Date: 19991214
Dockets: 98-1477-IT-I; 98-1478-IT-I
BETWEEN:
RENALD BONIN, SUSAN BONIN,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
ISSUE:
[1] The issue as stated in the Reply to the Notice of Appeal
in each case was:
... whether the Appellant had a reasonable expectation of
profit from the Activity in the 1994 and 1995 taxation years.
That, obviously, is not a complete statement of the issue
because an answer, either positive or negative, does not, without
response to further queries, resolve the issue in this appeal.
Respondent's counsel submitted that if the Court should
conclude that there was no reasonable expectation of profit,
neither Appellant could be said to be carrying on business and
the appeals should, accordingly, be dismissed. Such conclusion,
he submitted, would be based upon the premise as stated in
Moldowan v. The Queen, 77 DTC 5213 at 5215 that:
... 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: Dorfman v. M.N.R. [1972 DTC 6131]
[2] It appears that the issue should have been described as
whether the Appellant was carrying on business and whether the
losses therefrom were deductible in those two taxation years.
FACTS:
[3] The Appellant, Renald Bonin ("Renald"),
representing him and his wife, Susan Bonin ("Susan")
gave evidence on behalf of both of them.
[4] Renald's evidence was vague and incomplete, lacking
the presentation of facts basic to the appeals. He agreed that
the amounts set forth in the Reply in each case were not in
dispute. He testified that he had been in the Amway business from
1984 to 1988 in partnership with his ex-wife, from 1989 to 1991
by himself as a sole proprietor, and from 1992 to 1997, in
partnership with Susan. As set out in the Assumptions of Fact in
the Reply to the Notice of Appeal, not rebutted, Renald's
losses from the "Activity" were as follows:
|
Year
|
Gross Income
|
Net Loss
|
|
1984
|
$2,096.00
|
($2,897.00)
|
|
1985
|
82,750.00
|
(3,733.00)
|
|
1986
|
111,994.00
|
(8,266.00)
|
|
1987
|
3,724.00
|
(7,907.00)
|
|
1988
|
Unknown
|
(4,222.00)
|
|
1989
|
23,925.00
|
(3,048.00)
|
|
1990
|
58,430.00
|
(4,238.00)
|
|
1991
|
73,041.00
|
(8,561.00)
|
|
Year
|
Gross Income
|
Net Loss
|
Appellant's Share
|
|
1992
|
$111,717.00
|
($4,746.00)
|
($2,373.00)
|
|
1993
|
83,518.00
|
(8,576.00)
|
(4,288.00)
|
|
1994
|
48,182.00
|
(11,518.00)
|
(5,759.00)
|
|
1995
|
41,272.00
|
(8,952.00)
|
(4,476.00)
|
|
1996
|
45,638.00
|
(7,854.00)
|
(3,927.00)
|
|
1997
|
33,393.00
|
(5,822.00)
|
(2,911.00)
|
[5] An amount equal to Renald's share of losses in each of
the years from 1992 to 1997 was also claimed for income tax
purposes, as a loss of Susan for her corresponding taxation
year.
[6] Renald was employed full-time during the period 1984 to
1985. His income was generally in the range of $32,000 to $34,000
for most years in that period. However, he had income of $22,000
in one year, approximately $37,000 in two years, and
approximately $40,000 in one of those years. Susan's income
was approximately $30,500 in 1992, $31,800 in 1993, $32,300 in
1994 and $14,100 in 1995.
[7] It is garnered from the assumptions in the Reply to the
Notice of Appeal that the sale of products was by way of a
network marketing system. These products were purchased by the
Appellants and sold by them, normally, at the same price.
However, they received performance bonuses based on the volume of
products sold. There having been no evidence from Renald on this
point, it is stated in the assumptions that:
a portion of the performance bonuses earned by the Appellant
and his spouse for the 1994 and 1995 taxation years included
sales made to themselves for products consumed personally by
them.
[8] The Appellant, when urged to present more facts to the
Court stated, with repetition, that they expected to have a
reasonable expectation.[1] He testified that they taught and helped people in
their network. He said also that they understood the business and
its potential growth and that they were building up a network to
furnish income for the future, describing same as "delayed
gratification".
[9] On cross-examination, Renald, shown the STATEMENT OF
BUSINESS ACTIVITIES in his 1994 income tax return, admitted that
in that year the cost of goods sold was $41,183 and that net
sales totalled $35,932, creating a loss of $5,251. In spite of
BONUSES EARNED/MISC. SALES/REBATES in the amount of $12,249, the
loss for the year was $11,518. This was divided equally between
Renald and Susan. Renald also admitted that product was sold at
less than cost, the object being to earn bonuses on sales.
[10] No capital cost allowance was claimed in the years in
question in respect of a computer and an automobile, being the
assets described on the capital cost allowance schedule in the
income tax returns.
ANALYSIS AND CONCLUSION:
[11] The outcome of this appeal depends, so far as facts are
concerned, substantially on the assumptions of fact in each Reply
not negated by the Appellants.
[12] Renald stated that it was normal to have expenses, that
they had expanded the business and that the expenses were
dropping because the business had been stream-lined. He said that
they always believed that they would have a profit. He stated
that the 1998 statement shows that expenses had been reduced,
that the loss was nil and that there would be a profit in
1999.
[13] Respondent's counsel referred to sections 3, 9(1),
9(2), 18(1)(a) and 18(1)(h) of the Income Tax Act
("Act"). He then asserted that
There is no business here because there is no reasonable
expectation of profit.
[14] He referred to Moldowan (supra), Tonn v.
Her Majesty the Queen, 96 DTC 6001, Corbett v. Her Majesty
the Queen, 96 DTC 6572 and Rempel v. Her Majesty the
Queen,97 DTC 3272.
[15] Counsel submitted that there was no business plan and
that the Appellants' only evidence was that more people
needed to be introduced to the business but were unable to say
specifically what sales were needed. He submitted that there was
no evidence to support the proposition that this enterprise was
capable of producing a profit. He said that one would expect to
hear what was required, how bonuses were determined and
distributed, and how the business would be capable of producing a
profit with or without capital cost allowance. He also submitted
that there was a personal element. He said that the evidence
respecting what happened at conventions, in respect of which the
Appellants had deducted expenses, was vague. He stated that using
the objective test, there was no business because there was no
reasonable expectation of profit.
[16] With respect, I cannot in these circumstances, subscribe
to the theory that the Appellants must have a reasonable
expectation of profit in order to have a business. The
Moldowan case was not concerned with the existence of a
business but, rather, with the source of income. Specifically,
section 13(1) of the Act[2] was being examined for the purposes of that
case. It read, in part:
Where a taxpayer's chief source of income for a taxation
year is neither farming nor a combination of farming and some
other source of income ...
[17] In order to determine whether there was a business one
must look at the description of the word "business"
contained in section 248 of the Act. For the period in
question it was read as follows:
"business" includes a profession, calling, trade,
manufacture or undertaking of any kind whatever and ... an
adventure or concern in the nature of trade ...
[18] It would be difficult not to characterize the
Appellants' activities as an undertaking or an adventure or
concern in the nature of trade as apparently contemplated by the
above definition. If the Appellants carried on business, what
validity attaches to the argument that the absence of a
reasonable expectation of profit means that there is no business?
Assume a taxpayer consulted with some renowned person having the
highest university degree in business administration, with an
outstanding chartered accountant and an outstanding chief
financial officer of a major corporation. Assume further that the
subject of such consultation was the plan of that taxpayer to
open a store for the sale of goods produced by him or her. Then
assume that the three consultants were unanimous in their opinion
that the taxpayer had no chance of success in such venture.
Assume, finally, that the taxpayer, being resolute, opened a
store for the sale of his products with the result that his
efforts produced a $50,000 profit from the first year's
operations. In the face of expert evidence that that taxpayer had
no reasonable expectation of profit can it seriously be imagined
that Revenue Canada would say that there was no business, thereby
denying itself the opportunity of reaping rewards from that
taxpayer's bountiful harvest? Could this Court seriously on
that basis conclude that that taxpayer did not conduct business
and did not have profit for purposes of the Act?
[19] With that example having put in focus the tedious
sameness of Revenue Canada's arguments in loss cases let us
advance.
[20] If I find that there was no reasonable expectation of
profit in the Appellants' activities, I must then determine
what consequences such finding has to those Appellants. Assume
that I find also that the activities constitute a business by
virtue of being an undertaking of any kind whatever or an
adventure or concern in the nature of trade. In this situation, I
must weigh what importance is attributed to each of these
conflicting conclusions. With respect, I state again that I
cannot conclude, in the face of the vast body of jurisprudence,
that no reasonable expectation of profit means that there is no
business. It seems, therefore, that I must retreat to the
description of "business". The word
"business" suggests profit motive and ensuing profit.
Do activities cease to be a business just because no profit
arises? Normally one would expect that a person operating an
unprofitable business would terminate such operation. However, if
as in the present case someone continues to conduct business
operations in spite of many years of continuous losses, can one
conclude that there is no business? In such circumstances it may
be suggested that the business is not being properly conducted.
If it is truly a business and not simply a rental loss situation
where it is sought to minimize personal living expenses, what
logic resides in the submission that there is no business? The
fact that the Appellants have continued with a losing enterprise
may not be regarded as normal but why should losses be disallowed
as income tax deductions on the basis that they constitute
personal or living expenses or on the basis that there is no
reasonable expectation of profit?
[21] I conclude that the Appellants were carrying on a
business. If the word "reasonable" has any application
in these circumstances, it may more appropriately be used in the
sense of its inclusion in section 67 of the Act. That
section reads as follows:
In computing income, no deduction shall be made in respect of
an outlay or expense in respect of which any amount is otherwise
deductible under this Act except to the extent that the outlay or
expense was reasonable in the circumstances.
[22] Relevant figures, taken from the statement of business
activities in Renald's 1994 income tax return are:
Net sales income $35,932
Bonuses earned and miscellaneous sales and rebates $12,249
Gross income $48,182
[23] The expenses are:
Advertising, promotion and discounts $648
Bad debts $215
Business tax, fees, licences dues, memberships $ 81
Delivery, freight, and express $809
Supplies $353
Interest $102
Meals and entertainment $426
Motor vehicle expenses $3,486
Office expenses $792
Legal, accounting, and other professional fees $112
Return tapes and outdated products $2,008
Salaries, wages and benefits $240
Travel $2,790
Bonuses paid out $4,710
Conventions and other functions $1,740
Total Business expenses $18,516
[24] While it may be reasonable for losses of this order to
arise during the initial years of a business operation, its
continuance does not seem "reasonable in the
circumstances" of the Appellants' operations. A review
of the loss amounts set out above indicates that the loss of
$11,518 in 1994 and the loss of $8,952 in 1995[3] are the two largest losses in
twelve years of business operation. While Renald did not produce
statements to support his assertion that there was no loss in
1998 and no material with respect to profit in 1999, he said in
testimony that they had cut expenses substantially. This may be
seen as supporting his own judgment that expenses deducted in the
years under appeal were not reasonable.
[25] I conclude that for the 1994 and 1995 taxation years the
deduction of expenses from the Appellants' business in excess
of income as above stated was not reasonable in the
circumstances.
[26] Accordingly, the appeals are dismissed.
Signed at Ottawa, Canada this 14th day of December,
1999.
"R.D. Bell"
J.T.C.C.
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