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Citation: 2003TCC155
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Date: 20030320
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Docket: 2001-2852(IT)I
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BETWEEN:
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RODNEY MARTIN,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Bowman, A.C.J.
[1] These are appeals from assessments
for the appellant's 1998 and 1999 taxation years. By those
assessments the Minister of National Revenue disallowed losses
claimed by the appellant from the trapping business operated by
him under the name of Rodney Martin Trapline.
[2] The reply sets out his revenues
and losses from 1987 to 1999, as follows:
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Taxation Year
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Gross
Revenues
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Net Business
Income (Loss)
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1987
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$ 2,070
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($ 4,806)
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1988
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2,909
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($ 4,003)
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1989
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2,655
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($ 6,310)
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1990
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1,446
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($ 7,585)
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1991
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1,025
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($ 5,692)
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1992
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1,150
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($ 6,565)
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1993
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431
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($ 8,361)
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1994
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1,887
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($ 6,188)
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1995
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1,582
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($ 6,546)
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1996
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1,997
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($ 8,892)
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1997
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2,137
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($ 9,760)
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1998
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1,562
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($ 9,985)
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1999
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999
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($
11,661)
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Total
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$ 21,850
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($
96,354)
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[3] The losses were allowed for all
years up to and including 1997.
[4] The appellant inherited the
trapline from his father many years ago and he has operated it
since that time.
[5] Both the appellant and his wife
have full time jobs. The appellant works as a maintenance person
and his wife is a bookkeeper. They both spend their weekends and
holidays on the trapline.
[6] The operation of a trapline
involves constant maintenance of the roads. The appellant has a
cabin where he cleans and skins the animals that he traps.
Recently he extended the cabin. Also, one room in the basement of
his house is used for storing furs.
[7] In order to keep the trapline (and
the annual licence) the appellant must trap at least 75% of his
annual quota of 42 beavers. There is a quota of
29 martins and one lynx. There is no quota on wolves or
foxes. It seems the province of Ontario encourages the trapping
of beavers for ecological reasons.
[8] The trapline seems to be about 25
miles in length to judge by the map that was put in evidence. In
1997 a fire destroyed a large portion of the trees in the forest.
In 2001 high winds blew down trees on the trapline. All this
contributed to the difficulties faced by Mr. Martin and he
was put to additional expense and considerably greater effort to
clear the trapline. Neither fire nor wind storms, however, were
alone responsible for the losses. The problem, according to
Mr. Martin, was the low prices for furs.
[9] The assessments were based upon
the view that the appellant did not have a "reasonable
expectation of profit" from the fur trapping business. None
of the expenses were challenged.
[10] The assessments were issued before the
decision of the Supreme Court of Canada in Brian J. Stewart v.
The Queen, 2002 DTC 6969. Counsel for the
respondent amended the reply. Very properly, she refrained from
amending the assumptions. She also did not change Part B of
the reply (issues to be decided), which reads:
7. The issue
is whether the Appellant had a reasonable expectation of profit
from the Activity in the 1998 and 1999 taxation years.
[11] Part C was restated by removing
paragraph 9 and adding paragraphs 9.1 and 9.2.
[12] Paragraph 9, which was removed,
originally read:
9. He
respectfully submits that, for the 1998 and 1999 taxation years,
the Activity did not have a reasonable expectation of profit and
did not constitute a source of income within the meaning of
sections 3, 4 and 9 of the Act and consequently, the
losses were properly disallowed.
[13] Paragraphs 9.1 and 9.2 read:
9.1 He respectfully
submits that, for the 1998 and 1999 taxation years, the Activity
was undertaken as a personal endeavor.
9.2 He further submits
that the Activity was not carried on with a sufficiently
commercial manner for it to have a reasonable expectation of
profit and could not constitute a source of income within the
meaning of sections 3, 4 and 9 of the Act and
consequently, the losses were properly disallowed.
[14] The Stewart case represented a
fundamental rethinking of the tests to be applied in determining
whether a business existed the losses from which could be
deducted. It was obvious that prior to Stewart the
"reasonable expectation of profit" test, stated by
Dickson J. (as he then was) in Moldowan v. The Queen,
[1978] 1 S.C.R. 480 at 485, was being misused and
overused.
[15] The importance of the Stewart
case will be apparent from the following passages from the
reasons for judgment.
[4] In our view, the reasonable expectation of profit analysis
cannot be maintained as an independent source test. To do so
would run contrary to the principle that courts should avoid
judicial innovation and rule-making in tax law. Although the
phrase "reasonable expectation of profit" is found in
the Income Tax Act, S.C. 1970-71-72, c. 63, (the
"Act"), its statutory use does not support the
broad judicial application to which the phrase has been
subjected. In addition, the reasonable expectation of profit test
is imprecise, causing an unfortunate degree of uncertainty for
taxpayers. As well, the nature of the test has encouraged a
hindsight assessment of the business judgment of taxpayers in
order to deny losses incurred in bona fide, albeit
unsuccessful, commercial ventures.
[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.
...
[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.
[16] Since Stewart the Federal Court
of Appeal has routinely allowed virtually all appeals from
decisions of this court where the taxpayer has lost on the basis
of REOP.
[17] Counsel argued that there was a
personal element in the appellant's trapping activities. It
may be that he derived some personal satisfaction from trapping.
Trapping seems to have been a family tradition. My recollection
is that Mr. Martin said something like "Trapping is in
my blood".
[18] The existence of a personal element
must be put in perspective. There is frequently a personal
element in the carrying on of a commercial enterprise in the
sense that the person derives great personal satisfaction from
the activity. This does not make the activity any the less a
business. Professional artists, photographers, writers, musicians
(and sometimes even lawyers) no doubt derive great satisfaction
from what they do but if their activity is commercial and is
intended to yield a profit it is nonetheless a business. It is
only where the personal element so overshadows any element of
commerciality as to substantially displace it that one may
conclude that the activity is merely a hobby and is not a
business at all.
[19] For example in a recent decision of the
Federal Court of Appeal, Morris v. The Queen,
2003 FCA 116, the court said at paragraph 12:
[12] According to Stewart
(at para. 50), in order to determine if a source of income exists
a court should first ask: "is the activity of the taxpayer
undertaken in pursuit of profit, or is it a personal
endeavour?" The factors listed in Moldowan provide
objective criteria for answering this question. Thus, even though
the taxpayer has a personal interest in the activity, if
"the venture is undertaken in a sufficiently commercial
manner, the venture will be considered a source of income for the
purposes of the Act": Stewart at para. 52. The Court
went on to say (at para. 54) that to establish an intention on
the part of the taxpayer to pursue an activity for profit, rather
than personal interest,
requires the taxpayer to establish that his or her predominant
intention is to make a profit and that the activity has been
carried on in accordance with objective standards of businesslike
behaviour.
[20] I do not think that the conclusion that
the personal element overshadowed the commercial motivation is
justified here. It is clear Mr. Martin hoped and expected to
earn a profit and continues to hope to do so. He explored various
ways of improving his return from the business - including having
fur hats made up so that they could be sold. This turned out not
to be profitable. He routinely sends furs to the auction in North
Bay and sells as many as he can.
[21] It may well be that the business of
trapping furs in Canada is going through a difficult cycle. It
seems at this point not to be economic, but then one might
question the economics of farming in Canada as well. It is
nonetheless a business because it is a commercial enterprise
carried on with a view to profit and falls within the definition
of business in section 248.
[22] The appellant's activity here has
the necessary ingredients of commerciality to make it a business
- the commitment of substantial capital, the organized and
businesslike way in which records are kept and the devotion of
enormous amounts of time by the appellant and his wife and, in
earlier years at least, his sons as well as the intent to earn a
profit. Perhaps some people might see Mr. Martin's hopes
as overly optimistic or even ill conceived but if an intent to
earn a profit is a necessary ingredient in a business it
certainly exists here.
[23] One of the cases cited in
Stewart was Kaye v. The Queen,
98 DTC 1659. At page 1660 the following passage
appears.
[4] I do not find the ritual repetition of the phrase [REOP]
particularly helpful in cases of this type, and I prefer to put
the matter on the basis "Is there or is there not truly a
business?" This is a broader but, I believe, a more
meaningful question and one that, for me at least, leads to a
more fruitful line of enquiry. No doubt it subsumes the question
of the objective reasonableness of the taxpayer's expectation
of profit, but there is more to it than that. How can it be said
that a driller of wildcat oil wells has a reasonable expectation
of profit and is therefore conducting a business given the
extremely low success rate? Yet no one questions that such
companies are carrying on a business. It is the inherent
commerciality of the enterprise, revealed in its organization,
that makes it a business. Subjective intention to make money,
while a factor, is not determinative, although its absence may
militate against the assertion that an activity is a
business.
[5] One cannot view the reasonableness of the expectation of
profit in isolation. 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.
[6] This leads to a further consideration - that of
reasonableness. The reasonableness of expenditures is dealt with
specifically in section 67 of the Income Tax Act, but it
does not exist in a watertight compartment. Section 67 operates
within the context of a business and assumes the existence of a
business. It is also a component in the question whether a
particular activity is a business. For example, it cannot be
said, in the absence of compelling reasons, that a person would
spend $1,000,000 if all that could reasonably be expected to be
earned was $1,000.
[7] 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.
[24] This passage illustrates the approach I
have taken in the pre-Stewart era and the approach that I
am applying here which I believe is consistent with and supported
by Stewart.
[25] It is difficult to imagine how a
business that forces one to go out every weekend, sometimes in
sub-zero northern Ontario temperatures, and attend and clear
traplines and clean and skin beavers and other animals and store
the skins in one room in the basement of the house can by any
stretch of the imagination be called a hobby. The appellant's
wife accompanies him on the trapline, does the bookkeeping and
puts up with having the house smelled up with the pelts. Frankly,
I think she deserves to be highly commended.
[26] There is one final point that ought to
be mentioned because it illustrates rather eloquently just what
was wrong with the pre-Stewart REOP approach. In the
letter from the CCRA to Mr. Martin the following paragraph
appears.
Please ensure that no further losses are claimed in relation
to trapping. You are not required to report either the trapping
income or expenses on your tax returns until a year in which you
make a profit.
[27] In other words, if you lose money we
don't want to hear about it. If you make money we want part
of it.
Q.E.D.
[28] The appeals are allowed and the
assessments for 1998 and 1999 are referred back to the Minister
of National Revenue for reconsideration and reassessment to
permit the appellant to deduct in computing income the losses of
$9,985.04 and $11,661.19 claimed by him from the fur trapping
business.
[29] The appellant is entitled to his costs,
if any, in accordance with the tariff.
Signed at Ottawa, Canada, this 20th day of March 2003.
A.C.J.
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