Joyal J.:-The plaintiff 1s appealing a decision rendered by the Tax Court of Canada which disallowed the deduction of the amounts in issue as business expenditures with respect to the 1984, 1985 and 1986 taxation years.
Facts
As ably summarized by the Tax Court of Canada, the plaintiff, employed as a pilot for more than 25 years, has always carried out some kind of business activity in his spare time. He has also shown a particular interest in astronomy. As such, around 1980, he came up with the unique concept of developing a commercial observatory resort where amateur astronomers could come and pay a fee to use more sophisticated telescopes to enhance the enjoyment of their hobby.
He made numerous attempts at setting up this business. In particular, on August 28, 1981, the plaintiff-who already owned a property on Pender Island, one of the Gulf Islands located in the Strait of Georgia, British Columbia-acquired a small adjoining island called Fane Island, with the intention of developing his observatory resort on this site. The plaintiff also made improvements to the island in 1981 and early 1982. For example, he incurred costs of $24,646 to build a guest cottage and dock facilities. He also constructed a windmill to provide electrical power and had a 3,000 gallon water tank installed on the island. According to the plaintiff, the overall costs associated with the island project were in the neighbourhood of $200,000.
Within a few months of acquiring Fane Island, the plaintiff realized that he could not proceed with its intended purpose due to potential liability factors associated with operating a self- monitored resort on the island. Moreover, a provision in the March 15, 1982 separation agreement between the plaintiff and his wife stated that the island would be sold and that the funds would be equally distributed. Hence, the plaintiff listed Fane Island for sale and made no more improvements to it. Still convinced that his concept was viable as a business, he endeavoured to find other suitable locations for his observatory in Hawaii, Arizona and New Mexico.
In 1987, the plaintiff realized his dream as he formed a partnership with another individual for the development of an observatory in New Mexico and by 1990, he was making modest profits from the operation of this business. As for the Fane Island property, it ultimately sold on July 1, 1987 for $100,000.
On his 1984, 1985 and 1986 tax returns, the plaintiff claimed business losses, in connection with Fane Island, of $37,783, $35,983.78 and $35,814.85 respectively. In each of these tax returns, an attached statement listed the business expenses associated with Fane Island Developments. The Tax Court remarked that these expenses represented almost exclusively interest on the moneys borrowed for the purchase and improvements of Fane Island.
By notices of reassessment, dated May 15, 1989, the Minister of National Revenue disallowed the business losses of the plaintiff claimed in 1984, 1985 and 1986 with respect to Fane Island, on the basis that the business had no reasonable expectation of profit for the years in question. Following the plaintiff’s objection, the Minister confirmed the reassessments, and on February 7, 1991, the plaintiff appealed to the Tax Court of Canada which dismissed his appeal. The plaintiff appeals from this decision, but it is a well- recognized doctrine that such an appeal is in the
nature of a trial de novo.
Plaintiff's case
The main thrust of the plaintiff’s argument is that his expenses were outlays or expenses incurred for the purpose of gaining or producing income. In support of this submission, he contends that he developed a business plan based on projected numbers of tourists to Fane Island and the number of amateur astronomers prepared to rent the observatory resort facility. He also made costly improvements to the island. Moreover, realizing that the project was not feasible on Fane Island, he persevered in his search for other suitable locations for his commercial observatory. Also, as underlined by the Tax Court, there 1s unequivocal evidence to show that the plaintiff never used the island for personal purposes and that the sole reason for its acquisition was as a business endeavour.
Defendant’s position
In response, the defendant contends that it has not been shown that the activities connected with the operation of Fane Island constituted a "business" as defined in subsection 248(1) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the "Act"). Accordingly, the claimed expenditures incurred in the taxation years at issue, with respect to Fane Island, were not outlays or expenses incurred for the purpose of gaining or producing income within the meaning of paragraph 18(1)(a) of the Act. The amounts were, rather, personal or living expenses within the meaning of paragraph 18( l)(h) and subsection 248(1) of the Act.
Issue
The crux of this matter 1s the nature of the expenses related to Fane Island, in particular, whether a business was carried on by the plaintiff and whether it had a reasonable expectation of profit, pursuant to paragraph 18(1 )(h) and subsection 248(1) of the Income Tax Act. Accordingly, this Court must determine whether the expenses are of a business, personal or capital nature.
The law
The main provisions of the Income Tax Act involved in this case are paragraphs 18(1)(a), (b) and (h) and subsection 248(1), which read as follows:
18(1) In computing the income of a taxpayer from a business or property, no deduction shall be made in respect of:
(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;
(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part;
(h) personal or living expenses of the taxpayer except travelling expenses (including the entire amount expended for meals and lodging) incurred by the taxpayer while away from home in the course of carrying on his business.
248(1) "business" includes a profession, calling, trade, manufacture, or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), an adventure or concern in the nature of trade but does not include an office or employment.
Analysis
A. Overview of the relevant jurisprudence
As a general rule, for an amount to be deductible as a business expense, the taxpayer must have been carrying on business in the fiscal period in which the expense was incurred. It is therefore necessary to establish whether the plaintiffs activities were tantamount to carrying on a business.
There is ample jurisprudence to establish that expenses laid out prior to the commencement of the business are not deductible under paragraph 18(1)(a) of the Act. For example, in Rolland v. M.N.R., [1987] 2 C.T.C. 2001, 87 D.T.C. 341, the taxpayer decided to start his own hot air ballooning business. As such, he ordered accessory equipment and took lessons to secure an operator’s licence. However, he did not accept passengers during the years for which he claimed the business expenditures. In light of this fact situation, the Tax Court found that the losses were incurred by the taxpayer when no business had yet commenced. In support of this finding, the Court relied on a statement made by the Court in Daley v. M.N.R., [1950] Ex. C.R. 516, 50 D.T.C. 877, at pages 522-23 (D.T.C. 880):
It seems clear that a disbursement or expense such as this which is laid out or expended not in the course of the operations, transactions or services from which the taxpayers earned his income but at a time anterior to their commencement and by way of qualification or preparation for them is not the kind of disbursement or expense that could be properly deducted in the ascertainment or estimation of his “annual net profit or gain".
[Emphasis added.]
In a similar manner, in McLachlen v. M.N.R., [1974] C.T.C. 2003, 74 D.T.C. 1035, the Court held that expenses incurred by the taxpayer to make various improvements and additions necessary to establish a farm were not deductible. The Court stated that the expenses were not related to an ongoing farm operation with a reasonable expectation of profit but were rather incurred during a preparatory stage leading up to such a point.
Also, as underlined by the Tax Court in its decision, the comments made by the trial judge in Bancroft v. M.N.R., [1989] 1 C.T.C. 2196, 89 D.T.C. 153, at page 2198 (D.T.C. 155) are very relevant as they accurately portray the present fact situation:
...1 can only conclude that the appellant’s activities do not meet the threshold required for him to be considered as "carrying on a business". Put differently, the appellant never passed the stage of capital expenditure. The walls and foundations were there but there was nothing which resembled a tourist resort. There was no kitchen, no washrooms. The inside was never finished. There had not been any training of personnel, needless to say no hiring, no promotion, no advertising. The appellant, during all the years under appeal, was quite far from the operational phase of his plan.
The appellant was in the process of creating a business structure. He never finished creating it. He never commenced his proposed business on a year round country retreat. I am of the view that the evidence disclosed that the appellant never carried on a business, nor did he commence a business.
[Emphasis added.]
To summarize, it is well-known principle that in order for a business to exist, the taxpayer must have a profit or a reasonable expectation of profit. The meaning of "reasonable expectation of profit" was closely examined by the Supreme Court of Canada in Moldowan v. The Queen, [1978] I S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213, at pages 485-86 (C.T.C. 313-14, D.T.C. 5215). In particular, the Court stated the following:
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 taxpayers’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.
B. The present fact situation
In light of the aforementioned criteria and the relevant jurisprudence, it is clear that the plaintiff’s project never materialized into a "profitable business" within the meaning of subsection 248(1) of the Act but remained at the preparatory stage. Hence, as ably summarized by the Tax Court, the plaintiff had a concept, not a business. Although the plaintiff spent considerable sums of money in his attempt to set up a commercial observatory, he did not meet the threshold required for the island to be considered a business. For example, in Kier v. M.N.R., [1990] 1 C.T.C. 2055, 89 D.T.C. 710, at page 2068 (D.T.C. 718), the Tax Court held that the business had never commenced apart from some acquisitions of inventory-type assets.
At the trial before me, the plaintiff did provide some evidence as to certain market projections being put together, but in my respectful view, they are but one of several criteria which may be applied and, in the light of the other factual circumstances, have little if any bearing on the issue.
The plaintiff also referred to his longstanding interest in astronomy. Sometime in 1977, he had subscribed to two major astronomy magazines and had held talks with career astronomers at the nearby Dominion Observatory. He also enquired as to the needs and activities of amateur astronomers, including the provision of equipment and services to heighten the enjoyment of their hobby.
When the Fane Island project came to a standstill early in 1982, the plaintiff visited Hawaii on some four occasions to find an alternate site there. By 1986-87, that search was abandoned. He then explored the possibilities of a site in Arizona and in the summer of 1988, he entered into a partnership with a motel operator whereby the latter provided the lodgings and the plaintiff provided the telescopes and other equipment for rental purposes.
I can only surmise from this evidence an attempt by the plaintiff to establish that the whole concept of an astro-centre, beginning with the purchase of an island in 1981 and culminating with some success in a relatively small operation in Arizona in 1989-90, was one long continuum of directly connected stages in a business venture. That approach might be termed bold and imaginative, but there is sufficient fantasy in it, at least in applying a taxing statute, that I should give it little weight.
At the opening of the trial of the issue, plaintiff’s counsel moved to amend the statement of claim by adding to his allegation of a primary intention the following:
The plaintiff’s secondary intention was to purchase Fane Island for resale at a profit. An operating motivation was the expectation that he could resell Fane Island at a profit if the observatory business was unsuccessful.
Counsel for the Crown objected to this amendment. It obviously did not have any relevance to the taxation years in question, although it might be material when debating the issue of capital or non- capital losses incurred in 1987 when Fane Island was eventually sold. Nevertheless, I decided to reserve judgment on the proposed amendment and gave leave to the plaintiff’s counsel to adduce evidence on the matter and I could later rule accordingly. In passing, I might observe that the plaintiff’s amendment implies that any profit or loss can be both of an income or a capital nature at the same time, a proposition which, in dealing with a taxing statute, some people would find difficult to endorse.
As it turned out, the evidence on that point was in respect of the various other business ventures in which the plaintiff, a born entrepreneur, has been involved over the past 25 years or more. These included:
-1966: involvement in a company called Caulfield Inc., a mortgage company which closed up one year later;
-1970: the purchase of farm acreage on Pender Island which was sold ten years later at $1 million gross profit;
—1974: the formation of Canada-West Charters involving some half-dozen C & C 36 sailboats, chartered on a weekly basis, and which he sold in 1980;
—1982: the purchase of property in Whistler, B.C., bearing the name Unique Resorts, which he sold a year later; and
-1984: the establishment of Fern Press, involved in Northwest Art lithographs and prints, which he sold at a loss a year later.
I have some difficulty in dealing with the plaintiff’s approach to this secondary intention. The issue before me is to determine whether losses over the years 1984-85-86, with respect to Fane Island, are losses deductible from the plaintiff’s other income. The Crown contends that the venture does not meet the "reasonable expectation of profit" test and if normal logic applies, the losses become purely personal expenses.
On the other hand, the thrust of plaintiff’s argument is that if the loss on the resale of Fane Island arises out of land speculation on which a profit might have been realized and such profit be on income account, then to paraphrase the words of Bastin D.J. in M.P. Drilling Ltd. v. M.N.R., [1974] C.T.C. 426, 74 D.T.C. 6343, at page 430 (D.T.C. 6345), what is sauce for the goose is sauce for the gander when losses are suffered.
To make a finding on this evidence would require, in my respectful view, a giant leap of conclusions which I am not prepared to make. Whatever the whole history of the plaintiff’s ventures might disclose, including the tax treatment in relation thereto, and which might have some relevance to the categorization of his losses on the resale of Fane Island, the case before me is to determine the issue of deductibility of mortgage interest and other costs through taxation years 1984-85-86. Were the evidence otherwise material, I would of course have provided the Crown with an opportunity to answer.
Conclusion
Notwithstanding the subjective element present in any tax case of this nature, or of the earnest plea of plaintiff’s counsel to bring persuasion into it, I am not satisfied that the Crown’s assumptions have been rebutted. The realities, in my respectful view, do not meet the test of "reasonable expectation of profit" or, for that matter, show that the disallowed expenses were related to a business. The activities of the plaintiff consisted of buying a property and of building a cottage, a jetty and a windmill on it. The business activity did not go any further than that. The decision to abandon it took place no later than March 1982, a matter of months after Fane Island had been purchased. That decision, whether by reason of the liability issue, on which the plaintiff’s evidence is somewhat questionable, or by reason of marital discord, was objectively sanctioned as of the date of the separation agreement, namely March 15, 1982.
From the date of acquisition in the taxation year 1981 to the end of the taxation year 1983, the liabilities or debts incurred by the plaintiff during that period had to be serviced. There is no direct evidence as to whether these servicing costs were charged by the taxpayer or how they were treated for tax purposes. The reassessment years begin in 1984, and it is a reasonable conclusion to draw that by that time, if not a couple of years earlier, profits could not have been reasonably expected. The assets lay fallow.
The income tax incidence relating to the ultimate disposal of Fane Island in 1987 is not before me and should be left for others to decide.
As for the case at bar, and with all consideration due to any taxpayer in the circumstances I have outlined, the plaintiff’s action must be dismissed with costs.
The appeal by the plaintiff is dismissed with costs. The reassessments by the defendant with respect to certain expenditures claimed by the plaintiff for each of the years 1984, 1985 and 1986 are confirmed.
Appeal dismissed.
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