Date: 20021105
Docket: 2001-1824-IT-I
BETWEEN:
UMESH JHA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Angers, J.T.C.C.
[1] This is an appeal of a reassessment for each of the appellant's 1996 and 1997 taxation years. The Minister of National Revenue (the "Minister"), in the reassessment, disallowed motor vehicle expenses and work space in home expenses which the appellant had claimed against rental income. In 1996, these expenses were $4,301.09 for the motor vehicles and $8,869.74 for the work space. In 1997, they were $7,694.33 and $5,949.03 respectively. In reassessing, the Minister relied on the following assumptions of fact set out in paragraph 6 of the Reply to the Notice of Appeal, which were either admitted or denied as indicated:
(b) in the 1996 and 1997 taxation years, the appellant had the following rental properties: (admitted)
|
Property Address |
Number of Units |
Management Fee Expenses Claimed |
Net Income/ (Loss) Claimed |
||
|
|
|
1996 |
1997 |
1996 |
1997 |
|
40-50 Rutledge Street, Bedford, Nova Scotia |
21 |
28,236 |
29,736 |
(3,814) |
(4,565) |
|
131-4711 Jane St., Toronto,Ontario |
1 |
5,343 |
4,781 |
(3,814) |
(3,547) |
|
66 Sydney Rd, London England |
1 |
0 |
0 |
(852) |
(1,947) |
|
40-42 Regal Road, Dartmouth, Nova Scotia |
2 |
0 |
0 |
365 |
(3,912) |
|
5575 5589 Morris St, Halifax, Nova Scotia |
16 |
0 |
0 |
6,607 |
8,088 |
|
5A B Withrod Drive, Halifax, Nova Scotia |
2 |
0 |
0 |
(5,677) |
(3,588) |
|
12 Dover Crt, Dartmouth, Nova Scotia |
1 |
0 |
0 |
(3,776) |
(5,048) |
|
1005 55 Centre Ave, Toronto, Ontario |
1 |
4,021 |
4,347 |
1,800 |
(4,046) |
|
2104 260 Queens Way Toronto Ontario |
1 |
2,760 |
2,070 |
(92) |
642 |
|
1905 270 Queens Way Toronto Ontario |
1 |
2,580 |
2,801 |
(5,541) |
(9,171) |
(c) in 1996 and 1997 taxation years, the Appellant claimed total rental losses from these properties in the amounts of $38,200.59 and $54,820.60 respectively; (admitted)
Work Space in Home Expenses
(d) the Appellant claimed work space in home expenses against income from property in 1996 and 1997 in the amounts of $8,869.74 and $5,949.03 respectively; (admitted)
(e) the Appellant did not meet tenants on an ongoing or continual basis at his home office; (denied in part)
Motor Vehicle Expenses
(f) at all material times the Appellant owned a Volvo and a Mercedes; (admitted)
(g) the Appellant claimed to use the Volvo when handling the affairs of his rental properties and the Mercedes for his psychiatric practice; (admitted)
(h) the Appellant claimed motor vehicle expenses in 1996 and 1997 against income from property in the amounts of $4,301.09 and $8,833.90 respectively; (admitted)
(i) of the $4,301.09 in 6(h) above, $2,064.89 was for interest expense; (admitted)
(j) the Volvo was a late 1980's model and the original vehicle loan had been paid off several years before 1996; (denied)
(k) the interest amount of $2,064.89 was therefore disallowed as there was no documentation to show it had been incurred for the purpose of earning income; (denied)
(l) the remaining amount of $2,236.20 (4,301.09 - 2,064.89) was disallowed as insufficient documentation was supplied to confirm the expense was incurred to earn income; (denied)
(m) the Appellant claimed additional motor vehicle expenses against his professional income in 1996 in the amount of $6,452.11; (admitted)
(n) the Appellant incorporated his professional practice in January of 1997, and claimed no motor vehicle expenses against his professional income on his 1997 personal tax return; (admitted)
(o) the Appellant did not maintain adequate records to support the motor vehicle expenses claimed; (denied)
(p) in 1997, the Appellant supplied receipts to support only $4,558.28 of the $8,833.90 claimed for motor vehicle expenses; and (denied)
(q) in the absence of proper records to support that the expense was incurred to earn income, an amount of 25%, or $1,139.57 was allowed as reasonable in 1997; (denied)
[2] The onus is on the appellant to establish on a balance of probabilities that the expenses claimed are valid and allowed under the Income Tax Act (the "Act").
[3] The appellant has been a psychiatrist and family physician since 1976. He has also invested in real estate and owns rental properties as described in paragraph 6(b). After a number of years, his wife resigned from her job and became manager, medical secretary and receptionist for the appellant. They eventually built a house with 12 rooms to accommodate his practice, the real estate operations and their family. It is a three-storey house. The ground floor houses the appellant's medical practice and there is a two-door garage on that level. One third of the house is needed for the medical practice and less than one third for managing the real estate operations; the rest is for the family's use. The garage is used to store building materials for repairs and various supplies.
[4] The appellant explained that three rooms are needed for the real estate operations. One room is an office in which leasing and financial records and tenant information are kept and bookkeeping is done. Another is used for meetings with building supervisors, rental agents and others. The third, the double garage, is for storage. The appellant did not meet all his tenants, for he had an agent, but on occasion, he would meet with some of them at his home.
[5] In 1994, the appellant borrowed money to provide funds for his real estate operations as these were not profitable. The loan served to consolidate all his debts and his house was mortgaged as collateral for the loan.
[6] The appellant produced in evidence a logbook for both taxation years detailing the trips made with his motor vehicles and the kilometers travelled. He testified under cross-examination that the logbook had been prepared by his bookkeeper, Robert Hume, and that it contained the appellant's recollection of what had taken place. The log was not kept on a daily basis as the appellant found that too cumbersome. He could not recall when it had been prepared but said it was compiled by Mr. Hume using his diary. The appellant testified that his motor vehicles were only used for personal purposes twice during the years in issue and it was to travel to P.E.I. In his tax return for 1996 the appellant claimed 95% of the expenses for one of his motor vehicles and deducted those expenses from his rental income. He claimed 100% of the expenses for the other motor vehicle, which he deducted with respect to his medical practice. The appellant did not remember, for 1996, what proportion of the motor vehicle expenses he claimed for the vehicle used in his rental operations. Although he produced a log showing the kilometers driven, he could not say how many kilometers the car had in fact travelled.
[7] The appellant's bookkeeper, Robert Hume, testified that he keeps the books and records for the real estate operations. He attends at the home of the appellant every Tuesday to process the rental payments and pay the bills. He testified that the meetings with condo management and with tenants are held in the living room but that the records are kept in an office on the main floor of the house. Mr. Hume said he provides the bookkeeping information, and in particular the necessary receipts, to the accountant for the preparation of appellant's tax returns. He had no receipts or other documents with him when he testified. The receipts concerning the motor vehicles are divided between the medical practice and the real estate operations according to the information given to him by the appellant. He acknowledged having prepared the logbook for the motor vehicles (Exhibit A-4) but said he had no personal knowledge of the kilometers travelled and relied on what the appellant told him. Nor did he have any involvement in determining the percentage attributed to personal use.
[8] The first issue has to do with whether the work space in home expenses were properly disallowed by the Minister. In order for the appellant to claim those expenses, he must establish that they were incurred for the purpose of earning income from a business rather than rental income or income from property. Subsection 18(12) of the Act, which deals with this issue, reads as follows:
(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.
[9] The appellant must therefore establish that his real estate operations are in fact a business operation. There is no doubt that the appellant has a substantial number of rental units in both Nova Scotia and Ontario. He uses an agent to rent these units and needs a bookkeeper to attend to the rental property operations at least once a week. The evidence, however, does not disclose any information on what services are actually being provided or supplied by the appellant to the tenants or on the extent of such services. The determination of when ownership of real property becomes a business is a question of fact. In Walsh and Micay v. Minister of National Revenue, 65 DTC 5293, it was said at page 5296:
In my view, prima facie the perception of rent as land owner is not the conduct of a business, but cases can arise where the extent of the various services provided by the landlord under the terms of a leasing contract and the time and labour devoted by him are such that the rental paid by the tenant can be regarded as in a substantial measure payment for such services as well as for the use of the property and the interrelation of the use of the premises with the use of such services may be so extensive that the whole sum could readily be regarded not as mere rental of property, but as true receipts of a business of providing apartment suites and services to tenants. It is a question of fact as to what point mere ownership of real property and the letting thereof has passed into commercial enterprise and administration.
[10] In Exchequer Court of Canada's decision in Wertman v. Minister of National Revenue, 64 DTC 5158, Thurlow J. commented as follows on this issue at page 5167:
. . . There may well be cases wherein the extent of various services provided by the landlord under the terms of the leasing contract is such that the rental paid by the tenant can be regarded as in a substantial measure a payment for such services as well as for the use of the property and the interrelation of the use of the premises with the use of such services may be so extensive that the whole sum paid could readily be regarded not as mere rental of property but as true receipts of a business of providing apartments and services to tenants but I do not regard this as a case of that kind.
[11] In the instant case, the evidence presented by the appellant is, as suggested above, insufficient to allow me to conclude that the real estate operations are of such a nature as to allow one to characterize them as a commercial or business venture. The expenses for work space in home were therefore properly disallowed by the Minister for both taxation years.
[12] On the second issue, the Minister disallowed the appellant's motor vehicle expenses on the basis that they were not substantiated. For the 1996 taxation year $2,064.89 out of a total motor vehicle expense claim of $4,301.09 was interest. For 1997, the Minister disallowed part of the motor vehicle expenses claimed as no proper records to support the claim were submitted. The Minister nevertheless allowed 25% of these expenses as being reasonable under the circumstances.
[13] The appellant testified that, when he borrowed money in 1994, it was to consolidate his debts. As a result, the Minister submits, the loans on both vehicles were paid off and the interest deduction claim for the 1996 taxation year is unfounded. The appellant produced an annual mortgage statement for the years 1995, 1996 and 1997 showing the annual amount of interest he paid on his mortgage, but nothing in those statements relates to interest paid on a motor vehicle loan. The appellant suggested that the accountant took a portion of that annual interest amount as the interest relating to his cars but was unable to explain how the calculations were made and what numbers were actually used to come up with the $2,064.89 interest payment on the motor vehicles. The accountant did not testify.
[14] As for the remaining automobile expenses, no documents or records were produced other than the logbook which was created after the fact. The appellant found it too cumbersome to maintain a logbook or to keep proper records. With regard to the receipts provided to the Minister, other than saying that he used one vehicle for personal purposes only 5% of the time and the other 100% of the time for his medical practice, the appellant was unable to establish that the motor vehicle expenses were incurred to earn income from a business or property as required by the Act.
[15] In 421229 Ontario Ltd. v. The Queen, [1995] 1 C.T.C. 305, Reed J. of the Federal Court - Trial Division noted at page 308:
. . . I note, however, that the income tax system is a self-assessment system. All the information concerning the taxpayer's affairs is in the knowledge of the taxpayer. In such circumstances, once the Minister has proven the facts which exist in this case, there can be no complaint about the onus of proof to disprove the conclusions which arise therefore being on the taxpayer.
[16] In the present case, the appellant did not provide the evidence needed to substantiate the motor vehicle expenses claimed. The logbook is not accurate other than as reflecting routine daily trips and it fails to document personal trips the appellant made to P.E.I. in the taxation years in issue. The logbook provides no details as to the mileage on each vehicle at the beginning or end of each year. The amounts claimed reflect 100% of the expenses for one car and 95% for the other. I cannot imagine these percentages to be accurate in these particular circumstances. In the absence of evidence in that regard, I cannot allow a greater proportion of these expenses than that allowed by the Minister nor can I allow expenses for interest when there is no evidence to support a claim for them.
[17] As Mr. Justice McDonald of the Federal Court of Appeal held in Njenga v. The Queen, 96 DTC 6593, the burden of proof of deductions and claims properly rests with the taxpayer. Appellants must thus maintain and have available detailed information and documentation in support of the claims they make. In the present case, the appellant must certainly have had motor vehicle expenses but he was unable to establish the amounts thereof or in what reasonable proportions they were divided between personal use and use for earning income, nor was he able to show whether they were expenses incurred to actually gain or produce income from a business or property.
[18] In light of the above, the appeals are dismissed.
Signed at Ottawa, Canada, this 5th day of November 2002.
|
"François Angers" |
J.T.C.C.COURT FILE NO.: 2001-1824(IT)I
STYLE OF CAUSE: UMESH JHA
and Her Majesty The Queen
PLACE OF HEARING: Halifax, Nova Scotia
DATE OF HEARING: June 28, 2002
REASONS FOR JUDGMENT BY: The Honourable François Angers
DATE OF JUDGMENT: November 5, 2002
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: Dominique Gallant
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-1824(IT)I
BETWEEN:
UMESH JHA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on June 28, 2002 at Halifax, Nova Scotia, by
the Honourable Judge François Angers
Appearances
Counsel for the Appellant: The Appelant himself
Counsel for the Respondent: Dominique Gallant
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1997 and 1997 taxation years are dismissed.
Signed at Ottawa, Canada, this 5th day of November 2002.
|
"François Angers" |
J.T.C.C.