Date: 20110629
Docket:
A-330-10
Citation: 2011 FCA 218
CORAM: SHARLOW
J.A.
TRUDEL
J.A.
STRATAS
J.A.
BETWEEN:
WAYNE BOWDEN
Appellant
and
HER MAJESTY
THE QUEEN
Respondent
REASONS FOR
JUDGMENT
SHARLOW J.A.
[1]
Mr.
Bowden is appealing the judgment of the Tax Court of Canada (2010 TCC 424) dismissing
his appeal of an assessment under the Excise Tax Act, R.S.C. 1985, c.
E-15. The assessment rejected Mr. Bowden’s claims for input tax credits for the
period July 1, 2007 to December 31, 2008.
[2]
Mr.
Bowden had claimed the input tax credits in the period specified above, but he
says that the payments of goods and services tax (GST) for which the input tax
credits were claimed were actually paid by him in 2003 and subsequent years. He
says that during those years he carried on more than one business. One of his
businesses was a financial services business (or investment business), and Mr.
Bowden now accepts that he is not entitled to input tax credits in relation to
that business. However, he argues that he is entitled to input tax credits in
relation to his other businesses, computer consulting, home renovation and home
staging. The purpose of his appeal to the Tax Court, as he understood it, was
to establish his entitlement to input tax credits in relation to those other
businesses.
[3]
Mr.
Bowden did not succeed in the Tax Court because the judge agreed with the
argument of the Crown that the other businesses of Mr. Bowden did not fall
within paragraph (a) of the definition of “commercial activity” in subsection
123.1 of the Act, which reads as follows (my emphasis):
|
123. (1) In section 121,
this Part and Schedules V to X,
|
123. (1) Les définitions
qui suivent s’appliquent à l’article 121, à la présente partie et aux annexes
V à X.
|
|
…
|
[…]
|
|
“commercial
activity” of a person means
|
«
activité commerciale » Constituent des activités commerciales exercées par
une personne :
|
|
(a) a
business carried on by the person (other than a business carried on
without a reasonable expectation of profit by an individual, a personal
trust or a partnership, all of the members of which are individuals), except
to the extent to which the business involves the making of exempt supplies by
the person.
|
a) l’exploitation d’une
entreprise (à l’exception d’une entreprise exploitée sans attente
raisonnable de profit par un particulier, une fiducie personnelle ou une
société de personnes dont l’ensemble des associés sont des particuliers),
sauf dans la mesure où l’entreprise comporte la réalisation par la personne
de fournitures exonérées.
|
[4]
Mr.
Bowden, in his memorandum of fact and law, argued that the judge erred in law
because he failed to apply the principles from Stewart v. Canada, [2002]
2 S.C.R.645, 2002 SCC 46, and Walls v. Canada, [2002] 2 S.C.R. 684, 2002
SCC 47. He argues that those cases establish that for tax purposes, the “reasonable
expectation of profit” test is relevant only to distinguish between business
and personal activities, and since there is no personal or hobby element in his
computer consulting, home renovation and home staging activities, the judge
should have determined that those activities were businesses and therefore were
“commercial activities” within the statutory definition.
[5]
The
difficulty with Mr. Bowden’s analysis is that it extends the reach of Stewart
and Walls too far. Those cases dealt with a judge made rule that was
once applied in determining whether, for income tax purposes, a particular
activity or venture of a taxpayer was a “source of income”, and therefore a
business (see Moldowan v. The Queen, [1978] 1 S.C.R. 480 at page 485). In
Stewart and Walls, the Supreme Court of Canada held that the
reasonable expectation of profit test could not be used for that purpose.
[6]
After
Stewart and Walls, the general principle is that for income tax
purposes, a venture or activity of a commercial nature is to be considered a
business even if there is no reasonable expectation of profit, unless there is a
personal or hobby element. If there is such a personal or hobby element, then
the reasonable expectation of profit test may be used to determine whether the
activity is nevertheless a business. In cases where it is necessary and
appropriate to apply the reasonable expectation of profit test, the factors to
be taken into account in determining whether there is a reasonable expectation
of profit are as stated in Moldowan (at page 486) and the many cases
decided after Moldowan. It is not necessary to list all of the relevant
factors here. It is necessary to point out only that one of the relevant
factors is the profit and loss experience of years before and after the year of
assessment, as well as anticipated future profits.
[7]
Having
said that, however, I am compelled to conclude that the Stewart and Walls
limitation does not assist Mr. Bowden, even if I were to accept his submission
that his computer consulting, home renovation and home staging activities have
no personal or hobby element (I express no opinion on that factual point as it
is not necessary to do so.) The argument of Mr. Bowden based on Stewart and
Walls has no merit because the entitlement of a taxpayer to input tax
credits does not depend upon whether the taxpayer has paid GST in relation to a
“business”. Rather, it depends upon whether the taxpayer has paid GST in
relation to a “commercial activity”.
[8]
In
this context, the phrase “commercial activity” does not bear its ordinary
meaning. It is specifically defined for GST purposes to mean a business that is
carried on with a reasonable expectation of profit (see the definition quoted
above). This definition implicitly recognizes that a business may exist without
a reasonable expectation of profit, but it states that a business without a
reasonable expectation of profit is not a “commercial activity”. It follows
that, assuming Mr. Bowden carried on businesses other than a financial services
business during the relevant period, he is entitled to input tax credits in
respect of those other businesses only if he carried them on with a reasonable
expectation of profit.
[9]
Generally,
the factual findings made by a judge in determining whether the reasonable
expectation of profit test is met in a particular case must stand in the
absence of palpable and overriding error. The judge in this case considered the
relevant factors and in my view, his factual findings were reasonably open to
him, given the documentary evidence and testimony presented. However, that does
not resolve this appeal. That is because the record discloses a more fundamental
issue as to whether the application of the statutory definition of “commercial
activity” was properly before the judge at all.
[10]
In
that regard, it is necessary to recount the procedural history of this matter.
It appears from the record that when the Minister (i.e., the Canada Revenue
Agency acting for the Minister) issued the notice of assessment that led to Mr.
Bowden’s tax appeal, the Minister was of the view that Mr. Bowden was carrying
on only one business, a financial services business. Mr. Bowden objected to the
assessment on the basis that the input tax credits he had claimed related to his
other businesses. Indeed, that is all his notice of objection said.
[11]
The
Minister did not confirm the assessment or reassess within the statutory 180
day period, and so Mr. Bowden exercised his right to appeal directly to the Tax
Court, choosing the informal procedure. His notice of appeal as filed in the
Tax Court is very short and reads as follows:
On two (2) prior occasions, the Canada Revenue Agency (CRA)
has been supplied with detailed information about what constituted the input
tax credits (ITC’s) claimed by me on the G.S.T. Returns for Registrants and
obviously has chosen to completely ignore the facts presented to them and still
make the assertion that ALL the ITC’s claimed by a business collecting and
remitting G.S.T. are to be denied.
[12]
The
Minister’s reply to the notice of appeal is also short. The Minister’s
assumptions are found in paragraph 5 of the reply and read as follows:
a)
the
appellant was registered for GST purposes;
b)
the
appellant claimed ITC’s of $4,419.71 for the period July 1, 2007 to December
31, 2008; and
c)
the
appellant operated an investment business from July 1, 2007 to December 31,
2008.
[13]
The
judge read the third assumption as implicitly including the assumption that the
appellant operated only an investment business during the relevant time.
In my view, that is a fair interpretation of the Minister’s pleading. It is
consistent with the fact that the Minister had not concluded his review of the
issues raised in Mr. Bowden’s notice of objection when Mr. Bowden filed his
notice of appeal in the Tax Court.
[14]
Based
on the circumstances as revealed in the record, the Minister had been informed of
the basis upon which Mr. Bowden objected to the assessment. Specifically, the
Minister was informed that Mr. Bowden was asserting that the input tax credits
were claimed in relation to businesses other than his financial services
business.
[15]
However,
nothing in the Minister’s reply informed Mr. Bowden that the Minister would
take the position in the Tax Court that any business activity of Mr. Bowden
apart from his financial services business would fall outside the statutory
definition of “commercial activity”. In my view, that lack of notice in the
Minister’s reply caused significant prejudice to Mr. Bowden, because it
deprived him of notice that the success of his appeal could depend on evidence
relating to the reasonable expectation of profit test. The most striking
example of this prejudicial omission was the absence of a full history of his various
businesses for a period of time much longer than the period covered by the
input tax credit claims in issue. Mr. Bowden asserted in this Court that he had
such evidence and he could have produced it if he had known it would be
relevant.
[16]
The
judge noted this deficiency in the Minister’s pleadings, but in the end
concluded that Mr. Bowden was not prejudiced by the deficiency. He explains why
at paragraph 10 of his reasons:
Initially, I had some concern whether the Minister's
position in this respect was adequately revealed by the reply, and whether the
appellant was sufficiently apprised of the issues that he had to meet. However,
as the evidence developed it became apparent to my satisfaction that the
appellant indeed understood the issues from the outset and was in no way taken
by surprise. Indeed, he had prepared spreadsheets specifically intended to
demonstrate the extent of his commercial activities with respect to computer
consulting, home renovation and home staging.
[17]
In
my respectful view, it was not reasonably open to the judge, based on the
spreadsheets to which he referred, to conclude that Mr. Bowden had sufficient
notice that the Minister would rely on the reasonable expectation of profit
test. It is apparent that the spreadsheets were aimed at proving the allocation
of input tax credit claims relating to Mr. Bowden’s various business activities,
which is clearly what Mr. Bowden thought would be in issue based on his notice
of objection, his notice of appeal, and the Minister’s reply. The spreadsheets
do not disclose relevant evidence about the profit and loss history of Mr.
Bowden’s businesses for the full period of time that could be taken into
account in a reasonable expectation of profit analysis.
[18]
The
Minister argued that the Mr. Bowden did not complain of any such prejudice in
his memorandum of fact and law, but raised this issue only in oral argument,
not giving the Minister a reasonable opportunity to respond. It is true that
Mr. Bowden did not refer to this issue in his written submissions. However, the
relevant facts are abundantly clear from the record and were known to the
Minister, and the legal implications of those facts are readily apparent.
Counsel for the Minister, to his credit, candidly admitted that when the debate
in the Tax Court evolved into a discussion of the reasonable expectation of
profit test, he should have applied to amend the pleadings (which undoubtedly
would have led the judge to consider whether an adjournment was in order).
[19]
For
these reasons, I have concluded that Mr. Bowden’s appeal should be allowed and
the judgment of the Tax Court set aside.
[20]
I
have considered whether this matter should be returned to the Tax Court for a
new trial, or whether the merits of Mr. Bowden’s appeal should be determined by
this Court on the record as it now stands. In view of the fact that the amount
of tax involved is less than $5,000, I have concluded that the interests of
justice would be best served by dealing with the merits of appeal in this
Court.
[21]
The
Minister assumed as a fact that Mr. Bowden carried on only one business during
the relevant period, a financial services business in respect of which input
tax credits could not be claimed. That assumption must be accepted as fact
unless it is rebutted by the evidence. Mr. Bowden adduced evidence that is
capable of establishing that he was engaged in a business activity during the
relevant time that was not a financial services business. That evidence is not
challenged and is sufficient to rebut the Minister’s principal factual
assumption. Since the application of the statutory definition of “commercial
activity” was not properly raised on the pleadings, Mr. Bowden’s appeal should
not be determined on that basis.
[22]
The
only remaining issue is the allocation of the claimed input tax credits as
between Mr. Bowden’s financial services business and his other business. Mr.
Bowden submitted a spreadsheet establishing that allocation. It appears from
the transcript that the judge had it in mind that if he had concluded that Mr.
Bowden was entitled to some input tax credits, the proceedings would be
adjourned to permit the Minister to determine the allocation based on an audit.
That would necessarily involve an indefinite delay in a matter that has already
consumed considerable time and resources. In light of the small amounts
involved, I would direct the Minister to reassess on the basis that Mr.
Bowden’s spreadsheet be accepted as accurate (see spreadsheet, Appeal Book, Tab
10, at page 85).
[23]
I
would allow this appeal, set aside the judgment of the Tax Court and, giving
the judgment that should have been given, I would allow Mr. Bowden’s tax appeal
and refer the GST assessment back to the Minister for reassessment in
accordance with these reasons.
[24]
Mr.
Bowden is entitled to his costs in this Court. As he is self represented, his
costs are essentially limited to his disbursements relating to his appeal in
this Court. In the interest of saving time and resources, I would fix the costs
in this Court at $800. As the proceedings in the Tax Court
were commenced under the informal
procedure, Mr. Bowden is not entitled to the costs of the Tax Court proceeding.
“K.
Sharlow”
“I
agree
Johanne Trudel”
“I
agree
David Stratas”
Email this Content