Amprimoz v. R., [1999] 2 CTC 2219

Bowie T.C.J.:

The Appellant holds a full-time appointment as a tenured professor of French at Brock University in St. Catharines, Ontario. In computing his income pursuant to section 3 of the Income Tax Act (the Act) for the taxation years 1992, 1993, and 1994, he claimed to be entitled to take into account certain losses which he claimed to have incurred in connection with activities carried on by him which he regarded as being the practice of a profession, and therefore a business. [1] The Minister of National Revenue (the Minister) in assessing him took the position that the Appellant had no reasonable expectation of producing a profit from these activities, and that they therefore did not constitute a business, with the result that the losses were not available to be deducted. In filing his return for the year 1995, the Appellant described his professional activity as “professional writer”. The question at issue, therefore, is whether the losses arose from a business, as that word has been used in the considerable jurisprudence which surrounds this subject. [2]

There is no doubt that the Appellant has had a very distinguished academic career in the humanities. His education began in Rome in 1953. He achieved three degrees in Mathematics in France between 1966 and 1968. He came to Canada, and pursued studies in French language and Literature, obtaining an M.A. from the University of Windsor in 1970 and a Ph.D. from the University of Western Ontario in 1978. He taught at the University of Manitoba from 1978 to 1985. In 1985, he joined the faculty of Brock University, where he remains today. He became a full professor in 1983, at the age of 35.

Between 1978 and 1995, the Appellant published several hundred short stories, papers, book reviews, poems and learned articles, in English, French, Italian and Spanish. In 1965, he published seven articles on mathematical and scientific topics. Between 1988 and 1995, he published two articles on computer-related subjects, and he prepared materials for a number of computer training courses and workshops in connection with his work at Brock University. His curriculum vitae is 57 pages long.

Schedule B to the Reply to the Notice of Appeal summarizes the gross income and the net losses claimed by the Appellant in connection with his professional writing between the years 1978 and 1995. In Schedule A his expenses for the years from 1990 to 1994 are broken down. The total of the losses claimed by him during this 18-year period is slightly more than $160,000.00. The only year in which he showed a profit was 1989, and that profit was $7.00. In the last six of those years the losses claimed average more than $23,000.00 annually. It is beyond doubt that the Appellant did not, during the years under appeal, have even a remote prospect of profit from his writing activities. Certainly, it was not a business within the ordinary meaning of that ordinary word.

That does not end the matter, however. The Notice of Appeal, drawn by counsel, alleges that the Appellant was, during the years under appeal, carrying on a “writing business”. I quote paragraphs 3 to 9:

3. The Appellant has been, since the early 1970’s, involved in considerable writing and has published numerous articles.

4. In the 1992, 1993 and 1994 taxation years the Appellant expended sums of $23,984.00 in 1992, $32,107.00 in 1993, and $22,564.00 in 1994. The expenditures were made to gain or produce income from the Appellant’s writing business.

5. Throughout those taxation years the Appellant continued his writing activities in both literature and computer science.

6. The expenditures incurred by the Appellant were to further his business in writing and in earning profits in the computer field.

7. The Appellant states that all of the expenditures incurred were for business purposes and were not for personal use.

8. The Appellant states that he has a reasonable expectation of profit in his writing business.

9. The Appellant states that the expenditures have directly resulted in increased income of the Appellant from writing, part-time teaching and other business activities. The Appellant also states that these expenditures will lead to future income from business activities in years after the years under objection.

In argument, however, counsel took the position that the Appellant was, by 1992, in a new business of computer consulting, including software development and manual writing.

The Appellant has had an interest in computers for a number of years. His first writing on the subject was in 1988. He had apparently taught himself programming, and the use of the Unix operating system, during the 19805. By 1990, he was working on a project to develop a computerized testing system to be used in the academic world. His second project, starting in December 1992, was to develop a movie database. The third project that he undertook was for the University, and involved the development and direction of a multi-media laboratory. This project came to an end when the University sold the laboratory in 1995. In 1995, he also worked on the development of computer-assisted distance education, a mathematics tutoring program, and a university registration system. All of these were, in one way or another, carried out under the auspices of Brock University.

The Appellant described his financial arrangement with the University. He said that it was understood between them that if any of the projects became commercially successful then he, and the other staff members involved in the work on them, would have shared in the proceeds, along with the University. There was not, apparently, any written agreement, or even a precise oral one, to that effect. Exactly how they would have shared in the proceeds was not specified. As it turned out, there never were proceeds to be shared. These projects were no doubt good experience for the Appellant, but I do not think that they can be viewed as even the beginning of a computer-consulting business.

By the late 1980s the Appellant had concluded that, however personally satisfying his creative and literary writing might be, the potential for profit lay not there, but in computers. He had some considerable experience in this field, and he had confidence in his own ability to be able to turn it to account. What he lacked, however, was the credentials that would enable him to obtain contract work from which to derive income over and above his teaching salary. He said in his evidence, and I accept this as being correct, that it was necessary to have a degree in computer science in order to have credibility with potential employers, and thereby obtain consulting contracts. That this is so, is demonstrated by the fact that he sent hundreds of résumés to potential clients in the early 1990s without obtaining a single contract.

To overcome this problem, in 1992 the Appellant enrolled in an undergraduate course in computer science at Brock. Between September 1992 and the spring of 1995 he completed the course requirements and obtained a degree. Almost immediately, consulting work in this new field became available to him.

The Appellant in his evidence tried to characterize his early projects for the University as demonstrating that he was, as early as 1990 or 1991, qualified as a computer consultant. He argued, too, that his first contract, which was with Andres Wines, came to him as a result of these projects. I do not accept that. Certainly he did have discussions with Andrés Wines as early as 1993, and the scope of the contract was agreed to in general terms during 1994, but he did not start to work for that company as a consultant until after he had obtained his computer science degree in the spring of 1995. Although he did have a good deal of self-taught knowledge before 1995, he did not have a marketable expertise in the field prior to obtaining his degree in 1995.

Once he had obtained his degree, however, he quickly was able to obtain lucrative work. In 1995, he had a small income from consulting; in 1996 his gross income from consulting was $38,765.00. In 1997, it was $109,000.00, and for the first 10 months of 1998, it was about $80,000.00.

It is well settled that a person setting out in business can expect some losses during the start-up period, and that the fact of these losses does not prevent the enterprise from being, for purposes of section 3 the Act, a source of income, the losses from which may be taken into account. There is, however, an important distinction between a business which has not come into existence, and one which is experiencing losses in the start-up period. In Knight v. Minister of National Revenuef [3] Mogan J. held that the Appellant, a teacher, although he had devoted much of his spare time and a great deal of money to his attempts to develop a computer system to control machine tools, did not have a business, because throughout that time he did not have a product that he could sell. In my opinion, the Appellant in this case, for the same reason, did not have a computer consulting and software business.

In order to have a personal service consulting business a person must be able to deliver a marketable service. During the years under appeal, the Ap- pellant may have had skill and knowledge in the computer field that could have been useful to others, but on his own evidence it only became marketable when he obtained his degree in computer science from Brock in 1995. The years 1992 to 1994 were not start-up years. They were years during which the Appellant, whose writing had never approached profitability, prepared himself for a different spare-time career by furthering his education to achieve the necessary qualification. His expenditures on computer hardware, software, and reference materials during this period were personal expenses.

Counsel for the Appellant relies on the decision in Zolis v. Minister of National Revenue, [4] where Couture C.J. found that the Appellant, a mathematics teacher, and his three colleagues with whom he collaborated in the writing of a text book, had a reasonable expectation of profit, saying: [5]

In my opinion, they embarked on this undertaking with assurance, because of their experience as teachers, that their project was capable of being profitable. The fact that they were engaging in a field of activity in which they were particularly qualified together with the knowledge of a readily available market for their finished products are, for me, sufficient reasons to inject the “confident belief” referred to by Lacourciére J. that a profit was objectively anticipated.

This Appellant finds himself in a much different position. He was not qualified until he received his degree in computer science in 1995, and until that time he most certainly did not have a readily available market.

I find that the Appellant was not engaged in a business during the years under appeal. It was pleaded by the Respondent, in the alternative, that the expenses claimed were unreasonable. In view of my conclusion that they were personal expenses, it is not necessary to deal with this argument.

The appeals are dismissed.

Appeal dismissed.