Citation: 2013 TCC 287
Date: 20130920
Docket: 2011-2652(IT)I
BETWEEN:
DENIS BEAUREGARD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
and
BETWEEN:
Docket: 2011-2654(IT)I
VALÉRIE PELCHAT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Favreau J.
[1]
These are appeals heard
on common evidence under the informal procedure rules from reassessments made
by Minister of National Revenue (the Minister) under the Income Tax Act,
R.S.C. 1985, c. 1 (5th Supp.), as amended (the Act), dated July 19, 2010,
in respect of the 2007 taxation year and May 27, 2011, in respect of the 2008
taxation year.
[2]
In making these
reassessments, the Minister disallowed the male and female appellants’ business
losses of $11,995 for the 2007 taxation year and of $6,420 for the 2008
taxation year and added to the appellants’ income an undeclared taxable capital
gain of $12,651.
[3]
In determining the
income tax payable, the Minister relied on the following findings and
assumptions of fact, namely:
[Translation]
(a) During the years at issue, the male appellant worked
full-time for Cirque du Soleil Inc; (admitted)
(b) during those same years, the male appellant claimed
business losses, but did not declare any gross income from said business;
(admitted)
(c) On March 1, 2007, the male appellant acquired, holding equal
interest with his spouse, Valérie Pelchat, vacant land known and designated as
lot (97-44) of the official cadastre of the [TRANSLATION] “Parish of Saint-Luc”
in the land registration division of Saint-Jean; (admitted)
(d) the male appellant stated having acquired the land for the
purpose of gaining or producing income from a business by eventually building
an office building on it; (admitted)
(e) the
land’s acquisition price was $98,000; (admitted)
(f) the male appellant stated having incurred certain expenses
prior to the project’s completion, inter alia, for architectural plans and
to ensure commencement of construction work; (admitted)
(g) based on the statement of business activities, the male appellant
claimed the following amounts as operating expenses: (admitted)
|
|
2007
|
2008
|
|
Interest fees
|
$6,726
|
-
|
|
Delivery and transportation costs
|
$ 284
|
-
|
|
Management and administration fees
|
$ 80
|
$ 228
|
|
Eligible capital expenditure deduction
|
$5,145
|
-
|
|
Member fees
|
$2,518
|
$2,150
|
|
Property taxes
|
$2,400
|
$1,069
|
|
Advertising
|
$ 180
|
$ 103
|
|
Maintenance and repair fees
|
$ 900
|
$ 651
|
|
Professional fees
|
$ 4,677
|
$ 8,637
|
|
Supplies
|
$ 1,079
|
-
|
|
TOTAL
|
$23,989
|
$12,838
|
|
Male appellant’s share (50%)
|
$11,995
|
$ 6,420
|
(h) owing to unfavourable economic conditions, the appellant
abandoned the project’s completion; (admitted)
(i) on September 25, 2008, the land was sold for $172,755, resulting
in a taxable capital gain of $12,651 that was calculated as follows: (admitted)
Proceeds
of disposition: $172,755
Less:
Acquisition cost $98,000
GST and QST paid $13,671
Transfer tax $ 730
Commission $ 9,750
Capital
gain $50,604
Share
(50%) $25,302
Taxable
capital gain $12,651
(j) the sales contract indicated that the disposition of the
land was not business -related; (admitted)
(k) business losses were disallowed because the male appellant
failed to demonstrate that he had made or incurred expenses for the purpose of income
from a business or property. (neither admitted nor denied)
[4]
Mr. Beauregard and Ms. Pelchat
testified at the hearing and explained that at the time of the land’s acquisition,
they did not have expertise in real property. Their mutual intention was to
build on the land, which was zoned “commercial”, a health centre on two floors
that would include a chiropractor, psychologists and the social worker
professional activities of Ms. Pelchat.
[5]
The commercial land was
acquired on March 1, 2007, and the $98,000 purchase price was financed by a
hypothec from the Caisse Desjardins de la Chaudière. A joint business account
was opened to that end on March 1, 2007, with the Caisse Desjardins de la
Chaudière. Mr. Beauregard and Ms. Pelchat stated that they submitted a
business plan to the Caisse Desjardins which included a summary appraisal of
the building to be erected and an estimate of future income for the purpose of obtaining
the necessary funding to acquire the land. Said business plan was not filed
with the Court.
[6]
Mr. Beauregard and Ms. Pelchat
mentioned that they requested and obtained a goods and services tax/harmonized
sales tax (GST/HST) account number and their registration became effective on February
26, 2007 (Exhibit A-1, tab 12).
[7]
Mr. Beauregard and Ms. Pelchat
also stated that they had architectural plans prepared for the construction of
an office building on the land they had acquired. Preliminary plans were obtained
on September 10, 2007, and technical plans to apply for a building permit were
obtained on October 30, 2007. The witnesses introduced in evidence the two (2) invoices
from the architect, the three (3) pages of the architectural plans and the
application for a building permit dated January 25, 2008.
[8]
Mr. Beauregard and Ms. Pelchat
contacted three (3) construction companies to obtain bids for the construction
of the office building. They accepted the bid of Construction Systec dated
December 17, 2007, for $495,682.50 (taxes included) and on February 14, 2008, they
paid the construction company a $5,000 deposit to start the work. The bid and
invoice were filed as Exhibit A-2 and Exhibit A-1, tab 6, respectively.
[9]
On January 23, 2008,
and February 6, 2008, Mr. Beauregard and Ms. Pelchat put an advertisement in
the local newspaper “Le Canada Français” to lease office space in the building
to be built. The two (2) invoices for the advertisement were filed as Exhibit
A-1, tab 5.
[10]
Mr. Beauregard and Ms.
Pelchat mandated the firm Baillargeon Bergeron Deneault and Associés Inc. for the
purpose of obtaining a market value appraisal of the building to be built on
lot 97—44 Saint‑Luc Boulevard, Saint-Jean-sur-Richelieu. The chartered
appraisal firm expressed the considered opinion that as of April 28, 2008, the
market value appraisal of the building to be built was $532,000. The appraisal
report was filed as Exhibit A‑1, tab 1, whereas the invoice for fees from
the appraisal firm dated May 14, 2008, in the amount of $1,241.63 was filed as
Exhibit A-1, tab 7.
[11]
Following receipt of
said appraisal report, Mr. Beauregard and Ms. Pelchat realized that the office
building had to be leased in its entirety to be profitable. They said they were
concerned by the looming economic crisis and by the fact that, despite their
advertising, no firm lease for office space in the building had been signed. Furthermore,
the chiropractor who was supposed to take the building’s entire first floor
backed out in February 2008. None of their leasing efforts proved fruitful and
the Caisse Desjardins was not prepared to fund the construction costs of the
building, estimated at $500,000, without any firm lease commitments.
[12]
Mr. Beauregard and Ms.
Pelchat mandated the Sutton-Millénia Group in early summer 2008 to sell the
land and it was sold on September 25, 2008, for $172,755. Mr. Beauregard and
Ms. Pelchat paid the Sutton-Millénia Group a commission of $9,749.86 (taxes
included).
[13]
In the deed of sale of
the land, the sellers stated as follows with respect to the goods and services
tax (GST) and the Quebec sales tax (QST):
[Translation]
The
seller stated that the immovable [as rendered in English in An Act
respecting the Québec sales tax] or real property [as rendered in English
in the Excise Tax Act] was not immediately before the signing of this
deed of sale OR immediately before the date of possession by the recipient, a
capital property used primarily in the business carried on by the seller, that
the sale has not been made in the course of a business of the seller, and that
the seller has not filed and does not undertake to file the election in
prescribed form by the authorities concerned, under paragraph 9(b)(ii), Part
I of Schedule V of the Excise Tax Act, and paragraph 102(2)(b)
of An Act respecting the Québec sales tax.
Accordingly,
this sale is exempt under the provisions of the Excise Tax Act and An
Act respecting the Québec sales tax.
Position of the parties
[14]
According to Mr. Beauregard
and Ms. Pelchat, they made significant, serious and ongoing efforts to complete
their project. All those steps were made for the
purpose of earning income from a business or property.
[15]
For the respondent, the
Minister was justified in disallowing the business losses of $11,995 for the 2007
taxation year and of $6,420 for the 2008 taxation year because the appellants did
not carry on a business. the building was never built and no income was ever
generated by appellants’ activities.
Analysis and conclusion
[16]
The term “business” is
defined in subsection 248(1) of the Act as follows:
“business” includes a profession,
calling, trade, manufacture or undertaking of any kind whatever and, except for
the purposes of paragraph 18(2)(c),
section 54.2, subsection 95(1) and paragraph 110.6(14)(f), an adventure or concern
in the nature of trade but does not include an office or employment;
[17]
Basic rules for
computation of the income or loss from a business or property are found in
section 9 of the Act, which reads as follows:
9.(1) Subject to this Part, a taxpayer’s income for a taxation year
from a business or property is the taxpayer’s profit from that business or
property for the year.
(2)
Subject to section 31, a taxpayer’s loss for a taxation year from a business or
property is the amount of the taxpayer’s loss, if any, for the taxation year
from that source computed by applying the provisions of this Act respecting
computation of income from that source with such modifications as the
circumstances require.
(3)
In this Act, “income from a property” does not include any capital gain from
the disposition of that property and “loss from a property” does not include
any capital loss from the disposition of that property.
[18]
The general limitation on
the deductibility of expenses for the purpose of computing the income of a
taxpayer from a business or property is set out in paragraph 18(1)(a) of
the Act 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;
[19]
For section 9 of the
Act to apply, the taxpayer must first show that he or she has a source of either business or property income.
[20]
In Stewart v. Canada,
2002 SCC 46, Justices Iacobucci and Bastarache suggested that the two-stage approach with respect to the source question can
be employed:
50 . . .
(i) Is the activity of the taxpayer
undertaken in pursuit of profit, or is it a personal endeavour?
(ii) If it is not a personal
endeavour, is the source of the income a business or property?
The first stage of the test assesses the general question
of whether or not a source of income exists; the second stage categorizes the
source as either business or property.
[21]
At paragraph 52 of Stewart,
supra, the Court specified that the “pursuit of profit” source test will only require analysis in situations where there is
some personal or hobby element to the activity in question, which is not
the case in these appeals. The appellants’ activities related to the acquisition,
development and sale of the land were undertaken in a
sufficiently commercial manner in pursuit of profit in accordance with objective standards of businesslike
behaviour, for the activities to constitute a source of income for the
purpose of application of the Act. It should be noted here that the appellants
(i) had construction plans prepared for the office building (ii) submitted an application
for a building permit to the municipality concerned (iii) hired a builder and
gave him a $5,000 deposit, (ix) incurred advertising expenses to find tenants; and
(v) had an appraisal of the building to be built prepared to obtain the necessary
funding to pay for the building’s construction costs.
[22]
Based on the
testimonies of Mr. Beauregard and Ms. Pelchat, I do not believe that the sole
purpose of the acquisition of the land was a subsequent sale of the property. In
my view, the appellants truly intended to build and operate an office building.
When the appellants realized they could not find tenants and that, without
tenants, they could not obtain funding for the building’s construction costs, they
had no alternative but to sell the land less than twenty (20) months after having
acquired it. In such a context, it should be considered that the purchase and
subsequent sale of the land amounted at the very least to an adventure or concern in the nature of trade. The lack of financial resources and the
start of an economic recession led the appellants to setting a new intention, that
is, the sale of the land, and abandoning their initial intention.
[23]
According to the appellants’
testimonies, the statement in the deed of sale of the land to the effect that
the sale was exempt pursuant to the provisions of the Excise Tax Act and
the An Act respecting the Québec sales tax was incorrect and resulted
from an error on the part of the notary and real estate agent who performed the
sale. The transaction was taxable and the taxes should have been collected.
[24]
As for the deductibility
of the expenses claimed by the appellants in respect of the 2007 and 2008
taxation years, it should be noted here that the deductibility of the expenses presupposes the existence of a source of income. The
following passage from paragraph 57 of the Supreme Court of Canada decision in Stewart,
supra, is, for present purposes, relevant:
.
. . If the deductibility of a particular expense is
in question, then it is not the existence of a source of income which ought to
be questioned, but the relationship between that expense and the source to which
it is purported to relate. The fact that an expense is found to be a personal
or living expense does not affect the characterization of the source of income
to which the taxpayer attempts to allocate the expense, it simply means that
the expense cannot be attributed to the source of income in question. …
[25]
Of the expenses claimed
by the appellants, who prepared their tax returns themselves, the eligible
deduction for capital expenditures of $5,145 in 2007 should be subtracted as by
the appellants’ own admission it was an error, as should the [Translation] “member fees” of $2,518 in 2007 and $2,150
in 2008 because the appellants were unable to explain the exact nature of that
expense.
[26]
The addition of a
taxable capital gain of $12,651 to each of the appellants’ income for the 2008
taxation year, from the sale of the land, was not challenged by the appellants at
the hearing.
[27]
For these reasons, the appellants’
appeals are allowed and the matter is referred back to the Minister for
reconsideration and reassessment so that
(a) the
amount of deductible expenses for 2007 be decreased by $7,663 and be set at $16,326 in
total, that is, at $8,163 for each of the appellants; and
(b) the amount of deductible
expenses for 2008 be decreased by $2,150 and be set at $10,688 in total, that
is, at $5,344 $ for each of the appellants.
Signed at Ottawa, Canada, this 20th day of September
2013.
“Réal Favreau”
Translation certified true
on this 7th day of November 2013
Daniela Guglietta,
Translator
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