Arthur E Chapman v. Minister of National Revenue, [1985] 2 CTC 2268

Brulé, TCJ:—

Issue

This is an appeal from an assessment of income tax for the 1982 taxation year. In his return of income for the year the appellant claimed a deduction in the computation of income of some $1,755, being the cost to him of renting a small office from which he conducted his personal investment dealings.

The Minister disallowed the deduction, and approached the case as one in which paragraph 18(1)(a) of the Act does not provide for the deduction claiming the appellant was not carrying on an investment business.

The appellant gave evidence to the effect that the office space provided the proper milieu for his endeavours and resulted in other savings. The total cost of the office rental represented less than a 0.007th part of the appellant’s investment income in the 1982 taxation year. It was common ground that the appellant was neither a dealer nor a trader in investments. His background however was in the investment business and over the years he accumulated a substantial amount of capital. Upon retirement he devoted his energies to managing his own portfolio. This not only included daily conversation with bankers and investment brokers, but also required the perusal of related published material. The appellant kept a double entry set of books requiring ten pages of synoptic record in a cash book, plus entries in a ledger and journal. This resulted in a saving of any accounting expense which the appellant claimed would have been a deductible item. In order to have the necessary place to keep the proper records without closing and storing them every day and to have a surrounding necessary for concentration and private conversations, it was necessary that he have a place other than his home. The second floor office he rented has a desk, chairs and a filing cabinet. It is not a commercial office, does not require payment of commercial taxes, and is not listed on the building’s directory. The appellant has used the office for a number of years to conduct his investment operation and the results of his endeavours speak for themselves.

Counsel for the Minister argued that the office was only a convenience and the operation could have been carried on at the appellant’s residence. It was pointed out that during 1982 almost all the appellant’s income was derived from bank deposit certificates and thus he was not carrying out an investment program. In any event it was pointed out that paragraph 8(1 )(a) of the Income Tax Act limits deductions and one such as claimed here was not permissible. The Minister also pleaded that this expense was of a capital nature and not allowed under paragraph 18(1)(b). In support of his argument the respondent put forward three cases:

Harry H Wilson v MNR, [1980] CTC 2431; 80 DTC 1379; Robert C Hume v MNR, [1980] CTC 2645; 80 DTC 1542, and F Davida Beadle v MNR, [1979] CTC 2917; 79 DTC 775

In the first case (supra), the appellant was allowed to deduct from income the cost of financial publications as being vital to sensitive investment.

In the Hume case the Court disallowed certain expenses, finding that the appellant’s investing was merely a hobby.

The Court in the Beadle case concluded that the expenses claimed were of a capital nature and not deductible from income.

None of these cases are helpful in this matter. Certainly the renting of premises is not a capital item, it is quite different from the purchase of financial literature, and I have no difficulty in determining that the appellant's endeavours were not a hobby, but a serious undertaking to which he devoted up to three hours daily at his office.

The suggestion that the purchase of bank deposit certificates does not represent an investment program is ludicrous. There are times when interest rates are very high and common sense might dictate that all assets in an investment portfolio should be in these types of securities rather than in equities. The appellant pointed out the diligence that was required to seek the best rates at different banks, both in Canada and the United States. This required a great deal of communication in the proper atmosphere, which did not include a busy household.

The question then is, “Can such an expense for the rental of an office be a proper deduction under paragraph 18(1 )(a) of the Income Tax Act?”’

This section is as follows:

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.

There are two particular matters of concern with this section as applied to the present appeal. The first involves the nature of the income from a business or property and secondly the consideration of the expense being for the purpose of gaining or producing income.

Conceding that the taxpayer's income is not from a normal business, can his investment endeavour be classified as income from property? Subsection 248(1) sets out that

“property” means property of any kind whatsoever whether real or personal or corporeal or incorporeal . . . .

J Harvey Perry in his text Taxation in Canada, 4th edition 1984, published by the Canadian Tax Foundation, sets out at page 36 referring to income from property as follows:

obviously individuals can and do have income of this type. For tax purposes such income is to be the profit from the holding property, so that the computation is generally similar to that for carrying on business . . . But the classification of investment income of an individual as income from property is significant, since it permits the deduction of related expenses . . .

As so many appellants before this Court do, the appellant here relied on an Interpretation Bulletin (IT-487) which deals with paragraph 18(1 )(a) of the Income Tax Act. In that Bulletin there was stated:

It is not necessary to show that income actually resulted from the particular outlay or expenditure itself. It is sufficient that the outlay or expense was a part of the income-earning process.

Further there is the statement:

Outlays or expenses made or incurred to maintain income or to reduce other expenses are also deductible as their purpose would be to increase income, whether or not such an increase resulted.

The appellant maintained that by having the separate office he could keep proper books, for which he was trained, and did avoid accounting expense. The expenditure for the office was an eventual savings to the appellant which allowed him to conduct his personal investment business in an atmosphere conducive to the large amounts of money involved, where privacy was realized as opposed to a busy home where family and help might intrude.

“Business” the appellant offered includes by subsection 248(1) an “undertaking of any kind whatsoever”, and as set out by Mr Justice Abbott in the Supreme Court of Canada decision of British Columbia Electric Railway Company Limited v MNR, [1958] CTC 21 at 31; 58 DTC 1022 at 1027:

Since the main purpose of every business undertaking is presumably to make a profit, any expenditure made for the purpose of gaining or producing income comes within the terms of section 12(1)(a) whether it be classified as an income expense or as a Capital outlay.

In E F Anthony Merchant v MNR, [1982] CTC 2742, the Court said at 2743:

The question whether the purpose test of paragraph 18(1)(a) of the Act is met or not is essentially one of fact and the cases relied upon by the Respondent have little bearing, having regard to what was established in evidence here.

This quotation was recently approved by Cardin, TCJ in the case of Charles Roy v MNR, [1985] 1 CTC 2328; 85 DTC 261.

While the cases referred to involve basically “in-residence office expense" the evidence in the present case, which was not refuted, satisfactorily establishes that the purpose and use of the rented premises were a prime factor in the successful operation of the appellant’s investment operation. There were other savings which resulted and the premises were more than a convenience. Indeed if he could have conducted his affairs in a similar manner at home, which he maintained he could not, then operating from his residence would have been more convenient. Evidence did not reveal any personal use of the premises and therefore the rental paid was not a personal or living expense of the appellant.

In conclusion then I find that the expense claimed by the appellant for office space meets the test that it was laid out to produce income from property or a business of the taxpayer. This appeal is therefore allowed and the matter referred back to the Minister for reconsideration and reassessment on the basis that the sum of $1,755 be an allowable expense in the taxpayer's 1982 taxation year.

Appeal allowed.