James Stephen Bancroft v. Minister of National Revenue, [1989] 1 CTC 2196, 89 DTC 153

Lamarre Proulx, T.C.J.:—This is an appeal in respect of the appellant's 1982, 1983 and 1984 taxation years in which the Minister disallowed deductions in the amount of $43,390, $54,414 and $34,875 respectively, that the appellant had claimed as expenses for the purpose of gaining or producing income from a business.

The assumptions of the Minister are as follows:

(a) The appellant is a chartered accountant who, during the years 1980 to 1984, worked as a consultant and administrator.

(b) In early 1980, the appellant acquired 700 acres of land at North Onslow, Quebec (the "property"). The property borders on Gatineau Park, and is approximately 8 miles from Quyon and 35 miles from Ottawa.

(c) The property contained a farm house, stable and barn. A railway station building was purchased and moved to the property.

(d) The appellant commenced extensive repairs and renovations to these buildings, and the construction of a 3-storey concrete block building.

(e) In 1980, the appellant spent substantial sums of money (approximately $250,000) on the activities referred to in paragraph (d) and by the end of that year he had an outstanding debt of approximately $125,000.

(f) The appellant's intention was to open a year-round tourist resort in late 1980 or 1981. It was to be known as Les Sentiers Sauvages, and would offer accommodation, dining and a variety of outdoor sports activities.

(g) By the end of 1980, the appellant ran into financial difficulties, and was unable to obtain the additional financing which he required for Les Sentiers Sauvages.

(h) At no time was Les Sentiers Sauvages sufficiently capitalized to be a viable business.

(i) At no time did Les Sentiers Sauvages produce any revenue.

(j) From 1980 to 1984, Les Sentiers Sauvages incurred the following losses:

(k) At no time did the appellant formulate a business plan for Les Sentiers Sauvages, nor did he ever conduct any feasibility studies or market surveys.

(l) At no time did Les Sentiers Sauvages commence to be a business.

(m) If Les Sentiers Sauvages was initially a business, it had ceased to be a business by the end of 1981, and was not a business during the 1982 to 1984 taxation years.

(n) At no time did the appellant have any idea when Les Sentiers Sauvages would produce a profit.

(o) During the 1982 to 1984 taxation years, the appellant had no reasonable expectation of profit from Les Sentiers Sauvages.

(p) The amounts referred to in paragraph 2 [of the respondent's reply to notice of appeal] were personal or living expenses of the appellant.

(q) In 1982, the appellant contemplated selling the property, but he did not sell because he thought the real estate market was depressed.

(r) The appellant sold approximately 400 acres of the property in 1985.

(s) The appellant declared bankruptcy in February 1987.

The position of the appellant with respect to the Minister’s assumptions are as follows: he agreed with paragraphs (a), (b), (d), (e), (f) and (g). With respect to paragraph (c) he said that there was also a small building which would have served as a reception office. He did not agree with (h) but as discussed later the evidence showed the statement to be right. The appellant agreed with (i) and (j). He denied (k). The evidence showed that he had developed business plans but that no feasibility studies or market surveys had been conducted. The appellant also denied (I) but provided no evidence in support of his position.

The appellant is a professional man who spent most of his career as a consultant in matters relating to business and economics in developing countries and Canada. He has been a competitive skier and is an outdoor enthusiast.

In early 1980, the appellant had assembled land from five different owners for the purpose of establishing a year-round resort for sports and outdoor activities. The local and regional municipalities were interested in the project as well as the Société d'aménagement de l'Outaouais.

In 1980 the appellant approached two banks for loans in the amount of $120,000. Though financing was apparently promised, these loans never materialized and consequently the appellant was unable to put the buildings into a condition to receive paying guests.

The plan was to have started business in April 1981 but costs got out of hand. He had no choice but to leave the project unfinished and go to Columbia in November 1980 to the end of May 1981 to earn money. This was, however, far from enough and the project was never completed.

On the evidence that was before me, I can only conclude that the appellant's activities do not meet the threshold required for him to be considered as “carrying on a business”. Put differently the appellant never passed the stage of capital expenditure. The walls and foundations were there, but there was nothing which resembled a tourist resort. There was no kitchen, no washrooms. The inside was never finished. There had not been any training of personnel, needless to say no hiring, no promotion, no advertising. The appellant, during all the years under appeal, was quite far from the operational phase of his plan.

The major failure was that the bank financing never materialized and the appellant was unable to complete his construction program. The appellant continued to work on obtaining funds by trying to be the recipient of manufacturing incentives or some other government incentive programs. None materialized and the initial project and other projects were never close to being operational.

On the matter of distinction between expenditures on capital account and on revenue account I find useful to refer to Mr. Justice Jackett in Canada Starch Co. v. M.N.R., [1968] C.T.C. 466; 68 D.T.C. 5320, where he states at page 472 (D.T.C. 5323):

For the purpose of the particular problem raised by this appeal, I find it helpful to refer to the comment on the “distinction between expenditure and outgoings on revenue account and on capital account” made by Dixon, J. in Sun Newspapers Ltd. et al v. The Federal Commissioner of Taxation, (1938) 61 C.L.R. 337 at page 359, where he said:

"The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure, or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss.”

In other words, as I understand it, generally speaking,

(a) on the one hand, an expenditure for the acquisition or creation of a business entity, structure or organization, for the earning of profit, or for an addition to such an entity, structure or organization, is an expenditure on account of capital, and

(b) on the other hand, an expenditure in the process of operation of a profitmaking entity, structure or organization is an expenditure on revenue account.

Applying this test to the acquisition or creation of ordinary property constituting the business structure as originally created, or an addition thereto, there is no difficulty. Plant and machinery are capital assets and moneys paid for them are moneys paid on account of capital whether they are

(a) moneys paid in the course of putting together a new business structure,

(b) moneys paid for an addition to a business structure already in existence,

or

(c) moneys paid to acquire an existing business structure.

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.

Much was said at the hearing about whether the undertaking had a reasonable expectation of profit. I find that I do not have to decide on that in view of my finding that the business itself never commenced.

For the foregoing reasons, the appeal is dismissed

Appeal dismissed.