Citation: 2009TCC145
Date: 20090312
Docket: 2008-2736(IT)I
BETWEEN:
CHEEMA CLEANING SERVICES LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1] The Appellant
was reassessed to include unreported revenue in its taxation years ending
January 31, 2004 (its 2004 taxation year) and January 31, 2005 (its 2005
taxation year) and to deny various expenses (including a portion of the capital
cost allowance) that it had claimed in computing its income for these years. In
its Notice of Appeal, the Appellant stated that it was appealing the inclusion
of the amounts stated to be unreported revenue and the denial of the deductions
claimed for personal automobile expenses, capital cost allowance and travel
expenses. At the commencement of the hearing, the agent for the Appellant
stated that the Appellant was no longer contesting the denial of the deduction
for personal automobile expenses and therefore the only remaining issues were
in relation to the following adjustments that were made to the income of the Appellant:
|
Item
|
Taxation Year Ending January 31, 2004
|
Taxation Year Ending January 31, 2005
|
|
Unreported Revenue
|
$40,935
|
$42,339
|
|
CCA disallowed
|
$4,424
|
$3,097
|
|
Travel Expenses disallowed
|
$7,475
|
$3,220
|
Unreported Revenue
[2]
At the commencement of the hearing
counsel for the Respondent acknowledged that certain amounts that had been
included in the unreported revenue for the fiscal year ending January 31, 2005
should not have been included in that year. These amounts relate to two deposits
that were made on January 28, 2004 and hence, based on the position
of the Respondent in this matter, should have been included as unreported revenue
for the year ending January 31, 2004. These two deposits totaled
$19,000. As a result, the unreported revenue for the Appellant’s 2005 taxation
year should be reduced from $42,339 to $23,339.
[3]
Counsel for the Respondent argued
that these two amounts that should not have been included as unreported revenue
for the year ending January 31, 2005, should be taken into account in
determining whether the assessment for the year ending January 31, 2004 is
correct. However, the reassessment of the 2004 taxation year of the Appellant was
not based on these two amounts that total $19,000 being included in unreported
revenue for the Appellant’s 2004 taxation year. If the Respondent wanted to
include these amounts in the Appellant's income for its 2004 taxation year, the
proper procedure for the Respondent to follow would have been to reassess the Appellant
to increase its income by these amounts. The Respondent would then have to determine
whether the reassessment would be after the Appellant’s normal reassessment
period. If the reassessment would be after the Appellant’s normal reassessment
period, the restrictions contained in subsection 152(4) of the Income Tax
Act (the “Act”) would be applicable. By suggesting that these
amounts, which were not included in the reassessment for the year ending
January 31, 2004, should be taken into account in determining whether the
assessment for that year is correct, the Respondent is effectively trying to
reassess the Appellant and circumvent the provisions of subsection 152(4) of
the Act that would apply if the reassessment is after the Appellant’s
normal reassessment period.
[4]
Subsection 152(9) was added to the
Act to allow the Respondent to rely on an alternative argument for
supporting a reassessment after the normal reassessment period. This subsection
provides as follows:
152 (9) The Minister may advance an alternative
argument in support of an assessment at any time after the normal reassessment
period unless, on an appeal under this Act
(a) there is relevant evidence that the taxpayer is no longer able to
adduce without the leave of the court; and
(b) it is not appropriate in the circumstances for the court to order
that the evidence be adduced.
[5]
In Walsh v. The Queen, 2007
FCA 222, [2007] 4 C.T.C. 73, 2007 DTC 5441, Justice Richard of the
Federal Court of Appeal made the following comments in relation to subsection
152(9) of the Act:
18 The following conditions apply when the
Minister seeks to rely on subsection 152(9) of the Act:
1) the Minister cannot include transactions which did not form
the basis of the taxpayer's reassessment;
2) the right of the Minister to present an alternative argument
in support of an assessment is subject to paragraphs 152(9)(a) and (b), which
speak to the prejudice to the taxpayer; and
3) the Minister cannot use subsection 152(9) to reassess outside
the time limitations in subsection 152(4) of the Act, or to collect tax
exceeding the amount in the assessment under appeal.
[6]
Since these deposit amounts that
total $19,000 were not transactions that were included in determining the
reassessment for the Appellant’s 2004 taxation year, the provisions of
subsection 152(9) of the Act do not allow the Respondent to include
these transactions as support for its reassessment of the Appellant’s 2004
taxation year.
[7]
The unreported revenue amounts
were determined by examining the deposits made to the personal bank account of Jasbir
Cheema. Jasbir Cheema owns 50% of the shares of the Appellant and the balance
of the shares are held by his spouse. The Appellant carries on a janitorial
business. Jasbir Cheema started the business in 1986 and incorporated the Appellant
in 1992. During the years under appeal the Appellant had 150 – 200 customers in
the greater Toronto area (“GTA”). The Appellant now has 600 customers in
the GTA.
[8]
The gross income of the Appellant
for its taxation years under appeal was as follows:
|
2004 Taxation Year
|
2005 Taxation Year
|
|
$932,886
|
$1,314,261
|
[9]
There was a 41% increase in the gross
revenue of the Appellant from its 2004 taxation year to its 2005 taxation year.
The gross revenue of the Appellant is now close to $4 million. This significant
increase in gross revenue indicates that the business has expanded
substantially in the last few years.
[10]
In reviewing the bank account
information for Jasbir Cheema the Canada Revenue Agency (“CRA”) identified
various deposits that were questioned. The explanation provided by Jasbir
Cheema was that these deposits represented repayments of loans that he had made
to relatives and friends. He indicated that he did not charge interest on any
of these loans. During the course of the audit, he submitted affidavits from four
of the individuals to whom he stated that he had been provided loans. In these
affidavits the individuals stated that Jasbir Cheema had advanced them funds
and the affidavits set out the dates on which payments were made on the loans
and the amounts of such payments.
[11]
At the hearing three of the four
individuals who provided affidavits testified. The fourth individual was in India, and
therefore was unavailable to testify.
[12]
In each case, the individuals
confirmed during the hearing that Jasbir Cheema had advanced them significant
amounts and that he did not charge interest on these amounts. They also
confirmed that they had made various payments to him in cash during the years
under appeal as set out in their respective affidavits. The appeals officer for
CRA also testified. She stated that she included the deposits in question in
the revenue of the Appellant, because she was unable to match the payments that
these individuals stated that they made to Jasbir Cheema to the deposits in
question.
[13]
The following chart sets out the
payments that the individuals stated were made as well as the deposits in
question (except the deposits discussed separately below and the transfer of
$5,000 from the children’s account on January 28, 2004 that is part of the
$19,000 removed from the unreported revenue of the Appellant for its 2005
taxation year as discussed above).
2003
|
Date
|
Swaranjit
Gill
|
Harmeet Gill
|
Lakhwinder
Dhaliwal
|
Simarjeet
Cheema
|
Payments YTD
Available for Deposit
|
Deposits
|
|
|
|
|
|
|
|
|
|
Jan. 2003
|
|
|
|
$1,940.00
|
|
|
|
Jan. 30, 2003
|
$1,154.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Feb. 11, 2003
|
|
|
$1,900.00
|
|
|
|
|
Feb. 25, 2003
|
|
$2,000.00
|
|
|
$6,994.84
|
|
|
Feb. 25, 2003
|
|
|
|
|
|
$5,489.07
|
|
|
|
|
|
|
|
|
|
Mar. 2003
|
|
|
|
$1,740.00
|
|
|
|
|
|
|
|
|
|
|
|
Apr. 25, 2003
|
|
$2,000.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 2003
|
|
|
|
$3,460.00
|
|
|
|
May 30, 2003
|
$3,000.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 2003
|
|
|
|
$1,330.00
|
|
|
|
June 2, 2003
|
|
|
$3,000.00
|
|
|
|
|
|
|
|
|
|
|
|
|
July 4, 2003
|
$1,133.18
|
|
|
|
|
|
|
July 16, 2003
|
|
|
$2,600.00
|
|
|
|
|
July 25, 2003
|
|
$2,000.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aug. 19, 2003
|
|
|
$3,900.00
|
|
$25,668.95
|
|
|
Aug. 29, 2003
|
|
|
|
|
|
$2,444.53
|
|
|
|
|
|
|
|
|
|
Sept. 2003
|
|
|
|
$1,280.00
|
$24,504.42
|
|
|
Sept. 9, 2003
|
|
|
|
|
|
$3,000.00
|
|
|
|
|
|
|
|
|
|
Oct. 9, 2003
|
|
|
$1,200.00
|
|
$22,704.42
|
|
|
Oct. 23, 2003
|
|
|
|
|
|
$4,000.00
|
|
Oct. 24, 2003
|
$1,142.77
|
|
|
|
$19,847.19
|
|
|
Oct. 30, 2003
|
|
|
|
|
|
$1,695.00
|
|
|
|
|
|
|
|
|
|
Nov. 2003
|
|
|
|
$940.00
|
$19,092.19
|
|
|
Nov. 19, 2003
|
|
|
|
|
|
$1,846.40
|
|
|
|
|
|
|
|
|
|
Dec. 2003
|
|
|
|
$1,380.00
|
|
|
|
Dec. 4, 2003
|
|
|
$200.00
|
|
|
|
|
Dec. 8, 2003
|
|
$5,000.00
|
|
|
$23,825.79
|
|
|
Dec. 11, 2003
|
|
|
|
|
|
$4,000.00
|
|
Dec. 23, 2003
|
|
|
$300.00
|
|
|
|
|
Year end amount:
|
|
|
|
|
$20,125.79
|
|
2004
|
Date
|
Swaranjit Gill
|
Harmeet Gill
|
Lakhwinder Dhaliwal
|
Simarjeet Cheema
|
Payments YTD Available
for Deposit
|
Deposits
|
|
Carry forward from 2003:
|
|
|
|
|
$20,125.79
|
|
|
Jan. 26, 2004
|
|
$16,000.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Feb. 9, 2004
|
|
$3,400.00
|
|
|
|
|
|
|
|
|
|
|
$39,525.79
|
|
|
Mar. 2004
|
|
|
|
|
|
$400.00
|
|
|
|
|
|
|
|
|
|
Apr. 5, 2004
|
|
|
$200.00
|
|
|
|
|
Apr. 12, 2004
|
|
|
$200.00
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2004
|
$4,000.00
|
|
|
|
|
|
|
|
|
|
|
|
$43,525.79
|
|
|
July 2004
|
|
|
|
|
|
$3,453.24
|
|
|
|
|
|
|
|
|
|
Aug. 16, 2004
|
|
|
$400.00
|
|
$40,472.55
|
|
|
Aug. 2004
|
|
|
|
|
|
$3,000.00
|
|
|
|
|
|
|
|
|
|
Sept. 15, 2004
|
|
|
$1,000.00
|
|
$38,472.55
|
|
|
Sept. 2004
|
|
|
|
|
|
$7,000.00
|
|
|
|
|
|
|
|
|
|
Nov. 15, 2004
|
|
|
$1,000.00
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 6, 2004
|
|
|
$1,100.00
|
|
$33,572.55
|
|
|
Dec. 2004
|
|
|
|
|
|
$4,000.00
|
|
Dec. 2004
|
|
|
|
|
|
$2,000.00
|
|
Dec. 2004
|
|
|
|
|
|
$5,000.00
|
|
Year end amount:
|
|
|
|
|
$22,572.55
|
|
[14]
The “Payments TTD (year to date)
Available for Deposit” column shows the total payments made since the beginning
of 2003 minus the deposits made as of the time of each particular questionable
deposit identified by CRA. This chart shows that for each deposit the total
loan payments from the individuals made before that deposit exceed the amount
of the previous deposits in question and therefore these payments could have
funded the particular deposit. The CRA auditor did not accept this because the
deposit amount did not exactly equal the payments made by the various
individuals. However, since the payments were made in cash, Jasbir Cheema
could easily have withheld some of the cash from the amount that was deposited.
[15]
There was a deposit of $725 in
2003 and two separate deposits of $725 each in 2004 that were included as
unreported revenue of the Appellant. These amounts are not included in the
above charts. Jasbir Cheema stated that these amounts were received by him as
rent for the basement of his house. The CRA appeals officer included these
amounts as unreported income of the Appellant because Jasbir Cheema did
not include any rental income in his income for 2004 or 2005 for the purposes
of the Act. Jasbir Cheema had included rental income in his tax return
for 2001. The amount of $725 seems to be an amount that could be for rent for
the basement of Jasbir Cheema’s house and I accept his statement that these
amounts were payments for rent for the basement of his house. The failure of a
shareholder to include rental income in his income does not justify the
inclusion of that amount in the income of the Appellant. If Jasbir Cheema
failed to include rental income in his income tax return for renting the
basement of his house, he and not the Appellant should have been reassessed to
include this amount.
[16]
Although the deposit of $14,000
made to Jasbir Cheema’s bank account on January 28, 2004 was, at the
commencement of the hearing, deleted from the unreported income for the
Appellant’s 2005 taxation year, the Appellant still called evidence in relation
to this amount. This deposit was a cheque from a law firm. Tom Kontaxis
testified and he confirmed that he had borrowed money from Jasbir Cheema
and had repaid him when his house was sold. The cheque for $14,000 was from his
solicitors. I accept his testimony and therefore the $14,000 deposit amount
should not have been included as unreported revenue of the Appellant for its
taxation year ending January 31, 2005 in any event. Neither the deposit of
$14,000 nor the payment of $14,000 is included in the above charts.
[17]
Counsel for the Respondent had
also submitted summaries of what were identified as questionable deposits made
to the bank accounts of the individuals who were making payments to Jasbir
Cheema. The theory of counsel for the Respondent was that these individuals
were receiving payments from the customers of the Appellant for cleaning
services rendered by the Appellant, depositing these payments to their own bank
account and then making payments to Jasbir Cheema. Most of the “suspect
deposits” were simple multiples of $100. There was no suggestion that the
Appellant was not collecting GST in relation to the cleaning services rendered,
so it seems unlikely that the amount payable for cleaning services would be a
simple multiple of $100. The more logical explanation for the fact that
deposits were made shortly before a payment was made was that these individuals
owed Jasbir Cheema money and would make payments to him when they received cash
for work that they had done. There was no evidence to support this conspiracy
theory of the Respondent which the Respondent would have had to adduce as the
Appellant presented a prima facie case that the deposits were repayments
of amounts that had been advanced.
[18]
In Hickman Motors Ltd. v. Her
Majesty the Queen, [1997] S.C.J. No. 62, Justice L’Heureux-Dubé of
the Supreme Court of Canada made the following comments in relation to a
taxpayer's onus of “demolishing” the Minister’s assumptions:
92 It is trite law that in taxation the
standard of proof is the civil balance of probabilities: Dobieco Ltd. v.
Minister of National Revenue, [1966] S.C.R. 95 (S.C.C.), and that within
balance of probabilities, there can be varying degrees of proof required in
order to discharge the onus, depending on the subject matter: Continental
Insurance Co. v. Dalton Cartage Ltd., [1982] 1 S.C.R. 164 (S.C.C.); Pallan
v. Minister of National Revenue (1989), 90 D.T.C. 1102 (T.C.C.) at p.
1106. The Minister, in making assessments, proceeds on assumptions (Bayridge Estates
Ltd. v. Minister of National Revenue (1959), 59 D.T.C. 1098 (Can.
Ex. Ct.), at p. 1101) and the initial onus is on the taxpayer to “demolish” the
Minister's assumptions in the assessment (Johnston v. Minister of
National Revenue, [1948] S.C.R. 486 (S.C.C.); Kennedy v. Minister
of National Revenue (1973), 73 D.T.C. 5359 (Fed. C.A.), at p. 5361). The
initial burden is only to “demolish” the exact assumptions made by the Minister
but no more: First Fund Genesis Corp. v. R. (1990), 90 D.T.C.
6337 (Fed. T.D.), at p. 6340.
93 This initial onus of “demolishing” the
Minister's exact assumptions is met where the Appellant makes out at least a
prima facie case: Kamin v. Minister of National Revenue (1992),
93 D.T.C. 62 (T.C.C.); Goodwin v. Minister of National Revenue
(1982), 82 D.T.C. 1679 (T.R.B.). In the case at bar, the Appellant adduced
evidence which met not only a prima facie standard, but also, in my view, even
a higher one. In my view, the Appellant “demolished” the following assumptions
as follows: (a) the assumption of “two businesses”, by adducing clear evidence
of only one business; (b) the assumption of “no income”, by adducing clear
evidence of income. The law is settled that unchallenged and uncontradicted
evidence “demolishes” the Minister's assumptions: see for example MacIsaac
v. Minister of National Revenue (1974), 74 D.T.C. 6380 (Fed. C.A.), at
p. 6381; Zink v. Minister of National Revenue (1987), 87 D.T.C.
652 (T.C.C.). As stated above, all of the Appellant's evidence in the case at
bar remained unchallenged and uncontradicted. Accordingly, in my view, the
assumptions of “two businesses” and “no income” have been “demolished” by the
Appellant.
94 Where the Minister's assumptions have
been “demolished” by the Appellant, “the onus shifts to the Minister to rebut
the prima facie case” made out by the Appellant and to prove the assumptions: Magilb
Development Corp. v. Minister of National Revenue (1986), 87 D.T.C.
5012 (Fed. T.D.), at p. 5018. Hence, in the case at bar, the onus has shifted
to the Minister to prove its assumptions that there are “two businesses” and
“no income”.
95 Where the burden has shifted to the
Minister, and the Minister adduces no evidence whatsoever, the taxpayer is
entitled to succeed: see for example MacIsaac, supra, where the Federal
Court of Appeal set aside the judgment of the Trial Division, on the grounds
that (at pp. 6381-2) the “evidence was not challenged or contradicted and no
objection of any kind was taken thereto”. See also Waxstein v. Minister
of National Revenue (1980), 80 D.T.C. 1348 (T.R.B.); Roselawn
Investments Ltd. v. Minister of National Revenue (1980), 80 D.T.C.
1271 (T.R.B.). Refer also to Zink v. Minister of National Revenue,
supra, at p. 653, where, even if the evidence contained “gaps in logic,
chronology and substance”, the taxpayer's appeal was allowed as the Minster
failed to present any evidence as to the source of income. I note that, in the
case at bar, the evidence contains no such “gaps”. Therefore, in the case at
bar, since the Minister adduced no evidence whatsoever, and no question of
credibility was ever raised by anyone, the Appellant is entitled to succeed.
96 In the present case, without any
evidence, both the Trial Division and the Court of Appeal purported to
transform the Minister's unsubstantiated and unproven assumptions into “factual
findings”, thus making errors of law on the onus of proof. My colleague
Iacobucci J. defers to these so-called “concurrent findings” of the courts
below, but, while I fully agree in general with the principle of deference, in
this case two wrongs cannot make a right. Even with “concurrent findings”,
unchallenged and uncontradicted evidence positively rebuts the Minister's
assumptions: MacIsaac, supra. As Rip T.C.J., stated in Gelber v. Minister
of National Revenue (1991), 91 D.T.C. 1030 (T.C.C.), at p. 1033, “[the
Minister] is not the arbiter of what is right or wrong in tax law”. As Brulé
T.C.J., stated in Kamin, supra, at p. 64:
the Minister should be able to rebut such [prima facie] evidence and
bring forth some foundation for his assumptions.
…
The Minister does not have a carte blanche in terms of setting out any
assumption which suits his convenience. On being challenged by evidence in
chief he must be expected to present something more concrete than a simple
assumption. [Emphasis added by Justice L’Heureux Dubé]
[19]
Counsel for the Respondent also argued
that the testimony of Simarjeet Cheema
should not be found to be credible because she provided contradictory answers
to the questions related to the account from which funds were withdrawn to pay
Jasbir Cheema. However, in this case Simarjeet Cheema did not speak
English so the questions were translated by an interpreter into Punjabi and her
answers were translated into English. This raises the question of whether
something may have been lost in the translation. She first stated that the
money to pay Jasbir Cheema was withdrawn from a joint bank account and then
later that some of the funds were from her husband’s account and then that the
money that was used from her husband’s account was first transferred to the
joint bank account and then withdrawn from this joint account. It does not seem
to me that these statements are so inconsistent that I should disregard her entire
testimony or find that she not a credible witness. It seems to me that if money
was transferred from her husband’s account to the joint account and then
withdrawn from this account to pay Jasbir Cheema, then it seems reasonable for
her to state that the money to pay Jasbir Cheema was withdrawn from the joint
account, that some of the money came from her husband’s account and that some
funds were transferred. I do not find that these statements diminished her
credibility and more likely were simply given as a result of the way that the
questions were asked and translated.
[20]
Counsel for the Respondent also
suggested that the amounts withdrawn by Simarjeet
Cheema from the joint account were not
sufficient to cover the payments made to Jasbir Cheema. However, in making this
submission counsel for the Respondent was ignoring several ATM withdrawals of
$100 and two of $20. When all of the withdrawals for the month of January 2003
are added together, they total $1,940, which is the same amount that Simarjeet Cheema stated that she paid to Jasbir Cheema
during January 2003. I find that Simarjeet Cheema was a credible witness and I
accept her testimony that she had borrowed funds from Jasbir Cheema and
had made the payments to him as set out in the above charts.
[21]
I also accept the testimony of the
other individuals who confirmed that Jasbir Cheema had advanced them money
and that they were repaying him in cash and I find that they also made the
payments to Jasbir Cheema as set out in the above charts. I find, therefore,
that the Appellant has demolished the assumption that was made that these
deposits to Jasbir Cheema’s personal bank account were revenue of the Appellant.
Since the Respondent did not present anything more concrete than assumptions,
the deposit amounts should not have been included as unreported revenue of the
Appellant.
[22]
A deposit of $20,000 (which was as
a result of a transfer of funds from the children’s account to Jasbir Cheema’s
account) is also included as unreported revenue of the Appellant for its
taxation year ending January 31, 2004. The notes of the appeals officer in
relation to this deposit state as follows:
Although we do
see the amount of $20,000 transferred from the kids account, we see huge [sic]
amount deposited in the account. 3 deposits of $9,000 were deposited on
July 2000, Jan 2002 and July 2002. The representative had explained that the
kids got money for birthdays and graduation. However, we do not feel that such
huge amounts could correspond to such events. No further explanation was
provided by the representative of the taxpayer.
[23]
It is not clear why the $20,000
would be included in computing the income of the Appellant for its 2004
taxation year when the funds were transferred from the children's account to
Jasbir Cheema’s account. There was nothing to suggest (and no reason to
believe) that the children of Jasbir Cheema had retained the Appellant to
provide any cleaning services for them. The basis of the reassessment was that
these amounts represented revenue that the Appellant had earned and which were
deposited in the personal account of the shareholder or the children’s account.
On this basis, the years in question for the Appellant (the years during which
the deposits were made to the children’s account) would be the taxation year of
the Appellant ending January 31, 2001 (for the deposit of $9,000 made in July,
2000), the taxation year of the Appellant ending January 31, 2002 (for the
deposit of $9,000 made in January, 2002) and the taxation year of the Appellant
ending January 31, 2003 (for the deposit of $9,000 made in July, 2002). These
are not the years that are under appeal. There is no basis upon which these
amounts should be included in the income of the Appellant for its taxation year
ending January 31, 2004.
[24]
As a result, the $20,000 that was
transferred from the children’s account to Jasbir Cheema’s account should not
have been included as unreported revenue of the Appellant for its taxation year
ending January 31, 2004.
Capital Cost Allowance Disallowed
[25]
The Appellant owned two vehicles.
Jasbir Cheema testified that he would use one vehicle during the day to visit
clients and the second vehicle in the evening when he was cleaning. The Appellant
produced mileage logs which consisted of two calendars with abbreviations for
the places visited each day and the number of kilometres driven during that day
inserted in the box for each day. There are two separate calendars - one for
each vehicle. The number of kilometres driven each day was consistent. However
since the Appellant was carrying on a cleaning business it seems logical that
the Appellant would be cleaning the same premises each day and therefore it
does not seem unreasonable that the vehicle would be driven to the same
locations, which would result in the same number of kilometres being driven
each day.
[26]
The issue, in this case, is
related to the use of the Chevrolet Tahoe. The position of the Respondent was that
the percentage of business use of this vehicle was only 70%. The Respondent did
accept that the percentage of business use of the other vehicle was 100%. The
position of the Respondent was that since the percentage of business use of the
Tahoe was only 70%, the cost of this vehicle was restricted for the purposes of
determining the capital cost allowance available for this vehicle.
[27] Paragraph 13(7)(g) of the Act provides as
follows:
13(7) 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),
…
(g) where the
cost to a taxpayer of a passenger vehicle exceeds $20,000 or such other amount
as may be prescribed, the capital cost to the taxpayer of the vehicle shall be
deemed to be $20,000 or that other prescribed amount, as the case may be; and
[28]
A passenger vehicle is defined in
subsection 248(1) of the Act as follows:
“passenger
vehicle” means an automobile acquired after June 17, 1987 (other than an
automobile acquired after that date pursuant to an obligation in writing
entered into before June 18, 1987) and an automobile leased under a lease
entered into, extended or renewed after June 17, 1987;
[29]
An automobile is defined, in part,
as:
“automobile”
means
(a) a motor
vehicle that is designed or adapted primarily to carry individuals on highways
and streets and that has a seating capacity for not more than the driver and 8
passengers,
but does not
include
…
(e) a motor
vehicle
(i) of a type
commonly called a van or pick-up truck, or a similar vehicle, that has a
seating capacity for not more than the driver and two passengers and that, in
the taxation year in which it is acquired or leased, is used primarily for the
transportation of goods or equipment in the course of gaining or producing
income,
(ii) of a type
commonly called a van or pick-up truck, or a similar vehicle, the use of which,
in the taxation year in which it is acquired or leased, is all or substantially
all for the transportation of goods, equipment or passengers in the course of
gaining or producing income, or
[30]
Since the Tahoe had a seating
capacity for more than three persons, the Tahoe will only be excluded from the
definition of an automobile (and hence not be subject to the restriction on
cost) if it is a vehicle that is similar to a van or pick up truck and the use
of the Tahoe is “all or substantially all for the transportation of goods,
equipment or passengers in the course of gaining or producing income”. Since
the only argument raised by the Respondent in relation to the capital cost
allowance restriction imposed on the Appellant was in relation to the use of
the vehicle, it is implicit that the Respondent was agreeing that the Tahoe is
a vehicle that is similar to a van or pick up truck. In this case the back seat
had been removed from the Tahoe (which left two rows of seating) and it was
used to transport cleaners (as well as presumably cleaning supplies).
[31]
The appeals officer testified that
the total number of kilometres that the Tahoe was driven, as presented in the calendars,
was accepted by the Respondent. However, the appeals officer also stated that
it did not matter how many kilometres the Tahoe was driven, as the formula of
70% for business use and 30% for personal use would have been applied
regardless of the number of kilometers that the Tahoe was driven. The requirement,
as set out in the Act, is, however, whether the use of the vehicle is “all
or substantially all for the transportation of goods, equipment or passengers
in the course of gaining or producing income”. It seems to me that in
determining this, the actual number of kilometres that the vehicle was driven
in total and the actual number of kilometres that the vehicle was driven for
the required purpose would be relevant.
[32]
Based on the mileage logs that
were maintained, the Tahoe was driven 38,165 kilometres during the Appellant’s
2004 taxation year and 42,486 kilometres during the Appellant’s 2005 taxation
year. The Notice of Appeal and a bill prepared by Jasbir Cheema for travel
costs (and addressed to the Appellant) indicate that the address of the Appellant
was the same as the address of Jasbir Cheema as noted in the summary of
tax information submitted by the Respondent. It therefore seems logical that
the office of the Appellant was located at the home of Jasbir Cheema. The
Respondent did not question or suggest that the initial trip each day for the
vehicle was personal use. Since the office was located at the home of Jasbir
Cheema, it seems to me that the initial trip each day would be for business
use, provided that Jasbir Cheema was traveling to a client of the Appellant or
otherwise traveling in the course of gaining or producing income for the
Appellant.
[33] The mileage amounts of 38,165 kilometres for the
Appellant’s 2004 taxation year and 42,486 for the Appellant’s 2005 taxation
year were calculated by adding the daily trips recorded by the Appellant in the
calendars. The auditor for the CRA accepted that these total amounts were
reasonable for the total distance that the Tahoe was driven in these years. The
CRA then arbitrarily determined that 30% of the kilometres driven were
personal. Jasbir Cheema testified that he would write down the total number of
kilometres that the vehicle was driven each day and that each day for which the
mileage was recorded the vehicle was driven, except for a very few times, in
the course of carrying on the business of the Appellant.
[34]
The Tahoe was used during the
daytime when Jasbir Cheema would travel to meet with customers. The appeals
officer for the CRA stated that one reason why the CRA determined that not all
of the kilometres that the Tahoe was driven were done so in the course of
business was that no mileage was recorded (except for a few weekends) for
travel on Saturdays or Sundays. This, however, does not lead to a conclusion
that 30% of the 38,165 kilometres for the Appellant’s 2004 taxation year (which
were the recorded kilometres for Monday to Friday) were personal kilometres but
suggests that the total number of kilometres driven in that year was greater
than 38,165 (which was not the assumption that was made). The kilometres
recorded for each day were generally 150 to 160 kilometres. The clients of the
Appellant were located throughout the GTA. The Appellant had clients in
Thornhill, Mississauga and other parts of the GTA. For most days the logs
indicate that the vehicle was driven from Caledon to three or four different
communities and then back to Caledon. There was nothing to suggest that the recorded kilometers
for each day were unreasonable for a business with clients throughout the GTA.
[35]
The appeals officer stated that
since Jasbir Cheema had stated that he worked seven days a week and since she
did not see any mileage recorded for travel on the weekends, she determined
that 30% of the 38,165 kilometres that had been recorded for the Appellant’s
2004 taxation year were personal (and as noted above she would have applied the
30% personal amount to whatever the total number of kilometres would have been
and the same percentage was applied to the Appellant’s 2005 taxation year). It
does not seem to me that any comment made by the Appellant that he works seven
days a week would necessarily mean that he is traveling each and every day.
There presumably would be work that would have to be done at the office (which
as noted above appears to be in or near his home). In any event the failure to
record kilometres driven on weekends (when Jasbir Cheema was only recording
kilometres driven in the course of the Appellant’s business on Mondays to
Fridays) does not necessarily lead to a conclusion that 30% of the kilometres
recorded for the other days of the week were personal. If the kilometres driven
on the weekends were added in with the amounts recorded for the other days, one
would have expected to see a greater number of kilometres recorded on Mondays -
but this is not the case here.
[36]
As noted above, the business of
the Appellant has grown significantly. The gross revenues grew by 41% from the
Appellant’s 2004 taxation year to its 2005 taxation year and have grown
significantly since then. This would also explain why the Tahoe was driven more
kilometres during the Appellant’s 2005 taxation year (42,486 kilometres).
Therefore, it seems logical to assume that Jasbir Cheema was very busy in
recruiting new customers for the Appellant and very focused on the Appellant’s
business during the years under appeal.
[37]
As a result, I find that on the
balance of probabilities that the Appellant has demolished the assumption made
by the Respondent that the use of the Tahoe was not “all or substantially all for
the transportation of goods, equipment or passengers in the course of gaining
or producing income” and since the Respondent only presented assumptions, the
Appellant is entitled to succeed on this point. The Respondent in the Reply,
stated that the adjustments made to the income of the Appellant were as stated
in the Notice of Appeal and therefore the capital cost allowance that was
disallowed was $4,424 for the Appellant’s 2004 taxation year and $3,097 for the
Appellant’s 2005 taxation year. These amounts should be allowed in computing
the income of the Appellant.
Travel
[38]
The Appellant claimed expenses for
trips taken during the Appellant’s 2004 taxation year and its 2005 taxation
year. Jasbir Cheema traveled to Québec, Edmonton and Vancouver. As
well, the father‑in-law of Jasbir Cheema traveled to India. The
testimony of Jasbir Cheema and his father-in-law was that these trips were
undertaken to expand the business to these areas. Jasbir Cheema stated that he
wanted to obtain customers for cleaning in Québec, Edmonton, Vancouver and India.
[39]
It does not seem plausible to me
that a customer in India would retain a company in Canada to clean
its premises when that cleaning company has no operations and no staff in India. As well,
it does not seem plausible to me that firms in Québec, Edmonton or Vancouver would
hire cleaning companies from Toronto who do not have any presence in their local area.
Obviously cleaning services must be done at the premises of the client. Jasbir
Cheema also stated he now spends a significant amount of time supervising the
cleaners retained by the Appellant (a task that would be much more difficult if
the cleaners are in India). The suggestion that these trips were undertaken to
expand the business to these areas is not plausible to me.
[40]
Paragraph 18(1)(a) of the Act
provides as follows:
18. (1) In computing the income of a taxpayer from
a business or property no deduction shall be made in respect of
(a) an outlay or expense except to the extent that
it was made or incurred by the taxpayer for the purpose of gaining or producing
income from the business or property;
[41]
A couple of trips to shopping
malls and a few visits to a tractor factory while Naunihal Singh Gill (the
father-in-law of Jasbir Cheema) spent two months in India were, in my opinion,
simply window dressing and are not sufficient to justify the cost of traveling
to India as a business expense of the Appellant incurred for the purpose of
gaining or producing income from the business given the implausibility of
attracting customers in India for the cleaning business of the Appellant.
Similarly a few visits by Jasbir Cheema to businesses in Québec, Edmonton, or Vancouver would
also, in my opinion, simply be window dressing and would not be sufficient to
justify the cost of the trips to these places as a deductible expense of the
Appellant.
[42]
As a result the travel expenses were
not incurred for the purpose of gaining or producing income and hence are not
deductible by the Appellant in determining its income for the purposes of the Act.
Conclusion
[43]
As a result, the appeal is allowed,
with costs, and the matter is referred back to the Minister of National Revenue
for reconsideration and reassessment on the basis that:
(a) the Appellant did not have unreported income in its 2004
taxation year of $40,935;
(b) the Appellant did not have unreported income in its 2005 taxation year
of $42,339; and
(c) the Tahoe was not a passenger vehicle and therefore is
not included in Class 10.1 of Schedule II to the Income Tax Regulations and
therefore:
i.
the amount that Appellant is
entitled to deduct as capital cost allowance in computing its income for its
2004 taxation year is increased by $4,424; and
ii.
the amount that the Appellant is
entitled to deduct as capital cost allowance in computing its income for its
2005 taxation year is increased by $3,097.
Signed
at Halifax, Nova Scotia, this 12th
day of March 2009.
“Wyman W. Webb”
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