http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/71772/index.do
Francis & Associates v. The Queen (May 9, 2014 – 2014 TCC 137) involved three appeals heard on common evidence. The individual Appellants were partners in a law firm which itself was the third Appellant (for a GST appeal). The issues were varied:
[4] These above-noted disputed expenses forming this appeal are calculated as follows:
| Bad Debt Allocations |
2002 |
2003 |
2004 |
|
Minister’s Allocation in reassessment |
$44,604 |
$36,541 |
$19,142 |
|
Appellants’ Allocationsin appeals |
$18,929 |
$77,641 |
$3,889 |
(This is no material dispute regarding the aggregate of the bad debt expense, but merely the re-allocations among each year within the Relevant Period.)
| Stranded Disbursements |
2002 |
2003 |
2004 |
|
Total Disallowed |
$82,834 |
$25,677 |
$52,941 |
|
Promotional Expenses |
2002 |
2003 |
2004 |
|
Total Disallowed |
$6,000 |
$5,901 |
$6,000 |
|
Re: s.67.1 50% rule |
$3,000 |
$2,901 |
$3,000 |
|
Cash Expenditures |
$3,000 |
$3,000 |
$3,000 |
[5] The Minister also denied the Partnership’s input tax credits under the ETA in the amount of $10,194 for the Relevant Period (the “Disallowed ITCs”).
The individual taxpayers did not succeed in their bad debt claim:
[34] The Appellants are not entitled to the Bad Debt Allocations because prima facie no determination of the uncollectible nature or any adjustment to the allocation of same was possible until late in 2005 well beyond the Relevant Priod. The assumption of the Minister in relation to the Relevant Period remains relevant and the Appellants’ appeals fail on this point.
They were successful however with respect to unrecovered disbursements (“Stranded Disbursements”):
[45] In short, because the Partnership had the option of deducting the expenses, the Minister’s assumption regarding the extra step (applicable to accounts receivable) does not apply where the Partnership merely elects to absorb the “outlays” as non-recoverable costs and deduct same from aggregate professional income. When doing so, no timely determination of uncollectible status is required since such expenses never existed as accounts receivable. Such outlays were simply not deducted through error or omission. Factually, based upon the evidence, the Court accepts that such outlays were incurred for the purpose of gaining professional income and were not otherwise previously deducted as an expense or billed as revenue and written off. Therefore, an expense deduction from professional fees should be allowed to the extent of the Stranded Disbursements.
The court rejected their promotional expenses claim:
[49] The Appellants have not discharged this burden of proving they incurred the Cash Expenditures. No receipts, bank statements, or testimony from persons alleged to have received those amounts were offered at the hearing. The Appellants have not demolished the Minister’s assumption that they did not incur the Cash Expenditures and their appeals in that regard must fail.
…
[52] The Appellants have failed to demolish the Minister’s assumption that these promotional expenses were generally taken in respect of meals and entertainment for clients, and not specifically and exclusively expended on Special Events for staff. For that reason, the Special Events expenditures are not deductible in full pursuant to paragraph 67.1(2)(f), but merely as to the fifty per cent allowed by the Minister.
Finally the GST appeal was dismissed for want of evidence:
[53] As a consequence of the findings relating to the appeals under the Act, the appeals for Disallowed ITCs under the ETA should be dismissed in the first instance since a goodly portion are ITCs claimed in relation to the deductions otherwise disallowed by the Minister and in respect of which the appeals are dismissed by this Court. However, a percentage, but not all of the Disallowed ITCs may have related to the Stranded Disbursements. There is no evidence as to which Stranded Disbursements did or did not include GST or whether such related ITCs were not previously recovered separately. The reason for three Disbursement Clearing Accounts may have related to an attempt to separate exempt, zero-rated or taxable supplies in the Disbursement Clearing Accounts; however, there was no evidence or submissions whatsoever pleaded or led on this point by the Appellants. In the absence of such evidence, the ITCs cannot be claimed and the appeal is accordingly dismissed.
The Appellants were awarded costs on the basis of the Tariff:
[54] These appeals are brought under the Tax Court of Canada Rules (Informal Procedure). While the Appellants shall have their costs, same are awarded on the basis of the Tariff. The Court will not exercise its discretion to depart from the Tariff. Such a determination is advisedly made for two reasons: the Appellants were only partially successful and the state of the Partnership’s records at the end of the Relevant Period (which stretched over three taxation years) contributed to these appeals and ought to have been detected and cured prior to any audit.