Citation:
2017 TCC 40
Date: 20170314
Docket: 2013-4435(IT)I
BETWEEN:
HAROLD
PEACH,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR ORDER
Bocock J.
Background
of this Order
[1]
This Court originally heard the appeal of the
Appellant in St. John’s, Newfoundland on August 21, 2014. Oral reasons for
judgment were rendered by telephone conference on September 9, 2014. There were
two bases of the Appellant’s, Mr. Peach’s, appeal before the Court. The first
basis concerned Mr. Peach’s assertion that he incurred losses from a rental
property for the 2009 and 2010 taxation years. The second basis of appeal
concerned additional business losses from a financial consulting business for
the same two taxation years. The Court dismissed the appeal in its entirety.
[2]
Mr. Peach appealed to the Federal Court of
Appeal. The Federal Court of Appeal denied Mr. Peach’s appeal in respect of the
rental losses. In respect of the financial consulting business losses, the
Federal Court of Appeal allowed the appeal, set aside that judgment of this
Court and returned the matter to the Tax Court for a redetermination.
[3]
Specifically, Trudel J.A., found and directed as
follows:
[5] Under section 67, the Judge, without saying why,
considered globally whether the expenses were reasonable and accepted that, as
set out in the Minister’s assessment, some of the expenses should be allowed to
the extent they matched the appellant’s commission income. He did not have
regard to the particular expenses and the appellant’s explanation for them.
[6] Stewart makes it clear (at paragraph 57)
that under section 67, unreasonable expenses can be eliminated or reduced to
make them reasonable.
[7] We are not satisfied that the Judge asked himself
that question, namely whether the actual expenses in this case were
unreasonable and what reduction in the appellant’s claimed expenses might be
necessary in order to be reasonable.
[8] As a result, the appeal will be allowed in part,
with costs, the judgement of the Tax Court of Canada will be set aside with
respect to the appellant’s business losses and returned to the Tax Court of
Canada for redetermination of the section 67 issue.
[4]
The Chief Justice of this Court directed that
this judge hear and re-determine “whether the actual expenses in this case were
unreasonable and what reduction in the Appellant’s claimed expense might be
necessary in order to be reasonable.”
Process for Redetermination of Business
Expenses
[5]
After a conference call, parties’ counsel
mutually agreed to submit further argument by written submissions. These
written submissions, the audio CD of the original hearing and the direction of
the Federal Court of Appeal constitute the basis for this re-determination
order.
[6]
Given the categories of expenses and the Federal
Court of Appeal’s direction that particular expenses and Mr. Peach explanation
for them be considered, the Court has employed a hopefully useful methodology.
The Court has examined each particular category of expense, the evidence and
testimony for each at the hearing and the subsequent written respective
submissions of counsel. The Court has provided its related conclusions
concerning the extent of unreasonableness, if any. Therefore, by deduction, the
Court has determined the reasonable expenses which Mr. Peach may deduct from
income in each year.
Legal Basis for Analysis
[7]
In undertaking the redetermination, the Court
uses the instruction provided in Stewart v. The Queen, 2002 SCC
46 at paragraph 57:
57 It is clear
from these provisions that the deductibility of expenses presupposes the
existence of a source of income, and thus should not be confused with the
preliminary source inquiry. If the deductibility of a particular expense is in
question, then it is not the existence of a source of income which ought to be
questioned, but the relationship between that expense and the source to which
it is purported to relate. The fact that an expense is found to be a personal
or living expense does not affect the characterization of the source of income
to which the taxpayer attempts to allocate the expense, it simply means that
the expense cannot be attributed to the source of income in question. As well,
if, in the circumstances, the expense is unreasonable in relation to the source
of income, then s. 67 of the Act provides a mechanism to reduce or eliminate
the amount of the expense. Again, however, excessive or unreasonable expenses
have no bearing on the characterization of a particular activity as a source of
income.
[8]
In addition, poor business judgment should not
be the primary basis which determines that business expenses are unreasonable,
but rather, a conclusion that no person of business would pay such amount given
the circumstances of the taxpayer before the Court: Ankrah v. R.,
2003 TCC 413 at paragraph 4, itself citing Gabco Limited v. MNR,
(1968), 68 DTC 5210 (Ex. CF) at page 5216.
[9]
Moreover, any contemporenous assessment of
reasonableness or unreasonableness cannot utilize a simple notion that expenses
exceeded revenue: Williams v. R., 2009 TCC 93 at paragraphs 16
and 17. Logically, this conclusion exists for two reasons. First, the measure
of revenue versus expenses is a quantifiable calculation which occurs after the
fact. It cannot possibly be made at the time of the expenditure or even during
the annual period of measure. Second, a business expenditure is by nature made
to gain business income, thus is incurred beforehand, with its hopeful result of
income unpredictably subsequent.
Analysis
[10]
The Federal Court of Appeal requires that this
Court review the facts concerning the unreasonableness (and by deduction
reasonableness) of the additional business expenses by each category. Appropriately,
the evidence of Mr. Peach was not considered in the Federal Court of Appeal’s
decision. To that extent, counsels’ submissions have been received and filtered
by this Court through the actual evidence, pleadings and documentary evidence
before this Court at the hearing.
[11]
Of particular note in that regard, are the
following facts concerning the 2009 and 2010 taxation years adduced into
evidence by Mr. Peach, either in his testimony in chief, his documents or on
cross-examination:
(a) the vast majority of Mr. Peach’s testimony related to
his purported rental property;
(b) his testimony and submissions regarding his financial
consulting business were primarily directed towards demonstrating that he had a
business source of income (a finding the Court originally made);
(c) Mr. Peach spent no more than 8 hours a week on his
business during 2009 and 2010;
(d) primarily, these efforts consisted of attending
training sessions in St. John’s, some 125 km away from his residence;
(e) aside from training, business growth was attempted through
face to face, direct marketing rather than advertising and promotion, which was
discouraged by the principal, Primerica;
(f) Mr. Peach produced no travel log for his business
travel, nor did he testify that he kept one;
(g) Mr. Peach previously operated the business for 10
years and incurred losses in each year;
(h) his losses increased as time passed;
(i) Mr. Peach moved to Nunavut in August of 2010;
(j) Mr. Peach claimed expenses and capital cost allowance
for five (5) vehicles during the 2009 and 2010 appeal years;
(k) Mr. Peach was the only person undertaking the financial
consulting business;
(l) Mr. Peach testified that the operation of his business
was not “reasonable”, but rather “hopeful”; and
(m) Mr. Peach produced no expense receipts for the appeal
years, however, the Respondent admitted she did not contest that the quantum of
the amounts claimed were incurred by Mr. Peach, but only that such amounts were
not reasonable or were not incurred in respect of the business.
[12]
On the basis of the foregoing, the following
represent, in the case of each heading of expense, an analysis grouped by categories
of the unreasonableness and reasonableness of the claimed expenses.
Meals and Entertainment
(i) Testimony and submissions by
Appellant
Mr. Peach testified that meals and entertainment were incurred solely
for him while travelling away from home. These expenses were incurred to allow
him to attend the branch meetings and training sessions in St. John’s, some
125km from his home.
(ii) Respondent’s Submissions
No evidence was
produced at trial regarding these expenses: amounts, entertainees or any cross-reference
to purpose. The history of losses over the 10 previous years renders these
expenses unreasonable.
(iii) Analysis of Reasonable vs.
Unreasonable Expense
Mr. Peach spent 8 hours a week on his business. Based upon a 50 week
working year and generously assuming Mr. Peach travelled to St. John’s the one
day he worked each week, this would require him to buy his lunch each day. He
did not testify that he met with clients in St. John’s, nor did he pay for
others’ meals. Anything beyond $20.00 per day for lunch would be unreasonable,
even if he travelled to St. John’s 50 days a year, itself unlikely. Therefore,
expenses for his out of town meals beyond $1,000.00 are unreasonable. For 2010,
Mr. Peach was not in Newfoundland for 6 months to travel to St. John’s.
Therefore, one half these expenses for 2010 are reasonable.
(iv) Determination of Unreasonable
Amount
Amounts beyond $20.00 a day are unreasonable. In 2009, the amount
claimed was $1,662.00, the unreasonable amount is determined to be $662.00,
rendering a reasonable amount as a 2009 expense for meals and entertainment of
$1,000.00. In 2010, the amount claimed was $1,161.00, the unreasonable amount
is determined to be $661.00, rendering a reasonable amount as a 2010 expense for
meals and entertainment of $500.00.
Business Tax, Fees and Licenses
(i) Testimony and submissions by
Appellant
Business Taxes and fees are fixed costs and must be incurred to
operate.
(ii) Respondent’s Submissions
Since a business existed, these costs
are reasonable.
(iii) Analysis of Reasonable vs.
Unreasonable Amounts
The parties have agreed and, while the logic of expending such sums
given the return achieved over a decade is not entirely logical, they were
nonetheless incurred as part of a business and are not necessarily unreasonable.
(iv) Determination of Unreasonable
Amount
As conceded by the Respondent, there is no amount determined to be
unreasonable and therefore the sum of $760.00 for 2009 and $769.00 for 2010 are
to be allowed on account of Business Tax, fees and Licenses.
Office Expenses
(i) Testimony and submissions by
Appellant
Office expenses are required for a business, therefore those claimed
are reasonable.
(ii) Respondent’s Submissions
A certain sum is reasonable for office expenses. The sum for 2010 is
$378.00 more than that claimed 2009. No evidence was furnished at the hearing
as to the increase and therefore 2010 should remain the same.
(iii) Analysis of Reasonable vs.
Unreasonable Amounts
While the evidence at the hearing was scant, office expenses for
2009 are allowed at $665.00 as claimed. While it is more logical, given Mr.
Peach’s absence from Newfoundland for the latter part of 2010, that anything in
excess of one-half of $665.00 is unreasonable, the Court is prepared to agree
with the Respondent’s concession of the $665.00.
(iv) Determination of Unreasonable
Amount
In 2009, the amount claimed was $665.00, there is no unreasonable
amount, yielding a reasonable amount of $665.00 as 2009 office expenses. In
2010, the amount claimed was $1,043.00, the unreasonable amount is determined
to be $378.00 given the five month absence, rendering a reasonable amount for 2010
office expenses of $665.00.
Delivery Freight and Express
(i) Testimony and submissions by
Appellant
Respondent has conceded all such expenses as reasonable.
(ii) Respondent’s Submissions
The amount of $38.00 is
reasonable.
(iii) Analysis of Reasonable vs.
Unreasonable Amounts
On the basis that a receipt was original submitted, as conceded by
the Respondent at the hearing, the amount claimed is reasonable.
(iv) Determination of Unreasonable Amount
The amount of $38.00 is
reasonable.
Capital Cost Allowance
(i) Testimony and submissions by Appellant
Mr. Peach acquired
two new cars in each of 2009 (April) and 2010 (July). Operating expenses
decreased as the cost of these newer capital assets increased. In July 2009,
only one-half of capital cost allowance was claimed for a new car (acquired in
April) and in 2010, again, only one-half was claimed because of relocation.
(ii) Respondent’s
Submissions
The use of 5 cars is unreasonable. Adding a new car to the capital
asset pool in both of 2009 and 2010 was not reasonable. Total capital cost
allowance for each of 2009 ($17,085.00) and 2010 ($17,105.00) should be
averaged over one car for 2009 ($3,417.00) and for 2010 ($3,421.00). Given Mr.
Peach’s testimony that 24% and 20% constituted business travel, the amounts for
motor vehicle capital cost allowance should thereafter be reduced in each of
2009 to $820.00 and 2010 to $684.00. There was no further evidence of capital
cost allowance for other assets.
(iii) Analysis of Reasonable vs.
Unreasonable Amounts
Three issues figure prominently:
1. The new car in 2009 was acquired in April of that year;
2.
The new car in 2010 was acquired the month
before Mr. Peach left Newfoundland for Nunavut;
3.
No log was produced at the hearing identifying
how much business travel occurred per week or month or which vehicle was used.
It is unreasonable to allow a percentage of capital costs allowance across 5
different motor vehicles. The Respondent’s submission is consistent and
reasonable.
(iv) Determination of Unreasonable
Amount
In 2009, the amount claimed is $2,962.00, the unreasonable amount is
determined to be $2,142.00, rendering a reasonable amount as a 2009 capital
cost allowance of $820.00. In 2010, the amount claimed was $4,040.00, the
unreasonable amount is determined to be $3,356.00, rendering a reasonable
amount as a 2010 capital cost allowance of $684.00.
There simply was no other evidence regarding other capital cost
allowance beyond that offered for the motor vehicles.
Motor Vehicle Expense
(i) Testimony and submissions by
Appellant
The Appellant owned 5 motor vehicles over the course of 2009-2010.
Mr. Peach attempted to introduce motor vehicle registrations, but not were made
exhibits at the hearing. In 2009, there were 3 old vehicles which were
expensive to maintain and all used for business. In April 2009, Mr. Peach acquired
a new motor vehicle for $44,488.54. As a result, expenses reduced but capital
costs allowance increased. In 2010, another new car was purchased to replace another
vehicle. The ratios of 24% and 20% of business use was reasonable in the
circumstances.
(ii) Respondent’s Submissions
No evidence was adduced at trial disclosing the motor vehicle
expenses. Therefore, 24% business usage should be allowed of what was claimed
in 2009 ($973.00) and 20% in 2010 ($1,076.00).
(iii) Analysis of Reasonable vs.
Unreasonable Amounts
The business use of 5 different motor vehicles over 2 years in a one
person business is unreasonable. No justification for these additional and
varied motor vehicles was entered into evidence at the hearing.
The acquisition of a new car in April 2009 rendered the continued
use of older vehicles unstainable, unreasonable and inexplicable. Simply, a one
person business, undertaken one day a week cannot use more than one car at one
time. Given this use, the only reasonable calculation of expenses for motor
vehicles is that offered by the Respondent. This uses the percentages offered
by Mr. Peach, but applied to one average motor vehicle expense category rather
than five. It is reasonable, logical and balanced. For these expense purposes,
the Court will ignore Mr. Peach’s 5 month absence from Newfoundland in 2010.
(iv) Determination of Unreasonable
Amount
In 2009, the amount claimed is $4,056.00, the unreasonable amount is
determined to be $3,083.00, rendering a reasonable amount as a 2009 motor
vehicle expenses of $973.00. In 2010, the amount claimed was $5,380.00, the
unreasonable amount is determined to be $4,304.00, rendering a reasonable
amount as a 2010 motor vehicle expenses of $1,076.00.
Other Expenses
[13]
Appellant’s counsel submits that receipts of
this category of evidence were submitted to CRA in July 2012. This may well be.
However, no evidence, either by way of documents or vive voce testimony,
was submitted to this Court at trial. Nothing before the Court allows it to
make any determination regarding this genre of expense. Such expenses are not
allowed because no evidence of same exists. The pertains to the “other”
category in 2009 and “travel” in 2010, neither of which were referred to in Mr.
Peach’s testimony at the hearing.
[14]
On the basis of the foregoing, the findings
contained below represent this Court’s determination, on the facts, of the
extent of the unreasonable expenses and, by deduction, the reasonable expenses
that shall be allowed Mr. Peach for his business in the 2009 and 2010 taxation
years. As a summary, the original expenses claimed, those which were
unreasonable and those which are reasonable and allowed for the two taxation
years are as follows:
|
Taxation
Year
|
Re-determined Unreasonableness Expenses
|
Reasonable
Expenses
|
|
2009
|
$6,191.00
|
$4,249.00
|
|
2010
|
$9,224.00
|
$3,694.00
|
[15]
Mr. Peach shall be entitled to his costs in
accordance with the tariff as if the matter were a two day informal appeal,
subject to the right of either party to make further submissions in writing to
the Court within 30 days of the date of this Order.
Signed at Vancouver, British Columbia, this
14th day of March 2017.
“R.S. Bocock”
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