E F Anthony Merchant v. Minister of National Revenue, [1982] CTC 2742, 82 DTC 1764

M J Bonner [ORALLY]:—The appellant appeals from assessments of income tax for the 1975 and 1977 taxation years. During those years the appellant practised law in the City of Regina and maintained an office in the Suite where the partnership of which he was a member practised law. As well, he had an office in his home. In assessing tax, the Minister disallowed as deductions the expenses of the home office. The quantum was not in dispute. The Minister contended that the deductions

(a) were prohibited by paragraph 18(1 )(a) of the Income Tax Act; and

(b) were unreasonable in the circumstances and thus prohibited by section 67 of the Act.

The second argument was not pressed at trial.

As to the first argument, the Minister assumed on assessment that no part of the appellant’s personal residence was used for the conduct of the partnership business and that office space in the downtown premises occupied by other members of the law firm was available to the appellant at all times.

The evidence at the hearing established beyond a doubt that the first- mentioned assumption was factually incorrect and that, although the appellant used the firm’s offices, he in fact used and required the home office premises in order to carry on his practice.

The appellant specialized in litigation. He was in court frequently and thus often was not available to clients during normal office hours. It was therefore necessary that he see clients and attend to correspondence and drafting chores at times outside normal office hours. He chose to attend to those aspects of his practice at home, during evenings and weekends. The decision to work at home was not based entirely on considerations of convenience. The partnership offices were located in a high crime area of the City of Regina. That area was unattractive to clients, particularly during the evening hours. Because of frequent break-ins, the building was kept locked outside normal business hours. It is hard to see how the appellant could admit clients to the locked building without wasting a lot of time waiting for them at the door. In the circumstances, the maintenance of a home office seems to have been a sensible idea.

The evidence established further that the home office was not used for domestic purposes, save for meals consumed by the appellant while working, nor was it used, certainly to any significant extent, for purposes connected with the appellant’s political activities. For the latter purposes the appellant used his office at the legislative buildings a few blocks away.

Counsel for the respondent relied on points of similarity which he submitted existed between the present case and other cases in which similar issues have arisen. In particular he relied on the decision of the Federal Court in Perry Brooks v The Queen, [1978] CTC 761; 78 DTC 6505, and on the decision of the Tax Appeal Board in Hugh Russell Locke v MNR, 38 Tax ABC 38; 65 DTC 223. 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. Here, there was more than the usual direct evidence of the appellant’s intent and purpose. That evidence was corroborated by the evidence given by the appellant’s wife, their children’s nanny who resided in the appellant’s home, and a business acquaintance. Their testimony showed that the home office was in fact extensively used during the years in ques- tion and during subsequent years for the purpose of meeting clients, doing dictation and making and receiving telephone calls for the purpose of the practice of law.

Much was made of the inability of the appellant to produce, at the hearing, precise records of the time spent in the home office and of other work done there. The failure to produce such records is not fatal to this case. During the years in question the appellant kept his time records on the covers of his client’s files, many of which have now been destroyed. He can hardly be reasonably expected to produce all of his 1975 and 1977 files now, particularly when he adduced the evidence of three other witnesses whose testimony fully supported his on the question of the extent and nature of the use made of the home office.

The respondent’s counsel placed some reliance on the appellant’s failure to pay business taxes and on a suggested breach of a residential zoning by-law. Assuming there was an illegality in regard to such matters, and no such by-law was proved in evidence, it does not follow that the appellant did not carry on a very substantial part of his law practice from his home office. The costs of carrying on an unlawful business or of carrying on a lawful business unlawfully are deductible in the computation of profit under the Income Tax Act. In this regard reference may be made to MNR v O/va Diana Eldridge, [1964] CTC 545; 64 DTC 5338, and to Day & Ross Limited v The Queen, [1976] CTC 707; 76 DTC 6433.

For the foregoing reasons I find that the appellant has established that during the years in question he maintained an office in his home for the purposes of gaining or producing income from the business of the practice of law and that paragraph 18(1 )(a) of the Act does not prohibit the deductibility of the expenses in question. The appeals will therefore be allowed and the assessemtns referred back to the respondent for reassessment accordingly.

No evidence was adduced regarding the issue of the deductibility, in 1977, of expenses incurred by the appellant in seeking the leadership of the Saskatchewan Liberal Party. In that regard the 1977 appeal fails.

Appeal allowed in part.