Date: 20001211
Docket: 1999-4014-IT-I
BETWEEN:
DONNA M. LANGILLE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Campbell, J.
[1] The Appellant assumed the operation of her father's farming operation in 1976. Her father had successfully operated the farm without obtaining other employment to help support the farm. Since taking over the farm, the Appellant has increased the barn space by four fold. She has been employed outside the farming operation to help maintain it. In 1978 she entered hog production on a larger scale. At the time, she took advantage of grants available through a government stabilization program. With the withdrawal of this program ten years later, the farm experienced severe losses. Disease in the hogs caused greater losses and consequently the farm has had a difficult time recovering. In addition the Appellant's husband, who had been running a garage and service station, was diagnosed with cancer in 1991 and eventually the garage went through bankruptcy. The hogs remaining were sold in 1998. The Appellant continues to run a beef cow/calf operation and to farm about 260 acres. To supplement the farm income she must work full time with a farming organization, known as the Federation of Agriculture.
[2] The present appeal is with respect to the Appellant's 1993, 1994 and 1995 taxation years. In April 1998 the Minister, by a notice of reassessment, reduced the Appellant's losses claimed from her farming operation for those three years, and disallowed the spousal amount claimed in 1993 and 1994 taxation years.
[3] These reassessments were varied again in July 1997 and in September 1999 by reducing the Appellant's farming losses for each of the three taxation years by the following amounts:
1993 1994 1995
Truck Expenses $1,356.00 $995.00 $1,638.00
Cellular Telephone 681.00 -- --
Mandatory Inventory Adjustment 4,694.00 2,931.00 4,623.00
Total $6,731.00 $3,926.00 $6,261.00
[4] In computing her net income from farming the Appellant had claimed truck expenditures of $2,146.00, $2,374.00 and $2,704.00 in 1993, 1994 and 1995 respectively. The Minister reduced these amounts claimed by the Appellant to those referred to above, on the basis that a portion of these amounts was not incurred for the purpose of gaining or producing income from the farming operation but rather were related to the Appellant's personal expenses. The Minister also contended that the Appellant provided insufficient documentation to support her claim for the full amounts.
[5] In 1993 the Appellant also claimed an expense of $681.00 for a telephone package consisting of acquisition of a cell telephone and three years of air time. The Minister disallowed this expenditure and capitalized it as a Class 8 asset.
[6] The Minister contended that the Appellant did not apply the mandatory inventory adjustment to her farming losses in her 1993, 1994 and 1995 returns pursuant to subsection 28(1) of the Income Tax Act (the "Act"). The Minister submits therefore that he calculated the adjustments for 1993, 1994 and 1995 in accordance with this subsection in the amounts of $4,694.00, $2,931.00 and $4,623.00 respectively.
[7] In addition to the above three issues of truck expenses, cellular telephone and mandatory inventory adjustments, this appeal dealt with the following two issues:
- whether the Minister properly disallowed the spousal amounts claimed in 1993 and 1994 taxation years; and
- whether the Minister properly assessed penalties pursuant to subsection 163(2) of the Act.
Truck Expenses
[8] The first issue is that of the truck expenses. The truck was apparently used in both the farming and garage operations as well as personally by the Appellant's husband. The Appellant submitted two extensive ledgers which were kept by the Appellant and which, by admission of the Revenue Canada official called to testify on behalf of the Crown, were well kept and in good order. The Appellant also submitted three envelopes containing gas credit card receipts for each of the three years under appeal. The amounts of these invoices totalled $2,189.36, $2,461.33 and $1,821.38 for 1993, 1994 and 1995 respectively. The Appellant testified that she was not able to figure out the exact percentage of time that the truck was used by the farm versus the husband's garage business. However she testified that she arrived at the figures for truck expenses by using the ledger books which listed trips she made for the farm to pick up feeder hogs from other farms, to pick up feed, etc. These trips were listed in the ledger books by dates which she then cross-referenced to the gas receipts. She testified that on some occasions the truck would have enough gas to complete a trip for the farm and in those cases where there would be no gas purchased, then she did not claim for gas. She felt this balanced out with the trips where she filled the truck even though the whole tank of gas would not be used for that trip. This meant that the times she used the truck for the farm in which there was no gas purchased would roughly equate to those times when she used the truck for the farm and filled the truck with gas and claimed for that trip supported by a credit card receipt. She went on to state that although her husband sometimes used the truck for his personal use, she used it exclusively for farm purposes.
[9] The Revenue Canada auditor, who testified on behalf of the Respondent, stated that it was difficult to deal with the expenses as the truck was used for the farm, garage and personally by the husband. A car was also used occasionally to pick up feed for the farm. The auditor had the two ledgers available to her but she did not use them in calculating these expenses when the Appellant's returns were audited. I accept the evidence of the Appellant that feeder operations, as a general rule, have higher travel expenses than the average "birth to finish" farms. There is far more travel in picking up feeder animals than other farms would incur. I accept the Appellant's submission that the high cost of travel is one of the reasons for the demise of feeder hog operations within the Province of Nova Scotia. She also submitted that one-half of the trips would be fully loaded with feeder hogs from a neighbouring farm. Therefore the gas consumption was higher than normal, with the result that so-called "average" fuel consumption rates would not apply. The Appellant also argued that the year of the truck, an 1985 or 1986 half-ton, may have meant it was not fuel efficient. The Appellant also disagreed with the 52 ¢ per litre used by the auditor as the average price of gas during the years 1993-1995 in the area where the farm was located. The Appellant contended that her invoices were more consistent with a price of 54 ¢ per litre. The claims for truck expenses related only to gas, registration and insurance. All related truck expenses for repairs, tires, batteries and parts were paid for and claimed through the husband's service station business.
[10] Paragraph 18(1)(a) states that a taxpayer cannot deduct any expenses except to the extent that the expenses are made or incurred for the purpose of gaining or producing income from a business or property. Paragraph 18(1)(h) states that the taxpayer's personal or living expenses are not deductible. I conclude from the facts that the truck expenses supported by the credit card receipts were expenses incurred by the farm for producing income and were not personal expenses of the Appellant. I accept the Appellant's method of calculating the truck expenses and therefore accept the receipts produced by the Appellant in the amounts of $2,189.36, $2,461.33 and $1,821.38 for the taxation years 1993, 1994 and 1995 respectively. There is a small discrepancy between the amounts initially claimed by her on her returns for each year and the amounts supported by the credit card receipts submitted at the hearing. I find that there is sufficient evidence to change the reassessments by the Minister in favour of the amounts substantiated by the receipts provided by the Appellant. I find these yearly expenses more than reasonable in terms of the type of farming operation carried on by the Appellant.
Cellular Telephone
[11] The Appellant was required by The Department of Occupational Health and Safety within the Province to provide communication with farm employees working in remote areas of the farm. To comply she purchased a cellular telephone in 1993 for $681.00. I accept her testimony that the cost of the telephone was $99.00 and the balance of $582.00 was part of the package deal for a reduced rate for air time for three years.
[12] If the proper evidence had been before me, I may have been able to conclude that the entire amount is a current expense and not at all a capital expenditure. In the absence of any evidence adduced by the Appellant to the contrary, I will conclude in these circumstances that the telephone that cost $99.00 is a capital outlay and subject to capital cost allowance, if claimed by the Appellant. I must now determine if the telephone is to be included in Class 8 or Class 12 of Schedule II to the Income Tax Regulations. In the circumstances of the present case, I am placing the telephone in Class 12. The remaining $582.00 is not a capital outlay. It is properly categorized as a prepaid expense. The auditor should have been more adept at making this distinction. According to the Appellant's testimony, it related quite clearly to a package deal she obtained at the time of purchase for three years free air time. I am allowing a deduction in the amount of $582.00 in computing the Appellant's income for the years to which it can reasonably be considered to relate. I allow this deduction for air time as an expense deductible in computing income under section 9 and properly spread over the appropriate period to which it relates, pursuant to subsection 18(9). This section was not relied upon in the Respondent's Reply nor was I referred to it during the course of the hearing. It would have been most helpful if Counsel had drawn my attention to this section which is relevant to this issue.
Mandatory Inventory Adjustment
[13] Section 9 of the Act defines income from a business to be the profit from that business in a taxation year. Section 28 allows farmers and fishermen to depart from the use of accrual accounting principles in computing business income. Paragraph 28(1)(c) requires that in computing income for a farming operation that is reporting on a cash basis, any loss must be reduced or eliminated by the value of any inventory on hand at the end of the year in which the taxpayer purchased and paid for it. The adjustment requires an addition to income in a year of losses of the lesser of the amount of the loss and the value of purchased inventory on hand at the end of the year. The Appellant had elected and was on a cash basis for computing income. It was argued that she applied the losses and ignored the adjustment required to be made. She therefore did not apply the inventory adjustment to her farm losses as required by paragraph 28(1)(c). The auditor explained that the application of this inventory adjustment was not an option if a farmer had elected the cash basis. In this case, the auditor stated that the adjustment would serve to reduce the losses she could otherwise claim in each year as the Appellant had inventory on hand that the farm had purchased and paid for during the year. In the absence of any other evidence adduced by the Appellant, I find that she did not apply the mandatory inventory adjustments to her farming losses in the years under appeal as she should have done. The Minister's calculations of these adjustments as presented at the hearing in accordance with subsection 28(1) of the Act are maintained. There was no evidence adduced which would indicate one way or the other whether the assessor (who, with no prior knowledge of her farming operations, relied upon reading a farm guide manual to gain this expertise) properly permitted the corresponding deduction, under paragraph 28(1)(f), to the adjustment in the subsequent year. If this was not properly calculated, I direct the Minister to properly apply the appropriate provision.
Spousal Amount
[14] For the taxation years 1993 and 1994 the Appellant's claim for the spousal amount was disallowed on the basis that the Appellant's spouse had income in these years in excess of the base amount. The only evidence produced by the Appellant was to state that her husband's income for these years was currently under appeal. Otherwise she had no personal knowledge of her husband's income. I find that the spousal amount was properly disallowed in accordance with subsection 118(1) of the Act. If, as a result of the husband's appeal, his income is favourably altered to allow her to claim this amount, then her assessment should be altered accordingly.
Penalties
[15] Penalties were assessed against the Appellant for each of the years under appeal, as the Minister contended the Appellant understated her income for those years. Subsection 163(2) of the Act allows the Minister to impose such penalties where a taxpayer knowingly or under circumstances amounting to gross negligence makes, asserts to or acquiesces in the making of a false statement or omission on a return. Subsection 163(3) places the burden of proof on the Minister. The Revenue Canada official, who gave evidence on behalf of the Crown, stated that the penalty was not levied in respect to the mandatory inventory adjustment as this was a very technical section. The penalty was levied as the Appellant had claimed 100% of the residential utilities, telephone, heat, property taxes and mortgage interest instead of pro-rating these expenses. The utility bill was combined for both the farm and the residence. The Appellant claimed the telephone in lieu of other expenses she felt she might have claimed. There was an office in the residence where it was recognized that some portion of heat costs could be claimed. The auditor stated the penalty was levied as the Appellant should have known some of these were personal and could not be claimed. No evidence was presented to indicate that the Appellant wilfully and recklessly claimed such expenses with a complete indifference to the law. She stated that she claimed these expenses as she had similarly done in the past. She did omit to properly pro rate these expenses but the facts do not support a finding that she did this intentionally with a blatant disregard for compliance with the law. The Appellant did not knowingly or in circumstances amounting to gross negligence make misleading calculations in respect to these expenses. The penalty is deleted.
[16] I would be remiss if I did not comment on what I perceive to be Revenue Canada's continued inclination to assess penalties against taxpayers without reviewing each individual case on its merits. This tendency to casually toss in a penalty assessment and then hope this Court might buy the argument, is tantamount to negligence on the part of auditors and assessors in the performance of their job responsibilities.
[17] If Revenue Canada officials intend to take a nonchalant approach to assessing penalties against taxpayers, I do not intend to apply the same procedure to those cases that come before me.
[18] The appeals are allowed and the assessments are referred back to the Minister for reconsideration and reassessment on the following basis:
(a) The truck expenses be permitted in the amounts submitted by the Appellant, that is $2,189.36, $2,461.33 and $1,821.38 in the taxation years 1993, 1994 and 1995 respectively;
(b) The $99.00 cost to purchase the telephone is a capital outlay and should be included in Class 12. The remaining $582.00 is a prepaid expense for three years of air time purchased as a package in 1993 and are deductible in the years in which the expense can reasonably be considered to relate.
(c) The mandatory inventory adjustment has been properly calculated by the Minister for each of the taxation years under appeal and is confirmed. There was no evidence adduced which would indicate one way or the other whether the assessor properly permitted the corresponding deduction, under paragraph 28(1)(f), to the adjustment in the subsequent year. If this was not properly calculated, I direct the Minister to properly apply the appropriate provision.
(d) In the absence of evidence respecting the husband's income, the spousal amounts were properly disallowed by the Minister for the taxation years 1993 and 1994. If as a result of the husband's appeal, his income is favourably altered to allow the Appellant to claim this amount, then her assessment should be altered accordingly.
(e) The penalties assessed pursuant to subsection 163(2) of the Act are deleted for each of the taxation years 1993, 1994 and 1995.
[19] The Appellant is entitled to costs in the amount of $400.00.
Signed at Ottawa, Canada, this 11th day of December 2000.
"Diane Campbell"
J.T.C.C.