REASONS
FOR JUDGMENT
Sommerfeldt J.
I. INTRODUCTION
[1]
These Reasons pertain to the Appeals instituted
by Yiu-Cho Ngai in respect of his 2005 and 2006 taxation years. Mr. Ngai was
reassessed in respect of those taxation years by the Minister of National
Revenue (the “Minister”), as represented by the
Canada Revenue Agency (the “CRA”), so as to
disallow the deduction of certain expenses. In particular, the Minister
initially reassessed Mr. Ngai on April 30, 2009, and subsequently, after
considering Mr. Ngai’s earlier notices of objection, again reassessed Mr.
Ngai, on September 26, 2011, so as to allow some (but not all) of the expenses
that had been previously disallowed.
II. MATTERS
IN DISPUTE
[2]
The expenses that are the subject of these
Appeals have been categorized and tabulated by the Crown as follows:
2005
|
|
|
As filed
|
Allowed
|
Disallowed
|
|
Advertising
|
$18,382
|
$7,563
|
$10,819
|
|
Capital cost allowance
|
5,234
|
0
|
5,234
|
|
Motor vehicle expenses
|
12,591
|
11,323
|
1,268
|
|
Other (consulting/referral expenses)
|
79,916
|
22,022
|
57,894
|
|
Total
|
$116,123
|
$40,908
|
$75,215
|
|
2006
|
|
|
As filed
|
Allowed
|
Disallowed
|
|
Advertising
|
$31,690
|
19,160
|
12,530
|
|
Capital cost allowance
|
3,928
|
0
|
3,928
|
|
Legal, accounting & professional fees
|
9,730
|
3,790
|
5,940
|
|
Motor vehicle expenses
|
11,870
|
9,950
|
1,920
|
|
Rent expense
|
5,500
|
0
|
5,500
|
|
Travel expense
|
2,665
|
0
|
2,665
|
|
Other (consulting/referral expenses)
|
179,289
|
12,269
|
167,020
|
|
Total
|
$244,672
|
$45,169
|
$199,503
|
Thus, the issue to be determined is whether any of the expenses
referred to in the column headed “Disallowed”
were deductible by Mr. Ngai in computing his income for 2005 or 2006, as
the case may be.
[3]
During the hearing of these Appeals, counsel for
the Crown advised that the Crown was conceding the deductibility of some of the
expenditures deducted by Mr. Ngai in computing his income for 2005 or 2006, as
the case may be. Some of those conceded expenditures will be discussed in these
Reasons.
III. FACTUAL
BACKGROUND
[4]
In 2005 and 2006, Mr. Ngai was a real
estate broker working in the greater Toronto area and surrounding areas. He
earned commission income and was responsible for the payment of many of his own
expenses. In 2005 and 2006, he worked for two or three successive real estate
brokerages, as follows:
a) from January 1, 2005 to mid-2005, he worked at Homelife CultureLink
Realty Inc. (“Homelife Culture”);
b) from mid-2005 to August or September 2006, he worked at Homelife
Gold Trade Realty Ltd. (“Homelife Gold”); and
c) from August or September 2006 to December 31, 2006, he worked at
Sutton Group-New Standard Realty Inc. (“Sutton Group”).
[5]
In reassessing Mr. Ngai, the Minister assumed
that his gross commission income in 2005 and 2006 was $154,678 and $380,953
respectively, and that he had reported net commission income for those two
years in the amounts of $22,161 and $115,375 respectively.
[6]
As indicated above, the totals of the expenses,
as set out in the above tables and as claimed by Mr. Ngai, were $116,123 for
2005 and $244,672 for 2006. If those totals were to be subtracted from the
gross commission income earned by Mr. Ngai in those two years (as assumed
by the Minister), the results would be $38,555 and $136,281 respectively, which
are greater than the amounts of net commission income that Mr. Ngai apparently
reported for 2005 and 2006 (i.e., $22,161 and $115,375 respectively). This
suggests to me that there may have been additional expenses that were deducted
by Mr. Ngai in computing his income for 2005 and 2006, which were not
disallowed in whole or in part by the CRA, and therefore are not the subject of
these Appeals.
[7]
Mr. Ngai testified that in 2005 he lived in a
rented basement apartment, but he was flooded out in the summer or fall of
2006, whereupon he rented a two-bedroom condominium, and used the second
bedroom as an office for his business.
IV. ANALYSIS
A. Motor Vehicle Expenses and
Capital Cost Allowance
[8]
In computing the profit from his real estate
business for 2005 and 2006, Mr. Ngai deducted motor vehicle expenses and
capital cost allowance (“CCA”) in respect of two
vehicles, a 1997 BMW and a 2003 Mercedes-Benz. The CRA allowed the deduction of
the expenses and the CCA in respect of the BMW, but not the Mercedes-Benz, as
the CRA was of the understanding that Mr. Ngai did not own the
Mercedes-Benz. During the hearing of the Appeals, Mr. Ngai produced a copy
of a sales contract
showing that Mr. Ngai purchased the Mercedes-Benz on October 23, 2003.
[9]
On the final day of the hearing, when oral
submissions were presented, counsel for the Crown advised the Court that, with
the production of the above-mentioned sales contract, the Crown was willing to
acknowledge that Mr. Ngai was the owner of the Mercedes-Benz in 2005 and
2006, and that the Crown was willing to allow the motor vehicle expenses in
respect of the Mercedes-Benz to be deducted on an “as-filed
basis” (i.e., the motor vehicle expenses claimed by Mr. Ngai on his
2005 and 2006 tax returns in respect of both the BMW and the Mercedes-Benz
would be allowed). Counsel for the Crown also advised that the expenses in
respect of the Mercedes-Benz had been determined on the basis that Mr. Ngai
used the Mercedes-Benz 85% of the time for business purposes in 2005 and 91% of
the time for business purposes in 2006. Accordingly, counsel advised that the
Crown is willing to allow the deduction of 85% of the appropriately calculated
CCA for 2005 and 91% of the appropriately calculated CCA for 2006. Counsel for
Mr. Ngai concurred with that resolution of this particular issue. The
Court similarly so concurs.
B. Rent
[10]
In computing his business income for 2006, Mr. Ngai,
on the first page of his Statement of Business Activities for that year, deducted
rent in the amount of $5,500, and on the second page of the same document, in
calculating the amount of his business-use-of-home expenses, deducted rent in
respect of a workplace in the home in the amount of $3,039.06.
[11]
During his direct examination, Mr. Ngai stated that
this rent related to the office that he maintained in the second bedroom of a
rented condominium unit. The total rent for the entire unit was $1,250 per
month. He said that, in computing his income for 2006, he deducted rent in the
amount of $5,500. In his direct examination, he said nothing about the other
amount that he had also claimed, i.e., $3,039.06.
[12]
Although Mr. Ngai’s direct examination had drawn
to a close at the end of the first day of the hearing, on the morning of the
second day of the hearing, counsel for Mr. Ngai requested that the direct
examination be reopened to provide clarification concerning the rent deducted
by Mr. Ngai in computing his income for 2006. Upon the request being granted,
Mr. Ngai testified that the amount of the rent paid by him for the two-bedroom
condominium unit was actually $1,430 per month, as evidenced by cheque no. 313
dated September 15, 2006, in the amount of $1,430, and made payable to Gina
Cheng Nga Wong.
Mr. Ngai testified that the portion of the floor space used for his business
represented 37.3% of the total floor space, resulting in a deduction for the
year of $5,500, as he had rented the unit for all 12 months of 2006. The math
does not work out, as, when I multiplied $1,430 by 0.373 and then by 12,
the result was $6,400.68, not $5,500. Furthermore, Mr. Ngai’s statement that he
rented the two-bedroom condominium unit for all 12 months of 2006 is not
consistent with his testimony that he lived in a rented basement apartment
until he was flooded out in the summer or fall of 2006, or with a statement that he
made to a CRA official to the effect that he lived in the basement apartment in
2005 and half of 2006 and that he lived in the condominium unit for the other
half of 2006.
[13]
During his cross-examination, Mr. Ngai
acknowledged that, if he is entitled, in computing his business income for
2006, to deduct rent in the amount of $3,039.06 as a business-use-of-home
expense, he is not also entitled to deduct rent in the amount of $5,500 in
respect of the office in the second bedroom of his rented condominium unit.
[14]
When Mr. Ngai was re-examined, after his
cross-examination, he stated that the rent in the amount of $5,500 did not relate
to his home office. Rather, the $5,500 had been paid by him to Homelife Gold as
rent for the use of an office at the premises of that brokerage. However, he
did not produce any documents that substantiated that the payment of $5,500 had
been made to Homelife Gold. He suggested that the applicable portion of that
amount had been subtracted from each of the monthly commission-payment cheques
paid to him by Homelife Gold. However, there is no documentary evidence to
confirm that rent charges were subtracted from the commissions.
[15]
In view of the conflicting explanations provided
by Mr. Ngai and in view of his failure to produce any documentation to confirm
that the payment of $5,500 was actually paid to Homelife Gold, Mr. Ngai has
failed to discharge the burden of proving that the amount was paid as rent for
business premises.
C. Travel Expenses
[16]
In computing his income from business in 2006,
Mr. Ngai deducted the amount of $2,665, which represented the cost of two
airline tickets from Toronto to Hong Kong and return. Mr. Ngai explained that he had
gone to Hong Kong to meet with John Leung, who was looking for commercial
property in Toronto that could be leased. He explained that he was hoping to
interest Mr. Leung in a building in Toronto and took with him a business
associate named Alvin Young, who was a builder and who could assist Mr. Ngai
in promoting his (i.e., Mr. Ngai’s) business to Mr. Leung. In other words,
according to Mr. Ngai, Mr. Young went on the trip to facilitate Mr.
Ngai’s business. Accordingly, Mr. Ngai paid for, and deducted, the airfare
for both himself and Mr. Young. I accept that the trip of Mr. Ngai himself
to Hong Kong was for business purposes. However, as Mr. Ngai chose not to call
Mr. Young as a witness, Mr. Ngai’s testimony concerning the reason for Mr.
Young’s trip to Hong Kong was not corroborated.
[17]
Mr. Leung sent a letter to Mr. Ngai, after Mr.
Ngai’s return to Canada. Included in the letter was the following statement:
Also, with your client, Mr. Alvin Young,
came to the meeting showing us how his expertise, as a builder, can employ his
company to build a new $100,000 sq. ft. facility in Toronto, Canada for our
company.
In view of the
above statement, it seems that Mr. Young went on the trip to promote
his own business, and not to promote Mr. Ngai’s business. Therefore, it
was not appropriate for Mr. Ngai to deduct the cost of Mr. Young’s airfare,
such that the cost of only one airfare (i.e., $1,332.50), and not two, was
deductible by Mr. Ngai in computing his income for 2006.
D. Legal, Accounting and
Professional Fees
[18]
In computing his business income for 2006, Mr.
Ngai deducted various amounts apparently paid for legal, accounting and other
professional services. Initially, the CRA denied the deduction of many of those
expenditures, as they were not supported by appropriate documentation to show
that the expenditures had been made or to confirm that they related to Mr.
Ngai’s business. The most significant of those expenditures were amounts paid
to Mr. Ngai’s solicitor, Anita Leung, allegedly for legal services in
respect of his business. Mr. Ngai explained that Ms. Leung charged a monthly
retainer, pursuant to which Mr. Ngai paid her the amount of $467.29 (plus
GST) per month,
in exchange for which she provided miscellaneous legal advice and other legal services
from time to time, as needed. Some of those monthly payments were supported by
invoices and were allowed by the CRA during the course of the audit.
[19]
The payments that were not supported by a
monthly invoice were initially disallowed by the CRA. The most significant item
in this category was the amount of $4,672.90 (or $5,000 inclusive of GST) that
was paid by Mr. Ngai to his solicitor, Ms. Leung, on April 21, 2006. Mr. Ngai
did not produce an invoice or any other documentation whatsoever to explain the
nature of this payment, nor did he call Ms. Leung as a witness to provide an
explanation of the payment. A copy of the cancelled cheque was produced, such that the CRA
acknowledged that the payment had been made; however, there was no indication
on the cheque as to whether the payment related to services pertaining to
Mr. Ngai’s real estate business or services pertaining to something else,
such as his recent bankruptcy, a matrimonial matter, a personal injury matter,
or a motor vehicle matter.
[20]
Mr. Ngai has not provided sufficient evidence to
prove on a balance of probabilities that the payment of $4,672.90, on April 21,
2006, related to his real estate business. Accordingly, that amount was not
deductible.
[21]
Various smaller amounts paid in 2006 to other
professionals were also deducted, and some of those were allowed by the CRA,
while the remainder were disallowed. During his oral submissions, counsel for
the Crown stated that the CRA was conceding all of the amounts deducted in 2006
in respect of legal, accounting and professional fees, other than the payment
of $4,672.90 made on April 21, 2006 by Mr. Ngai to Ms. Leung. It is my
understanding that the deductions that were conceded at the hearing and that
had not previously been allowed by the CRA relate to the following payments:
|
Payee
|
Date
|
Amount
|
|
Anita Leung
|
January 6, 2006
|
$188.67
|
|
Anita Leung
|
May 10, 2006
|
467.29
|
|
R.H. Small Claim
|
May 24, 2006
|
40.00
|
|
Anita Leung
|
June 13, 2006
|
467.29
|
|
Total
|
|
$1,163.25
|
E. Advertising
[22]
Before analyzing the specific advertising expenditures
that are in dispute, it would be helpful to review some of the legal principles
that may limit the deductibility of expenses. It is common knowledge that, in
computing the income of a taxpayer from a business:
a) paragraph 18(1)(a) of the Income Tax Act (the “ITA”) precludes the deduction of an outlay or
expense except to the extent that it was made or incurred by the taxpayer for
the purpose of gaining or producing income from the business;
b) paragraph 18(1)(h) of the ITA precludes the deduction
of many personal or living expenses of the taxpayer;
c)
section 67 of the ITA precludes the
deduction of an otherwise deductible outlay or expense, except to the extent
that the outlay or expense was reasonable in the circumstances; and
d) subsection 67.1(1) of the ITA permits the deduction of only
50% of certain expenditures that would otherwise be deductible in respect of
the human consumption of food or beverages or the enjoyment of entertainment.
[23]
The Federal Court of Appeal provided a helpful
observation in Stapley, which dealt with the application subsection
67.1(1) of the ITA to a real estate agent who gave his clients gift
certificates for food and beverages and tickets to sporting events and
concerts, although he did not go with his clients to consume the food and
beverages or to attend the entertainment. While the case focused primarily on
the interpretation of subsection 67.1(1), the Federal Court of Appeal made a
few general comments about advertising and promotion as follows:
… in my
respectful opinion, it seems unfair to cut the respondent’s [i.e., the real estate
agent’s] deductions in half. The respondent could have purchased flowers or
books for his clients and deducted 100 percent of their costs. Likewise, he
could have fully “deducted” rebates on his real
estate commission or gifts of cash to his clients. Thus, in its current form,
section 67.1 interferes with taxpayers’ business decisions and in particular,
how they allocate their marketing budgets. It provides them with an incentive
to forego purchasing gifts of food and entertainment for the purpose of building
and maintaining their client relationships.
Although the
above statement was obiter dicta, it is germane to this Appeal as it
indicates that gifts of cash and rebates of real estate commissions may be
deductible if they are reasonable in the circumstances and if they are given
for the purpose of gaining or producing income, rather than for a personal or
other non-business purpose.
[24]
In the context of advertising and promotion,
some of the above statutory principles were explained in Ace Salvage as
follows:
In effect, the Income Tax Act presupposes a
tax on all business income, reduced only by the deductions scheduled and
permitted. It must be demonstrated that the funds expended … were so
expended for the purpose of gaining or producing income for the … business. The
Court recognizes that there is probably no more ethereal category than “advertising and promotion”, and that indeed in general the
interpretation of the tax laws by Revenue Canada has been flexible and generous
in allowing the parameters around such a category to encompass a great range of
tangential or obliquely related items. [Italics in original.]
Against the backdrop of the above
principles, I will examine the various advertising expenses deducted by Mr.
Ngai in computing his income for 2005 and 2006.
(1)
2005
[25]
In computing his income for 2005, Mr. Ngai
deducted certain advertising expenses, which included the following:
|
Description
|
Amount
|
|
Gifts
|
$10,537.54
|
|
Marketing
|
394.08
|
|
Signage
|
199.10
|
|
Status certificate
|
706.05
|
|
Ming Pao Daily
|
1,277.94
|
|
Sponsorship
|
500.00
|
|
|
|
The CRA initially disallowed the deduction of all of the above
expenditures, but after reviewing documents submitted by Mr. Ngai, the CRA allowed
the deduction in full of the expenditures in respect of marketing, signage, the
status certificate and the Ming Pao Daily, while maintaining its
disallowance of most of the gifts and sponsorship amounts.
(a) Gifts
[26]
The purported advertising expenses categorized
as gifts included monetary gifts and gifts of high-end merchandise, whose
recipients and amounts or values are set out below:
|
Name
|
Amount
|
|
Jeannie Lee
|
$1,050.00
|
|
Shirley Chan
|
264.00
|
|
Jenny Chan
|
603.00
|
|
Mr. Ansari
|
1,000.00
|
|
Eda Wong
|
300.00
|
|
Kevin Yu
|
1,500.00
|
|
KamKong Wu
|
400.00
|
|
Vancy Chu
|
2,000.00
|
|
Owners of Lorema Inc.
|
1,296.00
|
|
|
|
The CRA initially proposed to disallow the deduction of each of the
above gifts. In response to the CRA’s proposal letter, Mr. Ngai submitted
additional information and supporting documentation to substantiate the
business nature of three of the expenditures. Accordingly, the CRA allowed the
deduction of the gifts or expenditures made in respect of Shirley Chan ($264),
Eda Wong ($300) and KamKong Wu ($400) as expenses that were reasonable in the
circumstances or that should be given the benefit of the doubt.
(i) Jeannie Lee ($1,050)
[27]
After Mr. Ngai filed notices of objection in
respect of the reassessments issued on April 30, 2009, the Appeals Division of
the CRA allowed the deduction of $1,050 paid by Mr. Ngai to Jeannie Lee.
(ii) Jenny Chan ($603)
[28]
The above expenditure in the amount of $603 in
respect of Jenny Chan apparently related to the purchase of jewellery by
Mr. Ngai from Eternity Jewellery. Mr. Ngai stated that he gave the jewellery to
a client, Jun Yang, who owned Kwan Shun Meat Wholesale and who, using
the brokerage services of Mr. Ngai, purchased an industrial unit located
at 110 Dynamic Drive, #55.
[29]
The details concerning the purchase of the jewellery
are unclear. In an undated document that Mr. Ngai provided to the CRA, he
stated that the $603 expenditure was a reimbursement for jewellery that he
bought from Jenny Chan’s friend.
This appears to be somewhat (but not precisely) consistent with a statement
made by Mr. Ngai to the CRA appeals officer to the effect that the payment was
a reimbursement to Jenny Chan for jewellery that was purchased on his behalf
and that was given to Jun Yang.
However, in the written submissions filed by the Appellant on April 3, 2017,
Mr. Ngai stated that Jenny Chan owned Eternity Jewellery and that he
bought the jewellery in question from her.
Thus, it is not clear whether Eternity Jewellery was owned by Jenny Chan or by
her friend.
[30]
Although Mr. Ngai provided a copy of the cheque
in the amount of $603 issued on April 1, 2005 to Jenny Chan, the “memo” (or description) line on the cheque
was left blank. Thus, the purpose for issuing the cheque does not appear on the
face of the cheque. Mr. Ngai did not provide any
invoice, receipt or other document to corroborate the purchase of the jewellery
or the alleged business purpose of the purchase, nor did he call Jenny Chan or Jun Yang as a witness. Accordingly, Mr. Ngai has not proven on a
balance of probabilities that the $603 was spent for a business purpose.
(iii) Mr. Ansari ($1,000)
[31]
The gift of $1,000 given to Mr. Ansari was made
by means of a cheque, a photocopy of which was entered into evidence. The notation in the lower
left corner of the cheque clearly indicated that it was given as a wedding
gift. Mr. Ngai stated that the recipient of the cheque (i.e. the groom) was
the son of an important business contact, such that the gift, as well as Mr.
Ngai’s attendance at the wedding, had a business-promotion purpose.
[32]
The CRA took the position that the gift was made
for personal, rather than business, purposes.
Counsel for the Crown referred me to the Samaan case, in which Justice Paris
stated:
… when asked
about certain claims for liquor that was purchased, he [i.e., Mr. Samaan] advised
that the item had been taken to a party to which he had been invited, with
friends. He said that he had handed out business cards at the party and so felt
that the liquor he had purchased was a business expense. It is apparent,
though, that the liquor was a gift to [Mr. Samaan’s] host when invited into a
social event, unconnected with his business. One cannot convert this obvious
personal expense into a business expense by handing out business cards while at
a personal, social function.
[33]
Another case containing helpful comments is Ace
Salvage, which dealt with a corporation that carried on a scrap-metal
processing and sales business and that, in computing its income from that
business, deducted horse-racing expenses on the basis that horse-racing was the
chief method of advertising the scrap-metal business. The court stated:
I do not doubt …
that some of the activity which surrounded the horse-racing provided contacts,
information, leads and help which were of benefit to the salvage business. But
it could also easily be argued that [the president of the taxpayer corporation]
– (a highly personable and congenial man) going for a cup of coffee, mowing his
lawn or attending a wedding could have (and probably has) done the same
thing, perhaps even to the same degree. But it could not be argued
(except under possibly the most extreme circumstances that are not easily
evident to me) that going for a cup of coffee, mowing the lawn, or attending
the wedding was for the “purpose of gaining
or producing income from the salvage business”…. It might be argued that some
small or modest part of the cost of doing so (coffee, lawn, wedding)
which could be directly and clearly associated with the income-producing
activities of the company might be the responsibility of the company – but no
such limited and restricted effort was defined in this appeal. Any such
proposal would be required in any event to meet the test of “reasonableness”
under section 67 of the Act. [Italics in original; underlining added.]
[34]
I am of the view that, like the party attended
by Mr. Samaan in the above-noted case bearing his name, the Ansari wedding
attended by Mr. Ngai was a social function, not a business function, and the
wedding gift had a personal purpose, not a business purpose. This view is
supported by the comments in the above extract from Ace Salvage about attendance
at a wedding. Furthermore, Mr. Ngai did not call Mr. Ansari (either the
father or the son) as a witness, nor did he provide sufficient evidence to prove
on a balance of probabilities that the wedding gift was made for a business
purpose. In addition, Mr. Ngai has failed to prove that, in computing his
income from his real estate business, it was reasonable in the circumstances to
deduct a $1,000 wedding gift.
(iv) Kevin Yu ($1,500)
[35]
The CRA initially denied the deduction of the
$1,500 gift paid to Kevin Yu. However, when the Appeals Division subsequently
reviewed the notice of objection and supporting documents, it allowed the
deduction.
(v) Vancy Chu ($2,000)
[36]
The $2,000 payment to Vancy Chu was made by
means of a cheque dated December 23, 2005 and bearing the notation “gift” in the lower left corner. Mr. Ngai testified that he
paid the $2,000 to Ms. Chu to reimburse her for certain travel expenses that
she had incurred on his behalf in respect of a trip that he made to Alberta in
2005. In particular, she purchased an airplane ticket for him, hosted him at
her home and provided a vehicle for him to drive. Mr. Ngai did not produce
copies of any receipts or invoices to substantiate any of the expenses. Mr.
Ngai stated that he had friends or clients in Ontario who were interested in
the Alberta real estate market, but it appears that he was not working with any
serious buyers when he went to Alberta. Furthermore, Mr. Ngai was not
licensed in Alberta as a real estate agent or broker.
[37]
One of the items apparently deducted by Mr. Ngai
in 2005 and recorded as a gift was a cash expenditure in the amount of $2.95 on
October 10, 2005 at the Royal Tyrrell Museum,
which is located approximately 140 kilometres northeast of Calgary. When asked
at the hearing about this expenditure, Mr. Ngai stated that he did not
visit the museum and that he did not remember the expenditure. He could not
explain how the $2.95 expenditure came to be deducted in computing his income.
If Mr. Ngai, in fact, visited the museum while in Alberta, it suggests that his
trip to Alberta may not have been exclusively (or perhaps at all) for business
purposes.
[38]
As Mr. Ngai did not provide any documents to
support the business nature of his trip to Alberta and did not call Ms. Chu as
a corroborating witness, he has not proven on a balance of probabilities that
the $2,000 gift or reimbursement (depending on the categorization that one
accepts) in 2005 had a business purpose.
(vi) Owners of Lorema Inc.
($1,296)
[39]
The last gift listed in the table in paragraph 26
above, in the amount of $1,296, was a payment made on July 20, 2005 to Holt
Renfrew to purchase a Louis Vuitton designer purse that Mr. Ngai gave to
the owner (or one of the owners) of Lorema Inc. (“Lorema”),
which was one of his clients.
At one point in the audit or appeals process, Mr. Ngai advised the CRA
that Lorema was the owner and seller of commercial premises described as
110 Dynamic Drive, #55-57, the sale of which closed on March 1, 2005, resulting in a commission being
paid to Mr. Ngai, for which he desired to express appreciation. Mr. Ngai took this same
position in the written submissions that he filed on April 3, 2017. It appears that Mr. Ngai or
his representative, Patrick Morris, advised the CRA that the owner of the
three units at 110 Dynamic Drive was Lorema; however, the real estate
listing summaries produced by Mr. Ngai show that the seller of those units was
767541 Ontario Inc. (“767ON”). It is possible that Lorema
and 767ON have common ownership; however, there was no evidence to that effect.
[40]
On another occasion, Mr. Ngai advised the CRA
that the owner (in the next two sentences referred to as the “Owner”) (or one of the owners) of Lorema owned a 1997
BMW 328i. At a time when the Owner was stricken with cancer and could no longer
drive and when Mr. Ngai’s vehicle had become increasingly unreliable and costly
to drive, the Owner loaned his car to Mr. Ngai. To show appreciation for the
loan of the car, Mr. Ngai purchased the purse and gave it to the Owner’s wife. When the CRA pointed out the seemingly
inconsistent explanations given by Mr. Ngai, he, through his
representative, explained that the owner of Lorema and the owner of the 1997
BMW 328i were the same individual.
However, in the written submissions that he filed on April 3, 2017, the Appellant
stated that a different purse (one purchased on May 15, 2006) was given to the
owner of the 1997 BMW 328i.
[41]
To add to the uncertainty, in an undated document
that Mr. Ngai submitted to the CRA, he stated that the $1,296 expenditure
at Holt Renfrew in 2005 was “a gift item to
thank the owner of the BMW 328 for its use.” In the same document, a
page later, he said exactly the same thing about a $1,404 expenditure at Holt
Renfrew in 2006.
[42]
Like the CRA, I am troubled by the
differing explanations provided by Mr. Ngai as to why and when he gave a
purse (or perhaps two purses) to the wife of the individual who was the owner
of both Lorema and the 1997 BMW 328i.
[43]
Apart from the confusion arising by reason of the
multiple explanations provided by Mr. Ngai in respect of the Louis Vuitton
purse purchased on July 20, 2005 at Holt Renfrew and the second Louis
Vuitton purse purchased on May 15, 2006, also at Holt Renfrew, a further point
to consider is raised in the Rail case, in which Justice McArthur
stated:
… [the appellant/taxpayer]
is seeking to deduct gifts given to employees (most of which were given to his
former spouse), which included perfume, jewellery, hairdresser, cosmetics, baby
accessories, alcohol and clothes bought at various high-end stores. Those items
clearly appear to be personal expenses, and unreasonable in all cases.
While Mr. Ngai
does not appear to be related to the recipient of either Louis Vuitton purse,
he has not provided convincing evidence to prove on a balance of probabilities the
alleged business purpose in making the gift. The recipient was not called as a
witness to confirm that the purse was given to her for a business purpose,
rather than a personal purpose.
(vii) Entertainment ($1,305.45)
[44]
Also included in the gift category of the advertising
expenses deducted by Mr. Ngai in computing his income for 2005, but not listed
in the table in paragraph 26 above, were certain food and entertainment
expenditures.
[45]
The cost of providing reasonable food and
beverages for a client or customer is generally viewed as an acceptable
advertising or promotion expense, as indicated by Justice Mogan in Racco
Industrial Roofing:
… the cost of
inviting a customer to lunch or dinner or to a theatrical or sporting event is
deductible under paragraph 18(1)(a). By ordinary commercial standards,
it is an accepted cost of promoting business akin to advertising….
While food and
entertainment costs may, depending on all the circumstances, be recognized as
acceptable advertising or promotion expenses, subsection 67.1(1) of the ITA
generally provides that only 50% of those expenditures are deductible.
[46]
The food, beverage and entertainment
expenditures deducted by Mr. Ngai as advertising expenses, in computing his
income for 2005, included the following items:
|
Description
|
Amount
|
|
Beer/LCBO
|
$ 936.32
|
|
Coffee/Donut/Cambridge
|
369.13
|
|
|
|
In the course of
its audit, the CRA applied subsection 67.1(1) of the ITA, and thus
allowed only 50% of the above amounts as a deduction, as follows:
|
Description
|
Amount
|
|
Beer/LCBO
|
$468.16
|
|
Coffee/Donut/Cambridge
|
184.56
|
|
|
$652.72
|
Mr. Ngai did not
persuade me that subsection 67.1(1) of the ITA does not apply to the
above-mentioned food, beverage and entertainment items.
(b) Sponsorship ($500)
[47]
Mr. Ngai paid $500 to Chris Kiepal, who was a
client, to sponsor a horse show that was organized and managed by Jan Kiepal, who
was the father of Chris Kiepal and the owner of the Forest Hill Equestrian
Centre, where the show was held.
Through his representative, Mr. Ngai told the CRA that another entity which had
committed to sponsor the horse show backed out at the last minute, whereupon
Chris Kiepal asked Mr. Ngai to sponsor the show. Mr. Ngai agreed to do so
in order to maintain a good client relationship. Due to the late timing of his
commitment, Mr. Ngai’s name was not included in the program for the horse show;
however, Mr. Ngai testified that throughout the show the announcer periodically
mentioned Mr. Ngai and his sponsorship.
[48]
Mr. Ngai did not produce any documentation to confirm
that an advertising or business-promotion advantage resulted from this
expenditure. He did not call Mr. Kiepal as a witness to corroborate that the
payment was for a sponsorship. However, it is clear from the documentary
evidence (specifically cheque no. 218) that the $500 expenditure was made
and that it was designated as being a sponsorship. As well, I accept Mr. Ngai’s
testimony that his sponsorship was announced periodically throughout the horse
show.
[49]
The jurisprudence has established that sponsoring
a horse show or other sporting event is an acceptable form of advertising. Accordingly, I have concluded
that the $500 expenditure by Mr. Ngai in respect of his sponsorship of the
horse show was a deductible expense.
(c) Seller’s Rebate ($1,500)
[50]
In computing his income for 2005, Mr. Ngai
deducted the amount of $1,500, which he paid by cheque dated February 16, 2005
to James H. Chow, who was the solicitor for Jennifer Chan. The memo line of the cheque
contains the notation “Jennifer Chan retainer.” Initially,
Mr. Ngai categorized the $1,500 expenditure as a consulting or referral fee and
explained that Jennifer Chan was the “Buyer and [sic]
Seller” of property located at #1705, 725 Don Mills Road, Toronto, (the “Don Mills Property”) and that the payment was “intended for buying her a gift to show my appreciation for
her business over time.” However, in the letter which Mr. Morris (Mr. Ngai’s
representative at the time) sent to the CRA on August 12, 2011, Mr. Morris
described the expenditure as a “Seller’s Rebate.”
[51]
During the audit by the CRA in respect of Mr.
Ngai, this expenditure was categorized as a referral fee. The auditor disallowed the
deduction of the $1,500 expenditure, apparently because insufficient
information was provided to explain the purpose of the expenditure. Candace
Keats, the CRA Appeals Officer who initially considered this matter, did not
accept the expenditure as deductible because Mr. Ngai had not submitted any
documentation to confirm that he was the real estate agent who acted in respect
of the sale of the Don Mills Property.
In a letter dated November 7, 2012 from Lianne Durant, another CRA Appeals
Officer, to Mr. Ngai, she acknowledged that Mr. Ngai had provided her with a
copy of an agreement of purchase and sale for the Don Mills Property, showing a
completion date of April 30, 2003. She also acknowledged that Mr. Ngai had
explained to her that the delay in paying the $1,500 to Ms. Chan was that he
was experiencing financial issues. Ms. Durant stated that the expenditure was not
deductible as the cheque was not payable to Ms. Chan and the CRA had been unable
to confirm the exact nature of the payment or that it was incurred to earn or
generate income.
[52]
At the hearing of these Appeals, Mr. Ngai
testified that Jennifer Chan was a client, for whom he listed and sold the
Don Mills Property. He produced copies of the MLS Listing Agreement and the first page of the
Agreement of Purchase and Sale – Condominium Resale in respect of the Don Mills
Property.
Mr. Ngai testified that he promised in 2003 to pay a rebate to Ms. Chan,
but he did not have sufficient money then to do so. He ultimately paid the
rebate on February 16, 2005 to Ms. Chan’s solicitor, James H. Chow, who
promptly certified the cheque. Mr. Ngai also produced copies of a fax that he
sent to the property manager in respect of the Don Mills Property, requesting a
copy of the status certificate for that property, and a fax that he sent to
another individual who was involved with the sale and purchase, apparently with
an attached “Vendor’s Acknowledgment for
Waiver-financing.”
[53]
The MLS Listing Agreement and the Agreement of
Purchase and Sale referenced in the preceding paragraph clearly confirm that
Homelife Culture was the listing brokerage, and the faxed documents described
in the preceding paragraph confirm that Mr. Ngai was involved in the sale of
the Don Mills Property. The obiter dicta by the Federal Court of Appeal
in Stapley, as quoted above,
indicates that a real estate agent may deduct a rebate in respect of his real
estate commission. By reason of well-established principles in the law of
agency, a payment to a solicitor on behalf of the solicitor’s client is
equivalent to a payment directly to the client. Accordingly, the payment of
$1,500 on February 16, 2005 by Mr. Ngai to Ms. Chan’s solicitor, on her
behalf, was deductible by Mr. Ngai in computing his income for 2005.
(d) Other ($4,767.40)
[54]
Also included in the advertising expenses
deducted by Mr. Ngai in computing his income for 2005 were various amounts
aggregating $4,767.40 in respect of which Mr. Ngai did not provide any
supporting documentation, either at the CRA audit and appeals phases or in
Court. In the absence of any evidence in respect of those expenditures, the
CRA’s disallowance of the deduction of those expenditures is upheld.
(2) 2006
[55]
In computing his income for 2006, Mr. Ngai
deducted certain advertising expenses, which included the following:
|
Description
|
Amount
|
|
Gifts
|
$20,349.04
|
|
Marketing
|
4,852.58
|
|
Signage
|
198.47
|
|
Flyer
|
200.00
|
|
Ming Pao Daily
|
5,478.15
|
|
Other Newspapers
|
1,155.09
|
|
|
|
The CRA accepted that the amounts expended for signage, a flyer or
flyers, the Ming Pao Daily and other newspapers had been incurred by Mr.
Ngai and that they related to his business. Accordingly, those expenses were
allowed as deductions.
(a) Gifts
[56]
The purported advertising expenses categorized
as gifts included monetary gifts and gifts of high-end merchandise whose
recipients or merchants and amounts or prices are set out below:
|
Name
|
Amount
|
|
Holt Renfrew
|
$1,404.00
|
|
Future Shop
|
1,097.03
|
|
Anita Leung
|
800.00
|
|
Shirley Chan
|
604.00
|
|
Vancy Chu
|
740.00
|
|
Vancy Chu
|
1,000.00
|
|
Perry So
|
850.00
|
|
Jeannie Lee
|
1,200.00
|
|
Jeannie Lee
|
1,400.00
|
|
Kale Gao
|
300.00
|
|
Theresa Pang
|
500.00
|
|
Cindy Ho
|
1,149.99
|
|
Eternity Jewellery
|
4,185.00
|
|
Jeannie Lee
|
2,000.00
|
|
|
|
The CRA initially proposed to disallow the deduction of each of the
above gifts. In response to the CRA’s proposal letter, Mr. Ngai submitted
additional information and supporting documentation sufficient to substantiate
the business nature of the following expenditures:
|
Name
|
Amount
|
|
Anita Leung
|
$800.00
|
|
Shirley Chan
|
604.00
|
|
Kale Gao
|
300.00
|
|
|
|
Consequently the CRA allowed the deduction of the three gifts set
out immediately above on the basis that they were reasonable in the
circumstances or that they should be given the benefit of the doubt. I will now discuss the
gifts whose deduction was not allowed by the CRA.
(i) Holt Renfrew ($1,404)
[57]
As mentioned above, in discussing the Louis
Vuitton purse purchased in 2005, on May 15, 2006, Mr. Ngai also purchased
another Louis Vuitton purse at Holt Renfrew for a price of $1,300. In computing his income for
2006, he deducted the amount of $1,404, representing the price of the purse
plus provincial sales tax in the amount of $104. Mr. Ngai stated that the purse
was given as a gift to promote his business. One of the difficulties that the
CRA had with this deduction was that the identity of the recipient of the gift was
not clear.
[58]
In the letter dated August 12, 2011 that Mr.
Ngai’s then representative, Mr. Morris, sent to the CRA, Mr. Morris
acknowledged that Mr. Ngai had provided different explanations to the CRA
in the course of the audit and in subsequent submissions. Apparently, Mr. Ngai
had previously told the CRA that the gift of a Louis Vuitton purse in 2006
related to the loan of the BMW, but Mr. Morris clarified that the gift in
2006 was actually to show appreciation to the person who introduced Mr. Ngai to
the seller of three properties, located at 2213 Rodick Road, Markham,
Ontario; 8501 Bayview Avenue, Richmond Hill, Ontario; and 143 Willowdale
Avenue, North York, Ontario (together, the “Three
Properties”).
Mr. Morris did not provide the name of that person.
[59]
In the document entitled “Report on an Objection,” prepared by a CRA Appeals
officer, Candace Keats, she noted that Mr. Ngai had explained that the
$1,404 expenditure related to a gift to the person who had introduced him to
the seller of the Three Properties. She also referenced the earlier explanation
given by Mr. Ngai during the audit, in which he had indicated that the purse
had been given as a gift to the owner of the BMW 328. Given the inconsistencies
in Mr. Ngai’s explanations and the CRA’s inability to locate any
documentation to confirm that the Three Properties were listed or sold by Mr.
Ngai, Ms. Keats maintained the earlier disallowance of the deduction.
[60]
In the undated document that Mr. Ngai submitted
to the CRA and that is referenced in paragraph 41 above, he stated that
the $1,404 expenditure at Holt Renfrew in 2006 was “a gift item to thank the owner of the BMW 328 for its use.” As already noted above, in
the same document, he said exactly the same thing about the $1,296 expenditure
at Holt Renfrew in 2005.
[61]
At the hearing, during his direct examination,
Mr. Ngai testified that he sold four (not three) properties for Lena Hiu (spelling
uncertain) and that he gave a purse to her to show his appreciation.
[62]
During written submissions filed after the
conclusion of the hearing, Mr. Ngai reverted to his original position and
stated that the $1,404 expenditure at Holt Renfrew on May 15, 2006 was “a gift to the BMW owner for the generosity of allowing me to
use the vehicle.”
[63]
Given the inconsistencies in the evidence
concerning the recipient of the 2006 gift of a Louis Vuitton purse, Mr. Ngai
has failed to prove on a balance of probabilities that the gift was made for
the purpose of gaining or producing income from his business.
(ii) Future Shop ($1,097.03)
[64]
This expenditure relates to a Canon camcorder and
accessories purchased online from Future Shop on August 11, 2006, for a price
of $999.99, which, together with shipping ($8.37) and retail sales tax
($88.67), resulted in an expenditure deducted by Mr. Ngai in the amount of
$1,097.03.
The camcorder was shipped by Future Shop to Winnie Ip, who apparently is a
friend or acquaintance of Mr. Ngai. Given Mr. Ngai’s busy schedule and his lack
of expertise in respect of photographic equipment, he asked Ms. Ip to purchase
the camcorder for him, and he subsequently reimbursed her with cash. Mr. Ngai advised the CRA
that the expenditure had been misclassified as a gift for advertising purposes,
and that it should have been classified as an office supply.
[65]
As the CRA was unable to confirm that Mr. Ngai
had reimbursed Ms. Ip for the purchase of the camcorder or that he
actually used the camcorder in his business, the CRA disallowed the deduction. At the hearing, Mr. Ngai
testified that he required the camcorder to film virtual tours of properties
that he was listing and that he reimbursed, likely in cash, Ms. Ip for the
purchase price. In his written submissions filed after the hearing, Mr. Ngai
reiterated that he reimbursed his friend who had bought the camcorder on his
behalf and that he needed the camcorder to make virtual tours of listed
properties.
[66]
I am prepared to accept that Mr. Ngai purchased
the camcorder and that he used it in his business. However, it is my
understanding that the camcorder is depreciable property, such that Mr. Ngai
should have claimed CCA, rather than a
deduction, in respect of it.
(iii) Vancy Chu ($740 and $1,000)
[67]
In the undated and untitled explanatory document
that Mr. Ngai provided to the CRA, he stated that on February 20, 2006 he made
two payments, in the respective amounts of $740 and $1,000, to Vancy Chu. The
first payment was to reimburse her for out-of-pocket expenses that she incurred
in doing research for him in Calgary. The second payment was to buy her a gift
for the help which she had given to him to collect data in respect of the
Calgary real estate market.
[68]
When Mr. Ngai’s solicitor provided written
submissions on behalf of Mr. Ngai, after the hearing had concluded, he
attached to those submissions copies of various documents, including
photocopies of cheques which seemed to correspond to the payments of $740 and
$1,000 made on February 20, 2006 to Ms. Chu. As those documents were not
presented to the Court at the hearing, and as counsel for the Crown did not
have an opportunity to cross-examine Mr. Ngai in respect of those documents,
I have not admitted them into evidence. However, Mr. Ngai’s monthly bank
statements, which were admitted into evidence, contain references to the two
cheques.
[69]
In the letter that Mr. Morris sent to the CRA on
behalf of Mr. Ngai on August 12, 2011, Mr. Morris stated, in explaining
the payments of $740 and $1,000, that, “This work is a
continuation of that work noted above”, where Mr. Morris described
the $2,000 payment made to Ms. Chu in 2005.
No further explanation was given in that letter in respect of the two payments
in 2006.
[70]
In the written submissions filed by the
Appellant after the hearing had concluded, Mr. Ngai indicated that the $740
payment was a reimbursement of research expense, and the $1,000 payment was a
market data collection cost. There was no reference to this latter payment
being a gift.
[71]
The CRA disallowed the deduction of the $740 and
$1,000 payments on the basis that the evidence was insufficient to substantiate
the business nature of the expenditures,
particularly as there were no receipts or invoices detailing the research
expenses that were supposedly reimbursed, and there was no information
concerning the clients who were interested in the Alberta real estate market.
[72]
At the hearing, the only testimony of Mr. Ngai pertaining
to Vancy Chu related to his trip to Alberta in 2005, the $2,000 payment made to
her in that year and the four properties in Alberta in which he was most
interested (as they were owned by a joint venture which he had set up earlier). He did not testify in respect
of the payments to her in 2006.
[73]
Based on the March and April 2006 bank
statements, I accept that the $740 and $1,000 payments were made by Mr.
Ngai to Ms. Chu in 2006; however, the evidence is insufficient to verify
the research expenses, if any, that were supposedly reimbursed by Mr. Ngai or
to prove on a balance of probabilities that the payments were made for the
purpose of gaining or producing income and were reasonable in the
circumstances.
(iv) Perry So ($850)
[74]
The $850 expenditure made by Mr. Ngai in respect
of Perry So related to the purchase of a kitchen exhaust fan that Mr. Ngai
purchased for a home acquired by Mr. So, who was a client of Mr. Ngai and who
was reluctant to acquire the home because he did not like its exhaust fan. When
Mr. Ngai offered to pay for the acquisition and installation of a new exhaust
fan, Mr. So decided to purchase the home.
[75]
The CRA treated this expenditure as a form of
seller’s rebate. The Appeals Division of the CRA allowed the deduction of this
expenditure.
(v) Jeannie Lee ($4,600)
[76]
In 2006, Mr. Ngai made three payments to Jeannie
Lee, the general manager of the Ming Pao Daily, as follows:
|
Date
|
Amount
|
|
March 6, 2006
|
$1,200
|
|
April 5, 2006
|
1,400
|
|
December 24, 2006
|
2,000
|
|
Total
|
$4,600
|
[77]
The CRA disallowed these expenditures because
there was no confirmation that they related to Mr. Ngai’s business. As well,
there was no documentation to confirm that the payments had actually been made.
[78]
There is some uncertainty concerning the purpose
for which these three payments were made. During the audit and appeals phases
of the CRA’s handling of this matter, Mr. Ngai advised the CRA that the $1,200
and $2,000 payments to Ms. Lee were gifts to show his appreciation to her and
the $1,400 payment was to reimburse her for her airfare to Hong Kong, where she
arranged for one of her contacts in Hong Kong to sign a listing agreement with
Mr. Ngai’s brokerage. When Mr. Ngai was cross-examined, he stated that the
$1,200 cheque was paid to Ms. Lee to reimburse her airfare, the $1,400 cheque
was paid to her to reimburse her hotel costs and other expenses incurred in
Hong Kong, and the $2,000 cheque was paid to her as a year-end gift to show his
appreciation to her. In the submissions that Mr. Ngai submitted after the
hearing, he reverted to his original position, and indicated that the $1,200
payment and the $2,000 payment were gifts to show appreciation and the $1,400
payment was to reimburse Ms. Lee’s airfare.
[79]
During oral submissions at the hearing of these
Appeals, counsel for the Crown stated that the only payments to Ms. Lee in 2006
that the Crown is contesting are the two gifts, in the respective amounts of
$1,200 and $2,000. It is my understanding that the Crown has conceded that the
$1,400 expenditure to reimburse Ms. Lee’s airfare is deductible.
[80]
As there is no admissible documentary proof of
the payments of $1,200 and $2,000, and given the inconsistencies in Mr. Ngai’s
evidence and his failure to prove that the payments (particularly the $2,000
payment) were made, he has failed to prove on a balance of probabilities that
the $1,200 payment and the $2,000 payment were made by him for the purpose of
gaining or producing income. As indicated above, the Crown has conceded that the
$1,400 payment was deductible.
(vi) Theresa Pang ($500)
[81]
At the appeals phase, the CRA allowed the
deduction of the $500 gift made by Mr. Ngai to Theresa Pang, who was one of his
clients and a referral source. Therefore, this expenditure is no longer in
issue.
(vii) Cindy Ho ($1,149.99)
[82]
At the appeals phase, the CRA allowed the
deduction of the $1,149.99 payment made by Mr. Ngai to Cindy Ho to reimburse
her for the cost of a barbecue that Mr. Ngai gave to a significant client, M
& S Quality Produce, for use by the employees of that client. Accordingly,
this expenditure is no longer in issue.
(viii) Eternity Jewellery
($4,185)
[83]
Also at the appeals phase, the CRA allowed the
deduction of the $4,185 paid by Mr. Ngai to Eternity Jewellery to purchase an
Omega watch,
which was given as a gift to Gary Kwok, the owner of M & S Quality Produce,
as a gift to show appreciation for Mr. Kwok’s business. Hence, this
expenditure is no longer in issue.
(ix) Entertainment - Gifts
($2,205.73)
[84]
Also included in the gift category of the
advertising expenses claimed by Mr. Ngai in computing his income for 2006 (but
not listed in the first table in paragraph 56 above) were the following items,
which related to entertainment:
|
Description
|
Amount
|
|
Beer/LCBO
|
$1,251.73
|
|
Cdn Intl Auto Show
|
750.00
|
|
Markham Theatre
|
204.00
|
|
|
|
In the course of its audit, the CRA applied subsection 67.1(1) of
the ITA, and thus allowed only 50% of the above amounts as a deduction,
as follows:
|
Description
|
Amount
|
|
Beer/LCBO
|
$625.87
|
|
Cdn Intl Auto Show
|
375.00
|
|
Markham Theatre
|
102.00
|
|
|
|
Mr. Ngai did not persuade me that subsection 67.1(1) does not apply
to the above-mentioned food, beverage and entertainment items.
(b) Marketing
[85]
The marketing expenditures incurred by Mr. Ngai
in 2006 are the following:
|
Description
|
Amount
|
|
Toronto Paragon
|
$138.00
|
|
Cdn Intl Auto Show
|
750.00
|
|
Toronto Raptors
|
56.35
|
|
Beaver Fishery
|
148.00
|
|
Siu Fong Chan
|
120.00
|
|
Siu Fong Chan
|
500.00
|
|
Coffee/Restaurant/Food
|
220.53
|
|
Beer Store
|
176.88
|
|
Dragon Ball
|
450.00
|
|
Oversea Chinese
|
140.00
|
|
Taiwan Merchants
|
1,000.00
|
|
|
|
(i) Toronto
Paragon ($138)
[86]
Mr. Ngai did not provide any explanation or
documentation to the CRA during the audit and appeals phases or to the Court
during the hearing of these Appeals in respect of the alleged expenditure of
$138 to Toronto Paragon. Accordingly, the CRA’s disallowance of this deduction
is confirmed.
(ii) Canadian International
Auto Show ($750)
[87]
It appears that the payment of $750 made in 2006
by Mr. Ngai in respect of the Canadian International Auto Show was tabulated
twice by the CRA, once as an entertainment expenditure (see the first table in paragraph
84 above) and again as a marketing expenditure (see the table in paragraph 85
above). Mr. Ngai stated that he only claimed the expenditure once and that
the double counting was done by the CRA, not him. As 50% of this expenditure
has been allowed as an entertainment expense (see the second table in paragraph
84 above), no further deduction is available.
(iii) Toronto Raptors ($56.35)
[88]
Mr. Ngai did not provide any explanation or
documentation to the CRA during the audit and appeals phases or to the Court
during the hearing of these Appeals in respect of the alleged expenditure of
$56.35 to the Toronto Raptors. Therefore, the CRA’s disallowance of this
deduction is confirmed.
(iv) Beaver Fishery ($148)
[89]
Mr. Ngai did not provide any explanation or
documentation to the CRA during the audit and appeals phases or to the Court
during the hearing of these Appeals in respect of the alleged expenditure of
$148 to Beaver Fishery. Hence, the CRA’s disallowance of this deduction is
confirmed.
(v) Siu Fong Chan ($120 and $500)
[90]
Mr. Ngai indicated that, from time to time, Siu
Fong Chan provided cleaning services for properties listed by him and that she
occasionally provided referrals to him. In computing his income for 2006, Mr.
Ngai deducted two payments to Ms. Chan, in the respective amounts of $120 and
$500. At the audit phase, the CRA allowed the deduction of the $120 payment by
Mr. Ngai to Ms. Chan as compensation for cleaning a condominium unit prior
to its sale. According to Mr. Ngai, the $500 payment represented a gift to show
his appreciation to her; however, he did not produce any cheques or other
documentation to substantiate this payment. He was not even aware of the date
of the payment.
Mr. Ngai produced copies of five cheques paid by him to Ms. Chan, but four
of them were each in the amount of $300 and the fifth was in the amount of
$100. Therefore, there was not any cheque, or even a combination of two
cheques, to substantiate the alleged $500 payment.
[91]
Mr. Ngai has failed to prove on a balance of
probabilities that the $500 payment was made to Ms. Chan or, even if it was so
made, that it was made for the purpose of gaining or producing income.
(vi) Entertainment – Marketing
($1,987.41)
[92]
The entertainment expenditures categorized as
marketing expenses in 2006 are the following:
|
Description
|
Amount
|
50%
|
|
Coffee/Restaurant/Food
|
$220.53
|
$110.27
|
|
Beer Store
|
176.88
|
88.44
|
|
Dragon Ball
|
450.00
|
225.00
|
|
Oversea Chinese
|
140.00
|
70.00
|
|
Taiwan Merchants
|
1,000.00
|
500.00
|
|
Total
|
$1,987.41
|
$993.71
|
By
reason of subsection 67.1(1) of the ITA, the CRA allowed the deduction
of 50% of the above expenditures and disallowed the deduction of the other 50%.
Mr. Ngai has not persuaded me that subsection 67.1(1) does not apply to those
expenditures.
F. Consulting
and Referral Fees
[93]
In computing his business income for 2005 and
2006, Mr. Ngai deducted a number of payments allegedly made to various
individuals. Some of the alleged payments were categorized as consulting fees;
others were categorized as referral fees. Many of the payments were allegedly
made in cash.
(1) Consulting
Fees
[94]
The consulting fees that Mr. Ngai allegedly paid
are itemized below:
|
Recipient
|
Amount (2005)
|
Amount (2006)
|
|
Ricky Chow
|
$40,000.00
|
$72,000.00
|
|
Hang Zhou
|
26,000.00
|
25,000.00
|
|
Maria Poon
|
14,500.00
|
|
|
Qilan Guan
|
1,200.00
|
|
|
Wen Tuo Li
|
1,150.00
|
|
|
Joslyn Chan
|
756.00
|
|
|
EC Home Design
|
1,000.00
|
|
|
Albert Chou
|
__________
|
4,000.00
|
|
|
|
$101,000.00
|
[95]
At the audit phase, the CRA disallowed most of
the above consulting fees for the following reasons:
a)
Mr. Ngai was unable to provide the CRA with
documentation to confirm that the amounts were paid by him for a
business-related purpose.
b) Most of the payments were allegedly made in cash, but Mr. Ngai’s
bank records did not disclose sufficiently large withdrawals to support the
alleged payments.
c)
When the CRA reviewed its files in respect of
the first three individuals set out in the above table, who received the
largest alleged payments, the CRA was unable to substantiate that those
individuals had received and reported the payments, although it acknowledged
that not every one of those individuals had filed his or her 2005 and 2006
income tax returns by the time when the CRA audited Mr. Ngai.
[96]
I am somewhat uncertain as to the recipients and
amounts of the consulting fees paid by Mr. Ngai in 2005, other than those
allegedly paid to Ricky Chow and Zhou Hang. For ease of reference, the names
and amounts for 2005 set out in the table immediately above (other than those
of Mr. Chow and Mr. Zhou) are repeated below:
|
Recipient
|
Amount
|
|
Maria Poon
|
$14,500.00
|
|
|
Qilan Guan
|
1,200.00
|
|
|
Wen Tuo Li
|
1,150.00
|
|
|
Joslyn Chan
|
756.00
|
|
|
EC Home Design
|
1,000.00
|
|
|
Total
|
$18,606.00
|
|
[97]
At the appeals phase, the CRA had a slightly
different group of consulting fee recipients (apart from Ricky Chow and Zhou
Hang) for 2005, as follows:
|
Recipient
|
Amount
|
|
Qilan Guan
|
$1,200.00
|
|
Wen Tuo Li
|
1,150.00
|
|
Joslyn Chan
|
756.00
|
|
Jennifer Chan
|
1,500.00
|
|
Albert Kwan
|
11,250.00
|
|
Theresa Pang
|
500.00
|
|
Mr. Shunkla
|
500.00
|
|
Winnie Cheung
|
1,570.00
|
|
Total
|
$18,426.00
|
I was not provided with any explanation as to why some of the names
and amounts in the two tables are different. The CRA Appeals Officer allowed
the deduction of all of the payments shown in the table immediately above,
other than the $1,500 paid to Jennifer Chan.
The total of those allowed payments is $16,926 (i.e., $18,426 − $1,500). At
the hearing, counsel for the Crown confirmed that the Appeals Division of the
CRA had allowed the deduction of the consulting fees in the aggregate amount of
$16,926 paid to the recipients (other than Jennifer Chan) in the table
immediately above.
(a) Ricky Chow ($40,000 and
$72,000)
[98]
As the table in paragraph 94 indicates, Mr. Ngai
allegedly paid $40,000 in 2005 and $72,000 in 2006, as consulting fees, to
Ricky Chow, who was a former licensed real estate agent and who, according to
Mr. Ngai, provided consulting services to Mr. Ngai. Apart from cheque
number 173,
dated March 29, 2005, in the amount of $4,000.00 and cheque number 277, dated May 9, 2006, in the
amount of $6,600.00, all of the payments to Mr. Chow were allegedly made in
cash. The payments made in 2005 were supported by monthly invoices submitted by
Mr. Chow. The payments made in 2006 were supported by monthly receipts
signed by Mr. Chow. It is curious that invoices were used in 2005 and
receipts were used in 2006. It is also curious that the signatures of Mr. Chow
on the invoices in 2005 appear to be different from the signatures of Mr. Chow
on the receipts in 2006. During the hearing, Mr. Ngai acknowledged that the
signatures appear to be different, but he did not provide any explanation as to
why that might be the case.
[99]
At the appeals phase, the CRA allowed the
deduction of the two payments paid by cheque by Mr. Ngai to Mr. Chow
(i.e., $4,000 in 2005 and $6,600 in 2006). The CRA disallowed the deduction of
all of the payments to Mr. Chow that were allegedly paid in cash. For the
reasons discussed below, I concur with the disallowance of the deduction
of the alleged cash payments.
(b) Hang Zhou ($26,000 and $25,000)
[100]
Mr. Ngai testified that he hired Hang Zhou as a
driver. Mr. Zhou’s duties included driving Mr. Ngai to appointments or site
inspections, particularly when Mr. Ngai’s sore back was bothering him, or when he
was meeting a client for an entertainment function that would include alcohol,
or when there was a site inspection of industrial premises after dark. The CRA disallowed the
deduction of the amounts paid by Mr. Ngai to Mr. Zhou ($26,000 in 2005 and
$25,000 in 2006), as the actual payments of those amounts could not be
confirmed. Mr. Zhou did not file an income tax return for 2005, so the CRA
could not ascertain whether he received the alleged payments totalling $26,000
in that year. He did file an income tax return for 2006 and reported $26,312 of
“other income,” but there was no documentary confirmation
that this was business income earned by him as a driver for Mr. Ngai.
[101] For the consulting fees allegedly paid in 2005 to Mr. Zhou,
Mr. Ngai produced copies of twelve monthly invoices, the first eleven (for
January to November) each in the amount of $2,250 and the twelfth (for
December) in the amount of $1,250. The total of the invoices is $26,000,
which is the amount deducted by Mr. Ngai in computing his income for 2005. For the
consulting fees allegedly paid in 2006 to Mr. Zhou, Mr. Ngai produced
copies of twelve receipts, the first eleven (for January to November) each
in the amount of $2,100 and the twelfth (for December) in the amount of $1,900,
resulting in a total of $25,000, which corresponds to the amount deducted by
Mr. Ngai in computing his income for 2006. Again, it is curious that
invoices were used in 2005 and receipts were used in 2006. On the invoices for
2005, Mr. Zhou’s name appears as “Hang Zhuo,”
while on the receipts for 2006, his name appears as “Zhou
Hang.” As well, the signatures (which are in Chinese characters) on the
invoices for 2005 are written in a manner that is noticeably different (even to
a reader with an untrained eye) from the signatures (which are also in Chinese
characters) on the receipts for 2006. The inconsistencies between the documents
for 2005 and the documents for 2006 might be more imagined than real and may be
readily explainable; however, when coupled with the lack of any other proof
that the payments were actually made, and without Mr. Zhou testifying to
confirm that he received the payments, I am of the view that Mr. Ngai has
failed to satisfy the burden of proof that he bears.
(2) Referral
Fees
[102]
In 2005 and 2006, Mr. Ngai made various payments
to other individuals that were categorized as referral fees, notwithstanding
that the receipts issued in 2006 for those items described them as being
consulting fees. The expenses deducted in the category of referral fees are the
following:
|
Recipient
|
Amount (2005)
|
Amount (2006)
|
|
Albert Kwan
|
$11,250.10
|
$1,886.79
|
|
Sharon Pang
|
96.30
|
|
|
Jennifer Chan
|
1,500.00
|
|
|
Theresa Pang
|
500.00
|
|
|
Mr. Shunkla
|
500.00
|
|
|
Winnie Cheung
|
1,570.00
|
|
|
EC Home
|
|
2,803.74
|
|
Kit Chan
|
|
5,658.00
|
|
Marc Elder
|
|
500.00
|
|
Charles Hui
|
|
3,480.00
|
|
Porise Lau
|
|
4,000.00
|
|
Mario Ng
|
|
7,000.00
|
|
Yee Kwan Wong
|
|
7,000.00
|
|
Tai Yun Heng
|
|
4,000.00
|
|
Xu Xian Dong
|
|
14,000.00
|
|
Leung Siu Yuen
|
|
13,000.00
|
|
Maggie Chau
|
|
7,000.00
|
|
Michael Tam
|
_________
|
7,000.00
|
|
|
|
$77,328.53
|
[103]
Five of the first six names set out in the above
table for 2005 (which lists referral fee recipients) are also shown in the
table prepared by the CRA’s Appeals Division, as set out in paragraph 97 above
(which lists consulting fee recipients). As indicated above, with the exception
of the $1,500 payment to Jennifer Chan, the Appeals Division allowed the
deduction of the amounts paid in 2005 to those five individuals.
[104] Turning to the referral fees paid in 2006, at the audit phase, the
CRA allowed the deduction of $2,803.74 paid to EC Home Design (although it was
categorized as a consulting fee).
[105] Based on certain concessions made orally by counsel for the Crown
during the submissions phase of the hearing of these Appeals, it is my
understanding that the Crown has conceded the deductibility of the following
referral fees paid in 2006:
|
Recipient
|
Amount
|
|
Albert Kwan
|
$1,886.79
|
|
Kit Chan
|
5,658.00
|
|
Mark Elder
|
500.00
|
|
Charles Hui
|
3,480.00
|
|
Total
|
$11,524.79
|
[106] The payments allegedly made in 2006 by Mr. Ngai to Porise Lau
($4,000), Mario Ng ($7,000), Yee Kwan Wong ($7,000), Tai Yun Heng
($4,000), Xu Xian Dong ($14,000), Leung Siu Yuen ($13,000), Maggie Chau
($7,000) and Michael Tam ($7,000) were, according to Mr. Ngai, paid in cash.
Given my concerns about alleged cash payments (as discussed below) and given
that none of the recipients of the alleged payments was called as a witness to
confirm the receipt of those amounts, Mr. Ngai has failed to prove on a balance
of probabilities that the payments were made, or if they were made, that they
were made for the purpose of gaining or producing income.
G. Alleged Cash Payments
[107]
When asked about the source of the cash used to
pay the individuals referred to above, Mr. Ngai acknowledged that he did not
withdraw money from his bank account. Rather, he explained that, when his
parents returned to China (after having lived in Canada for a few years), they
did not want to take their Canadian money with them. Therefore, they left him
$250,000 in cash, which he was to hold on their behalf, although they gave him
permission to borrow against it. Mr. Ngai testified that he kept the cash in
the basement suite in which he was residing in 2005 and 2006, notwithstanding
that his landlord had ready access to his suite. Mr. Ngai stated that he
had no worries about his landlord finding the cash because he (Mr. Ngai) was
extremely untidy, his suite was a mess and he had hidden the cash under a pile
of disorganized material. Mr. Ngai also stated that he had a small safe, in
which he kept some of the cash.
[108]
In the Nichols case, Justice V.A. Miller
identified several factors that a judge may consider in assessing the
credibility of a witness. She stated the following in respect of the fourth
factor:
… I can consider
the overall sense of the evidence. That is, when common sense is applied to the
testimony, does it suggest that the evidence is impossible or highly
improbable.
To me, it seems
contrary to common sense that an individual would keep $250,000 in cash in a
basement suite to which the landlord has ready access. As well, it seems
peculiar that Mr. Ngai, who wrote numerous cheques to pay expenses incurred in
respect of his business, and who even wrote a $1,000 cheque to make a wedding
gift, would use cash to pay many of the consulting and referral fees discussed
above.
[109]
As indicated above, the consulting fees paid by
Mr. Ngai to Mr. Chow and Mr. Zhou in 2005 were supported by invoices, while the
consulting fees paid to them in 2006 were supported by receipts. The same
pattern applied to all of the consulting fees and referral fees paid to the other
individuals mentioned above, i.e., invoices in 2005 and receipts in 2006. All
of the invoices in 2005 for all of the alleged payees bear a striking
similarity to one another. As well, all of the receipts in 2006 for all of the
alleged payees are remarkably similar to one another. Mr. Ngai acknowledged
during his cross-examination that Mr. Chow, at the request of Mr. Ngai,
prepared all of the invoices and receipts. Given the above circumstances, I do
not have confidence in the veracity of the invoices and receipts.
H. Lack of Corroboration
[110]
The hearing of these Appeals took place over
three days, with evidence being presented on March 23 and 24, 2016, and oral
argument being presented on January 30, 2017. Mr. Ngai was the only witness at
the hearing. At the conclusion of his testimony on March 24, 2016, I stated
that I had serious concerns about the veracity of some of his testimony and
that parts of his testimony cried out for corroboration. I offered to allow him
to keep his case open, so as to call corroborating witnesses when the hearing
resumed. In particular, I said that his case would be assisted by the
testimony of the recipients of many of the gifts and payments whose
deductibility had been disallowed by the CRA. Mr. Ngai stated that, due to
cultural sensitivities and a desire not to offend or alienate any of his business
contacts, he preferred not to ask any of his clients, referral sources, gift
recipients or other business associates to testify.
[111]
I am particularly concerned about the lack of
corroboration in respect of the alleged business purpose of many of the expenditures
discussed above and the lack of corroboration in respect of the alleged
expenditures that were supposedly paid in cash. In order to establish the
deductibility by a taxpayer of expenditures in circumstances such as these, it
is often necessary to establish a link between the amounts deducted and reliable
source documents substantiating the payments, or to call witnesses to
corroborate the taxpayer’s oral evidence.
[112]
However, corroborating evidence is not always
necessary. In Agostini, Justice Boyle stated:
23. … While
supporting, corroborating evidence in writing or from another witness is not
required of a taxpayer to discharge his burden of proof, it can prove very
helpful….
39. In
order to succeed in a tax appeal, a taxpayer is not required to offer
supporting or corroborating evidence, including supporting documentation. A
taxpayer can succeed on his own testimony if the judge finds it credible,
reasonable and sufficient.
Mr. Ngai’s
difficulty is that I have not found his testimony concerning the payments that
he allegedly made in cash to be credible, reasonable or sufficient.
[113]
While, as noted above, corroborating evidence is
not always required, it can be very helpful, particularly where are there are
concerns about the reliability of a witness’s testimony. In such a situation,
common sense suggests that supporting or confirmatory evidence is desirable. As Mr. Ngai chose not to
call any witnesses to confirm his testimony concerning the cash payments that
he allegedly made, I have serious and significant doubts as to whether those
payments were actually made.
[114]
Helpful guidance has been provided by the
Federal Court of Appeal, in the context of unsubstantiated deductions, as
follows:
The Income [sic]
tax system is based on self monitoring. As a public policy matter the burden of
proof of deductions and claims properly rests with the taxpayer. The Tax Court
Judge held that persons such as the Appellant must maintain and have available
detailed information and documentation in support of the claims they make. We
agree with that finding. Ms. Njenga as the Taxpayer is responsible for
documenting her own personal affairs in a reasonable manner. Self written
receipts and assertion without proof are not sufficient.
[115]
Thus, in some situations, more than an appellant’s
oral assertion is required to prove that a particular expenditure was made. Given the concerns expressed
above, this is one of those situations. Having offered nothing more than the
above-described invoices and receipts (whose veracity I question) and his
uncorroborated assertions, Mr. Ngai has failed to prove on a balance of
probabilities that he made the alleged cash payments designated as consulting
fees or referral fees.
V. CONCLUSION
[116]
For the above reasons, these Appeals are allowed
and the reassessments (the “Reassessments”) that
are the subject of these Appeals are referred back to the Minister for
reconsideration and reassessment on the basis that:
a)
Mr. Ngai is allowed to deduct the expenditures
(the “Conceded Expenditures”) whose
deductibility was conceded by the Crown before or during the hearing of these
Appeals;
b) without limiting the generality of the preceding subparagraph, and
for greater certainty, in computing his income for 2005 or 2006, as the case
may be, Mr. Ngai is entitled to deduct the following Conceded Expenditures:
i.
the motor vehicle expenses claimed in 2005 and
2006 respectively in respect of the 2003 Mercedes Benz, such expenses
(including CCA) to be deducted on an “as-filed basis,”
on the understanding that the Mercedes Benz was used 85% of the time for
business purposes in 2005 and 91% of the time for business purposes in 2006;
ii.
all of the legal, accounting and professional
fees paid by Mr. Ngai in 2006 (other than the payment of $4,672.90 (or $5,000
inclusive of GST) on April 21, 2006 to Anita Leung), including, for greater
certainty, $188.67 paid on January 6, 2006 to Ms. Leung, $467.29 paid on May
10, 2006 to Ms. Leung, $467.29 paid on June 13, 2006 to Ms. Leung and $40.00
paid on May 24, 2006 in respect of an expenditure identified as “R.H. Small Claim”;
iii.
expenditures incurred by Mr. Ngai in 2005 in
respect of marketing ($394.08), signage ($199.10), a status certificate or
certificates ($706.05) and the Ming Pao Daily ($1,277.94);
iv.
gifts or payments made by Mr. Ngai in 2005 to
Shirley Chan ($264), Eda Wong ($300), KamKong Wu ($400) and Jeannie Lee
($1,050);
v.
the gift in the amount of $1,500 given by Mr.
Ngai to Kevin Yu in 2005;
vi.
50% of the amounts paid in 2005 by Mr. Ngai for
certain entertainment expenditures categorized as gifts, resulting in
deductible amounts of $468.16 (described as beer/LCBO) and $184.56 (described
as coffee/donut/Cambridge);
vii.
the amounts expended by Mr. Ngai, as advertising
expenses, in 2006 for signage ($198.47), a flyer or flyers ($200), the Ming
Pao Daily ($5,478.15) and other newspapers ($1,155.09);
viii.
the gifts made in 2006 by Mr. Ngai to Anita
Leung ($800), Shirley Chan ($604) and Kale Gao ($300);
ix.
the $850 payment by Mr. Ngai to purchase a
kitchen exhaust fan for the home acquired by Perry So;
x.
the $1,400 paid on April 5, 2006 by Mr. Ngai to
Jeannie Lee to reimburse her airfare to Hong Kong;
xi.
the $500 gift made in 2006 by Mr. Ngai to
Theresa Pang;
xii.
the $1,149.99 payment made in 2006 by Mr. Ngai
to Cindy Ho to reimburse her for the cost of a barbecue for a client of Mr.
Ngai;
xiii.
the $4,185 payment in 2006 by Mr. Ngai to
Eternity Jewellery to purchase a watch for one of his clients;
xiv.
50% of the amounts paid in 2006 by Mr. Ngai for
certain entertainment expenditures categorized as gifts, resulting in deductible
amounts of $625.87 paid for beer/LCBO, $375 paid to the Canadian International
Auto Show and $102 paid to the Markham Theatre;
xv.
the $120 payment made in 2006 by Mr. Ngai to Siu
Fong Chan to compensate her for cleaning a condominium unit prior to its sale;
xvi.
50% of the amounts paid in 2006 by Mr. Ngai for
certain entertainment expenditures categorized as marketing expenses, resulting
in deductions described as coffee/restaurant/food ($110.27), Beer Store
($88.44), Dragon Ball ($225), Oversea Chinese ($70) and Taiwan Merchants
($500);
xvii.
the consulting fees paid in 2005 by Mr. Ngai to
Qilan Guan ($1,200), Wen Tuo Li ($1,150), Joslyn Chan ($756), Albert Kwan
($11,250), Theresa Pang ($500), Mr. Shunkla ($500) and Winnie Cheung
($1,570);
xviii.
the $4,000 consulting fee paid by Mr. Ngai to
Ricky Chow by cheque no. 173, dated March 29, 2005, and the $6,600 consulting
fee paid by Mr. Ngai to Mr. Chow by cheque no. 277, dated May 9, 2006;
xix.
the $2,803.74 referral fee (also categorized as
a consulting fee) paid in 2006 by Mr. Ngai to EC Home Design; and
xx.
certain other referral fees paid in 2006 by Mr.
Ngai to Albert Kwan ($1,886.79), Kit Chan ($5,658), Mark Elder ($500) and
Charles Hui ($3,480);
c) in computing his income for 2005 or 2006, as the case may be, Mr. Ngai
is entitled to deduct the following additional expenditures:
i.
the cost, in the amount of $1,332.50, of his own
airfare (but not the airfare of Alvin Young) in travelling to and from Hong
Kong in 2006;
ii.
the $500 paid to Chris Kiepal in 2005 to sponsor
a horse show;
and
iii.
the payment of $1,500 on February 16, 2005 by
Mr. Ngai to James H. Chow, on behalf of his client, Jennifer Chan;
d) subject to the applicable rules in the ITA and the Income
Tax Regulations,
the cost of the Canon camcorder and accessories purchased from Future Shop on
August 11, 2006 is to be taken into consideration in calculating the
undepreciated capital cost to Mr. Ngai of the depreciable property of the
applicable prescribed class in 2006;
and
e)
in all other respects, the Reassessments are
confirmed.
[117]
As success has been divided, there is no award
of costs.
Signed at Ottawa,
Canada, this 26th day of January 2018.
“Don R. Sommerfeldt”
Email this Content