Date: 20010710
Docket: 2000-3792-IT-I
BETWEEN:
SYLVIA WOJCIK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent
Docket: 2000-3793-IT-I
AND BETWEEN:
ANDY WOJCIK,
Appellant,
and
HER MAJESTY THE QUEEN
Respondent.
Reasons for Judgment
O'Connor, J.T.C.C.
[1]
These appeals were heard at Toronto, Ontario on April 9 and
continuing on April 12, 2001.
[2]
There are three principal issues. First, was the 1997 taxation
year properly before the Court? Second, did the Appellants have a
reasonable expectation of profit in the 1995, 1996 and 1997
taxation years from their alleged home
renovation-construction-glass installation activity and from
certain research and development such that the business losses
suffered in those years were deductible from other income; and
Third, whether the Appellants are entitled to certain scientific
research and experimental development expenditures and related
investment tax credits.
[3]
The two appeals were heard together on common evidence. Evidence
was given by Andy Wojcik ("Andy") and by his agent,
Tadeusz Wojcik. The Appellant, Sylvia Wojcik ("Sylvia")
did not appear. Numerous exhibits were submitted, including
Exhibit A-1 containing nine tabs. Only pages 11; 50 to 61; 63 to
65; 73 to 83; 97 to 100; 102; 103; 138 to 140; and 143 to 149 of
Exhibit A-1 were admitted into evidence. The Appellants also
submitted as Exhibit A-2, statements of business activities for
Sylvia for the years 1995 and 1996. Testimony was given by Andy
that statements of business activities for himself were the same
with the exception of the allocation of the losses. Counsel for
the Respondent submitted Exhibit R-1, being a copy of
"Answers for a Business Questionnaire: Royal Knight
Contracting".
[4]
After the close of the hearing the Appellants' agent filed
with the Court on April 27, 2001 the Appellants' Written
Submission. On May 3, 2001 counsel for the Respondent submitted
Respondent's Written Submissions. Further, on May 11,
2001 the Appellants' agent submitted what he entitled
"Appellants' Final Written Submissions". Subsequent
to that, the Appellants' agent submitted a document entitled
"Supplementary Factum of the Appellants" including a
form of motion requesting the Court to admit same.
[5] I
have reviewed this last document and I do not believe it is a
valid motion because it does not conform with the Rules of the
Tax Court of Canada requiring notice and a delay for the
presentation of the motion. In any event, I do not consider that
the additional documents assist the Appellants' appeals.
[6]
The Reply to the Notice of Appeal in the appeals of Andy state
the following:
7.
In computing income for the 1995, 1996 and 1997 taxation years,
the Appellant claimed business losses in amounts of $1,866.00,
$2,532.00 and $2,354.00 respectively.
8.
The Minister assessed the Appellant's 1995, 1996 and 1997
taxation years as filed, Notices of Assessment thereof dated
March 28, 1996, April 7, 1997 and June 22, 1998 respectively.
9.
In reassessing the Appellant's 1995, 1996 and 1997 taxation
years, concurrent Notices of Reassessment thereof dated March 1,
1999, the Minister disallowed business losses in the amounts of
$1,866.00, $2,532.00 and $2,354.00 respectively.
10.
In so reassessing the Appellant, the Minister made the following
assumptions of fact:
(a)
at all material time the Appellant was employed full time with
several glass companies;
(b)
the Appellant's main source of income was employment income
earned from these glass companies (Schedule A attached);
(c)
in 1988 the Appellant commenced a partnership business with his
spouse known as Royal Knight Contracting ("RKC") for
the installation of residential windows;
(d)
RKC has been in existence since 1988, and has shown business
losses for the last 10 years;
(e)
the Appellant and his spouse had no business plans or projections
on how to develop RKC;
(f)
no business income was ever generated in respect of RKC over the
years with only minor gross income in 1994 and 1995 from patent
work for his brother's company;
(g)
the Appellant and his spouse have claimed business losses in
respect to RKC for the last 10 years as follows:
|
Year
|
Gross
Income
|
Net
Business Loss
|
|
1988
|
$
1
|
$(14,069)
|
|
1989
|
0
|
(17,080)
|
|
1990
|
1
|
(19,664)
|
|
1991
|
1
|
( 8,987)
|
|
1992
|
0
|
(11,796)
|
|
1993
|
0
|
(11,733)
|
|
1994
|
3,155
|
(18,523)
|
|
1995
|
3,745
|
(18,663)
|
|
1996
|
0
|
(25,325)
|
|
1997
|
0
|
(23,548)
|
|
1998
|
not filed
|
not filed
|
(h)
although it was a 50/50 partnership, the Appellant and his spouse
discretionary [sic] altered their partnership allocations of
income as follows:
|
Year
|
Appellant's
Share
|
Spouse's
Share
|
|
1989
|
($17,080)
100%
|
0
|
|
1990
|
($19,664)
100%
|
0
|
|
1991
|
($ 898) 10%
|
($ 8,089) 90%
|
|
1992
|
($ 5,898) 50%
|
($ 5,898) 50%
|
|
1993
|
($ 1,173) 10%
|
($10,560)
90%
|
|
1994
|
($ 1,852) 10%
|
($16,671)
90%
|
|
1995
|
($ 1,866) 10%
|
($16,797)
90%
|
|
1996
|
($ 2,532) 10%
|
($22,793)
90%
|
(i)
the inventory purchased on April 16, 1994 had not been used and
remained in inventory for the years under appeal;
...
(m) the
Appellant stated that most of their incurred expenditures related
to the research and development activities, but they failed to
provide the T661, T2038 forms and adequate documentation in
support of their eligibility for the investment tax credits in
respect of scientific research and development qualified
expenditures;
(n)
consequently, no investment tax credits were granted for the
Appellant's request.
[7]
The Reply in the appeals of Sylvia is essentially the same except
that (i) the business losses she claimed were $16,797.00 in 1995,
$22,793.00 in 1996 and $21,194.00 in 1997; (ii) paragraph 10(a)
indicates that Sylvia was employed full time at Lapointe Fisher
Nursing Home Ltd. which provided her main source of income and
(iii) the reference in subparagraph 10(f) refers to patent work
for Sylvia's brother-in-law's company. In each of the
Replies, the allocation of the losses is the same. No specific
allocation is made for 1997 but the loss claimed totalled
$23,548.00 of which Sylvia claimed $21,194.00, i.e. 90%.
[8]
The site of the original operation in 1988 was a small two room
rented building. By the end of 1993 the operation, which had
practically closed down was being run from the Appellants'
home at 125 Cole Road. In November 1993 the Appellants acquired
12 John Street and commenced renovating it as their residence and
place of business. At about this time Andy acquired considerable
construction materials at auction and in 1994 the Appellants
rented an industrial-commercial property at
59 Suburban Street for the storage of some of those
materials. The ramifications of these various sites are set out
in the Appellants' agent's submissions cited towards the
end of this Judgment.
Submissions and Decision
[9]
With respect to the 1997 taxation year being properly before the
Court, the written submissions of counsel for the Respondent read
in part as follows:
The 1997 taxation year is properly before the Court
2.
By Notices of Reassessment dated March 1, 1999, the Appellants
were reassessed for the 1995, 1996, and 1997 taxation years.
Pursuant to subsection 152(4) of the Income Tax Act (the
"Act"), the Minister of National Revenue (the
"Minister") has the power to reassess taxpayers at any
time within the normal reassessment period. The "normal
reassessment period" for individuals is defined as the
period that ends 3 years after the earlier of the day of mailing
of a notice of an original assessment and the day of mailing of
an original notification that no tax is payable by the taxpayer
for the year. The Appellants were originally reassessed for the
1997 taxation year by Notice of Assessment dated June 29, 1998.
Therefore, the Minister of National Revenue had until June 2001
in which to reassess the Appellants. The reassessment occurred in
March 1999, well within the normal reassessment period. The 1997
taxation year is properly before the Court. The Appellants
brought no evidence to show that the assessment and reassessment
for the 1997 taxation year occurred on different dates from those
stated in the Reply to the Notice of Appeal.
Reply to the Notice of Appeal, paragraphs 8 and 9
Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) as amended,
subsections 152(3.1) and 152(4), Respondent's Book of
Authorities, Tab 1
[10] The agent
for the Appellants submitted that much of the correspondence and
questionnaires with and from Revenue Canada did not refer to the
1997 taxation year and concludes from that, mainly, that the 1997
year was not properly before the Court. What the agent ignores is
that it is the date of the original Notice of Assessment, namely
June 29, 1998 which sets the three year clock running. In other
words, it is not set running by correspondence and questionnaires
emanating back and forth between Revenue Canada and the
Appellants or their agent. Consequently I agree with Respondent
Counsel's submissions.
[11] With
respect to the reasonable expectation of profit test, I believe
counsel for the Respondent has summarized the applicable
principals. Her written submissions, so far as material, read as
follows:
The Appellants had no reasonable expectation of profit from
Royal Knight Contracting
6.
The Appellants did not have a reasonable expectation of profit
from Royal Knight Contracting in the 1995, 1996, and 1997
taxation years. Therefore, they have no source of income from
which to deduct their losses in those years.
7.
Income from business is defined as "the taxpayer's
profit from that business". In order to have a source of
income from business, the Appellants must have had a profit or a
reasonable expectation of profit from Royal Knight Contracting in
the years in question. The reasonable expectation of profit test
applies to all types of activities that a taxpayer may claim are
business activities.
The Act, supra, section 9, Respondent's Book of
Authorities, Tab 1
Moldowan v. R., 1977 CarswellNat 243 (S.C.C.) at 4,
Respondent's Book of Authorities, Tab 4
8.
In order to determine whether the Appellants had a reasonable
expectation of profit, the Court should consider the following
factors:
profit and loss experience in past years
the taxpayer's business plan, including the existence,
background, and implementation of the plan
the presence of the necessary ingredients to make the activity
profitable
the time required to make the activity profitable
the persistence of factors causing losses.
Tonn v. R., 1995 CarswellNat 884 (F.C.A.) at 16,
Respondent's Book of Authorities, Tab 5
9.
As well, the Court may make another, more general determination
as to whether the Appellants had a reasonable expectation of
profit:
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.
Kaye v. R. , 1998 CarswellNat 575 (T.C.C. -
Informal Procedure) (Bowman, T.C.J.) at 2, Respondent's Book
of Authorities, Tab 6
10.
The reasonable expectation of profit test is applied to alleged
business activities whether or not the activities have a personal
element to them.
Stewart v. R., 2000 CarswellNat 259 (F.C.A.) at 3,
Respondent's Book of Authorities, Tab 7
The Appellants had no reasonable expectation of profit from
Royal Knight Contracting
11.
The Appellants commenced their alleged home
renovation-construction-glass installation activity (the
"Activity" under the name of Royal Knight Contracting
in 1988. Andy Wojcik testified that he and his wife became
involved with a subdivision project in the late eighties that was
supposed to lead to construction work for Royal Knight
Contracting. The Appellants were involved in this project for six
years but no construction work resulted. In 1994, Tadeusz Wojcik
became involved with the Activity when he allegedly began
overseeing the research and development that the Appellants were
performing. He was not an employee of or a partner in Royal
Knight Contracting. According to Andy Wojcik, Royal Knight
Contracting continued to carry on the Activity. Some time around
1994, the Appellants purchased a house at 12 John Street in
Guelph, Ontario with the intention of renovating it and using it
for the Activity and with the eventual intention of reselling
it.
12.
The Respondent submits that the Appellants have been carrying on
the same Activity under the name of Royal Knight Contracting
since 1988 and that no new business commenced in 1994.
9 years of losses
13.
Between 1988 and 1997, Royal Knight Contracting suffered nine
years of losses. Royal Knight Contracting had no customers,
obtained no bids for contracts and brought in little or no gross
revenue during the years under appeal. Royal Knight Contracting
has brought in little or no gross revenue since it commenced
operations in 1988. The Respondent submits that it is very
difficult for the Appellants to show that they had a reasonable
expectation of profit when the Activity has brought in little or
no gross revenue over a nine year period.
Knight v. Minister of National Revenue, 1993
CarswellNat 1124 (T.C.C.) at 7 and 8, Respondent's Book of
Authorities, Tab 8
Demarais v. Minister of National Revenue, 1990
CarswellNat 548 (T.C.C.) at 3 and 7, Respondent's Book of
Authorities, Tab 9
Thousands of dollars of expenses claimed
14.
Between 1988 and 1997, the expenses of the Activity ranged
between $8,987.00 and $25,325.00. In 1995, the Appellants claimed
expenses of $22,408.00, in 1996, they claimed expenses of
$25,325.00, and, in 1997, they claimed expenses of $23,548.00. In
these years, they brought in a total of $3,745.00 in gross
revenue. Their expenses for those three years totaled $71,281.00.
Their expenses were nineteen times larger than their gross
revenue in the three years under appeal. Their rental expense
alone (in 1995, $11,320.60 and in 1996, $12,604.60) exceeded
their gross revenue.
Reply to the Notice of Appeal, paragraph 10(g),
Exhibit A-2
...
No customers, no contract bids, no actual work for Royal
Knight Contracting
17.
Andy Wojcik testified that bids for contracts were made but he
could not remember the specific contracts on which Royal Knight
Contracting may have tendered bids. There was oral testimony
about several projects in which Royal Knight Contracting hoped to
be involved, such as the Wellington County Board project, work
for the Lapointe Nursing Home, and a prospective deal with PPG,
but none of these potential projects resulted in any work or
revenue for Royal Knight Contracting. Andy Wojcik could not
remember the dates relating to these projects so it is not clear
whether these projects even relate to the years under appeal. No
other evidence regarding these projects was introduced at the
hearing. Andy Wojcik testified that small jobs were performed but
he did not testify as to any of the specifics of these small
jobs, what work was performed as part of them, or what revenue
(even an approximation) was brought in as a result of them.
18.
Andy Wojcik testified that Royal Knight Contracting could not
obtain big contract bids because these types of bids required
large cash advances. The Appellants could not obtain large cash
advances because the bank would not give them financing. The
Respondent submits that this inability to obtain the type of
financing necessary to be successful in bidding for contracts, as
well as the lack of customers generally, were persistent factors
contributing to the Appellants' losses in the years in
question and in previous years.
The Appellants did not have the time necessary to make
the Activity profitable
19.
Royal Knight Contracting was a partnership between
Andy Wojcik and his wife, Sylvia Wojcik. Sylvia Wojcik
worked full time at a nursing home in the years in question and,
therefore, the Respondent submits that she did not have much time
to devote to the Activity. Andy Wojcik admittedly had more time
but he was also employed at many places of employment during the
years in question: Cast Craft Corporation, AGS Contract Glazing
Ltd., Pro Roofing and Cladding Co. Ltd., Speedy Auto Glass Ltd.,
Harding Glass & Mirror Ltd., Albion Glass Co. Ltd., Service
Glass & Mirror Ltd., Applewood Glass & Mirror Ltd., TNT
Glazing Ltd., KUB Glass & Mirror, and F.G. Aluminum &
Glass. The worksites of Andy Wojcik's employment were all
over southern Ontario: Mississauga, Kitchener, Oshawa, Brampton,
Markham, and Toronto. He spent between two and four hours driving
to the worksites each day that he worked. Therefore, between
actual employment and his commute to and from his employment,
Andy Wojcik would have had limited time to devote to the
Activity. Tadeusz Wojcik testified that it was necessary for
the Appellants to be employed elsewhere to finance the
Activity.
No indicia of commerciality
20.
The Respondent respectfully submits that Royal Knight Contracting
was not being carried on in a commercially viable manner. The
Appellants were content to continue to lose thousands of dollars
every year, with little or no gross revenue being earned.
21.
Both Andy Wojcik and Tadeusz Wojcik testified that Royal Knight
Contracting was also carrying on scientific research and
experimental development activites at the same time that the
Appellants were carrying on the Activity. The evidence on the
research and development was vague. A smokeless ashtray and an
eco-dryer were mentioned. However, in order for Royal Knight
Contracting to be carrying on an actual business, Royal Knight
Contracting also had to be engaged in a commercial endeavour to
sell and deliver a product or service to the public. As already
mentioned, Royal Knight Contracting had no customers and no bids
for contracts. Furthermore, it was unclear from the evidence
whether Royal Knight Contacting actually had premises open to the
public in the years under appeal.
Knight, supra at 7-8, Respondent's Book of
Authorities, Tab 8
22.
The Respondent notes that the Appellants spent minimal amounts on
advertising in years when they had no customers.
Exhibit A-2
23.
The Respondent submits that without customers, without premises
open to the public, without some realistic plan as to how to
pursue the Activity, and without even rough projections of
revenue and expenses, a reasonable person, looking at the
Activity and applying ordinary standards of commercial common
sense, would say "no, this is not a business".
Kaye, supra at 2, Respondent's Book of Authorities,
Tab 6
24.
The Appellants were not carrying on the Activity with a
reasonable expectation of profit. The Activity had huge losses,
little or no gross revenue, insufficient financial resources, no
contract bids, no customers, and no potential customers. In the
nine years between 1988 and 1997, Royal Knight Contracting,
supposedly a home renovation-construction-glass window
installation operation, renovated one house: the 12 John Street
residence, which became the Appellants' residence in 1995. No
other buildings were constructed or renovated. There was no
evidence of any glass installation customers or projects. There
are simply no indicia of commerciality here on which this Court
could conclude that there was a reasonable expectation of profit
from the Activity.
[12] The
arbitrary way the Appellants allocated the losses in each year is
unusual at best and unreasonable in the years in question. Sylvia
was allocated 90% yet the evidence shows that Andy was the person
who contributed most to the partnership. The fact that no income
was generated in years 1988 to 1993 (save the nominal amounts of
$1.00) and the fact that the only income generated in 1994 and
1995 ($3,155.00 and $3,748.00) consisted of payments from
Andy's brother, allegedly for some research and development
work, do not point to a business being carried on. Andy's
explanation that when he started to take only 10% of the losses
- this was because of a provision in the union contract
which he states limited his business activity income/losses to
that 10% figure. No independent evidence on this point was given
and I simply cannot accept the explanation given by Andy.
[13] With
respect to the scientific research and experimental development
aspect, once again I accept the written submissions of counsel
for the Respondent which read as follows:
Scientific Research and Experimental Development
44.
The Respondent submits that the Appellants are not entitled to
have any expenses treated as expenditures on scientific research
and experimental development because they have not met the many
criteria set out in the scientific research and experimental
development scheme in the Act.
The claim that the Appellants were unable to obtain the
forms has not been established
45.
The Appellants claim that the forms to claim scientific research
and experimental development expenditures and related credits
were consistently denied to them to prevent them from make a
scientific research and experimental development claim.
46.
The Respondent submits that this claim is incredible. The
evidence of Harjinder Dhesy, an Appeals Officer with the Research
and Development Division of the Canada Customs and Revenue
Agency, establishes that the necessary scientific research and
experimental development forms are available and have been
available from a variety of sources. The forms can be obtained
from any forms counter of a Canada Customs and Revenue Agency
office by simple enquiry. The forms can be obtained by
telephoning either the general enquiry line or the business
enquiry line where, if the individual answering the call did not
have the ability to send out the form him or herself, the
Appellants would be directed to someone who could provide the
forms to them. The general enquiry line and the business enquiry
line are in the blue pages of the telephone book and have been
there since at least 1998. As well, accountants generally would
know about the business enquiry line. There is no prerequisite to
obtaining the forms. The Respondent submits that the
Appellants' claim of a Canada Customs and Revenue Agency
conspiracy to prevent them from obtaining the forms is entirely
without foundation.
47.
Even if the Court accepts the claim that, for some reason, the
forms were consistently denied to the Appellants prior to March
2000, the Appellants did obtain the proper forms in March 2000
when the forms were sent to Tadeusz Wojcik, their
representative, by Sherry Sullivan, the Appeals Officer who dealt
with the Appellants' Objections. Ms. Sullivan sent a letter
to Tadeusz Wojcik outlining the process for applying to extend
time to make a scientific research and experimental development
claim and indicating that she enclosed forms T661 and T2038 (the
scientific research and experimental development forms the
Appellants were seeking). The Appellants' representative
indicates that, because this letter was addressed to him
personally, he felt he could not possibly have used these forms
or the process outlined to make a scientific research and
experimental development claim for the Appellants. The Respondent
submits that, having obtained the blank forms, there was nothing
to prevent the Appellants' representative from completing and
filing these forms on the Appellants' behalf, and thus making
a scientific research and experimental development claim on their
behalf.
Exhibit A-1, pages 50-55 of the Appellants' Appeal
Book
48.
The Appellants claim that the forms provided to them were
unreadable. Ms. Dhesy was able to read the forms. The Respondent
submits that the forms were, in fact, readable. In any case,
there was nothing to prevent the Appellants, either directly or
through their representative, from obtaining more forms from
either Ms. Sullivan or from any of the other possible sources.
Tadeusz Wojcik testified that, at some point, he did consult an
accountant regarding the Appellants' tax returns but that it
did not occur to him to ask the accountant for the forms.
49.
In any case, the Appellants are not entitled to succeed in
respect of their claim for scientific research and experimental
development expenditures and related investment tax credits
because they fail to meet the statutory criteria.
There is no evidence that scientific research and
experimental
development was being performed
50.
In order to be entitled to the incentives available in respect of
scientific research and experimental development
("SRED"), the Appellants must have been engaged in SRED
as defined by Parliament. The preliminary words of the definition
require that the Appellants must have been engaged in a
"systematic investigation or search that is carried out in a
field of science or technology by means of experiment or
analysis".
The Act, supra, subsection 248(1), definition of
scientific research and experimental development (formerly
defined in Regulation 2900), Respondent's Book of
Authorities, Tab 10
51.
The Courts have established that scientific research and
experimental development requires controlled experiments and
highly accurate measurements and the testing of one's
theories against empirical evidence. The Court must consider, for
example, whether hypotheses were appropriately formulated and the
scientific method applied. The Appellants must present cogent,
detailed and documented evidence of scientific research and
experimental development.
Sass Manufacturing Ltd. v. Minister of National
Revenue, 1988 CarswellNat 348 (T.C.C.) (Sarchuk, T.C.J.) at
9-11, Respondent's Book of Authorities, Tab 11
Northwest Hydraulic Consultants Ltd. v. R., 1998
CarswellNat 696 (T.C.C.) (Bowman, T.C.J.) at 4-5,
Respondent's Book of Authorities, Tab 12 RIS-Christie Ltd.
v. R., 1998 CarswellNat 2485 (F.C.A.) at 5, Respondent's
Book of Authorities, Tab 13
52.
There is no evidence on which the Court could come to the
conclusion that scientific research and experimental development
was being carried on by the Appellants in the years in question.
The evidence adduced mentioned a few projects: the smokeless ash
tray, the eco-dryer, and linear motors for space transportation
(the "projects"). However, there is not sufficient
evidence of the nature of these activities to establish that they
constitute SRED being carried on by the Appellants. The
Appellants' case cannot succeed based on evidence of SRED
which may have been undertaken by Tadeusz Wojcik, since he was
neither an employee of nor a partner in Royal Knight
Contracting.
53.
There is no evidence as to what technical risk or uncertainty was
identified in relation to the projects. There is no evidence of
any specific hypotheses formulated in relation to the projects
and there is no evidence as to the procedures used in the
development of the projects. There is no evidence of any
systematic observation, measurement or experiment in relation to
these or any other projects.
54.
Essentially, the only evidence before the Court is the repeated
claim that scientific research and experimental development was
being carried on; ...
The Appellants were not carrying on business in Canada
as required by subsection 37(1)
55.
The first requirement of subsection 37(1) is that the taxpayers
must have been carrying on a business in Canada. As already set
out in the first part of the Respondent's submissions, the
Respondent submits that the Appellants did not have a reasonable
expectation of profit and, therefore, that they were not carrying
on a business in the years in question. The Appellants were not
operating Royal Knight Contracting in a commercially viable
manner, they were bringing in no gross revenue, and they had no
customers in the years in question. Therefore, the Respondent
submits that the Appellants do not meet the first requirement for
claiming scientific research and experimental development
expenditures and related investment tax credits laid out in
subsection 37(1).
The Act, supra, subsection 37(1), Respondent's Book
of Authorities, Tab 10
Expenditures must be "all or substantially
all" attributable to SRED
56.
Even if this Court finds that the Appellants established that
their activities constituted SRED and that they were carrying on
a business with a reasonable expectation of profit, there are
further requirements to be met under subsection 37(1).
57.
"Expenditures on scientific research and experimental
development" are defined as expenditures that are "all
or substantially all" attributable to the prosecution of
SRED, according to the definition in subsection 37(8) of the
Act.
The Act, supra, subsection 37(8), Respondent's Book
of Authorities, Tab 10
58.
In the Appellants' case, there is no evidence that any
amounts were expenditures that were "all or substantially
all" attributable to the prosecution of scientific research
and experimental development. The evidence of the Appellants is
that they were carrying on the Activity at the same time that
they were carrying on research and development activities. They
required premises for the Activity, as well as a telephone line
and vehicles for use in that undertaking. Therefore, many
expenses claimed as business expenses were attributable to the
Activity and not "all or substantially all"
attributable to the prosecution of SRED.
The SRED must be related to the Appellants' alleged
business
59.
Finally, subsection 37(1) requires that the scientific research
and experimental development be related to the business carried
on by the Appellants. There must a nexus between the business and
the research and development and that nexus is simply not present
here.
The Act, supra, subsection 37(1), Respondent's Book
of Authorities, Tab 10
...
[14] The agent
for the Appellants contends that the years in question (1995,
1996 & 1997) should be considered as start-up years because
in those years the Appellants were undertaking a new business,
namely research and development. I cannot accept this proposal.
It is clear that to a certain extent the original activity of
renovations, etc. was being carried on partly in the years in
question. To allow the same entity, namely Royal Knight
Contracting to have start-up years every time it commences a new
business, in effect, would permit the deduction of losses over an
unreasonable period of time. If persons want start-up periods for
every new business, they should at least carry on those
businesses through a legal entity different than the one which
has already had considerable losses for several prior years.
[15]
Appellant's agent also submits that processing patents and
bringing research and development activities to market takes a
considerable amount of time. This may be true but it ignores the
fact that to qualify under the Act the research and
development must relate to a business being carried on, must
consist of a systematic investigation as described above in
paragraphs 50 and 51 of the Respondent's submissions and that
the expenditures must be "all or substantially all"
attributable to research and development; the evidence does not
establish that these qualifications were met. Moreover the proper
forms were never filed.
[16] The
Appellants' agent states further in his original written
submissions in relation to 12 John Street (one of the sites where
the activity was pursued) and with respect to certain materials
acquired.
...
The Appellants further reiterate their earlier submissions
of facts and evidence that, all along in terms of a
diversified business plan, it was a prudent business plan for the
Appellant to have the insurance money to start a business and
have the investment funds in fact multiply in value immediately
on purchases made well below market value. For example, the
12 John Street made the Appellants $10,000.00, in round
figures, just from comparing the appraisals of similar lots of
residential land in the area, not counting the value of the house
thereon. Notwithstanding and independently, the construction
materials and similar purchases were made through an auction, and
were purchased at a fraction of what they would cost in retail or
wholesale, thus yielding immediately a profit of several
100 percent. Thus for example, the 1994 Appellants
investment of $22,000.00 would in fact bring in the neighborhood
of a $100,000.00 in sales, or guaranteed profit over the expenses
of said property and said construction material when the material
was incorporated in a construction business of the
Appellants-such as it was factually done at the 12 John
Street property.
The Appellants further submit that, it took great deal
of planning, research, costs and continued efforts of various
sorts for the Appellants to be ready to purchase construction
materials when the opportunity arose. Most certainly the
Appellants did not just one day purchase the material at a local
retail or wholesale outlet. This took much research and skill on
part of Andy. The fact of the matter is that in terms of business
plan, the Appellants were prepared to do business for quite some
time and with great deal of preparation and forethought,
following the Appellants business principle in that
"the opportunity favors the prepared
mind." This in fact happened when a Guelph business
closed and the Appellants were thus ready, able and prepared to
purchase great deal of the required materials and equipment for
their new partnership business with their own funds. This was a
very rare, or "once in a lifetime," opportunity for the
Appellants, and anyone else for that matter, even though Andy had
a long history of attending actions (sic) from a point of
view of purchasing assets or chattels for his business.
...
The Appellants reaffirm and submit that, with such a
prejudicial predisposition of the Respondent that had a direct
effect on the Appellants' various business operations as
stated above, starting with 1994 the Appellants (the Appellant
and his wife), commenced a new business Royal Knight Contracting
(RKC), that was a partnership. The property at 12 John Street was
purchased through a bank loan. It was to be a construction and
business office and material storage, for rebuilding, renovation,
and sale of the property. The profit made from the sale of the 12
John Street was to be used in purchasing similar properties for
renovation and sale, and thus further the business development
along the same lines and also finance the SR & ED.
The Appellants reaffirm and submit that, the 12 John
Street and was purchased for a sum of $68,000 in round figures on
the 29th of November 1993. This sum was about $10,000
less than what it would take to purchase a land of similar size
in the area, in fact making $10,000.00 just purchasing the land
not to mention the property located thereon. The extensive and
prior research on 12 John Street indicated that the Appellants
were in a position to sell the rebuild and renovated property for
an estimated $200,000.00 to $300,000.00 range, at a clear profit
over expenses. This was due to the fact that 12 John Street had
separate basements, and thus could be made into two semidetached
dwellings, without much effort in that respect. This was the one
of the Appellants business undertaking and plans, and the
Appellants have made extra floors, new roof and roof covering,
cathedral ceilings with skylight windows, modern and state of the
art electrical and electronic wiring, dedicated fire alarm
wiring, cable TV, Internet, and telephone, a firewall between
dwellings, and the electrical wiring were on separate circuits as
planned by the Appellants.
The Appellants reaffirm and submit that, essentially
for the next two years, the Appellants did not live at the 12
John Street, and this property was used exclusively as business
premisess, (sic) material storage, and for rebuilding
and renovation. The Appellants lived at 125 Cole Road until the
last quarter of 1995, and the 125 Cole Road was the residence and
part business office since there were no services while the
12 John Street was being totally stripped, renovated, and
rebuilt. Furthermore, the Appellant's were testing some of
the SR & ED prototypes during their renovation of the 12 John
Street, with the aid of the Appellant's sons.
...
... in 1994 the Appellants initially purchased construction
materials for their business and that these were placed at 12
John Street. Subsequently, additional purchases of a very large
quantity and volume of materials from an auction of a closing
business in Guelph, made the 12 John Street too small, and the
Appellants first rented land adjacent to the closing business to
comply with the time condition for removal imposed by the sale,
and then in May 1994 had to rent a large commercial-industrial
warehouse with two offices at 59 Suburban Avenue to move and
store the purchased material. The volume and type of the
materials purchased necessitated the use of large trucks equipped
with cranes, forklifts, and about a dozen hired workers to move
the material to the 59 Suburban Avenue. Still further, some of
the materials not needed for the immediate use at 12 John Street
was moved by the Appellants to the 59 Suburban Avenue. Yet, still
further some of the materials from the 59 Suburban Avenue was
moved to the 12 John Street. Still much further, the material
that was not at both said locations was purchased by the
Appellants as needed and when needed, following the principle of
JIT (Just In Time) material delivery to avoid the tie up of
capital and costs of storage.
...
[17] The
difficulty in these submissions is that a sale at profit of 12
John Street would not produce a business profit and in any event,
if that property was sold there was no indication that any profit
was declared in any year up to and including 1997. The sale or
installation of the materials probably would result in profits
but this never occurred during the years in question.
[18] I add
that the Appellants have the burden of proof to show that the
reassessment was wrong and to disprove the assumptions contained
in the Replies and in these appeals they have not succeeded on
either of those points.
[19] In
conclusion, for all of the above reasons, the appeals are
dismissed.
Signed at Ottawa, Canada this 10th day of July,
2001.
"T. O'Connor"
J.T.C.C.
COURT FILE
NO.:
2000-3792(IT)I and 2000-3793(IT)I
STYLE OF
CAUSE:
Sylvia Wojcik and the Queen
Andy Wojcik and the Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
April 9 and 12, 2001
REASONS FOR JUDGMENT BY: The
Honourable Judge T. O'Connor
DATE OF
JUDGMENT:
July 10, 2001
APPEARANCES:
Agent for the
Appellant:
Tadeusz Wojcik
Counsel for the
Respondent:
Sointula Kirkpatrick
COUNSEL OF RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-3792(IT)I
BETWEEN:
SYLVIA WOJCIK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the
appeals of Andy Wojcik (2000-3793(IT)I) on April 9
and 12, 2001 at Toronto, Ontario, by
the Honourable Judge Terrence O'Connor
Appearances
Agent for the
Appellant:
Tadeusz Wojcik
Counsel for the
Respondent:
Sointula Kirkpatrick
JUDGMENT
The
appeals from the reassessments made under the Income Tax
Act for the 1995, 1996 and 1997 taxation years are dismissed
in accordance with the attached Reasons for Judgment.
Signed
at Ottawa, Canada this 10th day of July, 2001.
J.T.C.C.
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