Chequer v. The Queen, 88 DTC 6169, [1988] 1 CTC 257 (FCTD)

Addy, J.:—The plaintiff is appealing his income tax reassessments by Revenue Canada for the taxation years 1981 and 1982. The sole matter in dispute regarding these two assessments is whether, in order to justify the net losses of $31,534 for 1981 and $24,608 for 1982 arising from an alleged boat charter operation, the plaintiff had a reasonable expectation of profit when he purchased and operated a 48-foot diesel cruiser for the purpose of gaining income from chartering the vessel.

He purchased it in 1981 for $199,000 less a sum of $67,000 which was credited to him, as part of the purchase price, for a 33-foot cruiser which he traded-in at the time. The 33-foot cruiser was delivered to the vendor in March 1981 upon signing the agreement for purchase which provided that the new cruiser, which was being imported from Taiwan, would be delivered on or about the 7th of June of that year. It was apparently delivered in July but, because navigational equipment had to be installed and certain additions had to be made in order to make the boat more suitable for charter cruising, it was not really ready for operation as a charter vessel before August. The plaintiff claims to have spent a large amount of money to complete the vessel after it was delivered but there is no evidence as to how much or as to any details.

The details of the net losses claimed by the plaintiff from 1979 to 1982 are as follows:

It is to be noted that, as above stated, he had, during 1979 and 1980 been using his 33-foot cruiser in the boat chartering business. He stated that he had purchased the new vessel because there was more accommodation aboard and it also permitted him to cruise further afield and to stay out for longer periods.

He and his wife both had other full-time salaried employment. He testified, however, that he counted on eventually making enough money to establish a boat chartering business of his own and engage in it with his wife on a full-time basis, once it had developed sufficiently. He testified that, in the meantime, because of the normal holidays which were allocated to him in his employment and of the overtime work which could be compensated for by taking time off regular work, he really had plenty of spare time to take the boat out on any charters which he was able to obtain during the charter season, which normally terminated towards the end of September, depending on the weather. There was also evidence given by the plaintiff that until the beginning of 1981 when he purchased the 48-foot cruiser, the boat chartering business had been very good but that, because of the general slump of business in British Columbia, which occurred immediately following the purchase, there was a considerable reduction in the demand for cruising and fishing boat charters and that this was really the cause of the problem. He also testified that he believed that had the boat charter business continued as it had formerly, he would eventually have experienced a profit.

In my view this is not a case where an attempt is being made to obtain income tax credits by reason of a sham business operation, nor do I entertain any doubt as to the sincerity of the plaintiff's belief that he would eventually be making a financial success of his enterprise. It is clear that, even when taking into consideration his wife's salary as well as his own, he could not have afforded the 48-foot cruiser for his own use exclusively as a pleasure craft.

However, the plaintiff is obliged to go much further than demonstrate good faith. There exists a burden of proof on every taxpayer who claims a deduction of net losses resulting from a business adventure, to establish that there was, at the time that he engaged in and carried on with the business, a reasonable expectation of profit. The reasonableness of the expectation must be viewed objectively and cannot merely consist of an expectation which the taxpayer in good faith entertains to the effect that a profit will eventually be realized.

As Chief Justice Dickson (Justice Dickson as he then was) stated in the case of William Moldowan v. The Queen, [1977] C.T.C. 310 at 313; 77 D.T.C 5213 at 5215:

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking: The Queen v. Matthews, [1974] C.T.C. 230; 74 D.T.C. 6193. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land. [Emphasis added.]

The same principle regarding the objective nature of the test was recently applied by my brother, Strayer, J., in the case of Meech v. The Queen, [1987] 1 C.T.C. 421; 87 D.T.C. 5251.

The plaintiff claims that, before purchasing the cruiser, he inquired around various places to determine whether the venture would be a profitable one, but he failed to specify who gave him the advice, to testify what the advice was based on or to give any detail whatsoever concerning the nature or the extent of the consultations.

When questioned as to what figures, if any he had to establish that he had calculated that there was a reasonable expectation of profit, he testified that he had had the figures written down somewhere but did not know where they were. He also testified that he had made some calculations with an accountant but did not know how the accountant arrived at the conclusion that it would be profitable. No accountant was called to testify.

He expressed great uncertainty as to certain advertisements which were produced in evidence. He could not, for instance, remember whether the advertisement produced at tab 52 of the book of documents was made in 1981 or 1982. He believed that it was perhaps made in 1983 or 1984. As to the advertisement at tab 54, which he claims to have posted in certain hotels and other public places, he believes that it was probably done in 1983. As to the advertisements for time-sharing charters, he had no idea how many were published or how often they were published. He attempted to rely on an agreement prepared by a solicitor for proposed charter business contracts as evidence of reasonable expectation of profit but he did not obtain at any time any time-sharing contract whatsoever, nor could he indicate why or how the calculations arrived at by the solicitor were obtained.

He could not give the Court even a rough idea of how many charter trips he obtained in 1981 or 1982 nor did he give any evidence as to how many charter trips he had obtained in previous years. Even after being questioned with the vessel’s log book in hand, he could furnish little or no detail of any charter trips nor furnish any detail whatsoever of amounts actually received for any specific trip. After August 1982 there were no log entries furnished. Those that were furnished were singularly devoid of any detail. He could furnish little or no detail orally after carefully examining those entries. The plaintiff had no idea whatsoever as to how the excess of expenses over income in the amount of $42,596 and the other income of $11,062 reported in his 1981 return (page 8 of Exhibit P2) were arrived at.

He was also unable to give any idea of the amount of chartering which would have been required to enable him to break even in the chartering business nor did he have any idea of how much money could be made from the 48-foot boat as compared to his 33-foot one. Finally, when asked how he expected to make more money, he stated that he did not know.

It is difficult for me to conceive of a case where a taxpayer could have failed more dismally to establish objectively that there was a reasonable expectation of profit. His expectation could best be described as a pious wish.

The action will accordingly be dismissed and the assessments in dispute confirmed. Costs will follow the event.

Action dismissed.