Citation: 2010 TCC 484
Date: 20101112
Docket: 2009-2765(IT)I
BETWEEN:
MICHAEL LIPPERT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers J.
[1]
The Appellant is
appealing reassessments for his 2004 and 2005 taxation years. His tax returns
for both those years were initially assessed on June 28, 2005 and July 10, 2006
respectively. In computing his income for both those years, the Appellant
reported net business income of $31,111.55 and $30,029.47 respectively, as
detailed below.
Please see table on pages
2 and 3.
[2]
The Minister of
National Revenue (the Minister) reassessed the Appellant on May 3, 2007 for
both taxation years and, in doing so, increased the Appellant’s net business
income to $94,223.35 and $86,598.72 respectively by reducing the total expenses
as shown above. The expenses were disallowed by the Minister as either not having
been incurred or, if incurred, as not having been for the purpose of gaining or
producing income from a business or property.
[3]
The Minister also
assessed penalties pursuant to subsection 163(2) of the Income Tax Act
(the Act) of $7,065.03 and $3,544.76 for the 2004 and 2005 taxation years
respectively, as detailed above, on the amounts of $55,829.85 and $28,053.03.
He assessed in addition $1,641.40 and $1,601.20 of Canada Child Tax Benefit
overpayments to the Appellant’s spouse.
[4]
In filing his notices
of objection, the Appellant submitted, in support of his objections, amended
business income and expense statements requesting that the net business income
be revised to $26,250.24 and $15,190.62 for the 2004 and 2005 taxation years
respectively, as detailed below. These amendments became necessary when the
Appellant lost the data from his computer.
Please see table on pages 5
and 6.
[5]
The Minister confirmed
the reassessments on May 27, 2009 on the basis that expense amounts of
$63,111.80 and $56,569.25 originally claimed by the Appellant were not incurred
to gain or produce income from a business or property within the meaning of
paragraph 18(1)(a) of the Act, and that the Appellant knowingly or under
circumstances amounting to gross negligence, in carrying out a duty or
obligation imposed under the Act, made a false statement or omission in
his income tax returns for the 2004 and 2005 taxation years, within the meaning
of subsection 163(2) of the Act.
[6]
The Appellant provides courier
services and operates his business as a sole proprietor under the name of
Lippert Transportation. He works under a contract for services with DHL Express
(Canada) Ltd. He has a small office in his home,
which will be discussed later in these reasons, and a warehouse situated
approximately 15 kilometres from his home. To provide the services, the
Appellant uses different vehicles. He uses a Freightliner truck, which is
parked at the warehouse. He used another vehicle, called a Hino, but only did
so until March 2004. The Appellant did not use that vehicle for business
purposes in either of the taxation years under appeal. The two other vehicles
used by the Appellant are a Toyota 4Runner and a Toyota Matrix. At the time
of the audit, the Appellant told the auditor that the 4Runner was used for
business purposes 65% of the time and that the Toyota Matrix was not for
business purposes as it was used by his wife. At trial, he testified that
he drove the Matrix and that his wife drove the 4Runner. He used the Matrix
to drive from his office to the warehouse.
[7]
The Appellant’s wife
testified that the 4Runner was her vehicle during both taxation years, that it
was for personal and family use, but that she sometimes did use it for business
purposes in assisting the Appellant with deliveries. She did not keep a logbook
and was unable to determine a percentage of personal versus business use for
that vehicle. If the Appellant was mistaken when he told the auditor which
vehicle he used for business purposes, I can only assume that, notwithstanding
his mistake, the vehicle actually used was used 65% of the time for business
purposes, as he admitted that percentage stated in subparagraph 8(h) of the
Reply, which should refer to the Matrix instead of the 4Runner.
[8]
The gross income
reported by the Appellant is not disputed, nor are the subcontract expenses as
determined by the auditor during the audit. I will deal with each expense in
the order in which it appears in the Reply to the Notice of Appeal.
Business Taxes and Fees
[9]
The Appellant admitted
that he only incurred $964.53 and $1,272.88 of business taxes and fees, as determined
by the auditor for the 2004 and 2005 taxation years respectively, to earn
income from a business or property. The expenses that were denied were for
nutritional supplements, Costco memberships, clothing, shoes, alterations,
lottery tickets and gym memberships. The Appellant testified that uniforms were
supplied, but said that he supplied hats, gloves and shoes. He could not
explain why two gym memberships were claimed for 2004. He admitted to buying
personal items and groceries at Costco and could not explain the lottery
tickets. No numbers were provided that could assist the Court in any way in
this regard. The expenses were therefore properly disallowed.
Computer Costs
[10]
The computer costs of
$779.95 claimed by the Appellant for the 2004 taxation year were denied and
reduced to $52.95. None were claimed for the 2005 taxation year. The Appellant
could not provide any explanations to the Court to justify the amounts claimed
under computer costs, nor was he able to explain the computer equipment used
for business purposes in 2004. The expenses were properly reduced and the
reduced amount properly assessed.
Delivery and Freight
[11]
There is no dispute
regarding this item.
Equipment Rental, Insurance, Maintenance
and Repair Expenses
[12]
The Appellant admitted
subparagraphs (q), (r), (s) and (t) of the Reply to the Notice of Appeal
pertaining to this expense. They read as follows:
(q) The Appellant incurred $2,211.12 and
$2,199.12 for insurance in 2004 and 2005, respectively, for the Freightliner;
(r) The Appellant incurred $342.98 and $991.90,
respectively, for insurance for the Toyota 4Runner for the purpose of gaining or producing income in the 2004
and 2005 taxation years;
(s) $135.00 of general liability insurance
incurred in 2005 was allowed as part of the total allowable expenses of
$29,096.54;
(t) The Appellant incurred $5,346.01 and
$5,360.24 for maintenance and repairs in 2004 and 2005, respectively, for the
Freightliner and the Toyota
4Runner.
[13]
Subparagraph (p) was denied
on the basis that the equipment rental expenses for the Hino and the Toyota
Matrix were not, according to the appellant, incurred to earn income. The evidence
reveals that the Hino was not used for business purposes in either taxation
year and it turns out that the Toyota Matrix rather than the 4Runner was used by
the Appellant for business purposes as the Appellant had misinformed the
auditor regarding the use of the latter. The Toyota
4Runner is therefore the one that was not used for business purposes, except on
a few occasions that neither the Appellant nor his spouse could specify. The
auditor allowed in their entirety the expenses pertaining to the 4Runner and allowed
none for the Toyota Matrix. In order for expenses for the Matrix to be allowed,
it will be necessary to reduce those allowed for the 4Runner. I do not have
evidence before me that can assist in such a determination, and am satisfied
that the appellant has been allowed an expense amount of fairly equal value. As
for the Freightliner, the expenses allowed for insurance, maintenance and
repairs for the two taxation years at issue are to remain unchanged. This item
was therefore properly assessed.
Fuel Costs
[14]
The Appellant has
admitted all the facts assumed by the Minister under this heading. The amount
allowed will remain unchanged.
Interest Expense
[15]
As regards this
heading, the Appellant agreed that part of the amount claimed in relation to
Freightliner loan was with respect to principal payments and he agreed with the
adjustment made by the auditor. Other interest was disallowed on a loan from the
Canadian Imperial Bank of Commerce on the basis that the loan was not for the
purpose of gaining or producing income from a business or property. The Appellant
was unable to explain why and for what purpose the loan was taken out.
[16]
Interest on credit cards
was also disallowed by the auditor for the same reason. The Appellant believes
the interest was charged on fuel purchases but he did not present any
statements that could confirm this and possibly enable the Court to determine
how much of that interest could be attributed to fuel charges and for what
vehicle. As for bank fees relating to overdraft charges and overdraft interest,
the Appellant had in both the 2004 and 2005 taxation years only one bank
account for both business and personal use. There is no evidence to assist the
Court in determining what is applicable to each of these uses. The Appellant
has not met his burden of proof and the interest expenses as audited shall
remain unchanged.
Legal and Accounting
[17]
The Appellant admitted
the audited amount under this heading.
Consulting Services (Management and
Administration Fees)
[18]
The Appellant claimed under
this heading an expense of $25,000 for the 2004 taxation year and $2,000 for
the 2005 taxation year. Both expenses were disallowed by the auditor as not having
been incurred to earn income from a business or property.
[19]
The Appellant could not
explain the expense of $25,000 for the 2004 taxation year other than to say it
was an amount paid to a company he had incorporated known as Northern Igloo Computers
Ltd. The invoice (Exhibit R-1) is dated December 31, 2004 and is for consulting
services as per the contract for the year ending December 31, 2004. The Appellant’s
accountant testified that the Appellant wanted to diversify because of his failing
health and also because a corporation can provide better tax benefits. The
accountant and the Appellant agreed that Northern Igloo Computers Ltd. would
invoice for consulting fees but no consulting services were provided. Northern
Igloo Computers Ltd. did not file a tax return for 2004 and, in fact, had been
dissolved in 1997, which is the year in which it filed its last tax return and
deregistered for GST purposes. It did not exist at the time of the contract. The
$25,000 was actually never paid to Northern Igloo Computers Ltd. That expense
was therefore properly disallowed.
[20]
As for the consulting
services of $2,000 for the 2005 taxation year, the Appellant said it was salary
paid to his wife for helping him out during that year. It turns out, though,
that the invoice of $2,000 provided to the auditor to support that expense was
issued by Northern Igloo Computers Ltd. to the Appellant's wife. As mentioned above,
Northern Igloo Computers Ltd. was non-existent in 2005, and no funds were
actually transferred. The expense was therefore properly disallowed as it had
nothing to do with the Appellant's business.
Meals and Entertainment and Subsistence
Expenses
[21]
The Appellant claimed an
amount of $1,271.95 under this heading for the 2004 taxation year, which was
disallowed; he claimed nothing for the 2005 taxation year, but the auditor
allowed him $115 for that year. The Appellant testified that he walks
approximately eight kilometres a day and does do deliveries on foot. He could
not establish the amount of money he spends on food in a day other than to say
he eats more when he works. The accountant testified that he simply “ballparked”
the number for that expense. The auditor was not satisfied that the Appellant
was using food and drink as a replacement for automobile fuel when making his
deliveries on foot. The evidence before me has not satisfied me in this regard either.
The expense was properly disallowed.
Office Expenses
[22]
There is no dispute regarding
this item for the 2004 taxation year. For the 2005 taxation year, the amount
claimed by the Appellant was substantially reduced by the auditor, and the
Appellant was unable to substantiate any of the expenses disallowed, thus
leaving the Court with no choice but to conclude that the claim was properly
disallowed.
Rent
[23]
The Appellant admits
that no expense was incurred for rent in the 2004 taxation year. The Appellant
had claimed $525 under this heading. The expense was therefore properly
disallowed. No rental expense was claimed for 2005.
Supplies
[24]
The expense for supplies
claimed by the Appellant for the 2004 taxation year was allowed by the auditor.
As for the 2005 taxation year, the Appellant claimed $5,014.03, all of which
was disallowed. The Appellant did not provide the Court with any documents to
substantiate the expenses claimed under this heading for 2005, but merely
stated that he incurred expenses for supplies. The expense was therefore
properly disallowed.
Security Expense
[25]
The Appellant admits
that the expense claimed for the 2005 taxation year under this heading was not
incurred to earn income from a business or property. No security expense
was claimed for the 2004 taxation year. The expense was therefore properly
disallowed.
Telephone Expenses
[26]
The expense of
$1,611.20 claimed by the Appellant under this heading for his 2004 taxation
year for the use of his cell phone was allowed. For his 2005 taxation year, the
Appellant claimed $3,771.82, all of which was disallowed because it included
his home phone and other personal or living expenses. The Appellant did not
present any evidence to substantiate the amount he claimed or to establish that
the amount included his cell phone expenses. He also admitted that he had
claimed this expense for the entire house and not just for his home office. The
evidence adduced by the Appellant is insufficient to allow me to apportion the
amount between business and personal use. I would allow, though, a cell phone
expense for 2005 of the same amount as that for 2004, namely $1,611.20.
Business Use of Home Expenses
[27]
The claim under this
heading was broken down into different items, but it was the percentage assigned
to the personal portion and the business portion for these items that the
Appellant objected to. The office used for the business is located in the
basement of the Appellant’s home. The basement is approximately 700 square feet
in a two-storey house that the Appellant says has a floor area of 1,495 square
feet. The Appellant claimed 20% of his home expenses as a business expense.
[28]
When he met with the
auditor, the Appellant told him that he uses one-third of the total square
footage for his home office but that he believed his accountant claimed only
10%.
[29]
It turns out, though,
that part of the basement is used for a laundry and utility room and another
part for a pantry, and that a substantial part is empty. The auditor used the Appellant’s
numbers of 20% of a 1,000 square-foot area for the basement or 200 square feet,
but took the total square footage of the house, namely 2,195 square feet,
to come up with the 9% figure for business use. That 9% business use figure
appears to me to be appropriate in these circumstances, and the total business
use of home expense was appropriately calculated by the auditor since the
Appellant did not submit any evidence to prove that the disallowed expenses
were incurred at all, or if incurred, that it was for the purpose of earning
income from a business or property.
Penalties
[30]
In order to assess
penalties under subsection 163(2) of the Act, the Minister must
establish on a balance of probabilities that the Appellant knowingly, or under
circumstances amounting to gross negligence, has made or has participated in,
assented to or acquiesced in the making of, a false statement or omission in a
return, form, certificate, statement or answer filed or made in respect of a
taxation year for the purposes of the Act.
[31]
The Appellant kept the
books and records for his business and says he did so to the best of his
ability, although he did acknowledge that his bookkeeping was not good. As for
the tax returns, they were prepared by his accountant, but were based on the
information and data the Appellant provided. The Appellant acknowledged that he
was aware that he was required to retain records to support claimed expenses.
[32]
The evidence has
clearly disclosed that the Appellant claimed business expenses that were not
incurred, claimed personal expenses as business expenses, overstated business
expenses, and claimed as management fees amounts paid to his spouse or to a
company that had been dissolved since 1997 and which were for all intents and
purposes fictitious.
[33]
The penalties were
assessed on five disallowed expenses claimed by the Appellant, namely: the
interest expense claimed that included principal payments, the management fees claims
that were based on fictitious invoices, the supplies expenses that were not substantiated,
the business use of home expenses and the equipment rental expense. In my
opinion, these kinds of expense claims are clearly not permissible and there has
been no explanation provided that could lead me to believe that there was just
an honest mistake. The Appellant, in my opinion, was totally indifferent. The
auditor did not calculate penalties on other claimed expenses that were
disallowed. With regard to those expenses, he gave the Appellant the benefit of
the doubt as the claims may have been suggested by his accountant.
[34]
Considering all the
circumstances, the Respondent has established on a balance of probabilities
that the Appellant’s conduct amounted to gross negligence in that he either
participated or acquiesced in the making of false statements in his 2004 and
2005 tax returns and that he was totally indifferent as regards whether or not
he could actually claim some of the expenses he did claim. The Minister was
justified in assessing penalties on the disallowed expenses. The appeal for
2004 is dismissed. The appeal for 2005 is allowed
in part and the assessment is referred back to the Minister for reconsideration
and reassessment.
Signed this 12th
day of November 2010.
"François Angers"
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