Elizabeth Hruska v. Her Majesty the Queen, [1994] 2 CTC 2361

Mogan J.T.C.C. (orally):— This is an appeal in respect of the 1989 and 1990 taxation years. There are two issues before the Court. The first issue is whether a certain amount received by the appellant with respect to the last payroll period for 1989 should be included in her income for 1989 or 1990. The second issue relates to a business which the appellant claims she was operating in the period ending August 31, 1990, and whether a loss in respect of that business is a business loss (non-capital loss, to use the technical term) which can be set off against other source income for 1990 and perhaps carried back against 1989 income.

The appellant came to Canada from Czechoslovakia around 1986. At that time she had higher education in Czechoslovakia which would be something like a commerce degree in Canada. It gave her a type of accounting qualification which was recognized in Czechoslovakia perhaps at the level permitting her to function as a professional accountant. Her qualifications were not recognized in Ontario, however, and so she could not practice as a public accountant in Ontario. Nevertheless, she did seek work in areas that related to financial matters like bookkeeping and an accounts payable clerk.

I will consider the first issue. In the last four months of 1989 the appellant worked for a company which was identified as Fame Furniture Company Limited. She was employed originally as an accounts payable clerk but, in the course of her employment, they asked her to perform other duties in the area of general bookkeeping. She worked there from the 11th day of September, 1989 until the end of December, 1989, at which time she left the employment of Fame Furniture.

There was entered in evidence a document (Exhibit A-2) prepared by Fame Furniture and registered with Employment and Immigration Canada, perhaps for unemployment insurance purposes. It appears to be a standard Government of Canada form for Employment and Immigration Canada and it records her insurable earnings for the weeks beginning September 11, 1989 and ending with the last pay period which was December 30, 1989.

There is no issue concerning most of the money she earned from Fame Furniture. That is to say, she received a T4 slip from Fame Furniture for 1989 in the amount of $7,491.39 and she reported that in her 1989 income tax return. The amount in issue is $793.66 which is the amount she received (and I have to be careful when I say the word "received" because it is not certain when she received it) in respect of the last pay period ending December 30, 1989.

Exhibit R-2 is a page from the payroll records of Fame Furniture showing that for the payroll period ending December 30, 1989, the appellant earned her regular weekly salary of $475 plus vacation pay in the amount of $318.66. Those two amounts when added together represent her gross income of $793.66 for the last pay period of 1989. That is the amount which is the basis of the first issue. There were, of course, source deductions for income tax, unemployment insurance, and Canada Pension Plan, so that her net take-home pay for this last pay period was $552.97, but that net amount is irrelevant for our purposes.

Apparently Fame Furniture issued a T4 slip for 1990 showing this gross amount $793.66 as part of her 1990 earnings. The Minister accepted that T4 slip and included the amount of $793.66 in the appellant’s 1990 income. She protests, however, and says that the amount of $793.66 was earned in the pay period ending December 30, 1989, and received in 1989, which would clinch thematter as making it taxable for 1989.

Subsection 5(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") states (and I quote only the relevant parts):

5(1). . .a taxpayer’s income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by him in the year.

I emphasize the last few words, "received by him in the year,” because those words indicate that income from employment is taxed on a "received" basis and not on an "earned" basis. For example, if a person were employed at a salary of $2,000 a month and received his December salary for a particular year on January 5 in the subsequent year, the $2,000 for December would be part of his income for the subsequent year. That is the kind of question facing the appellant in this case. Was the $793.66 received by her in 1989 or in 1990?

Counsel for the respondent has drawn to my attention a fact of which I may take judicial notice that, in 1989, December 30 was a Saturday. Therefore, December 31 was a Sunday, and the next business day would probably be Tuesday January 2 if New Year's Day was a public holiday.

When the appellant was questioned on the regular work period at Fame Furniture, she stated that the work week was Monday to Friday. Exhibit A-2, a document I have already referred to, which was filed and prepared by Fame Furniture for Employment and Immigration Canada, indicates that the last day worked was December 29, 1989. That would be a Friday. On the other hand, the payroll document, Exhibit R-2, prepared by Fame Furniture, shows that the payroll period ended on December 30, 1989, which is the Saturday. Therefore, one would think that the appellant could not have been paid on Friday, the 29 of December if the payroll period were ending on the next day, Saturday, December 30. At first blush, I am inclined to the view that if the payroll period ended on Saturday, the employees were probably paid on the first business day of the following week which in this case would have been January 2, because most businesses are closed on New Year's Day. That is only a first blush impression I have from the acts.

There is no direct evidence as to when this last pay cheque was delivered to the appellant and received by her. Exhibit A-2, the document filed with Employment and Immigration Canada, was signed by Mr. Francis Lam, an officer of Fame Furniture, on January 12, 1990. Although it records insurable earnings up to and including the pay period ending December 30, 1989, it does not disclose the date when the pay cheque for that particular period was delivered to the appellant.

I asked the appellant if she had a bank account in which she may have deposited her pay cheques. Her answer was that she had abank account for only a very short period and that, after she closed out her bank account, she was able to cash her salary cheques by going to the bank near her place of work at which the employer banked. That is to say, by going to the bank where Fame Furniture maintained its account, she was able to present and cash her salary cheque. I can only assume from the appellant's evidence that the bank was comfortable in cashing her cheque (subject to identification) because that particular branch would have immediate access to the payor's account and would know if there were funds to support the cheque.

This is one of those issues that is difficult to decide because, in the absence of direct evidence as to when the last payroll cheque was issued and delivered, it is difficult to know whether the appellant might have been paid on Friday, December 29, probably the last business day in 1989. Because she was on salary and not an hourly paid worker, the employer might have simply paid her on Friday for the last pay period of the year even though it would not end until the next day. On the other hand, it is just as likely that the employer would not issue the cheques until the pay period had come to an end according to the calendar which would mean that the salary cheques could not be delivered until the first business day after the weekend. It is unfortunate that the appellant did not have a bank account where she deposited her pay cheque because that would have been a convenient means of establishing at least the day when the cheque was deposited.

Counsel for the respondent referred me to an old decision of the Tax Appeal Board Jawl v. M.N.R., [1968] Tax A.B.C. 860, 68 D.T.C. 624, which was a decision of Mr. Weldon, a member of the Board. There was a question as to when Mr. Jawl was paid a particular amount. At page 863 (D.T.C. 627) of that decision, Mr. Weldon stated:

By way of supplementing his oral testimony, the appellant produced a formal bank statement in respect of his account in the Bank of Montreal covering the period from January 1, 1965 to 1967.

He makes a number of further statements which I will omit, and then he stated further at pages 863-64 (D.T.C. 627):

It seems to me, in allowing this appeal following the hearing thereof, as already mentioned, that the appellant had adequately established. . .that his salary figures in respect of his 1965 taxation year were considerably more trustworthy than those which were reported by the employer on his T4 Summary return. It also struck me as being particularly significant that the latter was not readily available for questioning by the Minister's officials and, furthermore, that his books of account and bank account were not also readily available to enable the assessors to verify or correct his figures in his above-mentioned T4 Summary return.

The evidence, in my opinion, is tilted against the appellant here because of the fact that the employer, Fame Furniture, when issuing its T4 slips, identified this last amount of $793.66 as being 1990 earnings even though the employer knew that the appellant had ended her employment on December 29. It is an indication that the employer had closed off its books for the amounts of salary and wages which were delivered to the various employees in 1989. It indicates further that the payroll period ending December 30 for all employees was probably not recorded as a 1989 payment delivered in 1989.

Counsel for the respondent also relied on the old decision of Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182, to support the position that the onus of proof was on the appellant. In the Minister’s reply to notice of appeal, there is a statement that the Minister assumed that in 1990 the appellant received from Fame Furniture the amount of $793.66. That assumption was probably based in part on the T4 slip issued by Fame Furniture but also, the evidence itself tilts against the appellant. The onus is on her and she failed to discharge that onus.

I shall find in favour of the Minister of National Revenue on this first issue and hold that the amount of $793.66 was received from Fame Furniture sometime in 1990 and, therefore, was part of the appellant's 1990 income and not part of her 1989 income.

I turn now to the second issue which is more complex. The appellant was discouraged because of the quality of employment she was able to obtain in Canada which she felt was, in plain language, below her standards of professional qualifications. She thought that she was qualified to do more sophisticated accounting and bookkeeping, but she was able to get work only as an accounts payable clerk and similar work. Therefore, she decided that she would try to develop a bookkeeping business.

In that regard, she decided to operate a proprietorship under the name Russell Business Services. She claims that the first fiscal period for that proprietorship was from September 1, 1989 to August 31, 199. At one point in her discussions with Revenue Canada Taxation, she suggested that her work at Fame Furniture was really part of professional fees earned by her proprietorship and not employment income. She asked Revenue Canada to take the total earnings from Fame Furniture out of her 1989 income and include it as part of the fiscal period of her proprietorship ending August 31, 1990. Revenue Canada flatly refused to do that because they characterized her income from Fame Furniture as employment income and not fees for professional services or revenue from any kind of business she was carrying on. She accepted that decision by Revenue Canada and does not contest that decision in the appeal I have to decide today.

I mention that fact only to indicate that the appellant hasa degree of sophistication. She is by no means a babe in the woods when it comes to accounting matters and tax planning, and the little suggestion I just referred to would have given her the benefit of tax deferral by throwing over into 1990 the income from Fame Furniture which she earned in 1989. She has real accounting sophistication in tax matters.

When filing her 1990 tax return, the appellant initially reported employment income of $4,000. This was shown as income from a numbered Ontario corporation, 932716 Ontario Inc. (which I shall refer to as number “716”). It is the only employment income which she reported for 1990, but she also in a subsequent document submitted to Revenue Canada asked them to recognize a loss of $15,352.37 which she had suffered in the operation of her business being the proprietorship known as Russell Business Services. She filed with Revenue Canada one of their standard documents being a statement of income and expenses from a professional practice which is form T2032. In that document, she shows professional fees of $7,172.12, being her gross revenue; she shows expenses in the aggregate amount of $22,524.49, producing the loss of $15,352.37.

I should deal with the $4,000 item first. The Minister recognized the $4,000 as employment income but the Minister refused to recognize the claimed loss as being a loss or, if it was, that it was a loss in connection with a business. In the reply to the notice of appeal, the Minister makes the following assumption in paragraph 6(d): in the 1990 taxation year the appellant did not incur expenses in the amount of $22,524.49 in relation to the Russell Business Services; however, if they were incurred, they were not incurred for the purpose of gaining or producing income from business or property. The Minister therefore put in issue before this Court whether the appellant had even incurred these expenses, and, if she had incurred them, the Minister goes on to claim that they were not incurred for the purpose of gaining or producing income from a business.

The appellant therefore comes to Court having to show that she paid the amounts and that there was a bona fide business. In evidence the appellant entered Exhibit A-1 which she called and has the title "932716 Ontario Inc., Income Statement, Consolidated Statement, August 31, 1990". As the evidence came out, that title has to be inaccurate because number 716 was not incorporated until February 1991. Therefore, the corporation did not even exist in the calendar year 1990, but it did come into existence in February of 1991 before the appellant’s 1990 income tax return was filed. She gave the financial statement (Exhibit A-1) the name of the company even though, in my view, it could be nothing more than the financial statement of her proprietorship for the fiscal period ending August 31, 1990. Counsel for the respondent suggested in argument that that was the only practical way to view the financial statement.

What I have then is really two financial statements. I havethe form T2032 (Exhibit R-6) which the appellant provided to Revenue Canada as the basis for claiming her expenses of >22,524.49, and that appears to have been provided sometime around 1991. And I have Exhibit A-1, which is the consolidated financial statement as at August 31, 1990, for her proprietorship, mistakenly given the title of the numbered company. Both documents show that the fiscal period covered is September 1, 1989 to August 31, 1990. I say they both show that, although Exhibit R-6 actually shows in numbers the closing of the fiscal period being day 31, month 10, year 1990. Month 10 would be October 31. I regard the 10 as a typographical error and that she really intended the 10 to be 8 which would have made it August, because in other respects the amounts in Exhibit R-6 and A-1 have similarities, enough similarities indicating they must be for the same fiscal period. Unfortunately, they also have discrepancies.

For example, Exhibit R-6, the first document shows fees of $7,172.12, but no allowance or reserve for doubtful debts or anything like that, indicating that was the gross revenue. Exhibit A-1 shows fees of $6,600 with an allowance for doubtful debts of $1,100, making basically a net gross revenue of $5,500. The appellant explained Exhibit A-1 on the basis that she had only one client, a corporation called Compact, and that she billed them $6,600, but they paid only $5,500, and that's why she set up the reserve of $1,100.

She was asked if she had any other clients in this fiscal period and she said there was no other client who paid her but Compact. She actually obtained the client by going to discuss with Compact some kind of computer or software services that she thought she may need in the bookkeeping business, and when they found out what she was doing and what her qualifications were, they said they had some bookkeeping which she could do. And so she took them on as a client, the only client she had.

Having regard to the fact that she had only one client, it is difficult to justify the magnitude of the expenses which she ran up in that fiscal period remembering that she was a full-time employee of Fame Furniture in the first four months of that same fiscal period. In other words, she really had only the last eight months of the fiscal period, being the first eight months of 1990, to give herself over full-time to this new proprietorship.

The appellant was cross-examined at length and closely on the expenses and I must say that I found her answers wanting in a number of instances. I do recognize the fact that for the appellant, having come from Czechoslovakia, English is not her mother tongue. She does speak English reasonably well, however, and as I have already indicated, she is a professional person with a reasonably high level of sophistication and knowledge in tax and accounting matters. In particular, she was evasive on a number of questions, evasive in areas where I think she should not have had to wonder or evade questions. In other areas she wascandid, to the extent that it hurt her case. For example, in Exhibit R-6, the first statement she filed with Revenue Canada, under the heading "motor vehicle: fuel, insurance, and repairs", she deducted expenses of $3,608.91, but Exhibit A-1 which she filed in Court shows car expenses of $1,758 and repairs and maintenance of $697, making a total of about $2,450, two-thirds of the amount she had deducted in Exhibit R-6. Those are significant expenses given the fact that she had no clients except Compact.

Also, it turns out that she does not have a licence which permits her to drive in the Province of Ontario and, therefore, she did not drive a car. Indeed, she did not own a car! The automobile in question was registered in the name of her husband, a man from whom she separated in the period 1988-89. Apparently, the separation was on relatively friendly terms because, although they were living separate and apart, the husband did permit her to use some space in his apartment to store some of the material or equipment or records which she claimed were needed in connection with this bookkeeping business. But the car was his and there was very limited evidence that she would need the car much in connection with her business. I assume the husband had a driver's licence and so was able to drive the car and use it most of the time for his own purposes.

The astonishing thing about the two sets of financial statements is that in each case there is a claim for capital cost allowance or depreciation in the amount of $6,731. In Exhibit R-6 that claim is supported by showing that she claimed $6,000 depreciation in respect of a car which had an undepreciated capital cost of $20,349.00 when she did not own the car. I would have thought that the most elementary knowledge of accounting and tax would have led her to conclude that she could not claim depreciation on a car she did not own. Therefore, the financial statements and, in particular, the expenses which are running at a rate of $22,524 per year are skewed by at least $6,000 because the appellant is not entitled to depreciate an asset she does not own.

There are also other amounts which are troubling. She has an amount in Exhibit R-6 called property taxes or rent on business property, $2,830. In Exhibit A-1, the same amount appears called rent and utilities. She claims that those were amounts paid to her separated husband during this fiscal period to compensate him for letting her store some of her records in his apartment. It turns out that it was a bachelor apartment. A bachelor apartment has very limited space. It is not like a two or three bedroom apartment in which a tenant could convert one bedroom into an office. Indeed, it appears to me that she was paying, if these amounts were paid, about half the rent.

This last comment brings me to the most critical thing concerning her financial statements and that is, there is no evidence that the amounts were paid. She did not produce anyevidence that she had a bank account. There was no monthly statement; there are no cancelled cheques. Indeed, in connection with her employment income, in the last four months of 1989, when the maintenance of a bank account might have helped win her appeal on the first issue concerning the payment of the last payroll cheque, she said she did not have a bank account. I believe her. I take her at her word. If she had no bank account in the last weeks of December 1989 and the first weeks of January 1990, when did she get one? If she did not get a bank account in the first eight months of 1990, how did she go about paying these extraordinary expenses that amount to — I will not say $22,000 because that includes depreciation — the cash outlays come to $15,793. That is a significant amount of money for any person to pay out in connection with a business over an eight month period if that person does not have a bank account.

Then I could consider the other side. Suppose she did have a bank account. Why was it not produced in evidence? Why do I not have monthly statements and cancelled cheques supporting at least some of these claimed amounts? The appellant said that when Revenue Canada asked for verification of these amounts she gave them the documentation. The correspondence was entered in evidence, and I do not intend to deal with it now, but there were four or five letters exchanged between Revenue Canada and the appellant in the period March to June, 1993, indicating that they asked for documentation and did not get it.

Indeed, at the end of her submissions in Court today, she said she is willing to submit additional documents to Revenue Canada Taxation if the Court orders her to do so. It is too late for that. The correspondence makes it clear that they were asking for those documents between March and June, 1993 and did not get satisfactory documents. It is not up to me now to order her to provide them. If she has them she should have brought them with her to Court.

I find against the appellant on this second issue for two reasons. Firstly, I think she has not proven that she paid the expenses of $15,793.49 which are listed in Exhibit R-6. She was required to prove those expenses because in the Minister's Reply he flatly denied that those amounts were paid. I put a higher onus on the appellant because she is an accountant. She is not just some simple, unsophisticated taxpayer who wanders into court looking for relief. She knows about audits; she knows about accounting; she knows about verification of amounts expended; but she came to Court basically empty-handed in terms of verifying any of these outlays.

The second reason on which I would find against her on this issue of the deductibility of the loss in 1990 is that I think she had no business. Her intended bookkeeping business was in the development stage. She did not have any clients except the one she got by chance. Normally a person can suffer start-up losses and deduct them where there is an ongoing enterprise; where thereare customers or clients coming in the door or phoning to obtain services or writing letters with instructions to come and do certain bookkeeping. There is no evidence of that ebb and flow of commerce in what the appellant claimed was the business. Indeed, even if the expenses were incurred, and I doubt that they all were, I would call them the capitalization of an enterprise that may begin some day. I think there was no business being carried on, and what she picked up from the Compact company was basically casual employment. But even if it was taken on as a professional client, there was no reasonable expectation of profit from this enterprise in the fiscal period ending August 31, 1990, particularly having in mind the fact that the appellant was a full-time employee during the first four months of that fiscal period. Having regard to the expenses she incurred, she could not possibly earn a profit in the last eight months of that fiscal period with these expenses and absence of clients, save for Compact.

For those reasons, I would hold against the appellant on the second issue and dismiss the appeal.

Appeal dismissed.