BETWEEN:
and
Heard at Toronto, Ontario, on January 31, 2007.
Judgment delivered at Toronto, Ontario, on February 1, 2007
REASONS FOR JUDGMENT BY: EVANS J.A.
CONCURRED IN BY: DÉCARY J.A.
MALONE J.A.
Docket: A-578-05
Citation: 2007 FCA 27
CORAM: DÉCARY J.A.
EVANS J.A.
MALONE J.A.
BETWEEN:
VASUNDARA RAGHAVAN
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
[1] This is an appeal by Vasundra Raghavan from a decision by a Judge of the Tax Court of Canada dismissing her appeal from the Minister’s assessment of her tax liability for the taxation years 2001 and 2002. The decision is reported as Raghavan v. Her Majesty the Queen, 2005 TCC 706.
[2] The Minister disallowed expenses which Ms Raghavan had claimed to deduct from her business income in those years. The activity claimed as a business is a research website, operated since 2001 under the name, Value Balance.com, and located in the Raghavans’ home. Ms Raghavan’s husband, a professional engineer, is said to have worked full-time for Value Balance.com in 2001 and 2002 without remuneration. Ms Raghavan herself is in full-time employment with another employer, and has financed Value Balance.com from her savings.
[3] In the year 2001, Ms Raghaven reported $1,200.00 business income, from which she claimed to deduct expenses of $20,606.79. For 2002, her reported business income was $900.00, and the expenses were $26,946.94. Accordingly, she claimed business losses of $19,406.79 in 2001, and $26,046.94 in 2002. The revenue appears to have been generated by two sales by Balance Value.com.
[4] Nearly all the expenses were attributable to fees for consulting services related to the activities of Value Balance.com paid to her three children, who in 2001-2002, were 14-15, 18-19, and 22-23 years of age respectively. Consulting fees were also paid to a woman who had helped out with the children when they were young, and who was a family friend.
[5] The trial before the Tax Court lasted a day; five witnesses testified and many documents were put into evidence. In his reasons for decision, the Judge set out the main facts. He made no finding respecting the credibility of the witnesses or the probative value of the documentary evidence.
[6] After quoting from the reasons for decision written by now Chief Justice Bowman in Stephen v. Canada, [2001] 2 C.T.C. 2621 (T.C.C.), which in turn refers to Kaye v. R, 98 D.T.C. 1659 (T.C.C.), the Judge concluded (at para. 16) that the expenses claimed by Ms Raghavan were vastly disproportionate to the revenues received, and that no reasonable person would have spent that amount to obtain such a small revenue. As a result, the expenses “were commercially inconsistent with the existence of a business”, and she was not operating a business in 2001 and 2002. The Judge also concluded (at para. 18) that the salaries paid to Ms Raghavan’s children and to the friend “were not reasonable in the circumstances.”
[7] In my opinion, the Judge erred in law by failing to apply the two-step approach adopted by the Supreme Court of Canada in Stewart v. Canada, [2002] 2 S.C.R. 645, 2002 SCC 46, for determining whether expenses are deductible under subsection 18(1) of the Income Tax Act. R.S.C. 1985, c. 1 (5tt Supp.) (“ITA”). Stewart represents something of a fresh start in this area of the law.
[8] First, a court must determine if the taxpayer has a source of income from a business for the purpose of section 9 of the ITA. The ultimate objective of this part of the test is to distinguish between commercial and personal activities (para. 51), in accordance with the methodology prescribed by the Court, especially at paras. 52-56, and 60.
[9] Second, having found a source of income, a court must determine if the expenses claimed by the taxpayer may be deducted pursuant to subsection 18(1) from the income earned from the business. If they can, the expenses will be allowed, but only to the extent that they are “reasonable” under section 67: at para. 57. The Court emphasized (at para. 60):
Whether or not a business exists is a separate question from the deductibility of expenses.
See also Hammill v. Canada, 2005 FCA 252 paras. 51-53, on the approach to be taken to the application of section 67 in light of the decision in Stewart.
[10] Although Stewart was discussed in the submissions made by the parties to the Judge in the present case, it is not mentioned in his reasons. Rather, the Judge appears to have decided, on the basis of older authority and contrary to the teaching of Stewart, that Ms Raghavan was not operating a business in 2001 and 2002 because the expenses that she claimed were disproportionate to the revenue earned
[11] Moreover, when the Judge later concludes that the expenses claimed were unreasonable, he does not explain why they should be eliminated altogether, rather than reduced. I suspect that he may have disallowed them altogether because he had already found that they were so disproportionate to the revenue as to preclude the activity from constituting a business.
[12] On the basis of the record, I am not able to say with sufficient certainty that, if the Judge had applied the correct legal test and made his reasoning more explicit, he would have reached the same result. In these circumstances, and in view of the volume of evidence and the importance of oral testimony, I have concluded, reluctantly, that a new trial should be held.
[13] For these reasons, I would allow the appeal and grant the appellant her disbursements, set aside the decision of the Tax Court, and remit the matter for a new trial.
“I agree
Robert Décary”
J.A.
“I agree
B. Malone”
J.A.
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-578-05
(APPEAL FROM THE TAX COURT OF CANADA DATED NOVEMBER 1, 2005, DOCKET NO. 2004-3716-(IT)1)
STYLE OF CAUSE: VASUNDARA RAGHAVAN v. HER MAJESTY THE
QUEEN
PLACE OF HEARING: TORONTO, ONTARIO
DATE OF HEARING: JANUARY 31, 2007
REASONS FOR JUDGMENT BY: EVANS J.A.
CONCURRED IN BY: DÉCARY J.A.
MALONE J.A.
APPEARANCES:
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FOR THE APPELLANT
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FOR THE RESPONDENT
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SOLICITORS OF RECORD:
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Mississauga, Ontario |
FOR THE APPELLANT
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Deputy Attorney General of Canada
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FOR THE RESPONDENT |