Soshiroda v. R. – TCC: Inadequately documented expenses of a web design business disallowed

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Soshiroda v. The Queen (August 26, 2014 – 2014 TCC 256) was a case where the taxpayer and his wife operated a web design business. They claimed as deductions very large amounts for host server, programming and licensing fees:

[1] These appeals were heard on common evidence. The appellants own a web design business which operates under the names S‑Design and Abeillex. When filing their 2008 and 2009 tax returns, both appellants deducted host server fees as well as programming and licensing fees of $90,100 and $55,650, representing each one’s percentage (50%) of the total partnership amounts of $180,200 and $111,300 for those taxation years respectively. By Notices of Reassessment dated December 28, 2011, the Minister of National Revenue (the “Minister”) disallowed the amounts of $90,100 and $55,650 as not being proper expenses for each appellant’s 2008 and 2009 taxation years respectively. On February 20, 2012, the Minister received from each appellant a Notice of Objection with regard to the December 28, 2011 reassessments for the 2008 and 2009 taxation years. On April 5, 2013, the Minister partially confirmed each appellant’s reassessment dated December 28, 2011 for the 2008 and 2009 taxation years, as follows:

Year                     Additional Other Business Expenses Allowed
2008                                   $9,188
2009                                   $8,363

The appellants have appealed from these reassessments.

Only the wife testified and the only documentary evidence she presented were Japanese emails from the alleged supplier all bearing the same date and described as “Reissued Invoice”.

The court simply did not accept her evidence:

[7] Ms. Okamoto’s answers were generally vague, imprecise and ambiguous. In fact, her testimony can be summarized as follows: we were billed by Heat Systems Inc. for host server fees as well as programming and licensing fees; the host server fees were paid directly to Heat Systems Inc. but the programming fees were paid directly to Mr. Miyadera. She never explained what the digital content was or what their costs were. Her testimony was also silent regarding Heat Systems Inc.’s server (what kind of server was it? what was the data transfer speed?) Her testimony was likewise silent regarding the basis on which the programming fees were charged by Heat Systems Inc. and paid to Mr. Miyadera. All too often, she was unable to provide any valid explanation of how their business operated. In this regard, she was unable to explain why all the programming and licensing fees that were billed by Heat Systems Inc. were paid directly to Mr. Miyadera. She was also unable to explain the inconsistencies between the several versions of the supporting documents that were provided during the audit and during the review following the objection. In addition, the evidence showed that in 2010 the appellants switched to another provider (Hurricane Electric LLC). Ms. Okamoto was unable as well to explain why Hurricane’s host server fees were much less expensive than those of Heat Systems Inc. The evidence further showed that the appellants had declared to the CRA’s auditor that the owner of Heat Systems Inc. was Mr. Miyadera. In this regard, the evidence (Exhibit R‑1) proves the contrary. Ms. Okamoto again was unable to explain the contradiction. Finally, the evidence also showed that the appellants never informed the tax auditor that they themselves had prepared the first set of invoices filed with him. This also added to my doubts regarding Ms. Okamoto’s credibility. For these reasons, I attached little probative value to her testimony.

As a result both appeals were dismissed.