Tax Court of Canada Judgments

Docket: 2002-4731(IT)I

BETWEEN:

CLAIRE RILEY,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeals heard on April 28, 2003, at Vancouver, British Columbia

Before: The Honourable Justice Pierre Archambault
Appearances:
For the Appellant:	The Appellant herself
Counsel for the Respondent:	Raj Grewal

____________________________________________________________________

AMENDED JUDGMENT

          The appeals from the assessments made under the Income Tax Act for the 1998 and 1999 taxation years are allowed, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is entitled for each of these taxation years to capital cost allowance with respect to the following properties:

·         TV set and audio system (25% for business purposes);

·         Microphone and attachment and office chair (100% for business purposes);

·         Automobile (70% for business purposes).

The other automobile expenses should be allowed on the basis that it was used for business purposes at a rate of 70%. The Appellant is also entitled to these additional current expenditures:

	1998	1999
Advertising/promotion professional development	$ 280.43	$ 541.29
Cable (25% business purposes)	80.82	86.02
Business Fees	595.63
Office expenses	95.86	43.06
Travel	84.54	195.01
Fax	345.44	354.34
Meals		19.45
Office/Studio	1,926.59	1,928.55
(Minus amount already allowed)	(1,483.59)	(1,576.62)
	$ 443	$ 351.93

Signed at Montréal, Quebec, this 14th day of July 2003.

"Pierre Archambault"

Archambault J.

Citation: 2003TCC409

Date: 20030714

Docket: 2002-4731(IT)I

BETWEEN:

CLAIRE RILEY,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

(Delivered orally from the bench on May 2, 2003,

in Vancouver, British Columbia, and revised for greater clarity

in Montréal, Québec on July 14th, 2003)

Archambault, J.

[1]      Ms. Claire Riley is appealing income tax assessments issued by the Minister of National Revenue (Minister) with respect to the 1998 and 1999 taxation years. The Minister disallowed some of the expenses that were claimed by Ms. Riley, a self-employed performing artist.

[2]      In issuing the assessments, the Minister relied on certain assumptions of fact, which are set out in paragraph 14 of the Minister's Reply. Only subparagraphs b), c), d), k) and l) were admitted by Ms. Riley at the outset of the hearing.

[3]      During the course of the hearing, some admissions were also made by counsel for the respondent with respect to the deductibility of certain expenses, and by Ms. Riley with respect to the non-deductibility of other expenses. All these expenses are described in Exhibit A-5. Those admitted as being deductible for the 1998 taxation year are:

Taxi	$ 120.40
Demo	32.10
Demo	15.00
Demo	64.20
Advertising	41.73
Promotion	7.00
Union (UBCP)	477.34
Union (ACTRA)	118.29
Travel expenses (Montreal)	84.54
Fax	345.44
Rent expenses	1,884.00[1]
Utility	42.59

[4]      Those allowed with respect to the 1999 taxation year are:

Audio	$     44.43
Photos	120.84
Photos	13.21
Taxi	96.56
Advertising	44.94
Advertising	21.31
Meals and entertainment	19.45
Travel	195.01
Fax	354.34
Rent	1,884.001
Utility	44.55

Finally, an amount of $200, which is described as a donation in Exhibit A-5, was to be allowed as a marketing expense.

[5]      Ms. Riley consented to withdraw her deductible expense claims with respect to her trip to the State of Washington in 1998 ($169.25) and her tuition fees ($249) incurred in 1999. The last-mentioned amount had already been allowed by the Minister.

Factual Background

[6]      As a performing artist, Ms. Riley provides her services as an actor, narrator, events coordinator and master of ceremonies and also does voice-overs. She indicated as well that she is planning to extend her skills to include musical performances. For the purposes of carrying on her business, she has hired a talent agent who represents her and assists her in securing contracts for her services.

Analysis

[7]      I would like to state at the outset that these appeals were made under the Informal Procedure and accordingly, by law, these reasons for judgment do not have any precedential value.[2] Although I very rarely make this statement when I render judgments under the Informal Procedure, I do so here because I sense a move by the performing arts industry, at least in British Columbia, to contest the administrative practices of the Canada Customs and Revenue Agency (CCRA). Such a contestation raises difficult issues. Many of the expenses claimed by performing arts artists such as Ms. Riley could be described as borderline because they have a significant personal component. If my perception as to the intention of the performing arts industry is right, I believe that the contestation of the CCRA's administrative practices should be done within the framework of an appeal under the General Procedure as a sort of test case, hopefully with the assistance of a well-qualified tax lawyer. This lawyer would have to introduce all the proper and relevant evidence as to what the expenses are and in what circumstances they were incurred. It is important that this Court not be left with generalities and vague statements as to how the trade is being carried on and as to the purpose for which the expenses were incurred.

[8]      Unfortunately, in this case the evidence was not sufficient to convince me that all the expenses were actually incurred for business and not personal consumption purposes. For example, the statements made with respect to the costs for attending wrap parties did not provide sufficient evidence to identify which parties had to be attended for business reasons and which were social activities too remotely connected to the business aspect. More will be said on this theme below.

[9]      The three provisions[3] of the Income Tax Act (Act) that are applicable here are: section 9, which basically states that a taxpayer's income includes his income from a business, that is, essentially, the profit; paragraph 18(1)(a), a limitation provision, which states that no expense can be deducted unless it was incurred for the purpose of earning income; and finally, paragraph 18(1)(h), another limitation provision, which states that no personal or living expenses can be deducted, except to the extent that these expenses were incurred while travelling away from home on business.

[10]     The greatest difficulty facing Ms. Riley in her appeals was dealing with this last-mentioned prohibition in the Act. To illustrate the scope of that provision, counsel for the respondent relied on several court decisions. The first, which involved very similar facts to those in this particular case, is No. 360 v. M.N.R., 16 Tax A.B.C. 31. This is a case of a taxpayer who was, as described by the Chairman of the Tax Appeal Board, an "actress, commentator and dramatic artist . . . a star of the stage, radio and television - and occasionally of the screen". She was also a person earning income from a business, self-employed, as it is more commonly put. The Chairman acknowledged that her success was due both to "her great talent as an actress and to her charm and grooming".

[11]     The actress in question claimed expenses with respect to her clothing and that is the description we find in the Chairman's reasons. The evidence was that she had to provide her own costumes for modern plays and, in most of her television engagements, she was required to furnish her own dresses, which had to be varied and always in the best taste. The appellant in that case also testified that because her viewers complained when she wore the same clothes more than once, she had to buy a large number of dresses and accessories if she wanted to retain her television contracts. As in the case at bar, it was a situation where the dresses could be worn not only for business purposes but also for personal purposes on other occasions. It was even argued that she had to maintain her reputation as a well-dressed woman both on and off the stage.

[12]     Based on these facts, the Chairman rendered the following judgment:

The question here has arisen in a great number of cases heard by this Board. In all such cases it was decided that such expenses were personal expenses and a deduction was not allowed. I find nothing in the present case which would warrant a decision different from the one reached by my colleagues and myself in similar cases, to wit, that these are "personal or living expenses" within the meaning of section 12(1)(h) [at the time] of the Act and consequently are not deductible.[4]

[13]     The other precedent submitted by counsel for the Respondent is the decision of the Supreme Court of Canada in Symes v. Canada, [1994] 1 C.T.C. 40. Symes is not a case dealing with the same kind of expenses as those claimed in these particular appeals: it deals rather with child care expenses. However, it does contain a review of the notion of "personal or living expenses" as found in paragraph 18(1)(h) of the Act. Writing on behalf of the majority of the Supreme Court, Mr. Justice Iacobucci made the following statements as to how one goes about determining if an expense is a personal or living expense. The three most relevant paragraphs of his reasons are 76, 77 and 79.

[14]     Atpage 59, Mr. Justice Iacobucci refers to this statement written by Professor Brooks:

If a person would have incurred a particular expense even if he or she had not been working, there is a strong inference that the expense has a personal purpose. For example, it is necessary in order to earn income from a business that a business person be fed, clothed and sheltered. However, since these are expenses that a person would incur even if not working, it can be assumed they are incurred for a personal purpose - to stay alive, covered , and out of the rain. These expenses do not increase significantly when one undertakes to earn income.

At pages 59-60, Justice Iacobucci writes:

Since I have commented upon the underlying concept of the "business need" above, it may also be helpful to discuss the factors relevant to expense classification in need-based terms. In particular, it may be helpful to resort to a "but for" test applied not to the expense but to the need which the expense meets. Would the need exist apart from the business? If a need exists even in the absence of business activity, and irrespective of whether the need was or might have been satisfied by an expenditure to a third party or by the opportunity cost of personal labour, then an expense to meet the need would traditionally be viewed as a personal expense.

[15]     So it is with the benefit of these dicta that I have approached the matter of deciding, in this particular case, whether the expenses are deductible. I am not saying that some of the disallowed expenses can never be allowed. In respect of some of them, I believe the evidence was not sufficient to allow one to determine accurately which were required for business purposes and were not of a personal nature. For instance, had the costumes or clothing been acquired only for attending auditions, their cost clearly could have been considered an expense incurred for business purposes. That was not the case here. Perhaps a case could have been made for adopting a different approach than the one taken by the Tax Appeal Board in 360. With respect to clothing used to a significant extent in business activities, such as attending auditions, in such a case, a portion of the expenses could be considered as a business expense, as was done for the apartment rental and car expenses. If such a new approach was to be considered, evidence would be required as to what percentage of the use of the clothing was for personal purposes and what percentage was used for business purposes. Such evidence was not available here. Ms. Riley stated that the clothing required for her auditions (such as for a doctor's or a news anchor's role) were not the style of clothes she would normally wear. However, in her cross-examination, she acknowledged that her claims for costumes included the cost of jeans.

[16]     When one is dealing with expenses that have all the appearance of being personal or living expenses, I believe that the evidence required to reverse this appearance has to be of a higher level and more specific than just a general statement such as: "all our lunches that we have with our colleagues are required to create networking". Furthermore, I am in general agreement with the following statement which was made in the appeals officer's letter[5] provided to Ms. Riley and which dealt with meal and entertainment expenses:

MEALS AND ENTERTAINMENT

Expenses incurred for "networking" activities is a broad category which could include meetings with friends and colleagues in the business, to more formal invitations such as attendance at agency parties, film wrap parties, public relations events, seminars or workshops. To be deductible for tax purposes, the reason for a meeting must specifically be for the purpose of generating revenue. The fact that during an informal gathering with friends or colleagues, some time is devoted to a discussion of work opportunities, is not a sufficient reason to allow said costs for tax purposes. It is the Agency's opinion that informal gatherings with friends and colleagues, whether it be in a bar, restaurant or someone's home, has a large personal component and should therefore be disallowed on that basis.

However, where an actor is required to attend various functions or public relation events to promote a specific movie or performance, any expenses directly attributable to that appearance would be deductible, including the cost of makeup or hairstyling required for the appearance; any special clothing required for that engagement that cannot be worn for any other occasion; and, transportation; meals, board and lodging for out-of-town engagements.

. . .

[17]     For example, if Ms. Riley had to incur expenses to go to a wrap party following a particular production in which she had participated, then I would think that it might be reasonable to conclude that these expenses were incurred for business purposes. But here the evidence does not distinguish between those that were just for wrap parties following productions in which she herself had been involved and those for parties of her colleagues.

[18]     In any event, I am only stating this to illustrate the difficulty that I was faced with and how borderline these cases can be. Maybe with better evidence, I would have been more inclined to allow more expenses. Given the broad general statements that were given here with respect to wrap parties, I was not convinced that the costs for attending these parties, including the cost of clothing worn for such occasions, should be allowed.

[19]     With respect to the television set and audio system, however, I was satisfied on the evidence that they were required, at least in part, for the appellant's business. These expenses are of a capital nature, so they cannot be fully written off. They can only be amortized by claiming the proper capital cost allowance (CCA). Given that the items in question were used in large part for personal purposes, I estimate such use to be 75 percent, so that 25 percent of their use can be considered to have been for business purposes. Basically for the same reason, I will allow 25 percent of the cable expenses that were claimed for 1998 ($323.28) and for 1999 ($344.08).

[20]     It was admitted by counsel that the expense of $248 for the microphone and the microphone attachment were for business purposes. Given that they are capital assets, they should be amortized and 100 percent of the CCA claimed should be allowed.

[21]     With respect to the interest expenses claimed, the evidence shows that most of the money borrowed was in the form of cash advances from VISA and, in all likelihood, was used for personal purposes. There being no basis for concluding that this money was used for business purposes, the full amount of interest is disallowed.

[22]     With respect to the "office expenses", I have allowed a total of $95.86 for 1998 and $43.06 for 1999. These amounts include the cost of the Friday edition of the Vancouver Sun ($14.74 for 1998 and $12.06 for 1999), the city maps ($14.53) required in order to get to auditions, the music CDs ($21.47, representing 25 percent of their cost), the books (the one dealing with intuition ($9.58) and The Yes Book ($31.00)), general supplies ($9.58), video rental ($4.29) and blank video tapes ($5.68). The rest of the expenses, such as the cost of women's magazines, are disallowed as being of a personal nature.

[23]     The full cost of telephone services should be treated as a personal expense given that this is an expense that would have been incurred in any event. Also, I took into account the fact that the second line for the fax service is being allowed in total, although it could be used for personal purposes.

[24]     All the expenses that were claimed for costumes, hair, makeup, dressing room and cleaning are disallowed because I have concluded that these are personal or living expenses. As mentioned before, the evidence was not sufficient to determine which of them could have been deductible. For example, I would agree that whenever mouthwash was used on a set, its cost would be deductible, but it represents such a small amount that it becomes almost irrelevant. Also, if a particular wig had been bought only to be used for auditions, its cost would have been allowed. But the evidence does not show this to have been the case.

[25]     I have also concluded that the cost of tennis lessons is also an expense of a personal nature. These lessons are too far removed from the process of earning income from a business. Had they been taken for a particular production, it would have been a different story.

[26]     With respect to the automobile expenses, on the evidence presented to me, I am prepared to be more generous. I think it is fair to allow 70 percent of these expenses. But with respect to the 1998 taxation year, an adjustment has to be made to the computation of CCA; the amount of undepreciated capital cost (UCC) appears to be wrong. The depreciation seems to have been computed on a straight-line basis rather than on a diminishing basis. The CCA with respect to the automobile for the 1998 and 1999 taxation years should be computed in accordance with the rules in the Act and the regulations thereunder. Surely this should not create any problem when the Minister issues his new assessments pursuant to my judgment herein. Should there be a problem, however, the parties are to so advise the Court.

[27]     With respect to the maintenance and repair costs for the apartment, I have decided against allowing these costs given the lack of evidence as to what percentage of them was related to the portion of the apartment used for business purposes. Also, I have taken into account the fact that the Minister allowed 20 percent of the rental expenses, which in my view, is fairly generous.

[28]     I have also concluded that the sofa was a personal item, so I have disallowed the CCA claimed with respect thereto ($166.92 in 1998). However, the office chair is considered to be used solely for business purposes and therefore 100 percent of the CCA claimed should be allowed for 1999.

[29]     The appeals from the assessments made under the Act for the 1998 and 1999 taxation years are allowed, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that, for each of these taxation years, the appellant is entitled to capital cost allowance with respect to the following items:

·         TV set and audio system (25% for business purposes);

·         Microphone and attachment and office chair (100% for business purposes);

·         Automobile (70% for business purposes).

The other automobile expenses should be allowed on the basis that the automobile was used for business purposes in a proportion of 70%. The appellant is also entitled to the following additional current expenses:

	1998	1999
Advertising/promotion, professional development	$ 280.43	$ 541.29
Cable (25% for business purposes)	80.82	86.02
Business fees	595.63
Office expenses	95.86	43.06
Travel	84.54	195.01
Fax	345.44	354.34
Meals		$ 19.45
Office/studio	1,926.59	1,928.55
(Minus amount already allowed)	(1,483.59)	(1,576.62)
Additional office/studio	$ 443	$ 351.93

Signed at Montréal, Quebec, on the 14th day of July, 2003.

"Pierre Archambault"

Archambault, J.

CITATION:

2003TCC409

COURT FILE NO.:

2002-4731(IT)I

STYLE OF CAUSE:

Claire Riley and Her Majesty the Queen

PLACE OF HEARING:

Vancouver, British Columbia

DATE OF HEARING:

April 28, 2003

REASONS FOR JUDGMENT BY:

The Honourable Justice Pierre Archambault

DATE OF JUDGMENT:

July 14, 2003

APPEARANCES:

For the Appellant:

The Appellant herself

Counsel for the Respondent:

Raj Grewal

COUNSEL OF RECORD:

For the Appellant:

Name:

Firm:

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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