Claiming questionable bills can result in tax courtroom hassle

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What higher time than with year-end approaching to start out gathering your 2021 tax paperwork to get a soar begin on the upcoming tax season, which is especially vital for enterprise house owners seeking to deduct myriad bills on their 2021 tax returns.

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Two current tax instances, each determined final month, contain questionable enterprise bills that caught the attention of the taxman. The primary concerned an actual property agent who was challenged on varied money funds she claimed as enterprise bills, whereas the second case handled a monetary adviser who racked up some big-time authorized charges in convincing the Canada Income Company (CRA) to permit his enterprise bills. Let’s take a fast have a look at every case.

The agent

The Toronto actual property agent was reassessed by the CRA for her 2002 and 2003 tax years, during which the company challenged a few of the enterprise bills she deducted in computing her earnings for these years. She objected and went to Tax Court docket in 2018 and was partially profitable, however the courtroom didn’t settle for all of the bills she claimed. Specifically, the taxpayer claimed she paid three people important quantities of money for serving to her actual property enterprise.

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The taxpayer appealed the decrease Tax Court docket’s resolution to the Federal Court docket of Enchantment. In an enchantment, the appellate courtroom is required to deal with the decrease Tax Court docket’s findings of reality with a “excessive diploma of deference,” interfering provided that the taxpayer can present it made a “palpable and overriding error.” A palpable error is one that’s “apparent and plain to see.”

The taxpayer argued that as a result of the Tax Court docket discovered her to be a reputable witness, and accepted that she made funds for actual property leads, it ought to have made the “affordable inference” that she made the money funds she claimed to have made to the people she specified.

The appellate courtroom disagreed, refusing to equate credibility with reliability. “Credibility is worried with honesty, whereas reliability considerations the accuracy of the testimony, i.e., whether or not the witness precisely recollects and recounts the related occasions,” the three-judge panel defined. “A reputable witness might give unreliable proof.”

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The Tax Court docket did, certainly, describe the taxpayer as “total a reputable witness,” however it additionally famous she was “struggling to remember” varied information, and the courtroom did “not settle for all the pieces she mentioned as confirmed.” Particularly, the Tax Court docket mentioned her information “weren’t superb,” and her testimony concerning the money withdrawals she undertook to pay the people for leads when she deposited a fee cheque was not borne out by her precise financial institution information.

The courtroom mentioned “she was guessing a couple of instances,” she had no information of the funds made, the people she mentioned she paid didn’t truly report the earnings on their returns, and the quantities she claimed had been “spherical thousand greenback numbers,” which the Tax Court docket discovered a “little coincidental, not going, and inconsistent.”

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Ultimately, the Tax Court docket concluded it merely didn’t have adequate proof to simply accept these deductions. The Federal Court docket of Enchantment discovered no cause to overturn the choice and dismissed the taxpayer’s enchantment.

The adviser

The second case handled a Mississauga, Ont., monetary adviser who was reassessed by the CRA, which disallowed varied enterprise bills he claimed for the 2008 and 2009 taxation years within the quantities of $133,170 and $150,510, respectively. The federal tax in dispute totalled $64,135.

Nearly all of the denied bills had been incurred by the taxpayer to buy and use a $105,000, 2008 Chevrolet Corvette Z06 throughout what was known as “monitor days,” presumably for enterprise improvement functions.

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In September 2020, roughly 10 days earlier than the case was set to go to trial, the taxpayer and the CRA finally agreed to settle the matter, permitting $116,543 of deductible bills for 2008 and $130,821 for 2009. With the substantive matter now settled largely in favour of the taxpayer, how did the case nonetheless wind up in Tax Court docket a 12 months later?

Because it seems, the current case wasn’t concerning the quantity of the deductible enterprise bills, however reasonably concerning the prices that ought to be awarded to the taxpayer. For the reason that taxpayer and the CRA couldn’t agree on an quantity, they agreed to show to the Tax Court docket to set the suitable prices award.

Tariff B of the Tax Court docket Guidelines (Basic Process) usually prescribes a really low quantity to be awarded as prices, however the Tax Court docket has “absolute and unfettered discretion” to award (or withhold) prices. This discretion permits the courtroom to set “simply and applicable price awards appropriate to the actual circumstances of particular person instances.”

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In exercising its discretion, the Tax Court docket considers a wide range of components, together with: who gained the case, the quantities in challenge, the significance of the problems, any supply of settlement made in writing, the amount of labor, the complexity of the problems, and the conduct of any occasion that tended to unnecessarily shorten or lengthen the continuing’s length.

The taxpayer was looking for authorized prices of $260,413, an quantity the courtroom famous was “roughly 4 instances the quantity (of tax) at challenge.” The tariff prices, nonetheless, had been a lot decrease, set at $4,096, which included solely $625 to organize for the listening to, and $1,500 for the listening to itself.

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The decide famous it took the taxpayer practically three years to supply the CRA with info it had requested in September 2017, which included detailed breakdowns of the bills the taxpayer incurred, together with copies of “invoices, receipts, financial institution/bank card statements” to help the quantities deducted by the taxpayer on his return.

“(The taxpayer’s) failure to supply such info for practically three years impeded the power of the events to achieve a settlement. A celebration who fails to adjust to an order of the Court docket shouldn’t be rewarded by enhanced prices,” the decide wrote. “The (taxpayer) is lucky to obtain any prices in any respect.”

The decide mounted the prices award at $4,096, plus one other $10,400 in out-of-pocket disbursements, however disallowed about $6,300 in “after-hours rush service” for last-minute printing charges.

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Property Planning with CIBC Non-public Wealth in Toronto. [email protected]

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