REASONS
FOR JUDGMENT
Woods J.
[1]
This appeal under the Income Tax Act concerns
business expenses claimed by Vijitharan Kandasamy in respect of a cleaning
business that he operated as a sole proprietor. The deductions resulted in
business losses that, if proper, could be used to reduce other income.
[2]
The Minister of National Revenue disallowed a
large portion of the deductions claimed, mainly on the basis that there was not
sufficient supporting documentation.
[3]
The taxation years at issue are 2010 and 2011.
Overview
[4]
Mr. Kandasamy operated a cleaning business in
the Toronto area from 2009 to 2011. He testified that he had plans to expand
but the business never became profitable and it was discontinued near the end
of 2011.
[5]
The business charged cleaning fees of
approximately $60 for a “basic clean” and up to $300 for a “deep
clean.” Mr. Kandasamy did the work himself, and
mainly on weekends.
[6]
In the reassessments at issue, the Minister:
-
accepted the gross revenues as reported by Mr.
Kandasamy - $3,458 in 2010 and $7,251 in 2011; and
-
reduced deductions claimed for business expenses
- in 2010 from $32,792 to $7,723, and in 2011 from $32,552 to $7,740.
[7]
At the hearing, Mr. Kandasamy provided receipts
to support part of the deductions claimed. He explained that he did not have
all of them because the other receipts were with an ex-girlfriend who had done
the bookkeeping for the business.
[8]
The receipt evidence was organized into bundles,
separated by taxation year and by the categories below. Mr. Kandasamy did not
provide the total amounts for each bundle:
-
office expense,
-
meals and entertainment,
-
storage and utilities,
-
telephone,
-
car expense,
-
equipment,
-
gas expense,
-
auto insurance, and
-
hair loss treatment.
[9]
Further support for the appeal was provided by
testimony from Mr. Kandasamy’s cousin and a friend of his sister.
[10]
The friend, Romashini Thanikasalan, testified
that she charged Mr. Kandasamy $165 every six weeks for allowing him to
store cleaning equipment in her garage. She said that Mr. Kandasamy paid her in
cash and that she had issued the receipts that were entered into evidence.
[11]
It is worth mentioning that this was one of
three storage rental arrangements that Mr. Kandasamy testified that he had
entered into. He also stored some equipment in his own apartment. Hand-written
receipts were provided for all the rentals totalling $6,000 for 2010 and $4,250
for 2011.
[12]
The other witness at the hearing was Mr.
Kandasamy’s cousin, Shiyamini Thaneeskaran. She testified that Mr. Kandasamy’s
cell phone was in her name and that Mr. Kandasamy reimbursed her for
charges of around $82 per month. Hand-written receipts for the cash
reimbursements were entered into evidence. The original cell phone invoices
were not provided.
[13]
The Crown called no witnesses.
Discussion
[14]
In an appeal of an income tax assessment in this
Court, the taxpayer has the initial burden of proof to overcome the assumptions
pled by the Minister. The burden is to make a prima facie case. The
assumptions in this case can be found at paragraph 9 of the Minister’s Reply to
the Notice of Appeal.
[15]
Overall, I find that the evidence in support of
the appeal is very weak and that the burden of proof has not been satisfied.
Purchases of equipment
[16]
Although I have found Mr. Kandasamy’s case to be
weak, I would make one adjustment in his favour. This is due to a problem with
the Reply.
[17]
The matter relates to purchases of equipment, totalling
$5,000 in 2010 and $2,400 in 2011 (Ex. R-3). The Minister treated the
purchases as on capital account and allowed capital cost allowance instead of a
full deduction.
[18]
The problem that the Crown has is that this
issue was not clearly raised in the Reply. There are no assumptions with
respect to the capital issue, and the term “capital”
does not appear in the Reply. The only reference to this issue is to a
paragraph number in the Income Tax Act, paragraph 18(1)(b).
[19]
A reference to a section number in the Income
Tax Act is not sufficient notice to Mr. Kandasamy that the Crown intends to
raise this as an issue. Accordingly, adjustments should be made to the
reassessments to reverse the capital treatment.
[20]
This is the only adjustment to the assessments
that is warranted. As for the other items in dispute, the reassessments in my
view provide a fair result based on the evidence before me. My reasons are set
out below.
Insufficiency of receipts
[21]
I would first comment concerning the receipts.
One problem, as mentioned earlier, is that the receipts do not match the
amounts claimed on the income tax returns. Even if I were to accept that
additional receipts were with an ex-girlfriend, this explanation does not
justify allowing further deductions.
[22]
The second problem with the receipts is that the
items purchased are not always described on the receipts and, if they are
described, many of the items may have been purchased for personal use. Examples
are office expenses of airbed, webcam, stamps, and “car-multi-freq.fm.” Included in meals and entertainment are receipts
from Hotel Le Prestige in Quebec, the LCBO, and Stars Mens Shop. Such receipts
do not instill confidence in the reliability of the evidence presented.
[23]
Except to the extent that the receipts are for
items that clearly relate to a cleaning business, I have no confidence that the
receipts are related to the business.
Testimony of Mr. Kandasamy
[24]
I would also comment concerning Mr. Kandasamy’s
testimony. In general, his testimony was very brief and vague. When he was
asked for detail on cross-examination, some of his explanations were
far-fetched and not at all convincing.
[25]
For example, Mr. Kandasamy testified that he
made a claim for a business expense for a hair loss treatment costing $4,400.
He said that this was on the advice of his accountant on the basis that he is
meeting the public. In another case, Mr. Kandasamy attempted to justify a claim
for a purchase of juice at Costco on the basis that if a customer came to his
residence he would provide them with a glass of juice. These claims are so
far-fetched that it does call into question the reliability of Mr. Kandasamy’s
testimony as a whole.
Large claims
[26]
Some of the expenditures were for very large
amounts relative to the size of the business. For example, Mr. Kandasamy
claimed storage expenses for three storage facilities with three individuals
for a total of $4,250 in 2010 and $6,000 in 2011. These amounts are almost as
much as the total revenue for the business in these years. It is unlikely that
such large expenditures would be incurred for this fledgling business.
Hand-written receipts
[27]
Receipts for storage rentals and reimbursement
of cell phone charges were provided in the form of hand-written receipts from a
typical receipt book. These receipts could easily have been fabricated. Two of
the four individuals who prepared the receipts testified, as mentioned earlier.
[28]
As for the storage receipts, some of the
receipts evidenced an arrangement with Mr. Kandasamy’s sister. She did not
testify. These receipts refer to a storage facility at an apartment at 2405
Finch Avenue West. The apartment was used by Mr. Kandasamy for a brief period
during the relevant taxation years and the sister did not live there. No
satisfactory explanation was given for the use of this apartment and there was
not sufficient detail concerning the purported storage arrangement.
[29]
As for the cousin and friend who testified about
storage rental and cell phone charges, neither of these witnesses’ testimony
was convincing. The testimony was brief, and the explanations provided on
cross-examination concerning non-sequential receipt numbers were not at all
convincing.
[30]
I have concluded that none of the hand-written
receipts or the testimony of the two witnesses is reliable and that this
evidence should be given no weight.
Motor vehicle
[31]
The allocation of motor vehicle expenses to the
business was very high, and it was not supported by contemporaneous documentation
such as a vehicle log.
[32]
Mr. Kandasamy allocated 100 percent of his motor
vehicle expenses to the business in 2010 and over 80 percent to the business in
2011. These are large proportions for such a small business.
[33]
Even more problematic was the fact that the
business allocation for 2011 was supported by figures for kilometers driven for
business and in total, and yet no good explanation was provided for how these
figures were obtained.
[34]
There is no reasonable basis to allow further
deductions for motor vehicle expenses. In particular, the Minister’s allocation
to business use, which was 10 percent in 2010 and 16 percent in 2011, is reasonable
in the circumstances.
Conclusion
[35]
In general, the evidence to support this appeal
for further business deductions was very weak. The only adjustment that should
be made to the reassessments is for the capital items, as discussed above.
[36]
The appeal will be allowed, and the
reassessments will be referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that the only adjustment should
be for expenditures in the amounts of $5,000 for 2010 and $2,400 for 2011,
which were assessed as on account of capital, and should be treated as on
current account.
[37]
As Mr. Kandasamy was unsuccessful in most of his
claims, there will be no order as to costs.
Signed
at Toronto, Ontario this 1st day of April 2016.
“J. Woods”
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