Gill v. The Queen, docket 96-359-IT-I (Informal Procedure)

Date: 19980316

Dockets: 96-359-IT-I; 96-513-IT-I

BETWEEN:

GURDIP GILL,

TEJINDER GILL,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

GARON, J.T.C.C.

[1] These are appeals by each Appellant from income tax assessments for the taxation years 1990, 1991 and 1992.

[2] By his reassessments in respect of the Appellant Gurdip Gill, the Minister of National Revenue disallowed expenses in the amounts of $14,918.55, $22,962.55 and $17,519.00 for the 1990, 1991 and 1992 taxation years.

[3] By his reassessments with respect to the Appellant Tejinder Gill, the Minister of National Revenue has disallowed the expenses in the amounts of $21,913.74, $41,232.69 and $3,574.00 for the 1990, 1991 and 1992 taxation years.

[4] The Respondent has acknowledged that the reassessments in respect of the 1990 taxation year for both Appellants have been issued beyond the normal reassessment period. There has been no suggestion that the Appellants have made any misrepresentation within the purview of subparagraph 152(4)(a)(i) of the Income Tax Act and since no waiver has been filed by either Appellant within the normal reassessment period it follows that the reassessments for the 1990 taxation year are statute-barred.

[5] Before reviewing the evidence, I should point out at the outset that it was common ground that the expenses relating to the real estate optioning business were allowed by the Minister of National Revenue. Also, there was no dispute about the expenses incurred in connection with the property management business conducted by the Appellant Gurdip Gill. As for the Appellant Tejinder Gill, she was involved in two types of operation: the greeting card operation and the real estate computer program. The apportionment of the expenses, in connection with the greeting card operation and the real estate computer program, between the two Appellants was not an issue.

[6] The Appellant Gurdip Gill acted for himself and for his wife, the Appellant Tejinder Gill, at the hearing of these appeals. The Appellant Gurdip Gill was the only witness at the hearing of these appeals.

[7] Paragraph 5 of the Reply to the Notice of Appeal, in the case of the Appellant Gurdip Gill, sets out the assumptions on which the Minister of National Revenue relied in assessing this Appellant for the 1990, 1991 and 1992 taxation years. The said paragraph 5 reads as follows:

5. In so reassessing the Appellant, the Minister made the following assumptions of fact:

(a) The amounts of the insurance recoveries from the Insurance Corporation of British Columbia are non-taxable amounts and are not to be included in the calculation of taxation income;

(b) the Appellant was involved in property management from 1989 to 1991 and was involved in trading in real estate options in 1990 through 1993 taxation years and the expenses pertaining to this business have been are allowed as follows:

1990 $ 17,782.00

1991 $ 16,910.00

1992 $ 12,489.00

(c) the Minister disallowed expenditures claimed with respect to the following activities:

1. Greeting Card Vending Kiosks;

2. Real Estate Computer Program;

3. Real Estate Video; and

4. a Video Wall

(collectively ‘the Activities’).

(d) before starting the Activities the Appellant prepared no business plans to determine if any of the Activities would be profitable;

(e) the Activities were undercapitalized; and

(f) at no time did the Appellant commence a business in respect to any of the Activities.

[8] The Appellant Gurdip Gill admitted, in the course of his deposition, the allegations in subparagraphs a), b) and c) and denied the remaining subparagraphs d), e) and f) of paragraph 5.

[9] In addition to denying the allegation that he had “prepared no business plans to determine if any of the activities would be profitable”, the Appellant Gurdip Gill produced a document entitled “Personal Touch Greeting Card System Business Plan”. “The Executive Summary” of this business plan reads in part as follows:

The company plans to enter the personalized greeting card business. The greeting card business is a $4.5 billion industry in the USA, in fact the industry rivals the movie industry in dollar volume. It’s estimated the size of the greeting card market is over $450 million in Canada.

The company plans to enter this business not as a traditional card shop but it plans to introduce a software program that will allow users to personalize messages on greeting cards through the use of computers and laser printers. The company plans to take advantage of the growing trend towards personalization. Furthermore, the company plans to take advantage of very health profit margin for personalized cards. In fact the cards are sold for twice the price of traditional cards.

The Product

The user will find the product at his local grocery store. It will consist of a computer monitor, 286 computer, laser printer and pre-printed blank cards (with out print-just image). The user will select a card from a rack where the cards are displayed. A sample card will illustrate how a user may personalize the card. Upon selection of a card the user will move to the computer system and input a three letter code from the back of the card. The system will then display the card selected in color. If the image on screen matches the image of the card in the users hand the program proceeds. The user will then be instructed in how to fill in his personal message on the front of the card, middle and back. Once the user has completed personalizing his message he will instructed on how to print out the card. When the card is printed out the user will take the card to the cashier and pay for the card. The entire process can take anywhere from 5 minutes to 15 minutes.

The cost of the system, that is the computer, printer, cards and display is estimated at about $6500 per system.

The comments in the Executive Summary of the aforementioned business plan under the headings “Industry”, “Competition”, “Marketing”, “Risks” and “Financial Plan” are also of interest. However, I do not find it necessary to reproduce these excerpts from this Executive Summary.

[10] The Appellant Gurdip Gill explained that he had no business plans for the activities other than what he called the “greeting card business” which was the main activity in which both Appellants were involved during the years in issue.

[11] With respect to the allegation that “the activities were undercapitalized” the Appellant Gurdip Gill mentioned that his wife “used to earn about $40,000 a year” and that he had a salary of about $20,000. In addition, he said that the Appellants had savings between $10,000 to $25,000 at the relevant times.

[12] The assumptions of fact relied on by the Minister of National Revenue in the appeal of Tejinder Gill were set out in paragraph 5 of the Reply to the Notice of Appeal which reads thus:

5. In so assessing the Appellant, the Minister made the following assumptions of fact:

(a) the Appellant was involved in a real estate option business in 1990, 1991 and 1992 and all expenses pertaining to that business, as set out in paragraph 4, have been allowed;

(b) all other expenses claimed by the Appellant in excess of the amounts set out in paragraph 4 (the ‘Excess Expenses’) were in respect of a greeting card activity and a real estate computer program activity;

(c) at no time did the Appellant commence a greeting card business;

(d) at no time did the Appellant commence a business with respect to a real estate computer program; and

(e) the Excess Expenses disallowed by the Minister were not incurred for the purpose of gaining or producing income from a business or property, but were personal or living expenses of the Appellant.

[13] The Appellant Gurdip Gill admitted subparagraphs a) and b) of paragraph 5 of the Reply to the Notice of Appeal in the case involving the Appellant Tejinder Gill and denied the allegations referred to in subparagraphs c), d) and e) of the said paragraph 5.

[14] The greeting card business was the main focus of the activities of both Appellants. The Appellant Gurdip Gill explained that in 1989 he and his wife were newly married. His wife had a good job as a registered nurse in an hospital. As for the Appellant Gurdip Gill, he had a bachelor’s degree in accounting and finance. He had run a fitness centre for two years; the centre had 18 employees. His father provided capital and the Appellant Gurdip Gill operated the centre. That business was sold in 1986 or thereabouts. At that point, the Appellant Gurdip Gill wanted to establish a business where his wife, the Appellant Tejinder Gill, could be involved.

[15] The Appellant Gurdip Gill mentioned that he started being active in the greeting card operation in June 1990. He has continued to work on that program, trying to refine it until the present time. He spent over $78,000 developing the greeting card operation from 1990 to 1992 without generating any revenue. He stated that both he and his wife, the Appellant Tejinder Gill, were carrying on this operation.

[16] The Appellant submitted three newspaper articles relating to greeting cards. One of these articles shows that card shops could make substantial profit. A brochure from Hallmark Cards Inc. was produced. The Appellant thought that he could duplicate the concept for a cheaper price. In June 1990, he started to lay out the program. He prepared a business plan, as indicated earlier. Under the rubric “Product Information”, at page 6 of the Business Plan, detailed explanations are given about the workings of the user friendly program. For our purposes, the information under the heading “The Product” appearing in the Executive Summary and reproduced earlier is sufficient.

[17] Two confidentiality agreements, one with Protocall Computer Services and the other with Jo Blackmore, President of Creative Connections Ltd., were tendered in evidence. In addition to these agreements and the business plan, the Appellants hired consultants to write software and create a card line. The Appellant Gurdip Gill drew the Court’s attention to the terms of payment of the agreement between himself and Jo Blackmore. He stated that the payment of $75 per hour was a substantial amount in 1991. He also referred to the agreement with Protocall Computer Services where the price stipulated was in the amount of $3,500. The Appellant Gurdip Gill underscored the point that these contracts were with third party individuals, strangers, and that he and his wife did not personally benefit from such payments.

[18] In connection with the process of creating a traditional card, the Appellant Gurdip Gill explained that an artist must first design an image, the artist will often then sell the image to a publisher, who retains the services of a distributor who places the cards in retail stores. The store in exchange for placing the cards, will receive 50 per cent of the retail price. Finally, the customers buy the card. The Appellant asserted that a small shop, in connection with this process, sells about 4,500 cards per month. Seventy percent of the sales of a card shop are for greeting cards.

[19] The Appellants were not the only ones using a personalized computer in producing greeting card messages. Excerpts from an article in the Financial Post issue dated September 24, 1991 reporting in part the comments of the Chairman of Hallmark Cards Inc., Irvine Hockaday, are hereafter reproduced:

Typically, it takes 18 to 20 months for a card to go from concept to store. It should be four to six. Hockaday said, noting that the company delivered yellow ribbons and other patriotic items to retailers within 14 days during the Persian Gulf war.

And Hallmark wants to enhance the marketing of its products.

The company is testing its ‘Personalize it!’collection of 200 cards, invitations and announcements in about 400 Gold Crown Hallmark stores in the western U.S. and Pittsburgh.

Customers use a computer screen to create personalized messages. The products are printed at the checkout counter with the help of a salesperson.

Taking this concept a step further, Hallmark envisions a customer visiting a kiosk, where a computer would help him find and review the inventory of cards on an appropriate subject. ‘This would give us a whole new channel’ for marketing, Hockaday said.

Perhaps Hallmark could use cable television to sell cards, he said. A customer could order cards shown on screen, requesting that his name be imprinted, then pick up the cards at a Hallmark shop.

[20] The Appellant Gurdip Gill “tried to find names of artists in the yellow pages and prepared a contact list and phones”. He “tried to call the art schools, Emily Carr and Commercial Artists, trying to get artists and people to create cards for the business”. He added that upon the advice of his consultant, Mr. Jo Blackmore on the artistic side, the best thing to do was for artists to submit work to him and if he liked the work he could purchase it on a royalty basis. A number of consulting and service agreements entered into with artists were filed.

[21] In order to speed up the process, he went to New York for the National Stationary Show which is the largest show of greeting cards in North America. A list of greeting card representatives was filed with the Court. The Appellant Gurdip Gill indicated that the National Stationary Show was very important and he said that he learned a lot from the show. At the show, he did not see anyone doing personalized cards. He did not even see a Hallmark Cards Inc. system even though he knew that firm had one. Being at the show, he was able to see how other companies were selling their products and how they were marketing them. One company was using a computer to print out material which included a “family history of surnames”. A brochure on Flash system was produced. This system was sold for about $7,000; with the accessories the system costs about $10,000 U.S. The firm InScribe, Inc. made a similar product.

[22] The Appellant Gurdip Gill made the point that he had to be aware of what is happening in the industry and how it may affect their undertaking. What could affect what the Appellants were doing was another type of card produced by Hallmark Cards Inc. called “Talking Cards”. He said “I am in the business of personalizing a card and this is personalizing”. This was a potential threat to the Appellants’ business.

[23] The Appellant Gurdip Gill explained in detail what he did in order to carry out this venture. He entered into contracts with the artists, developed software, kept up with the industry or the competition, visited Hallmark Cards Inc. stores, determined how many cards they were selling as well as their methods about separating cards, getting bar codes on the cards approved, looking at displays, etc. He also had correspondence, which was filed with the Court, with Columbia Overseas Marketing Company. In support of his testimony, the Appellant Gurdip Gill submitted his journal for the period 1990-1991 describing his activities and containing other information relative to the greeting card operation.

[24] Reference was also made to the inventory of the greeting card operation. In a document prepared by the Appellant Gurdip Gill, the matter of inventory is commented upon as follows:

...

4) Inventory:

There did not exist inventory for personalized cards we could license we had to create our own. The basic problem was what came first the chicken or the egg. We needed a large inventory for stores to care our kiosk with program developed but the cost to create our own card was very expensive and we could only move as fast as our cashflow which was limited.

Today we have focused on instead of creating our own design try to license other artist to place their design on the kiosk for a rental income.

In cross-examination, the Appellant Gurdip Gill added concerning the subject matter of inventory that he started off with an inventory of 12 cards; some time later he produced 48 cards.

[25] The Appellant Gurdip Gill was concerned about how he would market the greeting cards. He wanted to target grocery stores. He explained the program to firms like Safeway. He was told by such firms that they had contracts with greeting card companies. They declined to do business with him.

[26] Then, he went to New York in order to ascertain how the firms there were marketing the cards. They were selling to investors. He then hired a firm by the name of LaBonté & Co. as part of the Appellants’ efforts to sell these cards. He also thought he “needed an accountant, a C.A. to give investors confidence that it’s a sound idea”. In this regard, two letters from LaBonté & Co. were tendered in evidence.

[27] The Appellant stressed that the amounts in question, the deduction of which was claimed by the Appellants, were not for personal or living expenses. They were for artists, software programmers, display suites, color separations. Some expenses were card development expenses, defined by the Appellant as expenses to create the greeting cards. The Appellants had to abandon the greeting card operation in 1992. The Appellant Gurdip Gill was mainly in charge of this venture but his wife was also involved to some extent.

[28] The Appellant Gurdip Gill then went on to explain why he abandoned the venture. He stated that in mid-1992 after he had incurred “the majority of the costs” in connection with his project, Carlton Cards, a very large U.S. company, came up with a similar concept which they called “CreataCard”. In this respect, the Appellant Gurdip Gill referred to two articles; one of these articles reads in part as follows:

CARLTON CARDS PERSONALIZED CARD SYSTEM

Carlton Cards Limited recently introduced its innovative ‘CreataCard’ system with a celebrity contest held at Toronto’s Eaton Centre which launched a weekend of CreataCard sales in support of Easter Seals.

Available exclusively in Canada through Carlton, CreataCard is the industry’s first self-contained system that enables consumers to design, personalize and print their own one-of-a-kind greeting cards.

Resembling an automated banking machine, consumers use a video touch-screen to choose from over 1,000 different traditional, contemporary and offbeat designs, with a vast number of personalization options.

[29] The following extract from his testimony shows how the Appellant Gurdip Gill reacted to this development:[1]

So here we have another very large company getting in the business. At this point I said, holy mackerel, my concept that I had of having the cards on a display, getting them blank, putting them in there, is obsolete. Because here now you can create your cards just automatically. You don’t have to print the card, separate the cards, do any of that stuff. And, you know, here’s a company that they think they’re just going to do 25 to 30 million, and they’re -- to the cost of these kiosks is, for those 2,000 kiosks, is about 25 to $30 million. It’s not a small investment for them. So obviously they have done their test marketing, they’ve done their thing, they know that people are going to buy this product, and they’re shipping the same thing out.

So at that point I’m -- that’s it. I mean, you know, the only thing I have to do is now I have to redo what I’m doing to change with what they’re doing.

[30] In cross-examination, the Appellant stated that his venture by the name Touch-for-a-Card was not the continuation of the original greeting card operation, which became obsolete in 1992. He indicated that it was a computerized card. It was a kiosk program; however, this program no longer used pre-made cards where the message is printed on. One can print the whole card. Over the period 1990 to 1995, the Appellants did not put any kiosks in the stores, nor was any revenue generated during that period. It would have cost the Appellants about $6,400 per greeting card machine.

[31] The Appellant Gurdip Gill also testified that, in connection with the concept Touch-for-a-Card, the user had to select a pre-printed card through the printer. He referred to the fact that Hallmark Cards Inc. and Carlton Cards had essentially sewn up the market. Thus, it was difficult to find locations. The Appellant then explained what they were to attempt to do at that point:[2]

... what I’m trying to say there is if it’s too expensive for you to get the cards -- okay, to create a traditional card is very expensive. You have to create the image, get it separated, print out at least 2,000 cards, give it to a distributor, they have to go take the physical card and do it. So for you to introduce just one card, it would just anywhere between 25 and $100 in the traditional way.

So instead of him paying $2,500, we could go to the artist -- there’s thousands -- there’s a large number of card companies. If they paid us -- they already have the card created, they just don’t want to pay for the printing and doing it, then we could put it on -- let’s say we charge them $12 for the rent on this unit for a year, it would be a lot cheaper than him have to print it out and do it. It might be a new way for him to market it.

The Appellants purchased only one kiosk which did not make it into the malls.

[32] In his testimony, the Appellant Gurdip Gill summarized his attitude towards the greeting cards venture in these terms:[3]

THE WITNESS: In summary, Your Honour, I’d like to just say that I tried to conduct the business in an organized manner. I did a business plan, I hired outside consultants -- Jo Blackmore and Andy Axelrod, Protocol Computer -- entered into contracts with artists, programmers, consultants. I tried to follow, I tried to keep up with the industry, up to date. I went to National Stationery Shows, I contacted greeting card reps, I hired accountants to help me find investors.

I did not personally benefit from these expenses. I can’t drive the software program. I can’t eat the greeting cards. I’m even saying to Justice, look, even the expenses, like car -- you can go through the expenses if you want. Like cars, you could say, okay, they’re personal. I even grant you -- let’s say they are personal, right? I don’t agree because I needed this stuff. Take those out and just do the direct expenses where I do not benefit. I’m talking to outside people, which is, you know, the cheques are all there, all the documentation is there. That’s all I’m asking.

Appellant's position

[33] The Appellant stressed to the Court that he did not incur these expenses for the purpose of reducing his taxes. These expenses were not personal or living expenses as alleged on behalf of the Respondent.

[34] The Appellant Gurdip Gill argued that significant activity was undertaken and continuous effort was made to develop the greeting card operation in particular.

[35] With respect to the issue as to whether the greeting card business had commenced, the Appellant felt that the operation was done in an organized manner. He had a business plan. He hired outside people. He emphasized that he really hoped to make a profit from these activities. He carried out the normal activities that he thought constituted running a greeting card business.

The Respondent's position

[36] Counsel for the Respondent relied in particular on the decision of the Federal Court of Appeal in the case of Firestone v. The Queen,[4]for its observations on certain general principles. From that decision in the Firestone case, Counsel for the Respondent proceeded to analyze more particularly three subsequent decisions of this Court: Bancroft v. M.N.R.,[5]Gartry v. The Queen,[6]and finally Samson et Frères Ltée v. The Queen.[7]

[37] Counsel for the Respondent went on to compare the situation in the present case with that considered in each of the above-mentioned cases. He argued that there was not proper capitalization in the Appellant’s greeting card business and from this concluded that the Appellant would fail under the test in the Bancroft and Firestone decisions. He also contended that we do not have a situation similar to the Gartry decision where but for the happening of a serious third party event or an act of God, the business would be a going concern. Reference was also made to the unreported decision dated August 21, 1997 of Judge Taylor of this Court in the case of Alan C.G. Cunningham and The Queen. On the basis of the foregoing, he therefore concluded that the Appellants are not entitled to the deduction of the losses sustained in the three years in issue.

Analysis

[38] The central issue in the present case is whether the Appellant is entitled to the deduction of expenses made or incurred in connection with the greeting card operation. This issue in turn could be narrowed down to whether the Appellant, in carrying on this operation, had commenced a business.

[39] In considering this question it seems useful to begin with a study of the decision of the Federal Court of Appeal in the case Firestone v. The Queen, 87 DTC 5237. This was a case where the taxpayer, an individual, had a business which consisted of acquiring manufacturing businesses which were in financial difficulties and making them profitable by providing guidance and direction. In computing his income for the 1969 to 1972 taxation years, the taxpayer claimed the costs of investigating opportunities in those cases where no acquisition was made, and in other cases the expenses for supervising the various business entities. Justice MacGuigan, speaking for the Court, said this at page 5240:

Despite this climate of uncertainty as to the exact test, there has nevertheless been general agreement that an expenditure for the acquisition or creation of a business entity is on capital account.

At page 5244, the learned Justice added the following:

There are, evidently, three distinct situations rather than just two. At one extreme there is the cost of acquiring or creating a capital asset, which is always a capital expenditure. At the other extreme there is the cost of current repair or maintenance, which is always a running expense. But in between there is the cost of improving a capital asset by adding to it or modifying it, which may well be a capital expenditure, but which must be characterized as one or the other on the particular facts of each case, especially — though I think not exclusively — when there has been (as in the case at bar) a change of ownership.

[40] In the Bancroft case, the relevant facts are well summarized in the head-note:

The taxpayer in 1980 acquired property and spent considerable sums of money in his attempt to set up a tourist resort in Quebec. He incurred financial difficulties, declared bankruptcy and never completed his tourist resort. He sought to deduct business expenses for the years 1982, 1983 and 1984, but the Minister disallowed the deductions because there was at no time a reasonable expectation of profit from the taxpayer’s operation. The taxpayer appealed to the Tax Court of Canada, arguing that he intended to carry on a viable business and he had a reasonable expectation it would be profitable. Therefore, he argued that the expenses he incurred should have been deductible.

Judge Lamarre Proulx of this Court commented as follows at page 155:

On the evidence that was before me, I can only conclude that the Appellant’s activities do not meet the threshold required for him to be considered as ‘carrying on a business’. Put differently the Appellant never passed the stage of capital expenditure. The walls and foundations were there, but there was nothing which resembled a tourist resort. There was no kitchen, no washrooms. The inside was never finished. There had not been any training of personnel, needless to say no hiring, no promotion, no advertising. The Appellant, during all the years under appeal, was quite far from the operational phase of his plan.

[41] In the Gartry v. The Queen, 94 DTC 1947, Judge Bowman of this Court found in favour of the taxpayer and decided that the expenses incurred by the taxpayer were current expenses. At page 1949, Judge Bowman made these following observations:

There was also some suggestion that the business may not have commenced when the expenses were incurred and that, if there was no business in existence when the money was spent, it could not have been laid out for the purpose of gaining or producing income from a business within paragraph 18(1)(a). Even if the premise were correct I doubt that the conclusion follows. I do not however think that the premise is correct. In determining when a business has commenced, it is not realistic to fix the time either at the moment when money starts being earned from the trading or manufacturing operation or the provision of services or, at the other extreme, when the intention to start the business is first formed. Each case turns on its own facts, but where a taxpayer has taken significant and essential steps that are necessary to the carrying on of the business it is fair to conclude that the business has started. That is certainly the case here. The appellant had borrowed money, agreed to buy the boat, arranged for a crew, obtained the necessary licences, arranged with a substantial number of owners of boats with ‘G’ licences to utilize his services when the boat became available, arranged and paid for modifications to be made to the boat and placed insurance. In my view the business had been commenced and was well underway when the expenses in question were incurred. Interpretation bulletins are of course not the law and they should be referred to with some caution. However the observations in Interpretation Bulletin IT-364 as to when a business commences make eminently good sense both as a matter of law and as a matter of business reality. The appellant has met the criteria set out in that bulletin. Accordingly, even if the costs of modifying the vessel were on capital account the other running expenses, such as accounting, legal, office expenses, travel and insurance would be deductible. The interest expense, as noted above, is deductible under paragraph 20(1)(c).

[42] In the case Samson et Frères Ltée v The Queen, 97 DTC 642, Judge Dussault found that none of the activities relating to the efforts being made to set up the new business were, by themselves, capable of generating income. Thus, the taxpayer’s claim for current expenses was denied. At page 644, Judge Dussault commented as follows:

[Translation]

I find that all the steps taken to purchase lands, buildings and equipment in various locations were merely preliminary and intended to bring together the basic elements or structure of the new business, which structure moreover was never concretely put into place and always remained at the planning stage, the materialization of that plan being contingent upon obtaining outside financing. To the extent that the very structure of the business the appellant wished to operate was never put into place, it is hard to see how the expenses relating to preliminary efforts to establish a business that does not exist — which efforts did not go beyond the planning stage — can be claimed to be deductible.

And at 645:

[Translation]

It seems clear to me from that decision that, for a business to exist and to have commenced, one must have gone beyond the stage of merely intending to commence it. A plan to do so, even a clearly-stated one, is in my view merely the expression of that intention and must be taken further. The essential elements relating to the very structure of the business, that is the necessary financing, assets and labour, must have been sought out and brought together before it can be stated that the business exists and that it has commenced. I will add that the decision to commence the business, as it may be detected from ‘significant’ or ‘essential’ steps taken by the taxpayer with a view to operating the business, is an important indicator that the business has commenced. That, in my view, is the meaning of the decision by Judge Bowman of this Court in Gartry, supra. It is indeed fairly difficult to conceive that a business has commenced before a firm decision has been made to that effect and before the essential elements relating to the very structure of such a business have been brought together.

[43] Like Judge Bowman in the Gartry case referred to earlier, I find the observations in Interpretation Bulletin IT-364 dated March, 1977, entitled “Commencement of Business Operations” to be quite useful. I am referring in particular to the following excerpts:

2. ... Generally speaking, it is the Department’s view that a business commences whenever some significant activity is undertaken that is a regular part of the income-earning process in that type of business or is an essential preliminary to normal operations. In order that there be a finding that a business has commenced, it is necessary that there be a fairly specific concept of the type of activity to be carried on and a sufficient organizational structure assembled to undertake at least the essential preliminaries. ... Where an activity consists merely of a review of various business possibilities in the expectation or hope that information will be obtained to justify going into a business of some kind, such an activity does not represent the commencement of a business. A business would be viewed as being merely contemplated for the future if no serious or reasonably continuous efforts are being made to begin normal business operations. ...

3. ... Any positive and continuous steps taken to introduce a particular product to an intended market are activities of an operating nature even though they precede the creation of the sales organization of the business.

[44] I am now required to apply the foregoing principles to the facts of the present case.

[45] First, I do not doubt that the Appellant’s intention was to eventually earn a profit from these various activities. However, this is not the point at issue. The point at issue is whether a business had commenced.

[46] It is also clear from the case law that a taxpayer has to do more than simply form an intention to start a business. As mentioned by Judge Bowman in the Gartry case, the taxpayer has to take “significant and essential steps that are necessary to the carrying on of a business” before it can be concluded that a business had started.

[47] In the present case, the evidence establishes that the Appellant prepared a business plan, hired consultants, entered into contracts with artists to design the greeting card computer program, retained the services of a firm of accountants and had an inventory, albeit modest. The Appellant, in his testimony, made reference to the fact that once he had the system up and running, he could either produce more kiosks which the business would continue to own and which would be placed in stores, malls or alternatively, he had the option of producing fully completed kiosks and selling them to an interested third party.

[48] The Appellant’s venture was well enough funded to construct a prototype of the greeting card kiosks. If, at that time, the Appellant had been able to find purchasers for his kiosks and signed contracts to that effect, the Appellant would have been generating revenue from the greeting card venture. I find that the greeting card went beyond the conceptual stage and into the operational stage.

[49] I do not accept the Respondent’s contention that the greeting card operation was underfunded from the start and that consequently no business ever commenced.

[50] To adopt the words of the above Interpretation Bulletin, the Appellants in the years in issue developed a “fairly specific concept of the type of activity to be carried on” in connection with the greeting card operation. On the whole of the evidence, to paraphrase some of the observations found in the paragraph numbered 3 of the Interpretation Bulletin referred to earlier, the Appellants took a great number of “positive and continuous steps” to introduce their greeting card product to an intended market.

[51] I shall now advert to the real estate software activity and the real estate video and video wall venture.

[52] Regarding the real estate software, the Appellant admitted that he did not complete a business plan nor did he approach the Vancouver Real Estate Board to see if there was interest in purchasing the program he wanted to develop. This program was never completed. It is abundantly clear that the real estate software business has never commenced.

[53] With respect to the real estate video and video wall ventures, the Appellant Gurdip Gill testified that he did not spend a lot of time or money on these ventures. The evidence clearly shows that the Appellant Gurdip Gill did not take the significant and essential steps that are necessary to the carrying on of this business.

[54] Since, as explained at the beginning of these Reasons, the reassessments in respect of both Appellants for the 1990 taxation year are statute-barred the reassessments must be vacated. The appeals are therefore allowed in respect of such reassessments.

[55] I have therefore come to the conclusion that it can be said that the Appellants had commenced business in the years in issue in respect of the greeting card operation. To that extent, the appeals from the reassessments for the 1991 and 1992 taxation years must be allowed. The reassessments for the 1991 and 1992 taxation years must be referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellants are entitled to the deduction of the expenses made or incurred in these two years in respect of the greeting card operation. In all other respects, the reassessments for the 1991 and 1992 taxation years in respect of both Appellants are confirmed.

[56] The Appellants are entitled to any disbursements as were essential for the conduct of these appeals, as provided by subsection 12(3) of the Tax Court of Canada Rules (Informal Procedure).

Signed at Ottawa, Canada, this 16th day of March 1998.

"Alban Garon"

J.T.C.C.

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