Category Archives: Motor Vehicle Expenses

Reasonableness of Business Expenses

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Reasonableness of Business Expenses

Peach v The Queen, 2017 TCC 40

There are a number of hurdles to overcome before an expense is deductible for income tax purposes when determining profits of a business under the Income Tax Act.  One hurdle is the limitation imposed by section 67 of the Act, requiring that the expense be reasonable.

In this case, the TCC issued a Redetermination Order after the taxpayer had partial success at the Federal Court of Appeal. The FCA sent the matter back to the TCC to identify what particular expenses were unreasonable and to what extent, as under section 67 the court can reduce or eliminate an expense to make it reasonable. The TCC reviewed each category of expense, the evidence and testimony in relation to each category, as well as submissions by counsel.


The Court referred to the Supreme Court of Canada decision in Stewart v. The Queen, 2002 SCC 46, where the SCC at paragraph 57 addressed how a court should approach the reasonableness inquiry:

57 It is clear from these provisions that the deductibility of expenses presupposes the existence of a source of income, and thus should not be confused with the preliminary source inquiry.  If the deductibility of a particular expense is in question, then it is not the existence of a source of income which ought to be questioned, but the relationship between that expense and the source to which it is purported to relate.  The fact that an expense is found to be a personal or living expense does not affect the characterization of the source of income to which the taxpayer attempts to allocate the expense, it simply means that the expense cannot be attributed to the source of income in question.  As well, if, in the circumstances, the expense is unreasonable in relation to the source of income, then s. 67 of the Act provides a mechanism to reduce or eliminate the amount of the expense. Again, however, excessive or unreasonable expenses have no bearing on the characterization of a particular activity as a source of income.

There are certain things that a court is not entitled to consider, including second guessing the business decisions of a taxpayer by asking:

  • whether the expense is the result of poor business judgment – Ankrah v. R., 2003 TCC 413 at paragraph 4, citing Gabco Limited v. MNR, (1968), 68 DTC 5210 (Ex. CF) at page 5216. The primary basis for denial is that no person of business would pay such an amount given the circumstances of the particular taxpayer; and
  • whether expenses exceed revenues as business expenses are incurred before profitability can be determined and for the purpose to gain business income, and cannot be part of the reasonableness inquiry – Williams v. R., 2009 TCC 93 at paragraphs 16 and 17.

The Court considered the following categories of expenses:

  • Meals and Entertainment
    • the court stated that anything beyond $20.00 a day for lunch, when no client meetings are involved, is unreasonable.
    • NOTE – the court considered travel meals under meals and entertainment – not the appropriate category of expenses, and also did not consider the particular circumstances (location, average meal, dietary needs) in setting out a hard line number.
  • Business Tax, Fees and Licenses 
    • these are costs that must be incurred to operate a business and as such are reasonable.
  • Office Expenses
    • the Court determined that absent an explanation for an increase in the subsequent year, the amount in excess of the year previous was unreasonable.
  • Capital Cost Allowance
    • The court determined that without a travel log the expenses were unreasonable
    • The Court also determined that give vehicles were unreasonable
  • Motor Vehicle Expenses
    • The Court held that the operation of five motor vehicles over two years for one person was unreasonable without a justification

Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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Motor Vehicle Expenses & Res Judicata – Sas Ansari

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Employee Deduction of Motor Vehicle Expenses and Res Judicata in Tax Cases.

Kreuz v The Queen, 2012 TCC 238

There were two issues in this appeal:

  • Ability to claim motor vehicle expenses by employee absent a form T2200 from employer
  • Application of Res Judicata in tax cases

The Taxpayer was an occasional teacher who worked at different schools and deducted his motor vehicle expenses from employment income.  The CRA denied the deduction on the basis that a valid T2200 form was not signed by the employer certifying that the requirements of paragraph 8(1)(h.1) were met.  The taxpayer appealed the denial of motor vehicle expenses as a deduction from his employment income. He had previously argued appeals on the same basis but introduced new evidence in this case.  The CRA argued Res Judicata on the basis of previous decisions involving this taxpayer on the same issue. The taxpayer also argued res judicata in relation to a previous decision regarding one employer in one taxation year where the deduction was allowed by the TCC but, in that case, the employer had issued the T2200 for that year but had stopped issuing the form for years after 2007.

The Court held that a taxpayer is allowed to bring an appeal each year, due to an assessment, and may argue the same issue using new evidence or different interpretations of the law.

Justice D’Auray began her analysis by referring to the decision in General Electric Canada co v R, 2011 TCC 564 where Justice Campbell summarising the decision of the SCC in Angle v Minister of National Revenue, [1975] 2 SCR 248, where it was stated that Res Judicata and abuse of process are granted at the court’s discretion to prevent the relitigation of matters previously decided by a court. Abuse of process focuses on the integrity of the adjudicative process, while res judicata focuses on the parties.  The taxpayer also relied on the “might or ought” principle, as outlined in McFadyen v The Queen, 2008 TCC 441, where Chief Justice Rip stated that  “matters that properly should have been part of the original litigation but that the party failed to argue cannot be raised in subsequent litigation”, to argue that the Minister should not have been allowed to call witnesses on the matter previously determined by the TCC.

The Court stated that obtaining a form T2200 from an employer is a condition precedent for being able to deduct motor vehicle expenses under paragraph 8(1)(h.1), and unless the employer has acted unreasonably or in bad faith in not providing the form, an employee cannot claim the deduction.

The court stated that the doctrine of res judicata is difficult to apply to tax appeals that do not deal with the same taxation year. Justice D’Auray referred to the decision in Hagedorn v Canada, [1993] TCJ No 727 (TCC), where Justice Christie stated that an appeal to the TCC is as a result of an assessment and not the process or reasoning by which the assessment is arrived by.  Thus, each taxation year is a different cause of action. What is being litigated in each case is whether the Minister has correctly assessed the amount owed by the taxpayer for the year as required by the ITA.  She referred to the decision of Justice Paris in Merrins v R, 2006 DTC 3216, where it was stated that even if there is no difference in material facts between two taxation years as each appeal “involves a different taxation year, an independent review of the facts and issues is required”.

The Court stated that tax appeals often involved recurring issues and that a taxpayer who lost an appeal in one taxation year is given a second chance to come to the TCC and argue the same issues in a different taxation year.  In doing so, the taxpayer is able to bring evidence that was not called in the previous year and is able to argue a different position in law.

– Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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