Date: 20010810
Docket: 1999-3925-IT-I, 2000-350-IT-I
BETWEEN:
ADALBERT G. LALLIER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
(delivered orally from the bench on July14, 2000, at
Sherbrooke, Quebec, and amended for greater clarity)
Archambault, J.T.C.C.
[1]
Mr. Adalbert Lallier is appealing income tax
assessments issued by the Minister of National Revenue
(Minister) with respect to his 1995 and 1997 taxation
years. For the 1995 taxation year, the Minister disallowed
business losses claimed by Mr. Lallier with respect to a
business carried on under the name of A.G. Lallier,
Consulting and Research (consulting business). For the
1997 taxation year, the Minister disallowed an income tax credit
for charitable gifts made to a Thai university, Sripatum
University.
FACTS
[2]
At the beginning of the hearing, Mr. Lallier admitted the
following facts outlined by the Minister in his Reply to the
Notice of Appeal with respect to the appeal for the 1995 taxation
year:
3. In order to establish the above-mentioned assessment, the
Minister made the following assumptions of fact:
a)
the appellant has claimed since 1987 losses from professional
income totalling $224,798.
|
|
1987
|
1988
|
1989
|
1990
|
1991
|
|
Gross Professional income
|
$ 203
|
$ 7,810
|
$ 6,624
|
$ 899
|
$ 2,022
|
|
Loss
|
$ 29,043
|
$23,802
|
$14,674
|
$41,411
|
$30,120
|
|
|
1992
|
1993
|
1994
|
1995
|
|
Gross Professional income
|
$ 0
|
$ 0
|
$ 476
|
$ 1,015
|
|
Loss
|
$ 23,188
|
$22,764
|
$20,099
|
$19,697
|
b)
in 1995 the appellant includes [sic] non-deductible
employment expenses as part of the expenses of earning
professional income;
c)
the appellant derives [sic] the professional income from
consulting and writing in the academic domain of economics and
social economics, the resulting revenues are fees and
royalties;
e)
during the year in appeal the appellant also provided academic
instruction under an employment contract with the Concordia
University, Montreal, amount earned in 1995 per T4,
$37,707.99;
f)
for the services rendered to the Concordia University the
appellant was issued a T4, Statement of Remuneration
Paid;
g)
the appellant provides professional services to international
organisation [sic] on a gratuitous basis;
k)
the appellant divides his time between research and writing
projects and instruction at the Concordia University;
m)
for the 1995 taxation year the appellant's income statement
is as follows:
|
Professional Income
|
|
$ 1,015.20
|
|
Expenses:
|
|
|
|
Interest
|
$ 1,921.86
|
|
|
Automobile expense
|
4,632.00
|
|
|
Office
|
3,781.87
|
|
|
Office supplies
|
957.00
|
|
|
Professional fees
|
2,920.19
|
|
|
Travel
|
2,483.69
|
|
|
Capital cost allowance
|
4,016.53
|
|
|
|
|
20,713.14
|
|
Loss
|
|
$ 19,697.94
|
[3]
With respect to the appeal for 1997, Mr. Lallier admitted
the following facts:
6. In order to establish the above-mentioned assessment, the
Minister made the following assumptions of fact:
a)
the Appellant gave 1,221 books from his personal academic library
to Sripatum University, Bangkok, Thailand;
c)
this estimated amount of $6,230 (US) [total value of the books]
was claimed as a charitable gift for the 1997 taxation year;
d)
the entire amount of $6,230 was claimed as a non-refundable tax
credit for a charitable gift, however, if this deduction is
allowed only the prescribed rates applying to this amount for
that year should be accepted as non-refundable tax credit.
[4]
Mr. Lallier, who was 70 years old in 1995, was born in
Austria and immigrated to Canada in 1951. Mr. Lallier is a
distinguished scholar and academic, a man of honour and high
morals and ideals. He believes in giving back to society for what
he has received from it and in helping developing countries, not
only because it is good for Canada, but also because he sees it
as a moral duty. He also believes in paying his taxes: he did not
want to be perceived as having abused the tax system.
[5]
Mr. Lallier has several university degrees. He has a
bachelor's degree in Economics and Political Science from
McGill University (1958), a master's degree in Economics and
a diploma in International Relations from Columbia University in
New York (1961), and a doctorate in Economics from La Sorbonne,
Paris II (1978). He has also done post-doctoral studies at the
London School of Economics and Political Science. Prior to coming
to Canada in 1951, he was also enrolled in a three-year
program in Economics, Law and Political Science in Vienna, which,
unfortunately, he was unable to finish because of a lack of
money.
[6]
Mr. Lallier started his professional career in 1960 as a
lecturer at Loyola University (Concordia) in the Economics
Department. He subsequently became a professor at Concordia, a
position he continued to hold until he took early retirement in
1986. Between 1963 and 1965, he was dean of the Evening Division
at Concordia. In 1985, Mr. Lallier received the
John W. O'Brien Distinguished Teaching Award in
recognition of a decade of distinguished teaching at Concordia.
Upon his early retirement, he received an incentive of
$52,000.
[7]
In a letter to the Minister's auditor dated
December 15, 1996 (1996 letter),
Mr. Lallier gave the following as one of his reasons for
taking early retirement:
There was newly emerging willingness of faculty associations
to go on strike, as a pursuant tactic to have accepted the
forever demands for higher salaries and higher social benefits, a
proposition which my morality, as a teacher simply could not
accept.
Before retirement, Mr. Lallier was earning an annual
salary of $67,000 and additional remuneration from his summer
courses, which, I believe, amounted to $5,400.
[8]
Mr. Lallier stated in answer to a written questionnaire
(questionnaire) prepared by the Minister that he
registered his consulting business in 1971 as
"A.G. Lallier, Consultation et recherche
économique, éducation, financement". As part
of his consulting business, Mr. Lallier provided services to
several clients. Between 1971 and 1974, he did a study for the
Royal Bank on the risks of Quebec sovereignty. In
1972-1973, he did a three-month research study for
Alcan on world charter shipping rates, for which he received
remuneration of $1,000. In connection with that research, he had
to hire an assistant at a cost of $400. From September 1973
to March 1974, he also performed services for the UN with
respect to maritime transport in the Middle East and received for
that remuneration of $6,000. In 1981, he did a six-week
study for the Quebec Government on the Montreal and the
Port-Cartier harbours, for which he was paid $15,000. It
appears that after 1989 no similar such consulting work took
place, with the exception of a Thai contract, to which I will
refer later. I come to this conclusion because, as far as I can
see, there were no fees of substance in his gross revenues earned
from the consulting business during that period, a fact admitted
by Mr. Lallier[1].
[9]
In computing his income from his consulting business,
Mr. Lallier included money received in connection with
various activities, such as teaching. After having taken early
retirement in 1986, he was rehired on an annual basis by
Concordia because it could not find a suitable replacement to
teach the courses that he had been giving. This rehiring was
subject to the needs of Concordia and the existence of proper
funding for those courses. Mr. Lallier identified himself as
an "adjunct professor". From 1987 to 1992, he was
receiving a yearly salary of $25,000 and, from 1993 to 1995,
$28,000. It would seem that Mr. Lallier continued to teach
at Concordia until 1999 when he retired completely.
[10]
Mr. Lallier takes the view that his teaching activities
constituted a business because they were highly risky. In the
1996 letter, he gave the following explanation to the
auditor:
This is so because part-timers never know if they will obtain
a contract renewal, which means that their preparation for the
courses to be taught can unexpectedly turn into a disinvestment,
i.e. an unexpected loss that full-time teachers are not faced
with. In addition, having lost all the privileges of a full-time
professor, extra costs are involved from having to purchase a
computer, a printer, office supplies, having to do many of the
tasks for which secretaries are normally available for full-time
professors.
[11]
Mr. Lallier included in his consulting business activities
volunteer work done on behalf of CESO, which, as I understand,
stands for Canadian Executive Service Organization, a
non-governmental organization partly funded by CIDA, a
Canadian government agency that provides funding for projects in
developing countries. The purpose of CESO is to provide the
expert assistance of Canadian executives and scholars who go and
work without remuneration in different developing countries or in
countries that are converting from a communist to a capitalist
regime. Executives and scholars providing their services receive
only a living and travelling allowance. Mr. Lallier did such
work for one month in August 1995 in the Czech Republic
where he gave a series of seminars. He also worked for two
universities in Thailand from June 26th, 1996 to
August 16th,1996.
[12] As a
result of the work done in Thailand in 1996, Mr. Lallier was
able to secure a lucrative contract to help establish an English
international program for business communications at Sripatum
University. This contract lasted a year, from June 1997 to
May 1998. Under the contract, labelled a "Consulting
Contract", he was entitled to a monthly allowance of 50,000
baht for services that he described as being equivalent to the
work of a dean or a department head. Mr. Lallier was also
entitled to the usual benefits of a civil servant, such as life
and health insurance and annual leave of up to 30 workdays per
year with full pay.
[13] During
the course of his work for Sripatum University, Mr. Lallier
realized that the university lacked many resources, including a
proper library. So, he decided to give that university 1,221
books from his own library, which had an aggregate value of
$6,105 US dollars.[2]
[14] Last on
the list of activities carried on under the name of the
consulting business is the writing of books. Mr. Lallier has
written several books. The first was a novel published in 1974
entitled Peace Without Honour. It was written between 1969
and 1973. The action takes place during the Vietnam War and,
according to Mr. Lallier, it is very critical of American
involvement in that war. American publishers refused to publish
it in their country because it was perceived to be
anti-American. Mr. Lallier stated that he received
approximately $4,000 in royalties from the book over a period of
five or six years.
[15] His next
book, entitled La souveraineté-association -
Réalisme économique ou utopie?
(Souveraineté) was published by Cercle du
livre de France in 1980. In the 1996 letter, Mr. Lallier
states that this book had all the makings of a best-seller
for it was recognized by its critics as an important
contribution. But he stated that success did not materialize
because the issue of Quebec's sovereignty was viewed as being
one that could only be treated by writers coming from
"Canada's two founding nations" and not by a writer
known to be "un nouveau arrivé". In
Mr. Lallier's own words, this book was not profitable:
he only received approximately $2,500 from it over a period of
five or six years.
[16] Next came
The Economics of Marx's Grundrisse - An Annotated
Summary (Grundrisse), published by
St. Martin's Press in 1989. Mr. Lallier stated that
he spent, between 1985 and 1988, a full two years and a half
researching and writing this book. Among the expenses he incurred
during that period were approximately $2,500 in photocopies, $200
in typing expenses and undisclosed costs for telephone calls. He
explained the poor success of this book by the fact that
communism collapsed around that time. He said that the book
brought in over a period of six or seven years approximately 750
pounds sterling, which probably represents about $1,700
Canadian.
[17] In 1991,
Mosaic Press, an Ontario publisher, published
Sovereignty-Association - Economic Realism or
Utopia? (Sovereignty), an updated version, in
the English language, of Souveraineté published in
1980.
[18]
Mr. Lallier has completed the drafts of two other books
which have not yet been published. One is entitled
Sexonomics and the other Sin and Retribution. I
believe Mr. Lallier stated in his testimony that he started
working on the first book of the two in 1992. However, I find the
following information on page 2 of the questionnaire:
"Sexonomics, a mischievous scientific inquiry into human
behaviour, Manuscript, Montreal, 1987."
[19] In his
1995 statement of income from his consulting business,
Mr. Lallier shows income of $20 from "Sexonomics
(1990)". He also testified that he made several
trips to obtain opinions from other specialists in 1992 and 1993.
As to the reason why this book has not yet been published, I find
the following explanation at page 7 of the
questionnaire:
Je veux mentionner que l'une des éditions que
j'avais approchées avec ma Sexonomie m'offrait la
publication si j'aurais la volonté de remplacer les
expressions trop intellectuelles par leur équivalent en
langue ordinaire, c'est-à-dire de consentir à
remplacer les expressions comme
" fornication " et
" copulation " par leur équivalent
vulgaire qui se vendront en masse, mais absolument, non. Ma
devise: un dollar honnête en échange pour un produit
supérieur et réfléchissant nos valeurs
morales.
[20]
Mr. Lallier stated that he began to work on his novel Sin
and Retribution in 1950 but has been working on it more
intensively in the last three years. According to
Mr. Lallier, that book is as yet unpublished because he was
a witness in a Nazi criminal trial in Germany: Mr. Lallier
was a Waffen SS officer cadet at the time the alleged crimes were
committed. It was suggested to him that he wait until his
evidence had been given before publishing the novel.
[21] The
losses incurred from the consulting business from 1987 to 1995,
as Mr. Lallier admitted, totalled $224,798. In the
computation of those losses, the part-time teaching income of
Mr. Lallier is not included. The losses from 1996 to 1998
amount to an additional $29,989, if we exclude the income from
his part-time teaching and for his services to Sripatum
University.
[22] I will
now review the revenues earned and the expenses incurred by
Mr. Lallier for the 1995 taxation year. The income from
part-time teaching as declared by Mr. Lallier was
$38,818.99; it apparently covers the period from January to April
1995, the summer of 1995 and the period from September to
December 1995. The royalty income from his books totalled
$304.60, the largest amount being $197 from Sovereignty,
published in 1991. The last item of income declared by
Mr. Lallier is an amount of $710.60 which represents an
additional allowance paid to him to enable him to travel to
Prague (Czech Republic) for CESO.
[23] As part
of his expenses, Mr. Lallier claimed amounts for the partial
use of his house in Mansonville in the Eastern Townships. During
his testimony, Mr. Lallier stated that he used his house for
doing his research and for carrying on his consulting business.
For business purposes, he used one room and a half out of seven,
which represents 21%. At page 4 of the questionnaire,
Mr. Lallier stated in the following terms that he claimed
40% of his house for business purposes: "En total,
approximativement 40% de la superficie totale, comme
rapporté dans ma déclaration
d'impôt."[3] I also note that for the 1997 and 1998 taxation years,
the percentage of the house claimed for business purposes was
reduced to 16.6%.
[24] There
were also travelling expenses for commuting between Mansonville
and Montreal. Mr. Lallier had to stay in Montreal three or
four days in order to give his courses at Concordia. Although he
was only a part-time teacher, he basically taught the same
number of hours as he had when he was a full-time professor. The
big difference, according to him, was that he received a lot less
money than before.[4]
[25]
Mr. Lallier also stated that he visited Austria twice a
year. In 1995, he spent one week there for pleasure only and did
not claim any expenses with respect to that trip. During his
second stay, he spent four weeks doing research in a library in
Vienna. That research was carried out in connection with his
novel Sin and Retribution and covered the period from 1934
to 1945.
[26] During
the hearing, the appeals officer testified and produced her
written report on page 8 of which she explains as follows
her conclusion that the tax auditor had properly disallowed
Mr. Lallier's business losses for the
year 1995:
Considérant toutes les informations au dossier, les
activités de M. Adalbert Lallier sont plus qu'un
simple passe-temps. Il est raisonnable de conclure que les
activités de recherche et d'écriture font
partie de la vie courante du contribuable.
Le contribuable se fait un devoir et une obligation de
remettre à la société son savoir pour en
faire un meilleur endroit. Toutefois, est ce [sic] que ce
sens d'obligation et de dévouement rencontre les
principes de base d'une entreprise au sens défini par
la Loi de l'impôt sur le revenu?
En considérant objectivement tous les
éléments est ce [sic] qu'on peut
s'attendre du contribuable qu'il atteigne une
expectative raisonnable de profit, en d'autres mots
est ce [sic] raisonnable de présumer que les
recherches et les écrits du contribuable vont
générer un profit éventuellement?
De par les dires du contribuable, ce dernier fait beaucoup de
consultations et de recherches pour divers organismes
bénévolement, le principe en lui-même
est honorable, mais va à l'encontre même
d'une entreprise à savoir que le but premier de cette
dernière est d'en tirer un avantage
économique, en d'autres termes d'en tirer
des profits. Pour M. Adalbert Lallier le but premier des
[sic] ses activités est la renommée
internationale, le second de rendre à
l'humanité son savoir puis en dernier lieu en tirer un
avantage pécuniaire.
Le contribuable désire qu'il soit pris en
considération le fait qu'il a volontairement
changé son statut de professeur à temps plein pour
celui de professeur à temps partiel et qu'il contribue
à la renommée du pays. Il n'est pas dans
l'optique du législateur que la contribution sociale
et économique du contribuable lui en fasse découler
un avantage fiscal.
Les revenus du contribuable sont minimes, et ce même
depuis 1987. Il n'y a pas eu de croissance réelle dans
les revenus bruts déclarés.
Le contribuable a toujours oeuvré dans les domaines de
recherches et d'écriture, donc on peut admettre que la
période de démarrage à [sic]
commencé durant les années postdoctorales.
Le contribuable consacre beaucoup de temps à ses
activités de recherches et d'écriture mais ne
fait aucune étude ou encore de
" sondage " avant de commencer
l'écriture d'un manuscrit. Il écrit et
espère par la suite que les maisons d'édition
s'intéresseront à son produit. Il est à
noter que le contribuable ne réclame aucune dépense
pour la promotion de ses livres. M. Adalbert Lallier ne
peut définir la rentabilité potentielle de ses
oeuvres, il espère qu'il [sic]
seront de bons vendeurs.
Les recherches ou études
" commandées " au contribuable sont
de par les dires du contribuable, des documents officiels qui
sont pour usage restreint et confidentiel du demandeur, donc si
par hasard le sujet serait d'intérêt
général le contribuable ne peut les mettre sur le
marché.
Le contribuable admet que ses recherches et écritures
sont accessibles et désirées que par un groupe
très restreint et sélect.
M. Adalbert Lallier fait peu d'effort pour mousser
la vente de ses produits, il s'en remet aux maisons
d'édition entièrement.
La plus grande partie d'ouvrages que le contribuable a
réalisés s'adresse à un public restreint
et rencontre les intérêts personnels et
professionnels du contribuable.
Le contribuable n'a pas vraiment de plan structuré
pour faire en sorte que les travaux d'écriture sur
lesquels il travaille présentement deviennent de plus gros
vendeurs, M. Adalbert Lallier se contente
d'espérer que le prochain livre sera un succès.
De plus le contribuable a de grandes ambitions soit de faire du
roman sur lequel il travaille (et qui n'a pas encore
été édité et publié) un
scénario pour film, il est raisonnable d'avancer que
les dépenses pour les années en cours et à
venir seront encore considérables.
Par conséquent, en considérant tous ces facteurs
il est raisonnable de conclure que les activités de
M. Adalbert Lallier ne permettent pas
d'établir l'existence d'une attente
raisonnable de profit.
The position of the respondent
[27]
Basically, the Minister takes the view with respect to the 1997
taxation year that Mr. Lallier is not entitled to the credit
for charitable gifts because Scripatum University in Thailand was
not a qualified donee for tax purposes. On the issue of the
business losses for the 1995 taxation year, the Minister's
position is that the losses claimed by Mr. Lallier do not
meet the standards developed in the case law and, accordingly,
Mr. Lallier did not have a reasonable expectation of
profit.
[28] Counsel
for the Respondent cited three of the classic cases dealing with
this issue. The first of these was Moldowan v. The Queen,
[1978] 1 S.C.R. 480, a decision of the Supreme Court of Canada.
She cited the usual dictum of Dickson, J. 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" . . . .
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.
[29] Counsel
also cited the Federal Court of Appeal's decision in
Landry v. The Queen, 94 DTC 6624, which bears some
resemblance to this case, and quoted the following statement by
Décary J.A. at page 6626:
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[5].
[30] Lastly,
counsel referred to another Federal Court of Appeal decision:
Tonn v. Canada, [1996] 2 F.C. 73, at page 75:
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.
The position of the appellant
[31] With
respect to the charitable gifts, Mr. Lallier takes the view
that the Canadian tax system should recognize that it would be to
the benefit of Canada if people like him were allowed to make
gifts to organizations such as Sripatum University. His work in
Thailand was encouraged by Canadian agencies so that, if that
work is recognized by one department, it should also be
recognized by the Department of National Revenue. He also stated
that he was under the impression that such a gift would be
deductible for tax purposes.
[32] With
respect to the issue of the business losses, Mr. Lallier
noted that the case law referred to by counsel for the Minister
did not include any cases involving intellectual property. He
believed strongly that he would not have incurred the expenses in
question if the activities had constituted just a hobby for him.
He firmly believed that one of his books would eventually prove
very successful and that his business losses should consequently
be allowed as a deduction.
Analysis
Gift to Sripatum University
[33] In order
to qualify as giving rise to a tax credit under
section 118.1 of the Income Tax Act
(Act), it is important that the gift come within
the definition of "total charitable gifts" in that
section. To do so, it must have been made to one of the
organizations described in paragraphs a) to f) of
the definition. Paragraph (f) is relevant here:
(f) a university outside Canada that is prescribed to
be a university the student body of which ordinarily includes
students from Canada
[34] To
determine what is "prescribed to be a university", we
must turn to section 3503 of the Income Tax
Regulations (Regulations), which states that:
For the purposes of subparagraph 110.1(1)(a)(vi) and
paragraph (f) of the definition "total charitable
gifts" in subsection 118.1(1) of the Act, the universities
outside Canada named in Schedule VIII are hereby prescribed to be
universities the student body of which ordinarily includes
students from Canada.
[35]
Unfortunately for Mr. Lallier, Sripatum University is not
mentioned in Schedule VIII. Therefore, his gift does not
qualify under section 118.1 of the Act. It does not matter
that the gift made by Mr. Lallier was a true gift, an act of
great generosity toward the people of Thailand. The Income Tax
Act and the Regulations specify all the conditions that must
be met in order to claim the tax credit, and if any of those
conditions has not been satisfied, this Court does not have the
power to allow the deduction.
Business Losses
[36] As stated
in Brock (D.J.) v. The Queen, [1993] 2 C.T.C. 2989, the
burden rests on Mr. Lallier to prove that the losses he
incurred were so incurred in carrying on a business.[6] In other words, he must
prove that the expenses giving rise to those losses were incurred
for the purpose of earning income from a business or from
property, which are considered as two distinct sources of income
under the Income Tax Act.
[37] Given
that no decisions involving the activity of writing books were
referred to by counsel for the Minister, I will summarize quickly
those cases that I have found which are, in my opinion,
relevant.
[38] In
McKinney v. R., 1996 CarswellNat 2382, the relevants facts
are as follows. The taxpayer was a professor who retired from
teaching in 1985. The relevant taxation years were from 1990 to
1993. The losses arose from an activity that the taxpayer
described as a business of knowledge-based writing. The taxpayer
had been working on seven writing projects since 1970. Only one
book was ever published, however, and only 500 copies of that
book were ever sold. For the years under appeal, the expenses
aggregated $12,088, $13,788, $10,533 and $10,529. Against those
expenses, the taxpayer reported a revenue of $50 for 1990 and no
revenue at all for the other years under appeal.
[39]
Judge Mogan held that a review of the taxpayer's record
showed that he had accumulated approximately $200,000 in losses
and earned negligible revenues from writing during the period
from 1978 to 1994. A business had to have a reasonable
expectation of profit and in the circumstances of that case there
was none. In Judge Mogan's view, the taxpayer's
life's work in sociology had become a hobby in his
retirement. Judge Mogan stated:
20 In reaching my decision, I am influenced by the position of
the Appellant in 1990, 1991, 1992 and 1993. At that time, he was
a retired professor. In 1990, he had been retired five years.
Prior to 1986, he had a 40-year career as an academic and his
whole life was research, teaching and writing. When the teaching
stopped on retirement, I would not expect him to do anything else
but what he has done all his life. A man with an intellectual
curiosity and a good mind is not going to turn his brain off just
because he retires. He just keeps doing what he has always done;
thinking, researching and writing. It is second nature to him. I
find it is in the realm of a hobby and not a business because
there is virtually no revenue from it.
29 . . . He is simply indulging in his life work which has
become his hobby in retirement and a hobby is not a business. A
business has to have a reasonable expectation of profit . . .
.
[40] In
Brock (supra), the relevants facts and the decision
rendered are set out as follows in the headnote:
At all material times, the appellant was employed by the local
board of education. Since 1975, the appellant had been producing
literary works of one kind or another, primarily about London,
Ontario. The appellant's most recent book was published in
November 1992. Initially 1905 copies were printed, but since
sales were good, a second printing was expected in May 1993. In
the 1986, 1987, 1988 and 1989 taxation years, the appellant's
income from writing was negligible but he claimed net losses from
his writing activities of $4,202 in 1986, $7,152.48 in 1987,
$5,674.37 in 1988, and $8,358.60 in 1989. The Minister disallowed
the losses on the grounds that the appellant did not have a
reasonable expectation of profit . . . .
Held: There were losses in each of the years under review.
Furthermore, there was no evidence that the appellant ever turned
a profit from his literary endeavours prior to or after those
years. The book published in 1992 was described as the most
financially successful of any of his undertakings, yet, in 1992,
it showed gross revenue of $6,286.59 and a net loss of
$480.51.
[41]
Associate Chief Justice Christie, quoting from the decision of
the Tax Court of Canada in Kerr et al v. M.N.R., [1984]
CTC 2071, 84 DTC 1094, provided the following explanation at page
2992:
The existence of a reasonable expectation of profit is not to
be determined by the presence of subjective hopes or aspirations,
no matter how genuine or deep-felt they may be. The issue is to
be decided by objective testing.
[42] In
Fleming and Gellately (supra), the taxpayers,
husband and wife, were associate professors at the same college.
He taught History and she taught Political Science. Each had
published numerous articles and one book, and each was working on
a book originally planned for publication in 1984. This date was
subsequently put back several years in both cases. In issue were
expenses claimed for the 1981 taxation year. The headnote of that
case contains the following (C.T.C.):
The expenses included amounts in respect of home offices,
travel and capital cost allowance. The Minister disallowed the
claims on the ground that the taxpayers were not carrying on a
business with a reasonable expectation of profit.
Held: The taxpayers had the onus of proving that they were
carrying on a business with a reasonable expectation of profit,
and not merely writing as a hobby, or as part of their teaching
duties. The taxpayers' uncorroborated statements regarding
the marketability or expected sales of their projected books did
not establish the existence of any such reasonable expectation.
The taxpayers' book-writing conduct was more consistent with
academic pursuits than with profit making. Their activities were
chiefly useful in furthering their academic careers, of which the
deferral of publishing dates was a reflection. The taxpayers
planned their co-ordinated research travel for personal rather
than business reasons. It could not be concluded that they were
carrying on a business with a reasonable expectation of
profit.
[43] In
Christopher Lobban (supra), we again have a
university professor who spent many years, commencing in 1984,
conducting research for the purposes of writing a book on
"food crops". In computing his income for 1984 and
1985, the taxpayer sought to deduct business losses of $14,809
and $21,295 respectively, which represented costs incurred by him
in writing and editing the said book. The Minister disallowed
$10,125 and $18,928 of those respective amounts. The appeals were
dismissed. The taxpayer's book was still not ready for
publication in 1991. An examination of the history of the book
project revealed that, from an income and expense point of view
alone, there was simply no way that there could have been a
reasonable expectation of profit therefrom during the taxation
years in issue.
[44] There are
other cases, such as Fouad E. Shaker v.
M.N.R., [1987] 2 C.T.C. 2156, 87 DTC 463, a case in
which a teacher was not allowed to claim his losses from writing
activities.
[45] There are
also cases that went in favour of taxpayers. I will cite for
instance Paul Zolis (supra). In that case, the
taxpayer was a high-school mathematic teacher. He and three
colleagues wrote a mathematics textbook which was published by
one publisher in 1980 and by another in 1981. The taxpayer
commenced writing in 1979; the following year he built an office
in the basement of his home for his writing activity. He
published a second book in 1982 and a third in 1983. Royalty
income commenced in the 1980 taxation year and by 1983 and 1984
resulted in net profits. The Minister disallowed the losses
claimed by the taxpayer as a deduction for 1980 and 1981 on the
ground that the writing did not give rise to a reasonable
expectation of profit and, therefore, the taxpayer was not
engaged in a business endeavour. The conclusion of Chief
Judge Couture of this Court in that case is summarized in
the headnote (C.T.C.) as follows:
A "reasonable expectation" was concisely defined as
"a confident belief, for good and sufficient reasons."
The taxpayer's expertise in the field of teaching high school
mathematics, the presence of a ready market for his work, and the
dedication that he exhibited in pursuing his writing career, when
considered in combination, led to the conclusion that he had a
reasonable expectation of profit . . . .
[46] Another
example of a decision going in favour of a taxpayer is
Ron Callender v. The Queen, [1996] 3 C.T.C.
2334. But at the end of the day, each case must stand on its own
facts. So I will now analyze the relevant facts of this
appeal.
[47] The first
comment that has to be made with respect to
Mr. Lallier's case is that he has considered as being
part in his consulting business several activities which, in my
opinion, are not business activities. These are his part-time
teaching, his work for CESO, the work done for Sripatum
University in Thailand and his book writing.
[48] I will
deal first with the services he provided to Concordia on a
part-time basis. Were those services provided under a contract of
employment or a contract for services? This issue has been raised
many times before the courts. In Rosen v. The Queen,
[1976] CTC 462, 76 DTC 6274, a decision of Marceau J. of the
Trial Division of the Federal Court of Canada, the relevant facts
were the following. In addition to his full-time employment in
the federal Public Service, Mr. Rosen also had regular
engagements as a lecturer at three post-secondary institutions.
In respect of the work as a lecturer, he claimed to be
self-employed and to be entitled to deduct expenses of $709 in
connection therewith. The Minister disallowed
Mr. Rosen's deduction on the ground that his income from
lecturing was income from employment. Marceau J. concluded
that Mr. Rosen's situation as a part-time lecturer was
not essentially different from that of a full-time professor. He
was not an independent contractor but was rather an employee
engaged for the purpose of delivering lectures on a part-time
basis.
[49] That
decision was followed in several other decisions, including
Talbot v. M.N.R., 92 DTC 1994. In that case, the taxpayer,
who was employed by Laval University as an educational
consultant, also accepted a teaching assignment, which consisted
in giving a regular course at the university and which
necessitated his attendance at hours other than those comprising
his regular hours of employment.
[50] In
Bart v. M.N.R., 91 DTC 884, the facts bear an even greater
resemblance to the facts of the instant case. Mr. Bart, a
tenure professor at the University of Windsor, also carried on a
consulting business. In May 1985, he personally conducted a
five-week course at the University of Cape-Town in return
for a flat fee of $13,200, which he received in 1985.
Mr. Bart reported this as business income received in the
course of his consulting business during its fiscal period ending
in 1986. In reassessing Mr. Bart, the Minister included that
amount in Mr. Bart's 1985 taxation year as employment
income and not as business income. Applying Wiebe Door
Services Ltd v. M.N.R., 87 DTC 5025, a decision in which the
Court of Appeal set out the well-known four-part test
(control, ownership of tools, chance of profit or risk of loss,
and integration) for determining the existence of an
employer-employee relationship, Judge Brulé of this
Court held that on the weight of evidence Mr. Bart's
relationship with the University of Cape-Town was that of
an employee rather than that of an independent contractor.
Accordingly, the $13,200 was employment income.
[51] As
mentioned before, Mr. Lallier stated that, when he taught
part-time, he provided to Concordia services similar to those he
had provided previously as a full-time professor. He said that he
worked almost as many hours but for less money. Tenure and job
security are not essential to the existence of a contract of
employment. So, the fact that Mr. Lallier's employment
contract was subject to annual renewal and that there was no
certainty that it would be renewed are completely irrelevant for
the purposes of determining the status of the work he did for the
university. I would add that there are a lot of Government
employees these days working under conditions similar to those of
Mr. Lallier and they are all treated as employees. In my
view, Mr. Lallier continued after his retirement in 1986 to
provide his services to Concordia as an employee.
[52] This
analysis also applies, in my opinion, to the contract performed
by Mr. Lallier for Sripatum University. He described his
work as that of a dean or a department head. Although he stated
that he was hired by the president of the university as a
consultant and the contract is referred to as a consulting
contract, that does not change the reality that he was hired to
perform services normally performed by an employee of the
university. Probably one of the reasons why he was only hired for
one year is, as Mr. Lallier stated, that there seems to be
legal constraints with respect to the hiring of a non-Thai
as a full-time employee in a Thai university. Also, I would like
to point out that the terms of the contract are in fact
characteristic of a contract of employment and not of a contract
for services. In a contract for services, one does not usually
find provisions for remuneration during vacation. Nor does one
usually provide health care benefits to a consultant. In one of
the documents filed during the hearing, it is stated that
Mr. Lallier left his employment for health reasons, probably
two or three months earlier than the time stipulated in the
contract and, as I understand it, he was paid in full until the
end of that contract. Therefore, it is, in my view, appropriate
to subtract from his consulting business income all his income
from employment.
[53] With
respect to the 1995 taxation year, the only other activity that
could qualify as a business activity is the book writing. No
other consulting work was done. As I mentioned in my description
of the facts above, I do not see evidence of any true consulting
work having been done since 1989 for particular clients such as
Alcan, the Royal Bank, the Government of Quebec or the UN.
Furthermore, there are no gross revenues at all in 1992 and 1993
from his consulting business and only very small gross revenues
in 1994. Based on the gross revenues shown for 1995, it is likely
that those for 1994 constituted royalties from his books.
Finally, the amount of $710 for the work done in the Czech
Republic that was included in gross revenues in 1995 was in all
likelyhood not income because it was given to Mr. Lallier as
a travelling allowance in the course of work he performed in that
country for no remuneration under the auspices of CESO.
[54] Now, what
about the book writing? Is it possible to conclude that the books
he wrote amounted to a business being carried on or, at least,
constituted property from which income was earned? There was
evidence before me that Mr. Lallier started seriously
writing his first book in 1969.[7] From that date until 1998, the total income from
his books amounted to approximately $10,700: about $4000 from
Peace without Honour, $2,500 for each of the French and
English versions of Souveraineté and $1,700 for
Grundrisse.
[55] It should
be remembered that Mr. Lallier's losses from 1987 to
1998 amounted to $254,787. It is true that those expenses may not
all be related to the book writing. However, for the 1995
taxation year alone, when his only business activity was book
writing, total expenses incurred were $20,712. It should also be
noted that the loss figure includes neither the costs incurred in
writing the books published prior to 1987, namely Peace
without Honour andSouveraineté, nor at least a
year of expenses incurred in writing Grundrisse.
[56] So, based
on these facts, I come to the conclusion that Mr. Lallier
has failed to discharge his burden of showing that there was a
reasonable expectation of profit from his consulting business in
1995. In my view, the statement by Judge Mogan in
McKinney (supra) is apposite here. Mr. Lallier
was simply indulging in his life's work, which had become his
hobby in retirement, and a hobby is not a business.
[57]
Mr. Lallier is an honest person who subjectively believed
that he was pursuing a business in writing his books. But
objectively, his conduct did not conform with that of a
businessman engaged in a venture for profit. He preferred
maintaining his high standards and therefore did not accept
recommendations from his publishers. The fact that
Sexonomics, which seems to have been ready since 1987,
remains unpublished in 2000 is, in my view, indicative of the
fact that there is no market for that book. Since no publisher
accepted his offer of the book for publication, Mr. Lallier
is now trying to generate interest in it on the Web. But it is
well known that people surfing on the Web are used to getting
material for nothing, and even to copying material such as music
illegally. So, in my view, it is very doubtful that the Web will
provide the bonanza that Mr. Lallier is hoping for and
enable him to recoup his very high losses. However, I wish him
well and much luck. In the unlikely event that his two current
books, Sexonomics and Sin and Retribution, become
best-sellers, this judgment, now a big disappointment for
Mr. Lallier, may prove to be a blessing in disguise. Having
concluded that the writing of those books constituted a hobby for
Mr. Lallier, I do not see how the Minister could tax any
money that they might generate in the future.
[58]
Accordingly, for all these reasons, Mr. Lallier's
appeals for 1995 and 1997 are dismissed.
Signed at Ottawa, Canada, this 10th day of August 2001.
"Pierre Archambault"
J.T.C.C.
COURT FILES
NOS.:
1999-3925(IT)I and
2000-350(IT)I
STYLE OF
CAUSE:
ADALBERT G. LALLIER
and Her Majesty the Queen
PLACE OF
HEARING:
Sherbrooke, Quebec
DATE OF
HEARING:
July 12 and 13, 2000
REASONS FOR JUDGMENT
BY:
The Honourable Judge Pierre Archambault
DATE OF
JUDGMENT:
July 20, 2000
APPEARANCES:
For the
Appellant:
The Appellant himself
For the
Respondent:
Pascale O'Bomsawin and
Anne-Marie Desgens
COUNSEL OF RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
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