Heier v. The Queen, 97 DTC 739, [1997] 1 CTC 2471 (TCC)

Beaubier J.T.C.C.: — This matter was heard at Saskatoon, Saskatchewan on October 21 and 22, 1996. The Appellant and her chartered accountant since the assessments in this matter, Audry Kawula, C.A. were the only witnesses. The Appellant has appealed reassessments for her 1989, 1990 and 1991 taxation years.

Two matters were settled by the parties: the Respondent’s counsel acknowledged that there was no series of loans and repayments, but stated that an amount of $3,772.00 was not repaid within 12 months within subsection 15(2). The Appellant conceded interest assessed pursuant to section 80.4.

The hearing concerned business losses claimed by the Appellant respecting Yahweh’s Word Bookstore (the “Bookstore”) at Estevan, Saskatchewan for approximately four months in 1989 (loss $11,257.00), 1990 (loss $31,475.00) and 1991 (loss $21,285.00). According to Exhibit A-l the Bookstore is now called “St. Joseph’s Prayer Centre and Bookstore.”

The Appellant was born in 1936. She graduated from grade 12, immigrated to Canada, took and obtained her certificate in a one year business course in Winnipeg, Manitoba, and moved to Estevan, Saskatchewan. There she worked as a legal secretary and married. She and her husband eventually started a business “Waterflood Service and Sales Ltd.” which has now existed for more than 25 years. She works in its office and has since its beginning. She has also worked as a legal secretary in the Court system in Estevan from time to time.

The Appellant and her husband have 10 children. The Appellant is a faithful Roman Catholic. She frequently attends Roman Catholic conferences and charismatic events. She and her husband have visited many catholic shrines in North America and Europe. In doing so the Appellant acquired a great deal of material - books, pamphlets, magazines and videotapes. This accumulated in their home. The Appellant also spoke to many groups and distributed or sold some of this material.

The Appellant testified in examination-in-chief that, in 1989, her husband stated that there was too much of this material in their home. When dealing with the question of the purpose of starting the Bookstore, the Appellant testified:

Well, my husband said to me there is too much stuff around the house so we needed to do something and he said try to find a room. Phoned a friend who had buildings and so we found a building, the friend said yes, on Main Street and we wanted a building that was easily accessible to the public because by then we realized that we had something here to share with the people and we wanted to set up a business and do it in a legal way to have a business and instead of giving away anything. We felt we had to begin a bookstore and small business and sell it and that’s what we did. We found a building in 1989....

The building was on Estevan’s Main street. It had street access to the public. She leased it free of any charge for rent. She also went to a lawyer and stated that she wanted to open a bookstore. The lawyer warned her not to expect a profit from a bookstore right away. The Appellant testified that she did intend to make a profit. The Appellant went ahead and did all the necessary things with the local authorities, contacted accountants and got help from volunteers. She also hired two employees who were not relatives, one part time and one full time. She opened Yahweh’s Word Bookstore as a sole proprietorship. She opened a separate bank account for the Bookstore and financed it with her own money. The Appellant never took any draw from the Bookstore operation and never hired a relative. A number of people volunteered their time to assist the Bookstore operations. These included her children.

The Bookstore had an official opening in mid-September, 1989. The day before the opening about 60 people attended a “retreat” at the Appellant’s church in respect to the opening. Ten or twelve were at the store when the clergy blessed the store and the Mayor opened it. The store attracted browsers. But sales came from tables of goods that the Appellant set up at religious conferences with the assistance of a nun. The inventory is religious articles that are Christian, but mainly those of the Roman Catholic faith. There are also gift items, but the nature of these was not described.

Schedule A to the Reply describes the Bookstore’s financial history for the years before the Court. It reads as follows:

Schedule "A

	YAHWEHS WORD BOOKSTORE
	1989	1990	1991
	4 months
Sales	$4,424.00	$10,746.00	$13,232.00
Cost of sales	3,720.00	18,866.00	6,569.00
Other income	234.00
Gross Profit	938.00	8,120.00)	6,663.00
Dues and		326.00	246.00
subscriptions
	,353.00	359.00	849.00
Advertising
Bank charges	77.00	74.00	113.00
Building repairs &	103.00	-
Business tax	108.00	427.00	463.00
CCA	196.00	1,391.00	1,329.00
Donations	80.00		-
Employee benefits	108.00	$91.00	951.00
Employee training	130.00
Equipment repairs	403.0
			138.00
& maintenance
Freight	15.00	-
Office supplies	1,497.00	1,163.00	1,199.00
Postage	92.0	-
Telephone	1,484.00	2,244.00	2,029.00
Travel	1,012.00	2,189.00
Uu'ltucs	628 0	2,058.00	1,871.00
Wages	4,909.00	11,680.00	18,426.00
Accounting		$85.00
Insurance		232.00	256.00

Worker's
			__ 1800
	12.195,00	23,355.00	21,948 00
Net Loss	(111-237 00)	(11475 00	SZJLZUJO)

The Appellant obtained mark-up advice from her accountant She testified that he suggested a mark up of 40 per cent. She also said that her staff marked goods up 40 per cent from cost. But the mark ups did not amount to 40 per cent. The average mark-up of goods sold worked out to be about 15 per cent of the cost of the goods. The Appellant did not check on the mark-ups until after the assessments. They were not raised until after the assessments in question. In April 1991, the Appellant states, she pointed out what appeared to be an inventory error in the 1990 inventory to her chartered accountant. Neither the accountant nor the Appellant did anything about this until after the assessments in question.

These failures by the Appellant to check on things or to act to stop the losses in these years permeate the operation of the Bookstore from the beginning. She did not mark goods up further or reduce staff or costs in the store (which was not the source of her sales). Nor did she reduce buying despite poor sales and losses. After the assessments she obtained a new accountant who insisted that she revise her mark ups to raise them to 40 per cent of cost. Apparently she did, but there is still no profit. After the assessments she also began buying shrine goods directly from manufacturers abroad and marked them up substantially.

In Moldowan v. R., (Moldowan v. The Queen) [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213, at page (D.T.C. 5215), Dickson, J. stated:

Although originally disputed, it is now accepted that in order to have a “source of income” the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business: Dorfman v. Minister of National Revenues'll D.T.C. 6131], [1972] C.T.C. 151. See also subsection 139(1) (ae) of the Income Tax Act which includes as “personal and living expenses” and therefore not deductible for tax purposes, the expenses of properties maintained by the taxpayer for his own use and benefit, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit. If the taxpayer in operating his farm is merely indulging in a hobby, with no reasonable expectation of profit, he is disentitled to claim any deduction at all in respect of expenses incurred.

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. 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 taxpayer’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: R. v. Matthews (1974), 28 D.T.C. 6193. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.

The Appellant had no bookstore experience. However she knew the religious material that she purchased and she did have considerable office experience. The Appellant put her own money into it and did not borrow, so there was no interest to pay. There is very little capital cost allowance, but the losses were larger than the gross sales in all of the years in question.

The Bookstore was a start up during the years in question. Therefore the question is whether there was a reasonable expectation of profit.

The Appellant stated that she moved material into the Bookstore to get it out of her house. Respondent’s counsel suggested that after the Bookstore began, the Appellant merely continued doing what she did before - that is she propagated the Roman Catholic faith; she had no intent to make a financial profit. The Appellant states that she did not follow up on the 1990 cost of sales problem which appears to have amounted to about $8,000.00. She left that to the chartered accountant. It is in the Appellant’s favour that where her personal travel coincided with the Bookstore’s travel to purchase goods or sell them, the Appellant never deducted any expense. She paid it personally from her own pocket. On the other hand she does not appear to have taken an active role in attempting to manage the business to make a profit until after the assessments before the Court were made upon her. The Appellant worked 3 or 4 hours a day at Waterflood. Her spare time was given to the Bookstore.

The Appellant was presented with her answers to a questionnaire, Exhibit R-1. Questions 3, 7 and 13 and their answers read as follows:

3) Brief history of your business operations; products handled, size of buildings, assets, inventories, etc.

The products we handle are religious articles such as books, video cassettes audio cassettes, rosaries, scapulars, statues, teaching aids etc., all for the purpose of promoting the Roman Catholic faith. We lease a 1500 ft2 building. Assets are mainly inventories, with other items, such as store fixtures, office equipment, and office furniture.

7) Do you have the necessary knowledge to effectively carry out the business operation with a reasonable expectation of profit? Have you engaged any one to assist you?

The purpose of our bookstore is to promote the Catholic faith. We have the products and services available that explain the genuine teachings of the faith. As far as the business aspects are concerned, there are accounting and legal consultants that are of the faith, that donate time to assist us with business promotions, record keeping, etc. on a regular basis. Their assistance will guide us toward our goals of promoting our faith and maintaining a viable business operation.

13) Are there any unusual circumstances that may have caused the business losses? What will you do in the future to gain a profit?

The nature of our business has left a small market to capture. However, the future looks very bright as we have been taking our store to various Catholic conferences and sales have been strong at these conferences. The future will allow us to continue promoting our bookstore through these conferences as well as introducing our promotion of the faith into the schools.

These answers were made on the authority of the Appellant and after she had discussed the questions and proposed answers with the person who typed it. The answers clearly reflect her purposes and intentions before she saw her new lawyer and accountant about the assessments. She intended to propagate the Roman Catholic and Christian faith through the Bookstore. That was its purpose from the beginning. She had no intent to profit at the beginning or during the years in question. Any intention to make a profit came after the assessments. When asked if she stated to Revenue Canada officials that she thought her losses were a “tithe”, she stated that this statement was taken out of context: but she did not deny this or elaborate on the context.

Having seen and heard the Appellant, and on the evidence before the Court, it appears that the Appellant thought that if she had a store premises, she could deduct the expenses she was incurring for her material as business losses. Her initial. purpose in starting the Bookstore was not to make a profit; it was to propagate the faith. This failure to have a purpose to profit permeates the start-up. It is clear that the Appellant did not from the very beginning and during the years in question:

1. Reduce staff or close the Main Street store although it was immediately apparent that it was not a successful sales outlet or an aid to sales. The sales arose out of the conferences.

2. Do her mark ups, check on them or raise them.

3. Manage her bookstore operation, whether as to the store premises, the mark ups, inventory, personnel, or in any other way to obtain a profit.

The Court is of the view that in fact during the years in question, the Appellant did regard the losses as a tithe to be paid to propagate the faith. She is a sincere and religious lady. It is apparent that after the assessments she contacted Audry Kawula, C.A., who instructed her clearly and properly on the way to conduct a business and the concept of intention to profit. What she did to conduct a business after that does not relate to the years in question since it represents a change from her previous conduct based upon proper advice from her new accountant and, at about the same time, her new lawyer.

The Appellant did not operate the Bookstore during the years in question to obtain a profit and there was no profit. But it is for the Court to decide if, in any event, there was a reasonable expectation of profit from an objective point of view.

It is hard to find a reasonable expectation of profit if the Appellant does not set out to make a profit. The Appellant had no bookstore operation experience; she did not have a plan except “to promote the Catholic faith”. From the beginning she did not manage this small Bookstore to make a profit while doing so. This failure from the beginning to institute businesslike operations or to make corrections or check on things in order to make a profit during the years before the Court, coupled with her failure to have a profit- making purpose, make it unreasonable to expect a profit from the Bookstore. The Appellant’s counsel argued that the Appellant was engaged in an expanding market. The only evidence as to this is general public knowledge, and it may very well be true. However, the Appellant’s actions or purpose to develop that market profitably for her Bookstore are absent in this case.

On the evidence before the Court there was no reasonable expectation of profit from the operation of the Bookstore during the years 1989, 1990 and 1991. The mark ups were insufficient. The Appellant was advised to mark up 40 per cent from the beginning. She did not do that in fact. Nor did she check to see that it was done during 1989, 1990 or 1991. She did not adjust her operation in any way to correct the losses and turn the business around during the years in question. It is clear to the Court that she did nothing to turn it into a profitable operation until after the assessments. Without an increased mark-up from the beginning, some change of goods, and a reduction in the operating costs at the store in Estevan, no profit could reasonably be expected. The Appellant took none of these steps during the years in question. The failures continued for 1989, 1990 and 1991. The obvious explanation for these failures is the strong personal interest of the Appellant to propagate the Roman Catholic and the Christian faith. That was the purpose the Appellant had in setting up and operating the Bookstore during 1989, 1990 and 1991.

It is clear that the changes that occurred after 1991 were prompted by Revenue Canada’s actions respecting the years 1989, 1990 and 1991. The Appellant’s accountant and lawyer dealt with these changes in Court. It may be that, subsequently, despite the continuing losses, the Appellant began a business. However, it is not for this Court to make that determination.

The appeals of the reassessments disallowing the business losses in 1989, 1990 and 1991 are dismissed.

These matters are referred to the Minister of National Revenue for reconsideration and reassessment as to the settlement by the parties of the assessment respecting the alleged loans and repayments.

There is no order respecting costs.

Appeals dismissed.