Citation: 2006TCC37
Date: 20060117
Docket: 2005-1002(IT)I
BETWEEN:
PIRJO SETCHELL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(delivered orally from the Bench
on December 19, 2005 at Toronto, Ontario)
Woods J.
[1] This is an appeal by Pirjo Setchell in respect of an assessment under the Income Tax Act for the 2003 taxation year. The assessment disallowed Mrs. Setchell's claim for a tax credit in respect of a four-week training course that she took to upgrade her computer skills.
[2] There are two issues in the appeal. The first is whether the fees paid by Mrs. Setchell qualify for the tuition tax credit in section 118.5 of the Act. The second is an alternative argument made by Mrs. Setchell that the fees are deductible in computing income as an ordinary business expense.
[3] I will first briefly set out the facts. In 2003, Mrs. Setchell was laid off by the Hudson's Bay Company where she had worked as a systems analyst for over five years. As Mrs. Setchell explored other work opportunities, she concluded that her computer skills were no longer marketable. After conducting research into what skills might be useful, Mrs. Setchell decided to take a four-week course offered by
SAP Canada Inc., a computer software company. It was her hope that this would lead to work with a company that used the SAP software, either as an employee or as an independent contractor. Mrs. Setchell had previously taken courses on how to run her own business, through the assistance program offered by her old employer.
[4] Since completing the SAP course, Mrs. Setchell has been active in trying to find work. She has not been successful to date, but it has not been for lack of trying and she has not given up.
[5] The amount that Mrs. Setchell paid for the four-week course was $14,097 and her successful completion of the course led to a certificate issued by SAP.
[6] These are the basic facts. I will now turn to the requirements of the tax credit. The relevant statutory provision is paragraph 118.5(1)(a) of the Income Tax Act. It is divided in two parts - clause (i) and clause (ii).
[7] I will deal with clause (ii) first. It applies to educational institutions that have been certified by the Minister of Human Resources Development. The parties agree that clause (ii) is not applicable because SAP is not certified by this government department. A witness from SAP stated that she investigated applying for the certification but concluded that it was not a high priority because the vast majority of the participants in the course have their fees paid for by their employers. The employers would presumably be allowed to deduct the fees as business expenses.
[8] Because SAP does not have certification, the only issue is whether the course qualifies for the credit under clause (i). This clause applies to a "university, college or other educational institution providing courses at a post-secondary school level."
[9] SAP is not a university because it is not a degree-granting institution. It is also not an educational institution providing courses at a post-secondary school level. The witness from SAP stated that having a secondary school education was not required although she stated that it would be difficult to take the courses without it.
[10] It remains to be considered whether SAP is a college. There is another hurdle, however, that must be met even if SAP is a college. Under clause (ii.1) of the relevant section, courses taken at a college will not qualify for the tax credit unless the courses taken are at the post-secondary school level.
[11] As mentioned earlier, the SAP courses did not require completion of secondary school as a requirement. In my view, clause (ii.1) is not satisfied in this case and Mrs. Setchell's claim for the tuition tax credit must therefore be denied.
[12] I now turn to the alternative argument that the fees are deductible as an ordinary business expense.
[13] Counsel for the Crown submits that the fees are not deductible because Mrs. Setchell was not carrying on business when the course was taken. Counsel referred to the fact that Mrs. Setchell had not earned any business income in the year in question, aside from a very small amount of tutoring income. He referred me to the case of Martin v. The Queen, [2003] 3 C.T.C. 2416 (T.C.C.).
[14] I am not able to agree with counsel as to the relevance of the Martin decision. The question in Martin was whether the activities of the taxpayer were business or personal activities. This question turns on whether the activity undertaken by the taxpayer was sufficiently commercial to be considered primarily business and not personal.
[15] In this case, there was no personal element to the activities conducted by Mrs. Setchell. Her goal was to earn income, either by way of employment or a business.
[16] Although the Martin case is not relevant, I agree with counsel that the fees are not deductible unless Mrs. Setchell was carrying on business at the time the course was taken. I do not agree, however, that it was necessary for Mrs. Setchell to have entered into business contracts in order to be considered to be carrying on a business. Judicial decisions make it clear that this is not necessary. If the capital structure of the business is in place and a taxpayer is actively pursuing business opportunities, then the business has commenced even if no business contracts have been entered into. In Hudon v. The Queen, 2001 D.T.C. 5630 (F.C.A.), the Court held that a corporation was carrying on an active business even though it had not been able to enter into any business contracts.
[17] I also note that this test appears to be accepted by the Canada Revenue Agency. Their administrative policy is of course not law but it is helpful to refer to when it reflects the judicial decisions. The Agency's administrative policy is set out in Interpretation Bulletin IT-364, at paragraph 2.
According to the Bulletin, the Agency considers that a business has not commenced if activities are undertaken in the hope that the information obtained will justify going into a business and that a business will be considered to have commenced if there are serious or continuous efforts to begin normal operations.
[18] From Mrs. Setchell's testimony, I am satisfied that she was in the latter category. She had done her research, she had committed $14,000 to upgrade her skills and she was actively seeking work. There was nothing more to do except land a contract.
[19] I am particularly influenced by the fact that Mrs. Setchell had committed a large amount of funds to upgrade her skills. This evidences a serious commitment to the endeavour. In my view this is sufficient for the business to have begun. I would also note that if the deduction were to be disallowed on the basis of contracts not being entered into, it would put persons in a different position depending on whether or not they were successful in getting business contracts. The fact that Mrs. Setchell has not been successful to date should have no bearing on deductibility.
[20] The Crown also submitted that the fees are a capital expense and therefore the deduction is prohibited by paragraph 18(1)(b). Counsel referred to a decision called Cormier v. The Queen, 98 D.T.C. 1070 (T.C.C.).
[21] The facts in Cormier are quite different from the facts in this case. The general principles to be applied in considering whether education expenses are capital or not are described in the Interpretation Bulletin dealing with training expenses, IT-357R2. All the judicial decisions that I have reviewed, including Cormier, adopt these principles.
[22] The general principle is that training costs will be deductible as a current expense if they are incurred to maintain, update or upgrade an already existing skill or qualification. This aptly describes Mrs. Setchell's circumstances. In my view, the expenses that Mrs. Setchell incurred to attend the course offered by SAP are not capital.
[23] For these reasons, the appeal will be allowed and the assessment will be referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the fees paid to SAP by Mrs. Setchell are deductible in computing income. There will be no order as to costs.
Signed at Toronto, Ontario, this 17th day of January, 2006.
Woods J.
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