REASONS
FOR JUDGMENT
Favreau J.
[1]
This is an appeal from the reassessments dated October 8, 2015 for the appellant’s 2009 and 2010
taxation years and from the reassessments dated March 17, 2016 for the appellant’s
2008 and 2011 taxation years, made by the Minister of National Revenue (the
“Minister”), under the Income Tax Act, R.S.C.
1985 (5th supp.), c. 1, as amended (the “Act ).
[2]
By way of the reassessments under appeal, the
appellant’s tax liability was determined as per the table below:
|
Year
|
Gross
Business Income
|
Net
Business Income
|
Interest
|
CPP
|
|
2008
|
$
56,493
|
$
29,638
|
Nil
|
$
1,294
|
|
2009
|
$
55,384
|
$
33,534
|
Nil
|
$
1,486
|
|
2010
|
$
73,504
|
$
55,799
|
Nil
|
$
2,163
|
|
2011
|
$
45,339
|
$
27,621
|
Nil
|
$
1,193
|
[3]
At the beginning of the hearing of the appeal,
the Minister made the following concessions:
(a)
except for the associate musician fees, and part
of the telephone and utilities expenses, the rest of the expenses claimed by
the appellant in computing his income for the 2008, 2009, 2010 and 2011
taxation years are fully deductible;
(b)
the associate musician fees claimed by the
appellant in the amounts of $7,835 for 2008, $11,723 for 2009, $31,722 for 2010
and $700 for 2011, are not deductible;
(c)
the telephone and utilities expenses claimed by
the appellant are partially deductible as per the table below:
|
Year
|
Expenses claimed
|
Expenses allowed
|
|
2008
|
$ 6,636
|
$ 3,982
|
|
2009
|
$ 2,258
|
$ 1,355
|
|
2010
|
$ 3,119
|
$ 1,871
|
|
2011
|
$ 4,227
|
$2,896
|
[4]
As a result of the concessions referred to
above, the only issue of this appeal is with respect to the so-called associate
musician fees. The said fees are alleged to have been paid to Ms. Amy Todd and
Mr. Scott McManus for musical services provided to the appellant in the
following amounts for the 2008 to 2011 years:
|
Year
|
Fees paid to Amy Todd
|
Fees paid to Scott McManus
|
|
2008
|
$ 1,700
|
$ 6,135
|
|
2009
|
$ 9,400
|
$ 2,334
|
|
2010
|
$ 26,500
|
$ 5,200
|
|
2011
|
$ 700
|
Nil
|
[5]
Mr. Costanzo testified at the hearing. He
explained that, during the years under appeal, he operated a sole
proprietorship business as a performing artist (singer/musician) and freelance
talent searcher. He also operated a music studio.
[6]
During his testimony, Mr. Costanzo confirmed
that his tax returns for the 2008, 2009, 2010 and 2011 taxation years were
filed late on June 11, 2014 by Mr. Rubin Cohen, C.A., who was also his
representative in court.
[7]
Mr. Costanzo stated that he has been using the
services of Ms. Todd since 2008 as a sounding board when he needs a perspective
as to what type of sound, beat or rhythm is hot or cool at any particular time.
He also stated that Ms. Todd is a very good friend that he used to date in 1999
and 2000 and with whom he lived for a short period in 2003.
[8]
Mr. Costanzo indicated that he had no written
contract with Ms. Todd for her services and that there were no specific terms
and conditions regarding her remuneration. He paid her what he can afford. The
payments to Ms. Todd were made irregularly by interact transfers or by cash.
[9]
Mr. Costanzo explained that no fixed terms could
be established concerning Ms. Todd’s remuneration because the royalties he
received for his songs were not paid to him on a regular basis.
[10]
Mr. Costanzo also stated that he has not kept
any records concerning the dates and the number of times he consulted Ms. Todd
in any given week, month or year and that Ms. Todd did not invoice him for her
services.
[11]
Concerning Mr. McManus, Mr. Costanzo said that
he retained his services for various musical tasks, like the mixing of tracks.
Mr. McManus is an engineer who also has a music studio. Mr. Costanzo stated
that he has no formal written contract with Mr. McManus because he is a friend.
He further said that the costs of the services provided by Mr. McManus were
below the fair market value of such services. Mr. McManus did not invoice the
appellant for the services he rendered. The appellant has no records concerning
the dates and number of times he consulted or retained the services of Mr.
McManus in any given week, month or year.
[12]
In terms of documentary evidence, Mr. Costanzo
filed the following documents:
(a)
his tax returns for the 2008, 2009, 2010 and
2011 taxation years;
(b)
a document signed by Ms. Todd in which she
confirmed having received from the appellant for music services the amounts
indicated above;
(c)
a document signed by Mr. McManus in which he
confirmed having received from the appellant for music services the amounts
indicated above; and
(d)
a Canadian Imperial Bank of Commerce statement
from his unlimited chequing account for the period from January 18, 2008 to
April 17, 2008 showing that in the three-month period, Ms. Todd received $780
and Mr. McManus received $1,300.
[13]
Mr. Costanzo’s tax returns for the 2008, 2009,
2010 and 2011 taxation years were all filed late on June 11, 2014. The
associate musician fees claimed by Mr. Costanzo represented, as a percentage of
the total business expenses claimed, 20.4% for 2008, 31% for 2009, 58% for 2010
and 3% for 2011.
[14]
Ms. Amy Todd testified at the hearing. She
explained that she was a professional dancer and that she had no musical
background. She stated that she did not work from 2008 to 2011 because her
father wanted to commit suicide.
[15]
Ms. Todd confirmed she was Mr. Costanzo’s best
friend and they lived together in the early 2000’s. She said that she acted for
him as a music consultant (sounding board). Mr. Costanzo contacted her every
day, sometimes many times a day by telephone and by e-mail. There was no
particular or formal arrangement made with Mr. Costanzo. She was paid by cash
or by interact transfers. She did not receive payment in a lump sum. She did
not send invoices to Mr. Costanzo for her services and she did not keep records
of the dates and nature of the services requested by Mr. Costanzo. She stated
that she has no idea of the value of the services she rendered. Mr. Costanzo
alone decided on the amounts he was going to pay her and when.
[16]
She confirmed that she received the amounts
indicated in the document that she signed but these amounts were not reported
for income tax purposes since she did not file any tax return for these years.
In January 2017, Mr. Rubin Cohen, the appellant’s representative, filed on her
behalf, unsigned copies of her tax returns for the 2008 to 2011 taxation years
to report the amounts received from Mr. Costanzo. The amounts reported were
based on Mr. Costanzo’s records and not on her own records of the money she
received from Mr. Costanzo.
Legislation
[17]
The relevant statutory provisions of the Act
are the following:
18(1) In computing the income of a taxpayer from a business or
property no deduction shall be made in respect of
(a) General limitation - an outlay or
expense except to the extent that it was made or incurred by the taxpayer for
the purpose of gaining or producing income from the business or property;
. . .
Personal and living expenses
(h) personal or living expenses of the taxpayer, other than travel
expenses incurred by the taxpayer while away from home in the course of
carrying on the taxpayer's business;
. . .
67 General limitation re expenses
In computing income, no deduction shall be made in respect of an
outlay or expense in respect of which any amount is otherwise deductible under
this Act, except to the extent that the outlay or expense was reasonable in the
circumstances.
Analysis
[18]
This appeal raises two issues:
(a) whether the claimed expenses were incurred to earn income from a
business within the meaning of paragraph 18(1)(a) of the Act,
and if so,
(b) whether these expenses were reasonable in the circumstances so as to
overcome the deduction prohibition of section 67 of the Act.
[19]
As the income tax system is based on
self-monitoring, the burden of proof of deductions and claims rests with the
taxpayer (Njenga v. Canada, [1996] F.C.J. No. 1218 (Federal Court of
Appeal)).
[20]
Section 230 of the Act requires a
taxpayer to keep adequate books and records to justify the deduction of the
business expenses claimed. Mr. Costanzo, as the taxpayer, is responsible for
documenting his own affairs in a reasonable manner.
[21]
Based on the evidence submitted in this appeal,
I accept the fact that Mr. Costanzo was carrying on a commercial venture
but the documentation supporting the claims is clearly insufficient to justify
the deduction of the associate musician fees and that they were incurred for
the purposes of earning income from a business.
[22]
Mr. Costanzo filed his tax returns late; as late
as six years after the 2008 fees were actually paid and only based on his
recollection. He did not submit documentation showing the amount of fees paid,
the dates of payment and the nature and frequency of the services provided. No
formal or written agreement describing the general terms and conditions under
which the services were to be provided, no invoice or receipt was submitted to
the Court. His documentary evidence is mainly in the form of a bank statement
for the period from January 18 to April 17, 2008, showing some transfers
to Amy Todd and Scott McManus and in a letter from each one of them confirming that
the fees were received from Mr. Costanzo. Both were very close friends of
Mr. Costanzo.
[23]
Mr. Costanzo has been very vague as to the
nature of the services provided by his friends. Concerning the services provided
by Mr. McManus, Mr. Costanzo said that he helped him in mixing sound track
and that the amounts paid to him were well below the fair market value of the
services that he received in exchange. Mr. McManus did not testify at the
hearing. Concerning the services provided by Ms. Todd, Mr. Costanzo said
that he used her as a sounding board for the type of music that is hot and
cool. She testified at the hearing but her testimony was also very vague and indecisive.
She has no records of telephone calls or work performed for Mr. Costanzo
and she did not have a clue on the value of the services she rendered to Mr.
Costanzo. She did not know how much money she received from Mr. Costanzo and
she did not report the amounts received in her income tax returns for the years
in which she was paid. She reported the fees received only in 2017 at the
request of Mr. Costanzo’s accountant, based on the information provided by Mr.
Costanzo.
[24]
Based on the foregoing reasons, I am not
satisfied that, even if the expenses were in fact incurred as stated by the
appellant, they were incurred for the purposes of earning income as set out in
paragraph 18(1)(a) of the Act. The vague generalities that were presented
as evidence are not adequate to discharge the burden of proof that the
appellant has to meet.
[25]
Furthermore, the associate musician fees claimed
by the appellant were not reasonable in the circumstances.
[26]
The appeal is allowed and
the reassessments are referred back to the Minister of National Revenue for
reconsideration and reassessments on the basis that the
expenses claimed by the appellant in computing his business income for the
2008, 2009, 2010 and 2011 taxation years are fully deductible except for the
associate musician fees which are not deductible and for the telephone and
utilities expenses which are partly deductible as follows:
|
2008:
$ 3,982
2009:
$ 1,355
2010:
$ 1,871
2011:
$ 2,896
|
Signed at Ottawa,
Canada, this 26th day of April 2017.
“Réal Favreau”
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