Eric R Krause v. Minister of National Revenue, [1984] CTC 2040, 84 DTC 1031

Tremblay, TCJ:—This case was heard on August 3, 1983, at the City of Sydney, Nova Scotia.

1. The Point at Issue

The point at issue is whether the appellant, an employee of the Canada Department of Indian and Northern Affairs, is correct, in computing his income for the 1977, 1978, 1979 and 1980 taxation years, to deduct a net loss from his research and writing activity: gross income of $325, expenses of about $5,000, and a net loss of about $4,765.

The respondent contends that these expenses are personal expenses because there is no expectation of profit from his research and writing activity.

2. The Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his assessments or reassessments are also deemed to be correct. In the present case, the assumed facts are described in the reply to notice of appeal as follows:

3. In so assessing the Appellant’s income tax liability for his 1977, 1978, 1979 and 1980 taxation years, the Respondent relied, inter alia, upon the following assumptions of fact:

(a) At all meterial times the Appellant was employed, full-time, as a Historical Records Supervisor by the Canada Department of Indian and Northern Affairs and his annual earnings from that source for the 1977, 1978, 1979, and 1980 taxation years were as follows:

1977 —$23,185.33

1978 — $23,493.72

1979 — $27,909.30

1980 — $29,910.70

(b) During 1977, 1978, 1979 and 1980 the Appellant was engaged in a part-time research and writing activity;

(c) In 1977, 1978, 1979 and 1980 the Appellant reported gross income, expenses,

and net losses from his research and writing activity in the following amounts:

	Gross
Year	Income Income	Expenses	Net Loss
1977	NIL	$1,207.60	$1,207.60
1978	$65.00	$1,210.37	$1,145.37
1979	$130.00	$1,306.00	$1,176.00
1980	$130.00	$1,364.00	$1,234.00

(d) The expenses referred to in paragraph 3(c) consisted of the following:

		1977	1978		1979		1980
Capital Cost Allowance on
tape recorder, typewriter,
desks, cabinets, bookcases,
etc	$	102.00	$	42	$	54	$	54
Stationery, books, periodicals,
and general supplies		445.00		380	410		450
Home office		660.60		788		842	1,364
TOTALS	$1,207.60		$1,210		$1,306		$1,364

(e) The Appellant had no reasonable expectation of making a profit from his research and writing activity;

(f) The activity carried on by the Appellant was not a business, but a hobby of the

Appellant and the expenses incurred by him were personal or living expenses. 3. The Facts

Admission

3.01 The appellant admitted subparagraphs (a), (b), (c) and (d) of paragraph 3 of the Reply to Notice of Appeal quoted above. The counsel for the respondent informed the Court that the figures were really not in dispute.

3.02. The professional background of the appellant is well described in the notice of appeal:

I have a MA (1968) and a partial PH D (1969) in history, and have since that time been employed as a professional historian with Parks Canada, the University College of Cape Breton, and published, outside writers have publicly acknowledged. I also have a Public Archives of Canada certificate in a second profession, Archival Science. Each year I add to my research and writing skills, to produce numerous “in-house” histor- cial reports and memoranda useful to Parks Canada, outside writers, and the inquisitive public, while at the same time enhancing my professional image in the private sector.

3.03 The appellant testified that:

(a) the gross income given in subparagraph (c) of paragraph 3 of the Reply to Notice of Appeal quoted above ($65 for $978, $130 for 1979 and $130 for 1980) were not from published material, but from lectures given at the College of Cape Breton;

(b) at no time during the years involved, and in 1981 and 1982, did he receive income from published material;

(c) during the years 1974 and 1977, he published the following articles:

1974 — “Private Buildings in Louisbourg, 1713-1758” Canada: An Historical Magazine (June 1974),

1974 — “Goutin”, Dictionary of Canadian Biography, University of Toronto Press, 1974 — Volume 111, 1741-1770,

1977 — “The Fisheries of the Hudson’s Bay Company at Fort Chipewyan, 1791-1871”, Manuscript Report Number 208;

(d) during the years involved he made preliminary research on certain points or gave lectures for charitable organizations. He received no payment;

(e) he is a known expert in the field of historical research.

3.04 In the letter to the respondent’s employees (Exhibit A-1), July 27, 1982) he wrote:

“I remain a novice writer learning his trade; (. . .) My professional training is history — not writing. In starts, hoping one day in the near future to develop a style which will allow me to sell my material at a profit. Meanwhile I incur expenses to learn how to become a good writer. (Exhibit A-l)

3.05 In a letter dated November 12, 1981, filed as Exhibit R-l:

I am yet a novice writer and consequently have not achieved any of my major goals.

4. Law — Analysis

4.01 Law

The main provisions involved in the instant case are 18(1)(h) and 248(1) the definition of “personal or living expenses”. They read as follows:

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(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;

248. (1) In this Act,

“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,

(b) the expenses, premiums or other costs of a policy of insurance, annuity contract or other like contract if the proceeds of the policy or contract are payable to or for the benefit of the taxpayer or a person connected with him by blood relationship, marriage or adoption, and

(c) expenses of properties maintained by an estate or trust for the benefit of the taxpayer as one of the beneficiaries;

4.02 Analysis

4.02.1 The crux of the matter is whether there was a reasonable expectation of profit in the appellant’s research and writing activity during the years 1977 to 1980 inclusive. If there is no reasonable expectation of profit, there is no business; the expenses are then personal and not deductible.

4.02.2 The Court recognizes the qualifications of the appellant as an historian; however, he stated that during the years involved he had no income coming from his writings.

4.02.3 Pursuant to his own testimony, the appellant is in a developmental period (para 3.03(c)). The Court understands that becoming a good writer takes a long time, practice and discipline. The Court admits the accuracy of the comment of Mahoney, J of the Federal Court of Canada when he pointed out in The Queen v Douglas C Matthews, [1974] CTC 230; 74 DTC 6193, that the word “reasonable” applies to “expectation” and not to “profit”.

However, the Court cannot, for the 4 years involved, share the appellant’s opinion that there is a reasonable expectation of profit. The appellant’s burden of proof was considerable. It was not reversed. The expenses must be considered as personal and not deductible.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.