Date: 20020514
Docket: 2001-4502-IT-I
BETWEEN:
THOMAS BODANIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Bowman, A.C.J.
[1]
These appeals are from assessments for the 1997, 1998 and 1999
taxation years. The issue is whether the appellant, a
professional musician, can deduct losses incurred in carrying on
a business as a musician and composer. The losses claimed were
denied on the basis that the expenses were personal or living
expenses, were not laid out for the purpose of gaining or
producing income from a business or property and the business did
not have a reasonable expectation of profit
("REOP").
[2]
Mr. Bodanis was employed as a Customs Appraiser and
Inspector for Revenue Canada until his retirement in 1986. In
1986 he registered his business as an entertainer. He has spent
two and one half years at The Juilliard School of music in New
York. He had a band, The Bodanis Group, and played at numerous
functions in the Toronto area. He belongs to the Toronto
Musicians' Association, which is a local of the American
Federation of Musicians. He is a member of the Society of
Composers, Authors and Music Publishers of Canada (SOCAN). He has
produced tapes of music and is at present working on a compact
disc of Macedonian music. He has an extensive recording studio in
his basement. He has since 1987 actively promoted his band by the
distribution of brochures and other forms of advertisement.
[3]
His entire life since his retirement has been devoted to music.
It is a full-time occupation for him. If this activity is to be
described as a business I think it is important that we be clear
on just what that business comprises. In Mr. Bodanis'
case it has several aspects. He is a musician (saxophone,
clarinet and piano), an arranger, a composer and a band
leader.
[4]
Mr. Bodanis and his band were somewhat more active in the
early 1990s than today. Nonetheless, he has not been notably
successful. Paragraph 7(c) of the assumptions in the reply
sets out his income, expenses and losses from 1987 to 1999.
(c)
the Appellant has claimed losses for the Business since 1987 and
reported income, expenses and profits/(losses) for the 1987 to
1999 taxation years as follows:
Year
Revenue
Expenses
Loss
1987
$
4,496.00
$14,470.00
($ 9,974.00)
1988
$
3,324.00
$15,317.00
($11,993.00)
1989
$
3,832.00
$17,195.00
($13,363.00)
1990
$
4,015.00
$18,192.00
($14,897.00)
1991
$
1,865.00
$13,974.00
($12,109.00)
1992
$
2,730.00
$15,719.00
($12,989.00)
1993
$
2,272.00
$15,195.00
($12,923.00)
1994
$
2,770.00
$15,279.00
($12,509.00)
1995
$
3,395.00
$16,546.00
($13,151.00)
1996
$
2,670.00
$13,775.00
($11,105.00)
1997
$
1,890.00
$15,503.13
($13,163.13)
1998
$
2,850.00
$15,132.82
($12,182.82)
1999
$
1,755.00
$13,923.59
($12,168.59)
[5]
The losses were allowed up to 1996 but they were disallowed in
1997, 1998 and 1999. In those years the respondent points out
that the appellant had only five engagements per year.
[6]
It is important to observe at the outset that the carrying on of
a business as a musician, performer, arranger and composer is not
restricted to only those persons who do so successfully. There
are many people in the arts and entertainment field who are not
successful, or who require many years before their work becomes
known and recognized. A good example of this is Leblanc c.
Canada, [2002] A.C.I. no 70, where a composer and
musician with a series of losses was denied those losses. In
allowing his appeal I quoted the decision of this court in
Donyina v. R., [2001] 3 C.T.C. 2741, in which I
summarized my understanding of the law relating to REOP. It is to
be hoped that the Supreme Court of Canada will in its decisions
in Walls and Stewart cast some light on this murky
area.
[7]
In Donyina the following was said:
[8]
The REOP principle has been evolving. For a period of time after
the Moldowan case assessors were zealously disallowing
losses, that with the benefit of hindsight, they thought resulted
from an activity with no REOP. Their fervour has been tempered
substantially by such cases as Tonn et al. v. The Queen,
96 DTC 6001; A.G. of Canada v. Mastri et al.,
97 DTC 5420; Mohammad v. The Queen,
97 DTC 5503; Kuhlmann et al. v. The Queen,
98 DTC 6652; Walls v. The Queen,
2000 DTC 6025 (under appeal to S.C.C.); Milewski v.
The Queen, 99 DTC 968 (aff'd
2000 DTC 6559, F.C.A.); Kaye v. The Queen,
98 DTC 1659; Costello v. The Queen,
98 DTC 1362; Smith v. The Queen,
96 DTC 1886; Saunders v. R., [1998]
2 C.T.C. 3196, and Roopchan v. The Queen,
96 DTC 1338, as well as some earlier decisions of this
court: Bélec v. The Queen, 95 DTC 121;
Nichol v. The Queen, 93 DTC 1216, and N.
Cipollone v. Canada, [1995] 1 C.T.C. 2598. The most
recent pronouncement on this point is Keeping v. The
Queen, 2001 F.C.A. 182.
[9] I
shall not quote from these cases or analyse them at length. It
is, I think, sufficient to summarize some of the principles that
they appear to establish.
1.
Where there is no personal element the REOP test should be
applied sparingly (Tonn, Keeping,
Bélec and Walls). The absence of a personal
element does not establish conclusively that the REOP principle
cannot be invoked but such an absence is a factor that carries a
great deal of weight (Mastri).
2.
The Minister or the court should not, with the benefit of
hindsight, second-guess the business acumen of a taxpayer who
embarks upon a business venture in good faith (Keeping,
Tonn, Nichol, Kuhlmann, Bélec
and Smith).
3.
The fact that a business or property is 100% financed is not in
itself a reason for applying the REOP principle (Milewski,
Mohammad and Saunders).
4.
A taxpayer should be allowed a reasonable period of time to get
the business established (Keeping). Such a period will
vary with the circumstances and may well be lengthy
(Milewski).
5.
The REOP principle should not be invoked as a substitute for
analysis. Before invoking REOP the assessor should examine the
expenses to determine whether they are reasonable or for any
other reason not deductible (Smith, Costello and
Cipollone).
6.
For an expectation of profit to be reasonable it has to be not
"irrational, absurd and ridiculous"
(Kuhlmann).
7.
The fact that an investment or a business is motivated in part by
tax considerations is not relevant in determining whether there
is a business, nor is tax motivation in itself relevant in
determining the deductibility of expenses if a business exists
(Stubart Investments Limited v. The Queen,
84 DTC 6305) unless of course the Minister chooses to
invoke the general anti-avoidance rule in section 245, in
which case we are into a fundamentally different ball-game.
8.
The initial question where losses are claimed and denied is
whether they are personal or living expenses, the statutory
definition of which includes the REOP test. If they are not, the
REOP test must be applied with extreme care and the question
becomes "Is there a business?" The existence of REOP is
only one factor in that determination (Kaye).
9.
Reasonableness operates both in the context of the existence of a
business, where section 67 disallows the deduction of
expenses to the extent that they are unreasonable, and also at
the liminal stage of determining whether there is a business
(Kaye).
10.
If what is ostensibly a rental property was acquired and held in
the course of an adventure in the nature of trade and it was
reasonable to expect a profit on the resale the losses
(i.e. carrying costs net of rentals received) should not
be disallowed on the basis of REOP (Roopchan). The court
should however examine with some care an ex post facto
declaration that property that was carried for some years at a
loss is part of a speculative venture in which the motive was
resale at a profit. This is not something that one would expect
someone readily to admit if the property were sold at a
profit.
11.
If the taxpayer has several rental properties, some yielding a
profit and some a loss, it is improper to apply REOP to the
losing properties and ignore the profitable ones. The entire
investment picture should be considered (Smith).
12.
When to start a business and when to abandon it are business
decisions in which neither the taxing authorities nor the court
should intervene (Nichol). Nonetheless if losses go on
being incurred year after year for an inordinate length of time
sooner or later one has to apply what I shall call the
"Enough is enough" principle and decide that what might
have been a viable business has, with the effluxion of time,
became hopeless and the best thing to do with it is to give it a
decent burial. Nonetheless, a businessman's judgement to
maintain a business must be treated with great respect.
[8]
In Kaye v. The Queen, 98 DTC 1659 at
page 1660, the following observation was made about the use
of the phrase "reasonable expectation of profit":
[4] I
do not find the ritual repetition of the phrase particularly
helpful in cases of this type, and I prefer to put the matter on
the basis "Is there or is there not truly a business?"
This is a broader but, I believe, a more meaningful question and
one that, for me at least, leads to a more fruitful line of
enquiry. No doubt it subsumes the question of the objective
reasonableness of the taxpayer's expectation of profit, but
there is more to it than that. How can it be said that a driller
of wildcat oil wells has a reasonable expectation of profit and
is therefore conducting a business given the extremely low
success rate? Yet no one questions that such companies are
carrying on a business. It is the inherent commerciality of the
enterprise, revealed in its organization, that makes it a
business. Subjective intention to make money, while a factor, is
not determinative, although its absence may militate against the
assertion that an activity is a business.
[5]
One cannot view the reasonableness of the expectation of profit
in isolation. One must ask "Would a reasonable person,
looking at a particular activity and applying ordinary standards
of commercial common sense, say 'yes, this is a
business'?" In answering this question the hypothetical
reasonable person would look at such things as capitalization,
knowledge of the participant and time spent. He or she would also
consider whether the person claiming to be in business has gone
about it in an orderly, businesslike way and in the way that a
business person would normally be expected to do.
[6]
This leads to a further consideration — that of
reasonableness. The reasonableness of expenditures is dealt with
specifically in section 67 of the Income Tax Act, but it
does not exist in a watertight compartment. Section 67 operates
within the context of a business and assumes the existence of a
business. It is also a component in the question whether a
particular activity is a business. For example, it cannot be
said, in the absence of compelling reasons, that a person would
spend $1,000,000 if all that could reasonably be expected to be
earned was $1,000.
[7]
Ultimately, it boils down to a common sense appreciation of all
of the factors, in which each is assigned its appropriate weight
in the overall context. One must of course not discount
entrepreneurial vision and imagination, but they are hard to
evaluate at the outset. Simply put, if you want to be treated as
carrying on a business, you should act like a businessman.
[9]
In Tramble v. R., [2001] 4 C.T.C. 2160, I dealt
with an artist whose losses were denied. In allowing her appeal I
quoted the last paragraph set out above from Donyina and
said:
[6]
The statement is probably true enough, as far as it goes, as a
practical guideline - certainly I did not intend it to be a
principle of law - but it has to be applied with some care
and there must be taken into account the nature of the business
with which one is dealing. Artistic endeavour is something that
may require a lifetime before the artist is recognized. We can
all think of artists and composers who died penniless only to
have their work recognized by later generations long after their
death.
[10] In that
case, at pages 2162-2164, I quoted at length from Interpretation
Bulletin IT-504R2. The observations are equally applicable to
composers.
4.
...
The nature of art and literature is such that a considerable
period of time may pass before an artist or writer becomes
established and profitable. Although the existence of a
reasonable expectation of profit is relevant in determining the
deductibility of losses, in the case of artists and writers it is
recognized that a longer period of time may be required in
establishing that such reasonable expectation does exist.
5.
Factors which will be considered by the Department in determining
whether or not an artist or writer has a reasonable expectation
of profit include:
(a)
the amount of time devoted to artistic or literary
endeavours,
(b)
the extent to which an artist or writer has presented his or her
own works in public and private settings including, but not
limited to, exhibiting, publishing and reading as is appropriate
to the nature of the work,
(c)
the extent to which an artist is represented by an art dealer or
agent and the extent to which a writer is represented by a
publisher or agent,
(d)
the amount of time devoted to, and type of activity normally
pursued in, promoting and marketing the artist's or
writer's own works,
(e)
the amount of revenue received that is relevant to the
artist's or writer's own works including, but not limited
to, revenue from sales, commissions, royalties, fees, grants and
awards which may reasonably be included in business income,
(f)
the historical record, spanning a significant number of years, of
annual profits or losses relevant to the artist's or
writer's exploitation of his or her own works,
(g) a
variation, over a period of time, in the value or popularity of
the individual's artistic or literary works,
(h)
the type of expenditures claimed and their relevance to the
endeavours (e.g., in the case of a writer there would be a
positive indication of business activity if a substantial portion
of the expenditures were incurred for research),
(i)
the artist's or writer's qualifications as an artist or
writer, respectively, as evidenced by education and also by
public and peer recognition received in the form of honours,
awards, prizes and/or critical appraisal,
(j)
membership in any professional association of artists or writers
whose membership or categories of membership are limited under
standards established by that association,
(k)
the significance of the amount of gross revenue derived by an
artist or writer from the exploitation of that individual's
own works and the growth of such gross revenue over time. In
applying this factor, external influences such as economic
conditions, changes in the public mood, etc., which may affect
the sale of artistic or literary works will be taken into
consideration, and
(l)
the nature of the literary works undertaken by a writer. It is
considered that a literary work such as a novel, poem, short
story or any non-fictional prose composition that is written for
general sale or syndicated distribution would normally have a
greater profit potential than a work undertaken for restricted
distribution.
6.
No particular factor described in 5 above is more important than
another and no one factor determines whether or not an activity
is a business carried on for profit or with a reasonable
expectation of profit. All relevant criteria are considered
together in making a determination and the taxpayer's failure
to meet any one particular factor will not in itself preclude the
taxpayer's artistic or literary activities from qualifying as
a business.
7.
In the case of an artist or writer, it is possible that a
taxpayer may not realize a profit during his or her lifetime but
still have a reasonable expectation of profit. However, in order
to have this "reasonable expectation of profit" the
artistic or literary endeavours, as the case may be, of the
artist or writer must be carried on in a manner such that, based
on the criteria in 5 above, they may be considered for income tax
purposes to be the carrying on of a business rather than, for
example, a hobby.
[8]
Whoever wrote the above demonstrated considerable sensitivity to
the nature of artistic endeavour and a recognition of the
validity of the aphorism ars longa vita brevis. Although
interpretation bulletins are not the law and do not bind the
court this one makes sense and substantially she meets the
criteria in it.
[11] The
question boils down to this: is Mr. Bodanis' activity a
business or a hobby? It is certainly something that he pursues
passionately, but this does not detract from its being a
business. Artistic endeavour is by its very nature passionate.
(See also Jacks v. Canada, [2000]
T.C.J. No. 830, a decision of Campbell J. of this
court. Cf. Jandrisits v. Canada, [1998]
T.C.J. No. 80.)
[12] The
Crown's case seems to be premised on a view that although
Mr. Bodanis may have been carrying on a business in the
earlier years, by 1997 it had ceased to be a business. I do not
think the evidence justifies this conclusion. He kept careful
records and I accept that the amounts spent have been established
as having been spent in connection with the business. There is no
suggestion that the amounts are unreasonable.
[13] The
respondent submitted schedules of expenses that were disallowed.
I am not prepared to accept that just because Mr. Bodanis
did not give me boxes of receipts he should be denied the
expenses claimed. His records are quite adequate to establish the
expenditures.
[14] Each of
the myriad of REOP cases that have been heard in this court turns
on its own facts. In this case there is nothing "irrational,
absurd or ridiculous" in Mr. Bodanis' expectation
that he will make a profit. It is not for this court or the
Minister to second guess Mr. Bodanis' business judgment
or to tell him that he should give up the endeavour. If I apply
the guidelines set out in Donyina it is clear that he
falls well on the side of carrying on a business. Cases involving
musicians are particularly difficult for a couple of reasons. For
one thing there is always the possibility that there is a
personal element by the very nature of artistic endeavour. This,
as has been observed above, is not fatal. The fact that one
derives enjoyment from one's work does not detract from the
work being a business. Nonetheless the possibility that the
activity is predominantly a personal hobby is something of which
one must be aware and it adds to the difficulties in deciding
this type of case. Second, the music business is, as I mentioned
in Leblanc, going through a difficult time in Canada. For
every performer, musician and composer who makes vast amounts of
money there are many who can barely make a living or who must
look to other forms of work to sustain their musical endeavours.
I think this court should be very careful about dismissing
appeals of musicians who are down on their luck or suffering from
the current problems in the music industry.
[15] I think
that Mr. Bodanis was carrying on a business in 1997, 1998
and 1999 and the losses are deductible.
[16] The
appeals are allowed and the assessments are referred back to the
Minister of National Revenue to allow the losses claimed from the
music business.
[17] The
appellant is entitled to his costs, if any, in accordance with
the tariff.
Signed at Ottawa, Canada, this 14th day of May 2002.
"D.G.H. Bowman"
A.C.J.
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