Gerard W.A. Richard v. Her Majesty the Queen (Informal Procedure), [1994] 2 CTC 2096

O'Connor, J.T.C.C.:— This appeal was heard in Ottawa, Ontario on April 15, 1994 pursuant to the informal procedure of this Court. The only issue in this case is whether in his 1991 taxation year the appellant is entitled to deduct room and board expenses of $1,675 and travelling expenses of $1,215.

The facts are simple. From July of 1988 and through the 1991 taxation year the appellant worked as a missionary on a ship named "Anastasis" which is one of the "mercy ships” of an organization in the United States of America entitled Youth with a Mission. His work on the ship and from the ship was all done on a volunteer basis and the appellant received no income for his missionary work. In 1991 he was considered as a resident of Canada because of certain ties he had retained with Canada coupled with the fact he had not established a residence abroad.

In the 1991 taxation year the appellant’s only source of income was his pension from the Canadian Armed Forces from which he had resigned in 1988. The amount of the pension for 1991 was $11,879. The appellant explained that in the learning and carrying out of his missionary work and as being part of the organization he had to pay his own room and board and for his travelling expenses. He concludes from this that he should be entitled to deduct the amounts in question from his pension income.

The relevant provisions of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), are 248(1) definitions of "business" and “personal expenses", 8(1)(h), 8(2), 9(1), 18(1)(a) and (h) and 56(1 )(a), which read as follows:

248(1) “business” includes a profession, calling, trade, manufacture or undertaking of any kind whatever and . . . an adventure or concern in the nature of trade but docs not include an office or employment;

"personal or living expenses" includes

(a) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit. . . .

8(1) In computing a taxpayer’s income for a taxation year from an office or employment, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto. . . .

(h) where the taxpayer, in the year;

(i) was ordinarily required to carry on the duties of his employment away from his employer's place of business or in different places, and

(ii) under the contract of employment was required to pay the travelling expenses incurred by him in the performance of the duties of his office or employment,

amounts expended by the taxpayer in the year (other than motor vehicle expense) for travelling in the course of the taxpayer's employment, except. . . .

(2) Except as permitted by this section, no deductions shall be made in computing a taxpayer's income for a taxation year from an office or employment.

9(1) Subject to this Part, a taxpayer's income for a taxation year from a business or property is his profit therefrom for the year.

18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) 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 or property;

(h) personal or living expenses of the taxpayer other than travelling expenses incurred

by the taxpayer while away from home in the course of carrying on his business;

56(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

(a) any amount received by the taxpayer in the year as, on account or in lieu of payment of, or in satisfaction of,

(i) a superannuation or pension benefit including, without limiting the generality of the foregoing. . . .

The appellant submits that the Act as it applies to him is unfair in not permitting the deductions of the expenses claimed from his pension income.

The Court recognizes the contribution the appellant has made to society generally in his humanitarian work directed to providing the needy persons of the world with sustenance, education and other benefits.

Regrettably, however, the Court is bound by the provisions of the Act and finds that the deductions claimed cannot be allowed. The deductions relate to the appellant’s missionary activities but he derived no salary or other remuneration from these activities. In other words he was not an employee of the organization nor can he be considered as carrying on a business as it is absolutely clear that there were no profits to be derived from his activities. Moreover although the expenditures relate to his missionary work they are in the nature of personal or living expenses and as such are not deductible.

The Court was satisfied on the basis of the representations of counsel for the respondent that the Department of National Revenue has done its best in attempting to find some acceptable characterization of the expenses to permit the appellant to have the treatment he desires. The Department has considered the possibility of the expenses being considered as a charitable donation but this obviously does not square with the facts of the case. The appellant himself has explored the possibility of having his entire pension paid to the organization which could then remunerate him in some way such that the expenses could be considered deductible. Such an approach may or may not be helpful to the appellant but such was not the position before the Court in respect to the 1991 taxation year and accordingly the appeal must be dismissed for the reasons set forth above.

Appeal! dismissed.

Albert Surminsky v. Her Majesty The Queen (informal procedure)

[Indexed as: Surminsky (A.) v. Canada]

Tax Court of Canada (Bell, J.T.C.C.), May 18, 1994 (Court File No. 93-2484).

Income tax—Federal—income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

The appellant disputed whether a penalty under subsection 162(2) was properly levied against him. The appellant testified that at some time in mid 1991 he received a request to fife income tax returns for his 1989 and 1990 taxation years, but he claimed that he had not received a demand to file income tax returns pursuant to subsection 150(2). In this regard, L, an associate of the accounting firm with which the appellant dealt, stated that it was his experience that the appellant was diligent in forwarding to that firm all documents that the appellant had received including the request to file income tax returns and the notices of assessments. The appellant also disputed that paragraph 162(c) applied to him because before the failure to file returns, no penalty was payable under subsection 162(1) or (2) in respect of a return of income for any of the preceding years. In response, the Crown led evidence that the demands pursuant to subsection 150(2) were computer generated and that they were mailed “by bulk” but Crown counsel admitted that she could not produce a witness who could give evidence that the demand had been served by registered mail as required by subsection 150(2). The Crown also contended that, with respect to a penalty being payable in preceding years, the appellant was liable to a penalty if the return for a year had not been filed on time and that paragraph 162(c) applied to the appellant.

HELD:

Based on the Crown's evidence, the Court was not prepared to assume that demands were mailed to the appellant by registered letter. Accordingly, the Court accepted the appellant’s evidence that he did not receive the demands to file returns. Furthermore, respecting each taxation year in question, there was no evidence that a penalty was payable in respect of a return of income for any of the three preceding taxation years. In this regard, the Court rejected the Crown's submission that a penalty "was payable” under subsection 162(1) simply because that section provided that a person who failed to file a return of income on time was “liable to a penalty". Subsection 162(2) speaks of a person who “has failed to file a return of income” on time. Paragraph 162(c) speaks of a penalty being payable “before the time of failure". Obviously, the time of failure must be the time when a person failed to file a return — namely April 30 in the year following the taxation year in question. Appeal allowed.

Donald Zaldin for the appellant.

Elizabeth Boyd for the respondent.

Cases referred to:

Bowers v. M.N.R, [1991] 2 C.T.C. 266, 91 D.T.C. 5594.

Bell, J.T.C.C.:— The issue in this appeal, heard under the informal procedure of the Court, is whether a penalty levied by the Minister of National Revenue ("Minister") pursuant to the provisions of subsection 162(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), in respect of each of the appellant’s 1989 and 1990 taxation years was properly levied.

The appellant, in paragraph 4 of his notice of appeal, states that on January 10, 1992 the Minister levied a penalty pursuant to subsection 162(2) of the Act respecting his 1989 taxation year and, in paragraph 6, states that the Minister, on January 17, 1992 levied a penalty pursuant to subsection 162(2) of the Act in respect of his 1990 taxation year. The respondent, in paragraph 4 of its notice of appeal, admits that such penalties were imposed and states, in paragraph 5 of the reply, that for the 1989 and 1990 taxation years the Minister assessed late filing penalties in the amounts of $2,130.29 and $879.61 respectively.

Although what follows is peripheral to the issue, in my opinion it needs to be expressed.

For the years in question, subsection 170(2) of the Act required the Deputy Minister of National Revenue for Taxation to forward to this Court

. . .copies of all returns, notices of assessment, notices of objection and notification, if any, that are relevant to the appeal.

Copies of certain documents were forwarded to the Court with a letter of November 29, 1993 which expressed same to have been done "pursuant to subsection 170(2) of the Income Tax Act’. A letter from Revenue Canada, Taxation dated December 20, 1993 reading as follows,

We enclose pursuant to subsection 170(2) reconstructed notices of assessment previously omitted from transmission

attached two pages of documents respecting the 1989 taxation year and two pages of documents respecting the 1990 taxation year apparently presuming to be copies of notices of reassessment. Each of the four pages bore what appears to be an endorsement by stamp reading "RECONSTRUCTED" and "RECONSTITUE". The aforesaid letter of December 20, 1993 is inaccurate in stating that reconstructed notices of assessment are forwarded pursuant to subsection 170(2) because that section clearly requires, inter alia, the forwarding of "copies of . . . notices of assessment". Reconstructed documents are not copies of the original documents.

One page of the document marked "RECONSTRUCTED" respecting the 1989 taxation year was accompanied by a document, also bearing the reconstructed endorsement, entitled "EXPLANATION OF CHANGES”. It reads, in part, as follows:

WE HAVE ASSESSED YOU A LATE-FILING PENALTY OF $2,130.29. THIS IS 46 PER CENT OF YOUR UNPAID TAX AS OF APRIL 30, 1990 AND IS INCLUDED IN THE AMOUNT AT THE PENALTIES LINE (IN THE “SUMMARY OF CHANGES" AREA).

On the second page of the reconstructed document apparently purporting to be a copy of the 1989 taxation year notice of assessment, the number 485 appears under a column entitled “LINE ON RETURN". That number is followed by eight lines each bearing a different description. Opposite the description “balance resulting from this reassessment” is the entry "$2,130.29 DR”. Since this is the amount described as a penalty in the respondent's reply to the notice of appeal, one is left to assume that the quoted words mean "penalty". If the document bearing the description "RECONSTRUCTED" sets forth the same descriptions and numbers as the notice of assessment of which it presumably purports to be a copy, that original assessment would be so difficult of comprehension that taxpayers, in attempting to understand same, could become not only very frustrated but also very angry. The reconstructed documents respecting the 1990 taxation year are equally abstruse except that enlightenment apparently descended upon those who prepare forms because, assuming the original document contains the same wording as the reconstructed document, the word "penalties" appears and is followed by an amount described as $879.61 DR" (the 1990 taxation year penalty).

The evidence in this case, unlike the documentation, was refreshingly straightforward. The appellant testified that at some time in mid-1991 he received a request to file income tax returns for his 1989 and 1990 taxation years. In response to a question based on an assumption set forth in paragraph 6(d) of the reply as to whether he had received a demand to file income tax returns expressed in such reply to have been "served under subsection 150(2) of the Act", the appellant said that he did not recall receiving such document and that if he had received it he would have sent it to his accountants. He testified that he had received the notification of confirmation in respect of the two taxation years in question and further that he had lived at his then address for some 20 years.

Further evidence was given by one Benyi Ladislav, an associate of the accounting firm with which the appellant dealt. He stated that the Department of National Revenue was conducting an audit of the appellant’s prior year returns when he became involved with this matter, that it was his experience that the appellant was diligent in forwarding to that firm all documents that he had received including the request to file income tax returns and notices of assessments. He stated that there were no other documents according to his knowledge received from the appellant in respect of this transaction.

The respondent produced a witness, one Louis Michael Tatarka, an officer of the Department of National Revenue. He explained the procedure of how decisions were made to send requests and demands to a taxpayer and he stated that this was all done by computer, that the information was kept on computer for six years and that it could not be erased or altered. He produced a document which was described as a computer printout for delinquent action history. I find it useless for the purpose of determining whether a demand had been sent by registered letter to the appellant. Mr. Tatarka testified that no copy of the demand is retained in the Department when it is issued.

Counsel for the appellant, on cross-examination, established that Mr. Tatarka had no personal knowledge about the forwarding of a demand to the appellant. On reexamination Mr. Tatarka stated that all demands were generated by the computer. When asked whether they were sent out by registered mail he stated that it was “by bulk". No explanation of that term was given.

Appellant’s counsel, respecting subsection 162(2) of the Act, made reference to the pertinent portions thereof which read as follows:

Every person

(a) who has failed to file a return of income for a taxation year as and when required by subsection 150(1),

(b) on whom a demand for a return for the year has been served under subsection 150(2),

and

(c) by whom, before the time of failure, a penalty was payable under subsection (1) or this subsection in respect of a return of income for any of the three preceding taxation years,;

is liable to a penalty. . . .

He agreed that the appellant had failed to comply with the conditions set forth in paragraph 162(2)(a). He stated that the appellant had testified that he had not received a demand for a return for either of the taxation years in question and that the respondent had failed to prove that it had complied with the provisions of subsection 150(2) in that it had presented no evidence that the demand was served personally or by registered letter on the appellant. That subsection reads as follows:

150(2) Whether or not he is liable to pay tax under this Part for a taxation year and whether or not a return has been filed under subsection (1) or (3), every person shall, on demand from the Minister, served personally or by registered letter, file, within such reasonable time as may be stipulated therein, with the Minister in prescribed form and containing prescribed information a return of the income for the taxation year designated therein.

Counsel stated further that before the failure to file returns as aforesaid no penalty was payable under subsection (1) or subsection (2) of section 162 in respect of a return of income for any of the preceding years.

Respondent's counsel argued that, with respect to a penalty being payable in preceding years, the appellant was liable to a penalty if the return for a year had not been filed on time and that paragraph 162(c) applied to the appellant. She also stated that the onus was on the taxpayer to dislodge the assessment and that the Minister’s assumption stated in the reply that the demand was served had not been disproved. She followed this by stating that she could not produce a witness who could give evidence that the demand had been served by registered letter as required by subsection 150(2) but that it seemed unlikely, on the balance of probabilities, that the appellant did not receive the demand.

I accept the appellant’s evidence that he did not receive the demands to file returns. Based upon Mr. Tatarka’s evidence and respondent's counsel's statement, I am not prepared to assume that demands were mailed to the appellant by registered letter. This differs from the fact situation in Bowers v. M.N.R, [1991] 2 C.T.C. 266, 91 D.T.C. 5594 (F.C.A.), in which the mailing of a document to the appellant by registered mail was not disputed. In that case the Court said that nothing required the document to be received by the taxpayer and that the Minister had by sending the document by registered mail done all that was required of him.

Further, respecting each taxation year in question, there was no evidence that a penalty was payable in respect of a return of income for any of the three preceding taxation years. I cannot accept the respondent's submission that a penalty "was payable” under subsection 162(1) simply because that section provided that a person who failed to file a return of income on time was “liable to a penalty". Paragraph 162(2)(a) speaks of a person who "has failed to file a return of income" on time. Paragraph 162(2)(c) speaks of a penalty being payable "before the time of failure". Obviously, the time of failure must be the time when a person failed to file a return — namely April 30 in the year following the taxation year in question.

In the circumstances, the appeal is allowed with costs.

Appeal allowed.