Date: 19991029
Docket: 98-3854-IT-I
BETWEEN:
ROBERT GUIMOND,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
P. R. Dussault, J.T.C.C.
[1]
The appellant is contesting assessments issued for his 1994, 1995
and 1996 taxation years. Through those assessments, the Minister
of National Revenue ("the Minister") disallowed
$13,668, $3,840 and $12,971 for each of those years respectively
as losses from carrying on a business. The reasons relied on are
that the appellant had no reasonable expectation of profit and
that the claimed losses are personal expenses.
[2]
In making the assessments, the Minister assumed the facts set out
in subparagraphs (a) to (m) of paragraph 5 of the Reply to the
Notice of Appeal. Those subparagraphs read as follows:
[TRANSLATION]
(a)
during the years at issue, the appellant worked in refrigeration,
air conditioning and fire protection;
(b)
during the years at issue, the appellant carried on an activity
as a sole proprietor under the firm name Location d'autos
Jaguar Enr.;
(c)
that pastime involved providing a service consisting in the
rental of classic cars, with drivers, for weddings;
(d)
the classic car rental service was provided from May to September
of each year (20 weeks);
(e)
the cars were rented mainly on Saturdays;
(f)
during the years at issue, the fleet consisted of two cars, a
Bentley and a Jaguar;
(g)
the cars were rented at about $500 for four hours;
(h)
both cars were purchased entirely through loans;
(i)
the appellant was the driver, but his wife and
father-in-law occasionally drove as well, without
being paid;
(j)
the appellant's wife worked answering the telephone and as a
receptionist, without being paid;
(k)
the operation of the classic car rental service constantly
generated losses:
(i)
1992 $8,841
(ii)
1993 $8,563
(iii)
1994 $13,668
(iv)
1995 $3,840
(v)
1996 $12,971
(l)
the appellant had no reasonable expectation of profit from
carrying on his activity;
(m) the
losses claimed with respect to the classic car rental service
were personal expenses for the years at issue.
[3]
The appellant expressed disagreement with subparagraphs (c) and
(e) as written and disputed the validity of the conclusions
stated in subparagraphs (l) and (m).
[4]
The appellant began his activities in mid-1992 after
purchasing a 1989 Jaguar. The purchase was financed through a
loan secured by a mortgage on a building owned by the appellant,
part of which was occupied as a personal residence.
[5]
In 1993, the appellant purchased a 1963 Bentley. The price of
$25,000 was paid through a personal loan that was repaid in
1995.
[6]
In November 1996, the appellant purchased a third car, a
four-door Continental convertible, for $9,000 in cash.
[7]
The rental income was $6,400, $9,000, $11,395 and $15,000 in
1994, 1995, 1996 and 1997 respectively.
[8]
The appellant said that 1994 and 1996 were especially difficult
because of the cost of the major repairs that had to be made to
the cars, which cost amounted to $5,576 and $8,466 respectively
for those years. In 1996, one expense the appellant had to pay
was $3,498 to repair damage from vandalism. Since his insurance
had a deductible of $2,500, he preferred to pay the entire cost
of the repairs himself rather than see his insurance premiums
increase in the future.
[9]
The appellant argued that, once the major repairs were done, the
annual cost of maintaining the cars was relatively low.
[10] Thus,
only $1,144 in expenses, including registration and gasoline
costs, was claimed for the three cars in 1997. The appellant said
that since there were in fact very few expenses in 1997, he made
a small profit of $433. He said that the reported profit was
nearly twice as high in 1998.
[11] Counsel
for the respondent argued that not all of the expenses incurred
in 1997 were claimed, so that the appellant showed an artificial
profit. Thus, he said, the registration and gasoline expenses for
two cars were about $1,000 a year for the previous years, and
they were in addition to the substantial maintenance and repair
costs each year. He therefore questioned whether the total direct
expenses related to the three cars was only $1,144 for 1997. It
should be noted that no wages were claimed as an expense during
the years at issue. Nor did the appellant claim capital cost
allowance or home office expenses.
[12] In 1994,
no amount was claimed for the telephone or the cellular
telephone. Moreover, $1,200 was claimed for the tax paid on the
purchase of the Bentley in 1993. It is clear that that amount was
not a current expenditure that could be deducted in 1994. It was
a capital expenditure that had to be added to the cost of the car
in 1993.
[13] For 1994,
the Minister also added to the loss claimed—the deduction
of which was disallowed—an amount for the additional
interest paid by the appellant on the portion of the mortgage
loan used to purchase the Jaguar.
[14] During
his testimony, the appellant stated that he never made personal
use of the cars, that a car was provided to him for his work and
that he owned a van for his family's use. Moreover, he said,
the Jaguar and Bentley are right-hand-drive cars,
which are not very practical for everyday use. The appellant also
spoke of the limited use of the cars for rental purposes. Thus,
he said, just over 11,000 kilometres have been put on the
Jaguar since he purchased it, that is, an average of about 1,600
kilometres a year over a period of seven years.
[15] The
appellant claimed that he currently spends about 25 hours a week
on his rental activity and that he spent about 20 hours a week on
it during the years at issue. He admitted that he does not pay
any wages to his wife, his father-in-law or his
father, who occasionally serve as drivers. His wife is also the
receptionist. The appellant said that his
father-in-law and father are retired and give him a
hand to help him succeed.
[16] On the
question of advertising, the appellant said that he went to a
bridal show, the Salon de la mariée, every year from 1993
to 1997. However, it should be noted that no expense was claimed
for that show for 1994. Ever since that annual show has ceased to
be held, the appellant has paid for advertising on a yearly basis
in the magazine Let's Get Married.
[17] According
to the appellant, the use of the cars for weddings usually occurs
on Saturdays but sometimes also on Sundays.
[18] When
asked about his interest in renting his cars for proms as well as
weddings, the appellant said that he could not do so at the time
because the special licence for that purpose was granted only for
cars less than two years old. The appellant said that at the time
he also could not obtain the licence for antique cars at least 30
years old.
[19] Lucie
Allaire, an appeals officer, testified for the respondent. She
said that the appellant told her that he had begun his activity
as a pastime in 1992 and that he had devoted six to eight hours a
week to it at that time.
[20] Counsel
for the respondent referred first to the Federal Court of
Appeal's decision in Tonn v. Canada, [1996]
2 F.C. 73, in arguing that the appeals should be
dismissed because the appellant had no reasonable expectation of
profit from his rental activity during the years at issue.
Counsel for the respondent emphasized that the appellant himself
told the appeals officer that he had begun his activity as a
pastime. Thus, according to counsel, the activity involves a
personal element that calls for a more thorough review of the
situation in light of the tests adopted by the courts for
determining whether or not the taxpayer had a reasonable
expectation of profit during the years at issue. Although counsel
for the respondent admitted that there is not necessarily a very
clear personal element in this case, he maintained that account
must be taken of the circumstances as a whole. He stressed the
lack of consistency in the way the appellant claimed deductions
for his expenses from one year to the next.
[21] With
regard to the losses, he began by pointing out that the appellant
has incurred losses since 1992. With regard to the years
subsequent to the years at issue, he argued that the minimal
profit shown in 1997 does not reflect reality because no expense
was claimed for maintaining and repairing the cars that year.
[22] Counsel
for the respondent also noted that the appellant does not spend
much time on his activity and has not expressed any intention of
expanding it in the future.
[23] Counsel
for the respondent further pointed out that the appellant has no
paid employees and has not claimed any capital cost allowance. In
this regard, he referred to this Court's decision in Major
v. Canada, [1995] T.C.J. No. 718, in which some
facts were very different from the facts of this case. Thus,
although the taxpayer in Major carried on an activity
similar to the appellant's, he had five cars and three paid
employees. Moreover, he had claimed capital cost allowance each
year.
[24] As noted
in that decision, capital cost allowance is—according to
the Supreme Court of Canada's decision in Moldowan v. The
Queen, [1978] 1 S.C.R. 480—an element that
must be taken into account in determining whether a taxpayer has
a reasonable expectation of profit. Counsel for the respondent
therefore argued that, if the appellant had claimed capital cost
allowance, the losses would have been much higher during the
years at issue and he would have incurred a loss in 1997 as
well.
[25] Finally,
counsel for the respondent noted that the appellant has not
claimed home office expenses either.
[26] Counsel
for the respondent argued that, all in all, there is no
consistency in the way the appellant claims his expenses from
year to year and that—if I understand his reasoning
correctly—if all the expenses had been claimed in the usual
way, the losses would have been so much higher that the appellant
could not claim to have a reasonable expectation of profit from
his car rental activity.
[27] The
appellant argued that he had to incur expenses in certain years
to have major repairs made to the cars—repairs involving
such things as the transmission, the suspension and the exhaust
system—but said that those expenses would not be incurred
again for 10 years. With regard to the argument of counsel for
the respondent that he did not spend much time on his activity
when he began it, the appellant argued that he did not have to be
present constantly to take telephone calls, that he had an
answering machine and that he scheduled his appointments in the
evenings or on the weekends when people were most likely to come
to meet him. He also repeated that he has not made any personal
use of the cars because a car is made available to him by his
employer 24 hours a day and he owns a van for his family's
needs. Finally, he said that from the start he had wanted to
create a business and that he invested about $65,000 for that
purpose.
[28] In
Moldowan, supra, Dickson J. of the Supreme Court of
Canada stated at page 485:
Although originally disputed, it is now accepted that in order to
have a "source of income" the taxpayer must have a
profit or a reasonable expectation of profit. Source of income,
thus, is an equivalent term to business: Dorfman v.
M.N.R.2
_______________________________
2
[1972] C.T.C. 151.
He added at pages 485-86:
There is a vast case literature on what reasonable expectation of
profit means and it is by no means entirely consistent. In my
view, whether a taxpayer has a reasonable expectation of profit
is an objective determination to be made from all of the facts.
The following criteria should be considered: the profit and loss
experience in past years, the taxpayer's training, the
taxpayer's intended course of action, the capability of the
venture as capitalized to show a profit after charging capital
cost allowance. The list is not intended to be exhaustive. The
factors will differ with the nature and extent of the
undertaking: The Queen v. Matthews3.
________________________________
3
(1974), 74 D.T.C. 6193.
[29] In
Landry v. The Queen, 94 DTC 6624, Décary
J.A. of the Federal Court of Appeal stressed that the factors
identified by Dickson J. are not exhaustive and will in fact vary
depending on the nature and size of the business.
[30] Referring
next to a number of decisions, Décary J.A. listed as
follows, at page 6626, the tests adopted by the courts over the
years:
Apart from the tests set out by Mr. Justice Dickson, the tests
that have been applied in the case law to date in order to
determine whether there was a reasonable expectation of profit
include the following: the time required to make an activity of
this nature profitable, the presence of the necessary ingredients
for profits ultimately to be earned, the profit and loss
situation for the years subsequent to the years in issue, the
number of consecutive years during which losses were incurred,
the increase in expenses and decrease in income in the course of
the relevant periods, the persistence of the factors causing the
losses, the absence of planning, and failure to adjust. Moreover,
it is apparent from these decisions that the taxpayer's good
faith and reputation, the quality of the results obtained and the
time and energy devoted are not in themselves sufficient to turn
the activity carried on into a business.
(References omitted.)
[31] Moreover,
in Tonn, supra, the Federal Court of Appeal noted
the following at page 75:
The primary use of Moldowan as an objective test
is the prevention of inappropriate reductions in tax; it is not
intended as a vehicle for the wholesale judicial second-guessing
of business judgments. Errors in business judgment, unless the
Act stipulates otherwise, do not prohibit one from claiming
deductions for losses arising from those errors. The
Moldowan test should be applied sparingly where a
taxpayer's "business judgment" is involved, where
no personal element is in evidence, and where the extent of the
deductions claimed are not on their face questionable.
However, where circumstances suggest that a personal or
other-than-business motivation existed, or where the expectation
of profit was so unreasonable as to raise a suspicion, the
taxpayer will be called upon to justify objectively that the
operation was in fact a business.
(Emphasis added.)
[32] In the
instant case, a review of the expenses claimed for the years at
issue, namely 1994, 1995 and 1996, and of the 1997 expenses
(Exhibit I-1) shows that there are certain anomalies whose
effect is the understating the real losses incurred, at least
during the years at issue.
[33] Thus,
although the appellant said that he advertised at the Salon de la
mariée starting in 1993, no expense with respect thereto
was claimed for 1994, whereas a deduction was claimed for 1995,
1996 and 1997.
[34] No
telephone, cellular telephone or pager expenses were claimed for
1994, whereas the expenses indicated for those items for 1995,
1996 and 1997 amount to $616, $1,194 and $1,348 respectively. Yet
the appellant said that there was a cellular telephone in the
Jaguar as early as 1993 and that he also had another portable
cellular telephone. One may legitimately wonder whether the
figures given by the appellant regarding his expenses are indeed
a reflection of reality. When he testified, the appellant said
that he borrowed to pay the full purchase price of the Jaguar in
1992. That loan was secured by a mortgage on the building he
owned, part of which was used as a residence. Since the interest
paid was not claimed as an expense associated with the car rental
activity but was rather claimed against the income from the
building, Revenue Canada estimated that an amount representing 32
percent of the interest paid could be attributed to the car
rental activity. This had the effect of increasing the loss
claimed for 1996 by $4,214 and decreasing the profit made in 1997
by $4,114. If a similar amount were added as an expense
associated with the car rental activity in 1994 and 1995, the
reported losses of $10,688 and $3,840 (see Exhibit I-1)
would in actual fact be nearly $15,000 and $8,000 for each of
those two years, without taking into account the other expenses
that were not claimed.[1]
[35]
Admittedly, the appellant's income from his activity
increased from $6,400 in 1994 to $15,000 in 1997 and has
apparently stabilized at about that level since. For the 1997
taxation year, the appellant reported a profit of $433. The
profit was apparently twice as high in 1998. Yet one wonders to
what extent the audit and the reassessments for the previous
years may have influenced him and led him to present results for
1997 that favoured him by again understating the expenses
actually incurred. In the statement of business activities
submitted for 1997, under the heading "Motor vehicle
expenses (not including capital cost allowance)", the
expenses claimed are $694.50 and $450, for a total of $1,144.50.
Those expenses are not identified. According to the appellant,
the total represents all the expenses incurred for the three cars
for registration, gasoline and maintenance. He said that there
were no repairs in 1997. This assertion is somewhat surprising
considering that the appellant owned three cars in 1997 and that
the registration and gasoline expenses alone totalled just under
$1,000 for the previous years when he owned two cars.
[36] As noted
above, in the statements of business activities for the previous
years and especially for the years at issue, it can be seen that
the expenses were not all claimed consistently, and one wonders
to what extent the other figures provided by the appellant can be
relied on. This aspect raises serious doubt about whether the
activity is really capable of generating a profit.
[37] On the
question of remuneration, it must be noted that the appellant has
never paid any direct compensation to anyone, and in particular
to his wife, father and father-in-law, who, he said,
have all worked without pay. If the appellant has paid them
indirectly by taking them out to eat occasionally, as he claimed,
he has also never sought to deduct those expenses, or at least
part of them. The matter of remuneration is important and
suggests that the activity could not be profitable if it were
engaged in on a strictly commercial basis, as in such a case an
employer must not only pay employees but must also assume various
indirect costs, such as employment insurance contributions,
contributions to the CSST, and so on.
[38] The fact
that the appellant does not pay anyone any wages and that members
of his family have for more than six years been helping to
maintain his car rental activity by working without pay suggests
that the activity is more of a pastime than a genuine business
activity.
[39] Finally,
there is the question of capital cost allowance. As we know,
claiming capital cost allowance is optional and a taxpayer who
claims it is not required to claim the maximum yearly amount
allowed. In the case of so-called classic cars, such as the 1963
Bentley, it may no doubt be thought that claiming each year the
maximum allowed is perhaps not appropriate, although it would
seem normal to take into account nevertheless the loss in value
resulting from use, unless, of course, the appellant is counting
on an increase rather than a decrease in the value of the cars he
purchased. It is in fact well known that, depending on the
circumstances, classic cars may rise rather than decline in value
over time.
[40] As for
the home office expenses referred to by counsel for the
respondent, we know that the appellant has claimed none even
though the car rental activity is carried on exclusively out of
his home. Note must be made here of subsection 18(12) of the
Income Tax Act, which would have precluded any deduction
of such expenses that would have increased the losses in the
years at issue. The fact remains that, although not deductible
where a taxpayer already has a loss because of other expenses,
reasonable and justified expenses for such an office may
nevertheless be carried over indefinitely for the purpose of
computing income in subsequent years insofar as there is a profit
once the other expenses are deducted. Here, the appellant did not
even try to determine an amount that would represent the true
cost of the use of an office in his home.
[41] Moreover,
in a situation like the one here, where the taxpayer has a main
source of income, one may legitimately wonder whether he is not
attempting to "subsidize" the cost of his other
activities by seeking to deduct the expenses related thereto from
the income from his main source.
[42] All
things considered, it is my view that the appellant has not shown
on a balance of probabilities that his car rental activity could
have become profitable in the foreseeable future if account were
taken of all the expenses that would normally be deductible in
relation to that activity if it were engaged in on a truly
commercial basis.
[43] In light
of the foregoing, the appeals are dismissed.
Signed at Ottawa, Canada, this 29th day of October 1999.
"P. R. Dussault"
J.T.C.C.
Translation certified true on this 17th day of August
2001.
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
98-3854(IT)I
BETWEEN:
ROBERT GUIMOND,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on October 8, 1999, at
Montréal, Quebec, by
the Honourable Judge P. R. Dussault
Appearances
For the
Appellant:
The appellant himself
Counsel for the Respondent: Mounes
Ayadi
JUDGMENT
The
appeals from the assessments made under the Income Tax Act
for the 1994, 1995 and 1996 taxation years are dismissed in
accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 29th day of October 1999.
J.T.C.C.
Translation certified true
on this 17th day of August 2001.
Erich Klein, Revisor
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