Eugene Dinnall v. Her Majesty the Queen, [1996] 3 CTC 2647 (Informal Procedure)

Sobier J.T.C.C. (orally): - The Court is now prepared to give judgment and reasons for judgment in the matter between Eugene Dinnall versus Her Majesty the Queen, 94-2244(IT)I.

The Appellant appeals from the assessments made by the Minister of National Revenue (the “Minister”) for his 1989, 1990, and 1991 taxation years whereby the Minister disallowed certain deductions in computing his income. The deductions claimed were claimed as business losses for those years.

Commencing in 1985, the Appellant acted as a artists’ representative and over the years continued in that capacity and became an independent recording producer. Needless to say, he was heavily engaged in promoting his clients who were musicians and singers. Several of those were singing groups and bands and some were individuals. The common thread was that for the most part they were black performers and, according to the Appellant, it was difficult for black performers to find work in Canada. Therefore, his efforts were even more strenuous in order to find work for his clients.

That the Appellant performed his duties in attempting to promote his clients is not in dispute. He gave numerous examples of his attempts to promote shows, recording sessions, and his efforts to gain recording contracts for his clients. However, it is also clear that since 1985, he has not made a profit and that expenses vastly overwhelmed income.

The thrust of the Appellant’s life is in the music industry. He readily admits that it is extremely unlikely to earn sufficient income to overcome expenses. He described the music business as a “crap shoot,” a gamble. But he also states that he is working hard to overcome all of the obstacles which are part and parcel of the music industry. His sincerity is not in doubt. What we do not have in Mr. Dinnall is someone holding himself out to be an agent in order to be a visible player in the nightlife of Toronto or elsewhere. I believe him when he stated that he was not in the business for the club scene.

However sincere the Appellant is, in order to be able to deduct expenses and losses he must have a business.

In the often quoted Moldowan v. R. (sub nom. Moldowan v. Minister of National Revenue), [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213, a decision of the Supreme Court of Canada, Mr. Justice Dickson, as he then was, said at pages 485-86 (C.T.C. 313-14, D.T.C. 5215):

Although originally disputed, it is now accepted that in order to have a “source of income” the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business: Dorfman v. Minister of National Revenue, [1972] C.T.C. 151, 72 D.T.C. 6131].... 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: R. v. Matthews, [1974] C.T.C. 230, 74 D.T.C. 6193. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.

Did the Appellant have a reasonable expectation of profit? One must look at all of the facts in an objective fashion in order to make that determination. Ten years of losses with no evidence that this will change in the future would lead one to believe not.

Although this was no hobby on the Appellant’s part, this fact does not necessarily make his activities a business. I believe that matters have been succinctly put by the Federal Court of Appeal in Landry v. R. (sub nom. Landry v. Canada), [1995] 2 C.T.C. 3, 94 D.T.C. 6624. At pages 6-7 (D.T.C. 6626), the Court refers to Moldowan, supra, and then went on to say:

Apart from the tests set out by Mr. Justice Dickson, the tests that have been applied in the case law to date in order to determine whether there was a reasonable expectation of profit include the following: the time required to make an activity of this nature profitable, the presence of the necessary ingredients for profits ultimately to be earned, the profit and loss situation for the years subsequent to the years in issue, the number of consecutive years during which losses were incurred, the increase in expenses and decrease in income in the course of the relevant periods, the persistence of the factors causing the losses, the absence of planning, and failure to adjust. Moreover, it is apparent from these decisions that the taxpayer’s good faith and reputation, the quality of the results obtained and the time and energy devoted are not in themselves sufficient to turn the activity carried on into a business.

These comments by Chief Couture in Zolis appear to me to provide a good summary of the approach, that should be taken by a judge who must determine whether there is a reasonable expectation of profit:

... he aspirations or ambitions that a taxpayer may have entertained in respect of activity in which he was engaged are not alone sufficient to bring it within the strict meaning of business in the relevant legislation no matter how genuine they might have been. What must be examined apart from the structural features of the undertaking is the manner in which it is carried on or operated by the taxpayer and from the interplay of these elements a determination made whether it is capable of yielding a profit in due course. The Court has to deal with concrete facts and from those facts alone assess the validity of the contention of the existence of a business for the purpose of the Act.

Notwithstanding the Appellant’s sincerity, his operations were not, in my opinion, capable of producing a profit. His hopes and aspirations do not a business make. The losses which the Appellant admits suffering since 1991 also lead me to this conclusion.

When dealing with losses, the case of Walker v. Minister of National Revenue, [1984] C.T.C. 2634, 84 D.T.C. 1545 (T.C.C.), is useful. There, at page 2636 (D.T.C. 1546), Judge Brulé of this Court said:

As set out in DeMontigny v. Minister of National Revenue, [1992] C.T.C. 2012, 82 D.T.C. 1034, and offered by the Respondent, at page 1036 the Honourable L.J. Cardin said, and I quote, “It is clear and well-settled law that no activity can be regarded as a business within the meaning of section 18( l)(a) of the Act if there is no reasonable expectation of realizing a profit from it. In my view this principle necessarily assumes that the primary intention of the businessman is to realize a monetary return from carrying on his business. It also goes without saying that there cannot be a business within the meaning of section 18(1 )(a) of the Act if the maximum possible profit that can be expected from a business does not cover the necessary expenses of operating it.”

The Appellant’s business generated such limited revenues (gross sales of $3,143.00 in 1989, $2,150.00 in 1990, and $3,581.00 in 1991) that they could not possibly cover expenses.

While hope, ambitions, dedication, and hard work are commendable traits and characteristics, they must be coupled with a reasonable expectation of profit.

In the recent case of Easton v. R. (sub nom. Easton v. Canada), [1994] 1 C.T.C. 2609, 94 D.T.C. 1492 (T.C.C.), Judge Hamlyn, also of this Court, offered the following remarks on the topic, at page 2613 (D.T.C. 1494):

A reasonable expectation of profit is an objective test, not a fanciful dream. The objective test includes an examination of profit and loss experience in past years, also the examination of the operational plan and the background to the operation plan including the planned course of action. The test further includes an examination of the time spent in the activity as well as the background of the taxpayer and the educational experience of the taxpayer. The determination of a reasonable expectation of profit is a finding of fact. Where there has been no actual profit, it would appear that that fact alone is a presumption against a finding of reasonable expectation of profit. That presumption, however, may be rebutted by evidence submitted on behalf of the taxpayer.

Here not only is the element of profitability or reasonable expectation of profitability missing, the presumption against finding a reasonable expectation of profit has not been rebutted by the Appellant. For these reasons, the appeals are dismissed. Thank you.

Appeal dismissed.