Marcel H. Castonguay v. Minister of National Revenue, [1988] 2 CTC 2307, 88 DTC 1633

Couture, C.J.T.C. [Translation]: —Marcel Castonguay, a civil engineer whose specialty, according to his testimony, is in maritime work such as building booms, foundations, and so on, appealed from an income tax assessment dated April 2, 1986.

The Minister of National Revenue disallowed the following deductions: $202.67 that the appellant considered non-taxable; $30 representing miscellaneous expenses; and $12,172.34 that the appellant considered to be a business loss for the 1984 taxation year.

The appellant alleged that the $202.67 that was paid to him by his employer, Socodec Inc. (a division of Lavalin Inc.) for accumulated sick leave days in 1984 is non-taxable compensation that was incorrectly included by the respondent in the appellant's income for the 1984 taxation year. The appellant wrongly based this submission on the decision of the Supreme Court of Canada in The Queen v. Elizabeth Joan Savage, [1983] 2 S.C.R. 428; [1983] C.T.C. 393. This decision dealt with a completely different point of law, and in no way supports the appellant's argument. On the contrary, as noted at the hearing, in Gerald Molleur v. M.N.R., 37 Tax A.B.C. 78; 64 D.T.C. 788, the Exchequer Court clearly established that accumulated paid sick leave is taxable in the hands of employees.

At the request of the respondent, Bernard Lachapelle, payroll director for all divisions of Lavalin Inc., including Socodec Inc., brought to Court the stubs of all paycheques received by the appellant in 1984, totalling $42,099.42 (Exhibit 1-9). Mr. Lachapelle's testimony was that this amount represented the appellant's regular salary, reimbursement for sick leave not taken, holidays and the taxable portion of the group insurance paid by the employer. A further $590.43 (which was also in issue) was added to this sum, which Mr. Lachapelle said represented earnings for overtime worked by the appellant in the course of his employment with Socodec. The deduction of $202.67 must therefore be disallowed: this amount, as well as the $590.43, is an integral part of the appellant's 1984 income and is taxable.

The appellant also indicated that the "miscellaneous expenses" for which he was seeking a deduction of $30 were the costs of two sets of business cards on which appeared the names of the appellant and of Lavalin, on one set of cards, and of ABDA on the other; the appellant was at the time employed simultaneously by both businesses (Exhibit A-1, appendix F). There was no indication that these business expenses were required by the employers or that they were of any use to the appellant in the course of his employment or in earning his salary.

Although the appellant was hired as a “professional engineer", he was nevertheless an employee and was entitled only to the deduction for expenses provided by the Act (subsection 8(2) and paragraph 8(1)(a) of the Income Tax Act). His income tax return for the 1984 year (Exhibit 1-1, line 108) indicates that the appellant took the $500 deduction provided by the Act in connection with his employment. The $30 therefore may not be deducted.

In my opinion, the nub of this case is the fact that the appellant underestimated the important distinction to be made for income tax purposes between income earned inclusively from his employment and income generated, and expenses incurred, in the practice of his profession as an engineer as a self-employed person or in administering his personal businesses. The employment expense deduction is, as noted earlier, strictly limited by the Act, while expenses which are clearly intended to generate professional or business income are deductible if they were necessary or useful in the effective operation of the businesses and were in fact incurred. (See, inter alia, Jaroslav Verner v. M.N.R., [1983] C.T.C. 2333; 83 D.T.C. 289, which is particularly applicable to the facts of this case.) Moreover, the quantum of such expenses must be reasonable, taking into account the circumstances and reasons for which they were incurred.

The evidence showed that in 1984 the appellant was employed full time as an engineer with the company Socodec Inc. and earned a salary in 1984 of $41,689.85 (Exhibits 1-1 and 1-2). The appellant was also employed by the company ABDA (and was also one of its partners) until June 1984. However, the appellant only worked ten hours for this company during that six-month period, and received no income from that source in 1984 (Exhibit A-2)*

The appellant stated that in 1984, in addition to his full-time employment, he practised his profession as a self-employed person, and also administered the following businesses:

1. “Castonguay et Castonguay Enrg": When this business started in 1977 the appellant had as his partner his father-in-law, who was replaced by his brother, and the business was renamed “Les Jardins du Village”. The business consisted in the development of 33 lots for resale as residential lots in St. Quentin, N.B. In 1984 income of $5,634 was realized from the sale of wood on these lots. However, this income was not divided between the partners, and was therefore not included in the appellant's income for the 1984 taxation year.

2. "Les productions de Lycopodes": This business, also located in St. Quentin, N.B. had previously been involved in the production of club moss used in the manufacture of explosives and tracer-bullets. In 1984 the basic product was replaced by another substance and so the business had been inoperative for several years.

3. "La Ferme": The farm, which the appellant considered to be a business, is located in St. Martin, N.B. some 20 miles from St. Quentin. The appellant stated that the farm had earlier produced income from cutting and selling wood, but it had never been really active and was inactive in 1984.

At the hearing the appellant stated that he also had a client in St. Eustache, Quebec, from whom he had received $550 in fees in 1984. No other details were given, but the amount appeared in the appellant's income for 1984.

The explanations about the appellant's work and his professional or administrative responsibilities, as well as the expenses that he alleged that he had incurred in connection with his own businesses, were very vague, to the point of substantially diminishing his credibility (A-1). The appellant sought to deduct from his income, which was with the exception of $550 exclusively income from employment, expenses that he claimed he had incurred in 1984 in operating his businesses. Since Jardins du Village began operating in 1977 the expenses or losses incurred had been capitalized and had reached a total of $139,905.47 in 1984. The expenses claimed by the appellant for 1984 were $36,137.16 (Exhibit 1-1, last page).

The respondent did not dispute that reasonable expenses clearly incurred by the appellant in operating his businesses in 1984 were deductible. Two-thirds of the operating expenses claimed by the appellant in 1984, or $23,464.82, were actually allowed. Only the expenses of $12,172.34 remain in dispute.

The disputed expenses are as follows:

Extraordinary Expenses

Construction of professional and

business office space $2,642.54

(amortized over three years:

1983, 1984 and 1985)

The evidence showed that the appellant lived in Chicoutimi until 1981, when he moved to 674 Magellan Street in Boucherville, a property purchased in the appellant's wife's name. In 1983, the appellant undertook construction of an office in the basement of his Boucherville residence, at a cost of $7,927. A bathroom with shower was installed, at cost of over $4,000 (Exhibit 1-3, rental improvements), or more than 50 per cent of the total cost of the office.

In the summary of expenses set out above the first item claimed by the appellant is $3,000 for rental of the office. This expense, as well as all other expenses connected with the construction or financing of this office, such as the extraordinary expenses claimed in the amount of $2,642.54 for constructing the professional and business office space (amortized amount) may be deducted only if the appellant shows that the office was necessary and was actually used by him to earn income. The appellant therefore had the burden of showing:

(a) that the construction of an office in his home was a condition of his employment, or

(b) that the appellant had an actual need and in fact used his office at home to earn income from his personal businesses in 1984.

The appellant admitted that he was employed full-time and paid a salary by the Lavalin company in 1984. On the other hand, he did not succeed in establishing that the duties of his employment required that he maintain an office in his home. On the contrary, Yolande Tremblay, the person responsible for administration of the files of Lavalin Inc., entered as Exhibit 1-1 a letter that confirmed, inter alia, that the appellant was not required to maintain an office under the terms of his contract of employment. The appellant could not contradict this statement, and none of the expenses claimed may be deducted on the basis of his employment with Lavalin.

There remains the question of whether the appellant's activities in practising his profession as a self-employed person or in the administration of his personal businesses can justify the deduction of the expenses of this office. First, the rent of $3,000 claimed as an expense for rental of the office is supposed, according to the evidence, to have been paid by the appellant to his wife by a series of 12 pre-authorized bank withdrawals of $250 each, drawn on bank account No. 507-352-3, which prima facie is a joint account at the Royal Bank of Canada in the name of the appellant and his wife (Exhibit A-3). The evidence that the appellant in fact paid the rent claimed in full is not conclusive.

Les Jardins du Village was undoubtedly the appellant's principal project and most important business in 1984 and a majority of his activities (with the exception of his full-time employment) was devoted to it. However, Les Jardins du Village was started in 1977, and the plans of subdivision and layout of the lots, two of which had been sold in 1979, had necessarily been prepared well before the appellant built the office in his residence in 1983. In my opinion, the appellant has not shown what purpose the office in his home may have served in generating income for Les Jardins du Village or any other of his businesses in 1984. The appellant stated that the bathroom was included in the construction of the office for the use of his clients. The evidence was that no client had come into the appellant's office in 1984 and if I am not mistaken no client had been there by the date this appeal was heard. The fact that the cost of the shower was not included in the expenses in no way lessens my conviction that the purpose of the office, on the evidence as a whole, was not to generate business income but was simply a residential improvement, perhaps useful, but of a purely personal nature.

Also included in the summary of expenses was $2,000 which was supposed to have been paid to the appellant's wife. This transaction was also effected by means of a cheque drawn on the joint account No. 507-352-3 (Exhibit A-3). The appellant stated that his wife took over his work and his responsibilities when he was away. It is difficult to conceive and to understand the justification for this expense when the appellant could not show what activities he carried out himself in his office in 1984 to earn income.

The appellant also claimed automobile expenses in the amount of $1,245. These expenses related to two trips that the appellant stated he had made from Boucherville to St. Quentin. The details of these expenses appear in Exhibit 1-4. After examining these expenses, the appellant had to admit that in 1984 he had only made one trip to St. Quentin, between July 20 and 31, at a cost of $189.34. The appellant also admitted that for the rest of the year the automobile was used primarily for family purposes; however, he added that 30 per cent of the use of his car was for his business activities in Montreal. On cross-examination the appellant ultimately admitted that he had no personal business activities in Montreal in 1984. The appellant's answer to one question asked on this specific point was:

[Translation]

A. I have none. Right, I have none.

The evidence was not only that the appellant travelled from his home to his work at Lavalin Inc. by public transport, which was not disputed, but also that the travel expenses the appellant incurred from St. André to Beaumont in the course of his employment were reimbursable to him on request. The 30 per cent use of the automobile for business was entirely unsupported.

Along a somewhat different line, but still in relation to the automobile expenses, the appellant stated (as is also reflected in a so-called agreement (Exhibit A-1)) that the Jardins du Village partners had agreed that expenses for travel, lodging and communications between the partners would not be reimbursed by the business. The appellant explained that the partners believed that such expenses would not have been reasonable in the circumstances.

The appellant’s evidence as to the use of the automobile for his business activities in no way justifies the deduction of 47.4 per cent of all of the automobile expenses claimed in 1984, or $1,295.52 (Exhibit 1-4).

Similarly, the allegation that $500 was paid to the appellant's parents in 1984 to supervise the building where the club moss plant, which had already been inoperative for several years, was housed, appears unlikely to me, particularly when there was no receipt or cheque stub to confirm the payment of this amount.

The appellant's documentation of the expenses claimed is voluminous (Exhibit A-3), but clearly it is the quality and not the quantity of the supporting documents that is important. The documentation does not specify exactly why the expenses were incurred and how they were related to the appellant's businesses and were used to earn income for the appellant. Exhibit A-3 contains a listing of expenses such as parking, highway tolls, carwashes, and so on, for which the explanations were too vague for us to be able to connect them with earning income or with the appellant's businesses. If we examine the receipts included in Exhibit A-3 we find as business expenses amounts paid to Time Life Books on American Painting, the works of Rubens and Monet, a subscription to La Presse, the Corporations Act, the Jacques Duval car book, a subscription to the publication Les Affaires. As interesting and instructive as these publications may be, they are purely personal expenses of the appellant and have nothing to do with the practice of his profession.

With respect to the other expenses claimed in the appellant's summary and in Exhibit A-3, they do not establish that the amounts in question were expenses incurred in order to generate income, and represent operating costs. For example, under the heading "interest and bank charges", the appellant claimed $1,486.99. This amount is in fact interest accrued since September 1983 on a $4,500 line of credit granted by the National Bank of Canada to which was added an additional line of credit, at the request of the appellant (Exhibit 1-5). The purpose of this increase was to permit the appellant to complete payments on an Olivetti typewriter purchased in 1983 and to cover the cost of the construction of the office in his residence which was begun in 1983, the cost of which was estimated at $7,500.

In my opinion, the evidence showed that the construction of an office in his residence and the purchase of a typewriter had nothing to do with the practice of his profession or operation of his business. These interest expenses are of a personal nature and are not deductible. It should be noted, however, that by notice of reassessment the respondent allowed interest expenses in the amount of $114.24 on a loan for the purchase by the appellant of shares under a REA [Quebec share savings plan].

As well, the $705.51 for stationery and office expenses includes $500 for depreciation of the typewriter and the balance, $205.51, is composed of a series of small expenses such as postage for which no connection was established with the operating expenses of the appellant's businesses. The $113.53 claimed represented municipal taxes payable in 1984 on the club moss plant and the farm in St. Martin. Both had been inactive for years and these cannot be considered to be operating expenses.

In a letter to the Department dated January 30, 1986 (Exhibit 1-7) the appellant included in appendix "3" a statement of activities, which read in part as follows:

[Translation]

Introduction

This statement of activities is made in order to allocate the expenses related to each of the businesses referred to in my income statement for the year 1984

In my opinion, if we consider the evidence presented, these figures are pure fiction and in no way reflect reality. In 1984 the appellant's activities as a "professional engineer" consisted, according to the evidence, of one visit to a client in St. Eustache, for which the travel costs were undetermined. The “residential development" refers to expenses connected with Les Jardins du Village, which the appellant visited only once in 1984, at a cost of $189.34. The appellant stated that these two items represent 51 per cent and 29 per cent respectively, of the expenses of $12,172.34 claimed in 1984.

Moreover, contrary to what the appellant stated, the "securities investment" does not account for a significant portion of his time and expenses. The expenses consisted of broker fees and interest in the amount of $175.83 on a loan for RRSP and REA purchases which, in any event, were allowed. This transaction surely did not require an office in the appellant's residence and the amount does not represent 13 per cent of the expenses claimed by the appellant.

The appellant's credibility in this matter leaves a lot to be desired, and he has not succeeded in establishing that the $12,172.34 represents expenses specifically incurred in the practice of his profession as an engineer in order to earn income from this practice in 1984. By not taking into account the income of $550 received by the appellant from the client in St. Eustache in 1984 the respondent de facto allowed the taxpayer a deduction of up to this $550, which easily covers the expenses the appellant might have incurred for the trip from Montreal to St. Eustache and the automobile expense of $189 for the trip from Montreal to St. Quentin if the deduction of this expense can be considered to be justified.

I do not see any reason in the submissions of the appellant that would justify the Court in varying the respondent's assessment, and the appeal must therefore be dismissed.

Appeal dismissed.