Dufour v. R., [1998] 3 CTC 2741

Tremblay T.C.J.:

Point at issue

According to the Notice of Appeal and Reply to the Notice of Appeal, the question is whether s. 18(12) of the Income Tax Act (“the Act”) applies in calculating the appellant’s income for the 1993 and 1994 taxation years.

If so, the appellant cannot deduct the sums of $2,472 (1993) and $490 (1994). If not, he may do so. Section 18(12) authorizes the deduction of expenses for a home office which is either

(a) the individual’s principal place of business, or

(b) used exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business.

In such cases the individual may deduct eligible expenses, but only up to the amount of his income from the business.

Burden of proof

The appellant has the burden of showing that the respondent’s assessments are ill-founded. This burden of proof results from several judicial decisions, including a judgment of the Supreme Court of Canada in Johnston v. Minister of National Revenue), [1]

In the same judgment the Court held that the facts alleged by the respondent in support of the assessments or reassessments are also deemed to be true until proof to the contrary is shown. In the instant case the facts alleged by the respondent are set out in subparagraphs (a) to (g) of paragraph 6 of the Reply to the Notice of Appeal. That paragraph reads as follows:

[TRANSLATION]

6. In support of the notices of reassessment for the 1993 and 1994 taxation years dated March 28, 1996, the Minister assumed in particular the following facts:

(a) during the years at issue the appellant was employed by Université Laval; [admitted]

(b) concurrently with his employment the appellant also, during the years at issue, carried on his profession of notary at home; [admitted]

(c) in 1990 the appellant renovated his garage beside his home, creating a law office where he has subsequently carried on his profession; [admitted]

(d) the loss of income from his professional work for the 1993 and 1994 taxation years amounted to $5,914 and $7,644 respectively; [admitted in part subject to completion]

(e) the loss of income from his professional work for each of the 1993 and 1994 taxation years included $2,472 and $490 respectively for the cost of his home work space; [denied]

(f) the $2,472 and $490 were related to an expense for depreciation related to the undepreciated capital cost of part of the self-contained domestic establishment; [denied]

(g) in calculating the income from the appellant’s professional work any amount for the cost of home work space cannot exceed the appellant’s income from the business ... [denied]

Facts in evidence

In addition to the facts admitted above, the appellant testified that the same problem had existed for 1990, 1991 and 1992. Revenue Quebec had cut down the expenses and later Revenue Canada, Taxation had done the same. The case ended up in the Court of Quebec, Civil Division (Access Hearing).

Judge Guy Pinsonnault summarized as follows the facts which were essentially the same as those before this Court, except that the years were different:

[TRANSLATION]

During those years the appellant was employed by Université Laval; however, in 1990 he decided to carry on his profession of notary at home in the garage beside his residence: he accordingly renovated it and set up an office in which he carried on his profession.

In his tax return for 1990 the appellant made a deduction from his income from other sources by reporting a professional loss of $11,381, which he had obtained by subtracting expenses totalling $12,756 from his professional income.

Included in those expenses was an amount of $1,241 claimed as depreciation on “leasehold improvements” made by renovating his garage into an office.

In 1991 the same scenario was repeated, but this time the appellant deducted $2,602 as depreciation on leasehold improvements; in 1992, he included $2,517 in his balance sheet for this item.

These amounts deducted by the appellant as depreciation on leasehold improvements were disallowed by the respondent: the appellant challenged this decision, and hence the instant appeal.

It should be noted that the respondent admitted the operation which the appellant had undertaken by transforming his garage into an office for his professional use, as well as the cost of the work, namely $12,000.

However, the point which the Court of Quebec had to resolve was stated as follows:

[TRANSLATION]

The legal problem which the Court must solve is to determine whether the amounts which the appellant deducted as depreciation on “leasehold improvements” can be calculated on the basis of 20 percent annually (Class 8), as he maintained, or whether he is only entitled to an annual deduction of four percent (Class 1), as the respondent argued.

Seen in this way, the Court held that painting and other maintenance expenses could not be the subject of an annual deduction of four percent per annum, as it would take 25 years to amortize. Judge Pinsonnault opted for Class 8, which is a “catch-all class” and concluded:

[TRANSLATION]

The Court feels that in general this class is more in line with the objective nature of the expenses incurred by the appellant to set up his office.

According to the appellant, there was a previous agreement with the respondent’s chief of appeals that Revenue Canada would follow the Court of Quebec decision. The respondent complied with the agreement in 1990, 1991 and 1992.

However, the respondent did not see the problem in the same way for 1993 and 1994 - the issue was different.

Was the appellant subject to s. 18(12) of the Act? It reads as follows:

18. (12) Work space in home. Notwithstanding any other provision of this Act, in computing an individual’s income from a business for a taxation year,

(a) no amount shall be deducted in respect of an otherwise deductible amount for any part (in this subsection referred to as the “work space”) of a self-contained domestic establishment in which the individual resides, except to the extent that the work space is either

(i) the individual’s principal place of business, or

(ii) used exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business;

(b) where the conditions set out in subparagraph (a)(i) or (ii) are met, the amount for the work space that is deductible in computing the individual’s income from the business for a taxation year shall not exceed the individual’s income from the business for the year, computed without reference to the amount; and

(c) any amount not deductible by reason only of paragraph (b) in computing the individual’s income from the business for the immediately preceding taxation year shall be deemed to be an amount otherwise deductible that, subject to paragraphs (a) and (b), may be deducted for the year for the work space in respect of the business. [My emphasis.]

Section 248 of the Act defines “self-contained domestic establishment” as follows:

“self-contained domestic establishment” — “self-contained domestic establishment” means a dwelling house, apartment or other similar place of residence in which place a person as a general rule sleeps and eats ...

Since the appellant’s professional practice as a notary is included in the definition of the word “business” (s. 248 of the Act), the question is whether the premises used exclusively for the business were part of a self- contained domestic establishment where the appellant lived.

The renovation work done in the existing garage (12’ x 20’) consisted first of insulating the floor, ceiling and walls and then of installing a small bathroom, all to be used as a waiting room for clients. Additionally, the necessary work was done to connect this former garage with the home, chiefly on an already existing bedroom which served as an office, and also to create space for a library and strongroom. Heating, water and electricity for the notarial office came from the residence.

In Ellis v. R [2] Deputy Judge Rowe of this Court had to render a similar decision regarding use of a garage. Page 7 and part of page 8 of his decision are worth citing:

In the present appeal, the appellant constructed a studio as a work space over a garage which was attached to the house in which she lived. The question is whether or not the area referred to as the studio, used exclusively for business purposes, was “any part of” a self-contained domestic establishment in which the appellant resided. The studio space was connected to the rest of the house by two interior passages, one through a bathroom into the appellant’s bedroom, both of which could be locked to prevent public access. Webster’s Dictionary, 1988 Edition, defines “part” as “a portion, fragment or section of a whole”. The 1986 Edition of The Oxford Reference Dictionary, Clarendon Press, defines “self-contained” as “complete in itself; (of accommodation), having all the necessary facilities and not sharing these”.

Counsel for the appellant referred to the decision of the Supreme Court of Canada in Bell v. The Ontario Human Rights Commission, 1971 S.C.R. 756, in which the Court held a three-room flat, without a separate outside entrance, may well have been a “dwelling unit” but was not one that was “self-contained”. The argument on behalf of the appellant is that she eats and sleeps in her residence and does not use the studio/store premises, which does have a separate outside entrance, for any of those domestic purposes. In my view, for the purposes of the subsection, that is looking down the wrong end of the telescope. The fact is that the studio/store area, falling within the definition of work space, is clearly a part of the residence of the appellant, which is indeed a self-contained domestic establishment. By comparison, the kiln shed at the rear of the property, standing alone without physical attachment to the house, is not. Although potential customers could enter the business premise from the outside, the studio was still physically connected to the house and was accessible therefrom without having to go outside and share the electrical, water and heating facilities. It is probably safe to assume the legislators in enacting the subsection at issue had an eye on the typical home office in which a portion of the residence, although possessing a business identity, is still readily identifiable as forming a part of the domestic establishment. The appellant, for reasons of practicality and cost efficiency found it expedient to construct her business premises in the manner she did, and from the perspective of the public, was able to create a sense of a separate entity by design, provision of walkway, stairway and entrance, and by the appropriate use of signs. In such a way she was able to distinguish her business from what might ordinarily be expected from an “in home” business establishment. However, such distinction by way of perception, does not detract from the fact the studio was an area which formed a part of the appellant’s residence. In order to apply, the subsection does not require the smell of home-baked bread wafting into the work space. The Minister was correct in applying the limitation imposed by subsection 18(12) of the Act to the years under appeal. [Emphasis added]

It seems to us that Judge Rowe’s reasoning is logical and also applies in the instant case.

The appellant’s notarial office, from the outer entrance to the room serving as an Office, is all part of his residence which is in fact a self-contained domestic establishment. The notarial office was physically attached to the house. Additionally, it was accessible from inside and “shared the water supply, electricity and heating systems”.

Paragraph (b) of s. 18(12) of the Act applies and the assessments for the 1993 and 1994 taxation years must be upheld: the sums of $2,472 (1993) and $490 (1994) cannot be deducted.

Conclusion

The appeal is dismissed.

Appeal dismissed.