Citation: 2013 TCC 189
Date: 20130705
Docket: 2008-1538(IT)I
BETWEEN:
SOBHANADRI NAIDU SUGNANAM,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Docket: 2008-3815(IT)I
BETWEEN:
ESESSON CANADA INC.
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
D'Auray J.
[1]
The appeals of
Mr. Sobhanadri Naidu Sugnanam (“Mr. Sugnanam”) and Esesson Canada
Inc. (“Esesson”) were heard on common evidence.
Questions to be decided
[2]
The question to be
decided in the appeal of Esesson is whether the expenses incurred by it in the
2002 taxation year were incurred for the purpose of gaining or producing income
within the meaning of subsection 9(1) and paragraph 18(1)(a) of the Income
Tax Act (the “Act”).
[3]
The questions to be
decided in the appeals of Mr. Sugnanam are whether he was entitled to
deduct motor vehicle expenses in the amount of $7,607.62 for the 2002 taxation
year pursuant to paragraph 8(1)(h.1) of the Act, and whether he was
entitled to deduct an amount of $8,090.06 for the 2003 taxation year as a
professional business loss pursuant to subsection 9(1) of the Act or employment
expenses under paragraphs 8(1)(h) and 8(1)(h.1) and subsections
8(2) and 8(10) of the Act.
Esesson’s appeal
[4]
Esesson Canada Inc. was
incorporated on June 4, 2001.
[5]
Esesson was in the consulting
business. According to the testimony of Mr. Sugnanam, Esesson provided
medical services (50%) and engineering services (50%). The respondent’s
position is that Esesson only provided engineering services.
[6]
Mr. Sugnanam and
his spouse, Dr. Nirmala Naidu Sugnanam (“Dr. Sugnanam”), were both
directors and shareholders of Esesson, each owning 50% of its shares.
[7]
Mr. Sugnanam was
Esesson’s manager and only employee. He is an engineer specializing in the
field of oil exploration. Dr. Sugnanam is a gynaecologist.
[8]
In 2001,
Mr. Sugnanam was employed by Acres International, a firm based in Calgary,
to perform services relating to the White Rose oil project in St. John’s,
Newfoundland.
[9]
From January 2002 to
June 2002, Mr. Sugnanam continued to perform engineering services for
Acres International on the White Rose project in St. John’s. The only
difference was the incorporation of Esesson. Mr. Sugnanam became an
employee of Esesson, and Acres International paid Esesson for the work
performed by Mr. Sugnanam. It was Esesson’s only source of income for the
2002 taxation year.
[10]
Five related appeals
were filed before this Court. Esesson and Mr. Sugnanam’s appeals were
filed under the informal procedure. Dr. Sugnanam’s appeals were filed
under the general procedure.
[11]
The five appeals were
case managed by Justice Woods of this Court.
·
On June 18, 2010,
Justice Woods ordered that the appeals of Esesson and Mr. Sugnanam be
heard with the appeal of Dr. Sugnanam and granted Mr. Sugnanam leave to
act as agent of Esesson.
·
On April 12, 2012,
Justice Woods ordered that each party provide the opposing party with a copy of
the documents that the party intended to introduce at trial, and that they do
so by May 11, 2012.
·
On May 7, 2012, Justice
Woods extended the time for the exchange of documents until May 18, 2012.
[12]
In the appeal of
Dr. Sugnanam, on May 4, 2012, Consent to Judgment was filed with the
Court. On May 15, 2012, a judgment was issued by this Court.
[13]
As part of the
settlement, Dr. Sugnanam agreed to the removal from Esesson of all the
income and expenses relating to her medical practice. Accordingly, the Minister
of National Revenue (the “Minister”) allowed Dr. Sugnanam additional
expenses of $81,467.81 for the 2002 taxation year and $27,713.16 for the 2003 taxation
year.
[14]
Esesson did not agree
with the removal of Dr. Sugnanam’s medical practice from Esesson. Mr. Sugnanam
stated that he was not aware of the terms of the Consent to Judgment signed by
his spouse, Dr. Sugnanam.
[15]
On June 11, 2012, two
weeks prior to the hearing, Mr. Sugnanam submitted to the Court an amended
notice of appeal for Esesson. At the hearing, Mr. Sugnanam requested that
Esesson’s amended notice of appeal be filed. The respondent objected to any
such filing.
[16]
I did not allow Esesson
to file its amended notice of appeal.
[17]
The amended notice of
appeal referred to expenses that were not initially claimed by Esesson in its
income tax return. In addition, certain amounts claimed as expenses by Esesson
in the amended notice of appeal were either smaller or greater than those the
Minister had allowed. With respect to the expenses for which the Minister had
allowed more than the amount claimed by Esesson in its amended notice of
appeal, Mr. Sugnanam’s position varied during the trial. At first I understood
that Esesson was claiming the lower amount, but Mr. Sugnanam subsequently
stated that the amounts were in addition to what had been allowed by the
Minister.
[18]
Furthermore, the
expenses listed in the amended notice of appeal were also categorized differently
than the expenses listed in Esesson’s tax return, and subsequently dealt with
at the audit stage, and listed in the Notice of Objection and in Esesson’s
initial Notice of Appeal.
[19]
The respondent had
prepared her case on the basis of the amounts claimed and the categorization of
expenses set out at those stages and would be prejudiced if the amounts and the
categorization of expenses were changed at trial. It would have been impossible
to proceed with the hearing without having the Minister review all of the
expenses. An adjournment was not a viable option since Mr. Sugnanam and
Dr. Sugnanam came to Calgary from Australia for the hearing.
[20]
Although, I did not
allow Esesson to file the amended notice of appeal, I advised Mr. Sugnanam
that he could use the schedule of expenses attached to the amended notice of
appeal as a guide.
Relevant Statutory Provisions
[21]
Subsection 9(1),
subsection 18(1), paragraph 18(1)(a), paragraph 18(1)(h),
subsection 67(1) and the definition of personal and living expenses in section
248 of the Act are applicable to the appeal of Esesson.
[22]
Subsection 9(1) states
that a taxpayer’s income from a business or property is the taxpayer’s profit
therefrom.
[23]
Subsection 18(1)
prohibits a taxpayer from deducting, in calculating business income, expenses
that do not fall within the ambit of paragraph 18(1)(a). Under paragraph
18(1)(a), a deduction will only be permitted if the expense was incurred
by the taxpayer for the purpose of gaining or producing income.
[24]
Paragraph 18(1)(h)
specifically bars any deduction for personal and living expenses of a taxpayer.
[25]
Personal and living
expenses are defined in section 248 to include:
(a) 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 common-law partnership or adoption, and not maintained in
connection with a business carried on for profit or with a reasonable
expectation of profit,
.
. .
[26]
There is also a general
limitation with respect to claiming expenses. Pursuant to section 67 of the
Act, a taxpayer is able to deduct an expense only to the extent that the
expense claimed is reasonable in the circumstances.
Burden of proof
[27]
In tax cases, the
burden of proof is on the taxpayer. The taxpayer has to demolish the
assumptions made by the Minister. In The Queen v. Anchor Pointe Energy Ltd.,
2007 FCA 188, 2007 DTC 5379, [2008] 1 F.C.R. 839, Justice Létourneau, in
an unanimous judgment of the Federal Court of Appeal, stated the following with
respect to the burden of proof, at paragraph 35:
[35] It
is trite law that, barring exceptions, the initial onus of proof with respect
to assumptions of fact made by the Minister in assessing a taxpayer's tax
liability and quantum rests with the taxpayer. In Les Voitures Orly Inc./Orly Automobiles Inc. v. The Queen, 2005 FCA 425, 2006 [G]TC 111[5], at
paragraph 20, this Court reasserted the importance of the rule in the following
terms:
To
sum up, we see no merit in the submissions of the appellant that it no longer
had the burden of disproving the assumptions made by the Minister. We want to
firmly and strongly reassert the principle that the burden of proof put on the
taxpayer is not to be lightly, capriciously or casually shifted. There is a
very simple and pragmatic reason going back to over 80 years ago as to why the
burden is on the taxpayer: see Anderson Logging Co. v. British Columbia,
(1925) S.C.R. 45, Pollock v. Canada (Minister of National Revenue)
(1993), 161 N.R. 232 (F.C.A.), Vacation Villas of Collingwood Inc. v. Canada
[4 GTC 6065] (1996) 133 D.L.R. (4th) 374 (F.C.A.), Anchor Pointe Energy
Ltd. v. Canada, [2003 DTC 5512] 2003 FCA 294. It is the taxpayer's
business. He knows how and why it is run in a particular fashion rather than in
some other ways. He knows and possesses information that the Minister does not.
He has information within his reach and under his control. The taxation system
is a self-reporting system. Any shifting of the taxpayer's burden to provide
and to report information that he knows or controls can compromise the
integrity, enforceability and, therefore, the credibility of the system. That
being said, we recognize that there are instances where the shifting of the
burden may be warranted. This is simply not one of those cases.
[28]
However, if the
taxpayer makes out a prima facie case refuting the assumptions of fact
made by the Minister, the burden will shift to the respondent. Once the burden
is shifted, the Crown will have to bring forward evidence to support the
assumptions of fact. Where the Minister’s assumptions have been demolished by
unchallenged and uncontradicted evidence, the appellant will succeed.
Analysis
[29]
The parties agreed that
the expenses relating to subcontracts, salaries and wages, rent, professional
fees, business tax and licences, and insurance were no longer in issue.
[30]
I was also advised by
the respondent that the following additional amounts had been allowed with
respect to vehicle, travel, property taxes and repairs and maintenance:
|
Expenses
|
Allowed
before the hearing (June 7, 2012 letter)
|
Allowed
at the hearing
|
|
Vehicle
|
|
$158.00
|
|
Travel
|
$314.97
|
|
|
Property Taxes
|
|
$568.58
|
|
Repairs and
Maintenance
|
$3,541.37
|
|
[31]
The expenses listed
below remained in dispute:
|
|
Expenses
claimed by Esesson in its 2002 tax return
|
Remaining
Disallowed
Expenses
|
|
Vehicle
|
$2,685.00
|
$2,649.21
|
|
Telephone
|
$3,660.00
|
$3,191.00
|
|
Utilities
|
$7,626.00
|
$5,317.38
|
|
Travel
|
$33,931.00
|
$14,088.39
|
|
Property Taxes
|
$4,201.00
|
$3,401.76
|
|
Office
Expenses
|
$6,193.00
|
$4,416.20
|
[32]
The evidence supporting
the expenses was confusing and at times contradictory. There was confusion as
to who should claim the expense – some expenses pertained to Dr. Sugnanam’s
medical practice. Some expenses were claimed in more than one category, some
were capital or clearly personal expenses, and others lacked supporting
documentation.
[33]
Mr. Sugnanam’s
answers to the respondent’s questions did not do anything to reduce the level
of confusion. He was often vague, evasive and defensive.
[34]
He did not convince me
that he was unaware of the terms of the settlement reached in the appeal
of his spouse, Dr. Sugnanam. He
acted as agent for her at the audit, objection and, to a certain extent, the
appeal stages. He had to be aware of the terms of the settlement since a few
weeks before the hearing, the respondent provided him with a schedule detailing
Dr. Sugnanam’s settlement.
[35]
It was difficult to
understand why at the hearing Esesson continued to claim expenses related to
Dr. Sugnanam’s practice. Mr. Sugnanam also had to know that he was
using the same receipts as Dr. Sugnanam used to claim her expenses related to
her medical practice. He also had to be aware that some expenses were clearly
personal expenses.
Property expenses
[36]
The expenses for
property taxes, telephone, utilities and cable claimed by Esesson related to
three properties. One property was located at 14 Georgia Loop, Stephenville,
Newfoundland; the second was located at 32 Beaumont Street, St. John’s,
Newfoundland; and the third was located at 64 Chatham Drive NW, Calgary,
Alberta.
[37]
Esesson owned 14
Georgia Loop in Stephenville and 32 Beaumont Street in St. John’s.
Dr. Sugnanam owned 64 Chatham Drive NW in Calgary.
[38]
Esesson’s place of
business was located at 14 Georgia Loop in Stephenville. Esesson rented part of
14 Georgia Loop to Mr. Sugnanam and Dr. Sugnanam as their place of
residence.
[39]
Esesson also had a
place of business at 32 Beaumont Street in St. John’s. Part of the
Beaumont Street property was rented to a non-related party.
[40]
The property located at
64 Chatham Drive NW in Calgary was owned by Dr. Sugnanam and was used for
her software development business.
[41]
I will first deal with
the expenses relating to the Calgary property. Esesson claimed all the property
taxes, telephone and utility bills, and office expenses for that property.
[42]
I am not allowing any
expenses relating to the Calgary property. Esesson did not own it. As I have
previously stated, the property was owned by Dr. Sugnanam; part of it was
used for her software development business for her medical practice and the
rest of it was rented out. In 2002, Mr. Sugnanam only travelled to Calgary
a few times. In addition, at the audit and the objection stages,
Mr. Sugnanam stated that the Calgary property was used for the medical practice
and not for providing engineering services.
[43]
Esesson did not
demolish the Minister’s assumption of fact that the Calgary property was not
used by it for the purpose of gaining or producing income. Dr. Sugnanam
was present at the hearing. As the owner of the property, she could have
testified with respect to Esesson’s use of the Calgary property, if any.
However, she chose not to do so.
[44]
With respect to the
Georgia Loop property in Stephenville, the Minister allowed 1/3 of the amounts
claimed by Esesson for electricity, telephone and insurance. Esesson was also
allowed to claim the property taxes in full since it owned the Georgia Loop
property. Esesson argued that it should have been allowed 2/3 of these expenses
relating to Georgia Loop property.
[45]
I find the Minister’s
allowance of 1/3 of the expenses for the Georgia Loop property to be adequate
taking into account that Esesson occupied the basement of the two-storey,
three-bedroom house. The Sugnanams occupied 2/3 of the house as their
residence. There was no evidentiary basis provided by Esesson for allowing more
than 1/3 of the expenses relating to the Georgia Loop property.
[46]
The Minister did not allow any expenses for
long-distance calls and cable with respect to the Georgia Loop property.
Esesson argued that 100% of the long‑distance expenses and the cable
expenses should be allowed. At trial, I told Mr. Sugnanam that I found it
hard to believe that he and his spouse never made any personal long-distance
calls.
[47]
Following my comment, Mr. Sugnanam continued to
insist that the calls were made for business purposes, stating that if not 100%
at least 99% of the calls were for business purposes.
[48]
I agree with the
decision of the Minister to deny the claim for long-distance calls as I am
highly sceptical that the long-distance calls made by the Sugnanams could have
been for business purposes 100% of the time, or even 99% of the time. The
evidence was that there was only one telephone line. In addition, their son
Kirthi was living in Calgary and they had a number of relatives living in India.
Applying section 67 of the Act, I will not allow any of the long-distance
calls claimed by Esesson. The percentage claimed for personal use is
unreasonable taking into account the circumstances.
Furthermore, Esesson will not be allowed to deduct the amounts claimed for
cable for the Georgia Loop property as it was a personal expense of the
Sugnanams.
[49]
The other property
owned by Esesson, the Beaumont
Street property in St. John’s, was not in dispute. The Minister allowed in
full all expenses relating to this property, which included heat, electricity,
telephone, insurance, and property taxes.
[50]
Mr. Sugnanam also
questioned why deductions for certain taxes were denied by the Minister, namely
a poll tax of $150 and an amount of $75 for which a receipt was issued by the
municipality of Stephenville. The poll tax invoice was addressed to
Dr. Sugnanam since she was the tenant. Esesson was therefore not entitled
to deduct the pool tax amount. With respect to the $75 receipt, Mr. Sugnanam
could not remember why it was issued by the municipality. The receipt might
have been for the payment of a fine or, alternatively, it might have been related
to advertising for Dr. Sugnanam’s medical practice. As there was no
indication as to the purpose of the expense shown on the receipt,
Mr. Sugnanam could not prove that this $75 expense was incurred for
business purposes.
Motor vehicle expenses
[51]
There was also some
confusion with respect to the claim made by Esesson for motor vehicle expenses.
[52]
Three vehicles were in
issue: a Honda owned by Esesson, a Toyota owned by Mr. Sugnanam and a
Dodge Neon kept in Calgary. Esesson claimed motor vehicle expenses in the
amount of $2,685. The Minister allowed amounts of $36 for cleaning supplies and
$140 for vehicle registration with regard to the Honda.
[53]
No logs were submitted
by Esesson for the Honda or by Mr. Sugnanam for the Toyota. What was
submitted by Esesson was a potpourri of invoices, some of which did not relate
to motor vehicle expenses. Those invoices that did relate to motor vehicles
included expenses for gas, parking, car maintenance and repairs. I have
analyzed each invoice submitted by Esesson.
[54]
Of the gas receipts
submitted, 17 were signed by Dr. Sugnanam while 15 were signed by
Mr. Sugnanam; two receipts had no signature. It was impossible to discern
whether these gas purchases were made for business or personal purposes. It was
also impossible to determine if the invoices were related to the Honda owned by
Esesson or to Mr. Sugnanam’s personal vehicle, the Toyota. That said, the
Minister allowed some motor vehicle expenses, but did not allow any expenses
for gas. Common sense would suggest that some of these gas purchases were for
Esesson’s business purposes. I therefore decided to give the taxpayer the
benefit of the doubt and allow 50% of the gas receipts that were signed by
Mr. Sugnanam, which amounts to $227.84. I will also allow as motor vehicle
expenses an $18 parking fee incurred at the St. John’s airport and an
amount of $41.40 for replacing a mirror on the Honda.
[55]
With respect to car
maintenance and repairs, the respondent allowed an additional amount of $3,541.47
before the hearing. From the invoices submitted, I could not determine if the
expenses were incurred for the purpose of earning business income. In addition,
some expenses related to the personal vehicle of Mr. Sugnanam. Esesson did
not prove that it had incurred more repair and maintenance expenses that what
had been allowed by the respondent.
[56]
With respect to the
Dodge Neon, no evidence was submitted to prove that Esesson was the registered
owner of the vehicle or that any expenses relating to it were incurred by
Esesson for the purpose of gaining income. In addition, the evidence showed
that the Neon was used by the Sugnanams’ son, Kirthi, who was studying at the
University of Calgary. Therefore, the motor vehicle expenses claimed by
Esesson for the Dodge Neon will not be allowed.
[57]
Accordingly, with
respect to motor vehicle expenses, in addition to the amounts allowed by the
Minister, an amount of $287.24 will be allowed for motor vehicle expenses.
Travel expenses
[58]
Esesson claimed $33,931
as travel expenses in its 2002 income tax return. This amount included
Dr. Sugnanam’s travel expenses for her medical practice. Pursuant to the
settlement, Dr. Sugnanam was allowed an amount of 15,911.67 for her travel
expenses.
[59]
With respect to travel
expenses, initially, at the audit stage, all of Esesson’s travel expenses were disallowed.
Documents were submitted by Mr. Sugnanam on behalf of Esesson and, at the
objection stage, the following travel expenses were allowed:
|
Air Labrador
invoice dated Feb 27/02 for 20 legs of travel between Stephenville and
St. John’s
|
$3,737.50
|
|
10 receipts
for airport improvement fees at $10 each
|
$100.00
|
|
Provincial
Airlines ticket dated February 28, 2002
|
$191.48
|
|
Provincial
Airlines ticket dated January 29, 2002
|
$129.38
|
|
Less HST
|
-$542.39
|
|
Total allowed
|
$3,615.97
|
[60]
At trial, Esesson
and the respondent agreed that only three specific trips remained in dispute: the
Stephenville to Halifax trip to meet with Blue Atlantic, a trip from
Stephenville to Calgary to meet with a Mideast Oil Company, and the
Stephenville to Clarenville trip.
(1) A $1,212.77 e-ticket for travel
from Stephenville to Halifax
Mr. Sugnanam submitted at trial that
he received a call by Blue Atlantic, a company involved in deep-sea mining. He
was asked to meet them with regard to a possible assignment. He stated that
Blue Atlantic’s travel agency, Fraser Hoyt, paid for the trip but that he
reimbursed the agency. Mr. Sugnanam stated that he probably reimbursed
Fraser Hoyt by credit card or cheque, but did not have any documentation to
support this reimbursement.
(2) A $1,396.22 e-ticket
for a flight with Air Canada Tango from St. John’s to Toronto and from
Toronto to Calgary
The trip was from St. John’s to Toronto
and then from Toronto to Calgary. Mr. Sugnanam said that he met with a
person specialized in deep-sea mining from a Libyan oil company. Mr. Sugnanam
stated that he wanted to learn deep-sea mining techniques. It is unclear
whether this trip was for Esesson’s business or to improve Mr. Sugnanam’s
skills. Mr. Sugnanam could not recall exactly how he paid for the trip; he
stated that it was either by cheque or credit card.
(3) A trip from Stephenville to
Clarenville
According to the invoice, the trip was
booked and paid for by North Atlantic Refinery. Mr. Sugnanam stated that
he forwarded his resume to North Atlantic after they got in touch with him. It
was unclear if he was attempting to obtain employment or if he was trying to
get work for Esesson. Mr. Sugnanam claimed that when he checked out he was
asked by reception to pay the bill as it had not been paid. There was no record
of any such payment.
[61]
Giving the benefit of
the doubt to the appellant, I will allow the travel expense of $1,396.22
relating to the St. John’s to Toronto and Toronto to Calgary trip since
Mr. Sugnanam went to Calgary for the purpose of improving his skills for
future business dealings of Esesson. The invoice for the trip was submitted. It
was incurred for business purposes.
[62]
With respect to the
other two trips, there is no evidence that
Esesson paid for them. On the contrary, the evidence suggests that the first
trip was paid for by Blue Atlantic and the second by North Atlantic Refinery.
In my view, Esesson has not established that the assumptions of fact made by
the Minister with respect to these trips were incorrect.
Office expenses
[63]
Esesson had originally
claimed $6,193 as office expenses. Dr. Sugnanam was allowed an amount of 1,061.80.
[64]
At the audit stage, Esesson
was allowed an amount of $713.86 for office expenses, namely $603 for moving
expenses and $110.86 relating to the Beaumont Street property in
St. John’s.
[65]
Accordingly, an amount
of $4,416 of office expenses remained in dispute.
[66]
The office expenses
claimed were intermingled with personal expenses. Furthermore, some expenses,
such as those for a computer, a monitor, a chair and a camera, were capital
expenses. In addition, the same receipts were submitted for expenses already
claimed by Dr. Sugnanam.
[67]
After analyzing the invoices
submitted by Esesson, the expenses listed below should have been allowed in
addition to those already allowed by the Minister. These listed expenses were
incurred by Esesson for business purposes:
|
Purolator invoice paid on
October 16, 2002
|
$49.00
|
|
Purolator invoice paid on
December 24, 2002
|
$49.00
|
|
Printer ink refill for
computer, February 23, 2002
|
$51.74
|
|
Canon printer ink refill, July
30, 2002
|
$34.49
|
|
Computer repairs, May 11, 2002
|
$425.49
|
|
Colour ink, February 7, 2002
|
$55.19
|
|
Paper bought at WalMart,
September 2, 2002
|
$7.44
|
|
Total:
|
$672.35
|
[68]
As for the remaining office
expenses claimed, Esesson did not provide reliable evidence to establish that
the expenses were incurred for business purposes. I am also not allowing the expenses
related to office equipment, such as the computer, computer monitor, chair and
camera, since they were capital expenditures.
Conclusion
[69]
Accordingly, the appeal of Esesson
is allowed and the matter is referred back to the Minister for reconsideration
and reassessment on the basis that the following amounts will be allowed:
·
$445.24 for motor vehicle
expenses;
·
$568.58 for property taxes;
·
$1,711.19 for travel expenses;
·
$3,541.37 for repairs and
maintenance;
·
$672.35 for office expenses.
Esesson
will not be entitled to any further relief.
Mr.
Sugnanam’s appeals
[70]
I will now deal with the appeals
of Mr. Sugnanam for his 2002 and 2003 taxation years.
[71]
For the 2002 taxation
year, the question to be decided is whether Mr. Sugnanam was entitled to
deduct motor vehicle expenses in the amount of $7,607.62 pursuant to paragraph
8(1)(h.1) of the Act.
[72]
With regard to the 2003
taxation year, Mr. Sugnanam argued that, although he was employed by Esesson,
he also operated a separate consulting business in oil engineering.
Accordingly, Mr. Sugnanam, instead of claiming employment expenses as he
did for the 2002 taxation year, claimed for the 2003 taxation year a
professional business loss in the amount of $8,090.06 pursuant to subsection
9(1) and paragraph 18(1)(a) of the Act.
[73]
The respondent argued
that I should analyze the expenses claimed by Mr. Sugnanam as employment
expenses. She stated that his employment status did not change in 2003.
Mr. Sugnanam continued to work for Esesson. She stated that his only
income was employment income. In addition, she argued that no evidence was
submitted by Mr. Sugnanam indicating that he was operating a business
separate and apart from Esesson.
[74]
Mr. Sugnanam did
not demolish the assumption of fact made by the Minister that in the 2003
taxation year he was an employee of Esesson. Mr. Sugnanam did not operate
a business separate and apart from Esesson in 2003. The business was that of
Esesson. The only income he reported was employment income in the amount of
$38,000. He did not submit any evidence that he was operating a registered
business.
[75]
I will therefore analyze the
expenses claimed by Mr. Sugnanam for the 2003 taxation year as employment
expenses under subsection 8(1) of the Act.
[76]
At the hearing,
Mr. Sugnanam requested that he be allowed to file an amended notice of
appeal in order to add expenses that he had not claimed in his 2002 and 2003
income tax returns, such as professional development expenses in the amount of
$1,874.44 for 2002 and an automobile insurance expense of $392.72 for 2003.
[77]
I did not allow Mr.
Sugnanam to file his amended notice of appeal; it was too late at the hearing
stage to do so. In any event, as explained in my analysis below, he would have
not been entitled to claim his automobile insurance expenses as he did not meet
the requirements of paragraph 8(1)(h.1). Furthermore, subsection 8(1)
does not allow Mr. Sugnanam to claim his professional development expenses.
[78]
There was again some confusion
relating to the invoices submitted by Mr. Sugnanam in support of his
appeals for the 2002 and 2003 taxation years. He submitted in evidence many of
the same invoices that were tendered in support of the expenses claimed by Esesson
and by Dr. Sugnanam.
Applicable Statutory Provisions
[79]
Section 8 of the Act is the
provision dealing with the deduction of employment expenses. It states that an
employee will be entitled to deduct the expenses listed in section 8. In order
to do so, the taxpayer will have to meet the conditions enunciated in such
provision.
[80]
In this appeal, Mr. Sugnanam has
to meet the conditions set out in paragraph 8(1)(h) in order to be entitled to deduct travel
expenses from his employment income.
He has to be ordinarily required to carry on the duties of the office
or employment away from the employer’s place of business or in different
places, and
He has to be required under the contract of employment to pay the
travel expenses incurred by the taxpayer in the performance of the duties of
the office or employment,
He will not be able to deduct travel expenses if
He received an allowance for travel expenses that was, because of
subparagraph 6(1)(b)(v), (vi) or (vii), not included in computing the
taxpayer’s income for the year, or
. . .
[Underlining added.]
[81]
In order for Mr. Sugnanam to claim
motor vehicle expenses, he needs to meet the conditions set out in paragraph
8(1)(h.1). Those conditions are the same as the ones in paragraph 8(1)(h).
[82]
In addition, subsection
8(10) states that if a taxpayer deducts travel expenses and motor vehicle
expenses, he or she is required to obtain from his or her employer a form
certifying (T2200) that the conditions set out in the provisions dealing with
travel expenses and motor vehicle expenses are met.
Analysis
[83]
I will first deal with the 2002
taxation year. Mr. Sugnanam reported $40,000 in employment income. He
claimed, and the Minister disallowed, as motor vehicle expenses the amount of
$7,607.62:
|
Employment Expenses
|
Claimed
(as per T1
return)
|
Disallowed
Expenses
|
|
Fuel
Car travel
Professional
development travel
|
$6,050.00
|
$6,050.00
|
|
Insurance
|
$1,417.62
|
$1,417.62
|
|
Licence and registration
|
$140.00
|
$140.00
|
|
|
|
|
|
Total
|
$7,607.62
|
$7,607.62
|
[84]
Mr. Sugnanam’s
T2200, per subsection 8(10) of the Act was signed by his spouse,
Dr. Sugnanam. The initial T2200 signed by Dr. Sugnanam indicated that
Mr. Sugnanam received a per diem and was reimbursed for the expenses he
incurred for Esesson when away from Stephenville. Following the audit, a second
T2200 was signed by Dr. Sugnanam. The second T2200 indicated that
Mr. Sugnanam was not reimbursed by Esesson for the expenses he incurred on
behalf of Esesson.
[85]
I give no weight to the
second T2200 signed by Dr. Sugnanam. The first T2200 is in line with the
evidence submitted at trial. Mr. Sugnanam was entitled to be reimbursed
for his expenses when working away from Stephenville. Esesson, in calculating
its income for the 2002 taxation year, claimed an allowance of $100 per day for
Mr. Sugnanam when he worked outside of Stephenville. Furthermore,
Dr. Sugnanam could have testified regarding the change in the T2200s, but
she chose not to do so. I therefore draw a negative inference from
Dr. Sugnanam not being called as a witness.
[86]
Mr. Sugnanam was
therefore not entitled to claim his motor vehicle expenses in the amount of
$7,607.62 for his 2002 taxation year pursuant to paragraph 8(1)(h.1) of
the Act.
2003 taxation year
[87]
I will now turn to the
2003 taxation year. Mr. Sugnanam claimed, and the Minister disallowed, the
following expenses:
|
Employment Expenses
|
Claimed
(as per T1 return)
|
Disallowed
Expenses
|
|
Business taxes and licences
|
$274.85
|
$274.85
|
|
Insurance
|
0
|
0
|
|
Meals and entertainment
|
$157.50
|
$157.50
|
|
Motor vehicle expenses
|
$2109.98
|
$2109.98
|
|
Accounting
|
$92.00
|
$92.00
|
|
Travel
-Air ticket Australia
-Travel by road
|
$5,455.73
|
$5,455.73
|
|
|
|
|
|
Total
|
$8,090.06
|
$8,090.06
|
[88]
At trial, the
respondent conceded that Mr. Sugnanam was entitled to deduct in the
business taxes and licences category, an amount of $257.60 for his professional
association membership fees. Mr. Sugnanam in turn conceded that he should
not have claimed the accounting fees of $92 since the fees were for the
preparation of his personal tax returns.
[89]
With respect to the
motor vehicle expenses, the evidence is the same as the 2002 taxation year.
Accordingly, my reasoning for disallowing the motor vehicle expenses for the
2002 taxation year also applies to the 2003 taxation year. Accordingly,
Mr. Sugnanam is not entitled to deduct his motor vehicle expenses for the
2003 taxation year since he does not meet the requirements of paragraph 8(1)(h.1)
of the Act.
[90]
With respect to travel
expenses under paragraph 8(1)(h) of the Act, Mr. Sugnanam claimed
an amount of $2,662.73 for an air ticket to Australia and an amount of $2,371
for travel by road.
[91]
With respect to the
trip to Australia, I am of the view that it is not a deductible employment
expense. According to the evidence, the trip was either made on behalf of
Esesson in order to seek business opportunities in Australia or made by
Mr. Sugnanam to seek employment for himself. In either case, the expense
was not deductible by Mr. Sugnanam. If this travel was for Esesson, it was
Esesson’s expense, and if it was for Mr. Sugnanam to seek employment, it was
a personal expense.
[92]
With respect to the
travel by road as well as the meal and entertainment expenses,
Mr. Sugnanam was entitled to receive a per diem. He was also
entitled to be reimbursed by Esesson for his travel expenses. Therefore, he
could not deduct his travel expenses pursuant to paragraph 8(1)(h). Furthermore,
subsection 8(1) does not allow Mr. Sugnanam to deduct his entertainment
expenses.
Taxable benefits
[93]
At trial,
Mr. Sugnanam raised the point that the Minister had included the amounts
of $1,556.62 and $1,442.86 as shareholder benefits in his income for the 2002
and 2003 taxation years respectively.
[94]
The basis for the
taxable benefit was that the Sugnanams were residing in the Georgia Loop
property in Stephenville, which was owned by Esesson. The amount of the taxable
benefit was based on the difference between the fair market monthly rental
value namely $450, and the monthly rent charged to the Sugnanams, namely $300.
The Minister also included as taxable benefits the amounts paid by Esesson for
utilities.
[95]
The rent and utilities
amounted to $4,669.86 and $4,328.59 for the 2002 and 2003 taxation years
respectively. From these amounts, the Minister subtracted 1/3 since 1/3 of the
Georgia Loop property was used by Esesson for business purposes. The table below
shows how the benefits were calculated:
|
Rent Benefit
|
2002
|
2003
|
|
Fair Market
Rental Value (POU)
|
$5,400.00
|
$5,400.00
|
|
Less Rent Paid
|
$3,600.00
|
$3,600.00
|
|
Rent Benefit
|
$1,800.00
|
$1,80000.00
|
|
Utilities
Benefit
|
|
|
|
Heat
|
$1,808.44
|
$1,367.29
|
|
Power
|
$1,061.42
|
$1,161.30
|
|
Total
Utilities Benefit
|
$2,869.86
|
$2,528.59
|
|
Total Living
Expense Benefit
|
$4,669.86
|
$4,328.59
|
|
Mr. Sugnanam’s
Benefit (1/3)
|
$1,556.62
|
$1,442.86
|
[96]
The Minister was
correct in assessing Mr. Sugnanam’s taxable benefit amounts. At the
hearing, Mr. Sugnanam did not question the fair market monthly rental
value established by the Minister. Nor did he question the utilities amounts
used by the Minister in computing the taxable benefits. He simply disagreed
with the inclusion of the benefit in his income for the 2002 and 2003 taxation
years.
Conclusion
[97]
Accordingly, the appeal
of Mr. Sugnanam for the 2002 taxation year is dismissed.
[98]
The appeal of
Mr. Sugnanam for the 2003 taxation year is allowed and the matter is
referred back to the Minister for reconsideration and reassessment on the basis
that Mr. Sugnanam was entitled to deduct an amount of $257.60 for his
professional association membership fees.
Signed at Montreal,
Quebec, this 5th day of July 2013.
“Johanne D’Auray”
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