Date:
20070201
Docket: A-578-05
Citation: 2007
FCA 27
CORAM: DÉCARY
J.A.
EVANS
J.A.
MALONE
J.A.
BETWEEN:
VASUNDARA
RAGHAVAN
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
EVANS J.A.
[1]
This
is an appeal by Vasundra Raghavan from a decision by a Judge of the Tax Court
of Canada dismissing her appeal from the Minister’s assessment of her tax
liability for the taxation years 2001 and 2002. The decision is reported as Raghavan
v. Her Majesty the Queen, 2005 TCC 706.
[2]
The
Minister disallowed expenses which Ms Raghavan had claimed to deduct from her
business income in those years. The activity claimed as a business is a research
website, operated since 2001 under the name, Value Balance.com, and located in
the Raghavans’ home. Ms Raghavan’s husband, a professional engineer, is said to
have worked full-time for Value Balance.com in 2001 and 2002 without
remuneration. Ms Raghavan herself is in full-time employment with another
employer, and has financed Value Balance.com from her savings.
[3]
In
the year 2001, Ms Raghaven reported $1,200.00 business income, from which she claimed
to deduct expenses of $20,606.79. For 2002, her reported business income was
$900.00, and the expenses were $26,946.94. Accordingly, she claimed business
losses of $19,406.79 in 2001, and $26,046.94 in 2002. The revenue appears to have
been generated by two sales by Balance Value.com.
[4]
Nearly
all the expenses were attributable to fees for consulting services related to
the activities of Value Balance.com paid to her three children, who in 2001-2002,
were 14-15, 18-19, and 22-23 years of age respectively. Consulting fees were
also paid to a woman who had helped out with the children when they were young,
and who was a family friend.
[5]
The
trial before the Tax Court lasted a day; five witnesses testified and many
documents were put into evidence. In his reasons for decision, the Judge set
out the main facts. He made no finding respecting the credibility of the
witnesses or the probative value of the documentary evidence.
[6]
After
quoting from the reasons for decision written by now Chief Justice Bowman in Stephen
v. Canada, [2001] 2 C.T.C. 2621 (T.C.C.), which in turn refers to Kaye
v. R, 98 D.T.C. 1659 (T.C.C.), the Judge concluded (at para. 16) that the
expenses claimed by Ms Raghavan were vastly disproportionate to the revenues
received, and that no reasonable person would have spent that amount to obtain
such a small revenue. As a result, the expenses “were commercially inconsistent
with the existence of a business”, and she was not operating a business in 2001
and 2002. The Judge also concluded (at para. 18) that the salaries paid to Ms
Raghavan’s children and to the friend “were not reasonable in the
circumstances.”
[7]
In
my opinion, the Judge erred in law by failing to apply the two-step approach
adopted by the Supreme Court of Canada in Stewart v. Canada, [2002] 2
S.C.R. 645, 2002 SCC 46, for determining whether expenses are deductible under
subsection 18(1) of the Income Tax Act. R.S.C. 1985, c. 1 (5tt Supp.)
(“ITA”). Stewart represents something of a fresh start in this
area of the law.
[8]
First,
a court must determine if the taxpayer has a source of income from a business
for the purpose of section 9 of the ITA. The ultimate objective of this part
of the test is to distinguish between commercial and personal activities (para.
51), in accordance with the methodology prescribed by the Court, especially at paras.
52-56, and 60.
[9]
Second,
having found a source of income, a court must determine if the expenses claimed
by the taxpayer may be deducted pursuant to subsection 18(1) from the income
earned from the business. If they can, the expenses will be allowed, but only to
the extent that they are “reasonable” under section 67: at para. 57. The Court
emphasized (at para. 60):
Whether or not a business exists is a
separate question from the deductibility of expenses.
See also Hammill v. Canada, 2005 FCA
252 paras. 51-53, on the approach to be taken to the application of section 67
in light of the decision in Stewart.
[10]
Although
Stewart was discussed in the submissions made by the parties to the
Judge in the present case, it is not mentioned in his reasons. Rather, the
Judge appears to have decided, on the basis of older authority and contrary to
the teaching of Stewart, that Ms Raghavan was not operating a business in
2001 and 2002 because the expenses that she claimed were disproportionate to
the revenue earned
[11]
Moreover,
when the Judge later concludes that the expenses claimed were unreasonable, he
does not explain why they should be eliminated altogether, rather than reduced.
I suspect that he may have disallowed them altogether because he had already
found that they were so disproportionate to the revenue as to preclude the
activity from constituting a business.
[12]
On
the basis of the record, I am not able to say with sufficient certainty that,
if the Judge had applied the correct legal test and made his reasoning more
explicit, he would have reached the same result. In these circumstances, and in
view of the volume of evidence and the importance of oral testimony, I have
concluded, reluctantly, that a new trial should be held.
[13]
For
these reasons, I would allow the appeal and grant the appellant her
disbursements, set aside the decision of the Tax Court, and remit the matter
for a new trial.
“John
M. Evans”
“I agree
Robert Décary”
J.A.
“I agree
B.
Malone”
J.A.
Email this Content