Citation: 2011 TCC 410
Date: 20110901
Docket: 2010-3668(IT)I
BETWEEN:
JERRY KUHLMANN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bowie J.
[1] Section 3 of the Income Tax (the Act)
mandates that taxpayers compute their income each year by aggregating their
income from all sources, including net taxable capital gains, and deducting from
that total their losses, if any, from any office, employment, business or
property. When he filed his income tax returns for the 2005, 2006 and 2007
taxation years Mr. Kuhlmann declared his aggregate income from a number of
sources, principally pension benefits, and he deducted from that what he
claimed to be his share each year of the business losses sustained by a
partnership called JHK& BK Enterprises (Enterprises). The results may be
summarized this way:
|
|
2005
|
2006
|
2007
|
|
Income from various sources
|
$52,643
|
$51,213
|
$51,513
|
|
Less share of partnership losses
|
16,508
|
15,059
|
10,848
|
|
Total income
|
$36,135
|
$36,154
|
$40,665
|
[2] Initially the Minister assessed Mr.
Kuhlmann on the basis upon which he had filed his returns, but upon further
reflection he took the view that Enterprises was not a source of income, and so
he reassessed Mr Kuhlmann for the years in question to disallow the deduction
of the partnership losses from his aggregate income. Mr. Kuhlmann objected
to the reassessments, the Minister confirmed them, and Mr. Kuhlmann now appeals
from those reassessments.
[3] The appellant was the only witness at the
trial. His evidence was, for the most part, candid and credible. I do, however,
have some difficulty accepting his evidence that he simply gave all his
receipts to his accountant,
and that he signed the income tax returns that she prepared for him without
giving any consideration to their contents. It seems unlikely that someone with
a degree in business administration would not be inclined to question some of
the very obviously exaggerated claims for expenses that were made, such as vacation
trips and theatre tickets for the appellant and his wife.
[4] Mr. Kuhlmann is an engineer, and also has a
business administration degree. He was employed for almost 30 years by the Dow
Chemical Company. In 1995 he retired from Dow under an arrangement by which he
would be paid a deferred pension starting at age 60. At that time, with a view
to starting a consulting business, he and his wife registered a partnership by
the name of JHK & BK Enterprises. During the next few years Mr. Kuhlmann
worked as a consultant under that partnership name. His major client was Vulsay
Industries Ltd., for which he did consulting work that he invoiced monthly for
several years. At some point Vulsay offered him full time salaried employment
as a sales manager, and he worked in that position until 2005. In 2005,
following a change in control of Vulsay Industries, Mr. Kuhlmann again retired,
with a pension from Vulsay.
[5] At this point Mr. Kuhlmann, in his words,
started looking for either fulltime or part time work. Although Enterprises had
been dormant since Mr. Kuhlmann became an employee of Vulsay, it was still
extant as a registered partnership. Had the appellant found work that could be
carried on as an independent contractor rather than as an employee, then no
doubt he would have done it in the name of Enterprises, as he did prior to the
period of his employment by Vulsay. In his words, his efforts were fruitless
– he did not find any opportunities, and in 2008 or 2009 he gave up looking
and retired. He testified that he did incur expenses in looking for work,
however, and, encouraged by his “accountant”, he claimed those expenses, and
many that had no connection to his search for work, as the expenses of
Enterprises. As Enterprises had no revenue whatsoever during the years under
appeal the statements of business activities for the partnership which the
appellant filed as part of his income tax returns show losses equal to the
amount of the claimed expenses each year. For some unexplained reason the
appellant claimed 100% of these losses as his share in 2005, and 80% in each of
2006 and 2007.
[6] Enterprises certainly was a source of
income for some period of time before the appellant took employment with
Vulsay. Was it that in 2005 to 2007? Some assistance with this question can be
had from the judgment in Kaye v. The Queen. There
Bowman J., as he then was, said this:
4 I do not find the ritual repetition of the
phrase ["no reasonable expectation of profit"] particularly helpful
in cases of this type, and I prefer to put the matter on the basis "Is
there or is there not truly a business?" This is a broader but, I believe,
a more meaningful question and one that, for me at least, leads to a more
fruitful line of enquiry. No doubt it subsumes the question of the objective
reasonableness of the taxpayer's expectation of profit, but there is more to it
than that. How can it be said that a driller of wildcat oil wells has a reasonable
expectation of profit and is therefore conducting a business given the
extremely low success rate? Yet no one questions that such companies are
carrying on a business. It is the inherent commerciality of the enterprise,
revealed in its organization, that makes it a business. Subjective intention to
make money, while a factor, is not determinative, although its absence may
militate against the assertion that an activity is a business.
5 One cannot view the reasonableness of the
expectation of profit in isolation. One must ask "Would a reasonable
person, looking at a particular activity and applying ordinary standards of
commercial common sense, say 'yes, this is a business'?" In answering this
question the hypothetical reasonable person would look at such things as
capitalization, knowledge of the participant and time spent. He or she would
also consider whether the person claiming to be in business has gone about it
in an orderly, businesslike way and in the way that a business person would
normally be expected to do.
6 This leads to a further consideration --
that of reasonableness. The reasonableness of expenditures is dealt with
specifically in section 67 of the Income Tax Act, but it does not exist
in a watertight compartment. Section 67 operates within the context of a
business and assumes the existence of a business. It is also a component in the
question whether a particular activity is a business. For example, it cannot be
said, in the absence of compelling reasons, that a person would spend $1,000,000
if all that could reasonably be expected to be earned was $1,000.
7 Ultimately, it boils down to a common sense
appreciation of all of the factors, in which each is assigned its appropriate
weight in the overall context. One must of course not discount entrepreneurial
vision and imagination, but they are hard to evaluate at the outset. Simply
put, if you want to be treated as carrying on a business, you should act like a
businessman.
[7] When the matter is viewed in this light it
is evident that there was no business here during the years under appeal. There
is no commerciality and no businesslike activity here. There is simply someone
looking for work, either as an independent contractor or as an employee, either
full time or part time. It is not reasonable to expect the fisc to subsidize
the search for employment, otherwise than through the employment insurance
system created for that purpose.
[8] Kaye was, of course, decided before the Supreme Court of
Canada’s decision in Stewart v. The Queen. The test applied
by Bowman J., however, is totally consistent with the Supreme Court’s
restatement there of the approach to be taken:
We would also
emphasize that although the reasonable expectation of profit is a factor to be
considered at this stage, it is not the only factor, nor is it
conclusive. The overall assessment to be made is whether or not the
taxpayer is carrying on the activity in a commercial manner. However,
this assessment should not be used to second-guess the business judgment of the
taxpayer. It is the commercial nature of the taxpayer’s activity which
must be evaluated, not his or her business acumen.
[9] Nor does it
assist the appellant that Enterprises at one time carried on a business and so
was a source of income. In Moufarrège v. Quebec
(Deputy Minister of Revenue) The Supreme
Court of Canada said this at paragraphs 4-5:
4 Stewart
v. Canada, 2002 SCC 46 (CanLII),
[2002] 2 S.C.R. 645, 2002 SCC 46, did not alter the principle that when a
reasonable expectation of income disappears, so does the right to a
deduction. In that decision, the Court stated that “the deductibility of
expenses presupposes the existence of a source of income” (para. 57).
5 In
the instant case, once the properties were sold, the source of income ceased to
exist and the loan was no longer being used to earn income from property in
accordance with ss. 128 and 160. With regard to the shares, the company
in question is bankrupt, and nothing in the record indicates a possibility of a
resumption of activities, so here too the source of income has disappeared even
though the company has not been dissolved.
When
Enterprises ceased to be a source of income, as it did when Mr. Kuhlmann became
an employee of Vulsay, Mr. Kuhlmann’s right to deduct its supposed losses came
to an end.
[10] In view of this
conclusion it is not necessary to consider which of the numerous items making
up the supposed losses of Enterprises are personal expenses. There being no
business, the expenses are all personal and therefore are not deductible.
[11] The appeals are
dismissed.
Signed at Ottawa, Canada, this 1st day of September, 2011.
“E.A. Bowie”
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