Aloysuis Huber v. Her Majesty the Queen (Informal Procedure), [1994] 1 CTC 2127

McArthur, J.T.C.C.:—The appeals heard under the rules governing the informal procedure, are in respect to reassessments for taxation years 1989 and 1990. The appellant and the respondent were represented by competent counsel.

The respondent disallowed the appellant's claim for losses of $4,783 in 1989 and $3,433 in 1990 from the operation of a dog breeding business. The appellant claims that these losses are deductible as ordinary business expenses in computing his taxable income. He had revenues in those years from PSC Mines (Potash) where he worked 40 hours per week as a technician and had losses from his own woodworking operation where he worked up to 60 hours a week.

The respondent denies the deduction relying on the basis that:

1. the deductions claimed were not expended for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(1)(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

2. that they were personal or living expenses within the meaning of paragraph 18(1)(h) and subsection 248(1).

The only one to testify was the appellant. His evidence was that he had a long time love for and interest in dogs. In 1988, he commenced his dog breeding business under the kennel name"Allisahaven Kennels Reg". He built a substantial dog shelter facility and purchased two dogs, one of which, "Nobler's Ghost Story", a female, received some recognition as a show dog and was used for commercial breeding purposes. This animal was basically the only success in a series of disappointments. There was considerable evidence with respect to the difficulties experienced and the modest successes achieved in the appellant's efforts over a five year period to develop a profitable business. While the appellant did not have formal training in the dog breeding business, he learned from the "school of hard knocks" and relied on outside assistance. In his evidence, Mr. Huber explained the lead up costs and slow growth of the business reflected losses in 1988, 1989, 1990 and 1991 taxation years of $1,176, $4,783.79, $3,433.08 and $3,253.29 respectively, with a profit of $383.56 in 1992 and a modest profit anticipated for 1993. From the outset he anticipated losses in the start up years not expecting a profit for four or five years.

The losses in 1989 and 1990 were incurred by the following expenses:

Given the high standards required by the Canadian Kennel Club and the vulnerability of the dogs to birth defects, disease, accident, etc., it is obviously a very high risk business requiring a good deal of expertise and good fortune to arrive at any degree of profitability.

In cross-examination the respondent's counsel filed through the appellant, part copies of the appellant's tax returns, identifying earnings from PCS Mining and other income totalling approximately $39,000 and losses of $4,783.79 from the dog kennel business, ana of $387.22 from the woodworking operation in 1989 and approximately $40,000 in total earnings in 1990 with losses of $3,433.08 ana $4,850.04 from the dog kennel and woodworking enterprises, respectively. Counsel for the respondent tried to demonstrate the dramatic decline in expenses in 1992 (approximately one tenth of those incurred in previous years) to reflect a profit for that year from the kennel operation. The 1992 statement was prepared after the reassessment by the Minister of National Revenue for the years subject to this appeal. The appellant testified that "Nobler's Ghost Story" was with a handler, he only paid for food from time to time and he had no pups and he did not share the expenses for keeping and caring for a diseased dog that he took out of his business program. He further explained that there was no automobile or travel expense because interested parties travel to a champion and "Nobler's Ghost Story” had achieved that status.

Appellant's position

Included in his argument the appellant’s counsel presented, in part, that it is standard to allow five years for a new business to achieve profit. In the present instance a profit was achieved in 1992 and a profit was anticipated in 1993. He added that "Nobler's Ghost Story" resided with a handler in 1992, keeping the expenses low.

Respondent's position

The respondent submitted, inter alia, that the appellant manipulated his statement in 1992 to reflect a profit wherein expenses declined by approximately 90 per cent. He further noted that presently the appellant has but one show dog suitable for breeding which is more indicative of a hobby than the building of a profitable business. The respondent relies on the following income tax provisions 18(1)(a), 18(1)(h) and 248(1):

18 (a) General limitation.—an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

(h) Personal and living expenses.—personal or living expenses of the taxpayer, other than travelling expenses incurred by the taxpayer while away from home in the course of carrying on his business;

248 (1) "Personal or living expenses"—"personal or living expenses” includes

(a) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit,

(b) the expenses, premiums or other costs of a policy of insurance, annuity contract or other like contract if the proceeds of the policy or contract are payable to or for the benefit of the taxpayer or a person connected with him by blood relationship, marriage or adoption, and

(c) expenses of properties maintained by an estate or trust for the benefit of the taxpayer as one of the beneficiaries;

Analysis

I have some empathy for Mr. Huber. He obviously has a love for dogs and expended money and effort towards breeding titled or certified German Shepherds. It is trite to state that to be considered a "business" the venture must be conducted for the purpose of making a profit or with the expectation of making a profit within a reasonable period of time. Where a taxpayer incurs expenses for the purpose of earning income from a business, he can deduct the amount notwithstanding that it may not have produced income. The taxpayer's primary purpose must be to produce income from the business in which he is engaged before it can be considered deductible. Moneys expended for personal or living expenses are, of course, not deductible under the Act. The test applied is subjective and the courts will often examine the nature of the expense to assess whether it is to be considered in pursuit of earning income from a business or only incidentals related to a business and more of a creative tax deduction. Case law further suggests that there must be a reasonable proximity of the expense incurred to the profit made by the taxpayer from the business. The burden of proof is upon the appellant to provide sufficient evidence to demonstrate he is operating a business. The appellant's reasonable expectation of profit must be determined on an objective basis, examining all the factors surrounding his kennel operation.

The respondent referred the Court to the leading case in this area Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213, wherein the Court stated at pages 485-86 (C.T.C. 313-14, D.T.C. 5215):

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking.

The criteria serve as a guideline. The importance of particular factors vary in each case.

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.

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.

Consequently, the losses incurred by the appellant during the taxation years in issue were personal or living expenses as defined by the Act and the appeals are dismissed.

Appeal dismissed.