Citation: 2013 TCC 268
Date: 20130827
Docket: 2012-4355(GST)I
BETWEEN:
Bernard Yevzeroff,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre J.
[1]
This is an appeal from
an assessment made by the Minister of National Revenue (Minister) on
September 2, 2011 under Part IX of the Excise Tax Act (ETA),
denying the appellant input tax credits (ITCs) in the amount of $2,462
for the period from January 1, 2011 to March 31, 2011.
[2]
The ITCs were
disallowed on the basis that (1) the appellant did not carry on any commercial
activity; (2) the appellant did not acquire or import any property or services
for consumption, use or supply in the course of a commercial activity; (3) the
appellant failed to produce adequate receipts, invoices and other records in
support of the disallowed ITCs and claimed ITCs in respect of expenses that
were personal in nature; and (4) the expenses were not incurred for the purpose
of making taxable supplies (Reply, subparagraphs 10 j) to m)).
[3]
In court, the appellant
admitted that he filed goods and services tax (GST) returns on a
quarterly basis but denied all the following assumptions of fact that were made
by the Minister, and that are set out in subparagraphs 10 b), c), d), e), h)
and i) of the Reply, in reaching the above-stated decision. These facts read as
follows:
10. In
so determining the Appellant’s net tax for the Period, the Minister made the
following assumptions of fact:
. . .
b) the Appellant became a GST registrant on September 26, 2000 and
remained a registrant throughout the Period;
c) at all relevant times, the Appellant operated Andomeda Capital as a
sole proprietorship;
d) the appellant claimed to be operating a business since the year 2000
as a stock trader;
e) the appellant had a quarterly reporting period beginning on January
1, 2011 and ending on March 31, 2011 for GST purposes;
. . .
h) the Appellant did not provide stock trading services for clients in
the Period;
i)
the Appellant did not receive any compensation
from clients for stock trading services performed in the Period.
[4]
The appellant said that
the Minister had not challenged the payment of ITCs since he became a
registrant in 2000 and that he does not understand why they should be refused
to him now. He said that the fact that he did not receive any compensation from
clients for stock-trading services performed or that he did not provide stock-trading
services to clients during the period at issue is irrelevant. In his notice of
appeal, he states that his “commercial activity changed to consulting
collectables purchased from Auctioneers” and he stated in court that all he was
claiming were the ITCs for the work he did representing clients in tax and
collection matters.
[5]
As proof of his new
commercial activity, he filed as part of Exhibit A‑1 excerpts from two
decisions of this Court in cases in which he had appeared as agent for the
taxpayers. The first case was Lewis Hsu v. The Queen, 2005‑758(GST)I,
2006 TCC 304, heard by Little J. on January 19, 2006, and the second was Clarence Maquito
v. The Queen, 2010-2892(GST)I, 2011 TCC 123, which was heard by V.A. Miller
J. and in which reasons for judgment were issued on February 23, 2011.
The appellant also filed various invoices issued during the period at issue.
Two of them were issued by Mandarin and total approximately $750. Another
invoice is for an amount of $50,901.99 for the purchase of a software package
and follow-up service support. The appellant also filed five invoices from
Beaches Para Legal Services issued between April 2010 and August 2010
totalling approximately $1,500 and one issued in October 2011 for almost $1,000.
The appellant did not really explain those invoices, but under the heading “description”
on the invoices it is indicated that Beaches Para Legal Services was charging
the appellant for such things as attending a settlement conference, preparing a
claim and motions, and attending trials in proceedings before the Newmarket and
Toronto Small Claims Courts for what I understand were four different clients. Lastly,
the appellant filed two invoices from Canada Post for the rental of a postal
box for a 12-month period, the first expiring in June 2010 and the second expiring
after the period at issue, in June 2013.
[6]
With regard to income,
the appellant produced a cheque for $200 dated August 5, 2011 from
one individual. He also provided a chart of his gross and net income from 2000
through 2010. According to that chart, starting in 2006 and up until 2009 he
incurred net losses varying between $5,665 and $ 41,823, and he earned a small
net income of $120 in 2010. The chart corresponds to the figures appearing on
the summary of information found in the tax returns filed by the appellant for
those years (Option C documents) and entered in evidence by the litigation
officer for the Canada Revenue Agency (CRA) as Exhibit R-9. From those
documents it can be seen that the gross business income decreased every year from
2005 to 2009 ($64,543 in 2005, $15,673 in 2006, $3,109 in 2007, $960 in 2008,
nil in 2009). It then rose to $987 in 2010, and for 2011 it appears that the
appellant declared gross business income of $2,645 and net business income of $288
(as per the Income Tax Return Information-Regular from the CRA provided by the
appellant in his documents filed as Exhibit A-1). The appellant stated that in
2006 he had a gain of $29,560 and in 2008 a gain of $3,908 that should be taken
into account so as to reduce his business losses. He also said that he claimed
capital cost allowance (CCA) in 2006, 2007 and 2008 that should not be
considered in determining the profit or loss from his business activities. As
for the gains, I do not see in the Income Tax Return Information summaries
(Exhibit R-9) that any such gains were declared. With respect to CCA, the
appellant did not file any statement of revenue and expenses for the years in
question.
[7]
In a letter sent to the
appellant on August 16, 2011 (Exhibit R-3), the CRA made reference to
the two cases referred to above in which the appellant had acted as agent for
the taxpayers. The CRA asked the appellant to provide all client billings,
including detailed invoices regarding taxable services being provided to each
client, along with proof of payment. In that letter, the CRA stated that there
was no record of any revenue pertaining to his work on the Maquito file having
been reported, as could be seen from the GST return filed.
Analysis
[8]
The issue is whether
the appellant carried on a commercial activity during the period at issue so as
to be entitled to ITCs.
[9]
The term “commercial
activity” is defined in subsection 123(1) of the ETA as follows:
Division I — Interpretation
123.
(1) Definitions — In section 121, this Part and
Schedules V to X,
. .
.
“commercial
activity” of a person means
(a) a business
carried on by the person (other than a business carried on without a
reasonable expectation of profit by an individual, a personal trust or a
partnership, all of the members of which are individuals), except to the extent
to which the business involves the making of exempt supplies by the person,
(b) an adventure
or concern of the person in the nature of trade (other than an adventure or
concern engaged in without a reasonable expectation of profit by an individual,
a personal trust or a partnership, all of the members of which are
individuals), except to the extent to which the adventure or concern involves
the making of exempt supplies by the person, and
(c)
the making of a supply (other than an exempt supply) by the person of real
property of the person, including anything done by the person in the course of
or in connection with the making of the supply;
[My
emphasis.]
[10]
Counsel for the respondent
referred to the case of Bowden v. Canada, 2011 TCC 418, [2011] T.C.J.
No. 346 (QL), in which Favreau J. of this Court stated the following regarding
the definition of “commercial activity”, at paragraphs 20 and 21:
20 This definition clearly establishes that a business carried
on without a reasonable expectation of profit is not a "commercial
activity" for GST purposes.
21 In Moldowan v. The Queen, 77 DTC 5213, at page 5215,
the Supreme Court of Canada made the following comment concerning the meaning
of the expression "reasonable expectation of profit":
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. The factors will differ with the nature and extent of the
undertaking. . . .
[11]
In Stewart v. Canada,
2002 SCC 46, [2002] 2 S.C.R. 645, the Supreme Court of Canada (SCC),
after referring to the range of uses and interpretations of the phrase
“reasonable expectation of profit” by the courts and the corresponding
uncertainty this has created for taxpayers, acknowledged the numerous practical
difficulties which may arise in the application of this test (at paragraph 43).
As an example, the SCC indicated that it is unclear whether the capacity for
profit should be determined after taking into account depreciation and, if so,
whether capital cost allowance or accounting depreciation should be used (at
paragraph 44).
[12]
Nevertheless, the SCC
recognized that the criteria listed by Dickson J. in Moldowan v. The Queen,
[1978] 1 S.C.R. 480, 77 DTC 5213, and referred to by Favreau J. in the
above-quoted excerpt from Bowden, supra, are an attempt to
provide an objective list of factors for determining whether the activity in
question is of a commercial nature, or in other words, whether the activity
shows “indicia of commerciality” or “badges of trade” (paragraph 52).
[13]
Although in Stewart,
supra, the SCC emphasized that, where the nature of an activity is
clearly commercial, there is no need to undertake an analysis based on the
“pursuit of profit” source test as such endeavours necessarily involve the
pursuit of profit (paragraph 53), the situation is different where such a test
is based on the wording and scheme of the legislation. In the present case the
definition of “commercial activity” in the ETA requires that a business be
carried on with a reasonable expectation of profit by an individual. That being
so, in order for it to be determined that a particular activity constitutes a
source of income, the taxpayer must show that he intends to carry on that
activity in the pursuit of profit and support that intention with evidence.
This requires the taxpayer to establish that his predominant intention is to
make a profit from the activity and that the activity has been carried on in
accordance with objective standards of businesslike behaviour (paragraphs 5 and
54).
[14]
The SCC explicitly declined
to expand the list of objective factors set out by Dickson J. in Moldowan,
supra, namely: (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. The SCC reiterated 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. The SCC stressed,
however, that the overall assessment to be made is whether or not the taxpayer
was carrying on the activity in a commercial manner, which means that it is the
commercial nature of the taxpayer’s activity that must be evaluated, not his
business acumen (paragraph 55).
[15]
In the present case, it
is my understanding that the appellant does not base his claims for ITCs for
the period at issue on the stock-trading activities that he carried on in the
past. Rather, the appellant maintains that he reoriented his commercial
activities toward the provision of paralegal, and collection services.
[16]
According to the
appellant’s own figures provided to the CRA, his gross business income dropped considerably
after 2005, and he continued incurring business losses during the years 2005
through 2009. In 2010 and 2011, the appellant reported gross business income of
$987 and $2,645 respectively, and a small net business income of $120 and $288
respectively. No statement of income and expenses was provided for those years.
[17]
The appellant claimed
$49,240 in expenses for the period at issue (January to March 2011) for GST
purposes.
[18]
It would appear from
the evidence — although this is not clear — that the appellant represented perhaps
five or six clients in 2010 and 2011 and one in 2006. I infer this from the invoices
from Beaches Para Legal Services and the two judgments issued in cases in which
the appellant represented the taxpayers. However, the appellant did not provide
any bills issued to any clients during those years. The appellant is not a
lawyer and it is unclear what role exactly he played in the paralegal
activities.
[19]
Furthermore, the
appellant did not provide any evidence as to what his intended course of action
was during those years, or as to whether there was any capability for his new venture
to show a profit.
[20]
The appellant tried to
explain that the income and loss figures reported by him over the years did not
provide an accurate picture of the profits and losses from his new paralegal
activities. He said, for example, that capital cost allowance should not be
taken into account in the determination of profit. However, he did not provide
anything tangible that would help me reach the same conclusion.
[21]
The Minister relied on
figures reported by the appellant himself. The appellant must maintain and possess
detailed information and documentation in support of his claims (see Njenga
v. The Queen, 96 DTC 6593, [1997] 2 C.T.C. 8 (FCA)).
[22]
Without such
documentation, especially in the present case, where the appellant wants to
modify his own reported figures, it is difficult for me to determine that the
appellant had a reasonable expectation of profit from his paralegal or
collection activities, even though he reported a very small net business income
of $120 in 2010 and $288 in 2011.
[23]
Furthermore, even if I
were to find that there was a source of income in 2011, the expenses of $49,240
claimed in order to receive $2,462 in ITCs are excessive and unreasonable in
relation to the so-called source of income (see subsection 170(2) of the ETA).
[24]
I therefore conclude
that the Minister was right in disallowing the ITCs for the period at issue.
[25]
The appeal is
dismissed.
Signed at Montreal, Quebec, this 27th day of August 2013.
“Lucie Lamarre”
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