Date:
20010529
Docket:
2000-1679-IT-I
BETWEEN:
MARIE-ANDRÉE COSSETTE,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasonsfor Judgment
Lamarre
Proulx, J.T.C.C.
[1]
This appeal concerns the 1995 to 1997 taxation years. The issue is whether the appellant carried on a
business within the meaning of section 9 and paragraph
18(1)(a) of the Income Tax Act
(the "Act") in respect of artistic
activities involving holography.
[2]
The facts on which the Minister of National Revenue (the
"Minister") relied in making the reassessments are set
out in paragraph 4 of the Reply to the Notice of Appeal (the
"Reply") as follows:
[TRANSLATION]
(a)
during the taxation years at issue, the appellant was a professor
of photography at Université Laval and received as income
from employment $76,212, $74,326 and $80,509 for the 1995, 1996
and 1997 taxation years respectively;
(b)
the appellant is a professional artist in the visual
arts;
(c)
during the taxation years at issue, the appellant claimed net
business losses in the amounts of $17,333, $15,842 and
$26,413 for the 1995, 1996 and 1997 taxation years
respectively;
(d)
included in the above net business losses were capital cost
allowances in the amounts of $9,966, $7,834 and $6,576 for the
1995, 1996 and 1997 taxation years respectively;
(e)
for the years at issue, the source of the business losses that
were claimed was the alleged business operated by the appellant
from her residence as "Institut holographique et
médiatique de Québec";
(f)
the appellant has been claiming substantial losses since 1978
and, as can be seen from Schedule A, the accumulated losses since
1978 have totalled $245,702, while it was only in 1984 that a
very small profit of $270 was generated;
(g)
an analysis of the source of her gross income for the period from
1989 to 1997 shows that 34% of that income came from the sale of
her works and 53% came from research grants from
Université Laval and/or the Canada Council (see details in
Schedule B);
(h)
holography is a medium with limited commercial application, but
the appellant believes that her pioneering role in holography
deserves recognition as being indispensable for the development
of the arts;
(i)
the appellant is a member of the Regroupement des artistes en
arts visuels du Québec (RAAV) and the Association
d'artistes professionnels en arts visuels du Québec
(Videre);
(j)
since July 1, 1991, the appellant has been registered in the
index of artists of the Secrétariat de
l'intégration des arts à l'architecture in
the discipline of photography/holography;
(k)
the Minister noted (as can be seen from Schedule A) that the
losses claimed by the appellant grew constantly from 1991
on;
(l)
Schedules A and B show that, in comparison to the expenses
claimed, the amount representing sales was very low;
(m)
considering the specialized nature of the appellant's
activity, its very limited saleability and the $245,702 in losses
accumulated between 1978 and 1998, the Minister of National
Revenue, in computing the appellant's income for the 1995,
1996 and 1997 taxation years, disallowed the deduction for losses
stemming from the "Institut holographique et
médiatique de Québec", as the appellant had no
reasonable expectation of making a profit from this
activity.
[3]
Both the appellant and her accountant, Robert Gagné, testified on her behalf.
[4]
The appellant admitted subparagraphs 4(a) to 4(d), 4(f), 4(g), 4(i) and 4(j) of the Reply. She
admitted subparagraph 4(e) of the Reply, with the exception of
the word "alleged". She denied the first part of
subparagraph 4(h) of the Reply and said that commercial
applications are being developed. She admitted the second part of
that subparagraph. She denied subparagraph (k) of the
Reply.
[5]
In order to define the parameters of her evidence, counsel for
the appellant referred at the outset to Interpretation
Bulletin IT-504R2 of August 9,
1995, entitled "Visual Artists and Writers", and more
particularly to paragraphs 4 to 7 thereof, which read as
follows:
4.
Section 9 of the Act provides that a taxpayer's income for a
taxation year from a business (self-employment) is the profit
therefrom for the year. The concept of profit is critical in
determining whether a taxpayer's artistic activity or
literary undertaking constitutes the carrying on of a business or
is merely the furtherance of a hobby or interest of the taxpayer
that is of a personal nature. Generally, any undertaking or
activity of a taxpayer that results in profits or has a
reasonable prospect of profits would be viewed as the carrying on
of a business. On the other hand, where the activity or
undertaking has no reasonable expectation of producing profits, a
business would not be considered to have been carried on and any
losses that resulted would not be deductible for income tax
purposes.
Whether or not a taxpayer has a reasonable expectation of profit
is an objective determination to be made from all the facts. The
relevant factors to be considered in making such a determination
will differ with the nature and extent of the activity or
undertaking.
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.
[6]
The appellant explained that she owns a three-storey house with
an apartment on each floor. Initially,
she occupied the ground-floor apartment. In 1990, she
transformed that apartment into a holography centre. The
second-floor apartment is rented, and she now occupies the
third-floor apartment.
[7]
The appellant invested a considerable amount of money in her
holography centre, which explains why her expenses increased,
beginning in 1990. As Exhibit A-1, she
filed photographs of her centre. The centre appears to be
equipped in accordance with accepted trade practices. There was
no evidence to the contrary.
[8]
According to Exhibit A-10, which is a statement of
income and expenses for the years from 1991 to 2000, total
expenses for the years from 1995 to 1997 were $21,887, $25,014
and $20,775 respectively. For the years from 1998 to 2000, when
the appellant knew that the Minister was contesting her business
expenses, the expenses were $10,505, $6,981 and $8,575. For those
three years, she claimed no capital cost allowance. For the years
from 1995 to 1997, she had claimed amounts of $9,966, $7,834 and
$6,577 respectively as capital cost allowances.
[9]
Exhibit A-2 is a letter from
the appellant, dated May 23, 1996, to the arts adviser of the
Collection Desjardins, thanking her for her visit to the
institute and offering her three of her works.
Exhibit A-8 is a similar letter written in March
2001.
[10]
Exhibit A-3 is a document
dated May 1997 that describes a creative project in photography
and holography submitted to Université Laval in the
context of a funding program entitled Soutien à la
création en milieu universitaire.
[11]
Exhibit A-6 is a publicity brochure
from Université Laval's École des arts visuels.
It indicates what was to be new in September 2000, including an
opportunity for training in holography.
[12] As
Exhibit A-7, the appellant filed a
letter from the dean of the Faculté
d'aménagement, d'architecture et des arts visuels.
The letter, written for the purposes of this hearing on March 16,
2001, reads as follows:
[TRANSLATION]
. . .
This letter confirms that, to my knowledge, no direct financial
assistance was given to Marie-Andrée Cossette to set up
her holography laboratory at 1139 des Laurentides,
Québec.
For several years now, the École des arts visuels of the
Faculté d'aménagement, d'architecture et
des arts visuels at Université Laval has been open to new
technologies and to holography in particular.
As a
result, courses in this area have been included in a "new
media" stream for the bachelor of plastic arts degree. We
are fortunate to be able to count on Ms. Cossette's
acknowledged expertise in this field and we hope to rent her
well-equipped and already operational holography laboratory so
that this course may be offered.
We are negotiating
with Ms. Cossette in this connection and are hoping we can reach
an agreement very soon so that we may complete our course
offerings.
. . .
[13]
Exhibit A-9 is a statement by the
appellant detailing her career, her work and activities to
promote her works. At pages 3, 4, 6 and 7, she writes as
follows:
[TRANSLATION]
. . .
I believe it is important to point out that I earn enough from my
teaching to live on and to support my artistic endeavours. It is
safe to say that I devote a third of my time to teaching and two
thirds to professional activities relating to creation, including
research, exploration, development of new techniques, laboratory
work and various dissemination activities.
. .
.
As a professional artist in the visual arts, my role is to create
original works of art and to communicate them to my
contemporaries. Although I have chosen a medium with limited
commercial application, I believe that my professional
achievements prove that my pioneering role deserves recognition
as being indispensable for the development of the arts and that I
should consequently benefit from the tax measures intended for
creative artists.
. .
.
Naturally, I think that the works I create can generate enough
income in the medium term to show a degree of profitability. This
is one of my objectives and it is amply illustrated by the number
of shows where my works are exhibited for sale.
. . .
In order to create holograms, I have had to set up a laboratory
that is unique in Quebec. More than any argument, this shows the
long-term seriousness of my artistic activity and my hope of
making it show a profit. If I had "no reasonable expectation
of profit", I would abandon creative activities instead of
continually trying to improve the equipment at my
disposal.
In Appendix 2, you will find a description of the equipment that
I require. I must point out that its total cost is over $10,000
and that this expense was to a large extent financed by a
mortgage on my house.
. . .
As has been amply demonstrated, holography is an avant-garde art
form that still, despite promising developments, attracts the
attention of all too few collectors. More and more museums are
offering shows where holograms are exhibited side by side with
other new media creations. However, the development of a private
clientele is still several years in the offing.
. . .
The only reasonable solution is to make a long-term investment in
developing contacts in the broadest possible market, which
accordingly involves sustained international activity. This is
what has led me to make a major effort to promote my creative
work and my research in holography through lectures,
publications, participation in symposiums and other initiatives
having an international impact.
. . .
[14]
Exhibit I-4 is the
appellant's curriculum vitae. It describes her group and
one-woman shows, bursaries, participation on juries and in
symposiums, publications, public collections containing her works
and the prizes she has been awarded.
Arguments
[15] Council
for the appellant reviewed the various factors referred to in the
Interpretation Bulletin (paragraph 5 of these Reasons). He argued
that the appellant devotes three days a week to her work and is
very concerned with promoting her creative work. She is not
represented by a dealer. She devotes two days a month to
promoting her work. Holography is a medium that is not very
accessible and so far has not generated substantial cash
revenues. However, the value of the appellant's activity is
confirmed by the fact that, in 2001, courses will be offered in
this technique at Université Laval and the appellant's
institute may be used for this course.
[16] Council
for the respondent argued that the appellant had incurred
business losses over a considerable period. She did not question
the appellant's status as an artist. However, she noted that
very few works had been sold and that the appellant's
institute was not bringing in any money.
Conclusion
[17] I think
it appropriate to take Interpretation Bulletin IT-504R2 on
visual artists and writers into consideration. I find that what
it says is reasonable and consistent with the Act.
Paragraph 7 of the Bulletin indicates that an artist or
writer may not realize a profit during his or her lifetime but
that his or her work may nevertheless constitute a business
within the meaning of section 9 of the Act because his or
her artistic activities are carried on as a genuine artistic
business rather than a hobby.
[18] In my
opinion, the evidence revealed, on the appellant's part, a
high degree of professionalism, sustained effort, productive
participation in activities with her peers and serious research.
The appellant's centre also appears to me to have been
designed and set up with the same degree of care and research.
What is more, I find it significant that the appellant's
artistic activities were carried out in a field in which she has
professional expertise. I am compelled to find that the appellant
carried on a genuine artistic business that was not in the nature
of a hobby.
[19] Were
the expenses exaggerated? Were they directly related to the
business? Once the appellant knew that the expenses related to
her artistic activities could be challenged, she claimed in the
ensuing years expenses that amounted to only a third or half of
what had been claimed in the years at issue. As this point was
not raised in the Reply, it did not really form part of the
lis. I therefore have no basis on which I could reduce the
amount of the expenses claimed.
[20] The
appeal is allowed, with costs.
Signed at
Ottawa, Canada, this 29th day of May 2001.
J.T.C.C.
[OFFICIAL
ENGLISH TRANSLATION]
2000-1679(IT)I
BETWEEN:
MARIE-ANDRÉE COSSETTE,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeals
heard on March 22, 2001, at Québec, Quebec, by
the
Honourable Judge Louise Lamarre Proulx
Appearances
Counsel
for the
Appellant:
Jean Bécotte
Counsel
for the
Respondent:
Anne Poirier
JUDGMENT
The appeals from the assessments made under the Income Tax
Act for the 1995, 1996 and 1997 taxation years are allowed,
with costs, in accordance with the attached Reasons for
Judgment.
Signed at
Ottawa, Canada, this 29th day of May 2001.
J.T.C.C.
[OFFICIAL
ENGLISH TRANSLATION]
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