REASONS
FOR JUDGMENT
C. Miller J.
[1]
John Savage appeals the assessment by the
Minister of National Revenue (the “Minister”) of
his 2010, 2011 and 2012 taxation years and Carolyn Savage appeals the
Minister’s assessment of her 2010 and 2011 taxation years, in both cases
denying the Savages losses they claimed arose in the carrying on of a dog kennel
business. The Minister concluded they were not engaged in a business but that
the dog kennel operation was nothing more than a hobby. The Minister went on to
indicate that if I found there was a business then not all of the expenses
claimed were business expenses. The Savages were unprepared to address this
second issue, believing, incorrectly, that the only issue was whether or not
the losses were incurred in a business. It was agreed that I would hear their
testimony and arguments on this first issue, and if I found that the losses
were business losses, I would resume the trial to hear evidence and argument in
connection with the expenses explicitly. As I have determined the Savages were
not carrying on a business but only a hobby, this second stage of the trial is
unnecessary.
[2]
Both Mr. and Ms. Savage work full-time in areas
not connected to the dog kennel business, and they have been doing so for many
years. In 1999, they made a decision that it was necessary to plan to augment
their retirement income and they could do so through the operation of a dog
kennel, as they had cared for dogs for many years and clearly had a passion for
dogs. This was no more evident than when Mr. Savage emotionally tried to
describe the possible benefits of having a championship dog, which he felt they
had with their dog, Maverick, who unfortunately succumbed to illness.
[3]
The first eleven years (1999-2010) of the
Savages’ efforts to establish the dog kennel business took place in Pickering,
Ontario. They operated under the name Jenberly Kennels; they provided a copy of
a 2003 registration of Jenberly Kennels with the Canadian Kennel Club. Mr.
Savage acknowledged that he had no formal education with respect to dog
training, while Ms. Savage had taken several courses in that regard. Mr. Savage
had also taken a bookkeeping course.
[4]
Mr. Savage described their mission statement was
to build a successful kennel business to supplement their retirement income.
The business was to breed, train and board dogs as well as dog sit. The training
was handled by Ms. Savage. Mr. Savage acknowledged that Ms. Savage
trained dogs for him for hunting.
[5]
There were two time periods addressed by the
Savages in describing their operation. The period from 1999 to 2010, while
living in Pickering, and the period from 2010 on after they moved to
Huntsville, Ontario. Two things happened in 2010. First, for employment
reasons, the Savages moved from Pickering to Huntsville and second, they lost
Maverick. Mr. Savage described Maverick as the type of dog that, like a
championship thoroughbred horse, could make the owner considerable money. As he
put it, they needed to find another Maverick. They have been unable to do so.
[6]
Mr. Savage explained that they would travel to a
few shows a year, not always showing, but often to simply make contacts in the
field. This was not as necessary in Pickering, as they had developed some
regular customers and contacts. Mr. Savage did not produce any documents of
customer lists, suppliers etc. He also did not give details of the kennel
layout acknowledging simply that they owned two dogs.
[7]
Unfortunately, the two dogs that they had
acquired shortly after Maverick’s death were not registered: the dogs could not
be shown unless they were registered. They had no success in tracking down the
registration.
[8]
Mr. Savage acknowledged there was no formal
business plan as such, but they simply were good at dog breeding and
anticipated building up their business over 15 years to provide income in
retirement. He explained that initially that was to be around now, but with the
move to Huntsville, they have had to adjust that plan to age 75, another eight
years from now.
[9]
Revenues from their operation arose from
training, boarding and up to 2010, breeding. Ms. Savage explained some of the
charges: $140 for a five-week training course and $45 per day or $125 a week
for boarding, though with their own two dogs they only had capacity for two
more dogs. Since 2010, they have attempted to switch to a dog stud service. Mr.
Savage was somewhat vague in trying to allocate revenues amongst these
different areas. He produced no financial records illustrating from whence
revenues were derived, no financial statements, no ledgers, no customer lists
nor advertising materials. He testified that advertising was through the use of
business cards, contacts at dog shows and flyers, though he did not provide any
examples of the latter.
[10]
The following is a schedule of the losses over
the years:
|
|
Gross business income
|
Net business loss for the Savages
|
|
1999
|
$1200
|
$12460
|
|
2000
|
$1200
|
$12546
|
|
2001
|
$1200
|
$10604
|
|
2002
|
$3600
|
$17240
|
|
2003
|
$3600
|
$7656
|
|
2004
|
$3600
|
$6558
|
|
2005
|
$3600
|
$13442
|
|
2006
|
$4800
|
$8178
|
|
2007
|
$4800
|
$8032
|
|
2008
|
$1050
|
$29384
|
|
2009
|
$0
|
$28974
|
|
2010
|
$1750
|
$13394
|
|
2011
|
$2500
|
$21,438
|
|
2012
|
$1600
|
$15890
|
|
2013
|
|
$4000*
|
|
2014
|
|
$2500*
|
|
2015
|
|
$1900*
|
|
2016
|
|
$1600*
|
|
* Unclear whether this was for each of
Mr. & Ms. Savage or the total losses.
|
[11]
It was evident from Mr. Savage’s testimony he
considered the move in 2010 and the loss of Maverick created a virtual
recommencement of the operation, an operation which he maintained, like the
horse business, could take years to establish. This was made more difficult by
the different nature of clientele in the Muskoka region compared with
Pickering. In Huntsville, the Savages are required to travel more to
re-establish a new network. It was difficult given they both worked full-time
to network as fully as was necessary; that is, establishing relationships with
suppliers, vets and customers alike.
[12]
Was the Savages’ operation a business or a
hobby? The leading case in this type of appeal is the Supreme Court of Canada
decision in Stewart v Canada.
In that case, the Supreme Court of Canada tweaked the reasonable expectation of
profit test that had been relied on for many years in resolving the business
versus hobby issue, concluding the following:
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. …
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.
[13]
So, if I find there is a personal element then I
turn to the badges of trade or indicia of commerciality to determine if it was carried
on in a sufficiently commercial manner to constitute a business. It is at this
stage it remains open to consider the reasonable expectation of profit test as
one factor in such an evaluation. The court outlined the following factors indicating
this is not exhaustive:
1)
Profit and loss of past years;
2)
Training;
3)
Intended course of action;
4)
Capability to show a profit.
[14]
I would add to this a review of all the
trappings that tend to go hand-in-hand with a business venture, that is, the
commercial nature of the activity.
[15]
It is clear that there was a personal element to
the Savages’ endeavour. Their love of dogs lead them down this path. Their own
two dogs were trained by Ms. Savage to assist Mr. Savage when he went hunting.
Their emotional ties to their dogs was very evident throughout their testimony.
Given this personal element, it is necessary to examine the pursuit of profit
test to determine if the venture was undertaken in a sufficiently commercial
manner to be considered a source of income.
[16]
Before assessing their operation addressing the
previously mentioned factors, I will review a couple of cases that specifically
address similar operations. In Huber v Canada, the facts were strikingly
similar to the case before me, though in one year Mr. Huber actually made
a small profit. McArthur J. concluded:
13. In the present case the appellant's attempts to create a
profit in 1992 by drastically reducing expenses are suspect and further, he was
left in December 1993 with but one show dog after four or five years of
operation, having commenced in 1988 with what he believed were two dogs of
economic quality.
14. The volume of cases provided lead to the conclusion that
each case depends on its own factual circumstances. I find the appellant to
have a sincere affection for German Shepherds, but not an expert in the dog
breeding business. He had a desire to make money with his venture, but, in no
manner whatsoever, did he rely on it for his living needs. He was a full-time
employee of a potash mining company and he spent more of his off work hours on
his wood working business than on his dog breeding operation. His efforts and
course of action are not sufficient to take it beyond the scope of a hobby
interest. Given all of the evidence, the appellant failed to establish that he
had a reasonable expectation of profit for the years under review.
[17]
In the case of White v Canada, again the facts were similar
in that the appellant worked full-time elsewhere and had yet to produce a
profit. Teskey J. concluded:
19. The venture as structured in each of the years before me
could not have produced a profit. There simply were not enough female dogs
producing enough puppies to bring in enough income to make a profit. There does
not appear to be a valid reason why the appellants did not have sufficient
puppies at least in 1991 and 1992 if they had desired. Thus, I am drawn to the
conclusion at least up to the end of 1992, the dog venture was a hobby and as
structured in those years, could not have produced a profit.
[18]
While these cases were decided prior to the Stewart
decision, it is clear the expectation of profit is a significant consideration,
though now only one factor in determining commerciality.
[19]
With respect to the past profit and loss, it is
not a favourable picture for the Savages. They have yet to produce a profit
and, while Mr. Savage points out they are getting close to breakeven in the
last two or three years, he realistically views possible profit a few years down
the road yet, when retirement looms and more time can be devoted to the
kennels. This factor weighs heavily against an objective finding of
commerciality, even considering the impact of the move to Huntsville.
[20]
A factor in their favour is that Ms. Savage did
testify she had some training in dealing with dogs, though did not produce any
detail in that regard. The testimony was, however, that dog training did not
make up a significant part of the business. Although, it was never clear
exactly what the breakdown of revenue was among breeding, training, boarding
and dog sitting.
[21]
With respect to the intended course of action,
no real plan was provided, certainly no written business plan, though Mr.
Savage acknowledged several things they needed to do: create different
strategies for marketing, build on insurance regulations to protect ourselves
from liability “once we become full-time”, acquire
a bookkeeping system, create a customer agreement form and “once we retire, we would also be looking at fostering
animals, rescues and seniors to help build the success of the business”.
[22]
Mr. Savage concluded
that “due to our restructuring of the business since moving in 2010 and our
anticipation of at least semi-retirement within a few years, the time we can
dedicate to the kennel business should increase the profitability to a
successful level”.
[23]
While all these suggestions sound like appropriate
methods of moving forward, none of them appear to have been put in motion and
it is now many years past the years in issue. The overall sense I get from the
Savages is that this would all come to fruition when Mr. Savage retires in
another seven or eight years. So, while I accept there is some thought to the
future course of action, it does not appear to be based on making any profits for
some period to come. I do not find this factor supports the commerciality of
the venture in the years at issue.
[24]
Regarding the capability to make a profit, the
Savages produced no financial forecast setting out projections of revenue from
the different branches of the kennel operation. They gave no concrete plans on
how expenses might be trimmed or revenues increased. I was left with no
appreciation of how, in its current form, the operation could possibly make a
profit.
[25]
Yes, there were some badges of trade, a business
card for example, but I was provided with no copies of advertising
materials or their frequency of distribution, no financial records, no customer
lists, no list of shows attended and contacts made. I conclude the Savages have
every intention of pursuing this endeavour more fully down the road, but for
the years in question and up to the present, I could at best describe them as
dabbling, which certainly smacks more of a hobby than a business.
[26]
I conclude there was no business, and I therefore
dismiss their Appeals. There is no need to continue the trial to examine any of
the expenses in more detail.
Signed at Ottawa, Canada, this 7th day of December 2017.
“Campbell J. Miller”
Email this Content