Thomas J Scoit v. Minister of National Revenue, [1976] CTC 2100, 76 DTC 1084

The Chairman:—This is the appeal of Thomas J Scott from income tax assessments in respect of the 1968, 1969, 1970 and 1971 taxation years.

There are two issues in this appeal. The first is in respect of certain moneys received by the appellant in each of the taxation years which the Minister considers to have been management fees and which the appellant claims to have been the reimbursement of operational expenses with respect to a car wash business. The second issue is the reduction by the Minister of the capital cost of the car wash by $900 which the appellant considers to be unwarranted.

Dealing with the first issue, the appellant in 1968 started a car wash business with three partners who were medical doctors (Exhibit A-1). The group of doctors owned 50% of the business and the appellant 90% but the appellant in fact looked after the running of the business alone.

It is alleged by the appellant that as a result of an agreement between the parties the operational expenses of the car wash, including obtaining the necessary supplies, the repair parts, the deposits at the bank and the car expenses involved in carrying out these administrative duties which were paid out by the appellant, would be reimbursed to him. The Memorandum of Agreement to that effect was filed with the Board as Exhibit A-2.

In the 1968 to 1971 taxation years the appellant claims to have received as reimbursement for certain operational expenses the following amounts:

The Minister in his reassessment allowed $100 in 1968 and $400 in the three following years as reimbursement for operational expenses and included the balance of the amount claimed by the appellant as income from the partnership, received by the appellant as management fees.

Alternatively, counsel for the respondent contends that the expenses other than those allowed by the Minister were not made for the purpose of earning income but were personal expenses within the meaning of paragraph 12(1)(h) and not deductible pursuant to paragraph 12(1)(a) of the Income Tax Act.

The appellant claims that the coin-operated car wash was situated 15 miles from his home and that he had to visit the car wash for receipt collection, for repairs, inspection, cleaning, customer complaints etc, at fairly regular periods. The repair parts of the car wash could be obtained from a company called ALD of Canada from which the appellant had obtained his car wash franchise. The appellant was obliged to travel 40 miles to the west end of Toronto where the company was located for repair parts, soap supplies, paper towels etc, at least twice a week. The partners resided 10 miles from the appellant's home and once a week he had to travel there to have cheques signed. The bank deposits were made at the nearest bank once a week but it was situated 28 miles from his home. The appellant claimed he travelled on a more irregular basis for repairs to the building in which the car wash was located, for doors, piping and glass which were often broken. By letter dated November 7, 1973 to the Department of National Revenue the appellant claims to have travelled in this respect 11,960 miles and charged 10c a mile for his car expenses.

Counsel for the respondent called as witness Mr Crawford, a tax assessor for the department of National Revenue. Mr Crawford testified that the appellant’s records had previously been audited but that finding no vouchers for any of the expenses claimed he concluded that the amounts received were management fees.

By fetter of May 2, 1973 on file, the appellant asked that the audit be redone and Mr Crawford then audited the appellant’s books. In the absence of vouchers or records of the appellant’s expenses, the assessor, on the basis of the vouchers for purchases made by the appellant at ALD of Canada, arrived at an average of 3,000 miles a year travelled by the appellant in connection with his car wash business. However, instead of allowing $300 a year at a rate of 10c per mile he allowed $400, except for 1968 when the car wash was operated for only part of the year he allowed $100 deductible operational expenses.

On the basis of the facts before me I do not believe that the amounts of $1,500 and $1,300 a year received by the appellant can reasonably be considered as management fees. It would mean taking into account the $400 which the respondent accepts as being operational expenses that the management fees would be in the order of some $80 or $90 a month. Nor do I believe that the amounts claimed are unreasonable as operational expenses. The problem as I see it is to determine the amount of the expenses in the absence of adequate vouchers or records.

lt is well recognized that the appellant has the onus of proving the amount of the expenses claimed and in this instance he did not satisfy that burden of proof. On the other hand, as pointed out by the appellant it is well-nigh impossible in the circumstances to keep an accurate account of business trips made with the family car and I don’t believe that any law can reasonably expect someone to do the impossible. The assessor based part of the mileage travel on the invoices for purchases made by the appellant at ALD of Canada in Toronto but in his rough calculation, as pointed out by the appellant, the assessor figured one trip to Toronto per invoice whereas two and sometimes three trips were required. Trips to the bank or to have the cheques signed by the partners which in my view are also operational expenses were not taken into account and could involve considerable additional mileage.

If because of the difficulty of keeping accurate records the respondent felt inclined to allow certain amounts as operational expenses without proper vouchers it is a matter of appreciation of the facts in determining what amount of the expenses should be allowed. The full amount of the appellant’s claim should not be allowed because of the absence of proper records but in my opinion, and it can be only that, the facts would indicate that the appellant in connection with his car wash business travelled more than to and from ALD of Canada and the assessor’s estimate based on the appellant’s purchase vouchers which are not a proper record of the appeilant’s travel, is low and does not take into account other comparable trips directly related to the appellant’s business. In the circumstances it is my opinion that half of the expenses claimed by the appellant in the years pertinent to this appeal would be a more realistic figure of the expenses which should be allowed.

As to the second issue which stems from the reduction by the Minister of $900 from the purchase cost of the car wash, the evidence is that the appellant’s three original partners had each paid $300 into the partnership. With the appellant’s $300 the total amount invested into the partnership was $1,200 which was deposited with the supplier and applied on the purchase of the car wash equipment. Subsequently, the three partners withdrew from the partnership.

Counsel for the respondent suggested that the partnership not having proceeded with the purchase of the equipment saw its $1,200 deposit forfeited and, therefore, the $900 paid by the three partners was not part of the cost of the equipment which was subsequently bought by the appellant. No evidence to that effect was produced by the respondent.

The appellant stated under oath that at no time did the contract to purchase equipment lapse and at no time was the $1,200 deposit forfeited by the vendor, and was all applied to the purchase of the car wash equipment. The appellant further stated that the $900 originally invested by the three partners was still owed by him.

On the basis of the evidence adduced, I can only conclude that there was no justification for reducing the capital cost of the equipment by $900.

In conclusion therefore the appeal is allowed in part and the matter referred to the Minister for reconsideration and reassessment on the basis that 50% of the operational expenditures claimed by the appellant in the 1968, 1969, 1970, and 1971 taxation years should be allowed and that, in the circumstances, the amount of $900 was improperly deducted from the capital cost of the car wash equipment.

Appeal allowed in part.