Peach v. R. - FCA: Tax Court reversed on reasonableness of business expenses

Peach v. R. - FCA:  Tax Court reversed on reasonableness of business expenses

http://decisions.fca-caf.gc.ca/fca-caf/decisions/en/item/145624/index.do

Peach v. Canada  (June 8, 2016 – 2016 FCA 173, Trudel (author), Stratas, Boivin, JJ. A.).

Précis:   The Minister disallowed certain rental and business expenses claimed by the taxpayer.  He appealed to the Tax Court which dismissed his appeal.  The Federal Court of Appeal, in a decision delivered from the bench, dismissed his appeal on the rental expenses but allowed it in connection with the business expenses which the Tax Court had disallowed as unreasonable (section 67 of the Income Tax Act).  There was no indication that that Tax Court Judge had turned his mind to what amount, if any, of the expenses would be reasonable.  The case was allowed in part, with costs, and returned to the Tax Court for a redetermination of the reasonableness issue.

Decision:   The Court of Appeal concluded that the record did not disclose that the Tax Court Judge applied the proper test in determining the reasonableness of the disputed business expenses:

[4]               With respect to the appellant’s business losses, however, we are all of the opinion that the appeal must succeed. We are all of the view that on the section 67 issue, the oral reasons suffer from lack of structure, lack of clarity and confusion. At the hearing of this appeal, both parties agreed that in the Court below, it was taken for granted that there was a source of income and all expenses had been incurred to earn business income.

[5]               Under section 67, the Judge, without saying why, considered globally whether the expenses were reasonable and accepted that, as set out in the Minister’s assessment, some of the expenses should be allowed to the extent they matched the appellant’s commission income. He did not have regard to the particular expenses and the appellant’s explanation for them.

[6]               Stewart makes it clear (at paragraph 57) that under section 67, unreasonable expenses can be eliminated or reduced to make them reasonable.

[7]               We are not satisfied that the Judge asked himself that question, namely whether the actual expenses in this case were unreasonable and what reduction in the appellant’s claimed expenses might be necessary in order to be reasonable.

[8]               As a result, the appeal will be allowed in part, with costs, the judgement of the Tax Court of Canada will be set aside with respect to the appellant’s business losses and returned to the Tax Court of Canada for redetermination of the section 67 issue.