Jaroslav Verner v. Minister of National Revenue, [1983] CTC 2333, 83 DTC 289

M J Bonner:—The appellant appeals from assessments of income tax for the 1975 and 1976 taxation years. During those years the appellant was self- employed. He carried on the business of a professional engineer under the name “Verner Design Service”. His reported financial results from the activity were as follows:

It was common ground that the appellant was self-employed, was taxable on the profits from his business and was not subject to the restrictive provisions of the Income Tax Act which govern the computation of income from employment.

The respondent disallowed the expenses claimed. In doing so he relied primarily on paragraph 18(1) (a) of the Income Tax Act. That provision reads:

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.

During the years in question the appellant worked for three firms. The first was Franteck Investments Ltd. That firm provided the appellant’s services to fulfil a contract which it had with a company named Hepburn. Hepburn was engaged in the manufacture of cranes. The appellant worked on engineering problems in connection with the cranes and he prepared reports and instruction manuals that related to the use of the machines. Next, during the period from June to the end of September the appellant worked for Pertec Incorporated. Again, that firm supplied the services of the appellant to fill a contract to a company called Aerofall Mills Limited. This arrangement governed the appellant’s work during the period from June to September. Finally, for the balance of 1975 and up to the end of October of 1976 the appellant worked under a contract made directly between himself and Aerofall Mills Limited.

It may be useful to set out the contract with Aerofall Mills Limited in full:

Mr Jaroslav Verner—Verner Design Service

Self-employed to supply engineering service to Aerofall Mills Limited as follows:

1. The charge rate is $8.50 per hour.

2. The rate of hours in excess of 44 per week will be $12.75 per hour, with the exception of a week wherein a statutory holiday falls. In this case the overtime will commence after 36 hours per week.

3. It is understood that any part or all of this contract may be terminated by either party on the basis of 2 weeks notice.

4. It is understood that any design work done will become exclusive property of Aerofall Mills Limited, and will be kept confidential.

5. It is understood that the above named, as self-employed, will cover the cost of unemployment insurance, government pension, holiday pay, statutory holidays, workmen’s compensation, hospitalization, any group or life insurance, etc.

6. Terms—Net payment within 7 days of invoicing.

7. Starting: Sept 15, 1975.

The appellant’s contracts with Franteck and Pertec were oral and no precise details of them were given in evidence. It would seem that they were similar in tenor to the Aerofall contract.

Part of the expenses in dispute were those of an office in the appellant’s home. That home was a one-bedroom apartment. The expenses claimed and disallowed included portions of the rent paid for the apartment and of telephone, light, heat and water charges. The bedroom was, the appellant said, used exclusively for the purposes of his business. He said that a library of technical materials was kept in that room together with a desk and drafting facilities. It was also equipped with photographic darkroom equipment. The office equipment included in the list of property for which capital cost allowance was claimed included a camera. It also included several articles described as “graphics”. The graphics were works of art hung on the wall. I note that the cost of them was very substantial in relation to the cost of the appellant’s other “office equipment”. For example, in 1974 graphics were acquired at a cost of $1,140. The total cost of “office equipment” for that year was $1,369.65. That total included darkroom equipment costing $155.35.

A second category of expense in dispute were amounts paid to entertain the appellant’s accountant and a typist who the appellant said typed technical reports which he prepared for the firms for which he worked. Also claimed were amounts paid to that typist for typing services.

Automobile expenses, including direct operating costs, capital cost allowance and interest on borrowed money used to purchase a car, formed the next category in dispute. The appellant claimed the cost of daily “business trips” from his apartment to the offices of the firms where he worked under a contract or subcontract. As well, he claimed the cost of mileage for trips to the bank to make deposits, to make business purchases and other trips described as “sundry”. Until August of 1975 the appellant had one car and claimed that 75% of the use thereof was for business purposes. He then bought a second car. The second car, an expensive Corvette purchased entirely with borrowed money, was, according to the appellant, used exclusively for business purposes. Consequently, for the latter part of 1975 all costs pertaining to that car were claimed as business expenses. For 1976 90% of the costs of the Corvette were so claimed.

The records maintained by the appellant of the outlays upon which his claims were based can only be described as meticulous. However, the relationship shown by the evidence to exist between those expenses and the income-earning process was tenuous in the extreme.

The appellant’s counsel argued that the evidence showed that the companies which contracted with the appellant did not provide him with adequate facilities. I agree with counsel that the appellant’s evidence was that he was a professional engineer and that at work he was thrown into an open area with technicians, designers and others who, while skilled, were not members of a recognized profession. However, the appellant could and did perform the great bulk of his work at the Hepburn and Aerofall Mills prem- ises and it was not shown that, from a realistic standpoint, any business purpose was served by performing at home what little work was done there.

The appellant’s evidence was that the library facilities at his various places of work were not sufficient for his purposes because none of the employed engineers had expertise in the appellant’s areas of specialization, hydraulics. However, the home office library did nothing to fill the gap. None of the books listed in the library said to have existed in the appellant’s “office” appears to have anything to do with hydraulics. Few appear to have much to do with engineering.

I am not satisfied that the expenditures in connection with the home office were laid out for the purpose of gaining or producing income from the appellant’s business. On all of the evidence it does not appear that the office met or was intended to meet any real need in the income-earning process. It follows that paragraph 18(1 )(a) prohibits the deduction of the costs of creating and maintaining the office. In so far as the outlays involved were outlays of capital in respect of which capital cost allowance claims were made the deductions in question are prohibited by paragraph 1102(1)(c) of the Income Tax Regulations. That provision reads as follows:

1102. (1) The classes of property described in this Part and in Schedule B shall be deemed not to include property

(c) that was not acquired by the taxpayer for the purpose of gaining or producing income;

I can find nothing in the evidence which would support a conclusion that the appellant, when at home, was there in order to carry on the operations of the business. It follows that the cost of driving between home and work is not deductible. A distinction is to be drawn between driving in the course of Carrying on a business and driving from home to a place where the business operations commence. The parties did not approach the case on the basis that the various classes of driving, the costs of which were in question, were to be treated separately. However, I will note that it would appear that the income-earning process had ended before the appellant did his driving to the bank. His situation was not in any way analogous to that of a merchant who, from a practical standpoint, needs to go to the bank regularly to deal with the cash generated by his business. In summary, none of the automobile-related costs including capital cost allowance and interest on the borrowed money used to buy the car were shown to be deductible.

It was said that the firms for which the appellant worked expected him to bear the cost of taking and developing photographs for purposes of the reports which he had to do. I very much doubt that this is so in the case of a very junior engineer who is paid $8.50 an hour. Equally, I find it difficult to imagine that such firms would not have allowed the appellant to use their secretaries for purposes of typing the reports he was expected to prepare. No persuasive evidence was given which related the entertainment and secretarial costs to the income-earning process.

For the foregoing reasons the appeals fail completely, and will be dismissed.

Appeal dismissed.