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Docket: 2002-4155(IT)I |
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BETWEEN: |
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LINDA GILBERT, |
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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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Appeals heard on October 31, 2003 and January 29, 2004 at Toronto, Ontario.
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Before: The Honourable Justice T. E. Margeson |
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Appearances: |
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For the Appellant: |
The Appellant herself |
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Agent for the Respondent: |
Jeremy Streeter, Student-at-Law |
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JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1996 and 1997 taxation years are allowed, without costs, and the matter is referred to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 8th day of April, 2004.
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Margeson, J.
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Citation: 2004TCC283 |
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Date: 20040408 |
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Docket: 2002-4155(IT)I |
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BETWEEN: |
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LINDA GILBERT, |
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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
Margeson, J.
[1] These are appeals from the reassessment of the Minister of National Revenue ("Minister") for the 1996 and 1997 taxation years, concurrent Notices of which were dated April 7, 2000. By the reassessments, the Minister included gross business income in the amounts of $23,272.50 and $18,347.84 respectively, allowed expenses in the amounts of $10,957.69 and $11,442.19 respectively, assessed unreported net business income in the amounts of $12,314.81 and $6,905.65 respectively, and imposed penalties pursuant to subsection 163(2) of the Income Tax Act ("Act") in the amounts of $783 and $348.50 respectively.
[2] In further reassessing the Appellant pursuant to subsection 165(3) of the Act for the 1996 and 1997 taxation years, concurrent Notices of Reassessment thereof dated July 11, 2002, the Minister allowed deduction of additional rental expenses in the amount of $1,500 for each of the 1996 and 1997 taxation years and correspondingly reduced the gross negligence penalties by the amounts of $124.10 and $123.10 respectively.
[3] The Minister took the position that any amount of expenses claimed by the Appellant in excess of the amounts of $12,457.69 and $12,942.19 for the years 1996 and 1997 respectively, were not made or incurred for the purpose of earning income and that they were personal or living expenses.
[4] The Appellant took the position that the expenses claimed in excess of the amounts allowed by the Minister in the 1996 and 1997 taxation years were made or incurred by the Appellant to earn income from a business. She should be allowed to deduct them.
[5] Further, the Appellant took the position that the Minister included in 1996 income, for 1995 work in progress, the amount of $2,180 and did not allow deduction for an allowance for bad debt of $3,200.
[6] At the commencement of the trial the parties agreed to allow into evidence, by consent, Exhibit A-1, which was the auditor's list of disallowed receipts; Exhibit A-2, which was a mileage log and expense listing; Exhibit A-3, calendars for the 1996 and 1997 years; Exhibit A-4, map of Prince Edward Island ("PEI") with client sites noted; Exhibit A-5, a Notice of Appeal with Schedule attached and Exhibit A-6, a bundle of office expense receipts.
[7] The Appellant testified that she was a chocolatier and a chartered accountant as well as a part-time student. She agreed that in 1997 she had $18,347.84 of income which was the amount assessed by the Minister for that year. Everything else appeared to be in dispute.
[8] She also contended that the Minister should have allowed a deduction of $3,200 in the 1996 taxation year as an allowance for bad debt. This was a specific invoice for Design International, which was eleven months overdue at the time the tax return was due and so it was excluded from income. The company subsequently did file for bankruptcy and she received less than $100 for that invoice five years later. Therefore, it should not be included in her income for that year which was assessed in the amount of $23,272.
[9] With respect to the expense claim for office supplies, the Appellant said that she produced receipts for all of these expenses and they were all deductible. Some of them might have to be classified as a business gift or business development advertising but they are deductible.
[10] Counsel for the Respondent was prepared to concede that a certain proportion of the expenses claimed were deductible but the Appellant took the position that all of the receipts submitted were all related to business and none of them were personal so the trial had to continue. The parties agreed that there were receipts for all of the items claimed and that it was not disputed that the amounts were expended but the only question was whether or not they were deductible as business expenses.
[11] There were some exceptions to that, particularly with respect to the category of "office" where there were three items where there were no receipts. This was for the year 1996.
[12] With respect to office expense, the Appellant said that she has one room, and clients come to her office. Sometimes she gives them tea, coffee, juice or water. She has a large window and in front of that window is where they put the recycling bins so that she normally puts flowers or plants in the window so that you are not looking at the recycling bins. Some of the expenses were related to this office.
[13] With respect to the claim for office expense in the amount of $132.18, there were no receipts. She said that she paid them by credit cards. One was for $63.03 paid to Business Depot for computer software. It was related to a tax problem that she had. The purchase was for fish (coat hangers) hooks for people to come in and hang up their coats. It was purchased from one of her clients, Pottery By the Sea. Another part of the expenses was for paper or cartridges for the computer. She also had a receipt for glasses that she had purchased for her clients.
[14] The expenses for books would have been for professional development. One of the expenses for $12.60 was for the Rossignol Winery. She said that she went there for the purpose of trying to contract Mr. Rosssignol as one of her clients. Wine was given to her client who had introduced her to Mr. Rossignol. Another item was an umbrella which she bought for herself on the way to an appointment as it was raining. The amount of $7.86 was for a paper pad and envelopes that were bought in Montreal en route. They were used in her business.
[15] One item for $22.34, was for the purchase of two cassettes which were produced by one of her clients. She bought them to gain more information about her client. The amount of $6.42 was a payment made for sending faxes. Other amounts were for books that she purchased as reference material or sometimes for business development, the art of advertising, promotion or professional presentation.
[16] One item was for a chocolate bar that she had eaten. The amount of $68.99 was for a briefcase. The amount of $15.90 was for a bread pan that she used as a plant and flower holder in her office. The briefcase was for business purposes. She did not know what this $54.33 item was for. The amount of $18.04 was for a child's book. She could not be more specific. It would be a gift for a client.
[17] Her rationale in purchasing those items was that she has many clients who tell her about their families. She thought that this book would be appropriate for her client's family. The $125.09 item was for Edwards Books. She claimed that these were all books that would help her to be better in her business. They were books about office management.
[18] She could not specifically remember what every one of the receipts totalling $154.90 were for, except the $57.49 which she admitted was personal. However, the rest, she said, were all receipts for business purposes such as envelopes, which she buys at the corner store, computer paper, or water for her clients. She only put them in the file because they had been spent for business.
[19] She had made a personal commitment to the chocolate factory and wanted to implement a business plan for it. That would be her first priority. However, she knew that after that, she wanted to come back and become more involved in the company because she thought it had more potential. During the period of what could be referred to as her transition period, the implementation of the business plan, her first commitment was to the chocolate factory and her second commitment was to keep the clients that she had so that when she did move into doing less chocolates, she would still have a business to go to. This meant that she had to maintain her chartered accountant dues, her insurance and other costs.
[20] She had some clients in Toronto and some in PEI. Approximately 60 to 70 percent of her income comes from Toronto from two regular clients and the rest is spread between Toronto and PEI. During this time she had a primary commitment to work at the chocolate factory, at the same time that she was maintaining the clients that she had so that when the chocolate factory commitment lessened, she would be able to develop her business.
[21] In the years 1996 and 1997 she was physically doing a lot of chocolate factory work. She was going to Toronto to deal with her clients as well. She would squeeze in the PEI clients while she was there and then go back to Toronto, as needed, to keep the clients that she had. Her two main clients were associations and they do monthly reports to their boards of directors so that generally she had to be in Toronto once a month to deal with that. That was the reason why she was travelling back and forth between Montreal and PEI so much. She also had a client who lives primarily in PEI but performs in Halifax. She would have to meet him sometimes in Halifax.
[22] She referred to the interest expense item and said that Canada Customs and Revenue Agency ("CCRA") was disallowing an amount which was credit card interest and she provided summaries of all of her credit card expenses in 1996. She referred to Schedules A-3 and A-4, which were attached to her Notice of Appeal.
[23] She noted what were personal expenses and these were usually repaid, so that the expenses which she is claiming, are all business expenses and she paid them on the credit card. The Minister disallowed all credit card interest.
[24] Regarding telephone expenses, after meeting with counsel for the Respondent, she determined that the auditor had based the telephone allowance on a sample of three months, January, February and March for long distance, and she calculated that 50 percent was for business and 50 percent was for personal. She had the telephone receipts in Court. She believed that the telephone in PEI should be fully deductible as it is an expense. They had separate business telephones for the chocolate factory. They had a separate business telephone for the family. The disputed bill was for a third telephone.
[25] The $1,206.02 item, which was disallowed, was related to three different parts. There was a telephone in PEI used strictly for business. The number was 658-2008 and 658-2006 for the children. The one claimed was entirely for the business. It was agreed that the amounts were all expended. In PEI three telephones ring at both businesses, at her office in the chocolate factory, and it also rings in her office and in her house. The primary listing was under "Ron Gilbert". That was the telephone that she used. That was the telephone that she paid for. That was the telephone that was necessary for her business. She paid for the telephone personally. She did not bring the receipts. She had the telephone bill showing that they were paid, that is all. The matter of how they were paid was in issue.
[26] She insisted that all of the expenses for the PEI telephone were business expenses. Further, she said that the auditor allowed none of her basic line in Toronto as a business expense, even though it is the only telephone that she had. The message part and a percentage of the basic service should be a business expense.
[27] For the telephone in Toronto, the auditor did not allow any of the basic costs but because she had a message service and because it was required, she believed that 75 percent of the basic telephone should be considered a business expense. She did not believe that the auditor allowed telephone calls between PEI and Toronto, which was a substantial part of the long distance charges. The sprint long distance was all business and she reiterated that 75 percent of the Toronto bill should be allowed and all of the PEI bill.
[28] With respect to auto expenses, they were set out in Exhibit A-2. Counsel for the Respondent agreed that the number of miles that were recorded were correct although he disputed the amount of the claim when the Appellant was claiming 99 percent for business. The Minister disallowed trips to the airport because he felt that the travel between PEI and Toronto was not a business expense, but all of those trips to the airport or to Moncton, to catch a train and the bus and the mileage required to travel was part of her business expense. This included the trips from her office to the airport.
[29] The Minister allowed 50 percent of the cost of the flights. According to her, the auditor considered her mileage, allowed some, identified specific trips that she said were not business trips and came up with a different percentage for business and personal mileage. The auditor identified trips to the airport and trips made to clients, where there was no money generated and concluded these were not business trips. She used that in determining the percentage of mileage for business and the percentage of mileage for personal.
[30] The $1,874 of disallowed expenses were all related to business trips to the airport and the business trips to clients. Sometimes she would take the train from Moncton because it was cheaper. She also took the bus from Warden to Moncton, which was cheaper. All of these trips to Moncton were related to the beginning or end of her trip to Toronto.
[31] She went through each of the items contained in her Exhibit A-2 that were disallowed by the Minister and explained why each one of those was related to business. She even identified the clients and where she had to go. They had two cars on PEI and she had access to another car at all times other than the one being claimed. She did not claim any automobile expenses prior to July of 1996 because that is when she bought the car in issue. She did incur expenses during that period of time related to business.
[32] In the year 1997, the Minister disallowed $3,502.17 as automobile expenses. She went over her log for 1997 and specifically identified clients, distances and related these expenses to clients that she either had or was attempting to obtain. She used specific and detailed references in each case and explained why the expense should have been deductible. She was meticulously familiar with each of these entries. Her explanations covered the total amount of $3,502.17, which was disallowed by the Minister. The Minister had allowed basically 50 percent of the expenses claimed.
[33] She contested the Minister's position in only allowing one-half of the travel claim of $2,208.12, saying that she had receipts for those items and they all related to business. Her position was that she did not include personal travel in her claim. All of the amounts claimed were for business. These were either airfare, train fare or car rental. These were itemized in her documentation.
[34] She indicated that she made a trip to Kelowna to do some work for a Michael Bird, who was a computer programmer. He apparently was her client in Toronto and was relocating to Kelowna so she went out there to do his year-end but also in the hopes of developing further work. All of her travel expenses related to clients. They generally relate to travel to and from PEI, and in the winter it would be for early flights. No claim was made for personal trips as they were not included in the list.
[35] With respect to travel expenses in the year 1997, she referred to Schedule B-1 of Exhibit A-5 and said that the expenditures were made for the purposes of her business. She was able to give specifics with respect to these expenditures. She was also able to describe the names of the clients to whom the expenses related. She also referred to items expended on car rental, Toronto Transit Commission, parking and taxi receipts in Toronto.
[36] She disagreed with the penalties being levied against her. According to her figures there was no income but there was a loss. She considered the accounting business and the bookkeeping business to be in a holding pattern. She did not deduct the loss in her tax return because she concluded that the Minister might decide that there was no reasonable expectation of making a profit and therefore the expenses may not have been allowed. She did not deduct the loss because she felt that the loss was mainly because she was not devoting the time she should to the business and therefore the expectation of profit issue might arise. There were no issues with respect to her business or her husband's business for the years 1993, 1994 and 1995.
[37] The only reason that there was extra income was because some of the expenses were not allowed. If the expenses are deductible as she claimed, then there was no profit, there was a loss, and therefore there should be no penalties. In 1996, according to her calculations, she had a loss of $3,642.35 and in 1997 a loss of $2,333.93. She believed that the expenses claimed were reasonable and necessary, they were all documented except for an automobile expense claim of $100 where there was a mistake in the receipt and there was one payment at Canadian Tire that she did not have a receipt for but it was for tires. Those are the only items for which there was no documentation.
[38] After the matter was adjourned and brought back for hearing at Toronto, Linda Gilbert was cross-examined. With respect to the $2,180.00 item, she said that it was for work in progress from 1995. She hoped to deduct it but she was unable to say whether it was included in income or not.
[39] With respect to the bad debt of $3,200, again, she said that this was owed by Design Company. She did work in 1996 and sent out an invoice and tried to collect the money. They went into bankruptcy. She provided the name of the Trustee to the Minister. In 2001 she received $95 from the Trustee. She used her best judgment in deciding that it was not collectible.
[40] In cross-examination she claimed that the travel expenses were 100 percent related to business. She now lives in Toronto and this was the case in 1996 and 1997. Her medical coverage is in Toronto. She lived with her daughter and claimed an equivalent-to-spouse deduction.
[41] She went to PEI to do work and returned to Toronto and did work there as well. She also worked in a chocolate factory in PEI. She received employment income. It took a lot of time to do her work in PEI. She had some family in PEI. She went to PEI for the purpose of visiting family, to work and to work in the chocolate factory. She spent large "chunks" of time in PEI. All of the trips that were claimed were to PEI and Toronto except for the one to Kelowna, British Columbia. This was for work that she did for Michael Bird. She charged $395 for the work and she was there a week. She claimed no other expenses. She stayed with her client. She was expecting this to be a very lucrative contract.
[42] With respect to her office expenses, she was referred to the item for $209.24 and she agreed that it contained no name. She did not keep corner store receipts, but it would be for the office. With respect to the interest charge, this stems from her use of her credit card for business purposes. In 1996 it related to the Royal Bank and the Toronto-Dominion credit cards. In 1997 it related to the Royal Bank, Toronto-Dominion and Mastercard accounts. These accounts were in her and her husband's name.
[43] In 1996 there was no zero balance on the accounts when she started using them for business purposes. In 1997 the Mastercard and Toronto-Dominion accounts had zero balances. She used these cards for personal accounts and her husband used them as well. However, the personal accounts were paid right away so that there would be no interest or very little interest charged to the account. These expenses are mostly for her accounting business and were travel expenses. The chocolate factory had its own financing.
[44] With respect to telephones, the only issue was with respect to what businesses the telephones were used for. She was claiming 100 percent of the use of the telephone for long distance purposes for 1996 for the Bell invoice. She calls the number in PEI to collect her messages. This telephone was located at the chocolate factory. However, the primary purpose of the telephone was for her business. She maintained that she did not chat with her husband or her children on this telephone.
[45] For the Toronto telephone, she was claiming 75 percent of the home telephone basic bill plus all costs of the long distance charges. With respect to the PEI telephone number (902) 658-2006, this was in the name of Ron Gilbert. It also was connected to the chocolate factory. It was not listed. It rang in her office, the house and the chocolate factory.
[46] With respect to other expenses, the $100 that she claimed should be disallowed. She was wrong in claiming that. Further, she could not find the receipt for the Canadian Tire amount.
[47] She referred to the automobile, which she purchased and used to travel to PEI. She deducted personal miles from it and claimed the balance. 20 percent of the expenses related to going from Toronto to PEI. She did not need a car in Toronto. It was cheaper to drive to PEI then to go by some other means and then she kept it there for business purposes. She went there to deliver the car for business purposes.
[48] She has been a chartered accountant since 1980. She has prepared income tax returns for people but it is not her expertise. She did some in 1996 and 1997. In 1996 and 1997 she made income from accounting but she made no profit. She reported her income for every year except 1996 and 1997, except perhaps 1995.
[49] She was aware of the reasonable expectation of profit test and that is why she did not report income on her return. In 1995 she was in PEI more than other years. She did not report income in 1996 and 1997. She knew that she was not making money. There were things that she could have claimed but she did not.
[50] In 1996 she had a list of sales and after looking at her expenses she knew that it was hopeless so that is one of the reasons why she did not report her expenses and income. She may have claimed a loss subsequent to the audit. She was not sure about 1995 but the auditor did review it. Her experience gave her the knowledge that she needed to conclude that she would not have made a profit in the years in question.
[51] She did not develop a profitable client basis on PEI but hoped to and hoped to make a choice. She did not want to give up her clients as she would not get them back.
[52] Exhibits R-3 and R-4 were admitted by consent. These were the 1996 and 1997 T1 General returns for the Appellant respectively. They do not provide any net or gross figures for the business.
[53] In July, August and November the chocolate factory was working. In the year 1996, about 51 percent of her travel was for personal purposes and in 1997 it was only about 10 percent.
[54] When she considered the credit card interest claim, very little was related to personal use.
Argument of the Respondent
[55] Counsel said there were three issues:
1. What was the total amount of income in the years 1996 and 1997? He concluded that the proper amount of income in 1996 was $23,272.50 and the proper amount of income in 1997 was $18,347.84.
2. Did the Minister properly determine the deductions?
3. Were the penalties imposed under subsection 163(2) proper?
[56] In considering the 1996 taxation year, he referred to the Reply to the Notice of Appeal, Exhibit A and said that as a result of documents tendered by the Appellant and the position taken by her, the Minister has changed its mind and the Appellant is entitled to more deductions than the Minister initially allowed. He tendered a revised summary of items in issue with respect to the years in question, setting out the amounts that the Minister was prepared to allow, the basis for same and the amounts that the Minister was still contesting.
[57] With respect to the income, there was no dispute with respect to 1997 and that remained at $18,347.84. However, with respect to 1996 there were two items in dispute. The Minister added on the amount of $2,180 as work in progress during 1995 whereas the Appellant wanted to deduct it. The Appellant took the position that it must be reported in previous years and taken out this year. However, it had not been shown by the evidence that it was added into income in previous years, that it was included before, therefore it must be added on to the year 1997.
[58] With respect to the $3,200 figure for bad debt, the Appellant wanted to deduct it. However, it must be added in first and then taken out when it becomes a bad debt. There was no proof that it was included in the 1996 income. The company that owed it went bankrupt at a later date. She also received a small amount of money on the debt one year later.
[59] The Respondent's argument was that it was not a bad debt in 1996. The Appellant did not prove it. It was taken into income in 1996. The evidence suggests that it was not bad in 1996. It may be in 2001.
[60] With respect to travel expenses, counsel for the Respondent argued that at least 50 percent were for personal business. The real issues were her trips to PEI. She was there to serve clients but she was also there to work in the chocolate factory and she was there to visit her own family. If she was in PEI to work in the factory, then the trips back there were not related to her business. The Minister arrived at the 50 percent figure because of the fact that she had clients in PEI. The auditor allowed 50 percent.
[61] With respect to the trip to British Columbia, they were allowing only 50 percent because she was there only one week and she only billed $350 for the work. This was reasonable in the circumstances.
[62] With respect to the 1997 taxation year, the arguments are the same. The Minister has already allowed $3,645.51 for travel expenses. This is more than 50 percent of what the Appellant was claiming and the Minister was staying with that position.
[63] With respect to office supplies, the only items disallowed were those items for which the Minister was not satisfied that there were adequate receipts.
[64] With respect to the matter of interest, the main issue is with respect to the interest charge on the credit cards. These were personal credit cards. They were used to make personal purchases for the Appellant and her husband. The cards are in the names of the Appellant and her husband. There is no way of knowing when the interest occurred, why it occurred and there is no evidence satisfactory to connect up the expense to the business.
[65] These amounts were allowed by the auditor with respect to the bank account and not for the credit cards. If any of the amounts are allowed for the credit cards, it should only be 50 percent. Like the travel, a large portion of the credit card interest was personal.
[66] With respect to the telephone, the Minister allowed 50 percent of the long distance telephone calls whereas the Appellant wanted 100 percent. The auditor went through the bills and found that they related to the chocolate factory. This was not for business purposes (by and large). The telephone rang in the house and the factory. She talked to her husband and other members of the family. She has not shown that this was a legitimate expense for business.
[67] With respect to the basic telephone service in Toronto, the auditor concluded that this was all or nothing. It was her own home telephone and you would have had to have a telephone in any event even if she was not in business. This is completely personal. There is no evidence to how much was personal and how much was business.
[68] With respect to the telephone in PEI, the Minister disallowed the amounts of $779.53 in 1996 and $764.13 in 1997 because the telephone was in the husband's name. It rang in three places. The Appellant has not shown that the PEI number was used for business purposes.
[69] With respect to motor vehicle expenses, the auditor made an error with respect to capital cost allowance. The Minister is now prepared to allow the amount of $795 in 1996 and the amount of $980 in 1997.
[70] The amount of $542.83 which was disallowed, related to invoice discrepancies. The disallowance of $1,213.20 related to mileage where there was no income reported. The $706.09 amount which was disallowed, is the mileage which was deemed to be personal.
[71] Overall, the Appellant has given some evidence with respect to the items which she claimed and many of them were not for the purpose of producing income from a business. They were not business related. The evidence was not satisfactory. The onus has not been met except with respect to the items that the Minister allowed.
[72] In the year 1996, the Minister disallowed the amount of $1,032.48 for motor vehicle expenses because he concluded that this was personal. This included a trip from Toronto where the car was purchased. It was allegedly left in PEI for business purposes. If this contained a business element then it should not be allowed except to the extent of the 50 percent.
[73] Regarding penalties, he argued that these penalties should stand because the Appellant was a chartered accountant and should be familiar with the requirements of the Act. She reported income from the chocolate factory but not from her business. Testimony indicated that she had an ongoing business. He said that she was sure that she was not going to have any net income. This was not so.
[74] Under section 230 of the Act, the taxpayer is required to keep adequate records. There were not adequate records kept here. She did not know what she earned and spent in each year. There was no way for the CCRA agent to find out what she was going to earn. If she did not do it knowingly, then she was grossly negligent in acting like she did.
[75] He referred to the case of Cline-Schuit v. Canada, [2001] T.C.J. No. 869 at paragraph 24 in support of this position. In that case Bowie, J. found that since the returns were prepared by members of her staff, the taxpayer reviewed them herself before they were filed, and she knew that there were personal expenses that had been charged against her business income, he drew the inference from these facts and from the absence of proper records, that she was reckless, at best, in signing and filing her returns. In that case the taxpayer did file a return but in the case at bar the Appellant only filed for her employment income. She said that she did not believe that she would earn income but this is not an excuse. The appeal should be dismissed with respect to the penalties.
Argument on Behalf of the Appellant
[76] With respect to the work in progress, she said that an audit was done by CCRA. She is on the accrual method. Therefore, the income of $2,180.00 belonged in the previous year. It was 1995 work in progress and should have been reported in the 1995 year. It does not belong in 1996.
[77] With respect to the bad debt claim for $3,200, this account was 11 months overdue and therefore it was reasonable to consider it as a bad debt in 1996. She had not received any payment on it. Subsequent events proved her to be correct.
[78] With respect to the travel, the Minister only allowed 50 percent of the travel. This was not correct. She testified in respect to her travel and she should be allowed 100 percent.
[79] In regard to the credit card, the same thing applies. The personal charges were paid as they occurred and there would be no interest charge on them.
[80] Regarding the telephone, she used the Toronto telephone for business purposes. The auditor called her in Toronto. Many taxpayers have such a telephone and can use the expense. The argument that you need a telephone anyway and therefore you should not be able to use it for business is not reasonable.
[81] In PEI, there were three telephones; the chocolate factory, her home and her personal telephone. They are under the same name in order to obtain a better rate. The auditor was aware of the three telephones. She only claimed for the one telephone and she made business calls on her personal telephone.
[82] She presented the mileage log to support her automobile expense claims. She gave evidence about the purpose for the trips. A 50 percent allowance by the Minister is not reasonable or realistic. It did not matter that she was not able to obtain business every time. The receipts that she presented were legitimate. She does not have the missing receipt but she has the credit card reference that she paid that amount to Canadian Tire.
[83] Penalties should be deleted. She knew that she was going to have a loss. Her books were adequate to tell her that she would have a loss and therefore she did not have to report anything. That was her position.
[84] She presented all of these documents at the time of the audit or to the review officer. If all of her expenses were allowed, there would be no income and therefore it would not possible that there be a penalties.
[85] The appeals should be allowed, with costs.
Analysis and Decision
[86] This is a case where it should not have been necessary to proceed to trial. Certainly, it is a case where two full days of trial time on two different occasions, should not have been necessary. Even as late as the end of the first day of trial, the Court gave to the parties a considerable opportunity to try and resolve some of the outstanding issues, but they were largely unsuccessful. This was reflective of the intransience of both parties from the beginning.
[87] There is enough blame to go around for both parties. The Appellant certainly was to blame for not filing her Statement of Income and Expenses. She is a chartered accountant and was experienced in business files, and even if she was not an expert in tax matters, she did indicate that she had done some tax returns. In any event, she should have known that under the Act, it is necessary for businesses to keep adequate records and receipts. She should have known that when the time comes and the Minister questions a taxpayer's income or deductions, the taxpayer has to come up with adequate receipts and records.
[88] In this case, the Appellant took the position that she was not going to have any net income and consequently she would not have to file a Statement of Income and Expense for her business. However, one must ask how she concluded that the Minister was going to be able to determine whether the expenses that she was claiming were proper and, at the end of the day, whether or not there was any net income. This is the purpose of the Act requiring proper records of accounting to be kept for businesses and individuals and, in not doing so, the Appellant sowed the first seeds of discontent.
[89] Further, she argued that she was aware of the "reasonable expectation of profit test" and was concerned that if she filed a return that some of the expenses might not be allowed. This was unreasonable on her behalf and, again, her actions obviously instigated the investigation and audit which took place and which gave rise to this action.
[90] There should have been much more communication between the Appellant and the authorities at CCRA, long before this matter came to trial. Certainly, at the audit stage, the objection stage and the appeal stage there should have been sufficient opportunity for the parties aptly to discuss these differences if they had approached it in a reasonable manner. They should have been able to resolve a large number of the outstanding issues. Fortunately, for the Court, by the end of the hearing, the Respondent was able to produce a Revised Summary of Items in Issue which went a long way to assisting the Court in deciding the issues in this case. As it stands, the Court had to basically conduct a new audit in the matter and without the Revised Summary of Items in Issue, the Court's task would have been even more difficult.
[91] The Court is aware of the fact that distance must have played some part in preventing the parties from communicating to any large extent since the audit took place in PEI, the auditor was located in PEI, and the Appellant was travelling between Toronto, PEI, Halifax, British Columbia and other parts of the country. Perhaps it was difficult for the two sides to meet. However, the Court is satisfied there was not any great motivation to do so.
[92] The Appellant said that she made records available to the Respondent at the time of the audit. If that were the case, then many of these issues should have been resolved before trial.
[93] The auditor was not present in Court to give evidence on this issue or any other issues and so the evidence of the Appellant is all that the Court has on that matter.
[94] In any event, the Court is satisfied that the Appellant did keep records, in some cases very meticulous records, and these records should have been sufficient to allow many of the issues to have been resolved.
[95] There can be no doubt that the Appellant was involved in a business during the years in question, that she made legitimate expenses to earn income and that she incurred expenses that were innate to the business for which she was claiming expenses. On the other hand, the Appellant was at fault in not keeping completely separate her expenses which she alleged were incurred for the purposes of her business and those expenses which would have been incurred for personal reasons, family reasons, her employment with the chocolate factory or the business of the chocolate factory.
[96] This inter-mingling of expenses and charges took place with respect to travel, office supplies, interest, telephone and motor vehicles. In spite of the fact that the Appellant kept meticulous logs, and in many cases was able to point with specificity to clients that she was either servicing or hoping to service, there still was some personal use of the motor vehicle and such expenses are not deductible for the purpose of her business.
[97] On the other hand, the Court is satisfied that the Minister has taken too firm a position on the matters in issue and that some of the expenses that should have been allowed were denied by the Minister and were still in issue at the end of the trial.
[98] The Court will deal first of all with the matter of unreported sales or income. With respect to the matter of $2,180 which is still in dispute, relating to work in progress for work done in 1995, the Appellant seeks to deduct this amount. The Minister argued that it must be shown to have been reported in the previous year's income in order for it to be deducted in the 1996 taxation year. The Court can see no reason for including this amount in the 1996 taxation year. This business was on the accrual method and if the Minister was questioning this amount, he should show it in 1995. This amount should be deducted from the total income in the taxation year 1996.
[99] Further, the Minister says that the amount of $3,200, as a bad debt, should not be deductible because the Appellant has not been able to show that this amount was added into income in the previous year, or that the debt had become bad under the Act.
[100] The Court is not satisfied that the Appellant has established on a balance of probabilities, that the amount of this debt was included in income in previous years. That is the Appellant's responsibility to do. She cannot rely upon the Minister and the Minister's audit to supply this proof. Consequently, that amount will be left in income in the year 1996 and the appeal in that regard is dismissed and the Minister's assessment is confirmed.
[101] With respect to travel in the year 1996, the Court is satisfied that some of this travel was personal. However, it is not satisfied that 50 percent of the travel was personal. A more reasonable figure would be 25 percent in both years. Therefore, the appeal will be allowed in that regard and the Appellant will be entitled to deduct 75 percent of the claimed expenses. For the 1996 taxation year, she will be entitled to deduct the amount of $5,718.18. For the 1997 taxation year, she will be allowed to deduct the amount of $5,176.74.
[102] With respect to office supplies, there are items here which were clearly not deductible and others were questionable. The Court will allow the Appellant to deduct a further 25 percent of the disputed amount. For 1996, she may deduct $2,676.28.
[103] With respect to interest, this is a very difficult area since the Appellant's records really show no break down at all except her own evidence that she paid off the personal items quickly and therefore there would be no interest on those accounts. The Court will allow her to deduct 50 percent of the interest claimed in 1996 of $1,135.61 or $567.80. In the year 1997, the Appellant will be entitled to claim as interest expense the amount of $411.92, or one-half of the $823.85 claimed.
[104] With respect to telephones, as indicated above, there were no clear records kept of when the telephones were used for the Appellant's business, when they were used for the Chocolate factory business or when they were for personal use. Clearly, all of these telephones must have been used for all purposes and under the circumstances, it is impossible to determine exactly what was personal, business or otherwise. Consequently, the Court will allow one-third of the total charges to deduct for business purposes amounting to $440.79 in the year 1996 and $413.49 in the year 1997.
[105] With respect to the motor vehicle expense, the Court will allow a further 25 percent of the amount claimed in addition to the amount conceded by the Minister or an additional $936.25 for a total expense claim in 1996 of $2,807.25. In the year 1997, the Court will allow a further 25 percent of the amount claimed in addition to the amounts conceded by the Minister or an additional $1,441.56 for a total expense of $3,705.65.
[106] The following amounts have all been conceded by the Minister. The Appellant will also be entitled to claim deductions of $754.15 for office supplies in the year 1997; $232.15 in the year 1996 for promotion and meals; $507.97 in the year 1997 for promotion and meals; $518.95 for professional development in the year 1996; $1,305.15 for dues in the year 1996; $1,402.16 for dues in the year 1997; rent of $2,640 in the year 1996; rent in the amount of $2,670 in the year 1997; capital cost allowance of $795 in the year 1996 and $980 in the year 1997.
[107] In light of the circumstances of this case, as set out earlier in these reasons for judgment, the Court will make no order as to costs.
Signed at Vancouver, British Columbia, this 8th day of April, 2004.
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Margeson, J.
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CITATION: |
2004TCC283 |
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COURT FILE NO.: |
2002-4155(IT)I |
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STYLE OF CAUSE: |
Linda Gilbert v. The Queen |
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PLACE OF HEARING: |
Toronto, Ontario |
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DATE OF HEARING: |
October 31, 2003 and January 29, 2004 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice T.E. Margeson |
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DATE OF JUDGMENT: |
April 8, 2004 |
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APPEARANCES: |
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For the Appellant: |
The Appellant herself |
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Agent for the Respondent: |
Jeremy Streeter, Student-at-Law |
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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 |