Docket: 2007-828(IT)I
BETWEEN:
CYRUS DRIVER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on September 16, 2011 at Ottawa,
Ontario
By: The Honourable Justice Judith Woods
Appearances:
|
Agent for the Appellant:
|
K.E. Koshy
|
|
Counsel for the Respondent:
|
Joanna Hill
|
____________________________________________________________________
AMENDED JUDGMENT
The appeal with respect to assessments made under the Income
Tax Act for the 2003 and 2004
taxation years is allowed, and the assessments are referred back to the
Minister of National Revenue for reconsideration and reassessment on the basis
that:
1. the appellant is entitled to additional
deductions for motor vehicle expenses (including insurance) in the amounts of
$2,944 for the 2003 taxation year and $2,630 for the 2004
taxation year; and
2. property described as “cutlery, crockery
& utensils” and “linen, furnishings & presentation” should be
classified as Class 12 assets for purposes of capital cost allowance.
Each
party shall bear their own costs. The Registry is directed to reimburse the
Court’s filing fee to the appellant.
This
Amended Judgment is issued in substitution for the Judgment dated September 22,
2011.
Signed at Toronto, Ontario this 5th day of October
2011.
“J. M. Woods”
Citation: 2011 TCC 444
Date: 20111005
Docket: 2007-828(IT)I
BETWEEN:
CYRUS DRIVER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Woods J.
[1]
This appeal concerns the deductibility
of expenses incurred by Cyrus Driver in 2003 and 2004 in connection with a
restaurant business operated by him in Saudi Arabia. Mr. Driver was a resident
of Canada during this period.
[2]
In income tax returns
for the 2003 and 2004 taxation years, Mr.
Driver reported net income from the restaurant business in the amounts of
$14,667 and $27,596, respectively.
[3]
Reassessments were issued under
the Income Tax Act to increase net income by $20,302 and $20,057, for
each year respectively. The additions to income are comprised of two items:
(1) disallowance on account of personal use of 34 percent of motor vehicle
expenses claimed; and (2) a reduction in the deduction for depreciation to
conform with the capital cost allowance provisions of the Act.
[4]
By way of background, in the 1980s
Mr. Driver opened a restaurant called The Grill in Saudi Arabia;
at the time he resided there. When he moved to Canada in 1993, Mr. Driver
continued to operate the restaurant and he spent several months each year in
Saudi Arabia.
[5]
There were others who had
interests in the business as well. Prince\Mishari Abdullah Abdul Aziz Al-Saud
was described as the Sponsor of the business. He had legal title to the assets
and control over major decisions. In the relevant period, Mr. Driver had a 74
percent share of the profits of the business. A family who lived in Great
Britain had the remaining 26 percent.
[6]
Mr. Driver left Canada in 2007.
He was not able to obtain a visa to attend the hearing and he provided oral
evidence by way of teleconference.
Deduction of motor vehicle
expenses
[7]
Mr. Driver claimed a deduction for
expenses for five motor vehicles. Two of the vehicles were used to transport
the restaurant’s 27 employees to and from work and there is no dispute as to
the deductibility of the expenses for these two vehicles.
[8]
The remaining three vehicles are
described as a 85 Mazda Station Wagon, a 92 Lexus, and a 99 Dodge Intrepid. Mr.
Driver said that he used only the Lexus and that his personal use was about 14
percent.
[9]
The main difficulty that I have
with Mr. Driver’s testimony is that I have no way of knowing how accurate it
is. The testimony is self-interested and it was not detailed enough for me to
be satisfied as to its reliability. A log book is generally recognized as the
appropriate way to establish business use of a vehicle. Mr. Driver had been in
Canada for about 10 years before the taxation years at issue. He had adequate
time to be advised as to the necessity of keeping a log book for Canadian tax
purposes.
[10]
I also have difficulty with the
Crown’s position because it attributed minimal business use to the three
vehicles. This seems inappropriate considering that extensive business use of
vehicles would likely be required in the day to day operation of the
restaurant. In addition, it came out for the first time at the hearing that Mr.
Driver owned another vehicle that was used by his family. That was not taken
into account by the Crown.
[11]
In the circumstances, the best
that can be done is to provide a rough estimate. I propose to reduce the disallowed
amounts by one-half. Accordingly, additional deductions will be allowed in the
amounts of $2,944 for the 2003 taxation year and $2,630 for the
2004 taxation year.
Depreciation
[12]
In the income tax returns for the
2003 and 2004 taxation years, Mr. Driver deducted depreciation on the same
basis that was claimed in the financial statements which were prepared by an accounting
firm in Saudi Arabia. There was no attempt to apply the capital cost
allowance provisions of the Act.
[13]
For purposes of the reassessments,
the CRA auditor attempted to use the provisions of the Act to the extent
possible, using the description of the assets provided to her by Mr. Driver.
[14]
At the hearing, the representative
for Mr. Driver made several submissions in support of the deductions claimed in
the tax returns. Some of these are:
-
Mr. Driver is an employee of the
Prince;
-
it is too complicated to apply the
provisions of the Act;
-
the Minister used the incorrect
foreign exchange rate for the cost of assets;
-
the Minister used the wrong CCA
classification for cutlery and linens;
-
the Minister should have allowed a
deduction as a running expense for renovations and pre-start up costs.
[15]
I would first comment that these
arguments were made for the first time at the hearing, which put the Crown at a
significant disadvantage. The arguments should have been made in the notice of
appeal so that the Crown could have considered them prior to the hearing.
[16]
In reply to the arguments, counsel
for the Crown quickly conceded that a mistake had been made in classifying
cutlery and linens. An adjustment should be made, therefore, to change the
classification of these assets from Class 8 to Class 12. The change appears to
be significant in terms of the total amount at issue.
[17]
No other adjustment is warranted
in my view. In brief, I would comment:
-
there is insufficient evidence
that Mr. Driver was an employee;
-
even if the application of
Canadian law is complicated, no relief can be provided by this Court on this
basis alone;
-
as for the exchange rate, there
was insufficient evidence as to what the appropriate exchange rate is; and
-
there was insufficient evidence to
justify changing the classification of renovation costs and pre-start up costs.
Conclusion
[18]
In the result, the appeal will be
allowed to provide for the following adjustments: (1) additional deductions may
be claimed for motor vehicle expenses (including insurance) in the amounts of
$2,944 for the 2003 taxation year and $2,630 for the 2004 taxation
year; and (2) items described as “cutlery, crockery & utensils,” and
“linen, furnishings & presentation” should be classified as Class 12 assets
for purposes of capital cost allowance.
[19]
As for costs, I have concluded
that each party should bear their own. Although Mr. Driver was partially
successful in the appeal, I am not satisfied that he took satisfactory steps to
make his position known to the Crown prior to the hearing. If that had been
done, there might have been fruitful settlement discussions, or at least the
Crown could have properly prepared for the hearing.
These Amended Reasons for Judgment are issued in
substitution for the Reasons for Judgment dated September 22, 2011.
Signed at Toronto, Ontario this 5th
day of October 2011.
“J. M. Woods”
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