Frederick T. Howland v. Minister of National Revenue, [1987] 1 CTC 2269, 87 DTC 186

Tremblay, T.C.J.:—This appeal was heard on July 14, 1986 at the City of Saint John, New Brunswick.* [1]

1. The Point at Issue

The point is whether the appellant, employed as a commission salesman by NCH Canada Inc. ((National Chem Search) NCH), is correct in the computation of his income for the 1980 taxation year, to claim a business loss of $14,459.23 from a construction operation. According to the appellant, he decided in the fall 1979 after careful consideration, to purchase for over $25,000 of small construction equipment, and to enter business construction.

According to the respondent, the appellant incurred business losses in 1980 and 1981 because he had no reasonable expectation of profit from his construction operation. Thence the expenses were not incurred for the purpose of producing income the said expenses must be considered personal or living expenses.

The appellant contends that in the said years, the economy came to a grinding halt: no road construction, very little housing and commercial construction — this explains the business losses. However the expenses were incurred for gaining or producing income, and therefore the losses must be allowed as business losses.

2. The Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent's reassessment is incorrect. This burden of proof results particularly from several judicial decisions, including the judgment by 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 In the same judgment, the Court decided that the assumed facts on which the respondent based his reassessment are also deemed to be correct. In the present case, the assumed facts are described in paragraphs 6(a) to (f) of the reply to notice of appeal.

6. In so reassessing the Appellant for his 1980 taxation year, the Minister of National Revenue made, inter alia, the following assumptions of facts:

a) at all material times, the Appellant was employed full time as a commission salesman by NCH Canada Inc.;

b) in 1980, the Appellant commenced a construction operation;

c) in 1980 and 1981, the Appellant declared business income and expenses from his construction operation as follows:

Year	Income	Expenses	(Loss)
1980	$1,598.00	$16,057.23	($14,459.23)
1981	$1,600.10	$13,803.09	($12,202.99)

d) the business expenses claimed by the Appellant were personal or living

expenses within the meaning of paragraph 18(1)(h) of the Income Tax Act;

e) the expenses were not made or incurred for the purpose of gaining or producing income from a business or property;

f) the Appellant had no reasonable expectation of earning a profit from his construction operation in 1980;

3. The Facts

3.01 The appellant who was 35 years old in 1979, was living in a small village, Lower Kars, Kings County, situated 35 miles from Sussex and 45 miles from Saint John. The next small village from Lower Kars is Hampton, about 15 miles.

3.02 Lower Kars is the largest village in the area. The centre of the village indeed is about ten miles from the appellant’s home. Concerning the population, the only evidence shows that the voting poll is around 220 voters.

3.03 The appellant was born and brought up on a farm. As educational background he has a grade 12. After his high school, he went to work for Ford Motor Company of Canada in the parts department. It was in 1963. He was then living in South Bay. In 1967, he started a business on his own because he did not want “to be cooped up inside a plant for the rest of my life” (Tr. p. 13). It was a small skidoo franchise paid with $3,000 borrowed from the Bank of Nova Scotia. He was then 23 years old. In the winter 1967-68, he sold from 25 to 40 machines.

3.04 He left Ford Company in 1969 (Tr. pp. 12, 13) and expanded his business in taking an extra line like boats, lawn mowers, snow blowers and motorcycles. He then devoted 16 hours a day. He then had three employees and had up to 15 employees in 1973. In the fall 1974, he closed the business. He had purchased a large building and expanded too quickly. When the energy crisis occurred everything “went completely flat”. At that time, a lot of people in the business closed their operation. The appellant settled his debts $0.50 on the dollar. He sold his house to pay the bank the amount of $22,000. He did not go to bankruptcy and the bank did not force him to sell his house. He willingly did that to alleviate his debt at the bank. With the rest of the money he built another home. It was in Ingleside, about eight miles from South Bay (Tr. pp. 14 to 21).

3.05 In spring 1975, with a couple of carpenters, he completed the house. The same year, he started to work for NCH Canada Inc. He was hired as salesman on commission only. It is like a business. He was selling “parts washers: it was a small sink affair with a pump and a sump with fluid that circulates for washing automotive parts or repart [sic] parts". The clients are garages owners, pulp mill owners, government and places that have a maintenance department.

3.06 In 1982, the appellant initiated a company called Easy-Kleen Systems Limited to modify a piece of equipment called “spraying" and sold to him by NCH Canada. It was modified to be more practical for the users and sold on the label of Easy-Kleen Systems Limited.

3.07 In 1983, he started manufacturing high pressure cleaning equipment. It is used for outdoors big bulldozers or trucks, engines, etc. In 1985, he started a franchise: Mr. Pressure. It is another invention. It is still under the label of Easy-Kleen Systems Limited.

3.08 The appellant is rather inventive. He finds it very challenging but it is to make money at the bottom of line.

Easy-Kleen Systems Limited took two years to become profitable.

3.09 In 1977, he sold his home in Ingleside and moved to a cottage on a farm located at Kars. He had bought it in 1971. In 1977, he then started to build a house on the farm land.

In 1977, he also purchased a bulldozer, “International". He used it to build a rock gabion wall around his place.

In 1978, he built a barn. He got into the hog business. He had 140 hogs. However he did not like the hog business because they stunk and the price was very bad. He sold them. It was in 1979.

3.10 In 1981, he bought purebred Holstein cattle. Sussex is supposed to be the cattle-town of the Maritimes. There are more dairy farms in Sussex than in the rest of New Brunswick. He bought 22 milk-cows.

In 1983, the market went flat. He sold his breeding stock.

In his farming operation, hogs business and milk-cows business, he made profits.

3.11 With his bulldozer the appellant, during evenings and weekends, made different small jobs around community like digging basements, etc.

In fall 1979, he bought a truck from one of his friends and started to sell gravel he had on his farm land. Concerning this gravel and construction operation, the respondent in a letter dated March 16, 1984, wrote to the appellant (Exhibit R-1). Paragraph (C) of this letter reads as follows:

(C) Concerning the Construction Operation, before expenses or losses can be claimed from an operation, it must be shown that the operation was undertaken with a reasonable expectation of profit and was maintained in a businesslike manner. Therefore, it will be necessary for you to show how a reasonable expectation existed in financial terms, that the operation was maintained in a businesslike manner, however, due to some unforeseen or unpredictable occurrence losses were unattainable.

Answering to that particular paragraph, the appellant said:

In 1979 I bought a gravel truck to haul some fill and gravel for a road I had to construct on my farm. After the road was completed I started hauling gravel for neighbours. Since the gravel pit was nearby it was convenient in the evenings and weekends and I figure it would pay for expenses on the truck. Work increased and requests came for more than I could handle. Larry Welton drove the truck for me when I couldn’t. We discussed at several points about starting a business and that he would work the equipment full time. I then purchased the backhoe from the Town of Sussex so we could load our own gravel and fill and put in septic systems, etc. Everything went well that fall of 1979. We started again in the spring of 1980 with promises from Clark-Kennedy Contractors in our area that they would give me all the work they could. Work became spotty and Larry Welton started his own mechanical business so I hired occasional help to operate when I couldn’t myself. We made it through the summer and fall with very little encouragement. When the spring of 1981 arrived the writing was on the wall, there wasn’t any building or construction work. Kennedy & Clark laid off there [sic] help and had to find jobs at the local repair terminal for the ferry boats. We did small jobs here and there. I had to work harder on the road selling to make my bank payments and interest payments to keep the equipment. I tried to sell the equipment and I couldn’t even do that as there was nobody buying. Everyone in the business was folding up so you could buy trucks and backhoes very cheap. I held on making my payments, etc. until finally I sold the truck and backhoe later on.

They say hindsight is 20-20. If I had to do over again and had known there was a depression coming, I wouldn’t have got into that business at all.

The appellant said in Court that this answer was an accurate statement of what his understanding was with respect to this matter (Tr. p. 166 (675)).

3.12 In substance, the appellant in Court testified in the same sense except that above he says, he bought the backhoe from the Town of Sussex. In his testimony (Tr. p. 42) he said “we [appellant and Mr. Welton] got a chance to buy a backhoe . . .”. He gave more information. The backhoe was paid $7,500. He had paid the bulldozer $5,000 and the gravel truck $3,000.

3.13 For buying the backhoe, he loaned $6,500 from the bank. In 1983, when he sold the backhoe, he reimbursed the debt.

He said that he never “thought there was a risk because I had value of the equipment that I could always fall back on” (Tr. p. 49 (231)). “I’d always done it in the past . . . I'd always sold out and recouped my investment . . .”

(Tr. p. 49 (232)).

In fall 1979, he said he earned gross income of $3,500 to $4,000 from his construction operation (Tr. p. 49 (233)).

3.14 Despite the promises made by Clark-Kennedy, they could not fulfill them because the housing market in 1980 “went to pot” (Tr. p. 51 (239)).

Pursuant to Statistics Canada, table Q3 for starts and completion of dwellings in New Brunswick shows as follows:

The appellant said that in a rural community, the situation was worse than in an urban area.

3.15 The statement of construction operation for the 1980 and 1981 taxation years were filed as Exhibits R-3 and R-4:

For the Year Ended December 31, 1980

Revenue:		$ 1,598.00
Expenses:
Gas, Oil & Grease	$ 136.62
Construction Materials	1,287.14
Interest & Bank Charges	1,588.65
Maintenance & Repairs	5,008.78
Capital Cost Allowance	. . . . 8,036.04	16,057.23
Net Loss for the Year		$(14,459.23)
Statement of Capital Cost
		Class 10
Additions		$ 26,788.04
Allowance		8,036.04
Dec. 31/80 U.C.C.		$ 18,752.00

For the Year Ended December 31, 1981

3.16 The appellant said that during those years he paid interest at the rate of 22 per cent or 23 per cent. Such a high interest stifled the construction business, said the appellant who, during those years, had to travel in six counties of New Brunswick — “there was no activity there for at least three years” he said (Tr. p. 56 (263)). “There was a lot of equipment for sale — there was a lot of auctions at that time” (Tr. p. 57 (270)). A Mr. Galbraithe who was in construction for some 20 years had a big auction and sold $1.5 million worth of equipment (Tr. pp. 57, 58). The appellant bought a secondhand tandem truck (ten wheels) for $3,000. At the time of the purchase, it was worth between $15,000 to $30,000. He sold it at an auction few years later for $3,000.

3.17 Since the episode with the construction operation, the appellant remained in the farming operation. He started in blueberry business, leasing blueberry land. He has to invest over $15,000 harvesting on blueberry. In 1986, he expected to harvest between 40,000 to 60,000 pounds of blueberries from the 40-acre piece of land.

3.18 Concerning the plans he had in terms of the growth of the construction business, the appellant said:

A. Mr. Welton who went to work for me driving the truck in ’79, we'd discussed building the business up to the point where we could move it to another area where we . . . there would be more volume of work like Quispamsis, Fair- dale, Hampton or Sussex, in that area, and expanding it, or even possibly buying out a smaller contractor in those areas, and I would work full-time at it.

Q. So you would then have gotten out of the commission salesman business?

A. Yes.

Q. And why would you do that?

A. I like the construction business and I’ve always favored equipment and I thought that there would be more money (Tr. pp. 69, 70).

3.19 In cross-examination, the appellant explained that the initial use of the bulldozer purchased in 1977 was to build a retaining wall around the front of his house (80 feet long, 10 feet high) (Tr. p. 76).

3.20 Concerning his day-to-day work with NCH Canada, the appellant says that he plans his day ahead. He has a list on a work plan of the customers in the triangle area: Fredericton, Nackawich and St. Stephen. Kars is in the middle of the triangle. Doing his work for NCH Canada, he tries to schedule his time so that it coincides with his other routine as well: something to buy for the farming operation, etc. He comes back home every night. He is working from 8:00 a.m. to 4:00 p.m. five days a week except during the summer. During that time indeed no business wants to see a salesman on Friday (Tr. pp. 83 to 89).

3.21 Concerning the purchase of the truck in 1979, he said that he did not purchase to build the road on his farm as he wrote it on Exhibit R-2 (para. 3.11). In fact he purchased the truck from the owner, Garnet Boyd, after the road was built. He bought the truck in the summer 1979, but he had used it for building the roads in the spring 1979 (Tr. pp. 90 to 108).

3.22 The appellant work early in the morning, in the evening and on Saturday on the farming operation and the construction operation.

3.23 The appellant drove the bulldozer and the backhoe. However, after he hired Mr. Welton, the latter drove the backhoe and the gravel truck. It was in fall 1979 when Mr. Welton quit his job at Fundy Honda to drive the truck (Tr. pp. 110 (449, 450)). He was paid $6 to $7 per hour. Mr. Welton, who was a licensed mechanic, also did the repairs of the equipment. Mr. Welton also started a little garage in February 1980 to do other mechanical jobs on the side.

3.24 Before purchasing the backhoe from the Town of Sussex, the appellant went and met Clark-Kennedy Contractors to inquire if they had any work he could do for them: “they said: ‘well we don't right now but when work comes up, we'll give you the work'". The appellant said he knew those contractors were aggressive and had good reputation. Therefore, “I went on that encouragement and bought the backhoe" (Tr. p. 115 (469)).

However, in 1980, “things started to really slow up". Larry Welton was working only part time for the appellant. Clark-Kennedy referred the appellant to customers of theirs — those customers directly paid the appellant.

With the backhoe, the appellant only made $1,600. In 1981, it was quite the same situation. The appellant attempted to sell the equipment.

The work they did was to install septic tank to clean land for summer cottages to put in sauna tubes for a deck, etc. They also worked with the government on the road, etc. For installing a septic tank, which takes 20 hours in the best circumstances, it was charged $22 per hour, including the labour and the use of the machinery.

3.25 In 1981, the appellant bought a three-quarter ton G.M.C. truck for $5,400.

3.26 Concerning the goal the appellant had in 1979, he said:

Q. So you weren't really operating your business on a . . . let’s say a job by job basis then?

A. Well we identified our market. We could see that there was a need in the area for such a small construction business, and we attempted to fulfil that need by the encouragement that we had in 1979 we went forward on that basis and what else can I say. How can you knock a fellow that tries to do something like that? (Tr. p. 146 (608))

3.27 Two exhibits were then filed, R-5 and R-6, the latter being a letter dated June 6, 1983, sent to the appellant by Ms. H. Allaby at the Department of National Revenue. Ms. Allaby, among others, asked few questions concerning construction operation. The answers to these questions were given by the appellant as mentioned on Exhibit R-5. Some of the questions and answers are as follows:

A. At the commencement of the operation, what were your long-term goals?

"We commenced the equipment operations with optimistic view of making additional income with the gravel pit nearby, and a contractor friend who had no equipment we started.”

B. From what location is this operation being carried out? Provide square footage of the area utilized in the operation.

“We operate from our farm.”

C. Provide a listing of the assets used including item, date acquired and cost.

“See list of.”

D. In what manner is income earned, i.e., retail or wholesale sales, type of goods sold, special contracts, services rendered, other (please provide details).

“Income is acquired from services rendered.”

E. If the operation has not progressed as planned, explain why.

“We had no projections or goals at the time of start up. We simply went from job to job, day to day.”

F. What is projected for the following four years in terms of growth, expansion and specifically the profit potential?

“We have no projections at this time, as in our area there is no growth.”

In Court, the appellant said that in writing “at this time”, he was referring to 1983, i.e. the time when he wrote the answer (Tr. p. 68 (685)).

G. How will these plans be financed?

“I and when there are further plans and financing is needed, we will most likely borrow from the bank.”

H. Considering the time devoted to earning your primary income from N.C.H. Canada Inc., please explain how you will provide for any additional time required to follow through with the plans as outlined above.

“If work picks up to the degree we can operate, I will operate either part time (evenings and weekends) or hire operators.”

I. Has there been any governmental assistance requested or offered, i.e. grants, subsidies, training loans? If not, explain why.

J. Provide details on advertising carried out.

“Advertising: word of mouth.”

3.28 From the statement of construction operation for the 1982 taxation year (Exhibit R-7), it appears that there is no revenue but there are expenses: interest and insurance to the amount of $1,488.72, this amount also being the net loss for the year.

The statement for 1988 [sic] (Exhibit R-8) shows no income and no expense, only disposal of machineries for $8,500. There were the truck and the backhoe according to the appellant.

3.29 In re-direct examination, the appellant said that he never knew that the answers he gave in 1983, in Exhibit R-5, could be used in Court. He never took a legal advice before answering the questions (Exhibit R-6) but an employee of the Department of National Revenue encouraged him to fight his case (Tr. p. 59).

3.30 Mr. Gordon Charles Kennedy, a building contractor for approximately 12 years, testified that:

(a) he is a partner in the Clark-Kennedy contracting firm in all types of carpentry, renovations, foundations under existing houses;

(b) it mainly works in southern New Brunswick;

(c) in the fall 1979, the appellant approached them and asked them “. . . if we bought equipment . . . if he could do work and we said yes”. “We were doing this type of work, using backhoes, front-end loaders and not all the time but once in a while when we had a job that he could do . .. in installing septic tanks”;

(d) they were hiring equipment as backhoe to do their work;

(e) if the construction business had continued “in fairly good shape”, they would have been able to give contract to the appellant for $3,000 to $4,000 a year;

(f) in 1980, the construction started on April 7 and went throughout the year; in 1981, they work ten months and in 1982, seven months; during those years, the two associates only had two men besides themselves; ordinarily, they have five men subcontracting;

(g) they do not make advertising but they are well known in the area and their business has been successful;

(h) they were prepared to give to the appellant all of the backhoe and the trucking work;

(i) if the construction was good, normally they would have put three septic tanks per year; when they do foundations under older homes, they use a crawler-loader as the appellant had;

(j) in fact, they refer the appellant to a customer who wanted him for a certain job: septic tanks, some digging or backhoe work;

(k) since the appellant has sold his equipment, they have bought their own equipment; they do not use it all the time but they rent it; however, for the profit point of view, it is better to hire it than to purchase it.

3.31 In cross-examination, Mr. Kennedy confirmed what he said in direct examination, adding that the cost of material for a septic tank was about $1,200 in 1980-1981.

3.32 In direct examination, Larry Welton testified that:

(a) he has been a licensed mechanic since 1971;

(b) in 1979, he had been working at Fundy Honda as service manager, earning $12,000 a year when he quite that steady job to work for the appellant;

(c) he then had a home at Hatfields Point with mortgage on it. He was married and had three boys;

(d) he had discussions with the appellant before he quit that job; then seeing a possibility of a partnership and "getting tired of travelling back and forth to St. John” to work for Fundy Honda, he decided to conclude the verbal agreement and in the meantime, to be paid $6 to $7 per hour; his main work was the repair and the maintenance of the equipment and the driving of the backhoe and the truck; he worked with the appellant in the fall 1979;

(e) in January 1980, seeing that the construction business was failing, he decided to start a garage, renting a small one from one of his acquaintance who used it to park his car in; this permitted him to work part- time in the construction operation and in the meantime to make some money repairing cars, etc.;

(f) he continued that kind of business until the fall of 1985 when he started to work on the mechanic maintenance for Potash Corporation of America in Sussex.

4. Law — Cases at Law — Analysis

4,01 Law

The main provisions of the Income Tax Act involved in this case are 9(1), 18(1)(a), 18(1)(h) and 248 (definition of "Personal or living expenses”). They shall be quoted in the analysis if necessary.

4.02 Cases at Law

Counsel for the parties referred the Court to the following cases at law:

(1) McNulty v. M.N.R., [1986] 1 C.T.C. 2137; 86 D.T.C. 1113 (T.C.C.);

(2) Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213 (S.C.C.);

(3) Warden v. M.N.R., [1981] C.T.C. 2379; 81 D.T.C. 322 (T.R.B.);

(4) The Queen v. Matthews, [1974] C.T.C. 230; 74 D.T.C. 6193 (F.C.T.D.);

(5) Mannella v. M.N.R., [1984] C.T.C. 3046; 85 D.T.C. 19 (T.C.C.);

(6) Dale v. M.N.R., [1981] C.T.C. 2320; 81 D.T.C. 278; (T.R.B.);

(7) Escudero v. M.N.R., [1981] C.T.C. 2340; 81 D.T.C. 301 (T.R.B.).

4.03 Analysis

4.03.1 One of the arguments of counsel for the appellant is that the expression "reasonable expectation of profit” in the definition of “personal or living expenses” does not apply in the instant case.

Referring to the said definition in section 248 indeed, one can read in paragraph (a):

“Personal or living expenses . — “personal or living expenses includes

(a) the expenses of properties maintained by any person for the use or benefit of the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit.

The counsel contends that pursuant to the evidence, the appellant did not maintain expenses of properties, mainly equipment for his use or benefit. It was for the purpose of earning income. The Court admits that the evidence is to this effect. However, the expression "reasonable expectation of profit” does not apply in the Act only by the way of this section but also as explained in the Moldowan case, to know whether an operation is a source of income.

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. [72 DTC 6131], [1972] C.T.C. 151. See also s. 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.

In my view, paragraph (a) of the definition of “Personal or living expenses" is only one application of the principle involved in the economical requirement of reasonable expectation of profit.

4.03.3 Concerning the reasonable expectation of profit, the Supreme Court said in the Moldowan case:

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 of 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.

With respect to the adduced evidence, it is appropriate to review the above different criteria.

4.03.3.1 The profit and loss experience in different years

Concerning the fall 1979, the appellant said his gross income from his construction operation was $3,500 to $4,000 (para. 3.13). However, those figures were not confirmed by anything else and we do not know the expenses incurred against that revenue.

Concerning the other years, the losses are of $14,459.23 in 1980, $12,202.99 in 1981 (para. 3.15) and $1,488.72 in 1982. There was no income and no expense in 1983 (para. 3.28). The total gross income of all those years is $3,198.10 ($1,598.00 in 1980 and $1,600.10 in 1981) (para. 3.15). The main deductions are capital cost allowance of $8,036 in 1980 and $7,242 in 1981 (para. 3.15). Interest and bank charges are also substantial due to the recession: $1,588.65 in 1980 and $2,205.46 in 1981 (para. 3.15).

The Court states that even if one does not take into account the capital cost allowance and interest and bank charges in the computation of the net income, the expenses are still higher than the revenue.

1980

Revenue		$1,598.00
Expenses
Gas, Oil & Grease	$ 136.62
Construction Materials	1,287.14
Maintenance & Repairs	5,008.78	$6,432.54
Loss		$4,834.54
1981
Revenue		$1,600.10
Expenses
Gas, Oil & Grease	$ 123.92
Maintenance	3,834.71
Insurance	397.00 $4,355.63
Loss		$2,755.53

It is obvious that the application of the above criterion does not favour the appellant’s thesis.

4.03.3.2 The appellant’s training

The appellant, undoubtedly, is an experienced businessman and a rather inventive person: in 1967, skidoo business (para. 3.03); in 1969, boats, lawn mowers, etc. (para. 3.04); in 1982, Easy Kleen Systems Limited (paras. 3.06, 3.07, 3.08); in 1978, farming in hog business (para. 3.09) and in 1981, in milkcows business (para. 3.10). Being a skilful person, he built a house and a barn (para. 3.09).

The Court concludes that the preponderance of evidence is to the effect that the application of the experience criterion is in favour of the appellant concerning the construction business, the main work being the use of heavy equipment for digging holes, etc.

The mental attitude of the appellant and his resourcefulness may be considered as a good asset.

4.03.3.3 The appellant's intended course of action

Many times after the Supreme Court, the courts have insisted on the existence of an organized plan of action to prove the objective seriousness of the activity, contended as being a business, a source of income by a taxpayer.

In 1983, the appellant made comments on a point raised by one of the respondent's employees (Exhibit A-5) (para. 3.27, alinea E):

We had no projection or goals at the time of start up. We simply went from job to job, day to day.

At first glance, the answer is clear. However, can the Court ignore that the appellant and Mr. Welton, after working few times together in the spring and in the summer, “discussed at several points about starting a business . . .”? (paras. 3.11 and 3.32(d))

We identified our market. We could see that there was a need in the area for such a small construction business (paras. 3.26, 3.18).

Equipment was required. The appellant already had a bulldozer and there was an opportunity to buy a backhoe from the Town of Sussex. However, before purchasing the said backhoe, the appellant went to see Mr. Gordon Charles Kennedy of Clark-Kennedy Contractors if they had any work he could do for them (para. 3.24). Without giving him a written engagement, they told him “. . . when work comes up, we'll give you the work".

Knowing those contractors were aggressive and had good reputation, “I went on that encouragement and bought the backhoe” (para. 3.24).

First, the Court states the prudence of the appellant to meet those contractors before purchasing the backhoe. The Court also states that, in fact, there was an opening for a small business construction completing the one of Clark-Kennedy firm. The latter, indeed, were hiring equipment rather than purchasing it (para. 3.30(d)). It is better for this firm to hire it than to purchase it (para. 3.30(k)).

In my opinion, because of the nature of the operation, from the moment there was a market, it was not very useful to plan for the next three or four years, provided that there was material assets and qualified labour to start the operation.

In the circumstances, I think that the application of this criterion is not against the appellant's thesis.

4.03.3.4 The capability of the venture as capitalized to show a profit

The appellant owned all the required equipment and assets to succeed the operation. The equipment he had in 1979 was composed of a bulldozer he paid $5,000, a backhoe $7,500 and a gravel truck $3,000. Later, he bought a secondhand tandem truck for $3,000. As assets, he also had a sand quarry in case sand be needed for construction (paras. 3.12, 3.16).

The appellant and Mr. Welton were both qualified to drive and repair the machinery. Mr. Welton was ready to work full-time and the appellant every evening and weekend. During the summer, i.e. the high time for construction, the appellant’s weekend started on Thursday at 4:00 p.m. (paras. 3.20, 3.32).

In my opinion, in the fall 1979 and in the year 1980, everything was available to succeed the business operation: material assets and labour.

4.03.4 However, is it sufficient to have available assets and labour to have intention to make profit, to arrive at the conclusion that there is a reasonable expectation of profit? (courts many times pointed out good intention was not sufficient).

The appellant said that in the fall 1979, there was a market for a small construction business and as it was mentioned above, the appellant’s operation completed the Clark-Kennedy enterprise that then did not own the heavy equipment that the appellant had.

In my opinion, because of the special circumstances of this economical recession, the crux of the matter is when the recession started to become really obvious for businessmen.

If it was in 1979, therefore, one cannot say objectively in 1980 that there was reasonable expectation of profit. The Court has a doubt that it was obvious in 1979, because it seems to me that Mr. Welton would have not, in the fall of the said year, left his work with Fundy Honda with intention to initiate a partnership with the appellant.

Was it in 1980? This becomes obvious during 1980 and 1981 — when big enterprises started to bankrupt and even at that time everyone was hoping that a change occur. The decision from the President of the United States to diminish the interest rates came later.

The Court concludes that in the course of 1980, during at least a part of 1980, for every businessman, there was then objectively a reasonable expec- tation that the world of businesses would succeed to continue at a normal level.

However, is it possible to say that the same principle applies in the instant case for the appellant? I think it is reasonable to apply the same principle to the appellant who was not a seer in those difficult circumstances of the recession. And as it exists during a part of 1980, in these circumstances, it must apply for the whole year. The word “reasonable” in the expression “reasonable expectation of profit” qualifies the word “expectation” and not the word “profit”.

In my opinion, the preponderance of the evidence favours the appellant’s thesis.

5. Conclusion

For these reasons, the appeal must be allowed with costs.

Appeal allowed.