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Docket: 2005-3160(IT)I |
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BETWEEN: |
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PRAIMLALL MISIR, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeals heard on April 26, 2006, at Toronto, Ontario,
By: The Honourable Justice E.A. Bowie |
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Appearances:
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Agent for the Appellant: |
Harry Kopyto
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Counsel for the Respondent: |
Stacey Sloan |
____________________________________________________________________
JUDGMENT
The appeals from reassessments of tax made under the Income Tax Act for the 2001 and 2002 taxation years are dismissed.
The appeal from the reassessment of tax made under the Act for the 2003 taxation year is allowed, and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is entitled to have taken into account in computing his income for that year, a loss from the Frizzell Avenue property of $1,248.52.
Signed at Ottawa, Canada, this 5th day of May, 2006.
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"E.A. Bowie" |
Bowie J.
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Citation: 2006TCC273 |
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Date: 20060505 |
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Docket: 2005-3160(IT)I |
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BETWEEN: |
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PRAIMLALL MISIR, |
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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
BowieJ.
[1] When he filed his income tax returns for the taxation years 2001, 2002 and 2003, Mr. Misir deducted from his other income the very substantial losses that he claims to have incurred in the operation of a rental property during those years. In reassessing him, the Minister of National Revenue disallowed these losses, taking the position that the rental property in question should not be considered to be a source of income within the meaning of that expression as it is used in section 3 of the Income Tax Act.[1] In reaching this conclusion he was influenced by the fact that Mr. Misir had reported net rental losses for this property from 1987 to 2000 in the following amounts:
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Taxation Year |
Gross Rental Income
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Rental Expenses |
Net Rental Loss
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1987 |
$8,342 |
$11,738 |
($3,396) |
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1988 |
9,600 |
14,542 |
(4,942) |
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1989 |
9,000 |
14,145 |
(5,145) |
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1990 |
9,400 |
17,629 |
(7,229) |
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1991 |
8,280 |
15,511 |
(7,231) |
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1992 |
7,200 |
15,468 |
(8,268) |
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1993 |
7,800 |
16,602 |
(8,802) |
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1994 |
7,600 |
17,647 |
(10,047) |
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1995 |
7,750 |
18,132 |
(10,382) |
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1996 |
7,950 |
18,157 |
(10,207) |
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1997 |
8,350 |
17,912 |
(9,562) |
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1998 |
8,600 |
20,413 |
(11,813) |
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1999 |
4,300 |
17,100 |
(12,800) |
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2000 |
10,300 |
24,840 |
(14,540) |
For the years under appeal the Appellant reported the following income and expenses for the property:
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Taxation Year |
2001
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2002 |
2003
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Gross Rent |
$10,750 |
$11,300 |
$11,600 |
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Total Expenses |
25,405 |
26,165 |
27,985 |
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Net Income(Loss) |
(14,655) |
(14,865) |
(16,385) |
The Minister's alternative position is that the amounts claimed as expenses related to the property were not incurred, or if they were incurred then it was not for the purpose of gaining or producing income, but for his personal benefit.
[2] The property in question is a semi-detached house at 57 Frizzell Avenue in the city of Toronto. It was originally purchased by the Appellant in 1974, and he lived there with his mother and his siblings until 1981. In 1981 the Appellant moved, but other members of his family lived in the house until 1994, when it first became a rental property in which no member of the family lived. According to the Appellant the house is about 100 years old, and it is not in good condition. He described a good deal of work that had been done to repair and improve the electrical system, the plumbing, the back porch, the drains and the roof. He replaced the siding in the 1990s. He said that for the most part work on the house had to be done by contractors, because he lived a considerable distance away and did not have the time to travel back and forth to do major repairs. There also were necessary repairs to be done when tenants moved out, because they were often prone to damage the premises.
[3] The house has two floors, an attic and a basement. The Appellant rents it as two apartments. The upper one has two bedrooms, a kitchen and a bathroom; the lower one has one bedroom, a living room, a kitchen and a bathroom. In 2001 he charged $500 to $550 per month rent for each apartment. Because the building is somewhat run down the tenants tended not to stay very long, he said, and often they owed arrears of rent when they left.
[4] The Appellant's position is that this property is a purely commercial operation, albeit an unsuccessful one in terms of the profit and loss statements over the 17-year period as to which there is evidence. I suspect that there may have been a substantial increase in the value of the property over that period of time, but I have no evidence of that. Counsel for the Respondent argued that the fact that the Appellant lived there for some seven years, and that other members of his family did so for an additional 13 years, gives his ownership of the property an element of personal use for purposes of applying the decision of the Supreme Court of Canada in Stewart v. Canada.[2] I do not agree. There was no suggestion of any sentimental attachment to the premises in the evidence. Nor was there any evidence that the Appellant might put the property to some non-commercial use at some time in the future. There is nothing about the facts of this case that distinguishes it from Stewart. There is no doubt that for purposes of section 3 of the Act, 57 Frizzell Avenue is a source of income for the Appellant.
[5] I turn now to the Respondent's alternate position. It is no exaggeration to say that the Appellant's evidence to support the claims of expenses, which total more than $78,000 for the three years, is frail. Exhibits A-1, A-2, A-3 and A-4 contain estimates of the rents received by the Appellant, and some bills for utilities and other expenses. They were submitted to me without any effort by his agent, or anyone else, to tabulate them, except for a monthly summary of the gas bills that is part of Exhibit A-4.
[6] Unfortunately, the Minister's auditor seems to have applied equally little effort on these reassessments. Convinced, it seems, that the case could be distinguished from Stewart, he did not bother to audit the claimed expenses, but simply allowed the Appellant to deduct sufficient expenses to offset the declared income from the property.
[7] A close examination of Exhibits A-1, A-2, A-3 and A-4 shows that for each of the three years the receipts that the Appellant tendered in support of his claimed expenses total less than half of the amounts claimed. It also shows that in some categories, for example taxes, the expenses claimed and the receipts are similar, but not identical, amounts, while in other categories there is no similarity at all. For example, the Appellant claimed more than $9,000 in each of the years for utilities, but the totals of his receipts for oil, gas, hydro and water for the three years are $3,030.57, $2,947.26 and $3,573.11, respectively. He claimed a total of $4,700 for travel expenses for which he could produce no particulars other than the distance from his house in Etobicoke to Frizzell Avenue. He made substantial claims for management and administration fees, legal, accounting and other professional fees, and salaries and wages. None of these are documented, and the amounts claimed seem quite improbable for a house with two apartments. A letter from the Appellant's insurance company recites the premiums paid by him in the three years on three different policies, with no particulars. It is impossible to say what amounts were paid, if any, to insure the Frizzell Avenue house. It is clear from the summary of estimated rents that is part of Exhibit A-3 that the Appellant, through an arithmetic error, declared rent of $11,600 for 2003, while his own estimate was that he collected $12,236.
[8] Tabulating the receipted expenses and the Appellant's estimates of his revenues from these exhibits produces this result:
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2001
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2002 |
2003 |
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Income
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$10,750.00 |
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$11,295.00 |
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$12,236.00 |
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Expenses
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Utilities |
3,030.57 |
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2,947.26 |
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3,573.11 |
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Maintenance & Repairs |
4,574.19 |
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5,718.09 |
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7,452.35 |
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Taxes |
2,447.00 |
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2,616.03 |
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2,459.06 |
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10,051.76 |
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11,281.38 |
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13,484.52
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Profit(loss) |
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$698.24 |
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$13.62 |
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($1,248.52) |
[9] Of course, the absence of a receipt does not of itself exclude the possibility that a claimed expense may be allowed. In Njenga v. Canada,[3] McDonald J.A. said this:
[3] The Income tax system is based on self monitoring. As a public policy matter the burden of proof of deductions and claims properly rests with the taxpayer. The Tax Court Judge held that persons such as the Appellant must maintain and have available detailed information and documentation in support of the claims they make. We agree with that finding. Ms. Njenga as the Taxpayer is responsible for documenting her own personal affairs in a reasonable manner. Self written receipts and assertion without proof are not sufficient.
[4] The problem of insufficient documentation is further compounded by the fact that the Trial Judge, who is the assessor of credibility, found the applicant to be lacking in this regard.
The degree to which a taxpayer will have to support all his claims for expenses with receipts depends to a large extent on the trial judge's view of his credibility. As Evans J.A. put it in Bullas v. Canada:[4]
... a taxpayer is obliged by law to keep records to support claimed deductions and puts himself in a very difficult position if he fails to do so. Nonetheless, the Tax Court may accept other evidence in place of documentary records. However, it is for the Tax Court Judge, as the trier of fact, to consider the totality of the evidence and to assess its credibility in determining whether the taxpayer has demonstrated that the Minister was in error in disallowing the claimed deductions.
The problem that Mr. Misir has in this case is that neither the statements of his rental income included in his returns for the years under appeal nor his testimony inspires confidence in the accuracy of the claimed expenses. The expenses claimed in all 13 categories for each of the three years are round numbers that end in 0 or 5, which gives rise to the possibility that the numbers are, at best, estimates. Under cross-examination the Appellant admitted that his claims for motor vehicle expense to travel between his home and Frizzell Avenue were just that. He had no contemporaneous records of the rents that he collected, nor of the expenses that he claimed to have incurred, other than the receipts to which I have already referred. The summaries of rents collected that he entered into evidence were, he said, reconstructions made after the fact from his memory and that of other members of his family. The gap between the claims and the receipts is substantial. None of this gives me any confidence in the Appellant's evidence to the effect that he actually incurred these expenses in the amounts claimed.
[10] The Appellant's agent stated in the course of the trial that he could obtain receipts for the claimed "legal accounting and other professional fees", and he sought leave, as he put it, to file them later. He also said that at least some of the amounts claimed had been fees paid to him, presumably for paralegal services. To permit him to add to the evidence at a later time would have required an adjournment of unspecified length. He offered no reason why certain receipts might exist that were not present in Court that day. The Appellant and his agent had some six weeks' notice of the hearing date. The Notice of Hearing sent to them says in large bold type:
PLEASE NOTEthat all relevant documents in support of the appeal must be available at the hearing of the appeal. In the absence of agreement between the parties about the facts relating to the appeal, they must be established by evidence given under oath or affirmation. All witnesses are subject to cross-examination.
Under these circumstances I declined the request to adjourn the trial to obtain evidence that should have been available, if it existed.
[11] There may well have been some other expenses that the Appellant did not establish by means of receipts or other records, but I do not think that this is a case in which it would be appropriate to allow undocumented expenses. The discrepancies to which I have referred leave me with no confidence in the accuracy of the Appellant's income tax returns, or his testimony.
[12] The appeals for the taxation years 2001 and 2002 are dismissed. The appeal for the taxation year 2003 is allowed and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that the Appellant is entitled to have taken into account in computing his income for that year a loss from the Frizzell Avenue property of $1,248.52. I make no Order as to costs.
Signed at Ottawa, Canada, this 5th day of May, 2006.
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"E.A. Bowie" |
Bowie J.
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CITATION: |
2006TCC273 |
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COURT FILE NO.: |
2005-3160(IT)I |
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STYLE OF CAUSE: |
Praimlall Misir and Her Majesty the Queen |
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PLACE OF HEARING: |
Toronto, Ontario |
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DATES OF HEARING: |
April 26, 2006 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice E.A. Bowie |
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DATE OF JUDGMENT: |
May 5, 2006 |
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APPEARANCES: |
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Agent for the Appellant: |
Harry Kopyto |
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Counsel for the Respondent: |
Stacey Sloan |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
N/A |
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Firm: |
N/A |
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For the Respondent: |
John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada |