C Alexander Squires v. Minister of National Revenue, [1983] CTC 2409, 83 DTC 359

D E Taylor:—This is an appeal heard on May 19, 1983 in Toronto, Ontario, against income tax assessments for the years 1977 and 1978 in which the Minister of National Revenue disallowed certain amounts claimed as business expenses by the taxpayer. The Minister relied, inter alia, upon section 8, paragraphs 18(1 )(a), (b) and (h), and sections 67 and 248 of the Income Tax Act, SC 1970-71-72, chapter 63, as amended. The dispute centred around whether the amounts claimed had been incurred for the purpose of gaining or producing income.

The notice of appeal provided the following information:

On October 1, 1976 the Appellant together with Dr W G Squires and Robert D Smith formed a partnership under the name “Richmond Hill Squash Club’’.

— The business of the partnership was the development of a racquet club in Richmond Hill.

— The Appellant and his partners each spent a considerable amount of time working on the development of such a facility but ultimately discontinued the business on June 1, 1978 after the partnership failed to obtain permits from the Town of Richmond Hill for such a facility.

— The partnership incurred a loss of $10,124 in the fiscal period ended June 30, 1977. During this fiscal period, the partnership had no income; the major expenses incurred by the partnership were $3,472 for consulting fees and $5,441 paid for a marketing study.

— During the 1977 taxation year, the Appellant incurred personally expenses of $3,782.16 in pursuing (his share of the) partnership business (above) and in advancing his interests in the corporations described (below) . . .

— In May of 1977, the Appellant, Dr W G Squires and Robert D Smith, became involved in the development of skateboarding in Canada. The Canadian Skateboarding Association, a sport interest body was established and two corporations, Canadian Skateboard Parks Ltd, and Skateboard Management Associates Ltd, were formed in October of 1977 to design and build skateboard parks. In November 1977, Canadian Skateboard Parks Ltd, became involved in the design and construction of the Superbowl Sport Park at Lawrence and Midland Avenues in Scarborough, Ontario in which Skateboard Management Associates Ltd, held a substantial interest. This park was opened to the public in February of 1978.

— During the 1978 taxation year, the Appellant incurred expenses of $5,488.40. These expenses were related to the promotion of the Appellant’s interests in the above corporations .. .

The respondent found or assumed that:

— The Appellant was a full time employee of Shell Canada Limited;

— The Appellant together with Dr W G Squires and Robert D Smith formed a syndicate on October 5, 1976 to investigate the feasibility of establishing a tennis and squash club;

— The syndicate’s expenditures were substantially for a marketing study and consulting fees with respect to such investigation;

— The expenses incurred personally by the Appellant in 1977 of $3,782.16 and in 1978 of $5,488.40 were substantially:

(a) for meals with business associates and professional advisors;

(b) maintenance household expenses;

(c) travel to Florida; and

(d) automobile expenses.

The major documentation provided was that related to the formation of the partnership “Richmond Hill Squash Club”, and the appellant provided details regarding the nature of the expenses incurred. In argument, counsel for the appellant relied almost exclusively on the case of MNR v M P Drilling Ltd, [1976] CTC 58; 76 DTC 6028.

It is clear that M P Drilling provides for the deductibility on income account of payments having certain capital characteristics — feasibility and marketing studies for example. However, in M P Drilling the learned judge found as a fact that M P Drilling was “in business” at the time the expenditures were incurred. Notwithstanding the contentions of counsel for the appellant, it is my view that the reverse is the situation in this appeal — “Richmond Hill Squash Club” was not a “business” to operate and earn income from a squash club — but only to investigate the feasibility of doing so. That is sufficient distinction for me to determine as a fact that the expenditures at issue were “for the purpose of creating or acquiring a business structure” (see M P Drilling, (supra)). It is possible (and I am not called upon to make such a determination) that if the circumstances had appeared propitious and the Squash Club operated, the deductions might be claimed against income earned. But there is no indication in the documentation, or very little in the testimony, that the Richmond Hill Squash Club had any intention or prospect of earning income from its investigative studies. It is also noted that in M P Drilling, (supra), when the initial project investigated proved not to be viable, that the same taxpayer company embarked on another but closely related income-producing venture, and it was from that “secondary choice” income that the deductions were claimed and allowed. That element is also distinctly missing in this appeal. It has been held in the jurisprudence that a “presumption” of “business” may be accorded because a corporation with such a business purpose is formed. In this appeal there was no corporation formed for the squash club and, accordingly, even that slight prospect is denied to the appellant. No basis for that part of the deduction claimed dealing with the Richmond Hill Squash Club has been provided to the Board and that part of the appeal is to be dismissed.

With regard to the deductions claimed for the skateboarding venture, I refer back to the comment in the previous paragraph that the incorporation of the company might provide at least a prima facie case that a business was being conducted. Whether the expenses claimed by this appellant were in anticipation of that incorporation or because the corporation had no funds of its own, might be material. But the amounts involved, if deductible at all, would be deductible from the income — if any — of the corporation(s) in the circumstances of this case. It is noted for the record that the appellant did not claim these amounts as “uncollectible loans” to the corporation but rather as direct expenses that he personally incurred. The Minister is correct, the expenditures were on personal account, and not a business expense.

In summary, I would quote with approval certain comments from the recent decision in Jaroslav Verner v MNR (not yet published):

The records maintained by the Appellant of the outlays upon which his claims were based can only be described as meticulous. However, the relationship shown by the evidence to exist between those expenses and the income-earning process was tenuous in the extreme.

I am not satisfied that the expenditures in connection with the home office were laid out for the purpose of gaining or producing income from the Appellant’s business. On all of the evidence it does not appear that the office met or was intended to meet any real need in the income-earning process. It follows that paragraph 18(1 )(a) prohibits the deduction of the costs of creating and maintaining the office.

I can find nothing in the evidence which would support a conclusion that the Appellant, when at home, was there in order to carry on the operations of the business. It follows that the cost of driving between home and work is not deductible. A distinction is to be drawn between driving in the course of carrying on a business and driving from home to a place where the business operations commence.

No persuasive evidence was given which related the entertainment and secretarial costs to the income-earning process.

The appeal is dismissed.

Appeal dismissed.