Date: 20001208
Docket: 1999-4515-IT-I
BETWEEN:
MICHEL GENDRON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Rip, J.T.C.C.
[1] These are appeals by Michel Gendron from assessments in respect of the 1994, 1995 and 1996 taxation years. In computing his income, the appellant deducted amounts of $7,738, $4,612 and $19,693 as business expenses for mineral exploration for the 1994, 1995 and 1996 taxation years respectively. The Minister of National Revenue (the "Minister") disallowed the expenses claimed for 1994 and 1995 and disallowed as well $13,677 of those claimed for 1996. (The Minister allowed a total of $6,016 of the expenses claimed for the 1996 taxation year.)
[2] In assessing the appellant for the 1996 taxation year, the Minister also added $2,748 to the appellant's income, which amount had not been included in his income tax return for that year. It represents an amount of $1,448 that the appellant had earned from the sale of wood and $1,300 that he had deducted as a doubtful debt but had not otherwise included in his income. At the hearing, the appellant acknowledged that these amounts had been omitted by mistake.
[3] The Minister disallowed the claims for the following amounts in view of the fact that supporting documentation was not provided:
Year Amount
1994 $1,978
1995 $1,978
1996 $6,134
[4] The other expenses disallowed by the Minister concerned a portion of the expenses that, in his opinion, was not incurred for the purpose of producing income from business. The amounts are the following:
Year Amount
1994 $5,670
1995 $2,634
1996 $7,543
[5] During the relevant period, Mr. Gendron was involved in promoting the development of a quartz mine in Low, Quebec. According to his testimony, although he had been engaged in that activity since 1976, he only earned income from it in 1996 and 1997. His activities consisted of developing the mine site for exploitation. A road was created and the site was surveyed and divided into concessions. The appellant testified that he contracted with other companies to have them operate the mine for the purpose of earning income from it. As an example, he filed as evidence a contract with Moïka Mines inc. dated May 29, 1996.
[6] Under that contract, the appellant was to receive royalties in return for the authorization he gave to Moïka Mines inc. to mine the quartz deposit. This shows that the appellant's activities in relation to the mine were for the purpose of producing income. Other evidence allows the inference to be drawn that the appellant operated the mine as a business rather than as a purely personal activity. For example, he called on specialists for their assistance in conducting geological studies and doing other analyses concerning the mine site. He took steps, inter alia in the United States, to identify a possible market for the quartz extracted from the mine. The fact that the appellant contracted out the operation of the mine is another factor from which it may be inferred that his activities in relation to the mine were business activities.
[7] Prior to the years in issue, Gendron Quartz inc., a company of which the appellant is the sole shareholder, operated the mine in Low, but during the years in issue the appellant operated it personally.
[8] Mr. Gendron also owns land in Chelsea, Quebec. He testified that he purchased 65 acres between 1976 and 1979. The appellant could not say with any certainty the exact date of the purchase. Approximately ten acres were sold prior to the years under appeal. It is not known whether the profits (or losses) were capital gains (or losses). Another portion of the land was seized by the Bank of Nova Scotia, leaving the appellant with about ten acres. The appellant admits that he did nothing to contribute to developing that investment during the years under appeal because he lacked the necessary cash. There is no financial statement for that land.
[9] Considering the evidence adduced, it is impossible to conclude that the appellant's activities with respect to the Chelsea properties were carried on with a view to earning income from a business. The fact that transactions relating to the properties were virtually non-existent during more than 20 years of possession leads in fact to the opposite conclusion.
[10] A judge is not an auditor. Nonetheless, in an appeal, it is desirable that the taxpayer have an opportunity to make his case, which must be done in an orderly fashion. In the case at bar, Mr. Gendron tried to explain the sources of the expenses disallowed by the Minister because of the lack of supporting documents.
[11] For lack of supporting documentation the Minister disallowed the following expenses: business taxes, office expenses, purchase of materials, property taxes, travel costs, interest, administrative expenses, supplies, telephone and photographs.
Business taxes
[12] When filing the notice of objection, Mr. Gendron presented bills for business taxes amounting to $1,046.28. However, it cannot be determined whether the bills show that the expense related to the mining venture or to something else. The appellant testified that the business taxes he claimed probably consisted of municipal and school taxes for his Chelsea and Low properties. The appellant also said that for a time he leased the land on which his Low office is located from the province and that he ultimately purchased it in 1996. The appellant seems to be saying that part of the taxes claimed in 1994 related to the rental of that property in Low. In view of the appellant's confusing evidence on this point, it is impossible to conclude that this expense was incurred for the purpose of producing income from a business.
Office expenses
[13] In this regard, the appellant claimed expenses of $240, $240 and $472 in 1994, 1995 and 1996, respectively. He testified that these expenses might have been for various office supplies, such as stamps, envelopes and stationery. He admitted, however, that he could not find the invoices or had not kept them. He explained that the expenses might relate both to his office in Low and to the office he maintains at his mother's house on Laval Street in Chelsea.
[14] The appellant must indeed have allocated certain amounts for office supplies for his mining venture. Considering his admission that the expenses claimed could relate both to the Low office and to the Chelsea office and that it is probable that he did incur such expenses for the mine, I am inclined to allow only a quarter of such expenses claimed, namely, $60, $60 and $118 for 1994, 1995 and 1996 respectively.
Purchase of materials
[15] The appellant claimed $600 in 1994 in this regard. He admitted in his testimony that he did not remember what these expenses could have been for. He acknowledged that he had not found supporting documents that might relate to these expenses. As a result, the Court finds it impossible to conclude that they were expenses incurred for the purpose of producing income from a business.
Property taxes
[16] The amount in issue here is the $1,138 claimed by the appellant for 1995. According to the appellant, this represented taxes on his land in Cascade and Low. (I assume he means Chelsea and not Cascade.) It is not certain, however, whether the amount billed related only to 1995 or whether it included arrears for one or more earlier years. The appellant admitted that it was possible that he had not provided the Minister with any evidence to back up his claim for property taxes in relation to his venture in Low. The only supporting document provided by the appellant to the Minister in connection with property taxes relates solely to the Chelsea land. According to that document, the amount owed by the appellant to the municipality for property taxes was $2,144. The appellant's testimony indicates that he did not pay all of this amount, since part of the Chelsea land had been seized by the Bank of Nova Scotia at that time. The appellant stated, however, that he had paid the part of that amount that related to the portion of the land that he still owned. Although he did not specify the exact amount he paid, it is possible that the $1,138 claimed represented in fact the part for the property taxes that was still owing after the seizure, which the appellant says he did in fact pay. Since it is not possible, based on the appellant's testimony, to relate the amount claimed in this regard to the mining venture, it cannot be concluded that that expense was incurred for the purpose of producing income from a business.
Travel expenses
[17] For 1995, the appellant claimed $600 as travel expenses. According to his testimony, this could be money he spent to have various experts visit the mine site in Low. It could also represent expenses incurred for a training trip. (The appellant maintains that, in 1988, for example, he went to Pennsylvania for a conference of ceramic engineers. He did not, however, refer to any specific trip that might have been made in 1995, the taxation year for which he claimed these expenses.) He admits that he probably mislaid the supporting documents but maintains that he provided those documents to the accountant when his tax return was being prepared. In view of the confusion on this subject in the appellant's testimony, the Court cannot conclude that these were expenses incurred for the purpose of producing income from a business.
Interest
[18] The appellant claimed $53 as interest for 1996. He admits he has no document proving this interest payment. Moreover, he does not remember the loan to which this interest might relate. Accordingly, I cannot find that the interest expense was incurred for the purpose of producing income from a business.
Administrative expenses
[19] An amount of $320 was claimed by the appellant for 1996 as administrative expenses. According to the Minister, the documents presented in support of these expenses relate primarily to sales of "mineral exploration plates" ("plaques de prospection minière") and the creation of "mineral exploration plate" ("plaques de prospection minière") sales. The documents that were filed do not therefore justify a deduction for administrative expenses.
[20] The appellant's testimony is contradictory on this aspect. In testifying, he seemed unsure about how the administrative expenses claimed by him were determined. He began by suggesting that they could represent expenses incurred to arrange the contract with the Moïka company and to allow the integration of that company's employees in the vicinity of the mine site. Later, on cross-examination by counsel for the respondent, he stated that they were expenses incurred with H & R Block to bring his affairs up to date so that they would be in order in anticipation of the eventual hiring of staff. According to the appellant, although the supporting documentation he produced referred to "mineral exploration plates" ("plaques de prospection minière"), it also relates to the expenses incurred by the appellant to put his affairs in order so that he could eventually hire employees. While the appellant was uncertain about how these expenses were determined, that is, about whether they represented expenses incurred relative to the integration of Moïka employees or, rather, expenses incurred in preparation for the eventual hiring of staff, it is likely that they were related in some way to his mining venture. His testimony on this point is satisfactory. In either case, the expenses were incurred for the purpose of producing income from a business.
Supplies
[21] According to the Minister, part of the expenses deducted for supplies was allowed on the basis of the supporting documents. The difference, $4,482, an amount that was not supported, was disallowed.
[22] The appellant admits that he probably did not provide the Minister with any further invoices or other supporting documents concerning expenses for supplies. In his testimony regarding those expenses, the appellant spoke of wood that he had had cut into planks by the Gary Picard sawmill. He did not specify the amount of that expense. However an invoice for $456.75 issued by Gary Picard was tendered in evidence. The appellant did not provide further explanations about supplies. Accordingly, no additional amount is deductible in this regard.
Telephone
[23] The amount in issue is the $492 claimed by the appellant for 1996. According to the respondent, the invoices provided by the appellant with respect to telephone expenses were sent to the residence of the appellant's mother. Accordingly, as the Minister had not established any relationship between those expenses and the appellant's business, the deduction was disallowed.
[24] The appellant's testimony was that he used the telephone line to his mother's home for his mineral exploration business. He testified that he had a cellular telephone at the mine site in Low, but had to [TRANSLATION] "go up on the mountain" in order to make a call, probably because the cellular network did not reach as far as the mine site. Consequently, he testified, since it was impossible to reach him when he was at the mine, his official telephone number for his business was that of his mother's home. Thus, people who wished to contact him in relation to his business telephoned his mother's house and she took the messages. The appellant then called his mother to get his messages and contacted his business callers if necessary. The appellant admitted, however, that his mother used the same telephone line for her personal purposes and he did not specify the proportion of use for his business. We do not know who paid for the telephone, the appellant or his mother. This expense was not incurred for the purpose of producing income from a business.
Photographs
[25] The appellant claimed $400 for photographs in 1996. According to the testimony of the Revenue Canada appeals officer, only $84.90 was deducted from the appellant's income because there were supporting documents only with respect to that amount. A balance of $315 was therefore disallowed and is at issue here.
[26] The appellant did not deny that he had not provided further supporting documents. He did, however, testify that the entire expense had been incurred in order to produce a history of the mine so as to be able to show the progress that had been made. Such a history could be useful in enabling the appellant to interest various potential stakeholders in the operation of the mine. As a result, it seems to me that this expense was incurred for the purpose of producing income from a business.
[27] The Minister also disallowed expenses that, in his opinion, were not incurred for the purpose of earning income from a business or property under paragraph 18(1)(a) of the Act. These are expenses that were claimed for legal costs, the motor vehicle, the truck rental and food.
Legal Costs
[28] At issue here are amounts of $5,760, $2,634 and $1,941 claimed for 1994, 1995 and 1996 respectively. According to the testimony of the Revenue Canada appeals officer, the deduction for legal costs was disallowed on the grounds that the documents produced by the appellant related to the Chelsea land and not to the mining operation.
[29] The appellant's testimony did not contradict the Minister's explanation. It is clear from his testimony that the legal costs were incurred in relation to a mortgage on his Chelsea land that he was unable to pay. This expense was not incurred for the purpose of producing income from business.
Motor vehicle
[30] The appellant claimed $4,195.20 in this regard for 1996. According to the Revenue Canada appeals officer, ten percent of the total amount claimed was allowed to the appellant, on an arbitrary basis, as counsel for the respondent admitted, because of the appellant's failure to provide records detailing the use he had made of the vehicle. A balance of $3,973 is thus in issue.
[31] The appellant testified that a part of the expenses claimed consisted of the purchase price of an automobile in 1996, which was $1,000. The balance of the amount claimed represented, according to his testimony, over $3,000 worth of repairs to this vehicle and $627.50 for the gas it used. The appellant also explained that a motor vehicle was necessary for the operation of his mining business because the mine was so far away.
[32] I believe that the expenses allowed by the Minister should be increased to 50 percent of the total claimed by the appellant.
Truck rental
[33] The amount in issue is $741, claimed by the appellant for 1996. It appears from the testimony of the Revenue Canada appeals officer that this expense was incurred for the purpose of moving the appellant and thus was disallowed as a business expense. However, it was deducted as a moving expense.
[34] The appellant testified that he did not remember getting this adjustment. He testified, however, that these expenses had indeed been incurred—at least in part—in order to move certain items (he did not explain which) to the Low office. He explained that the truck was also necessary because of the increased activity at the mine in 1996. Because of the contract with Moïka, there were more workers at the mine and they had to be provided with a means of transportation.
[35] Since the Minister allowed the deduction of $741 as a moving expense, I cannot give Mr. Gendron a double deduction.
Food
[36] The amount in question is $888 that was claimed for 1996. According to counsel for the respondent, the Minister's position is that this is a personal expense that is not directly related to the appellant's mining operation.
[37] The appellant explained that this expense had been incurred in the operation of his mining business because he had to remain at the mine site in order to prevent possible theft, which explains the food expenses incurred. This is a reasonable explanation. Unfortunately, we do not know how many days or evenings Mr. Gendron spent at the site. I believe it is reasonable to allow him to deduct $200 for food.
Conclusion
[38] I find that the appellant's testimony was weak. In the absence of supporting documents proving the expenses claimed, a good explanation, and preferably some corroboration, is required. In most of his testimony, Mr. Gendron could not explain, with even a modicum of certainty, the expenses he claimed. I have already provided some examples. I am not suggesting that Mr. Gendron was not honest, only that he was poorly organized. Except in relation to some of his claims, he was unable to reverse the onus upon him to prove that the assessments were unfounded.
[39] The appeals will therefore be allowed, with costs if any, and the assessments referred back to the Minister of National Revenue for reconsideration and reassessment only to increase the claims by $60 for each of the 1994 and 1995 taxation years and by $3,050.60 for the 1996 taxation year.
|
Expenses |
1994 |
1995 |
1996 |
|
Office expenses |
$60 |
$60 |
$118 |
|
Administrative expenses |
__ |
__ |
$320 |
|
Photographs |
__ |
__ |
$315 |
|
Motor vehicle |
__ |
__ |
$2,097.60 |
|
Food |
__ |
__ |
$200 |
Signed at Ottawa, Canada, this 8th day of December 2000.
|
"Gerald J. Rip" |
J.T.C.C
Translation certified true
on this 30th day of January 2002.
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
1999-4515(IT)I
BETWEEN:
MICHEL GENDRON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on July 14, 2000, at Ottawa, Ontario, by
the Honourable Judge Gerald J. Rip
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Catherine Letellier
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1994, 1995 and 1996 taxation years are allowed, with costs if any, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment only to increase the claims by $60 for each of the 1994 and 1995 taxation years and by $3,050.60 for the 1996 taxation year.
Signed at Ottawa, Canada, this 8th day of December 2000.
|
"Gerald J. Rip" |
J.T.C.C.
Translation certified true
on this 30th day of January 2002.
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]