Anthony F. Humphrey v. Her Majesty the Queen, [1995] 2 CTC 2602, 98 DTC 2070

Christie A.C.J.T.C.C.:-The years under appeal are 1986 and 1988. The essential background to these appeals are set out in paragraphs 1 to 6 of the notice of appeal and paragraphs 1 to 4 of the reply to the notice of appeal. They read:

Notice of appeal

1. The appellant is a businessman who resides at 12251-221 st Street, Maple Ridge, British Columbia, V2X 5T4 and is a Canadian resident for income tax purposes.

2. At all material times, the appellant was in the business of promoting and marketing various products (the "business").

3. In the course of carrying on the business the appellant necessarily incurred various expenses for the purpose of gaining or producing income from the business including:

(a) in 1986, management, administration and rental expenses in the aggregate of $84,000;

(b) in 1987, management, administration and rental expenses in the aggregate of $96,000; and

(c) in 1988, rental and secretarial expenses in the aggregate of $40,500 and printing and advertising expenses in the aggregate of $11,982.14.

4. The claim by the appellant of the aforesaid expenses referred to in paragraph 3(b) in respect of 1987 resulted in a non- capital loss.

5. In computing his taxable income in respect of the 1986 and 1988 taxation years the appellant sought to deduct the 1987 non-capital loss referred to in paragraph (4).

6. The respondent by notices of assessment dated April 23, 1991 and by notice of confirmation dated March 19, 1993 has:

(a) Disallowed the appellant’s claim to the various expenditures referred to in paragraphs 3(a) and 3(c) by finding that there was no business carried on by the appellant within the meaning of subsections 9(1) and 248(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act");

(b) In computing the appellant’s taxable income for the 1986 and 1988 taxation years, disallowed the portion of the appellant’s loss from 1987 that related to the expenditures referred to in paragraph 3(b) hereof;

(c) Assessed a late filing penalty pursuant to subsection 162(1) of the Act in respect of 1986.

Reply to notice of appeal

1. He admits the allegations of fact contained in paragraphs 1,5 and 6 of the notice of appeal.

2. He denies the allegations of fact contained in paragraphs 2, 3, 4, 7, 8 and 9 of the notice of appeal.

3. By notice of reassessment in respect of the appellant’s 1986 taxation year and notice of assessment in respect of the appellant’s 1988 taxation year, both dated April 23, 1991, the Minister of National Revenue (the "Minister") disallowed the appellant’s claim for various expenditures purportedly incurred with respect to a business, and also disallowed the appellant’s claim for non-capital losses to be applied to the appellant’s 1986 and 1988 taxation years, to the extent that the non-capital losses were a result of expenditures purportedly incurred with respect to a business in the appellant’s 1987 taxation year. With respect to the 1986 taxation year, the Minister assessed the appellant a late- filing penalty for failing to file his income tax return as and when required by the Income Tax Act.

4. In so assessing the appellant in respect of his 1986 and 1988 taxation years, the Minister relied on the following assumptions of fact:

(a) the appellant is a chartered accountant;

(b) during the 1986, 1987 and 1988 taxation years, the appellant was engaged in the activity of searching for products that he could market and distribute primarily in Europe (the "activity"), which activity was separate and distinct from any business that the appellant engaged in;

(c) the appellant claimed the following expenses in respect of the activity for the 1986, 1987 and 1988 taxation years (the "expenditures"):

1986
Management and Administration:	$72,000
Rent:	nm
	$84,000
1987

Rent oe $96,000

$96,000

1988
Rent:	$10,500
Secretarial Fees	&}QLQQQ
	$40,500

(d) for the 1986, 1987 and 1988 taxation years the appellant reported no revenue with respect to the activity;

(e) the appellant has failed to substantiate that the expenditures were actually paid;

(f) of the expenditures, certain amounts, as more particularly set out below, were purportedly paid to the appellant’s father who resided in Surrey, United Kingdom:

Parking	1986	1988
Accomodation/Office	$2,400	$2,400
Reception, Message and Mail	6,300	7,000
Storage	1,200	1,200
Mailings/Misc.	2,999	2,OOP
Totals:	$12,250	$12,950

(g) of the expenditures, $30,145 in 1988 was purportedly paid to Susan Millar of Monte Carlo, the appellant’s girlfriend, as more particularly set

out as follows:	Accomodation	$27, 370
	Typing/Telex/Fax	1,600
	Telephone	500
	Vehicle	675
	Total:	$30,145

(h) to the extent that the appellant incurred any of the expenditures, such expenditures were not incurred for the purpose of gaining or producing income from a business or property, but were the appellant’s personal or living expenses;

(i) the appellant had not commenced to carry on a business with respect to the activity at any time during the 1986, 1987 and 1988 taxation years;

(j) the appellant’s return of income for the 1986 taxation year (the "return") was required to be filed with the Minister on or before April 30, 1987, but was not so filed until November 4, 1988; and

(k) the amount of the appellant’s federal income tax payable for the 1986 taxation year that was unpaid when the return was required to be filed was $47,802.86.

The evidence on behalf of the appellant is essentially as follows. He was the only witness at trial. He is a member of the profession of chartered accountants in the United Kingdom and Wales. He came to Canada in 1973 and has participated in a variety of undertakings. Among those mentioned are products from herbs to motivational tapes. Since 1981 he has had a 40 per cent interest in a travel agency. In 1986 and 1988 he derived gross income of $181,812 and $93,000 respectively from that source. He became involved with Boost B.C. Sales Inc. This extract from Exhibit A-5 is sufficient to explain it:

The BOOST BC campaign is a vote of confidence in BC people and products. It was conceived and launched by people who believe in BC and its ability to get things done. In their view, a positive approach will bring positive results-and bring BC back from the economic doldrums.

The concept is simple. Encourage British Columbians and others to buy British Columbia products-and watch for a positive effect on profits. Business expansion will follow, with increased investment and more work for the people of the province.

But these things don’t just happen. As BC-Boosters we’ll identify every BC product with a BOOST BC decal and consumers will be encouraged through media advertising and publicity to choose BC first. As producers, we’ll ensure that every BC product proudly carries the logo.

BOOST BC Sales Inc. is privately funded. It neither seeks nor receives government aid or sponsorship. Recovery lies in the hands of the private sector. The BOOST BC campaign will help make it happen.

About 15 months later he and the other individual associated with him in the venture concluded that an adequate living was not available from Boost BC. The appellant then turned to the exploitation of three products "with superb potential" that he discovered in the course of working on Boost BC. The first was a one-cup coffee maker. He expected it would succeed in the U.K. market where the appellant says instant coffee is very popular. A sample coffee maker is in evidence. It is a simple plastic container about the size of a cup. There is a "filter basket" that is filled with coffee and placed in a receptacle at the bottom of the container. The coffee maker is then placed on a cup and hot water is poured into it. It passes through the filter and produces coffee. Along with the coffee maker three photographs of it were placed in evidence together with a container bearing the instructions in which the coffee makers were packaged. The coffee maker was not a commercial success. Indeed the only money received in respect of it that involved the appellant was $450 in 1990 on sales to a store in Langley, B.C. that was part of a supermarket chain.

The second selected product was made in Cloverdale, B.C. and pertained to the sport of golfing. It was called a "Green Saver". It was made of plastic and fits on the end of a putter. The appellant sent the product to Mr. Peter Ellis at St. Andrews, Scotland. Ellis was described as a senior official with the Professional Golfers Association. The Green Saver was found unacceptable. Apparently it was made of inferior plastic that broke when tested. The appellant said he lost credibility over this.

The third product chosen was KIKBAK. The appellant described it as a "soccer toy cum game improver". One is not in evidence, but it basically consists of a ball resembling a soccer ball with a spring device attached to it that enabled the kicker to control the ball after it was kicked. The appellant saw Sir Bobby Charlton, "the great English footballer" about this. Charlton rejected it. He then turned to the agent of Mr. Emlyn Hughes, a television and sports related personality in the United Kingdom. It is said that Hughes thought the device ideal for the United Kingdom market. He was to receive 10 pence per sale. There is in evidence a picture of Hughes with a KIKBAK that is in the nature of advertising. KIKBAK is said to have been invented by Mr. Ron Jones, an employee of B.C. Tel. It was manufactured in Taiwan. It was discovered that the paint on KIKBAK was "highly lead toxic" and not suitable for children. That terminated this venture.

The appellant then turned to promoting and marketing the Muller Generator. It was thought to be a perpetual motion machine. The appellant said it was "totally magnet related". Needless to say it failed because it was not what it was thought to be. The appellant appears to have some contempt for it himself. He described it as the "impossible machine" and the "Muller Generator thing". Expenses incurred by the appellant in this regard are said to have been $78,836 and in his return of income for 1987 an investment tax credit of $15,767 was claimed with respect thereto. It will be seen from what has been quoted from the pleadings that a reassessment in respect of that year is not under appeal.

While engaged on the Muller Generator project the appellant discovered these products in Europe that he thought could be marketed in Canada: silver bibles-bibles, the covers of which were made of silver, antique reproductions of silver picture frames and costume jewellery from Monte Carlo. These products were advertised in "Maturity" which describes itself as "The National Magazine About Midlife and Beyond". It is published six times a year by Maturity Magazine Publications Inc. of Surrey, B.C. The September- October 1988 issue is in evidence. This appears at the bottom of the front cover: "With the compliments of Bank of Montreal". The silver picture frames and costume jewellery are prominently advertised and these products are tied in with a "Maturity Selections Club". The November-December 1988 issue of Maturity is also in evidence and two pages are devoted to advertising the silver bibles. They were also advertised in a prominent advertisement on page A-12 of the November 9, 1988 edition of the Abbotsford, Sumas and Matsqui News of B.C. This page was also entered as an exhibit. The silver bibles were also advertised in the United States in publications said to have a readership of 700,000. This only produced 17 orders which was considered an inadequate response. Consequently the orders were not filled and the money was returned to the persons who placed them. An attempt was also made to market the picture frames, bibles and jewellery through television sales organizations who refused the products.

The plastic cup and container, plus the documents referred to consist of the total material placed in evidence as exhibits by the appellant at trial.

Like the marketing of the coffee maker, the Green Saver and KIKBAK, the marketing of the picture frames, bibles and costume jewellery was an abject financial failure. Finally before leaving the evidence I mention that the appellant made very terse reference to a toothbrush holder and a "myriad number of products" none of which were identified.

The onus is on the appellant to show that the reassessments are in error. This can be established on a balance of probability. Where the onus lies has been settled by numerous authorities binding on this Court. It is sufficient to refer to two judgments of the Supreme Court of Canada in this regard: Anderson Logging Co. v. The King, [1925] S.C.R. 45, [1917-27] C.T.C. 198, 210, 25 D.T.C. 1209, 1215, and Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182. This onus applies not only to the reassessment of the liability for tax, but also in respect of the penalty under subsection 162(1). In Beaudoin v. The Queen (reasons dated July 15, 1992, unreported) this is said:

Included in the basic rules regarding income or loss from a business or property is subsection 9(2) of the Act. It provides:

9(2) Subject to section 31, [1] a taxpayer’s loss for a taxation year from a business or property is the amount of his loss, if any, for the taxation year from that source computed by applying the provisions of this Act respecting computation of income from that source mutatis mutandis.

It will be seen from the foregoing that the concept of source of income is important and in order for there to be a loss from a business or property that has tax consequences under the Act it must flow from those sources of income.

Further, it is settled that essential to the existence of a source of income is profit or a reasonable expectation thereof. In Dorfman, O. v. M.N.R., [1972] C.T.C. 151, 72 D.T.C. 6131 (F.C.T.D.), Mr. Justice Collier said at page 154 (D.T.C. 6134):

In my view the words (source of income) are used in the sense of a business, employment or property from which a net profit might reasonably be expected to come.

In Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213, the issue was whether the appellant was entitled to deduct the entire amount of his losses from a farming business or only the limited amounts allowed under section 13 (now section 31) of the Act. Dickson J. (later Chief Justice) said at page C.T.C. 313, D.T.C. 5215:

Although originally disputed, 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, O. v. M.N.R., [1972] C.T.C. 151, 72 D.T.C. 6131.

He added on the same page that: "Whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts."

On the whole of the evidence and applying the required objective determination my conclusion is that the appellant has failed to establish on a balance of probability the existence of a reasonable expectation of profit during the years under review from the marketing activities described in these reasons. The existence of subjective hopes and aspirations in the mind of the appellant, no matter how genuine they may be, is not determinative of the existence of a reasonable expectation of profit: Kerr, W.M. et al. v. M.N.R., [1984] C.T.C. 2071, 84 D.T.C. 1094 (T.C.C.), at page 2072 (D.T.C. 1095).

With respect to the late filing penalty, no evidence was adduced at trial challenging the validity of the assessment.

Although the foregoing is sufficient to dispose of these appeals with costs in favour of the respondent, I add this observation: the assumption in paragraph 4(e) of the reply to the notice of appeal that the appellant has failed to substantiate that the expenditures claimed were actually paid was not adequately dealt with by him at trial.

The appeals are dismissed.

Appeals dismissed.