Date: 20020321
Docket: 1999-1542-IT-G
BETWEEN:
DANE WILSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
(requested by the Appellant February 27,
2002)
(Edited from the transcript of Reasons
delivered orally from the Bench at Winnipeg, Manitoba on
September 5, 2001)
Hershfield, J.T.C.C.
[1]
This is an appeal from a reassessment of the Appellant's
1994, 1995 and 1996 taxation years, during which the Appellant
operated a grass cutting and other yard services business under
the name of Lakeside Lawn Care.
[2]
The appeal is allowed with costs.
[3] I
will give brief findings of fact and brief reasons, and I will
elaborate more fully if required by a request for these reasons
in writing.
[4]
The Appellant commenced the business activity in 1989 when he and
a neighbour rented a power rake and offered services to other
neighbours. He found that the earnings from such services were
sufficient to at least cover the rental costs of the power rake
and he determined that there might well be a business opportunity
in the area of lawn care service and yard care service.
[5]
He was a police officer at the time, employed on a full time
basis in Winnipeg. He worked for four days on and had four to
five days off. That cycle apparently repeated itself through the
years in question. This allowed him considerable time to engage
in the yard care business and I accept his testimony that he
spent 40 to 50 hours per week at that business.
[6]
Also he testified that he was able, at least in some years, to
take holidays in May, which period was the most rewarding
financially. It was the time at which power raking was
undertaken.
[7]
By 1994, the first of the three subject years, he had in his
employ four employees and had invested considerable capital in
equipment. At that time he had one lawn tractor, four mowers,
three trimmers, a chemical tank, three leased trucks, three power
rakes, three lawn vacuums, two leaf blowers and various spreaders
and edgers.
[8]
He was enjoying a number of lawn service contracts and gross
revenues in the subject years 1994 through 1996 were some
$39,000.00, $40,000.00 and $41,000.00 respectively.
[9]
Those revenues had more than doubled and redoubled since 1990,
when gross earnings were some $8,000.00.
[10]
Notwithstanding that growth in gross revenues, the Appellant
continued throughout the period to report losses. In fact, those
losses grew from some $11,000.00 in 1990 to some $27,000.00 in
1994, $24,000.00 in 1995 and almost $32,000.00 in 1996.
[11] In
addition to the subject years, evidence was provided as to what
happened in subsequent years. By 1997 based on input from a new
accountant whose business input was sought by the Appellant, the
Appellant had cut down employment of his employees and was
performing most of the services himself. He still managed to
generate almost $30,000.00 of gross income. The business still
lost some $5,000.00 and that was before capital cost allowance,
which he had claimed in prior years, but did not claim in
1997.
[12] By 1998,
he had basically trimmed down his accounts to four commercial
accounts and was still able, in that year, to have gross revenues
of over $10,000.00. In 1998, he showed a $3,300.00 profit but
again did not claim capital cost allowance. Extrapolating from
his 1996 return where he did claim capital cost allowance of
$8,600.00, it would appear he would have had a small loss in 1998
if he had continued to claim capital cost allowance in 1997 and
1998.
[13] Returning
to the subject years, his expenses were largely in the area of
salaries and vehicle expenses. They were the two biggest
categories of expenses. For example in 1994, salaries were some
$23,000.00 and vehicle expenses were $12,500.00. There does not
appear any other single expense that was even half of the lower
of those two.
[14] No
challenge was made by the Respondent on the reasonableness of any
of the expenses. No challenge was made under paragraph
18(1)(a) on the basis of claiming expenses incurred
without the purpose of earning income and no challenge was made
under paragraph 18(1)(h). There was no personal element to
the expenditures.
[15] The
Respondent acknowledged that there was no personal element in
respect of the undertaking of the Appellant and conceded, as
well, that there was a business being conducted. That would seem
to me to be a concession that there was a genuine business, but
still, I will expand my findings on that question.
[16] That
there is a genuine commercial enterprise being undertaken is
based on my finding that the activity was clearly carried on by
the Appellant in a business-like manner. He had derived a
considerable number of contracts, pursuant to which he was
earning significant gross receipts.
[17] He
advertised and marketed in a reasonable fashion. He had
advertisements in yellow pages, distributed flyers and engaged in
marketing generally.
[18] He had a
presence, if you will, as a lawn care service provider at least
in his area. He worked and was known primarily in the area of
Transcona although his area was not limited. I accept his
evidence that he was recognized as part of the broader business
community, at least in that area. He was requested by a
sprinkling system supplier to become a sprinkling system
installer in Transcona and, indeed, was recruited for that
purpose and took courses in it.
[19] There is
no evidence as to what the commerciality of that proved to be,
but, in any event, the fact that he was recognized as being part
of the lawn care business community is just another indicia, to
me, of the commerciality of his endeavours.
[20] He
purchased and made a substantial investment in equipment. The
Minister's reply indicates that equipment investments were
some $45,000.00.
[21] He was
registered to and did collect and remit Goods and Services Tax.
He maintained what appear to be excellent books and records in
respect of the operation of the business.
[22] He was
certified as a chemical sprayer or certified to handle the
chemicals that are used to fertilize and weed kill lawns, and he
alone operated that portion of the business.
[23] He did
devote 40 to 50 hours per week at this business and in the
subject years hired several employees and operated within the
student employment program of, I gather, the Province of
Manitoba.
[24] These all
point to a genuine commercial activity - a genuine commercial
enterprise. That leads to the question, if there is no personal
element, no expense denials on the basis of reasonableness and
none on the basis that they are not deductible under paragraphs
18(1)(a) or 18(1)(h), then on what basis would the
Minister seek to deny these losses where there is a commercial
activity?
[25] The
Minister's counsel maintained a number of reasons, primarily
based and on the premise that the doctrine of reasonable
expectation of profit was still alive even where there was no
personal element and relied on A.G. of Canada v. Mastri et
al., 97 DTC 5420 (F.C.A.) (hereinafter
"Mastri")principally, I think, to underline that
a finding that there are no personal elements in relation to an
activity does not mean that the test cannot apply to it.
[26] Where
there is no personal element then Mastri provides
thatthe reasonable expectation of profit test should be
applied less assiduously. That still begs the question of
applying the test where there is a finding of a genuine business.
Where there is a genuine business conducted as such without
personal elements, the combination of those two makes it
difficult, in my view, for the Minister to apply a reasonable
expectation of profit test. I concur with the comments of Judge
Bowman in Kaye v. The Queen, 98 DTC 1659 at p. 1660
(T.C.C.) and his preference in cases of this type to put the
matter on the basis "Is there or is there not truly a
business?".
[27] Where
there is no material personal element but also no genuine
business, the test will of course apply. That is an example of
when the reasonable expectation of profit test would apply even
if an activity were being pursued without a personal benefit.
Beyond that, where there is a genuine business activity, I think
the room to apply the test in such case is narrow at best but
counsel for the Respondent argued that the facts of this case
could fit within such narrow application.
[28]
Respondent's counsel argued that 40 to 50 hours per week
during the subject period was simply not sufficient. The
inference I think of that being that the record speaks for
itself. He was putting in that amount of time and he was still
losing money.
[29] Counsel
argued that putting in that amount of time was not sufficient to
cover the contracts that he was getting and he had to hire
employees and incur employee expenses but only at a loss. If he
could not put in sufficient time to make a go of it and hiring
people was not the answer, it had no commercial expectations. He
was in, in effect, a catch 22 situation that made it wholly
unreasonable to expect that he could ever make a profit.
[30] Over and
above that, it was argued that he had no plan to solve this.
Counsel for the Respondent referred to the Appellant's
losses as inherent in the structure of the operator, as a part
timer, which he was not able to solve.
[31] Perhaps
this is just another way of saying that there is no inherent
commerciality to the enterprise as being operated. The suggestion
is that, on the facts of a particular case, it is possible to
have a genuine business enterprise, with no personal elements,
that still lacks in inherent commerciality and that is within the
narrow range where the reasonable expectation of profit test
applies.
[32] Such a
narrow range may well exist, but I do not believe it applies on
the facts of this case. As I will note later in these Reasons, my
finding here that there is genuine business enterprise includes a
finding that there is an inherent commerciality, notwithstanding
that losses are sustained throughout the subject period or, for
that matter, throughout a longer period of time.
[33]
Respondent's counsel went on to suggest that another factor
in this case was the simple lack of concern or apparent lack of
concern on the Appellant's part as to his losses that
underlined that there was no genuine profit motive which is
another indicia of a type of case where the absence of a personal
element, even if one has a business undertaking, would leave room
for the application of the reasonable expectation of profit test.
Here the absence of a profit motive is, in Respondent's
counsel's view, demonstrated by the taxpayer's lack of
concern as to whether or not he actually made a profit.
[34] On the
other hand, counsel for the Respondent did acknowledge that the
Respondent was not relying on paragraph 18(1)(a). Since,
there was no assertion that the expenses were not incurred for
the purpose of earning income, this approach seems doubtful even
if I agreed that there was no profit motive. As it is, I do not
find that there was the type of, using counsel for the
Respondent's words, lack of concern that would lead me to
believe that there was no profit motive.
[35] It is
true that the Appellant seemed unable to make a profit and was in
no apparent panic about it. In fact, it is my impression drawn
from his testimony that he likely had no appreciation of the
extent to which he was subsidizing the business out of his
earnings as a police officer and, more importantly perhaps, that
he saw nothing unusual about the time it might take in this type
of business to, in fact, see profits.
[36] It was of
some distress and alarm to him when he found out, from Revenue
Canada's point of view at least, that his business should
have been profitable by that point (1994) and that he was
operating a business totally irrationally, if you will, by
operating it on a subsidized basis for such a long period of time
(and without a business plan to change it).
[37] In my
view, he genuinely thought that these activities would take time
and that the subsidy would one day pay off. He was alarmed when
he found out that from Revenue's perspective of what a
proper business plan should accomplish, his business was taking
an inordinate amount of time to show a profit. This was the first
suggestion that his operation might stand for some planning and
changing so he found a new accountant to give him business
management advice. It seems that such advise led to focusing on
fewer but larger commercial accounts with less overhead for
wages.
[38] Lack of
sophistication and business acumen in the subject years and even
later years is not a reason to apply the reasonable expectation
of profit test. Here Revenue Canada has the benefit of hindsight
and applying a hindsight test to assess a person's business
acumen is not one that has been approved by the Courts in terms
of determining whether or not there is a reasonable expectation
of profit. Even Mastri on which the Respondent relies,
sets this out clearly. The Appellant's efforts may have
lacked the acumen to succeed but his efforts are not thereby
irrational. His persistence and willingness to subsidize his
efforts should not be punished if there is any chance to succeed
as there might well be in this case.
[39] There is
no lack of inherent commerciality here in respect of this
activity. That he was profiting by 1998 is some evidence of this
- regardless of his not claiming allowances that are
discretionary and not necessarily, taken or not, reflective of a
true profit picture. There is no suggestion that the declining
balance rates of deprecation in the Act are meant to
measure each year a true reflection of depreciation in the year.
Earlier depreciation claims might have made, in terms of getting
a true picture of the profitability of a subsequent year, further
claims unnecessary. Of course that is not why the claims were not
made, but my point is only that not making claims is not always
relevant.
[40] This
leads me to the next point that counsel for the Respondent argued
as being a factor that should permit the application of a
reasonable expectation of profit test, even where there was an
acknowledged business in existence and even where there was no
personal element. That point related to the apparent motive of
the Appellant to go into this business to earn retirement income.
The Appellant testified that he hoped the business would provide
a source of income (positive cash flow at least) on his
retirement from the police force. The Respondent's argument
is, in effect, that this is a pre-start-up activity and the
expenses are personal (or capital). This is an approach to
reasonable expectation of profit cases. (See McClure et al. v.
M.N.R. (1988), 88 DTC 1504). However, this is not a case of
preparing for a business to be carried on the future. This is a
genuine business being carried on in the subject years. That is a
finding of fact and it being part of a vision for future
retirement income is not relevant.
[41] As I have
already found, this is a genuine commercial activity and the
question should not be whether or not it was commercially
exploitable during the subject year, as opposed to perhaps being
commercially exploitable at some future time (say, on
retirement). In Mattabi Mines Ltd. v. Ontario (Minister of
Revenue) [1988] 2 S.C.R. cited with approval by the Supreme
Court of Canada in Symes v. Canada [1993] 4 S.C.R., a very
fundamental principle in our tax system was underlined which is
that it does not matter the year in which you might hope to have
a profit to get the deduction currently. However remote in time
that income potential might be, is not a factor in determining
its deductibility. This is also a relevant principle in respect
of the next argument of the Respondent's counsel.
[42] Having
accepted, as counsel for the Appellant argued, that there are
absolutely no expenditures here that are even "blurry"
as between business and personal - there are no entertainment
expenses, there are no personal car usages, there are no
convention and promotion expenses - and having conceded that
every expense was directly applied to a business activity,
Respondent's counsel simply argues that this is an
ill-fated venture which the Minister of National Revenue cannot
see other than giving rise to losses in perpetuity and that the
public purse should not accept that. That is why the reasonable
expectation of profit test must apply. This takes us back to the
question of whether it is irrational to think this activity can
give rise to a profit and if not the test should apply. See
Kuhlmanm et al v. The Queen, 98 DTC 6652
(F.C.A.). As I stated in Spearing v. R. [2001]
1 C.T.C. 2689, which set out in considerable more
detail an analysis of this common law test, ultimately the test
laid out in Kuhlmanm might well be the correct test
subject to the findings of the Supreme Court of Canada in the
Jack Walls and Robert Buvyer v. The Queen, 2000 DTC
6025 (appeal heard and reserved by Supreme Court of Canada
on December 12, 2001). If this affords losses in perpetuity
perhaps legislative intervention is required. That losses may not
be recovered in the foreseeable future is not a bar to the
claiming of such losses. Consider the recent Supreme Court of
Canada decision in Spire Freezers Ltd. v. Canada [2001]
1 S.C.R. In that case, the Supreme Court of Canada stated
that the law does not require a net gain over a determined
period. Although the context was partnership law, the statement
is equally true regardless of the form of carrying on business.
That suggests to me that genuine business losses can be
sustained, depending on the circumstances, for an indefinite
period of time if you cannot, for legislated reasons such as
those in paragraphs 18(1)(a), 18(1)(h) or section
67, attack the expenses giving rise to the losses.
[43] Counsel
for the Respondent pointed to a number of cases in her book of
authorities, all of which I think she acknowledged were
distinguishable, or at least the ones examined.
[44]
Petrovic v. The Queen, 2001 DTC 306 (T.C.C.) allowed for
the application of the reasonable expectation of profit test, but
in that case Judge Lamarre found that a personal element did
exist and that the enterprise did not reveal, in its
organization, an inherent commerciality. Judge Lamarre went on to
state at page 315:
...Although it is not the place of this Court to second-guess
the business acumen of a taxpayer who embarks bona fide on
a commercial venture that turns out to be less profitable than
anticipated, there must be sufficient indicia of commerciality to
justify the conclusion that there is a real commercial enterprise
being conducted ...
In my view there is a real commercial business being conducted
here.
[45] In
Stewart v. Canada, [2001] T.C.J. No. 357 (Q.L.) (T.C.C.),
Judge Miller held that the Appellant was not in business in
the subject years. In fact, that case looks at a situation where
a taxpayer is in the pre-business on pre-start-up stages having
superficial indicia of a business but not yet amounting to a
legitimate commercial activity. It was only an activity setting
something up for a future time as circumstances permitted. While
that sounds somewhat like the retirement scenario in the case at
bar, it is distinguishable on the basis that in that case it was
found that there was no commercial, genuine commercial activity
or genuine business at the time the activity was being examined.
Here I have made a finding that there was.
[46] The last
case I will refer to is Peary v. Canada, [2001] T.C.J. No.
458 (Q.L.) (T.C.C.). Respondent's counsel argued that Judge
Mogan applied the reasonable expectation of profit test in that
case, even where there was a genuine business and no apparent
personal element. However, in that case Judge Mogan did
find a personal element. He added that finding toward the end of
his judgement but it is there. He notes that although there was
no obvious personal involvement or element, that, in fact, there
was a personal element in the fact that certain rents were being
paid for the use of a building owned by the same partners
receiving the rents. This self-dealing which created losses
assisted the pay down of the mortgage on this particular rental
property and was a personal element in the incurrence of the
losses. Further, Judge Mogan was quite suspicious of the
circumstances of the reason for these losses, given the way in
which they were allocated. I have no suspicions here as to the
motivation for incurring these expenses or the resultant losses.
These losses were simply incurred as business expenses, with the
genuine hope for profitability.
[47]
Accordingly, for these reasons the reasonable expectation of
profit basis of reassessment cannot stand and the appeals are
allowed with costs.
Signed at Ottawa, Canada, this 21st day of March 2002.
"J.E. Hershfield"
J.T.C.C.
COURT FILE
NO.:
1999-1542(IT)G
STYLE OF
CAUSE:
Dane Wilson and
Her Majesty the Queen
PLACE OF
HEARING:
Winnipeg, Manitoba
DATE OF
HEARING:
September 5, 2001
REASONS FOR JUDGMENT BY: The
Honourable Judge J.E. Hershfield
DATE OF
JUDGMENT:
March 21, 2002
APPEARANCES:
Counsel for the Appellant: Barbara M. Shields
Counsel for the
Respondent:
Tracey Harwood-Jones
COUNSEL OF RECORD:
For the
Appellant:
Name:
Barbara M. Shields
Firm:
Aikins, MacAulay & Thorvaldson
Winnipeg, Manitoba
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
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