Citation: 2008 TCC 518
Date: 20080915
Dockets: 2008-134(IT)I
2008-141(IT)I
BETWEEN:
KELLY CLANCY,
BRENT JACKSON,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally from the bench on August
29, 2008, at Toronto, Ontario
and modified for clarity and accuracy.)
Boyle, J.
[1]
Mr. Jackson’s band
is named after a male organ. He has played in the band for a number of years. Prior
to 2003, Mr. Jackson’s band occasionally played local gigs for which bar
owners paid each of the four members $50 to $100. This was at that time
strictly a hobby or pastime for Mr. Jackson. He was and remains a
well-employed aerospace worker.
[2]
Another personal
pursuit of Mr. Jackson's prior to 2003 was that he was taking flying
lessons with a view to getting a pilot's licence. He knew someone who did
aerial photography. Mr. Jackson did not have any previous experience
running a business of any sort. He did not have any background in the travel
business or in photography, greeting cards, therapy, dog kennels or
landscaping.
[3]
In 2003 and 2004, Ms. Clancy
worked for a major Canadian bank in Toronto. Before 2003,
she did not have any previous experience running a business of any sort. During
her school years, she had worked part-time at an aquarium store.
[4]
Before 2003, Ms. Clancy
did not have any background in the travel business, nor did she have any
personal or business interest in photography, greeting cards, therapy,
landscaping or dog kennels. Ms. Clancy said she only ever started dabbling
in photography in 2003.
[5]
In 2003, these two
taxpayers bought into the World Network Business Club.
[6]
The informal income tax
appeals of Mr. Jackson and Ms. Clancy in respect of their 2003 and
2004 taxation years were heard together in Toronto.
The taxpayers are spouses of one another.
[7]
The taxpayers were
represented by Mr. Dan White in these appeals. Mr. White described
himself as the principal of WNBC and also the author of a book entitled,
"How to Pay Zero Taxes and Keep the Tax Department Happy!"
[8]
While there was little
evidence regarding WNBC or the WNBC plan or formula, Mr. White described
WNBC as a provider of educational tax reduction strategies, encouraging clients
to turn their hobbies or interests into businesses, track their expenses and
enjoy the tax write-off of start-up losses.
[9]
Following the WNBC plan
or formula, Mr. Jackson and Ms. Clancy claimed to have started at
least six businesses in 2003 and 2004. It is the Crown's primary position that
none of their activities constituted a business. There are, thus, no business
losses that they could have deducted from their employment income.
[10]
When filing their
returns, these businesses were reported as being undertaken by one or the other
taxpayer. The taxpayers now argue that all of the businesses were actually in
partnership. It was not entirely clear whether they now believed each business
was a separate partnership or if there was a single partnership carrying on all
of the businesses or, as argued by Mr. White, a single partnership
carrying on a single business with music management, travel agency, tour guide,
aerial photographer, saltwater aquarium consulting therapy, portrait
photography and greeting card divisions or departments, much like a Walmart is
structured.
[11]
In deciding the initial
and fundamental issues of whether any of Mr. Jackson's and Ms. Clancy's
activities constituted a business, nothing turns on the legal distinctions
between partnerships and sole proprietorships, since a partnership by
definition involves persons carrying on a business together.
[12]
In filing her 2003 and
2004 returns, Ms. Clancy did not report any revenue whatsoever from any of
her reported businesses, of therapy, photography, travel agent or greeting
cards. Her reported losses from these businesses were in the $20,000 range. All
of these pursuits, except photography, have since been discontinued without
ever having generated any revenue whatsoever.
[13]
In filing his 2003 and
2004 returns, Mr. Jackson reported gross revenues of less than $6,000 in
total, from his reported business of entertainment and aviation services. His
reported losses from these businesses were in the $43,000 range.
[14]
The aerial photography
pursuits have since been discontinued without ever having generated any
revenue. Mr. Jackson's band continues. Mr. Jackson acknowledged that
the majority of the reported revenues were in fact his WNBC commissions and not
from his music or other business.
[15]
In circumstances such
as these, I must first decide whether any or all of these activities constitute
a business pursued for profit in a commercial manner, or whether they were
personal endeavours, such as hobbies or the like. This approach is mandated by
the Supreme Court's 2002 decision in Stewart. In Stewart, the
Supreme Court highlights some of the criteria, indicia of commerciality and
badges of trade that should be considered.
[16]
A related legal
question in circumstances such as these is at what time do a person's pursuits
with a view to starting up a business give rise to the existence of a business?
The approach to determining that question is guided by the approach taken by
this Court in such earlier cases as its 1994 Gartry decision and its
1998 Kaye decision, both decided by our former Chief Justice.
[17]
The Band: Mr. Jackson had been a band member
for some time before 2003. The four members equally shared the $200 to $400
received each gig. The estimated number of gigs each year could be described as
very light.
[18]
In addition to word of
mouth and reputation, the band is promoted by direct approaches to local bars
and by a vanity licence plate on his car and a licence plate cover showing the
band's website address. The band's website turns out to still be under
construction and "coming soon."
[19]
Mr. Jackson
entered a business card in evidence, together with e-mail and other
correspondence, with bars and fans in the years in question.
[20]
Little changed in the
functioning of the band in 2003, when Mr. Jackson claims his hobby became a
business, apart from the extensive recording of expenses allegedly associated
with it. Mr. Jackson described the band's activities through 2003 and 2004
and to date. The evidence did not suggest it played more gigs, pursued more
gigs or pursued gigs more diligently or in a more businesslike fashion
beginning in 2003.
[21]
The listing of expenses
to which I will return does not suggest more diligent and businesslike steps
were being taken.
[22]
In the e-mail to the
band's fan club for the summer of 2003, two performances were announced. The
first was the Clancy family farmhouse pig roast. The second was that several of
the band members would be performing with another musician under a different
band's name.
[23]
Clearly, even if I were
to fully accept all of the evidence of these taxpayers, the band has remained a
hobby throughout.
[24]
Aerial Photography: Mr. Jackson had begun flying lessons
prior to 2003 as a personal interest. He said he found the costs very high.
After his involvement with WNBC, he decided an aerial photography business
would help him address the high costs. He never made a sale or even took a
sample aerial photograph before discontinuing his alleged business venture,
which he did before even obtaining his pilot's licence.
[25]
This activity was never
a business. Obtaining his pilot's licence was never more than a personal
pursuit. I am far from satisfied that Mr. Jackson ever genuinely intended
to develop an aerial photography business.
[26]
Dog Kennels: The itemized expenses and the taxpayers'
testimony claimed that the establishing of a dog kennel was a legitimate part
of the plans for their business activities. This never went further than
discussions among the spouses at meetings at restaurants of the possibility of
getting into the dog kennel business. They expensed those restaurant meals.
[27]
There was no evidence
that the taxpayers ever even owned a dog. There were no steps taken towards
entering a dog kennel business beyond enjoying meals together at numerous
restaurants. There was no such business. Any claim to the contrary is a serious
misrepresentation.
[28]
These same comments
apply to the landscaping business referred to in the evidence.
[29]
Aquarium Consulting
and Therapy: The only
evidence of activity in this area is Ms. Clancy's part-time job while at
school, a saltwater aquarium in their home and Ms. Clancy's statement that
her only promotional efforts were that she had talked to some aquarium stores
about the availability of her services.
[30]
She acknowledged it was
really just a concept for a business. There was no evidence to support the
therapy aspect of aquaria beyond her assertion that saltwater aquaria can be
used in therapy settings.
[31]
Ms. Clancy's
aquarium at home did not appear to even constitute a hobby. It was more in the
nature of something she had in her home. This was certainly not a business.
[32]
Further, I do not
believe that it was ever genuinely intended to be developed into a business.
There was not sufficient evidence, activity or investment to even regard as
plausible window dressing for trying to start up an aquarium consulting or
therapy business.
[33]
Greeting Cards:
Ms. Clancy's greeting card venture was supported by a filed photo album
filled with four-by-six photographs printed at retail photo shops. None of
these cards was in a conventional folding-card format, although a few had
sayings written on the face of the print. Almost all of the pictures of babies,
expectant mothers, the CN Tower, Lake
Louise and the family cat
looked like they came from a typical family photo album.
[34]
Ms. Clancy said on
several occasions that, contrary to what was set out in her Notice of Appeal,
her promotion of this business was only to try to develop word-of-mouth
interest by circulating her cards to friends and family. In cross-examination,
she acknowledged that she circulated them to friends and family by sending handmade
cards to her friends and family.
[35]
Again, this does not
even approach being able to be considered to be a business. Indeed, the
totality of the taxpayers' evidence, such as it was, leads me to the conclusion
that this was never honestly intended to be developed into a business either.
[36]
Travel Agent and
Tour Guide: The taxpayers
took a week-long family trip to Ireland in 2004 and a similar trip to London in another year. In Ireland,
Ms. Clancy led her family and friends on a day-long Dublin tour she developed. She claims this was in effect
the test launch of the travel agent and tour guide business. The taxpayers also
claim these trips aided the development of the photography business by branching
out into travel photography, and the music business and Mr. Jackson's
band, since he discovered the bhodran while in Ireland,
and has since incorporated it into his band's performances.
[37]
The taxpayers filed
photo albums of these trips as well. Again, these look like the family holiday
photo albums and souvenir scrapbooks found in any family's home. There was no
evidence that Ms. Clancy spoke with hotel operators, checked out the
existing commercial tours or did similar things while in Dublin or in London.
[38]
The only thing she did
in this area beyond what appears to be taking typical family holidays is that,
following her Ireland trip, she paid for a travel agent ID card
from an IATA-registered travel-agency franchise business. This entitled her to
a commission on any travel she booked in her capacity as travel agent. She did
not in fact sell any travel and did not earn any commissions. There was little
or no evidence of trying to sell travel trips or tours to anyone at all. She
did not renew the card beyond its expiry. There was no travel agency or tour
guide business, nor am I satisfied there were bona fide intentions to
start one. The travel agent card obtained upon payment of a fee appears to have
been mere window dressing.
[39]
Photography: If Ms. Clancy is to be believed at
her word, her photography pursuits have proved successful and profitable and
she has continued to carry them on. In 2003 and 2004, she had no revenues from
it. In her own words, she only began dabbling in photography in 2003. There was
no mention of studio space in the home or elsewhere and no mention of lugging
equipment to customers. There was no mention of professional quality cameras or
photographic equipment. Indeed, there was very little evidence, if any at all,
of efforts to obtain customers.
[40]
The photo albums
already mentioned filled with snapshots of family and family travel were said
to be evidence of the existence of her photographer business as well. None of
these resembled a traditional photographer's portfolio.
[41]
Ms. Clancy testified
that her photography business is now both successful and profitable but, when
asked about current years' numbers, could not even estimate her revenues or
profit. She did mention having done three weddings, but did not say whether
they were for family or friends or whether she was paid anything at all for
them.
[42]
The evidence presented
does not suggest that Ms. Clancy's photographic pursuits went beyond being
a personal interest or hobby in the years in question.
[43]
World Network
Business Club: Mr. Jackson's
involvement with World Network Business Club was not described as a business
activity in his tax returns and reporting documentation. The $5,000 fee paid to
WNBC was recorded as an expense of his business. However, in his evidence, Mr. Jackson
described his role, as a WNBC Satellite Champion for Oakville, as one of his business activities. Apparently, he held meetings
locally to recruit other members to WNBC. For that, he received commissions
from WNBC.
[44]
The commissions he
received from WNBC were significantly less than the fees he paid to WNBC. They
also comprised the majority of his gross business revenues.
[45]
The evidence such as it
was regarding Mr. Jackson's involvement with WNBC is insufficient to meet
the onus on him to satisfy the Court that his involvement with WNBC's business
constituted a business carried on by him.
[46]
Indeed, the evidence
leads one to wonder whether this was a partial circling of cash to create more
window dressing of business activities and revenues.
[47]
Turning to a review of
all of the evidence of the nature of expenses claimed, I need only say that
many of the items expensed to the businesses were preposterous and outrageously
aggressive. Mr. Jackson and Mr. White acknowledged that a lot were in
fact entirely personal.
[48]
Some highlights of
their reported expenses were: a portion of Ms. Clancy's weekly GO Train
passes and subway tokens to get to her place of employment, daily Starbucks
meetings with herself, Blockbuster Video rentals for meetings with each other
at home, groceries for meetings with family, gifts to family, clothes,
hairdressers, flowers for his wife, meetings allegedly held at LCBO outlets,
wine purchased by the bottle with no explanations, hygiene products, souvenirs
in Ireland, a $400 Irish wool sweater and a handbag from Harrods.
[49]
Three home computers
were fully allocated to the business. The Ireland
and England trips were fully expensed. A portion of
their cars was expensed, although the use of cars was not even indirectly
referred to in evidence.
[50]
All of the two taxpayers'
evidence is tainted by their series of excessive, implausible and unreasonable
claims. Mr. Jackson and Ms. Clancy were shamefully aggressive in
claiming their expenses and shamefully loose with the facts surrounding their
ventures. They were not simply duped by WNBC. They spun and stretched their
stories, they rationalized by relating to the possible, and they evaded
answering questions. This level of lack of forthrightness casts doubt on all of
their claims as described by this Court in Voitures Orly Inc., Chrabalowski
and Zepotoczny.
[51]
The taxpayers
rationalized and explained things away by what could have been. The words
"could have" kept rolling off Mr. Jackson's lips in evidence and
Mr. White's in argument. By way of example, Mr. Jackson explained the
florist bill he expensed for sending flowers to his wife by saying they could
have been sent as a thank-you for helping in the business. Plausibility is not
the threshold test to be met in order to succeed in a tax appeal.
[52]
Further, virtually all
of the potential clients who were wined and dined or given gifts by Mr. Jackson
and Ms. Clancy, were immediate family members or each other. It is true
that, in a strict business sense, a potential client is anyone who is not
already your client. But, in the absence of any real clients or unrelated
potential clients, a reality check and common sense dictate this is unlikely to
be persuasive evidence of reasonable business activity.
[53]
Similarly, in trying to
demonstrate the ability of a start-up venture to become profitable, one is not
much helped by the observation that others run businesses in the same area very
successfully.
[54]
In conclusion, I find
neither Mr. Jackson nor Ms. Clancy carried on any business in 2003 or
2004 and their testimony was not very credible.
[55]
The World Network
Business Club plan or formula as followed by these taxpayers was perhaps
sufficiently plausible to avoid tax evasion charges, but certainly involved
them making serious misrepresentations and distortions. I am not satisfied
there were even good-faith intentions on these taxpayers' parts to convert
their pre-existing hobbies and interests into a business.
[56]
Mr. White's book and
WNBC did not help these taxpayers pay zero tax or keep the tax department happy
―
quite the contrary. However,
Mr. Jackson and Ms. Clancy were not mere simple dupes of WNBC's plan.
They were willing and eager informed participants in control of their very
thinly veiled attempts to deceive the tax authorities. They made their own
decisions. They struck me as smart and educated Canadians who are ultimately
the authors of their own misfortunes.
[57]
The appeals are
dismissed.
Signed at Ottawa, Canada, this 15th day of September
2008.
"Patrick Boyle"
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