Tax Court of Canada Judgments

Date: 20011203

Docket: 2001-70-IT-I

BETWEEN:

SPIROS VERGOS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Sarchuk J.T.C.C.

[1]            This is an appeal from an assessment of the Appellant for the 1997 taxation year by virtue of which the Minister of National Revenue (Minister) disallowed business expenses of $46,170.83 claimed by the Appellant. In so assessing the Appellant, the Minister made the following assumptions of fact:

(a)            during the 1997 taxation year, the Appellant was a self-employed insurance agent earning commissions income;

(b)            the Expenses were not incurred or if incurred, were not made for the purpose of gaining or producing income from a business and were in fact personal or living expenses of the Appellant.

Background

[2]            In 1989, the Appellant was licensed as a life insurance agent and two years later became an insurance broker. In the years following, he acted as an associate broker and earned commission income based on sales of all types of insurance. At some point of time in the mid-1990s, his health began to deteriorate and for a period he had been unemployed. The Appellant maintains that the assessment is wrong and that the necessary documentary material to support his case has been available for examination by the Minister's officers for some time. For his part, the Minister pleads that several letters were mailed to the Appellant by Audit and Appeals requesting substantiation with respect to the business expenses claimed but no documentation was provided. This, counsel for the Respondent noted, was the reason why all expenses claimed had been disallowed.

[3]            The appeal was initially scheduled to be heard on July 31, 2001. Prior to the commencement of the trial, counsel for the Respondent advised the Court that the Revenue Canada auditor had not been given an opportunity to review the Appellant's documentation. Counsel further advised the Court that she had spoken to the Appellant and offered to have the auditor review the documentation prior to the commencement of the hearing, but the Appellant was unwilling to do so. After hearing the Appellant's representations, Miller J. directed that the documents be provided for examination by the Respondent's auditors and adjourned the trial sine die.

[4]            At the commencement of the trial on November 6, 2001, the Appellant testified, produced and made reference to certain documentary material, and was cross-examined. In the course of cross-examination, the following documents were produced by the Appellant and filed as exhibits: (a) the Statement of Business Activities (expenses) appended to his return; (b) Appellant's "work sheet" with respect to certain of the expenses; (c) two car repair invoices; and (d) an invoice re: computer equipment.[1] The Appellant also had several hundred receipts which he said supported various expense items claimed and, as I understood him, were reflected in his "work sheet".

[5]            Christina DeBenedetti (the auditor) testified for the Respondent. It immediately became apparent that she had not been given sufficient access to the Appellant's documents and in particular, to the receipts, to perform a reasonable review. It was made clear to both parties that the Court did not intend to do an audit of the receipts and it was agreed that all of the Appellant's documents would be filed as exhibits and the hearing be adjourned to permit the auditor to examine them while in the custody of the Court Registrar.[2]

[6]            Upon reconvening on November 8, 2001, the auditor, DeBenedetti, filed a document captioned 'Summary of Changes' prepared on the basis of the documentary material made available by the Appellant and was cross-examined by him.[3] At the conclusion of this process, the Minister's position, based upon the auditor's review, was that expenses totalling $9,188 were allowable. The Appellant, for his part, maintains that with the exception of one item in the amount of $125, all of the expenses he claimed were legitimate, established, and deductible.

Analysis

[7]            I have now had the opportunity to examine the receipts and documents produced by the Appellant and have reviewed the Respondent's analysis of the expenses as provided by the auditor. I have also considered the Appellant's testimony and have taken into account his particular circumstances. On balance, I have concluded as follows:

(a)            The following expenses claimed by the Appellant: (i) advertising - $217.65; (ii) bad debts - $136; (iii) business tax, fees, licenses, dues, memberships and subscriptions - $656; and (iv) management and administration fees - $2,213.50 are to be allowed in the full.

(b)            Meals and entertainment:    Under this head, the Appellant claimed $5,236.17. He tendered in evidence some 110 receipts ranging in amounts from $1.58 to $541.[4] The Appellant could not or would not provide any details regarding the business purpose underlying any of the expenditures. Not one of the receipts bore any reference to assist him in identifying a client or a business purpose. As well a substantial number of the receipts examined indicated that only one person was served. Indeed, he even maintained that some 25 receipts for amounts less than $10.00 (and incurred mostly at Burger King or Wendy's) were deductible. On the evidence the position advanced by the Appellant with respect to the deductibility of these expenses is not tenable.

The Respondent, based upon the auditor's review of the material, is prepared to allow the amount of $3,698.73, being approximately 70% of the amount claimed. This, as the auditor conceded, was an arbitrary conclusion based on an acceptance of all expenditures exceeding $80. Although admittedly arbitrary, in the absence of any reasonable alternative from the Appellant, I am prepared to accept it. This amount of course is subject to the provisions of section 67.1 of the Income Tax Act which reads:

67.1(1)     For the purposes of this Act, other than sections 62, 63 and 118.2, an amount paid or payable in respect of the human consumption of food or beverages or the enjoyment of entertainment shall be deemed to be 50% of the lesser of

(a)            the amount actually paid or payable in respect thereof, and

...

Accordingly under this head, the Appellant will be permitted to deduct $1,849.32.

(c)            Salaries: The Appellant claimed expenses for "subcontracting" in the amount of $12,700 which reflected payments to his three daughters in the amounts of $5,000, $5,000 and $2,700, respectively. Their ages are unknown but it appears that they were all resident at home. There is also little useful evidence as to the nature of the work they are alleged to have performed nor is there any evidence as to how or when the payments were made.[5] Wages are generally considered to be payments to a person for services rendered. They need not necessarily be based upon time but can include payment computed on the basis of the amount of work done by an employee. In circumstances where an individual is claiming wages as a deductible expense, it is incumbent upon him to establish by some reasonably cogent evidence the basis upon which the wages were paid to the employees. In my view, this is particularly so when the claimed wages are being paid to members of the family. The evidence presented by the Appellant falls far short of what is required to establish the deductibility of this expense and accordingly, this portion of his claim is disallowed.

(d)            Supplies:                 The Appellant claimed the amount of $3,353.14 under this head. The evidence indicates that the supply itself reflected the purchase of a customer list data base program and accessories. The Minister's position is that computer software which is not system software is a capital item and is included in Class 12 and the Appellant would be entitled to a 100% write-off subject to the half-year rule in the year of acquisition. That position is correct. Accordingly, the Appellant may not deduct the foregoing amount as an expense but is entitled to include 50% as an adjustment to the capital cost allowance claimed.

(e)            Motor vehicle expenses (not including CCA): The Appellant claimed the amount of $7,209.02 under this head calculated as follows: $2,255.15 in respect of gas, etc., insurance payments of $2,046.87 and 85% of the lease costs attributable to a van amounting to $2,907. His testimony regarding these expenses was to say the least confusing. Initially he said that two cars were available to him, however, other evidence including his work sheet and automobile repair documents indicate that three motor vehicles were available for at least a portion of time in 1997.[6]

                The motor vehicle expense calculations submitted by the Appellant[7] indicate that costs attributable to the van formed in excess of one-third of the motor vehicle expenses claimed. I note as well that his claim for CCA included an amount with respect to this leased vehicle. However, in the course of his cross-examination of DeBenedetti and in his testimony, the Appellant insisted that the "business" vehicle was the Renault and not the leased van. It may well be that the true facts are that the Appellant used more than one vehicle for business purposes, however, the evidence overall leads to the conclusion that the van was more likely to have been the primary vehicle used. That conclusion is consistent with the Appellant's work sheet filed with the Court as Exhibit R-2.

Based on the auditor's analysis, the Respondent is prepared to allow the Appellant 20% of the lease and insurance payments. With respect to the gas and parking receipts, the auditor observed that the amount covered by the vouchers was less than the amount claimed on the Appellant's working paper.[8] The Respondent further takes the position that gas purchases in Brampton and North York are to be disallowed on the basis that driving between home and the office are considered personal. The Appellant for his part takes exception to the reduced amount with respect to gas and parking contending that it failed to take into account the actual substantial use by him of the vehicle in question.

I have some difficulty with the Respondent's position in that the location of a gas purchase is not of much assistance in the determination of whether the vehicle was being used for business purposes. On the other hand, the Appellant has not assisted his cause by simply stating "I used my vehicle for business purposes" with no further supporting evidence. Automobile expenses may be claimed by an individual such as the Appellant for use of his automobile while away from home in the course of carrying on business. Expenses incurred in driving to and from work are not deductible. If a professional person uses his own car partly for business and partly for personal transportation, the proportions of each must be proven and the expenditures appropriately apportioned. The Appellant by failing to maintain a car log or other form of record relating to his use of the vehicle (or vehicles) has failed to do so. Thus, in my view, the sole remaining question is whether the amounts proposed on behalf of the Respondent should be accepted. I have, not without some misgiving, concluded that given the nature of the Appellant's business, he should be allowed to claim as a deduction one-third of the lease payments, insurance and gas and parking. To be more specific, the Appellant will be entitled to one-third of the lease and insurance payments claimed and to one-third of the automobile expenses supported by actual vouchers being one-third of $1,848.84.

(f)             Capital Cost Allowance: The Appellant claimed capital cost allowance with respect to computer equipment and a fax machine in the amount of $474.20. The Respondent does not dispute this item. The Appellant further claimed the amount of $1,966.41 as CCA with respect to business vehicle. The Appellant's work sheet and his testimony indicates that this amount was calculated on the lease costs with respect to the van. Accordingly, the Respondent's position is that it is not eligible for CCA. In addition, the Respondent has agreed that the amount of $1,676.57 is to be allowed as capital cost allowance with respect to the acquisition of a customer list data base program and accessories.[9] Thus, the total capital cost allowance which the Appellant may claim in this taxation year is $2,150.77.

(g)            Maintenance and Repairs: Under this head, the Appellant claimed the amount of $1,205.20 and produced in support thereof ten invoices. One invoice was for the repair of a television set, five were for a vehicle which was not identified, three were for the Renault and one was for the Pontiac Tempest. In view of my conclusion that the Appellant was using the leased van, a Dodge Caravan, as his primary business vehicle and since none of these expenses relate to that car, the total amount claimed was properly disallowed.

(h)            Office expenses:    The Appellant claimed the amount of $5,539.48 as home office expenses made up as follows: mortgage payments - $4,263.79,[10] house insurance - $125.09, property taxes - $708.10 and the amount of $442.50 for repairs, maintenance and sundry utilities. The Appellant said these expenses reflect his use of 25% of the residence for business purposes. From the scant evidence provided by the Appellant it would appear that the residence is a three-bedroom bungalow. According to the Appellant, the third bedroom was dedicated exclusively to his business requirements, while the main bedroom was used by him and his wife and the second by the three daughters.

                There are substantial restrictions on the deduction of expenses in respect of a home office. Specifically, subsection 18(12) of the Act provides:

18(12)      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;

...

                The evidence before me does not support the Appellant's claim for home office expenses. It clearly was not his principal place of business since his primary office was located in North York in the office of an insurance broker where he was provided with basic office requirements for which he paid 40% of his commissions. Thus, the alleged home office was neither the principal place of business nor is there any evidence that it was used exclusively for the purpose of earning income from business and was used on a regular and continuous basis for meeting clients or customers. The Respondent was prepared to allow $200 for storage of files, etc. Although this appears to be a gratuitous gesture with little or no statutory foundation, that amount will be allowed.

(i)             Telephone and utilities:       In this category, the Appellant claimed the amount of $5,138.98 made up as follows: AT & T - $102.84, Cantel (cell phone(s)) - $1,818.18 and computer maintenance of $3,217.94. The latter is not supported by invoices, vouchers or any other documentary evidence. The auditor's review of the records provided by the Appellant with respect to the telephone expenses disclosed that there was no record or listing of the calls made and it was not possible to determine whether the calls were personal or business. As well, the documents submitted by the Appellant[11] indicated that there were two cellular telephones (two separate telephone numbers). No explanation was forthcoming from the Appellant. In the absence of any further documentation, the Respondent was prepared to allow the amount of $161.31 (10% of the Cantel and AT & T bills submitted). Given the lack of any substantive evidence supporting the Appellant's position, it is difficult to reject the Respondent's position. However, there are several facts which should be taken into account. First, the Respondent is satisfied that there were two cellular telephones. That being the case, it is also reasonable to assume that the Appellant was the primary user of one for both business and personal communication. Secondly, as the Appellant pointed out, the 10% urged by the Respondent fails to take into account the obvious fact that as a salesperson carrying on his own business, telephone communication was integral to making sales. On the other hand, I cannot accept the Appellant's position that the telephone was used almost exclusively for business purposes. On the basis that there were two cellular telephones, one of which was primarily used by the Appellant, I am of the view that 25% of the $613.13 claimed be allowed as a business expense.

                With respect to the Appellant's claim of $3,217.94 for computer maintenance, the failure to substantiate this claim in any sense of the word leads to the conclusion that this amount must be disallowed.

[8]            The appeal is allowed and the matter is referred back for reconsideration and reassessment in accordance with the above reasons.

Signed at Ottawa, Canada, this 3rd day of December, 2001.

"A.A. Sarchuk"

J.T.C.C.

COURT FILE NO.:                                                 2001-70(IT)I

STYLE OF CAUSE:                                               Spiros Vergos and Her Majesty the Queen

PLACE OF HEARING:                                         Toronto, Ontario

DATE OF HEARING:                                           November 6, 2001

REASONS FOR JUDGMENT BY:                      The Honourable Judge A.A. Sarchuk

DATE OF JUDGMENT:                                       December 3, 2001

APPEARANCES:

For the Appellant:                                                 The Appellant himself

Agent for the Respondent:                                 Param-Preet Singh (Student-at-law)

COUNSEL OF RECORD:

For the Appellant:                

Name:                                N/A

Firm:                 

For the Respondent:                             Morris Rosenberg

                                                                Deputy Attorney General of Canada

                                                                                Ottawa, Canada

2001-70(IT)I

BETWEEN:

SPIROS VERGOS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on November 6, 2001, at Toronto, Ontario, by

the Honourable Judge A.A. Sarchuk

Appearances

For the Appellant:                      The Appellant himself

Agent for the Respondent:          Param-Preet Singh (Student-at-law)

JUDGMENT

          The appeal from the assessment of tax made under the Income Tax Act for the 1997 taxation year is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached reasons.

Signed at Ottawa, Canada, this 3rd day of December, 2001.

"A.A. Sarchuk"

J.T.C.C.

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