Michel Sirois v. Minister of National Revenue, [1988] 1 CTC 2147, 88 DTC 1114

Couture, C.J.T.C. [Translation]:—These appeals concern assessments by the respondent for the 1981 and 1982 taxation years. Under these assessments the respondent disallowed the losses claimed by the appellant on the presumption that the restaurant business he had been operating did not provide a reasonable expectation of profit.

During the years in question the appellant was an institutional supervisor employed by the Department of Justice and resided in Blainville.

In 1976 he began operating a restaurant under the name "Crêperie Bretonne Blainville”. He had no experience in operating a restaurant business but his wife had acquired some experience, having worked for her mother, who had run an identical business a few years earlier.

The income and expenses for 1976 to 1980 were not introduced but it is admitted that the operations showed a loss.

According to a document prepared by the appellant and filed as an exhibit, the operations for 1981 to 1984 showed the following amounts:

Until 1983 the restaurant was open from Thursday to Sunday, from 4:00 pm to 11:00 pm.

In 1982, in order to increase and improve results, the appellant expanded his establishment by adding about 20 places, thereby doubling his capacity by increasing the seating from 20 to 40.

In 1983 he decided to operate his restaurant six days rather than four days a week as previously, from noon until 11:00 pm. Experience showed that it was not profitable to serve lunch, and the opening time was therefore postponed to 4:00 in the afternoon, while the closing time remained 11:00 pm. In addition, in 1983 he substantially increased his advertising expenses, which were $76 in 1982, $801 in 1983 and $535 in 1984.

1982 was not a good year not only for the Crêperie Bretonne Blainville but also for several other establishments in the area, according to the appellant's evidence, but the subsequent years, namely 1983 and 1984, produced better results.

In 1983 the sales were $13,221, an increase of 60 per cent over those in 1982. In 1984 the sales increased to $15,637, an increase of 90 per cent over sales in 1982 and 18 per cent over those in 1983. Although the expenses also increased compared with 1982, the losses were in the order of $5,989 in 1983 but only $319 in 1984.

During his testimony the appellant openly protested against the cavalier manner in which the respondent's officers had handled his file as regards the assessment and the notice of objection. None of them had seen fit to visit the establishment or meet him to obtain information about his operations.

The person who conducted the investigation for purposes of issuing the assessments dated June 7, 1984 was called as a witness by counsel for the respondent and stated, among other things, that she had gone to Blainville to see the situation for herself. For reasons she did not explain, she did not go into the establishment, limiting her visit to an observation of the exterior of the building and the surrounding area. She noted that the parking lot used by the restaurant had space for only four cars. If this fact was important in arriving at her decision, by meeting the appellant she would have learned, as the evidence showed, that the adjacent lot belonged to him and that there was space there for at least an additional 15 cars. As well, there was parking on the street in front of the restaurant.

The person who was responsible for the appellant's case as regards the notice of objection also testified, at the request of counsel for the respondent, and he also said he had not felt it necessary to get in touch with the taxpayer or meet him to obtain additional information that would have assisted him in his assessment of the relevant facts.

In reply to a question from his counsel as to whether it was the Department's practice to conduct field audits in each case, he replied:

[TRANSLATION]

Not necessarily. There are auditing projects where at a certain point we take a typical precedent and if we see that the figures show continual losses, then we do not necessarily audit the business, but proceed on the basis of an expectation of profit.

This way of proceeding, as explained by the witness, is not consistent with the information concerning taxpayers who have filed a notice of objection against an assessment contained in Information Circular 80-7 issued by Revenue Canada on June 30, 1980.

In paragraph 12 of this circular we read the following:

12. On receipt of the notice of objection in Ottawa it is redirected to the local District Office. Shortly after its receipt in the District Office the taxpayer will be contacted by a District Office appeals officer. The apeals officer will carefully review the assessment in an impartial and objective manner. If necessary, the taxpayer will be invited to make representations either in writing or at a meeting. [Emphasis added.]

The leading case referred to by the witness is Roger Schip v M.N.R. [1983] C.T.C. 2221; 83 D.T.C. 190. This case dealt with the situation of a fine art photography teacher who was running a business on the side outside his working hours at the institute where he taught, a situation fairly different from that of a restaurant owner.

In addition, the conclusion suggested by the witness that there can be no reasonable expectation of profit where a commercial activity has had only operating losses since the beginning is fundamentally false in law. Such losses are only one of several factors that must be considered in arriving at a determination that a business activity did or did not offer a reasonable expectation of profit. It is only when all relevant facts are known that such a determination is legally possible.

The witness admitted that when he examined the file he had the appellant's figures for the 1983 taxation year and that they showed an increase in sales of 59.9 per cent over 1982. This factor alone was sufficient to alert an experienced investigator that this was an abnormal situation compared with previous years and should have aroused his curiosity and encouraged him to investigate further.

In view of the documentary evidence and the appellant's testimony, I find that for the 1981 taxation year, considering that the restaurant was operated with seating for only 20, four days a week, and that since 1976 the operations had shown a loss, there was no realistic reasonable expectation of profit in these circumstances.

For the 1982 taxation year, however, when the situation was entirely different, I am of the opinion that the respondent, who had no knowledge of these facts owing to professional lethargy on the part of his officers, was not justified in presuming that there was no reasonable expectation of profit in such circumstances. The respondent's decision was unfounded and premature. In a matter in which important facts had not been brought to his attention, counsel for the respondent was unable to convince the Court of the validity of the assessment for 1982.

For these reasons the appeal for 1981 is dismissed and the appeal for 1982 is allowed.

The appellant is entitled to party-and-party costs.

Appeals allowed in part.