Spencer v. R., [1998] 2 C.T.C. 2758

Rowe T.C.J.:

1 The appellant appealed with respect to his 1992, 1993 and 1994 taxation years. During those years he claimed business losses in the amounts of $37,219, $36,510 and $34,016 respectively.

2 The Minister of National Revenue disallowed the deductions of the losses claimed on the basis that during those years there was no reasonable expectation of profit.

3 At paragraph 6(d) of the Reply to the Notice of Appeal there is a schedule of losses claimed from business in prior years from 1978 to 1991.

4 The appellant testified that he is a published author and, since 1976, has written several books which produced varying amounts of revenue, but that he decided to pursue the film or video business, premised partly on a travel book that he had written earlier, called Under One Sun. His concept was to film people who were described as ordinary people in extraordinary locales or venues.

5 The concept evolved and he decided that it would be a strong marketing ploy to utilize women in travel to these extraordinary places and he began travelling to these exotic locations and did the bulk of the work himself right up to the point of doing the rough editing.

6 He was able to obtain some sponsorships from airlines in the form of free tickets for himself and the individual who would be the subject of a particular episode and also from other travel related businesses, ground transportation, hotels and similar services.

7 He was able to keep the cost of production, per episode, down to approximately $5,000, on average, where, if he had taken along a sound man, a camera person and the usual team associated with such productions, his costs would have been three or four times higher.

8 There is no doubt that there has been no income generated from the concept to date since its inception in 1988 or 1989, right up until this point in 1997.

9 The appellant introduced into evidence a nine minute demo tape which was completed in April of 1997 and has been sent out to approximately ninety potential buyers at various locations around the world. He envisages the series as being sold on the basis of a minimum of thirteen episodes at the various television networks and also, in his projection of income, provided a summary of what he felt would be an amount that he could obtain from various corporations who would be interested in sponsoring the particular project.

10 It is to be noted from that summary that the actual amount to be received from the television networks for actually showing the programmes constitutes a small part of the overall projected revenue.

11 The ability to obtain grants from funding agencies has been limited by the fact that, in Mr. Spencer's words, it was premature.

12 In 1992 through 1994, he was working full-time with the Attorney General's department of Ontario in a position which required him to work hard during the day and also to have other commitments, on occasion, in the evenings. He began by filming during a two week holiday in the summer or other times and then, as his holiday entitlement expanded up to five weeks, he began utilizing five weeks of his time to travel to these various locations and to undertake the necessary film work.

13 He testified that, in order to get these episodes ready for market to a network for viewing it would cost between 10 and $15,000 per thirty-minute episode.

14 It is difficult in a particular business such as film or television to have the same kind of foreseeability with respect to profit as might be the case with a restaurant, a resort business or a tree farm. However, the relevant jurisprudence is still as set forth by the Supreme Court of Canada in the case of Moldowan v. R. (1977), 77 D.T.C. 5213 (S.C.C.). And as Justice Dickson, as he then was, stated at 5215:

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. 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.

15 There is no question that the profit and loss experience from the appellant's activities, both in publishing as an author or a potential marketer of films in past years lead to losses on a continuous basis since 1978. There were ongoing losses in the years subsequent to 1994 from the intended activity.

16 There is also no question that he is well qualified to do this kind of work but it also must be borne in mind that he was then, and now, required to work full time in a demanding occupation.

17 The difficulty is that he continued to incur expenditures to put more potential programmes on the shelf or in the library at a time in which there still has not been any particular hard funding for him to be able to proceed.

18 Within the purview of the comments of Justice Linden in Tonn v. R. (1995), 96 D.T.C. 6001 (Fed. C.A.), I am satisfied that the nature of the work undertaken here was done for the purpose, in his mind, of generating revenue and is not one of those circumstances that one can say was driven as a consequence of a personal element.

19 The locations chosen were, to a large extent, chosen for a particular purpose in accordance with the concept of the programme which has evolved over the years with a series of titles and is now referred to as “Escape”.

20 The camera that he lugs along with him is very large and he has to work extremely hard under sometimes unpleasant conditions which do not equate to the kind of activity that one would expect if they were pursuing the personal element, purely speaking, of a hobby.

21 The point, however, remains that, as was noted by Justice Robertson in the decision of the Federal Court of Appeal, Mastri v. R., unreported, A-650-96 [reported[1997] 3 C.T.C. 234 (Fed. C.A.)] at page 6 as follows:

First, it was decided inMoldowanthat in order to have a source of income a taxpayer must have a reasonable expectation of profit. Second, ‘whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts’. If as a matter of fact a taxpayer is found not to have a reasonable expectation of profit then there is no source of income and, therefore, no basis upon which the taxpayer is able to calculate a rental loss. There is no doubt that, post-Moldowan, this Court has followed and applied that decision: seeLandry v Canada,94 D.T.C. 6624;Poetker v Canada,95 D.T.C. 5614; andHugill v Canada,95 D.T.C. 5311. The only remaining issue is whether Tonn departs from that jurisprudence by postulating that the reasonable expectation of profit test remains irrelevant to the question of deductibility of losses until such time as it can be established that the case involves an inappropriate deduction of tax, the presence of a strong personal element or suspicious circumstances. There are two passages in Tonn which are cited in support of that proposition of law and are worthy of reproduction (supra at 6009 and 6013): TheMoldowantest, therefore is a useful tool by which the tax-inappropriateness of an activity may be reasonably inferred when other, more direct forms of evidence are lacking. Consequently, when the circumstances do not admit of any suspicion that a 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.... I otherwise agree that theMoldowantest should be applied sparingly where a taxpayer's ‘business judgment’ is involved, where no personal element is in evidence, and where the extent of the deductions claimed are not on their face questionable. However, where circumstances suggest that a personal or other-than-business motivation existed, or where the expectation of profit was so unreasonable as to raise a suspicion, the taxpayer will be called upon to justify objectively that the operation was in fact a business. Suspicious circumstances, therefore, will more often lead to closer scrutiny than those that are in no way suspect.

In my respectful view, neither of the above passages support the legal proposition espoused by both the Minister and the taxpayers. 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 theMoldowantest being applied ‘sparingly’ is not intended as a rule of law, but as a common-sense guideline for the 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 taxpayers. Lest there be any doubt on this point, one need go no further than the analysis pursued by the Court inTonn.

In summary, the decision of this Court in Tonn does not purport to alter the law as stated in Moldowan. Tonn simply affirms the commonsense understanding that it is not the place of the courts to second-guess the business acumen of a taxpayer whose commercial venture turns out to be less profitable than anticipated.

22 The Federal Court of Appeal also in a decision released September 24, 1997, Watt v. R., A-332-95 [reported[1997] 3 C.T.C. 462 (Fed. C.A.)] dealt with the question of reasonable expectation of profit relating to the development of an individual as an equestrian.

23 In that particular instance, the Tax Court Judge had found on the evidence that the appellant's business in the years under question was not: “structured, organized, manned, financed and planned in such a way as to be found to be reasonably capable at that time of yielding a profit in due course.” The Court found that it was open to the Tax Court Judge to find, with respect to the taxation years at issue, that the start-up period had not yet begun.

24 The Federal Court of Appeal in Landry v. R. (1994), [1995] 2 C.T.C. 3 (Fed. C.A.)determined that a grace period cannot last forever. The difficulty is to determine when that period actually starts. And, in this particular instance this business is such that, as the appellant put it, it requires all of the pieces of the jigsaw puzzle to come together. It is a difficult venture made more difficult by the fact that he is working full time and needs to find about 100 and some thousand dollars, or more, in order to do the necessary post-production work to make these saleable.

25 Now the demo tape has gone around the world and he is in the process of meeting, later in 1998, with some celebrities with a view to providing a marketable and saleable package which may some day produce income to him.

26 However, during the particular years at issue and thereafter, there was nothing that I am able to find on the evidence that leads me to conclude there existed, within the definition expounded in the jurisprudence, a reasonable expectation of profit.

27 In addition, many of the expenses claimed, just on a brief overview, were expenses that were specifically prohibited by another provision of the Income Tax Act, such as home office expense. There were items claimed which are personal in nature. There were other expenses claimed which were properly attributable to capital and not expensed in a particular year. And generally, had there been a line-by-line analysis of those expenses, a great deal of them would not have been allowed in any event.

28 The issue was whether or not the Minister of National Revenue made the correct decision by disallowing the expenses claimed on the basis the appellant had no reasonable expectation of profit from those businesses in the years under appeal. The answer is that the Minister was correct in coming to that decision.

29 There is no question the appellant is extremely talented and is working very, very hard-at personal sacrifice-to put this together and one can only hope that in the fullness of time it will come to fruition because it is based on a very good idea which will be interesting, entertaining and informative to a viewing audience, if and when all of the pieces ever do come together.

30 Accordingly, therefore, the appeal is hereby dismissed.