[OFFICIAL ENGLISH TRANSLATION]
Date: 20020606
Docket: 2001-2466(IT)I
BETWEEN:
FRANCIS CORPATAUX,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Tardif, J.T.C.C.
[1] This is an appeal concerning the
1997, 1998 and 1999 taxation years.
[2] The assessments under appeal were
made on the basis of the following assumptions of fact:
[TRANSLATION]
(a) the appellant
was a full-time professor at the faculty of education at
l'Université de Sherbrooke (hereinafter "University")
during the entire period in issue;
(b) the appellant's
position as a professor entailed four areas of responsibility:
teaching, research, participation in university life and
community service;
(c)
as an employee at l'Université de Sherbrooke, the
appellant was generally required to perform the duties of his
position at his employer's place of business,
l'Université de Sherbrooke;
(d) among other
things, the appellant conducted research in the field of
ethnomusicology;
(e) in the context
of a so-called "business", the appellant collected children's
songs and instrumental pieces from various communities around the
world and, according to the appellant, [TRANSLATION] "the product
consists of records of ethnic children's music the purpose of
which is the preservation of a universal heritage and not the
making of profit" (see Annex A);
(f) the target
markets were libraries, schools, ethnomusicology specialists and
families;
(g) the appellant
and the publisher, the ARION corporation, have been bound by a
contract since May 10, 1993;
(h) under that
contract, the appellant assigned to the publisher exclusive
rights to the audio recordings of works in the "Chants des
enfants du monde" collection for a ten-year period and in return
receives royalties, the terms of which are described in the said
contract;
(i) promotion
and advertising of the records are the responsibility of the
ARION record company of Paris, France;
(j) the
statement of income and expenses for the appellant's so-called
"business" indicates the following amounts:
1997
1998
1999
Gross
revenue
$3,500
$3,900
$3,590
Expenses:
Advertising
726
Delivery
1,631
Fuel
300
60
Maintenance,
repairs
994
Motor
vehicles
278
Office
expenses
286
Supplies
1,428
395
Honorariums
93
109
111
Rent
195
Travel
expenses
4,800
2,024
8,088
Translation,
studio
1,480
1,032
Parking
50
Partial
total
$ 8,229
$ 4,594
$11,257
Depreciation
$ 4,356
$ 5,429
$ 1,141
Total
expenses
$12,585
$10,023
$12,398
Net
total
($9,085)
($6,123)
($8,807)
(k) the appellant
did not receive any grants from the University during the period
between 1991 and 1999;
(l) according
to the appellant, if the royalty revenues increased to the point
of covering or exceeding his research expenses, the University
would use the surplus to establish special research funds, and it
was clear to him that the salaries received for his research
projects would be partly covered by those royalty revenues;
(m) there is an
employer-employee relationship between the University and the
appellant for the following reasons:
· the
appellant is a salaried employee and his income is divided over
12 months with 26 pay periods;
· aside from
his one month of annual summer vacation, the appellant must
inform the University authorities of his non-teaching activities
in order to obtain authorization from them to pursue his
activities;
· the dean of
the University decides on the appellant's workload;
· Mario
Laforest, the dean of the faculty of education at
l'Université de Sherbrooke, indicated in a letter sent
to the Minister that the appellant's research in ethnomusicology
is an integral part of his work as a professor;
· the
appellant must submit an annual work plan to be approved at a
department meeting (approval must be made and forwarded to the
appellant by May 25 of each year);
· no changes
to the work description can be made during the year without
approval;
· the
appellant must make an annual report to the University
authorities concerning all of his research activities;
(n) according to the
dean, Mario Laforest, [TRANSLATION] "while
Professor Corpataux's work is very important and is highly
original, it nonetheless is not traditional in nature, which
would make it eligible for funding from the usual research
organizations";
(o) according to the
dean, Mario Laforest, [TRANSLATION] "the period of unprecedented
budget cuts that Quebec universities have experienced in recent
years has ruled out any significant financial support for the
work being carried out by this professor. The only thing the
professor had was time to conduct his unique work. For the rest,
he had to cover the expenses incurred out of his own pocket";
(p) the appellant
has reported the following business income and losses since the
beginning of this research activity:
YEAR
GROSS
TOTAL
NET
REVENUES
EXPENSES
LOSSES
1999
$ 3,590
$12,397
($ 8,807 )
1998
3,900
10,023
( 6,123 )
1997
3,500
12,585
( 9,085 )
1996
5,000
8,502
( 3,502 )
1995
5,775
11,767
( 5,992 )
1994
3,000
8,946
( 5,946 )
1993
855
1,986
( 1,136 )
1992
1,300
3,776
( 2,476 )
1991
850
1,655
( 855 )
Total
$27,715
$71,637
($43,922 )
(q) the appellant
did not conduct any market studies to verify his project's
profitability and did not produce any specific plan of action to
make his research activities profitable;
(r) the appellant
failed to demonstrate that the expenses claimed for the years in
issue in connection with his research activities were incurred or
made in order to turn a profit or with a reasonable expectation
of generating an income from them;
(s) the appellant's
research work is not one of the artistic activities described in
paragraph 8(1)(q) of the Act;
(t) during the
2000 taxation year the appellant received for the first time a
$2,400 grant from the faculty of education at
l'Université de Sherbrooke.
[3] The appellant admitted all of the
facts with the exception of subparagraphs 6(c), 6(l), 6(n) and
6(r), which are reproduced below for better reading:
[TRANSLATION]
(c)
as an employee at l'Université de Sherbrooke, the
appellant was generally required to perform the duties of his
position at his employer's place of business,
l'Université de Sherbrooke;
(l) according
to the appellant, if the royalty revenues increased to the point
of covering or exceeding his research expenses, the University
would use the surplus to establish special research funds, and it
was clear to him that the salaries received for his research
projects would be partly covered by those royalty revenues;
(n) according to the
dean, Mario Laforest, [TRANSLATION] "while
Professor Corpataux's work is very important and is highly
original, it nonetheless is not traditional in nature, which
would make it eligible for funding from the usual research
organizations";
(r) the appellant
failed to demonstrate that the expenses claimed for the years in
issue in connection with his research activities were incurred or
made in order to turn a profit or with a reasonable expectation
of generating an income from them;
[4] The evidence, comprised of the
appellant's testimony, revealed that the content of subparagraphs
6(c) and 6(l) was accurate.
[5] The appellant's explanations
convinced the Court that his research and work was highly
worthwhile. He also provided irrefutable evidence of the
exceptional quality of the results obtained, making him a
resource person in ethnomusicology who essentially could not be
ignored.
[6] The awards, the recognition, the
participation and invitations in connection with the various
media and national and international forums moreover confirm his
renown in the field.
[7] It appears from the testimony of
the auditor, Robert Goulet, that the respondent did
everything she could to support Professor Corpataux's work
in her own way.
[8] Unfortunately, the facts, the
documentation and the whole of the circumstances do not support
the validity of the appellant's appeal.
[9] Although the work, the objectives
and the results are very noble and there is no doubt whatsoever
that they enrich our cultural heritage, it appears that the
primary and fundamental purpose was not to obtain financial
profit.
[10] The appellant was a regular professor
at the University and was bound thereto by a contract of service.
Under that contract, the appellant was accountable for work
carried out in the performance of his duties.
[11] From the outset, the appellant had
indicated his keen interest in the subject matter and had
attempted to obtain the collaboration of his employer; the
University had not shown much willingness and had even expressed
reservations.
[12] The appellant's enthusiasm and tenacity
finally paid off and the University ultimately accepted and even
supported his initiative. The collaboration mainly took the form
of greater flexibility in the scheduling of his courses. It was
always clear, however, that if the project, the research and the
results of the appellant's work were to generate a surplus, the
University would profit directly from it. Moreover, the
University alone would be entitled to any such surpluses.
[13] This can be seen very clearly in a
letter dated April 1, 2001, that the appellant sent to
the Canada Customs and Revenue Agency (the "Agency"), at
paragraph 1:
[TRANSLATION]
1. The
expenses reported in my tax returns prepared by the agency of
Carole Galipeau, Carole Impôts, Conseil Street in
Sherbrooke, are directly related to my responsibilities as a
professor, which
are clearly set out in the collective agreement between
l'Université de Sherbrooke and the Syndicat des
professeurs de l'Université de Sherbrooke. The
agreement provides that all professors must perform research
activities as part of their responsibilities.
[14] On that same issue,
Mario Laforest, the dean of the faculty to which the
appellant belonged, wrote the following in a letter sent to the
Agency on March 5, 2001:
[TRANSLATION]
...
Reference is made to article 12, reproduced in its entirety in
attachment. However, since the required information pertains
essentially to the responsibilities in the area of research, I
will reproduce articles 12.01, 12.03 and 12.06.
12.01 The position of professor entails four areas
of responsibility:
(a) teaching;
(b) research;
(c) participation in university life;
(d) community service.
...
12.06 A professor's annual workload includes
activities in each of the four areas of responsibility indicated
in paragraph 12.01.
... The only thing the professor had was time to conduct his
unique work. For the rest, he had to cover the expenses incurred
out of his own pocket.
[15] In light of the evidence submitted for
the years in issue, it seems clear that the appellant essentially
performed one or more activities in the context of his work as a
professor. This was a specific project several components of
which fell under the concept of business. However, in no way was
this a business from a taxation perspective, which requires
objectives of profit that would ultimately benefit the business
person directly. Anyone who starts up and operates a business
must absolutely have a reasonable expectation of eventually
making a profit that he or she will obtain, failing which there
is no business within the meaning of this term from a tax
standpoint. In this case, there was no expectation of
conventional profit. The only notion of profit was the enrichment
of the cultural heritage. Moreover, if the undertaking had
generated surpluses, they would have benefited the university and
the appellant indirectly.
[16] The appellant moreover admitted this in
answers provided to the respondent further to the mailing of a
questionnaire. It would be appropriate to reproduce some of the
questions and answers below: (Exhibit I-1, Tab 10)
[TRANSLATION]
...
2 (b) What were your initial long-term
objectives? If your business did not develop as expected, explain
the reasons for this.
The product consists of records for listening to ethnic music
the purpose of which is the preservation of a universal heritage
and not profit.
...
6(a) Indicate the amount of time
you dedicated each week to ensuring the business ran smoothly
during the period under review. This description must consider
the time spent on other jobs as well as the other duties related
to your business.
- Approximately 15 hours/week during the school year
- Travel abroad for approximately 4 months
...
10(c) Faced with an uninterrupted series of
losses, what measures did you take to reduce expenses or increase
revenues?
personal savings
grants
...
[17] There is no doubt that I would not
hesitate whatsoever in siding with the appellant if the issue
involved determining the quality and relevance of his work, but
the question is entirely different. It is a matter of determining
whether the appellant had a reasonable expectation of realizing a
profit through his work and, more fundamentally, whether it was a
genuine business or simply a specific part of his workload.
[18] The respondent submitted a decision by
Judge Brulé in Fleming v. M.N.R,
[1987] T.C.J. No. 649 (Q.L.). This decision is relevant in terms
of both its content and the references found therein. A number of
passages should be reproduced:
...
2. Burden of proof
"The burden is on the appellant to show that the
respondent's assessments are incorrect. This burden of proof
results not from any particular provision of the Income Tax Act,
but from several court decisions, including the judgment rendered
by the Supreme Court of Canada in Johnston v. Minister of
National Revenue, 3 DTC
1182, (1948) CTC 195."
...
The primary intention underlying the taxpayer's activity
must be considered in determining the existence of a reasonable
expectation of profit. Cardin, J. stated in Marcel De Montigny v.
M.N.R., 82 DTC 1034 at page 1036:
"It is clear and well-settled law that no activity can be
regarded as a business within the meaning of s. 18(1)(a) of the
Act, if there is no reasonable expectation of realizing a profit
from it. In my view, this principle necessarily assumes that the
primary intention of the businessman is to realize a monetary
return from carrying on his business."
... It is clear that the research the appellants did, the
books they purchased and the conferences they attended in
relation to their writing activities were useful in the
furthering of their careers as teachers and their reputations as
experts in their field. The lack of urgency in the setting of
publishing dates in the light of considerable amounts invested by
the appellants over the years is a further indication that
profits were not utmost considerations in the appellants'
writing activities.
...
In Paul Zolis v. M.N.R., [1987] C.T.C. 183, Couture, C.J.
stated at page 185:
"The aspirations or ambitions that a taxpayer may have
entertained in respect of an activity in which he was engaged are
not alone sufficient to bring it within the strict meaning of
business in the relevant legislation no matter how genuine they
might have been. What must be examined apart from the structural
features of the undertaking is the manner in which it is carried
on or operated by the taxpayer and from the interplay of these
elements a determination made whether it is capable of yielding a
profit in due course."
[19] In Matthew Corrigan v. M.N.R.,
84 DTC 1764, at page 1765, Judge Bonner stated:
The problem in this case, as in many similar cases, arises
because many activities which can be carried on as a business can
also be carried on as a hobby. The distinction between the
two classes of activity turns on the question whether the
activity was carried on with a reasonable expectation of
profit. It does not turn on the artistic quality of the end
product of the activity, save to the extent that quality makes
the product saleable at a price likely to generate a
profit. It does not turn on the question whether the person
who carried on the activity devoted a great deal of time and
effort to it, save again to the extent that effort is likely to
generate a profit.
The time and effort invested by the Appellant and his
educational background are all factors which tend to indicate
some likelihood of producing a work of quality. However,
the evidence left unanswered the question whether and to what
extent such quality was likely to generate profits, that is to
say, revenues in excess of costs. In an income tax appeal
the onus is on the Appellant to establish that the factual
premise upon which the assessment rests is erroneous. The
appellant has failed to discharge that onus.
...
[20] In the present case, the appellant
became involved in a highly worthwhile project that was not
initially the subject of general agreement. He further noted that
the University authorities had not expressed a great deal of
enthusiasm when he started.
[21] Tenacious and determined, the appellant
continued to believe in the project and above all to work on it
to the point that there now seems to be general agreement on the
quality of his knowledge and expertise.
[22] Nonetheless, this was not a
commercially viable endeavour. The appellant admitted that he had
no reasonable expectation of making a profit during the years in
issue.
[23] Moreover, if there had been any
profits, they would not have gone to him directly because the
University would have collected them and would have been able to
dispose of them as it saw fit.
[24] The appellant may have found it easier
to obtain financial support from the University if his project
had generated surpluses; there again there was no guarantee or
assurance to that effect. In the event of a profit, the
University alone would have benefited from it.
[25] The appellant's work in ethnomusicology
was prepared with interest, passion, attention to detail and
exemplary determination. Such qualities are regrettably not
sufficient to make it a genuine business; the appellant had
always known that his chances of turning a monetary profit were,
for all practical purposes, non-existent.
[26] Moreover, the appellant never attempted
to prove that he had any kind of expectation of profit for the
years in issue. The evidence essentially showed that the
appellant had a great deal of interest and had succeeded over the
years in demonstrating the merit of his project after putting in
a tremendous amount of work.
[27] The balance of evidence shows that the
appellant, through his work and the results obtained, convinced
his employer, the University, of the undeniable relevance of his
project.
[28] Further to that convincing
demonstration, the University ultimately agreed to collaborate by
offering the appellant greater flexibility to enable him to
successfully complete the project.
[29] In light of such facts in that context,
the appellant was not carrying on his own business; he was merely
performing a specific type of work as part of his duties as a
professor employed by l'Université de Sherbrooke.
Accordingly, this was not a genuine business over which the
appellant alone had control. He had to report like any other
employee.
[30] On the basis of his knowledge, the data
compiled and the interest of the global community, it is possible
that a genuine business may eventually be established. Such a
scenario will necessitate a severance of the employer-employee
relationship and the creation of a separate entity that will need
to have objectives of financial viability.
[31] For the 1997, 1998 and 1999 taxation
years, no such business existed but rather what was involved was
a specific component of the appellant's workload and,
accordingly, his appeal cannot be allowed.
[32] The appeal is therefore dismissed.
Signed at Ottawa, Canada, this 6th day of June 2002.
J.T.C.C.
Translation certified true
on this 27th day of August 2003.
Sophie Debbané, Revisor
Email this Content