REASONS
FOR JUDGMENT
Owen J.
I. Introduction
[1]
These reasons address the appeal by Mr. Tamer
Salloum from income tax reassessments for the 2006, 2007 and 2008 taxation
years and from GST reassessments for the period from January 1, 2005 to
December 31, 2008, court file numbers 2012-2746(IT)I and 2012-2750(GST)I. In
addition, these reasons address the appeal by Ms. Melissa Morton from
income tax reassessments issued for the 2005, 2006 and 2007 taxation years,
court file number 2012-2748(IT)I. These three appeals were heard together on
common evidence.
[2]
The issue in Mr. Salloum’s appeals is
whether he carried on a business known as Speedpro High Performance at any time
during 2005, 2006, 2007 or 2008. The issue in Ms. Morton’s appeal is
whether she carried on that same business in partnership with Mr. Salloum
at any time during 2005, 2006 or 2007. If the answer in either case is in the
affirmative then it will be necessary to consider whether, and to what extent,
the deductions from income and the input tax credits claimed by Mr. Salloum
and the deductions from income claimed by Ms. Morton are to be allowed.
II. Facts
[3]
Mr. Salloum, Ms. Morton and Mr. Salloum’s
mother, Mrs. Nancy Salloum, each testified on behalf of the Appellants and
Mrs. Salloum presented the case for the Appellants. Mr. Salloum
testified that he has always had a strong interest in performance automobiles
and started attending the local drag strip while he was in high school.
Although he did not take automotive courses in high school, he did take
carpentry and described himself as someone who liked to work with his hands. He
also said he knew his way around a car by the end of high school in 2000.
[4]
After high school, Mr. Salloum had a number
of odd jobs for a short period of time to support his personal lifestyle. In
2001, he conceived an idea to pursue a business venture involving the
modification and customization of automobiles and automobile parts with a
general view to enhancing their performance. A business plan was prepared and a
sole proprietorship was created and registered with the British Columbia Ministry
of Finance and Corporate Relations Corporate and Personal Property Registries
on October 29, 2001 under the name “Speedpro
High Performance”. The line of business was described on the
registration form as “mobile auto mechanic services”.
[5]
From the time of registration until late in 2008,
Mr. Salloum did not have the certification required to offer auto
mechanic’s services to the public and he testified that for liability and other
reasons he offered no such services to the public until after he became a qualified
automotive service technician with the Red Seal endorsement. The lists of
expenses claimed by Mr. Salloum in 2006, 2007 and 2008 and by Ms. Morton
in 2005, 2006 and 2007 show that no advertising or promotional expenses were
incurred and Mr. Salloum confirmed that fact in cross-examination.
[6]
A corporation was created in 2010 called
Speedpro High Performance Services Inc. (“Speedpro
Inc.”); Mr. Salloum is its Chief Executive Officer and Mrs. Salloum
is its Chief Financial Officer. According to Mr. Salloum and his mother,
Speedpro Inc. secured financing by amalgamating with another corporation
shortly after its incorporation and has operated a very successful performance-oriented
automotive services business since that time. Mr. Salloum testified that
Speedpro Inc. is held out as, among other things, able to build any kind of car
for any kind of racing.
[7]
In furtherance of the plan he formulated in
2001, Mr. Salloum pursued a formal education as an automotive services
technician funded, for the most part, by monies received in 2002 from Human
Resources and Skills Development Canada (now Employment and Social Development
Canada). In 2001, he enrolled in a six-month entry level technical training
program at the British Columbia Institute of Technology (“BCIT”), which included an unpaid “pre-apprenticeship” with a local Toyota dealership.
The pre-apprenticeship required Mr. Salloum to be mentored by a licensed
mechanic for a few weeks but not to work on any automobiles.
[8]
In December 2004, Mr. Salloum started a
two-year program at the Burnaby campus of BCIT that was called “Automotive Service Technician – Ford ASSET Option”.
That program led to an Automotive Service Technician (“AST”)
Diploma in September 2006. Mr. Salloum described this as a book intensive
course that did not itself lead to Red Seal endorsement as an automotive
service technician. Rather, after the course, Mr. Salloum was required to
accumulate additional practical experience as an apprentice mechanic after
which he could obtain his Red Seal endorsement. He accumulated these hours
primarily at a local Ford dealership and, in late 2008, he achieved his goal of
becoming an automotive service technician with Red Seal endorsement.
[9]
Mr. Salloum testified that the formal
education program and apprenticeship that he completed did not provide all the
knowledge and skills required to succeed in the performance automotive services
industry. To address this, Mr. Salloum undertook to teach himself
everything he could about that industry. In particular, Mr. Salloum
testified that he needed to learn: how to build performance engines and powertrains;
how to modify auto parts to enhance performance; how to ensure that these parts
worked together in a reliable way; what potential competitors were doing; what
the demand for high performance auto parts and services was likely to be and
how it could be improved; and, what others in the industry were doing to
satisfy that demand. Mr. Salloum also noted that the performance
automotive services market in Canada was ten to twenty years behind the U.S.
market and that he also wanted to understand how that might be changed.
[10]
To learn how to build and modify performance
engines, powertrains and parts, starting in 2003, Mr. Salloum acquired
used cars as well as new and used auto parts to experiment on in his parents’
garage. He stored the cars and parts in the garage, basement and backyard of
his parents’ house. The general objective of his research was to acquire and
hone his skills at modifying and combining parts to achieve optimum performance
while maintaining reliability such that any engine he built or modified would operate
reliably. In that respect, Mr. Salloum stated that he spent a great deal
of his time and available money developing a reliable high performance engine
that could be used for, among other things, drag racing.
[11]
Mr. Salloum testified that he had developed
a specially modified V-8 engine as early as 2003 but that he continued to work
on improving that engine and developing other powertrain components that would
work with the engine to this day. Mr. Salloum candidly acknowledged that
the engine has never been marketed as such but may one day be used in a race
car sponsored by Speedpro Inc. The engine is currently used by Speedpro Inc.
for promotional purposes. Mr. Salloum also explained that neither the
engine nor the modified parts were patented as the components already had
patents secured by the original manufacturer and it would therefore be
difficult to secure patents for the modified parts.
[12]
Mr. Salloum worked on his automotive
projects throughout the period that he was completing his formal studies and his
full-time apprenticeship. During his full-time apprenticeship, he would work on
his automotive projects after he finished work at 5:00 p.m. and on the
weekends. The process conducted by Mr. Salloum involved a lot of trial and
error as he figured out which modifications would work and how specific parts
would fit together in a reliable way. Mr. Salloum candidly conceded that
he was not undertaking any marketing activity or pursuing sales during 2005,
2006, 2007 or 2008 and that during those years he could not legally hold
himself out as a mechanic. In addition, he was not insured and the risk of
liability by providing mechanic’s services before he obtained his Red Seal
designation was too high. Mr. Salloum also testified that no one was going
to approach him and give him thousands of dollars worth of parts and say “we want you to figure this out.” In short, Mr. Salloum
needed to have obtained his Red Seal designation and also needed to convince
potential customers that he knew what he was doing. To accomplish the latter,
he needed to practice his chosen calling in his parents’ garage.
[13]
Mr. Salloum testified that, to gain
knowledge of the industry, he would attend racing events, car shows and similar
venues to: network with enthusiasts and others in the industry; determine what
competitors were doing; and, generally to learn as much as he could about what
was out there in the high performance automobile services market in Canada. Prior
to 2007, his girlfriend from 2003 to 2006, Ms. Morton, would accompany him
to these events when her work schedule permitted.
[14]
Mrs. Salloum was a strong supporter of her
son’s activities and dealt with all of the financial matters, including the
raising of capital for the undertaking and the preparation of all financial
records and tax returns. Mrs. Salloum kept detailed records and
painstakingly allocated expenditures to the activities she believed to be of a
business nature. Occasionally, the accounting software she used led her astray,
for example, by categorizing expenses as the cost of goods sold even though
there was no inventory, but she was clearly diligent and was firmly convinced
that the activities undertaken by Mr. Salloum after 2002 were of a
business nature.
[15]
Apart from the monies received from Human
Resources and Skills Development Canada in 2002, Mr. Salloum’s activities
from 2003 to the end of 2008 were funded, for the most part, through loans or
lines of credit secured by the family home, an inheritance and proceeds from an
accident claim. Mr. Salloum also contributed from his salary as an
apprentice mechanic and Ms. Morton purchased parts and covered travel
expenses from time to time prior to their split at the end of 2006. Ms. Morton
was reimbursed in 2007 for the expenses incurred by her and Mrs. Salloum
testified that she and her husband traded the debt secured by their home for shares
in Speedpro Inc. in 2010. Mrs. Salloum sought out third-party financing on
behalf of Mr. Salloum as early as 2003 but did not secure such financing
until the second half of 2010, after the creation of Speedpro Inc.
[16]
Mrs. Salloum testified that Mr. Salloum
carried on business in partnership with Ms. Morton throughout 2003 to 2006
and that the business related deductions claimed in Mr. Salloum’s and
Ms. Morton’s T1 returns for 2005 and 2006 reflected their respective 51%
and 49% interests in the partnership. Mrs. Salloum conceded that the sole
proprietorship registration was not amended to reflect a partnership and that
there was no written partnership agreement. Mrs. Salloum also testified
that the deduction allocated to Ms. Morton in 2007 was done so in error as
the partnership terminated in 2006.
[17]
Ms. Morton testified that during 2005 and
2006, she worked full-time for McDonald’s in management. She stated that she
would assist Mr. Salloum as best she could when she was not working by
helping out in his parents’ garage and by traveling with him to as many of the industry
events as her work schedule allowed. She would also pick up car parts for Mr. Salloum
from time to time using her own automobile.
[18]
Ms. Morton testified that at the industry
events they would describe the activity of Speedpro High Performance as the
modification of or the creation of engines but that they would not try to sell
anything at the events. Ms. Morton stated that she did not hold herself
out as a representative of Speedpro High Performance but that people knew that
she was attending with Mr. Salloum.
[19]
Ms. Morton testified that she would give
the receipts for gas, meals, travel expenses and parts that she paid for to
Mrs. Salloum but she could not recall the amount of the expenses in 2005
and 2006. Ms. Morton stopped paying expenses after the break-up in late
2006 and renounced any interest she may have had in Mr. Salloum’s activities.
In her view, Mr. Salloum had worked hard to get where he is today.
[20]
Mrs. Salloum testified that Ms. Morton
was living in the family home in 2003 and 2004 and that she expected Mr. Salloum
and Ms. Morton to marry at some point in the not too distant future. She
described Ms. Morton as a very supportive girlfriend and explained that,
because she was in a common-law relationship, she was entitled to half of everything.
[21]
Mr. Salloum testified that Ms. Morton
was always there for him, that the family wanted her to participate in the
venture and that she made a small contribution to the financing of the venture.
[22]
Mr. Salloum and Ms. Morton were not able to
explain or describe how the various expenses were accounted for or how they
were allocated to the various activities as they relied on Mrs. Salloum to
deal with all such matters.
A. The Appellants’ Position
[23]
Mrs. Salloum argued on behalf of Mr. Salloum
and Ms. Morton. The crux of the argument is that Mr. Salloum was
pursuing his education and conducting substantial and costly research in the 2005,
2006, 2007 and 2008 taxation years toward a business objective, with the
support of his parents, his friends and the community. He achieved that
objective in 2010 when Speedpro Inc. was incorporated and successfully financed.
Mrs. Salloum referred to her son as a born mechanic who has become a well-known
and successful businessman in the community.
[24]
Mrs. Salloum cited subsection 9(2) of the Income
Tax Act (the “ITA”), under which, she argued, a business may be operated
at a loss. She also referred to the test for the existence of a business in Stewart
v. Her Majesty the Queen, 2002 SCC 46 and the observations of Cy Fien as to
the early meaning of the word “business” as “anything which occupies the time and attention and labour of
a man for the purpose of profit . . .” found at page 1296 of his article
To Profit or Not to Profit: A Historical Review and Critical Analysis of the
“Reasonable Expectation of Profit” Test (1995), Vol. 43, No. 5, Canadian
Tax Journal.
[25]
In reply to the Respondent’s arguments,
Mrs. Salloum stressed that the studies pursued by Mr. Salloum were
not a personal endeavour but a means of achieving his ultimate objective, which
was to make money in the future. She also stated that Mr. Salloum did not
race for a hobby but attended the race track to learn everything he could about
engines; he never intended to race a car but to reach a point for his future
career.
[26]
With respect to the purported partnership with
Ms. Morton, Mrs. Salloum argued that Mr. Salloum and Ms. Morton
were in a common-law relationship and that they were therefore partners in
everything. The 51-49 business partnership was simply a reflection of that
state of affairs at the time.
[27]
Finally, Mrs. Salloum asked that Mr. Salloum
be allowed to claim a provincial tuition tax credit on $2,709.76 identified as
a business deduction on Schedule “A” to the
Respondent’s Reply in appeal 2012-2746(IT)I under the heading “Other” (to the extent that the credit had not already
been given by the province).
B. The Respondent’s Position
[28]
The Respondent raised the following question: were
Mr. Salloum’s activities prior to and during the years in issue undertaken
with a view to profit or were they a personal endeavour? The Respondent argued
that the activities undertaken by Mr. Salloum were not undertaken for
profit; his objective was to become a better automobile mechanic and to learn about
the industry in general. Granted, Mr. Salloum was not a dreamer or a
schemer, but he was a student in training.
[29]
The Respondent cited the test in Stewart for
the existence of a business and then referred to Walsh v. Her Majesty The
Queen, 2011 TCC 341, in which our Court stated:
19 While
referring me to several other cases including Tax Court of Canada cases Coome
v. Canada, Dreaver v. Canada, and Gartry v. Canada, counsel
for the Respondent also referred me to my 2005 decision in McNeil v. Canada
at paragraph 12 where, in that case, I referred specifically to a person who
had been working on investment models and strategies to enable himself to carry
on an investment activity for his family which I found was not yet a business
activity. While in that case the taxpayer did not show the same background as
the Appellant in the case at bar, and never demonstrated that he had ever
developed a strategic planning model as Mr. Walsh seems to have done, the issue
is the same - preparations leading to creating a business activity are not
themselves yet a business. Reference might also be made to earlier decisions of
this court in Sherman McClure and June N. McClure v. The Minister of
National Revenue and Cunningham v. Canada, essentially coming to
similar conclusions that underline that educating oneself as a preparation to
the start-up of a business is essentially a personal activity and not a
business activity.
20 The
Appellant argued that he had the background to pursue, with the necessary
degree of sophistication, the trading business that he has carried out since
2004. He acknowledged that his work was devoted largely to determining the
entry strategies given the small amount of capital he had to put at risk but,
nonetheless, they were simply preliminary steps which were a part of a
business. That is, as recognized in Interpretation Bulletin IT-364, preliminary
steps are inherently part of a business. Every business must start with taking
a preliminary step.
21 Nonetheless,
I have to agree with the Respondent in this case. Subjectively, Mr. Walsh has
admitted throughout his testimony that during the subject years he was at a
pre-exploitation stage of the subject activity. This was not a case of
preliminary exploitation steps. It is clearly subjectively and objectively pre-exploitation.
He was researching the technology involved to start a business, he was
researching the strategy steps that he needed to take to start a business
employing his capital. He was taking courses, doing demonstration trades and
getting a feel for a business that he felt he could yet pursue. I cannot find
in such circumstances that the business had yet commenced in the subject years.
Accordingly, the appeals will be dismissed.
[30]
The Respondent further argued that some of the
expenses claimed, such as life insurance premiums, were clearly personal in
nature and that Mr. Salloum admitted a love of cars and drag racing from
an early age, all of which raised a suspicion that the activities had a
personal element. The Respondent argued that the fact that Mrs. Salloum
maintained detailed records and meticulously allocated expenses to what she
perceived to be a business activity did not in and of itself cause the expenses
to be incurred in pursuit of a business. The issue remains whether a business
existed in the years that were reassessed and the existence of detailed records
or journal entries does not call for a positive answer.
[31]
With respect to the activities of Ms. Morton
and the purported partnership, the Respondent argued that Ms. Morton was
nothing more than a supportive girlfriend and was not carrying on any business
in common or otherwise. The Respondent cited Diflorio v. Her Majesty The
Queen, 2014 TCC 67, and argued that none of the indicia of partnership
identified by the Court in paragraph 31 of that judgment existed in this case. The
Respondent also noted that if Mr. Salloum’s activities were personal in
nature, there could be no business that could be carried on in common with
Ms. Morton with a view to profit.
[32]
Finally, the Respondent submitted with respect
to the input tax credits claimed by Mr. Salloum that the definition of
“commercial activity” in subsection 123(1) of the Excise Tax Act (the “ETA”)
excludes, in the case of an individual or a partnership of individuals, a
business carried on without a reasonable expectation of profit. The Respondent
argued that this amounted to a higher standard for a commercial activity to
exist than the one for the existence of a business found in section 9 of the ITA.
The Respondent also cited paragraph 22 of the decision of this Court in 173122
Canada Inc. v. Her Majesty The Queen, 2007 TCC 17, for the proposition that
since Mr. Salloum reported no sales or revenues during the reporting periods
in issue, one may reasonably infer that Mr. Salloum was not engaged in
commercial activities during those periods and, therefore, that he is not eligible
for input tax credits for those periods.
[33]
I note that Walsh, Diflorio and 173122
Canada Inc. are cases decided under the informal procedure.
III. The
Law
[34]
The Supreme Court of Canada in Stewart
described the test used to determine whether a business exists as follows:
50 It is
clear that in order to apply s. 9, the taxpayer must first determine whether he
or she has a source of either business or property income. As has been pointed
out, a commercial activity which falls short of being a business, may
nevertheless be a source of property income. As well, it is clear that some
taxpayer endeavours are neither businesses nor sources of property income, but
are mere personal activities. As such, the following two-stage approach with
respect to the source question can be employed:
(i) Is the activity of the taxpayer undertaken in pursuit of
profit, or is it a personal endeavour?
(ii) If it is not a personal endeavour, is the source of the
income a business or property?
The first stage
of the test assesses the general question of whether or not a source of income
exists; the second stage categorizes the source as either business or property.
51 Equating
“source of income” with an activity undertaken “in pursuit of profit” accords with the traditional
common law definition of “business”, i.e., “anything which occupies the time and attention and labour of
a man for the purpose of profit”: Smith, supra, at p. 258,
Terminal Dock, supra. As well, business income is generally
distinguished from property income on the basis that a business requires an
additional level of taxpayer activity: see Krishna, supra, at p. 240. As
such, it is logical to conclude that an activity undertaken in pursuit of
profit, regardless of the level of taxpayer activity, will be either a business
or property source of income.
52 The
purpose of this first stage of the test is simply to distinguish between
commercial and personal activities, and, as discussed above, it has been
pointed out that this may well have been the original intention of Dickson J.'s
reference to “reasonable expectation of profit” in
Moldowan. Viewed in this light, the criteria listed by Dickson J. are an
attempt to provide an objective list of factors for determining whether the
activity in question is of a commercial or personal nature. These factors are
what Bowman J.T.C.C. has referred to as “indicia
of commerciality” or “badges of trade”: Nichol,
supra, at p. 1218. Thus, where the nature of a taxpayer's venture contains
elements which suggest that it could be considered a hobby or other personal
pursuit, but the venture is undertaken in a sufficiently commercial manner, the
venture will be considered a source of income for the purposes of the Act.
53 We
emphasize that this “pursuit of profit” source
test will only require analysis in situations where there is some personal or
hobby element to the activity in question. With respect, in our view, courts
have erred in the past in applying the REOP test to activities such as law
practices and restaurants where there exists no such personal element: see, for
example, Landry, supra; Sirois, supra; Engler v. The Queen,
94 D.T.C. 6280 (F.C.T.D.). Where the nature of an activity is clearly
commercial, there is no need to analyze the taxpayer's business decisions. Such
endeavours necessarily involve the pursuit of profit. As such, a source of
income by definition exists, and there is no need to take the inquiry any
further.
54 It
should also be noted that the source of income assessment is not a purely
subjective inquiry. Although in order for an activity to be classified as
commercial in nature, the taxpayer must have the subjective intention to
profit, in addition, as stated in Moldowan, this determination should be
made by looking at a variety of objective factors. Thus, in expanded form, the
first stage of the above test can be restated as follows: “Does the taxpayer intend to carry on an activity for profit
and is there evidence to support that intention?” This requires the
taxpayer to establish that his or her predominant intention is to make a profit
from the activity and that the activity has been carried out in accordance with
objective standards of businesslike behaviour.
55 The
objective factors listed by Dickson J. in Moldowan, at p. 486 were: (1)
the profit and loss experience in past years; (2) the taxpayer's training, (3)
the taxpayer's intended course of action; and (4) the capability of the venture
to show a profit. As we conclude below, it is not necessary for the purposes of
this appeal to expand on this list of factors. As such, we decline to do so;
however, we would reiterate Dickson J.'s caution that this list is not intended
to be exhaustive, and that the factors will differ with the nature and extent
of the undertaking. We would also emphasize that although the reasonable
expectation of profit is a factor to be considered at this stage, it is not the
only factor, nor is it conclusive. The overall assessment to be made is whether
or not the taxpayer is carrying on the activity in a commercial manner.
However, this assessment should not be used to second-guess the business
judgment of the taxpayer. It is the commercial nature of the taxpayer's
activity which must be evaluated, not his or her business acumen.
...
60 In
summary, the issue of whether or not a taxpayer has a source of income is to be
determined by looking at the commerciality of the activity in question. Where
the activity contains no personal element and is clearly commercial, no further
inquiry is necessary. Where the activity could be classified as a personal
pursuit, then it must be determined whether or not the activity is being
carried on in a sufficiently commercial manner to constitute a source of
income. However, to deny the deduction of losses on the simple ground that the
losses signify that no business (or property) source exists is contrary to the
words and scheme of the Act. Whether or not a business exists is a separate
question from the deductibility of expenses. As suggested by the appellant, to
disallow deductions based on a reasonable expectation of profit analysis would
amount to a case law stop-loss rule which would be contrary to established
principles of interpretation, mentioned above, which are applicable to the Act.
As well, unlike many statutory stop-loss rules, once deductions are disallowed
under the REOP test, the taxpayer cannot carry forward such losses to apply to
future income in the event the activity becomes profitable. As stated by Bowman
J.T.C.C. in Bélec, supra, at p. 123: “It would
be ... unacceptable to permit the Minister [to say] to the taxpayer ‘The fact
that you lost money ... proves that you did not have a reasonable expectation
of profit, but as soon as you earn some money, it proves that you now have such
an expectation.’”
IV. Analysis
[35]
The first question raised in view of the Stewart
test is whether Mr. Salloum’s activities in 2005, 2006, 2007 and 2008 are
of a purely commercial nature or contain a personal element. The difficulty
that Mr. Salloum faces in addressing this question is that, by his own
admission, he was not pursuing a profit by offering or marketing goods or
services for sale in those years. Rather, he was seeking to educate himself
through his attendance at BCIT, his apprenticeship, his activities in his
parents’ garage and his attendance at various industry events.
[36]
While Mr. Salloum’s ultimate goal in
undertaking these activities was to pursue a profit in the future, he did not start
a business in 2005, 2006, 2007 or 2008 because he did not have the qualifications
required to offer mechanic’s services to the public until the end of 2008. In
fact, it is clear from Mr. Salloum’s candid testimony that the high
performance automotive services business was not operated in earnest until 2010
with the incorporation of Speedpro Inc. and the securing of third-party
financing by the corporation later that year. The fact that the business
undertaken by Speedpro Inc. has proven successful, while a great credit to the
dedication and perseverance of Mr. Salloum and his family, does not alter
the nature of the activities that were conducted by Mr. Salloum in 2005, 2006,
2007 and 2008, which were educational and not commercial.
[37]
Mr. Salloum recognized that during 2005,
2006, 2007 and 2008, he could not actually offer mechanic’s services to the
public as that would have exposed him to a significant risk of liability
because he was not certified. Hence, he could not pursue a profit in those
years. Mr. Salloum also recognized that, from a practical perspective, he
could not offer his particular brand of performance-oriented services to the
general public in exchange for payment until he could show that, in addition to
the required credentials, he had the necessary knowledge and skill to perform
those services. The fact that Mr. Salloum built, at significant cost, a
performance automobile engine in the course of securing that knowledge and
skill does not make his self-education activities a commercial activity. The
engine itself was not marketed or offered for sale and only recently has been
used as a promotional tool for Speedpro Inc.
[38]
The creation of an initial business plan and the
registration of a business name in 2001 do not alter the reality that during 2005,
2006, 2007 and 2008 Mr. Salloum did not offer to the public “mobile auto mechanic services,” the activity
described on the registration, because he did not obtain the Red Seal
endorsement until the end of 2008. In Gartry v. Her Majesty The Queen,
94 DTC 1947, our Court stated at paragraph 16:
. . . In determining when a business has commenced,
it is not realistic to fix the time either at the moment when money starts
being earned from the trading or manufacturing operation or the provision of
services or, at the other extreme, when the intention to start the business
is first formed.
(Emphasis added)
[39]
While Mr. Salloum no doubt undertook a
laudable course of action in order to secure the necessary credentials and to
develop his knowledge and skills in the performance automotive services field, his
activities do not relate to the pursuit of profit but rather constitute the
completion of an inherently personal activity – securing an education - so that
he could pursue a profit in the future using that education.
[40]
The distinction to be drawn here is that the
pursuit of an education by an individual in order to be able to pursue a profit
in the future is different from the current pursuit of a profit that leads to a
profit in the future. In the former case, there is only a personal element to
the education – the improvement of the individual – even if the ultimate
objective is to pursue a profit at some future point in time by exploiting the
credentials, knowledge and skills obtained through that education. Here, Mr. Salloum
pursued a personal endeavour with the financial and other support of his family
and, for a period, Ms. Morton, but, in my view he did not conduct an
automotive services business in 2005, 2006, 2007 or 2008 as he did not, and
could not, pursue a profit from such a business in those years. There is also
no evidence that any other business was carried on in those years.
[41]
The absence of a business in 2005, 2006, 2007
and 2008 is relevant to the reassessments of Mr. Salloum under both the ITA
and the ETA. Generally, in the former case, there must be a business; only
then can Mr. Salloum deduct any outlay or expense made or incurred for the
purpose of gaining or producing income from that business (see subsection 9(2)
and paragraph 18(1)(a) of the ITA). In the latter case, there
must a commercial activity, which, for an individual, is essentially a business
carried on with a reasonable expectation of profit; only then can Mr. Salloum
claim input tax credits in respect of that commercial activity. As Mr. Salloum
did not carry on a business in 2005, 2006, 2007 and 2008, Mr. Salloum’s
claim in 2006 to 2008 for business related deductions and in 2005 to 2008 for input
tax credits must fail.
[42]
The finding that Mr. Salloum was not
carrying on a business in 2005, 2006, 2007 and 2008 is also relevant to the
income tax deductions claimed by Ms. Morton for her 2005, 2006 and 2007
taxation years. Section 2 of the Partnership Act (British Columbia)
states that “partnership is the relation which subsists
between persons carrying on business in common with a view of profit”.
Simply stated, if there is no business to carry on in common, there can be no
partnership.
[43]
The evidence establishes that Ms. Morton
was very supportive of Mr. Salloum and that during 2005 and 2006 she was
helping him pursue his various educational activities as best she could.
However, Ms. Morton was not qualified to provide automotive services of
any kind, she and Mr. Salloum did not undertake marketing or pursue sales
at any time and Ms. Morton did not hold herself out as a representative of
Speedpro High Performance. In addition, there was no partnership agreement, the
business registration for Speedpro High Performance was not modified to reflect
a partnership and there was no apparent dissolution of a partnership after
Ms. Morton broke up with Mr. Salloum at the end of 2006. In the
circumstances, Ms. Morton’s role is best described as that of a supportive
girlfriend rather than a business partner. Accordingly, consistent with the
finding that Mr. Salloum was not carrying on a business in 2005, 2006,
2007 or 2008, I find that there was no partnership between Mr. Salloum and
Ms. Morton and that Ms. Morton’s claim for business related
deductions in 2005 to 2007 must fail.
[44]
The foregoing conclusions do not end the matter
however. Paragraph 5 of the Reply (the “ETA Reply”) in Mr. Salloum’s
appeal under the ETA states that Mr. Salloum filed a return under
the ETA for the reporting period ending December 31, 2005 on July 4,
2006. Paragraph 7 of the ETA Reply states that Mr. Salloum was reassessed
for that reporting period by notice dated November 22, 2006 to reduce
the input tax credit to $1,508.95, which is the amount in issue in this appeal.
Paragraph 9 of the ETA Reply states that Mr. Salloum was again reassessed
for that reporting period by notice dated January 11, 2011 (the “2005 ETA
Reassessment”) to reduce the input tax credit to zero. Mr. Salloum
objected to and then appealed the 2005 ETA Reassessment.
[45]
Subsection 298(1) of the ETA states that
an assessment of net tax for a reporting period may not be made more than four
years after the later of the day the return was due and the day the return was
filed. The 2005 ETA Reassessment was made more than four years after the return
for the period was filed. Subsection 298(4) of the ETA states that an
assessment in respect of any matter may be made at any time where the person to
be assessed has, in respect of that matter, made a misrepresentation that is
attributable to the person's neglect, carelessness or wilful default.
[46]
Paragraph 8 of the Reply (the “ITA Reply”) in
Ms. Morton’s appeal under the ITA states that she was initially
assessed under the ITA for the 2005 taxation year by notice dated March
30, 2006. Paragraph 9 of the ITA Reply states that the Minister reassessed the
2005 taxation year by notice dated January 17, 2011 (the “2005 ITA
Reassessment”). Ms. Morton objected to and then appealed the 2005 ITA Reassessment.
[47]
Paragraph 152(4)(a) of the ITA states
that an assessment, reassessment or additional assessment of a taxation year
may be made after the taxpayer’s normal reassessment period in respect of the
year only if the taxpayer or person filing the return has made any
misrepresentation that is attributable to neglect, carelessness or wilful
default. Under subsection 152(3.1) of the ITA, the normal reassessment
period for an individual for a particular taxation year is three years after
the day of sending an original assessment or notification that no tax is
payable for the year. The 2005 ITA Reassessment was made more than three years
after the initial assessment of Ms. Morton’s 2005 taxation year.
[48]
The Respondent set out assumptions of fact
relating to the out of time issue in paragraph 13 of the ETA Reply and the ITA
Reply and identified the issue of whether the two reassessments were issued out
of time in paragraph 14 of the Replies. In paragraph 19 of the ETA Reply and in
paragraph 18 of the ITA Reply, the Respondent stated the grounds relied on as
follows:
19. He
submits that the Minister correctly reassessed the Appellant’s reporting period
ending December 31, 2005 pursuant to paragraph 298(4)(a) of the Act as the
Appellant, in filing his claim for ITCs, made a misrepresentation attributable
to neglect, carelessness or wilful default.
…
18. He
further submits that the Minister properly reassessed the Appellant’s 2005
taxation year pursuant to subsection 152(4) of the Act, as the Appellant in
filing her return for that year, made a misrepresentation attributable to
neglect, carelessness or wilful default.
[49]
In the Notices of Appeal, the Appellants did not
challenge the 2005 ETA Reassessment or the 2005 ITA Reassessment on the basis
that they were made out of time. As well, the Appellants and the Respondent did
not address this issue during the trial. However, the Respondent did raise the
out of time issue in the Replies and should be commended for this even-handed
approach. It is also implicit in an out of time assessment that there is an
allegation of misrepresentation or fraud (The Queen v. Canadian Marconi
Company, [1992] 1 F.C. 655 (FCA)).
[50]
The Respondent does not have a duty to plead or
establish misrepresentation where the Appellant does not raise the issue (see Naguib
v. The Queen, 2004 FCA 40 and The Queen v. Last, 2014 FCA 129).
However, in this case, assumptions of fact were made, the issue was identified
and grounds were set out in the ETA Reply and the ITA Reply. Accordingly, the
issue is before me even if the Appellant did not expressly raise the issue in
the Notices of Appeal or at the trial. I also note that these are appeals under
the informal procedure which mandates that I deal with the appeals as
informally and expeditiously as the circumstances and considerations of
fairness permit (see subsection 18.15(3) of the Tax Court of Canada Act).
Fairness dictates that I not ignore this issue simply because it was not
explicitly raised by the Appellant.
[51]
To accept the Respondent’s position regarding
the validity of the out of time reassessments, I must conclude, first, that
Mr. Salloum made a misrepresentation in his GST return for the reporting
period ending December 31, 2005 and, second, that the
misrepresentation was attributable to neglect, carelessness or wilful default.
Similarly, I must conclude, first, that Ms. Morton made a
misrepresentation in her income tax return for 2005 and, second, that the
misrepresentation was attributable to neglect, carelessness or wilful default
(see, generally, Boucher v. The Queen, 2004 FCA 46).
[52]
I found the testimony of Mr. Salloum and
Ms. Morton to be straightforward and credible. Based on this testimony, I
have no doubt that Mr. Salloum and Ms. Morton had a bona fide
belief that they were carrying-on a business together in 2005 known as Speedpro
High Performance. While I have found that no such business existed in 2005,
that finding does not in and of itself support a finding that Mr. Salloum
made a misrepresentation in his GST return for the period ending December 31,
2005 that was attributable to neglect, carelessness or wilful default by
claiming input tax credits in respect of activities that he viewed as business
activities. Nor does it support a finding that Ms. Morton made a
misrepresentation in her 2005 income tax return attributable to neglect,
carelessness or wilful default by claiming business deductions for her 2005
taxation year in respect of activities that she viewed as business activities
conducted in partnership with Mr. Salloum.
[53]
The question of whether a business exists in a
particular set of circumstances has given rise to a large body of jurisprudence
essentially because the issue is often difficult to resolve at the margins. The
import of this sort of legal and factual milieu in the context of paragraph
152(4)(a) of the ITA was recognized in Petric v. The Queen, 2006
TCC 306, where the Court said (at paragraph 38):
To the extent
that we can reconcile the above decisions, it is my view that the present case
resembles the situation in Regina Shoppers Mall Limited and 1056
Enterprises Ltd. more than that in Nesbitt. The matter of fair
market value is a controversial issue, to be settled on the basis of the
interpretation of the facts in evidence, as is the question of whether proceeds
of disposition should be characterized as income or as a capital gain (Regina
Shoppers Mall Limited) or of whether corporations are associated (1056
Enterprises Ltd.). The mathematical error in Nesbitt, by contrast,
is a clear-cut issue, which even the taxpayer in that case conceded to be
non-controversial.
[54]
Here, as in Petric, the type of question
to be resolved echoes that in The Queen v. Regina Shoppers Mall Ltd.,
126 N.R. 141 (FCA) and 1056 Enterprises Ltd. v. The Queen, 27 F.T.R. 307
(FCTD). This is not a case in which the Appellants failed to report something
that they should have reported or attempted to disguise the true nature of
their activities but a case in which the Appellants undertook activities that
they genuinely believed to constitute a business because the goal was to earn a
profit in the future.
[55]
The Appellants had a not unreasonable argument
to make that a business did exist based on the research conducted and the significant
monies expended to further a future business endeavour that ultimately was very
successful. As well, there is no doubt that in 2005 Mr. Salloum and
Ms. Morton carried on together the activities they mistakenly viewed as a
business. Mrs. Salloum fervently believed that the activities conducted by
Mr. Salloum and Ms. Morton in 2005 constituted a business carried on
together in partnership. As noted by the Respondent at the commencement of
argument, the issue in this case is very factual.
[56]
While a claim for deductions and input tax
credits where no business is found to exist may constitute a misrepresentation
in the broad sense of that word adopted in Minister of National Revenue v.
Taylor, [1961] Ex. C.R. 318 and Nesbitt v. The Queen, 206 N.R. 188
(FCA), the misrepresentation stems from a not unreasonable mistake in judging
when the business commenced. The requirement to act as a wise and prudent
person in filing a tax return is not a standard of perfection: wisdom is not
infallibility and prudence is not perfection. Where a taxpayer thoughtfully,
deliberately and carefully assesses the situation and files on what he or she
believes bona fide to be the proper method there can be no
misrepresentation as contemplated by paragraph 152(4)(a) of the ITA
(The Queen v. Johnson, 2012 FCA 253 at paragraph 55).
[57]
In light of all the circumstances, I find that Mr.
Salloum did not make a misrepresentation attributable to neglect, carelessness
or wilful default in claiming input tax credits for the reporting period ending
December 31, 2005. I also find that Ms. Morton did not make any
misrepresentation attributable to neglect, carelessness or wilful default in
her 2005 income tax return by claiming business deductions for that year.
Accordingly, the 2005 ETA Reassessment and the 2005 ITA Reassessment were
issued outside the time limits found in paragraph 298(1)(a) of the ETA
and paragraph 152(4)(a) of the ITA, respectively, and are
therefore void.
[58]
One final matter to be addressed is the proper
treatment of the $2,709.76 identified by Mrs. Salloum in argument.
Mrs. Salloum noted that Mr. Salloum should have claimed this amount
as eligible for the tuition tax credit available under section 4.6 of the British
Columbia Income Tax Act, RSBC 1996, Chapter 215. Unfortunately, this Court
does not have jurisdiction to decide whether Mr. Salloum is entitled to a
tax credit that is provided for in a provincial income tax statute.
[59]
For the forgoing reasons:
1. Mr. Salloum’s
appeal of the 2005 ETA Reassessment is allowed, without costs, and the
reassessment is vacated;
2. Ms. Morton’s
appeal of the 2005 ITA Reassessment is allowed, without costs, and the
reassessment is vacated;
3. Mr. Salloum’s
appeal of the reassessments made under the ETA for the reporting periods
ending between January 1, 2006 and December 31, 2008 by
notice dated January 11, 2011 is dismissed without costs;
4. Mr. Salloum’s
appeal of the reassessments made under the ITA for the 2006, 2007 and
2008 taxation years by notices dated January 17, 2011 is dismissed
without costs; and
5. Ms.
Morton’s appeal of the reassessment made under the ITA for the 2006 and
2007 taxation years by notices dated January 17, 2011 is dismissed
without costs.
Signed
at Ottawa, Canada, this 12th day of December 2014.
“J.R. Owen”
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