Date: 20010306
Docket: 97-3286-IT-G
BETWEEN:
MAURICE DUVAL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Tardif, J.T.C.C.
[1] This is an appeal concerning expenses that were denied the appellant for the 1992, 1993 and 1994 taxation years.
[2] The appellant, a trained engineer with a doctorate, obtained a contract with the Canadian International Development Agency ("CIDA") for a term of two years.
[3] Under that contract, the appellant received CAN$74,010 for 1992 and CAN$55,032.95 for the 1993 taxation year. These amounts are indicated in Exhibit A-1.
[4] In consideration for the amounts so received, the appellant taught at the École Polytechnique in Thiès, Senegal. At the same time, he undertook several initiatives in the pursuit of which he incurred significant expenses, most of which were disallowed.
[5] In assessing the appellant, the Minister of National Revenue (the "Minister") made the following assumptions of fact:
[TRANSLATION]
(a) the appellant was an engineer at all relevant times;
(b) in 1992 and 1993, the appellant worked for the Canadian International Development Agency, hereinafter "CIDA", in Senegal;
(c) the appellant stopped working for CIDA in September 1993;
(d) in filing his income tax returns for his 1992 and 1993 taxation years, the appellant reported professional income¾the sole source of which was his contract with CIDA¾of $74,010 for 1992 and $55,033 for 1993, from which amounts he deducted expenses totalling $30,033 for 1992 and $29,104 for 1993, for net income of $43,976 for 1992 and $25,928 for 1993;
(e) following an audit, the Minister of National Revenue disallowed expenses of $25,390 for 1992 and $26,262 for 1993;
(f) for those years, most of the expenses claimed by the appellant against his professional income were not in any way related to his work for CIDA;
(g) in filing his income tax return for his 1994 taxation year, the appellant reported no professional income and claimed expenses totalling $38,024, for a net loss of $38,024;
(h) the Minister of National Revenue disallowed expenses of $37,251 for 1994;
(i) the appellant never started up a business during the periods in issue;
(j) the expenses of $25,490, $26,626 and $37,251 for 1992, 1993 and 1994 respectively were not made or incurred by the appellant for the purpose of gaining or producing income from a business or property.
[6] The appellant admitted all the facts assumed by the Minister, with the exception of those stated in subparagraphs (f), (i) and (j).
[7] The issue is whether the appellant was entitled to deduct the expenses that were disallowed for 1992, 1993 and 1994.
[8] The respondent began by stating that the amount of $5,532 had indeed been reported for the 1992 taxation year, contrary to her initial claim, which, she added, had been made in error.
[9] The appellant testified that he had devoted only a few hours a week to his teaching duties. As he had enjoyed a great deal of free time to get involved in other activities, he testified, he had made considerable efforts to start up a new business or obtain various contracts that would turn to account his knowledge as a consultant. This was all the more important since he was aware that his status with CIDA was precarious since he had no guarantee that his contract would be renewed upon its expiry after a year.
[10] The appellant indicated that, to secure his economic future, he had put time and money into obtaining other contracts and initiating certain projects that might generate income and eventually become viable and profitable.
[11] To that end, he set up an office in Dakar and hired an administrative assistant, who, as it happens, was his wife.
[12] In his capacity as a consulting engineer, he made a number of efforts during his stay in Senegal to obtain contracts that would enable him to make money from his very high level of engineering knowledge and expertise.
[13] He also tried to exploit his extensive technical and scientific knowledge in projects that might eventually become truly profitable businesses.
[14] The evidence showed that the appellant's efforts never produced concrete results, and so he returned to Canada at the end of his contract with CIDA.
[15] Once back in Canada, the appellant continued to offer his consulting services, all the while thinking about projects that might become actual businesses.
[16] The appellant explained through his testimony and numerous documents, photos and letters that, in the three years in issue, he was a self-employed worker carrying on his own business, which consisted in conducting various research projects for specific purposes, namely establishing one or more profitable businesses.
[17] There is no doubt that, during the three taxation years in question, the appellant wanted to take, and in fact did take, all kinds of initiatives to ensure his economic survival. Being an engineering consultant by profession, he moreover had to do as much prospecting for clients as possible in order to ensure his own material survival.
[18] However, the evidence showed that, during the years in issue, the appellant initiated two kinds of economic activities. First of all, he solicited contracts that would make use of his expertise and knowledge as a consultant and bring in professional fees.
[19] Second, the appellant took steps whose ultimate purpose was to start up one or more businesses that could eventually become profitable, the intent being either to operate them alone or jointly with someone else or simply to dispose of them once they were established.
[20] The appellant clearly never understood the distinction between the two types of initiatives. In this regard, both the documentary evidence and his testimony essentially attempted to show that he was a self-employed worker during the three taxation years in issue and that, such being the case, he could take all his expenses without any distinction whatsoever and deduct them against his income.
[21] The evidence nevertheless established unequivocally that the appellant initiated and incurred expenses in practising his profession as a consulting engineer. He was thus entitled, for accounting purposes, to enter inherent and relevant expenses. These expenses could also be deducted from his income provided they were reasonable, justified and supported by appropriate receipts.
[22] Furthermore, the appellant did in fact attempt to start up certain businesses in both Senegal and Canada. He had truly hoped to establish one or more businesses which eventually could and would have to ensure his economic survival.
[23] However, all the expenses incurred in these initiatives had to be recorded separately from those incurred in the course of his professional activities. The former expenses must moreover be assessed in the context of the provisions relating to businesses.
[24] The burden of proof was on the appellant. He had to discharge this burden by adducing evidence which he alone could furnish. Such evidence is generally composed of testimony and of documents which flesh out and support or complete the testimony.
[25] As the appellant chose to represent himself, the Court attempted to make him understand that he was nevertheless not exempt from the obligation to adduce valid and sufficient evidence to support and prove the validity of his claims.
[26] In this regard, it was very surprising that he did not call as a witness his wife, whose wages during the years in issue were a very significant expense component. If she had testified, she could have provided details and information highly relevant to the appeal. I am thinking in particular of the very justification of her work through a job description, of the nature of the work performed and, lastly, of details concerning all the activities with which she was involved.
[27] The appellant's evidence was deficient in a number of respects. First of all, as he clearly did not understand the distinction that must be drawn between expenses incurred in practising his profession and those incurred for the purpose of starting up a business, he confused everything and concluded that all the expenses were and should have been allowable.
[28] Not only did he make no distinction, he was not even able to produce all the supporting documents on the ground that he had lost or mislaid them in his travels.
[29] The expenses incurred in carrying on his profession could have been of two kinds. First, they could have been expenses incurred for the purpose of receiving fees. Second, they could have been expenses relating to initiatives designed to obtain contracts calling upon his consulting expertise.
[30] Lastly, and this appears to have been the main purpose of most of the expenses, he said that he had tried to set up various projects with a view to having them become viable, independent businesses.
[31] How is one to distinguish between these different fields of activity?
[32] On the one hand, it cannot be done on the evidence adduced by the appellant. On the other hand, certain significant expenses, including, in particular, the secretarial wages paid, were apparently attributable to all activity components, that is to say, as much to the appellant's practice of his profession as to business start-ups.
[33] The appellant's reasoning, which was quite simple, could be expressed as follows: I do not have all the supporting documentation, but the expenses were reasonable ones which were in fact incurred. For many reasons, including competition, the very difficult economic situation and so on, I was unable to earn any income from my various initiatives. If I had been more familiar with the Income Tax Act, I could have taken advantage of certain provisions concerning research and development whose effect would have been to reduce my tax burden even more significantly.
[34] These arguments in support of his appeal are very weak. The Court must dispose of the appeal not intuitively or on the basis of fairness, but essentially on the strength of the facts and not based on assumptions drawn from the supporting documentation.
[35] Anyone who wishes to earn, increase and maximize professional or business income must generally focus his energies on two separate aspects. He must do everything in his power to obtain new contracts or to recruit new clients and take steps to minimize his expenses. The ideal is to exercise tight control over both components and to seek to strike a fair balance.
[36] The creation of an imposing structure which generates no income is necessarily suspect and calls for intelligent and rational explanation.
[37] In the instant case, the appellant put in place a structure which cannot be characterized as totally reasonable. One thing is certain: it was highly questionable in the most important respect, and that is the hiring of an administrative assistant. It would certainly have been possible, indeed more appropriate, reasonable and realistic, to proceed in a manner that could have yielded appreciably the same result, but at a substantially lower cost.
[38] It is easy to understand why the appellant favoured the scenario in which he hired his wife. By so doing, he split his income from the CIDA contract and thus considerably reduced his tax burden.
[39] This is not a prohibited choice. However, it would have been necessary to prove that it was a business decision dictated by the imperatives of the effective practice of his profession and necessary for the success of an eventual business.
[40] In the 1994 taxation year, the appellant's income consisted of a withdrawal from an RRSP, which makes the appropriateness of paying his spouse a salary even more dubious. This leads to a very strong presumption that the sole purpose was to split the income from the RRSP.
[41] As his only source of income was an RRSP, the appellant hired his spouse at an annual salary of nearly $15,000. Was this a necessary or even useful expense? Did the hiring of his spouse have the effect of generating income? Why, like many professionals with substantial professional income, did he not turn to specialized secretarial services or simply to a message service.
[42] The appellant presented no evidence or explanation regarding the relevance of the employment in question. He did not describe the work performed by his secretary, who received a relatively large salary in relation to the very limited commercial and professional activities¾so limited in fact that they brought in virtually no income.
[43] Even though the Court indicated that the testimony of the person who had received the salary would have been useful in proving that salary's appropriateness, the appellant preferred not to call her as a witness. He merely stated that the salary had indeed been paid and that the recipient had assumed the inherent tax liability relating thereto.
[44] The fact that it was actually paid is, to be sure, an important element but is not in itself sufficient and does not prove that it constituted a justified, acceptable and allowable expense.
[45] The evidence adduced by the appellant could be summarized as follows: I am an honest professional and did all I could to earn my living honourably. To that end, I made necessary outlays the appropriateness of which should not be questioned or even discussed, particularly since I could have taken advantage of and enjoyed much more generous tax benefits under the provisions concerning research and development. Consequently, the respondent has an obligation to allow all my expenses, even if I cannot prove in detail that they were relevant.
[46] Unfortunately, it is not that simple. Every expense must be justified, particularly if the facts suggest that the expenses may have been personal in nature.
[47] In such a case, it is important that the taxpayer who has been the subject of an assessment in which certain expenses have been considered to be personal be able to show on a preponderance of evidence that those expenses were necessary and required for the operation of the business or for the practice of the profession.
[48] In the instant case, the appellant submitted evidence that was incomplete, deficient and confused in many respects, to the point that the Court was scarcely any more able to render judgment after the appellant had presented the evidence than it had been before the trial started.
[49] In the circumstances, having regard to the evidence, it is very difficult, not to say impossible, to determine objectively which expenses are allowable and which are not since the evidence was incomplete, deficient and very insufficient, so much so that a clear distinction cannot be made.
[50] Consequently, I have no other choice but to make a determination regarding the expenses based on an exhibit which the appellant himself filed in evidence (Exhibit A-11).
[51] For the 1992 taxation year, the respondent allowed expenses totalling $4,543.03 and disallowed expenses of $25,490.70 for total expenses claimed of $30,033.75. For the 1993 taxation year, the respondent allowed expenses totalling $2,478.66 and denied expenses of $26,626.08 for total expenses claimed of $29,104.75. For the 1994 taxation year, the respondent disallowed all the expenses claimed, which amounted to $38,024.
[52] The appeal is therefore allowed in that reassessments shall be made on the basis that the appellant could claim against his income the amounts of expenses indicated below for the years in issue:
Year Expenses
1992 $13,464
1993 $11,798
1994 $19,012
The whole without costs, and the appellant is entitled to no further relief.
Signed at Ottawa, Canada, this 6th day of March 2001.
"Alain Tardif"
J.T.C.C.
Translation certified true on this 28th day of June 2002.
[OFFICIAL ENGLISH TRANSLATION]
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
97-3286(IT)G
BETWEEN:
MAURICE DUVAL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on May 8, 2000, at Chicoutimi, Quebec, by
the Honourable Judge Alain Tardif
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Michel Lamarre
JUDGMENT
The appeal from the assessments made under the Income Tax Act for the 1992, 1993 and 1994 taxation years is allowed, without costs, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 6th day of March 2001.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 28th day of June 2002.
Erich Klein, Revisor