Date: 20010921
Docket: 2000-2563-IT-I
BETWEEN:
ROBERT G. SMALLEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
McArthur J.
[1]
Robert G. Smalley (the Appellant) appeals from assessments for
the 1996 and 1997 taxation years. The Minister of National
Revenue (the Minister) disallowed the deduction of losses of
$22,613 and $17,143 claimed by the Appellant in carrying on of
what he contends was a business of selling insurance on the basis
that he had no reasonable expectation of profit (REOP).
[2]
The facts which I accept, are taken primarily from those set out
by the Appellant and the Respondent in their written arguments.
The Appellant retired in 1989 from his position as the Atlantic
regional manager for Sun Life of Canada after a 36-year career in
the insurance industry. Upon retirement, he provided consultant
services to Sun Life from late 1989 to mid-1993 and then sold
life insurance for Sun Life from late 1993 to 1997. He claimed
losses as follows:
|
Year
|
Gross Commissions
|
Total Expenses
|
Net Income (Loss)
|
|
1990
|
$ 227
|
$30,727
|
($30,500)
|
|
1991
|
1,693
|
17,420
|
(15,736)
|
|
1992
|
0
|
17,191
|
(17,191)
|
|
1993
|
0
|
21,043
|
(21,043)
|
|
1994
|
171
|
19,065
|
(18,894)
|
|
1995
|
165
|
21,460
|
(21,297)
|
|
1996
|
213
|
22,826
|
(23,039)
|
|
1997
|
285
|
19,497
|
(17,143)
|
It was not until 1996 that the losses were disallowed.
[3]
He had experienced selling life insurance dating back to 1953 yet
was in managerial positions with Sun Life in Atlantic Canada for
much of his career up to 1989 when he reluctantly retired.
[4]
To supplement his pension after retirement, he acted as a
consultant for Sun Life for four years. During this period, he
did not sell life insurance. He ended his unsuccessful consulting
business in 1993 and commenced selling life insurance from his
Shediac Cape residence. This activity was as spectacularly
unsuccessful as his consulting work. He lost approximately
$82,000 in four years of consulting and $80,000 in four years
selling insurance. Throughout these eight years, he enjoyed a
comfortable pension and other income in excess of $60,000
annually.
[5]
For his business plan, he completed the forms provided by Sun
Life for all its sales agents, to plan their life insurance
selling approach in each coming year. He was not able to meet
these goals. He approached and conducted his life insurance sales
business on a business-like basis. He travelled by automobile to
his designated areas where he would meet by prior arrangement
with "centres of influence" in order to gain leads as
to prosperous clients. Of course he would also meet with
prospective clients. He gave presentations to potential clients
whom he had previously screened. He conducted approximately one
presentation per week.
[6]
After making very little income from this business in 1994, he
nevertheless felt that he had established contacts and had become
sufficiently known so that the business would do better in 1995.
In 1995, his selling efforts were in the Moncton and surrounding
area. His revenue for the year was only $165. He persevered. In
1996, he spent more time trying to sell life insurance in the
Florenceville area. At the end of 1996, his results were only
$213 of revenue. He testified that if he actually moved to the
Florenceville area this would assist his business in breaking
into the life insurance market share. His revenue for that year
from selling life insurance, focused in the Florenceville area,
was only $285. Therefore, after four years of trying to make this
business succeed, he decided to give it up. In early 1998, he
commenced work as a real estate agent in the Florenceville area
and currently earns a small profit from that business. He claimed
substantial losses after his first and second year in this
endeavour.
[7]
Both parties state that the sole issue is whether the Appellant
had a reasonable expectation of profit from his life insurance
sale activities in 1996 and 1997.
Position of the Appellant
[8]
The Appellant argued that he did have a REOP in each of the years
1996 and 1997 from selling life insurance. The Appellant believes
that he approached his activity in a committed and business-like
way. He had ample experience from prior years. His motivation was
to supplement his pension income and there was no personal
element involved.
[9]
The business failed and in hindsight, the Appellant expressed
regret that he engaged in the business at all. A substantial
amount of his money was lost while trying to make a success of
this undertaking. The Appellant admits that upon commencing his
business of selling insurance and investments in 1994, he was not
properly prepared to actually go out into the field and actually
sell, as his field of expertise was in administration. In
retrospect, the Appellant admits his failure was due primarily to
his inexperience and inflated expectations.
Position of the Respondent
[10] The
Respondent submits that the Appellant's selling of life
insurance had no reasonable expectation of profit. The Appellant
lacked the knowledge and experience of a direct salesperson, as
his background and business experience was in the management
field. The Appellant did not have a business plan for the years
under appeal that projected annual revenues and the anticipated
rate of growth of his operation.
Analysis
[11] Whether
there was a REOP is primarily a question of fact. The question is
better phrased by asking whether there was a business rather than
a REOP.
[12] The
Respondent acknowledges that the Appellant's sale of life
insurance was not a hobby that would attract greater scrutiny as
indicated in Tonn v. The Queen, 96 DTC 6001. The
Respondent is rightly concerned with the great disparity in total
revenues of $2,754 and reported losses of $164,843 from 1990 to
1997. It would have been more realistic to challenge the
reasonableness of the Appellant's expenditures by referring
to section 67 of the Income Act, as suggested by Linden
J.A. in Tonn, supra at page 6009.[1]
[13] The
Respondent called three witnesses: Susan Buck, Jackie Lohnes and
Charlotte Magasi. Ms. Buck's evidence as the auditor for the
1994 and 1995 taxation years was that they had started to audit
Mr. Smalley's expenses but then reassessed him on the basis
of no REOP. She testified that she had no reason to disbelieve
Mr. Smalley's testimony that he discontinued his consulting
business in 1993 and began his business of selling life insurance
in 1994. She also testified she was not able to confirm when the
shift in business pursuits had occurred. Ms. Buck also
agreed that normally a start-up period is permitted for REOP
cases and that a reasonable period for such would be
approximately four years, although each case is different. Ms.
Lohnes who was the Appeals Officer, agreed that there had been a
change of business from consulting to selling life insurance. Ms.
Magasi agreed that where a business had changed, a new start-up
period should be allowed.
[14] I accept
the Appellant's evidence that during the years 1994 through
the end of 1996, he attempted to sell life insurance in the
traditional manner. He made cold calls, made contacts and
followed up on them. He did not use a laptop and did not sell
mutual funds. A very successful New Brunswick insurance salesman,
Mr. Pickett, testified that the Appellant's approach was
common in the industry during the relevant period. During the
mid-1990s, the life insurance industry was changing. Many life
insurance agents of Sun Life left the business. There was a
movement away from branch offices and toward home offices. There
was much less corporate support from Sun Life. Sun Life products
were harder to sell.
[15] I agree
with the Appellant's counsel that, in this case, the nature
and character of the Appellant's expenses have not been
questioned. Section 67 of the Act was not argued. REOP was
made the only issue. The nature of the expenses may have had some
relevance in determining whether there was a personal element but
this was not pursued. There was reference to the Appellant
claiming travelling expenses while on his honeymoon yet he later
withdrew these expenses explaining it was a mistake.
[16] I find as
a fact that the Appellant began to sell life insurance late in
1993. He commenced this activity with a belief that it would be
profitable. It was a business. He had a REOP. The Respondent
raises the question of start-up time. How long should he be
permitted to, deduct these expenses which were outrageous in
comparison to his income. From 1993 to the end of 1997, he
reported a total of $834 in income from his business activity.
For the same period, he claimed over $100,000 in losses. These
losses were escalating from 1994 to 1996 inclusive.
[17] There is
no question that integral to REOP is the allowance of a start-up
time. See Tonn, supra, at page 6014. The question is when
should the line be drawn. The Appellant commenced the new
business of selling life insurance in late 1993. He had no
revenue in 1993 but claimed expenses of $21,043. His losses in
1994 were $18,900, and escalated in 1995 to $21,300 (rounded to
the nearest $100). During these years, his revenue for 1994 was
$171 and even lower in 1995: $165. Surely, a reasonable business
person with the Appellant's experience would conclude that
enough was enough and it was time to close the business. I find
that after December 1995, the Appellant no longer could be said
to have been in business and to have a REOP. His motivation for
continuing had to be for something other than selling insurance.
He knew or ought to have known by the end of 1995 that his
selling insurance was not a viable business. At this time, it was
unreasonable if not outrageous to continue on. He is indeed
fortunate that he was permitted to deduct what appears to be
unreasonable expenses over several years.
[18] The
appeals for the 1996 and 1997 taxation years are dismissed.
Signed at Ottawa, Canada, this 21st day of September,
2001.
"C.H. McArthur"
J.T.C.C.
COURT FILE
NO.:
2000-2563(IT)I
STYLE OF
CAUSE:
Robert G. Smalley and
Her Majesty the Queen
PLACE OF
HEARING:
Fredericton, New Brunswick
DATE OF
HEARING:
April 18 and 19, 2001
REASONS FOR JUDGMENT BY: The
Honourable Judge C.H. McArthur
DATE OF
JUDGMENT:
September 21, 2001
APPEARANCES:
Counsel for the Appellant: Bruce S. Russell
Counsel for the
Respondent:
Ifeanyichukwu Nwachuku
COUNSEL OF RECORD:
For the
Appellant:
Name:
Bruce S. Russell
Firm:
McInnes Cooper
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-2563(IT)I
BETWEEN:
ROBERT G. SMALLEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on April 18 and 19, 2001, at
Fredericton, New Brunswick, by
the Honourable Judge C.H. McArthur
Appearances
Counsel for the
Appellant: Bruce
Russell
Counsel for the Respondent:
Ifeanyichukwu Nwachukwu
JUDGMENT
The
appeals from the assessments of tax made under the Income Tax
Act for the 1996 and 1997 taxation year are dismissed.
Signed at Ottawa, Canada, this 21st day of September,
2001.
J.T.C.C.
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