John Zwack and Kendra Zwack v. Her Majesty the Queen (Informal Procedure), [1993] 2 CTC 3159

Beaubier, T.C.C.J. (orally):—This matter was heard on June 28, 1993, in Saskatoon, Saskatchewan. John Zwack was the only witness. The appeals of John Zwack and Kendra Zwack were heard together on the consent of the parties, Mr. John Zwack being the agent of Kendra Zwack in respect to her appeal.

The basic case governing matters of this sort in respect to a business or, for that matter, a start-up business is Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213, a decision of Chief Justice Dickson of the Supreme Court of Canada in that case, and I refer particularly to pages 485-86 (S.C.R., C.T.C. 313-14, D.T.C. 5215, where he said that in his view, and I’m quoting,

. .. 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:

And using Chief Justice Dickson's headings, the first is the profit and loss experience in past years.

In this case the appellant had been an employee and remained an employee during the start-up of this business of a butchering operation in the Melfort area. He realized that that butchering operation wasn't going to last forever and he had to find a new source of employment. He had hunted for a number of years. It was a business he wanted to get into and he chose to do so. He had no profit and loss experience in previous years but the circumstances in a rural farming area of Canada these days and in the years in question make it understandable that he would go ahead on the basis that he did.

Secondly, the taxpayer's training. His training was basically that he had hunted since he was 14 or 15 years old and he had worked in a business. In the circumstances I am finding that that was enough training. He didn't go and work for another outfitter but he had his family and his home there and circumstances are what one accepts sometimes in life.

Three, the taxpayer's intended course of action. His intention is obviously, from his testimony and his experience, that he would work at his job as long as he could and work part time at this business in an effort to get it going, and he did so. He expected a profit within a year or two — that didn't happen. Quite frankly, as I will deal with later on, part of that may be due to the way the expenses were dealt with by he and his wife, who acted as what one might call an office accountant.

Fourth, the capability of the venture as capitalized to show a profit after charging capital cost allowance. Simply put, when he started out, his capital cost allowance in the first year in record before the Court, which apparently is the second year of the business, was $3,000 in not only round numbers but in round numbers as reported. There is evidence that perhaps this was overstated in the circumstances of the business, but it is possible that, given reasonable capital, and I will deal with that shortly, it was capable of showing a profit.

Going further in Chief Justice Dickson’s decision, he stated this on page 486 (C.T.C. 314, D.T.C. 5215):

One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.

I refer to that because this man was starting up and I accept the fact that in a Start-up, in the circumstances he was faced with, it was going to be tough sledding and, while he looked forward to a profit in the first year or two and I believe him in that respect, I reasonably do not look forward to a profit the first year or two. Therefore, I find that there was a reasonable expectation of profit, even though it was not in the first year or two, and I find that he had an allowable time in which to start up his business and suffer some losses. Personally I've always thought of that, depending on the business but in a business such as this, as ranging over a period of up to say five years and that's one that I can give and take on, in the circumstances, and I am not setting it out as a line in a business such as this or any other business.

So that I find the man had a reasonable expectation of profit and was in business and then I look at his expenses and, quite frankly, I find that the expenses that he claimed were not at all reasonable and I am going to go through the expenses and cut the claims of the appellant item by item according to the schedules attached to the reply in this matter and I am going to go by the headings on the left-hand column in Schedule A first.

One, truck expenses. In each of the years in question I am reducing the expenses claimed to one third of those claimed. The appellant had three trucks, which I think was over-claiming on trucks, and furthermore he admitted personal use. In these circumstances I feel one third of the claim is sufficient.

Secondly, maintenance, repairs. In cross-examination he stated that he didn't know what some of these represented. Once again I am reducing these to one third of the amounts claimed.

Thirdly, bait/tools, and I refer only to 1990, the claim of $1,840.70 which the appellant stated represented a “bike”. This is a capital item. There is no evidence before the court that this was for the business. That sum is struck out in its entirety.

Fourthly, the utilities claimed in 1989 and 1990, I am reducing those claims to one tenth of the amount claimed based upon the percentages ascribed or taken from paragraph 4(h) of the assumptions.

Fifthly, rifles. In 1988 the claim of $789.40. That is to be treated as a capital item and depreciated accordingly.

Sixthly, office expenses. I am dealing with those because they were cross- examined and while the appellant didn't know, I feel that the office expenses for other than 1989 are reasonable. In 1989 there was no explanation of the amount and I am simply cutting that in half for want of proof, so that $941.50 is reduced by one half.

(Seven, bad debts claimed in 1989 and 1990. The appellant didn't know. These bad debts amounted to in excess of five per cent of the gross revenue in each year. Quite frankly, I was in business myself for over 25 years. I can still remember bad debts and I can remember those people who owe me bad debts when I see them on the street and I cannot believe that this appellant did not know that!)

Eight, boat, camper, tools. In 1989 there was a claim for $2,280.95 which the appellant considers probably constituted a camper and a chain saw. That amount is disallowed in its entirety but it is allowed for capital cost purposes based upon the rate applicable to a camper and a chain saw applied to this business.

Nine, capital cost allowance. This would be, in the main, the trucks and, therefore, reduce the capital cost allowance claimed to one third of the amount claimed in each year.

Schedule B, again referring to the reply schedules. Number one, vehicle expenses, reduced to one third of the amount claimed. Number two, small boat and motor — the only claim is for $925.00 claimed in 1988. That is disallowed. It is to be treated as a capital item and depreciation will be dealt with accordingly by the Minister of National Revenue. Three, varmint rifle supplies, disallowed in respect to the claim in 1990 of $680.95 on the basis that that is a capital item.

The matter is referred back to the Minister of National Revenue for reconsideration and reassessment accordingly. To the extent that I have allowed the remaining expenses, the appeal is allowed.

Regarding Kendra Zwack, the matter is referred back to the Minister of National Revenue for reconsideration and reassessment accordingly.

Appeal allowed in part.