Wilson v. R. – TCC: Unreported income from a bed and breakfast operation reduced by operating expenses

https://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/364292/index.do

Wilson v. The Queen (February 25, 2019 – 2019 TCC 42, Bocock J.).

Précis:  The taxpayer operated a bed and breakfast at her home.  She failed to file tax returns for the period from 2009 to 2015.  CRA assessed her for an annual income of $30,000 from the bed and breakfast operation during this period.  She was also assessed for RPP, CPP and OAS benefits along with interest and penalties.

Decision:   The central issue in this case was the quantum of income from the bed and breakfast operation.  The Court reduced the assessed amounts by the expenses connected with the bed and breakfast:

[11]  At the hearing, there was third party evidence of taxes, interest costs and insurance expenses incurred by Ms. Wilson before the Court for each assessed year. The source of the property taxes and interest originated from the mortgagee’s summary judgment motion in June, 2016. The insurance premium is taken from an invoice dated May, 2016 and addressed to the B&B Business. The insurance premium is only for one year. For simplicity, the Court has utilized that premium less $100 for each previous assessed year. The taxes and interest amounts are available for each assessed year. The aggregate amounts are as follows: 

[12]  The Court identifies that such amounts apply to the entire property; there were 21 acres of land and a certain percentage of use of the dwelling was to Ms. Wilson’s personal benefit. She maintained three B&B units. As well, the rustic, natural setting on the Niagara escarpment was undoubtedly attractive to B&B guests. As such, the Court is prepared to allow a 50% deduction of these expenses as business related. Not to be forgotten is the fact the B&B Business by definition included breakfast for each guest for each night stayed. Undoubtedly, there were other direct costs related to the 400 guests nights beyond taxes, interest and insurance.  These direct business costs would fluctuate based upon single or double occupancy. For simplicity, the Court will simply adopt $10.00 per day per room revenue night. Revenue each night is averaged to $75 as per the Minister’s alternative assessment. At 400 total guest nights occupancy each year, the direct cost for such patrons totals $4000 annually to earn the Minister’s gross ascribed income of $30,000.00. As such, Ms. Wilson’s net income, inclusive of 50% of expenses for taxes, interest and insurance and $4000 for direct guest costs, would be as follows: 

[13]  On the basis of the foregoing, after deducting the total B&B Business expenses from the Minister’s gross ascribed income of $30,000 per assessed year, the Court finds that on the basis of an alternative assessment Ms. Wilson’s net business income would more likely have been $13,743, $14,427, $15,196, $15,656, $17,589, $18,368 and $18,996 for each of the taxation years 2009, 2010, 2011, 2012, 2013, 2014 and 2015, respectively.

CRA was directed to make consequential adjustments resulting from the reduced income inclusion.

Thus the taxpayer’s appeal was allowed in part.  There was no order as to costs since this was an informal procedure appeal.