Tax Court of Canada Judgments

Date: 20010511

Docket: 96-4730-IT-G

BETWEEN:

MARCEL LACHANCE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Archambault, J.T.C.C.

[1]            These are appeals by Marcel Lachance from tax assessments by the Minister of National Revenue (the Minister) for his 1991, 1992 and 1993 taxation years. The Minister included in Mr. Lachance's income the value of the benefits conferred on him by Comptabilité E.G.L. Inc. (EGL). Those benefits were payments by EGL for expenses relating to Mr. Lachance's residence (housing expenses) and his meals (meal expenses). The following table shows the adjustments made by the Minister.

The facts

	1991	1992	1993
Benefits:    Rent     Meals Total benefit	6,869 3,191 10,060	4,807 3,994 8,801	4,128 2,126 6,254

[2]            As indicated in paragraph 3 of the amended Reply to the Notice of Appeal, in making the assessments, the Minister made the following assumptions of fact:

(a)            during the years at issue, the appellant was employed by "Comptabilité E.G.L. Inc." (the company);

(b)            the company headquarters were located in the basement of the appellant's residence;

(c)            the company paid all expenses relating to the appellant's residence;

(d)            in computing his income for the years at issue, the appellant considered that he occupied only 35% of the total area of his residence for personal use;

(e)            in an audit conducted by a representative of the Minister of National Revenue, the representative determined that the appellant occupied 50% of the total area of his residence for personal use; and

(f)             in addition, during the years at issue, the company paid certain personal expenses of the appellant for meals he had in restaurants and in his residence.

Mr. Lachance admitted all the above facts with the exception of those in subparagraphs (a) and (f).

[3]            EGL was incorporated under the Companies Act of Quebec on December 28, 1990, and its sole shareholder is Mr. Lachance's wife. The business of EGL consists in providing bookkeeping services and financial and accounting consulting services. In its first financial year, which ended on January 31, 1992, EGL had a loss of $6,641. At that time, its paid-up capital amounted to $10. In its second financial year, EGL made a net profit of $31,997.

[4]            According to Mr. Lachance, EGL had no employees. Every one who worked for this company was self-employed. Apart from Mr. and Mrs. Lachance, EGL generally used the services of one other full-time person and two other part-time persons. Mr. Lachance devoted 80 to 90 hours weekly to EGL's clients and to managing the company. The income reported by Mr. Lachance as a self-employed worker was $13,500 in 1991, $11,000 in 1992 and $31,000 in 1993. Mrs. Lachance devoted between 30 and 40 hours weekly to EGL. Among other things, she handled the payroll and did the bookkeeping for EGL's clients. Mr. Lachance was not a member of any professional order, but he had studied actuarial science and accounting.

[5]            The residence of Mr. Lachance, located in Cap-Rouge, near Québec city, is a one-and-a-half storey Canadian-style house, built in 1980. On the ground floor, there is a kitchen, a dining room and a living room. On the upper floor, there are two bedrooms, including a master bedroom and a bathroom. In the basement, there are four offices and a washroom. Only three of them are closed offices. Mr. Lachance occupied a closed corner office, while Mrs. Lachance and the rest of the staff used the open office. Mr. Lachance said that the dining room on the ground floor could be used when needed for meeting with clients. In addition, some files were stored in the smaller bedroom on the upper floor.

[6]            Mr. Lachance was able to locate between 90% and 97% of the supporting documents for the meal expenses deducted by EGL in respect of the 1992, 1993 and 1994 financial years. Approximately 7% to 10% of the meal expenses for which he provided supporting documents consisted in home-delivered meals.

[7]            Mr. Lachance prepared a summary describing each of the supporting documents. The date of the bill, the name of the restaurant, the place where the meal was consumed (at home or in the restaurant), the name of the person with whom he met, the business for which the person worked and the reason for the meeting were indicated on the summary. Lastly, the summary indicated, for each bill, the cost of the meal, the amount of GST and QST and the total amount payable.

[8]            A number of the supporting documents are bills from fast-food restaurants for amounts as low as $5.21 (net of tax) for which Mr. Lachance provided the name of the person he met with. For February 1991, there are nine bills totalling less than $15 (between $5.21 and $13.23) each, and four bills for which the total in each case is greater than $15 (the lowest is for $19.90 and the highest is for $41.17).

[9]            Mr. Lachance testified that it had never been EGL's intention to confer a benefit on him. He told the Court that, had he and his wife known that a portion of the housing and meal expenses constituted personal expenses, they would have reduced their advance account in EGL. At January 31, 1992, Mrs. Lachance's account totalled $9,476. At January 31, 1993, the advance accounts of Mr. and Mrs. Lachance totalled $32,268, and at January 31, 1994, $70,323. The advances made by Mr. and Mrs. Lachance were non-interest bearing and no repayment terms had been provided for.

Minister's assessment

[10]          In making his assessment, the Minister assumed that Mr. Lachance was an employee of EGL and that he had received taxable benefits the value of which was to be included in his income by virtue of paragraph 6(1)(a) of the Income Tax Act (the Act). He considered that 50% of Mr. Lachance's residence had been used for the business of EGL and 50% for his personal use. Since the Lachance couple had repaid 35% of the housing expenses by reducing their advance account, the value of the taxable benefit amounted to 15% of the housing expenses. As for the meal expenses, the Minister determined that 50% were personal expenses.

Analysis

[11]          In my view, the Minister was correct in considering Mr. Lachance to be an employee of EGL. The fact that he was responsible for its administration and that he devoted a considerable amount of time to the business of that company leads me to believe that there was a relationship of subordination between the company and Mr. Lachance. Mr. Lachance's conduct was more akin to the conduct of an employee than to the conduct of a self-employed worker. The fact that a person has virtually only one client who keeps him so steadily busy seems to indicate instead that the client is that person's employer.

Housing expenses

[12]          What must now be determined is whether the Minister was correct in including in Mr. Lachance's employment income the value of the benefits represented by the payment of the housing and meal expenses. In my opinion, merely carrying on a business in a private residence and using some of its rooms in the course of that business does not necessarily mean that all expenses relating to those rooms may be deducted. A number of factors must be taken into account, including the space occupied, its quality and the frequency of its use. Space located in a basement is not of the same quality as space on the ground floor. The use of that space for household purposes as well as the need for that space to provide a minimal degree of comfort for the occupants of that residence must also be considered.

[13]          I believe that the Minister was more than generous in this case in considering 50% of Mr. Lachance's housing expenses as expenses incurred by EGL for the purpose of earning income from a business. However, I was not convinced that Mr. Lachance received a taxable benefit under paragraph 6(1)(a) of the Act when EGL paid his personal housing expenses. According to the evidence that I heard, it was not at all EGL's intention to confer a benefit on Mr. Lachance by paying those expenses. It was by chance that Mr. Lachance's personal housing expenses were assumed by EGL.

[14]          For a taxable benefit to be conferred by an employer on an employee, it is essential that the benefit be granted without the employee paying for the value of that benefit or without the employer being entitled to such payment. In the case at bar, if Mr. Lachance had known that part of the expenses paid by EGL were in fact personal expenses, he would have reduced the amount of his and his wife's advance accounts accordingly. Moreover, that is what was done for the 35% of the housing expenses that were paid by EGL and considered as personal expenses by Mr. and Mrs. Lachance.

[15]          Since EGL was entitled to be reimbursed for the full portion of the personal housing expenses and the real intention of the Lachance couple was to do so, it is difficult to find that a taxable benefit was conferred on Mr. Lachance. Obviously, so long as a dispute between him and the Minister concerning the reasonable allocation of expenses between EGL's business activities and the couple's domestic needs was unresolved, Mr. Lachance was not in a position to determine what he owed EGL. It would be reasonable to expect that, once the full amount of the personal housing expenses paid by EGL has been determined, the outstanding balance be reimbursed to EGL. If that amount were not reimbursed, the issue of a taxable benefit might arise once again. However, I am not required to resolve that issue in the instant case and I shall refrain from doing so.

Meal expenses

[16]          Mr. Lachance submitted numerous exhibits to substantiate his assertions that the meal expenses paid by EGL were expenses incurred in the ordinary course of his business. However, I was not satisfied that all these expenses were business expenses for EGL. First, Mr. Lachance did not provide supporting documents for 3% to 10% of the meal expenses.[1] In the case of some of the documents, he was unable to state the name of the person he met with or the reason for the meeting. Second, even when the name of the person he met with and the reason for the meeting were provided, it was rather odd to note that the amount of the bill appeared to reflect the cost of a meal for one person rather than for two. In the circumstances, I believe that at least 10% of all the meal expenses paid for by EGL may reasonably be considered to be personal expenses of Mr. Lachance. The value of the benefit conferred on him would thus be $638 for 1991, $799 for 1992 and $425 for 1993.

[17]          I am not prepared to give the meal expenses the same treatment that I gave to the housing expenses. In the case of the housing expenses, there could be some uncertainty as to what a reasonable percentage would be in allocating the business and personal use of the residence. In the case of the meal expenses, I do not believe that there was such uncertainty. I assume that Mr. Lachance was well aware that some of those expenses were personal expenses. In the circumstances, since the personal meal expenses were not reimbursed by Mr. Lachance, I find that EGL's intention was to confer a benefit on Mr. Lachance and that he had no intention of reimbursing them.

[18]          For these reasons, the appeals of Mr. Lachance are allowed and the assessments for the 1991, 1992 and 1993 taxation years are referred back to the Minister for reconsideration and reassessment on the basis that the only amounts that must be included as additional income are $638 for 1991, $799 for 1992 and $425 for 1993. With regard to costs, Mr. Lachance is entitled to his disbursements for the preparation of his appeals before the Court, including those for photocopying.

Signed at Ottawa, Canada, this 11th day of May 2001.

"Pierre Archambault"

J.T.C.C.

Translation certified true on this 4th day of december 2002.

Sophie Debbané, Revisor

[OFFICIAL ENGLISH TRANSLATION]

96-4730(IT)G

BETWEEN:

MARCEL LACHANCE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard in Quebec City on December 8, 2000, by

the Honourable Judge Pierre Archambault

Appearances

For the Appellant:                                                                 The Appellant himself

Counsel for the Respondent:                              Anne Poirier

JUDGMENT

                The appeals from the assessments made under the Income Tax Act for the taxation years 1991, 1992 et 1993 are allowed and the assessments are referred back to the Minister for reconsideration and reassessment on the basis that the only amounts that should be included as additional income are $638 in 1991, $799 in 1992 and $425 in 1993. The appellant is entitled to costs for the disbursements incurred in preparing his appeals to the Court, including those for photocopying.

Signed at Ottawa, Canada, this 11th day of May 2001.

"Pierre Archambault"

J.T.C.C.

Translation certified true on this 4th day of december 2002.

Sophie Debbané, Revisor

[OFFICIAL ENGLISH TRANSLATION]