Lomas v. R., [1998] 1 CTC 2462

Mogan T.C.J. :

These appeals are in respect of the 1991 and 1992 taxation years in which the Appellant has elected the informal procedure. The sole issue is whether certain amounts which the Appellant claims to have lost in a business venture are deductible from his other source income in the computation of his total income for the years under appeal.

The Appellant is a full-time employee of an elevator company and is qualified as an elevator mechanic. He earns a good income from his employment. In the two years under appeal, he engaged in a fish breeding operation and reported losses in his income tax returns from that operation. He deducted those losses from his employment income in the computation of his total income. It is the deduction of those losses which the Minister of National Revenue disallowed.

The Appellant has been raising fish in his home since he was a boy of approximately eight years of age. He has always had an interest in fish and stated that at various times prior to 1991, he had probably either raised or bred more than 90% of the tropical fish which one would ordinarily find in the average pet store. The Appellant has a long association with tropical fish and he obviously has some knowledge about the problems of breeding and raising them.

In 1991, the Appellant heard about a relatively new tropical fish known as a Discus which is apparently found in its natural habitat in the Amazon River of South America. The Discus was first brought into captivity around 1977 and so it is a newcomer on the scene in terms of being a domesticated pet fish. It is available in pet stores for an individual to own and maintain in an aquarium in the home. When the Appellant learned about the Discus, he decided to breed it because it offered such an attractive financial return. In 1991 and 1992, a young Discus about three centimeters long was selling for $25. It would take about three years to mature to an adult when it could breed. The Appellant stated that a breeding pair (as mature adult fish) were selling for about $600 in 1991 and 1992.

According to the Appellant, over a six-month period, a breeding pair would lay a batch of 200 eggs every three weeks, and one could expect about eight batches of eggs. In good conditions, about 65% of the eggs would survive. Therefore, if conditions were right, there could be many fish to survive and grow to be adults to be sold at $600 per pair.

The Appellant had done the arithmetic and concluded that he could make a significant amount of money from the raising and breeding of these Discus. He has always had small aquariums in his home. When he decided to acquire these fish, he purchased many aquariums. He renovated his basement and finished it with a floor, ceiling, and walls to make it a breeding area. Also, it had to be maintained at a constant temperature of approximately 88° Fahrenheit. He needed water facilities because he had to replace about 35% of the water in each tank each day in order to keep it from becoming contaminated.

He bought books on the Discus, a number of which he produced in Court. Also, he met Bob Wilson, the President of the North American Discus Society (NADS) who lived in Etobicoke, Ontario. This was a great convenience to the Appellant who lived in Brampton, Ontario, a 20 minute drive to Etobicoke, and he got to know Mr. Wilson quite well. Mr. Wilson was a man over 60 years of age who was one of the few and perhaps the only breeder of Discus in Canada. Mr. Wilson was very interested to have a young man like the Appellant take an interest in Discus.

In September 1991, the Appellant purchased 30 baby Discus at $25 each for a total of $750. Within a few weeks, he acquired another 12 or 13 from Bob Wilson so that he had as many as 42 or 43 Discus. He could keep only a small number of fish in one tank. He had 20 tanks each holding 33 gallons of water and eight tanks each holding 75 gallons. He also had three 45- gallon drums each holding water only for changing in the other tanks. The Appellant explained that he could not use tap water directly because of the high chlorine content. He had to store tap water in these three drums for at least 24 to 48 hours in order to get rid of most of the chlorine before the tap water could be used to replace the water in his fish tanks. Therefore, these three drums were always filled with tap water but, as the tap water settled and the chlorine disappeared, he was able to take it out of the drums and put it into the 28 tanks. By way of illustration, the Appellant said that a 33- gallon tank would be three feet long, 18 inches high, and about 12 inches wide. Maintenance of the fish was time-consuming. He spent about 1'/2 hours in the morning before he went to work feeding the fish and, when he got home from work, he spent another three hours feeding them and changing the water in the tanks.

The maintenance of his fish was taking so much time that he did not have any time for his personal life or other interests like playing football and rugby. He eventually paid $1,200 for the installation of additional plumbing fixtures so that he could reduce the time required to siphon the water from the three storage drums into the fish tanks. He got this new facility perfected and was able to replace the water in less than one-half hour, an operation that used to take almost three hours.

Some of the Discus which the Appellant had acquired in September 1991 began to get sick in May 1992. He was able to detect the illness from the colour of the feces in the bottom of the tank. The discoloured feces were an indication that something was wrong. He had his own microscope and, by putting the feces and the fish under a microscope and consulting with Bob Wilson, he was able to determine the disease that the fish had. As a result, he bought a special kind of pill from the pharmacy and fed it to the fish. By June 1992, the fish seemed to be healthy again.

In late July, there was another illness which attacked the fish. Although the Appellant worked hard to overcome it, his fish started to die. He lost most of his fish over a period of less than one month. When he was down to just three or four Discus, he took them to Bob Wilson who put them in his fish tanks and maintained them for another couple of weeks. By the end of August, however, the Appellant’s remaining Discus had died. Therefore, the Appellant had these fish for less than a year because they were purchased in September 1991 and had died before September 1992.

On April 28, 1992, the Appellant had applied for the registration of the business name “Healthy Aquaria” which he registered with the Ministry of Consumer and Corporate Affairs for the Province of Ontario. That registration identified the business as that of fish breeding, rabbit breeding, and selling offspring to pet stores. In these appeals, however, there was no evidence from the Appellant concerning rabbit breeding.

When filing his income tax returns for 1991 and 1992, the Appellant included for each year a statement of profit and loss for this fish development operation called “Healthy Aquaria”. The statement for 1991 shows revenues of $21.06 and expenses of $3,077.69, resulting in a net loss of $3,056.63. For 1992, the Appellant shows total revenues of $137 and expenses of $5,063, resulting in a net loss of $4,926. These are the loss amounts which the Appellant deducted from his employment income in the years 1991 and 1992 respectively. The Appellant claims that his fish development operation was a business and that these amounts were business losses. The Respondent claims that there was no business and that it was only the Appellant’s hobby. Alternatively, the Respondent claims that, if there was a business, it did not have a reasonable expectation of profit.

The Appellant has had a genuine interest in fish breeding from the time he was eight years old. He has had a lifelong interest in tropical fish as pet fish. I am satisfied that prior to 1991, this was only a hobby with the Appellant. There is no evidence that he had any business interest in fish prior to 1991; his maintenance of one or more aquariums in his house was strictly a matter of personal interest.

I am also satisfied that in 1991, the Appellant made a decision to get into this business of raising and breeding Discus, a very special tropical fish. The fact that the Appellant made the decision to get into this business does not necessarily mean that the business had commenced in 1991 or 1992. Although he had for the first time in his life a commercial interest in raising and breeding fish, I am satisfied on the evidence that this interest had not developed into a business in 1991 or 1992.

Counsel for the Appellant argued that the fish operation had all the hallmarks of a business. I find that argument difficult to accept because one of the most important hallmarks of a business is commerce, the buying and selling of a product which means that the entrepreneur has customers. The Appellant had no customers in 1991 or 1992. He had not reached the point where he could have customers. The small amounts of money he showed as revenue, $21.06 in 1991 and $137 in 1992, did not come from the sale of Discus. They were small amounts of revenue that arose from the fact that the Appellant had Guppies, a very popular and common form of pet fish. He was using the Guppies as food for the Discus but he had so many that, from time to time, he would sell off a redundant supply of these Guppies. Therefore, the small amounts of revenue did not even come from raising and breeding of Discus.

In the years under appeal, although the Appellant had a commercial intent, that commercial intent had not developed into a business with the normal incidence of commerce like trading, the buying and selling of a particular product. He was at the research and development stage. If I were to compare the Appellant’s operation to the natural resource industry, like mining or oil and gas, I would say he was at the exploration and development stage before the mine comes into production or before the oil and gas well starts to produce. The Appellant was gearing himself up hoping to become a successful fish breeder.

It is clear from the evidence of the Appellant and from the books he brought to Court that Discus are a very delicate fish to raise, susceptible to disease as was demonstrated in his own experience. On his ambitious venture, he lost all of his stock in less than 12 months. What was to be his basic breeding stock had all died. He never developed a single Discus fish that could be sold. He was trying to bring himself to the point where he could be regarded as a successful fish breeder. The amounts he was trying to deduct in the two years under appeal are the development costs of a business that had not yet come into production. In my view, they were the capital costs of building up a basic stock. I find that although the Appellant had a genuine commercial intent, he did not in 1991 and 1992 have an operating business. Also, if he did have a business operation, it had no reasonable expectation of profit in the years 1991 and 1992.

On the issue of reasonable expectation of profit, I refer to the recent decision of the Federal Court of Appeal in Tonn v. R. (1995), 96 D.T.C. 6001 (Fed. C.A.). At page 6013, Linden J.A. stated:

…] otherwise agree that the Moldowan test should be applied sparingly where a taxpayer’s ‘business judgment’ is involved, where no personal element is in evidence, and where the extent of the deductions claimed are not on their face questionable. However, where circumstances suggest that a personal or other- than-business motivation existed, or where the expectation of profit was so unreasonable as to raise a suspicion, the taxpayer will be called upon to justify objectively that the operation was in fact a business...

In particular, I refer to the words “or where the expectation of profit was so unreasonable”. In my view, that is the situation in this case because the Appellant has not demonstrated that he has the sophistication or know-how to raise these delicate fish. Also, Linden J.A. went on to state:

As should be readily apparent, the most important factor in this case is the nature of the operation from which the deductions were claimed. This operation was purely commercial. It was a real estate venture, and did not involve an element of personal satisfaction for those operating it. By personal satisfaction, of course, I mean that the rental operation had neither a hobby nor a personal benefit element about it...

Although I find that the Appellant had a commercial intent towards these fish, it was an outgrowth of his lifelong hobby of raising fish in personal aquariums which he kept in his home. In my view, the Appellant’s personal challenge in the raising of Discus was an extension of his hobby, albeit in a new direction after the Appellant had decided to make a commercial venture out of his hobby. The appeals for 1991 and 1992 are dismissed.

Appeal dismissed.