R. John Harper, Executor Under the Last Will and Testament of the Late Lea Lechner v. Minister of National Revenue, [1992] 2 CTC 2615, 92 DTC 2285

Rip, T.C.C.J.:—A notice of appeal against taxes assessed Lea Lechner (” Lecnner") for 1980 to 1984 inclusive was filed on her behalf on the basis she “embarked on a new business venture" in 1983 and ought to be entitled to deduct the cost of goods purchased for the purported business as well as purported related expenses. The Minister of National Revenue ("Minister") disallowed Lechner's deduction of $129,062 in computing her income from a business in 1983 since he was not satisfied the outlays or expenses were made or incurred for the purpose of gaining or producing income from a business 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") since the venture had no reasonable expectation of profit. The Minister also denied the application of the noncapital loss claimed in 1983 in computing Lechner's taxable income for 1980, 1981, 1982 and 1984 in accordance with the provisions of paragraphs 111(1)(a) and 111(8)(b) of the Act.

Lechner died on April 26, 1991 at age 78. The parties consented to the amendment of the style of cause making R. John Harper, executor under the last will and testament of the late Lea Lechner, the appellant.

The appeals proceeded to trial by way of an agreed statement of facts and vive voce evidence. The agreed statement of facts states that:

1. The appellant, in her individual capacity or in partnership with others, engaged in the following business operations:

(a) Shoe cleaning operations;

(b) Flax Farm;

(c) Lechner's Delicatessen;

(d) Roseview Apartments.

2. In September, 1983 the appellant acquired various ivory figurines from Lugano Art Gallery, New York, New York, U.S.A, for $108,000 U.S. or the equivalent of $132,062 Canadian calculated at an exchange rate of 1.2228.

3. The appellant's purchases in September, 1983 were recorded in the following vouchers and statements attached:

(a) American Express receipts:

(i) September 12, 1983	$15,000
(ii) September 12, 1983	$ 3,000
(iii) September 19, 1983	$10,000
(iv) September 19, 1983	$10,000

(b) Canadian Imperial Bank of Commerce United States Dollar bank book withdrawal dated September 22, 1983 in the amount of $70,000, which was utilized to purchase a bank draft for $70,000 U.S.

4. In or about October, 1983 the appellant was informed by the R.C.M.P. or others that the ivory figurines acquired were estimated at a total fair market value of between $6,000 and $12,000. The appraisal obtained by the R.C.M.P. was provided by Mr. Thomas Quirk of Waddington's Auctioneers, 189 Queen Street East, Toronto, Ontario in October 1983.

5. In filing her return of income for the 1983 taxation year, the appellant claimed a business loss of $129,062 on the sale of the ivory figurines.

6. The appellant maintained possession of the ivory figurines until disposition by Freeman-Brooks Auctions, 93 Oakwood Avenue, Simcoe, Ontario on or about October 16, 1991.

7. Lea Lechner and Lea Spitzer are one and the same person.

The parties also admitted the authenticity and admissibility of several documents for trial, including a statutory declaration made by Lechner on January 30, 1989. This declaration reads as follows:

I, Lea Lechner of the City of Hamilton in the Regional Municipality of Hamilton- Wentworth DO SOLEMNLY DECLARE, that

1. That over many years I have developed business expertise in a variety of ventures;

2. Experiences early in my life required me to make life and death decisions. Based upon those early experiences I have come to rely upon my own instincts, usually to good effect;

3. Prior to entering into the transaction involving ivory, I had been searching for a business opportunity and had reviewed with my professional advisors a number of such possibilities, including a gift business, a restaurant and a hotel;

4. When I was presented unexpectedly with the opportunity to go into the ivory business, it was done in a setting where there was little opportunity to consult with my professional advisors;

5. While others might not have attempted this ivory business, as I have stated above, based upon my earlier life experiences I have come to trust my instincts and believed on the basis of my business experience that this would be a very rewarding business opportunity;

6. The business opportunity was speculative and required a large portion of my financial resources, which I placed into the business;

7. My expectation, which I felt at the time was entirely reasonable, was that the business would be an enormous success, to this end I did the following:

(a) made substantial payments;

(b) received delivery of the merchandise; and

(c) searched for an appropriate location to display the merchandise.

8. Within a very short period of time, Richard Sniderman, my accountant, raised issues about the business which I had not considered and on the basis of a police investigation, the business was abandoned;

9. I remain of the view that the business could have been a success, but, unfortunately it fell victim to the unethical practices of others.

AND I MAKE this solemn Declaration conscientiously believing it to be true, and knowing that it is of the same force and effect as if made under oath.

Mrs. Lechner's accountant, Richard Sniderman, C.A., had a general accounting practice and had been engaged by her and her previous husband, Mr. Lechner, since the late 1960s to look after “their business and personal affairs". He informed the court Lechner was a Holocaust survivor. Sniderman testified the Lechners owned some apartment buildings as well as a delicatessen in Hamilton. He described the delicatessen as "very small but [had a] tremendous volume” of approximately $250,000 in annual sales. He said Lechner worked nights cooking and never took a holiday. Mr. Lechner died in 1971 and the delicatessen was sold in 1973. He described Lechner as being "very depressed" after Mr. Lechner died.

The apartments referred to by Sniderman included a 50-unit residential building known as Riverview Apartments and a four-unit building on Stinson Street, Doth in Hamilton. The appellant resided in one of the units on the lower floor on Stinson Street, according to Sniderman. The Riverview apartments were in fact owned by a corporation, the shares of which were owned by Lechner.

Sniderman recalled Lechner met George Spitzer of New York City while holidaying in Florida. Spitzer was a retired banker and was "comfortable", Sniderman stated. They soon married.

When Spitzer died in 1981, Lechner suffered "severe depression", Sniderman said. Sniderman described the settling of Spitzer's estate in New York as difficult but Lechner "surprised me how shrewd and aware she was . . . (she) would feign stupidity but was very bright. . . she came out of Spitzer's estate very well. . .”. Lechner resided in Hamilton after Spitzer's death.

Nevertheless, Sniderman testified, she was ill and, in his view, the illness was due to depression. She was getting stronger, he said, and wanted to go back into business. He testified that her interest in going back to work Originated as early as the "late stages" of her marriage to Spitzer.

Sniderman stated he visited Lechner at home" regularly” and on a visit one evening in September, 1983 she said to him "Wait till you see what I have”. She showed him some ivory pieces she purchased in New York City and informed Sniderman, he said, that she was "going into the ivory business". The vendors of the ivory accompanied her to Hamilton and one of them was in Hamilton at the time of Sniderman's visit. She told Sniderman the person was in Hamilton to help her open a store.

Sniderman testified he was “in shock she would go into business without letting me know. The ivory pieces concerned me.” Apparently Sniderman's wife's family in Rhodesia, at the time, had sent the family many ivory pieces and it was Sniderman's view that ivory is usually worth less than what the owner thinks it is worth. There is a lot of confusion about ivory, he said. His instinct was that there was a problem and therefore"! was quite concerned”. He telephoned Lechner's lawyer, R. John Harper (“Harper”), later on that evening to express his concern. Sniderman said he did not talk to Lechner much after this occasion since her attitude was that her accountant and lawyer wanted to talk her out of going into business.

Sniderman also stated his daughter and wife would assist Lechner with her bookkeeping. Lechner had discussed with them and him, he said, business opportunities referred to in paragraph 3 of her statutory declaration.

Sniderman testified that Lechner “felt what she bought was valuable and people would pay to see” the ivory. He stated she wished to rent a small gallery and put the purchases on display and people would pay a fee to see the items. The fees, according to Sniderman, would “cover overhead". If someone wished to purchase an object, she would be willing to sell at a fair price. Sniderman reviewed Lechner's efforts since she arrived in Canada and in his view she was "bright" and “formidable”. He concluded that "her business acumen would not let her pay less than value . . . she was sure she got herself a proper business. .. .”

Sniderman acknowledged Lechner never opened a gallery for viewing or purchasing of the ivory but insisted business operations did commence and had ceased in 1983. Thus, in preparing Lechner's tax return for 1983 Sniderman reported that Lechner's ivory business had sales of $10,000 and deducted from the sales, the cost of sales, that is, the cost of the ivory, of $132,062. He added to the gross loss of $122,062 an amount of $7,000, representing accounting and legal expenses and travel costs to New York, and claimed a net loss of $129,062. The amount of sales, namely $10,000, was the value of the goods purchased. In fact, there were no sales.

Harper testified he had been Lechner's lawyer since 1976 when she was married to George Spitzer of New York City. During her marriage to Spitzer the couple spent six months in Hamilton and six months in New York. Lechner's assets included a number of mortgages which Spitzer administered.

Harper declared Lechner “could not stand being 'cooped up'" in her apartment and wanted “to do something”. On several occasions she brought business proposals for Harper to review on her behalf; Harper recommended against accepting the proposals.

Harper confirmed Lechner was upset at the reactions from her accountant and lawyer as a result of her purchase of the ivory. He, himself, he said, had no idea as to the value of the ivory she purchased and relied on Sniderman.

The day after Sniderman got in touch with him, Harper said, he verified the costs of the ivory to Lechner by reviewing her American Express receipts and speaking to American Express personnel. He also contacted City of Hamilton police to determine whether Lechner had been defrauded. He was referred to the Royal Canadian Mounted Police and informed the R.C.M.P. of the facts as he knew them.

Harper stated that Lechner had been visiting New York City in early September, 1983 when she and a travelling companion were befriended by two men who were associated with the Lugano Gallery in that city. They convinced her to purchase the ivory pieces. The younger of the two men was in Hamilton at the time of Sniderman's visit. Eventually this person was arrested but soon afterwards was released and he returned to the United States.

Harper repeated on several occasions Lechner was upset at him for interfering. When he informed her the R.C.M.P. had the pieces appraised at $10,000 and not the $132,062 she paid, she became, Harper said,“ very distraught and didn't want to talk about it”. In discussions with Harper, Lechner continued to believe the ivory was worth what she paid for it. She thought, he said, she purchased valuable items.

Harper also stated that once the R.C.M.P. advised him of the value of the ivory he considered suing the individuals and went so far as to retain counsel in New York. However, nothing was pursued since litigation would be expensive and there was no real chance of success”.

The proceeds from the sale of the ivory was less than $5,000, according to Harper.

Theodore Alec Bilger was the R.C.M.P. officer in charge of the investigation initiated by Harper. He is currently in charge of the Commercial Crime Section of the R.C.M.P. in Hamilton. In 1983 he was a corporal in that section.

The main thrust of Bilger's testimony contradicted one of the assumptions of fact relied on by the respondent in assessing Lechner, namely, that Lechner "purchased the ivory with the intention of setting up a business of importing, selling and leasing these works of ivory for show". He testified Lechner informed him that when she purchased the ivory she knew it was not worth what she paid for it but purchased the ivory for other than business reasons. [1] Bilger also described Lechner's behaviour, giving examples of "mood swings". Bilger's description of Lechner's state of mind after her lawyer contacted the R.C.M.P. is not inconsistent with the evidence of Harper and Sniderman. Harper described Lechner as distraught" and Sniderman remembered that she was upset with her advisors and ” . . . she would dwell at some length on what she would do with the objects”. In short, the evidence of all the witnesses indicates Lechner was highly upset once Harper got in touch with the R.C.M.P.

I am not prepared to accept Bilger’s evidence of statements Lechner made to him as to the value of the ivory or the reason for the purchase of the ivory. In my view her statements at the time they were made to him were not reliable. An elderly woman had lost a large portion of her savings under possibly fraudulent pretences. She was despondent and upset. It is not unreasonable to infer that the presence of an R.C.M.P. officer inquiring into her affairs at the time was frightening and intimidating to her, no matter now much concern and sympathy the officer may have displayed.

Revenue Canada disallowed the claim for non-capital loss and assessed on the basis Lechner's ivory venture had no reasonable expectation of profit; the expenses incurred by Lechner “ relating to her proposed ivory operation were personal or living expenses".

Paragraph 18(1)(a) states that:

In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) 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;

The term "personal or living expenses" is defined in subsection 248(1). This term 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,

It is quite clear that at no time in 1983 did Lechner have in existence a financially viable operation of selling or showing of ivory. The question before me is whether, when Lechner purchased the ivory, she had a reasonable expectation of profit. It is common ground between the parties that the merchandise purchased by Lechner had a value at time of purchase of approximately $10,000 as opposed to the purchase price of $132,062.

Lechner's evidence is set out in her statutory declaration of January 30, 1989. Many of her declarations are incomplete and beg for clarification. Paragraph 4 does not elaborate on the circumstances surrounding the purchase of the ivory and the reason why she was unable to consult with her professional advisors. I would have expected the declaration to explain, in light of the contents of paragraph 4, how she was presented with the "opportunity to go into the ivory business” and the reason the presentation of the opportunity was unexpected. There is no evidence Lechner was given any projections, bona fide or otherwise, or financial statements demonstrating any potential profitability of such a venture. Indeed, in paragraph 6 of the declaration, she acknowledges the speculative nature of the venture but does not attempt to explain the reason she viewed the“ opportunity” as viable.

The acquisition of ivory for show and sale was unlike any other venture Lechner had participated in earlier. Yet she took no precautions on what she knew was a risky venture.

Lechner had neither a formal or informal plan of action prior to embarking on the venture. Lechner acknowledged in her declaration the venture required the investment of a "large portion of my financial resources”. On embarking on the venture she did not make any inquiries that a reasonable person might be expected to make in similar circumstances to determine the value of the ivory or whether the pieces were authentic works of art. Lechner's course of action in this venture contrasts to her other efforts to go into business; in the latter cases she at all times consulted with her professional advisers.

On acquiring the ivory she did not make even the most basic enquiry as to their value or as to the reasonableness of expecting to earn a profit from them.

Counsel for the appellant submitted that Lechner had entered into an isolated transaction which was a venture in the nature of trade and therefore constituted a business: subsection 248(1). In his view the venture started at the time she paid for the ivory through American Express. Amongst the cases he relied on were Chutter v. M.N.R., [1955] C.T.C. 377, 55 D.T.C. 1239, M.N.R. v. Taylor, [1956] C.T.C. 189, 56 D.T.C. 1125, M.N.R. v. Freud, [1969] S.C.R. 75, [1968] C.T.C. 438, 68 D.T.C. 5279, Johnson v. M.N.R., [1978] C.T.C. 2122, 78 D.T.C. 1109 and Tamas v. The Queen, [1981] C.T.C. 220, 81 D.T.C. 5150. He also argued that Lechner was defrauded by her supplier of goods and referred to Cassidy's Ltd. v. M.N.R., [1990] 1 C.T.C. 2043, 89 D.T.C. 686.

Lechner never commenced any business undertaking, either as a continuing operation or as an isolated transaction, which had a reasonable expectation of profit. Ivory is not purchased and sold in the same or similar manner as the goods Messrs. Chutter and Taylor purchased. Lechner did not deal with the ivory in the same way a trader in ivory would do. In fact her dealing with the ivory was the opposite of how a trader would deal. None of the jurisprudence cited by the appellants counsel is of assistance.

The evidence of Harper and Sniderman do not assist the appellants case. Sniderman indicated Lechner was not a healthy woman and her claims in her 1983 tax return for medical expenses corroborates his evidence; in 1983 Lechner paid over $3,000 for the help of a nurse's aid. Both Harper and Sniderman testified she would request advice from either or both of them, as well as Sniderman's wife and daughter, whenever she had an interest in going into a business or investment. She was normally cautious, it would appear, but on the occasion in issue, she unexpectedly went against her normal practice and relied on her instinct. One does not know the reason for this change in practice. I am not satisfied that I can substitute her instinct for her previous practice and find she acquired the ivory with a reasonable expectation of making a profit therefrom. Her actions at time of acquisition were, to put it mildly, reckless.

Lechner incurred no non-capital loss in 1983; accordingly there are no noncapital losses in 1983 to apply to 1980, 1981, 1982 and 1984. The appeals are dismissed.

Appeals dismissed.