Tax Court of Canada Judgments

Docket: 2004-3585(IT)I

BETWEEN:

RUDOLF DESOUZA,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeals heard on September 14, 2005, at Toronto, Ontario

By: The Honourable Justice A.A. Sarchuk
Appearances:
For the Appellant:	The Appellant himself
Counsel for the Respondent:	Paolo Torchetti

____________________________________________________________________

JUDGMENT

          The appeals from assessments of tax made under the Income Tax Act for the 2000 and 2001 taxation years are dismissed.

Signed at Ottawa, Canada, this 17^th day of November, 2005.

"A.A. Sarchuk"

Sarchuk J.

Citation: 2005TCC746

Date: 20051117

Docket: 2004-3585(IT)I

BETWEEN:

RUDOLF DESOUZA,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Sarchuk J.

[1]      These are appeals by Rudolf Desouza from assessments made by the Minister of National Revenue disallowing his claim that expenses of $7,755 and $15,374 incurred in the course of his employment with Vaughan Engineering Associates Limited (Vaughan) in the 2000 and 2001 taxation years, respectively, were employment expenses that were deductible by him.

Background

[2]      In computing income for the 2000 and 2001 taxation years, the Appellant deducted other employment expenses in the amount of $12,055 and $17,069. No details regarding the expenses claimed were provided by the Appellant at that time. On June 27, 2002, Canada Customs and Revenue Agency sent a letter to the Appellant with respect to his 2001 income tax return and asked him to provide a form T2200, Declaration of Employment Conditions ("T2200"), completed and signed by the Appellant's employer to confirm the conditions of his employment for that year. He was also asked to provide a breakdown of his claim for other employment expenses and provided him with form T777, Statement of Employment Expenses ("T777") for this purpose. The Appellant responded by completing the T777 for 2001, and reported expenses of $17,309 therein, and also submitted the required T2200 signed on July 16, 2002 by Brenda King, chief financial officer of Vaughan.[1] The latter set out the period of the Appellant's employment as July 2000 to February 2001, and the response "No" to the following questions:

5(a)       Did this employee receive a repayment of the expenses he or she paid to earn employment income?

6(a)       Did you require this employee to pay other expenses for which the employee did not receive any allowance or repayment?

9(a)       Did you require this employee under a contract of employment to:

·         Rent an office away from your place of business, or use a portion of his or her home?

·         Pay for a substitute or assistant?

·         Pay for supplies that the employee used in his or her work?

9(b)       Did you or will you repay this employee for any of the expenses in 9(a)?

[3]      Following further discussions with a representative of the Respondent, on September 10, 2002, the Appellant forwarded a T777 for the 2000 taxation year, and Statements of Expenses for the 2000 and 2001 taxation years to CCRA, and reiterated his claim for expenses in the amounts of $23,129 and $17,069, respectively.[2] Based on the information provided, the Appellant was reassessed on July 31, 2003 and a substantial portion of the expenses claimed were denied.

[4]      On October 30, 2003, the Appellant submitted a Notice of Objection along with revised Declarations of Conditions of Employment for taxation years 2000 and 2001. These documents appear to have been prepared by the Appellant for signature by Ray Halsey, senior vice-president, Vaughan Engineering, as of December 31, but neither document was signed.[3] As contrasted to the previous Declaration of Brenda King, submitted by the Appellant, in this document the responses to questions 6(a) and 9(a) were "Yes" rather than "No". Further discussions appear to have taken place and on December 19, 2003, the Appellant was granted an extension of time to serve Notices of Objection for the taxation years in issue. On February 13, 2004, the Appellant submitted another set of Declarations of Employment which were identical to the previous Declarations submitted in October, but were signed by "Ray Halsey". These also appear to have been prepared by the Appellant. The material submitted was considered, and the reassessments of tax for the two years in issue were confirmed by CCRA on March 12, 2004.

Appellant's position

[5]      In filing his returns for the taxation years in issue, the Appellant claimed employment expenses incurred in the carrying out of his duties with Vaughan as follows: automobile expenses, including registration, insurance, car rental, and parking; food, beverage and entertainment; cell phones; advertising and promotion. In the course of his testimony, the Appellant stated that he accepted the Minister's assessments with respect to all of the expenses, save one, that being the costs incurred to engage an assistant. According to the Appellant, this item reflects, in American currency, the amount of "approximately US$7,000 expended in taxation year 2000, and US$950 in 2001", paid to Shirley Tash (Tash). He maintains that he is entitled to the deductions and relies on the statement of his employer in paragraph 9(a) of the third T2200 submitted in 2004, that "required him as an employee to pay for his substitute or assistant". In this context, the Appellant contends that the first Declaration signed by Brenda King was, in his words, "false" and was "an erroneous form" prepared and signed "by a person that had no knowledge whatsoever about what my terms and conditions of employment were". On the other hand, he says that he reported to Halsey, who was his immediate supervisor, and that accordingly, the documents executed by Halsey that were ultimately forwarded to CCRA in 2004, should be acted upon.

[6]      With respect to the payments to Tash, the Appellant stated that his primary task at Vaughan was to develop business for the firm, and in particular, "to develop United States business to be done in Canada, and Government contracting". For this purpose, Tash was specifically hired to research "the United States Commerce Business Daily, which is a periodical that comes out daily, on Monday though Friday, and it lists all Government contracts and awards made within the last 24 hours". The objective was, he said, to obtain "leads as to where the Government contracts were" with the "intention to develop business for the firm in Halifax". He testified that she worked "about at least 12 hours a day" and that he spoke to her "on a daily basis, maybe five or six times". All communications were by telephone and Tash provided no written memoranda or reports, and although the Appellant did say that "findings" made in the course of her research were transmitted by email, none were produced. He also said that he kept track of her time "verbally", but had no documents, other than phone records with respect to these conversations, none of which were on hand to present to the Court.

[7]      The Appellant also testified that he did not pay her an hourly wage, but rather "paid her a lump sum of approximately US$950 per month". This amount was for "12 hours a day of work, for five days per week", and was a "firm fixed price that I agreed verbally and we came up with that". The Appellant produced a handwritten list of the payments made to Tash, which he had forwarded to CCRA, together with his "customers" copies of the money orders. The actual amount paid to Tash during the relevant period was US$10,686.[4]

Respondent's position

[8]      The Minister's position is relatively straightforward. First, the amounts in issue are not deductible because they do not meet the full requirements of subparagraph 8(1)(i)(ii) and subsection 8(10) of the Income Tax Act, and second, they are not deductible because they were not incurred for the purpose of gaining or producing income. Furthermore, with respect to taxation year 2001, counsel argued that no expenses had been incurred in that year since the amounts in issue were in fact paid by the Appellant to Tash in 2000.

Conclusion

[9]      The Appellant's acceptance of the Minister's determination with respect to all but one of the employment expenses, reduces the issue to whether the payments made by the Appellant, in either or both of the two taxation years in issue, as salary to an assistant, are deductible, and if so, the amount of the expenses to be allowed. The determination of this issue comes down to two questions.

(a)       which of the Declarations of Conditions of Employment is to be accepted?

In this context, it is necessary for the taxpayer to comply with the provisions of subsection 8(10) of the Act which read:

8(10)     An amount otherwise deductible for a taxation year under paragraph 1(a), (f), (h) or (h.1), or subparagraph (1)(i)(ii) or (iii) by a taxpayer shall not be deducted unless a prescribed form, signed by the taxpayer's employer certifying that the conditions set out in that paragraph or subparagraph, as the case may be, were met in the year in respect of the taxpayer is filed with the taxpayer's return of income for the year.

and

(b)      if it is concluded that the Appellant was required by the terms of his employment to pay for the cost of an assistant, does the evidence provide adequate proof of the performance and value of those services? In this context, a subsidiary question is whether amounts paid for the period of time prior to the commencement of his contract with Vaughan are deductible.

[10]     I have substantial concerns regarding the documents submitted by the Appellant with respect to the conditions of employment. The initial request by CCRA for the T2200 was made in June 2002 when the Appellant's returns were under review. He complied by forwarding a Declaration signed by Brenda King, the chief financial officer of Vaughan, on July 16, 2002, and raised no issue with respect to the employer's responses to the questions in 9(a) therein. The next set of Declarations submitted by him on or about October 30, 2003 were unsigned and were most likely prepared by the Appellant himself in response to the Minister's proposed assessment. Subsequently, at the objection stage, by letter dated February 13, 2004, the Appellant produced and forwarded to CCRA a third set of Declarations which bear the signature R.J. Halsey, and show the date of signature as being December 31, 2000 and December 31, 2001. The Appellant had absolutely no recollection of when Halsey signed these documents and conceded, in the course of his testimony, that these documents were dated in that fashion because, he said, it was necessary for him to "make it retroactive to December 31, 2000". Nonetheless, the Appellant maintains these documents support his position that the amounts paid "for clerical help amounting to US$10,686" were expenses which were not reimbursed by the employer, and therefore deductible to him. He further maintained that the forms signed by Brenda King which he previously submitted "were erroneous and have been superseded by the forms faxed herewith".[5]

[11]     In the course of his cross-examination of the Crown witness, Deborah Chapman, the Appellant challenged the Minister's acceptance of the T2200 signed by Brenda King which had originally been submitted by him, and the following exchange took place:

Q.         When did you speak to Brenda King?

A.         On January 20, 2004 and also on February 23, 2004. I had contacted - -

Q.         But Brenda, - - go ahead.

A.         On those dates.

Q.         Did Brenda King indicate to you that Ray Halsey was no longer an employee of the company?

A.         That was one of the points that she had indicated to me, yes, when I asked her.

Q.         Did you ask Brenda King why there is a discrepancy in the boxes checked on page 2 of that document I just showed you, which says the rent for office away from business, "yes", "yes", "yes", and "no"?

A.         She had indicated that as a matter of policy and practice of Vaughan Engineering that all T2200 forms are sent to corporate services division for completion. She indicated that employees are not required to hire assistants. She indicated that you contacted her to ask that she amend the T2200 Declaration of Conditions of Employment for the 2000 and 2001 years, and she advised you that she could not.

Q.         Did she say why?

A.         She indicated that the form was completed correctly.

Q.         Okay. Did she indicate to you that the form has since been modified by Ray Halsey who was a bona fide senior vice-president at the same level as her, or a higher level than her, in the corporation?

A.         He's not able to complete the forms and provide them to employees at any time, nor after he no longer works for the company. As I said, the forms are to be completed by the corporate services division. She was the chief financial officer. She completed it. She had indicated to me that the answers were completed, the responses to the questions were completed correctly.

I am unable to accept the Appellant's assertion that the Declaration signed by Brenda King was in his words "false" and that it was "an erroneous form" prepared and signed "by a person that had no knowledge whatsoever about what my terms and conditions of employment were". I have also concluded that the T2200 form signed by Halsey and submitted by the Appellant in 2004, is not reliable for a number of reasons. First, Halsey had left the company at some point of time in 2003 and was no longer an officer of Vaughan in February 2004, and would not have been in a position to examine the relevant corporate documents with respect to the contract entered into by the Appellant and Vaughan. Furthermore, he was no longer entitled to speak on behalf of the employer. Given the conflicting T2200 forms, all of which were submitted by the Appellant, the onus rested with him to have Halsey testify to clarify the conditions of employment and explain the inconsistencies. This the Appellant did not do.

[12]     It is appropriate to add that even had I reached a different conclusion with respect to the T2200 forms, I would have dismissed the appeals. First, I note that of the amounts listed as paid, the first seven, totalling US$4,972, predated the June 2000 commencement of his contract with Vaughan. The balance of some US$5,700 reflects amounts sent to her during the period August 1 to December 22.[6] The Appellant, however, maintains that he was hired to develop new business for the company and that he had actually commenced working for Vaughan in February 2000, and that the expenses incurred prior to June were deductible. However, he also testified at another point of time that prior to July 2000, he did not have a contract with Vaughanalbeit he was "in negotiations". He made similar comments with respect to what he referred to as "his continuing employment" as an independent contractor after February 2001 and for the balance of that year. Aside from being inconsistent, the latter comments fly in the face of the fact that the Appellant was the recipient of employment insurance benefits in the amount of $7,847 in taxation year 2001. Second, with specific reference to the cash payments made to Tash from June to December 2000, it was conceded by the Appellant that no memoranda or reports were provided by her. Nor is there any evidence as to the subject matter or nature of the information she may have been providing and its relevance with respect to his employment by Vaughn. Given that her responsibility included, among other things, the assessment of documents and other material for the Appellant, some evidence should, and could, have been provided with respect to her credentials, or other evidence capable of establishing the fact that she was qualified in this particular field. The Appellant did say he received email from her, but there is nothing before the Court on the basis of which it would be possible to assess the scope and value of the services she rendered.

[13]     It has been stated on a number of occasions that the income tax system is based on self-monitoring. This, in essence, means that the burden of proof of deductions and claims rests with the taxpayer. Accordingly, it is necessary for the Appellant to maintain and have available all necessary information in reasonable detail, as well as the necessary documentation to support the claims that he is making. That is not the case here.

[14]     For the foregoing reason, the appeals are dismissed.

Signed at Ottawa, Canada, this 17^th day of November, 2005.

"A.A. Sarchuk"

Sarchuk J.

CITATION:

2005TCC746

COURT FILE NO.:

2004-3585(IT)I

STYLE OF CAUSE:

Rudolf Desouza and Her Majesty the Queen

PLACE OF HEARING:

Toronto, Ontario

DATES OF HEARING:

September 14, 2005

REASONS FOR JUDGMENT BY:

The Honourable Justice A.A. Sarchuk

DATE OF JUDGMENT:

November 17, 2005

APPEARANCES:

For the Appellant:

The Appellant himself

Counsel for the Respondent:

Paolo Torchetti

COUNSEL OF RECORD:

For the Appellant:

Name:

N/A

Firm:

N/A

For the Respondent:

John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada

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