Csizmadia v. R., [1998] 3 CTC 2603

Watson D.J.T.C.:

This appeal was heard in Toronto, Ontario on May 5, 1998, under the Informal Procedure.

The Appellant appeals from the Notices of Reassessment dated July 13, 1995 for the 1990, 1991, 1992 and 1993 taxation years. The issues deal with research grants received during those taxation years and whether the Appellant is entitled to deduct certain amounts as expenses for accommodation, transportation and professional assistance and, in the alternative, whether the disallowed expenses were reasonable in the circumstances.

The Appellant received research grant awards during the four years in issue to supervise an international collaborative research project related to protein folding, including peptide conformations and organic sulphur stereochemistry. The amounts of the grants varied from year to year and were not received at regular intervals. These grants were awarded to the Appellant by the University of Nancy in France in each year under appeal; in addition, he received a lump sum amount of $47,944.00 from the University of Toronto in the 1993 taxation year.

In reassessing the Appellant for the 1990, 1991, 1992 and 1993 taxation years, the Minister of National Revenue (the “Minister”) included the above amounts and allowed certain expenses as set out in the revised schedules to the Reply to the Notice of Appeal.

In so reassessing the Appellant, the Minister made the following assumptions of fact:

(a) the facts hereinbefore admitted or stated:

(b) at all material times, the Appellant was a Professor with the University of Toronto;

(c) in the 1993 taxation year, the Appellant received a research grant in the amount of $47,944.00 from the University of Toronto;

(d) the research grant in the amount of $47,944.00 was income to the Appellant in the 1993 taxation year;

Research Grants from University of Nancy

(e) in the 1990, 1991, 1992 and 1993 taxation years, the Appellant was awarded gross research grants in the amounts of 158,635, 82,300, 97,989 and 44,265 French francs from the University of Nancy, France;

(f) the University of Nancy made certain deductions at source. These deductions included contributions for old age pension, sickness and accident (the “Deductions”);

(g) the Deductions were in respect of personal or living expenses of the Appellant;

(h) the gross research grants before the Deductions were income to the Appellant;

Accommodation Expenses

(i) in the 1990, 1991, 1992 and 1993 taxation years, the Appellant deducted the amounts of $12,592.62, $12,846.58, $16,251.09 and $14,018.45, respectively, as accommodation expenses in computing his net research income;

(j) the Appellant deducted the amount of $5,157.75 in each of the 1990, 1991, 1992 and 1993 taxation years and deducted the amount of $399.20 in each of the 1991, 1992 and 1993 taxation years, for the costs of furniture and furnishing, respectively, in computing his net research income;

(k) the Appellant rented the Apartment for the entire year in each of the 1990, 1991, 1992 and 1993 taxation years at an annual rent of 33,150 French francs;

(l) in 1990, the Appellant furnished the Apartment with approximately $25,788.00 worth of furniture and household items (the “Furniture”);

(m) the Appellant stayed in Europe for 4 '/2 months in 1990, 5 months in 1991, 8 months in 1992 and 9 months in 1993. The Appellant stayed in the Apartment in Nancy most of the time;

(n) in the 1990, 1991, 1992 and 1993 taxation years, the Appellant incurred additional accommodation expenses when he travelled to other Universities, as follows:

	1990	1991	1992	1993
University Hungary	$1,900	$1,900	$1,350	$1,900
Hotels France				110
Hotels Hungary			666
Hotels Germany			3,582	1,057
Hotels Austria	212			169
Total	$2,112	$1,900	$5,598	$3,236

(0) at all material times, the Appellant was separated and was living apart from his spouse and his child;

(p) at all material times, the Appellant’s mother resided in Budapest, Hungary;

(q) at all material times, the Apartment was the Appellant’s temporary residence;

(r) the Appellant resided temporarily in Nancy, France and was sojourning there during the years in question;

(s) the documentation provided by the Appellant did not substantiate the total accommodation expenses claimed by the Appellant;

(t) the accommodation expenses, in excess of the amounts i.e. $2,301.16, $3,974.79, $6,560.29 and $8,030.89 allowed by the Minister in the 1990, 1991, 1992 and 1993 taxation years, were not incurred, or if incurred, were not incurred by the Appellant for the purpose of carrying on the research work but were personal or living expenses of the Appellant;

Transportation Expenses

(u) in the 1990, 1991, 1992 and 1993 taxation years, the Appellant deducted the amounts of $6,331.75, $3,214.06, $7,999.45 and $8,787.00, respectively, as transportation expenses including train tickets, car rentals, taxi service and use of a personal vehicle in computing his net research income;

(v) in 1992, the Appellant purchased a motor vehicle (the “Vehicle”) for 1,900 Deutsche mark, approximately $1,474.00 in Canadian funds;

(w) in the 1992 and 1993 taxation years, the Appellant incurred transportation expenses related to the use of the Vehicle including capital cost allowance (“CCA”) for the purpose of carrying on the research work, as follows:

	1992	1993
Repairs		$2,216.13
Insurance	$341.31	238.84
Gas	495.67	499.09
Car Park		79.76
Toll charges	8.46	109.39
CCA	147.40	265.40
Total	$992.84	$3,408.61

(x) the cost of the Vehicle was capital in nature;

(y) the documentation provided by the Appellant did not substantiate the total transportation expenses claimed by the Appellant;

(z) the transportation expenses, in excess of the amounts i.e. $3,784.24, $2,416.73, $6,170.10 and $3,756.88 allowed by the Minister in the 1990, 1991, 1992 and 1993 taxation years, were not incurred, or if incurred, were not incurred by the Appellant for the purpose of carrying on the research work, but were personal or living expenses of the Appellant;

Expenses for Professional Assistance

(aa) in the 1990, 1992 and 1993 taxation years, the Appellant deducted the amounts of $1,021.18, $1,321.36 and $623.19 respectively, as expenses for professional assistance in computing his net research income;

(ab) in the 1990 taxation year, the Appellant incurred convention expenses of $629.77;

(ac) in the 1992 taxation year, the expenses of $930.00 were claimed twice by the Appellant or were incurred by other persons;

(ad) in the 1993 taxation year, the expenses of $623.19 were incurred by other persons;

(ae) the documentation provided by the Appellant did not substantiate the total expenses for professional assistance claimed by the Appellant; (af) the expenses for professional assistance, in excess of the amounts i.e. $121.18 and $41.36 allowed by the Minister in the 1990 and 1992 taxation years, were not incurred, or if incurred, were not incurred by the Appellant for the purpose of carrying on the research work.

At the hearing, Counsel for the Minister acknowledged that the Appellant was entitled to an additional deduction for expenses totalling $7,957.52 over the four years in issue for various items that were verified by receipts received from the Appellant after the setting of a date for the appeal. He further acknowledged that the Appellant was entitled to a deduction for the cost of meals while he was on travel status in Europe in various locations other than Nancy, France at a per diem rate of $40.00 as follows: 74 days in 1990, 53 days in 1991, 142 days in 1992, 144 days in 1993 and 83 days in 1994.

The Appellant has the onus of establishing on a balance of probabilities that the reassessments for the four years in issue were ill-founded in fact and in law.

Paragraph 56(1 )(o) of the Income Tax Act (the “Art”), which sets out the rules relating to research grants, reads as follows:

56 (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

(o) the amount, if any, by which any grant received by the taxpayer in the year to enable the taxpayer to carry on research or any similar work exceeds the total of expenses incurred by the taxpayer in the year for the purpose of carrying on the work, other than

(i) personal or living expenses of the taxpayer except travel expenses (including the entire amount expended for meals and lodging) incurred by the taxpayer while away from home in the course of carrying on the work,

(ii) expenses in respect of which the taxpayer has been reimbursed, or

(iii) expenses that are otherwise deductible in computing the taxpayer’s income for the year;

The French version of that paragraph states:

56 (1) Sans prejudice de la portée générale de l’article 3, sont à inclure dans le calcul du revenu d’un contribuable pour une année d’imposition:

o) l’excédent éventuel de toute subvention reçue au cours de l’année par le contribuable pour la poursuite de recherches ou de tous travaux simi- lakes sur le total des dépenses qu’il a engagées pendant l’année dans le but de poursuivre ces travaux, à l’exception:

(i) des frais personnels ou de subsistance du contribuable, sauf ses frais de déplacement (y compris le montant entier dépensé pour ses repas et son logement) engagés par lui pendant qu'il vivait hors de chez lui occupé a poursuivre ces travaux,

(ii) des dépenses qui lui ont été remboursées,

(iii) des dépenses déductibles, comme il est prévu par ailleurs, dans le calcul de son revenu de l’année;

In the case of Scheinberg v. R., [1996] 2 C.T.C. 2089 (T.C.C.) at paragraph 7, Bowman J. of this Court made the following observations with respect to paragraph 56(1 )(t?) of the Act:

... Paragraph 56(1 )(o) is not a provision that allows a deduction. It requires the inclusion in income of the amount of a research grant to the extent that it exceeds the expenses relating to the research. Where the expenses exceed the grant it does not authorize the deduction of the excess. If those expenses are to be deducted the authority, if it exists at all, must be found elsewhere.

Both the English and French versions of paragraph 56(1 )(o) clearly state that research income must be included in a taxpayer’s income, but only the portion which exceeds expenses related to the research; however, it also provides that certain expenses may not be deducted, as set out in subparagraphs (i) to (iii).

In his testimony, the Appellant explained that the amounts received from the University of Nancy were in fact 135,004.86 F in 1990, 68,883.47 F in 1991, 79,044.56 F in 1992 and 43,991.23 F in 1994 and not 159,998.82 F, 82,300.32 F, 84,767.52 F and 57,486.82 F respectively; the University of Nancy treated him as if he was an employee and made deductions at source (for old age pension, etc.) over which the Appellant had no control and for benefits that he clearly had been informed that he was not entitled. The amounts of 24,993.96 F, 14,402.88 F, 6,734.78 F and 14,180.32 F respectively were included by the Minister as part of the Appellant’s income during the four years in issue even though they were never received by him either as payment, reimbursement or entitlement to benefits.

Considering all of the circumstances of this appeal, including the testimony of the two witnesses, the admissions of the Appellant and of the Respondent, and the documentary evidence, I am satisfied that the Appellant has succeeded in his onus of establishing on a balance of probabilities that the correct amounts received by him as research grants from the University of Nancy were as follows: 135,004.86 F in 1990, 68,883.47 F in 1991, 79,044.56 F in 1992 and 43,991.23 F in 1993; however, in relation to the expenses claimed that were over and above the amounts allowed by the Minister both in the reassessment and the acknowledgement made by the Minister’s counsel at the hearing as set out above, I am satisfied that the Appellant has failed in his onus of establishing that the various expenses claimed, including accommodation expenses, transportation, expenses and expenses for professional assistance, were incurred by him “for the purposes of carrying on the work” and not personal or living expenses. It is indeed unfortunate for the Appellant that he was unable to provide receipts and supporting documentation for various expenses claimed. I am satisfied that the Appellant acted honestly and in good faith in relation to his research work.

Accordingly, the appeal is allowed and the matter is referred back to the Minister for reconsideration and reassessment in accordance with the reasons set out above.

Appeal allowed in part.