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Docket: 2004-2312(IT)I |
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BETWEEN: |
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SLAWOMIR PODLESNY, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
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Appeals heard on January 25, 2005, at London, Ontario.
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Before: The Honourable D.G.H. Bowman, Associate Chief Justice |
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Appearances: |
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Agent for the Appellant: |
Edward Sheehan |
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Counsel for the Respondent: |
Geneviève Léveillé |
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JUDGMENT
It is ordered that the appeals from assessments made under the Income Tax Act for the 2000 and 2001 taxation years are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the Reasons for Judgment.
Signed at Ottawa, Canada, this 3rd day of February 2005.
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"D.G.H. Bowman" |
Bowman, A.C.J.
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Citation: 2005TCC97 |
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Date: 20050203 |
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Docket: 2004-2312(IT)I |
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BETWEEN: |
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SLAWOMIR PODLESNY, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Bowman, A.C.J.
[1] These appeals are from assessments of income tax for the appellant's 2000 and 2001 taxation years. In those years the appellant was employed by the St. Thomas-Elgin General Hospital as a physiotherapist. He travelled each day from London to the hospital where he worked during the day. There is no issue with respect to the cost of travelling to that place of employment. It is not deductible.
[2] What is in issue is the extent to which he is entitled to deduct the cost of two automobiles used in his employment with two other employers, Comcare (Canada) Limited and Para-Med Health Services. Both of those companies provided in-house care to patients. The appellant's specialty as a physiotherapist is with persons suffering from chronic obstructive pulmonary disease.
[3] In each of the two years under appeal he visited 1100 - 1200 patients. His normal practice was to visit his patients in the morning before he went to work at the hospital or after work in the evening. Somewhat less than one half of his fairly substantial income came from his home care employment.
[4] In each of the two years he owned three automobiles. In 2000 he owned a Volkswagen Passat, a Honda Accord and a GMC Sierra. His evidence - it was not contradicted - is that he used the GMC and the Honda throughout 2000 for the purpose of visiting his patients and the Volkswagen for personal use. The GMC had been bought in November 1999 and he began using it to visit patients on January 2, 2000. The same pattern was followed in 2001. He bought a Subaru Forester in November of 2000 and started using it on January 2, 2001 to visit patients. Throughout 2001 he used the GMC and the Subaru to visit patients and the Honda for personal use.
[5] He kept a meticulous record of his trips to visit patients, setting out the names of the patients, their addresses and the number of kilometres travelled as well as the automobile he used.
[6] At the opening of trial counsel moved to amend the reply to the notice of appeal to refer to section 67 and paragraph 13(7)(b) of the Income Tax Act. I permitted the amendment with respect to paragraph 13(7)(b) because it was acknowledged that that provision was the basis of that portion of the assessments whereby the Minister assumed that the GMC and the Subaru were deemed to have been acquired in 2000 and 2001, respectively. I did not however allow the amendment with respect to section 67 because I was not aware that the disallowance of some of the capital cost allowance ("CCA") was specifically based upon the view that it was unreasonable for him to use two cars exclusively for visiting patients and I thought it was rather late in the day to confront a litigant who was not represented by counsel with a new and significant argument. However, it became obvious from the evidence of the appeals assessor, Mr. Okonski, and his cross-examination that reasonableness was the basis upon which the appellant was not allowed 97% CCA on both cars. Indeed a letter to the appellant from the Canada Customs and Revenue Agency dated September 8, 2003 specifically refers to the concept of reasonableness as a basis for allowing CCA of 50% on each vehicle. Therefore the point was fully argued by Mr. Podlesny's representative and counsel for the respondent.
[7] The records that Mr. Podlesny kept established that in each of the two years, 97% of the total mileage on each of the two cars (the GMC and the Honda in 2000 and the GMC and Subaru in 2001) was used for visiting patients. Indeed, the CCRA appears to have been satisfied on this point because some of the assumptions pleaded in the reply were:
11. In reassessing tax for the 2000 and 2001 taxation years, the Minister assumed the following facts:
. . . . .
(d) at all material times, the Appellant owned three vehicles, and used two of those vehicles for business purposes;
(e) in the 2000 taxation year, the Appellant owned a VW Passat, a GMC Sierra and a 1998 Honda Accord, and used the GMC Sierra and the Honda Accord for business purposes;
(f) in the 2001 taxation year, the Appellant owned a Honda Accord, a GMC Sierra and a Subaru Forester, and used the GMC Sierra and the Subaru Forester for business purposes;
(g) in the 2000 and 2001 taxation years, the business use of the Appellant's vehicles was 97%;
[8] In light of these admissions I have some difficulty in seeing how I can make an adverse finding against the appellant on some of the points that are in issue. The issues that need to be dealt with are the following:
(a) Was there a change of use in 2000 in respect of the GMC and in 2001 in respect of the Subaru giving rise to deemed acquisition of these vehicles in 2000 and 2001 respectively?
(b) Is the appellant entitled to use two cars to visit his patients so that his expenses and CCA for both cars can be claimed to the extent of 97%?
[9] On assessing, the Minister allowed the full amount claimed for fuel for both vehicles used in those years as employment expenses. In 2000 he allowed $3,291 for the GMC and Honda and $3,220 for the GMC and Subaru. Similarly, he allowed the full amount claimed for maintenance on the automobiles as employment expenses. This amount was $883 for 2000 on the GMC and Honda and $4,468 for the GMC and Subaru. Also, he allowed the full amount claimed for car washes - $99 in 2000 for the GMC and Honda and $220 for 2001 on the GMC and Subaru.
[10] However, at this point the taxpayer's and the CCRA's paths diverge. The CCRA allowed $1,134 on the Honda in 2000 for insurance, $75 on the Honda for a licence and $1,531 for interest on the Honda. He allowed no part of the amounts claimed in 2000 on the GMC for insurance, licence and interest ($771, $75 and $505 respectively). Similarly, for 2001 he allowed $1,488, $75 and $1,156 on the Subaru for insurance, licence and interest but none of the amounts claimed on the GMC for these items ($1,245, $75 and $364).
[11] While he denied the amounts completely in respect of the GMC, he allowed less than 50% of the total CCA claimed on both cars. The amounts claimed in 2000 were $9,315 and $5,321 on the GMC and Honda respectively for a total of $14,636 and in 2001, $6,520 and $10,350 on the GMC and Subaru respectively for a total of $16,870. The amounts allowed for CCA by the Minister for 2000 were $4,658 and $5,321 for the GMC and Honda respectively for a total of $4,990 and for 2001, $7,918 and $5,175 for the GMC and Subaru, respectively for a total of $6,547.
[12] The difference between the amount claimed for CCA and the amount allowed is not simply a 50% reduction of the amount claimed. It is a little more complex than that. First of all, the Minister assumed a deemed acquisition of the GMC in 2000 and the Subaru in 2001, the year after each of these cars was acquired. The theory was that under paragraph 13(7)(b) they had been acquired for personal use in 1999 and 2000 respectively and had started to be used in 2000 and 2001 for the purpose of earning income. Second, on the basis of the deemed acquisition in 2000 and 2001 respectively, he applied the half year rule in subsection 1100(2) of the Income Tax Regulations which permits a taxpayer to deduct in the year of acquisition only 50% of the CCA which the taxpayer would otherwise be entitled to claim. Third, the Minister applied the limitation on the cost that may be used for automobiles costing over $20,000. The limitation under section 7307 of the Regulations was $26,000 in 1999, $27,000 in 2000 and $30,000 in 2001.
[13] To summarize then: the Minister accepts that the "business" (strictly speaking, employment) use of the two automobiles was 97%. He allowed all of the gas, maintenance and car washes claimed for both automobiles, but only insurance, license and interest on one of the two and a portion of the CCA claimed on both. The uncontradicted evidence is that the appellant in fact used the two automobiles almost exclusively (97%) for the purpose of visiting his home care patients and did not use them for personal purposes (including driving to work at the St. Thomas-Elgin General Hospital). Indeed he testified that he would drive his "business" car home from visiting patients and leave it there and take his personal car to work. This strikes me as a little surprising but I have no basis upon which I can reject the evidence.
[14] The appellant's agent argued that the Minister's assessing actions were inconsistent in the sense that he allowed some expenses on both vehicles and some on only one. At first blush it may be that is how it appears. Nonetheless, inconsistencies in assessing are seldom a very good reason for varying an assessment. The question is whether the assessment is right or wrong, not whether some of its constituent elements are inconsistent.
[15] There is also the question of reasonableness which was not pleaded but which appears to have been an important consideration in the making of the assessments. It is obvious to me that Mr. Podlesny was rather aggressive in claiming the cost of two cars in computing his employment income. It is equally obvious that he liked cars. That, however, is his choice. It is not for me or the Minister to second-guess his business judgement and say that he cannot use two cars for business purposes even though he might have been able to make do with only one, and a cheaper one at that. His work is important and at times urgent. His decision to have two well maintained automobiles is not so patently absurd that I would be justified in setting it aside as irrational or capricious. (See, for example, Gabco Ltd. v. M.N.R., [1968] DTC 5210). To do so would require me to substitute my business judgement for that of the taxpayer and that is not something that I am entitled or prepared to do. Moreover, I would be to some extent usurping the role of Parliament. If Parliament wants to say that you can only use one car in your business it knows how to say so, just as it has put a limit on how much CCA you can claim on a luxury car. I do not think that one can, under the guise of "reasonableness" substitute the court's judgement for that of the taxpayer. This is to some degree what Tremblay J. did in Beauchemin v. M.N.R., 77 DTC 26, where a doctor claimed the business use of two cars. At page 4, Tremblay J. said:
4.1 Two automobiles in 1972
One of the principal arguments of the respondent is that, if they are to be allowed, the expenses must be reasonable, in accordance with section 12(2) of the Income Tax Act, R.S.C. 1952, c. 148, as amended, and section 67 of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended.
The respondent contends that it was unreasonable to claim depreciation and expenses for two automobiles in the same year, particularly as one of the vehicles was a Porsche and the other a Blazer jeep.
Counsel for the respondent cited a number of precedents: G. H. Chambers (Northiam Farms) Ltd. v. Watmough (H.M. Inspector of Taxes), 36 T.C. 711; Niessen v. Minister of National Revenue, 60 DTC 489, (1960) Tax A.B.C. 62; No. 485 v. Minister of National Revenue, 58 DTC 69, (1958) Tax A.B.C. 358; Zakoor v. Minister of National Revenue, 64 DTC 392, (1964) Tax A.B.C. 338; W. J. Kent and Co. Ltd. v. Minister of National Revenue, 72 DTC 1018, (1971) Tax A.B.C. 1158.
These cases held that expenses claimed or vehicles considered as luxuries (Bentley, Cadillac, Rolls-Royce) were unreasonable expenses. The taxpayers had not shown that in fact their business required the use of a vehicle considered to be a luxury.
According to the evidence submitted in the case at bar, the Board is of the opinion, first, that the use of a special vehicle appropriate for winter driving, namely, the Blazer jeep, was justified. The urgent and frequent need of his medical services particularly when a storm was raging, justified this expenditure.
The evidence has shown that another automobile was also needed for the rest of the year. The Board does not consider, however, that an automobile as costly as a Porsche was required. The appellant's argument to the effect that the purchase of an automobile with a certain prestige could only promote an increase in the size of his practice does not convince the Board, just as such arguments did not earlier satisfy the courts. The Board accordingly allows, in respect of a second automobile, half the cost of the Porsche, namely $5,627. The purchase of an automobile at that price in 1972 would have been reasonable for the professional needs in question.
Similarly, Chairman Flanigan of the Tax Review Board, in Raz v. M.N.R., 74 DTC 1136, said at paragraphs 9 and 10:
The evidence is clear that he acquired the Oldsmobile in 1968 to replace the Princess. From then on there is no evidence whatsoever that the Princess was ever used as a result of the failure of the Oldsmobile to be available to him for any purpose. It then became a matter of choice to him which motor vehicle he used.
In my view, this situation does not entitle a sole taxpayer operating a business to use more than one motor vehicle in the earning of income. In my judgment, the appellant is entitled to depreciation in the manner computed by the Minister; that is, by adding the Oldsmobile to the class in 1968 and deleting the Princess from that time on as not being used for business purposes.
[16] A determination of reasonableness does not justify arbitrariness. In 2831422 Canada Inc. et al v. The Queen, 2002 DTC 3930, the following observations were made:
[8] ... What is reasonable in any circumstance is a matter of fact, judgment, and common sense. In Words and Phrases Legally Defined there are eight pages of two columns dealing with the words reasonable or reasonably, yet no court of which I am aware has ever had the temerity to try to formulate a comprehensive definition of the word, nor do I. Any attempts to assign a meaning to it usually end up using the word itself. It is said to imply the application of objective criteria but it is a word of such fluidity and elasticity that a judge must resist the temptation to let some element of subjectivity creep into his or her determination. What may seem reasonable to one judge may not to another. Attempts to define the "reasonable person" usually end up deferring to some hypothetical passenger on the Clapham omnibus. One can ask "What would an impartial observer possessing a somewhat (but not excessively) above average intelligence, knowing all the relevant facts, having no preconceived notions, biases or hidden agendas consider to be reasonable?" In short, one draws the line between reasonable and unreasonable where one's good sense tells one to draw it.
[17] Even if the question of reasonableness had been pleaded I would not be prepared to uphold the Minister's action in allowing certain expenses on only one automobile or allowing CCA on both automobiles but limiting it to what is essentially the total amount that might be claimed on one. This sort of rough and ready approach may have a certain superficial attractiveness but it is simply not in accordance with a measured application of the rule of reasonableness. It is arbitrary. Once it is accepted that the "business" use of two automobiles is 97%, the Minister cannot simply reduce the amount allowed to a figure that he finds more palatable.
[18] I propose to dispose of these appeals as follows:
(1) I find that there was a change of use of the Subaru in 2001 from personal to business use and a deemed acquisition in that year. Therefore, the half year rule applies as well as the prescribed limit on the cost applicable to an acquisition in 2001. I make this finding on the basis of Mr. Podlesny's admission in a letter dated January 27, 2003 (Exhibit R-7) in which he states that the Subaru became his personal car for the remainder of 2000.
(2) The evidence does not support the same conclusion for the GMC. I find that it was acquired in 1999 for the purpose of earning income and that there was no change of use in 2000. Therefore, this car was acquired at its actual cost in 1999 and the one-half year rule applies to 1999 even though no CCA was claimed in that year, and it does not apply to 2000. This conclusion would normally mean that the prescribed deemed capital cost under paragraph 13(7)(b) would be the figure applicable to 1999. However, since the Minister has used the 2000 figure of $27,000, I cannot refer the matter back to achieve a less favourable result than the Minister accorded to the taxpayer.
(3) The appellant is entitled to claim CCA on the GMC and the Honda in 2000 and on the GMC and the Subaru in 2001 to the extent permitted by the Income Tax Act and Regulations without any reduction on the basis that he is entitled to CCA only on the equivalent of one car.
(4) The appellant is entitled to deduct his insurance, licence and interest costs on the GMC in 2000 and 2001.
[19] The appellant is entitled to his costs, if any, in accordance with the tariff.
Signed at Ottawa, Canada, this 3rd day of February 2005.
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"D.G.H. Bowman" |
Bowman, A.C.J.
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CITATION: |
2005TCC97 |
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COURT FILE NO.: |
2004-2312(IT)I |
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STYLE OF CAUSE: |
Slawomir Podlesny and Her Majesty The Queen |
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PLACE OF HEARING: |
London, Ontario |
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DATE OF HEARING: |
January 25, 2005 |
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REASONS FOR JUDGMENT BY: |
The Honourable D.G.H. Bowman, Associate Chief Justice |
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DATE OF JUDGMENT AND REASONS FOR JUDGMENT: |
February 3, 2005 |
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APPEARANCES: |
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Agent for the Appellant: |
Edward Sheehan |
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Counsel for the Respondent: |
Geneviève Léveillé |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
John Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada |