AMENDED
REASONS FOR JUDGMENT
[These amended reasons for judgment are issued in substitution
for the reasons for judgment signed on June 8,
2017 and
to remove a word from the first line of
paragraph 12.]
Jorré J.
[1]
The Appellant appeals from reassessments of her
2008 and 2009 taxation years.
[2]
In reassessing:
i.
With respect to the 2008 taxation year, the Minister
a.
disallowed all $12,136.40 of employment expenses
claimed,
b.
disallowed the $2,419 of administrative fees and
safety deposit box fees claimed against investment income and
c.
levied gross negligence penalties of $638.60
pursuant to subsection 163(2) of the Income Tax Act (the “Act”) in respect
of the disallowed amounts in a. and b.
ii.
With respect to the 2009 taxation year, the Minister
a.
added to the Appellant’s income unemployment
insurance benefits in the amount of $17,501,
b.
disallowed the rental loss of $4,701.08 claimed
(i.e. the Minister treated the Appellant as not having a rental income source),
c.
disallowed all expenses claimed with respect to
a trucking business and
d.
levied gross negligence penalties of $682.50
pursuant to subsection 163(2) of the Act in respect of the
disallowed amounts in b. and c.
[3]
The issues in this case are primarily questions
of fact and I will deal in turn with each of the changes made by the Minister.
2008
Tax Year
[4]
In 2008 the Appellant worked as a server at a restaurant
in a hotel; she also worked occasionally off-site because her employer did
catering off‑site. The employer was a company. According to the record of
employment filed the period of employment was from 1 January 2008 to 29
November 2008.
[5]
Her income tax return for the 2008 taxation year
showed employment income of $26,868.48. As a result of claiming various
deductions she filed a return showing no federal or Ontario tax payable and
resulting in a refund of all tax withheld as well as a refundable working
income tax benefit of just over $1,000.
Administrative
and Safety Deposit Box Fees
[6]
With respect to the $2,419 of administrative
fees and safety deposit box fees claimed against investment income, the
Appellant did not really know what the fees were about. She thought the
administrative fees might be what she paid the man who prepared her tax return
and, as for the safety deposit box she stated that she kept her passport in it.
The Appellant had no investment income and did not have any investments. Accordingly
there is no basis for those claimed deductions.
Employment
Expenses
[7]
Under subsection 8(2) of the Act
employees are limited to deducting only those expenses that are permitted by
section 8. Subsection 8(1) states:
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:
[8]
The only provisions that might have application
here are paragraphs 8(1)(h), (h.1), (i) or (j) of
the Act; subsections 8(4) and (10) are also relevant.
[9]
Turning to the employment income, the Appellant
claimed the following employment expenses:
|
Entertainment
|
$ 430.00
|
|
Legal, accounting & professional fees
|
$ 500.00
|
|
Maintenance & repairs
|
$ 239.70
|
|
Meals
|
$ 499.30
|
|
Memberships & subscriptions
|
$ 132.00
|
|
Office expenses
|
$ 250.00
|
|
Supplies
|
$ 247.80
|
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Telecommunications
|
$ 1,458.30
|
|
Tools
|
$ 263.70
|
|
Travel (4,950 km @ $0.52)
|
$ 2,574.00
|
|
Uniforms
|
$ 1,887.60
|
|
Vehicles
|
|
|
Gasoline & oil
|
$ 1,180.00
|
|
Insurance & licences
|
$ 1,374.00
|
|
Parking & tolls
|
$ 550.00
|
|
Repairs & maintenance
|
$ 550.00
|
|
|
|
|
|
|
[10]
The Statement of Employment Expenses attached to
the return is headed “Cleaners” which is odd although the Appellant testified
that, when there are no customers around to serve, she might clean the bar.
[11]
There are a number of problems with the expenses
claimed and, except to a very minor extent, I am satisfied that the Minister
was correct in denying the expenses.
[12]
First, I will turn to the car expenses; they
include not only gasoline and oil, insurance and licences, parking and tolls
and repairs and maintenance but also the travel expenses claimed at $0.52 per
kilometre. Together these car expenses represent slightly over one half of the
employment expenses claimed.
[13]
I note that one cannot claim both the deductible
portion of actual expenses for things such as gasoline and also claim an amount
per deductible kilometre. This is double counting; a claim for an amount per
deductible kilometre is a rough and ready proxy for the deductible portion of
actual costs.
[14]
However, the first question is whether the Appellant
has any deductible car expenses at all. The cost of getting to work is not
normally deductible. However, where the taxpayer is “. . .
ordinarily required to carry on the duties of the . . . employment
away from the employer’s place of business or in different places” then “. . . expenses incurred for travelling in the
course of the . . . employment” (emphasis added) will be
deductible.
[15]
The evidence was that most of the Appellant’s
work was done at her employer’s restaurant. Sometimes she worked at a different
location where her employer was catering the event.
[16]
Although the Appellant had a long commute to her
employer’s restaurant, about 300 km round trip, it is well settled that the
costs of travelling to an employee’s place of work are not deductible. That
would cover the bulk of the claimed car expenses whatever the proper quantum
is.
[17]
Going to work at the locations other than the
restaurant where her employer was catering an event for a client and which do
not constitute a regular place of employment might be deductible;
unfortunately, the Appellant did not keep a log book and the evidence does not
enable me to determine how many times the Appellant went to work at such
locations, where they were or what distances the Appellant may have travelled
to get to such locations.
[18]
As a result, while I accept that, on occasion,
the Appellant performed work at locations other than the restaurant and there
may be a modest amount of allowable car expenditures, there is little basis
upon which I could recognize them. In the circumstances, I will allow a very
modest amount of car expenditures to recognize that there were some such
expenditures, which amount I set at $400.
[19]
A large amount was claimed for uniforms but the
evidence did not demonstrate that the restaurant required a uniform. Based on
the testimony and the receipts in evidence the expenditures appear to have
simply been to purchase clothing. The law is quite clear that normal clothing
worn to work is not deductible.
[20]
The Appellant said that on some occasions where
they were serving at a themed occasion they had to wear a costume and gave two
or three examples. That might have raised an interesting question but given
that the Appellant did not point to any specific amount expended, there is no
basis on which I could find that there should be any amount allowed in respect
of a costume.
[21]
The amount for telecommunications appears to be
for a mobile phone.
The Appellant needed this so she could be readily reached if, for example, the
restaurant wanted to call her in and also to find locations through the Internet.
These appear to be a rather incidental use of the phone. Perhaps a portion of
the monthly cost of the phone might fall within “supplies consumed” in subparagraph 8(1)(i)(iii)
if the evidence had shown some incremental costs from the work-related uses. There was no such evidence.
[22]
There is no reason to allow any amount for
telecommunications.
[23]
Meals are not generally deductible except as
part of a travel expense and in such a case the requirements of subsection 8(4)
of the Act must be met. The subsection says:
An amount expended in respect of a meal
consumed by a taxpayer who is an . . . employee shall not be included
in computing the amount of a deduction under paragraph (1)(f) or (h)
unless the meal was consumed during a period while the taxpayer was required
by the taxpayer’s duties to be away, for a period of not less than twelve
hours, from the municipality where the employer’s establishment to which the
taxpayer ordinarily reported for work was located and away from the
metropolitan area, if there is one, where it was located.
[Emphasis added]
[24]
There is simply nothing in the evidence that
shows that the conditions of the section are met.
[25]
Finally, with respect to the remaining amounts
claimed for entertainment, legal, accounting and professional fees, maintenance
and repairs, memberships and subscriptions, office expenses, supplies and
tools, there is no basis for these claims: for much of the amounts claimed I am
not convinced of the existence of the expenditures, for example the claimed
entertainment expenses or membership and subscription expenses; equally
important, to the extent there might be such expenditures incurred I am not
convinced that the evidence shows any reason to think that they were “amounts as are wholly applicable” to the Appellant’s
income as a restaurant server or that any part of the expenditure “may reasonably be regarded as applicable” to the
Appellant’s income as a restaurant server as required by the opening paragraph
of subsection 8(1).
2008 Penalties
[26]
Penalties pursuant to subsection 163(2) were
levied with respect to the disallowed amounts. The subsection says, in part:
Every person
who, knowingly, or under circumstances amounting to gross negligence, has made
or has participated in, assented to or acquiesced in the making of, a false
statement or omission in a return . . . filed or made in respect
of a taxation year for the purposes of this Act, is liable to a penalty of the
greater of $100 and 50% of the total of
. . .
[27]
There are two key elements to the penalty: first,
there must be a false statement and, second, the person must make or assent to
the statement knowingly or circumstances amounting to gross negligence.
[28]
There is no question that there are false
statements.
[29]
As to the question of gross negligence, it must
be remembered that gross negligence includes wilful blindness.
[30]
The Appellant takes the position she knows
little about tax and relied on the person who was recommended to her and who
prepared her returns.
[31]
While individuals are not expected to be tax
experts, relying on someone else does not relieve a person from making
reasonable efforts in the circumstances to insure the accuracy of their tax
return.
[32]
I am not satisfied that the Appellant made such
efforts. There are a number of red flags that should have led the Appellant to
question the return prepared for her and take action. The following are
examples of items that should unquestionably have raised questions in the mind
of the Appellant: claiming administrative fees and safety deposit box fees
against non‑existent investment income when she had no investments,
claiming entertainment expenses or claiming memberships and subscriptions. More
generally, the high level of expenses claimed relative to her income ought to
have provoked questions.
[33]
The only reasonable explanation for this failure
to see these “red flags” is wilful blindness. Accordingly, the penalty is
justified and should be maintained except for an adjustment to the amount of the
penalty to take account of $400 in car expenses allowed.
2009
[34]
The Appellant filed a 2009 income tax return
showing no federal tax payable and no Ontario tax payable. It did calculate
that she had $389 in CPP premiums to pay.
Employment
Insurance Benefits
[35]
The Minister added to the Appellant’s income
unemployment insurance benefits in the amount of $17,501 that were not included
in her tax return. No penalties were levied with respect to this amount and
this change is not contested.
The
Rental Loss
[36]
The Appellant reported gross rental income of
$4,800 and claimed the following expenses:
|
Insurance
|
$ 655.00
|
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Interest
|
$2,144.85
|
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Maintenance & repairs
|
$
877.00
|
|
Motor vehicle expenses
|
$2,485.00
|
|
Office expense
|
$
125.00
|
|
Legal, accounting &
professional fees
|
$ 550.00
|
|
Utilities
|
$1,337.31
|
|
|
|
[37]
These expenses total $9,501.08 for a reported
net rental loss of $4,701.
[38]
The Minister treated the Appellant as not having
a source of rental income and simply disallowed the loss of $4,701. In the alternative, the
Minister challenged the expenses.
[39]
The Appellant’s condo had two floors and her
testimony was that she rented the second floor for the last five or six months
of the year to three foreign students for $400 (or $380) a month to each
student. She did this out of necessity because her husband was going bankrupt
at the time.
[40]
While at the start of the year the upstairs was
undivided she and her husband built walls so as to create three separate rooms
for the students. There was only one bedroom downstairs for her family which
consisted of the Appellant and her husband, twins who were about two years old
and an infant who was recently born. The Appellant said the family could manage
this crowding given that, as a long‑distance truck driver, her husband
was away much of the time.
[41]
For five months of rental this should have
produced about $6,000 in rent but only $4,800 was reported. The Appellant
explained this by the fact that the three students could not always pay and
because they were good tenants she accepted what they could pay.
[42]
Given the difficulties she and her husband faced
I find this evidence hard to accept.
[43]
There is a more important reason why I cannot
accept the Appellant’s evidence regarding the rentals. She said quite clearly
that because her husband was away she only wanted to rent to female students
and did indeed rent to female students.
[44]
Her evidence on this and certain other matters
relating to the rental is flatly contradicted by a letter dated January 16,
2016 that she sent to the CRA where she says:
My renters for the year were Mr. Chen,
Ye Tse, and Mr. Hwang, Ji Yu. They were students from China.
They took up residence in July and left December 31, 2009. They paid $400
per month each, in cash. Total rent was $4,800.
[45]
The Appellant explained the contradictions by
the fact that her tax preparer had drafted the letter. I do not accept the
explanation: the Appellant sent the letter and, while English is not her first
language I have no doubt that she would have understood what I just quoted. I
also note the discrepancy between two tenants and three tenants.
[46]
As a result I do not accept the Appellant’s
testimony about the rentals with the consequence that I have not been convinced
that part of the house was rented out. Accordingly, there was no rental source
and the Minister was justified in denying the loss claimed.
[47]
Accordingly there is no reason to change this
aspect of the reassessment.
The Trucking Business
[48]
The Appellant’s husband was a long-distance
truck driver. He went bankrupt and in 2009 the Appellant bought a truck and
went into the trucking business in order for her husband to be employed driving
the truck she bought. Based on the Bill of Sale the truck was purchased in
August and, based on the owner operator pay statements from the Rosedale Group
the truck started earning revenue at the beginning of September.
[49]
The Appellant’s tax return showed sales of
$38,565. It also showed a subcontract of $9,109 and various other expenses
totalling $22,027.45 leaving a net income of $7,428.55.
[50]
In assessing, the Minister accepted the gross
revenue but denied all the expenses. It is of course hard to imagine a business
without expenses.
[51]
At the hearing, the Appellant filed a variety of
documents but does not appear to have kept any sort of conventional accounting
records with respect to the trucking business. The most useful documents were
the owner operator pay statements. I will come back to them in a moment. The Appellant
also brought a jumble of receipts many of which are not relevant to the
trucking business.
[52]
Portions of the owner operator pay statements
are not always legible. From those statements it would appear that Rosedale
paid the Appellant an amount of about $53,400 for trucking services. This
amount appears to include an amount of approximately $7,000 in fuel rebates.
The statements also show deductions of approximately $24,500 from the payments;
these deductions appear to be for expenses paid by Rosedale on behalf of the Appellant,
primarily for fuel.
[53]
I wish to take a moment and recognize the
efforts by counsel for the Respondent, Mr. King, during the hearing in
going through the documents, many or most of which he had not seen before, and
conceding a number of expenses. The concessions included the above‑mentioned
deductions on the owner operator statements and additional amounts totalling about
$1,750 for a total of about $26,250, a total greater than the $22,027.45 amount
of expenses claimed in the tax return, not counting the claimed $9,109 expense
for a subcontract. Counsel, in effect, qualified his concessions stating that
they were made on the basis that if the deductions shown by Rosedale were
accepted so must the gross revenues earned by the Appellant as shown on the
same statements. I agree. The result still leads to a reduction in the net
income from trucking and as a consequence the income tax assessed.
[54]
Are there any other valid expenses for this
business? The Appellant claimed $9,109 expense for a subcontract. She said this
was the amount she paid her husband to drive the truck and was paid in cash. I
do not accept her evidence on this for three reasons. First, it is odd to
classify such an amount as a subcontract as opposed to wages in Part 5 of the
Statement of Business Activities in the tax return. Secondly, this amount is
inconsistent with two statements she prepared that purportedly show amounts
paid to her husband in the four months September to December 2009 inclusive;
according to these statements, over $13,600 was paid to her husband. Third, I am unable to
conceive how she could have paid her husband $9,109, or over $13,600, and yet
show her husband’s net income as $902.48 on the first page of her tax return. As a
result I do not accept that there was such an expense.
[55]
The major cost shown on her tax return is some
$19,000 in motor vehicle costs; this amount is more than covered by the $26,250
conceded by the Respondent. There is no need to make any further allowance for
motor vehicle costs save for capital cost allowance.
[56]
The Appellant bought a used truck in 2009 for
$52,950 exclusive of GST
and no amount was claimed for capital cost allowance in the return. The
Respondent concedes that the Appellant should be allowed to claim capital cost
allowance on the truck if she so chooses. The judgment will reflect this.
[57]
The Appellant also claimed various smaller
amounts for interest, supplies, legal, accounting and other professional fees
as well as for telephone and utilities; these amounts totalled a little less
than $2,950. Although there were no doubt some amounts of other miscellaneous
expenses, there was no explanation of these amounts. For example, it was not
explained what interest, paid to who, was paid in relation to the business.
There are some phone and utility bills that are in the receipts but no
testimony to explain what is linked to the business and how the allocation was
done.
In the circumstances, it is appropriate to recognize a small amount of $750 in
other expenses.
[58]
I have not been satisfied that the Appellant is
entitled to any other expenses in relation to the trucking business.
[59]
Consequently, with $53,400 in revenues and
$27,000 in trucking expenses, the Appellant has a net income from trucking of
$26,400 before any claim for capital cost allowance.
[60]
Since the Minister assessed on the basis of a
net trucking income of $38,565, the consequence is that the Appellant’s
trucking income must be reduced by $12,165. In addition, the Appellant may
deduct an amount of capital cost allowance not exceeding the maximum amount
permissible in 2009 with respect to the truck. The Appellant will have to
advise the Minister what amount of capital cost allowance she wishes to claim.
2009 Penalties
[61]
Finally, I come to the gross negligence
penalties levied by the Minister in 2009. There is no question that there are
false statements in the return. I am also satisfied that the Appellant had to
have, at the least, been wilfully blind to think that, in the circumstances,
there could be a rental loss and that the net income of the trucking company
was $7,428.55 or that its gross revenue was about $38,000.
[62]
Accordingly the Minister is justified in
applying a gross negligence penalty in 2009.
Conclusion
[63]
For the above reasons a limited number of
changes are to be made to the assessments of 2008 and 2009. Accordingly, the
appeal is allowed and the matter is referred back to the Minister for reconsideration
and reassessment on the basis that:
1.
With respect to the 2008 taxation year, the
Appellant is to be allowed an amount of $400 in employment expenses and the
gross negligence penalty pursuant to subsection 163(2) of the Act
is to be adjusted to take account of that change;
2.
With respect to the 2009 taxation year:
a.
The Appellant’s net trucking income must be
reduced by $12,165 and, in addition,
b.
The Appellant may, with respect to the truck,
deduct an amount of capital cost allowance not exceeding the maximum amount
permissible in accordance with the Act and the Income Tax Regulations.
The Appellant shall advise the Minister, within two months of the date of this
judgment, what amount, if any, of capital cost allowance she wishes to claim.
c.
The amount of the gross negligence penalty
pursuant to subsection 163(2) of the Act is to be adjusted to take
account of the reduction in the trucking income as a result of a. and b.
Signed at Ottawa, Ontario, this 21st day of June 2017.
“Gaston Jorré”
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