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Citation: 2005TCC603
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Date: 20050809
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Docket: 2005-980(IT)I
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BETWEEN:
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MURRAY R. LEMMERICK,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Miller J.
[1] Mr. Murray Lemmerick appeals by way of informal procedure the assessment of the Minister of National Revenue (the Minister) of his 1997 and 1998 taxation years. The Minister attributed personal benefits to Mr. Lemmerick in those years from his company, Lemmerick Marketing Ltd., in the amounts of $29,304 and $9,642, respectively. At the outset of the trial, Mr. Everett for the Respondent, brought a motion to quash the 1998 appeal on the basis that Mr. Lemmerick had not filed his appeal in a timely manner. The Minister issued a Notice of Confirmation of the 1998 taxation year on January 26, 2004. Rather than filing an appeal with the Tax Court of Canada, on February 16, 2004, Mr. Lemmerick filed another notice of objection with the Canada Revenue Agency (CRA). On March 11, 2004, CRA wrote to Mr. Lemmerick stating:
With reference to your 1998 Taxation Year, we would like to advise that we had previously reviewed an objection from you and we confirmed the assessment. Notification of our decision was mailed to you on January 24, 2004.
To the notification we attached a document, which provides information concerning appeal procedures. If you wish to exercise your right of appeal to the Tax Court of Canada, please refer to the procedures found in this document. We enclose another form for your information.
[2] Mr. Lemmerick's explanation to his approach was that he was receiving communications from CRA three or four times a month. He preferred talking to someone directly rather than relying on correspondence. He always believed he was in an on-going process of objecting to, or appealing his 1997 and 1998 taxation years. He formerly filed appeals for those two years in the Tax Court of Canada in March 2005. The time within which he had to apply for an extension for the 1998 taxation year was April 2005.
[3] The first issue to address is whether the filing of an appeal constitutes implicitly an application to extend time to file an appeal. The Minister argues it does not. Respondent's counsel referred to MacDonell et al. v. M.N.R.[1] where it was held that filing an appeal one day after the 90-day limit was found to be too late, and because no application to extend was made within the additional one-year period, the Court was without jurisdiction to hear the appeal. No consideration was given to the filing of the appeal as an application to extend. The Respondent also referred to Henry v. The Queen[2] and M.N.R. v. Minuteman Press of Canada Company Limited[3] for further support that a notice of appeal does not constitute an application for extension of time.
[4] Section 167 of the Income Tax Act explicitly sets out what is required to make an application for extension. There must be an actual written application filed in the Tax Court of Canada giving the reasons why the appeal was not instituted on a timely basis. Mr. Lemmerick simply did not do that. While I find the Minister's response of March 11, 2005 left something to be desired in assisting the taxpayer, it did at least advise that he must file with the Tax Court of Canada. Mr. Lemmerick's only response was that he must not have read the correspondence that closely. I have some sympathy for a taxpayer inundated with communications from CRA, as well as receiving advice over the phone from them, feeling somewhat tangled in the procedural web. Yet, even if I were to accept that his filing an appeal constituted an application to extend, which I am not inclined to do, this was done several months after the notification from CRA that he had to file with the Tax Court of Canada within 30 days of the Confirmation. Under these circumstances, Mr. Lemmerick has not satisfied me that he sought an extension as soon as circumstances permitted. I grant the Respondent's application to quash the appeal of the 1998 taxation year.
[5] I turn now to the 1997 appeal. Mr. Lemmerick was sole shareholder of Lemmerick Marketing Ltd. In 1994 the company acquired, for $165,000, a property from which Mr. Lemmerick intended to carry on the business of arranging lotteries or fundraising programs for hospitals and similar organizations. Mr. Lemmerick explained that, at that time, he believed this decision made more economic sense than renting premises. The property was an 1,800 square foot bungalow, in which Mr. Lemmerick both resided and worked.
[6] In 1995 and 1996, Mr. Lemmerick was successful in obtaining a major contract to run a lottery. In 1997, however, the contracting hospital decided it could do the lottery itself, and Mr. Lemmerick lost the contract. He described 1997 and 1998 as very difficult years, both business wise and personally. Throughout those years, he continued to try and market his services both in Alberta and in Ontario, though acknowledged there was overall less business activity in 1997. He travelled to Ontario to make presentations. He felt he had actually won a contract in Alberta with a partnership of two hospitals, but only one hospital came onside and he was unable to secure the work. Notwithstanding Mr. Lemmerick's considerable efforts to stay in touch with potential clients, prepare for and make presentations, the company had no income in 1997 and 1998.
[7] With such a decline in business, the Respondent took the position that many of the expenses incurred by the company were personal expenses of Mr. Lemmerick. Mr. Lemmerick did acknowledge that his personal affairs and the company's affairs were intermingled, even to the extent that bank accounts were shared. Attached is Schedule "A" to the Reply, which sets out the expenses attributed by the Respondent to the benefit of Mr. Lemmerick.
[8] Mr. Lemmerick was unable to supply any supporting documentation for such expenses, having left boxes of records for 1997 and 1998 behind in Edmonton when he moved to Kelowna in 1999. Yet, it is not the quantum of the expenses at issue, as the numbers from the company's financial statements have been accepted by the Respondent, rather it is the allocation of such expenses between business and personal use.
[9] Mr. Lemmerick's response to the suggestion that the expenses incurred by the company as shown in Schedule "A", were for his personal benefit was that: firstly, with respect to home-related expenses, the only reason he owned the house was for business purposes, describing it as no personal advantage but simply necessary to get the business in shape; secondly, with respect to auto, travel, office and general supplies expenses he queried why would the company have incurred these costs if not for business purposes.
[10] He went on to add that he had multiple trips to Ontario. He also believed the office and supplies expenses simply represented normal operating costs. Regrettably for Mr. Lemmerick, without any records other than financial statements, he could not specifically identify exactly what the expenses pertained to. He was unable to offer any supporting evidence.
[11] With respect to the home, Mr. Lemmerick gave no indication as to his work routine in the house during the relevant period or even how the space was used. In 1996, a year in which the company earned income, the Respondent allowed 50% of the home-related expenses as legitimate business expenses. According to the appeals officer, Mr. Richard Andrews' review of the government file, this percentage was based on square footage usage. When the Minister first assessed Mr. Lemmerick's 1997 taxation year, only 10% of the home-related expenses were allowed as business expenses, but on appeal the appeals officer increased that to 32% as can be seen from Schedule "A". The Respondent determined a fair market value rent for the property would have been $10,200. The Respondent also allowed 50% of the automobile and travel expenses, and $2,273 worth of office supplies.
[12] Mr. Lemmerick's explanation as to how he survived financially during these lean years, was that he borrowed $70,000 from two siblings, neither of whom testified.
Analysis
[13] The Respondent conceded that the amount of the shareholder benefit in 1997 should be reduced by:
(a) $12,000, representing an adjustment to Mr. Lemmerick's shareholder loan account previously not taken into account;
(b) $1,476 representing the cost of shelving used in the business.
The amount of benefit at issue in 1997 is therefore $29,304 less these two amounts, leaving $15,828.
[14] Mr. Lemmerick has been assessed pursuant to subsection 15(1) of the Act which reads:
15(1) Where at any time in a taxation year a benefit is conferred on a shareholder, or on a person in contemplation of the person becoming a shareholder, by a corporation otherwise than by
(a) the reduction of the paid-up capital, the redemption, cancellation or acquisition by the corporation of shares of its capital stock or on the winding-up, discontinuance or reorganization of its business, or otherwise by way of a transaction to which section 88 applies,
(b) the payment of a dividend or a stock dividend,
(c) conferring, on all owners of common shares of the capital stock of the corporation at that time, a right in respect of each common share, that is identical to every other right conferred at that time in respect of each other such share, to acquire additional shares of the capital stock of the corporation, ...
..
(d) an action described in paragraph 84(1)(c.1), (c.2) or (c.3),
the amount or value thereof shall, except to the extent that it is deemed by section 84 to be a dividend, be included in computing the income of the shareholder for the year.
[15] There is no disagreement between the parties as to the amount of the total expenses claimed by the company. There is also no dispute as to the fair market value rental amount determined by the Respondent. The sole issue is what proportion of such expenditures in 1997 was a personal benefit conferred on Mr. Lemmerick by the company. Notwithstanding Mr. Lemmerick's opinion that the house was acquired solely for business purposes, he clearly lived in the house. It was his home. He derived a benefit from the company providing this accommodation rent-free. In 1996, the Respondent assessed the split between business and personal in the home as 50-50. In 1997, the Respondent adjusted the business use down to 32%. Mr. Andrews indicated the percentage in 1997 was based on 600 feet of the 1,800 square foot home being used for business purposes. Mr. Lemmerick has not given me any explanation to contradict that usage. Indeed, he admitted that business activity in 1997 was down from 1996, apparently justifying the Respondent's downward adjustment from 50% to 32%. Mr. Lemmerick has been unable to demolish the Respondent's assumptions in this regard.
[16] With respect to the fixed asset expenses, apart from the concession on the shelving, there is no evidence the other assets (dishwasher and lawnmower) pertained to the business use of the premises.
[17] Finally, in connection with auto, travel and office expenses, while I believe the company did incur travel expenses for business purposes in 1997, Mr. Lemmerick has not provided any supporting material for me to alter the amount allowed by the Respondent of $3,069.
[18] I have some sympathy for Mr. Lemmerick who was experiencing both business and personal difficulties in the late 1990s. He left Edmonton in 1999 and, unfortunately, did not take any of his documents or records for 1997 with him. He claims he is an honest man. I believe him. I believe he did keep proper books and records in 1997 as he was required, but he has been unable to produce such documents to justify the business nature of the expenses beyond what the Respondent has allowed. He also has been unable to provide detailed explanations of the expenditures in question. He has offered broad, general statements only. Under these circumstances, I am left to rely upon the Respondent's assumptions.
[19] The appeal for the 1997 taxation year is allowed and referred back to the Minister for reassessment to the extent of the $13,476 conceded by the Respondent as not being a shareholder benefit.
Signed at Ottawa, Canada, this 9th day of September, 2005.
Miller J.
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