Date: 20020524
Docket: 2001-1523-IT-I
BETWEEN:
BRIAN SCHUMAKER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
For the Appellant: The Appellant himself
Agent for the Respondent: Lorraine Edinboro (Student-at-law)
____________________________________________________________________
Reasonsfor Judgment
(Delivered orally from the Bench on May 1, 2002, at Toronto, Ontario)
Sarchuk J.
[1] These are appeals of Brian Schumaker with respect to assessments for his 1995 and 1996 taxation years in which the Minister of National Revenue disallowed the deduction of certain business expenses incurred by him in the operation of a tanning salon and a financial consulting practice.
[2] I turn first to the expenses claimed with respect to the tanning salon. In the spring of 1987, Briker Holdings Ltd. (Briker Ltd.), an Alberta company owned solely by the Appellant entered into an agreement with 325861 Alberta Ltd. (325861) to purchase the rights to use the registered trademark, Fabutan; to establish a Fabutan suntan studio and to purchase certain tanning equipment as set out in Schedule "B" to the agreement. Schedule "A" to the agreement entitled Briker Ltd. to locate its initial studio in the City of Etobicoke and in fact that was done.
[3] According to the Appellant Briker Ltd. could not carry on business in Ontario and thus, the Appellant registered the name Briker Holdings (Grab-A-Tan) (Holdings) under the Ontario Business Names Act. Holdings was a partnership in which the Appellant was to receive 90% of the profits and his wife the remaining 10%. In 1987, they began to operate the studio in Etobicoke and continued to do so until April 1, 1996 when it was sold to Robert and Todd Morgan. It is appropriate to mention at this point of time that during the latter part of 1996, the purchaser defaulted under the terms of the agreement. It appears that the studio was closed by the landlord and the purchasers locked out. During that period of time the assets as well as the books of account and records, etc. were disposed of by the landlord without giving notice to the Appellant and according to him, without having the proper authority to do so. The absence of supporting documents for some of his claims was one of the fallouts of the foregoing events.
[4] I return now to the deductions claimed with respect to the tanning salon business. In reassessing the Appellant, a number of deductions claimed by the Appellant were disallowed. I propose to deal with these in order with the first item being rent. In the 1995 and 1996 taxation years, the Appellant and his wife deducted rent expenses of $17,770 and $9,000, respectively, of which the Minister disallowed $6,170 and $6,000. The amount allowed by the Minister in 1995 was based on the production of receipts amounting to $11,600. According to the auditor, no explanation was provided regarding the balance with the exception of a comment by the Appellant that the difference may have related to home office and storage expenses. With respect to 1996, the Appellant produced receipts totalling $3,000 and on this basis the balance of $6,000 was disallowed. Mr. Mayadunne, the auditor, had also been shown a letter from the landlord (Exhibit A-8) setting out the lease terms, but observed that the payment receipts provided to the Appellant by the landlord for that year did not match the amounts set out in Exhibit A-8. These receipts were returned to the Appellant and have not been produced in court. I must also note that the letter (Exhibit A-8) suggests that the tenant, Briker Ltd., may have been in arrears at that time and that arrears payments would be required for some period. Exhibit A-8 presented by the Appellant may set out the lease terms correctly but it is by itself incapable of establishing the actual amounts that were paid. Thus on balance, the evidence adduced by the Appellant does not justify a revision of the amounts allowed by the Minister.
[5] I turn next to the issue of wages. In 1996, the Appellant and his wife deducted the amount of $2,868 for wages. In each case, when I refer to both of them making the deduction, it is understood that 90% and 10%, respectively, was the allocation in terms of the amounts claimed by the Appellant and his wife, respectively. The full amount claimed was disallowed because no supporting records or other documentation was produced. At trial, the Appellant filed 14 receipts which he was able to locate totalling $2,218.50 (Exhibit A-12). With the exception of three receipts all are dated in the month of March 1996. The Appellant testified his wife was ill and unable to work and that part-time help was required in the tanning salon and that these receipts reflect that fact.
[6] My review of the documents submitted leads to the conclusion that two of the receipts are questionable. Receipt number 4831 is dated November 1, 1997 and reflects a payment of $200 for babysitting. Receipt 4808 for $100 is dated December 20, 1995 and although the writing is unclear, appears to be a reimbursement of some sort but does not have any relationship to salary or wages. The balance of the receipts are adequate proof of payment of wages by the Appellant and he will be entitled to a deduction in the taxation year 1996 of his 90% share on account of wages amounting to $1,918.50.
[7] Automobile Expenses: In 1995, the Appellant and his wife deducted expenses in respect of the tanning salon business for automobile use totalling $5,068. This claim relates to two vehicles, a van and a Supra which I understand to be a smaller vehicle. The Appellant was the primary user of the van in 1995 in relation to both the tanning salon operations and more particularly, in his consulting business. [1] Fifty percent of the amount claimed was disallowed by the auditor on the basis that there was no log book and no substantive evidence as to the amount of use adequate to warrant an allowance over and above that. The Appellant testified that no logs were kept during the years in issue. He endeavoured to show the percentage of use of the vehicle for his consulting business by analyzing his customer sales in 1995, 1996 and 1997. Using data reflecting these sales he maintains that in 1995, he would have been justified in claiming in excess of $3,500 based on $.35 per kilometre (or $2,875 at $.28 per kilometre). [2] He further argued that this was probably less than what he would have been entitled to claim if he had kept daily logs.
[8] The failure to keep logs did not appear to be of much concern to the Appellant. However, there is a basic principle to be considered with respect to expenses such as these. To be deductible, motor vehicle expenses and indeed all expenses must be reasonable in the circumstances and supportable by vouchers. A taxpayer is not expected to keep every last receipt nor does the court expect him to produce every one but, some records must be maintained. It has been held on a number of occasions that a claim by an individual for motor vehicle expenses calculated on a cents per kilometre basis is not acceptable. Here the vehicles are not the same and the expenses incurred in driving a van may well be greater than those incurred with respect to a small car like a Supra or Volkswagen. To expect to be able to claim vehicle costs on an arbitrary "X" cents per kilometre is not acceptable.
[9] To support a claim for motor vehicle expenses a record should be kept of the distances travelled for business purposes which should contain sufficient information to enable the Appellant to deal with the situation he finds himself in, in this particular case. Taxpayers have certain responsibilities with respect to establishing their expenses and if they do not fulfil them, there is not much that can be done. Absent such evidence, there is no basis upon which additional expenses could be allowed over and above what the Minister has already permitted, which was 50%. I might add that given the complete absence of records, it would not have been particularly surprising if the Minister had decided to disallow all of the vehicle expenses.
[10] I turn next to the issue of capital cost allowance. In computing income for the 1995 and 1996 taxation years, the Appellant deducted the amount of $2,585 in the 1995 taxation year as CCA and terminal losses in the amounts of $10,340 and $3,703 in respect of Class 8 and Class 10 assets in 1996, respectively. The Minister disallowed the deduction of the Appellant's share of the CCA for 1995 and his share of the terminal loss in 1996. With respect to the Class 8 assets, the disallowance was based on the assumption that although the Appellant and his wife were operating a tanning salon as a partnership (Holdings), the purchase and sale agreement indicated that the owner of the Class 8 assets was Briker Ltd., a corporation under the laws of Alberta. Furthermore, the Appellant did not provide any receipts, invoices or purchase agreements or other documentation capable of showing proof of his ownership of the Class 8 assets. The Appellant for his part maintains that the tanning business and tanning equipment were not the property of the corporation since the corporation had divested itself of the ownership of the property in order to permit Holdings, the partnership, to carry on business in Ontario. As proof, the Appellant submitted a copy of an application to register Briker Holdings (Grab-A-Tan) under the Business Names Act. He also argued that all funds to purchase the equipment were provided by him and produced cheques dated April 28, 1987 payable to the vendor, 325861.
[11] I have some difficulty with his submission. The cheques produced were for $7,500 and $22,796, the exact amounts which were paid to the vendor, 325861, with respect to the purchase by Briker Ltd. of the franchise and tanning equipment. All that indicates is that the funds were advanced by the Appellant to Briker Ltd. to enable it to complete the acquisition of the franchise and equipment. Whatever arrangement may have existed between Briker Ltd. and the Appellant with respect to the funds advanced (if any) has not been established. On the other hand, the agreement (Exhibit A-2) clearly indicates that the purchaser and owner of the equipment was Briker Ltd.
[12] The Appellant relies on what he says was a letter to the Royal Bank in which reference is made to the "release" by Briker Ltd. of the equipment in issue to the Appellant. This he said was necessary to satisfy some unspecified loan requirements. First, there is some question regarding the genesis of this document. Furthermore, there is in my view, nothing in the agreement (Exhibit A-2) which entitled him to unilaterally, and without the consent of the vendor, 325861, release his interest in the agreement to a third party. [3] It is an accepted fact that the Appellant carried on business in Ontario in partnership with his wife operating as "Holdings". This fact, however, does not alter the status of Briker Ltd. as the legal owner of the assets acquired from 325861 used in the tanning business. I also note that a sixth bed was purchased in February 1998 and was shipped to Fabutan Suntan Studios at the Etobicoke address, a designation which only Briker Ltd., was permitted and entitled to use pursuant to the franchise agreement. On the evidence I can reach no other conclusion but that the Class 8 assets were the property of Briker Ltd. and thus, the Appellant was not entitled to claim CCA or terminal losses with respect to these assets in 1995 and 1996.
[13] The Appellant further argued that CCA was allowed with respect to these items in previous years and urged the court to find that the Minister was bound by these previous allowances. There is a substantial body of case law in which the courts have consistently held that a concession made in one year in the absence of any statutory provisions to the contrary does not preclude the Minister from taking a different view in a later year. As was stated in Admiral Investment Ltd., v. the Minister of National Revenue, [4] and has been repeated any number of times since then, an assessment is conclusive as between the parties only in relation to the assessment for the year in which it is made. in Gilbert v. the Minister of National Revenue, [5] (1991) 2 C.T.C. 2319. Judge Rip observed:
The treatment for tax purposes of expenses claimed in earlier years is not before me and I am not bound by how the respondent may have treated similar claims in previous years. After all, the respondent is not the arbiter of what is right or wrong in tax law.
Quite simply this means that if the Minister inadvertently or incorrectly allowed certain amounts as a deduction in prior years, that is not binding on this Court. Rather, it is necessary for the Court to consider the facts before it for the particular taxation year under appeal and on that basis, determine whether a particular disallowance or allowance of a particular item comes within the scope of a particular section. If it does, a taxpayer may be entitled to a deduction. If it does not, he is not so entitled. The court cannot simply say, "Oh, well, the Minister made a mistake before, therefore, we are going to make the same mistake".
[14] Regarding the Class 10 assets, the two vehicles were owned by the Appellant. Absent any reasonable evidence as to the percentage of business use as contrasted to personal use, I cannot find that the Minister's allowance of 50% CCA was wrong. The CCA claimed with respect to the computers was allowed to the maximum extent permissible and no issue arises there.
[15] The next issue to be dealt with is the disallowance of deductions claimed with respect to the Appellant's consulting business. No changes were made for the 1995 taxation year. Thus, this issue relates only to the 1996 taxation year in which the Appellant deducted $4,357 for rent (home office) and $3,686 for telephone and utilities. No documentation was provided to support the amounts claimed. It is accepted that the residence used was a small three bedroom property in which the Appellant, his wife and I believe five children resided. During the audit, the Appellant provided a rough sketch of the house with room dimensions and specifically indicated the area allocated for business purposes. The auditor, using that information, calculated that 10% of the total area had been utilized for business purposes. Absent any additional relevant information, he allowed 10% of the rental cost as reasonable home expenses. He also allowed 100% of the telephone cost on the basis that this was essential to the Appellant's business and 10% of all remaining utilities. Since no additional evidence was produced by the Appellant, I cannot disagree with this conclusion. Accordingly, the amounts in issue were properly disallowed.
[16] I wish to deal with two other matters. The Appellant, in his Notice of Appeal, raised what was referred to as the Charter issue in paragraphs 34, 35 and 36. The issue as stated appears to question whether the federal government has constitutional authority to levy direct taxes. There are two aspects to this issue. The first is that before a Charter issue can be determined by this court the Rules require that notice be given to each and every one of the Attorneys General of every province and to the Attorney General of Canada. The practice in this court has been to initially review the substance of the constitutional claim and determine whether it has any merit or arguable basis. If it does, an adjournment is granted to permit the Appellant to comply with the Rules.
[17] I have considered the issue raised on behalf of the Appellant and find nothing whatsoever of any legal merit therein. The decisions cited by the Appellant's accountant in the Notice of Appeal are stale-dated, have been overruled and have no legal standing. On the other hand, in Caron v. The King, [6] the Privy Counsel, which was the final arbiter in those years, ruled that subsection 92(2), which is the section dealing with the province's right to impose direct taxation, does not prevent the federal government from levying direct taxes. A review of the law on this subject since 1927 as discussed in Hogg on Constitutional Law suggests that there have been no decisions that have changed the position expressed in Caron. The Appellant's reliance on some earlier cases is completely misplaced and there is simply no merit in the position advanced.
[18] I have one further comment and that relates to the issue of the Appellant's wife's appeal which was indirectly raised in his Amended Notice of Appeal. I am referring specifically to paragraphs 24 and 29 where the Notice of Appeal states:
24. Since these matters pertain also directly to the reassessment of the spouse of the Appellant, that we move to have the decisions of this court binding equally upon the reassessment of the spouse of the Appellant.
29. Should the reassessment be vacated or amended, and accordingly the respective reassessment of the Spouse of the Appellant?
This is a totally inappropriate pleading and has no place in this appeal. I have no jurisdiction to deal with another taxpayer's appeal which is not itself before me.
[19] For the foregoing reasons, the appeal for 1995 is dismissed and the appeal for 1996 is allowed in part.
Signed at Ottawa, Canada, this 24th day of May, 2002.
"A.A. Sarchuk"
J.T.C.C.
COURT FILE NO.: 2001-1523(IT)I
STYLE OF CAUSE: Brian Schumaker and Her Majesty
the Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: April 29, 30 and May 1, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge A.A. Sarchuk
DATE OF JUDGMENT: May 9, 2002
APPEARANCES:
For the Appellant: The Appellant himself
Agent for the Respondent: Lorraine Edinboro (Student-at-law)
COUNSEL OF RECORD:
For the Appellant:
Name: N/A
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
[1] In 1995, all expenses relating to the Appellant's business activities were reported in the tanning salon business and expense statement. However, in 1996, separate expense statements were prepared for each business.
[2] He also observed that if travel to head office was included, the claimed amounts would have been either $6,423 or $5,138.
[3] See paragraphs 20 and 23 inclusive.
[4] (1967) 2 Exchequer Court 308.
[5] (1991) 2 C.T.C. 2319.
[6] 1 DTC 49.