Date: 19980126
Docket: 97-429-IT-I
BETWEEN:
CLAUDE DUFOUR,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
G. TREMBLAY, J.T.C.C.
Point at issue
[1] According to the Notice of Appeal and Reply to the Notice
of Appeal, the question is whether s. 18(12) of the
Income Tax Act ("the Act") applies in
calculating the appellant's income for the 1993 and 1994
taxation years.
[2] If so, the appellant cannot deduct the sums of $2,472
(1993) and $490 (1994). If not, he may do so. Section 18(12)
authorizes the deduction of expenses for a home office which is
either
(a) the individual's principal place of business,
or
(b) used exclusively for the purpose of earning income
from business and used on a regular and continuous basis for
meeting clients, customers or patients of the individual in
respect of the business.
In such cases the individual may deduct eligible expenses, but
only up to the amount of his income from the business.
Burden of proof
[3] The appellant has the burden of showing that the
respondent's assessments are ill-founded. This burden of
proof results from several judicial decisions, including a
judgment of the Supreme Court of Canada in Johnston v.
Minister of National Revenue.[1]
[4] In the same judgment the Court held that the facts alleged
by the respondent in support of the assessments or reassessments
are also deemed to be true until proof to the contrary is shown.
In the instant case the facts alleged by the respondent are set
out in subparagraphs (a) to (g) of paragraph 6 of the
Reply to the Notice of Appeal. That paragraph reads as
follows:
[TRANSLATION]
6. In support of the notices of reassessment for the 1993 and
1994 taxation years dated March 28, 1996, the Minister
assumed in particular the following facts:
(a) during the years at issue the appellant was employed by
Université Laval; [admitted]
(b) concurrently with his employment the appellant also,
during the years at issue, carried on his profession of notary at
home; [admitted]
(c) in 1990 the appellant renovated his garage beside his
home, creating a law office where he has subsequently carried on
his profession; [admitted]
(d) the loss of income from his professional work for the 1993
and 1994 taxation years amounted to $5,914 and $7,644
respectively; [admitted in part subject to completion]
(e) the loss of income from his professional work for each of
the 1993 and 1994 taxation years included $2,472 and $490
respectively for the cost of his home work space;
[denied]
(f) the $2,472 and $490 were related to an expense for
depreciation related to the undepreciated capital cost of part of
the self-contained domestic establishment; [denied]
(g) in calculating the income from the appellant's
professional work any amount for the cost of home work space
cannot exceed the appellant's income from the
business . . . [denied]
Facts in evidence
[5] In addition to the facts admitted above, the appellant
testified that the same problem had existed for 1990, 1991 and
1992. Revenue Quebec had cut down the expenses and later Revenue
Canada, Taxation had done the same. The case ended up in the
Court of Quebec, Civil Division (Access Hearing).
[6] Judge Guy Pinsonnault summarized as follows the facts
which were essentially the same as those before this Court,
except that the years were different:
[TRANSLATION]
During those years the appellant was employed by
Université Laval; however, in 1990 he decided to carry on
his profession of notary at home in the garage beside his
residence: he accordingly renovated it and set up an office in
which he carried on his profession.
In his tax return for 1990 the appellant made a deduction from
his income from other sources by reporting a professional loss of
$11,381, which he had obtained by subtracting expenses totalling
$12,756 from his professional income.
Included in those expenses was an amount of $1,241 claimed
as depreciation on "leasehold improvements" made
by renovating his garage into an office.
In 1991 the same scenario was repeated, but this time the
appellant deducted $2,602 as depreciation on leasehold
improvements; in 1992, he included $2,517 in his balance sheet
for this item.
These amounts deducted by the appellant as depreciation on
leasehold improvements were disallowed by the respondent: the
appellant challenged this decision, and hence the instant
appeal.
It should be noted that the respondent admitted the
operation which the appellant had undertaken by transforming
his garage into an office for his professional use, as well as
the cost of the work, namely $12,000.
[7] However, the point which the Court of Quebec had to
resolve was stated as follows:
[TRANSLATION]
The legal problem which the Court must solve is to determine
whether the amounts which the appellant deducted as
depreciation on "leasehold improvements" can be
calculated on the basis of 20 percent annually
(Class 8), as he maintained, or whether he is only entitled
to an annual deduction of four percent (Class 1), as
the respondent argued.
[8] Seen in this way, the Court held that painting and other
maintenance expenses could not be the subject of an annual
deduction of four percent per annum, as it would take
25 years to amortize. Judge Pinsonnault opted for
Class 8, which is a "catch-all class" and
concluded:
[TRANSLATION]
The Court feels that in general this class is more in line
with the objective nature of the expenses incurred by the
appellant to set up his office.
[9] According to the appellant, there was a previous agreement
with the respondent's chief of appeals that Revenue Canada
would follow the Court of Quebec decision. The respondent
complied with the agreement in 1990, 1991 and 1992.
[10] However, the respondent did not see the problem in the
same way for 1993 and 1994 - the issue was different.
Was the appellant subject to s. 18(12) of the Act? It
reads as follows:
18. (12) Work space in home. Notwithstanding any other
provision of this Act, in computing an individual's income
from a business for a taxation year,
(a) no amount shall be deducted in respect of an
otherwise deductible amount for any part (in this subsection
referred to as the "work space") of a self-contained
domestic establishment in which the individual resides, except to
the extent that the work space is either
(i) the individual's principal place of business,
or
(ii) used exclusively for the purpose of earning income
from business and used on a regular and continuous basis for
meeting clients, customers or patients of the individual in
respect of the business;
(b) where the conditions set out in
subparagraph (a)(i) or (ii) are met, the amount for
the work space that is deductible in computing the
individual's income from the business for a taxation year
shall not exceed the individual's income from the business
for the year, computed without reference to the amount; and
(c) any amount not deductible by reason only of
paragraph (b) in computing the individual's
income from the business for the immediately preceding taxation
year shall be deemed to be an amount otherwise deductible that,
subject to paragraphs (a) and (b), may be
deducted for the year for the work space in respect of the
business. [My emphasis.]
[11] Section 248 of the Act defines "self-contained
domestic establishment" as follows:
"self-contained domestic establishment"
— "self-contained domestic establishment" means a
dwelling house, apartment or other similar place of residence in
which place a person as a general rule sleeps and
eats . . .
[12] Since the appellant's professional practice as a
notary is included in the definition of the word
"business" (s. 248 of the Act), the question is
whether the premises used exclusively for the business were part
of a self-contained domestic establishment where the appellant
lived.
[13] The renovation work done in the existing garage
(12' x 20') consisted first of insulating the
floor, ceiling and walls and then of installing a small bathroom,
all to be used as a waiting room for clients. Additionally, the
necessary work was done to connect this former garage with the
home, chiefly on an already existing bedroom which served as an
office, and also to create space for a library and strongroom.
Heating, water and electricity for the notarial office came from
the residence.
[14] In Grace Ellis[2] Deputy Judge Rowe of this Court had to render
a similar decision regarding use of a garage. Page 7 and
part of page 8 of his decision are worth citing:
In the present appeal, the appellant constructed a studio as a
work space over a garage which was attached to the house in which
she lived. The question is whether or not the area referred to
as the studio, used exclusively for business purposes, was
"any part of" a self-contained domestic establishment
in which the appellant resided. The studio space was
connected to the rest of the house by two interior passages, one
through a bathroom into the appellant’s bedroom, both of
which could be locked to prevent public access. Webster’s
Dictionary, 1988 Edition, defines "part" as "a
portion, fragment or section of a whole". The 1986 Edition
of The Oxford Reference Dictionary, Clarendon Press, defines
"self-contained" as "complete in itself; (of
accommodation), having all the necessary facilities and not
sharing these".
Counsel for the appellant referred to the decision of the
Supreme Court of Canada in Bell v. The Ontario Human Rights
Commission, 1971 S.C.R. 756, in which the Court held a
three-room flat, without a separate outside entrance, may
well have been a "dwelling unit" but was not one that
was "self-contained". The argument on behalf of
the appellant is that she eats and sleeps in her residence and
does not use the studio/store premises, which does have a
separate outside entrance, for any of those domestic purposes.
In my view, for the purposes of the subsection, that is
looking down the wrong end of the telescope. The fact is that the
studio/store area, falling within the definition of work space,
is clearly a part of the residence of the appellant, which is
indeed a self-contained domestic establishment. By
comparison, the kiln shed at the rear of the property, standing
alone without physical attachment to the house, is not.
Although potential customers could enter the business premise
from the outside, the studio was still physically connected to
the house and was accessible therefrom without having to go
outside and share the electrical, water and heating facilities.
It is probably safe to assume the legislators in enacting the
subsection at issue had an eye on the typical home office in
which a portion of the residence, although possessing a business
identity, is still readily identifiable as forming a part of the
domestic establishment. The appellant, for reasons of
practicality and cost efficiency found it expedient to construct
her business premises in the manner she did, and from the
perspective of the public, was able to create a sense of a
separate entity by design, provision of walkway, stairway and
entrance, and by the appropriate use of signs. In such a way she
was able to distinguish her business from what might ordinarily
be expected from an "in home" business establishment.
However, such distinction by way of perception, does not detract
from the fact the studio was an area which formed a part of the
appellant’s residence. In order to apply, the subsection
does not require the smell of home-baked bread wafting into
the work space. The Minister was correct in applying the
limitation imposed by subsection 18(12) of the Act to
the years under appeal. [Emphasis added]
[15] It seems to us that Judge Rowe's reasoning is
logical and also applies in the instant case.
[16] The appellant's notarial office, from the outer
entrance to the room serving as an office, is all part of his
residence which is in fact a self-contained domestic
establishment. The notarial office was physically attached to the
house. Additionally, it was accessible from inside and
"shared the water supply, electricity and heating
systems".
[17] Paragraph (b) of s. 18(12) of the Act
applies and the assessments for the 1993 and 1994 taxation years
must be upheld: the sums of $2,472 (1993) and $490 (1994) cannot
be deducted.
Conclusion
[18] The appeal is dismissed.
Guy Tremblay
J.T.C.C.
Québec, Canada, January 26, 1998.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 5th day of June
1998.
Mario Lagacé, Revisor
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