and $3,145,
respectively?
[7]
My answer is no. There is no reasonable expectation of profit
here insofar as, first of all, we must note the personal element
of renting rooms to family members, namely the appellant's
son, parents and brother. In the end, what those people actually
did was pay part of the claimed expenses. With the figures that
were given, it is obvious that there is absolutely no reasonable
expectation of profit. What is involved is clearly what the
Act refers to as personal or living expenses. I refer to
paragraph 18(1)(h) of the Act, which
states:
[N]o deduction shall be made in respect of personal or living
expenses of the taxpayer, other than . . . .
[8]
The exception is not applicable in the case at bar.
Subsection 248(1) of the Act defines "personal
or living expenses" as follows:
. . . the expenses of properties maintained by any person for
the use or benefit of the taxpayer or any person connected with
the taxpayer by blood relationship, marriage or adoption, and not
maintained in connection with a business carried on for profit or
with a reasonable expectation of profit.
[9]
With regard to 1991, I must also note that the appellant did not
even own the home in which rooms were rented. The assessment is
therefore confirmed with respect to paragraph 13 as
well.
[10] Paragraph
14 reads as follows:
[TRANSLATION]
For the 1992 taxation year, is the amount of twenty-two
thousand eight hundred and fifty dollars [and here I make a
correction by substituting eight hundred and fifty-one dollars
and seventeen cents for eight hundred and fifty dollars] claimed
as part of the appellant's business expenses deductible from
the appellant's business income?
[11] My answer
is no. There is absolutely no evidence that that $22,000 or so in
expenses was wrongfully disallowed.
[12] First of
all, the expenses claimed under a number of headings contain an
indeterminate percentage of personal expenses; such is the case
for the use of the vehicle, and a breakdown of the expenses
claimed, allowed and disallowed can be found on page 3 of
the Reply to the Notice of Appeal, in paragraph 4(b)(i).
[13] In
particular, the evidence shows thatunder the headings
"Maintenance and Repairs" and "Motor Vehicle"
there is an indeterminate percentage of personal expenses, first
for the appellant's use of his vehicle, which he said he used
to go to work—and that is a personal expense, never a
business expense—and second for the use of a second vehicle
by his spouse.
[14] As for
the expenses relating to the use of a vehicle for business
purposes, the evidence definitely does not make it possible to go
beyond the 25 percent allowed, especially since the appellant did
not keep any record of his trips.
[15] With
regard to the other expenses disallowed under the various
headings, there is nothing other than the appellant's
testimony to enable one to connect them to the business. The
evidence is merely a general assertion, without any specific or
detailed explanation of the nature of the expenses and how they
may be related to the operation of a business.
[16] The fact
that the appellant has already claimed personal expenses in
connection with car expenses suggests that here too an
indeterminate proportion of the claimed expenses could be
personal in nature.
[17] It is
therefore on the basis of insufficient evidence that I find
myself unable to vary the amount of $22,851.17 that was
disallowed.
Paragraph 15 reads as follows:
[TRANSLATION]
For the 1992 and 1993 taxation years, is the appellant
entitled to business-use-of-home expenses?
My answer is yes for 1992, and I refer here to
subsection 18(12) of the Act, which states:
Notwithstanding any other provision of this Act, in computing
an individual's income from a business for a taxation
year,
(a)
no amount shall be deducted in respect of an otherwise deductible
amount for any part (in this subsection referred to as the
"work space") of a self-contained domestic
establishment in which the individual resides, except to the
extent that the work space is either
(i) the individual's principal place of business, or
(ii) used exclusively for the purpose of earning income from
business and used on a regular and continuous basis for meeting
clients, customers or patients of the individual in respect of
the business.
[18] I think
that, basically, the reason the expenses were disallowed can be
found—and I referred to it earlier—in
subparagraph (nn) of paragraph 11 of the Reply to the
Notice of Appeal. That subparagraph is on page 9, and it
reads as follows:
[TRANSLATION]
The living room of the appellant's home was not used
exclusively for the purpose of earning income from business and
for meeting clients.
[19] During
argument, the appellant referred to the use of both the dining
room and the living room, one as an office and the other to see
clients.
[20] However,
what I was able to determine during the evidence, during
Mr. Mérabet's evidence in chief or during his
cross-examination, is that this was his only place of
business. As a result, I am prepared to allow the expenses on
that basis, since that is an alternative. It is not only the
principal place of business but the only place of business, so I
am prepared to allow the expenses on that basis.
[21] However,
I must go into detail, and the answer is therefore yes, in
principle. The appellant reported $9,450 in business income for
that year. The allowed expenses were $5,293.48, and I have not
allowed other expenses referred to in the preceding paragraph.
There is therefore a balance of $4,156, income of $4,156,
available for 1992 to absorb that home office expense.
[22] By your
own admission, Mr. Mérabet, your home office expenses
were $3,969 and not $9,382 that year. That $3,969 in expenses can
therefore be deducted, leaving income of $187 after the
deduction.
[23] I will
apply the same principle for 1993, except that I cannot give the
same answer because I do not have the particulars for 1993.
Taking the 1993 income, if all the expenses were allowed as given
to me, there would be a $6,895 loss here. So there is already a
$6,895 loss here, and you said that your expenses in this regard
were $4,414 and not $3,185.
[24] Thus,
whether one takes one amount or the other, it seems to me that
there cannot be a deduction for 1993 as such. However, I am not
saying that the expenses may not be carried over to future
years.
[25] On this
point, therefore, the assessment is referred back to the Minister
for reconsideration and reassessment for 1992 only.
[26] It was
agreed to strike out paragraph 16, so that settles that
question.
[27] I have
already dealt with paragraphs 17 and 18 in connection with
paragraph 12—they concern the excess interest expenses
that were disallowed.
[28] Paragraph
19 is no longer an issue, so I will not deal with it.
[29] The
question in paragraph 20 is as follows:
[TRANSLATION]
For the 1991, 1992 and 1993 taxation years, are there losses
incurred by the appellant in practising his profession that were
not used and may be carried over to 1991, 1992 and 1993?
[30] I have no
details for 1991, but there does not seem to be any business
loss.
[31] There is
income for 1992, so there is no loss that could be carried over.
For 1993, I see that there is a business loss. In principle,
insofar as there is a loss, it may be carried over if it cannot
be absorbed by the income for the year. So that is all I can say
on this point.
[32] Paragraph
21 reads as follows:
[TRANSLATION]
Did the appellant waive the application of the normal
reassessment period in respect of the 1991 taxation year?
[33] The
answer is yes. The waiver is valid but the revocation is not
since it occurred after the assessment. It is sufficient to refer
to subsection 152(4.1) of the Act.
[34] There
remains one final point, that raised in paragraph 22, which
reads as follows:
[TRANSLATION]
Was the Minister of National Revenue justified in assessing a
penalty against the appellant for the 1991, 1992 and 1993
taxation years under subsection 163(2) of the Income Tax Act
in respect of the rental losses disallowed and the interest
income added?
[35] What I
would say in this regard is that, concerning the added income,
the way the Department went about things was to rely on a
presumption in the Act or, if you will, on a special
attribution rule found in subsection 56(4.1) of the
Act.
[36] This
whole question of interest could, of course, have been approached
from another angle, as I noted earlier, by saying that there was
simply no reasonable expectation of profit given that, obviously,
you did not earn any income as such. Rather, you arranged things
so that your son would earn the income, and all of the losses
could simply have been disallowed.
[37] As for
the rental income, you told me, Mr. Mérabet, that
rooms were rented to third parties after being rented to your
family, and I have taken that into account. However, the rental
to your family strikes me as fictitious and as an indirect way of
claiming personal expenses, although I cannot determine to what
extent. However, with regard to the rental income, the
respondent's position is that there was no reasonable
expectation of profit from that activity during the years at
issue.
[38] Not a
great deal was said about the other elements, aside from the fact
that you tried to pass income on to your son—and you have
admitted this yourself—in a way that was perhaps not quite
proper.
[39] I have
decided, though not without some hesitation, I must admit, to
cancel the penalties in this case considering the letter from
your doctor and the fact that it might be thought that what is
actually involved is not unreported income but rather unjustified
expenses.
[40] Thus, as
I said, not without some hesitation and probably because counsel
for the respondent failed to adduce slightly stronger evidence, I
have decided to cancel the penalties.
[41] The
appeals are therefore allowed, with costs to the respondent,
however, since the assessments remain unchanged for the most
part. Aside from the penalties, there is just one point that has
been varied, namely the possibility of claiming home office
expenses for 1992. In light of the calculations made herein, such
a deduction is possible for 1992. Accordingly, the assessment for
that year is referred back to the Minister for reconsideration
and reassessment.
[42] The
assessments for the three years are also referred back to the
Minister for cancellation of the penalties. In all other
respects, the assessments remain unchanged.
Signed at Ottawa, Canada, this 23rd day of August 2000.
"P.R. Dussault"
J.T.C.C.
Translation certified true on this 12th day of October
2001.
[OFFICIAL ENGLISH TRANSLATION]
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Docket: 98-1640(IT)G
BETWEEN:
AZIZ MÉRABET,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
CERTIFICATION OF TRANSCRIPT OF REASONS FOR
JUDGMENT
Let the
attached copy, as corrected, of the Reasons for Judgment
delivered from the bench at the Tax Court of Canada, 500 Place
d'Armes, Montréal, Quebec, on May 5, 2000,
be filed.
Signed at Ottawa, Canada, this 23rd day of August 2000.
J.T.C.C.
Translation certified true
on this 12th day of October 2001.
Erich Klein, Revisor
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