Citation: 2006TCC529
Date: 20060928
Docket: 2005-2453(IT)I
2005-2454(GST)I
BETWEEN:
MICHAEL KHOURY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bowie J.
[1] There are two appeals before me, one under the Income
Tax Act (the Act) and the other under the Excise Tax Act,
Part IX (the ETA). Both are concerned with the extent to which the
Appellant uses his residence for business purposes.
[2] In computing his
income for the taxation years 2000 and 2001, Mr. Khoury claimed deductions
under paragraph 18(12)(a) of the Act of $13,816.79 and $12,427.20,
respectively, for the cost of workspace in his home. This was based on business
use amounting to 50%. The Minister of National Revenue reassessed him to reduce
the business use to 20%, and to disallow certain maintenance expenses that had
been included in the computation.
[3] Mr. Khoury also
claimed input tax credits (credits) under the ETA for the reporting
periods 2000 and 2001 in respect of the cost to him of utilities and
maintenance for the home on the basis of 50% business use. The Minister
reassessed him to reduce his credits by $783.56, again reducing the business
use permitted to 20%, and disallowing the same maintenance expenses.
[4] Paragraph
18(12)(a) of the Act reads:
18(12) Notwithstanding any other
provision of this Act, in computing an individual's income from a
business for a taxation year,
(a) no amount shall
be deducted in respect of an otherwise deductible amount for any part (in this
subsection referred to as the "work space") of a self-contained
domestic establishment in which the individual resides, except to the extent
that the work space is either
(i) the individual's
principal place of business, or
(ii) used exclusively for
the purpose of earning income from business and used on a regular and
continuous basis for meeting clients, customers or patients of the individual
in respect of the business;
Paragraph
170(1)(a.1) of the ETA reads:
170(1) In determining an input tax credit of a
registrant, no amount shall be included in respect of the tax payable by the
registrant in respect of
(a) …
(a.1) a supply, importation or bringing into a
participating province of property or a service that is acquired, imported or
brought in by the registrant for consumption or use by the registrant (or,
where the registrant is a partnership, an individual who is a member of the
partnership) in relation to any part (in this paragraph referred to as the
“work space”) of a self-contained domestic establishment in which the
registrant or the individual, as the case may be, resides unless the work space
(i) is the principal place
of business of the registrant, or
(ii) is used exclusively
for the purpose of earning income from a business and is used on a regular and
continuous basis for meeting clients, customers or patients of the registrant
in respect of the business;
[5] The respondent
does not dispute that Mr. Khoury’s principal place of business is his home. In
fact it is his only place of business. He is therefore entitled to a deduction
under section 18 of the Act, and to credits under section 170 of the ETA.
The appellant offered no evidence at the hearing to justify the maintenance
expenses that the Minister had disallowed. The dispute, therefore, is simply
as to the extent to which his use of his house during the years in question was
for business.
[6] Mr. Khoury is an
artist. For the past decade that has been his sole occupation. He trained under
a renowned artist at the University of New
Brunswick, and his energy and talent are
such that he has been able to establish a considerable local reputation in the province of New
Brunswick. With the assistance of the internet he has now extended that
reputation to the point where he makes a number of sales throughout North America
and beyond. His studio is in his home, and he displays paintings throughout his
home to be viewed by potential buyers. The house has a large entrance foyer,
and it is filled with paintings at all times, as are the living room, the
family room and the dining room. There is also an upstairs foyer that is used
for the same purpose. Two or three times each year Mr. Khoury has an open house
at which the public is invited to view, and to buy, his paintings. On these
occasions there are even more paintings on display than usual. There are also
paintings stored behind the furniture in the living room at all times, many of
which are displayed at open houses. The dining room also is filled with
paintings for sale. In addition to the open houses, people frequently wish to
come and view Mr. Khoury’s inventory of paintings, and they are always welcome
to do so. On those occasions they generally view paintings in all the main
floor rooms of the house, as well as the upstairs foyer.
[7] Mr. Khoury uses
a room on the main floor as his studio. He paints there most frequently, and it
too serves to display his work that is available for purchase. That room
contains a piano, a stereo and a computer, and these are sometimes used by
other members of the family, but the main use of the studio is as a place for
him to paint. Nearby is the laundry room, and he uses it for cleaning his
brushes and other tools. The dining room, as well as being used to display
paintings, is used by his wife, who is his business manager, to do paperwork in
connection with the business. Mr. Khoury frequently paints still lifes and
garden scenes, and he does this in various parts of the house, including the
kitchen and the dining room, as well as on the patio outside the rear entrance
door. For this he uses a portable easel that he can set up anywhere in the
house where there is a suitable subject for his art.
[8] In the basement
of the house is a large room that is used as a projection room to display
photographic images of Mr. Khoury’s inventory of paintings for sale. Another
room in the basement is used for framing, for stretching canvases, for wrapping
paintings that are to be sent to purchasers, and for the storage of packing
materials and supplies. These two rooms together account for the major part of
the basement space, and they are used almost exclusively for business purposes.
[9] The second story
of the house contains, in addition to the foyer to which I have referred, four
bedrooms and two bathrooms. Of these, only the bedroom occupied by Mr. and Mrs.
Khoury is used for business purposes. A computer and a fax machine are located
there, and Mrs. Khoury estimated that 50% of that room was devoted exclusively
to use as an office. Much of the dining room is used by her for paperwork
related to the business as well.
[10] I have no doubt
that Mr. Khoury is a prolific artist who is developing a substantial
reputation. In 2001 he was in Europe for about two months, during which time he
shipped numerous canvasses to his wife for display and sale. Typically, these
are rolled up for shipping, and when they arrive they are placed throughout the
house to be aired and then stretched.
[11] The evidence
before me as to the degree of use is less precise than one might like. As
Bowman C.J. recently pointed out, subsection 4(1) of the Act permits a
deduction of the expenses that may reasonably be regarded as wholly applicable
to the source of income.
He then went on to say at paragraph [7]:
The concept of
reasonableness, and its converse, unreasonableness, appear frequently both in
income tax law and in other areas of the law. They are terms of some
elasticity. They are easier to recognize than to define. If the court is
directed by the law to determine what is "reasonable" it requires the
application of judgment and common sense and may involve as an initial
determination what is unreasonable.
The
evidence of the Appellant and Mrs. Khoury provides a very full description of
the type of business use that was made of this house compared to its use as a
residence by them, and their four children. Plans of the three stories in the
house were introduced in evidence, but these unfortunately do not provide as
many particulars of the dimensions of the rooms as they might. I am satisfied
that the witnesses were doing their best to present an honest and accurate
picture of the use of the home for business, but of necessity much of their
evidence consisted of approximations. The assessor frankly admitted in her
evidence that the audit was a brief one, and that she did not see or take into
account the storage space or the projection room in the basement. I have no
doubt on the evidence before me that her estimate of 20% business use for the
whole house was too low, as a result of her failure to take the basement space
into account. It does seem a reasonable proportion of the expense attributable
to the upper two stories, however. Mr. Hatfield did not offer any
computation of time and space to support the reasonableness of the Appellant’s
estimate of 50% that he used in filing his returns.
[12] My evaluation of
the evidence leads me to conclude that in the years 2000 and 2001, virtually
all the basement was used exclusively for business, and that this was not taken
into account at all by the assessor. The area of the basement is about 2/3 of
the area of each of the ground floor and the upper floor. When that is taken
into account the appellant’s business use of the home is 100% of ¼ (the
basement), and 20% of ¾ (the two upper floors), which is 40%. This, I believe,
is a more reasonable estimate than that of either the assessor or the
appellant.
[13] The appeals under
the Act are allowed. The appellant is entitled to a deduction from
income for use of space in the home for 2000 based on 40% use of the home and
total home expenditures of $24,544.43, and to a deduction from income for use
of space in the home for 2001 based on 40% use of the home and total home
expenditures of $23,594.64. He is entitled to input tax credits based on 40%
use of the home and expenditures of $5,918.06 in 2000, and 40% use of the home
and total expenditures of $4,246.31 in 2001.
[14] The parties may
speak to costs if they are unable to agree thereon.
Signed at Ottawa, Canada, this 28th day of September, 2006.
"E.A. Bowie"
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