|
Citation: 2003TCC850
|
|
Date: 20031120
|
|
Docket: 2002-1770(IT)I
|
|
BETWEEN:
|
|
JOSEPH HANCOCK,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
|
___________________________________________________________________
REASONS FOR JUDGMENT
GARON, C.J.
[1] These are appeals from income tax
assessments for the 1998 and 1999 taxation years. By his
reassessments, the Minister of National Revenue disallowed losses
claimed by the Appellant to be business losses amounting to
$8,072.93 and $6,840.22 for the years 1998 and 1999
respectively.
[2] In reassessing the Appellant for
the 1998 and 1999 taxation years, the Minister of National
Revenue assumed the facts set out in paragraph 10 of the Reply to
the Notice of Appeal, which reads:
10. In so reassessing the
Appellant for the 1998 and 1999 taxation years, the Minister
relied on the following assumptions of fact:
(a) those admitted to
and stated above;
(b) the
Appellant allegedly started Ptarmigan Adventures in May of 1995,
in order to offer snowmobile tours, (the "Activity")
during the time period of December 25th to April
30th each year;
(c) the
alleged Activity was to provide guided tours of the Labrador
coast by snowmobile, and was to include the use of cabins owned
by the Appellant;
(d) the
Activity has generated no sales or revenues of any kind since its
alleged start-up in 1995;
(e) the
Appellant has not provided any tours since 1995;
(f) the
activity has reported losses since 1995 detailed as follows:
Sales
Loss
1995
Nil
($12,350)
1996
Nil
(5,481)
1997
Not reported Not reported
1998
Nil
(8,072)
1999
Nil
(6,840)
(g) the
Appellant claimed the losses as outlined above on his tax returns
for those years;
(h) the
Appellant owned one snowmobile prior to 1995;
(i) the
Appellant owned 3 cabins for at least 10 years prior to 1995;
(j) the
cabins were approximately 80 km from the Appellant's
residence;
(k) the cabins
remained vacant and unused for at least the last 10 years prior
to 1995;
(l) the
Appellant began claiming expenses including CCA in relation to
his cabins and snowmobile in 1995;
(m) the Appellant
recorded the cabins on a CCA schedule at an amount of
$17,200;
(n) the
Appellant has claimed CCA on the cabins, and as at December 31,
1999 the Undepreciated Capital Cost of the cabins had been
reduced to $12,845.77;
(o) the
Appellant did not earn any revenue from the cabins at any time
since 1995;
(p) the
Appellant made no effort to earn any revenue from the cabins;
(q) the
Appellant drove a snowmobile for approximately 25 years,
including the years at issue, for personal use;
(r) the
use of the snowmobile earned no revenue since 1995;
(s) there was
sufficient snowfall during the years at issue for driving a
snowmobile;
(t) at
all relevant times the Appellant operated an ambulance business
and was on call 75% of the time;
(u) during the
times the Appellant worked at his ambulance business, he was
unavailable to work in the activity;
(v) the
Appellant did not maintain sufficient books and records to
calculate his income tax liability;
(w) the activity was
not run in a business like manner;
(x) the
activity was a personal endeavor of the Appellant and not carried
out in the pursuit of profit;
(y) the
expenses claimed by the Appellant were not incurred for the
purpose of earning income from a business or property; and
(z) the
Appellant did not have a reasonable expectation of profit during
the relevant taxation years.
[3] The Appellant and Mr. Dalton
Earle, a friend of the Appellant, were the only witnesses at the
hearing of these appeals.
[4] The Appellant admitted
subparagraphs (b), (c), (d), (e), (g), (i), (l), (m), (n), (o),
(q) and (r) of paragraph 10 of the Reply to the Notice of Appeal
and denied all the other subparagraphs of paragraph 10 with the
exception of subparagraph (a), to which the Appellant did not
address himself specifically. The latter allegation refers to
other paragraphs of the Reply to the Notice of Appeal.
[5] The Appellant is a self-employed
paramedic.
[6] In addition to the facts set out
in the Reply to the Notice of Appeal that were admitted by the
Appellant, some other evidence is worth noting.
[7] At the beginning of his
examination in chief, the Appellant filed with the Court a
prepared statement which reads, in part, as follows: (Exhibit
A-1, paragraphs 3, 4, 5 and 6)
Your Honour, I believe that the evidence will show
beyond the reasonable doubt that every effort was made to make
Ptarmigan Adventures a successful and profitable business
venture, but the business failed due to circumstances beyond my
control.
Your Honour, back in 1995 I set out on a venture to start a
snowmobile touring business. The objective was to attract
snowmobile enthusiast to ride the untouched last frontier of
Canada - The heart of Labrador. The idea was to carry 4-6 clients
at a time to enjoy the great snowmobile adventures, wildlife and
scenic photography. For the avid hunters we offered guided
hunting trips for caribou and Ptarmigan.
Then the most unusual thing happened for the next three years
we had very little snow, mild weather, and extensive periods of
rain. Just when I started to get correspondence by phone and
mail, I had to keep postponing bookings because the weather and
snow conditions weren't suitable to entertain clients for
snowmobile touring. This continued for the next three years with
dwindling interest with each passing year.
I believe that the evidence will show that I worked very hard
to make this business a profitable one, and that I had every
expectation of profit. I was only willing to invest in
advertising, your honour, what was within my means at the time. I
spent moderately in advertising, your honour, because I
didn't want to bankrupt myself in the process. Now in some
peoples view that might make me a poor businessman, but it
doesn't make me guilty of tax evasion.
[8] The Appellant testified that back
in 1995, he embarked on a venture, which he called "a
snowmobile touring business." He wanted to attract
snowmobile enthusiasts to the untouched last frontier of Canada
in the heart of Labrador. He mentioned that he planned "to
carry four or six clients at a time to enjoy great snowmobile
adventures, wild life and scene photography." Ice fishing
and shooting ptarmigans, a game bird, were also contemplated
activities. For the avid hunter, he "offered guided hunting
trips in Ptarmigan." These tours were to include the use of
cabins owned by the Appellant.
[9] Prior to starting the business, he
had prepared a business plan that he had submitted to the
Atlantic Canada Opportunities Agency ("ACOA"), a
federal government organization, in order to get a loan. His
application for a loan, the date of which was not mentioned, was
rejected but he was given a loan by ACOA for "advertising
back in 1995."
[10] The Appellant testified that he owned
two snowmobiles until sometime around 1997 and that only one of
the two was used for personal purposes. He indicated that the
three cabins were located at different places, the distances from
his residence being 238 kilometres, 138 kilometres and
78 kilometres
respectively. Two cabins were owned by the Appellant for about
10 years. The Eagle River cabin was built in 1997. Prior to 1995,
two cabins were used for personal purposes.
[11] With respect to advertising, the
Appellant claimed that he did a lot of advertising. He attended a
snowmobile trade show in Syracuse, New York, in 1995. He had to
drive there because he had to bring large posters or signs, some
mounted birds and a lot of photos. Flying would not have been
practical. To go to Syracuse for the trade show was a hassle for
him. Approximately 6,000 brochures entitled Ptarmigan
Adventures in Labrador were published. These were distributed at
different places of interest across Canada including airports. It
cost him $13,000 to $15,000, including lodging expenses, just to
do the trade show. The expenses connected with it are detailed in
Exhibit A-2. As well, he advertised worldwide through the
Internet, Travel Guide magazines and Newfoundland Sports during
the relevant period. In this respect, he referred to three
countries in particular, U.S., Germany and Switzerland. The
advertising expenses amounted to $1,200 to $1,500. He attended a
tourism seminar in Cornerbrook. He also added "... I did get
a lot of information from the Newfoundland tours and part of
government. I got, under Frank Phillips who was Outdoors Product
Development specialist, and he gave me direction to go to the
different outfitters that would give me sound advice as how to
proceed with the venture and the project."
[12] Commenting on the weather conditions
that prevailed at the relevant times, the Appellant said
this:
[...]
... in 1996, we had a series of rare weather, mild weather
conditions and that sort of thing but then in the interim period,
the three years that was when the weather wasn't suitable in
that interim period was when I was giving the itinerary, the
cabins ready, renovations.
[Transcript at page 22, line 24 to page 23, line 3].
[....]
A. Your Honour, the
1995 was a year that we had a lot of snow and usually, Labrador
winters can be something you can depend on for snow. I mean,
Labrador's synonymous was snow. And for some unknown reason,
the weather conditions in '96, '97 and '98 were such
that a lot of rain, mild periods, periods when it would cold off
and be okay and then, the next week it was rain and snow again.
The weather conditions was totally unsettled.
[Transcript at page 48, line 24 to page 49, line 6].
[13] The Appellant described the work that
he carried out respecting the cabins and the trails in order to
make the venture profitable in the following terms:
[...]
Up to this point, the cabins were basically just tilted and
stuff, and so I done a lot of renovations, I spent a lot of money
during those three years getting the itinerary ready for
snowmobile tours.
And I cut a lot of trails at the time to make the scenery more
accessible and to make it a lost easier to - because this, Your
Honour, was an area where there's a lot of wilderness and you
wouldn't see a lot of people, probably one or two besides
ourselves that was in this area because it's a wilderness
area, if you can understand the concept of what a wilderness area
is like, and there's a lot of scenic areas in that area, so
we cut trails to make the areas more accessible to clients.
[Transcript at page 23, lines 3 to 16].
[14] With regard to his availability to run
this venture, the Appellant stated that while it is true that he
was on call 75% of the time for the purposes of the ambulance
business in which he was engaged, he had trained four to five
persons to operate the ambulance and in this respect he said
this: "I'm perfectly capable of paying employees to run
that for me or to work for me."
[15] During the period in issue, in 1998 and
1999 as well as during the years 1996 and 1997, there was not a
single guided tour. He explained why no tours were booked in
these terms:
Then, the most unusual thing happened for the next three years,
we had very little snow and mild weather conditions and extensive
periods of rain. Just when I started to get correspondence by
phone and mail, I had to keep postponing booking because the
weather and snow conditions weren't suitable to entertain the
clients for snowmobile touring.
[Transcript at page 13, line 21 to page 14, line 2].
He also said this:
Q. And when you're
talking about the weather conditions, you're talking about
the weather conditions in those two years, 1998 and 1999?
A. No, Your Honour,
it's '96, '97 and '98. '99 was a good year
but by the time '99 rolled around, the interest that I had
accumulated from the trade show and the circulation of brochures
and that sort of thing kind of dwindled the interest and kind of
people lost interest.
I had phone calls from and a fax in different contexts with
different clients that would have made the trip and would have
done the tours during the first three years, but by the time
'99 rolled around it was like, there was dwindling interest
and I didn't have a lot of money to put into it, and it was
risky for me to lose any other money and to make the venture get
off the ground.
[Transcript at page 23, line 21 to page 24, line 13].
[16] The Appellant asserted that he invested
about $30,000 to $35,000 from 1995 to 1999. In 1999, he closed
out the business when he "was hit with income tax for $4,000
to $5,000 and something that I couldn't afford. That extra
money I would have probably used for advertising."
Throughout his testimony, the Appellant stressed the point that
given the right circumstances, the business could have been
profitable.
Analysis
[17] The Appellant's main contention is
formulated in the second paragraph of the Notice of Appeal in
this way: "I tried very hard to make Ptarmigan Adventures a
profitable business venture however due to circumstances beyond
my control I lost a lot of my own hard earned money."
[18] As appears from paragraph 13 of the
Reply to the Notice of Appeal, the Respondent's main
submission is that "the activity was a personal endeavor of
the Appellant, and did not constitute a source of income in
accordance with section 9 of the Act."
[19] The question in issue is whether or not
the Appellant was engaged in a business in respect of his
activity referred to as Ptarmigan Adventures. The decision of the
Supreme Court in the case of Stewart v. Canada, [2002]
S.C.J. No. 46, at paragraph 50, set out the following test in
broad terms:
(i) Is the activity of the taxpayer undertaken in pursuit of
profit, or is it a personal endeavour?
[20] I must first determine if the activity
of the taxpayer was undertaken in pursuit of a profit or whether
it was rather a personal endeavor.
[21] In the present case, there is no
question that his activity had personal elements. Prior to the
years in issue, more specifically in 1995, 1996 and 1997 the
Appellant rode a snowmobile in the area in question and used his
cabins between one to five times a year. Friends and a member of
his family helped him renovate the cabins before 1995. The
Appellant was candid enough to admit that one of the reasons he
started his business was because he loved to ride his snowmobile
in the country and in the wilderness.
[22] There are aspects of his venture that
had a business component. The Appellant invested $30,000 to
$35,000 of his own money. He made some renovations to his cabins
after he started this activity. He went to a trade show in
Syracuse in the State of New York, in 1995. Before that time, he
had never gone to a trade show. For the trade show, the Appellant
had brought approximately 6,000 brochures. He advertised through
the Internet, travel guides and
Newfoundland Sports. He bought sleeping bags, winter clothes and
generators for the cabins. The Appellant sought the advice of an
outdoor specialist by the name of Frank Phillips.
[23] Also, the Appellant prepared a business
plan and submitted it to the ACOA. The latter agency granted him
a loan for advertising purposes. Moreover, in 1995 the Appellant
prepared projected statements of profit and loss for three years.
These undated statements were done by a firm Labrador Enterprises
in association with a local Southern Labrador Development
Association.
[24] In the Stewart case referred to
earlier, the Supreme Court indicated at paragraph 60 thereof that
where the activity could be classified as a personal pursuit it
must be determined whether or not the activity is being carried
on in a sufficiently commercial manner to constitute a source of
income. In another passage, at paragraph 54, the Court stated
that the taxpayer is required in such cases 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 Court
referred to the four factors set out in the case of Moldowan
v. The Queen, [1978] 1 S.C.R. 480 at page 486, for the
purpose of determining if a taxpayer had a reasonable expectation
of profit from a particular activity. The Court made clear that
the list of criteria was not exhaustive. These criteria are the
following:
The profit and loss experience of past years;
the taxpayer's training;
the taxpayer's intended course of action;
the capability of the venture to show a profit.
[25] With respect to the first factor, the
Appellant experienced significant losses during the two years in
issue and the three immediately preceding years, the years 1995,
1996, 1997.[1] The
first three years were mainly devoted to setting up the
infrastructure for the operation of this activity. The activity
has never earned a profit over the years of its operation. The
start-up period does not appear to be unduly long.
[26] With respect to the taxpayer's
training, the Appellant was already operating a business in an
unrelated field, to wit the ambulance business, but he was not
familiar with what was required to operate the new venture
successfully although he possessed some substantial knowledge
about some aspects relating to the operation of this activity. He
definitely took a number of positive steps to familiarize himself
with this type of venture.
[27] As far as the taxpayer's intended
course of action, I am inclined to the view that the Appellant
clearly demonstrated that he intended to carry on this activity
with a view to profit in taking the following steps: a) incurring
substantial expenditures in respect of the publication of 6,000
brochures, advertisement, cutting trails, (which operation
involved the cutting of trees and stumps), getting the itinerary
ready for tourists, and doing renovation work to the cabins; b)
seeking advice from certain government officials and attending a
tourism seminar; and c) securing a loan from ACOA.
[28] With respect to the capability of the
venture to show a profit, the Appellant was able to persuade ACOA
to make him a loan on one occasion. On an objective basis, it is
difficult to arrive at a negative conclusion regarding this
factor, bearing in mind that in the relevant years the weather
conditions were clearly exceptional, an assertion that was not
disputed by the Respondent at the hearing of these appeals and
was corroborated by a witness, Mr. Dalton Earle.
[29] Considering all facts, I am inclined to
the view that the operation was sufficiently commercial. The
Appellant had in the relevant years a reasonable expectation of
profit from this activity and the activity was carried out in
accordance with objective standards of businesslike
behaviour.
[30] For these reasons, I would allow the
appeals from the assessments for the 1998 and 1999 taxation years
and refer the matter back to the Minister of National Revenue for
re-examination and reassessment on the basis that the Appellant
is entitled to the deduction of the subject losses in respect of
the two years.
Signed at Ottawa, Canada, this 20th day of November 2003.
Garon, C.J.
Email this Content