Tax Court of Canada Judgments

Date: 20020730

Docket: 2001-4527-IT-I

BETWEEN:

IVANA CAPPELLETTO,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

McArthur J.

[1]            The Minister of National Revenue disallowed certain expenses claimed by the Appellant for her 1996, 1997 and 1998 taxation years on the basis that they were personal expenses or unreasonable pursuant to paragraph 18(1)(a) and section 67 of the Income Tax Act.

[2]            The Appellant carried on a graphic arts business out of a 686 square foot condominium loft apartment which she shared with a friend. Her friend owned the condominium and he paid 50% of the expenses. Her expense claim was erroneously based on her paying 100% of the condominium expenses.

[3]            Upon agreement, the expenses in dispute narrowed down to the following:

	1996	1997	1998
Insurance	$183	$750	$750
Cost of goods sold			5,000
Meals	499	1,955	1,570
Business use of home	2,362	3,874	4,471
Motor Vehicle expenses	724	1,500	3,005
C.C.A.		3,921	2,907
Travel expense	1,426	3,766	1,708
Reference materials		4,893	2,634

[4]            Before analysing the individual expenses, brief general comments on the distinction between business and personal expenses are helpful.[1] An expense is deductible only if the taxpayer incurs it to earn income. Some expenses are clearly of a pure business nature, raising no serious issue of deductibility. For example, the cost of goods sold. Expenses of purely a personal nature such as meals, personal use of an automobile and personal travel are not deductible. The primary and predominant purpose of the expenditure must be scrutinized. In the present case, some claimed expenditures fall into a grey zone. Most expenditures give pleasure possibly in the pursuit of profit as in meals, business use of the home, car expense and travel. What must be considered is why did the business incur the expenditure. Some of these can be classified as hybrid expenses incurred partly for profit and partly for personal enjoyment or consumption. I must determine which is the dominant factor or make a fair allocation.

[5]            The Appellant testified on her own behalf and an auditor, Robert Vance Gill, testified on behalf of the Respondent. What prompted his audit of the Appellant was the large amount of expenses claimed against a small income.

[6]            In computing income for the 1996, 1997 and 1998 taxation years, the Appellant reported income (loss) from the business as follows:

                                                1996                                                                           $ 14,691

                                                1997                                                                         $ (19,418)

                                                1998                                                                           $ 23,669

[7]            In reassessing the Appellant, the Minister made the following changes:

                                                1996 increase by                                                     $15,414

                                                1997 increase by                                                      $19,387

                                                1998 decrease by                                                      $ 8,154

[8]            I give considerable weight to the auditor's evidence which was impressive. He has considerable experience in auditing small businesses and spent upwards of 100 hours on the present file, much of it at the Appellant's premises, reviewing records, viewing the premises and the equipment. There were many issues resolved before the hearing, many issues remain. The time consumed to complete the audit is understandable.

[9]            I will deal with the issues in the order enumerated earlier.

Insurance

[10]          Without difficulty, I accept the Minister's prorating of the premiums paid to reflect the amounts applicable to the calendar year. It is clear that an auditor's error benefited the Appellant.

Cost of Goods Sold

[11]          The Appellant included a $5,000 freight charge for shipping a large antique family desk that had been bequeathed to her. The Minister does not deny that the Appellant uses the desk for business purposes but states she would have paid the transportation in any event. Why should the taxpayers share the cost? I find this falls into the category of "hybrid costs" incurred for profit and partly for purely personal considerations and allow the Appellant $2,500.

Meals

[12]          The Appellant's position is that she had an important client in Coquitlam who she met at a mid-way restaurant, in addition to other restaurant business meetings. She presented two letters purportedly from clients to that effect. The Appellant had the burden of proof. The evidence presented was the general statement of the Appellant, unsupported but for the letters which of course were hearsay. The only restaurant receipt presented indicated it was incurred at 9:00 p.m., an unlikely hour for a business meeting. These expenses are disallowed entirely.

Business Use of Home

[13]          The Appellant lived with J. Paul Manson, now her husband, in a 686 square foot loft condo-apartment. She claimed approximately 70% of the total apartment expenses, although Mr. Manson paid 50% of those expenses. It was, in fact, Mr. Manson's condo. I accept the Minister's position for the reasons given by the auditor and allow the Appellant 30% of the apartment costs for business expenses.

Motor Vehicle Expenses

[14]          I accept the Minister's position as set out in the Reply:

r)              the Appellant did not keep a log of the miles she drove for the Business;

s)              the Appellant drove no more than 150 kilometres per month for the Business;

t)              the fair market value of the vehicle on 22^nd May 1996, at the time the Appellant changed the use of the vehicle from personal only to mixed personal and business, was $4,500;

u)             the total kilometres driven in the 1996, 1997 and 1998 taxation years were 3,703, 3,640 and 6,036 respectively;

Capital Cost Allowance

[15]          I accept the Minister's position as set out in the Reply:

v)             the $1,594 addition to class 10 in the 1997 taxation year related to furniture acquired for personal use;

w)             the personal property was not at any time used in the Business;

Travel Expense

[16]          The Appellant is of Italian ancestry and had spent some 13 years in Italy from 1982 where she obtained a Master's degree and worked for 11 years. She claims that it was important to travel to Italy to keep abreast with colours and styles. In cross-examination, she admitted that most of this information was available through modern technology. One of the transatlantic trips, the cost of which she claimed as a business expense, was to visit her father in Spain at Christmas. She gave confusing and conflicting evidence with respect to a property in Italy. She stated to a bank that she owned property in Italy valued at C$50,000. At the hearing, she stated that it was a family property and not worth anything near $50,000. I believe she explained that she embellished the truth to obtain financing. The expense of a trip to Edmonton was claimed, yet it was for a ticket issued to her father. Again, I accept the Minister's position that apart from $248.37 in 1997, there was no business purposes for these trips. She provided no supporting documents and I do not accept her evidence. The swatches of material presented were of no assistance. I found it difficult to separate the Appellant's embellishments from reality. For her automobile, she claimed a value of $14,500 in 1996, yet a car dealership gave it a value of $3,000, and I believe she sold it for $1,000 in 1997 or 1998. The Minister, very fairly, allowed a fair market value, as of May 1996 of $4,500.

Reference Materials

[17]          The Appellant stated she purchased designer magazines at a cost of $4,893, in 1997 and $2,634 in 1998. She presented six or seven magazines in evidence. They were dated 1996 or 1997. Their total cost was approximately C$500. I accept the Minister's position as set out in the Reply as follows:

hh)           in 1997 and 1998 the Appellant acquired certain reference and educational materials at a cost of $4,893 and $2,634 respectively (the "Reference Materials");

ii)              the purpose of the Reference Materials was to provide design ideas for current and future projects for the Appellant and her clients;

jj)              the Reference Materials provided the Business with an enduring benefit and were class 8 capital expenditures; and

kk)            expenses in excess of the amount allowed by the Minister were not incurred for the purpose of gaining or producing income from a business or property, but were personal or living expenses for the Appellant.

[18]          The following quotations referred to by the Minister's counsel apply equally to the present case: Zalzalah (L.) v. Canada, 95 DTC 5498, wherein Heald J. stated:

The plaintiff frankly acknowledged that he did not keep any books or records during the taxation years here under review. This matter was also raised in the proceedings before the Tax Court of Canada where Lamarre Proulx, TCJ stated:

The Minister cannot and should not allow business deductions that cannot be proven by documentary evidence. That would bring the administration of the Income Tax Act in the sphere of arbitrariness.

I agree with that view of the matter. Likewise, in the case of Holotnak v. The Queen, Cullen, J. considered the requirements of section 230 and stated as follows:

Section 230 of the Act requires taxpayers to keep adequate books and records. "Adequate" is not defined but it would seem that these records should support whatever the taxpayer is claiming for tax purposes.

The onus of proof that the expenses were incurred for the purpose of earning income is on the taxpayer (Wellington Hotel Holdings Limited v. M.N.R. 73 DTC 5391). Specifically, with regard to assessments, the onus is on the taxpayer to prove that the Minister's assumptions and assessments are wrong (Strayer, J. in Schwarz v. The Queen, 87 DTC 5274) quoting from Johnston v. M.N.R., [3 DTC 1182] [1948] S.C.R. 486). The Schwarz case (supra) also involved a situation where the plaintiff's purchases were not supported by vouchers. As Strayer, J. points out, the onus is on the taxpayer to prove wrong the M.N.R.'s reassessment as the taxpayer is in a better position to prove what actually happened.

The following statement by McDonald J. in Njenga v. R., 96 DTC 6593, also applies to the present appeal:

The Income tax system is based on self monitoring. As a public policy matter the burden of proof of deductions and claims properly rests with the taxpayer. The Tax Court Judge held that persons such as the Appellant must maintain and have available detailed information and documentation in support of the claims they make. We agree with that finding. Ms. Njenga as the Taxpayer is responsible for documenting her own personal affairs in a reasonable manner. Self written receipts and assertion without proof are not sufficient.

[19]          In conclusion, the appeals for the 1996 and 1997 taxation years are dismissed and the appeal for the 1998 taxation year is allowed on the basis that the Appellant is entitled to claim only freight expenses of $2,500 under the heading "Cost of Goods Sold". The Appellant is not entitled to any further relief.

Signed at Ottawa, Canada, this 30th day of July, 2002.

"C.H. McArthur"

J.T.C.C.

COURT FILE NO.:                                                 2001-4527(IT)I

STYLE OF CAUSE:                                               Ivana Cappelletto and

Her Majesty the Queen

PLACE OF HEARING:                                         Vancouver, British Columbia

DATE OF HEARING:                                           June 14, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge C.H. McArthur

DATE OF JUDGMENT:                                       July 30, 2002

APPEARANCES:

Agent for the Appellant:                     Eva Y. Lee

Counsel for the Respondent:              Victor Caux

COUNSEL OF RECORD:

For the Appellant:                

Name:                                N/A

Firm:                  N/A

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2001-4527(IT)I

BETWEEN:

IVANA CAPPELLETTO,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on June 14, 2002, at Vancouver, British Columbia, by

the Honourable Judge C.H. McArthur

Appearances

Agent for the Appellant:             Eva Y. Lee

Counsel for the Respondent:      Victor Caux

JUDGMENT

          The appeals from reassessments of tax made under the Income Tax Act for the 1996 and 1997 taxation years are dismissed.

          The appeal from the reassessment of tax made under the Act for the 1998 taxation year is allowed and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is entitled to claim only freight expenses of $2,500 under the heading "Cost of Goods Sold". The Appellant is not entitled to any further relief.

Signed at Ottawa, Canada, this 30th day of July, 2002.

"C.H. McArthur"

J.T.C.C.