Fenney v. The Queen, docket 2000-2692-IT-I (Informal Procedure)

Date: 20010628

Docket: 2000-2692-IT-I

BETWEEN:

RICHARD FENNEY,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Miller, J.T.C.C.

[1]            This is an appeal by Richard Fenney of the Minister's reassessment of Mr. Fenney's 1994 taxation year. In that reassessment the Minister assessed gross business income of $28,400.00 and allowed business expenses of $11,914.00, resulting in net business income of $16,486.00. All of the income and expenses relate to the construction of a pool and pool house by Mr. Fenney for Mr. Nadir Jamal. Mr. Fenney claims he made no money on the pool construction project. The issue is the quantum of deductible expenses on this project.

[2]            I found Mr. Fenney's testimony was honest and straightforward. He built a pool and pool house. He did so as inexpensively as possible as he knew he would not make any money on the project. He took on the project because it would provide some visibility in the community and allow him to gain something of a reputation as a contractor. Work was generally slow at that time and only those who appeared to be working would have opportunities to continue to get work. Mr. Fenney was otherwise unemployed he, his wife and three children were living on social assistance. I do not question Mr. Fenney's motivation for taking on this project. As he put it, he needed to break out of the cycle of poverty and this was how he chose to do it. He acknowledged he lacked business acumen; he was indeed a poor record keeper. As he felt he lost money on the project the importance of record keeping seemed insignificant. Only when questioned by the government did he realize his potentially costly error in not maintaining adequate records. He then attempted to piece together as many receipts, invoices and bank records from 1994 as he could, once it became apparent from his dealings with representatives of Canada Customs and Revenue Agency that without such support, his claim that his expenditures exceeded his income was unlikely to succeed. The difficulty in providing support for the expenses stemmed from a variety of reasons. Firstly, this was a new venture for Mr. Fenney, entering the risky world of a self-employed contractor. Secondly, he acknowledged no capacity for record keeping. Thirdly, several years had lapsed since the actual expenditures were made. Fourthly, Mr. Fenney was attempting to build the project as inexpensively as possible, knowing it was unlikely to be profitable. For this reason he acquired materials on a cash basis by contacts made through the local Super Shopper paper. On this basis he would acquire used materials at low prices. He would also attempt to have sub trades work in their spare time at reduced rates.

[3]            There is no question that Mr. Fenney built a rather substantial pool and pool house based on his evidence and supporting photographs. It is also clear he was paid $28,400.00 for the project by Mr. Jamal. The Minister was able to find substantiation for $11,914.00 worth of expenditures. Mr. Fenney testified as to the following expenses, for which he could provide no supporting documentation other than his own handwritten notes.

                Windows and doors             $2,170.00

                Electrical                                 $1,400.00

                Pool liner                                $650.00

                Carpeting                                $650.00

                Drywall                   $500.00

                Insulation                               $1,200.00

                Welding                  $300.00

                Concrete                                 $2,600.00

                Manual labour       $2,400.00

                Total                                        $11,870.00

Mr. Fenney was able to provide some supporting documentation for the following:

                Pool         $900.00

                Certificate of Inspection      $72.00

                Total        $972.00

The total amount of expenses presented by Mr. Fenney at trial which had been disallowed by the Minister was $12,842.00 There was some confusion as to the payment of $2,400.00 for labour as Mr. Fenney's or Mrs. Fenney's handwritten notes suggests this was an amount paid to Mr. Fenney himself, not a third party, but Mr. Fenney denied this to be the case. The Appeals Officer categorized the $2,400.00 as what she believed to be Mr. Fenney's income earned in this project.

[4]            The real issue I am faced with is whether I can allow deductions for expenses when the only evidence of such expenses is the Appellant's own testimony. I believe Mr. Fenney when he says that it is impossible that such a pool and pool house could have been built for anything close to the $11,914.00 the Minister is allowing. I also accept his statement that it is ludicrous to suggest Mr. Jamal would have paid $11,914.00 for the cost of the project and paid Mr. Fenney a $16,486.00 profit. I am satisfied the cost of the project was significantly greater than $11,914.00.

[5]            Counsel for the Respondent argued that Section 230 of the Income Tax Act places an obligation on the taxpayer to keep adequate records, and if a taxpayer falls short of meeting an appropriate standard in this regard, the taxpayer cannot rebuff the Minister's assumptions. She relied on the following paragraphs from the Federal Court of Appeal decision in Njenga v. The Minister of National Revenue, 96 DTC 6593, in support:

3               The Income tax system is based on self monitoring. As a public policy matter the burden of proof of deductions and claims properly rests with the taxpayer. The Tax Court Judge held that persons such as the Appellant must maintain and have available detailed information and documentation in support of the claims they make. We agree with that finding. Ms. Njenga as the Taxpayer is responsible for documenting her own personal affairs in a reasonable manner. Self written receipts and assertion without proof are not sufficient.

4               The problem of insufficient documentation is further compounded by the fact that the Trial Judge, who is the assessor of credibility, found the applicant to be lacking in this regard.

[6]            Certainly the Court made it clear in Njenga that the burden of proof of elligible deductions rests with the taxpayer, and that the taxpayer must maintain documentation in support of claims. However, in Njenga it was clear that the trial Judge found the Appellant lacking in credibility. That is not the case here. I believe Mr. Fenney's assertions. I do not read Njenga as an absolute prohibition on allowing undocumented expenses: it should be read in the light of a non-credible witness.

[7]            With a credible witness such as Mr. Fenney I am prepared to consider the expenses he raised at trial with a view to assessing the reasonableness of such expenses. With one exception, I find each of the items presented by Mr. Fenney represents a legitimate expenditure on the pool and pool house. If anything, the expenses appear significantly on the low side. As there is some documentation suggesting the $2,400.00 for labour may have been paid to Mr. Fenney, I am not prepared to allow this as a deductible expense.

[8]            Although Mr. Fenney stated he did not make any money on this project he has only presented to me a listing of expenses totalling $12,842.00 over and above the expenses already allowed by the Minister. Of this amount I find $10,442.00 to be reasonable deductible business expenses. I therefore allow the appeal in part and refer the matter back to the Minister for reassessment and reconsideration on the basis that Mr. Fenney can deduct the $11,914.00 previously allowed by the Minister as well as $10,442.00 which I am allowing for a total of $22,356.00 in expenses against business income of $28,400.00 I make no award of costs.

                Signed at Ottawa, Canada this 28^th day of June, 2001.

"Campbell J. Miller"

J.T.C.C.

COURT FILE NO.:                                                 2000-2692(IT)I

STYLE OF CAUSE:                                               Richard Fenney v. Her Majesty the Queen

PLACE OF HEARING:                                         Toronto, Ontario

DATE OF HEARING:                                           June 18, 2001

REASONS FOR JUDGMENT BY:      The Honourable Judge Campbell J. Miller

DATE OF JUDGMENT:                                       June 28, 2001

APPEARANCES:

For the Appellant:                                                 The Appellant himself

Counsel for the Respondent:              Brianna Caryll

COUNSEL OF RECORD:

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2000-2692(IT)I

BETWEEN:

RICHARD FENNEY,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on June 18, 2001 at Toronto, Ontario by

the Honourable Judge Campbell J. Miller

Appearances

For the Appellant:                                         The Appellant himself

Counsel for the Respondent:                         Brianna Caryll

JUDGMENT

The appeal from the reassessment made under the Income Tax Act for the 1994 taxation year is allowed, without costs, and the matter is referred back to the Minister for reassessment and reconsideration in accordance with the attached Reasons for Judgment.

          Signed at Ottawa, Canada this 28^th day of June, 2001.

"Campbell J. Miller"

J.T.C.C.