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Docket: 2003-1741(IT)I |
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BETWEEN: |
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GILL GAUTHIER, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
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Appeal heard on November 18, 2003 at Prince Albert, Saskatchewan
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By: The Honourable Justice J.M. Woods |
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Appearances: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Anne Jinnouchi |
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JUDGMENT
The appeal in respect of reassessments made under the Income Tax Act for the 1998 and 1999 taxation years is allowed, without costs, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on a basis consistent with the reasons for judgment.
Signed at Ottawa, Canada, this 10th day of February, 2004.
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"J.M. Woods" |
J.M. Woods J.
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Citation: 2004TCC57 |
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Date: 20040210 |
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Docket: 2003-1741(IT)I |
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BETWEEN: |
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GILL GAUTHIER, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Woods J.
[1] In the 1998 and 1999 taxation years, Gill Gauthier was the proprietor of a construction business in Prince Albert, Saskatchewan. He appeals income tax reassessments that disallowed various deductions, many of which were claimed as business expenses.
[2] The Minister disallowed many of the expenses because there was not sufficient documentation to verify that the expenses were incurred and that they were incurred for business purposes. Mr. Gauthier claimed business expenses of $81,841 and $94,939 for the 1998 and 1999 taxation years respectively. In the reassessments, the Minister of National Revenue increased the amount allowed for the 1998 taxation year to $83,610 and decreased the amount allowed for the 1999 taxation year to $70,106.
[3] Before discussing the specific items in dispute, I would comment generally that I have difficulty accepting many of Mr. Gauthier's submissions. By his own admission, Mr. Gauthier improperly claimed deductions in income tax returns for expenses incurred in renovating his personal residence. Further, by his own admission, improper claims were made in a GST application for a new housing rebate. In that application, some construction costs on homes belonging to customers of the construction business were claimed as construction costs on Mr. Gauthier's personal residence. Mr. Gauthier stated that his common-law spouse would have completed the GST application form but presumably the details of the expenses would have been obtained either from Mr. Gauthier's records or from Mr. Gauthier himself. In addition, Mr. Gauthier's testimony at the hearing was generally vague and imprecise and he did not submit any supporting documents. At times, the testimony changed to fit the facts as established by the Crown.
[4] Against this background, I will now consider the items in dispute under the headings used in schedules attached to the reply to the notice of appeal.
1998 Material and Tools
[5] In computing income for the 1998 taxation year, Mr. Gauthier deducted $29,789 on account of material and tools. The Minister allowed only $24,922, the amount that could be substantiated by receipts. In respect to items that were not supported by receipts, Mr. Gauthier suggests that he sometimes paid cash or that perhaps the receipts had been misplaced. He does not remember specific items except for one, the purchase of a brake machine for which there was no receipt.
[6] I would conclude that the amount disallowed by the Minister has not been established by Mr. Gauthier as a business expense incurred. There was no supporting evidence for any of the expenses and the only expense that Mr. Gauthier could recall, the brake machine, would have been on capital account. Accordingly, I would agree with the reassessment with respect to material and tools for the 1998 taxation year.
1998 Labour
[7] In computing income for the 1998 taxation year, Mr. Gauthier claimed a deduction of $13,689 on account of amounts paid to workers. In the reassessment, the Minister arbitrarily disallowed 15 percent of this amount because Mr. Gauthier's records were incomplete and it was not possible to verify that none of the amount claimed was incurred in renovating Mr. Gauthier's home. Mr. Gauthier stated that he incurred as business expenses more than what was allowed by the Minister but he admitted that he did not have the records to prove it.
[8] In all the circumstances of this case, I would conclude that Mr. Gauthier has not established the deductibility of labour expenses in excess of what was allowed in the reassessment for the 1998 taxation year.
1998 and 1999 Shop Rent
[9] The Minister reduced the amount deductible for rent on business premises from $966 to $759 for the 1998 taxation year and from $1,669 to $771 for the 1999 taxation year. During the hearing, Mr. Gauthier conceded that the reassessment of shop rent was correct and accordingly, I would agree with the reassessments.
1998 and 1999 Subtrades
[10] In reassessing amounts that Mr. Gauthier deducted as payments to subtrades, the Minister increased the deduction from $17,478 to $25,974 for the 1998 taxation year and decreased the deduction from $23,604 to $8,975 for the 1999 taxation year. There are three items in dispute - payments to Neufeld Building Movers Ltd., Dymterko Enterprises and Paulsen Concrete.
[11] Neufeld Movers - Mr. Gauthier paid $27,810.23 to Neufeld Building Movers Ltd. to move three houses from Manitoba to Saskatchewan. This amount was claimed as a business expense for the 1998 taxation year. One of the houses was Mr. Gauthier's home and in the GST application for the new housing rebate, one-half of the amount paid to Neufeld Movers was claimed as a moving expense of the personal residence. In the income tax reassessments, the Minister disallowed a deduction for one-third of the amount paid to Neufeld Movers as a reasonable allocation to the personal residence. Mr. Gauthier suggested at the hearing that a one-fifth allocation would be more appropriate because it was more difficult and more costly to move another house that was significantly larger. He testified that the mover had told him that approximately 50 percent of the price was attributable to the larger home.
[12] I would conclude that the apportionment by the Minister is reasonable in the circumstances. After taking insupportable and inconsistent positions in the income tax return and the GST application, I do not think that it is sufficient for Mr. Gauthier to merely suggest that one-fifth is an appropriate apportionment to the personal residence. In the circumstances, Mr. Gauthier should have had some supporting documentation for the one-fifth apportionment.
[13] In addition to challenging the quantum of the moving costs that were deductible, Mr. Gauthier suggests that part of the amount paid to Neufeld Movers should be deductible in 1999 instead of 1998 as claimed in the return. He stated that approximately one-half of the total price was paid by cheque in early December, 1998 but Neufeld Movers did not cash it until the next year. Mr. Gauthier explained that the moving company was required not to cash the cheque until the work was completed which was in 1999. Mr. Gauthier did not submit any documents or other evidence in support of this position. Accordingly, I would conclude that Mr. Gauthier has not established that the expense was incurred in 1999 and not 1998 as originally claimed in the income tax return.
[14] Dymterko Enterprises - In the reassessments, the Minister disallowed a deduction of $3,079.50 which was paid to Dymterko Enterprises for excavation work. The ground for the disallowance was that this amount was claimed in the GST application as an expense incurred to excavate the personal residence. At the hearing, Mr. Gauthier first suggested that this amount was not claimed as a deduction in the income tax return, but he later conceded that it was. This concession confirms that the reassessment is correct in this regard.
[15] Paulsen Concrete - The Minister also disallowed a deduction of $3,798 which was paid to Paulsen Concrete because this amount was claimed in the GST application as an expense for concrete on the personal residence. Mr. Gauthier suggested that the GST entry was incorrect because he had used another company for concrete on his house and the date of the invoice did not correspond with when the work was done on the house. No supporting evidence was provided.
[16] I would not give Mr. Gauthier the benefit of the doubt with respect to this item. In view of the errors in the income tax return, the GST application and in view of testimony that was vague and contradictory, I would conclude that Mr. Gauthier has not established that the amount of $3,798 paid to Paulsen Concrete is a business expense.
1999 Truck Lease
[17] In computing income for the 1999 taxation year, Mr. Gauthier deducted an amount of $5,102 paid for a truck lease. In the reassessment, the Minister allowed only $3,757 of this amount. At the hearing, the Crown conceded the deductibility of the full amount except for the December lease payment of $672. The December payment was disallowed because the construction business had been shut down in November and Mr. Gauthier commenced full time employment in North Battleford at that time. Mr. Gauthier stated that he was finishing certain jobs in his spare time during December.
[18] I would conclude that allowing a deduction for 25 percent of the December lease payment is reasonable.
1999 Cell Phone
[19] In the reassessment for the 1999 taxation year, the Minister allowed a deduction for Mr. Gauthier's cell phone charges except for the amount of $250 incurred in December. The expense for this month was considerably higher than any other month and Mr. Gauthier explained that this was on account of long distance charges from his new place of employment in North Battleford.
[20] Although Mr. Gauthier may have incurred some long distance charges in connection with the construction business during this time, there was insufficient evidence to prove what these expenses were. I would conclude that allowing a deduction for 25 percent of the December cell phone charges, which is the same percentage that I have allowed on the truck lease, is the most reasonable in the circumstances.
1999 Material and Tools
[21] Mr. Gauthier claimed a deduction of $24,881 for material and tools in computing income for the 1999 taxation year. In the reassessment, the Minister allowed only $18,950. The reassessment was based on an arbitrary allocation to personal expenses of 75 percent of the expenses claimed for the first three months of the year. The reason for the Minister's high allocation to personal expenses was that there was no business revenue generated during this period. Mr. Gauthier stated that, although part of the amount claimed for the first three months was personal, the amount disallowed in the reassessment was excessive because during that time he made expenditures on jobs coming up.
[22] There was no supporting evidence before me to support Mr. Gauthier's claim. Without proper records of the amount allocable to the personal residence, I would conclude that the Minister's allocation is reasonable.
1999 Home Office and Storage
[23] Mr. Gauthier stated that he used one room in his house for paper work related to the business and he used the basement, garage and backyard for storage. In his 1999 income tax return, Mr. Gauthier deducted 25 percent of the costs of maintaining the home (including telephone expenses) as business expenses. At the hearing, Mr. Gauthier suggested that it would be appropriate to increase this to 40 percent. In the reassessment, the Minister allowed only 12.5 percent, partly on the basis of what the Minister considered a reasonable allocation and partly because some of the expenses appeared high and there was no supporting documentation.
[24] The Minister's allocation of 12.5 percent appears to be low but I am not satisfied that Mr. Gauthier's suggestion of 40 percent is reasonable. First, there is no basis on which the telephone charges should be allocated. Secondly, very few of the home expenses should be attributed to the backyard. Thirdly, I do not believe that the use of a basement for storage justifies allocating all home expenses, including telephone charges, on a proportionate square footage basis with the living areas. In the circumstances, I believe that the 25 percent allocation originally claimed by Mr. Gauthier is the most reasonable in the circumstances.
1999 GST Payments
[25] In computing income for the 1999 taxation year, the Minister disallowed a deduction of $1,980 that was paid as goods and services tax (GST) on business supplies. The ground for the disallowance was stated in a written submission by counsel for the Crown received subsequent to the hearing. The submission is a little difficult to understand. The Crown suggests that the taxpayer was allowed input tax credits for the GST paid and the input tax credits must be included in income under subsection 248(16) and paragraph 12(1)(x). However, the Crown does not suggest that there should be an income inclusion for the input tax credits. Instead, the Crown suggests that this somehow justifies the disallowance of the deduction for GST paid. I disagree. The Crown does not dispute that the GST was paid as a business expense and therefore I see no reason to disallow the deduction.
[26] As for input tax credits, subsection 248(16) requires input tax credits claimed by a taxpayer to be included in computing income as government assistance under paragraph 12(1)(x). Subsection 248(16) reads in part as follows:
(16) For the purposes of this Act, other than this subsection and subsection 6(8), an amount claimed by a taxpayer as an input tax credit or rebate with respect to the goods and services tax in respect of a property or service shall be deemed to be assistance from a government in respect of the property or service that is received by the taxpayer ...
(emphasis added)
[27] There is no evidence properly before me that input tax credits have been claimed by Mr. Gauthier and therefore there is no basis on which I can conclude that the input tax credits should be included in income under subsection 248(16) and paragraph 12(1)(x).
1998 and 1999 Support Payments
[28] Mr. Gauthier paid support payments to his former spouse of $6,313 and $5,000 in the taxation years at issue. These amounts were disallowed by the Minister because there was no court order or written agreement governing the payments. Mr. Gauthier submitted that it was unfair to disallow such large amounts on this ground.
[29] There is no basis on which I can allow a deduction simply on the basis of fairness. I would conclude that the reassessments with respect to the support payments are correct.
Interest and Penalty
[30] At the hearing, Mr. Gauthier stated that he disagreed with the reassessment of interest on the tax owing and a late filing penalty. He did not provide an explanation for this, notwithstanding my invitation for him to make a written submission after the hearing. In the circumstances, I would conclude that the reassessments of interest and penalty are correct.
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[31] The appeal is allowed, without costs, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on a basis consistent with these reasons.
Signed at Ottawa, Canada, this 10th day of February, 2004.
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"J.M. Woods" |
J.M. Woods J.
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CITATION: |
2004TCC57 |
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COURT FILE NO.: |
2003-1741(IT)I |
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STYLE OF CAUSE: |
Gill Gauthier v. The Queen |
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PLACE OF HEARING: |
Prince Albert, Saskatchewan |
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DATE OF HEARING: |
November 18, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice J.M. Woods |
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DATE OF JUDGMENT: |
February 10, 2004 |
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APPEARANCES: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Anne Jinnouchi |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |