Marie A. Fleming and Robert Gellately v. Minister of National Revenue, [1987] 2 CTC 2113, 87 DTC 425

Brulé, T.C.J.:— The present appeals, heard on common evidence in London, Ontario, on June 12, 1987, are from notices of reassessment for the 1981 taxation year, by which the Minister of National Revenue disallowed the losses claimed by the appellants in relation to their writing activities.

Facts

The appellants are husband and wife. Both have Ph.D.'s and both are associate professors with tenure at the same college. Ms. Fleming teaches European political science and her writing has been in the field of political theory. Her husband teaches in modern European history and writes on modern German history, particularly its social history. The appellants have published many articles and each has published a book.

Since they have begun writing (1974 in Mr. Gellately's case) up to this time, both the appellants' writing undertakings have constantly shown losses. In his notice of appeal, Mr. Gellately indicated he expected the book he was working on during the year under appeal, would be published in 1984. He subsequently revised his plans and began working on two more books. He now expects to publish a book at the end of 1987. Ms. Fleming also indicated in her notice of appeal that she had expected to submit her work for publication in 1984. She also revised her previsions and now plans to publish her next book in 1989 or 1990 in order that a companion book she is now writing may be published at the same time.

The expenses claimed by Mr. Gellately for the year under consideration totaled $8,324.10. The most important amounts are $1,200 for use of his home as an office, $2,275.25 for travel and $3,840.95 for capital cost allowance. The undepreciated capital cost of the assets used in relation to Mr. Gellately's writing was $9,204.77. The main expenses claimed by Ms. Fleming in relation to her writing undertaking for the 1981 taxation year are $840 for use of her home as an office, $1,177.25 for travel and $1,597.81 as capital cost allowance. The undepreciated capital cost of the assets used in relation to Ms. Fleming’s writing for the year under appeal was $7,986.07. The Minister of National Revenue disallowed the deduction of losses resulting from the appellants’ writing activities from other sources of income on the grounds that the appellants were not carrying on a business with a reasonable expectation of profit.

Issue

At issue in the present appeals is whether the appellants operated a business with a reasonable expectation of profit for the 1981 taxation year.

Analysis

It is now well established that for losses to be deductible from other income, the taxpayer must have operated a business with a reasonable expectation of profit. In the case of William Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213, Dickson, J. stated at page 313 (D.T.C. 5215):

Although originally disputed, it is now accepted that in order to have a “source of income” the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business; Dorfman v. M.N.R., [1972] C.T.C. 151; 72 D.T.C. 6131. See also paragraph 139(1)(ae) of the Income Tax Act which includes as “personal and living expenses?' and therefore not deductible for tax purposes, the expenses of properties maintained by the taxpayer for his own use and benefit, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit.

Dickson, J. added at the same page this often cited passage:

There is a vast case of literature on what reasonable expectation of profit means and it is by no means entirely consistent in my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking.

It is also well established that the onus of proving that they were carrying on a business with a reasonable expectation of profit and not merely writing as a hobby or as part of their teaching duties rests solely with the appellants. In the case of Gaston C. Payette v. M.N.R., [1978] C.T.C. 2223; 78 D.T.C. 1181, Board member Tremblay, explained at page 2223 (D.T.C. 1181):

The burden is on the appellant to show that the respondent's assessments are incorrect. This burden of proof results not from any particular provision of the Income Tax Act, but from several court decisions, including the judgment rendered by the Supreme Court of Canada in Johnston v. Minister of National Revenue, [1948] C.T.C. 195; 3 D.T.C. 1182.

The appellants chose not to present any witnesses as to the marketability or expected sales of their projected books. Statements made by the appellants on this subject, none of whom possesses expert knowledge of the publishing industry were left uncorroborated. Such self-serving evidence was insufficient to establish a reasonable expectation of profit.

The primary intention underlying the taxpayer's activity must be considered in determining the existence of a reasonable expectation of profit. Board chairman Cardin, stated in Marcel de Montigny v. M.N.R., [1982] C.T.C. 2012 at 2014; 82 D.T.C. 1034 at 1036:

It is clear and well-settled law that no activity can be regarded as a business within the meaning of paragraph 18(1)(a) of the Act, if there is no reasonable expectation of realizing a profit from it. In my view, this principle necessarily assumes that the primary intention of the businessman is to realize a monetary return from carrying on his business.

The manner in which the appellants chose to carry on their undertaking does not satisfy the Court that their primary intention was that of turning their writing into a money-making operation. The appellants’ deferring for many years of the publication dates of their respective books in order that they might expand the scope of their undertaking seems more consistent with academic pursuits than profit making. Such a conclusion was reached by the Court in Devendra Varma v. M.N.R., [1986] 1 C.T.C. 2478; 86 D.T.C. 1342.

As college teachers, the appellants were expected to keep abreast of new developments in their fields, to carry on research and to publish their findings. In the case of J. De Angelis v. M.N.R. (84-961), unreported, Sar- chuk, J. described this as "the university’s basic requirements of publish or perish". It is clear that the research the appellants did, the books they purchased and the conferences they attended in relation to their writing activities were useful in the furthering of their careers as teachers and their reputations as experts in their field. The lack of urgency in the setting of publishing dates in the light of considerable amounts invested by the appellants over the years is a further indication that profits were not utmost considerations in the appellants' writing activities.

The manner in which the appellants chose to carry on their research leads to the conclusion that personal consideration may have been more important in the operation of their undertaking than the search for profits. As is evidenced from the travel expenses statement they submitted, the appellants, although they were writing in areas as varied as political theory and European history, chose on three out of four occasions to plan their activities in order that they may carry on research at the same place or attend conferences together. This method of operation does not seem motivated by the concern for efficiency necessary to produce profits.

The Court may examine subsequent events in order to determine whether the appellants’ primary intentions in pursuing their writing activities was that of realizing a monetary return. In the case of Ernest Koteles et al. v. M.N.R., [1986] 1 C.T.C. 2511; 86 D.T.C. 1378, Couture, C.J.T.C. stated at page 2513 (D.T.C. 1380):

The Court has to consider the facts as they were presented in evidence and, therefore, as they allegedly existed in 1981. Admittedly it is permissible to the Court to consider events which took place either prior or after the taxation year under appeal, as what happened in those years often provides informative data as to the true nature of an appellant's farming operations in a year under appeal.

The evidence adduced by the appellants indicated that they again travelled to conduct research for the writing of their respective books in 1982. Both appellants chose to pursue their research in Germany for the length of their sabbatical leave. The fact that the appellants conducted their writing activities in such an interrelated fashion might suggest that personal and not monetary consideration was the primary concern of the taxpayers.

In Paul Zolis v. M.N.R., [1987] 1 C.T.C. 2199; 87 D.T.C. 183, Couture, C.J.T.C. stated at page 2201 (D.T.C. 185):

The aspirations or ambitions that a taxpayer may have entertained in respect of an activity in which he was engaged are not alone sufficient to bring it within the strict meaning of business in the relevant legislation no matter how genuine they might have been. What must be examined apart from the structural features of the undertaking is the manner in which it is carried on or operated by the taxpayer and from the interplay of these elements a determination made whether it is capable of yielding a profit in due course.

The "manner in which the undertaking was carried on or operated by the taxpayers", the amounts invested in the undertaking, the record of losses and the lack of independent evidence as to the expected sale of books, lead the Court to conclude that the appellants were not in 1981 carrying on a business in a realistic manner with a reasonable expectation of profit.

I would cite the words of Bonner, T.C.J. in the case of Matthew Corrigan v. M.N.R., [1984] C.T.C. 2904 at 2905; 84 D.T.C. 1764 at 1765:

The problem in this case, as in many similar cases, arises because many activities which can be carried on as a business can also be carried on as a hobby. The distinction between the two classes of activity turns on the question whether the activity was carried on with a reasonable expectation of profit. It does not turn on the artistic quality of the end product of the activity, save to the extent that quality makes the product saleable at a price likely to generate a profit. It does not turn on the question whether the person who carried on the activity devoted a great deal of time and effort to it, save again to the extent that effort is likely to generate a profit.

The time and effort invested by the appellant and his educational background are all factors which tend to indicate some likelihood of producing a work of quality. However, the evidence left unanswered the question whether and to what extent such quality was likely to generate profits, that is to say, revenues in excess of costs. In an income tax appeal the onus is on the appellant to establish that the factual premise upon which the assessment rests is erroneous. The appellant has failed to discharge that onus.

For these reasons the appeals must fail. The appeals are dismissed.

Appeals dismissed.