Citation: 2011 TCC 227
Date: 20110622
Docket: 2009-1277(IT)I
BETWEEN:
GARNETT BAILEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Little J.
A. FACTS
[1]
The Appellant and his
brother, Ronald Bailey, were equal partners in a landscaping business that
operated under the name of Blue Mountain Peak Landscaping Services (the
“Partnership”).
[2]
The Partnership carried
out landscaping work for individuals and commercial customers in the City of Calgary and the surrounding area.
[3]
The 2004 taxation year
was the second year of business operation for the Partnership.
[4]
Subsequent to the 2004
taxation year, the Appellant and his brother incorporated their landscaping
business.
[5]
In computing income for
the 2004 taxation year, the Appellant reported a net business loss in the
amount of $44,646.49.
[6]
The Minister of
National Revenue (the “Minister”) reassessed the Appellant on December 11, 2006
to disallow the business loss of $44,646.49 and assessed net business income in
the amount of $36,471.00.
[7]
The Appellant filed a
Notice of Objection.
[8]
By Notification dated
December 4, 2008, the Minister confirmed the reassessment for the 2004 taxation
year.
B. ISSUE
[9]
The issue is whether
the Partnership is entitled to deduct any amounts in excess of the amounts
allowed by the Minister in determining the income of the Partnership for the
2004 taxation year.
C. ANALYSIS AND DECISION
[10]
While carrying out an
audit on the Partnership for the 2004 taxation year, the Minister made a number
of conclusions. The conclusions are outlined in the Minister’s Reply, dated
November 6, 2009. The Reply contains the following comments:
I. Undeclared Revenue
1. Except for the
income earned by the Partnership, the Appellant had no other sources of income
in 2004.
Comment: The parties agreed that this statement is correct.
2. The Minister
maintains that there were unknown deposits to the business bank account of the
Partnership in the amount of $6,856.93.
3. The Minister
maintains that the contributions that were made to the Partnership bank account
totalled $32,898.47 and of this amount, $19,538.13 was made through personal
debt financing.
4. The Minister
maintains that revenue earned by the Partnership exceeded revenue reported by
the Partnership by $20,217.27. According to the Minister, the amount of
$20,217.27 is made up as follows:
Contributions made to the
Partnership $32,898.47
Unknown deposits to business bank
accounts 6,856.93
Total: $39,755.40
Less: Contributions to Partnership
through
debt financing 19,538.13
Unreported Sales: $20,217.27
Comment: I have concluded that the Appellant did not produce sufficient
evidence to establish that the Minister was incorrect in his conclusions. This
item should not be changed.
II. Opening Inventory
5. The Minister
maintains that the Partnership claimed opening inventory in the amount of
$13,717.69.
6. Of the total amount
claimed by the Appellant as the opening inventory, the amount of $8,922.25
represented the purchase of equipment and not inventory.
7. Amounts claimed by
the Partnership in excess of $8,922.25 were not incurred.
Comment: I have concluded that the Minister was correct in removing
the amount of $8,922.25 from the opening inventory. In my opinion, the amount
of $8,922.25 should be added to the Partnership’s capital cost allowance
schedule. I have also concluded that the following amounts should be added to
the Partnership’s capital cost allowance schedule:
Arn’s Equipment – Invoice #
100751 $ 1,743.83
Arn’s Equipment – Invoice #
100457 12,497.39
Arn’s Equipment – Invoice #
100748 11,422.25
Total (see Exhibit A-10): $25,663.47
(See capital cost allowance schedule
at paragraph XV, on page 9.)
III. Advertising
(Note: Amended
from original Reasons dated April 28, 2011)
8. During the hearing,
the Appellant filed invoices issued by Super Pages which indicated that the
following amounts were paid in 2004 for advertising (Exhibit A-5):
Super Pages $650.99
310.00
Total: $960.99
The amount of
$960.99 will be allowed as an advertising expense.
IV. Business Tax, License and Dues
9. The Minister
maintains that the Partnership incurred expenses with respect to business tax,
license and dues of no more than $574.65.
Comment: During
the hearing, the Appellant filed records showing that the following additional payments
were made:
Business Licence $150.00
Licence Fee $100.00
City of Calgary
Planning Service $300.00
(See Exhibit A-15)
I will allow an additional $550.00
in this category.
V. Fuel Costs (not including Motor
Vehicle)
(Note: Amended from
original Reasons dated April 28, 2011)
10. The Minister
maintains that the Partnership incurred fuel costs (other than for motor vehicles)
of no more than $3,537.00 (See Exhibit R-4).
Comment: The
Partnership should be allowed fuel costs (other than for motor vehicles) of $3,537.00.
VI. Insurance
(Note: Amended from
original Reasons dated April 28, 2011)
11. Further records on
insurance were filed with the Court during the hearing. I am
satisfied that the Partnership is entitled to claim the following additional amounts
for insurance:
Tax year insurance for
2004 $ 5,253.96
WCB insurance
1,761.08
Insurance on the two
leased Silverado vehicles
($5,240 at 75%)
3,930.00
Total: $10,945.04
The amount of $10,945.04
is allowed as an insurance expense.
VII. Management and Administration
Fees
12. The Minister
maintains that the amount of $46,000.00 claimed by the Partnership as
management and administration fees was in respect of drawings by the Appellant.
13. The Minister also maintains
that management and administration fees that were claimed by the Partnership
were not incurred.
Comment: During
the hearing, the Agent for the Appellant stated that she agreed with the
Minister on this point.
VIII. Meals and Entertainment
14. The Minister
maintains that the amount of $1,406.78 claimed by the Partnership as meals and
entertainment was not incurred and, if incurred, was personal.
Comment: It
was established that only 50 percent of the actual cost was claimed. I will
agree with the claim of $1,406.78 and allow the Appellant a deduction of
$1,406.78.
IX. Motor Vehicle
Expenses
15. The Minister
maintains as follows:
a)
the business of the
Partnership was seasonal – the majority of the work being carried out during
eight months of the year and mainly carried out in or around Northwest and
Northeast Calgary and the Town of Cochrane, Alberta;
b)
in addition to working
as a partner in the Partnership, Ronald Bailey was also employed on a
full-time basis during the 2004 taxation year and because of his outside
employment, Ronald Bailey did not work as many days for the Partnership as
the Appellant did;
c)
the Partnership leased
a 2003 Chevrolet Silverado and a 2004 Chevrolet Avalanche (the “Leased
Vehicles”). The Appellant claims that the Leased Vehicles were used by the
Appellant and Ronald Bailey in carrying out the business activities of the
Partnership;
d)
the Appellant and
Ronald Bailey did not maintain any records with respect to the following:
i)
personal kilometres;
ii)
business kilometres;
and
iii)
total kilometres driven
in the year.
e)
some of the amounts
claimed as motor vehicle expenses for the Leased Vehicles were for personal use
of the Leased Vehicles by the partners and were not business expenses of the
Partnership;
f)
some of the amounts
claimed as motor vehicle expenses were with respect to other personal vehicles
that were not used for business activities of the Partnership;
g)
some amounts that were
claimed as business are motor vehicle expenses that were not incurred in the
business activities of the Partnership;
h)
no more than 75 percent
of the motor vehicle expenses that were incurred by the Partnership could
reasonably be considered to have been incurred in the course of the business
activities of the Partnership; and
i)
motor vehicle expenses
of no more than $25,666.00 were incurred for the purposes of the business activities
of the Partnership.
Comment: During
the hearing, it was stated that the total amount claimed for motor vehicle
expenses in 2004 was $34,530.00. Since the Appellant was allowed to claim 75
percent of these expenses as business expenses, he is entitled to claim his share
of $25,897.00 or $12,948.75.
X. Office
Supplies
16. The Minister said
that the Partnership incurred office expenses of no more than $812.24 and any
other expenses claimed as office expenses were not incurred.
Comment:
The Appellant did not provide any evidence to convince me to change the
Minister’s position.
XI. Supplies
17. The Minister
determined that the Partnership incurred expenses in respect of supplies of no
more than $8,381.29 and any other expenses claimed as supplies were not
incurred.
Comment:
The Appellant did not provide any evidence to convince me to change the
Minister’s position. The amount of $8,381.29 will be allowed as the cost of
office supplies.
XII. Wages
18. The Minister
determined that the Partnership incurred expenses in respect of wages of no
more than $26,221.05.
Comment: I
agree with the Minister on this point.
XIII. Telephone and
Utilities
19. The Minister said
that the Partnership incurred expenses in respect of telephone and utilities of
no more than $4,080.00. Note: In a letter dated November 28, 2006, the
auditor said, “You made representation, per your revised T-124 that utility and
telephone expenses were $4,080. We are accepting your position.” (See
Exhibit R-4).
Comment: I
agree with the Minister on this point.
XIV. Charitable
Donations
20. The Minister said
that amounts totalling $2,250.00 that were claimed by the Partnership as
donations were personal expenses of the partners and were not incurred in the
business activities of the Partnership.
Comment:
When carrying out the audit, the auditor, Kerri Blanke, reviewed the charitable
donations and said in her letter dated May 31, 2006:
5. Charitable Donations
Charitable donations are not a partnership expense, and hence the
expense will be denied to the partnership in the amount of $2,250. The amounts
paid that qualify as charitable donations (i.e. paid to a registered charity)
will be added to the appropriate partners non‑refundable tax credits upon
request in writing to the auditor. (See Appendix H). (Emphasis Added)
Comment: I was advised that the auditor did not receive a
request from the Appellant.
Appendix H, of
Exhibit R3, contains a list of donations totalling $2,250.00. Of the amount of
$2,250.00, there is a reference to a payment of $635.00 to Money Mart. (There
was no evidence filed to establish that the payment to Money Mart was a
charitable donation.) The evidence indicated that most of the cheques were
signed by the Appellant and there is a reference to “TITHES” on the cheques
issued to the Garden Road Church.
I have concluded
that the Appellant is entitled to claim a credit for the following charitable
donations in 2004:
Amount
claimed: $2,250.00
Deduct
Money Mart: 635.00
Total: $1,615.00
XV. Capital Cost
Allowance
21. The Minister
maintains that the capital cost allowance claimed in the amount of $28,348.00
was with respect to two trucks that were leased by the Partnership.
22. The lease payments
that were paid in connection with the two leased trucks were claimed and
allowed as expenses in calculating motor vehicle expenses.
23. The Partnership
purchased equipment in the year at a cost of $8,922.25. The Minister maintains
that the Partnership was allowed to claim capital cost allowance on the equipment
calculated as follows:
1/2
of $8,922.25 x 20 percent = $892.00
Comment:
The Partnership should also be allowed to add to the capital cost allowance
schedule the amounts of $1,743.83, $12,497.39 and $11,422.25 as shown in
paragraph 7 above. In addition, no capital cost allowance should be
available for the two leased trucks since the leasing expenses that were paid
for the trucks were allowed as a business expense.
XVI. Legal, Accounting
and Other Fees
24. The Minister
determined that legal, accounting and other fees that were claimed by the
Partnership in the amount of $450.00 were not incurred.
Comment: I
agree with the Minister’s position on this point.
XVII. Landfill Expense
25. The Minister
determined that the Partnership incurred landfill expenses in the amount of
$1,678.02.
Comment: I
agree with the deduction of this amount.
XVIII. Equipment Rental
26. The Minister said
that the Partnership incurred equipment rental expenses in the amount of
$502.13. (See Exhibit R-4). This amount should be allowed.
Comment: Amounts totalling $8,922.25 that were claimed by the
Partnership as rental expenses were paid for the purchase of the equipment. See
capital cost allowance schedule, paragraph XV above.
XIX. Purchase
27. The Minister said
that the Partnership made purchases in the amount of $7,451.19.
Comment:
There should be no change to this item.
[11]
The appeal is allowed,
without costs and the Minister is to reassess to allow the deductions as shown
above.
[12]
Before closing, I want
to state that the Appellant’s records were not prepared properly. He did not
have proper records for automobile expenses and he had inadequate records for
meals, entertainment and various other business expenses. Many of the other
records were insufficient to permit a business deduction. In my opinion, the
Appellant was unsuccessful in many of his claims because of inadequate record
keeping.
Signed at Vancouver, British
Columbia, this 22nd
day of June 2011.
“L.M. Little”
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