Date: 20001213
Docket: 1999-3997(IT)I
1999-4004(IT)I
BETWEEN:
JENNY XU and
GEORGE Q.W. YE
Appellants
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Counsel for the Appellants: Stephen Du and Howard
Markowitz
Counsel for the Respondent: Jocelyn
Espejo-Clarke
____________________________________________________________________
REASONS FOR JUDGMENT
(Delivered orally from the Bench at
Toronto, Ontario, on October 6, 2000)
McArthur J.
[1] These appeals are from assessments of tax for the 1994, 1995 and 1996 taxation years. The issue in each
year is whether the Appellants were carrying on a business under the registered
partnership name "Yes International" and whether the losses from that
business are deductible from
their taxable incomes.
The losses arise primarily from travel expenses. The primary position of the
Minister of National Revenue is that the Appellants had no reasonable
expectation of profit. The Appellants are husband and wife, and their appeals
were heard together on common evidence. Although Jenny Xu did not appear at the
hearing, she was represented by counsel, and George Ye gave evidence on behalf
of both Appellants. Deborah Chapman, a Revenue Canada field
officer, testified on behalf of the Respondent.
[2] Dr. Ye obtained a PhD in microbiology from the University of
Illinois in 1984. After working in New York City, he moved to Toronto in 1989,
where he founded "Yes Biotech Laboratories Ltd." (the
“Company"). The Company manufactured antibodies and Dr. Ye headed the
research department and had from five to 15
employees, dependent on the year. Up to 1996, the decision-maker and
substantial shareholder was Mr. Wu who was also the major financial
contributor. Dr. Ye had a serious falling out with Mr. Wu primarily because of his refusal to fund Dr. Ye's
business trips, particularly to China. As a result, Ye and his wife Jenny Xu,
registered the partnership "Yes International" in March 1993. Jenny
Xu is a skilled technician who worked in a third‑party laboratory prior
to being employed by the
Company.
[3] During the three relevant years, the Appellants travelled several
times annually to China. Precisely what the purpose of these trips was is not
entirely clear. Dr. Ye stated that he thought China would be a big market,
presumably for Biotech's antibodies. He was somewhat obsessed with obtaining
business in China but found it very difficult. In 1994, 1995 and 1996, little
became of his efforts. Some success came, not for Yes International, but for
Biotech when it obtained funding of $300,000 per year from a Chinese source in
1998 and in subsequent years. In late 1996, after an out‑of‑court
settlement, Mr. Wu was no longer a part of Biotech and Dr. Ye took
control. He no longer needed Yes International, and it appears it ceased
carrying on business after 1996.
[4] Dr. Ye sought to deduct losses from Yes International in 1994,
1995 and 1996 of $7,787, $6,876 and $5,203, respectively. Ms. Xu claimed losses
of $2,000, $2,292 and $1,387 in 1994, 1995 and 1996, respectively. The income
and expenses for Yes International were as follows: in 1994, income of $3,070
and expenses of $11,077; in 1995, income of $4,010 and expenses of $10,383; and
in 1996, income of $5,700 and expenses of $10,650. The travel expenses alone
averaged about $8,000 in each year and it is primarily the travel expenses to
China, with which these appeals are concerned.
[5] The Appellants established that they personally expended the
amount claimed for travel and that their travelling was for business purposes
and not personal. They had a four-year old son
in Toronto in 1994, whom they left with Dr. Ye's mother when they travelled.
Often Dr. Ye travelled to China alone. I accept his evidence that while in
China, he sold his knowledge and expertise together with selling pharmaceutical
products produced by third parties for which he received a commission. He
established that he communicated with his Chinese contacts through exchange of
over 50 faxes. He admitted that there was some overlap and mingling of efforts
between Biotech and Yes International while travelling, both in the USA and in
China. There was apparently no allocation made to reflect work done for Biotech
while travelling for Yes International. I have no doubt that he was carrying on
a business. While it ultimately benefited Biotech, Dr. Ye and Ms. Xu took the
personal risk and expended their own funds to promote the objects of Yes
International. Had Dr. Ye not won the Biotech internal conflict, he was poised
to continue his technological efforts under the name of "Yes
International."
[6] I cannot accept that travelling to China several times a year,
while his child and most often, his wife stayed in Toronto was anything but for
the purpose of earning income from Yes International and secondarily, from
Biotech. Dr. Ye and Ms. Xu's activity falls within the definition of
"business" in section 248 as an undertaking of any kind. The
following quotation from Bowman J. in Keery v. The Queen applies to the present case. At
pages 4 and 5,
Judge Bowman stated:
… The respondent,
however, says that despite its commercial animus, he had no reasonable
expectation of profit. It is more accurate to say that he had no profit, and
therefore the respondent concludes that he had no reasonable expectation of it.
The two are not the same. In Kaye v. R. [1998] 3 C.T.C. 2248, incommenting on the NREOP principle I
said:
…
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, a 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 business‑like way and in the way that a business person
would be normally be expected to do.
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 a million dollars if all that could reasonably be expected to be
earned is $1,000.00.
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.
Here we have all of the business elements of a
business, commercial animus, a pure profit motive, a type of business that is carried on by
many people in that area, and a significant commitment of capital and time to
the enterprise.
It
cannot be said that his expectation of profit was unreasonable in the sense
that it was "irrational, absurd, and ridiculous", the words
used by the Federal Court of Appeal in Kuhlmann et al v. The Queen, 98 DTC 6653
to define 'unreasonable' in the
context of NREOP.
The
problem is that Mr. Keery had no profits …
[9] The Appellants' accounting records were lacking, and I am left to
extract some meaningful expenditures. There were two problems: (a) the
overlapping of Biotech's work without any evidence that the Appellants received
expense payments from Biotech; and (b) the Appellants claimed some expenditures
that appeared more personal than for business or appear to be capital in
nature. For instance, expenditures include The Disney Store, Harvey's and
Burger King restaurants, a coffee table, end tables and chairs. My deductions
of expenses are somewhat rough and ready. In each year, the expenses of Dr. Ye
are reduced by $1,200, to reflect $1,000 for Biotech's portion of the expenses
while travelling and $200 annually to reflect personal and capital
expenditures.
[10] With respect to Ms. Xu, she was
not present to support her appeals and expenditures. I am left with the
evidence of Dr. Ye. While satisfied that she was required
to attend on some of the trips, I am not prepared to guess at her personal
expenditures included in her claim for losses and the appeals for Jenny Xu are
dismissed.
[11] The appeals of Dr. Ye are allowed and referred back to the
Minister of National Revenue for reconsideration and reassessment to allow
losses in 1994 of $6,587, in 1995 of $5,676 and in 1996 of $3,005. I have
deducted from Dr. Ye's losses claimed $1,200 in each of the three years. Costs,
if any, are awarded to Dr. Ye, his having been substantially
successful.
Signed at Ottawa,
Canada, this 13th day of December, 2000.
J.T.C.C.
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