Paul Zolis v. Minister of National Revenue, [1987] 1 CTC 2199, 87 DTC 183

Couture, C.J.T.C.:—This is an appeal against assessments issued by the respondent on the 6th of October 1983 for the taxation years 1980 and 1981.

At the hearing the appellant was represented by Mr. N. A. Khan, C.G.A. and the respondent by Mr. L. Teichman. The evidence revealed the following facts:

During the taxation years under appeal, the appellant was employed by the Scarborough Board of Education as a teacher of mathematics and computer science, to students from grade nine to thirteen.

In or about 1979, he decided to write a textbook on mathematics in collaboration with three other professional colleagues, directed at grade 12 students. They regarded the book in use at the time as not providing them with an adequate academic challenge because it was too facile. After consulting various individuals versed in the field of mathematics, they launched their project.

The book was published by two publishing firms: Copp Clark Publishing Co. Ltd. and Nelson Canada Ltd. in 1980 and 1981. The publishers managed the marketing and sales of the book and paid royalties to its authors in equal amounts.

In 1982 a second book was published directed at students in grades nine and ten, and in 1983 a third book directed at students in grade eleven was also published. There is no evidence indicating whether these books were written in collaboration with the same three colleagues or by the appellant himself. The evidence only established that the appellant was instrumental in the writing of these books and received royalties from their sales.

The appellant asserted that when this work was undertaken he intended to carry on writing on a professional basis and he had a definite expectation of eventually realizing a profit.

He said that he did his writing at home and needed some privacy to enable him to concentrate and work efficiently. In 1980 he built an office in the basement of his house which he furnished and equipped with the tools of his profession such as a desk, typewriter, chairs, lamps etc., at a cost of some $6,000.

The appellant filed copies of his income tax returns for the taxation years 1983 and 1984 together with financial statements, but nothing was filed with respect to the taxation year 1982. The returns for the taxation years under appeal were transmitted to the Court in accordance with the provisions of subsection 170(2) of the Income Tax Act (“the Act”).

Prior to preparing his income tax return for the taxation year 1980 he inquired of officials of Revenue Canada regarding the extent to which the expenses of maintaining his house could be deducted from his royalties in computing his income. He was informed that 25 per cent of these costs and an equivalent share of capital cost would be acceptable. He followed this advice in preparing his income tax return for 1980, 1981 and 1982.

After reviewing the notices of reassessment in October 1983 which are the subject of this appeal he consulted a tax expert who informed him that his claim for deductions against his royalties income might be high in the circumstances and therefore for the taxation years 1983 and 1984 he reduced it to 15 per cent deleting the claim for capital cost allowance. His income tax returns as filed reflect the following income and expenses related to his writings for:

Additional mortgage interest and an increase in the allowance for capital cost seem to account for the increase in expenses between 1980 and 1981, but no specific explanation was offered to the Court regarding the reasons for these increases.

In assessing the appellant for the taxation years 1980 and 1981 the respondent disallowed the losses claimed as a deduction in computing his income contending that his writings did not give rise to a reasonable expectation of profit and therefore these endeavours could not be construed as a business within the meaning assigned to this expression by the jurisprudence.

The outcome of this appeal rests entirely on whether, based on the evidence before the Court, the writing activities of the appellant, as they were carried on, considered objectively met the onus of rebutting the assumption invoked by the respondent that they were not carried on with a reasonable expectation of profit.

A number of decisions have been rendered by the Courts on the concept of business with respect to literary or artistic activities carried on by taxpayers, but they are based on specific facts and circumstances and are of limited general application. Each situation, as has been repeatedly said, must be assessed by the Court having regard essentially to its own particular facts and only after a full analysis of these facts is a determination of the issue possible.

Dickson, J. (as he then was) in Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213 said at 313 (D.T.C. 5215):

There is a vast case 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.

Joseph De Angelis v. M.N.R., (unreported) involved a university professor who was also a sculptor. Sarchuk, T.C.J. said that a taxpayer who claims to be carrying on a business must demonstrate that his activities were being pursued with a commercial purpose in mind and not being carried on merely as a hobby. 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 Court has to deal with concrete facts and from those facts alone assess the validity of the contention of the existence of a business for the purpose of the Act.

In the present case there is no doubt that the appellant devoted time, attention and labour to his undertaking and according to his own evidence his ultimate objective was the realization of a profit. The question that remains to be answered is whether on an objective consideration of his particular circumstances, as suggested by Dickson, J. (supra), he had reasonable expectation to attain this goal. In other words was it reasonable to assume that his writings could generate a profit?

In McDonald v. McDonald, [1970] 3 O.R. 297 Lacourcière, J. of the High Court of Justice in considering the meaning of the expression “reasonable expectation” said at page 303:

Reasonable expectation in my interpretation implies a confident belief, for good and sufficient reasons . . .

This is as concise an interpretation as could be hoped for, and I accept it.

With respect to this appeal what are the facts in evidence that would justify finding the existence of a "confident belief for good and sufficient reasons” in support of the contention of the existence of a business?

His academic background, Bachelor of Arts, Bachelor of Education, Master of Science together with his long experience as a teacher of mathematics (at the time of the hearing he was coordinator of mathematics with the Board) surely indicates that he was qualified to bring this project to commercial fruition. The confirmation, following consultations with individuals versed in the subject, that a need existed for the proposed textbook together with an accessible market for the book across Ontario account for some of the “good and sufficient reasons’" on which reliance could be placed with a “confident belief” that his writing endeavours were capable of yielding a profit.

In addition, he spent some $6,000 at the outset to equip an office for the purpose, as he explained, of carrying on his work sheltered from the normal disturbances present in a household with children is a fact of some importance pointing to the existence of a business and is consistent with the conduct of an individual who is seriously dedicated to pursuing a writing Career.

Also the fact that he was joined by three collègues would tend to give validity to the expectation of a market for the literature and supports his conviction that a profit could be realized from its publication. I have difficulty in accepting that four qualified individuals working in concert in the production of a textbook on a highly technical and specialized topic used in a field of endeavour ordinarily carried on by them would sacrifice their time, efforts and money for purely altruistic reasons.

In my opinion, they embarked on this undertaking with assurance, because of their experience as teachers, that their project was capable of being profitable. The fact that they were engaging in a field of activity in which they were particularly qualified together with the knowledge of a readily available market for their finished products are, for me, sufficient reasons to inject the “confident belief” referred to by Lacourcière, J. that a profit was objectively anticipated.

That the appellant persevered in his work over a number of years and the fact that two more books were completed confirms that his career as a writer was more than a casual passing experience. His revenues from that source increased year after year and during the fourth and fifth years were sufficient to yield the anticipated profits.

I am satisfied that the appellant’s expertise in the field in which he was involved as an author, the presence of a ready market for his work and the dedication which he exhibited in pursuing his writing career when considered together lead to the conclusion that he had a reasonable expectation of profit from the sale of his publications and therefore his work in this regard constituted a business for the purpose of the Act.

The next issue raised by the respondent is with respect to the expenses claimed by the appellant in computing his income.

Counsel for the respondent contended that these expenses were not related to his activities as an author and the gaining or producing of income therefrom. Alternatively, he submitted that if the appellant was carrying on business then they were unreasonable within the meaning of section 67 of the Act.

At the hearing the appellant’s agent conceded that the expenses allocated to his client’s writing activities and deducted in computing his income for the taxation years 1980 and 1981 required some downward adjustments and he submitted an amended schedule of itemized amounts which he said were reasonable. Unfortunately, counsel for the respondent had not had the chance to examine these figures prior to the hearing and could not therefore voice an opinion on whether he could agree with the appellant’s agent. However, I have considered this revised schedule and I am satified that the items shown thereon and their aggregate for each taxation year under appeal amounting to $1,957.60 in 1980 and $4,023.20 in 1981 are reasonable and deductible.

For the above reasons the appeal is allowed, the assessments referred back to the respondent for reassessment in accordance with my findings.

The appellant is entitled to his costs on a party-party basis.

Appeal allowed.