Karda v. The Queen

Karda v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2005-09-06 Neutral citation 2005 TCC 564 File numbers 2002-1790(IT)G Judges and Taxing Officers Campbell J. Miller Subjects Income Tax Act Decision Content Docket:2002-1790(IT)G BETWEEN: WILLIAM P. KARDA, Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeals heard on June 23, 24 and 27, 2005, at Toronto, Ontario, by The Honourable Justice Campbell J. Miller Appearances: Counsel for the Appellant: Richard G. Fitzsimmons Counsel for the Respondent: Suzanne M. Bruce ____________________________________________________________________ JUDGMENT The appeals from assessments of tax made under the Income Tax Act for the 1996, 1997 and 1998 taxation years are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is entitled to claim interest and carrying charges expenses of $13,939, $10,221 and $10,939, respectively. The Respondent is entitled to its costs. Signed at Ottawa, Canada, this 6th day of September, 2005. "CampbellJ. Miller" Miller J. Citation: 2005TCC564 Date: 20050906 Docket:2002-1790(IT)G BETWEEN: WILLIAM P. KARDA, Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT Miller J. [1] During the 1990s, Mr. William Karda was a busy man. He was an agency field executive with State Farm Insurance Company (State Farm); he was attempting to extricate himself from numerous property investments; he served on the City of Mississauga Committee of Adjustments and on the County's Land Use Committee; he was involved with several volunteer organizations; and he was engaged in activities he hoped would lead to a land use consulting business when he retired. These appeals for 1996, 1997 and 1998 relate to Mr. Karda's expenses in connection with his work with State Farm, interest on his property investments and expenses in connection with activities referred to as his consulting business. Specifically the issues are: (i) Is the reassessment of Mr. Karda's 1996 taxation year on June 2, 2000 a valid reassessment? Yes it is. (ii) In connection with his work with State Farm Insurance, was Mr. Karda an employee or an independent contractor? Mr. Karda was an employee throughout the period in question. (iii) Is Mr. Karda entitled to deduct employment expenses of $43,106, $24,292 and $2,460 in 1996, 1997 and 1998, respectively? No, such expenses do not qualify for deduction pursuant to section 8 of the Income Tax Act. (iv) Can the Respondent argue that Mr. Karda was not carrying on business in 1996, 1997 and 1998? The Respondent can make such an argument. (v) Was Mr. Karda carrying on a land use consulting business in 1996, 1997 and 1998? No, he was not carrying on such a business during that period. If I am wrong in concluding Mr. Karda was not carrying on a business, is he entitled to deduct business expenses claimed in excess of income reported from the business? No. (vi) Is Mr. Karda entitled to deduct interest expenses claimed of $24,645, $24,653 and $21,109 in 1996, 1997 and 1998? No, Mr. Karda is entitled to interest and carrying charge expense deductions of $13,939, $10,221 and $10,939 in 1996, 1997 and 1998, respectively. Facts [2] There are three elements to these appeals, and I will accordingly review the facts relative to each. (i) State Farm Expenses Mr. Karda joined State Farm in 1968. Until 1996, he operated as an independent contractor with the task of recruiting, training and developing agents to represent State Farm. Such agents were also independent contractors. Mr. Karda himself did not solicit insurance business on behalf of State Farm. Until 1996, Mr. Karda was responsible for all his own expenses, including office, secretarial (he employed a full-time secretary), promotional, vehicle, etc., to the point that he had bought a small office building for this work which he shared with one of the State Farm agents. He was remunerated by State Farm on the basis of the amount of business brought to the books by his agents. Mr. Karda would provide incentives to agents in his jurisdiction, as increased business by them meant greater revenues for him. [3] In April 1995, State Farm had Mr. Karda agree to a new arrangement, an arrangement offered to all managers. They were to become employed "agency field executives" no later than December 31, 1995. State Farm would provide company offices, company cars and company staff. The new arrangement for remuneration was to shift from a form of commission-based to more salary-based, with opportunities for agency leadership bonuses. There was also a transitional payment over three years. The letter of Agreement dated April 28, 1995, included an exhibit outlining this transition. In effect, Mr. Karda would receive 90%, 65% and 25% of the difference between his last year's compensation under the old arrangement and his salary under the new arrangement. [4] Once subject to the new arrangement, Mr. Karda sold his office building and moved to the State Farm premises. He was reimbursed for car expenses for his own car, until after a few months he took up the offer of the company car. His secretary, though still working for him, was now employed by State Farm. As he put it, State Farm supplied everything. As there was a bonus element to the compensation, Mr. Karda continued to treat agents in his jurisdiction with incentives, which he claimed would be recoverable from increased productivity. He made claims over the three years in issue for deductible employment expenses: accounting and legal fees, car expenses, food and entertainment expenses and travel expenses. In addition, in 1996 he claimed $30,000 salary paid to his wife, and in 1998 he claimed some supplies' expenses. [5] The only copy of a T2200 signed by a representative of State Farm in the years in question was for the 1997 year. The State Farm representative answered "no" to the following questions:[1] 6(a) Did you require this employee to pay other expenses for which the employee did not receive any allowance or repayment? 7(a) Did you pay this employee wholly or partly by commissions or similar amounts according to the volume of sales made or contracts negotiated? (ii) Land Use Consulting Business [6] Mr. Karda testified that during 1996, 1997 and 1998, he was establishing contacts for a land use consulting business which he hoped would supply additional income in his retirement. He retired in 2002-2003. He relied in large measure on two activities for the basis of this consulting business. First, since 1977 he served as a committee member on the City's Committee of Adjustments, which met weekly, and on the County and Land Division Committee, which met every second week. The former required certain site inspections and the latter dealt primarily with severance requests. [7] Second, he was involved in numerous activities (Shriners, PC Club, Boy Scouts, etc.) which expanded his network of potential business clients. He indicated that in 1996, 1997 and 1998 he had no clients; as he put it, he was not trying to make a living at that time from this business. He did, however, record income from the business of $3,200 in 1996 and 1997, and $7,200 in 1998. He could not recall exactly where this income came from, but suggested that those grateful for some land use advice probably gave him something for it. In 1996 and 1997, Mr. Karda also recorded the stipend he received from his committee work as income from the business ($6,523 in 1996 and $7,084 in 1997). He suggested that the committee work was intermingled with his business, as people who might appear at the committee could be future contacts. [8] Mr. Karda had a home office, though he admitted that he would not often meet people there. He acknowledged that he was required to read reports for his committee work. He did so at the home office. He reported business expenses of $42,129 in 1996, $44,655 in 1997, and $23,444 in 1998. These expenses consisted of advertising, fees, licenses, management fees to his wife or her holding company of $12,000 per year, meals and entertainment expenses, car expenses, office expenses, supplies, utilities, travel to sites and meetings and notional rent of $300 per month for the home office. He could provide no specifics with respect to his advertisement expenses. The dues and fees items he recalled related to the Committee of Adjustments. The management fee to his wife was for her to look after telephone calls, planning site inspection routes and taking notes of site inspections; again, connected to the Committee work. Meals and entertainment were for taking contacts out, but no names of potential customers were provided. [9] Vouchers and receipts were contained in one of Mr. Karda's exhibits, but were not broken down between the State Farm expenses and consulting expenses. Some entertainment expenses related to theatre for Mr. Karda and his wife, which he justified because Mrs. Karda worked in his business. The vouchers for meals in 1996 totalled approximately $7,000; the meals and entertainment expenses claimed by Mr. Karda for State Farm and the consulting business totalled $6,515, representing 50% of actual claims of $13,030. The car expenses were acknowledged to have been overstated as the business kilometres relied upon were improperly calculated. (iii) Interest Expenses [10] Mr. Karda would be the first to admit that he experienced a less than successful run in the property investment arena in the late 1980s and into the 1990s. Of the nine real estate investments he described in Court, not one led to a profitable return. I will describe each investment and the financial arrangements in connection therewith. (i) Bac Bay [11] This was a Florida condominium project constructed in the late 1980s. Mr. Karda saw an opportunity to flip the property at a significant gain, as he required construction funding of only $50,000 per unit while units were valued at $96,000. Several documents were provided in connection with this project, starting back in 1985: (i) June 3, 1985, Purchase and Sale Agreement for one unit sold to the Appellant for $96,000;[2] (ii) April 7, 1986, Purchase and Sale Agreement for one unit sold to the Appellant for $77,500;[3] (iii) November 13, 1987, Purchase and Sale Agreement for one unit sold to the Appellant for $65,000;[4] (iv) February 5, 1987, Purchase and Sale Agreement for one unit sold to the Appellant and his wife for $50,000;[5] (v) May 10, 1988, Purchase Agreement for six units (including three units referred to above) sold to the Appellant and five other individuals for $325,000;[6] What I glean from these documents and Mr. Karda's and Mr. David F. Quick's (Mr. Karda's accountant) testimonies is that Mr. Karda relied upon a mortgage with So-Use (Toronto) Credit Union Limited (So-Use) on his home to finance his investment in this project. Mr. Quick provided a schedule[7] showing advances from Mr. Karda to Bac Bay of US$324,323 for the period January 15, 1987 to July 11, 1990. These numbers are not readily reconcilable to the documents provided, other than to confirm some considerable amount was invested by Mr. Karda in the Bac Bay project personally and, it appears, on account of others. Mr. Quick did confirm the financing of Bac Bay came from the So-Use Credit Union, but could provide no relation of amounts borrowed from So-Use for this particular project. [12] In July 1992, Mr. Karda rearranged his So-Use mortgage to combine various loans under one mortgage of $281,000 on his home. He maintains the funds required for the Bac Bay project constituted part of that refinancing, yet there is no clear trace of such. What is clear is that the interest on the mortgage in 1996, 1997 and 1998 was $17,843, $15,952 and $15,400, respectively. Mr. Karda also testified that this particular investment probably collapsed prior to 1995 or 1996, though his accountant placed the timing closer to 1990. (ii) Kitimat [13] Kitimat was a high-end industrial condominium project on which Mr. Karda hoped to double his money. He borrowed $100,000 from 452366 Ontario Inc. to finance this project in 1988. In July 1992, as part of the new So-Use mortgage of $281,000, $91,039 of this loan was picked up in the mortgage on the Karda's home. (iii) Lincoln Park [14] This was a condominium investment in St. Catharines acquired through the vehicle of a limited partnership. Mr. Karda borrowed $67,800 from the Royal Bank in 1987 to fund this investment. Mrs. Karda co-signed the note attached to the loan. In October 1996, the Kardas settled this debt, along with the outstanding debt owed on the Cedar Downs' project, for $67,600. The document entitled "Covenant not to Proceed" between the Kardas and the Royal Bank states:[8] In consideration of the sum of Sixty-Seven Thousand Six Hundred Dollars ($67,600.00) and other valuable consideration, the receipt and sufficiency of which the undersigned hereby acknowledges, and in consideration of the terms of the Minutes of Settlement executed by the parties, Royal Bank of Canada for itself, its successors and assigns, covenants and agrees that save and except for claims and causes of action arising under or pursuant to the aforesaid Minutes of Settlement, it will not commence or continue any claim, action or other proceeding against William P. Karda and/or Claire E. Karda in respect of two promissory notes they executed in favour of the Bank dated June 29, 1987 in the amount of $101,700 and March 27, 1991 in the amount of $62,270, respectively. [15] Mr. Karda's evidence was that this was not paid in October 1996, but was paid out over four or five years. He could not point to any statements or banking documents to confirm payments over time or, if there were such payments, what portion, if any, related to interest. Mr. Karda's tax returns did not separately identify interest to the Royal Bank, nor could Mr. Quick, specifically identify a particular claim on the return related to the Royal Bank payments. Mr. Quick testified that each year he would ask Mr. Karda for all correspondence and financial statements from the various real estate projects, so that he could prepare the tax returns. He attempted to track the continuity of the loans from one year to the next. (iv) Cedar Downs [16] This was a high-rise condominium investment in Woodstock, two units of which were acquired jointly with Mrs. Karda in December 1987. The developers arranged financing through the Royal Bank. This financing was part of the settled amount dealt with in conjunction with the Lincoln Park loan. (v) Falconer [17] In February 1987, Mr. Karda acquired an interest in this industrial condominium in Mississauga. He recalled borrowing about $20,000, though could not recall from whom. The project collapsed in 1989, and whatever Mr. Karda put in had to be repaid. He testified that he borrowed to make that repayment. There is no document to support such loan. (vi) Deanlee [18] This was an interest in a house in Mississauga that was to be joined with other properties for future development. Mr. Karda contributed $12,000 which he believes he may have borrowed from the Toronto-Dominion Bank in the summer of 1987. The only claim for interest in connection with the Toronto-Dominion Bank was for an amount of $1,450 in 1996. There was no documentary evidence tying this project to that interest claim. (vii) Galaxy [19] In March 1990, Mr. Karda borrowed $30,000 from the National Bank to inject in this industrial project near Pearson airport. A letter from the National Bank to Mr. Karda dated March 26, 1998, confirmed the principal outstanding of $27,708 and accrued interest of $25,097. The Respondent concedes, based on an interest rate of 15.5% compounded annually, interest expenses in 1996, 1997 and 1998 of $4,294, $4,960 and $5,729, respectively. (viii) Renfrew Drive [20] In July 1989, Mr. Karda borrowed $31,893 from Canadian Imperial Bank of Commerce to invest in a unit in what he described as a prestigious office building. He indicated he held this property until 2000, having tried for a number of years to extricate himself from the project as it never produced a positive cash flow. The last document evidencing this indebtedness was a November 1991 demand letter from CIBC to Mr. Karda. In February 1994, Canada Customs and Revenue Agency (CCRA) advised Mr. Karda it would allow an interest deduction from this loan for the taxation year. Mr. Quick recalled the Renfrew project as an underachieving investment for Mr. Karda during the years in question. (ix) Emerald Point [21] In October 1989, Mr. Karda bought a "B" unit in this condominium project in Whitby for $169,990. He provided a promissory note in the amount of $49,497 to Reemark Emerald Point Inc. Mr. Karda acknowledged his obligation to Reemark was extinguished prior to 1996. [22] Mr. Karda provided copies of legal invoices received in 1996, 1997 and 1998 totalling $3,934.96, $93.00 and $303.67, respectively, relating to the Renfrew, Lincoln Park, and Cedar Downs projects. Mr. Quick testified that the claims in Mr. Karda's 1996, 1997 and 1998 tax returns entitled "investment counsel fees, accounting fees" or "management or safe custody fees" would include these legal fees. In 1996, 1997 and 1998, these amounts claimed by Mr. Karda under those headings were $3,864, $3,399 and $211, respectively. 1996 Assessment [23] The Minister of National Revenue (the Minister) initially assessed Mr. Karda for the 1996 taxation year by Notice dated June 2, 1997. On November 10, 1997, the Minister issued the first reassessment. Mr. Karda filed a Notice of Objection and on September 21, 1998, the Minister issued a second reassessment. Again Mr. Karda filed a Notice of Objection. The Minister confirmed the September 21, 1998 reassessment on March 31, 2000. On May 5, 2000, CCRA wrote to Mr. Karda advising him that his 1996, 1997 and 1998 returns were under review and that he should submit receipts and vouchers in connection with business expenses, carrying charges and employment expenses. In the auditor's report T20 dated May 24, 2000, the auditor, Mr. Y. Mohammed states:[9] A limited review was done on the 1996 tax year. The taxpayer was requested to sign a waiver and return it to us by May 19, 2000, because the return becomes statute barred on June 2, 2000. We did not receive a response from the taxpayer, and accordingly, we are proceeding with the reassessment. The taxpayer was advised of this in our final letter of May 25, 2000. [24] Mr. Quick confirmed that he advised Mr. Karda not to file a waiver. He recalled having one telephone conversation with the auditor between March and June 2000. On June 2, 2000, the last day prior to the expiry of the three-year limitation for making the assessment, the Minister issued the third reassessment. Analysis (i) Is the reassessment of Mr. Karda's 1996 taxation year on June 2, 2000 a valid reassessment? [25] The Appellant argues that the only reason the June 2, 2000 reassessment was issued was because Mr. Karda would not provide a waiver, effectively saying to the taxpayer if you do not provide a waiver, the Government will deprive you of the benefit of the three-year limitation period. This, according to the Appellant, is not a reassessment as a reassessment is a process only finalized upon issuance of the notice. There is no process where the Minister does not even identify an error in the prior reassessment. A reassessment denying all the Appellant's claims simply to meet the limitation period is not a valid reassessment. With respect, I disagree. [26] Subsection 152(4) of the Income Tax Act (Act) reads: 152(4) The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, 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 or has committed any fraud in filing the return or in supplying any information under this Act, or (ii) has filed with the Minister a waiver in prescribed form within the normal reassessment period for the taxpayer in respect of the year; or (b) the assessment, reassessment or additional assessment is made before the day that is 3 years after the end of the normal reassessment period for the taxpayer in respect of the year and (i) is required pursuant to subsection (6) or would be so required if the taxpayer had claimed an amount by filing the prescribed form referred to in that subsection on or before the day referred to therein, (ii) is made as a consequence of the assessment or reassessment pursuant to this paragraph or subsection (6) of tax payable by another taxpayer, (iii) is made as a consequence of a transaction involving the taxpayer and a non-resident person with whom the taxpayer was not dealing at arm's length, (iv) is made as a consequence of a payment or reimbursement of any income or profits tax to or by the government of a country other than Canada or a government of a state, province or other political subdivision of any such country, (v) is made as a consequence of a reduction under subsection 66(12.73) of an amount purported to be renounced under section 66, or (vi) is made in order to give effect to the application of subsection 118.1(15) or (16). [27] President Thorson in Provincial Paper, Limited v. M.N.R.[10] stated: ... It is, therefore, idle to attempt to define what the Minister must do to make a proper assessment. It is exclusively for him to decide how he should, in any given case, ascertain and fix the liability of the taxpayer. The extent of the investigation that he should make, if any, is for him to decide. Of necessity it will not be the same in all cases. [Minister's power] But the basic fallacy in the contention lies in the assumption that the Minister is precluded from ascertaining and fixing a taxpayer's liability on the basis of the assumed correctness of his income tax return but must do something else and that if he does not do so he has not made an assessment. While the Minister is not bound by the taxpayer's return, as was emphasized in the Dezura case (supra), there is nothing in the Act to prevent him from accepting it as correct and fixing the taxpayer's liability accordingly. In Davidson v. The King, (1945) Ex. C.R. 160 at 170, I made the statement that the taxpayer's own return of his income, while not binding upon the Minister, may be the basis of the assessment made by him and I pointed out that it was reasonable that this should be so, since the taxpayer knew better than anyone else what his income was. [Assessment properly made] The Minister may, therefore, properly decide to accept a taxpayer's income tax return as a correct statement of his taxable income and merely check the computations of tax in it and without any further examination or investigation fix his tax liability accordingly. If he does so it cannot be said that he has not made an assessment. While these comments apply to an assessment, as opposed to a reassessment, I believe the principle can be applied to the reassessment; and that is, that the Minister must do something, albeit that something may be minimal. Mr. Fitzsimmons, for the Appellant, puts it that the Minister at the stage of a reassessment must identify an error, otherwise there has not been a valid process of reassessment. [28] What did the Minister do within the period from March to June 2000? The Minister reviewed the file, determined further information was required, requested such information, and having not received it requested a waiver, which request was refused. The Minister then issued the Notice of Reassessment. CCRA's effort goes well beyond a cursory review. To nullify a reassessment on the basis the Minister did not identify an error in a prior reassessment under such circumstances, where the Minister has not received additional information requested from the taxpayer, would severely handcuff the Minister. [29] The Minister has three years to assess a taxpayer (longer if the conditions in paragraph 152(4)(a) are met). In most circumstances this should be sufficient time to render a valid assessment or reassessment. And, the taxpayer should have some certainty that after that three-year period, barring misrepresentation, the Government cannot review the taxpayer's tax situation. Yet, there are going to be circumstances where more time is required - the taxpayer and the Government will both recognize this and the taxpayer will obligingly provide a waiver of the limitation. Where, as here, the taxpayer does not provide a waiver, the Government has a choice. It can render what Mr. Fitzsimmons calls "a protective reassessment", or it can gamble it can prove the taxpayer made a misrepresentation and reassess after the limitation. In issuing the reassessment on June 2, 2000, after a lengthy history of dealing with Mr. Karda, CCRA is telling Mr. Karda that it does not believe the prior reassessment is accurate; indeed, there are errors, yet without more information from Mr. Karda, the Minister is unable to be more specific in disallowing all claims. I see nothing so inappropriate in that approach as to render the reassessment invalid. There was a review, a deliberation, and based on the information received, a Notice of Reassessment was issued within the three-year period. It is a valid reassessment. (ii) In connection with State Farm, was Mr. Karda an employee or an independent contractor? [30] In argument, Mr. Fitzsimmons conceded that, based on the evidence, Mr. Karda's arrangement had changed to that of an employment arrangement by January 1, 1996. Mr. Fitzsimmons was wise to make this concession, as applying the principles set forth by Justice Major in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc.,[11] the evidence points overwhelmingly to an employer/employee relationship between State Farm and Mr. Karda in 1996, 1997 and 1998. (iii) Is Mr. Karda entitled to employment expenses as claimed? [31] If Mr. Karda is entitled to employment expenses, the parties agree his entitlement must be found in subsection 8(1) of the Act, specifically paragraph 8(1)(f), which reads: 8(1) In computing a taxpayer's income for a taxation year from an office or employment, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto: ... (f) where the taxpayer was employed in the year in connection with the selling of property or negotiating of contracts for the taxpayer's employer, and (i) under the contract of employment was required to pay the taxpayer's own expenses, (ii) was ordinarily required to carry on the duties of the employment away from the employer's place of business, (iii) was remunerated in whole or part by commissions or to other similar amounts fixed by reference to the volume of the sales made or the contracts negotiated, and (iv) was not in receipt of an allowance for travel expenses in respect of the taxation year that was, by virtue of subparagraph 6(1)(b)(v), not included in computing the taxpayer's income, ... [32] The first requirement for qualification under this section is that Mr. Karda be employed in connection with "selling of property or negotiating of contracts" for State Farm. Exhibit A to the Letter of Agreement with State Farm dated April 28 and signed May 26, 1995, is Mr. Karda's job description. It reads:[12] EXHIBIT A AGENCY FIELD EXECUTIVE · Oversees training for agents and agents' staff. · Writes articles and other communications for field publications. · Plans and conducts field meetings. · Visits agents' offices and determines need for agent or staff training. · Leads weekly team meetings to discuss plans, progress, and priorities with team members. · Supports consultants in handling more difficult problems and questions in the agent's office. · Participates in update meetings and training sessions to stay abreast of the latest management and marketing developments. · Encourages consultants to keep current in order to make business modelling work effectively in the office. · Makes follow-up visits to agents' offices to assess any additional training needs. · Counsels with agents as needed. · Meets, as needed with VPA and/or RVP on plans, progress, and goals. · Coordinates the personal development activities of the consultants. · Counsels with and mentors activities of TAs. · Monitors progress of assigned areas of responsibility to assure meeting Regional and Company goals. [33] I do not see any reference to the selling of property or negotiating of contracts. I see Mr. Karda as a resource person for insurance agents in the field. He was not directly involved in the selling of property and even though "negotiating of contracts" is a broad concept, I find it does not describe what Mr. Karda did for State Farm in 1996, 1997 and 1998. He simply does not qualify. [34] However, if I am too limited in my reading of "selling of property or negotiating contracts", I then ask, was Mr. Karda required under his contract of employment with State Farm to pay his own expenses? Mr. Fitzsimmons suggested that because Mr. Karda incurred expenses over and above what was covered by State Farm, for example, for incentives for agents, that must logically have been required by State Farm, as State Farm did not pay such excess costs. This somewhat circuitous reasoning is not how I interpret this condition in paragraph 8(1)(f). I interpret paragraph 8(1)(f) as a requirement that the contract of employment stipulates the employee must pay for his own expenses, not voluntarily make such payments. Mr. Karda himself explained these employment expenses were incurred "at his own peril" above and beyond what was required to create additional income. He explained he incurred car expenses by going beyond minimal job requirements, so that this would improve his bonus. Clearly, Mr. Karda was not required to incur those expenses. He knew that. They were voluntary. It may have been a smart economic decision for Mr. Karda, but I find that on the ordinary meaning of subparagraph 8(1)(f)(i) he was not required to pay such expenses. I deny Mr. Karda's claims for employment expenses pursuant to paragraph 8(1)(f). (iv) Can the Respondent argue that Mr. Karda was not carrying on land use consulting business in 1996, 1997 and 1998? [35] In an affidavit clarifying answers given on Discovery, an officer of CCRA, Mr. Yacoob Mohammed stated:[13] (c) In the course of the audit of the Appellant's 1996, 1997 and 1998 taxation years, the Minister made no inquiry into the source of the reported non-T4 business income. Hence, the Minister assumed that the Appellant earned gross business income in the amounts of $3,200, $3,200 and $7,200 for the 1996, 1997 and 1998 taxation years, respectively. (d) The Minister also assumed that the Appellant did not incur business expenses in excess of the assumed gross business income for the 1996, 1997 and 1998 taxation years. In any event, the Appellant provided no documents substantiating that he incurred the reported business expenses for the 1996, 1997 and 1998 taxation years. (e) Consequently, the Minister assumed that the Appellant did operate a land use consulting business, under the name "William Karda Consultants". However, the net effect of the assumptions stated in paragraphs 1(c) to 1(e) reduced the Appellant's taxable business income for the 1996, 1997 and 1998 taxation years to NIL (emphasis added). In the Respondent's Amended Reply to the Amended Notice of Appeal, the Minister had made the following assumptions: 20 In so reassessing the Appellant, the Minister made, inter alia, the following assumptions: ... (l) at all material times, the Appellant did not operate a land use consulting business under the name "William Karda Consultants" (the Business); (m) at all material times, the Appellant did not earn gross business income, incur business expenses or earn net business income (loss) for the 1996, 1997 and 1998 taxation years, in the following amounts: 1996 1997 1998 Gross Business Income $9,723 $70,284 $7,200 Reported Business Expenses $42,129 $44,655 $23,444 Net Business Income (Loss) ($32,406) $25,629 ($16,244) [36] The Appellant contends that, by the answers given by Mr. Mohammed, the Respondent has precluded itself from making the argument that there was no land use consulting business. The Minister is effectively stuck with the position that there was business income, and the issue is the determination of whether the expenses incurred related to the business or were personal or living expenses. The Respondent suggests whether there was a business is a question of fact, and that I cannot turn a blind eye to the evidence if it supports the position there was no business being carried on. I agree it is up to me to determine the facts based on the evidence tendered at trial, and I can therefore properly determine if Mr. Karda was carrying on a business. Yet, the fact at issue here is not so much whether there was a business, but whether the Respondent assessed on the basis there was no business. If the Reply is correct, that is, the assessment was based on there being no business, it is certainly open to me to determine the correctness of that assessment based on a finding of whether there was a business. If the fact is that the Minister assessed on the basis there was a business but that the expenses claimed were personal or living expenses, is the Minister now too late to raise the "no business" argument? I do not believe it is too late for the Minister to do so. [37] Subsection 152(9) of the Act permits the advance of an alternative argument at any time provided: 152(9) The Minister may advance an alternative argument in support of an assessment at any time after the normal reassessment period unless, on an appeal under this Act (a) there is relevant evidence that the taxpayer is no longer able to adduce without the leave of the court; and (b) it is not appropriate in the circumstances for the court to order that the evidence be adduced. It is somewhat unusual to rely upon subsection 152(9) to raise the "no business" argument as an alternative argument, when the Respondent's Reply clearly addresses that argument. Yet, the Minister's representative's refutation of that position casts such doubt on the Reply as to warrant reliance on subsection 152(9). I am satisfied there is no relevant evidence Mr. Karda was unable to produce which would preclude the operation of subsection 152(9). [38] In summary, accepting the assumptions in the Reply certainly leaves it open to me to deal with the issue of whether Mr. Karda was carrying on a business. On the other hand, reliance on Mr. Mohammed's contrary position in his affidavit does not preclude me from considering that same issue. So, either way, I feel unconstrained in assessing the evidence to address the issue of whether Mr. Karda was carrying on a business of land use consulting in 1996, 1997 and 1998. (v) Was Mr. Karda carrying on a land use consulting business in 1996, 1997 and 1998? [39] The business which Mr. Karda claims to have been carrying on is a land use consulting business. Indeed, he reported $3,200 in 1996 and 1997, and $7,200 in 1998 as income from a consulting business. Yet, Mr. Karda acknowledged he had no customers in the years in question; he had no recollection from whence that purported revenue derived. I find that he was not generating revenue from any land use consulting business in 1996, 1997 and 1998. The activities Mr. Karda described as the activities of a business were at best, preliminary client development activities. This was a "business" he intended to nurture to provide income in his retirement years, a few years off. In 1996, 1997 and 1998, he was attempting to lay some ground work. How was he doing this? By being actively involved in community organizations but, mostly by sitting on the two land use related committees. [40] With respect to the numerous community activities, Mr. Karda admitted that State Farm encouraged this activity for their business. It is a stretch to suggest this civic-minded involvement should be treated as business activity for a consulting business, which was not even to start consulting for years to come. Many people volunteer their time for the good of the Boy Scouts, Shriners, or such similar worthwhile organizations. One would hope that the motivation in doing so is first and foremost to assist that organization. A secondary reason may be that an employer, such as State Farm, might encourage an employee to be actively involved to broaden his or her network. But to claim that such activity is the commercial activity of a potential retirement business, so as to justify the current existence of such a business is unacceptable. [41] Mr. Karda remarked that the City and County committee work was intermingled with his business, as people he saw through the committees could be future contacts. Mr. Karda's revenue derived from this committee work was not income from a business. It was income from an office or employment. His activity in connection with that work was not the activity of a land use consulting business; it was the work of the committee. The only element that might pertain to any possible consulting business would be client development; that is, meeting people who may require Mr. Karda's services some years in the future. That element requires no expenditure of expenses; any expenses incurred in connection with the ongoing committee work, were not expenditures on client development. [42] I find Mr. Karda's activities were not those of a start-up business; they were activities specifically related to other responsibilities totally separate from and unrelated to any alleged consulting business. The possible client development was a mere offshoot of those responsibilities, and in no way justifies the existence of a business. [43] Looking at the nature of the expenses themselves, claimed by Mr. Karda to be in connection with a business, it is clear that the vast majority relate to his committee work and volunteer organization work, not to a consulting business. In 1996 and 1997, he claimed advertisement expenses of $2,791 and $2,879 respectively, but could give no indication what the expenditures entailed other than putting his name out. Mr. Karda gave me no evidence that he incurred any expenses in relation to a land use consulting business. I find the costs of meals, travel, management fees, etc., related to either his State Farm employment, to his committee work or to personal or living expenses. Mr. Karda has simply not proven that he was engaged in any activity that could possibly constitute a land use consulting business. As he was not carrying on business, there is no source from which net income or losses could be derived. [44] If I am wrong in considering the issue of whether Mr. Karda was carrying on a land use consulting business in 1996, 1997 and 1998, and am compelled to find he was carrying on a business, then I find that such business consisted only of client development activity, and that the expenses he claimed in excess of any income derived did not relate to that business, but related to State Farm work or City and County committee work, neither of which constituted his consulting business, or related to personal or living expenses. (vi) Is Mr. Karda entitled to deduct interest expenses claimed? [45] The largest claim for interest expenses relate to the refinancing of July 1992 with So-Use Credit Union ($15,480, $15,952, $14,367 in 1996, 1997 and 1998, respectively). The Respondent concedes that $91,039 of the $281,000 re-mortgaging related to the Kitimat project. This would yield an interest expense of $5,781, $5,168 and $4,999, respectively, in 1996, 1997 and 1998. The Respondent allows only half of such amounts, on the basis that Mrs. Karda was a 50% owner in the re-mortgaged property. There was no evidence to suggest the Kitimat investment was a joint investment. It was Mr. Karda's investment. He used the matrimonial home as security. Mrs. Karda does not become an investor in Kitimat solely by virtue of her joint interest in the mortgaged property. Mr. Karda is entitled to the full interest expense of $5,781, $5,168 and $4,999 in 1996, 1997 and 1998, respectively. [46] With respect to the balance of the So-Use July 1992 mortgage, Mr. Karda's position is that it relates to other investments but primarily the Bac Bay investment. Even considering that there were other investors in Bac Bay, I am satisfied that prior to the re-mortgaging in July 1992, Mr. Karda invested in Bac Bay an amount greater than the balance of the refinancing of $189,961. Yet, Mr. Karda was unable to trace directly that balance to any particular property investments. Documenting his investments and corresponding loans was not Mr. Karda's strong point. He acknowledged that the funds for Bac Bay"probably" came from So-Use, as apart from a minor home mortgage, this So-Use line was used for his property investments. [47] Mr. Karda provided a computer printout from So-Use Credit Union[14] for the period January 1989 to December 2002. This confirms the amounts of interest paid in 1996, 1997 and 1998. It also confirms the new loan in July 1992, which appears to have been a consolidation of the then outstanding loan balance of $189,961 and the Kitimat debt of $91,039. Unfortunately, the records do not go back to the 1986 to 1988 period when most funds were expended on Bac Bay. Interestingly, Mr. Quick's summary[15] of loan advances includes a July 1990 payment to the Bac Bay project of approximately US$20,000, yet there is no corresponding record in the So-Use printout of this amount at that time. Presumably this amount must have been funded from elsewhere. [48] The Appellant has proven he incurred interest costs of $15,480, $15,952 and $15,367 on the So-Use account in 1996, 1997 and 1998. He has proven he invested in Bac Bay in the late 1980s to an amount not less than $190,000. He has testified the funds probably came from the So-Use line, but he has provided no corroborative documentary link between borrowing from So-Use and investing in Bac Bay. Indeed, in the So-Use computer printout, which covers the period 1989 to 2002, nothing can be related to Bac Bay. What Mr. Karda has provided is his accountant's testimony that the So-Use credit related to the financing and funding of the Bac Bay project. Mr. Quick likewise provided nothing other than his recollection in that regard. Perhaps this is all that can be expected when dealing with events over 15 years ago. Yet it is not enough to satisfy me that all $189,961 of the So-Use loan in 1996, 1997 and 1998 related to Bac Bay. It is not for the Respondent to prove it related to something else; the onus is on the Appellant to prove it related to the property investments. The evidence presented satisfies me that, on balance, some part of the $189,961 is likely to have related to Mr. Karda's property investments. There is nothing however to indicate how much. The Act requires the taxpayer to keep books and records for a reason - to avoid the very dilemma now facing me. I do not have any basis for making even a best guess at what portion of the loan relates to Mr. Karda's property investments. The Appellant has not proven an amount of interest to be deductible on the $189,961 balance of the So-Use loan. [49] As previously indicated, the Respondent concedes interest deductibility on the National Bank loan in connection with the Galaxy project of $4,294, $4,960 and $5,729, respectively, in 1996, 1997 and 1998. [50] Mr. Karda claimed $1,450 as interest paid to the Toronto-Dominion Bank in 1996. He recalled this may have related to his Deanlee investment, though his testimony was not particularly strong in that regard. Mr. Quick could not confirm what the TD loan related to in 1996. There was no other evidence relating this interest expense to any particular real estate project, and I consequently find Mr. Karda has not proven this expense as deductible. [51] The balance of the interest expense claimed by Mr. Karda in his 1996, 1997 and 1998 returns, he identified simply as "interest to earn investment income" in amounts of $3,850, $2,602 and $2,880, respectively. Mr. Karda suggested that a portion of this related to monies borrowed from the Royal Bank for the Lincoln Park and Cedar Downs projects. These Royal Bank loans were settled in October 1996, according to the settlement document for $67,600.[16] Though contrary to the document itself, Mr. Karda stated the $67,600 was paid over four or five years with interest. No interest rate or specific payment amounts were attributed to this $67,600 settlement amount. No documents were produced to confirm payments were made to the Royal Bank over four years. I am unable to conclude any part of the $3,850, $2,602 and $2,880 amounts claimed by Mr. Karda in 1996, 1997 and 1998, respectively, relate to payments to the Royal Bank. [52] Mr. Karda also argued that these interest amounts pertain partly to a CIBC loan on the Renfrew project. The evidence established there was indeed a loan from CIBC in 1989 for $31,893 and that as of November 1991, $28,009 remained owing. There is no record of any payments thereafter and indeed of any dealings with CIBC thereafter. Mr. Karda has not proven any part of the $3,850, $2,602 and $2,880 amounts claimed by him relate to the CIBC loan. [53] The only remaining projects to which interest might be ascribed are Falconer Court, Deanlee and Emerald Point. Mr. Karda acknowledged that his obligation to Emerald Point was extinguished by 1996. With respect to Falconer, Mr. Karda could not recall from whom he borrowed funds, let alone at what rate or when payments were made. Similarly, in connection with Deanlee, there was some suggestion funding may have been to the TD Bank, but there was no evidence to tie interest payments to this project or to the TD Bank. Mr. Karda has simply been unable to substantiate his interest expense claim beyond the So-Use amounts of $4,294, $4,960 and $5,729, and the National Bank amounts of $5,781, $5,168 and $4,999, respectively, for 1996, 1997 and 1998. [54] With respect to the miscellaneous carrying charges expenses, Mr. Karda has provided invoices from his legal advisors in 1996, 1997 and 1998, evidencing work performed in connection with some of his real estate projects ($3,934.96, $93 and $303). From Mr. Karda's and Mr. Quick's testimonies, I conclude that the legal work constituted efforts to either salvage a project or extricate Mr. Karda from a project. I am also satisfied that Mr. Quick, in preparing Mr. Karda's returns, included legal expenses under the heading of "investment counsel fees, accounting fees" or "management or safe custody fees". Are legal expenses of such nature incurred for the purpose of gaining or producing income from business or property as required by paragraph 18(1)(a)? Neither side extensively addressed this issue. I find that in the late 1980s and early 1990s, Mr. Karda was so actively involved in his real estate projects as to constitute a business. Legal expenses incurred in winding down that business are legitimate deductible expenses and I allow Mr. Karda the deduction of the amounts of $3,864 claimed in 1996, and $211 claimed in 1998. I also allow a deduction of $93 in 1997 for his proven legal expenses in that year. [55] Mr. Karda's deductible interest expenses and carrying charges, therefore, are as follows: 1996 1997 1998 So-Use $5,781 $5,168 $4,999 National Bank $4,294 $4,960 $5,729 Legal $3,864 $ 93 $ 211 Total $13,939 $10,221 $10,939 [56] In conclusion, the appeals are allowed and the matter is referred back to the Minister for reconsideration and reassessment on the basis that Mr. Karda is entitled to interest and carrying charges expenses in 1996, 1997 and 1998 of $13,939, $10,221 and $10,939, respectively. Costs to the Respondent. Signed at Ottawa, Canada, this 6th day of September, 2005. "CampbellJ. Miller" Miller J. CITATION: 2005TCC564 COURT FILE NO.: 2002-1790(IT)G STYLE OF CAUSE: William P. Karda and Her Majesty the Queen PLACE OF HEARING: Toronto, Ontario DATE OF HEARING: June 23, 24 and 27, 2005 REASONS FOR JUDGMENT BY: The Honourable Justice Campbell J. Miller DATE OF JUDGMENT: September 6, 2005 APPEARANCES: Counsel for the Appellant: Richard G. Fitzsimmons Counsel for the Respondent: Suzanne M. Bruce COUNSEL OF RECORD: For the Appellant: Name: Richard G. Fitzsimmons Firm: Fitzsimmons & Company For the Respondent: John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada [1] Exhibit R-1, Tab 1. [2] Exhibit A-2, Tab 5. [3] Exhibit A-2, Tab 6. [4] Exhibit A-2, Tab 9. [5] Exhibit A-2, Tab 10. [6] Exhibit A-2, Tab 12. [7] Exhibit A-2, Tab 14. [8] Exhibit A-1, Tab 26. [9] Exhibt A-5, Tab C2. [10] 54 DTC 1199 (Ex. Ct.) at page 1201. [11] [2001] 2 S.C.R. 982 (S.C.C.) [12] Exhibit R-2, Tab 2, "Exhibit A". [13] Exhibit A-5, Tab E. [14] Exhibit A-2, Tab 20. [15] Exhibit A-2, Tab 14. [16] Exhibit A-2, Tab 26.