Dugas v. R., [1996] 2 CTC 2483, 97 DTC 144 (Informal Procedure)

Bowman J.T.C.C.: — These are appeals instituted from the assessments made under the Income Tax Act for the years 1989 and 1990. The point at issue concerns the appellant’s right to deduct the amounts of $9,412 in 1989 and of $8,243 in 1990, as maintenance and repair expenses relating to a property.

In 1989 and 1990, the appellant was the owner of a duplex at 9065-9067 Christophe-Colomb Avenue in Montreal. She lived on the ground floor and rented out the second floor. In computing her income for the years 1989 and 1990, she included rental income of $5,100 and $5,400 respectively. She claimed a deduction for the following expenses:

1989

Expenses:

Totals/Relating to her personal accommodation

Property taxes: 3,596.14: 1,798.07

Insurance: 800.00: 400.00

Mortgage interest: 867.29: 433.64

Repairs (tenant): 1,067.49

Repairs and maintenance: 20,824.74: 10,412.37

Administrative expenses: 52.00: 26.00

27,207.66: 13,070.08

Deductible EXPENSES: 14,137.58

1990

Property taxes: 3,761.36

Maintenance and repairs: 18,486.14

Interest charges: 868.60

Insurance: 852.81

Mortgage costs: 60.00

Total: 24,028.91

Less personal portion (50 %): 12,014.45

Expenses: 12,014.46

She therefore claimed losses of $9,037.58 for 1989 and $6,614.46 for 1990.

In notices of reassessment dated September 14, 1992, for 1989 and 1990, the Minister of National Revenue allowed the appellant’s deduction of all the expenses she had claimed except those relating to maintenance and repairs, that is, $10,412 and $9,243. With respect to these expenses, he allowed her a deduction of only $1,000 for each of the years in issue. The appellant filed a notice of objection to these assessments. In a notice of reassessment dated March 19, 1993, the Minister allowed the appellant a further deduction, for 1989, of $2,145 for repairs to the roof of the house. He did not change the assessment for 1990.

In addition, the Minister assessed the appellant a penalty under subsection 163(2) of the Act because, in his opinion, she had, knowingly or under circumstances amounting to gross negligence, made a false statement or omission in her tax returns for the years in issue.

The penalties were apparently based on the tax established according to the difference between the expenses for which a deduction was claimed and those for which the Minister allowed the deduction.

The burden is on the appellant to prove that the tax assessments are incorrect, while the onus is on the respondent to justify the penalties.

As to the expenses, at first glance, it seems unreasonable to me to spend $10,412 and $9,243 two years in a row to repair and maintain a property that only produces an income of $5,100 and $5,400 per year, unless there is a fairly persuasive argument for such extraordinary expenditures. The very scale of these expenditures raises the question of whether they were actually incurred or whether they could reasonably be considered applicable to the rental business the appellant operated.

I cite a few examples of the expenses for which the appellant claimed a deduction. In 1987, there was quite a serious flood in the street in which the appellant’s house was located. Ms. Dugas testified that she had had to repair the walls, as a result of the damage caused by the flood, at a cost of $7,200. This point raises two problems. Firstly, the evidence that the appellant spent this amount was insufficient. She filed in evidence an estimate of the cost of repairs but did not file a receipt. She said that she had paid the full price in cash. If one is claiming a deduction for such a large amount more convincing evidence must be filed than a simple allegation to the effect that the whole amount was paid in cash. I accept however that she had the repairs done following the flood, but I am completely in the dark as to the amount. Secondly, even if she incurred the expenses indicated, I am not convinced that the repairs to the basement and the ground floor had anything to do with the second floor, which was the part in the house that was rented. The flood waters never rose higher than the ground floor. The second expense was $6,800 for a pool. I have difficulty believing that to install a pool for a tenant who pays an annual rent of only $5,000 is reasonable.

I conclude that the two expenses in issue were personal expenses of the appellant and were not incurred for the purposes of her rental business.

As to the year 1990, the appellant had walls repaired which were damaged as a result of blasting by a construction company. Repairs were also made to the pool. As I stated above, the cost of the repairs to the pool and to the walls of the house were not related closely enough to the appellant’s rental business as to allow their deduction in computing her income. The same comment can be made with respect to the repairs made to the garage roof. The garage was not occupied by the tenant.

Exhibit A-8 shows two expenses of $579 and $1,383 for the second floor balcony. In my view, these were legitimate and I agree that these amounts may be deducted. Furthermore, in 1990, electrical repairs of $236 were made in the part of the house that was rented. These amounts are deductible. It must be acknowledged that the Minister allowed a deduction of $3,145 for 1989 and $1,000 for 1990.1 am assuming that these amounts were not included in the amounts allowed by the Minister.

In the Reply to the Notice of Appeal, the Minister alleged that most of the documents filed had been falsified. I accept that there were falsified documents, but I am of the view that it is perhaps an exaggeration to say that “most” were. Nevertheless, there were many. Among the documents filed by the appellant with Revenue Canada officials were invoices from Canada Tire, including:

1. an invoice for a barbecue, filed by Ms. Dugas as an invoice for paint;

2. an invoice for a Shop-Vac vacuum cleaner, filed by Ms. Dugas as an invoice for a ceiling light for the balcony.

The third falsified invoice was a receipt from a grocery store, filed by Ms Dugas as a receipt for pipes.

There were also receipts from Sears, and I cite:

1. a receipt for a sweater, filed as relating to the purchase of a board for a shelf and of Varsol;

2. a receipt for the purchase of a purse, filed by Ms. Dugas as a receipt for a “door stopper”;

3. a receipt for a dress, filed as relating to a door windowpane.

Additional falsified documents included:

1. a receipt for a tree that Ms. Dugas filed as a receipt for a lock, a back door cylinder and a nut for the back door;

2. a Master Card statement on which the date had been changed;

3. a grocery store receipt which was changed into a receipt for a “shelf bracket”;

4. a receipt from Jean Coutu changed into a receipt from Major and Major;

5. a receipt from Consumers Distributing for a plant hanger changed into a receipt for a lamp.

It is not necessary to list all the examples of falsified documents. I accept the whole of the testimony of Mr. Plante, a Revenue Canada employee, who conducted a thorough review of the invoices and receipts filed by Ms. Dugas.

With respect to deductibility, I am not satisfied that the appellant discharged her burden of proof, except in the aforementioned cases. Among the factors on which the Minister relied in making the assessment, the respondent mentioned the investigation conducted by the Minister which enabled him to note that “most of the documents filed had been falsified by the appellant”. Consequently, the appellant had been clearly forewarned that this question was at issue, but she did nothing to establish that the Minister’s conclusion was incorrect. Indeed, the respondent showed conclusively that the appellant had falsified documents, and that she had included, in the expenses for which she was claiming a deduction, amounts which she had not disbursed.

As to the penalties, this is not a case of the simple deduction of legitimately incurred expenses which the taxpayer attributed somewhat overzealously to her business. Rather, it involved the deduction of fictitious expenses invented by the appellant for the deliberate purpose of deceiving the Minister. In these circumstances, I have no hesitation to conclude that the penalties are justified, except for those attributable to the deductions claimed by the appellant in respect of the cost of repairs necessitated by the flood and the cost of the pool. I am not fully convinced that these expenses were falsified, and I am prepared to give the appellant the benefit of the doubt. These two expenses are simply not deductible. It must be pointed out that when one files documents that have been falsified, this casts a shadow over the whole of the testimony, even that which is possibly true, and forces the court to examine the evidence very rigorously. In addition, the appellant gave all her receipts to her accountant, without trying to explain to him which ones related to her rental business and which ones were personal. Moreover, she signed a blank tax return and left the accountant with the responsibility of filling it out and sending it to Revenue Canada. It is not surprising that the Minister subjected the appellant’s return to a minute examination and that he assessed penalties because there were serious errors.

The appeals are allowed and the assessments referred back to the Minister of National Revenue for reconsideration and reassessment to:

(a) permit for 1990, the deduction of $579, $1,383 and $236 as mentioned in the reasons for judgment; and

(b) delete the penalties referring to the expenses mentioned above in paragraph (a), as well as the penalties relating to the cost of repairs caused by the flood and the cost of the pool.

Each party is to bear his own costs.

Appeal allowed in part.