Ngai v. The Queen

Ngai v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2018-01-26
Neutral citation
2018 TCC 26
File numbers
2013-604(IT)G
Judges and Taxing Officers
Don R. Sommerfeldt
Subjects
Income Tax Act
Decision Content
Docket: 2013-604(IT)G
BETWEEN:
YIU-CHO NGAI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on March 23 and 24, 2016, and on January 30, 2017, at Toronto, Ontario. Written Submissions filed by the Appellant
on April 3, 2017.
By: The Honourable Justice Don R. Sommerfeldt
Appearances:
Counsel for the Appellant:
Abba Chima
Counsel for the Respondent:
Tony Cheung
JUDGMENT
The Appeals from the reassessments (the “Reassessments”) made under the Income Tax Act with respect to the 2005 and 2006 taxation years are allowed and the Reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons.
There is no award as to costs.
Signed at Ottawa, Canada, this 26th day of January 2018.
“Don R. Sommerfeldt”
Sommerfeldt J.
Citation: 2018 TCC 26
Date: 20180126
Docket: 2013-604(IT)G
BETWEEN:
YIU-CHO NGAI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sommerfeldt J.
I. INTRODUCTION [1] These Reasons pertain to the Appeals instituted by Yiu-Cho Ngai in respect of his 2005 and 2006 taxation years. Mr. Ngai was reassessed in respect of those taxation years by the Minister of National Revenue (the “Minister”), as represented by the Canada Revenue Agency (the “CRA”), so as to disallow the deduction of certain expenses. In particular, the Minister initially reassessed Mr. Ngai on April 30, 2009, and subsequently, after considering Mr. Ngai’s earlier notices of objection, again reassessed Mr. Ngai, on September 26, 2011, so as to allow some (but not all) of the expenses that had been previously disallowed.
II. MATTERS IN DISPUTE [2] The expenses that are the subject of these Appeals have been categorized and tabulated by the Crown as follows:[1]
2005
As filed
Allowed
Disallowed
Advertising
$18,382
$7,563
$10,819
Capital cost allowance
5,234
0
5,234
Motor vehicle expenses
12,591
11,323
1,268
Other (consulting/referral expenses)
79,916
22,022
57,894
Total
$116,123
$40,908
$75,215
2006
As filed
Allowed
Disallowed
Advertising
$31,690
19,160
12,530
Capital cost allowance
3,928
0
3,928
Legal, accounting & professional fees
9,730
3,790
5,940
Motor vehicle expenses
11,870
9,950
1,920
Rent expense
5,500
0
5,500
Travel expense
2,665
0
2,665
Other (consulting/referral expenses)
179,289
12,269
167,020
Total
$244,672
$45,169
$199,503
Thus, the issue to be determined is whether any of the expenses referred to in the column headed “Disallowed” were deductible by Mr. Ngai in computing his income for 2005 or 2006, as the case may be.
[3] During the hearing of these Appeals, counsel for the Crown advised that the Crown was conceding the deductibility of some of the expenditures deducted by Mr. Ngai in computing his income for 2005 or 2006, as the case may be. Some of those conceded expenditures will be discussed in these Reasons.
III. FACTUAL BACKGROUND [4] In 2005 and 2006, Mr. Ngai was a real estate broker working in the greater Toronto area and surrounding areas. He earned commission income and was responsible for the payment of many of his own expenses. In 2005 and 2006, he worked for two or three successive real estate brokerages, as follows:
a) from January 1, 2005 to mid-2005, he worked at Homelife CultureLink Realty Inc. (“Homelife Culture”);
b) from mid-2005 to August or September 2006, he worked at Homelife Gold Trade Realty Ltd. (“Homelife Gold”); and
c) from August or September 2006 to December 31, 2006, he worked at Sutton Group-New Standard Realty Inc. (“Sutton Group”).
[5] In reassessing Mr. Ngai, the Minister assumed that his gross commission income in 2005 and 2006 was $154,678 and $380,953 respectively, and that he had reported net commission income for those two years in the amounts of $22,161 and $115,375 respectively.
[6] As indicated above, the totals of the expenses, as set out in the above tables and as claimed by Mr. Ngai, were $116,123 for 2005 and $244,672 for 2006. If those totals were to be subtracted from the gross commission income earned by Mr. Ngai in those two years (as assumed by the Minister), the results would be $38,555 and $136,281 respectively, which are greater than the amounts of net commission income that Mr. Ngai apparently reported for 2005 and 2006 (i.e., $22,161 and $115,375 respectively). This suggests to me that there may have been additional expenses that were deducted by Mr. Ngai in computing his income for 2005 and 2006, which were not disallowed in whole or in part by the CRA, and therefore are not the subject of these Appeals.
[7] Mr. Ngai testified that in 2005 he lived in a rented basement apartment, but he was flooded out in the summer or fall of 2006, whereupon he rented a two-bedroom condominium, and used the second bedroom as an office for his business.
IV. ANALYSIS A. Motor Vehicle Expenses and Capital Cost Allowance [8] In computing the profit from his real estate business for 2005 and 2006, Mr. Ngai deducted motor vehicle expenses and capital cost allowance (“CCA”) in respect of two vehicles, a 1997 BMW and a 2003 Mercedes-Benz. The CRA allowed the deduction of the expenses and the CCA in respect of the BMW, but not the Mercedes-Benz, as the CRA was of the understanding that Mr. Ngai did not own the Mercedes-Benz. During the hearing of the Appeals, Mr. Ngai produced a copy of a sales contract[2] showing that Mr. Ngai purchased the Mercedes-Benz on October 23, 2003.
[9] On the final day of the hearing, when oral submissions were presented, counsel for the Crown advised the Court that, with the production of the above-mentioned sales contract, the Crown was willing to acknowledge that Mr. Ngai was the owner of the Mercedes-Benz in 2005 and 2006, and that the Crown was willing to allow the motor vehicle expenses in respect of the Mercedes-Benz to be deducted on an “as-filed basis” (i.e., the motor vehicle expenses claimed by Mr. Ngai on his 2005 and 2006 tax returns in respect of both the BMW and the Mercedes-Benz would be allowed). Counsel for the Crown also advised that the expenses in respect of the Mercedes-Benz had been determined on the basis that Mr. Ngai used the Mercedes-Benz 85% of the time for business purposes in 2005 and 91% of the time for business purposes in 2006. Accordingly, counsel advised that the Crown is willing to allow the deduction of 85% of the appropriately calculated CCA for 2005 and 91% of the appropriately calculated CCA for 2006. Counsel for Mr. Ngai concurred with that resolution of this particular issue. The Court similarly so concurs.
B. Rent [10] In computing his business income for 2006, Mr. Ngai, on the first page of his Statement of Business Activities for that year, deducted rent in the amount of $5,500, and on the second page of the same document, in calculating the amount of his business-use-of-home expenses, deducted rent in respect of a workplace in the home in the amount of $3,039.06.[3]
[11] During his direct examination, Mr. Ngai stated that this rent related to the office that he maintained in the second bedroom of a rented condominium unit. The total rent for the entire unit was $1,250 per month. He said that, in computing his income for 2006, he deducted rent in the amount of $5,500. In his direct examination, he said nothing about the other amount that he had also claimed, i.e., $3,039.06.
[12] Although Mr. Ngai’s direct examination had drawn to a close at the end of the first day of the hearing, on the morning of the second day of the hearing, counsel for Mr. Ngai requested that the direct examination be reopened to provide clarification concerning the rent deducted by Mr. Ngai in computing his income for 2006. Upon the request being granted, Mr. Ngai testified that the amount of the rent paid by him for the two-bedroom condominium unit was actually $1,430 per month, as evidenced by cheque no. 313 dated September 15, 2006, in the amount of $1,430, and made payable to Gina Cheng Nga Wong.[4] Mr. Ngai testified that the portion of the floor space used for his business represented 37.3% of the total floor space, resulting in a deduction for the year of $5,500, as he had rented the unit for all 12 months of 2006. The math does not work out, as, when I multiplied $1,430 by 0.373 and then by 12, the result was $6,400.68, not $5,500. Furthermore, Mr. Ngai’s statement that he rented the two-bedroom condominium unit for all 12 months of 2006 is not consistent with his testimony that he lived in a rented basement apartment until he was flooded out in the summer or fall of 2006,[5] or with a statement that he made to a CRA official to the effect that he lived in the basement apartment in 2005 and half of 2006 and that he lived in the condominium unit for the other half of 2006.[6]
[13] During his cross-examination, Mr. Ngai acknowledged that, if he is entitled, in computing his business income for 2006, to deduct rent in the amount of $3,039.06 as a business-use-of-home expense, he is not also entitled to deduct rent in the amount of $5,500 in respect of the office in the second bedroom of his rented condominium unit.
[14] When Mr. Ngai was re-examined, after his cross-examination, he stated that the rent in the amount of $5,500 did not relate to his home office. Rather, the $5,500 had been paid by him to Homelife Gold as rent for the use of an office at the premises of that brokerage. However, he did not produce any documents that substantiated that the payment of $5,500 had been made to Homelife Gold. He suggested that the applicable portion of that amount had been subtracted from each of the monthly commission-payment cheques paid to him by Homelife Gold. However, there is no documentary evidence to confirm that rent charges were subtracted from the commissions.
[15] In view of the conflicting explanations provided by Mr. Ngai and in view of his failure to produce any documentation to confirm that the payment of $5,500 was actually paid to Homelife Gold, Mr. Ngai has failed to discharge the burden of proving that the amount was paid as rent for business premises.
C. Travel Expenses [16] In computing his income from business in 2006, Mr. Ngai deducted the amount of $2,665, which represented the cost of two airline tickets from Toronto to Hong Kong and return.[7] Mr. Ngai explained that he had gone to Hong Kong to meet with John Leung, who was looking for commercial property in Toronto that could be leased. He explained that he was hoping to interest Mr. Leung in a building in Toronto and took with him a business associate named Alvin Young, who was a builder and who could assist Mr. Ngai in promoting his (i.e., Mr. Ngai’s) business to Mr. Leung. In other words, according to Mr. Ngai, Mr. Young went on the trip to facilitate Mr. Ngai’s business. Accordingly, Mr. Ngai paid for, and deducted, the airfare for both himself and Mr. Young. I accept that the trip of Mr. Ngai himself to Hong Kong was for business purposes. However, as Mr. Ngai chose not to call Mr. Young as a witness, Mr. Ngai’s testimony concerning the reason for Mr. Young’s trip to Hong Kong was not corroborated.
[17] Mr. Leung sent a letter to Mr. Ngai, after Mr. Ngai’s return to Canada. Included in the letter was the following statement:
Also, with your client, Mr. Alvin Young, came to the meeting showing us how his expertise, as a builder, can employ his company to build a new $100,000 sq. ft. facility in Toronto, Canada for our company.[8]
In view of the above statement, it seems that Mr. Young went on the trip to promote his own business, and not to promote Mr. Ngai’s business. Therefore, it was not appropriate for Mr. Ngai to deduct the cost of Mr. Young’s airfare, such that the cost of only one airfare (i.e., $1,332.50), and not two, was deductible by Mr. Ngai in computing his income for 2006.
D. Legal, Accounting and Professional Fees [18] In computing his business income for 2006, Mr. Ngai deducted various amounts apparently paid for legal, accounting and other professional services. Initially, the CRA denied the deduction of many of those expenditures, as they were not supported by appropriate documentation to show that the expenditures had been made or to confirm that they related to Mr. Ngai’s business. The most significant of those expenditures were amounts paid to Mr. Ngai’s solicitor, Anita Leung, allegedly for legal services in respect of his business. Mr. Ngai explained that Ms. Leung charged a monthly retainer, pursuant to which Mr. Ngai paid her the amount of $467.29 (plus GST) per month,[9] in exchange for which she provided miscellaneous legal advice and other legal services from time to time, as needed. Some of those monthly payments were supported by invoices and were allowed by the CRA during the course of the audit.[10]
[19] The payments that were not supported by a monthly invoice were initially disallowed by the CRA. The most significant item in this category was the amount of $4,672.90 (or $5,000 inclusive of GST) that was paid by Mr. Ngai to his solicitor, Ms. Leung, on April 21, 2006. Mr. Ngai did not produce an invoice or any other documentation whatsoever to explain the nature of this payment, nor did he call Ms. Leung as a witness to provide an explanation of the payment. A copy of the cancelled cheque was produced,[11] such that the CRA acknowledged that the payment had been made; however, there was no indication on the cheque as to whether the payment related to services pertaining to Mr. Ngai’s real estate business or services pertaining to something else, such as his recent bankruptcy, a matrimonial matter, a personal injury matter, or a motor vehicle matter.
[20] Mr. Ngai has not provided sufficient evidence to prove on a balance of probabilities that the payment of $4,672.90, on April 21, 2006, related to his real estate business. Accordingly, that amount was not deductible.
[21] Various smaller amounts paid in 2006 to other professionals were also deducted, and some of those were allowed by the CRA, while the remainder were disallowed. During his oral submissions, counsel for the Crown stated that the CRA was conceding all of the amounts deducted in 2006 in respect of legal, accounting and professional fees, other than the payment of $4,672.90 made on April 21, 2006 by Mr. Ngai to Ms. Leung. It is my understanding that the deductions that were conceded at the hearing and that had not previously been allowed by the CRA relate to the following payments: [12]
Payee
Date
Amount
Anita Leung
January 6, 2006
$188.67
Anita Leung
May 10, 2006
467.29
R.H. Small Claim
May 24, 2006
40.00
Anita Leung
June 13, 2006
467.29
Total
$1,163.25
E. Advertising [22] Before analyzing the specific advertising expenditures that are in dispute, it would be helpful to review some of the legal principles that may limit the deductibility of expenses. It is common knowledge that, in computing the income of a taxpayer from a business:
a) paragraph 18(1)(a) of the Income Tax Act[13] (the “ITA”) precludes the deduction of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business;
b) paragraph 18(1)(h) of the ITA precludes the deduction of many personal or living expenses of the taxpayer;
c) section 67 of the ITA precludes the deduction of an otherwise deductible outlay or expense, except to the extent that the outlay or expense was reasonable in the circumstances; and
d) subsection 67.1(1) of the ITA permits the deduction of only 50% of certain expenditures that would otherwise be deductible in respect of the human consumption of food or beverages or the enjoyment of entertainment.
[23] The Federal Court of Appeal provided a helpful observation in Stapley, which dealt with the application subsection 67.1(1) of the ITA to a real estate agent who gave his clients gift certificates for food and beverages and tickets to sporting events and concerts, although he did not go with his clients to consume the food and beverages or to attend the entertainment. While the case focused primarily on the interpretation of subsection 67.1(1), the Federal Court of Appeal made a few general comments about advertising and promotion as follows:
… in my respectful opinion, it seems unfair to cut the respondent’s [i.e., the real estate agent’s] deductions in half. The respondent could have purchased flowers or books for his clients and deducted 100 percent of their costs. Likewise, he could have fully “deducted” rebates on his real estate commission or gifts of cash to his clients. Thus, in its current form, section 67.1 interferes with taxpayers’ business decisions and in particular, how they allocate their marketing budgets. It provides them with an incentive to forego purchasing gifts of food and entertainment for the purpose of building and maintaining their client relationships.[14]
Although the above statement was obiter dicta, it is germane to this Appeal as it indicates that gifts of cash and rebates of real estate commissions may be deductible if they are reasonable in the circumstances and if they are given for the purpose of gaining or producing income, rather than for a personal or other non-business purpose.
[24] In the context of advertising and promotion, some of the above statutory principles were explained in Ace Salvage as follows:
In effect, the Income Tax Act presupposes a tax on all business income, reduced only by the deductions scheduled and permitted. It must be demonstrated that the funds expended … were so expended for the purpose of gaining or producing income for the … business. The Court recognizes that there is probably no more ethereal category than “advertising and promotion”, and that indeed in general the interpretation of the tax laws by Revenue Canada has been flexible and generous in allowing the parameters around such a category to encompass a great range of tangential or obliquely related items.[15] [Italics in original.]
Against the backdrop of the above principles, I will examine the various advertising expenses deducted by Mr. Ngai in computing his income for 2005 and 2006.
(1) 2005 [25] In computing his income for 2005, Mr. Ngai deducted certain advertising expenses, which included the following:[16]
Description
Amount
Gifts
$10,537.54
Marketing
394.08
Signage
199.10
Status certificate
706.05
Ming Pao Daily[17]
1,277.94
Sponsorship
500.00
Total
$13,614.71
The CRA initially disallowed the deduction of all of the above expenditures, but after reviewing documents submitted by Mr. Ngai, the CRA allowed the deduction in full of the expenditures in respect of marketing, signage, the status certificate and the Ming Pao Daily, while maintaining its disallowance of most of the gifts and sponsorship amounts.
(a) Gifts [26] The purported advertising expenses categorized as gifts included monetary gifts and gifts of high-end merchandise, whose recipients and amounts or values are set out below:[18]
Name
Amount
Jeannie Lee
$1,050.00
Shirley Chan
264.00
Jenny Chan
603.00
Mr. Ansari
1,000.00
Eda Wong
300.00
Kevin Yu
1,500.00
KamKong Wu
400.00
Vancy Chu
2,000.00
Owners of Lorema Inc.
1,296.00
Total
$8,413.00
The CRA initially proposed to disallow the deduction of each of the above gifts. In response to the CRA’s proposal letter, Mr. Ngai submitted additional information and supporting documentation to substantiate the business nature of three of the expenditures. Accordingly, the CRA allowed the deduction of the gifts or expenditures made in respect of Shirley Chan ($264), Eda Wong ($300) and KamKong Wu ($400) as expenses that were reasonable in the circumstances or that should be given the benefit of the doubt.[19]
(i) Jeannie Lee ($1,050) [27] After Mr. Ngai filed notices of objection in respect of the reassessments issued on April 30, 2009, the Appeals Division of the CRA allowed the deduction of $1,050 paid by Mr. Ngai to Jeannie Lee.[20]
(ii) Jenny Chan ($603) [28] The above expenditure in the amount of $603 in respect of Jenny Chan apparently related to the purchase of jewellery by Mr. Ngai from Eternity Jewellery. Mr. Ngai stated that he gave the jewellery to a client, Jun Yang, who owned Kwan Shun Meat Wholesale and who, using the brokerage services of Mr. Ngai, purchased an industrial unit located at 110 Dynamic Drive, #55.[21]
[29] The details concerning the purchase of the jewellery are unclear. In an undated document that Mr. Ngai provided to the CRA, he stated that the $603 expenditure was a reimbursement for jewellery that he bought from Jenny Chan’s friend.[22] This appears to be somewhat (but not precisely) consistent with a statement made by Mr. Ngai to the CRA appeals officer to the effect that the payment was a reimbursement to Jenny Chan for jewellery that was purchased on his behalf and that was given to Jun Yang.[23] However, in the written submissions filed by the Appellant on April 3, 2017, Mr. Ngai stated that Jenny Chan owned Eternity Jewellery and that he bought the jewellery in question from her.[24] Thus, it is not clear whether Eternity Jewellery was owned by Jenny Chan or by her friend.
[30] Although Mr. Ngai provided a copy of the cheque in the amount of $603 issued on April 1, 2005 to Jenny Chan,[25] the “memo” (or description) line on the cheque was left blank. Thus, the purpose for issuing the cheque does not appear on the face of the cheque. Mr. Ngai did not provide any invoice, receipt or other document to corroborate the purchase of the jewellery or the alleged business purpose of the purchase, nor did he call Jenny Chan or Jun Yang as a witness. Accordingly, Mr. Ngai has not proven on a balance of probabilities that the $603 was spent for a business purpose.
(iii) Mr. Ansari ($1,000) [31] The gift of $1,000 given to Mr. Ansari was made by means of a cheque, a photocopy of which was entered into evidence.[26] The notation in the lower left corner of the cheque clearly indicated that it was given as a wedding gift. Mr. Ngai stated that the recipient of the cheque (i.e. the groom) was the son of an important business contact, such that the gift, as well as Mr. Ngai’s attendance at the wedding, had a business-promotion purpose.
[32] The CRA took the position that the gift was made for personal, rather than business, purposes.[27] Counsel for the Crown referred me to the Samaan case, in which Justice Paris stated:
… when asked about certain claims for liquor that was purchased, he [i.e., Mr. Samaan] advised that the item had been taken to a party to which he had been invited, with friends. He said that he had handed out business cards at the party and so felt that the liquor he had purchased was a business expense. It is apparent, though, that the liquor was a gift to [Mr. Samaan’s] host when invited into a social event, unconnected with his business. One cannot convert this obvious personal expense into a business expense by handing out business cards while at a personal, social function.[28]
[33] Another case containing helpful comments is Ace Salvage, which dealt with a corporation that carried on a scrap-metal processing and sales business and that, in computing its income from that business, deducted horse-racing expenses on the basis that horse-racing was the chief method of advertising the scrap-metal business. The court stated:
I do not doubt … that some of the activity which surrounded the horse-racing provided contacts, information, leads and help which were of benefit to the salvage business. But it could also easily be argued that [the president of the taxpayer corporation] – (a highly personable and congenial man) going for a cup of coffee, mowing his lawn or attending a wedding could have (and probably has) done the same thing, perhaps even to the same degree. But it could not be argued (except under possibly the most extreme circumstances that are not easily evident to me) that going for a cup of coffee, mowing the lawn, or attending the wedding was for the “purpose of gaining or producing income from the salvage business”…. It might be argued that some small or modest part of the cost of doing so (coffee, lawn, wedding) which could be directly and clearly associated with the income-producing activities of the company might be the responsibility of the company – but no such limited and restricted effort was defined in this appeal. Any such proposal would be required in any event to meet the test of “reasonableness” under section 67 of the Act.[29] [Italics in original; underlining added.]
[34] I am of the view that, like the party attended by Mr. Samaan in the above-noted case bearing his name, the Ansari wedding attended by Mr. Ngai was a social function, not a business function, and the wedding gift had a personal purpose, not a business purpose. This view is supported by the comments in the above extract from Ace Salvage about attendance at a wedding. Furthermore, Mr. Ngai did not call Mr. Ansari (either the father or the son) as a witness, nor did he provide sufficient evidence to prove on a balance of probabilities that the wedding gift was made for a business purpose. In addition, Mr. Ngai has failed to prove that, in computing his income from his real estate business, it was reasonable in the circumstances to deduct a $1,000 wedding gift.
(iv) Kevin Yu ($1,500) [35] The CRA initially denied the deduction of the $1,500 gift paid to Kevin Yu. However, when the Appeals Division subsequently reviewed the notice of objection and supporting documents, it allowed the deduction.[30]
(v) Vancy Chu ($2,000) [36] The $2,000 payment to Vancy Chu was made by means of a cheque dated December 23, 2005 and bearing the notation “gift” in the lower left corner.[31] Mr. Ngai testified that he paid the $2,000 to Ms. Chu to reimburse her for certain travel expenses that she had incurred on his behalf in respect of a trip that he made to Alberta in 2005. In particular, she purchased an airplane ticket for him, hosted him at her home and provided a vehicle for him to drive. Mr. Ngai did not produce copies of any receipts or invoices to substantiate any of the expenses. Mr. Ngai stated that he had friends or clients in Ontario who were interested in the Alberta real estate market, but it appears that he was not working with any serious buyers when he went to Alberta. Furthermore, Mr. Ngai was not licensed in Alberta as a real estate agent or broker.
[37] One of the items apparently deducted by Mr. Ngai in 2005 and recorded as a gift was a cash expenditure in the amount of $2.95 on October 10, 2005 at the Royal Tyrrell Museum,[32] which is located approximately 140 kilometres northeast of Calgary. When asked at the hearing about this expenditure, Mr. Ngai stated that he did not visit the museum and that he did not remember the expenditure. He could not explain how the $2.95 expenditure came to be deducted in computing his income. If Mr. Ngai, in fact, visited the museum while in Alberta, it suggests that his trip to Alberta may not have been exclusively (or perhaps at all) for business purposes.
[38] As Mr. Ngai did not provide any documents to support the business nature of his trip to Alberta and did not call Ms. Chu as a corroborating witness, he has not proven on a balance of probabilities that the $2,000 gift or reimbursement (depending on the categorization that one accepts) in 2005 had a business purpose.
(vi) Owners of Lorema Inc. ($1,296) [39] The last gift listed in the table in paragraph 26 above, in the amount of $1,296, was a payment made on July 20, 2005 to Holt Renfrew to purchase a Louis Vuitton designer purse that Mr. Ngai gave to the owner (or one of the owners) of Lorema Inc. (“Lorema”), which was one of his clients.[33] At one point in the audit or appeals process, Mr. Ngai advised the CRA that Lorema was the owner and seller of commercial premises described as 110 Dynamic Drive, #55-57, the sale of which closed on March 1, 2005,[34] resulting in a commission being paid to Mr. Ngai, for which he desired to express appreciation.[35] Mr. Ngai took this same position in the written submissions that he filed on April 3, 2017.[36] It appears that Mr. Ngai or his representative, Patrick Morris, advised the CRA that the owner of the three units at 110 Dynamic Drive was Lorema; however, the real estate listing summaries produced by Mr. Ngai show that the seller of those units was 767541 Ontario Inc. (“767ON”).[37] It is possible that Lorema and 767ON have common ownership; however, there was no evidence to that effect.[38]
[40] On another occasion, Mr. Ngai advised the CRA that the owner (in the next two sentences referred to as the “Owner”) (or one of the owners) of Lorema owned a 1997 BMW 328i. At a time when the Owner was stricken with cancer and could no longer drive and when Mr. Ngai’s vehicle had become increasingly unreliable and costly to drive, the Owner loaned his car to Mr. Ngai. To show appreciation for the loan of the car, Mr. Ngai purchased the purse and gave it to the Owner’s wife.[39] When the CRA pointed out the seemingly inconsistent explanations given by Mr. Ngai, he, through his representative, explained that the owner of Lorema and the owner of the 1997 BMW 328i were the same individual.[40] However, in the written submissions that he filed on April 3, 2017, the Appellant stated that a different purse (one purchased on May 15, 2006) was given to the owner of the 1997 BMW 328i.[41]
[41] To add to the uncertainty, in an undated document that Mr. Ngai submitted to the CRA, he stated that the $1,296 expenditure at Holt Renfrew in 2005 was “a gift item to thank the owner of the BMW 328 for its use.” In the same document, a page later, he said exactly the same thing about a $1,404 expenditure at Holt Renfrew in 2006.[42]
[42] Like the CRA, I am troubled by the differing explanations provided by Mr. Ngai as to why and when he gave a purse (or perhaps two purses) to the wife of the individual who was the owner of both Lorema and the 1997 BMW 328i.
[43] Apart from the confusion arising by reason of the multiple explanations provided by Mr. Ngai in respect of the Louis Vuitton purse purchased on July 20, 2005 at Holt Renfrew and the second Louis Vuitton purse purchased on May 15, 2006, also at Holt Renfrew, a further point to consider is raised in the Rail case, in which Justice McArthur stated:
… [the appellant/taxpayer] is seeking to deduct gifts given to employees (most of which were given to his former spouse), which included perfume, jewellery, hairdresser, cosmetics, baby accessories, alcohol and clothes bought at various high-end stores. Those items clearly appear to be personal expenses, and unreasonable in all cases.[43]
While Mr. Ngai does not appear to be related to the recipient of either Louis Vuitton purse, he has not provided convincing evidence to prove on a balance of probabilities the alleged business purpose in making the gift. The recipient was not called as a witness to confirm that the purse was given to her for a business purpose, rather than a personal purpose.
(vii) Entertainment ($1,305.45) [44] Also included in the gift category of the advertising expenses deducted by Mr. Ngai in computing his income for 2005, but not listed in the table in paragraph 26 above, were certain food and entertainment expenditures.
[45] The cost of providing reasonable food and beverages for a client or customer is generally viewed as an acceptable advertising or promotion expense, as indicated by Justice Mogan in Racco Industrial Roofing:
… the cost of inviting a customer to lunch or dinner or to a theatrical or sporting event is deductible under paragraph 18(1)(a). By ordinary commercial standards, it is an accepted cost of promoting business akin to advertising….[44]
While food and entertainment costs may, depending on all the circumstances, be recognized as acceptable advertising or promotion expenses, subsection 67.1(1) of the ITA generally provides that only 50% of those expenditures are deductible.
[46] The food, beverage and entertainment expenditures deducted by Mr. Ngai as advertising expenses, in computing his income for 2005, included the following items:[45]
Description
Amount
Beer/LCBO
$ 936.32
Coffee/Donut/Cambridge
369.13
Total
$1,305.45
In the course of its audit, the CRA applied subsection 67.1(1) of the ITA, and thus allowed only 50% of the above amounts as a deduction, as follows:[46]
Description
Amount
Beer/LCBO
$468.16
Coffee/Donut/Cambridge
184.56
Total
$652.72
Mr. Ngai did not persuade me that subsection 67.1(1) of the ITA does not apply to the above-mentioned food, beverage and entertainment items.[47]
(b) Sponsorship ($500) [47] Mr. Ngai paid $500 to Chris Kiepal, who was a client, to sponsor a horse show that was organized and managed by Jan Kiepal, who was the father of Chris Kiepal and the owner of the Forest Hill Equestrian Centre, where the show was held.[48] Through his representative, Mr. Ngai told the CRA that another entity which had committed to sponsor the horse show backed out at the last minute, whereupon Chris Kiepal asked Mr. Ngai to sponsor the show. Mr. Ngai agreed to do so in order to maintain a good client relationship. Due to the late timing of his commitment, Mr. Ngai’s name was not included in the program for the horse show; however, Mr. Ngai testified that throughout the show the announcer periodically mentioned Mr. Ngai and his sponsorship.[49]
[48] Mr. Ngai did not produce any documentation to confirm that an advertising or business-promotion advantage resulted from this expenditure. He did not call Mr. Kiepal as a witness to corroborate that the payment was for a sponsorship. However, it is clear from the documentary evidence (specifically cheque no. 218) that the $500 expenditure was made and that it was designated as being a sponsorship. As well, I accept Mr. Ngai’s testimony that his sponsorship was announced periodically throughout the horse show.
[49] The jurisprudence has established that sponsoring a horse show or other sporting event is an acceptable form of advertising.[50] Accordingly, I have concluded that the $500 expenditure by Mr. Ngai in respect of his sponsorship of the horse show was a deductible expense.
(c) Seller’s Rebate ($1,500) [50] In computing his income for 2005, Mr. Ngai deducted the amount of $1,500, which he paid by cheque dated February 16, 2005 to James H. Chow, who was the solicitor for Jennifer Chan.[51] The memo line of the cheque contains the notation “Jennifer Chan retainer.” Initially, Mr. Ngai categorized the $1,500 expenditure as a consulting or referral fee and explained that Jennifer Chan was the “Buyer and [sic] Seller” of property located at #1705, 725 Don Mills Road, Toronto, (the “Don Mills Property”) and that the payment was “intended for buying her a gift to show my appreciation for her business over time.”[52] However, in the letter which Mr. Morris (Mr. Ngai’s representative at the time) sent to the CRA on August 12, 2011, Mr. Morris described the expenditure as a “Seller’s Rebate.”[53]
[51] During the audit by the CRA in respect of Mr. Ngai, this expenditure was categorized as a referral fee.[54] The auditor disallowed the deduction of the $1,500 expenditure, apparently because insufficient information was provided to explain the purpose of the expenditure. Candace Keats, the CRA Appeals Officer who initially considered this matter, did not accept the expenditure as deductible because Mr. Ngai had not submitted any documentation to confirm that he was the real estate agent who acted in respect of the sale of the Don Mills Property.[55] In a letter dated November 7, 2012 from Lianne Durant, another CRA Appeals Officer, to Mr. Ngai, she acknowledged that Mr. Ngai had provided her with a copy of an agreement of purchase and sale for the Don Mills Property, showing a completion date of April 30, 2003. She also acknowledged that Mr. Ngai had explained to her that the delay in paying the $1,500 to Ms. Chan was that he was experiencing financial issues. Ms. Durant stated that the expenditure was not deductible as the cheque was not payable to Ms. Chan and the CRA had been unable to confirm the exact nature of the payment or that it was incurred to earn or generate income.[56]
[52] At the hearing of these Appeals, Mr. Ngai testified that Jennifer Chan was a client, for whom he listed and sold the Don Mills Property. He produced copies of the MLS Listing Agreement[57] and the first page of the Agreement of Purchase and Sale – Condominium Resale in respect of the Don Mills Property.[58] Mr. Ngai testified that he promised in 2003 to pay a rebate to Ms. Chan, but he did not have sufficient money then to do so. He ultimately paid the rebate on February 16, 2005 to Ms. Chan’s solicitor, James H. Chow, who promptly certified the cheque. Mr. Ngai also produced copies of a fax that he sent to the property manager in respect of the Don Mills Property, requesting a copy of the status certificate for that property, and a fax that he sent to another individual who was involved with the sale and purchase, apparently with an attached “Vendor’s Acknowledgment for Waiver-financing.”[59]
[53] The MLS Listing Agreement and the Agreement of Purchase and Sale referenced in the preceding paragraph clearly confirm that Homelife Culture was the listing brokerage, and the faxed documents described in the preceding paragraph confirm that Mr. Ngai was involved in the sale of the Don Mills Property. The obiter dicta by the Federal Court of Appeal in Stapley, as quoted above,[60] indicates that a real estate agent may deduct a rebate in respect of his real estate commission. By reason of well-established principles in the law of agency, a payment to a solicitor on behalf of the solicitor’s client is equivalent to a payment directly to the client. Accordingly, the payment of $1,500 on February 16, 2005 by Mr. Ngai to Ms. Chan’s solicitor, on her behalf, was deductible by Mr. Ngai in computing his income for 2005.
(d) Other ($4,767.40) [54] Also included in the advertising expenses deducted by Mr. Ngai in computing his income for 2005 were various amounts aggregating $4,767.40 in respect of which Mr. Ngai did not provide any supporting documentation, either at the CRA audit and appeals phases or in Court. In the absence of any evidence in respect of those expenditures, the CRA’s disallowance of the deduction of those expenditures is upheld.
(2) 2006 [55] In computing his income for 2006, Mr. Ngai deducted certain advertising expenses, which included the following:[61]
Description
Amount
Gifts
$20,349.04
Marketing
4,852.58
Signage
198.47
Flyer
200.00
Ming Pao Daily
5,478.15
Other Newspapers
1,155.09
Total
$32,233.33
The CRA accepted that the amounts expended for signage, a flyer or flyers, the Ming Pao Daily and other newspapers had been incurred by Mr. Ngai and that they related to his business. Accordingly, those expenses were allowed as deductions.
(a) Gifts [56] The purported advertising expenses categorized as gifts included monetary gifts and gifts of high-end merchandise whose recipients or merchants and amounts or prices are set out below:[62]
Name
Amount
Holt Renfrew
$1,404.00
Future Shop
1,097.03
Anita Leung
800.00
Shirley Chan
604.00
Vancy Chu
740.00
Vancy Chu
1,000.00
Perry So
850.00
Jeannie Lee
1,200.00
Jeannie Lee
1,400.00
Kale Gao
300.00
Theresa Pang
500.00
Cindy Ho
1,149.99
Eternity Jewellery
4,185.00
Jeannie Lee
2,000.00
Total
$17,230.02
The CRA initially proposed to disallow the deduction of each of the above gifts. In response to the CRA’s proposal letter, Mr. Ngai submitted additional information and supporting documentation sufficient to substantiate the business nature of the following expenditures:[63]
Name
Amount
Anita Leung
$800.00
Shirley Chan
604.00
Kale Gao
300.00
Total
$1,704.00
Consequently the CRA allowed the de