Corcoran v. R., [1998] 2 C.T.C. 2088

Hamlyn T.C.J.:

1 This is in the matter of Brad Corcoran and Her Majesty The Queen, and are appeals with respect to the 1992, 1993 and 1994 taxation years.

2 In computing his income for the 1992, 1993 and 1994 taxation years, the Appellant deducted the amounts of $10,560.00, $12,737.00 and $5,961.29, respectively, as business losses.

3 In reassessing the Appellant for the 1992, 1993 and 1994 taxation years, the Minister of National Revenue (the “Minister”) disallowed the deduction of the business losses.

4 In reassessing the Appellant, the Minister made the following assumptions of fact: that at all relevant times throughout the 1992, 1993 and 1994 taxation years, the Appellant was a full-time employee of Annan Bird Litographers Ltd., but the disallowed business losses were in respect of a purported automobile racing business. And from January 1st, 1990 to December 31st, 1994, the Appellant reported gross income from a purported automobile racing business and expenses and losses that are set forth in a schedule attached to the reply. And that schedule I adopt as part of these reasons at this time, but I will not read them in.

5 Further, the Minister assumed the claimed expenses were not made or incurred for the purpose of gaining or producing income, but were made or incurred in the pursuit of a hobby. The expenses claimed were personal or living expenses. And lastly, the Appellant had no reasonable expectation of profit from the purported business during the 1992, 1993 and 1994 taxation years.

Issue

6 The issue before the Court is whether the Appellant is entitled to deduct the claimed expenditures related to the purported business in 1992, 1993 and 1994 taxation years.

Facts

7 The Appellant, in the appeals document which he sent to this Court, and substantially, he confirmed today in his evidence, reads, in part, as follows:

1. The Appellant is a Canadian resident who resides at 49 35th Street, Etobikoke, Ontario, M8W 3K3

2. The Appellant is a professional race car driver who competes in various professional car races in Ontario, particularly at Mosport International Speedway. The Appellant is the sole owner and driver of the race car.

3. As a professional race car driver, a source of income is derived from advertising, i.e. the Appellant will place certain business logos or trademarks on his race car in exchange for an advertising fee from these companies (referred to as “sponsors”). Presently, the Appellant's major sponsor is Slick 50, a company in the business of selling engine products.

4. The Appellant also earns prize money from successful completing professional races.

8 It is further stated in the appeal document, and the Appellant confirmed this evidence:

5. At all times, the Appellant anticipated the net income from his professional car racing operations would increase as he gained experience.

6. Specifically, the Appellant anticipated that his income from advertising and sponsorships would increase as his driving performance improved.

9 The Appellant's basic position is also found in that same appeal document, which he claims expenses incurred by him in connection with his professional racing operations were incurred for the sole purpose of gaining or producing income from a business or property. The Appellant claims at all times he had a reasonable expectation of profit from the professional racing operations and, in fact, did earn a profit from his professional racing operations during the 1995 taxation year.

Jurisprudence

10 The Income Tax Act (the “Act”) does not define “business”, but merely stipulates that a “business” includes a profession, calling, trade, manufacture, undertaking of any kind whatever. Generally speaking, “business” refers to some form of industrial, commercial or financial endeavour or activity. If a business is not being conducted at all, it cannot be said to be a business. The word “business” implies the presence of some economic activity. A taxpayer's income for a taxation year from a business or property is the profit therefrom for the year.

11 Profit means net profit, that is, revenues minus expenses incurred for the purpose of earning income. Expenses sought to be deducted must be reasonable, not artificial, not personal and must be for the purpose of producing income, and must not be prohibited by statute. The purpose of an expectation of profit determines whether income from a particular source is income from a business. The expectation of profit is central to the concept of business and distinguishes it from the pursuit of a hobby. The determination of a reasonable expectation of profit is a finding of fact.

12 Now, and this was referred to by counsel, reasonable expectation of profit has been explored by the Federal Court of Appeal in Tonn v. R. (1996), 96 D.T.C. 6001 (Fed. C.A.). And generally, Linden, J.A., is critical of the Courts for applying the test too strictly and for substituting the judge's business judgement for that of the taxpayer. And, specifically, at page 6009, Linden, J.A. states:

The tax system has every interest in investigating the bona fides of a taxpayer's dealings in certain situations, but it should not discourage, or penalize, honest but erroneous business decisions.

Consequently, when the circumstances do not admit of any suspicion that the business loss was made for a personal or non-business motive, the test should be applied sparingly and with a latitude favouring the taxpayer, whose business judgment may have been less than competent.

13 The Court of Appeal has also gone on, and this was also cited to the Court by counsel, in the case of Mastri v. R.. I have that judgment before me now, and it is known as file number A-650-96 [reported[1997] 3 C.T.C. 234 (Fed. C.A.)]. That is also a decision of the Federal Court of Appeal. Robertson, J.A. states in an extension of the Tonn decision, and that is on pages 7 and 8 of the printed copy:

It is simply unreasonable to posit that the Court intended to establish a rule of law to the effect that, even though there was no reasonable expectation of profit, losses are deductible from other income sources unless, for example, the income earning activity involved a personal element. The reference to Moldowan test being applied “sparingly” is not intended as a rule of law, but as a common-sense guideline for judges of the Tax Court. In other words, the term “sparingly” was meant to convey the understanding that in cases, for example, where there is no personal element the judge should apply the reasonable expectation of profit test less assiduously than he or she might do if such a factor were present. It is in this sense that the Court in Tonn cautioned against “second-guessing” the business decisions of the taxpayers.

14 So it is with that background I consider the decisions that were cited to the Court today as further jurisprudence.

15 The first case that was cited, I believe, was Huband v. Minister of National Revenue (1974), 74 D.T.C. 1039 (T.R.B.). In that case, the Appellant, who was employed as a commerce officer with the Department of Trade and Commerce, began his car racing activities as a hobby in 1965. But from that year through to 1968, bought and re-sold bigger and better cars, and entered more rigorous and demanding racing competitions each year. In 1969, he realized $500 in racing, but claimed a net loss of $3,600. The following year, he made $800, but sustained losses of $8,000. The Minister refused to allow the deduction of these amounts from income, claiming that the Appellant was not in the business of car racing with a reasonable expectation of profit, and the income taxpayer, of course, objected. And it was held in that case that the Appellant was entitled to deduct the losses that he had suffered in 1969 and 1970.

16 Over the years, he had spent over 80% of his salary in acquiring cars and equipment to race professionally. Therefore, it could not be said that he was merely enjoying a sport or hobby, no matter how much pleasure he may have derived from the activity.

17 Furthermore, the Tax Review Board noted, in that case, that auto racing, unlike most enterprises, involved a high degree of risk, in which large losses can be expected as a matter of course.

18 The next case that was cited was Cook v. Minister of National Revenue (1985), 85 D.T.C. 167 (T.C.C.). From the headnote of that case, the taxpayer was employed full-time and was involved in car rally racing. The taxpayer deducted losses associated with his car racing business from other income. The Minister disallowed the deduction on the basis that the racing activities were personal living expenses and did not constitute a business.

19 The taxpayer appealed to this Court, and the appeal was allowed. The Court found that the taxpayer's racing activities were a business from which the taxpayer had a reasonable expectation of profit. The taxpayer was beginning to earn a small profit from his car racing, after several years of losses. The nature of the activity was such that the initial years were spent securing experience and sponsors, in order to earn future profit.

20 And the case that was cited to the Court by the Crown is the case of Brown v. R. (file number 95-1723(IT)I) [reported[1996] 2 C.T.C. 2196 (T.C.C.)]. That is a case of a similar nature. It was decided by Judge Sarchuk of this Court. In that particular case, the Appellant sought to deduct certain amounts for several taxation years as business losses from snowmobile and automobile racing.

21 I have read that case carefully to determine its applicability to this case, and it does have some applicability. But I think it is important that I read from page 4, the following findings of Judge Sarchuk:

The issue in this appeal is whether the Appellant's racing venture was a business carried on for profit or with a reasonable expectation of profit in the taxation years in issue. At the outset, let me say I am not convinced the Appellant's business in those years was comprised of two complementary racing activities and that accordingly, the years 1990 to 1992 inclusive can be said to be start-up years for the stock car venture he now carries on. The evidence is quite clear that in 1990 the Appellant limited his business activities to snowmobile racing and indeed, that is pleaded in his Notice of Appeal. Furthermore, the analyses that the Appellant made in 1988 and 1989 focused principally on the potential profitability of snowmobile racing and were premised by his belief that a number of high-caliber snowmobile race events offering greater financial payouts were available.

22 Judge Sarchuk then goes on to find:

His involvement in stock car racing in the taxation years in issue was in my view a continuation of a hobby that he had participated in himself as a driver and continued to do as a car owner.

23 Then he goes on to say, after finding the strong personal element that was involved in this case in relation to what I deem to be the snowmobile part of the case, at page 6:

I am satisfied on the evidence that although the Appellant may have convinced himself that the pursuit of profit from snowmobile racing was reasonable and likely to be successful in a commercial sense, that conclusion was unrealistic and the expectation of profit was unreasonable.

Analysis

24 So we turn now to this case, and what do we have? We have an Appellant who commenced his racing activities in 1990. He received some short-term racing training in Florida. He did have some success in racing in 1992 and 1993. He did not race in 1994, and he has had some success, in terms of profit, for 1995 and 1996. As well, he anticipates from his activities for this particular year, a profit at the end of the 1997 taxation year. Prior to the 1992 taxation year, he had a history of losses from '90 up to 1994.

25 The source of income stream comes from two parts. The first part is winnings and races, and the second part is sponsorship. But from the evidence, I conclude the two go hand-in-hand. And most of the expenses that the Appellant incurs are for maintenance to the vehicle and promotion of his activities. Throughout, the Appellant asserted that he operated his racing activities with an expectation of profit.

26 When you take a look at the history of profit and losses in this matter from 1990 until 1997, it lends credence to a conclusion, that the Appellant's contention that he was operating a business. Because if you look specifically at the year 1994, you come to the conclusion that he refrained from racing because of a lack of an income stream. Furthermore, he spends considerable time on his activity, and has been trained and continues to carry on his racing activity in pursuit of this income stream.

27 I conclude from his evidence, although there were early years of start-up losses, that he did attempt to control his costs and makes decisions in relation to racing based on his potential of an income flow.

Conclusion

28 The involvement of the Appellant in this activity for the 1992 and 1993 taxation years was not simply a hobby. While it had a personal satisfaction element, it was conducted like a business. In 1994, he did not race; as such I conclude he did not carry on business of stock car racing, as the business income is both a combination of race winnings and sponsorship. And in 1994, he could not be assured of that income stream. However, the subjective anticipation of a reasonable expectation of profit is carried forward objectively [in 1995 and 1996], and is borne out by the way he conducted his business and his subsequent history of profits.

Decision

29 In this matter, the appeals for 1992 and 1993 are allowed and referred back to the Minister for reconsideration and reassessment on the basis that for those years the Appellant operated a business and had a reasonable expectation of profit from his business.

30 For the year 1994, the appeal is dismissed, as I cannot conclude he operated his business and, therefore, did not have a reasonable expectation of profit.