Hui v. R., [1998] 1 CTC 2830, 98 DTC 1332

Bell T.C.J.:

Issue:

The issue is whether the Appellant, in respect of his immigration consulting activities, had a reasonable expectation of profit in the 1991, 1992 and 1993 taxation years.

Facts:

The Appellant moved from Hong Kong to Edmonton, Alberta some 28 years ago, at the age of 19. Sensing that his employment with the City of Edmonton was, by virtue of privatization, in jeopardy, he decided to commence a business. He said that after the Tiananmen Square incident in China in 1989 and the imminent end of British rule in Hong Kong, a boom in immigration to Canada was anticipated. He decided to go into the business of immigration consulting. He outlined the various tests that had to be met in respect of the differing categories of immigration. He testified that the immigration consulting business involved the necessity to gain the trust of those wishing to come to Canada from Hong Kong. He felt it was a business with very good potential. His activities commenced in 1991. He testified that he had expected to represent at least 20 immigrants in each of those years in question. On cross-examination he modified that response to the number of clients he had said on written discovery he could expect in those years. That was one to five persons. His revenue from this business, he having had six clients whose applications for entry into Canada were successful, and his expenses in the corresponding years were as follows:

The Minister of National Revenue (“Minister”) disallowed the total expenses claimed.

The Appellant testified that in spite of the fact that he had received no more than $3,000 from one client, he had the expectation of earning substantial amounts of money assisting in the purchase of houses and performing other activities for successful immigrants to Canada. He also testified that because of the downturn in the Canadian economy and the bankruptcy of a Winnipeg company in which several hundred immigrants had invested and lost, and other discouraging business enterprises, his business was not as successful as he had anticipated.

He stated that in 1991, because of the lack of clientele and revenue, he expanded his operation to Malaysia because he had a long-time friend who was an immigrant consultant in that country. The Appellant said that his friend needed him to assist him here in Canada and he visited him in Malaysia. He then testified that the Malaysian gave his business to other consultants who could spend more time in Malaysia.

Although Respondent’s counsel on cross-examination sought to establish that the Appellant had no background training, no working experience with an immigration consultant and no familiarity with procedures, the Appellant testified otherwise. He said it was not necessary to have special training because lawyers did refugee work. He also said that he had enough understanding of the guidelines to complete an application and that he worked with lawyers and other consulting companies. He stated that he did not know the number and length of calls ahead of time that he would have to make. He testified that none of the expenditures made by him were personal. He said that the expenses were higher than his income because he thought he could expand and survive in the business. He also said that had he not believed in the potential profitability of the business he would not have mortgaged his house in order to be able to meet the expenditures made by him in attempting to advance his activities.

Respondent’s counsel submitted that the Appellant had no plan but had only a belief and a hope that people from Hong Kong would use his services. He submitted further that he had no training but simply thought that he could carry on this business. He emphasized that there were total expenses of $92,539.13 for three years with a total income in that period of $8,800 only. He also pointed to the evidence which revealed that there was no revenue from these activities in the 1994 and 1995 taxation years. He pointed out also that the expenses for meals and lodging in 1991 were about $18,900, in 1992 were about $16,000 and in 1993 were about $14,000. He stated that the Appellant had no concept of the nature of income and expenses involved in this business. He then turned to the oft quoted decision in Moldowan v. R. (1977), 77 D.T.C. 5213 (S.C.C.) in which the Supreme Court of Canada said at 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 ... In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts.

Respondent’s counsel then submitted that, viewed objectively, the Appellant simply did not have and could not have a reasonable expectation of profit.

I disagree. As stated in a number of cases, particularly Tonn v. R. (1995), 96 D.T.C. 6001 (Fed. C.A.) , a taxpayer’s business judgment should not be an ingredient in the test of whether a reasonable expectation of profit exists. Mr. Justice Linden said, at 6009,

But do the Act’s purposes suggest that deductions of losses from bona fide businesses be disallowed solely because the taxpayer made a bad judgment call? I do not think so. The tax system has every interest in investigating the bona fides of a taxpayer’s dealing in certain situations, but it should not discourage, or penalize, honest but erroneous business decisions. The tax system does not tax on the basis of a taxpayer’s business acumen, with deductions extended to the wise and withheld from the foolish.

I accept the Appellant’s evidence that he commenced these activities with the fervent belief that they would constitute a profitable business. Respondent’s counsel submitted that these expenses were personal or living expenses. I found no evidence to support that conclusion. The Appellant’s description of the expenses incurred by him on his various trips to Hong Kong and on one trip to Belgium persuaded me that they were for business purposes. Also, these activities did not involve a place of residence, were not the type of cases such as horse farms, yacht operations, et cetera which, in the words of Linden, J.A., fall into

..the personal benefit and hobby type cases where a taxpayer has invested money into an activity from which that taxpayer derives personal satisfaction or psychological benefit.

The Appellant’s operations were a commercial enterprise. It would be unreasonable to find that the Appellant had no reasonable expectation of profit simply because no net income was realized in the first three years. It may well be that, having regard to the 1994 and 1995 experience, the business will not continue to warrant a finding of reasonable expectation of profit in the future. However, in the circumstances, including the fact that the Appellant was from Hong Kong, that he had a number of contacts there, that there appeared to be an inevitable increase in the number of persons from Hong Kong wanting to come to Canada and the number of money making opportunities by providing services to them in Canada and the fact that these were not personal or living expenses, I conclude that the Appellant had a reasonable expectation of profit.

In his Notice of Appeal, the Appellant said,

I am seeking a relief of recognition of at least three-quarters of my expenses incurred to be allowed under Section 18(1 )(a) for the respective years.

Having found that there was a reasonable expectation of profit, I will allow the appeal to the extent of three quarters of the expenses incurred. Respondent’s counsel had agreed at the commencement of the hearing that the amounts claimed had been spent.

Costs are awarded to the Appellant.

Appeal allowed.