Rodrigue Boulanger v. Minister of National Revenue, [1988] 2 CTC 2269, 88 DTC 1616

Tremblay, T.C.J. [Translation]:—This appeal was heard on December 18, 1986 at the City of Quebec, Quebec.

1. Issue

The issue is whether the appellant, a professor at the Séminaire St- François de Cap-Rouge, Quebec, was justified in claiming losses of $6,957 and $4,272, respectively, in the calculation of his income for the 1981 and 1982 taxation years.

These losses pertain to the production of an educational manual for the teaching of English. In substance, the expenses consist of some expenses for premises, study trips to the United States and the use of his automobile.

The respondent disallowed the losses on the grounds that this activity of producing a book does not constitute an undertaking with a reasonable expectation of profit. The losses, it argued, must therefore be considered as personal expenses and cannot be allowed as a deduction.

2. Burden of Proof

2.01 The appellant has the burden of demonstrating that the respondent's assessments are unfounded. This burden of proof is based on a number of judicial decisions, including the judgment of the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.

2.02 The Court ruled in that case that the presumed facts underlying assessments or reassessments by the respondent are presumed to be true until proof to the contrary. In this case, the facts presumed by the respondent are described in subparagraphs (a) to (e) of paragraph 6 of the respondent's reply to the notice of appeal. This paragraph reads as follows:

[Translation]

6. In assessing and upholding these assessments, the respondent, the Minister of National Revenue, relied inter alia on the following presumptions of fact:

(a) During the disputed taxation years, the appellant was employed as a professor for the Séminaire St-François;

(b) During the 1981 and 1982 taxation years, the supposed undertaking of the appellant did not generate any profit;

(c) The income and expenses reported by the appellant for the 1981 and 1982 taxation years are particularized as follows (See schedules A and B attached as an integral part to this reply to the notice of appeal);

(d) During the disputed taxation years, the appellant had no reasonable expectation of profits deriving from his undertaking;

(e) The expenses claimed by the appellant during the disputed taxation years are personal or living expenses within the meaning of paragraph 18(1)(h) and subsection 248(1) of the Income Tax Act;

Statements of Income and Expenses to December 31, 1981 for EDITIONS LASER ENR.

Sales revenues nil

EXPENSES

Rental of premises ($150./month) 1,800. Physical improvement (decoration, appointments) 800. Insurance (25% of total cost) 75. Heating [+ electricity] 300. Office furnishings (depreciated at 20%) 160. Video recorder (depreciated at 20%) 240. Cost of study trips to U.S.A. (see attached

receipts), to the University of Baton Rouge 2,400. Car used 20% for business

Statements of income and expenses to December 31, 1982 for EDITIONS LASER ENR.

Sales revenue 650.

EXPENSES

Rental of premises ($150./month) 1,800. Physical improvement (decoration, appointments) 197. Insurance (25% of total cost) 75. Heating [+ electricity] 320. Office furnishings (depreciated at 20%) 128.

800. — 160. deprec. 1981) = 640.00

Video recorder (depreciated at 20%) 192.

1200. — 240. = 960. x 20%

Cost of Boston trip (2 weeks' stay) 700. Video cassettes (10) 200. Video cassettes (10)

Car used 20% for business

3. Facts

3.01 The appellant was born in 1947. He speaks French, English and Spanish. The major steps in his formal education were the following:

Educational achievement

1974-76 — Diplôme en Science de l'information, Institut de Presse et

des Sciences de l'information, Paris, France. French Government scholarship.

3.02 His professional teaching experience has been developed in the following positions:

3.03 The appellant is a member of the following professional associations:

— Member of the Association des professeurs d'histoire du Québec.

— Member of the Société historique de Cap-Rouge.

— Member of the Association des professeurs d’anglais, langue seconde, du Québec.

— Member of the Association des professeurs de géographie du Québec.

— Member of Mensa-Canada.

3.04 In 1981 the appellant began to work systematically with a view to publication. He produced, as Exhibit A-1, a bundle of documents ranging from his curriculum vitae to letters of recommendation, diplomas received from universities, and other things.

On July 8, 1980, following a fire in his home and attendant financial problems, the appellant made an assignment of property to his creditors. He obtained his certificate of absolute discharge on February 24, 1983 (Exhibit A-1). This bankruptcy was the source of his decision to publish a volume in order to improve his financial situation.

3.05 In 1981, in order to minimize costs, the appellant decided to be his own publisher under the name Editions Laser Enr. The trade name declaration, dated December 15, 1981, was registered at the office of the prothonotary of the Superior Court of the District of Quebec. It is numbered 200-15-005988-815.

3.06 In the summer of 1981, from July 1 to August 4, he went to study English at the University of Baton Rouge, Louisiana. According to a letter dated August 4, 1981 issued by this university, this course cost U.S. $600. In addition to optional organized outings costing $700, the weekends cost approximately $200 (Exhibit A-1).

3.07 In the summer of 1982, the appellant spent two weeks in Boston to consult theses at a university library and meet some professors, all of this for the purpose of enriching his method of teaching English. This so-called research trip cost him $700. The appellant also received a scholarship from the Quebec government in the amount of $1,100 for these studies. He included this $1,100 in his income, while taking the applicable $500 deduction. The theses consultation was of no help to the appellant, according to his testimony.

3.08 As a result of this research and study, and his own experience in teaching English, the appellant published a volume entitled Let's Talk English (Exhibit A-2). It is composed of about 300 unnumbered sheets printed on one side only. It is comprised substantially of photocopies or typewritten documents extracted from 30 publications listed at the beginning of the volume under the title Bibliography. It is unclear from the evidence what percentage was composed by the appellant, but there are about 100 pages of songs, poems and crosswords that are not by him. There are also more than 125 pages of drawings or other things to be filled in, most of which are not by him. It is primarily a volume for teachers who may, however, use some pages to make photocopies for pupils. If the photocopies were done by a business specializing in this, the cost would be about $18 per volume. However, since the appellant used the photocopier of the educational institution, this cost was non-existent. In 1982, the sale price was $25 and in 1983, $39.95.

Although the professors have some discretion in choosing teaching materials at the seminary, the appellant did not use his volume with his pupils. However, he explains, [translation] "since he has his method in his head", a number of aspects are included in his courses.

3.09 The appellant also published another volume entitled La méthodologie de l'enseignement de l'anglais [Methodology of teaching English]. He did not produce any sample of this volume as an Exhibit. However, according to a letter written to the respondent in January 1985 (Exhibit A-1), he sent the respondent a copy. He says he sold 47 copies in 1984 at $39.95 each, for a total of $1,877.65. In his 1984 tax return, however, he reported a gross income of only $1,320.

3.10 In addition, in 1986, the appellant wanted to have his volume La méthodologie de l'enseignement de l'anglais published by an official publisher. According to letters received from the Presses de ('Université du Québec, the Presses de l’Université Laval, Editions de l'Ecole polytechnique, which is affiliated to the University of Montreal and Editions Anne Sigier (Exhibit A-1), it appears that the latter two declined to publish La méthodologie de l'enseignement de l'anglais, referring him to firms publishing in the educational field. The first two publishers asked for further information: a table of contents, a chapter of the manuscript, etc.

3.11 The appellant produced as Exhibit A-3 a copy of a volume entitled Take Two, published by Les Editions du renouveau pédagogique Inc. It seems that his "methodology" was intended to resemble this kind of publication.

3.12 In 1985, the appellant conducted a mail advertising campaign, applying to all the school boards in the public and private school systems. He did not sell any copies. Books are accepted for sale only through the school boards. The approval of the educational content depends on them, in effect. Since the appellant's clients were, in practice, teachers, he therefore had to go through the school boards in order to make sales.

3.13 The appellant explained that the advertising he did for his publications was done at conventions of the Association des professeurs d'anglais, langue seconde, du Québec (SPEAQ), and in 1985 and 1986, at annual professional development meetings of teachers of English as a second language, at the Séminaire de Québec and the Collège St-Charles Garnier. However, he did not sell any copies.

3.14 According to an undated lease covering the period from July 1, 1980 to June 30, 1981, the appellant rented a bungalow located at 1318, Place Blanchette, Cap-Rouge, for $3,000, or $250 per month (Exhibit A-1). He received a letter from the owner dated March 1, 1981, in which the latter announced that the rent would be increased to $325 per month ($3,900 per year) beginning July 1, 1981 (Exhibit A-1). In 1983, the appellant acquired the house.

3.15 The statements of profits and losses for the years 1981 to 1986 are particularized as follows:

Although the financial statement for 1986 was not produced, the appellant's oral evidence indicates that there were in practice no income or expenses in 1986.

4. Law Cases Analysis

4.01 Law

The main provisions of the Income Tax Act that are relevant to this appeal are sections 3 and 9, paragraphs 18(1)(a) and 18(1)(h) and the definition of "personal and living expenses" in subsection 248(1). These provisions will be quoted in the analysis where necessary.

4.02 Cases

Counsel for the respondent referred the Court to the following case law:

1. Moldowan v. The Queen, [1977] C.T.C. 310, 77 D.T.C. 5213, [1978] 1 S.C.R. 480;

2. Krause v. M.N.R., [1984] C.T.C. 2040; 84 D.T.C. 1031 (T.C.C.);

3. Schip v. M.N.R., [1983] C.T.C. 2221; 83 D.T.C. 190 (T.R.B.);

4. Leguillou v. M.N.R., [1984] C.T.C. 2397; 84 D.T.C. 1367 (T.C.C.);

5. Varma v. M.N.R., [1986] 1 C.T.C. 2478; 86 D.T.C. 1342 (T.C.C.);

6. Corrigan v. M.N.R., [1984] C.T.C. 2904; 84 D.T.C. 1764 (T.C.C.).

4.03 Analysis

4.03.1 In view of the evidence concerning the appellant's professional training (para. 3.01), he has the requisite basis that would allow him to attempt to become a writer.

However, in view of the evidence concerning the volume that was published, entitled Let's Talk English (Exhibit A-2), I am unable to conclude that this is the work of a writer. Indeed, a writer is a person [translation] "who composes books" (Le Petit Larousse Illustré) or [translation] "who composes literary works" (Le Petit Robert). Indeed, “composing”, in my opinion, involves a creation, something original coming from the author. According to Exhibit A-2, his share is minimal (para. 3.08). The truth is that in the entire volume I could not find five pages written by him. Thus the evidence has not demonstrated that the appellant fulfilled this fundamental condition. Instead, it indicates that the appellant has done the job of a researcher, compiling some useful documentation for an English teacher.

The volume Let's Talk English is in fact the only one that was actually the subject of evidence. The other volume, entitled La méthodologie de l'enseignement de l'anglais, which is mentioned in a letter in January 1985 (Exhibit A-1) (para. 3.09), is open to contradiction when it is said that 47 copies were sold at $39.95 each in 1984, while according to the appellant's oral testimony it was Let's Talk English that was sold in 1984. Moreover, in 1986 the appellant was seeking a publisher for La méthodologie de l'enseignement de l'anglais. So this volume had never been published previously and no copy had therefore been sold.

4.03.2 Given the conclusion I have reached, that the appellant was a researcher compiling useful documentation for an English teacher, and not a writer, I ought first to eliminate a number of expenses that would be irrelevant for a researcher who had published Let's Talk English, and only then ask myself whether there was a reasonable expectation of profit.

4.03.3 Given that Let's Talk English is to a large degree simply photocopies and retranscription (para. 3.08), I see no relevance in the following expenditures:

1. The expenditures for the English courses in Louisiana in 1981 and the research in Boston in 1982, which were of no use in any event, according to the appellant himself (paras. 3.06, 3.07);

2. The automobile expenses for the trips to Louisiana and Boston and for travelling to and from in the city, that is, the expenses for going to work, cannot be allowed. The only expenses left, then, would be those for going to a commercial establishment to make photocopies. But the appellant made the photocopies at the institution where he was teaching.

3. The expenses in relation to the video recorder. This machine was in effect used substantially for recording English-language television programs and rebroadcasting them to the appellant’s pupils.

4.03.4 I would accept that a certain percentage of the office space of the bungalow rented by the appellant can be used for his research. However, I must take into account the fact that this space and the furniture were also used for his personal use and the preparation of his own courses for teaching.

An office like that in a bungalow cannot constitute more than 20 per cent of the space. Since this space was used at least 60 per cent of the time for personal purposes, that therefore leaves 40 per cent of 20 per cent, or 8 per cent for his publication.

That is what seems to me to be realistic and consistent with the evidence in the circumstances.

4.03.5 It is now appropriate to ask the question: Was there a reasonable expectation of profit in 1981 and 1982?

In relation to 1982, I note that the appellant made an income of $650 (para. 3.15) and that thereby, with the expenditures of $387.60 (he did not have photocopy expenses), he made a profit. However, as the Court does not have jurisdiction to increase a taxpayer's taxes, I simply have to maintain the respondent's assessment and thereby dismiss the appeal for that year, 1982.

4.03.6 I do not think it is necessary to cite at greater length the case law to which I was referred in order to decide on the assessment for 1981.

Although the appellant had no income during that year, it has nevertheless been proved that he began to work on the preparation of his volume during that year. The expenses occasioned by the beginning of an activity, as was pointed out in Moldowan (para. 4.02(1)), may be allowed as a deduction if there was a reasonable expectation of profit.

Given that an activity such as this requires few expenditures, if one considers only those that are relevant, it is my opinion that in 1981 the appellant had a reasonable expectation of profit and that this activity already constituted a source of income.

I would therefore allow the appeal in part for 1981.

5. Conclusion

The appeal is allowed in part for 1981 and the matter is referred back to the respondent for reconsideration and reassessment in accordance with the aforementioned reasons. The appeal is dismissed for 1982.

Appeal allowed in part.