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 atToronto,
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[1] 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 Kayev.
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 alv. 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.
"C.H. McArthur"
J.T.C.C.
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