Citation: 2009 TCC 370
Date: 20090721
Docket: 2007-3220(IT)G
BETWEEN:
CYNTHIA NGAI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rip, C.J.
[1]
These are reasons for
judgment in appeals by Cynthia Ngai from assessments of income tax for
1999, 2000, 2001, 2002 and 2003 in which the Minister of National Revenue (the "Minister")
disallowed the appellant's claim for expenses on the basis she was not carrying
on a business. In the alternative, the Minister questions whether, if the
appellant were carrying on a business, the expenses claimed, a) were laid
out to earn income from a business, as required by paragraph 18(1)(a)
of the Income Tax Act (the "Act"); and b) were
reasonable in the circumstances, in accordance with section 67 of the Act.
The Minister also alleges that some of the expenses claimed by the appellant
were personal, contrary to paragraph 18(1)(h) of the Act.
[2]
Prior to trial, the
appellant and respondent's counsel agreed on the amounts in dispute in the
event I found a business was carried on in any of the years under appeal. The
amounts are listed in Schedule "A" to these reasons.
[3]
In 1998, Ms. Ngai
purchased refurbished Chinese style Ming wood furniture from China for resale
in North America. The furniture was purchased with the help
of Ms. Ngai's sister in Hong Kong who "had experience with China" from working for a trading company. Her sister
had shown her pictures of furniture and recommended which pieces to purchase.
[4]
Ms. Ngai's sister
financed the purchase for Ms. Ngai. There was no formal agreement as to
when the loan for the purchase price would have to be paid back; there was no
interest on the loan.
[5]
The venture was carried
on by Ms. Ngai in the Toronto area. The "business" name
"Things U Select" was registered by the appellant in December 1998.
Shipment from China to Toronto was expected in Spring 1999. Ms. Ngai
also applied for a bank loan in 1999; she received an operating line of credit.
[6]
Before the inventory
arrived Ms. Ngai looked for a location from which it could be sold. She
attended flea markets and antique markets in the Toronto
region. She also designed a web page, hoping to sell in the United States.
[7]
Ms. Ngai had no
prior experience selling Chinese furniture. As a child she worked in her
parents' store in Hong Kong. She said she also ran a graphic design
and typesetting business in England from 1974 to 1987. In Canada, Ms. Ngai sold life insurance and advertising.
She also sold sewing machines and books at various exhibitions, including the
Canadian National Exhibition. She said she took a "few weeks"
business course. In cross‑examination she was unable to disclose what
income she would have to generate for the venture to break even.
[8]
When Ms. Ngai was
laid off from her employment in 1998 she went to Hong Kong to attend
a parent's funeral. It was then that she decided to get into the furniture
business because it sounded "interesting and exciting". Her
preparations for the venture included interviewing people in Hong Kong and researching the internet. From
"Googling" Chinese furniture, she discovered that there was a dealer
in the Yorkville area of Toronto selling "very expensive"
furniture. She did visit the dealer.
[9]
Inventory arrived at
different times during Spring 1999 and later. About 200 pieces of
furniture, all assembled, as well as over 1,200 lap tables or trays, each
measuring 11 inches by 14 inches, were received by the appellant. In
all 2,178 units were shipped to the appellant for sale. These were the
only shipments of inventory received. She described some furniture as a "very
awkward size". Some pieces were "huge" and heavy, not the
standard American style. Later on she also purchased some accessories to make
the furniture more attractive.
[10]
During Spring 1999, Ms. Ngai
rented four booths at a flea market in Pickering. Each booth was 10 feet by 10 feet; one booth was used to
sell the furniture, three booths were used for storage. Later on she stored
some furniture in self‑storage facilities to keep her "costs as low
as possible".
[11]
Ms. Ngai rented a
booth in mid July 1999 at the Harbourfront Antique Market in the tourist area of
downtown Toronto. Harbourfront was open seven days a week,
from 9:00 a.m. to 9:00 p.m., and Ms. Ngai said she "was
there every day". During 1999, Ms. Ngai sold nothing at Harbourfront.
[12]
Harbourfront required a
one year lease, Pickering was rented on a weekly basis.
[13]
A sister, Patricia Ngai,
also living in Toronto, would attend at one of the premises when
Ms. Ngai was at the other premises. Ms. Ngai said that she could not
attend at two locations at the same time. She could not recall the portions of
time she spent at each. Ms. Ngai explained that Harbourfront was an
antique market and "high class". Pickering was a flea market selling "cheap stuff". People go to a flea
market for bargains, she declared. However, she sold essentially the same quality
at both sites.
[14]
Ms. Ngai reported
sales for the four years were $31,104.
Forty‑four per cent of the total sales took place in 1999. About
40 per cent of the sales, $12,504, were in one four‑week period from
July 18, 1999 to August 8, 1999.
All of these sales took place on Sundays, a "busy day", according to
Ms. Ngai. In 2000, Ms. Ngai had sales of $11,017, approximately
30 per cent of total sales.
[15]
Ms. Ngai explained
that sales were higher in 1999 because people were curious. Potential customers
also were asking for pieces of furniture of a design she had already sold. Based
on her estimate of cost of goods, her margin was almost tenfold. But she did
not reorder any furniture, partly because she did not have money to reorder.
She also complained it took a long time to sell one item. Her line of credit,
$14,250, was being used to pay rent and there was no money to purchase more
inventory, she stated on several occasions.
[16]
The appellant realized
she was having problems selling the furniture as early as late Summer in 1999.
The furniture she purchased was made of natural wood and with the temperature
change in Toronto, the wood started cracking. This made it
difficult to sell. Also, because of the weight of the furniture, she could not
deliver it herself; she "needed some manpower". She "found the
business is not what I thought it as simple, and then my expense is getting
larger, but income was not as comparable." She also testified that people
in Toronto told her the market had changed for the
worse. These are things that she said she did not foresee when she started the
venture.
[17]
No other inventory was
ordered by Ms. Ngai because she was trying to get rid of the problems.
People wanted bargains and she had to sell for less than what she originally
thought she could get for the furniture. After the first year, or even during the
first year — her evidence is contradictory — she decided that
business was not good. Ms. Ngai acknowledged that after the first year she
wanted to "get rid" of the inventory. In the first year, she said she
realized that "I didn't think I can carry on anymore." She started to
look for a job.
[18]
Ms. Ngai was not
prepared for the challenges she incurred. She acknowledged that she did not
research the venture sufficiently before she started: "But sometimes you
have to start after some research. You cannot just keep researching and not
doing things, so you don't know when to start doing and when to start ordering
and when to stop. Then what is the point in business? In business you have to
try everything until you see if there is light, then you have to stop."
[19]
In 2000, Ms. Ngai
found a job selling automobiles. As a sales agent the hours of work varied and
she was able to attend daily at Pickering and Harbourfront. She said she made
arrangements with persons selling from booths close to her booths at both locations.
The persons were to contact her pager or cell phone if anyone expressed
interest in purchasing any furniture. If a neighbour sold an item for the
appellant, Ms. Ngai would pay a commission of 10 per cent.
Ms. Ngai tried to avoid having a neighbour sell items; she tried to have
the potential client return to the booth in the evening so that she could make
the sale. She also would use the pager and cell phone to take messages during
the day, returning the calls in the evening when there was no charge.
[20]
Ms. Ngai closed
her booths at Pickering in July 2000 and at Harbourfront in
April 2003. She closed Pickering even though that was the location where
she had all her sales in 1999. However, she said that security was superior at
Harbourfront, people were better behaved at Harbourfront, the "right
clientele" was at Harbourfront. She explained that she preferred an
antique market to a flea market where she had to discount "too much".
Also, at Harbourfront there were people working who could oversee her inventory
when she was not on the premises. Items, similar to the purported quality she
was selling, were more available at Harbourfront. In 2000 she also sold the
furniture at a location at Queen and Dufferin. At the latter location, her
presence was not necessary. As I understand her evidence, the proprietor of the
premises agreed to sell the furniture for her and deduct any proceeds of sale
from the rent. If sales exceeded rent, she would get the excess.
[21]
In the latter years
Ms. Ngai also tried to sell the furniture to furniture retailers but
without any success. She made modest sales selling the furniture at cost at
garage sales. She was disposing of the lap tables by giving one free to a
purchaser buying over $400 in merchandise or, when she was selling cars, as a
gift to persons who bought a car from her.
[22]
Patricia Ngai
testified on behalf of Ms. Ngai. Patricia Ngai helped her sister sell
the furniture in Pickering when needed. She said the appellant would pick
her up after work and treat her to dinner after hours.
[23]
Patricia Ngai
confirmed that Ms. Ngai leased a car during the years in appeal and that
Patricia Ngai's car was used for personal matters.
[24]
When she worked at
Pickering, Patricia Ngai "did not sell much", mainly
"little items" having a value of $20 to $30 each. She also worked at
Harbourfront. In cold weather she did not work every day. She could not recall
the year she worked in the summer. Patricia Ngai recalled her sister was
at Harbourfront every day, more frequently than at Pickering.
[25]
Stewart v.
The Queen put to rest the "reasonable
expectation of profit" test to determine whether a taxpayer's activities
constituted a source of income for the purpose of section 9 of the Act.
The Supreme Court suggested a two‑stage approach to determine if a taxpayer
has a source of income: 1) is the activity undertaken in pursuit of profit or
is it a personal endeavour that is, to distinguish between personal and
commercial activities, and secondly, if it is not a personal endeavour, is the
source of income business or property? (Here the issue is if Ms. Ngai's
activities were a business.) The first stage assesses whether a source exists
and the second distinguishes between business and property. Notwithstanding
that an activity could have a personal pursuit, if it is undertaken in a
sufficiently commercial manner, the activity will be considered a source of
income for purposes of section 9.
[26]
Iacobucci and
Bastarache J.J. cautioned that the pursuit of profit test should only be
considered when there is a personal element to the activity. Once it is
determined that the activity is commercial, the Court need not analyze the
taxpayer's business decisions. They state that for an activity to be classified
as commercial the taxpayer must have the subjective intention to profit and
there must be evidence of businesslike behaviour to support that intention. The
determination of subjective intention can be made by looking at a variety of
objective factors. Reasonable expectation of profit is a factor to be
considered at this stage, but it is not the only factor and it is not
conclusive.
Objective factors listed by Dickson J. in Moldowan v. M.N.R.
are to be considered: (1) the profit and loss experienced 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.
[27]
The appellant's counsel
described Ms. Ngai as unsophisticated. I agree. She was also inexperienced
and perhaps headstrong, the latter not necessarily a fatal flaw in business.
[28]
That one is
unsophisticated or naïve does not absolve that person from otherwise having to
establish that he or she had the intention to profit from a venture. Stewart
cautioned that there must be businesslike behaviour to support that intention.
In analyzing evidence that may support a taxpayer's intention to carry on an
activity for profit and what is businesslike behaviour, one at least ought to
consider what a reasonable person carrying on a business may have done in
circumstances similar to the facts at bar.
[29]
In 1998, Ms. Ngai
started making plans to sell the furniture with the intention of making a
profit. I can find no personal benefit to Ms. Ngai in exercising this
activity. Waiting around for customers at a booth day after day is not a hobby
or gives one personal enjoyment.
[30]
Prior to starting the
venture Ms. Ngai arranged for financing to pay current expenditures such
as rent. She rented booths from which to sell the furniture and arranged for
storage of furniture later on in 1999.
[31]
There was a commercial
character to her preparation and planning for the sale of the furniture.
[32]
The respondent says
that Ms. Ngai never carried on the furniture business. I disagree. She
carried on business in 1999 and at least to the end of Summer 2000. She
purchased inventory to sell at a profit and put the furniture up for sale. That
she was overly optimistic in the venture's future or that she may have been
inexperienced to carry on such a venture does not mean that she was not
operating a business: she had a business location, customers and sales. That
the number of customers and sales were less than modest again does not mean
that there was no business.
[33]
During 1999 and up to
at least July 2000 when she left Pickering, Ms. Ngai was carrying on business of
selling furniture. In 2000 she finally or definitely concluded that the
business was not successful and decided to end it. However, she would require
time to dispose of the remaining inventory and close the business. The
inventory consisted of damaged furniture and lap tables. Ms. Ngai had no
idea in 2000 of the inventory's value. Arguably, a reasonable business person may
have concluded it more economically viable to junk the furniture than to pay
storage fees and incur other expenses during the next three years.
[34]
However, this was not
what Ms. Ngai decided. Perhaps due to her inexperience in carrying on
business or due to wanting to dispose of the furniture at what she thought
would be a good price, she took her time until 2003 to find alternate means of
disposing of the furniture.
[35]
It is only the period
after Ms. Ngai decided that the business must be terminated that it is
questionable whether she carried on a business. Once a person decides to
terminate a business, that person must be given time to close the business in
an ordinary manner. Ms. Ngai's business was very modest. The question is
whether, bearing in mind no new inventory was being purchased and the existing
inventory was damaged, she required approximately two and a half years to close
the business.
[36]
There is no evidence
before me that a reasonable business person in circumstances similar to
Ms. Ngai would require from mid‑2000 to 2003 to orderly liquidate
the business. Notwithstanding her research and efforts in planning for a
business, Ms. Ngai had absolutely no prior experience in either buying
furniture for sale or in selling furniture. She relied on her sister in
Hong Kong to recommend what type and pieces of furniture to purchase for
sale in Canada. She relied on her sister because her
sister worked for a trading company. Ms. Ngai did say that Chinese
furniture was "hot" at the time and this was an influence on her
decision to sell furniture. However, there is no evidence that her sister knew
anything about furniture, the reaction of the furniture to Canadian weather
conditions and the market for the furniture in Canada.
The only research or preparation Ms. Ngai undertook for the proposed
business was talking to people in Hong Kong, checking the internet and
visiting an antique furniture store in Yorkville.
[37]
Ms. Ngai
said that from the end of 1999 on she wanted to get rid of the furniture. In
2000, she started making alternate plans realizing the business she started in
1999 was doomed to failure. She got a job selling cars. But she continued to
try to dispose of the furniture. No reasonable businessperson in her situation
would have attempted to continue in business after August 2000, when the last
sales for the year were made, for the following reasons, at least:
a) Ms. Ngai did
not have the financial wherewithal to finance the business for any extended
period. She relied on her sister purchasing the furniture for her and paying
the shipping costs to Canada; there were no terms for repaying the
loan. The operating line of credit she received from the bank was applied to
paying day‑to‑day expenses, such as rent. She did not have funds to
purchase additional inventory, for example.
b) There is no evidence
of the cost in Hong Kong of the furniture delivered to Canada. In the Statement of Business Activities in the 1999
income tax return, Ms. Ngai reported the opening inventory as $21,206.70
and sales of $10,502. In her 2000 tax return, Ms. Ngai reported opening
inventory at $19,342.75. This would include the cost of accessories purchased
in 1999. Ms. Ngai could not explain with any confidence how the costs of
goods in each year were determined. I will assume the cost of the furniture was
$21,206.70 and this was for furniture in good condition.
There is no evidence that the furniture was
in damaged condition when it left Hong Kong or arrived in Toronto. The furniture became cracked and damaged once in Canada. It would be reasonable to conclude that, once
damaged, the value of the furniture had declined. Yet even though Ms. Ngai
acknowledged damage to the furniture — a key consideration in realizing selling
furniture was a major problem — she was not ready to consider the fact
that its value may have deteriorated or may be a harder sell.
c) She closed Pickering, where she had all her sales in 1999, to concentrate
on Harbourfront which had no sales in 1999. In her view Harbourfront was a
higher end antique market as opposed to Pickering's flea market. However the furniture she had for sale was damaged
goods, having an obvious value of less than cost and if Harbourfront were
"higher end", would damaged merchandise attract such a clientele?
d) Ms. Ngai
continued to offer goods for sale at a higher end market. There is no evidence
that she considered reducing her prices to meet changed circumstances. In fact,
she continued to pay rent for storage and for booths. During the years in
appeal she paid $58,994 in rent for storage and booth rental. She never gave
any thought to having the inventory valued to determine whether it would be
worth spending more money to keep the furniture. She did not consider — or want to
consider — that the
furniture may possibly have a value considerably less than cost and, based on
her sales experience, continuing the venture would be a waste of time and
money.
[38]
Nevertheless,
on the basis the business terminated in August 2000, Ms. Ngai should be
allowed at least six months to otherwise liquidate her business. Thus I would
allow her to deduct expenses incurred from a business for 1999, 2000 and
January and February 2001.
[39]
However,
the expenses claimed by Ms. Ngai were, in some cases, excessive and ought
to be reduced accordingly. Some of the expenses were simply not reasonable
in the circumstances. Ms. Ngai had an exaggerated idea as to what expenses
she was entitled to deduct. For example, she deducted an amount in respect of
rent for the basement of the home, a bungalow, in which she lived with her
sister, as an office. The basement included laundry facilities, furnace, hot
water tank, etc. Ms. Ngai said she had an office in the basement and used
the office to issue receipts to customers, read business books and think. She
claimed 50 per cent of the expenses for the house as a business
expense.
[40]
The
portions of the amounts still in dispute at the commencement of trial for 1999,
2000 and January and February 2001 ought to be allowed or disallowed as
explained in the following paragraphs 41 to 59 inclusive.
Rent
[41]
The rent paid by Ms. Ngai was
for the booths at Pickering and Harbourfront as well as for the storage of the
furniture. Ms. Ngai used the booths from which to sell the furniture and
related items. Because of the quantity of pieces she acquired, she also
required a place to store inventory. These are reasonable expenses laid out to
earn income in 1999 and 2000. I would allow 16.67 per cent of rent paid in
January and February 2001. There is no question that the rent was at arm's
length. I would deny any rent that she may have paid to her sister or may have
deducted for office space.
Telephone / Utilities
[42]
Ms. Ngai had two cell phones
and two land phones, one of each, she said, for business and the other for
personal use. She also had a pager. Her position is that the personal phones
were used for personal use only and the business phones for business purposes
only. Ms. Ngai testified that the business phones were used to call
Hong Kong to find out about freight deliveries and to communicate with her
sister in Hong Kong about the business and products, and locally, to
deliver product to customers, to communicate with people watching her booths,
to solicit sales and other daily business activities. The pager was used to
reduce cell phone costs.
[43]
That Ms. Ngai required two
phones for business as well as a pager was a business decision that she made
and I am loath to disallow it.
[44]
However, as mentioned earlier, I
have found that there was a tendency by Ms. Ngai to exaggerate her needs
for the business. The evidence is that a great portion of sales took place on
Sundays in the summer months and in 1999, only from Pickering.
[45]
Ms. Ngai was making numerous
calls on the business phone to her sister, Patricia, who would frequently spend
evenings gambling at the casino in Orillia. Ms. Ngai testified that these calls to a person
she shared a home with were business related, for example if Patricia Ngai
would be available to attend at a booth. I find it difficult to accept that
costs of these calls were laid out to earn income from a business.
[46]
I would allow Ms. Ngai
50 per cent of expenses she claimed for telephones and the pager as
described in Schedule "A" for 1999 and 2000 and 8½ per cent for 2001.
[47]
I would allow Ms. Ngai
internet expenses, described as Advertising in Schedule "A".
When she started the business she was optimistic that she would succeed and she
saw the internet as a mean of generating income. She had a website advertising
the furniture, among other things. She should be entitled to these expenses in
the adjusted amount she now claims for 1999 and 2000 in
Schedule "A" and 16.67 per cent of the amount in 2001.
Motor
Vehicle
[48]
Ms. Ngai's motor vehicle
expenses to and from her work places and her home are not deductible expenses.
Similarly the expenses from Ms. Ngai's home to storage facilities are not
deductible.
[49]
In Henry v. M.N.R. the Supreme Court
denied the automobile expenses of an anesthetist carrying on a business on his
own account for trips between his home and the hospital in the morning and in
the afternoon during the year and capital cost allowance for the automobile.
[50]
As far as Ms. Ngai attending
at the booths and storage facilities every single day, bearing in mind the
amount of sales generated, I believe Ms. Ngai and her sister have
exaggerated Ms. Ngai's frequency of attending these facilities. I would
have preferred evidence in this regard from independent witnesses, people who
had booths at Pickering or Harbourfront and, preferably, were in contact with
Ms. Ngai during the day when potential customers approached
Ms. Ngai's booth and expressed interest in purchasing furniture.
[51]
That is not to say I do not
believe that Ms. Ngai did not attend the facilities on a regular basis,
simply that it was not on a daily basis. Automobile expenses incurred between
Pickering and Harbourfront and storage facilities are deductible. However, I do
question whether any reasonable business person would visit a storage facility
every single day.
[52]
I would permit Ms. Ngai to
deduct 25 per cent of her automobile expenses in 1999 and 2000,
described in Schedule "A". I would round off at 8½ per cent of the portion of automobile
expenses she be allowed to deduct in 2001. This is the fairest and most
efficient manner of determining automobile expenses; to go on a daily trip by
trip allocation, including leasing costs, over 1999, 2000 and 2001 would not be
to anyone's benefit.
Interest Expenses
[53]
Interest expenses claimed include
interest on a line of credit and on unpaid balances due on credit card
purchases. I would not disallow the claim of $318.95 in 1999 on Ms. Ngai's
line of credit.
[54]
In 2000, she claimed interest
expenses of $1,487 on her line of credit as well as $3,118 from credit card
balances. Some of the charges on the credit cards include expenses that appear
to be personal: occasional Cineplex costs, frequent service station charges as
well as at least one charge from Holt Renfrew, although this may be in respect
of accessories she purchased for the business. The bulk were restaurant
charges. The only evidence at hand with respect to restaurants was that
Ms. Ngai did not cook and she and her sister ate out almost every night;
the credit card invoices reflect this. Costs of eating at restaurants were not
business expenses. There were some highlighted items that appear to be for
business, for example, Business Depot and Pagenet. Many charges are not
identified. I would disallow 90 per cent of interest on credit
balances in 2000 and for January and February 2001, I would leave 1999 alone. I
would also allow interest on the line of credit as well as bank charges for
1999, 2000 and the first two months of 2001.
Management Fees
[55]
Management fees were purportedly
incurred in 2000. There is no evidence supporting these expenses and therefore they
ought not be allowed.
Office
Expenses, Supplies and Other Expenses
[56]
Ms. Ngai claimed office
expenses. The amounts are not significant; they include Royal Bank monthly
activity fees and such items as rent for a VISA computer. I would allow these
items.
[57]
I would also allow her to deduct
the cost of office supplies in 1999 and 2000.
[58]
Other expenses incurred in 1999
are not fully explained and ought to be disallowed.
[59]
Business taxes paid in 1999, 2000
and for January and February 2001 are deductible in computing income from
business.
[60]
Therefore, the appeals
for 1999, 2000 and 2001 are allowed but the amounts of expenses claimed in each
year shall be reduced in accordance with paragraphs 41 to 59 of these
reasons. The appeals for 2002 and 2003 are dismissed. The respondent shall be
entitled to 66 ⅔ per cent of the costs.
Signed at Ottawa, Canada, this 21st day of July 2009.
"Gerald J. Rip"
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