Citation: 2009TCC552
Date: 20091109
Docket: 2008-550(IT)I
BETWEEN:
FRANK MORGAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller, J.
[1]
The Appellant has
appealed the reassessment of his 2003 and 2004 taxation years wherein the Minister
of National Revenue (the “Minister”) disallowed the deduction of losses in the
amounts of $2,010.33 and $1,072.50 respectively. The issue in this appeal is
whether the Appellant had a source of income from the operation of a daycare.
[2]
It was the Appellant’s
evidence that he and his spouse, Fiona Morgan, were partners in a daycare
business called Morgan’s Day Care (the “Day Care”). The business was operated
from their home. He stated that from 1999 until 2004 his spouse ran the Day
Care in the afternoons only as she worked with United Parcel Service Canada
Ltd. in the mornings.
[3]
The Appellant testified
that the Day Care was used by parents who could not pick up their children
after school. He and his spouse did not advertise the Day Care but it became
known by “word of mouth”. The children did not register for the Day Care and
the number of children which attended at the Appellant’s home varied. It was
the Appellant’s evidence that the children were teenagers or younger and it was
fair to assume that his spouse did not have the same child each and every day.
[4]
The Appellant did not
know how much his spouse charged for the Day Care services. He stated that
fifty percent of their clientele were unwed mothers and his spouse altered the
fee charged according to the circumstances of the parents.
[5]
The Appellant did not
know the names of any of the families who used his Day Care; he did not know
the number of children who used the Day Care; and, he did not know the fees
charged for the Day Care services. He stated that his spouse knew the answers
to these questions; but, unfortunately, she did not attend the hearing.
[6]
It was the Appellant’s
evidence that he and his spouse terminated the Day Care services at the end of
2004 as they found that the attendance at the Day Care decreased.
[7]
The only documents the
Appellant tendered were a police report, the mortgage loan agreement and the
plot plan for his home at 11
GrayRocks Avenue in Hamilton, Ontario. It was his evidence that he no longer had any
receipts to substantiate the amount spent for the food used in the Day Care nor
did he have copies of the receipts to show the amount of income earned by the
Day Care. The Appellant stated that his spouse kept these items in a file
folder which was stolen when they moved from Hamilton to Caledonia.
[8]
The Appellant and his
spouse first operated the Day Care from their home at 11 GrayRocks Avenue in Hamilton, Ontario. According to
the police report, the Appellant moved to Caledonia on January 28, 2004. On
February 28, 2004, he reported to the Hamilton Police that several boxes were
missing as result of the move.
Source of Income
[9]
In Stewart v. The
Queen[1],
the Supreme Court of Canada gave the following test with respect to source of
income:
5
It is undisputed that the concept of a “source of income” is fundamental
to the Canadian tax system; however, any test which assesses the existence of a
source must be firmly based on the words and scheme of the Act. As such,
in order to determine whether a particular activity constitutes a source of
income, the taxpayer must show that he or she intends to carry on that activity
in pursuit of profit and support that intention with evidence. The
purpose of this test is to distinguish between commercial and personal
activities, and where there is no personal or hobby element to a venture
undertaken with a view to a profit, the activity is commercial, and the
taxpayer's pursuit of profit is established. However, where there is a
suspicion that the taxpayer's activity is a hobby or personal endeavour rather
than a business, the taxpayer's so-called reasonable expectation of profit is a
factor, among others, which can be examined to ascertain whether the taxpayer
has a commercial intent.
…
50
It
is clear that in order to apply s. 9, the taxpayer must first determine whether
he or she has a source of either business or property income. 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.
51
Equating “source of income” with an activity
undertaken “in pursuit of profit” accords with the traditional common law
definition of “business”, i.e., “anything which occupies the time and attention
and labour of a man for the purpose of profit”: Smith, supra, at
p. 258; Terminal Dock, supra. As well, business income is
generally distinguished from property income on the basis that a business
requires an additional level of taxpayer activity: see Krishna, supra,
at p. 240. As such, it is logical to conclude that an activity
undertaken in pursuit of profit, regardless of the level of taxpayer activity,
will be either a business or property source of income.
52
The purpose of this first stage of the test is
simply to distinguish between commercial and personal activities, and, as
discussed above, it has been pointed out that this may well have been the
original intention of Dickson J.’s reference to “reasonable expectation of
profit” in Moldowan. Viewed in this light, the criteria listed by
Dickson J. are an attempt to provide an objective list of factors for
determining whether the activity in question is of a commercial or personal
nature. These factors are what Bowman J.T.C.C. has referred to as “indicia
of commerciality” or “badges of trade”: Nichol, supra, at
p. 1218. Thus, where the nature of a taxpayer’s venture contains elements
which suggest that it could be considered a hobby or other personal pursuit,
but the venture is undertaken in a sufficiently commercial manner, the venture
will be considered a source of income for the purposes of the Act.
53
We emphasize that this “pursuit of profit”
source test will only require analysis in situations where there is some
personal or hobby element to the activity in question. With respect, in
our view, courts have erred in the past in applying the REOP test to activities
such as law practices and restaurants where there exists no such personal
element: see, for example, Landry, supra; Sirois,
supra; Engler v. The Queen, 94 D.T.C. 6280 (F.C.T.D.). Where
the nature of an activity is clearly commercial, there is no need to analyze
the taxpayer’s business decisions. Such endeavours necessarily involve
the pursuit of profit. As such, a source of income by definition exists,
and there is no need to take the inquiry any further.
54
It should also be noted that the source of
income assessment is not a purely subjective inquiry. Although in order
for an activity to be classified as commercial in nature, the taxpayer must
have the subjective intention to profit, in addition, as stated in Moldowan,
this determination should be made by looking at a variety of objective
factors. 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.
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. 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.
[10]
In cross-examination the Appellant
stated that he and his spouse did not undertake the Day Care activity to make a
profit. On further questioning, he said that they did not intend to make a
profit nor did they want to make a loss.
[11]
When I review all of the evidence,
it is my opinion that the Appellant’s Day Care activity was not a source of
income. He did not have the subjective intent to make a profit and the Day Care
activity was not carried out in a commercial manner.
[12]
The activity was not advertised.
The fee charged for the Day Care varied according to the amount the parents
could pay for the services. The Appellant did not keep books for the Day Care
activity and I am left in doubt whether any records were actually kept for the
activity. The Appellant stated that he kept records for the Day Care activity;
he gave them to his accountant who prepared his tax returns for 2003 and 2004;
but, the records were stolen when he and his spouse moved. The evidence showed
that the Appellant moved on January 28, 2004 and he filed his 2003 and 2004 tax
returns on March 19, 2004 and March 14, 2005, respectively. If he had records,
they could not have been stolen on January 28, 2004 because he allegedly used
them to complete his tax returns.
[13]
In this case, the Day Care
activity could be a personal endeavour. According to the Appellant, his spouse
volunteered at the school library. She noticed that there were many single
parent families who didn’t have anyone to take care of their children after
school hours while the parents were still at work. Mrs. Morgan saw there were
parents in need and she assisted them by allowing the children to come to her
home. She is to be applauded. However, it is my opinion that the provision of
Day Care services was not a source of income,
[14]
The profit and loss experience of
the Day Care activity and the Appellant’s 50% share were as follows:
|
Year
|
Day Care Loss
|
Appellant’s Loss
|
|
1999
|
$6,824
|
$3,412
|
|
2000
|
$6,652
|
$3,326
|
|
2001
|
$4,234
|
$2,117
|
|
2002
|
$4,884
|
$2,442
|
[15]
There was no evidence
that the Appellant or his spouse had training in the daycare business. There
was no evidence of the Appellant’s intended course of action to try to make the
activity profitable.
[16]
The Appellant’s
subjective intention and an analysis of the objective factors in this case lead
me to the conclusion that the Day Care activity was not a source of income. The
appeal is dismissed.
Signed at Ottawa,
Canada this 9th day of November 2009.
“V.A. Miller”
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