Basic v. R. - TCC: Taxpayer denied deduction of most home office expenses

http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/111242/index.do

Basic v. The Queen (August 11, 2015 – 2015 TCC 202, Campbell J.).

Précis:  Mr. Basic operated an aluminum siding business from his home.  He was reassessed for 2007 denying roughly $50,000 of the expenses he claimed.  He was also assessed for unremitted GST.  The two appeals were heard together.

The Court allowed a portion of the expenses disallowed by CRA, principally by increasing the allowable percentage of use of his home from 8% to 15%.  The GST appeal was dismissed.  These were both informal procedure appeals and there was no order as to costs.

Decision:   The income tax issues were not complex:

[2]             I will deal first with the income tax issue in respect to the 2007 taxation year. The Appellant operated a construction subcontracting business that specialized in aluminum siding. From January 1, 2006 to May 31, 2006, he was a 50 percent partner in this business which operated under the name BF Aluminum Contracting. From June 1, 2006 to December 31, 2007, he operated as a sole proprietor under the name A.B. Aluminum. For the 2007 taxation year, the Appellant reported gross business income of $342,294 and net business income of $26,056. The Minister reassessed the Appellant and disallowed business expenses of $55,534.

The only significant success for Mr. Basic was on “business use of home”:

[10]        Under the last category, “business use of home”, the Minister disallowed $10,341 of the total amount claimed of $12,063. The Appellant claimed 25 percent of home-related costs. He was permitted 100 percent of the heating, electrical, water, property taxes and insurance costs. The two items that are in dispute are the mortgage interest amount and closing costs. The Appeals Division permitted 8 percent respecting the Appellant’s business use of his home, which according to the Canada Revenue Agency (“CRA”) consisted of one office and half of the garage. Although the Appellant would not allow the CRA to enter and view his premises, I am satisfied that the portion of his new residence that is being used for business purposes is higher than 8 percent. However, when he testified regarding the size of various areas used for his business, much of it was based on approximations. According to the property listing agreements and his testimony concerning his use of the entire garage, basement and other office space in the home, I conclude that he was using approximately 15 percent of his residence for business purposes.

On his GST appeal the Court concluded that he had applied the wrong rate of tax:

[23]        For businesses where the cost of goods purchased for resale is less than 40 percent of the total annual taxable supplies for each reporting period, that business is one that purchases goods for resale, while those businesses that fall below the threshold of 40 percent, are those that provide services. At “assumptions of fact” 8(k) of the Reply to the Notice of Appeal, the Minister assumed that the Appellant used the incorrect rates of 2.5 percent and 2.3 percent in respect to the 2006 and 2007 reporting periods respectively:

k)         the Appellant was ineligible to use the Quick Method rates of 2.5% for the reporting period ending December 31, 2006 and 2.3% for the reporting period ending December 31, 2007 because his cost of goods purchased for resale was less than 40% of the total annual taxable sales for each reporting period;

This places the Appellant’s business as one that provides services because the cost of goods purchased for resale was less than 40 percent of the annual taxable sales and, therefore, the correct Quick Method rate to be applied is 4.3 percent. The Minister came to this conclusion using the sales and purchase figures that were contained in the Appellant’s tax filings. According to the evidence of Ms. Brown, no adjustments were made to those amounts that the Appellant used in his filings. The Appellant’s agent used rates for a business that purchases goods for resale. Ms. Brown applied the correct rate of 4.3 percent and then reassessed in respect to the difference between the amount that the Appellant actually reported and the amount that he should have reported. The Appellant has failed to establish that he was not eligible to use the Quick Method and the election has not been revoked. In fact, in submissions, the Respondent contended that, if the Court accepted the Appellant’s agent’s argument to allow reporting GST by the conventional method, the result would actually increase the Appellant’s reassessment in the range of $13,000 to $20,000 for GST collectible. The Appellant would then be entitled to ITCs under this method but there is little evidence before me that would support such an entitlement. There is no documentation in respect to the ITC entitlement for the 2006 reporting period and the little that is available for the 2007 reporting period would be insufficient to lower the net tax compared to the amount that has been currently assessed under the Quick Method. Lack of documentation in respect to ITCs will generally not be a problem under the Quick Method because the registrant foregoes a claim for ITCs except with respect to capital assets.

[24]        In summary, the Appellant was entitled to use the Quick Method of accounting to calculate GST for the 2006 and 2007 reporting periods pursuant to his election to do so. He failed to apply the correct GST rates under this method and, consequently, failed to properly report net tax. His sales were taxable at the rate of 4.3 percent for those reporting periods resulting in additional net tax of $11,869.38 that the Appellant failed to report. The Appellant is not entitled to ITCs exceeding the amounts of $252.43 and $201.77 in respect to the 2006 and 2007 reporting periods.

As a result both appeals were dismissed.  There was no order as to costs since both appeals were informal procedure appeals.