[OFFICIAL ENGLISH TRANSLATION]
Date: 20020404
Docket: 2000-5219(IT)I
BETWEEN:
DENISE GAOUETTE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre Proulx, J.T.C.C.
[1] These are appeals under the
informal procedure concerning the 1995 to 1997 taxation
years.
[2] The points at issue are:
(1) whether net business income of $30,495, $20,622 and
$21,257 respectively should have been added to the
appellant's income for the taxation years in issue;
(2) whether the Minister of National Revenue (the
"Minister") was authorized to reassess after the normal
reassessment period for the 1995 taxation year had expired; and
(3) whether the Minister was right in assessing penalties
under subsection 163(2) of the Income Tax Act (the
"Act").
[3] The witnesses were
Johanne Tremblay, the appellant, and
Chii Lean Lee Bélanger for the appellant
and Diane Grenier for the respondent.
[4] Johanne Tremblay is an editor
with Éditions de Renouveau Pédagogique Inc.
("ERPI"). She has edited the appellant's literary
works since 1989 and has also acted as editor for the
appellant's spouse, Conrad Huard. Mr. Huard wrote
mathematics textbooks for all primary school grades.
[5] Ms. Tremblay explained that
the appellant was the author of "En Tête", a
collection designed to teach French in grades 1 and 2. It is
a collection that has more than 50 percent of the market in
Quebec, New Brunswick and French-speaking Ontario.
[6] The witness explained that,
although the appellant had worked alone, she needed to hold
meetings with the graphic artists. Those meetings could be held
in Sherbrooke, but they usually took place at the appellant's
home in order to save the author time. Meetings the appellant had
to attend as an author were also held in other cities such as
Drummondville or Québec. Ms. Tremblay might accompany
the appellant to meet the students or the appellant met them
alone. According to Ms. Tremblay, the students consider the
appellant to be a star. She receives mail from them, and she is
close to teachers and children. Ms. Tremblay knows that the
appellant also lectures to the children's parents and takes
part in televised interviews.
[7] Ms. Tremblay explained that
the appellant and her husband, Conrad Huard, had their own
office. The dining room served as a conference room. She
explained that she could talk to the appellant at virtually any
time of day, from 7:00 a.m. to 10:00 p.m.
[8] Books are launched in the spring,
but Ms. Tremblay explained that she did not play the role of
representative. She also said that Ms. Gaouette's
daughter, Mélissa, had worked on one of the guides when
she was a student. Ms. Tremblay is not the one who
reimburses the appellant's expenses.
[9] The appellant explained in her
testimony that she was a lecturer and wrote teaching material.
She has a master's degree in education and taught five or
six years. She then worked as a French-language educational
consultant until 1986 when she began to devote herself
exclusively to writing and to leading conferences.
[10] The appellant filed
Exhibits A-2 and A-3, which are prepared in the
same order as the report of the Minister's auditor
(Exhibit I-4) and the Reply to the Notice of Appeal
(the "Reply"). In the audit conducted by the Minister,
the appellant accepted certain points and disputed others. For
each point, I will state the evidence, if any, the arguments and
the decision.
[11] The appellant admits
paragraphs (h), (i) and (j) of the Reply entitled
"Unreported Income", that is, ERPI's reimbursements
of the appellant's expenses, which were not reported in her
tax returns. The amounts had in fact been entered into the
appellant's books but, for some reason, the accountant had
not taken them into account. The appellant admitted that the
amounts for the years ending on September 30, 1995, and
December 31, 1995, to December 31, 1997, of $2,935,
$674, $3,457 and $2,254, had to be included in her income. She
explained why she had not done so. On this point, counsel for the
respondent informed the Court that the Minister had cancelled the
penalties that had been assessed on these amounts.
[12] The amounts claimed as conference
leader referred to in paragraph (k) of the Reply consist of
expenses relating to hairdressing, beauty treatments, manicures
and dry cleaning. The appellant had claimed 50 percent of
those expenses on the ground that they were necessary for her
appearance when she acted as a lecturer and conference leader.
The Minister's auditor said that, if she had been able to
link the hairdressing expenses directly to the conferences, she
might have allowed them, but that was not the case.
[13] In Rouillard v. Canada,
[1999] T.C.J. No. 650, I analyzed the nature of personal
expenses. That case involved a service man who had claimed a
deduction in respect of the haircuts required by his position. I
considered the analysis made by Iacobucci J. in
Symes v. Canada, [1993] 4 S.C.R. 695, and held
as follows at paragraphs 7 and 8:
(7) It may be seen from this analysis
that the test - any expense that would not be incurred but for
the business constitutes a business, not a personal expense - is
a test that may be useful but is virtually impossible to apply in
view of the variety of choices that individuals may make. I
believe that what is stated to be the traditional test is the
test which should be adopted because it applies equally to
everyone. According to this test, if I interpret it correctly,
any expense that must be made by a person in order to report for
work will be considered a personal expense. Certain positions
require that one be well dressed but each person determines the
amount of money that person wishes to invest in clothing. Some
positions require a neat personal appearance. Some individuals
may be able to provide the kind of care needed to achieve this on
their own, while others need the help of persons specializing in
the field. Some live far from their place of work, while others
live closer but their housing may be more expensive. As
Baron Pollock wrote in Bowers v. Harding, (1891)
3 Tax Cas. 22 (Q.B.), in a passage cited in paragraph 6
of these reasons:
When a man and his wife accept an office there are certain
detriments as well as profits, but is in no sense an expenditure
which enables them to earn the income in the sense of its being
money expended upon goods, or in the payment of clerks, whereby a
tradesman or a merchant is enabled to earn an income.
. . . If we were to go into these questions with great
nicety we must consider the district in which the person lives,
the altitude at which he lives, the price of meat, and the
character of the clothing that he would require, in many places
indeed the character of the services and the wages paid to
particular servants, and the style in which each person lives,
before we could come to any conclusion.
(8) I believe it must be concluded
that all expenses incurred in order to report to one's normal
place of work for one's usual duties are personal expenses
incurred as a quid pro quo for remuneration. In the case of
servicemen, their employment agreement requires them to be
available for their work activities with regulation haircuts and
well-maintained clothing. The salaries they receive are the quid
pro quo for this availability to comply with the regulations.
Thus, if the income in question were business income, it would
appear to be certain that the appellant would not be entitled to
the deduction because the expense would be of a personal
nature.
[14] For the same reasons, I find that
hairdressing, manicure and dry cleaning expenses are personal
expenses and, under paragraph 18(1)(h) of the
Act, are not deductible. Interpretation Bulletin IT525R
concerns performing artists. I find it hard to consider the
appellant a performing artist, but, if she considers herself so
on some occasions, the bulletin describes the circumstances in
which certain deductions may be allowed, but there are no such
circumstances in this case.
[15] The portion of the expenses disallowed
under the item "Accounting and Management" indicated in
paragraph (l) of the Reply is accepted by the appellant.
[16] With respect to the expenses relating
to the documentation and subscription described in
paragraph (m) of the Reply, in dispute is an amount of $510
for the period ending on September 30, 1995, and an amount
of $291 for the period ending on December 31, 1995.
According to Exhibit I-5, nothing under that item was
claimed for the other years. According to Exhibit I-4,
the auditor's report, the appellant was allowed $128.42 to
September 30, 1995, and $17.95 to December 31, 1995.
The appellant argued that all the material represented by those
expenses had been sources of information for her books. I have no
evidence to the contrary. The amounts are allowable.
[17] Office supplies are listed in
paragraphs (n) and (o) of the Reply. In her
Exhibit A-2, the appellant proposed that a substantial
deduction be allowed. After hearing the appellant's
explanations, I find that what she proposed in
Exhibit A-2 is reasonable.
[18] Office expenses are stated in
paragraph (p) of the Reply. Based on the appellant's
explanations, these were items that were useful for her office
for her work as an author. The expenses that were claimed, as
corrected in Exhibit A-2, may be allowed.
[19] As to the advertising and promotion
expenses indicated in paragraph (q) of the Reply, the
corrections to Exhibit A-2 made by the appellant seem
reasonable on the whole and must be allowed.
[20] Counsel for the appellant raised the
issue of the calculation of depreciation in which periods prior
to the normal assessment period were considered. The
Minister's auditor reorganized the CCA schedules starting in
1989; she allowed certain capital expenditures and disallowed
others because they were not supported by invoices or had not
been incurred for business purposes.
[21] Counsel for the appellant argued that
the auditor could not remake the schedules for the years prior to
the normal assessment period: the capital expenditures have
already been allowed by the Minister and can no longer be
disallowed.
[22] In my view, the principles that apply
in computing the losses for the years prior to the normal
assessment period also apply to the calculation of depreciable
property. In the calculation of losses, the courts have
determined that the Minister may not assess for the previous
years but may redo the calculations for those years: New
St. James Limited v. M.N.R., 64 DTC 121; and
Coastal Construction and Excavating Ltd. v. Canada,
[1996] T.C.J. No. 1102. In conclusion, the capital costs of
depreciable property and the purpose of their acquisition may be
revised even if that property was acquired during periods prior
to the normal assessment period.
[23] Counsel for the appellant raised the
issue of building occupancy expenses. The amounts claimed are
$2,345, $2,110 and $3,519 for the years from 1995 to 1997. The
auditor determined that the business percentage was
100 percent. However, she allowed amounts solely for the
office where the appellant had her principal place of business
and allowed no percentage for the other rooms of the house such
as the bathroom, storage areas, library or client meeting area on
the ground that those places were not used exclusively to meet
clients on a regular and ongoing basis. She had originally
allowed the accountant's percentages but once she had read
Interpretation Bulletin IT-514 entitled, "Work space
in home expenses", she found thereafter that she could not
do so.
[24] I believe this is a misinterpretation
of paragraph 18(12)(a) of the Act and of the
bulletin itself. That paragraph of the Act provides for
two different situations: in his domestic establishment, an
individual has (i) his principal place of business or
(ii) a place used exclusively for the purpose of earning
income from business and used on a regular and continuous basis
for meeting clients in respect of the business.
[25] The second case concerns a place that
is not the principal place of business because the individual
presumably has a principal place of business elsewhere than in
the self-contained domestic establishment in which he
resides.
[26] The case at bar involves the
application of subparagraph 18(12)(a)(i), not (ii).
Even Interpretation Bulletin IT-514 provides that the
principal place of business may be used for personal purposes
since it need not be used exclusively for business in order to
meet the requirement of paragraph 18(12)(a). The
relevant portion of paragraph 2 of that bulletin states:
. . . The room used by the contractor and the
farmer's work space could also be used for personal purposes
since they need not be used exclusively for the business in order
to meet the 1(a) requirement.
[27] It is also possible for an individual
who has his principal place of business at his home to determine
the business and personal use percentages for other rooms that
are not used exclusively as the main office but are useful for
the purposes of the business. On that point, the relevant portion
of paragraph 4 of that bulletin states:
... However, the reasonable basis should also take into
consideration the personal use, if any, of a work space that is
an individual's principal place of business as described in 2
above....
[28] In view of what I consider to be the
correct interpretation of subparagraph 18(12)(a)(i)
of the Act, the rental losses claimed must be allowed.
[29] Another point concerns kilometrage. The
appellant claims 85 percent of the number of kilometers
travelled in her car. The auditor allowed her 60 percent.
The car was purchased new on November 28, 1994, and when it
was sold on October 10, 1997, it had 46,600 kilometers
on it. The total number of kilometers for which the appellant was
reimbursed in the course of her business activities was 26,474,
representing 57 percent, which the auditor rounded out to
60 percent.
[30] Lee Bélanger, an accountant
from the appellant's accounting firm, analyzed the
kilometrage that the appellant might have travelled in cases
where that kilometrage was not reimbursed. She considered the
places where purchases had been made for business purposes, such
as book stores, and the business trips the appellant made for
which kilometrage was not reimbursed; she calculated
6,708 kilometers and, adding it to the above kilometrage of
26,474, obtained a total of 33,182 kilometers, representing
71.2 percent.
[31] The evidence showed that the appellant
made a number of business trips that were not reimbursed, either
for promotional purposes, to host conferences, or to acquire
materials she needed to write her books. She had to meet with
teachers, conduct research at libraries, meet with accountants
and go to book stores. I must also consider that the appellant
did not keep her day planners. I believe that an average of
70 percent would be reasonable in the circumstances.
[32] Counsel for the appellant asserts that
the waiver document is not valid for 1995 because the draft
assessment was not attached to the form signed by the appellant.
The waiver reads as follows (Tab 5,
Exhibit A-1):
. . .
WAIVER
The normal reassessment period referred to in
subsection 152(4) of the Income Tax Act, within which the
Minister may reassess or make additional assessments or assess
tax, interest or penalties under the Act is hereby waived for the
taxation year indicated above, in respect of:
[TRANSLATION]
All points and changes included in our draft assessment dated
November 30, 1998, and all subsequent amendments that will
have to be made to the capital cost allowance schedules.
. . .
[33] Counsel for the appellant argued that
the draft assessment should have been appended to the waiver in
order for that waiver to be valid. He stated that
subparagraph 152(4)(a)(ii) of the Act requires
that the waiver be filed in prescribed form. This is form T2029,
which requires that the matter or matters being waived must be
specified in the space provided in order for the waiver to be
valid.
[34] Counsel for the respondent argued that
the appellant had already thoroughly annotated the draft
assessment, as is shown in Exhibit I-2, that the
waiver was signed at the accountant's office and that the
appellant knew precisely what she was signing, that is to say, a
waiver of the limitation period for 1995 with respect to the
draft assessment.
[35] I refer to the reasons of Reed J.
in Solberg v. The Queen, 92 DTC 6448, at
page 6452, where she states that the appropriate approach to
interpreting a waiver is to seek to ascertain the intention of
the parties in the relevant circumstances. Having heard the
appellant and in the circumstances of fact described by counsel
for the respondent, I find that the appellant knew that she was
signing a waiver respecting the draft assessment dated
November 30, 1998, with which she was already very familiar.
I further find that it was not essential that the draft be
attached to the waiver for that document to be valid because it
was specifically referred to in the text of the waiver and the
parties had already read it.
[36] The other point raised concerned the
trips to Acapulco and Ogunquit. The tickets for Acapulco were
purchased on November 21 and 28, 1994, for $1,420.80 for a
stay starting on March 2, 1995. In her original return, the
appellant had claimed 50 percent and now claims
100 percent. Hotel expenses were $545. The trip to Ogunquit
was on May 19, 1995. The appellant stayed at the Sea Castle
Resort in Ogunquit and the amount claimed is $245. The appellant
contends that she worked on her texts during those trips and that
she had needed to get away in order to do so.
[37] Counsel for the appellant relied on the
decision by the Federal Court of Appeal in Lowe v. The
Queen, [1996] F.C.J. No. 319, more particularly the
following passage:
. . . The essential question in the present case, it
seems to me, is whether on the facts the principal purpose of the
trip was business or pleasure. Here it was found to be the
former. Any pleasure derived by the appellant must, in my view,
be seen as merely incidental to business purposes having regard
to the fact that the overwhelming portion of the appellant's
time in New Orleans was devoted to business activities.
[38] The purpose of the trip is a decisive
factor. The principal purpose must be business. In Lowe,
supra, the purpose was to establish and maintain business
relations with the company's clients.
[39] The purpose of the trip here was not to
meet clients or to collect the information needed to write a
book. This was not a trip to attend a conference or to take part
in a seminar. The purpose was to get away temporarily to write or
revise texts. These are expenses relating to a place of work.
[40] On the one hand, I find the purpose of
the trip to Acapulco was uncertain. Since that trip was planned
two months in advance, it is therefore doubtful it had been
planned for the purpose of working on texts. What may have
happened is that the appellant was unable to complete her
workload before leaving and was forced to work on the trip. It is
possible the appellant went to Ogunquit for a change of place of
work.
[41] On the other hand, even assuming that
the purpose of the trip was really to have an isolated place of
work conducive to the revision of texts, I do not believe there
are any statutory provisions providing for the deduction of trips
and stays of that kind. Expenses relating to places of work and
travel are governed by specific statutory provisions.
[42] With regard to the provisions
concerning place of work, we have seen earlier those governing
the principal place of business and the place used exclusively
for earning income from a business where they are located in the
individual self-contained domestic establishment. That expression
is defined as follows in subsection 248(1) of the
Act:
"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.
[43] That definition does not apply to the
temporary places of residence in question. In conclusion, the
travel and accommodation expenses relating to the isolated or
different places of work located in a temporary residence may not
be deducted.
[44] As to the penalties assessed under
subsection 163(2) of the Act, the evidence showed
that the appellant kept rather good books, that she generally
retained her documents, that she acted on advice from her
accountants and that she declared all her gross income. I do not
believe that the errors she may have made in estimating certain
expenses were tantamount to gross negligence.
[45] The appeals are allowed, without costs,
to the extent indicated in each point noted above.
Signed at Ottawa, Canada, this 4th day of April 2002.
J.T.C.C.
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