Citation: 2007TCC186
Date: 20070411
Dockets: 2006-1170(IT)I
BETWEEN:
NABIH SROUGI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Lamarre J.
[1] The Appellant is
appealing the assessments made by the Minister of
National Revenue (Minister) for the 1998, 1999 and 2000 taxation years. In his
assessments, the Minister added $19,294.17 and $16,602.10 to the
Appellant’s income for the 1998 and 1999 taxation years, respectively, and
disallowed certain expenses in the amounts of $6,157.36 and $4,830 for the
1999 and 2000 taxation years, respectively. The assessment for the 1998
taxation year was made after the normal reassessment period, and the onus is on
the Respondent to demonstrate, in accordance with subsection 152(4) of the
Income Tax Act (Act), that the Appellant has made any misrepresentation that is
attributable to neglect, carelessness or wilful default in filing his income tax
return in respect of the 1998 taxation year.
[2] The Appellant is a
lawyer and reported gross income of $52,955.15 in 1998 and
$66,115.66 in 1999 using the cash basis of accounting. The Minister
adjusted the Appellant’s income using the accrual method of accounting based on
the invoices for professional fees prepared by the Appellant for each of those
years.
[3] According to the
Appellant and his spouse, Ilse M. Srougi, acting in that capacity,
the Minister doubled the income by taking into account both the invoicing and
the bank deposits, and furthermore, did not take into account bad debts. The
Appellant acknowledged that in the statements of income and expenses he
included with his income tax returns for 1998 and 1999, he indicated a nil
amount for bad debts. He however explained in court that he was justified in
doing so inasmuch as he used the cash basis of accounting. In fact, by using
that method, only income received and actual expenses incurred in the year are
taken into account, and from that perspective, bad debts cannot be claimed. As
long as the Minister applies the accrual method of accounting, and the
professional fees billed but not collected are included, the Appellant says
that he is justified in claiming bad debts.
[4] Furthermore, in
filing his income tax returns for 1998 and 1999, the Appellant did not make the
election to exclude from his income any amount in respect of work in progress at the end of the year, in accordance with
section 34 of the Act, which reads as follows:
SECTION 34:
Professional business
In computing the income of a taxpayer for a taxation year
from a business that is the professional practice of an accountant, dentist,
lawyer, medical doctor, veterinarian or chiropractor, the following rules
apply:
(a) where the
taxpayer so elects in the taxpayer's return of income under this Part for the
year, there shall not be included any amount in respect of work in progress at
the end of the year; and
(b) where the
taxpayer has made an election under this section, paragraph 34(a) shall apply
in computing the taxpayer's income from the business for all subsequent
taxation years unless the taxpayer, with the concurrence of the Minister and on
such terms and conditions as are specified by the Minister, revokes the
election to have that paragraph apply.
[5] The Appellant first
takes issue with the use of the accrual method of accounting. He claims that it
is his right to use the cash basis of accounting because it better reflects
his income, based on the actual cash receipts he receives in the course of the
year.
[6] Unfortunately for
the Appellant, he is bound by paragraph 12(1)(b) of the Act, which reads
as follows:
Inclusions
SECTION 12:
Income inclusions
(1) There shall be included in computing the income of a
taxpayer for a taxation year as income from a business or property such of the
following amounts as are applicable:
. . .
(b) Amounts receivable -- any amount receivable by the taxpayer in respect of
property sold or services rendered in the course of a business in the year,
notwithstanding that the amount or any part thereof is not due until a
subsequent year, unless the method adopted by the taxpayer for computing income
from the business and accepted for the purpose of this Part does not require
the taxpayer to include any amount receivable in computing the taxpayer's
income for a taxation year unless it has been received in the year, and for the
purposes of this paragraph, an amount shall be deemed to have become receivable
in respect of services rendered in the course of a business on the day that is
the earlier of
(i) the day on which the account in respect of the services
was rendered, and
(ii) the day on which the account in respect of those services
would have been rendered had there been no undue delay in rendering the account
in respect of the services;
[7] Therefore, under
this legislative provision, the Appellant must include in his income for the
year any amount receivable by
him in respect of services rendered in the course of a business in the year (related to his
professional practice as a lawyer), notwithstanding that the amount or any part thereof is not due
until a subsequent year. That rule does not apply if the method adopted by the taxpayer for
computing income from the business and accepted for the purpose of Part I of the Act does not require the taxpayer to include
any amount receivable in computing the taxpayer's income for a taxation year
unless it has been received in the year. An acceptable method for the
purpose of Part I of the Act “. . . is
that whichever method presents the ‘truer picture’ of a taxpayer’s revenue,
which more fairly and accurately portrays income, and which ‘matches’ revenue
and expenditure, if one method does, is the one that must be followed” (West Kootenay
Power & Light Co. v. The Queen, [1992] 1 F.C. 732 (C.A.),
p. 745, whose passage was adopted in Canderel Ltd. v. Canada,
[1998] 1 S.C.R. 147, at para. 43).
[8] Members of a
professional business must compute their income based on the accrual method of
accounting. (See
Les principes de l’imposition au Canada, Lord, Sasseville [et al.],
13th edition, Wilson & Lafleur, 2002, p. 180, para. 4.2.9.2, quoted by the
Appellant himself).
[9] This is consistent
with the general principle that the
computation of profit involves the offsetting of revenues against the
expenditures incurred in earning them (see Canderel Ltd. v. Canada, at
para. 49). According to well-accepted
business principles, business income shall be calculated not only by taking into account cash
receipts in the year, but also any
amount receivable in respect of services rendered in that
year. That
is the accrual method of accounting. For the professional practice of a
lawyer, it is even clearer that the it is the accrual method of accounting
which applies as section 34 was enacted to allow lawyers to make the election
to exclude from their income for the year accounts in respect of work in progress. That election must be made when
filing an income tax return for the year for which the election has been made.
However, in this case, the Appellant did not make that election. The Minister
was therefore justified in reassessing the Appellant by calculating his income
based on the accrual method of accounting.
[10] Second, the
Appellant submits that in being reassessed, the Minister doubled some of his
income and included certain loans as income. Moreover, the Appellant proved
that some clients went bankrupt during the years in issue (Exhibit A‑3).
The Respondent acknowledged those errors, as well as the bad debts caused by
the clients’ bankruptcy. After the hearing, counsel for the Respondent
submitted to the Court by correspondence dated March 16, 2007, the amended
income with the corrections made. The amended income increased to
$61,436.58 in 1998 and to $70,116.93 in 1999. Considering that the
Appellant reported income of $52,955.15 in 1998 and $66,115.66 in
1999, the additional income increased to $8,481.43 for 1998 and to
$4,001.27 for 1999.
[11] The Appellant
accepts those figures (see letter addressed to the Court dated March 20, 2007).
[12] As to whether there
was double taxation for the Appellant, as he included in his income amounts
actually cashed, and the Respondent included the income billed, the
Respondent’s reply is that for the 1998 and 1999 taxation years, the income
reported by the Appellant was subtracted from the income calculated by the
auditor of the Canada Revenue Agency (CRA) and that therefore there was not
double taxation for those two years. However, counsel for the Respondent
indicates in her letter of March 16, 2007, that the invoices issued in 1999,
which, according to the evidence, were paid in 2000, should be subtracted from
the Appellant’s income for 2000. The invoices are as follows:
− invoice of October 4, 1999, addressed to Une
Grande Famille: portion paid in 2000: $696.53 (see note on invoice, Exhibit I‑3,
invoices issued in 1999);
− invoice of December 8, 1999, addressed to
Restaurant Mechoui Express Inc.: portion paid in 2000: $646.98 (see note
on invoice, Exhibit I‑3, invoices issued in 1999).
[13] Accordingly, the
Appellant’s income for 2000 will have to be reduced by a total amount of
$1,343.51 ($696.53 + $646.98).
[14] Moreover, the
Appellant claimed all his automobile expenses for business purposes for 1999
and 2000 ($6,384.88 in 1999 and $6,440.00 in 2000, Exhibit I‑7).
The CRA auditor disallowed 75% of the expenses claimed, as 75% of those
expenses represent the kilometres travelled by the Appellant from his residence
to his office, which are personal expenses. The Appellant did not add anything
new to object to that. I therefore accept the Minister’s evidence in that
regard and I retain the automobile expenses as assessed (that is $2,158.04
deductible in 1999 and $1,903.66 deductible in 2000, which include the
parking expenses allowed on top of that, Exhibit I‑7).
[15] As for the meal
expenses for the 1999 taxation year, the CRA auditor reduced to 50% the
eligible expense on two invoices identified as “Le Vieux
Pêcheur” (one in the amount of $253.54 and the other in the amount of
$47.89), as they were expenses for food in accordance with section 67.1 of the
Act. The Appellant did not really contest that point in court.
[16] As for the expense
claimed for promotional expenses for the 1999 taxation year, following the
Appellant’s stay at Mont‑Tremblant, in the amount of
$1,217.98 (Exhibit I‑7), it was disallowed on the ground that
it was a personal expense. The Appellant was vague on that point as he did not
remember the purpose of that stay. He suggested that he probably took a client.
The Appellant did not keep any written documentation in that respect and his
testimony was not very clear. I therefore consider that the Appellant did not
prove that it was a business expense. I uphold the CRA’s decision.
[17] Furthermore, the
Minister was justified in reassessing the 1998 taxation year in accordance with
subsection 152(4) of the Act, as the Appellant, who is a lawyer, should have
known that he had to use the accrual method of accounting and that if he wanted
to avail himself of the election to exclude from his income the accounts in respect of work in progress, he had to do so by
specifying it very clearly when he filed his income tax return, which he failed
to do.
[18] The appeals are
allowed without costs and the assessments
are referred back to the Minister on the basis that additional income of $8,481.43 and
$4,001.27 must be added to the Appellant’s income for the 1998 and 1999
taxation years, respectively (instead of $19,294.17 for 1998 and
$16,602.10 for 1999). For the 2000 taxation year, the Appellant’s income
will have to be reduced by $1,343.51. In all other respects, the assessments
under appeal remain unchanged.
Signed at Ottawa, Canada, this 11th day of April 2007.
“Lucie Lamarre”
Translation certified true
on this 14th day of December 2007.
Daniela Possamai,
Translator
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