Watson, T.C.C.D.J. (informal procedure):—This appeal was heard under the Informal Procedure in Winnipeg, Manitoba, on November 4, 1992. Mr. Gay appeals against the taxes assessed by the Minister of National Revenue in respect of his 1986 taxation year. In computing his income for the 1986 taxation year, the appellant included net income in the amount of $722.84. In reassessing the appellant for this same year, the Minister included revised net income in the amount of $14,579 in computing his income and made the following adjustments:
4. In computing the appellant's business income for the 1986 taxation year, the Minister made the following adjustments:
| Declared | Adjustment | Revised |
| Gross Revenue | $103,276 | | $103,276 |
| — | |
| Gasoline Sales | | $ 2,695 | 2,695 |
| — | |
| $103,276 | $ 2,695 | $105,971 |
| Cost of Sales | $ 90,067 | $ 8,042 | $ 82,025 |
| Gross Profit | $ 13,209 | $10,737 | $ 23,946 |
| Expenses | $ 12,486 | $ 1,559 | $ 10,927 |
| $ | 723 | $12,296 | $ 13,019 |
| Personal Consumption of Goods | | 1,560 | 1,560 |
| — | |
| Net Business Income | $ | 723 | $13,856 | $ 14,579 |
In reassessing the appellant, the Minister made the following assumptions of fact:
(a) At all relevant times the appellant was a 50 per cent partner in a general merchandise store (the"Store");
(b) At all relevant times the appellant was engaged in the sale of gasoline;
(c) In calculating his share of the net income from the Store for the 1986 taxation year, the appellant deducted an amount of $90,067 in respect of the cost of goods sold;
(d) In calculating his share of the net income from the Store for the 1986 taxation year, the appellant deducted expenses in the amount of $12,486;
(e) In calculating his share of the net income from the Store for the 1986 taxation year, the appellant did not take into account any amount in respect of his personal consumption of goods;
(f) In computing his business income for the 1986 taxation year, the appellant did not include any amount in respect of sales of gasoline;
(g) Cost of sales for the 1986 taxation year in excess of the amount of $82,025 allowed by the Minister were not incurred for the purpose of gaining or producing income from a business or property;
(h) Expenses for the 1986 taxation year in excess of the amount of $10,927 allowed were not incurred for the purpose of gaining or producing income from a business or property, but were personal or living expenses of the appellant;
(i) During the 1986 taxation year the appellant consumed goods from the Store valued at an amount of $1,560; and
(j) The appellant sold gasoline during the 1986 taxation year in the amount of $2,695.
At the hearing, the appellant admitted paragraphs (a) to (d) and (j); he denied all the other paragraphs. The Minister’s counsel conceded that an error in calculation was made by the appellant's accountant and that the correct amount of gross revenue was $99,776, $3,500 less than the amount of $103,276 included in the reassessment.
In the 1986 taxation year, the appellant was a 50 per cent owner of a general store called "Gay General Store", his brother Frank Gay owned the other half interest in the store. At the same time, the appellant operated the gas sales entirely on his own account and Frank operated a post office sub-station located in the store on his own.
The appellant lived in quarters located in the back of the store, consisting of a bedroom, bathroom with shower and kitchen until sometime in September 1986. Some meals were taken at a nearby restaurant and others prepared in the store's kitchen. The store also owned a motor-van that the appellant sometimes used for his personal business.
No separate books of accounts or journal were maintained by the appellant to keep separate his personal expenses and those of the store in relation to the use of the motor-van, the heat, electricity, water, taxes or insurance. He also consumed food from the store and used various supplies or equipment for his personal use as did his brother Frank; a journal was kept detailing Frank's purchases but none was kept for the appellant's. Informal inventories were made on an estimate basis and the amount of sales was also done by way of estimate. The only complete inventory made at the store was at the time of its sale in 1988. The books of accounts were the appellant's responsibility even though he had no formal training in accounting. The appellant was not able to produce any records or books concerning the amounts disallowed by the Minister. Both brothers blame the accountant for their woes in this matter.
In a statement provided to National Revenue in November 1989 (produced as Exhibit R-1) the appellant stated that the gross sales for 1986 were $205,062, the total purchases were $164,399 and the expenses were $23,417.82 and that he had all the invoices for the above, but these were not produced at the hearing of the appeal.
In a letter dated December 19, 1989 (produced as Exhibit R-2), the Minister allowed 63 per cent of the motor-van expenses, 90 per cent of the utilities, 80 per cent of the taxes for business use and made an allowance of $30 per week for the goods taken from the store for the appellant's own use, for a total of $1,560.
The issues to be decided are the following:
1. Whether the cost of goods sold in excess of the amount allowed by the Minister were incurred by the appellant for the purpose of gaining or producing income from a business or property;
2. Whether the expenses in excess of the amount allowed by the Minister were incurred by the appellant for the purpose of gaining or producing income from a business or property;
3. Whether the appellant personally consumed goods from the store in an amount assessed by the Minister; and
4 Whether the appellant sold gasoline in the amount of $2,695 as assessed by the Minister.
1. Cost of goods sold
Generally, the cost of goods sold is determined by taking the opening inventory, adding purchases and subtracting the closing inventory. However, in this case, the appellant and his brother did not take inventory before, during or after the period in issue but relied only on a general estimate. The revised amount allowed by the Minister was based on the vouchers reviewed as supplied by the appellant and no evidence was provided at the hearing to the contrary.
2. Business expenses
The appellant resided on store property for a good part of 1986, but distinct accounts were not kept for the store's share and the appellant's share of the expenses. There is no reliable way to determine the true share of the personal use of the appellant in relation to the overall expenses of the business. No records were available at the hearing. The amounts allowed as reasonable by the Minister were, in my opinion, quite generous in the circumstances, reducing the business expenses from $12,486 to $10,927 (approximately $1,560).
3. Personally consumed goods
The Minister established an amount of $30 per week for the food and goods personally consumed by the appellant. Records were kept for Frank Gay; it is unfortunate that none were kept for the appellant. There was no explanation for this difference for the two partners. In the absence of any documentary or objective evidence to the contrary the amount of $30 per week appears to be reasonable in the circumstances.
4. Sale of gasoline
The sale of gasoline by the appellant was not included in the 1986 income tax return but was subsequently found by the auditors, discussed and admitted by the appellant.
The appeal is dismissed in respect to the matters mentioned above. I am satisfied that the appellant has not succeeded in establishing on a balance of probabilities that the Minister’s reassessment was ill-founded in fact and in law for these four issues. In so far as the calculation of gross revenue is concerned, the appeal is allowed to reduce the gross revenue by $3,500, from $103,276 to $99,276, and the matter is referred back to the Minister for reconsideration and reassessment based on an error in calculation.
Appeal dismissed.
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