Citation:
2005TCC13
Date:
20050105
Docket: 2003-1130(IT)I
BETWEEN:
ALLAN TANNENBAUM,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rip J.
[1] The issue in these appeals from assessments for 1998 and
1999 is whether Allan Tannenbaum carried on a business in these years and,
therefore, is entitled to deduct expenses he claimed were incurred in carrying
on the business.
[2] Mr. Tannenbaum testified that he carried on the business
of trading in gold even though he never purchased a gold contract. His plan was
to purchase raw gold and if the gold was sufficiently pure, the gold would be
refined in Montreal and then sold to a chartered bank in Montreal. The key to obtaining high quality
gold, 24 karats, he said, was to have good contacts in the trade. He worked all
day, weekends and holidays, trying to acquire contracts. He thought "I
could make a lot of money". He chose gold since he "felt gold would
bring in the most money".
[3] A typical transaction contemplated by Mr. Tannenbaum
would be for the seller of the gold to ship the gold to Montreal where it would be picked up by
Securcor, a security delivery company, for delivery to a refinery in Montreal. Once the gold was in bullion
form, Securcor would deliver the bullion to the Gold Bullion desk of the bank.
[4] In pursuit of obtaining gold contracts Mr. Tannenbaum
traveled to Europe to meet people in the trade and also made overseas telephone
calls to these people, including potential sellers of gold.
[5] Mr. Tannenbaum testified that people did come to him
with offers but most were unacceptable; many offers required "money up
front" which he was not prepared to do. Also, assays of gold samples he
received did not prove to be satisfactory. In at least one case, the people
"didn't check out". In other cases, the "rules of the game
changed" during negotiations. Each potential transaction had its
idiosyncrasies, Mr. Tannebaum recalled, no two were exactly the same.
[6] Mr. Tannenbaum produced a bundle of copies of facsimiles
("faxes") describing offers, counter‑offers and proposals for
the purchase and sale of gold in 1998. The persons making the offers and
proposals were located in Toronto, the
United States and Austria. Mr. Tannenbaum did not accept any
of these proposals or offers. The respondent's counsel also produced copies of
proposals that never came to fruition. In one set of documents produced by the
respondent's counsel the existence of the refinery in Montreal that was to refine the gold is
questioned; Mr. Tannenbaum insisted that the refinery did exist but that the
person looking for the refinery was not familiar with the area in Montreal where the refinery was located.
Respondent's counsel stated that he did not question the existence of the
refinery.
[7] Mr. Tannenbaum was unable to remember facts relating to
several of the documents put to him by counsel for the respondent. Apparently,
according to Mrs. Tannenbaum, he spent all of his capital, over $500,000, in
trying to make money trading in gold and in 2003 was hospitalized for major
depression. Mrs. Tannenbaum, a professor at the Faculty of Medicine at McGill University, confirmed that her husband has
serious memory impairment and neurological problems. I am therefore reluctant
to assess negatively Mr. Tannenbaum's inability to answer questions put to him
in this regard.
[8] Until 1991 Mr. Tannenbaum was the owner of a corporation
that manufactured men's and boy's sportswear, employing as many as 200 people.
He closed the business in 1991. Sometime after closing the manufacturing
business Mr. Tannenbaum and a long‑time friend, Leon Cooper, started a
business to act as agents abroad for all types of manufacturers in the Montreal area. They opened an office in Montreal and worked together for about a
year. Mr. Cooper recalled that almost immediately Mr. Tannenbaum became
interested in gold trading. Their functions were separated: Mr. Cooper's
efforts were devoted to finding manufacturers they could represent, Mr.
Tannenbaum was seeking sources to buy and sell gold. While there was a
gentlemen's agreement, Mr. Cooper said, for both parties to participate in
both businesses, their association lasted only a year. Mr. Cooper was not as wealthy
as was Mr. Tannenbaum. Mr. He had "monthly commitments" and
could not wait for a successful contract. Mr. Cooper "could not afford to
carry on".
[9] During the time Mr. Cooper shared office space with Mr.
Tannenbaum, he did observe offers received by Mr. Tannenbaum to sell gold. He
also testified that Mr. Tannenbaum traveled overseas to secure bank and
gold trading relationships.
[10] Mr. Cooper was the respondent's witness. In cross‑examination
he corroborated Mr. Tannenbaum's view that "one deal could make it"
and that the Tannenbaum's business was based on communications and contacts with
persons in the gold trade. There was no evidence submitted by the respondent to
disprove Mr. Tannenbaum’s belief that he could make money from the activity.
[11] Mr. Tannenbaum did not complete a contract since 1994. His
income from any gold trading was nil. All of the expenses claimed in his tax
returns were for the purpose of earning income from a business, Mr. Tannenbaum
declared. He claimed the following expenses in 1998 and 1999:
|
|
1998
|
1999
|
|
|
|
|
|
Interest
|
$ 144.15
|
$ 117.85
|
|
Office expenses
|
$ 1,335.96
|
$ 645.22
|
|
Legal, accounting and other
fees
|
$ 402.59
|
$ 402.59
|
|
Rent
|
$ 5,150.60
|
$ 5,257.36
|
|
Travel
|
$ 3,217.19
|
$ 4,600.18
|
|
Telephone and utilities
|
$ 7,178.29
|
$ 7,233.99
|
|
Business taxes
|
$ 846.40
|
$ 846.40
|
|
Capital cost allowance
|
$ 234.29
|
$ 187.43
|
|
Total business expenses
|
$ 18,509.47
|
$ 19,291.02
|
|
|
|
|
|
Net business income
(loss)
|
($ 18,509.47)
|
($ 19,291.02)
|
[12] Interest represented bank charges and bank interest. Mr.
Tannenbaum testified that the office expenses were for equipment, such as a fax
machine. He paid fees to his accountant. Rent was paid for the same office he
had previously shared with Mr. Cooper, the year he first got interested in gold
trading. Mr. Tannenbaum said that he traveled to France and Switzerland to contact potential sellers of gold. He explained his
telephone expenses for long distance calls to Europe were to obtain or maintain
contacts. He incurred City of Montreal
business tax. Capital cost allowance was taken on the cost of office equipment.
[13] Mr. Tannenbaum was assessed on the basis that he incurred
no business expenses because he had no reasonable expectation of profit. This
was the evidence of Marc‑André Paquin, an auditor at the Canada Revenue
Agency. The assessments in question were issued on April 29, 2000, before the
judgment of the Supreme Court of Canada in Stewart v. The Queen,
Mr. Paquin noted. In Stewart, the Supreme Court held that
"reasonable expectation of profit" is not a test to use in
determining whether a taxpayer's activities constitute a source of income for
purposes of section 9 of the Income Tax Act ("Act"). The
Court provided a two‑stage approach to determine whether a taxpayer's
activities constitute a source of business: a) has the activity been undertaken
in pursuit of profit or is it a personal endeavour, and b) if it is not a
personal endeavour, is the source of income a business? The taxpayer's predominant
intention for the activity must be to make a profit and the activity is to be
carried out in accordance with relative standards of businesslike behaviour.
Where there is no personal element and the activity is clearly commercial, then
the taxpayer ought to be permitted to deduct expenses.
[14] Mr. Tannenbaum, Mr. Paquin explained, had no business
plan, no marketing plan and no growth. Also, Mr. Tannenbaum was unable to prove
the losses he claimed. The predecessor to the CRA considered the expenses to be
personal, "a dream to make money with gold ... there was no commercial
activity". At trial, the Crown acknowledged Mr. Tannenbaum had a source of
income but his expenses were not reasonable: section 67 of the Act.
[15] Crown counsel relied on the decision in this Court of Hammill
v. Canada, a judgment that has been appealed
to the Federal Court of Appeal. In that case the taxpayer put his gem
collection for sale through a third party, paying the latter significant
amounts, including "up front fees", in the belief that it would
arrange for him to sell the gems at a substantial profit. The third party
brought him five fraudulent offers and eventually the gems vanished. The third
party was arrested. The Minister relied on paragraph 18(1)(a) and
section 67 of the Act to disallow "deemed interest expenses"
and business losses of $1,855,800. Mr. Hammill's appeal was dismissed. The
Court found there was no secondary market for precious gems since only dealers
could dispose of them on the market. Mr. Hammill had no business structure
or revenue‑generating activities in place. His expectations were
unreasonable since he could not sell the gems in the manner he attempted; his
approach went beyond errors in judgment. He was not acting like a prudent
businessman. He did not lay out money to earn income; hence, his interest
expense was denied. The business loss deductions claimed were found to be
unreasonable, hence denied as well by the Court.
[16] The Hammill decision does not assist me. There is
no evidence before me, for example, that Mr. Tannenbaum could not have sold
gold in the way he planned. There is no evidence that his expectations were
unreasonable or that he was not acting like a prudent businessman. Indeed, the
fact that he insisted on the gold being assayed indicates a degree of prudence.
Also, if he was suspicious of the people offering to sell him gold or of the
proposal itself, he did not sign the contract; he investigated the proposals
brought to him. He was unlike Mr. Hammill in dealing with potential
associates. Mr. Tannenbaum was an experienced businessman and no doubt, applied
his past business experience to his gold venture. It is not for a court to
question how a person conducts business or how he or she may have reduced
expenses by acting in a different way.
[17] In Stewart, the Supreme Court, at paragraph 57,
stated that if, in the circumstances, an expense is unreasonable in relation to
the source of income, then section 67 of the Act is a mechanism the fisc
may use to reduce or eliminate the amount of the expense. That Mr. Tannenbaum
earned no income is not necessarily a bar to him claiming expenses. The
circumstances of his venture, where one contract, according to Mr. Tannenbaum,
can be a home run, is not the norm. The Crown did not suggest Mr. Tannenbaum
was wrong in his thinking. Expenses so incurred in a reasonable manner are not
unreasonable; Mr. Tannenbaum's expenses for 1998 and 1999 are quite modest
bearing in mind the circumstances and nature of his venture. His activities
were not a hobby and were not a personal endeavour. His predominant intention,
even if some people may characterize his intention as foolhardy or a gamble,
was to make a profit from buying and selling gold. There was an element of
commerciality in Mr. Tannenbaum's efforts. He ought to be entitled to
deduct expenses he incurred in carrying on this business.
[18] The appeals are allowed, with costs, if any, subject only
to the amounts he may have deducted both as cost of equipment and as capital
cost allowance; he is entitled to either the cost of the equipment of the
allowance on the capital cost of the equipment in a class.
Signed at Ottawa, Canada, this 5th day of January 2005.
"Gerald J. Rip"
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