Charles Roy v. Minister of National Revenue, [1985] 1 CTC 2328, 85 DTC 261

Cardin, TCJ:—In his 1979 and 1980 tax returns, Charles Roy claimed deductions of $1,468.65 and $1,599.12 respectively as “in-residence” office expenses which the Minister disallowed on the grounds that they had not been incurred for the purpose of gaining or producing income from a business or property but were personal living expenses and not deductible by virtue of both paragraphs 18(1)(a) and 18(1)(h) of the Income Tax Act, RSC 1952, c 148.

The appellant, a bachelor, had prior to 1975 been manager of the Niagara Falls office of AGF Management Limited, which was eventually dissolved. He then began a business as an independent Investment Fund dealer, licensed through a broker of Regal Capital Planners Ltd. His income was exclusively on a commission basis.

It is the appellant’s contention that, in order to minimize operational costs, he decided in 1975 to conduct his new business from a one-bedroom apartment situated on the top floor of a high-rise apartment in St Catharines which he had occupied since 1966. The alternative, according to the appellant, would have been to rent much smaller office space in Pen Centre nearby, at a cost of $550 a month.

It is alleged that all but the bedroom was used as an office. The dining-room area contained a desk with a stationary typewriter, filing cabinets; the livingroom area was arranged with a desk and office-like furniture for clients, a black- board, tape recorders and, more recently, video was used to inform clients of market trends. The kitchen was used to prepare and serve coffee and drinks to clients, creating thereby a more congenial atmosphere that could not have been realized in a conventional office. Although the appellant’s business required him to travel considerably, he received clients at their convenience in his apartment two or three days a week, mostly in the evenings and on week-ends. The uncontradicted evidence is that, in this way, the appellant, who had no other business office, more than doubled his income from 1975 to 1983, with sales of over $1 million.

The appellant admitted that the apartment was used occasionally to entertain personal friends but he stated that he never prepared or cooked meals in his kitchen. He also alleged that he usually ate in restaurants and slept at his girlfriend’s house most of the time. It was admitted that there were no external indications that the apartment was being used as an office and no licence or permit for that purpose had been obtained. Furthermore, no business tax had been paid.

In argument the respondent submitted that in 1975, the appellant, in using his apartment to conduct his business, had not incurred additional expenses. Actually, no evidence one way or another was adduced on that point. I do not believe, however, that paragraph 18(l)(a) requires that additional expenses be incurred. It appears to me that any expense directly related to the gaining or producing of income from a business is deductible. Furthermore, it is not clear to what extent and how the apartment was used by the appellant prior to 1975 when he was manager of the Niagara Falls office of AGF Management Limited. However, what the evidence clearly showed was that the appellant, for business reasons, decided in 1975 to operate his new business from his apartment. The respondent does not deny that in 1978 and 1979, the appellant did just that, nor that taxable income was produced as a result.

Moreover, it would appear that all of the apartment except for the bedroom was used principally for business purposes rather than as a residence, even though some personal use was made of the premises. As I understand it, the use made by the appellant of the kitchen, the bar and the living-room, is not unlike the use made in executive suites of large corporations. In both cases, the purpose is to increase sales through a more personal and congenial approach to business relationships.

The facts in this appeal, while perhaps not unique, are unusual and differ from those of most “in-residence office expense” cases cited by the respondent. However, the facts in The Queen v Justin Cork ([1984] CTC 479; 84 DTC 6515) are indeed not basically unlike those of the case at bar. It was held by Muldoon, J, of the Federal Court — Trial Division, that:

The taxpayer’s decision to minimize expenses by establishing his office in his home rather than at another place was entirely a matter of his own business judgment and was perfectly reasonable. (DTC Headnote)

In E F Anthony Merchant v MNR, [1982] CTC 2742; 82 DTC 1764, M J Bonner, Esq, QC (Member of the Tax Review Board as he then was), found that the appellant had maintained an office in his home for the purpose of gaining or producing income from his law practice pursuant to paragraph 18(l)(a). At 2743 (DTC 1765), he stated:

The question whether the purpose test of paragraph 18(1)(a) of the Act is met or not is essentially one of fact and the cases relied upon by the respondent have little bearing, having regard to what was established in evidence here.

These remarks are equally applicable to the case at bar in which the purpose, the use and indeed the result of the appellant’s “in-residence” office were satisfactorily established. In my opinion, an office was necessary in the appellant’s business; there was nothing in the Income Tax Act to preclude him from establishing his only office in his residence, the purpose of which was not one of convenience but to gain or produce income from his business and he succeeded in doing so. On the basis of uncontradicted evidence, the appellant’s apartment was used principally as a business office and only occasionally for his personal use.

The office expenses claimed in each of the taxation years represent one-half of the rent of the apartment which, in my view, is reasonable in the circumstances.

The appeal is therefore allowed and the matter referred back to the Minister for reconsideration and reassessment on the basis that the amounts of $1,468.65 and $1,599.12 for each of the taxation years 1979 and 1980 respectively were incurred for the purpose of gaining and producing income from a business and are deductible under paragraph 18(l)(a) of the Act. The appellant is allowed party and party costs.

Appeal allowed.