Citation: 2010 TCC 208
Date: 20100416
Docket: 2009-2093(IT)I
BETWEEN:
RENATE CAROLINE VANDONKERSGOED NEE HOLZ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
EDITED VERSION OF TRANSCRIPT
OF REASONS FOR JUDGMENT
[delivered
orally from the Bench at Kelowna,
BC, on March 24, 2010]
Boyle J.
[1]
These are my oral
Reasons in this morning’s informal appeal heard in Kelowna
by Mrs. Van Donkersgoed against her 2004 through 2006 reassessments
in respect of her bed and breakfast tourist home operations.
[2]
Mrs. Van Donkersgoed
represented herself in this appeal. She is a widow of almost 70 and did a fine
job. Her credibility was not put in issue by the Crown and the Court fully
accepts the truthfulness of her testimony.
[3]
Mrs. Van Donkersgoed
operated a very successful bed and breakfast style tourist accommodation named
Villa Blanca in the rural mountainside of British Columbia’s Okanagan area. Following the devastating B.C. Anarchist Mountain forest fire
in July of 2003, her business was seriously adversely affected. For the several
years following that, the surrounding area, including the area adjacent to
Villa Blanca, was devastated and had lingering blowing ash and the smells of
the fire, ash and smoke. Mrs. Van Donkersgoed nonetheless continued
to operate Villa Blanca through 2006. Following the fire, business at Villa
Blanca was down 80 percent from years prior to the fire. It is not surprising
that losses resulted in these years. Nonetheless, Mrs. Van Donkersgoed
continued to fully maintain and market the business at Villa Blanca. She kept
it open and ready for guests throughout those years. However, she only had
guest bookings for somewhat more than 100 nights each year, and most of those
cancelled upon arriving in the area and seeing the devastation surrounding
Villa Blanca. She only had guests in Villa Blanca between 30 and 40 nights per
year in the three years following the fire.
[4]
The principal questions
raised in this appeal are (i) the extent to which paragraph 18(12)(b)
applies to restrict losses arising from the business use of one’s home, and (ii) whether
the allocation between business and personal use of expenses was correct.
[5]
Villa Blanca was a
three‑storey home of 4,868 square feet. The ground, basement level floor,
consisted of a large guest family suite, which was not used for any personal
purposes.
[6]
The main floor had two
guest rooms with bathrooms, living and dining rooms, a hot tub area, as well as
a kitchen. Only the kitchen on this floor was shared personal and business use,
as the third floor private residence did not have its own kitchen.
[7]
The third, top floor,
private area was entirely the personal living quarters of Mrs. Van Donkersgoed
and her late husband. This floor was 956 square feet, approximately one‑half
of the size of each of the other two floors. It had three large rooms for
living, dining and sleeping, and two bathrooms. Except for the need to use the
kitchen for meal preparation on the main floor, the top floor was the self‑contained
living quarters for the taxpayer and her husband.
[8]
Based on the square
footage of the property, the personal living quarters on the top floor
accounted for slightly less than 20 percent of the Villa Blanca. This does not
account for the use of the kitchen. After consulting with her chartered
accountant, who also testified, Mrs. Van Donkersgoed prepared her
business income statement throughout allocating 30 percent of the expenses
related to the upkeep of Villa Blanca as personal.
[9]
The taxpayer filed her
returns on the basis that paragraph 18(12)(b) did not apply to her
business. The Canada Revenue Agency (“CRA”) reassessed and applied
paragraph 18(12)(b) on the basis that the entire property was her
self‑contained domestic establishment. At the objection stage the CRA
reassessed to apply paragraph 18(12)(b) on the basis that the
ground floor suite did not form part of the self‑contained domestic
establishment.
[10]
I find that the self‑contained
domestic establishment at Villa Blanca comprised the top floor private
residence area only and none of that was used in her business, nor were any
expenses associated with that area deducted by her. The Villa Blanca set‑up
is remarkably similar to that in this Court’s 2007 decision in Denis v. The
Queen, 2007 TCC 656, 2008 DTC 2004. In Denis the
former Chief Justice Bowman held that a shared‑use kitchen does not
necessarily expand a self‑contained domestic establishment, nor does it
prevent the remaining private living quarters from being a self‑contained
domestic establishment. I wholeheartedly agree with our former Chief
Justice, and the other cases of this Court he referred to, and find that
reasoning entirely applicable on the particular facts of this case.
[11]
Mrs. Van Donkersgoed’s
appeal should be allowed to the extent of completely removing the application
of the paragraph 18(12)(b) loss restrictions.
[12]
As stated,
Mrs. Van Donkersgoed used a 30 percent allocation in respect of the
personal use portion of the Villa Blanca property related expenses. I find this
was entirely reasonable on the evidence, given that the private quarters constituted
less than 20 percent of the floor space. That allowed for the shared‑use
of the kitchen for meal preparation and similar factors that ought to be
recognized. The Crown said it felt a 60 percent allocation was perhaps more
reasonable, but I saw no evidentiary foundation for that.
Mrs. Van Donkersgoed’s appeal on this point is allowed and the
Minister will reassess to the extent that anything more than 30 percent of the
total Villa Blanca property related expenses, being insurance, interest,
maintenance and repairs, property tax and utilities, were treated by the CRA as
non‑deductible personal residence expenses. It appears from
paragraphs 11 (k), (l) and (m) of the Reply that no such adjustment may in
fact be necessary.
[13]
I am also satisfied on
the evidence of the taxpayer that her motor vehicle expense allocation of 70
percent to the business, 30 percent personal, was reasonable in the
circumstances. She described clearly the extent of her use of the vehicle in
obtaining supplies regularly, promoting her business at local tourism
establishments and tourist attractions, et cetera. She described the use of a
1995 half‑ton pick‑up suitable for rural mountainside gravel road
conditions, notwithstanding all of its apparent cost inefficiencies. The Crown’s
position that only about 30 percent should be allowed only recognized the
purchasing of supplies aspects since it was based entirely upon the number of
days that she had guests or last‑minute cancellations. I do agree that the
CRA properly disallowed the car rental expenses in her motor vehicle expenses
from her trips to Palm Springs and Los Angeles.
[14]
I am satisfied that the
modest amount of business‑related meals and entertainment were properly
accounted for in her testimony and her income statement filed with her return.
[15]
Adjustments, however,
are warranted to the travel expenses she claimed. I am not certain that
the Costa Rica birding trip of 2005 related to her
business, or to a new business she had started, or to a new business she was
only thinking of starting. It appeared to be a personal venture in considering
whether to start a new business. However, the Crown has indicated that perhaps
10 percent of it should be allowed. Accordingly, I will allow $1,000 of travel
expenses in 2005.
[16]
The 2005 Berlin trip related entirely to the taxpayer manning a local
British Columbia table at a major European tourism fair. She did not deduct
anything beyond airfare and travel expenses, as her room and board were
covered. She did not stay on before or after the three‑day fair. Accordingly,
her entire 2006 travel expense of just under $2,000 should properly be allowed
as a business expense.
[17]
Adjustments are also
warranted to her Costco and British Columbia Automobile Association membership
fees. These should only be 70 percent deductible, not the 100 percent claimed, nor
the 60 percent reassessed. Similarly, the 2006 appraisal costs were properly
reassessed at 70 percent instead of the 100 percent claimed.
[18]
The CRA should have
allowed all of the other business expenses claimed by Mrs. Van Donkersgoed
in her business income statements without adjustments and is ordered to
reassess accordingly.
[19]
I will be ordering the CRA
to reconsider and reassess in accordance with these reasons. I will order a
transcript of these reasons to be sent to each of the taxpayer and the
respondent with my judgment.
[20]
Mrs. Van Donkersgoed
has been substantially successful in her appeal today and I am awarding costs
in her favour fixed at $250.
[21]
Thank you
Mrs. Van Donkersgoed and Mr. Canzer. Thank you Madam Court
Reporter and Madam Registrar. We are adjourned.
Signed at Ottawa, Canada, this 16th day of April 2010.
"Patrick Boyle"
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