Claiming questionable expenses can lead to problems with the tax court


Jamie Golombek: Here’s a look at two recent cases where such spending caught the taxman’s attention

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What better time than as the end of the year approaches to start putting together your 2021 tax documents to get a good start for the next tax season, which is especially important for business owners looking to deduct a myriad of expenses on their 2021 tax returns.

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Two recent tax cases, both decided last month, concern questionable business expenses that have caught the attention of the tax authorities. The first involved a real estate agent who was challenged over various cash payments she claimed as business expenses, while the second involved a financial advisor who racked up considerable legal fees to convince the Revenue Agency of the Canada (ARC) to authorize his professional expenses. Let’s take a quick look at each case.

The agent

The Toronto real estate agent was reassessed by the CRA for its 2002 and 2003 tax years, in which the agency disputed some of the business expenses it deducted in calculating his income for those years. She objected and went to Tax Court in 2018 and was partially successful, but the court did not accept all of the expenses she claimed. In particular, the taxpayer claimed that she paid three people large sums of cash to help her with her real estate business.

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The taxpayer appealed the decision of the Lower Tax Court to the Federal Court of Appeal. In an appeal, the appellate court is required to treat the lower tax court’s findings of fact with a “high degree of deference”, interfering only if the taxpayer can show that he committed a wrongdoing. “Manifest and overriding error”. A palpable error is an “obvious and obvious” error.

The taxpayer argued that, because the Tax Court considered her a credible witness and admitted that she had made payments for real estate leads, she should have made the “reasonable deduction” that she had made. had made the cash payments that she claimed to have made to individuals. she specifies.

The appeals court disagreed, refusing to equate credibility with reliability. “Credibility is about honesty, while reliability is about the accuracy of the testimony, that is, whether the witness remembers and accurately recounts the relevant events,” the three-judge panel explained. “A credible witness can give unreliable evidence. “

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The Tax Court did describe the taxpayer as “an overall credible witness”, but it also noted that she “had difficulty remembering” various facts, and the court “did not accept everything. that she said as proven ”. Specifically, the Tax Court said her records “weren’t very good” and that her testimony regarding the cash withdrawals she had undertaken to pay individuals for leads when she deposited a check. commission was not corroborated by his actual bank statements.

The court said “she guessed several times”, that she had no record of payments made, that the people she said she paid did not actually report the income in their returns, and that the amounts she claimed were “thousands of dollars or so.” what the Tax Court found “a bit fortuitous, unlikely and inconsistent”.

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In the end, the Tax Court concluded that it simply did not have enough evidence to accept these deductions. The Federal Court of Appeal found no reason to overturn the decision and dismissed the taxpayer’s appeal.

The counselor

The second case involved a financial advisor in Mississauga, Ontario, who was reassessed by the CRA, who rejected various business expenses he claimed for the 2008 tax years and 2009 for amounts of $ 133,170 and $ 150,510, respectively. The federal tax in dispute was $ 64,135.

The majority of the disallowed expenses were incurred by the taxpayer to purchase and operate a 2008 Chevrolet Corvette Z06 for $ 105,000 during what have been called “track days”, presumably for business development purposes.

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In September 2020, approximately 10 days before the start of the trial, the taxpayer and the CRA finally agreed to settle the case, authorizing $ 116,543 in deductible expenses for 2008 and $ 130,821 for 2009. The substantive case being now settled primarily in favor of the taxpayer, how did the case still end up in Tax Court a year later?

As it turns out, the recent case was not about the amount of deductible business expenses, but rather the fees that should be attributed to the taxpayer. Since the taxpayer and the CRA could not agree on an amount, they agreed to look to the Tax Court to set the appropriate cost award.

Tariff B of the Rules of the Tax Court (General Procedure) generally prescribes a very small amount to be awarded in costs, but the Tax Court has “absolute and unfettered discretion” to award (or withhold) costs. This discretion allows the court to set “fair and appropriate cost awards tailored to the particular circumstances of individual cases”.

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In exercising its discretion, the Tax Court of Canada takes various factors into account, including: who won, the amounts in dispute, the importance of the stakes, any settlement offer made in writing, the volume of work, the complexity of the issues, and the conduct of any party which has tended to shorten or unnecessarily lengthen the duration of the proceedings.

The taxpayer was claiming legal costs of $ 260,413, an amount the court noted was “about four times the amount (of tax) involved.” Tariff costs, however, were much lower, set at $ 4,096, which included only $ 625 for preparation for the hearing and $ 1,500 for the hearing itself.

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The judge noted that it had taken almost three years for the taxpayer to provide the CRA with the information it requested in September 2017, which included detailed breakdowns of expenses incurred by the taxpayer, as well as copies of ” invoices, receipts, bank / credit card statements ”to justify the amounts deducted by the taxpayer in his return.

“The failure (of the taxpayer) to provide this information for almost three years has hampered the parties’ ability to reach a settlement. A party who does not comply with a court order should not be rewarded with increased costs, ”the judge wrote. “The (taxpayer) is lucky to receive any award. “

The judge set costs at $ 4,096, plus $ 10,400 in additional disbursements, but denied approximately $ 6,300 of “after-hours emergency service” for last-minute printing costs.

Jamie Golombek, CPA, CA, CFP, CLU, TEP is Managing Director, Tax and Estate Planning at CIBC Private Wealth in Toronto. [email protected]

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