Lemelin v. R., [1998] 1 CTC 3291

Somers D.J.T.C.:

This appeal was heard in Timmins, Ontario, on July 14, 1997, pursuant to the Informal Procedure of this Court concerning the Appellant’s 1993 and 1994 taxation years.

The issues in this appeal are whether the Appellant had a reasonable expectation of profit from his trapping activity on a commercial basis and to determine if the cost of a new furnace is deductible as an expense in the 1994 taxation year. In the reassessment, the Minister of National Revenue (the “Minister”) relied on paragraphs 18(1 )(a), 18(1)(b) and 18(1 )(/i) of the Income Tax Act (the “Act”).

The Appellant held a permanent job for the past 30 years at Abitiby- Price Inc. earning approximately $43,469.71 in 1993 and $54,566.81 in 1994. He started trapping in 1989 and his yearly revenue derived from this business varied for the years 1989 to 1994 from $48 to $507. In 1992, his income was $1,100. However, his yearly losses varied between $3,754 and $8,967. He spent 80% of his holidays and weekends trapping. The trapping season is between October and March of each year. The work consisted of cutting trails, checking for new beaver houses, fixing traps and etc. The equipment necessary for trapping consisted of a truck, all terrain vehicle (A.T.V.), snowmobile, boat, traps, chain saw, brush cutter, axes, etc. On any single trip he could travel from 100 to 200 miles covering his territory.

The Appellant’s gross income and losses for the taxation years 1993 and 1994 are as follows:

The business losses claimed for the taxation years 1993 and 1994 are as follows:

One of the reasons for not making a profit during the years 1989 to 1994 was based mainly on the price of the fur. In 1994 the price of the beaver fur increased to approximately $80, while in 1991 the price of the beaver was $6. The other reason is the purchase of the equipment as listed above. Now that his equipment is paid the Appellant can expect making a profit in the future.

The Appellant maintains that he can foresee making a profit in the taxation year 1997. However, in the taxation year 1995, his income was $716 and his expenses were set at $7,588. In 1996, his gross income was $1,077 with expenses established at $1,345; therefore, suffering a loss of $268. He expects his expenses to reduce in 1997 since his equipment has been paid.

His capital loss allowances were established for the taxation years 1994 and 1993, at $6,356.55 and $4,448.42. By substracting these figures from the total expenses, the operation costs would be calculated at $3,659.59 and $5,292.46, for the taxation years 1994 and 1993. He stated that his revenue for the taxation year 1997 could be between $1,200 and $1,500. By retaining his operational expenses in the taxation years 1994 and 1993 respectively, he would still be at a loss.

The Appellant admitted that he claimed, for the 1994 taxation year, the sum of $3,100 for a new furnace for one of his rental properties to replace an old furnace.

As stated above the issue in this appeal is whether the Appellant had a reasonable expectation of profit from his trapping activity.

In the case of the Moldowan v. R. (1977), 77 D.T.C. 5213 (S.C.C.) Justice Dickson states the following:

…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 Appellant started to trap in 1989 and intends to continue trapping. He expects to make a profit in 1997; unfortunately he has not demonstrated such a reality. Bearing in mind the losses incurred from 1989 to 1996 sufficient income should have been forthcoming to establish a reasonable expectation of profit in the years to come.

In the case of Landry v. R. [Now reported (1994), 173 N.R. 213 (Fed. C.A.)], rendered by the Federal Court of Appeal, July 5, 1994, Justice Décary, J.A.. retained the following factor as important:

There comes a time in the life of any business operating at a deficit when the Minister must be able to determine objectively, after giving someone a head start for a number of years, as the case may be, that a reasonable expectation of profit has turned into an impossible dream.

The yearly operating costs seem to be constant over the years from 1989 to 1996. The gross income barely varies over the years. The Appellant stated that the price of the furs have or will increase in the future, but he did not submit concrete evidence to support such a rise in prices. If the Appellant can establish, in future years, that there is a reasonable expectation of a profit, he may be successful in the trapping activity. Unfortunately, the Appellant has not succeeded in proving, this bearing in mind his financial experience between the years 1989 to 1996, that there is a reasonable expectation of profit is the trapping activity for the 1993 and 1994 taxation year and the appeal is therefore dismissed.

As to the deductibility of the purchase of a new furnace, paragraph 18(1 )(è) of the Act is applicable:

Section 18

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

(b) Capital outlay or loss - an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this part;

In the case of the Minister of National Revenue v. Haddon Hall Realty Inc. (1962), [1961] C.T.C. 508 (S.C.C.), the Supreme Court of Canada expresses itself as follows:

...Among the tests which may be used in order to determine whether an expenditure is an income expense or a capital outlay, it has been held that an expenditure made once and for all with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade is of a capital nature.

Expenditures to replace capital assets which have become worn out or obsolete are something quite different from those ordinary annual expenditures for repairs which fall naturally into the category of income disbursements. Applying the test to which I have referred to the facts of the present case, the expenditures totalling $11,675.95, made by respondent in the 1955 for replacing refrigerators, stoves and blinds in its apartment building were, in my opinion, clearly capital outlays within the provisions of Section 12( 1)(Z?) of the Act.

In view of paragraph 18(1 )(£?) of the Act and its interpretation given by the Supreme Court of Canada, the cost of the replacement of the furnace is not deductible from income in the 1994 taxation year.

The appeal for the 1993 and 1994 taxation years is dismissed.

Appeal dismissed.