Gagné v. R., [1998] 2 C.T.C. 2997

Tremblay T.C.J.:

1 This appeal was heard under the informal procedure at Montréal, Quebec, on October 21, 1996.

1. Point at Issue

2 According to the Notice of Appeal and the Reply to the Notice of Appeal, the point at issue is whether the appellant was correct in claiming amounts of $13,733 for 1992 and $9,263 for 1993 as business losses (ALGA Enterprise).

3 These losses allegedly stemmed from research into a hunting product incorporating an explosive charge, that is, “the Last Chance Arrow Point”. Canadian and U.S. patents were obtained, but sales did not materialize as a result.

4 According to the respondent, the appellant held permanent employment with his employer, ICI Explosives Brownsburg, during the periods at issue.

5 The respondent contends that the appellant claimed losses of $42,163 from 1986 to 1993. He apparently made few sales and thus had no reasonable expectation of profit. The appellant contends that the research confirmed by the patents obtained did not commence until 1990. The market is a difficult one.

2. Burden of Proof

6 2.01 The burden is on the appellant to show that the respondent's reassessments are incorrect. This burden of proof arises from a number of judicial decisions including a judgment by the Supreme Court of Canada in Johnston v. Minister of National Revenue, [1948] S.C.R. 486, 3 D.T.C. 1182, [1948] C.T.C. 195 (S.C.C.).

7 2.02 The facts assumed by the respondent in the instant case are described in subparagraphs 4(a) to (g) of the Reply to the Notice of Appeal and read as follows:

[TRANSLATION]

4. In arriving at these reassessments, the Minister made the following assumptions of fact:

• a. the appellant started out in 1986 with a maintenance business, which also made repairs and renovations and was partly converted in 1990 into a hunting products research business; (admitted, but to be completed)

• b. the appellant obtained Canadian and U.S. patents which did not result in sales; (admitted)

• c. the appellant was the sole proprietor of the business; (admitted)

• d. during the years under appeal, the appellant had permanent work with his employer, ICI Explosives Brownsburg; (admitted)

• e. from 1986 to 1993, the appellant reported very nominal gross revenues and, for those eight years, claimed deductions in respect of losses totalling $42,163, calculated as follows:

  Year	Gross Revenue	Losses
  1986	$ 1,026
  1987	$ 950	3,428
  1988	469	2,992
  1989	1,345	6,741
  1990	970	2,950
  1991	752	2,030
  1992	415	13,733
  1993	509	9,263	(admitted)

• f. the appellant did not make many sales relative to the expenses incurred and thus did not show that he was carrying on a business with the expectation of earning a profit; (denied)

• g. the expenses incurred by the appellant, in addition to the amount allowed by the Minister, were not incurred for the purpose of gaining or producing income from a business or property, but rather constituted personal or living expenses of the appellant. (denied)

3. Facts Adduced in Evidence

8 3.01 In addition to the admitted facts cited above, the appellant stated that he began to conduct research on “the Last Chance Arrow Point” in 1990. He explained what it consisted of.

9 The Last Chance Arrow Point is an arrow head that explodes on contact with the ground. The purpose of an arrow equipped in this manner is to frighten an animal so that it turns toward the shooter. A bow hunter cannot fire on an animal if he is more than 100 feet away from it. Thus, by shooting an arrow beyond the animal, he has a chance that it will change its course and head toward the hunter.

10 3.02 The appellant explained at length that he had had to start over many times in order to meet the standards respecting the explosive, the plastic that must not remain in the environment and the trials. He had had to produce 22 models before coming up with the final model.

11 3.03 The appellant applied for a patent in the United States on January 28, 1992. In July 1992, he received his temporary acceptance stating inter alia that no other invention of that nature existed. Final U.S. acceptance was given on December 14, 1993.

12 He was aiming at the U.S. market, where there are 3,000,000 bow hunters. There are 73,000 in Canada, including 26,000 in Quebec.

13 3.04 An inventor must go through a number of departments in order to obtain final approval for an invention in Canada. Among others, he requires the approval of the Ministry of Hunting and Fishing Quebec, the Department of Energy, Mines and Resources Canada, the Sûreté du Québec, the Royal Canadian Mounted Police, the Department of Fish and Wildlife and the Department of Environmental Conservation.

14 The appellant filed, as Exhibit A-3, a letter dated May 4, 1992, from Energy, Mines and Resources Canada. It reads as follows:

[TRANSLATION]

• May 4, 1992

• Mr. Albert Gagné

• ALGA Enr.

• P.O. Box 941

• Brownsburg, Quebec

• J0V 1A0

Subject: Authorization of LAST CHANCE ARROW POINTS

Dear Sir:

This is to acknowledge receipt of your letter dated April 20, 1992. The enclosed box meets Canadian standard CTC-12A30 and U.N. standard 4G/X 10 kg/S/86 and is therefore acceptable as external packaging for transportation purposes. However, in addition to the marks that you have made, you must also add the orange label for class 1.4S materials. An example of that label has been affixed to the box, which will be returned to you by separate parcel.

Based on Lab Report CIE 7676, I declare that LAST CHANCE ARROW POINTS are an authorized explosive having the following classifications:

Canadian Explosives Act and Regulations	Class 6
Division 1
U.N. No.	0044
Class and Division	1.4S
Name and Description	PERCUSSION PRIMER

• Yours sincerely,

• /S/ Richard Shaw

• Richard Shaw

• Chief Inspector, Explosives

15 3.05 The appellant explained that having patent approval is not enough to make money. Advertising is needed and that is expensive. He met with hunters associations and hunting products salesmen, but that is a long process. In 1995, he associated with the company Davica Inc., of Farnham, which sells all kinds of products and attends exhibitions in the United States.

16 He was Davica Inc.'s agent at those exhibitions and also had permission to sell his “Last Chance Arrow Points”.

17 He filed as Exhibit A-1 the following extract from the exhibition guide book under number 432:

“Last Chance” Arrow Point

This product consists of an arrow head used to deter a game animal from heading in its present direction. Often bow hunters see their game too far away, out of their reach and all hunting tricks have been used but nothing seems to work. Now there's something else to try, a “Last Chance” arrow head.

Aim your arrow above and in front of the animal. The “Last Chance” arrow head will make a loud noise on impact startling the animal into changing directions — hopefully towards you!

18 He sold $5,000 worth of Last Chance Arrow Points during his U.S. tours.

19 3.06 The appellant is a member of the Association of Inventors. One inventor in 500 lives off his invention.

20 What motivates him is that he wants to find something that he can one day leave to his children and that can be their means of livelihood.

21 3.07 In many cases, it is not the inventor who profits from the invention. Another party may alter it somewhat and have the money to market it.

22 In 1986, he invented a system to kill rats, mice and other animals living in large warehouses. He did not have the money to market it. However, in the January 1996 issue of National Geographic, he found the following invention exploited by a Japanese company, Ikari Corporation:

Better Mousetrap Vacuums Its Victims

GOING DOWN THE TUBE may be the fate of some Japanese rodents, a novel way to end their destructive lives. To control rats in warehouses and other buildings, the Ikari Corporation has developed a pneumatic system to whisk the unwanted pests through a tube and then quietly, automatically freeze them. No muss, no fuss, no smelly corpses.

Installed inside a building's baseboards, the plastic tube has several entrance holes. When powdered bait entices a rat into a hole, its body heat activates a sensor that slams steel shutters over the holes. Then a powerful fan blows a plastic ball down the tube toward the rat; the forced air and the ball push the rat into a vat of 0°F antifreeze for disposal.

Ikari's system will cost $40,000, but it may well be worth it. According to the company, rodents are a major cause of damage to electrical wires and cables throughout Japan.

23 3.08 In addition, a certain Paul Garneau of Quebec is currently making millions of dollars with a three-dimensional puzzle.

24 3.09 Counsel for the respondent filed, as Exhibit I-1, Les Entreprises ALGA Enr.'s statement of revenue and expenditure for the years ending December 31, 1992, 1993 and 1994. They read as follows:

[TRANSLATION]

31/12/94	31/12/93	31/12/92
Revenue
Services	$ 150
Sale of goods	$2,588	$1,259	1,943
2,588	1,259	2,093
Cost of goods sold
Opening inventory	2,561	--	--
+ Purchases	69	3,311	1,678
- Closing inventory	(1,077)	(2,561)	--
1,553	750	1,678
Gross profit	509	415
Expenses
Transportation	603	953	835
Machinery	29	445	1,889
Casual help	320	320	620
Shop maintenance	100	100	100
Auto (gas, maintenance)	2,692	2,911	1,817
Entertainment expenses (80 %)	831	546	862
Promotion	--	1,293	1,596
Advertising	16	270	485
Telephone	200	422	895
Professional fees	822	2,460	4,768
Margin interest	--	52	120
Bank charges	--	--	24
Miscellaneous	4	--	137
$5,617	$9,772	$14,148
Net loss	($9,263)	($13,733)

4. Analysis

25 4.01 The entire question is whether Les Entreprises ALGA Enr., the appellant's business, had a reasonable expectation of profit during 1992 and 1993.

26 4.02 The appellant admitted that, from 1986 to 1993, the respondent allowed losses totalling $42,163 for research in respect of inventions, including rat and mouse traps. However, the losses that form the subject of the instant appeal stem from the invention of “the Last Chance Arrow Point” for which patents were obtained in 1992 and 1993. The Court accordingly cannot consider the losses prior to 1992. The appellant showed that, in the matter of invention patents, income does not usually come automatically with the patent. This is the very nature of that kind of business.

27 4.03 In Moldowan v. R.[(1977), [1978] 1 S.C.R. 480 (S.C.C.)] the Supreme Court of Canada cited the known tests: profit and losses from previous years, the taxpayer's training, his business planning and the venture's ability to show a profit.

28 The factors to be considered differ with the nature and size of the business. Referring to R. v. Matthews (1974), 74 D.T.C. 6193 (Fed. T.D.), the Supreme Court of Canada held that one would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.

29 The same is true in the instant case. Someone who invests a substantial amount in the production of an invention that has already been patented cannot be expected to claim the same initial expenses as a person who conducts research in order to create an invention.

30 Furthermore, the evidence showed that, in 1995, the appellant earned gross income of $5,000 and net income of $3,500 on the sale of Last Chance Arrow Points.

31 It is the Court's view that there was a reasonable expectation of profit during the years prior to 1995.

32 4.04 However, as the respondent had disallowed all the expenses on the basis that there was no reasonable expectation of profit, the Court now authorizes the respondent to check whether there were not certain expenses which should be disallowed for other reasons: personal expenses, etc.

5. Conclusion

33 For the aforementioned reasons, the appeal is allowed with costs.