Dore v. The Queen

Dore v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2004-10-15 Neutral citation 2004 TCC 638 File numbers 2004-277(IT)I Judges and Taxing Officers Eric A. Bowie Subjects Income Tax Act Decision Content Citation: 2004TCC638 Date: 20041015 Docket: 2004-277(IT)I 2004-278(IT)I BETWEEN: LINDA DORE and ROGER J. DORE, Appellants, and HER MAJESTY THE QUEEN, Respondent. _______________________________________________________________ Agent for the Appellants: Linda Dore Agent for the Respondent: Katy Grist (Student-at-law) _______________________________________________________________ REASONS FOR JUDGMENT (Delivered orally from the Bench on July 16, 2004, at Vancouver, British Columbia) Bowie J. [1] During 1998, 1999 and 2000, Roger and Linda Dore operated a business out of their home as a 50/50 partnership. They sold Watkins products for household use by direct sale, and they rented out certain pieces of equipment, such as power washers, for those who required them infrequently and did not therefore wish to purchase them. These appeals are concerned with the computation of the losses of the business during each of these three years. The amounts at issue are set out in seven schedules attached to the Replies filed by the Minister. I propose to deal with the items disallowed at the partnership level. Each Appellant's income will be affected to the extent of 50% of the adjustments to be made. [2] The only disagreement as to revenues arises in 1998 when the last reassessment added $117.86 to the revenue reported. The Appellants are entitled to have that amount removed from income on the basis of Ms. Dore's evidence. I did not hear any explanation as to the reason for making that change. The Appellants are also entitled to succeed as to the amount of $2.78 of inventory. Ms. Dore said that they did a physical count of the inventory and I have no reason to disbelieve that it was done correctly, therefore $120.64 is removed from revenues. [3] Seven items of expense are disputed in the computation for 1998. They were all expenses that were disallowed in part by the assessor. There also was initially a dispute as to the capital cost allowance as adjusted by the assessor, but during the course of the hearing Ms. Dore agreed that the Minister's computation of capital cost allowance would be accepted. [4] I will now deal with the expense items. The first one is advertising and promotion, of which $152.93 was disallowed. This relates primarily to grocery items purchased for dinners to which prospective customers were invited, and some other minor items. These claims are not unreasonable, and I am satisfied that they were sufficiently business-related to be deductible under paragraph 18(1)(a) of the Act. Additional expense of $152.93 is allowed on that account. [5] Second, office expenses of $194.67 were disallowed. Ms. Dore's evidence satisfies me that these were all reasonable and business-related expenses, with the exception of an amount of $45.01 which the Appellants spent to have their kitchen chairs recovered. In my assessment of her evidence this was more in the nature of a personal expenditure than business-related. The Appellants are entitled to an additional $149.66 under that head. [6] The third item is the wages that the Appellants paid to their children, which were, as I understood it, disallowed on the basis of reasonableness under section 67. The Appellants' children are a 12-year-old boy and a 7-year-old girl or, more accurately, they were those ages at the relevant time. The Appellants paid $25 per month to their son and $15 per month to their daughter to perform duties to assist them in the partnership business. There is no question that the amounts were paid. The children were paid an allowance by their parents before this business came into being, and they were paid an allowance after the business had ceased to exist. These amounts were incremental, and Ms. Dore described duties that they performed. Reasonableness is properly to be assessed on the basis of the test set down by Mr. Justice Cattanach in Gabco Ltd. v. M.N.R.[1] He said there that to be disallowed as unreasonable, an expense must be such that no reasonable business person would have contracted to pay the amount for the work done, or services rendered, having only business considerations in mind. The amounts involved here are small. The son is paid significantly more than their daughter because his duties were significantly greater than their daughter. And while they did not punch a time clock, I am satisfied that the remuneration is reasonably commensurate with what they did for it. An additional $240 in expenses is therefore allowed under that head. [7] The fourth item in 1998 is $129.96 claimed to be deducted in connection with the expenses of a trip taken by the two Appellants and their two children from their home in Vancouver to the Okanagan Valley. I was told that the actual amount claimed was that paid for highway tolls and campground fees. Ms. Dore said the trip was for business purposes, specifically to promote the business by enlisting two specific people at their destination as salespersons. I am not persuaded that business was a predominant or even necessarily a significant motive for this trip. The trip and its description sounds much more like a family vacation than business travel. It was properly disallowed under paragraph 18(1)(h). [8] The fifth item is training, meals and entertainment amounting to $555.11 which was disallowed; $283.00 of that related to courses taken to improve skills of the Appellants and I think can be said they have had a reasonable, legitimate business purpose, and so it should be allowed. The balance of this item relates to amounts paid for dinners eaten by the Appellants and their two children at local restaurants. Ms. Dore described these events, which took place monthly, as business meetings at which the whole family discussed ways to improve the performance of their business, and at the same time spread out on their table in the restaurant various brochures and other materials provided by the Watkins company. She said that these attracted the attention of nearby diners, and that they promoted the products to those diners, as well as to the proprietors of the restaurants, and thereby advanced the interests of their business. I am mindful of the caution expressed by Mr. Justice Iacobucci in Symes v. Canada,[2] as to the scrutiny that should be given to items of expense that appear to have a highly personal element about them, and like the trips to the Okanagan Valley, I regard these dinners as much more in the nature of a family evening dining out than of a business meeting. In my view they should not be subsidized by the fisc, and were properly disallowed as being personal expenses. Therefore, $283.00 of additional expenses are to be added under the head of training, meals and entertainment. [9] The sixth item for 1998 relates to goods and services tax (GST) and provincial sales tax (PST) disallowed in respect of specific items of expense otherwise disallowed. To the extent that taxable items were disallowed by the assessor, she also disallowed the taxes paid. To the extent that the Appellants succeed in respect of such items in these appeals, they are entitled to a further adjustment related to the GST and PST. [10] The seventh item is motor vehicle expense, of which $933.09 was disallowed in the year 1998. I propose to leave motor vehicle expense for the moment and deal with it later in my reasons. So exclusive of that item, the Appellants succeed in respect of the 1998 taxation year to the extent of $946.23 plus the GST and PST associated with the taxable items that I have allowed. [11] I turn now to the 1999 taxation year. Five items of expense other than motor vehicle expense were disallowed in that year. The first is advertising and promotion for $52.53. Of this amount, $34.09 appears to have expended for business-related entertaining and can reasonably be allowed. The remainder, if I understood Ms. Dore's evidence correctly, was for what she called a "staff meeting", and like those in 1998, it was properly disallowed. So under that head, a further $34.09 is allowed. [12] The second item is office expenses of $61.15 disallowed. As I understood the evidence, this related to the purchase of a can of paint, and 50% of the charges for the Appellant's internet connection in their house. The internet connection is the only internet access in the house, it was not located in the one room of the house used as an office for the businesses, and Ms. Dore said it was mainly used for business and that they preferred to have it outside the office so that if it were used by the children at all, it would be in an area where there was some supervision. Clearly it had some personal use, I have no doubt that it also had significant business use. The assessor allowed it on the basis of 50% business and 50% personal, and the evidence has not persuaded me that she was wrong in that. So far as the can of paint is concerned, Ms. Dore was unable to tell us what was painted with the can of paint. It was properly disallowed. [13] The third item is the children's salaries, and as in 1998 I would allow those as a reasonable business expense. [14] The fourth item is another trip from Vancouver to the Okanagan Valley. Ms. Dore's evidence as to the purpose of the trip was not greatly different from her evidence with respect to the trip the previous year. The amount of $67.41 is obviously but a modest portion of what was spent on the trip. There was no particular rationale that I could understand for charging that amount against the business, along with the automobile expense, and not any of the other amounts expended. In any event, I would consider it to be personal, and so properly disallowed. [15] That brings me to the fifth item for 1999 which is training, meals and entertainment amounting to $1,301.52. The largest item here was $895.00 paid for vocational testing for Roger Dore. Ms. Dore's evidence was that this vocational testing was something that the Watkins people, as she called them, recommended. He also took courses in speed-reading, which she said would assist him in reading repair manuals, and courses in English. I consider all of these to be personal expenditures. They certainly have no direct relationship to the business. They may very well assist Mr. Dore in selecting another line of endeavour, and they may assist him in his personal reading pursuits. They may assist him in his communication skills, but the connection to the business is tenuous at best, and I would regard them as personal expenses, properly disallowed. [16] An amount of $120.76 for entertaining clients is properly allowable as a business expense, as is an additional amount of $34.09. The total additional increment to be allowed as expenses, therefore, for 1999, subject to my later consideration of motor vehicle expenses and home office expense, is $634.85. [17] In the year 2000 there were three items in dispute over and above the motor vehicle and office in the home expenses. The first one was $982.27, of which Ms. Dore conceded $536.12 was properly disallowed, leaving $446.15 in dispute. Mr. Dore took a computer course that cost $300. The computer was certainly used in the course of the business and I would consider that to be a legitimate business expense. The other items that were disallowed in the year 2000 were of a personal nature, relating to personal education or skills training and testing, together with one-half of the internet charges. In my view these were all properly disallowed as being personal in nature; therefore $300 is allowed under that head. [18] The second item is supplies of $129.62. These were disallowed, at least in part, for lack of receipts. They range from some very minor items to some more significant ones, but Ms. Dore's evidence satisfies me that the amounts were, in fact, expended and that in general they had a legitimate business purpose, and so I would allow an additional $129.62, making a total of $429.62 to be permitted as expenses in the year 2000. The third item for that year is, again, the associated GST and PST. [19] This brings me to the motor vehicle expense claims. The Appellants used two vehicles, both for personal and for business use, during the three relevant years. They needed vehicles for use in such things as visiting customers, delivering product, delivering equipment that was being rented to customers, and picking up equipment from rental companies that was being sub-rented to customers. Mr. Dore used a pickup truck in connection with the rental business, and also to go to his full-time job and back. Mrs. Dore used a van to go to her part-time job and back, and the van was also used for business. [20] Ms. Dore explained that during the years prior to 1998 they had kept mileage logs for these vehicles, and for reasons that seemed to be associated with advice given to them by someone, they discontinued keeping those mileage logs. Some partial logs were kept for about six months of 1998 for the van, and a lesser period for the pickup truck. For reasons that defy logic, the Appellants concluded that on their estimate they used the van 90% of the time for business and the pick-up truck about 10% of the time for business, and that they should therefore claim 100% of the expenses related to the van, and none of the expenses related to the truck as business expenses. This, of course, is not any record of actual use, but simply a guesstimate based on partial information. Business people who use personal vehicles for business need to keep accurate logs of their mileage actually driven, if they expect to be entitled to deduct all the costs of operating those vehicles for business purposes. Estimates made at yearend by subtracting an amount estimated to be the personal use from the annual total mileage driven are only that, estimates. Generally, they tend to be generous to the estimator. [21] I note again what Mr. Justice Iacobucci had to say on that subject in Symes, supra. I believe that to be the case here. A case in point would be the trips to the Okanagan Valley, the motor vehicle expense of which was included in that claimed generally for motor vehicle expense, and would have inflated the claim. The assessor also made an estimate. She based it on the logs that were available for the part of the year 1998 and extrapolated the information that she was able to obtain from those. She added the percentage of business use that she computed for the van, which was 60%, and that for the truck, which was 11%, and applied that 71% to the expenses reported for the van, and allowed the product of that. She was forced into that kind of estimate because she could only work with the data provided, and the actual expenses for the pickup truck were simply not available to her. The van, on the evidence of Ms. Dore, was a more expensive vehicle to operate than was the truck. Its capital cost was approximately twice that of the truck. The obvious fallacy in this approach works in favour of the Appellants, I should think. I consider that the assessor's approach was the best that she could be expected to do with the data available to her, and it is probably slightly generous to the Appellants. My understanding was that the other two years were calculated on essentially the same basis. Certainly the Appellants have failed to discharge the onus on them to show that the business-related motor vehicle expenses exceeded those allowed by the assessor. [22] Turning now to the office in the home expenses, the Appellants' evidence was that their house has an area of 2,600 square feet and that one room in that house, and part of the garage, were used for business purposes. The room used as an office, Ms. Dore said, was an area of 150 square feet. The car is a one-car garage, the house has nine rooms in total. Ms. Dore claims that 10% of the house expenses should be allowed for the office in the home. She seemed to base this on the fact that one room out of nine was used for business. The assessor applies the percentage of area, 150 square feet is 5.7% of 2,600 square feet, which she rounded up to 6%. In my view, the percentage of the area of a house is a much fairer way to estimate the apportionment of expenses of the home to be allowed against the business income when part of that home is used for the business. Rooms obviously vary greatly in size. The 0.3% between 5.7 and 6, in my view, adequately accounts for the use of approximately half of the garage for business purposes. [23] There was some minor dispute having to do with landscaping and lawn care expenses, which Ms. Dore argued ought to have been included in the estimate of home office expenses. Their relationship to the business I would have thought somewhat tenuous. To the extent that they are an expense, as part of the aggregate expenses of the household their effect annually at 6% would be minimal. Considering that the Appellants were not entitled to deduct all of their expenses for the office in the home in any of the three years under appeal, but only a portion thereof with the balance to be carried forward to later years, even if Ms. Dore had persuaded me that she was correct as to those particular items, they would not affect the assessments for the years that are under appeal. [24] In summary, then, the appeals will be allowed, the assessments will be referred back to the Minister of National Revenue for reconsideration, and reassessment on the basis that the partnership income will be adjusted as follows: for the year 1998, additional expenses totaling $946.23 plus any related GST and PST shall be allowed. For 1999, additional expenses of $634.85 plus any related GST and PST will be allowed. For the year 2000, an additional $429.62 of expenses plus the related GST and PST will be allowed. The amounts by which the incomes of each of the Appellants are to be reduced will, of course, be one-half of those amounts. There will be no order as to costs. Signed at Ottawa, Canada, this 15th day of October, 2004. "E.A. Bowie" Bowie J. CITATION: 2004TCC638 COURT FILE NO.: 2004-277(IT)I and 2004-278(IT)I STYLE OF CAUSE: Linda Dore and Roger J. Dore and Her Majesty the Queen PLACE OF HEARING Vancouver, British Columbia DATE OF HEARING July 15, 2004 REASONS FOR JUDGMENT BY: The Honourable Justice E.A. Bowie DATE OF JUDGMENT July 19, 2004 APPEARANCES: Agent for the Appellants: Linda Dore Agent for the Respondent: Katy Grist (Student-at-law) COUNSEL OF RECORD: For the Appellant: Name: N/A Firm: N/A For the Respondent: Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada [1] 68 DTC 5210. [2] [1993] 4 S.C.R. 695.