Date: 19980218
Docket: 97-1589-IT-I
BETWEEN:
BRYAN SOTHERAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Rowe, D.J.T.C.C.
[1]
The appellant appeals from assessments of income tax for his
1992, 1993 and 1994 taxation years. In computing income for those
years, the appellant deducted the amounts of $13,652, $9,542 and
$4,700 as business losses incurred as a result of operating a
fishing charter enterprise. The Minister of National Revenue (the
"Minister") disallowed the losses, as claimed, on the
basis the appellant did not have a reasonable expectation of
profit from the activity and also decided any expenses incurred
were personal or living expenses.
[2]
The appellant testified he resides in Maple Ridge, British
Columbia and works as a truck driver. He stated he began his
fishing charter business in 1991, operating on the west side of
Vancouver Island, on the basis of offering one to three-day trips
designed for the specific needs of clients. He had experience,
for one year, as a commercial fisherman and also operated, as
skipper, a 52-foot boat out of Granville Island in Vancouver
which took people on cruises around the local waters. The boat
had a capacity of 30 passengers. In addition, he had been
sportfishing for 25 years near Vancouver or in areas off
Vancouver Island and was well experienced in various aspects of
fishing, boathandling and dealing with people in the context of
operating a tourism business. He stated his plan was to develop
the business by relying on word-of-mouth advertising and on
repeat customers so that he could quit his truck-driving job and
then operate the charter business full time. During the years
from 1991-1995, he worked full time for Canada Safeway - on the
Lower Mainland and in other parts of interior
British Columbia - driving an 18-wheel tractor/trailer unit
- until he accepted a buy-out offer, following which he began
working as a driver/trainer for another company. The appellant
explained that, leading up to the change of management and
re-structuring at Canada Safeway, he worked a lot of overtime as
it was apparent there was more money to be made driving truck
than in taking out fishing charters. He identified a Schedule of
Disallowed Expenses together with a Schedule of Non-Capital
Losses Disallowed - Exhibit A-1 - prepared by his Chartered
Accountant, Barry Ward. During the years under appeal, the
appellant stated he lived in Maple Ridge.When people booked a
charter with him, he would hook up his trailer to his truck and
haul the boat to Sooke - on Vancouver Island - or to another
Island location. During the summer months, he would leave the
boat in Victoria and return it to Maple Ridge at the end of the
season. He stated he found clients for the charters through
friends, business contacts and acquaintances. He did not maintain
any log of time spent on the charter business. In 1992, he was
able to take 10 weeks holiday and used some of that time to
operate the charter business. He stated he ceased operations
following reassessment by the Minister, the result of which was
to disallow his losses.
[3]
In cross-examination, the appellant stated he is 43 years old,
married, with one 6- year old boy. While living in Maple Ridge,
he would drive truck to various points in British Columbia and
worked between 40-60 hours per week for three years. On
occasion, he would have to stay overnight at a destination. He
also assisted his wife in operating a childcare business. He
stated his parents, brother and sister live in Victoria. The trip
from Maple Ridge to the ferry terminal at Tsawwassen would take
one hour. Then, the ferry ride to Vancouver Island took one hour
and thirty-five minutes after which he would drive to the fishing
site. In total, it would often take eight hours from the time he
left home until he arrived at the charter destination. After
arrival, depending on the type of charter, he would attend to
preparation of the boat or to provisioning, as some people wanted
a complete service. He did not advertise his business but relied
on contacts. The Georgia Strait is not known for
"world-class" salmon unlike the west side of Vancouver
Island which has big fish and cleaner water. The appellant
explained he used a one-half ton truck to haul the trailer and
boat. The ferry fares for truck and trailer were between $75-$85
- one-way - but it was less expensive when he was able to leave
the boat in Victoria for the summer and merely pay the fare for
the truck. The appellant identified his 1992 tax return - Exhibit
R-1. He agreed the total Capital Cost Allowance (CCA) in relation
to the boat and truck amounted to more than $4,600. His income
that year from the charter business was in the sum of $2,525. The
appellant's 1993 tax return was filed as Exhibit R-2. During
that year, his revenue was $4,825 and his expenses were $14,367.
The appellant's 1994 tax return - Exhibit R-3 - showed
revenue in the sum of $5,330 and expenses in the amount of
$10,030 - including $4,562 in CCA - leading to a loss of $4,700.
One item - insurance and permits - cost $1,905. During the years
under appeal, the appellant stated he assisted his wife in a
day-care business which they operated as 50-50 partners. He often
started driving truck at 5:00 a.m. and would finish by
2:30 p.m. so as to be available to assist in the day-care.
He identified a letter - Exhibit R-4 - dated June 5, 1996 he had
received from R.K. Bidlake, an auditor at Revenue Canada. Mr.
Ward replied on July 3, 1996 (Exhibit R-5). The appellant stated
that other than a "shakedown cruise" at the beginning
of each fishing season he did not fish in waters near Vancouver.
The only other use of the boat was in Alouette Lake - a
freshwater lake - into which he put the boat to flush out salt
accumulated during a fishing season. The appellant agreed that,
in 1992, he took out a total of six customers on charters on the
following days: June 28, July 19, August 25, 26, 27 and 30. On
the June 28 trip, he earned $375. The July 19 charter produced
$450 in revenue and the trips during the week at the end of
August produced gross revenue in the sum of $1,500 but he brought
along another boat and rotated the clients between it and his
regular boat. In 1993, the appellant agreed he had seven clients
in total which had been taken out on trips on the following days:
June 5 and 6, June 25 and 26, July 16-19, July 23-26, and August
6 and 7. The charters were to Sooke, Bamfield and Tahsis, all on
the west coast of Vancouver Island. On occasion, he would pay a
facility to provide accommodation for his guests and included
that expense as a disbursement in the invoice submitted to them
as part of the calculation of the total cost of the charters. He
operated from June to August - a period of 12 weeks - and most of
the fishing trips were on Fridays, weekends, or Mondays or on
other days during which he was able to take time off from work. A
trip to Bamfield lasted two or three days. The appellant stated
he loved to fish - as a hobby - but used a 16-foot boat, with
oars, and drifted on rivers. The boat used for charters was not
taken on his personal fishing trips. One repeat client during the
three years under appeal was Brad Tate, his cousin. The appellant
stated it was necessary to purchase life jackets, fishing gear
and safety equipment to be carried on the boat. He stated he was
aware he had fixed costs and needed to increase revenue but he
was working a lot of overtime for Canada Safeway and receiving
more income from his high hourly wage than could be generated
from the fishing business. Currently, the appellant is seven
years from retirement and is aware he cannot operate the charter
business full time unless he relocates to Vancouver Island.
Because holiday entitlement at Safeway was based on seniority, he
was not able to obtain enough time off during summer and had to
use up the majority of his holiday time in February. The
appellant stated he did not think he had encountered any unusual
expenses in operating the charter business during the years under
appeal.
[4]
Robert Bidlake testified he has been employed for 26 years by
Revenue Canada, the last 12 of which he has worked as an
auditor. He performed an audit on the appellant's charter
activity from the perspective of determining whether or not the
appellant had a reasonable expectation of profit and also
reviewed material pertaining to expenses claimed. This process
does not involve visiting the appellant or attending at his place
of business. Bidlake referred to his handwritten notes made
during the course of the audit - Exhibit R-6 - and identified a
letter - Exhibit R-7 - dated August 2, 1996 he had sent to
the appellant following completion of the audit. Bidlake stated
that of the $4,825 gross revenue from the fishing charters in
1993, the sum of $1,284 was attributable to reimbursement for
accommodation paid by the appellant for guests. In 1994, $400 of
the revenue - out of a total of $5,330 - was attributable to
repayment for accommodation costs. He determined these amounts by
looking at receipt books provided by the appellant. Referring to
his working notes for the 1992 taxation year - included in
Exhibit R-6 - Bidlake stated he discovered
receipts in the sum of $4,173.67 pertaining to items which were
capital in nature such as navigation equipment, fishing reels,
depth sounder, and similar products. He also did not agree with
the appellant's contention the truck had been used 20% for
business as a perusal of receipts indicated locations of fuel
purchases were for personal use and, as a result, set the level
of personal use at 90%. As well, he was not able to verify
interest charges and decided 50% of the amount claimed was
appropriate. In addition, the appellant had claimed - as business
expense - personal items such as a swimsuit, shorts, shirts, and
pullovers. Bidlake stated the time of purchase - between December
and April - indicated they were not made for business reasons and
he also disallowed certain travel costs on the ferry as the trips
were made during winter months and included family members of the
appellant. Bidlake stated he undertook the same sort of analysis
with respect to the 1993 and 1994 taxation years and then
concluded that, although there were various expenses claimed
which would be subject to disallowance for various reasons, there
was no reasonable expectation of profit, at all, from the charter
activity. All of the revenue was from six or seven customers and
there had been no method of advertising to attract a larger
client base.
[5]
In cross-examination, Bidlake stated that he is aware some
employees at Revenue Canada may send out a questionnaire of the
type shown to him by the agent for the appellant and filed as
Exhibit A-2 but he did not request the appellant to complete such
a document. Bidlake stated he assessed the appellant's
personal use of the boat at 50% on the basis there had been no
log maintained of the time spent on charters and did not discuss
the matter with the appellant prior to completing the audit.
[6]
The agent for the appellant submitted the appellant had the right
to develop the business and that it was not reasonable to expect
profitability during this period but that, overall, it was a
viable enterprise.
[7]
Counsel for the respondent submitted the jurisprudence supported
the position taken by the Minister.
[8]
In Tonn et al. v. The Queen, 96 DTC 6001, the Federal
Court of Appeal examined the concept of reasonable expectation of
profit as it has evolved over the years since the judgment of the
Supreme Court of Canada in Moldowan v. The Queen
[1978] 1 S.C.R. 480. In the case of Tonn, supra,
Linden, J.A., writing for the Court, undertook an analysis of the
case law and at p. 6009 stated:
"A closer look at this jurisprudence will illustrate that
this is the approach now taken in most of the cases. The cases in
which the "reasonable expectation of profit" test is
employed can be placed in two groups. One group is comprised of
the cases where the impugned activity has a strong personal
element. These are the personal benefit and hobby type cases
where a taxpayer has invested money into an activity from which
that taxpayer derives personal satisfaction or psychological
benefit. Such activities have included horse farms, Hawaii and
Florida condominium rentals, ski chalet rentals, yacht
operations, dog kennel operations, and so forth. Though these
activities may in some ways be operated as businesses, the cases
have generally found the main goal to be personal. Any desire for
profit in such contexts is no more than a "pious wish"
or "fanciful dream". It is only a secondary motive for
having set out on the venture. What is really going on here is
that the taxpayer is seeking a tax subsidy by deducting the cost
of what, in reality, is a personal expenditure."
[9]
In the recent decision of the Federal Court of Appeal in The
Attorney General of Canada v. Mastri et al., 97
DTC 5420 Robertson, J.A., writing for the Court, dealt with the
issue of whether or not there had been a misapprehension by the
Tax Court of the true import of Tonn, supra. At p. 5423,
Robertson, J.A. stated:
"First, it was decided in Moldowan that in order
to have a source of income a taxpayer must have a reasonable
expectation of profit. Second, "whether a taxpayer has a
reasonable expectation of profit is an objective determination to
be made from all of the facts" (supra at 485-86). If
as a matter of fact a taxpayer is found not to have a reasonable
expectation of profit then there is no source of income and,
therefore, no basis upon which the taxpayer is able to calculate
a rental loss. There is no doubt that,
post-Moldowan, this Court has followed and applied
that decision : see Landry v. Canada, 94 DTC 6624;
Poetker v. Canada, 95 DTC 5614; and Hugill v.
Canada, 95 DTC 5311. The only remaining issue is whether
Tonn departs from that jurisprudence by postulating that
the reasonable expectation of profit test remains irrelevant to
the question of deductibility of losses until such time as it can
be established that the case involves an inappropriate deduction
of tax, the presence of a strong personal element or suspicious
circumstances. There are two passages in Tonn which are
cited in support of that proposition of law and are worthy of
reproduction (supra at 6009 and 6013):
The Moldowan test, thereofre is a useful tool by which
the tax-inappropriateness of an activity may be reasonably
inferred when other, more direct forms of evidence are lacking.
Consequently, when the circumstances do not admit of any
suspicion that a business loss was made for a personal or
non-business motive, the test should be applied sparingly
and with a latitude favouring the taxpayer, whose business
judgment may have been less than competent.
...
...I otherwise agree that the Moldowan test should be
applied sparingly where a taxpayer's "business
judgment" is involved, where no personal element is in
evidence, and where the extent of the deductions claimed are not
on their face questionable. However, where circumstances suggest
that a personal or other-than-business motivation
existed, or where the expectation of profit was so unreasonable
as to raise a suspicion, the taxpayer will be called upon to
justify objectively that the operation was in fact a business.
Suspîcious circumstances, therefore, will more often lead
to closer scrutiny than those that are in no way suspect.
In my respectful view, neither of the above passages support
the legal proposition espoused by both the Minister and the
taxpayers. It is simply unreasonable to posit that the Court
intended to establish a rule of law to the effect that, even
though there was no reasonable expectation of profit, losses are
deductible from other income sources unless, for example, the
income earning activity involved a personal element. The
reference to the Moldowan test being applied
"sparingly" is not intended as a rule of law, but as a
common-sense guideline for the judges of the Tax Court. In other
words, the term "sparingly" was meant to convey the
understanding that in cases, for example, where there is no
personal element the judge should apply the reasonable
expectation of profit test less assiduously than he or she might
do if such a factor were present. It is in this sense that the
Court in Tonn cautioned against
"second-guessing" the business decisions of taxpayers.
Lest there be any doubt on this point, one need go no further
than the analysis pursued by the Court in Tonn.
In Tonn, the Court clearly held that no personal
advantage had accrued to the taxpayer who was seeking to deduct
rental losses from his other sources of income. Nonetheless, the
Court continued to pursue the deductibility of losses issue by
applying the factors set out in Moldowan when assessing
whether there was a reasonable expectation of profit. The
Court's summary, provided at 6015, lays to rest any doubt
as to what was decided in Tonn:
My disposition of this case is therefore as follows. The Tax
Court Judge erred in principle as well as in his application of
the reasonable expectation of profit test, as it is now
understood. He did not consider all of the factors he should have
considered, nor did he assess the context fully. The evidence
clearly showed that the taxpayers engaged themselves in a
business enterprise and their expectations of profit were not
unreasonable in the circumstances. A small rental business was
launched without the aid of sophisticated market analysis at a
time when the rental market looked promising. Soon after, as a
result of unforeseen circumstances, it became precarious. No
personal benefit accrued to the taxpayers by the rental
arrangements. The property was not a vacation site. The house was
not used to give free or subsidized housing to relatives or
friends. They made an honest error in judgment and lost money
instead of earning it. It is not for the Department (or the
Court) to penalize them for this, using the reasonable
expectation of the profit test, without giving the enterprise a
reasonable length of time to prove itself capable of yielding
profits.
In summary, the decision of this Court in Tonn does not
purport to alter the law as stated in Moldowan.
Tonn simply affirms the common-sense understanding that it
is not the place of the courts to second-guess the business
acumen of a taxpayer whose commercial venture turns out to be
less profitable than anticipated. Accordingly, the Tax Court
Judge erred in his understanding and application of Tonn.
The same holds true in regard to the following Tax Court cases
which reveal a misunderstanding of the true import of
Tonn: Howard v. Canada, [1997] T.C.J. No. 69 (QL);
and Rossi v. Canada, [1996] T.C.J. No. 1632 (QL). By
comparison, other Tax Court cases confirm my opinion as to what
was decided in Tonn; see Joudrey v. Canada, [1997]
T.C.J. No. 74 (QL); Stacey v. Canada, [1997] T.C.J.
No. 117 (QL); Riddell v. Canada, 97 DTC 51;
Schimmens v. Canada, [1996] T.C.J. No. 539 (QL);
Urquhart v. Canada, [1996] T.C.J. No. 208 (QL); and
Wallace v. Canada, [1996] T.C.J. No. 583 (QL).
Before concluding, I wish to register my respectful
disagreement with the finding made below that no "personal
element" exists in the circumstances of this case. On the
contrary, the evidence clearly shows that the Mastris entered
into an agreement to buy the townhouse with the intention of
occupying it themselves and that, roughly a year after purchase,
they actually used the home as their principal residence. In my
opinion, one can scarcely speak of the absence of a personal
element in this situation - particularly since there is no
evidence indicating that, at the time the taxpayers agreed to
purchase the property for $159,000, consideration was given to
whether the townhouse could be rented profitably."
[10] On the
evidence, it is apparent the appellant was attempting to prepare
for a business which he could operate, part-time during the
summer, after his retirement and which would be contingent on
moving his residence and family to Vancouver Island. During
the years under appeal, the appellant was not only working full
time but was putting in overtime so that he worked as much as
60 hours per week. He did so because his rate of pay was
such he could not afford to lose income while taking out any
customers on a charter. In addition, he was a 50-50 partner with
his wife, and actively worked in, a day-care business. He lived
in Maple Ridge - on the Mainland - and it made no business sense
at all to haul a boat, on a trailer, for eight hours only to
produce two or, at best, three days revenue ranging between
$1,200 and $1,500. The travel costs alone - even without hauling
the trailer across on the ferry on each trip - were $250 or $300.
The appellant still had to pick up the trailer and boat in
Victoria and tow it up Island to the fishing site where he had
other costs, including moorage. After three years, he still had
only seven clients and they were a close-knit group composed
of family, friends, and business acquaintances. There was a
personal element in the sense the appellant's business
venture was little more than a mechanism for sharing the cost of
summer fishing trips with friends and providing him with an
opportunity to visit his family in Victoria where he was able to
store his trailer for the short time he was actually using the
boat to generate revenue. This aspect was also borne out by the
review of receipts which indicated the appellant's attitude
was that a wide array of expenses could be charged against the
purported business when they were clearly expenses - often out of
season - of a personal nature. In effect, the appellant was
operating the fishing charter activity in the sense of taking a
dry run or "shakedown cruise" in preparation for his
retirement which was - at the time - more than 10 years in the
future. As structured, and in view of his choice to devote his
time and energy to full-time employment and to the day-care
business, it is clear the fishing operation was only in the
experimental stage and, with low priority assigned to it, was not
ready to produce sufficient revenue so as to have a reasonable
chance to turn a profit. The Minister was quite correct in
disallowing the claimed losses on the basis there was never any
reasonable expectation of profit during the years under
appeal.
[11] The
appeal is hereby dismissed.
Signed at Vancouver, British Columbia, this 18th day of
February 1998.
"D.W. Rowe"
D.J.T.C.C.
COURT FILE
NO.:
97-1589(IT)I
STYLE OF
CAUSE:
Bryan Sotheran and H.M.Q.
PLACE OF
HEARING:
Vancouver, British Columbia
DATE OF
HEARING:
January 6, 1998
REASONS FOR JUDGMENT BY:
the Honourable Deputy Judge D.W. Rowe
DATE OF
JUDGMENT:
February 18, 1998
APPEARANCES:
Agent for the
Appellant:
B. Ward
Counsel for the
Respondent:
A. Rachert
COUNSEL OF RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
George Thomson
Deputy Attorney General of Canada
Ottawa, Canada
97-1589(IT)I
BETWEEN:
BRYAN SOTHERAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on January 6, 1998, at Vancouver,
British Columbia, by
the Honourable Deputy Judge D.W. Rowe
Appearances
Agent for the Appellant:
B.
Ward
Counsel for the
Respondent:
A. Rachert
JUDGMENT
The
appeal from the assessments made under the Income Tax Act
for the 1992, 1993 and 1994 taxation years is dismissed in
accordance with the attached Reasons for Judgment.
Signed at Vancouver, British Columbia, this 18th day of
February 1998.
D.J.T.C.C.
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