G Seymour v. Minister of National Revenue, [1982] CTC 2683, 82 DTC 1706

Guy Tremblay:—This appeal was heard in London, Ontario, on April 27, 1982.

1. The Point at Issue

Pursuant to pleadings, the point at issue is whether the appellant, a motorcycle mechanic, is correct in deducting in the computation of his net income for his 1978 taxation year, the loss of $3,940 with respect to his part-time musical activities.

According to the respondent, the appellant reported losses of $325 in 1976 and $2,313 in 1977. He had no reasonable expectation of profit from musical activities during the year 1978. Such expenses are personal and living expenses and therefore are not deductible in accordance with the Income Tax Act, SC 1970-71-72, c 63, as amended.

2. Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results especially 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 assumptions of fact on which the respondent based the assessment are also deemed to be correct. In the present case, in paragraph 2(a) to (i) of the reply to the notice of appeal, the respondent described the facts on which he based his assessment:

2. In assessing the Appellant for income tax, the Respondent relied upon the following findings or assumptions of fact:

(a) In his 1976 taxation year, the Appellant reported a loss with respect to musical activity of $325;

(b) in his 1977 taxation year, the Appellant reported a loss with respect to musical activity of $2,313;

(c) in his 1978 taxation year, the Appellant reported a loss of $3,940, with gross earnings of $675, with respect to musical activity:

(d) in his 1978 taxation year, the Appellant earned $9,078.35 as a motorcycle mechanic;

(e) in his 1978 taxation year, the Appellant had no reasonable expectation of profit from musical activity;

(f) the Appellant’s expenses associated with musical activity were personal or living expenses;

(g) expenses associated with musical activity were not made for the purpose of gaining or producing income from a business;

(h) the Appellant has not proved that the outlays claimed were actually made.

3. The Facts

3.01 The appellant admitted the following respondent’s assumptions of fact given in above subparagraphs (a), (b), (c). Concerning subparagraph (d) he said he had not worked as a motorcycle mechanic but had worked in a motorcycle shop. the appellant denied subparagraphs (e) to (i).

3.02 The appellant, born in 1948, testified that he had been a musician in high school in 1966-67. He was asked to work in the hotel as a musician for a friend of his in 1976. In 1977, the hotel hired musicians. However, in 1979 he left his friend because the latter wanted to be a musician only as a part time job. He himself was interested in having a career with the band.

3.03 In 1978, at the same time as he was working at a full-time job in the motorcycle shop (36 hours per week at $3.25 per hour — SN p 31), he was auditioning other musicians in order to get a full-time band together. Finally, he put a band of four together.

3.04 In 1979 he continued to work in a motorcycle shop. In November 1979, however, and 1980, 1981 and 1982 he worked only as a musician. In 1980 he had a gross income of about $7,000 and a net income of $2,000. In 1981 he had a net loss of $600.

3.05 In 1978, he declared an income of $675 and a loss of $3,940.

As Exhibit A-1, he filed a two-page document headed “Expenses 1978”; these expenses are as follows:

In the income tax return the Capital Cost Allowance 20, vouchers were also filed concerning the van expenses. He said that he phoned the employees of the respondent, met them and they asked him only for the van expenses which they accepted at 100%. They told him he could not be considered as a self-employed person. The appellant had no vouchers to confirm the other expenses because he thought they were not in dispute. The respondent filed as Exhibit R-2 a document issued by Avco Financial Services dated November 9, 1979, addressed to the appellant. This document shows the capital and interest paid from October 23, 1977 to November 9, 1979, and the balance after each payment. The appellant said that he borrowed to purchase the van and musical instruments.

After the first payment of $150 (interest $97.01; principal $52.99) the balance was $3,934.52. Therefore, the original principal was $3,987.51. The interest paid during the year 1978 was $886.44. The balance of the principal at the end of December 1978 was $3,194.98. On November 9, 1979 it was $2,381.56.

3.06 He testified that he purchased the van (an Econoline) in 1978 for $900.

With the said van, the band of four travelled to different cities in Ontario, Manitoba, Saskatchewan and Alberta. However, it seems that the travelling occurred particularly in 1979. In 1978 he worked more in Ontario: Stratford, Sebringville, Woodstock and Chatham. I

3.07 In the year 1978 and the years after, the appellant also owned a car and a motorcycle.

3.08 The appellant testified he did no bookkeeping. He only kept his receipts.

3.09 Concerning the year 1979, counsel for the respondent asked the following question:

Q And during 1979, then as well you still would have been preparing to enter some kind of musical career?

A No, only in the sense of being an apprentice and as far as preparing, I was auditioning and looking for the opportunity to do it as soon as the time when I had the people who were willing to work with me and who I could work with and I quit the motorcycle shop and played music. I wasn’t preparing in that sense as I was looking. I was only trying to acquire full-time musical employment in the sense that a person would look for a job.

My particular chosen field was music at that time and it still is. (SN pages 20 and 21)

3.10 The appellant explained that the $675 earned in 1978 was paid to him by the friend with whom he engaged musical activities. Moreover, this friend helped him work on his van.

I didn't take all the money that I was supposed to be getting in cash. Like I took it in services from the drummer. He paid me $675 cash as far as the period of time that I worked with him, or I received $675. It was sort of he helped me work on my truck, because he was a mechanic, a certified mechanic and he helped me work on my truck so instead of paying me like say $50 and give me $25 and the other $25 would go into the time he spent on my truck, so he gave me some money in services rendered rather than in cash, which was basically — (SN pages 24 and 25).

3.11 He and his friend hired two other musicians to work with them. In 1978 the four were paid $250 for the weekend and they divided the amount equally. He had to pay for gas, union dues and work dues (SN pages 28 and 29). Ordinarily, they made written contracts with the owners of the bar where they worked. However, he had no such contracts to file as exhibits. He said that his profit was about $25 for one night. Each member of the group of four had his own instruments. He also said that at the time of the hearing average income from musical activities, per week was about $250 (SN p 30).

The appellant also explained:

I have trouble finding people who like to work or who want to work or who are willing to work hard. I just don’t pick anybody that comes along as far as that goes. That is basically the way it was and in 1978 I was attempting with my best endeavours, I spent a lot of time over and above my general working day trying to find people and trying to get things together. I worked hard and I rehearsed a lot. I rehearsed an awful lot with a lot of different people. I hired and fired and dismissed people and said, “I don’t want to rehearse with you, because you are not showing enough effort”, or “You are not into what I am into”, or “We are not compatible as far as music goes”. (SN p 42).

4. Law — Analysis

4.01 Law

The main sections of the Income Tax Act involved in the present case were paragraphs 18(1)(a), (h) and section 248, definition of “personal or living expenses”, which read as follows:

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

(a) General limitation. — 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;

(h) Personal or living expenses. — 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) Definitions. In this Act,

“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 relation- ship, 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 In a problem of this nature, there are two points to decide:

1. Is the appellant an employee or a self-employed person?

2. In the latter case, is there a reasonable expectation of profit?

4.02.2 ‘‘Employee” or ‘‘Self-employed person”

The Interpretation Bulletin IT-312 headed “Musicians and Other Performers” gives information concerning the difference between an employee and a self-employed person. It summarizes, in fact, the general elements given by the courts. Paragraphs 7, 8, and 9 of the said bulletin read as follows:

7. Thus, it is not possible to give one criterion or even a group of criteria that can absolutely determine in all cases whether or not an artist is an employee. The following two paragraphs are guidelines or factors which will help in the determination of the artist’s status.

8. There is an indication of employee status and therefore of a contract of service if, for example, a party such as a symphony or other type of orchestra, a ballet company, an orchestra leader, a film or theater producer or a television company, according to the terms of the engagement;

(a) has the right to decide on or change the size of the group with which the artist performs;

(b) has the right to choose the nature of the artist’s performance (opera, ballet, theatre, films, musicals, concerts, classical, popular, jazz) without obtaining the agreement of the artist;

(c) has continuing authority to dictate the time and place of the artist’s performance

including rehearsals, again, without obtaining the artist’s agreement;

(d) may unilaterally change the dates, times and places from those ordinarily scheduled, or increase the number of rehearsals or performances;

(e) is obliged to pay for overtime, or

(f) provides or authorizes transportation for the artist.

9. On the other hand, there is an indication that the artist could be a self- employed individual carrying on a business if the artist:

(a) has a chance of profit or risk of loss;

(b) provides his own instruments and other apparatus;

(c) has a number of engagements with different persons during the course of a year;

(d) regularly takes auditions or makes application for engagements;

(e) retains the services of an agent on a continuing basis;

(f) can select or hire his own employees or helpers, fix their salary, direct them or dismiss them:

(g) Can arrange the time, place and nature of his performance, or

(h) his remuneration is directly related to particular rehearsals and performances.

4.02.3 In the present case, the appellant in 1978, concerning his musical activities, was in partnership with three other persons.

According to the appellant, indeed the group of four had a gross income of $250 for a weekend and after paying the expenses, they divided the profit equally. Moreover, they had written contracts with the owners of the bars. The appellant received in fact around $25 per evening (see para 3.11). The best evidence would have been having his own testimony confirmed by at least one of his partners and also his filing of a written contract as an exhibit.

4.02.4 “Reasonable Expectation of Profit’’

Many times, the courts give decisions about this meaning of the reasonable expectation of profits. However, the Board did not find any cases where the element of reasonable expectation of profit was involved in musical activities. However, in the William Moldowan v HMQ, [1977] CTC 310; 77 DTC 5213, the Supreme Court of Canada gave general principles or criteria which applied in all cases even if in the said case the problem in dispute was farming losses:

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. The factors will differ with the nature and extent of the undertaking: .. .

Further, the Court gives the following criteria in relation to a source of income: time spent, the capital committed, the profitability both actual and potential. The Board thinks that these criteria may apply to the instant case. Pursuant to the evidence, what is “the objective determination to be made“?

(a) Income

The appellant received in cash $675 from the friend he was working with. However, it seems it was not the only remuneration he received, because rather than paying him money his friend helped him to repair his van. The evidence does not show the number of hours this friend worked or the equivalence in money. Moreover, what he received in cash and the equivalence of the repairs made by the friend was the net after paying for gas, union dues and work dues (paras 3.10 and 3.11).

It is very difficult for the Board to know the actual amount the appellant received during the year involved and the amount against which he may apply expenses. It was the appellant’s burden to give the preponderance of the evidence on that point which is an important element in making an objective determination;

(b) Capital

The capital committed seems to be the amount of $3,987.51 which was due to Avco Financial Services in September 1977 (para 3.05).

It was invested in musical instruments (piano, guitar and bass) and the Econoline. According to his testimony those expenses were admitted by the respondent’s employees. Before the Board, however, counsel for the respondent did not admit the figures. In fact, documents of purchase of musical instruments would be required to confirm the appellant’s testimony;

(c) Time Spent

The appellant said that he received $25 per night (para 3.11). As he declared $675 of income (despite the fact that the actual amount received is not clear — see subparagraph (a) above). This means that he worked about 27 days during the year 1978. It is true that he said, “I worked hard and I rehearsed a lot” (see para 3.11). Moreover, in 1979 the appellant considered himself only as an apprentice. He was “only having to acquire full-time musical employment in the sense that a person would look for a job” (para 3.09).

4.02.5 The appellant had the burden of proof as explained above. Even if the Board accepted, despite the weakness of the evidence, that in 1978 he was a self-employed person, the preponderance of the evidence, however, is not to the effect that in 1978 there was a reasonable expectation of profit. The evidence indeed is that the appellant actually worked only about 30 nights during that year (para 4.02.4(c) ). An important part of the evidence concerning the work and travel does not concern the year 1978 but the years afterwards. Moreover, the appellant’s testimony concerning income and the capital committed is not confirmed by vouchers or by other documents. The appellant did no bookkeeping.

5. Conclusion

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

Appeal dismissed.