Citation: 2011TCC484
Date: 20111017
Docket: 2010-258(IT)G
BETWEEN:
BRIAN D. SUMNER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller J.
[1]
The Appellant has
appealed the reassessment of his 2004, 2005 and 2006 taxation years in which the
Minister of National Revenue (the “Minister”) disallowed losses claimed by the
Appellant in the amounts of $26,425, $29,232 and $32,150. The issue in this
appeal is whether the Appellant had a source of income from excavation, welding
and machining.
[2]
It was the Appellant’s
position that he carried on a business which offered excavation, welding and
machine shop services from his property in Victoria Beach, Manitoba (the
“Victoria Beach Property”).
[3]
He claimed expenses,
revenue and losses on his personal income tax returns with respect to
excavation, welding and machining activities as follows:
|
Year
|
Expenses
|
Revenue
|
Loss
|
|
2001
|
$23,573
|
nil
|
$23,573
|
|
2002
|
$35,205
|
$520
|
$34,685
|
|
2003
|
$30,105
|
$950
|
$29,155
|
|
2004
|
$26,857
|
$432
|
$26,425
|
|
2005
|
$29,648
|
$416
|
$29,232
|
|
2006
|
$32,710
|
$560
|
$32,150
|
|
Total
|
$178,098
|
$2,878
|
$175,220
|
Facts
[4]
During the period, the
Appellant was employed full-time as a senior economist by Manitoba Hydro in the
city of Winnipeg. He stated that he worked 38 hours a week
and he had every second Monday off from work. He resided in Winnipeg during the week.
[5]
In 1991, the Appellant
purchased the Victoria Beach Property. It consisted of one and one-half acres
of land with a house and a two-car garage. The Appellant spent his weekends and
most of his vacation at the Victoria Beach Property.
[6]
I gather from the
Appellant’s evidence that the Victoria Beach area was primarily a summer
recreational area. He stated that there were approximately 250 permanent
residents in the area but that during the summer there could be as many as 5000
people on a given weekend.
[7]
It was the Appellant’s
evidence that in 2000 or 2001, it appeared to him that there was a market in
Victoria Beach for such services as clearing land, removing rocks and
excavating for basements and holding tanks. In 2001, he registered the business
name 4477228 Manitoba to offer these services. He later referred
to his business as Sumner Mechanical and I will refer to his activities by this
name as well.
[8]
The Appellant stated
that to have a complete mechanical operation, he felt that he needed three
pieces of machinery and a maintenance shop. From 2001 to 2006, he expanded the
two-car garage on the Victoria Beach Property so that it became his maintenance
shop and he purchased a backhoe, a tractor, and a skid-steer as follows:
-
In 2001, he purchased a
used 1989 Case 580K Backhoe for $19,000. It required extensive repairs and
parts which the Appellant estimated cost an additional $10,000. This backhoe
was not ready for use until early 2003. In 2005, the original backhoe had
serious mechanical problems and in 2006, the Appellant purchased a newer Case
backhoe for $31,503.
-
In 2003, he purchased a
used 1993 International highway tractor (the “truck”) for $13,000 which he
converted into a gravel truck. The Appellant built a gravel box and installed
it on the truck. The truck was not ready for use until 2005.
-
In 2004, he purchased a
used 1993 skid-steer for $13,000.
[9]
In 2001 the Appellant
offered welding services only. He did not expect to be profitable from this
activity; but he had hoped that this activity would make him known in the area.
I note that he recorded no income in 2001.
[10]
From 2002 to 2006, the
Appellant placed advertisements for Sumner Mechanical in various publications
which were local to Victoria Beach. He also listed his operation in the Yellow
Pages for eastern Manitoba.
[11]
It was the Appellant’s
evidence that he knew it would take a few years to make Sumner Mechanical
profitable but he had hoped to build his operations so that when he retired
from Manitoba Hydro he would have a business. However, he had eye surgery in
2007 and has since stopped operating Sumner Mechanical.
Law
[12]
The losses claimed by
the Appellant are deductible only if the Appellant had a source of income. The
Supreme Court of Canada, in Stewart v. R., 2002 SCC 46,
recommended a two-stage approach with respect to the determination of the
source of income question. It stated:
50 ... As has
been pointed out, a commercial activity which falls short of being a business,
may nevertheless be a source of property income. As well, it is clear that some
taxpayer endeavours are neither businesses, nor sources of property income, but
are mere personal activities. As such, the following two-stage approach with
respect to the source question can be employed:
(i) Is the
activity of the taxpayer undertaken in pursuit of profit, or is it a personal
endeavour?
(ii) If it is
not a personal endeavour, is the source of the income a business or property?
The first
stage of the test assesses the general question of whether or not a source of
income exists; the second stage categorizes the source as either business or
property.
[13]
The first stage of the enquiry is
to determine if the activity in question has a personal element. At paragraph
60 of Stewart the court stated:
60 In summary, the issue
of whether or not a taxpayer has a source of income is to be determined by
looking at the commerciality of the activity in question. Where the activity
contains no personal element and is clearly commercial, no further inquiry is
necessary. Where the activity could be classified as a personal pursuit, then
it must be determined whether or not the activity is being carried on in a
sufficiently commercial manner to constitute a source of income.
[14]
If the activity has a personal element,
then it must still be determined if the activity is carried on in a commercial
manner such that it constitutes a source of income. To determine if a source of
income exists, it is not enough that the taxpayer has a subjective intent to
make a profit. The determination is made by looking at a variety of objective
factors some of which were listed in paragraph 55 of Stewart:
55 The
objective factors listed by Dickson J. in Moldowan, at p. 486, were: (1)
the profit and loss experience in past years; (2) the taxpayer's training; (3)
the taxpayer's intended course of action; and (4) the capability of the venture
to show a profit. As we conclude below, it is not necessary for the purposes of
this appeal to expand on this list of factors. As such, we decline to do so;
however, we would reiterate Dickson J.'s caution that this list is not intended
to be exhaustive, and that the factors will differ with the nature and extent
of the undertaking. We would also emphasize that although the reasonable
expectation of profit is a factor to be considered at this stage, it is not the
only factor, nor is it conclusive. The overall assessment to be made is whether
or not the taxpayer is carrying on the activity in a commercial manner. …
Analysis
[15]
Having regard to the
first stage of the test, I find that the Appellant’s activity had a personal
element. The backhoe and other machinery were used primarily to level and clear
land or to clear snow around the Appellant’s home at his Victoria Beach
Property. Sumner Mechanical had only one contract in which it used the backhoe
and that was in 2004. Otherwise, it did not use any of the heavy equipment in
its business activities.
[16]
I also find that the
Appellant did not carry on Sumner Mechanical in a commercial manner.
[17]
The Appellant acquired
his knowledge, experience and skills with heavy equipment when he worked in the
construction industry before he attended university. However, he had no
experience or training in operating an excavation or mechanical business.
[18]
It was the Appellant’s
evidence that there were two businesses in the Victoria Beach area which
performed the same services he offered. He submitted pictures of some of the
equipment owned by these businesses to demonstrate that he had purchased the
same type of equipment. I concluded from the Appellant’s evidence that the only
similarity between his endeavours and those of the other backhoe businesses in
the area was the equipment. The other businesses operated on a full time basis
whereas Sumner Mechanical could only offer its services when the Appellant was
at his Victoria Beach property on weekends or during his vacation.
[19]
The Appellant may have
advertised his services in the seasonal newspapers; but, he did nothing else to
promote Sumner Mechanical as a business. He stated that his major problem was
that he was not known in the area. Yet he produced no evidence to show that he
investigated ways to become known.
[20]
It was the Appellant’s
evidence that in the summertime, if he was not at work in Winnipeg, he spent four or five days each week at Victoria
Beach. In the wintertime, he went to Victoria Beach every third weekend and
every long weekend. I infer from his evidence that Sumner Mechanical operated
only during the summer.
[21]
The Appellant never
developed a business plan as to how he could make his endeavours profitable.
His endeavours were a weekend seasonal operation and there was no evidence that
Sumner Mechanical, as operated by the Appellant, had the capability to become
profitable. The Appellant gave no consideration to the revenues required to
generate a profit. It was his evidence that he considered it more important to
spend time building his maintenance shop and repairing the heavy machinery than
preparing a business plan for Sumner Mechanical.
[22]
The Appellant did not
operate in a commercial manner. The Appellant insured the truck for the period
of August 23, 2004 to November 2, 2004 while he was training himself to obtain
his class 3 driver’s licence. Other than this period, none of the heavy
equipment owned by the Appellant was insured. Also, the Appellant did not have
the required driver’s licence to operate his backhoe on a public street. He
stated that one would need a class 5 licence to drive a backhoe on the public
streets in Manitoba. He held only a class 3 driver’s licence.
[23]
The Appellant reported
substantial losses for each of the years at issue. Most of these losses
consisted of capital cost allowances claimed by the Appellant. The Appellant
submitted only three invoices for jobs performed by Sumner Mechanical. They disclosed
that the Appellant had one job in 2003 and two jobs in 2004. When he was asked
how many jobs he performed in 2005 and 2006, the Appellant’s responses were
vague and non-committal. However, his automobile log showed that he had no jobs
in 2005 and only one job in 2006.
[24]
When I consider all of
the evidence, I conclude that in 2004, 2005 and 2006 the Appellant did not have
a source of income from excavation, welding and machining. The appeal is
dismissed with costs to the Respondent.
Signed at Ottawa, Canada, this 17th day of October 2011.
“V.A. Miller”
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