Belyea v. R., [1999] 2 CTC 2393, [1999] DTC 1069

Garon A.C.J.T.C.:

These are appeals from income tax reassessments for the 1991 and 1992 taxation years. By his reassessments, the Minister National Revenue disallowed expenses in the amount of $26,530.00 for the 1991 taxation year and $23,698.00 for the 1992 taxation year on the ground that these losses did not relate to any operation where the Appellant had a reasonable expectation of profit. The Minister of National Revenue considered that these expenditures were personal or living expenses.

The assumptions on which the Minister of National Revenue relied are set out in paragraph 8 of the Reply to the Notice of Appeal. The said paragraph reads as follows:

8. In so reassessing the appellant’s income liabilities for each of the 1991 and 1992 taxation years, the Minister relied upon the facts admitted herein and upon the following findings of fact:

a) at all material times the appellant reported “Keora Yacht Charters” and “Innovative Industries” as two separate operations;

b) Keora Yacht Charters was first claimed as a business operation in 1991;

c) the appellant reported losses for Keora Yacht Charters in 1991 and 1992 of $11,800 and $14,300 respectively;

d) no sales for Keora Yacht Charters were reported for 1992 or for 1993;

e) at all material times, the single vessel associated with Keora Yachts required further improvements to make it seaworthy for public use:

f) at no material time were there formal or even semi-general plans as to the timetable for developments, costs associated with developments, expected revenue flows, etc., relating to Keora Yacht Charters;

g) with respect to Keora Yacht Charters, the appellant’s general idea, to be achieved over an indeterminate number of years, was to develop an old school house located on a river into a lounge with four double overnight rooms upstairs, build a small dock for a boat, renovate a boat to make it seaworthy for public use, run charters and a bed and breakfast operation;

h) the acquisition of the boat was reported as costing $43,000 rather than the $26-28,000 actually paid, and capital cost allowance (“CCA”) on the boat was accordingly overstated;

i) The Keora Yacht Charters alleged operations was significantly underfunded, and development proceeded only slowly as non-borrowed funds became available;

j) at no material time did the Keora Yacht Charters alleged operation have any reasonable expectation of profit, or constitute a business;

k) the expenses claimed as business losses in respect of Keora Yacht Charters in each of the relevant taxation years were not business losses and were instead non-deductible personal expenses of the appellant;

l) Innovative Industries is the name under which a sequence of varied activities of the appellant were allegedly operated;

m) the name appears to have been first used by the appellant in 1988 for the alleged business of “renovations”;

n) in 1989, a backhoe is shown as having been acquired for $3,500 in relation to activities under the name Innovative Industries;

o) the appellant reported business losses for Innovative Industries in 1988 of approximately $4,000, and for 1989 of approximately $11,000:

p) the major activity of Innovative Industries for 1990 to mid-1993 was to attempt to sell Purion Water Conditioners and other magnetic products;

q) revenue of $1,900 for backhoe operation in 1992 is the only revenue reported for the backhoe from 1990 onward;

r) losses claimed by Innovative Industries for the taxation years 1990, 1991 and 1992 were approximately $10,900, $14,700, and $9,300 respectively;

s) during the same period gross revenue excluding that generated by the backhoe were $100, $323, and $583 respectively;

t) in mid-1993 and 1994, the focus of Innovative Industries changed to selling hair and skin products, an endeavor begun by the appellant’s spouse;

u) losses claimed for this activity were $2,700 in 1993 and nil in 1994, although $1,800 of deductions for work space in the home has not been claimed because of insufficient income;

v) with respect to Innovative Industries, there have never been any formal or even semi-general plans as to development timetable, development costs, expected revenue forms, etc.:

w) at all relevant times, Innovative Industries was under-funded;

x) the appellant’s approach with Innovative Industries was involvement with one different activity after another - renovations, direct sales, backhoe work - with little or no advance planning;

y) at no material time did any of the alleged operations of Innovative Industries have any reasonable expectation of profit, or constitute a business;

z) the expenses claimed as business losses in respect of Innovative Industries in each of the relevant taxation years were not business expenses or losses and were instead non-deductible personal expenses of the appellant.

The Appellant was the only one to testify at the hearing of these appeals. The Appellant admitted subparagraphs (a) to (e) inclusive, (g), (h) and (1) to (u) inclusive of paragraph 8 of the Reply to the Notice of Appeal.

He denied the allegations found in subparagraphs (f), (1), (j), (k), (v), (w), (y) and (z). As for the allegation in subparagraph (x) of the same paragraph 8, the Appellant admitted this allegation with the exception of its latter part reading thus:“... with little or no advance planning”, which he denied.

It should be noted that subparagraphs (d), (s) and (u) of paragraph 8 of the Reply to the Notice of Appeal were amended with leave of the Court at the hearing to read as follows:

(d) no sales for the Keora Yacht Charters were reported for the 1991. 1992 and 1993 taxation years;

[...]

(s) during the same period gross revenue, excluding that generated by the backhoe, were $100, $323, and $583 respectively for 1990, 1991, 1992 taxation years;

[...]

(u) losses claimed in respect of Innovative Industries were $2,700 in 1993 and nil in 1994 although $1,800 of deduction for work space in the home has not been claimed because of insufficient income.

The Appellant completed high school studies in 1973. After leaving school, he worked for over 30 years in the earth-moving industry and operated various machines. From 1979 to 1988, he switched to hoisting machinery. In 1988, he became employed as a crane operator until December 1992 when he was the victim of a serious accident. In 1992, he did some overtime and worked on weekends. As a result of this accident, he was unable to work for approximately 18 months.

The Appellant testified that over a period of a number of years, including the years in issue, he was engaged mainly in two different types of operation. One of these of operations is described as Keora Yacht Charters and the other operation was carried under the name Innovative Industries.

With respect to the Keora Yacht Charters, the Court was informed that the Appellant and three other persons originally acquired a sailboat in 1986 or 1987. This vessel is described as a 38-foot yacht. In 1988 or 1989, the Appellant became the sole owner of the boat. The Appellant’s interest in the boat was financed with the assistance of some members of his family. The price paid for the boat was in the range of $26,000.00 to $28,000.00.

As appears from a report entitled “Assessment Counselling” attached to a letter of September 13, 1994 to the Appellant from the Manager, Business Training & Counselling of the Federal Business Development Bank, the Appellant had the intention to set up a boat tour operation on the St. John River in the Westfield area of the Province of New Brunswick. In this connection, the Appellant made reference to a report prepared by Fiander-Good concerning the Lower Saint John River Valley Tourism Development Plan (prepared in 1988), which indicates that there was a good potential for the type of plan that the Appellant had in mind. The executive summary of this report Was also filed with the Court. The Appellant also made reference to a brochure entitled “The 1994 New Brunswick Tourism Product and Marketing Reference Guide”.

The Appellant had gained a fair amount of personal experience in sailing prior to the purchase of this vessel. At one point, he said that he loves sailing. In cross-examination, he recognized that his “passion” for sailing was one of the reasons for which he purchased the boat. He used the boat originally for his own enjoyment.

The Appellant indicated that this vessel needed considerable repairs and improvements to make it seaworthy for public use. For a number of years, including the years in issue, the Appellant carried out the required work to make it seaworthy. It is only in 1997 that the vessel was certified to be seaworthy for public use. No revenue was derived from the use of the vessel before 1997. Although no precise data were supplied by the Appellant in connection with the use of the boat in 1997, the Appellant stated that he “almost broke even”.

Because of his employment as a crane operator, particularly during the years in issue, the Appellant could not devote too much time to the reconditioning of the vessel. Furthermore, the Appellant indicated that in particular during the years in issue, when he was not working as a crane operator, he gave priority to carrying on repairs on the vessel over the Innovative Industries operation to which I will be referring later on.

I shall now refer to the evidence given by the Appellant in relation to Innovative Industries.

The Appellant asserted that in connection with the Innovative Industries operation he had been involved in many different endeavours over the years.

The Appellant began being involved in Innovative Industries in 1984 and for some time he was involved in selling products by the name of Thermopad. He asserted that he “made some money off the Thermopad”.

Later on he carried out renovation work mainly in residential buildings. He worked as a carpenter. For many years he had been having a shop in the basement of his house. In more recent years, and in particular during the two taxation years in question, he had been engaged in the sale of Purion Water Conditioners. The Appellant arranged for the advertising and the promotion of this product in a great number of newspapers. The benefits of magnetic water are explained in the advertising material put on by Innovative Industries. In a brochure circulated by Innovative Industries, the role of modern magnets is described in relation to the plumbing system. He stopped selling this product at the end of 1993 or the beginning of 1994 because he realized that he could not make money from selling the water conditioners in question.

The Appellant also wrote to numerous potential customers. A list of such customers was filed with the Court. During the years in issue, very little activity took place in terms of sales of these units. He sold at cost some units in 1991 as a promotion, as he put it. In 1992 he sold a few more units. In the years in issue, the Appellant testified that he spent in connection with the activities of Innovative Industries, 15 hours to 20 hours per week, weather permitting.

As mentioned earlier, the Appellant’s activities in relation to the operation of Keora Yacht Charters and Innovative Industries during the 1991 and 1992 taxation years were carried out while the Appellant was employed as crane operator for Saint John Shipbuilding Limited. In 1991 he was employed by that firm most of the time and he earned $41,222.00 from that employment in respect of that year. In 1982, the Appellant worked on a full-time basis for the above-mentioned firm and his income from this employment amounted to $52,354.00.

The 1991 and 1992 tax returns show no gross revenue from the Keora Yacht Charters given the fact that the vessel could not be used by the public, not being seaworthy. With respect to the Innovative Industries operation, the Appellant’s 1991 tax return indicates gross revenue from sales of $323.40, an inventory at the end of the period of $2,301.88 and a loss of $14,729.14. In relation to the same operation for the 1992 taxation year, which includes a reference to backhoe work, sales produced gross revenue in the amount of $2,483.07, an inventory at the end of the period in the amount of $408.07 and a loss in the amount of $9,368.37.

Analysis

In light of these facts I am called upon to determine if the Appellant had a reasonable expectation of profit in 1991 and 1992 in carrying on these two operations.

In considering the evidence, I must bear in mind the principles laid down by the Supreme Court of Canada in the leading case of Moldowan v. R.!. The following passage of this decision is of particular interest:

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.

I shall first consider the Keora Yacht Charters’ operation. I find as a fact that this operation was not a business in the years in issue. In fact, no business had commenced in those two years. No gross revenue was earned because the vessel could not be used by the public, not being certified as seaworthy. There could therefore be no reasonable expectation of profit at that time. Although I cannot deal with the matter of the deduction of the Appellant’s loss for the year 1997, the two years in issue being 1991 and 1992, I may say that the situation in 1997 and in subsequent years, as far as this operation is concerned, could be drastically different since the Appellant had begun the operation of this vessel for a fee.

With respect to the Innovative Industries’ operation, there was very little activity in the years in issue. The Appellant devoted little time during the two years in question to this operation giving priority, as he mentioned himself, to the Keora Yacht Charters, and given the additional fact that he was employed, as mentioned earlier, on a full-time basis in 1992 as a crane operator, and most of the time in 1991, in the same capacity. I do not even accept that the Appellant spent the hours that he mentioned in his evidence in connection with this operation.

The loss experience in connection with this endeavour in 1991 and 1992, as well as in prior years, militates against the Appellant having a reasonable expectation of profit. The Appellant’s capital investment in relation to this particular operation was not of any significance. Also, the expenses, to some extent at least, claimed in connection with this operation, appear to be personal or living expenses even if I were of the opinion that the Appellant had a reasonable expectation of profit in carrying on this particular activity.

From the evidence, I could not detect that there was on an objective basis a reasonable expectation of profit in the years in question from the Innovative Industries’ operation. The likelihood of a profit in the reasonably near future from the latter operation was simply not a realistic prospect that one could reasonably entertain during the years in issue.

The Appellant is therefore not entitled to the deduction of the losses incurred in 1991 and 1992 in carrying on these two operations.

For these reasons the appeals are dismissed.

Appeal dismissed.