An Ottawa-area insurance advisor’s attempt to write off a month-long trip to Rome with his girlfriend didn’t fly with the Tax Court of Canada or the Federal Court of Appeal.

In its April 2007 decision, the FCA confirmed the TCC’s judgment to deny claims by Ellsworth Murray for several tax deductions, including the Rome trip. A key concern for both courts was Murray’s lack of evidence. He made his case mainly on the basis of his own testimony — changing his story on the day of his Tax Court hearing.

“Murray is faced with a credibility problem,” wrote TCC Justice Lucie Lamarre in her August 2006 decision. The FCA echoed her sentiment. “Despite the detailed arguments of the appellant,” wrote Justice Brian Malone for the FCA, “I am not persuaded that the Tax Court judge committed any errors that warrant our intervention.”

Guidance from legal counsel might have helped Murray, says Robin MacKnight, a partner and tax lawyer with Wilson Vukelich LLP in Markham, Ont. A lawyer would have pointed out what he had to prove and how.

Murray’s case focused on several types of business expenses including home office, travel, lodging and car rental, and insurance premiums.

Under home-office expenses Murray originally claimed $2,002.80 for the 2001 tax year and $1,953.60 for the 2002 tax year. The Canada Revenue Agency allowed $1,001.79 and $1,037.03, respectively.

Murray evidently was dissatisfied with the CRA’s assessments and decided to appeal them in the Tax Court, at which he represented himself, as he did later in the FCA.

On the day of his TCC hearing, instead of claiming home-office expenses incurred at his house, Murray claimed expenses for a home office allegedly incurred at a two-bedroom apartment that was not his home: $7,263.99 for 2001 and $7,617.58 for 2002.

Justice Lamarre wrote that “no lease, no notebook, no client list and no business cards were filed as evidence that the apartment had been used for business purposes.”

That Murray changed his story on the day of trial in an attempt to get an even larger writeoff did not sit well with the TCC judge: “I find the appellant’s testimony alone is not sufficient to prove that the rent expenses, disclosed for the first time at trial, were business expenses.”

Murray also waited until his hearing to raise the one-month trip to Rome with his Italian girlfriend. He claimed $3,656 for travel, $750 for lodging and $487.50 for renting a car for both himself and his girlfriend.

He testified that the trip was justified as an expense because he went “to learn the Italian language, to get information on Italian habits and to observe other sales agents in order to better serve my Italian clientele in Ottawa.”

Lamarre dismissed this claim, saying: “I find this trip to be more akin to a personal leisure activity, and too remote from the appellant’s business to be considered a business expense.”

Tax lawyers sometimes run into clients “who have a complete misapprehension of the tax system, says Heather Evans, partner and tax lawyer with Deloitte & Touche LLP. She had one client who tried to claim the cost of her dog’s food, because the dog enabled her to feel secure while working at home.

Evans says the CRA also denies claims that are legitimate, such as a businesswoman who took her clients to a spa: “It’s the same as taking a client out for a round of golf.”

She says clients need to provide the proper business context when making claims. The Rome trip might have been more acceptable to the court if he had attended a work–related conference, for instance.

In his tax returns, Murray also claimed $1,440 for 2001 and $1,680 in 2002 for group insurance premiums. The CRA disallowed these claims and Justice Lamarre agreed. She noted the insurance documentation reflected the premiums were for life insurance — not group medical insurance. Life insurance premiums are not deductible.

Murray could have claimed medical and dental expenses through a “personal health services plan,” enabled by section 248(1) of the Income Tax Act, Lamarre noted.

Small business corporations use PHSPs to provide health care to employees. It allows the employer–corporation to write off 100% of the medical and dental costs incurred by employees, up to an annual maximum, covered by a plan provider. The insurer reimburses the employees, who are not taxed, either.

@page_break@It’s one thing to walk in “a grey area” of tax law, says Merlin Chouinard, president of the In-dependent Financial Brokers of Canada and Sentinel Financial Management Corp. of Saskatoon, Sask. But his organization would not condone Murray’s action, he says: “It’s pretty self-evident it was abusive of the laws of our country.” IE