Citation: 2011 TCC 341
Date: 20110706
Docket: 2010-3709(IT)I
BETWEEN:
PATRICK M. WALSH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered from the Bench on June 28, 2011
at Toronto,
Ontario)
Hershfield J.
[1] The Appellant
claimed business losses in 2005 and 2006 in the approximate amounts of $12,900
in 2005 and $13,600 in 2006.
[2] On reassessment by
the Minister of National Revenue (the “Minister”) same were denied on the basis
of the failure to provide adequate receipts, the expenses being unreasonable
and there being personal expenses.
[3] The Appellant
appeals such reassessments asserting that the expenses were incurred and
resulted in losses in the course of the conduct of a business and were
deductible under the terms of the Income Tax Act. As well, he asserted
that the expenses incurred were evidenced as required and were reasonable.
[4] During the course
of the hearing, the Respondent abandoned its assertion that the expenses were
not sufficiently evidenced by receipts. Further, no argument was pursued as to
the reasonableness of the expenses. The sole position relied on by the
Respondent at the hearing was that the expenses incurred were personal in
nature and the asserted business activity had not yet commenced. Reliance was
placed primarily on the 2002 Supreme Court of Canada decision in Stewart v. Canada.
[5] The Notice of
Appeal describes the business activity in question as trading foreign exchange
contracts in the retail/spot market.
[6] I have little doubt
that the Appellant had, in general terms, the educational background to attack
this high risk business activity. He has degrees in economics, business and
accounting and also achieved his chartered accountant designation, a profession
he practiced for many years. Forced to retire from his CA practice due to
health issues he looked for a business that he could carry on that was
compatible with his skills and health.
[7] He researched
several business opportunities and in 2004 he acquired trading software and a
new computer capable of supporting the multiple and simultaneous tasks that the
software permitted him to perform. The software had some 45,000 subscribers. He
selected it because it offered training in the trading activities that he
aspired to pursue. It offered on-line daily support with demonstration trading accounts
to learn and practice with. He testified that in 2005 he probably did not enter
into one real trade and in 2006 maybe only a few hundred dollars were invested
in trades.
[8] Mr. Walsh also
testified that he joined a local support group comprised of persons who had
acquired the same software program and that early on he led a seminar for this
group after meeting with Canada Revenue Agency as to the income tax treatment
of such activities which he had understood would be on income account as an adventure
in the nature of trade. He prepared proper books and accounts and filed a
statement of business activities with his returns for the 2005 and 2006 years
as he understood he was required to do.
[9] I should mention
that the software package included a data feed that provided access to trading
information that had not always been available until, apparently, the U.S.
congress mandated access. This information presumably provided essential and
timely information to pursue trades and to conduct trading activities. In that
sense, the program offered more than training and support. However, in the
years in question I am not satisfied that Mr. Walsh was undertaking anything
other than a training program. His testimony repeatedly underlined that the
focus of his activity was learning the market in order to exploit it and doing
the research to find ways to exploit this opportunity. He was devoting his
exclusive attention to this task and moving toward a combination of traditional
analysis of circumstantial factors and charting patterns.
[10] I do not see Mr.
Walsh as a dreamer or schemer in this regard. He was, in the years in question,
a serious student of forecasting price movements in the currency markets using
his educational background together with his understanding of the interaction
amongst interest rate pressures, currency values, inflation, employment,
balances of trade and like factors. According to his testimony, he had
accumulated some 12,000 pages of economic study and research that have now
allowed him to reach a goal of some 70% success. Indeed, he put in evidence a
record of recent trade activity illustrating profitability. He further put in
evidence a document illustrating analytical aspects of his approach. Still, his
testimony was somewhat unclear as to when he began to actually focus on a
business model that he felt was workable and enter into trading activity in
pursuit of that model. It may have been, for example, in 2008 when his losses
started to decline.
[11] Although the quantum
and reasonableness of his expenses were not ultimately put in issue, I believe
it merits note that there is nothing aggressive in the items claimed. For
example, there are no claims for such things as home office expenses that
include an allocation of a percentage of household living costs or automobile
expenses. The expenses, more clearly, are source related which I commend. However,
that does not change my impression as to the stage at which this activity must
be found to be in, in 2005 and 2006. Indeed, one expense in 2006 was to attend
a program with three days of intensive practice trading seminars which he had
described as a unique training opportunity that evidences a continuing
underlying theme in all of Mr. Walsh’s testimony namely Mr. Walsh was in school
throughout the period under appeal.
[12] As well, I should
note at this point that Mr. Walsh acknowledged that he had little capital to
put at risk in this high risk enterprise. He has a modest pension and
disability income and he essentially acknowledged that he was using these early
years to get the feel for trading in this high risk area and to be properly
schooled, self-taught if you will, with earnest research and practice, before
he could actually invest any real money in this enterprise. As stated earlier,
throughout the two year period, 2005 and 2006, virtually only a few hundred
dollars had been engaged in actual trades. They were, still, in the nature of practise
exercises.
[13] That takes me then
to my analysis including the arguments of the parties.
Analysis
[14] Mr. Baker arguing for the Respondent relied
primarily on the 2002 Supreme Court of Canada decision in Stewart to
frame the required analysis.
[15] He pointed out that where there is a
suspicion of a personal element then the exercise is to ascertain, by looking
at a variety of factors including objective and subjective factors, the intentions
of the taxpayer.
[16] That which would be a personal element, it
is argued, is not just a hobby type activity but an educational pursuit, as
well, even where it is aimed at preparing one for a business activity. That is,
developing the know-how to operate a specific type of business, which was the
intention here, is personal development not a commercial activity per se.
[17] The objective factors listed in paragraph
55 of Stewart which include things like the profit and loss experience
and the capacity of the operation to show a profit are said not to be
exhaustive. The exercise is to seek to discover the commercial nature of the
activity. Indicia of commerciality must be sufficient to warrant a finding that
there is a source of income.
[18] Consideration of
relevant factors in this case
lead one to conclude, both objectively and subjectively, that the activity in
2005 and 2006 was not a source of income. It did not yet reach the level of
commerciality to justify a finding that a business had commenced.
[19] While referring me to several other cases
including Tax Court of Canada cases Coome v. Canada, Dreaver v.
Canada,
and Gartry v. Canada,
counsel for the Respondent also referred me to my 2005 decision in McNeil
v. Canada
at paragraph 12 where, in that case, I referred specifically to a person
who had been working on investment models and strategies to enable himself to
carry on an investment activity for his family which I found was not yet a
business activity. While in that case the taxpayer did not show the same
background as the Appellant in the case at bar, and never demonstrated that he
had ever developed a strategic planning model as Mr. Walsh seems to have done, the
issue is the same - preparations leading to creating a business activity are not
themselves yet a business. Reference might also be made to earlier decisions of
this court in Sherman McClure and June N. McClure v. The Minister of
National Revenue
and Cunningham v. Canada,
essentially coming to similar conclusions that underline that educating oneself
as a preparation to the start-up of a business is essentially a personal
activity and not a business activity.
[20] The Appellant argued that he had the
background to pursue, with the necessary degree of sophistication, the trading
business that he has carried out since 2004. He acknowledged that his work was
devoted largely to determining the entry strategies given the small amount of
capital he had to put at risk but, nonetheless, they were simply preliminary
steps which were a part of a business. That is, as recognized in Interpretation
Bulletin IT-364, preliminary steps are inherently part of a business. Every
business must start with taking a preliminary step.
[21] Nonetheless, I have to agree with the Respondent in this
case. Subjectively, Mr. Walsh has admitted throughout his testimony that during
the subject years he was at a pre-exploitation stage of the subject activity.
This was not a case of preliminary exploitation steps. It is clearly
subjectively and objectively pre-exploitation. He was researching the
technology involved to start a business, he was researching the strategy steps that
he needed to take to start a business employing his capital. He was taking
courses, doing demonstration trades and getting a feel for a business that he
felt he could yet pursue. I cannot find in such circumstances that the business
had yet commenced in the subject years. Accordingly, the appeals will be
dismissed.
Signed
at Ottawa, Canada this 6th day of July 2011.
"J.E. Hershfield"
Email this Content