Date: 20000125
Dockets: 98-498-IT-I; 98-499-IT-I
BETWEEN:
MARIA C. EKEH, EZEKIEL C. EKEH,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent,
Reasons for Judgment
P.R. Dussault, J.T.C.C.
[1] These appeals were heard together under the informal procedure of this Court.
[2] The appeal of Maria Ekeh is from an assessment for the 1992 taxation year. By that assessment the Minister of National Revenue (the “Minister”) disallowed an amount of $2,732.00 (50% of $5,465.00) claimed as maintenance and repair expenses with respect to a basement apartment in the appellant’s residence and treated the same as capital expenditures.
[3] The appeals of Ezekiel Ekeh are from assessments for the 1991, 1992 and 1993 taxation years. By those assessments the Minister disallowed professional expenses in the amounts of $15,493.00, $19,683.00 and $19,933.00 respectively for the years in question.
[4] For 1992, the Minister also disallowed an amount of $2,732.00 (50% of $5,465.00) as maintenance and repair expenses with respect to a basement apartment in the appellant’s residence and treated the same as capital expenditures.
[5] As the question of the nature of the expenses with respect to the apartment, which is raised in the appeal of Maria Ekeh, is also in issue in the appeal of Ezekiel Ekeh for his 1992 taxation year, I will only refer to the Reply to the Notice of Appeal (the “Reply”) filed in his case.
[6] In assessing the appellant, the Minister made the assumptions of fact stated in paragraph s. 11.(a) to (gg) of the Reply. Those paragraphs read as follows:
(a) the facts hereinbefore admitted or stated;
RENTAL EXPENSES
(b) on July 31, 1992, the Appellant and his spouse purchased the Property for $175,000.00;
(c) at all material times, the Property was the principal residence of the Appellant, his spouse and their three children;
(d) from July 1, 1992 to December 31, 1992, the Appellant and his spouse rented out the basement of the Property (the "Basement Apartment"), reported gross rental income in the amount of $1,470.00, maintenance and repairs expenses in the amount of $5,465.88, other rental expenses in the amount of $2,744.21 and net rental loss in the amount of $6,740.09;
(e) in or around September 1992, the Appellant and his spouse incurred expenses to renovate the Basement Apartment to make it suitable for rental purpose as follows:
C.L. Plumbing And Drain $3,425.00
C.L. Plumbing And Drain 1,050.00
Bath/Shower 360.00
Stove 250.00
Doors/Painting 340.00
Total $5,425.00
(f) the amounts paid to C.L. Plumbing and Drain were incurred for construction of walls in kitchen area, for installation of insulation of all outer walls, drywalls, all pipes and waste line for vanity, bath tub and washing machine, for supply and installation of doors for laundry room and bedroom in the Basement Apartment;
(g) the Basement Apartment could not be rented out without the renovation;
(h) in the 1992 taxation year, the Basement Apartment was rented out for 3 months after the renovation was completed;
(i) the claimed maintenance and repairs expenses were capital outlays or expenditures;
(j) the renovated Basement Apartment was a property of Class 1 of Schedule II of the Income Tax Regulations (the "Regulations");
Professional Expenses
(k) at all material times, the Appellant was a full time employee of the Ontario Ministry of Agriculture (the "Employer");
(l) in the 1991, 1992 and 1993 taxation years, the Appellant operated the Consulting Business, including preparation of income tax returns and purported consulting and research activities as an intermediary between Canadian suppliers and African purchasers of goods such as foodstuffs and pharmaceutical products;
(m) the Appellant did not provide any books and records to support gross income reported and only provided documentation regarding some of the expenses claimed;
(n) in the 1991 taxation year, the Appellant incurred $245.00 for typing assignment and sought to claim as advertising expenses;
(o) in the 1992 taxation year, the Appellant claimed various food expenses including $397.00 for frozen beef and $266.00 for numerous cases of beers as meals and entertainment expenses;
(p) the Appellant and his family only owned one motor vehicle (the "Vehicle") and the Appellant used the Vehicle for driving to the Employer's place of business;
(q) in the 1991, 1992 and 1993 taxation years, the Appellant did not maintain a log book for the use of the Vehicle but sought to claim 90%, 90% and 75% of the vehicle expenses for the Consulting Business;
(r) at all material times, the Appellant's use of the Vehicle for the Consulting Business was minimal;
(s) in the 1991 taxation year, the Appellant incurred travel expenses in respect of a trip to Lagos, Nigeria in the amount of $2,292.00;
(t) the travel expenses claimed by the Appellant were not incurred for the purpose of gaining or producing income from a business or property but were personal or living expense;
(u) in the 1991, 1992 and 1993 taxation years, the Appellant claimed bad debts in the amounts of $1,820.00, $7,470.06 and $5,865.58 (the "Debts");
(v) the Appellant did not include the amount of the Debts in computing his income from the Consulting Business;
(w) the Appellant did not take any legal action to collect the Debts;
(x) in the 1993 taxation year, the Appellant claimed data and market research expenses in the amount of $4,013.00 for feasibility study of supplying African customers with goods such as foodstuffs and pharmaceutical products from Canada;
(y) the Appellant did not provide any documentation to support the data and market research expenses or that any foreign business activities existed in the 1992 and 1993 taxation years;
(z) in the 1991, 1992 and 1993 taxation years, the Appellant claimed office expenses in the amounts of $6,403.51, $4,624.73 and $3,965.76, respectively;
(aa) the Appellant provided documentation to support some of the expenses claimed as office expenses including expenses for home telephone line, numerous long distance calls, Time magazine, a cabinet and an used air conditioner;
(bb) the disallowed office expenses were not incurred, or if incurred, were not incurred to earn income, were capital in nature, or personal or living expenses of the Appellant;
(cc) in the 1992 and 1993 taxation years, the Appellant claimed business use of home expenses in the amounts of $2,633.15 (13.67% of total expenses in the amount of $19,272.95) and $4,159.89 (25% of total expenses in the amount of $16,639.55), respectively;
(dd) the Appellant maintained a small office by partitioning his master bedroom and it pertained to not more than 10% of the Property;
(ee) during each taxation year, the Appellant used his home office for not more than 3 months during the tax season;
(ff) in the 1991, 1992 and 1993 taxation years, the Appellant's business use of home expenses were $250.00, $222.00 and $415.00, respectively;
(gg) expenses claimed by the Appellant in respect of the Consulting Business in excess of $8,832.00, $9,624.97 and $9,225.50 allowed by the Minister in the 1991, 1992 and 1993 taxation years, as shown in Schedules "A", "B" and "C" attached hereto,[1] respectively, were not made or incurred, or if made or incurred, were not made or incurred by the Appellant for the purpose of gaining or producing income from a property or business, were capital in nature, personal or living expenses of the Appellant, or not reasonable in the circumstances.
[7] I will deal first with the amount of $2,732.00 claimed by each appellant (for a total of $5,465.) as maintenance and repair expenses described in paragraph 11.(e) of the Reply. Despite the assertion by Mr. Ekeh that the basement was already finished, the evidence is clearly that the amount of $5,425.00 was paid for a major renovation of the basement apartment in the appellants’ residence (Exhibits R-2 and R-3). By any standard, such expenses as those described in paragraph 11.(e) and 11.(f) of the Reply would have been paid for the purpose of improving the existing property and acquiring capital property. They are definitely capital and not current in nature.
[8] Secondly, as to the professional expenses disallowed in 1991, 1992 and 1993, it is important to note that the appellant, although he is an accountant, does not maintain any books or records despite his assertion that he does. None were submitted in evidence. The various documents provided are such that they would not enable a reasonable person to ascertain, with a minimum degree of accuracy, either his income or the expenses which he would be entitled to deduct. Everything seems to be in a complete state of disarray. The appellant himself admits that he is not keeping the “best records” and that he has “a lousy bookkeeping” system although he says that he is an honest man and that he never intended to cheat. He blames the situation on the lack of resources to hire an assistant. One of the problems here is a severe lack of source documents.
[9] Schedules A, B and C to the Reply indicate for the years 1991, 1992 and 1993 that only 36.7%, 18.9% and 16.7% of the expenses claimed were supported by vouchers. However, the appellant was allowed 36%, 32.8% and 31.6% of the expenses claimed for each of the years in question. Most of the expenses disallowed were so disallowed because they were either not supported by vouchers, or were personal in nature. At this point, it might be useful to reproduce comments made by Mr. Chakraborty, the auditor, in his report. The report was filed in evidence as Exhibit R-1, Tab 4 and Mr. Chakraborty referred to it during his testimony as to why each of the expenses claimed was disallowed. At page 6 he states:
In addition to the preparation of tax returns, the taxpayer also maintains that his business, (Blue Chips Management and Accounting), acts as an intermediary between Canadian suppliers and African purchasers, of goods such as foodstuffs and pharmaceutical products. However, despite repeated requests, the taxpayer was unable to provide any objective documentation to support any business activity of this nature. The taxpayer did provide a business plan (see Exhibit 1) and he also provided approximately 20 questionnaires which he stated are used to gauge the interest of Canadian suppliers. However, all the questionnaires provided were blank, except one. Moreover, the taxpayer is vague as to who his clients are, what exactly are the services he provides, and how exactly he gets paid. Based on these facts, expense claims relating to this aspect of the taxpayer’s business have been restricted. Although the taxpayer is reporting income from this activity, there is no source documentation as to how this income was calculated, nor what was required in order to earn the income.
Despite being a tax preparer, the taxpayer’s own records are severely lacking. The taxpayer has absolutely no source documents regarding income, either foreign or domestic. The taxpayer only retains source documents regarding expense claims, and many are of a questionable nature.
Finally, it is noted that many cheques written by the taxpayer are under the name “Globe Enterprises.” The taxpayer explained that this was a previous business venture that has since stopped operating, however the taxpayer still maintains and uses the bank account.
[10] On numerous occasions, both before and after the commencement of the hearing, which had to be interrupted for many months, the appellant was given an opportunity to present documents that would help to substantiate the expenses claimed, but to no avail. The documents presented in evidence are basically the same as those reviewed by the auditor.
[11] At the hearing, the appellant fumbled through his papers for almost two days trying to provide more cogent evidence, but without success. Some of the documents provided are totally useless, when not self-serving (Exhibits A-5 and A-14). The explanations offered are incomplete and unconvincing. They are sometimes contradictory and sometimes vague if not outright confusing.
[12] A taxpayer claiming a deduction for bad debts should be in a position to prove that the amounts thereof have been included in income for the year in question or for a previous year. Claims for long-distance business calls should be substantiated by more than just submitting the residential phone bills on which they are charged. Providing a list of clients and their location would have been useful to both the auditor and the Court. Business use of an automobile should be supported by a logbook, an appointment book, a list of clients visited or something of that nature. There should at least be provided some credible explanation of the business activities requiring the use of the vehicle. None of this was done.
[13] Referring to a market survey and entering blank questionnaires as evidence of that survey does not get one very far, especially when the explanation offered is that the questionnaires are blank because the information that should appear thereon is secret.
[14] When a 4-page document purporting to be a market research report for which a sum in excess of $4,000. has been paid is provided to an auditor, one would at least expect a credible explanation to be forthcoming when the auditor considers the payment unreasonable. Here again the appellant failed.
[15] Credibility is obviously an issue. For example, when the appellant insists that he maintains a 15 x 20 ft home office on the second floor of his residence while Exhibit A-1 indicates that the largest room on the second floor is the master bedroom which is 3.89 x 3.16 m or 12.76 x 10.37 ft, one is left wondering to what extent the appellant has been exaggerating all his business expenses.
[16] Thus, for example, despite the explanations offered by the appellant as to the minimal use of his automobile for personal purposes, I am not prepared to accept his claim that the commercial use of his vehicle was 90%, 90% and 75% for 1991, 1992 and 1993 respectively. As I said before, the appellant does not maintain a logbook and does not even seem to have an appointment book.
[17] When the appellant claims an amount of $245.00 for advertising expenses in 1991 and the document provided in support (Exhibit A-15) relates to miscellaneous typing, mostly of a 49-page assignment at $5.00 a page, for a total of $225.00 (the amount should have been $245.00), the inescapable conclusion is that the appellant is indeed claiming expenses that are personal in nature despite his assertion to the contrary. I would add here that receipts filed with the appellant’s 1991 tax return show that he was registered as a student with the Certified General Accountants Association of Ontario during that year (Exhibit R-1, Tab 1).
[18] The foregoing examples are sufficient to illustrate the point.
[19] Another feature of the appellant’s affairs is that many cheques purportedly in payment of expenses of the business carried by him under the name of Blue Chips Management & Financial Consulting and Associates International are drawn on a bank account in the name of Globe Enterprises. Although the auditor mentions in his report that he had been informed that this was a previous business operated by the appellant and that the appellant was still using the bank account for Blue Chips, the relation between the two businesses was never explained by the appellant.
[20] Subsection 230(1) of the Income Tax Act provides as follows:
SECTION 230: Records and books.
Every person carrying on business and every person who is required, by or pursuant to this Act, to pay or collect taxes or other amounts shall keep records and books of account (including an annual inventory kept in prescribed manner) at the person’s place of business or residence in Canada or at such other place as may be designated by the Minister, in such form and containing such information as will enable the taxes payable under this Act or the taxes or other amounts that should have been deducted, withheld or collected to be determined.
[21] Obviously, this was not done in the present case. Considering the evidence submitted I am not convinced on a balance of probabilities that the assessments disallowing business expenses in the amounts of $15,493.00, $19,683.00 and $19,933.00 for the 1991, 1992 and 1993 taxation years respectively are wrong.
[22] I might add here some comments made by the Federal Court of Appeal in Njenga v. R., [1997] 2 C.T.C. 8. At page 9, paragraphs 3 and 4, it is said:
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.
The problem of insufficient documentation is further compounded by the fact that the Trial Judge, who is the assessor of credibility, found the applicant to be lacking in this regard.
[23] In circumstances such as these, which closely resemble those of the present case, a taxpayer has no one but himself to blame for his misfortune. As both an accountant and a tax preparer, the appellant should have been well aware of his responsibilities.
[24] The appeals are dismissed.
Signed at Ottawa, Canada, this 25th day of January 2000.
“P.R. Dussault”
J.T.C.C.