[OFFICIAL ENGLISH TRANSLATION]
2000-5219(IT)I
BETWEEN:
DENISE GAOUETTE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on September 18 and 19, 2001,
and November 28, 2001, at Québec, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
Counsel for the Appellant: Richard Généreux
Counsel for the Respondent: Pascale O'Bomsawin
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1995, 1996 and 1997 taxation years are allowed, without costs, to the extent indicated in the attached Reasons for Judgment.
The appellant is not entitled to any further relief.
Signed at Ottawa, Canada, this 4th day of April 2002.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Date: 20020404
Docket: 2000-5219(IT)I
BETWEEN:
DENISE GAOUETTE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre Proulx, J.T.C.C.
[1] These are appeals under the informal procedure concerning the 1995 to 1997 taxation years.
[2] The points at issue are: (1) whether net business income of $30,495, $20,622 and $21,257 respectively should have been added to the appellant's income for the taxation years in issue; (2) whether the Minister of National Revenue (the "Minister") was authorized to reassess after the normal reassessment period for the 1995 taxation year had expired; and (3) whether the Minister was right in assessing penalties under subsection 163(2) of the Income Tax Act (the "Act").
[3] The witnesses were Johanne Tremblay, the appellant, and Chii Lean Lee Bélanger for the appellant and Diane Grenier for the respondent.
[4] Johanne Tremblay is an editor with Éditions de Renouveau Pédagogique Inc. ("ERPI"). She has edited the appellant's literary works since 1989 and has also acted as editor for the appellant's spouse, Conrad Huard. Mr. Huard wrote mathematics textbooks for all primary school grades.
[5] Ms. Tremblay explained that the appellant was the author of "En Tête", a collection designed to teach French in grades 1 and 2. It is a collection that has more than 50 percent of the market in Quebec, New Brunswick and French-speaking Ontario.
[6] The witness explained that, although the appellant had worked alone, she needed to hold meetings with the graphic artists. Those meetings could be held in Sherbrooke, but they usually took place at the appellant's home in order to save the author time. Meetings the appellant had to attend as an author were also held in other cities such as Drummondville or Québec. Ms. Tremblay might accompany the appellant to meet the students or the appellant met them alone. According to Ms. Tremblay, the students consider the appellant to be a star. She receives mail from them, and she is close to teachers and children. Ms. Tremblay knows that the appellant also lectures to the children's parents and takes part in televised interviews.
[7] Ms. Tremblay explained that the appellant and her husband, Conrad Huard, had their own office. The dining room served as a conference room. She explained that she could talk to the appellant at virtually any time of day, from 7:00 a.m. to 10:00 p.m.
[8] Books are launched in the spring, but Ms. Tremblay explained that she did not play the role of representative. She also said that Ms. Gaouette's daughter, Mélissa, had worked on one of the guides when she was a student. Ms. Tremblay is not the one who reimburses the appellant's expenses.
[9] The appellant explained in her testimony that she was a lecturer and wrote teaching material. She has a master's degree in education and taught five or six years. She then worked as a French-language educational consultant until 1986 when she began to devote herself exclusively to writing and to leading conferences.
[10] The appellant filed Exhibits A-2 and A-3, which are prepared in the same order as the report of the Minister's auditor (Exhibit I-4) and the Reply to the Notice of Appeal (the "Reply"). In the audit conducted by the Minister, the appellant accepted certain points and disputed others. For each point, I will state the evidence, if any, the arguments and the decision.
[11] The appellant admits paragraphs (h), (i) and (j) of the Reply entitled "Unreported Income", that is, ERPI's reimbursements of the appellant's expenses, which were not reported in her tax returns. The amounts had in fact been entered into the appellant's books but, for some reason, the accountant had not taken them into account. The appellant admitted that the amounts for the years ending on September 30, 1995, and December 31, 1995, to December 31, 1997, of $2,935, $674, $3,457 and $2,254, had to be included in her income. She explained why she had not done so. On this point, counsel for the respondent informed the Court that the Minister had cancelled the penalties that had been assessed on these amounts.
[12] The amounts claimed as conference leader referred to in paragraph (k) of the Reply consist of expenses relating to hairdressing, beauty treatments, manicures and dry cleaning. The appellant had claimed 50 percent of those expenses on the ground that they were necessary for her appearance when she acted as a lecturer and conference leader. The Minister's auditor said that, if she had been able to link the hairdressing expenses directly to the conferences, she might have allowed them, but that was not the case.
[13] In Rouillard v. Canada, [1999] T.C.J. No. 650, I analyzed the nature of personal expenses. That case involved a service man who had claimed a deduction in respect of the haircuts required by his position. I considered the analysis made by Iacobucci J. in Symes v. Canada, [1993] 4 S.C.R. 695, and held as follows at paragraphs 7 and 8:
(7) It may be seen from this analysis that the test - any expense that would not be incurred but for the business constitutes a business, not a personal expense - is a test that may be useful but is virtually impossible to apply in view of the variety of choices that individuals may make. I believe that what is stated to be the traditional test is the test which should be adopted because it applies equally to everyone. According to this test, if I interpret it correctly, any expense that must be made by a person in order to report for work will be considered a personal expense. Certain positions require that one be well dressed but each person determines the amount of money that person wishes to invest in clothing. Some positions require a neat personal appearance. Some individuals may be able to provide the kind of care needed to achieve this on their own, while others need the help of persons specializing in the field. Some live far from their place of work, while others live closer but their housing may be more expensive. As Baron Pollock wrote in Bowers v. Harding, (1891) 3 Tax Cas. 22 (Q.B.), in a passage cited in paragraph 6 of these reasons:
When a man and his wife accept an office there are certain detriments as well as profits, but is in no sense an expenditure which enables them to earn the income in the sense of its being money expended upon goods, or in the payment of clerks, whereby a tradesman or a merchant is enabled to earn an income. . . . If we were to go into these questions with great nicety we must consider the district in which the person lives, the altitude at which he lives, the price of meat, and the character of the clothing that he would require, in many places indeed the character of the services and the wages paid to particular servants, and the style in which each person lives, before we could come to any conclusion.
(8) I believe it must be concluded that all expenses incurred in order to report to one's normal place of work for one's usual duties are personal expenses incurred as a quid pro quo for remuneration. In the case of servicemen, their employment agreement requires them to be available for their work activities with regulation haircuts and well-maintained clothing. The salaries they receive are the quid pro quo for this availability to comply with the regulations. Thus, if the income in question were business income, it would appear to be certain that the appellant would not be entitled to the deduction because the expense would be of a personal nature.
[14] For the same reasons, I find that hairdressing, manicure and dry cleaning expenses are personal expenses and, under paragraph 18(1)(h) of the Act, are not deductible. Interpretation Bulletin IT525R concerns performing artists. I find it hard to consider the appellant a performing artist, but, if she considers herself so on some occasions, the bulletin describes the circumstances in which certain deductions may be allowed, but there are no such circumstances in this case.
[15] The portion of the expenses disallowed under the item "Accounting and Management" indicated in paragraph (l) of the Reply is accepted by the appellant.
[16] With respect to the expenses relating to the documentation and subscription described in paragraph (m) of the Reply, in dispute is an amount of $510 for the period ending on September 30, 1995, and an amount of $291 for the period ending on December 31, 1995. According to Exhibit I-5, nothing under that item was claimed for the other years. According to Exhibit I-4, the auditor's report, the appellant was allowed $128.42 to September 30, 1995, and $17.95 to December 31, 1995. The appellant argued that all the material represented by those expenses had been sources of information for her books. I have no evidence to the contrary. The amounts are allowable.
[17] Office supplies are listed in paragraphs (n) and (o) of the Reply. In her Exhibit A-2, the appellant proposed that a substantial deduction be allowed. After hearing the appellant's explanations, I find that what she proposed in Exhibit A-2 is reasonable.
[18] Office expenses are stated in paragraph (p) of the Reply. Based on the appellant's explanations, these were items that were useful for her office for her work as an author. The expenses that were claimed, as corrected in Exhibit A-2, may be allowed.
[19] As to the advertising and promotion expenses indicated in paragraph (q) of the Reply, the corrections to Exhibit A-2 made by the appellant seem reasonable on the whole and must be allowed.
[20] Counsel for the appellant raised the issue of the calculation of depreciation in which periods prior to the normal assessment period were considered. The Minister's auditor reorganized the CCA schedules starting in 1989; she allowed certain capital expenditures and disallowed others because they were not supported by invoices or had not been incurred for business purposes.
[21] Counsel for the appellant argued that the auditor could not remake the schedules for the years prior to the normal assessment period: the capital expenditures have already been allowed by the Minister and can no longer be disallowed.
[22] In my view, the principles that apply in computing the losses for the years prior to the normal assessment period also apply to the calculation of depreciable property. In the calculation of losses, the courts have determined that the Minister may not assess for the previous years but may redo the calculations for those years: New St. James Limited v. M.N.R., 64 DTC 121; and Coastal Construction and Excavating Ltd. v. Canada, [1996] T.C.J. No. 1102. In conclusion, the capital costs of depreciable property and the purpose of their acquisition may be revised even if that property was acquired during periods prior to the normal assessment period.
[23] Counsel for the appellant raised the issue of building occupancy expenses. The amounts claimed are $2,345, $2,110 and $3,519 for the years from 1995 to 1997. The auditor determined that the business percentage was 100 percent. However, she allowed amounts solely for the office where the appellant had her principal place of business and allowed no percentage for the other rooms of the house such as the bathroom, storage areas, library or client meeting area on the ground that those places were not used exclusively to meet clients on a regular and ongoing basis. She had originally allowed the accountant's percentages but once she had read Interpretation Bulletin IT-514 entitled, "Work space in home expenses", she found thereafter that she could not do so.
[24] I believe this is a misinterpretation of paragraph 18(12)(a) of the Act and of the bulletin itself. That paragraph of the Act provides for two different situations: in his domestic establishment, an individual has (i) his principal place of business or (ii) a place used exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients in respect of the business.
[25] The second case concerns a place that is not the principal place of business because the individual presumably has a principal place of business elsewhere than in the self-contained domestic establishment in which he resides.
[26] The case at bar involves the application of subparagraph 18(12)(a)(i), not (ii). Even Interpretation Bulletin IT-514 provides that the principal place of business may be used for personal purposes since it need not be used exclusively for business in order to meet the requirement of paragraph 18(12)(a). The relevant portion of paragraph 2 of that bulletin states:
. . . The room used by the contractor and the farmer's work space could also be used for personal purposes since they need not be used exclusively for the business in order to meet the 1(a) requirement.
[27] It is also possible for an individual who has his principal place of business at his home to determine the business and personal use percentages for other rooms that are not used exclusively as the main office but are useful for the purposes of the business. On that point, the relevant portion of paragraph 4 of that bulletin states:
... However, the reasonable basis should also take into consideration the personal use, if any, of a work space that is an individual's principal place of business as described in 2 above....
[28] In view of what I consider to be the correct interpretation of subparagraph 18(12)(a)(i) of the Act, the rental losses claimed must be allowed.
[29] Another point concerns kilometrage. The appellant claims 85 percent of the number of kilometers travelled in her car. The auditor allowed her 60 percent. The car was purchased new on November 28, 1994, and when it was sold on October 10, 1997, it had 46,600 kilometers on it. The total number of kilometers for which the appellant was reimbursed in the course of her business activities was 26,474, representing 57 percent, which the auditor rounded out to 60 percent.
[30] Lee Bélanger, an accountant from the appellant's accounting firm, analyzed the kilometrage that the appellant might have travelled in cases where that kilometrage was not reimbursed. She considered the places where purchases had been made for business purposes, such as book stores, and the business trips the appellant made for which kilometrage was not reimbursed; she calculated 6,708 kilometers and, adding it to the above kilometrage of 26,474, obtained a total of 33,182 kilometers, representing 71.2 percent.
[31] The evidence showed that the appellant made a number of business trips that were not reimbursed, either for promotional purposes, to host conferences, or to acquire materials she needed to write her books. She had to meet with teachers, conduct research at libraries, meet with accountants and go to book stores. I must also consider that the appellant did not keep her day planners. I believe that an average of 70 percent would be reasonable in the circumstances.
[32] Counsel for the appellant asserts that the waiver document is not valid for 1995 because the draft assessment was not attached to the form signed by the appellant. The waiver reads as follows (Tab 5, Exhibit A-1):
. . .
WAIVER
The normal reassessment period referred to in subsection 152(4) of the Income Tax Act, within which the Minister may reassess or make additional assessments or assess tax, interest or penalties under the Act is hereby waived for the taxation year indicated above, in respect of:
[TRANSLATION]
All points and changes included in our draft assessment dated November 30, 1998, and all subsequent amendments that will have to be made to the capital cost allowance schedules.
. . .
[33] Counsel for the appellant argued that the draft assessment should have been appended to the waiver in order for that waiver to be valid. He stated that subparagraph 152(4)(a)(ii) of the Act requires that the waiver be filed in prescribed form. This is form T2029, which requires that the matter or matters being waived must be specified in the space provided in order for the waiver to be valid.
[34] Counsel for the respondent argued that the appellant had already thoroughly annotated the draft assessment, as is shown in Exhibit I-2, that the waiver was signed at the accountant's office and that the appellant knew precisely what she was signing, that is to say, a waiver of the limitation period for 1995 with respect to the draft assessment.
[35] I refer to the reasons of Reed J. in Solberg v. The Queen, 92 DTC 6448, at page 6452, where she states that the appropriate approach to interpreting a waiver is to seek to ascertain the intention of the parties in the relevant circumstances. Having heard the appellant and in the circumstances of fact described by counsel for the respondent, I find that the appellant knew that she was signing a waiver respecting the draft assessment dated November 30, 1998, with which she was already very familiar. I further find that it was not essential that the draft be attached to the waiver for that document to be valid because it was specifically referred to in the text of the waiver and the parties had already read it.
[36] The other point raised concerned the trips to Acapulco and Ogunquit. The tickets for Acapulco were purchased on November 21 and 28, 1994, for $1,420.80 for a stay starting on March 2, 1995. In her original return, the appellant had claimed 50 percent and now claims 100 percent. Hotel expenses were $545. The trip to Ogunquit was on May 19, 1995. The appellant stayed at the Sea Castle Resort in Ogunquit and the amount claimed is $245. The appellant contends that she worked on her texts during those trips and that she had needed to get away in order to do so.
[37] Counsel for the appellant relied on the decision by the Federal Court of Appeal in Lowe v. The Queen, [1996] F.C.J. No. 319, more particularly the following passage:
. . . The essential question in the present case, it seems to me, is whether on the facts the principal purpose of the trip was business or pleasure. Here it was found to be the former. Any pleasure derived by the appellant must, in my view, be seen as merely incidental to business purposes having regard to the fact that the overwhelming portion of the appellant's time in New Orleans was devoted to business activities.
[38] The purpose of the trip is a decisive factor. The principal purpose must be business. In Lowe, supra, the purpose was to establish and maintain business relations with the company's clients.
[39] The purpose of the trip here was not to meet clients or to collect the information needed to write a book. This was not a trip to attend a conference or to take part in a seminar. The purpose was to get away temporarily to write or revise texts. These are expenses relating to a place of work.
[40] On the one hand, I find the purpose of the trip to Acapulco was uncertain. Since that trip was planned two months in advance, it is therefore doubtful it had been planned for the purpose of working on texts. What may have happened is that the appellant was unable to complete her workload before leaving and was forced to work on the trip. It is possible the appellant went to Ogunquit for a change of place of work.
[41] On the other hand, even assuming that the purpose of the trip was really to have an isolated place of work conducive to the revision of texts, I do not believe there are any statutory provisions providing for the deduction of trips and stays of that kind. Expenses relating to places of work and travel are governed by specific statutory provisions.
[42] With regard to the provisions concerning place of work, we have seen earlier those governing the principal place of business and the place used exclusively for earning income from a business where they are located in the individual self-contained domestic establishment. That expression is defined as follows in subsection 248(1) of the Act:
"self-contained domestic establishment" means a dwelling-house, apartment or other similar place of residence in which place a person as a general rule sleeps and eats.
[43] That definition does not apply to the temporary places of residence in question. In conclusion, the travel and accommodation expenses relating to the isolated or different places of work located in a temporary residence may not be deducted.
[44] As to the penalties assessed under subsection 163(2) of the Act, the evidence showed that the appellant kept rather good books, that she generally retained her documents, that she acted on advice from her accountants and that she declared all her gross income. I do not believe that the errors she may have made in estimating certain expenses were tantamount to gross negligence.
[45] The appeals are allowed, without costs, to the extent indicated in each point noted above.
Signed at Ottawa, Canada, this 4th day of April 2002.
|
"Louise Lamarre Proulx" |
J.T.C.C.