Citation: 2013 TCC 247
Date: 20130807
Docket: 2011-538(IT)I
BETWEEN:
MICHEL BOUCHARD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Masse D.J.
[1]
This is an appeal from
Notices of Reassessment disallowing business losses from a partnership for the
2005, 2006 and 2007 taxation years.
[2]
The Appellant filed income
tax returns for the taxation years 2005, 2006 and 2007 (the “taxation years”).
In these returns, he claimed business losses from a partnership known as Tennis
Mania Limited Partnership (the “partnership”) in the amount of $25,047 for
2005, $20,085 for 2006 and $36,011 for 2007. Initially, these business losses
were allowed by the Canada Revenue Agency (the “CRA”). Following an audit of the
partnership, the CRA issued Notices of Reassessment on May 28, 2009,
disallowing the business losses claimed. The Appellant filed a Notice of
Objection and on November 18, 2010, the CRA confirmed the Reassessments. Hence
the appeal to this Court.
Factual Context
[3]
Eugénie Bouchard,
who is now aged 19, is a tremendously gifted athlete. She started playing
tennis at age five and she has worked very hard to hone her skills. Her hard
work has been rewarded. She has become world renown and world ranked as a
junior tennis player and now as a professional player. She reached the pinnacle
of her junior career in July 2012 when she won the Wimbledon junior girls’
single and doubles titles. She was ranked second in the world in ITF (International Tennis Federation) junior rankings. She has since turned
professional and is now enjoying a promising career. At the end of 2012, she
enjoyed a WTA (Women’s Tennis Association) professional ranking of 140th in the
world. As of the date of this hearing, her ranking had improved to 123rd. This
amazingly talented young woman will no doubt make all of Canada very proud for
years to come as she pursues her professional career. Her father Michel Bouchard,
the Appellant, is definitely Eugénie Bouchard’s biggest fan and her
biggest supporter. He is understandably very proud of her.
[4]
Michel Bouchard noticed that from a very early age Eugénie
had extraordinary talent. He recognized that Eugénie was one of those very rare
players who had the potential to become a successful professional tennis
player. However, it takes a lot of effort and money to develop a young but
talented player into a world ranked professional player. It requires hard work
and dedication on the part of the athlete. It requires many lessons, private
one-on-one coaching, training camps in Florida, travel expenses, tournaments
both in and out of Canada, equipment, fitness trainers and so much more. All of
this is very expensive.
[5]
The Appellant expended a lot of his personal resources in helping Eugénie
realize her potential. From the time Eugénie was five years of age until age
nine he paid for her development out of his own pocket. However, the Appellant
is also an astute business man and he thought of a way how he could best
finance and foster the development of Eugénie’s talents as well as diminish the
costs to himself. He conceived of a business venture whereby he would be able
to attract investors with the promise of sharing Eugénie’s income stream once
she became a professional player. Consequently, he and another individual
founded a partnership called “Tennis Mania LP”. This other individual,
François Gervais, was the parent of another young tennis player,
Béatrice Gervais. The Appellant, Mr. Gervais and MGB Capital Inc.,
the Appellant’s company, entered into a partnership agreement dated
December 8, 2003 (see Exhibit A‑1, Tab 13). The
partnership was registered pursuant to the laws of the province of Québec as a
limited partnership (see Exhibit A‑1, Tab 14). The object of
the partnership as indicated in paragraph four of the partnership agreement
was, “ … la promotion du tennis junior et l’assistance financière auprès de
jeunes athlètes prometteurs.” In other words, the object was to promote
junior tennis and support young promising athletes. At the beginning, there
were only two athletes who were assisted by the partnership:
Eugénie Bouchard and Béatrice Gervais. The partnership stopped funding
Béatrice because she did not have the potential to make it as a professional
player. So then, the only real purpose of the partnership was to finance the
development of Eugénie Bouchard as a professional tennis player. The
contributions to the partnership and the equity in the partnership varied from
year to year depending on the total funds individual partners had contributed.
[6]
According to the
Appellant, the deal was that investors would get a return on their investment
once Eugénie turned professional, which would be several years in the future.
It was understood that, once Eugénie turned pro, she would pay the investors
10% of her tennis earnings up until the time that the investors recouped all of
their investment, plus a 10% per annum return on investment.
[7]
Even though the
purposes of the partnership was to promote junior tennis and financially assist
promising young players, the Appellant candidly admits that the partnership’s
mission was to finance one athlete in particular, his daughter. The Appellant
admits that they were searching for investors for just Eugénie and, for a
while, Béatrice Gervais. If other young players were to be considered,
then the parents of that young player had to find their own investors. As the
Appellant stated, “I’m not going to find investors for everyone else’s
kids.” No other young players were in fact assisted by the partnership.
[8]
The workings of the
venture can be briefly described. The Appellant contributed to the partnership
the amount that was required for his own daughter’s training during any
particular year. For instance, during the 2005 taxation year, the Appellant had
spent $25,000 of his own money to pay for Eugénie’s tennis expenses. On December 6,
2005, the Appellant deposited $25,000 into the partnership bank account and a
cheque in that same amount was immediately issued to him as a reimbursement for
the expenses that he had incurred. The money was in and out of the partnership
bank account practically the same day. It is clear that the money was funnelled
through the partnership bank account in order to create a tax deductible
expense for the Appellant which was equal to the amount that he had actually spent
for his daughter’s tennis expenses that year. This amount would then be claimed
as a partnership business loss for that taxation year in the Appellant’s income
tax return. This resulted in significant tax savings to the Appellant and thus
made it easier for him to finance Eugénie’s burgeoning career. Mr. Gervais would do the same for all expenses related to his
daughter, Béatrice.
[9]
The only other investor
that the partnership has been able to attract is Mr. Jacques Nolin
who has known Michel Bouchard since the 1980’s when they both worked at Wood
Gundy. Mr. Nolin knew this was a risky venture and he would have to wait
several years before realizing a return but he had a great deal of confidence
in Eugénie’s talents, as well as in Mr. Bouchard’s honour and integrity.
He also felt that a return of 10% per annum was worth the risk. In addition, he
was interested in the significant tax advantages that this arrangement
immediately offered. Consequently, he invested into the partnership the sum of
$10,000 for 2006 and $20,000 for 2007. He has not realized any return yet on
his investment but he is hopeful and quite confident that he will as Eugénie’s
professional career takes off.
[10]
The Appellant was
successful in finding some sponsors for Eugénie. Equipment was provided by Head
(see Exhibit A‑1, Tab 9); Adidas agreed to pay her $75,000 for
two years (see Tab 10); and there were also agreements entered into with
2K Sports, Inc. (see Tab 11) and Nike (see Tab 12). The benefits
of these sponsorships went to Eugénie and not to the partnership.
[11]
Other than banking
charges, the partnership did not have any other operating expenses. From the
time of establishing the partnership to the time of the hearing of this trial,
almost ten years, the partnership has not made any return on its investment.
Even though Eugénie has started to earn money as a professional tennis player,
she has yet to pay any amount to the partnership, although her father is quite
confident that she will. The partnership stopped funding tennis activities by
the end of 2008 or the beginning of 2009 since by that time Eugénie was making
enough money to pay her own expenses.
[12]
At the time that the
partnership was established, Eugénie was only nine years of age. There is
simply no way that Eugénie could, at age nine, commit herself legally to share
her future income stream if and when she turned professional. She was a minor.
Eugénie was not a party to the
partnership agreement and at no time did she enter into any legally binding
agreement with her father or the partnership to pay back any money that was
expended on her behalf for her development as a professional tennis player.
Theory of the Appellant
[13]
The
Appellant admits that the
partnership expenses that have been incurred have a significant personal aspect; they were to advance the development of
Eugénie’s career as a tennis player. However, he argues that the fundamental
basis upon which the partnership was established was to finance Eugénie’s
development as a tennis player and also earn a profit. The partners realized
that this was a risky venture but they had the expectation that they would recoup
all of their investment and make a profit of 10% per year on their investment
until such time as they were completely reimbursed. The fact that no revenue
has been earned yet is not determinative since the investors are looking at
future revenues as Eugénie becomes a more seasoned professional and begins to
earn more money. The fact that Eugénie was under no obligation to pay and that
she might refuse to pay anything at all is of no moment since that was a risk
that the investors willingly took when they decided to invest in this scheme.
The primary objective was to invest in a budding tennis star and to earn a
return from her eventual success. While doing so, they simply found a
tax-efficient structure within which to do this.
[14]
The
Appellant therefore prays that his appeal be allowed.
Theory of the Respondent
[15]
The
Respondent submits that the expenses here under consideration were completely
personal in nature since the Appellant’s daughter was the sole beneficiary of
the enterprise. It is also argued that the expenses claimed are not deductible
since the partnership did not have a source of income against which expenses
can be deducted pursuant to the Income Tax Act, R.S.C., 1995, c. 1
(5th supp.) (the “Act”). It is argued that the
Appellant’s actions did not demonstrate a pursuit of profit and were not
carried out in accordance with objective standards of businesslike behaviour.
The goal of the enterprise was to fund the Appellant’s daughter’s development
as a tennis player while at the same time creating a tax deduction for the
Appellant. There was no reasonable expectation of profit. It is argued that
this was not a true partnership since the Appellant was only in this enterprise
to the extent that his daughter could be funded. It is submitted that the relationship
between the partnership and Eugénie Bouchard was more in the nature of a
loan than it was in the nature of a business venture and it was a loan which
could not be legally enforced since there was no legal relationship and no
enforceable contract between Eugénie and the partnership. It is also argued
that there was no search for other talent to make the business grow; the
partnership was focussing only on Eugénie Bouchard, the Appellant’s
daughter.
[16]
The
Respondent therefore submits that the appeal should be dismissed.
Legislative Provisions
[17]
The
relevant provisions of the Act are as follows:
3. Income for taxation year.
The income of a taxpayer for a taxation year for the
purposes of this Part is the taxpayer’s income for the year determined by the
following rules:
(a) determine the
total of all amounts each of which is the taxpayer’s income for the year ...
from a source inside or outside Canada, including, without restricting the
generality of the foregoing, the taxpayer’s income for the year from each …
business …
[…]
(c) determine the amount, if any, by which the total
determined under paragraph (a) … exceeds the total of the deductions
permitted by subdivision e in computing the taxpayer’s income for the year
(except to the extent that those deductions, if any, have been taken into
account in determining the total referred to in paragraph (a)), and
(d) determine the
amount, if any, by which the amount determined under paragraph (c)
exceeds the total of all amounts each of which is the taxpayer’s loss for the
year from … [a] business … ,
9(1) Income. Subject to this Part, a taxpayer’s income for a taxation year
from a business … is the taxpayer’s profit from the business … for the year.
9(2) Loss. Subject to section 31, a
taxpayer’s loss for a taxation year from a business … 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.
18(1) General limitations. In computing the income of a taxpayer from a
business or property no deduction shall be made in respect of
(a) General
limitation - 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;
[…]
(h) Personal and
living expenses - personal
or living expenses of the taxpayer, …
96(1) General rules. Where a taxpayer is a member of a partnership, …
the taxpayer’s taxable income earned in Canada for a taxation year, … shall be
computed as if
(a) the partnership were a separate
person resident in Canada;
(b) the taxation year of the
partnership were its fiscal period;
[...]
(f) the
amount of the income of the partnership for a taxation year from any source or
from sources in a particular place were the income of the taxpayer from that
source or from sources in that particular place, as the case may be, for the
taxation year of the taxpayer in which the partnership's taxation year ends, to
the extent of the taxpayer' share thereof; and
(g) the amount, if any, by which
(i) the loss of the
partnership for a taxation year from any source or sources in a particular
place,
exceeds
(ii) in the case of
a specified member (within the meaning of the definition "specified
member" in subsection 248(1) if that definition were read without
reference to paragraph (b) thereof) of the partnership in the year, the
amount, if any, deducted by the partnership by virtue of section 37 in
calculating its income for the taxation year from that source or sources in the
particular place, as the case may be, and
(iii) in any other case, nil
were the loss of the taxpayer from that source or
from sources in that particular place, as the case may be, for the taxation
year of the taxpayer in which the partnership's taxation year ends, to the
extent of the taxpayer's share thereof.
[Emphasis added]
Analysis
[18]
In the final analysis,
it is clear that the Appellant was the driving force in setting up this
venture; without him, Tennis Mania LP would not exist. His motivation was to
benefit his daughter and to help her realize her potential as a professional
tennis player. It is also clear in my view that the Appellant meant to create a
tax loss that could be deducted from his income thus resulting in significant
financial benefits for the Appellant. As pointed out by the Appellant, a
taxpayer can arrange his affairs in such a way as to minimize the payment of
taxes. Even though a taxpayer enters an arrangement with the principal view of
creating tax deductions, this does not mean that the arrangement was not for
the purposes of earning revenue. If the secondary purpose of the arrangement is
the realization of a profit then the original losses are tax-deductible: see Water's Edge Village Estates
(Phase II) Ltd v Canada, 2002 FCA 291, [2003] 2 FC 25. Indeed, a taxpayer can enter a partnership with the
primary motivation of securing a tax loss but there must at least be an
ancillary intention to carry on business in common with the view to profit: see
Witkin v Canada, [2002] FCJ No. 703 (QL), at paragraph 15
(leave to appeal dismissed, [2002] SCCA No. 294 (QL)). Without such an
intention, the tax losses are not deductible from income. This theme has been
repeated by Justice Lamarre of this Court in Carpentier v Canada,
[2005] TCJ No. 519 (QL), where she stated at paragraph 42:
[42] Further,
where it is established that the sole reason for the creation of a partnership
was to give a partner the benefit of the tax loss, when there was no
contemplation in the parties minds that a profit would be derived from carrying
on the relevant business, the partnership could not in any real sense be said
to have been formed “with a view of profit (see Continental Bank, supra,
at paragraph 43).
[19]
The key issue to be determined in this appeal is whether or
not the partnership was carrying on business with a view to profit. This
requires the Appellant to establish that his predominant intention was to make
a profit from the partnership and that the partnership was carried out in
accordance with objective standards of business like behaviour.
[20]
In the case of Stewart
v Canada, [2002] 2 SCR 645, the Supreme Court of Canada redefined the
test that must be used to determine whether a taxpayer has a business source of
income. The Court was of the view that the “reasonable expectation of profit”,
although a factor to be considered, was no longer the test to be applied. The
Court stated as follows:
48 In
our view, the determination of whether a taxpayer has a source of income, must
be grounded in the words and scheme of the Act.
[…]
50 It
is clear that in order to apply s. 9, the taxpayer must first determine whether
he or she has a source of either business or property income. As has been
pointed out, a commercial activity which falls short of being a business, may
nevertheless be a source of property income. As well, it is clear that some
taxpayer endeavours are neither businesses, nor sources of property income, but
are mere personal activities. As such, the following two-stage approach with
respect to the source question can be employed:
(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.
51 Equating
“source of income” with an activity undertaken “in pursuit of profit” accords
with the traditional common law definition of “business”, i.e., “anything which occupies the time and
attention and labour of a man for the purpose of profit”; Smith, supra, at p. 258; Terminal Dock, supra.
As well, business income is generally distinguished from property income on the
basis that a business requires an additional level of taxpayer activity: see Krishna,
supra, at p. 240. As such, it is logical to conclude that an activity
undertaken in pursuit of profit, regardless of the level of taxpayer activity,
will be either a business or property source of income.
52 The
purpose of this first stage of the test is simply to distinguish between
commercial and personal activities, and, as discussed above, it has been
pointed out that this may well have been the original intention of Dickson J.’s
reference to “reasonable expectation of profit” in Moldowan. Viewed in
this light, the criteria listed by Dickson J. are an attempt to provide an
objective list of factors for determining whether the activity in question is
of a commercial or personal nature. These factors are what Bowman J.T.C.C. has
referred to as “indicia of commerciality” or “badges of trade”: Nichol,
supra, at p. 1218. Thus, where the nature of a taxpayer’s venture
contains elements which suggest that it could be considered a hobby or other
personal pursuit, but the venture is undertaken in a sufficiently commercial
manner, the venture will be considered a source of income for the purposes of
the Act.
53 We
emphasize that this “pursuit of profit” source test will only require analysis
in situations where there is some personal or hobby element to the activity in
question. With respect, in our view, courts have erred in the past in applying
the REOP test to activities such as law practices and restaurants where there
exists no such personal element: … Where the nature of an activity is clearly
commercial, there is no need to analyze the taxpayer’s business decisions. Such
endeavours necessarily involve the pursuit of profit. As such, a source of
income by definition exists, and there is no need to take the inquiry any
further.
54 It
should also be noted that the source of income assessment is not a purely
subjective inquiry. Although in order for an activity to be classified as
commercial in nature, the taxpayer must have the subjective intention to
profit, in addition, as stated in Moldowan, this determination should be
made by looking at a variety of objective factors. Thus, in expanded form, the
first stage of the above test can be restated as follows: “Does the taxpayer
intend to carry on an activity for profit and is there evidence to support that
intention?” This requires the taxpayer to establish that his or her predominant
intention is to make a profit from the activity and that the activity has been
carried out in accordance with objective standards of businesslike behaviour.
55 The
objective factors listed by Dickson J. in Moldowan, at p. 486, were: (1)
the profit and loss experience in past years; (2) the taxpayer’s training; (3)
the taxpayer’s intended course of action; and (4) the capability of the venture
to show a profit. As we conclude below, it is not necessary for the purposes of
this appeal to expand on this list of factors. As such, we decline to do so;
however, we would reiterate Dickson J.’s caution that this list is not intended
to be exhaustive, and that the factors will differ with the nature and extent
of the undertaking. 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.
[…]
60 In
summary, the issue of whether or not a taxpayer has a source of income is to be
determined by looking at the commerciality of the activity in question. Where
the activity contains no personal element and is clearly commercial, no further
inquiry is necessary. Where the activity could be classified as a personal
pursuit, then it must be determined whether or not the activity is being
carried on in a sufficiently commercial manner to constitute a source of
income. […]
[Emphasis added]
[21]
In the case at bar,
having examined the activities of the partnership and also those of the
Appellant within the framework of the partnership, it is obvious that the
Appellant became involved in this venture strictly for personal reasons; the
development of his daughter as a professional tennis player. I conclude that he
was not looking at the partnership as a source of profit but was instead
looking for a means to finance Eugénie’s development as a tennis player, while
at the same time creating a tax advantage in the form of a tax loss for
himself. In so deciding, I have considered the test as set out in Stewart,
supra, as well as the following factors, among others:
a) The objects of the partnership do
not speak of profits. Paragraph 4 of the partnership agreement states that
the activities of the partnership is the promotion of junior tennis and to
provide financial assistance to promising young athletes. The partnership
agreement makes no mention at all of a 10% return on investment. The
partnership declared no revenue at any time during its existence from 2003 up
to the time of the hearing of this appeal, a period of almost ten (10) years.
b) The business losses claimed by the
Appellant were completely personal to him and as such are not deductible
pursuant to paragraph 18(1)(h) of the Act. The partnership was
established to help raise funds to assist the Appellant in the training and
development of Eugénie into a professional player. I find that these personal
expenses were not incurred to earn income from a business.
c) The manner in which the partnership
was operated was not for the purpose of earning income from a business
activity; it was only operated in such a way as to create tax deductions. Had
the Appellant paid these expenses directly, which he did, they would not have
been tax deductible in his hands. Funds were deposited in the partnership bank
account and then immediately taken out as a reimbursement. Flowing the funds
“in and out” from the Appellant through the bank account of the partnership and
then immediately back to the Appellant again cannot convert a non-deductible
expense into a deductible expense.
d) The partnership’s purported source
of income was totally dependant on Eugénie’s good will once she turned
professional and only if she turned professional. Thus, whether viewed subjectively
or objectively, the partnership had no reasonable expectation of profit and had
no realistic source of profit. This, for the following reasons:
i) Eugénie was only 9 years old when
the partnership was formed. She did not have the legal capacity to commit
herself to share her income stream once she turned professional.
ii) Once Eugénie became an adult and
turned professional, there was no way to oblige her to repay the partnership
for the moneys that were expended on her behalf.
iii) Even if Eugénie agrees to share
some of her income stream with the partnership, she is certainly not obliged to
pay all of the money, or any of it. She was not a party to this arrangement and
so she could pay whatever amount she chose. She could change her mind at any
time and stop paying and the partnership would have no legal recourse.
iv) There is nothing to say that
Eugénie would be willing to pay a 10% per annum return on the monies that were
expended for her training; she may very well be of the view that another
percentage would be more appropriate. She may not be willing to pay any
percentage at all.
I am not suggesting for one moment that Eugénie would
be capricious or cavalier in her dealings with her father once she turned pro,
but the reality is that she was not a party to the venture and she cannot
legally be obliged to provide the profits that the partnership was supposedly
looking for – her money is her money and no one else’s. Whether she chooses to
share her money or not is her personal choice and the partnership is powerless
to do anything about it. The partnership had no legal recourse against her if
she refused to share her income stream with the partnership.
e) The partnership had no source of
revenue since any future potential revenues would not be earned by the
partnership but would be earned by Eugénie. Any potential revenues from
competitions and sponsorships would not be revenues for the partnership but
would instead be revenues gained by Eugénie Bouchard in her professional career
as a tennis player.
f) Any equipment, financial support
or winnings received by Eugénie during the taxation years were not reported as
revenue by the partnership.
g) There was no effort made at all to
sign up any other athletes to share their future income stream and to pay a
return of 10%, or any other percentage per annum, on moneys paid into the
partnership. There was no search for other talent even though the purpose of
the partnership was the promotion of junior tennis. This is inconsistent with a
view to earning profits from the promotion of junior tennis.
h) The partnership had no operating
costs other than banking expenses
Conclusion
[22]
In conclusion, I am not
satisfied that the Appellant has established that his predominant intention was
to make a profit from the partnership activities. I find that the predominant
purpose and intention was personal in nature and was clearly in relation to his
daughter. A secondary but equally important purpose was the creation of a tax
loss by using an “in and out” scheme of flowing money through the partnership
bank account. These expenses could not be deducted by the Appellant himself and
using this “in and out” scheme cannot convert non‑deductible personal
expenses into deductible business or partnership expenses. I am not satisfied
that the activity that was being carried out was done so in a sufficiently
commercial manner so as to constitute a source of income. When one looks at the
commerciality of the activity, it is readily apparent that any hope of
recouping investments and making a profit lay far in the future, at least a
decade from the time of establishing the partnership. Any hope of recouping
investments and making a profit was not dependant on the merits of a good
business plan but was instead entirely dependant on the good will and
willingness of Eugénie
Bouchard to voluntarily share the fruits of her hard
earned success with the partnership; something she may not be willing to do,
and something she cannot be forced to do.
[23]
For all of the
foregoing reasons, this appeal is dismissed.
Signed at Kingston, Ontario, this 7th day of August 2013.
"Rommel G. Masse"
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