Beaubier T.C.J.:
1 This appeal pursuant to the Informal Procedure was heard at Vancouver, British Columbia, on January 7, 1997. The Appellant was the only witness.
2 The Appellant claimed to deduct business losses for 1992, 1993 and 1994. They were denied. He appealed.
3 The Appellant immigrated to Canada with his wife 12 years ago from Poland and Nigeria. He was a professor in Poland. By the years in question he had become a teacher at a private school (St. Thomas Aquinas) in Vancouver. He became aware of a business opportunity respecting Japanese Christian students associated with Nazan Association for International Cultural Exchange (“Nazan”) in Nagoya, Japan. In cross-examination he agreed that he began receiving these students on the basis that, for a fee, he would provide:
1. A Christian atmosphere,
2. Teenage company of the same sex,
3. A bedroom and bath, private to the Japanese student,
4. Touring around Vancouver and British Columbia,
5. Help with the English language,
6. Attendance in church,
7. No drinking or smoking, and
8. A curfew.
4 The Appellant moved with his wife and son to an apartment which had a separate private bedroom and bath for such a student. He took the first student in 1991 and others in 1992, 1993 and 1994. These were all for a duration of a week or two. He toured them extensively and carried out his other duties. He lost money. There were the following reasons for this:
1. The touring was too expensive in the short term.
2. He did not have enough student referrals.
3. The students were not staying long enough.
5 In 1995 and thereafter he received more referrals and the students stayed for several months. He has shown a profit since 1995.
6 In other words, the Appellant had start-up losses and amended his business plan so that he now makes a profit. On this basis the Minister of National Revenue now agrees that the Appellant had a reasonable expectation of profit from the beginning and the Court finds that as well.
7 However, the Minister of National Revenue takes the position that the Appellant's losses in 1992, 1993 and 1994 are restricted as to deductibility by reason of subsection 18(12) which reads as follows:
Notwithstanding any other provision of this Act, in computing an individual's income from a business for a taxation year,- (a) no amount shall be deducted in respect of an otherwise deductible amount for any part (in this subsection referred to as the ‘work space’) of a self-contained domestic establishment in which the individual resides, except to the extent that the work space is either
(i) the individual's principal place of business, or
(ii) used exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business;
(b) where the conditions set out in subparagraph (a)(i) or (ii) are met, the amount for the work space that is deductible in computing the individual's income from the business for a taxation year shall not exceed the individual's income from the business for the year, computed without reference to the amount; and
(c) any amount not deductible by reason only of paragraph (b) in computing the individual's income from the business for the immediately preceding taxation year shall be deemed to be an amount otherwise deductible that, subject to paragraphs (a) and (b), may be deducted for the year for the work space in respect of the business.
7 Thus subsection 18(12) restricts the Appellant's deductionin respect of an amount for any part of a self-contained domestic establishment, and that deduction
shall not exceed the individual's income from the business for the year.
| 1992 | 1993 | 1994 | |
|---|
| Revenue | $ 925.00 | $ 775.00 | $ 950.00 |
| Accounting | 60.00 | 60.00 | 60.00 |
| Meals & Entertainment | 280.00 | 308.00 | 377.00 |
| Motor Vehicle | 350.00 | 401.00 | 489.00 |
| Housing & Food | 2,320.00 | 1,540.00 | 1,879.00 |
| Net income (loss) | $(2,085.00) | $(1,534.00) | $(1,855.00) |
| Less: Personal portion of entertainment (20%) | $ 56.00 | $ 62.00 | $ 189.99 |
| Total | $(2,029.00) | $(1,427.00) | $(1,666.00) |
8 The figures for “Housing & Food” expenses were not broken down individually by the appellant in his income tax returns or in evidence. However, Accounting, Meals, Entertainment and Motor Vehicle do not relate to the work space and they are separately deductible, since the Appellant had a reasonable expectation of profit from the business in the years in question.
9 As a result the Appellant is entitled to a deduction in addition to that already allowed by the Minister of National Revenue, for the years in question which is calculated as follows:
| 1992 | 1993 | 1994 | |
|---|
| Accounting | $ 60.00 | $ 60.00 | $ 60.00 |
| Meals & Entertainment | 280.00 | 308.00 | 377.00 |
| Motor Vehicle | 350.00 | 401.00 | 489.00 |
| Subtotal: | $(690.00) | $(769.00) | $(926.00) |
| Less: Personal portion of entertainment (20%) | $ 56.00 | $ 62.00 | $ 189.00 |
| Net: | $636.00 | $707.00 | $ 737.00 |
10 The loss allowed pursuant to subsection 18(12) and the amount of loss which he is entitled to carry forward pursuant to paragraph 18(12)(c) is calculated as follows:
| 1992 | 1993 | 1994 | |
|---|
| Housing & Food | $2,320.00 | $1,540.00 | $1,879.00 |
| Less: Revenue | 925.00 | 775.00 | 950.00 |
| 18(12)(c) Amount: | $1,405.00 | $ 765.00 | $ 929.00 |
11 The appeal is allowed on the foregoing basis.
12 The appeal is referred to the Minister of National Revenue for reconsideration and reassessment accordingly.
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