Brown v. R., [1998] 2 C.T.C. 2641

Bowman T.C.J. (Orally):

1 These are my reasons for judgment in the case of William Brown v. Her Majesty the Queen, 97-748(IT)I.

2 These appeals are from assessments for the 1993 and 1994 taxation years. They involve the deductibility of certain expenses claimed by the appellant in the computation of his income for those years in carrying on a business. The appellant is a systems analyst, a computer consultant.

3 In the years in question, and in prior and subsequent years, he carried on that business. I am satisfied, indeed it was admitted, that his income was derived from carrying on that business. It was not income from employment.

4 He has, up until 1993 at least, lived in Sault Ste. Marie where his family lived. He did not move to Toronto until 1996. He was unable to find sufficient work in the Sault area, so he came to Toronto.

5 In 1993 and 1994, he found work with Ontario Hydro through Churchill, I do not have a note of the correct name so I will just call it Churchill, and Professional Computer Consultants Group, Pro-Com. They were, essentially, organizations who put professionals together with clients such as Ontario Hydro. He billed them. He was, of course, not an employee of Churchill or Pro-Com or of Ontario Hydro. He was an independent contractor. When in Toronto, he stayed at a variety of apartment hotels. On weekends, he travelled to Sault Ste. Marie where his home was and his family. He also maintained an office in his home at Sault Ste. Marie.

6 In 1993, he claimed $20,891.12 and in 1994, he claimed $26,391.45 in expenses. These were substantially disallowed. He testified, and I believe him, that he provided receipts and vouchers for the amounts claimed. He had them all organized and catalogued. He got them back from the tax department in a state of total disarray and many of them were missing. I accept his testimony. It was not contradicted. This put the appellant at a serious disadvantage.

7 Exhibit A-1 is a letter from the Department of National Revenue that sets out in detail the amounts claimed. He stated that all of the expenses set out in the schedules to Exhibit A-1 were supported by vouchers. I accept his testimony.

8 Subparagraph (g) of section 7 of the reply reads: “The appellant has failed to produce adequate receipts or other records to support the alleged business expenses claimed.” This is a wholly unsupportable allegation. It is incumbent upon the Department of Justice in preparing the reply to set out the assumptions accurately and honestly and I am satisfied that the expenses claimed have been proved. Their deductibility is another matter.

9 I shall go through the list of expenses claimed and indicate which of them I believe to be deductible and which are not. Before I do so, I should refer to section 9, section 4 and section 18.12 of the Income Tax Act. Section 9 reads as follows: “Subject to this part, a taxpayer's income for a taxation year from a business or property is the taxpayer's profit from that business or property for the year.”

For the purposes of this Act, a taxpayer's income or loss for a taxation year from an office, employment, business, property or other source, or from sources of a particular place is the taxpayer's income or loss, as the case may be, computed in accordance with this Act, on the assumption the taxpayer had during the taxation year no income or loss, except from those sources, as the case may be, and was allowed no deductions in computing the taxpayer's income for the taxation year, except such deductions as may reasonably be regarded as wholly applicable to that source or to those sources, as the case may be, and except such part of any other deductions as may reasonably be regarded as applicable thereto.

10 I will not read section 18(12). It is the one that deals with office expenses.

11 I shall also go through the assumptions. The assumptions in an income tax appeal are found in the Reply to the Notice of Appeal and are supposed to set out accurately and completely the basis upon which the Minister assessed. I shall read the assumptions.

12 “The appellant maintains a residence in Sault Ste. Marie and also rents an apartment in Toronto.” It is not quite accurate. He rents accommodations in a number of apartment hotels.

13 “(b) Since 1992, the appellant has been employed in the Toronto area and signed an agreement with a placement agency known as Professional Computer Consultants Group, Pro-Com, whereby he was required to work at Ontario Hydro.” Not quite accurate, I would say, because he was not employed as an employee.

14 “The appellant was not required under a contract of employment to maintain an office at home.” The statement is correct enough because he was not under a contract of employment at all.

15 “The appellant did not maintain any business activity in Sault Ste. Marie.” In fact, he had an office there.

16 “The appellant was not entitled to claim expenses with respect to his travel to and from Sault Ste. Marie.” That is a conclusion, to some extent, of law which I will deal with in a moment.

17 “At all relevant times, the business travel expenses incurred by the appellant with respect to his employment were paid by his employer.” Once again, he was not employed. He was carrying on business.

18 “The appellant has failed to produce adequate receipts or other records to support the alleged business expenses claimed.” I have already dealt with that point. That is quite inaccurate.

19 “The disallowed expenses were not made or incurred, or if made or incurred, were not made or incurred for the purposes of gaining or producing income from a business or property.” A conclusion I will deal with in a moment.

20 “The disallowed expenses were not made or incurred, or if made or incurred, were not made or incurred for the purpose of gaining or receiving income from employment.” Well, I dare say that is so. He was not employed. He was carrying on business, but I do not accept the proposition that they were not made or incurred. I think they were fully incurred.

21 “The disallowed expenses were personal or living expenses.” Again, a conclusion.

22 But I emphasize that the assumptions in the Reply to the Notice of Appeal are premised upon a proposition that he was employed. He was not employed. He was not an employee. He was an independent contractor. That puts a totally different complexion on the case.

23 I shall go through the expenses. I repeat that these expenses are taken from receipts and documents that he gave to the Minister of National Revenue, and I regard them as having been proved.

24 Starting with 1993, the claim $275 for delivery and freight, that was disallowed. He should be allowed that amount. Accounting, he claimed 140. He was allowed 135. I shall not interfere with that $5. Advertising, $425 was claimed. Nothing was allowed. He testified that he did advertising and, indeed, in connection with his business, I do not regard $425 as a particularly unreasonable amount. That should be allowed. He claimed a bad debt of $2,000. That was totally disallowed. In my opinion, it should be allowed. He testified that he had done some work for a customer, not Ontario Hydro, and was not paid. He has established that it is a bad debt that should be written off. He also testified that he brought this amount into income.

25 Business tax, $67. I can see no reason for disallowing that. It should be allowed. Computer rental, $575 was claimed. $540 was allowed. I think he should have the additional $35. It has not been established why he should not have that.

26 Interest was allowed. Maintenance, that is maintenance I presume on his computers, at least according to the evidence, of $350. That was disallowed. It should be allowed. It is a perfectly legitimate business expense. Meals and entertainment of $880. These were not meals, according to him, that he spent travelling back and forth from Sault Ste. Marie to Toronto. These were meals that he spent trying to get business. There is no adequate reason given for disallowing these. I think they should be allowed.

27 Office expenses. He claimed $1,450. He was allowed only 233.09. He stated these were for supplies, books on computers, and that sort of thing. It has been adequately proved. There has not been suggested any reason why he should not be allowed these. I would allow a further $1,216.

28 He was allowed $900 for capital cost allowance. He was disallowed $586 for the use of his home in the Sault. He testified that he kept a place there where he kept his records and did backup work. I can see no reason why he should not be allowed $586 for the use of his home at the Sault.

29 I am going to come back to the travel and hotel expense because I am going to deal with that in a somewhat different way.

30 For 1994, I am allowing an additional $600.27 for advertising. I am allowing an additional $2,150 for bad debt. CCA was allowed. The business tax of $67 is an allowable expense. Delivery and freight, $325 is a proper expense in connection with his business. Meals again, $429.83. That would be in connection with the entertainment. That should be allowed. Legal and accounting. I cannot understand why there is a difference of $10.97 here, but it should be allowed. Supplies and books, $655, a perfectly acceptable business expense. Those amounts I think should be allowed.

31 The two large items, however, are the hotels and the apartment and travel by car or air back to his home in Sault Ste. Marie. Can it be said that these were reasonably attributable to the business that he carried on? I do not think so. I accept Mr. Wall's contention that the appellant was liable to have his contract terminated on one week's notice, and he took short-term accommodation because of the volatility of the work at Ontario Hydro.

32 I do not, however, think it can be said that he was working out of his office in the Sault and going to Ontario Hydro in Toronto. It is unreasonable, in my view, to say that the cost of living in Toronto or travelling back and forth to his home in Sault Ste. Marie were reasonably applicable to the business that he carried on in Toronto when he worked at the offices of Ontario Hydro, and I refer specifically to section 4 which I quoted earlier.

33 In the result, I am allowing the appeal, referring the matter back to the Minister of National Revenue for reconsideration and reassessment on the basis that for 1993, he be allowed a further deduction of $5,891, and for 1994, a further deduction of $4,283.07. Since this is less than 50 percent of the amount claimed, I make no order as to costs.