TAX COURT OF CANADA
IN RE: The Income tax Act
2005-4332(IT)I
BETWEEN:
HANS RUPPRECHT,
Appellant;
- and -
HER MAJESTY THE QUEEN,
Respondent.
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Held before Mr. Justice Paris in Courtroom No. 602, 6th Floor, 701 West Georgia Street, Vancouver, B.C., on Tuesday, August 29, 2006.
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APPEARANCES:
Mr. H. Rupprecht On His Own Behalf;
Ms. S. Cruz, For the Respondent.
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THE REGISTRAR: F. Richard
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Allwest Reporting Ltd.
1125 Howe Street
Vancouver, B.C.
V6Z 2K8
Per: S. Leeburn
REASONS FOR JUDGMENT
(Delivered Orally in Vancouver, B.C. on August 29, 2006)
JUSTICE: Thank you. This is an appeal from reassessments of the appellant's 1999 to 2004 taxation years. The appellant conceded that with the Minister's allowance of his claim for a disability tax credit transfer from a dependent there was no longer any item in dispute for the 2003 and 2004 taxation years, and therefore the appeal for those years is dismissed.
For the appellant's 1999 and 2000 taxation years, the Minister disallowed certain deductions claimed by the appellant in calculating his income from business. In this appeal, the appellant is challenging the disallowance of amounts claimed for clothing, RRSP penalties, Costco membership fees, and the purchase of software.
For the 1999 and 2002 taxation year, the Minister imposed late filing penalties pursuant to subsection 162(1) of the Income Tax Act, and for the 2000 and 2001 taxation years, the Minister imposed penalties for repeat late filing pursuant to subsection 162(2) of the Act. The appellant is challenging all of those penalties.
The facts relied upon by the Minister in reassessing the appellant are set out in paragraph 32 of the reply to the notice of appeal. Those assumptions will form part of these reasons.
I would look firstly with the issue of the disallowed deductions. The first disallowed item was for clothing purchased in 1999 at a cost of $6,014.83 and in 2000 at a cost of $2,420.20. All of the clothing consisted of items purchased at Ermengildo Zegna, an exclusive men's wear shop. The appellant testified that he purchased suits, ties, shirts and accessories. He stated that these were worn for his work as a certified financial planner and only for work purposes. He testified that:
"We had put together an office in Langley and spent approximately $60,000 on it in 1997 or 1998,"
and that he needed suitable clothing to go with the office. He also entered a letter from a sales associate at the Zegna shop in support of his position.
With respect to the Costco fees, the appellant spent $48.15 to renew his membership at the store to enable him to shop for office supplies and items used in his business. The appellant stated that he did not renew his membership in later years because he was able to obtain the necessary products and supplies at other stores.
With respect to the claim for $2,289.47 for the purchase of software, the appellant testified that this was part of a separate business venture undertaken with a friend. The business was connected with the sale of music software, apparently, although it was not clear to me what exact product was involved. The appellant did not say what became of the venture.
Finally, the appellant gave evidence that he reimbursed certain of his clients for RRSP penalties that were imposed upon them for exceeding the foreign content limit of their RRSP. This was done to keep the clients; the appellant felt that they were at risk of going elsewhere for financial planning services as a result of incurring the penalties.
I infer that the penalties arose because investments recommended by the appellant to the client for their RRSP did not perform as successfully as anticipated, causing the RRSP to go offside of the foreign content rules.
On the matter of the late filing penalties, the appellant admitted that each of his tax returns for 1999 through 2002 were late-filed. Furthermore, he did not take issue with the fact that demands were made on him by the Minister to file returns for 2000 and 2001, as set out in the assumptions. However, the appellant testified that he was under duress throughout the years in issue, both in his personal and professional life. The list of factors which created the duress included the death of his mother in April, 2000; the diagnosis of his son with diabetes in September, 2000; a break-in to his car in April, 2001; a break-in to his office on August 28th, 2001; the sale of the business he worked for in the spring of 2002; his move to a new firm at that time; the filing of a complaint about him to the Financial Planning Standards Council of Canada by a co-worker; and the making of allegedly defamatory statements about him by the director of his former company around the time of the sale of the business. The appellant also added that the state of the financial markets in light of the Bre-X and Enron scandals and other well-publicized corporate scandals made his work very difficult.
Particulars of all of these factors were contained in documents entered by the appellant at the hearing.
In support of his claim for the deduction of the disputed expenses, the appellant referred to the following cases: Fardeau v. The Queen, Charron v. The Queen, Symes v. The Queen, and 65302 B.C. Limited v. The Queen. In Fardeau, the appellant RCMP officer was allowed a deduction under Section 8 of the Income Tax Act for items of clothing consumed in the course of his employment. The requirements for deductability under subparagraph 8(1)(iii) are quite different from those for deductability as a business expense. Furthermore, according to the Fardeau decision, the appellant was required by his contract of employment to supply and pay for the items of clothing in issue. I am not persuaded that the circumstances of that case are sufficiently similar to those of the case before me to make that decision applicable.
In the Charron case, the appellant's claim for the cost of a barrister's gown and accessories was allowed to the extent of a deduction of CCA. However, no analysis was provided for the decision, and therefore it is of limited precedential value. The appellant also stated that the Supreme Court decision in Symes v. The Queen did not set out with precision what constituted a personal expense and failed to take into account the definition of the phrase "personal or living expense" in subsection 248(1) of the Act.
The appellant also submitted that since the deduction of clothing expenses is not specifically denied under Section 18, that it should be admitted.
The appellant argued that his deduction of the RRSP penalties should be allowed in light of the decision of the Supreme Court of Canada in 65302 B.C. Limited. To the extent penalties are paid in furtherance of business purposes, he said, they should be deductible and in this case the retention of clients was clearly a business purpose.
Finally, the appellant submitted that the evidence showed that he failed to file his tax returns on time because he was under duress. He referred to a Supreme Court decision in The Queen v. Perka et al. in which the court considered the defence of duress or necessity in relation to a charge of importing marijuana. In my view, it is not necessary to consider this case, given that there was ample evidence to show that the appellant continued to work in his business and to conduct his personal affairs, such that it could not be said his breach of the Act was unavoidable or that, faced with the alternatives, it would have been unreasonable to expect him to comply with the law.
After considering all of the evidence and the submissions made by both parties, I am of the view that the clothing expenditures and software purchase by the appellant are personal expenses and therefore non-deductible in computing income from business. Clothing is prima facie a personal expense. This has been alluded to by the Supreme Court of Canada in the Symes decision at paragraphs 76 and 77.
The deduction of personal expenses is specifically prohibited by subsection 18(1)(h) of the Income Tax Act. The appellant's argument concerning the definition of personal or living expenses in subsection 248(1) of the Act fails to take into account that the definition is not an exhaustive one, but that the particular expenses listed are included in the category of expenses which are considered personal or living expenses. The relevant part of that definition reads as follows:
"Personal or living expenses includes the expenses of property maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by a blood relationship, marriage or common-law partnership or adoption, and not maintained in connection with a business carried on for profit, or with a reasonable expectation of profit."
It is necessary to determine whether an expense is of a personal nature regardless of whether it relates to any property maintained by the taxpayer. Expenses relating to one's personal appearance are the very essence of a personal expense and involve choices made by a taxpayer in preparing him or herself for work. I conclude that the clothing in issue was used by the appellant as personal wear in everyday business and therefore its cost is not deductible.
I am also of the view that the RRSP penalty reimbursements made by the appellant to clients of his business are deductible, as are the costs of the Costco membership fees. It was the appellant's evidence that the penalties were reimbursements of amounts incurred by his clients resulting from fluctuations in the value of securities in their RRSP accounts on which the appellant had input in directly as part of his business. The appellant's assertion that the purpose of the reimbursements was to retain his clients was not challenged in cross-examination, and I accept it as true. Nor was any evidence led to show a non-business or personal purpose for the expenditure. Therefore, these expenditures will be allowed.
I am also satisfied by the appellant that the Costco membership fees were incurred for the purpose of earning income from the appellant's business.
As far as the software expense in 2001 is concerned, it appears it was originally claimed as an expense in the appellant's business as a certified financial planner. At the hearing, the appellant admitted that it was not related to that business but suggested he was intending to start another business involving music software. The appellant has the onus to show that such a business existed at the time the expenditure was incurred. The evidence falls short on this point and the expense is disallowed.
Finally, I am not satisfied that the appellant has established that he took all reasonable steps to comply with the filing requirements contained in subsection 150(1) of the Income Tax Act for the 1999 and 2002 taxation years, or that he has shown any other reason that the penalties imposed by the Minister under subsections 162(1) and (2) should not be upheld.
The appellant conceded that all of the requirements for the imposition of the penalties had been satisfied, but asked that he be excused from paying the penalties because of extenuating circumstances. This Court, in Bennett v. The Queen, has held that a due diligence defence is available to a taxpayer against whom a late filing penalty has been assessed. The Court also pointed out that a high degree of diligence is to be expected from a taxpayer. I am not persuaded that the appellant made all reasonable efforts to file his returns in a timely manner for the four consecutive years in issue. In fact, no evidence at all was presented to show that the appellant had even attempted to prepare and file returns in those years by the filing due dates. I recognize that the appellant faced a number of challenges in those years, but as I said earlier, no evidence was led to relate those difficulties to the task of filing returns or to show that he was incapacitated in any way by their occurrence. Overall, there is insufficient evidence upon which to find that the appellant was duly diligent in attempting to meet the filing obligations contained in the Act. The penalties are therefore upheld.
In summary, the appeal is allowed in part only to the extent that the appellant will be allowed an additional deduction of $233.38 for his 1999 taxation year, and an equal amount in his 2000 taxation year. In all other respects, the appeals are dismissed.
Thank you.
I hereby certify that the FOREGOING is a true and accurate transcript of the proceedings herein to the best of my skill and ability.
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S. Leeburn, COURT REPORTER