Date: 20010214
Docket: 1999-1841-IT-I
BETWEEN:
ROSE PREFONTAINE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Agent for the Appellant: Maurice Prefontaine
Counsel for the Respondent: James Yaskowich
____________________________________________________________________
Reasons for Judgment
(Delivered orally from the Bench at Edmonton, Alberta, on January 26, 2001)
McArthur J.
[1] This appeal is from an assessment of tax for the Appellant’s 1994 taxation year. The sole issue is whether certain expenses claimed were incurred for the purpose of gaining or producing income from a residential business. There is no issue with respect to reasonable expectation of profit. At the outset of the hearing, the Appellant presented a motion to strike out the Reply to the Notice of Appeal which motion was denied and reasons will be given separately therefor. I understand from the Appellant that a similar appeal for the 1993 taxation year was settled during a hearing in February 2000. The Appellant's spouse, Maurice Prefontaine, acted as her agent. She remained throughout the hearing and appeared to take copious notes. He is the manager of the properties and most knowledgeable with respect to the issues. He alone gave evidence.
[2] The Appellant is a full-time employee with a human resources department. In 1985, she was transferred and moved to Edmonton from Prince George, British Columbia with her two daughters. Mr. Prefontaine remained in Prince George for five years winding up his litigation law practice of 10 years and selling substantial real estate holdings. He moved to Edmonton in 1989 or 1990 when the Appellant commenced the present real estate property business.
[3] In 1994, the Appellant owned four units in three properties in Edmonton from which she declared income as follows:
|
Property |
Rental Income |
|
11207 – 79 Avenue (Upper Apt.) |
$9,600 |
|
11207 – 79 Avenue (Lower Apt.) |
6,500 |
|
9046 – 94 Street |
6,025 |
|
4652 – 43A Avenue |
6,000 |
|
Total |
$28,125 |
The property at 79 Avenue contained two apartments, 94 Street was a single family older home and 43A Avenue is the residence of the Appellant and her family, containing one rental unit for a border on the main floor. The issue is whether the expenses in excess of the amount allowed by the Minister were incurred by the Appellant for the purpose of gaining or producing income from a business or property. The Minister of National Revenue concedes that the Appellant had a rental business with a reasonable expectation of profit. Counsel for the Respondent simplified and clarified the issues by filing the "Position of the Respondent" dated January 24, 2001, which I include in its entirety as Schedule "A" to these Reasons for Judgment.
[4] While Mr. Prefontaine expressed regret, if not bitterness, because the Minister did not agree with his position prior to trial, he presented evidence together with passing reference to supporting documentation that filled seven banker's boxes and were stacked on a shelf trolley in the courtroom. Most of it was of no assistance. Photocopies of hundreds of invoices were meticulously kept in binders. But for the wages to the Appellant's daughters, Michelle and Yvette, the Minister did not deny the amounts of the expenditures but disagreed with their characterization. The most notable items in dispute, taken from paragraph 12 of the Respondent's Position, are as follows.
[5] The Appellant claimed 57% of the family home at 43A Avenue attributable to office for the rental business as well at 18.5% of the home for a border. The Minister is prepared to allow 30% of the amount claimed to office in addition to the 18.5% claimed for the border. In 1990, the Appellant had a two-story plus basement home built for herself, husband and two children and a border. Exhibit A-1 is a sketch or floor plan of each floor. Including the basement, the total area of the home is 3,800 square feet. The Appellant claims that the entire basement (1,240 square feet except for a small common area) is used for business. No allowance in her allocation was made for this being inferior space. The main floor is approximately 1,650 square feet of which, it is agreed, the border uses just in excess of 600 square feet and the Appellant claims another 600 square feet for business purposes. From the upper floor which is 910 square feet, the Appellant claims 525 square feet for business purposes. Therefore, of the home’s total 3,800 square feet, the Appellant claims over 75% including the 18.5% for the border. The two-car garage is 465 square feet, and the Appellant claims 50% of this space for business.
[6] The home office claim boils down to a question of what is reasonable under the circumstances. The Appellant is claiming about 2,000 square feet of her home for the operation of a very small rental business involving four tenants. I believe larger rental businesses operate very efficiently with the use of one-half of that support space. In Mohammad v. The Queen, 97 DTC 5503, an observation was made by Robertson J. which is of assistance to the present circumstances. At page 5509, he stated:
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. When dealing with interest expenses, the task can be objectified readily. For example, it would have been open to the Minister to challenge the amount of interest being paid on the $25,000 loan had the taxpayer agreed to pay interest in excess of market rates. The reasonableness of an interest expense can thus be measured objectively, namely, by reference to market rates. Similarly, the Minister might want to confront a taxpayer who seeks to deduct 3/4 of the interest paid on a mortgage loan pertaining to a duplex in which the taxpayer is residing in one of the two identical units. Once again, the reasonableness of the interest expense being claimed can be measured objectively by reference to area (assuming, of course, that the rental value of a square meter in one part of the property is equal to that in another): see generally Narine v. R., [1995] 2 C.T.C. 2055 (T.C.C.).
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, where the taxpayer, a “humourologist”, sought to deduct, for example, significant clothing costs against modest income. Similarly, one can debate ad nauseam what constitutes a reasonable lunch expense or weigh the perceived need of a taxpayer to purchase a Rolls Royce rather than a Chevrolet, Lincoln or a Mercedes-Benz. The problem is that one’s understanding of extravagance will be influenced as much by one’s professional and business experiences, taken together with personal expectations informed by a particular lifestyle, as by pragmatic considerations related to the objects of the Act. ...
Section 67 of the Income Tax Act provides that to be deductible, expenses must be reasonable under the circumstances. The Appellant may use more than 30% of her house for business but, I find that is excessive. The 30% allocation suggested by the Minister is more than fair and reasonable.
[7] Paragraph 12 c) of the Respondent's Position states that the Appellant claimed approximately $1,460 for stationery and photocopy expenses. Most of this charge was expended for an action before the Court of Queen’s Bench, an appeal to the Alberta Court of Appeal and for appeals to the Tax Court of Canada. Subsection 60(o) of the Act provides for the deduction of amounts paid by the taxpayer in the year in respect of fees or expenses incurred in preparing, instituting and prosecuting an objection to a tax assessment. Mr. Prefontaine testified that one-half of the $1,460 expended was for a tax appeal or appeals. It may not have been necessary or expended wisely but I accept that it was incurred and one-half of such expense does meet the provisions of subsection 60(o). The Respondent had agreed to allow approximately $220. The only evidence as to the amount spent pursuant to subsection 60(o) was that of Mr. Prefontaine who stated 50% of the $1,460. Somewhat reluctantly, I accept his amount of $730. His statement is corroborated by hundreds of copies. My reluctance herein arises from a belief that the differences could have been settled without litigation. It would appear that the Appellant and her representative are overly litigious.
[8] Most often, I believe, the Appellant's litigation does not serve a useful purpose. I state this having reviewed the action by the Appellant in the Court of Queen’s Bench basically for an Order preventing the Minister’s representatives from assessing her rental business documentation during an audit. The Appellant’s statement of claim was struck as being an abuse of process by the Court of Queen’s Bench. There was an appeal to the Alberta Court of Appeal. This action was not for the purpose of earning income from a property pursuant to paragraph 18(1)(a) of the Act. A certificate from the Registrar of that Court states that the appeal has been taken off the list. Other actions pursued have ended with similar results.
[9] In paragraph 12 i) of the Position of the Respondent, the Appellant claims the amount of $2,366 being 75% of $3,155 claimed as salaries to her two daughters, Michelle who was 17 in 1994 and Yvette who was 12. Michelle is now, I understand, successfully employed as an accountant and business administrator and Yvette apparently is living at home and has learning or psychological difficulties. No doubt Michelle did provide services to the business and was paid for this work. I am not satisfied from the evidence, however, that these services were as extensive as claimed. Michelle did not give evidence. The Minister’s position is that this expenditure is not deductible. The business could ill afford to pay for secretarial help. In 1994, Michelle was in full-time attendance at school and taught music lessons earning $20 an hour. One of the rental units was vacant for several months during the summer of 1994 and I accept that she did substantial cleaning up and yard work. I find that wages to Michelle of $1,925 is unreasonable under the circumstances yet I am prepared to make an estimate as to what may be reasonable and allow total wages and salaries of $500. I cannot ignore that she did render valuable services to the business. With respect to Yvette, there is insufficient evidence to establish that she was paid any money or that she earned a wage or salary and she was only 12 years old in 1994.
[10] The fourth issue is paragraph 12 j) which states that the Appellant claimed $1,357 being 60% of the amount of $2,262 claimed as management and administrative fees incurred for life insurance. The Appellant purchased $100,000 of insurance on her husband’s life and he, a lesser amount on her life, contending that: (a) if he died, she would no longer have free management services that he was rendering and would need the $100,000 to save the business; and (b) if she predeceased her husband, he would need the proceeds of her policy to pay off a $37,000 mortgage and other debts. For the cost of insurance to be a deductible business expense, there must be some reasonable, factual connection between the carrying on of the business and the payment of the premiums. These amounts were not paid to benefit the business but to benefit the beneficiaries. The money was not expended to gain income. The connection between benefiting the Appellant or her husband and the insurance costs is far too tenuous. These premiums are not deductible.
[11] Another issue was the deduction disallowed contained in paragraphs 12 g) and h). The Appellant paid $3,257 in legal fees and $1,111 to an engineering firm defending and counter-claiming in a lien action with respect to their home which was built in 1990. The Appellant had refused to pay the contractor $75,000, claiming shoddy workmanship and the action was settled in 1995. I find the legal fees were not expended to earn income and are not deductible. As in the insurance claim, the connection to earning income is too remote.
[12] With regard to the remaining expenses, I agree with the Minister’s position set out in Schedule "A" attached hereto. Briefly dealing with the expenses set out in paragraph 12 b): the water and sewer expenses are properly attributable to home and personal use; 12 d): the $28 office expense related to the Court of Queen's Bench action and is disallowed for the same reasons as set out in remarks with respect to paragraph 12 c); 12 e): $274 claimed for a second phone is unreasonable. Surely one phone for the small business is more than sufficient; 12 f): the Appellant claimed $192 to repair a frozen outside water tap on her home. This was used for the garden and perhaps to wash cars and I find this expense is personal.
[13] In paragraph 7 of Schedule "A", the Appellant maintained two automobiles, a van and a Cavalier. The Minister accepted that the automobiles were each used 60% in the rental operation with the remaining 40% for personal use. Given the evidence, I find that this is a fair, if not a generous disposition.
[14] In conclusion, the Position of the Respondent is accepted in its entirety but for paragraph 12 c) where a $730 deduction is allowed for stationery and photocopy expenses and for paragraph 12 i) where a $500 deduction is allowed for salary and wages. The appeal is allowed only to adopt the Respondent's Position (Schedule "A") with the two changes referred to. This being an appeal under the informal procedure with limited success, no costs are awarded.
Signed at Ottawa, Canada, this 14th day of February, 2001.
"C.H. McArthur"
J.T.C.C.