Alex Mills v. Minister of National Revenue, [1981] CTC 2995, 81 DTC 909

The Chairman:—The appeals of Mr Alex Mills are from income tax assessments with respect to the 1973 and 1974 taxation years.

The principal issue is a claim by the appellant, a real estate broker, to several deductions for expenses allegedly incurred for the purpose of earning income from his real estate business and other business activities.

In reassessing the appellant, the respondent disallowed as being personal or living expenses all or a portion of certain expenses claimed.

The items and the amounts in issue in these appeals can be summarized as follows:

Counsel for the respondent conceded that, based on evidence presented, an expenditure of $260 for pay-phone for each of the 1973 and 1974 taxation years might possibly be considered as a reasonable business expense. The Board does not propose to further consider that item and the expenditures claimed for public phone in each of those years is allowed.

The appellant advised that he was not proceeding with expenses claimed in 1973 and 1974 with respect to the use of the office in his home.

On the basis of statements made by counsel with respect to the grubstaking (mining expenses), it is my understanding that some of the expenses referred to in the notice of appeal were subsequently partially allowed and the appellant is no longer proceeding with respect to the mining expenses item for the 1973 taxation year. It is also my understanding that a further allowance of $2,400 In mining claims will be granted to the appellant for the 1974 taxation year. At the request of counsel for the respondent, the Board therefore allows to the extent of $2,400 the appeal with respect to the appellant’s mining claim for the 1974 taxation year.

Both counsel in summation suggested that the Board must look at the evidence as a whole in rendering its decision. In so doing, the Board is left with the general notion that the appellant, described as “not an ordinary businessman”, though very active, did not keep clear records of his various activities as a real estate broker and as an investor. It is of course within the provisions of the Income Tax Act that expenses incurred for the purpose of earning income from the appellant’s business are deductible. However, contrary to what the appellant appears to believe, it is not reasonable for him to expect that unsupported general amounts claimed as deductible business expenses will automatically be accepted as such.

The Minister’s reassessments of the appellant are based on the assumptions that some part or all of certain amounts claimed were not business expenses but were personal or living expenses. For the appellant to be successful in his appeal, he must establish to the satisfaction of the Board that the Minister was wrong in his assumptions and must show that the amounts claimed as business expenses were directly related to the earning of income. Reviewing the evidence as a whole, although there is the appellant’s affirmation that all of the expenses claimed were to earn income, the notices of appeal for 1973 and 1974 and the evidence given by the appellant at the hearing do not provide the Board with the proof necessary to establish that the amounts disallowed by the Minister were in fact expended to earn income.

Of the automobile expenses claimed in 1973 and 1974 ($3,693.34 and $3,272.19), the Minister disallowed $527.45 and $428.57. The evidence is that the appellant, with his wife and six children operate three cars: the appellant’s car which he claims was used 100% for business purposes, the family car on which he claimed a 50% use for business and a car whose principal driver was the appellant’s daughter, (Exhibit R-2). The appellant’s concept of what constitutes a business use of a car is by far wider than what is generally accepted for tax purposes. I find it difficult on the basis of the evidence to accept that the personal use made of the cars by himself, his wife and children in the course of ordinary day-to-day living would be only 20%, as suggested by the appellant. I find that the amount allowed by the Minister for automobile expenses in each of 1974 and 1975 is very reasonable and the appellant has not in his evidence convinced me that the amounts disallowed do in fact represent expenses related to the business use of the cars.

The appellant claimed $3,808.76 In 1973 and $3,096.85 In 1974 as entertainment expenses. The Minister disallowed $1,809.61 and $2,781.67 in each of the said years respectively. The appellant claimed that the expenses were for luncheons and dinners. There were of course no receipts and very little evidence as to when, where and on whom the expenses were incurred. It might well be that the appellant did expend the amounts claimed for entertainment in the course of earning income but the appellant did not offer any evidence to establish that the Minister, in allowing roughly $2,000 in 1973 and $2,300 in 1974 for entertainment expenses, was wrong or unreasonable. On what basis can the Board justify varying the Minister’s assessment in the circumstances?

Perhaps the most unsatisfactory and confusing evidence given by the appellant is with respect to the carrying charges in each of the taxation years for loans granted by the Canadian Imperial Bank of Commerce and the Toronto Dominion Bank.

Exhibits A-1 and A-3 confirm that the appellant had outstanding loans at each of the said banks on which he paid interest in 1973 and 1974. What is unclear is why the loans were made. The figures in Exhibits A-2, A-3 and A-4 may or may not concur with the amounts and dates of the Bank loans but they certainly do not establish that the loans were made to earn income therefrom. There is no way the Board can determine whether the amounts shown in Exhibits A-2, A-3 and A-4 were in part or in whole expended for business purposes, personal living expenses or capital investments since the appellant himself was unable to identify the carrying charges to any income-producing activity. The appellant’s records confirm his testimony that his substantial commission earnings were deposited in accounts from which he made various general payments including investments. When his bank accounts were short, he would borrow from the bank and continue his general operations, whatever they might be (Exhibit R-3). The loans so obtained and the carrying charges thereon cannot be accepted as having been paid on borrowed money used for the purpose of gaining or producing income from a business or property within the meaning of paragraph 20(1 )(c) of the Act.

The appellant failed to establish that the carrying charges claimed with respect to the General Steel Ware shares, the Harris Farms or the Flying Dutchman Motel were paid on borrowed money used for the purpose of earning income for any of the said businesses. Nor was the appellant able to identify specific income from those three sources to corresponding carrying charges.

The appellant’s claim for travelling expenses to Hawaii as being business expenses raises a serious question of credibility.

His travel arrangements were made by the Eaton Travel Service and consisted of a round trip from Toronto-Vancouver-Los Angeles to Hawaii, with hotel accommodation for the appellant and his wife for a period of 10 days, during which time tours to most of the Hawaiian Islands had been scheduled.

The invoices of the Eaton Travel Service are to be found as one of several documents included in Exhibit R-1. Cards wishing the appellant a “happy holiday” and “happy second honeymoon” were received by the appellant prior to his Hawaii trip. Invoices for items such as groceries, films, sport shirts and a dress are to be found in Exhibit R-1, none of which can, under the circumstances, be considered as business expenses. Whether or not the appellant carried on business in Hawaii and in the other cities mentioned as he claims he did, none of the business expenses he might have incurred during the trip was identified and the nature of the business itself was unacceptably vague. Even if the appellant had done some business during his stay abroad, he would not be justified in claiming as business expenditures all the travelling and living expenses incurred by his wife and himself during the trip. In any event I do not accept, on the basis of the evidence, that the purpose of the appellant’s trip to Hawaii was for business or that the expenses incurred were business expenses.

There are substantial differences in the appellant’s written pleadings as opposed to the evidence given by him at the hearing as to the reasons the appellant went to Grenada in 1974. What is known is that the appellant and his wife, the appellant’s brother and his wife and a fellow real estate agent and his wife all decided to go to Grenada (Exhibit R-4). As was the situation with respect to the Hawaii trip, the appellant had made no prior appointments nor was there any indication of the actual business he was to attend to in Grenada. By itself, the claim that the business purpose of the trip was to investigate with his wife and two other couples the possibilities in Grenada for the development and sale of vacation property is, in my opinion, an insufficient and frivolous allegation. More importantly, the appellant has not given the Board any firm evidence of what his business activities in Grenada entailed and what portion of the expenses claimed are directly related to the real estate business he alleges to have carried out in Grenada. Whether or not the appellant was at the time considering being the only licensed Ontario agent for off-shore properties is immaterial. That was not, in my view, the purpose for which the trip was made.

The preponderance of the evidence leads me to conclude that both the Hawaii and Grenada trips were principally and basically vacations for the appellant and his wife and the expenses incurred were personal and living expenses. The appellant failed to isolate or to identify in all the expenses claimed those which could conceivably be attributable to his business activities and the earning of income, if indeed he did carry on any business on either of the trips.

In his reply, counsel for the appellant referred to the entertainment and automobile expenses in the amounts of $3,096.85 and $3,272.19 respectively in submitting that they were reasonable expenses to earn some $54,000 commission income in 1974.

Limiting the appellant’s expenses to entertainment and automobile expenditures is of course quite misleading and is not in accord with the amounts claimed as business expenses in the appellant’s tax returns for 1973 and 1974. As pointed out by counsel for the respondent, the appellant claimed in his 1973 and 1974 tax returns other business expenses which are in addition to those in issue in this appeal and which were also claimed as expenses to earn income. Even on the basis of the business expenses presently in issue alone, the appellant claimed over $19,000 of expenses to earn $29,136.99 on 1973 and some $36,000 to earn $54,250 In 1974.

Taking all the evidence as a whole, as was suggested I should do, I find that the total amounts claimed by the appellant as expenses to earn income in 1973 and 1974 are not reasonable within the meaning of section 67 of the Act; the appellant did not establish that the automobile and entertainment expenses for 1973 and 1974, which were disallowed by the Minister, were incurred for the purpose of producing income; the appellant did not prove that the interest expenses claimed were paid by the appellant on money borrowed for the purpose of earning income and he failed to relate the carrying charges with the income the loan was to have generated and the travelling expenses to Hawaii and Grenada were not incurred for the purpose of earning income but were personal living expenses.

The appeal is allowed and the matter referred back to the Minister for reassessment on the basis that the telephone expenses in the amount of $260 for each of the 1973 and 1974 taxation years be allowed and that the mining expenses claimed in the 1974 taxation year be allowed to the extent of $2,400. The appeal is dismissed in all other respects.

Appeal allowed in part.