Henry G. Pelletier v. Minister of National Revenue, [1987] 1 CTC 2123

Brulé, T.C.J.:—These are appeals involving the taxpayer’s 1980, 1981 and 1982 taxation years in which the Minister disallowed as deductions from income certain amounts, indicating that they were not losses from a business within the meaning of subsection 9(2) of the Income Tax Act since the appellant had no reasonable expectation of profit from his operations.

Facts

The appellant, who was a full-time employee of the New Brunswick Hydro Electric Power Commission, carried on a sideline business since 1974, primarily in a radio and television repair business. In certain years he showed profits, but by 1979 there was a decline to the point where the Minister disallowed his losses, but later consented. For the years 1980 to 1982 no deductions were permitted, hence these appeals.

Appellant's Position

It was maintained that at all times since 1974 the appellant was in business to repair radios and television sets. For a time he also conducted a pet shop business, but this was phased out. To show he was in business the appellant indicated that he had a separate building on his property (a converted garage) from which to operate. He maintained books and records, acquired somewhat sophisticated equipment, purchased current repair manuals, had a New Brunswick sales tax number and kept an inventory of parts. It was this inventory which contributed to some of his losses in the period in- volved. In order to provide service an inventory was required. The result of technological changes in the industry was that television was changing from black and white to coloured sets, from tubes to transistors and then to solid state circuitry.

In addition then to having excess inventory of many obsolete items it became difficult to obtain repair parts as manufacturers were setting up local dealers and, while the appellant was approached as a potential dealer, the cost of acquisition entailed a $40,000 dealership fee plus a requirement to purchase $100,000 of inventory. This he could not afford.

In spite of these problems the appellant continued as best he could to service the area and gradually changed his servicing to include repairs of modules. By 1985 he again showed a profit. He worked anywhere from two to six hours during the week and up to ten to twelve hours on Saturdays and Sundays. At no time was this a hobby.

Referring to the criteria set out in the case of William Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213, counsel pointed out that the appellant met the tests suggested in that:

(a) he had profits in previous years;

(b) he had the training and qualifications for the undertaking;

(c) he persisted in a course of action to make a profit by adapting to changes in technology — it is not possible to make a forecast in a service business;

(d) he had been capable of showing a profit in the venture as capitalized and had charged capital cost allowance.

While the venture suffered because of changes, the appellant adapted. He had always been in business. The losses stemmed largely from obsolete inventory due to industry changes which had to be liquidated and over which he had no control.

Counsel for the appellant referred to all the assumptions made by the Minister in the reply to the notice of appeal, indicating how the appellant in his evidence had properly met these and they were not successfully challenged on cross-examination.

Minister's Position

It was indicated that expenses kept on incurring while income was diminishing during the years in question and as a result there was no reasonable expectation of profit. The equipment purchased for radio and television servicing was not needed for module servicing. It was pointed out that the activities of the appellant must be organized to result in a profit. This must include a plan and none was set out.

The Court was referred to several farm loss cases dealing with reasonable expectations of profit in support of the argument that here, at least in the area the appellant was pursuing in the years under appeal, there was no reasonable expectation of profit and therefore the appeals should fail.

Analysis

In his reply to notice of appeal, the Minister relied principally upon subsection 9(2) and paragraphs 18(1)(a) and 18(1)(h) of the Income Tax Act.

Subsection 9(2) defines a taxpayer's loss which may be considered provided the loss is properly computed.

Section 18 becomes important and reads:

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;

(h) personal or living expenses of the taxpayer except travelling expenses (including the entire amount expended for meals and lodging) incurred by the taxpayer while away from home in the course of carrying on his business;

At the hearing there were no allegations that any of the expenses claimed would fall within paragraph 18(1)(h) and further the small challenges made by the Minister’s counsel as to the purposes or quantum of the expenses were easily answered and would not offend the provisions of paragraph 18(1)(a).

The appellant had been in business and was modestly successful. Adversity arrived largely because of industry changes and he sought to adapt to these and eventually did. To deny him his losses after taxing his profits and to tax him again as profits occurred would not be consistent. The Minister for years recognized the appellant was in business and to deny this in the middle of a change of operations is not proper.

I believe the appellant has been conducting a sideline business and is entitled to claim his losses in the years in question.

These appeals are allowed with costs and will be returned to the Minister for reconsideration and reassessment.

Appeals allowed.