Citation: 2011 TCC 418
Date: 20110926
Docket: 2010-2666(GST)I
BETWEEN:
WAYNE BOWDEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Favreau J.
[1]
The Appellant has appealed
by way of the informal procedure the reassessments dated January 21, 2010 made
under Part IX of the Excise Tax Act, R.S.C. 1985, c. E-15, as
amended (the "Act"), for the period from January 1, 2009 to
September 30, 2009 (the "period").
[2]
The Appellant claimed
input tax credits ("ITCs") and reported sales and other revenue, goods
and services tax ("GST") collectible and net tax for the period as
follows:
|
Period
|
Sales / Other Revenue
|
GST Collectible
|
ITCs Claimed
|
Net Tax
|
|
01-01-2009 to 31-03-2009
|
|
|
$508.34
|
$-508.34
|
|
01-04-2009 to 30-06-2009
|
$200.00
|
$10.00
|
$214.40
|
$-204.40
|
|
01-07-2009 to 30-09-2009
|
$100.00
|
$5.00
|
$325.84
|
$-320.84
|
[3]
By a reassessment dated
January 21, 2010, the Minister of National Revenue (the "Minister")
disallowed the ITCs claimed by the Appellant for the quarterly periods from
January 1, 2009 to June 30, 2009 and reassessed the Appellant for net tax and
arrears interest as follows:
|
Period
|
Net Tax
|
Arrears Interest
|
Total Assessment
|
|
01-01-2009 to 31-03-2009
|
* $508.34
|
$17.99
|
$526.33
|
|
01-04-2009 to 30-06-2009
|
** $214.40
|
$5.17
|
$219.57
|
|
Total
|
$722.74
|
$23.16
|
$745.90
|
* refund paid
** refund not paid
[4]
By another reassessment
dated January 21, 2010, the Minister disallowed the ITCs claimed by the
Appellant for the quarterly period from July 1, 2009 to September 30,
2009 and reassessed the Appellant for net tax and arrears interest in the
amounts of $5.00 and $0.05 respectively.
[5]
The only issue to be
decided is whether the Minister properly disallowed the ITCs in the aggregate
amount of $1,048.58 for the period. The ITCs claimed by the Appellant were in
respect of new residential rental property rebates ($266.88), the home renovation
and home staging business ($136.39) and the computer consulting business
($645.31).
[6]
In determining the
Appellant’s net tax for the period, the Minister made the following assumptions
of fact set out in paragraph 6 of the reply to the notice of appeal:
a) the Appellant was registered for
GST purposes; (admitted)
b) the Appellant
claimed ITCs and reported sales and other revenue, GST collectible and net tax
for the Period as set out in paragraph 2 above; (admitted)
c) during the Period the Appellant did not
have a business enterprise for which he claimed the ITCs; (denied)
d) the Appellant did not provide any evidence
to enable the amount of the claimed ITCs to be determined. (denied)
[7]
Mr. Bowden testified at
the hearing. He provided information concerning the revenues generated by the
computer consulting business from December 1994 to June 2009. From December
1994 to September 1997, that business generated substantial revenues, but from
October 1997 to September 2000, only $400 in revenues was generated. Revenues
then recovered from October 2000 to September 2002. No revenues were
generated from October 2002 to September 2005 except for $350 from July
2003 to September 2003 due to the development of a commercial software
package. From October to December 2005, the Appellant’s computer consulting
business generated revenues of $7,700. From January 2006 to March 2009, no
revenues were generated from the business and only $200 was generated from
April to June 2009.
[8]
Mr. Bowden also
provided information concerning the revenues generated by the home renovation
and home staging business from January 2006 to December 2010. None were
generated from January 2006 to March 2009. From April 2009 to December 2009,
that business generated $300 in revenues. From January 2010 to December 31,
2010, $3,755 was generated from the Appellant’s home renovation and home staging
business.
[9]
Mr. Bowden further
explained that he claimed the GST residential rental property rebates as a
result of the purchase of a rental property located in the City of Toronto in 2009. In 2009, Mr. Bowden owned four rental
properties while in 2007 and 2008 he owned three rental properties. According
to Mr. Bowden’s tax returns filed for the 2007, 2008 and 2009 taxation
years, the rental properties generated the following gross rents and net income
(loss) after adjustments:
|
Years
|
Gross Rents
|
Net Income (Loss)
|
|
2009
|
$59,667.50
|
$10,857.32
|
|
2008
|
$57,572.90
|
($8,427.82)
|
|
2007
|
$22,514.82
|
($40,136.12)
|
Mr. Bowden stated that the management of the rental
properties does not require any of his time because a property manager is doing
it for him.
[10]
In his testimony, Mr.
Bowden explained that no employees work for him in his various businesses and
that he does not subcontract any of the work to be performed for his clients.
He further stated that he does not record the number of hours he spends on each
of his businesses. He estimated that he spent approximately 20 hours per week
on his home renovation and home staging business and from 15 to 20 hours per
week on his computer consulting business. He said that his hourly rate for his
computer consulting business varies from $50 to $75 and that his hourly rate
for his home renovation and home staging business is $50. He always provides
invoices for the services rendered to his clients and stated that his computer
consulting services are always paid for by cheque while the home renovation and
home staging services are paid for half of the time by cheque and half of the
time in cash.
[11]
Mr. Bowden acknowledged
that he has no formal business plan for any of his businesses and stated that
he does not need any financing from external sources to carry on his
businesses. He advertises his computer consulting services on a web site and he
uses an e-mail address to correspond with his actual and potential clients. His
home renovation and home staging services are offered through the web sites of
the management companies which administer each of his rental properties. His
name is simply added to the pool of providers of various services to the owners
of those companies.
[12]
When cross-examined by counsel
for the Respondent, Mr. Bowden admitted that his primary business in the last
five years had been his investment business. He was trading in stocks and
options on his own account from his home, using one GST registration number for
his three businesses. The rental income generated by the four rental properties
had been reported as income from property in Mr. Bowden’s tax returns and not
as business income. All of Mr. Bowden’s businesses are grouped together
under the business name The 3x Resource Centre. All business income is
consolidated in the Statement of Business or Professional Activities filed each
year with his tax return. For the 2009 taxation year, Mr. Bowden’s businesses
generated gross sales of $300 and a net loss of $101,013.85. For the 2008
taxation year, the businesses generated gross sales of $11,890.93 and a net
loss of $7,223.67. For the 2007 taxation year, there were no gross sales and a
net loss of $571,951.64. The net losses that were generated in 2009 and 2007
were mostly attributable to the investment business.
[13]
During his
cross-examination, Mr. Bowden also acknowledged that in his 2009 tax return he
reported employment income in the amount of $71,844.19 and filed a T4 slip from
RR Enterprises Ltd. He explained that he had been hired in May 2009 as a
computer programmer on the basis of 35 hours per week and that, at the hearing
date, he still was an employee of that company. He further explained that he is
a full-time employee working 5 days a week and that he has to commute almost
every working day to Mississauga where the offices of the company are
located.
The Appellant’s position
[14]
The Appellant alleged
that in 2009, he carried on two distinct businesses with a reasonable
expectation of profit. The computer consulting business has been in existence
for 24 years and had been profitable in prior years; the home renovation and home
staging business has been carried on by the Appellant only since January 2006.
From January 2006 to September 30, 2009, that business was in the development
stage and it became profitable in the year 2010.
[15]
The Appellant further
alleged that there was no personal element in, nor was any benefit derived from,
the business activities carried on by him, and that they represent genuine
commercial activities carried on in a bona fide businesslike manner with a bona
fide expectation of profit.
[16]
Finally, the Appellant
argued that the Respondent is in effect proposing the application of the
definition of "commercial activity" on a yearly basis.
The Respondent’s position
[17]
Counsel for the
Respondent contended that the Appellant had no reasonable expectation of profit
given the way in which he carried on his computer consulting activities and his
home renovation and home staging activities. The Appellant had no business plan
and no tangible objectives. He had no organized business activities except for
advertising on web sites. In 2009, the Appellant had full-time employment and
he had to spend a lot of time on his investment business. In addition, he spent
20 hours per week on his home renovation and home staging activities and
15 to 20 hours per week on his computer consulting activities. Finally, he had
to devote some time to the four rental properties that he owns.
[18]
The statements of
business or professional activities filed by the Appellant with his tax returns
for the 2007, 2008 and 2009 taxation years showed that the Appellant’s
businesses generated adjusted gross revenues of only $300 in 2009, $11,890.93
in 2008 and zero in 2007, and incurred significant net losses in each of those
years, namely: $101,013.85 in 2009, $7,223.67 in 2008 and $571,951.64 in 2007.
Analysis
[19]
The entitlement of a
taxpayer to ITCs depends upon whether the taxpayer has paid GST in relation to
a "commercial activity". The expression "commercial
activity" is specifically defined in subsection 123(1) of the Act,
which reads in part as follows:
123.(1) In section 121, this Part and Schedules V to X,
. . .
"commercial activity"
of a person means
(a) a business carried on by the person
(other than a business carried on without a reasonable expectation of profit by
an individual, a personal trust or a partnership, all of the members of which
are individuals), except to the extent to which the business involves the
making of exempt supplies by the person.
. . .
[20]
This definition clearly
establishes that a business carried on without a reasonable expectation of
profit is not a "commercial activity" for GST purposes.
[21]
In Moldowan v.The
Queen, 77 DTC 5213, at page 5215, the Supreme Court of Canada made the
following comment concerning the meaning of the expression "reasonable
expectation of profit":
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 application of the reasonable expectation of
profit test to the computer consulting activities
[22]
The Appellant is a
knowledgeable person and an experienced businessman. The evidence clearly
establishes that he had the qualifications and necessary training to carry on
the computer consulting activities as a business. He now holds full-time
employment as a computer programmer. The problem is that since January 2006 he
has not devoted enough time to the consulting activities to generate revenue.
In the 39-month period beginning in January 2006 and ending in March 2009 no
revenue was generated and no GST collected, but the Appellant claimed in
respect of that period ITCs in the amount of $7,434.10. In fact, the only
revenue earned in 2009 from the computer consulting activities was during the
period from April to June 2009 and it amounted to only $200 in respect of which
$10 in GST was collected.
[23]
The Appellant alleged
that the decline in or absence of revenue from the computer consulting
activities for the period from January 2006 to March 2009 was attributable to
the income tax audit of his affairs that began in April 2006 and which severely
curtailed the time he had available to dedicate to his computer consulting
activities. The same situation prevailed for the rest of 2009 because the
Canada Revenue Agency initiated a GST audit in April 2009 and, I would add,
because the Appellant began full-time employment with RR Enterprises Ltd.
in May 2009.
[24]
Considering the
circumstances described above, I do not see how a reasonable person looking at
the computer consulting activities of the Appellant and applying ordinary standards
of commercial common sense could conclude that the Appellant had, in 2009, a
reasonable expectation of profit in respect of his computer consulting
activities. Since January 2006, the Appellant had not devoted any time or
attention to his computer consulting activities and that business appeared to
me to be inactive or in a dormant state. The Appellant did not act in an
orderly, businesslike fashion or in the way that would normally be expected of
a business person.
The application of the reasonable expectation of profit
test to the home renovation and home staging activities
[25]
No revenue was
generated from the home renovation and home staging activities from the start
of those activities in January 2006 to March 2009 (39 months), and only
$300 was earned from April to December 2009, in respect of which $15 in GST was
collected. For the period from January 2006 to December 2009, the Appellant
claimed ITCs in the amount of $466.23. In 2010, the home renovation and home staging
activities generated revenues of $3,755.
[26]
The Appellant alleged
that the absence of revenue for the period from January 2006 to March 2009 and
the low level of revenue ($300) for the period from April to December 2009 was
attributable to the fact that the activities in question were in the start-up
phase and attributable as well to the income tax audit that began in April 2006
and the GST audit that began in April 2009.
[27]
In Land and Sea
Enterprises Ltd. v. Canada, 2011 TCC 101, Madam Justice Campbell
of this Court made the following comment concerning business activities in the
start-up phase:
14. It is clear that an activity may be
considered a commercial activity well in advance of the stage of profitability.
It will always be a question of fact. Expenditures giving rise to ITCs in the
start-up phase of a commercial activity may be eligible provided that there is
clear intention to commence a business and that measurably significant and
fundamental steps and actions have been put into place.
[28]
The evidence when
looked at in its totality reveals an extremely low level of activities from
January 2006 to December 2009. The Appellant was not able to devote any time or
attention to the home renovation and home staging activities before 2010. He
was not properly trained to carry on those activities as a business. His only
training was as an apprentice to his father in Ireland
many years ago. In summary, it is not clear from the evidence that the
Appellant had the intention to commence a business back in January 2006 or that
“measurably significant and fundamental steps and actions have been put into
place” to achieve the start-up. Consequently, I am of the view that no start-up
phase business activities were being conducted and that, during the period,
there was no reasonable expectation of profit.
The rental property tax rebates
[29]
I do not think it is
necessary for me to consider this issue as the revenues generated from the
rental activities were reported by the Appellant as income from property in his
2009 tax return.
Conclusion
[30]
For these reasons, I
have concluded that Mr. Bowden’s appeals should be dismissed.
[31]
On June 29, 2011, the
Federal Court of Appeal rendered a judgment (2011 FCA 218) in Mr. Bowden’s
appeal from a judgment of this Court (2010 TCC 424). Mr. Bowden’s
appeal was allowed and his claims for ITCs with respect to his computer
consulting services and his home renovation and home staging services for the
period from July 1, 2007 to December 31, 2008 were accepted.
[32]
In my respectful view, I
am not bound by that Federal Court of Appeal decision. That was a case in which
there was a deficiency in the Minister’s reply at the Tax Court level: Mr.
Bowden was not informed that the Minister would be taking the position in the
Tax Court that any business activity of Mr. Bowden, apart from his financial
services business, fell outside the statutory definition of "commercial
activity". Madam Justice Sharlow rightly pointed out at the end
of paragraph 15 of her reasons that:
. . . The most striking example of this prejudicial omission was the
absence of a full history of his various businesses for a period of time much
longer than the period covered by the input tax credit claims in issue. Mr.
Bowden asserted in this Court that he had such evidence and he could have
produced it if he had known it would be relevant.
[33]
Madam Justice Sharlow
allowed Mr. Bowden’s appeal for the following reason stated at the end of
paragraph 21:
. . .Since the application of the statutory definition of "commercial activity" was not properly raised on the
pleadings, Mr. Bowden’s appeal should not be determined on that basis.
[34]
In this case, the
"commercial activity" issue was raised and has been carefully
examined.
Signed at Ottawa, Canada, this
26th day of September 2011.
"Réal Favreau"
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