Saunders v. R., [1997] 1 CTC 2202 (Informal Procedure)

Bonner J.T.C.C.: — The Appellant appeals from assessments for the 1992 and 1993 taxation years. The appeals arise from the denial of the Appellant’s claims to deduct rental losses from three properties located in Winnipeg. The three properties are all single dwellings.

One was acquired in July of 1992 by foreclosure, and that’s 725 Simpson Avenue; two were acquired at around July 1992 by gift from the Appellant’s mother-in-law. They were 146 and 125 Selkirk Avenue. All were in need of repairs at the time of acquisition. Some at least of the repairs were imperative from the stand point of the safety of occupants and visitors. The Appellant was concerned about liability.

The Appellant and his wife lived in Edmonton. The Appellant, and on occasion his wife, travelled from Edmonton to Winnipeg in order to deal with the acquisition of the properties, to effect repairs and renovations and to supervise such repairs and renovations as were being effected by contractors. Travel expenses loom large in the computation of the losses claimed. As well in 1993 there was a claim to deduct a $10,000.00 deposit on the lease of a new automobile, together with periodical payments made pursuant to the lease.

The adjustments made by the Minister of National Revenue on assessment are detailed on Schedules 3 and 4 to the Reply to the Notice of Appeal and it is therefore not necessary to set them out in detail here. It is sufficient to note that the Appellant argued that the Minister of National Revenue erred

(a) in treating some of the outlays on the dwellings as capital outlays;

(b) in disallowing part of the deductions claimed for travel; and

(c) in disallowing the deductions claimed for auto leasing costs and the deposit. This third branch of the claim was asserted for the first time following the assessment.

The properties were in poor condition when acquired. I accept that in some cases repairs were required to rectify dangerous conditions. However, not every necessary repair to a rental property gives rise to a currently deductible expense. It is one thing to charge against current income as a cost of earning it the repairs required to rectify wear and tear resulting from the use of the property for rental purposes; it is quite another thing to acquire a property in dilapidated condition and to treat as a cost of earning current income the costs associated with upgrading the thing acquired with a view to putting it into the condition required to carry on the income earning process. The latter is a capital outlay. It is not necessary to cite authority because the law in this area is well settled.

The disallowance of part of the cost of travel between Edmonton, where the Appellant lived, and Winnipeg, where the properties were located, may have been justified. I say “may” because the exact basis on which some costs were disallowed and others were not was not explored. It may have been helpful if the assessor had been called to give evidence, but he or she was not. In any event, the evidence suggests that the Appellant went to Winnipeg more often and stayed longer than was necessary or could ever be justified having regard to the requirements of earning rental income. The Appellant’s daughter and mother-in-law were in Winnipeg and that may well explain why in 1993 the Appellant expended $2842.77 in travel and $6195.56 in automobile expenses, the amounts claimed by him. The evidence falls far short of establishing that the Appellant spent that money in the earning of rental revenues. To an extent which I cannot calculate some travel costs appear to have been on capital account. I refer, for example, to the 1992 trips made to meet with a lawyer regarding the acquisition of the properties and to arrange for repair work that was of a capital nature.

The last issue relates to the claim to deduct lease payments and the $10,000.00 deposit made in 1993 for a Cadillac automobile said by the Appellant to be dedicated to use for travel between Edmonton and Winnipeg and travel in Winnipeg for the purpose of effecting repairs to the dwellings. The evidence as to dedication to an income earning purpose is unpersuasive. The total mileage added to the vehicle after acquisition greatly exceeded any amount of use for travel to and within Winnipeg that the Appellant was able to connect to the rental operation. Furthermore, the $10,000.00 deposit would, I assume, be a cost of acquiring the Appellant’s interest in a lease not a current cost. I say “assume” because the contract was not produced in evidence.

The Appellant has failed to adduce evidence establishing on the balance of probabilities that the assessments in issue are too high. I formed the view as he gave his evidence that he was inclined to treat his rental costs, outlays which cannot realistically be said to have had any connection with the income earning process. Profit in this case is to be computed by the deduction from rental revenues of the cost of earning them and nothing more.

I will only add one thing. The rental properties were owned by the Appellant and his wife. It is difficult to imagine how the deduction of the entire losses by the Appellant can be justified. It would be well to remember what was said by President Jackett in Lagacé v. Minister of National Revenue, [1968] C.T.C. 98, 68 D.T.C. 5143, at page 108 (D.T.C. 5149),

For purposes of Part I of the Income Tax Act profits from a business are income of the person who carries on the business and not, as such, income of a third person into whose hands they may come.

The same holds true of losses. The Appellant and his wife were coowners. The wife’s share of the losses does not become the husband’s just because it is convenient for him to deduct them.

The appeals will be dismissed.

Appeal dismissed.

Chris Seater v. Her Majesty The Queen

Tax Court of Canada (McArthur J.T.C.C.), October 21, 1996 (Court File No. APP-280-96-IT).

Income tax — Federal — Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) — 28,

The taxpayer was reassessed for income tax for 1990, 1991 and 1992. The taxpayer forwarded the reassessments to financial consultants F.B.C. who had been retained to file returns for those years. The taxpayer, a farmer, was inexperienced in tax matters and forwarded the reassessments to his accountants with instructions to deal with the reassessments. F.B.C. neglected to file an appeal until March 1996 when the taxpayer received a collection letter. F.B.C. tried to remedy the situation by filing an application under the fairness package and another Notice of Objection to no effect. F.B.C. retained counsel in mid-July 1996 who filed the present application for an extension of time within which to file a notice of appeal.

HELD:

Application was granted.

The taxpayer filed for an extension within the time limits contained in par. 167(5)(a) of the Income Tax Act. The taxpayer had a bona fide intention to appeal and relied in good faith on the expertise of F.B.C. While F.B.C. mishandled the situation, they did not intentionally ignore the time limits. Finally, the taxpayer had reasonable grounds for appeal.

Kevin Mellor for the appellant.

Duncan Fraser for the respondent.

Legislation cited:

Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) -

28

167(1)

167(5)

167(5)(a)

167(5)(b)

169

McArthur J.T.C.C.: — This is an application for an Order extending the time within which the Applicant may file a Notice of Appeal in respect of his 1990, 1991 and 1992 taxation years. By way of notices dated May 26, 1995, Mr. Seater was reassessed for income tax for the three years. Mr. Seater forwarded the reassessments to Farm Business Consultants (F.B.C.) who had been retained to file returns for the relevant years. F.B.C. filed a Notice of Objection June 7, 1995. The Minister of National Revenue (the “Minister”) filed a Notice of confirmation October 24, 1995.

The Applicant’s instructions to F.B.C. was “to do what you have to do to make the problem go away”. The Applicant is in the business of raising and selling livestock and related products. He had little or no understanding of filing returns and of the income tax appeal procedures. He relied absolutely on expertise of F.B.C. in those matters.

Consideration was given by F.B.C. in mid-December of 1995 to filing an appeal but the file was neglected until March 1996 when the Applicant received a collection letter from Revenue Canada advising him that he owed income tax in the amount of $15,829.28. This letter is dated March 12, 1996 and on March 15, 1996 he faxed a copy of it to F.B.C.

A fleury of activity ensued by F.B.C. that had no effect in remedying the situation. F.B.C. filed an application under the fairness package and later, filed another Notice of Objection. Finally realising that the situation was beyond them, they retained legal Counsel in mid-July 1996 who filed the present application within days of receiving instructions.

Subsections 167(1) and (5) of the Income Tax Act (the “Act”) read as follows:

167(1) Extension of time to appeal - Where an appeal to the Tax Court of Canada has not been instituted by a taxpayer under section 169 within the time limited by that section for doing so, the taxpayer may make an application to the Court for an order extending the time within which the appeal may be instituted and the Court may make an order extending the time for appealing and may impose such terms as it deems just.

[I

(5) When order to be made - No order shall be made under this section unless

(a) the application is made within one year after the expiration of the time limited by section 169 for appealing; and

(b) the taxpayer demonstrates that

(i) within the time otherwise limited by section 169 for appealing the taxpayer

(A) was unable to act or to instruct another to act in the taxpayer’s name, or

(B) had a bona fide intention to appeal,

(ii) given the reasons set out in the application and the circumstances of

the case, it would be just and equitable to grant the application,

(iii) the application was made as soon as circumstances permitted, and

(iv) there are reasonable grounds for the appeal.

The Minister submits that the Applicant has not met the conditions in paragraphs 167(5)(a) and (b).

Analysis

The Applicant did not file a Notice of Appeal within the 90 days limited by section 169 which was January 22, 1996.

The Applicant filed this application for extension on July 26, 1996, being within the time limits contained in paragraph 167(5)(a). I will attempt to apply the criteria in paragraph 167(5)(b) to the present facts:

1. (b) the taxpayer demonstrates that

(i) within the time otherwise limited by section 169 for appealing the taxpayer

(A) was unable to act or to instruct another to act in the taxpayer’s name, or

(B) had a bona fide intention to appeal,

The Applicant’s testimony was credible and I accept it in its entirety. There is no doubt that he “had a bona fide intention to appeal” before the time otherwise limited for serving a Notice of Appeal being January 22, 1996. F.B.C. also had a bona fide intention to appeal yet lacked the competence to do so.

2. (ii) given the reasons set out in the application and the circumstances of the case, it would be just and equitable to grant the application,

The Applicant relied in good faith on the expertise of F.B.C. He is a farmer and salesman, with no accounting expertise. It is not unreasonable for him to have turned over his income tax responsibilities to people who held themselves out as experts namely F.B.C. They fell asleep on the file and when they realised what had happened in March 1996, they took action albeit in the wrong direction.

3. While F.B.C. mishandled the situation, they did not intentionally ignore the time limits and did take action in April shortly after the file was brought back to their attention. While the original action they took was misguided, I am satisfied, that given all the circumstances it is just and equitable to grant this application and that (iii) it was made as soon as circumstances permitted.

4. I further find that “there are reasonable grounds for appeal”.

The Appellant disputes the cattle sales and personal expenses not allowed. Counsel submits that the optional inventory adjustment pursuant to section 28 of the Act would in any event reduce his income to the amount he originally filed and therefore no tax in excess of what he reported would have to be paid.

Generally, it is preferable to have a taxpayer’s issues decided on their merits than having them dismissed, for having missed time limits in the Act. The courts must attempt to make a fair and just decision in view of all of the facts.

It is ordered that the time for filing appeals regarding Notices of Reassessment dated May 26, 1995 for the 1990, 1991 and 1992 taxation years be extended. The Notice of appeal attached to the application is taken as filed on October 1, 1996.

The Respondent shall have until November 30, 1996 to file a Reply to the Notice of Appeal.

Application granted.