Bowman T.C.J.:
This is an appeal from assessments for the 1994 and 1995 taxation years.
The Appellant, Mr. Cook, is a former R.C.M.P. officer and also he worked for a number of years at the Department of Indian Affairs. He’s always been very much interested in art, and to judge by the photographs of his art and the one painting that he showed to the Court, he has a great deal of talent. I was very much impressed with his work.
In 1992, after retiring, he decided to start an art business and sell art, and he went down to the tax department and they told him how to calculate income and so forth from a business. He filed returns for 1992 and 1993 claiming a relatively small loss. These returns were accepted and they are not before me. In 1994 and 1995, however, he claimed losses from his art business of $7,278.00 in 1994 and $11,302.35 in 1995. He had revenues from the art business of about $450.00 in one year and $485.00 in another year. And, as I observed in direct examination, it does seem a little unreasonable to be charging $11,000 or $7,000.00 against revenues of that sort.
However, the tax department disallowed certain of his expenses and it’s important to emphasize that at no time has it been suggested that he did not have a business or that he did not have a reasonable expectation of profit. What they did was simply to adjust a number of his expenses, and I shall deal with each of those.
Capital cost allowance was claimed on his car in the amount of $1,365 using 100 percent of the cost of the car. The tax department looked at his log of miles or kilometers traveled in the course of his business and it turned out he had about 20 percent in 1994 and 41 percent in 1995. They therefore averaged the two, coming up with 30 percent, and applied that figure to the capital cost allowance claimed on the car.
Also, he had claimed $905.00 as an expense. This was GST on the car, which he bought. The department, in my view quite correctly, said that that is part of the capital cost of the car and should be added into the computation of the capital cost for capital cost allowance purposes. In this regard I think the department was quite correct.
So far as the office in his home expense is concerned he was claiming $2,950.00 and $3,114.94. I think it’s roughly a third of the overall expenses. The department did not disallow these expenses on the basis that they were personal or living, but rather on the basis that under the Income Tax Act a home office expense cannot be used to increase the loss from a business. That loss could, presumably be carried forward to 1996 or 1997, although he has closed down the business in 1997.
The final adjustment to the loss claimed by him is a purely mechanical one having to do with the increase in the closing inventory. He showed closing inventory in 1994 and 1995 as nil. However, in 1995 he showed an opening inventory of $875.00, from which it may be inferred, indeed concluded, that that $875.00 was the closing inventory in 1994. Similarly, he showed nil as his closing inventory for 1995. If one simply deducts his sales from his opening inventory plus purchases, one arrives at approximately $800.00. Therefore, I think the department was right in making these adjustments. Again I emphasize that the department is not disallowing all of his losses. The department is disallowing only a portion of his losses, and in my opinion they were correct in doing so in accordance with the law.
One final point should be mentioned. Mr. Cook states that his returns for 1994 and 1995 were as originally filed accepted by the department and then somewhat later, within the three-year period of time permitted to the depart- ment for reassessing, they made the adjustments, which are the subject matter of this appeal. The Department of National Revenue is entitled within three years of the date of the original assessment to reassess, and many taxpayers feel that this is unfair because if they originally accepted the returns they believe they should not be able to go back and re-examine the years. Unfortunately the system doesn’t work that way. The Department of Na- tional Revenue has to have the right to go back within the prescribed period and look at the years. The first assessment that comes out, generally within a few months of filing the return, is known as a desk assessment or quick assessment. It’s the initial assessment. Normally all those assessments are is a verification of the arithmetic in the return and it isn’t until later that the department gets around to doing an audit. I sympathize with the Appellant, who feels that having accepted his returns they should not have gone back and re-examined them, but I don’t see how the system could work otherwise.
In the circumstances, the appeal is therefore dismissed.
Appeal dismissed.
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