Citation: 2009 TCC 193
Date: 20090407
Docket: 2008-1848(IT)I
BETWEEN:
JOVAN SPASIC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Boyle J.
[1]
Mr. Spasic is
employed full-time at Ford Motors as a millwright. While he gets 40 to 48 hours
of work at Ford, he has concerns about Ford’s future and thus for his future
employment as well. Mr. Spasic has a passion for wanting to develop things
that do not yet exist, and creating things you now cannot buy. His training is
in electronics and he has a background as an electronics technician in
technology‑related engineering functions at major companies.
[2]
Mr. Spasic hopes
to be able to develop a transducer that is sensitive enough that it can form
part of a sonic imaging device capable of producing three‑dimensional
images. Such a device once developed could be used in a number of different
practical applications in diagnostic and working tools that he hopes to develop
thereafter.
[3]
In the years in
question, 2003 through 2005, Mr. Spasic was in the early stages of
pursuing his desire. In the years prior, in his basement workshop, he had
limited success in electroplating 2.5 inch silicon wafers with copper.
This was a necessary part of his planned transducer. By 2003 or 2004, he had
stopped using his basement workshop. He began to substantially renovate an old
barn on his farm property to convert part of it into a heated electronics
workshop, part of it into a more traditional workshop, and the balance to be
used for storage. He was also at the stage of acquiring equipment and supplies
in those years, both sophisticated electronic workstations and traditional
heavy equipment, heavy and light tools that might be needed, etc. He also did
some very limited work in these years on the transducer as well as the planned
self-propelled riding lawnmower and the planned enhanced Pelletier junction
heat pump, each of which would be applications of his planned transducer.
[4]
Mr. Spasic has a
limited amount of time and a limited amount of money that he is able to spend
on his pursuits. He is very frugal with his expenses, acquiring things that may
be needed or helpful second-hand or at auction. He is able to get good value in
this way although it entails buying equipment and supplies knowing there is a
risk that some of the purchases may never be needed or used. Accordingly, he
has been careful to make sure he is only buying things that he could later
resell if not needed for at least what he paid for them.
[5]
He had begun his
venture in 1999. In each of the years since then through 2007, Mr. Spasic
claimed a business loss equal to the full amount of his expenses. In the three
years in question, these were in the range of $20,000, $10,000 and $6,000
respectively. Mr. Spasic never received any revenues from his pursuits.
For tax purposes, he deducted all of the amounts expended as scientific research
and experimental development expenses in order to get an immediate deduction
for his capital expenditures on equipment as well as on the barn renovations
and the workshop construction within the barn.
[6]
Unfortunately, his barn
burned in mid-2008 shortly before the workshop areas were to be ready for use.
Since the audit occurred in 2006, Mr. Spasic said his pursuits were
focussed on the barn renovations and trying to understand the Income Tax Act
(the "ITA"). He estimates he spent an average of 20 hours
per week on the barn workshop renovations. It appears no effort was put into
the transducer development or related research.
[7]
The taxpayer’s pursuits
were in the early stages. In his own words, he had performed research and
development in his basement workshop and he was working towards a research and
development business. At some stage he built a simple transducer but not one
with the capabilities needed to pursue his projects. He does not keep track of
nor record his experimental efforts or results. In this regard,
Mr. Spasic’s activities certainly do not follow what is commonly referred
to as the scientific method. Since he had not yet developed the capacity to
develop or create the needed type of transducer, he was not yet at the
prototype stage. He had not needed to prepare either a research plan or a
business plan because he was a one-man company and had a general direction in
his head. That did not seem to include any timelines nor any forecasts. Being
at the early stages of his pursuits, he did not feel he was at the stage of
needing to conduct even preliminary market research.
I. Preliminary Issue
[8]
It was
Mr. Spasic’s position that the 2003 and 2004 taxation years were
statute-barred. It is clear that the assessments were all within the three-year
statutory normal reassessment period. This preliminary issue appears to have
arisen from some confusion on Mr. Spasic’s part as to whether the period
started when he filed his return or when the Minister initially assessed it, as
well as whether any reassessment that may be needed as a result of the decision
in these court proceedings also has to be within the three-year period. He
further confused this somewhat with the Minister’s obligations to proceed with
due dispatch. Given the complexities of the Income Tax Act, it is
certainly quite understandable that taxpayers like Mr. Spasic at times get
confused on such procedural matters.
II. Principal Issue
[9]
The primary and
possibly determinative issue in this case is simply whether or not
Mr. Spasic carried on a business in the years 2003 through 2005. In order
to deduct business losses, it is obviously necessary that there first be a
business carried on. This issue of whether or not a business was carried on may
be determinative in this case because, unless there is a business, it is not
necessary to determine (i) whether or not the expenses were qualifying research
and development expenses related to that business or were ordinary business
expenses to be tracked on capital and income account, (ii) whether all of the
expenses claimed related to the business, nor (iii) whether the business
carried on was itself the business of performing research and development.
[10]
The Court’s former
Chief Justice Bowman in his 1998 decision in Kaye v. The Queen, 98 DTC
1659, described the test to be applied simply as "Is there or is there not
truly a business?" Of this he went on to write:
. . . 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.
And:
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.
[11]
The Supreme Court of
Canada in Stewart v. Canada, 2002 SCC 46, 2002 DTC 6969, describes
this as the need to look at the commerciality of the activity in question.
[12]
Mr. Spasic’s
pursuits are focussed on trying to develop technological advances with a view
to marketing them for profit whether by way of licence, manufacture or sale.
The inherent need for creativity in his technological pursuits is quite
analagous to those who wish to pursue a creative arts business. For this
reason, creative science pursuits should be treated in those respects in a manner
similar to creative arts pursuits. It has been recognized by this Court that,
in the case of creative artists such as painters, authors, musicians and
sculptors, a broader range of criteria and a broader contextual view reflective
of the reality of the particular industry may be needed than might be in more
traditional commercial pursuits when trying to establish whether a taxpayer has
yet commenced to carry on his or her planned creative business. See, for
example, Harrison v. Canada, 2007 TCC 19, 2007 DTC 377 (book
publishing), Malltezi v. Canada, 2009 TCC 149, [2009] T.C.J.
No. 104 (QL) (product development), Li v. Canada, 2008 TCC 175,
2008 DTC 3039 (product development), Janitsch v. Canada, 2004 TCC 378,
[2004] G.S.T.C. 70 (artist), Arsenault v. Canada, 2006 TCC 42,
2008 DTC 2224 (film production), Cossette v. Canada, [2003] 1 C.T.C. 2359
(visual artist) and Tramble v. Canada, [2001] 4 C.T.C. 2160
(painter). This is also recognized by the Canada Revenue Agency ("CRA")
in its Interpretation Bulletin IT-504 on "Visual Artists and Writers".
[13]
Mr. Spasic gave
his testimony in an honest and credible fashion and I do not doubt the
truthfulness of his testimony. I believe Mr. Spasic claimed his tax deductions
in good faith. However, I must apply the provisions of the Act as they
have been written by Parliament and have been considered by the Courts. I am
mindful that it is in the nature of technology research pursuits that they may
potentially remain in the start-up loss phase longer than other businesses
after they are started. Based upon the totality of the evidence, I am simply
unable to conclude that Mr. Spasic had started to carry on a business in
any of the years in question. The underlying commerciality of an endeavour can
often best be recognized by the organized or methodical approach with which the
endeavour is pursued. I do not think a business person, a scientist or an
engineer could describe Mr. Spasic’s pursuits as business-like. There are clearly
not sufficient indicia of commerciality to allow me to conclude that
Mr. Spasic’s efforts, expenditures and related pursuits in furtherance of
his desired research and development business yet gave rise to a business in
the year in question.
III. The Crown’s Pleadings
[14]
At the start of trial,
Crown counsel suggested the Court should first decide whether or not
Mr. Spasic carried on business and, if he was found to be in business, the
Court could then deal with the issue of quantum of expenses incurred as well as
an allocation of those expenses as between business and personal expenses. I advised
Crown counsel that the reply, which had been drafted by a CRA "agent"
not a lawyer with the Department of Justice, did not raise these last two
issues so they were not properly before the Court. The pleadings govern
notwithstanding that it may be clear from CRA’s Audit and Appeal files that
these were also in dispute. Taxpayers generally have the right to rely upon the
issues as framed by the government in its reply as the case they must prepare to
meet. While it is possible to amend the reply in appropriate circumstances, the
general rule is there for the benefit of taxpayers to guide them in their
preparation. It is also for the benefit of the proper and efficient
administration of the Court. Had I found Mr. Spasic did carry on a
business, the manner in which the reply was drafted by CRA’s agent would have
caused me to allow all of the expenses claimed subject only to those which
should have been capitalized instead of expensed as that issue is the only
expense-related issue set out in the reply. These comments are not intended in
any way to reflect on the quality of Justice counsel’s representation of the
Crown’s interests. They are to serve as a reminder to CRA that fine and capable
auditors and appeals officers are not lawyers and that cost savings come at a
cost.
[15]
The taxpayer’s appeal
is dismissed without costs.
Signed at Ottawa, Canada, this
7th day of April 2009.
"Patrick Boyle"
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