DR George Mallouh v. Minister of National Revenue, [1985] 1 CTC 2297, 85 DTC 250

Cardin, TCJ:—The appeal of Dr George Mallouh is from a reassessment of income tax dated March 24, 1981 by which the Minister of National Revenue disallowed, on the ground that they were personal and unreasonable expenses, amounts of approximately $1,440 claimed by the appellant under paragraph 18( l)(a) of the Income Tax Act, RSC 1952, c 148, for each of the taxation years 1976 to 1979 inclusive.

The appellant, a gynecologist and obstetrician who was also a lecturer at St Mary’s Hospital and McGill University and a consultant at the Royal Victoria Hospital, maintained his principal medical office at 1538 Sherbrooke Street West, Montréal, Québec. He also had an office in his residence on Rosalyn Avenue, Montréal, which took up one-half of the basement of his three-floor home consisting of a closed private office, a library, a bathroom and a separate entrance.

Because of the number of points raised and cases cited by the appellant at the hearing, I feel it necessary to pinpoint the issue by eliminating what is not in issue in this appeal.

There is no dispute that the appellant’s practice of medicine, for income tax purposes, is a business and, as such, operational expenses, which are by definition incurred to earn income, are deductible. There is no question that the appellant’s preparation and the giving of lectures on obstetrics at various institutions are part of his medical practice and a valuable asset to his professional reputation.

Although I do not quite agree with the appellant that the Income Tax Act induces taxpayers to operate businesses from their residences, there is no provision in the Act which precludes taxpayers from operating a business in their homes, nor do I know of any section of the Act which prevents the operation of a business in more than one location or office.

The issue before this Court is not the adequacy of the remuneration paid by the Province of Quebec for medical services, nor whether the appellant’s billings and other related administrative responsibilities should, or should not, be included in the amounts paid to doctors in the Province of Québec for their services — a subject with which the appellant dealt in his rebuttal not without some emotion, even to the point of suggesting the possible existence of double standards in applying the Income Tax Act to the medical profession as opposed to other professions or businesses, thereby forcing doctors to cut down on their expenses.

The appellant, no doubt, was referring to the disallowance by the Minister of expenses he claimed for the professional use, he allegedly made, of his inresidence office on Rosalyn Avenue. There is nothing in the wording of paragraph 18(1)(a) of the Act, or indeed in case law, which can conceivably be interpreted as giving rise to double standards or discriminatory practices, prejudicial to the medical profession. The basic principles, the criteria and various tests that have evolved over the years with respect to the deductibility of “expenses incurred for the purpose of gaining and producing income’’ arising from paragraph 18(l)(a), are applied equally to all professions, businesses and properties. The determination of that issue in each case, however, is a question of fact — conclusive evidence of the existence of alleged facts.

Also, in this appeal, the amount of expenses claimed is not in issue. The only point to be determined is whether the expenses claimed in his appeal come under the exception of paragraph 18(l)(a), and can be deducted as having been incurred for the purpose of gaining income from the appellant’s medical practice, or whether it comes under the general limitation of that section and the deduction of the expenses prohibited.

Containing as it does an exception to the general rule that no deduction shall be made from income, the courts have consistently interpreted paragraph 18(l)(a) restrictively.

Among the underlying factors the courts have had to consider in determining on their respective facts whether expenses were in fact incurred for the purpose of producing income were: the nature of the expenditures, their relationship with the taxpayer’s principal income-producing activities and the degree of necessity of the expenditures in the process of earning income.

In the case at bar, the expenses claimed were based on one-sixth of the annual payments of mortgage interest, insurance, municipal taxes, heating, electricity and telephone charged to the appellant’s residence. The nature of these expenses is normal household and personal liabilities which the taxpayer must meet, whether or not he set up an office in the basement of his home.

I am satisfied on the basis of the evidence that the appellant purchased the Rosalyn Avenue home because he liked it and not because he wanted a large home for the purpose of organizing a business office there. Had the appellant’s primary purpose in acquiring the Rosalyn Avenue property been to establish a medical office, I doubt that he would have chosen to construct it in the basement of his home. This fact of course does not, of itself, preclude the possibility that the in-residence office could be used for business but it does, in my opinion, limit the professional use to which the office could in fact be put.

Indeed, the appellant’s evidence is that he neither treated nor received patients in his office on Rosalyn Avenue. He had no business phone number for the office and there was no indication anywhere that he operated a medical office in his home. This office, according to the appellant, was used principally for doing the administrative work related to his practice, consisting mostly of billings with respect to patients seen or treated at his main office. The preparation of lectures for the hospitals and the university taking up to six hours a month and keeping up-to-date by reading medical publications was also done in his office on Rosalyn Avenue. The only other specified use to which the in-residence office was put was the storage of documents which would otherwise take up additional space at the main office. No evidence was given as to the amount of floor space required for that purpose.

The appellant’s use of his home office, and the nature of his professional activities there while they may relate to his medical practice do so only marginally, not unlike the use made of studies or dens in the home of most professionals or businessmen in relation to their principal occupation. The expenses with respect to such accommodations are personal and non-deductible.

The appellant’s professional income was $79,980, $97,262, $105,866 and $107,946 for each of the taxation years 1976 to 1979 inclusive (Exhibit R-1). The appellant testified he spent long hours each day at the main office receiving and treating patients. Although the building in which his main office was located closed at 10:00 pm, the appellant left at 7:00 or 8:00 pm and went home to rest before assuming the necessary duties of billings alleged to have been carried out in his home office.

In submitting that the expenses with respect to his office at home, where he performed necessary administrative duties, were deductible, the appellant in a comparison referred to administrative divisions of large manufacturing corporations whose expenses are deductible even though their activities do not directly contribute to the actual earning of the corporation’s income. The analogy does not reflect the present issue.

Necessary operational expenses, including of course administrative expenditures, are deductible whether they arise in manufacturing corporations or medical offices. Indeed, the Minister of National Revenue allowed the deduction of necessary operational expenses set out in the appellant’s statement of income and expenses for each year under appeal. The main office expenses claimed by the appellant and allowed by the Minister include amounts of $7,954, $9,793, $10,612, $10,916 and $12,845 for office salaries for each of the years 1976 to 1980 respectively (Exhibit R-1). Obviously, not all the appellant’s administrative work was done by him in his office at home.

There can be no doubt that the appellant’s office in his residence was convenient to prepare for lectures, to keep abreast of progressive medical technology and to consider administrative matters related to his medical practice. The question is whether it was necessary to do that work at home and whether one-sixth of the appellant’s normal household expenses relative to his in-residence office were, in fact, necessary or indeed reasonable operational expenses of his medical profession.

The appellant did not succeed in satisfying the onus of establishing that the existence and the use made of his office on Rosalyn Avenue, as well as the expenses with respect thereto, were necessary or did, in fact, contribute to the earning of income from his practice of medicine in his Sherbrooke Street office. The expenses, in my opinion, were not incurred for the purpose of earning income but were personal expenses whose sole purpose was for the convenience of the appellant. In that sense, they were not reasonable operational expenses of the appellant’s medical practice.

The cases to which the appellant referred the Court are distinguishable from the case at bar on their basic facts. In Dr Ronald K Cumming v MNR, [1967] CTC 462; 67 DTC 5312, an anaesthetist practised his profession exclusively at a hospital in which no office facilities were available to him to carry out related administratie activities. The issue was somewhat different than the present one and the Court found that the administrative part of Cumming’s medical practice was, in fact, carried out in his home. In the case at bar, the appellant practised his profession at his main office and there was no necessity whatever of carrying out any part of his medical practice at home.

In Rolf Kenton v MNR, [1969] Tax ABC 981; 69 DTC 681, also cited by the appellant, it was found that Kenton, a chartered accountant, kept all his clients’ files and his own business accounting records in an office in his home in which he worked three or four days a week. The home office expenses were allowed. It was found that Kenton’s home was large enough to operate a business office without interfering with his family’s living accommodation and indeed he did not have a full-time office anywhere else to conduct his business.

In the case at bar, the issue is not the adequacy of the appellant’s home or in-residence office, it is the necessity of having a medical office in his home when he already operates an office in which he practised his medical profession.

The appellant cited part of Taylor, TCJ’s remarks, then member of the Tax Review Board, in Justin A Cork v MNR, [1981] CTC 2367; 81 DTC 346, where he stated at CTC 2374 (DTC 351):

One aspect of its “reasonableness” might be to ask whether or not the appellant could have rented even minimum office and storage space for an average of about $100 per month. I would doubt that he could have done so.

In that case, the Board had found that Cork, a draftsman by profession, ran his business from his home and expenses with respect to that business were allowed. The quantum of expenses, however, was disputed and the reasonableness of the office and storage expenses claimed by Cork (to which Taylor was referring), was in issue.

In the case at bar, the reasonableness of the amount of expenses claimed is not in issue. The appellant’s medical practice was carried out in his office on Sherbrooke Street and necessary operational expenses were therefore allowed. No evidence was adduced as to the amount and the necessity of storage of the appellant’s documents in an area other than in his main office.

Counsel for the respondent cited from his book of authorities several cases in which various tests and criteria were used by the courts in determining whether or not expenses were incurred for the purpose of earning income from a business or property. Perhaps one of these decisions, applicable a fortiori to the facts of the case at bar, is MNR v E Ross Henry, [1969] CTC 600; 69 DTC 5395, which was confirmed by the Supreme Court of Canada. In that case, Sheppard, DJ stated at 604 (DTC 5397):

There was nothing that required the respondent to perform any part of those services at his house; in fact he was precluded from rendering anaesthetics elsewhere than in the hospital without the consent of the hospital. Further the respondent could fill out the card at the hospital or at his office; there was nothing which required his filling out a card at his house and if so done was entirely a matter of his own convenience.

For these reasons the appeal for the 1976, 1977, 1978 and 1979 taxation years is dismissed.

Appeal dismissed.