Morrison v. The Queen, docket 98-2814-IT-G

Date: 20010110

Docket: 98-2814-IT-G

BETWEEN:

GLEN E. MORRISON,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

O'Connor, J.T.C.C.

[1]            These appeals were heard at Toronto, Ontario on November 27, 2000. Testimony was given by the Appellant, Glen E. Morrison, by the Appellant's tax preparer, Maria Elder and by the Canadian Customs and Revenue Agency auditor in charge of this file, Winston Mathew John. Several exhibits were filed.

ISSUE

[2]            The issue is whether the Appellant can deduct business losses of $38,048 in 1993, $45,490 in 1994 and $56,389 in 1995 in relation to a purported business carried on by him as a proprietorship under the name Glen Lyn Import Export Company ("business").

FACTS

[3]            The basic facts are as follows:

1.              At all material times the Appellant was a regional manager of the Government of Ontario, Human Resources Department. His employment income from that source was $64,746 in 1993, $64,298 in 1994 and $69,927 in 1995. His employment was full-time, essentially from 9:00 a.m. to 5:00 p.m. during weekdays.

2.              Glen Lyn Import Export was registered in April of 1992 under the Business Names Act, R.S.O. 1990, c. B. 17 as amended/Limited Partnerships Act, R.S.O 1990, c. L.16 as amended. Although registered as a partnership between the Appellant and two other persons, the Appellant states he operated the business as a proprietorship.

3.              In computing income for the 1992 to 1995 taxation years the Appellant reported gross business income and deducted net business losses with respect to the business as follows:

Year	Gross Business Income	Net Business Income (Losses)
1992	$ 785	($9,038)
1993	$1,100	($38,048)
1994	$9,884	($45,490)
1995	$5,569	($56,389)

Originally the Appellant took the position that some of the expenses giving rise to the losses related to his acting as a real estate agent and some related to carrying on activities in his office in the basement of his home in connection with his employment with the Ontario Government. At the hearing, however, the Appellant indicated that all or substantially all of the expenses related to the business.

4.              The Appellant was unable to produce at the audit stage nor at the hearing any bills, invoices or receipts to back up the expenses claimed. Moreover with respect to 1993 and 1994 the Appellant and the tax preparer were only able to give a general idea of what the expenses comprised. For 1995 the Appellant gave to the auditor, at the time of the audit, a hand-written breakdown of his expenses and a typed version of that was filed as Exhibit R-2. It is useful to reproduce that Exhibit in its entirety as follows:

Glen Everald Morrison

Statement of Business Activities

Glen Lyn Import Export

For the period from 01/01/95 to 31/12/95

Sales                                                                                                        $ 5,569.55

Cost of Goods Sold

Inventory at beginning of period       11,650.00

Add: Purchases                                     9,335.00

Sub-total                                                                 20,985.00

Deduct: Inventory at year end                0.00

Cost of goods Sold                                               20,985.00                 20,985.00

Gross Profit                                                                                 ($15,415.45)

Expenses

Professional fees                                   1,650.00

Advertising                                                               950.00

Management and admin fees                                 960.00

Automobile expenses                                           14,464.65

Insurance                                                                  285.90

Long term debt interest                        3,795.00

Taxes, dues                                                            1,525.60

Office expenses and postage                              2,255.90

Light, heat, water and telephone        3,135.66

Travelling expenses                                              3,262.50

Fuel costs                                                               1,924.60

Meals and entertainment expenses    1,148.00

Maintenance and repairs                     1,565.00

Computer and other equipment          2,425.00

Miscellaneous                                       1,625.90

                                Total expenses                                           $40,973.71          $40,973.71

                                Net Income (loss) from the business                                                 ($56,389.16)

5.              The Appellant explained that he co-operated with the auditor at the time of the audit and indicated that the reason he could not provide documents justifying the expenses was because of a break-in at his house in February, 1996. The Appellant explained that someone broke into his house by means of forcing the garage door, necessitating its replacement. He stated that amongst the items removed from his basement office was a box which contained all of his tax documentation, including receipts for the expenses claimed. The "Synopsis Of Police Report" submitted as Exhibit A-2 indicates that what was stolen was a 16" chainsaw and a variety of tools such as drills/trimmer/pliers/skill-saw, wrenches, etc. It makes no mention of a box containing the tax documents and receipts but the Appellant maintains the word "etc." that follows the word "wrenches" was intended not only for additional tools but also for the said box. The Fire and Casualty Theft Claim Report filed as Exhibit A-3 indicates that in addition to certain tools one of the items stolen was "the tax records (box 24" x 24")". The said Claim Report also indicates the total replacement cost of the items stolen as $775.45. The Appellant explained that in his history as a metropolitan police officer, thefts are essentially grab-and-go as fast as possible and possibly the thieves thought that the box, which was a sealed computer-type box, actually contained a computer or computer accessories and that is why they took only that (plus a few tools) and did not take the television and the actual computer that was hooked up both of which were in the basement office. The Appellant also filed Exhibit A-4 which is an "Inventory/Valuation List of items which the Appellant prepared to illustrate the various items of clothing and cosmetics he alleged he was exporting.

6.              Counsel for the Respondent filed Exhibit R-1 containing various income tax returns and assessments plus at Tab 17 the following letter of Revenue Canada:

Mr. Glen Everald Morrison

48 – 2670 Battleford Road                                    W. John

Mississauga, Ontario                                                           Sec. 443-1-5

L5N 2S7                                                                  4^th Floor W.

                                                                                                (416) 410-9641.

March 12, 1997

Dear Mr. Morrison

Re: Review of your 1993, 1994 and 1995 T1 Income Tax Returns

S.I.N. # 441-968-021

Thank you for your letter of Mach 6, 1997. We have not yet received a signed T2029 "Waiver In Respect Of The Normal Reassessment Period", as requested in our letter of February 27, 1997, we will therefore proceed with the reassessment of your 1993 T1 Tax Return, disallowing the reported business loss of $38,048.

The Department's disallowance of your 1993 business loss is based on the following reasons:

a) Unvouchered and unsubstantiated expenditures.

b) Expenses appear to be unreasonable under the circumstances, when compared to the gross income reported, and

c) There is no reasonable expectation of profit from the business operations, since, from their inception, business loss claimed has increased every year.

You have stated that your home was broken into and your tax records were stolen. This was an unfortunate event. However, it is still possible for you to obtain copies of supplier invoices, sales invoices, bank statements, cancelled cheques, mortgage and loan documents, credit card statements, and other records. Therefore, as stated in our letter of February 27, 1997, unless the records, necessary to verify business loses of $45,490 and $56,389 claimed in your 1994 and 1995 T1 Tax Returns, respectively, are provided by April 1, 1997, these losses will be disallowed.

Should you have any questions or require additional information with respect to our review, please contact Mr. John at the telephone number listed above.

Yours truly,

"Winston John"

W. John

Verification and Enforcement Division

Notwithstanding this letter the Appellant did not seek to obtain the back-up documentation.

7.              The claiming of the business losses was principally responsible for the Appellant receiving income tax refunds as follows:

1992 - $5,557.00

1993 - $17,489.00

1994 - $18,611.00

1995 - $25,362.00

8.              The Appellant submitted as Exhibit A-1 a Business Plan. However no Profit and Loss Forecast Statement was submitted.

9.              The Appellant claimed rental losses of approximately $10,000 to $45,000 in the 1987, 1998, 1989 and 1990 years and "commission losses" of approximately $13,000 and $7,000 in 1997 and 1998. The business of exporting ceased in 1996. The Appellant stated he was building up his import business but it never got off the ground. The Statement of Business Activities for 1995 (Exhibit R-2) indicates sales of only $5,569.55 but also indicates that the Appellant apparently disposed of $20,985.00 worth of inventory.

SUBMISSIONS

[4]            The Appellant submits that he ran the business and blames the theft for his inability to produce receipts. Counsel for the Respondent submitted the Appellant has not discharged his onus and that the activity had no reasonable expectation of profit and in any event the expenses claimed were unreasonable.

ANALYSIS AND DECISION

[7]            For the following reasons I have decided that these appeals must be dismissed with costs:

1.              The Appellant had a full time job with the Province of Ontario, which occupied most of his time. Consequently he did not have that much time to devote to the business.

2.              Gross sales of the business were extremely low compared with the expenses claimed and the losses claimed were increasing every year from 1992 to 1995. This indicates at the very least that there was no reasonable expectation of profit.

3.              The Appellant has the burden to prove the reassessments wrong and this burden has not been discharged.

4.              No expense details were provided for 1993 and 1994 and the Appellant had the opportunity, assuming the tax documentation box was actually stolen to obtain back-up documentation justifying the expenses for all years as he was advised in the letter at Tab 17 of Exhibit R-1.

[8]            In any event subsection 230(1) of the Income Tax Act obliges every person carrying on a business to keep books and records. I refer to Zalzalah v. Her Majesty The Queen, [1995] 2 C.T.C. 368 where the Federal Court stated as follow at paragraph 4:

Subsection 230(1) of the Income Tax Act reads as follows:

230(1)

Every person carrying on business and every person who is required by or pursuant to this Act to pay or collect taxes or other amounts shall keep records and books of account ... in such form and containing such information as will enable the taxes payable under this Act or the taxes or other amounts that should have been deducted, withheld or collected to be determined.

5 The plaintiff frankly acknowledged that he did not keep any books or records during the taxation years here under review. This matter was also raised in the proceedings before the Tax Court of Canada where Lamarre Proulx TCJ stated

The Minister cannot and should not allow business deductions that cannot be proven by documentary evidence. That would bring the administration of the Income Tax Act in the sphere of arbitrariness.

6 I agree with that view of the matter. Likewise, in the case of Holotnak v. The Queen, [See Note 2 below] Cullen J. considered the requirements of section 230 and stated as follows:

	Section 230 of the Act requires taxpayers to keep adequate books and records. "Adequate" is not defined but it would seem that these records should support whatever the taxpayer is claiming for tax purposes.
	The onus of proof that the expenses were incurred for the purpose of earning income is on the taxpayer (Wellington Hotel Holdings Limited v. M.N.R., 73 DTC 5391). Specifically, with regard to assessments, the onus is on the taxpayer to prove that the Minister's assumptions and assessments are wrong (Strayer, J. in Schwarz v. The Queen, 87 DTC 5274) quoting from Johnston v. M.N.R., [1948] S.C.R. 486). The Schwarz case (supra) also involved a situation where the plaintiff's purchases were not supported by vouchers. As Strayer, J. points out, the onus is on the taxpayer to prove wrong the M.N.R.'s reassessment as the taxpayer is in a better position to prove what actually happened.

5.              The total settlement value for the items stolen was only $607.33. Moreover the Synopsis of Police Report does not mention the box of tax documentation, which surely had some value for the Appellant.

6.              The Business Plan and the other plans annexed thereto are essentially promotional in nature and do not reflect what actually happened. Moreover the date the said plans were prepared was not firmly established.

7.              The Appellant stopped the business shortly after the audit which resulted in the disallowance of the business losses. One possibility is that the claiming of the losses was principally directed to obtaining income tax refunds and once the Appellant realized this was not going to happen any more, he stopped the business.

8.              The Statement of Business Activities (Exhibit R-2) indicates sales of only $5,569.55 but also indicates that the Appellant apparently disposed of $20,985.00 worth of inventory. This discrepancy and other factors, such as the business being registered as a partnership but carried on as a proprietorship, the box of tax receipts etc. being stolen but not the T.V. or computer plainly visible in the office and the rental and commission losses claimed in other years do not reflect favourably on the Appellant.

9.              In certain cases a reasonable start-up period for a new business is permitted. Here, however, the losses kept increasing and given the other factors mentioned above, it was not reasonable to consider the years in question as start-up. Moreover the Appellant ceased the business in 1996 and no projections of future years profits were provided.

                For all of the above reasons the appeals are dismissed with costs.

Signed at Ottawa, Canada, this 10^th day of January, 2001.

"T. O'Connor"

J.T.C.C.