Bruce Colby v. Minister of National Revenue, [1991] 2 CTC 2511, 91 DTC 1237

Sobier, T.C.J.: —The appellant appeals the reassessment by the respondent of his income tax for the 1985 taxation year whereby the respondent:

(a) disallowed the deduction of $14,979.68 as “Travel, Promotion and miscellaneous expenses";

(b) disallowed capital cost allowance in $1,956 with respect to a delivery van, automobile and computer;

(c) included in his income for the year an amount of $6,081 as recapture of capital cost allowance; and

(d) allowed as an expense the amount of $35 with respect to the amount claimed as expenses under paragraph (a) above.

The reassessment arises from events flowing from the sale of certain of the appellant's assets used in connection with his office coffee supply business (the "coffee business"). These assets were sold pursuant to an agreement of purchase and sale (the "purchase agreement") dated August 27, 1985 between the appellant described as operating under the firm name and style of "Award Food and Vending Services" as vendor and Competition Automatic Services Ltd. as purchaser. The assets sold under the purchase agreement were described as "a going concern . . . all the undertaking, business, properties, rights, permits, licences and interests and all other assets of whatsoever kind or nature and wheresoever situated or located (except cash in bank or on hand, notes receivables and accounts receivables, stale or unusable inventory) in any way used or enjoyed in connection with the operation of the business presently carried on by you under the firm name and style of Award Food And Vending Services, as located at 94 Homestead Road, Scarborough, Ontario (hereinafter called the "Business")".

These assets were more particularly described in the purchase agreement by categories including goodwill, the right to carry on the Business in succession to the appellant and the right to use the name “Award Food and Vending Services".

Of the purchase price for the assets there was a $10,000 holdback to ensure that there were no claims for obligations or liabilities asserted against the purchaser. No liabilities were assumed by the purchaser; therefore, the appellant was responsible for satisfying all liabilities incurred in connection with the coffee business.

At closing, the appellant entered into a non-competition agreement with the purchaser whereby he agreed, for a period of five years, not to compete with the purchaser in the “office coffee business" in a described area.

According to the purchase agreement the sale was completed on September 20, 1985.

At or about the time of the sale, the appellant began to make plans to search out a product which he could market or distribute. He stated that he wanted to sell a product rather than a service. In his words, he was looking for a "golden ring" or a product which would lead to more than just a living for himself. Mr. Colby planned to travel to the Far East in search of this product or products.

Mr. Colby gave evidence that he was accompanied on the trip by his wife and by friends who had experience and contacts in the Far East. The trip began on or about October 4, 1985 and ended on or about November 15, 1985. The appellant set out in his evidence and through exhibits filed at the hearing, his itinerary and activities in Japan, Thailand, Singapore, Taiwan and Israel.

Prior to commencing the trip he wrote to several trade commissions seeking leads and introductions. At the time he departed, he did not have any idea what product he wanted to market. On his return from the Far East it appeared that, even with follow-up, he did not find the elusive product and nothing further was done.

Mr. Colby documented total travelling expenses of $23,447.32 of which he claimed the amount of $14,979.68 as a deduction in computing his income for 1985. He claims that these were properly deductible expenses.

If deductible, they must be so under 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") which reads as follows:

18.(1) 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 parties agreed that the issue is whether the expenses were incurred for the purpose of gaining or producing income from a business.

It was the appellant's position that he carried on a business even after the sale of assets under the sale agreement. Counsel argued that the appellant had no other source of income except what he earned from his businesses.

The evidence showed that the appellant commenced business in 1979 and, that from that date onward, he continued to carry on a business even if the nature of the product or service provided changed from time to time. Commencing in 1979, he sold stationery and model boxes to orthodontists. He was also engaged in a coin vending machine operation and the coffee business.

It was admitted that prior to the sale of the coffee business, he had ceased carrying on the stationery and model box businesses and the coin vending machine business. The question is: Did the appellant carry on a business after the closing of the sale of the coffee business?

From reading the agreement of purchase and sale and the non-competition agreement and from the evidence, Mr. Colby did not and could not carry on the coffee business after its sale. Therefore, it must be determined whether the activities of the appellant after the sale were tantamount to carrying on a business.

The appellant argues that even after the sale he never ceased doing business. He continued to pursue his business which was an on-going one with changes in directions or products or services. However, if he did carry on a business the expenditures made in the course of the trip had to be related to that business.

Counsel argued that the sale of the coffee business did not in itself mean that he ceased or discontinued carrying on business. In support of this proposition counsel referred to Canadian Dredge and Dock Company Limited v. M.N.R., [1981] C.T.C. 2212; 81 D.T.C. 154 (T.R.B.), a decision of Chairman Cardin. This was a loss carry forward case whereby to be successful, the appellant must establish that in the subsequent years in which the loss is sought to be written off the appellant carried on the same business in which the losses were incurred. Chairman Cardin found that the appellant carried on the same business albeit in a much reduced fashion. He said at page 2217 (D.T.C. 157-58):

The respondent contends that between the end of the loss period and the beginning of the loss application period, the appellant had ceased exercising its Maritime construction business in the Maritimes, or had so altered its operations that in effect it could no longer be said to be in the marine construction business in the Maritimes. The respondent also claims that the Company's Ontario operations were not the business carried on by the appellant in the loss years.

It is therefore the respondent's contention that having discontinued, essentially altered or completely changed the business it exercised in the loss years, the appellant company cannot claim losses from any of its subsequent operations in the loss application years, whether in the Maritimes or in Ontario, since those subsequent operations would no longer be “the business” the appellant carried on in the loss years as required by subsections 27(5) and 111(5) of the Act.

He goes on to say at pages 2217-18 (D.T.C. 158):

The respondent's basic submissions are that, in the loss application period the appellant's company's revenues were from rentals; it had no current marine contracts; its administrative office was reduced to a trailer; it had disposed of major fixed assets; it had substantially reduced the use of its warehouse due to leasing and its permanent personnel had been cut down to two employees.

In my opinion, whatever may have been the amount of the reduction of the assets allocated by the appellant to the appellants Maritime operations in the loss application years, one cannot reasonably conclude from that fact alone that the appellant was no longer in the marine construction business.

The documentary evidence produced by both the respondent and the appellant leads me only to the conclusion that the appellant's marine construction operations in the Maritimes were greatly diminished in the loss application years, but there is no hard evidence that the appellant had at any time actually ceased its marine construction operations or had converted it into a small leasing business as claimed by the respondent.

The distinction in the present case is that the appellant ceased carrying on the coffee business after closing. He was precluded from carrying on the coffee business by the non-competition agreement.

Further in support of her position, counsel for the appellant referred to Meredith v. The Queen, [1975] C.T.C. 570; 75 D.T.C. 5412 (F.C.T.D.) a decision of Mr. Justice Cattanach.

In certain years the Minister allowed the deduction because as the learned judge said at page 528 (D.T.C. 5418): “In the 1967 and 1968 taxation years there was a faint spark of life in the business of operating the fishing ponds". However, he went on to say: “In the 1969 taxation year that faint spark of life of that business was extinguished. Therefore the Minister disallowed the deductions claimed in the subsequent years".

The only "spark of life" left in the coffee business was collecting receivables and paying payables.

Reference was made to Carland (Niagara) Ltd. v. M.N.R., 34 Tax A.B.C. 386; 64 D.T.C. 139 (T.A.B.) for the proposition that so long as trade debts remained undischarged there is "a presumption that a company continues to carry on business as long as it is engaged in collecting debts periodically falling due to it in the course of its business. Business is not confined to being busy; in many businesses long intervals of inactivity occur" see: The Commissioner of Inland Revenue v. South Behar Railway Co. Ltd. (1925), 12 T.C. 657 at page 712.

However, in Carland, supra, the Tax Appeal Board found as a fact that there was continuity in the business and that while business activities might have been reduced during the time the company was changing hands, some measure of business never ceased to be conducted at any material time. Again, in the present appeal, although receivables were collected and payables paid, the appellant was not carrying on a business. He was tidying up his affairs after the sale.

If the coffee business ceased, what was the appellant's business?

In Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213 (S.C.C.) Mr. Justice Dickson, as he then was, said at page 314 (D.T.C. 5215), when he referred to Dorfman v. M.N.R [1972] C.T.C. 151; 72 D.T.C. 6131: "Source of income, thus, is an equivalent term to business".

After the sale and during the time that the travel expenses were incurred, the appellant had no source of income; therefore, no business. What the appellant was doing at the time was considering opening a new business and searching for a product to sell. See Bancroft v. M.N.R., [1989] 1 C.T.C. 2196; 89 D.T.C. 153 (T.C.C.) at page 2199 (D.T.C. 155) where Judge Lamarre Proulx of this Court stated:

The appellant was in the process of creating a business structure. He never finished creating it. He never commenced his proposed business of a year-round country retreat. I am of the view that the evidence disclosed that the appellant never carried on a business nor did he commence a business.

Having ceased carrying on the coffee business, the evidence disclosed that no new business was established and operating at the time the trip was taken. Accordingly, the expenditures incurred for travelling were not made for the purpose of gaining or producing income from a business. This portion of the appeal fails.

In addition, the appellant was unable to establish the actual amount of the expenditure. He was able to document that $20,447.22 was spent during the trip. But, when asked how the amount of $14,979.68, which was the amount claimed as a deduction, was arrived at he said he did not know. He stated that the amount was determined by his accountant and he did not know how his accountant arrivéd at that figure. For those reasons the appellant would also be unsuccessful since he did not discharge the onus of establishing that the assessment was incorrect since he could not demonstrate what in fact was expensed.

Having found that the appellant was not carrying on a business, it follows that the appellant is not entitled to any capital cost allowance for the period from the sale to December 31, 1985.

Dealing with the addition of $6,081 as income recapture of capital cost allowance, reference is made to paragraph 13(7)(a) of the Act which reads as follows:

13.(7) For the purposes of this section, section 20 and any regulations made under paragraph 20(1)(a), the following rules apply:

(a) where a taxpayer, having acquired property for the purpose of gaining or producing income therefrom or for the purpose of gaining or producing income from a business, has commenced at a later time to use it for some other purpose, he shall be deemed to have disposed of it at that later time at its fair market value at that time;

Having ceased to use the assets for business after the sale, any use was of a personal nature. Therefore, it was used for some other purpose and the provisions of paragraph 13(7)(a) of the Act are applicable.

Concerning the travel expenses, the appellant in his notice of appeal pleads in the alternative as follows:

In the alternative, should it be found that no business was carried on after the sale of the coffee services portion of the appellant's business, the amounts expended as set out in paragraph 5 were capital expenditures made in an attempt to acquire a benefit of an enduring nature toward the start-up of a new business entitling the appellant to capital loss treatment in connection with those amounts.

As stated above, since the appellant has failed to establish the actual amount of the expenditure on the trip, the Court is unable to refer the assessment back to the Minister on the basis that the amounts were capital expenditure since no amount has been identified as that capital expenditure.

For all of the above reasons, the appeal is dismissed.

Appeal dismissed.