Docket: 2009-1687(IT)I
2009-1688(IT)I
BETWEEN:
CYNTHIA A. MURPHY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal
heard on October 18, 2010, at Edmonton, Alberta
Before: The Honourable
Justice Valerie Miller
Appearances:
|
For the Appellant:
|
The
Appellant herself
|
|
Counsel for the Respondent:
|
Marla Teeling
|
____________________________________________________________________
JUDGMENT
The
appeals from the reassessments made under the Income Tax Act (the “Act”)
for the 2004 and 2005 taxation years are allowed and the matter is referred
back to the Minister of National Revenue for reconsideration and reassessment as
follows:
1.
In the 2004 taxation year:
(a)
the Appellant incurred business
expenses totalling $4,729.07, which resulted in a business loss of $(529.07);
(b)
the Appellant incurred
work space in home expenses of $1,459.01 that are not deductible in the 2004
taxation year pursuant to paragraph 18(12)(b) of the Act, but may
be carried forward in accordance with paragraph 18(12)(c); and
(c)
the Appellant incurred
an interest expense in the amount of $478.62 on her student loan.
2.
In the 2005 taxation
year:
(a)
the Appellant incurred
business expenses totalling $3,167.33 which resulted in a business loss of
$(167.33);
(b)
the Appellant incurred
work space in home expenses of $1,652.29 that are not deductible in the 2005
taxation year pursuant to paragraph 18(12)(b) of the Act but may
be carried forward in accordance with paragraph 18(2)(c);
(c)
the Appellant incurred
an interest expense in the amount of $1,503.69 on her student loan; and
(d) the Appellant is allowed a deduction of
$1,369.70 from income pursuant to subparagraph 8(1)(i)(i) of the Act.
Signed at
Ottawa, Canada, this 4th day of November 2010.
“V.A. Miller”
Citation: 2010TCC564
Date: 20101104
Docket: 2009-1687(IT)I
2009-1688(IT)I
BETWEEN:
CYNTHIA A. MURPHY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller J.
[1]
The issues raised in
the pleadings in these appeals were whether the Appellant was entitled to
deduct expenses in excess of $2,300.36 and $841.72 in 2004 and 2005
respectively.
[2]
At the commencement of
the hearing of these appeals, counsel for the Respondent submitted a Summary of
Amounts Conceded which is reproduced below:
1. For the 2004 taxation year:
(a) the Appellant incurred business expenses totalling
$4,253.89, as detailed in the attached Schedule A, and resulting in a business
loss of $(53.89); and,
(b)
the Appellant incurred work space in home
expenses of $1,459.01 that are not deductible in the 2004 taxation year
pursuant to paragraph 18(12)(b) of the Income Tax Act, but may be
carried forward in accordance with paragraph 18(12)(c).
2. For the 2005 taxation year:
(a)
the Appellant incurred business expenses
totalling $3,167.33, as detailed in the attached Schedule B, and resulting in a
business loss of $(167.33);
(b)
the Appellant incurred work space in home
expenses of $355.53 that are not deductible in the 2005 taxation year pursuant
to paragraph 18(12)(b) of the Income Tax Act but may be carried forward
in accordance with paragraph 18(12)(c); and
(c) the Appellant is allowed a deduction of $1,369.70 from
income pursuant to subparagraph 8(1)(i)(i) of the Income Tax Act.
[3]
As a result of these
concessions, the Appellant is now disputing only those matters which I will
discuss below.
[4]
A brief description of
the Appellant’s work history as a lawyer is as follows. She started to practice
law in 2000. From November 2000 to sometime in 2002, she practiced law in British Columbia. In 2002, she commenced to practice in Alberta as a sole practitioner. In addition to her practice,
she did consulting work for the province
of Alberta and research in
the area of personal injury and corporate law for other lawyers. As a sole
practitioner, she mainly did child welfare and criminal cases. Her clients did
not go to her office which was in her home; she met them at the court house.
[5]
In October 2004, the
Appellant became employed as a legal aid lawyer with the province of Saskatchewan. It was her evidence that she did not
fully wind down her practice as a sole practitioner until March 2005 and her
employment with the province
of Saskatchewan ended in June
2005.
Business Use of Home
[6]
The Appellant does not
dispute the amounts conceded by the Minister of National Revenue (the
“Minister”) for the utilities, insurance, property tax, condo fees and mortgage
interest[1].
Her only disagreement is with the percentage of those amounts which were
allowed by the Minister. It is her position that she used 26% of her home for
business purposes; whereas, the Minister has conceded that she used 17% of her
home for business purposes.
[7]
The Appellant’s only
office was in her home. She used two of the three bedrooms as an office and
together they measured 200 square feet. It is the Appellant’s position that her
office space was 26% of the area of the living space in her home. The living
space was 1259.4 square feet and it consisted of only the first and second
floor in her home. She did not use her basement for business purposes and its
area should not be considered when calculating the percentage of her home that
was used for business.
[8]
It was the Respondent’s
position that the Appellant used a room in her basement for storage of her
files. This room measured 132 square feet. The total area of the Appellant’s
home, including the basement, was 2,091 square feet. The Appellant used 332
square feet of her home for business purposes and this was approximately 16% of
her home. However, the Minister has conceded that 17% of the Appellant’s home
was used for business.
[9]
The Appellant’s
calculations are incorrect. The result of her calculations is that 15.88%
(200/1259.4) of her home was used for business. If I accept the Appellant’s
evidence that she did not use her basement for storage, then the actual square
footage of her home that was used for business was 9.56% (200/2091). She cannot
ignore the basement area in the calculation of the square footage of her home.
[10]
In 2005 the Appellant
did not include an amount for mortgage interest expense in her calculation for
business use of home. At the hearing she estimated that this expense was $4,700
in 2005. Counsel for the Respondent accepted the estimation.
Interest Expense for Student Loan
[11]
The Appellant submitted
documents which confirmed that, in 2004 and 2005, she paid $478.62 and
$1,503.69 respectively as interest on her student loans and these amounts will
be allowed.
Motor Vehicle
[12]
The Appellant stated
that she no longer disputed the amounts allowed for motor vehicle expenses for
2005. However, it was her position that she incurred $1,009 as motor vehicle
expenses in 2004. The Minister has conceded that the Appellant incurred motor
vehicle expenses of $500 in 2004. I note that in her 2004 income tax return,
the Appellant claimed a motor vehicle expense of $4,534.
[13]
The only receipts
submitted by the Appellant for operating expenses for a motor vehicle were
those for gas purchases and repairs for 2004 and 2005. Some of the receipts for
2004 were duplicates and some were illegible. The receipts for January to
October 2004, which I could read, totalled $975.18. The Appellant is entitled
to deduct this amount for motor vehicle expenses in 2004.
Capital Cost Allowance
[14]
The Appellant has also
disputed the amount of Capital Cost Allowance (CCA) which the Minister has
conceded for the 2004 taxation year. In her 2004 income tax return, the
Appellant claimed CCA of $10,446; whereas, the Minister has conceded total CCA
of $271.99 for a computer and a fax machine. He has not allowed a deduction for
CCA for the motor vehicle owned by the Appellant on the basis that she was no
longer in business as of the end of 2004.
[15]
It was the Appellant’s
evidence that, on May 4, 2004, she traded in her GMC truck for a Ford 250. She
used the Ford 250 exclusively for business purposes. In August 2004, she
acquired an Infiniti for personal use and it was this vehicle which she used
when she was employed by Saskatchewan Legal Aid. She used the Infiniti to
travel within Saskatchewan and between Saskatchewan and Alberta.
[16]
It was the Appellant’s
position that her law practice did not cease when she became employed by
Saskatchewan Legal Aid. She continued to have carriage of a litigation file
from Nelson, British Columbia. This file was litigated in June 2004 and
she appeared in court in March 2005 in Nelson, B.C. on the cost application for
this file.
[17]
I find that the
Appellant ceased her business as a sole practitioner in October 2004 when she
became an employee of Legal Aid Saskatchewan. Although she stated that she was still
performing tasks for her clients at the end of 2004, she was unable to
substantiate her statement. In 2004, all income that she earned after October
was employment income. The Appellant was not carrying on a business; she was
tidying up her affairs after she took employment as a legal aid lawyer. She
tendered a log book for 2004 but I have given no weight to this evidence as it
was only produced in 2007 at the audit stage of this case.
[18]
Paragraph 13(7)(a) of
the Income Tax Act and section 1100 of the Income Tax
Regulations read as follows:
13(7) Rules applicable -- Subject to subsection 70(13), for the
purposes of paragraphs 8(1)(j) and (p), this section, section 20
and any regulations made for the purpose of paragraph 20(1)(a),
(a) [change in use from income-producing] -- where a taxpayer, having acquired property
for the purpose of gaining or producing income, has begun at a later time to
use it for some other purpose, the taxpayer shall be deemed to have disposed of
it at that later time for proceeds of disposition equal to its fair market
value at that time and to have reacquired it immediately thereafter at a cost
equal to that fair market value;
…
1100. (1) For
the purposes of paragraphs 8(1)(j) and (p) and 20(1)(a) of
the Act, the following deductions are allowed in computing a taxpayer's income
for each taxation year:
(a)
rates -- subject to subsection (2), such amount as the taxpayer
may claim in respect of property of each of the following classes in Schedule
II not exceeding in respect of property
(x) of Class
10, 30 per cent,
…
of the
undepreciated capital cost to the taxpayer as of the end of the taxation year
(before making any deduction under this subsection for the taxation year) of
property of the class;
[19]
As I have found that
the Appellant was not carrying on a business after she took employment with
Saskatchewan Legal Aid, it follows that she is not entitled to capital cost
allowance for the Ford 250. The moment the Appellant ceased her business in
October 2004, there was a change in use of the Ford 250. In accordance with
paragraph 13(7)(a) of the Act, the Appellant is deemed to have
disposed of the Ford 250 in October 2004. As a result, there is no
undepreciated capital cost in class 10 as of the end of the 2004 taxation year
from which the Appellant can claim CCA.
Costs
[20]
The Respondent has made
an application for costs in this appeal on the basis that the Appellant has
unduly delayed the prompt and effective resolution of this appeal. In support
of its application, the Respondent submitted the affidavit of Pat Chmilar,
auditor with the Canada Revenue Agency (CRA). The Appellant did not ask for
costs but opposed the Respondent’s cost application and she relied on her own
affidavit. I told both parties that I would not read the affidavits until after
I had made my decision on the issues raised by the Appellant.
[21]
On reading the
affidavits, I am informed that counsel for the Respondent had sent several letters
to the Appellant requesting the documents to support the expenses she claimed.
The earliest letter was dated July 30, 2009 and the last letter was sent on
January 22, 2010. The Appellant had problems locating the documents requested
because she had moved in December 2008 and many documents were lost. However,
on January 27, 2010, she did send counsel those documents which she had found.
[22]
These appeals were set
for hearing before Pizzitelli J. on February 17, 2010. He changed the format of
the hearing and held a pre-trial conference on that date. At the conclusion of
the pre-trial conference, the parties were instructed to attempt to negotiate a
settlement and report back to the Court by April 26, 2010. The parties met on
March 22, 2010 and they reached an agreement subject to the Appellant
furnishing further information and documentation to confirm student loan
interest and mortgage interest.
[23]
Counsel for the
Respondent drafted Minutes of Settlement (the “Minutes”) based on the agreement
reached and sent the Minutes to the Appellant on April 14, 2010. The Appellant
decided that she would not sign the Minutes as she wanted CCA for the Ford 250
in 2004. In response to the Appellant, Counsel for the Respondent wrote the
following letter:
Thank you for your letter dated April 18, 2010. I am writing to
clarify the points raised in your letter.
Capital Cost Allowance (“CCA”) – the
disposal (change in use) of the class 10 asset in 2004 relates to the fact that
you were an employee at the conclusion of 2004 and first six months of 2005,
and not in business. As you will recall from our discussions at our meeting in
March, it is irrelevant which vehicle is listed on the CCA schedule; the
disposition (change of use) occurred because you were not in business at the end
of the 2004 taxation year. While you did not benefit from a CCA deduction for
2004 (because there was no business at the conclusion of the year), you
benefitted from a full year of depreciation in 2005, despite the fact that you
were an employee for almost half the year. You will also recall that any
receipts tendered with respect to the Nelson trip were allowed at 100%, despite
our agreement that the vehicle was used (otherwise) 50% for business purposes.
Mortgage – Please advise when you
anticipate having this documentation. I am reluctant to delay the settlement
beyond the date for us to communicate with the Court. This matter was
originally scheduled in February; you have had an additional two months to
procure the documents. Please note that the mortgage interest payments for your
residence are calculated in the Business Use of Home amounts. As your expenses
exceeded your business income, these amounts are not deductible in the 2004 or
2005 taxation years, and only available for carry-forward.
Principal Payments – Payments towards
principal (regardless of the reason) are not deductible expenses under the Income
Tax Act. Furthermore, payments to redeem your mortgage, while an employee,
because your husband was ill are personal living expenses, and disallowed
pursuant to paragraph 18(1)(h) of the Income Tax Act.
Kindly execute the documents enclosed with my previous letter or
provide the requested additional documentation. We are required to communicate
with the Court by April 26, 2010, as to whether the matters will settle
or if we require a new hearing date. I look forward to hearing from you.
[24]
I have reviewed the
Minutes and the amounts negotiated were more favourable to the Appellant than
the outcome of this hearing. However, in an informal appeal, costs can only be
granted to the Respondent in accordance with subsection 10(2) of the Tax
Court of Canada Rules (Informal Procedure) which reads:
10(2) The Court may award costs to the respondent, in an
amount not exceeding the amounts listed in section 11, only if the actions of
the appellant unduly delayed the prompt and effective resolution of the appeal.
[25]
I do not read subsection
10(2) as requiring the Court to consider a settlement offer when exercising its
discretion to award costs. I acknowledge that the Appellant took considerable
time to submit documents which supported the interest she paid on her mortgage.
However, I accept her evidence about the personal difficulties which she faced
both because of her husband’s illness and her own illness. The Appellant wrote
to ING Mortgage in March 2010 to get confirmation of the amount of mortgage
interest expense she had paid in 2004 and 2005. She received confirmation of
the amount she had paid in 2004 only. According to the Appellant, in 2008, she
had provided the CRA with the documents which proved the amount of interest she
had paid on her student loans.
[26]
The Appellant would have
been wise to accept the settlement proposal; but, under the circumstances, I
decline to award costs to the Respondent.
[27]
The appeals are allowed to
give effect to the concessions made by the Respondent; to increase the motor
vehicle expenses to $975.18 in
2004; to include mortgage interest expense in the amount of $4,700 in the
calculation for the business use of home in 2005; and, to allow a deduction for
the student loan interest paid in the amount of $478.62 and $1,503.69 in 2004
and 2005 respectively.
Signed at Ottawa,
Canada, this 4th day of November 2010.
“V.A. Miller”
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