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Citation: 2004TCC247
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Date: 20040512
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Docket: 2001-2324(IT)G
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BETWEEN:
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ALLAN ORCHESON,
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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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and
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Docket: 2001-2325(IT)G
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BETWEEN:
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LORNA ORCHESON,
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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
Teskey, J.
[1] These appeals were heard on common
evidence.
[2] Allan Orcheson
("Allan") appeals his reassessment of income tax for
the taxation years 1995, 1996, 1997, 1998 and 1999.
[3] Lorna Orcheson
("Lorna") appeals her reassessment of income tax for
the taxation years 1996, 1997, 1998 and 1999.
[4] These appeals revolve around the
rental of cottages (the "Activity") fronting on
Lake Simcoe, near Keswick, known as
311 Lake Drive, 454 Lake Drive and
470 Lake Drive (now known as 314 Glenwoods
Avenue), all in the Town of Georgina.
Issues
[5] There are six issues involved,
namely:
(i) Whether income from the
Activity constitutes income from a business or income from
property;
(ii) If I find that it is income
from a business, then was there a valid election filed in
accordance with subsection 249.1(4) of the Income Tax
Act (the "Act")?;
(iii) What does paragraph 5 of
the Replies to both Notices of Appeal mean?
(iv) Whether the T4 issued for the
year 1997 by Londonderry Capital Structuring Ltd. for Lorna is
accurate.
(v) Whether the Activity in the years
in question consisted of two or three cottages.
(vi) Whether the Appellants are
entitled to deduct expenses in excess of those permitted by the
Minister of National Revenue (the "Minister").
The Evidence Adduced
[6] Keeping in mind that the
assessments are deemed valid and correct and that the onus of
proof lies with the Appellants to demonstrate that the assessment
of tax is wrong, the evidence adduced was most
unsatisfactory.
[7] Lorna was the only witness. Her
testimony was argumentative, repetitive and evasive. A discussion
usually ensued after every question. As a result of her reticence
to answer simple questions, the hearing that should have taken
conservatively half the time, took three and a half days. When
asked what taxes were expensed for 1995, the answer was: "We
used 11 months of 1994 for our year-end 1995 plus one
month of 1994." I asked Lorna on one occasion, when dealing
with the cancelled cheques, "Do you have a bill?",
several questions and answers went back and forth, then, when I
said: "Do you want to answer the question before you carry
on?", she said: "You see the implication is I don't
have a bill. I don't have supporting evidence. If that is not
the implication, then yes, I don't have an invoice but I do
have a record of this cost!"
[8] Since the 1999 assessment was
based on a gross income of $34,430.00 and allowed expenses in a
lump sum amount of $12,836.00, producing a net profit for the
activity of $21,594.00, which was apportioned equally between
both Appellants, it called into contention all items of expenses,
including some items that were never challenged before by
previous assessments.
[9] Lorna describes herself as a
professional accountant. She is a member of the Society of
Management Accountants of Ontario. The receipt for her 1997/1998
dues is attached to her T1 tax return for 1997.
[10] Lorna stated that she and Allan provide
firewood, barbeques, picnic tables, swimming and fishing in
Lake Simcoe, a boat, a canoe, boat launching dock,
snowmobiling, ice fishing, skating, cross-country skiing, in
addition to fully furnished housing.
[11] Lorna stated that the tenants get
exclusive use of the whole property on which the cottage that is
rented sits on and that a tenant can store an ice hut on the
property. There are no common areas.
[12] The cottage is clean when a tenant
moves in and is supplied with fresh linen.
[13] The Activity was described, in answer
to my question: "Tell me about the cleaning and what you
do." The answer was: "Fully furnished accommodations,
cleaning services, we shovel the snow, we clean the yard; as a
marina: boat launching and docking."
[14] Lorna has a full time job and two part
time jobs. Allan has a full time job.
[15] No evidence was adduced whatsoever as
to the type of tenancy they experienced in the various seasons.
Were the cottages rented normally for the ice fishing season,
which would be three months, or by the month, or by the week, or
by the weekend, the same as in the summer season? What was
typical? This was not put in evidence.
[16] Thus, there is no way I can determine
the amount of snow shovelling, cleaning or linen replacement that
took place.
[17] The Appellants advertised their
activity in a local paper, the EZR Banner, and in the Toronto
Star each year. The only evidence they produced was cancelled
cheques. Not one invoice or tear sheet was produced. Even one for
the 2003 year could have been produced as representative. This
would have assisted the Court in determining the type of rental
that was offered.
[18] No bank statements were adduced, nor
tenant lists nor a rate schedule for any of the cottages.
[19] No description was given of each
cottage. Therefore, it is not known if they are
one-bedroom, two-bedroom or 10-bedroom
cottages.
[20] No evidence was adduced as to the gross
rental received for 1999. The alleged business bank statements
were not produced. A rental diary, if one was kept, was not
produced. The appellants' position was simply: "In
previous assessments, our gross rental was accepted, therefore
for 1999, it should again be accepted."
[21] In regards to issue (iv), the T4
that is alleged to be for the wrong amount, the Court is asked to
accept Lorna's word that it is in the wrong amount. Again, no
bank records or any other supporting documentation was brought
forward.
[22] The evidence on the expenses will be
dealt with later on herein.
The Law on Issue (i)
[23] The Appellant referred the Court to a
1982 Revenue Canada Interpretation Bulletin. As an interpretation
bulletin is not the law, I will deal with the case history. The
reliable jurisprudence starts with two Exchequer Court of Canada
decisions, the 1984 decision of Wertman v. Minister of
National Revenue, 64 DTC 5158 and a 1965 decision,
Walsh v. Minister of National Revenue, 65 DTC 5293,
followed by a Supreme Court of Canada decision in 1986,
Canadian Marconi v. Canada, [1986] 2 S.C.R. 522.
[24] Thurlow J., in the Wertman
decision, was dealing with an apartment building in Vancouver. He
said in paragraph 22 and 23 thereof:
Under the Canadian statute what is taxed as income from a
property or a business is the 'profit therefrom' for a
taxation year, and this poses the question 'what is the
profit from the property or business?' In the great majority
of cases it is quite immaterial whether the profit is regarded as
arising from a business or from property, but when the question
does arise, it is in my opinion simply one that must be resolved
on the facts of the particular case and I know of no single
criterion on which it may be determined. That the rentals are
primarily or entirely receipts from property may be a factor of
great importance but it is not necessarily conclusive for the
question in a case such as the present one is not so much what
the income is derived from but whether the income can be fairly
described as income from a business within the meaning of that
term as used in the Act. Moreover, cases are I think readily
conceivable where particular income may be accurately described
as income from property and just as accurately regarded as income
from a business.
On the evidence in the present case the sum received as
rentals from the Park Strand should I think be regarded as having
accrued to the appellant and his wife and son predominantly, if
not entirely, in their capacity as owners of the property rather
than as traders, and I also think that the rentals should be
regarded as having accrued predominantly, if not entirely, from
the use by tenants of the property in the sense that they
represent payments for the tenants' occupation thereof rather
than payments arising from the process of letting apartments and
providing certain limited services such as heat of which the
tenants have the benefit. To my mind while there is a sense in
which the rentals can be said to be revenues from a business of
letting apartments or operating an apartment building for the
purpose of securing rentals, it is a fanciful and unrealistic way
of describing them for it puts the emphasis of the description of
their source where it does not belong viz., on the mere sine
qua non or conduit pipe of the letting activity rather than
on the fact that they arise from the use or exercise of the
owners' right of occupation of the property by tenants who
pay not for the letting but for the use of the property. There
may well be cases wherein the extent of various services provided
by the landlord under the terms of the leasing contract is such
that the rental paid by the tenant can be regarded as in a
substantial measure a payment for such services as well as for
the use of the property and the interrelation of the use of the
premises with the use of such services may be so extensive that
the whole sum paid could readily be regarded not as mere rental
of property but as true receipts of a business of providing
apartments and services to tenants but I do not regard this
as a case of that kind. The nature of the services provided in my
opinion also has a bearing on the question some, such as maid
service and linen and laundry service, being more indicative of a
business operation than the heating of the building which in my
view is so closely concerned with the property itself as to offer
no definite indication one way or the other. Nor do I think that
the fact that the management of the property occupies the
appellant's time or the fact that he uses his car to go to
and from the property indicate that the operation is a business
for at most these facts indicate that he renders a service to
himself and to the other owners of the building which so far as
charged for represents a proper outgoing against revenue for the
purpose of ascertaining the net profit divisible among the owners
regardless of whether the rentals are mere income from property
or income from a business. If the appellant had a profit from
such charges it would no doubt be taxable as his income but there
is no indication that he had any profit therefrom and no such
issue has been raised. Moreover while the appellant's share
of the net profit of the Park Strand may to him represent both
his share of the profit and in a sense the result of his efforts
the share of his wife in her hands does not represent return for
effort on her part but simply income from her property and it is
her share alone with which the case is concerned. On the whole
there appears to me to be nothing in the situation which affects
the rentals with a trading character as distinct from mere income
receipts from property and I am accordingly of the opinion that
the profits from the Park Strand were not profits from a business
and that the operation of the Park Strand was not a business in
which the appellant and his wife were partners. Section 21(4)
therefore cannot be invoked to support the assessment.
(The underlining is mine.)
[25] Cattanach J., in the Walsh
decision, was dealing with two large apartment buildings and a
shopping centre. He said in paragraphs 22 and 25
thereof:
22 In my view,
prima facie the perception of rent as land owner is not
the conduct of a business, but cases can arise where the extent
of the various services provided by the landlord under the terms
of a leasing contract and the time and labour devoted by him are
such that the rental paid by the tenant can be regarded as in a
substantial measure payment for such services as well as for the
use of the property and the interrelation of the use of the
premises with the use of such services may be so extensive that
the whole sum could readily be regarded not as mere rental of
property, but as true receipts of a business of providing
apartment suites and services to tenants. It is a question of
fact as to what point mere ownership of real property and the
letting thereof has passed into commercial enterprise and
administration.
...
25 On the evidence I
think that the rentals received by the appellants should be
regarded as having accrued to them as owners of the properties
rather than as traders and that the rentals accrued from use by
the tenants of the property in that the rentals represent
payments for their occupation thereof rather than from a
combination of such use and the other services from which the
tenants benefited. I regard the additional services which were
provided to tenants as being relatively insignificant and
insufficient to convert the appellants from land owners into the
conductors of a business. The services such as the provision of
heat, electric stoves and refrigerators, janitorial services to
the common hallways, snow removal, carpeting in some rooms of the
suites and drapes for windows are those which tenants have come
to expect and are those which landlords normally provide in
living accommodation of this kind. These are refinements offered
to the tenants in connection with the occupation of suites and,
in most instances, are also property for the use of which, along
with the suites themselves, rent is paid. The heating of the
building and snow removal are ancillary to the property itself
and are exercised in the landlords capacity as owner of the
property rather than as a service to tenants although the tenants
incidentally enjoy the benefits thereof. While the nature of
services provided has a bearing on the question, the services
above described are not such as would characterize the rental
received therefor as income from a business rather than income
from property, as services such as the provisions of breakfast,
maid, linen, laundry and such like services might do.
[26] Wilson J., for the Court, in the
Canadian Marconi decision, said in paragraph 7
thereof:
7 The
distinction between income from a business and income from
property is a difficult one to draw but it is one which the Act
compels us to make. There are two reasons for the difficulty.
First, the terms "business" and "property"
are broadly and loosely defined in s. 248(1) of the Income Tax
Act. As a consequence the definitions on a fair reading can
be construed in such a way as to overlap. Second, persons or
corporations generally [page528] engaged in trading-type activity
often use property as a means of earning income. On first
reflection this sort of income could realistically be considered
either business income or property income. The observation of
Thurlow J. (as he then was) in Wertman v. Minister of National
Revenue, 64 D.T.C. 5158 (Ex. Ct.), at p. 5167, that
cases are "readily conceivable where particular income may
be accurately described as income from property and just as
accurately regarded as income from a business" is frequently
apposite. The courts have handled the difficult task of deciding
whether a particular receipt is business income or property
income by applying certain set criteria or indicia of trading
activity and, in the case of a corporate taxpayer, by applying a
presumption in favour of the characterization of its income as
income from a business. I shall examine these in reverse
order.
and in paragraph 12 thereof, she said:
... It is trite law that the characterization of income as
income from a business or income from property must be made from
an examination of the taxpayer's whole course of conduct
viewed in the light of surrounding circumstances: ...
[27] My colleague Margeson J., in Jong v.
The Queen, 98 DTC 1616, referring to the
Walsh decision said in paragraph 81 therein:
... a prima facie case is made out that the amount
received from the property was from rental and not from a
business unless the Appellant can show that the range of services
provided by the landlord was such that the payment received can
be regarded as substantial payment for the services.
[28] This same issue was also dealt with by
now Associate Chief Justice Bowman as he now is, in
Arbutus Garden Apartments Corp. v. The Queen,
98 DTC 1795. In this case, the Court was dealing with an
apartment complex consisting of seven buildings containing
302 units on 12 acres of land. The owners had five
full-time managers, two full-time maintenance people
and two part-time gardeners.
[29] Bowman A.C.J., as he now is, said,
besides quoting from Cattanach J. in the Wertman
decision, in paragraphs 24, 25 and 26:
24 Essentially it is
a question of fact depending on all of the circumstances. I think
that the operation of the Arbutus Apartments goes well beyond the
mere passive perception of rentals. It is clearly a business. It
involved the hiring of five full time managers, who lived in the
project with their spouses, two full time maintenance persons,
and two full time gardeners.
25 During and prior
to the year in question the project was having problems, with a
high vacancy rate and high turnover of tenants. Mrs. Janet Roethe
was brought in, in an attempt to turn the project around and she
was apparently successful. In addition to the work done by the
full time staff, many services were contracted out, such as
gardening, painting and pool maintenance. There were eight acres
of gardens, with elaborate landscaping and two outdoor swimming
pools, games rooms, a health spa, and a number of party
rooms.
26 Far more services
were provided to the tenants (many of whom were seniors) than
would normally be the case in an apartment building. Mrs. Roethe
testified that in the early part of the seven years in which she
worked at attempting to rehabilitate the project she spent five
days a week at the property.
[30] The use of Lake Simcoe for
boating, swimming or fishing is not a service. The use of a
barbeque, a picnic table, a phone, a television and deck chairs
are likewise not a service. Clean linen changed daily as well as
daily cleaning of the cottages would be services. There is no
evidence that this volume of service was performed. Both
appellants have full time jobs in Toronto.
[31] Since income herein is rental income,
the Court must start with the premises that it is income from
property, as opposed to income from a business. Since the
evidence has not established that a substantial portion of the
rents were for services, I can only find that the income was from
property.
Issue (ii)
[32] Having decided that the income herein
is income from a property, issue (ii) does not have to be
addressed. However, it should be noted that Strayer J., as
he then was, in Canada v. Adelman, 1993FCJ776, when
dealing with a different election than herein but nevertheless
one that conferred on a taxpayer the right to take advantage of a
provision, said in paragraph 12 thereof:
... It seems neither unjust nor unreasonable, nor in any way
inconsistent with the Act or the Regulations, for a taxpayer to
be required to adhere strictly to the procedure prescribed by the
law for the exercise of this right having regard to the fact that
its exercise will affect his position and that of the Minister
...
[33] Therein, an election was not in
prescribed form. Herein, the election was not only not on the
prescribed from, but was after the time period provided by the
Act.
[34] The arguments of the Appellants that
they always used a January 31 year-end, that they
could not obtain the prescribed form and that they believed they
had an agreement that protected their January 31
year-end are just not valid.
[35] Thus, even if I had determined that
their activity was a business (which I expressly do not) I would
hold that there was no valid election filed on time pursuant to
subsection 249.1(4) of the Act.
[36] The Appellants referred the Court to
the decision of Rowe, D.J.T.C.C., in Thomson et al. v. The
Minister of National Revenue, 93 DTC 320, a
director's liability case. I can find nothing therein that
would aid or assist the Appellants herein, and in any event, I do
not find that they had an honest or well-founded belief, as
alleged.
Issue (iii)
[37] Paragraphs c) 10, of both
Notices of Appeal read as follow:
By agreement dated July 14, 1997, the tax department
accepted that our business income and expenses included the three
aforementioned properties for our 1989, 1990, 1991, 1992, 1993
tax years. That agreement included acceptance of our reporting
results on the fiscal year-end basis of January 31.
Consistent with that agreement, the tax department reassessed our
1994 returns for the activities of these same three properties
reported on the same basis. Our business properties and fiscal
year-end have not changed in the current period, 1995 to
1999 inclusive.
Summertime accommodation at these properties provided
swimming, fishing, boat launching and outdoor camping in addition
to fully furnished housing. Wintertime accommodation provided
skidooing, ice fishing, skating, xcountry skiing, campfires as
well as indoor accommodation. The nature of our business has not
changed in the current period, 1995 to 1999 inclusive.
In the current audit period, there was a demand for our filing
the business operations of calendar year 1999. Effectively, this
was our 2000 year-end, which was not required by the Act
from us at the time.
In the previous audit of our year-ends January 31,
1989, 1990, 1991, 1992 and 1993, our automobile expenses were
allowed. Consistent with that manner, the tax department allowed
our automobile expenses for January 31, 1994.
The tax department is unable to provide us with specific
references to the Income Tax Act, Regulations, policy and
procedure upon which the department relied in disallowing one
quarter of our annual expenses while taxing our annual incomes
for reasons referred to as "seasonal" for the audit
period 1995 to 1999 inclusive.
[38] Paragraphs 5 of both Replies to
the Notices of Appeal (the "Replies") read:
5. With
respect to paragraph (c) 10 of the Amended Notice of
Appeal, he admits that the Appellant was requested to file
financial statements for his rental activity for the 1995, 1996,
1997, 1998 and 1999 taxation years. He also admits that the
Appellant was permitted a deduction for automobile expenses for
the 1995, 1996, 1997, 1998 and 1999 taxation years as set out
under the headings "Allowed" in
Schedule "A" hereto. He denies all other
allegations of fact contained in paragraph (c) 10 of
the Amended Notice of Appeal and he states that all facts alleged
regarding the Appellant's assessments for the 1989, 1990,
1991, 1992, 1993 and 1994 taxation years are irrelevant to the
determination of the Appellant's appeals for the 1995, 1996,
1997, 1998 and 1999 taxation years.
[39] Schedule "A" to both
Replies is a schedule showing under different headings
"Claimed" and "Allowed" in regards to the
expenses. Under the heading "Auto", nothing was
allowed.
[40] The Appellants argue that
paragraph 5 allows automobile expenses and I therefore
should allow whatever they have claimed.
[41] I do not interpret paragraph 5 in
this way, as it obviously contains a typing error and I will deal
with automobile expenses hereafter, when dealing with expenses
generally.
Issue (iv) - Income Different From T4
[42] When Lorna filed her T1 General tax
return (Exhibit A-19) she claimed that a T4 received
from Londonderry Capital, showing employment income of
$32,453.82, was in error and it should have shown a gross income
of $29,038.49.
[43] No evidence was adduced other than her
word that the income was $29,038.49. She could have produced her
bank statements showing the deposits. I probably would have
accepted one statement and calculated from that the yearly gross
income. Obviously, in February of 1997, she could have assembled
some documentation that would have confirmed her allegation that
the T4 was not accurate.
[44] I therefore do not accept her position
and find that her employment income, as assessed, is correct.
Issue (v) - Two Cottages or Three Cottages
[45] The reported gross income for
year-end January 31st, 1996 was as $22,300.00 and for
year-end January 31st, 1997, it was as $32,350.00. I
accept the testimony that the reasons for this $10,000.00
increase were that repairs for 311 Lake Drive was completed
and it was rented. I accept that the Appellant started renting
311 Lake Drive in September of 1996.
[46] Thus, for calendar year 1996, the
expenses for 311 Lake Drive for the last four months are
acceptable and prior to that time are not allowed.
[47] I therefore find that from September
1996 onward, the Activity comprised of the rental of all three
properties.
Issue (vi) - Deduction of Further Expenses
[48] The 1999 assessment allowed a deduction
from gross income of $12,836.00. Thus, the Appellants were in the
position that they had to show allowable expenses greater than
this amount.
[49] The Appellants sought to deduct
interest in the amount of $14,461.34, made up of $12,063.72 paid
to Hepcoe Credit Union ("Hepcoe") and $2,397.62 paid to
National Bank, who took over Family Trust ("Family
Trust").
[50] The Hepcoe mortgage is against the
Appellants' residence, municipally known as 63 Chudleigh
Avenue, Toronto.
[51] Nothing is known about the Hepcoe
mortgage other than the information shown on
Exhibits A-3 and A-4. Exhibit A-3 is
a statement showing the interest paid on the mortgage each year,
1994 to and including 1999. Exhibit A-4 is a statement
showing the principal amount owing as of December 1994 and each
year to and including December 1999.
[52] No evidence was adduced as to when the
Hepcoe mortgage was originally taken out or what the money
therefrom was used for. Thus, having failed to demonstrate that
the money was used in the Activity, the Appellants are not
entitled to deduct any amounts paid to Hepcoe.
[53] The only evidence concerning the Family
Trust mortgage, other than interest and principal payments, is
contained in Exhibit A-6, which is a statement from
Family Trust that shows the mortgage is on 454 Lake Drive
South, Keswick.
[54] No evidence was adduced as to when any
of the properties were purchased or for how much, and on what
terms. In fact, on the second day of the hearing, when asked
specifically when 311 Lake Drive was purchased and for how
much, the answer given was: "I do not recall." The same
answer was given in regards to 454 Lake Drive. The answer
was: "I am not going to guess." Thus, no basis was
established for the Family Trust mortgage interest to be
deducted.
[55] The information concerning the date of
purchase and the amounts paid for each property could easily have
been given the following day of the hearing. The Appellants
obviously chose not to disclose this information to the Court or
to attempt to track the principal amount of the mortgages. Thus,
I do not allow as an expense the interest on the Family Trust
mortgage in 1999.
[56] The Appellants always claimed that
their year-end was January 31. Thus, for the 1999
assessment, they produced the 1998 municipal tax bills for the
three properties totalling $6,707.84.
[57] The 1998 water and sewer bills for
314 Glenwoods Avenue for 1998 were for a total amount of
$253.86.
[58] No 1999 final tax bills or water bills
were produced, so I am going to gross up the 1998 taxes by 10% to
a total amount of $7,378.62, combined with the sewage and water
charges also grossed up by 10% for a total amount of $7,658.00.
Thus, the sum of $7,658.00 can be deducted from the allowed
expense sum of $12,836.00, leaving $5,178.00.
[59] The only evidence of the type of
automobile used was that it was said to be a very old Volvo,
owned by Allan. On the first day of the hearing, Lorna could not
recall what they were driving.
[60] Without evidence from Allan, the owner
of the vehicle, or more substantial evidence than that received
from Lorna, I do not allow any amount for automobile
expenses.
[61] Since all other amounts claimed by the
Appellants as expenses do not total $5,178.00, the amount of
expenses of $12,836.00 allowed in the assessment stands. It
should be noted that other than the 1999 interim tax statement,
not one document was produced to substantiate a 1999 year
expense.
[62] Thus, the assessment for 1999 stands
and the 1999 appeals will be dismissed.
[63] In regards to the years 1995, 1996,
1997 and 1998, my position on the deductibility of the mortgage
interest and car expenses remains the same and therefore, there
will be no changes in these categories.
Taxes and Water
[64] In regards to taxes for 1995, it
appears that the assessment allowed taxes and water on only two
properties, namely 470 and 454 Lake Drive South, the 1995
taxes on these two properties totalled $3,743.51. As the amount
allowed is greater than the taxes on the two properties, it
therefore stands.
[65] Since 311 Lake Drive was rented
from September of 1996, one third of the 1996 taxes should be
allowed, namely the amount of $425.33. The allowed amount under
this heading was $4,878.00, while the taxes on the other two
properties totalled $3,780.44, together with $425.33, for a total
amount of $4,205.77. Thus, the Appellants have not shown that
they should be credited any more than already allowed.
[66] The assessment of 1997 allowed a
deduction for taxes and water in the amount of $4,878.00. The
1997 tax bills for the three properties was $5,180.86. Therefore,
a further amount of $302.96, together with $200.00 (estimated)
for water and sewer, for a total of $502.96, is allowed under
this heading.
[67] The assessment allowed a deduction for
taxes and water in the amount of $4,878.00 for 1998. The 1998 tax
bills for the three properties was $6,707.84. Therefore, a
further amount of $1,829.84 for taxes, together with $253.94 for
water and sewer, for a total of $2,083.78, is allowed under this
heading.
Cable and Phone
[68] The Appellants were allowed the amounts
claimed for 1995 and 1996.
[69] The Appellants claimed, under this
heading for 1997, the sum of $512.00. The assessment allowed
$82.00. There are two cancelled cheques to Shaw Cable and one to
Bell Canada in 1997 totalling $237.10. The Appellants are allowed
the additional amount of $237.10 , less $82.00, being
$155.10. There are only two cancelled cheques dated in 1998, one
payable to Shaw Cable, the other to Bell Canada for a total of
$87.39. Since the assessment under this heading for 1998 allowed
$100.00, this amount stands.
Maintenance and Janitorial
[70] The Appellants were allowed the amounts
claimed for 1995, 1997 and 1998.
[71] The Appellants claimed, under this
heading, for 1996, the sum of $4,276.00 and were allowed only the
sum of $2,188.00. Having heard the testimony and having looked at
Exhibit A-7, I am not convinced the allowed amount
should be increased.
Advertising
[72] Under this heading, the assessment in
1995 and 1996 allowed the claimed expenses.
[73] For 1997, there are a total of six
cancelled cheques, one to the Toronto Star and five to the EZR
Banner, totalling $344.61. As $182.00 has already been allowed
under this heading, the Appellants are entitled to an additional
amount of $162.61.
[74] For 1998, there are only two cancelled
cheques, one to Bell Canada and one to Shaw Cable, totalling
$87.39, and since the assessment for 1998 allowed $191.00 under
this heading, therefore that amount stands.
Bank Charges
[75] The Respondent at the hearing conceded
that the Appellants should be allowed, under this heading the
amount as claimed. Therefore, under this heading, for 1995,
additional expenses of $310.00 are allowed, for 1996, additional
expenses of $276.00 are allowed, for 1997, additional expenses of
$211.00 are allowed, and for 1998, additional expenses of $433.00
are allowed.
[76] If the Respondent had not conceded
these amounts, I would not have accepted them without production
of the business bank statements confirming these amounts. This
category of expense is reasonable but the amounts should be
verified by production of the bank statements, or some other
document from the bank.
[77] As no evidence was presented concerning
the Capital Cost Allowance ("CCA") claimed for the
years 1997 and 1998, thus the claimed CCA is not allowed.
[78] As I am very critical of the lack of
records produced and of the lack of pertinent evidence, and
particularly the comments made in essence that says: "It was
a long time ago.", it should be noted that the Appellants
signed a Consent to Judgment concerning the years 1989, 1990,
1991 and 1992 on the 14th day of July, 1997, in an appeal
commenced in the Tax Court of Canada in 1995. Thus, the
Appellants should, in the very first year of the audit, have
known that their records may be challenged. Both Appellants
received letters from the Canada Customs and Revenue Agency
(the "CCRA"), dated September 22, 1999. The
letter to Allan had a "Re: 1995, 1996, 1997 Tax
Returns" and the letter to Lorna, the "Re: 1995, 1996,
1997, 1998 Tax Returns". Both letters stated no business
statements were filed with the above noted returns. Both letters
asked the following three questions:
1. The names and addresses
of each of your tenants.
2. What was the monthly
rent and how was it determined?
3. For what periods during
each year was each cottage rented?
The answer to these three questions was never provided to the
CCRA or to the Court.
[79] The CCRA sent a letter to Lorna, dated
August 4, 2002. The second full paragraph stated:
As you did not provide all the information requested, and were
not responsive to the providing of information, you impeded and
delayed the completion of our review. The lack of information has
resulted in changes to your filed statements. As you did not
provide all the documentation and information requested, the
proposed adjustments are being made based on the available
information. In terms of the receipts and cancelled cheques you
did provide, they could not at times be identified as a rental
expense. As well, the receipts were not segregated in accordance
with the correct fiscal year of December 31st.
This letter obviously sets out the basis of the reassessments
for 1995, 1996, 1997 and 1998.
[80] Many cash register receipts were
produced, many of which do not specify what was purchased.
[81] Proper bookkeeping records would have
assisted a great deal.
[82] I find it very difficult to believe
that the Appellants deliberately discarded invoices for such
things as the advertising and a copy of the actual advertisement.
I believe these were deliberately withheld from the Court.
[83] The Appellants argue that the
settlement executed in 1997 and their letter of July 14,
1997 protects their January 31 year-end. It does not,
as each year must stand on its own and the Minister cannot enter
into a contract contrary to the law. As well, it is trite law
that there is no estoppel against the Crown.
[84] The Appellants' argument that once
a claim for expenses is allowed on one taxation year, that
forever they should be allowed expenses under that heading is
mistaken. This just is not the law.
[85] The Appellants' argument that once
the Minister accepted their gross income figures for many years,
that their 1999 figure should be accepted. Again, there is no
basis for this. It would have been easy to prove these amounts if
proper books had been kept and bank statements were produced.
[86] Lorna claimed in her testimony that the
CCRA's policy is to do three-year audits and since no fraud
is alleged, they should not have been reassessed for 1999 and
that the assessment should be vacated. This position is also not
valid.
[87] I am driven to the conclusion that
there is an ulterior motive in having so many cash purchases, as
well as so few invoices, together with a total lack of normal
bookkeeping records. The Appellants' actions has to be
described as deliberate.
[88] For all the above reasons, there shall
be issued a judgment as follows. In regards to the appeals of
Allan Orcheson, the 1995, 1996, 1997 and 1998 appeals are
allowed and the assessments are referred back to the Minister of
National Revenue for reconsideration and reassessment on the
basis that he is entitled to deduct further expenses in those
years, namely one-half of the following amounts: $310.00,
$276.00, $1,295.12 and $2,516.78 respectively. The 1999 appeal is
dismissed. Allan Orcheson is not entitled to any further
relief. Costs are awarded to the Respondent on a party and party
basis, to be taxed.
[89] In regards to the appeals of
Lorna Orcheson, the 1996, 1997 and 1998 appeals are allowed
and the assessment are referred back to the Minister of National
Revenue for reconsideration and reassessment on the basis that
she is entitled to deduct further expenses in those years, namely
one-half of the following amounts: $276.00, $1,295.12 and
$2,516.78 respectively. The 1999 appeal is dismissed.
Lorna Orcheson is not entitled to any further relief. Costs
are awarded to the Respondent on a party and party basis, to be
taxed, but to be allowed only one set of preparation costs and
one counsel fee at trial.
Signed at Toronto, Ontario, this 12 th day of May,
2004.
Teskey, J.
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