Baxter v. The Queen, docket 97-396-IT-I (Informal Procedure)

Date: 19980416

Docket: 97-396-IT-I

BETWEEN:

MICHAEL BAXTER,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

(Delivered orally from the Bench at Winnipeg, Manitoba, on March 5, 1998)

Beaubier, J.T.C.C.

[1] This appeal pursuant to the informal procedure was heard at Winnipeg, Manitoba on March 3, 1998. The Appellant was the only witness. The Appellant was reassessed for his 1993, 1994 and 1995 taxation years, and his losses from the operation of the Lyric Theatre in Beausejour, Manitoba, were disallowed in the following amounts; 1993, $20,367.10; 1994, $22,587.65; 1995, $21,328.00. He appealed.

[2] The Minister’s assumptions in the reply read,

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

(a) the facts hereinbefore admitted;

(b) at all material times, the Appellant was a school principal employed on a full-time basis;

(c) the Appellant owned the building known as Beausejour Lyric Theatre since 1985;

(d) the said building is very old and at all material times no capital additions were made by the Appellant;

(e) a portion of the said building was used, at all material times, as the principal residence of the Appellant;

(f) the remaining portion of the said building was used by the Appellant to operate a theatre;

(g) certain areas of the theatre portion of the building were, on occasion, rented by the Appellant;

(h) the renting referred to in subparagraph (g) above was incidental to the theatre operation of the Appellant and was reported as such in his returns filed with the Minister;

(ii) the theatre was operated on a part-time basis;

(j) the theater was located in a rural area and the population in that area was not large enough to support a theatre;

(k) at all material times, the theatre operated at approximately 6% capacity and was very much below the break-even capacity of about 25%;

(l) at all material times, the Appellant had no business plan with respect to his theatre operation;

(m) since the commencement of his theatre operation, the Appellant never reported any profit and the magnitude of the losses incurred was such that a profitable theatre operation was not reasonable, particularly when the gross revenue in proportion to the expenses was not significant; listed below is the history of business losses from his theatre operation reported by the Appellant for the taxation years from 1985 to 1992:

1985 $ 12,952.00

1986 28,172.00

1987 39,747.00

1988 20,772.00

1989 10,434.00

1990 16,378.00

1991 19,338.00

1992 17,132.00

$164,925.00

(n) the said building was principally an investment in a principal residence with the intention of selling it on retirement at a profit;

(o) profit-motivation was not the reason for the Appellant’s theatre operation;

(p) the Appellant had no reasonable expectation of profit from the operation of a theatre during the 1993, 1994 and 1995 taxation years;

(p) the Appellant’s expenses relating to the portion of his residence used for the theatre operation were personal or living expenses of the Appellant.

[3] Paragraphs (g) and (h) are incorrect. Four apartment suites and two business premises were rented in the theatre building. Paragraph (l) is incorrect in that the Appellant had no written plan. His unwritten plan was to do the best he could in a population area of 5,000 people, 35 miles from Winnipeg. Paragraph (n) is incorrect in that while the Appellant resided in the theatre building that was not the building’s principal use. The remaining paragraphs are correct.

[4] In William Moldowan v. The Queen, in 77 DTC, 5213, at 5215 and 5216, Dickson J. said,

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), 28 DTC 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.

[5] Using these criteria, the Appellant’s past experience is of losses. He stated that he showed a profit in 1997, but that financial statement was not presented for cross-examination. He has operated the theatre since 1983. His intended course of action is to continue as before. On the evidence the venture has, and in the years in question had, no capability to show a profit after charging capital cost allowance.

[6] The Appellant and the Lyric Theatre benefit the community of Beausejour, but they do not meet the tests established by the appellate courts in Canada to constitute a business. There is and was no reasonable expectation of profit there.

[7] The appeal is dismissed.

Signed at Ottawa, Canada

"D.W. Beaubier"

J.T.C.C.