Date: 20000823
Docket: 98-1640-IT-G
BETWEEN:
AZIZ MÉRABET,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
P.R. Dussault, J.T.C.C.
[1] I am rendering my judgment in the case of Aziz Mérabet (Court file No. 98-1640(IT)G), and I do so by referring—as I asked you to do for the purposes of your arguments—to the Reply to the Notice of Appeal, in which the various issues are dealt with. I will begin with paragraph 12, which reads as follows:
[TRANSLATION]
Must the interest income of $10,567, $11,133 and $8,137 be added to the appellant's income for the 1991, 1992 and 1993 taxation years, respectively?
[2] My decision on this is yes. Those amounts must be included in the appellant's income. The respondent used subsection 56(4.1) of the Income Tax Act ("the Act"), which seems to me to be applicable here in view of the evidence provided.
[3] I hasten to add that it would have been possible simply not to add that income and to disallow all the interest paid—thus, not to add the interest earned by Mr. Mérabet's son, which was added to Mr. Mérabet's income, and to disallow all the interest paid, since there is definitely no reasonable expectation of earning income where 12 percent interest is paid to receive interest at a rate of 8 percent.
[4] The mathematical result would have been exactly the same as adding income under subsection 56(4.1) and disallowing just the excess interest of $1,799 for 1991 and $6,281 for 1993.
[5] This also takes into account paragraphs 17 and 18 of the Reply to the Notice of Appeal.
[6] I turn now to paragraph 13, which reads as follows:
[TRANSLATION]
For the 1991 to 1993 taxation years, can the appellant deduct from his income rental losses of $8,635 and $3,145, respectively?
[7] My answer is no. There is no reasonable expectation of profit here insofar as, first of all, we must note the personal element of renting rooms to family members, namely the appellant's son, parents and brother. In the end, what those people actually did was pay part of the claimed expenses. With the figures that were given, it is obvious that there is absolutely no reasonable expectation of profit. What is involved is clearly what the Act refers to as personal or living expenses. I refer to paragraph 18(1)(h) of the Act, which states:
[N]o deduction shall be made in respect of personal or living expenses of the taxpayer, other than . . . .
[8] The exception is not applicable in the case at bar. Subsection 248(1) of the Act defines "personal or living expenses" as follows:
. . . the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit.
[9] With regard to 1991, I must also note that the appellant did not even own the home in which rooms were rented. The assessment is therefore confirmed with respect to paragraph 13 as well.
[10] Paragraph 14 reads as follows:
[TRANSLATION]
For the 1992 taxation year, is the amount of twenty-two thousand eight hundred and fifty dollars [and here I make a correction by substituting eight hundred and fifty-one dollars and seventeen cents for eight hundred and fifty dollars] claimed as part of the appellant's business expenses deductible from the appellant's business income?
[11] My answer is no. There is absolutely no evidence that that $22,000 or so in expenses was wrongfully disallowed.
[12] First of all, the expenses claimed under a number of headings contain an indeterminate percentage of personal expenses; such is the case for the use of the vehicle, and a breakdown of the expenses claimed, allowed and disallowed can be found on page 3 of the Reply to the Notice of Appeal, in paragraph 4(b)(i).
[13] In particular, the evidence shows thatunder the headings "Maintenance and Repairs" and "Motor Vehicle" there is an indeterminate percentage of personal expenses, first for the appellant's use of his vehicle, which he said he used to go to work—and that is a personal expense, never a business expense—and second for the use of a second vehicle by his spouse.
[14] As for the expenses relating to the use of a vehicle for business purposes, the evidence definitely does not make it possible to go beyond the 25 percent allowed, especially since the appellant did not keep any record of his trips.
[15] With regard to the other expenses disallowed under the various headings, there is nothing other than the appellant's testimony to enable one to connect them to the business. The evidence is merely a general assertion, without any specific or detailed explanation of the nature of the expenses and how they may be related to the operation of a business.
[16] The fact that the appellant has already claimed personal expenses in connection with car expenses suggests that here too an indeterminate proportion of the claimed expenses could be personal in nature.
[17] It is therefore on the basis of insufficient evidence that I find myself unable to vary the amount of $22,851.17 that was disallowed.
Paragraph 15 reads as follows:
[TRANSLATION]
For the 1992 and 1993 taxation years, is the appellant entitled to business-use-of-home expenses?
My answer is yes for 1992, and I refer here to subsection 18(12) of the Act, which states:
Notwithstanding any other provision of this Act, in computing an individual's income from a business for a taxation year,
(a) no amount shall be deducted in respect of an otherwise deductible amount for any part (in this subsection referred to as the "work space") of a self-contained domestic establishment in which the individual resides, except to the extent that the work space is either
(i) the individual's principal place of business, or
(ii) used exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business.
[18] I think that, basically, the reason the expenses were disallowed can be found—and I referred to it earlier—in subparagraph (nn) of paragraph 11 of the Reply to the Notice of Appeal. That subparagraph is on page 9, and it reads as follows:
[TRANSLATION]
The living room of the appellant's home was not used exclusively for the purpose of earning income from business and for meeting clients.
[19] During argument, the appellant referred to the use of both the dining room and the living room, one as an office and the other to see clients.
[20] However, what I was able to determine during the evidence, during Mr. Mérabet's evidence in chief or during his cross-examination, is that this was his only place of business. As a result, I am prepared to allow the expenses on that basis, since that is an alternative. It is not only the principal place of business but the only place of business, so I am prepared to allow the expenses on that basis.
[21] However, I must go into detail, and the answer is therefore yes, in principle. The appellant reported $9,450 in business income for that year. The allowed expenses were $5,293.48, and I have not allowed other expenses referred to in the preceding paragraph. There is therefore a balance of $4,156, income of $4,156, available for 1992 to absorb that home office expense.
[22] By your own admission, Mr. Mérabet, your home office expenses were $3,969 and not $9,382 that year. That $3,969 in expenses can therefore be deducted, leaving income of $187 after the deduction.
[23] I will apply the same principle for 1993, except that I cannot give the same answer because I do not have the particulars for 1993. Taking the 1993 income, if all the expenses were allowed as given to me, there would be a $6,895 loss here. So there is already a $6,895 loss here, and you said that your expenses in this regard were $4,414 and not $3,185.
[24] Thus, whether one takes one amount or the other, it seems to me that there cannot be a deduction for 1993 as such. However, I am not saying that the expenses may not be carried over to future years.
[25] On this point, therefore, the assessment is referred back to the Minister for reconsideration and reassessment for 1992 only.
[26] It was agreed to strike out paragraph 16, so that settles that question.
[27] I have already dealt with paragraphs 17 and 18 in connection with paragraph 12—they concern the excess interest expenses that were disallowed.
[28] Paragraph 19 is no longer an issue, so I will not deal with it.
[29] The question in paragraph 20 is as follows:
[TRANSLATION]
For the 1991, 1992 and 1993 taxation years, are there losses incurred by the appellant in practising his profession that were not used and may be carried over to 1991, 1992 and 1993?
[30] I have no details for 1991, but there does not seem to be any business loss.
[31] There is income for 1992, so there is no loss that could be carried over. For 1993, I see that there is a business loss. In principle, insofar as there is a loss, it may be carried over if it cannot be absorbed by the income for the year. So that is all I can say on this point.
[32] Paragraph 21 reads as follows:
[TRANSLATION]
Did the appellant waive the application of the normal reassessment period in respect of the 1991 taxation year?
[33] The answer is yes. The waiver is valid but the revocation is not since it occurred after the assessment. It is sufficient to refer to subsection 152(4.1) of the Act.
[34] There remains one final point, that raised in paragraph 22, which reads as follows:
[TRANSLATION]
Was the Minister of National Revenue justified in assessing a penalty against the appellant for the 1991, 1992 and 1993 taxation years under subsection 163(2) of the Income Tax Act in respect of the rental losses disallowed and the interest income added?
[35] What I would say in this regard is that, concerning the added income, the way the Department went about things was to rely on a presumption in the Act or, if you will, on a special attribution rule found in subsection 56(4.1) of the Act.
[36] This whole question of interest could, of course, have been approached from another angle, as I noted earlier, by saying that there was simply no reasonable expectation of profit given that, obviously, you did not earn any income as such. Rather, you arranged things so that your son would earn the income, and all of the losses could simply have been disallowed.
[37] As for the rental income, you told me, Mr. Mérabet, that rooms were rented to third parties after being rented to your family, and I have taken that into account. However, the rental to your family strikes me as fictitious and as an indirect way of claiming personal expenses, although I cannot determine to what extent. However, with regard to the rental income, the respondent's position is that there was no reasonable expectation of profit from that activity during the years at issue.
[38] Not a great deal was said about the other elements, aside from the fact that you tried to pass income on to your son—and you have admitted this yourself—in a way that was perhaps not quite proper.
[39] I have decided, though not without some hesitation, I must admit, to cancel the penalties in this case considering the letter from your doctor and the fact that it might be thought that what is actually involved is not unreported income but rather unjustified expenses.
[40] Thus, as I said, not without some hesitation and probably because counsel for the respondent failed to adduce slightly stronger evidence, I have decided to cancel the penalties.
[41] The appeals are therefore allowed, with costs to the respondent, however, since the assessments remain unchanged for the most part. Aside from the penalties, there is just one point that has been varied, namely the possibility of claiming home office expenses for 1992. In light of the calculations made herein, such a deduction is possible for 1992. Accordingly, the assessment for that year is referred back to the Minister for reconsideration and reassessment.
[42] The assessments for the three years are also referred back to the Minister for cancellation of the penalties. In all other respects, the assessments remain unchanged.
Signed at Ottawa, Canada, this 23rd day of August 2000.
"P.R. Dussault"
J.T.C.C.
Translation certified true on this 12th day of October 2001.
[OFFICIAL ENGLISH TRANSLATION]
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Docket: 98-1640(IT)G
BETWEEN:
AZIZ MÉRABET,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
CERTIFICATION OF TRANSCRIPT OF REASONS FOR JUDGMENT
Let the attached copy, as corrected, of the Reasons for Judgment delivered from the bench at the Tax Court of Canada, 500 Place d'Armes, Montréal, Quebec, on May 5, 2000, be filed.
Signed at Ottawa, Canada, this 23rd day of August 2000.
|
"P.R. Dussault" |
J.T.C.C.
Translation certified true
on this 12th day of October 2001.
Erich Klein, Revisor