REASONS
FOR JUDGMENT
Masse D.J.
[1]
The Appellant is
appealing his reassessment for the 2011 taxation year whereby the Minister of National
Revenue (the “Minister”) disallowed rental losses, charitable donations and
business losses that were claimed by the Appellant for that year. The Minister
also assessed a gross negligence penalty pursuant to subsection 163(2) of the Income
Tax Act, RSC 1985, c 1 (5th Supp), as amended (the “Act” )
in respect of the claimed charitable donations.
[2]
Mr. Okafor lives in Mississauga. He
is an accountant by profession. At the relevant time throughout 2011, he was
working for SCM Supply Chain Management Inc. He was married and had a dependant
child but is now divorced.
[3]
In computing
income for the 2011 taxation year, the Appellant reported gross rental income
of $4,800 and claimed a net rental loss of $3,726.15.
[4]
The Appellant also
claimed a non-refundable tax credit with respect to a portion of charitable
donations amounting to $3,349.35 allegedly made by him to Power Zone Outreach
Ministries (“Power Zone” ) as well as a carry-forward of unclaimed charitable
donations in the amount of $3,312.46 allegedly made by the Appellant to Power
Zone in 2010. The total charitable donation amount claimed in 2011 was
therefore $6,661.81.
[5]
Finally, the
Appellant reported gross business income of $67,588.00. The reported cost of
goods sold was in the amount of $48,317.33 for a gross profit of $19,270.67. He
also reported total business expenses in the amount of $65,972.21, which
resulted in a claimed business loss of $46,234.52.
[6]
The Minister
initially assessed the Appellant’s tax return as claimed by way of Notice of
Assessment dated June 11, 2012. However, the Minister later reassessed the
Appellant by way of Notice of Reassessment dated June 11, 2015 so as to
disallow all of the above noted claimed rental losses, charitable donations and
business losses. The Minister also assessed a gross negligence penalty pursuant
to subsection 163(2) of the Act in respect of the charitable donation
non-refundable tax credit claimed in the 2011 taxation year.
[7]
The Appellant
filed a Notice of Objection to this reassessment. The Minister confirmed the
reassessment by way of Notice of Confirmation dated May 12, 2016. Hence the
appeal to this Court.
Rental Losses
[8]
Mr. Okafor owned a property located at 100 Sand
Cherry Crescent, Brampton Ontario. This residence is a three-story,
semi-detached four-bedroom residence with a finished basement. The basement is
a self-contained living unit with a separate entrance. Each storey has the same
floor area, amounting to 33% of the available living space per storey. The
Appellant, his ex-wife and his son lived on the main and upper floors. The
basement apartment was rented out to a tenant named Meaghan Corbett-Dickson.
This tenancy is evidenced by a written lease‑agreement for one-year. A
copy of this lease is contained in Exhibit A-1. The rent for the basement
apartment was $800 per month as stated in the lease. Ms. Corbett-Dickson moved
out at the end of March 2011.
[9]
The Appellant testified that during the first
three months of 2011 his brother-in-law, Jason (or Jesse) McKain, occupied two
rooms on the top floor of the residence for his exclusive use. The Appellant
and his wife occupied the master bedroom on the top floor and their son
occupied the other bedroom. They all shared the remainder of the living area on
the top floor and main floor, in common. Mr. McKain lived there for 3 months.
He paid $800 per month for a total of $2,400. Therefore, according to the
Appellant, his total gross rental revenue for 2011 was $4,800.00. The
Appellant’s expenses in relation to this property for insurance, interest,
maintenance & repairs, property taxes and utilities amounted to $12,725.60.
The Appellant attributed 33% of these expenses to personal use amounting to
$4,199.45. He attributed the remaining 67% of these expenses to rental expenses
amounting to $8,526.16. This resulted in a net rental loss of $3,726.15 that he
claimed on his 2011 tax returns. The attribution rate is based on the
percentage of floor space occupied by the tenants.
[10]
Initially, the Respondent took the position that
the Appellant did not rent out any property owned by him to any individual at
any time during the 2011 taxation year, and if he did, then he was not doing so
in a sufficiently commercial manner to constitute income from property.
However, at the beginning of the hearing, the Respondent conceded that the
Appellant suffered a rental loss for that year but only $1,842.00 and not the
amount claimed by the Appellant. The Respondent is of the view that the correct
percentage of property related expenses to be attributed to personal use is
67%, not 33%, as claimed by the Appellant.
[11]
How many tenants did the Appellant have living
in his house? In his Notice of Objection dated August 13, 2015, the Appellant
did not indicate who his tenants were or how many there were. The Appellant
also indicated that all his tenants made their rental payments to him by way of
cheques. The Appellant has produced copies of cheques from Meaghan Corbett-Dickson
proving he received rents from her. However, he did not produce any cheques
from his brother-in‑law. The Appellant did advertise the basement
apartment for rent to the public at large. He did not advertise the fact that
other rooms in his house were also available for rent. He states that he would
not have rented those rooms to strangers, only family or friends. The Appellant
has produced a written lease‑agreement for the rental of the basement apartment.
He has not produced any written lease-agreement with his brother-in-law. In his
Notice of Appeal, the Appellant indicates that once he separated from his wife
and moved out, his wife put her two brothers in the rooms upstairs but they
never paid any rent. If they paid any rent, it was paid directly to his
ex-wife. He maintains that his wife stole the rent money that his
brothers-in-law paid by depositing the rent in their joint bank account and
then withdrawing all of the money.
[12]
I accept that the basement apartment, or 33% of
the available living space in the Appellant’s home, was rented out to Meaghan
Corbett-Dickson. This fact is fully supported by documentation such as a
written lease agreement and copies of cancelled checks. However, there is no
documentation that would support the Appellant’s contention that a
brother-in-law lived with him in a landlord/tenant relationship. The Appellant
cannot provide any documentation whatsoever confirming the existence of a lease
agreement between himself and his brother-in-law. There is no written lease
agreement, there are no cancelled checks, there are no receipts attesting to
the payment of cash amounts, and the appellant cannot point to any entries in
his bank records that would relate to payments from his brother-in-law. It is
significant that neither his wife nor his brother-in-law came to testify and
explain their involvement in all of this. I am entitled to draw an adverse
inference from their failure to testify and I do so. It must be remembered that
the burden of proof is upon the Appellant to establish on the balance of
probabilities that there was indeed a rental agreement between himself and his
brother-in-law. Quite simply, there is no convincing evidence beyond the
Appellant’s verbal assertion to that effect.
[13]
If the Appellant was permitting his
brother-in-law to live in the family home, then this was a family arrangement
under which rent was to be paid in order to help defray the expenses of
maintaining the family home and not for the purpose of earning income (see for
example Greig v. Canada, [2003] 2 C.T.C. 2475).
[14]
Therefore, with respect to rental expenses, the
appeal is allowed in part and the matter is referred back to the Minister for
re-evaluation and reassessment on the basis that the Appellant is entitled to
claim a net rental loss of $1,842.
Charitable donations
[15]
In computing the tax payable for the 2011
taxation year, the Appellant claimed a non-refundable tax credit with respect
to charitable donations allegedly made by him to Power Zone. He claimed the sum
of $3,349.35 from donations made in 2011 as well as a carry-forward of
$3,312.46 of unclaimed charitable donations made by him in 2010. The total
charitable donation amount claimed for 2011 was therefore $6,661.81.
[16]
The Appellant produced a copy of a receipt
(Exhibit R-6) issued 17th February 2011 in the amount of $15,220.00
representing charitable donations made by him to Power Zone in 2010. The
Appellant also produced a copy of a receipt (part of Exhibit A-2) issued 27th
February 2011 in the amount of $16,450.00 representing charitable donations
made by him to Power Zone in 2011. The Appellant has also provided copies of
seven cancelled cheques drawn on his personal bank account (also part of
Exhibit A-2). These cheques total $15,000.
[17]
The charitable organization status of Power Zone
was revoked for cause on May 5, 2012 (see Exhibit R-7, excerpt from Canada
Gazette).
[18]
Subsection 118.1(3) of the Act allows a
deduction from tax payable for gifts made to a registered charity. Subsection 118.1(2)
of the Act provides that the making of a gift must be proven by filing
with the Minister a receipt containing prescribed information. The prescribed
information required to be included in an official charitable receipt is listed
in subsection 3501(1) of the Income Tax Regulations, C.R.C., c. 945 (the
“Regulations”), which states:
(1) Every official receipt issued by a registered organization
shall contain a statement that it is an official receipt for income tax
purposes and shall show clearly in such a manner that it cannot readily be
altered,
(a) the name and address in Canada of the organization as recorded
with the Minister;
(b) the registration number assigned by the Minister to the
organization;
(c) the serial number of the receipt;
(d) the place or locality where the receipt was issued;
(e) where the gift is a cash gift, the date on which or the year
during which the gift was received;
(e.1) …
(f) the date on which the receipt was issued;
(g) the name and address of the donor including, in the case of an
individual, the individual’s first name and initial;
(h) the amount that is
(i) the amount of a cash gift, or
(ii) …
(h.1) …
(h.2) …
(i) the signature, as provided in subsection (2) or (3), of a
responsible individual who has been authorized by the organization to
acknowledge gifts; and
(j) the name and Internet
website of the Canada Revenue Agency.
[19]
The Respondent argues that the receipts provided
by the Appellant for both 2010 and 2011 are deficient in that neither receipt
shows the place or the locality of issuance of the receipt as required by
paragraph 3501(1)(d) of the Regulations. The requirements of the Regulations
are mandatory and they are to be strictly adhered to. If the requirements are
not met, a receipt is deficient and the credit must be denied.
[20]
In Plante v. R., [1999] 2 C.T.C. 2631,
Justice Tardif of this Court observed at paragraphs 46 through to 48:
[46] The
requirements in question are not frivolous or unimportant; on the contrary, the
information required is fundamental, and absolutely necessary for checking both
that the indicated value is accurate and that the gift was actually made.
[47] The purpose of
such requirements is to prevent abuses of any kind. They are the minimum
requirements for defining the kind of gift that can qualify the taxpayer making
it for a tax deduction.
[48] If the
requirements as to the nature of the information that a receipt must contain
are not met, the receipt must be rejected, with the result that the holder of
the receipt loses tax benefits. …
[21]
In Sowah v. R., [2014] 1 C.T.C. 2072, Mr.
Justice Campbell Miller of this Court found that the charitable donations
receipt issued by the Jesus Healing Centre that had been produced to the Court
was deficient in several respects. In particular, the address of the charitable
organization was provided but there was no indication of the locality of where
the receipt was issued. Justice Campbell Miller was of the view that the
charity’s address as indicated on the official receipt could not be considered
as the place of issuance of the receipt. He stated at paragraphs 19 and 20 as
follows:
[19] … [T]he receipt must
show the locality or place where the receipt was issued. This is a separate
requirement from the address of the organization as recorded with the Minister.
Here, while we might presume that the address of the organization is the same
place as where the receipt was issued, this should not be left to presumption.
Maybe there are several Jesus Healing Centres throughout Toronto. It should be
clear on the receipt from which place the receipt is issued. It is not. Again,
a requirement has not been met
[20] The Appellant has therefore not provided a receipt with the
prescribed information and has therefore not met the 2nd condition
necessary to obtain credit for a charitable donation. The Appeal can be
dismissed on that basis.
An appeal to the Federal Court of Appeal was dismissed
(see Sowa v. R., 2015 D.T.C. 5052. [It is noted that the spelling of the
Appellant’s name at the Federal Court of Appeal is different from that at the
Tax Court of Canada]. I myself arrived at the same decision in the case of Bope
c. R., 2015 TCC 120. In Bope, I agreed with Justice Miller in Sowah
that the requirement pertaining to the locality or place where the receipt was
issued is a separate requirement from the address of the organization as
recorded with the Minister. It should be clear on the face of the receipt from
which place the receipt is issued, because the address of the organization may
be different from the place where the receipt was issued.
[22]
I agree with the Respondent’s position. The
receipts being considered here must show not only the address of the
organization as recorded with the Minister, as required by paragraph 3501(1)(a)
of the Regulations, they must also show the place or locality where the
receipts were issued as required by paragraph 3501(1)(d). These
requirements may be technical but they are mandatory. In keeping with what I
said in Bope, it should be made clear on the face of the receipt the
place or locality where the receipt was issued in addition to the address of
the organization. The receipts here in question do not. The Appellant argues
that the address of the organization and the place where the receipts were
issued is the same. Perhaps that is so but we cannot presume that they are the
same – if they are the same, then that should have been so indicated on the
receipts. That alone is a sufficient basis upon which to deny the Appellant’s
appeal in regard to the charitable donations.
[23]
Part of the charitable donations that the
Appellant claimed in 2011 were carried over from his 2010 taxation year. The
Appellant argues that the Minister was statute barred from reassessing his 2010
tax returns. This argument has no merit. The Minister reassessed only the 2011
taxation year, which is not statute barred. In doing so, the Minister was fully
entitled to consider the validity of all claimed deductions for that year, even
those that are carried forward from previous years.
[24]
Quite apart from the foregoing, there is much
that gives rise to suspicion regarding the validity of the supposed charitable
donations. Firstly, the cheques that the Appellant produced as part of Exhibit
A-2 are all dated during the last three months of 2011.
The Appellant was experiencing serious financial difficulties in 2011, having
gone through an acrimonious separation, having allegedly suffered significant
business losses of some $46,000 and yet he made a flurry of large donations in
the last quarter of the year. The total charitable donations for that year
amount to about 25% of his annual gross income of $66,965 from employment. It
is unlikely that a taxpayer in the Appellant’s personal situation would make
charitable donations of that magnitude. Secondly, the seven cheques produced by
the Appellant were processed by the bank anywhere from one-and-a-half to two
months after the date they were written. It is most unusual that a charity
would hold on to cheques for that long before depositing them. That is
suspicious. Thirdly, the receipt for 2011 is suspicious on its face. The Power
Zone logo on Exhibit R-6 for 2010 is positioned between the printed portions of
the receipt and does not overlap on any of the printed portions of the receipt.
However, the 2011 receipt in Exhibit A-2 is off-centre and almost impinges onto
the printed portions of the receipt located on the upper left of the document
leaving one to conclude that this document was simply pasted together on a
computer. Lastly, both receipts indicate “Official Receipt Number 90327”. I
find it astonishingly coincidental that two receipts issued a year apart in
time to exactly the same individual donor would have exactly the same official
receipt number.
[25]
And finally, the
Minister assessed a gross negligence penalty pursuant to subsection 163(2) of
the Act in respect of the charitable donation non-refundable tax credit
claimed in the 2011 taxation year. The Respondent now concedes that this is not
a proper case for the imposition of a gross negligence penalty. Therefore, with respect to charitable donations, the appeal is
allowed in part and the matter is referred back to the Minister for
re-evaluation and reassessment on the basis that the Appellant ought not to be
subjected to the imposition of a gross negligence penalty pursuant to subsection 163(2) of the Act.
All other aspects of the appeal with respect to the
charitable donations are dismissed.
Business Losses
[26]
In computing income for the 2011 taxation year, the Appellant reported gross business
income of $67,588.00. The reported cost of goods sold was in the amount of
$48,317.33 for a gross profit of $19,270.67. He also reported total business
expenses in the amount of $65,972.21, which resulted in a claimed business loss
of $46,234.52.
[27]
The Appellant and a colleague, Mr. Chris Nsoedo,
decided to go into business together. Their plan was to buy used clothing in
bulk, sort it and export it to Africa where the clothing was very much needed
and could be sold at considerable profit. However, this was a very high-risk
adventure.
[28]
Initially, the Appellant and Mr. Nsoedo were to
invest $9,000 each and they were to be equal partners. Mr. Nsoedo was having
difficulties in securing funds to invest and so the business relationship
changed from one of equal partners to one where the Appellant had a 99%
interest and Mr. Nsoedo only had a 1% interest. However, Mr. Nsoedo was kept on
because he knew how things worked in Nigeria, the target market.
[29]
The enterprise was registered in Ontario as a
registered partnership under the business name of Christim Associates
(“Christim”). Partnership banking accounts were opened at the Royal Bank of
Canada in the name of Christim for both US and Canadian currencies. Christim
decided to market its product through a consignee who operated in Nigeria. The
Appellant and Nsoedo travelled to Nigeria in order to study the potential
market there. The sum of $9,000 was used to purchase a bulk container load of
used clothing. However, the supplier of this container was forced into
liquidation and Christim was at risk of losing its investment. Rather than take
a loss on its initial investment, Christim doubled down and invested an
additional $7,000 in order to obtain the inventory remaining on the premises of
this supplier. Christim also purchased another bulk container of used clothing
from another supplier at a cost of $32,000. However, not all the inventory of
clothing could be sold in Nigeria since some of the clothing was not suitable
to the Nigerian climate. Therefore, Christim got another consignee to sell some
of the clothing in Malawi where the clothing was better suited to that climate.
With respect to both containers, what Christim bought was not what was expected
in terms of quality and quantity and simply was not worth what Christim paid
for it. Two containers of used clothing were shipped overseas to be sold in
Nigeria and Malawi. Once in Africa, additional expenses had to be paid to
government officials and to un-named others for customs clearing, warehousing,
demurrage, and to bring the product to market.
[30]
The business venture was never profitable. It
was shut down in 2012.
[31]
The Appellant has filed a number of documents in
support of his contention that he was indeed carrying on a business and that
his business suffered financial losses. Exhibit A-3 is comprised of the following:
1)
Master Business License dated December 7, 2010
issued by the Government of Ontario registering the business name of Christim
Associates.
2)
Minutes of partners meeting held on January 2,
2011.
3)
Partnership Agreement dated January 3, 2011
between Christim as consignor, and Mr. Nwose Ambrose Chukwualuka of Nigeria as
agent and consignee.
4)
Partnership agreement dated January 3, 2011
between Christim as consignor and Mr. Peter Chkwu of Malawi as agent and
consignee.
5)
Packing list dated December 13, 2010 detailing
the contents of a shipping container.
6)
Form T2125, Statement of Business or
Professional Activities, showing profit and loss for the 2011 taxation year.
7)
Invoice dated February 24, 2012 from, Comet May
Industrial Ltd. (“Comet”) of Nigeria regarding the shipment and sale of a
container of used clothing indicating itemized expenses of $34,213.13.
8)
Invoice dated February 28th 2012 from
Trinity Holdings (“Trinity”) from Malawi regarding the shipment and sale of a
container of used clothing indicating itemized expenses of $24,138.26.
9)
Invoice dated March 1, 2011 from ABN Exports
Inc. from Mississauga Ontario regarding the purchase of used clothing for
$16,209.78.
10)
Invoice from ACMS Export Inc. dated March 1,
2011 regarding purchase of 450 bales of used clothing for $32,000.
11)
Invoice from Alphatec Business Operations Inc.
(“Alphatec”) dated March 22, 2011 in the amount of $6,500 representing the cost
of shipping a container to Nigeria.
12)
Invoice from Alphatec dated May 3, 2011 in the
amount of $5,725 representing the cost of shipping a container to Malawi.
13)
Business Account Statements in US funds from the
Royal Bank of Canada regarding Christim together with copies of cancelled
checks from March 4, 2011 to July 6, 2011.
14)
Business Account Statements in Canadian funds from
the Royal Bank of Canada regarding Christim together with copies of cancelled
checks from February 17, 2011 to July 6, 2011.
[32]
The Appellant also provided his personal bank account statements, his personal line of credit
statements and his credit card statements.
[33]
The Respondent argues that the Appellant is not entitled
to deduct any of the claimed business losses of $46,234 from his personal
income in the 2011 taxation year. The Respondent argues that the Appellant did
not have a source of business income in 2011 as he has not demonstrated that he
operated his venture with sufficient commerciality. If it is found that the
Appellant was operating a business, then the Respondent argues that he has not
shown that the claimed expenses were legitimate business expenses and that
there is insufficient source documentation to support his claimed business
expenses.
[34]
Was the Appellant operating
a business? Resort must be had to the leading case of the Supreme Court of
Canada in Stewart v. Canada, 2002 SCC 46 (CanLII), for guidance. In that case, the
Court posited a two-stage test to determine if an activity amounted to a
business enterprise. The Court stated the following:
50. It is clear
that in order to apply s. 9 [which deals with income and losses from a business
or property], the taxpayer must first determine whether he or she has a source
of either business or property income. As has been pointed out, a
commercial activity which falls short of being a business, may nevertheless be
a source of property income. As well, it is clear that some taxpayer
endeavours are neither businesses, nor sources of property income, but are mere
personal activities. As such, the following two-stage approach with
respect to the source question can be employed:
(i) Is the
activity of the taxpayer undertaken in pursuit of profit, or is it a personal
endeavour?
(ii) If it is
not a personal endeavour, is the source of the income a business or property?
The first stage of the
test assesses the general question of whether or not a source of income exists;
the second stage categorizes the source as either business or property.
51. Equating
“source of income” with an activity undertaken “in pursuit of profit” accords
with the traditional common law definition of “business”, i.e., “anything which
occupies the time and attention and labour of a man for the purpose of
profit”: … As well, business income is generally
distinguished from property income on the basis that a business requires an
additional level of taxpayer activity: … As such, it is logical to
conclude that an activity undertaken in pursuit of profit, regardless of the
level of taxpayer activity, will be either a business or property source of
income.
52. The purpose of
this first stage of the test is simply to distinguish between commercial and
personal activities, … [W]here the nature of a taxpayer’s venture
contains elements which suggest that it could be considered a hobby or other
personal pursuit, but the venture is undertaken in a sufficiently commercial
manner, the venture will be considered a source of income for the purposes of
the Act.
53. … [This]
“pursuit of profit” source test will only require analysis in situations where
there is some personal or hobby element to the activity in question. … Where the nature of an activity is clearly commercial, there
is no need to analyze the taxpayer’s business decisions. Such endeavours
necessarily involve the pursuit of profit. As such, a source of income, by
definition, exists, and there is no need to take the inquiry any further.
54. … Thus, in
expanded form, the first stage of the above test can be restated as follows:
“Does the taxpayer intend to carry on an activity for profit and is there
evidence to support that intention?” This requires the taxpayer to
establish that his or her predominant intention is to make a profit from the
activity and that the activity has been carried out in accordance with
objective standards of businesslike behaviour.
[35]
On considering the testimony
of the Appellant as well as all of the documents provided by him and the
activity of the partnership banking accounts, I come to the conclusion that the
activity carried on by the Appellant was not a personal endeavour. I am
satisfied that the Appellant’s predominant intention was to make a profit from
this activity and he made efforts to carry out his intention in accordance with
objective standards of businesslike behaviour. In hindsight, he may not have
demonstrated the best business acumen and he may not have made the best
business decisions but it is not up to this Court to second-guess his business
judgment.
[36]
Having decided that Christim was carrying on a
business activity, I now have to determine whether the claimed expenses are
properly deductible for tax purposes.
[37]
Before analyzing the deductibility of the 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 Act 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 Act precludes
the deduction of many personal or living expenses of the taxpayer;
c) section 67 of the Act precludes
the deduction of an otherwise deductible outlay or expense, except to the
extent that the outlay or expense was reasonable in the circumstances.
[38]
In addition the burden of proving that any
disputed expense is properly deductible lies upon the Appellant. In a
self-assessing and self-reporting tax system such as exists in Canada, the
taxpayer must provide the evidence necessary to substantiate any claimed
deductible expenditures on the balance of probabilities. This evidence must
amount to more than mere assertion. There must be credible and reliable
documentary evidence that corroborates the expenditures being claimed. To that
end, proper record keeping is a must. The Act recognizes this since
section 230 of the Act provides that a person carrying on a business is
required to keep records and books of account. Section 230 of the Act
provides in part:
Records and books
230 (1) Every person carrying on business and every person who is
required, by or pursuant to this Act, to pay or collect taxes or other amounts
shall keep records and books of account (including an annual inventory kept in
prescribed manner) at the person’s place of business or residence in Canada or
at such other place as may be designated by the Minister, in such form and
containing such information as will enable the taxes payable under this Act or
the taxes or other amounts that should have been deducted, withheld or
collected to be determined.
…
Limitation period for keeping records, etc.
(4) Every person required by this section to keep records and books of
account shall retain
(a) the
records and books of account referred to in this section in respect of which a
period is prescribed, together with every account and voucher necessary to
verify the information contained therein, for such period as is prescribed; and
(b) all other records and books of account referred to
in this section, together with every account and voucher necessary to verify
the information contained therein, until the expiration of six years from the
end of the last taxation year to which the records and books of account relate.
[39]
Therefore, there is a
positive duty on a taxpayer to keep all records and books of account, and I
would also suggest all contracts, accounting ledgers, bank statements, cheques,
vouchers, invoices, receipts, explanatory letters and emails, and any and all
other documents that contain such information as will enable the taxes payable
on income to be determined. The absence of adequate documentation will tell
against a taxpayer.
[40]
In the case of Njenga v. Canada, [1996]
F.C.J. No. 1218, Justice McDonald of the Federal Court of Appeal put this
succinctly as follows at paragraph 3:
The income 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.
[41]
According to the Appellant, the documents that
he produced in Exhibit A-3 constitute practically the entirety of the business
records before the Court in support of his claimed business expenditures. It is
his evidence that the information used to draw up his Statement of Business or
Professional Activities (Form T2125) was gleaned primarily from two documents,
the Comet invoice regarding Nigeria and the Trinity invoice regarding Malawi.
There are no third‑party source documents to show how any amounts listed
therein were determined or who they were paid to.
[42]
The Appellant claims that copies of source
documents containing all the information from Nigeria and Malawi were stored on
a computer flash-drive that was destroyed by his son while the Appellant was
working on his computer with his son sitting on his lap. However, the Appellant
did not obtain or request any replacement documentation from any independent
sources such as his agents/consignees in Nigeria and Malawi. The Appellant
states that these source documents are not his but rather belong to his
agents/consignees in Africa. With respect, that assertion only serves as an
excuse to avoid the responsibility of keeping adequate records. Such
documentation was necessary to prove the existence of, the amount and the reasonableness
of the claimed expenditures. The Appellant takes the position that all the
information that is required can be obtained by simply contacting people in
Nigeria. That may be true but the burden of so doing does not repose upon the
CRA, or the Court or anybody else other than the Appellant.
[43]
One would generally expect an export business to
produce considerably more of a paper record than what has been provided by the
Appellant to this Court, particularly when run by someone who understands the
need to produce documentation in order to make tax claims in Canada. What is
striking in this case is that we do not have a general ledger for the business,
there is no evidence of an effort of ongoing accounting of the money coming in
and out of the business. The Appellant consistently pointed to the bank
statements that he provided to the Court; however, they are incomplete and
provide only for the first half of 2011. Although the bank statements do
indicate some activity, there is no clear indication of where the money is
coming from and where it’s going. When asked to source the expenses claimed by
the Appellant, he points to his bank statements and essentially invites the
Court to find the answers within those documents. It is not the function of
this Court to act as a forensic accountant. It is up to the Appellant to
satisfy the Court that expenses were incurred and accounted for.
[44]
Nonetheless, the Appellant was carrying on a
business and he did incur some expenses that are properly deductible. The
Respondent concedes that if it is found that the Appellant did carry on a
business, then the cost of shipping totalling $12,225 (see Exhibit A-3:
Alphatec invoice dated March 22, 2011 for $6,500 and Alphatec invoice dated May
3, 2011 for $5,725) would be a proper business deduction.
[45]
I am also willing to allow other deductions as
discussed below.
[46]
The Appellant’s Statement of Business or
Professional Activities (Form T2125) filed with his 2011 tax return shows total
business expenses of $65,972.21 for a net business loss of $46,701.54. Details
of total business expenses are as follows:
|
Interest
|
$4,502.63
|
|
Management and administration fees
|
$1,351.76
|
|
Rent
|
$3,510.00
|
|
Salaries, wages and benefits
|
$1,798.69
|
|
Travel
|
$3,118.19
|
|
Custom clearing, demurrage, NBL, offloading, keys, sorting, and
miscellaneous
|
$51,690.94
|
|
Total
|
$65,972.21
|
Interest
[47]
The Appellant is claiming interest charges of
$4,502.63. It should be a simple matter to go through the banking records and
determine how and when the interest charges were incurred. An examination of
Christim’s bank records does not disclose how much money Christim borrowed,
from whom, the rate of interest charged, the schedule of payments or when the
interest charges were paid. The Appellant claims that he borrowed money on his
personal line of credit. An examination of his personal bank records indicate
that he paid interest on his line of credit for 2011 in the amount of
$2.295.19.
[48]
On the question of interest expenses, I am
willing to give the Appellant the benefit of the doubt and I accept the claimed
interest expenses of $2,295.19.
Management and Administration Fees
[49]
The Appellant claims expenses of $1,351.76 under
the heading of Management and Administration Fees. These management and
administration fees really are commissions at the rate of 2% of sales paid to
Trinity and Comet. These were paid in accordance with the partnership
agreements that were contracted with the consignees. These commissions are
clearly indicated on the invoices from Comet May and Trinity that are part of Exhibit
A-3.
[50]
I accept the claimed Management and
Administration Fees expenses of $1,351.76.
Rent
[51]
The Appellant is claiming rental expenses in the
amount of $3,510. It has not been established to my satisfaction what premises
were being rented, where the premises were located, or for what purpose. There
is no evidence of any rental agreement. An examination of banking records does
not support the contention that this amount of rental expenses was in fact
paid. The total amount claimed for rent on the Trinity and Comet invoices do
not add up to the amount claimed. The Appellant claims that something else must
have been added in but he cannot say what that was. His answers concerning the
details of this additional unaccounted for expense are vague, uncertain and
unsupported by any documentation.
[52]
I reject the claimed rental expenses.
Salaries, Wages and Benefits
[53]
The Appellant claims expenses on account of
salaries, wages and benefits in the amount of $1,798.69. With respect to
Nigeria, these expenses appear on the Comet invoice as two items; Sales Boy
expenses amounting to $342.44, and 2nd Sales Boy expenses amounting
to $406.25. In Malawi, the Trinity invoice shows an item of Salary for a sales
lady in the amount of $1,050 for a total of $1,798.69. We of course have no
idea who was hired to do this work in Nigeria and Malawi. However, I do not
doubt that some labour was hired and that in those countries casual labour is
very likely paid for in cash and I can appreciate that it might be unusual to
ask for a receipt in such circumstances.
[54]
I accept the claimed expenses of $1,798.69 as a
valid business.
Travel
[55]
The Appellant claims travel expenses in the
amount of $3,118.19. It is my understanding that this is in relation to motor
vehicle expenses for fuel, maintenance and repairs, and insurance. The
Appellant has provided copies of invoices in support of maintenance and repairs
expenses (see Exhibit A-5) from January 29, 2011 to August 27, 2011 totalling
$2,338.38 but not for insurance or fuel. He does not have any vehicle logs
showing the distance travelled for business as opposed to the distance
travelled for personal reasons. Thus we do not know what proportion of these
claimed expenses are properly deductible for tax purposes. It is up to the
Appellant to establish this. The Appellant also indicated that this may very
well have included the cost of travelling to Nigeria but he has not provided
any supporting documentation such as airline tickets or invoices.
[56]
I reject this claimed expenditure of $3,118.19
for travel expenses.
Custom Clearing,
Demurrage, NBL, Offloading, Keys, Sorting, and Miscellaneous
[57]
The Appellant claims business expenses totalling
$51,690.94 under this heading. The source documents that are relied upon in
support of these claimed expenses are the two invoices from Comet and Trinity.
The Trinity invoice shows a line item of $20,000 for Clearing Costs. The Comet
invoice shows $29,375 for Clearing, $687.50 for Demurrage, $625.00 for NBL,
$237.50 for Off-loading, $12.50 for Key, $188.44 for Sorting and $235 for
Balance of 1st deposit. Not one of these expenditures is supported
by any source document. Indeed, when it comes to source documents from the
Nigerian or Malawian governments for customs clearing, I am left with the clear
impression that none exist since the goods being marketed by the Appellant in
Africa were considered to be contraband.
[58]
This claimed expenditure of $51,690.94 for
Custom Clearing, Demurrage, NBL, Offloading, Keys, Sorting and Miscellaneous is
rejected.
[59]
In summary, with respect to the claimed business
deductions, the appeal is allowed in part and the matter is referred back to
the Minister for re-evaluation and re-assessment on the basis that the
following expenditures are properly deductible from income:
|
Shipping
|
$12,225.00
|
|
Interest
|
$2,295.19
|
|
Management & Administration Fees
|
$1,351.76
|
|
Salaries, Wages and Benefits
|
$1,798.69
|
|
Total
|
$17,670.64
|
|
|
|
[60]
In all other respects, the appeal is dismissed.
Conclusion
[61]
In conclusion, the appeal is allowed in part and
the matter is referred back to the Minister for re-evaluation and reassessment
on the basis that:
a. With respect to the appeal regarding net rental losses, the
Appellant is entitled to claim net rental losses for the taxation year
amounting to $1,842.
b. With respect to the appeal regarding charitable donations, the
Respondent concedes that this is not a proper case for the imposition of the
gross negligence penalties imposed pursuant to section 163(2) of the Act and
therefore the Appellant is not liable for these penalties.
c. With respect to the appeal regarding claimed business losses, the
Appellant is entitled to claim business expenses totalling $17,670.64. All
other claimed business expenditures have not been proven on the balance of
probabilities.
[62]
In all other respects, the appeal is dismissed
without costs.
Signed at Kingston,
Ontario this 16th day of February 2018.
“Rommel G. Masse”
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