Bowman, T.C.J.:— This is an appeal from a determination of a loss claimed by the appellant in its 1985 taxation year. The loss arises from the appellant's deduction in computing its income of $17,180.14 consisting of $15,000 described as “territorial fees" and $2,180.14 office and travel expenses. The appellant claims that these expenses are deductible as ordinary business expenses in computing its income as loss. The appellant had no revenues in that year and has had no revenues or expenses since that time.
The respondent denies the deduction on three alternative bases:
(a) that they were not laid out for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(1)(a) of the Income Tax Act.
(b) that they were personal or living expenses within the meaning of paragraph 18(1)(h) within the extended meaning given that term in section 248;
(c) that they were in any event payments on account of capital within the meaning of paragraph 18(1)(b).
The only witness called was Barry English, a director and shareholder of the appellant. His evidence was that in December 1984 he had completed 24 years with the Canadian Armed Forces. During that service he earned a degree in business administration. He saw an advertisement in the newspaper placed by WGL Productions International Ltd. ("WGL") inviting applicants to participate in the business of putting on seminars on a wide variety of topics in which it was felt there would be a public interest. In January 1985, he met with a representative of WGL in Toronto and was evidently persuaded that there was potential to earn a good profit from organizing seminars and decided to participate in the program. He entered into an agreement in his own name with WGL on January 21, 1985 and paid WGL $15,000 which was described as a "once only management fee”.
The arrangement was that WGL would provide to "the Associate” (Mr. English) "a minimum of fifty-two tested seminars, workshops or events in every twelve (12) month period complete with a qualified speaker and with any advance material required for promotional purposes . . .”. The Associate was required to accept and to present not less than 45 such seminars, workshops or events within that 12-month period. His exclusive territory was said to be Ottawa.
On February 11, 1985, the appellant was incorporated. Although Mr. English testified on cross-examination that the agreement with WGL was assigned to the appellant, no other evidence of such assignment was adduced and it was not established that the appellant paid anything, either by way of cash or the issuance of shares or debt.
Mr. English testified that his understanding was that WGL had about eight or nine associates and that there was an administration manager, a research consultant, and an operations manager. He also testified that he set up an office in Ottawa. Later that spring he attended a seminar in Toronto and found that the attendance was so low that the project was uneconomic. In April 1985, he received a letter from WGL stating in essence that the project as conceived was not successful and offering to “buy back your territory for your original investment”, or, alternatively to establish a new business arrangement with WGL's sister company of selling franchises.
Mr. English not surprisingly asked for his money back but notwithstanding repeated efforts—including considering legal action—nothing was forthcoming and by June WGL's telephone was disconnected. It soon became obvious that the project was dead and the money that Mr. English had invested was irrevocably lost.
I feel great sympathy for Mr. English. He resigned his commission in the armed forces and invested his savings in an ill-conceived scheme propounded by persons who were at best hopelessly incompetent visionaries and. at worst fly-by-night charlatans. The Dun & Bradstreet report on WGL indicated that it was incorporated in September 1984, and commenced business in October 1984. There was no evidence that this company, of doubtful provenance and more doubtful prospects, had the facilities, experience, expertise, staff or capital to carry out any of its obligations under the agreement. By June 1985, it disappeared, leaving Mr. English and the other associates empty-handed.
Mr. English has been victimized and although he is to some extent the author of his own misfortunes in failing to examine WGL more critically, he is entitled to know why his company is not entitled to deduct the amounts that he spent.
I accept that the money was spent in good faith in the hope and expectation that it would result in a profitable enterprise. The fact that Mr. English made an error in judgment and that his expectations turned out to be wrong is not, in itself, a reason for denying deductibility. As Cattanach, J. observed in a somewhat different context in Gabco Ltd. v. M.N.R., [1968] C.T.C. 313; 68 D.T.C. 5210 it is not the place of this Court or the Minister of National Revenue, after the event, to second-guess a taxpayer's business acumen. At page 323 (D.T.C. 5216) Cattanach, J. said:
It is not a question of the Minister or this Court substituting its judgment for what is a reasonable amount to pay, but rather a case of the Minister or the Court coming to the conclusion that no reasonable business man would have contracted to pay su such an amount having only the business consideration of the appellant in mind. . . .
Risky enterprises sometimes succeed and become taxable. Where they fail it would be unconscionable for the entrepreneur to be penalized because the Minister, basing his decision on the wisdom of hindsight, concludes that the project was not commercially viable.
I do not accept the respondent's contention that there was no reasonable expectation of profit. In Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5215, a decision of the Supreme Court of Canada dealing with section 31 of the Income Tax Act, Dixon, J. (as he then was) stated at page 313 (D.T.C. 5215):
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: The Queen v. Matthews, [1974] C.T.C. 230; 74 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.
Here Mr. English left his position with the armed forces, invested $15,000 and believed in good faith and not unreasonably that the presentation of seminars could be profitable. Such enterprises frequently are highly profitable if the organization under whose aegis the seminars are conducted has adequate staff and expertise. He did not foresee that WGL was as shaky as it turned out to be.
It should be noted that the statutory provision upon which the Minister relies, paragraph 18(1)(h), has in any event no application. The expression "personal or living expense" in ordinary parlance does not encompass a payment made in the context of a commercial relationship of the type involved here. Section 248 extends the meaning of the expression to include, inter alia: (a) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit
The words following "marriage or adoption" are clearly conjunctive with the preceding words. Accordingly, the statutory underpinning of the Minister's position on this point is lacking.
It was contended as well that the money was not laid out for the purpose of gaining or producing income from a business or property. In light of the disposition that I propose to make of this case I shall not embark on a lengthy consideration of the application of paragraph 18(1)(a) of the Act to these facts. It is clear that the purpose of Mr. English in spending the money was to earn income from the proposed business of presenting seminars. As Abbott, J. stated in British Columbia Electric Railway v. M.N.R., [1958] C.T.C. 21; 58 D.T.C. 1022 most expenditures made in a business context are made for the purpose of gaining or producing income and are therefore not prohibited by paragraph 12(1)(a), the predecessor of paragraph 18(1)(a). Once that determination is made, it is necessary to consider whether they are prohibited by paragraph 18(1)(b) (formerly 12(1)(b)) as being on capital account. At pages 31-32 (D.T.C. 1027) Abbott, J. (with whom the Chief Justice and Fauteux, J. agreed) stated:
Since the main purpose of every business undertaking is presumably to make a profit, any expenditure made "for the purpose of gaining or producing income" comes within the terms of Section 12(1)(a) whether it be classified as an income expense or as a Capital outlay.
Once it is determined that a particular expenditure is one made for the purpose of gaining or producing income, in order to compute income tax liability it must next be ascertained whether such disbursement is an income expense or a capital outlay. The principle underlying such a distinction is, of course, that since for tax purposes income is determined on an annual basis, an income expense is one incurred to earn the income of the particular year in which it is made and should be allowed as a deduction from gross income in that year. Most capital outlays on the other hand may be amortized or written off over a period of years depending upon whether or not the asset in respect of which the outlay is made is one coming within the capital cost allowance regulations made under Section 11 (1)(a) of the Income Tax Act.
What is fatal to the appellant's case is that at the time Mr. English spent the money neither the appellant nor the business existed. Although the appellant was incorporated on February 11, 1985, the business never did come into existence. No evidence was adduced of any formal assignment to the appellant of the contract or, if there was one, of any payment to Mr. English of any amount by the appellant for such assignment. Nor was it suggested that the payment was made as agent for the as yet non-existent appellant, assuming such a relationship can exist as a matter of law. Even if that evidentiary hurdle had been surmounted I would still have been obliged to dismiss the appeal on the basis that the payment was essentially anterior to the commencement of a business which, as it turned out, never did commence. (See Daley v.
[1950] C.T.C. 254; 50 D.T.C. 877.) At best such a payment would have been on capital account.
One final point merits comment. This Court does not exist for the purpose of determining academic questions. The loss claimed by the appellant consisted solely of the payments in issue here. Had I concluded that the expenses had been incurred by the appellant and that they were deductible as business expenses, this would have given rise to a non-capital loss that could be carried forward under section 111 of the Act as a deduction in computing taxable income for later years. The appellant has had no income and no business since that time and no intention or prospect of having any. I asked the appellant's representative what purpose was served in appealing from the Minister's determination of loss if the loss was expected to expire in any event by the end of 1992. I was informed that the purpose of the appeal was to enable Mr. English, if he wound the appellant up, to claim an allowable business investment loss under section 38 of the Act. Mr. English’s entitlement to such a loss should be determined on assessing his return for the year in which the claim is made or, if denied, on an appeal by him. I do not think that it is appropriate, in an appeal by this appellant, to have a question determined that is of interest only to Mr. English and that will never have any practical application to the appellant. It might be noted, however, that for Mr. English to claim an allowable business investment loss on the disposition of the shares of the appellant, it is necessary for the appellant to be a “small business corporation". This in turn requires that the appellant had carried on an active business. My conclusion, on the evidence before the Court, was that the appellant carried on no business.
The appeal is dismissed.
Appeal dismissed.