Tramble v. The Queen, docket 2001-639-IT-I (Informal Procedure)

Date: 20010803

Docket: 2001-639-IT-I

BETWEEN:

LYN TRAMBLE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Bowman, A.C.J.

[1]            The appellant appeals from assessments for the 1996 and 1997 taxation years whereby the Minister of National Revenue disallowed the deduction of losses of $4,661 and $1,198 which she sustained in carrying on of what she contends is a business as an artist.

[2]            The appellant is the oldest of 11 children. She started painting at the age of five. She has a Bachelor of Arts from the University of Windsor in which she majored in Fine Arts. She has also studied at the Banff School of Fine Arts, York University and Guelph University. She has been a teacher since 1965 and was a Sister at the St. Joseph's convent in London until she left the convent in 1972. She moved to Toronto and taught visual arts at the Loretto Abbey which was also the subject of interiors which she painted.

[3]            Since 1985 she has been employed full time by the Dufferin-Peel Roman Catholic Secondary School Board until her retirement, as I recall the evidence, in 1999.

[4]            She began reporting her income or loss in 1980 and has done so until the present. The results are as follows.

Year                         Revenue                    Expenses                             Loss

1980         $ 2,350.00                $ 7,948.00                ($5,598.00)

1981         $ 3,292.00                $ 7,689.00                ($4,397.00)

1982         $ 5,421.00                $13,270.00               ($7,849.00)

1983         $    676.00                 $ 3,569.00                ($2,893.00)

1984         $ 6,354.00                $ 6,774.00                ($ 420.00)

1985         $ 2,776.00                $10,155.00               ($7,379.00)

1986         $ 6,055.00                $13,096.00               ($7,041.00)

1987         $16,585.00               $14,421.00               $2,164.00

1988         $ 8,267.00                $14,231.00               ($5,964.00)

1989         $ 6,135.00                $ 8,906.00                ($2,771.00)

1990         $ 2,635.00                $10,193.00               ($7,558.00)

1991         $ 7,088.00                $10,838.00               ($3,750.00)

1992         $ 3,441.00                $ 6,604.00                ($3,163.00)

1993         $ 5,485.00                $ 8,803.00                ($3,318.00)

1994         $ 2,046.00                $ 8,610.00                ($6,564.00)

1995         $ 4,352.00                $ 8,537.00                ($4,185.00)

1996         $ 3,084.00                $ 7,745.00                ($4,661.00)

1997         $ 5,481.00                $ 6,679.00                ($1,198.00)

1998         $ 1,194.00                $ 5,897.00                ($5,703.00)

1999         $ 7,786.00                $ 8,890.00                ($1,104.00)

[5]            It was not until 1996 that the losses were disallowed on the basis that she had no reasonable expectation of profit. What seems to have gotten the revenue authorities exercised is the fact that in twenty years she has earned a profit in only one year. This appears to be a little troublesome for them but they have clearly picked the wrong case in which to attack an established artist on the basis of REOP. In Donyina v. The Queen, file 2001-934(IT)I, I said:

When to start a business and when to abandon it are business decisions in which neither the taxing authorities nor the court should intervene (Nichol). Nonetheless if losses go on being incurred year after year for an inordinate length of time sooner or later one has to apply what I shall call the "Enough is enough" principle and decide that what might have been a viable business has, with the effluxion of time, became hopeless and the best thing to do with it is to give it a decent burial. Nonetheless, a businessman's judgement to maintain a business must be treated with great respect.

[6]            The statement is probably true enough, as far as it goes, as a practical guideline - certainly I did not intend it to be a principle of law - but it has to be applied with some care and there must be taken into account the nature of the business with which one is dealing. Artistic endeavour is something that may require a lifetime before the artist is recognized. We can all think of artists and composers who died penniless only to have their work recognized by later generations long after their death.

[7]            The Department of National Revenue (now CCRA) recognizes the unique position of artists in a very useful bulletin IT-504R2, Visual Artists and Writers, which reads in part as follows.

4.              ...

The nature of art and literature is such that a considerable period of time may pass before an artist or writer becomes established and profitable. Although the existence of a reasonable expectation of profit is relevant in determining the deductibility of losses, in the case of artists and writers it is recognized that a longer period of time may be required in establishing that such reasonable expectation does exist.

5.              Factors which will be considered by the Department in determining whether or not an artist or writer has a reasonable expectation of profit include:

(a)            the amount of time devoted to artistic or literary endeavours,

(b)            the extent to which an artist or writer has presented his or her own works in public and private settings including, but not limited to, exhibiting, publishing and reading as is appropriate to the nature of the work,

(c)            the extent to which an artist is represented by an art dealer or agent and the extent to which a writer is represented by a publisher or agent,

(d)            the amount of time devoted to, and type of activity normally pursued in, promoting and marketing the artist's or writer's own works,

(e)            the amount of revenue received that is relevant to the artist's or writer's own works including, but not limited to, revenue from sales, commissions, royalties, fees, grants and awards which may reasonably be included in business income,

(f)             the historical record, spanning a significant number of years, of annual profits or losses relevant to the artist's or writer's exploitation of his or her own works,

(g)            a variation, over a period of time, in the value or popularity of the individual's artistic or literary works,

(h)            the type of expenditures claimed and their relevance to the endeavours (e.g., in the case of a writer there would be a positive indication of business activity if a substantial portion of the expenditures were incurred for research),

(i)             the artist's or writer's qualifications as an artist or writer, respectively, as evidenced by education and also by public and peer recognition received in the form of honours, awards, prizes and/or critical appraisal,

(j)             membership in any professional association of artists or writers whose membership or categories of membership are limited under standards established by that association,

(k)            the significance of the amount of gross revenue derived by an artist or writer from the exploitation of that individual's own works and the growth of such gross revenue over time. In applying this factor, external influences such as economic conditions, changes in the public mood, etc., which may affect the sale of artistic or literary works will be taken into consideration, and

(l)             the nature of the literary works undertaken by a writer. It is considered that a literary work such as a novel, poem, short story or any non-fictional prose composition that is written for general sale or syndicated distribution would normally have a greater profit potential than a work undertaken for restricted distribution.

6.              No particular factor described in 5 above is more important than another and no one factor determines whether or not an activity is a business carried on for profit or with a reasonable expectation of profit. All relevant criteria are considered together in making a determination and the taxpayer's failure to meet any one particular factor will not in itself preclude the taxpayer's artistic or literary activities from qualifying as a business.

7.              In the case of an artist or writer, it is possible that a taxpayer may not realize a profit during his or her lifetime but still have a reasonable expectation of profit. However, in order to have this "reasonable expectation of profit" the artistic or literary endeavours, as the case may be, of the artist or writer must be carried on in a manner such that, based on the criteria in 5 above, they may be considered for income tax purposes to be the carrying on of a business rather than, for example, a hobby.

[8]            Whoever wrote the above demonstrated considerable sensitivity to the nature of artistic endeavour and a recognition of the validity of the aphorism ars longa vita brevis. Although interpretation bulletins are not the law and do not bind the court this one makes sense and substantially she meets the criteria in it.

[9]            I turn now to the artistic endeavour of the appellant, Ms. Tramble, who carries on her business under her maiden name, Lyn Westfall. She is a recognized artist with numerous exhibitions to her credit, and her works are in a number of collections. I reproduce a portion of Exhibit A-5 which sets out the exhibitions and collections in which her paintings have been displayed.

ONE-ARTIST EXHIBITIONS:

                1979/80    Metropolitan Separate School Board, Toronto

                1981         Gallery 480, Elora

                1982         Kaspar Gallery, Toronto

                1982         Wilfrid Laurier University

                1984         The Artist's Residence, Caledon

                1986         The Millcroft Inn, Alton

                1987         The Artist's Residence, Caledon

                1988         Woodstock Public Art Gallery, Woodstock

                1991         The Artist's Residence, Caledon

                1994         The Tarragon Theatre, Toronto

                1995         The Art Gallery of Peel, Brampton

GROUP SHOWS:

                1992         - Juried Show - Wellington Country Museum

                                                - Studio Tour '92

                1993         - Peel Collects - Art Gallery of Peel

                                                - 20^th Annual Juried Exhibition - Art Gallery

                                                of Peel

                                                - Studio Tour '93

                1994         - Juried Show - Wellington County Museum -

                                Juror's Award

                                                - Studio Tour '94

                1995         - Juried Show - Edward Day Gallery - Kingston

                                                - Juried Show - Art Gallery of Peel -

                                                Juror's Award

                                                - Studio Tour '95

                1996         - Juried Show - Art Gallery of Peel

                                                - Studio Tour '96

                1998         - Joseph D. Carrier Art Gallery, Columbus Centre,

                                                North York

                                                - Studio Tour '98

MAJOR COLLECTIONS:

Shell Canada Collection, Calgary

Steven Slavin Agencies, Toronto

Neiman, Callegari, Bolton

Karoma Publishing Inc., Ann Arbour, Michigan

Villa Columbo Children's Centre, Toronto

James A. Coutts, Toronto

Wilfred Laurier University, Waterloo

Kathryn Robinson, Toronto

Goodman, Phillips & Vineberg, Toronto

Isabel Bassett, Toronto

J.H. Warch and Co. Limited, Toronto

Austin Cooper, Toronto

Prudential Life, Toronto

Gordon and Selma Edelstone, Toronto

Xerox Canada Inc., Toronto

Koffler Gallery, Toronto

[10]          In an attempt to make the business profitable she advertises in Slate magazine, a publication devoted to artists, she shows her works at exhibitions and art galleries and also rents out her works of art. She testified that 80% of the rentals result in sales.

[11]          She put in evidence lists of works sold in 1996 and 1997. One thing that struck me was that virtually all of the paintings sold in those years were created in earlier years - some as early as 1982. What this demonstrates is that it may take years for art works to sell. She testified that usually they increase in value as the artist's reputation grows, as it did in the appellant's case.

[12]          The appellant is a remarkably versatile and prolific artist. She works in watercolour and oil and she covers a variety of themes. Her requiem series appear to be watercolour collages with Japanese rice paper affixes and Gregorian chant notations. Her painting "Ubi caritas, et amor, Deus ibi est" is a complex and striking painting commissioned for an old peoples home. It sold for $4,000 in 1999.

[13]          A large part of her work consists of paintings of outstanding women in history, such as Hildegard von Bingen, Joan of Arc, and Edith Stein, as well as Biblical women. There is a strong religious and feminist theme running through her works.

[14]          The appellant testified that the appeals officer, Mr. Baksh, based his rejection of her objection on three considerations.

(a)            She worked full time as a teacher in the years in question. The response to this is that she devoted as much time as she could to her artwork and she needed her salary to support her artistic endeavours. The time devoted to artistic endeavour is hardly determinative of the question whether it is a business. Mozart could toss off a symphony in a matter of days. Brahms took years.

(b)            Her work is too localized - she should be trying to sell it across the country.

(c)            Her area of artistic endeavour is too specialized: paintings with religious themes are not much in demand these days.

[15]          These last two points are outstanding examples of the Minister's second-guessing the business acumen of the taxpayer. This is something that the courts have consistently held that the Minister of National Revenue should not do. It is always presumptuous for an outsider, such as a tax assessor, to give a businessperson advice on the way the business should be run. It is doubly so if the business happens to be that of being an artist.

[16]          As was said in Donyina:

2.              The Minister or the court should not, with the benefit of hindsight, second-guess the business acumen of a taxpayer who embarks upon a business venture in good faith (Keeping, Tonn, Nichol, Kuhlmann, Bélec and Smith).

[17]          I repeat what was said in Kaye v. The Queen, 98 DTC 1659 at 1660:

                [4]            I do not find the ritual repetition of the phrase 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 as 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.

[18]          What do we have here? An accomplished professional artist who goes about the business of being an artist in an organized, businesslike way. She keeps meticulous records. Her expenses are modest — for example she does not claim CCA on her studio. The losses in fact are relatively small and her expenses are reasonable in relation to the revenues produced. If this is not a business, what on earth is it? It is certainly not a hobby.

[19]          Counsel suggested that there was a personal element in what the appellant did and therefore the REOP principle should be applied more rigorously. He relies upon something attributed to her in a newspaper interview on the occasion of an exhibition of her works at the Peel Art Gallery in 1995:

                "(My art's) something I have to do. It's a compulsion, it gives a feeling of self worth, piece of mind. It's absolutely fascinating - both absorbing and exhausting."

[20]          Artistic endeavour is by its very nature compulsive and passionate. If an artist is not passionate about what he or she does possibly a different line of work should be pursued. I am sure there are many professions in which passion is not only unnecessary but distinctly undesirable. Art is not one of them.

[21]          I do not think the appellant's passion for her work means that there is a personal element that detracts from her carrying on a business.

[22]          Counsel also suggested that she made no attempt to reduce expenses or increase income. She was doing all she could. As it happens her work has not yet caught the public's imagination to the extent that it probably merits, or taken off in the way in which the work of some other Canadian artists has. Her supposition that it will is not unreasonable. Counsel suggested no way in which she could have reduced her already modest expenses. To increase her income would have involved increasing her production of paintings. This would have increased her expenses but if her paintings did not sell in the year her income would not have increased — only the size of her loss.

[23]          One final point deserves to be made. Artists can elect under subsection 10(6) of the Income Tax Act to value their inventory at nil. What this means is that artists need not reduce their cost of goods sold by the cost or value of paintings remaining in inventory at year-end. The result is that effectively artists may report on the cash basis and that is what the appellant is doing here. If she had to value her inventory at the lower of cost or market, given the number of unsold paintings in her inventory at the end of the year, it would seem likely that the losses would disappear and she would realize a profit, albeit a notional one, and would be taxed accordingly.

[24]          It is ironic that the very concession that is made to artists in subsection 10(6) as an incentive to encourage artistic endeavour and to recognize the somewhat unique situation in which artists find themselves should give rise to the very losses that are used to justify the denial of their deduction on the basis that there was no reasonable expectation of profit.

[25]          I have concluded that the appellant was carrying on a business as an artist and that her expectation of profit was reasonable. Her expectation was far from "irrational, absurd and ridiculous" (Kuhlmann et al. v. The Queen, 98 DTC 6652).

[26]          The appeals are allowed with costs and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment to permit the appellant to deduct in computing her income for the years 1996 and 1997 the losses incurred in carrying on business as an artist.

Signed at Ottawa, Canada, this 3rd day of August 2001.

"D.G.H. Bowman"

A.C.J.

COURT FILE NO.:                                                 2001-639(IT)I

STYLE OF CAUSE:                                               Between Lyn Tramble and

                                                                                Her Majesty The Queen

PLACE OF HEARING:                                         London, Ontario

DATE OF HEARING:                                           July 24, 2001

REASONS FOR JUDGMENT BY:                      The Honourable D.G.H. Bowman

                                                                                Associate Chief Judge

DATE OF JUDGMENT:                                       August 3, 2001

APPEARANCES:

Counsel for the Appellant: Peter Westfall, Esq.

Counsel for the Respondent:              Patrick Folz, Esq.

COUNSEL OF RECORD:

For the Appellant:                

Name:                      Peter Westfall, Esq.

Firm:                        Peter Westfall

Point Edward, Ontario

For the Respondent:                             Morris Rosenberg

                                                                Deputy Attorney General of Canada

                                                                Ottawa, Canada

2001-639(IT)I

BETWEEN:

LYN TRAMBLE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on July 24, 2001, at London, Ontario, by

The Honourable D.G.H. Bowman

Associate Chief Judge

Appearances

Counsel for the Appellant:          Peter Westfall, Esq.

Counsel for the Respondent:      Patrick Folz, Esq.

JUDGMENT

          It is ordered that the appeals from assessments made under the Income Tax Act for the 1996 and 1997 taxation years be allowed with costs and the assessments be referred back to the Minister of National Revenue for reconsideration and reassessment to permit the appellant to deduct in computing her income the losses incurred in carrying on business as an artist.

Signed at Ottawa, Canada, this 3rd day of August 2001.

"D.G.H. Bowman"

A.C.J.