Ottawa, Ontario
EDITED VERSION OF TRANSCRIPT OF
REASONS FOR JUDGMENT
--- The
hearing started on Friday, April 28, 2017 at 8:57 a.m.
MR. MUNRO: All rise.
Before the Court... This sitting
of the Tax Court of Canada in Ottawa has now commenced. Before the Court, the
decision in docket 2016-3196(IT)I between Andray Renaud and Her
Majesty the Queen. For the appellant, Andray Renaud; for the respondent,
Cédric Renaud-Lafrance.
Your Honour.
JUSTICE JORRÉ: Thank you.
Good morning, Ms. Renaud; good morning...
MS. RENAUD: Good morning.
JUSTICE JORRÉ: Good morning,
Mr. Renaud...
MR. RENAUD-LAFRANCE: Good
morning.
JUSTICE JORRÉ: ...
Mr. Renaud-Lafrance.
I will now render my decision.
The appellant is a lawyer; she was
admitted to the Barreau du Québec in 1996. Among other things, she ran her own
full-time law practice in Repentigny before moving to the national capital
region in the fall of 2000.
I believe that her situation
before she moved to the national capital region was different enough and that
her professional situation before then really has no impact on the issue to be
decided here. And specifically the fact that during the period before she moved
she had started a full-time law practice and incurred losses in the first three
years of it is irrelevant here. It was a start-up period.
The appellant moved to the
national capital region when she got a non-legal job with the Government of
Canada in the fall of 2000. In 2005 she was hired as counsel by the Canadian
Transportation Agency, where she still works and where she practises in a very
specialized area of law. The appellant has also had a private law practice
since she moved. She does not practise in the area of law in which she is
employed full time. Her private practice has been part-time since she moved.
Lastly, she has had a third law-related activity, but only since 2013. She
teaches law part time at the University of Ottawa.
The issue is the following: During
the years 2011, 2012, 2013 and 2014, was the part-time private practice a
source of income? This is the issue because the Minister of National Revenue
reassessed the appellant and denied losses claimed by her in each of the four
years at issue.
In paragraph 7(h) of the
Reply to the Notice of Appeal, there is a chart of gross income and net losses
with regard to the private practice; this chart is not in dispute. And as I
said, I do not believe that what happened before the move is relevant.
Whereas before the move it was a
full-time practice, after the move, as I said, it was a part-time practice. I
do not intend to read this chart, but losses were claimed every year from 2001
to 2014. From 2001 to 2014, only losses were reported, ranging from $1,956 in
2003 to $15,680 in 2012. And the gross income reported throughout that period
was quite low. During that period the maximum gross income reported was $3,850.
No income was reported for three years: 2005, 2009 and 2010.
In the four years at issue, the
income, expense and loss amounts were as follows: in 2011, gross professional
income of $2,500 and business expenses of $15,113 were reported, for a loss of
$12,613. In 2012, gross income of $850 and expenses of $16,530 were reported,
for a loss of $15,680. In 2013, gross income of $850 and business expenses of
$4,864 were reported, for a loss of $4,014. In 2014, gross income of $3,850 and
expenses of $10,512 were reported, for a net loss of $6,662.
The appellant testified that in
her private practice, she made sure that the jobs she accepted would not take
more time than she had available, given that she practised part time and had a
full-time job. Obviously, she also made sure that there was no conflict with
her full-time job and that she was qualified in that area of law.
Her private practice is relatively
varied; she practises family, civil, administrative and criminal law. She does
consultations, gives legal advice, and participates in negotiations. She
handles cases before the Régie du logement. She does municipal law. In this
area, there is a practical advantage for her: hearings are held in the evening.
Her hours are quite variable, but
on average, they can be five to 10 per week,
which is an average for the entire year. Her full-time job gives her some
flexibility regarding when she has to put in full-time hours. This sometimes
makes her private practice easier.
When the appellant was asked about
how many clients and cases she had, her answers were not very specific. She
testified that she received requests every week. I assume that by
"request," she means people who come to her for legal services. She
testified that she could handle five to 10 different things in a month, but
that they could be the same things that she handled the following month.
In general, she does not bill clients
for her time before deciding whether she will represent them. She will refer a
potential client to legal aid if they qualify for it. She does not take legal
aid cases.
When deciding what she will charge
when she takes a case, she takes the person's income into account and adjusts
her rates accordingly.
In cross-examination, the
appellant was asked whether she accepted cases at a loss. She said no; she
always covered her travel expenses and her time for the case, but not all her
expenses. If a client does not pay the amount billed, she will not take him or
her on a second time.
The appellant says that she does
her job in a professional manner, but does not work on a volunteer or pro
bono basis; she adjusts her rates to a client's situation. The appellant
does not advertise her services, as she already has enough clients who come to
her through word-of-mouth to take up the time that she has to conduct her
private practice.
She intends to teach more law
courses and recently she looked into the possibility of teaching a course at
the Université du Québec en Outaouais. She also plans to do a bit of
advertising in the horse community, in which she is active. She already has a
few clients from this community.
As I already said, in 2013, the
third year at issue here, the appellant started teaching law at the University
of Ottawa. That year she received $1,000 from the university. In 2014 she
taught more semesters and received $3,000 from the university. Although she
included these sums of $1,000 and $3,000 in her income, she did not include
them in the gross income from her private practice, so the numbers that I just
read a few moments ago do not include those two amounts.
I will briefly discuss these
expenses later, but I will now consider the law on the source issue, especially
Stewart v. Canada, which is the fundamental case regarding this issue. This
is a 2002 decision of the Supreme Court of Canada, neutral citation
2002 SCC 46. It is a case that deals with losses in a real estate
project, but this case lists basic principles for the source issue.
In paragraphs 48 to 61 of the
decision, the Supreme Court examines these principles to determine whether or
not a source exists. I will read certain portions, starting with the last part
of paragraph 50.
"50 [...] 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. [...] 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 [...]. 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."
I will come back to this paragraph
and to the reference to law practices later.
Where there is a personal element,
the factors stated by the Supreme Court in paragraphs 54 and 55 of the
decision must be considered. The Supreme Court goes on to say in
paragraphs 56 to 58 that the fact that personal expenses may or may not
have been deducted should not change the nature of the source or... rather its
existence or non-existence.
The Supreme Court then summarizes
what it said. I will read two passages, starting with the first part of
paragraph 60 of the decision.
"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. [...]”
Lastly, I note paragraph 61,
which repeats the same summary a bit differently.
"As stated above, whether or
not a taxpayer has a source of income from a particular activity is determined
by considering whether the taxpayer intends to carry on the activity for
profit, and whether there is evidence to support that intention. As well, where
an activity is clearly commercial and lacks any personal element, there is no
need to search further. Such activities are sources of income."
So the underlying principle behind
all this in paragraph 51 is: Is this an activity undertaken in pursuit of
profit? We first have to ask ourselves whether the activity is clearly
commercial. If so, then the considerations described by the Court in
paragraphs 54 and 55 do not have to be analyzed.
I will now come back to
paragraph 53 because, according to the appellant, given what is said
there, law practices are clearly commercial and can never be questioned. Obviously
she is referring to when the Supreme Court states:
"[...] With respect, in our
view, courts have erred in the past in applying [...]," and I am jumping
ahead a bit, "[...] the REOP test to activities such as law practices
[...]."
What is the scope of this
passage? This passage must be understood in the context of the principles set
out by the Supreme Court, namely that to constitute a source of income an
activity must be undertaken in pursuit of profit. Obviously the Court must not
substitute its judgment on the conduct of the business for that of the business
person or professional.
And obviously law practices, and
the other example given, restaurants, are normally operated in pursuit of
profit. Normally, these activities do not warrant further inquiry. But normally
does not mean never. The sentence in question in paragraph 53
is an obiter, and it is useful to recall the principles that apply to
Supreme Court of Canada obiters.
A brief history lesson: There was
a time when people quoted Lord Halsbury's famous words about a case being
an authority only for what it actually decides. That time has clearly long
since passed. Moreover, the Supreme Court stated in Sellars v. The Queen,
[1980] 1 S.C.R. 527, that lower Courts should take a Supreme Court decision very
seriously even if it is obiter. Sellars has been relied on quite
heavily. More recently, the Supreme Court felt the need to provide further
explanation of the scope of Sellars.
It did so in R. v. Henry,
2005 SCC 76. At paragraph 57, the Supreme Court states:
"The issue in each case, to
return to the Halsbury question, is what did the case decide? Beyond the ratio
decidendi which, as the Earl of Halsbury L.C. pointed out, is generally
rooted in the facts, the legal point decided by this Court may be as narrow as
the jury instruction at issue in Sellars or as broad as the Oakes
test. All obiter do not have, and are not intended to have, the same
weight. The weight decreases as one moves from the dispositive ratio
decidendi to a wider circle of analysis which is obviously intended for
guidance and which should be accepted as authoritative. Beyond that, there will
be commentary, examples or exposition that are intended to be helpful and may
be found to be persuasive, but are certainly not "binding" in the
sense the Sellars principle in its most exaggerated form would have it. The
objective of the exercise is to promote certainty in the law, not to stifle its
growth and creativity. The notion that each phrase in a judgment of this Court
should be treated as if enacted in a statute is not supported by the cases and
is inconsistent with the basic fundamental principle that the common law develops
by experience."
This means that the sentence in
paragraph 53 of Stewart must not be read in an absolute sense and
does not automatically apply regardless of the status of a law practice or
restaurant.
In this case I believe that
factually we are in a rather exceptional situation. Let us examine the facts. I
am satisfied that the appellant's private practice is quite simply not
undertaken in pursuit of profit. I find this for the following reasons. To
begin with, there is gross income. The appellant says that she works five to 10
hours a week on average in her private practice throughout the year.
So at most 10 hours a week. To make the math easier I will assume 50 work
weeks, which means at most 500 hours a year.
In the four years at issue, the
appellant reported gross incomes of $2,500, $850, $850, and $3,850 in 2011,
2012, 2013 and 2014, respectively. Mathematically this equals gross income of
$5 per hour in 2011, $1.70 per hour worked in 2012, the same in 2013, and $7.70
per hour for each hour worked in 2014. That is not even minimum wage. Even with
the best management in the world, it is impossible to generate net earnings in
a law practice with this level of income. I also note that in 2009 and 2010 no
income was reported. This is not at all like a law practice as normally
understood, even in the widest sense. With such a level of income, this cannot
be undertaken in pursuit of profit.
Moreover, in the evidence there is
no mention of cases that could be highly profitable down the line but in the
short term could not be invoiced, for instance a case taken on a contingency
basis. The evidence does not show that during the period at issue, the
appellant sought to change her billing practices significantly or to make some
changes to her client base to increase income.
At the hearing the appellant said
that she wanted to teach more courses; that seems recent. However, I would note
that teaching law is a source that is separate from that of the law practice. The
appellant also said at the hearing that she planned to advertise in the horse
community, as I just read. However, moments before that, she said she did not
do any advertising because she already had enough clients to take up her time. But
if she is not looking to slightly increase her income one way or another, I
fail to see how it can be said that her activity is undertaken in pursuit of
profit.
The appellant says she does no
volunteer or pro bono work, as she charges all her clients something,
though occasionally some do not pay, but she does not take them on as clients
again. This may not be volunteering, strictly speaking, but it is very close to
it. I would also point out that pro bono work can very well be part of a
law practice, but normally the purpose of such a practice is to make a profit. That
does not always happen. Lawyers try to start practices and, sometimes, their
efforts fail, but they were undertaken in pursuit of profit.
Therefore, in light of the facts
before me, I fail to see how I cannot find that what the appellant seeks in her
private practice is to try to help people with modest incomes while working
professionally and trying to somewhat reduce what it is costing her to carry
out this activity. That is commendable, very, very commendable, but I fail to
see how that can be clearly commercial. Consequently, I fail to see how there
could be a source of income. Without such a source, losses are not deductible,
so I must dismiss the appeal.
Before I finish, let me briefly
discuss expenses. At the hearing the respondent tried to prove that some of the
expenses claimed regarding the private practice were not legitimately
deductible as expenses related to the practice or were personal. On the one
hand, I am not sure that this issue was validly raised in the Reply to the
Notice of Appeal.
According to the reply, the basis
of assessment was that there was no source of income. None of the facts assumed
argue that some of the expenses claimed were not related to the practice or
were of a personal nature. There are no such allegations in part A of the
reply, either. Only in the last part of the arguments are personal expenses
raised as an alternative.
On the other hand, even if I were
to disregard that, when I reread the evidence and considered whether the
respondent had proven that some expenses were not legitimately related to the
law practice, I noticed that given how everything was presented, it was
impossible for me to make such a determination because what I noticed was that
both bundles of the receipts submitted totalled more than the amounts claimed.
Without documents showing what had
been claimed, I fail to see how I could make a finding one way or another
regarding expenses, because even if an expense in both bundles was personal, I
have no way of knowing whether it is part of the expenses claimed. Therefore, I
do not believe that for these two reasons, the Court can really review the
expenses in this case.
I have another observation to make
regarding expenses. The appellant brought to my attention
Justice Hershfield's decision in Spearing v. The Queen, [2001]
T.C.J. No. 32 (QL), particularly paragraph 29. I read this
paragraph carefully and I can understand the difficult situation that Justice
Hershfield faced in Spearing, but in that decision I fail to see any
rule of law that has any impact on the case before me. He expresses no rule of
law that states that the Minister must verify the expenses before wondering
about the existence of a source of income. He expresses the difficulties that
this caused in the case before him and that it could cause in other cases.
I would also note that the
Minister of National Revenue, though he has a lot of employees in relation to
his responsibilities as Minister, in the end his available resources are modest.
The Income Tax Act does not require him to verify everything. It is
entirely normal, given the modest resources in relation to his duties, for him
to selectively choose to verify some things. Moreover, I think this is a given
with what is basically a self-assessment system. I will also add that nothing
prevents taxpayers from, if necessary, letting the Minister know in their
return about a correction to their income. In any case, I just wanted to make
these comments regarding expenses.
However, to get back to the basic
issue, for the reasons that I stated a few moments ago, I find that there is no
source of income and, therefore, the appeal must be dismissed.
Thank you.
MR. MUNRO: All rise.
MS. RENAUD: May I just ask
one question? Are there any costs? Do I have to...
JUSTICE JORRÉ: There are no costs.
MS. RENAUD: Okay.
JUSTICE JORRÉ: This is an informal
proceeding and there are normally no costs. There are exceptions, but no, in
this case there are no costs.
MS. RENAUD: Perfect. Thank
you.
MR. MUNRO: This sitting of
the Tax Court of Canada in Ottawa is now concluded.
--- The hearing was adjourned at
9:41 a.m.
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