Date: 19990425
Docket: 1999-21-IT-I
BETWEEN:
H.R. NIEBOER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
(Delivered orally from the Bench at Fredericton, New Brunswick, on Tuesday, January 25, 2000)
Hamlyn, J.T.C.C.
[1] This is in the matter of H. Nieboer and Her Majesty the Queen; and the appeal notice relates to 1993, 1994, 1995, 1996 and 1997 taxation years. The Amended Reply to the Notice of Appeal was filed on consent of the Appellant. The Appellant has withdrawn her Notice of Appeal for the 1993 taxation year, and I understand the Appellant has agreed to the Minister amending the Reply to the Notice of Appeal to include the 1997 taxation year.[1]
[2] By Notice of Assessment dated July 27, 1998, the Minister assessed the Appellant's 1997 income tax return, adding $2,920 received from the Royal Conservatory of Music to the amount of self-employed income reported by the Appellant.
[3] By Notices of Reassessment dated November 18, 1997, the Minister reassessed the Appellant's 1994, 1995 and 1996 income tax returns to disallow expenses totalling $9,995; $13,995 and $3,586, respectively, claimed by the Appellant against her professional income.
[4] The Appellant filed a valid Notice of Objection to the 1994, 1995 and 1996 assessments and by Notices of Reassessment dated September 15, 1998, the Minister varied the 1994, 1995 and 1996 assessments to permit the deduction of $2,840; $4,532 and $2,391, respectively, which were previously disallowed.
[5] The Appellant filed a valid Notice of Objection to the 1997 taxation year on November 9, 1998 to which the Minister did not reply. In response to that objection the Minister has conceded the position and has stated that the Minister erred in his pleading of the Reply, by adding the amount of $2,920 to the 1997 business income as the Appellant already had included that same amount in the gross business income report at the time of filing her 1997 return.
The Appeal
[6] In response to the reassessments resulting from the Notice of Objection for 1994, 1995 and 1996, the Appellant filed with this Court a brief document dated October 14, 1998 which reads in part: “Re: 1993 and 1994 Tax Reassessments and appeal of 1995, 1996, 1997 Tax Reassessments.”
[7] This is an “appeal to the Tax Court of Canada.” ... “My reasons for appealing are primarily because Revenue Canada is disallowing business expenses as personal expenses.” The Appellant, in the document filed with the Court as Exhibit R-2, expanded on her view of the reassessments in the letter to Revenue Canada, and she also expanded in relation to the expenses in her filed Exhibits A-1, A-2 and A-3.
Minister's Assumptions
[8] In the Minister's pleading are contained the Minister's assumptions. The assumptions were reviewed with the Appellant, and I will read the assumptions (a) through to (u) with the response of the Appellant as given in the course of the proceeding:
(a) the Appellant was a self-employed music teacher during the 1994, 1995 and 1996 taxation years;
The Appellant said in addition to being a music teacher, she was a performer, a conductor, an adjudicator, and an examiner.
(b) the majority of the Appellant's professional income reported in the 1994, 1995 and 1996 taxation years was derived from private lessons and a contract with St Andrews Church as choir director and organist;
In addition, the Appellant added she also derived income from performing, conducting, adjudicating, and examining.
(c) the Appellant's contract with St. Andrews Church was terminated in 1996;
The Appellant stated that the termination was January 1996.
(d) the Appellant claimed amounts in the 1994 and 1995 taxation years as business expenses for which she did not provide documentation to support her claim that the amounts were incurred to earn income from a business;
She stated emphatically, ‘No, this was not true.’ She said she accounted for the receipts and had developed working papers based on receipts.
(e) the said amounts referred to in paragraph (d) claimed by the Appellant were not incurred by the Appellant for the purpose of gaining or producing income from a business;
The Appellant stated her schedules showed it was incurred for this purpose.
(f) the Appellant claimed amounts in 1994 and 1995 taxation years relating to personal expenses as business expenses and capital additions;
The Appellant said they were not personal expenses and she disagreed with the capital addition assessments.
(g) the said amounts referred to in paragraph (f) claimed by the Appellant were not incurred by the Appellant for the purpose of gaining or producing income from a business but were personal expenses of the Appellant;
The Appellant said: ‘No, they were not personal expenses.’
(h) in the 1994 and 1995 taxation years the Appellant claimed amounts relating to capital additions to her personal residence and studio/recording equipment as current business expenses;
The Appellant disagreed with this assumption and said the expenses were for repairs and maintenance.
(i) the said amounts referred to in paragraph (h) relate to a capital outlay and accordingly are considered to be additions to the capital cost of the assets;
She said in her response that the previous paragraph response applied to this one.
(j) the Appellant was entitled to claim a current expense in relation to these capital outlays limited to the amount calculated on a prescribed rate and business usage percent in accordance with section 13 and regulation 1100 of the Act and the Appellant chose not to make this claim;
She agreed with the assumption.
(k) the Appellant resided in an apartment located at 267 St. George Street, Toronto (“Apt 1”) from January 1993 to August 1993;
She said while she believed the 1993 taxation year was statute barred, she also had in this dwelling a business use and therefore had a claim of business use of home expenses.
(l) the Appellant resided in an apartment at 19 Forest Hill Road, Fredericton (“Apt 2”) from August 1993 to August 1994;
She said, yes, she resided there; but there was also in her view a business use in relation to that dwelling.
(m) the Appellant resided in a house located at 184 Forest Hill Road, Fredericton (the “House") from September 1994 until at least December 1996;
She agreed with the assumption; but also maintained there was business use of the dwelling.
(n) the Appellant claimed amounts for ‘business use of home’ in the 1994, 1995 and 1996 taxation years based on business use percentages of: 100% for Apt 1 and Apt 2 in 1993; 50% for Apt 2 in 1994 and 50% for the House in 1994, 1995 and 1996;
She said this was erroneous, she claimed only 50%. The Court will comment on this evidence later in this Judgment.
(o) the actual business use percentages based on the area and usage exclusive to earning income from business was: 5% for Apt 1; 25% for Apt 2 and 40% for the House;
The Appellant disagreed with the allocations.
(p) amounts were claimed by the Appellant as business expenses in the 1994 and 1995 taxation years relating to Apt 2 and the House;
She agreed with the assumption.
(q) the said amounts referred to in paragraph (p), were not deductible in full as business expenses however they were allowed as ‘business use of home’ expenses calculated at the applicable actual business use percentages;
She agreed with that paragraph.
(r) the ‘business use of home’ amounts claimed by the Appellant in the 1994, 1995 and 1996 taxation years were not deductible as claimed and reduced amounts were allowed based on recalculations made by applying the actual business use percentages to revised amounts;
The Appellant agreed with that paragraph and its outcome.
(s) in the 1995 taxation year the Appellant claimed a carryforward of ‘business use of home’ amount from the 1993 taxation year;
She said that is what she understood had happened and she believed that it was credited by a concept known as ‘rolling balances’.
(t) the Appellant’s claim in the 1995 taxation year of the carryforward of the ‘business use of home’ amount from the 1993 taxation year is not permitted in accordance with paragraph 18(12)(c) of the Act which requires that the said amount must be claimed in the immediately following taxation year in which there is business income against which to claim it;
She said that her comment in relation to the previous paragraph applied to this paragraph.
(u) in 1997 the Appellant failed to report self employed income of $2,920 from the Royal Conservatory of Music.
The parties agreed that this issue had now been resolved and will be reflected in the decision part of this judgment.
Issues as Defined by the Pleadings
[9] The issues were set forth in the Amended Reply. The first issue was whether the unsupported amounts claimed by the Appellant as business expenses in the 1994 and 1995 taxation years were properly disallowed as they were not shown to be incurred for the purpose of gaining or producing income from a business.
[10] Secondly, whether the amounts relating to personal expenses claimed by the Appellant as business expenses and capital additions in the 1994 and 1995 taxation years were properly disallowed as they were not incurred for the purpose of gaining or producing income from a business and they were personal or living expenses.
[11] Thirdly, whether the amounts relating to capital items claimed as current expenses in the 1994 and 1995 taxation years were properly disallowed and capitalized as they were outlays in respect of a capital expenditure.
[12] Fourthly, whether the ‘business use of home’ amounts allowed in 1994, 1995 and 1996 taxation years were calculated using the actual percentages of business use of the Appellant’s homes had been properly reduced to reflect the portion of the homes used exclusively to earn income from a business.
[13] Fifthly, whether the carryforward of the 1993 ‘business use of home’ amount was properly disallowed in the 1995 taxation year and allowed in the 1994 taxation year.
[14] And sixthly, whether the amount of $2,920 was properly added to the Appellant’s 1997 reported net business income (now resolved).
The Focus of the Analysis
[15] Basically the focus of the appeal as stated by the Appellant was directed towards deductible expenses and to whether expenses were on capital account or current account.
[16] Generally speaking, if an expense is deductible for accounting purposes, then it will be deductible for tax purposes unless there is a specific income tax provision disallowing the deduction.
[17] If an outlay or expense is made or incurred by a taxpayer in accordance with the principles of commercial trading or accepted business practice and is made or incurred for the purpose of gaining or producing income from his business, its amount is deductible for income tax purposes.
[18] Thus, to be deductible, an expenditure must satisfy two tests: (1) it must be incurred for the purpose of gaining or producing income from a business or property; (2) it must be a current, rather than a capital, expense.
Capital v. Current Expenses
[19] What is the difference between a capital or current expense? There is no single definitive or conclusive test for determining whether an expenditure is of a capital or revenue in nature; however, essentially expenditures can be on account of capital, if they are incurred to bring assets of enduring value into existence.
Documentation
[20] The Court was asked to deal with is the question of documentation. The Respondent said that the Appellant did not provide the tax authorities with the necessary documentation to support her claim that the amounts were incurred to earn an income from a business.
[21] A basic feature of the Canadian tax system is that the taxpayers are relied upon to voluntarily report their income for each taxation year and to estimate the tax payable thereon. One of the results of this tax self-assessing system is that the taxpayer has the burden of proving that an assessment is incorrect because it is assumed that the taxpayer has all of the basic data under his or her control upon which a correct assessment can be made.
[22] This rule is being reinforced by subsection 230(1) of the Act which clearly states:
Every person carrying on business and every person who is required, by or pursuant to this Act, to pay or collect taxes or other amounts shall keep records and books of account (including an annual inventory kept in prescribed manner) at the person’s place of business or residence in Canada or at such other place as may be designated by the Minister, in such form and containing such information as will enable the taxes payable under this Act or the taxes or other amounts that should have been deducted, withheld or collected to be determined.
Analysis
[23] In terms of analysis, on the question of documentation I conclude in general that the Appellant has sufficient documentation to support her expense claims that she has made with some exceptions; however the question remains, are the expenses claimed within the provisions of the Income Tax Act (“the Act”).
Meals and Entertainment
[24] First of all, dealing with meals and entertainment, and promotional expense claims for the 1994 and 1995 taxation years, the Minister denied some of the Appellant’s meal and entertainment and promotional expense claims on the basis that they were not incurred for the purpose of gaining or producing income from a business, and that they were personal expenses of the Appellant.
[25] The Appellant’s evidence indicated that each expenditures could be related to her business activities; could be identified and shown to be directed to specific clients or client groups. As well, her expenditures were directed to organizations she worked with, including the Royal Conservatory of Music and a particular church.
[26] I find that through several documents there is a conclusion to be drawn that the expenses have been documented and while somewhat extensive, they were expended for the purpose of gaining or producing income from her business. The Court will deal with the specific amounts that are allowed at the conclusion of these Reasons for Judgment.
Clothing
[27] In terms of other expenses including costumes, clothing, hair, cosmetics, stockings, glasses for the 1994 and 1995 taxation years, the Appellant’s evidence was directed that these expenditures were all related to her business activities as a performer or an adjudicator, and did not form part of her day to day attire or day to day use; however, I have reviewed the expenditures and the documents that have been filed. The itemized expenses are highly personal and I conclude these expenses in all instances were personal choice items and the specifics of the purchases as found in Exhibit R-4 does not lead the Court to the Appellant’s assertion. I find these expenses were personal expenditures. There is an exception in relation to the Appellants organ shoes, but I could not ascertain from the evidence the detail of the organ shoes expenses and so they are disallowed.
Professional Development and Concert Tickets
[28] The Appellant maintained that her attendance at concerts was part of her professional development and her attendance at seminars was part of her professional development. I had some problems with this part of the claim. The specifics of the disallowed expenses related to items that were either unspecified or unclear, and on the evidence they were not directly addressed by the Appellant, and as such I conclude that they were not deductible for the 1994 taxation year.
[29] For the 1994 taxation year the question of concert tickets – the Appellant’s evidence was that these tickets related to expenditure for students who attended concerts as part of their curriculum with the Appellant and reported back to the Appellant in relation to the concerts. The expenditure was $117 and I find it to be a business expenditure.
Music Expenditures
[30] The Music Expenditures for 1994 and 1995 related to music scores, to batons, to pipes, the tapes, the CDs, et cetera. The Appellant’s position is that these expenditures were for business activities and this essentially was not challenged by the Respondent; however, the Appellant maintains the music expenditures did not have a useful life of more than one year and that they were currently consumed. The Respondent’s position was the music expenditures had a larger life, had an enduring benefit, and such expenditures were to be treated as capital outlays pursuant to the Act.
[31] Once again my function is to review the evidence that was tendered. The Court concludes that the expenditures titled under the heading of music were capital in nature. They form part of the Appellant’s assets and in accordance with the Act should be capitalized.
Studio and Recording Expenses
[32] The Appellant sought to deduct expenses in relation to her studio by stating expenditures for Christmas trees, Christmas decorations, tapes, rechargeable batteries, drapes et cetera; were for the exclusive use of her business clients.
[33] After hearing all the evidence and reviewing Exhibit R-4, the Court’s conclusion is that these expenditures were not related, except in a peripheral way, to the gaining or producing of income. They were personal to the Appellant and the Court finds that these expenditures characterization for tax purposes should be personal and not deductible as business expenses.
Garden Expenses
[34] For the 1995 taxation year $2,439.45 was claimed as business use home expenses to landscape the Appellant’s property. The Court is not convinced that these expenditures were for the purpose of gaining or producing income, although once again the Appellant argued that they were and it was tailored to her specific clientele. The Court concludes on the totality of the evidence that these expenses were personal for the Appellant and therefore not deductible.
Repairs and Maintenance
[35] Also, for the 1995 taxation year under the heading of repairs and maintenance – this was a general category that had several things in it – insecticide, felt pads, snow shovelling, cleaning supplies, sand paper, glue, curtain rods, rubber boots, et cetera. The Court concludes from the evidence and the totality of the evidence that these expenditures were related to daily living costs and were personal to the Appellant; however, the Court concluded that there were certain exceptions and finds that these expenditures have been proven and this goes back to the documentation point, that in relation to certain renovations $636 should be allowed on capital account; $30 in relation to piano tuning should be allowed as a current expense; $284 in relation to an eaves trough should be allowed as a current expense; and $31.60 in relation to a sump pump expenses should be allowed as a current expense.
Business Use of the Home
[36] Now we come to business use of the home for 1993, 1994, 1995 and 1996. The reason 1993 is included is because of the roll over provision that is provided in the Act and that affects 1994 and the subsequent years.
[37] The question is, what are the total expenses and what square footage of use in the Appellant’s various homes was used for the business use of the home?
[38] Now going back to the Amended Reply and interpreting the Reply to Notice of Appeal the Appellant claimed amounts for work space in the home in the 1994, 1995 and 1996 taxation years based on the following business use percentages. In 1993, apartment 1, 100%; apartment 2, 100%. In 1994, apartment 2, 50%; house, 50%. In 1995, house, 50%. In 1996, house, 50%.
[39] The Minister assumed the percentage of the total square footage of the home that the Appellant used for business purposes was as follows: for 1993 the apartment 5%; for apartment 2, 25%. For 1994, apartment 2, 25%; for the house, 40%. In 1995 for the house, 40%. For 1996, 40%.
[40] In this area I had some problems with the evidence; and the percentage use is a question of reviewing the evidence and finding an answer. Apartment 1 in Toronto was apparently a very small apartment, and the Appellant’s client’s base was not that large. There seems to be some argument between the Appellant and the Crown how much it was, but it was not a large client base. The Appellant from the evidence and from what I saw in the documentation that was filed as exhibits, lived in virtually the same area that was used for the business use of the home. Apartment 2 in Fredericton was a larger apartment and the client base was much bigger and in that same space the Appellant also used as her personal living space.
[41] The evidence of the Appellant on this issue (square footage usage) was conflicting in that the Appellant said in relation to apartment 1 in Toronto (and the Fredericton apartment) she only claimed 50%; whereas her tax return according to the tax return that was filed, was a claim of 100%. This caused the Court some difficulty.
[42] There was also some conflict in relation to the Fredericton property (the “house”) as to the amount of taxes that were paid. The Appellant’s evidence was one figure, the Crown’s evidence was another figure, and I have resolved that question in finding that the Crown’s position was not dislodged.
[43] In Exhibit R-5 the Minister develops a percentage for the business use of the home. In his determination he took into account the common areas, and took into account personal use; in another taxation year in relation to the Fredericton house; the Minister also accounted for another unrelated business use, that is, a room and board operation.
[44] In summary, the Minister concluded that the Toronto apartment (apt. 1) the business in the home use was 5%, for the Fredericton apartment (apt. 2), 25%, and for the Fredericton house 40%. The Appellant’s argument was that the music business clients had full and extensive use of the Appellant’s business facilities and that her allotment is correct and should be accepted. However, the Court had to consider all the use evidence including the common use areas and the evaluation of evidentiary conflicts. The Court finds the evidentiary conflicts were resolved in favour of the Crown’s position; as the Court concludes that the Minister’s use assumptions which the Appellant had the onus to dislodge have not been dislodged; and on that basis the Minister’s allotment of percentage uses were correct.
Decision
[45] For the 1994 taxation year, the appeal is allowed and is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is entitled to deduct $2,588 for meals and entertainment and $177 for tickets. The amount of $2,159 expended for music and supplies is on capital account.
[46] For the 1995 taxation year, the appeal is allowed and referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is entitled to deduct $1,595 for meals and entertainment, $30 for piano tuning, $284 for maintenance and repair of the eaves and $31.60 for maintenance and repair to the sump pump. The amount of $2,224 expended for music and supplies is on capital account. The amount of $636 for renovations, repairs and maintenance is on capital account.
[47] For the 1996 taxation year, the appeal is dismissed.
[48] For the 1997 taxation year, the appeal is allowed and referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Minister erred in adding $2,920 to the Appellant’s 1997 business income.
Edited and signed at Ottawa, Canada,
this 25th day of April 2000
"D.Hamlyn"
J.T.C.C.
[1] In relation to 1997 there was a technical defect in terms of when the matter was appealed; however, the parties are now content in dealing with the 1997 taxation year as part of this appeal.