William J. McNulty v. Minister of National Revenue, [1986] 1 CTC 2137, 86 DTC 1113

Couture, C.J.T.C.:—This is an appeal against reassessments for the taxation years 1979 and 1980 dated January 10, 1983 and confirmed by notification of confirmation by the Minister on August 11, 1983. It was heard in Ottawa. The appellant acted on his own behalf.

His evidence disclosed the following facts:

He has been a full-time teacher on a renewable annual contract basis with the Ottawa Separate School Board for 18 years and also from 1972 to 1979 he taught summer school and evening courses on a part-time basis for the Ottawa Board of Education.

In 1967 he obtained a B.A. with honours in history. In the years that followed he took courses at the University of Ottawa and obtained a degree referred to as an H.A.S. type A in English literature, and a Special Education certification from the Ministry of Education following studies at the same university in the summer of 1980. During that same period the appellant also took courses in welding and mechanics.

In 1959 he started working in construction to earn money to pay for his high school and college education and, as he explained, as a result of working for a number of companies he learned to operate industrial automotive equipment. Since 1976 he has a Class A licence which allows him to drive any type of motorized equipment on the public highways and roads, except a school bus. In 1972 he bought a second-hand snow plough referred to as a “backhoe” and began a snow-ploughing operation. In that year he carried on as a sub-contractor of Derex Excavation Company Limited.

In 1973 he entered into a contract with the Ottawa Separate School Board to remove snow from the parking lots of four schools. In the years that followed, the number of schools increased and by 1977 he was looking after the parking lots of nine schools. However, because of some alleged conflict of interest apparently related to his position as a teacher with the Ottawa Separate School Board and his snow removal operations for the said Board, his snow removal contract with the Board was terminated at the end of 1978. Therefore, in 1979 and the subsequent years his snow removal activities were limited to one convent, three residential driveways and the odd snow Clearing job he could obtain. In 1981 the appellant added lawn maintenance and related services to his operations.

At the end of 1981 he owned the following equipment: one dump truck, one 1973 GMC truck, one 1979 GMC truck and the backhoe purchased in 1972. No evidence was adduced as to the cost to the appellant of his equipment but in his 1979 income tax return its undepreciated capital cost is shown at $14,296.

His snow removal operations, which he carried on personally in the early mornings or as time permitted, were admittedly somewhat modest as a commercial endeavour and their success was dependent upon the abundance of snow during the winter season, and also on the number of contracts he could obtain.

The evidence showed that his earnings from this activity for the period covering the taxation years 1977 to 1983 were:

In addition to the cancellation of his contract by the Ottawa Separate School Board at the end of 1978 the appellant also explained in his evidence that in 1979 and 1980 there was hardly any snow so that his equipment remained idle for most of the two winters, a situation which is not conducive to generating revenue if one carries on a snow removal operation. This situation accounted for the relatively limited amount of revenue reported for these two taxation years, according to the appellant.

Counsel for the respondent was very persuasive in support of her contention that the evidence both oral and documentary could only lead to the conclusion that the appellant had not carried on his snow-removal operations during the years under appeal with a reasonable expectation of profit, and, therefore, during that time he did not carry on a business.

Counsel made reference to the decision of the Supreme Court of Canada in the case of William Moldowan v. The Queen, [1977] C.T.C. 310; 77 D.T.C. 5213 in which Mr. Justice Dickson, as he then was, formulated the test which should be applied to ascertain whether an operation carried on by a taxpayer is so carried on with a reasonable expectation of profit. His Lordship at 313 (D.T.C. 5215) said: “In my view whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all the facts.”

Counsel for the respondent, in her submission, highlighted the facts which in her view supported her contention. She made reference to the absence of profit throughout the period extending from 1977 to 1983, to which I will return later; to the limited amount of time that the appellant could allocate to his operations considering that he was a full-time employee of the Ottawa Separate School Board; to the fact that the appellant had never advertised or promoted his operations in an attempt to secure additional contracts as would be expected, she claimed, from a prudent businessman operating on a sound business basis especially after the cancellation of his contract in 1978.

Admittedly, each of these facts considered by itself is not necessarily conclusive as to the existence or non-existence of a business, but examined together tend to sustain counsel's allegation that the operation's structure as a commercial enterprise in spite of all the efforts exerted by the appellant throughout the years, did not measure up to the standards commonly expected from a business undertaking.

The most significant fact pointing to a lack of reasonable expectation of profit has to be the constant losses incurred over a period of seven years, 1977 to 1983 without any apparent capability for the operation to reverse this trend.

This passage from Wesley H. Warden v. M.N.R., [1981] C.T.C. 2379 at 2388; 81 D.T.C. 322 at 328 is quite pertinent:

The very fact a loss has been incurred in a taxation year from an operation alleged to be a “business” is a strong reflection against the proposition that there was a reasonable expectation of profit.

Conceded, a marginal profit was realized in 1978, but the amount ($63) was so minimal that it cannot be really considered as creating a presumption that profit could be generated from the operation. It was a one-time situation, followed by annual losses thereafter, and moreover not enough revenue each year to offset operating expenses, excluding capital cost allowance claims.

Even taking into account the cancellation of his contract at the end of 1978 and the lack of snow in 1979 and 1980, the revenue generated in 1978, that is during a taxation year when he was apparently carrying on his operations under normal conditions with a full slate of contracts and no lack of snow, would not have been sufficient to offset the aggregate of his operating expenses and the capital cost allowance claimed in 1979 and 1980, or in any of the subsequent years referred to previously.

The appellant unfortunately did not meet the challenge that was incumbent upon him as a result of the Minister’s reassessments to demonstrate to the Court that in carrying out his snow removal operations during the taxation years under appeal he was doing so with a reasonable expectation of profit, and also that while no profit was realized during the said taxation years that the operation itself was capable of generating a profit once the adversity he had encountered in launching his undertaking was overcome.

While insisting that he was carrying on a business, he did not offer any projections of revenue and expenses showing that the trend of successive annual losses could be reversed and that a reasonable expectation of profit was a possibility. Having failed to meet this test, the Court has no alternative but to conclude, following a close scrutiny of the evidence submitted, that the appellant’s operations were not carried on with a reasonable expectation of profit and, therefore, did not constitute a business within the meaning attributed to this expression in the jurisprudence.

For the same taxation years the appellant also reported rental income of $6,350 for the taxation year 1979 and $6,425 for 1980.

In 1979 he claimed expenses of $7,446, no capital cost allowance, and for 1980 he claimed expenses of $8,814 and $387 of capital cost allowance.

In assessing the appellant for the taxation year 1979 in respect of his rental income, the respondent disallowed maintenance and repair expenses amounting to $1,400, which amount related to paving costs of a driveway and was therefore considered a capital expenditure by the respondent. For 1980 he disallowed maintenance and repair expenses in the amount of $2,669 of which $2,161 related to the purchase price of a refrigerator and a stove considered a capital expenditure. The remainder of $508 related to the construction of a small porch or deck at the rear of the rented house and which also was capitalized according to the assessment. In addition for the taxation year 1980 the respondent disallowed the capital cost allowance in the amount of $387 as claimed by the appellant.

For the taxation year 1979, having regard to the disallowance of the amount of $1,400, the contention of the respondent was that the nature of this expense was capital. However, at the hearing, counsel for the respondent informed the Court that following a re-examination of the amount in question, the respondent was then admitting as deductible $726.37 out of the $1,400 claimed. Finally, after consultation between the parties during a short recess, counsel for the respondent conceded that an additional amount of $150 was properly deductible and, therefore, of the $1,400 disallowed, $876.37 will be deductible in computing the income of the appellant for the 1979 taxation year. The remainder, $523.63 is not deductible because of lack of supporting documentary evidence.

For 1980 the amount of $2,669 represented the cost of the purchase of a stove, a refrigerator and the construction of a deck or porch or platform attached to the Heron Road property. Much discussion was held as to the exact nature of this construction, but from the description given by the appellant, I am satisfied that while the amount related to this construction was minimal, the work done was more in the nature of the replacement of an asset than mere cost of repairs and therefore of a capital nature. The cost of a stove and a refrigerator is also of a capital nature and consequently the full amount of $2,669 claimed by the appellant as a deductible expense must be disallowed and capitalized accordingly.

And to conclude, in 1980 the appellant deducted an amount of $387 as capital cost allowance in computing his income from property, a deduction which is prohibited by virtue of the provisions of Regulation 1100(11) and must, therefore, be disallowed because a taxpayer may not create or increase a non-capital loss with a deduction for an allowance for capital cost.

For the foregoing reasons the appeal for the taxation year 1979 is allowed, and the assessment referred back to the Minister for reconsideration and reassessment in accordance with these reasons. The appeal for the taxation year 1980 is dismissed.

Appeals allowed in part.