Citation: 2010 TCC 597
Date: 20101124
Docket: 2008-3468(IT)G
BETWEEN:
DINO BERTUCCI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bédard J.
[1]
This appeal pursuant to
the general procedure was heard at Toronto, Ontario, on
March 29 and 30, 2010.
[2]
Paragraphs 10 to
18 inclusive of the Reply to the Notice of Appeal outline the matters in
dispute. They read as follows:
10. In his returns of income for the Taxation
Years, the Appellant reported and computed business losses relating to the
artist management services as follows:
|
|
2000
|
2001
|
2002
|
2003
|
2004
|
|
Fees (Income)
|
$2,000.00
|
Nil
|
Nil
|
Nil
|
Nil
|
|
Expenses:
|
|
|
|
|
|
|
Advertising
|
$1,400.00
|
1,400.00
|
1,500.00
|
1,600.00
|
1,650.00
|
|
Meals &
Entertainment
(50%)
|
2,194.33
|
4,437.37
|
1,803.14
|
617.78
|
2,228.07
|
|
Motor Vehicle
|
8,771.53
|
13,973.00
|
6,548.36
|
11,397.10
|
6,885.64
|
|
Office Expenses
|
165.58
|
1,041.72
|
694.48
|
Nil
|
482.04
|
|
Supplies
|
1,028.50
|
1,141.64
|
1,278.63
|
1,342.56
|
1,979.43
|
|
Travel
|
17,551.17
|
25,654.39
|
8.940.00
|
8,260.44
|
13,042.04
|
|
Salaries
|
1,700.00
|
Nil
|
Nil
|
Nil
|
Nil
|
|
Telephone,
Utilities
|
1,153.42
|
1,522.83
|
1,347.03
|
1,320.49
|
Nil
|
|
Education
Materials
|
165.00
|
175.00
|
1,590.40
|
2,325.00
|
638.91
|
|
Maintenance &
Repairs
|
Nil
|
Nil
|
Nil
|
Nil
|
200.00
|
|
CCA (on Vehicle)
|
1,464.86
|
1,003.45
|
463.27
|
12,448.64
|
11,484.49
|
|
Total Expenses
|
$35,894.39
|
$50,349.40
|
$24,165.31
|
$39,312.01
|
$38,590.62
|
|
Net Loss
|
($33,894.39)
|
($50,349.40)
|
($24,165.31)
|
($39,312.01)
|
($38,590.62)
|
11.
In assessing the Taxation Years, the Minister
disallowed the deduction of the foregoing expenses claimed by the Appellant
and, accordingly, disallowed the reported business losses in full.
12.
In determining the Appellant’s tax liability for
the Taxation years, the Minister made the following assumptions of fact:
a) the Appellant’s primary source of income
was from employment as a teacher at Seneca College;
b)
the Appellant also worked as a marketing sales
manager at Pink Triangle Press @ Xtra Magazine;
c)
the Appellant also worked as a fitness
instructor at Oxygen Fitness;
d)
in his returns of income for the Taxation Year,
the Appellant claimed business expenses and reported business losses from his
artist management services, the particulars of which are set out in
paragraph 10 above;
e)
the Appellant reported a combined gross revenue
of $2,000 and a combined business loss of $186,311.73 during the relevant
Taxation Years in relation to artist management services;
f)
in none of the years between 2000 and 2004 did
the artist management services generate a profit;
g)
the amounts claimed by the Appellant as business
expenses were not incurred in relation to any business activity of the
Appellant;
h)
the Appellant provided artist management
services for personal enjoyment and not to carry on a business activity to gain
or produce income;
i)
the amounts claimed by the Appellant as business
expenses were personal expenses of the Appellant;
j)
the amounts claimed by the Appellant as business
expenses were not reasonable under the circumstances.
B. ISSUE TO BE DECIDED
13.
The issues are:
a) whether the Appellant’s activities
pertaining to the artist management services constituted a source of income;
b)
whether the expenses claimed by the Appellant in
his Taxation Years were incurred for the purpose of gaining or producing income
from a business;
c)
whether the expenses claimed by the Appellant in
his Taxation Years were the personal or living expenses of the Appellant; and
d)
whether the expenses claimed by the Appellant in
his Taxation years were reasonable in the circumstances.
C. STATUTORY PROVISIONS, GROUNDS RELIED ON,
AND RELIEF SOUGHT
14.
He relies on sections 3, 4 and 9, paragraphs 18(1)(a)
and 18(1)(h), section 67, and subsection 248(1) of the Income Tax
Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the “Act”).
15.
The Appellant undertook the artist management
services as a personal endeavour and did not conduct his activities in a
sufficiently commercial manner or in pursuit of a profit. Accordingly, the
artist management services did not constitute a source of income for purposes
of section 9 of the Act and the Minister properly disallowed the
Losses claimed by the Appellant in relation to the said activity.
16.
In the alternative, the claimed business
expenses were not incurred to gain or produce income from a business.
Therefore, the deduction of the expenses was correctly disallowed by the
Minister pursuant to section 9 and paragraph 18(1)(a) of the Act.
17.
Further to the paragraph above, certain of the
expenses were “personal or living expenses” of the Appellant, as defined in
subsection 248(1) of the Act and the deduction of such amounts is
specifically precluded by paragraph 18(1)(h) of the Act.
18.
In the further alternative, he submits that if
this Honourable Court finds that during the Taxation Years the Appellant did
carry on a business with respect to the artist management services which the
Minister specifically puts into issue, the Appellant is not entitled to deduct
any amount of expenses in the determination of the business under
subsections 9(1) and 9(2) of the Act, in those Taxation years
unless the amounts are reasonable in the circumstances, in accordance with
section 67 of the Act.
[3]
Assumptions 12a),
b), c), d) and f) were not refuted by any evidence.
[4]
The Appellant and
Teresa D’sa, a CRA litigation officer, were the only witnesses.
Appellant’s testimony
[5]
The Appellant’s
testimony was essentially the following:
i)
The Appellant had no
intention of starting an opera singer management business until Catherine
McKeever (an opera singer he met through his brother, also an opera singer),
who had been impressed by his sales and marketing acumen, commented that he
should start an artist management business. The Appellant explained that he was
intrigued and quickly saw that he could immediately overcome one of the hurdles
in that he would have some contacts in the business who might lead him to opera
singers to promote. The Appellant explained that he decided (after completing
research on the subject and doing pro‑forma income and expense forecasts)
to start an opera singer management business under the name of BSG Artist
Management (“BSG”) – even though he had neither a fondness for nor
a particular interest in opera – since he had the
training, education, and business experience to make such a venture successful.
I would point out immediately that the evidence revealed that the Appellant’s
research on opera consisted essentially in a discussion with Catherine McKeever
and in the reading of three books (see Exhibit A‑2), one of which is
a career guide for singers published in 1994. I would also point out that the
Appellant explained that he did not buy a recent edition of the career guide for
singers (the cost of which was $300) because it was too expensive. Finally, the
Appellant added that he learned from his research that his business endeavour
would require years of dedication and investment in order to become successful
and profitable. The Appellant also explained that he found out from his
research that the largest artist management company in Canada
had only been able to reach a successful and profitable level of operation
after five years of continued losses, even though it had received grants in
each of the first five years of operation.
ii)
The Appellant was the
sole proprietor of BSG and his duties were essentially to contact opera singers
and attempt to get them hired by opera companies.
iii)
The Appellant
personally funded BSG’s operations during its 5½ years of existence.
iv)
BSG’s office or
principal place of business was located in his apartment.
v)
BSG provided the
following services:
a)
Providing qualified
candidates for auditions being held by opera companies. The Appellant explained
that this service involved contacting hiring managers and presenting the
resumes and biographies of opera signers he represented. In support of this
testimony, the Appellant filed e‑mails and letters he had exchanged with
opera companies (see Exhibit A‑1);
b)
Recruiting opera
singers. The Appellant explained that in order to recruit opera singers he
attended various auditions and events at which singers were present. I would
point out immediately that the Appellant’s testimony was silent with regard to
the names of the singers he allegedly met at those auditions and events and
with regard to the places and dates of the alleged meetings. The Appellant also
testified that over BSG’s 5½ years
of existence he had put under contract eight singers, six of them under written
contracts. In support of this testimony, the Appellant filed on the first day
of the hearing an artist management contract entered into on June 29, 2000
between Catherine McKeever and BSG (see Exhibit A‑5) (the “McKeever
contract”). The Appellant also filed, on the second day of the hearing, two
artist management contracts, one entered into on January 5, 2000 between Dominic
Bertucci (the Appellant’s brother) and BSG (see Exhibit A‑7) (the
“Bertucci contract”) and the other entered into on March 14, 2000 between
Melinda Enns and BSG (the “Enns contract”). I would point out immediately that
the Appellant did not specify when the three other written contracts were
signed or the circumstances in which they were signed. The Appellant’s
testimony was also silent with regard to the length of those contracts. I would
point out as well that the Appellant’s hesitancy in naming, and the amount of time
he took to name, the two signers that were allegedly under oral contract with
BSG raised doubts in my mind with respect to his credibility. Finally, the fact
that the signature of Dominic Bertucci appearing on the Enns contract and on
the Bertucci contract is completely different from his signature appearing on
the McKeever contract also raised serious doubts in my mind with respect to the
Appellant’s credibility.
c)
Matching singer type
with roles for which opera companies were casting. The Appellant explained that
this activity involved reading through the various hiring/audition lists on a regular
basis to see what operas were being produced and what roles he could fill with
his clients.
d)
Researching operas to
find out what singers were required for them. The Appellant testified that
research was done by using various books on operas which listed information about
the productions, including the number and types of voices required. The
Appellant filed the three books he consulted (see Exhibit A‑2) in
support of his testimony.
e)
Recording and producing
compact disks of singers’ performances. The Appellant filed only one disk,
which he allegedly produced himself (see Exhibit A‑1), in support of
his testimony in this regard.
f)
Creating a website for
promotional purposes.
g)
Creating and printing
resumes and biographies using BSG letterhead.
h)
Travelling to events,
including performances and auditions, to try to meet audition managers and also
to meet with singers for the purpose of signing them with BSG. The Appellant
explained that he also travelled to auditions to provide moral support for his
clients during the auditions. I would point out that the Appellant’s testimony
was silent with regard to the names of the audition managers he met and with
regard to the places and the dates of their alleged meetings. The Appellant
testified that during the relevant period he travelled 32 times to
auditions outside Canada (in Europe and the USA)
with his clients. The evidence (Exhibit A‑1, Tab 12) also
revealed that the average cost of that travel was around $2,000 and that the
trips were unsuccessful since they never led to any of BSG’s clients signing a
contract with an opera company and since BSG never signed any new singers as
clients. The Appellant also explained that his clients (singers allegedly under
contract) paid their own travel expenses. The summary of auditions and travel
dates filed by the Appellant in support of his testimony (see Exhibit A‑1,
Tab 12) reveals that Melinda Enns travelled 12 times with the
Appellant to auditions outside Canada, his brother eight times, Karyn Hanson 12 times,
Katherine McKeever twice, Justin Spears four times and David Vabarjad 3 times.
It is really hard to imagine second‑class opera singers who earned no
money from their profession during the relevant period repeatedly travelling
outside Canada and consequently incurring huge costs in
order to find secondary roles in which they might be cast by non‑Canadian
opera companies. It would have been interesting to hear the testimony of those
singers who allegedly travelled to auditions outside Canada
or the testimony of the audition managers that the Appellant allegedly met
during those alleged auditions.
vi)
The Appellant did not
obtain any licence to operate BSG. However, he did register with the Province of Ontario (see Exhibit A‑1, Tab 5).
vii)
The Appellant did not
have a separate bank account for BSG because that would have been too
expensive.
viii)
The Appellant’s primary
source of income was from employment as a marketing teacher at Seneca College. The Appellant testified that he was devoting
an average of 25 hours a week to that employment in the period from
September to April. The Appellant also worked (from the year 2003) as a
salesman (selling advertising) and as a sales manager at Xtra ‑ Pink
Triangle Press. The Appellant explained that he was devoting an average of
20 hours a week to that activity, mainly in the afternoon. The Appellant
also worked as a fitness instructor at Oxygen Fitness. He added that he was
devoting two hours a week to that activity. The Appellant testified that he
still had a great deal of time to devote to performing his duties for BSG,
considering the numerous days off from teaching he had during the relevant
period and considering that the industry has cycles such that sometimes you
work many hours, and sometimes none at all, in any given week. Finally, the
Appellant added that sometimes his fellow teachers replaced him when he had to
travel to auditions outside Toronto. It would have been interesting to hear
the testimony of those teachers who so kindly replaced the Appellant during the
relevant period.
ix)
All the meal and entertainment
expenses claimed by the Appellant were business expenses. The Appellant
explained that those meals were in fact business meetings with singers and
industry people at which he discussed opera companies, performances being staged,
plans for future performances and where to scout for new talent. I would point
out immediately that the names of the people he allegedly met during those
business meals are not shown on the meal invoices. The Appellant’s testimony
was also silent with regard to the people he met and the places and dates of the
meetings. Furthermore, the evidence revealed that most of the restaurants where
those meals allegedly took place were in the neighbourhood of his residence and
that the amounts spent were very often particularly small. The Appellant
incurred huge meal and entertainment expenses during the relevant period
without convincing a single singer to sign on with BSG and without convincing a
single opera company to hire one of his clients. It is really hard to believe
that those meals were really business meals.
Analysis and Conclusion
[6]
The Supreme Court of Canada in Stewart v. The Queen, 2002 DTC 6969, set
out a two‑stage approach for determining if an activity may be considered
a source of income:
a.
Is the taxpayer’s
activity undertaken in pursuit of profit, or is it a personal endeavour?
b.
If it is not a personal
endeavour, is the source of the income a business or property?
According to the Supreme Court of Canada, the first stage
of the test is only relevant when there is some personal or hobby element to
the activity. Where the nature of an activity is clearly commercial, the
taxpayer’s pursuit of profit is established and there is no need to take the
inquiry any further by analyzing the taxpayer’s business decisions. However,
where the nature of the taxpayer’s venture contains elements which suggest that
it could be considered a hobby or other personal pursuit, the venture will be
considered a source of income only if it is undertaken in a commercial manner.
In order for an activity to be classified as commercial in nature for these
purposes, the taxpayer must have a subjective intention to profit and there
must be evidence of businesslike behaviour that supports that intention. A
reasonable expectation of profit is no more than a single factor, among a
number of others, to be considered at this stage of the analysis. In the Stewart
decision, the Supreme Court of Canada summarized the relevant criteria as
follows at 6980:
… Thus, in expanded form, the first stage of the above test can be
restated as follows: "Does the taxpayer intend to carry on an activity for
profit and is there evidence to support that intention?" This requires the
taxpayer to establish that his or her predominant intention is to make a profit
from the activity and that the activity has been carried out in accordance with
objective standards of businesslike behaviour.
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. However, this assessment should not be used to second-guess
the business judgment of the taxpayer. It is the commercial nature of the
taxpayer's activity which must be evaluated, not his or her business acumen.
Once it has been determined that an activity is a
source of income, the deductibility inquiry is undertaken according to whether
the expenses claimed fall within the words of the relevant deduction provisions
of the Income Tax Act. Even if we conclude that the expenses claimed by
the taxpayer were incurred for the purpose of gaining or producing income from
a business or property, we still will have to determine whether those expenses
were reasonable in the circumstances.
[7]
So the Appellant first has
the onus of satisfying the Court that the activity he undertook was clearly
commercial in nature.
[8]
The Appellant’s
evidence in this regard consisted essentially of his own testimony, which was
not supported by adequate documentation or by credible testimony from other witnesses.
Consequently, the assessment of the Appellant's credibility played an important
role in my decision.
[9]
It is true that the
testimony of a single person may be sufficient to meet one’s persuasive burden.
That being said, the Appellant must understand that a judge does not have to
believe an uncontradicted witness. Indeed, the uncontradicted account can be
determined to be implausible in light of the circumstances revealed by the evidence
or on the basis of common-sense principles. In the present case, the
Appellant's testimony that his activity was clearly commercial in nature is clearly
implausible given the circumstances revealed by the evidence. In fact, the
evidence revealed, inter alia, that the alleged business activity
carried on by the Appellant during BSG’s 5½
years of existence did not generate any a profit. Moreover, the alleged business activity did not
generate any income (except for an amount of $2,000 that generated a $300
profit, which was wrongly declared in the Appellant’s 2000 taxation year since it
was actually earned in his 1999 taxation year) during those 5½ years, even
though, according to the Appellant’s testimony, eight artists were under
exclusive contracts with BSG, which contracts provided that BSG was to receive
15% of those eight artists’ gross earnings related to their careers as opera
singers. This means that those artists under contract with BSG did not earn any
income (related to their careers as opera singers) during BSG’s 5½ years of
existence. It is also really hard to imagine second‑class opera singers
who earned no money from their profession during the relevant period repeatedly
travelling outside Canada and consequently incurring huge costs in order to
find secondary roles in which they might be cast by non‑Canadian opera
companies (see paragraph 5v)h) above). In other words, it seems to me
implausible that the taxpayer's activity was undertaken in pursuit of profit.
[10]
The Appellant must also
understand that it is even more difficult to believe a witness who is content
to make general and unverifiable comments and who provides evasive
explanations. Moreover, I would say that the hesitancy of the Appellant, the amount
of time he took to answer questions, his attitude, and the gaps in his memory
(see, inter alia, paragraph 5v)b) above) raised even more doubts in
my mind with respect to the Appellant's credibility. I would also point out that
the fact that the signature of Dominic Bertucci appearing on the Enns contract
and on the Bertucci contract is completely different from his signature
appearing on the McKeever contract also raised serious doubts in my mind with
respect of the Appellant's credibility.
[11]
Finally, in assessing
the evidence provided by the Appellant, the Court must also comment on the
Appellant's failure to call as witnesses certain persons (namely the
Appellant's brother, the opera singers that were allegedly under contract with
BSG, the hiring managers he allegedly met over the years, the artists the Appellant
tried to recruit, the teachers who so kindly replaced the Appellant during the
relevant period) who could have confirmed the Appellant's statements. In Huneault
v. Canada, [1998] T.C.J. No. 103 (QL), 98 DTC 1488, my colleague
Judge Lamarre referred, at paragraph 25, to remarks made by Sopinka and
Lederman in The Law of Evidence in Civil Cases which were cited by Judge
Sarchuk of this Court in Enns v. M.N.R., 87 DTC 208, at page 210:
In The Law of Evidence in Civil Cases, by Sopinka and
Lederman, the authors comment on the effect of failure to call a witness and I
quote:
In Blatch v. Archer, (1774), 1 Cowp. 63, at p. 65, Lord Mansfield
stated:
It is certainly a maxim that all evidence is to be weighed according
to the proof which it was in the power of one side to have produced, and in the
power of the other to have contradicted.
The application of this maxim has led to a well-recognized rule that
the failure of a party or a witness to give evidence, which it was in the power
of the party or witness to give and by which the facts might have been
elucidated, justifies the court in drawing the inference that the evidence of
the party or witness would have been unfavourable to the party to whom the
failure was attributed.
In the case of a plaintiff who has the evidentiary burden of
establishing an issue, the effect of such an inference may be that the evidence
led will be insufficient to discharge the burden. (Lévesque
et al. v. Comeau et al., [1970] S.C.R. 1010, (1971), 16 D.L.R. (3d) 425.)
[12]
For these reasons, I am
of the opinion that the Appellant undertook the artist management services enterprise
as a personal endeavour and did not carry on his activities in pursuit of
profit. Accordingly, the artist management services did not constitute a source
of income for the purposes of section 9 of the Act and the Minister
properly disallowed the losses claimed by the Appellant in relation to that activity.
Consequently, it is not necessary to examine whether the claimed business
expenses were incurred to gain or produce income from a business or whether
those business expenses were reasonable in the circumstances. Accordingly, the appeal
from the reassessments made under the Act for the 2000, 2001, 2002, 2003 and
2004 taxation years is dismissed, with costs.
Signed at Ottawa, Canada, this 24th day of November 2010.
“Paul Bédard”
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