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Docket: 2003-1740(IT)I |
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BETWEEN: |
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JON BRESLAW |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeals heard on December 11, 2003, at Montreal, Québec
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By: The Honourable Justice C.H. McArthur |
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Appearances: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Emmanuelle Faulkner |
____________________________________________________________________
JUDGMENT
The appeals from assessments of tax made under the Income Tax Act for the 1997 and 1998 taxation years are dismissed.
Signed at Ottawa, Canada, this 27th day of April, 2004.
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"C.H. McArthur" |
McArthur J.
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Citation: 2004TCC299 |
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Date: 20040427 |
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Docket: 2003-1740(IT)I |
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BETWEEN: |
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JON BRESLAW |
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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
McArthur J.
[1] This is an appeal from the decision of the Minister of National Revenue disallowing expenses claimed by the Appellant for the 1997 and 1998 taxation years on the basis that they were personal and not business expenses. The Appellant also appeals from an assessment of a capital gain from the sale of shares.
[2] During the 1997 and 1998 taxation years, the Appellant was employed as a professor with Concordia University. In addition he was at the time and remains today, the sole proprietor of a business, "Econotron", which markets economic analysis software having its head office in the Appellant's home.
[3] Hetestified on his own behalf. Auditors Hubert Degroot and Jean-Claude Roy testified on behalf of Canada Customs and Revenue Agency (CCRA) as well as appeals officer, Donald Lecours.
[4] Originally, there were a number of business expenses in dispute. Many of these were resolved in the interim between the pleadings being filed and the hearing. At the outset of trial, I permitted the Minister's amended Reply relating to the capital gains reassessment.
[5] The Minister performed an audit of the Appellant's 1998 taxation year resulting in an assessment that reduced expenses claimed and added a capital gain from the sale of flow-through shares of Millstream Mines Ltd.
[6] The Appellant argued that the reassessment for the capital gain is statute-barred because it was made after the expiry of the three-year limitation. The Minister relied on subsection 152(4)(a)(i) of the Income Tax Act to reassess for the capital gain. Any reassessment beyond the three-year limitation is restricted by subsection 152(5) to amounts that formed part of the original assessment or reassessment within the three-year period. Paragraph 152(4)(a) provides an exception to subsection 152(5) by authorizing the Minister to reassess beyond three years if the taxpayer made a misrepresentation in filing his or her return.
[7] The guiding case for allowing an amended Reply is The Queen v. Canderel Limited[1] where Décary J.A. stated at paragraph 9:
... while it is impossible to enumerate all the factors that a judge must take into consideration in determining whether it is just, in a given case, to authorize an amendment, the general rule is that an amendment should be allowed at any stage of an action for the purpose of determining the real questions in controversy between the parties, provided, notably, that the allowance would not result in an injustice to the other party not capable of being compensated by an award of costs and that it would serve the interests of justice.
[8] In the present case, both Replies refer to the capital gain arising from the sale of the flow-through shares. The original Reply unfortunately did not address the statute-barred issue nor alleged a misrepresentation under subparagraph 152(4)(a)(i).
[9] For the reasons that follow, the filing of the amended Reply is allowed. First, the Appellant had ample notice before the hearing that the Minister was relying on this section to reassess for the capital gain. Second, the amended Reply does not raise a new basis for assessment; rather, it clarifies the statutory grounds for an issue in dispute between the parties. Third, it is implicit in the facts assumed by the Minister that he intends to establish that the assessment for the capital gain is not statute-barred because of a misrepresentation by the Appellant. Finally, the appeals are under the more relaxed informal procedure.
[10] The Appellant had time to prepare and respond to this basis for reassessment.[2] The second reassessment dated November 15, 2002, over one year before the hearing, put the Appellant on notice of the statutory grounds for reassessment of the capital gain. The second reassessment refers to subparagraph 152(4)(i)[3]under the "explanation of changes" heading. The Appellant raised this apparent typographical error as grounds for disallowing the amended Reply. His position was that he was unable to determine the provision that the Minister was relying on to reassess for the capital gain. I do not accept this assertion.
[11] It is obvious that the Minister intended to refer to paragraph 152(4)(a)(i). Subsection 152(8) deems assessments valid and binding notwithstanding an error in the assessment. Similarly, section 166 preserves the validity of assessments notwithstanding irregularities and informalities in the compliance of directory provisions in the Act.
[12] The Appellant acknowledged that he was not surprised by the changes in the amended Reply. Indeed, the Minister explained to the Appellant that the reassessment of the capital gain arose under subparagraph 152(4)(a)(i). The meeting between the parties followed discussions with CCRA after the Appellant's objection to the second reassessment when he was informed of the grounds for the reassessment of the capital gain.
[13] The original Reply made the following assumptions of fact about the capital gain:
6. In 1998 the Appellant disposed of his investment in the flow-through shares issued by Millstream Mines Ltd.
(a) The disposition of the shares provided an additional taxable capital gain for the taxation year in the amount of $27,768.75 calculated as follows:
Total proceeds of disposition $37,025.00
Less: ACB $ 0.00
Capital gain $37,025.00
Taxable capital gain $27,768.75
(b) The shares were held in the name of the Appellant and therefore were capital property of the Appellant.
(c) For the taxation years prior to the disposition the Appellant claimed the deductions allowed in relation to the ownership of the flow-through shares.
(d) Millstream Mines Ltd. is a corporation listed with the Toronto Stock Exchange and therefore does not meet the definition of a Small Business Corporation as it is a public corporation and not a Canadian Controlled Private Corporation.
(e) The flow-through shares disposed of by the Appellant were not qualified Small Business Corporation shares and therefore were not qualified shares for the purpose of the Capital Gains Exemption
(f) The ACB of the flow-through shares was Nil.
The amended Reply added the following regarding the flow-through shares.
(g) The Appellant did not declare the capital gain on the disposition of the flow-through shares for the 1998 taxation year.
The issues related to the disposition of the flow-through shares in the original Reply are listed above (letters (a) to (e)). The amended Reply also added the following:
(l) Did the Appellant make a representation that is attributable to neglect, carelessness or wilful default in filing his income tax return for the 1998 taxation year.
[14] The original Reply and the amended one set out the sections of the Act which the Minister relied on to reassess the capital gain: subsection 38(a), paragraph 39(1)(a), subparagraph 66.3(1)(b), subsections 110.6(1), 110.6(2.1) and 165(3).
[15] The assumption of fact that the Appellant did not declare the capital gain on the disposition of the flow-through shares for the 1998 taxation year formed the basis for the allegation of misrepresentation. The original Reply stated that the flow-through shares were capital property of the Appellant, that he took a deduction for these shares prior to 1998, and that the shares were disposed of. The implication was that the Minister sought an explanation from the Appellant for the pattern of taking a deduction for these shares and the nature of the gain upon their sale. I have no difficulty in concluding that the Appellant is not prejudiced by allowing the amendment.
[16] Did the Appellant make a misrepresentation that is attributable to neglect, carelessness or wilful default in filing his income tax return for the 1998 taxation year? The relevant provision states:
152(4) The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, ..., except that an assessment, reassessment or additional assessment may be made after the taxpayer's normal reassessment period in respect of the year only if
(a) the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default ... .
A useful approach to applying this provision is set out by Bowman A.C.J. in Sarraf et al. v. M.N.R., 94 DTC 1506 at pages 1507-08:
... A brief review of the rules relating to the making of reassessments after the normal reassessment period may be worthwhile:
(a) where a taxpayer wishes to attack an assessment as having been made beyond the normal reassessment period ... the basis of challenge should be pleaded and it is for the taxpayer to establish a prima facie case that the reassessment has indeed been made beyond that period, unless the date of the original assessment is obvious from the material before the court;
(b) if a taxpayer has, in a return of income, made a misrepresentation that is attributable to neglect, carelessness, or wilful default ... the Minister is entitled under subsection 152(4) of the Income Tax Act to assess beyond the normal reassessment period. The Minister's entitlement to reassess beyond the normal reassessment period must be established by proving the existence of any of the elements set out in subparagraph 152(4)(a)(i). It is up to the Minister to do so;
(c) if those elements are established the onus shifts back to the taxpayer under paragraph 152(5)(b) to establish that the failure to include in the return an amount included in a reassessment beyond the normal reassessment period did not result from any misrepresentation that is attributable to negligence, carelessness or wilful default.
In each case the shifting onus is a civil one and may be satisfied by making out a prima facie case which, if unrefuted by the opposing party, stands.
[17] The second reassessment is more than three years after the original assessment. The Minister had to establish a misrepresentation by the Appellant as set out in subparagraph 152(4)(a)(i).
[18] I accept the evidence of the Minister's officers, Messrs. Roy and Lecours.
[19] The Appellant claimed 100% of the deduction for these flow-through shares in years prior to their disposition in 1998. However, the 1998 disposition of the flow-through shares was improperly declared by his wife who had a lower income. A letter from TD Waterhouse Investor Services (Exhibit R-5) confirms that the trading account from which the flow-through shares were sold was opened in the name of the Appellant. The Appellant did not challenge this evidence.
[20] Heprovided a letter from his investment advisor, Stan Lichman (Exhibit A-2) asserting that he was not negligent because he had investment advice to purchase these shares. The letter does not challenge the Minister's position that the Appellant owned the shares alone. Nor does it advise the Appellant to declare the capital gain on the sale of these shares in his wife's income tax return.
[21] Overall, the Appellant did not demolish the Minister's assumptions of fact related to the misrepresentation nor convincingly challenge the evidence given in court. In his arguments, the Appellant cited Sarraf, supra and Anchor Pointe Energy Ltd. v. Canada [2002] T.C.J. No. 502. Both passages relied on, restate the statutory rules pertaining to reassessments.
[22] I find that the Minister established on a balance of probabilities that the Appellant misrepresented reporting the sale of the flow-through shares. The Appellant owned the shares alone and took a deduction against his income in the years prior to the sale of the shares and when the shares were sold, the capital gain was attributed to his wife's income. The Appellant's misrepresentation was due to wilful default.
[23] Having allowed the amended Reply and found that the Minister has established that the Appellant misrepresented the sale of the flow-through shares, I now turn to the issue of the capital gain.
[24] The taxability of capital gains is set out generally under subsection 38(a).[4] For the years in issue the taxable portion was 75% of the capital gain. Other relevant legislation includes the following:
110.6(1) For the purposes of this section,
"qualified small business corporation share" of an individual (...) at any time (...) means a share of the capital stock of a corporation that,
(a) at the determination time, is a share of the capital stock of a small business corporation owned by the individual... (emphasis mine)
110.6(2.1) In computing the taxable income for a taxation year of an individual (...) who was resident in Canada throughout the year and who disposed of a share of a corporation in the year or a preceding taxation year and after June 17, 1987 that, at the time of disposition, was a qualified small business corporation share of the individual, there may be deducted such amount as the individual may claim
125(7) "Canadian-controlled private corporation" means a private corporation that is a Canadian corporation other than a corporation
...
(c) a class of the shares of the capital stock of which is listed on a prescribed stock exchange;
248.(1) "small business corporation", at any particular time, means, subject to subsection 110.6(15), a particular corporation that is a Canadian-controlled private corporation.
[25] The Respondent submitted a printout from the Toronto Stock Exchange indicating that Millstream Mines Ltd. is a publicly traded company (Exhibit R-6). A publicly-traded corporation is not a qualified-small business and thus not a Canadian-controlled private corporation (CCPC). Therefore, the sale of Millstream Mines Ltd. flow-through shares does not qualify for the capital gains exemption pursuant to subsections 110.6(1) and 110.6(2.1).
[26] The Appellant made no argument that the shares did qualify for the capital gains exemption. The letter from his investment advisor in reference to the flow-through shares states:
... I advised Dr. Breslaw that a large portion of the shares purchased had aged and could be treated as QSBC (Qualified Small Business Shares) for taxable gain purposes.
It does not set out whether the flow-through shares at issue form the portion which "could be treated" as qualified small business shares and is of no assistance.
[27] The Appellant did not challenge this assumption. The Minister assumed as fact that the adjusted cost base flow-through shares was nil on the basis of subsection 66.3(1).
[28] The Appellant disposed of the shares that did not qualify for capital gains exemption. The Minister correctly determined that the cost of the shares was nil. The appeal of the reassessment of the capital gain is dismissed. The Minister did not seek a penalty under subsection 163(2) of the Act and this is not addressed.
[29] With respect to the business expenses claimed by the Appellant, the following are the relevant provisions:
18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property; (emphasis added)
...
(h) personal or living expenses of the taxpayer, other than travel expenses incurred by the taxpayer while away from home in the course of carrying on the taxpayer's business;
67 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.
[30] The following amounts were consented by the Respondent prior to the hearing (Exhibit R-3):
Taxation years
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1997 |
1998
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Total Expenses vouched and allowed before to hearing |
$18,603 |
$9,891 |
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Previously allowed |
$4,695 |
$3,755 |
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Increase / additional expenses) |
$13,908 |
$6,136 |
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Maintenance and Expense during hearing |
$3,667 |
$858 |
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Subtotal |
$17,575 |
$6,994 |
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CCA class 8 office furniture |
$547 |
$984 |
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Total additional Expenses |
$18,122 |
$7,978 |
The following amounts are in dispute:
Taxation Years
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1997 |
1998 |
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Decision required on |
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1) Maintenance & Repair |
$47,520 |
$25,753 |
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x .25 |
$11,880 |
$6,438 |
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Allowed above |
$ 3,667 |
$858 |
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Additional Maintenance Sought |
$8,213 |
$5,580 |
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2) Painting |
$13,104 |
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. 25% |
$3,276 |
UCC $2,948 x .20 $590 |
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1/2 Yr. Rule .50 |
$1,638 $328 |
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- CCA 20% |
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3) Capital Gain on disposal of Millstream shares |
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[31] An expense is only deductible if the taxpayer incurs it to earn income. In some cases, it is obvious that an expense is of a business nature, raising no serious issue of deductibility. Often, however, some expenses have both personal and business characteristics. In this situation, which is common in home-office cases such as the present one, the reason that the business incurred the expense must be determined. The Court's role is to determine if the expense is predominantly business or personal, or, alternatively, make a fair allocation.
[32] The position of the Minister was that the Appellant did not provide documentary evidence to support a claim that 25% were business expenses incurred for the purpose of earning income. The Minister allowed the expenses claimed in the Appellant's 1997 and 1998 tax returns because they could be vouched for. However, the additional amounts that the Appellant sought for these years should be denied because they relate to renovations to the Appellant's home used for personal purposes.
[33] The Minister relied on the testimony of Jean-Claude Roy who prepared the Report on Objection by the Appellant for the 1997 and 1998 assessments. As for the expenses, Roy stated that many of the vouchers provided to him by the Appellant were insufficiently detailed.
[34] Donald Lecours testified that he visited the Appellant's home and calculated the square footage of the office area. The actual office composed 100 square feet of a 1,789 square foot home. Lecours accepted that the library and living room were used, in part, for the business. Lecours used a formula to calculate the expenses attributable to the business for these areas testifying that the combined areas used for the business in the Appellant's home would entitle him to treat 8.6% of the expenses as business expenses. The Appellant requests 25%.
[35] Hesubmitted a table (Exhibit A-1) setting out all of the business expenses for Econotron for the years 1997 to 1999. He stated that in 1997, the Minister allowed $2,111 for business expenses of heat, electricity and municipal tax. This expense is listed under the heading "Business Use of Home," separate from the expenses. Also, the amount $2,111 is 25% of the total for these expenses which was $8,445. The Minister did not challenge this. In addition, the Appellant testified that, later confirmed by Hubert Degroot, of an agreement between the Appellant and the CCRA that 25% would be used for allowing certain business expenses.
[36] The Appellant relied on Canada Steamship Lines Limited v. M.N.R., 66 DTC 5205, and Interpretation Bulletin IT-128, for support that these were current expenses because they restored the home to its original condition. He also cited Nieboer v. Canada, [2000] T.C.J. No. 232, where the Court found that a proportion of the costs for repairs to the eaves trough at the home of a taxpayer who operated a business from the home were current.
[37] I accept the testimony of Roy and Lecours that a claim of 25% of the expenses as business expenses is unreasonable. The test is to show how the expenses were incurred for the purpose of earning income. The Appellant did not provide evidence to establish that 25% of the expenses were incurred for the purpose of earning income from the business. Pursuant to paragraph 18(1)(h), I find that the remaining amounts claimed by the Appellant are for personal purposes and thus cannot be deducted. The Minister clearly explained that they could vouch for the original amounts listed by the Appellant in his T1 returns for 1997 and 1998. Beyond these amounts, which have been allowed (see table above), I do not allow the additional amounts sought by the Appellant.
[38] The final issue is whether a proportion of a painting's purchase price of $13,104 can be considered a business expense. If so, the Appellant seeks to deduct the capital cost allowance (CCA) for the painting. The Minister's position was that the painting is personal and thus does not qualify for CCA.
[39] Subsection 20(1) sets out the deductions permitted in computing income from business or property and paragraph (a) refers to deductions for the capital cost of property as allowed by the Regulations. Schedule II of the Regulations sets out the classes of property for CCA. Class 8 is considered the "catch-all" class because it covers tangible capital property that is not specifically excluded by the exceptions listed under Class 8 or by Regulation 1102. Generally, artwork such as a painting acquired by a taxpayer can qualify as a Class 8 asset and be eligible for CCA at a rate of 20% provided that the artwork was acquired for the purpose of gaining or producing income; the artwork is not described in the taxpayer's inventory; the cost of the artwork to the taxpayer was $200 or more; and the individual who created the artwork was a Canadian.
[40] The Appellant testified that the painting is hanging in a room adjoining the library. This room is a reception area and the Appellant typically meets with clients in the library. The Appellant argued that having the painting in the reception area is analogous to the situation of a lawyer who has art hanging in his law firm. Art used in such contexts helps to create a particular image of the business for his clients. Thus, the purchase of the painting was in part an expense incurred for the purpose of earning income. The Appellant argued that 25% of the purchase price was a business expense against which he could deduct CCA.
[41] I agree with the Minister's counsel that there was no proof that the Appellant had client's coming to his office and that the painting had a business purpose. It was for his own personal enjoyment and had no business purpose.
[42] When the evidence is conflicting, I accept that of the Minister's witnesses over the Appellant particularly in light of the Appellant's blatant manipulations of the flow-through shares which I believe were reprehensible.
[43] With the exception of amounts consented to by the Minister prior to the hearing, the appeals are dismissed.
Signed at Ottawa, Canada, this 27th day of April, 2004.
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"C.H. McArthur" |
McArthur J.
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CITATION: |
2004TCC299 |
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COURT FILE NO.: |
2003-1740(IT)I |
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STYLE OF CAUSE: |
Jon Breslaw and Her Majesty the Queen |
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PLACE OF HEARING: |
Montréal, Québec |
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DATE OF HEARING: |
December 11, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice C.H. McArthur |
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DATE OF JUDGMENT: |
April 27, 2004 |
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APPEARANCES: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Emmanuelle Faulkner |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
N/A |
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Firm: |
N/A |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |
[1] [1994] 1 F.C. 3.
[2] Hollinger Inc. v. R., [1999] 4 C.T.C. 61.
[3] It should have read subparagraph 152(4)(a)(i) as paragraph 152(4)(i) does not exist.
[4] Paragraph 38(a) amended by 2001, c. 17, subsection 22(1). Taxable portion of capital gain 1/2. For taxation years prior to end of February 28, 2000 the taxable portion of a capital.