Case StudiesOver the years, we have come across many different and varied scenarios that have presented some precarious problems for our team. The experience we have garnered through these many cases enable us to be better prepared for your tax issue. Please have a read through these cases below and contact us to discuss yours!
Warren’s Case: $200,000 in Disallowed Expenses to $3,500 Refund!
Client, Warren E., from Barrie, came to us with a significant problem. CRA had disallowed $200,000 in expenses which triggered an approximate $40,000 tax liability with significant interest and penalties on top. We took on the case and over a two-year period went through the objection, appeals and tax court process. The client ended up able to keep all the deductions he had claimed, including trips to Belize and Florida with his wife and children; as well the judge allowed him an increase in the amount of space used in his home for business purposes and he received a $3,500 refund.
Craig’ Case: Client Facing Jail Wins Refund
Client Craig L., of North York, came to us with a problem. CRA had discovered he had not reported $7,000 in income for a particular year. He was afraid of criminal charges as well as interest and penalties; he would have owed approx. $4,000 with the interest and penalties. CRA took the case to tax court and we were able to obtain a refund of $1,200 by proving that the client was really in business without realizing it. There were no criminal charges.
Jerry’s Case: Client Loses Records When Accountant Bails
Jerry B., of Toronto, a client in the aluminum siding business, came to us when his accountant lost his records. We reconstructed his business support documentation by taking photographs of his inventory, jobs completed, tools, truck, office etc and working with these and bank statements and a detailed written explanation filed a tax return which was not questioned.
Robert’s Case: Client Wins Refund After Ten Years of Non Reporting
Client Robert Z., of Scarborough, came to us with 10 years of unfiled taxes. We prepared and filed the returns and the client received a $15,000 refund – a rather different outcome than the 15,000 to $20,000 he was expecting to owe.
The Client’s Accountants Refused to Help
Client James E., from Aurora, came to us having received a Demand to File notice from CRA for twenty years of unfiled tax returns. His wife had been unable to find an accountant to take on the case. With considerable work, we reconstructed twenty years of financial and business history and filed the returns. The client received a small refund and over $17,000 in Child Tax Credits.
Bob’s Case: From Owing $45,000 to a $3,763 Refund!
Our client, Bob J., from Eastern Ontario, came to us saying he owed $45,000 to CRA and that he and his wife were sleeping in a hotel out of fear and to avoid CRA collections efforts. We took on the case and went through a review of the client’s financial history and then the objection and appeals process and the client ended up receiving a refund of $3,763.
Kim’s Case: Tax Audit Solutions Wins Major Ruling at Tax Court
Client Kim D., a sales representative for a chemicals manufacturer, wanted to write off home expenses. Prior to starting court, we were able to have all the clearly documented expenses accepted. In court we faced Chief Justice Bowman, a man with a reputation for wisdom and wit, not to mention impeccable knowledge of tax law. When a Chief Justice is presiding, you can be sure that his or her ruling will be looked at by the tax lawyers across the land. The question of the day was: “Is a sales rep entitled to claim business use of home expenses?”
If she did not pass the stringent criteria as outlined in the law, then not only could our client not take the deductions, then neither could the other sales reps from this company. Even more significantly, neither could any other commissioned sales representative in Canada claim home expenses. Because the way the law has been interpreted to date, no outside sales rep could ever qualify for these deductions because sales representatives by the nature of their job spend most of their time away from their homes.
CRA had been able to successfully disallow all these expenses in their audits across the land. It became clear in our negotiations with the tax litigator that they were not going to back off on this point and believed they could get the court to agree with them, based on how the law is written and how it had been repeatedly interpreted over the years.
CRA’s lawyer was a knowledgeable and tough litigator with considerable experience in law. So CRA was well-positioned to prevail on this contentious issue. Dan White argued for our client. Dan, of course, is not a lawyer. Having the judge rule in our favor was a surprise to the CRA lawyer. We won in part because of excellent preparation work by our team. And we had a credible witness. And finally, we were able to make a logical case that could not be swatted away.
The first thing we had to do was to remove any shadow of doubt as to whether our client was required to use his home for doing business.
Here’s how we were able to establish required use:
We submitted a T2200 form signed by the client’s employer.
We presented a letter signed by a manager of the client’s employer, stating it was mandatory to use her home as a place of business. The lawyer for CRA objected based on the letter being “hearsay.” The judge overruled the objection based on the procedures around hearsay have become broader over recent years; he asked to see the letter and then simply asked the client if she believed the letter to be real. The judge stated that while the letter was not strong evidence, he entered it as evidence.
We presented her employment contract.
We provided a detailed sketch of the entire premises; the CRA lawyer argued that the sketch did not have any actual measurements on it. The judge did allow for the garage and basement to be considered business use.
We had a picture of her work area… Having her dog in the picture did create a few chuckles and human interest.
We had pictures of the equipment that required space to be housed in her home.
We had a witness who reeked of credibility and corroborated each point.
Points 1 to 7 removed any doubt that the home was required for the client to perform her contracted duties. From there we had to argue the intent of the law. And; we also had to argue the interpretation of the law. The law was clear. The premises must be used primarily for business, and must be used for business 100% of the time, in order to be deductible as an employment expense.
We argued that there could be no business premises anywhere fulfilling that description, as all business space is used from time to time for personal purposes, such as calls from your family, etc. If that was a hard and fast rule, all business premises would revert to personal. We argued that Primary Purpose should be interpreted as: “What is the primary use of the space when it is being used?”, rather than to ask, “What is the space primarily used for twenty-four hours a day?”
We argued that during the time the space is not used for any purpose, it defaults to “no use at all.” rather than personal use. In other words if the only time you use a space is for business, then even if you use the space for only an hour a day it is still used 100% of the time for business.
Upon hearing this argument the judge stopped Dan White, took off his glasses, waved them in the air in circles, and declared a recess while he went to get a desk copy of the income tax act. He returned and studied the act for what probably was a few minutes but felt like an eternity. He then declared with great wisdom and presence. “In fact, there are two ways to interpret the clauses and, as such, we have to consider the new interpretation”.
There was much argument for precedent from the CRA lawyer, but the judge was not buying it, because the way the clause had been interpreted in the past did not make sense with the new but valid interpretation. The judge ruled in our favor and declared the home expenses for our client as deductible employment expenses. What this means is our client’s employers’ other reps can now write off their home use expenses.
But most of all, sales representatives from across the country can use this court case as a precedent and, being that it was Chief Justice Bowman who so ruled, it carries huge weight. This interpretation of the law will also apply to non sales representatives as well because the same sections of the act apply.