REASONS FOR JUDGMENT
Paris J.
[1]
This appeal was heard under the informal
procedure. This is an appeal of income tax assessments for the 2010 and 2011 taxation
years, in which the Minister of National Revenue (the Minister) disallowed
the deduction of the following business losses:
|
2010
|
$22,000
|
|
2011
|
$23,167
|
[2]
In issuing the assessments, the Minister deduced
that the jewelry buying and reselling activity in which the appellant was
involved did not constitute a source of income under section 3 of the Income
Tax Act (the ITA), and that, even if it were a source of income, the
expenses deducted with respect to this activity were not incurred, or were not
incurred in hopes of turning a profit from the activity.
[3]
A source of income is an activity carried out
for profit, and when such an activity contains a personal element, it must be
carried out in a commercial manner (Stewart v. Canada, 2002 SCC 46).
[4]
In this case, it is clear that the activity
carried out by the appellant contained a personal element. The appellant used
his personal vehicle and a portion of his residence for the purposes of the
activity, and claimed a significant portion of the associated expenses as
deductions in calculating his income. For the most part, these were costs that
the appellant would have incurred even without being involved in the activity in
question.
[5]
Therefore, the first question to be answered is
whether the appellant operated the business in a sufficiently commercial manner
for it to constitute a source of income. In paragraphs 54 and 55 of Stewart,
the Supreme Court stated:
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.
[6]
The appellant claims that it is difficult for
him to substantiate the commercial nature of his business at this time, as all
of the relevant documents regarding the business’ operation were stolen from his
residence in February 2012 during a robbery. In addition to the documents,
the appellant claimed that jewelry, a stereo system, sporting goods, and
various other goods were stolen, for a total value of $62,570. He states that
when the tax audit began at the start of 2013, he informed the Canada
Revenue Agency (the CRA) auditor that he had no
documents, and that the auditor did not ask him to provide copies of documents
or other written evidence from his suppliers or clients. He claimed that he was
therefore surprised to learn, 20 months later, once the CRA had processed
his objection, that his claim that his business was a source of income had not
been accepted, and that at that time, he said, it was too late to recover the
documentary evidence. His main supplier, Bidz.com, had declared bankruptcy in 2011,
and certain other suppliers could no longer be found. He was also unable to
obtain a copy of the ads that he had posted because too much time had passed,
and as for the newspaper autoHEBDO, it was now only available on the
Internet.
[7]
According to the appellant’s testimony, he
started his business in 2006 and sold jewelry and watches—mainly
Lamborghini brand watches. He bought his stock in the United States, from two
websites, of which Bidz.com was the biggest. He says that he bought jewelry and
watches in large quantities and had hundreds of watches to sell. Nevertheless,
it was hard to turn a profit from sales due to competition from vendors on
eBay, who offered the same products, or products similar to those he offered,
at lower prices than his. He was therefore forced to lower his prices, and this
led to the losses. He claimed the following gross revenue and net business
losses:
|
|
Gross business
revenue
|
Net business revenue
(losses)
|
|
2006
|
$28,110
|
($27,030)
|
|
2007
|
$12,000
|
($28,940)
|
|
2008
|
$10,000
|
($24,287)
|
|
2009
|
$27,200
|
($19,695)
|
|
2010
|
$23,000
|
($22,000)
|
|
2011
|
$26,000
|
($23,167)
|
|
|
|
|
[8]
The appellant testified that he had tried,
without specifying how, to increase his buying power in order to make his
business profitable. He also said that, toward the end of 2011, just
before he stopped operating the business, following the robbery, he had
partnered with another vendor and planned either to open a kiosk or "to
launch on eBay." However, his partner died shortly thereafter and the
appellant decided to close the business. The appellant reiterated that he could
not offer prices as low as those of American vendors on eBay and that that was
the cause of his losses. He said that he offset his losses by drawing on
employment income earned at Bombardier, where he has worked full-time for
19 years.
[9]
The burden of proving the commercial nature of
his activity rests with the appellant and, in my view, the evidence submitted
is insufficient to relieve the appellant of this burden.
[10]
Firstly, in my view, the appellant’s testimony
regarding the lack of documents was not credible, and I have difficulty
believing his testimony that all of his documents were stolen when his house
was robbed.
[11]
As the appellant himself stated, the documents
had no value and would have held little interest for a robber. I also note that
there is no mention of document theft in the police report on the event. The
appellant said that he had not mentioned the theft of the documents to the
police or to his insurer because they had no dollar value, but he nonetheless
mentioned the theft of an identification document and of his passport. Another
remarkable thing is that the appellant declared the theft of just one watch,
one ring and one bracelet, for a total value of $9,200, which seems like very
little stock for a business that sells jewelry, and which, according to the
appellant, bought jewelry and watches in large quantities.
[12]
I am also unconvinced that it would have
been impossible for the appellant to recover his documents, at least in part.
Although his main supplier had filed for bankruptcy, the appellant said that he
paid for all of his purchases by credit card or PayPal. It seems to me that
copies of account statements should exist, along with proof of payment of the
credit card interest he claimed. It also appears that the appellant often used
the Internet to buy and sell, and it would surprise me if there were not a
number of relevant emails that could have been provided to the Court.
[13]
Furthermore, although the appellant testified
that his main supplier was Bidz.com and that he made his purchases on the
Internet, in a questionnaire regarding vehicle expenses, which he filled out at
the CRA’s request, he had indicated that he made "a lot of purchases in
Toronto."
[14]
The other factors mentioned in Stewart
for assessing the commercial nature of a business include the taxpayer’s
training, the taxpayer’s intended course of action, and the capability of the
venture to show a profit. Although the appellant had shown a longstanding
interest in jewelry, he had no training in this field nor any business
training. His business plan was to make his business profitable by reducing his
purchasing costs and increasing his buying power, but, aside from expressing
these general intentions, he did not specify how he expected to achieve this
goal. Lastly, the uninterrupted series of losses and the closure of the
business in 2012 show objectively that the business did not have the
ability to turn a profit in the way it was being run by the appellant.
[15]
For all of these reasons, I find that the
appellant’s activity did not constitute a source of income in 2010 and 2011.
Given this finding, it is not necessary to determine the deductibility of the
specific expenses claimed by the appellant, and the appeal is dismissed.
Signed at Ottawa, Canada, this 15th day of September 2016.
"B. Paris"
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