Citation: 2008TCC578
Date: 20081022
Docket: 2005-1590(IT)I
BETWEEN:
FRED HICKERTY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 20051588(IT)I
AND BETWEEN:
BETTY HICKERTY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller, J.
[1]
These are appeals from
reassessments of the Appellant’s 1998 and 1999 taxation years wherein the
Minister of National Revenue (the “Minister”) disallowed farming expenses;
assessed net business income; and, assessed penalties pursuant to subsection
163(2) of the Income Tax Act (the Act).
[2]
The appeals were heard
on common evidence and only Betty Hickerty testified on behalf of the
Appellants.
[3]
The issues were as
follows:
a)
whether the Appellants
underreported their income;
b)
whether the Appellants
are entitled to deductions in excess of the amounts allowed by the Minister for
work space in the home, the use of the telephone, insurance, maintenance and
repairs and the Quonset; and,
c)
whether the Minister
properly assessed gross negligence penalties under subsection 163(2) of the Act.
[4]
The Appellants are
married and during the years under appeal they resided in a home near Sundre, Alberta. They operated an accounting and tax preparation
business, a construction business and an advertising sales business (the
“Businesses”) from their home. They also had a farm operation near Youngstown, Alberta. All Businesses and the farm operation
were run as an equal partnership between the Appellants.
[5]
The Appellants did not
keep proper books and records. They kept documents loosely in a binder and file
folder. The expense invoices they submitted to the Canada Revenue Agency (the
“CRA”) could not be reconciled with the amounts claimed on their returns. The
Appellants prepared a synoptic or a ledger as requested by the CRA and this as
well could not be reconciled with the amounts claimed on the returns.
FARM OPERATION
[6]
The Appellants’ farming
operation was near Youngstown,
Alberta. They operated a
cattle farm by leasing property from Tim and Jeff Laughlin (the Laughlins) and
sharing expenses with them.
[7]
The only issue raised
by the Appellants with respect to the Farming Operation was the Quonset. Mrs.
Hickerty stated that they had bought the Quonset in 1999 with the intention of
selling it. It cost $12,000. Instead of selling the Quonset they used it as a
mechanical shop and storage shed. They still own the Quonset and it is being
used by the Laughlins in Youngstown.
[8]
Patricia McCulloch, an
appeals officer with the CRA, testified that she did not allow any deduction
for the Quonset as she was told that it was purchased with the intention of
selling it. However, after hearing the evidence, Ms. McCulloch stated that
capital cost allowance (“CCA”) should have been allowed on the Quonset.
BUSINESS
OPERATIONS
[9]
With their income tax
returns (“returns”) the Appellants filed a Statement of Farming Activities (the
Statement). They included the income from their Businesses on this Statement
under the heading “Custom or contract work and machine rentals”. As well, the
Appellants each indicated on their returns that they were 100% partners.
[10]
The Appellants operated
an accounting/tax preparation business as well as construction and advertising
businesses. Most of the Appellants’ income was earned from the accounting/tax
preparation business. Mrs. Hickerty stated that in the years under appeal she
and her spouse prepared returns for approximately 300 to 400 clients. However,
on cross-examination she agreed that they prepared returns for approximately
700 clients.
[11]
Mr. Hickerty has
completed grade 12 and is a journeyman carpenter. He has taken some
accounting/bookkeeping courses. He has operated an accounting/tax preparation
business for 26 years.
[12]
Mrs. Hickerty also has
grade 12 and has taken accounting courses. She has operated an accounting/tax
preparation business with her spouse for 18 years.
[13]
The Appellants
calculated their income from this source by reviewing the bank statements as they
said that all monies received were deposited into their bank accounts. Mrs.
Hickerty said that they used the cash method because some of their clients did
not pay for a year. In total they reported gross income of $46,420 and $32,510
from the Businesses in 1998 and 1999 respectively.
[14]
Ms. McCulloch used the
Appellants’ invoice books to determine that the Appellants had earned gross
income in the amount of $63,051 and $76,550 in 1998 and 1999 respectively. The
Appellants were given a deduction for accounts that could not be collected (bad
debts) for those years. The bad debts were only the amounts of $1,880 and
$1,953 in 1998 and 1999 respectively.
[15]
Mrs. Hickerty stated
that she and her spouse did not underreport their income yet they produced no
documents at the hearing of the appeal. She stated that she was not sure what
her income was but that she disagrees with the Minister’s calculations.
[16]
The Appellants have not
shown that the Minister’s computation of income was incorrect. It really does
not matter whether the cash method or accrual method of calculating income was
used; in either scenario, it is evident that the Appellants failed to report
all the income they earned each year. The amount of bad debts for each of the
years was minimal.
[17]
The Appellants ought to
have computed their income for tax purposes by matching their revenues and
their expenses.[i]
This would have given a more accurate computation of their income for each
year.
WORK SPACE IN THE HOME
[18]
The Appellants used
their home as their principal place of business. The Appellants claimed that
they used 75% of their home for business purposes as every room contained items
that related to their Businesses. Mrs. Hickerty explained that they always had
their clients’ papers stored in filing cabinets. The filing cabinets were
stored in their bedroom and in sheds. They had a photocopier in their bedroom
and one bedroom in the house was used exclusively for business. Their busy
season started in November and by November they usually had hired people to
work with them.
[19]
The appeals officer
allowed a deduction of 30% for business use of the home. She stated that the
Appellants had told her that they used almost 100% of their home for business
purposes during tax filing season (March to May). The appeals officer estimated
that the business use of the home was 25% for January, 50% for February through
May and 15% for June through December. As a result she allowed a 30% deduction
of the telephone, utilities, property taxes and interest expenses.
[20]
In the absence of any
documentary evidence, 75% business use appears to me to be too high. However,
based on Mrs. Hickerty’s description of her business and her home it is my
opinion that a more reasonable estimate of the business use of her home for the
period under appeal was 45%.
TELEPHONE EXPENSES
[21]
Ms. McCulloch stated
that she had intended to allow the Appellants to deduct 30% of their telephone
and utilities expenses. At the hearing she noticed that she had only allowed
25% of the telephone expense. The Appellants have requested that they be
allowed to deduct 80% of their telephone expense.
[22]
The Appellants agree
that their telephone and utilities expense did not exceed $7,347 in 1998 and
$6,927 in 1999.
[23]
I have allowed a
deduction of 45% for the telephone expense for each of the years under appeal.
INSURANCE EXPENSES
[24]
The Appellants have
been allowed deductions for home and vehicle insurance. However, they have
asked for a deduction for “Combined Insurance”, the proceeds of which they say
would be taxable in the event of accident or disability. The Appellant have not
submitted anything to show that they paid premiums or that they have an
insurance policy the proceeds of which would be taxable.
MAINTENANCE AND REPAIRS
[25]
The Appellants claimed
maintenance and repair expenses in the amounts of $5,269.16 and $6,991.26 in
1998 and 1999. Mrs. Hickerty thought that these amounts related to fence and
building materials. On cross examination she admitted that she did not really
know what they had bought with these amounts.
PENALTIES
[26]
On filing their income
tax returns the Appellants each reported net income of $6500 and $7000 in 1998
and 1999 respectively. As a result of the reassessment, each Appellant’s net
farm income was calculated to be $11,306 and $9,308 in 1998 and 1999
respectively. Each Appellant’s net business income was reassessed to be $17,880
and $24,161 in 1998 and 1999 respectively.
[27]
The Appellants failed
to report income of $16,631 and $44,040 from their Businesses in 1998 and 1999 respectively.
[28]
The Appellants operate
an accounting/tax preparation business. They provide consultation in tax
matters to other taxpayers. They very often represent other taxpayers at the
audit and appeal stage with the CRA.
[29]
The Appellants kept no
books and very poor records for themselves.
[30]
The Appellants felt
that they should have been given a warning and that gross negligence penalties
should not have been assessed. I disagree. I believe that the penalty was
properly imposed.
[31]
In DeCosta v. R.[ii], Chief Justice
Bowman wrote the following:
[11]
In drawing the line between "ordinary" negligence or
neglect and "gross" negligence a number of factors have to be
considered. One of course is the magnitude of the omission in relation to the
income declared. Another is the opportunity the taxpayer had to detect the
error. Another is the taxpayer's education and apparent intelligence. No single
factor predominates. Each must be assigned its proper weight in the context of
the overall picture that emerges from the evidence.
[32]
In the present appeal all factors
indicate that the Appellants knowingly or under circumstances amounting to
gross negligence made a false statement or omission in their returns. Their
omissions were not mere inadvertence. They claimed expenses which they could
not substantiate and they failed to report a substantial amount of their
income.
[33]
The appeals are allowed to
increase the business use of home from 30% to 45% and to allow the Appellants a
deduction for CCA for the Quonset.
Signed at Ottawa,
Canada, this 22nd day of October 2008.
“V.A. Miller”
Email this Content