Charlemagne Landry v. Her Majesty the Queen (Informal Procedure), [1994] 1 CTC 2049

Garon, J.T.C.C.:— These are appeals governed by the informal procedure from income tax reassessments dated March 11, 1991 and made by the Minister of National Revenue for the 1987 and 1988 taxation years. By these assessments the Minister of National Revenue disallowed the deduction of losses amounting to $23,140 and $31,137 for 1987 and 1988 respectively.

The appellant became a member of the Quebec Bar in 1936. He practised his profession from 1936 to 1956 and worked primarily in the field of civil law, occasionally in that of criminal law.

He worked in a nominal partnership with several lawyers during this period. In 1956 he ceased practising law and worked as an impresario for various artists. In 1979 he resumed the practice of law when he was 71 years old. At that time his office was in his home. He used the services of an agency for secretarial work and also had a special telephone service at his disposal for his practice.

The appellant alleged that he was completely available and responsive as a general rule in his professional activities during the two years at issue. The vacation which the appellant took in particular during the period in question was of a normal length.

It was established that the appellant paid his dues to the Quebec Bar for the years in question. During the period at issue, the appellant enjoyed the protection of professional liability insurance. He passed on work to other lawyers if the professional work required by his clients involved a special field of law, such as tax law.

It should be noted that in paragraph 10(c) of the reply to the notice of appeal it is alleged that the appellant took no action on a letter of November 27, 1990 from the Department of National Revenue informing him that the deduction of losses of $23,140 and $31,137 for the 1987 and 1988 taxation years would be disallowed unless he supplied the necessary information to support those deductions. It was established that, contrary to this allegation, the appellant responded to the invitation by Revenue Canada to provide further information by meeting the appropriate employees of the Department of National Revenue together with his counsel.

It was further established in evidence that during the years at issue the appellant, as a lawyer, provided considerable professional services to one Pierre Boiselle who was having many problems with the City of Montréal. He also furnished professional services to one of his nephews and certain other persons.

The appellant insisted that for him the practice of law was neither a pastime nor a charitable activity. He did not account for his time on an hourly basis. In general his procedure for the administrative side of the practice of his profession remained the same as what he had adopted during the first years of his practice in the late 1930s.

For information only — the years in question being the 1987 and 1988 taxation years — an income and expenditure statement was filed for the fiscal year ending December 31, 1990. This statement is set out below:

This statement was accompanied by a footnote reading as follows:

I prepared this summary from information provided to me. I have made no audit or examination and taken no other steps to ensure the accuracy or completeness of this information. The reader should keep in mind that this summary may not suit his purposes.

[Translation.]

The accuracy of the allegation contained in paragraph 10(a)(iv) of the reply to the notice of appeal was not disputed. That paragraph reads as follows:

In making these reassessments the Minister assumed, in particular, the following facts :

(iv) from 1985 to 1989, the appellant reported very low gross income and, for those five years, claimed the deduction of losses totalling $102,505 established as follows:

Year	Gross income	Losses claimed
1985	$9,574	$2,055
1986	$2,975	$10,169
1987	$2,100	$21,008
1988	$2,000	$31,137
1989	$2,020	$38,136
		[Translation.]

The appellant further admitted that he had also suffered losses due to his professional activities in 1990,1991 and 1992.

Counsel for the appellant argued, relying on the definition of the word "business" in subsection 248(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), where it states that this word includes notably a profession, from which it follows according to his counsel that the appellant was carrying on a business during the years in question. Counsel for the appellant noted in particular the appellant's professional competence and availability. He also drew the Court's attention to certain provisions of the Lawyers’ Code of Ethics and in particular to clause 3.08.03, which provides as follows:

The advocate must avoid all methods and attitudes likely to give to his profession a profit-seeking or commercial character.

[Translation.]

After noting that the basis of the assessment in his opinion was ill-founded, counsel for the appellant went on to say — if I understood him correctly — that the Minister of National Revenue should perhaps have disallowed the deduction of certain expenses or reduced some of them rather than applying the concept of a reasonable expectation of profit to the appellant’s professional activities as a whole.

For her part, the respondent in the reply to the notice of appeal said in paragraph 14:

. . «that the expenses at issue were not incurred by the appellant for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(1)(a) of the Act, but were personal or living expenses of the appellant within the meaning of paragraph 18(1)(h) of the Act.

[Translation.]

An allegation essentially similar to paragraph 14 is made in paragraph 10(d) of the reply to the notice of appeal, containing various assumptions made by the Minister of National Revenue in arriving at the assessments on appeal.

In paragraph 15 of the said reply to the notice of appeal, the respondent added:

. . .that during the years at issue the appellant was not carrying on a business with the reasonable expectation of deriving a profit therefrom.

[Translation.]

It was established that in the eight years preceding the period at issue as well as the four years following it, the appellant sustained large losses in the pursuit of his professional activities as a lawyer.

From the evidence as a whole it seems clear that, on an objective view of the facts, the appellant did not have a reasonable expectation of profit in the two years in question in light of the principles stated by the Supreme Court of Canada in the notorious decision Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213. In any case, the appellant did not discharge the burden of proof that rested upon him, considering, in particular, the Minister of National Revenue's assumption in paragraph 10(d) of the reply to the notice of appeal.

I see no reason why the reasonable expectation of profit test should not apply to any profession, liberal or otherwise, any occupation or activity which purports to be in the course of carrying on a business. As I see it, the reasonable expectation of a profit is a general rule applicable to any activity which may give rise to business income. The courts have in fact used this test in various types of factual situations.

I conclude my examination of the facts of the instant case by saying that at least during the two years at issue the appellant was not practising his profession with the reasonable expectation of deriving income from doing so. I see no contradiction between this conclusion on the facts for the purposes of applying the Income Tax Act and the provision of the lawyers' Code of Ethics requiring a lawyer to avoid methods and attitudes likely to give his profession a profit-seeking or commercial character. This aforementioned provision of the Code of Ethics is concerned with the methods and actions of a lawyer that might suggest that he is primarily motivated in the practice of his profession by considerations of personal gain. There seems to be no question that the Code of Ethics certainly does not prohibit a lawyer from practising his profession with the view of obtaining a reasonable income, depending on the circumstances and especially his ability. In the instant case the appellant was unable to show realistically that he expected to derive income from his professional activities during the period at issue.

For these reasons the appeals from the assessments for the years 1987 and 1988 are dismissed.

Appeal dismissed.