[OFFICIAL
ENGLISH TRANSLATION]
Date:
20000809
Docket:
1999-4717(IT)I
BETWEEN:
YVON
BEAUCHESNE,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre Proulx, J.T.C.C.
[1] This is an appeal under
the informal procedure for the 1995 and 1996 taxation years.
[2] The issue is whether,
during those years, the appellant was carrying on a commercial activity
operating as "Mini-Excavation Y.B. Enr.".
[3] The facts on which the
Minister of National Revenue ("the Minister") relied in making his
reassessments are set out in paragraph 10 of the Reply to the Notice of Appeal
("the Reply"), as follows:
(a) during
the years at issue, the appellant worked as a welder;
(b) during
the years at issue, the appellant carried on an activity as sole proprietor
operating as "Mini‑Excavation Y.B. Enr.";
(c) during
the years at issue, the appellant carried on an activity as sole proprietor
operating as "Mini-Excavation Y.B. Enr.";
(d) in
1993, the appellant purchased a Kubota brand tractor with a front-end loader, a
backhoe, a tiller, a brush cutter, a snow blower, a post-hole digger and a
trailer, for a total value of $25,000;
(e) during
the years at issue, the appellant did not spend many working hours at his
activity since he was working full time (40‑hour weeks);
(f) in
anticipation of retirement in 2001, the appellant intends to work as a welder
for as many hours as possible so that he can have a full pension;
(g) during
the years from 1993 to 1997, the appellant completed only 16 contracts in
carrying on his activity;
(h) more
specifically, the Minister calculated the following numbers of hours the
appellant worked in carrying on his activity:
i) 72
hours billed in 1995,
ii) 0
hours billed in 1996,
iii) 28
hours billed in 1997;
(i) the
appellant does not have an apprentice's (operator's) card or an excavation
contractor's licence;
(j) the
appellant's activity continually generated losses:
i) 1993 $5,025
ii) 1994 $8,480
iii) 1995 $6,897
iv) 1996
$11,553
v) 1997
$51;
(k) annual
sales from the appellant's activity were as follows:
i) 1993
$205
ii) 1994 $3,635
iii) 1995 $1,843
iv) 1996
$0
v) 1997 $1,120;
(l) following
the theft of the Kubota tractor in 1996, the appellant waited 14 months before
purchasing replacement equipment;
(m) the
appellant, believing he was covered by his home insurance policy, did not carry
commercial insurance on the Kubota tractor and was paid no compensation;
(n) the
loss in 1995 is mainly the result of the capital cost allowance of $6,654 that
was claimed;
(o) in
1996, a terminal loss of $11,186 was computed because of the loss of the Kubota
tractor;
(p) in
1997, the appellant purchased a John Deere brand excavator for approximately
$16,000;
(q) no
advertising (posters or signs) was posted at the appellant's residence, where
the equipment was located throughout the years at issue;
(r) the
appellant had no reasonable expectation of profit from carrying on his
activity;
(s) for
the years at issue, the losses claimed from the appellant's activity were
personal expenses.
[4] The facts in support of
the appellant's arguments are described in paragraphs 6 to 19 and 22 of the
Notice of Appeal and read as follows:
...
6. In
fact, for the years at issue, the appellant worked mainly in the construction
industry and wanted to start up a business to generate additional income.
7. As
a result, one of the appellant's friends, knowing that the appellant was
interested in machinery, suggested that he submit a tender on a project to
excavate a path, which the appellant did.
8. To
that end, the appellant purchased a tractor for light excavation work.
9. Unfortunately,
the appellant's friend did not obtain the contract, but the appellant
nevertheless decided to start up his business.
10. Consequently,
the appellant first contacted the Commission de la construction du Québec, in
order to ascertain the extent of work he was legally authorized to perform.
11. Then,
in order to comply with the municipal bylaws, the appellant registered his
business and place of business with the town of Bécancour.
12. The
appellant also had a series of business cards printed in order to promote his
business.
13. In
order to give his business a good start, the appellant then conducted a
promotional campaign in the Bécancour area, in particular by taking out
advertising space on notepads distributed in the area, on menus for trailside
restaurants for snowmobile riders, and on various other documents distributed
throughout the area he wanted to cover.
14. The
appellant also registered his business for the purposes of the Goods and
Services Tax (GST) and the Quebec Sales Tax (QST).
15. In
1995, the appellant had gross income of one thousand eight hundred forty-three
dollars ($1,843) and expenditures of nine thousand four hundred forty dollars
($9,440), including a claimed capital cost allowance of six thousand six
hundred fifty-four dollars ($6,654) from his business.
16. In
1996, the appellant had a loss of eleven thousand five hundred fifty-three
dollars ($11,553) because he had no business income following the theft of his
tractor.
17. Thus,
eleven thousand one hundred eighty-five dollars ($11,185) or ninety-six point
eight per cent (96.8%) of that loss resulted from the terminal loss because of
the theft of the tractor.
18. The
appellant was unable to recover any money from his insurers.
19. The
theft of the tractor was an accident that the appellant could not reasonably
have foreseen and was the main cause of the loss incurred that year.
...
22. As
well, the appellant purchased another tractor in 1997 and has continued to
operate his business to this day.
...
[5] The appellant testified
on his own behalf. Mr. Robert Gaudreau, an auditor at Revenue Canada,
testified on behalf of the respondent.
[6] The appellant admitted
the assumptions in paragraphs 10(a) to 10(d) and 10(j) to 10(p) of the
Reply.
[7] The appellant is a
welder and a member of a union¾local 144. He obtains work as a welder through this
union.
[8] The appellant is a
member of that union's pension plan. In 1993, he was 42 years old. At age 50,
he would be eligible to retire with a reduced pension. At age 55, he would be
eligible for a full pension. He explained that he began excavation work in
order to supplement his pension.
[9] A stamp indicating the
business's name, telephone number, and GST and QST registration numbers was
produced (Exhibit A-1) as evidence in support of the claim in paragraph 14 of
the Notice of Appeal. Although this point is not crucial to my decision, in my
opinion the appellant's correspondence with the government authorities in
obtaining these registrations would have been the best evidence.
[10] Exhibit A-2 is a
business card with a photo of the tractor purchased in 1993. There is no
invoice showing the date of purchase of the business cards. The business card
indicates work with a mini-backhoe and a rototiller as activities.
[11] Exhibit A-3 is an April
19, 1995 contract to purchase advertising. On this contract is a note
indicating that the following is to be added to what is written on the business
card: post-hole digger, brush cutter, garden tilling a specialty. The cost of
the contract appears to be $250. Exhibit A‑4 appears to be the result of
this contract: a notepad with various advertising spaces, including one for
"Mini‑Excavation Y.B. Enr."
[12] Exhibit A-6 consists of
two receipts from Club Motoneige Riv-Bec Inc., each for $25. Those receipts for
advertising are signed by the appellant, who explained that he was the Club's
president at the time. Exhibit A-5 is the result of this advertising purchase:
a snowmobile trail map on the back of which are a number of business cards,
including that of "Mini‑Excavation Y.B. Enr."
[13] Exhibit A-7 is a
February 28, 1995, document from the town of Bécancour: an authorization for a
home business office, specifying that the backhoe was not to be stored on the
residential lot, which was zoned as agricultural land.
[14] In testifying, the
appellant reiterated the facts described in paragraphs 6 to 9 of the
Notice of Appeal. Concerning the wording of paragraph 10 of the Notice of
Appeal, he stated that the Commission de la construction du Québec ("the
CCQ") had informed him that he was authorized to dig house foundations. No
documentation confirmed this statement and, in any case, the appellant obtained
no contracts for this type of work.
[15] Concerning the theft of
the tractor in April 1996, the appellant explained that it had been stolen
while he was inside the garage. He purchased an excavator shovel in 1997; at
the time of this purchase, the excavator shovel had needed repairs, which the
appellant had done.
[16] In cross-examination,
the appellant stated that during the years at issue he worked as a welder,
doing maintenance work on equipment for Prometal in Bécancour. As a result, he
was available only evenings and weekends. In addition, it was in his interest
to accumulate as many hours as possible in anticipation of his retirement, a
point that is confirmed by paragraphs 10(e) and 10(f) of the Reply. In
other years, he might be called upon to work in outlying areas.
[17] The appellant admitted
the assumptions in paragraph 10(i) of the Reply. The appellant did not have
either an apprentice's (operator's) card or an excavation contractor's licence.
He is not authorized to work on a construction site. Before 1993, he had no
training or experience in excavation, earthwork, or snow removal.
[18] The appellant admitted
that from 1993 to 1997 he had obtained only 16 contracts, as is pointed
out in paragraph 10(g) of the Reply, which had been denied at the beginning of
the hearing. Of those 16 contracts, only four came from persons who were not
immediate family members or friends of the appellant. His hourly rates were
between $25 and $30 when he worked with the tractor, and $40 when he worked
with the excavator.
[19] Although the appellant
had denied paragraph 10(h) of the Reply, he admitted that it was accurate. On
the basis of a normal seven-hour working day, he would have worked 10 days in
1995, no days in 1996, and four days in 1997. The appellant did not challenge
these figures.
[20] Concerning the fact
that the first tractor was not insured, the appellant explained that he had
been negotiating with an insurance agent but had found the premium too high.
The excavator is now apparently insured for $600 or $700 annually
against theft, fire and liability.
[21] The appellant admitted
that he had used the tractor for personal purposes. His son, who was trying to
register for courses in heavy equipment operation, used the tractor to
practice.
[22] The appellant submitted
that he had operated the business at a profit in 1998 and 1999.
[23] Robert Gaudreau
explained that in determining whether there was a reasonable expectation of
profit, the facts of the case, not the element of personal use, were
considered: little effort and little profit. Throughout the years at issue, the
appellant obtained only 16 contracts and worked only a few days. There was no
sign at his home indicating the activity. Had the appellant continued to claim
a capital cost allowance from 1997 to 1999, the loss would have been
$2,601 in 1997, $4,384 in 1998, and $3,035 in 1999. Furthermore,
during those years the appellant hardly claimed any further expenditures: for
example, the cost of insurance was not included in his expenditures.
[24] Counsel for the
appellant pointed out the appellant's knowledge of construction, the fact that
his was a small business that needed time to establish profitability, and the
fact that it had nearly been profitable since 1997. He also noted that no one
was obliged to claim the capital cost allowance and that, if the appellant did
not claim it in 1997, this was his right. He pointed out that the appellant had
obtained information from the CCQ. The appellant's decision not to take out
insurance might have been an error in judgment, but it had been a business decision
since the appellant had decided that the cost of insurance was too high. The
appellant could not be blamed for the theft of the tractor, which was an event
beyond his control. The appellant had made efforts to adjust by reducing his
expenditures.
[25] Counsel for the
respondent noted that the appellant spent little effort on his activity and
that, in fact, the efforts were instead those that would be made to pursue a
hobby. The appellant apparently worked at his activity for 14 days from 1995 to
1997, and for two days in 1998. Clearly, that activity was not a business. The
appellant had no employees and was not available during the day. Although
reference was made to a reduction in expenditures since 1997, the only
statement of expenditures available for those years does not show the
expenditures that were made, insurance for example. If profits were made in
subsequent years, they are artificial. The appellant has neither the training
nor the licensing required for this type of business.
Conclusion
[26] From 1993 to
1995, the very small number of days worked, the minimal gross income from the
activity, the appellant's absence of training, and the resulting absence of the
licences required to operate the business make it impossible to conclude that
the appellant was carrying on a commercial activity. Clearly, the appellant did
not devote himself to his business as would have a person wanting to make the
business a livelihood. It is especially odd that the appellant did not take out
insurance—theft and especially liability insurance— for his activities with the
tractor. It is unlikely that a person could operate a business without this
type of insurance; even if that were possible, it is certainly not
characteristic of a commercial activity. In fact, the evidence in this case has
shown no characteristics of a commercial activity seeking profitability and
efficiency.
[27] I therefore conclude
that, in refusing to allow the business losses that were claimed in 1995 and
1996, the Minister's decision was right in fact and in law, because the
appellant did not operate a business within the meaning of that term under
sections 3, 9 and 18(1)(a) of the Income Tax Act. The appeals are
therefore dismissed.
Signed at Ottawa, Canada, this 9th day of
August 2000.
J.T.C.C.
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