BETWEEN:
and
____________________________________________________________________
Appeals heard on March 2, 2006, at Ottawa, Ontario.
Before: The Honourable Justice Lucie Lamarre
Appearances:
____________________________________________________________________
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1997, 1998, 1999 and 2000 taxation years are allowed, without costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant is allowed to deduct rent expenses as follows:
1997 $25,000
1998 $24,360
1999 $24,405
2000 $25,000
Signed at Ottawa, Canada, this 14th day of March 2006.
BETWEEN:
AHMAD S. AMMAR,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
[1] The appellant claimed rent expenses as follows in the calculation of his income for the 1997, 1998, 1999 and 2000 taxation years:
|
Taxation Years |
Rent Expenses |
|
1997 |
$43,054 |
|
1998 |
$24,360 |
|
1999 |
$24,405 |
|
2000 |
$43,219 |
[2] In reassessing the appellant for those years, the Minister of National Revenue ("Minister") disallowed those expenses pursuant to section 67 of the Income Tax Act ("Act") on the basis that they were unreasonable. Section 67 reads as follows:
SECTION 67: General limitation re expenses.
In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.
[3] At trial, the respondent conceded the rent expenses for 1998 and 1999 and argued that the same amount of rent expenses should be allowed for 1997 and 2000. The appellant argued that the amounts claimed for 1997 and 2000 were reasonable in the circumstances.
[4] The rent expenses were incurred for the lease of a 230 m2 apartment in Egypt in the course of operating an immigration and consulting business for students from Egyptand other countries of the Middle East, who want to study in Canada. The business started operating in 1997 and was closed down in 2001. The appellant's business attracted four clients in 1997, seven in 1998, seven in 1999 and four in 2000. The appellant acknowledged that there existed similar businesses in Egyptand that competitors usually rent hotel rooms there to meet their clients. The appellant wanted a more sophisticated approach and rented an apartment for $44,300 in 1997, the first year of operation. He and the members of his family working in that business had high expectations, which were never realized. It operated at a loss during the four-year period it was carried on, and the decision was taken to close the business in 2001. In 1998 and 1999, the appellant and his brother, who was present in Egyptfor approximately seven months per year, were able to negotiate a reduction in rental to half the price paid in 1997. In 2000, the owner raised its price to $43,219 and, as the appellant did not want to move, he and his brother accepted that price.
[5] Ms. Adrienne Diorio, an appeals officer with the Canada Customs and Revenue Agency ("CCRA"), did some research and found out that the average rental for comparable apartments in Cairo, Egypt, where the apartment in question here was located, was $20,000 during the period from 2004 to 2006 (Exhibits R-3 to R-7). She compared the rental for five apartments with an area varying between 200 m2 and 300 m2. The respondent also calculated the average cost of renting a room for two weeks every three months in a deluxe hotel. It amounted to an average of $15,000 per year.
[6] The appellant gave as an example the rental cost of only one apartment (260 m2) and that was for 2004. It rented at $62,160 per year. He also said that competitors would rent hotel rooms for two or three weeks every two or three months. The appellant acknowledged as well that the most important part of the immigration and education application procedure took place in Canada(see Exhibit R-1: letter sent to Ms. Adrienne Diorio dated July 15, 2004, page 2, paragraph 3).
[7] In Mohammad v. Canada, [1998] 1 F.C. 165, [1997] F.C.J. 1020 (QL), the Federal Court of Appeal said at paragraphs 28 and 29:
[28] When evaluating the reasonableness of an expense, one is measuring its reasonableness in terms of its magnitude or quantum. Although such a determination may involve an element of subjective appreciation on the part of the trier of fact, there should always be a search for an objective component. . . .
[29] I concede that there will be instances where the objective component will be difficult to isolate and, therefore, practical experience informed by common sense will have to prevail. Such is true in respect of those expenses deemed to be unreasonable because they are believed to be excessive or extravagant: see Cipollone, supra . . . .
[8] In my view, the respondent provided sufficient objective evidence to demonstrate that the rental costs were excessive in 1997 and 2000. Although it is not the CCRA's role to interfere with the appellant's business decision to rent an expensive apartment, and although the rentals for comparable apartments that were given by the respondent in court are for years subsequent to the taxation years at issue, it can be inferred from the evidence that a hotel room or comparable apartments could have cost less than half of what was claimed by the appellant. As a matter of fact, the appellant was able to negotiate half the rate for the apartment in 1998 and 1999. These considerations are in my view the kind of objective components referred to in the above-cited Mohammad case. I would also add that the appellant did not provide the Court with rates for comparable apartments for the years at issue.
[9] I find that, in terms of assessing the magnitude of the expenses claimed, the respondent relied on the best objective components available in the circumstances, and these components were unrelated to the income generated by the business. I therefore conclude that the rent expenses claimed for 1997 and 2000 are unreasonable. I agree with the respondent that those claimed for 1998 and 1999 are more reasonable.
[10] The appeals are allowed and the assessments are referred back to the Minister for reconsideration and reassessment on the basis that the reasonable rent expenses that can be claimed by the appellant in the computation of his income for the years at issue, pursuant to section 67 of the Act, are $25,000 (instead of $43,054) for the 1997 taxation year, $24,360 (as claimed) for the 1998 taxation year, $24,405 (as claimed) for the 1999 taxation year and $25,000 (instead of $43,219) for the 2000 taxation year.
Signed at Ottawa, Canada, this 14th day of March 2006.
"Lucie Lamarre"
Lamarre J.
COURT FILE NO.: 2005-2516(IT)I
STYLE OF CAUSE: AHMAD S. AMMAR v. HER MAJESTY THE QUEEN
PLACE OF HEARING: Ottawa, Ontario
DATE OF HEARING: March 2, 2006
REASONS FOR JUDGMENT BY: The Honourable Justice Lucie Lamarre
DATE OF JUDGMENT: March 14, 2006
APPEARANCES:
|
For the Appellant: |
The Appellant himself |
|
Counsel for the Respondent: |
Amy Kendell |
COUNSEL OF RECORD:
Firm:
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada