AMENDED
REASONS FOR JUDGMENT
Jorré J.
Introduction
[1]
This is a case about salesman’s expenses and
rental losses.
[2]
The Appellant appeals from reassessments of the
2007 and 2008 taxation years. In both years the reassessments disallowed all
the employment expenses as well as all the investment carrying charges claimed.
In 2008 the Minister of National Revenue (the “Minister”) also disallowed
almost all the various rental expenses claimed thereby denying the rental loss
claimed by the Appellant. In addition, gross negligence penalties were levied
pursuant to subsection 163(2) of the Income Tax Act
(the “Act”).
[3]
To a large extent, this appeal turns on findings
of fact and it will be useful to begin with some background. During the period
in question the Appellant sold electronics at Future Shop. His earnings came
primarily from commissions.
[4]
The Appellant’s brother trained him in how to
sell in a way that would be very profitable in terms of commissions.
[5]
A tax preparer named Attilio Ciurcovich was
recommended to the Appellant. After going to meet and interview Mr. Ciurcovich
he decided that he wanted to use the services of Mr. Ciurcovich who
charged $500 per tax return. Although expensive this seemed worthwhile to the Appellant
because Mr. Ciurcovich would coach clients and explain how to get their
receipts organized so as to take advantage of available deductions. Mr. Ciurcovich’s
approach was aggressive; as the Appellant put it: if an expense helped to sell
goods then it was deductible.
[6]
Mr. Ciurcovich also promised to take care
of any issues with the Canada Revenue Agency (the “CRA”); Mr. Ciurcovich
wrote on behalf of the Appellant a number of times. Mr. Ciurcovich
appeared to be a very popular tax preparer and was used by other sales
representatives at the Future Shop where he worked.
[7]
The Appellant followed Mr. Ciurcovich’s
instructions, brought his receipts to Mr. Ciurcovich and filed the returns
prepared by Mr. Ciurcovich. On both the 2007 and 2008 income tax returns
Mr. Ciurcovich did not fill in his name and address in the box for Professional
Tax Preparers, line 490, on page 4 of the returns.
[8]
In the 2007 taxation year the Appellant filed a
tax return showing some $44,781 in employment income and claiming $26,571 of
employment expenses. These expenses were about 59% of his employment income. An
amount of $1,858 was claimed on line 221, carrying charges and interest
expense.
[9]
As filed, the Appellant’s 2007 return, Exhibit R‑1,
showed no federal or Ontario tax payable. As a result the Appellant claimed a
refund of all income tax deducted as well as certain refundable credits.
[10]
In the 2008 taxation year the Appellant filed a
tax return showing employment income of some $45,623 and employment expenses of
$25,012. These expenses are slightly less than 55% of the employment income. He
also claimed a deduction of $2,308 for carrying charges and interest expense on
line 224 as well as a rental loss of $9,241.28; this rental loss was his
half of a $18,482 loss for the entire rental property.
[11]
Again, as can be seen on page 4 of the 2008
return, the last page of Exhibit R‑2, the return showed no federal
or provincial tax payable. He claimed a refund of all income tax deducted. He
also claimed certain refundable credits.
[12]
On initial assessment, the two returns were
assessed as filed.
Salesman’s Expenses
2007 Expenses
[13]
I will now turn to each set of issues in turn. I
will start with the employment expenses and with the question: what expenses
were incurred, and to what extent, for employment purposes? I will deal later
with the remaining conditions. The Minister assumed, among other assumptions,
that no employment expenses were incurred.
[14]
When dealing with claims for employee expenses
it is worth bearing in mind the opening paragraph of subsection 8(1) as
well as subsection 8(2) of the Act. They state:
8(1) In
computing a taxpayer’s income for a taxation year from an office or employment,
there may be deducted such of the following amounts as are wholly applicable
to that source or such part of the following amounts as may reasonably be
regarded as applicable thereto:
. . .
(2) Except as permitted by this section, no deductions shall be made
in computing a taxpayer’s income for a taxation year from an office or
employment.
[Emphasis added.]
[15]
For the reasons set out below, I have great
difficulty in accepting that the Appellant had more than a modest amount of
selling expenses that could be deducted.
[16]
The Appellant brought copies of a great many
receipts, credit card statements and the like in support of his salesman
expense claims. These were organized under various headings but did not
correspond with the headings in the expense statements prepared by Mr. Ciurcovich
and included with the tax returns.
[17]
In 2007 the Appellant claimed $26,571 in
expenses. This included an amount of $2,461 under the heading “Boots and Gloves”.
The Appellant had no idea why Mr. Ciurcovich had called this heading “Boots
and Gloves”; he guessed that it might relate to clothing although his receipts
did not show amounts spent for clothing.
[18]
In any event, based on the evidence I heard
there could not be any deductible amount for clothing. The employer provided a
shirt to be worn but otherwise simply had a dress code specifying, for example,
the colour of the pants to be worn. There is simply nothing in the evidence to
suggest a requirement for a uniform or other specialized clothing paid for by
the employee. As a result there could not be a basis for deductible clothing
expense.
[19]
The total of the receipts and other documents
that the Appellant included in Exhibit A‑1 and which are summarized
in the cover sheets of the exhibit is about $20,000 including everything in Exhibit A‑1.
However within that amount there are over $5,000 in mutual fund purchases (Tab J),
amounts clearly unrelated to the Appellant’s job as a salesman.
[20]
In Tabs H and I are all the expenses of the Appellant’s
car including fuel, traffic tickets and the cost of buying a second‑hand
automobile. The cost of the car purchased was simply expensed rather than
capitalized.
[21]
The Appellant’s evidence is that he had one car
for both personal and work use. No effort was made either by Mr. Ciurcovich
or by the Appellant to allocate automobile expenses between work related and
personal use.
[22]
The Appellant kept no log of his kilometres and
his evidence does not provide a basis on which one could estimate what
kilometres were in the course of his employment. His only evidence on this is
twofold. First, in addition to his work at his regular store he was occasionally
asked to work elsewhere: for example, at a grand opening of a new store.
Secondly, he testified that, before the store had a delivery service, he would
sometimes deliver large televisions to clients after he left work. His
testimony was that this helped to close sales because he was able to say “if
you buy it today I will deliver it tonight”.
[23]
Also included in the documents in Exhibit A‑1
were all his costs of his mobile phone (Tab E), his home Internet and his
home satellite television (Tab F). With respect to the mobile phone the Appellant
had one mobile phone which he said he used for work as well as personal
use. With respect to home Internet and satellite television his explanation as
to how these were related to selling was that this helped him to understand
what he sold.
[24]
With respect to the phone, it is not at all
clear on what basis I could reach a conclusion as to a particular portion of
business use. The evidence does not suggest any obvious allocation. I might add
that, given that stores normally have land lines, it is not apparent to me why
the store’s landline would not have been the principal method of work related
phone communication for the Appellant.
[25]
As to the Appellant’s home Internet and home
satellite television being a sales expense because it gave him a better
understanding of products he was selling, the claim is “a stretch”. Ongoing
expenditures for home Internet and home satellite television or cable are
personal consumption expenditures. They are not deductible.
[26]
The other major group of expenditures set out in
the documents in Exhibit A‑1 are expenditures for, to use the Appellant’s
label, “product knowledge”. These were some $4,000 in expenditures to buy
various products from Future Shop. According to the Appellant employees were
given discounts to encourage them to buy products sold so they would know the
products and be better able to sell them. Examples of these purchases were car
speakers and their installation, a wireless controller for the Blu‑ray
player on a gaming console and a Harman Kardon receiver. Again, these are
personal expenditures and are not deductible.
[27]
The above claims are exaggerated to the point
where I cannot accept that the Appellant is being forthright in his testimony.
As a result I am unable to accept much of his testimony.
[28]
There remain two other categories in Exhibit A‑1.
First, at Tab I there is a small amount for interest on the Appellant’s
Visa card as well as the annual fee. Nothing in the evidence explains how this
would be related to his expenses as a salesman. Secondly, at Tab F there
are some $400 in assorted expenses of which more than half are for business
cards and a photograph used for the cards. The cards are useful for a salesman.
There is also a charge for parking, presumably at an airport, since it says
“Park & Fly”, and a motel 6 charge for a business trip. While the Appellant
testified that he sometimes worked at other stores he did not testify that he
had to fly to the location of another store or that he had to stay overnight.
[29]
In all this there may be a small amount of
expenses that are related to the Appellant’s employment but, in general, I am
at a loss to determine what the amount might be.
2008 Expenses
[30]
I do not propose to go through the 2008 claim
for selling expenses at any length. Broadly the situation is very similar to
2007 and most of the expenses are not valid.
[31]
I would simply note a couple of points. In 2008
in the Statement of Expenses filed with the return there is not only an amount
of $2,884 claimed for “Boots and Gloves” but also an additional amount of
$1,805 claimed for “Uniforms”, a total of almost $4,700 claimed for non‑existent
expenses which are not required by the contract of employment: see paragraph 18
above.
[32]
There are also 84 Starbucks receipts totalling
$642 which the Appellant testified were to purchase drinks for customers and
for employees who worked at the front of the store at the customer service
desk. According to the Appellant this helped build rapport with customers; in
the case of the fellow employees at the front it fostered good relations and
helped him save sales when customers came back with a problem. The employees in
front would call him to the front giving him the opportunity to try to save the
sale thereby protecting his commission which would be lost if an item were
returned. One of the employees at the front of the store was also his
girlfriend at the time.
[33]
In addition to my general difficulties with the
Appellant’s testimony I have an additional reason with respect to this particular
expenditure. Many of the receipts are not readable but among those that are
readable there appears to be overwhelmingly the cost of teas of various kinds
and very little coffee — something that would be unlikely if these
refreshments were for the benefit of a cross section of customers who came to
the store to buy electronics.
[34]
I do not accept that these expenses at Starbucks
were selling expenses.
Conditions of Employment
and the T2200 Forms
[35]
Subparagraph 8(1)(f)(i) of the Act
states that, among other conditions, salesman’s expenses can only be claimed to
the extent that the contract of employment requires the employee to pay them. Subsection 8(10)
of the Act also provides that an employee making a claim for expenses in
circumstances such as these may not claim a deduction unless:
. . . a prescribed form, signed by
the taxpayer’s employer certifying that the conditions set out in the
applicable provision were met in the year in respect of the taxpayer, is filed
with the taxpayer’s return of income for the year.
[36]
The relevant form is called a T2200. The
Minister’s reply assumed that the T2200 forms submitted by the employer
indicated that any expenses incurred by the Appellant were reimbursed by the
employer in both years in issue.
[37]
In the allegations with respect to the gross
negligence penalties the Minister alleges that the T2200 forms submitted by the
Appellant with his 2007 and 2008 taxation years were different than the ones
provided by the employer. Of course, it is for the Minister to prove this particular
allegation in relation to the gross negligence penalty.
[38]
The evidence with respect to the T2200 forms was
confusing. Multiple forms were produced with variations in their contents.
[39]
I do not understand on what basis the Minister
assumed that the Appellant was reimbursed for any employment expenses.
[40]
The first page of the T2200 form filed with the
return, the T2200 form at Tab B of Exhibit A‑1 and the T2200 form
filed as Exhibit R‑10 all state that the employment contract
required the employee to pay his own expenses while carrying out the duties of
employment (question 1), the employee received no motor vehicle allowance
(question 4) and the employee did not receive a repayment of expenses he
paid (question 5).
[41]
Exhibit R‑1, the 2007 income tax
return, only had the first page of the form. I do not know if that is because
the second page was not filed with the return or if this is because the page
was accidentally omitted when the return was reproduced for trial. Exhibit R‑10
and Exhibit A‑1, Tab B, are signed a day apart by different
people.
[42]
On the second page of both Exhibit R‑10
and Exhibit A‑1, Tab B, the employer states that the employee
is required to pay for supplies used directly in his work and for the use of a
cell phone. In answer to the question whether the Appellant was required to be
away at least 12 consecutive hours from the municipality where the Appellant
normally works one of the forms said: no, while the other said: yes, 2 or 3
times a month.
[43]
To further confuse matters, all of the form T2200
for the 2007 year shows the following in question 4. After answering that
the employee did not receive a motor vehicle allowance, in the same box in the
second bullet after the line that says “if yes, indicate:”, it then states that
a $0.44 per kilometre rate was used and that the amount received was $422.40,
implying that a motor vehicle allowance was indeed received.
[44]
For the 2008 year, the situation with respect to
T2200s is also confusing. There is no form T2200 attached to the copy of
2008 income tax return filed in evidence, Exhibit R‑2. Exhibit R‑12,
a form T2200 signed on 16 February 2009, appears to be a duplicate of
the exhibit at Tab BB of Exhibit A‑2 except for question 8
which is answered differently on Exhibit R‑12. Exhibit R‑11
is also a form T2200 for 2008 but it is signed on 27 September 2010
by the same person as the form T2200 at Tab BB of Exhibit A‑2.
Again there is a certain variation between the 16 February 2009 and the 27 September
2010 versions of the form T2200.
[45]
The first pages of all the T2200s filed
regarding 2008 agree that the employee did not receive a motor vehicle
allowance although within the same box a per kilometre rate of payment is given
but no amount is shown as paid. On the first page at question 5 they say
that the employee received a repayment of expenses he or she paid to earn
employment income, but they then both say at question 6 that the employee
was required to pay his own expenses for “cell phone & automotive”.
[46]
On the second page of the earlier form T2200
(Tab BB of Exhibit A‑2 and Exhibit R‑12) it says
that the employee is required under the contract of employment to pay for the
supplies that the employee uses in his work and for his mobile phone; the later
form T2200 for 2008, Exhibit R‑1, says, in question 9,
that the employee is not required under the contract of employment to pay for
the supplies that he uses in his work and for his cell phone; however, in
question 6 it says that the employee is required to pay for his mobile
phone.
[47]
One thing is quite clear from all these
confusing documents. The Minister’s bald assumption that in both years the
employer reimbursed all employment expenses incurred is clearly unfounded. This
was the only assumption made by the Minister with regard to the contractual terms
of employment in respect of expenses incurred in the course of employment. The
Minister also made the alternative assumption that the Appellant did not incur
such expenses and that, if he did incur them, they were personal.
[48]
The confusing evidence does not enable me to
determine that some versions of the T2200s should be considered authoritative
as opposed to others. Clearly, the T2200s show that it was envisaged that the
employee would incur some expenses for which he would not be reimbursed. It is
also clear that these expenses included the cost of supplies and use of the
mobile phone.
[49]
In 2008 the T2200s are all consistent that the Appellant
would have to pay for his own automobile expenses (question 6). In the
case of 2007 the T2200s are somewhat inconsistent on this but there is no
reason for me to think that 2007 and 2008 were different. Given that the only
assumption in respect of whether the Appellant had to pay his own expenses was
rebutted and given the Appellant’s own evidence, I conclude that he was
required to pay his own automobile expenses as well as for supplies used and
his mobile phone.
[50]
The Appellant testified that he incurred the
various other expenses claimed to boost sales but was less categorical when it
came to conditions of employment. In particular, taken as a whole I do not
understand his evidence to be that he was required to buy certain products or
have home satellite television or home Internet in order to gain product
knowledge. This may have been encouraged by the employer but it was not a
contractual requirement. In any event, as previously indicated with respect to
purchase of the products, home satellite and home Internet, these expenditures
are essentially personal expenditures and are not deductible.
[51]
With respect to any personal delivery of
television sets that may have occurred, not only do we have no idea what
proportion of car use this could represent but, given that the Appellant
testified that this was done at his own initiative, it was clearly not a
contractual requirement.
[52]
I accept that business cards are a valid
employment expense. I also accept that the Appellant was required to pay for
his own mobile phone and pay for automobile expenses for travel related to his
employment that were required under the contract. As previously indicated, such
amounts are deductible only to the extent that they are: “wholly applicable to that source or such part [thereof] as
may reasonably be regarded as applicable thereto”.
[53]
The automobile expenses required by contract are
thus limited to those incurred to go to work at a location other than the
Appellant’s usual store when requested by the employer. The only quantum
evidence that we have in respect of this is that some of the T2200s say
that such requests may have occurred 2 to 3 times a month. Clearly only a
very small portion of the Appellant’s total automobile expenses for the year
are employment related.
[54]
In the case of the mobile phone there is even
less information available as to the business portion of the expense.
Conclusion Regarding
Salesman’s Expenses
[55]
In 2007 the total claimed for automobile
expenses including fuel was just under $7,135. This included an amount of $3,600
for the purchase of a used car, an amount which should be capitalized and not
expensed. The mobile phone cost in the 2007 year was about $1,601. In the
circumstances, given that it is clear that there is some employment use an
amount of $900 will be allowed for both of these costs.
[56]
The amount of expenditure for business cards and
the photograph taken for the card is clear. This totals $245.05 and is
deductible in 2007.
[57]
In 2008 there are again some business cards
totalling $63.89; this is a valid expense. Again with respect to the mobile
phone and the automobile expenses there is little evidence on which to base an
allocation between valid employment expenses and personal expenses. Again to
recognize that there is some modest amount that is a valid expenditure an
amount of $900 will be allowed for both of these costs.
[58]
As a consequence for the 2007 and 2008 taxation
years respectively a total of $1,045.05 and $963.89 in employment expenses will
be allowed.
Rental Losses in 2008
[59]
The Appellant and his girlfriend at the time bought
a residence in 2008; the Appellant owned 50% of the house. The Appellant and his
girlfriend planned to live in part of the house and rent the other part of the
house.
[60]
They had to do a lot of work before they could
rent the house and they only began to have a first tenant in December 2008.
Based on the photographs produced at Tab UU of Exhibit A‑2, I
am satisfied the house needed a lot of work.
[61]
The Minister assumed that the rental portion of
the house amounted to 44% of the space in the residence. There was no evidence
contradicting this allocation.
[62]
The Appellant reported $375 in rental income for
2008 and expenses totalling $18,857 resulting in a loss of $18,482. Much of
these expenses related to fixing up the house. The Appellant claimed his 50%
share of the rental loss, $9,241, in his 2008 tax return. The Minister
disallowed all but $320 of the expense claimed.
[63]
The expenses claimed and the expenses proved by
the Appellant at the hearing made no distinction between those incurred for the
personal portion and those incurred for the rental proportion of the residence.
Whatever the amount of expenses incurred for the entire property, in the
absence of any specific link between an expense and the rental part of the
house no more than 44% of the expenses may be claimed. The one exception to
this is the two amounts totalling $110 for the student rental listing; the $110
amount is wholly deductible.
[64]
Among the expenses claimed in relation to the
rental income in the tax return is $1,982 in telecommunications costs. There
are also approximately $2,500 in motor vehicle costs claimed in relation to the
rental income.
[65]
I note that for 2008 in relation to the Appellant’s
employment expenses the Appellant claimed over $7,400 in vehicle costs and over
$4,700 in other travel costs. Together with the $2,500 claimed in relation to
the rental this is a total of some $9,900 in motor vehicle claimed by the Appellant
either as employment expenses or rental income expenses. I also note that the
Appellant was only able to produce receipts for 2008 for dramatically less than
the $9,900 amount in respect of motor vehicle expenses.
[66]
Again, the Appellant kept no log and whatever
the actual motor vehicle expenses were, there is no factual basis to allow one
to determine what portion might relate to the rental expense. The same is true
vis-à-vis any telecommunications expense. I am not satisfied that there are any
material amounts in these two categories that are in relation to the rental
expense.
[67]
Although Mr. Ciurcovich taught the Appellant
how to organize his receipts at the hearing he produced receipts for about
$5,165 in relation to costs for the rental property, excluding vehicle or
telecommunications costs: see Tab LL of Exhibit A‑2. This
compares with some $14,000 in expenses claimed, excluding vehicle costs and
mobile phone costs.
[68]
The largest of the amounts in the $5,165 is a
payment of $1,866 to a law firm. Legal expenses should be allocated between the
land and building and added to their capital cost. Capital cost allowance could
be claimed against the cost of the residence but only to the extent of rental
use of the property and only to the extent that it does not create a loss.
[69]
The Appellant also testified that he put in the
new floor but he did not have a receipt for this; in any event the new floor
would likely be a capital expenditure rather than a current expenditure.
[70]
There was also a receipt for $924 for
insulation, which on the basis of the Appellant’s testimony was an improvement.
It should therefore be capitalized and not treated as a current expenditure.
[71]
After deducting the $1,866 paid to the law firm
and the $924 for insulation, there remains $2,375 of current expenses that are
deductible. The rental portion of that expense is 44% x $2,265 which
is equal to $996 plus the amount of $110 specifically for the rental listing
for a total of $1,106. To this must be added the $320 previously allowed by the
Minister for a total of $1,426 in expenses in respect of the rental property.
Amounts Claimed as Carrying Charges
[72]
In respect of the 2007 and 2008 taxation years
the Minister disallowed amounts of $1,858 and $2,308 respectively. This amount
is described in Schedule 4 of the two returns as “administration fees,
safety deposit box”.
[73]
At the hearing the Appellant stated that he had
no idea what these were in relation to and abandoned the claim. There is no
further need to deal with these claims.
Gross Negligence Penalties
[74]
Finally, there is the matter of the gross
negligence penalties under subsection 163(2) of the Act. There are
two essential elements before such a penalty can be applied. The first is that
there must be a false statement in the return. There is no question that there
are a number of false statements in the two returns.
[75]
The second element is whether the Appellant “. . . knowingly,
or under circumstances amounting to gross negligence, has made or has
participated in, assented to or acquiesced in the making of . . .”
the false statements. It is well settled that gross negligence includes wilful
blindness, see Panini v. Canada, 2006 FCA 224.
[76]
When signing his return the Appellant certified
that the information given was correct, complete and fully disclosed all his
income. While taxpayers are not expected to be tax experts they are expected to
make a reasonable effort at ensuring the accuracy of their return.
[77]
Here, there are numerous red flags that should
have raised questions in the Appellant’s mind: for example, the claim for large
sums under the heading “Boots and Gloves” when the Appellant had no expenses
for boots and gloves, the claim for employment use of the totality of his motor
vehicle expenses, the claim for the totality of his mobile, Internet and
satellite television expenses and the failure to allocate any expenses to
personal use of the house he bought as opposed to the portion used for rental
income.
[78]
The only possible explanation for this failure
to ask questions is wilful blindness on the part of the Appellant. Accordingly,
the penalty is properly levied.
Conclusion
[79]
Consequently, the appeal will be allowed but
only for the purpose of the Minister making the following changes:
a.
in the 2007 taxation year, employment expenses
totalling $1,045.05 are to be allowed;
b.
in the 2008 taxation year, employment expenses
totalling $963.89 and rental expenses totalling $1,426 are to be allowed;
c.
in both taxation years the penalties under subsection 163(2)
of the Act are to be adjusted to take account of the expenses allowed.
Signed at Ottawa, Canada, this 27th day of September 2016.
“Gaston Jorré”
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